PROJECT REPORT ON TOTAL QUALITY MANAGEMENT
PROJECT REPORT ON TOTAL QUALITY MANAGEMENT
CONCEPTUALIZATION This is Total Quality Management Project
Report. Human resource is the most important factor for any
organization and success of any Organization is depending upon its
resource .If human resource of organization is not happy with the
organization. It will adversely affect the organization.
The higher degree of commitment toward work will improve
productivity and will decrease rejection cause due to human
factor.
So to make the people happy is the responsibility of the
organization. So this study is helpful to measure the level of
commitment toward work and to know the factor affecting the
commitment level .
QUALITY:-1. Quality means fit ness for use.
2. Quality means productivity, competitive cost, and timely
delivery, total customer satisfaction.
3. Quality means conformance to specification and standard.
4. Conformance to requirements.
5. Quality is what the customer says
6. Quality means getting every one to do what they have agreed
to do and to do it right the first time and every time.
TOTAL QUALITY :-It means all the people of the organization are
committed to product quality by doing right things right, first
time, every time by employing organization resource to provide
value to customer.
TOTAL QUALITY MANAGEMENT: -
It is the process designed to focus external/internal customer
expectation preventing problems building ,commitment to quality in
the workforce and promoting to open decision making.
TOTAL:Every one associated with the company is involved in
continuous improvement, in all functional area, at all level.
QUALITY:Customer express and implied requirement is met
fully.
MANAGEMENT:Executive are fully committed
Decision in a planned way.
To maintain existing lever of quality.
To improve existing lever of quality.
Effective utilization of resource.
PRINCIPLES OF TQM:-1.Delight the customer
2. Management by fact
3. People based management
4. Continuous improvement
5. Strong leadership
6. Quality system measure& record
7. Team work, Team accountable, correct problem
8. People oriented technology, speed.
FOUR CS OF TQM1. Commitment 2. Comptence
3. Communication 4. Continuous improvement
FACTOR AFFECTED THE COMMITMENT OF THE EMPLOYEES:-General worker
attitude toward the company.
General worker attitude toward the supervisor.
Lever of satisfaction toward job standard.
The lever of consideration the supervisor shows to his
subordination.
The workload & work pressure level.
The treatment of individual by the management
The lever of workers satisfaction with the salaries
The level of worker pride in the company and its activity
Worker reaction to the formal communication network in the
organization.
Intrinsic job satisfaction level of the worker.
Worker attitude toward the fellow worker.
OPERATIONALISATION OF THE CONCEPT:-I have studied on impact of
employees commitment toward. I have explained earlier.
In the company, they already have implemented TQM so through
this study, I measured the degree of implementation in the
organization and what are the factor that are affected the
commitment lever and to check how much they are satisfaction with
the TQM implement.
For this purpose, I have made the questionnaire which consisting
of multiple-choice questions. I have collected the data from them
and after that I have tabulated them and interpreted them and give
the recommendation.
Focus of the problem:The main emphasis will be on to find out
quality employees commitment toward their work as a result total
quality implementation.
Review of Existing literature: Many people have work on this
topic. They sum up various finding. They found that apply TQM has
directly increased their morale; increase the satisfaction lever
and commitment toward their work. These are the finding of various
researchers.
Several articles have been published in different journals ,
magazines and newspaper such as HARVARD BUSINESS REVIEW,THE
ECONOMIC TIMES,VIKALPA etc.
But the effect of TQM on employees commitment in the company has
so far not undertaken. This project has been done first time in the
company.
LIMITATION~Employees of the organization may hide the fact.~The
management did not agree to disclose all the confidential
data.~Number of respondents are very less, so clear conclusion cant
be drawn.
OBJECTIVE OF THE STUDY:-The objectives of this study are:1.To
find the degree of TQM implemented in the organization.
2.To study the level of commitment of employeestoward their
work.
3. To find out factor influencing the commitment.
RESEARCH METHODOLOGYResearch methodology is a way to solve the
research problem in a systematic manner. It may understand as a
science of studying how the research is done significantly. The
methodology may differ from problem to problem, yet the basic
approach towards the research remains the same. The sequence or
steps followed have been explained as under:
UNIVERSE AND SURVAY POPULATIONThe universe is the employee
working at mill. I have selected 100 employee 40 FROM THE STAFF,60
FROM THE WORKER for the survey.
RESEARCH DESIGNThis research is of EXPLORATARY RESEARCH DESIGN
.I have used the questionnaire method for collecting the data.
ANALYSIS PATTERNData collection: This data is primary data,
which I have been collected with the help of questionnaire. I have
prepared a questionnaire on the basis of the factors responsible
for employees commitment in the organization. MACRO ANALYSIS
(Inferences &Interpretation)The detailed analyses of the
results are explained below:
MOST OF EMPLOYEES FEELS THAT:Most of the staff member and worker
feel that organization is quality conscious toward the employees.
This also increases their commitment toward the work and toward the
organization.
Some of the employees feel that thy have proper information
about the policies, practices followed in the organization. But
some of employees feel that there is no proper communication.
Most of the facts related with the organization are hided by the
management from the employees.
Most of the employees feel that they dont get rewarded for their
good performance.
Most of the staffs member feel that their performance is
properly measured in the organization.
RECCOMENDATIONSThe suggestions I have given for the betterment
are explained below:
It is very important to provide the opportunity to the employees
of the organization to express their ideas or whatever they want to
express.
Management should clear their vision mission and goals towards
the employees in the organization.
Management should involve the workers representatives in
managerial activities so that the transparency could be maintained
and through this they can win the confidence of the employees.
Management should give due importance to mental relaxation
&social cultural development of an employees who strives hard
for the company.
Reward or Praise/appreciation works as magic for an individual
and motivates them for work.
Role clarity of each position should be defined and based on
that individuals can plan their work accordingly.
Self-potential system should be encouraged.
There are regular review and comparison of current & past
performance to detect gradual deterioration in the strategy.
Proper cooperation should be necessary in the company.
NOTE: THIS QUESTIONNAIRE IS PURELY FOR ACADEMIC PURPOSES.ALL THE
INFORMATION PROVIDED WOULD BE KEPT CONFIDENTIAL.Do you think the
organization is quality conscious toward employees?YES NODoes the
organization have the certification of ISO 9000?YES NOIs the
organization providing quality assurance system & operation?YES
NODoes the organization have quality circle?YES NOHow many people
are involved in quality circle?Below 10 above 10 above 15 cant
sayHow frequently the organizations have the meeting of quality
circle?Weekly biweekly monthly yearlyDo you about the agenda of
information or any other information?YES NO
Are the organization is going for the quality audit?YES NO cant
sayDoes your organization have quality information system?YES NO
cant sayAre the information system is regularly updated?YES NO cant
sayDo you think the organization used bench marking, if any, please
tell me the name of the benchmark organization?YES NO cant sayIf
yes, then Org. Areaa. b.Does the organization is going for the
brain storming session?YES NO dontknowAre you practicing the 5s
Japanese philosophy ?YES NODoes the organization have the
certification of ISO 14000 or any other, if any please mention?YES
NO dontknowAre you practicing the six sigma for the error
control?YES NO dontknowA formal career planning process exist in
the organizationStrongly Agree Strongly disagree Dont know Agree
DisagreeThere is a shared vision of where your business is
growing?Strongly Agree Strongly disagree Dont know Agree
DisagreeEmployees are kept updated with changes in job skills &
job designs?Strongly Agree Strongly disagree Dont know Agree
DisagreeFormal or informal method is followed for employees
feedback and acting on that feedback?Strongly Agree Strongly
disagree Dont know Agree DisagreeDoes the organization provide
right environment to apply your knowledge from new programs to the
job?Very much Some whatLittle Not at allDo you feel that the
organization is a good place to work?Yes No SometimesDo you feel
comfortable with rules and policy of the organization?Yes No
Sometimes What types of relations are you having with your
superior, peers and subordinates?Good Average Poor If bad then why
it is so? They are not cooperating. Their behavior is not good
There is no proper communication. All aboveDo you feel that you can
get ahead in the org. if you make an effort?Yes No SometimesDo you
get any reward on your good performance?Yes No SometimesDo you find
that your performance is properly measured in the organization?Yes
No SometimesDo you find that your job makes the best use of your
abilities?Yes No Some TimesThank you for your kind
co-operation.
Find the Next Chapter - objective_wise_analysis of total quality
management ..............Project Report on Total Quality Management
[TQM] OBJECTIVE WISE ANALYSIS(Micro Analysis)The analysis according
to the objectives are explained below:
Do you think that this organization is QUALITY conscious toward
employees?A. Yes B. NoStaff %Workers %
A8765
B1325
This shows that about 87% staff and 65% worker agreed that
organization is quality conscious toward employees.
Does the organization have the certification of ISO 9000?A.
YesB. NoStaff %Worker %
A.10067
B.033
This shows that 100% staff and 70% worker said that the
organization have the certification of ISO 9000.
Is the organization provide quality assurance system&
operationA. YesB. NoStaff %Worker %
A.8058
B.2042
This shows that 80% staff& app.65% worker think that
organization providing quality assurance system &operation.
Does the organization have the quality circle?A. YesB. NoStaff
%Worker %
A.8746
B.1354
It shows that app.90% staff & 46% worker agreed with the
statement . 54% workers said they dont know about this.How many
people are involved in the quality circle?A. Below 10 B.Above 10 C.
