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INTRODUCTION
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INTRODUCTION
Finance is the life-blood of business. It is rightly termed as the science of money. Finance is very
essential for the smooth running of the business. Finance controls the policies, activities and
decision of every business. Finance may be said to be the circulatory system of the economic
body,making possible the needed co-operation between the many units of activity.
Finance is that business activity which is concerned with the organization and conversation of
capital funds in meeting financial needs and overall objectives of a business enterprise.
Wheeler
Working capital plays an important role in the day to day activities of a business enterprise.
The working capital management intimately links the functions of every department in the
business concern If working capital is mismanaged it may affect the existence of the business
itself. It is concerned with the management of the current assets as well as the management of
the total working capital. By analyzing the management of the working capital it can maximize
companys leverage and potential for revenue generation. Every business needs find for two
purposes; for its establishment and to carry out the day-to-day operations. Working Capital
ratters to that part of firms capital which is required for financing the short term assets such as
cash, marketable securities, debtors and inventories.
The short term financial strength of the company was analyzed by the ratios like current ratio,
quick ratio, debtors turnover ratio, creditors turnover ratio, stock turnover ratio, working capital
turnover ratio etc...The working capital of an organization has the implication on both
profitability and liquidity. The elements of working capital such as inventories, trade debtors,
stock-in-trade, cash and bank balance etc must be managed effectively for obtaining the
desired result. Efficient management of financial resources and analysis of financial results are
prerequisites for success of an enterprise. Here working capital is one of the major areas of
financial management. Managing of working capital implies the management of current assets of
the company like cash, inventory, accounts receivable, loans and advances and current liabilities
like sundry creditors, interest payments and provision.
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1.1 STATEMENT OF THE PROBLEM
A business is an economic activity which needs funds not only for long term expansion but also
for meeting its day to day expenses. Funds are invested in current asset for meeting day to day
needs is called working capital or short term capital. The need for working capital arises because
of the time gap between the production and realisation of cash from sales. Management of
working capital is concerned with the problem that arises in attempting to manage current assets,
current liabilities and their relationship. Working Capital management has a vital importance in
every business towards the profitability, liquidity, structural strength; smooth working of the
business enterprise etc. If a business need to run smoothly it need sufficient amount of working
capital. Thus the study concentrate on the examining of the working capital position to satisfy its
short term objectives and also to study how effectively firm manages its working capital.
The primary objective of the study is to analyze the of working capital utilization of the company
for the last 5 years.
The scope of the study is to analyze how efficiently the working capital the working capital of
the company is utilized and to know the financial position of the company for the past five years
(2010-2011 to 2014-2015) and to suggest feasible solutions to improve companys profitability
in future years.
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1.4 RESEARCH METHODOLOGY:
Here I use descriptive and analytical research for analysis on working capital
management in KSE LTD. Descriptive analysis mainly used for explain the theoretical
background of working capital management and about the company. For the easiness of analyse
the working capital management and derived the objective, analytical method are mostly
adopted.
The study was analytical in nature and used primary and secondary data.
These data are first hand information collected through interviews with the officials and
staffs in the Finance department of the company.
These data are collected from Annual reports from 2010-2011 to 2014-2015 and other
published documents of the company.
Mainly data are in two primary data and secondary data. Here used both primary and
secondary data. They are from the staffs of the company and from the published sources such
as five years financial statement of the company, company journals and magazines, annual
report, working capital management books etc.
Profit and loss account reveals the income and expenditure of the company. Balance Sheet
reveals the financial position of the organization. Those two statements are prepared by the
highly qualified and experts with the help of available information or data.
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LIMITATIONS OF THE STUDY:
The project was bound for a short period, thus time is a limiting factor.
Study is based on secondary data, so errors are possible.
The study covers only the accounting period of 5 years.
The analysis is made only on the basis of the available data of annual reports of KSE
ltd.
Certain confidential information regarding study was not available and the analysis and
interpretations are subject to limitations.
The information provided by the people in the organization may not be complete.
There was a considerable amount of inhibition on part of staff for providing information.
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1.6 CHAPTER SCHEME
Chapter 1
This chapter is dealing with the introduction, it consist of the statement of the problem, objective
and scope of the study.
Chapter 2
This chapter deals with the industrial profile which consists of global scenario, national scenario
and state scenario and also the company profile, department details, structure etc.
Chapter 3
This chapter deals with the literature review conducted for the study.
Chapter 4
Chapter 5
This chapter exhibits the Research Methodology, data analysis and interpretation done.
Chapter 6
Chapter 7
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CHAPTER 2
INDUSTRY PROFILE
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INDUSTRY PROFILE:
The solvent industry has achieved a phenomenal progress and at present there are 520 units
having overall oil cake or oil seed processing capacity of more than 9.9 million/year. The solvent
extraction plays important role in the oil industry. Solvent extraction in India was started at 1945;
it had to struggle for more than 20 years to establish it.
In the year 1960s there was a crisis in the coconut oil extraction industry in Kerala. After the conversion from
wooden ghanis to rotaries the cost of production has increased considerably. By using the new
method, there were able to extract more oil from coconut cake. Earlier 20% of the oil was
retained in the coconut cake, now it has reduced to 12%.
When oil industry in other parts of the country was thriving, in Kerala it was struggling. So they
understood the need for modernizations of their mills.
At the time Dr.P.S.Lokanathan committee setup to study the feasibility of starting new industries
in Kerala, recommended the establishment of 3 solvent plants in Kerala and it was also proposed
that one should be located in Thrissur itself.
Cow had a significant place in ancient India. Since mans many essentials were met by the cow; she was
worked shipped as Gomatha. Eventually breeding of cows became one of the most profitable jobs
for man. India is the country which has the largest number of cows but they produce considerably less
amount of milk. The main reason is lack of nutrients. In early days, grass was considered as the main
cattle feed. But now the attitude is changed. Initially cow was given grass and straw.
As man became more and more civilized, he invented advanced cattle feed. As cattle feed
industry flourished in the country, cattle feed started to be produced in bulk, in factories.
Cattle feed industry even though had initial teething troubles due to lack of knowledge
and indifferences from the part of authorities; now is in the growth phase.
Growth in milk sector has occurred mainly through co-operative efforts. The milk collection
centers started through co-operative effort and collected milk from villagers in quantities as
small as liter and gradually started to provide other services to farmers, including education,
artificial insemination, and veterinary health support and feeding. Small farmers became
prosperous, loan facilities were made available through banks, and member farmers started to
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share the profits from co-operatives .Co-operative society also set up their own computerized
feed plant. They began to own modern computerized as well equipped milk processing plants
from which they produce and market pasteurized milk, butter oil, chocolate, ice-cream from
milk, sweets, which are very popular with Indian consumers. Today the feed production capacity
of the co-operative society is about 0.7million tones per year.
The solvent industry has achieved a phenomenal progress and at present there are 520 units
having overall oil cake or oil seed processing capacity of more than 25.6 million tons per year,
which included rice bran processing capacity of more than 9.9 million per year. The solvent
extraction plays the important role in the oil economy. Solvent extraction in India was started in
1945. It had to struggle for more than 20 years to establish it.
The animal feed industry has developed since the beginning of the 20,h century, initially
supplying feed stuffs only for ruminants and later, as demand developed, also for pigs and
poultry. Many of the raw materials were imported, including cereals such as wheat barley and
maize, and proteins from groundnuts, linseed, cottonseed and fishmeal. Some home produced
materials were also used, generally by products of the food industry. These included what feed
left over from flours manufacture, oilseed cakes and meal from the manufacture of margarine
and cooking oils. It can be seen as the compound feed production for cattle increased between
1974 and 1983. This increase was influenced by the financial incentives for dairy farmers to
produce as much milk as possible, thereby requiring large volume of feed for their cattle. In
1986, there were 374 feed companies, compared with 407 in 1979.
The Indian feed industry is about 35 years old. The quality standards of Indian feeds are
high and up international levels. Raw materials for feed are adequately available in India. The
industrys production is about 3 million tones, which represents only 5% of the total potential,
and feed experts are not very high. The feed industry has modem computerized.
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Plants and the latest equipments for analytical procedures and least-out ration formulation and it
employ the latest manufacturing technology. In India, most research work on animal feeds is
practical and focuses on the Use of by-products, the up-grading of ingredients and theenhancing
productivity, India to open up and invite investment from multinationals, liberalize imports,
reduce government expenditure and remove public sector businesses.
Feed manufacturing on a commercial and scientific basis started around 1965 with the setting up
of medium sized feed plants in Northern and Western India. Feed was produced mainly to
cater to the needs of dairy cattle. India is currently self-sufficient in livestock feed and depends
on imports. Instead the country exports large quantity of solvent extracted meals, which is major
source of foreign exchange earnings. BIS have produced guidelines for feed standards and
industry also has its own guidelines. Currently, there is no compulsion to use BIS standards, but
the Central Government has been advising states to introduce their own regulatory standards.
There is no shortage of compound animal feeds anywhere in the country. CLFMA was formed in
June 1967 as an association of feed manufacturers and associated industries such as ingredient
suppliers, importers, feed additive manufacturers, consultants, hatcheries and milk cooperatives
and feed machinery manufacturers. The objectives of CLFMA are to promote the concept of
nutritionally balanced compound feed; to promote, assist, organize and coordinate scientific
research in the field of animal nutrition; to conduct, assign, sponsor or co-sponsor surveys and
studies; to collect, classify and circulate information related to animal feed to its members and
government; to offer suggestions to government in formulating policies; and to impart training to
livestock farmers, feed mill personnel, veterinarians, students and others. The office-bearers of
CLFMA are elected and operate for a maximum of two years at one level.
The Indian economy is growing at the rate of 6 to 8 percent per annum. The livestock industry in
India is the second largest contributor to gross domestic product (GDP), after agriculture, and
accounts for 9 percent of the total. Consumption is likely to increase as follows: per capita milk
from 240 to 450 g per year; per capita eggs from 40 to 100 per year; and per capita broiler meat
from 1 000 to 2 000 g per year.
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A major change is occurring in India on the economic front. The country has adopted a model
that lies midway between liberal and public sector production, but growth has been affected by
the poor performance of most of the public sector units, rising government costs and fiscal
deficit, and the economy has suffered. A process of liberalization was set in motion by the
government and has been implemented for the last eight to ten years. This has caused
Today, dairy industry in the state is on the growth path and that compound animal feed,
especially based on coconut, would have a great demand. Use of compound cattle feed could go
up from the present six lakh tones a year to at least 15 lakh tones in the near future. Due to the
change in lifestyle, consumption of milk and milk based products would go up and also through
intensive promotional methods cattle feed use could be increased.
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2.4 COMPANY PROFILE:
Place :-Irinjalakuda
District :-Thrissur
State :- Kerala
Country :- India
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KSE Limited an ISO 9001-2000 certified company is having an annual sales turnover Rs. 1000
cores; Irinjalakuda branch is the head office of the company. Only the cattle feed production is
running in Irinjalakuda plant with a production capacity of 500 tones per day.
