Financial Statement Analysis Sip.... Bhagyashree

A
PROJECT REPORT ON
“FINANCIAL STATEMENT ANALYSIS
& WORKING CAPITAL MANAGEMENT”
AT
GANPATI IMPEX Pvt Ltd

DEHUROAD, PUNE- 412101
By
BHAGYASHREE RANE
MBA- II
(BATCH 2018-2020)
Under the Guidance of

Dr. MAHIMA SINGH
Submitted to
“University of Pune”
In Partial Fulfillment of the requirement the award of the degree
of
Master of Business Administration (MBA)
Through
PRATIBHA INSTITUTE OF BUSINESS MANAGEMNET
CHINCHWAD, PUNE
Acknowledgement
I present sincere thanks to Mr. Arun Kulkarni (General Manager, Finance) providing me an opportunity to
carry out the project on Financial Statement Analysis & Working Capital Management. I would also like to
thank Mr. Prashant Joshi for his continues support during project. The Practical & learning inputs provided
by these people will always add a great learning experience in my career.
I would also like to express sincere thanks to Dr. Mahima Singh, my Project Guide for having given me this
privilege of working under her & completing this study.
At the end, I would like to thank all those people who are directly or indirectly supported me for
successfully completing the project.

DECLARATION
This is to declare that, I Bhagyashree Rane student of Master of Business Administration at Pratibha
Institute of Business Management have given original data and information to the best of my knowledge
in the project report “FINANCIAL STATEMENT ANALYSIS & WORKING CAPITAL
MANAGEMENT” under the guidance of Dr. Mahima Singh.
I am grateful to Mr. Sachin Borgave (Director), Pratibha Institute of Business Management who has
provided me an opportunity to undertake this project and gain a practical exposure of the industry.
I have prepared this report independently and I have gathered all the relevant information personally. I also
agree in principle not to share the vital information with any other outside the organization and will not
submit the project report to any other university.
Place: Pune BHAGYASHREE RANE

Date: MBA (FINANCE)
Certificate
This is to certify that the project report titled “Financial Statement Analysis & Working Capital
Management” is a bonafied work carried out by Miss. Bhagyashree Rane for Ganpati Impex Pvt Ltd.
Pune. She is a student of Pratibha Institute of Business Management & has worked under our guidance &
directions.
This project is submitted in partial fulfillment of Master of Business Administration, University of Pune for
the Academic year 2019-2020.
Dr. Mahima Singh Dr. Sachin Borgave
Project Guide Director
Prof. Gururaj Dangare External Examiner
HOD- MBA
List of Tables
Table no. Particulars Page no.

1 Current Ratio
2 Acid Test Ratio
3 Comparison of Current & Acid Test Ratio
4 Cash Ratio
5 Interest Coverage Ratio
6 Inventory Turnover Ratio
7 Debtors Turnover Ratio
8 Creditors Turnover Ratio
9 Return on Assets
10 Gross Profit Calculation
11 Gross Profit Margin Ratio
12 Net Profit Calculation
13 Net Profit Margin Ratio
14 Operating Expense Ratio
15 If………. Then…………………
16 Estimated Working Capital
List of Figures
Figure No. Particulars Page no.

