MBA PROJECT ON MBA

EXECUTIVE SUMMARY

A Project report on

WORKING CAPITAL MANAGEMENT

With reference to

SUJALA PIPES PVT LTD

Submitted in partial fullfillment of the

Requirement for the award of the degree of

MASTER OF BUSINESS ADMINISTRATION

Submitted By

D.VIKRANTH

Redgno:( 1980863030 )

(2007-2009)

Under the esteemed guidance of

Prof.D.V.RAMANA

DEPARTMENT OF MANAGEMENT STUDIES,

S V U COLLEGE OF C M I S,

SRI VENKATESWARA UNIVERSITY,

TIRUPATI-515702

2007-09

DECLERATIONI declared that this project report entitled A STUDY ON working capital management with reference to SUJALA PIPES PVT LTD in NANDYAL is original and bonfire work of my own in the partial fulfillment of the requirements for the award of the degree of MASTER OF BUSINESS ADMINISTRATION and submitted to the post graduate department of management, S V U COLLEGE OF COMMERCE, MANAGEMENT AND INFORMATION SCIENCES, SRI VENKATESWARA UNIVERSITY, TIRUPATI.,under the guidance of Prof.D.V.RAMANA and has not been copied from any earlier reports. The empirical conclusions and findings on this report are based on the information collected by me.

Place:

Date:

(D.VIKRANTH)

Acknowledgement

I would like to express my sincere gratitude to the following people without whose support, help and encouragement, this project would not have reached its successful completion.

I would like to express my gratitude to Prof. P. BALAJI PRASAD Head of the Department, guide Prof.D.V.RAMANA lecturer of their magnanimous support in making this project a success.

I would like to thank the H.R manager, FINANCIAL manager & all the members who have guided me to complete this project work General Manager costing, remitting to me to undertake this project.

Last but not least, I would like to express my gratitude to all other members of the faculty, Department of management Studies, for continuous guidance and cooperation

(D.VIKRANTH)

CONTENTSChapter Title

Page No.

1. Introduction

6 - 8

2. Profile

Industry profile

9 - 12

Company profile

13 - 23

3.

Review of literature

24 -51

4.

Data analysis and Interpretation

52 - 64

5.

Findings & Suggestions

65 - 66

6.

Bibliography

67

conclution

68

LIST OF TABLES

Sl. NoTitle of the TablePage No

1

2

Working capital analysis

Ratio Analysis

Current Ratio

Quick Ratio

Cash Ratio

Net Working Capital turnover Ratio

Net working capital ratio52-56

57

59

62

63

61

LIST OF GRAPHSSl.NoTitle of the GraphPage No

1

2

3

4

5Current Ratio

Quick Ratio

Cash Ratio

Net working Capital Ratio

Net working Capital Turnover Ratio58

60

62

61

63

EXECUTIVE SUMMARY

Company Profile:

Sujala pipes (p) ltd., is commissioned with the objective of catering the agricultural needs of the region. A dynamic entrepreneur Sri S.P.Y.Reddy who is basically a mechanical engineer started a unit at Nandyal those manufacturers black pipes. This resulted information of private ltd., company called Sujala Pipes Pvt. Ltd.,

In the year 1995 it diversified into other products like milk products mineral water, super market etc., its greatest achievements are taking over sagar pipes in 1997 and monarch pipes in 1999 who are major competitors at that time. At present the major competitors are sudhakar & finolex pipes. It has its market presence in four states in south India (A.P, T.N, Karnataka, and Kerala).

INTRODUTION:

Working capital signifies funds required for day to day business operation of the organization. Working capital management refers to the administration of all aspects of current assests and current liabilities.

It refers to the firms investment in current assests. It is defined as excess of current assests over current liabilities. In other words, it is the net current assests or net working capital

NEED AND IMPORTANCE OF THE STUDY:

Working capital management plays a vital role in any organization and one should have a through knowledge about the working capital position.

In view of this context, I have undertaken this study and it would be a great advantage to the company also to know its working capital.

OBJECTIVES OF THE STUDY:

Primary objective:

To find out the working capital position of the company for the last five financial years.

Secondary objective:

To know the liquidity position of the firm.

To study the profitability of the company

RESEARCH METHODOLOGY : The data collected from both primary and secondary data.

Primary data

Primary data has been collected through personal interviews with the financial department and the executives.

Secondary data

Secondary data collected from the records like B/S, income statement and necessary records and website (www.nandipipes.com).

LIMITATIONS:

Confidential matters like financial position, soundness etc, are naturally not disclosed fully. This is certainly set back while drawing the conclusions.

The study is based on five annual reports only. The information

from annual reports is insufficient to calculate few ratios.

Limited time does not allowed to do more analysis.

FINDINGS

The current ratio is mostly constant for first 4 years and highly increased in last year 2006-2007

The companies net working capiotal turnover ratio is increasing corresponding maximum increase is 16.8 The working capital ratio is gradually increasing from year after yearThe maximum ratio is 0.46

The cash ratio is gradually reaching the standered normSUGGESTIONS

The company should keep more current assets such as cash & bank balances short-term investment to meet its increasing liabilities. By that the company can able to have a better liquidity position.

The company has to take necessary steps to establish effective working capital management ( which maintains adequate working capital required for the business). In the view of increasing current liabilities and less allocations of resources towards working capital..

As of now, the company has maintained good financial position by controlling the current liabilities and other expenses, it has suggested that the company should maintain the same performance in the future.

INDUSTRY PROFILE

Plastics have becomes synonymous with modern living. It is undoubtedly a product, which has penetrated extensively into the common mans life. No wonder the industry has achieved in terms of supply of raw materials, expansion and diversification of processing capacities and manufacturing of processing machinery and ancillary equipment.

The versatile material with its superior qualities such as light weight, easy process ability, corrosion resistance, energy conservation, non toxicity etc., may substitute to a large extent, many conventional and costly industrial materials like wood, metal, glass, jute, leather etc., on the automobiles, electronics, packaging and agriculture give enough evidence of the immense utility of plastics.

At present 80% of total requirement of raw material and almost all types of plastic machines required for the industry and indigenously available. The present investment in all three segment of the industry, namely production of raw materials, expansion and diversification of processing equipment in Rs.1,250 crores and it provides employment to more than eight lakh people.

Plastics have been subject to level not only at the central, but at state, and local government levels. These levels have affected the price of plastic of production adversely, because of their inherent advantage in properties and versatile in adaptation and use, plastics have come to play a vital role in a variety of applications over the world. In our country, plastics are used in essential consumer goods of daily use for common man such as baskets, shopping bags tiffany boxes, hair combs, tooth brushes, spectacle frames and fountain pens etc., they also find applications in field like packaging and automobiles and transportation, engineering, electronics, telecommunications, defense, medicine, building and other construction plastics and its importance is also growing infield like agriculture and water management.

The govt of India recognizing the importance of plastics in Agriculture, appointed on March 7th, 1981. National committee on the use of plastics in agriculture under the chairmanship of Dr.G.V.K.Rao. The committee has forecast a tremendous growth of drip irrigation through a network of plastic pipes and tubes. In its opinion, large-scale adoption of irrigation would lend to support in demand for PVC pipes LDPE tubes and polypropylene emitters. The committee has highlighted the importance of the use of PVC resin in the manufacture of rigid pies, flexible pipes and sheeting, which are being used for agricultural operations to carry water for one place to another and also linen of ponds and reservoirs to reduce see page and most important, in drip irrigation system.

Engineering plastics are being increasingly used for various applications in automatic, electronics, telecommunications and other industries, The plastics are classified into two major classes thermoplastics and thermoses. The thermoplastics become sufficiently soft on the applications of heat. The thermoses on the initial application of heat and pressure in the mould to flow, but upon further application of heat and pressure they are cured to hard, insert molded piece which cannot be resoftened by reheating.