The company has a track record of 53 years in this field. The product is being exported to Tamil
Nadu. KSE business philosophy is to deliver goods of the HIGHEST QUALITY at the MOST
COMPETITIVE PRICES to the ENTIRE SATISFACTION of our customers.
In 1963, KSE Limited was established to Indian Companies Act, 1956. It was registered as a
public limited company on 25th September, 1963. The former roasting of the company was held
on 20th October 1963 its former production was started in 972 with a capacity of 40 tones per
day. In 1980 the capacity of the plant was raised to 60 tonnes per day. In 1983, fully automatic
cattle feed plant was added with 120 tonnes per day capacity. By 1992, and the capacity of
Solvent Extraction Plant was further increased to 100 tonnes per day.
In 1987, the cattle feed capacity was increased to 180 tonnes per day. The companys seconds
production unit with a capacity of 150 tonnes per day. Solvent Extraction commenced operation
at Swaminathapuram, Dindigul District of Tamil Nadu in 1988 and 1989 respectively. The cattle
feed capacity was subsequently increased to 180 tonnes per day.
The third cattle feed plant of the company started production at Vedagiri in Kottayam District of
Kerala in 1995. This plant is now working on 3 shifts producing around 150 tonnes per day. This
plant has a basic installed capacity to go up to 240 tonnes per day. The plants at Irinjalakuda and
Vedagiri are fully automatic and key manufacturing operations are controlled by microprocessor.
Vedagiri project costing around Rs. 6 Corers was fully financed out of internal sources of the
company.
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Company put up a vegetable oil refining plant at Irinjalakuda at a cost of Rs. 1 crore in
1995.project was also fully financed from internal accruals. The company is refining Solvent
extraction Coconut Oil and expeller sunflower oil in the refining plant.
India is predominantly an agricultural country. It is the very back bone of her economic system.
Agriculture today provides livelihood to 63% of the labor force directly. '' ' Indias population
below the poverty line lives in rural areas and is directly or depending on agriculture. Agriculture
contributes almost 28% of GDP. It accountsfor about 18% of total value of India's exports. This
economic development of India depends upon development of agriculture in India.
KSE Ltd is a brand leader in the cattle feed, wherever its products are available. KSE produces
high quality products. They are all for the ultimate benefit of the common man in j| India. Top
priority should be given to the growth and development of this industry.
The Board invariable meets in every month and evaluates the performance of the company. All
major policies and business decisions of the company are placed before the Board and decisions
are taken after due deliberation and with mutual consensus. At the management committee with
five directors as its members is functioning to asset the board, which is regularly meeting, twice
in a month, in order to review the operations of the company and study the proposals that are to
be placed before the Board and make recommendations thereon.
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Capital structure:
KS supreme Vesta
flavors
pellets
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Raw Material
Some of the material used by the company for the production of cattle feed:
1984 : The Solvent Extraction Plant capacity of Irinjalakuda increased to 80 MTs / day.
1987 : Cattle feed Plant at Irinjalakuda capacity increased to 180 MTs per day.
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1989 : Solvent Extraction Plant of Swaminathapuram unit with a capacity of 120
MTs per day started production.
1994 :Keyes Forte, the new feed supplement for cattle introduced.
Cattle feed production capacity at Swaminathapuram increased to 180 MTs per
day.
1996 : 240 TPD cattle feed Plant at Vedagiri in Kottayam District started operation.
Company renamed as KSE Limited. (Formerly Kerala Solvent Extractions
Limited)
1998 : Company acquired its fourth manufacturing unit at Palakkad for
manufacturingCattle feed.
2000 : Company started production and marketing of Pasteurized Milk and Milk
products from Konikkara Dairy, TrichurDistrict,Kerala and Thalayuthu Dairy,
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2002 : Cattle feed production at Irinjalakuda unit increased to 195 MTs per day .
'VESTA' Ice Cream launched.
2004 : Acquired Land from KINFRA for starting the new project of 200 TPD Solvent
Plant an d 100 TPD Oil Physical Refining Plant at Kinfra Park, Koratty.
ISO 9001:2008 Accreditation for Irinjalakuda.
2005 : Cattle feed Production capacity at the Irinjalakuda unit increased to 210 MTs
Per Day.Company acquired property at Mysore. ISO 9001:2008
accreditation for edagiri and Swaminathapuram units.
2009 : Cattle Feed production capacity at Swaminathapuram increased to 200 MTs Per
Day. Commissioned Fractionation Plant at Koratty.
Commenced 500 TPD Fully State-of-the-Art German Technology Animal Feed
Plant at Irinjalakuda.
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2.8 DEPARTMENTAL DETAILS:
Security : 7 nos
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KSE ltd consists of mainly 6 departments. Each department role is very important to achieve
the companys objectives. The different departments are:
Finance Department
Marketing Department
Purchase Department
Personnel Department
Production Department
Quality Control department
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1) FINANCE DEPARTMENT:
Finance plays a key role in all the activities of business. It may be defined as the service
of money. It deals with the principles and methods of obtaining money from those who have
saved it and of administrating it by those who control it.
The share capital of KSE Ltd comes to 320 lakh from around 6500 shareholders. Its
shares are listed in stock exchanges of Mumbai, Chennai, Cochin. The total turnover during the
year grew by 14% compared to the previous year. The increase in production of cattle feed was
21% and that of ice cream was 30%. The company focusing on cost competitiveness and also is
in search of new product lines to further improve its overall performance.
The company accepts fixed deposit from the public at the rate of 15% per annum. The
company keeps book such as purchase daybook, sales daybook, cashbook and bankbook.
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Department Structure:
Executive Officer
Officer
Junior Officer
Senior Assistant
Office Assistant
Clerk
figure 2.1
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Accounting policies:
1. Accounts in KSE Ltd are prepared under historical cost convention on accrual basis
unless otherwise specifically stated in the notes to account.
2. Fixed assets
a) Assets put to use have been stated at cost less depreciation.
b)Assets not put to use have been stated at cost.
3. Depreciation
Depreciation on fixed assets has been provided on written down value method at the rates
prescribed in the company act 1956.
4. Investments
Long-term investments are stated at cost less provision, if any .for permanent elimination
in the value of such investment.
5. Inventories
Inventories as at the close of the year are valued at lower of cost or net Realizablevalue.
Contribution to provident fund and employee welfare fund is charged to profit andloss
account.
Gratuity: the accruing liability towards gratuity of employees is covered by the group gratuity
assurance scheme of life insurance Corporation of India and the contribution due in accordance
with the scheme is charged.
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2) MARKETING DEPARTMENT:
Marketing is the process of planning and executing the consumption, pricing, promotion
and distribution (4 ps) of ideas, goods and services to create exchange that satisfy individual and
organizational objectives.
The story of success of KSE Limited would reveal the excellence of the marketing brains
of the company. During 1976, when KS cattle feed was launched in the Kerala market, the
market was in the hands ofGodrej and Tata the big boys. The transformation from that level
to the market leader of the south and to the second largest seller of cattle feed in the country tells
the entire story. The fact that KSE Ltd could export cattle feed adds another feather to its cap.
The milk producing environment in Kerala is entirely different from other parts of the
country. The lack of graze lands has limited the option of the cattle growers. They are forced to
depend on the compound cattle feeds that are available in the market. Because of this reason,
Kerala is the most potential market in the country. The fanner is so watchful that even the
slightest variation in quality would be noted and responded. Reduced quality affects in different
forms- reduced milk quality, deterioration in the health of the cattle etc.
Thus quality is the prime element that determines where the product should stand i.e. the
product would be sold only if it maintains quality consistently. KSE ltd has always been
successful in this regard and has obtained the results.
The marketing department is headed by a marketing manager. The company has a large
dealer network which is directly under the control of the marketing department. All planning and
strategy formation regarding the marketing activities of the company are devised, implemented
and monitored by this department.
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Department Structure:
Manager (Sales)
Senior Executive
Executive
Officer
Junior Officer
Senior Assistant
Office Assistant
Clerk
figure 2.2
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Functions Of Marketing Department:
Seeking: It is the first function. The purpose of seeking is to discover the customer and
customer needs. The marketing opportunity is revealed through an analysis of the
environment.
Matching: Marketing is matching process. Customer demand has to be matched with
organizational resources environmental limitations such as competition, government
regulation, general economic conditions and so on.
'Programming : The marketing programme called the marketing mix, covering product,
price, place and promotion strategies will be formulated and implemented to accomplish
the twin objectives of customer satisfaction and profitability.
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iii. Duties and responsibilities of assistant Manager-Customer Service
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3) PURCHASE DEPARTMENT:
There are about 15 to 20 ingredients that are used for the manufacture of cattle feed. Not
all there ingredients are used at one go. The company nutritionist creates a formula according to
the availing to the availing of the material and the plant operators are instructed accordingly. The
quality of cattle feed is always maintained even if a particular ingredient is not available in the
market. Purchase department in KSE Ltd mainly concentrate on the purchase of raw materials
for cattle feed. They purchase stock normally for the 20 days. They take stock report daily and
purchase on the basis of material required in production.
The nutritionist prepares the formula for production and requirement of raw material depends on
it. He will pare the formula by considering the quality price of raw materials etc. They place
order on the basis of funds, godown capacity, and availability of labor, space allotted to each
material, etc...
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Department Structure :
Asst. Manager
Senior Executive
Executive
Officer
Junior Officer
Office Assistant
Clerk
figure 2.3
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Functions Of Purchase Department:
b. Contact brokers
To contact brokers all over India to know about market price.
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2) Duties of the office assistant
a. Accepting and editing purchase requests from various departments, corresponding with
suppliers for quotations.
b. Preparing purchase orders and performing buying duties.
c. Help in accounting and accounts payable departments prepare accurate supplier reports.
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PURCHASE PROCEDURE IN SOLVENT PLANT:
Selection of suppliers
Receiving and
inspecting materials
figure 2.4
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4) PERSONNEL DEPARTMENT:
Personal Department is the main and the most important department of a manufacturing
concern. KSE is proud of its well co-ordinated labour force. The personal department was seen
as a place where the lesser productive employees could be placed with minimal damage to the
organization ongoing operation. Personal as an activity were seen as a necessary but unimportant
part of the organization.
Department Structure
Personnel Manager
Asst. Manager
Senior Executive
Executive
Senior Officer
Executive Officer
Executive Officer
Junior Officer
Executive Officer
Figure 2.5
Senior Assistant
Executive Officer
Office Assistant
Executive Officer
Executive Officer
Clerk
Executive Officer
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Executive Officer
Executive Officer
5) PRODUCTION DEPARTMENT:
Department Structure:
Shift Engineer
Tally Clerk
Electrical Boiler Store in Maintenance Operators
supervisors Supervisor Charge in Charge
Senior Godown
Asst. Assistant
Electricians Boiler Helper Maintenance Operators
Attendant Fitter
Godown
Electrical Plant Assistant
Attendant Apprentices Attendants Attendants
Unskilled workers
Apprentices Figure2.6
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Functions of production department
Production process
Employee supervision
Maintenance of machines
Quality assurance
Production plan
Production control
Maintaining a hygienic work place
Management of different shift of employees
Maximizing the production with minimum resource
In KSE, production takes place in cattle feed plant
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3) Duties and responsibilities of assistant plant manager
a. Responsible for plant operations
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10) Duties and responsibilities of Electrical Foreman:
MMCP TECHNOLOGY:
The KSE Limited uses the MMCP Technology for its production process, i.e., milling,
mixing, cooking and pelleting.
