SUMMER TRAINING PROJECT REPORT On WORKING CAPITAL MANAGEMENT

Submitted to Mahamaya Technical University, Noida in the partial fulfillment of the requirement for the award of the degree of MASTER OF BUSINESS ADMINISTRATION

ACADEMIC SESSION (2010 2012)

DECLARATION

I, Shivani Sharma, student of MBA 3rd Semester, studying at ABES Institute of Business Administration hereby declare that the summer training report on WORKING CAPITAL MANAGEMRNT submitted to MAHAMAYA TECHNICAL UNIVERSITY, NOIDA in partial fulfillment of Degree of Masters of Business Administration is the original work conducted by me. The information and data given in the report is authentic to the best of my knowledge. This summer training report is not being submitted to any other University for award of any other Degree, Diploma and Fellowship.

SHIVANI SHARMA (Name of the student)

ACKNOWLEDGEMENT

It is my pleasure to be indebted to various people, who directly or indirectly contributed in the development of this work and who influenced my thinking, behavior, and acts during the course of study. I am thankful to Mr. Govind Prasad Mundhra for his support, cooperation, and motivation provided to me during the training for constant inspiration, presence and blessings. Lastly, I would like to thank the almighty and my parents for their moral support and my friends with whom I shared my day-to-day experience and received lots of suggestions that improved my quality of work.

SHIVANI SHARMA (Name of the student)

TABLE OF CONTENTS

1. Executive Summary 2. Introduction 3. Company Profile 4. Introduction of Topic 5. Objective of the study 6. Research Deign 7. Data analysis and interpretation 8. Conclusion 9. Limitations 10.Recommendations 11.Bibliography

EXECUTIVE SUMMARY

The major objective of the study is to proper understanding the working capital of merino & to suggest measures to overcome the shortfalls if any. The Merino Group is Indias one of largest manufacturer and exporter of laminates for interiors. In addition to its comprehensive range of interior solutions - from decorative laminates and plywood to modular furniture and locker rooms & cubicles - the group has forayed successfully into the agro business starting with cold storage and diversifying into farming, biotechnology and food processing. Based on the core principles of economy, excellence and ethics, the group has a turnover of over Rs. 4000 million. The two primary areas of operation for the Merino Group are Interior solutions and Agro business. In interior solutions the group started with by providing the furniture and panel industry with products for home, retail and office decor. The first product launched in 1974 was plywood which made a name for itself in product quality and company service. The group then diversified into high pressure decorative laminates with a manufacturing unit at Hapur near New Delhi. The same integrated approach was adopted for the agro business. Starting with cold storage, the group integrated both backwards and forwards into farming, biotechnology and food processing. Today it has ventured into the FMCG market with its flagship product - Vegit Potato Flakes. Merino Industries possessed a portfolio comprising 400 SKUs until 1990, and today its in excess of 50000 SKUs. The net current assets of the Group (working capital) is Rs. 12,435 lacs as on March 31, 2010 despite sales increases, indicating superior working capital management. Our strong ERP helped locate overdue receivables with appropriate action.

Inventories: The finished goods inventory turnover improved to 18 in 2009-10; inventory holding declined from 23 days of turnover equivalent in 2007-08 to 21 days in 2009-10.

Debtors increased 5% from Rs. 6,836 lacs in 2008-09 to Rs. 7,147 lacs in 2009-10.

The debtors' collection period, as a measure of collection efficiency, improved from 57 days in 2008-09 to 54 days in 2009-10;

MARKETING ASSISTANCE70% of sales were through the dealer network with a reduction in the OEM debtors' cycle owing to stronger credit terms. Creditors: Creditors increased from Rs. 3,102 lacs in 2008-09 to Rs. 5,649 lacs in 2009-10 owing to increased sales volume. Creditor's day equivalent of sales stood at 45 days in 200910, against 28 days in the previous year

COMPANY PROFILE Merino group was set up as a small unit in 1965 by the late Man Kumar Lochia and his brothers. Incorporated as a private limited company in 1965 under the name N H Lochia

(Agencies) Put Ltd, Century Laminating Company acquired its present name in 1984. It became a deemed public limited company in 1988 and a public limited company in 1995. The company was promoted by M K Lochia, Chapala Lochia, Rup Chand Lochia and Parkas Lochia. Merino Panel Products is a subsidiary of the company. The company exports through Merino Exports Put Ltd, its group company. The company manufactures decorative laminates at its plant in Achaia (Ghaziabad district), Uttar Pradesh, which are sold under the Merino brand name. Its cold storage and ice plant is located in New Delhi. In Aug.'94, the company set up a 6000 TPA formaldehyde manufacturing plant as a backward integration. Formaldehyde is used for the preparation of resins which is required in the manufacture of laminates. In 1994-95, the installed capacity of the laminating plant was increased from 42.50 lac sq. mar to 80 lac sq. mar. In Sep.'95, it came out with a public issue to part-finance the expansion-cum-modernization programmer involving the laminating capacity increase from 80 lac sq. mar to 108 lac sq. mar. During 2000-2001 company obtained ISO-9002:1994 certification from DNV the Netherlands, in its branches at Kolkata, Mumbai, Bangalore, Chennai, Delhi, Pune, Nagpur and Ahmedabad. The Installed Capacity of Decorative laminates has increased from 80 lac Sq. Mtrs to 108 lac Sq. Mtrs. In 2001-02 the installed capacity of Decorative laminates was increased to 167 lacs Sq Mtrs. In addition to its comprehensive range of interior solutions - from decorative laminates and plywood to modular furniture and locker rooms & cubicles - the group has forayed successfully into the agro business starting with cold storage and diversifying into farming, biotechnology and food processing. Based on the core principles of economy, excellence and ethics, the group has a turnover of over Rs. 4000 million

The two primary areas of operation for the Merino Group are interior solutions and agro business. In interior solutions the group started with by providing the furniture and panel industry with products for home, retail and office decor. The first product launched in 1974 was plywood which made a name for itself in product quality and company service. The group then diversified into high pressure decorative laminates with a manufacturing unit at Hapur near New Delhi. Rapid growth made it Indias largest manufacturer and exporter of laminates and led to a second unit at Rohad. The specialty of the group is to continuously release new products in keeping with international trends and market demand. Merino has, over the years, been an innovator of quality products which have increasingly found favor with architects and interior designers by complementing their creative needs. The group adopts an integrated approach to all its endeavors. It offers customers the complete range - from raw material to finished product. Today Merino holds the distinction of being the largest manufacturer and highest exporter of laminates in India as recognized by Government of India. The same integrated approach was adopted for the agro business. Starting with cold storage, the group integrated both backwards and forwards into farming, biotechnology and food processing. Today it has ventured into the FMCG market with its flagship product Veg it potato Flakes. The group has two manufacturing facilities with a combined capacity of 32 million square feet of high pressure laminates per annum. It has three short-cycle lamination facilities for producing prelaminated particle & MDF boards in various sizes. A new facility for prelaminated board was set up in Bangalore to tackle increasing demand. To offer

customized, trendy designs it has set up a printing facility at the Hapur unit. Driven by an integrated approach at every stage of its operation Merino has set up units for producing both formaldehyde and resin. It has also installed a plate polishing facility for uniform surface finish. In its Endeavour towards excellence in service the group has offices and warehouses in all major state capitals to ensure efficient logistics and delivery. An in house fleet of vehicles ensures on time delivery. Advanced automation techniques and a focus on quality based on ethics and excellence have helped make Merino Industries Limited's range of interior solutions a worldwide favorite among architects, interior designers and home owners. It is the only manufacturer offering sheets in sizes of 1550x3660 and 1830x4100. Its captive formaldehyde plant-a crucial ingredient in the production of laminates-and its stringent quality measures helps the company produce as many as 400 laminate designs at any given time. Products include high pressure laminates, plywood, melamine faced particle board & MDF board, plywood, furniture components and solutions, ready to fit furniture, restroom & locker systems and poly vinyl adhesives. Merino's ethics and excellence driven long-term business policies have led to a high level of credibility among its customers and financial institutions.

