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A Project report
On
“Working Capital Management”
For
Unit – CPM
(Songadh Fort)
By
Sagar R. Ratnani
From Date : 11/6/2012 to 23/7/2012
Enrollment No. 117500592119
Batch – 2011-2013
Under the Guidance of
Company Guide : Nimesh Joshi
College Guide : Esha Pandya
Submitted to :
Gujarat Technological University
Through
S. R. Luthra Institute Of Management, Surat
The project report on JK Paper Ltd. has been prepared as per the topic “Working
Capital Management of JK Paper Ltd.”
Understanding of both practical and theoretical knowledge is essential in this
competitive world. Training is an important aspect of the study. The basic aim of
training in the management field is to know how to apply management theories in
practice. Practice makes man perfect; therefore practical study is very important
for management students.
Practical training helps in comprehending the theory of subject taught in
classroom. This is more applicable in case of management education. My training
at JK Paper Ltd. has such effect to acquire the practical knowledge of Finance
Management and others.
Thus, it is our moral and obligatory duty to take part of our studies with great
enthusiasm and seriousness and give them due importance.
Last but not the least I received all required information and co-operation from the
Accounts Department and HR Department. I hope that this report will meet the
educational requirement.
Sagar R. Ratnani
PREFACE
Success is not merely a question of luck of genius it depends on hard work,
sustained toil and most important of all his guidance. I am greatly thankful to JK
Paper Ltd. for giving me an opportunity to work on this project at their company.
I wish to express my sincere thanks top M.s Esha Pandya, Lecturer of S.R.Luthra
Institute of Management who guide me to undertake this project report under JK
Paper Ltd.
I wish to convey my heart full gratitude to Mr. Surendra Behani (GM, Accounts)
of JK Paper Ltd. for his valuable guidance and co-operation me during the course
of this project; I also thank the all the officers of Accounts Department of the JK
Paper Ltd.
Last but not the least I would like to thank sincerely to Mr. Nimesh Joshi (Asst.
Executive-HRD & TPM) for his assistance during my training period.
( Sagar R. Ratnani )
ACKNOWLEDGEMENT
The term research refers to the systematic method consisting of enunciating the problem, formulating the hypothesis collecting data, analyzing the facts and reaching the certain conclusions either in the form of solution towards the concern problem or in certain generalization for some theoretical formulation.
Research methodology is a way to solve systematically the research problem. It may be understood as a science of studying how research is done scientifically.
Time period of the study :
The present study was undertaken during six weeks from 11th June – 23rd July.
Research Design :
Descriptive research procedure is used for describing the recent situations in the organization and analytical research to analyze the result by using research tools. Descriptive Research :
Descriptive research, also known as statistical research, describes data and
characteristics about the population and phenomenon being studied.
Although the data description is factual, accurate and systematic, the research
cannot describe what caused a situation. Therefore descriptive research cannot be
used to create a casual relationship, where one variable affects another. In other
words, descriptive research can be said to have a low requirement for internal
validity.
Data Source & Collection Method : I. Primary data
II. Secondary data
Primary data :
RESEARCH METHODOLOGY
To collect the primary data I have collected the information by informal discussion held with various department heads. Information pertaining to receivables, cash, inventory, and creditors were collected from the respective departments in the units.
Secondary data :
Secondary data are those which have already been collected by someone else
and which have already been passed through the statistical process. The Secondary
data consist of reality available companies already complied statistical statements.
Secondary data consist of not only published records and reports but also
unpublished records.
Purpose :
The purpose of this paper is to properly analysis of the working capital
management of JK Paper Ltd., Songadh over the period 2008-2012
OBJECTIVE OF THE STUDY :
The management of Working Capital is very important. It involves the study of
day – to – day affairs of the company. The motive behind the study to develop the
understanding about working capital management in the running business
organization and to help the company in developing the efficient working capital
management. Therefore, it helps in future planning and control decision.
To analyze the working capital management.
To determine the gross operating and net operating cycle of the unit.
To know the future need of working capital in the running organization.
To render recommendations for the effective management of working capital.
SCOPE OF THE STUDY :
The study is conducted at “JK Paper Ltd., Songadh” for 6 weeks duration. 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.
To get proper understanding of concepts, I have done the study of balance
sheet, profit/ loss A/c’s, cash accounts.
I have also conducted the interview with employees of accounts department.
So scope of the study limited up to the availability of official records and
information provided by the employees.
The study is supposed to be related to the period of last four years.
Analysis through working capital ratios.
Analysis through schedule change in working capital.
Analysis through gross operating cycle and net operating cycle.