HIGH DENSITY POLYETHYLENE

Production of HDPE in INDIA started commences in 1968. At present is on unit (polyolefins industry ltd.,) in INDIA, production HDPE by the end of 2002 to 2003 is placed at 1.25 lakhs tonnes.

LOW DENSITY PLYETHYLENE(LPDE)

Production of LDPE in INDIA started in 1959. At present there are three units manufacturing LDPE with a total of 1.15 lakh tonnes.

POLYSTERENE

Polystyrene was first manufactured in India in May 1957. The first production commenced in 1978. A production target of 29000 tonnes tube is achieved by the end of 1999-2000.

ACRYLONITRIL BUTANDIENE SYTRENE (ABS)

The production of acrylonitrile Butadiene styrene (ABS) in India started in 1978. The present total annual installment capacity of (ABC) is 5,000 tonnes.

POLY VINYL CHLORIDE (PVC)

Production of PVC started in INDIA in 1961 against first production of PVC in the world in 1927. At present there are six units manufacturing PVC resins. The present total installed capacity comes to 1.70 lakh tones. The production target of PVC by the end of 2001-2002 is placed at 2.33 lakh tonnes.

EXPORT OF PLASTICS GOODS

Today India exports plastic products to as many as 80 countries all over the world. The exports, which aware stagnant at around aRs.60-70 crores per annum double to Rs.129 crores. The plastic industry has taken up the challenge of achieving an export target of Rs.17 crores.

Major export markets for plastic products and linoleum are Australia, Bangladesh, Canada, Egypt, Hong Kong, Hungary, Italy, Kuwait, Federal, Republic of Germany, Sri Lanka, Sweden, Taiwan, U.K, U.S.A, and Russia.

ROLE OF PLASTICS IN THE NATIONAL ECONOMY

Plastics are been perceived as just simple colorful household products in the minds of common man. A dominant part of the plastics of the present and future find their utilization in the following areas.

1. Agriculture, forestry and water-management

2. Automobiles and transportation.

3. Electronics and telecommunications buildings, construction and furniture especially wood substitutes.

4. Food processing and packaging

5. Power and gas distribution.

IMPORTANCE OF PIPES INDUSTRY

We shall look at the basic data about plastics and particularly those properties, which are of use in practical working with plastics. Plastics are the man-made materials. The oldest raw materials for producing plastics are carbonaceous materials obtained from petrol chemical sources and they can be economically produced in large quantities.

Plastics have changed our world and day by day they are becoming important. They own their success to whole series of advantages, which they have over conventional materials such as

1. Light weight

2. Excellent mould ability

3. Attractive colors

4. Low energy requirement for convention

5. Low labor and cost of manufacture

6. Low maintenance

7. High strength weight ratio

8. Aesthetic

COMPANY PROFILE

NANDI is brand name of popular PVC pipes made by two companies Sujala Pipes and Rani plastic Pipes Industries. The companies was started in 1975 by a young mechanical engineer who had just left a plum job in Baba Atomic Research Center(Barc) and wanted to do something on his own.

Today the companies are worth few (or lot depends on who you are millions (both Indian & amp; American). They made possible few other small ventures Pipes are sold under brand names of Nandi, Rani, and Jala. Together they are highest selling PVC pipe brands in South India and will be among top three.

We believe that companies are about people more than anything else is. The group companies employ about 1500 people. Free accommodation is provided to most of the employees. Health services are also provided at free of cost. Other business interests of Nandi group include dairy product, information technology and education Sujala Pipes (p) Ltd, manufacturers the largest and most comprehensive range of U-P.V.C pipes in India. They offer pipes of up to 400 mm diameter Nandi pipes that are suitable for a wide range of applications.

Portable water transportation, irrigation, plumbing, drainage, cable ducting bore-wells, transfer of industrial effluents. Our gamuts of products cover all applications, which are covered by PVC pipes.

Nandi UPVC systems are more cost effective than conventional GI, CI or AC systems. They are lightweight, durable and non-corrosive. They offer excellent flow characteristics and they are easy to transport handle and install as well. Excellent quality with customized product development support.

The Unit also has excellent quality assurance systems in place we ensure products of uncompromising excellence, meeting all relevant ISI, BS, DIN, and ASTM standards. In addition, extensive R&B facilities provide reliable and committed support for new product development.

This means that, even if a Nandi customer is unable to find his precise requirements from our elaborate range of products, we can also develop customized products to his own exclusive specifications

It is this relentless pursuit of quality and a willingness to adapt and innovate, that has propelled Nandi to the forefront of this product category in India.

Water is indispensable for agriculture. However, only 15% of agricultural land, the world over, gets dependable water supply. In India too, only a fraction of the 164 hectares of cultivated land gets a dependable supply of water. Various irrigation methods are employed by farmers to ensure proper water supply.

Canal irrigation is one such method. However, canals occupy cultivate space and thus hamper production. Moreover, nearly 40% of canal water is wasted due to evaporation and percolation. Besides, in certain areas, canal irrigation, over a period, has led to salivations. Pipes are an effective way of overcoming the problem caused by canal irrigation as they can be laid underground and water loss because of percolation and evaporation is eliminated. Lift irrigation is employed to carry water from a lower to a higher level. Here, various kinds of pipes are used.

Product Portfolios

UPVC Pressures Pipes & Fittings (MM Series)

UPVC Pressure Pipes.

UPVC Pressure Fittings.

UPVC High Pressures Solvent Cement jointing System.

UPVC Solvent cement jointing pipes.

UPVC Solvent cements fittings.

UPVC Soil waste & Rainwater (S. W. R) Drainage System.

UPVC S.W.R. Pipes.

UPVC S.W.R. Fittings.

UPVC High Pressure Threaded System for Plumbing.

UPVC Plumbing Pipes.

UPVC Plumbing fittings.

UPVC Casting Pipes.

UPVC casting Pipes.

Product attributes

All pipes and fittings fully conforming to relevant ISI/BS/DIN and ASTM standards. More cost effective than GI, GI and AC pipe systems due to

Light weight and

Ease of handling transportation and installation.

Excellent flow characteristics.

Virtually Maintenance free.

Environment friendly.

Seamless, durable and resilient.

Non-corrosive even resistant to chemical & electrolytic corrosion.

Application Areas

Portable water distribution.

Lift irrigation

Sprinkler & drip irrigation systems.

Bore-wells & Domestic plumbing.

Soil, waste and ventilation system.

Rain water & subsoil drainage.

Industrial effluents & waste chemicals transportation

Cable ducting.

Features of UPVC Casing Pipes:-

PVC Casing Pipes do not corrode.

PVC Casing Pipes have smooth bore, do not support bacterial growth or encrustation.

PVC Casing Pipes are less expensive than any other non-corrodible pipes.

Easy to handle easy to install, no skilled labor required.

PVC Casing Pipes are ideally suitable for domestic wells, irrigation wells, industrial wells, public wells, watering wells, mining wells, observation wells, infiltration galleries and naturally packed wells.

PVC screens with continuous shaped ribs increase the permeability rating more than times.

Studies proved that permeability of well screen with horizontal slots is twice that of the screens with longitudinal slots.

UPVC casing has trapezoidal acme threads, which make easy joint.

UPVC Screens can be chemically developed where as steel screen will react to strong chemicals.

THE PRIDE OF UPVC INDUSTRY

Sujala Pipes (p) Ltd., the jewel of Nandi Group of companies under the dynamic, energetic leadership of S.P.Y. Reddy, has been making rapid strides as the pioneering manufacturers of quality PVC pipes for potable and irrigation water supplies.

The Company has been consistently recording and excellent growth rate every year with the current production capacity of 22,000 Metric tones per annum. The plant is equipped with Battened Twin Screw extruders capable of producing pipes from 20mm to 315mm in 0.25 M pHs to 1.0 M pa pressure classes.

Stringent quality control tests are regularly conducted to ensure top quality products for multifarious applications like tube well casing telephone-ducting aquaculture besides supplying to various government aided schemes and medium irrigation projects.

