WORKING CAPITAL MANAGEMENT OF MILKFOOD LIMITED

A summer training report submitted in partial fulfillment of the requirement for the degree of

MASTERS OF BUSINESS ADMINISTRATION (2011-2013)

Submitted to: Dr. Anju Puri Assistant Professor

Submitted by: NAVDEEP BAJWA MBA 2nd year

SCHOOL OF MANAGEMENT STUDIES

PUNJABI UNIVERSITY PATIALA WORKING CAPITAL OF MANAGEMENT

Summer Training Report

Summer Training Report submitted as a partial requirement for the award of the two year MBA Programme.(2011-2013)

MILKFOOD LIMITED BAHADURGARH, PATIALA

Submitted by:

Navdeep Bajwa

MBA 2nd year

Corporate Supervisor Name: Mr. Dinesh Bhatia Mobile: E-mail:

DECLARATION

I hereby certify that I, a Student of MBA 2011-2013 , have successfully completed my internship with in the month of July, 2012 i.e. 4 June, 2012 to 19 July, 2012. This is also to certify that this report is an original product and no unfair means like copying etc have been used for its completion.

It has been done under the guidance of Mr. Dinesh Bhatia

Navdeep Bajwa (Signature)

Dated: 19 July, 2012

ACKNOWLEDGEMENT

No big thing in the world is achieved without the help and blessing of our well wishers. I feel obliged to express my grateful thanks to all those persons who rendered me all possible help in completion of this project. I would like to thank Mr. Dinesh Bhatia for providing me with the valuable opportunity to undertake summer project at Milkfood Ltd . I am grateful to him who extended his wholehearted and unreserved help to me throughout this project and enabled me to give the project its present shape. He provided me with valuable suggestions and information related the project and really co-operated me a lot during my project. He was deeply concerned and involved in my study and research work. I am immensely thankful to all the staff members of the Department for helping me from time to time, and providing me their valuable suggestions.

PREFACE
The present study is conducted with objectives of identifiying the WORKINGCAPITAL MANAGEMENT from the balance sheets provided by the MILKFOOD LIMITED.

The first chapter deals with the introduction , where the information is briefed about dairy industry. The second chapter discuss the need of the study, the methodology used and limitation thereof. The third chapter deals with the organization profile in detailed. The forth chapter deals with the literature review of the study. The fifth chapter deals with analysis and interpretation. The sixth chapter findings, suggestions, conclusions and Bibliography regarding the study with the help of last four years balance sheets.

CONTENTS
CHAPTER-1 MANAGEMENT INTRODUCTION TO WORKING CAPITAL Nature of working capital management Methodology Objective of study Significant of the study Limitations of the study

CHAPTER-2 CHAPTER-3

INDUSTRY PROFILE COMPANY PROFILE THEORETICAL FRAMEWORK OF WORKING CAPITAL

CHAPTER-4 CHAPTER-5

ANALYSIS AND INTREPRETATION FINIDING&SUGGESTIONS REFERENCES & BIBLIOGRAPHY

CHAPTER-1

INTRODUCTION TO WORKING CAPITAL MANAGEMENT. NATURE OF WORKING CAPITAL MANAGEMENT. OBJECTIVE OF THE STUDY. SIGNIFICANCE OF THE STUDY. METHODOLOGY. Limitations of the study

INTRODUCTION
Working capital management is significant in financial management. It plays a vital role in keeping the wheel of the business running. Every business requires capital ,without it cant be promoted. Investment decisions is concerned with investment in current assets and fixed assets .working capital plays a key role in a business enterprise just as the role of heart in human body . it acts as grease to run the wheels of fixed assets .its effective provision can ensure the success of business while its inefficient management can lead not only to loss but also to the ultimate downfall of what otherwise might be considered as a promising concern . Efficiency of a business enterprise depends largely on its ability to its working capital .working capital management is one of the important facts of affirms overall financial management For increasing shareholders wealth a firm has to analyze the effect of fixed assets and current assets on its return and risk.working capital management of current assets . the management of current assets on the basis of the following points: 1. current assets are for short period while fixed assets are for more than one year 2. The large holding of current assets ,especially cash, strengthens liquidity position but also reduce overall profitability ,and to maintain an optimal level of liquidity and profitability , risk return trade off is involved holding current assets 3. Only current assets can be adjusted with sales fluctuating in the short run. thus the firm has greater degree of flexibility in managing current assets. The management of current assets help affirm in building a good market reputation regarding its business and economic conditions.

Now first let us discuss the paradigms of working capital management.

CONCEPT OF WORKING CAPITAL:

The concept of working capital includes current assets and current liabilities both. There are two of working capital of working capital they are gross and net working capital. 1.Gross working capital: Gross working capital refers to the firms investment in current assets .current assets are the assets, which can be converted into cash within an accounting year or operating cycle. It includes cash, short term securities ,debtors (account receivables or book debts),bills receivables and stock (inventory). 2.Net working capital: net working capital refers to the difference between current assets and liabilities are those claims of outsiders, which are expected to mature for payment within an accounting year. It includes creditors or accounts payables bills payable and outstanding expenses. Net working copulate can be positive or negative. A positive working capital will arise when current assets exceed current liabilities and vice versa.

NATURE OF WORKING CAPITAL

Working capital management is concerned with the problems that arise in attempting to manage the current assets ,the current liabilities and the inter relationship that exists between them. The term current refers to those assets which in the ordinary course of business can be ,or will be converted into cash within one year without undergoing a diminution in value and

without disrupting the operation of the firm. the major current assets are cash, marketable securities, accounts receivables and inventory. current liabilities are those liabilities, which are intended at their inception ,to be paid in the ordinary course of business, within a year out of the current or the earning of the concern .The basic current liabilities are accounts payable ,bills payable ,bank overdrafts and outstanding expense. The goal of working management is to manage the firms assets and liabilities in such a way that a satisfactory level of working capital is maintain. This is because if the firms cannot maintain a satisfactory level of working capital ,it is likely to become insolvent and may even be forced into bankruptcy. The current assets should be large enough to cover its current liabilities in order to ensure a reasonable margin of safety. Each of the short term source of financing must be continuously managed to ensure that they are obtained and used in the way. Interaction between current liabilities is ,therefore the main theme of the of management of working capital.

METHODOLOGY
For the purpose of the study necessary information has been collected through primary and secondary sources.

PRIMARY DATA:

DEFINITION The primary data are those which are collected a fresh and for the first time, and thus happened to be original in character . primary data include the information collected from the officials and existing company through discussions

SECONDARY DATA :

DEFINITION The secondary data ,on the other hand are those which have already been collected by some one else and which have already been passed though the stastical process. The secondary data include the information from the company annual reports which include financial statement like balance sheet and income statements and such other information from text books of financial management ,journals and magazine has also been collected.

OBJECTIVES OF THE STUDY

Working capital is the most widely used and powerful technique of financial analysis .The main objective of the present study is to know the financial

condition of the company. To know the overall operational efficiently and performance of the sudha agro oil and chemical industries limited. To interpret the financial position of company of is appropriate (or) not. To asses the long term financial viability of company .to know whether the management is constantly concerned about the over all profitability of the company (or) not. To provide reliable financial information about economic resources and obligation of a business enterprise. To provide reliable financial information those add ,its in estimating the potential of the enterprise. To disclose to the extent possible other information related to the financial statements users.

NEED OF THE STUDY

During the post liberalization are the worlds assail as economic indias scenario has shown a great progress and is growing with increased phase this has necessitated the complex and efficient ways of management .thinking practically the main concern is of the influence of external environment on business providing a modern dimension to business to management .they find solution for many problems in the aspect of financial analysis .financial establishes inter relationship that exists among. The different items appeared in the financial statements, which are effectively helpful to describe the company should monitor key indication of operating performance and where possible must compare, itself with the competitors in the industry.

A systematic financial analysis of accounting figure helps to analysis the probable caused relationship among different items after analyzing scrutinizing the past result which helps the management to prepare budgets ,to formulate company policy and to prepare future plan of action. It focuses on companys relative performance in sales growth margins and assets management .It is a simple tool where by a company can make its internal audit to evaluate internal strengths and weakness of the part of the strategic planning.

LIMITATIONS OF THE STUDY

The study conducted and done is analytical ,subject to the following limitations 1)The study is mainly carried out based on the secondary data provided in the financial statements . 2)this study is based on the historical data and information provided in the annual reports therefore it may not be a future indicator . 3)There may be some fractional differences in the calculated ratios. As the study was for short span of 8 weeks and due to lack of time other areas could not be well focused.

CHAPTER -2
INDUSTRY PROFILE COMPANY PROFILE

INDUSTRY PROFILE

Today, India is 'The Oyster' of the global dairy industry. It offers opportunities galore to entrepreneurs worldwide, who wish to capitalize on one of the world's largest and fastest growing markets for milk and milk products. A bagful of 'pearls' awaits the international dairy processor in India. The Indian dairy industry is

rapidly growing, trying to keep pace with the galloping progress around the world. As he expands his overseas operations to India many profitable options await him. He may transfer technology, sign joint ventures or use India as a sourcing center for regional exports. The liberalization of the Indian economy beckons to MNC's and foreign investors alike. Indias dairy sector is expected to triple its production in the next 10 years in vi ew of expanding potential for export to Europe and the West. Moreover with WTO regulations expected to come into force in coming years all the developed countries which are among big exporters today would have to withdraw the support and subsidy to their domestic milk products sector. Also India today is the lowest cost producer of per litre of milk in the world, at 27 cents, compared with the U.S' 63 cents, and Japans $2.8 dollars. Also to take advantage of this lowest cost of milk production and increasing production in the country multinational companies are planning to expand their activities here. Some of these milk producers have already obtained quality standard certificates from the authorities. This will help them in marketing their products in foreign countries in processed form. The urban market for milk products is expected to grow at an accelerated pace of around 33% per annum to around Rs.43,500 crores by year 2005. This growth is going to come from the greater emphasis on the processed foods sector and also by increase in the conversion of milk into milk products. By 2005, the value of Indian dairy produce is expected to be Rs 10,00,000 million. Presently the market is valued at around Rs7,00,000mn.

