A Project Report On WORKING CAPITAL MANAGEMENT With reference to SUJANA METAL PRODUCTS LTD, HYDERABAD A Report Submitted to Gitam

Institute of Management, Gitam University in partial fulfillment for the award of the degree of

BACHELOR OF BUSINESS MANAGEMENT Submitted by ALKA THAKUR Reg No.1214109103

Under the esteemed guidance of Ms. T .Geeta Madhuri Naidu Assistant Professor

GITAM INSTITUTE of MANAGEMENT AN INSTITUTION ACCREDITED WITH A GRADE BY NAAC GITAM University, Visakhapatnam

DECLARATION

I, ALKA THAKUR hereby declare that this project report entitled WORKING CAPITAL MANAGEMENT with special reference to SUJANA METAL PRODUCTS Ltd; HYDERABAD is submitted to GIM-GITAM UNIVERSITY in partial fulfillment for the award of the degree of BACHELOR OF BUSINESS MANAGEMENT. This is Bonafide work carried out by me under the guidance of Ms.T. Geeta Madhuri Naidu and has not been submitted to any other university or institute or published earlier.

Place: Visakhapatnam Date:

(Alka Thakur) Reg no. 1214109103

CERTIFICATE

This is to certify that the project entitled WORKING CAPITAL MANAGEMENT with special reference to SUJANA METAL PRODUCTS Ltd; HYDERABAD is a bonafide work carried out by ALKA THAKUR under my guidance, and has been submitted in the partial fulfillment for the award of the degree of BACHELOR OF BUSINESS MANAGEMENT.

Place: Visakhapatnam Date:

Ms. T. Geeta Madhuri Naidu (Asst. Professor)

ACKNOWLEDGEMENT

I am grateful to Management of Gitam University, Visakhapatnam for granting me the permission and providing me the support and motivating me during my BBM program.

I would like to express my sincere gratitude to Prof. K .Siva Rama Krishna, Principal, Gitam Institute of Management, Gitam University, Visakhapatnam, for giving the opportunity to work on this project.

I am obliged to Mrs. P. Sheela, Vice Principal, Gitam Institute of Management, Gitam University, Visakhapatnam, for her valuable advice and motivation

I am grateful to Dr. (Ms.) K. Manjushree Naidu, Head Of Department, Gitam Institute of Management, Gitam University, Visakhapatnam, for giving me the opportunity to work on this project and for her valuable advice.

I take this opportunity to record my everlasting thanks and heartily feeling of gratitude to my project guide, Ms. T. Geeta Madhuri Naidu, Gitam Institute of Management, Gitam University, Visakhapatnam for her constant encouragement and guidance for the successful completion of the project work.

I am sincerely thankful to Mr.V.R.Chary (Chief Financial Officer), T.Raghavender Rao (Chartered Accountant) And Mr.Satish Kommineni (Deputy Manager Finance & Accounts) for allowing me to do my project on Sujana Metal Products Limited and to helping me out for completing this project by their guidance and valuable advice and suggestions. Place: Visakhapatnam Date: Alka Thakur

CONTENTS

Title Conceptual Framework

CHAPTER 1 Topic related concepts Review of literature

Page No.

Methodology
Scope & Need Of Study Objective Of Study CHAPTER 2 Research Design Data collection method Limitations of study

Organization Profile
Organization Profile CHAPTER 3 Industry Profile Topic Profile In Organization CHAPTER 4

Analysis

CHAPTER 5

Finding, Suggestions And Conclusion

CHAPTER 6

Bibliography Annexure

CHAPTER 7

EXECUTIVE SUMMARY

Working capital is a major part of every organization as it helps in managing day to day business transactions. Working capital (abbreviated WC) is a financial metric which represents operating liquidity available to a business, organization or other entity, including governmental entity. Along with fixed assets such as plant and equipment, working capital is considered a part of operating capital. Net working capital is calculated as current assets minus current liabilities. If current assets are less than current liabilities, an entity has a working capital deficiency, also called a working capital deficit.

Sujana Metal Product Limited (SMPL) every month prepares a Stock Statement that retrieves the amount of working capital which firm needs to meet its day to day targets. Once the amount is identified, the next step for the organization is to prepare CMA (Credit Management Appraisal) report, which it is supposed to submit to banks in order to raise funds from them. The working capital of a company depends on its Total Sales and Operation Cycle. Sujana metal draws money from 9 different banks at a certain rate of return, which is decided by the bank and company itself. This group of banks is termed as Consortium and the bank which lends more money becomes the leader of that consortium. Currently Punjab National Bank is leading the consortium with lending amount of `115.00 crores out of a total of `562.40crores.

Financial Management is one of the important function of management in dealing with the resource and monetary aspect of business for funding and operating a business with adequate return. The financial management deals with pros and cons of sources of different funds in term of capital. As business needs capital to start, the finance management plays important role in identifying the different sources in term of owner's fund, share capital or loans to finance the business operation.

CHAPTER 1

Conceptual Framework

Financial Management means planning, organizing, directing and controlling the financial activities such as procurement and utilization of funds of the enterprise. It means applying general management principles to financial resources of the enterprise.

Financial management determines the objective of business for profit maximization or wealth maximization. Finance management decides on short term and long term objective of business operation.

Scope
1. Investment decisions includes investment in fixed assets (called as capital budgeting). Investment in current assets is also a part of investment decisions called as working capital decisions.
1

Financial Management
2. Financial decisions - They relate to the raising of finance from various resources which will depend upon decision on type of source, period of financing, cost of financing and the returns thereby.

3. Dividend decision - The finance manager has to take decision with regards to the net

Functions of Financial Management

1. Estimation of capital requirements: A finance manager has to make estimation with regards to capital requirements of the company. This will depend upon expected costs and profits and future programs and policies of a concern. Estimations have to be made in an adequate manner which increases earning capacity of enterprise.

2. Determination of capital composition: Once the estimation has been made, the capital structure have to be decided. This involves short- term and long- term debt equity analysis. This will depend upon the proportion of equity capital a company is possessing and additional funds which have to be raised from outside parties.

3. Choice of sources of funds: For additional funds to be procured, a company has many choices like- a. Issue of shares and debentures b. Loans to be taken from banks and financial institutions c. Public deposits to be drawn like in form of bonds. Choice of factor will depend on relative merits and demerits of each source and period of financing.

4. Investment of funds: The finance manager has to decide to allocate funds into profitable ventures so that there is safety on investment and regular returns is possible.

5. Disposal of surplus: The net profits decision has to be made by the finance manager. This can be done in two ways: a. Dividend declaration - It includes identifying the rate of dividends and other benefits like bonus. b. Retained profits The volume has to be decided which will depend upon expansion, innovational, diversification plans of the company.
3

WORKING CAPITAL MANAGEMENT

INTRODUCTION
Working Capital is the amount of Capital that a Business has available to meet the day-to-day cash requirements of its operations. It refers to the amount of Current Assets that exceeds Current Liabilities (i.e. CA CL). 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 and Inventories. Working Capital is also known as Revolving or Circulating Capital or Short-Term Capital. . Factors affecting Working Capital/ Determinants of Working Capital: - Nature of Business/Industry; Size of Business/Scale of Operations; Growth prospects - Business Cycle; Manufacturing Cycle; Operating Cycle & Rapidity of Turnover; - Operating Efficiency; Profit Margin; Profit Appropriation - Depreciation Policy; Taxation Policy; Dividend Policy and Government Regulations Working Capital Cycle: Cash Raw-Materials Work-in-Process Finished Goods Cash
4

Working Capital Management is concerned with the problems that arise in attempting to manage the Current Assets, Current Liabilities and the interrelationship that exists between them

Working Capital Management means the deployment of current assets and current liabilities efficiently so as to maximize short-term liquidity Working capital management entails short term decisions - generally, relating to the next one year period - which is "reversible. From a company's point of view, excess working capital means operating inefficiencies. Money that is tied up in inventory or money that customers still owe to the company cannot be used to pay off any of the company's obligations. Therefore, if a company is operating in an inefficient manner (slow collection), then it will show up an increase in the working capital. This can be seen by comparing the working capital from one period to another; slow collection may signal an underlying problem in the company's operations.

