Sie sind auf Seite 1von 60

SHRI RAMSWAROOP MEMORIAL UNIVERSITY

LUCKNOW-DEVA ROAD, UTTAR PRADESH

SUMMER TRAINING REPORT


ON
A Comparative Study on Working Capital Management in Sugar Mill
Spl ref. to Lakshmi Sugarmill
SUBMITTED IN PARTIAL FULFILLMENT OF REQUIREMENT FOR THE AWARD OF DEGREE
OF
Bachelor of Commerce

TO
SHRI RAMSWAROOP MEMORIAL UNVERSITY
2014-15

Under Guidance of:


Dr. Pradeep Asthana
Institute of Management,
Commerce & Economics
SRMU, Lucknow.

Submitted by:
Gaurav Raghuvanshi
Roll No.-201310701110014

INSTITUTE OF MANAGEMENT, COMMERCE & ECONOMICS

SRMU

CERTIFICATE
This is to certify that the project entitled A Comparative Study on Working Capital
Management in Sugar Mill Spl ref. to Lakshmi Sugarmill submitted by Guarav
Raghuvanshi [Univ. Roll No. 201310701110014] and in the partial fulfillment of the requirement
for the award of the DEGREE OF BACHELOR OF COMMERCE of SHRI RAMSWAROOP
MEMORIAL UNIVERSITY to the best of my knowledge it is a record of students own work
carried under our supervision and guidance. The project report embodies result of original work
and the study carried out by the student and the contents do not form the basis for the award of
any other degree to the candidate or to anybody else.

(Dr. Pradeep Asthana)

CERTIFICATE OF ORIGINALITY
I_____________________________________ Roll No __________________of, a full time
bonafide student of first year of Bachelor of Commerce of Shri Ramswaroop Memorial
University. I hereby certify that for this project work carried out by me at
_________________________________________________ the

report

submitted

in partial

fulfillment of the requirements of the programme is an original work of mine carried out under
the

guidance

of

the

industry

mentor

___________________________________________________________________ and faculty


mentor _______________________________________________________ and is not based or
reproduced from any existing work of any other person or on any earlier work undertaken at any
other time or for any other purpose, and has not been submitted anywhere else at any time to the
best of my knowledge.

(Student's Signature)
Date:

INSTITUTE OF MANAGEMENT, COMMERCE & ECONOMICS


SRMU

DECLARATION
I hereby declare that the project entitled A Comparative Study on Working Capital
Management in Sugar Mill Spl ref. to Lakshmi Sugarmill submitted by me in the partial
fulfillment of the requirements for the award of the degree of Master of Business Administration
of Shri Ram Swaroop Memorial University, is a record of my own work carried under the
supervision and guidance of Dr. Pradeep Asthana
To the best of my knowledge this project has not been submitted to SHRI RAMSWAROOP
MEMORIAL UNIVERSITY or any other University or Institute for the award of any degree.

Name: Gaurav Raghuvanshi


University Roll. No201310701110014

ACKNOWLEDGEMENT

I take this opportunity to express my profound gratitude and deep regards to my


guide Dr. Pradeep Asthana for his exemplary guidance, monitoring and constant
encouragement throughout the course of this project. The blessings, help and
guidance given by him time to time shall carry me a long way in the journey of life
on which I am about to embark.
I also take this opportunity to express a deep sense of gratitude to Mr.
__________________, Asstt. Manager, Lakshmi Sugarmill, for his cordial support,
valuable information and guidance, which helped me in completing this task
through various stages.
I am also obliged to staff members of Lakshmi Sugarmill for the valuable
information provided by them in their respective fields. I am grateful for their
cooperation during the period of my summer training.
Finally, I am thankful to almighty, my parents, brothers, sisters and friends for their
consistent encouragement without which this project would have not been
completed.

Gaurav Raghuvanshi

TABLE OF CONTENTS
Certificate of the college
Certificate of the organization
Preface
Acknowledgement
Declaration
Table of contents
Executive summary
CHAPTER I
Introduction
Objective of the study
Scope and limitations of study
Methodology: this would contain the following things:
1. Sources of data
2. Sample sizes, if any
3. Methods of data collection
4. Instrument used
5. Tools and techniques of analysis
CHAPTER II
Company Profile
Marketing strategies
Competitors
CHAPTER III
Data Analysis & Findings
CHAPTER IV
Suggestion/ Recommendation
CHAPTER V
6

Conclusion
Bibliography
Appendix / Annexure

EXECUTIVE SUMMARY
A Comparative Study on Working Capital Management in Sugar Mill
Spl ref. to Lakshmi Sugarmill

As a part of curriculum, every student studying Graduation has to undertake a


project on a particular subject assigned to him/her. Accordingly I have been
assigned the project work on the study of working capital management in Lakshmi
Sugarmill.
Decisions relating to working capital (Current assets-Current liabilities) and short
term financing are known as working capital management. It involves the
relationship between a firms short-term assets and its short term liabilities.
The goal of working capital management is to ensure that the firm is able to
continue its operation and that it has sufficient cash flow to satisfy both maturing
short term debt and upcoming operational expenses.
Working capital is used in Lakshmi Sugarmill., for the following purpose:Raw material, work in progress, finished goods, inventories, sundry debtors, and
day to day cash requirements. The Lakshmi Sugarmill., keep certain funds which
is automatically available to finance the current assets requirements.

The various information regarding Working Capital Management such as


classification, determinants, sources have been discussed relating to Lakshmi
Sugarmill
Ratio

Analysis has been Carried out using Financial Information for last five

accounting years i.e. from 2006 to 2010 Ratios like Working capital Turnover
Ratio, Quick Ratio, Current Ratio, Inventory Turnover Ratio, Debtor Turnover
Ratio, Creditors turnover ratio have also been analyzed. A Statement of Changes
in Working Capital has also been analyzed.

At Lakshmi Sugarmill., the working capital management has shown increase in


the period of study. This shows working capital is managed effectively and all the
other departments are working in perfect co-ordination to ensure the progress of
Lakshmi Sugarmill., but I have given some Suggestions & Conclusions on the
basis of my Project Study.