Background
India with 134mn cows and 125mn buffaloes, has the largest population of cattle in the world. Total cattle population in the country as on October'00 stood at 313mn. More than fifty percent of the buffaloes and twenty percent of the cattle in the world are found in India and most of these are milch cows and milch buffaloes. Indian dairy sector contributes the large share in agricultural gross domestic products. Presently there are around 70,000 village dairy cooperatives across the country. The co-operative societies are federated into 170 district milk producers unions, which is turn has 22-state cooperative dairy federation. Milk production gives employment to more than 72mn dairy farmers. In terms of total production,

India is the leading producer of milk in the world followed by USA. The milk production in 1999-00 is estimated at 78mn MT as compared to 74.5mn MT in the previous year. This production is expected to increase to 81mn MT by 2000-01. Of this total produce of 78mn cows' milk constitute 36mn MT while rest is from other cattle. While world milk production declined by 2 per cent in the last three years, according to FAO estimates, Indian production has increased by 4 per cent. The milk production in India accounts for more than 13% of the total world output and 57% of total Asia's production. The top five milk producing nations in the world are India ,USA, Russia, Germany and France. Although milk production has grown at a fast pace during the last three decades(courtesy: Operation Flood), milk yield per animal is very low. The main reasons for the low yield are

Lack of use of scientific practices in milching. Inadequate availability of fodder in all seasons. Unavailability of veterinary health services.

Milk Yield comparison:

Country Milk Yield (Kgs per year) 7002 5417 5348 2976 1052 795 2021

USA UK Canada New Zealand Pakistan India World (Average)

Source: Export prospects for agro-based industries, World Trade Centre, Mumbai.

Production of milk in India

Year 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 199900(E) 200001(T) E= estimated T= target / expected Source: DFPI, Annual Report-1999-2000 Production in million MT 48.4 51.4 53.7 56.3 58.6 61.2 63.5 65 68.5 70.8 74.7 78.1 81.0

World's major milk producers

(Million MTs)

Country India USA

1997-98

1998-99 ( Approx.) 71 74.5 71 71

Russia Germany France Pakistan Brazil UK Ukraine Poland New Zealand Netherlands Italy Australia

34 27 24 21 21 14 15 12 11 11 10 9

33 27 24 22 27 14 14 12 12 11 10 10

Operation Flood

The transition of the Indian milk industry from a situation of net import to that of surplus has been led by the efforts of National Dairy Development Board's Operation Flood. programme under the aegis of the former Chairman of the board Dr. Kurien. Launched in 1970, Operation Flood has led to the modernization of India's dairy sector and created a strong network for procurement processing and distribution of milk by the co-operative sector. Per capita availability of milk has increased from 132 gm per day in 1950 to over 220 gm per day in 1998. The main thrust of Operation Flood was to organize dairy cooperatives in the milkshed areas of the village, and to link them to the four Metro cities, which are the main markets for milk. The efforts undertaken by NDDB have not only led to enhanced production, improvement in methods of processing and development of a strong marketing network, but have also led to the emergence of dairying as an important source of employment and income generation in the rural areas. It has also led to an improvement in yields, longer lactation periods, shorter calving intervals, etc through the use of modern breeding techniques. Establishment of milk collection

centers, and chilling centers has enhanced life of raw milk and enabled minimization of wastage due to spoilage of milk. Operation Flood has been one of the world's largest dairy development programme and looking at the success achieved in India by adopting the co-operative route, a few other countries have also replicated the model of India's White Revolution. Per Capita availability of milk

Year 1950 1960 1968 1973 1980* 1990 1992 1996 1997 1998 1999 2000 2001E 2002P
E= Estimated P= Provisional * Operation flood was launched in 1970

gm/day 132 127 113 111 128 178 192 198 200 202 203 212 225 250

Fresh Milk

Over 50% of the milk produced in India is buffalo milk, and 45% is cow milk. The buffalo milk contribution to total milk produce is expected to be 54% in 2000. Buffalo milk has 3.6% protein, 7.4% fat, 5.5% milk sugar, 0.8% ash and 82.7% water whereas cow milk has 3.5% protein, 3.7% fat, 4.9% milk sugar, 0.7% ash and 87% water. While presently (for the year 2000) the price of Buffalo milk is ruling at $261-313 per MT that of cow is ruling at $170-267 per MT. Fresh pasteurized milk is available in packaged form. However, a large part of milk consumed in India is not pasteurized, and is sold in loose form by vendors. Sterilized milk is scarcely available in India. Packaged milk can be divided according to fat content as follows, Whole (full cream) milk - 6% fat Standardized (toned) milk - 4.5% fat Doubled toned (low fat) milk - 3% fat Another category of milk, which has a small market is flavoured milk.

The Indian Market - A Pyramid

Consumer Habits And Practices Milk has been an integral part of Indian food for centuries. The per capita availability of milk in India has grown from 172 gm per person per day in 1972 to 182gm in 1992 and 203 gm in 1998-99.This is expected to increase to 212gms for 1999-00. However a large part of the population cannot afford milk. At this per capita consumption it is below the world average of 285 gm and even less than 220 gm recommended by the Nutritional Advisory Committee of the Indian Council of Medical Research. There are regional disparities in production and consumption also. The per capita availability in the north is 278 gm, west 174 gm, south 148 gm and in the east only 93 gm per person per day. This disparity is due to concentration of milk production in some pockets and high cost of transportation. Also the output of milk in cereal growing areas is much higher than elsewhere which can be attributed to abundant availability of fodder, crop residues, etc which have a high food value for milch animals.

In India about 46 per cent of the total milk produced is consumed in liquid form and 47 per cent is converted into traditional products like cottage butter, ghee, paneer, khoya, curd, malai, etc. Only 7 per cent of the milk goes into the production of western products like milk powders, processed butter and processed cheese. The remaining 54% is utilized for conversion to milk products. Among the milk products manufactured by the organized sector some of the prominent ones are ghee, butter, cheese, ice creams, milk powders, malted milk food, condensed milk infants foods etc. Of these ghee alone accounts for 85%. It is estimated that around 20% of the total milk produced in the country is consumed at producer-household level and remaining is marketed through various cooperatives, private dairies and vendors. Also of the total produce more than 50% is procured by cooperatives and other private dairies. While for cooperatives of the total milk procured 60% is consumed in fluid form and rest is used for manufacturing processed value added dairy products; for private dairies only 45% is marketed in fluid form and rest is processed into value added dairy products like ghee, makhan etc. Still, several consumers in urban areas prefer to buy loose milk from vendors due to the strong perception that loose milk is fresh. Also, the current level of processing and packaging capacity limits the availability of packaged milk. The preferred dairy animal in India is buffalo unlike the majority of the world market, which is dominated by cow milk. As high as 98% of milk is produced in rural India, which caters to 72% of the total population, whereas the urban sector with 28% population consumes 56% of total milk produced. Even in urban India, as high as 83% of the consumed milk comes from the unorganized traditional sector. Presently only 12% of the milk market is represented by packaged and branded pasteurized milk, valued at about Rs. 8,000 crores. Quality of milk sold by unorganized sector however is inconsistent and so is the price across the season in local areas. Also these vendors add water and caustic soda, which makes the milk unhygienic. India's dairy market is multi-layered. It's shaped like a pyramid with the base made up of a vast market for low-cost milk. The bulk of the demand for milk is among the poor in urban areas whose individual requirement is small, maybe a glassful for use as whitener for their tea and coffee. Nevertheless, it adds up to a sizable volume - millions of litres per day. In the major cities lies an immense growth

potential for the modern sector. Presently, barely 778 out of 3,700 cities and towns are served by its milk distribution network, dispensing hygienically packed wholesome, quality pasteurized milk. According to one estimate, the packed milk segment would double in the next five years, giving both strength and volume to the modern sector. The narrow tip at the top is a small but affluent market for western type milk products.

Growing Volumes
The effective milk market is largely confined to urban areas, inhabited by over 25 per cent of the country's population. An estimated 50 per cent of the total milk produced is consumed here. By the end of the twentieth century, the urban population is expected to increase by more than 100 million to touch 364 million in 2000 a growth of about 40 per cent. The expected rise in urban population would be a boon to Indian dairying. Presently, the organized sector both cooperative and private and the traditional sector cater to this market. The consumer access has become easier with the information revolution. The number of households with TV has increased from 23 million in 1989 to 45 million in 1995. About 34 per cent of these households in urban India have access to satellite television channel.

Potential for further growth

Of the three A's of marketing - availability, acceptability and affordability, Indian dairying is already endowed with the first two. People in India love to drink milk. Hence no efforts are needed to make it acceptable. Its availability is not a limitation either, because of the ample scope for increasing milk production, given the prevailing low yields from dairy cattle. It leaves the third vital marketing factor affordability. How to make milk affordable for the large majority with limited purchasing power? That is essence of the challenge. One practical way is to pack milk in small quantities of 250 ml or less in polythene sachets. Already, the glass bottle for retailing milk has given way to single-use sachets which are more economical. Another viable alternative is to sell small quantities of milk powder in mini-sachets, adequate for two cups of tea or coffee.

Marketing Strategy for 2000 AD

Two key elements of marketing strategy for 2000 AD are: Focus on strong brands and, product mix expansion to include UHT milk, cheese, ice creams and spreads. The changing marketing trends will see the shift from generic products to the packaged quasi, regular and premium brands. The national brands will gradually edge out the regional brands or reduce their presence. The brand image can do wonders to a product's marketing as is evident from the words of Perfume Princess Coco Channel: In the factory, we pack perfume; in the market, we sell hope! Emerging Dairy Markets

Food service institutional market: It is growing at double the rate of consumer market Defense market: An important growing market for quality products at reasonable prices Ingredients market: A boom is forecast in the market of dairy products used as raw material in pharmaceutical and allied industries Parlour market: The increasing away-from-home consumption trend opens new vistas for ready-to-serve dairy products which would ride piggyback on the fast food revolution sweeping the urban India.

India, with her sizable dairy industry growing rapidly and on the path of modernization, would have a place in the sun of prosperity for many decades to come. The one index to the statement is the fact that the projected total milk output over the next 15 years (1995-2010) would exceed 1457.6 million tonnes which is twice the total production of the past 15 years!