Importance of Working Capital Management:

- Working Capital is the Life Blood of the Business - Fixed Assets (Long Term Assets) can be purchased on Lease/Hire Purchase but Current Assets cannot be.
- Determines the optimal level of investment in current assets.

- Determines the appropriate mix of short-term and long-term financing used to support this investment in current assets.

Objectives of Working Capital Management:

- Deciding Optimum Level of Investment in various WC Assets

- Decide Optimal Mix of Short Term and Long Term Capital - Decide appropriate means of Short Term Financing

DURING RECESSION
The economic and credit crisis of 2008 has forced many companies into cash flow problems due to non availability of working capital and credit facilities which in turn have led to retrenchment of staff, shrinkage of operations, curtailment of plans for capital expansion into different markets and downsizing. For most of these companies such a curtailment of operations and credit crunch threatens their very existence. To overcome this problem companys look up to finance professionals who can manage the working capital requirements through planning, obtaining additional facilities and restructuring their operations. Working capital management is one of the cornerstones of business continuity and acts as a hedge against tightening credit and access to additional capital. Companies which manage their working capital optimally during times of recessions come out stronger post the recession period. During times of double digit growth and expansions it is easy to forecast working capital needs and manage liquidity. The real test however comes during periods of recession and credit crisis as witnessed by the world during 2008 and 2009. During these times the management and finance professionals need to devote themselves to reassessing the organizations working capital sources and needs, such as how to finance the working capital, what is the level of financing required in downturn and what are the costs of obtaining the working capital.
6

CONCEPT OF WORKING CAPITAL:

There are 2 concepts:

Gross Working Capital Net Working Capital

Gross working capital: - It is referred as total current assets.

Focuses on,

Optimum investment in current assets:

Excessive investments impair firms profitability, as idle investment earns nothing. Inadequate working capital can threaten solvency of the firm because of its inability to meet its current obligations. Therefore there should be adequate investment in current assets.

Financing of current assets:

Whenever the need for working capital funds arises, agreement should be made quickly. If surplus funds are available they should be invested in short term Securities. Net working capital (NWC) defined by 2 ways,

Difference between current assets and current liabilities Net working capital is that portion of current assets which is financed with long term funds.

NET WORKING CAPITAL = CURRENT ASSETS - CURRENT LIABILITIES

If the working capital is efficiently managed then liquidity and profitability both will improve. They are not components of working capital but outcome of working capital. Working capital is basically related with the question of profitability versus liquidity & related aspects of risk.
7

Implications of Net Working Capital:

Net working capital is necessary because the cash outflows and inflows do not coincide. In general the cash outflows resulting from payments of current liability are relatively predictable. The cash inflows are however difficult to predict. More predictable the cash inflows are the less NWC will be required. But where the cash inflows are uncertain, it will be necessary to maintain current assets at level adequate to cover current liabilities that are there must be NWC. For evaluating NWC position, an important consideration is tradeoff between probability and risk. The term profitability is measured by profits after expenses. The term risk is defined as the profitability that a firm will become technically insolvent so that it will not be able to meet its obligations when they become due for payment. The risk of becoming technically insolvent is measured by NWC. If the firm wants to increase profitability, the risk will definitely increase. If firm wants to reduce the risk, the profitability will decrease.

REVIEW OF LITERATURE

1) The research done by Pass C.L., Pike R.H., An overview of Working Capital Management and Corporate financing, (1984) describes that over the past 40 years major theoretical developments have occurred in the areas of longerterm investment and financing decision making. Many of these new concepts and the related techniques are now being employed successfully in industrial practice. By contrast, far less attention has been paid to the area of short-term finance, in particular that of working capital management. Such neglect might be acceptable were working capital considerable of relatively little importance to the firm, but effective working capital management has a crucial role to play in enhancing the profitability and growth of the firm. Indeed, experience shows that inadequate planning and control of working capital is one of the more common causes of business failure. 2) The research done by Herrfeldt B., How to understand Working Capital Management describes that Cash Is King so say the money managers who share the responsibility of running this countrys business. And with banks demanding more form their prospective borrowers, greater emphasis has been placed on those accountable for so-called working capital management. Working capital management refers to the management of current or shortterm assets and short-term liabilities. In essence, the purpose of that function is to make certain that the company has enough assets to operate its business. 3) The research done by Samiloglu F. and Demirunes K., The Effect of Working Capital Management on Firm Profitability: Evidence from Turkey (2008) describes that the effect of working capital management on firm profitability. In accordance with this aim, to consider statistically significant relationships between firm profitability and the components of cash conversion cycle at length, a sample consisting of Istanbul Stock Exchange (ISE) listed manufacturing firms for the period of 1998-2007 has been analyzed under multiple regression models. Empirical findings of the study show that accounts receivables period, inventory period and leverage affect firm profitability negatively; while growth(in sales) affects firm profitability positively.

4) The research done by, Appuhami, Ranjith BA, The Impact of Firms capital expenditure on Working Capital Management: an empirical study across industries in Thailand, international management review, (2008), the purpose of this research is to investigate the impact of firms capital expenditure on their working capital management. The author used the data collected from listed companies in the Thailand stock exchange. The study used Shulman and Coxs (1985) net liquidity balance and working capital requirement as a proxy for working capital measurement and developed multiple regression models. The empirical research found that firms capital expenditure has a significant impact on working capital management. The study also found that the firms operating cash flows, which was recognized as a control variable, has a significant relationship with working capital management. 5) The research done by ,Hardcastle J., Working Capital Management,(2007) describe that working capital, sometimes called gross working capital, simply refers to the firms total current assets(the short-term ones), cash, marketable securities, accounts receivable and inventory. While long term financial analysis primarily concerns strategic planning, working capital management deals with day to day operations. By making sure that production lines do not stop due to lack of raw materials that inventories do not build up because production continues unchanged when sales dip, that customers pay on time and that enough cash is on hand to make payments when they are due. Obviously without good working capital management, no firm can be efficient and profitable. 6) The research done by, Gass D., How to Improve Working Capital Management (2006) Cash Is the Lifeblood of Business is an often repeated maximum amongst financial mangers. Working capital management refers to the management refers to the management of current or shot-term assets and short-term liabilities. Components of short-term assets include inventories, loans and advance, debtors, investments and cash & bank balances. Short term liability includes creditors, trade advances, borrowings and provisions. The major emphasis is, however, on short-term assets, since short-term liabilities

10

arise in the context of short-term assets. It is important that companies minimize risk by prudent working capital management. 7) The research done by, Maynard E.Rafuse, Working Capital Management an Urgent Need to Refocus management decision, (1996) argues that the attempt to improve working capital by delaying payment to creditors is counterproductive to individual and to the economy as a whole. Claims that altering debtor and creditor levels for individual tiers within a value system will rarely produce any net benefit. Proposes that stock reduction generates system wide financial improvements and other important benefits. Urges those organizations seeking concentrated working capital reduction strategies to focus on stock management strategies based on Lean Supply-Chain techniques.

8) The research done by, Dubey R., Working Capital Management an Effective Tool for Organizational Success (2008) describes that the working capital in a firm generally arises out of four basic factors like sales volume, technological changes, seasonal, cyclical changes and policies of the firm. The strength o the firm is dependent on the working capital as discussed earlier but this working capital is in self dependent on the level of sales volume of the firm. The firm requires current assets to support and maintain operational or functional activities. By current assets we mean the assets which can be converted readily into cash say within a year such as receivables, inventories and liquid cash. If the level of sales is stable and towards growth the level of cash, receivable and stock will also be on the high.