Above 15 D. Cant sayStaff %Worker%
A.2236
B.5428
C.1422
D.1014
It shows that about 54% staff says there are above 10 member in
the quality circle.How frequently the organization have the meeting
of quality circle ?A. Weekly B. Biweekly C. Monthly D. YearlyStaff
%Worker%
A.1735
B.5742
C.2623
D.00
It shows that app.60 % staff & 42% worker says organization
have the biweekly meeting of quality circle.Do you know about the
agenda of information or any other information?A. YesB. NoStaff
%Worker %
A.6014
B.4086
Above graph shows that 60% staff say thatthey know about the
agenda of the information but 86% worker say they dont know about
this.Are the organization s going for the quality audit?A. YesB.
NoC. Cant sayStaff %Worker %
A.8526
B.1024
C550
Above shows that 85% staff &26% worker says that
organization is going for quality audit but 50% worker says they
dont know about the quality audit.
Does the organization s have quality information system?A. YesB.
NoC. Cant sayStaff %Worker %
A.9515
B.031
C554
Above shows that 95% staff says that organization have quality
information system &54 % worker says they dont know about
this.
Are the information system is regularly updated?A. YesB. NoC.
Cant sayStaff %Worker %
A.6955
B.1111
C2034
About 70 % staff & 55% worker says that organization
regularly updated.
Do you think the organization s used benchmarking?D. YesE. NoF.
Cant sayStaff %Worker %
A.308
B.250
C4592
This shows that 95%staff says that organization have quality
information system but 54% worker say they dont know about
this.
Does the organization s is going for brain storming session?A.
YesB. NoC. Dont knowStaff %Worker %
A.703
B.130
C1797
Above table shows that 70%staff agreed with the statement.but
97% worker say they dont know about this.
Are the organization is practicing the 5s Japanese philosophy?A.
YesB. NoStaff %Worker %
A.9026
B.1074
It shows that about the 90% staff and 26% worker says they are
practicing this but 74% workers dont know about this.Does the
organization has the certification of ISO 14000 ?A. YesB. NoC. Dont
knowStaff %Worker %
A.10053
B.016
C031
It shows that all of the respondent of staff & most of the
worker category says that organization have ISO 14000. A formal
planning process exist in the organization? A. Strongly agreeB.
Strongly disagreeC. Dont knowD. AgreeE. DisagreeStaff %Workers
%
A187
B1230
C2046
D307
E2010
It shows that about 50% of the respondent are agree with the
statement but in worker category most of them are either disagree
or dont know.
There is a shared vision of where the business is growing?A.
Strongly agreeB. Strongly disagreeC. Dont knowD. AgreeE.
DisagreeStaff %Workers %
A227
B513
C2540
D4513
E327
It shows that about 50% staff of the respondent are agree with
the statement but in worker category app.60% disagree with the
statement.Employees are keep updating with change in the job skill
& job design? A. Strongly agreeB. Strongly disagreeC. Dont
knowD. AgreeE. DisagreeStaff %Workers %
A103
B515
C1013
D5545
E2024
It shows that app. 70% respondents are agree with the statement
.Formal& informal method is followed for employees feedback
& acting on that feedback?A. Strongly agree B. Strongly
disagree C. Dont knowD.Agree E. DisagreeStaff %Workers %
A152
B521
C07
D7040
E1030
Above table shows that app. 80% respondents of the staff and 45%
from worker said that there are proper feedback system. are agree
with the statement .Does the organization provide right environment
to apply knowledge from new programs to the job?A. Strongly agree
B.Strongly disagree C. Dont knowD. Agree E. DisagreeStaff %Workers
%
A55
B7528
C1013
D746
E38
Above table shows that 75% staff and 50% from worker said that
organization provide the right environment to apply knowledge to
the job Proper feedback system. are agree with the statement .
Do you feel that this organization is a good place to work?A.
Yes B. NoC. Cant sayStaff %Workers %
A8058
B536
C158
It shows that 80% staff&58% worker agreed with the
statement.
Do you feel comfortable with the rules and policies of the
organization?A. YesB. NoC. Some timesStaff %Worker %
A.5547
B.2040
C.2513
It shows that the employees of the staff category are more
satisfied with the rules and policies of the organization then
employees from the workers category. What type of relations are you
having with your superiors, peers and subordinates?A. GoodB.
Average C. PoorStaffWorkers
A.9034
B.1050
C.016
It shows that most of the employees from the staff category are
having good relationships with their superiors. But most of the
workers are having only satisfactory relationships. If bad, then
why it is so?A. They are not co-operating with youB. There behavior
is not goodC. There is not proper communication.D. All of the above
Workers
A.10
B.27
C.18
D.45
It shows that most of the worker take misbehaviour from their
superior.Do you feel that you can get ahead in the organization if
you make efforts?A. Yes B. No C. SometimesStaffWorkers
A.4524
B.2572
C.304
This shows that most of the workers feels that they cant get
ahead in the organization if they work hard but the attitude of
employees of staff is just opposite. Do you get reward on your good
performance?A. YesB. NoC. SometimesStaff %Workers %
A.3022
B.6568
C.510
This shows that most of the staff members or workers have not
get reward in the organization on their good performance.Do you
feel that your performance is measured properly in the
organization?A. YesB. NoC. SometimesStaff %Workers %
A.4526
B.4067
C.157
Most of the staff members thinks that their performance is
properly measured in the organization but the workers feels just
opposite of it
Do you find that your job makes the best use of your
abilities?(For Managers)A. YesB. NoC. Sometimes Staff
A.55
B.30
C.15
It shows that most of the staff members are feels that their job
makes the best use of their abilities.
Objective of Project Report : The main objective of the Project
Report is Find the Ratio Analysis of company. And sub objectives of
this report is understand the Meaning of Ratio, Pure Ratio or
Simple Ratio, Advantages of Ratio Analysis, Limitations of Ratio
Analysis, classification of Ratio, Liquidity Ratio, Profitability
Ratio or Income Ratio, Activity & Turnover Ratio, Return on
Capital Employed
RATIO ANALYSISMeaning of Ratio:- A ratio is simple arithmetical
expression of the relationship of one number to another. It may be
defined as the indicated quotient of two mathematical
expressions.According to Accountants Handbook by Wixon, Kell and
Bedford, a ratio is an expression of the quantitative relationship
between two numbers.Ratio Analysis:- Ratio analysis is the process
of determining and presenting the relationship of items and group
of items in the statements. According to Batty J. Management
Accounting Ratio can assist management in its basic functions of
forecasting, planning coordination, control and communication.It is
helpful to know about the liquidity, solvency, capital structure
and profitability of an organization. It is helpful tool to aid in
applying judgement, otherwise complex situations. Ratio analysis
can represent following three methods.Ratio may be expressed in the
following three ways : 1. Pure Ratio or Simple Ratio :- It is
expressed by the simple division of one number by another. For
example , if the current assets of a business are Rs. 200000 and
its current liabilities are Rs. 100000, the ratio of Current assets
to current liabilities will be 2:1.2. Rate or So Many Times :- In
this type , it is calculated how many times a figure is, in
comparison to another figure. For example , if a firms credit sales
during the year are Rs. 200000 and its debtors at the end of the
year are Rs. 40000 , its Debtors Turnover Ratio is 200000/40000 = 5
times. It shows that the credit sales are 5 times in comparison to
debtors. 3. Percentage :- In this type, the relation between two
figures is expressed in hundredth. For example, if a firms capital
is Rs.1000000 and its profit is Rs.200000 the ratio of profit
capital, in term of percentage, is 200000/1000000*100 =
20%ADVANTAGE OF RATIO ANALYSIS1. Helpful in analysis of Financial
Statements.2. Helpful in comparative Study.3. Helpful in locating
the weak spots of the business.4. Helpful in Forecasting. 5.
Estimate about the trend of the business.6. Fixation of ideal
Standards.7. Effective Control.8. Study of Financial
Soundness.LIMITATIONS OF RATIO ANALYSIS1. Comparison not possible
if different firms adopt different accounting policies.2. Ratio
analysis becomes less effective due to price level changes.3. Ratio
may be misleading in the absence of absolute data.4. Limited use of
a single data.5. Lack of proper standards.6. False accounting data
gives false ratio.7. Ratios alone are not adequate for proper
conclusions.8. Effect of personal ability and bias of the
analyst.CLASSIFICATION OF RATIO
Ratio may be classified into the four categories as follows:A.
Liquidity Ratioa. Current Ratiob. Quick Ratio or Acid Test RatioB.
Leverage or Capital Structure Ratioa. Debt Equity Ratiob. Debt to
Total Fund Ratioc. Proprietary Ratiod. Fixed Assets to Proprietors
Fund Ratioe. Capital Gearing Ratiof. Interest Coverage RatioC.
Activity Ratio or Turnover Ratioa. Stock Turnover Ratiob. Debtors
or Receivables Turnover Ratioc. Average Collection Periodd.
Creditors or Payables Turnover Ratioe. Average Payment Periodf.
Fixed Assets Turnover Ratiog. Working Capital Turnover RatioD.
Profitability Ratio or Income Ratio(A) Profitability Ratio based on
Sales :a. Gross Profit Ratiob. Net Profit Ratioc. Operating Ratiod.