CHAPTER-1
WORKING CAPITAL MANAGEMENT
WHAT IS WORKING CAPITAL???
Working capital is the cash needed to pay for the day to day operation of the
business. Working capital is a financial metric which represents operating
liquidity available to a business, organization or other entity, including
governmental entity. Along with fixed assets such as plant and equipment, working
capital is considered a part of operating capital. Net working capital is calculated
as current assets minus current liabilities.. It is a derivation of working capital, that
is commonly used in valuation techniques such as DCFs (Discounted cash flows).
If current assets are less than current liabilities, an entity has a working capital
deficiency, also called a working capital deficit.

A company can be endowed with assets and profitability but short


of liquidity if its assets cannot readily be converted into cash. Positive working
capital is required to ensure that a firm is able to continue its operations and that it
has sufficient funds to satisfy both maturing short-term debt and upcoming
operational expenses. The management of working capital involves managing
inventories, accounts receivable and payable, and cash.

Working capital management is a very important component of corporate


finance because it directly affects the liquidity and profitability of the company. It
involves the decision of the amount and composition of current assets and the
financing of these assets. Efficient working capital management involves planning
and controlling current assets and current liabilities in a manner that eliminates the
risk of inability to meet due short term obligations on the one hand and avoid
excessive investment in these assets on the other hand.

10

OBJECTIVE OF STUDY
To study the overall working of the organisation i.e., study of all department
and organisation structure.
To study the efficiency of working capital management of the company.
To study the efficiency of cash , inventory and receivables of the company.
To understand and analyze the working capital position of

the overall

workingof the organisation i.e., study of all department and organisation


structureLAKSHMI sugar mills.
To measure the overall financial position of the company with the help of
ratio analysis.

SCOPE OF THE STUDY

11

The sugar sub-sector played a major role in the LAKSMI economy and was a
source of livelihood for peoples. Therefore, pegged on the sub-sectors
irreplaceable indispensability, stable synergy was of essence to strengthening and
harnessing stakeholders collective contributions. The studys findings were
anticipated to contribute in solidifying scholarly contributions towards establishing
an ideal working capital practice in the context of outgrower/other related
companies serving vast interests.
Finally, the study recommendations focused on institutional weaknesses on
working capital management to trigger managerial refocusing of their practices and
work towards investment value creation. This did not only benefit the companies in
terms of sustainability but also individual farmers who resorted to borrowing in
boosting their produce. The anticipated improvements in sugarcane produce would
to a large extent enhance industry performance which in turn would enrich the
economys performance.

RESEARCH METHODOLOGY

12

Introduction
The process used to collect information and data for the purpose of making
business

decisions. The methodology may include

publication

research,

interviews, surveys and other research techniques, and could include both present
and historical information.

Types of research methodology

Qualitative: This type of research methods involves describing


in details specific situation using research tools like interviews,
surveys, and Observations.

[3]

Qualitative Research is primarily

exploratory research. It is used to gain an understanding of


underlying reasons, opinions, and motivations. It provides insights
into the problem or helps to develop ideas or hypotheses for
potential quantitative research. Qualitative Research is also used
to uncover trends in thought and opinions, and dive deeper into
the problem. Qualitative data collection methods vary using
unstructured

or

semi-structured

techniques.

Some

common

methods include focus groups (group discussions), individual


interviews, and participation/observations. The sample size is
typically small, and respondents are selected to fulfill a given
quota.
13

Quantitative : This type of research methods requires


quantifiable data involving numerical and statistical explanations.
Quantitative Research is used to quantify the problem by way of
generating numerical data or data that can be transformed into
useable statistics. It is used to quantify attitudes, opinions,
behaviors, and other defined variables and generalize results
from a larger sample population. Quantitative Research uses
measurable data to formulate facts and uncover patterns in
research. Quantitative data collection methods are much more
structured than Qualitative data collection methods. Quantitative
data collection methods include various forms of surveys online
surveys, paper surveys, mobile surveys and kiosk surveys, faceto-face interviews, telephone interviews, longitudinal studies,
website interceptors, online polls, and systematic observations .

Correlation/Regression

Analysis:

This

research

method

involves determining the strength of the relationship between two


or more variables

The working capital meets the short-term financial requirements of a business


enterprise. It is a trading capital, not retained in the business in a particular form
for longer than a year. The money invested in it changes form and substance during
14

the normal course of business operations. The need for maintaining an adequate
working capital can hardly be questioned. Just as circulation of blood is very
necessary in the human body to maintain life, the flow of funds is very necessary
to maintain business. If it becomes weak, the business can hardly prosper and
survive. Working capital starvation is generally credited as a major cause if not the
major cause of small business failure in many developed and developing countries
(Rafuse, 1996).

The success of a firm depends ultimately, on its ability to generate cash receipts in
excess of disbursements. The cash flow problems of many small businesses are
exacerbated by poor financial management and in particular the lack of planning
cash requirements .

Research design
The study adopted a descriptive cross-sectional survey research design. According
to Polit and Beck (2010), this design necessitates a more economical collection of
data at one point in time and is fundamental in objective analysis due to timing
similarity. The design provides a quick, efficient and accurate means of accessing
information about the population and it is more appropriate where there is a gap of
secondary data.
This design was considered appropriate because this study focused on the data
relating to working capital management practices at the time of the study for all the
entities being studied. The data collected also provided descriptive information
15

