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EXECUTIVE SUMMARY
The project was undertaken at Abhinandan Engineers, Belgaum. The training wasundertaken to understand the Working Capital Management at Abhinandan EngineersCompany.
My project conducted at Company consists of two parts:
1. The first part belongs to overall study relating to the organization.
2. The second part belonging to the finance project is specially focused on workingcapital management.
Working Capital plays an important role in the successful operation of businessactivities. The need for managing working capital is very necessary for any business house.Working capital management is a matter of top priority, as it has a bearing on
creditworthiness, liquidity, solvency and profitability.
Working capital management is a process of determining quantum of current assets to beheld at right time, so as to discharge current liabilities and there by utilizing them to theiroptimum extent and at the same time increasing overall value of the firm by keeping theliquidity position intact.
Objectives:
To study the pattern & procedure followed regarding working capital management.
To study the different components of working capital of the corporation.
To understand how effectively the working capital management is in AbhinandanEngineers.
To offer suggestions for improving the efficiency in working capital management.
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Methodology of the Study
1. Primary Data:
It is collection of first hand information. This data is collected throughdiscussion. The required primary data is collected from the concerned officers of theAbhinandan Engineers, Belgaum. The data collected is processed and presented inthe data analysis through various tables and explanations. The tables are analyzed byindividual current assets and current liabilities and by calculating working capital forevery year.
2. Secondary Data:
It is reviewing relevant information, which is already collected and making
inferences based on the information collected from secondary data from annualreports of the company. The present study is mainly based on the secondary data.
Scope of Study:
Scope of the study in General terms is the extent to which it is possible tocover the subject. This study attempts to cover almost all the tools and techniques forthe purpose of evaluating working capital management in Abhinandan Engineers,Belgaum
Study is limited to the information that could be gathered from personnel and
records that were made available.
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INTRODUCTION:
The ABHINANDAN ENGINEERS is a private limited company directed by, the company is
registered with government of India registrar of companies Bangalore. Abhinandan engineers
commenced operations in 1997, with the initiative of first generation young entrepreneur
Mr. Udaykumar M. Patil with his first confidence steep to manufacture of Die, Pattern making and
foundry and all types of engineering CI machined components in Belgaum.
The proprietor of the business is versed in this line of business. Proprietor is currently
financed by many institutions, now wishes to expand his business over new horizons. For this
proprietor wishes to consolidate his borrowings and achieve economy by cost reduction and savings
in running and interest costs. The proprietor has been approached with many proposal for Die and
Pattern making of one of its kind in the market. The proprietor being one person in and around his
vicinity who can undertake such work is very much assured of customers who would flocking to his
doorsteps for such Dies and Patterns. He is aware that there is a vast un-catered market which he can
tap. This will require additional sources. He is very certain that this market is tapped, he can repay hisborrowing well before time. Taking a conservative approach, the project proposals have been worked
out by him. Despite the project as proposed in seen to be viable as per the basis and orders on hand.
The proprietor is currently engaged in making and selling of casting materials and also die
and pattern making on a small scale basis. The proprietor is now venturing into mainly making of dies
and pattern in additions to his existing business of making casting. The applicant will also be getting a
subsidy of almost Rs 5.76 lakhs by March 2011. The amount will gain the invested into the business
of the applicant to achieve better results. The proprietor has ready orders on hand but is not able to
cater to the same due to lack of infrastructure. The standing orders will fetch a gross revenue of Rs. 3
lakhs per month on an average to cater this market on a conservative basis with monthly labour
turnover of Rs. 3 lakhs itself. The proprietor had invested in infrastructure in form of new VMC
machineries worth Rs. 30 lakhs.
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FACTORY UNIT:
The proprietor is already running his business of manufacture of casting materials of die and
pattern making and is currently operating from 185, Mahalaxmi Foundry Compound, Udyambag,
Belgaum. He has the required infrastructure along with requisite man power requirement to under
take the proposed activity of expansion into major die and pattern making activity. The applicant is
currently operating on single machinery supplied to him by one of his customer. Who is recovering
lease rental on the same for its usage. The proprietor now is desirous of expanding his activity by
procuring additional VMC machinery with installation at a cost about 30 lakhs. This new machinery
will enable the proprietor to undertake additional order of Rs 3 lakhs per month which will yield a net
inflow about 25%. The financial of the same have been explained in the detailed working of the
project.
LOCATION:
The company is situated at 185, Mahalaxmi Foundry Compound, Industrial Estate,
Udyambag, Belgaum. The raw materials, labour, power and transportation and other infrastructural
facilities are easily available for the company this industrial area has been developed by the
Karnataka Small Industries Development Corporation LTD. Belgaum.
This existing factory building is located in 185, Mahalaxmi Foundry Compound, IndustrialEstate Udyambag, Belgaum.
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PROPOSED MACHINERY:
The details of plant and machinery proposed to be installed are given below.
Name of the machine
1. BFW Make CHAKRA BMV65T24
2. Toolcraft make Radial type
3. KMT make Pillar type
4. Hydrotech make Hydraulic Press
5. Bench Grinder's Electrocraft make
6. Flexible Shaft Grinder Electrocraft make
7. 4" Angle Grinder Dewalt make
8. 5HP COMPTECH make Compressor
9. Die Grinder Makita make
10. 7" Angle Grinder Atlas Copco make
PRODUCT PROFILE :
Electric motors, which are used mainly in industrial and agricultural sectors, account for a substantial
35 percent of the total electricity consumption in India. One of the ways to address the problem of
energy shortage is to reduce demand, mainly by increasing end-use efficiency of appliances used. As
per manufacturers feedback, sale of energy-efficient motors is approximately two percent of the total
sales. The major reason identified for the low sales is the high initial cost. Hence, there is a need to
develop technology that can reduce the initial cost of energy-efficient motors. According to motordesign experts, using copper die-cast technology instead of aluminium die-cast for rotors is cost
effective and will also reduce the size of the motors, without affecting the output.
PRODUCTS:
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Using raw C.I.Casting various components for electric motors and alternators various types
of terminal boxes and covers. For power transmission unit various types of gear boxes centers, top
and bottom bearing housing, gear cases, shafts. Bearing housing for automobile industry back plates,
face plates, drums. etc are manufactured by the company.
