SUMMER TRAINING REPORT ON WORKING CAPITAL MANAGEMENT IN VINAYAK TEXTILE MILLS LIMITED Submitted To: Mr. M.S.Arora (D.G.M.) In partial fulfillment of requirement for the award of degree in MASTER OF BUSINESS ADMINISTRATION Submitted By:- AMAN DEEP PASSI
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SUMMER TRAINING REPORT
ON
WORKING CAPITAL MANAGEMENT
IN VINAYAK TEXTILE MILLS LIMITED
Submitted To: Mr. M.S.Arora (D.G.M.)
In partial fulfillment of requirement for the award of degree in
MASTER OF BUSINESS ADMINISTRATION
Submitted By:- AMAN DEEP PASSI
AJAY JAIN
(2008-10)
PREFACE
This report , prepared during the summer training, is life’s greatest treasure. The training
held was very gainful as it took me close to real life.
The study aims to analyze the extent to which volume of working capital has been
effectively and efficiently utilized in this unit. The report is divided into various parts for
the close analyses of different components of working capital. The last part deals with the
conclusion and suggestions to improve the working capital management and to make it
more effective.
ACKNOWLEDGEMENT
“Accomplishment of a task with desired success calls for dedication towards work and
prompting guidance, co-operation and deliberation from seniors.”
This report is the outcome of six weeks training that I received at VINAYAK
TEXTILE MILLS LTD.
First of all, I wish to express my profound gratitude and sincere thanks to
MR. M.S. ARORA(D.G.M, ACCOUNTS DEPARTMENT),Incharge of the project for
his constant and tireless guidance and encouragement given during the study and who
allowed me to join summer training at VTM.
It gives me immense pleasure to acknowledge my deep sense of gratitude
and sincere thanks to Mr. GURNAM SINGH, ACCOUNTS OFFICER for extending the
courtesy and for guidance, support and affection throughout the course of this work.
I am extremely grateful to MISS. KAWALPREET KAUR and other
faculty members for their valuable guidance and glorious teaching.
In last, I express my profound gratefulness and indebtedness to the
esteemed organization for granting me the grand privilege of working on a project under
team of experts and professionals in the field of finance.
CONTENTS
CHAPTER 1
THEORETICAL BACKGROUND OF WORKING CAPITAL
MANAGEMENT
CHAPTER 2
HISTORY OF INDIAN TEXTILE INDUSTRY
CHAPTER 3
PROFILE OF THE GROUP AND UNIT
CHAPTER 4
OUTLINE OF THE STUDY
CHAPTER 5
WORKING CAPITAL ANALYSIS
OPERATING CYCLE ANALYSIS
ANALYSIS ON THE BASIS OF HISTORICAL DATA
1. RATIO ANALYSIS
2. COMMON SIZE STATEMENT ANALYSIS
3. ANALYSIS ON THE BASIS OF SCHEDULE
OF CHANGES IN WORKING CAPITAL
CHAPTER 6
CASH MANAGEMENT
CHAPTER 7
RECEIVABLES MANAGEMENT
CHAPTER 8
MANAGEMENT OF INVENTORY
CHAPTER 9
FINDINGS, SUGGESTIONS, CONCLUSION, BIBLIOGRAPHY
APPENDIX
REFERENCES AND BIBLIOGRAPHY
EXECUTIVE SUMMARY
STUDY TOPIC:
WORKING CAPITAL MANAGEMENT OF VINAYAK TEXTILE MILLS LTD.
( A UNIT OF VARDHMAN POLYTEX LTD.)
OBJECTIVES OF THE STUDY :
To analyze the working capital management of the company.
To determine the operating cycle of the unit.
To know the future need of working capital in the running organization.
To render recommendations for effective management of working capital.
TIME SPAN:
A period of five year i.e. 2004-2008 has been taken for the study.
STUDY INSTRUMENT:
Annual Reports and other official documents of the selected units of the company.
METHODOLOGY :
To recognize the various type of information which are necessary for the
study of working capital management.
Collection of data from various department of VTM to analyze the working
capital management of VTM.
For understanding the various reports, personal interviews are conducted.
With the help of various techniques like:
- Operating Cycle analysis
- Ratio Analysis
- Common size statement
- Schedule of changes in working capital
The overall position of VTM is studied and analyzed
Suggestions are given on the basis of findings for better understanding of
working capital management.
SCHEME OF PRESENTATION:
The project report is prepared in three parts.
1. First part of the report gives an overview and theoretical
background to the subject i.e working capital management.
2. Second part of the report presents a general profile of
VINAYAK TEXTILE MILLS LTD. where the summer
training has been undertaken.