CHAPTER 2 METHODOLOGY

11 1

OBJECTIVES OF THE STUDY

The above discussion gives a comprehensive idea about the Working Capital Management in Sujana Metal Product Limited. The objective of this study over working capital activities done by Sujana Metals is basically to understand the operating cycle of the organization based on which a CMA report is prepared by the auditor of the company. And which is offered to different banks in order to raise funds from them.

1) To analyze working capital management of Sujana Metal Products Limited.

2) To determine gross and net operating cycle of company.

3) To examine CMA report which consists of last 2 years Balance Sheet of Sujana

Metals based on which future estimations and projections are made.

4) To find out the utility of financial ratio in credit analysis & determining the

financial capacity of the firm.

5) Evaluating companys performance relating to financial statement analysis.

6) To analyze stock statements made by Sujanas on monthly basis which shows

different debtors and creditors of the firm and which also helps in understanding the Drawing Power of the firm.

12 7) To render recommendation for the effective management of working capital.

SCOPE OF THE STUDY

The

scope of my project was to get an overall view of Management Of and

Working Capital in Sujana Metal Products Ltd and understanding its infrastructure through studying previous years & current years financial statements accordingly analyzing different ratios .

NEED OF THE STUDY

The basic need of this study is to understand Working Capital Management activities done in the SMPL and difficulties faced by them in relation to flow of cash in the organization or while taking loan through various Institution. They are also concentrating upon their distribution system which is also of primary concern & helps one being to strategize their plans according to the market conditions.

1) To analyze the Working Capital need of SMPL.

2) To know the services availed by them from their present banks.

3) To assess their further requirements.

4)

To know about their present financial performance based on which future assumptions and projections are made.

13

RESEARCH DESIGNS

A research design is the framework or plan for a study which is used as a guide in collecting and analyzing the data collected. It specifies the methods and procedures for acquiring the information needed to conduct the research effectively.

RESEARCH METHODOLOGY Primary Data: The data has been collected through:
Discussion with Mr.V.R.Chary (Chief Financial Officer), Mr. Ragvender Rao (Auditor) and Mr. Satish Kommineni (Deputy Manager - Finance & Accounts) of Sujana Metal Products Limited, which helped in getting a clear picture of activities carried out by the SMPL under Working Capital Management.

Secondary Data: The data has been collected through:

Figures from the annual reports and financial statements of Sujana Metal Product Limited. Records of the company: This helped me to get details regarding the history of the organization. Library research: A number of books on finance were referred to collect theoretical background related to finance. Sujana Metal Products Limited website: www.sujana.com

1 5

Tools used: The different tools used to understand the working capital management of
Sujana Metal Products Limited.

Analyzing through working capital ratios Analyzing through CMA report and stock statements. Analyzing through gross and net operating cycle. Analyzing through various components of working capital management.

Limitations of Study: The study also suffers from the following limitations:

The company is exposed to normal industry risk factors of competition, project delay, human resource, and cost escalation and consumer attrition. The study is conducted for the purpose of fulfillment of the condition stipulated by the University for Completion of course, so the study may not fulfillment all the requirements of a detailed investigation.

A limitation to this study is the research duration (summer placement) as its very short and its not possible to observe every aspect of working capital practices.

CHAPTER 3 Organization Profile

1 6

INDUSTRY PROFILE

INDIAN STEEL AND METAL INDUSTRIES

India is the fifth largest producer of steel in the world. India Steel Industry has grown by leaps and bounds, especially in recent times with Indian firms buying steel companies overseas. The scope for steel industry is huge and industry estimates indicate that the industry will continue will to grow reasonably in the coming years with huge demands for stainless steel in the construction of new airports and metro rail projects. The government is planning a massive enhancement of the steel production capacity of India with the modernization of the existing steel plants. There are many strong points of the industry that makes it one of the leading names in the global steel industry. The rate of labor wage in India is among one of the lowest in the world thereby making large scale production feasible. The boom witnessed in the automobile industry has ensured that the demand for steel is increasing gradually and will continue to do so in the near future. There is huge manpower in India which is another reason why steel production in India is high and the industry is doing pretty well both nationally and internationally.

Industry Statistics
Government targets to increase the production capacity from 56 million tons annually to 124 MT in the first phase which will come to an end by 2011 - 12. Currently with a production of 56 million tones India accounts for over 7% of the total steel produced globally, while it accounts to about 5% of global steel consumption. The steel sector in India grew by 5.3% in May 2009. Globally India is the only country to post a positive

overall growth in the production of crude steel at 1.01% for the period of January March in 2009.

1 7

Export
About 50% of the steel produced in India is exported. India's export of steel during April - December 2008 was 64.4 MT as against 9.7 MT in December 2007. In February 2009, steel export increased by 17% to 12.6 MT from 10.8 MT in the same month last year. More than 50% of steel from India is exported to China.

Investments
Numerous steel companies some major projects in the pipeline to invest in India steel industry. Steel companies have earmarked more than 100 million USD for the setting up of sponge iron units in Koppal and Bellary in Karnataka. As per Investment Commission of India more than 30 billion USD are in the pipeline for investment over the next five years.

Hurdles

- Power shortage hampers the production of steel. - Use of outdated process for production. - Lags behind in the production of stainless steel. - Deficiency of raw materials required by the industry. -Labor productivity is low. It is 144 tons per worker per year against 600 tons in Western Europe as per estimates.

18

Domestic scenario

The Indian steel industry has entered into a new development stage from 2007-08, riding high

on the resurgent economy and rising demand for steel.

Rapid rise in production has resulted in India becoming the 4th largest producer of crude steel

and the largest producer of sponge iron or DRI in the world.

The National Steel Policy 2005 is currently being reviewed keeping in mind the rapid developments in the domestic steel industry (both onsthe supply and demand sides) as well as the stable growth of the Indian economy since the release of the Policy in 2005.

As per the report of the Working Group on Steel for the 12th Plan, there exist many factors

which carry the potential of raising the per capita steel consumption in the country, currently estimated at 55 kg (provisional). These include among others, an estimated infrastructure investment of nearly a trillion dollars, a projected growth of manufacturing from current 8% to 11-12%, increase in urban population to 600 million by 2030 from the current level of 400 million, emergence of the rural market for steel currently consuming around 10 kg per annum buoyed by projects like Bharat Nirman, Pradhan Mantri Gram Sadak Yojana, Rajiv Gandhi Awaas Yojana among others.

ORGANIZATION PROFILE

SUJANA METAL PRODUCTS LIMITED

Sujana Metal Products Limited (SMPL) was incorporated in May, 1988 under the name of Sujana Steel Re-Rolling Industries Private Limited. The Company was incorporated with an objective to manufacture Steel Re-rolled products. The Company was promoted by Mr. Y S Chowdary his associates and relatives. The name of the Company was changed to Sujana Steels Private Limited on 30th March 1992. The Company was converted into a public limited company on 20th April 1992. The Company further changed its name to Sujana Metal Products Limited w.e.f., 9th November 2001. Sujana Metal Products Limited (SMPL) is A Company engaged in the business of manufacturing and marketing value added steel products. SMPL is categorized as a secondary steel producer in the industry. The Company caters to product requirements of some of the most reputed players in the construction & infrastructure sectors. Over the years, the group has carved a niche for itself in the value added product segment of the Indian steel market. SMPL

is

primarily

into

the

business

of

manufacturing

various

steel

products/applications such as the following: Thermo Mechanically Treated (TMT) bars Structural steel Smart steel

SMPL supplies high quality TMT bars of various sizes with varying material properties depending upon the requirements of the clients. It also manufactures

structural steel of varying shapes and dimensions for the construction & infrastructure sector.

PRODUCTS
SMART STEEL PRODUCTS

Bettering the existing products and taking up the challenge of providing smarter products has always been a way with Sujana. It is this spirit that has made them introduce Smart Steel the steel that bends to your needs, following the pioneering success of Sujana TMT. Smart Steel from Sujana brings a host of advantages. It combines convenience with amazing cost-savings; reduces construction cycle time; saves labor costs, reduces the hassles of inventory management; achieves zero scrap and absolute ease of operations. In short, Sujanas Smart Steel is 'Ready Made' to customers needs.

