CHAPTER-1

SUGAR INDUSTRY AT GLANCE

INDIAN SUGAR INDUSTRY

1.1) INTRODUCTION:
Sugar originated from the Arabic word "sharkara" and is derived from the sanskrit world "sharkara". Sugar is an important part of the daily diet and forming a class of edible substances which includes sucrose, lactose, and fructose. It provides the human body with requisite carbohydrates and is basically extracted from sugar cane and sugar beet. Found in fruits, honey,sorghum, sugar maple and in several other sources, it is the main ingredient of candy which is loved by children the world over. Yet, it has been blamed for causing tooth decay and excess consumption of sugar has been associated with a host of ailments like diabetes, obesity, weight gain, depression, joint pain, fatigue and insulin resistance and even cancer. Sugar is present in various forms in fruits, honey, maple syrup and other natural sources. It is extracted by an intricate process, whereby the pulp is extracted first and then, the remaining is used for producing the sugar. Sugar has wide variety of uses and is used for baking, sweets, alcoholic beverages, and even in the soap we use. Further, it is also used as a food preservative and in confectionery items.

1.2) History:
Sugar is said to have originated in India. During the Gupta dynasty in India, the extraction of sugar was clearly known to the Indians. Experts identify the Pacific region and certain parts of India like the North East as real locations where the sugar cultivation was practised. This was taken to the western hemisphere by the Arab traders who borrowed the techniques from India and subsequently, set up mills to commercially produce this highly useful agricultural product. The production of sugar spread to countries like Spain and the Portuguese took it to South America. During the eighteenth century, sugar production became increasingly mechanized and sugar market went through a phase of great boom. New technology was developed as sugar became a very popular item and specialized procedures were developed for the large scale processing of sugar. At first, the sugar was used mainly for tea and then, went into the making of confectionery and chocolates. The Dutch took sugar to the Carribean Islands and today, this area is the largest source of sugar in the world. With the introduction of sugar plantations in the Carribean islands on a large scale, the price of sugar fell

substantially and in Britain, all classes of people took to sugar and it has become a part of their routine. Earlier, it was relegated to the upper echelons of society, it, then, became a common commodity and became sufficiently cheaper. Maximum consumption of sugar has been recorded from Belgium and the least consumption is from Ethopia with an amount of three kilos per year.

1.3) Sources of Sugar 1.4)

Generally, sugar is produced from plants like sugarcane and sugar beet. The sugarcane plant is very thick with long grasses. A perennial crop, it is grown in the various tropical and subtropical areas. The stalks of the sugarcane is the exact location, from where the sweet sap is extracted. Sugar beet has the highest sugar content from among the beetroot family and this variety is specifically cultivated for high quality sugar production. In addition, sugar is produced from sweet sorghum, maple, honey, corn sugar, etc. Of a 180 countries of the world, around a 100 of them make sugar from the sugar beet and cane.

1.5) Types 1)Raw sugars

Raw sugars consist of varying shades of yellow to brown sugars and is processed by boiling till it solidifies. From sugar beet juice, the raw beet sugars are extracted and are then used to fabricate white sugar. Raw sugars include demerera, muscovada and turbinado. These are available in crystalline and loaf forms, where the moulds are then allowed to dry up and the resulting product is called jaggery or gur. Raw sugar is not so popular in South America. Mill white sugar is produced by exposing the sugar to sulfur dioxide but it retains the coloured impurities.

2)Blanco direct

Blanco direct is a white sugar used much more in India and Asia and is less purer than the white sugar. It undergoes the process of phosphation and is more devoid of impurities. White refined sugar, popular in the West, is processed by dissolving the raw sugar and purifying it with phosphoric acid or by filtration strategies. White sugar is available in granulated form. Granulated sugar includes coarse grained sugars

such as sanding sugars, caster sugar and superfine powdered sugar and they are divided on the basis of fineness of grades.

3)Brown sugars

Brown sugars are formed when sugars form fine crystals with high molasses content or from coating white refined sugar with a cane molasses syrup. Colour and taste becomes stronger with increasing molasses content . On being exposed to air, they tend to harden and proper handling of this. Natural sugars are found in their natural form and covers the most unrefined sugars and includes the fruits, grains and vegetables. The World Health Organization has approved the natural sugars as carbohydrates for unrestricted consumption purposes.

1.6)

Manufacturing Process:

For sugarcane, the process of refining is carried out in following steps Pressing of sugarcane to extract the juice. Boiling the juice until it begins to thicken and sugar begins to crystallize. Spinning the crystals in a centrifuge to remove the syrup, producing raw sugar. Shipping the raw sugar to a refinery where it is washed and filtered to remove remaining non-sugar ingredients and color. Crystallizing, drying and packaging the refined sugar.

1.7)

World Sugar Scenario:

After two consecutive seasons of surplus between world sugar production\and consumption, World Sugar economy is now facing a significant supplydemand imbalance. There will be fall in global sugar production. The world consumption of sugar is forecasted to grow by 1.73% to 167.446 mln tones. World production is expected to increase by 4.817 million tonnes, which is 8.404 million tonnes lower than world consumption. World export availability is expected to rise due to projected growth in

output in exporting countries. World export availability for season 2009-10 is expected to be 51.964 million tonnes, as against 50.903 million tonnes in the previous season. A significant production shortfall in India and China, as well as afurther contraction of production in the EU, on the other hand and a continuing expansion of sugar output in Brazil, on the other hand are the four major supply features of Sugar season 2008- 2009.