about the study subjects and were sourced from a mix of primary and secondary
sources.
Sampling Design
There were about 113 sugar factories in the state in March 2003 of which 45 were
in the private sector, 37 in the public sector and 31 in the cooperative sector.
During 2000-01, 47 sugar factories in eastern UP, 41 in central UP and 25 in
western UP were in operation in the state. For selection of sugar factories, these
were grouped into 3 regions, viz. western, central and eastern. This grouping was
made in consonance with sugar zoning concept adopted by the Government of
India and Indian Sugar.
Manufacturers Association (ISMA) and not according to the administrative zoning
(see end notes). Further, twenty-one factories, seven each in private, public and
cooperative sectors were selected from each region randomly. Thus in all, 63
factories were selected and manufacturing details and other data on costing
parameters were collected from ISMA, New Delhi, UP Cooperative Sugar
Federation, Lucknow, UP Sugar Corporation, Lucknow, and CMIE prowess
database for the year 2000-01. A cursory look at Table 1 indicates that there were
67 sugar factories till the end of Second Five-Year Plan period, of which nearly
half were in the eastern region. The private sector accounted for the maximum
number of factories (36). The co-operative sector had only two factories, one each
in western and central regions. Though a major thrust was given to setting up of
co-operative factories after the Fourth Plan, the concentration was mainly in the
central and eastern regions. Details about crushing capacity and crushing duration
across various sectors and zones in the state are given in Table 2. The private sector
16

with 41 sugar factories had the crushing capacity of 159400 TCD, commanding
nearly 55 per cent share in the total cane crushed, while the public and cooperative
sectors had 20 and 25 per cent shares, respectively. This clearly reflects the lower
capacity of plants in these two sectors. Most of the plants had the capacity of 2500
TCD or even less in these sectors, which eventually affected the performance of
factories. The crushing duration of factories across different zones of UP varied
between 129 days and 162 days in 2000-01, with maximum in western zone,
followed by central and eastern zones. The private sector generally crushed the
cane for a longer period, than by co-operative and public sectors, contrary to the
popular belief that the private sector is whimsical about their opening and closing
dates of the cane crushing, coupled with lesser duration of operation Table. Sectorwise and zone-wise establishment of sugar factorie U.P.
Year

Western
Private Publi

Central
Coop. Private Publi

c
7

1960
1961-

70
1971-

80
1981-

Coop

1o

c
5

.
1

90
1991-

02
Total

11

Befor

Eastern
Private Publi

Coop.

17

c
17

nil

14

18

20

20

17

HYPOTHESES
Following null hypotheses have been framed:

1. There is no difference among the sample firms in terms of their liquidity .

2. There growth in the profitability is higher in private sector firms than


government and cooperative sector firms.
3. The productivity is more in private sector firms than cooperative and
government owned firms .

Data collection
To ensure comprehensive examination and inter-firm comparison, both secondary
and primary sources of data were adopted. The secondary data were ascertained
from financial statements and inventory records with the aid of predesigned desk
review checklist. On the other hand, primary data collection was accomplished by
use of a semi-structured and self administered questionnaire.

18

Dillman (2005) also supports use of questionnaire as it is made to accomplish a


wide range of feedbacks because each respondent is asked to respond to the same
set of questions. The questionnaire was given to respondents drawn from
representatives of top management, finance and procurement sections. Hence,
there were three inclusions from each company with top management represented
by managing directors, finance by head of accounts, and procurement by head of
supply chain sections. Primary instrument validity was gained through scholarly
critique and professional input from one financial manager/practitioner and two
research experts. Moreover, the instrument was triangulated to ensure collection of
both in-depth and closed feedbacks. In addition to these, using both secondary and
primary data sources was helpful in enhancing reliability of findings due to
minimal inconsistencies from the respondents. The researchers availability 23
during data collection also ensured that respondents were assisted in completions
by way of giving guided clarifications.

19

LIMITATIONS OF STUDY :

Time factor is the most crucial one . The study was conducted within short
period of one month.

LSM executives were hesitating to provide infornmataion.

I had to wait for a long time to make contact with the executives as they all
are busy in their works.
Due to busy work schedule, detailed discussions were not possible.
Competitor of LSM were given less information and data.
Lot of time consumed during servay.

20

CHAPTER -2

Background of the Study


The project undertaken is on WORKING CAPITAL MANAGEMENT IN
LAKSHMI SUGAR MILL. It describes about how the company manages its
working capital and the various steps that are required in the management of
working capital. Cash is the lifeline of a company. If this lifeline deteriorates, so
does the company's ability to fund operations, reinvest and meet capital
requirements and payments. Understanding a company's cash flow health is
essential to making investment decisions. A good way to judge a company's cash
flow prospects is to look at its working capital management (WCM). Working
capital refers to the cash a business requires for day-to-day operations or, more
specifically, for financing the conversion of raw materials into finished goods,
which the company sells for payment. Among the most important items of
working capital are levels of inventory, accounts receivable, and accounts payable.
Analysts look at these items for signs of a company's efficiency and financial
strength. The working capital is an important yardstick to measure the companys
operational and financial efficiency. Any company should have a right amount of

21

cash and lines of credit for its business needs at all times. This project describes
how the management of working capital takes place at LMS.

The working capital meets the short-term financial requirements of a business


enterprise. It is a trading capital, not retained in the business in a particular form
for longer than a year. The money invested in it changes form and substance during
the normal course of business operations. The need for maintaining an adequate
working capital can hardly be questioned. Just as circulation of blood is very
necessary in the human body to maintain life, the flow of funds is very necessary
to maintain business. If it becomes weak, the business can hardly prosper and
survive. Working capital starvation is generally credited as a major cause if not the
major cause of small business failure in many developed and developing countries.
The success of a firm depends ultimately, on its ability to generate cash receipts in
excess of disbursements. The cash flow problems of many small businesses are
exacerbated by poor financial management and in particular the lack of planning
cash requirements.
A firm can be very profitable, but if this is not translated into cash from operations
within the same operating cycle, the firm would need to borrow to support its
continued working capital needs. Thus, the twin objectives of profitability and
liquidity must be synchronized and one should not impinge on the other for long.
Investments in current assets are inevitable to ensure delivery of goods or services
to the ultimate customers and a proper management of same should give the
desired impact on either profitability or liquidity. If resources are blocked at the
different stage of the supply chain, this will prolong the cash operating cycle.
Although this might increase profitability (due to increase sales), it may also
22

adversely affect the profitability if the costs tied up in working capital exceed the
benefits of holding more inventory and/or granting more trade credit to customers.
Another component of working capital is accounts payable, but it is different in the
sense that it does not consume resources; instead it is often used as a short term
source of finance. Thus it helps firms to reduce its cash operating cycle, but it has
an implicit cost where discount is offered for early settlement of invoices.

