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A PROJECT REPORT ON

HINDUSTAN BIOSYNTH LIMITED

SUBMITTED TO:Dr. J.K.Patel Institute Of Management, AT & PO Limbda, Ta: Waghodia, Dist Vadodara

SUBMITTED BY:ARCHITA K PARIKH MBA 2nd SEMESTER ENROLLMENT NO: - 107110592022

A PROJECT REPORT MADE ON

WORKING CAPITAL MANAGEMENT.


Prepared Under the Guidance Of MR. DEEPAK GAYWALA (FACULTY MEMBER JKPIM) RAMESH PARMAR (PROJECT GUIDE)

Dr J.K.Patel Institute Of Management, AT & PO Limbda, Ta: Waghodia, Dist Vadodara. Affiliated To Gujarat Technological University

CERTIFICATE

PREFACE

The project training is an integral part of the MBA program and it is designed in such a way that student can give maximum knowledge & can get practical exposure to the corporate world in minimum time.

With the respect & pleasure, I have privilege to submit my report to the king hands of eminent examination of Gujarat Technological University. MBA is a professional course, to be an MBA student is a matter of pride because,

Through MBA each student is prepared to hold the post of manager very confidently & you are in the field which helps you are in field which helps you to develop from normal human being into a disciplined & dedicated professional.

We have heard that famous saying God helps those who help them selves Experience is the best teacher

The four week training at Hindustan Pharmaceuticals Limited has given me sufficient knowledge to fill the gap between the theoretical & practical knowledge. To read the story of movie & to see the movie is the different between the study in classroom & training in the industry. In the management field cannot create stories if you are not good learner.

ACKNOLEDGMENT

It gives me great pleasure & personal satisfaction in presenting this report as part of my vocational training at Hindustan Pharmaceuticals that has first hand experience of my.

I am indebted to many individuals who have either directly or indirectly made an important contribution in preparation of this report. Training with immense sense of gratitude, I here by takes this opportunity to thanks Mr. K S Chhabra ( managing director ) for giving me this opportunity to work at Hindustan pharmaceuticals & Ramesh parmar ( head of account department) for guiding me & supporting me in giving complete & comprehensive data required for my project work. Finally I am thankful to all Hindustan Pharmaceuticals family.

I am also thankful to Mrs. Krupa shah (QA In charge) & Mr.Sanjay rathod (QC In charge) as well as staff members who were always ready to help me & share their previous knowledge.

I am also thankful to my faculty guide Deepak gaywala, friends & family members for their support & for the acknowledgement provided by them.

DECLARATION

I undersigned Miss. Archita Parikh, hereby declare that the project report entitled Working Capital Management under the guidance of Ramesh parmar. Submitted in partial fulfillment of the requirements for the award of the degree of Master of Business Administration, Gujarat Technological University from Dr. J K Patel Institute of Management is my original work research study carried out during 2nd June, 2011 to 30th June, 2011.

Place: Vadodara Date: 15-07-2011

Signature Archita Parikh

EXECUTIVE SUMMARY

The summar tinning report was undertaken to know the working capital management as a part of our MBA program program, we study the HINDUSTAN BIOSYNTH LIMITED to prepare project report.

During my analysis of secondary data, I find these finding which is as under.

HINDUSTAN BIOSYNTH LIMITED is a beautiful developed unit. The student who visited this unit for different purpose they speak volume of its beauty & good administration. It is necessary to have principal knowledge before of todays competitive world.

Day by day gross working capital of the company is increasing over the period of last three years.

For conducting the research, data are collected from the balance sheet of the company for the period from 2008 to 2011.

From this study, I come to know that companys financial aspect like profitability, liquidity, assets management & valuation through different ratios.

CONTENT NO. PARTICULARS NO.


1. 2. 3. LITERATURE REVIEW OBJECTIVE OF THE STUDY INTRODUCTION OF THE PROJECT Introduction of working capital management Profile of the company Detail study of project

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4.

RESEARCH METHODOLOGY Methodology Data collection Tools used for analysis

5. 6. 7.

DATA ANYSIS FINDING & OBSERVATION LIMITATION OF THE STUDY

8. 9. 10. 11.

SUGGESTION CONCLUSION BIBLIOGRAPHY ANNEXURE

CONTENTS OF TABLE NO.


4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18.