Board Of Directors

DESIGNATION EXECUTIVE CHAIRMAN

NAMES Champalal Lohia

Executive Vice Chairman Managing Director Whole-time Director

Rupchand Lohia Prakash Lohia Ruchira Lohia Prasan Lohia Bikash Lohia Madhusudan Lohia Nripen Kumar Dugar

Director

Gautam Bhattacharjee Amar Nath Roy

Nominee (EXIM) Company Secretary

S J Sonowal Asok Kumar Parui

CORPORATE SOCIAL RESPONSIBILITY As a concerned corporate citizen Merino Group believes that it is a moral duty to give back its dues to the society , nation and the world through sustained projects. As the every initiatives at the merino group, social concern is the ongoing priority. This social responsibility revolves around reducing pressure on natural resources and helping people get equal opportunities in education and healthcare. Accordingly, merino has taken various steps for the betterment of environment, education and healthcare. Steps taken for the betterment of the environment:

 Commissioning a boiler, based on agro waste fuel for power generation (in substitution of FO/Diesel generator with turbines) Development of green belt inside the factory by planting shrubs, flower, grass and trees.

Minimization of waste programmer

in all processes through environment management

Recycling of water, bopp, and oil, among others Usage of potato peels in production of wormy compost which replaced chemical fertilizer in the field

Replacement of cfcs by using vapor absorption machines which uses stream as source of energy

100% usage of boiler ash in brick production Redesigning of incinerator to better treat hazardous effluents

Reus age of the sawdust for heat generation in the incinerator

Plantation of 500 trees per annum in nearby locations Usage of cyclone for separation of dust particles from outgoing fuel gases in the boiler Steps taken to fight tuberculosis
Adoption of 100 villages in the belt from Hapur, UP to Garh Mukteshwar

Providing free dispensaries, mobile vans and doctors on service Steps taken for education Providing scholarship to needy people Publication of books for student welfare Annapurna- Swami Vivekananda- Mid- Day Meal Program

 A step towards nation building

Service in the field of health and education providing nutritious and hygienic meals to students(preferably to girls in primary schools) belonging to the weaker section of the society

VISION AND MISSION

VISIONTo extend into allied lines (particle board) with growing capacities that is marketed through our existing distribution base and by leveraging our existing merino brand.

To scale our production shoulder to shoulder with that of globally competitive names like Wilson art and Formica, offering customer the advantage of larger volumes and a superior price- value proposition .

To emerge as the largest and most respected laminate group in the world, enhancing value for all those who own shares in us

MISSIONContinual Endeavour to achieve excellence in products and services through intelligent and economic use of resources, while adopting means to conduct business

Aim at faster urbanization, changing life style and enhanced purchasing power of sizeable Indian population (300 million) has created immense opportunities for quality/ branded agricultural products including potato.

PRODUCT AND SERVICES

PRODUCTS

APPLICATION

DEMAND DRIVERS

Application in the furniture LAMINATES industry

Increasing urbanization Rising income Growing industry real estate per capita

Merino rest room and locker solutions, which are used in changing rooms, libraries,

Growing urbanization Increasing incomes disposable

Booming Indian retail segment

PANEL

PRODUCTS

AND

clubhouse, swimming pools, gyms, malls, and schools, among others The furniture business provides interior solutions to offices and residence

Improving infrastructure

Indian

FURNITURE DIVISON

POTATO FLAKES Used by bulk and home customers

Mall

shopping

and

consumerism are on the rise Shelf months Food quality, taste, and flavor remain fresh up to expiry date

Bulk customers include restaurateurs, caterer,

life

of

nine

and hospitality segment, among others

Higher working bachelors

incidence women away

of and from

home , favoring the off take of processed foods

LAMINATES Decorative Laminates Merino decorative interior grade laminates are suitable for a wide range of applications such as home furniture, wall linings, column claddings, doors, shelves, table tops, work-tops, counters, vanity units, cubicles, lift linings, store fittings, displays, check out desks, office partitions, storage units, etc. Merino provides more than 400 designs in 36 finishes and can produce 11 different sizes simultaneously. Merino introduces new designs at regular intervals to keep pace with the changing trends in the market. These designs, in combination with the variety of innovative textures, make the range dynamic, trendy and young. Merino high pressure decorative laminates comprise of specially selected decorative papers and absorbent Kraft paper impregnated with melamine and phenol resins, pressed and hardened under heat and high pressure. The process ensures strong bonding, resistance to boiling water and stains and increases dimensional stability. Surface protection through

special treatment makes Merino laminates scratch resistant

Merino flex

Merino flex post forming grade laminates are intended for use on vertical and horizontal interior surfaces where it is necessary that the laminate rolls in a simple radius over the edges of the substrate. The result - no seams around edges and a smooth evenly laminated, attractive surface.

Specialty Laminates

Merino also produces a wide range of specialty laminates to meet the special requirements of modern architecture and workspaces. Fire retardant laminates to prevent the spread of fire, compact laminates, electrostatic dissipative laminates for electrostatic protected areas and door skins are some of the specialty grade laminates available.

Merino Drill and Entry Boards Merino Drill and Entry Boards are special boards designed for technical purpose. Those boards are used in the assembly for protecting drill bead while drilling PCBs. They are used at taste of assembly for protecting the same.

Merino Post laminated Boards

For application requiring pressing of substrate with decorative laminate Merino Post laminated Boards are ideal In merino postlamianted boards various options are available for substrate 1)Plywood 2)DF 3) Particle Board Surfacing high gloss and special finishes are available in a range of designs The factory finish boards ensure proper bonding between the substrate & the surface ensuring quality and hassle free workmanship. Categories Lamituff Ply Lamituff Board

Lamituff Ply: Merino Ply bonded with Merino Laminates Lamituff Panel: MDF boards and Prelam Boards bonded with Merino Laminates Lamituff Door: Flush doors bonded with Merino laminates. Lamituff doors are also available in Merino designer door skins

COMPETITORS IN laminates division

Greenly industries ltd

Century ply boards(India) limited

IN PANEL PRODUCTS AND FURNITURE DIVISON

Godrej and Boyce mfg. limited

BP Ergo limited Wipro limited

IN POTATO FLAKES
Satnam overseas limited

STRENGTHS
1. Merinos India most prominent laminate brand generating a recall of class,

innovation, premium and value.