1 Du Pont Chart
2 Operating Cycle
INDEX
Sr No. Particulars Page No.

1 Executive Summary 1-2
2 Objectives 3
3 Research Methodology 4-5
4 Company Profile 6-7
5 Introduction of Financial Ratios 8-12
6 Standard of Comparison 13-14
7 Liquidity Ratios 15-23
8 Activity Ratios 23-30
9 Profitability Ratios 30-38
10 Introduction of Working Capital Management 39-50
11 Receivables Management 51-53
12 Creditors Management 54-55
13 Inventory Management 56-57
14 Estimated Working Capital 59-64
15 Working Capital Financing 65-69
16 Findings 70
17 Recommendations 71
18 Conclusion 72
19 Bibliography 73
EXECUTIVE SUMMARY
Company being established as Grauer & Weil India limited in 1957, made an entry with manufacturing of
polishing compounds, mops, fiber, wheels etc & soon diversified by establishing companies like Growel
Hobbies Ltd., Poona Bottling Plant Ltd., Bombay Paints & Growel Projects Ltd.
My Project is to find out the Financial Health of the Company & study of working capital
management. The study was conducted only for the Ganpati Impex Ltd Dehuroad. The company has full
experienced and well educated engineering teams with more than 40 persons. The project was of 2 months
duration. During the project I interviewed the executives & staff to collect the data, & also made use of
company records. The data collected were then compiled, tabulated and analyzed.
Financial analysis which is one of the topics of this project refers to an assessment of the viability, stability
and profitability of a business. This important analysis is performed usually by finance professionals in order
to prepare financial reports. These financial reports are made with using the information taken from financial
statements of the company and it is based on the significant tool of Ratio Analysis. These reports are usually
presented to top management as one of their basis in making crucial business decisions. During the summer
training period at Ganpati Impex Ltd. This experience was an emphasis on the importance of these Ratios
which could be the roots of decisions made by management that can make or break the company.
Working Capital Management is a very important facet of financial management due to: Investments in
current assets represent a substantial portion of total investment. Investment in current assets & the level of
current liabilities have to be geared quickly to change sales.
OBJECTIVES
 To identify the financial strengths & weakness of the company.
 Evaluating company s performance relating to financial statement analysis.
 To know the liquidity position of the company with the help of Liquidity ratio.
 To find out the utility of financial ratio in credit analysis & determining the financial capacity of the
firm.
 To minimize the amount of capital employed in financing the current assets. This will also lead to an
improvement in Return on Capital Employed.
 To manage the current in such a way that the marginal return on investment in these assets is not less
than the cost of capital acquired to finance them. This will ensure the maximization of the value of
business unit.
 To maintain a proper balance between the amount of current assets & the current liabilities in such a
way that a firm is always able to meet its financial obligations whenever due. This will ensure
smooth working of the unit without any production held ups due to paucity of funds. Thus, the
objective is to ensure the maintenance of satisfactory level of working capital in such a way that it is
neither inadequate nor excessive. It should not only be sufficient to cover the current liabilities but
should ensure a reasonable margin of safety also.
Research Methodology
Research framework:
This study is based on the data about Grauer & Weil India Ltd. (Engineering Division) Pune for a detailed
study of its financial statements to recognize and determine the position of the company & Working Capital
Management.
Types of data which helped to prepare this report:
1. First type is the primary data which was collected personally to be used and studied to prepare and reach
the objectives already mentioned. Primary data is that which is not published. So the information was
collected by discussion held with the executives of accounts and finance department.
2. The secondary data which was already exists or someone has collected it for specific purpose. These data
was only used to reach the aims and objectives of this project. These data has been collected from the
financial reports of the company.