Penetration of milk products

Western table spreads such as butter, margarine and jams are not very popular in India. All India penetration of butter/ margarine is only 4%. This is also largely represented by urban areas, where penetration is higher at 9%. In rural areas, butter/ margarine have penetrated in 2.1% of households only. The use of these products in the large metros is higher, with penetration at 15%. Penetration of cheese is almost nil in rural areas and negligible in the urban areas. Per capita consumption even among the cheese-consuming households is a poor

2.4kg pa as compared to over 20kg in USA. The lower penetration is due to peculiar food habits, relatively expensive products and also non-availability in many parts of the country. Butter, margarine and cheese products are mainly manufactured by organized sector. Similarly, penetration of ghee is highest in medium sized towns at 37.2% compared to 31.7% in all urban areas and 21.3% in all rural areas. The all India penetration of ghee is 24.1%. In relative terms, penetration of ghee is significantly higher in North and West, which are milk surplus regions. North accounts for 57% of ghee consumption and West for 23%, South & East together account for the balance 20%. A large part of ghee is made at home and by small/ cottage industry from milk. The relative share of branded products in this category is very low at around 1-2%. Milk powder and condensed milk have not been able to garner any significant consumer acceptance in India as indicated by a very low 4.7% penetration. The penetration is higher at 8.1% in urban areas and lower at 3.5% in rural areas. Within urban areas, it is relatively higher in medium sized towns at 8.5% compared to 7.7% in a large metros.

Market Size And Growth

Market size for milk (sold in loose/ packaged form) is estimated to be 36mn MT valued at Rs470bn. The market is currently growing at round 4% pa in volume terms. The milk surplus states in India are Uttar Pradesh, Punjab, Haryana, Rajasthan, Gujarat, Maharashtra, Andhra Pradesh, Karnataka and Tamil Nadu. The manufacturing of milk products is concentrated in these milk surplus States. The top 6 states viz. Uttar Pradesh, Punjab, Madhya Pradesh, Rajasthan, Tamil Nadu and Gujarat together account for 58% of national production. Milk production grew by a mere 1% pa between 1947 and 1970. Since the early 70's, under Operation Flood, production growth increased significantly averaging over 5% pa. About 75% of milk is consumed at the household level which is not a part of commercial dairy industry. Loose milk has a larger market in India as it is perceived to be fresh by most consumers. In reality however, it poses a higher risk of adulteration and contamination.

The production of milk products, i.e. milk products including infant milk food, malted food, condensed milk & cheese stood at 3.07 lakh MT in 1999. Production of milk powder including infant milk-food has risen to 2.25 lakh MT in 1999, whereas that of malted food is at 65000 MT. Cheese and condensed milk production stands at 5000 and 11000 MT respectively in the same year. (Source: Annual Report 1999-2000, DFPI)

Major Players
The packaged milk segment is dominated by the dairy cooperatives. Gujarat Cooperative Milk Marketing Federation (GCMMF) is the largest player. All other local dairy cooperatives have their local brands (For e.g. Gokul, Warana in Maharashtra, Saras in Rajasthan, Verka in Punjab, Vijaya in Andhra Pradesh, Aavin in Tamil Nadu, etc). Other private players include J K Dairy, Heritage Foods, Indiana Dairy, Dairy Specialties, etc. Amrut Industries, once a leading player in the sector has turned bankrupt and is facing liquidation.

Packaging Technology
Milk was initially sold door-to-door by the local milkman. When the dairy cooperatives initially started marketing branded milk, it was sold in glass bottles sealed with foil. Over the years, several developments in packaging media have taken place. In the early 80's, plastic pouches replaced the bottles. Plastic pouches made transportation and storage very convenient, besides reducing costs. Milk packed in plastic pouches/bottles have a shelf life of just 1-2 days , that too only if refrigerated. In 1996, Tetra Packs were introduced in India. Tetra Packs are aseptic laminate packs made of aluminum, paper, board and plastic. Milk stored in tetra packs and treated under Ultra High Temperature (UHT) technique can be stored for four months without refrigeration. Most of the dairy co-operatives in Andhra Pradesh, Tamil Nadu, Punjab and Rajasthan sell milk in tetra packs. However tetra packed milk is costlier by Rs5-7 compared to plastic pouches. In 1999-00 Nestle launched its UHT milk. Amul too re-launched its Amul Taaza brand of UHT milk. The UHT milk market is expected to grow at a rate of more than 10-12% in coming years.

Export Potential
India has the potential to become one of the leading players in milk and milk product exports. Locational advantage : India is located amidst major milk deficit

countries in Asia and Africa. Major importers of milk and milk products are Bangladesh, China, Hong Kong, Singapore, Thailand, Malaysia, Philippines, Japan, UAE, Oman and other gulf countries, all located close to India. Low Cost Of Production : Milk production is scale insensitive and labour intensive. Due to low labour cost, cost of production of milk is significantly lower in India. Concerns in export competitiveness are Quality : Significant investment has to be made in milk procurement, equipments, chilling and refrigeration facilities. Also, training has to be imparted to improve the quality to bring it up to international standards. Productivity : To have an exportable surplus in the long-term and also to maintain cost competitiveness, it is imperative to improve productivity of Indian cattle. There is a vast market for the export of traditional milk products such as ghee, paneer, shrikhand, rasgolas and other ethnic sweets to the large number of Indians scattered all over the world India's exports of milk products Description 1995-96 1996-97 1997-98 (Quantity, M T.: Value, Rs. million) Quantity Value Quantity Value Quantity Value Skimmed milk 4,638.62 3,35.32 282.70 19.64 5.00 0.375 powder Milk and Milk Food 8.27 2.019 111.37 4.27 11.00 2.02 for babies Milk cream 332.23 28.04 1.00 0.084 Sweetened 41.73 2.84 9.22 0.97 60.39 7.22 condensed milk Whey 78.46 3.75 11.50 1.01 6.00 0.342 Ghee/Butter/Butter 7,895.08 431.1 299.97 19.2 4,352.08 2,38.95 oil Cheese (a) Fresh 0.10 0.013 (b) Processed 5.67 1.20 2.1 0.375 22.10 2.19

(c) Other TOTAL

66.64 -

8.35 8,72.7

36.78 -

0.69 52.4

24.84 -

4.55 2,55.6

What does the Indian Dairy Industry has to Offer to Foreign Investors?
India is a land of opportunity for investors looking for new and expanding markets. Dairy food processing holds immense potential for high returns. Growth prospects in the dairy food sector are termed healthy, according to various studies on the subject. The basic infrastructural elements for a successful enterprise are in place.

Key elements of free market system raw material (milk) availability an established infrastructure of technology supporting manpower

An entrepreneur's participation is likely to provide attractive returns on the investment in a fast growing market such as India, along with an export potential in the Middle East, Singapore, Malaysia, Indonesia, Korea, Thailand, Hong Kong and other countries in the region. Among several areas of potential participation by NRIs and foreign investors, the following list outlines a few promising opportunities:

Biotechnology:

Dairy cattle breeding of the finest buffaloes and hybrid cows Milk yield increase with recombinant somatotropin Recombinant chymosin, acceptable to vegetarian consumers Dairy cultures, probiotics, dairy biologics, enzymes and coloring materials for food processing Fermentation derived foods and industrial products alcohol, citric acid, lysine, flavor preparations, etc. Biopreservative ingredients based on dairy fermentation, viz., Nisin, pediococcin, acidophilin, bulgarican contained in dairy powders .

Dairy/food processing equipment:

Potential exists for manufacturing and marketing of cost competitive food processing machinery of world-class quality.

Food packaging equipment:

Opportunities lie in the manufacturing of both machinery and packaging materials that help develop brand loyalty and a clear edge in the marketing of dairy foods.

Distribution channels:
For refrigerated and frozen food distribution, a world class cold chain would help in providing quality assurance to the consumers around the region.

Retailing:
There is scope for standardizing and upgrading food retailing in major metropolitan cities to meet the shopping needs of a vast middle class. This area includes grocery stores of European and North American quality, warehousing and distribution.

Product development:

Dairy foods can be manufactured and packaged for export to countries where Indian food enjoys basic acceptance. The manufacturing may be carried out in contract plants in India. An option to market the products in collaboration with local establishments or entrepreneurs can also be explored. Products exhibiting potential include typical indigenous dairy foods either not available in foreign countries or products whose authenticity may be questionable. Gulabjamuns, Burfi, Peda, Rasagollas, and a host of other Indian sweets have good business prospects. Products typically foreign to India but indigenous to other countries could also be developed for export. Such products can be manufactured in retail package sizes and could be produced from milk of sheep, goats and camel. Certain products are characteristically produced from milk of a particular species. For example, Feta cheese is used in significant tonnage, in Iran. Sheep milk is traditionally used for authentic Feta cheese. Accordingly,

India's goat and sheep herds can be utilized for the manufacture of such authentic products.

Ingredient manufacture:
Export markets for commodities like dry milk, condensed milk, ghee and certain cheese varieties are well established. These items are utilized as ingredients in foreign countries. These markets can be expanded to include value-added ingredients like aseptically packaged cheese sauce and dehydrated cheese powders.

Cheese sauce: Canned cheese sauce is made from real cheese to which milk, whey, modified food starch, vegetable oil, colorings and spices may be added. Cheese sauce is useful in kitchens for the preparation of omelet, sandwiches, entrees, and soups. In addition, cheese sauce is used as a topping on potatoes and vegetables and may be incorporated in pasta dishes. Cheese powders: Cheese powders are formulated for dusting or smearing of popular snacks like potato chips, crackers, etc. They impart flavor and may be blended with spices.

With the globalization of food items, an opportunity should open up for food service and institutional markets.

Technology-driven manufacturing units:

These plants would fulfil an essential need by providing a centralized and specialized facility for hire by the units which cannot justify capital investment but do need such services. Potential areas for state-of-the-art contract-pack units may conceivably specialize in cheese slicing, or dicing line, cheese packaging, butter printing, and aseptic packaged fluid products.

Western Milk Products

Western milk products such as butter, cheese, yogurt have gained popularity in the Indian market only during the last few years. However consumption has been expanding with increasing urbanization.

Butter
Most Indians prefer to use home made white butter (makkhan) for reasons of taste and affordability. Most of the branded butter is sold in the towns and cities. The major brands are Amul, Vijaya, Sagar, Nandini and Aarey. Amul is the leading national brand while the other players have greater shares in their local markets. The latest entrant in the butter market has been Britannia. Britannia has the advantages of a wide distribution reach and a strong brand recall. Priced at par with the Amul brand, it is expected to give stiff competition to the existing players. In 1999-00 the butter production is estimated at 4 lakh MT of this only 45K MT is in the white form used for table purposes rest all is in the yellow form.

