A STUDY ON WORKING CAPITAL MANAGEMENT IN DATAZONE PVT LTD

ABSTRACT

Every business whether big, medium or small, needs finance to carry on its operations and to
achieve its target. In fact, finance is so indispensable today that it’s rightly said to be the
lifeblood of an enterprise. Without adequate finance, no enterprise can possibly accomplish
its objectives. So this project deals with studying various aspects of working capital
management that is necessary to carry out the day-today operations. This project deals with
the study about “Working Capital Management” in Datazone Pvt Ltd.

In the management of working capital, the firm is faced by two key problems: First, given the
level of sales and the relevant cost considerations, what are the optimal amounts of cash,
accounts receivable and inventories that a firm should choose to maintain. Second, given
these optimal amounts, what is the most economical way to finance these working capital
investments. To produce the best possible results, firms should keep no unproductive assets
and should finance with the cheapest available sources of funds. Why? In general, is quit
advantageous for the firm to invest in short term assets and to finance short-term liabilities.

The scope of the study is identified after and during the study is conducted. The main
scope of the study was to put into practical the theoretical aspect of the study into real life
work experience. The study of working capital is based on tools like Ratio Analysis,
Statement of changes in working capital. Further the study is based on last5 years Annual
Reports of Datazone Pvt Ltd.

TABLE OF CONTENTS

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CHAPTER PARTICULARS PAGE NO

1 About The Study

 Concepts Of Working Capital

 Circulation Of Working Capital

2
2.1 Industry Profile
2.2 Company Profile

3 Review Of Literature

4 Research Methodology

4.1 Need For The Study

4.2 Objectives Of The Study

4.3 Scope Of The Study

4.4 Limitations Of The Study

4.5 Research Methodology

5 Data Analysis And Interpretation

 Working Capital Analysis

 Ratio Analysis

 Trend Analysis

6 Findings

Suggestion

Conclusion

LIST OF TABLES

Table. no Name of Tables Page. no

5.1.1 Schedule of Changes in Working Capital (2013)

5.1.2 Schedule of Changes in Working Capital (2014)

5.1.3 Schedule of Changes in Working Capital (2015)

5.1.4 Schedule of Changes in Working Capital (2016)

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5.2.1 Schedule of Changes in Working Capital (2017)

5.2.2 Current Ratio

5.2.3 Quick Ratio

5.2.4 Absolute Liquid Ratio

5.2.5 Inventory Turnover Ratio

5.2.6 Debtors Turnover Ratio

5.2.7 Creditors Turnover Ratio

5.2.8 Fixed Asset Turnover Ratio

5.2.9 Cash to Current Asset Ratio

5.2.10 Current Asset Turnover Ratio

5.2.11 Inventory to Sales Ratio

5.2.12 Working Capital Turnover Ratio

5.2.13 Inventory to Current Asset Ratio

5.2.14 Gross profit Ratio

5.2.15 Administrative Expenses Ratio

5.3.1 Trend Analysis- Current Asset

5.3.2 Trend Analysis- Fixed Asset

5.3.3 Trend Analysis- Cash and Bank

5.3.4 Trend Analysis- Inventory

5.3.5 Trend Analysis- Sundry Debtors

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 LIST OF CHARTS

Figure. No Name of Tables Page. no

5.2.2 Current Assets

5.2.3 Fixed Assets

5.2.4 Cash & Bank Balances

5.2.5 Inventory Turnover ratio

5.2.6 Sundry Debtors turnover ratio

5.2.7 Creditors Turnover ratio

5.2.8 Fixed Asset Turnover ratio

5.2.9 Cash to Current Asset

5.2.10 Current Asset Turnover

5.2.11 Inventory Turnover

5.2.12 Working Capital Turnover Ratio

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5.2.13 Inventory to Current Asset Ratio

5.2.14 Gross profit Ratio

5.2.15 Administrative Expenses Ratio

5.3.1 Trend Analysis- Current Asset

5.3.2 Trend Analysis- Fixed Asset

5.3.3 Trend Analysis- Cash and Bank

5.3.4 Trend Analysis- Inventory

5.3.5 Trend Analysis- Sundry Debtors

CHAPTER 1

Introduction

Working capital is a critical factor in the sustainability and viability of any business. Many
firms are forced to cease trading due to an inability to meet short-term obligations when they
are due. To remain in business, it is essential that a firm successfully manage its working
capital. Proper management of working capital helps to improve a firm’s liquidity position
and financial health and reduces risk.

In this course, you will be introduced to the concept of working capital and working capital
management. The course will examine the need for working capital management and identify
key factors that will have an impact on the size of the working capital requirement. This
course will also cover the financial planning concepts to estimate working capital
requirement. Finally, this course will describe some of the key strategies that can be used for
financing working capital.
The management and control of working capital is of vital importance to companies and
forms a major workload function of the finance manager and accountant. By working capital,
the commonly accepted descriptive term for these resources, we mean the company's
investment in short-term assets; traditionally these relate to items coming under the balance-
sheet heading of current assets (in practice, of course, all capital is working, whether invested
in fixed or current assets). Thus inventories (stocks), accounts receivable (debtors), short-
term investments and cash balances all come within the term working capital. (The words in
brackets represent alternative descriptions of the asset; throughout this book these terms are

5
used synonymously.) Apart from the efficient operation and control of these assets, the
finance manager will also be concerned with their financing. In this the finance manager will
be faced with numerous alternative sources, both short-term and long-term. Short-term
financing is generally shown under the heading of current liabilities and includes items such
as bank overdrafts and credit received from suppliers. The efficient financing of current
assets by short-term liabilities also comes within the scope of working-capital management
and is therefore included in the text.

In reading the book the following terms will be found useful:

working capital - a general term gross

working capital- total current assets

net working capital - current assets minus current liabilities

This is the generally accepted terminology although some text books adopt different
definitions. A frequently used description of working capital is 'circulating capital' or
'circulating assets'; this description follows from the short-term cash cycle of the firm which
is described later. This terminology can be confusing, however, as in the long term all assets
are involved in the cash cycle. Because of this, the description 'circulating assets' is not used.

Component Items

Net working capital consists of current assets minus current liabilities. Current assets are
those which are used in the selling operation of the business and which. are held for short
periods of time. Sometimes they are defined as those that are expected to be converted into
cash within one year and this, in fact, covers virtually all the items. Many firms have assets
which they intend to keep for the long term although they are in an easily realisable form
such as investments. Although these are not termed current assets they can be utilised in
working capital management as they can often be easily converted into cash. The major
component items of current assets are set out below.

(a) Inventories or stocks. These are the materials, commodities or goods that the firm has at
any moment in time and which are expected to be used in the firm's production process or be
sold in the form of a finished product in the normal day-to-day operations of the business.
Inventories indude raw materials, bought-in components, finished goods, and products part-
way through a manufacturing process (known as work in progress).

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(b) Debtors or accounts receivable. These are short-term debts owed to the company. In the
case of manufacturing and commercial firms debts receivable generally represent credit taken
by their sales customers.

(c) Prepayments or expenses paid in advance. These represent expenses that have been paid
for but for which the goods or service have not yet been received.

(d) Short-term investments. When a firm has short-term surplus cash, this is often invested in
securities on which a rate of return is expected, either in the form of interest received or
capital appreciation; these amounts may be certain (i.e. local-authority deposits) or uncertain
(equity shares). If a company decides to invest for the long term then the investment will not
be shown in current assets and its management will be kept separate.

OBJECTIVES

• 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;
• pay government taxation and providers of capital – dividends; and
• ensure the long term survival of the business entity

Nature and Scope of Working Capital

Working Capital Management is concerned with the problems that arise in attempting to
manage the Current Assets, the Current Liabilities and the inter-relationship that
exists between them. The term Current Assets refers to those Assets which in the ordinary
course of business can be, or will be, converted 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 Inventory. Current
Liabilities are those Liabilities, which are intended at their inception, to be paid in the
ordinary course of business, within a year out of the current assets or the earnings of the
concern .The basic Current Liabilities are Accounts Payable, Bills Payable, Bank Overdraft
and outstanding expense

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The goal of Working Capital Management is to manage the firm's Assets and Liabilities in
such a way that a satisfactory level of working capital is maintained.
This is so because if the firm cannot maintain a satisfactory level of working capital, it is
likely to become insolvent and may even be forced into bankruptcy. 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 managed efficiently in order to maintain the
liquidity of the firm while not keeping too high a 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.
The interaction between current assets and current liabilities is, therefore, the main theme
of the theory of management of working capital.

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 1.2 INDUSTRY PROFILE

Industry profile

Information technology in India is an industry consisting of two major components: IT

services and business process outsourcing (BPO). The sector has increased its contribution to
India's GDP from 1.2% in 1998 to 7.7% in 2017. According to NASSCOM, the sector
aggregated revenues of US$160 billion in 2017, with export revenue standing at US$99
billion and domestic revenue at US$48 billion, growing by over 13%. The United States
accounts for two-thirds of India's IT services exports.

