A PROJECT REPORT ON WORKING CAPITAL MANAGEMENT FOR NEW ERA ALUMINUM MILLS Pvt. Ltd. NAGPUR.

CONDUCTED BY Ms. PRACHI AJIT GHATE. Student, MBA II

FOR PARTIAL FULFILLMENT OF MASTER OF BUSINESS ADMINISTRATION

UNDER THE GUIDANCE OF Prof. MRS. SUPRIYA LAKHANGAONKAR.

SINHGAD TECHNICAL EDUCATION SOCIETYS SINHGAD INSTITUTE OF TECHNOLOGY & SCIENCE NARHE PUNE 41 JULY 2011

Acknowledgement

I would like to acknowledge and extend my heartfelt gratitude to Mr. H. I. Hussain, Director, NEW ERA ALUMINUM MILLS Pvt. Ltd for his vital encouragement and support which lead to the successful completion of my project. Apart from being my Company project guide he also stood by me as a mentor, and made sure that I get to learn each and every aspect of Finance.

I pay my sincere thanks to Prof. Supriya Lakhangaonkar, faculty, SITS, Pune for her invaluable suggestion, timely guidance, encouragement and support in process of the progress of the report. The Project Working Capital Management has been magnificent experience as it has embarked, though not all but many managerial traits in me. This surly has become a lifetime experience for me.

I also thank the organization New Era Aluminum Pvt. Ltd. and the entire Staff for their support and co-operation during the tenure of Two Months.

Date:Place:-

Prachi Ajit Ghate.

Table of Contents Chapter No. Chapter1 Chapter 2 Chapter 3 Chapter 4 Chapter 5 Chapter 6 Chapter 7 Description Introduction. Company Profile. Research Methodology Introduction to the topic Analysis & interpretation. Suggestion & Recommendations. Conclusion. Bibliography. Page No. 5-6 7-10 11-16 17-36 37-58 59-60 61-62 63

EXECUTIVE SUMMARY The analogy has often been made that cash is the lifeblood of any business. Take it away and the business will surely expire. A transfusion will miraculously bring the patient back from the brink of death, but only if, The blood is of the right kind; 3

The problem causing the leakage is attended to; Many companies are interested in increasing their profits. However, very

few companies worry about managing the Working Capital. Many companies fail due to bad management of Working Capital. They may be profitable, but they are not able to pay their bills. New Era Aluminium Mills Pvt. Ltd. is an experienced group with focus on producing Quality Aluminium slabs, sheets and plates for varied use. The state-ofthe-art manufacturing plant at Kalmeshwar, Distt Nagpur India has installed capacity of 15,000 MTPA. Cash is the lifeline of a company. If this lifeline deteriorates, so does the companys ability to fund operations, reinvest and meet capital requirements and payments. Understanding Companys cash flow is essential to make investment decisions. A good way to judge a companys cash flow prospects is to look at its Working Capital Management. The better the company manages its Working Capital, the less the company needs to borrow. Even companies with cash surpluses need to manage Working Capital to ensure that those surpluses are invested in ways that will generate suitable returns for investors. Working Capital Management involves the relationship between a companys short term assets and its short term liabilities. The goal of Working Capital Management is to ensure that a company is able to continue its operations and that it has sufficient ability to satisfy both maturing short term debt and upcoming operational expenses. The management of Working Capital involves managing inventories, accounts receivable and payable and cash management. Thus, an attempt has been made to study the management of Working Capital.

Chapter 1 Introduction of the Project.

Introduction

The main and basic objective of business organization is to earn profit and manage funds in a proper manner. For achieving this objective, funds are required. After these rising, investing funds in the right place so as to incur more benefits. Many times management fails because of decision making. Before proceeding to examine the allocation and rising of funds, tools of analysis are important. In allocation and raising funds, the finance manager uses certain tools of analysis, planning and control. A 5

company is deemed to be financially sound if its in position to carry on its business smoothly and meet the obligations, both short term as well as long term. Requirement of funds for short term should be met out from short term funds and long term requirement should be met out from long-term funds.
o o

To study the concept of Working Capital. To study the company. important factors of working capital and its role in

To knowing the importance of working capital in company

Chapter 2
6

Company Profile

Company Profile

Established in 1973 New Era Aluminum Pvt. Ltd. is a leading manufacturer of aluminum sheets and has consistently invested in technology up-gradation and state-ofthe-art facilities. New Era Aluminium Mills pvt ltd is an experienced group with focus on producing Quality Aluminium slabs, sheets and plates for varied use. The state-of-theart manufacturing plant at Kalmeshwar, Distt Nagpur India has installed capacity of 15,000 MTPA. Their Aluminium slabs are produced by hot rolling method and for sheets and plates, the hot-rolled slabs are further cold rolled, annealed and stretched as 7

per the requirement to produce best quality products. Aluminium sheets produced have aluminium content of about 99.50% purity and various alloys are mixed as per the customers requirement and use. Hot rolling provides the advantage that slabs can be used for various load bearing products. Products which are hot rolled and then cold rolled are harder and stronger with high load bearing capacity. There are very few aluminium plants in India which offers hot rolling as well as cold rolling capabilities and this is where New Era Aluminium Mills pvt ltd has an edge.