Expenses Ratio(B) Profitability Ratio Based on Investment : I.
Return on Capital Employed II. Return on Shareholders Funds :a.
Return on Total Shareholders Fundsb. Return on Equity Shareholders
Fundsc. Earning Per Shared. Dividend Per Sharee. Dividend Payout
Ratiof. Earning and Dividend Yieldg. Price Earning RatioLIQUIDITY
RATIO(A) Liquidity Ratio:- It refers to the ability of the firm to
meet its current liabilities. The liquidity ratio, therefore, are
also called Short-term Solvency Ratio. These ratio are used to
assess the short-term financial position of the concern. They
indicate the firms ability to meet its current obligation out of
current resources.In the words of Saloman J. Flink, Liquidity is
the ability of the firms to meet its current obligations as they
fall due.Liquidity ratio include two ratio :-a. Current Ratiob.
Quick Ratio or Acid Test Ratioa. Current Ratio:- This ratio
explains the relationship between current assets and current
liabilities of a business. Formula: Current Ratio = Current
Assets/
Current Liabilities
Current Assets:-Current assets includes those assets which can
be converted into cash with in a years time.Current Assets = Cash
in Hand + Cash at Bank + B/R + Short Term Investment +
Debtors(Debtors Provision) + Stock(Stock of Finished Goods + Stock
of Raw Material + Work in Progress) + Prepaid Expenses.Current
Liabilities :- Current liabilities include those liabilities which
are repayable in a years time. Current Liabilities = Bank Overdraft
+ B/P + Creditors + Provision for Taxation + Proposed Dividend +
Unclaimed Dividends + Outstanding Expenses + Loans Payable with in
a Year.Significance :- According to accounting principles, a
current ratio of 2:1 is supposed to be an ideal ratio.It means that
current assets of a business should, at least , be twice of its
current liabilities. The higher ratio indicates the better
liquidity position, the firm will be able to pay its current
liabilities more easily. If the ratio is less than 2:1, it indicate
lack of liquidity and shortage of working capital.The biggest
drawback of the current ratio is that it is susceptible to window
dressing. This ratio can be improved by an equal decrease in both
current assets and current liabilities.b. Quick Ratio:- Quick ratio
indicates whether the firm is in a position to pay its current
liabilities with in a month or immediately.Formula:Quick Ratio =
Liquid Assets/ Current Liabilities
Liquid Assets means those assets, which will yield cash very
shortly.Liquid Assets = Current Assets Stock Prepaid
ExpensesSignificance :- An ideal quick ratio is said to be 1:1. If
it is more, it is considered to be better. This ratio is a better
test of short-term financial position of the company.LEVERAGE OR
CAPITAL STRUCTURE RATIO(B) Leverage or Capital Structure Ratio :-
This ratio disclose the firms ability to meet the interest costs
regularly and Long term indebtedness at maturity. These ratio
include the following ratios :a. Debt Equity Ratio:- This ratio can
be expressed in two ways: First Approach : According to this
approach, this ratio expresses the relationship between long term
debts and shareholders fund.Formula:Debt Equity Ratio=Long term
Loans/Shareholders Funds or Net Worth
Long Term Loans:- These refer to long term liabilities which
mature after one year. These include Debentures, Mortgage Loan,
Bank Loan, Loan from Financial institutions and Public Deposits
etc.Shareholders Funds :- These include Equity Share Capital,
Preference Share Capital, Share Premium, General Reserve, Capital
Reserve, Other Reserve and Credit Balance of Profit & Loss
Account.Second Approach : According to this approach the ratio is
calculated as follows:-Formula:Debt Equity Ratio=External
Equities/internal Equities
Debt equity ratio is calculated for using second
approach.Significance :- This Ratio is calculated to assess the
ability of the firm to meet its long term liabilities. Generally,
debt equity ratio of is considered safe.If the debt equity ratio is
more than that, it shows a rather risky financial position from the
long-term point of view, as it indicates that more and more funds
invested in the business are provided by long-term lenders.The
lower this ratio, the better it is for long-term lenders because
they are more secure in that case. Lower than 2:1 debt equity ratio
provides sufficient protection to long-term lenders.b. Debt to
Total Funds Ratio : This Ratio is a variation of the debt equity
ratio and gives the same indication as the debt equity ratio. In
the ratio, debt is expressed in relation to total funds, i.e., both
equity and debt.Formula:Debt to Total Funds Ratio = Long-term
Loans/Shareholders funds + Long-term Loans
Significance :- Generally, debt to total funds ratio of 0.67:1
(or 67%) is considered satisfactory. In other words, the proportion
of long term loans should not be more than 67% of total funds.A
higher ratio indicates a burden of payment of large amount of
interest charges periodically and the repayment of large amount of
loans at maturity. Payment of interest may become difficult if
profit is reduced. Hence, good concerns keep the debt to total
funds ratio below 67%. The lower ratio is better from the long-term
solvency point of view.c. Proprietary Ratio:- This ratio indicates
the proportion of total funds provide by owners or
shareholders.Formula:Proprietary Ratio = Shareholders
Funds/Shareholders Funds + Long term loans
Significance :- This ratio should be 33% or more than that. In
other words, the proportion of shareholders funds to total funds
should be 33% or more. A higher proprietary ratio is generally
treated an indicator of sound financial position from long-term
point of view, because it means that the firm is less dependent on
external sources of finance.If the ratio is low it indicates that
long-term loans are less secured and they face the risk of losing
their money.d. Fixed Assets to Proprietors Fund Ratio :- This ratio
is also know as fixed assets to net worth ratio.Formula:Fixed Asset
to Proprietors Fund Ratio = Fixed Assets/Proprietors Funds (i.e.,
Net Worth)
Significance :- The ratio indicates the extent to which
proprietors (Shareholders) funds are sunk into fixed assets.
Normally , the purchase of fixed assets should be financed by
proprietors funds. If this ratio is less than 100%, it would mean
that proprietors fund are more than fixed assets and a part of
working capital is provided by the proprietors. This will indicate
the long-term financial soundness of business.e. Capital Gearing
Ratio:- This ratio establishes a relationship between equity
capital (including all reserves and undistributed profits) and
fixed cost bearing capital.Formula:Capital Gearing Ratio = Equity
Share Capital+ Reserves + P&L Balance/ Fixed cost Bearing
Capital
Whereas, Fixed Cost Bearing Capital = Preference Share Capital +
Debentures + Long Term LoanSignificance:- If the amount of fixed
cost bearing capital is more than the equity share capital
including reserves an undistributed profits), it will be called
high capital gearing and if it is less, it will be called low
capital gearing.The high gearing will be beneficial to equity
shareholders when the rate of interest/dividend payable on fixed
cost bearing capital is lower than the rate of return on investment
in business.Thus, the main objective of using fixed cost bearing
capital is to maximize the profits available to equity
shareholders.f. Interest Coverage Ratio:- This ratio is also termed
as Debt Service Ratio. This ratio is calculated as
follows:Formula:Interest Coverage Ratio = Net Profit before
charging interest and tax / Fixed Interest Charges
Significance :- This ratio indicates how many times the interest
charges are covered by the profits available to pay interest
charges.This ratio measures the margin of safety for long-term
lenders.This higher the ratio, more secure the lenders is in
respect of payment of interest regularly. If profit just equals
interest, it is an unsafe position for the lender as well as for
the company also , as nothing will be left for shareholders.An
interest coverage ratio of 6 or 7 times is considered
appropriate.ACTIVITY RATIO OR TURNOVER RATIO(C) Activity Ratio or
Turnover Ratio :- These ratio are calculated on the bases of cost
of sales or sales, therefore, these ratio are also called as
Turnover Ratio. Turnover indicates the speed or number of times the
capital employed has been rotated in the process of doing business.
Higher turnover ratio indicates the better use of capital or
resources and in turn lead to higher profitability. It includes the
following :a. Stock Turnover Ratio:- This ratio indicates the
relationship between the cost of goods during the year and average
stock kept during that year.Formula: Stock Turnover Ratio = Cost of
Goods Sold / Average Stock
Here, Cost of goods sold = Net Sales Gross ProfitAverage Stock =
Opening Stock + Closing Stock/2Significance:- This ratio indicates
whether stock has been used or not. It shows the speed with which
the stock is rotated into sales or the number of times the stock is
turned into sales during the year.The higher the ratio, the better
it is, since it indicates that stock is selling quickly. In a
business where stock turnover ratio is high, goods can be sold at a
low margin of profit and even than the profitability may be quit
high.b. Debtors Turnover Ratio :- This ratio indicates the
relationship between credit sales and average debtors during the
year :Formula: Debtor Turnover Ratio = Net Credit Sales / Average
Debtors + Average B/R
While calculating this ratio, provision for bad and doubtful
debts is not deducted from the debtors, so that it may not give a
false impression that debtors are collected quickly.Significance :-
This ratio indicates the speed with which the amount is collected
from debtors. The higher the ratio, the better it is, since it
indicates that amount from debtors is being collected more quickly.
The more quickly the debtors pay, the less the risk from bad-
debts, and so the lower the expenses of collection and increase in
the liquidity of the firm.By comparing the debtors turnover ratio
of the current year with the previous year, it may be assessed
whether the sales policy of the management is efficient or not.c.