MILLING
MIXING
MIXING
COOKING
PELLETING
Figure 2.7
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1. MILLING:- this is used for ensuring that all granules are grinded, screened 3mm sieve.
The materials fed into grinder are powered and it passes through the screen provided at
the bottom side of the grinding chamber. Two hammer malls at 30 tonnes per hour
together are used.
2. MIXING: The raw material will be mixed thoroughly by using horizontal mixes.
Capacity of this loiter is 6mm.
3. COOKING: The steam for cooking is produced using 3 million tone boiler. The mixer
or homogenizer carry out a strong mixing while the mash is moved forward and added
with dry saturated steam. The cooking is carried at a temperature of 80C using a high
pressure dry saturated steam.
4. PELLETING: The pellet mill dye by rotating the mixture of mash and steam towards
the roller, which press it and consequently compel it to pass through the hole of the dye.
It increases the density of the mixture, which together with the heat generated by the
saturated steam facilitates the extraction of pellets. Two pellet machines are there with 15
million tones per hour capacity each.
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Production process description:
Batch Weighting
Batch Grinding
Molasses mixing
MASH
Pellestising
Bagging
Quality check
Despatch
Figure 2.8
39
Raw materials used
40
6) QUALITY CONTROL DEPARTMENT:
The success of a company depends upon the quality of its product. Quality is the totality. Quality is the
totality of features and characteristics of a product and service that bear on its ability to satisfy stated or
implied needs. Total quality is the key to value creation and customer satisfaction. The quality control
department has to play an important role in the success of a company through innovating quality product.
It aims at total quality control. It begins right from the purchase of raw materials to after sales
quality check. Uncompromising quality is the main feature of KSE.
The quality control department ensures the quality of cattle feeds through testi
ng the products at different stages. Statistical sampling techniques are applied for quality control
tests. The quality control tests include the raw materials inspection, in process inspection, finished
products inspection and finally after sales quality control.
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Departmental Structure
Nutritionist
Assistant Manager
Chemist
Junior Chemist
Lab Attendants
Figure 2.9
42
Functions of quality control department
Ensure maintenance of proper inspection and test status at stages of manufacturing and
testing of items in time with documented procedure.
Developing technical specification for raw materials, in process materials and product.
Customer complaint processing including adverse incident reporting.
Coordinating data analysis and interpretation.
Coordinate the preparation of registration and the other quality documents.
Designing and developing art work (labeling").
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4) Duties and responsibilities of lab assistant
a. Sets up and operates laboratory equipment in preparation for specimens examinations.
b. Opens, separates, numbers and arranges specimens for laboratory examination and trace
results.
c. Maintain a clean and sanitary work area in accordance with standard laboratory practice
and procedures.
Quality control activities Incoming raw material Production process In finished products
Raw material must maintain its specification. It must contain required quality of protection, fat
fiber, moisture, etc... any increase or decrease in these items will adversely affect the quality.
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2.12 ORGANIZATIONAL CHART:
Board of Directors
Chairman
Managing Director
Executive Directors
Assistant Manager
Other Employees
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CHAPTER 3
LITERATURE REVIEW
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LITERATURE REVIEW:
The purpose of this chapter is to present a review of literature relating to the working capital
management. Although working capital is an important ingredient in the smooth working of
business entities, it has not attracted much attention of scholars. Whatever studies have
conducted, those have exercised profound influence on the understanding of working capital
management good number of these studies which pioneered work in this area have been
conducted abroad, following which, Indian scholars have also conducted research studies
exploring various aspects of working capital. Special studies have been undertaken, mostly
economists, to study the dynamics of inventory investment which often represented largest
component of total working capital. As such the previous studies may be grouped into three
broad classes (1) studies conducted abroad, (2) studies conducted in India, and (3) studies
relating to determine of inventory investment.
Studies adopting a new approach towards working capital management are reviewed here:
Sagan in his paper (1955),1 perhaps the first theoretical paper on the theory of working capital
management, emphasized the need for management of working capital accounts and warned
that it could vitally affect the health of the company. He realized the need to build up a theory
of working capital management. He discussed mainly the role and functions of money manager
inefficient working capital management. Sagan pointed out the money managers operations
were primarily in the area of cash flows generated in the course of business transactions.
However, money manager must be familiar with what is being done with the control of
inventories, receivables and payables because all these accounts affect cash position. Thus,
Sagan concentrated mainly on cash component of working capital. Sagan indicated that the
task of money manager was to provide funds as and when needed and to invest temporarily
47
surplus funds as profitably as possible in view of his particular requirements of safety and
liquidity of funds by examining the risk and return of various investment opportunities. He
suggested that money manager should take his decisions on the basis of cash budget and total
current assets position rather than on the basis of traditional working capital ratios. This is
important because efficient money manager can avoid borrowing from outside even when his
net working capital position is low. The study pointed out that there was a need to improve the
collection of funds but it remained silent about the method of doing it. Moreover, this study is
descriptive without any empirical support.
Realising the dearth of pertinent literature on working capital management, Walker in his
study (1964)2 made a pioneering effort to develop a theory of working capital management by
empirically testing, though partially, three propositions based on risk-return trade-off of
working capital management. Walker studied the effect of the change in the level of working capital
on the rate of return in nine industries for the year 1961 and found the relationship between the level of
working capital and the rate of return to be negative. On the basis of this observation, Walker
formulated three following propositions:
Proposition I If the amount of working capital is to fixed capital, the amount of risk the firm
assumes is also varied and the opportunities for gain or loss are increased.
Walker further stated that if a firm wished to reduce its risk to the minimum, it should employ
only equity capital for financing of working capital; however by doing so, the firm reduced its
opportunities for higher gains on equity capital as it would not be taking advantage of leverage.
In fact, the problem is not whether to use debt capital but how much debt capital to use, which
would depend on management attitude towards risk and return. On the basis of this, he
developed his second proposition.
Proposition II The type of capital (debt or equity) used to finance working capital directly
affects the amount of risk that a firm assumes as well as the opportunities for gain or loss.
Walker again suggested that not only the debt-equity ratio, but also the maturity period of debt
would affect the risk-return trade-off. The longer the period of debt, the lower be the risk. For,
management would have enough opportunity to acquire funds from operations to meet the debt
48
obligations. But at the same time, long-term debt is costlier. On the basis of this, he developed
his third proposition:
Proposition III The greater the disparity between the maturities of a firms debt instruments
and its flow of internally generated funds, the greater the risk and vice-versa.
Thus, Walker tried to build-up a theory of working capital management by developing three
prepositions. However, Walker tested empirically the first proposition only. Walkers Study
would have been more useful had he attempted to test all the three propositions. Weston and
Brigham (1972)3 further extended the second proposition suggested by Walker by dividing
debt into long-term debt and short-term debt. They suggested that short-term debt should be
used in place of long-term debt whenever their use would lower the average cost of capital to
the firm. They suggested that a business would hold short-term marketable securities only if
there were excess funds after meeting short-term debt obligations. They further suggested that
current assets holding should be expanded to the point where marginal returns on increase in
these assets would just equal the cost of capital required to finance such increases.
Van Horne in his study (1969)4, recognizing working capital management as an area largely
lacking in theoretical perspective, attempted to develop a framework in terms of probabilistic
cash budget for evaluating decisions concerning the level of liquid assets and the maturity
composition of debt involving risk-return trade-off. He proposed calculation of different
forecasted liquid asset requirements along with their subjective probabilities under different
possible assumptions of sales, receivables, payables and other related receipts and
disbursements. He suggested preparing a schedule showing, under each alternative of debt
maturity, probability distributions of liquid asset balances for future periods, opportunity cost,
maximum probability of running out of cash and number of future periods in which there was a
chance of cash stock-out. Once the risk and opportunity cost for different alternatives were
estimated, the form could determine the best alternative by balancing the risk of running out of
cash against the cost of providing a solution to avoid such a possibility depending on
managements risk tolerance limits. Thus, Vanhorne study presented a risk-return trade-off of
working capital management in entirely new perspective by considering some of the variables
probabilistically. However, the usefulness of the framework suggested by Vanhorne is limited
49
because of the difficulties in obtaining information about the probability distributions of liquid-
asset balances, the opportunity cost and the probability of running out of cash for different
alternative of debt maturities.
Welter, in his study (1970)5, stated that working capital originated because of the global delay
between the moment expenditure for purchase of raw material was made and the moment when
payment were received for the sale of finished product. Delay centres are located throughout
the production and marketing functions. The study requires specifying the delay centres and
working capital tied up in each delay centre with the help of information regarding average
delay and added value. He recognized that by more rapid and precise information through
computers and improved professional ability of management, saving through reduction of
working capital could be possible by reducing the length of global delay by rescuing and/or
favourable redistribution of this global delay among the different delay centres. However,
better information and improved staff involve cost. Therefore, savings through reduction of
working capital should be tried till these saving are greater or equal to the cost of these savings.
Thus, this study is concerned only with return aspect of working capital management ignoring
risk. Enterprises, following this approach, can adversely affect its short-term liquidity position
in an attempt to achieve saving through reduction of working capital. Thus, firms should be
conscious of the effect of law current assets on its ability to pay-off current liabilities.
Moreover, this approach concentrated only on total amount of current assets ignoring the
interactions between current assets and current liabilities. Lambrix and Singhvi(1979)6
adopting the working capital cycle approach to the working capital management, also
suggested that investment in working capital could be optimized and cash flows could be
improved by reducing the time frame of the physical flow from receipt of raw material to
shipment of finished goods, i.e. inventory management, and by improving the terms on which
firm sells goods as well as receipt of cash. However, the further suggested that working capital
investment could be optimized also (1) by improving the terms on which firms bought goods
i.e. creditors and payment of cash, and (2) by eliminating the administrative delays i.e. the
deficiencies of paper-work flow which tended to extend the time-frame of the movement of
goods and cash.
50
Warren and Shelton (1971)7 applied financial simulation8 to simulate future financial
statements of a firm, based on a set of simultaneous equations. Financial simulation approach
makes it possible to incorporate both the uncertainty of the future and the many
interrelationships between current assets, current liabilities and other balance sheet accounts.
The strength of simulation as a tool of analysis is that it permits the financial manager to
incorporate in his planning both the most likely value of an activity and the margin of error
associated with this estimate. Warren and Shelton presented a model in which twenty
simultaneous equations were used to forecast future balance sheet of the firm including
forecasted current assets and forecasted current liabilities. Current assets and current liabilities
were forecasted in aggregate by directly relating to firm sales. However, individual working
capital accounts can also be forecasted in a larger simulation system. Moreover, future
financial statements can be simulated over a range of different assumptions to portray inherent
uncertainty of the future.