Product profile
Cold Rolled Sheets Chequered Sheets

Balcheq Baltread.

Applications
Aluminum sheets and plates are used in Other applications Include all white goods like Washing machines Refrigerators Cars, bus and truck body buildings Milk cans Chemical cans

Computers cabinets Computer peripherals Motor car number plates Aluminum fittings Aluminum reservoirs, tanks, vats and

Aluminum bottling such as

Cold drinks Utensils Beer cans

Packing materials such as

Shoe polish Medicine Chemical packing Food packaging Aluminum foils

Liquefied gas cylinders Tables and kitchen equipments Other house hold articles and parts Aluminum pots Aluminum sanitary ware and parts Pressure cookers etc.

Quality assurance
Committed to high standards of customer satisfaction and an ISO / TS 16949:

2002 and AS 9100B certified Company, New Era Aluminum Mills Pvt. Ltd. consistently demonstrated the ability to meet the most stringent quality assurance standards. Our mechanical & chemical testing labs have NABL accreditation. While we strive for continuous improvement, our advanced manufacturing processes and quality systems ensure sustained and consistent quality in our products and services. 9

10

Chapter 3 Research Methodology

RESEARCH METHODOLOGY

Area of Research:- Finance Topic for Research:- Working Capital Management as a tool to find out the short term solvency position of the company. Period of Research:- 19th may 2011 to 19th July 2011 . Meaning :- Research is discovery of facts, developments of facts and

verification of facts. Research is an endeavor to discover intellectual and practical 11

solution to the problems through the application of scientific methods to the knowledgeable universe. Research is the process which involves defining and redefining problems, hypothesis formulation, organizing and evaluating data, deriving deductions, inference and conclusion, after careful testing. Research Methodology explained by Redman and Mory are as follows systematized effort to gain new knowledge Research Methodology is original contribution to the existing stock of knowledge making its advancement. It is the purist of truth with the help of study Observation, Comparison and Experiment. In short it also covers the systematic method findings solution to some problem is research. It also covers the systematic approach concerning generalization and the formulation of the theory. DATA COLLECTION: 1) Primary data:Primary data is the data, which is collected directly personal interview, indirect oral investigation, drafting a questionnaire. The primary information and data collected for the purpose of completion of project is through discussion with the project guide and executives and staff of New Era aluminum mills Pvt. Ltd. .

2) Secondary data:Secondary data is the data, which is collected from the financial statements of the company. In the project, secondary data were used for the study is collected from Internet & Books. In the project most of the data is secondary data. Secondary data are collected from different websites through internet, books and magazines, newspaper, financial report of company etc.

Research Design:o

Descriptive and it includes the following steps 12

o o o o o

Analysis of working capital management and its interpretation Use of ratio analysis Findings Conclusions Suggestions

Objective of the project:

o o o

To analyze the concept of working capital To study the various elements of working capital To calculate ratios related to working capital and from that determine financial position of the company.

13

14

Scope of the Study.

The scope of the study defined below in terms of concepts adopted and period under focus. The study management of working capital in New Era Aluminum Mills Pvt. Ltd. The study is based on annual reports of the company for a period of three years 2008, 2009, 2010. Thus on the whole purpose of the project is to analyze the past and present performance of the company on various financial areas like cash, inventories and receivables.

15

Limitations of the Research

The main limitation of the research is the data source. The data is collected from the audited financial statements, which are prepared on the historical cost basis The reason for restricting the study of this period is due to the time constraint. Some data due to the purpose of secrecy was not disclosed

16

Chapter 4 Introduction to the Topic

17

THEROTICAL INFORMATION

Concepts to Be Covered

Introduction of Working Capital Definition Concept of Working Capital Need of Working Capital Importance of Working Capital management Factors affecting Working Capital Nature of Working Capital Management Operating Cycle Cash Management Inventory Management Debtors Management Creditors Management Ratio Analysis

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Working Capital

Working capital refers to the cash a business requires for its day to day operations or more specifically for financing the conversion of raw material into finished goods, which the company sells for payment. It is a measure of both a companys efficiency and its short term financial health. It is calculated by the following formula:Working capital = Current Assets - Current Liabilities If a companys current assets do not exceed its current liabilities, then it may run into trouble paying back creditors in the short run. The worst case scenario is bankruptcy. A declining working capital ratio over a longer time period is also a danger (Red Flag) that warrants further analysis. Working Capital also gives investors an idea of the companys underlying operational efficiency. The primary objective of Working Capital Management is to ensure that sufficient cash is available to:
o o o o

Meet day to day cash flow needs Pay wages and salaries when they fall due Pay creditors to ensure continued supplies of goods and services Ensure long term survival of the business entity.