With a view to effectively cater to the needs of the international market, the company is gearing up for ISO 9002 certification to become a member of select brand of elite group of companies. The company is also manufacturing UPVC Pipes and fittings conforming to British standards and DIN specifications especially to meet the requirements of the Middle East market for soil, wastewater and drainage systems and micro irrigation systems for Dry land.

NANDI PIPES

Formed in: 1988

Manufactures as per Indian standards is 4985-2000

Has wide range of 20.315 mm

Types

AGRICULTURE

BLUECASING(Special)

WELL CASING

PLUMBING

S W R

ELECTRICAL

RING FIT

SUB MERSIBLE

QUALITY LAB

Stringent quality control tests are regularly conducted to ensure top quality products for multifarious applications like:

Tube well Casing

Telephone ducting

Aquaculture

Government aided schemes

Medium irrigations projects

Manufacturers as per IS 4985-2000

Passes all the tests as per IS 12125-1980

Proprietary compound development

Maximum specific gravity of 1.46

Maximum ash content of 8% when tested as per ISE 3451 part III

No deterioration of Physical and chemical properties

Fully automatic Manufacturing layout with world class batten field extrusion plant

Production capacity of 22000 metric tones per annum.

Benefits with Nandi Pipes

If the Customer purchases 75mm and above dia pipes at least 200, Poclain for trenching will be provided at a cost of Rs.30 for each pipe length. For laying Bore wells Rigs and Compressors are available with us. With large fleet of Trucks, free door delivery will provided for dealers and customers buying above 100 Nods of Pipes.

ADVANTAGES OF NANDI UPVC PIPES

Corrosion Resistance

No Chemical contamination

No need of protective Liners, Coating, Encasements or Cathodes

Protection of Thermal Conductivity

Flexibility

Variety of Jointing Methods.

Nontoxic & Biological Resistance

High Hazen William `x Coefficient (150)

OUR ESTIMATED CUSTOMERS

Nandi Pipes is proud to announce that we have supplied Pipes to lay big water pipe line projects.

Panchayat Raj,

Industrial Development Corporation etc.,

Satya Sai Water Schemes.

Lorven Projects

Kolleru Project

NABARD water schemes

Karnataka L and Army Department

TWAD Board Authority Tamilnadu

Out customers have the benefit to buy our pipes at any place in South India Because of wide network of 493 Dealers spread in the states.

StateNo of Dealers

Andhra Pradesh301

Karnataka17

Tamilanadu23

Maharastra9

Pondichery2

Chatishghar1

Dealer Ship at Sujala Pipes Pvt Ltd.

The company notifies in a local newspaper.

Based on the given advertisement it receives for dealership.

After receiving the application, the company will scrutinize the application and calls for an informal interview.

In the interview, they will see their credit worthiness and their profile.

Once they have selected, and are not allowed to take another companys dealership.

ORGANIZATIONAL CHART

MANUFACTURING PROCESS

PVC raw material + other chemicals

(Compound)

Fed into mixture hopper

Fed into extruder hopper

Heating Chamber

(Compound is melt into paste)

Dye(10-35mm)

Cooling chamber

(The paste is hardened)

Haul off

Cutter of pipes

Stocking of Pipes

THE FOLLOWING DATA SHOWS THE MARKET DEVELOPMENT FOR PVC PIPES OF SUJALA PIPES PVT. LTD.

1977 84

Nandyal Region (Polythene Pipes)

1984 85

Rayalaseema Region (PVC Pipes)

1985 86

Rayalaseema and Telangana.

1986 88

Karnataka and Andhra Pradesh.

1988 91

Karnataka and Andhra Pradesh and TamilNadu.

1991 98

Karnataka, AndhraPradesh, TamilNadu & Kerala.

1998 - 2000Karnataka, AndhraPradesh, TamilNadu,Goa & Maharastra.

2000 2002Karnataka, AndhraPradesh, TamilNadu, Goa, Maharastra, Orissa, Uttar Pradesh, Pondicherry,& Yanam.

CHART FOR FINANCE DEPARTMENT

CHART FOR PURCHASE DEPARTMENT

CHART OF COMPUTERS DEPARTMENT

CHART FOR MARKETING DEPARTMENT

CHART OF MAINTEINANCE DEPARTMENT

INTRODUCTION TO WORKING CAPITAL MANAGEMENT

DEFINITION OF WORKING CAPITAL:

According to M Y Khan & P. K. Jain Working capital refers to manage the firm current assets & current liabilities in such a way that a satisfactory level of working capital is maintained.

According to the Cubing working capital is am amount of fun is necessary to cover the cost of operating the enterprise.

Working capital management is concerned with the problem is that arise in attempting to manage the current assets and the current liabilities and their inter relationships their arise between them.

Current assets refers to those assets which to the ordinary course of business can be or will be turned into cash within one year without undergoing a diminution in value and without disrupting the operations of the firm.

The major current assets are cash marketable securities accounts receivables and their inception to be paid in the ordinary course of business with in a year out of Current Assets or earnings of the concern. The basic Current Liabilities are Bills Payables, Bank Overdrafts and Outstanding expenses.

The goal of working capital management is to manage the firms Current Assets. And Current Liabilities in such a way that a satisfactory level of working capital is maintained.

Thus the current assets should be large enough to cover its current Liabilities in order to ensure a reasonable margin of safety. Each of the current assets must be efficiently in order to maintain the liquidity of the short term be managed efficiently in order to maintain the liquidity of the short term sources of financing must be continuously managed to ensure that they are obtained and used in a best possible way.

Therefore interaction between current assets and current assets liabilities in the main theme of working capital Management.

Profits are earned with to help of assets, which are partly fixed, and patty Current Working capital some times referred to as CIRCULATING CAPITAL.

WORKING CAPITAL is also called as CIRCULATING CAPITAL.

CONCEPTS:-

GROSS WORKING CAPITAL:

The Gross working capital is the firm investment in Current Assets. The Current Assets are the Assets which can be converted into cash with in an accounting year and include cash within an accounting year and include cash, Short term securities like Debtors. Bills Receivables and inventor.

Gross working capital constituted current Assets i.e. (1) inventory which are further classified into (a) Raw Materials (b) Work in progress (c) Finished Goods (2) Accounts Receivables (a) cash and Bank balance. Any business firm needs to provide it with enough of these current Assets. So that it an carry on its business operation smoothly.

These Assets are essential circulating in nature. That is to say that the business buys raw Materials with cash Receivable as a result or cash sales.

NET WORKING CAPITAL:

Net Working Capital refers to the difference between current assets and current liabilities are those claims outsiders which are expected to mature are payment within an accounting year and include creditors Bills payable and outside expenses.

Net working helps the management to look after the permanent sources for its financing working capital under this approach does not increase with increase in short term borrowing.

Profits are earned with the help of assets, which are partly fixed, and partly working capital some times referred to as CIRCULATING CAPITAL or WORKING CAPITAL.

PROPRIETORS

FUNDS

CASH

CASH FROM

CREDITORS

DEBTORS

DEBTORS

NEED FOR WORKING CAPITALS

Business firms aim at maximizing the wealth of shareholders. In its endeavor to maximize shareholders wealth a firm should earn sufficient return from its operation earning a steady amount of profits required successfully sales activity. The firm has to invest enough funds in current assets for the success of sales activity current assets are needed because sales dont convert into cash instantaneously there is always an operating cycle involved in the conversion of sales into cash.

Level of working capital is necessary on a continuous and uninterrupted basis. This requirement is referred to as permanent of fixed working capital. Any amount over and above the permanent level of working capital is temporary, fluctuating or variable working capital. This is portion of the required working capital is needed to meet fluctuating in demand consequent upon changes in production and sales as a result of seasonal changes

PERMANENT AND TEMPORARY WORKING CAPITAL:

The above figure shows permanent level is fairly constant, while temporary working capital is fluctuating some times increasing and some times decreasing in accordance with seasonal demands, in the case an expanding firm the permanent working capital may not be a horizontal. This is because the demand for permanent current assets might be increasing or decreasing t supports a rising level of activity. In that the line should be a rising one.