3. Third part of the report deals with the project under study
which includes:
- Operating Cycle analysis
- Ratio Analysis
- Common size statement
- Schedule of changes in working capital
Chapter- 1 THEORETICAL BACKGROUND OF WORKING CAPITAL MANAGEMENT
MEANING OF WORKING CAPITAL:-
In simple words working capital means that which is issued to carry out the day to day
operations of a business. Capital required for a business can be classified under two main
categories
Fixed capital
Working capital
Every business needs funds for two purposes, for its establishment and to carry on its day
to day operations. Long term funds are required to create production facilities through
purchase of fixed assets such as plant and machinery, land, building, furniture etc.
Investment in these assets represents that part of firm capital, which is blocked on a
permanent or fixed basis called fixed capital. Funds are also needed for short term
purposes i.e. for the purchase of raw material, payment of wages and other day to day
operations of business. These funds are known as working capital. In other words,
working capital refers to that firm’s Capital, which is required for short – term assets or
current assets. Funds thus invested in current assets keep revolving last and being
constantly converted into cash and this cash flow is again converted into other current
assts. Hence it is known as circulating or short – term capital.
CONCEPT OF WORKING CAPITAL:
1. Gross Working Capital
It is simply called working capital refers to the firm’s investment in current assets so
the total current assets of the firm are known as gross working capital.
2. Net Working Capital
It represents the difference between current assets and current liabilities. Net
working capital may be positive or negative. Positive net working capital is that when
current assets are more than current liabilities. But when current liabilities become
more than current assets than it is negative working capital.
In brief we can say that working capital is too much necessary for the smooth functioning
and proper utilization of fixed assets.
TYPES OF WORKING CAPITAL:
1. Permanent Working Capital:
As the operating cycle is a continuous process so the need for working capital also
arises continuously. But the magnitude of current assets needed is not always
same; it increases and decreases over time. However there is always a minimum
level of current assets. This level is known as permanent or fixed working capital.
2. Temporary Working Capital:
The extra working capital needed to support the changing production and sales
activities, is called variable or functioning or temporary working capital. This can
be shown in the following diagram:-
Amount of Working
Capital Temporary capital
Permanent Capital
Time
NEED FOR WORKING CAPITAL:
The need for working capital cannot be overemphasized. The need of working capital
arises due to the time gap between production and realization of cash from sales. So the
working capital or investment in current assets becomes necessary need for working
capital. It arises due to following reasons:-
A. OPERATING CYCLE
“Operating cycle is the time duration requires for converting sales into cash after the
conversion of resources into inventories.”
First of all a firm purchase Raw Material, then after some processing it is
converted into work–in–progress and after this further processing is done to convert
work–in–progress in finished goods. After the raw material is converted into finished
goods, sales are made. Sales are no always full cash sales; there are credit sales also.
These credit sales after some period are converted into cash. So the whole process takes
the time. This time taken is known as the length of operating cycle. So operating cycles
includes:-
1. Raw Material conversion period (RMCP)
2. Work–in – progress conversion period (WIPCP)
3. Finished goods conversion period (FCP)
4. Debtors Conversion period (DCP)
So operating cycle can be known as following:-
Sales
Raw Material
Work in Progress
Cash Collection from Debtors
Finished Goods
Credit Sales Cash Sales
If the length of the operating cycle has short length period then less working capital is
required. So working capital requirement is directly related with operating cycle.
Operating cycle may be of two types
1. Gross Operating cycle
2. Net operating cycle
1. Gross Operating cycle
Gross Operating cycle is the total time period from the conversion of Raw Material
into finished goods and finished goods into sales and then sales into cash.
GOC =RMCP + WIPCP + FCP + DCP
2. Net Operating Cycle
As we provide period to debtors for the payments, our creditors also provide period to
us for payment to them. So this reduces our requirement of working capital. This also
affects the operating cycle. Operating cycle’s length reduces with so many days as
provided by the creditors to us. The difference between gross operating cycle and
period allowed by the creditors for payment is known as net operating cycle.
NOC = GOC – CPP
B. WORKING CAPITAL REQUIREMENT FOR THE ANTICIPATED
NEEDS FOR FUTURE:-
These needs may be of Raw Material or Finished Goods. Sometimes because of non-
availability of Raw Material or due to seasonal availability of Raw Material some
advances stock of Raw Material becomes necessary for company. In the similar way due
to sudden arise of demand of finished goods in future more finished goods are kept in
stock. For both reasons more working capital is required because funds will be involve in
these safeties stocks.
DETERMINENTS OF WORKING CAPITAL :
Followings are the main determinants of working capital.
1. Nature and Size of Business :
The working capital of a firm basically depends upon nature of its business for e.g.
Public utility undertakings like electricity; water supply needs very less working
capital because offer only cash sales whereas trading & financial firms have a very
less investment in fixed assets but require a large sum of money invested in working
capital.
The size of business also determines working capital requirement and it may be
measured in terms of scale of operations. Greater the size of operation, larger will be
requirement of working capital.
