DECLARATION

I FIROZ AMBADI hereby declares that this Project Report entitled

“A STUDY ON WORKING CAPITAL MANAGEMENT OF THE FACT LTD,
ERNAKULAM” is a bonafide record of work done by me in partial fulfillment
of the MBA Degree Course of the University of Mahatma Gandhi.

FIROZ AMBADI
Date:
 ACKNOWLEDGEMENT

First and foremost, I thank God who

helped me in my endeavor

My first and foremost acknowledgement is to Shrimathi. CHANDRIKA

,FINANCE OFFICER,F ACT LTD
, for giving me an opportunity to do my project work .I also owe my
special word of thanks to Mr.PHILIPOS (FACT TRAINING CENTRE) and I
also thank Mr.Sabu for his constructive comments and sincere guidance.

I express my deep gratitude and indebtedness to the management,

staff’s and employees of TCC Ltd for their constant support helped me to
complete this project successfully.

I wish to extend my sincere gratitude to Ms.Divya (MBA) Regional

Management College Malappuram, Academic guide for her immense help
and co-operation which she had extended during the course of project. And
also I owe my sincere thanks to our Head Of The Department.

I have pleasure and privilege in expressing my deep sense gratitude

and respect to our beloved Principal Mr. José Joseph (Regional Management
College Malappuram), for his helpful guidance, critical suggestions, and
inspiring encouragement, timely help and warn concern offered during the
course of study.

I owe my graceful acknowledgement to my parents, teachers, friends

and everyone associated with my project.
 CONTENTS
Page No

1. INTRODUCTION OF THE STUDY

 Objectives of the study
 Scope of the study
 Limitations of the study
2. RESEARCH METHODOLOGY
3. COMPANY PROFILE
 About the company
 Divisions of company
 Products of company
 Achievements of the company
4. REVIEW OF LITERATURE
 Concepts of working capital
 Determinants of working capital
 Determining working capital mix
 Analysis of working capital management
5. DATA ANALYSIS AND INTERPRETATION
 Statement of gross working capital
 Statement of net working cpiatl
 Schedule of changes in working capital
 Ratio analysis
 Trend analysis
 Fund flow analysis
FINDINGS AND SUGGESSION
CONCLUSION
BIBLIOGRAPHY
INTRODUCTION
Here this project study is entitled the analysis
and interpretation of management of working capital by the help of various
tools used for financial analysis. So first upon we know about theatrical
aspects of working capital and its management.

Working capital
Working capital is the capital required for the day to day
working of an enterprise. It is required for the purchase of raw materials and
for meeting the day to day expenditure on salaries , wages ,rents , advertising
etc.. It is needed for holding some convertible assets (current assets) such as
stock , book debts, bills receivables and cash. The firm operates its business
through these assets. These assets are convertible in the sense that these
change from one form of asset to another. Cash is converted in to raw material,
raw material converted in to work in progress, work in progress converted in
to finished goods , finished goods in to book debts and bills receivables and
then book debts and bills receivable in to cash. Thus the amount goes on
circulating or revolving from cash to current assets and current assets to cash.
That is why working capital is also called circulating capital or revolving
capital.
There are two views on the definition of
working capital, namely, gross concept and net concept. Gross working capital
refers to total current assets. It represents the amount of funds invested in
current assets. Net working capital refers to the excess of current asset over
current liabilities. In other words, working capital is the difference between
current assets and current liabilities. Of the two , the concepts of net working
capital is most widely accepted.

Working capital = current asset – current liabilities

 1

MANAGEMENT OF WORKING CAPITAL

Working capital management involves deciding
upon the amount and composition of current assets and how to finance these
assets. These decisions involve trade-offs between risk and probability. The
greater the relative proportion of liquid assets, the less the risk of running out
of cash, all other things being equal. However , profitability will also be less,
resolution of the trade off between risk and profitability with respect of these
decisions depends upon the risk preference of the management. The lower the
preference of the liquid asset to total assets, the greater the firms return on
total investment. This strategy will result in a low level of working capital.

The length of the operating cycle of the firms will

be different as such working capital of the firm will also vary . there is no
uniformity in the approach in assessing working capital requirements
especially with regards to inventories. Different firms will have different
inventory policies and different methods of allowing credit period as such
different will be there working capital requirements.

The problem of working capital requirement

can be examined under two heads. Internal financing and external financing.
We would be concerned with the internal financing aspects which deal with
determining the size of working capital needs in particular business. Situations
and seeking to achieve certain long run operating goals. Instead of telling
financial executives how much working capital is required in specific situation
our purpose is acquired them with tools and skills that may take them more
proficient in making quantitative decisions about working capital needs.

2
 OBJECTIVES OF THE STUDY
 To study and interpret the working capital management of FACT
Ltd
 To analyses the changes in working capital position of the company.
 To study the profitability position of the company.
 Suggest measures for improvement with respect to management of
debtors, inventory and cash
 To identify the areas of inefficiency
 To analyses about the suitable proportion of current assets and
current liabilities in FACT.
 To make suggestions and recommendations on the basis of the
study to improve the working capital of the trust.

SCOPE OF THE STUDY

Working capital is the single best method of determining the
position of the company, or how well that company may be doing. The study
was to analyze the working capital management of FACT Ltd Cochin. The
study involves the analysis of working capital, liquidity and profitability
position, as well as the operational efficiency of the company. For the
purpose of the study has been conducted for a period of last five year.

LIMITATIONS OF THE STUDY

 This study is limited for a period of five years from 2003-2007
 Time is another major constraint in the study, because of not possible to
amylase all documents.
 Study based on annual report of company.
 Tools used for analysis is subject to its inherent limit.
 In this short period of time ,the research could not go through all
aspects of working capital management
3
 RESEARCH METHODOLOGY
The methodology used in the study involves the collection of primary
data as well as secondary data. Mainly data are collected from the annual
report of the company.
 Primary data: Direct interview with the concerned officers of the
company
 Secondary data: Collected from the annual reports and other
records of the company.
Period of the study
A five year period from 2003-2007 has been taken for the study
Tools of analysis
1. Ratio analysis
2. Trend analysis
3. Schedule of changes in working capital
4. fund flow analysis

4
 INDUSTRY PROFILE

Economic liberalization and reforms are the two key notes of the govt: political
philosophy today which has emplaced almost all sectors of the economy. Even
in the care of fertilizer sector , an attempt to introduce liberalization has been
made since aug 1992. fertilizer sector has to fall in line with the rest of
economy and a total decontrol would there for have to be ultimate goal for this
sector. In 1992 with a view to reducing the subsidy all the phosphoric and
politick fertilizers were decontrolled. consequently the prices of there
fertilizers increased sharply leading to fall in their consumption and
destructing in the ratio of fertilizer consumption. The retention pricing scheme
(RPS) which was introduced in 1977 got confined urea only. Govt of India is
drawing a long term policy for fertilizer industry which is to ensure that is
transition to total decontrol is achieved in a shared manner. Govt of India
proposes to decontrol the fertilizer completely by 2006.

The most necessary requirements of human

being is food. The accelerated growth in a nation needs remarkable expansion
of food production from time to time. Agriculture must relay upon a primary
source for increase in food production.

India is the third largest producer and

consumer of chemical fertilizers in the worlds and accounts for about 12% of
world fertilizer consumption. The country produces several straight
nitrogenous fertilizers such as urea, ammonium sulphate, calcium ammonium
nitrate etc…as ell as complex fertilizers such as DAP and several NPK
complexes. Urea and DAP are the main fertilizers produced in India.

5
INTERNATIONAL SCENARIO

When there are large areas of unused frontier

land in the world it was often more economical for farmers to move on to new
unfarmed land than to invest additional money in fertilizers for the land they
were than farming, a practice continued in second half of the 20th century in
some under developed areas of the world. The use of manure and composts is
probably as old as agriculture itself and many other material such as ground
bones ,wood ash from burning the fallen trees , dried blood and fish were
employed long before the chemistry of soil and crops was understood. The
disappearance of frontiers combined with improvements in the technology of
fertilizers manufacture and more effective transportation lead to a growing
role of fertilizers for producing the needed food and fiber.