COMPANY INFORMATION

Lakshmi Sugar Mills Company Limited is a Public Company incorporated on 16


September 1940. It is classified as Indian Non-Government Company and is
registered at Registrar of Companies, Uttarakhand. Its authorized share capital is
Rs. 300,000,000 and its paid up capital is Rs. 290,000,000.It is involved in
Manufacture of other chemical products.
Lakshmi Sugar Mills Company Limited's Annual General Meeting (AGM) was last
held on 29 December 2014 and as per records from Ministry of Corporate Affairs
(MCA), its balance sheet was last filed on 30 June 2014.
Directors of Lakshmi Sugar Mills Company Limited are Anil Kumar Tanwar,
Anjali Birla Sawhney and Shreya Sawhney.
Lakshmi Sugar Mills Company Limited's Corporate Identification Number is

23

(CIN) U24231UR1940PLC004491 and its registration number is 4491.

LAKSHMI

SUGAR

MILLS

Company Name
RoC

COMPANY LIMITED
RoC-Uttarakhand

Registration Number

4491

Activity

Manufacture of other chemical

Company Category

products
Company limited by shares

Company Sub Category

Indian Non-Government Company

Class of Company

Public Company

Paid up capital (in Rs.)

290,000,000

Date of Incorporation

16 September 1940

Address

VILLAGE

City

ROORKEE
HARIDWAR

State

Uttarakhand

Company Status (for eFiling)

Active

IQBALPURTEHSIL

24

VISION AND MISSION

Vesion
It is the vison of the LSM to creat a brand image for sugar that evoke a sence of
awe , blind faith and inspiration and to achieve for itself the position of industry
leader in the field of value addition business of processed sugar , by investing into
integrated operations.
Creating and multiplying wealth of the company with continous expension for the
better future of the stakeholders.

Mission
To bring its customers the benefits of industry leading technology from
concept of realisation.
25

To provide its customer the best quality of sugar


To set standards in service to customers.

THERE ARE TWO DIFFERENT CONCEPTS OF WORKING CAPITAL:1. Balance sheet or Traditional concept - It shows the position of the firm at
certain point of time. It is calculated in the basis of balance sheet prepared at a
specific date. In this method there are two types of working capital:-

a) Gross working capital - It refers to the firms investment in current assets. The
sum of the current assets is the working capital of the business. The sum of the
current assets is a quantitative aspect of working capital. Which emphasizes more
on quantity than its quality, but it fails to reveal the true financial position of the
firm because every increase in current liabilities will decrease the gross working
capital.

b) Net working capital - It is the difference between current assets and current
liabilities or the excess of total current assets over total current liabilities. It is also
can defined as that part of a firms current assets which is financed with long term
funds. It may be either positive or negative. When the current assets exceed the
current liability, the working capital is positive and vice versa.
26

2. Operating cycle concept - The duration or time required to complete the


sequence of events right from purchase of raw material for cash to the realization
of sales in cash is called the operating cycle or working capital cycle
Debtors and bills
recievable
Cash

Sales

Operating cycle

Raw material

Finished goods

Work-in-progress

27

The investment in working capital is influenced by four key events in the


production & sales cycle of the firm:
Purchase of raw materials.
Payment of raw materials.
Sale of finished goods.
Collection of cash for sales.
The firm begins with the purchase of raw materials which are paid after a delay
which represents the accounts payable period. The raw materials are then
converted into finished goods which are then sold. The time lag between the
purchase of raw materials and the sale of finished goods is called the inventory
period. The time lag between the date of sales & the date of collection of
receivables is the accounts receivable period. The time lag between purchase
28

of raw materials & the collection of cash for sales is referred to as operating
cycle. The time lag between payment for raw material purchases & the collection
of cash for sales is referred to as cash cycle.

IMPORTANCE OF WORKING CAPITAL


The advantages of working capital or adequate working capital may be enumerated
as below: -

1. Cash Discount:
If a proper cash balance is maintained, the business can avail the advantage
of cash discount by paying cash for the purchase of raw materials and
merchandise. It will result in reducing the cost of production.

2. It creates a Feeling of Security and Confidence:


The proprietor or officials or management of a concern are quite carefree, if
they have proper working capital arrangements because they need not worry
for the payment of business expenditure or creditors. Adequate working
capital creates a sense of security, confidence and loyalty, not only
throughout the business itself, but also among its customers, creditors and
business associates.

29

3. Must for Maintaining Solvency and Continuing Production:


In order to maintain the solvency of the business, it is but essential that the
sufficient amount t of fund is available to make all the payments in time as
and when they are due. Without ample working capital, production will
suffer, particularly in the era of cut throat competition, and a business can
never flourish in the absence of adequate working capital.

4. Sound Goodwill and Debt Capacity:


It is common experience of all prudent businessmen that promptness of
payment in business creates goodwill and increases the debt of the capacity
of the business. A firm can raise funds from the market, purchase goods on
credit and borrow short-term funds from bank, etc. If the investor and
borrowers are confident that they will get their due interest and payment of
principal in time.

5. Easy Loans from the Banks:


An adequate working capital i.e. excess of current assets over current
liabilities helps the company to borrow unsecured loans from the bank
because the excess provides a good security to the unsecured loans, Banks
favour in granting seasonal loans, if business has a good credit standing and
trade reputation.

30

6.

Distribution of Dividend:
If company is short of working capital, it cannot distribute the good dividend
to its shareholders in spite of sufficient profits. Profits are to be retained in
the business to make up the deficiency of working capital. On the other
contrary, if working capital is sufficient, ample dividend can be declared and
distributed. It increases the market value of shares.