TMT STEELS

Sujana Metals enjoy the first mover advantage in TMT on account of their defining the industry this year. Sujanas proximity to growing markets in Andhra Pradesh, Tamil Nadu ad Karnataka helps further their leadership position. Sujanas strategic geographical location ensures that they cater to the market requirements across all the major markets of South India and regarded as the only regional player with significant capacities to be a key player in the industry.

STRUCTURAL STEELS

With its innovative features Sujana Metal Products Limited turns of products conforming to rigid domestic and international specifications and tolerances. The excellent and elaborate finishing facilities in the rolling mills of Sujana Metal Products Limited enable production of products conforming to exacting standards.

The product mix of Sujana Metal Products Limited comprises of rounds reinforcement Bars, Angles, Channels, Flats, and I. Beams etc.

SUBSIDIARIES OF SUJANA METAL PRODUCTS LTD

Glade Steel Private Limited

Sujana metals has acquired 100% share holding of glade steel private limited by making investment of ` 6,74,514.00, therefore company holding 51.15% share in M/s Glade Steel Private Limited. Alpha Venture Limited

Alpha venture limited is a wholly owned subsidiary company in Cayman Islands on 6 March 2007. Asian Tide Enterprises Limited

Its a wholly owned subsidiary company incorporated in Hongkong on 3rd July 2007 for carrying on the business trading of goods and services with accent on procuring raw material for manufacturing activities.

Research and Development (R&D) In Sujana Metal Products Limited

In view of the changing business market conditions for the re-rolling industry products, the management has taken the decision to introduce new product range in TMT bars such as corrosion resistance steel. Longer life due to superior corrosion resistance. High yield strength couples with good ductility and bends ability. Customers better services Increasing life of the products Life span cost benefit

22

Opportunities

The biggest opportunity before Indian steel sector is that there is enormous scope for increasing consumption of steel in almost all sectors in India. The following graph gives a glimpse of untapped potential of increasing steel consumption in India; eg, even to reach the comparable developing and lately developed economies like China and other Europe, a quantum jump in steel consumption will be required.

Inherent Strengths

BIS standard compliance Quality Products. Strong core technical team & low employee turnover. Capacity for Flexible designs and small batch sizes. Strong Clientele base and established track record. Efficient use of infrastructure.

Expansion Plan Expansion of finished products capacity from 290,000 TPA to 1,000,000 TPA 30% of capacity with further value addition: processed TMT bars 30% of capacity for high value products of exports / imports 0 substitute : Alloy steel heavy & light structures

Complete integration from iron ore to finished steel

23

TOPIC PROFILE IN ORGANIZATION

The management of working capital is concerned with two problems that arises in attempting to manage current assets, current liabilities and the inter relationship that asserts between them. The basic goal is working capital management is to manage current assets and current liabilities of a firm in such a way that a satisfactory of optimum level of working capital is maintained i.e. it is neither inadequate nor excessive. This is so because both inadequate and excessive working position is bad for the business. SMPL tries to achieve a satisfactory level of WC so that it does not face any problem regarding cash flows in the organization. WORKING CAPITAL ANALYSIS OPERATING CYCLE ANALYSIS Operating cycle refers to the time period which starts from raw material purchases and ends with realization of receivable. So it is total time gap between raw material purchases to debtors collection. This is also known as working capital cycle. Operating cycle is therefore is expressed in terms of months or weeks or days. The higher the operating cycle, higher the working capital requirement. It comprises of raw material conversion period, work in process conversion period, finished goods conversion period, debtor conversion period and creditor conversion period. The basic reason for calculating of working capital is to find out the means for reducing the duration of operating cycle because if duration of operating cycle will be less than working capital requirement will be less. Operating cycle = R + W + F + D C Where, R = Raw Material Conversion Period W = Work In Process Period F = Finished Goods Conversion Period

D = Debtor Collection Period C = Creditor Collection Period Here, the length of GOC (gross operating cycle) is the sum of ICP (inventory conversion period) and RCP (Receivables Conversion Period). ICP (inventory conversion period) is the total time needed for producing and selling the products. Hence it is the sum total of RMCP (raw material conversion period), WIPCP (work in progress conversion period) and FGCP (finished goods conversion period). On the other hand, RCP (receivables conversion period) is the total time required to collect the outstanding amount from customers. Usually, firm acquires resources on credit basis. PDP (payables deferral period) is the result of such an incidence and it represents the length of time the firm is able to defer payments on various resources purchased. The difference between GOC(gross operating cycle) and PDP(payables deferral period) is known as Net Operating Cycle and if depreciation is excluded from the expenses in computation of operating cycle, the NOC(net operating cost) also represents the cash collection from sale and cash payments for resources acquired by the firm and during such time interval between cash collection from sale and cash payments for resources acquired by the firm and during such time interval over which additional funds called working capital should be obtained in order to carry out the firms operations. In short, the working capital position is directly proportional to the Net Operating Cycle.

Calculations:
On the basis of financial statement of an organization we can calculate the inventory conversion period. Debtors / receivables conversion period and the creditors conversion period and based on such calculations we can find out the length of the operating cycle (in days) both gross as well as net operating cycle. As mentioned above, on the basis of information presented in the Balance sheet and CMA statement

of Sujana Metal Products Limited, the length of gross as well as net operating cycle is calculated as follows. 1) RAW MATERIAL CONVERSION PERIOD (RMCP)

Average Raw Material Stock Annual Raw Material Consumed

x 360 days (12 months)

[In case of financial year 2009-2012(18 months) = 540 days & financial year 20072008(15 months) = 450 days] Where, Average raw material stock = OPENING STOCK + CLOSING STOCK 2 Calculation of raw material conversion period: Table No.1
(In lakhs)

Particulars

2009-2011 (18 Months)

2008-2009 (12 Months) 1945.01 41,038.89

2007-2008 (15 Months) 1220.14 1,72,305.70

Average raw material stock Raw material consumed during that year
RMCP

1900.19 66,126.82

15.51 days

17.06 days

3.18 days

Fig no 1

20 15 10 5 0 2009-2011 2008-2009 2007-2008 R MCP

2) WORK IN PROGRESS CONVERSION PERIOD (WIPCP)

Average Raw Material Stock Cost of production

x 360 days (12 months)

[In case of financial year 2009-2012(18 months) = 540 days & financial year 20072008(15 months) = 450 days]

Calculation of work in progress conversion period: Table no2

(In lakhs)

Particulars Average stock Cost of production WIPCP

2009-2011 (18 Months) 1900.19 32,253.73

2008-2009 (12 Months) 1945.01 16,137.29

2007-2008 (15 Months) 1220.14 14,841.54

31.8 days

43.39 days

36.99 days

Fig no 2

4 5 4 0 3 5 3 0 2 5 2 0 1 5 1 0 5 0

WorkinProg ress ConversionPeriod

2 0 -2 1 09 01

2 0 -2 0 08 09

2 0 -2 0 07 08
2

3) FINISHED GOODS CONVERSION PERIOD(FGCP)

Average Raw Material stock Cost of goods sold

x 360 days (12 months)

[In case of financial year 2009-2012(18 months) = 540 days & financial year 20072008(15 months) = 450 days]

Calculation of finished goods conversion period: Table no 3

(In lakhs)

Particulars Average Raw Material Stock Cost of goods sold FGCP

2009-2011 (18 Months) 1900.19 426,298.83 2.40 days

2008-2009 (12 Months) 1945.01 193,805.83 3.61 days

2007-2008 (15 Months) 1220.14 189,563.24 2.89 days

Fig no 3

4 3.5 3 2.5 2 1.5 1 0.5 0 2009-2011 2008-2009 2007-2008 F inished G oodsConvers ion Period

4) DEBTORS CONVERSION PERIOD(DCP)

= Where, Average Debtors

Average Debtors Total Sales (Credit)

x 360 (12 months)