Analysis through various components of working capital.a. Receivable Managementb. Inventory Managementc. Cash Management
Limitation of Study :
Generally the company does not allow the finance project to have any study or
research work. Therefore getting a project work in the company itself was very
difficult.
The time span of the project was very short 6 weeks, which was a major
constraint, so study and analysis on this topic within limited period was not
sufficient.
The organizations do not disclose all the data which is an obstacle for the detail
study.
Due to the busy schedule, some of the staff members were not in a position to
spare time for guiding the topic or giving any information.
As the organization policies were very strict regarding using actual figures due
to which approximately values were used for analysis. Hence the result also
reveals approximate values.
Maximum secondary data is used.
Here I have done the analysis on the basis of secondary data, which includes :
Balance Sheet of company
Profit / Loss of JK Paper Ltd.
1. The research done by Herrfeldt B., “How to understand Working Capital Management” describe that “Cash is king” so say the money managers who share the responsibility of running this country’s businesses. And with banks demanding more from there prospective borrowers, greater emphasis has been placed on those accountable for so-called working capital management. Working capital management refers to the management of current or short – term assets and short – term liabilities. In essence, the purpose of that function is to make certain that the company has enough assets to operate its business.
2. The research done by, Samiloglu F. and Demirgunes K., “Effect of Working Capital Management on firm Profitability : Evidence of Turkey” (2010) describe that the effect of working capital management on firm profitability. In accordance with this aim, to consider statistical significance relationship between firm profitability and the component of cash conversion cycle at length a sample consisting of Istanbul Stock Exchange (ISE) listed manufacture firms for the period of 1998-2007 has been analyzed under multiple regression models. Empirical findings the study show that accounts receivable period, inventory period and leverage affect firms profitability negatively; while growth (in sales) affects on firm profitability positively.
3. Michael J Peel, Nicholas Wilson (2009), very little research has been conducted on the capital budgeting and working capital practices of small firms. The result of survey indicates that a relatively high proportion of small firm in the sample claimed to use quantitative capital budgeting and working capital technique and to review various aspect of the companies’ working capital. In addition, the firms which claim to usequantitative capital budgeting and working capital technique and to review various aspects of their companies’ working capital. In addition, the firms which claim to use more sophisticated discounted cash flows capital budgeting techniques, or which had been active in terms of reducing stock level
LITERATURE REVIEW
4. The research done by Hardcastle J., “Working Capital Management”, (2007) describe that the working capital sometimes called gross working capital, simply refers to the firm’s total current assets (the short term ones), cash, marketable securities, account receivables and inventory. While long term finance analysis primarily concern strategic planning, working capital management deal with day-to-day operations. By making sure that the production line do not stop due to lack of raw material, that inventories do not build up because production continue unchanged when sales dip that customer pay on time and that have enough cash is on hand to make payments when they are due. Obviously good working capital management, no firm can be efficient and profitable.
5. The research done by Thachappilly G., “Working Capital Management manages Flow of Fund”, (2010) describe that the Working Capital is the cash needed to carry on operation during the cash conversion cycle, i.e. the days for paying for raw material to collecting cash from customers. Raw material and operating supplies must be brought and stores to ensure uninterrupted production. Wages, salaries, utility charges and other incidents must be paid for converting the material into finished goods. Customers must be allowed a credit period that is standard in the business. Only at the end of cycle does cash flow in again.
6. The research done by, Gass D., “How to improve Working Capital Management” (2009) “ Cash is the lifeblood of the business” is an often repeated maxim amongst financial manager. Working capital management refers to the management of current or short-term assets and short-term liabilities. Component of short-term assets include inventories, loans and advance, debtors, investmentand cash & bank balances. Short-term liabilities include creditors, trade advances, borrowing and provisions. The major emphasis is, however, on short-term assets, since short-term liabilities arise in the context of short-term assets. It is important that companies minimize risk by prudent working capital management.
WORKING CAPITAL MANAGEMENT
Meaning And Nature of Working Capital Management
The management of working capital is concerned with two problems that arising in
attempting to manage the current assets, current liabilities and the inter relationship
that asserts between them.
The basic goal is working capital management is to manage current assets and
current liabilities of the firm in such 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.
A business which is fully equipped with all types of fixed assets required is bound
to collapse without (i) Adequate supply of raw material processing, (ii) Cash to pay
for wages, power and other costs, (iii) Creating a stock of finished goods to feed
the market demand regularly and (iv) The ability to grant credit to its customers.
All these require working capital. Working capital is thus like the lifeblood of
business.
Working capital cycle involves conversions and rotation of various component of
the working capital. Initial cash is converted into raw material.