7. Exploitation of Good Opportunity:


In case of adequacy of capital in a concern, good opportunities can be
exploited e.g., company may make off-season purchases resulting in
substantial savings or it can fetch big supply orders resulting in good profits.

8. Meeting Unseen Contingency:


Depression shoots the demand of working capital because sock piling of
finished goods become necessary. Certain other unseen contingencies e.g.,
financial crisis due to heavy losses, business oscillations, etc. can easily be
overcome, if company maintains adequate working capital.

9. High Morale:
The provision of adequate working capital improves the morale of the
executive because they have an environment of certainty, security and
confidence, which is a great psychological, factor in improving the overall
efficiency of the business and of the person who is at the hell of fairs in the
company.
31

10.Increased Production Efficiency:


A continuous supply of raw material, research programme, innovations and
technical development and expansion programmes can successfully be
carried out if adequate working capital is maintained in the business. It will
increase the production efficiency, which will, in turn increases the
efficiency and morale of the employees and lower costs and create image
among the community.
DISADVANTAGES OF EXCESSIVE WORKING CAPITAL

Every business concern should have adequate working capital to run itsbusiness
operations. It should have neither redundant or excessive working capital
nor inadequate nor shortage of working capital. Both excessive as well as short
working capital positions are bad for any business.

1. Excessive working capital means idle funds which earn no profits for the
business and hence the business cannot earn a proper rate of return on its
investments.
2. When there is redundant working capital, it may lead to unnecessary purchasing
and accumulation of inventories causing more chances of theft waste and losses.
3. Excessive working capital implies excessive debtors and defective credit Policy
which may cause higher incidence of bad debts.
4. It may result into overall inefficiency in the organization.
32

5. When there is an excessive working capital relation with the banks


and other financial institutions may not be maintained.
6. Due to low rate of return on investments the value of shares may also fall

DISADVANTAGES OF INADEQUATE WORKING CAPITAL


1) A concern, which has inadequate working capital, cannot pay its short-term
liabilities in time. Thus it will loose its reputation and shall not be able to get good
credit facilities.
2) The firm cannot pay day-to-day expenses of its operations and it creates
inefficiencies, increases costs and reduces the profits of the business.
3) It becomes impossible to utilize efficiently the fixed assets due to nonavailability of liquid funds.
4) The rate of return on investments also falls with the shortage of working capital.

3.3The Management of Working Capital


While the performance levels of small businesses have traditionally been attributed
to general managerial Factors such as manufacturing, marketing and operations,
working capital management may have a consequent impact on small business
survival and growth (Kargar and Blumenthal, 1994). The management of working
33

capital is important to the financial health of businesses of all sizes. The amounts
invested in working capital are often high in proportion to the total assets
employed and so it is vital that these amounts are used in an efficient and effective
way. However, there is evidence that small businesses are not very good at
managing their working capital. Given that many small businesses suffer from
undercapitalisation, theimportance of exerting tight control over working capital
investment is difficult to overstate.
A firm can be very profitable, but if this is not translated into cash from operations
within the same operating cycle, the firm would need to borrow to support its
continued working capital needs. Thus, the twin objectives of profitability and
liquidity must be synchronised and one should not impinge on the other for long.
Investments in current assets are inevitable to ensure delivery of goods or services
to the ultimate customers and a proper management of same should give the
desired impact on either profitability or liquidity. If resources are blocked at the
different stage of the supply chain, this will prolong the cash operating cycle.
Although this might increase profitability (due to increase sales), it may also
adversely affect the profitability if the costs tied up in working capital exceed the
benefits of holding more inventory and/or granting more trade credit to customers.
Another component of working capital is accounts payable, but it is different in the
sense that it does not consume resources; instead it is often used as a short term
source of finance. Thus it helps firms to reduce its cash operating cycle, but it has
an implicit cost where discount is offered for early settlement of invoice.

34

Working Capital Management Practices


Wide range of surveys have been used to study working capital policies overall and
the practices to manage different components of net working capital separately.
Cash and marketable securities, accounts receivable, inventories, accounts payable
and short-term loans have been studied. These surveys show that most of the
companies have informal policies for working capital management. The most
important action in working capital management is the collection of accounts
receivable followed by efficient inventory management.

Cash Management Practices

Davidson (2002) defined cash management as a term which refers to the collection,
concentration and disbursement of cash. It encompasses a companys level of
liquidity, management of cash balance and short term strategies. Pindado (2004)
also defines cash management as part of working capital that makes up the optimal
level needed by a company. Bort (2004) noted that, cash management is of
importance for both new and growing businesses. Companies may suffer from cash
flow problems because of lack of margin of safety in case of anticipated expenses
such that they experience problems in finding the funds for innovation or
expansion. Further Bort (2004), alludes that effective cash management is the
fundamental starting point to ensure that the companys finances are in strong
position.
According to Bort (2004) cash is the lifeblood of the business. The key to
successful cash management lies in tabulating realistic projections, monitoring
35

collections and disbursements, establishing effective billing and collection


measures, and adhering to budgetary parameters because cash flow can be a
problem to the business organization. Gitman (2008) offers theoretical positions
drawn from observations and consulting experience on the fact that a firm can
improve its cash management efficiency by collecting accounts receivable as soon
as possible. The most obvious way of bringing forward cash inflows, would be to
press debtors for earlier payment although this policy will result in goodwill and
problems with customers. Gitman (2008) advocates for cash budget as another
cash management tool. It is used by the firm to estimate its short term requirement
with particular attention being paid to planning for surplus cash or for cash
shortages. Kirkman (2006) arrived at the same idea by 15 highlighting that as a
component of implementing an effective cash management program, a cash flow
statement called a cash budget may be prepared. Chastain (2008) asserts that
budgets are the financial road map companies use, when planning business
expenses and tracking the cash flow throughout the business year.

