A Project Report

On
ASSESSMENT OF WORKING CAPITAL
AND CASH FLOW STATEMENT
WITH RATIO ANALYSIS OF INDIA GLYCOL LIMITED

Guided By:

Submitted by:

Mr. MAHARSHI GAUR (Account Head)

RAKESH KUMAR SHARMA

Ms. MUKESH (Project Guide)

M.B.A. STUDENT
MARKETING, FINANCE
ROLL NUMBER: 0811470060

Institute Of Professional
Excellence & Management

PREFACE

The project is responsible for the assessment of the working capital, cash flow
and fund flow and then the ratio analysis of the India Glycol Limited so that it can
use its resources into the optimum manner and what are the areas which are taken
into consideration to generate more and more profit for the concern. Here the
comparison between all these things is done between the two adjacent years and
on the basis of it the assessment is done.
The regular assessment of working capital, cash flow and fund flow statement of
the concern is very necessary of the proper working and the proper grooming of
the concern in the proper direction.

ACKNOWLEDGEMENT

I am thankful to Mr. MAHARSHI GAUR (Project Guide) of India Glycols

Limited of BHARTIYA GROUP OF COMPANIES for his guidance and
suggestions in the project work. As my guide, he has been extremely helpful in
explaining us the practical aspects and implementation of the system. With his
guidance and support I have completed the project within the stipulated time.
I am extremely grateful to Miss. MUKESH for offering us this excellent
opportunity of project training.
Last but not the least I am thankful to all the Employees of the INDIA
GLYCOL LIMITED whose timely help has proved quite valuable.

RAKESH KUMAR
SHARMA
(M.B.A. STUDENT)

DECLARATION

I, the undersigned, hereby declare that this project report submitted by me under
the guidance of MR.MAHARSHI GAUR Accounts Head of INDIA GLYCOLS
LIMITED

and

Miss.

MUKESH

Faculty

member

of

IPEM,GHAZIABAD(affiliated to Uttar Pradesh Technical University) for the

partial fulfillment of Master degree in Business Administration from Institute of
professional excellence and management, Uttar Pradesh Technical University is
exclusively prepared and conceptualized by me and the empirical findings in this
project report are based in the data collected by me, and I have not copied from
any research report or project report submitted by anyone, anywhere earlier.

Date: .

Place:

(RAKESH KUMAR SHARMA)

TABLE OF CONTENT

S.No.
1
2
3
4
5
6
7
8
9
10

Contents
Company History
Introduction
Companys Structure
Main Products of IGL
Companys Problem and Future of Company
Objective
Research Methodology
SWOT Analysis
Manufacturing Process
Working Capital

Page No.
6
11
12
14
15
16
17
18
20
30

11
12

Cash Flow
Fund Flow Statement

48
53

13

Ratio Analysis

61

14

Financial Statement Analysis

93

15
16

Result and Conclusion

Bibliography

104
119

INDIA GLYCOLS LIMITED

COMPANY HISTORY
YEAR EVENTS:
1983
India Glycols Ltd was incorporated at New Delhi on 19th November as a public
limited company as `U.P. Glycols Limited' and obtained the Certificate of

Commencement of Business on 3rd February 1984. The company was promoted

by Vam Organic Chemicals Ltd. The company manufactures mono-ethylene
glycol (MEG) diethylene glycol (DEG) and triethylene glycol (TEG).
- The company entered into a technical know-how agreement with `Scientific
Design Company Inc. USA (SD) for the supply of process know-how only for the
conversion of ethanol into MEG as the promoter VAM agreed to advise free of
cost on the conversion process of molasses into ethanol.
- The company also entered into an agreement with Toyo Engineering India Ltd.
for implementing the project within guaranteed cost and time limit.

1986

The name of the Company was changed to `India Glycols Limited' effective from
4th September.
1988

70 shares subscribed for by the signatories to the Memorandum of Association.

244 99 930 shares then issued at par of which 84 69 930 shares to promoters
directors etc. and Vam Organic Chemicals Ltd. and its wholly owned subsidiaries
6

and 25 00 000 shares to shareholders of Vam Organic Chemicals Ltd. Ramganga

Fertilisers Ltd. and Hindustan Wires Ltd. were reserved and allotted. Out of the
remaining 135 30 000 shares the following shares were reserved for preferential
allotment: (i) 15 00 000 share to UTI (ii) 7 50 000 shares to SBI Capital Markets
Ltd. (iii) 30 00 000 shares to NRIs on repatriation basis (iv) 2 50 000 shares to
business associates (v) 10 00 000 shares to farmers and rural investors and (vi) 12
25 000 shares to employees/workers of the company as also of the Vam Organic
Chemicals Ltd. (Except 12 01 100 shares of the employees quota all shares taken
up.) The balance 58 05 000 shares along with 12 01 100 shares not taken up by
employees were offered to the public in July 1988.
- Additional 33 82 500 shares allotted to retain oversubscription (7 50 000 shares
to NRIs 62 500 shares to business associates 8 12 500 shares to farmers and 17 57
500 shares to public).

1990

The Company received approval for expanding the MEG capacity upto 60 000
MT per annum. The Company proposed to diversify into the field of Ethylene
Oxide (EO) derivatives and had received letter of intent for the manufacture of
1000 MT per annum of EO derivatives.
1991

Steps were initiated to undertake diversification programme to manufacture

Ethylene Oxide condensate/derivatives. The Company undertook the expansion of
effluent treatment and Biogas generation facilities.
1992

The Capacity of MEG was enhanced to 25 000 tonnes per annum.

1995

The company had tied up with Sanyo Chemical Industrial Surfactants Covering
major industries like textiles toiletries pharmaceuticals agrochemicals paper
lubricants etc.
- The Company also proposed to set up facilities for chlorosulphation to produce
other specialty chemicals to maintain better quality standards.

1996

The Company was implementing cholorosulphation project.

2003

The Board of Directors at their meeting held on December 4 2003 has approved
the merger of wholly owned subsidiary company CDS International Ltd with the
company.

The Board of Directors at their meeting held on December 4 2003 have approved
the merger of wholly owned subsidiary company CDS International Ltd with the
company.

ABOUT INDIA GLYCOL LIMITED GORAKHPUR

India Glycol Limited Gorakhpur is situated at 21 Km from Gorakhpur railway
station. It is established in vast greeneries situated in 57 acres of area, engaging
about 50 Master Degree, Engineering, M.B.A., state of art of Engineering. It was
established in 2005.
India Glycols Ltd. is a market leading player in the business of Ethylene Oxide
Derivatives (EOD). It has significant MEG (and related glycols) operation in the
country at 125,000 TPA. IGL has three reporting segments: Chemicals which
covers Glycols, Ethoxylates, Glycol Ethers/Acetates and Performance Chemicals;
Alcohol that is concerned with its IMFL and Country Liquor business and others
a segment covering the Guar Gum and Industrial Gases.
The Company manufactures these products through the molasses/ethanol route
and thus enjoys inherent margin cushion in pricing its products over those
manufactured via the petrochemical route. Using advanced technologies and
custom solutions to its advantage the Company has built key positions in the
domestic and international (Glycol Ethers) markets. IGL has initiated measures to
strengthen its backward integration in CY2007 it acquired the operations of
Shakumbari Sugar & allied Industries, where it is planning to raise the distillery
9

capacity to 300 Kltrs. per day and cane crushing to 10,000 TCD by 2010. IGL is
also using the current round of capex to improve productivity at its EOD
operation.

MISSION, VISION, GOAL

MISSION
To provide Innovative Guar Solutions and other companys products like
Medicinal Alcohol, Extra Nutritional Alcohol, and Dry Carbon Dioxide etc to all
the related customers and Augmenting Customer Satisfaction as much as the
company can.

10

 GOAL
To exceed the Global requirements of economic Guar and other companys
products like Medicinal Alcohol, Extra Nutritional Alcohol, and Dry Carbon
Dioxide etc that performs that give the ultimate satisfaction to the company
customers.

VISION
Attaining leadership in Guar Industry and other companys products like
Medicinal Alcohol, Extra Nutritional Alcohol, and Dry Carbon Dioxide etc
throughout the world by providing best and ultimate products to its
consumers/customers.
Providing the competitive edge with its competitors in all the products that
company is manufacturing.

COMPANYS STRUCTURE

ABOUT THE HEADS OF THE DIVISIONS OF IGL

GORAKHPUR

The Engineering Head of it is Mr. SANJAY KUMAR.

11

 The Unit Head of IGL Gorakhpur is Mr. DEVESH SRIVASTAVA

The Account Head is Mr. MAHARSHI GAUR

The Personal Head is Mr. RAVI RANJAN

Production Head is Mr. P.N. PANDEY

KEY OFFICIALS THROUGHOUT THE COUNTRY

Mr. R C Misra

Director

Mr. N Ramachandran

Director

Mr. K N Memani

Director

12

Mr. Jagmohan Kejriwal

Director

Mr. M K Rao

Executive Director

Mr. Jayshree Bhartia

Director

Mr. Pradip Khaitan

Director

Mr. U S Bhatia

Chairman and Managing Director

Mr. Autar Krishna

Director

MAIN PRODUCTS OF IGL

Rectified Sprit.
Medicinal Alcohol.
Extra Nutritional Alcohol.
Dry CO2 (used in Pepsi, Coke etc.).
IMF (India Met Foreign County).
Whisky.
Solomet.
Rum.
Guar Gum
Polyethylene Glycol

13

 IGL IS NUMBER 1 IN WHISKY, GIN, DRY CO2, AND RUM.