PARTICULARS NO.
CALCULATION OF CURRENT RATIO CALCULATION OF QUICK RATIO CALCULATION OF ABSOLUTE LIQUID RATIO CALCULATION OF INVENTORY TUENOVER RATIO CALCULATION OF INVENTORY CONSERVATION PERIOD CALCULATION OF DEBTORS TURNOVER RATIO CALCULATION OF AVERAGE COLLECTION PERIOD CALCULATION OF WORKING CAPITAL TURNOVER RATIO TABLE OF INVENTORY TABLE OF CASH & BANK BALANCE TABLE OF DEBTORS TABLE OF CURRENT ASSETS TABLE OF CURRENT LIABLITIES TABLE OF NET WORKING CAPITAL TYPICAL PROBLEM & EFFECTS OF IT

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CONTENTS OF GRAPH & DIAGRAM: NO. PARTICULARS PAGE


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NO. 1. 2. 8. 9. 10. 11. 12. 13. WORKING CAPITAL CYCLE VISION & MISSION PHOTO PERMENANT & TEMPORARY WORKING CAPITAL CHART KINDS OF WORKING CAPITAL MANAGEMENT CHART WORKING CAPITAL CYCLE GRAPH OF MATCHING CONCEPT GRAPH OF CONSERVATIVE APPROACH GRAPH OF AGGRESSIVE APPROACH

LITERATURE REVIEW

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Working capital refers to that part of the total capital which is available and used for carrying on the routine or regular day to day business operations. Thus, the capital required for purchasing raw materials, payment of direct & indirect expenses, maintaing production, investment in stocks and stores, receivables and to be maintained in the form of cash is known as working capital. In short, it is the capital with which business runs.

Working capital, in another word, is that part of the total capital which is required for financing short term or current assets such as cash, inventories, receivables (debtors) marketable securities, etc.

Funds invested in current assets are revolving / circulating fast are been constantly converted from cash to inventories to receivables and back to cash. Hence, working capital is also known as circulating capital or revolving capital.

in the management of working capital, two characteristics of current assets must be born in mind: (1) short life span, and (2) swift transformation into other asset form

Current assets have a short life span, cash balance may be held idle for a week or two, account receivable may have a life span of 30 to 120 days, and inventory may be held for 5 to 100 days.

WORKING CAPITAL CYCLE:

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Each current asset is swiftly transformed into other asset form : cash is used for acquiring raw materials, raw materials are transformed into finished goods, finished goods generally sold on credit, are converted into account receivable (book debt), and finally account receivable, on realization, generate cash.

Decisions related to working capital management are representative & frequent. The close interaction among working capital component implies that management of one component can not undertaken with out simultaneous consideration of other components.

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OBJECTIVE OF THE STUDY:

The project is about the working capital management of Hindustan Biosynth Ltd. Working capital management is very important tool for the efficiency measurement in modern business. When this research took place, I analyzed & observed the usefulness of working capital management. The following are the objective of the study.

To assess the significance of working capital by selecting few important parameters such as working capital ratio.

To analyze the major components of working capital & their impact on working capital changes / fluctuations.

To study the liquidity position of the company.

To know how to manage current assets & current liabilities so that satisfy level of working capital is managed.

To know how to manage receivables, inventory & cash.

To study the operating cycle of company.

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INTRODUCTION OF THE WORKING CAPITAL MANGEMENT:

1. Current assets Current liabilities 2. It measures how much in liquid assets a company has available to build its business. 3. A short term loan which provides money to buy earning assets 4. Allows to avail of unexpected opportunities. 5. Positive working capital is required to ensure that a firm is able to continue its operations and that it has sufficient funds to satisfy both maturing shortterm debt and upcoming operational expenses. The management of working capital involves managing inventories, accounts receivable and payable and cash. 6. An increase in working capital indicates that the business has either increased current assets (that is received cash, or other current assets) or has decreased current liabilities, for example has paid off some short-term creditors. 7. Decisions relating to working capital and short term financing are referred to as working capital management. Short term financial management concerned with decisions regarding to CA and CL. 8. Management of Working capital refers to management of CA as well as CL. 9. If current assets are less than current liabilities, an entity has a working capital deficiency, also called a working capital deficit.

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10. These involve managing the relationship between a firm's short-term assets and its short-term liabilities. 11. The goal of working capital management is to ensure that the firm is able to continue its operations and that it has sufficient cash flow to satisfy both maturing short-term debt and upcoming operational expenses. 12. Businesses face ever increasing pressure on costs and financing requirements as a result of intensified competition on globalize markets. When trying to attain greater efficiency, it is important not to focus exclusively on income and expense items, but to also take into account the capital structure, whose improvement can free up valuable financial resources. 13. Active working capital management is an extremely effective way to increase enterprise value. Optimizing working capital results in a rapid release of liquid resources and contributes to an improvement in free cash flow and to a permanent reduction in inventory and capital costs, thereby increasing liquidity for strategic investment and debt reduction. Process optimizations then helps increase profitability. 14. The fundamental principles of working capital management are reducing the capital employed and improving efficiency in the areas of receivables, inventories, and payables. 15. Investment in CA represents a substantial portion of total investment. 16. Investment in CA and level of CL have to be geared quickly to changes in sales.