Average Collection Period :- This ratio indicates the time with in
which the amount is collected from debtors and bills
receivables.Formula:Average Collection Period = Debtors + Bills
Receivable / Credit Sales per day
Here, Credit Sales per day = Net Credit Sales of the year /
365Second Formula :- Average Collection Period = Average Debtors
*365 / Net Credit Sales
Average collection period can also be calculated on the bases of
Debtors Turnover Ratio. The formula will be:Average Collection
Period = 12 months or 365 days / Debtors Turnover Ratio
Significance :- This ratio shows the time in which the customers
are paying for credit sales. A higher debt collection period is
thus, an indicates of the inefficiency and negligency on the part
of management. On the other hand, if there is decrease in debt
collection period, it indicates prompt payment by debtors which
reduces the chance of bad debts.d. Creditors Turnover Ratio :- This
ratio indicates the relationship between credit purchases and
average creditors during the year .Formula:-Creditors Turnover
Ratio = Net credit Purchases / Average Creditors + Average B/P
Note :- If the amount of credit purchase is not given in the
question, the ratio may be calculated on the bases of total
purchase.Significance :- This ratio indicates the speed with which
the amount is being paid to creditors. The higher the ratio, the
better it is, since it will indicate that the creditors are being
paid more quickly which increases the credit worthiness of the
firm.d. Average Payment Period :- This ratio indicates the period
which is normally taken by the firm to make payment to its
creditors. Formula:-Average Payment Period = Creditors + B/P/
Credit Purchase per day
This ratio may also be calculated as follows :Average Payment
Period = 12 months or 365 days / Creditors Turnover Ratio
Significance :- The lower the ratio, the better it is, because a
shorter payment period implies that the creditors are being paid
rapidly.d. Fixed Assets Turnover Ratio :- This ratio reveals how
efficiently the fixed assets are being utilized.Formula:-Fixed
Assets Turnover Ratio = Cost of Goods Sold/ Net Fixed Assets
Here, Net Fixed Assets = Fixed Assets DepreciationSignificance:-
This ratio is particular importance in manufacturing concerns where
the investment in fixed asset is quit high. Compared with the
previous year, if there is increase in this ratio, it will indicate
that there is better utilization of fixed assets. If there is a
fall in this ratio, it will show that fixed assets have not been
used as efficiently, as they had been used in the previous year.e.
Working Capital Turnover Ratio :- This ratio reveals how
efficiently working capital has been utilized in making
sales.Formula :- Working Capital Turnover Ratio = Cost of Goods
Sold / Working Capital
Here, Cost of Goods Sold = Opening Stock + Purchases + Carriage
+ Wages + Other Direct Expenses - Closing StockWorking Capital =
Current Assets Current LiabilitiesSignificance :- This ratio is of
particular importance in non-manufacturing concerns where current
assets play a major role in generating sales. It shows the number
of times working capital has been rotated in producing sales.A high
working capital turnover ratio shows efficient use of working
capital and quick turnover of current assets like stock and
debtors.A low working capital turnover ratio indicates
under-utilisation of working capital.Profitability Ratios or Income
Ratios(D) Profitability Ratios or Income Ratios:- The main object
of every business concern is to earn profits. A business must be
able to earn adequate profits in relation to the risk and capital
invested in it. The efficiency and the success of a business can be
measured with the help of profitability ratio.Profitability ratios
are calculated to provide answers to the following questions: i. Is
the firm earning adequate profits? ii. What is the rate of gross
profit and net profit on sales? iii. What is the rate of return on
capital employed in the firm? iv. What is the rate of return on
proprietors (shareholders) funds? v. What is the earning per
share?Profitability ratio can be determined on the basis of either
sales or investment into business.(A) Profitability Ratio Based on
Sales :a) Gross Profit Ratio : This ratio shows the relationship
between gross profit and sales. Formula :Gross Profit Ratio = Gross
Profit / Net Sales *100
Here, Net Sales = Sales Sales ReturnSignificance:- This ratio
measures the margin of profit available on sales. The higher the
gross profit ratio, the better it is. No ideal standard is fixed
for this ratio, but the gross profit ratio should be adequate
enough not only to cover the operating expenses but also to provide
for deprecation, interest on loans, dividends and creation of
reserves.b) Net Profit Ratio:- This ratio shows the relationship
between net profit and sales. It may be calculated by two
methods:Formula: Net Profit Ratio = Net Profit / Net sales
*100Operating Net Profit = Operating Net Profit / Net Sales
*100
Here, Operating Net Profit = Gross Profit Operating Expenses
such as Office and Administrative Expenses, Selling and
Distribution Expenses, Discount, Bad Debts, Interest on short-term
debts etc.Significance :- This ratio measures the rate of net
profit earned on sales. It helps in determining the overall
efficiency of the business operations. An increase in the ratio
over the previous year shows improvement in the overall efficiency
and profitability of the business.(c) Operating Ratio:- This ratio
measures the proportion of an enterprise cost of sales and
operating expenses in comparison to its sales.Formula:Operating
Ratio = Cost of Goods Sold + Operating Expenses/ Net Sales *100
Where, Cost of Goods Sold = Opening Stock + Purchases + Carriage
+ Wages + Other Direct Expenses - Closing Stock Operating Expenses
= Office and Administration Exp. + Selling and Distribution Exp. +
Discount + Bad Debts + Interest on Short- term loans. Operating
Ratio and Operating Net Profit Ratio are inter-related. Total of
both these ratios will be 100.Significance:- Operating Ratio is a
measurement of the efficiency and profitability of the business
enterprise. The ratio indicates the extent of sales that is
absorbed by the cost of goods sold and operating expenses. Lower
the operating ratio is better, because it will leave higher margin
of profit on sales.(d) Expenses Ratio:- These ratio indicate the
relationship between expenses and sales. Although the operating
ratio reveals the ratio of total operating expenses in relation to
sales but some of the expenses include in operating ratio may be
increasing while some may be decreasing. Hence, specific expenses
ratio are computed by dividing each type of expense with the net
sales to analyse the causes of variation in each type of
expense.The ratio may be calculated as :(a) Material Consumed Ratio
= Material Consumed/Net Sales*100 (b) Direct Labour cost Ratio =
Direct labour cost / Net sales*100(c) Factory Expenses Ratio =
Factory Expenses / Net Sales *100(a), (b) and (c) mentioned above
will be jointly called cost of goods sold ratio. It may be
calculated as:Cost of Goods Sold Ratio = Cost of Goods Sold / Net
Sales*100(d) Office and Administrative Expenses Ratio= Office and
Administrative Exp./ Net Sales*100(e) Selling Expenses Ratio =
Selling Expenses / Net Sales *100(f) Non- Operating Expenses Ratio
= Non-Operating Exp./Net sales*100Significance:- Various expenses
ratio when compared with the same ratios of the previous year give
a very important indication whether these expenses in relation to
sales are increasing, decreasing or remain stationary. If the
expenses ratio is lower, the profitability will be greater and if
the expenses ratio is higher, the profitability will be lower.(B)
Profitability Ratio Based on Investment in the Business:-These
ratio reflect the true capacity of the resources employed in the
enterprise. Sometimes the profitability ratio based on sales are
high whereas profitability ratio based on investment are low. Since
the capital is employed to earn profit, these ratios are the real
measure of the success of the business and managerial
efficiency.These ratio may be calculated into two categories:I.
Return on Capital EmployedII. Return on Shareholders fundsI. Return
on Capital Employed :- This ratio reflects the overall
profitability of the business. It is calculated by comparing the
profit earned and the capital employed to earn it. This ratio is
usually in percentage and is also known as Rate of Return or Yield
on Capital.Formula:Return on Capital Employed = Profit before
interest, tax and dividends/
Capital Employed *100
Where, Capital Employed = Equity Share Capital + Preference
Share Capital + All Reserves + P&L Balance +Long-Term Loans-
Fictitious Assets (Such as Preliminary Expenses OR etc.)
Non-Operating Assets like Investment made outside the
business.Capital Employed = Fixed Assets + Working Capital
Advantages of Return on Capital Employed:- Since profit is the
overall objective of a business enterprise, this ratio is a
barometer of the overall performance of the enterprise. It measures
how efficiently the capital employed in the business is being used.
