Chapter I

INTRODUCTION
Finance is the life blood of an industrial system. No business can be started without
adequate finance or it can be developed. Provision of sufficient funds at the required time is
the key to success of a concern. As a matter of fact, finance is said to be the circulatory
system of the economic body, making possible the needed co-operation between the many
units of activity.
The term capital means the amount invested in business, the amount of money financed to
start and maintain a business concern. The funds required by an enterprise can be financed
either by owners fund or by a mix of both owners fund and outsiders fund. The capital;
raised concern can be utilized for both long term and short term financial needs. So the
capital required by a business concern can be broadly classified in to two.

a. Fixed capital requirement and

b. Working capital requirement.

The term fixed capital stands for that amount of capital which is invested in fixed assets such
as land and building , plant and machinery, furniture and fixtures etc. working capital is the
amount of funds necessary to cover the cost of operating the enterprise.
The long term investment may be termed as fixed investment which is invested in fixed
assets. These fixed assets are retained in the business to earn profit during life of business.
The short term investment or funds are required for financing the duration of the operating
cycle in a business, often known as the accounting year.
These funds are often used for carrying out routine or regular business operations consist of
purchase raw material, payment of direct and indirect expenses, carrying out production,
investment stock and stores, credit facility to customers and to be maintained in the form of
cash. Thus, the funds for financing the duration of operating cycle in a business are known as
working capital.
Briefly, working capital denotes funds which are required to carry on day- to-day business
operation.
Working capital is the life blood and nerve centre of a business. Just as circulation of blood is
essential in the human body for maintaining life, working capital is very essential to maintain
the smooth running of a business. No business can run successfully without an adequate

amount of working capital. In adequate amount of working capital means shortage of liquid
fund, raw materials, and other inputs. The result will be the part time utilization of the
efficiency of fixed assets and the firm is not in the position to pay day to day expenses of it
operation. Thus, it will lose it reputation and shall not be to good credit facilities. On the
other hand excessive working capital means idle fund, dumped stock inefficient store
keeping, excessive receivables etc. excessive working capital earn no profit for the business
and hence the business cannot earn a proper rate of return on its investment. So the proper
management of working capital is very essential for the success of an enterprise.
The basic goal of working capital management is to manage cash of the current assets and
current liabilities in such a way that an acceptable level of net working capital is always
referred to as liquidity management. Liquidity refers to the companys ability to meet its
current obligation in time. Each current asset must be managed efficiently in order to
maintain the firm liquidity. It ultimately assists in increasing the profitability of the concern.
Hence the problem of efficient management of working capital is to establish a trade-off
between liquidity and profitability.

1.1 STATEMENT OF PROBLEM

In this study, the investigator attempts to evaluate the performance of working capital
management in Dhanwanthari Vaidyasala, Thodupuzha. The problem is state as performance
of working capital management in Dhanwanthari Vaidyasala, Thodupuzha-An Analysis.

1.2 SIGNIFICANCE OF THE STUDY

Today many undertaking face the serious problem of lack of working capital to meet
the day to day operations. Proper management of working capital is very important for the
success of an enterprise. Since the liquidity plays a crucial role in the satisfactory on-going of
every concern, the proposed study, to evaluate the performance of working capital
management in Dhanwanthari Vaidyasala, Thodupuzha is very significant.

1.3 OBJECTIVES OF THE STUDY

This study aimed to evaluate the performance of Dhanwanthari Vaidyasala, Thodupuzha with
regards to its current asset management. The objectives of the study are;
To analyse the liquidity position of the concern
To analyse the working capital position of the concern
To identify the financial strengths & weakness of the company.
To suggest ways and means through the management can improve the working capital
position
1.4 LIMITATION OF THE STUDY
Following are some of the important limitation experienced by the investigator during
conduct of the study.
Technical and Administrative aspects were considered in the study.
Time being a limiting factor; the researcher could not go very deep in
analysis the financial position of the company.
The investigator has to depend mainly on secondary data rather than primary data.
The study is limited to the period of five year.

1.5 CHAPTERISATION
The study, working capital management analysis has been organized and presented in
five chapters.

1. The first chapter is all about introduction, scope of study, statement of problem, and
significance of the study, working hypothesis, data and methodology, period of study,
limitation and chapter scheme.
2. The second chapter contains a theoretical frame work of working capital management.
3. The third chapter includes a brief profile of Dhanwanthari Vaidyasala, Thodupuzha
4. Chapter four is a detailed analysis of working capital position of Dhanwanthari Vaidyasala,
Thodupuzha
5. The fifth chapter summarizes the findings and recommendations to improve companys
working capital position.

WORKING CAPITAL MANAGEMENT THEORETICAL FRAME WORK

Every business needs funds for two purposes for it establishment and to carry out its
day to day operations. Long term funds are required to create production facilities through
purchase of fixed assets such as plant, and machinery, land and building, furniture etc.
investment in these assets represent that part of firms capital is blocked on a permanent or
fixed basis and is called fixed capital.
Funds are also needed for short term purpose for the purchase of raw material,
payment of wages and other day to day expenses etc. These funds are known as working
capital. In the simple words working capital refers to that part of the firms capital which is
required for financing short term or current asset such as cash, marketable securities, debtors
and inventories. Working capital management is concerned with the management of both
current assets and current liabilities and the interrelationship that exists between them.

2.1 MEANING AND DEFINITION

Working capital is the amount of funds necessary to cover the cost of operating the
enterprises. The term working capital is commonly used for the capital required for the day to
day working of the business concern.
According to Genestnberg working capital current asset of a company that are
changed in the ordinary course of business from one form to another, as example from cash
to inventories, inventories to receivables, receivables in to cash.
Working capital is the difference between the inflow and outflow of Funds. In other words it
is the net cash inflow.

Working capital represents the total of all current assets. In other words it is the Gross
working capital, it is also known as Circulating capital or Current capital for current assets
are rotating in their nature.

2.2 CONCEPT OF WORKING CAPITAL

There are two concept of working capital:-

A. Balance sheet concept

B. Operating cycle or circular flow concept

A. Balance sheet concept:

There are two interpretation of working capital under the balance sheet concept:-

a. Gross working capital

b. Net working capital

The term working capital refers to the gross working capital and represents the
amount of funds invested in current assets. Thus, the gross working capital is the capital
invested in total current asset of the enterprise. Current assets are those assets which in the
ordinary course of business can be converted into cash within a short period of time normally
one accounting year.Net working capital is the excess of current asset over current liabilities.
Net working capital= current assets current liabilities.

Net working capital may be positive or negative. When the current assets exceed the
current liabilities the working capital is positive and the negative working capital results
when the current liabilities are more than the current assets. Current liabilities are those
liabilities, which are intended to be paid in the ordinary course of business within a short
period of normally one accounting year out of the current assets or the income of the
business.
Working capital management is concerned with the problems that crop up in
managing the interrelationship between current assets and current liabilities.

Net
Concept

Gross
Concept

Relationship
between current
assets& current
liabilities

Individual current
assets

Perspective short
term & long term

Perspective short
term & long term

Evaluation by
external parties

Evaluation by
management

Optimum balance
among risk

Optimum
investments in
individual CA

Return & liquidity

Financing of
current assets

The gross working capital concept is financial or going concern concept whereas net working
capital is the accounting concept of working capital.