2. Manufacturing Cycle:
The manufacturing cycle also creates the need of working capital. Manufacturing
cycle starts with the purchase and use of Raw Material and completes with the production
of finished goods. If the manufacturing cycle will be longer more working capital will be
required or vice versa.
3. Seasonal variation:
In certain industries like VTM raw material is not available throughout the year. They
have to buy raw material in bulk during the season to ensure an uninterrupted flow and
process them during the year. Generally, during the busy season, a firm requires large
working capital than in the slack season.
.
4. Production Policy:
Production policy also determines the working capital level of a firm. If the firm has
steady production policy, it may require need of continuous working capital. But if the
firms adopt a fluctuating production policy means to produce more during the lead
demand season then the more working capital may require at that time but not in other
period during a financial year. So the different productions policy arises different type
of need of working capital.
5. Firm’s Credit Policy:
The firm’s credit policy directly affects the working capital requirement. If the firm
has liberal credit policy, hence the more credit period will be provided to the debtors
so this will lead to more working capital requirement. With the liberal credit policy
operating cycle length increases and vice versa.
6. Sales Growth:
Working capital requirement is directly related with sales growth. If the sales are
growing, more working capital will be needed due to arises need of more Raw Material,
finished goods and credit sales.
7. Business Cycle:
Business cycle refers to alternate expansion and contraction in general business. In a
period of boom, larger amount of working capital is required where as in a period of
depression lesser amount of working capital is required.
8. Earning Capacity & Dividend Policy:
If the firm has enough earnings and it is not paying dividend then it will not be in need
of external borrowings. If firm wants to increase its earning power then more working
capital will be required also to pay more dividend more profits are needed which give
rise to more working capital. Company is paying 42% dividend to its shareholder.
9. Price Level Changes:
Changes in the price level also effects the working capital requirements. Generally, the
rising prices will require the firm to maintain larger amount of working capital as
more funds will be required to maintain the same current assets.
10. Condition of Supply:
The inventory of raw material, spares and stores depends on the condition of supply.
If the supply is prompt the firm can manage with small inventory. However if the
supply is unpredictable then the firm to ensure continuity of production, should
acquire stocks as and when they are available and have to carry larger inventory on an
average.
11. Other Factors:
Certain other factors such as operating efficiency, management ability, irregularities of
supply, import policy, asset structure, importance of labour, banking facilities, time
lag. etc. also influence the requirement of working capital.
So these are the main determinants of working capital. The importance of influence of
these determinants on working capital may differ from firm to firm.
MEANING AND NATURE OF WORKING CAPITAL
MANAGEMENT
The management of working capital is concerned with two problems that arise in
attempting to manage the current assets, current liabilities and the inter relationship that
asserts between them.
The basic goal is working capital management is to manage current assets and current
liabilities of a firm in such a way that a satisfactory of optimum level of working capital
is maintained i.e. it is neither inadequate nor excessive. This is so because both
inadequate as well as excessive working capital position is bad for business.
MAJOR DECISIONS IN WORKING CAPITAL MANAGEMENT
There are two major decisions management relating to working capital management:-
1. What should be ratio of current assets to sales?
2. What should be the appropriate mix of short term financing and long term
financing for financing these current assets?
1. Current assets in relation to sales:-
If the firm can forecast accurately the factors, which effect the working capital, the
investment in current assets, can be designed uniquely. When uncertainty characteristics
the above factors, as it usually does the investment in current assets cannot be specified
uniquely. In case of uncertainty, the outlay on current assets should consist of base
component meant to meet normal requirement and a safety component meant to cope
with unusual requirement. The safety component depends upon low conservative or
aggressive in the current assets policy of a firm. If the firm purchases a very conservative
current asset policy it would carry a high level of current assets in relation to sales. If a
firm adopts a moderate current assets policy it would carry moderate level of current
assets in relation to sales, finally is a firm follows a highly aggressive current assets
policy, it would carry a low level of current assets in relation to sales.
VTM is following current assets policy showing moderate level of current assets in
relation to sales as is evident from ratio analysis.
2. Determining a Short Term and Long Term Financing Mix for
Financing of current assets:-
There are three approaches in this regard, which are discussed below:
HEDGING APPROACH
This approach is also called matching approach. In this approach there is a proper
matching of expected life of asset with the duration of fund. Usually, according to this
approach long-term sources are used for financing permanent current assets and fixed
assets & short-term sources are used for financing temporary current assets:
term financing
Fixed Assets
Time
CONSERVATIVE APPROACH
In this approach there is more reliance on long-term financing in comparison to short-
term financing. Even some part of the temporary current comparison to finance from
long-term sources because long-term sources are less risky in comparison to short-term
sources.
Temporary Current Assets
Short-term financing
Permanent Current Assets Long-term financing
Fixed Assets
Time
Permanent current assets
Temporary current assetsShort term financing
Long term financing
ASSETS
ASSETS
AGGRESSIVE APPROACH
In this approach there is more reliance on short term financing and even a part of
permanent current assets is financed from short-term finance.