2. The merino group has been engaged in the business of interiors and ancillary

businesses for a long time.

3. Merino invested more than RS. 148 crore in its gross block over the last decade 4. Merino is respected for its consistent ability in pioneering product variants and

introductions like post from laminates, compact, laminates and Mr. Gloss, among others.

5. Merino literally created a market for post form laminates in India in 2000 and merino

restroom cubicles in 2004 resulting in the products widespread acceptability. 6. Merino laminate range comprises material of varied thickness
7. Merino laminates comprising 23 finishes as well as different colors, texture and

design, has translated into a repository of more than 50000 SKUs.

8. Merinos product are available across every state in India

9. Merino has been consistently investing in plant modernization 10. It enjoys attractive economies of scale and lowest production cost on the other hand.
11. Merino leveraged it rich research insight to introduce pioneering products in India.

WEAKNESSES

1. Merinos inability to keep pace with evolving preferences 2. Its inability to mobilize adequate funding 3. To procure correct quantities of raw material at the right price
4. Inability to spread sales wide.

THEORY OF WORKING CAPITAL WORKING CAPITAL MANAGEMENT Working Capital is the amount of capital that a business has available to meet the day to day cash requirements of its operations. It is concerned with the problem arise in attempting to manage the current assets, the current liabilities and the inter relationship that exist between them. Working Capital is the difference between resources in cash or readily convertible into cash and organizational commitments for which cash will soon be required or within one year without undergoing a diminution in value and without disrupting the operation of the firm. It also refers to the amount of current Assets that exceeds current Liabilities. Working Capital refers to that part of the firm capital, which is required for financing Short-Term or Current

Assets such as Cash, Marketable Securities, Debtors and Inventories. Working Capital is also known as Revolving or Circulating Capital or Short Term Capital.

The goal of working capital management is to manage the firms current assets and current liabilities in such way that the satisfactory level of working capital is mentioned. The current should be large enough to cover its current liabilities in order to ensure a reasonable margin of the safety. Capital required for a business can be classifies under two main categories: Fixed Capital Working Capital Every business needs funds for two purposes for its establishments and to carry out day to day operations. Long term funds are required to create production facilities through purchase of fixed assets such as plant and machinery, land and building, furniture etc. Investments in these assets are representing that part of firms capital which is blocked on a permanent or fixed basis and is called fixed capital. Funds are also needed for short term purposes for the purchasing of raw materials, payments 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. CONCEPTS OF WORKING CAPITAL: There are two concepts of working capital: Balance Sheet concepts Operating Cycle or circular flow concept BALANCE SHEET CONCEPT: There are two interpretation of working capital under the balance sheet concept: Gross Working Capital

 Net Working Capital The term working capital refers to the Gross working capital and represents the amount of funds invested in current assets. Thus, the gross working capital is the capital invested in total current assets of the enterprises. Current Assets: Current Assets are the liquid assets in a business concern determining the solvency of it and are held for sale or conversion into cash within a period of not exceeding 12 months. This period of one year is only a norm followed for the purpose of analysis as a maximum length of operation cycle. These are the assets, which are income bearing and the income results from the sale of finished products. The current assets of one concern need not be current assets of another concern. For example a motor car owned by a concern is the fixed asset whereas same is current asset for a manufacturing co. The books available in the library of a college are classified as fixed assets whereas books found in a book shop are classified as current assets. Constituents of Current Assets: Cash in hand and Bank balance Bills Receivable Sundry Debtors Short term Loans and Advances Inventories of Stock as: Raw Materials Work in Process Stores and Spaces Finished Goods -Temporary Investments of Surplus Funds

-Prepaid Expenses -Accrued Incomes Liabilities: Liabilities are claims on the business and against all the assets by the owners and external creditors. But they are also sources of the business. The business will be carried on by owned funds supplemented by borrowed funds. These are the funds, which will construct the structure of asset in a business. Borrowed funds may be for a short term or for a long term and these are required to be paid back as per terms of the borrowing. For outside borrowings, interest will have to be paid and for owned funds the dividend or not income will be due to be paid.

CONSTITUENTS OF CURRENT LIBILITIES: Bills Payable Sundry Creditors or Account Payable Accrued or Outstanding Expenses Short term Loans, Advances and Deposits Dividends Payable Bank Overdraft Provision for Taxation, If does not amount to appropriation of profits. The gross working capital concept is financial or going concern concept whereas net working capital is an accounting concept of working capital The term working capital refers to the net working capital. Net working capital is the excess of current assets over current liabilities or say:

Net Working Capital = Current Assets Current Liabilities CURRENT RATIO Current Ratio, also known as working capital ratio is a measure of general liquidity and its most widely used to make the analysis of short-term financial position or liquidity of a firm. It is defined as the relation between current assets and current liabilities. Thus, Current Ratio= Current Assets Current Liabilities A relatively high current ratio is an indication that the firm is liquid and has the ability to pay its current obligations in time. On the hand a low current ratio represents that the liquidity position of the firm is not good and the firm shall not be able to pay its current liabilities in time. A ratio equal or near to the rule of thumb of 2:1 i.e. current assets double the current liabilities is considered to be satisfactory. QUICK RATIO Quick ratio is a more rigorous test of liquidity than current ratio. Quick ratio may be defined as the relationship between quick/liquid assets and current or liquid liabilities. An asset is said to be liquid if it can be converted into cash with a short period without loss of value. It measures the firms capacity to pay off current obligations immediately. Quick Ratio = Quick Assets Current Liabilities Where Quick Assets are: 1) Marketable Securities 2) Cash in hand and Cash at bank. 3) Debtors.

A high ratio is an indication that the firm is liquid and has the ability to meet its current liabilities in time and on the other hand a low quick ratio represents that the firms liquidity position is not good. As a rule of thumb ratio of 1:1 is considered satisfactory. It is generally thought that if quick assets are equal to the current liabilities then the concern may be able to meet its short-term obligations. However, a firm having high quick ratio may not have a satisfactory liquidity position if it has slow paying debtors. On the other hand, a firm having a low liquidity position if it has fast moving inventories. INVENTORY TURNOVER OR STOCK TURNOVER RATIO Every firm has to maintain a certain amount of inventory of finished goods so as to meet the requirements of the business. But the level of inventory should neither be too high nor too low. Because it is harmful to hold more inventory as some amount of capital is blocked in it and some cost is involved in it. It will therefore be advisable to dispose the inventory as soon as possible Inventory Turnover Ratio = COGS Average Inventory Inventory turnover ratio measures the speed with which the stock is converted into sales. Usually a high inventory ratio indicates an efficient management of inventory because more frequently the stocks are sold; the lesser amount of money is required to finance the inventory. Whereas low inventory turnover ratio indicates the inefficient management of inventory. A low inventory turnover implies over investment in inventories, dull business, poor quality of goods, stock accumulations and slow moving goods and low profits as compared to total investment. DEBTORS TURNOVER RATIO:

A concern may sell its goods on cash as well as on credit to increase its sales and a liberal credit policy may result in tying up substantial funds of a firm in the form of trade debtors. Trade debtors are expected to be converted into cash within a short period and are included in current assets. So liquidity position of a concern also depends upon the quality of trade debtors. DEBTORS TURNOVER RATIO = TOTAL SALES (CREDIT) AVERAGE DEBTORS This ratio indicates the speed with which debtors are being converted or turnover into sales.. The higher the values of debtors turnover, the more efficient is the management of credit. But in the company the debtor turnover ratio is decreasing year to year. This shows that company is not utilizing its debtors efficiency. Now their credit policy becomes liberal as compare to previous year. Debtors velocity indicates the number of times the debtors are turned over during a year. Generally higher the value of debtors turnover ratio the more efficient is the management of debtors/sales or more liquid are the debtors. Whereas a low debtors turnover ratio indicates poor management of debtors/sales and less liquid debtors. This ratio should be compared with ratios of other firms doing the same business and a trend may be found to make a better interpretation of the ratio. WORKING CAPITAL TURNOVER RATIO : Working capital turnover ratio indicates the velocity of utilization of net working capital. This ratio indicates the number of times the working capital is turned over in the course of the year. This ratio measures the efficiency with which the working capital is used by the firm. A higher ratio indicates efficient utilization of working capital and a low ratio indicates otherwise. But a very high working capital turnover is not a good situation for any firm.

Working Capital Turnover Ratio = Cost of Sales

Net Working Capital

NET WORKING CAPITAL MAY BE NEGATIVE OR POSITIVE: When the current assets exceed the current liabilities, the working capital is positive and the negative working capital results when the current liabilities are more than the current assets. Current liabilities are those liabilities which are intended to be paid in the ordinary course of business within a short period of normally one accounting year of the current assets or the income of the business. Examples of current liabilities are: . OPERATING CYCLE OR CIRCULATING CASH FORMAT: Working Capital refers to that part of 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 being constantly converted into cash and these cash flows out again in exchange for other current assets. Hence it is also known as revolving or circulating capital. The circular flow concept of working capital is based upon this operating or working capital cycle of a firm. The cycle starts with the purchase of raw material and other resources. And ends with the realization of cash from the sales of finished goods. It involves purchase of raw material and stores, its conversion into stocks of finished goods through work in progress with progressive increment of labour and service cost, 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 of duration required to complete one cycle determines the requirements of working capital longer the period of cycle, larger is the requirement of working capital.

The gross operating cycle of a firm is equal to the length of the inventories and receivables conversion periods. Thus,

Gross Operating Cycle = RMCP + WIPCP + FGCP + RCP Where, RMCP = Raw Material Conversion Period WIPCP = Work in- Process Conversion Period FGCP = Finished Goods Conversion Period RCP = Receivables Conversion Period However, a firm may acquire some resources on credit and thus defer payments for certain period. In that case, net operating cycle period can be calculated as below:

Net Operating Cycle Period = Gross Operating Cycle Period Payable Deferral period

Further, following formula can be used to determine the conversion periods.

Raw Material Conversion Period = Average Stock of Raw Material. Raw Material Consumption per day

Work in process Conversion Period = Average Stock of Work-in Progress Total Cost of Production per day

Finished Goods Conversion Period = Average Stock of Finished Goods Total Cost of Goods sold per day

Receivables Conversion Period =

Average Accounts Receivables Net Credit Sales per day

Payable Deferral Period =

Average Payable Net Credit Purchase per day

CLASSIFICATION OR KINDS OF WORKING CAPITAL: Working capital may be classified in two ways: -On the basis of concept On the basis of time

On the basis of concept, working capital is classified as - Gross working capital -Net working capital. The classification is important from the point of view of the financial manager. On the basis of time, working capital may be classified as: Permanent or Fixed working capital Temporary or Variable working capital.

Kinds of Working Capital

On the basis of concept

On the basis of time

Permanent or Fixed Working capital Gross Working Capital Capital

Temporary or Variable Working Capital

Net Working Capital

Regular Working Capital

Reserve Working Capital

Special Working Capital

Seasonal Working Capital 1. PERMANENT OR FIXED WORKING CAPITAL: Permanent or fixed working capital is the minimum amount which is required to ensure effective utilization of fixed facilities and for maintaining the circulation of current assets. There is always a minimum level of current assets which is continuously required by the enterprises to carry out its normal business operations. 2. TEMPRORAY 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.Varibles working capital can be further classified as second working capital and special working capital. The capital required to meet the seasonal needs of the enterprises is called the seasonal working capital. Temporary working capital differs from permanent working capital in the sense that is required for short periods and cannot be permanently employed gainfully in the business IMPORATNCE OR ADVANTAGE OF ADEQUATE WORKING CAPITAL: Working capital is the life blood and nerve centre of a business. Just a circulation of a blood is essential in the human body for maintaining life, working capital is very essential to maintain the smooth running of a business. No business can run successfully without an adequate amount of working capital. The main advantages of maintaining adequate amount of working capital are as follows: Solvency of the Business Goodwill Easy Loans Cash discounts Regular supply of Raw Materials

Regular payments of salaries, wages & other day to day commitments. Exploitation of favourable market conditions Ability of crisis Quick and regular return on investments High morals

THE NEED OR OBJECTS OF WORKING CAPITAL: The need for working capital cannot be emphasized. Every business needs some amount of working capital. The need of working capital arises due to the time gap between production and realization of cash from sales. There is an operating cycle involved in the sales and realization of cash. There are time gaps in purchase of raw materials and production, production and sales, And sales, and realization of cash, thus, working capital is needed for the following purposes: For the purchase of raw materials, components and spaces. To pay wages and salaries. To incur day to day expenses and overhead costs such as fuel, power and office expenses To meet the selling costs as packing, advertising etc. To provide credit facilities to the customers. To maintain the inventories of raw materials, work in- progress, stores and spares and finished stock.

FACTORS DETERMING THE WORKING CAPITAL REQUIRMENT: The working capital requirements of a concern depend upon a large number of factors such as nature and size of the business, the characteristics of their operations, the length of production cycle, the rate of stock turnover and the state of economic situation. However the following are the important factors generally influencing the working capital requirements. NATURE OR CHARACTERSTICS OF A BUSINESS:

The nature and the working capital requirement of enterprises are interlinked. While a manufacturing industry has a long cycle of operation of the working capital, the same would be short in an enterprises involve in providing services. The amount required also varies as per the nature, an enterprises involved in production would require more working capital then a service sector enterprise. MANAFACTURE PRODUCTION POLICY: Each enterprises in the manufacturing sector has its own production policy, some follow the policy of uniform production even if the demand varies from time to time and other may follow the principles of demand based production in which production is based on the demand during the particular phase of time. Accordingly the working capital requirements vary for both of them. OPERATIONS: The requirement of working capital fluctuates for seasonal business. The working capital needs of such business may increase considerably during the busy.

