BALANCE SHEET CONCEPT OF WORKING CAPITAL

YEAR 2009-10

CURRENT ASSETS 6515542873

CURRENT LIABILITIES 519524891

NET WORKING CAPITAL 5996017982

2010-11

12223864086

2167328544

10056535542

NET WORKING CAPITAL

120 100.5 100 80 60 40 20 0 2009-10 2010-11 59.9 NET WORKING CAPITAL

INTERPRETATION: It is depicted from the net working capital chart that due to
fastly conversion of current assets into cash working capital condition of the company is satisfactory.

FORECAST/ ESTIMATES OF WORKING CAPITAL REQUIREMENTS

Working Capital is the life blood and controlling nerve centre of a business . No business can be successfully run without an adequate amount of working Capital. To avoid the shortage of Working Capital at once, an estimate of Working Capital requirements should be made in advance so that arrangements can be made to procure adequate Working Capital. METHODS OF ESTIMATENG WORKING CAPITAL REQUIREMENTS: The following methods are usually followed in forecasting Working Capital requirements of a firm:

Percentage sales method Regression analysis method Operating cycle method Projected balance sheet method

1. PERCENTAGE OF SALES METHOD: This method of estimating Working Capital requirements is based on the assumptions that the level of Working Capital for any firm is directly related to its sales value. If past experience indicates a stable relationship between the amount of sales and Working Capital, then this basic can be used to determine the requirements of Working Capital for future period. The individual items of current assets and current liabilities are also being estimated on the basis of the past experience as a percentage of sales. This method is simple to understand and easy to operate but it cannot be applied in all cases because the direct relationship between sales and Working Capital may not be established .

ESTIMATION OF WORKING CAPITAL REQUIREMENTS

Actual 2010-11 (Rs. In Crores) Percentage in sales 2010-11 Estimate 2011-12 (Rs. In crores)

Sales
Current Assets Inventories Debtors Bank & Cash Loans & Advances Total Current Assets Total Current Liabilities Working Capital (CA-CL)

1583

100

2000

54.9 43.8 9.5 13.8 122

21.6

3.5 2.8 0.6 0.87 7.7

1.4

8.9 45.9 10 14.2 128.9

22.6

100.4

6.3

106.3

Percentage of sales method: The sales are estimated to b e Rs 2000 crores in 2011-12

INTERPRETATION: Thus, when estimated sales for 2011-12 are 2000 crores, the amount of estimates Working Capital shall be Rs.106.3 Crores.

2. REGRESSION ANALYSIS METHOD (AVERAGE RELATIONSHIP B/W SALES AND WORKING CAPITAL): This method of forecasting Working Capital requirements is based upon the statistical technique of estimating or predicting the unknown value of a dependent variable from the known value of an independent variable. It is the measure of the average relationship between two or more variables, i.e. sales and Working capital, in terms of the original units of the data. The relationship between sales and working capital is represented by the equation:

Y = a + bx
Where, y is working Capital (dependent variable) a is intercept of least square b is slope of the regression line

x is sales (independent variable)

For findings the values of a and b following equation are used:

y= na+bx

xy = ax +b x 2

YEAR

SALES IN CRORES(x)

WORKING CAPITAL(y)

Xy

X2

2009-10

942

59.9

56425.8

887364

2010-11

1583

100.5

159091.5

2505889

TOTAL

x=2525

y=160.4

xy=215517.3 xy=3393253

y =Na + bx
160.4 = 2a +2525b.(i)

xy = ax + bx 2 215517.3 =2525a +3393253b..(ii) Multiply equation (i) by 2525 405010 = 5050a + 6375625b..(iii) Multiply equation (ii) by 2 431034.6 = 5050a + 6786506b(iv) Subtracting equation (iii) & (iv)..

431034.6 = 5050a + 6786506b 405010 = 5050a + 6375625b -

________________________________________ 26024.6 = 410881b B = 0.063

Put the vaue of b in equation (i)

160.4 = 2a +2525(0.063) 160.4 = 2a + 159.075 2a =1.325 A = 0.633

OPERATING CYCLE METHOD:- This method of estimating requirements is based

upon the operating cycle concept of working capital. The cycle starts with the raw material and other sources and ends with the realization of the cash from the sale of finished goods. It involves purchase of raw material and stores, its conversion into finished goods through work in process with possessive increment in labour and service costs, conversion of finished stock into sales, debtors and receivables, realization of cash and this cycle continues again from cash to purchase of raw material and so on. The speed/ time duration is required to complete one cycle determines the requirement of working capital. Longer the period of cycle, larger is the requirement of working capital and vice-versa. The requirements of working capital can be estimated as follows:-

WORKING CAPITAL REQUIRED= Cost of goods sold*operating cycle(days)/365 days+desired cash balance

PROJECTED BALANCE SHEET METHOD:- Under this method , projected balance sheet for the future date is prepared by forcasting of assets and liabilities by following of any method stated above. The excess of estimated current assets over estimated current liabilities , is computed to indicate the estimated amount of Working Capital required. a) Projected annual sales for 2010-11 Rs. 2000 Crores. b) %age of net profit on sales 6.3%. c) Average credit period allowed to cutomers 3 days. d) Average credit period allowed to suppliers 21 days e) Average stock holding in terms of sales requirements 46 days f) Allow 10% for contingencies

STATEMENT OF WORKING CAPITAL REQUIREMENTS CURRENT ASSETS Debtors (3 days): 2000*3/365 Stock(46 days): 2000*46/365 Rs (IN CRORES) 16.4 252.05 268.45 Less: CURRENT LIABILITIES Creditors (21 days):2000*21/365 NET WORKING CAPITAL Add 10% contingencies WORKING CAPITAL REQUIRED 115.07 153.38 15.34 168.72

Working notes: a. Sales= 2000 crores Profits = 6.3% of Rs. 2000 = 126 crores Cost of sales = Rs. 1874 crores b. Profits have been ignored as funds provided by profits may or may not be used as Working Capital. Thus, when estimated sales for 2011-12 are Rs. 2000 crores, the amount of estimates Working Capital shall be Rs. 168.72 crores.