Temporary current assets Short term financing
Permanent current assets Long term financing
Fixed Assets
Time
In VTM, the current assets are financed from short term sources as well as long term
sources, so they follow conservative approach.
ASSETS
Chapter- 2
HISTORY OF THE INDIAN TEXTILE
INDUSTRY
HISTORY OF THE INDIAN TEXTILE INDUSTRY:
The human need is to eat well for to be alive and shelter to protect them from discomforts
of nature and a place to live in. Human beings also need something to cover their body to
protect from diverse climates and to add the appearance. Earlier there was a time when
the human being known nothing about the cloth to wear. The human beings first use
plant barks, leaves and animal skin to wrap around them. Then as the development of
brain took place, they started to explore other possibilities and invent more in this area.
There is constant search for clothing and it led to the knowledge of sources from
vegetation i.e. Cotton and from animals i.e. wool, which could be knitted and woven to
manufacture clothes to wear.
The commercial development of man-made fiber began late in the 19 th Century,
experienced much growth during the 1940’s, expanded rapidly after world War – II and
in the 1970’s was still the subject of extensive Research and Development.
The spinning and weaving both are very common and attached with each other in all parts
of the world. We talk of the ancient times, when maximum work like weaving of the
clothes was done manually, but all the things were being done for the right perspectives.
From time to time in this world development had taken place, which has been found to be
a continuous process. Similarly considering the developments in the Spinning and
Weaving lot of improvements has come-up. Because earlier too was the Cotton crop was
grown by the farmers, but its end use was not done in an effective way, which seems
good. So much thick fiber was produced and accordingly its impact for the fabric
preparation.
APPARATUS USED FOR SPINNING AND WEAVING DURING
PRE-INDEPENDENCE PERIOD
Before Independence we talk of the political leaders like Mahatma Gandhi, who had
always insisted to use Khadi Clothes and even self-spinning and weaving. It is also
called as self-dependence for all needs. Such a good initiatives had come-up at India
level amongst the followers of the Leader – Mahatma Gandhi. On the other side too such
initiatives had been proved very good and had attracted many other western countries to
follow such practices and show their excitedness. Though in case we talk of the English
rule before the Independence i.e. 1947, it was not appreciated by the English Rulers, but
after the freedom these leaders had got very good appreciation particularly for the self
spinning and weaving and in an overall manner this sector of Spinning and Weaving was
industrialized even after the independence too on the basis of Indian cotton growers.
It is needless to mention here that through out India, cotton growers belts are available
and after independence even English people take their raw material from here and had
established themselves with the Spinning and Weaving industries. Overall In India no
such preferences for the Spinning and Weaving industries were made, however the
Library research reveals that the first Cotton mill had been established in India during
1854 named as Bombay Spinning and Weaving company. Though the Cotton industry
had progressed a lot, but in case we say that India alone is heading this world, it is wrong.
Though in India Textile Machine manufacturers are there and one or two decades ago
they were the market leaders, but with the help of the other parts/people of world i.e.
Germany, Switzerland etc., India had made a very good recognition in the yarn market.
Because Indian Industrial Organizations have also initiated towards the most modernized
machinery produced by Schlafhorsts – Germany, Luwa – Humidification systems,
Switzerland. This is just the example of the development, that in India too the most
modern machinery is being installed. However, it is an evident that the Indian yarn is
always running on the development trend since its Inception of first unit in Bombay, but
its position in the international market has not appeared so good. Because many other
countries like China as Cotton Textiles has went ahead. Though till today India has
achieved a lot in the Textile Industry and almost 700 Textile units are working
successfully, because India is having at present more than 20 Million spindles and a
weaving capacity of more than 2.5 Lac looms and the total output value of the same is
around Rs.1500 Cores, employing more than 10 Lac of workers directly.