PERMANENT AND TEMPORARY WORKING CAPITAL.

Both kinds of working capital are necessary to facilitate the sale process through the operating cycle. Temporary working capital is created to meet liquidity requirements that are purely transient in nature.

CHANGES IN WORKING CAPITAL

The changes in working capital occur for the following basic reasons

Changes in level of sales and operating expenses

Policy changes.

Changes in technology.

1. CHANGES IN SALES AND OPERATING EXPENSES:-

The first factor causing a change in the working capital requirement is a change in the sales and operating expenses. The changes in this factor may occur due to top three reasons first there may be a long run trend of changes for instance the price of raw materials any oil may constantly rise necessitating the holding of a large inventory. The secular trends would mainly affect the need for permanent current assets. In the second place cyclical changes in the economy leading to ups and downs in business activities will influence level of working capital. The third source of changes is seasonality in sales activity.

The changes in sales always and operating expenses may either in the form of an increase or decrease an increase in the volume of sales is bound to be accompanying by higher levels of cash in inventory and receivables. The decline in sales will have exactly the opposite effect a decline in the need for working capital. Changes in the operating expenses rise or fall will have a similar effect on the level of working capital.

2. POLICY CHANGES:-

The second major cause of changes in the level of working capital is policy changes initiated by the management there is wide choice in the matter of current assets policy. The term current assets and sales value, a following a conservative policy in this

Respect having a very level of current assets in relation to sales may deliberately opt for a less conservations policy and vice versa these conscious managerial decisions will certainly have an impact on the level of working capital.

3. TECHNOLOGICAL CHANGES:-

Finally another factor that can change in the level of working capital is technology changes if a new process emerges as results of technological development, which shortens the operating cycle it will reduce the need for working capital.

FACTORS INFLUENCE IN WORKING CAPITAL REQUIREMENT:U-

(1) NATURE OF BUSINESS :- The working capital requirement of a firm is closely related to the nature of its businesses a service firm like an electricity undertaking or a transport corporation which a short operating cycle and which sells predominantly on cash bases has most requirement on the other hand a manufacturing concern like a machine tool unit which has long operating cycle and sells largely on credit has a very substantial working capital requirement.(2) SEASONALITY OF OPERATIONS:- Firms which have marked seasonality in their operations usually have fluctuating working capital requirement. For during the summer months and drops sharply during the winter period. The working capital need for such a firm likely to increase considerably in summer months and decrease significantly during the winter period. On the other hand a firm manufacturing a product laps which have fairly even round the year trends to have stable working capital need.

CHANGE IN PRICE :- The increase shifts in price level makes the functions of financial manager difficult. He should anticipate the effect of rising price level will require a firm to maintain higher amount of working capital same level of current assets will need increased investment when prices are increasing.

CREDIT POLICY:- The level of working capital is also influenced by credit policy which relates to sales and purchase. If influences the working capital in two ways

Through credit terms granted by the firm to its customers buyers of goods.

Credit terms available to the firm from its of creditors.

LEVEL OF PRODUCTION:- The quantum of working capital is also determined by production level. In case of seasonal products the demand for product is seasonal i.e. they will be purchased during certain months of the year. For this purpose it has to serve its needs either by confirming their production only to periods when goods are purchased or they follow a steady production policy through out the year.

PROFIT LEVEL :- The level of profits earned differs from an enterprise to enterprise. In general the nature of the products hold on the market quality of management and monopoly power would by an large determined the profit earned by a firm. Higher profits margin would improve the prospects of generating more internal funds there by contributing to the working capital.

PRODUCTION POLICY:- A firm marked by pronounced seasonal fluctuations in its sales may pursue a production policy which may reduce the sharp variance in working capital requirement for example a manufacturer of ceiling fans may maintain a steady production through out the year rather then intensity the production activity peak business season.

Such production policy may dampen the fluctuation in working capital requirements.

MARKET CONDITIONS:- The degree of competition prevailing in the market place gas an important bearing on working capital needs when promptly serve customers who may be inclined to attract customer in a who may be inclined to wait because other manufacturers are ready to be offered to attract customer in a highly competition market. Thus working capital needs tends to be high because of greater investment in finished goods inventory and accounts receivables.

CONDITIONS OF SUPPLY:- The inventory of raw materials spears and stores depend on the conditions of supply. If the supply is prompt and adequate the firm can manage with small inventory however if the supply is unpredictable and scant them the firm to ensure continuity of production would have to acquire stocks as and when they are available and carry large inventory on an average. A similar policy may have to be followed when the raw material is available only seasonally and production operations are carried out around the year.

SAKES GROWTH:- The working capital of the firm increase as it sales growth. It is difficult to determine the relationship between volume of sales and working capital needs. It is necessary to make advance planning of working capital for a growing from on a continuous basis. The firm has to make use of its external swell as internal sourced to meet increasing needs of funds.

PERMANENT AND TEMPORARY WORKING CAPITAL

Both kinds of working capital are necessary to facilitate the sale process through the operating cycle. Temporary working capital is created to meet liquidity requirements that are purely transient in nature

PROBLEMS OF WORKING CAPITAL MANAGEMENT

The firm should maintain a sound working position. It should have adequate working capital to run its business operations excessive as well as inadequate working positions are dangerous from the firms point of view.

THE DANGERS OF EXCESSIVE WORKING CAPITAL

It results in unnecessary accumulation of inventories thus chances of inventory mishandling waste theft and losses increase

It is an indication of defective credit policy and slack collection period. Consequently higher incidence of bad debts results, which adversely effect degenerated in to management co placement, which degenerated in to managerial inefficient.

Excessive working capital makes management complacent, which degenerates in to managerial in efficiency.

Tendencies of accumulating inventories to make speculation profits grow this may tend to make dividend policy liberal and difficult to cope with in future when the firm is unable to make speculative profits.

INADEQUATE WORKING CAPITAL

It stages growth and become difficult for the firm to undertake profitable projects for non availability of working capital funds.

It become difficult to implement operating plans and achieve the firms profit target

Operating inefficiencies creep in when it becomes difficult even to meet day to day commitments

Fixed assets are not efficiently utilized for the lack of working capital funds thus the firms profitability would deteriorate.

Paucity of working capital funds renders the firm unable to avail attractive credit opportunities etc.

The firm losses its reputation when it is not in position to honor its short term obligation as results the firm faces tight credit terms

Thus, enlightened management should there fore maintains a right amount of working capital on a continuous basis which help to develop the organization effectively and efficiently.

ROLE OF FINANCIAL MANAGER IN WORKING CAPITAL MANAGEMENT:

Working capital management requires must of the finance manager time as it represent a large position of investment is assets

Working capital management requires much of the finance management time as it represent larger position of investment in assets.

Action should be taken to curtail unnecessary investment in current assets.

All precaution should be taken for the effective and efficient management of working capital.

Larger firms have to manage their current assets and current liabilities very carefully and should see that the work should be done properly in order to achieve predetermined organizational goals.

The financial manager should pay special attention to the management of Current assets on continuing basis.

FUNDS FLOW STATEMENT

Funds flow analysis design effective management tool to study how funds have been procured for the business and how they have been employed. The statement of variation in working capital is based fundamentally on the same approach used for the preparation of funds flow statement. This technique helps to analyses changes in working capital between dates of two balance sheets. The comparison of current assets and current liabilities as shown in the balance sheet at the beginning and the ending of a specific period.

The statement of changes in working capital reveals to management to way in which working capital was obtained and use with this insight management to can prepare the estimates of the working capital flows. A project statement of changes in working capital is very much useful in the firm long planning.CONCEPT OF FUND

The working capital flow or fund arises when the net affect of a transaction is to increase or decrease the amount of working capital a firm will have same transactions that will change net working capital and same that will cause no change in net working capital transaction which change net working capital include most of items of the profit & loss account and those business events which simultaneously effect both current and non current balance sheet items. On the other based transaction, which do not increase or decrease working capital include those which effect only current accounts or only non current accounts

USES AND SIGNIFICANCE OF THE FUND FLOW STATEMENT

1. A Funds Flow statement show how the resource has been obtained and the uses to which are put it helps in analyzing the financial operations.