COMPANY PROFILE
In the year 1957, a group of entrepreneurs comprising two traders of long standing repute in the plating
industry and a financer, joined hands together to form a young company in collaboration with Ganpati
Impex Pune, thus creating Ganpati Impex Pvt. Ltc., Dehuroad.
In the days of its inception, Ganpati Impex, commenced with the manufacturing of polishing compounds,
mops, fiber, wheels etc. In the next decade, the company grew in leaps and bounds supported by a very
dynamic and fast growing economy in the Indian sub-continent, acquired and adopted newer technologies
through its principals and other international associates, enlarging its product range vastly, for e.g. pre-
treatment chemicals, basic chemicals used in electroplating industries, and also conventional equipments
like filters, agitation units, tanks, exhaust, etc. Subsequently, the management of the company changed
hands by virtue of which the control came to rest with a larger business house. The Company is listed on
Bombay Stock Exchange. It has its registered office in Mumbai & has branches in Pune, Aurangabad,
Ahmedabad, Coimbator, Cochin, Chennai, Bangalore, Kolkata, Indore, Ludhiana, Noida, Rajkot &
Secundarabad. The Company’s manufacturing plants are in Alandi, Vapi and Dadara & Barotiwala (H.P.).
The Company also has overseas braches in Thailand & China.
The company has since built an extremely strong team of very dedicated and capable group of people to
cover virtually all the branches of metal finishing akin to decorative as well as industrial usage, substantially
contributing to a fast growing technology in the Asian sub-continent. In the more recent times it has well
adapted itself to the modern tools of the industrial world.
Financial Ratio Analysis
Financial ratio analysis is the calculation and comparison of ratios which are derived from the information in
a company's financial statements. In other words, a financial ratio or accounting ratio is a ratio of selected
values on an enterprise's statements. The level and historical trends of these ratios can be used to make
inferences about a company's financial condition, its operations and attractiveness as an investment. Ratios
are always expressed as a decimal value, such as 0.10, or the equivalent percent value, such as 10%
Financial ratios are calculated from one or more pieces of information from a company's financial
statements. For example, the "gross margin" is the gross profit from operations divided by the total sales or
revenues of a company, expressed in percentage terms.
It is imperative to note the importance of the proper context for ratio analysis. Like computer programming,
financial ratio is governed by the GIGO law of "Garbage In...Garbage Out!" A cross industry comparison of
the leverage of stable utility companies and cyclical mining companies would be worse than useless.
Examining a cyclical company's profitability ratios over less than a full commodity or business cycle would
fail to give an accurate long-term measure of profitability. Using historical data independent of fundamental
changes in a company's situation or prospects would predict very little about future trends. For example, the
historical ratios of a company that has undergone a merger or had a substantive change in its technology or
market position would tell very little about the prospects for this company.
Credit analysts, those interpreting the financial ratios from the prospects of a lender, focus on the
"downside" risk since they gain none of the upside from an improvement in operations. They pay great
attention to liquidity and leverage ratios to ascertain a company's financial risk. Equity analysts look more to
the operational and profitability ratios, to determine the future profits that will accrue to the shareholder.
Although financial ratio analysis is well-developed and the actual ratios are well-known, practicing financial
analysts often develop their own measures for particular industries and even individual companies. Analysts
will often differ drastically in their conclusions from the same ratio analysis.
Analyzing the Financial Ratios
Overview
Any successful business owner is constantly evaluating the performance of his or her company, comparing it
with the company's historical figures, with its industry competitors, and even with successful businesses
from other industries. To complete a thorough examination of our company's effectiveness, however, we
need to look at more than just easily attainable numbers like sales, profits, and total assets. We must be able
to read between the lines of your financial statements and make the seemingly inconsequential numbers
accessible and comprehensible.
This massive data overload could seem staggering. Luckily, there are many well-tested ratios out there that
make the task a bit less daunting. Comparative ratio analysis helps us identify and quantify our company's
strengths and weaknesses, evaluate its financial position, and understand the risks we may be taking.
As with any other form of analysis, comparative ratio techniques aren't definitive and their results shouldn't
be viewed as gospel. Many off-the-balance-sheet factors can play a role in the success or failure of a
company. But, when used in concert with various other business evaluation processes, comparative ratios are
invaluable.
This discussion contains descriptions and examples of the eight major types of ratios used in financial
analysis: Income, Profitability, Liquidity, Working Capital, Bankruptcy, Long-Term Analysis, Coverage, and
Leverage.
Purposes and Considerations of Ratios and Ratio Analysis
Ratios are highly important profit tools in financial analysis that help financial analysts implement plans that
improve profitability, liquidity, financial structure, reordering, leverage, and interest coverage. Although
ratios report mostly on past performances, they can be predictive too, and provide lead indications of
potential problem areas.
Ratio analysis is primarily used to compare a company's financial figures over a period of time, a method
sometimes called trend analysis. Through trend analysis, you can identify trends, good and bad, and adjust
your business practices accordingly. We can also see how your ratios stack up against other businesses, both
in and out of our industry.
There are several considerations one must be aware of when comparing ratios from one financial period to
another or when comparing the financial ratios of two or more companies.

 If we are making a comparative analysis of a company's financial statements over a certain period of
time, make an appropriate allowance for any changes in accounting policies that occurred during the
same time span.
 When comparing our business with others in our industry, allow for any material differences in
accounting policies between our company and industry norms.
 When comparing ratios from various fiscal periods or companies, inquire about the types of
accounting policies used. Different accounting methods can result in a wide variety of reported
figures.
 Determine whether ratios were calculated before or after adjustments were made to the balance sheet
or income statement, such as non-recurring items and inventory or pro forma adjustments. In many
cases, these adjustments can significantly affect the ratios.
Standards of Comparison
1) Time Series Analysis:-
When financial ratios over a period of time are compared, it is known as the time series analysis.
An aspect of trend analysis that tries to predict the future movement of company on past data. Trend analysis
is based on the idea that what has happened in the past gives financial analysts an idea of what will happen
in the future
Trends can be thought of as three main types,
I. Short
II. Intermediate and
III. Long term