India's IT Services industry was born in Mumbai in 1967 with the establishment of the Tata
Group in partnership with Burroughs. The first software export zone, SEEPZ – the precursor
to the modern-day IT park – was established in Mumbai in 1973. More than 80 percent of the
country's software exports were from SEEPZ in the 1980s.

The Indian economy underwent major economic reforms in 1991, leading to a new era of
globalization and international economic integration, and annual economic growth of over
6% from 1993–2002. The new administration under Sri Atal Bihari Vajpayee (Posthumus)
(who was Prime Minister from 1998–2004) placed the development of Information
Technology among its top five priorities and formed the Indian National Task Force on
Information Technology and Software Development.

Wolcott & Goodman (2003) report on the role of the Indian National Task Force on
Information Technology and Software Development:

Within 90 days of its establishment, the Task Force produced an extensive background report
on the state of technology in India and an IT Action Plan with 108 recommendations. The
Task Force could act quickly because it built upon the experience and frustrations of state
governments, central government agencies, universities, and the software industry. Much of
what it proposed was also consistent with the thinking and recommendations of international
bodies like the World Trade Organization (WTO), International Telecommunications

9
Union (ITU), and World Bank. In addition, the Task Force incorporated the experiences
of Singapore and other nations, which implemented similar programs. It was less a task of
invention than of sparking action on a consensus that had already evolved within the
networking community and government.

Regulated VSAT links became visible in 1994. Desai (2006) describes the steps taken to relax
regulations on linking in 1991:

In 1991 the Department of Electronics broke this impasse, creating a corporation

called Software Technology Parks of India (STPI) that, being owned by the government,
could provide VSAT communications without breaching its monopoly. STPI set up software
technology parks in different cities, each of which provided satellite links to be used by firms;
the local link was a wireless radio link. In 1993 the government began to allow individual
companies their own dedicated links, which allowed work done in India to be transmitted
abroad directly. Indian firms soon convinced their American customers that a satellite link
was as reliable as a team of programmers working in the clients’ office.

Videsh Sanchar Nigam Limited (VSNL) introduced Gateway Electronic Mail Service in
1991, the 64 kbit/s leased line service in 1992, and commercial Internet access on a visible
scale in 1992. Election results were displayed via National Informatics Centre's NICNET.

"The New Telecommunications Policy, 1999" (NTP 1999) helped further liberalise India's
telecommunications sector. The Information Technology Act, 2000 created legal procedures
for electronic transactions and e-commerce.

A joint EU-India group of scholars was formed on 23 November 2001 to further promote
joint research and development. On 25 June 2002, India and the European Union agreed to
bilateral cooperation in the field of science and technology. India holds observer status
at CERN, while a joint India-EU Software Education and Development Center will be
located in Bangalore.

Contemporary situation

In the contemporary world economy India is the second-largest exporter of IT. Exports
dominate the Indian IT industry and constitute about 77% of the industry's total revenue.
However, the domestic market is also significant, with robust revenue growth.[2] The
industry’s share of total Indian exports (merchandise plus services) increased from less than
4% in FY1998 to about 25% in FY2012. The technologically-inclined services sector in India
accounts for 40% of the country's GDP and 30% of export earnings as of 2006, while
10
employing only 25% of its workforce, according to Sharma (2006). According to Gartner, the
"Top Five Indian IT Services Providers" are Tata Consultancy
Services, Infosys, Cognizant, Wipro, and HCL Technologies.

Future outlook

The Indian IT market currently focuses on providing low-cost solutions in the services
business of global IT. The presence of Indian companies in the product development business
of global IT is very meager, however, this number is slowly on the rise. The other prominent
trend is that IT jobs, once confined to Bangalore, are slowly starting to experience a
geographical diffusion into other cities like Chennai, Hyderabad and Pune. According to
Google estimates, the Indian community of developers will be the largest in the world by
2018.

New directions in research and development

Research in the industry was earlier concentrated in Programming languages like Java, but in
the recent times the research focus has changed towards technologies like Mobile computing,
Cloud computing and Software as a Service. This shift is attributed to the preference of
clients for ubiquitous computing over standalone computing.

Major information technology hubs

Sharma (2006) states: "Today, Bangalore is known as the Silicon Platuea of India and
contributes 38% of Indian IT Exports. India's second and third largest software companies are
headquartered in Bangalore, as are many of the global Companies. Cities like Hyderabad,
Chennai, Pune and Gurgaon are also emerging as technology hubs, with many global IT
companies establishing headquarters there. Numerous IT companies are also based in
Mumbai.

Chennai

The city has a world-class IT infrastructure with dedicated expressway nicknamed as IT

expressways, and many other IT parks promoted by both government agency
(Elcot) Electronics Corporation of Tamil Nadu and private entities. The city's strong
industrial base also favors the establishment of many major R&D centers in its vicinity.

Bangalore

Bangalore is known as the Silicon Valley of India and the IT Capital of India. It is considered
to be a global information technology hub and it is India's largest exporter both of IT overall

11
and of software. Some of the top Indian IT service providers
like Infosys, Wipro, Mindtree and Mphasis are headquartered in Bangalore. It is also the site
of the national headquarters of many top international firms like Intel, Texas
Instruments, Bosch, Yahoo, SAP Labs,Google India, EA, Apple Inc, SanDisk, Harman, Dell,
Ericsson, Sabre, Goldman Sachs, HP, Boeing, Wells Fargo, Sony, AT&T, Flipkart,
Walmart,Juniper Networks Inc, CenturyLink, Aricent, Samsung, Oracle, LG, Adobe,
JPMorgan, Genpact, Accenture, IBM, Qualcomm, Cisco, LBrand, PayPal, eBay, Quest,
Broadcom, Cerner, EY, Amazon, LinkedIn, BT, and Continental, among others. Bangalore
alone accounts for more than 35% of all IT companies present in India and contains close to
5,000 companies, making it India's largest IT contributor.

Hyderabad

Hyderabad – known as the HITEC City or Cyberabad – is a major global information

technology hub, and the largest bioinformatics hub in India. Hyderabad has emerged as the
second largest city in the country for software exports pipping competitors Chennai and Pune.
It is the site of the first Microsoft development center in India, which is also Microsoft's
largest software development center outside of its headquarters in Redmond, USA. It has also
many IT industries as Amazon(which is also a biggest outlet outside its headquarters),
Google, Microsoft, Facebook, Apple, Wipro, Infosys, Oracle, franklin templeton, jp morgan,
HSBC, wells fargo, Tech mahindra, and many more big it companies.India headquarters of
Google, Facebook and Apple. Hyderabad is Largest Deloitte hub of India .The new
government of Telangana is welcoming new investors and also supporting the small scale
industries through T-HUB. It contains close to 3,000 companies, making it India's second
largest IT contributor.

Pune

Pune is one of the leading Indian and international IT services and outsourcing exporters. The
next biggest IT park of India (Rajiv Gandhi IT Park at Hinjawadi) is expected to scale up to
phase 7.

Mumbai

Mumbai is headquarters to Tata Consultancy Services, India's largest IT company. Other

major IT companies based in the city include Datamatics, Patni, L&T Infotech, 3i
Infotech, Mastek and Oracle FinServ.

Others
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Telangana which includes Warangal and Khammam.,

Gujarat which includes Ahmedabad and Vadodara,

Tamil Nadu which includes Coimbatore and Madurai.

Kerala where 55% of the exports come from its capital city Trivandrum and the majority of
the rest from Kochi. Calicut is also another contributor from the state. Trivandrum houses
technology giants like Oracle Corporation, TCS, Infosys, UST Global, Ernst & Young etc.
Kochi also houses TCS, Cognizant, Wipro, KPMG, Ernst & Young, EXL
Service, Etisalat, UST Global, Xerox etc.

Andhra Pradesh which includes Vijayawada, Kakinada, Visakhapatnam, and Tirupati.

Kolkata and Durgapur of West Bengal

Employment generation

The IT sector has also led to massive employment generation in India. The industry continues
to be a net employment generator — expected to add 230,000 jobs in fiscal year 2012, thus
directly employing about 2.8 million people and indirectly employing 8.9 million, making it a
dominant player in the global outsourcing sector. However, it continues to face challenges of
competitiveness in the globalised and modern world, particularly from countries
like China and Philippines.

India's growing stature in the Information Age enabled it to form close ties with both
the United States and the European Union. However, the recent global financial crises have
deeply impacted Indian IT companies as well as global companies. As a result, hiring has
dropped sharply, and employees are looking at different sectors like financial services,
telecommunications, and manufacturing, which have been growing phenomenally over the
last few years.

With fundamental structural changes visible everywhere in the IT services due to Cloud
computing, proliferation of Social media, Big data, Analytics all leading to digital services
and digital economy, many of the leading companies in India's IT sector reported lower
headcounts in their financial results.

13
1.3 COMPANY PROFILE

14
1.4 IDENTIFIED PROBLEM

This project deals with the study about “Working Capital Management” in Datazone Pvt
Ltd.