2. It helps in determining the financial consequences of business operations.

3. It is useful in judging whether the fund has expanded at too faster rate and whether financing is trained.

4. It points out the effectiveness with which the management has handled working capital during the period under review.

5. The statement can assist the financial management in planning intermediate and long term finance to obtaining resources in the further and determining how they are used.

6. It gives an insight into the evaluation of the present situation it provides certain useful information about the firm financial policies to out side world.

The funds flow statement is becoming popular with the management because it is helps to explain why in spite of earn sizeable amount of profits the company is experiencing difficulty in making payment to creditors the rate of dividend on equity shares cannot be increased and bank balance is getting thinner.

Objectives OF FUNDS FLOW ANALYSIS

1. To indicate the results of current financial position.

2. TO lay emphasis on the most significant change that has taken place during specified period.

3. To show how general expansion in a business has been financed or to describe the sources from which additional funds were derived.

4. To know the relationship between profits from operating distribution of dividing and rating a new capital or contracting of loans.

5. To give reorganization to the fact that a business exists on flow of funds and is not a static management.

USES OF CASH MANAGEMENT

1. It indicated companys future financial need especially for its working capital requirement.

2. To help to evaluate proposed capital projects.

3. It pinpoints the cash required to finance these projects as well as the cash to be generated by the company to support them.

4. It helps to improve corporate planning.

5. Cash forecasting helps to future and to formulate projects carefully.

CASH MANAGEMENT STRATEGIES:-

The Cash Management strategies are intended to minimize the operating cash balance requirement. The basic strategies payable with out and affective a credit of the firm.

1. Stretching account payable with out affecting the credit of the firm.

2. Efficient inventory management

3. Speedy collection of accounts receivables.

Thus the main objectives of cash management are to reconcile two mutually contradictory and conflicting tasks to meet the payment schedule and to minimize funds committed to cash.

MOTIVE OF HOLDING CASH

The firms need to held cash to the following three motives.

1. TRANSACTIVE MOTIVE

The transitive motive refers to holding cash to meet anticipated payments whose timing is not perfectly matched with cash receipt.

2. PRECAUTIONERY MOTIVE:-

The precautionary motive is the need to hold cash to meet contingencies to future cash provides cushion or buffer to withstand some an expected emergency. Thus precautionary balance should be held more in marketable securities and relatively less in cash.

3. SPECULATIVE MOTIVE:-

The speculative motive relates to the holding of cash for investing in profit making opportunities as and they arise. Thus the primary motives to cash and marketable securities are transaction and precautionary motives.

FACTS OF CASH MANAGEMENT

MANAGING THE CASH FLOWS:

The flow of cash should be properly manage the inflows should be accelerated while as far possible decelerating the cash outflows.

OPTIMUM CASH LEVEL:-

The firm should decide about the appropriate level of cash balance the cost of excess cash and danger of cash deficiency should be matched to determine the optimum level of cash balance.

INVESTING SURPLUS CASH:-

The surplus cash balance should be properly invested to earn profits. The firm should decide about divisions of such cash balance between bank deposits. Marketable securities and inter corporate Lending.

RECEIVABLES MANAGEMENT

The receivables represent as important component of the current asset of a firm. The term receivable are defined as debt owned to the firm by customers arising from sale of goods of services in the ordinary course of business. Receivables management is also called trade credit management. The maintenance of receivable involves direct and indirect costs. Direct cost includes the cost of investments allowance and concessions to customers and also losses on account of bad debts. Administrative costs connected with connection of receivable the recording or bills and preparing statements inflationary costs legal expenses are indirect costs.

OBJECTIVES OF RECEIVABLES MANAGEMENT:

The goals of receivables management are:

1. To maintain an optimum level of investment in receivables.

2. To keep down the average collection of sales.

3. To obtain the optimum volume of sales.

4. To control the cost of credit allowed and to keep it at the minimum possible level.

The three crucial decision areas receivable management are;

1. Credit policies.

2. Credit terms.

3. Collection policies

CREDIT POLICIES:

The policies of a firm provides the framework to determine

(A) Proper classification of credit customers.

(B) Appropriate limits to both amount and duration of credit to each class of customers.

(C) Effective collection practices.

CREDIT STANDERS

Credit standers represent the basic criteria for the extent ion of credit to creditors. The quantitative bases of establishing credit standers are factors such as credit financial ratio. Credit standers are divided into.

(a) Tight or restrictive.

(b) Liberal or Non restrictive.

The trade off with reference to credit standers covers:

(a) The collection costs.

(b) The average collection period.

(c) Level of bad debts losses and

(d) Level of sales.

CREDIT ANALYSIS:

Credit analysis involves obtaining credit information and analysis of credit information. It is on basis of credit analysis that the decision to grant credit to a customer as well as the quantum of credit would be taken. Credit analysis is obtaining credit in information, which is internal and external.

External sources of credit information are to Asses the credit worthiness of customers. Financial statements are one to the external sources it throws light on an applicant financial stability liquidity profitability and debt capacity. Trade references are also an external source, which refer to the collections of information from forms with which the applicant as dealing and who on the basis of their experience would vouch for the applicant.

Internal sources of credit information are derived from the records and the various forms and documents giving details about financial operations, which the customers fill.

Analysis of credit information is done once the credit information has been collected from different sources.

The analysis should cover two aspects.

a. Quantitative aspectsb. Qualitative aspects.

The assessment of the Quantitative aspects is to prepare on Ageing schedule of the account payable of the applicant as well as calculate the average of the account payable.

CREDIT TERMS

The stipulation under which goods are sold on credit is referred to as credit terms. This relates to the repayment of the amount under the credit sales.

Credit period.

Cash discount.

Cash discount period.

COLLECTIONS POLICIES

Collection polices refer to the procedure following to collect accounts receivables when after the expiry of the credit periods they become due. The collection policy would be tight if very rigorous procedures are followed at tight collection policy has implications. Which involve benefits as well costs. The benefit is the bad debts expenses would decline the average collection period will be reduced which benefits the firm and increase the profits

A well established collection policy should have clear cut guide lines as to the sequence of collection efforts. The collection should in the beginning be polite with the passage of the time it should become gradually stricter and stem.

The firm should take recourse to very stringent measures like legal action only after all other avenues have been fully exhausted. The aim should be to collect as early as possible genuine difficulties of the customers should be given due consideration.

DEBITORS TURN OVER RATIO:-

The ratio indicates the number of times on an average the debtors or receivables turnover each year generally the higher values debtors turnover. The more efficiency is the management of assets.

Debtors turnover ratio expresses the relationship between debtors and sales. It is calculated as.

INVENTORY MANAGEMENT

Inventories are stock of the product a company is manufacturing for sale and components that make up the product. The various forms in which in venture exist in a manufacturing company are raw materials work in progress and finished goods. The level of three kinds of inventories for a firm depends on the nature of its business.

RAW MATERIALS:-

Raw materials are those basic inputs that are converted into finished through the manufacturing process. Raw materials inventories are those units, which have purchased and stored for future production.

WORK IN PROGRESS:-

Inventories are semi manufactured products they represent that need more before they become finished products for sale.

FINISHED GOODS:-

Finished goods inventories are those completed manufactured products, which are ready for sale. Stock of raw materials and work in progress facilities while stock of finished goods is required for smooth marketing options.

Excessive level of inventory consumes the finds of a firm, which cannot be used for any other purpose and thus involves an opportunity cost. The carrying cost such as the cost of storage and handling insurance also increased in proportion to the volume of inventory.