1. Electric motors
MANUFACTURING PROCESS:
The manufacturing process involves finished grinding, turning, boring, milling, salting,
shaping, drilling, taping, burnishing and painting etc by using lathes, milling machines, drillings,
balancing machines. All the parameters mentioned by customers in their components, drawings are
firstly shaped and finished on the above mentioned machines. Then finally these components are
inspected and checked by measuring instruments like bore gauges, verniers, micrometers, height and
depth gauges.
THE MAIN CUSTOMERS OF THE COMPANY:
1) Indotech Machines Pvt Ltd., Indore.
2) Alucast Auto Parts Ltd., Belgaum.
3) Surya Project Management Pvt Ltd., Belgaum.
4) Trio Enterprises, Kolhapur.
5) Shree Gajanan Alloys., Belgaum.
6) ARS Foundries Pvt Ltd., Belgaum.
7) Meritech. Pune.
8) Tulsi Castings & Machining Ltd., Sangli.
9) Soundcast Alloys Pvt Ltd., Belgaum.
10) Perfect Actuators & Controls Pvt Ltd., Hubli.
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11) Joshi Jampala Engineering Pvt Ltd., Satara.
12) Prakash Iron Works, Belgaum.
13) Rajmane Industries Pvt Ltd., Bangalore.
14) Sharma Group, Belgaum.
EXECUTIVE SUMMARY:
THE QUALITY:
The stringent quality control procedure is followed at Abhinanadan Engineers. Top class
testing instruments in the well equipped material testing laboratory has ably supported the quality
control activity. The results are visible.
THE COMMITMENT:
Abhinanadan Engineers with a open mind approach are always willing to accept new
developments and technologies to ensure the strict adherence to the delivery schedule on time, every
time. Restricting itself to a limited type of casting, Abhinanadan Engineers ensures 100% focuses, on
every minutes quality needed.
QUALITY POLICY:
Abhinanadan Engineers shall always strive for customer satisfaction.
We shall endeavor to be build in quality in our product to the at most satisfaction to our
customers.
We shall motivate and empower our employees and bring in a feeling of ownership in them.
We shall strive for continuous improvement in QMS to achieve our goal of providing a
quality product at a competitive price and on time.
We believe that with this goal we shall be able to excel in competitive markets.
COMPANY POLICY
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We set to be the most preferred partner in manufacturing and supply of engineering products
as well as production of tooling manufacturing like metallic patterns and the jigs & fixtures required
to develop the particular component.
Our motto is to give our entire efforts to get customer satisfaction & to prove our self as a one of
good & renowned tooling manufacturer.
Offer better customer service
STRATEGIC OBJECTIVES:
To provide products of the highest quality and value.
To achieve cost effectiveness in the Abhinandan Engineers and machine shops through
establishment of world class manufacturing facilities. To strive for employ empowerment,
team work and motivation.
DESIGNS AND INNOVATIONS:
All products are manufactured, as per customer design/ drawing AFBPL has no rights to change any
specifications.
SERVICE AGREEMENTS WITH CUSTOMER:
There is no service agreement with customer as not involved in after sales activities.
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VISION AND MISSION:
The corporate vision is to become one of the most vibrant, self reliant, financially viable,and steady growth oriented corporate. The corporate mission is:
Improve productivity and profitability.
Provide financial stability on long term.
Register steady growth in terms of percentage of capacity utilization, production ofincome and overall profitability.
Provide safe working conditions in the company.
Introduction of modern and effective management apart from achieving day to dayproduction target.
Promote harmonious and cordial industrial relationship.
Promote Human Resource Development.
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ORGANISATION STRUCTURE
SWOT ANALYSIS
SWOT analysis is a analysis of STRENGTH, WEAKNESS, OPPORTUNITY AND
THREATS of the Company. This is used to analysis the company environment will helpeach and every company to know the present situation of the company.
STRENGTH:
This is only a reputed Company in Belgaum.
It has been producing the product as the standard specified by the Government ofKarnataka.
Fully computerized environment.
Its continuous and larger production unit in India.
Product quality is the strength of the company.
The work environment is full of excitement, creativity, and innovative atmosphere.
WEAKNESS:
Absenteeism is the main problem in the Company.
Huge sound and air pollution in the production department.
Workers are not well qualified.
OPPORTUNITY:
Company is having the excellent growth opportunity.
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Company is having the good hold in the market so it will help to earn more profit.
In the capacity of the plant is the increasing direction.
THREATS:
Huge power consumption and power failure.
Foreign currency fluctuation.
INTRODUCTION TO FINANCIAL MANAGEMENT
Finance is defined as the money at the time when it is required. Every firm needs
finance whether it is small, medium, and big to carry in its operation and to a show itstargets. And it is rightly said that finance is lifeblood of an enterprise. Without adequatefinance, no enterprise can possibly accomplish its objective.
Management is a vital function control with all aspects of business management, havebecome a sort of pre-requisite for the successful carrier in dynamic business environment.The present study is concerned in Abhinandan Engineers, Belgaum.
Technically analysis of working capital in which the present project report is animportant part of financial managing current assets is more difficult than management of
fixed assets and the finance management needs to strike a balance both profitability andliquidity. If liquidity more there will be adverse effect of profitability is given more weightage is to greater risk.
A business enterprise with adequate working capital is always a position to eviladvantage of any favorable opportunities. The present study related to the working capitalmanagement Abhinandan Engineers, Belgaum. Sources control and effective utilization of theworking capital by the company.
An endeavor has been made to study and analyze the assisting pattern and utilization
of financial resources and analyze the five year of working capital management, receivablemanagement. The project primarily deals with the study of financing and utilization of
available resources and measuring the perform of the company.
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WORKING CAPITAL MANAGEMENT Working Capital is needed for the smooth conduct of day-to day business activities. It
is needed to finance the current assets of the firm. The working capital should neither be in excess nor
should it be inadequate. Excessive investment in current assets would have a negative impact on the
firms profitability because of idle investment On the other hand, inadequate working capital would
lead to inability to meet the current obligations which would hamper the firms creditability and
thereby its reputation.
Usually the current assets are maintained at twice the level of current liabilities i.e .thecurrent ratio is 2:1 But the quality of current assets is important. The current assets should be easily
marketable. i.e. they should be liquid. If the Liquidity is also harmful. It may be due to
mismanagement of current assets.