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PROFILE OF THE COMPANY:

GENERAL INFORMATION:

Hindustan Biosynth is one of the company in the state of Gujarat in field of contract manufacturing for budding entrepreneurs dealing in pharmaceutical formulations. Its established in 1992, Gujarats leading players of the pharma industry.

Its situated in G.I.D.C, por, about 25 kms from vadodara in western state of Gujarat about 100 kms from Ahmedabad on NH.No.8. In 2003 company embarked upon ISO Quality Management System. The company was awarded ISO 9001-2000 certification in the year 2003.

The manufacturing facility has been designed for logical flow of men and material and utilizes the concept of vertical material flow. Pharmaceutical manufacturing is licensed by the commissioner, food and drugs control administration, government of Gujarat, Gandhinagar under drugs and cosmetics act

1940 and rules under 1945, to manufacture solid oral dosage formulation tablets (General) and capsules (general).

Company has been inspected and certified by world health organization to conform to the requirements for good manufacturing practice for manufacturing and quality control of drug formulations to be sold or distributed with in country of origin or to be exported under aforesaid license.

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Hindustan Pharmaceuticals is positioned to provide contract manufacturing facilities to provide contract manufacturing facilities to MNCs and large Indian corporate.

Adding Life To Life... The Hindustan Group dictum is more than just words. It is the core that defines every operation and function carried out by the company. Established in 1992, Hindustan Group has grown to become one of Gujarats leading players of the pharma industry. Today, the group boasts of

unprecedented presence in three of the industrys biggest markets: pharmaceuticals, herbals and nutraceuticals. Its unrelenting passion and commitment towards achieving excellence at every level have enabled the Hindustan Group to become a name to reckon with in the pharma industry.

Hindustan Group has achieved its current status by going beyond the basics of pharmacy. Medicines fulfill a function that is larger than the ailments they heal and spread hope of a life better than before. It is on the basis of this belief that Hindustan Group has worked and produced formulations that facilitate the betterment of life. Adding life to life is after all the essence of not only Hindustan Group,

Today, after having successfully established itself in the field of pharmaceuticals, Hindustan Group surges ahead with the vision of creating a name for itself in the field of herbal and nutraceutical formulations. The group believes that herbals are the future of modern medicine. Herbal medicines, through the amalgamation of ancient knowledge and modern research, are definitely the way ahead, and Hindustan Group is proud to be at the threshold of such innovations in the field of medicine.

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Vision & Philosophy:

Hindustan Biosynths vision is to uphold the time tested values in all dealings and to deliver high quality value based pharmaceutical formulations and medicines meeting the expectations of patrons and customers, present and prospective, so as to ensure their utmost satisfaction. The company strictly adheres to the good manufacturing practices as adopted by the World Health Organization (WHO cGMP) to manufacture quality pharmaceutical products, in every respect, without any dilution. Furthermore, it adopts good clinical practices as per International Standards and emulates Total Quality Concepts through stateofthe-art techniques.

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PRODUCTION AND R & D:

Company mission is what we strive to attain. Its about delivering well about our cliients expectations.

At Hindustan Biosynth Limited, therefore, every activity is carefully & meticulously planned & arranged to deliver high & products that vindicate a client

Hindustan Biosynth believes in treating its employees and valued customers as two sides of the same coin and in building up enduring and endearing relationships by understanding and fulfilling their needs so as to create a sense of belonging and respect for each other. The company inculcates a feeling of family togetherness and cultivates universal brotherhood in every approach and dealing, thus creating a healthy interdependence.

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PRODUCTS OF THE COMPANY:

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WORKING CAPITAL MANAGEMENT:

OVERVIEW OF FINANCIAL MANAGEMENT

Financial means procuring sources of money supply & allocation of these sources on the basis of forecasting monetary requirements of the business.

Financial management refers to management of finance. It is effective & efficient utilization of financial resources. Financial management is the application of the planning & control functions of the finance functions.

Finance is the life blood of the business. With out finance business can not survive.

Capital required for a business can be classified under two main categories via,
1) 2) Fixed Capital Working Capital

Every business needs funds for two purposes for its establishment and to carry out its day- to-day operations. Long terms funds are required to create production facilities through purchase of fixed assets such as p&m, land, building, furniture, etc. Investments in these assets represent that part of firms capital which is blocked on permanent or fixed basis and is called fixed capital. Funds are also

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needed for short-term purposes for the purchase of raw material, payment of wages and other day to- day expenses etc.

PERMENANT & TEMPARARY WORKING CAPITAL:

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These funds are known as working capital. In simple words, working capital refers to that part of the firms capital which is required for financing short- term or current assets such as cash, marketable securities, debtors & inventories. Funds, thus, invested in current assts keep revolving fast and are being constantly converted in to cash and this cash flows out again in exchange for other current assets. Hence, it is also known as revolving or circulating capital or short term capital.