NATIONAL SCENARIO

India is one of the world's largest producers

and consumers of fertilizers , both phosphorescent and nitrogenous. The
fertilizer industry in the country is also among the fast growing sector in the
world. There are around 25 chemical fertilizers used in the country at present.
There fall under four broad categories namely nitrogenous, phosphates,
potassium and complex fertilizers.
71% of total fertilizer consumption during
1994-95 was of the nitrogenous variety where as the phosphorescent and
pottasic fertilizers accounted for 22% and 7% in the same order. While urea ,
calcium and ammonium phosphate are the major nitrogenous fertilizers,
single super phosphate falls under the phosphatic category. Ammonium
phosphate is the main complex fertilizer.
6

STATE SCENARIO
 Kerala has high degree of land use and cropping intensity.
The state's agricultural productivity is decreasing year by year. The
production and cultivation of rice is decreasing and the farmers are attached to
commercial cropes like rubber and coconut. Due to decrease in the cultivation
of rice, the consumption of nitrate and potash has come down. The percentage
consumption of fertilizers in different sates in India , the position of kerala is
one of the low ranking states. FACT is having market share of 53.4% in Kerala.
This is comparatively higher than the other companies in kerala. Due to the
entry of competitors in the field of fertilizers FACT has lost its market share
62.2%.

GENERAL HEALTH OF THE INDUSTRY

It is feared that several fertilizer units will be closed down in the process of
switch over from the present administrated pricing mechanism to a market
based industry. this would mean substantial loss of domestic fertilizer
production and corresponding incurred in import of raw material to meat the
demand. Even under the present circumstances health of industry is not good
several units have become loss making according to expenditure reform
committee recommendation of instead of unit wise retention price there will
be a GroupWise lump sum concession per ton of urea based on feed stock
which will harm some units and benefit others and there will be wide spread
sickness in the urea industry

Implication for future

India has become third largest country with a total capacity
of 11.07 million tones of p205 in the year 2000-2001. further capacity addition
for N now been started for the time being due to very narrow demand supply
gap at present and costly feed stock. However there will be some addition to
the phosphatic capacity. Domestic production of nitrogen fertilizers was 11.004
million tones in 200-01 where as production of phosphate fertilizer was 4.703
million tones. Which are marginal higher compared to last year production.
All India capacity utilization has gradually improved over the years and was
maintained at almost cent per cent level for N. however during 2000-01
vestrichous were imposed on capacity utilization of urea at 92%. The increase
in production of total N is observed due to increase in production of DAP
during 2000-01 was 10% higher compared to previous year. The capacity
utilization for P205 fertilizers was cent per cent

COMPANY PROFILE
The history of fact is a stage of initiative , enterprise , innovation and
adventure in industrial development in India. The story of fact begin the time
of second world war. During those days entire India had face a shortage in the
supply of food items. The condition was so severe that even our traditional
ways of cultivation and farming was not so sufficient to meet the
requirements. Every one was search of a long term solution for solving the
problem. Finally they came to the conclusion that chemical fertilizer will be an
answer tom the problem. It was at this time sir, C.P Ramaswami Iyer took the
initiative to put up the fertilizer plant for the production of chemical fertilizer.
He worked all the ways for the building up of a chemical fertilizer in kerala.
This can be considered an first stage of development of a fertilizer plant called
Fertilizers And Chemicals Travencore Ltd.
FACT became a public sector enterprise on
1960 and 1962 FACT was came under control of central Govt: The third stage
of expansion of FACT was completed in 1965 with setting up of a new
ammonium sulphate plant. FACT engineering and Design Organization
(FEDO) was set up on 24th July 1965 to meet the merging need for indigenous
capabilities in vital areas of Engineering , Design and consultancy for
establishing large modern fertilizer plants, FEDO has since the diversified in to
chemicals , petrochemicals , hydrometallurgy , pharmaceutical and other
areas. FEDO offers services from project identification and evaluation stage to
plant design , procurement , projects management , site supervision and
commissioning of new plants as well as revamping and modernization of old
plants.
FACT Engineering Works(FEW) was
established on 13th April 1966 as unit to fabricate and install equipments for
fertilizer plant. Over the years FEW few developed capabilities in the

9
fabrication of pressure vessels and heat exchangers. FEW has also undertaken
lying of cross country piping and fabrication and installation of large heddle
projects. The cochin division of FACT , the 2nd production unit was set up at
Ambalamedu and the first phase was commissioned in 1973. The 2nd face of
FACT cochin division was commissioned in 19769. as diversified plans from
the traditional field of fertilizers and chemicals 50000 TPA Caprolactum plant
at udyogamandal was commissioned in 1990.

FACT was set up 1990 TPD Ammonia

plant at Udyogamandal at s cost of 638 crores following an order of high court
of kerala in Feb 1994 on public interest Litigation ,to decommission the
existing imported Ammonia storage and handling facility at Willington Island
(cochin port). The Ammonia plant was commissioned in 1998. the companies
main business is manufacture and marketing of fertilizers , caprolactum and
engineering consultancy and fabrication of equipments.

From the year 1983-84 FACT had

overcome the break even point forever and started making a profit balance on
its profit and loss account. This trend was continued in several years. Till 1997-
98 FACT maintain the good run. But after that because of the effect of
globalization and several other reasons the trend was reversed. The profit
story of FACT became and old story and the negative trend continued for a
long period. It was such a difficult period for FACT , sop that most of the
experts predicted its death of giant industry. As expected at he time of selling
up FACT it had began a revolution in the field of agriculture and chemical
fertilizers. It had made the chemical fertilizers familiar to the Indian farmers.
Started an a large fertilizer plant in the country , FACT had fulfill and fulfilling
the whole needs and
10
expectation of past , present and future generations respectively. The different
kinds of activities that had been initiated and done by FACT had made it
living legend in the minds o people.

DIVISIONS OF FACT
The udyogamanadal division of FACT can be
called an birth place of FACT and the mother of entire fertilizer industry in
India. It was at udyogamandal division the first commercial production of
FACT was taken place on 1947. At the beginning there was an ammonium
sulphate plant having a capacity to produce 10000 tons of N. Over the years
the division grew phenomenally because of the multistage expansion
programs involving the rationalization and modernization of production
process aided this and technologies successfully experimented and
implemented at FACT by their on technologists, in the corse of their
experiences and expertise were enriched.

The current annual production capacity of

udyogamandal division is 76050 tons of N and 29700 tons of P2O apart from
the manufacturing of ammonia ,sulphuric acid,sulphur dioxide, phosphoric
acid, synthetic , co2 etc. are also produced in udyogamandal division. The 900
TPD ammonia complex set up at udyogamandal division was the latest
addition to that division. The division has been conferred iso 14001
certification for environmental management system.

COCHIN DIVISION
The success of FACT inculcating and building at
fertilizer awareness as well as in creating an atmosphere of self reliance in
agriculture production leads to more intensive efforts in maximizing
indigenous
11
know –how in the country. The cochin division of FACT formed in 1969 in
Ambalamedu, near cochin rerefinaries was a part of the well planned overall
efforts by the govt to give the greatest scope to the indigenous technology in
setting up large fixed fertilizer plant. FACT cochin division is totally designed
and engineered by their own technologies from (FEDO) keeping foreign
assistance to the minimum. It commences commercial product in 1973.This
division compraises a number of large capacity plants applying sophisticated
process technologies tom produce ammonia, sulphuric acid ,phosphoric acid,
urea and Factom fos 20:20 complex fertilizer and de ammonium phosphate.
Besides related off sites ,peripheral services and township the facility was
insist of two plants, one a 600TPD ammonia plant in single stream and the
other a 1000 TPD urea plant in two stream. The NAPHTA and Fnd oil requires
for the new venture were to be supplied but cochin refineries ,situated close to
the Ambalamedu division.
Over 3.30 lakhs ton of urea and 4.80 lacks tons of
complex fertilizers are manufacturing here annually but today the urea plant
,because of some technical reasons is shutdown. This division has been
conferred ISO 14001 certification for environment management system and
ISO 9002 for quality management system.

PETROCHEMICAL DIVISION
The petrochemical division of FACT was a result
of a major diversification process initiated by fact. They diversified in to
petrochemicals in 1990 with the production of camprolactum. This versatile
the petrochemical is the raw material used in the manufacture of Nylon-6,
which finds executive application in textile and engineering products. FACTs
caprolactum , by earning high quality has been acknowledged as amongst the
first in the world. The unit has the capacity of producing 50000 tons per anum
of caprolactum 2.25 lack ton of Soda Ash. A separate plant had been set up at
udyogamandal division for the processing of ammonium sulphate which is
coming out of the caprolactum plant as co-product. This division has obtained
ISO 9002 certification for quality and ISO 14001 for environment management
system.