1.7) Indian Sugar Economy

The sugar industry is the largest agro-based industry and India is the Second largest producer of sugar in the world next only to Brazil. Sugar industry in India is headed for a rough patch during the current sugar year ending September 30, 2009. India plays a crucial role in the world's sugar output. Indian sugar industry is controlled by the Government. Starting from cane price to the price of sugar, everything is under the hands of the Government. The Statutory minimum Price (SMP) of sugarcane is fixed by the Central Government to support the cane farmers. However, states like U.P.,Haryana and Uttarakhand are free to fix their own price known as State Advisory Price (SAP), which is usually higher than SMP. 1.8) Indias Production: The Countrys sugar output touched a three year low. Sugar production in 2008-09 season is set to fall by 44% from the previous season. In sugar season 2008-09, production has declined to 147.50 lacs tones compared to production of 263.28 lac tonnes in the year, 2007-08. One major reason for this is the shrinkage in the sugarcane growing area in last couple of years due to delay in cane payment and confusion over the price, less area of ratoon in this season and poor monsoon in some parts of the country. The sugar industry is cyclical in nature. It is dependent upon monsoons for both its production and price realisation. Such a shortfall in sugar production has posed a serious threat to inventory on hand. Drop in cane output may lead to increase in cost of production for sugar companies and hit their profit margins in 2009.

1.9) Government Policies:

Rising prices of sugar has caused concern to the Government and it has intervened substantially to control the prices of the sugar, because it is one of the essential commodities. The Government brought in measures such as weekly quota for free sale, weekly reporting mechanism to monitor sugar dispatches and sale, liberalized raw sugar import under Advance Authorization Scheme [with change in export obligation norm from grain-to-grain to tonne-to tonne basis] and finally the facility to import raw sugar without export obligation as well as import of white sugar upto 10 lakh tonnes by Government agencies, both at zero% customs duty. The Centre is also planning to bring back Gur under the Sugarcane (control) order, 1996 to ensure

1.10) Demand & Supply of sugar in India: (In million tonnes)

s.no 1 2 3 4 5 6 7
Opening stock as on 1st October Production during the season Imports Total availability Domestic consumption* Exports Closing stock

Season 2008-2009 80.00

Season 2007-2008 92.00

147.50

263.28

25.00 252.50 220.00 2.00 30.50

-----355.28 225.72 49.56 80.00

1.11) Sugar Producing States in India:

SWOT ANALYSIS:
SWOT analysis is a strategic planning method used to evaluate the Strengths, Weaknesses, Opportunities, and Threats involved in a project or in a business venture. It involves specifying the objective of the business venture or project and identifying the internal and external factors that are favorable and unfavorable to achieving that objective. The technique is credited to Albert Humphrey, who led a convention at Stanford University in the 1960s and 1970s using data from Fortune 500 companies.

STRENGTHS Global prices to move up an incremental positive The demand is everlasting Environmental conditions suitable for the growth of sugar cane About 2.7% culitvable land is used for the cane production The sugar industry also includes alcohol, gur an khandri which is mainly for the domestic industry WEAKNESS Production to decline by 20-25% in fy09 Shift of the farmer from cane to paddy, wheat, pulses and oil seeds The greater diversion of cane to un-organised sector The ignorance in the residual sugar market Some of the government policy that adhere the growth of the sugar industry Shortage in sugar cane supply Obsolete technology

OPPRTUNITIES Prices to rise by 25% in fy09 and more in fy10e Higher margins , lower cyclicality driving shift towerds integration The on going increase in demand year after year The shift of brazil from white sugar to production of ethanol.

THREATS Less rainfall in the highest sugarcane cultivating regions Due to water shortage the shift of the farmers to multiple crops cultivation Due to government policies the selling of sugarcane by the farmers to private sectors Sugar production being more volatile than cane production Due to rise in domestic consumtion the export is likely to fall

PROFILE OF THE FACTORY

GROUP
Dharani sugars and chemicals limited is one of the units of PGP Group of company promotes by Non-Resident Indians based at United States of America under the dynamic leadership of Dr.Palani G.Periasamy, MA., MA., Ph.D., a leading economist and industrialist. Dr.Palani G.Periasamy was a tenured professor of economics and directors of the Graduate school of Business Management at University of Baltimore, USA. On a passion to bring some contribution to born country he established the industry in Tamilnadu.

LOCATION OF THE FACTORY

Dharani sugars and chemicals ltd., is the first factory setup in southern part of Tamilnadu, the most industrially backward area. The factory is situated at Naranapuram village of sivagiri taluk in Thirunelveli district. It is one of few heavy industries of the district and it is the first agro based industry of the district .It caters to the needs of cane growers of three districts viz. Major parts of Thirunelveli, the western parts of Tuticorin and western parts of Virudhunagar.

CAPACITY OF THE FACTORY

The installed capacity of the sugar unit is 2500 TCD. Date of Commission: 03-03-1989. The DISTILLERY unit has been installed with the capacity of 30 KLD of Rectified spirit and 10 KLD of Extra neutral alcohols. Date of Commission: 25-06-1995.

CANE PRODUCTION
The factory has commenced its maiden season in March 1989 and has successfully completed 19 crushing seasons with total crushing of around 78 lakhs tones of cane.