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CLASSIFICATION OF WORKING CAPITAL
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WORKING CAPITAL
On the basis of On the basis of
Net working Capital Gross working
capital
Seasonal working
Capital
Special working
capital
Initial working
capital
Regular working
capital
Permanent
working
capital
Variable
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A. On the basics of Concept
1. Net Working capital
This is the difference between current assets and current liabilities. Current liabilities are
those that are expected to mature within an accounting year and include creditors, bills payable and
outstanding expenses.
Investment in current assets represents a very significant portion of the total
investment in assets. In case of public limited companies in India, current assets constitute
around 60% of the total capital employed. Therefore the finance manager should attention to
working capital management.
Working Capital Management is no doubt significant for all firms, but its significance is
enhanced in cases of small firms. A small firm has more investment in current assets than fixed assets
and therefore current assets should be efficiently managed.
The working capital needs increase as the firm grows. As sales grow, the firm needs to invest
more in debtors and inventories. The finance manager should be aware of such needs and finance
them quickly.
Current Assets can be financed through long term and short-term sources. The ratio of long
term to short-term source will depend on whether the firm is aggressive or conservative. If the firm is
aggressive then it will finance a part of its permanent current assets with short-term funds. On the
other hand , a conservative firm will finance its permanent assets and also a part of temporary current
assets with long- term financing.
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2. Gross Working Capital
This refers to the firms investment in current assets. Current assets are the assets
which can be converted into cash within a short period say, an accounting year. Current
assets include cash, debtors, bills receivable ,short term securities etc.
B) On the Basis of Time
1) Permanent Working Capital
Permanent Working Capital is permanently locked up in the circulation of current
assets. It covers the minimum amount requested for maintaining the circulation of current
assets.
a) Initial working capital
At its inception and during the formative period of its operations a company must
have enough cash fund to meet its obligations. The need for initial working capital is for
every company to consolidate its position.
b) Regular working capital
It refers to the minimum amount of liquid capital required to keep up the circulation of the
capital from the cash inventories to accounts receivable and from account receivables to back again
cash. It consists of adequate cash balance on hand and at bank, adequate stock of raw materials and
finished goods and amount of receivables.
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1) Variable Working Capital
It refers to the past of the Working Capital which changes with the volume of business, it
may be divided into two classes.
a) Seasonal Working Capital
There are many lines of business where the volume of operations is different and
hence the amount of working capital varies with the seasons. The capital required to meet the
seasonal needs of the enterprise is known as seasonal Working capital.
b) Special Working Capital
The Capital required to meet any special operations such as experiments with new products
or new techniques of production and making interior advertising campaign etc, are also known as
special Working Capital.
Determinants of Working Capital
In order to manage the Working Capital optimally, one has to give due consideration to the
factors that influence the amount of Working Capital to be maintained.
The determinants of Working Capital are stated below with reference to the
operations of Abhinandan Engineers, Belgaum :
1) Nature of business
2) Capacity Utilization3) Credit Policy
4) Demand, Sales and Conditions
5) Availability of Credit
6) Price Level
7) Degree of Competition
8) Conditions of Supply
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COMPONENTS OF WORKING CAPITAL
There are two components of Working Capital viz.
Current Assets
Current liabilities.1) Current Assets
An asset is termed as current assets when it is acquired either for the purpose of selling or
disposing of after taking some required benefit through the process of manufacturing or which
constantly changes in form and contributes to transactions take place with the operation of the
business although such assets does continue for long in the same form.
Components of Current Assets are as follows
0 Cash and bank balance
1 Stock of raw materials at cost- work in process and finished
goods.
2 Advanced recoverable in cash or kind or kind or for value to be
received.
3 Security deposits with electricity board- telephone
department balances with customers.
0 Deposits under the company scheme.
1 Prepaid expenses
2 Miscellaneous stores_ implements _ goods in transit
3 Advanced payment of income tax credit certificates
4 Excise duty and sales tax recoverable
5 Outstanding debts for a period exceeding six months
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6 Balance with central excise authorities.
2) Current Liabilities
Components of Current Liabilities are as follows
Non- refundable non-interest bearing advances against subscription to shares.
Sundry creditors for the goods and expenses Income tax deducted at sources from contractors
Expenses payable
Amount due to promoter of company
Unclaimed dividend
Security deposits
Dealers deposits
Liabilities for bills discounted
Bank overdraft acceptance
Dividend warrants but not un- cashed.
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SOURCES OF WORKING CAPITAL
SOURCES OF WORKING CAPITAL
SHORT TERM SOURCES
LONG TERM SOURCES
1 .ISSUE OF SHARES
2. ISSUE OF DEBENTURES
3. RETAINED PROFIT
4. RESERVES AND SURPLUS
5. LONG TERM LOANS
INTERNAL SHORT TERM SOURCES
EXTERNAL1 DEPRECITION FUNDS 1. TRADE CREDITS
2 PROVISION FOR TAXATION 2. BANK CREDIT
3 ACCURED EXPENSES 3. CREDIT PAPER
4. CUSTOMER CREDIT
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5. PUBLIC DEPOSITS
6. FINANCIAL CO-OPERATION
7. GOVERNMENTASSISTANCE
8. LOAN FROM DIRECTORS
ARRANGEMENT OF WORKING CAPITAL
The trade credit and cash creditors are two primary sources of working capital in India. Bank loan
and trade creditors together account for finance about 75% of the working capital credit requirements
of industry. The bankers after granting of the loans and applications on the line suggested by Reserve
Bank of India determine the maximum line of credit permissible for the period based on the margin
requirement of the security offered. After getting the overall credit limit sanctioned by the banker the
company actually draws the funds needed from time to time using all or any of the following forms of
credit
0 Loan Arrangement
The entire amount of loan is credited by the bank to the parties account. Interest is payable
on the entire amount or when loan is repaid in installments on the actual balance of outstanding.
1 Overdraft Arrangement
The party is permitted to over draft on his current account with his banker up to a specified
amount and during a specified period.
Interest is charged on the amount actually utilized and repayments are permitted.
2 Cash Credit Arrangement
The borrower is allowed to withdraw funds from the bank up to the sanctioned credit once
rather he can draw periodically to the extent of his requirements and repay by depositing surplus
funds in his cash credit amount.
3 Term loan for working capital
Under this arrangement borrower can obtain a loan for appeared three to five years and the
said amount in nearly or half yearly installments.