Subsequently, with the usage of fixed assets resulting in value addition, the raw
material get converted into working in progress and then into finished goods.
When sold on credit, the finished goods assume the form of debtor who give the
business cash on due date. Thus the ‘cash’ assume its original form again at the
end of one such working capital cycle but in the course it passes through various
other forms of current assets too. This is how various components of current assets
keep on changing their forms due to value addition. As a result they rotate and
business operation continues. Thus the working capital cycle involves rotation of
various constitute of working capital.
Sources of Additional Working Capital
Source of additional working capital include the following…
Existing cash reserves Profits ( When you secure it as cash ) Payables ( Credit from Supplier ) New equity or loans from shareholders Bank overdrafts or lines of credit Long – term loans
Classification of Working Capital
Working capital can be classified in two ways….
1. On the basis of concept
2. On the basis of time
A. On the basis of concept working capital can be classified
Gross Working Capital
Net working capital.
B. On the basis of time working capital may be classified
Permanent or fixed working capital
Temporary or variable working capital
Types of Working Capital
There are mainly two types of working capital.a) Permanent Working Capitalb) Temporary Working Capital
a) Permanent Working Capital:-
The need for current assets arises because of operating cycle. The operating cycle is continuous process and therefore the need for current assets is felt constantly. But the magnitude of current assets needed is not always the same. It increases and decreases over time. However there is always a minimum level of current assets, which are continuously required, by firm to carry or its business operations is called permanent or fixed working capital. This minimum level of working capital is necessary on the regular basis even if the management of working capital is done efficiently in the organization.As this type of working capital is minimum necessary for the business at all points of time, it is financed by the long-term sources.
b) Temporary Working Capital:-
The amount over and above the permanent level of working capital is temporary, fluctuating or variable working capital. The need for such type of working arises because of fluctuations in production and sales. The additional requirement may be during more active season when the volume of production and sales more goes up necessitating extra blockage of funds temporarily in current assets like Bank Balance, inventory, debtors, etc.The temporary working capital is the additional funds required. Whose volume is different at different points of time and hence it is financed by short-term sources.
Working Capital Assembly :
Particular
YEAR
2011-12 2010-11 2009-10 2008-09Current Assets
1) Inventories 164.19 127.53 126.89 117.11
2) Sundry Debtors 144.16 107.87 104.49 107.15
3) Cash & Bank Balances 147.69 30.89 7.87 34.22
4) Loans & Advances 177.67 171.78 160.98 162.24
5) Others Current Assets -- -- -- --
TOTAL CURRENT ASSETS (A) 633.71 438.07 400.23 420.72
Less : Current Liabilities
1) Current liabilities & Provisions 526.36 204.47 184.31 152.95
TOTAL CURRENT LIABILITIES (B) 107.35 204.47 184.31 152.95
NET WORKING CAPITAL (A-B) 107.35 233.60 215.92 267.77
Working Capital Analysis
Operating Cycle Analysis
Operating cycle refers to the time period which starts from raw material purchases and ends with realization of receivable. So it is total time gap between raw material purchases to total debtors’ collection. This is also known as working capital cycle. Operating cycle is therefore expressed in terms of months or weeks or days. The highest the operating cycle period, higher the working capital requirement. It comprises raw material conversion period, WIP conversion period, FG conversion period and debtors’ conversion period and creditors period. The basic reasons for calculating operating cycle is to find out the means for reducing the duration of operating cycle because if duration of operating cycle will be less than the working capital requirement will be less.
OC = R + W + F + D – C
Where,
R = Raw material conversion period W = Work in process periodF = Finished goods conversion period D = Debtors collection period
C = Creditors payment period
RAW MATERIAL CONVERSION PERIOD (RMCP)
¿ Ram Material StockRaw Material Consumed During the year
× 360
Rs. In Lac (0.1 Million)Particular 2011-12 2010-11 2009-2010 2008-2009
Raw Material Stock 8195.60 4803.42 5334.87 3174.20
Raw Material Consumed during the year
72140.11 33427.13 28,678.95 28,143.37
RMCP 41 Days 52 Days 67 Days 41 Days
2008-09 2009-10 2010-11 2011-120
10
20
30
40
50
60
70
80
41
67
52
41
Raw material conversion period
YEARS
DA
YS
Interpretation :-
The raw material conversion period is the average time period taken to convert material in to work - in – process. Smaller the raw material conversion period higher the efficiency of production. Here, we can see that year 2011-12 the raw material conversion period is 41 days which is high as compare to previous year. It is high because both the level of consumption and inventory level has been increase, so it is not good for the company.