Even the performance of two dissimilar firms may be compared with
the help of this ratio. The ratio can be used to judge the
borrowing policy of the enterprise. This ratio helps in taking
decisions regarding capital investment in new projects. The new
projects will be commenced only if the rate of return on capital
employed in such projects is expected to be more than the rate of
borrowing. This ratio helps in affecting the necessary changes in
the financial policies of the firm. Lenders like bankers and
financial institution will be determine whether the enterprise is
viable for giving credit or extending loans or not. With the help
of this ratio, shareholders can also find out whether they will
receive regular and higher dividend or not.II. Return on
Shareholders Funds :- Return on Capital Employed Shows the overall
profitability of the funds supplied by long term lenders and
shareholders taken together. Whereas, Return on shareholders funds
measures only the profitability of the funds invested by
shareholders. These are several measures to calculate the return on
shareholders funds:(a) Return on total Shareholders Funds :-For
calculating this ratio Net Profit after Interest and Tax is divided
by total shareholders funds.Formula:Return on Total Shareholders
Funds = Net Profit after Interest and Tax / Total Shareholders
Funds
Where, Total Shareholders Funds = Equity Share Capital +
Preference Share Capital + All Reserves + P&L A/c Balance
Fictitious Assets Significance:- This ratio reveals how profitably
the proprietors funds have been utilized by the firm. A comparison
of this ratio with that of similar firms will throw light on the
relative profitability and strength of the firm.(b) Return on
Equity Shareholders Funds:-Equity Shareholders of a company are
more interested in knowing the earning capacity of their funds in
the business. As such, this ratio measures the profitability of the
funds belonging to the equity shareholders.Formula:Return on Equity
Shareholders Funds = Net Profit (after int., tax & preference
dividend) / Equity Shareholders Funds *100
RATIO ANALYSIS Where, Equity Shareholders Funds = Equity Share
Capital + All Reserves + P&L A/c Balance Fictitious
AssetsSignificance:- This ratio measures how efficiently the equity
shareholders funds are being used in the business. It is a true
measure of the efficiency of the management since it shows what the
earning capacity of the equity shareholders funds. If the ratio is
high, it is better, because in such a case equity shareholders may
be given a higher dividend.(c) Earning Per Share (E.P.S.) :- This
ratio measure the profit available to the equity shareholders on a
per share basis. All profit left after payment of tax and
preference dividend are available to equity
shareholders.Formula:Earning Per Share = Net Profit Dividend on
Preference Shares / No. of Equity Shares
Significance:- This ratio helpful in the determining of the
market price of the equity share of the company. The ratio is also
helpful in estimating the capacity of the company to declare
dividends on equity shares.(d) Dividend Per Share (D.P.S.):-
Profits remaining after payment of tax and preference dividend are
available to equity shareholders.But of these are not distributed
among them as dividend . Out of these profits is retained in the
business and the remaining is distributed among equity shareholders
as dividend. D.P.S. is the dividend distributed to equity
shareholders divided by the number of equity shares.Formula:D.P.S.
= Dividend paid to Equity Shareholders / No. of Equity Shares
*100
(e) Dividend Payout Ratio or D.P. :- It measures the
relationship between the earning available to equity shareholders
and the dividend distributed among them.Formula:D.P. = Dividend
paid to Equity Shareholders/ Total Net Profit belonging to Equity
Shareholders*100 ORD.P. = D.P.S. / E.P.S. *100
(f) Earning and Dividend Yield :- This ratio is closely related
to E.P.S. and D.P.S. While the E.P.S. and D.P.S. are calculated on
the basis of the book value of shares, this ratio is calculated on
the basis of the market value of share(g) Price Earning (P.E.)
Ratio:- Price earning ratio is the ratio between market price per
equity share & earnings per share. The ratio is calculated to
make an estimate of appreciation in the value of a share of a
company & is widely used by investors to decide whether or not
to buy shares in a particular company.Significance :- This ratio
shows how much is to be invested in the market in this companys
shares to get each rupee of earning on its shares. This ratio is
used to measure whether the market price of a share is high or
low.
HomeProject Report - Working Capital Management
WORKING CAPITAL - Meaning of Working CapitalCapital required for
a business can be classified under two main categories via,
1) Fixed Capital2) Working Capital Every business needs funds
for two purposes for its establishment and to carry out its day-
to-day operations. Long terms funds are required to create
production facilities through purchase of fixed assets such as
p&m, land, building, furniture, etc. Investments in these
assets represent that part of firms capital which is blocked on
permanent or fixed basis and is called fixed capital. Funds are
also needed for short-term purposes for the purchase of raw
material, payment of wages and other day to- day expenses etc.
These funds are known as working capital. In simple words,
working capital refers to that part of the firms capital which is
required for financing short- term or current assets such as cash,
marketable securities, debtors & inventories. Funds, thus,
invested in current assts keep revolving fast and are being
constantly converted in to cash and this cash flows out again in
exchange for other current assets. Hence, it is also known as
revolving or circulating capital or short term capital.
CONCEPT OF WORKING CAPITALThere are two concepts of working
capital:
1. Gross working capital2. Net working capital The gross working
capital is the capital invested in the total current assets of the
enterprises current assets are those
Assets which can convert in to cash within a short period
normally one accounting year.
CONSTITUENTS OF CURRENT ASSETS1) Cash in hand and cash at bank2)
Bills receivables3) Sundry debtors4) Short term loans and
advances.5) Inventories of stock as:a. Raw materialb. Work in
processc. Stores and spares d. Finished goods6. Temporary
investment of surplus funds.
7. Prepaid expenses
8. Accrued incomes.
9. Marketable securities.
In a narrow sense, the term working capital refers to the net
working. Net working capital is the excess of current assets over
current liability, or, say:
NET WORKING CAPITAL = CURRENT ASSETS CURRENT LIABILITIES.
Net working capital can be positive or negative. When the
current assets exceeds the current liabilities are more than the
current assets. Current liabilities are those liabilities, which
are intended to be paid in the ordinary course of business within a
short period of normally one accounting year out of the current
assts or the income business.
CONSTITUENTS OF CURRENT LIABILITIES1. Accrued or outstanding
expenses.2. Short term loans, advances and deposits.3. Dividends
payable.4. Bank overdraft.5. Provision for taxation , if it does
not amt. to app. Of profit.6. Bills payable.7. Sundry creditors.The
gross working capital concept is financial or going concern concept
whereas net working capital is an accounting concept of working
capital. Both the concepts have their own merits.
The gross concept is sometimes preferred to the concept of
working capital for the following reasons:
1. It enables the enterprise to provide correct amount of
working capital at correct time.2. Every management is more
interested in total current assets with which it has to operate
then the source from where it is made available.3. It take into
consideration of the fact every increase in the funds of the
enterprise would increase its working capital.4. This concept is
also useful in determining the rate of return on investments in
working capital. The net working capital concept, however, is also
important for following reasons: It is qualitative concept, which
indicates the firms ability to meet to its operating expenses and
short-term liabilities.
IT indicates the margin of protection available to the short
term creditors.
It is an indicator of the financial soundness of
enterprises.
It suggests the need of financing a part of working capital
requirement out of the permanent sources of funds.
CLASSIFICATION OF WORKING CAPITALWorking capital may be
classified in to ways:
o On the basis of concept.
o On the basis of time.
On the basis of concept working capital can be classified as
gross working capital and net working capital. On the basis of
time, working capital may be classified as:
Permanent or fixed working capital.
Temporary or variable working capital
PERMANENT OR FIXED WORKING CAPITALPermanent or fixed working
capital is minimum amount which is required to ensure effective
utilization of fixed facilities and for maintaining the circulation
of current assets. Every firm has to maintain a minimum level of
raw material, work- in-process, finished goods and cash balance.
This minimum level of current assts is called permanent or fixed
working capital as this part of working is permanently blocked in
current assets. As the business grow the requirements of working
capital also increases due to increase in current assets.
TEMPORARY OR VARIABLE WORKING CAPITALTemporary or variable
working capital is the amount of working capital which is required
to meet the seasonal demands and some special exigencies. Variable
working capital can further be classified as seasonal working
capital and special working capital. The capital required to meet
the seasonal need of the enterprise is called seasonal working
capital. Special working capital is that part of working capital
which is required to meet special exigencies such as launching of
extensive marketing for conducting research, etc.
Temporary working capital differs from permanent working capital
in the sense that is required for short periods and cannot be
permanently employed gainfully in the business.
And some special al is the amount of working capital which is
required to meet the seasonal sets. IMPORTANCE OR ADVANTAGE OF
ADEQUATE WORKING CAPITAL SOLVENCY OF THE BUSINESS: Adequate working
capital helps in maintaining the solvency of the business by
providing uninterrupted of production.
Goodwill: Sufficient amount of working capital enables a firm to
make prompt payments and makes and maintain the goodwill.
Easy loans: Adequate working capital leads to high solvency and
credit standing can arrange loans from banks and other on easy and
favorable terms.
Cash Discounts: Adequate working capital also enables a concern
to avail cash discounts on the purchases and hence reduces
cost.
Regular Supply of Raw Material: Sufficient working capital
ensures regular supply of raw material and continuous
production.
Regular Payment Of Salaries, Wages And Other Day TO Day
Commitments: It leads to the satisfaction of the employees and
raises the morale of its employees, increases their efficiency,
reduces wastage and costs and enhances production and profits.
Exploitation Of Favorable MarketConditions: If a firm is having
adequate working capital then it can exploit the favorable market
conditions such as purchasing its requirements in bulk when the
prices are lower and holdings its inventories for higher
prices.
Ability To Face Crises: A concern can face the situation during
the depression.
Quick And Regular Return On Investments: Sufficient working
capital enables a concern to pay quick and regular of dividends to
its investors and gains confidence of the investors and can raise
more funds in future.
High Morale: Adequate working capital brings an environment of
securities, confidence, high morale which results in overall
efficiency in a business.
EXCESS OR INADEQUATE WORKING CAPITALEvery business concern
should have adequate amount of working capital to run its business
operations. It should have neither redundant or excess working
capital nor inadequate nor shortages of working capital. Both
excess as well as short working capital positions are bad for any
business. However, it is the inadequate working capital which is
more dangerous from the point of view of the firm.
DISADVANTAGES OF REDUNDANT OR EXCESSIVE WORKING CAPITAL1.