THE MAIN PRODUCT OF IGL IS MC- DOWELL

PROBLEM OF THE ORGANIZATION AND FUTURE

OF THE ORGANIZATION
There is no such problem in the working of the organization.

The Company is running in a sound position.

The Company has shown an increase sign in its growth since

2003.

The company had shown a good growth rate during the recession
period.

14

The Company is going to collaborate with the foreign companies

to increase its sale out side the country.

The Company has a bright future in upcoming years out the

financial position

OBJECTIVE

To find out the financial position of the company

To analyse the working capital, cash flow ,fund flow,
statement and ratio analysis of the company

To find the current asset position of the company.

15

 To analyse the future aspects of the company.

RESEARCH METHODOLOGY

Primary data: Taken the information of assets condition of the organization

from the employees.

Secondary data: Taken the data from the employees of the organization and
from the data that were provided by the company on the internet.

16

Research Method Adopted: I had conducted the personal interview of the

employees of the finance department of the organization.

SWOT ANALYSIS
STRENTHS
Has a highly dedicated team of executives and staff backed by skill
workers
Continuously does product improvement in accordance with exacting
customers, standard through a good R&D unit.
A satisfied customer base.
The distribution network of IGL is very wide and spread across the
country.

WEAKNESS17

 Product range somewhat narrow with respect to other related companies

Cyclic fluctuation in demand for related industries.

OPPORTUNITIES With the rapid industrialization rate of the country IGL is getting more and
more opportunities to get linked up with the related industries. This results
in the increase in demand and production. Also the organization is going
to collaborate with few foreign companies to sell its product outside the
countries.

THREATS
Constant demand for price reduction from customer.
Growing competition in the industry, in terms of new ranges and price
undercutting, too is a matter of concern as both sales realizations and
operating margins may come under pressure.

18

MANUFACTURING PROCESS

19

India Glycols Limited has proposed to set up Distillery well equipped with latest
process Technology and equipments so has to have higher productivity. This
includes continuous fermentation followed by multi pressure distillation process
to have less effluent and higher productivity.

20

Environment is vital input in any field of activity whether economic ,social

,cultural, moral or spiritual. With increasing awareness about environment world
over, most of the countries have enacted legislations for protecting Environment.

To meet the legislative requirement the company has adequate facilities to

control Water as well as Air Pollution impact on the Environment.

FERMENTATION PROCESS

Chemistry & Principle

The fermentable sugar present in molasses is converted into alcohol by

fermentation with the help of living microorganisms called yeasts. The following
reaction represents the conversion process.

C12H22O11 + H2O

SUCROSE + WATER

2C6H12O6

GLUCOSE + FRUCTOSE

ZYMASE

C6H12O6

2C2H5OH + 2CO2

After completion of the above reaction the fermented wash shall contain 8-9%
alcohol by volume.
21

We proposed to have continuous process for Fermentation so as to achieve.

Maximum Alcohol % in the Fermented wash.

Minimum effluent generation.

DETAILED PROCESS DESCRIPTION IS AS FOLLOWES

FERMENTATION
Two Fomenters of identical size cap 1300 m3 capacity are provided which are
equipped with agitator for mixing of Fermenter mass & facilitate release of CO2
produced. Molasses, diluted with water to the desired concentration is metered
continuously into Fermenter 1 Additives like urea (in the form of pellets or prills)
and defoaming oil are also introduced in the Fermentor 1 as required. There is an
automatic foam level sensing and dosing system for defoaming oil, in both the
Fermenters.

Every Kilogram of alcohol produced generates about 290 Kcal of heat. This
excess heat is removed by continuous circulation of the fermenting wash through
an external plate heat exchanger called the Fermenter Cooler 1. The Fermenter
temperature is always maintained between 32 and 34 C, the range optimum for
efficient fermentation. The conversion of 80% sugar is

approximately into

ethanol is completed in Fermenter 1. The fermenters are provided with a provision

22

for stillage recycle for maintaining high dissolved solids concentration in the
Fermenters. The temperature in the Fermenters is maintained between 32 to 34 C
for optimum fermentation. Conversion of sugar to ethanol is instantaneous and the
residual sugar concentration in Fermenters is maintained below 0.2% w/w as
glucose. The yeast for the fermentation is initially ( i.e. during start up of the
plant) developed in the propagation

section described further on. Once

propagated a viable cell population of about 300-500 million cells/ml is

maintained by yeast recycling and continuous aeration of the fermentor.
Fluctuations in the yeast count of + - 20% have little effect on the overall
fermenter productivity .Yeast cell vitality which is usually above 70% may, in
times of stress (such as prolonged shut downs) drop to 50%without affecting the
fermentation. The aeration rate in both the Fermenters is adjusted for desired yeast
cell vitality; All the nutrient elements necessary for yeast growth exist in adequate
quantities as impurities in molassess. Occasionally, Nitrogen may have to be
supplemented. Defoaming oil (DFO) say Turkey red Oil is added to the fermenter
by an automated DFO dosing system, to control foaming. Usually no other
additives are required.

Fermented wash from Fermenter II passes through a series of hydrocyclones

(number depending on plant capacity) which remove grit, iron filings and similar
heavy particulate mater. The overflow from the first set of hydro cyclone is taken
to Yeast Separator which clarified the wash. The hydrocyclones protect the
separator from erosion damage by removing grit and similar hard particles. The

23

reject from 1st. stage hydroclone is fed to 2nd. Stage hydroclone for further
separation. The reject from 2nd. Stage hydroclone containing sludge along with
some wash is fed to Decanter Centrifuge for separation of sludge which is sent to
composing. The clear wash recovered from the Decanter centrifuge is fed to wash
column for alcohol recovery. The overflow from 2nd. Stage is recycled back to
Fermentor I.

YEAST RECYLING

The yeast in the fermented wash is removed as 40 to 455 v/v slurry, and is
returned to the Fermenter I. This feature ensures that a high yeast cell
concentration is achieved and maintained in the fermenters. By re-circulating
grown, active yeast, sugar that would have otherwise been consumed in yeast
growth is made available for ethanol production, ensuring high process efficiency
and extra alcohol yield. The clarified wash from separators is collected and sent to
distillation section.

PROPAGATION

The propagation section is a feeder unit to the Fermenters. Yeast is grown in 3

stages. The first two stages are designed for aseptic growth. Propagation vessel
III, develops the inoculums using pasteurized molasses solution as the medium.

24

Propagation is carried out only to start up the process initially or after very long
shutdowns during which the fermenter is emptied.

CO2 SECRUBING AND RECOVERY

The carbon-dioxide produced during fermentation from Fermenter I is scrubbed

with water in sieve tray scrubber to recover alcohol from vent gases. The vent
gases from Fermenter II mainly air and carbon dioxide are also scrubbed in sieve
tray scrubber for alcohol recovery. The water from both the scrubber is returned to
respective Fermenters. About 1% of the total alcohol production is saved by
scrubbing the Fermenter off gases.

The CO2 produced from Fermenters is vented off to atmosphere after scrubbing.

VINASSE RECYCLING

Part of the Spend wash/Vinasse from the Distillation Section is cooled against
water in the Recycle cooler, and recycled back to the fermenter.

25

The recycling of Spend wash/Vinasse helps maintain the desired level of

dissolved solids in the fermenter, so that an adequately high osmotic pressure is
achieved. Osmotic pressure and the concentration of alcohol in the fermenter,
together keep off infection and minimize sugar losses. Spend wash/ Vinasse
recycling also reduces the final quantity of effluent (Spent wash/Vinasse)
discharged from the plant that reduces the process water requirement of the plant.

Spent wash/Vinasse at the bottom of the Beer stripping Column passed through a
forced circulation reboiler to generate vapors and get energy from overhead
Rectfier vapours. This avoids direct steam sparing in the Analyser column and
reduces the volume of effluent further.

PRESSURE VACCUM DISTILLATION RECTIFIED

SPIRIT PRODUCTION

Fermented beer is continuously pumped to the Beer Stripper after preheating in

beer preheater. The beer feed is preheated from the normal fermentation

26

temperature in two stages. The function of the beer stipper is to quantitatively

remove ethanol from the beer.

Beer Stripper is based on proprietary Disc & Donut tray Design of KATZEN,
which ensures that there is minimal fouling /clogging of plates along with
excellent operationally efficiency.

The scheme offered by us has Beer Stripper Column under vacuum and Rectifier
Column under pressure. The energy cascades from the rectifier to the beer
stripper, i.e. beer stripper is heated at a controlled rate by using the overhead
vapors from rectifier.