CONCEPT OF WORKING CAPITAL


There are two concepts of working capital: 1. 2. Gross working capital Net working capital

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The gross working capital is the capital invested in the total current assets of the enterprises current assets are those Assets which can convert in to cash within a short period normally one accounting year. CONSTITUENTS OF CURRENT ASSETS 1) 2) 3) 4) 5) Cash in hand and cash at bank Bills receivables Sundry debtors Short term loans and advances. Inventories of stock as: a. b. c. d. Raw material Work in process Stores and spares Finished goods

6. Temporary investment of surplus funds. 7. Prepaid expenses 8. Accrued incomes. 9. Marketable securities.

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In a narrow sense, the term working capital refers to the net working. Net working capital is the excess of current assets over current liability, or, say: NET WORKING CAPITAL = CURRENT ASSETS CURRENT LIABILITIES. Net working capital can be positive or negative. When the current assets exceeds the current liabilities are more than the current assets. Current liabilities are those liabilities, which are intended to be paid in the ordinary course of business within a short period of normally one accounting year out of the current assts or the income business.

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CONSTITUENTS OF CURRENT LIABILITIES


1. 2. 3. 4. 5. 6. 7. Accrued or outstanding expenses. Short term loans, advances and deposits. Dividends payable. Bank overdraft. Provision for taxation , if it does not amt. to app. Of profit. Bills payable. Sundry creditors.

The gross working capital concept is financial or going concern concept whereas net working capital is an accounting concept of working capital. Both the concepts have their own merits.

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DETERMENTS OF WORKING CAPITAL MANAGEMENT:

i. Nature of Enterprise: The nature and the working capital requirements of an enterprise are interlinked. While a manufacturing industry has a long cycle of operation of the working prise involved in providing services. The amount required also varies as per the nature; an enterprise involved in production would require more working capital than a service sector enterprise.

ii. Manufacturing/Production Policy: Each enterprise in the manufacturing sector has its own production policy, some follow the policy of uniform production even if the demand varies from time to time, and others may follow the principle of 'demand-based production' in which production is based on the demand during that particular phase of time. Accordingly, the working capital requirements vary for both of them.

iii. Operations: The requirement of working capital fluctuates for seasonal business. The working capital needs of such businesses may increase considerably during the busy season and decrease during the slack season. Ice creams and cold drinks have a great demand during summers, while in winters the sales are negligible.

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iv. Market Condition: If there is high competition in the chosen product category, then one shall need to offer sops like credit, immediate delivery of goods etc. for which the working capital requirement will be high. Otherwise, if there is no competition or less competition in the market then the working capital requirements will be low.

v. Availability of Raw Material: If raw material is readily available then one need not maintain a large stock of the same, thereby reducing the working capital investment in raw material stock. On the other hand, if raw material is not readily available then a large inventory/stock needs to be maintained, thereby calling for substantial investment in the same. vi. Growth and Expansion: Growth and expansion in the volume of business results in enhancement of the working capital requirement. As business grows and expands, it needs a larger amount of working capital. Normally, the need for increased working capital funds precedes growth in business activities. vii. Price Level Changes: Generally, rising price level requires a higher investment in the working capital. With increasing prices, the same level of current assets needs enhanced investment. viii. Manufacturing Cycle: The manufacturing cycle starts with the purchase of raw material and is completed with the production of finished goods. If the manufacturing cycle involves a longer period, the need for working capital would be more.

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IMPORTANCE OR ADVANTAGE OF ADEQUATE WORKING CAPITAL :

1. SOLVENCY OF THE BUSINESS: Adequate working capital helps in maintaining the solvency of the business by providing uninterrupted of production. 2. Goodwill: Sufficient amount of working capital enables a firm to make prompt payments and makes and maintain the goodwill. 3. Easy loans: Adequate working capital leads to high solvency and credit standing can arrange loans from banks and other on easy and favorable terms. 4. Cash Discounts: Adequate working capital also enables a concern to avail cash discounts on the purchases and hence reduces cost. 5. Regular Supply of Raw Material: Sufficient working capital ensures regular supply of raw material and continuous production. 6. Regular Payment Of Salaries, Wages And Other Day TO Day Commitments: It leads to the satisfaction of the employees and raises the morale of its employees, increases their efficiency, reduces wastage and costs and enhances production and profits. 7. Exploitation Of Favorable Market Conditions: If a firm is having adequate working capital then it can exploit the favorable market conditions such as purchasing its requirements in bulk when the prices are lower and holdings its inventories for higher prices. 8. Ability To Face Crises: A concern can face the situation during the depression.