MARKET CONDITION: If there is a high competition in the chosen project category then one shall need to offer sops like credit, immediate delivery of goods etc. for which the working capital requirement will be high. Otherwise if there is no competition or less competition in the market then the working capital requirements will be low. AVALIBILITY OF RAW MATERIAL: If raw material is readily available then one need not maintain a large stock of the same thereby reducing the working capital investment in the raw material stock. On other hand if

raw material is not readily available then a large inventory stocks need to be maintained, there by calling for substantial investment in the same. GROWTH AND EXAPNSION: Growth and Expansions in the volume of business result in enhancement of the working capital requirements. As business growth and expands it needs a larger amount of the working capital. Normally the needs for increased working capital funds processed growth in business activities. PRICE LEVEL CHANGES: Generally raising price level requires a higher investment in the working capital. With increasing prices, the same levels of current assets needs enhanced investments. MANAFACTURING CYCLE: The manufacturing cycle starts with the purchase of raw material and is completed with the production of finished goods. If the manufacturing cycle involves a longer period the need for working capital would be more. At time business needs to estimate the requirement of working capital in advance for proper control and management. The factors discussed above influence the quantum of working capital in the business. The assessment of the working capital requirement is made keeping this factor in view. Each constituents of the working capital retains it form for a certain period and that holding period is determined by the factors discussed above. So for correct assessment of the working capital requirement the duration at various stages of the working capital cycle is estimated. Thereafter proper value is assigned to the respective current assets, depending on its level of completion. The basis for assigning value to each component is given below: COMPONENTS OF WORKING CAPITAL BASIS OF VALUATION

Stock of Raw Material Stock of Work -in- Process Stock of finished Goods Debtors Cash

Purchase of Raw Material At cost of Market value which is lower Cost of Production Cost of Sales or Sales Value Working Expenses

Each constituent of the working capital is valued on the basis of valuation Enumerated above for the holding period estimated. The total of all such valuation becomes the total estimated working capital requirement. The assessment of the working capital should be accurate even in the case of small and micro enterprises where business operation is not very large. We know that working capital has a very close relationship with day-to-day operations of a business. Negligence in proper assessment of the working capital, therefore, can affect the day-to-day operations severely. It may lead to cash crisis and ultimately to liquidation. An inaccurate assessment of the working capital may cause either under-assessment or overassessment of the working capital and both of them are dangerous.

PRINCIPLES OF WORKING CAPITAL MANAGEMENT POLICY: The following are the general principles of a sound working capital management policy:

PRINCIPLES OF WORKING CAPITAL MANAGEMNT POLICY

PRINCIPLES OF RISK VARIATIONS

PRINCIPLES OF COST OF CAPITAL

PRINCIPLES OF EQUITY PRINCIPLES

PRINCIPLES OF MATURITY OF PAYMENTS

1. PRINCIPLE OF RISK VARAITAION (CURRENT ASSETS POLICY): Risk here refers to the inability of a firm to meet its obligations as and when they become due for payment. Larger investment in current Assets with less dependence on short term borrowings, increase liquidity, reduces risk and thereby decreases the opportunity for gain or loss. On the other hand less investments in current assets with greater dependence on short term borrowings, reduces liquidity and increase profitability. In other words there is a definite inverse relationship between the degree of risk and profitability. In other words, there is a definite inverse relationship between the risk and profitability. A conservative management prefers to minimize risk by maintaining a higher level of current assets or working capital while a liberal management assumes greater risk by reducing working capital. However, the goal of management should be to establish a suitable trade-off between profitability and risk.

2. PRINCIPLES OF COST OF CAPITAL: The various source of raising working capital finance have different cost of capital and the degree of risk involved. Generally, higher and risk however the risk lower is the cost and lower the risk higher is the cost. A sound working capital management should always try to achieve a proper balance between these two. 3. PRINCIPLE OF EQUITY POSITION:

The principle is concerned with planning the total investments in current assets. According to this principle, the amount of working capital invested in each component should be adequately justified by a firms equity position. Every rupee invested in current assets should contribute to the net worth of the firm. The level of current assets may be measured with the help of two ratios: 1. Current assets as a percentage of total assets and 2. Current assets as a percentage of total sales While deciding about the composition of current assets, the financial manager may consider the relevant industrial averages. 4. PRINCIPLES OF MATURITY OF PAYMENT: The principle is concerned with planning the source of finance for working capital. According to the principles, a firm should make every effort to relate maturities of payment to its flow of internally generated funds. Maturity pattern of various current obligations is an important factor in risk assumptions and risk assessments. Generally shorter the maturity schedule of current liabilities in relation to expected cash inflows, the greater the inability to meet its obligations in time

CONSEQUENCES OF UNDER ASSESMENT OF WORKING CAPITAL: Growth may be stunted. It may become difficult for the enterprises to undertake profitable projects due to non-availability of working capital. Implementations of operating plans may brome difficult and consequently the profit goals may not be achieved. Cash crisis may emerge due to paucity of working funds.

 Optimum capacity utilization of fixed assets may not be achieved due to non-availability of the working capital. The business may fail to honour its commitment in time thereby adversely affecting its creditability. This situation may lead to business closure. The business may be compelled to by raw materials on credit and sell finished goods on cash. In the process it may end up with increasing cost of purchase and reducing selling price by offering discounts. Both the situation would affect profitable adversely. Now avaibility of stocks due to non-availability of funds may result in production stoppage. While underassessment of working capital has disastrous implications on business overassesments of working capital also has its own dangerous.

CONSEQUENCES OF OUR OWN ASSESMNET OF WORKING CAPITAL: Excess of working capital may result in unnecessary accumulation of inventories. It may lead to offer too liberal credit terms to buyers and very poor recovery system & cash management. It may make management complacent leading to its inefficiency. Over investment in working capital makes capital less productive and may reduce return on investment.

Working Capital is very essential for success of business & therefore needs efficient management and control. Each of the components of working capital needs proper management to optimize profit. INVENTORY MANAGEMNT: Inventory includes all type of stocks. For effective working capital management, inventory needs to be managed effectively. The level of inventory should be such that the total cost of ordering and holding inventory is the least. Simultaneously stock out costs should be

minimized. Business therefore should fix the minimum safety stock level reorder level of ordering quantity so that the inventory costs is reduced and outs management become efficient.

Invento rymana gement

RECEIVABLE MANAGEMENT: Given a choice, every business would prefer selling its produce on cash basis. However, due to factors like trade policies, prevailing market conditions etc. Business are compelled to sells their goods on credit. In certain circumstances a business may deliberately extend credit as a strategy of increasing sales. Extending credit means creating current assets in the form of debtors or account receivables. Investment in the type of current assets needs proper and effective management as, it gives rise to costs such as:

 Cost of carrying receivables Cost of bad debts losses Thus the objective of any management policy pertaining to accounts receivables would be to ensure the benefits arising due to the receivables are more than the costs incurred for the receivables and the gap between benefit and costs increased resulting in increased profits. An effective control of receivables helps a great deal in properly managing it. Each business should therefore try to find out coverage credit extends to its clients using the below given formula: Average Credit = (Extend in days) Total amount of receivable Average credit sale per day

Each business should project expected sales and expected investments in receivable based on various factor, which influence the working capital requirement. From this it would be possible to find out the average credit days using the above given formula. A business should continuously try to monitor the credit days and see that the average. Credit offer to clients is not crossing the budgeted period otherwise the requirement of investment in the working capital would increase and as a result, activities may get squeezed. This may lead to cash crisis.