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4 Bills purchased or Bills discounted
Bills are purchased by bankers and advance bills are discounted whether bills are purchased
as discounted the amount need available under this arrangement is covered by cash and over draft
element. In obtaining commercial bank credit the various modes of security are such as
0 Hypothecation
Under hypothecation money is borrowed by owner of gods on the security of movable
property (normal inventories) without parting with the possession of movable property. The right of
the hypothecation depends upon the term of the contract between parties.
1 Pledge
Under this arrangement the borrower is required to transfer the physical possession of the
property offered as security to the bank to obtain credit.
2 Lien
It is the right of retaining goods belonging to the another until the debts due to him are paid.
3 Mortgage
It is the transfer of interest in specific immovable property for securing the payment of
money advanced.
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OPERATING CYCLE OF WORKING CAPITAL
It is essential that the operating cycle should be kept up continuously.
Others the fixed assets will remain idle and to the cost without bringing any reserve .so
long with fixed capital ready and adequate working capital is necessary to get the
understating successful on a sound pedestal
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Receipts
fromDebto
Creation of Account
Receivables
Debtors
Sales of finished
Goods/
Warehousing of
finished
Purchase
Raw material
Manufacturing
Operation
1.Wages&Salaries
2.Fuel supply
Payment to creditors
Creation of
Accounts
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Office selling Distribution &OtherExpenses
THE NEED FOR THE WORKING CAPITAL
The need for the working capital cannot be once emphasized. Every business need some
amount of working capital. The need for working capital arises due to the time gap between
production and realization of cash from sales. Therefore Working capital required for
To meet the cost of inventories including total of raw materials purchased parts, operating
supplies, work in progress, finished goods.
To pay wages, salaries, for indirect labour, clerical staff, managerial and supervision staff.
To meet overhead costs, including those of maintenance services activities, fuel, power charges,
taxes and general expense administration.
To bear the expansion(with regard to promotion of sales) e.g. expenses on packing advertisement,
salesmanship, sales servicing , after requires ,credit facilities, delivery services etc.
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IMPORTANCE OF WORKING CAPITAL MANAGEMENT
0 Adequate working capital creates certainty, security and confidence in the
minds of the persons in the management as well as in the minds of creditors andworkers.
1 It creates a good credit standing for the firm because credit standing depends upon
the ability to pay promptly. A Company with adequate working capital is always
able to meet current liabilities.
2 It ensures solvency and stability of the enterprises It also ensures continuity in
production and sales.
3 It enable the company to take advantage of cash discount offered by the suppliers of
raw materials or merchandise.4 It enhances the prestige of the company and moral of its workers because a company
with adequate working capital is always able to pay wages and salaries promptly and
regularly.
5 It enables the company to procure loans from banks on easy and competitive terms.
6 In times of boom, it enables the company to meet increasing demands for its
products.
7 In times of depression the company to overcome the crisis successfully.
8 It enables the company to hold carry on its business successfully and active continuedprogress and prospective.
9 It enables the company to carry on its business successfully and active continued
progress and prosperity.
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Working Capital Management is concerned with the following aspects:
0 Debtors Management
1 Creditors Management
2 Inventory Management
3 Cash Management
All these aspects will be analyzed in relation to the functioning of Ashok Iron Works Ltd in
the report as below.
Debtors Management
Now-a- days debtors management has assumed a lot of importance If the debtors are
efficiently managed, the blocked capital will be reduced and thereby the associated costs. Due to theincrease in competition, one cannot do away with credit sales. Credit provision can increase sales. It
is particularly appealing to those customers who cannot borrow from other sources or find it
inconvenient to do so.
A firms investment in accounts receivable depends on how much it sells on credit and how
long it takes to collect receivables. The firm should be very good at assessing the credit worthiness of
its customers and effective collection methods. Debt collection is no doubt challenging but a firm,
which executes it efficiently, will reduce costs to a great extent.
Debtors Management mainly concerns itself with three major aspects:
0 Credit Policy
1 Credit Analysis
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2 Collection Policy
INVENTORY MANAGEMENNT
The inventory is broadly classified into the following:
1) Raw material inventory.
2) Consumables inventory consisting of tools, statonery,fuel etc.3) Work in Progress inventory.
4) Finished goods inventory.
Usually the finished goods inventory is maintained at zero level. The parts are
manufactured to fulfil the current demand. Raw materials (basic) are usually in stock for 4 to
15 days. Raw materials (others) or consumables are kept for 15 days to 1 month. The
duration depends the availability, prices, demand and other market factors. Say, if the priceof a certain raw material is expected to increase or it is likely to be in short supply in the
future, then the quantity purchased will be more than usual and it will be stocked. On the
other hand if the raw material is freely available, then it will be purchased as and when
required.
ABC analysis is carried out to determine the relative importance of the types of raw materials
and the stocking duration is determined based on he rating assigned to the particular raw material.Thematerials with rating Awill be the most controlled because they constitute a major portion of the
investment.
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Economic Order Quantity ( E.O.Q) & Re-Order Level ( R.O.L)
Now, two Important questions need to be answered-when to purchase? and how much to
purchase?The first question can be answered by fixing the Re-order level (ROL). This is the level
after reaching which the order for the material should be placed. Calculation of this level and its
practical implementation will ensure the smooth flow of production activity without bottlenecks. This
is calculated as:
ROL=average daily consumption *Lead time+ safety stock
The second question can be answered by finding out the Economic Order Quantity ( EOQ).
Now, EOQ is the trade-off between the carrying costs and the ordering costs. It is that quantity at
which the ordering costs and carrying costs are minimum. This is calculated by using the formula:
E.O.Q.= 2AOC
Here,
A= Annual consumption
O= Ordering cost per order
C= Carrying cost per unit
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Safety stock is maintained to avoid unnecessary stoppage in production. Minimum and
Maximum stock level is also calculated on average yearly basis. But all these calculations made may
be altered depending on the activity of market forces.
Cash Management
Cash is the basic input of any business. It is necessary for the smooth flow of the business
operations. The cash balance with any business firm should neither be in excess nor in shortage.
Inadequate cash will disrupt the business operations and excess cash will result in higher opportunity
costs because it is idle.
Cash Management is an important function of the finance manager. Sufficient cash balance
has to be maintained to run the firm efficiently. But at the same time, the finance manager has to bear
in mind that cash balance is an idle resource which has an opportunity cost. The liquidity provided by
the cash holding is by sacrificing the profits of a foregone alternative investment opportunity. Hence
the finance manager should:
establish reliable forecasting and reporting systems, improve cash collections and disbursements &
achieve optimal conservation and utilization of funds.