Opening Debtor + Closing Debtor 2 [In case of financial year 2009-2012(18 months) = 540 days & financial year 20072008(15 months) = 450 days]

Calculation of debtor conversion period: Table no 4

(In lakhs)

Particulars

2009-2011 (18 months)

2008-2009 (12 months) 30,350.1 1,93,805.83

2007-2008 (15 months) 15,723.26 1,89,563.24

Average debtor Cost of sales

57,263.315 4,26,298.83

Debtors conversion period

72.58 days

56.37 days

37.32 days

Fig no 4
80 70 60 50 40 30 20 10 0 2009-2011 2008-2009 2007-2008 Averag Collec e tion Period

5) CREDIT CONVERSION PERIOD(CCP)

Average creditors Cost of goods sold

x 360 (12 months)

[In case of financial year 2009-2012(18 months) = 540 days & financial year 20072008(15 months) = 450 days] Calculation of credit conversion period: Table no5 Particulars 2009-2011 (18 Months) Average creditor Cost of goods sold Credit conversion period 39633.22 426,298.83 2008-2009 (12 Months) 36369.40 193,805.83
(In lakhs) 2007-2008

(15 Months) 6486.96 189,563.24

50.20 days

67.55 days

15.39 days

Fig no 5

70 60 50 40 30 20 10 0 2009-2011 2008-2009 2007-2008 C redit C onversion P eriod

GROSS OPERATING CYCLE FOR SUJANA METAL PRODUCTS LIMITED

Table no 6 YEAR 2009-2011 RMCP 15.51 WICP 31.8 FGCP 2.40 DCP 72.53

GOC 122.24 days

2008-2009

17.06

43.39

3.61

56.37

120.43 days

2007-2008

3.18

36.99

2.89

37.32

80.38 days

Fig no 6

140 120 100 80 60 40 20 0 2009-2011 2008-2009 20 07-2008

3

GR S OER OS ATING C T OS

NET OPERATING CYCLE FOR SUJANA METAL PRODUCTS LIMITED

Table no 7 YEAR GOC CCP

NOC

2009-2011

122.24 days

(50.20)

72.04 days

2008-2009

120.43 days

(67.55)

52.88 days

2007-2008

80.38 days

(15.39)

64.99 days

Fig no 7

8 0 7 0 6 0 5 0 4 0 3 0 2 0 1 0 0 2 0 -2 1 09 01 2 0 -2 0 08 09 2 0 -2 0 07 08
3

NE OPE AT T R ING CYCL E

ANALYSIS

It claimed that Gross Operating Cycle of Sujana Metal Products Limited is increasing in year 2008-2009 and 2009-2011 as compare to the year 2007-2008. In year 20082009, it is 120.43 days then later it increased to 122.24 days in the year 2009-2011 due to expansion in raw material. In 2009-2011, it is on the highest point of 122.24 days. The main reason of increasing gross operating cycle in 2009-20011 is due to more availability of raw material in the stores. This year company purchased a bulk of raw material due to market variations which resulted in increase of the GOC of SMPL. The GOC for SMPL has shown a significant increment of 1.81 days. The GOC is satisfactory as it varies as the market requirement and changes in form of meet the customers requirement largely. But when we came to NOC of SMPL we can see that creditors payment period or average payment period of SMPL is on a average of 44 days in each 3 years so does not make more effect on GOC. Therefore, it is somehow near of GOC. Therefore, we can say that there is a significant change in NOC of SMPL.

CHAPTER 4 ANALYSIS

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 SMPL and other firms. It only means for better understanding of financial strength and weakness of a SMPL. 1. Current ratio. 2. Quick ratio 3. Inventory turnover. 4. Receivable ratio. 5. Payable ratio. 6. Working capital turnover ratio. 7. Debt/equity ratio 8. Profitability ratio 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. CURRENT RATIO QUICK RATIO

3 4

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 short-term financial position or liquidity of a firm. It is defined as the relation between current assets and current liabilities. Thus, CURRENT RATIO = CURRENT ASSETS CURRENT LIABILITES The two components of this ratio are: - 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.

35

Calculation of current ratio TABLE NO 1 Year 2009-2011 Current Asset 158,172.54 Current Liability 45,216.19
(In lakhs) Current Ratio

3.49

2008-2009

104,831.78

42,706.26

2.45

2007-2008

75,201.65

24909.70

3.01

Fig no 1

3 .5 3 2 .5 2 1 .5 1 0 .5 0 2009-2011 20 08-2009 2007-2008 C URRENT R ATIO

INTERPRETATION: The current ratio of Sujana Metal Products Limited is above standards and it ensures the payment of dues in time. The current ratio of the company is considerably high because they had made over investment in inventories, which is the main reason for the high ratio of current asset. Inventories are high because of availability of raw material. The overall position of current ratio for Sujana Metal Product Limited is satisfactory. As per the above data, the current ratio on 2008-2009 was not satisfactory as it decremented from 3.01 in 2007-2008 to 2.45 in 2008-2009, but then theres a remarkable increment from 2.45 in 2008-2009 to 3.49 in 2009-2011.
36

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.

Or Quick Assets = Current Asset Inventories Prepaid Expenses. 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 has slow paying debtors. On the other hand, a firm having a low liquidity position if it has fast moving inventories.
3 7

Calculation of Liquid Ratio TABLE NO 2 Year 2009-2011 2008-2009 2007-2008 Quick Assets 1,47,987.34 81,866.43 53,253.89 Current Liability 45,216.19 42,706.26 24909.70
(In lakhs) Quick Ratio

3.27 1.92 2.13

Fig No 2

3.5 3 2.5 2 1.5 1 0.5 0 2009-2011 2008-2009 2007-200 8 QUIC RATIO K

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 1:1. As per the above data, the quick ratio of SMPL was 2.13 in 2007-2008 then it decremented to 1.92 in 2008-2009 but then went up to3.27 in 2009-2011.Companys quick ratio is more than ideal ratio. This shows company has no liquidity problem.

3 8

3. 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 low inventory turnover ratio indicates the inefficient management of inventory. A low inventory turnover implies low 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 = OPENING STOCK + CLOSING STOCK 2

39

Calculation of stock turnover ratio TABLE NO 3

(In lakhs)

Year Inventory turnover ratio Total

2009-2011 47.35 47.35 times

2008-2009 10.32 10.32times

2008-2007 9.04 9.04times

Fig no 3
50 40 30 20 10 0 2009-2011 2008-2009 2007-2008

S kT toc urnover R tio a

INTERPRETATION: By analyzing the three year data its seen, that it follows an uneven trend. From the year 2007-2008 & 2008-2009, it moves on a slow pace means, the ratio is changed in very nominal figures i.e. (1.28 times), which has been rectified in the year 2009-2011. In 2011 there is a huge increase in inventory, which shows the efficiency of the company but they are required to take measure to lower down this ratio as it affects the working capital cycle of company and the flow of the cash.
40

4. DEBTOR 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 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

4.1) 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, low debtors turnover ratio indicates poor management of /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 2

41

Calculation of Debtor turnover ratio TABLE NO 4.1

(In lakhs)

Year

Sales / COGS

Average Debtor

Debtor Turnover Ratio 7.44 times 6.38 times 12.05 times

2009-2011 2008-2009 2007-2008

426,298.83 193,805.83 189,563.24

57,263.315 30,350.1 15,723.26

Fig no 4.1

14 12 10 8 6 4 2 0 2009-2011 2008-2009 2007-2008 D ebtor T urnover R atio

INTERPRETATION This ratio indicates the speed with which debtors are being converted or turnover into sales. The higher the values of debtors turnover, the more efficient is the management of credit. From the above data it can be seen that it degraded in year 2008-2009 from 12.05 to 6.38 this shows that company is not utilizing its debtors efficiency. But later in the year 2009-20011 it improved and reached to 7.44.
4 2

4.2) AVERAGE COLLECTION PERIOD:

Average Collection Period =

NO. OF WORKING DAYS 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 = 360 (Net Working Days) Debtors Turnover Ratio

[In case of financial year 2009-2012(18 months) = 540 days & financial year 20072008(15 months) = 450 days]

Due to the size of transactions, most businesses allow customers to purchase goods or services via credit, but one of the problems with extending credit is not knowing when the customer will make cash payments. Therefore, possessing a lower average collection period is seen as optimal, because this means that it does not take a company very long to turn its receivables into cash. Ultimately, every business needs cash to pay off its own expenses (such as operating and administrative expenses).