Maintaining a liquate level of inventory is also dangerous. The consequences of inadequate investment in inventory are production holds up failure to meet delivery commitments. If inventory is not sufficient to meet the demand for the customers regularly that may shift to other competitors, which will amount to a permanent loss to a firm.

OBJECTIVES OF INVENTORY MANAGEMENT

1. To maintain sufficient stocks of raw material in the periods of short supply and anticipate price changes.

2. To ensure a continuous supply of raw material to facilitate UN in interrupted production.

3. To maintain sufficient finished goods inventory for smooth sales operations and efficient customer service.

4. To minimize the carrying costs and time.

5. To control investment in inventories and keep it at an optimum level.

INVENTORIES MANAGEMENT TECHNIQUES

The firm should determine the optimum level of inventory. Efficiently controlled inventories make the firm flexible. Determining an optimum level involves two types of costs.

(a) Ordering costs.

(b) Carrying costs.

ORDERING COSTS :- The term Ordering costs is used incases of raw materials and includes the entering costs of acquiring raw materials. Ordering costs are involved in.

1. Preparing purchase or requisition form

2. Receiving inspecting and records the goods receiving to ensure both quantity and quality. The costs of acquiring materials consist of clerical costs of stationary. It is called a set up costs but acquisition of a large quantity would increase the costs associated with the maintenance of inventory i.e. carrying cost

CARRYING COSTS:-

Carrying costs are involved in maintain or carrying inventory may be divinded in to two categories.

(a) Storage cost i.e. tax, deprecation, insurance, and maintain ace of building, utilities and services.

(b) Insurance of inventory against fire and theft.

(c) Depreciation in inventory because of pilferage fire, technical obsolescence, style obsolescence, and price declines.

(d) Serving cost such as labor for holding inventory, clerical and accounting costs.

The carrying cost and the inventory size are positively and move in the same directions, in the level of inventory increase the carrying cost also increased and vice versa.

BENFITS OF HOLDING INVENTORY:-

1. It acts as a offer to decouple or uncouple the various activities of a firm so that all do not have to be pursued exactly the same rate.

2. Since inventory enabled uncoupling of the key activities of a firm each of them can be operated at the most efficiently rate.

3. Inventories enables firms in the short run to produce at a rate then purchase of raw materials and vice versa, or sell at rate greater than production and vice versa.

4. The maintained of inventory also helps a firm to enhance its sales efforts.

By holding less inventory cost can be minimized, but there is a risk that the operations will be disturbed, as the emerging determined in the term of a trade of between befits the cost associated with marinating inventory.

INVENTORY RATIO OR TURNOVER RATIOS:-

This ratio indicates the number of stock is converted in to sales.

COGS = Opening stock + Purchases + Direct Expenses Closing Stock.

RATIO ANALYSISINTRODUCTION:

Ratio analysis is one of the techniques of financial analysis where ratios are used as a yardstick for evaluating the financial condition and performance of a firm. Analysis and interpretation of various accounting ratios gives skilled and experienced analyst, a better understanding of the financial condition and performance of the firm than what he could have obtained only through a perusal of financial statements.

MEANING OF RATIOS:

Ratios are relationships expressed in mathematical terms between figures which are connected with each other in some manner. Obviously, no purpose will be served by comparing two sets of figures which are not at all connected with each other. Moreover, absolute figures are also unfit for comparison.

There are various techniques or models for analyzing information contained in the financial statements viz. Comparative statements, Common Size Statements, Trend Percentages, Funds Flow Analysis, Cash Flow Analysis and Ratio Analysis. Financial analysis is undertaken by the management of the firm or by parties outside to it viz. owners, creditors, investors etc.

Ratio Analysis is most widely used and powerful tool or technique of financial analysis. The term ratio refers to the numerical or quantitative relationship between two variables. It shows arithmetical relationship between two figures, which can be expressed in three ways.

Percentage

Fraction

Proportion

A study of the trend of strategic ratios helps the management in planning, forecasting and decision making. It helps in identifying specific work areas. In short, though the technique of ratio analysis, the firms solvency, efficiency and profitability can be assessed.

IMPORTANCE OF RATIO ANALYSIS

Ratio analysis helps in simplifying the financial statement for easy understanding.

It helps in drawing out meaningful conclusion from the information provided in the financial statements which is useful for decision making and framing sound policies for business in future.

It helps in assessing the financial strength and weakness of the firm and thus enhances the value of the financial statements.

Comparative study of the ratios between the competing firms helps to know the efficiency of the firm.

It helps the investor to assess the financial position of the concern in which he is going to invest.

Ratio analysis helps the employees interested in wage increase and fringe benefits that are related the volume of profits earned by the concern.

Ratio analysis provides data for inter firm comparison. Ratios highlight the factors associated with successful and unsuccessful firms. They also reveal strong firms and weak firms, over valued and under valued firms.

Ratio analysis helps in planning and forecasting. Over a period of time a firm or industry develops certain norms that may include future success or failure. If relationship changes in firms data over different time periods, the ratios may provide clues on trends and future problems.

Ratio analysis also makes possible comparison of the performance of the different divisions of the firm. The ratios are helpful in deciding about their efficiency or otherwise in the past and likely performance in the future.

Thus, ratios can assist management in its basic function of forecasting, Planning, coordination, control and communication.

LIMITATIONS OF RATIO ANALYSIS

Ratios are of limited use and thus single ratio may not be useful. Better interpretation is possible with the calculation of number of ratios, which may lead to confusion to the analyst in making any meaningful conclusion.

Ratios are calculated on the basis of past results, which may not necessarily true indicators of the future, if the business policies are constantly changing.

Change in accounting procedure may be misleading for ratio analysis. For example, change in inventory valuation methods from LIFO to FIFO may also influence in the analysis.

Ratio analysis considers only quantitative aspect, but not qualitative factors.

Ratio analysis may give misleading results if the effects of price level changes are not considered.

Ratio analysis when interpreted by different people in different way may encounter with the personal bias or prejudice of the analyst.

CLASSIFICATION OF RATIOS

Ratios are classified in a number of ways, depending upon the basis of classification. The basis for classification can be

1. The financial statements from which the figures for comparison of ratios are derived. It is called Traditional classification.

2. The tests or functions of the ratios. It is called Functional classification.

3. The importance of the ratios.

4. The point of time in relation to which ratios are calculated.

5. The usage of ratios.

6. The nature of ratios.

1. Traditional Classification: Ratios are classified on the basis of the financial statements from which the figures used for calculation are taken. The ratios are classified as Balance sheet ratios, Profit and Loss Account ratios and Mixed ratios.

2. Functional Classification: Ratios are classified as liquidity ratios, profitability ratios and earning ratios. Liquidity ratios test the liquidity of business i.e. its ability to repay its short term liabilities out of short term assets (eg. Current ratio, Quick ratio, Stock Turnover ratio, Creditors Turnover ratio etc). Profitability ratios indicate the profitability of the business (eg. Gross profit ratio, Return on Capital Employed etc). Earnings ratios indicate the return to the owners or shareholders of the business (eg. Earnings per share, Dividend pay out ratio etc)

3. Classification on the basis of importance of Ratios: Ratios are classified as Primary ratios and secondary or supporting ratios. Primary ratios are more

4. important for the purpose of analysis and interpretation (eg. Return on capital Employed). The other ratios which support or explain the primary ratio are called secondary ratios (eg. Operating Profit ratio etc.)

5. Classification on the basis of point of time: Ratios are classified as Structural ratios and Trend ratios. Structural ratios are calculated from the data relating to some point of time, say a particular accounting year. Trend ratios are computed from the data relating to different periods of time.

6. Classification on the basis of usage: Ratios are classified as Ratios for Management, Ratios for Creditors and Ratios for Shareholders. Ratios for management indicates efficiency of management (eg. Operating ratios, stock turnover ratios etc). Ratios for creditors help in ascertaining the short term, long term solvency of the business undertaking (eg. Current ratio, creditor turnover ratio, Debt Equity ratio etc) Ratios for shareholders help the shareholders in assessing the fruitfulness of their investment (eg. Earnings per share, Return on capital employed etc).