TOOLS FOR ANALYSIS:RATIO ANALYSIS: Ratio analysis is a technique of analysis and interpretation of financial statements. It is the process of establishing and interpreting various ratios for help in making certain decisions. However, ratio analysis is not an end in itself. It is only a means of better understanding of financial strength and weaknesses of firm calculation of mere ratios doesnt serve any purpose, unless several appropriate ratios are analyzed and interpreted, There are a number of ratios which can be calculated from the information given in the financial statements, but the analyst has to select the appropriate data and calculate only a few appropriate ratios from the same keeping in mind the objectives of analysis. The following are the four steps involved in the ratio analysis: 1) Selection of the relevant data from the financial statement depending upon the objective of the analysis. 2) Calculation of the appropriate ratios from the above data. 3) Comparison of the calculated ratios with the ratios of the same firm in the past, or the ratios developed from projected financial statements or the ratios of some other firm or the comparison with ratio of the industry to which the firm belongs 4) Interpretation of the ratios. For the purpose of analyzing the Working Capital of the Verka Milk Plank three ratios are to be calculated:

1) Current Ratio 2) Stock Turnover Ratio 3) Working Capital Turnover Ratio CURRENT RATIO: Current ratio may be defined as the relationship between current assets and the current liabilities. This ratio, also known as WORKING CAPITAL RATIO, is a measure of general liquidity and is most widely used to make the analysis of short term financial position or liquidity of a firm. It is calculated by dividing the current assets by total of the current liabilities.

CURRET RATIO = CURRENT ASSETS/ CURRENT LIABILITIES

YEAR

CURRENT ASSETS

CURRENT LIALILITIES
519524891

RATIO

2009-10

6515542873

12.5

2010-11

12223864086 2167328544

56.4

Current ratio
60 50 40 30 20 10 0 2009-10 2010-11 12.5 Current ratio 56.4

INTERPRETATION: The current ratio is increasing

because current assets are

increasing and current liabilities are decreasing. The liquidity position of the company is very good.

2. STOCK TURNOVER RATIO: every firm has to maintain a certain level of inventory of finished goods so as to be able to meet the requirements of the business. But the level of the inventory should neither be too high or low. It is harmful to hold more inventories for the following reasons: A. it unnecessary blocks capital which can otherwise be profitability used Somewhere else B. Overstocking will require more go down space, so more rent will paid C. there are chances of obsolescence of stock consumer will prefer goods of latest Design, etc

d. Slow disposal of stocks will means slow recovery of cash also which will adversely e. There is chance of deterioration in quality if the stocks are held for more periods. It will therefore, be advisable to dispose of inventory as early as possible. On the other hand, too low inventory may mean loss of business opportunities. Thus, it is very essential to keep sufficient stock in business.

STOCK TURNOVER RATIO = NET SALES/ AVERAGE STOCK

AVERAGE STOCK = OPENING STOCK+ CLOSING STOCK / 2

YEAR 2009-10 2010-11

NET SALES 9422162366

AVERAGE STOCK 1558176254

RATIO 6.05

15832155179 36362678945 0.44

stock turnover artio

7 6.05 6 5 4 3 2 1 0 2009-10 2010-11 0.44 stock turnover artio

INTERPRETATION: The Stock Turnover Ratio is decreasing which means stocks are
not sold frequently. Thus, the more amount of money is required to finance the inventory.

3.WORKING CAPITAL TURNOVER RATIO: Working Capital of a concern is

directly related to sales, the current assts like debtors, bills receivable, cash, and stock etc. change with the increase or decrease in sales . Working Capital Turnover Ratio indicates the velocity of the utilization of the net Working Capital. This ratio indicates the number of times the Working Capital is turned over in the course of year. This ratio measures the efficiency with which the working capital is being used by a firm. A higher ratio indicates efficient utilization of Working Capital turnover ratio is not a good situation for any firm and hence care must be taken while interpreting the ratio.

NET WORKING CAPITAL= CURENT ASSETS- CURRENT LIABILITIES

WORKING CAPITAL = NET SALES/ NET WORKING CAPITAL

YEAR

NET SALES

NET WORKING CAPITAL

5996017982

RATIO

2009-10

9422162366

1.57

2010-11

15832155179

10056535542

1.57

Working capital turnover ratio

1.8 1.6 1.4 1.2 1 0.8 0.6 0.4 0.2 0 2009-10 2010-11 Working capital turnover ratio 1.57 1.57

INTERPRETATION:- The working capital turnover ratio is constant. Thus, care

must be undertaken to maintain a satisfactory ratio so as to improve the financial position of the company.