CANE PRODUCREMENT MANAGEMENT

Cane an agro based raw material is cultivated in 100 kilometer radius. Like other raw material, we cannot procure and store it in the industry and use according to our requirement. Whereas the planting of cane itself has to be planned well in advance in accordance with the crushing programme of the factory for next year. Hence, the cane lanting in the filed has to be controlled by the industry to suit their requirement of cane according to the crushing programme. We opened 14 division to approach the ryots and advise them in planning of cane, development, harvesting and supplying to the factory. Around 15000 cane growers are under our fold and they have been provided with crop loans through local financial institutions. The cane cultivation is completely monitored by our cane department. The ryots are advised in method of preparation of filed, preparation of seed, method of cultivation, manuaring, pest controlling and harvesting. The post harvesting service is also rendered to bring up the ratoon crop and registered to the factory.

SOCIAL ECONOMIC FACTORS

The rural growth of a country is scaled at the growth of villages. The growth of the villages is scaled at the growth of based industries. Our industry is also taking part in developing the socio economic growth of the villages in all three districts.

EMPLOYMENT OPPORTUNITY
Around 1000 employees are being directly benefited and about 1000 people are being indirectly benefited by offering themselves for the promotional operations of sugar cane production.

SUGAR FACTORY OPERATION

Our factory is one of the modern factories in Tamil nadu and is the one setup with auto setting mill in the world which contributes to the maximum efficiency of the industry.

HUMAN RESOURCES DEPARTMENT

After the selection they give joining date and from join ITI candidates are trained 2 years. Other graduates are taking training at 1 year. If they physically and mentally fit means the management will select them otherwise they will not selected be the management.

ADMIN RULES AND POLICY

Workers and others not allowed to smoking and drinking within the factory campus. They dont allowed to using mobile with in factory. But the office people can use mobile with in the office only, they also not using mobile in production area and other areas. Workers and others not allowed to take any plastic to the factory. Workers should keep punctuality and start work at a proper time. This is also watched by time office and they can give performance and discipline report to general manager. This may lead to dismiss the candidate. Dharani sugars working is 24 hours. They are not allowing any vehicles to the factory. Workers should be in uniform.

TOTAL NUMBER OF EMPLOYEES

325 peoples are working in the Dharani sugar and chemicals Ltd, Naranapuram. 15 securities is for security level. There are permanent workers also seasonal workers.

DESIGN OF THE STUDY

2.1) TITLE OF THE STUDY:

A study on working capital management and Ratio analysis at Dharani sugars and chemicals limited

2.2) STATEMENT OF THE PROBLEM: The success and failure of any organization is very much influenced by the past and previous year financial analysis and working capital management. Dharani sugars and chemicals limited is mainly engaged in production of sugar. The leading Dharani sugars and chemicals limited is private sector undertakings, which is located in Thirunelveli. and have been striving hard on meeting the competition from their competitors. Any business enterprise needs funds for its operations, investors are the major Source of fund apart from owners funds. From the above statement it is clearly state that they need to be strong in managing resources and increase there receivables and decrease the liabilities, to be strong in managing working capital thus it is this problem, which prompted the researcher to take up the study on financial statement analysis and working capital management.

2.3) OBJECTIVE OF THE STUDY: The study aims to achieve the following objectives: To determine the progress of the company and to ascertain the future prospects of the company. To find out the level of activity or the operating efficiency of the company. To measure the liquidity or the short-term solvency and to indicate whether the company will be able to meet the short-term obligations out of its resources. To ascertain the working capital requirement of the company. To study the extent of influence of different factors on size of working capital. 2.4) SCOPE OF THE STUDY: This study has a wider scope to cover components and determinants of capital, sources and types of working capital, components of capital management such as cash, receivables and inventory. Financial analysis which covers using different tools of ratios. 2.5) METHODOLOGY:

No study is completed until a proper method is adopted. The level of any systematic research depends upon collection of data by keenly observing the existing conditions, classification and interpretation of data and at the end formation and generalization and conclusion. The research design should be such that it maximizes reliability of the evidence collected. The data required for the preparation of financial statement analysis and working capital management was collected through Primary and Secondary data.

Primary Data : Primary data required for the study is collected from the Dharani sugars and chemicals limited Head office.

Secondary Data : This includes information relating too Annual reports. Company brouchers, magazines, periodical reports. Balance sheets, profit and loss accounts. Published text books. Internet.

2.6) TOOLS FOR COLLECTING DATA: After carrying out analysis of financial statements, balance sheet and profit and loss A/c, to elicit additional information to supplement the analysis, discussions were held with the concerned executives of the company. For this purpose a schedule was prepared for collection of data which is presented in the appendices.

2.7) PLAN OF ANALYSIS: Information from financial statements was arranged as per the objectives of the study. The data collection have been analyses by the use of statistical tools and techniques such as percentages, average where ever necessary the data have been presented diagrammatically using graph charts, tables etc.

REFRENCE PERIOD: For the company under study, financial year is from March 2008-2009, March 2007-2008, and March 2006-2007.

REVIEW OF LITERATURE: Annual reports of Vishwanath Sugars ltd from 2006-2009. Financial management text books: Prasanna Chandra. I. M. Pandey. Interviewing the finance manager of Vishwanath Sugars ltd.