There are three possible motives for holding cash. They are.
0 Transaction Motive:
1 Cash is required to carry out the numerous transactions involved in day-to-day business
activities. The firm needs cash to make payments for wages and salaries, for purchases, otheroperating expenses, taxes, dividends, etc. There would have been no need to hold cash if the
receipts and payments were perfectly synchronized.
2
3 Precautionary Motive:
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Cash is also needed to effectively confront uncertainties in the future. There may be some
uncertainty about the timing of cash inflows from sale of gods and services, assets etc. Similarly,
there may be uncertainty about cash outflows resulting from purchases and other obligations.
Stronger the ability of the firm to borrow at short notice less the need for precautionary balance.
The precautionary balance may be kept in cash and marketable securities.
4 Speculative Motive:
5 This motive relates to the holding of cash for investing in profit making opportunities arising
from fluctuations in commodity prices, security prices, interest rates and foreign exchange rates. A
cash-rich firm is better prepared to exploit such bargains. By and large business firms do not engage in
speculations.
6
Four Facts of Cash Management
In order to manage cash effectively, the firm should evolve strategies regarding the following
four facets of cash management
Cash Planning: Cash inflow and outflows should be planned to project cash surplus or deficit for each
period of the planning period. Cash planning is a technique to plan and control the use of cash. A
projected cash statement is prepared from forecast of expected cash inflows and outflows for a given
period . The forecasts may be based on the present operations or the anticipated future operations.
Cash Planning may be done on daily, weekly or monthly basis. The period and frequency of
cash planning generally depends upon the size of the firm and the philosophy of the management.
Large firms prepare daily and weekly forecasts. Medium-size firms usually prepare weekly and
monthly forecasts .Small firms may not prepare may not prepare formal cash forecasts
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.
Managing Cash Collection and Disbursements: The projected cash flows should match the actual cash
flows and the finance manager should ensure that there is no significant deviation. To achieve this,
cash management efficiency will have to be improved through proper control on cash collection and
disbursement. Generally it is recommended that the collections should be accelerated and the
payments should be delayed. But to manage cash efficiently we need to understand the concept of
float. The cash balance shown by a firm in its books is called the book or ledger balance and the
balance shown in its bank account is called the available or collected balance.
The difference between the available and the ledger balance is called float. There are two
kinds of float-disbursement float and collection float. Say a company has issued a cheque worth Rs 1
lakh. It will reduce the companys available balance only when the cheque is presented for
encashment. This creates a disbursement float of Rs .1 lakh. Similarly we have the collection float.
When a company receives acheque of say ,Rs 2 lakhs then it will increase its book balance by the
above amount .However, the companys bank will increase the available balance only when the
cheque is presented to the customers bank.
Optimal Cash Balance: It is one of the primary responsibilities of the finance manager to
maintain a sound liquidity position so that the production operation is carried on smoothly and also
the dues are settled in time. If a firm maintains a small cash balance, it has to sell its marketable
securities more frequently and this will result in increasing transaction costs. On the other hand if the
firm maintains a large cash balance then it will lead to higher opportunity costs. Therefore the cash
balance should neither be too small nor too large. We find that there is a trade-off between
transaction costs and opportunity costs. Hence the balance maintained should result in minimum
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possible transaction costs and opportunity costs. This case is similar to the calculation of E.O.Q.We
have the Baumols model to find optimal cash balance under certainty . The
Formula is:
C = 2FT/K
Where,
C = Optimal Cash Balance
T = per transaction cost
F = total funds requirement during the year
K = opportunity cost
The Baumol Model does not provide a solution in cases of uncertainty. To overcome these
disadvantages we have The Miller-Orr model. It assumes that the net cash flows are normally
distributed with a zero value of mean and a standard deviation. In this case the firm should fix the
upper control limit, the lower control limit and the return point. The return point is the normal level of
cash balance which is a healthy level. If the firms cash flows fluctuate and touch the upper
Control limit, then it buys sufficient marketable securities to reach the return point If the cash
balance touches the lower control limit then sufficient marketable securities are sold to reach the
return point. The firm sets the lower limit at a point which is its minimum cash requirement. Theformula for determining the distance (Z) between the upper and lower control limit is:
Z = (3/4* Transaction cost * Cash Flow Variance/ Interest Rate)1/3
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Investing Surplus Funds: The surplus funds with a company can be invested for short periods
before they are required. The surplus can be invested in marketable securities which can be
sold easily later when funds are required. The various options available for investments are as
follows:
Term Deposits with Scheduled Banks: Banks accept term deposits for periods ranging from 15days to 5 years. The interest may vary from 6% to 11% per anum. The interest rate rises sharply as
the period of deposits increase from 30 days to 1 year.
0 Mutual Fund Schemes: There are a variety of schemes offered by mutual funds like equity
schemes, balanced schemes and debt schemes. The most popular scheme is the debt scheme for
investing short-term surpluses because the investments are for a short period and is highly and
therefore less risky.
1 Treasury Bills: Treasury bills are the short-term obligations of the government. They have
maturity periods of 91 days, 182 days and 364 days. They do not carry an explicit interest rate
(coupon rate) but are instead sold at discount and redeemed at par.
2
3 Inter- Corporate Deposits: An inter-corporate deposit is a deposit made by one company with
another for a period of up to six months. The inter-corporate deposits represent unsecured
borrowings; hence the lending company must satisfy itself about the credit-worthiness of the
borrowing firm. There are also certain conditions prescribed under section 370 of the Companys Act1956 which should be adhered to by the lending company.
4 Bill Discounting: A bank may purchase a premature bill from the drawer at a discount and it
will release the worth of the bill less discount to the drawer. Similarly a company can purchase a bill
like a bank at a discount and thereby invest its idle funds. But a company should ensure that the bill
and should try to go for bils that are backed by letters of credit for security.
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DETERMINANTS OF WORKING CAPITAL
A firm should plan its operation in such a way that it should have neither too much nor
too little working capital. The working capital requirement is determined by a wide variety of
factors. These factors, however, affect different enterprises differently. They also vary from
time to time. In general, the following factors are involved in a proper assessment of the
quantum of working capital required. The following are some of the important determinantsof working capital
1. General nature of business
The working capital requirements of an enterprise are basically related to the conduct
of business. Enterprise falls in to some broad categories depending on the nature of
their business. For instance, public utilities have certain features which have a bearing
on their working capital needs. The relevant features are
1) The cash nature of business, that is, cash sale.