Thus working capital management is an attempt to manage and control the current assets and current liabilities in order to maximize profitability and proper liquidity in the business. To keep the business alive you need to manage working capital, so the cash flows quickly around the business.

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DEFINITION
Working capital is the excess of current assets over current liabilities of any business at any time. Use to evaluate the liquidity of a company and how well it is positioned to fund operations in the short term using cash and other assets convertible to cash. Liquid assets available for conducting the daily affairs of a business can also be called as working capital. It is used to meet fluctuating needs that will be repaid during the companys next full operating cycle, generally, one year. By definition, working capital management entails short term decisions- generally, relating to the next one year period- which is reversible There are two concepts of working capital: - Gross and Net Gross Working Capital:It refers to the firms investment in current assets. Current assets are the assets that can be converted into cash within an accounting year and include cash, short term securities, debtors, bills receivable and stock. Net Working Capital:It refers to the difference between current assets and current liabilities. It can also be defined as that portion of a firms current assets which is finance with long term funds. Current liabilities are those claims of outsiders that are expected to mature for payment within an accounting year and include creditors, bills payable and outstanding expenses. Net working capital can be positive or negative. A positive net working capital will arise when current assets exceed current liabilities. A negative net working capital occurs when current liabilities are in excess of current assets. The two concepts of working capital gross and net are not exclusive rather they have equal significance from the management view point. Working capital is also of permanent and variable nature. There is always a minimum level of current assets that is continuously required by the firm to carry on its business operations. This minimum level of current asset is referred to as permanent 20

or fixed working capital. The extra working capital needed to support the changing production and sales activities is called fluctuating or variable working capital.

Short Term Finance Long term Finance

Fixed Elements of working capital

Fixed Asset

21

Following is the diagram showing types of Working Capital:-

TYPES OF WORKING CAPITAL

NET WORKING CAPITAL

GROSS WORKING CAPITAL

TYPES OF WORKING CAPITAL

PERMANEN T WORKING CAPITAL

TEMPORARY WORKING CAPITAL

The firm should maintain working capital position. It should have adequate Working Capital to run its business operation. Both excessive as well as inadequate Working Capital positions are dangerous from the firms point of view. Excessive working capital means idle funds which earn no profits for the firm.

22

Need of Working Capital Not all businesses have the same need to invest in working capital. Much depends on:

The nature of the production process i.e. what and how something is being produce. The way in which the product is distributed to the customer. Different industries have different optimum working capital profiles, reflecting

their methods of doing business and what they are selling. The most appropriate a method of calculating the working capital need of a firm is a concept of Operating cycle.

Businesses with a lot of cash sales and few credit sales should have minimum trade debtor Example: Supermarkets. Businesses that exist to trade in completed products will only have finished goods in stock. As compared to this, manufacturers will have to maintain stock of Raw material and Work in Progress.

Larger Companies may be able to use their bargaining strength as customers obtain more favorable, extended credit terms from suppliers. But smaller companies those have recently started trading (and do not have a track record of credit worthiness) may be required to pay their suppliers immediately.

Some businesses will receive their money at certain times of year, although they may incur expenses throughout the year at a consistent level. This is known as Seasonality of cash flow. Example: Travel Agents Working Capital need fluctuate during the year:23

Amount of funds tied up in Working Capital would not typically be a constant figure throughout the year

IMPORTANCE OF WORKING CAPITAL MANAGEMENT The task of the financial manager in managing working capital efficiency is to ensure sufficient liquidity in the operations of the enterprise. The liquidity of a business firm is measured by its ability to satisfy short term obligations as they become due. 1. Time devoted to working capital management:Surveys indicate that the largest portion of a financial managers time is devoted to the day to day internal operations of the firm; this may be appropriately subsumed under the heading Working Capital Management 2. Investment in current assets:Characteristically, current assets represent more than half of the total assets of the business firm. Because they represent a large investment and it tends to be relatively volatile, current assets are worth of the financial managers careful attention 3. Importance for small firms:Working capital management is particularly important for small firms. A small firm may minimize its investment in fixed assets by renting or by leasing plant and equipment, but there is no way it can avoid investment in cash, receivables and inventory. Therefore, current assets are particularly significant for the financial manager of a small firm. Further, because a small firm has relatively limited access to the long term capital markets; it must necessarily rely on trade credit and short term bank loans, both of which affect net working capital by increased current liabilities. 4. Exploitation of favorable market conditions:Only concerns with adequate working capital can exploit favourable market conditions such as purchasing its requirement in bulk when the prices are lower and by holding inventories for higher prices. The working capital requirement of a firm increases with the growth and expansion of its activities. It is difficult to determine the relationship between growth in the volume of business and the growth in the working capital of a business. Yet it may be concluded that for normal rate of expansion in the volume of the business, we may 24

have retained profits to provide for more working capital but in fast growing concern, we shall require larger amount of working capital.