Work in Process Conversion Period (WIPCP)
¿ Stock∈ProcessCost of Production
× 360
Particular 2011-12 2010-11 2009-2010 2008-2009
Stock In Process
14.51 8.90 8.35 11.13
Cost of Production
1298.80 1097.15 988.45 938.45
WIPCP 4 Days 3 Days 3 Days 4 Days
Interpretation:-
It indicate the work – in – process inventory (can say semi – finished good) converted into finished goods. It’s also contain the production cost holding by it. Here, we can say that for the year 2011-12 due to low work – in – process inventory. Work – in – process conversion period is low even though the cost of production is too high compare to others.
2008-09 2009-10 2010-11 2011-120
0.51
1.52
2.53
3.54
4.5 4
3 3
4
Work process conversion period
YEARS
DA
YS
Finished Goods Conversion Period
¿ Finished Goods InventoryCost of Goods Sold
× 360
Particular 2011-12 2010-11 2009-2010 2008-2009
Finished Goods Inventory
24.43 34.89 26.54 32.71
Cost of Goods Sold
1294.81 1099.32 994.63 927.88
FGCP 11 Days 8 Days 16 Days 13 Days
2008-09 2009-10 2010-11 2011-1202468
1012141618
13
16
8
11
Finised goods conversion period
YEARS
DA
YS
Interpretation :-
It indicates the finished goods inventory converted in to sold or distributed to the end user. It’s also containing the production cost holding by it. If finished goods conversion period is lower, the efficiency of company is higher.
In case of this company for the year 2011-12 finished goods conversion period is 11 days which is lower than the previous year 2010-11, it indicates good efficiency of the company.
Debtors Conversion Period
¿ DebtorsCredit Sales
× 360
2008-09 2009-10 2010-11 2011-1205
1015202530354045
30 29 31
39
Debtors conversion period
DAYS
Interpretation :-
This conversion period measures the quality of debtors. A short collection period implies without delay in payment by debtors. It reduces the chances of bad debts. Similarly, a longer collection period implies too liberal and inefficient credit collection performance. It is difficult to provide a standard collection period of debtors.
Particular 2011-12 2010-11 2009-2010
2008-2009
Debtors 144.16 104.87 104.49 107.15
Credit Sales 1328.26 1230.72 1299.57 1268.34
DCP 39 Days 31Days 29 Days 30 Days
Here, we can say that for the year 2011-12, debtors’ conversion period is low as compare to previous years. So companies’ management is efficient in collection on cash and they have not more provision for bad debts.
Creditors Conversion Period
¿ CreditorsCredit Purchase
× 360
2008-09 2009-10 2010-11 2011-120
20406080
100120140160180
38 48 43
161
Creditors conversion period
YEARS
DAYS
Interpretation :-
Particular 2011-12 2010-11 2009-10 2008-09
Creditors 574.7 133.00 115.71 100.13
Purchase 1318.03 1107.55 874.47 941.68
CCP 161 Days 43 Days 48 days 38 days
Creditors’ conversion period an indication of a company’s credit worth in the eyes of its supplies and creditors, since it shows how long they are willing to wait for payment. Within reason, the higher the number the better, because all companies want to converse cash. A company that is especially slow to pay its bills may be a company having trouble generating cash or one trying to finance its operations with its suppliers’ funds.Here, we can say that for the year 2011-12, Creditor conversion period is high as compare to previous year. Company’s credit worth is increase so company can able to manage cash for the payment of their suppliers.
Gross Operating Cycle
Interpretation :-Gross operating cycle is total inventory conversion period and debtors’ conversion period. As we can see in the year 2011-12 gross operating cycle periods is 95 days which is high in the above data because gross operating cycle as well as payable deferral period is high in year 2011-12.
Net Operating Cycle
YEAR RMCP WIPCP FGCP DCP GOC
2011-2012 41 4 11 39 95 Days
2010-2011 52 3 8 31 94 Days
2009-2010 67 3 10 29 109 days
2008-2009 41 4 13 30 88 days
YEAR GOC CCP NOC
2011-2012 95 161 256 Days
2010-2011 94 43 137 Days
2009-2010 109 48 61 days
2008-2009 88 38 50 days
2008-09 2009-10 2010-11 2011-120
50100150200250300
50 61
137
256
Net operating cycle
YEARS
DA
YS
Interpretation :-
Net operating cycle also represents the cash conversion cycle. It is net time interval product and cash payment for resources acquired by the firm. It also represents the time interval over which additional funds, called working capital, should be obtained in order to carry out the firms operations. The firm has to negotiate working capital from sources such as commercial banks. If net operating cycle of a firm increase, it means further need for negotiable working capital.