MARKETING DIVISION
FACT has been the pace seller in the fertilizer
marketing. Through innovative farmers education and fertilizer promotion
programs FACT created awareness about scientific cultivation and fertilizer
are among the farmers. This was achieved with the aid of various programs
over the
part of 60 years. During the part from its very inception , FACT had realized
the taste of fertilizer manufacturers involves much more than fertilizer
production and marketing. The understood that the magical transformation in
agriculture production brought by fertilizer use had to be brought home to the
farmers through a variety of ways , which are understandable to them , to
show them the role of chemical fertilizer in agriculture. FACT had also
realized that given the Indian farming condition and the tradition approach of
the farmers , it was an uphill task and nothing short of creating a new wave of
awareness of fertilizer will do the trick. And this was exactly what FACT
marketing activities set out to achieve. Today the marketing division of FACT
has well organized distribution in south India for the sales of fertilizers and
other inputs. The FACT agro service centers located in major markets serve the
farmers with supply of fertilizer and know how.
The most significant aspect of FACT is marketing and
promotional programmers in within focus on the rural development. Many
ueque and novel methods of promotion had been developed by FACT realize
the goal. The concept of fertilizer festival is the most original and renowned
among them. Village adoption is another original practice introduced in the
country for the first time by FACT to demonstrate the fertilizer use. FACT
agriculture study centers –Krishi Vidyan Kendram is another novel program
to impact agriculture education to farmer. This scheme is selected pockets ,
will train farmers in modern scientific methods of cultivation. FACT is also
offering a series of other free agronomy services to the farming community
like free soil testing , farmers club and demonstration.
To ensure timely supply of fertilizers to farmers
FACT maintain a chain of go down with a lot of storage capacity . FACT
fertilizer also made available through the retail network of the co-operative
marketing federation and the agro industries corporation of the southern
states. In kerala FACT maintains the largest dealer network and also maintain
the major market of FACT. Today kerala , Tamil nadu , Karnataka and
andrapradesh are the major markets of FACT. The division continues its
farmers education programs like demonstration , village adoption, farmers
training and seminars.

FACT ENGINEERING AND DESIGHN ORGANISATION

(FEDO)
As a fast growing organization fact was continuously facing
with challenges arising out of problem of technology , rawmaterial,process
marketing and personnel. FACT constructive response to these challenges was
to meet them with innovation , invention ,improvisation and managerial acts .
the most significant act among them was the setting up of a separate
organization for the design and engineering of chemical fertilizer plant are for
involving new process for producing various chemicals vital for industry. As a
result of that FACT engineering and development organization was
established on 1965
FEDO is India's on of the project engineering
organization as a wide spectrum of industries like petrochemicals , refining ,
pharmaceuticals , hydro metallurgy etc.. and petroleum storage ,
environmental engineering , off site facilities etc… It undertakes project
execution on consultancy basis , design and engineer handmade procurement
and construction with practiced care , hard core professionals , advanced
computer system , technology tie-ups with globally reputed technology license
and a provoking track record have made FEDO the first choice for engineering
and turn key projects for India blue chips and western Asian countries.

FACT ENGINEERING WORKS (FEW)

FEW was established on 1996. FEW is get another
division of FACT which is established to turn in to reality the dream that the
FACT revolution had give wise to. It was originally conceived on fabricating
unit for large scale fertilizer plant. And on the years roll by FEW had attained
new dimensions and on today FEW is one of the leading fabricators in India ,
equipped with modern facilities and an excellent team of professionals. Over
the years it developed capabilities in the manufacture of chare pressure vessels
, heat exchanger , columns , tower etc.. required for the fertilizers ,
petrochemical and petroleum industries. FEW had received ISO 9002
certification in 1998.

RESEARCH AND DEVELOPMENT

Research and development plays a vital role in giving
the company and its products the cutting edge in the competitive market.
FACTs well equipped research and development department has advanced
facilities equipped with pilot plants , modern equipments and accessories. A
team of highly motivated research scientists backs it. Various process has been
developed and patented by FACT research and development division of
which several have been commercialized successfully. Field trials on slow
release fertilizers developed by the division have been successful. Production
of bio-fertilizers has commenced with an installed capacity of 150 tons per
annum.

PRODUCT PROFILE
FACT manufactures straight fertilizers , complex fertilizers ,
fertilizer mixtures and chemicals.
a) STRAIGHT FERTILIZERS
 1) Ammonium Sulphate
Ammonium sulphate is a nitrogenous fertilizer
containing 20.6% nitrogen , entirely in ammoniac form. It has
excellent physical properties-non hygroscopic , crystalline and free
following. It is deal an a straight nitrogenous fertilizer and also an
iron ingredients in fertilizer mixtures. It is the most widely proffered
nitrogenous fertilizer for dressing on all crops. Another unique
advantages is that it contains 24% sulphare , an important secondary
nutrient.
2) Urea
FACT urea with its 46% nitrogen is the highest
concentrated nitrogenous fertilizer. It is marketed in the form of pills
an has got good physical prosperities. It is the cheapest source of
"N". There is a great saving in overhead like transport , storage ,
handling and application charges due to its concentrated nutrient
contents. FACT urea is deal for foliar application also , the nutrient
content is extremely low.
b) COMLEX FERTILIZERS
1) FACTOM FOS 20:20:0:15
(Ammonium Phosphate Sulphate)
Factom fos 20:20:0:15 is a chemical blend of 40 parts of
20%"N" and p2o5. The entire N is in ammonial form and P is
completely water soluble. In addition FACTOM FOS contains 15 %
sulphar , a secondary plant nutrient which is now attaining great
importance is the cultural scene. FACTOM FOS 20:20:0:15 with the
granular formant non hygroscopic and fire flowing nature , has
excellent physical properties. It is ideal for application on all soils
and crops. FACTOM FOS 20:20:0:15 can also be used for foliar
application.
2) Diammonium Phosphate
 FACT Di –Ammonium (DAP) is also an NP complex
fertilizer with 18 % N and 46% P2O5. It is a concentrated fertilizer.
As the entire "N" is in ammonial form and phospherom fully in
water soluble form , it is suitable for all soils crops. The high "P"
content of the fertilizer make its ideal and suitable for application to
crops like pulses , ground nut and other legumes.
c) FERTILIZER MIXTURES
1) NPK Mixtures
FACT prepares a very large scale all the standared
mixtures for different cropes for Kerala an stipulated by the dept of
agriculture. In adition FACT prepares special tailor made fertilizer
mixtures of any required grade plantation cropes like coffee , tea ,
rubber etc…
2) Rose Mix
FACT rose mix is a special tonic for roses. This
fertilizer blend besides N , P and K contains the secondary and trace
elements in the required form and correct quantity for roses. Rose
mix is marketed in 500gms packets and available at prominent
fertilizer shops.
3) Vegetable Mixture
FACT vegetable mixture is also a special blend
exclusively prepared for use on vegetables. FACT vegetable mixture
is available in 1 kg packet.
4) Garden Mixture
FACT garden mixture is also a fertilizer blend
specially prepared for garden , pot flowers and foliage types. It is
sold in 1 kg packet.
d) CHEMICALS
1) An Hydro Ammonia
Ammonia is one of the basic products in the
manufacturer of fertilizers. FACT produces Ammonia of over
99.96% purity , used mainly for manufacture of ammonium
phosphate. Besides it also finds are mainly for rubber and explosive
industry and refineries. It is also used in the pharmaceutical
industry.
2) Sulphuric Acid
FACT has one of the largest plants in Asia for
producing Sulphuric Acid. Sulphuric Acid manufactured in FACT
plants has purity of 98%.
3) Caprolactum
Caprolactum is the raw material for Nylon-6 the
product quality of FACT Caprolactum is among the best available in
the world.
4) Nitric Acid and Soda Ash
Small quantities of Nitric Acid and Soda Ash are
obtained from the caprolactum plants as by products.

18
 REVIEWOF
LITERATURE
CONCEPTUAL BACK GROUND OF WORKING
CAPITAL

INTRODUCTION

In practice a firm has to empty short term assets and short term
sources of finance for management of such assets , described as working
capital management , is one of the most important aspects of the overall
financial management. It is one of the important decision making area of
financial management of an enterprise. It requires understanding of

(1) How to raise and allocate financial recourses

(2) How to create short term investment and financial
decision to the overall objectives of the firm.
(3) How to relate short term financial decisions to certain
long term financial decisions
NEED FOR WORKING CAPITAL

The need for working capital to run the day to day business
activities cannot be over emphasized. We will hardly find a business firm
which does not require any amount of working capital , indeed , firms differ in
their requirements of the working capital.
We know firms aim at maximizing the wealth of
share holders. In its endeavor to maximize share holders wealth , a firm
should earn sufficient return from its operations. Earning a study amount of
profit requires successful sales activity. The firm has to invest enough fund in
current assets for the success of the sales activity current assets are needed
because sales do not convert in to cash instantaneously. There is always an
operating cycle involved in the conversation of sales in to cash.
19
OPERATING CYCLE

The operating cycle of manufacturing company involve three phases.