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9.Quick And Regular Return On Investments: Sufficient working capital enables a concern to pay quick and regular of dividends to its investors and gains confidence of the investors and can raise more funds in future. 10. High Morale: Adequate working capital brings an environment of securities, confidence, high morale which results in overall efficiency in a business.

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EXCESS OR INADEQUATE WORKING CAPITAL


Every business concern should have adequate amount of working capital to run its business operations. It should have neither redundant or excess working capital nor inadequate nor shortages of working capital. Both excess as well as short working capital positions are bad for any business. However, it is the inadequate working capital which is more dangerous from the point of view of the firm.

DISADVANTAGES OF REDUNDANT OR EXCESSIVE WORKING CAPITAL


1. Excessive working capital means ideal funds which earn no profit for the firm and business cannot earn the required rate of return on its investments. 2. Redundant working capital leads to unnecessary purchasing and accumulation of inventories. 3. Excessive working capital implies excessive debtors and defective credit policy which causes higher incidence of bad debts. 4. 5. It may reduce the overall efficiency of the business. If a firm is having excessive working capital then the relations with banks and other financial institution may not be maintained. 6. Due to lower rate of return n investments, the values of shares may also fall. 7. The redundant working capital gives rise to speculative transactions

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OPERATING CYCLE & CASH CYCLE:


Investment in working capital is influenced by four key events in the production & sales cycle of the firm: a. purchase of raw materials b. c. d. payment for raw materials. Sales of finished goods Collection of cash for sales.

The firm begins with the purchase of raw materials which are paid for after a delay which represents the accounts payable period. The firm converts the raw materials into finished goods & then sales the same. The time lag between the purchase of raw materials & the sale of finished goods is the inventory period. Customers pay their bills sometime after the sales. The period that elapses between the date of sales & the date of collection of receivables is the account receivable period.

The time that elapses between the purchase of raw materials & the collection of cash for sales is referred to as the operating cycle. Whereas the time length between the payment for raw material purchase & the collection of cash for sales referred to as the cash cycle. The operating cycle is the sum of the inventory period & the account receivable period, whereas the cash cycle is equal to the operating cycle less the account payable period.

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Phase 3 Cash Phase 1

Receivables Phase 2 Inventory

RESEARCH METHODOLOGY:
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OBJECTIVE OF THE STUDY:


the preliminary objective of the study was to get the practical exposure of

the actual applications of financial learning.

And the secondary objective was to highlight the financial position of the company.

DATA COLLECTION: In research methodology used the secondary data that has been extracted from the last 2 annual reports of the company.

TOOLS USED FOR ANALYSIS: The analytical tool is ratio analysis worked upon in MICROSOFT EXCEL spreadsheets.

DATA ANAYSIS:

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WORKING CAPITAL ANALYSIS:


As we know working capital is the life blood and the centre of a business. Adequate amount of working capital is very much essential for the smooth running of the business. And the most important part is the efficient management of working capital in right time. The liquidity position of the firm is totally effected by the management of working capital. So, a study of changes in the uses and sources of working capital is necessary to evaluate the efficiency with which the working capital is employed in a business. This involves the need of working capital analysis. The analysis of working capital can be conducted through a number of devices, such as: 1. 2. 3. Ratio analysis. Fund flow analysis. Budgeting.

1.

RATIO ANALYSIS

A ratio is a simple arithmetical expression one number to another. The technique of ratio analysis can be employed for measuring short-term liquidity or working capital position of a firm. The following ratios can be calculated for these purposes:

1. Current ratio.

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2. Quick ratio 3. Absolute liquid ratio 4. Inventory turnover. 5. Receivables turnover. 6. Payable turnover ratio. 7. Working capital turnover ratio. 8. Working capital leverage 9. Ratio of current liabilities to tangible net worth.

2.

FUND FLOW ANALYSIS

Fund flow analysis is a technical device designated to the study the source from which additional funds were derived and the use to which these sources were put. The fund flow analysis consists of:

a. b.

Preparing schedule of changes of working capital Statement of sources and application of funds.

It is an effective management tool to study the changes in financial position (working capital) business enterprise between beginning and ending of the financial dates. 3. WORKING CAPITAL BUDGET

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A budget is a financial and / or quantitative expression of business plans and polices to be pursued in the future period time. Working capital budget as a part of the total budge ting process of a business is prepared estimating future long term and short term working capital needs and sources to finance them, and then comparing the budgeted figures with actual performance for calculating the variances, if any, so that corrective actions may be taken in future. He objective working capital budget is to ensure availability of funds as and needed, and to ensure effective utilization of these resources. The successful implementation of working capital budget involves the preparing of separate budget for each element of working capital, such as, cash, inventories and receivables etc.