The ethanol vapors from beer tripper are condensed in beer preheater and in final
condenser after collection in stripper /rectified/feed drum. 40-45% Ethanol water
mixture from beer stripper is passed to the rectification column after preheating
the beer feed. The purposed of the rectifier is to remove water from the dilute
ethanol vapors, resulting in 95-96% v/v ethanol overhead. Side stream of fusel oil
draws are also taken from lower in the rectifying section. Fusel oils are
concentrated & recovered.

The rectified spirit steam from rectifier flows to the Rectified spirit cooler & is
taken out as final product. The impure spirit is also drawn from the vent
condenser & taken out to impure spirit cooler for cooling.

27

 CONTROL SYSTEM

To provide continuous stable and efficient plant operation we propose electronic

instruments and a central DCS based control System. All field sensors will be
electronic and from reputed international brands. The control action will be
provided through pneumatically controlled valves.

All critical parameters will be constantly monitored by the system and required
control action will be automatically decided on basis of programmed algorithms.

28

WORKING CAPITAL

INTRODUCTION

The perfect world does not requires or concentrates about current assets or
current liabilities because there would not be uncertainty, no transaction costs,
information search costs, scheduling costs or production and technology
constraints. The unit cost of production would not vary with the quantity
produced. Capital, Labor and products markets shall be perfectly competitive and
would reflect all available information. Thus in such an environment, there would
be no advantage for investing in short term assets. Whereas, the world in which
we live is not perfect. It is characterized by considerable amount of uncertainty
regarding the demand, market price, quality and availability of own products and
those of suppliers. There are transaction costs for purchasing or selling goods or
securities. Information is costly to obtain and is not equally distributed. There are
spreads between the borrowing and lending rates for investments and financing of
equal risk. Similarly each organization is faced with its own limits on the
production capacity and technology it can employ. There are fixed as well as
variable costs associated with producing goods. In other words, the markets in
which real firms operate are not perfectly competitive.

29

These real world facts introduce problems and require the necessity of
working capital. The most important areas in the day to day management of the
firm, is the management of working capital. Working capital management is the
functional area of finance that covers all the current accounts of the firm. It is
concerned with management of the level of individual current assets as well as the
management of total working capital. Working capital management involves the
relationship between a firm's short-term assets and its short-term liabilities. The
goal of working capital management is to ensure that a firm is able to continue its
operations and that it has sufficient ability 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.

For example, an organization may be faced with an uncertainty regarding

availability of sufficient quantity of crucial inputs in future at reasonable price.
This may necessitate the holding of inventory ie current assets. Similarly an
organization may be faced with an uncertainty regarding the level of its future
cash inflows and insufficient amount of cash may incur substantial costs. This
may necessitate the holding of a reserve of short term marketable securities,
again a short term capital asset. The unpredictable and uncertain global market
plays a vital role in working capital. Though the globalization of economy and
free trading of products envisages the continuous availability of products but how
much its cost effective and quality based varies concern to concerns.

30

Working capital refers to the funds invested in current assets, ie.,

investment in stocks, sundry debtors, cash and other current assets. Current assets
are essential to use fixed assets profitably. The term current assets refers to those
assets which in the ordinary course of business can be converted into cash within
one year without undergoing diminish in value and without disrupting the
operations of the firm. The current assets are cash, marketable securities, accounts
receivable and inventory. Current liabilities are those which are to be paid within
a year out of the current assets or earnings of the concern. The current liabilities
are accounts payable, bills payable, bank overdraft and outstanding expenses.

The financial manager plays a vital role in management of working

capital. The financial management of any business organization involves the three
following vital functions:

Management of Long Term Assets

Management of Long Term Capital
Management of Short Term Assets and Liabilities

In most of the organizations the first & second one which refers to Capital
Budgeting and Capital Structure respectively will be maintained and cope up with
organization growth. The third one which refers to Working Capital Management
requires more skills for sustaining and steady growth rate for any organization.

31

The working capital management includes decisions:

How much stock/inventory to be hold?

How much cash/bank balance should be maintained?

How much the firm should provide credit to its customers?

How much the firm should enjoy credit from its suppliers?

What should be the composition of current assets?

What should be the composition of current liabilities

For example, a machine cannot be used without raw material. The

investment on the purchase of raw material is identified as working capital. It is
obvious that a certain amount of funds is always tied up in a raw material
inventories, work in progress, finished goods, consumable stores, sundry debtors
and day to day cash requirements. However the businessman also enjoys credit
facilities from his suppliers who may supply raw material on credit. Similarly, a
businessman may not pay immediately for various expenses. For instance, the
laborers are paid only periodically. Therefore, a certain amount of funds is
automatically available to finance the current assets requirements. However, the

32

requirements for current assets are usually greater than the amount of funds
payable through current liabilities. The satisfactory level of working capital is the
main object of working capital management. Any organization which fails to
maintain satisfactory level of working capital may be forced to bankruptcy. The
current assets should always be large enough to cover its current liabilities in
order to ensure a reasonable margin of safety. Thus the interaction between
current assets and current liabilities is the main aim of working capital
management.

The basic objective of financial management is to maximize shareholders

wealth. This objective can be achieved when the company earns sufficient profits.
The amount of profits largely depends on the magnitude of sales. But, sales do not
convert into cash instantly. There is time lag between the sale of goods and the
receipt of cash. Working capital is required to purchase the materials, pay wages and
other expenses in order to sustain sales activity the time lag. The time gap between the
sale of goods and realization of cash is called operating cycle. What operating cycle
stands for?

Conversion of cash into raw materials

Conversion of raw materials to finished goods
Conversion of finished goods into receivables
Conversion of receivables into cash

33

Where is Working Capital Analysis Most Critical?

On the one hand, working capital is always significant. This is especially

true from the lender's or creditor's perspective, where the main concern is
defensiveness: can the company meet its short-term obligations, such as paying
vendor bills?

But from the perspective of equity valuation and the company's growth
prospects, working capital is more critical to some businesses than to others. At
the risk of oversimplifying, we could say that the models of these businesses
are asset or capital intensive rather than service or people intensive. Examples of
service intensive companies include H&R Block, which provides personal tax
services, and Manpower, which provides employment services. In asset intensive
sectors, firms such as telecom and pharmaceutical companies invest heavily in
fixed assets for the long term, whereas others invest capital primarily to build
and/or buy inventory. It is the latter type of business - the type that is capital
intensive with a focus on inventory rather than fixed assets - that deserves the
greatest attention when it comes to working capital analysis. These businesses
tend to involve retail, consumer goods and technology hardware, especially if
they are low-cost producers or distributors.

34

 CONCEPTS & DEFINITIONS OF WORKING CAPITAL

There are two concepts of working capital

I) Gross Working Capital
It represents the total current assets and is also referred to as circulating capital
because current capital as current assets, are circulating in nature.
II) Net Working Capital
It is a measure of liquidity and it can be defined in two ways.

The most usually implied definition of net working

capital is that it represents the difference between
current assets and current liabilities. Some people
also define it as excess of current assets over the
current liabilities.

It is that portion of the firms current assets, which

is financed by long term funds.

Net working capital as a measure of liquidity is generally not very useful

to compare the performance of different units due to difference in scales of
operation, efficiency, and creditability in the market etc., between the different

35

firms. However it is a very useful measure for internal control purposes. It can
also be used to compare the liquidity position of the same unit over a period of
time. This will help in maintaining the acceptable level of net working capital.

Implementing an effective working capital management system is an

excellent way for many companies to improve their earnings. The two main
aspects of working capital management are ratio analysis and management of
individual components of working capital.

A few key performance ratios of a working capital management system

are the working capital ratio, inventory turnover and the collection ratio. Ratio
analysis will lead management to identify areas of focus such as inventory
management, cash management, accounts receivable and payable management.

36

 OBJECTIVES OF WORKING CAPITAL

MANAGEMENT

The main objective is to ensure the maintenance of satisfactory level of

working capital in such a way that it is neither inadequate nor excessive. It should
not only be sufficient to cover the current liabilities but ensure a reasonable
margin of safety also.

To minimize the amount of capital employed in financing the current

assets. This also leads to an improvement in the Return of Capital
Employed.

To manage the current assets in such a way that the marginal return on
investment in these assets is not less than the cost of capital acquired to
finance them. This will ensure the maximization of the value of the
business unit.

To maintain the proper balance between the amount of current assets and
the current liabilities in such a way that the firm is always able to meet its
financial obligations, whenever due. This will ensure the smooth working
of the unit without any production held ups due to paucity of funds.

37

 TYPES OF WORKING CAPITAL

(A)

Permanent Working Capital

(B)

Temporary Working Capital

The main objective is to ensure the maintenance of satisfactory level of working

capital in such a way that it is neither inadequate nor excessive. It should not only
be sufficient to cover the current liabilities but ensure a reasonable margin of
safety also.
To minimize the amount of capital employed in financing the current
assets. This also leads to an improvement in the Return of Capital
Employed.
To manage the current assets in such a way that the marginal return on
investment in these assets is not less than the cost of capital acquired to
finance them. This will ensure the maximization of the value of the
business unit.
To maintain the proper balance between the amount of current assets and
the current liabilities in such a way that the firm is always able to meet its
financial obligations, whenever due. This will ensure the smooth working
of the unit without any production held ups due to paucity of funds

Permanent Working Capital:

The operating cycle is a continuous feature in almost all the going concerns and
therefore creates the need for working capital and their efficient management.