7. Classification on the basis of nature of ratios: Ratios are classified in to liquidity (or short term solvency) ratios, leverage (or capital structure or long term solvency) ratios, Turnover (or Activity or Performance) ratios and Profitability ratios. This is the most widely accepted classification of ratios and this classification has been followed for explaining the various ratios.

Ratios may be classified in a number of ways keeping in view the particular purpose. Ratios indicating profitability are calculated on the basis of the profit and loss account, those indicating financial position are computed on the basis of the balance sheet and those which show operating efficiency or productivity or effective use of resources are calculated on the basis of figures in the profit and loss account and the balance sheet. This classification is rather crude and unsuitable to determine the profitability and financial position of the business. To achieve this effectively, ratios are classified as.

1. Liquidity ratios

2. Leverage ratios

3. Coverage ratios

4. Activity ratios (or) turnover ratios

5. Profitability ratios1. LIQUIDITY RATIOS:

Liquidity Ratios is also known as short term solvency. These ratios are used to measure the firms ability to meet short term obligations. They compare short term obligation to short term (or current) resources available to meet these obligations. From these ratios, much insight can be obtained into the present cash solvency of the firm and the firms ability to remain solvent in the event of adversity. The creditors of the firm are primarily interested in the short term solvency of the firm. A firms liquidity should be neither too high nor too low but adequate.

Low liquidity implies the firms inability to meet its maturing obligations. This will result in bad credit rating, loss of creditors confidence or even technical insolvency, ultimately leading to the closure of the firm.

A very high liquidity position is also bad. It means that the firms current assets are too high in proportion to maturing obligations. Idle assets earn nothing to the firm. The firms funds will be unnecessarily locked up in current assets, which if, released can be used to generate profits to the firm.

The ratios, which measure, and indicate the extent of a firms liquidity, are known as liquidity ratios or short term solvency ratios. Commonly used liquidity ratios include.

Current ratio (or) working capital ratio

Quick ratio (or) acid test ratio

Cash position ratio (or) super stock quick ratio

2. LEVERAGE RATIO:

These ratios are also known as Capital Structure ratios or Solvency ratios or Capital Gearing ratios. The long term creditors are more concerned with the firms long term financial position. They judge the financial soundness of the firm in the firm in term of the ability to pay interest promptly as well as making repayment of the principal. The long term solvency of the firm can be examined with the help of leverage ratios. They measure the funds supplied by owners as compared with the financial provided only a small proportion of total financing, the risks of the business are borne mainly by the creditors.

Firm with low leverage have less risk of loss, but they also have lower expected returns. Conversely, firms with high leverage ratios have the risk of large losses but also have a chance of earning huge profits. Therefore, before deciding whether a firm should have debt, it must balance higher expected returns against increased risks. The most commonly examined leverage: ratios are

Debt equity ratio

Proprietary ratio

Debt to capital ratio

Gross fixed assets to shareholders funds

Fixed assets ratio

3.COVERAGE RATIOS:

These ratios indicate the extent to which the interests of the persons entitled to get a fixed return (i.e., interest or dividend) or a scheduled repayment as per agreed terms are safe. The higher the cover the better it is. Under this category the following ratios are calculated.

Fixed interest coverage ratio

Fixed dividend coverage ratio

Debt service coverage ratio

3. ACTIVITY RATIO (OR) TURNOVER RATIO:

The finances obtained by the firm from its owners and creditors will be inverted in assets, which the firm uses to generate sales and profits. The amount of sales generated and the profit earned depend on the effective and efficient management of these assets by the firm. Activity ratios measure the efficiency with which the firm manages and uses its assets. That is why activity ratios are known as efficiency ratios, because these ratios are converted or turned over in to sales.

Thus, the turnover or activity ratios measure the relationship between sales on one side and various assets on the other side. Higher the turnover ratio, the better the profitability and use of capital.

Many activity ratios can be calculated to measure the efficiency of assets utilization. Following are some of the important activity ratios:

Total assets turnover ratio

Capital employed turnover ratio

Fixed assets turnover ratio

Current assets turnover ratio

Working capital turnover ratio

Stock turnover ratio

Debtors turnover ratio

Creditors turnover ratio

4. PROFITABILITY RATIOS:-

Profitability is the ability to make profits. Every firm should earn adequate profits in order to survive in the immediate present and grow in future. In fact, profit is what makes the business run. Profitability is the net results of a large number of policies and decisions. Profitability ratios give final answers about how efficiency the firm is managed. The profitability ratios relate profits earned by a firm by its parameters like sales, capital employed and net worth. But while making ratio analysis relating to profits, it should be remembered that there are different concepts of profit such as contribution, gross profits, net profits, EBIT, operating profits, profits before depreciation and before tax etc. Profitability ratios are important for a concern. These ratios are calculated to enlighten the end results of business activities, which is the sole criterion of the overall efficiency of a business concern. The following are the important profitability ratio which are based on.

1. Sales

2. Investment

Gross profit ratio

Operating raito

Operating profit ratio

Net profit ratio

Return on capital employed

Return on shareholders equity

Return on total assets

Earning per share

Dividend pay out ratioDATA ANALYSIS

Statement of changes in the working capital

FOR THE YEAR

OF SUJALA PIPES PVT LTD

PARTICULARS31-03-200331-03-2002Increase in

W.C RsDecrease in W.C Rs

CURRENT ASSESTS:

Inventories

Sundary debtors

Cash & Bank balance

Other Current assests31141292

15543967

480195

4406878310282787

31137406

673971

4156878320858505

250000015593439

190776

Total Current Assests (A)9123423983659949

CURRENT LIABILITIES:

Trade creditors

Payable expenses

Dealers deposits

52129639

2256726

-

72133509

1529621

44500020003870

445000727105

Total Current Liabilities (B)5438636574108130

Net Working Capital (A-B)368478749551819

Increase in Working Capital2729605527296055

Total36847874368478744380737543807375

Observation:

From the above statement we can see that there is an increase in working capital There is an increase in inventories & other current assests & decrease in sundry debtors , cash&bank balanceStatement of changes in the working capital

FOR THE YEAR




CURRENT ASSESTS:

Inventories

Sundary debtors

Cash & Bank balance


46298358

638869

51545318

31141292

15543967

480195

4406878330754389

158674

7476535

19803871



Trade creditors

Payable expenses

64385729

250360052129639

225672612256090

246874




Total42930637429306353838959838389598

Observation:

In 2003-04 the working capital has been decreased when compared to previous year since the increase in current liabilities There is a tremendous change in sundry debtors Statement of changes in the working capital

FOR THE YEAR




CURRENT ASSESTS:

Inventories

Sundary debtors

Cash & Bank balance


44874766

3131008

57985698

11337421

46298358

638869

515453182492139

644038010062586

1423592



Trade creditors

Payable expenses

59989566

368460064385729

250360043961631181000




Total43592141435921411332868213328682

Observation:

There is no much change in the working capital when compared to previous year Although there is an increase in inventories & sundry debtors but due to decrease in cash&bank balance & other current assests so there is no much difference when compared to previous year Statement of changes in the working capital

FOR THE YEAR




CURRENT ASSESTS:

Inventories

Sundary debtors

Cash & Bank balance


21914840

3601358

70366808

1274835

44874766

3131008

5798569833069823

470350

1238111022959926



Trade creditors

Payable expenses

66672316

6319846

59989566

36846006682750

2635246




Total57235502572355024592128345921283

Observation:

In 2005-2006 there is a highly increase in working capital when compared to previous. Because all the current assests are increased except in sundry debtors Current liabilities has been decreasedStatement of changes in the working capital

FOR THE YEAR




CURRENT ASSESTS:

Inventories

Sundary debtors

Cash & Bank balance


32555255

2263320

8544588334344658

21914840

3601358

7036680810640415

1507907518044302

1338038



Trade creditors

Payable expenses

9251084

7841303

66672316

631984657421232

1521457




Total1194724271194724278314072283140722

Observation:

In 2006-2007 there is a highly increase in working capital when compared to previous 2005-2006. Because all the current assests are increased except in sundry debtors Trade creditors has been increased.CURRENT RATIO:

This is the most widely used ratio. It is the ratio of current assets and current liabilities. It shows a firms ability to cover its current liabilities with its current assets. Generally 2:1 is considered ideal for a concern i.e., current assets should be twice of the current liabilities. If the current assets are two times of the current liabilities, there will be no adverse effect on business operations when the payment of current liabilities is made. If the ratio is less than 2, difficulty may be experienced in the payment of current liabilities and day to day operation of the business may suffer. If the ratio is higher than 2, it is comfortable for the creditor but, for the business concern, it is indicator of idle funds and a lack of enthusiasm for work. It is calculated as follows:

CURRENT RATIO = CURRENT ASSETS / CURRENT LIABILITIES

For the calculation this ratio

Current assets include inventories, sundry debtors, cash and bank balances and loans & advances

Current liabilities include Current liabilities and provisionsYearCurrent assestsCurrent liabilitiesCurrent ratio

200391234239543863651.67

2004109819966668893291.64

2005107266307636741661.68

2006130227664729921621.78

2007136564814170923877.98

Observation:

Current ratio standerd norm is 2:1.


The current ratio is satisfactory

QUICK RATIO (OR) ACID TEST RATIO:

This is the ratio of liquid assets to current liabilities. Is shows a firms ability to meet current liabilities with its most liquid or quick assets. The standard ratio 1:1 is considered ideal ratio for a concern. Liquid assets are those, which can be easily converted in to cash within a short period of time without loss of value. This ratio can be calculated by using the formula:LIQUID RATIO = LIQUID ASSETS / CURRENT LIABILITIES

YearQuick assestsCurrent liabilitiesQuick ratio

200360092947543863651.10

200498482545668893291.4

2005108545131636741661.70

200695883006729921621.31

2007120264458170923877

Observation:

The quick ratio standered norm is 1:1

The company reached the standered for all the years . hence the companies cash position is good.

But it has maintained huge ratio of ratio in 2006-2007 which affects the companies profitability.NET WORKING CAPITAL TURNOVER RATIO: Working capital is the excess of current assests over current liabilities.this ratio is calculated to study the eficiency with which the woking capital is utilized in the business.this ratio is also called as net current assests turnover . this ratio is shown as

NET WORKING CAPITAL RATIO=NET SALES \ NET WORKING CAPITAL * 100

YearNet salesNet working capitalWorking capital turnover ratio

20033698912203684787410.10

20047221714874293063716.8

20054521097214359214110.3

20067229577325723550212.6

20079914391681194724278.3

Observation:

The companies net working capiotal turnover ratio is increasing corresponding maximum increase is 16.8Cash Ratio :- (Absolute Quick Ratio)

YearCash Current liabilitiesCash ratio

2003480195543863650.01

2004638869668893290.02

20053131008636741660.04

20063601358729921620.05

20072263320170923870.13

Observation:

The cash ratio standered norm is 0.5:1 The cash ratio is gradually reaching the standered norm NET WORKING CAPITAL RATIO:

Net working capital ratio = net working capital/net assestsYearNet working capitalNet assestsNet working capital ratio

2003368478741399641710.26

2004429306371586718530.27

2005435921411478762290.29

2006572355021767742990.32

20071194724272581134120.46

Observation:

The working capital ratio is gradually increasing from year after year The maximum ratio is 0.46EPS RATIO:

EPS RATIO = PROFIT AFTER TAX / NUMBER OF EQUITY

SHARESYearProfit after taxNumber of equity sharesEps ratio

20039214395000018

200412586895000025

200521493685000042

200625552695000051

2007634737620000031

Observation:

The eps is increasing from 2003-2006 & decreased in the year 2007Finding


The companies net working capiotal turnover ratio is increasing corresponding maximum increase is 16.8 The working capital ratio is gradually increasing from year after yearThe maximum ratio is 0.46

The cash ratio is gradually reaching the standered normSUGGESTIONS

The company should keep more current assets such as cash & bank balances short-term investment to meet its increasing liabilities. By that the company can able to have a better liquidity position.

The company has to take necessary steps to establish effective working capital management ( which maintains adequate working capital required for the business). In the view of increasing current liabilities and less allocations of resources towards working capital..

As of now, the company has maintained good financial position by controlling the current liabilities and other expenses, it has suggested that the company should maintain the same performance in the future.

BIBLIOGRAPHY

I HAVE REFERRED THE FOLLOWING BOOKS WHILE DEVELOPING THIS PROJECT:

Financial Management ------------------ Khan & Jain.

Financial Management ------------------I.M.Pandey

Indian Banking Nature------------------Vasant Desai

& Procedures.

Data provided by the company.

I M Pandey, Financial Management (9th Edition), Vikas Publishing

House Pvt. LTD

Annual Reports of

Internet www.nandipipes.com

www.surveyconsole.com www.google.com www.yahoosearch.com.

Conclusion

Finally, I conclude that the study has helped the SUJALA PIPES PVT LTD to know their financial strength and it has helped me a lot gain to more knowledge about the working capital management.

MANAGING DIRECTOR

EMBED Excel.Sheet.8

EMBED Excel.Sheet.8

EMBED Excel.Sheet.8

EMBED Excel.Sheet.8

EMBED Excel.Sheet.8

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2

_1277972651.xlsChart4

10.1

16.8

10.3

12.6

8.3


years

ratio

Sheet1

YearWorking capital turnover ratio

200310.1

200416.8

200510.3

200612.6

20078.3

Sheet1

0

0

0

0

0

0


years

ratio

Sheet2

Sheet3

_1278255669.xlsChart1

0.01

0.02

0.04

0.05

0.13

Cash ratio

years

ratio

Sheet1

Cash ratio

0.01

0.02

0.04

0.05

0.13

Sheet1

Cash ratio

years

ratio

Sheet2

Sheet3

_1278256491.xlsChart4

18

25

42

51

31

Eps ratio

YEARS

RATIO

Sheet1

Cash ratio

0.01

0.02

0.04

0.05

0.13

Sheet1

Cash ratio

years

ratio

Sheet2

Net working capital ratio

0.26

0.27

0.29

0.32

0.46

Sheet2


YEARS

RATIO

Sheet3

Eps ratio

18

25

42

51

31

Sheet3

Eps ratio

YEARS

RATIO

_1278256097.xlsChart2

0.26

0.27

0.29

0.32

0.46


YEARS

RATIO

Sheet1

Cash ratio

0.01

0.02

0.04

0.05

0.13

Sheet1

Cash ratio

years

ratio

Sheet2


0.26

0.27

0.29

0.32

0.46

Sheet2


YEARS

RATIO

Sheet3

_1278255410.unknown

_1277972774.xlsChart7

1.67

1.64

1.68

1.78

7.98

Current ratio

years

ratio

Sheet1


200310.1

200416.8

200510.3

200612.6

20078.3

Sheet1


years

ratio

Sheet2

YearCurrent ratio

20031.67

20041.64

20051.68

20061.78

20077.98

Sheet2

Current ratio

years

ratio

Sheet3

YearQuick ratio

20031.1

20041.4

20051.7

20061.31

20077

Sheet3

Quick ratio

years

ratio

_1277969754.unknown

_1277969755.unknown

_1277972566.xlsChart6

1.1

1.4

1.7

1.31

7

Quick ratio

years

ratio

Sheet1


200310.1

200416.8

200510.3

200612.6

20078.3

Sheet1


years

ratio

Sheet2

Sheet3

YearQuick ratio

20031.1

20041.4

20051.7

20061.31

20077

Sheet3

Quick ratio

years

ratio

_1277969753.unknown

_1277969752.unknown

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MBA PROJECT ON MBA