Cohn and Pringle in their study (1973)9 illustrated the extension of Capital Asset Pricing
Model (CAPM)10 for working capital management decisions. They tried to interrelate long-
term investment and financing decisions and working capital management decisions through
CAPM. They emphasized that an active working capital management policy based on CAPM
could be employed to keep the firms shares in a given risk class. By risk, he meant
unsystematic risk, the only risk deemed relevant by CAPM. Owing to the lumpy nature for
long-term financial decisions, the firm is continually subject to shifts in the risk of its equity.
The fluid nature of working capital, on the other hand, can be exploited so as to offset or
moderate such swings. For example they suggested that a policy using CAPM could be adopted
for the management of marketable securities portfolio such that the appropriate risk level at any
point in time was that which maintains the risk of the companys common stock at a constant
level. Similarly,
Copeland and Khoury (1980)11 applied CAPM to develop a theory of credit expansion. They
argued that credit should be extended only if the expected rate of return on credit is greater than
or equal to market determined required rate of return. They used CAPM to determine the
required rate of return for the firm with its new risk, arising from uncertainty regarding
51
collection due to the extension of credit. Thus, these studies show how CAPM can be used for
decisions involved in working capital management.
One more approach, used mainly in empirical studies, towards working capital management
has been to apply regression analysis to determine the factors influencing investment in
working capital. Different studies in the past have considered different explanatory variables to
explain the investment in inventory. A brief review12 of these studies is important as
regression equation of investment in working capital, in the present study, would be formulated
on the basis of works on investment in inventory.
In inventory investment literature, there is basically one school of thought according to which
firms aim at an optimum or desired stock of inventories in relation to a given level of
output/sales. This is known as acceleration principle. Pioneering work in this field has been
done by Metzler (1941)13. However, his work was mainly on simple acceleration principle
which postulated that firms liked to maintain inventories in proportions to output/sales and they
succeeded in achieving the desired level of inventories in a unit time- period. That is to say,
any discrepancy between the actual level and desired level of inventories is adjusted within the
same time-period. Needless to say, that such an instantaneous adjustment is not a realistic
assumption to make. Modifications, therefore, have been introduced in the literature to provide
for partial adjustment. Goodwin (1948)14 assumed that firms attempted only a partial
adjustment of the discrepancy between the desired stocks as determined by the level of output
and the existing stock.
Darling and Lovell (1965)15 modified Metzlers formulation based on simple acceleration
principle and obtained, the relationship based on flexible accelerator principle. There are
several reasons physical, financial and technical those motivate partial adjustment. Among the
physical factors, mention may be made of procurement lags between orders and deliveries. The
length of such lags is connected with the source of supply, foreign or domestic availability.
Import licensing procedures on account of foreign exchange scarcity could cause further delays
in adjustment. Among the financial factors, cost advantages associated with bulk buying and
higher procurement costs for speedy delivery are also mentioned. Uncertainties in the market
for raw materials and in the demand for final product also play a role in influencing the speed
52
of adjustment. Technically, firms like to make sure that changes in demand are of a permanent
character before making full adjustment. The acceleration principle has great relevance in
inventory analysis than in the analysis of fixed investment, as there are limits to liquidate fixed
capital in the face of declining demand.
Other variables influencing inventories have been introduced in the literature in the context of
accelerator model. Rate of interest is used as a proxy for the opportunity cost of carrying stocks
or as a measure of the cost of funds needed to hold inventories. It has been found significant in
the studies of Hilton (1976)16 and Irwin (1981)17. Time-trend is expected to be important
because inventories generally accumulate with the expansion of economic activities of the
company. Anticipated price changes, measured by changes in wholesale price index of
inventories, are taken as an explanatory variable to capture speculative element in inventory.
This suggests a positive relationship between price changes and inventory. An increase in sales
is expected to increase the demand for stocks to meet orders regularly. An increase in capacity
utilization is also expected to increase the demand for stock by increasing the demand for raw
materials and increasing the inventories of finished goods. Thus, the variable, capacity
utilization, is postulated to have a positive coefficient in the equation.
Abramovitz (1950)18 and Modigliani (1957)19 highlighted the impact of capacity utilization
on inventory investment. Existing stock of inventories is expected to take account of adjustment
process to the desired levels. Thus the variable, existing stock of inventories, is postulated to be
negatively related with the desired stock. The ratio of inventory to sales may affect inventory
investment positively because a high ratio of stocks to sales in the past suggests the
maintenance of high levels of inventories in the past and thus also calling for high investment in
inventories in the current period.
Metzler (1941)20 and Hilton (1976)21 have found this variable, inventory-sales ratio, to be
statistically significant. Fixed investment is generally expected to affect inventory investment
inversely because of competing demand for the limited funds. However, in case of an
expanding firm, the two components may be complementary. Besides, availability of funds
from retained earnings and external sources, may affect investment decision by providing funds
53
for financing inventory investment. Therefore, retained earnings and flow of debt are postulated
to have positive coefficients.
The studies described so far, are the important studies conducted abroad. A number of studies
on working capital management have been conducted in India also. The following discussion
describes Indian studies.
This part briefly reviews the studies conducted in India in respect of working capital
management in Indian industries.
The first, small but fine piece of work is the study22 conducted by National Council of Applied
Economic Research (NCAER) in 1966 with reference to working capital management in three
industries namely cement, fertilizer and sugar. This was the first study on nature and norms of
working capital management in countries with scarcity of investible resources. This study was
mainly devoted to the ratio analysis of composition, utilization and financing of working capital
for the period 1959 to 1963. This study classified these three industries into private and public
sector for comparing their performance as regards the working capital management. The study
revealed that inventory constituted a major portion of working capital i.e. 74.06 per cent in the
sugar industry followed by cement industry (63.1%) and fertilizer industry (59.58%). The study
observed that the control of inventory had not received proper attention. The inventory control
was mainly confirmed to materials management leading to the neglect of stores and spares. So
far as the utilization of working capital was concerned, cement and fertilizer industry had a more
efficient utilization of working capital. The sugar industry had inefficient utilization of working
capital largely due to the accumulation of stock with the factories. As regards financing of
working capital, the study showed that internal sources had contributed very little towards the
financing of working capital. It was 11.87 per cent in the cement industry, 15.03 per cent in
sugar and 31.25 per cent in fertilizer industry, 17.78 per cent being the average. However, this
study failed to put into sharp focus the various problems involved in the management of specific
working capital accounts.
54
Appavadhanulu (1971)23 recognizing the lack of attention being given to investment in
working capital, analysed working capital management by examining the impact of method of
production on investment in working capital. He emphasized that different production techniques
require different amount of working capital by affecting goods-in- process because different
techniques have differences in the length of production period, the rate of output flow per unit of
time and time pattern of value addition. Different techniques would also affect the stock of raw
materials and finished goods, by affecting lead-time, optimum lot size and marketing lag of
output disposals. He, therefore, hypothesised that choice of production technique could reduce
the working capital needs. He estimated the ratio of work-in-progress and working capital to
gross output and net output in textile weaving done during 1960, on the basis of detailed
discussions with the producers and not on the basis of balance sheets which might include
speculative figures. His study could not show significant relationship between choice of
technique and working capital. However, he pointed out that the idea could be tested in some
other industries like machine tools, ship building etc. by taking more appropriate ratios
representing production technique correctly.
Chakraborty (1973)24 approached working capital as a segment of capital employed rather than
a mere cover for creditors. He emphasized that working capital is the fund to pay all the
operating expenses of running a business. He pointed out that return on capital employed, an
aggregate measure of overall efficiency in running a business, would be adversely affected by
excessive working capital. Similarly, too little working capital might reduce the earning capacity
of the fixed capital employed over the succeeding periods. For knowing the appropriateness of
working capital amount, he applied Operating Cycle (OC) Concept. He calculated required cash
working capital by applying OC concept and compared it with cash from balance sheet data to
find out the adequacy of working capital in Union Carbide Ltd. and Madura Mills Co. Ltd. for
the years 1970 and 1971. He extended the analysis to four companies over the period 1965-69 in
1974 study.25 The study revealed that cash working capital requirement were less than average
working capital as per balance sheet for Hindustan Lever Ltd. and Guest, Keen and Williams
Ltd. indicating the need for effective management of current assets. Cash working capital
requirements of Dunlop and Madura Mills were more than average balance sheet working capital
for all years efficient employment of resources. For Union Carbide Ltd., cash working capital
55
requirements were more in beginning years and then started reducing in the later years as
compared to conventional working capital indicating the attempts to better manage the working
capital. Chakraborty emphasized the usefulness of OC concept in the determination of future
cash requirements on the basis of estimated sales and costs by internal staff of the firm. OC
concept can also be successfully employed by banks to assess the working capital needs of the
borrowers.
Misra(1975)26 studied the problems of working capital with special reference to six selected
public sector undertakings in India over the period 1960-61 to 1967-68. Analysis of financial
ratios and responses to a questionnaire revealed somewhat the same results as those of NCAER
study with respect to composition and utilization of working capital. In all the selected
enterprises, inventory constituted the more important element of working capital. The study
further revealed the overstocking of inventory in regard to its each component, very low
receivables turnover and more cash than warranted by operational requirements and thus total
mismanagement of working capital in public sector undertakings.
Agarwal (1983)27 also studied working capital management on the basis of sample of 34 large
manufacturing and trading public limited companies in ten industries in private sector for the
period 1966-67 to 1976-77. Applying the same techniques of ratio analysis, responses to
questionnaire and interview, the study concluded the although the working capital per rupee of
sales showed a declining trend over the years but still there appeared a sufficient scope for
reduction in investment in almost all the segments of working capital. An upward trend in cash
to current assets ratio and a downward trend in cash turnover showed the accumulation of idle
cash in these industries. Almost all the industries had overstocking of raw materials shown by
increase in the share of raw material to total inventory while share of semi-finished and finished
goods came down. It also revealed that long-term funds as a percentage of total working capital
registered an upward trend, which was mainly due to restricted flow of bank credit to the
industries.
Kamta Prasad Singh, Anil Kumar Sinha and Subas Chandra Singh (1986)28 examined
various aspects of working capital management in fertilizer industry in India during the period
1978-79 to 1982-93. Sample included public sector unit, Fertilizer Corporation of India Ltd.
56
(FCI) and its daughter units namely Hindustan Fertilizers Corporation Ltd., the National
Fertilizer Ltd., Rashtriya Chemicals and Fertilizers Ltd. and Fertilizer (Projects and
Development) India Ltd. and comparing their working capital management results with Gujarat
State Fertilizer Company Limited in joint sector. On the basis of ratio-analysis and responses to a
questionnaire, study revealed that inefficient management of working capital was to a great
extent responsible for the losses incurred by the FCI and its daughter units, as turnover of its
current assets had been low. FCI and its daughter units had high overstocking of inventory in
respect of each of its components particularly stores and spares. Similarly, quantum of
receivables had been excessive and their turnover very low. However, cash and liquid resources
held by FCI and its daughter units had been much lower in relation to operation requirements. So
far as financing of working capital was concerned, long-term funds had been financing a low
proportion of current assets due to rapid increase of current liabilities. The profitability providing
an internal base for financing of working capital had been very low in these undertakings.