As we can see in the year 2011-12Net Operating Cycle period is 256 days which is highest in the above taken data because gross operating cycle as well as payable deferral period is high in 2011-12 compare to previous year. Here, initially net operating cycle of a firm increase as compare to previous year, so which gives bad indication.
ANALYSIS THROUGH WORKING CAPITAL RATIOS :
A study of the causes of changes in uses and sources of Working Capital is
necessary to observe that whether working capital is serving the purpose for which
Ratios Analysis
it has been created or not. In this technique, for each aspect of analysis certain
ratios are computed and then results are compared with standard ratio or industry
average.
The ratio analysis provides guides and clues especially in sporting trends towards
better or poorer performance and in finding out significant deviation for any
average or relatively applicable standards.
The following are the important ratios to measure the efficiency of working
capital: -
A. Current Ratio: -
It is most common measure for measuring liquidity. It is also called
“Working Capital Ratio.” It expresses relationship between current assets &
current liabilities. High current ratio indicates firm is liquid and has the ability to
pay its current obligation in time and when they become due.
A ratios equal or near to the rule of thumb of 2:1 i.e. current assets double the
current liabilities is considered to be satisfactory.
¿ Current AssetsCurrent Liabilities
YEAR CURRENT ASSETSCURRENT
LIABILITIASCURRENT
RATIO
2011-12 919.16 526.36 1.746
2010-11 938.07 326.18 2.876
2009-10 400.23 184.31 2.171
2008-09 420.72 152.95 2.751
2008-09 2009-10 2010-11 2011-120
0.51
1.52
2.53
3.52.751
2.171
2.876
1.746
Current ratio
YEARS
DA
YS
Interpretation:-
Higher the current ratio, the larger is the amount of rupees available per rupee of current liabilities, the more is the firm’s ability to meet current obligation and greater is safety of fund of short term creditors.
From the above calculation we can say that current ratio of 2011-12 is 1.746 : 1 which is comparatively lower than the previous year. It indicates the company is quite not satisfactory with their current affair as compare to previous years.
B.Net Working Capital Ratio
Net Working Capital is difference between current assets and current
liabilities. This ration measure firm’s potential reservoir funds relate to net
assets.
¿ Net Working CapitalNet Assets
Year Net W.C.
Net Assets Ratio (in
times)
2011-12 161.69 535.24 0.30
2010-11 265.97 232.47 1.14
2009-10 215.92 142.37 1.52
2008-09 267.77 150.20 1.78
2008-09 2009-10 2010-11 2011-120
0.4
0.8
1.2
1.6
2 1.781.52
1.14
0.3
Net working capital ratio
YEARS
DA
YS
Interpretation :-
The difference current assets and current liabilities excluding short – term bank borrowing is called net working capital or net current assets. Net current assets are sometimes used as a measure of a firm’s liquidity. It is considered that the firm
having the large networking capital has the greatest ability to meet its current obligation.
As shown in the calculation net working capital of 2011-12 is low as compares to previous year because firm had used its cash & bank balance to meet its current obligation. Here we can say that as compare to previous net working capital is low which is good for the company.
C. Liquid RatiosThis ratio is also known as quick ratios or acid test ratios. It is more rigorous
test of liquidity than the current ratios. It is based on those current assets which are highly liquid. Inventory and prepaid expenses are excluded because they are deemed to be least liquid component of current assets. A high quick ratios indicate that the firm is liquid and has the ability to meet its current assets in time and on the other hand low ratios represent liquidity position is not good.
¿ Quick∨Liquid RatioCurrent Liabilities
Interpretation :-
Usually high liquid ratios an indication that the firm is liquid and has the ability to meet its current or liquid liabilities in time and on the other hand a low liquidity ratio represents that the firm's liquidity position is not good. According to rule of thumb, it should be 1:1. The liquid ratios present an uneven change over the past four year. It was 1.985 in 2008-09 and increased to 1.483 in 2009-10 and then to 0.853 in 2010-11.
YEAR LIQUID ASSETS CURRENT LIABILITIES
LIQUID RATIOS
2011-12 494.49 555.28 0.891
2010-11 284.07 332.88 0.853
2009-10 273.34 184.31 1.483
2008-09 303.61 152.95 1.985
The decrement in ratios is not satisfactory, however the ratios 0.891 in 2011-12 is more than the rule of thumb but the ratios of four year is quite more than the rule of thumb.