1) Acquisition of recourses such as raw material , labor , power and fuel.

2) Manufacture of the product which includes conversion of raw material
in to work in progress and finished goods.
3) Sales of the product either for cash or on credit. Credit sales create book
debts for collection.

Concept of working capital

1.Gross working capital refers to firm’s investment in current

assets. Current assets are the assets which can be converted in to
cash with in a accounting year and include cash, short term
securities, debtors, bills receivable and stocks.
2.Net working capital refers to the difference between current assets
and current liabilities. Current liabilities are those claims of
outsiders which are expected to mature for payment with in an
accounting year accounting year and include creditors, bills payable
and outstanding expenses. Net working capital can be negative or
positive. A positive networking capital will arise when current
assets exceeds current liabilities. A negative net working capital
occurs when current liabilities are in excess of current assets.

20
 A firm is required to invest in current assets for a smooth,
uninterrupted production and sales. How much a firm will invest in current
assets will depend on its operating cycle.

The two concepts of working capital-gross and net are not exclusive;
rather they have equal significance from the management point of view. The
gross working capital concept focuses attention on two aspects of current
assets management: a) how to optimize investment in current assets? (b) How
should current assets be financed?

The consideration of the level of investment in current assets should

avoid two danger points- excessive and inadequate investment in current
assets. Investment in current assets should be just adequate, not more or less,
to the needs of the business firm. Excessive investment in current assets
should avoid because it impairs the firm’s profitability, as idle investment earn
nothing. On the other hand, inadequate amount of capital can threaten
solvency of the firm because of its inability to meet its current obligations.

Another aspect of gross working capital points to the need of arranging

funds to finance current assets. Whenever a need for working capital funds
arises due to the increasing level of business activity or for any other reason,
financing arrangement should be made quickly. Similarly, if suddenly, some
surplus funds arise they should not be allowed to remain idle, but should be
invested in short- term securities.

Net working capital is a qualitative aspect. It indicates the liquidity

position of the firm and suggests the extent to which working capital needs
may be financed by permanent source of funds. Current assets should be
sufficiently in excess of current liabilities to constitute a margin or buffer for

21
 maturing obligations within the ordinary operating cycle of a business. A
weak liquidity position poses a threat to the solvency of the company and
makes it unsafe and unsound. A negative working capital means a negative
liquidity, and may prove to be harmful for the company’s reputation.
Excessive liquidity is also bad.

Net working capital concept also covers the question of judicious mix
of long-term and short-term funds for financing current assets. For every firm,
there is a minimum amount of net working capital which is permanent.
Therefore, a portion of the working capital should be financed with the
permanent sources of funds such as equity share capital, debenture, long-term
debt, preference share capital or retained earnings. Management must,
therefore, decide the extent to which current assets should be financed with
equity capital and/ or borrowed capital.

In summary, it may be emphasized that both gross and net concepts of

working capital are equally important for the efficient management of
working capital. There is no precise way to determine the exact amount of
gross or net working capital for any firm.

TYPES OF WORKING CAPITAL

The classification of working capital in to two components in current assets is

short and long terms are as follows.
1)Permanent working capital
Permanent working capital is the minimum mount of current assets
which is needed to conduct the business even during the dullest season of the
year. The amount varies from year to year , depending upon growth of the
company and the stage of the business cycle in which it operates. It is the
amount of funds which required to produce the goods and services which are
required on a continuing basic over the entire year. It is maintained as the
medium to carry on operations at any time.

2) Variable working capital

It represents the additional assets which are required of different times

during the operating year additional inventory , extra cash etc.
Seasonal working capital is the additional of current assets
cash receivables , inventory which are required the most active business
season for the year. It is temporarily invested in purchase.
3) Gross working capital
Working capital some times defined as " the current assets ofv thec
firm notably cash and marketable securities , amount receivables and
inventory". This is also known as gross working capital. It refers to funds
invested in current assets. The gross working capital is going concern
concept. This concept is helpful to provide current amount off working
capital t the right time so that the firm is able to realize the greatest return
on investment.
4) Net working capital
It refers to both current assets and current liabilities. Net
working capital is defined as current assets minus current liabilities. The
concept of net working capital enable a firm to determine how much
amount is left for operational requirements.
5) Balance sheet working capital
It is one which calculated from the items appearing in the
balance sheet. Gross working capital is represented by the excess of current
assets over current liabilities are examples of balance sheet working capital.
6) Cash working capital
It is one which calculated from the item appearing in the
profit and loss account it shows the real flow of money or values at a
particular time and it is conceded to be the most realistic approach in
 working capital management. It is basis of the operation cycle concept
which has assumed great importance in financial management in recent
years. The reason is that the cash working capital indicates the adequacy of
cash flow , which is an essential pre requisite of a business.
7) Negative working capital
Negative 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

There are no set of rules or formulae to determine the working capital
requirements of firms. A large number of factors, each having a different
importance, influence working capital needs of firms. Following are the factors
which generally influence the working capital requirements of firms.
1) Nature of business
Working capital requirements of a firm are basically
influenced by the nature of its business. Trading and financial firms have a
very small investment in fixed assets, but require a large sum of money to
be invested in working capital. Manufacturing undertakings also have to
invest substantially in working capital and a nominal amount in fixed
assets. In contrast, public utilities have a very limited need for working
capital and have to invest abundantly in fixed assets. Their working capital
requirements are nominal because they may have only cash sales and
supply services, not products.
2) Size of business/scale of operations
The working capital requirements of a concern are directly
influenced by the size of its business which may be measured in terms of
scale of operations. Greater the size of a business unit, generally larger will
be the requirements of working capital.
3) Production policy
 In certain industries, the demand is subject to wide fluctuations due
to seasonal variations. The requirements of working capital, in such cases
depend upon the production policy. The production could be kept either
steady by accumulating inventories during slack periods with a view to
meet high demand during peak season or the production could be
curtailed during the slack season and increased during the peak season. If
the policy is to keep production steady by accumulating inventories it will
require higher working capital.
4) Manufacturing process/length of production cycle
In manufacturing business, the requirements of working capital
increase in direct proportion to length of manufacturing process. Longer
the process period of manufacture, larger is the amount of working capital
required.
5) Sales and demand conditions
The working capital needs of a firm are related to its sales. It is
difficult to precisely determine the relationship between volume of sales
and working capital needs. A growing firm may need to invest funds in
fixed assets in order to sustain its growing production and sales. This will,
in turn, increase investment in current assets to support enlarged scale of
operations. It should be realized that a growing firm needs funds
continuously. It used external as well as internal sources to meet increasing
needs of funds.
Sales depend on demand conditions. Most firms experience seasonal
and cyclical fluctuations in demand for their products and services. These
business variations affect the working capital requirements, specially the
temporary working capital requirement of the firm.
6) Credit policy
The credit policy of the firm affects the working capital by
influencing the level of debtors. A concern that purchases its requirements
on credit and sells its products/services on cash requires lesser amount of
working capital. On the other hand a concern buying its requirements for
cash and allowing credit to its customers, shall need larger amount of
working capital as very huge amount of funds are bound to be tied up in
debtors or bills receivables.
7) Availability of credit
The working capital requirements of a firm are also affected by credit
terms granted by its creditors. A firm will need less working capital if
liberal credit terms are available to it. Similarly , the availability of credit
from banks also influences the working capital needs of the firm. A firm,
which can get credit terms easily on favorable conditions, will operate with
less working capital than a firm without such a facility.
8) Business cycles
Business cycle refers to alternate expansion and contraction in
general business activity. In a period of boom i.e., when the business is
prosperous, there is a need for larger amount of working capital due to
increase in sales, rise in prices, optimistic expansion of business, etc. on the
contrary in the times of depression i.e., when there is a down swing of the
cycle, the business contracts, sales decline, difficulties are faced in
collections from debtors and firms may have a large amount of working
capital lying idle.
9) Operating efficiency
The operating efficiency of the firm relates to the optimum
utilization of resources at minimum costs. The firm will be effectively
contributing in keeping the working capital investment at a lower level if it
is efficient in controlling operating costs and utilizing current assets. The
use of working capital is improved and pace of cash conversion cycle is
accelerated with operating efficiency. Better utilization of resources
improves profitability and thus, helps in releasing the pressure of working
capital.
10) Price level changes
Changes in the price level also affect the working capital
requirements. Generally, the rising prices will require the firm to maintain
larger amount of working capital as more funds will be required to
maintain the same current assets. However, companies which can
immediately revise their product prices with rising prices levels will not
face a severe working capital problem. The effect of rising prices may be
different for different companies.
11) Earning capacity and dividend policy
Some firms have more earning capacity than others due to
quality of their products, monopoly conditions; etc. Such firms with high
earning capacity may generate cash operations and contribute to their
working capital. The dividend policy of a concern also influences the
requirements of its working capital. A firm that maintains a steady high
rate of cash dividend irrespective of its generation of profits needs more
working capital than the firm that retains larger part of its profits and does
not pay so high rate of cash dividend.
12) Other factors
Certain other factors such as operating efficiency, management
ability, irregularities of supply, import policy, asset structure, importance
of labour, banking facilities, etc., also influence the requirements of
working capital.
FACTORS AFFECTING THE WORKING CAPITAL REQUIRMENTS
The working capital requirements of a concern depend upon a large
number of factors such as nature and size of business , the character of their
operation etc. It is not possible to rank them because all such factors are of
great importance and individual factors changes a firm overtime.
However , the important factors generally influencing the working
capital requirements are:
1) Nature of business
2) Size of business
3) Production policy
4) Manufacturing process
5) Seasonal variations
6) Credit policy
7) Business cycle
8) Rate of growth of business
9) Earning capacity and dividend policy
10) Price level change
11) Working capital cycle