CASH BUDGET: Cash budget basically incorporates estimates of future inflow and outflows of cash cover a projected short period of time which may usually be a year, a half or a quarter year. Effective cash management is facilities if the cash budget is further broken down into months, weeks or even a daily basis. There are two components of cash budget are:

1. Cash inflows 2. Cash outflows The main sources for these flows are given here under: 1. Cash Sales 2. Cash received from debtors 3. Cash received from Loans, deposits etc. 4. Cash receipts other revenue income 5. Cash received from sale of investment or assets. CASH OUTFLOWS: 1. Cash Purchase 2. Cash payments to Creditors 3. Cash payment for other revenue expenditure 4. Cash payment for assets creation 5. Cash payments for withdrawals, taxes. 6. Repayments of Loan etc.

A suggestive for, at for cash budget is given below:

MONTHS PARTICULARS Estimated cash inflows . I. Total cash inflows JANUARY FERBUARY MARCH

Estimated cash outflows .. .. II. Total cash outflows III. Opening cash balances IV. Add/deduct surplus/deflect during the month ( III) V. Closing cash balances (III -IV) VI. Minimum level of cash balance VII. Estimated excess or short fall of cash (V-VI)

Balance Sheet Analysis Analysis may be defined as a process of breaking down a complex set of facts and figures into simple items Interpretation means the process of critically examining these elements with a view to draw conclusion from the simplified statements.

When we talk of Balance sheet analysis, we mean analysis of financial statements. Financial statements consist of the following:i) ii) iii) iv) v) vi) Trading or manufacturing account Profit & Loss account. Balance sheet Auditors Report (where compulsorily required) Board of Directors Report in case of corporate bodies Income tax / sales Tax assessment orders / Returns.

Basic techniques of financial analysis are two-fold namely 1) Ratio Analysis, 2) Concept of fund flow. The use of both the techniques are, if preceded by a process of classification of the various items of balance sheet and income statement into appropriate groups and sub-groups so that it becomes possible to relate the different items to each other and to obtain ratio, which express a meaningful and significance comparison more useful than the bare or the raw figures themselves. Banker, after having done the exercise of classifying figures under appropriate heads in the prescribed format, derives inference whether business trend is favorable or unfavorable.

It is a normal practice to ask the borrower / proponent to submit financial statement of last 3 year because what we want to know out of them is the trend of the business. Current idea about the trend can be had only by studying the accounts of 2/3 years. A particular year may be abnormal one, favorably or unfavorably and, therefore, may lead us to wrong conclusion. Balance sheet and other statements submitted by the borrowers relate to past period and are of historical nature. Trend revealed for the period covered by them in the past need not

necessarily prevail in future too. However, in case they are of recent past, information disclosed by them may be relevant for future. Therefore, we should ask borrowers to submit latest financial statements and last balance sheet should not be more than six months old from the date of study. Trading account is prepared to ascertain gross results i.e. gross profit or gross loss out of business activity (it is known as manufacturing account in case of an industrial concern.) It gives cumulative position for the entire period covered by it like sales figures appearing in it will not be of a particular day but of entire period. Profit & Loss account provides figure of net result. All expenses except these already shown in trading account are debited in this account to arrive at net result. For the purpose of our analysis, various business expenses may be divided into following groups: a) selling & distribution expense b) Management expenses b) Financial expenses d) Maintenance & Depreciation.

We choose only these firms for finance who are caring profit or at least their project shows generation of reasonable return in near future. Profit is an ultimate goal of every business. No business can survive for a long time without profit. Safety of bank advance greatly depends on this aspect. Therefore, Banker must analyze profitability aspect before the credit decision. Trend about profitability can be ascertained from the above two accounts, namely trading account and profit and loss account. While studying this account, following points may be kept in mind. Sales:

Sales bring revenue and major source of earning profit Banker desires that there should be reasonable growth in sales figures physical as well as financial over a period of time. Fall in sales is unfavorable feature which should be enquired in such a case, before considering credit proposal favorably, it should be ensured that reasons responsible for fall in sales do not exist anymore and the owners have taken necessary steps to improve it in future. i )Sales Returns: Sizeable return is an unfavorable sign. It indicates that products sold are either defective or inferior in quality. ii) Closing Stock: Lot of manipulation is possible in its valuation to adjust the profit. It is unsold stock which should market price or cost price whichever less is. iii) Selling Administrative Expenses: Large expenses under this indicate dependence on advertisement for sale and there is a competition in the market for its products iv) Management expenses: - They should be more or less static increase should be nominal with development of business. v) Financial Expenses: - It gives idea about extent of dependence on borrowed funds to run the business vi) Maintenance & Depreciation: - We may get some clue condition of machinery /fixed assets by scrutinizing expenses under repairs. Depreciation provided should be adequate considering nature and life of the concerned asset

Dangers of inadequate Working Capital: (i) It is not possible for it to utilize production capacity fully for want of working capital. (ii) A company may not be able to take advantage of cash discount facilities. (iii) A company may not be able to take advantage of profitable business opportunities. (iv) A company may not increase its cash sales and may have to restrict its activities to credit sales only. (v) A company may have to borrow funds at exorbitant rates of interest. (vi) Low liquidity would positively threaten the solvency of time business. The credit worthiness of the company is likely to be jeopardized because of lack of liquidity.

Objective of the study

Fixing the objective is like identifying the star. The objective decides where we want to go, what we want to achieve and what is our goal or destination. Every study is carried out for the achievement of certain objectives. i. To analyse the various components of working capital of Merino industries. ii. To study the financing of working capital of Merino Industries. iii. To study and analyse the operating cycle of Merino Industries.

RESEARCH METHODOLOGY

DATA COLLECTION METHODS: The data will be collected using both by primary data collection methods as well as secondary sources. PRIMARY DATA: Most of the information will be gathered through primary sources. The method that will be used to collect primary data is: Interview

SECONDARY DATA: Secondary data that will be used are web sites and published materials related to working capital management as well as any relevant information on capital of the company

DATA ANALYSIS AND INTERPRETATION

THE FOLLOWING IS THE C.M.A DATA OF MERINO INDUSTRIES PVT LTD

The manufacturing cycle starts with the purchase of raw material and is completedwith the production of finished goods. If the manufacturing cycle involves a longerperiod, the need for working capital would be more. At times, business needs toestimate the requirement of working capital in advance for proper control andmanagement. The factors discussed above influence the quantum of workingcapital in the business. The assessment of working capital requirement is madekeeping these factors in view. Each constituent of working capital retains its formfor a certain period and that holding period is determined by the factors discussedabove. So for correct assessment of the working capital requirement, the duration atvarious stages of the working capital cycle is estimated. Thereafter, proper value isassigned to the respective current assets, depending on its level of completion. Certain other factors such as operating efficiency, management ability,irregularities a supply, import policy, asset structure, importance of labor, bankingfacilities etc. also influences the requirement of working capital.