Nature of Working Capital Management Factors Affecting Working Capital

Determinants of Working Capital:There are no set of rules or formulas to determine the working capital requirements of firms. A large number of factors, each having a different importance influence working capital needs of firms. The importance of the factors also changes for a factor of time. Therefore an analysis of relevant factors should be made in order to determine total investment in working capital. Following are some factors affecting the composition of working capital: 1. Nature of business:Working capital requirements of a firm are basically influenced by the nature of its business. Trading and financial firms have a very small investment in fixed assets, but require a large sum of money to be invested in working capital. Retail stores, for example must carry large stocks of a variety of goods to stratify varied and continuously demands of their customers. In contrast, public utilities may have limited need of working capital and have to invest abundantly in fixed assets. Their working capital requirement is nominal because they may have only cash sales and supply services, not products. Thus, no funds will be tied up in debtors and stock. 2. Market and demand conditions:The working capital needs of a firm are related to its sales. However, it is difficult to precisely determine the relationship between volume of sales and working capital needs. Sales depend on demand conditions. Large number of firms experience 25

seasonal cyclical fluctuations in the demand for their products and services. These business variations affect the working capital requirements, specially the temporary working capital requirement of a firm. Seasonal fluctuations not only affect working capital requirement but also create production problems of the firm. 3. Technology and manufacturing policy:The manufacturing cycle (or the inventory conversion cycle) comprises of the purchase and use of raw material and the production of the finished goods. Longer the manufacturing cycle, larger will be the firms working capital requirement production policies will differ from firm to firm, depending on the circumstances of the individual firm. 4. Credit policy:The credit policy of the firm affect she working capital by influencing the level of debtors. The credit term to be granted to customers may depend upon the norms of the industry to which the firm belongs. The firm should follow a renationalized credit policy based on the credit standing of customers and other relevant factors. 5. Operating efficiency:The operating efficiency of the firm relates to the optimum utilization of all its resources at minimum costs. The efficiency in controlling costs and utilization fixed and current assets leads to operating efficiency. 6. Price level changes:Generally, rising price level will require a firm to maintain higher amount of working capital. Same levels of current asset will need increased investment when prices are increasing. It is possible that some companies will not be affected by rising prices while others may be badly affected.

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Working capital management is concern with the problem that arises in attempting to manage the current assets, the current liabilities and the inter relationships that exists between them .The term current assets refer to those assets, which in ordinary course will be or can be turned into cash within one year without undergoing a decrease in value and inventory. Current liabilities, which are intended at their inception to be paid in the ordinary course of business within year out of the current assets, are earning of the concerns. The basic current liabilities are bills payable, creditors, 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. This is because, if the firms cannot maintain a satisfactory level of working capital, it is likely to force into bankruptcy. The current assets should be large enough to cover its liabilities in order to ensure a reasonable margin of safety. Each of the current assets must be managed efficiently in order to maintain the liquidity if the firm while not keeping it too high level of any one of them. Each of the short term sources of financing must be continuously managed to ensure that they are obtained and used in the best possible way.

27

Elements of Working Capital OPERATING CYCLE Cash flows in a cycle into around and out of a business. It is the businesss life blood and every managers primary task is to help it keep flowing and to use the cash flow to generate profits. If a business is operating profitably, then in theory it should generate cash surpluses. If it doesnt generate surpluses, the business will eventually will run out cash and expire. More businesses fail for lack of cash than for want of profit Definition:The working capital cycle is the period of time between the points at which cash is first spent on the production of a product and the final collection of cash from a customer. The operating cycle involves 3 phases:

Acquisition of resources such as raw material, labour, power and fuel. Manufacture of the product which includes conversion of raw material into work in progress into finished goods Sale of a product either for cash or on credit. Credit sales create account receivables for collection. The faster the business expands the more cash it will need for working capital

and investments. Good management of working capital will generate cash, will help to improve profits and reduce risks.

28

OPERATING CYCLE

R
OPERATING CYCLE = R+ W+ F+ D- C R = RAW MATERIAL STORAGE PERIOD W=WORK IN PROGRESS HOLDING PERIOD F= FINISHED GOODS STORAGE PERIOD

D=DEBTORES COLLECTION PERIOD C= CREDIT PERIOD AVAILABLE

Operating Cycle:The investment in current assets is circulating in nature. This changes the shape from raw material to semi finished goods to finished goods, debtors and finally to cash. Thus, conversion of working capital into cash may result in the profit or loss. Working capital cycle consists of following five steps: 29

o o o o o

Conversion of cash into raw material. Conversion of raw material into work- in- progress. Conversion of work in progress into finished goods. Time for sale of finished goods.(cash and credit sales) Time for realization from debtors and bills receivables into cash.