2.8) OPERATIONAL DEFINATIONS OF CONCEPTS: Current Assets: Includes Inventories, Sundry debtors, Cash and Bank, Loans and advances and all those assets that could be converted into cash within one year. Current Liabilities: It includes Sundry Creditors, Advances received from Customers, Provisions and any other liability that fall due for payment within one year. Quick Assets: Current assets (less) Inventories. Liquid Liability: Current liability (less) Bank overdraft etc. Net working Capital: Current assets (less) Current liabilities. Liquidity: Liquidity is used in limited sense study to mean short term debt repaying capacity of the enterprises. In other words, it is taken as the ability of the firm to meet the claims of suppliers of short-term capital Profitability: Refers to the ability of the company in making the profits in relation to capital employed, sales and the share holders funds. Cash: Cash is the money, which the firm can disburse immediately without any restrictions. Inventory: Inventory refers to the stock of goods in the company. Receivables: Receivable represents the amount due from its customers to whom the company has extended the credit. Net sales: It is the gross sales less returns and allowances freight out and cash discounts allowed. Credit sales: It means gross credit sales less sales returns.

LIMITATIONS OF THE STUDY: o The figure and facts claimed in the annual reports and other forms are assumed to be true. o The authenticity of conclusions drawn is only based on the observations made by the researcher only. o It is data based on the data supplied by the company personnel. o The project is just a brief study due to lack of comprehensive and practical knowledge. o Lack of sufficient time to get required information. o The outcome of the study is based on the data given in the financial statements so that there is always difference in the actual and the calculated values.

INTRODUCTION TO FINANCE

INTRODUCTION TO FINANCE
Finance has been called The science of money. In studies the principles and methods of obtaining control of money from those have saved it and the administration of it by those in to whose control it passes. Finance may be said to be circulatory system of the economic body, making possible needed cooperation between the many units of activity. In an organization composed of myriad separate enterprises, each working for its own end but simultaneously contributing to the system as whole, some forces is necessary to bring about direction and co-ordination. Something must be directthe flow of economic activity and facilitate its smooth operation. Finance is the agent that produces this result. Finance is the business activity which is concerned with the acquisition and conversation of capital funds in meeting financial needs and overall objective of a business enterprise. 3.1) SCOPE AND IMPORTANCE OF FINANCE The modern industrial or service firm must conduct its business in a rapidly changing and highly competitive environment. A premium is placed on the ability to react quickly and correctly to constantly changing market conditions. Financial management is most totally independent area. It draws heavily on related discipline and fields of study namely Economics, Accounting, Marketing, Production and Quantitative methods. Management must be concerned with all the aspects of firms operation including production of goods and delivery of services, sales and marketing activities and supporting functions such as Personnel training and data processing. To handle these responsibilities, most firms make extensive use of financial data and reports. The scope financial management involves shaping the fortunes of the enterprise as it involves the most vital decision of allocation of capital. A broad and farsighted outlook has to be taken into consideration to ensure the funds of the enterprise are utilized in the most efficient manner. Financial decisions have far reaching consequences for the firm because they influence the size, profitability, growth, risk and survival of the firms. Financial statements are prepared for decision making. They play dominant role in setting the framework of managerial decisions. But the information provided in the financial statements not an ending itself as no meaningful conclusions can be drawn from these statements is of immense use in making decisions through analysis and interpretation of financial statements. Financial analysis is the process of identifying relationship between the items of Balance Sheet and the profit & loss statements, such as Schedule of changes in Working capital, cost volume profit analysis and ratio analysis. It is the process of establishing and interpreting various ratios. It is with the help of ratios that the financial statements can be analyzed more clearly and decision made from such analysis.

3.2) WORKING CAPITAL MANAGEMENT Introduction: The management of working capital is an important and time consuming aspect of management finance. Sufficient working capital must be provided in order to take care of the normal process of purchasing raw materials and supplies, turning out finished products, selling the products, waiting for payments to be made. If the original estimates of working capital are insufficient, some emergency measures must be restored to or the business will come to dead stop. Inadequate levels of working capital can results in serious financial difficulties, and even bankruptcy; exclusive levels are likely to reduce corporate profitability and ultimately cause the firms effectiveness and market value to decline. Meaning of Working Capital: In accounting working capital is the difference between the inflow and outflow of funds. In other words, it is the net cash inflow. It is defined as the excess of current assets over current liabilities and provision.

Definition of Working Capital: Working Capital is the amount of funds necessary to cover the cost of operating the enterprises. Concepts of Working Capital: There are two concepts of working capital: Balance Sheet concept. Operating Cycle or Circular flow concept. (A) Balance Sheet Concept: There are two interpretation of working capital under the balance sheet concept: 1. Gross working capital. 2. Net working capital. 1. Gross working capital: In the broad sense, the term working capital refers to gross working capital and represents the amount of funds invested in current assets. Thus, the gross working capital invested in total current assets of the enterprise. The gross working capital concept is financial or going concern concept. 2. Net working capital:

The term net working capital is the excess of current assets over current liabilities. Net working capital is an accounting concept of working capital. Net working capital= Current assets Current liabilities Current assets include: Cash in hand. Cash in bank. Sundry debtors (less provision for bad debts). Short-term loans and advances. Inventories of stocks as: Raw materials. Work-in-progress. Stores and spares. Finished goods. Temporary investments of surplus funds. Prepaid expenses. Accrued incomes. Current liabilities include: Bills payable. Sundry creditors or accounts payable. Accrued or outstanding expenses. Short-term loans, advances and deposits. Dividends payable. Bank overdraft. Provision for taxation, if it does not amount to appropriation of profits. (B) Operating cycle or circular flow concept: The circular flow of concept of working capital is based upon this operation 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 sale of finished goods. The speed/time duration required to complete one cycle determination the requirements of working capital-longer the period of cycle determines the requirements of working capital.