Cheese
The present market for cheese in India is estimated at about 9,000 tonnes and is growing at the rate of about 15% per annum. Cheese is mainly consumed in the urban areas. The four metro cities alone account for more than 50% of consumption . Mumbai is the largest market (accounting for 30% of cheese sold in the country), followed by Delhi (20%). Calcutta (7%) and Chennai (6%). Mumbai has a larger number of domestic consumers, compared to Delhi where the bulk institutional segment (mainly hotels) is larger.

Demand for various types of cheese in the Indian market

Type of cheese Processed Cheese spread Mozzarella Flavoured/Spiced Others

% of total consumption 50 30 10 5 5

The major players are Amul, Britannia, and Dabon International dominating the market. Other major brands were Vijaya, Verka and Nandini (all brands of various regional dairy cooperatives) and Vadilal. The heavy advertising and promotions

being undertaken by these new entrants is expected to lead to strong 20% growth in the segment. Amul has also become more aggressive with launch of new variants such as Mozzarella cheese (used in Pizza), cheese powder, etc. The entry of new players and increased marketing activity is expected to expand the market. All the major players are expanding their capacities Capacity expansion in Cheese

Company Dynamix Group GCMMF APDDCF

Brands Manufactures for Britannia Amul Vijaya

State Capacity Maharashtra 35 tons per day Gujarat 20 tons per day Andhra 10 tons Pradesh per day

Milk Powder
Milk powder are mainly of 2 types

Whole milk powder Skimmed milk powder

Whole milk powder contains fat, as distinguished from skimmed milk powder, which is produced by removing fat from milk solids. Skimmed milk powder is preferred by diet conscious consumers. Dairy whiteners contain more fat than skimmed milk powder but less compared to whole milk powder. Dairy whiteners are popular milk substitute for making tea, coffee etc. The penetration of these products in milk abundant regions is driven by convenience and non perishable nature (longer shelf life) of the product. Dairy sector of advanced nations export milk products with a subsidy of $ 1000 per tonne with a level of subsidy more than 60 % of the price of milk powder produced in India, this has led to large scale imports of milk powder both in whole and skimmed form. To protect the domestic sector from these subsidized imports the

central government has recently increased the basic import duty on all imports of milk powder more than 10000 MT to 60% from 15%. For imports less than 10000 MT the basic customs duty has been left unchanged at 15%. In 1999-00 India is estimated to have imported about 18,000 tonnes of milk powder against a total estimated production of 2.40 Lakh MTs. In 2000-01 India is expected to export 10000 MT of skimmed milk powder due to rise in international prices to $2300 per MT from last year's levels of $1400 per MT. These expectations are based on the strong demand from Russia, East Asia and Latin America, and also on tightening of supply in EU, which accounts for 75% of the annual global Skimmed Milk Powder exports.

Major Players
Milk Powder/Dairy Whiteners : Major skimmed milk brands are Sagar (GCMMF) and Nandini (Karnataka Milk Federation), Amul Full Cream milk powder is a whole milk powder brand. Leading brands in the dairy whitener segment are Nestle's Everyday, GCMMF's Amulya, Dalmia Industry's Sapan, Kwality Dairy India's KreamKountry, Wockhardt's Farm Fresh and Britannia's MilkMan Dairy Whitener.

Condensed Milk
The condensed milk market has grown from 9000 MT in 1998 to 11000 MT in 1999. Condensed milk is a popular ingredient used in home-made sweets and cakes. Nestle's Milkmaid is the leading brand with more than 55% market share. The only other competitor is GCMMF's Amul. Value addition in milk powder - Infant Foods Nestle is the market leader in the segment. This is a category where brand loyalties are very strong as mothers want the best for their babies. Heinz is the only other significant competitor to Nestle in this segment. Nestle's Cerelac and Nestum together have around 80% market share and Heinz's Farex has close to 18% share. Wockhardt is a relatively new entrant with its First Food brand. Wockhardt also proposes to launch a new baby food Easum containing moong (moong is one of the easily digestible pulses). The Easum brand will directly compete with Nestle's Nestum (made from rice).

In infant formula also Nestle's Lactogen formula and Lactogen standard formula are the leading brands with around 75% market share. Other brands are Heinz's Lactodex Farex, Wockhardt's Raptakos, and Amul's Amulspray

Regulatory Framework
The dairy industry was de-licensed in 1991 with a view to encourage private investment and flow of capital and new technology in the segment. Although delicensing attracted a large number of players, concerns on issues like excess capacity, sale of contaminated/ substandard quality of milk etc induced the Government to promulgate the MMPO (Milk and Milk Products Order) in 1992. Milk and Milk Products Order (MMPO) regulates milk and milk products production in the country. The order requires no permission for units handling less than 10,000 litres of liquid milk per day or milk solids up to 500 tpa. MMPO prescribes State registration to plants producing between 10,000 to 75,000 litres of milk per day or manufacturing milk products containing between 500 to 3,750 tonnes of milk solids per year. Plants producing over 75,000 litres per day or more than 3,750 tonnes per year of milk solids have to be registered with the Central Government. The stringent regulations, government controls and licensing requirements for new capacities have restricted large Indian and MNC players from making significant investments in this product category. Most of the private sector players have restricted themselves to manufacture of value added milk products like baby food, dairy whiteners, condensed milk etc. All the milk products except malted foods are covered in the category of industries for which foreign equity participation up to 51% is automatically allowed. Ice cream, which was earlier reserved for manufacturing in the small-scale sector, has now been de-reserved. As such, no license is required for setting up of large-scale production facilities for manufacture of ice cream. Subsequent to de-canalization, exports of some milk based products are freely allowed provided these units comply with the compulsory inspection requirements of concerned agencies like: National Dairy Development Board, Export Inspection Council etc. Bureau of Indian standards has prescribed the necessary standards for almost all milk-based products, which are to be adhered to by the industry.

Major dairy products manufacturers

Some of the major dairy products manufacturers in the country: Company Brands Nestle India Milkmaid,Cerelac, Limited Lactogen, Milo, Everyday Milkfood Milkfood Limited SmithKline Horlicks, Maltova, Beecham Viva Limited Indodan Industries Limited Indana Major Products Sweetened condensed milk, malted foods, milk powder and Dairy whitener Ghee, ice cream, and other milk products Malted Milkfood, ghee, butter, powdered milk, milk fluid and other milk based baby foods. Condensed milk, skimmed milk powder, whole milk powder, dairy milk whitener, chilled and processed milk Butter, cheese and other milk products

Gujarat Co- Amul operative milk Marketing Federation Limited H.J. Heinz Limited Britannia Cadbury

Farex, Complan, Infant Milkfood, malted Glactose, Bonniemix, Milkfood Vitamilk Milkman Flavoured milk, cheese, Milk Powder, Ghee Bournvita Malted food

Future Prospects India is the world's highest milk producer and all set to become the world's largest food factory. In celebration, Indian Dairy sector is now ready to invite NRIs and Foreign investors to find this country a place for the mammoth investment projects.

Be it investors, researchers, entrepreneurs, or the merely curious Indian Dairy sector has something for everyone. Milk production is relatively efficient way of converting vegetable material into animal food. Dairy cows buffaloes goats and sheep can eat fodder and crop by products which are not eaten by humans. Yet the loss of nutrients energy and equipment required in milk handling inevitably make milk comparatively expensive food. Also if dairying is to play its part in rural development policies , the price to milk producers has to be remunerative. In a situation of increased international prices, low availabilities of food aid and foreign exchange constraints, large scale subsidization of milk conception will be difficult in the majority of developing countries. Hence in the foreseeable future, in most of developing countries milk and milk products will not play the same roll in nutrition as in the affluent societies of developed countries. Effective demand will come mainly from middle and high income consumers in urban areas. There are ways to mitigate the effects of unequal distribution of incomes. In Cuba where the Government attaches high priority to milk in its food and nutrition policy, all pre-school children receive a daily ration of almost a litre of milk fat the reduced price. Cheap milk and milk products are made available to certain other vulnerable groups, by milk products outside the rationing system are sold price which is well above the cost level. Until recently, most fresh milk in the big cities of China was a reserved for infants and hospitals, but with the increase in supply, rationing has been relaxed. In other countries dairy industries have attempted to reach lower income consumers by variation of compositional quality or packaging and distribution methods or blending milk in vegetable ingredients in formula foods for vulnerable groups. For instance, pricing of products rich in butter fat or in more luxury packaging above cost level so as to enable sales of high protein milk products at a some what a reduced price has been widely practiced in developing countries. This policies need to be brought in Indian Dairy scenario.

COMPANY PROFILE

HISTORY OF THE COMPANY:-

Milkfood Limited was set up in the year 1973 with the first Plant at Bahadurgarh, on the Rajpura Patiala Road in the State of Punjab. The company is promoted by Karamjit Jaiswal. The Jaiswal family are also promoters of Jagatjit Industries Limited, which has interests in Alcoholic Beverages (AC Black, Aristocrat Premium, ACP , Bonnie Scot) , Malted Foods, Plastic and Glass Bottling and Real Estate. The Group has a Gross Turnover in excess of INR 5500 Million. The company manufactures Pure Ghee, Skimmed Milk Powder , Whole Milk Powder, and Dairy Whitener . From the intial installed capacity of 80 MT of milk processing per day at Patiala during 1974 the Company at has enhanced the processing capacity from time to time and the present milk processing capacity of all Plants is 1500 MT per day. In the year 1987 the company commissioned its second plant at Gurgoan in the State of Haryana for the manufacture of Cultured Desserts like Long Life Yoghurts, UHT Milk , Juices etc. and Frozen Desserts Yoghurts like Ice Creams. The Ice Cream brand 'Milkfood 100% Ice cream' still conjurs up memories even years after it's sale to Hindustan Lever. The company has taken on lease a Dairy Plant in 2003 at Hamira, Distt. Kapurthala, in the State of Punjab to supplement the production capacities by 200 MT of milk processing per day. The capacity has since been enhanced to 500 MT of Milk Processing per day. In 2005, the company has taken expansion plans further to the State of Uttar Pradesh where a fully modernised facility has been set up at Village Agwanpur, Tehsil Moradabad to add capacity of 500 MT of milk processing per day. The plant has commenced production in November 2005.

Further expansion plans for manufacture of Export Oriented and Value added products like Casein , Demineralised Whey Powder , Whey Protien Concentrates has been initiated at the Bahadurgarh facility, which is likely to be commissioned by end of 2006. Capacity expansion will enable the Bahadurgarh plant to process 700 MT of milk per day.