Verma(1989)29 evaluated working capital management in iron and steel industry by taking a
sample of selected units in both private and public sectors over the period 1978-79 to 1985-86.
Sample included Tata Iron and Steel Company Ltd. (TISCO) in private sector and Steel
Authority of India Ltd. (SAIL) and Indian Iron and Steel Company, a wholly owned subsidiary
of SAIL, in public sector. By using the techniques of ratio analysis, growth rates and simple
linear regression analysis, the study revealed that private sector had certainly an edge over public
sector in respect of working capital management. Simple regression results revealed that working
capital and sales were functionally related concepts. The study further showed that all the firms
in the industry had made excessive use of bank borrowings to meet their working capital
requirement vis--vis the norms suggested by Tandon Committee.
57
working capital and its components i.e. cash, receivables, inventory, gross working capital and
net working capital, by applying regression analysis. They showed the impact of sales and
interest rate on working capital and its components. When only sales was taken as independent
variable, coefficient of sales was more than unity in all the equations of working capital and its
components showing more than unity sales elasticity and diseconomies of scale. When sales and
interest rate were taken as independent variable, sales elasticity was again more than unity in
demand functions of working capital and its components except cash. So far as capital costs were
concerned, these had negative signs in all the equations but significant only in inventory, gross
working capital and net working capital showing negative impact of interest rates on investment
in working capital and its components. Thus study showed that demand for working capital and
its components was a function of both sales and carrying costs.
58
CHAPTER 4
THEORETICAL ANALYSIS
59
THEORETICAL FRAMEWORK
Whatever may be the organization, working capital plays an important role, as the company
needs capital for its day to day expenditure. Thousands of companies fail each year due to poor
working capital management practices. Entrepreneurs often don't account for short term
disruptions to cash flow and are forced to close their operations.
In simple terms, working capital is an excess of current assets over the current liabilities. Good
working capital management reveals higher returns of current assets than the current liabilities to
maintain a steady liquidity position of a company. Otherwise, working capital is a requirement of
funds to meet the day to day working expenses. So a proper way of management of working
capital is highly essential to ensure a dynamic stability of the financial position of an
organization.
Working capital management is concerned with the problem that arises in attempting manage
the current asset, the current liabilities and the interrelationship that exist between them. The goal
of working capital management is to manage the firms current asset and liabilities in such a way
60
that a satisfactory level of working capital, it is likely to become insolvent and may even be
forced into bankruptcy.
Working capital refers to the part of capital which is available and used for carrying on the
regular business operations. Simply it refers to capital which is required for the day- to-day
running of the business. The important components of the working capital are current asset and
current liabilities. Current assets are those which can be converted into cash with in an
accounting year. It includes cash, bank, debtors, bills receivable, short term loans and advances,
prepaid expenses and money receivable within twelve months. Current liabilities are those
liabilities they can be trade of within one year. It includes creditors, bills receivable, bank
overdraft, short term borrowings, dividend payable, provident fund due, outstanding expenses
and other payments which are due within one year. The working capital is needed for the
purchase of raw materials, for the payments of wages and salaries, to meet the day today
expenses, to provide credit facilities to the customers etc. so the working capital plays an
important role in the functioning of an enterprise.
Working capital can be regarded as life blood of a business. Its effective provision can do much
to ensure the success of a business while its inefficient management can lead not only to loss of
profits, but also to the ultimate downfall of business.
A study of working capital is of major importance to internal and external analysis, because of its
close relationship with the day to day operations of a business. Working capital is that portion of
the assets of a business, which are used in or related to current operations. It is defined as the
excess of current assets over current liabilities. Every business needs funds for two purposes for
its establishment and to carry out its day to day operations.
61
Short Term Funds are also needed for short term purposes for the purchase of wages and
other day to-day expenses etc. These funds are known as working capital. In simple words,
working capital refers to that part of the firms capital which is required for financing short term
or current assets such as cash, marketable securities, debtors and inventories. Funds, thus
invested in current assets keep revolving fast and are being constantly converted into cash and
this cash flows out again in exchange for other current assets. Hence, it is also known as
revolving or circulating capital or short term capital.
Working capital means the funds (i.e.; capital) available and used for day to day operations (i.e.;
working) of an enterprise. It consists broadly of that portion of assets of a business which are
used in or related to its current operations. It refers to funds which aroused during an accounting
period to generate a current income of a type which is consistent with major purpose of a firm
existence. In Accounting:
62
A. BALANCE SHEET CONCEPT
There are two interpretations of working under the balance sheet concept:
Gross Working Capital
Net Working Capital
Gross working capital is the capital invested in total current assets of the enterprise. Current
assets are those assets which in the ordinary course of business can be converted into cash within
a short period of normally one accounting period.
Funds invested in current assets keep revolving fast and are being constantly converted into cash
and this cash flow out again in exchange for other current assets it is known as revolving or
circulating capital. The circular flow concept of working capital is based up on this operating or
working capital cycle of a firm. The cycle starts with the purchase of raw materials and other
resources and ends with the realization of cash from the sale of finished goods. It involves the
purchase of raw materials and stores, its conversion into stock of finished goods through the
work-in-progress with progressive investment of labour and service costs, conversion of finished
stocks into sales, debtors, and receivables and ultimately realization of cash and this cycle
continuous again from cash to purchase of raw materials and so on. The speed/time duration
required to complete one cycle determines the requirements of working capital longer the period
of cycle, larger is the requirement of working capital.
63
Working capital cycle/circular flow concept (fig: 4.1)
CASH
DEBTORS
RAW
MATERIALS
WORK IN
SALES PROGRESS
FINISHED
GOODS
64
4.2 KINDS OF WORKING CAPITAL:
KINDS OF WORKING
CAPITAL
ON THE BASIS
ON THE BASIS OF CONCEPT
OF TIME
REGULAR SEASONAL
WORKING WORKING
CAPITAL CAPITAL
RESERVE
SPECIAL
WORKING
WORKING
CAPITAL
CAPITAL
Fig : 4.2
65
ON THE BASIS OF CONCEPT
Gross working capital.
Net working capital.
There are two types of Permanent or Fixed Working Capital. They are:
66
TEMPORARY OR VARIABLE WORKING CAPITAL
Temporary or variable working capital is the amount of working capital which is required to
meet the seasonal demands and some special exigencies. Variable working capital can be
further classified as seasonal working capital and special working capital. Most of the
enterprises have to provide additional working capital to meet the seasonal and special needs.
There are two types of temporary or variable working capital. They are,
67
Cash discounts:
Adequate working capital also enables a concern to avail cash discounts on the
purchases and hence reduces cost.
Regular supply of raw materials:
Sufficient working capital ensures regular supply of raw materials and continuous
production
Exploitation of favourable market conditions:
If a firm is having adequate working capital then it can exploit the favourable market
conditions such as purchasing its requirements in bulk when the prices are lower and
holdings its inventories for higher prices.
Ability to face crisis:
Adequate working capital enables a concern to face business crisis in emergencies such
as depression because during such period, generally there is much pressure on working
capital.
High morale:
Adequate working capital brings an environment of securities, confidence, high
morale which results in overall efficiency in a business.
.Quick and regular return on investments :
Sufficient working capital enables a concern to pay quick and regular of dividends to its
investors and gains confidence of the investors and can raise more funds in future
Regular payment of salaries, wages and other day to day commitments:
An ample amount of working capital can make regular payment of salaries, wages and
other day to day commitments which raise the morale of employees. Increase their
efficiency, reduces wastage and cost and enhance production and profits.
68
well as short working capital positions are bad for any business. However out of the two, it is the inadequacy
of the working capital which is more dangerous from the point of view of the firm.
Excessive working capital means idle funds which earn no profits for the business and hence the
business cannot earn proper rate of return on its investments.
When there is a redundant working capital it may lead to unnecessary purchasing and accumulation
of inventories causing more chances of theft, waste and losses.
Excessive working capital implies excessive debtors and defective credit policy which may cause
higher incidence of bad debts.
It may result into overall inefficiency in the organization.
Where there is excessive working capital, relations with bank and other financial institutions may not
be maintained.
Due to low rate of return on investment, the value of shares may also form.
The redundant working capital gives rise to speculative transactions
A concern which has inadequate working capital cannot pay its short term liabilities in time
It cannot buy its requirements in bulk and cannot avail of discounts, etc.
It becomes difficult for the firm to exploit favourable market conditions and undertake profitable
projects due to lack of working capital.
The firm cannot pay day to day expenses of its operations and it creates inefficiencies, increases cost
and reduces the profit of the business.
It becomes impossible to utilize efficiently the fixed assets due to non availability of liquid funds.
RequirementsOf working capital depend upon various factors such as nature of business, size of
business, the flow of business activities. However, small organization relatively needs lesser
69
working capital than the big business organization. Following are the factors which affect the
working capital of a firm:
Nature of Business:
The requirement of working capital depends on the nature of business. The nature of business
is usually of two types: Manufacturing Business and Trading Business. In the case of
manufacturing business it takes a lot of time in converting raw material into finished goods.
Therefore, capital remains invested for a long time in raw material, semi-finished goods and
the stocking of the finished goods.
Consequently, more working capital is required. On the contrary, in case of trading business
the goods are sold immediately after purchasing or sometimes the sale is affected even before
the purchase itself. Therefore, very little working capital is required. Moreover, in case of
service businesses, the working capital is almost nil since there is nothing in stock.
Scale of Operations:
There is a direct link between the working capital and the scale of operations. In other words,
more working capital is required in case of big organisations while less working capital is
needed in case of small organisations.
Business Cycle:
The need for the working capital is affected by various stages of the business cycle. During
the boom period, the demand of a product increases and sales also increase. Therefore, more
working capital is needed. On the contrary, during the period of depression, the demand
declines and it affects both the production and sales of goods. Therefore, in such a situation
less working capital is required.
Seasonal Factors:
Some goods are demanded throughout the year while others have seasonal demand. Goods
which have uniform demand the whole year their production and sale are continuous.
Consequently, such enterprises need little working capital.
70
On the other hand, some goods have seasonal demand but the same are produced almost the
whole year so that their supply is available readily when demanded.
Such enterprises have to maintain large stocks of raw material and finished products and so
they need large amount of working capital for this purpose. Woolen mills are a good example
of it.
Production Cycle:
Production cycle means the time involved in converting raw material into finished product.
The longer this period, the more will be the time for which the capital remains blocked in raw
material and semi-manufactured products.
Thus, more working capital will be needed. On the contrary, where period of production
cycle is little, less working capital will be needed.
Credit Allowed:
Those enterprises which sell goods on cash payment basis need little working capital but
those who provide credit facilities to the customers need more working capital.
Credit Availed:
If raw material and other inputs are easily available on credit, less working capital is
needed. On the contrary, if these things are not available on credit then to make cash
payment quickly large amount of working capital will be needed.