The invention and production of man made thirty three fibers that is synthetic fibers like
2004-05 169.2 DAYS 2.91 DAYS 13.6 DAYS 22.4 DAYS 208.1 DAYS
2005-06 263.8 DAYS 2.9 DAYS 7.9 DAYS 24.7 DAYS 299.3 DAYS
2006-07 191.1 DAYS 3.8 DAYS 7.4 DAYS 56.5 DAYS 258.8 DAYS
2007-08 238.3 DAYS 4.1 DAYS 19.1 DAYS 14.8 DAYS 276.3 DAYS
NET OPERATING CYCLE FOR SPINNING MILL:
YEAR GOC CCP NOC
2004-05 208.11 DAYS 4.03 DAYS 204.08 DAYS
2005-06 299.3 DAYS 6.8 DAYS 292.5 DAYS
2006-07 258.8 DAYS 4.6 DAYS 254.2 DAYS
2007-08 276.3 DAYS 1.7 DAYS 274.6 DAYS
GROSS OPERATING CYCLE FOR DYE HOUSE:
YEAR RMCP WICP FGCP DCP GOC
2004-05 - 14.6 DAYS - 420.3 DAYS 434.9 DAYS
2005-06 43.9 DAYS 9.5 DAYS 9.6 DAYS 51.5 DAYS 114.5 DAYS
2006-07 21.9 DAYS 5.9 DAYS 6 DAYS 35.7 DAYS 69.5 DAYS
2007-08 11.8 DAYS 3.4 DAYS 6.9 DAYS 58.5 DAYS 80.6 DAYS
NET OPERATING CYCLE FOR DYE HOUSE:
YEAR GOC CCP NOC
2004-05 434.9 DAYS - 434.9 DAYS
2005-06 114.5 DAYS 15.9 DAYS 98.6 DAYS
2006-07 69.5 DAYS 1.6 DAYS 67.9 DAYS
2007-08 80.6 DAYS 1.9 DAYS 78.7 DAYS
ANALYSIS
It is claimed that gross operating cycle of VTM for spinning mill is increasing in year
2004-05 and 2005-06 and it is decreasing for dye house in year 2004-05 and 2005-06. For
spinning mill in year 2004-05 it is 208.11 days then it increased to 299.3 days in year
2005-06. In 2006-07, it is decreased to 258.8 days. The main reason of increasing gross
operating cycle in 2004-05 and 2005-06 is due to more availability of raw material in the
stores but in year 2006-07 there is less GOC due to less availability of raw material in
stores. The GOC for dye house has shown a significant decreament from 434.9 days in
2004-05 to 69.5 days in year 2006-07. In year 2007-08, it came out to be 80.6 days. The
GOP for dye house is not satisfactory as it has decreased to a great extent.
2.ANALYSIS OF WORKING CAPITAL FROM DIFFERENT ASPECTS ON
BASIS OF THE HISTORICAL DATA
There are number of devices to analyze working capital like ratio analysis, common size
statement etc. We will discuss them one by one as follows:
1. RATIO ANALYSIS
Ratio analysis is a technique of analysis and interpretation of financial statements. It is
the process of establishing and interpreting various ratios for helping in making decisions.
It only means of better understanding of financial strengths and weaknesses of a firm.
The main emphasis has been on calculating the ratios related to a working capital
management.
LIQUIDITY RATIOS
These are the ratios which measures the short term solvency or financial position of a
firm. In other words, it refers to the ability of a concern to meet its current obligations as
and when these become due. To measure the liquidity of a firm, the following ratios can
be calculated.
CURRENT RATIO – It may be defined as the relationship between current assets and
current liabilities. This ratio is also known as working capital ratio and measures the
ability of the firm to meet current liabilities. High current ratio indicates firm is liquid and
has the ability to pay its current obligations in time as and when they become due.
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.
Current Ratio = Current Assets
Current Liabilities
Current Ratio of VTM
FOR SPINNING MILL:
YEAR CURRENT
ASSETS
CURRENT
LIABILITIES
CURRENT RATIO
(CR)
2004-05 329780134.40 22952307.82 14.4
2005-06 337914119-55 25398799.03 13.3
2006-07 372031954.03 29553280.08 12.6
2007-08 462706185.06 47891481.92 9.7
FOR DYE HOUSE:
YEAR CURRENT
ASSETS
CURRENT
LIABILITIES
CURRENT RATIO
(CR)
2004-05 9633007.63 10462522.55 0.9
2005-06 64846029.63 13090777.94 4.9
2006-07 92984361.6 8735151.3 10.6
2007-08 148537709.99 5975377.17 24.9
ANALYSIS
The current ratio of the spinning mill is above the standard and it guarantees the payment
of dues in time. The current ratio of the company has been considerably high because
they had made over investment in inventories which is the main reason for the high ratio
of current assets. Inventories are high because of seasonal availability of raw material.
The overall position of current ratio for spinning mill is satisfactory.
The current ratio of dye house has shown a remarkable increament from 0.9 in 2004-05
to10.6 in 2006-07 and then to 24.9 in 2007-08. Initially in 2004-05, the ratio was not
satisfactory but it is quite satisfactory for the years after 2004-05 and especially for the
year 2007-08.
LIQUID RATIO – This ratio is also known as quick ratio or acid test ratio. It is a more
rigorous test of liquidity than the current ratio. It is based on those current assets which
are highly liquid. Inventory and prepaid expenses are excluded because they are deemed
to be least liquid component of current assets. A high quick ratio is the indication that the
firm is liquid and has the ability to meet its current liabilities in time and on the other
hand low ratio represents liquidity position is not good.