Milkfood has three plants:

Patiala Plant- The plant has facilities to manufacture Anhydrous Milk Fat (Ghee) , Milk powders (Skimmed Milk Powder, Whole Milk Powder). The plant is being upgraded to manufacture value added products like Casein, Demineralised Whey powder, Lactose and Whey Protein Concentrate powders of different percentages. Hanira Plant- The plant has facilities to manufacture Anhydrous Milk Fat (Pure Ghee) , Milk Powders (Skimmed Milk Powder , Whole Milk Powder, Dairy Whitener & Infant Foods). The plant has facility to produce powder with disc and nozzle atomization resulting into powders of low or high density. A Three stage spray drying system with facility of Lecithination helps in production of instant powders. A separate facility for production of malted food is available. Moradabad Plant- The plant has facilities to manufacture Anhydrous Milk Fat (Pure Ghee), Milk Powders (Skimmed Milk powder, Whole Milk Powder).Among the private sector corporations in India the company is one of the largest supplier for Milk Powders to the institutions i.e Glaxo Smithkline , Cadburys, Nestle , Mother Dairy , Metro Dairy , Lotus Chocolate. The company also exports Skimmed Milk Powder and Whole Milk Powder to the South Asian countries of Pakistan, Bangladesh , Nepal, Sri Lanka , Afghanistan and Myanamar. For distribution of products, Redistribution depots are established at Gurgoan , Delhi , Kolkatta , Chandigarh and Mumbai apart from Agents spread over almost all states. Products manufactured by the company include:

Pure Ghee Skimmed Milk Powder Whole Milk Powder Dairy Creamer

Dairy Whitener

Future plans
A 100% Export Oriented Unit is being set up at the existing facilities at Bahadurgarh, Patiala to manufacture Casein which commands a premium price in Export markets of USA, Europe and Japan. India being the largest and cheapest producer of Milk holds comparative price advantage in the product which has varied applications from Food Products, Pharma to Technology products. Demineralised Whey Powder is a by product which has both a Domestic and Export market.

PROMOTORS OF THE COMPANY:-

BOARD OF DIRECTORS S.No 1 2 3 4 Name Mr. Amarjeet Kapoor Mrs. Asha Gadi Mr. Suresh Alipuria Mr. Kewal Krishan Kohli Designation Executive Non Independent Non Executive Independent Director Non Executive Independent Director Non Executive Independent Director

Senior Management
S.No 1 2 3 Name Dr. Umesh Saxena Mr. Sudhir Avasthi Designation President Finance Director

Mr. Amar Baljeet Singh Head Patiala Plant

..................................................................................................

AUDITORS:Madan & Associates Chartered Accountants New Delhi

BANKERS :STATE BANK OF INDIA Canara Bank

REGISTERED OFFICE
Bahadurgarh Distt. Patiala 147021 (Punjab)

WORKS
Bahadurgarh Distt. Patiala 147021 (Punjab)

Village Agwanpur Kanth Road, Moradabad 244001 (Uttar Pradesh)

HEAD OFFICE
Bhandari House 91, Nehru Place New Delhi 110019

Milkfood Plants Locations

PATIALA PLANT

The plant is located 250 Kms north of New Delhi at Bahadurgarh on National Highway, between Rajpura and Patiala. The Plant is set up in an area of 12 Acres and is capable of handling 500 MT of Milk per day.

The plant has facilities to manufacture Anhydrous Milk Fat (Ghee) , Milk powders (Skimmed M Powder, Whole Milk Powder). The plant is being upgraded to manufacture value added products like Casein, Demineralised Whey powder, Lactose and Whey Protein Concentrate powders of different percentages.

HAMIRA PLANT

The plant is located approximately 30 Kms north of Jullundur on G.T. Road, between Jullundur and Amritsar . T

Plant is on lease from Jagatjit Industries Ltd and has a capacity to process 500 MT of Milk per da

The plant has facilities to manufacture Anhydrous Milk Fat (Pure Ghee) , Milk Powders (Skimm Milk Powder , Whole Milk Powder, Dairy Whitener & Infant Foods). The plant has facility to produce powder with disc and nozzle atomization resulting into powders of low or high density. Three stage spray drying system with facility of Lecithination helps in production of instant powders. A separate facility for production of malted food is available.

MORADABAD PLANT

The plant is located approximately 200 Kms from New Delhi at Mugalpur urf Agwanpur Mustakam on the Moradabad Kanth Road. The Plant is set up in an area of 17 Acres and is capable of handling 500 Metric Tonnes of Milk per day. The plant commenced production In November 2005. The plant has facilities to manufacture Anhydrous Milk Fat (Pure Ghee) , Milk Powders (Skimmed Milk powder, Whole Milk Powder).

Milkfood Products

Milk Powder Skimmed Milk Powder and Whole Milk Powder are of institutional Grade supplied either to companies where it is used as a raw material for their end products (Malted Food , Food Supplements, Chocolates, Ice Creams, Biscuits , Sweets etc.) or it is used in the milk dry areas of the country to be reconstituted as liquid milk . The Powder is packed in Food Grade Polyliners and 25 Kg. Kraft Paper Bags packs and also 1 Kg. Polypacks. The product is ISI Graded for Export. Among the private sector corporations in India the company is one of the largest supplier for Milk Powders to the institutions i.e Glaxo Smithkline , Cadburys, Nestle , Mother Dairy , Metro Dairy , Lotus Chocolate. The company also exports Skimmed Milk Powder and Whole Milk Powder to the South Asian countries of Pakistan, Bangladesh , Nepal, Sri Lanka , Afghanistan and Myanamar. Ghee

The Anhydrous Milk Fat (Ghee) is marketed as 'MILKFOOD' brand is graded as AGMARK Special Grade and is the leading private sector ghee brand in the country and commands one of the largest shares of the North Indian Market. The company is also approved with the Canteen Stores Department for supply of Consumer Pack Ghee. Ghee is packed in seven pack sizes from Ltr. Packs to 15 Kg Tins. For distribution of Products Redistribution depots at Gurgoan , Delhi , Kolkatta , Chandigarh and Mumbai apart from Agents spread over almost all states.

Casein A 100% Export Oriented Unit is being set up at the existing facilities at Bahadurgarh, Patiala to manufacture Casein which commands a premium price in Export markets of USA, Europe and Japan. India being the largest and cheapest producer of Milk holds comparative price advantage in the product which has varied applications from Food Products, Pharma to Technology products. Demineralised Whey Powder is a by product which has both a Domestic and Export market. Uses of Casein : Casein / Caseinates Food grades : ingredient in noodles, chocolate, sweets, mayonnaise, ice cream, cheese manufacture, binding ingredient, emulsifier and milk substitute in processed foods. Industrial grades : Plastic (buttons, knitting needles), manufacture of synthetic fibres, chemical industry (paints, glues, glazed paper, putty and cosmetics), reinforcing agent and stabilizer for rubber in automobile tyres, nutritional supplement and binder in calf milk replacers. Other technical applications include detergents, hairseting products and cosmetics, lightweight concrete, wallboards, photo etching, computer circuits, electronics ignition components, water purification, insecticide sprays and fertilizer. Whey Powder : Food grade : Ice cream, bakery products (cakes, biscuits), chocolate flavouring, infant formula, yogurt, beverages, processed meat etc. Industrial grade : animal feed (pigs, horses, poultry), calf milk replacer, carrier for herbicides etc..

Chapter-3
THEORETICAL FRAME WORK OF WORKING CAPITAL

WORKING CAPITAL MANAGEMANT THEORY

MEANING AND DEFINITION: A part from investment in fixed assets , every enterprise has to arrange for adequate funds for meeting day (operations) expenses to kept it a concern. So originally speaking working capital refers to the flow funds , necessary for working of enterprise however these is no agreement among the financial experts regarding the meaning of working capital. They define working capital in the following ways.

ACCORDING TO MEAD MALLOT:

Working capital means current assets.

ACCORDING TO WESTON AND BRIGHAM: Working capital refers to a firm investment in short term assets, cash, short term securities, accounts receivable and inventories.

CONCEPT OF WORKING CAPITAL:There are 2 concepts of working capital : gross and net. The term gross working capital also referred to as a working capital, means the total current assets. The term net working capital can be defined in 2 ways. 1. The most common definition of net working capital is the different between current assets and current liabilities 2. Alternate definition of net working capital is that portion of current assets which is financed with long term funds. The task of the financial manager in managing working capital efficiency is to ensure sufficient liquidity in the operation of the enterprise. The liquidity of a business firm is measured by its ability to satisfy short term obligations as they become due. The three basics measure of a firms overall liquidity are 1. The acid test ratio 2. The net working capital 3. The current ratio In brief , they are useful in inter firm comparison of liquidity . net working capital as a measure of liquidity, is not very useful for comparing the performance of

different firms, but it is quite useful for internal control. The net working capital helps in comparing the same firm over time.

NEED FOR WORKING CAPITAL:In order earn sufficient profits, a firm has to depend on its sales activities apart from others. We know that sales are not analysis converted into cash immediately. i.e, there is a time lack between the sale of a product and the realization of cash so, an adequate amount of working capital is required by a firm in the form of different current assets for its activities to continue un interrupted and to tackle the problem that may arise because of the time lay. Practically this happens simply owing to the operating cycle(or) cash cycle, involves the following steps. (a) Conversion of cash into inventory. (b) Conversion of inventory into receivables. (c) Conversion of receivables into cash.

NATURE OF WORKING CAPITAL:The term working capital refers to current assets which may be defined as (1) Those which are convertible in to cash or equivalents with in a period of one year and (2) Those which are required to meet day operations.

This fixed assets as well as current assets, both required investment of funds. So, the management of working capital and of fixed assets, appearently seen to involve same type of consideration but it is not so. The management of capital involves different concepts and methodology than the techniques used in fixed assets management. The reason for this different is obvious. The very basics of fixed assets decision process (i.e the capital budgeting ) and the working capital decision process are different. The fixed assets involve long period perspective and therefore, the concept of time value of money is applied where as in working capital the time horizon is limited, in general, to one year only and the time value of money concept is not considered. The fixed assets the long term profitability of the while the current assets affect the short term liquidity position. Managing current assets may require more attention than managing fixed assets. The financial manager must. Therefore continuously monitor the assets to ensure that the desire levels are being maintained. Since the amount of money invested in current assets can change rapidly. So does the financing required. Mis management of current assets can be costly. Too large an investment in current means tying up funds that can be productively used else where (or it means added interest cost if the firm has borrowed funds to finance the investment in current assets). Excess investment may also expose the firm to undue risk eg. In case, the inventory cannot be sold or the receivable cannot be collected. On the other hand, too little investment also can be expensive for ex:insufficient inventory may mean that sales are lost as the goods which a customer wants are not available. The results is that financial managers spend a large chunk of their time managing the current assets because level of these assets changes quickly and a lack of attention paid to them may result in appreciably lower profits for firm. So, in the working capital management, a financial manager is faced with a decisions involving some consideration as follows:

1. what should be the total investment in working capital of the firm? 2. What should be the level of individual current assets?