RATIO ANALYSIS

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A) LIQUIDITY RATIOS Liquidity refers to the ability of a firm to meet its current obligations as and when these become due. The short-term obligations are met by realizing amounts from current, floating or circulating assts. The current assets should either be liquid or near about liquidity. These should be convertible in cash for paying obligations of short-term nature. The sufficiency or insufficiency of current assets should be assessed by comparing them with short-term liabilities. If current assets can pay off the current liabilities then the liquidity position is satisfactory. On the other hand, if the current liabilities cannot be met out of the current assets then the liquidity position is bad. To measure the liquidity of a firm, the following ratios can be calculated:

1. 2. 3.

CURRENT RATIO QUICK RATIO ABSOLUTE LIQUID RATIO

1. CURRENT RATIO Current Ratio, also known as working capital ratio is a measure of general liquidity and its most widely used to make the analysis of shortterm financial position or liquidity of a firm. It is defined as the relation between current assets and current liabilities. Thus,

CURRENT RATIO = CURRENT ASSETS

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CURRENT LIABILITES The two components of this ratio are: 1) 2) CURRENT ASSETS CURRENT LIABILITES

Current assets include cash, marketable securities, bill receivables, sundry debtors, inventories and work-in-progresses. Current liabilities include outstanding expenses, bill payable, dividend payable etc. A relatively high current ratio is an indication that the firm is liquid and has the ability to pay its current obligations in time. On the hand a low current ratio represents that the liquidity position of the firm is not good and the firm shall not be able to pay its current liabilities in time. A ratio equal or near to the rule of thumb of 2:1 i.e. current assets double the current liabilities is considered to be satisfactory.

CALCULATION OF CURRENT RATIO (Rupees in core) e.g. Year Current Assets Current Liabilities Current Ratio I interpretation:2009 81.29 27.42 2.96:1 2010 83.12 20.58 4.03:1 2011 13,6.57 33.48 4.08:1

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As we know that ideal current ratio for any firm is 2:1. If we see the current ratio of the company for last three years it has increased from 2009 to 2011. The current ratio of company is more than the ideal ratio. This depicts that companys liquidity position is sound. Its current assets are more than its current liabilities. 2. QUICK RATIO Quick ratio is a more rigorous test of liquidity than current ratio. Quick ratio may be defined as the relationship between quick/liquid assets and current or liquid liabilities. An asset is said to be liquid if it can be converted into cash with a short period without loss of value. It measures the firms capacity to pay off current obligations immediately. QUICK RATIO = QUICK ASSETS CURRENT LIABILITES Where Quick Assets are: 1) 2) 3) Marketable Securities Cash in hand and Cash at bank. Debtors.

A high ratio is an indication that the firm is liquid and has the ability to meet its current liabilities in time and on the other hand a low quick ratio represents that the firms liquidity position is not good. As a rule of thumb ratio of 1:1 is considered satisfactory. It is generally thought that if quick assets are equal to the current liabilities then the concern may be able to meet its short-term obligations. However, a firm having high quick ratio may not have a satisfactory liquidity position if it

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has slow paying debtors. On the other hand, a firm having a low liquidity position if it has fast moving inventories. CALCULATION OF QUICK RATIO e.g. Year Quick Assets Current Liabilities Quick Ratio Interpretation: A quick ratio is an indication that the firm is liquid and has the ability to meet its current liabilities in time. The ideal quick ratio is no liquidity problem. 3. ABSOLUTE LIQUID RATIO Although receivables, debtors and bills receivable are generally more liquid than inventories, yet there may be doubts regarding their realization into cash immediately or in time. So absolute liquid ratio should be calculated together with current ratio and acid test ratio so as to exclude even receivables from the current assets and find out the absolute liquid assets. Absolute Liquid Assets includes : ABSOLUTE LIQUID RATIO = ABSOLUTE LIQUID ASSETS CURRENT LIABILITES ABSOLUTE LIQUID ASSETS = CASH & BANK BALANCES. 1:1. Companys quick ratio is more than ideal ratio. This shows company has 2009 44.14 27.42 1.6 : 1 2010 47.43 20.58 2.3 : 1 (Rupees in Crore) 2011 61.55 33.48 1.8 : 1

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e.g. Year Absolute Liquid Assets Current Liabilities Absolute Liquid Ratio Interpretation: 2009 4.69 27.42 .17 : 1 2010 1.79 20.58 .09 : 1