Trend analysis is helpful in identifying trends as moving with them, and not against them will lead to profit
for a firm. It gives an indication of the direction of change & reflects whether the firm’s financial
performance has improved, deteriorated or remained constant over time.
2) Cross- Sectional Analysis:-
When the ratios of one firm are compared with some selected firms in a particular industry at same point in
time is called as Cross-Sectional Analysis. This kind of analysis is more helpful to compare the relative
financial position & performance of the firm with its competitors. A firm can easily resort to such a
comparison as it is not difficult to get the published financial statements of the similar firms.
3) Industry Analysis:-
In Industry Analysis the ratios of a firm is compared with the average ratios of the industry of which the firm
is a member. The average is the average of the ratios of strong & weak firms in the industry. This kind of
analysis is known as Industry Analysis. It helps to ascertain the financial standing & capability of the firm
with other firms in the industry. Industry ratios are important standards in view of the fact that each industry
has its characteristics which influences the financial & operating relationship.
4) Pro-forma Analysis:-
Sometimes future ratios are used as the standard of comparison. Future ratios can be developed from the
projected, or Pro-forma, financial statements. The comparison of current or past ratios with future ratios
shows the firm’s relative strengths & weaknesses in the past & the future. If the future ratios indicate weak
financial position, correlative actions should be initiated.
Here the ratios for GANPATI IMPEX Ltd. Dehuroad are calculated on the basis of Trend Analysis & Pro-
forma Analysis only.
Financial ratio analysis groups the ratios into categories which tell us about different facets of a company's
finances and operations. An overview of some of the categories of ratios is as follows:-