Operating Efficiency:
Operating efficiency means efficiently completing the various business operations.
Operating efficiency of every organisation happens to be different.
Some such examples are: (i) converting raw material into finished goods at the earliest,
(ii) selling the finished goods quickly, and (iii) quickly getting payments from the
debtors. A company which has a better operating efficiency has to invest less in stock and
the debtors. Therefore, it requires less working capital, while the case is different in
respect of companies with less operating efficiency.
71
Availability of Raw Material:
Availability of raw material also influences the amount of working capital. If the
enterprise makes use of such raw material which is available easily throughout the year,
then less working capital will be required, because there will be no need to stock it in
large quantity.
On the contrary, if the enterprise makes use of such raw material which is available only
in some particular months of the year whereas for continuous production it is needed all
the year round, then large quantity of it will be stocked. Under the circumstances, more
working capital will be required.
GrowthProspects:
Growth means the development of the scale of business operations (production, sales,
etc.). The organizations which have sufficient possibilities of growth require more
working capital, while the case is different in respect of companies with less growth
prospects.
Level of Competition:
High level of competition increases the need for more working capital. In order to face
competition, more stock is required for quick delivery and credit facility for a long period
has to be made available.
Inflation:
Inflation means rise in prices. In such a situation more capital is required than before in
order to maintain the previous scale of production and sales. Therefore, with the
increasing rate of inflation, there is a corresponding increase in the working capital.
72
SOURCES OF WORKING CAPITAL FINANCE:
The working capital requirements of a concern can be classified into Permanent or fixed working
capital requirement and Temporary or variable working capital requirement. Following are the
short term and long term sources of working capital.
Indigenous bankers
Trade credit
Instalment credit
Advances
Accrued Expenses
Deferred Incomes
Commercial Paper
Commercial Banks
In any concern, a part of the working capital investments are permanent investments in fixed assets. This is so because
there is always a minimum level of current assets which are continuously required by the enterprise to carry out its day-to-
day business operations and this minimum cannot be expected to reduce at any time. This minimum level of current assets
gives rise to permanent or fixed working capital as this part of working capital is permanently blocked in current assets.
The main Source of finance is Short term finance and Long term finance. The Source of short term finance are Unsecured
Accrued wages and taxes Trade off Bank credit Commercial paper, Secured Account receivable loans, Inventory loans,
Unsecured Shares, Unsecured debenture, Public deposits, Retain earnings, Secured Financial institutions loans and
Secured debenture.
73
MANAGEMENT OF WORKING CAPITAL:
Working capital management policies of a firm have a great effect on its profitability, liquidity and structural health of
organization.
Risk here refers to the inability of the firm to meet its obligation as and when they become due for payment. Larger
investment in current assets with less dependence on short term borrowings reduces risk and thereby decreases the
opportunity for gain or loss. In other words, there is a definite inverse relationship between the degree of risk and
profitability.
Various sources of raising working capital finance have different cost of capital and the degree of risk involved.
Generally, higher risk lower is the cost and lowers the risk, higher is the cost. A sound working capital management
should always try to achieve a proper balance between these two.
This principle is concerned with planning the total investment in current assets. According to this principle, the amount of
working capital invested in each component should be adequate justified by firms equity position. Every rupee invested in
the current assets should be contributed to the net worth of the firm.
This principle is concerned with planning the sources of finance for working, capital. According to this
principle, a firm should make every effort to relate maturities of payment to its flow of internally generated
funds. Maturity patterns of various current obligations are important factors in risk assumptions and risk
assessments. Generally, shorter the maturity schedule of current liabilities in relation to expected cash
Inflow, the greater the inability to meet its obligation in time.
Cash management:
The treasury department of the company makes short term forecasts of cash position, finding
avenues for financing during periods when cash deficit are anticipated; and arranging for
74
repayment/investment during the periods when cash surpluses arc anticipated with a view to
minimizing idle cash as far as possible. To facilitate this, short term forecasts of cash receipts
and payments are made in the structured form of cash budgets and information is monitored at
appropriate intervals for the purpose of control by taking suitable measures as warranted by
situation.
Inventory Management:
Inventory management involves the control of asset being produced for the purpose of sale in a normal
course of a companys operations. Inventories include raw material inventory, medicines inventory etc.
The goal of effective inventory management is to minimize cost i.e. the direct and indirect cost that is
associated with holding inventories. However the importance of inventory management for the company
depends upon the extend investment in the inventory. It is industry specific.
Raw material inventory is maintained to avoid payment of higher prices for ordering small quantity and
its availability. Similarly the firm holds inventories of finished goods to avoid the risk of running out of
product and losing a sale because it cannot fill an order. Money tied up in inventories does not earn
interest; storage and insurance must be paid for and often there is a spoilage and deterioration. Therefore a
firm tries to optimize its inventory holding volumes.
Receivables Management:
To manage the debtors by striking the right balance between increased credit sales leading to increase in
profit and the cost of having large amount of cash lock up in the form of receivables and the loss due to
the incidence of bad debts.
Creditors Management:
Creditors management is the process used to maximize the time period after which the company should
pay to its vendors, at the lowest possible extra cost. This would ensure reduction in the working capital
and thus increase in the frequency of working capital rotation. Creditors are vital part of cash
management and should be managed carefully to enhance the cash position. Purchasing initiates cash
75
outflows and overzealous purchasing function can creates liquidity problems. Management of creditors
and suppliers is just as important as the management of yours debtors. It is important to look after the
creditors - slow payment may create ill feeling and can signal that the company is inefficient.
The main issues related to Working Capital are financing Current Assets: Short-Term and Long-
term Mix Combining Liability Structure and Current Asset Decisions.
Following are the parameters for judging the efficiency of working capital management:
Timely payment of bill
Availability of adequate cash
Inventory management and control
Credit management
The analysis of working capital can be conducted through a number of devices, such as:-
Ratio analysis
i. RATIO ANALYSIS:
Ratio analysis is a powerful tool of financial analysis. A ratio is a statistical yardstick that
provides a measure of relation between two accounting figures. A ratio can be defined as the
indicated quotient of two mathematical expressions and also as the relationship between two
76
or more things. Ratio analysis stands for the process of determining and presenting the
financial statements. It is a way by which financial stability and health of a concern can be
judged.
Ratio analysis can be used both in trend analysis and static analysis. There are several ratios that
an analyst employ, but the type of the ratios that would precisely use depends on the purpose for
which analysis is made. The main users of financial ratio analysis are trend creditors, suppliers of
long term debt, investors, managers etc. Ratio analysis is based on financial statements which are
themselves subject to several limitations. Therefore, any ratio analysis is based on such
statements suffer from similar limitations. In the case of inter-firm and inter-period comparisons
are affected by the price level changes. A change in price level can affect the validity of ratios
calculated for different time periods. In such cases, the ratio
Analysis may not clearly the trends in the solvency and profitability of the company. Unless the
various items like gross profit, operating profit, net profit, current assets, current liabilities are
properly defined comparisons becomes meaningless This problem is now being solved with the
adoption of international accounting standard. Ratios are simply to understand and easy to
calculate. Therefore there has- been a tendency to over employ them. Analyst should not simply
rely on a single in account on order to reach the conclusions. Conclusions from analysis of
statement are not sore indicators of bad or good management. They merely convey certain
observations pointing investigation. Ratio analysis is based on the balance sheet prepared on the
accounting date. This practice, in some cases, may lead to window dressing to cover up bad
financial position. The researcher has done the evaluation using ratio analysis.
Ratio analysis stands for the process of determining and presenting relationship of items and
group of items in the financial statements. The following are the main points of importance of
ratio analysis:
77
Useful in financial position analysis:
Accounting ratios reveal the financial position of the concern. This helps the banks, insurance
companies and other financial institution in lending and making investment decisions.
Accounting ratios simply, summaries and systematize the accounting figures in order to make
them more understandable and in lucid form. They highlight the inter-relationship which exists
between various segments of the business as expressed purpose.
If the accounting ratios are calculated for a number of years, then trend is established. The trend
helps in-settingfutureplans and forecasting.
Accounting ratios are of great assistance in locating weak spots in the business even though overall performance may be
efficient. Weakness in financial structure due to incorrect policies in the past or present are revealed through accounting
ratios.
Useful in comparison of performance:
Through accounting ratios comparisons can be made one department of a firm with another of
the same firm in order to evaluate the performance of various departments in the firm in the firm
Ratios are also helps to make any changes in the organisation structure.
CLASSIFICATION OF RATIOS:
Several ratios, calculated from the accounting data, can be grouped in to various classes
accounting to financial activity or functions to be evaluated. The parties interested in financial
analysis are short and long term creditors, owners and management. Short term creditor's main
interest is in the liquidity position or the short term solvency of the firm. Long term creditors
are more interested in the long-term solvency and profitability of the firm. Similarly, owners
concentrate on firms profitability and financial condition. Management is interested in
78
evaluating every aspect of the firms performance. In view of the requirement of the various
users of ratios, ratios are classified in to four important categories:
RATIOS
MARKET ACCEPTABILITY
MIXED RATIOES
RATIOES
ACTIVITY RATIOES
INCOME STATEMENT
RATIOES
PROFITABILITY
RATIOES
Fig: 4.3
79
FINANCIAL RATIOS:
Activity ratios
Profitability ratios
CURRENT RATIO:
This is the most widely used ratio. It is the ratio of current asset to current liabilities. It shows a
firms ability to cover its current liabilities with its current assets. It is expressed as follows:
current asset
Current ratio =
current liability
Generally 2:1 is considered ideal for a concern. If the ratio is higher than 2, it is very comfortable
for creditors but for the concern, it is indicator of idle fund and a lack enthusiasm for work. On
the contrary, a low ratio would mean in adequacy of working capital may deter smooth
functioning of the enterprise.
Current asset include cash and those assets which can be converted in to cash within a year, such
as marketable securities, debtors, inventories and prepaid expenses. While current liabilities
include creditors, bills payable, accrued expenses, short-term bank loan, income tax payable.
LIQUID RATIO:
This is the ratio of liquid assets to liquid liabilities. It shows a firms ability to meet current
liabilities with its most liquid assets include cash balance, bills receivable, sundry debtors and
short term investment.
Liquid liabilities include all items of current liabilities except bank overdraft. This ratio is acid
test of a concerns financial soundness. 1:1 is considered ideal ratio for a concern.
Liquid Asset
Liquid Ratio =
Current or (liquid) Liability
80
ABSOLUTE LIQUID RATIO OR CASH RATIO:
Although receivables, debtors and bills receivables are generally more liquid than inventories,
yet there may be doubts regarding their realization into cash immediately or in times. Hence
some authorities are the opinion that the absolute liquid ratio should also be calculated together
with current ratio and acid test ratio. The acceptable norm for this ratio is 50% or 0.5:1.
It denotes the speed at which the inventory will be converted in to sales, thereby contributing for the profits of the,
concern. When all other factors remain constant, greater the turnover of
Inventory more will be efficiency of its management. Higher the ratio, thebetter it is because it
shows that finishedstock is rapidly turned over. On the other hand, a low stock turnoverratio is
not desirablebecause itreveals the accumulation of obsolete stock, or the carrying of tonmuch
stock.