Excessive working capital means ideal funds which earn no profit
for the firm and business cannot earn the required rate of return
on its investments.2. Redundant working capital leads to
unnecessary purchasing and accumulation of inventories.3. Excessive
working capital implies excessive debtors and defective credit
policy which causes higher incidence of bad debts.4. It may reduce
the overall efficiency of the business.5. If a firm is having
excessive working capital then the relations with banks and other
financial institution may not be maintained.6. Due to lower rate of
return n investments, the values of shares may also fall.7. The
redundant working capital gives rise to speculative
transactionsDISADVANTAGES OF INADEQUATE WORKING CAPITALEvery
business needs some amounts of working capital. The need for
working capital arises due to the time gap between production and
realization of cash from sales. There is an operating cycle
involved in sales and realization of cash. There are time gaps in
purchase of raw material and production; production and sales; and
realization of cash.
Thus working capital is needed for the following purposes:
For the purpose of raw material, components and spares.
To pay wages and salaries
To incur day-to-day expenses and overload costs such as office
expenses.
To meet the selling costs as packing, advertising, etc.
To provide credit facilities to the customer.
To maintain the inventories of the raw material,
work-in-progress, stores and spares and finished stock.
For studying the need of working capital in a business, one has
to study the business under varying circumstances such as a new
concern requires a lot of funds to meet its initial requirements
such as promotion and formation etc. These expenses are called
preliminary expenses and are capitalized. The amount needed for
working capital depends upon the size of the company and ambitions
of its promoters. Greater the size of the business unit, generally
larger will be the requirements of the working capital.
The requirement of the working capital goes on increasing with
the growth and expensing of the business till it gains maturity. At
maturity the amount of working capital required is called normal
working capital.
There are others factors also influence the need of working
capital in a business.
FACTORS DETERMINING THE WORKING CAPITAL REQUIREMENTS1. NATURE OF
BUSINESS: The requirements of working is very limited in public
utility undertakings such as electricity, water supply and railways
because they offer cash sale only and supply services not products,
and no funds are tied up in inventories and receivables. On the
other hand the trading and financial firms requires less investment
in fixed assets but have to invest large amt. of working capital
along with fixed investments.
2. SIZE OF THE BUSINESS: Greater the size of the business,
greater is the requirement of working capital.
3. PRODUCTION POLICY: If the policy is to keep production steady
by accumulating inventories it will require higher working
capital.
4. LENTH OF PRDUCTION CYCLE: The longer the manufacturing time
the raw material and other supplies have to be carried for a longer
in the process with progressive increment of labor and service
costs before the final product is obtained. So working capital is
directly proportional to the length of the manufacturing
process.
5. SEASONALS VARIATIONS: Generally, during the busy season, a
firm requires larger working capital than in slack season.
6. WORKING CAPITAL CYCLE: The speed with which the working cycle
completes one cycle determines the requirements of working capital.
Longer the cycle larger is the requirement of working capital.
DEBTORSCASH FINISHED GOODS
RAW MATERIAL WORK IN PROGRESS
7. RATE OF STOCK TURNOVER: There is an inverse co-relationship
between the question of working capital and the velocity or speed
with which the sales are affected. A firm having a high rate of
stock turnover wuill needs lower amt. of working capital as
compared to a firm having a low rate of turnover.
8. CREDIT POLICY: A concern that purchases its requirements on
credit and sales its product / services on cash requires lesser
amt. of working capital and vice-versa.
9. BUSINESS CYCLE: In period of boom, when the business is
prosperous, there is need for larger amt. of working capital due to
rise in sales, rise in prices, optimistic expansion of business,
etc. On the contrary in time of depression, the business contracts,
sales decline, difficulties are faced in collection from debtor and
the firm may have a large amt. of working capital.
10. RATE OF GROWTH OF BUSINESS: In faster growing concern, we
shall require large amt. of working capital.
11. EARNING CAPACITY AND DIVIDEND POLICY: Some firms have more
earning capacity than other due to quality of their products,
monopoly conditions, etc. Such firms may generate cash profits from
operations and contribute to their working capital. The dividend
policy also affects the requirement of working capital. A firm
maintaining a steady high rate of cash dividend irrespective of its
profits needs working capital than the firm that retains larger
part of its profits and does not pay so high rate of cash
dividend.
12. PRICE LEVEL CHANGES: Changes in the price level also affect
the working capital requirements. Generally rise in prices leads to
increase in working capital.
Others FACTORS: These are:
Operating efficiency.
Management ability.
Irregularities of supply.
Import policy.
Asset structure.
Importance of labor.
Banking facilities, etc.
MANAGEMENT OF WORKING CAPITALManagement of working capital is
concerned with the problem that arises in attempting to manage the
current assets, current liabilities. The basic goal of working
capital management is to manage the current assets and current
liabilities of a firm in such a way that a satisfactory level of
working capital is maintained, i.e. it is neither adequate nor
excessive as both the situations are bad for any firm. There should
be no shortage of funds and also no working capital should be
ideal. WORKING CAPITAL MANAGEMENT POLICES of a firm has a great on
its probability, liquidity and structural health of the
organization. So working capital management is three dimensional in
nature as
1. It concerned with the formulation of policies with regard to
profitability, liquidity and risk.2. It is concerned with the
decision about the composition and level of current assets.3. It is
concerned with the decision about the composition and level of
current liabilities.
WORKING CAPITAL ANALYSISAs we know working capital is the life
blood and the centre of a business. Adequate amount of working
capital is very much essential for the smooth running of the
business. And the most important part is the efficient management
of working capital in right time. The liquidity position of the
firm is totally effected by the management of working capital. So,
a study of changes in the uses and sources of working capital is
necessary to evaluate the efficiency with which the working capital
is employed in a business. This involves the need of working
capital analysis.
The analysis of working capital can be conducted through a
number of devices, such as:
1. Ratio analysis.2. Fund flow analysis.3. Budgeting.
1. RATIO ANALYSISA ratio is a simple arithmetical expression one
number to another. The technique of ratio analysis can be employed
for measuring short-term liquidity or working capital position of a
firm. The following ratios can be calculated for these
purposes:
1. Current ratio.
2. Quick ratio
3. Absolute liquid ratio
4. Inventory turnover.
5. Receivables turnover.
6. Payable turnover ratio.
7. Working capital turnover ratio.
8. Working capital leverage
9. Ratio of current liabilities to tangible net worth.
2. FUND FLOW ANALYSISFund flow analysis is a technical device
designated to the study the source from which additional funds were
derived and the use to which these sources were put. The fund flow
analysis consists of:
a. Preparing schedule of changes of working capitalb. Statement
of sources and application of funds.It is an effective management
tool to study the changes in financial position (working capital)
business enterprise between beginning and ending of the financial
dates.
3. WORKING CAPITAL BUDGETA budget is a financial and / or
quantitative expression of business plans and polices to be pursued
in the future period time. Working capital budget as a part of the
total budge ting process of a business is prepared estimating
future long term and short term working capital needs and sources
to finance them, and then comparing the budgeted figures with
actual performance for calculating the variances, if any, so that
corrective actions may be taken in future. He objective working
capital budget is to ensure availability of funds as and needed,
and to ensure effective utilization of these resources. The
successful implementation of working capital budget involves the
preparing of separate budget for each element of working capital,
such as, cash, inventories and receivables etc.
ANALYSIS OF SHORT TERM FINANCIAL POSITION OR TEST OF
LIQUIDITYThe short term creditors of a company such as suppliers of
goods of credit and commercial banks short-term loans are primarily
interested to know the ability of a firm to meet its obligations in
time. The short term obligations of a firm can be met in time only
when it is having sufficient liquid assets. So to with the
confidence of investors, creditors, the smooth functioning of the
firm and the efficient use of fixed assets the liquid position of
the firm must be strong. But a very high degree of liquidity of the
firm being tied up in current assets. Therefore, it is important
proper balance in regard to the liquidity of the firm. Two types of
ratios can be calculated for measuring short-term financial
position or short-term solvency position of the firm.
1. Liquidity ratios.2. Current assets movements ratios.
A) LIQUIDITY RATIOSLiquidity refers to the ability of a firm to
meet its current obligations as and when these become due. The
short-term obligations are met by realizing amounts from current,
floating or circulating assts. The current assets should either be
liquid or near about liquidity. These should be convertible in cash
for paying obligations of short-term nature. The sufficiency or
insufficiency of current assets should be assessed by comparing
them with short-term liabilities. If current assets can pay off the
current liabilities then the liquidity position is satisfactory. On
the other hand, if the current liabilities cannot be met out of the
current assets then the liquidity position is bad. To measure the
liquidity of a firm, the following ratios can be calculated:
1. CURRENT RATIO2. QUICK RATIO3. ABSOLUTE LIQUID RATIO
1. CURRENT RATIOCurrent Ratio, also known as working capital
ratio is a measure of general liquidity and its most widely used to
make the analysis of short-term financial position or liquidity of
a firm. It is defined as the relation between current assets and
current liabilities. Thus,
CURRENT RATIO = CURRENT ASSETS
CURRENT LIABILITES
The two components of this ratio are:
1) CURRENT ASSETS2) CURRENT LIABILITESCurrent assets include
cash, marketable securities, bill receivables, sundry debtors,
inventories and work-in-progresses. Current liabilities include
outstanding expenses, bill payable, dividend payable etc.