2008-09 2009-10 2010-11 2011-120
0.5
1
1.5
2
2.51.985
1.483
0.853000000000001 0.891
Quick ratio
YEARS
DA
YS
D. Working Capital Turnover RatiosWorking capital turnover ratios indicates the velocity of the utilization of the
net working capital. This ratio measures the efficiency with which the working capital is being used by the firm.
¿ COGS∨SalesNet Working Capital
YEAR SALES NET WORKING CAPITAL
WCTR
2011-12 1558.90 161.69 9.641
2010-11 1437.35 265.97 5.466
2009-10 1299.57 215.92 6.019
2008-09 1268.34 267.77 4.737
2008-09 2009-10 2010-11 2011-120
2
4
6
8
10
12
4.7376.019 5.466
9.641
Working capital turnover ratio
YEARS
parc
ante
g
Interpretation :-
Working capital turnover ratio measures the firm’s efficiency that how a firm manages and utilize its working capital as we can see from the above calculation of year 2011-12 has a higher working capital turnover ratio which is higher than the previous year 2010-11. So we can say that in 2011-12 working capital efficiency is more than the previous year 2010-11. The ratio of the company is satisfactory.
E. Stock Turnover RatiosThis ratios tell the story by which stock is converted into sales. A high stock turnover ratios reveals the liquidity of the inventory i.e., how many times on an average, inventory is turned over or sold during the year.
¿ COGS∨SalesAverage Stock
2008-09 2009-10 2010-11 2011-120
10
20
30
40
50
60
7.0910.65
48.46 47.63
Stock turnover ratio
YEARS
parc
ante
g
YEAR SALES AVERAGE INVENTORY
STOCK TURNOVER RATIO
2011-12 1558.90 32.73 47.63
2010-11 1437.35 29.66 48.46
2009-10 1299.57 122.00 10.65
2008-09 1268.34 178.90 7.09
Interpretation :-
Stock turnover ratio measures how quickly inventory is sold. It is a test of efficient inventory management. To judge whether the ratio of a firm is satisfactory or not, higher ratio shows efficient use of inventory.
As we can see from the graph that in the year 2010-11 ratio is 48.46 : 1 which is higher than all previous years, so we can say that inventory is converted into finished goods highest in this year which indicate the highest efficient use of the inventory.
F. Debtors Turnover Ratios
¿ C redit SalesAverage Debtors
YEAR SALES AVERAGE DEBTORS
DEBTOR TURNOVER RATIO
2011-12 1558.90 144.16 10.81
2010-11 1437.35 107.87 13.32
2009-10 909.70 105.82 8.60
2008-09 887.84 164.40 5.40
2011-12 2010-11 2009-10 2008-090
2
4
6
8
10
12
14
10.81
13.32
8.6
5.4
DEBTOR TURNOVER RATIO
Year
Perc
enta
ge
Interpretation:-
The analysis of the debtor’s turnover ratio supplements the information regarding the liquidity of one item of current asset of the firm. The ratio measure how rapidly debts are collected. A higher ratio is indicator of shorter time lag between credit sales and cash sales.
From the above calculation and chart we can interpret that in the year 2010-11 debtors’ turnover ratio is highest among all years that is about 13.32:1. This is lower than 2011-12 year. So we can say that company has faced problem in collecting the money in the 2011-12 year. So this ratio is not good for the converting credit sales into cash sales for the company as compare to 2010-11 year.
Inventory constitute major portion of current asset of public Ltd. Companies in India .The manufacturing companies hold inventories in the form of Raw material, work-in-process and finished goods.
There are at least three motives for holding inventories :
(1) To facilitate smooth production and sales operation (Transaction motive)(2) To guard against the risk of unpredictable changes in usage rate and
delivery time (Precautionary Motive)(3) To take advantage of price fluctuations. (Speculative Motive)
Inventories represent investment of a firms funds and that is why management of inventory is necessary for the maximization of the value of the firm. The firm should therefore consider (a) Costs (b) Return (c) Risk
EVALUATION OF INVENTORY MANAGEMENT PERFORMANCE: -
Ratio analysis has been used for making evaluation of Inventory management performance. As the raw material used in the company is pig iron, proper planning and handling is required for the purpose of achieving the right quality of output.
The ratios for last four years have been worked out and compared. The various
figures are given in the table.