B. Operating cycle or Circular flow concept:

Funds invested in current assets keep revolving fast and are being constantly
converted into cash and this cash flow out again in exchange for other current assets. Hence,
it is also known as revolving or circulating capital. The circular flow concept of working
capital is based upon this operating or working capital cycle of a firm. The cycles starts with
the purchase of raw material and other resources and ends with the realization of cash from
the sale of finished goods through work in progress with progressive incensement of labour
service costs, conversion of finished stock into sales, debtors and receivables and ultimately
realization of cash and this cycle continues again from cash to purchase of raw material and
so on. The speed/time duration required to complete one cycle determines the requirement of
working capital longer the period of cycle, larger is the requirement of working capital.

Showing operating cycle (Figure No 2.1)

Cash

Raw
materials

Work in
Progress

Debtor's

Sales

Finished
Goods

Length of the operating cycle mainly depends upon the length of the production and
companies credit policies.

2.3 TYPES OF WORKING CAPITAL

The changes in current assets in short term and long term have led to the classification
of working capital into two ways:-

1. Permanent or Fixed working capital

2. Temporary or variable working capital

1. Permanent working capital

There is always a minimum level of current assets always required by a firm, to carry
on its operations, the minimum level of current assets always known as permanent working
capital. It is also called core working capital, regular working capital or fixed working
capital. Normally fixed working capital is fixed in nature. But it should be noted that as the
business grows, the amount of permanent working capital would also increase.
The permanent working capital can further be classified as Regular working capital
and Reserve working capital. Regular working capital required to ensure circulation of
current assets from cash to inventories, from inventories to receivable and from receivable to
cash and so on. Reserve working capital is the excess amount over the requirement for
regular working capital, which may be provided for contingencies that may arise at unstated
period such as strikes, rise in prices, depreciation, etc.

2. Temporary working capital

Temporary or variable working capital is the amounts of working capital, which is

required to meet the seasonal demands and some special exigencies. Variable working capital
can be further classified as seasonal working capital and special working capital. Most of the
enterprises have to provide additional working capital to meet the seasonal needs of the
enterprise is called Seasonal working capital. Special working capital is that part of working
capital which is required to meet special exigencies such as launching of extensive marketing
campaigns for conducting research etc.

Figure: 2.2
Permanent and Temporary working capital of a manufacturing firm

Temporary or variable working capital

Permanent or fixed working capital

Figure: 2.3
Permanent and Temporary working capital of a Growing firm

2.4 DETERMINANTS OF WORKING CAPITAL

The working capital requirement of a concern depend upon a large number of factors
such as nature and size of the business, the character of their operations, the length of
production cycle, the rate of stock turnover and the state of economic situation. It is not
possible to rank them because all such factors are of different importance and the influence of
individual factors changes for a firm overtime. However, the following are important factors
generally influencing the working capital requirements.

1. Nature and size of business

2. Production policy
3. Length of manufacturing process/production cycle
4. Seasonal variation
5. Working capital cycle
6. Credit policy
7. Business cycle
8. Earning capacity and dividend policy
9. Price level changes
10. Other factors

2.5 SOURCES OF WORKING CAPITAL

All sources of funds can be classified into two groups:-

1. Long term sources

2. Short term sources

10

Figure: 2.4
Showing sources of working capital
Sorces of
Working Capital

Short Term
Sources

Long Term
Sources

Internal

External

Equity Capital

Depreciation Fund

Trade Credit

Debenture &
Preferance
shares

Provision for Tax

Bank Credit

Retained Profits

Accrued
Expences

Public

Sale of Fixed
Assets

Term Loans

Deposits

Govt.Securities

Credit papers

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2.6 IMPORTANCE OF ADEQUATE WORKING CAPITAL

Working capital is the lifeblood and nerve centre of a business. Just as circulation of
blood is essential in the human body for maintaining life, working capital is very essential to
maintain the smooth running of a business. No business can run successfully without an
adequate amount of working capital. The main advantages of maintaining adequate amount
of working capital as follows:-

1. Solvency of the business:Adequate working capital helps in maintaining solvency of the business by providing
uninterrupted flow of production.
2. Goodwill:Sufficient working capital enables a business concern to make prompt payments and
hence helps in creating and maintaining goodwill.
3. Easy loans:A concern having adequate working capital, high solvency and good credit standing
can arrange loans from banks and others on easy and favourable terms.
4. Cash discounts:Adequate working capital also enables a concern to avail cash discount on the
purchases and hence it reduces costs.
5. Regular supply of raw materials:Sufficient working capital ensures regular supply of raw materials and continuous
production.
6. High morale:Adequacy of working capital creates an environment of security, confidence, and high
morale and creates overall efficiency in business.

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2.7 NEED FOR WORKING CAPITAL

The basic objective of financial management is to maximize the shareholders wealth.
This is possible only when the company earns the sufficient profit. The amount of such profit
largely depends upon the magnitude of sales. However sales do not convert into cash
immediately. This is always a time gap between the sales of goods and receipts of cash.
Working capital is required for this period in order to sustain the sales activity. In case
adequate working capital is not available for this period, the company will not be in a
position to purchase raw materials, pay wages and other expenses required for manufacturing
the goods to be sold.

2.8 OBJECTIVES OF WORKING CAPITAL MANAGEMENT

Working capital management is concerned with the problems that arise in attempting
to manage the current assets, current liabilities and the interrelationship that exists between
them. The basic objectives of working capital management are to manage the firms current
assets and current liabilities in such a way that the satisfactory level of working capital is
maintained, i.e., it is neither in adequate nor excessive. Excessive working capital will dilute
the profitability whereas inadequate working capital can threaten the solvency of the firm.
The main aim of working capital management is also to decide up on the optional mix
of short term funds as well as long term funds. Thus working capital management policies of
a firm have a great effect on its profitability, liquidity and structural health of the
organization. In this context working capital management is three dimensional in nature.
These three dimensions can be represented in the following figure:

Figure 2.5

DIM 1

DIM 3

DIM 2

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Dimension-1 is concerned with formulation of policies with regard to profitability, risk and
liquidity.
Dimension-2 is concerned with the decision about the composition and level at current
assets.
Dimension-3 is concerned with the decision about the composition and level of different
sources of funds.

2.9 COMPONENTS OF WORKING CAPITAL

Working capital management of different component of working capital such as cash,

inventories, accounts receivables, etc. in the absence of such situation, the financial position
in respect of the firms liquidity may not be satisfactory in spite satisfactory liquidity ratio.
The main components of working capital are as follows:

1. MANAGEMENT OF CASH

Cash is the most liquid asset, is vital importance to the daily operations of business. It is
generally referred to as the lifeblood of a business enterprise. A sound cash management
scheme, therefore, maintain the balance between the twin objective of liquidity and cost. The
term cash has two meaning with reference to cash management. In narrow sense it includes
coins, currency, notes and other generally accepted equivalent of cash such as cheques, drafts
and demand deposits held in banks. The brooders definition of cash includes marketable
securities and time deposits in banks.

MOTIVES FOR HOLDING CASH

Cash management is one of the key areas of working capital management. John Maynard
Keynes in the general theory of employment, interest and money has been identified four
motives for holding cash and size of the firms cash balance depends basically upon these
four major reasons:-

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a. Transaction motive
The transaction motive is the need for cash to make the payments for day to day
obligations. Cash fund kept or arrange for making payment in normal course of
business are cash funds for transaction motive.
b. Precautionary motive
All firms anticipate uncertainties. All of a sudden, cash may be required to meet
certain unexpected demands for cash. In other words, a firm should take precautions
for meeting uncertainties with regards to sudden demands for cash.

c. Speculative motive
A firm may want to have ability to take advantage of profitable opportunities. These
opportunities do not come in a regular manner. Forecast of such opportunities cannot
be made scientifically or precisely.
d. Compensation motive

It refers to that portion of cash balance, which is maintain to compensate bank for
providing certain services, free of cost or at lower cost.