Liquidity Ratios
Liquidity ratios are also referred to as solvency ratios, show the ability of a firm to meet financial
obligations over the short term.
These ratios help you assess the organization’s ability to meet such near term obligations as accounts
payable, or to maintain regular operations with current assets that will become available in the near future
(Typically within one year). These ratios give information on the adequacy of unrestricted cash for seeding
new development projects, bringing cash shortfalls & providing collateral for loans.
The failure of a company to meet its obligations due to lack of sufficient liquidity, will result in poor
creditworthiness, loss of creditor’s confidence, or even in legal tangles resulting in the closure of the
company. A very high degree of liquidity is also bad; idle assets earn nothing. Therefore, it is necessary to
strike proper balance between high liquidity & lack of liquidity. The most common ratios that indicate the
extent of liquidity or lack of it are:-
Current Ratio:-
The current ratio is a popular financial ratio used to test a company's liquidity by deriving the proportion of
current assets available to cover current liabilities.
The concept behind this ratio is to ascertain whether a company's short-term assets (cash, cash equivalents,
marketable securities, receivables and inventory) are readily available to pay off its short-term liabilities
(notes payable, current portion of term debt, payables, accrued expenses and taxes). In theory, the higher the
current ratio, the better.
A Current Ratio of 1.2:1 or higher is considered satisfactory. Current Ratio less than 1.0 indicates that the
firm does not have sufficient fund to meet its current obligations.
One drawback of the current ratio is that inventory may include many items that are difficult to liquidate
quickly and that have uncertain liquidation values. Short-term creditors prefer a high current ratio since it
reduces their risk. Shareholders may prefer a lower current ratio so that more of the firm's assets are working
to grow the business. Typical values for the current ratio vary by firm and industry.
Work through the data for Grauer & Weil Engineering Division and calculate their current ratio for the three
years as follows:-
Table:1
2015-2016
Current Asset 135,407,857.16 1.98
Current Liabilities 68,108,242.79
2016-2017
Current Asset 162,083,207.03 1.82
2017-2018
Current Asset 216,016,236.43 1.59
When looking at the current ratio, it is important that a company's current assets can cover its current
liabilities. For the G & I Engineering Division, there has been a major turnaround among the three years as
the ratios are decreasing year-by-year, it was 1.98:1 in 2015-16, 1.82 in 2016-17 & 1.59 in 2017-18. But the
ratios are more
than satisfactory because it still cover all the Current Liabilities. From the accounting information the
business has increased its sales by 42% over the three years (i.e. from 2015-16 to 2016-2017), its stocks are
almost unchanged; debtors have increased by 40%, and cash by 300%.
But its not necessary that the above ratios are good for the company as it also depends on the quality of
debtors & Payable Deferral Period (explained below). It means that if the company has to pay to their
Creditors before they receive anything from their Debtors, the above ratio though looking satisfactory will
not be of any significance.
Quick Ratio:-
The Quick Ratio is also known as the Liquid or the Acid Test Ratio. The idea behind this ratio is that stocks
are sometimes a problem because they can be difficult to sell or use. That is, even though a supermarket has
thousands of people walking through its doors every day, there are still items on its shelves that don't sell as
quickly as the supermarket would like. Similarly, there are some items that will sell very well.
Nevertheless, there are some businesses whose stocks will sell or be used slowly and if those businesses
needed to sell some of their stocks to try to cover an emergency, they would be disappointed. Engineering
companies can have their materials in stock for as much as 9 months to a year; a greengrocer should have his
stocks for no longer than 4 or 5 days - a good greengrocer anyway.
(Current Asset – Inventory)
-----------------------(divided by) -----------------------
Current Liabilities
Table:2
2015-16
Current Asset – Inventory 92,295,771.26 1.35
2016-17
2017-18
As said earlier quick ratio of 1:1 is considered satisfactory & here also the ratios for three years are more
than 1 which means that the company has sufficient liquid assets with it. The Company has sufficient cash as
compared to its liabilities. Still we need to put the current and acid test ratios side-by-side to help us to
understand what is happening to the business:
Table:3
Comparison Current Ratio Quick Ratio
2015-16 1.98:1 1.35:1
2016-17 1.82:1 1.30:1
2017-18 1.59:1 1.20:1
The fact that the differences between the current and Quick Ratios are not too large tells us that the
Engineering Division’s stocks are not that large either.
Additionally, the acid test ratio has decreased over the three year period, meaning that the Engineering
Division has not that much liquidity position than it had before. Normally that is not a good thing.
Cash Ratio:-
The cash ratio is an indicator of a company's liquidity that further refines both the current ratio and the quick
ratio by measuring the amount of cash; cash equivalents or invested funds there are in current assets to cover
current liabilities.
Cash Ratio is the most conservative estimate than the current asset ratio since assets other than cash & cash
equivalent are excluded from this ratio. The Cash Ratio relates current liabilities to organization’s most
liquid current assets. The cash ratio is an indication of the firm's ability to pay off its current liabilities if for
some reason immediate payment were demanded. This ratio should be at least 0.5 to 0.75 & clearly, the
higher the better.
(Cash + Marketable Securities)
----------------------- (divided by) -----------------------
Current Liabilities
Table
2015-2016
Cash 712,102.05
Current Liabilities 68,108,242.79 1%
2016-2017
Cash 4,188,183.11 4%
2017-2018
Cash 5,054,217.73 3%
In the essence, some assets are quickly convertible into cash. Here Engineering division’s most liquid
current asset excludes accounts receivable from this calculation as these are frequently not immediately
collectable. This ratio is important measure of the firms’ liquidity. The Cash Ratio here indicates that the
Engineering Division is Carrying sufficient amount of Cash in the year 2016-2017 to 2017-2018 i.e. 4%,
3% respectively against their liability. It has cash below average in the year 2015-2016.
Here it only looks at the most liquid short-term assets of the Engineering Division, which are those that can
be most easily used to pay off current obligations. It also ignores inventory and receivables, as there are no
assurances that these two accounts can be converted to cash in a timely matter to meet Current Liabilities.
Interest Coverage Ratio:-
The interest coverage ratio is a measurement of the number of times a company could make its interest
payments with its earnings before interest and taxes; the lower the ratio, the higher the company’s debt
burden.
Interest coverage is the equivalent of a person taking the combined interest expense from their mortgage,
credit cards, auto and education loans, and calculating the number of times they can pay it with their annual
pre-tax income. For bond holders, the interest coverage ratio is supposed to act as a safety gauge. It gives
you a sense of how far a company’s earnings can fall before it will start defaulting on its bond payments. For
stockholders, the interest coverage ratio is important because it gives a clear picture of the short-term
financial health of a business. To calculate the interest coverage ratio, divide EBIT (earnings before interest
and taxes) by the total interest expense.