In the management of working capital, the firm is faced by two key problems:

1. First, given the level of sales and the relevant cost considerations, what are the optimal
amounts of cash, accounts receivable and inventories that a firm should choose to maintain?

2. Second, given these optimal amounts, what is the most economical way to finance these
working capital investments? To produce the best possible results, firms should keep no
unproductive assets and should finance with the cheapest available sources of funds. Why? In
general, is quit advantageous for the firm to invest in short term assets and to finance short-
term liabilities.

15
1.5 NEED FOR THE STUDY

 This study has undergone by the researcher for fulfilling the research gap and also
for the management requirements.
 The management wants to know whether the annual working capital requirement
has gone increase or decrease if the report produces a negative result then what
will do reduce the working capital so this study needed now.

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1.6 OBJECTIVES OF THE STUDY

PRIMARY OBJECTIVE

To study on the management of cash flow through working capital in Datazone Pvt Ltd

SECONDARY OBJECTIVES:

 To study the sources and uses of the working capital.

 To study the liquidity position through various working capital related ratios.
 To study the working capital components such as receivables accounts, cash
management, Inventory management.
 To make suggestions based on the finding of the study.

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1.7 SCOPE OF THE STUDY
The scope of the study is identified after and during the study is conducted. The
main scope of the study was to put into practical the theoretical aspect of the study
into real life work experience. The study of working capital is based on tools like
Ratio Analysis, Statement of changes in working capital. Further the study is based
on last5 years Annual Reports of Datazone Pvt Ltd.

18
 CHAPTER 2

2.1 REVIEW OF LERATURE

Many previous researches have indicated the relations between the working capital
management and profititability of a company in different environments

Krishnamurthy’s study (2000) was aggregative and dealt with inventories in the
private sector of the Indian economy as a whole for the period 1948-61, this study used sales
to represent demand for the product and suggested the importance of accelerator. Short-term
rate of interest has also been found to be significant.

According to Herzfeld B2(2003) working capital management refers to the

management of current or short term assets and short term liabilities. The purpose of that
function is to make certain that the company has enough assets to operate s business. Here are
things you should know about working capital management.

Garcia-Teruel and Martinez-Solano (2002) collected a panel of 8,872 small to

medium-sized enterprises (SMEs) from spain covering the period 2002-2003. They tested the
effects of working capital management on SME profititability using the panel data
methodology. The results, which are robust to the presence of endogeney, demonstrated that
managers could create value by reducing their inventories and the number of days for which
their accounts are outstanding. Moreover, shortening the cash conversion cycle also improves
the firm’s profititability.

19
 Maynard E.Refuse (2002), argued that attempts to improve working capital by
delaying payment to creditors is counter-productive to individuals and to the economy as a
whole. Claims that altering debtor and creditor levels for individual tiers whin a value system
will rarely produce any net benef. Proposes that stock reduction generates system-wide
financial improvements and other important benefs.

Shin and soenen (2006) used a sample of 58,985 firm’s years covering the period
1975-1994 in order to investigate the relation between net-trade cycle that was used to
measure the efficiency of working capital management and corporate profititability. In all
cases, they found a strong negative relation between the length of the firm’s net-trade cycle
and s profititability.

According to Eljelly (2003) the relationship between the firm’s profititability and s
liquidity level, as measured by current ration. This relationship is more pronounced for firms
with high current ratios and long cash conversion cycles. At the industry level, however, he
found that the cash conversion cycle or the cash gap is of more importance as a measure of
liquidity than current ratio that affects profititability. The firm size variable was found to have
significant effect on profititability at the industry level.

Deloof (2004) investigated the relation between working capital management and
corporate profititability for a sample of 1,009 large Belgian non-financial firms for the period
1992-2002. The result from analysis showed that there was a negative gap between
profititability that was measured by gross operating income and cash conversion cycle well
number of day’s accounts receivable and inventories. Less profitable firms waed longer to
pay their bills.

According to Gass (2007), studied “cash is the lifeblood of business” is an often

repeated maxim amongst financial managers. Working capital management refers to the
management of current or short term assets include inventories, loans and advances, debtors,
investments and cash and bank balances. Short-term liabilities include creditors, trade
advances, borrowings, and provisions. The major emphasis is, however, on short-term assets,
since short term liabilities arise in the context of short term assets. is important that
companies minimize risk by prudent working capital management.

20
 Lazaridis and tryfonidis (2007) have investigated the relation between working
capital Management and corporate profititability of listed company in the Athens stock
exchange. A sample of 131 listed companies for period of 2002-2005 was used to examine
this relationship. The result from regression analysis indicated that there was a statistical
significance between profititability, measured through gross operating profit, and the cash
conversion cycle. From those results, they claimed that the managers could create value for
shareholders by handling correctly the cash conversion cycle and keeping each different
component to an optimum level.

Raheman and Nasr (2012) have selected a sample of 94 Pakistani firms listed on
Karachi stock exchange for a period of 6 years from 1999-2005 to study the effect of
different variables of working capital management on the net operating profititability. From
result of study, they showed that there was a negative relation between variables of working
capital management including the average collection period, inventory turnover in days, cash
conversion cycle and profititability. Besides, they also indicated that size of the firm,
measured by natural logarhm of sales, and profititability had a positive relationship.

Garcia-Teruel and Martinez-Solano (2012) studied the effects of working capital

management on the profititability of a sample of 8.872 small and medium-sized enterprises
(SMEs) from spin covering the period 2002-2003. They found that managers can create value
by reducing their inventories and the number of days for which their accounts are
outstanding. Moreover, shortening the cash conversion cycle also improves the firm’s
profititability.

Chakra borty (2013) evaluated the relationship between working capital and
profititability of Indian pharmaceutical companies. He pointed out that there were two
distinct schools of thought on this issue: according to one school of thought, working capital
is not a factor of improving profititability and there may be a negative relationship between
them, while according to the other school of thought, investment in working capital plays a
val role to improve corporate profititability, and unless there is a minimum level of
investment of working capital, output and sales cannot be maintained-in fact, the inadequacy
of working capital would keep fixed asset inoperative.

Singh and pandey (2013) had an attempt to study the working capital components
and the impact of working capital management on profititability of Hindalco Industries

21
Limed for period from 1990 to 2012. Results of the study showed that current ratio, liquid
ratio, receivables turnover ratio and working capital to total assets ratio had statistically
significant impact on the profititability of Hindalco Industries Limed.

According to Dr. Debdasraks and chanchalchattejee, “working capital

management”, gam journal of management, vol.6, no.4, oct-dec 2013, page. No 129-138. In
the arana of increased globalize economy, maximizing shareholders, value and hereby
creating value for the company is considered to be the central objective of business firms.
The study explains that the management of working capital can facilate a company in
realizing s objective of value creation in the area of value based-management.

According to Beneda, Nancy; Zhang, Yilei (2013), the working capital management
on the operating performance and growth of new public companies. The study also sheds
light on the relationship of working capital with debt level, firm risk, and industry. Using a
sample of inial public offering (IPOs), the study finds a significant positive association
between higher levels of accounts receivable and operating performance. The study further
finds that maintaining control (i.e. lower amounts) over levels of cash and securities,
inventory, fixed assets, and accounts.

According to Dubey (2013), the working capital in affirm generally arises out of four
basic factors like sales volume, technological changes, seasonal, cyclical changes and policies
of the firm. The strength of the firm is dependent on the working capital as discussed earlier
but this working capital is self dependent on the level of sales volume of firm. The firm
requires current assets to support and maintain operational or functional activies. By current
assets we mean the assets which can be converted readily into cash say whin a year such as
receivables, inventories and liquid cash.

Afza and Nazir(2014) made an attempt in order to investigate the tradional relations
between working capital management policies and a firm’s profititability for a sample of 204
non-financial firms listed on Karachi Stock Exchange (KSE) for the period 1998-2006. The
study found significant different among their working capital requirements and financing
policies across different industries. Moreover, regression result found a negative relationship
between the profititability of firms and degree of aggressiveness of working capital
investment and financing policies.

22
 According to Amarj gill, Nahum Biger, Neil Mathur (2015) paper seeks to extend
Lazaridis and Tryfonidis’ findings regarding the relation between working capital
management and profititability. A sample of 88 American firms listed on New York Stock
Exchange for a period of 3 years from 2006 to 2012 was selected. They found statistically
significant relation between the cash conversion cycle and profititability, measured through
gross operating profit.