OBJECTIVES OF CASH MANAGEMENT

The important objectives of cash management are:-

a) Meeting of cash disbursement

The basic objective of cash management is to meet all the payments obligates in time.
This requires the maintenance of sufficient cash fund to meet the payment schedules
of raw materials, suppliers, workers, brokers etc.
b) Minimizing funds held upon cash balances

The second objective of cash management is to minimize cash balances. A large

amount of cash balances may ensure the liquidity and all its advantages, but it also
implies way high cost as large funds remained idle because cash in a non- earning
assets.

15

There are basically two approaches to determine an optimal cash balances, namely

Minimizing cost models

Cash budget

2. MANAGEMENT OF INVENTORY

Every enterprise need inventory for smooth running of its activities. It serves as a link
between production and distribution process. There is generally, a time lag between the
recognition of a need and its fulfilment. The greater time lags the higher the requirement of
inventory. The unforeseen fluctuation in demand and supply of goods also necessitate the
need for inventory. It also provides a caution for future price fluctuations. The term inventory
refers to the assets, which will be sold in future in the normal course of business operations.
The term inventory includes raw materials, work in progress and finished goods investment
in inventory forms a substantial portion of total assets employed. Short term borrowings from
banks are largely affected by inventories. While materials affect the cost of goods sold, short
term borrowings for investments affect the interest charges. Both material cost and interest
charges can be reduced with better inventory planning and control. This reduction increases
profit.

OBJECTIVES OF INVENTORY MANAGEMENT

The main objectives of inventory management are operational and financial. The operational
objective means that the materials and spares should be available insufficient quantity so that
work is not disrupted for want of inventory. The following are the objective and efficient
management of inventories.

To ensure continuous supply of materials, spares and finished goods, so that

production should not suffer at any time and the customer demand should also be
met.

To avoid both overstocking and under stocking of inventory.

16

 To maintain investment in inventories at optimum level as required by the

operational and sales activities.

To keep material cost under control so that they contribute in reducing cost of
production and overall cost.

To estimate duplication in ordering replenishing stock. This is possible with the help
of centralized purchasing.

3. MANAGEMENT OF RECEIVABLES

Receivables are asset accounts owned to the firm as a result of sale of goods or
service in the ordinary course of business. Receivables are direct result of credit sales. A
concern is required to allow credit sales in order to expand it sales volume. It is not always
possible to sell goods on cash basis only because of prevailing competition in the market. The
increase in the sales essential to increase in profitability. After an increasing level of sales,
the increase in sales will not proportionately increase production cost, i.e. each increase in
sales will bring in more profits. Even though credit sales ultimately result in pushing up the
profits earned by the firm, it results in blocking of funds in accounts receivables. It creates
extra cost in terms of interest and also increases chances of bad debts. Thus creation of
accounts receivables is beneficial as well as dangerous. Management of account receivables
is a process of making decision related to the investment of funds in these assets, which
results in maximizing the overall return on the investment of the firms. The objectives of
receivables management is to promote profits until that point is reached where the return on
investment is further finding of receivables is less than the cost of funds raised to finance that
additional credit.

17

IMPORTANCE OF RECEIVABLES

Sales growth: - provision of the facility of credit sales by a firm to its customers is a
powerful stimulant for increasing sales.

Increasing profit:- this is the indirect result of selling on credit

Capacity to face competition: - the firm may be able to face the competition by selling
on credit.

OPTIMUM LEVEL OF INVESTMENT IN RECEIVABLES

The optimum level of investment in receivables should be where; there is a trade-off

between the costs, profitability and liquidity. It is shown below:-

Figure: 2.6
Trade-off between costs, Profitability and Liquidity

Profitability

In short working capital management is an inevitable task of the financial management. The
success or failure of a business concern depends more or less on the efficiency of working
capital management.

18

2.6 CURRENT ASSET AND FIXED ASSET

A firm needs fixed and current assets to support a particular level of output. However to the
same level of output, the firm can have different levels of current assets.
The level of current asset can be measured by relating current asset to fixed assets. Dividing
current assets by fixed assets gives CA/FA ratio. Assuming a constant level of fixed assets.
If CA/FA ratio is higher than it indicates a conservative current asset policy. If CA/FA ratio
is lower it shows an aggressive current asset policy.
Conservative policy implies greater liquidity and lower risk as more amounts is invested in
current asset policy of the most firms may fall between these two policies i.e., average policy.
If in the conservative policy indicates high levels of current assets are maintained, but in
aggressive policy the level of current asset will be minimum.

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RESEARCH METHODOLOGY
RESEARCH DESIGN
Research design is the plan, structure and strategy of investigation conceived so as to obtain
answers to research questions. A research has to plan his work in advance as to anticipate any
obstacles in the course of research. A research design could be defined as a blue print
specifying every stage of section in the course of research. Such a design would indicate
whether the course of action planned will minimise the use of resources and maximize the
outcome.
For the present day, descriptive research design is applied as related to study the nature of
description refers to the use of already available facts of information for the ascertainment of
the level of working capital at present maintained by the DHAWANTHARI VAIDYASALA,
THODUPUZHA,IDUKKI
METHOD OF DATA COLLECTION
Types of Data:
There are two types (sources) for the collection of data.
(1) Primary Data
(2) Secondary Data
Primary Data:
The primary data are the first hand information collected, compiled and published by
organization for some purpose. They are most original data in character and have not
undergone any sort of statistical treatment. On this particular study, I collect the primary data
through formal and informal discussion and exchange of views with company personal.
Secondary Data:
The secondary data are the second hand information which are already collected by
someone (organization) for some purpose and are available for the present study. The
secondary data are not pure in character and have undergone some treatment at least once.
The main secondary data sources are as follows:

20

Annual Balance Sheet

Unpublished Accounts
Websites , such as
Google.com
Wikipedia.com
Investpedia.com
J gate.in
Dhanwanthari.org

PERIOD OF STUDY
The period of study restricted to five years from 2004-2005 to 2009-2010. The accounting
year of the undertaking commenced from 1st April to 31st March of the next year.
TOOLS FOR ANALYSIS
The financial management always strives to maintain an adequate working capital at every
time so as to carry on the operations successfully and maximize the return on investment. It
has to be vigilant about the trend in the items that make up the working capital. This requires
a careful enquiring into the current asset and current liability so as to control the working
capital and to conserve it properly.
There as a several tools for financial analysis of working capital. The important of them as
follows: RATIO ANALYSIS
GRAPHS
Now a day ratio analysis is used by all business and industrial concerns in their financial
analysis. Ratios are considered to be the best guidance for the efficient execution of basic
managerial functions like planning, forecasting, control etc. Ratio may be expressed in either
in the form of rate or proportions or percentage.