EBIT (earnings before interest and taxes)
-----------------------(divided by)-----------------------
Interest Expense
As a general rule of thumb, investors should not own a stock that has an interest coverage ratio under 1.5.
An interest coverage ratio below 1.0 indicates the business is having difficulties generating the cash
necessary to pay its interest obligations. The history and consistency of earnings is tremendously important.
The more consistent a company’s earnings, the lower the interest coverage ratio can be.
Table:5
2015-2016
Earning Before Interest & Tax 3,282,755.05
Net Interest Receivable 293,077.68 11.20
(Payable)
2016-2017
Earning Before Interest & Tax - 1,477,435.71
Net Interest Receivable 388,774.45
-3.80
(Payable)
2017-2018
Earning Before Interest & Tax 13,835,439.57
Net Interest Receivable 876,500.40
15.78
(Payable)
In 2015-2016 & 2017-2018, the G & I Engineering Division had no problem with its interest obligations
since it was a net receiver of interest: the interest it earned was greater than the interest it might have had to
pay. For the year 2015-2016, though, its interest obligations were negative, meaning that it needed to pay
more interest than it had earned. However, these results help us to illustrate a good point: even though the
interest cover ratio gives us a bad result in 2016-2017, it doesn't mean the Engineering Division can't pay the
interest it owes: in fact it must have because its still in business

Activity Ratios
Funds of creditors & owners are invested in various assets to generate sales & profits. The better the
management of assets, the larger the amount of sales. Activity Ratios are employed to evaluate the efficiency
with which the firm manages & utilizes its assets. These ratios are also called as turnover ratios because they
indicate the speed with which assets are being converted or turned over into sales. Activity Ratios, thus,
involve a relationship between sales & assets. A Proper balance between sales & assets generally reflects
that assets are managed well. Several activity ratios can calculate to judge the effectiveness of asset
utilization.
Inventory Turnover Ratio:-
Inventory Turnover Ratio indicates the efficiency of the firm in producing & selling its product. This ratio
reveals how well inventory is being managed. It is important because the more times inventory can be turned
in a given operating cycle, the greater the profit. The Company should maintain a sufficient quantity of
inventory i.e. it shouldn’t be too high or too low. Because high inventory may results in increasing storage
cost, unnecessary tie up of funds in inventories & low inventory may interrupt the process of production.
The Inventory Turnover Ratio is calculated as follows:
Cost of goods sold
----------------------- (divided by) -----------------------
Average Inventory
Table:6
In no. of months In no. of