38

However the magnitude of working capital required will not be constant, but will
fluctuate. At any time, there is always a minimum level of current assets which is
constantly and continuously required by a business unit to carry on its operations.
This minimum amount of current assets, which is required on a continuous and
uninterrupted basis, is after referred to as fixed or permanent working capital.
This type of working capital should be financed (along with other fixed assets)
out of long term funds of the unit. However in practice, a portion of these
requirements also is met through short term borrowings from banks and suppliers
credit.

For eg. In a manufacturing unit, basic raw materials required for

production has to be available at all times and this has to be financed without any
disturbance.

Temporary Working Capital

Any amount over and above the permanent level of working capital is
variable, temporary or fluctuating working capital. This type of working capital is
generally financed from short term sources of finance such as bank credit because
this amount is not permanently required and is usually paid back during off
season or after the contingency. As the name implies, the level of fluctuating
working capital keeps on fluctuating depending on the needs of the unit unlike the
permanent working capital which remains constant over a period of time.

39

 DETERMINANTS OF WORKING CAPITAL

Working capital management is an indispensable functional area of

management. However the total working capital requirements of the firm are
influenced by the large number of factors. It may however be added that these
factors affect differently to the different units and these keep varying from time to
time. In general, the determinants of working capital which are common to all
organizations can be summarized as under:

Nature and Size of Business

Production Cycle

Business Cycle

Production Policy

Credit Policy

40

 Growth & Expansion

Proper availability of raw materials

Profit level

Inflation

Operating Efficiency

ESTIMATING OF WORKING CAPITAL

REQUIREMENTS

The amount of the different constituents of the working capital such as

debtors, cash, inventories, creditors, etc are estimated separately and the total
amount of working capital requirement is worked out accordingly.

Percent Sales method is the most simple and widely used method in
combination with other scientific methods. A ratio is determined for estimating
the future working capital requirements. This is generally based on the past
experience of the management as this ratio varies from industry to industry and
unit to unit with in the same industry.
41

Operating Cycle method points towards the length of time considered

necessary to complete the following cycle of events:

Purchase of raw materials by converting cash

Storage of raw materials including for buffer stock and safety

margin

Conversion of raw materials into work in progress

Conversion of work in progress into finished goods

Conversion of finished goods into debtors and bills receivable

Conversion of debtors into cash

Cash Conversion Cycle is a measure of working capital efficiency, often

giving valuable clues about the underlying health of a business. The cycle
measures the average number of days that working capital is invested in the
operating cycle. It starts by adding days inventory outstanding (DIO) to days sales
outstanding (DSO). This is because a company "invests" its cash to acquire/build

42

inventory, but does not collect cash until the inventory is sold and the accounts
receivable are finally collected.
The finance profession recognizes the three primary reasons offered by
economist John Maynard Keynes to explain why firms hold cash. The three
reasons are for the purpose of speculation, for the purpose of precaution, and for
the purpose of making transactions. All three of these reasons stem from the need
for companies to possess liquidity.

Speculation: Economist Keynes described this reason for holding

cash as creating the ability for a firm to take advantage of special
opportunities that if acted upon quickly will favor the firm. An
example of this would be purchasing extra inventory at a discount
that is greater than the carrying costs of holding the inventory.

Precaution: Holding cash as a precaution serves as an emergency

fund for a firm. If expected cash inflows are not received as
expected cash held on a precautionary basis could be used to
satisfy short-term obligations that the cash inflow may have been
bench marked for.

43

 Transaction: Firms are in existence to create products or provide

services. The providing of services and creating of products results
in the need for cash inflows and outflows. Firms hold cash in order
to satisfy the cash inflow and cash outflow needs that they have.

Receivable are essentially loans extended to customers that consume

working capital; therefore, greater levels of DIO and DSO consume more working
capital. However, days payable outstanding (DPO), which essentially represent
loans from vendors to the company, are subtracted to help offset working capital
needs. In summary, the cash conversion cycle is measured in days and equals DIO
+ DSO DPO:

SOURCES OF WORKING CAPITAL

The working capital necessary and what constitutes working capital have
been analyzed in depth. Now we look out what are the ways we can generate
working capital.

Trade Credits

Bank Credit

44

 Current provisions and non-bank short term borrowings: and

Long term sources ie., equity share capital, preference share capital
and other long term borrowings.

Short term source of funds are generally available at comparatively lower

costs but theoretically these funds can be called back any moment and therefore it
is more appropriate to meet at least two thirds of the permanent working capital
requirements from the long term sources. The advantages of long term sources is,
it reduces risk as there is no need to repay the loans at frequent intervals and funds
can be employed gainfully and it increases liquidity.

SUMMARY

Traditional analysis of working capital is defensive; it asks, "Can the

company meet its short-term cash obligations?" But working capital accounts also
tell you about the operational efficiency of the company. The length of the cash
conversion cycle (DSO+DIO-DPO) tells you how much working capital is tied up
in ongoing operations. And trends in each of the days-outstanding numbers may
foretell improvements or declines in the health of the business.

Implementing an effective working capital management system is an

45

excellent way for many companies to improve their earnings. The two main
aspects of working capital management are ratio analysis and management of
individual components of working capital. Thus the importance of adequate of
working capital in commercial undertakings can never be over emphasized. The
various studies conducted by the Bureau of Public Enterprises have shown that
one of the reasons for the poor performance of public sector undertakings in our
country has been the large amount of funds locked up in working capital. This
results in over capitalization. Over Capitalization implies that a company has too
large funds for its requirements, resulting in a low rate of return a situation which
implies a less than optimal use of resources. Insolvency risk is there in the case of
under capitalization of working capital. Hence working capital management plays
a pivotal role in growth or to sustain in market for any organization.

46

CASH FLOW STATEMENT

Preparing a Cash Flow Statement

The statement is prepared annually, half yearly, quarterly or monthly with the help
of two Balance Sheets (one at the beginning an the other at the end). Income
statement and other information available from the receipts and disbursement
account.

Key to preparation of a Cash Flow Statement lies in raising the fact that all items
appearing in income statement are to be computed on cash basis which so far have
been shown an accrual basis. It is also divided in two parts-(i) Sources of cash and
(ii) Application of cash. All transactions involving inflow of cash are designated
as 'sources of cash' and all transactions resulting in outflow of cash are
summarized under the heading 'application of cash'. Cash Flow Statement may be
prepared in two forms:- (i) report form and (ii) Account from as explained below:

Cash Flow Statement (Report Form)

47

Cash

Balance

in

the

beginning

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

Add- Source of cash (or Cash Inflows)

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

(i)

..

Cash

from

operations

...

............................. ...........................
(ii)

Cash

from

operations

..

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

(iii) Sale of Investment and any other Fixed Asset

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

(iv)

Issue

of

Share

Capital/Debentures

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

.............................
(v) Loans raised during the year.

Total

cash

..

available .............................
..

Less- Application of Cash (or Cash outflows) .............................

..
(i) Purchase of Machinery of any other Fixed Asset

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

(ii)

Dividend

Paid
.............................

(iii) Decrease in Account Payable

..

48

(iv) Repayment of Loans

(v) Redemption of Preference shares or debentures in

cash.

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

Total

Cash

Payments .............................
..

Cash balance at the end

Cash Flow Statement (Account Form)

Cash balance at the beginning ..................
49

..................
.
..................
(i)

Cash

from

operations

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

..
(i) Decrease in Accounts Payable

(ii) Collection form debtors

..................
(ii) Purchase of Machinery or ..

(iii)

Sale

of

Investment

.................. other

Asset ..................

.
(iv)

Sale

of

Fixed

Asset

..
(iii)

Dividend

Paid ..................

..................
(v) Insurance of share capital or .

..
(iv)

Repayment

of

Loan

debentures

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

.................. (v) Redumption of Pref. Shares or

(vi) Loan

Debentures
Cash Balance at the end

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

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

..

50

FUND FLOW STATEMENT

51

Form of Funds Flow Statement

Generally, Funds Flow Statement can be prepared in two formats:

1) In report form or
2) In an account form which is generally used to find the fund flow statement.

Cash from Operations

Cash from Operations:
Cash from operations shown in the Cash Flow Statement, shall be calculated a
follows:

Cash from operations= Cash sales (Total sales-Credit sales )- Cash purchases
+ Cash operating expenses after adjusting accruals and prepayments).

Cash purchases may be calculated by deducting credit purchases i.e., increase in

accounts

payable

creditors

and

B/P

from

the

total

purchases.

Cash from operations may also be calculated by making necessary adjustments

for non-cash transactions in the net profits as shown by profit and loss account
i.e., by adding non-cash and non-trading payments and losses and by deducting

52

non-cash

an

non-trading

receipts

and

profits.

Distinction between Funds Flow Statement and Cash Flow

Statement

We have fully explained the meaning and importance of both the statementsFunds Flow a Cash Flow statements.

A distinction between these two statements may be briefed as under:-

(i) Funds Flow Statement is concerned with all items constituting funds (Working
Capital) for the business while Cash Flow Statement deals only with cash
transactions. In other words, a transaction affecting working capital other than
cash will affect Funds statement, and not the Cash Flow Statement.