Particulars 1.Gross sales a)domestic

Last year 34268.03 27435.65

Next year 39408.23 31551.00

b)export 2.Less export duty/sales tax Net sales(1-2) %rise or fall in net sales Cost of sales: Raw materials Imported Indigenous Other spares Imported Indigenous Power and fuel Direct labor Other mfg. expenses Depreciation Subtotal(I-vi) Add opening stock Deduct closing stock-inprocess Cost of production Add opening stock of finished

6832.38 1613.82 32654.21 13.29%

7857.24 2050.81 37357.42 14.40%

19435.98 10973.55 8462.43 685.04 51.21 633.83 1373.84 2776.10 218.18 921.15 25410.29 174.06 225.87 25358.48 1876.57

22934.46 12948.79 9985.66 787.80 58.89 728.90 1442.53 3192.52 250.91 1059.32 29967.53 225.87 184.05 29709.35 2176.78

goods Deduct closing stock of finished goods Cost of sales Selling, general& administrative expenses Subtotal(5-6) Operating profit before interest(3-7) Interest Operating profit after interest(8-9) Other non-operating income: Income from cold storage Interest income Export incentive Misc. income Gain on forex fluctuation Other non- operating expenses: Expenses for cold storage Loss on fire 1.73 172.29 525.18 262.81 1741.36 2.00 198.83 577.70 0.00 0.00 962.01 777.83 856.61 2857.55 1285.10 2416.23 28940.05 3714.16 33656.09 3701.33 2176.78 2200.00

25058.27 3881.78

29686.13 3969.96

1741.36 (779.35)

0.00 777.83

Net other operating income/expenses(a-b)

Profit/loss before tax(10+11c) 2078.20 Provision for taxes Net profit/loss(12-13) Dividend paid provision Corporate dividend tax Dividend rate: Retained profit (14-15) % of net profit retained(16/14) 640.94 1437.26 451.08 41.14 43% 945.04 65.75%

3194.06 1085.66 2108.40 451.00 41.14 43% 1616.26 76.66%

particulars Liabilities Current liabilities: Short term borrowings from banks: From applicant banks From other banks Potato loan from axis bank STL

Last year

Next year

5915.50

7000.00

1500 7415.50

1500

Subtotal(a) Short term borrowings from others Sundry creditors Advance payments from customers/deposits from dealers Provision for tax Dividend payable Other statutory liabilities (due within one yr) Installments of term loans/dpcs/debentures etc. due within one yr Other current liabilities and provisions 600.44 427 937.50 1146.75 307.80 0.00 33.30 253 0 56 4168.77 305.49 4500 450 1876.58

For expenses Interest accrued but not due in TLs Unclaimed dividends Other liabilities Subtotal(b) 0.00 13.49 0 35

21.89

7 385 6832.75

Total current liabilities(a-b) Term liabilities Debentures(not maturing within one yr) Preference shares( not redeemable within one yr) Term loans(excl.installment payable within one yr) Deferred payment credits (excl. installment due within one yr) Term deposit accepted(repayable after one yr) Other term liabilities Total term liabilities Total outside

15645.38

15332.75

1034.32

2312.57

1034.32 16679.70

2312.57 17645.32

liabilities(10+17) Net worth Share capital Share premium General reserve Revaluation reserves Other reserves(excl. provisions) Surplus/ deficit in profit/loss a/c Others Deferred tax liability Net worth Total liabilities Assets Current assets Cash and bank balances Investment( other than long term ) Govt. and other trustee securities Fixed deposits with banks Receivables other than deferred and exports(incl. bills purchased and discounted by banks) 3950.48 4148.00 1046.61 0.00 604 0.00 7215.90 23895.60 8807.37 26452.69 470.25 470.25 2389.54 4005.80 1047.03 87.48 2712.35 507.79 1.46 1047.03 87.48 2712.35 483.00 1.46

Export receivables (incl. bills purchased and discounted by banks) Installments of deferred receivables(due within one yr) Inventory: Raw materials Imported Indigenous Stock-in-process Finished goods Other consumables spares Imported Indigenous Advances tosuppiers of raw materials and stores/ spares Advance payment of taxes Other current assets (specify) Balance with excise dept. Other advances Prepaid expenses 0.00 866.37 446.89 297.31 48.12 0.00 901.41 469.23 312.18 50.00 7468.16 4700.35 244.18 2256.17 225.87 216.78 365.16 0.00 365.16 0.00 8182.84 5170.39 2680.60 2481.78 184.05 2378.41 450 0.00 450 0.00 836.69 962.19

Export incentives claims received

74.05

70.00

Total current assets Fixed assets Gross block Depreciation to date Net block Other non- current assets Investments, book debts, advances, deposits which are not current: Investments in subsidiary cos/affiliates Others Advances to suppliers of capital goods and contractors Deferred receivables(maturity exceeding one yr) Debts o/s for more than 6 months Misc. deposits( security )

14168.31

141798.05

14698.84 5321.74 9377.10

17682.73 6381.06 11301.67

350.19

352.97

151.97

152.07

0.85

0.85

27.91

28

169.46

172.05

Non- consumables stores and spares Other noncurrent assets including dues from debtors

Total other noncurrent assets

350.19

352.07

Intangible assets(patent, goodwill, preliminary exp. etc

0.00

0.00

Total assets(34+37+41+42) Tangible net worth (24-42) Adjusted tangible net worth Net working capital

23895.60 6708.11 6556.14 (1477.07)

26452.69 8324.37 8172.30 (534.70)

particulars Current assets Raw materials Imported Months consumption Indigenous Months consumption Other consumables spares Imported Months consumption Indigenous Months consumption Stock-in-process Months cost of production Finished goods Months cost of sales Receivables Other than export and deferred receivables Months domestic sales Export receivables

Last year

Next year

2444.18 2.67 2256.17 3.20

2688.60 2.49 2481.78 2,98

0.00 0.00 365.16 6.91 225.87 0.11 2176.78 1.04

0.00 0.00 450.00 7.41 184.05 0.07 2378.41 0.96

3950.48

4148.00

1.73 836.69

1.58 962.19

Months export sales Advance to suppliers of raw material and spares Cash and bank balance Investments(other than long term) Installments of deferred receivables (due within one yr) Advance payment of taxes Other current assets

1.47 0.00

1.47 0.00

1046.61 0.00

603.60 0.00

0.00

0.00

0.00 866.37 14168.31

0.00 901.41 14798.05

Other current liabilities Sundry creditors(trade) Months purchase Advance from customers 305.49 Provision for taxation Dividend payable Other statutory liabilities Short term borrowings from others 307.80 0.00 33.30 1876.58 450.00 253.00 0.00 56.00 0.00 4168.77 2.57 4500.00 2.35

Installments of tls/ dpgs Other current liabilities and provisions Total (other) current liabilities