Importance or advantage of adequate working capital:

Working capital is the life blood and nerve center of a business. 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. Some of the importance or advantage of adequate working capital are as follows:

Solvency of the business: Adequate working capital helps in maintaining solvency of the business by providing uninterrupted flow of production. Good will: Sufficient working capital enables a business concern to make prompt payment and hence helps in creating and maintaining good will. Easy loans: A concern having adequate working capital, high solvency and good credit standing can arrange loans from bank and other easy and favorable terms. Cash discounts: Adequate working capital also enables a concern to avail cash discounts on the purchases and hence it reduces costs. Regular supply of raw materials: Sufficient working capital ensures regular supply of raw materials and continuous production. Regular payment of salaries: A company which has ample working capital can make regular payment of salaries, wages and other day to day commitments which rises the morale of its employees, increase there efficiency, reduces wastages and costs and enhances production and profits. Exploitation of favorable market conditions: Only concerns with adequate working capital can exploit favorable market conditions such as purchasing its requirements in bulk when the prices are lower and by holding its inventories for higher prices. Ability to face crises: Adequate working capital enables a concern to face business crises in emergencies such as depression because during such periods, generally there is much pressures on working capital. Quick and regular return on investment: Every investor wants a quick and regular return on his investments. Sufficiency of working capital enables a concern to pay quick and regular dividends to its investors as there may not be much pressure to plough back profits. This gains the confidence of its investors and creates a favorable market to rise additional funds in the future. High morale: Adequacy working capital creates an environment of security, confidence; high morale creates efficiency in a business. Importance of Excess or Inadequate working capital:

Every business concern should have adequate working capital to run its business operations. Both excess as well as short working capital positions are bad for any business.

Disadvantages of redundant or excessive working capital: Excessive working capital mans idle funds which earn no profits for the business and hence the business cannot earn a proper rate of return on its investments. When there is redundant working capital, it may lead to unnecessary purchasing and accumulation of inventories causing more chances of theft, wastes 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. When there is excessive working capital, relations with the banks and other financial institutions may not be maintained. Due to low rate of return on investments the value of shares may also fall. The redundant working capital gives rise to speculative transactions. Disadvantages or dangers of inadequate working capital: A concern which has inadequate working capital cannot pay its short term liabilities in time. Thus it will lose its reputation and shall not be able to get good credit facilities. It cannot buy its requirement in bulk and cannot avail discounts, etc. It becomes difficult for the firm to exploit favorable 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 costs and reduces the profits of business. It becomes impossible to utilize efficiently the fixed assets due to non availability of liquid funds. The rate of return on investments also falls with the shortage of working capital. Need or Objectives of working capital: The need for working capital to meet the operation needs of a firm need not be over 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.

Working capital is needed for following purpose, they are: For the purchase of raw materials, components and spares. To pay wages and salaries. To incur day-to-day expenses and over heads costs such as fuel, power and office expenses, etc. 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. The amount of working capital needed goes on increasing with the growth and expansion of business till it attains maturity. At maturity the amount of working capital needed is called normal working capital.

Principles of working capital management:

Principles of Risk Variation: Risk here refers to inability of a firm to meet its obligation as and when they become due for payment. There is a definite inverse relationship between the degree of 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. Principle of Cost of Capital: The various sources of raising working capital finance have different cost of capital and the degree of risk involved. Generally, higher the risks lower is the cost and lower the risk higher is cost. A sound working capital management should always try to achieve a proper balance between these two. Principle of Equity Position: 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 adequately justified by firms equity position. Principle of Maturity of Payment: This principle is concerned with planning the sources of finance for working capital. According to this 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 obligation in time. COMPONENTS OF WORKING CAPITAL: There are three important components in working capital, they are:

Cash management. Receivable management. Inventory management. Cash Management: Cash management has assumed importance because it is the most significant of all the current assets. It is required to meet business obligations and it is unproductive when not used. Cash management deals with the following: Cash inflows and outflows. Cash flows within the firm. Cash balance held by the firm at a point of time by financing deficit or investing surplus cash. Receivable management: Receivable management is the process of making decisions relating to investment in trade debtors. We have already stated that certain investment decisions are necessary to increase the sales and the profits of a firm. But at the same time investment in this asset involves cost considerations also. Further, there is always a risk of bad debts too. Thus, the objective of receivables management is to take a sound decision as regards investment in debtors. Dimension of receivable management are: Forming of credit policy. Executing the credit policy. Formulating and executing collection policy. Inventory management: The investment in inventory is very high in most of the undertakings engaged in Manu fracturing, wholesale and retail trade. The amount of investment is sometimes more in inventory than in other assets. It is necessary for every management to give proper attention to inventory than in other assets. It is necessary for every management to give proper attention to inventory management. A proper planning of purchasing, handling, storing and accounting should form a part of inventory management. An efficient system of inventory management will determine what to purchase, how much to purchase, from where to purchase, where to store etc.