4 3

Calculation of average collection period: Table no 4.2 Year Net Working Days Debtors Turnover Ratio
(In lakhs) Average Collection Period

2009-2011 2008-2009 2007-2008

540 360 450

7.44 6.38 12.05

72.58 days 56.42 days 37.34 days

Fig no 4.2
80 70 60 50 40 30 20 10 0 2009-2011 2008-2009 2007-2008

Average C ollection P eriod

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. SMPLs average collection period is increasing year to year. It shows that the firm has Liberal Credit policy. These changes in policy are due to competitors credit policy.

44 4

5) Creditor Turnover Ratio

This ratio reveals the ability of the firm to avail the credit facility from the suppliers throughout the year. Generally a low creditors turnover ratio implies favorable since the firm enjoys lengthy credit period.

CREDITOR TURNOVER RATIO = NET CREDIT PURCHASE AVERAGE CREDITOR

AVERAGE CREDITOR

= OPENING CREDITOR + CLOSING CREDITOR 2

It indicates the speed with which the payments are made to the trade creditors. It establishes relationship between net credit annual purchases and average accounts payables. Accounts payables include trade creditors and bills payables. Average means opening plus closing balance divided by two. In this case also accounts payables' figure should be considered at gross value i.e. before deducting provision for discount on creditors.

4 5

Calculation of Creditor turnover ratio Table no 5

(In lakhs)

Year 2009-2011 2008-2009 2007-2008

Net Credit Purchase 3,73,023.27 1,63,650.54 1,72,305.70

Average Creditor 39,633.22 36,369.40 6,486.96

Creditor Turnover Ratio 9.411 times 4.49 times 26.56 times

Fig no 5

30 25 20 15 10 5 0 2009-2011 2008-2009 2007-2008 Creditor T urnover R tio a

INTERPRETATION: Actually, this ratio reveals the ability of the firm to avail the credit facility from the suppliers throughout the year. Generally, a low creditors turnover ratio implies favorable since the firm enjoys lengthy credit period. Now if we analyze the three years data we find that in the year 2007-2008 the ratio was very high which means that its position of creditors that year was not good, and when we turn ahead the other years creditors turnover ratio they are in pretty good position. In the all three years it has followed, a decreasing trend, which is very good, sign for the company. Therefore, we can say it enjoys a very good credit facility from the suppliers.

4 6

6) 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 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

[Net working capital = Current Assets Current Liabilities]

A company uses working capital (current assets - current liabilities) to fund operations and purchase inventory. These operations and inventory are then converted into sales revenue for the company. The working capital turnover ratio is used to analyze the relationship between the money used to fund operations and the sales generated from these operations. In a general sense, the higher the working capital turnover, the better because it means that the company is generating a lot of sales compared to the money it uses to fund the sales.
4 7

Calculation of working capital turnover ratio: Table no 6

(In lakhs)

Year

Cost Of Sales

Net Working Capital

Working Capital Turnover Ratio 3.77 3.11 3.76

2009-2011 2008-2009 2007-2008

426,298.83 193,805.83 189,563.24

1,12,956.35 62,125.52 50,291.95

Fig no 6
4 3.5 3 2.5 2 1.5 1 0.5 0 2009-2011 2008-2009 2007-2008

Work Ca l T ing pita urnov R tio er a

INTERPRETATION: This ratio indicates the number of times the working capital is turned over in the course of a year. A high working capital ratio indicated the effective utilization of working capital and less working capital ratio indicates less utilization. For SMPL, this ratio indicates that low net working capital is required for sales. In 2009-2011, the reciprocal of this ratio (1/3.77 = . 265) shows that for sales of `1 the company requires 26 paisa as working capital. Thus this ratio is helpful to forecast the working capital requirement on the basis of sale.
4 8

7) Debt/Equity Ratio

The debt-to-equity ratio (D/E) is a financial ratio indicating the relative proportion of shareholders equity and debt used to finance a company's assets. This ratio tells about the position of total debt of the company with respect to the total equity. TOTAL DEBTS DEBT TO EQUITY RATIO = EQUITY (SH. CAP. + R & S)

Calculation of Debt/Equity Ratio: Table no7.1

(In lakhs)

Year

Total Debt

Equity Share Capital

Debt/Equity Ratio

2009-2011 2008-2009 2007-2008

100,853.63 64,836.80 41,022.54

70,384.62 39,927.22 41,693.96

1.43 1.62 0.98

Fig no 7.1
1.8 1.6 1.4 1.2 1 0.8 0.6 0.4 0.2 0

D ebt/E quity R tio a

2009-2011

2008-2009

2007-2008

4 9

INTERPRETATION The D/E ratio is 1:1; it implies that for every rupee of outside liability. In case of SMPL, in year 2007-2008 to 2008-2009, there was an increment in debt/equity ratio which was unfavorable for companys health as it means that total debt is increasing and company is not operating fully on their own capital. But later theres an improvement in the D/E ratio from 2008-2009 to 2009-2011. There is continuous decrease in total debt and there is continuous increase in shareholder s equity (i.e. Reserves and Surpluses) with increasing rate so the ratio is decreasing from 1.62 to 1.43 in 2008-09 & 2009-2011.

5 0

8) PROFITABILITY RATIO: Profitability ratio measures the profitability of company (SMPL); they are calculated either in relation to sale or in relation to investments. The profitability ratios are:

8.1) Gross Profit Ratio:

Gross profit ratio is also known as gross margin ratio. The calculate gross profit subtract cost of sale(variable cost)from sale(i.e., gross profit=sales-cost sales).A low gross profit ratio indicates that low amount of earnings, required to pay fixed costs and profits, are generated from revenues, A low gross profit ratio indicates that the business is unable to control its production cost.

GROSS PROFIT GROSS PROFIT RATIO = SALES

The gross profit margin ratio provide exclude to the companys pricing, cost structure and production efficiency. The gross profit ratio is a benchmark against competitors.

4 7

Calculation of gross profit ratio: Table no 8.1 Year Gross profit Sales
(In lakhs) Gross Profit Ratio

2009-2011 2008-2009

9,870.98 6,701.4

4,36,169.81 2,00,507.23

0.022 0.033

2007-2008

7,320.3

1,96,883.50

0.037

Fig no 8.1
0.04 0.035 0.03 0.025 0.02 0.015 0.01 0.005 0 2009-2011 2008-2009 2007-2008 GrossProfit R tio a

Interpretation: There are no standards for gross profit ratio. The gross profit ratio in 20092011 is 0.022%, in 2008-2009 is 0.033% & in the 2007-2008 is 0.037%. This shows the companys performance in 2007-2008 was better when compare to 2009-2011 &20082009.
4 7

8.2) Net Profit Ratio: The net profit ratio is most commonly used profit margin ratio. A low profit and ratio indicates that low amount of earnings, required to pay fixed costs and profit and generated from revenue. Net profit ratio tells us about overall profitability PROFIT AFTER TAX NET PROFIT RATIO = x 100 NET SALE Calculation of net profit ratio: Table no 8.2
(In lakhs)

Year 2009-2011 2008-2009 2007-2008

Net profit after Tax 3868.69 2516.82 3822.5

Net Sales 4,26,298.83 1,93,805.83 1,89,563.2

Net Profit Ratio 0.90% 1.29% 2.01%

Fig no 8.2
2.5 2 1.5 1 0.5 0 2009-2011 2008-2009 2007-2008 Net P rofit Ratio

Interpretation: The profitability position of the company is decrementing by comparing the net profit ratios. The ratio in 20011 is 0.90%, 2009 is 1.29% & 2008 is 2.01%.