(Rupees in Crore) 2011 5.06 33.48 .15 : 1

These ratio shows that company carries a small amount of cash. But there is nothing to be worried about the lack of cash because company has reserve, borrowing power & long term investment. In India, firms have credit limits sanctioned from banks and can easily draw cash. B) CURRENT ASSETS MOVEMENT RATIOS Funds are invested in various assets in business to make sales and earn profits. The efficiency with which assets are managed directly affects the volume of sales. The better the management of assets, large is the amount of sales and profits. Current assets movement ratios measure the efficiency with which a firm manages its resources. These ratios are called turnover ratios because they indicate the speed with which assets are converted or turned over into sales. Depending upon the purpose, a number of turnover ratios can be calculated. These are : 1. 2. 3. 4. Inventory Turnover Ratio Debtors Turnover Ratio Creditors Turnover Ratio Working Capital Turnover Ratio

The current ratio and quick ratio give misleading results if current assets include high amount of debtors due to slow credit collections and

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moreover if the assets include high amount of slow moving inventories. As both the ratios ignore the movement of current assets, it is important to calculate the turnover ratio. 1. INVENTORY TURNOVER OR STOCK TURNOVER RATIO : Every firm has to maintain a certain amount of inventory of finished goods so as to meet the requirements of the business. But the level of inventory should neither be too high nor too low. Because it is harmful to hold more inventory as some amount of capital is blocked in it and some cost is involved in it. It will therefore be advisable to dispose the inventory as soon as possible. INVENTORY TURNOVER RATIO = COST OF GOOD SOLD AVERAGE INVENTORY Inventory turnover ratio measures the speed with which the stock is converted into sales. Usually a high inventory ratio indicates an efficient management of inventory because more frequently the stocks are sold ; the lesser amount of money is required to finance the inventory. Where as low inventory turnover ratio indicates the inefficient management of inventory. A low inventory turnover implies over investment in inventories, dull business, poor quality of goods, stock accumulations and slow moving goods and low profits as compared to total investment.

AVERAGE STOCK

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= OPENING STOCK + CLOSING STOCK 2 (Rupees in Crore) Year Cost of Goods sold Average Stock Inventory Turnover Ratio 2009 110.6 73.59 1.5 times 2010 103.2 36.42 2.8 times 2011 96.8 55.35 1.75 times

Interpretation : These ratio shows how rapidly the inventory is turning into receivable through sales. In 2007 the company has high inventory turnover ratio but in 2008 it has reduced to 1.75 times. This shows that the companys inventory management technique is less efficient as compare to last year.

2.

INVENTORY CONVERSION PERIOD:

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INVENTORY CONVERSION PERIOD = 365 (net working days) INVENTORY TURNOVER RATIO e.g. Year Days Inventory Turnover Ratio Inventory Conversion Period 2009 365 1.5 243 days 2010 365 2.8 130 days 2011 365 1.8 202 days

Interpretation : Inventory conversion period shows that how many days inventories takes to convert from raw material to finished goods. In the company inventory conversion period is decreasing. This shows the efficiency of management to convert the inventory into cash.

3.

DEBTORS TURNOVER RATIO : A concern may sell its goods on cash as well as on credit to

increase its sales and a liberal credit policy may result in tying up substantial funds of a firm in the form of trade debtors. Trade debtors are
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expected to be converted into cash within a short period and are included in current assets. So liquidity position of a concern also depends upon the quality of trade debtors. Two types of ratio can be calculated to evaluate the quality of debtors. a) b) Debtors Turnover Ratio Average Collection Period

DEBTORS TURNOVER RATIO = TOTAL SALES (CREDIT AVERAGE DEBTORS

Debtors velocity indicates the number of times the debtors are turned over during a year. Generally higher the value of debtors turnover ratio the more efficient is the management of debtors/sales or more liquid are the debtors. Whereas a low debtors turnover ratio indicates poor management of debtors/sales and less liquid debtors. This ratio should be compared with ratios of other firms doing the same business and a trend may be found to make a better interpretation of the ratio.

AVERAGE DEBTORS= OPENING DEBTOR+CLOSING DEBTOR

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e.g. Year Sales Average Debtors Debtor Turnover Ratio 2009 166.0 17.33 9.6 times 2010 151.5 18.19 8.3 times 2011 169.5 22.50 7.5 times

Interpretation : This ratio indicates the speed with which debtors are being converted or turnover into sales. The higher the values or turnover into sales. The higher the values of debtors turnover, the more efficient is the management of credit. But in the company the debtor turnover ratio is decreasing year to year. This shows that company is not utilizing its debtors efficiency. Now their credit policy become liberal as compare to previous year.

4.