21

Chapter II
Review of Literature
The purpose of this chapter is to present a review of literature relating to the working
capital management. Although working capital is an important ingredient in the smooth
working of business entities, it has not attracted much attention of scholars. Whatever studies
have conducted, those have exercised profound influence on the understanding of working
capital management good number of these studies which pioneered work in this area have
been conducted abroad, following which, Indian scholars have also conducted research
studies exploring various aspects of working capital. Special studies have been undertaken,
mostly economists, to study the dynamics of inventory investment which often represented
largest component of total working capital. As such the previous studies may be grouped into
three broad classes
(1) Studies conducted abroad,
(2) Studies conducted in India, and
(3) Studies relating to determine of inventory investment.
Studies on Working Capital Management
Studies adopting a new approach towards working capital management are reviewed here.

Sagan in his paper (1955), perhaps the first theoretical paper on the theory of
working capital management, emphasized the need for management of working capital
accounts and warned that it could vitally affect the health of the company. He realized the
need to build up a theory of working capital management. He discussed mainly the role and
functions of money manager inefficient working capital management. Sagan pointed out the
money managers operations were primarily in the area of cash flows generated in the course
of business transactions. However, money manager must be familiar with what is being done
with the control of inventories, receivables and payables because all these accounts affect
cash position. Thus, Sagan concentrated mainly on cash component of working capital. Sagan
indicated that the task of money manager was to provide funds as and when needed and to
invest temporarily surplus funds as profitably as possible in view of his particular

22

requirements of safety and liquidity of funds by examining the risk and return of various
investment opportunities. He suggested that money manager should take his decisions on the
basis of cash budget and total current assets position rather than on the basis of traditional
working capital ratios. This is important because efficient money manager can avoid
borrowing from outside even when his net working capital position is low. The study pointed
out that there was a need to improve the collection of funds but it remained silent about the
method of doing it. Moreover, this study is descriptive without any empirical support.
2

Walker in his study (1964) made a pioneering effort to develop a theory of working
capital management by empirically testing, though partially, three propositions based on riskreturn trade-off of working capital management. Walker studied the effect of the change in
the level of working capital on the rate of return in nine industries for the year 1961 and
found the relationship between the level of working capital and the rate of return to be
negative. On the basis of this observation, Walker formulated three following propositions:
Proposition I If the amount of working capital is to fixed capital, the amount of risk
the firm assumes is also varied and the opportunities for gain or loss are increased.
Walker further stated that if a firm wished to reduce its risk to the minimum, it should employ
only equity capital for financing of working capital; however by doing so, the firm reduced
its opportunities for higher gains on equity capital as it would not be taking advantage of
leverage. In fact, the problem is not whether to use debt capital but how much debt capital to
use, which would depend on management attitude towards risk and return. On the basis of
this, he developed his second proposition.
Proposition II The type of capital (debt or equity) used to finance working capital
directly affects the amount of risk that a firm assumes as well as the opportunities for gain or
loss. Walker again suggested that not only the debt-equity ratio, but also the maturity period
of debt would affect the risk-return trade-off. The longer the period of debt, the lower be the
risk. For, management would have enough opportunity to acquire funds from operations to
meet the debt obligations. But at the same time, long-term debt is costlier. On the basis of
this, he developed his third proposition:
Proposition III The greater the disparity between the maturities of a firms debt
instruments and its flow of internally generated funds, the greater the risk and vice-versa.

23

Weston and Brigham (1972) further extended the second proposition suggested by
Walker by dividing debt into long-term debt and short-term debt. They suggested that shortterm debt should be used in place of long-term debt whenever their use would lower the
average cost of capital to the firm. They suggested that a business would hold short-term
marketable securities only if there were excess funds after meeting short-term debt
obligations. They further suggested that current assets holding should be expanded to the
point where marginal returns on increase in these assets would just equal the cost of capital
required to finance such increases.
4

Van Horne in his study (1969) , recognizing working capital management as an area
largely lacking in theoretical perspective, attempted to develop a framework in terms of
probabilistic cash budget for evaluating decisions concerning the level of liquid assets and the
maturity composition of debt involving risk-return trade-off. He proposed calculation of
different forecasted liquid asset requirements along with their subjective probabilities under
different possible assumptions of sales, receivables, payables and other related receipts and
disbursements. He suggested preparing a schedule showing, under each alternative of debt
maturity, probability distributions of liquid asset balances for future periods, opportunity cost,
maximum probability of running out of cash and number of future periods in which there was
a chance of cash stock-out. Once the risk and opportunity cost for different alternatives were
estimated, the form could determine the best alternative by balancing the risk of running out
of cash against the cost of providing a solution to avoid such a possibility depending on
managements risk tolerance limits. Thus, Van Horne study presented a risk-return trade-off
of working capital management in entirely new perspective by considering some of the
variables probabilistically. However, the usefulness of the framework suggested by Van
Horne is limited because of the difficulties in obtaining information about the probability
distributions of liquid-asset balances, the opportunity cost and the probability of running out
of cash for different alternative of debt maturities.
5

Welter, in his study (1970) , stated that working capital originated because of the
global delay between the moment expenditure for purchase of raw material was made and the
moment when payment were received for the sale of finished product. Delay centres are
located throughout the production and marketing functions. The study requires specifying the
delay centres and working capital tied up in each delay centre with the help of information
regarding average delay and added value. He recognized that by more rapid and precise

24

information through computers and improved professional ability of management, saving

through reduction of working capital could be possible by reducing the length of global delay
by rescuing and/or favourable redistribution of this global delay among the different delay
centres. However, better information and improved staff involve cost. Therefore, savings
through reduction of working capital should be tried till these saving are greater or equal to
the cost of these savings. Thus, this study is concerned only with return aspect of working
capital management ignoring risk. Enterprises, following this approach, can adversely affect
its short-term liquidity position in an attempt to achieve saving through reduction of working
capital. Thus, firms should be conscious of the effect of law current assets on its ability to
pay-off current liabilities. Moreover, this approach concentrated only on total amount of
current assets ignoring the interactions between current assets and current liabilities.
6

Lambrix and Singhvi (1979) adopting the working capital cycle approach to the
working capital management, also suggested that investment in working capital could be
optimized and cash flows could be improved by reducing the time frame of the physical flow
from receipt of raw material to shipment of finished goods, i.e. inventory management, and
by improving the terms on which firm sells goods as well as receipt of cash. However, the
further suggested that working capital investment could be optimized also (1) by improving
the terms on which firms bought goods i.e. creditors and payment of cash, and (2) by
eliminating the administrative delays i.e. the deficiencies of paper-work flow which tended to
extend the time-frame of the movement of goods and cash.
7

Warren and Shelton (1971) applied financial simulation to simulate future financial
statements of a firm, based on a set of simultaneous equations. Financial simulation approach
makes it possible to incorporate both the uncertainty of the future and the many
interrelationships between current assets, current liabilities and other balance sheet accounts.
The strength of simulation as a tool of analysis is that it permits the financial manager to
incorporate in his planning both the most likely value of an activity and the margin of error
associated with this estimate. Warren and Shelton presented a model in which twenty
simultaneous equations were used to forecast future balance sheet of the firm including
forecasted current assets and forecasted current liabilities. Current assets and current
liabilities were forecasted in aggregate by directly relating to firm sales. However, individual
working capital accounts can also be forecasted in a larger simulation system. Moreover,

25

future financial statements can be simulated over a range of different assumptions to portray
inherent uncertainty of the future.
8