Analysis On The Basis Of Schedule of Changes in Working Capital

(In lakhs)

Particulars
Current Asset: Inventories Sundry Debtors Cash Bank Balance

2007-2008

2008-2009

Increase

Decrease

21,947.76 30,182.45 2,302.00

22,965.35 58,381.19 3,706.38

1,017.59 28,198.74 1,404.38

Loans & Advances Total CA (A) Current liabilities: Creditors Advances from customers Interest accrued but not dues on loans Other liabilities Provisions Total CL (B) Working Capital(A-B) Net increase In Working Capital

20,769.43

21,897.64

1,128.21

75,201.657

1,06,950.56

7,019.07 1,527.97 289.80 1,374.44 1,515.20

15,898.64 2,500.35 276.16 472.25 2,508.86 13.64 902.19

(8,879.57) (972.38)

(993.66)

11,726.48
63,475.17 21,819.14

21,656.26
85,294.3 32,664.75 (10,845.61) 21,819.14

85,294.3

85,294.3

32,664.75

32,664.75

INTERPRETATION: This statement shows the increase in Working Capital in the year 2007-2008 & 2008-2009 by increase in all current assets.
5 1

Analysis On The Basis Of Schedule of Changes in Working Capital

(In lakhs)

Particulars
Current Asset: Inventories Sundry Debtors Cash Bank Balance Loans & Advances

2008-2009

2009-2011

Increase

Decrease

22,965.35 58,381.19 3,706.38 19,778.86

10,185.20 86,302.93 7,177.59 54,506.82 27921.74 3471.21 34727.96

(12780.15)

Total CA (A) Current liabilities: Creditors Advances from customers Interest accrued but not dues on loans Other liabilities Provisions Total CL (B) Working Capital(A-B) Net increase In Working Capital

1,04,831.78

1,58,172.54

36,948.61 2,500.36 276.17 472.25 2,508.87

40,256.88 1240.57 588.09 179.74 2950.91 292.51 1259.79

(3308.27)

(311.92)

(442.04)

42,706.26
62,125.52 50,830.83

45,216.19
1,12,956.35 67,673.21 16,842.38 50,830.83

1,12,956.35

1,12,956.35

67673.21

67673.21

INTERPRETATION: This statement shows the increase in Working Capital in the year 2008-2009 & 2009-2011 by increase in current assets and decrease in certain current liabilities.
5 2

ANALYSIS OF VARIOUS COMPONENTS OF WORKING CAPITAL 1) INVENTORY ANALYSIS

Inventory is total amount of goods and materials. Inventories are a major part of current assets. If company wants to manage its working capital efficiency, it has to manage its inventories efficiently. Position of inventory in Sujana Metal Products Limited:

TABLE NO 1
(In lakhs)

PARTICULARS Raw materials Work in progress Finished goods Excise duty on finished goods

2009-2011 1768.52 1884.93 -

2008-2009 2031.85 110.96 5437.76 -

2007-2008 1858.17 122.81 15019.79 1329.60

Stores, spares & consumable

973.02

3539.05

3617.38

Goods for resale

5558.73

11845.73

Total

10,185.20

22,965.35

21,947.75

53

Fig No 1
25000 20000 15000 10000 5000 0 2009-2011 2008-2009 2007-2008 INVE OR S NT IE

INTERPRETATION By analyzing 3 years data we see that there is a substantial change in inventories year on year. As per the above data, level of inventory incremented from 21,947.75 in 20072008 to 22,965.35 in 2008-2009 but later it decremented in 2009-2011 to 10185.20 .Through this it can be seen that companys inventory level for current year is not satisfactory as level of finished goods, consumable and resale goods have gone down. So in order to match the market demand for its product SMPL need to increase its level of inventory.

5 4

2) CASH BANK BALANCE Cash called the liquid or vital current asset and its an important of working capital management. Cash includes notes, bank draft and cheque. Table no2
(In lakhs)

Particulars Cash & bank Total

2009-2011 7,177.59 7,177.59

2008-2009 3,706.37 3,706.37

2007-2008 2302.00 2302.00

Fig. no 2

8,000.00 7,000.00 6,000.00 5,000.00 4,000.00 3,000.00 2,000.00 1,000.00 0.00 2009 -2011 2008-2009 2007-2008 C H & BANK AS

INTERPRETATION
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 indicates that in 2007-2008 the cash is` 2302.00 lakhs and since then there is a tremendous increase in level of cash & bank in SMPL. In 2009-2011, it is increased up to` 7177.59 lakhs cash balance. So in 2009-2011, the company has no problem for meeting its requirement as compare to 2007-2008.
5 5

3) SUNDRY DEBTOR ANALYSIS

Debtors constitute a substantial portion of total current assets. In India it constitute one third of current assets. They arise only when credit sales made. Position of Sundry Debtor in Sujana Metal Product Limited Table no 3
(In lakhs)

Particulars Sundry Debtors

2009-2011 86,302.93

2008-2009 58,381.20

2007-2008 30182.45

Total

86,302.93

58,381.20

30182.45

Fig no. 3
100,000.00 80,000.00 60,000.00 40,000.00 20,000.00 0.00 2009-2011 2008-2009 2007-2008 S UNDRY DEBTORS

INTERPRETATION The above graph depicts that there is variations in level of debtors of Sujana Metal Products Limited in 3 years. A simple logic is that debtor increases when sales of the company increases. And if sales increase then it is a good sign of companys growth. In year 2007-2008 the debtors are at minimum level Moreover in next two years debtors are continuously increasing. We can say that its a good as well as bad sign also. SMPL policies for debtor are good but a risk of bad debts always prevails in high debtors. When sales are increasing with a great speed the profit also increases. If company decreases its debtors, they can use the money in various investment plans. So, this variation is good from the firms prospects. 4) LOANS AND ADVANCE ANALYSIS Loans and advances here refers to any amount given to different parties, company, employees for a specific period of time and in return they will be liable to make timely re-payment of that amount in addition to interest on that loan. Position of Loans and Advance in Sujana Metal Product Limited Table no 4
(In lakhs)

5 6

Particulars

2009-2011

2008-2009

2007-2008

Loans and advance Total

54,506.82 54,506.82

19,778.86 19,778.86

20,680.74 20,680.74

Fig No 4
60,000.00 50,000.00 40,000.00 30,000.00 20,000.00 10,000.00 0.00 2009-2011 2008-2009 2007-2008 LO ANSANDADVANCE S

INTERPRETATION The data shows an increasing trend which is good sign for SMPL. The level of loans and advances is incrementing year by year. In the year 2009-2011 `54.506 lakhs was given as loan due to this a lot of money was blocked. But it is used for expansion of the business. The increasing pattern shows that the company is giving advances for expansion of plants and machinery which is good sign for better production.
5 7

5) CURRENT LIABILITY ANALYSIS

Current liabilities shows company short term debts pay to outsiders. CREDITORS Table no 5 PARTICULAR Sundry Creditors Dues to micro and small enterprises Dues to other than micro and small enterprises _ 2009-2011 2008-2009 _
(In lakhs) 2007-2008

- For goods & services - For expenses Others Advances from customers Interest accrued but not due Total

39633.22 623.66 179.74 1240.57 588.09

36369.40 576.21 472.25 2500.36 276.17

6486.96 532.11 1374.44 1527.97 289.80

42,265.28

40,197.39

10,211.29

Fig no 5
50,000.00 40,000.00 30,000.00 20,000.00 10,000.00 0.00 2009-2011 2008-2009 2007-2008 S UNDR CR DIT R Y E OS

5 8

INTERPRETATION Above data depicts that theres an increase in the sundry creditors and other liabilities. Theres a tremendous increment in year 2008-2009, it was increased due to growth in other liabilities .This is because in the year 2008 SMPL purchased a bulk rate of raw material due to market variation. When company has minimum liability it creates a better goodwill in the market. High current liability indicates that the company is using credit facilities by the creditors.