3. What should be the relative proportion of different sources to financial the working capital requirements? Thus the working capital management may be defined as the management of firms sources and uses of working capital in order to maximize the wealth of the share holders. The proper working capital management requires both the medium term planning (say up to 3 years) and the immediate to changes arising due to fluctuation in operating levels of the firm.

THE OPERTING CYCLE AND THE WORKING CAPITAL NEEDS:The working capital requirement of a firm depends, to a great extent up on the operating cycle of the firm. The operating cycle may defined as the duration from the procurement of goods or raw materials and ending with sales realization. The length and nature of the operating cycle may differ from one firm to another depending up or the size and nature of the firm.

In a treading concern there is a serious of activities starting from procurement of goods ending with realization of sales revenue. Similarly in case manufacturing concern . This serious start form procurement of raw material and ending with the sales realization of finished foods. In both the cases however there is a time gap between the happening of the first event and the happening of last event . this time gap is called operating cycle. Thus the operating cycle of a firm consists of time required for the completion of chronological sequence of some or all of the following. 1. Procurement of raw material and services 2. Conversion of raw material in the work in progress.

3. Conversion of work in progress in to finished goods. 4. Sales of finished goods. (cash or credit). 5. Conversion of receivable into cash. The firm is after required to extend credit facilities to customers. The finished goods must be kept in store to take care of the orders and minimum cash balance must be maintained. It must also have minimum of raw material to have smooth and uninterrupted production process. So in order to have a proper and smooth running of the business activities, the firm must make investment in all these current assets. This requirement of funds depend up on the operating cycle period of the fiem and also denoted as the working capital needs of the firm. OPERATING CYCLE PERIOD:The length or time duration of the operating cycle of any firm can be defined as the sum of its inventory conversion period and the receivable conversion period. (1)INVENTORY CONVERSION PERIOD:It is the time required for the conversion of raw material in to finished goods sales. In a manufacturing concern the ICP is consisting of raw materials conversion period(RMCP), work in progress conversion period (WPCP), and the finished goods conversion period (FGCP). The RMCP refers to the period for which the raw material is generally kept in store before is issued to the production department. The WPCP refers to the period for which the raw material remain in the production process before it is taken out as a finished unit. The FGCP refers to the period for which finished units remain in stores before being sold to the customers. (2)RECEIVABLES CONVERSION PERIOD: (RCP) It is the time required to convert the credit sales in to cash realization. It refers to the period between the occurrence of credit sales and collection of debtors.

The total of ICP and RCP is also known as total operating cycle period (TOCP). The firm might be getting some credit facilities from the supplier of raw material wag earners etc. this period for which the payment it these parties are deferred or delayed is known as deferral period. The net operating cycle of a firm is arrived at by deducting the deferral period from total operating cycle period. Thus NOC = TOCP-D = ICP+RCP- DP.

OPERATING CYCLE The duration of time required for completing the following sequencies of events in case of manufacturing firm s called the operating cycle. 1. 2. 3. 4. 5. Conversion of cash into raw material. Convertion of raw material into work in progress. Conversion of work inprogress into finished goods. Conversion of finished goods into debtors & bills receivable through sale. Conversion of debtors & bills receivable into cash.

CASH

ACCOUNTS RECIEVABLE

RAW MATERIAL

FINISHED GOODS

WORK IN PROGRESS

The duration of the operating cycle for the purpose of estimating working capital requirement is equalant to the sum of duration of each of these tables less the credit period allowed by the suppliers of the firm.

TYPES OF WORKING CAPITAL

1. NET WORKING CAPITAL: The net working capital is the different between current assets and current liabilities. The concept of net working capital enables a firm to determine how much amount is left for operational requirements. 2. GROSS WORKING CAPITAL: Gross working capital is the amount of funds invested in the various components of current assets. 3. PERMANENT WORKING CAPITAL: Permanent working capital is the minimum amount of current assets which is needed to conduct a business even during the dullest season of the year. The amount varies from year to year depending up on the growth of the company and stage of business cycle in which it operates. It is the amount of funds required to produce goods and services which are necessary to satisfy demand at a particular point. 4. TEMPORARY OR VARIABLE WORKING CAPITAL:

It is represents the additional assets which are required at different times during the operating year additional inventory, extra cash etc., seasonal working capital is the additional amount of current assets particularly cash, receivables and inventory which is required during the more active business seasons of the year. 5. BALANCE SHEET WORKING CAPITAL: The balance sheet working capital is one which calculated from the items appearing in the balance sheet. Gross working capital which is represented by the excess of current assets, and net working capital which is represented by the excess of current assets over current liabilities are examples of balance sheet working capital.

6. CASH WORKING CAPITAl: Cash working capital is one which is calculated from the appearing in the profit and loss account. It shows the real flow of money or value at a particular time and is considered to be the most realistic approach in working capital management. It is the basis of the operating cycle concept which has assumed a great importance in financial management in recent years. The reason is the working capital indicates the adequacy of the cash flow. Which is an essential prerequisite of a business. 7. NEGATIVE WORKING capital: Numbers working capital emerges when current liabilities exceed current assets. Such a situation is not absolutely theoretical, and occurs when a firm is nearing a crisis of some magnitude.

DETERMINANTS OF WORKING CAPITAL:Numbers of rules are formulated to determine the working capital requirement of the firm. a large number of factors influence the working capital needs of the firm. All these factors have different importance, also the importance

of the factor change for a firm over time. Therefore analysis of the relevant factor should be made in order to determine the total investment in working capital requirements of the firm.

1. Nature and size of business 2. Seasonality of operation 3. Production policy 4. Marketing conditions

5. Business cycle fluctuation 6. Credit policy 7. Conditions of supply 8. Working capital policy 9. Current assets in relation to sales

NATURE OF BUSINESS:The working capital requirement of a firm is closing related to the nature of its business. A service firm like an electricity. A service firm like an electricity undertaking of a transport corporation, which has short operating cycle and sells on cash basis, has modest working capital requirement. On the other hand manufacturing concern like machine tools units which has long operating cycle and which sells largely on credit had varied substantial working capital management.

SEASONALITY OF OPERATION:Firms which have market seasonally in their operation usually have highly function working capital requirement. For a sugar industry the raw material i.e., sugar cane is available in particular season only. So sugar industry mainly depends upon seasonality of operations. PRODUCTION POLICY A firm marked by pronounced seasonal fluctuations in its sales many pursue a production policy which many reduce the shape variation is working capital requirement.

MARKETING CONDITIONS: In view of competitive conditions prevailing in the firm may have to offer liberal credit terms, to customs resulting in higher debtors, even large inventories many be maintain to serve an order as and when received. Thus the working capital tends to be high as a result of investors in inventions & receivable.

BUSINESS CYCLE FLUCTUATIONS:Different phases of business cycle i.e boom, recession, recovery etc, also effect working capital requirement. In case of born conditions inflationary pressure appear and business activities expand. As a result the overall need for

cash , inventories etc., increase resulting more and more funds blocked in these current assets. In case of recession period. How ever, there is usually dullness in business activities and there will be opposite effect on the level of working capital. CREDIT POLICY:The credit policy means the totality of terms and conditions on which goods are sold and purchased. At firm has interact with 2 types of credit policies at a time one, the credit policy of the supplier of raw material, goods etc, and two the credit policy relating to credit which it octends to its customer. In both the cases, however ,the firm while deciding its credit policy has to take care of credit policy of the market for example affirm might be purchasing goods and services on credit but selling foods only for cash the working capital requirement of this firm will be lower than that of a firm which is purchasing cash, but has to sell on credit basis. CONDITIONS OF SUPPLY:If the supply is prompt and adequate the firm can manage with small inventory, if the supply is unpredicted and service then the firm has to ensure continuity of production. WORKING CAPITAL POLICY:Two important issue in formulation the working capital policy are: 1. What should be the ratio of current assets to sales. 2. What should be the ratio of short term financing to long-term financing. CURRENT ASSETS IN RELATION TO SALES: It usually does the investment in current assets cannot be specified unequally. In sales of uncertainty the outlook on current assets would consist of base component meant to meet normal requirement and safety component mean to copy with unusual demands and requirements. The safety assets policy of the firm . 1. If the firm pursues a very conservation current assets policy is should carry a high level of current assets in relation to sales. 2. If the adopts a moderate current assets policy it would carry a moderate level of current assets in relation to assets.

3. If the term follows highly aggressive current assets policy. It would carry a low level of current assets in relation of sales. A conservative current assets policy trends to reduce risk. The surplus current assets under the policy enable firm to copy rather easily with variations in sales. 54&55 An aggressive current assets policy seeking to minimize the investment in current assets exposes the firm to greater risk. RATIO OF SHORT TERM FINANCING TO LONG TERM FINANCING:What would be the relative proportions of short-term bank financing on one hand and long-term sources of finance and the other hand. The board policy alternatives in the respect are: 1. A conservative current assets financing policy. 2. An aggressive current assets financing policy. A conservative current assets financing policy refills less on short-term bank financing and more long on term sources like debentures. An aggressive current financing policy relies heavily on short-term bank finance and seek to reduce dependants on long term financing. CHOOSING THE WORKING CAPITAL POLICY:The overall working capital policy adopted by the firm may broadly:1. Conservative 2. Moderate 3. Aggressive

CONSERVATIVE

A conservative overall working capital policy means that the firm chooses conservative current assets policy along with conservative current assets financing policy. MODERATE: A moderate overall working capital policy reflects a combination of a conservative current assets policy and aggressive current assets financing policy or a combination of an aggressive current assets policy and conservative current assets financing policy. AGGRESSIVE: An aggressive overall working capital consists of an aggressive current assets policy and aggressive current assets financing policy. FINANCING OF WORKING CAPITAL:Normally, financing arrangements are planned for a combination of needs including capital expenditure and working capital investment the assessment of sources of funds from a package and rarely will be possible to concept upto a particular shows to a specific application or use at the same time financing manager does make an assessment of the investment needs as well as current assets and decider an a proper mix of long and short term funds. Taking note of the internal generation of funds for 56 &57 the period in question be decisions on the extent to which the firm would resort to issue of share or long short-term borrowing to mobile the required sources. Typically the current assets of a firm are supported by the combination of long term and short term sources of financing long term sources of finance are equity, preference term loans and debentures which primarily are fixed assets and secondarily provide working capital margin.