Cohn and Pringle in their study (1973) illustrated the extension of Capital Asset
Pricing Model (CAPM) for working capital management decisions. They tried to interrelate
long-term investment and financing decisions and working capital management decisions
through CAPM. They emphasized that an active working capital management policy based
on CAPM could be employed to keep the firms shares in a given risk class. By risk, he
meant unsystematic risk, the only risk deemed relevant by CAPM. Owing to the lumpy nature
for long-term financial decisions, the firm is continually subject to shifts in the risk of its
equity. The fluid nature of working capital, on the other hand, can be exploited so as to offset
or moderate such swings. For example they suggested that a policy using CAPM could be
adopted for the management of marketable securities portfolio such that the appropriate risk
level at any point in time was that which maintains the risk of the companys common stock
at a constant level. Similarly,
9

Copeland and Khoury (1980) applied CAPM to develop a theory of credit

expansion. They argued that credit should be extended only if the expected rate of return on
credit is greater than or equal to market determined required rate of return. They used CAPM
to determine the required rate of return for the firm with its new risk, arising from uncertainty
regarding collection due to the extension of credit. Thus, these studies show how CAPM can
be used for decisions involved in working capital management. One more approach, used
mainly in empirical studies, towards working capital management has been to apply
regression analysis to determine the factors influencing investment in working capital.
Different studies in the past have considered different explanatory variables to explain the
investment in inventory.
10

Metzler (1941)

However, his work was mainly on simple acceleration principle

which postulated that firms liked to maintain inventories in proportions to output/sales and
they succeeded in achieving the desired level of inventories in a unit time-period. That is to
say, any discrepancy between the actual level and desired level of inventories is adjusted
within the same time-period. Needless to say, that such an instantaneous adjustment is not a
realistic assumption to make. Modifications, therefore, have been introduced in the literature
to provide for partial adjustment.

26

11

Goodwin (1948)

assumed that firms attempted only a partial adjustment of the

discrepancy between the desired stocks as determined by the level of output and the existing
stock.
12

Similarly, Darling and Lovell (1965)

modified Metzlers formulation based on

simple acceleration principle and obtained, the relationship based on flexible accelerator
principle. There are several reasons physical, financial and technical those motivate partial
adjustment. Among the physical factors, mention may be made of procurement lags between
orders and deliveries. The length of such lags is connected with the source of supply, foreign
or domestic availability. Import licensing procedures on account of foreign exchange scarcity
could cause further delays in adjustment. Among the financial factors, cost advantages
associated with bulk buying and higher procurement costs for speedy delivery are also
mentioned. Uncertainties in the market for raw materials and in the demand for final product
also play a role in influencing the speed of adjustment. Technically, firms like to make sure
that changes in demand are of a permanent character before making full adjustment. The
acceleration principle has great relevance in inventory analysis than in the analysis of fixed
investment, as there are limits to liquidate fixed capital in the face of declining demand.
13

It has been found significant in the studies of Hilton (1976)

and Irwin (1981).

Time-trend is expected to be important because inventories generally accumulate with the

expansion of economic activities of the company. Anticipated price changes, measured by
changes in wholesale price index of inventories, are taken as an explanatory variable to
capture speculative element in inventory. This suggests a positive relationship between price
changes and inventory. An increase in sales is expected to increase the demand for stocks to
meet orders regularly. An increase in capacity utilization is also expected to increase the
demand for stock by increasing the demand for raw materials and increasing the inventories
of finished goods. Thus, the variable, capacity utilization, is postulated to have a positive
coefficient in the equation.
14

Abramowitz (1950)

and Modigliani (1957) highlighted the impact of capacity

utilization on inventory investment. Existing stock of inventories is expected to take account

of adjustment process to the desired levels. Thus the variable, existing stock of inventories, is
postulated to be negatively related with the desired stock. The ratio of inventory to sales may
affect inventory investment positively because a high ratio of stocks to sales in the past

27

suggests the maintenance of high levels of inventories in the past and thus also calling for
high investment in inventories in the current period.
15

The studies of Metzler (1941)

and Hilton (1976) have found this variable,

inventory-sales ratio, to be statistically significant. Fixed investment is generally expected to

affect inventory investment inversely because of competing demand for the limited funds.
However, in case of an expanding firm, the two components may be complementary.
Besides, availability of funds from retained earnings and external sources, may affect
investment decision by providing funds for financing inventory investment. Therefore,
retained earnings and flow of debt are postulated to have positive coefficients.
16

Appavadhanulu (1971) recognizing the lack of attention being given to investment

in working capital, analysed working capital management by examining the impact of
method of production on investment in working capital. He emphasized that different
production techniques require different amount of working capital by affecting goods-inprocess because different techniques have differences in the length of production period, the
rate of output flow per unit of time and time pattern of value addition. Different techniques
would also affect the stock of raw materials and finished goods, by affecting lead-time,
optimum lot size and marketing lag of output disposals. He, therefore, hypothesised that
choice of production technique could reduce the working capital needs. He estimated the ratio
of work-in-progress and working capital to gross output and net output in textile weaving
done during 1960, on the basis of detailed discussions with the producers and not on the basis
of balance sheets which might include speculative figures. His study could not show
significant relationship between choice of technique and working capital. However, he
pointed out that the idea could be tested in some other industries like machine tools, ship
building etc. by taking more appropriate ratios representing production technique correctly.
17

Chakraborty (1973) approached working capital as a segment of capital employed

rather than a mere cover for creditors. He emphasized that working capital is the fund to pay
all the operating expenses of running a business. He pointed out that return on capital
employed, an aggregate measure of overall efficiency in running a business, would be
adversely affected by excessive working capital. Similarly, too little working capital might
reduce the earning capacity of the fixed capital employed over the succeeding periods. For
knowing the appropriateness of working capital amount, he applied Operating Cycle (OC)

28

Concept. He calculated required cash working capital by applying OC concept and compared
it with cash from balance sheet data to find out the adequacy of working capital in Union
Carbide Ltd. and Madura Mills Co. Ltd. for the years 1970 and 1971.
18

He extended the analysis to four companies over the period 1965-69 in 1974 study.
The study revealed that cash working capital requirement were less than average working
capital as per balance sheet for Hindustan Lever Ltd. and Guest, Keen and Williams Ltd.
indicating the need for effective management of current assets. Cash working capital
requirements of Dunlop and Madura Mills were more than average balance sheet working
capital for all years efficient employment of resources. For Union Carbide Ltd., cash
working capital requirements were more in beginning years and then started reducing in the
later years as compared to conventional working capital indicating the attempts to better
manage the working capital. Chakraborty emphasized the usefulness of OC concept in the
determination of future cash requirements on the basis of estimated sales and costs by internal
staff of the firm. OC concept can also be successfully employed by banks to assess the
working capital needs of the borrowers.
19

Misra (1975) studied the problems of working capital with special reference to six
selected public sector undertakings in India over the period 1960-61 to 1967-68. Analysis of
financial ratios and responses to a questionnaire revealed somewhat the same results as those
of NCAER study with respect to composition and utilization of working capital. In all the
selected enterprises, inventory constituted the more important element of working capital.
The study further revealed the overstocking of inventory in regard to its each component,
very low receivables turnover and more cash than warranted by operational requirements and
thus total mismanagement of working capital in public sector undertakings.
20

Agarwal (1983) also studied working capital management on the basis of sample of
34 large manufacturing and trading public limited companies in ten industries in private
sector for the period 1966-67 to 1976-77. Applying the same techniques of ratio analysis,
responses to questionnaire and interview, the study concluded the although the working
capital per rupee of sales showed a declining trend over the years but still there appeared a
sufficient scope for reduction in investment in almost all the segments of working capital. An
upward trend in cash to current assets ratio and a downward trend in cash turnover showed
the accumulation of idle cash in these industries. Almost all the industries had overstocking