Sales
Inventory Turnover Ratio =
Inventory
It indicates the number of times on the receivable is turnover in each year this ratio used by
financial analysis to judge the liquidity of the firm. The higher value of ratio, the more is the
efficient management of debtors. The ratio is calculated by dividing credit sales by average
debtors.
81
Debt collection Period:
Debt collection period represents the average number of days for which a firm has to
receivables are converted into cash. This also reflects the credit policy and terms of the
concern.
Days in a year
Collection Period =
Debtors turnover ratio
In the course of business operations, a firm has to make credit purchases and incur short
term current liabilities. Creditors are naturally interested in finding out how much time
the firm is likely to take in repaying its trade creditors.
consequently larger the benefit reaped from credit suppliers .But a longer ratio may implies
lesser discount facilities availed or higher price paid for the goods purchased on the credit.
82
WORKING CAPITAL TURNOVER RATIO:
Working capital turnover ratio indicates the velocity of the utilization of net working capital, fins
ratio indicates the number of limes the working capital is turned over in the course of a year.
This ratio measures the efficiency with which the working capital is being used by a firm higher
ratio indicates efficient utilization of working capital and a low ratio indicates otherwise.
cost of sales
Working capital turnover ratio=
net working capital
This ratio establishes the relationship between shareholders funds to total assets of the firm. The
ratio of proprietors fund to total funds is an important ratio for determining long term solvency
of the firm. The components of this ratio are Shareholders fund and total asset. Theratio can be
calculated as under;
Proprietary Ratio = x 100
Current Asset to Proprietors Fund = x 100
83
Net capital employed = Total asset - Current Liabilities
It reflects the relative claims of creditors and shareholders against the assets of the business.
Debt, usually, refers to long-term liabilities. Equity includes preference share capital and
reserves, the relationship describing the lenders contribution for each refers of the owners
contribution is called debt equity ratio.
A high ratio shows a large share of financing by the creditors relative to the owner's and
therefore, large claim against the assets of the firm.
A low ratio implies a smaller claim of creditors The equity indicates the margin of safety to the
creditors so, there is no doubt the Beth high and low debt equity ratios are not desirable. What is needed is
a ratio which strikes a proper balance between debt and equity.
84
Disadvantages of Ratio Analysis
Working capital budget, as a part of total budgeting process of business, is prepared estimating future long- term and
short-term working capital needs and sources to finance them, and then comparing the budgeted figures with the actual
performance for calculating variances, if any, so that corrective actions may be taken in future. Working capital
management affects the companys risk, return, and share price. Many ratios are used for evaluating the performance of
the business in the area of working capital management. A combined study of various ratios concerned indicates an
overall efficiency in this area. This study examines the relationship between hospitals' profitability and their
performance at managing two components of working capital: accounts receivable, measured in terms of hospitals'
average collection periods, and accounts payable, measured in terms of hospitals' average payment periods.
The Schedule of changes in working capital is prepared in order to measure the increase or
decrease in working capital over a period of time. It is necessary to prepare this. This schedule is
prepared with the help of only current assets and current liabilities.
Compare each current asset in previous year with that in current year. Similarly, compare each
current liability in the previous year with that in the current year. The difference is recorded for
each individual current asset and current liability. This process will be repeated till all accounts
relating to all current assets and current liabilities in two balance sheets are gone through and
differences are properly recorded. The two columns showing the changes in current assets and
current liabilities are balanced. The balancing figure represents either an increase or decrease in
working capital. It must be remembered that schedule of changes in working capital is prepared
only from accounts appearing in the Balance sheet.
85
CHAPTER - 5
DATA ANALYSIS AND INTERPRETATION
86
ANALYSIS OF CHANGES IN WORKING CAPITAL:
B.CURRENT LIABILITIES:
Short term borrowings 209713000 144780000 64933000
Trade payables 45194000 37568000 7626000
other current liabilities 3703000 76685000 72982000
short term provisions 39627000 62190000 22563000
TOTAL 298237000 321223000 72559000 95545000
Interpretation:
87
2) Schedule Of Changes In Working Capital For The Year Ended 2011-2012:
B.CURRENT LIABILITIES:
Short term borrowings 144780000 176356000 31576000
Trade payables 37568000 35535000 2033000
other current liabilities 76685000 85677000 8992000
short term provisions 62190000 76314000 14124000
TOTAL 321223000 373882000 2033000 54692000
Interpretation:
88
3) Schedule Of Changes In Working Capital For The Year Ended 2012-2013:
B.CURRENT LIABILITIES:
Short term borrowings 176356000 194559000 18203000
Trade payables 35535000 91387000 55852000
other current liabilities 85677000 129299000 43622000
short term provisions 76314000 42164000 34150000
TOTAL 373882000 457409000 34150000 117677000
Interpretation:
89
4) Schedule Of Changes In Working Capital For The Year Ended 2013-2014:
B.CURRENT LIABILITIES:
Short term borrowings 194559000 72890000 121669000
Trade payables 91387000 86564000 4823000
other current liabilities 129299000 147554000 18255000
short term provisions 42164000 77780000 35616000
TOTAL 457409000 384788000 126492000 53871000
Interpretation:
90
5) Schedule Of Changes In Working Capital For The Year Ended 2014-2015:
B.CURRENT LIABILITIES:
Short term borrowings 72890000 83160000 10270000
Trade payables 86564000 163316000 76752000
other current liabilities 147554000 255005000 107451000
short term provisions 77780000 102360000 24580000
TOTAL 384788000 603841000 0 219053000
Interpretation:
91
RATIO ANALYSIS:
1. Liquidity Ratio:
a) Current Ratio:
Current assets
Current ratio =
Current liability
Table 5.1
Chart 5.1
CURRENT RATIO
2
1.5
1
CURRENT RATIO
0.5
0
2010-11 2011-12 2012-13 2013-14 2014-15
Interpretation
A Current Ratio of 2:1 is ideal. A higher ratio indicates the firms ability and sound position to
meet its current obligation in time. Here the ratio is not up to the standard during the period of
study. In the year 2013-14 and 2014-2015 the company is having the higher ratio compared to
previous years. Overall the liquidity is not satisfactory.
92
b) Quick Ratio:
Quick assets
Quick ratio =
current liability
Table 5.2
Chart5.2
QUICK RATIO
0.8
0.7
0.6
0.5
0.4
QUICK RATIO
0.3
0.2
0.1
0
2010-11 2011-12 2012-13 2013-14 2014-15
Interpretation
A quick ratio of 1:1 is ideal. High quick ratio is an indication that firm is liquid and has the
ability to meet current or liquid liabilities in time and on the other hand a low quick ratio
indicates the firms liquidity position is not good. From the year 2010-2011 to 2014-2015 the
firm has insufficient quick assets to meet its current liabilities. It represents the firms quick asset
is not in a sound position.
93
c) Absolute Liquidity Ratio:
Table 5.3
ABSOLUTE LIQAUID
YEAR ASSETS CURRENT LIABILITY ABSOLUTE LIQUIDITY RATIO
2010-11 34806000 321223000 0.108354632
2011-12 58333000 373882000 0.156019814
2012-13 37578000 457409000 0.082154046
2013-14 31441000 384788000 0.081709929
2014-15 377775000 603841000 0.625619989
Chart 5.3
ABSOLUTE LIQUIDITY RATIO
0.7
0.6
0.5
0.4
0.2
0.1
0
2010-11 2011-12 2012-13 2013-14 2014-15
Interpretation:
The acceptable norm is 0.75. Here absolute liquidity ratio is below the acceptable norm, i.e. there
is no sufficient fund for meeting the current liabilities. The absolute liquidity ratio reached 0.62
in the year 2014-2015, showing an increasing trend which is good for the firm.
94
2. LEVERAGE RATIO:
Debt
Debt Equity Ratio =
Equity
Table 5.4
Chart 5.4
Interpretation:
The above data shows that the companys debt equity ratio is below the standard norm 2:1,
which means the owners prefer equity more than debt. The company should try to use more debt
finance in order to maintain its shareholders earnings.
95
b) Proprietary Ratio:
Shareholders Fund
Proprietory or Equity Ratio =
Total Asset
Table 5.5
Chart 5.5
PROPRITORS RATIO
0.6
0.5
0.4
0.3
PROPRITORS RATIO
0.2
0.1
0
2010-11 2011-12 2012-13 2013-14 2014-15
Interpretation:
The acceptable norm is 1:3. Proprietary ratio shows the strength of the company. Lower ratio
indicates greater risk to the creditors. Here the ratio doesnt reach the acceptable norm during the
5 years of study, which indicates that there is greater risk to the creditors.
96
c) Fixed Assets to Net Worth Ratio:
Fixed Assets
Fixed Assets to Net Worth Ratio =
Shareholders fund
Table 5.6
Chart 5.6
0.8
0.2
0
2010-11 2011-12 2012-13 2013-14 2014-15
Interpretation:
From the year 2011-2012 to 2014-2015 the fixed assets to net worth ratio is below the
standard 1:1, if the ratio is less than 100% it implies that the owners funds are less than total
fixed assets, which means that the shareholders funds are not sufficient to finance the fixed
assets of the company.
97
3. Activity Turnover Ratio:
Table5.7
Chart 5.7
0.1
0.08
0.06
0.04
0.02
0
2010-11 2011-12 2012-13 2013-14 2014-15
Interpretation:
The table shows the inventory turnover ratio. In the year 2014-2015 the company has low
inventory turnover ratio, due to stock accumulation but during the year 2010-2011 there is a high
inventory turnover ratio, indicate brisk sales. The company is not in a favorable situation. This is
mainly due to excessive cost.
98
b) Debtors Turnover Ratio:
Net sales
Debtors turnover ratio =
Average Debtors
Table 5.8
Chart 5.8
2500
2000
1500
DEBTORS TURNOVER RATIO
1000
500
0
2010-11 2011-12 2012-13 2013-14 2014-15
Interpretation:
This table shows the velocity of debt collection of the company. Here the company doesnt
promote credit sales. They are encouraging only cash sales. It shows that the management of
debtors is good. The ratio is increasing year by year, which indicates that the debtors are being
collected within short time. It minimizes the risk of the firm.
99
c) Average Collection Period:
No of Working days
Average Collection Period =
Debtors Turnover Ratio
Table 5.9
DEBTORS TURNOVER
YEAR NO OF WORKING DAYS RATIO AVERAGE COLLECTION PERIOD
2010-11 365 1167.323 0.312681237
2011-12 365 1924.813 0.189628811
2012-13 365 1851.486 0.197138947
2013-14 365 2549.978 0.14313849
2014-15 365 2418.224 0.150937217
Chart 5.9
AVERAGE COLLECTION PERIOD
0.35
0.3
0.25
0.2
0.1
0.05
0
2010-11 2011-12 2012-13 2013-14 2014-15
Interpretation:
Low average collection period indicate quick payment by debtors. Here the firm is not having
credit sales, so the collection period is also very low. So the payment is received quickly.