(ii) In Funds Flow Statement, net increase or decrease in working capital is

recorded while in Cash Flow Statement; individual item involving cash is taken
into the account.

(iii) Funds Flow statement is started with the opening cash balance and closed
with the closing cash balance records only cash transactions.

53

(iv) Cash Flow Statement is started with the opening cash balance and closed with
ht closing cash balance while there a no opening or closing balances in Funds
Flow Statement.

Example:
The following are the balance sheet for India Glycol Limited Gorakhpur for the
year ending March 31 2007 and March 31 2008:

Balance Sheet
As on 31 March
2007
Rs

2008
Rs

Capital and Liabilities

Share Capital

6, 75,000

7, 87,500

General Reserve

2, 25,000

2, 81,250

54

55

56

57

58

59

RATIO ANALYSIS

What is RATIO..??

An Arithmetical Expression of relationship between two related or InterDependent items.

What is ACCOUNTING RATIO..??

The term Accounting Ratio is used to describe the significant relationship which
exists between figures shown in a Balance Sheet, in a Profit/Loss Account, in a
Budgetary Control system or in any part of the accounting organization.

EXPRESSION OF RATIO

PURE

Expressed as a Quotient.
e.g. Current Ratio = Current Assets/Current Liabilities
= Rs. 2, 00,000/ Rs. 1, 00,000
= 2:1

60

 PERCENTAGE

Expressed in Percentage
e.g. Gross Profit Ratio = Gross Profit/Net Sales X100
= 25%

TIME

Expressed in number a particular figure is compared to another figure.

E.g. Stock turnover ratio which studies relationship between costs of goods sold
and average stock is (say) 4times.

FRACTION

Expressed as Fraction.
E.g. Ratio of fixed assets to share Capital is (say) 3/4
(0.75)

DAYS

Expressed in number of Days.

E.g. The average collection period for IGL is 73 Days.

61

MEANING OF RATIO ANALYSIS

Its a technique or process of determining and interpreting relationship between

the items of financial statements to provide a meaningful understanding of the
performance and financial position of an enterprise. Its a study of relationship
among various Financial factors in a Business.

OBJECTIVE OF RATIO ANALYSIS

Its main Objective is to Test and make Qualitative Judgment about the Firms
Profitability, Financial Position (Liquidity & Solvency), and Operating Efficiency.
E.g. a Current Ratio is calculated by dividing current assets by current liabilities;
the ratio indicates a relationship-a qualified relationship between current assets
and current liabilities. It measures the Firms Liquidity: The Greater the Ratio, the
greater the firms liquidity and vice-versa. In Financial Analysis, a ratio is used as
a benchmark for evaluating the financial position and performance of a firm. An
Accounting figure conveys meaning when it is related to some other relevant
information. E.g. a Rs. 5Crore Net Profit may look impressive, but the firms
performance can be said to be good or bad only when the net profit is related to
the firms investment.

TYPES OF RATIOS
62

 Liquidity Ratios: They Measure the Firms ability to meet current

Obligations.

Solvency Ratios: They Show the Proportions of Debt & Equity in financing the
Firms assets.

Activity Ratios: They reflect the Firms efficiency of utilizing assets.

Profitability Ratios: They measure overall performance and effectiveness of

the Firm.

Coverage Ratios: They measure the profit to measure the interest charges.

LIQUIDITY RATIOS

Liquidity ratios measure the ability of firm to meet its current obligations. In fact,
analysis of liquidity needs the preparation of cash budgets and cash and fund flow
statement; but liquidity ratios, by establishing a relationship between cash and
other current assets to current obligations, provide a quick measure of liquidity. A
firm should ensure that it does not suffer from lack of liquidity, and also that it
does not have excess liquidity.

63

TYPES OF LIQUIDITY RATIOS

1) Current ratio

2) Quick or acid test or liquid ratio

3) Cash ratio

4) Net working capital ratio

CURRENT RATIO

The current ratio is calculated by dividing current assets by current liabilities:

Current ratio = Current assets / Current liabilities
The current ratio is a measure of the firms short-term solvency. It indicates the
availability of current assets in rupees for every one rupee of current liability. A
ratio of greater than one means that the firm has more current assets than current
claims against them. As a conventional rule, a current ratio of 2:1 or more is
considered satisfactory.

QUICK RATIO

64

It is found out by dividing: Quick ratio = Quick assets / Current liabilities

Quick assets = current assets inventories prepaid expenses
Generally, a quick ratio of 1:1 is considered to represent satisfactory current
financial conditions.

CASH RATIO

The computation of cash ratio: Cash ratio = Cash + marketable securities/Current

liabilities
Since cash is the most liquid asset, a financial analyst may examine cash ratio and
its equivalent to current liabilities. Trade investment or marketable securities are
equivalent of cash; therefore, they may be included in the computation of cash
ratio.

NET WORKING CAPITAL RATIO

It can be computed by: NWC Ratio = Net working capital / Net assets
The difference between current assets and current liabilities excluding short - term
bank borrowings is called net working capital or net current assets. NWC is
sometimes used as the measure of a firms liquidity. It however, measures the
firms potential reservoir of funds

65

SOLVENCY RATIOS

The term solvency implies ability of an enterprise to meet its long-term

indebtedness and thus, solvency ratios convey an enterprises ability to meet its
long-term obligations. Some important solvency ratios are :

a) Debt-Equity Ratio,

b) Interest Coverage Ratio,

c) Debt to Total Funds Ratio,

d) Fixed Asset Ratio,

A) Debt Equity Ratio.

The debt-equity ratio is worked out to ascertain soundness of the long-term

financial policies of the firm.
The ratio ascertained as follows;
Debt-Equity Ratio = Debt (Long-Term Loans)/ Equity (Shareholders Funds)

66

Dept equity ratio indicates the proportion between shareholders funds and the
long-term borrowed funds. A higher ratio indicates a risky financial position while
a lower ratio indicates safer financial position.

Objective and Significance

This ratio is sufficient to assess the soundness of long-term financial position. It
also indicates the extent to which the firm depends upon outsiders for its existence
Ascertain Dept-Equity ratio for IGL (*1000):
a) Equity share capital 2, 00,000
b) General reserve 1, 60,000
c) 10% debenture 1, 50,000
d) Current liabilities 1, 00,000
e) Preliminary expenses 10,000

Solution: Dept-equity Ratio = Dept/ Equity

Dept = debentures = Rs. 1, 50,000
Equity= Equity Share Capital + General Reserve- preliminary Expenses

= 2, 00,000+1, 60,000-10,000 = 3, 50,000

Dept-Equity ratio= 1, 50,000 / 3, 50,000
= 15:35= 3:7

67

B) Interest Coverage ratio:

When a business borrows money, the lender is interested in finding out whether
the business would earn sufficient profit to pay periodically the interest charge. A
ratio which expresses this is called Interest Coverage Ratio or Dept service Ratio
or fixed charges cover.
This ratio is determined by dividing profit before interest by the interest charges
Interest Coverage Ratio =Net profit before interest and tax/ Interest on fixed
(long-term)

loans or Debentures.

Objective and Significance:

This ratio indicates how many times the profit covers fixed interest. It measures the
margin of safety for the lenders. The higher the number, more secure the lender is in
respect of his periodical interest income.

Example:
The operating profit of Exe. Ltd. After charging interest on debentures and tax is Rs
1, 00,000. The amount of interest is Rs 20,000 and the provision for tax has been
made at Rs 40,000. Calculate the interest coverage ratio.
Solution:
Interest Coverage Ratio = net profit before interest and tax/ Interest charges
= 1, 60,000/20,000

68

C) Debt to Total Fund Ratio

The Debt to Total Funds Ratio is a measure for long term financial soundness.
Debt Total Funds Ratio =Debt /(Equity + Debt)

Objective and Significance:

The main purpose of the ratio is to determine the relative stock of outsiders and
shareholders.
Calculate debt to total funds ratio for IGL with following data:
a) 9% Pref. Share Capital 10, 00,000
b) Equity Share Capital 20, 00,000
c) Reserves 10, 00,000
d) 10% Debentures 30, 00,000
e) Loans From Industrial Finance corporation 20, 00,000
f) Current liabilities 8, 00,000
Solution:
Debt to Total Funds Ratio = Long-term loans/(Shareholders funds +Long-term
loans)
=(30,00,000 + 20,00,000)/(10,00,000 + 20,00,000 + 10,00,000 + 30,00,000+
20,00,000)
Debt to Total Funds Ratio= 5: 9 or 0.56.

69

D) FIXED ASSETS RATIO

Fixed Assets Ratio = (Shareholders funds + Long-term loans)/Net Fixed Assets

Objective and Significance:

This ratio indicates as to what extent fixed assets are financed out of long-term

solvency.