Inventory Management Practices


Managers act rationally in managing their inventory efficiently if they are
convinced that the practice enhances firm performance. Traditionally, inventories
of raw materials, work-inprogress components, and finished goods were kept as a
buffer against the possibility of running out of needed items. However, large buffer
inventories consume valuable resources and generate hidden costs.
Inventory management leading to inventory reduction has become the primary
target, as is often the case in just-in-time (JIT) systems, where raw materials and
36

parts are purchased or produced just in time to be used at each stage of the
production process. This approach to inventory management brings considerable
cost savings from reduced inventory levels. As a result, inventories have been
decreasing in many firms (Chen et al., 2005). According to Chen et al. (2005),
firms with abnormally high inventories have abnormally poor stock returns. On the
other hand, firms with abnormally low inventories have ordinary stock returns. In
addition, firms with slightly lower than average inventories perform best over time.
Inventory management leads to inventory reduction, as is often the case in JIT.
Fullerton et al. (2003) give support that firms that implement higher degrees of JIT
manufacturing practices should outperform competitors who do not; it was also
found that a positive relationship exists between firm profitability and the degree to
which wastereducing production practices, such as reduced set-up times,
preventive maintenance 16 programs and uniform workloads are implemented.
Eroglu and Hofer (2011) argue that inventory leanness is the best inventory
management tool. Lean production itself considers inventory as a form of waste
that should be minimized and it has become synonymous with good inventory
management Cannon (2008) introduces contradictory perspective that inventory
performance should not be measured as a robust indicator of overall performance.
Cannon (2008) indicates that when the effects of time are taken into account,
turnover improvement on average has a slightly negative effect on ROA.
Additionally, turnover improvement exhibits a prominent random effect.
Consistent with Cannon (2008), another Kolias et al. (2011) present that inventory
turnover ratio (as a measurement of inventory management), is negatively
correlated with gross margin. Moreover, there exists a negative relationship
between gross margin and inventory turnover. This implies that retailers trade off
gross margin for inventory turns to achieve similar return on inventory investment
37

since, if inventory turnover ratio is lower than targeted given the level of gross
margin, then management should be alarmed with this inefficiency.

Receivables Management Practices

Provision of trade credit is normally used by businesses as a marketing strategy to


expand or maintain sales (Pandey, 2004). Efficient receivables management
augmented by a shortened creditors collection period, low levels of bad debts and
a sound credit policy often improves the businesses ability to attract new
customers and accordingly increase financial performance hence the need for a
sound credit policy that will ensure that value is optimized (Lazaridis and
Dimitrios, 2005). Costs of cash discounts and costs of managing credit and 17
credit collections constitute the carrying costs associated with granting a credit
which increase when the amount of receivables granted are increased. Lost sales
resulting from not granting credit constitute the opportunity cost which decrease
when the amounts of receivables are increased (Lazaridis and Dimitrios, 2005).
Michalski (2007) provides that an increase in the level of accounts receivables in a
firm increases both the net working capital and the costs of holding and managing
accounts receivables and both lead to a decrease in the value of the firm. Lazaridis
and Dimitrios (2005) argue that firms who pursue increase in their accounts
receivables to an optimal level increase their profitability resulting from increase
sales and market share. Juan and Martinez (2002) emphasize that firms can create
value by reducing their number of days of accounts receivable, while Deloof
(2003) writes that the length of receivables collection period has a negative effect
on a firms performance. Sushma and Bhupesh (2007) also affirm that, putting in
38

place a sound credit policy ensures proper debt collection procedures and is pivotal
in improving efficiency in receivables management hence the performance of
firms.

Chapter -3
Data Analysis

39

The researcher examined the collected quantitative data to make inferences


through a series of operations involving editing to eliminate inconsistencies,
classification on the basis of similarity and tabulation to relate variables.
Subsequently, the refined data were analyzed using descriptive statistics such as
percentages, measures of central tendency, and measures of dispersion.
DATA ANALYSIS AND INTERPRETATION
Introduction
This chapter presents outputs of data analysis and discussions thereof. The
statistical analyses are based on the studys thematic areas which include working
capital management practices, and the effects of WCM practices on financial
performance.

Response Rate
The study sought to obtain data from a total of 30 management representatives
comprising of managing directors, finance officers and procurement managers By
the end of the study period, however, 28 questionnaires were completed and
returned. This translated to a response rate of 93%. Study participants indicated
that they had served the sugar companies in similar positions for time-lengths
varying from one and ten years as further detailed in Table
Work Experience in the LAKSHMI Companies

40

Experience
(Years)
0 - 2 years
3 5 years
6 - 8 years
8 - 10 years
TOTAL

Frequency
4
8
11
5
28

Percent
14.3
28.6
39.3
17.9
100.0

Cumulative
Percent
14.3
42.9
82.1
100.0

Table illustrates that majority of the companies managers had accumulated


between 6 8 years of experience (39.3%) in the top level. Yet another cluster of
managers (28.6%) had a non-disrupted working stint ranging between 3 to 5 years.
There were also 17.9% of the managers who had stayed longest between 8 10
years while those with the least work-life durations, less than 2 years, constituted a
response portion of 14.3%. Averagely, the worklife experience in the units of
analysis was found to be 7.6 years and this was considered sufficient to enable
quality dissemination and informed topical opinions.
Financial Performance of LAKSHMI Company
The object of WCM is to maximize the owners wealth which is measured in terms
of profitability. Effectively, therefore, a firm in losses does not answer to the
business intent of the owners. In this study, financial performance of the sugar
companies was measured on the basis of their asset accumulation, membership and
net profits realized.

Under asset accumulation, the study established that the smallest sugarcane
company had an asset base of Sh.48 million while an equivalent in the biggest
41

company was Sh.180 million. The mean asset value was found to be Sh.111.29,
with a standard deviation of Sh.36.49 million. This showed inherent resource-base
dissimilarities among the sugarcane companies, signaling to a justifiable basis for
application of various approaches in their WCM.
The companies membership was constituted by small scale sugarcane farmers
affiliated to respective sugarcane companies. In this study, it was established that
the smallest company had registered a total of 560 full-subscription members while
the largest membership size 26 was 3,021. This variation gave a membership range
of 2,461 which again hinted to wider dispersions in financial performance among
the firms. Given that out-grower companies depended almost entirely on proceeds
from their listed members, it was observed that smaller companies had liquidity
and profitability challenges which would only be mitigated by adoption of
responsive WCM practices.