AVERAGE COLLECTION PERIOD : Average Collection Period = No. of Working Days

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Debtors Turnover Ratio The average collection period ratio represents the average number of days for which a firm has to wait before its receivables are converted into cash. It measures the quality of debtors. Generally, shorter the average collection period the better is the quality of debtors as a short collection period implies quick payment by debtors and vice-versa. Average Collection Period = 365 (Net Working Days) Debtors Turnover Ratio

Year Days Debtor Turnover Ratio Average Collection Period

2009 365 9.6 38 days

2010 365 8.3 44 days

2011 365 7.5 49 days

Interpretation : The average collection period measures the quality of debtors and it helps in analyzing the efficiency of collection efforts. It also helps to analysis the credit policy adopted by company. In the firm average collection period increasing year to year. It shows that the firm has Liberal Credit policy. These changes in policy are due to competitors credit policy. 5. WORKING CAPITAL TURNOVER RATIO : Working capital turnover ratio indicates the velocity of utilization of net working capital. This ratio indicates the number of times the working capital is turned over in the course of the year. This ratio

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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 = Cost of Sales Net Working Capital

Working Capital Turnover = Sales Networking Capital

e.g. Year Sales Networking Capital Working Capital Turnover 2009 166.0 53.87 3.08 2010 151.5 62.52 2.4 2011 169.5 103.09 1.64
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Interpretation: This ratio indicates low much net working capital requires for sales. In 2008, the reciprocal of this ratio (1/1.64 = .609) shows that for sales of Rs. 1 the company requires 60 paisa as working capital. Thus this ratio is helpful to forecast the working capital requirement on the basis of sale.

INVENTORIES (Rs. in Crores) Year Inventories 2008-2009 37.15 2009-2010 35.69 2010-2011 75.01

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Interpretation : Inventories is a major part of current assets. If any company wants to manage its working capital efficiency, it has to manage its inventories efficiently. The graph shows that inventory in 2005-2006 is 45%, in 20062007 is 43% and in 2007-2008 is 54% of their current assets. The company should try to reduce the inventory upto 10% or 20% of current assets.

Inventories 80 70 60 50 AMOUNT 40 30 20 10 0

Inventories

20082009

20092010 YEAR

20102011

CASH BNAK BALANCE: (Rs. in Crores) Year 2008-2009 2009-2010 2010-2011

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Cash Bank Balance Interpretation:

4.69

1.79

5.05

Cash is basic input or component of working capital. Cash is needed to keep the business running on a continuous basis. So the organization should have sufficient cash to meet various requirements. The above graph is indicate that in 2006 the cash is 4.69 crores but in 2007 it has decrease to 1.79. The result of that it disturb the firms manufacturing operations. In 2008, it is increased unto approx. 5.1% cash balance. So in 2008, the company has no problem for meeting its requirement as compare to 2007.

DEBTORS: (Rs. in Crores) Year Debtors Interpretation: 2008-2009 17.33 2009-2010 19.05 2010-2011 25.94

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Debtors constitute a substantial portion of total current assets. In India it constitute one third of current assets. The above graph is depict that there is increase in debtors. It represents an extension of credit to customers. The reason for increasing credit is competition and company liberal credit policy.

Debtors

30 25 20 AMOUNT 15 10 5 0 2008- 20092009 2010 YEAR 20102011

Debtors Debtors

CURRENT ASSETS: (Rs. in Crores) Year Current Assets Interpretation: 2008-2009 81.29 2009-2010 83.15 2010-2011 136.57

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This graph shows that there is 64% increase in current assets in 2008. This increase is arise because there is approx. 50% increase in inventories. Increase in current assets shows the liquidity soundness of company.

Current Assets

140 120 100 80 AMOUNT 60 40 20 0

Current Assets 20082009 20092010 YEAR 20102011

CURRENT LIABILITY: (Rs. in Cores) Year Current Liability 2008-2009 27.42 2009-2010 20.58 2010-2011 33.48

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Interpretation: Current liabilities shows company short term debts pay to outsiders. In 2008 the current liabilities of the company increased. But still increase in current assets is more than its current liabilities.

Current Liability 40 35 AMOUNT 30 25 20 15 10 5 0 2008-2009 2009-2010 2010-2011 YEAR

Current Liability

NET WOKRING CAPITAL : (Rs. in Crores) Year Net Working Capital 2008-2009 53.87 2009-2010 62.53 2010-2011 103.09

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Interpretation : Working capital is required to finance day to day operations of a firm. There should be an optimum level of working capital. It should not be too less or not too excess. In the company there is increase in working capital. The increase in working capital arises because the company has expanded its business.

Net Working Capital 120 100 80 AMOUNT 60 40 20 0 20082009 20092010 YEAR 20102011 Net Working Capital

FINDINGS:

Companys current ratio is more than ideal ratio. It shows that companys liquidity poison is sound.

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The ideal quick ratio is 1.1. companys quick ratio is more than ideal ratio. Its shows companys has no liquidity problem.

Inventory turnover ratio, in 2009 was 1.5 times whereas in 2010 was 2.8

times. & in 2011 1.75 times. It shows that company has not effective inventory management system.

Inventory conversion period in 2010 was 130 days while in 2011 it is 202 days. Its shows that company has less effective management system.

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