Mohammad Neab and Noriza BMS (2013) worked on crating the relationship between
Working Capital Management (WCM) and performance of firms. For their analysis they
chose the Malaysian listed companies. They administered the perspective of market valuation
and profitability. They used total of 172 listed companies from the databases of Bloomberg.
They randomly selected five year data (2004-2008). This research likewise the researches
quoted before studied the impact of the dimensions of working capital component i.e. C.C.C.,
current ratio (C.R.), current asset to total asset ratio (C.A.T.A.R), current liabilities to total
asset ratio (C.L.T.A.R.), and debt to asset ratio (D.T.A.R.) in effect to the firm’s performance
whereby firm’s value dimension was taken as Tobin Q (T.Q.) and profitability i.e. return on
asset (R.O.A.) and return on invested capital (R.O.I.C). They applied two different techniques
for analyzing the data that are multiple regression and correlations. They found that there is a
negative relationship between working capital variables and the firm’s performance.
Dong (2013) reported that the firms’ profitability and liquidity are affected by working
capital management in his analysis. Pooled data are selected for carrying out the research for
the era of 2007-2009 for assessing the companies listed in stock market of Vietnam. He
focused on the variables that include profitability, conversion cycle and its related elements
and the relationship that exists between them. From his research it was found that the
relationships among these variables are strongly negative. This denote that decrease in the
profitability occur due to increase in cash conversion cycle. It is also found that if the number
of days of account receivable and inventories are diminished then the profitability will
increase numbers of days of accounts receivable and inventories.

Saswata Chatterjee (2013) focused on the importance of the fixed and current assets in the
successful running of any organization. It poses direct impacts on the profitability liquidity.
There have been a phenomenon observed in the business that most of the companies increase
the margin for the profits and losses because this act shrinks the size of working capital
relative to sales. But if the companies want to increase or improve its liquidity, then it has to
increase its working capital. In the response of this policy the organization has to lower down

23
its sales and hence the profitability will be affected due to this action. For this purpose 30
United Kingdom based companies were selected which were listed in the London Stock
exchange. The data were taken of three years 2007-2009. It analyzed the impact of the
working capital on the profitability. The dimensions of working capital management included
in this research which is quick ratios, current ratios C.C.C, average days of payment,
Inventory turnover, and A.C.P (average collection period. on the net operating profitability of
the UK companies.

Mathuva (2012) studied the impact of working capital management on the

performance. He took almost 30 listed firms as a sample and all these companies were listed
in Nairobi stock exchange and the data was taken from 1993 to 2009. There were certain
findings of his research by analyzing the fixed effects regression models. Firstly, there is a
negative relationship between the time when the cash is collected from the customers and the
firm’s productivity. This depicts, firms that are more profitable enjoys less time period for the
collection of cash from the customers as compare to ones which are less profitable. Secondly,
there is a positive relationship between the inventories when they were brought in and the
period to which they are sold and the firm’s profitability. The interpretation comes out as that
the firms or the organizations which take more time to keep the inventories it reduces the
costs of the disruption in the process of production and usually the business losses as there is
the insufficiency in the goods. This situation decreases the operating cost of the firm. The
third assumption of the research was the association between the average payment period and
profitability and found out to be positive. The more the time taken to disburse the creditors,
the profitability will increases In our present day economy, finance is defined as the provision
of money at time when it is required. Every business whether big, medium or small, needs
finance to carry on its operations and to achieve its target. Infact, finance is so indispensable
today that its rightly said to be the lifeblood of an enterprise. Without adequate finance, no
enterprise can possibly accomplish its objectives. A firm is required to maintain a balance
between liquidity and profitability while conducting its day to day operations .liquidity is a
precond ition to ensure that the firm are able to meet its short term obligations and its
continued flow can be guaranteed from a profitable venture. The importance of cash as an
indicator of continuing financial health should not be surprising in view of its crucial role
within the business. This requires that business must be run both efficiently and profitably. In
the process, an asset-liability mismatch may occur which may increase firm’s profitability in
the short run but at a risk of its insolvency. On the other hand, too much focus on liquidity

24
will be at the expense of profitability. Thus, the manager of a business entity is in a dilemma
of achieving desired tradeoff between liquidity and profitability in order to maximize the
value of a firm Working capital management deals with the most dynamic fields in finance,
which needs constant interaction between finance and other functional managers. The finance
manager acting alone cannot improve the working capital situation. In recent times a few case
studies regarding management of working capital in selected companies have been in order to
make in-depth analysis of the several experts of working capital management, The finding of
such studies not only throws new lights on the technical loopholes of management activities
of the concerned companies , but also helps the scholars and researchers to develop new ideas
,techniques and methods for effective management of working capital. An effort has been
made to make an in-depth study of working capital management with special reference to
Hindustan Newsprint Limited, Kottayam.

CHAPTER 3

25
RESEARCH METHODOLOGY

Research methodology generally refers to the procedure carried out in any project on research
study. Methodology gives clear picture of suable clarification and sequence of the different
stages of the study, as to arrive at a proper manifestation of the objective, and the scope.

Research design

A research design is the arrangement of conditions for collection and analysis of

data in a manner that aims to combine relevance to the research purpose with
economy in procedure.

Research design can be thought of as the structure of research is the glue that holds
all of the elements in a research project together. We often describe a design using a
concise notation that enables us to summarize a complex design structure efficiently.

A research design appropriate for a particular research problem, usually involves the
consideration of the following factors:
 The means of obtaining information.
 The availability and skills of the researcher and his staff.
 The objective of the problem to be studied.
 The nature of the problem to be studied.
 The availability of time and money for the research work.

3.1 TYPE OF RESEARCH

Analytical research

In analytical research, on the other hand, the researcher has to use facts or information
already available, and analyze these to make a critical evaluation of the material.

3.2 LIMITATIONS OF THE STUDY

 The study duration is short.

 The analysis is limed to five years of data study (from year 2014 to year 2018)
for financial analysis.
 Limed interaction with the concerned heads due to their busy schedule.
 The findings of the study are based on the information retrieved by the selected un

26
3.3 METHOD OF DATA COLLECTION

Primary data

The primary data is that data which is collected fresh or first hand, and for first time
which is original in nature.
The Primary data has been collected from Personal Interaction with Finance manager and
other staff members.

Secondary data

The secondary data are those which have already collected and stored. Secondary
data easily get those secondary data from records, annual reports of the company etc. will
save the time, money and efforts to collect the data.

The major source of data for this project was collected through annual reports,
profit and loss account of 5 year period from 2014.

3.4 TOOLS FOR DATA COLLECTION

SAMPLING DESIGN
Sampling un : Financial Statements.
Sampling Size : Last five years financial statements.
Tool Used for calculations : MS-Excel.

3.5 TOOLS FOR ANALYSIS

 Ratio analysis
 Operating cycle
 Changes in working capital

3.5.1 RATIO ANANLYSIS

27
 Financial ratios are useful indicators of a firm’s performance and financial situation.
Most rations can be calculated from information provided by the financial statements.
Financial ratio can be used to analyze trends and to compare the firm’s financials to those of
other firms. In some cases, ratio analysis can predict future bankruptcy. Financial ratios can
be classified according to the information they provide. The following types of ratios
frequently are used:

Current Ratio

Liquidity ratios provide information about a firm’s about to meet s short-term

financial obligations. They are of particular interest to those extending short-term cred to the
firm. Two frequently-used liquidity ratios are the current ratio (or working capital ratio) and
the quick ratio.

The current ratio is the ratio of current assets to current liabilities:

Current Ratio = Current assets

Current liabilities

Short-term creditors prefer a high current ratio since reduces their risk. Shareholders
may prefer a lower current ratio so that more of the firm’s assets are working to grow the
business. Typical values for the current ratio in order to remain solvent during downturns.

Quick Ratio

One drawback of the current ratio is that inventory may include many ems that are difficult to
liquidate quickly and that have uncertain inventory in the current assets. The quick ratio is
defined as follows:

Quick Ratio = Quick asset

Current liabilities

The current assets used in the quick ratio are cash, accounts receivable, and notes
receivable. These assets essentially are current assets less inventory. The quick ratio often is
referred to as the acid test.

Cash Ratio

28
 Finally, the cash ratio is the most conservative liquidity ratio. excludes all current
assets except the most liquid: cash and cash equivalents. The cash ratio is defined as follows:

Cash Ratio = Cash + Marketable Securities

Current liabilities

The cash ratio is an indication of the firm’s ability to pay off s current liabilities if for
some reason immediate payment were demanded.

Inventory Turnover Ratio

Inventory turnover ratio is the ratio, which indicates the number of times the stock is
turned over i.e., sold during the year. This measures the efficiency of the sales and stock
levels of a company. A high ratio means high sales, fast stock turnover and a low stock level.
A low stock turnover ratio means the business is slowing down or with a high stock level.

Inventory Turnover Ratio = Net Sales

Closing Inventory

Debtors Turnover Ratio

Debtor’s turnover ratio indicates the speed of debt collection of the firm. This ratio
computes the number of times debtors (receivables) has been turned over during the
particular period.

Debtors Turnover Ratio = Net Sales

Average Debtors

Creditors Turnover Ratio

Creditor’s turnover ratio is the ratio, which indicates the number of times the debts are
paid in the year. This ratio is calculated as follows.