How can Working Capital Cycle be improved? Working capital cycle is improved by increasing the rate of stock turnover and/or cutting back on debt collection period. Calculation of, Gross operating cycle:Gross operating cycle =inventory conversion period +debtors conversion period GOC = ICP + DCP

Net Operating Cycle:= Inventory conversion Period + Debtors Conversion Period - Creditors Conversion Period NOC = ICP + DCP - CCP

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CASH MANAGEMENT Cash is both the beginning and the end of working capital cycle- cash, inventory, receivables and cash. Its effective management is the key determinant of efficient working capital management. Cash is the most important component of current assets. All other components such as debtors and inventories ultimately are converted into cash and this fact further emphasizes the importance of the management of cash. Importance of cash:The goal of cash management is to maintain the minimum cash balance, which provides the firm with sufficient liquidity needed to meet its financial obligation. At the same time, it should enhance firms profitability without exposing it to undue risk i.e. it involves trade off- between risk and profitability. Management of cash is primarily concerned with following:
o o o o o

Determination of minimum level of cash that an enterprise should hold. Controlling cash outflows. Controlling cash inflows Matching cash inflows and outflows through cash budgeting Proper investment of surplus cash.

Cash Conversion Cycle: The duration between the purchase of a firms inventory and the collection of accounts receivable for the sale of inventory. It is known as cash cycle. Cash conversion cycle = Inventory processing period + Days to collect Receivables

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INVENTORY MANAGEMENT Inventory can be referred to as sum of the nature of raw materials, fuel and lubricants, spare parts, maintenance consumables, semi-processed materials and finished goods stock at any point of time. In the present study raw materials, work in progress, finished goods and packing material are included Inventory control is concerned with acquisition, storage, handling and use of inventories so as to ensure the availability of inventory whenever needed, proved adequate cushion for contingencies, derive maximum economy and minimize wastage and losses. Objectives of Inventory Management:Basic objectives of inventory management are to reconcile the two conflicting requirements:

For maximization of shareholders wealth, it is essential to minimize the firms investment in inventories, and Sufficient inventory must be available to prevent stock- outs and production hold-ups.

Inventory management techniques:

ABC Analysis EOQ- Economic Order Quantity JIT- Just In Time FMS- Flexible Manufacturing System

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DEBTORS MANAGEMENT Get them to pay you as soon as possible Every business needs to knowwho owns them moneyhow much is owed.how long it owesfor what it owesThere is nothing more important than being paid for a product or service. A customer who does not pay is not a customer Receivables represent investment. Receivables as defined by Emerson, When goods or services are sold under an agreement permitting the customer to pay for them at a later date, the amount due from customer is recorded as account, representing claim to future payments of cash from customer. Objectives of Receivables Management:

To obtain optimum volume of sales. To control the cost of credit and keep it as the minimum. To maintain the optimum level of investment in receivables. To keep down the average collection period. Ensuring prompt and accurate billing.

Need for accounts receivable:

Sales expansion : Sales retention :

Management of accounts receivable is as follows:o o o o o o

Credit policy Credit variables Credit terms Credit information (Evaluating individual credit applications). Collection efforts. Monitoring accounts receivables. 33

Accounts Receivables = credit sales per day* length of collection period. Tactics for managing debtors:

Maintain constant contact with the customer. Set targets for collection cash and be committed to them. Send invoice out promptly. Use the debtor days calculation to determine how quickly you are collecting cash. Set the rules that limit the customer who can become debtors. Agree collection terms that encourages customer to pay quickly. Limits beyond which legal action will be pursued should be determined.

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CREDITORS MANAGEMENT
When goods or services are purchased on a credit under an agreement to pay for them at a later date, the amount payable is recorded as a creditor, representing claim to future payments by the company to its supplier. Creditors Management is an important aspect from the point of view of the company for the following reasons: It results in continuous production as availability of raw material is on continuous basis & certain time period is given for making the payment. Timely payment to creditors ensures uninterrupted supply of raw material. It results in good relationship with the supplier.

Tactics For Managing Creditors:

Maintain constant contact with the supplier. Set targets for payments and be committed to them. Agree upon proper conditions.

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Ratio Analysis The primary uses of financial statements are evaluating past performance and predicting future facilitated by comparison. Therefore, the focus of financial analysis is always on the crucial information contained in the financial statements. This depends on the objectives and purposes of such analysis. The purpose of evaluating such financial statements is different from person to person depending on its relationship. The financial analysis always needs certain yardstick to evaluate the efficiency and performance of any business unit. The one of the most frequently used yardsticks is ratio analysis. Ratio analysis involves the use of various methods for calculating and interpreting financial ratios to assess the performance and status of the business unit. It studies the numerical or quantitative relationship between two variables or items. Ratio Analysis is the systematic process of determining and interpreting the numerical relationship of various pairs of items derived from the financial statements of a business. Absolute figures do not convey much tangible meaning and is not meaningful while comparing the performance of one business with the other. It is very important the base (or denominator) selected for each ratio is relevant with the numerator. The two must be such that one is closely connected with and influenced by the other.

Importance of Ratio Analysis:-

36

Ratio Analysis stands for the process of determining and presenting the relationship of items and group of items in the financial statements. It is an important technique of financial analysis. It is a way by which financial stability and health of a concern can be judged. Main points of importance are as follows:

Useful in financial position analysis:Accounting ratios reveal the financial position of the concern. This helps

the banks, insurance companies and other financial institutions in lending and making investment decisions.