3.3) RATIO ANALYSIS

A ratio is a simple arithmetical expression of the relationship of one number to another. It may be defined as the indicated quotient to two mathematical expressions. According to Accountants hand book by Knell and Bedford, a ratio Is an expression of the quantitative relationship between two numbers Ratio analysis is a process of comparison of one figure against another, which make a ratio, and the appraisal of the ratios to make proper analysis about the strengths and weakness of the firm operations. The calculations ofratios are a relatively easy and simple task but the proper analysis andinterpretation of the ratios can be made only by the skilled analyst. While interpreting the financial information, the analyst has to be careful in limitations imposed by the accounting concepts and information, the analyst has to be careful in limitations imposed by the accounting concepts and methods of valuation. Information of non-financial nature will also be taken into consideration before a meaningful analysis is made. Significance of Ratio Analysis: The ratio analysis is one of the most powerful tools of financial analysis. It is used as a device to analysis and interprets the financial health of the enterprise. The use of ratios is not confined to financial managers only. There are different parties interested in the ratio analysis for knowing the financial position of a firm for different purposes of a firm for different purposes. The suppliers of goods on credit, banks, financial institutions, investors, shareholders and management all make use of ratio analysis as a tool in evaluating the financial positions and performance of a firm for granting credit, providing loans or making investment in the firm. With use of ratio analysis, one can measure the financial condition of a firm and one can point whether the condition is strong, good, questionable or poor. Helps in financial forecasting and planning: Ratio analysis is of much help in financial forecasting and planning. Planning is looking ahead and the ratio calculated for a number of year work as guide for the future. Meaningful conclusions can be drawn for future from these ratios. Helps in control: Ratio analysis even helps in making effective control of business standard ratio can be based upon Performa financial statement variances or deviation, if any can be found by comparing the actual with the standards to take a corrective action at the right time. The weakness or otherwise , if any come to the knowledge of the management which helps in the control of business. Utility to shareholder/investors: Investors in the company will like to assess the financial position of the concern where he is going to invest.His first interest will be the security of his investment and then a return in the form of dividend or interest. For purpose he will try to assess the value of fixed assets and

the loans raised against them. The investor will feel satisfied only if the concern has sufficient amount of assets long-term solvency ratios will help him in assessing the financial position of the concern. Profitability ratios, on the other hand will be useful to determine the profitability position. Utility to creditors: The creditors or suppliers extend short-term credit to the concern. They are interested to know whether financial positions of the concern enable their payments at a specified time or not. The concern pays short term creditors out of its current assets. If the current assets are sufficient to meet the current liabilities then the creditors will not hesitate in extending credit facilities. ADVANTAGES/USES OF RATIO ANALYSIS: Ratio analysis simplifies the understanding of financial statements. Ratio analysis is an instrument for diagnosing the financial health/condition of a business that is through the computation comparison and interpretation of accounting ratios. Ratio analysis is an invaluable aid to the management in the efficient discharge of its basic functions of forecasting, planning, communications etc. By an analytical study of the past performance of the business, trends in cost, sales, profits and other related facts can be understood and based on such trends. Future events can be forecasted. Ratios are helpful in establishing standard costing system and budgetary control. Ratio analysis is not only useful to management but also to outsiders like creditors and investors. LIMITATIONS OF RATIO ANALYSIS: Ratio analysis is very useful in many aspects. However, its importance should not be exaggerated because it has number of limitations which are as follows: Ratios computed from historical dated are used for predicting and projecting the likely events in the future. Such ratios may provide a glimpse of the firms past performance but the forecast for the future may not be correct. Ratios are tools of quantitative analysis only. As such only quantitative aspects are taken into account in ratios analysis, thereby ignoring qualitative factors which generally where the conclusions are drawn. A ratio is a hypersensitive; a new entry of a transaction can change its magnitude drastically.

3.4) Categories of Ratios The ratio analysis is made under six broad categories as follows: Long-term Solvency Ratios. Shot-term Solvency Ratios. Profitability Ratios.

Activity Ratios. Operating Ratios.

Long-Term Solvency Ratios: The long term liability financial stability of the firm may be considered as dependent upon its ability to meet all its liabilities, including those not currently payable. The ratios which are important in measuring the long-term solvency are as follows: Debt-Equity Ratio. Shareholders equity ratio. Debt to net worth ratio. Capital gearing ratio. Fixed assets to long-term funds ratio. Proprietary ratio. Debt service coverage ratio. Dividend cover. Interest cover. Debt-Equity ratio: Capital is derived from two sources: share and loans. It is quite likely for only shares to be issued when the company is formed, but loans are invariably raised at some later date. There are numerous reasons for issuing loan capital. For instance, the owners might want to increase their investment but avoid the risk which attaches to share capital, and they can do this by making secured loan.

This ratio indicates the relationship between loan funds and net worth of the company, which is known as gearing. If the proportion of debt to equity is low, a company is said to be low- geared and vice versa. A debt equity ratio of 2:1 is the norm accepted by financial institutions for financing of projects. The higher the gearing, the more volatile the return to the shareholders. Shareholders equity ratio:It is assumed that the larger the proportion of the shareholders equity, the stronger is the financial position of the firm. This ratio will supplement the debt equity ratio. In this ratio the relationship is established between the shareholders funds and the total assets. This ratio indicates the degree to which unsecured creditors are protected against the loss in the event of liquidation.