29

of raw materials shown by increase in the share of raw material to total inventory while share
of semi-finished and finished goods came down. It also revealed that long-term funds as a
percentage of total working capital registered an upward trend, which was mainly due to
restricted flow of bank credit to the industries.
21

Kamta Prasad Singh, Anil Kumar Sinha and Subas Chandra Singh (1986)
examined various aspects of working capital management in fertilizer industry in India during
the period 1978-79 to 1982-93. Sample included public sector unit, Fertilizer Corporation of
India Ltd. (FCI) and its daughter units namely Hindustan Fertilizers Corporation Ltd., the
National Fertilizer Ltd., Rashtriya Chemicals and Fertilizers Ltd. and Fertilizer (Projects and
Development) India Ltd. and comparing their working capital management results with
Gujarat State Fertilizer Company Limited in joint sector. On the basis of ratio-analysis and
responses to a questionnaire, study revealed that inefficient management of working capital
was to a great extent responsible for the losses incurred by the FCI and its daughter units, as
turnover of its current assets had been low. FCI and its daughter units had high overstocking
of inventory in respect of each of its components particularly stores and spares. Similarly,
quantum of receivables had been excessive and their turnover very low. However, cash and
liquid resources held by FCI and its daughter units had been much lower in relation to
operation requirements. So far as financing of working capital was concerned, long-term
funds had been financing a low proportion of current assets due to rapid increase of current
liabilities. The profitability providing an internal base for financing of working capital had
been very low in these undertakings.
22

Verma (1989) evaluated working capital management in iron and steel industry by
taking a sample of selected units in both private and public sectors over the period 1978-79 to
1985-86. Sample included Tata Iron and Steel Company Ltd. (TISCO) in private sector and
Steel Authority of India Ltd. (SAIL) and Indian Iron and Steel Company, a wholly owned
subsidiary of SAIL, in public sector. By using the techniques of ratio analysis, growth rates
and simple linear regression analysis, the study revealed that private sector had certainly an
edge over public sector in respect of working capital management. Simple regression results
revealed that working capital and sales were functionally related concepts. The study further
showed that all the firms in the industry had made excessive use of bank borrowings to meet
their working capital requirement vis--vis the norms suggested by Tandon Committee.

30

23

Vijaykumar and Venkatachalam (1995) studied the impact of working capital on

profitability in sugar industry in Tamil Nadu by selecting a sample of 13 companies; 6
companies in co-operative sector and 7 companies in private sector over the period 1982-83
to 1991-92. They applied simple correlation and multiple regression analysis on working
capital and profitability ratios. They concluded through correlation and regression analysis
that liquid ratio inventory turnover ratio, receivables turnover ratio and cash turnover ratio
influenced the profitability of sugar industry in Tamil Nadu. They also estimated the demand
functions of working capital and its components i.e. cash, receivables, inventory, gross
working capital and net working capital, by applying regression analysis. They showed the
impact of sales and interest rate on working capital and its components. When only sales was
taken as independent variable, coefficient of sales was more than unity in all the equations of
working capital and its components showing more than unity sales elasticity and
diseconomies of scale. When sales and interest rate were taken as independent variable, sales
elasticity was again more than unity in demand functions of working capital and its
components except cash. So far as capital costs were concerned, these had negative signs in
all the equations but significant only in inventory, gross working capital and net working
capital showing negative impact of interest rates on investment in working capital and its
components

31

Chapter III
DHANWANTHARI VAIDYASALA
-A BRIEF PROFILE
Ancient India depends on Ayurveda for all its medical needs, but of recently with the
advent of modern medicines, Ayurveda seemed to be having a natural deal. But after a long
downward trend in popularity, its back with resurgence. Its dynamic up wings comes with
itself projecting as a holistic health care systems gets worldwide attention. Dhanwnathari
Vaidyasala specially set up with the mission to contribute to this resurgence in a creative
manner in Kerala and in India since 1933.

3.1. HISTORY OF AYURVEDA

Ayurveda (the since of life) is Indias contribution to humanity in its search for health
care, well-being and longevity. This wonderful treats on human health is considered as the
Fifth Veda narrated directly by God to the great specious of the ancient part. It mellowed
with the Indian civilization training philosophical science in the history of mankind.
Where almost all medicines are of plant origin, they do not have any side effects. It
flourished at a time when all the science branches, we now practice where in its rudiments.
Physicians the world over, now consider Ayurveda as a system of treatment embodied in
nature that couples meditation and reorganized life style. In the modern era, where most of
the deceases results from mutations in life styles. We have started to look back in this ancient
wisdom, which advocated a therapy that has its roots in nature.

3.2. HISTORY AND EVOLUTION OF DHANWANTHARI AYURVEDA

VAIDYASALA
Dhanwanthari Ayurveda Vaidyasala was established 1933 by late vaidyan C.N
Namboodiri, at the age of 25 years as a humble beginning. After seven years of academic
carrier of Gurukulam, a curriculum as per the traditional Kerala culture, he started this firm
with only a few manufacturing companies established in Kerala. The modern concept of
marketing was very much in wanted, when he was decided to have his passion to a marketing
framework designed by him. He was a pioneer in institutionalizing the concept of Ayurveda
medicines market in Kerala. He thus had carved out the rich for the firm himself in those days
itself, apart from abroad and outside Kerala. He had visited various states in America early
70s on request from his patients.

32

Dhanwanthari Ayurveda Vaidyasala has around 50 branches and more than 100
agencies. It was the first Ayurvedic firm in south India to explore the Delhi market. Its area
of operation included Madras, Bangalore, Coimbatore, Selam, Erode and Kanyakumari in
Tamilnadu even 1960s. This network flourished under the meticular management of vaidyan
C.N. Namboodiri, Dhanwanthari Ayurveda vaidyasala, set up full-fledged treatment divisions
in Thiruvananthapuram, Kottayam,Kannur, and Thodupuzha.

Ayurveda market in India

There is about Rs. 1000 crores market in India for Ayurvedic products. The Dabur
India is the market leader; Zandu, Aryavaidyasala Kottackal, Nagarguna herbal concentrates
etc. are the other wide marketing companies. All these companies have worldwide marketing
network of the Ayurveda medicines.
Ayurveda Market in Kerala
Being the basic medicine of Kerala, today Ayurveda enjoy a leading market in Kerala.
Kottackal Aryavaidyasala was the first Ayurvedic Company in Kerala introduced the concept
of agency network in the field of Ayurvedic medicines.

3.3 Multi-Dimensional Operations Pharmaceuticals- Traditional Production Methods &

Product details

Ayurveda is at least four millennium years old and it survived the test of time by
propagation in a traditional curriculum as smrithi and sruthi (propagation through oral
education and by practice) with related discussions and meditation (mananam). Most of the
reference texts we have today were recorded after 1000BC in Thaliyolas (dried leaves an
ancient manuscript material). It can be noted that the Principles of Ayurveda are retained
intact and the Medical formulations in these text are narrated as examples of this treatment
theory for individual deceases. So this science has left ample vacuum for research and
development. That is how comparatively modern ailments like hypertension, Syphilis; AIDS
etc. come under the therapeutic range of Aurveda.