A relatively high current ratio is an indication that the firm
is liquid and has the ability to pay its current obligations in
time. On the hand a low current ratio represents that the liquidity
position of the firm is not good and the firm shall not be able to
pay its current liabilities in time. A ratio equal or near to the
rule of thumb of 2:1 i.e. current assets double the current
liabilities is considered to be satisfactory.
CALCULATION OF CURRENT RATIO (Rupees in crore)
e.g.
Year200620072008
Current Assets81.2983.1213,6.57
Current Liabilities27.4220.5833.48
Current Ratio2.96:14.03:14.08:1
Interpretation:-As we know that ideal current ratio for any firm
is 2:1. If we see the current ratio of the company for last three
years it has increased from 2006 to 2008. The current ratio of
company is more than the ideal ratio. This depicts that companys
liquidity position is sound. Its current assets are more than its
current liabilities.
2. QUICK RATIOQuick ratio is a more rigorous test of liquidity
than current ratio. Quick ratio may be defined as the relationship
between quick/liquid assets and current or liquid liabilities. An
asset is said to be liquid if it can be converted into cash with a
short period without loss of value. It measures the firms capacity
to pay off current obligations immediately.
QUICK RATIO = QUICK ASSETS CURRENT LIABILITES
Where Quick Assets are:
1) Marketable Securities2) Cash in hand and Cash at bank.3)
Debtors.A high ratio is an indication that the firm is liquid and
has the ability to meet its current liabilities in time and on the
other hand a low quick ratio represents that the firms liquidity
position is not good.
As a rule of thumb ratio of 1:1 is considered satisfactory. It
is generally thought that if quick assets are equal to the current
liabilities then the concern may be able to meet its short-term
obligations. However, a firm having high quick ratio may not have a
satisfactory liquidity position if it has slow paying debtors. On
the other hand, a firm having a low liquidity position if it has
fast moving inventories.
CALCULATION OF QUICK RATIOe.g. (Rupees in Crore)
Year200620072008
Quick Assets44.1447.4361.55
Current Liabilities27.4220.5833.48
Quick Ratio1.6 : 12.3 : 11.8 : 1
Interpretation : A quick ratio is an indication that the firm is
liquid and has the ability to meet its current liabilities in time.
The ideal quick ratio is 1:1. Companys quick ratio is more than
ideal ratio. This shows company has no liquidity problem.
3. absolute liquid ratio Although receivables, debtors and bills
receivable are generally more liquid than inventories, yet there
may be doubts regarding their realization into cash immediately or
in time. So absolute liquid ratio should be calculated together
with current ratio and acid test ratio so as to exclude even
receivables from the current assets and find out the absolute
liquid assets. Absolute Liquid Assets includes :
Absolute liquid ratio = absolute liquid assets CURRENT
LIABILITES
Absolute liquid assets = cash & bank balances. e.g. (Rupees
in Crore)
Year200620072008
Absolute Liquid Assets4.691.795.06
Current Liabilities27.4220.5833.48
Absolute Liquid Ratio.17 : 1.09 : 1.15 : 1
Interpretation : These ratio shows that company carries a small
amount of cash. But there is nothing to be worried about the lack
of cash because company has reserve, borrowing power & long
term investment. In India, firms have credit limits sanctioned from
banks and can easily draw cash.
B) current assets movement ratiosFunds are invested in various
assets in business to make sales and earn profits. The efficiency
with which assets are managed directly affects the volume of sales.
The better the management of assets, large is the amount of sales
and profits. Current assets movement ratios measure the efficiency
with which a firm manages its resources. These ratios are called
turnover ratios because they indicate the speed with which assets
are converted or turned over into sales. Depending upon the
purpose, a number of turnover ratios can be calculated. These are
:
1. Inventory Turnover Ratio2. Debtors Turnover Ratio3. Creditors
Turnover Ratio4. Working Capital Turnover RatioThe current ratio
and quick ratio give misleading results if current assets include
high amount of debtors due to slow credit collections and moreover
if the assets include high amount of slow moving inventories. As
both the ratios ignore the movement of current assets, it is
important to calculate the turnover ratio.
1. Inventory Turnover or Stock Turnover Ratio :Every firm has to
maintain a certain amount of inventory of finished goods so as to
meet the requirements of the business. But the level of inventory
should neither be too high nor too low. Because it is harmful to
hold more inventory as some amount of capital is blocked in it and
some cost is involved in it. It will therefore be advisable to
dispose the inventory as soon as possible.
inventory turnover ratio = cost of good sold Average
inventoryInventory turnover ratio measures the speed with which the
stock is converted into sales. Usually a high inventory ratio
indicates an efficient management of inventory because more
frequently the stocks are sold ; the lesser amount of money is
required to finance the inventory. Where as low inventory turnover
ratio indicates the inefficient management of inventory. A low
inventory turnover implies over investment in inventories, dull
business, poor quality of goods, stock accumulations and slow
moving goods and low profits as compared to total investment.
average stock = opening stock + closing stock 2(Rupees in
Crore)
Year200620072008
Cost of Goods sold110.6103.296.8
Average Stock73.5936.4255.35
Inventory Turnover Ratio1.5 times2.8 times1.75 times
Interpretation : These ratio shows how rapidly the inventory is
turning into receivable through sales. In 2007 the company has high
inventory turnover ratio but in 2008 it has reduced to 1.75 times.
This shows that the companys inventory management technique is less
efficient as compare to last year.
2. Inventory conversion period:Inventory conversion period = 365
(net working days) inventory turnover ratioe.g.
Year200620072008
Days365365365
Inventory Turnover Ratio1.52.81.8
Inventory Conversion Period243 days130 days202 days
Interpretation : Inventory conversion period shows that how many
days inventories takes to convert from raw material to finished
goods. In the company inventory conversion period is decreasing.
This shows the efficiency of management to convert the inventory
into cash.
3. debtors turnover ratio :A concern may sell its goods on cash
as well as on credit to increase its sales and a liberal credit
policy may result in tying up substantial funds of a firm in the
form of trade debtors. Trade debtors are expected to be converted
into cash within a short period and are included in current assets.
So liquidity position of a concern also depends upon the quality of
trade debtors. Two types of ratio can be calculated to evaluate the
quality of debtors.
a) Debtors Turnover Ratio
b) Average Collection Period
Debtors Turnover Ratio = Total Sales (Credit) Average
DebtorsDebtors velocity indicates the number of times the debtors
are turned over during a year. Generally higher the value of
debtors turnover ratio the more efficient is the management of
debtors/sales or more liquid are the debtors. Whereas a low debtors
turnover ratio indicates poor management of debtors/sales and less
liquid debtors. This ratio should be compared with ratios of other
firms doing the same business and a trend may be found to make a
better interpretation of the ratio.
average debtors= opening debtor+closing debtor 2
e.g.
Year200620072008
Sales166.0151.5169.5
Average Debtors17.3318.1922.50
Debtor Turnover Ratio9.6 times8.3 times7.5 times
Interpretation : This ratio indicates the speed with which
debtors are being converted or turnover into sales. The higher the
values or turnover into sales. The higher the values of debtors
turnover, the more efficient is the management of credit. But in
the company the debtor turnover ratio is decreasing year to year.
This shows that company is not utilizing its debtors efficiency.
Now their credit policy become liberal as compare to previous
year.
4. average collection period :Average Collection Period = No. of
Working Days Debtors Turnover Ratio
The average collection period ratio represents the average
number of days for which a firm has to wait before its receivables
are converted into cash. It measures the quality of debtors.
Generally, shorter the average collection period the better is the
quality of debtors as a short collection period implies quick
payment by debtors and vice-versa.
Average Collection Period = 365 (Net Working Days) Debtors
Turnover Ratio
Year200620072008
Days365365365
Debtor Turnover Ratio9.68.37.5
Average Collection Period38 days44 days49 days
Interpretation : The average collection period measures the
quality of debtors and it helps in analyzing the efficiency of
collection efforts. It also helps to analysis the credit policy
adopted by company. In the firm average collection period
increasing year to year. It shows that the firm has Liberal Credit
policy. These changes in policy are due to competitors credit
policy.
5. Working capital turnover ratio :Working capital turnover
ratio indicates the velocity of utilization of net working capital.
This ratio indicates the number of times the working capital is
turned over in the course of the year. This ratio measures the
efficiency with which the working capital is used by the firm. A
higher ratio indicates efficient utilization of working capital and
a low ratio indicates otherwise. But a very high working capital
turnover is not a good situation for any firm.
Working Capital Turnover Ratio = Cost of Sales Net Working
Capital
Working Capital Turnover = Sales Networking Capital
e.g.
Year200620072008
Sales166.0151.5169.5
Networking Capital53.8762.52103.09
Working Capital Turnover3.08 2.41.64
Interpretation : This ratio indicates low much net working
capital requires for sales. In 2008, the reciprocal of this ratio
(1/1.64 = .609) shows that for sales of Rs. 1 the company requires
60 paisa as working capital. Thus this ratio is helpful to forecast
the working capital requirement on the basis of sale.
Inventories(Rs. in Crores)Year2005-20062006-20072007-2008
Inventories37.1535.6975.01
Interpretation : Inventories is a major part of current assets.