Useful in simplifying accounting figures:Accounting ratios simplify, summarize and systematize the accounting

figures in order to make them more understandable and in lucid form. They highlight the inter-relationship, which exists between various segments of the business as expressed by accounting statements. Often the figures standing alone cannot help them convey any meaning and ratios help them to relate with other figures.

Useful in assessing the operational efficiency:Accounting ratios help to have an idea of the working of a concern. The efficiency of the firm becomes evident when analysis is based on accounting ratios. They diagnose the financial health by evaluating liquidity, solvency, profitability, etc. This helps the management to assess financial requirements and the capabilities of various business units.

Useful in forecasting purposes:If accounting ratios are calculated for a number of years, then a trend is established. This trend helps in setting up plans and forecasting.

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Chapter 5 Analysis & Interpretation

DATA ANALYSIS AND INTERPRETATION 38

Statement showing changes in working capital

(Figures in Rs.Lacs)

Particulars Current Assets Interest accrued on investment Inventories Sundry Debtors Cash and Balances Loans and Advances
Total(A)

2008

2009

Increase

Decrease

5.50 863.08 3011.97 625.43 770.94 5276.92

6.13 1074.36 5241.40 797.32 1121.51 8240.72

0.63 211.28 2229.43 171.89 350.57 2963.80 2963.80

1316.79 402.20 322.81 2041.80 922.00 2963.80

Current Liabilities Sundry Creditors Other liabilities Provisions Total(B) Net working Capital(A-B) Increase in Working Capital Total
4664.91 300.42 219.86 5185.19 91.73 922.00 1013.73 5981.70 702.62 542.67 7227.00 1013.73 1013.73

Statement showing changes in working capital Particulars 2009 2010 Increase Decrease
39

Current Assets Interest accrued on investment Inventories Sundry Debtors Cash and Balances Loans and Advances
Total(A) 6.13 1074.36 5241.40 797.31 1121.51 8240.72 6.49 741.04 6354.48 1186.44 2767.40 11056.85 0.36 1113.08 389.12 1646.89 333.32 -

Current Liabilities Sundry Creditors Other liabilities Provisions Total(B) Net working Capital(A-B) Increase in Working Capital Total
5981.70 702.62 542.67 7227.00 1013.73 2224.06 3237.78 6443.66 640.26 735.15 7819.07 3237.78 3237.78 62.37 3211.82 3211.82 461.96 192.48 987.76 2224.06 3211.82

Statement showing changes in working capital Particulars 2010 2011 Increase Decrease

40

Current Assets Interest accrued on investment Inventories Sundry Debtors Cash and Balances Loans and Advances Total(A) Current Liabilities Sundry Creditors Other liabilities Provisions Total(B) Net working Capital(A-B) Increase in Working Capital Total
6443.66 640.26 735.15 7819.07 3237.78 3710.91 6948.69 7234.36 955.45 674.99 8864.80 6948.69 6948.69 60.16 5049.19 5049.19 1338.28 3710.91 5049.19 790.70 315.19 6.49 741.04 6354.48 1186.44 2768.40 11056.85 6.27 1166.90 8702.22 954.27 4983.83 15813.49 425.86 2347.74 2215.43 0.22 232.17 -

Increase in Gross Working Capital:

Opening Current Asset 5276.92 8240.72 Closing Current Assets 8240.72 11056.85 Increase In Gross Working Capital 2963.80 2816.13 41

Years 2008-09 2009-10

2010-11

11056.85

15813.49

4756.64

In crease In Gross Workin C ital g ap

5000 4000 3000 2000 1000 0 2008-09 2009-10 2010-11

Interpretation
The Gross working capital is nothing but the total current assets of the company, and the Increase in gross Working Capital means the rise in current Assets of the company. From the above chart, there is continuous hike increase in gross working capital; the measure reason is that, the companys debtors are continuously increased by high amounts.

Increase in Net Working Capital:

Years 2008-09 2009-10 2010-11 Increase in Net Working Capital 922.00 2224.06 3710.91

42

Increas in Net WorkingC e apital

4000 3500 3000 2500 2000 1500 1000 500 0 2008-09 2009-10 2010-11

Interpretation
The increase in net working capital of the company is increasing every year. The Increased in working capital for the year 2008-2009,2009-10 and 2010-11 is 922.00, 2224.06, 3710.91(000) and the reason for the increase in working capital is increase in current assets.