Appropriate Technology
Celsius temperatures throughout, ensuring ideal conditions for the natural fermenting
agents. The vessels for production are either brass or copper in specified shapes. But we have
adopted the sterilization of pots; powder etc. to keep up the hygiene standards. For thermal

33

processing of decoctions, firewood, that will give controlled and continuous heat are
recommended. This is essential for adequate drug extraction and to check the extraction of
unwanted alkaloids, Tannins etc. we have adopted modern technology only in pre-processing
stage like disintegration, pulverization etc. and in preservation. In Dhanwanthari Vaidyasala,
we maintain traditional technology for Ayurvedic medicine preparation. The recommended
vessels for preparation of fermented products are earthen vessels. The natural temperature
regulation in porous vessel is unique and the medicines will be having 24 to 28 degree of
Kashayam. The fact that we have been able to maintain our goodwill and reputation for seven
decades vindicates our policy of maintaining traditional processing methods experienced
labour strength, care and hygiene of production. Now this is been awarded with GMP
Certificate by the concerned authorities.

The Products
Several pharmaceutical forms are employed for managing various stages of illness.
Dhanwanthari Vaidyasala has got a product list ranging over 300. The medicinal preparations
are classified under the following groups mainly Avarthi, Arishtasavam, gulika, Choornam,
Ghruthm, Kashayam, Kuzhambu, Lehyam, Lepam, Sevyam, Thailam, Keram.

Quality Control

Our credibility and goodwill makes it imperative that we stick on to the standards we
have set which is compatible with Indian Pharmaceutical standards achieved by production as
per GMP. Our prime asset acquired through seven decades of our existence, is the goodwill
through the superior quality of products.
Here, the Q.C Department deals with:
Raw material quality control
Pre-processing quality control
Processing quality control
Finished goods quality control
Shelf life quality control
Therapeutic quality control

34

3.4 RESEARCH AND DEVELOPMENT PROGRAMME

The firm is having its own research and development set up. A part from
standardization tests, the research and development department is also conducting tests for
basic research, new product development and test for improving the production quality.
Dhanwanthari Vaidyasala has already developed patented ayurvedic preparations and as they
have conducted various trials for the last 3 years. They are ready for market now. They are
having tie up with several reputed research institutes. Experts in various fields are invited to
tie up and perfect systems. They plan for workshop on specific subjects involving scientists,
doctors and technical experts from India and abroad.

Hospital division
Hospital division was started to boost the goodwill and credibility of the organization.
But later it emerged to be one of the most promising and fast growing activities of the mother
firm. Thus we were able to extend our goodwill beyond our expected limits or geographical
boundaries. Our objective is to extent health services to the public, incurring minimum cost.
We have dedicated ourselves to the cause of Ayurveda and its pure and traditional
methodologies. Our Head Office of Health services is in Thodupuzha, which is a 25 bedded
set up with full-fledged departments, aided by modern medical care. This will be having
different

specialty

departments

like

Kayachikitsa

(general

medicine),

marmachikitsa(orthopaedics), nethrachikitsa (eye specialty), salakyathanthra (E.N.T),

vishachikitsa (toxicology&skin), rasayanachikitsa (rejuvenative and Aphrodisiac therapy),
manasikam(psychiatry, stress management etc.), salyachikitsa(surgical deceases), and
balachikitsa(paediatric).
Panchakarma
This branch of Ayurveda was developed by physicians in Kerala from sodhana
chikitsa referred in Ayurvedic texts. This is a unique Kerala treatment now attracting global
attention. The therapeutic range of panchakarma extends from common low back pain to
cerebral lesion diseases. In healthy humans this treatment tunes up the somatic and mental
health enhances the immunity power, strength, vitality, and longevity without any side
effects.

35

Online Consultation
Now that we are in the web net, we have decided to extend the fruits of this science
and our experience in the field to our global clientele. Thats why we are opening up an
opportunity for consulting us online. One can email us at gulgulu@md4.vsnl.net.in or contact
through our online consultation section in www.dhanwanthari.org. Then we will email them
back for more clarifications, if needed be. Then our panel of expert doctors head by
Dr.C.N.Namboothiri will guide them to further course of action. This panel comprises mainly
of ayurvedic and Allopathic doctors expertise in various disciplines. Chief physician
Dr.C.N.Namboothiri himself is qualified and experienced in both these medical branches.

Herbal Cultivation
Dhanwanthiri Vaidyasala has developed a fully-fledged Herbal Nursery in
Thodupuzha. This aims at providing seedling and technical support to its projects for Herbal
Cultivation in Kerala and TamilNadu. It also has started associating with farmers by
providing them with seedling, technical support and buyback arrangement. Now
dhanwanthari vaidyasala has projects for herbal cultivations with aids from Central Health
Ministry and Central Herbal Board. It also aims at preserving endangered species which is of
medicinal use to mankind.

3.5 MAJOR CENTRES

1. Dhanwanthari Vaidyasala & treatment division
Head office, Thodupuzha, idukki dist.
Kerala state-685584
Phone no. 0486-220436, 222536,227566
Telefax 0486-227566
Email dhanwanthari@satyam.net.in
Website www.Dhanwanthari.org
2. Dhanwathari Vaidyasala &Treatment Centre
M.G Road, near govt. Ayurveda College
Thiruvananthapuram
3. Dhanwathari Vaidyasala &Treatment Centre
Main road, near Y.M.C.A
Kottayam
Ph. 0484-2563486

36

4. Dhanwathari Multi specialty hospital

M.G road padma theatre
Kochi
Ph. 0484-2368878
5. Dhanwathari Vaidyasala &Treatment Centre
S.N Park road, near kavitha theatre
Kannur
Ph. 0497-2764449
6. Dhanwathari Vaidyasala &Treatment Centre
Rajamandhir, chalapuram
Kozhikode
Ph. 0495-2306368
7. Dhanwathari Vaidyasala &Treatment Centre
Kalian health care centre
Karamcodu p o
Chathanoor, kollam
Ph. 0474-3094080
8. Dhanwathari Vaidyasala &Treatment Centre
Hassans home stay
Kumily, idukki
Ph. 04869-22186

9. Dhanwathari Vaidyasala &Treatment Centre

Chandana residency
Udumalpetta road,
Marayoor
Ph. 04865-252322
10. Ayurcare (in association with dhanwanthari)
Regional office, plot 500
Behind pantaloons lane
Ph. 040-2776688

37

ORGANISATIONAL STRUCTURE OF DHANWANTHARI VAIDYASALA

Managing Director

Partner Commercial

Partner Technical

Chief Executive Officer

Production
manger

Doctors marketing

Non-technical staff

Treatment division

Field
executive

Health service
Manager

Office staff

Accounting staff

Branch
staff

Market supervisor

Dispatch

Workmen

Finished product store

Packing material store

Staff

Raw material store

Workmen

R&D officer

Production supervisor
Section
in
charge

Finance
Manager

Marketing
Manager

Materials Manager

Doctors

Technical staff

38

PERFORMANCE OF WORKING CAPITAL MANAGEMENT IN

DHANWANTHARI VAIDYASALA
-AN ANALYSIS
4.1 INTRODUCTION
Working capital management is an integral part of overall financial management. The
manner of administration of current assets to very large extent determines the success of
operation of a firm. It is concerned with obtaining economic funds, using them in profitable
manner and controlling them to maintaining economy. Working capital management should
establish a proper balance among risk, profitability and liquidity. The importance of working
capital management lies in the fact financial managers spends a great deal of time in
managing current asset and current liabilities.
An analysis of liquidity aspect of working capital is vital for both short term creditors and the
management of business enterprise. The short term creditors get acquainted with the chance
of receiving payment in time or the margin of safety which may assure them of eventual
payment in full. The analysis helps the management to evaluate their current policies. In this
study the performance of working capital management in Dhanwanthari Vaidyasala has been
analysed with the help of following measures.