2) Sale of services rather than commodities.
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In a view of these features, they do not maintain big inventories and have, therefore, the
least requirement of working capital. The nature of their business is such that they have
to maintain a sufficient amount of cash, inventories, and book debts.
2. Production cycle
Another factor which has a bearing on the quantum of working capital is the production
cycle. The term production or manufacturing cycle refers to the time involved in
manufacture of goods. It covers the time span between the procurement of raw materials
to production of finished goods. Funds have to be necessarily tied up during the process
of manufacturing, necessitating enhanced working capital. In other words, there is some
time gap before raw materials become finished goods. To sustain such activities the need
for working capital is obvious. The longer the span the larger will be the tide up fundand therefore, the larger is the working capital needed and vice versa.
3. Business Cycle
The working capital requirements are also determined by the nature of business cycle.
Business fluctuations lead to cyclical and seasonal changes, which, in turn cause a shift
in the working capital position, particularly for temporary working capital requirement.
The variations in business condition may be in two directions,
I. Upswing phase- when boom conditions prevail
II. Downswing phase- when economic activity is marked by a decline.
During the upswing phase of business activity, the need for working capital is likely to
grow to cover the lag between increased sales and receipt of cash as well as to finance
purchase of additional materials to cater to the expansion of the level of activity.
4. Production Policy
The quantum of working capital is also determined by production policy.
In case of certain lines of business, the demand for production is seasonal, that is they
are purchased during certain months of the year. There are two options open to such
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enterprise, either they confine only to period when goods are purchased or they follow
a steady production policy throughout the year and produce goods at a level to meet the
peak demand. In former case, there are working force and physical facilities without
adequate production and sales.
5. Credit policy
The credit policy relating to sales and purchases also affect the working capital. The
credit policy influences the requirement of working capital in two ways,
I. Through the credit terms granted by the firm to its customers/buyers of goods.
II. Credit terms available to the firm from its creditors.
The credit terms granted to customers have a bearing in the magnitude of the working
capital by determining the level of book debts. The credit sales result in higher book
debt (receivables). Higher book debts mean higher working capital.
On the other hand, if liberal credit terms are available from the suppliers of goods
(trade creditors), the need of working capital will be very less. The working capital
requirements of a business are thus affected by the terms of purchase and sales, and
role given to credit by company in its dealing with creditors and debtors.
6. Growth and Expansion
As a company grows, it is logical to expect that a large amount of working
capital is required. It is, of course, difficult to determine precisely the relationship
between the grown in the volume of business of a company and the increase in its
working capital. The composition of working capital in a growing company also shifts
with economic circumstances and corporate practices. Other things being equal,
growing industries require more working capital then those that are static.
7. Profit Level
The level of profit earned differs from enterprise to enterprise. In general,
the nature of product, hold on the market, quality of management and monopoly power
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would by and large determine the profit earned by a firm. It can be generalized that a
firm dealing in a high quality product, having a good market presence and enjoying
monopoly power in the market, is likely to earn high profit and vice-versa. High profit
margin would improve the prospects of generating more internal funds there by
contributing to working capital pool.
8. Dividend Policy
Another appropriation of profit, which has bearing on working capital, is
dividend payment. The payment dividend consumes cash resources and there by affects
working capital as funds flow out of firm through dividends.
Conversely, if the firm does not pay dividend but retains profits, working capital
increases. In theory, a firm should retain profits to preserve cash resources and at the
same time, it must pay dividends to satisfy the expectations of share holders. When
profits are relatively small, the choice is between retention and payment. The choice
must be made after taking in to account all the relevant factors.
9. Depreciation Policy
Depreciation charges do not involve any cash outflows. The affect of
depreciation policy on working capital is therefore indirect. In the first place,
depreciation affects the tax liability and retention of profits. Depreciation is allowable
expenditure in calculating net profits. Higher depreciation also means lower disposable
profits and, therefore, smaller dividend payment. Thus cash is preserved. In the second
place, the selection of method of depreciation has important financial implication.
10. Price Level Changes
Changes in the price levels also affect the requirement of working capital.Rising prices necessitate the use of more funds for maintaining an existing level of
activity. For the same level of current assets, higher cash outlays are required. The
effect of rising price is that a higher amount of working capital is needed. However, in
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the case of companies, which can raise their prices proportionately, there is no serious
problem regarding working capital.
11. Operating efficiency
The operating efficiency of the management is also an important determinant of
the level of working capital. The management can contribute to a sound working
capital position through operating efficiency. Although the management cannot control
the rise in prices, it can ensure the efficient utilization of resources and so on.
Efficiency of operations accelerates the pace of cash cycle and improves the working
capital turnover. It releases the pressure on working capital by improving profitability
and improving the internal generation of funds.
Techniques of Working capital management
Working capital management involves deciding upon the amount and
Composition of current asset and how these assets are to be financed. This decision
involves tradeoff between risk and profitability.
Working capital balances are measured from the financial dates of the companys
balance sheet. A study of the causes for changes of working capital that take place in thebusiness from time to time is necessary. These changes can be measured in rupee
amount and also in percentage by comparing current assets, current liabilities and
working capital over the given period.
The important tools of working capital are,
1. Ratio Analysis of working capital
I. Ratio analysis of working capital
II. Turnover of working capital ratio
III. Current ratio
IV. Current debt tangible net worth
V. Inventory turnover ratio
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VI. Debtor turnover ratio
2. Fund Flow Analysis of Working capital
It is an effective management tool to study how funds are generated for a
business and how they have been employed. This technique helps to analyze change inworking capital components between two datas. the comparison of current asset andcurrent liability at the beginning and at the end of specific period show changes in suchtype of current assets and resources from which working capital has been obtainedfunds flow statement contributing materially to the financial aspects.
3. Working Capital Budget
The working capital budget is an important phase of overall financebudgeting. This budgeting should be distinguished from a cash budget that is designedto measure all the financial repayment of loans, term loans and similar items. Theobjective of this budget is to secure an effective utility of investment.