Creditors Turnover Ratio = Net Purchases

Average Creditors

29
Working Capital Turnover Ratio

This ratio indicates the number of times the working capital is turned over in the course
of the year. This ratio measures the efficiency with which the working capital is used by the
firm. A higher ratio indicates efficient utilization of working capital and a low ratio indicates
otherwise. But a very high working capital turnover is not a good situation for any firm.

Working Capital Turnover Ratio = Net Sales

Net Working Capital

3.5.2 OPERATING CYCLE OF WORKING CAPITAL

The working capital cycle reserves to the length of time between the firm paying cash
for materials etc., this working capital also known as operating cycle. Working capital cycle
or operating cycle indicates the length or time between companies paying for materials
entering into stock and receiving the cash from sales of finished goods. The operating cycle
(Working Capital) consists of the following events.

CASH

RAW
MATERIALS
DEBTORS

FINISHED STOCK WORK-IN-PROGRESS

30
  Conversion of cash into raw materials.
 Conversion of raw materials into work in progress.
 Conversion of work in progress into finished stock.
 Conversion of finished stock into accounts receivables(Debtors)through sale and
 Conversion of account receivables into cash.

CHAPTER V

DATA ANALYSIS AND INTERPRETAITION

WORKING CAPITAL ANALYSIS

Working capital management is concerned with the problems which arise in

attempting to manage the current assets, the current liabilities and the inter relationship that
exist between them. The term current assets refers to those assets which in ordinary course of
business can be, or, will be, turned in to cash within one year without undergoing a
diminution in value and without disrupting the operation of the firm. The major current assets
are cash, marketable securities, account receivable and inventory. Current liabilities ware
those liabilities which intended at their inception to be paid in ordinary course of business,
within a year, out of the current assets or earnings of the concern. The basic current liabilities
are account payable, bill payable, bank over-draft, and outstanding expenses.

The goal of working capital management is to manage the firm s current assets
and current liabilities in such way that the satisfactory level of working capital is mentioned.

31
The current should be large enough to cover its current liabilities in order to ensure a
reasonable margin of the safety.

The consideration of the level investment in current assets should avoid two danger
points excessive and inadequate investment in current assets. Investment in current assets
should be just adequate, not more or less, to the need of the business firms. Excessive
investment in current assets should be avoided because it impairs the firm s profitability, as
idle investment earns nothing. On the other hand inadequate amount of working capital can
be threatened for the solvency of the firms because of its inability to meet its current
obligation. It should be realized that the working capital need of the firms may be fluctuating
with changing business activity. This may cause excess or shortage of working capital
frequently. The management should be prompt to initiate an action and correct imbalance

5.1 SCHEDULE OF CHANGES IN WORKING CAPITAL

TABLE 5.1

2013 2014 INCREASE DECREASE

PARTICULARS AMOUNT AMOUNT AMOUNT AMOUNT
Rs. Rs. Rs. Rs.
ASSETS:
CURRENT ASSETS

Inventory (ERP Software 8,25,100

2,50,940 5,74,160 -
Licenses)
Sundry Debtors
12,63,430 15,90,440 3,27,010
Cash & Bank Balance
15,90,440 58,400 - 15,32,040
Loans and Advances 22,86,750 36,86,400 13,99,650

32
Prepaid Expenses 14,650
13,730 - 920

Accrued Income
59,090 42,925 16,165
TOTAL CURRENT 54,65,300 62,04,638 23,00,820 15,49,125
ASSETS
LESS:
CURRENT
LIABILITIES

Sundry Creditors
64,53,315 69,10,610 - 4,57,295
TOTAL CURRENT
LIABILITIES 64,53,315 69,10,610 - 4,57,295

NET WORKING
CAPITAL (9,88,015) (7,05,972) 23,00,820 10,91,830

INFERENCE:

Working capital is required to finance day to day operations of a firm. There should
be an optimum level of working capital. From the above calculations it is clearly found that
the company’s working capital is not at the best level. The current assets are lesser than the
liabilities.

33
 5.2 SCHEDULE OF CHANGES IN WORKING CAPITAL

TABLE 5.2

2014 2015 INCREASE DECREASE

PARTICULARS AMOUNT AMOUNT AMOUNT AMOUNT
Rs. Rs. Rs. Rs.
ASSETS:
CURRENT ASSETS

Inventory 8,25,100 2,82,180

5,42,920
Sundry Debtors 15,02,620
15,90,440 30,93,060
Cash & Bank Balance 5,46,630
58,400 6,05,030
Loans and Advances 31,92,231 4,94,169
36,86,400
Prepaid Expenses 13,730 17,022 3,292

Accrued Income 96,426 53,501

42,925
TOTAL CURRENT 62,16,995 75,46,689 21,06,043 7,76,349

34
ASSETS

LESS:
CURRENT
LIABILITIES

Sundry Creditors 69,10,610 1,46,42,090 - 77,31,480

TOTAL CURRENT 1,46,42,090 - 77,31,480
LIABILITIES 69,10,610

NET WORKING (7,05,972) (70,95,401) 21,06,043 (69,55,131)

CAPITAL

INFERENCE:

In the above the working capital is negative due to more fluctuations in inventory and
loans. The company has borrowed more from outsiders for their purchase of fixed asset. The
creditors are increased at a very high rate that causes the company for many bad debts. More
care should be taken to avoid such fluctuations in the later years.

35
 5.3 SCHEDULE OF CHANGES IN WORKING CAPITAL

TABLE 5.3

2015 2016 INCREASE DECREASE

PARTICULARS AMOUNT AMOUNT AMOUNT AMOUNT
Rs. Rs. Rs. Rs.
ASSETS:
CURRENT ASSETS

Inventory 4,07,390
5,42,920 9,50,310
Sundry Debtors 13,38,130
30,93,060 44,31,190
Cash & Bank Balance 2,33,655
6,05,030 3,71,375
Loans and Advances 31,92,231 33,71,511 1,79,280

Prepaid Expenses 17,022 2,93,998

3,11,020
Accrued Income 96,426 73,266
23,160
Advance Tax 2,26,385 -
2,26,385
TOTAL CURRENT 75,46,689 96,84,951 24,45,183 3,06,921
ASSETS

LESS:
CURRENT

36
LIABILITIES

Sundry Creditors 1,46,42,090 93,96,631 52,45,459 -

TOTAL CURRENT 1,46,42,090 93,96,631 52,45,459 -
LIABILITIES

NET WORKING (70,95,401) 2,88,320 (28,00,276) 3,06,921

CAPITAL

INFERENCE:
The company has an increased level in the year 2016. This is due to the control on
creditors. And increase in the inventory and loans. Moreover the company has to take a
special attention over this varying working capital.

37
 5.4 SCHEDULE OF CHANGES IN WORKING CAPITAL

TABLE 5.4

2016 2017 INCREASE DECREASE

PARTICULARS AMOUNT AMOUNT AMOUNT AMOUNT
Rs. Rs. Rs. Rs.
ASSETS:

CURRENT ASSETS

Inventory 37,58,140 -
9,50,310 47,08,450
Sundry Debtors - 13,64,970
44,31,190 30,66,220
Cash & Bank Balance 5,54,035
3,71,375 9,25,410
Loans and Advances 33,71,511 - 33,71,511
-
Advance Tax 5,89,870 2,78,850 -
3,11,020
Prepaid Expenses 1,43,770 1,20,610 --
23,160
Accrued Income - 56,555
2,26,385 1,69,830
TOTAL CURRENT 96,84,951 96,03,550 47,11,635 47,93,036
ASSETS

LESS:
CURRENT
LIABILITIES

Sundry Creditors 93,96,631 60,53,015 33,43,616 -

38
TOTAL CURRENT 93,96,631 60,53,015 33,43,616 -
LIABILITIES
NET WORKING 2,88,320) 35,50,535 13,68,019 47,93,036
CAPITAL

INFERENCE:

It can be clearly inferred that the company has a fluctuating working capital. This
means that the management is not making a good attention to the flow of funds. The
company’s working capital for the year 2017 is again decreased at a very low rate this is due
to more Bad debts. Although the company has improved to an extent by decreasing its
liabilities.

39
 5.2 RATIO ANALYSIS

5.2 MEANING OF RATIO:

A ratio is a mathematical relationship between two items expressed in a

quantitative form. Ratio can be defined as “Relationship expressed kin quantitative terms
between figures which have cause and effect relationship which are connected with each
other in some manner or the other.

DEFINITION OF RATIO:

According to Accountant’s Hand Book by Wixon, Kell and Bedford, a

Ratio” Is an expression of the quantitative relationship between two numbers.

LIQUIDITY RATIOS:

It measures the ability of a company to meet its current obligations, and indicate
the short term financial stability of the company. The parties interested in the liquid ratio
would be employees, bankers and short-term creditors.

CURRENT RARIO:

Current Ratio may be defined as the ratio of Current Assets to Current Liabilities.
It is also known as Working Capital Ratio 2:1 ratio. Current Ratio shows the relationship
between total current assets and total current liabilities expressed as a formula.