Example:
Calculate Fixed Assets Ratio for IGL with following data (*1000):
a) Share capital 2, 00,000
b) Reserves 50,000
c) 9% Debentures 2,00,000
d) Trade Creditors 75,000
e) Plant and Machinery 2, 00,000
f) Land and Building 2, 00,000
g) Furniture 50,000
h) Trade Debtors 60,000
i) Cash Balance 40,000
j) Bills Payable 24,000
k) Stock 80,000

70

Solution:

Fixed Assets Ratio = Long-term Funds/Fixed Assets

= (2, 00,000 + 50,000 + 2,00,000)/ (2, 00,000 + 2, 00,000 + 50,000)
= 4, 50,000/4, 50,000
=

ACTIVITY RATIOS

A) Activity ratios are also known as turnover or efficiency ratios.

B) Activity ratios indicate the efficiency with which the resources available to the
firm are utilized.

C) Higher turnover ratio means better use of resources available to the firm.

71

CAPITAL TURNOVER RATIO

This ratio expresses the relationship between net sales and capital employed.

Formula:
NET SALES/CAPITAL EMPLOYED
NET SALES= Sales Sales returns
CAPITAL EMPLOYED=
Two methods:

i.

Shareholder funds +Long term debts

Shareholder funds: Equity share capital +Preference share capital+ Reserves &
surplus+

P&La/c

Less:
Preliminary expenses, underwriting commission, discount on issue of shares
&debentures,
P&la/c (Dr.)

Long term debts:

Debentures +loans + public deposits
ii.

Fixed assets +current assets current liabilities

72

Objective:

The objective of working out this ratio is to determine how efficiently the capital
employed is being used.

Interpretation:

A higher ratio means efficient utilization of capital employed & vice versa.

A very high capital turnover ratio would indicate overtrading or under

capitalization.

Example: From the following Balance sheet of IGL Ltd. For the year ended
31st December, 2007, calculate Capital Turnover Ratio (* 1000):

LIABILITIES

AMOUNT

ASSETS

Equity share

75,000

Fixed Assets

47,000

Stock

AMOUNT
40,000

Capital

Profit for the year

90,000

73

Reserves

25,000

Debtors

86,000

Trade Creditors

76,000

Cash

7,000

2, 23,000

2, 23,000

Sales for the year amounted to Rs. 3, 50,000.

Solution:

Capital employed = Fixed Assets + Working capital.

=40,000+90,000+86,000+7,000-76,000
=Rs. 1, 47,000
Capital Turnover Ratio = Net sales/Capital employed
= 3, 50,000/1, 47,000
= 2.38 Times

SALES TO FIXED ASSETS OR

74

FIXED ASSETS TURNOVER RATIO

This ratio indicates the extent to which investment in fixed assets contribute
towards sales.

Formula:

NET SALES / NET FIXED ASSETS

NET FIXED ASSETS =Fixed Assets Depreciation

Objective:
Fixed Asset Turnover Ratio indicates how efficiently fixed assets are used.

Interpretation:

If there is increase in the ratio it will indicate that there is improvement in the
utilization of
fixed asset & a decline in ratio will indicate that fixed assets have not been used
efficiently by the firm.

Example:

75

From the following data, calculate the Fixed Assets Turnover Ratio for a section
of IGL:
1) Gross Fixed Assets = Rs. 3, 00,000
2) Accumulated Depreciation = Rs. 1, 00,000
3) Total Sales = Rs. 8, 50,000
4) Sales Returns = Rs. 50,000.

Solution:

NET SALES = TOTAL SALES SALES RETURNS

= RS. 8, 50,000 RS. 50,000
= RS. 8, 00,000
NET FIXED ASSET = GROSS FIXED ASSETS ACCUMULATED
DEPRECIATION
= RS. 3, 00,000 RS. 1, 00,000
= RS. 2, 00,000
FIXED ASSETS TURNOVER RATIO = SALES/NET FIXED
ASSETS
= RS. 8, 00,000
Rs 2, 00,000
= 4 Times

NET WORKING CAPITAL TURNOVER RATIO

76

This ratio indicates whether the working capital has been efficiently utilized or
not in making sales.

Formula:

NET SALES / NET WORKING CAPITAL

Objective:
This ratio indicates whether or not working capital has been effectively utilized
in making sales. In other words, it measures the rate of working capital utilization.

Interpretation:
A high working capital turnover ratio shows the efficient utilization of working
capital & vice versa.

Example:

Calculate the working capital turnover ratio from the following data for IGL (*
1000):
1) Current Assets = Rs. 9, 00,000
2) Total Sales = Rs. 30, 50,000
3) Current Liabilities = Rs. 3, 00,000
4) Sales Return = Rs. 50,000.

Solution:

77

Calculation of Working Capital Turnover Ratio:

Net Sales = Rs. 30, 50,000 Rs. 50,000 = Rs. 30, 00,000
Working Capital = Current Assets Current Liabilities
= Rs. 9, 00,000 Rs. 3, 00,000= Rs. 6, 00,000
Working Capital/Turnover Ratio = Rs. 30, 00,000/Rs. 6, 00,000= 5 Times

CREDITORS TURNOVER RATIO

Indicates the velocity with which the payments for credit purchase are made to
creditors. The term accounts payable includes creditors and bills payable. The
ratio is calculated as follows:

1) CREDITORS TURNOVER RATIO =

TOTALCREDITPURCHASES/AVERAGEACCOUNTS PAYABLE

2) AVERAGE ACCOUNTS PAYABLE = OPENING CREDITORS +OPENING

BILLS PAYABLE + CLOSING CREDITORS + CLOSING BILLS PAYABLE

Objectives and Significance:

78

1) Creditors turnover ratio and the debt payment enjoyed both indicates whether
the firm is enjoying actually the credit promised by suppliers.
2) If the firm enjoys lower credit period, it means the creditors are being paid
promptly and the firm is not taking the full advantage of credit facilities.

AVERAGE PAYMENT PERIOD (days payables outstanding) =

ACCOUNTS PAYABLE / (ANNUAL CREDIT PURCHASES / 365

DAYS)

Indicates the time within which the payments for credit purchases are made to
creditors.
The ratio is calculated as follows:

AVERAGE PAYMENT PERIOD =

MONTHS (OR DAYS) IN A YEAR /CREDITORS
TURNOVER
OR
AVERAGE PAYMENT PERIOD =
ACCOUNTS PAYABLE/MONTHLY CREDIT PURCHASES

OR

AVERAGE PAYMENT PERIOD =

79

ACCOUNTS PAYABLE x MONTHS IN A YEAR/CREDIT PURCHASES IN

A YEAR

Objectives and Significance:

1) Proper employment of capital being one part of good management working
capital one should ascertain whether the firm is actually enjoying the credit
promised by suppliers.

2) If suppliers allow credit period of one month but if, as per calculations, a firm
is taking 2 months credit period, it may mean either that the facilities given by the
creditors are not being properly utilized are that the firm is unnecessarily
damaging its credits in the markets.

PROFITABILITY RATIO
Main object earn profit

Profit as compared to the capital employed

Measures overall efficiency of business

GROSS PROFIT RATIOS

80

 Shows relationship of sales with D.C. (purchases, manufacturing cost)

G.P.R. =Gross Profit *100/Net Sales

G.P. net sales cost of goods sold (no a/c of exp charged to P/L)

Net Sales = Gross sales - (sales tax +excise duty)

Shows average margin on goods sold.

Gross Profit Is Calculated As:

81

Example:
For the head of a section of IGL Mr. Hemant Goel

Net Profit Ratio

N.P.R. = Net Profit *100/Net Sales

Net Profit =Gross Profit -[op. exp (S&D) +Non-op exp (int on
debentures)] +Non-op income (int on shares..)

Can be PBT/PAT

Reveals overall efficiency of business.

82

 Higher the N.P.R. the better it is.

Expense Ratios

Ascertains relationship b/w operating exp & volume of sales

Indicates portion of sales consumed by various operating expenses

Throws light on the level of efficiency in different aspects of work

It includes the following ratios:

Ratio of materials used to sales:

Direct material cost to sales =D.M.C. *100/Net Sales

Ratio of labour to sales:

Direct labor cost to sales =D.L.C. *100/Net Sales

Factory exp

83

 Office & administration expenses

S&D Expenses

Operating Profit Ratio

Operating profit ratio establishes relationship between operating profit & net
sales.

Operating profit is the net profit arising from the normal operation of an
enterprise.

Operating profit ration: operating profit x 100/Net sale

Operating profit = NP + Non- operating expenses Non operating income

Objective & significance

This ration is indicator of operational efficiencies of management as against the
net profit ration, which reveals overall efficiency.

84

Example:
For a section of IGL
1) Sales 3,00,0000
2) Gross profit 120,000
3) Administration expenses 35000
4) Selling & distribution expenses 25000
5) Income on investment 15000
6) Loss by fire 9000
Solution:
Operating profit ration = net operating profit x 100/ Net sale
Operating profit = G.P. (Administrative Exp. + Selling exp)
= 1.2 lac (25000+ 35000)
= 60000 X 100/3 lac
= 20%

OPERATING RATIO
Thais ratio establishes relationships between operating cost & net sales. This ratio
indicates the proportion that the cost of sales.