Where the commitments are certain but cash flows are not clearly predictable, it would wise to cut down drastically the number and extent of short term debts to manageable levels and prefer longer maturity schedules for debts.

Short term debts can take care of the seasonal needs of the organization even here to take care of vagaries in cash flow, a past of the funds required may be obtained from sources with longer maturity schedules of the debts. Thus usually permanent and long-term finance is used to finance the permanent requirements or fixed assets and the net permanent current assets and a apart of the reasonable short term needs. The important sources of finance which more or less exclusively support current assets are: 1. 2. 3. 4. 5. 6. 7. Trade credit Working capital advances by commercial bank. Public corporate deposits Inter corporate deposits Short term loans from financial institutions . Rights debentures for working capital. Emerging sources commercial paper and factoring.

Of all the above the most significant sources of working capital finance are trade credit and bank borrowings, after trade credit bank borrowing are the next important sources of financing working capital requirements of firms in India. Tanton committee has suggested guidelines for the ratio allocation and optimum use of the bank credit for the working capital requirement.

TANDON COMMITTEE RECOMMENTIONS:1. The borrowers should indicate the likely demand for credit. For this purpose, he should draw operating plans for the ensuring year and supply them bankers. This procedure will facilitate credit planning at the bankers credit needs in a realistic manner and the periodic follow up during the ensuring year

2. The bankers should finance only the genuine production needs of the borrower. The borrower should maintain the reasonable levels of the investor and receivable. He should hold just enough to carry on his targets production. Efficient management of resources should, therefore, be ensured to eliminate slow moving and flabby inventories.

3. The working capital needs of the borrower cannot be entirely financed by the bankers. They will finance only a reasonable part for the remaining borrower should depend upon his own funds, generated internally and externally.

CHORE COMMITTEE RECOMMENDATIONS:1. Borrowers should submit quarterly projection of cash credit banks. 2. The banks while assessing the credit requirements from borrowers should fix separate limits where as feasible. 3. As far as possible the borrowers should be discouraged for approaching the bank frequently limitation in excess of sanction limits. 4. Suitable provision should be made for charging of pena rate of interest in even of any defaults in the timely repayment of working capital loan.

CHANGES IN WORKING CAPITAL:The working capital of a concern is subject to changes due to several reasons. As we know that the gross working capital is equal to current assets. But net working capital we mean the excess of current assets over current liabilities. The net working capital is therefore, affected by the following transactions. 1. Which increase the current but not the current liabilities. 2. Which decrease the current assets and current liabilities both increase in the same direction by a transaction it does not bring any change in the net

working capital of the concern. Only the total of current assets and current liabilities increase and decrease. REASONS FOR CHANGES IN WORKING CAPITAL:1. Changes in the level of sales and\ or operating expenses. 2. Policy changes. 3. Changes in the technology.

STATEMENT OF CHANGES IN WORKING CAPITAL:Until now any increase decrease in any individual item of current assets and current liabilities was shown in the funds flow statement. But now a statement is prepared to deficit the changes in working capital. The net increase or decrease is then carried forward to the funds flow statement. The statement of working capital is prepared with the help of current assets and current liabilities of the two periods the figures of 2 periods are compared. If there is an increase in the amount of any current liabilities in the current year in comparison to that in that in the previous year, it will result to an increase in the working capital. Similarly, a decrease in the amount of any current assets or an increase in amount of current liabilities in the current year in comparison to that in the previous year and total decrease in the end is compared and the different of total increase and total decrease shows net increase or decrease in the working capital. Net increase in working capital is an application of funds and net decrease in working capital in the source of funds. A form of statement is shown below.

CHAPTER-4
ANALYSIS AND INTERPRETATION. CHANGES IN WORKING CAPITAL. RATIO ANALYSIS.

STATEMENTS OF MILKFOOD LTD. INDUSTRIES LIMITED FOR THE YEAR 2009-10 PARTICULARS CURRENT ASSETS,
LOANS AND ADVANCES

2009-10

PERCENTAGE

Inventory Sundry Debtors Cash & Bank Balance Loans and advances

51.52 9.39 4.88 10.78

67.28 12.96 6.37 14.07

Gross working capital (A) CURRENT LIABILITIES &PROVISION Current liabilities Provision

76.57

100.00

56.99 0.01

99.99 0.01

Total current liabilities and provisions(B) Net working capital(AB)

57.00 19.57

100.00

STATEMENTS OF MILKFOOD LTD. INDUSTRIES LIMITED FOR THE YEAR 2010-11 PARTICULARS CURRENT ASSETS,
LOANS AND ADVANCES

2010-11

PERCENTAGE

Inventory Sundry Debtors Cash & Bank Balance Loans and advances

43.24 7.27 1.75 22.73

57.67 9.69 2.33 30.31

Gross working capital (A) CURRENT LIABILITIES &PROVISION Current liabilities Provision

74.99

100.00

31.82 0.02

99.94 0.06

Total current liabilities and provisions(B) Net working capital(AB)

31.84 43.15

100.00

RATIO ANALYSIS
Several ratios calculated from the accounting date, can be grouped into various classes according to financial activity or function to be evaluated. As stated earlier, the parties interested in financial analysis are short and short and long-term creditors, owners and management. Short-term creditors main interest is in liquidity position or the short-term solvency of the firm. Long-term creditors, on the other hand, and more interested in the long-term solvency and profitability of the firm. Similarly, owners concentrate on the firms profitability and financial conditions. Management is interested on in evaluating every aspect of the firms performance. They have to protect the interests of all parties and see that the firm grows profitably. In view of the requirements of the various users of ratio, we may classify them into the following four important categories. TYPES OF RATIO: Liquidity ratios Leverage ratios Activity ratios Profitability ratios

 Liquidity ratio:The liquidity refers to the maintenance of cash, bank balance and those assets, which are easily convertible into cash in order to meet the liabilities as and when arising. So, the ratios study the firms short-term solvency and its ability to pay off the liabilities. Current ratio:Current ratio is the ratio of current and current liabilities. Current assets are assets which can be converted into cash within one year and include cash in hand and at bank, bills receivable, net sundry debtors, stock of raw materials, finished goods and work in progress, prepaid expenses, outstanding and occurred incomes, and short term or temporary investments. Current liabilities are liabilities, which are to be repaid with in a period of 1 year and include bills payable, sundry creditors, bank over drafts, and outstanding expenses, Income received in advanced, proposed dividend, provision for taxation, unclaimed dividends and short term loans and advances repayable within 1 year Current assets Current Ratio= ----------------------------------------------Current liabilities A current ratio 2:1 is considered as ideal: if a business has an undertaking with its bankers to meet its working capital requirements short notices, a current ratio of is adequate. 2) Quick Ratio:Quick assets Quick ratio = -------------------------------------------------Quick liabilities A quick ratio of 1 is considered as ideal. A quick ratio of less than 1 is indicated of inadequate liquidity of the business. A very high ratio is also not available as funds can be profitability employed.

Absolute liquid ratio:It is ratio of absolute liquid ratio assets to quick liabilities. However, for calculation purposes, it is taken as ratio of liquid assets of current liabilities. Trade investment or marketable securities are equivalent of cash therefore, they may be included in the computation of absolute liquid ratio. Absolute liquid ratio Absolute quick ratio = ------------------------------------------------Current liabilities a) Leverage ratios: leverage ratio indicate the relative interest of owners and creditors in a business. It shows the proportions of debt and equity in financing the firms assets the long- term solvency of a firm can be examined by using leverage ratio. The long-term creditors like debenture holders, financial institutions etc,. are more concerned with firms long term financial strength. There are two aspects of the long-term solvency of a firm 1) Ability to repay the principal when due, and 2) Regular payment of the interest they leverage ratio are calculated to measure the financial rest and firms abilities of using debt.

(1)

TOTAL DEBT RATIO:-

Total debt will include short and long-term borrowing from financial institution debentures bonds. Capital employed will include total debt and net worth. The firm may be interested in knowing the proportion of the interest bearing debt in the capital structure by calculating total debt ratio. A highly debt burdened firm difficulty in raising funds from creditors and owners in future. Creditors treat the owners equities as a margin of safety.

Total Debt Total Ratio= -----------------------------------------------Capital Employed

(2)

DEBT -EQUITY RATIO:-

It reflects the relative claims of creditors and shareholders against the assets of the business. Debt, usually, refers to long-term liabilities. Equity include preference share capital and reserves. The relationship describing the lenders contribution for each refers of the owners contribution is called debt equity ratio. A high ratio shows a large share of financing by the creditors relative to the owners and therefore, large claim against the assets of the firm. A low ratio implies a smaller claim of creditors. The equity indicates the margin of satisfy to the creditors so, there is no doubt the Beth high and low debt equity ratios are not desirable. What is needed is a ratio, which strikes a proper balance between debt and equity.

Total Debt Debt-Equity = ------------------------------------Net worth Some financial experts opine that debt should indicate current liabilities also. However, this is not a popular practice. In case of preference share capital, it is treated as a part of shareholders funds, but if the preference shares are redeemable, they are taken as a part of long-term debt shareholder funds are also known as proprietor funds and it indicates items equity share capital, reserve, and surplus. A debt equity ratio of 3:1 is considered ideal.

1. PROPRIETORY RATIO:It expresses the relation between net worth and total assets. Net worth Property ratio= ---------------------------------------Total assets Net worth= equity share capital + preference share capital + reserves fictitious assets. Total assets= fixed assets + current assets (excluding fictitious assets) Reserve earmarked specifically for a particular purpose should not be included in calculation of net worth. A high proprietors ratio is indicative of strong financial position of the business. The higher the ratio, the better it is.