Net Working Capital Requirement:

Particulars Current Assets

2008-09

2009-10

2010-11

43

Interest accrued on investment Inventories Sundry Debtors Cash and Balances Loans and Advances Total(A) Current Liabilities Sundry Creditors Other liabilities Provisions Total(B) Net working Capital(A-B)

6.13

6.49

6.27

1074.36 5241.4 797.31 1121.51 8240.71

741.04 6354.48 1186.44 2768.4 11056.9

1166.9 8702.22 954.27 4983.83 15813.49

5981.7 702.62 542.67 7226.99

6443.66 640.26 735.15 7819.07

7234.36 955.45 674.99 8864.8

1013.72

3237.78

6948.69

Net Working Capital:

Years 2008-09 2009-10

Net Working Capital 1013.72 3237.78 44

2010-11

6948.69

Interpretation:
The net working capital shows the difference between the current assets and current liabilities. From the above chart, there is continuous increase in Net working capital. It is 1013.27 in year 2008-09 which increase in 2009-10 and 2010-11 i.e. 3277.78 and 6948.69 respectively.

Ratio Analysis:
I) Liquidity Ratios

1) Current Ratio = Particulars 2008-09 2009-10 2010-11 45

Current Asset Current Liabilities Current Ratio

8240.72 7227.00 1.14

11056.85 7819.07 1.41

15812.49 8865.40 1.78

Interpretation A current ratio 2:1 is considered as good. The current ratio increase in the year 2009- 2010 from 1.14 of last year due to an increase in sundry debtors. In 2010-11 increase is current assets is high so, due to this current ratio has gone up to 1.78 due to increase in raw-material, loans and advances.

2) Acid Test Ratio or Quick ratio = Quick Assets = Current Assets Inventories Quick liabilities = Current Liabilities Bank Overdraft Particulars Quick Assets 2008-09 6166.36 2009-10 8575.81 2010-11 12645.59 46

Current Liabilities Quick ratio

7227.00 0.85

7819.07 1.09

8865.40 1.42

Interpretation A quick ratio is 1:1 or more is considered as satisfactory or of sound liquidity position. There is continuous increase in quick assets and quick liabilities with different proportion so that quick ratio changes in 2008-09, due to an increase quick liabilities the quick ratio is very low. The acid test ratio of year 20010-11 has increased to 1.42 due to increase in debtors as compared to the previous years.

II) Turnover Ratios: 1) Working Capital Turnover Ratio =

Particulars Net Sales

2008-09 22454.59

2009-10 26700.56

2010-11 35965.83 47

Net Working Capital Working Capital Turnover Ratio

1013.72 22.15

3237.78 8.24

6947.09 5.17

Interpretation: A change in Working Capital Turnover Ratio indicates ability of effecting sales through maintenance of working capital. It may be observed that due to increase in inventory levels working capital has drastically increased and as a result of which working capital turnover has decreased. Working Capital Turnover decrease here indicates inability of the company either to translate working capital levels into sales or blockage of funds in the working capital without increase in sales.

2) Debtors Turnover Ratio = Sales/Debtors Particulars Credit sales Average Debtors Debtors Turnover Ratio 2008-09 22454.59 5241.40 4.28 2009-10 26700.56 6354.48 4.20 2010-11 35965.83 8702.22 4.13

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Interpretation: The debtors turnover ratio is increasing slightly from the previous year. An increase in the debtors turnover ratio show recovery from debtors is improving. In 2008-09 the ratio is comparatively low which indicates greater funds are blocked in receivables. In has decreased and less funds are blocked.

3) Debtors Conversion Period: No of days & month in Year Debtors Conversion Period = Debtors Turnover Ratio

Particulars

2008-09

2009-10

2010-11 49

No. Days/ months in Year Debtors Turnover Ratio Debtors Conversion Period (days)

365 4.28 85

365 4.20 87

365 4.13 88

Interpretation: The debtors conversion period is increasing every year. An increase in debtors conversion period is not good for company. In 2008-09 ratio is low whereas in next years debtors conversion period is increasing which indicate block in receivables.

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4) Creditors Turnover Ratio = Credit Purchase Creditors Turnover Ratio = Avg. Creditors

Particulars Credit Purchases Average Creditors Credit Turnover Ratio

2008-09 12626.78 5981.70 2.11

2009-10 14897.92 6433.66 2.31

2010-11 20461.10 7234.96 2.82

Interpretation: The creditors turnover ratio is increasing every year which shows that creditors are being repaid more promptly with the passage of time.

5) Creditors Conversion Period:51

Particulars No. Days/ months in Year Creditors Turnover Ratio Creditors Conversion Period (days)

2008-09 365 2.11 173

2009-10 365 2.31 158

2010-11 365 2.82 129

Interpretation: The Creditors conversion period shows the Credit period allowed to the Creditors. from the above study the Creditors conversion period is contineously decreasing year by year due to increase in creditors turnover ratio.It shows prompt payment to creditors.

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6) Inventory Turnover Ratio Avg. Inventory Inventory Turnover Ratio = COGS 2008-09 931.74 862.48 `1.08 2009-10 1163.37 1360.7 0.85 2010-11 1492.21 1911.49 0.78

Particulars Cost of Goods Sold Average Inventory Inventory Turnover Ratio

Interpretation: Inventory ratio indicates the acumen of the management to effect sales by maintaining least possible inventory. The inventory turnover ratio is steadily increasing as the company has increased its stock in the year 2010-11 as the company has increased its inventory for completing the order on time. Inventory management has slightly better in the subsequent years as seen from the chart.