28
DATA ANALYSIS AND
INTERPRETATION
 TABLE NO.1
STATEMENT SHOWING GROSS WORKING CAPITAL

Particulars 2003-2004 2004-2005 2005-2006 2006-2007 2007-2008

Inventories 19686.01 22889.15 25996.71 34615.62 31844.48

Sundry 22815.45 9997.38 14817.40 19233.92 7585.22

debtors
Cash and 2465.98 2277.77 3462.62 7781.95 6746.39
bank
balances
42.29 36.93 11.59 730.39 501.98
Other
current asset
Loans and 2998.79 5600.99 9969.59 9668.21 11068.34
advances
Total current 48008.52 40802.22 54257.91 72030.09 57746.41
assets
Source: Annual report of FACT

29
 TABLE NO.2
STATEMENT SHOWING NET WORKING CAPITAL
(Rs. Lakhs)
Particulars 2003-2004 2004-2005 2005-2006 2006-2007 2007-2008

Inventories 19686.01 22889.15 25996.71 34615.62 31844.48

Sundry 22815.45 9997.38 14817.40 19233.92 7585.22

debtors
Cash and 2465.98 2277.77 3462.62 7781.95 6746.39
bank
balances
42.29 36.93 11.59 730.39 501.98
Other
current asse
Loans and 2998.79 5600.99 9969.59 9668.21 11068.34
advances
Total current 48008.52 40802.22 54257.91 72030.09 57746.41
assets

CURRENT LIABILITIES
Liabilities 34177.19 27513.19 37086.51 39098.07 25414.43

Provisions 1425.24 1640.16 1939.89 2282.53 3596.65

Total
current 35602.43 29153.35 39026.40 41380.60 29011.08
liabilities

Net
working 12406.09 11648.87 15231.51 30649.49 28735.33
capital
Source: Annual report of FACT

30
 TABLE NO. 3
STATEMENT OF CHANGES IN WORKING CAPITAL
(Rs. Lakhs)
Particulars 2003-2004 2004-2005 Increase Decrease
Current assets
1.Inventories 19686.01 22889.15 3203.14
2. Sundry Debtors 22815.45 9997.38 12818.07
3. Cash&Bank 2465.98 2277.77 188.21
4.other asset 42.29 36.93 5.36
5.loans and 2998.79 5600.99 2602.2
advances
Total 48008.52 40802.22
Current liabilities
1.liabilities 34177.19 27513.19 6664
2. provisions 1425.24 1640.16 214.91
Total 35602.43 29153.35
Working capital 12406.09 11648.87
Decrease in working -757.21 757.21
capital
Total 11648.87 11648.87 13226.55 13226.55

31
 TABLE NO. 4
STATEMENT OF CHANGES IN WORKING CAPITAL

(Rs. Lakhs)
Particulars 2004-2005 2005-2006 Increase Decrease
Current assets
1.Inventories 22889.15 25996.71 3107.56
2. Sundry Debtors 9997.38 14817.40 4820.02
3. Cash&Bank 2277.77 3462.62 1184.85
4.other asset 36.93 11.59 25.34
5.loans and 5600.99 9969.59 4368.6
advances
Total 40802.22 54257.91
Current liabilities
1.liabilities 27513.19 37086.51 9573.32
2. provisions 1640.16 1939.89 299.73
Total 29153.35 39026.40
Working capital 11648.87 15231.51
Increase in working 3582.64 3582.64
capital
Total 15231.51 15231.51 13481.03 13481.03

32
 TABLE NO. 6
STATEMENT OF CHANGES IN WORKING CAPITAL

(Rs. Lakhs)
Particulars 2005-2006 2006-2007 Increase Decrease
Current assets
1.Inventories 25996.71 34615.62 8618.91
2. Sundry Debtors 14817.40 19233.92 4416.52
3. Cash&Bank 3462.62 7781.95 4319.33
4.other asset 11.59 730.39 718.8
5.loans and 9969.59 9668.21 301.38
advances
Total 54257.91 72030.09
Current liabilities
1.liabilities 37086.51 39098.07 2011.56
2. provisions 1939.89 2282.53 342.64
Total 39026.40 41380.60
Working capital 15231.51 30649.49
Increase in working 15418 15418
capital
Total 30649.49 30649.49 18073.55 18073.55

33
 TABLE NO. 7
STATEMENT OF CHANGES IN WORKING CAPITAL

(Rs. Lakhs)
Particulars 2006-2007 2007-2008 Increase Decrease
Current assets
1.Inventories 34615.62 31844.48 2771.14
2. Sundry Debtors 19233.92 7585.22 11648.7
3. Cash&Bank 7781.95 6746.39 1035.56
4.other asset 730.39 501.98 228.41
5.loans and 9668.21 11068.34 1400.13
advances
Total 72030.09 57746.41
Current liabilities
1.liabilities 39098.07 25414.43 13683.64
2. provisions 2282.53 3596.65 1314.12
Total 41380.60 29011.08
Working capital 30649.49 28735.33
Decrease in working -1914.16 1914.16
capital
Total 28735.33 28735.33 16997.93 16997.93

34
 TREND ANALYSIS
Time series or trend analysis of ratios indicates the direction of change.
This kind of analysis is particularly applicable to the items of profit and loss
account.
Trend percentage is also referred to trend ratio. The financial
performance for a series of years may be analyzed to determine the trend of
the data contained therein. This method of analysis is adopted to determine,
the direction, upward or down ward. The method of calculating trend
percentage includes the calculation of percentage relationship, each item bears
to the same item in the base year. Each item of the base year is taken as 100and
on that basis the percentage for each of the item of each of the year is
calculated.
There are different steps for calculating trend percentage.
1) Selection of the base year, which may be earliest, latest on any
intervening period.
2) Assignment of a weight of 100 to each amount of the base year is
next step.
3) Mention each item amount of every other year as a percentage of
its base year amount by applying the formula.
Trend percentage thus shows not only the magnitude but also the
direction upward or down ward during various years and hence is quite
useful in horizontal analysis. It is advisable that trends of sales and net income
may be studied in the light of two factors: the rate of expansion or secular
trend in the growth of the business and the general price level.

35
1. Trend analysis of current assets

TABLE NO.8
STATEMENT SHOWING TREND ANALYSIS OF CURRENTASSETS

Year Current assets (Rs. Trend percentage

Lakhs)

2003 48009 100

2004 40802 85

2005 54150 113

2006 72030 150

2007 57746 120

 36

GRAPH SHOWING TREND OF CURRENT ASSETS

trend percentage

160
140
120
100
trend percentage

80
60
40
20
0
2003 2004 2005 2006 2007
year

Interpretation:
 From the graph it is clear that the direction of changes of current
assets is fluctuating. During the year 2003, the current assets decreased from
100to 85, which further started growing during the years 2005 and 2006.