Based on the companies estimated assets and membership, a correlation analysis


confirmed that asset appreciation was predominantly dependent on the number of
members subscribing to a company.

Working Capital Management Practices


The working capital management practices were investigated under each of the
WCM components: receivables, payables, inventory, and cash.

42

Receivables Management Practices


Under this objective area, the studys purpose was to determine the existence and
effectiveness of the companies credit policy and its application in maximization of
value of the firm. The indicators used included payable sources, duration till actual
receipts, and receipt acceleration approaches.

The sugar companies had options of generating receivables from distinct


transactions involving their members. Table illustrates the four identified options at
the companies disposal.
Sources
Payables
Loans
Interests
Sales

of Frequency
and 21
3

Percent

Cumulative

75.0

Percent
75.0

10.7

85.7
43

Subscriptions

7.1

92.9

on 2

7.1

100.0

and Charges
Return
Investments
Total

28

100.0

Table illustrates that 75% of the companies receivables were a derivative of loans
advanced to members and accumulating interests. Other options, but quantitatively
slim, involved sale of farm inputs (10.7%), membership subscriptions and other
charges (7.1%), and return from the companies investments (7.1%). These
findings showed that at least 75% of the firms investment was in form of credit.
This high demand for credit was justified by high farm preparation and input costs
which made the farmers seek financial help from their member companies.
Therefore, it was in the interest of the companies to advance loans to their
members so as not only to improve their produce but also to place the companies at
vantage financial positioning.

The amounts owed to the companies were paid under different trade periods
depending on the nature of credit. Table 4.5 presents the findings details.
Duration

Frequency

Percent

Cumulative

0 - 15 days

7.1

Percent
7.1

15 - 30 days

7.1

14.3

30 - 45 days

10.7

25.0
44

45 - 60 days
More
days
Total

than

3
60 18
28

10.7

35.7

64.3

100.0

100.0

Table illustrates that company debtors met their payments obligations within
varying durations ranging from zero to more than 60 days. At the high end,
company management allowed 64.3% of the receivables to be effected after a
period of 60 days or more from transaction date. This category was predominated
by loans advances to members which were recoverable after cane harvests. The
cumulative 35.7% of the receipts were remitted to the companies within 60 days.
otable, only 7.1% receivables were actualized in less than 15 days. The study,
therefore, established that a higher proportion of receivables to the outgrower
companies were long term. This was attributed to the long wait prior to receipts of
cane proceeds which took a minimum of 18 months

Inventory Management Practices.


There were two key forms of inventory that the companies were required to
manage. These included farm inputs such as fertilizers, spray chemicals and cane
seedlings; and general merchandise mainly for office use. The farm input inventory
constituted 82% while the general merchandise were 18%. Acquisition and
maintenance of inventory quantities were determined by various factors which
were established as presented in Table

45

Considerations

Frequency

Percent

Cumulative

Actual Demand
Demand

5
7

17.9
25.0

Percent
17.9
42.9

Projections
Stock

11

39.3

82.1

Replenishment
Unpredictable

17.9

100.0

Supply
Total

28

100.0

The highest push for inventory variation was the need for replenishment (39.3%)
followed by the companies demand projections (25%). The other factors
considered were actual demand (17.9%) and provision for unpredictable demand
(17.9%). The inventory orders were received within an average of 22 days but the
average time taken to issue them was 61 days. This implied that other than carrying
costs, companies had to meet the holding costs in form of storage and insurance for
a length of 39 days. This also meant that sugar companies experienced longer
inventory conversion cycles. The respondents further opined that they did not have
standard minimum and maximum inventories as the cases were most often than not
demand-driven.

46

Cash Management Practices

The availability of cash balances was regarded a key determinant of the


companies competitive ability because it would provide the means to invest in
people, technology, and other assets. Efficient cash management was therefore
indispensable to the sugar company. This study investigated cash management
practices on the basis of cash proportions held, conversion to marketable securities,
and company alternatives to cash optimization.

47

First, the proportions of current assets held in cash and in near-cash forms such as
marketable securities and time deposits were estimated as shown in Table
Descriptions
Proportion
Current

Mean
12.09

Std. Deviation
4.631

2.43

2.937

Assets

held in Cash
Proportion
Current
held

N
of 28

of 28

Assets
in

ST

Securities
From Table , it is shown that averagely companies retained 12.09% of their current
assets in the form of cash (4.63) while a paltry 2.43% of the current assets were
held in the form of short term securities (2.94). Comparatively, therefore, there
was more cash at hand or bank in the companies as opposed to near-cash
investments. This was attributed to 38 limited investment vehicles available to the
companies whose markets were constrained by the number of members they
served. Holding of too much cash indicated that the out-grower companies
preferred liquidity to profitability, and pointed to a more conservative practice in
managing the companies cash flows.

48

RESULTS AND FINDINGS


Background of the Study
Business entities exist for purposes of enhancing owners investment value.
Realization of this objective requires finesse in financial strategy and entrenchment
of responsive adoption systems. As a result, a firm is required to maintain a
balance between liquidity and profitability while conducting its day to day
operations. Liquidity is a precondition to ensure that a firm is able to meet its
short-term obligations and its continued flow can be guaranteed from a profitable
venture.
49

The relationship between working capital management and financial performance


may be seen through the liquidity-profitability trade-off theory. This theory
proposes that there is a trade-off between liquidity and profitability; gaining more
of one means giving up some of the other. At one end of the spectrum there are
highly liquid firms which are not very profitable while at the other end are firms
which are highly profitable but are not very liquid. The basic challenge is therefore
to determine where in the middle ground the firm should reside.