4. Trend Analysis
A trend analysis indicates the change, which has been taking place from time to time ofan individual item of current assets. It enables of creation of upward and downwardtrend of current asset and current liabilities. These are measured from review ofcomprehensive balance sheet of concern at the end of accounting year and result isdrawn on the basis of trend shown by them
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Analysis and Interpretation
STATEMENT SHOWING CHANGES IN WORKING CAPITAL IN 2010-11
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40
Particulars 2009-10
(Rs 000)
2010-11
(Rs 000)
Increase Decrease
A) Current Assets
Stock 8810 8,506 304S. Debtors 2294 2,196 98
Cash & bank balance 23 31 8
Loans & advances 536 406 130
TOTAL 11,663 11,335
B) Current Liabilities
Current liabilities 6,641 3,173 3,468
TOTAL 6,641 3,173 3,574 434
Working Capital (A-B) 5,022 8162
Net increase in W.C 3140 3140
GRAND TOTAL 7966 7966
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INTERPRETATION:-
In the year 2010-11 there is an overall increase in the working capital by Rs
31,40,000 i.e. by 62.52% but not as significant as in the previous financial year. This
is because of the following reasons
1. In the table we can see that there is increase in the current assets like inventories,
increase in the cash and bank balance, sundry debtors and decrease in the loans and
advances.
3. As there is decrease in the current liabilities and increase in the current assets it
implies that the firm has increased its operations while it has paid off its liabilitiesreducing the availability of funds through creditors, so there is an increase in the
working capital.
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STATEMENT SHOWING CHANGES IN WORKING CAPITAL IN 2009-10
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Particulars 2008-09
(Rs 000)
2009-10
(Rs 000)
Increase Decrease
A) Current Assets
Stock 9136 8810 326
S. Debtors 3211 2294 917
Cash & bank balance 83 23 60
Loans & advances 563 536 27
TOTAL 12993 11663
B) Current Liabilities
Current liabilities 8,697 6,641 2056
TOTAL 8,697 6,641 1330
Working Capital (A-B) 4296 5022
Net increase in W.C 726 726
GRAND TOTAL 5022 5022 2056 2056
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INTERPRETATION:-
In the year 2009-10 there is an overall increase in the working capital by Rs 726,000
i. e by 16.89% but not as significance as in the previous financial year. This is
because of the following reasons
1. In the above table we can see that there is decrease in the assets like sundry debtors
and decrease in the assets like inventories , cash & bank balance and loans &
advances.
2. There is overall decrease in the current liabilities by Rs 2,056.
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RATIO ANALYSIS
Ration analysis is a widely used tool of financial analysis. It is defined as the systematic use
of ratios to interpret the financial statements so that the strength and weaknesses of a firm as
well as its historical performance and current financial condition can be determined. The
term ratio refers to the numerical or quantitative relationship between two items or variables.
The ratios does not add any information not already inherent in the values of profits or sales
but, they reveal the relationship in a more meaningful way so as to enable the management to
make better decision.
Types of Ratios
Ratios can be classified in to broad categories as follows
1) Liquidity Ratios
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2) Capital Structure /Leverage ratios
3) Profitability Ratios
4) Activity /Efficiency Ratios
5) Integrated Analysis of Ratios
6) Growth Ratios
There are many ratios from which analysis can be made in relation to many aspects. The
ratios which we are using here to analysis the working capital related components are as
follows
1) Current Ratio
2) Quick Ratio
3) Cash Ratio
4) Cash Turnover Ratio
5) Working Capital Turnover Ratio
6) Inventory Turnover Ratio
7) Current Assets Turnover Ratio
8) Debt Equity Ratio
MERITS AND DEMERITS OF THE RATIOS
Merits of the ratios
The following are some of the important merits of ratios
1. Ratio analysis reflects the working efficiency of the organization
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2. Since ratio analysis relates the financial health of a concern, insurance and other financial
institutions rely on them while deciding about loan application and in taking vital investment
decisions
3. It helps in establishing trend it helps in preparing plans for the future
4. It is helpful in forecasting likely events of the future.
Demerits of the Ratios
The following are the some important demerits of the ratios
1. There is no single method adapted by all concerns as there is no explicit theoretical
structure for the calculation of the ratios
2. For concrete analysis inside information must be know by the analysis since most concerns
report to portray of ease picture of the financial attachments.
3. Change in the basis of accounting may pose difficult in analysis of ratios between two
intervals.
RATIO ANALYSIS
1. Current Ratios
It measures the relative ability of a company to pay its short term liabilities as and
when they become due. The ratio is used to calculate how well a company is prepared to
meet a sudden demand of short term payments to its creditors.
Formula: current Ratio = Current Assets / Current liabilities.
Particulars 2008-09 2009-10 2010-11
Current Assets 1,29,93,261 11664649 11138095
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Current Liabilities 86,97,007 6641016 3173245
Current Ratios 1.49 1.75 3.5
1.49
1.75
3.5
0
0.5
1
1.5
2
2.5
3
3.5
VAL
UES(intimes)
2009 2010 2011
YEARS
CURRENT ASSETS TO CURRENT LIABILITIES
Graph 1.1 CURRENT ASSTES TO CURRENT LIABILITIES
INTERPRETATION:-
The ratio 2:1 means that for every current liability of one rupee the firm is having two
rupees of current assets which it can repay the current liabilities as and when the
liabilities become due. Compared to previous year 2008-09 increase in the current
ratio of the year 2010-11 which implies that the firm is having sufficient funds to
meet its liabilities as and when they become due.
2. Quick Ratio
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it is also known as Acid Test Ratio and it is used to measure the liquidity of a firm
by its availability of cash as more liquid than other current assets like inventory which
require some time to realize in to cash and current ratio fails as it also takes in to
account assets like inventory which cannot be realized all of sudden. Quick ratio
comes out of this defect present in the current ratio. It gives more accurately the
liquidity of the organisation.
Formula: Acid Test Ratio = Quick Assets/Current Liabilities
Or
Acid Test Ratio = (Current Assets- Inventories)/Current Liabilities
Quick Assets refers to those assets which can be converted into cash immediately or a
shortest span of time without diminution of value such as cash & bank balance, short
term marketable securities, debtors/receivables.