Inventory Management
INVENTORY MANAGEMENT
ITEM 2011-12 2010-11 2009-10 2008-09
(1) Average Inventory
32.73 29.66 122.00 178.90
(2) Total Current Assets
919.16 938.07 400.23 420.72
(3) Cost of Goods Sold
1294.81 1099.32 994.63 927.88
Ratio (%)
a) Inventory to
Gross Working
Capital (1/2)
0.04 0.03 0.30 0.43
b) Inventory
Turnover (3/1)39.56 37.06 8.15 5.97
c) Inventory
Conversion Period
(365/b) days
9 Days 10 Days 45 Days 61 Days
2008-09 2009-10 2010-11 2011-120
10203040506070 61
45
10 9
Inventory Conversion Period
Inventory Conversion Period
Year
Days
Interpretation :-
Inventory conversion period means, time taken to convert raw material into finished goods to goods sold. It indicates how effectively and efficiently an inventory is controlled. Lesser the inventory conversion period more efficient and effective use of inventory.
From the above Calculation and Chart we can conclude that in the year 2011-12 inventory conversion period is 9 days which is less than the rest of year and this is lowest among the rest of the year. Therefore we can say that currently company is efficient and effective use of inventory.
When firm sell goods for cash, payments are received immediately and therefore no receivables are created. However when a firm sells goods or services on credit, payments are received only at a future date and receivables are created. It is an essential marketing tool in modern business trade. Credit creates receivables, which the firm is expected to collect in near future. A firm grants credit to its customers so that its sales are its customers so that its sales are not lost to competitors.
Account receivable constitutes a significant portion of the total current assets of the business after inventories. The receivables arising out of credit has three characteristics. It involves an element of risk, which should be carefully analyzed. It is based on economic value. To the buyer, the economic value goods or
services pass immediately at the time of sale, white the seller expects an equivalent value to be received later on.
It implies futurity. The customers from whom receivables have to collected in future are called debtors and represents the firm’s claim or asset.
DEBTORS COLLECTION PERIOD : -
Indicates the average time taken to collect debts. In other words, a reducing period of time is an indicator of increasing efficiency. Debtor Collection Period = (Average Debtors / Credit Sales) * 365 ( = No. of days) Credit Sales are all sales made on credit (i.e. excluding cash sales) . A firm sells goods on credit and cash basis. When firm extends credit to its customers, book debts are created in firms A/c debtors expected to convert in to cash over short period and thus included in current assets. It is used to measure liquidity of the receivables or to find out period over, which receivables remain uncollected.
¿ DebtorsCredit Sales(assume)
× 360
RECEIVABLE MANAGEMENT
Receivable Management
2008-09 2009-10 2010-11 2011-1205
101520253035 30 29 27
33
Collection Period
Collection Period
Year
Days
Interpretation :-
The collection period represents the average number of days for which a firm has
to wait before its debtors are converted into cash. A short collection period implies
without delay in payment by debtors. It reduces the chances of bad debts.
Similarly, a longer collection period implies too liberal and inefficient credit
collection performance. It is difficult to provide a standard collection period of
Year Sales Debtors Collection
Period
2011-12 1558.90 144.16 33 Days
2010-11 1437.35 107.87 27 Days
2009-10 1299.57 104.49 29 days
2008-09 1268.34 107.15 30 days
debtors. If it is longer than those terms, than this indicates some insufficiency in
the procedures for collection debts.
From the above calculation and chart we can interpret that in the 2011-12year the
debtors’ collection period is highest among as compare to rest of the years. So
companies’ management is inefficient in collection on cash within their decided
well specified period and company has insufficient control over receivable
management.
Cash in the important current assets for the operations of the business. Cash is the basic input needed to keep the business running on continues basis, it is also the ultimate output expected to be realized by selling the service or product manufactured by the firm. The firm should keep sufficient cash, neither more or less. Cash shortage will disrupt the firm’s manufacturing operation while excessive cash will simply remain idle, without contributing anything towards firm’s profitability. Thus, a major function of the financial managers is to maintain a sound financial position.
Cash management involves following four factors: -
I. Ascertainment of the minimum cash balance and controlling the levels of cash.
II. Controlling cash in flowsIII. Controlling cash outflowsIV. Optimum utilization of surplus cash.Cash is required to meet a firm’s transactions and precautionary needs. A firm needs cash to make payment for acquisition of resources and services for the normal conduct of business. It keeps additional funds to meet any emergency situation. Some firms maintain cash for taking advantages of speculative changes in price of input and output.
EVALUATION OF CASH MANAGEMENT PERFORMANCE: - The following ratios have been used to evaluate different aspects of cash management.
(1) Cash to Current Assets Ratio.(2) Cash turnover Ratio.