Quick Ratio = Quick or Liquid Assets
Current Liabilities
Quick Assets = Current Assets – Inventory – Prepaid Expenses
Quick Ratio of VTM
FOR SPINNING MILL:
YEAR LIQUID ASSETS CURRENT
LIABILITIES
LIQUID RATIO
(LR)
2004-05 120598521 22952307.82 5.3
2005-06 89811409.92 25398799.03 3.5
2006-07 127216004.91 29553280.08 4.3
2007-08 81358926 47891481.92 1.7
FOR DYE HOUSE:
YEAR LIQUID ASSETS CURRENT
LIABILITIES
LIQUID RATIO
(LR)
2004-05 6123027.86 10462522.55 0.6
2005-06 33218697.57 13090777.94 2.5
2006-07 56812234.26 8735151.3 6.5
2007-08 115776657.53 5975377.17 19.4
ANALYSIS
According to rule of thumb, it should be 1:1. For spinning mill, the liquid ratio has
decreased over the past four years. It was 5.3 in 2004-05 and decreased to 4.3 in 2006-07
and then to 1.7 in 2007-08. The decreament in the ratio is not satisfactory, however the
ratio 1.7 in 2007-08 matches the rule of thumb but it should be quite more than the rule of
thumb.
For dye house,the liquid ratio has shown a significant increament over the past four years.
It increased from 0.6 in 2004-05 to 6.5 in 2006-07 and then to 19.4 in 2007-08. The
increament in the ratio is quite good for the dye house. This shows that the investment in
liquid assets has increased over the past years.
ABSOLUTE LIQUID RATIO – Although receivables are generally more liquid than
inventories yet there may be doubt regarding their realization into cash in time. Absolute
liquid ratio shows the relationship between liquid assets which include cash, bank and
marketable securities.
Absolute Liquid Ratio = Absolute Liquid Assets
Current Liabilities
Absolute Liquid Ratio of VTM
FOR SPINNING MILL:
YEAR ABSOLUTE
LIQUID ASSETS
CURRENT
LIABILITIES
ABSOLUTE
LIQUID RATIO
(ALR)
2004-05 435629.36 22952307.82 0.01
2005-06 569656 25398799.03 0.02
2006-07 5210807.58 29553280.08 0.18
2007-08 395884.64 47891481.92 0.01
FOR DYE HOUSE:
YEAR ABSOLUTE
LIQUID ASSETS
CURRENT
LIABILITIES
ABSOLUTE
LIQUID RATIO
(ALR)
2004-05 - - -
2005-06 233902 13090777.94 0.01
2006-07 253609 8735151.3 0.02
2007-08 - - -
ANALYSIS
The acceptable standard for this ratio is 0.5:1. Thus spinning mill and dye house, we can
say that in all the years, it is below the standard due to very less cash and bank balance
maintained because major cash receipts and payments are handled by corporate office. It
is very less in 2005-06, 2006-07 due to increased cost of production both for spinning
mill and dye house.
WORKING CAPITAL TURNOVER RATIO – Working capital turnover ratio
indicates the velocity of the utilization of net working capital. This ratio measures the
efficiency with which the working capital is being used by a firm.
Working Capital Turnover Ratio = Sales
Net Working Capital
Working Capital Ratio of VTM
FOR SPINNING MILL:
YEAR SALES NET WORKING
CAPITAL
WCTR
2004-05 596069587.62 306883587.58 1.9
2005-06 543167006.35 312620335.52 1.7
2006-07 588183650.23 342591885.95 1.7
2007-08 730047747.60 415076656.14 1.8
FOR DYE HOUSE:
YEAR SALES NET WORKING
CAPITAL
WCTR
2004-05 - - -
2005-06 202379449.81 51755251.69 3.9
2006-07 492529652.69 84249210.4 5.8
2007-08 610863493.76 142581027.83 4.3
ANALYSIS
This ratio indicates the number of times the working capital is turned over in the course
of a year. A high working capital ratio indicates the effective utilization of working
capital and less working capital ratio indicates less utilization. For spinning mill, the ratio
is quite same for the past four years. It is 1.9 in 2004-05, 1.7 in years 2005-06 and 2006-
07 and 1.8 in 2007-08. For dye house, the ratio is more than that of spinning mill. It
shows increament from 3.9 in 2005-06 to 5.8 in 2006-07 and then decreased to 4.3 in
2007-08. The ratio is satisfactory for dye house but it should not decrease further.
2. COMMON SIZE STATEMENT ANALYSIS
This analysis is mainly to see the composition of working capital. Its purpose is to see the
%age of each asset to the total asset and %age of each liability to total liability.