Current Assets

40
 CURRENT RATIO =

Current Liabilities

QUICK RATIO:

A measure of company’s liquidity and ability to meet its obligations, Quick ratio,
often referred to as acid-test ratio, is obtained by subtracting inventories from current assets
and then dividing by current liabilities. Quick ratio is viewed as a sign of company’s financial
strength or weakness (higher number means stronger, lower number means weaker).

Liquid/Quick assets

QUICK RATIO =

Current Liabilities

ABSOLUTE LIQUIDITY RATIO:

This is also known as super Quick Ratio (or) Cash Ratio. This ratio
considers only absolute liquidity available with the firm. Absolute Liquid assets include cash
in hand, cash at bank marketable securities. A standard of 0.5: 1 absolute liquidity ratio is
considered an acceptable norm. It is calculated as follows:

Cash & Bank Balances

ABSOLUTE LIQUIDITY RATIO =

Current Liabilities

INVENTORY TURNOVER RATIO:

Inventory Turnover Ratio also known as stock turnover ratio in the

traditional language; usually establishes relationship between the cost of goods sold during a
given period and the average amount of Inventory outstanding during that period. Inventory
Turnover Ratio can be calculated by of the following formula:

41
 Net Sales

INVENTORY TURNOVER RATIO =

Average Inventory

DEBTORS TURNOVER RATIO:

Receivables (or) Debtors normally include both debtors and Bill

Receivable and represent the uncollected portion of Credit sales receivables constitute an
important component of Current Assets and therefore the quality of receivables to a great
extent determines the liquidity of a firm. This Ratio can be calculated as follows:

Credit Sales

DEBTORS TURNOVER RATIO =

Debtor

CREDITORS TURNOVER RATIO:

This Ratio is similar to receivable turnover ratio. It compares the

Accounts Payable with the total credit purchases. It signifies the credit period enjoyed by the
firm in paying creditors. Accounts payable include both sundry creditors and bills payable. It
is calculated as follows:

Net Purchase

CREDITORS TURNOVER RATIO =

Average creditors

FIXED ASSET TURNOVER RATIO:

This ratio indicates the extent to which the investment in fixed assets
contributes towards sales. If compared with a previous period, it indicates whether the
investment in fixed assets has been judicious or not, the Ratio is calculated as follows:

42
 Sales

FIXED ASSET TURNOVER RATIO =

Net Fixed Assets

WORKING CAPITAL TURNOVER RATIO:

A measurement comparing the depletion of working capital to the generation

of sales over a given period, this provides some useful information as to how effectively a
company is using its working capital to generate sales.

Net Sales

WORKING CAPITAL TURNOVER RATIO=

Net Working Capital

CASH TO CURRENT ASSET RATIO:

The cash asset ratio is similar to the current ratio, except that the current
ratio includes current assets such as inventories in the numerator. Some analysts believe that
including current assets makes it difficult to convert them into usable funds for debt
obligations. The cash asset ratio is a much more accurate measure of a firm's liquidity

Cash

CASH TO CURRENT ASSET RATIO=

Current Assets

CURRENT ASSET TURNOVER RATIO:

The ratio is calculated to ascertain the efficiency of use of current

assets of the concerns. With an increase in sales, current assets are expected to increase.
However, an increase in the ratio shows that current assets turned over faster resulting in
higher sales for a given investment in current assets. Higher ratio is generally an index of
better efficiency and profitability of the concern. This ratio gives a general impression about
the adequacy of working capital in reaction to sales.

43
 Sales

CURRENT ASSET TURNOVER RATIO=

Current Assets

INVENTORY TO SALES RATIO:

Inventory to Sales Ratio indicates the manner in which a firm’s inventory in

turning. The inventory to sales ratio indicates the efficiency with which inventory turnover
into sales.

Inventory

INVENTORY TO SALES RATIO=

Sales

INVENTORY TO CURRETN ASSETS RATIO:

It indicates the amount of inventory in Current Assets. Any increase

amount of inventory indicates the lower liquidity as compared to the other Current Assets.

Average Inventory

INVENTOTY TO CURRENT ASSETS RATIO=

Current Assets

DEBT UTILIZATION RATIOS

The debt utilization ratio measures the proportion of debt and low
efficiently management used the debt capital. The higher the ratio, the greater the amount
other people’s money being used in an attempt to generate profits

DEBT RATIO:

44
 The Debt Ratio measures the proportion of total assets financed by the time’s
creditor. The lighter the ratio the greater the amount other people’s money being used in an
attempt to generate profits, the ratio is calculated as follows,

Total Liability

DEBT RATIO=

Total Assets

PROFITABILITY RATIOS:

These measures the overall effectiveness in terms of returns generated, with

profits being related to sales and adequacy of such profits as to sales or investment. The
profitability ratios are important to internal management, to bankers, to investors, and to the
owners.

GROSS PROFIT RATIO:

Gross Profit Ratio expresses the relationship of gross profit of sales to net sales
in terms of percentage, representing the percentage of gross profit earned on sales.

Gross Profit

GROSS PROFIT RATIO= *100

Net Sales

ADMINISTRATIVE EXPENSES RATIO:

This Ratio is also known as supporting ratio’s operating ratio. They

indicate the efficiency with which business as a whole functions. It is better for the concern to
known how it is able to save or waste over expenditure in respect of different items of
expenses. Therefore each aspect of cost of sales & operation expenses are analyzed.

Administrative Expenses Ratio

45
ADMINISTRATIVEEXPENSESRATIO= *100

Net Sales

5.2.1 CURRENT RATIO:

Current Asset

CURRENT RATIO =

Current Liabilities

TABLE 5.2.1

YEAR CURRENT ASSETS CURRENT LIABILTIES RATIO

Rs Rs

2013 54,65,300 64,53,315 0.85

2014 62,04,638 69,10,610 0.90

2015 70,06,659 1,46,42,090 0.48

2016 96,84,951 93,96,631 1.03

2017 96,03,550 60,53,015 1.59

INTERPRETATION:

The Current Ratio measures the ability of the firm to meet its Current Liabilities.
The standard norms of Current Ratio are 2:1. From the above table it can be inferred that the
Current Ratio of Datazone. Ltd Shows higher in the year 2017 (i.e.) 1.59 . The company is
having a good current ratio as the liabilities of the company has been in declining position
and the sundry debtors for the current year has been reduced

46
CURRENT RATIO:

FIGURE 5.2.1

47
5.2.2 QUICK RATIO:

Liquidity Assets

Quick Ratio =

Current Liabilities

YEARS QUICK ASSETS CURRENT LIABILTIES RATIOS Where

as (Quick
Rs Rs
Assets =

2013 36,92,880 64,53,315 0.57

2014 53,78,165 69,10,610 0.78

2015 69,86,747 1,46,42,090 0.48

2016 84,23,621 93,96,631 0.90

2017 34,72,361 60,53,015 0.57

Current Assets - (Stock + Prepaid Expenses)

Table 5.2.2

48
INTERPRETATION:

The Quick Ratio (or) Liquidity ratio gives a measure of Liquidity the expected
industry standard is 1:1. From the above table it can be inferred that the Quick Ratio of
Datazone fluctuating in trend from the year 2013 to 2017. The ratio has been decreased in the
current year due to higher current liabilities.

QUICK RATIO

FIGURE 5.2.2

49
5.2.3 ABSOLUTE LIQUIDITY RATIO:

Cash & Bank Balances

Absolute Liquidity Ratio =

Current Liability

TABLE 5.2.3

CASH & BANK BALANCE CURRENT LIABILITIES

YEARS Rs Rs RATIOS

83,610 0.013
64,53,315
2013
58,400 69,10,610 0.008
2014

50
 6,05,030 1,46,42,090 0.04
2015
3,71,375 93,96,631 0.04
2016
9,25,410 60,53,015 0.15
2017

INTERPRETATION:

From the above table it can be inferred that the Datazone has a high Absolute
Liquidity Ratio in the year 2017 (i.e.) 0.15. The ratios are being in a increasing position
which means that the company has a good cash utilization. The ideal cash position is .05:1.
So the company’s cash position ratio is satisfactory.

ABSOLUTE LIQUIDITY RATIO

FIGURE 5.2.3

51
52
5.2.4 INVENTORY TURNOVER RATIO:

Net Sales

Inventory Turnover Ratio =

Average Inventory

TABLE 5.2.4

NET SALES AVERAGE INVENTORY

YEAR Rs Rs RATIO

2013 39377300 2,50,940 1.56

57364800 8,25,100 0.69

2014
1.16
2015 63273350 5,42,920
0.81
2016 77237255 9,50,310
0.19
2017 89967680 47,08,450

INTERPRETATION:

From the above table it can be inferred that the company’s

Inventory increase in year 2015 and get decreased in the next following years due to more
fluctuations in the sales.