CASH MANAGEMENT
CASH MANAGEMENT
ITEM 2011-12 2010-112009-
102008-09
(1) Cash & Bank
Balance147.69 30.90 793.81 3422.17
(2) Total Current
Assets702.70 453.83 400.23 420.72
(3) Cash balance
ratio814.5 738.01 313.37 145.5
a) Cash to Current
Asset Ratio (1/2)
1.98 8.13 0.86 1.25
b) Cash Turnover in
(365/3) days
46 days 65 days 60 days
112 days
2008-09 2009-10 2010-11 2011-120
20
40
60
80
100
120 112
60 65
46
Cash Turnover Ratio
Cash Turnover Ratio
Year
Days
Interpretation :-
In current assets cash is the most significant and the least productive asset that a firm holds. It is significant because it is used to pay the firms’ obligation.
From the above calculation and chart we can conclude that in the 2011-12cash turnover is 46 days this is lowest as compare to rest of the year. The company has to extend its creditors credit policy period so they can able to payable the bills.
From the study I come to know there is net decrease in working capital. It was observed that sources and application are managed in J K Paper Ltd.
WORKING CAPITAL OPERATING CYCLE
Year
2011-12 2010-11 2010-11 2009-09
Raw material conversion period 41 days 52 days 67 days 41 days
Work in Progress Conversion Period 4 days 3 days 3 days 4 days
Finished Goods Conversion Period 11 days 8 days 10 days 13 days
Gross Operating cycle 95 days 94 days 109 days 88 days
Net Operating Cycle 256 days 137 days 61 days 50 days
FINDINGS
RATIO ANALYSIS
YEAR
2011-12
2010-11
2009-10
2008-09
Current ratio 1.75:1 2.88:1 2.17 :1 2.75 : 1
Net working capital ratio 0.30:1 1.14:1 1.52 : 1 1.78 : 1
Liquidity ratio 0.89:1 0.85:1 1.48 : 1 1.99 : 1
Working capital turnover ratio
9.64:1 5.47:1 6.02 : 1 4.74 : 1
Stock turnover ratio 47.63:1 48.46:1 10.6 : 1 7.09 : 1
Debtors turnover ratio 10.81:1 13.32:1 8.60 : 1 5.40 : 1
INVENTORY MANAGEMENT
YEAR
2011-12
2010-11
2009-10
2008-09
Inventory Conversion Period 9 days 10 days 45 days 70 days
RECEIVABLE MANAGEMENT
YEAR
2011-12
2010-11
2009-10
2008-09
Debtors collection period 33 days 27 days 29 days 30 days
CASH MANAGEMENT
YEAR
2011-12
2010-11
2009-10
2008-09
Cash collection period 46 days 65 days 46 days 65 days
From the working capital management, I have found that it is very difficult task to
manage working capital in such big organization.
o Inventory conversion period shows a downward trend for year 2011-12 because
the average inventory holding period has been decrease and also the cost of
goods increase.
o From the data available we can see that there is very big fluctuation in net
working capital and for that JK Paper Ltd., have to improve the method of
maintaining working capital.
o JK Paper Ltd., strongly follows the credit policy and so that they are able to
recover their receivable which is good sign.
o Liquidity position of a company can be ensured by current ratio, it can be said
that if the ratio is 2 : 1 then the company’s liquidity position is sound.
o In case of JK Paper Ltd., while analysis of data from last four financial years, it
arrived that the company have more than double current assets compare to
current liabilities.
o Net operating cycle period is increased in the financial year 2011-12. So here
company not properly maintaining of raw material conversion period, while
debtors conversion period and finished goods conversion period is maintain
properly.
After the analysis I have come to the conclusion that the current assets should be managed efficiently.
After understanding and applying the Working Capital Management theory, my
suggestion are as below :-
o In case of JK Paper Ltd., they need to change their credit policy because in this
case we can see that the average creditors’ credit period (Bills Payable) is 48
days which they need to negotiate with over creditors’ to increase the credit
period.
o So that they can increase working capital and get in smooth running of the
business.
SUGGESTION
o It is possible because JK Paper Ltd., is the company who is producing Board
Paper and also has second biggest paper plant in over India.
o We can say they have the Monopoly in Board Paper and also they are the
market leader in case of paper plant.
o So either they can increase the period of creditors’ credit period or decrease the
debtors’ credit period, they can shorten collection period.
o The Gross working capital is increasing over the years 2011-10 but the major
proportion of current assets comprise of inventories. The company should try to
reduce investment in inventory.
Here, raw material conversion is increase which should be decreased.
Where finished goods conversion is decrease which is good sign.
Here, company should increase its credit period by this they can able to pay the
bills to their creditors properly.
From the above data we can say that there is decrease in net working capital
which company has to improve.
CONCLUSION
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BIBLIOGRAPHY