COMMON SIZE STATEMENT
FOR SPINNING MILL:
FOR YEAR 2004-05:
PARTICULARS AMOUNT ( IN RS.) %FIXED ASSETS Net block 570440434.93 62.18Capital work-in-progress 17200494.12 1.87Project & Pre-operative expenses
- -
Total fixed assets 587640929.05 64.05CURRENT ASSETSInventories 208195599.41 22.69Sundry debtors 37039996.26 4.04Cash & Bank Balances 435629.36 0.05Loans & Advances 84108909.37 9.17Total current assets 329780134.4 35.95Total assets 917421063.45 100SHARE CAPITAL & RESERVESInter unit balances 567503938.84 61.94Secured loans 336825183.77 36.76Reserves & Surplus (9804605.98) (1.07)Total Capital & Reserves 894524516.63 97.64CURRENT LIABILITIES Sundry creditors 3014518.31 0.33Other liabilities 16627112.73 1.81Interest accrued but not due
668837 0.07
Security deposits & Retention money
1339839.78 0.14
Total current liabilities 21650307.82 2.36Total of liability side 916174824.45 100
FOR YEAR 2005-06:
PARTICULARS AMOUNT (IN RS.) %FIXED ASSETSNet block 565709880.59 49.8
Capital work-in-progress 227016140.46 20Project & Pre-operative expenses
4400478.52 0.39
Total fixed assets 797126499.57 70.23 CURRENT ASSETSInventories 246141889.88 21.69Sundry debtors 37279070.84 3.28Cash & Bank Balances 569656 0.05Loans & Advances 53923502.83 4.75Total current assets 337914119.55 29.77Total assets 1135040619.12 100SHARE CAPITAL & RESERVESInter unit balances 857082196.43 64.30Secured loans 425924449.39 31.95Reserves & Surplus 24531788.78 1.84Total Capital & Reserves 1307538434.6 98.09CURRENT LIABILITIES Sundry creditors 5840979.88 0.44Other liabilities 18036489.88 1.35Interest accrued but not due
- -
Security deposits & Retention money
1521329.27 0.11
Total current liabilities 25398799.03 1.91Total of liability side 1332937233.63 100
FOR YEAR 2006-07:
PARTICULARS AMOUNT (IN RS.) %FIXED ASSETSNet block 873085829.95 67.94
Capital work-in-progress 39988683.62 3.11Project & Pre-operative expenses
-
-
Total fixed assets 913074513.57 71.05 CURRENT ASSETS
Inventories 240453655.62 18.71Sundry debtors 92312638.13 18.71Cash & Bank Balances 5210807.58 0.41Loans & Advances 34054852.70 2.65Total current assets 372031954.03 28.95Total assets 1285106467.6 100SHARE CAPITAL & RESERVESInter unit balances 730042330.44 56.80Secured loans 532957606.95 41.47Reserves & Surplus (7333537.87) (0.57)Total Capital & Reserves 1255666399.52 97.70CURRENT LIABILITIES Sundry creditors 5294945.83 0.41Other liabilities 21319619.32 1.67Interest accrued but not due
- -
Security deposits & Retention money
2938714.93 0.22
Total current liabilities 29553280.08 2.3Total of liability side 1285219679.6 100
FOR YEAR 2007-08:
PARTICULARS AMOUNT (IN RS.) %FIXED ASSETSNet block 822992994.43 62.69
Capital work-in-progress 27165970.92 2.07Project & Pre-operative expenses
- -
Total fixed assets 850158965.35 64.76 CURRENT ASSETSInventories 379510100.55 28.91Sundry debtors 29970369.49 2.28Cash & Bank Balances 395884.64 0.03Loans & Advances 52829830.38 4.02Total current assets 462706185.06 35.24Total assets 1312865150.41 100SHARE CAPITAL & RESERVESInter unit balances 1026736607.06 73.92Secured loans 431510188.42 31.06Reserves & Surplus (117066371.70) (8.43)
Total Capital & Reserves 1341180423.78 96.55CURRENT LIABILITIES Sundry creditors 24415626.72 1.76Other liabilities 23475855.20 1.69Interest accrued but not due
- -
Security deposits & Retention money
- -
Total current liabilities 47891481.92 3.45Total of liability side 1389071905.7 100
FOR DYE HOUSE:
FOR YEAR 2004-05:
PARTICULARS AMOUNT (IN RS.) %FIXED ASSETSNet block 186017879.85 93.34
Capital work-in-progress 3641581.77 1.83Project & Pre-operative expenses
- -
Total fixed assets 189659461.62 95.17 CURRENT ASSETSInventories 3247313.77 1.63Sundry debtors 247769 0.12Cash & Bank Balances - -Loans & Advances 6137924.86 3.08Total current assets 9633007.63 4.83Total assets 199292469.25 100SHARE CAPITAL & RESERVESInter unit balances 140951705.11 70.73Secured loans 59872920 (6.02)Reserves & Surplus (11994678.41) 30.04Total Capital & Reserves 188829946.7 94.75CURRENT LIABILITIES Sundry creditors 8359951.15 4.19Other liabilities 1429726.92 0.72Interest accrued but not due
- -
Security deposits & Retention money
672844.48 0.34
Total current liabilities 10462522.55 5.25Total of liability side 199292469.25 100
FOR YEAR 2005-06:
PARTICULARS AMOUNT (IN RS.) %FIXED ASSETSNet block 184248879.27 73.72