Cost of sale included direct cost of good sold & as well as other operating
expenses administration, selling & distribution expenses
Operating ratio = (Cost of good sold + operating expenses) X 100/ Net sale
= Operating cost X 100/ Net sale

85

Cost of good sold = opening stock + purchase + direct expenses closing stock
GP

Operating expenses = administrative expenses + selling & distribution expenses

Objective & significance

Operating ration is the test of the operational efficiency of the business .it shows
the percentage of sales that is absorbed by the cost of sales & operating expenses.
This ratio serves following objective:
1) To determine whether the cost content has increased or decreased in the figure
of sales.
2) To determine which element of the cost has gone up.

Example:
For a section of IGL
1) Cost of good sales 6 lac
2) Operating expenses 40,000
3) Sales 8, 20,000
4) Sales returns 20,000

86

Solution:
Operating Ratio = (Cost of good sold + operating expenses) X 100/Net Sales

= (6 lac + 40000) X 100/ (820000-20000)

= 640000 X 100/ 800000 = 80%

RETURN ON EQUITY

Common shareholders are entitled to the residual profit. The rate of

dividend is not fixed and earning may be distributed to shareholders or
retained in the business.

A ROE is calculated to se the profitability of owners investment.

ROE indicates how well the firm has used the resources of owners.

It is a most important relationship in financial analysis.

Formula:
ROE= PAI /Net Worth Equity

87

EARNING PER SHARE

It is a measure for calculating the profitability of shareholders investment.

EPS is calculated as; EPS=PAT/NO. OF OUTSTANDING SHARES

EPS shows the profitability of the firm on share basis, it doesnt reflect
how much is paid as dividend and how much is retained in the business?
But as profitability index as it is valuable.

The higher the EPS, the more attractive will be the investment plan or
vice-versa

RETURN ON INVESTMENT

The term investment refers to total asset or net asset.

The conventional approach of calculating ROI is to divide PAT by

investment; investment represents pool of funds, supplied by shareholders
and lenders.

While pat represents residue income of shareholders.

88

The formulae for calculating ROI is;

ROI=ROTA=EBIT (1-T)/ TA OR NA

Since taxes are not controllable by management and firms opportunities far
availing tax incentives differ, it may be more prudent to use before tax measure of
ROI, thus the before tax ratios are;
ROI=ROTA=EBIT/TA OR NA

COVERAGE RATIO

Fixed Interest Cover

Fixed Divident Cover

Fixed Interest Cover:

Income before Interest and Tax/Interest Charges

Fixed Divident Cover:

Net Profit after Interest and Tax/Preference Divident

89

Turnover Ratio

Turnover Ratio

Net Profit Ratio

Overall Profitability Ratio

1) Net Profit Ratio = Net Profit/ Sales * 100

2) Turnover Ratio = Sales/ Capital Employed

3) Profitability Ratio = net profit ratio * turnover ratio

=net profit/ capital *100
4) Working Capital Turnover Ratio = Net Sales/ Working Capital

5) Debtors turnover Ratio = Credit Sales/ Average Account Receivable

6) Debt Collection Period Ratio = Months in year/ Debtor turnover

=Average a/c receivable*months in year/ credit
sales
=a/c receivable/ average monthly credit sales

90

91

FINANCIAL STATEMENT ANALYSIS

RATIO ANALYSIS

A Ratio gives the mathematical relation ship between one variable and
another.

Ratio analysis helps in valuing the firm in quantitative terms.

Ratios are classified as follows

a) Liquidity Ratios

b) Ownership Ratios

i) Earnings Ratios
ii) Leverage Ratios

c) Capital Structure Ratios

d) Coverage Ratios

e) Dividend Ratios

92

1) Liquidity Ratios:

Liquidity implies firms ability to pay its debts in short run

This ability can be measured by Liquidity Ratios
Current Ratio and Quick Ratio are the two ratios which directly measure
Liquidity

Receivables turnover Ratio n Inventory Turnover Ratio are the two ratios which
in directly

measure Liquidity

I.

Current ratio = Current assets /Current Liabilities

Current assets which are converted into cash within one year
Current liabilities are liabilities which are to be repaid within a period of 1
year.

Current Assets

Cash

Current Liabilities

Loans And

Advances
Marketable Securities

Trade Creditors

Debtors

O.S.Expenses

Inventories

Provisions

93

Loans and Advances

Pre Received

incomes
Prepaid Expenses
O.S.Incomes

IDEAL RATIO = 2:1

II.

Quick ratio or Acid Test ratio = Quick Asset/ Quick liability

(Current Assets Inventories- Prepaid expenses )

(Current Liabilities Bank O.D. Income Received in Advance)

Ratio of quick assets to quick liabilities.

Quick assets which can be converted into cash very quickly.
Quick liabilities are liabilities which have to be necessarily paid with in 1
year.
Ideal ratio 1
1 is considered as inadequate liability of the business.

III.

Absolute Liquid Ratio = Absolute Liquid Assets/Current Liabilities

> Ratio of quick Absolute liquid assets to current liabilities.

> Absolute liquid Assets = Cash + Bank + Short Term Investments.
> Ideal Ratio = 1:2 or 0.5

94

IV. Bank Finance to working Capital Gap ratio =Short Term Bank Borrowings
Working Capital Gap
Working Capital Gap = Current Assets Current Liabilities
It shows firms Reliance on short term bank finance for financing the
working capital gap.

Turn over Ratios (Activity Ratios)

1. Accounts Receivable Turn over ratio

Or Debtors Turn over Ratio =.

Net Credit Sales

Average Account Receivable

Average Account Receivable = Opening receivable + Closing receivable
2
Relationship between debtors and sales
Ideal Ratio 10 12

2. Average collection period

Or Debt Collection Period = No. of Days in a year
Debtors Turn over Ratio
No. of days it takes for the debtors to get converted in to cash.
Ideal Ratio 30-36 days
High Debtors turn over ratio or low debt collection period indicates
sound credit management policy
95

.
3. Inventory Turnover Ratio = Cost of goods Sold
Average Inventory
It indicates no. of times stock has been turned into sales in a year
Ideal Ratio = 8
Cost of goods sold = Sales gross profit
Average Inventory = (Opening Stock + Closing Stock)/2
Stock Conversion Period = Cost of goods Sold * NO. of days in a year
Average Inventory

4. Creditors Turn over ratio = Net Credit Purchases.

Average Creditors
Average Creditors = (Opening Creditors + Closing Creditors)/2

Relation ship between Creditors and Purchases

Ideal Ratio 12 or More

5.

Average Payment period

Or Debt Payment Period = No. of Days in a year
Creditors Turn over Ratio
No. of days Taken by the business to pay off its debts
Ideal Ratio 30 or less

96

 Low Creditors turn over ratio or High debt Payment period indicates
sound credit management policy.

2) Profitability or Efficiency Ratios:

These Ratios measure the efficiency of forms activities and its ability to
generate profits. Two Types of profitability ratios:

A. Profits in relation to sales:

i.

Gross Profit Margin Ratio

ii.

Net Profit Margin Ratios

B. Profits in relation to assets:

i.

Assets Turn Over Ratio

ii. Earning Power

iii. Return On Equity

A. Profits in relation to sales: These Ratios identify the sources of the

business efficiency.

Gross Profit Margin Ratio = Gross Profit/ Net Sales

Gross Profit = Sales Cost Of goods sold

Net Sales = Sales Sales Return - Excise Duty
There Is no Ideal Ratio
Higher the ratio better will be performance of the business.

97

Net Profit Margin Ratio = Net Profit /Net Sales .

It measures the overall efficiency of production, administration, selling,
financing, pricing and tax management
It shows the result of overall operation of the firm.

B. Profits in relation to assets:

Assets Turn over Ratio = Sales / Average assets

Ability to generate a large volume of sales on a small asst base is an

important part of firms profit picture.
Improperly used assets increase the firms need for costly financing.

Earning Power = EBIT / Average total assets

It is a measure of operating Profitability.
It is a measure of operating business performance which is not effected
by and tax payments interest charges
Return on Equity = Net Income / Average Equity
Net income = PAT (Profit after Tax)

98

 It is an important profit indicator to share holders of the firm.

3) Ownership ratios:

a. Earning Ratios

b. Leverage Ratios
i. Capital Structure Ratios
ii. Coverage Ratios

c. Dividend Ratios
A. Earning Ratios:
Earning per Share = Net Income (PAT) / No. of outstanding Shares

EPS is the net profit after tax which is earned on the capital
representative of one equity share.
Higher the EPS, better the performance of the company
.
Price Earning Ratio = Market Price of the share/ EPS
It gives the relation ship between market price of the stock and its
earnings by revealing how earnings affect the market price of the firms
stock.

99

 P/E Ratio has Practical application in forecasting the market price of a

share.
There is no ideal ratio
.
Capitalization Rate or Earnings Yield = EPS / Market Price of the shares

B. Leverage Ratios
a) Capital Structure Ratio
i. Debt Equity Ratio = Debt /Equity
= (Long Term Liabilities + Current Liabilities)/ Share Holders Funds

Ratio 2 or Less Exposes Its Creditors Lesser Risk

Higher Risk Ratio >2 Exposes Its Creditor Higher Risk

ii.

Debt Assets Ratio = Debt /Assets

b) Coverage Ratios
i. Interest Coverage Ratio or Debt Service Ratio
=

EBIT

Interest Coverage
Ideal Ratio - 6
Indicates whether Business is carrying Sufficient Profit to pay
interest charges.