53
INVENTORY TURN OVER RATIO

FIGURE 4.2.4

54
5.2.5 DEBTORS TURNOVER RATIO:

Credit Sales

Debtors Turnover Ratio =

Debtors

TABLE 5.2.5

YEAR CREDIT SALES DEBTORS RATIO

Rs Rs

39377260 12,63,430 0.31

2013
57364800 15,90,440 0.36
2014
63273345 30,93,060 0.20
2015
77237255 44,31,190 0.17
2016
89967680 30,66,220 0.29
2017

INTERPRETATION:

From the above table it can be inferred that the Debtors Turnover Ratio of
Datazone increase in the year 2013 to 2017 (i.e.) 0.31 to 0.29 shows high in the year 2014
(i.e.) 0.36 .When compare to previous years.

55
DEBTORS TURN OVER RATIO:

FIGURE 5.2.5

56
5.2.6 CREDITORS TURNOVER RATIO:

Net Purchase

Creditors Turnover Ratio =

Average Creditors

TABLE 5.2.6

NET PURCHASE AVERAGE CREDITORS

YEAR Rs Rs RATIO

2013 34098755 64,53,315 5.28

2014 55053125 69,10,610 7.97

2015 56214265 1,46,42,090 3.84

2016 75714395 93,96,631 8.06

2017 77310590 60,53,015 12.77

INTERPRETATION:

From the above table it can be inferred that the Datazone company’s creditors
turnover ratio in year 2013 to 2017 (i.e.) 5.28 to 12.77. The company has decreased its
creditors that make the ratio to increase.

57
CREDITORS TURNOVER RATIO:

FIGURE 4.2.6

58
5.2.7 FIXED ASSET TURNOVER RATIO:

Sales

Fixed Assets Turnover Ratio =

Net Fixed Assets

TABLE4.2.7

YEAR SALES NET FIXED ASSETS RATIO

Rs Rs

39377260 7340010 5.36

2013
57364800 9586730 5.98
2014
63273345 95,08,586 5.91
2015
77237255 12621370 6.11
2016
89967680 12664270 7.10
2017

INTERPRETATION:

From the above table it can be inferred that the Fixed Asset Turnover Ratio of
Datazone, has increased by 6.11% in the year

59
FIXED ASSET TURNOVER RATIO:

FIGURE 4.2.7

60
5.2.8 CASH TO CURRENT ASSET RATIO:

Cash

Cash to Current Asset Ratio=

Current Assets

TABLE 5.2.8

YEAR CASH CURRENT ASSET RATIO

Rs Rs

83,610 64,53,315 0.01

2013
58,400 0.08
69,10,610
2014
6,05,030 1,46,42,090 0.004
2015
3,71,375 93,96,631 0.04
2016
9,25,410 60,53,015 0.15
2017

INTERPRETATION:

From the above table it can be inferred that the Ratio increase in the year 2013 to
2017 (i.e.) 0.01 to 0.15.The Cash to Current Asset Ratio shows higher in the year 2017 (i.e.)
0.15. This is due to increase in the cash balance and decrease in the sundry creditors.

61
CASH TO CURRENT ASSET RATIO:

FIGURE5.2.8

62
5.2.9 CURRENT ASSET TURNOVER RATIO:

Sales

Current Asset Turnover Ratio =

Current Assets

TABLE 5.2.9

CURRENT
YEAR SALES ASSETS RATIO

Rs Rs

64,53,315 6.10
2013 39377300

69,10,610 8.3
2014 57364800

1,46,42,090 6.37
2015 63273350

93,96,631 8.21
2016 77237255

60,53,015 14.86
2017 89967680

INTERPRETATION:

From the above table it can be inferred that the Current Asset Turnover Ratio
of Datazone in year 2013 to 2017. It has been increased which shows the satisfactory level of

63
current asset correspondence to the sales in the subsequent years and the ratio finally
increases in the year 2017 (i.e.) 14.86 when compared to the previous years

CURRENT ASSET TURNOVER RATIO:

FIGURE 5.2.9

64
5.32.10 INVENTORY TO SALES RATIO:

Inventory

Inventory to Sales Ratio=

Sales

TABLE 5.2.10

YEAR INVENTORY SALES

Rs Rs RATIO

0.15
2013 5825100 39377300

0.09
2014 5429251 57364800

0.06
2015 3880120 63273350

0.11
2016 9150310 77237255

0.05
2017 4708450 89967680

INTERPRETATION:

65
 From the above table it can be inferred that the Inventory to Sales Ratio of Datazone.
Has been increased in the year 2015 (i.e.) 0.11.When compared to previous years. But I the
year2016, the ratio have been fall down to 0.05.

INVENTORY TO SALES RATIO:

FIGURE 5.2.10

66
5.2.11 WORKING CAPITAL TURNOVER RATIO:

Net Working Capital

WORKING CAPITAL TURNOVER RATIO =

Current Liabilities

TABLE 5.2.11

YEAR NET WORKING CAPITAL CURRENT LIABILITIES RATIO

Rs Rs

2013 -988015 64,53,315 -0.15

2014 -705972 69,10,610 -0.10

2015 -7635431 1,46,42,090 -0.52

2016 288320 93,96,631 0.03

2017 3550535 60,53,015 0.59

INTERPRETATION:

67
 From the above table it can be inferred that the Working Capital
Turnover Ratio of Datazone. The Working Capital Turnover Ratio shows a negative ratio in
the first three years i.e.2013, 2014 and 2015. But on 2016 and 2017 there has been
continuously increase in the working capital due to decrease in the current liabilities.

WORKING CAPITAL TURNOVER RATIOS

FIGURE 5.2.15

68
5.2.12 INVENTORY TO CURRE NT ASSET RATIO:

Average Inventory

Inventory to Current Asset Ratio =

Current Assets

TABLE 5.2.12

AVERAGE INVENTORY CURRENT ASSET

YEAR Rs Rs RATIO

54,65,300
2013 5825100 1.06
0.12
62,04,638
2014 5429251
4.94
70,06,659
2015 3880120
0.33
96,84,951
2016 9150310
0.49
96,03,550
2017 4708450 69
INTERPRETATION:

From the above table it can be inferred that the company’s Inventory to
Current Asset Ratio in the year 2013 to 2017. There is a fluctuating in this ratio. The highest
ratio is on 2014, 0.94 and get decreases and finally comes to 0.49

INVENTORY TO CURRENT ASSET RATIO

FIGURE 5.2.12

70
5.2.13 GROSS PROFIT RATIO:

Gross Profit

Gross Profit Ratio= * 100

Net Sales

Where as (Gross Profit = Net Sales- Cost of Goods Sold)

Cost of Goods Sold = (Opening Stock+ Purchase Less Returns-Current Liabilities)

Net Sales = (Sales- Sales Return).

TABLE 5.2. 13

YEAR GROSS PROFIT CURRENT ASSET RATIO

Rs Rs

54,65,300
2013 3753500 0.68

62,04,638
2014 4172000 0.09

71
 70,06,659
2015 5509950 0.70

96,84,951
2016 6793055 0.24

96,03,550
2017 8215230 0.86

GROSS PROFIT RATIO

FIGURE 5.2.13

INTERPRETATION:

72
 From the above table it can be inferred that the company’s Gross Profit Ratio
increase in year 2017 (i.e.) 0.86. But from 2015 to 2016 there has been slowdown to some
extent, when comparing to the previous years.

5.2.14 ADMINISTRATIVE EXPENSES RATIO:

Administrative Expenses

Administrative Expenses Ratio= *100

Net Sales

TABLE 5.2.14

ADMINISTRATIVE EXPENSES RATIO

YEAR Rs NET SALES RATIO
Rs

2013 6660620 39377300 16.91

2014 9805870 57364800 17.09

2015 11598640 63273350 18.33

2016 13919615 77237255 18.02

2017 14236375 89967680 15.82

INTERPRETATION:

From the above table it can be inferred that the company’s Administrative Expenses Ratio in
year 2013 to 2017 (i.e.) 16.91 to 15.82.has been increased in the year 2013 (i.e.) 16.91. In the
year 2017 the Administrative Expenses Ratio has been decreased (i.e.) 15.82.When
compared to previous years

73
ADMINISTRATIVE EXPENSES RATIO

FIGURE 5.2.14

74
 TREND ANALYSIS

5.3 MEANING TREND ANALYSIS:

Trend analysis is one of the important tools of analyzing the financial

data. It computes the percentage changes for different variables over a long period and then
makes a comparative study of them. The trend percentage helps the analyst to study the
changes that have occurred darning the period. Such an analysis indicates the progress by
showing ups and downs in its activities

Financial Trend Analysis is the process of analyzing financial statements of a

company for any continuing relationship. Generally, an analysis is made to find out what
direction a concern is going, how rapidly, and whether there are enough resources to
complete proposed projects.

An aspect of technical analysis that tries to predict the future movement of a stock based on
past data. Trend analysis is based on the idea that what has happened in the past gives traders
an idea of what will happen in the future.

There are three main types of trends: short-, intermediate- and long-term.