Particulars 2008-09 2009-10 2010-11
Current Assets 38,56,786 28,54,407 26,32,455
Current Liabilities 86,97,007 66,41,016 3173245
Quick Ratios 0.44 0.43 0.83
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0.44 0.43
0.83
0
0.1
0.2
0.3
0.4
0.5
0.60.7
0.8
0.9
VALUES(intimes)
2009 2010 2011
YEARS
QUICK ASSETS TO CURRENT LIABILITIES
Graph 1.2 QUICK ASSETS TO CURRENT LIABILITIES
INTERPRETATION:-
Generally a quick ratio of 1:1 is considered as a satisfactory current financial
condition. Here in the graph 1.2 it can be seen that improvement in the year 2010-11
compared to the previous earlier year and also company improve its efficiency of
inventory turnover. The ratio 1:1 which implies the efficient utilization of resourcesand improvement in the operations of the firm.
3. Cash ratio
This ratio analysis the availability of cash to meet the current liabilities. It finds out
the capacity of the firm to meet the liabilities as and when they become due.
Formula: Cash Ratio= Cash Balance/Current Liabilities
Particulars 2008-09 2009-10 2010-11
Cash Balance 83,213 23864 30,762
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Current Liabilities 86,97,007 66,41,016 3173245
Cash Ratio 0.0095 0.0035 0.0096
0.0095
0.0035
0.0096
0
0.001
0.002
0.003
0.004
0.005
0.006
0.007
0.008
0.009
0.01
VALUES(intimes
)
2009 2010 2011
YEARS
CASH RATIO
Graph 1.3 CASH RATIO
INTERPRETATION:-
In most of the firm it is seen that the cash balance is always less than the current
liabilities. But in this year the cash balance is more compared to the previous year
there is no investment in the other ways like investment.
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4. Cash Turnover Ratio
This ratio represents how many times the cash has been covered in the sales. It shows
the no of times of sales made in terms of one unit of cash.
Formula: Cash Turnover Ratio = Sales/Cash
Particulars 2008-09 2009-10 2010-11
Sales 9962455 7096159 4506987
Cash Balance 83,213 23864 30,762
Cash Turnover Ratio 119 297 146
119
297
146
0
50
100
150
200
250
300
VALU
ES(intimes)
2009 2010 2011
YEARS
Cash Turnover Ratio
Graph 1.4 Cash Turnover Ratio
INTERPRETATION:-
-From the above table it can be seen that the cash ratio is in decreasing manner which is not a
good for the company for the growth.
5. Working Capital Turnover Ratio (WCTR)
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This ratio shows the no of times the working capital covered in the sales. The high
working capital ratio indicates high sales and high working capital coverage in the
sales made by the company.
Formula: WCTR= Cost of Goods Sold/Net Working Capital
Particulars 2008-09 2009-10 2010-11
Cost of Goods Sold 5538953 4994836 5800188
Net Working Capital 4296000 5023633 7966000
Cash Turnover Ratio 1.28 0.99 0.72
1.28
0.99
0.72
0
0.2
0.4
0.6
0.8
1
1.2
1.4
VALUES(intimes)
2009 2010 2011
YEARS
Working Capital Turnover Ratio
Graph 1.5 Working Capital Turnover Ratio
INTERPRETATION:-
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This ratio shows the no of times the working capital rotated in the cost of goods sold.
Higher capital turnover ratio higher will be the requirement of working capital if the
firm is selling goods on long term credit and vice versa.
6. Inventory Turnover Ratio (ITR)
This ratio shows the no of times the inventory covered in the cost of goods sold. Higher the ratio
higher the sales and turnover of inventory which is a good sign of an organisation.
Formula: Inventory turnover Ratio = Cost of Goods Sold/Average Inventory
Particulars 2008-09 2009-10 2010-11
Cost of Goods Sold 5538953 4994836 5800188
Avg Inventory 3784252 8657941 7966000
Cash Turnover Ratio 1.46 0.57 0.72
1.46
0.57
0.72
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
VALUES(intimes)
2009 2010 2011
YEARS
Inventory Turnover Ratio
Graph 1.6 Inventory Turnover Ratio
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1.43
1.74
2.2
0
0.5
1
1.5
2
2.5
VALUES(intimes)
2009 2010 2011
YEARS
Current Assets Turnover Ratio Ratio
Graph 1.7 Current Assets Turnover Ratio
INTERPRETATION:-
This ratio shows the no of times of coverage of current assets in the cost of goods
sold. The higher the ratio the better the operation of the company and vice versa the
current assets turnover ratio is on the rise which is good sign of management of
assets.
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Conclusion
Working capital may be regarded as lifeblood of a business. Its effective provision
can do much to ensure the success of a business, while its inefficient management can lead
not only to loss of profits but also to the ultimate down fall of what otherwise might be
considered as a promising concern. A study of working capital is of major importance to
internal and external analysis because of its close relationship with the current day to dayoperations of a business.
1. Here, I conclude that Changes in the financial year is showing increase in the working
capital, because company maintains its working capital properly in the year 2008-09.
2. According to my calculation Current Assets main part of, the working capital of the
business. According to all Ratios, It shows that company maintains its ratio is very well.
So, In the year 2010-11 company showing better position in the working capital.
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6. Summary of Findings
The Current Ratio has come to a satisfactory level and is nearing 2:1
The Quick Ratio is Should be bit greater than the 1:1 ratio but still the
company is growing this which is a good sign in managing working
capital
The Cash Ratio of the company is increasing as compared to the previous
year
The Cash Turnover Ratio of the company is decreasing year by year
which is not a good sign
The Working Capital Turnover is satisfactory of the company
The Inventory Turnover Ratio is rise which is good sign
The Current Assets Turnover Ratio has raised compared to the previous
year which is good sign of growth of the company
The Company is investing its own equity funds it decreased the debt
totally which indicates that the firm is generating more cash by its
operation
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7.Suggestions:-
Overall long term solvency of ABHINANDAN ENGINEERS is good.
The company is using its own fund for investment.
The overall profitability should be increased by reducing the costof raw material, administrative expenses and by increasing sales.
The company should utilize the available large marketing network
and improve the customer relation through the constant customer
support and often-sales services.
The company should focus on cost control measure for ensuring
competitive pricing of the product.
The company should take full advantages of creditors and obtain
maximum credits from them. So that it reduce interest payments
and the net profit
It is profitable to concentrate on business diversification.
So as the company has a better goodwill in the market it will help
them to a new market.
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It is good to have a decentralized decision making unit in order to
activate the company performance effectively and compete with
other companies.
8. BIBLIOGRAPHY
1. Company Manual
2. Financial Management Book by A.D Bhat
3. Financial Management Book by Khan and Jain.
4. Final Accounts ofABHINANDAN ENGINEERS.