100

 Higher Good , Lower - Not Good

i)Fixed Charges Coverage Ratio

=

EBIT ( Before Depreciation & Lease Rentals)

Debt

Lease + Loan Repayment + Preference

Interest

Rent

Installment . Dividend
(1 Tax Rate )

ii)Debt

Service

(1 Tax Rate )

Coverage

Ratio

=Pat + Depreciation + Non Cash Charges + Inerest on Term Loan

Interest on Term Loan + Repayment of Term Loan

Indicates whether Business is Earning Sufficient Profits to pay not only

interest

but

also

installments

of

personal

amount.

C. Dividend Ratios:

i. Dividend Pay out Ratio = DPS

EPS
i.

Dividend

Yield

DPS
MPS

Dividend Yield Ratio Gives Current Return on ones Investment.

101

102

RESULT AND CONCLUSION

SERIOL

PARTICULAR

QUARTER

QUARTER

ENDED

ENDED

(30/06/08)

(30/06/07)

from operation

24160

28518

-domestic

5335
29495

4498
33016

4489

5895

NUMBER
Gross sales/Income

-export
Total
1

Less: Excise Duty

Net sales/Income 25006

27121

from operation
2

Other Income

Total Expenditure

a)

Increase/Decrease

773

1901

(50)

534

in stock
b)

Consumption

of 12094

12030

raw material
c)

Purchase of good 99

for trading
d)

Employees cost

1161

1389

103

e)

Power And Fuel

3940

3708

f)

Depreciation

1476

1416

g)

Other

4263

3921

Total Expenditure

22983
Before 2796

22998
6024

4)

Profit

5)

Interest And Tax

Interest(net)

1096

1190

6)

Profit Before Tax

1700

4034

7)

Provision

-Current Tax

191

931

-Deferred Tax

413

322

-Fringe Benefit Tax

19

18

For

Taxation/Credit

Minimum alternate (136)

tax

credit

Entitlement

8)

-Tax for earlier year -

written back
Net Profit/Loss

3563

1243

104

9)

Paid

10)

share

up

equity 2788

2788

Reserve excluding
11)

revaluation reserves 4.35

12.78

Basic/Diluted EPS
12)

for the period

Aggregate of public
shares holding

13934682

14326628

- No. of shares

49.98%

51.38%

-Chemicals

24508

27504

-Ethyl Alcohol

4799

5314

-Others

188

198

Total

29495

33016

Tax

3071

4798

-Chemicals

447

342

-% of share holding
Segment
Wise
Revenue,

Results

and Capital Emp

Segment Revenue

Segment

Profit

Before Interest And

105

-Ethyl Alcohol

(104)

(27)

3414

5023

Less:

1096

1190

Interest(Net)

618

(1001)

1700

4834

-Chemicals

109389

97072

-Ethyl Alcohol

6941

4617

-Others

4348

1999

Total

120678

103688

-Others

Total

-Unallocated
corporate expenses
net of unallocated
income

Profit Before Tax

Capital Employed

Notes:
106

1) Profit for the quarter was affected on account of planned shutdown for 21 days
for debottlenecking of capacities and catalyst change.

2) CO2 plant of 80 TON per day capacity at Kashipur has started commercial
production in April 08.

3) The company has unrealized exchange loss of Rs. 1557 lacs on reinstatement
of all foreign currency borrowing as on 30 June 2008. Such losses being national
and not effecting cash flow of the company and the actual gain/loss in this respect
is ascertained and getting accured only on the final liquification of such loans. No
provision has been considered necessary in this quarter and will give effect to at
the end of the year or on the date of respective liquification.

4) Catalyst amortization over the technical assessed useful life is being charged to
profit and loss account as chemical consumption instead of depreciation and it has
no effect on the profit for the quarter.

5) Informations on the investors complaint for the quarter (Nos): Opening

balance-NIL New-25, Disposal-25, and Closing Balance-NIL.

6) Figure for the previous year /period have been regrouped/redessified, wherever
necessary.

107

7) Strong growth prospects are also seen in IMFL and county liquor business,
where the company has plans to improve the distribution of its range to other
markets nationally.

8) New business initiatives were taken by the Company i.e. Nutraceuticals and the
CO2 can also be expected to show better traction in the same period.

INDIA GLYCOLS LIMITED

Balance sheet as at 31march 2007

(Rs)
Schedule

As a31/.Mar/.2007

108

SOURCE OF FUND
1. Share Holders Fund
a) Share Capital

b) Reserve and Surplus

2. Loan Funds

130329852.8

130329852.8

Secured Loans

21673558.06

Unsecured Loans

21673558.06

3. Deferred Tax Liability

4. Inter Unit Balance

1589787241
TOTAL

1741790652

APPLICATION OF FUNDS
1. Fixed Asset

Gross Block

1090791713

Less Depreciation

42765395.68

Capital Work In Progress

249630369.5

1297656687
(Including Pre-Operative Expenses)

109

2. Investments

3. Current Assets, Loans and Advances

Inventories

634896140.7

Sundry Debtors

38072276.87

Cash and Bank Balances

30011576.71

Loan and Advances

219256801.4
922236795.7

Less: Current Liabilities and Provisions

Current Liabilities

G
478102864.2

Provisions

478102864.2

Net Current Assets

444133931

TOTAL

1741790619

33.40

INDIA GLYCOLS LIMITED

Profit and Loss account for the period ended 31March 2007

Schedule
INCOME

110

Sales

746516524.68
Less:

Excise

Duty

Recovered

on

sales

559739943.25

Net Sales
Other Income

186776581.43
Increase/Decrease in Stoel

EXPENDITURE
Manufacturing

and

Other

Exp

10727766.96
Finance

Charges

(Net)

2176200.01

Profit

before

depreciation

and

Tax

110003966.52
Depreciation
40051697.71
Profit

before

Tax

and

Exceptional

Item

133467168.81

111

Less: Exceptional Items

Profit

after

Exceptional

Items

133467168.81
Provision for doubtful Advances/loans to body corporates
Less: Transfer from general Reserves

Profit

Before

Tax

133467168.81

Provision for Taxation

-Current Tax
-Deferred tax charged/(Credit)
-Taxation for earlier years written back
-Fringe Benefit tax
-Minimum Alternate Tax Credit entitlement
Net

profit

of

the

year

133467168.81

Taxation for the year written back

Debenture redemption reserve written back
Amount withdrawn from reserve and contingencies

112

Taxation

for

earlier

years

written

back

125449538.21

Balance brought forward

2713697.97
Transfer from Investment Allowance Reserve
Balance

available

for

Appropriation

130753470.84

From the balance sheet we get the following conclusions in Ratio Analysis:

1) Liquidity Ratio

Liquidity Ratio: Current Asset/ Current Liability

Current Asset = 922236795.7

Current Liability = 478102864.2

Liquidity Ratio = 1.93:1

113

So in 2007 the liquidity ratio was 1.93:1

In 2008 it improved to 1.95:1

It is better performance to that of 2007 as the Ideal Ratio is 2:1. It shows India
Glycols Limited Gorakhpur has improved its performance.
.

2) Profitability Ratio
In relation to sales there are two ratios;
a) Gross Profit Margin ratio=Gross profit/Net Sales
b) Net Profit Margin Ratio=Net Profit/Net Sales

Gross Profit =173518866.52

Net Profit = 133467168.81
Net Sales = 186776581.43

Hence,
a) Gross Profit Margin Ratio in year 2007 was 0.92.
It goes to 0.94 in the year 2008.

114

It shows the improvement in the performance of India Glycols Limited Gorakhpur

as far as the business is concerned

b) Net Profit Margin Ratio in year comes 0.71.

Record shows it becomes 0.76 in the year 2008.
It shows the improvement in overall operation of the firm.

3) Turnover Ratio

Fixed Asset Turnover Ratio or Sales to Fixed Assets = Net Sales/ Net Fixed
Assets

Net Fixed Assets= Fixed Assets Depreciation

Fixed Assets=1090791713
Depreciation=42765395.68
Net Sales= 186776581.43

Hence,
Fixed Assets Turnover Ratio in year 2007=0.178
Records shows that the Ratio in year 2008= 0.183

115

It shows that the Fixed Assets are used more efficiently with respect to the
previous year.

ALL THESE RESULTS SHOWS THAT THERE IS ALL AROUND

IMPROVEMENT IN THE PERFRMANCE OF INDIA GLYCOLS LIMITED
GORAKHPUR IN THE YEAR 2008 WITH RESPECT TO THE OVERALL
PERFORMANCE IN THE YEAR 2007.

116

117

BIBILOGRAPHY

1) The account section of INDIA GLYCOLS LIMITED GORAKHPUR,

2) The press release of INDIA GLYCOLS LIMITED GORAKHPUR,

3) Various sites from GOOGLE,

4) Maheshwari S.N. And Maheshwari S.K. - A text book of Accounting For

Management (Vikas, 1st Edition),

5) Ghosh T.P. Financial Accounting for Managers (Taxman, 3rd Edition),

6) Mukherjee Financial Accounting for Management (TMH, 2nd Edition)

118