937.50 600.48

1146.75 427.00

8229.88

6832.75

methods First method of lending Total current assets Other current liabilities(other than bank borrowings) Working capital gap

Last year

Next year

14168.31 8229.88

14798.05 6832.75

5938.43

7965.30

Min. stipulated net working capital(25%pf wcg) Net working capital Item 3 minus item 4 Item 3minus item 5 Maximum permissible bank finance(lower of 6 or 7) Excess borrowings representing shortfall in nmc

1484.61

1991.33

(1477.07) 4453.82 7415.50 4453.82

(534.70) 5973.98 8500.00 5973.98

2961.68

2526.02

Second method of lending Total current assets Other current liabilities(other than bank borrowings) Working capital gap Min. stipulated net working capital (25% of current assets) Net working capital Item 3 minus item 4 Item 3 minus item 5 Maximum permissible bank finance(lower of 6 or 7) Excess borrowings representing shortfall in nwc 5019.15 4234.21 (1477.07) 2396.35 7415.50 2396.35 (534.70) 4265.79 8500.00 4265.79 5938.43 3542.08 7965.30 3699.51 14168.31 8229.88 14798.05 6832.75

Analysis of ratios Liquidity ratio

CURRENT RATIO The current is calculated by dividing current assets by current liabilities: Current Ratio = Current assets Current liabilities 14798.05

6832.75 = 2.1:1

Interpretation:

The current ratio indicates the availability of funds to payment of current liabilities in the form of current assets. A higher ratio indicates that there were sufficient assets available with the organization which can be converted in cash, without any reduction in the value. It was 1.72:1 in 2010, but increased in 2011 to 2.1:1

QUICK RATIO Quick ratio = Quick assets current liabilities

14798.05-8182.84-50 6832.75 = 6565.21 6832.75 =

Observations:-

0.96:1

Quick ratio indicates that the company has sufficient liquid balance for the payment of current liabilities. The liquid ratio of 1:1 is supposed to be standard or ideal but here ratio is near about 1 (0.96:1) over the period of time, it indicates that the firm maintains the liquid assets but a certain level.

DEBTOR TURNOVER RATIO Net credit sales Average debtor 32654.21 4741.95 = 6.8 times

ObservationIt is regarded as higher the debtor turnover ratio, higher is the credit management policies of the organization and here in this analysis it is 6.8 times in 2011which is good.

AVERAGE COLLECTION PERIOD365 average debtor Net credit sales = 365 4741.95 32654.21 = Observationshorter the average collection period the better is the quality of debtors as a short collection period implies quick payment by debtors and vice-versa but here it is 53 days which is more and therefore company should make its credit policies little strict to have early collection 53 days

INVENTORY TURNOVER RATIO Cost of goods sold Average inventory = 29686.13 7588.98 = 3.9 times

ObservationUsually a high inventory ratio indicates an efficient management of inventory because more frequently the stocks are sold ; the lesser amount of money is required to finance the inventory and here it is only 3.9 times that means inventor management of the company is not good and there shortage and high cost.

WORKING CAPITAL TURNOVER RATIO Working Capital Turnover Ratio= Cost of Sales

Net Working Capital = 29686.13 534.70 = 55.5 times

ObservationHigher the working capital ratio highly efficient is the working capital management and here it is bringing out 55.5 times which is very high therefore this company is sound in terms of working capital management.

RISK ANALYSIS
1. Merino invested over 71 crore across the five years leading to 2009-10 to upgrade

technology, including Rs 18 crore in 2009-10.

2. Merino used better machines leading to better quality end products.

3. Merinos revenues from products launched in the 3 years leading to 2009-10 accounted for 25% of its revenue during the year under review. 4. Merinos debtors collection period improved from 57 days of turnover equivalent in 2008-09 to 54 days in 2009-10 enhancing liquidity.
5. Merinos proposed investment of Rs 14 crore in laminate capacity expansion in 2010-

11 was funded by a project gearing of 0.71.

6. Merino exports products to 42 countries; exports accounted for 26% of the groups

net sales in 2009-2010. No country (except the US) accounted for over 7% of the groups products.

FUND FLOW STATAEMENT Particulars Sources Profit before tax Depreciation Increase in capital premium Increase in term liabilities Decrease in fixed assets non- current assets others total(a) 0.00 170.10 1.76 2302.62 0.00 0.00 0.00 4445.97 1437.26 693.50 0.00 0.00 2108.40 1059.32 0.00 1278.25 Last year (2010) Next year (2011)

Uses Net loss 0.00 0.00

Dividend payments Decrease in term liabilities Increase in Fixed assets Non-current assets Decrease in revaluation reserve Others Total(b) Long term surplus deficit

492.22 958.40

492.14 0.00

1864.86 0.00

2983.89 2.78

150.28 3456.76 (1163.14)

24.79 3503.60 942.37

Changes in current liabilities( other than bank borrowings) Change in working capital gap(4-5) Net surplus/deficit (3-6) Change in bank borrowings Change in net sales

(332.83)

629.74

3206.69

2026.87

2043.55 (2043.55) 3829.39

(1084.50) 1084.50 4703.21

CONCLUSION Working capital management is important aspect of financial management. The study of working capital management of Merino Industries has revealed that the Net Working Capital was improving regularly which is as per standard industrial practice. The current Assets of the company showed an increasing Rs.14168. in year 2010 to 14798.05. 1. Working capital of the company was increasing from year (1477.07) cr. to (534.70).All calculation is showing positive working capital per year. It shows good liquidity position. 2. Positive working capital indicates that company has the ability of payments of short terms liabilities. 3. Working capital increased because of increment in the current assets. Companys current assets were always more than requirement it effect on profitability of the company.

LIMITATIONS Even though every effort will be taken to minimize the variation and present a factual picture with the help of statistical methods, but still there are some limitations, which are as follows:
The preparation and interpretation of data may not be 100% free from errors. The

study will be based on the balance sheet of the company and depends directly on balance sheet and annual reports of the company. Time Span i.e. 4-5 weeks period was really not enough. Personal Interaction with the project manager was quite difficult, as they are busy in their work. People available are not willing to disclose the exact details
The specific data relating to Merino Industries has not been reproduced due to

companys policy in this regard

RECOMMENDATION Recommendation can be used by the firm for the betterment increased of the firm after study and analysis of project report on study and analysis of working capital. I would like to recommend. 1. Company should increase the inventory holding period. It is the major part of working capital of company. 2. Company has to take control on cash balance because cash is non-earning assets and increase cost of funds. 3. Company should raise it fund through short term sources for short term requirement of funds.

BIBLIO GRAPHY Reference of Books

1. Management Accounting and Business Finance-By R.K. Sharma and Shashi K Gupta-

16th Edition 2008

2. Financial Management by M.Y.Khan and P.K.Jain. 3. Financial Statement Analysis by S.Kr.Paul 4. Working Capital Management- By B. Murali Krishna 2010 5. Financial Management: Theory & Practice-By Prasanna Chandra 2004

6. Company annual report

Reference of Web Pages

www.merinoindia.com www.rbi.org www.google.com www.scribed.com www.wikipedia.org

http://www.answers.com/topic/cash-management