If any company wants to manage its working capital efficiency, it
has to manage its inventories efficiently. The graph shows that
inventory in 2005-2006 is 45%, in 2006-2007 is 43% and in 2007-2008
is 54% of their current assets. The company should try to reduce
the inventory upto 10% or 20% of current assets.
Cash bnak balance :(Rs. in
Crores)Year2005-20062006-20072007-2008
Cash Bank Balance4.691.795.05
Interpretation : Cash is basic input or component of working
capital. Cash is needed to keep the business running on a
continuous basis. So the organization should have sufficient cash
to meet various requirements. The above graph is indicate that in
2006 the cash is 4.69 crores but in 2007 it has decrease to 1.79.
The result of that it disturb the firms manufacturing operations.
In 2008, it is increased upto approx. 5.1% cash balance. So in
2008, the company has no problem for meeting its requirement as
compare to 2007.
debtors :(Rs. in Crores)Year2005-20062006-20072007-2008
Debtors17.3319.0525.94
Interpretation : Debtors constitute a substantial portion of
total current assets. In India it constitute one third of current
assets. The above graph is depict that there is increase in
debtors. It represents an extension of credit to customers. The
reason for increasing credit is competition and company liberal
credit policy.
current assets :(Rs. in
Crores)Year2005-20062006-20072007-2008
Current Assets81.2983.15136.57
Interpretation : This graph shows that there is 64% increase in
current assets in 2008. This increase is arise because there is
approx. 50% increase in inventories. Increase in current assets
shows the liquidity soundness of company.
current liability :(Rs. in
Crores)Year2005-20062006-20072007-2008
Current Liability27.4220.5833.48
Interpretation : Current liabilities shows company short term
debts pay to outsiders. In 2008 the current liabilities of the
company increased. But still increase in current assets are more
than its current liabilities.
net wokring capital :(Rs. in
Crores)Year2005-20062006-20072007-2008
Net Working Capital53.8762.53103.09
Interpretation : Working capital is required to finance day to
day operations of a firm. There should be an optimum level of
working capital. It should not be too less or not too excess. In
the company there is increase in working capital. The increase in
working capital arises because the company has expanded its
business.
RESEARCH METHODOLOGYThe methodology, I have adopted for my study
is the various tools, which basically analyze critically financial
position of to the organization: I. COMMON-SIZE P/L A/C II.
COMMON-SIZE BALANCE SHEET III. COMPARTIVE P/L A/C IV. COMPARTIVE
BALANCE SHEET V. TREND ANALYSIS VI. RATIO ANALYSISThe above
parameters are used for critical analysis of financial position.
With the evaluation of each component, the financial position from
different angles is tried to be presented in well and systematic
manner. By critical analysis with the help of different tools, it
becomes clear how the financial manager handles the finance matters
in profitable manner in the critical challenging atmosphere, the
recommendation are made which would suggest the organization in
formulation of a healthy and strong position financially with
proper management system.I sincerely hope, through the evaluation
of various percentage, ratios and comparative analysis, the
organization would be able to conquer its in efficiencies and makes
the desired changes.
ANALYSIS OF FINANCIAL STATEMENTS
FINANCIAL STATEMENTS:
Financial statement is a collection of data organized according
to logical and consistent accounting procedure to convey an
under-standing of some financial aspects of a business firm. It may
show position at a moment in time, as in the case of balance sheet
or may reveal a series of activities over a given period of time,
as in the case of an income statement. Thus, the term financial
statements generally refers to the two statements
(1) The position statement or Balance sheet.
(2) The income statement or the profit and loss Account.
OBJECTIVES OF FINANCIAL STATEMENTS:
According to accounting Principal Board of America (APB)
states
The following objectives of financial statements: -
1. To provide reliable financial information about economic
resources and obligation of a business firm.
2. To provide other needed information about charges in such
economic resources and obligation.
3. To provide reliable information about change in net resources
(recourses less obligations) missing out of business
activities.
4. To provide financial information that assets in estimating
the learning potential of the business.
LIMITATIONS OF FINANCIAL STATEMENTS:
Though financial statements are relevant and useful for a
concern, still they do not present a final picture a final picture
of a concern. The utility of these statements is dependent upon a
number of factors. The analysis and interpretation of these
statements must be done carefully otherwise misleading conclusion
may be drawn.
Financial statements suffer from the following limitations:
-
1. Financial statements do not given a final picture of the
concern. The data given in these statements is only approximate.
The actual value can only be determined when the business is sold
or liquidated.
2. Financial statements have been prepared for different
accounting periods, generally one year, during the life of a
concern. The costs and incomes are apportioned to different periods
with a view to determine profits etc. The allocation of expenses
and income depends upon the personal judgment of the accountant.
The existence of contingent assets and liabilities also make the
statements imprecise. So financial statement are at the most
interim reports rather than the final picture of the firm.
3. The financial statements are expressed in monetary value, so
they appear to give final and accurate position. The value of fixed
assets in the balance sheet neither represent the value for which
fixed assets can be sold nor the amount which will be required to
replace these assets. The balance sheet is prepared on the
presumption of a going concern. The concern is expected to continue
in future. So fixed assets are shown at cost less accumulated
deprecation. Moreover, there are certain assets in the balance
sheet which will realize nothing at the time of liquidation but
they are shown in the balance sheets.
4. The financial statements are prepared on the basis of
historical costs Or original costs. The value of assets decreases
with the passage of time current price changes are not taken into
account. The statement are not prepared with the keeping in view
the economic conditions. the balance sheet loses the significance
of being an index of current economics realities. Similarly, the
profitability shown by the income statements may be represent the
earning capacity of the concern.
5. There are certain factors which have a bearing on the
financial position and operating result of the business but they do
not become a part of these statements because they cannot be
measured in monetary terms. The basic limitation of the traditional
financial statements comprising the balance sheet, profit &
loss A/c is that they do not give all the information regarding the
financial operation of the firm. Nevertheless, they provide some
extremely useful information to the extent the balance sheet
mirrors the financial position on a particular data in lines of the
structure of assets, liabilities etc. and the profit & loss A/c
shows the result of operation during a certain period in terms
revenue obtained and cost incurred during the year. Thus, the
financial position and operation of the firm.
FINANCIAL STATEMENT ANALYSISIt is the process of identifying the
financial strength and weakness of a firm from the available
accounting data and financial statements. The analysis is done
CALCULATIONS OF RATIOSRatios are relationship expressed in
mathematical terms between figures, which are connected with each
other in some manner.
CLASSIFICATION OF RATIOSRatios can be classified in to different
categories depending upon the basis of classification
The traditional classification has been on the basis of the
financial statement to which the determination of ratios
belongs.
These are:- Profit & Loss account ratios Balance Sheet
ratios Composite ratios Project Description :Title : Working
Capital Management of ____________
Pages : 73
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TABLE OF CONTENTS INTRODUCTION TO BANKING SECTOR OBJECTIVES OF
THE STUDY RESEARCH METHODOLOGY ANALYSIS AND INTERPRETATION FINDINGS
RECOMMENDATIONS LIMITATIONS CONCLUSION BIBLIOGRAPHY
ANNEXUREOBJECTIVES OF THE STUDY Primary Objective: To know the
various HR implications in private banks.Secondary Objective: To
know whether employees are satisfied with their jobs or not. To
know the various retention practices used in banks? To know the
motivational factors used by the banks? To know whether training
and development programs are conducted b the banks or not To know
the cause of their problems related with :1. Their Health Problem2.
DissatisfactionProject Report - Training Need / Identification and
Importance of Training for Employees
TRAINING EFFECTIVENESS - 5p/TrainingThe game of economic
competition has new rules. Firms should be fast and responsive.
This requires responding to customers' needs for quality, variety,
customization, convenience and timeliness. Meeting these new
standards requires a workforce that is technically trained in all
respects. It requires people who are capable of analyzing and
solving job related problems, working cooperatively in teams and
'changing hats' and shifting from job to job as well. Training has
increased in importance in today's environment where jobs are
complex and change. Rapidly. Companies that pay lip-service to the
need for training, by lazily setting aside a few hours a year, will
soon find themselves at the receiving end when talented employees
leave in frustration and other employees find it difficult to beat
rivals with new products, sophisticated designs and improved ways
of selling. To survive and flourish in the present day
corporate-jungle, companies should invest time and money in
upgrading the knowledge and skills of their employees constantly.
For, any company that stops injecting itself with intelligence is
going to die. The purpose of this chapter is make the student
understand the basic principles, areas, and methods of training
currently in use in the corporate circles.
Need for TrainingAfter employees have been selected for various
positions in an organization, training them for the specific tasks
to which they have been assigned assumes great importance. It is
true in many organizations that before an employee is fitted into a
harmonious working relationship with other employees, he is given
adequate training. Training is the act of increasing the knowledge
and skills of an employee for performing a particular job. The
major outcome of training is learning. A trainee learns new habits,
refined skills and useful knowledge during the training that helps
him improve performance. Training enables an employee to do his
present job more efficiently and prepare himself for a higher-level
job. The essential features of training may be stated thus:
Increases knowledge and skills for doing a particular job; it
bridges the gap between job needs and employee skills, knowledge
and behaviors
Focuses attention on the current job; it is job specific and
addresses particular performance deficits or problems
Concentrates on individual employees; changing what employees
know, how they work, their attitudes toward their work or their
interactions with their co-workers or supervisors
Tends to be more narrowly focused and oriented toward
short-term