Capital work-in-progress 849096.46 0.34Project & Pre-operative expenses
- -
Total fixed assets 185097975.73 74.06 CURRENT ASSETSInventories 31300541.06 12.52Sundry debtors 28959170.26 11.59Cash & Bank Balances 233902 0.09Loans & Advances 4352416.31 1.74Total current assets 64846029.63 25.94Total assets 249944005.36 100SHARE CAPITAL & RESERVESInter unit balances 212651256.41 78.34Secured loans 59872920 5.22Reserves & Surplus (14177921.30) 22.06Total Capital & Reserves 258346255.11 95.18CURRENT LIABILITIES Sundry creditors 5449322.89 20.08Other liabilities 6821847.92 2.51Interest accrued but not due
- -
Security deposits & Retention money
819607.13 0.30
Total current liabilities 13090777.94 4.82Total of liability side 271437033.05 100
FOR YEAR 2006-07:
PARTICULARS AMOUNT (IN RS.) %FIXED ASSETSNet block 220213154.5 70.24
Capital work-in-progress 300237 0.096Project & Pre-operative expenses
- -
Total fixed assets 220513391.5 70.34 CURRENT ASSETSInventories 35816899.3 11.42Sundry debtors 48904270.9 15.59Cash & Bank Balances 253609 0.08Loans & Advances 8009581.9 2.55Total current assets 92984361.1 29.66Total assets 313497752.6 100SHARE CAPITAL & RESERVESInter unit balances 215855702.2 68.9Secured loans 59872920 92.6Reserves & Surplus 29033979.4 19.09Total Capital & Reserves 304762601.6 97.21CURRENT LIABILITIES Sundry creditors 1203818.69 0.38Other liabilities 7335764.53 2.34Interest accrued but not due
- -
Security deposits & Retention money
195567.89 0.062
Total current liabilities 8735151.11 2.79Total of liability side 313497752.71 100
FOR YEAR 2007-08:
PARTICULARS AMOUNT (IN RS.) %FIXED ASSETSNet block 209812946.08 58.39
Capital work-in-progress 983537.06 0.27Project & Pre-operative expenses
- -
Total fixed assets 210796483.14 58.66 CURRENT ASSETS
Inventories 32341614.46 9Sundry debtors 99301521.09 27.63Cash & Bank Balances - -Loans & Advances 16894574.44 4.70Total current assets 148537709.99 41.34Total assets 359334193.13 100SHARE CAPITAL & RESERVESInter unit balances 236801598.89 55.33Secured loans 131435332.52 12.56Reserves & Surplus 53753985.78 30.71Total Capital & Reserves 421990917.19 98.60CURRENT LIABILITIES Sundry creditors 1767614.89 0.41Other liabilities 4076005.21 0.95Interest accrued but not due
- -
Trade deposits and other Advances
131757.07 0.03
Total current liabilities 5975377.17 1.4Total of liability side 427966294.36 100
ANALYSIS
For spinning mill, the major part of current assets involves inventories. It covers more
than 50% of total current assets. The debtors also have significant part of current assets. It
contributes approximate 11% to 30% part of current assets for all the years from 2004-05
to 2007-08. The least contribution is thus of cash and bank balance. On the other hand,
current liabilities consist of mainly creditors and other liabilities. In 2007-08, current
assets have increased due to increase in inventories and loans & advances, and current
liabilities have also shown increament. So the working capital is more for year 2007-08
as compared to last year’s working capital.
For dye house, the inventories form a good portion of current assets and contribute 30%
to 50% of the total current assets over the past years. The sundry debtors also show
fluctuating proportions in the total current assets over the years. The proportion is quite
less for year 2004-05 but it increased significantly for the next years and contributed
about 66% to the total current assets in year 2007-08. The current liabilities mainly
consist of sundry creditors and other liabilities. The sundry creditors have decreased over
the past years. The other liabilities have shown increament from year 2004-05 to year
2006-07 but it has decreased in year 2007-08.
3. ANALYSIS ON THE BASIS OF SCHEDULE OF CHANGES IN WORKING
CAPITAL
SCHEDULE OF CHANGES IN WORKING CAPITAL:
FOR SPINNING MILL: PARTICULARS 2004-05 2005-06 INCREASE DECREASECURRENT ASSETS:Inventories 208195599.41 246141889.88 37946290.47S. debtors 37039996.26 37279070.84 239074.58Cash & Bank Balances
435629.36 569656 134026.64
Loans & Advances
84108909.37 53923502.83 30185406.54
Total current assets (A)
329780134.4 337914119.55
CURRENT LIABILITIES:S. creditors 4316518.31 5840979.88 1524461.57Other liabilities 16627112.73 18036489.88 1409377.15Int. accrued but not due