2. FIXED ASSETS RATIO:Fixed assets Fixed Assets = ------------------------------------------

Capital employed Capital employed equity share capital + preference share capital + reserves + long term liabilities fictitious assets. This ratio indicates the mode of financing the fixed assets. A financially well- managed company will have its fixed assets financed by long term funds. Therefore, the fixed assets ratio should never be more than 1) A ratio of 0.67 is considered idea

INTEREST COVERAGE RATIO: This interest coverage ratio is computed by dividing earnings before interests and taxed by interest charges. Debt Interest coverage ratio = --------------------Interest This interest coverage ratio shows the number of times the interest charges are covered by funds that are or demurely available for their payment. A high ratio is desirable but too high ratio indicates that the firm is very conservative in using debt and that is not using credit to the debt advantage of shareholder. A lower ratio indicates excessive use of debt or inefficiency operations. The firm should make efforts to improve the operating efficiency or to retire debt to have a comfortable coverage ratio. iii) ACTIVITY RATIOS:Activity assets turnover ratio, measures the efficiency of a firm in managing and utilizing its assets. The higher the turnover ratio, the more efficiency the management and utilization of the assets while low turnover ratio is indicate of under- utilization of available resources and presence idle capacity. The total assets turnover ratio is computed by dividing sales by total assets. Sales

78 Total assets turnover ratio = ------------------------------------Total assets 2) WORKING CAPITAL TURNOVER RATIOS:Cost of goods sold Working capital turnover ratio = ------------------------------------Working capital Where if cost of goods sold is known. Net sales can be taken in the numerator. Working capital = current assets current liabilities. A high working capital turnover ratio indicates efficiency utilization of the firms funds. However, it should not result in over trading. 3) DEBTORS TURNOVER RATIO :Debtors turnover ratio expresses the relationship between debtors and sales. It is calculated. Net credit sales Debtors turnover ratio = ------------------------------------Average debtors Net credit sales inspire credit sales after adjusting for sales returns. In case information no credit sale is not available. sales can be taken in the numerator. Debtors include bills receivable. Debtors should be taken at gross value, without adjusting provisions for bad debts. In case, average debtors be found; closing balance of debtors should be taken in the denominator. A high debtors turn over ratio or a low debt collection period is indicative of a sound credit management policy. A debtors turnover collection period of 30-36 days is considered ideal.

1. DEBT COLLECTION PERIOD:The debt collection period measures the quality of debtors since it indicates the speed of the collection. The shortest the average collection period implies the prompt payment by debtors. No. of days year Debt collection period = ----------------------------------------Debt collection period An excessively long collection period implies a very liberal and inefficient credit and collection performance. This certain delays the collection delays the collection of each and impairs the firms liquidity. The average no. of days for which debtors remain outstanding is called debt collection period or average collection period. 2. CREDITORS TURNOVER RATIO:Creditors turnover ratio expresses the relationship between creditors and purchases. Net credit purchase Creditors turnover ratio = --------------------------------------------Average creditors Net credit purchase imply credit purchase after adjusting for purchases returns. In case information on credit purchase is not available purchase may be taken in the numerator. Creditors include bills payable. In case avenue creditors cant be found, closing balance of creditors should be taken in the denominator. The creditors turnover ratio is 12 or more. However, very less creditors turnover ratio, or a high debt payment period, may indicate the firms inability in meeting its obligation in time.

3. PAYMENT PERIOD RATIO:Creditors turnover rate can also be expressed in terms of number of days by the business to pay off its debts. It is termed as debt payment period which is calculated as:Number of days in a year Payment period ratio = -------------------------------------------Creditors turnover ratio

4. FIXED ASSETS TURNOVER RATIO:It is defined as Net sales Fixed assets turnover ratio = --------------------------------Fixed assets Fixed assets imply net fixed assets i.e. after depreciation. A high fixed assets turnover ratio indicates better utilization of the firms fixed assets. A ratio around 5 is considered ideal. 5. INVENTORY TURNOVER RATIO:Stock turnover ratio indicates the number of times the stock has turned over into sale sin the year. It is calculated. Cost of goods sold Inventory turnover ratio = ------------------------------------------Average inventory

Cost of goods sold = sales gross profit Average stock = (opening stock and closing stock 1\2) In case, information regarding cost goods sold is not known. Sales may be taken in the numerator. Similarly, if average stock cant be calculated, closing stock should be taken in the denominator. A stock turnover ratio of 8 is considered ideal. A high stock turnover ratio indicates that the stocks are fast moving and get converted into sales quickly. However, it may also be on account of holding low amount of stocks and replenishing stocks in larger number of installments.

Iv) PROFITABILITY RATIO:It measure the overall performance and effective of the firm. Poor operational performance may indicate poor sales and hence poor profits. A lower profitability may arise due to the lack of control over the expenses. Bankers, financial institutions and other creditors look at the profitabilitys. ratio as an indicator whether or not the firm earns substantially more than it pays interest for the use of borrowed funds and weather the ultimate repayment of their debt appear reasonably certain owner are interest to know the profitability as it indicates the return which they can get on this instruments. Profitability ratios measure the profitability of a concern generally. They are calculated either in relation to sales or in relation to investment. 1) NET PROFIT RATIO It indicates the result of the overall operation of the firm. The higher the ratio, per profitable is the business. The net profit ratio is reassured by dividing net profit ratio indicates management efficiency in manufacturing administration and selling the products. This ratio is the overall firms ability to turn each rupee of sale into net profit. If the profit margin is inadequate, the firm fails to achieve satisfactory return on share holders funds. Profit after tax

Net profit ratio = ---------------------------------Net sales A firm with high net profit margin can make better use of favorable conditions. Such as rising selling prices, falling cost of products or increasing demand for the product. Such a firm will be able to accelerate its profits at a faster rate than a firm with a low net profit margin. This ratio also indicates the firm capacity to withstand adverse economic conditions.

3. RETURN ON NET WORTH RATIO :It indicates the return, which the shareholders are earning on their resources invested in the business. Profit after tax Return on net worth ratio = -----------------------------------------Net worth Net worth = share holders funds = equity share capital + preference share capital + Reserves factious assets. The higher the ratio, the better it is for the share holders. However, inter firm comparisons should be made to ascertain if the returns from the company are adequate. A trend analysis of the ratio over the past few years much is done to find out the growth or deterioration in the profitability of the business.

2) RETURN ON ASSETS RATIO :Profit after tax Return on assets ratio = -----------------------------------------Total assets

Total assets do not include fictitious assets. The higher the ratio, the better it is.

3) EARNINGS PER SHARE RATIO:Earnings per share are the net profit after tax and preferences dividend, which is earned on the capital representative of one equity share. It calculated as :Profit after tax available to equity holders Earnings per share ratio = ----------------------------------------------------------------Number of ordinary share

ADVANTAGE OF RATIOS

Useful of evaluation performance in terms of profitability and financial stability. Useful for intra & inter firm comparison. Useful forecasting and budgeting. It is just in tabular form over a period of years indicated the trend of business.

 Smile to understand rather than the reading but the figures of financial statement. Key tool in the hand of modern financial management. Enable outside parties to assess the strength and weakness of the firm. Ratio analysis is very useful for ranking management decisions and also highlights the performance in the area of profitability financial stability and operational efficiency.

LIMITATIONS OF FINANCIAL RATIOS

The ratio analysis is widely used of technique to evaluate the financial position and performance of business. But there are certain problems in using ratios. The analyst should be aware of these problems the following are some of the limitations of ratio analysis.

It is difficult to decide on the proper basis of comparison. The comparison is rendered difficult because of differences in situations of two companies or of one company over years.

 The price level changes make the interpretation of ratios invalid. the differences in the definitions of items in the balance sheet and the profit & loss statement make the interpretation of ratios difficult. The ratios calculated at a point of time or less informative and defective as they suffer from short term changes. Difference in accounting policies and accounting period make the accounting data of firms non comparable as also the accounting ratios. It is very difficult to generalize weather a particular ratio is good or bad. For ex: a low current ratio may be said bad from the point of view of low liquidity. But a high current ratio may not be good. As this may results from in efficient working capital management.

LIQUIDITY RATIO

A) Current ratio Current ratio= Current Assets Current liabilities

Year 2009-10 2010-11

Current assets 76.57 74.99

Current liabilities Ratio 57.00 31.84 1.34 2.35

2.5

2.35

1.5

1.34

0.5

0 2009-2010 2010-2011

B) Quick Ratio:

Quick Ratio =

Quick Assets Current liabilities

year 2009-10 2010-11

Quick assets 25.05 31.75

Current liabilities Ratio 57.00 31.84 0.43 0.99

Chart Title
1.8 1.6 1.4 1.2 1 0.8 0.6 0.4 0.2 0 2009-2010 2010-2011

(C) Absolute liquid ratio

Absolute liquid ratio =

Cash

Current liabilities year 2009-10 cash 4.88 current liability 57.00 Ratio 0.08

2010-11

1.75

31.84

0.05

0.35 0.3 0.25 0.2 0.15 0.1 0.05 0 2009-2010 2010-2011

CHAPTER-5
o FINDINGS & SUGGESSIONS o REFERECE & BIBLIOGRAPHY

FINDINGS

With reference to the working capital study of Milkfood Industries Ltd. quantity of working capital is contributed by short source of finance . In this gross working capital of the firm, a major part is occupied by inventory and sundry debtors. The minimum current ratio maintained by the company is 1.34, the company has exceeded minimum current ratio at all the years statement. The minimum quick asset ratio maintained by the company is 0.43 The minimum absolute liquid ratio maintained by company is 0.05 In order to achieve to the goals of the organization as whole and achievement of performance appraisal technique is very useful . The company has been maintaining sufficient amount of working capital in all the years.

SUGGESTIONS

1) Suggested the company should follow the present working capital.

2) The company spends reasonable amount on inventory so that it should be followed.

3) The current ratio is maintained at a satisfied level. So that company peruses this much of current assets to meet the objective of the firm. 4) Company is maintaining high quick assets to overcome current liabilities for better results. 5) For better results company has to maintain cash inflows to overcome current liabilities of the firm. 6) To gain good profits company has to improve the sales through inventory management. 7) The company b should try to reduce external liabilities, having pay high EPS & DPS. 8) The company should make arrangement of receivables and cash.

CONCLUSION

Working capital management analysis is an in depth analysis .,overages the entire financial management the with refers to integrated. The Milkfood Ltd. is the company, which give preference to the common mans privilege. Hence , it is on integrated approach and constant measure may be adopted for better managerial performance. Working capital analysis criteria is distinctive work while and commendable technique in postulating the financial behavior of business enterprise.

Thus, working capital management which is integrated ,internal, intermediate, and organization based financial and analytical measurement the study always a strategic measurement with reference in performance ,growth expansion and modernization of the business enterprises.