The theory of working capital management describes how working capital should
be managed and demonstrates the benefits in terms of liquidity, solvency,
efficiency, profitability, and shareholder wealth maximization which accrue to the
company from appropriately managing working capital. Declining levels of
liquidity, unless remedied, may result in insolvency and eventually bankruptcy as
the business's liabilities exceed its assets.
Working capital means that part of the total assets of the business that
change from one form to another form in the ordinary course of business
operations. Also known as revolving or circulating capital or short-term
financial management it is nothing but the difference between current assets and
current liabilities. The word working capital is made of two words- Working &
Capital. The word working means day to day operation of the business, whereas
the word capital means monetary value of all assets of the business. Working
capital is of major importance to internal and external analysis because of its close
relationship with the current day-to- day operations of a business.
50

Every business needs funds for two purposes.


Long term funds are required to create production facilities through
purchase of fixed assets such as plants, machineries, lands, building, etc.
Short term funds are required for the purchase of raw materials, payment of
wages, and other day-to-day expenses.
Working capital management deals with the management of these short term
funds.

The constituents of current assets & current liabilities is as follows-

CURRENT ASSETS

CURRENT LIABILITIES

1. INVENTORY

1. SUNDRY CREDITORS

a) RAW MATERIAL

2. TRADE ADVANCES

b)WORK-IN-PROGRESS

3. BORROWINGS (short term)

c) FINISHED GOODS

a) COMMERCIAL BANKS

d) OTHERS

b) OTHERS

2. TRADE CREDITORS

4. PROVISIONS

3. LOANS AND ADVANCES


51

4.CASH AND BANK BALANCE

WORKING CAPITAL COMPRISES OF THE FOLLOWING:1. Cash and cash equivalents: - This most liquid form of working capital
requires constant supervision. A good cash budgeting and forecasting system
provides answers to key questions such as:
Is the cash level adequate to meet current expenses as they come due?
What is the timing relationship between cash inflow and outflow?
When would cash need occur?
When and how much bank borrowing will be needed to meet any cash
shortfalls?
When will repayment be expected and will the cash flow cover it?
2. Accounts receivables: - Many businesses extend credit to their customers.
If you do, is the amount of accounts receivable reasonable relative to
sales?
How rapidly are receivables being collected?
Which customers are slow to pay and what should be done about them?

52

3. Inventory: - Inventory is often as much as 50 percent of a firm's current


assets, so naturally it requires continual scrutiny.
Is the inventory level reasonable compared with sales and the nature of
your business?
What's the rate of inventory turnover compared with other companies in
your type of business?

4. Accounts payable: - Financing by suppliers is common in small business; it


is one of the major sources of funds for entrepreneurs.
Is the amount of money owed suppliers reasonable relative to what you
purchase?
What is your firm's payment policy doing to enhance or detract from your
credit rating?

5. Accrued expenses and taxes payable: - These are obligations of your


company at any given time and represent a future outflow of cash.

53

CHAPTER-4
SUGGESTIONS.

Working capital of the company has increasing every year. Profit also increasing
every year this is good sign for the company. It has to maintain it further, to run the
business long term.

The Current and quick ratios are almost up to the standard requirement. So the
Working capital management. Lakshmi Sugarmill. is satisfactory and it has to
maintain it further.

54

The company has sufficient working capital and has better liquidity position.
By efficient utilizing this short-term capital, then it should increase the turnover.

The company should take precautionary measures for investing and collecting
funds from receivables and to reduce the bad debts.

The company has sufficient working capital and has better liquidity position.
By efficient utilizing this short-term capital, then it should increase the turnover.

Creditors turnover ratio has increasing from 2008-09 to 2010-11 and in the last
year 2013-2014 it is same as compared to 2012-13. Company is making prompt
payment to its creditors. This is good sign for the company. On-time payment to
suppliers will increase the credibility of the firm. It has maintain it further to
survive in the market.

The company is utilizing working capital effectively this is good for the
company. It has to maintain it further.

55

CHAPTER 5

CONCLUSIONS.
The study on working capital management conducted in Lakshmi Sugarmill.
to analyze the financial position of the company. The companys financial position
is analyzed by using the tool of annual reports from 2005-06 to 2009-10.

The financial status of Lakshmi Sugarmill. is good.


In the last year the inventory turnover has increased, this is good sign for the
company.
The companys liquidity position is very good With regard to the investments in
current assets there are adequate funds invested in it. Care should be taken by the
company not to make further investments in current assets, as it would block the
funds, which could otherwise be effectively utilized for some productive purpose.
56

On the whole, the company is moving forward with excellent management.

BIBLIOGRAPHY
TEXT BOOKS

M.Y.Khan / P.K Jain, Financial Management Text, Problems Cases,


5TH Edition,Tata McGraw Hill Publishing Company Limited, New
Delhi, 2007.

Prasanna Chandra, Financial Management Theory and Practice, 5TH Edition,


Tata McGraw Hill Publishing Company Limited, New Delhi, 2001.

Annual Report of Lakshmi Sugarmill.

WEB SITE VISITED


www.google.com
57

www.wikipedia.org
www.transtutors.com

58

FINANCIAL STATEMENT 2013-2014


PROVISIONAL BALANCE SHEET AS AT 31st MARCH, 2014

59

LIABILITY

AMOUNT

SOURCES OF
FUNDS
Share capital

ASSETS

AMOUNT

FIXED ASSETS
1000000.00

Gross block

Reserves and surplus 9827210.00 Less: Depreciation


LOAN FUNDS

10913360.00
5135959.00

Net Block

5777401.00
3693764.00

Secured Loans

2574672.00

Capital WIP

Unsecured Loans

3049192.00

CURRENT
ASSETS

Deferred tax liability

801098.00

Inventories

2360611.00

Sundry debtors

4355365.00

Cash & bank


balance

1978938.00

CURRENT
LIABILITIES
Sundry creditors
Provisions

3057849.00

1107810.00 Other current assets


Loans and
Advances

TOTAL

21417831.0
0

185585.00
3066167.00

21417831.00

60