37

2. Trend analysis of current liabilities

TABLE NO.9
STATEMENT SHOWING TREND ANALYSIS OF CURRENT LIABILITIES

Year Current liabilities(Rs. Trend percentage

Lakhs)

2003 35602.43 100

2004 29153.35 82

2005 39026.4 90

2006 41380.6 116

2007 29011.08 82
 38

GRAPH SHOWING TREND OF CURRENT LIABILITIES

 trend percentage

120
percentage

100

80

60

40

20
0
2003 2004 2005 2006 2007
year

Interpretation:
From the graph it is clear that the current liabilities have
fluctuated during the last five years, which had decreased from 116to
82 during the last year 2006-07.

39

3. Trend analysis of sundry debtors

TABLE NO.10
STATEMENT SHOWING TREND ANALYSIS OF SUNDRY DEBTORS
Year Sundry debtors (Rs. Trend percentage
Lakhs)

2003 22815.45 100

2004 9997.38 44

2005 14817.40 65

2006 19233.92 85

2007 7585.22 45
 40

GRAPH SHOWING TREND OF SUNDRY DEBTORS

trend percentage

100
90
percentage

80
70
60
50
40
30
20
10
0
2003 2004 2005 2006 2007
year

Interpretation:
 As per the graph, the direction of change of sundry debtors
is fluctuating. The first 2 years shows a decreasing trend, and it goes
on increasing in the next two years and the last year it is decreased.

41

1. Trend analysis of sundry creditors

TABLE NO.11
STATEMENT SHOWING TREND ANALYSIS OF CREDITORS

Year Creditors (Rs. Lakhs) Trend percentage

2003 13773.89 100

2004 14345.03 104

2005 19625.15 142

2006 18316.66 132

2007 6887.24 51
 42

GRAPH SHOWING TREND OF SUNDRY CREDITORS

trend percentage

160
140
percentage

120
100
80
60
40
20
0
2003 2004 2005 2006 2007
year

Interpretation:
 As per the graph, the creditors shows a growing trend in
years, 2003, 2004 and 2005. But during the last year of study, i.e.,
2006-07, it decreased to51.

43

CURRENT RATIO

Current ratio in a business concern indicates the availability of

current assets to meet its current liabilities. Higher the ratio better is
the coverage. Traditionally it is also called 2:1 ratio, i.e. 2 is the
standard for current assets for each unit of current liabilities. But this
is only a conservative outlook about the coverage of current
liabilities.

Current ratio = Current Assets

Current Liability

TABLE NO.1
STATEMENT SHOWING CURRENT RATIO

Cash to Current
Year Current Assets Current liabilities Assets ratio

2003 48009 35602.43 1.35

2004 40802 29153.35 1.4
 2005 54150 39026.4 1.39
2006 72030 41380.6 1.74
2007 57746 29011.08 1.99
TOTAL
Source: Annual report of FACT

44

GRAPH SHOWING CURRENT RATIO

current ratio

12

10

8
ratios

0
2003 2004 2005 2006 2007
year

Interpretation
 As a conventional rule, a current ratio of 2 to 1 or more is
considered satisfactory. But the current ratio of the company over the 5 years
is not meeting the ideal ratio. But in the last year the ratio is just 2:1. so we
can conclude that working capital position of the company is improving
stage.

45

QUICK RATIO

This ratio is similar to current ratio except that it exclude

inventory from the numerator of the ratio. All current assets have
different degrees of risk and liquidity, among them, inventory is
generally the least liquid asset as it needs more time for conversion
than other components of current assets or it would have no value at
all at the time of real crisis. The quick ratio, therefore, emphasis the
relationship of liquid assets (i.e. current assets less inventory) to
current liabilities. The term liquid assets refers to current assets,
which can be converted into cash immediately or at a short notice. It
is compared as follows.

Quick Ratio = Quick Assets

Current Liabilities

TABLE NO.2
STATEMENT SHOWING CURRENT RATIO
 Year Liquid assets Current liabilities Quick ratio

2003 28322.5 35602.43 .8

2004 17913.07 29153.35 .61
2005 28261.2 39026.4 .72
2006 37414.47 41380.6 .9
2007 25901.93 29011.08 .89
Total

Ssource: Annual report of FACT

46

GRAPH SHOWING QUICK RATIO

Quick ratio

0.9
0.8
0.7
0.6
0.5
ratios

0.4
0.3
0.2
0.1
0
2003 2004 2005 2006 2007
year

Interpretation:
 The quick ratio of the company is showing a satisfactory current
financial condition. During the last three years, the company maintaining
and improving the liquidity position. In 2004 ,company has a low liquidity
but after 2004 company improve illiquidity position.

47

DEBT EQUITY RATIO

Several debt ratios may used to analyze the long term

solvency of the firm. The firm may be interested in knowing the
proportion of the interest bearing debt in the capital structure. Total
debt include short and long term borrowings from financial
institutions, debenture/bonds, deferred payment arrangements for
buying capital equipments, and bank borrowings, public deposits
and any other interest bearing loan. The relationship describing the
lender’s contribution for each rupee of the owner’s contribution is
called Debt-Equity Ratio.
Debt Equity Ratio = Outsiders Fund

Shareholders Fund

TABLE NO.3
STATEMENT SHOWING DEBT EQUITY RATIO

Year Outsiders fund Shareholders fund Debt equity ratio

2003 113015.27 35660.14 3.16

2004 115890.74 35580.88 3.25
2005 68074.52 64806.53 1.05
2006 92863.47 64802.36 1.43
2007 75857.73 64798.36 1.17
 Source: Annual report of FACT

48

GRAPH SHOWING DEBT EQUITY RATIO

debt equity ratio

3.5

2.5

2
ratio
1.5

0.5

0
2003 2004 2005 2006 2007
year

Interpretation:
The debt equity ratio of the co shows a fluctuating trend. During the
year 2003-the ratio was 3.16, which increased to 3.25 during 2004. while in the
following years showed an decreasing trend in the debt equity ratio, such as
 1.05 in 2005, 1.43 in 2006 and 1.17 in 2007. And this decrease in the ratio
means company not concentrated in using long term debt .

49

ABSOLUTE LIQUIDITY RATIO

Absolute liquidity is represented by cash and near cash items. Hence, in the
computation of this ratio, only absolute liquid assets are compared with
current liabilities. These assets normally included cash, bank, and marketable
securities. It is to be observed that receivable are excluded from the list of
liquid assets.

Absolute ratio = cash + bank+ marketable securities

Current liability

TABLE NO.4
STATEMENT SHOWING ABSOLUTE LIQUIDITY RATIO

Year Liquid assets Current liability Absolute ratio

0.79
2003 28322.5 35602.43
0.6
2004 17913.07 29153.35
0.72
2005 28261.2 39126.40
0.9
2006 37414.47 41380.60
0.89
2007 25901.93 29011.08
Source: Annual report of FACT
 50

GRAPH SHOWING ABSOLUTE LIQUIDITY RATIO

Absolute liquid ratio

0.9
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0
2003
2004 West
2005
2006 ratio
2007
year

Interpretation:
 The absolute liquid ratio of the company is satisfactory and it is
showing a fluctuating trend. In last two years absolute liquid ratio is
increased .

51

TOTAL ASSETS TO DEBT RATIO:

The ratio of Total Assets to Debt ratio establishes a relationship
between total assets and the total long term debts. The two
components of this ratios, i.e., total assets and debt are computed as
follows:

(a) Total assets : Total assets include fixed as well as current assets.
However, it does not include fictitious assets like preliminary expenses,
underwriting commission, etc. and debt balance of Profit and Loss
account
(b) Long term Debts : Long term debt refers to debt that will mature after
one year. It includes debenture, bonds, loans from financial institutions.

Formula:
Total asset to debts ratio = Total asset

Long term debt

TABLE NO.5
STATEMENT SHOWING TOTAL ASSET TO DEBTS RATIO

Year Debt Total asset Absolute ratio

148675.41 1.3
2003 113015.27
151471.62 1.3
2004 115890.74
132881.05 1.95
2005 68074.52
127016.34 1.36
2006 92863.47
140656.09 1.85
2007 75857.73
 Source: Annual report of FACT

52

GRAPH SHOWING TOTAL ASSET TO DEBT RATIO

total asset to debt ratio

1.95 ratio 1.85

1.3 1.3 1.36

West
2003 2004 2005 2006 2007
year

Interpretation:

Total asset to debt ratio is usually expressed as pure ratio 2:1. It helps
to measure the safety margin available to the providers of long term
debts. Here the ratio is less than 2:1, this indicates a risky financial
position as it means that business depends heavily on outside loans
from its existence.