59

PROVISION ANALYSIS Table no 6

(In lakhs)

Particulars
PROVISIONS Total

2009-2011
2950.91 2950.91

2008-2009
2508.87 2508.87

2007-2008
1426.51 1426.51

Fig no 6

3000 2500 2000 1500 1000 500 0 2009-2011 2008-2009 2007-2008 PR OVIS IONS

INTERPRETATION: From the above data we can see that provisions show a growing trend and the huge amount is being kept in these provisions. Though the profit of the company increased, the income tax is also increase. Therefore theres a great need of maintaining proper provisions, which is good that company is creating on time. Company is paying more tax as its earning more so its a good sign for the company.

CHAPTER 5
FINDING, SUGGESTIONS AND CONCLUSION

6 0

FINDINGS Findings from Analysis: Standard current ratio is 2:1 and for industry it is 3.49:1. SMPLs ratio is

satisfactory. Acid test ratio is more than one but it does not mean that company has excessive liquidity.

 Debtors of the company were high; they were increasing year by year, so more funds were blocked in debtors. But now recovery is becoming faster.
Inventory turnover ratio is improving from 2008-09 to 2009-11, which means

inventory is used in better way so it is good for the company.

Debtors turnover ratio is improving from 2008-09 to 2009-11. Increase in ratio

is beneficial for the company because as ratio increases the number of days of collection for debtors decreases. Working capital turnover ratio is continuously increasing that shows increasing needs of working capital.

61

SUGGESTIONS Few suggestions which I would like to give as per my project in SUJANA METAL PRODUCTS LIMITED on the topic WORKING CAPITAL MANAGEMENT. Below are some of the suggestions: The high current ratio from the standard indicates that additional amount of money is blocked in the current assets than required. So there are possibilities of using this blocked money in normal business activities which expected to fetch more return.

The business of corporation is such that the working capital of the corporation tends to go high. Therefore it is important to have a more accurate method of cash forecasting. It can be said that overall financial position of the company is normal but it is required to be improved from the point of view of profitability. Net operating cycle is increasing that means there is a need to make improvements in receivables/debtors management. Company should try to increase volume based sales so as to stand in the competition. Management should make the proper use of inventory control techniques like fixation of minimum, maximum and ordering levels for all the items for less blockage of money. The company should also adopt proper inventory control like ABC analysis etc. This inventory system can make the inventory management more result oriented. The company should train its work force properly, which would enable the company to utilize its resources properly and in the interim help in minimizing wastage, and hence result in the expansion of its market share. Due to competition, prices are market driven and for earning more margin company should give more concentration on cost reduction by improving its efficiency. Companys average debtor collection period is 54 days. Therefore, it would be the one of the positive point for company and company should maintain it for future.

62

CONCLUSION

From the findings and suggestions I would like to conclude that the Working Capital Management of Sujana Metal Products Limited is good. SMPL has sufficient funds to meet its current obligation every time, which is due to sufficient profits and efficient management of Sujana Metal Products Limited.

SMPL is cash rich but as there are expansion and diversification plans under the pipeline, company is not utilizing these funds. For meeting the working capital needs and capacity expansion needs. It has borrowed from 9 different banks. Lack of advertisement can be considered to be a weak point for Sujana Metal Products Limited. The amount of stock is increasing per year, which is a good sign, as it would help them in the tough competition coming ahead. Firm profitability can be increasing by shortening accounts receivables and inventory periods.

6 3

BIBLIOGRAPHY

BOOKS AND JOUNRALS:

Khan M.Y. And Jain P.K., Financial Management (Tata McGraw - Hill Publication Company Limited, New Delhi).

Prasanna Chandra, Financial Management (Tata McGraw Hill Publishing Company Limited, New Delhi).

Anand, M. 2001. Working Capital Performance Of Corporate India: An Empirical Survey, Management & Accounting Research, Vol 4(4), Pp. 35-36.

Bhattacharya, H. 2001. Working Capital Management: Strategies and Techniques, Prentice Hall, New Delhi.

WEBSITES:

WWW.SUJANA.COM WWW.WIKIPEDIA.COM

Annual Report and Financial Report, Sujana Metal Products Limited (SMPL), Hyderabad. Information Collected From the CFO, Auditors and Managers of Sujana Metal Products Limited.

64

ANNEXURE
BALANCE SHEET OF SUJANA METALS PRODUCTS LIMITED AS ON
(In lakhs)

PARTICULARS SOURCES OF FUNDS SHAREHOLDERS FUNDS Share Capital Reserves And Surplus LOANS FUNDS Secured Loans

2009-2012 11,310.91 59,073.71 70,384.62 89,943.21 10,910.42

2008-2009 6,994.46 32,932.76 39,927.22 55,468.82 9,367.98

2007-2008 14,943.5 26,750.45 41,693.96 41,022.54 -

 Unsecured Loans DEFERRED TAX LIABILITY(NET) TOTAL APPLICATION OF FUNDS FIXED ASSETS Gross Block Less: Depreciation& Amortization Net Block Capital Work In Progress INVESTMENTS

1,00,853.63 61,83.21

64,836.80 4,987.60

41,022.54 4,736.81

1,77,421.46

1,09,751.62

87,453.32

58,087.28 14,855.43 43,231.85 20,472.15 63,704.00 761.11

44,086.40 8,557.84 35,528.56 11,411.15 46,939.71 686.39

41,914.44 6,274.78 35,639.65 839.57 36,479.22 682.14

CURRENT ASSETS,LOANS & ADVANCES Inventories Sundry debtors Cash & bank balances Loans & advances Less : CURRENT LIABILITIES & PROVISIONS Current liabilities Provisions NET CURRENT ASSETS
TOTAL

10,185.20 86,302.93 7,177.59 54,506.82 1,58,172.54 42,265.28 2,950.91 45,216.19 1,12,956.35

1,77,421.46

22,965.35 58,381.20 3,706.37 19,778.86 1,04,831.78 40,197.39 2,508.87 42,706.26 62,125.52

1,09,751.62

21,947.76 30,182.45 2,302.00 20,769.43 75,201.65 23,394.50 1,515.20 24,909.70 50,291.94

87,453.32

6 5

PROFIT & LOSS ACCOUNT OF SUJANA METAL PRODUCTS LIMITED Particulars Income Gross sales Less : excise duty Net sales Other income 2009-2011 4,36,169.1 (10,769.63) 4,25,400.18 898.65 2008-2009 200,507.23 (7,521.53) 192985.70 820.13
(In lakhs) 2007-2008

196883.50 (9101.20) 187782.29 1780.94

Total Income(A) Expenditure Reduction in stocks Raw materials Manufacturing & other operating expenses Goods for resale Selling and admin expenses Interest & finance charges Depreciation & amortization Total Expenses(B) Profit before tax Taxation Profit after tax Balance brought forward from last year Amount available for appropriation Appropriations: Transfer to Cumulative redeemable preference shares redemption reserves Proposed dividend on cumulative redeemable Preference shares Dividend distribution tax Balance carried to balance sheet Earnings per share (face value of `5 each) Basic(`) Diluted(`)

4,26,298.83 3,663.76 66,126.82 9,389.44 3,06,896.45 7,183.70 19,430.77 7,069.95 4,19,760.92 6537.91 2669.22 3868.69 11497.99 15366.68

1,93,805.83 5,124.58 41,038.89 5,307.10 1,22,611.65 4,322.78 8,882.42 2,766.19 1,90,053.61 3,752.22 1,235.40 2,516.82 9,526.17 12,042.99

1,89,563.24 6,446.83 1,72,305.70 11,554.53 4,465.99 2,202.82 184082.20 6,221.74 2,399.21 3,822.53 6,259.85 1,00,82.37

25.08 4.16 503.68 35.32 6.00

503.67 44.14
6 6

8.38

15,337.44

11,497.99

9,526.17

2.24 2.15

3.65 3.05

6.54 3.07