4.2 MEASURES
Study of working capital policy of Dhanwanthari Vaidyasala
Study of structure of working capital policy in Dhanwanthari Vaidyasala
Study of short term solvency of Dhanwanthari Vaidyasala
Study of the efficiency achieved by the firm utilizing its working capital

4.3 TOOLS OF WORKING CAPITAL ANALYSIS

The financial management always strives to maintain an adequate working capital at
every time so as to carry on the operations successfully and maximize the return on
investment. It has to be vigilant about the trend in the items that make up the working capital.
This requires a careful enquiring into the current asset and current liability so as to control the
working capital and to conserve it properly.

39

There as a several tools for financial analysis of working capital. The important of them as
follows:I.

Ratio Analysis

II.

Graph

4.4 RATIO ANALYSIS

In this chapter an earnest attempt is made to analysis the working capital performance
of company with the help of ratio analysis. Ratio Analysis is a powerful tool for financial
analysis. A ratio is defined as the indicated quotient of two mathematical expressions and
as relationship between two or more things. In financial analysis a ratio is used as the
benchmark for evaluating the financial position and performance of a firm. Ratio helps to
summarize large quantities of financial data and to make qualitative judgment about the
firms financial performance. It is an index or yardstick which permits a qualitative judgment
to be formed about the firms ability to meet its current obligations. It measures the firms
liquidity. A ratios reflecting a quantitative judgment. Such is the nature of all financial
ratios.
Now a day ratio analysis is used by all business and industrial concerns in their
financial analysis. Ratios are considered to be the best guidance for the efficient execution of
basic managerial functions like planning, forecasting, control etc. Ratio may be expressed in
either in the form of rate or proportions or percentage.

4.4.1 IMPORTANCE OF RATIO ANALYSIS

It makes it easy to grasp the relationship between various items and helps in
understanding the financial statement.
Ratio indicates trends in important items and thus will help in forecasting.
Inter-firm comparisons can be made with the help of ratios.
It helps in simple assessment of liquidity, profitability, solvency and efficiency of the
firm.
Ratio may be used as measure of efficiency.

40

4.4.2 LIMITATIONS OF RATIO ANALYSIS

Ratio analysis gives only a good basis of quantitative analysis of financial problems.
But it suffers from qualitative aspects.
Ratios are computed from historical accounting records. So they also process those
limitations of financial accounting.
It is not possible to calculate exact and well accepted absolute standard for
comparison.
Ratios are only means of financial analysis, but not an end in them.

4.4.3 TYPES OF RATIOS

Several ratios can be calculated from the accounting data contained in the financial
statement. These ratios can be grouped into various classes according to the financial
activities or functions to be evaluated. The parties, which generally undertake financial
analysis, are short-term creditors, long-term creditors, owners and management. Short term
creditors main interest in the liquidity position or the short term solvency of the firm. Long
term creditors on the other hand are more interested in the long term solvency and
profitability of the firm. Similarly owners concentrate on firms profitability analysis and the
analysis of the firms financial conditions. Management is interested in evaluating every
activity of the firm. They have to protect the interest of all parties and that the firm grows
profitably. The ratio can be classified into the following four categories.

1. Liquidity ratio
Liquidity refers to the ability of firm to meet its obligations in the short run, usually
one year. Liquidity ratios are generally based on relationship between current assets
(the source for meeting short term obligations) and current liabilities. The important
liquidity ratios are current ratio, acid test ratio etc.
2. Leverage ratio
Financial leverage refers to the use of debt finance. While debt capital is cheaper
source of finance, it is also a riskier source of finance. Leverage ratio helps in
assessing the risk arising from the use of debt capital. Two types of ratio are
commonly used to analyse financial leverage: structure ratios and coverage ratios.

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3. Activity ratio
Activity ratio or turn over ratios, measure how efficiently assets are employed by a
firm. These ratios are based on the relationship between the level of activity,
represented by sales or cost of goods sold, and levels of various assets. The important
turnover ratios are: inventory turnover, average collection period, receivable turn over
etc.
4. Profitability ratios
Profitability reflects the financial result of business operations. These are

two types

of profitability ratios, profit margin ratios and rate of return ratios. Profit margin ratio
shows the relationship between profit and sale. The two popular profit margin ratios
are: gross profit margin and net profit margin ratios. Rate of return ratios reflect the
relationship between profit and investment. The important rates of return measures
are: return on total assets, earning power, and return equity.
STEPS IN RATIO ANALYSIS
The first task of financial analysis is to select the information relevant to the decision
under consideration from the statements and calculate appropriate ratios.
To compare the calculated ratios with the ratios of the same firm relating to the past or
with the industry ratios. It facilitates in assessing success or failure of the firm.
Third step is to interpretation, drawing of inferences and report writing, conclusions
are drawn after comparison in the shape of report or recommended course of action.
BASIS OR STANDARDS OF COMPARISON
Ratios are relatively figures reflecting the relation between variables. They enable
analyst to draw conclusions regarding financial operations. They use of ratios as a tool of
financial analysis involves the comparison with related facts. The basis of ratio analysis is
four of types.
Past ratios, calculated from past financial statements of the firm.
Competitors ratio, of the some most progressive and successful competitor firm at
the same point of time.
Industry ratio, the industry ratios to which the firm belongs to
Projected ratios, ratios of the future developed from the projected or pro forma
financial statements.

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INTERPRETATIONS OF THE RATIOS

The interpretation of ratio is an important factor. The inherent limitations of ratio
analysis should be kept in mind while interpreting them. The impact of factors such as price
level changes, changes in accounting policies, window dressing etc., should also be kept in
mind when attempting to interpret ratios. The interpretation of the ratios can be made in the
following ways.
Single absolute ratio
Group of ratios
Historical comparison
Projected loans
Inter-firm comparison
GUIDELINES OR PRECAUTIONS FOR USE OF RATIOS
The calculations of ratios may not be a difficult task but their use is not easy.
Following guidelines or factors may be kept in mind while interpreting various ratios is

Accuracy of financial statements

Objective or purpose of analysis
Selection of ratios
Use of standards
Calibre of the analysis
CLASSIFICATIONS OF RATIOS
The use of ratio analysis is not confined to financial manager only. There are different
parties interested in the ratio analysis for knowing the financial position of a firm for different
purposes. Various accounting ratios can be classified as follows.
1. Traditional classification
2. Functional classification

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Traditional Classification
It includes the following
Balance sheet or position statement ratio: they deal with relationship between two
balance sheet items, e.g. the ratio of current assets to current liabilities etc., both the
items must, however pertain to the same balance sheet.
Profit & loss a/c or revenue statement ratio: these ratios deals with the relationship
between two profit & loss account items, e.g. the ratio of gross profit to sales etc.,
Composite or inter statement ratios: these ratios exhibit the relation between a profit a
profit & loss account or income statement item and a balance sheet items, e.g. stock
turnover ratio of total assets to sales.
Functional Classification
These include liquidity ratios, long term solvency and leverage ratios, activity ratios and
profitability ratios.

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