75
 CURRENT ASSET:

TABLE 5.3.1

CURRENT ASSET
YEAR (Y) X XY X2 Y=a+bx

-2 -11019320 4 5153980.3
55,09,660
2013
-1 -4,43,54,495 1 6271271.8
4,43,54,495
2014
0 0 0 57,18,534
78,46,689
2015
1 2,78,84,951 1 9889807.5
2,78,84,951
2016
2 19207100 4 11838135
96,03,550
2017

∑Y=36942826.5 ∑X=0 ∑XY= ∑X2=

11172925 10
Y = a + bX Where a = ∑Y ; b = ∑XY

n ∑X2

76
CURRENT ASSET:

FIGURE 5.3.1

77
 FIXED ASSET:

TABLE 5.3.2

FIXED ASSET
YEAR (Y) X XY X2 Y=a+bx

740010.600 -2 -1480021.2 4 845992.897

2013
986728.600 -1 -986728.6 1 1094308.666
2014
1700745.121 0 0 0 1342624.435

2015
1621368.217 1 1621368.217 1 1590940.204
2016
1664269.636 2 3328539.272 4 1839255.973

2017
∑Y=6713122.174 ∑X=0 ∑XY=2483157.689 ∑X2=10

Y = a + bX Where a = ∑Y ; b = ∑XY

n ∑X2

Fixed assets value for 2017 – 11 will be about Rs. 2, 08, 75,71.738

78
FIXED ASSET

FIGURE 5.3.2

79
 CASH & BANK BALANCE:

TABLE 5.3.3

YEAR CASH & BANK X XY X2 Y=a+bx

58403.077 -2 -116806.154 4 210601.589

2013
605026.901 -1 -605026.901 1 360637.041
2014
593151.324 0 0 0 510672.493
2015
371374.749 1 371374.749 1 660707.945
2016
925406.415 2 1850812.83 4 810743.397

2017
∑Y=2553362.466 ∑X=0 ∑XY=1500354.524 ∑X2=10

Y = a + bX Where a = ∑Y ; b = ∑XY

n ∑X2

80
CASH & BANK BALANCES

FIGURE 5.3.3

81
 INVENTORY

TABLE 5.3.4

YEARS INVENTORY X XY X2 Y=a+bx

3879602.726
2013 5825092.799 -2 -11650185.6 4
5649866.627
2014 5429251.165 -1 -5429251.165 1
5798643.734
2015 3880115.603 0 0 0
5947420.841
2016 9150310.374 1 9150310.374 1
6096197.948
2017 4708448.732 2 9416897.464 4

∑Y=28993218.67 ∑X=0 ∑XY=1487771.073 ∑X2=10

Y = a + bX Where a = ∑Y ; b = ∑XY

n ∑X2

82
INVENTORY

FIGURE 4.3.4

83
 SUNDRY DEBTORS

TABLE 4.3.5

YEARS SUNDRY DEBTORS X XY X2 YC= a + b x

(Y)

2013 1590439.776 -2 -3180879.552 4 1488553.358

2014 3093057.061 -1 -3093057.061 1 1917521.847

2015 2311550.508 0 0 0 2346490.336

2016 4431187.152 1 4431187.152 1 2775458.825

2017 3066217.179 2 6132434.358 4 3204427.314

∑Y=11732451.68 ∑X=0 ∑XY=4289684.897 ∑X2=10

Y = a + bX Where a = ∑Y ; b = ∑XY
n ∑X2

84
SUNDRY DEBTORS

FIGURE 5.3.5

85
 CHAPTER VI

FINDINGS:

 In the year of 2013, 2014 and 2015 shows increase in Working Capital. This indicates
that the company has ability of payment of short-term Liability.

 The fixed assets ratio indicates that the working capital of this company is funded by
long-term funds which indicate efficient funds management.

 The Short –term Liquidity and long- term Liquidity position of the concern were studied
to evaluate the Working Capital of the concern. During the study period 2013 to 2017 the
current ratio of the concern varied from 8.63 to 2.21.But 2015 - 2016 is varied from 0.77
to 1.80. This was much less than the prescribed of 2:1. The inference is that the Current
Liability may not be easily met out of Current Asset by the Company.

 The Quick ratio of the concern during the period 2013 - 2017 the study is varied from
7.22 to 1.67.Which was much greater than the prescribed standard of 1:1.So the company
Liquidity level is satisfactory.

 In Trend analysis the Cash &Bank Balance have been increased from 2013 to 2016.So it
shows the Cash position of the company

86
 CHAPTER VII

SUGGESTION:

 The company is a profit seeking one; it has to commit all of its resources to achieve its
goal. To achieve this, profitability, liquidity and solvency position a crucial elements to
be monitored carefully, thereby the trade off can be reached

 This company’s ability to meet its current obligations is satisfactory though it does not
meet the conventional norm. This company maintains current liabilities more than the
amount of current assets which has to be viewed seriously and improvement of this ratio
is required to achieve the optimum level.

 Stock Turnover Ratio should be maintained at the constant level.

 The Cash & Bank Balances of the company is good.

 Using trend analysis it can be suggested that the fixed assets curve shows steady upward
direction much than the current assets curve, which enable us to understand the
company’s funds are dumped in fixed asset, it is not a favorable condition to the
company

87
 CHAPTER VIII

CONCLUSION

The present study reveals that the liquidity position of this company is comparatively good
as it approaches the standard norms throughout the period of study. On the
whole, it can be concluded that the company’s overall risk evaluation process is
not at desired level and the author has made the realistic recommendation for
the improvement in operational and managerial efficiency of the company as to
maintain and increase further by effective utilization and control of all the
assets.

88
 CHAPTER IX

BIBILIOGRAPHY

 Management accounting - S.N.MAHESHWARY

 Financial management - I.M.PANDEY

 Research methodology - C.R.KOTHARI

 Management accounting - R.S.N.PILLAI

&

BAGAVATHI

Web site:

1. www.google.com

2. www.finance.org

3. http://www.universityofcalicut.info/SDE/VISem_BBA_working_capital_mgmnt.pdf

4. http://www.icaiknowledgegateway.org/littledms/folder1/chapter-7-management-of-
working-capital.pdf

5. http://wps.prenhall.com/wps/media/objects/13070/13384693/Chapter18.pdf

6. http://shodhganga.inflibnet.ac.in/bitstream/10603/705/13/14_chapter5.pdf

89
 7. http://shodhganga.inflibnet.ac.in/bitstream/10603/703/7/07_chapter1.pdf

8. http://faculty.london.edu/icooper/assets/documents/CapitalProjectPlanning.pdf

9. http://www.ediindia.org/doc/SpecialPDF/chp-14.pdf

CONSOLIDATED BALANCESHEET FOR THE 2013 TO 2017

PARTICULARS 2013 2014 2015 2016 2017

ASSETS:

CURRENT ASSETS:

a. Inventory 2,50,940 8,25,100 5,42,920 9,50,310 47,08,450

b. Sundry Debtors 12,63,430 15,90,440 30,93,060 44,31,190 30,66,220

c. Cash and Bank 83,610 58,400 6,05,030 3,71,375 9,25,410

d. Prepaid 14,650 13,730 17,022 3,11,020 5,89,870

Expenses

e. Accrued Income 59,090 42,925 96,426 23,160 1,43,770

f. Advance tax - - - 2,26,385 1,69,830

g. Loans and 22,86,750 36,86,400 31,92,231 33,71,511 -

Advances

TOTAL CURRENT 39,58,470 62,16,995 70,06,659 96,84,951 96,03,550

ASSETS:

FIXED ASSET:

Fixed assets 73,40,010 95,86,730 95,08,586 1,26,21,370 1,26,64,270

90
TOTAL FIXED 73,40,010 95,86,730 95,08,586 1,26,21,370 1,26,64,270
ASSETS:

TOTAL ASSSET 1,12,98,480 1,58,03,725 1,65,15,245 2,23,06,321 2,22,67,820

LIABILITIES:

CURRENT
LIABILITIES:

a. Sundry 64,53,315 69,10,610 1,46,42,090 93,96,631 60,53,015

Creditors

RESERVES AND
SURPLUS:

Capital Reserves 7,50,000 10,50,000 - 1,00,00,000 1,00,00,000

General Reserve 15,00,000 25,00,000 15,00,000 15,00,000 15,00,000

UNSECURED
LOAN:

Fixed Deposit 3,50,000 3,50,000 3,50,000 3,50,000 3,50,000

Short term loan and 10,00,000 20,00,000 - 10,00,000 19,85,000

Advances

Other loans and - 5,00,000 - - 3,00,000

Advances

PROVISIONS:

a. Provision of tax 20,000 20,000 20,000 20,000 20,000

b. Provident Fund 10,55,590 21,75,960 - - 20,00,000

Scheme

c. Pensions, 1,65,000 2,90,000 - 30,000 50,005

Insurance,
Similar staff

91
 benefits

d. Other 4,575 7,155 3,155 9,690 9,800

Provisions

TOTAL LIABILITIES 1,12,98,480 1,58,03,725 1,65,15,245 2,30,15,255 2,22,67,820

92