. Debt to net worth ratio: The ratio compares long- term debt to the net worth of the firm i.e., the capital and free reserves less intangible assets. This ratio is finer than the debt-equity ratio and includes capital which is invested in fictitious assets like deferred expenditure and carried forward losses. This ratio would be more interest to the contributors of long term finance of the firm.

Capital gearing ratio: It is the proportion of fixed interest bearing funds to equity shareholders funds. The fixed interest bearing funds include debenture, long term loans and preference share capital. The equity shareholder funds include equity share capital, reserves and surplus. Capital gearing ratio indicates the degree of vulnerability of earnings available for equity shareholders.

5. Fixed assets to long term funds ratio: This ratio indicates the proportion of long term funds deployed in fixed assets. Fixed assets represent the gross fixed assets less depreciation provided on this till date of calculation. Long term funds include share capital, reserves and surplus and long term loans. The higher the ratio indicates the safer the funds available in case of liquidation. It also indicates the proportion of long term funds that is invested in working capital.

6. Proprietary Ratio: It expresses the relationship between net worth and total assets. Net worth = equity share capital+ preference share capital+ reserves- fictitious assets. Total assets= fixed assets+ current assets Reserves embarked specifically for a particular purpose should not be included in calculation of net worth. A high proprietary ratio is indicative of strong financial position of the business. The higher the ratio the better it is

7. Interest cover: The interest coverage ratio shows how many times interest charges are covered by funds that are available for payment of interest. An interest cover of 2:1 is considered reasonable by financial institutions. A very high ratio indicates that the firm is conservative in using debt and a very low ratio indicates excessive use of debt.

8. Dividend cover: This ratio indicates the number of times the dividends are covered by net profits. This highlights the amount retained by a company for financing of future options.

Short- Term solvency Ratios: The short-term solvency ratios, which measure the liquidity of the firm and its ability to meet its maturing short-term obligations. Liquidity is defined as the ability to realize values in money the most of liquid assets. It refers to the ability to pay in cash, the obligations that are due. The corporate liquidity has two dimensions viz, quantitative and qualitative concepts. The quantitative concept includes the quantum, structure and utilization of liquid assets and in the qualitative concept it is the ability to meet all present and potential demands on cash from any source in a manner that minimizes cost and maximizes the value of the firm. Thus, corporate liquidity is a vital factor in business-excess liquidity, though a guarantor of solvency would reflect lower profitability, deterioration in managerial efficiency, increased speculation and unjustified expansion, extension of too liberal credit and dividend policies. The important ratios in measuring short term solvency are:

Current ratio. Quick ratio or liquid ratio. 1. Current ratio: This ratio measures the solvency of the company in the short-term. Current assets are those assets which can be converted into cash within a year. Current liabilities and provisions are those liabilities that are payable within a year. A current ratio of 2:1 indicates a highly solvent position. A current ratio of 1.33:1 is considered by banks as the minimum acceptable level for providing working capital finance. A high current ratio may be due to the pilling up of inventory, inefficiency in collection of debtors, high balances in cash and bank accounts with out the proper investment.

2. Quick ratio or liquid ratio: This ratio is used as measure of the companys ability to meet its current obligations. Since bank overdraft is secured by the inventories, the other current assets must be sufficient to meet other current liabilities. A quick ratio of 1:1 indicates highly solvent position. This ratio is called acid test ratio. This ratio serves as a supplement to the current ratio in analyzing liquidity.

Profitability Ratios: The purpose of study and analysis of profitability ratios are to help assessing the adequacy of profits earned by the company and also to discover whether profitability of the firm is the net result of a large number of policies and decisions. The profitability ratios show the combined effects of liquidity, asset management and debt management on operating results. Profitability ratios aremeasured with reference to sales, capital employed, total assets employed, shareholders funds etc. The major profitability ratios are as follows: Return on capital employed or return on investment (ROCE or ROI). Earnings per share (EPS). Cash earnings per share (Cash EPS). Gross profit margin. Net profit margin. Cash profit margin. Return on assets. Return on Net worth (Return on shareholders funds).

1. Return on capital employed: The strategic aim of business enterprises is to earn a return on capital. If in any particular case, the return on the long-run is not satisfactory then the deficiency should be corrected or the activity be abandoned for a more favorable one. Measuring the historical performance of an investment centre calls for a comparison of the profits that has been earned with capital employed.

2. Earnings per share (EPS): The objective of financial management is wealth or value maximization of a corporate entity. The value is maximized when the market price of equity shares is maximized. The use of the objective of wealth maximization or net present value maximization has been advocated as an appropriate and operationally feasible criterion to choose among the alternativesfinancial actions. A higher EPS means better capital productivity.

3. Gross profit margin: The ratio measures the gross profit margin on the total net sales made by the company. The gross profit represents the excess of sales proceeds during the period under observation over their costs, before taking into account administration, selling and distributionand financing charges. The ratio measures the efficiency of the company operations and this can be compared with the previous years results to ascertain the efficiency partners with respect to the previous years. The gross profit margin may be compared with that of competitors in the industry to assess the operational performance relative to the other players in the industry.

100 4. Net profit margin: The ratio is designed to focus attention on the net profit margin arising from
business operations before interest and tax is deducted. The convention is to express profit after tax and interest as a percentage of sales. A draw back is that the percentage which a result varies depending on the sources of employed to finance business activity, interest is charged above the line while dividends are deducted below the line. It is for this reason that the net profit earnings before interest and tax (EBIT) are used. It is to be observed that majority of the costs debited to the profit and loss account are fixed in nature and any increase in sales will cause the cost per unit to decline because of the spread of same fixed cost over the increased number of units sold.