53

PROPRIETARY RATIO:

The objective of computing the proprietary ratio is to establish the

relationship between proprietor’s funds and total assets. Proprietor’s
funds means share capital plus reserves and surplus, both of capital
and revenue nature. Loss if any should be deducted. Funds payable
to others should not be added. This ratio shows the extent to which
the shareholders own the business. The different between this ratio
as % and 100 represent the ratio of total liabilities to total assets. It is
worked out as follows:
Proprietary ratio = Share holders fund
Total asset

TABLE NO.6
STATEMENT SHOWING PROPRITORY RATIO
Year Equity Total asset Absolute ratio

148675.41 0.23
2003 35660.14
151471.62 0.23
2004 35580.88
132881.05 0.48
2005 64806.53
127016.34 0.5
2006 64802.36
140656.09 0.46
2007 64798.36
Source: Annual report of FACT

54

GRAPH SHOWING PROPRITORY RATIO

propritory ratio
0.5

0.45

0.4

0.35

0.3

ratio 0.25

0.2

0.15

0.1

0.05

0
2003 2004 2005 2006 2007
year
 Interpretation:
The propritory ratio of the co shows a improving trend. During the
year 2003 and 2004 the ratio is 0.23: 1 but in the last three years which
increased to 0.48:1 ,0.50: 1 and 0.46:1 respectively.While in the following years
showed a increasing trend in the propritory ratio.

55

FIXED ASSET RATIO

Fixed asset ratio indicates the extend to which the total of fixed assets is
financed by long term funds of the firm. Generally the total of long term funds
or the ratio should be 100%. But in case the fixed assets exceed the total of long
term funds, it implies that the firm has financed apart of its fixed assets out of
the current funds or working capital which is not a good financial policy. And
if the total long term funds are more than total fixed assets, it means that
working capital requirements are met out of the long term funds of the firm.

Fixed assets ratio = Net fixed assets

Long term funds

TABLE NO.7
STATEMENT SHOWING FIXED ASSET RATIO
 Year Net fixed assets Long term funds Fixed Asset ratio

66959.97 0.59
2003 113015.27
57391.96 0.49
2004 115890.74
51340.65 0.75
2005 68074.52
46030.77 0.49
2006 92863.47
43327.6 0.57
2007 75857.73
Source: Annual report of FACT

56

GRAPHS SHOWING FIXED ASSET RATIO

Fixed asset ratio

year

2007

2006

2005

2004

2003

ratio 0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8

Interpretation

The fixed asset ratio is high in the year 2005, but in 2007 it is increasing
trnd. The ratio decreased to 0.49 during 2006, which increased to 0.57 during
2007. This shows that the ratio is vary from year to year as increasing and
decreasing trend simultaneously.

57

GENERAL PROFITABILITY RATIO

1. GROSS PROFIT RATIO

The gross profit ratio reflects the efficiency with which

management produces each unit of product. This ratio indicates the
average spread between the cost of goods sold and the sales revenue.

Gross profit ratio = Gross profit

* 100
Net sales

TABLE NO.8
STATEMENT SHOWING GROSS PROFIT RATIO

Year Gross profit Sales Gross profit ratio

2003 -6832 76751 -8.9

2004 -2035 98055 -2
2005 -1371 101917 -1.34
2006 -1158 105501 -1.09
2007 -9316- 56297 -16.5
Source: Annual report of FACT
 58

GRAPH SHOWING GROSS PROFIT RATIO

-5
ratio
-10

-15

-20
2003 2004 2005 2006 2007
gross profit ratio year

Interpretation:
The gross profit ratio in recent five years is decreasing trend such
as.-8.9, -2 , -1.34, -1.09 ,-16.5 . the ratio decreased to -16.5 in the year 2007. in
2007 gross profit ratio of the company has big changes. Because it is varry
 from -1.09 to -16.5 . totally gross profit ratio of the company is not satisfactory
in recent years , especially in 2007.

59

NET PROFIT RATIO

This ratio explains per rupee profit generating capacity of sales. If the
cost of sales is lower, then the net profit will be higher than we divide it with
the net sales, the result is the sales efficiency. Lower is the net profit per rupee
of sales, lower will be the sales efficiency. The concern must try for achieving
greater sales efficiency for maximizing the return on investment. This ratio is
very useful to the proprietors and prospective investors because it reveals the
overall profitability of the concerns. This can be calculated as

Net profit ratio = Net profit after tax

* 100
Net sales

TABLE NO.9
STATEMENT SHOWING NET PROFIT RATIO

Year Net profit Sales Net profit ratio

2003 -16722 76751 -21.78

2004 -16796 98055 -17.12

2005 23566 101917 23.12

2006 -12473 105501 -11.8

2007 897 56297 1.6

 Source: Annual report of FACT

60

GRAPH SHOWING NET PROFIT RATIO

net profit ratio

25
20
15
10
ratio
5
0
-5
-10
-15
-20
-25
2003 2004 2005 2006 2007
year

Interpretation:
 From the study, it is clear that the company is not making profits
during the years, i.e., 2003 and 2004. The ratios for the 2 years are negative.
While the company is making profits during 2005. The net profit ratio during
the years 2003, and 2004 are-21.78 and -17.12 but in 2005 it is varry to 23.12
as net profit .In 2007 it is positively varry from 2006 as -11.8 to 1.6 and this
gives the idea of improved efficiency of the company.

61

OPERATING RATIO

The operating ratio is yardstick of operating efficiency. The

operating ratio indicates the average aggregative variations in
expenses, where some of the expenses may be increasing while
others may be falling. These ratios when compared from year to year
for the firm will throw light on managerial policies and programmes.

Operating ratio = Operating cost

* 100
Net sales

TABLE NO.10
STATEMENT SHOWING OPERATING PROFIT RATIO

Year Operating cost Sales Operating profit ratio

2003 111451.3 76751 145.2

2004 134491.63 98055 137.15
2005 152431.05 101917 149.5
2006 161762.88 105501 153.3
2007 108933.17 56297 193.5
 Source: Annual report of FACT

62

GRAPH SHOWING OPERATING PROFIT RATIO

operating profit ratio

250

200

150
ratio

100

50

0
2003 2004 2005 year 2006 2007

Interpretation:

The operating profit ratio of the company is improved during

the recent five years : 145, 137,149,153,193 respectively. So it depics that
operating efficiency of the company is improved especially in 2006 to 2007
,because in 2006 the ratio is 153 it is hugely changes to 193 in 2007 ,it is
satisfactory level of operating ratio.

63

CHANGES IN FINANCIAL POSITION FOR THE YEAR ENDED

31ST MARCH 2004

2003-2004
SOURSES OF FUNDS
Funds generated from operations
Profit after tax 0
Depreciation 6458
Long term loan 0
Short tem loan 7726
0
1418

APPLICATION OF FUNDS
Loss for the year 16722
Capital expenditure (net) 344
Repayment of long term loans 720
Repayment of short term loans 515
Reduction in liability towards the government
Of India loan on account of conversion in to capital 0
Reduction in liability towards the government of India loan
on account of write off 0
Reduction in liability towards interest due on the govt ogf
Indian loan written off 0
Miscellaneous expenditure not written off(net)
Increase/decrease(-) in working capital 2512
-6629
14184

64

CHANGES IN FINANCIAL POSITION FOR THE YEAR ENDED

31ST MARCH 2005

2004-2005
SOURSES OF FUNDS
Funds generated from operations
Profit after tax 0
Depreciation 6127
Long term loan 0
Short tem loan 4494
0
10621

APPLICATION OF FUNDS
Loss for the year 16796
Capital expenditure (net) -92
Repayment of long term loans 0
Repayment of short term loans 40
Reduction in liability towards the government
Of India loan on account of conversion in to capital 0
Reduction in liability towards the government of India loan
on account of write off 0
Reduction in liability towards interest due on the govt ogf
Indian loan written off 0
Miscellaneous expenditure not written off(net) -496
Increase/decrease(-) in working capital -5627

10621

65

CHANGES IN FINANCIAL POSITION FOR THE YEAR ENDED

31ST MARCH 2006

2005-2006
SOURSES OF FUNDS
Funds generated from operations 23566
Profit after tax 6271
Depreciation 29230
Long term loan 4000
Short tem loan 5121
68188

APPLICATION OF FUNDS
Loss for the year 0
Capital expenditure (net) 224
Repayment of long term loans 0
Repayment of short term loans 0
Reduction in liability towards the government
Of India loan on account of conversion in to capital 29230
Reduction in liability towards the government of India loan
on account of write off 32710
Reduction in liability towards interest due on the govt ogf
Indian loan written off 4869
Miscellaneous expenditure not written off(net) -2429
Increase/decrease(-) in working capital 3584
68188