7) Inventory Conversion Period:

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Inventory urnover ratio Inventory Conversion Period = 360 Particulars No. Days/ months in Year Inventory Turnover Ratio Inventory Conversion Period (days) 2008-09 2009-10 2010-11 365 1.08 338 365 0.85 429 365 0.78 468

Interpretation: Inventory conversion period is increasing every yeardue to decrease in inventory turnover ratio. As the company has increased its stock in the year 2010-11 as the company has increased its inventory for completing the order on time. Inventory management has slightly better in the subsequent years as seen from the chart.

Gross Operating Cycle: 54

Inventory conversion Period

Debtors Conversion Period

Year 2008-2009 2009-2010 2010-2011

Inventory Conversion Period 338 429 468

Debtors Conversion Period 85 87 88

Ratio (Days) 423 516 556

Interpretation: The gross Operating cycle shows cost in Holding of material and Receipt due from the Debtors. The gross Operating cycle of the company is continuously increased it means the company have high period for recovery money.

8) Operating Cycle:

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Inventory conversion Period

Debtors Conversion Period

Creditors Conversion Period

Year 2008-2009 2009-2010 2010-2011

Inventory Conversion Period 338 429 468

Debtors Conversion Period 85 87 88

Creditors Conversion Period 173 158 129

Ratio (Days) 250 358 427

Interpretation:

III)

Profitability Ratios

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1) Gross Profit ratio =

Particulars Gross Profit Sales Gross Profit Ratio

2008-09 6006.78 22454.59 26.75

2009-10 7194.08 26700.56 26.94

2010-11 9443.09 35965.83 26.25

Interpretation: The gross profit ratio reflects the efficiency with which management produce unit of product. This ratio indicates the average spread between the cost of goods sold and the sales revenue. A high gross profit ratio is a sign of good management which can be in the year 2009-10. Also, gross profit is relatively maintained by the company.

2) Net Profit ratio =

Particulars

2008-09

2009-10

2010-11 57

Net Profit Sales Net Profit Ratio

1859.80 22454.59 8.28

2356.48 26700.56 8.82

3089.58 35965.83 8.59

Interpretation: In the year 2010-11 we are observing a minute decline in the net profit ratio which is a sign of adverse condition. Net Profit is also maintained by the company.

FINDINGS 1. Current assets increased from 11056.85 (000) in 2010 to 15812.49 in 2011. 2. The debtors of the company have increased which shows that the company is continuously increasing its business. 58

3. The net working capital is also increasing. This is mainly due to the increase in current assets and increase in the current asset is due to increase in debtors and other current assets. 4. The current ratio shows increasing when compared to the previous year. 5. As per the result quick ratio was increased year by year which is showing sound liquidity position of the firm. In year 2010-11 quick ratio is 1.42 which is satisfactory. 6. The result shows the inventory turnover ratio has continuously increased in the year 20010-11 when compared to the previous year 2009-10. This shows the increasing business of the firm. The inventory turnover ratio is 1.28 in the year 2010-11 which means the company is maintaining appropriate stock of goods. 7. The debtors turnover ratio is decreasing which indicates that the collection period has decreased continuously. It implies that payments by debtor are quick because the turnover is high and collection period is short. It also shows us that the operating cycle period is short and hence the liquidity condition of the company is sound. 8. It is observed that there has been a substantial increase in the credit turnover ratio each year which helps to increase the sales of the company but may be wrong for the liquidity condition of the company future.

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Chapter 6 Suggestion & Recommendations

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SUGGESTIONS & RECOMMENDATIONS

It may be observed that inventory turnover period is unusually high and it is suggested to minimize the inventory levels so as to reduce blockage of funds in the inventory.

It may be observed that there has been increase in promptness of payments to creditors however, it has not resulted in increase in Gross Profit Margin. It therefore is recommended either to increase credit period from creditors or avail discount for prompt payment to them.

Loans and Advances also have increased drastically, it may be either due to payments to Creditors or payments to sister concerns. It may be suggested to reduce level of Loans and Advances since the unusually high level of Loans and Advances are eating up the profits by way of increase in interest and financial charges. The main reason behind this is that such loans and advances are usually advanced without any interest.

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Chapter 7 Conclusion

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CONCLUSION

It may be concluded that working capital management has improved with the passage of time. However, it may be concluded that company practically failed to manage inventory levels. Also, company has been very prompt in payments to creditors which may be a good sign but it has not resulted in betterment of Gross Margin. Also, increase in Loans and Advances indicate poor management of funds since it has resulted in deployment of funds without returns.

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BIBLIOGRAPHY

Annual Report of New Era Aluminum Mills Pvt. Ltd. Information broachers of Company. www.wikipedia.com www.goolge.com

Books:Financial Management Financial Management - Khan and Jain. - I.M. Pandey.

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