100
d) Working Capital Turnover Ratio:
Net Sales
Working Capital Turnover Ratio =
Net Working Capital
Table 5.10
YEAR NET SALES NET WORKING CAPITAL WORKING CAPITAL TURNOVER RATIO
2010-11 4536803000 63167000 71.82235978
2011-12 5422200000 124110000 43.68866328
2012-13 6971771000 90785000 76.79430523
2013-14 8063033000 194643000 41.42472629
2014-15 8997005000 487913000 18.43977307
Chart 5.10
Interpretation:
Highest working capital is favorable for the companys liquidity position. A high turnover of
working capital is a sign of over trading. The working capital ratio of the company shows a
decreasing trend over the years. In the year 2014-2015 the ratio is very low as compared to other
years. It shows that the working capital is turned over in a stated period of time. During 2011-
2012 the working capital ratio decreases to 43.68 from 71.82 of previous year ratio. In the year
2012-2013 it changed to 76.79. The ratio again falls during the year 2013-14 and 2014-15.
101
e) Fixed Assets Turnover Ratio:
.
Net sales
Fixed asset turnover ratio =
Fixed asset
Table 5.11
Chart 5.11
30
25
20
FIXED ASSETS TURNOVER
15 RATIO
10
0
2010-11 2011-12 2012-13 2013-14 2014-15
Interpretation:
In the year 2010-2011 the fixed assets turnover ratio of the company is low as compared to other
years. It shows that the fixed assets are not being turnover in a stated period of time. But in the
last year the ratio shows an increasing trend. In the year 2014-2015 it shows a highest value of
32.77, ie the fixed asset has been utilized properly.
102
f) Current Assets Turnover Ratio:
Table 5.12
Chart 5.12
4
2
0
2010-11 2011-12 2012-13 2013-14 2014-15
Interpretation:
A high current asset turnover ratio indicates the capability of the organization to achieve
maximum sales with the maximum investment in current assets. It indicates that the current asset
are turned over in the form of sales more number of times. Higher the current asset turnover ratio
is better for the firm. In the year 2010-11 the ratio is 11.80, it decreased to 10.88 in the year
2011-12, again increased to 12.71 in 2012-13 and to 13.91 in 2013-14. The ratio then decreased
to 8.24 in the year 2014-15, which shows it is not in a sound position at the end.
103
4. Net Profit Ratio:
Table 5.13
Chart 5.13
3
NET PROFIT RATIO
2
0
2010-11 2011-12 2012-13 2013-14 2014-15
Interpretation:
From the above data it is clear that net profit ratio is maximum in the year 2014-15. In the
year 2010-11 the ratio is 0.99, it has increased to 1.92 in the year 2011-12, in 2012-13 it again
decreased to 0.66 and in 2013-14 the ratio increased to 1.90. Totally the net profit ratio is
fluctuating year to year. It indicates the overall inefficiency of the firm. It shows the profitability
of the firm is not favorable.
104
TREND PERENTAGE:
Trend percentages are immensely helpful in making a comparative study of the financial
statements for several years. The method of calculating trend percentage involves the calculation
of percentage relationship that each items bears to the same item in the base year.
Chart 5.14
PERCENTAGE
250
200
150
100 PERCENTAGE
50
0
2010-11 2011-12 2012-13 2013-14 2014-15
Interpretation:
From the above data it is clear that sales is maximum in the year 2014-15. In all other
years it is increasing, because of increase in production. In all the years the trend percentage of
sales is high as compared with the base year. The increase in sales shows the efficient
management of stock.
105
TREND ANALYSIS OF NET PROFIT:
Table 5.15
Chart 5.15
PERCENTAGE
1200
1000
800
600
PERCENTAGE
400
200
0
2010-11 2011-12 2012-13 2013-14 2014-15
Interpretation:
The above data shows the fluctuating trend movement in net profit. In the year 2012-2013 the
trend movement shows a decreasing trend and is 103.44. it is due to didproportionate increase in
the cost of goods sold. But last two years shows upward trend.All the years the trend is higher
than the base year.
106
TREND ANALYSIS OF NET WORKING CAPITAL:
Table 5.16
Chart 5.16
PERCENTAGE
900
800
700
600
500
400 PERCENTAGE
300
200
100
0
2010-11 2011-12 2012-13 2013-14 2014-15
Interpretation:
From the above data it is clear that the trend percentage of working capital shows a
downward trend in the year 2012-2013. But the percentage of working capital is high in all the
years when compared with base year. This is because of the changes in the current asset is more
than the changes in the current liability. It reveals availability of adequate working capital.
107
CHAPTER - 6
108
6.1 FINDINGS:
Overall current ratio is not satisfactory during the period of study, hence liquidity of
company is in trouble.
The companys quick ratio is not in sound and it is below the standard. The firms quick
assets are not being capable of meeting the current liabilities.
The company doesnt have required amount of cash to meet its liabilities in the 5 years of
study. The present absolute liquidity ratio is in trouble.
The overall liquidity position of the firm is not satisfactory since all liquidity ratios are
below the standard.
Debt equity ratio is not satisfactory. It shows that the company depends more on equity
capital.
Company is not using its debt capacity fully.
The proprietary ratio is low during the years, which means that the shareholders fund in
total asset is comparatively low.
Fixed asset to net worth ratio of the company is satisfactory. It shows that the
shareholders funds are sufficient to finance fixed asset of the company.
In the year 2014-2015 the company had low inventory ratio and in the year 2010 -2011, it
has its highest value. A low inventory turnover ratio result in blocking of funds and a
high inventory turnover ratio indicates brisk sales.
Debtors turnover ratio of the company is satisfactory. It shows efficient management of
debtors.
Low average collection period indicate quick payment debtors during the period of study.
The companys working capital turnover ratio is showing a fluctuating trend. It reveals
inefficient management of working capital.
Fixed asset turnover ratio of the company is satisfactory it shows efficient utilization of
fixed assets.
109
Sales trend shows positive growth. It reveals efficient management of sales activities.
Net profit trend is fluctuating; it is due to disproportionate increase in operating expense
and income.
Working capital trend shows increasing, it is due to increasing sales and efficient
management of working capital.
110
6.2 SUGGESTIONS:
111
6.3 CONCLUSION:
The KSE ltd is a Public ltd. company. It acts as a model employer in the field of cattle feed,
solvent extract oil, ghee etc. The study on Working capital management of KSE ltd had given
an overview of the various financial positions of the company. Working capital is the main
criteria to analyze the financial position of every business concern. Working capital management
is concerned with the optimum way of processing the funds .The study mainly depends on
analysis and interpretation of financial statements through ratio analysis, and schedule of
changes in working capital which enables a person to judge the profitability of financial strength
of a business.
This study shows that the companys liquidity position is not good which means the company
has insufficiency of current assets to meet its current liabilities. Currently the profitability of the
company is good and also the long term solvency and profitability of the company have bright
future. So the company should pay attention to the problem areas and also adopt the suggestions
as a remedy.
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CHAPTER- 7
APPENDIX
113
PROFIT AND LOSS ACCOUNT OF KSE LTD. FOR THE LAST 5 YEARS
SI
NO PARTICULARS 2010-11 2011-12 2012-13 2013-14 2014-15
A REVENUE
REVENUE FROM OPERATIONS
Sale of products 4537244000 5423652000 6974187000 8065752000 8999816000
LESS: excise duty 441000 1452000 2416000 2719000 2811000
4536803000 5422200000 6971771000 8063033000 8997005000
OTHER INCOME 6804000 11428000 10818000 8978000 16311000
TOTAL REVENUE 4543607000 5433628000 6982589000 8072011000 9013316000
B EXPENSES:
COST OF MATERIALS CONSUMED 3814756000 4536454000 6047214000 6918024000 7407696000
CHANGES IN INVENTORIES OF
FINISHED GOODS -8748000 -33800000 220000 -5861000 -5769000
EMPLOYEE BENEFITS EXPENSES 185514000 228707000 234807000 285788000 338304000
FINANCE COSTS 32382000 34132000 31365000 23666000 19449000
DEPRECIATIONS AND AMORTISATION
EXPENSES 45585000 45947000 42210000 37577000 63619000
OTHER EXPENSES 407387000 463484000 560164000 578430000 655695000
TOTAL EXPENSES 4476876000 5274924000 6915980000 7837624000 8478994000
PROFIT BEFORE EXCEPTIONAL AND
EXTRA ORDINARY ITEMS AND TAX 66731000 158704000 66609000 234387000 534322000
EXCEPTIONAL ITEMS _ _ _ _ 104571000
PROFIT BEFORE EXTRA ORDINARY
ITEMS AND TAX 66731000 158704000 66609000 234387000 638893000
EXTRA ORDINARY ITEMS _ _ _ _ _
PROFIT BEFORE TAX 66731000 158704000 66609000 234387000 638893000
TAX EXPENSES:
a)current tax 25000000 56500000 22000000 83000000 215000000
b)relating to earlier years(net) 142000 -41000 -696000 -852000 -519000
c)deferred tax (net) -3392000 -2248000 -1225000 -1497000 -11929000
21750000 54211000 20079000 80651000 202552000
PFOFIT FOR THE YEAR 44981000 104493000 46530000 153736000 436341000
BASIC AND DILUTED EARNINGS PER
EQUITY SHARE(RS) 14.06 32.65 14.54 48.04 136.36
NORMAL VALUE PER EQUITY
SHARE(RS) 10 10 10 10 10
Table 7.1
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Table 7.2
115
REFERENCES
BOOKS AND JOURNALS:
1. Aswathappa. K, Human Resource Management, New Delhi, Tata MCGraw Hill
Education Pvt ltd, 2011.
2. Aswathappa. K, Organizational Behavior, Mumbai, Himalaya Publishing House, 2011.
3. Robins. R. Stephen, Organizational Behavior, New Delhi, Prentice- Hall of India Pvt ltd,
2005.
4. Chaturvedi P.D, Chaturvedi Mukesh, Business Communication, New Delhi, Pearson
Education, 2004.
5. Aswathappa. K, Bhat Shridhara K, Productions and Operations Management, Mumbai,
Himalaya Publishing House, 2007.
6. Koontz Harold, WeihrichHeinz , Essentials of Management, New Delhi, Tata MCGraw
Hill Education Pvt ltd, 2004.
7. Armstrong Gary, Principles of Marketing, New Delhi, Prentice- Hall of India Pvt ltd,
1999.
8. R.P. Rustagi, Financial Management Theory, Concepts And Problems, Second Revised
Edition, Galgotia Publishing Company , New Delhi.
9. M.Y Khan and P.K. Jain, Management Accounting, Third Edition, Tata McGraw-Hill
Publishing Company Limited, New Delhi.
10. Finacial Management by Shashi.K.Gupta, Neeti Gupta.
REPORTS:
Published Annual Reports of KSE ltd.(2010-11 to 2014-15)
WEBSITES:
www.accountingformanagement.org
www.managerialaccounting.com
http:// www.kselimited.com
http:// www.feed India.com
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