66

CHANGES IN FINANCIAL POSITION FOR THE YEAR ENDED

31ST MARCH 2007
 2006-2007
SOURSES OF FUNDS
Funds generated from operations
Profit after tax 0
Depreciation 6401
Long term loan 0
Short tem loan 3000
18935
28336

APPLICATION OF FUNDS
Loss for the year 12473
Capital expenditure (net) 982
Repayment of long term loans 0
Repayment of short term loans
Reduction in liability towards the government
Of India loan on account of conversion in to capital 0
Reduction in liability towards the government of India loan
on account of write off 0
Reduction in liability towards interest due on the govt of
Indian loan written off 0
Miscellaneous expenditure not written off(net) -151
Increase/decrease(-) in working capital 15032

28336

67

CHANGES IN FINANCIAL POSITION FOR THE YEAR ENDED

31ST MARCH 2008

2007-2008
SOURSES OF FUNDS
Funds generated from operations 0
Profit after tax 2993
Depreciation 0
Long term loan 1500
Short tem loan -6965
20000
17528

APPLICATION OF FUNDS
Loss for the year 19103
Capital expenditure (net) 295
Repayment of long term loans ----
Repayment of short term loans ----
Reduction in liability towards the government
Of India loan on account of conversion in to capital 0
Reduction in liability towards the government of India loan
on account of write off 0
Reduction in liability towards interest due on the govt ogf
Indian loan written off 0
Miscellaneous expenditure not written off(net) -5
Increase/decrease(-) in working capital -1865

17528

68

FINDINGS
 The working capital position of the company is on fluctuating trend in last
five years. But in 2005 to 2007 it is changed positively and shows increasing
trend as compare with 2003 and 2004. Totally net working capital shows
increasing and decreasing trend.
 Company shows positive working capital for the last five years of the
study due to increase in current asset and decrease in current liabilities. It
depicts that working capital position of the company is in satisfactory level
to maintain the day to day operations.
 In 2006 net current asset has a major increase compare with 2005, but it has
major decrease in 2007.These two major changes is closely affect the
working capital position especially in 2007.
 But , on the basis of current ratio of the firm it is on increasing trend but not
in satisfactory level as compare with the ideal ratio of 2:1
 On the basis of trend analysis of current asset it is on fluctuating trend and
it will closely affect the working capital position and also affect the day to
day operations.
 The trend percentages of current liability is on increasing trend fromm 2004
to 2006 but on 2007 it is decreased and it positively affect for the
maintaining of good working capital position.
 Short term solvency position of the company is satisfied on the basis of its
increasing trend. But on the basis of apt ratio it is not satisfied except last
two years.
 Generally company use outsiders fund on the basis of the debt equity ratio.
but in last three years company try to maintain the balancing of debt and
equity by reducing using more fund from owners and reducing fund from
outsiders for balancing a good long-term solvency position.
 The quick ratio of the company is satisfied in last two years on the basis of
the ideal ratio of 1:1

 The gross profit margin of the company is in decreasing trend and we can
know that company has gross loss in last five years. It is not enough
sufficient to cover the operating and other non operating expenses.
 Net profit of the company is on fluctuating trend. It represents the
inefficiency of the operation. But in the last year company has increasing
trend in their profitability.
 Profitability in operation is increasing trend in last five years on the basis of
operating profit ratio. It is the result of effective operation management of
the company

70

SUGGESTION

 The company shows decreasing trend in working capital for the last year,
so it should maintain adequate current asset to meet its day to day
operations.
 The company should try to decrease the current liabilities for a better
working capital position.
 Company must consider creditors and outsiders by maintaining a good
position in short term and long term solvency
 The company should adopt inventory control techniques and take a good
inventory decisions for the positive affects for a better working capital
position.
 Greater emphasis should be given tom minimize the cost . so cost control
technique is applied. It can be positively affect the profitability of the
company.
 Company try to maintain a good solvency position for good strength of the
working capital position.
 The company must take effective measures to reduce the operating
expenses
 The company can improve the earning power and increase the net prodfit
margin by reducing operating expenses and increasing the sales volume.
 The company’s liquidity position is also not satisfactory, so it should try to
maintain better liquidity position.
 The company’s net profit ratio is not satisfactory and there exist wide gap
between gross profit ratio and net profit ratio because of increasing
operating cost. Therefore steps must be taken to reduce all operating
expenses.

71

CONCLUSION

The study was conducted for a period of 5 years from 2003 to 2007.
secondary data was obtained from the published annual report of the
company. Ratio analysis , trend analysis , schedule of changes in working
capital , fund flow analysis done to evaluate the " WORKING CAPITAL
MANGEMENT OF FACT Ltd". The analysis of five years reveals that the
various factors affects the overall performance and their positive and negative
involvement in financial and non financial aspects of the company.
Totally we can conclude that financial
position of the company is on improving stage and company take necessary
decisions for the improvement of profitability , solvency ,leverage and all
other financial strength of the company as compare with previous years.

72

BIBLIOGRAPHY

1. I M Pandey, Financial Management, vikas publishing house pvt

ltd.
2. M Y Khan & P K Jain, Financial Management, Tata McGraw-Hill
publishing Company Limited.
1. Annual Reports of TCC, for five years from 2002-2003 to 2006-
2007.
2. www.tcckerala.com.
3. A.Vinod, Financial Management, Calicut University central co-
operative stores limited. No. 4347
4. Dr.S.N.Maheswari – Management Accounting & Financial
control

I GUGJ

73
160
140
120
100
80
East
60
40
20
0
2003 2004 2005 2006 2007
 FINDINGS
 Current ratio of the company shows a fluctuating trend. An ideal current
ratio is 2:1. Average current ratio for the last five years is 0.67, Showing that
the liquidity position is not satisfactory.
 Companies’ quick ratio for the last five years is 0.48. The standard norm
fixed for quick ratio is 1:1. This again shows that the company’s liquidity
position is not satisfactory. This is unfavorable to creditors.
 The average absolute liquid ratio is 0.05. The acceptable ratio is 1:2. This
shows that company’s financial position is not satisfactory.
 During the years, 2003-2004 and 2004-2005, the company had satisfactory
gross profit ratios, indicating increasing sales.
 Net profit ratio shows a down ward trend. It has declined over the 5 years
and has not increased as fast as the gross margin. This implies that the
operating expenses relative to sales have been increasing.
 The operating profit ratio also shows a declining trend, the reason can be
the increasing operating cost.
 The average inventory turn over ratio is 6.14. A high inventory turn over
ratio is indicative of good inventory management.
 The average debtors turn over ratio is 8.28 times. Debtors turn over ratio is
satisfactory. It shows the effectiveness of the company’s credit policy. The
average debt collection period is 44 days.
 The company shows negative working capital for the last 5 years of the
study, due to the increase in current liabilities and decrease in current
assets.

SUGGESTION

♦ The company shows negative working capital for the last five years, so it
should maintain adequate current asset to meet its day to day operations.
♦ The company should take necessary measures to check the increasing
current liabilities.
♦ The company’s liquidity position is also not satisfactory, so it should try to
maintain better liquidity position.
♦ The company’s net profit ratio is not satisfactory and there exist wide gap
between gross profit ratio and net profit ratio because of increasing
operating cost. Therefore steps must be taken to reduce all operating
expenses.
♦ The cash management should be done more carefully as it holds only a
small portion of current assent.

CONCLUSION

In this study an attempt is made to analyze the working

capital position of the company. The study shows that the overall performance
of the company is not satisfactory. The analysis and interpretation of various
data relating to working capital management helped to reach a conclusion that
the efficiency of working capital is not sufficient, since the working capital
amounts show negative balance. It also reveals that the company is not having
a satisfactory liquidity and profitability position.
The overall success of any company depends upon its
working capital position. So it should be handled properly because it shows
the efficiency and financial strength of the company. Therefore the company
should enforce strict and possible measures in every sphere of its activity to
bring the company back to sufficient working capital position and improve its
financial performance for better prospects in the coming days.
There should be a better short term fund management.
 92

BIBLIOGRAPHY

3. I M Pandey, Financial Management, vikas publishing house pvt

ltd.
4. M Y Khan & P K Jain, Financial Management, Tata McGraw-Hill
publishing Company Limited.
5. Annual Reports of TCC, for five years from 2002-2003 to 2006-
2007.
6. www.tcckerala.com.
7. A.Vinod, Financial Management, Calicut University central co-
operative stores limited. No. 4347
8. Dr.S.N.Maheswari – Management Accounting & Financial
control

I GUGJ