5. Cash

profit ratio: where cash profit= net profit + depreciation Cash profit ratio measures the

cash generation in the business as a result of the operations expressed in terms of sales. The cash profit ratio is more reliable indicator of performance where there are sharp fluctuations in the profit before tax and net profit from year to year owing in depreciation charged. It also facilitates inter-firm comparison of performance since different methods of depreciation may be adopted by different companies.

6. Return

on assets: The profitability of the firm is measured by establishing relation

of net profits with the total assets of the organization. This ratio indicates the efficiency of utilization of assets in generating the revenue.

Activity ratios or Turnover ratios: Activity ratios measure how effectively the firm employs its resources. These ratios are also called turnover ratios which involve comparison between the level of sales and investments in various accounts inventories, debtors, fixed assets, etc, activity ratios are used to measure the speed with which various accounts are converted into sales or cash. The following activity ratios are calculated for analysis: Inventory ratio: A considerable amount of a companys capital may be tied up in the financing of raw materials, work-in-progress and finished goods. It is important to ensure that the level of stocks is kept as low as possible, consistent with the need to fulfill customers order in time.

Inventory ratio: The level of inventory in a company may be assessed by the use of the inventory ratio, which measures how much has been tied up in inventory. The inventory turnover ratio has decreased from past, it means that either inventory is growing or sales are dropping. In addition to that, if a firm

has a turnover that is slower than for its industry, then there may be obsolete goods on hand, or inventory stocks may be high. Low turnover has impact on the liquidity of the business. 100 Debtors: There are three main debtors ratios are as follows : 1. Debtor turnover ratio: Debtor turnover, which measures whether the amount of resources tied up in debtors, is reasonable and whether the company has been efficient in converting debtors into cash.

2. Debtors collection period: Average collection period, which measures how long it take to collect amounts from debtors. The actual collection period can be compared with the stated credit terms of the company. If it is longer than those terms, then this indicates some insufficiency in the procedures of collecting debts.

3. Bad debts to sales ratio: This ratio indicates the efficiency of the credit control procedures of the company. Its level will depend on the type of the business. Mail order companies have to accept a fairly high level of bad debts, while retailing organizations should maintain very low levels or, if they do not allow credit accounts, none at all. The actual ratio is compared with the target or norm to decide whether or not acceptable.

4. Creditors payment period: In general the longer the credit period achieved the better, because delays in payment mean that the operation of the company are being financed interest free by suppliers of funds. But there will be a point beyond which delays in payment will damage relationships with the suppliers which, if they are operating in a sellers market, may harm the company. If too long period is taken to pay creditors, the credit rating of the company may suffer, there by making it more difficult to obtain suppliers in the future.

X 365

Operating ratios: The ratio of all operating expenses (i.e. materials, labour, factory overheads, administration, and selling expenses) to sales is the operating ratio. A comparison of the operating ratio would indicate whether the cost content is high or low in the figure of sales. If the annual comparison shows that the sales has increased the management would be naturally interested and concerned to know as to which element of the cost has gone up. 1) Material cost ratio. 2) Administrative expenses ratio. 3) Labour cost ratio. 4) Selling and distribution expenses ratio. 5) Factory overhead ratio.

ANALYSIS

SCHEDULE OF CHANGES IN WORKING CAPITAL

SL.NO PARTICULARS 31/03/2009 31/03/2008 Increase or Decrease in Absolute 692033530.03 23,242,972.00 715276502.03

LOANS Secured Loans Unsecured Loans TOTAL FIXED ASSETS Gross Block (Less) - Depreciation Net Block - A TOTAL CURRENT ASSET (Less) Current Liability in provision Net Current Assets B

1,330,097,993.26 638,064,463.23 23,242,972.00 ---------------1353340965.26 638,064,463.23

1,800,795,673.04 169,905,278.44 1,630,890,394.60 1,119,608,329.53 584,263,485.22 535,344,844.31

965,574,561.26 124,662,222.38 840,912,338.88 683,578,842.26 279,261,185.52 404,317,656.74

835221111.78 45243056.06 789978055.72 436029487.27 305002299.7 131027187.57

Total (A+B)

2166235238.91

1245229995.62

921005243.29

Working capital required:

WCP Operating Cycle = Raw material + WIP + Finished Goods +Debtors Creditors

1) Raw Materials

PARTICULARS 2009 Average stock of 500023234.43 Raw materials Raw Material 3846332.57 consumption per day Raw materials (in days) 130

2008 275874282.31 1339195.54

2007 254892920.00 897510.28

206

284

Working capital maintained by the company:

WC= Current assets (less) Current liabilities

Particulars Total current assets Totalcurrent liabilities W.C

2009 1,119,608,329.53 584,263,485.22 535,344,844.31

2008 683,578,842.26 279,261,185.52 404,317,656.74

2007 422067183.97 151708691.07 270358492.90

FINDINGS:
On the basis of analysis, the recommendation to further improves the working capital management, which would level the company to greater 1)As we seen in the current ratio, we can say that the company is utilizing its equity fully. This states us that there is no unutilized fund in the company. 2) By observing current ratio, we can say that the company is having more current assets than its current liabilities