days
2015-2016
Cost of goods 116,243,362.24
sold 3.26 3.68 Months 112 days
Avg. Inventory 35,635,163.59
2016-2017
Cost of goods 160,226,545.41
2017-2018
Cost of goods 266,201,553.58
Here with a result of 112 days in 2015-16, 101 days in the next year & 69 days in 2017-2018, we can see
that these ratios has fallen from 112 days to 68 days over the three years and that is probably a good thing. If
there's less stock to worry about, lower investment in stocks meaning that the money they used to have tied
up in the stock room is now free to spend somewhere else.
In fact, inventory of the Engineering Division have increased by 24% & the cost of sales has increased by
129% over the three years.
The increasing Inventory Turnover of the firm is showing very low level of inventory & frequent stock outs.
The company’s utilization of inventories in generating sales is good. The yearly holding of inventories is
decreasing. It means increase in sales. It also indicates the efficient inventory management by the Eng.
Division.
In principle, the lower the investment in stocks the better. Apart from buffer stocks that businesses
sometimes need in case of shortages of supply and strategic stocks in case of war, sudden changes in
demand and so on, modern stock control theory tells us to minimize our investment in stocks.
Debtors Turnover Ratio:-
Debtors Turnover Ratio indicates the number of times debtors turnover each year. Generally the higher the
value of debtors’ turnover, the more efficient is the management of credit. The Debtors Turnover is often
reported in terms of the number of days that credit sales remain in accounts receivable before they are
collected. This number is known as the collection period. The average collection period measures the quality
of debtors since it indicates the speed of their collection.
 The shorter the average collection period, the better the quality of debtors, as a short collection
period implies the prompt payment by debtors.
 The average collection period should be compared against the firm’s credit terms and policy to judge
its credit and collection efficiency.
 An excessively long collection period implies a very liberal and inefficient credit and collection
performance.
Many businesses need to sell their goods on credit, otherwise they might find it difficult to survive if their
competitors provide such credit facilities; this could mean losing customers to the opposition. Nevertheless,
since we do provide credit, we must do so as optimally as possible. It is Average Debtors divided by Credit
Sales per day, calculated as follows:-
Average Debtors
----------------------- (divided by) -----------------------
Credit Sales Per dayTable:7
2015-2016
Average Debtors 60,050,850.61 114 days
Cr. Sales per day 524,726.90
2016-2017
Average Debtors 76,777,026.55 108 days
Cr. Sales per day 706,634.42
2017-2018
Average Debtors 105,298,047.72
Cr. Sales per day 1,163,567.43 90 days
Common sense tells you the faster a company collects its receivables, the better. The sooner customers pay
their bills; the sooner a company can put the cash in the bank, pay down debt, or start making new products.
There is also a smaller chance of losing money to delinquent accounts.
Firstly, if you will see the above figure the ratio seems to be good as it has been decreasing from 114 to 90
days over the three years; and it means that, on average, the G & I’s debtors are taking 3.8 months in2015-
2016, 3.6 months in the next year & 3 months in 2017-18 to pay their accounts. If we compare this ratio
with the Payable Deferral Period it seem good because the company has been receiving cash before they
have to pay anything to their creditors .
As the company is in manufacturing of bulk products, we can say that the company is managing its
receivables quite good & also has improved its Collection Policy.
Creditors Turnover Ratio:-
Creditors are the businesses or people who provide goods and services in credit terms. That is, they allow us
time to pay rather than paying in cash.
There are good reasons why we allow people to pay on credit even though literally it doesn't make sense! If
we allow people time to pay their bills, they are more likely to buy from your business than from another
business that doesn't give credit. The length of credit period allowed is also a factor that can help a potential
customer deciding whether to buy from your business or not: the longer the better, of course.
In spite of what we have just said, creditors will need to optimize their credit control policies in exactly the
same way that we did when we were assessing our debtors' turnover ratio - after all, if you are my debtor I
am your creditor.
We give credit but we need to control how much we give, how often and for how long. Let's do some
calculations for the Carphone Warehouse.
The formula for this ratio is:
Avg. Creditors
----------------------- (divided by) -----------------------
(Cost of sales / 365)
Table:8
2015-16
Avg. Creditors 79,038,669.77 155 days
Cost of sales per day 507,489.97
2016-17
Avg. Creditors 105,556,383.20 182 days
2017-18
Avg. Creditors 193899445.9 200 days
We interpret this ratio in exactly the same way as the debtors' turnover ratio. That is, in 2015-2016 if we had
bought some supplies for 507,489.97, company would have paid for them 155 days later, similarly in the
year 2016-17 & 2017-18 company would have paid for their purchases 182 & 200 days later respectively.
Having found that debtors are taking somewhere between 90 and 115 days to pay their accounts, notice that
the business is taking over 6 month’s credit for itself in 2016-17. The credit of the company has increased
over the years.
A low turnover ratio reflects liberal credit terms granted by suppliers, while a high ratio shows that accounts
are to be settled rapidly. A creditor’s turnover ratio is an important tool of analysis as a firm can reduce its
requirement of current assets by relying on suppliers credit. The extent to which trade creditors are willing to
wait for payment can approximately by the creditors turnover ratio.

Profitability Ratios
Apart from the creditors, both short term & long term, also interested in the financial soundness of a firm are
the owners & management or the company itself. The management of the firm is naturally eager to measure
its operating efficiency. Similarly, the owners invest their funds in the expectation of reasonable returns. The
operating efficiency of a firm & its ability to ensure adequate returns to its owners depend ultimately on the
profit earned by it. The profitability of a firm can be measured by its profitability ratios. In other words the
profitability ratios are designed to provide answers to questions such as i) is the profit earned by the firm
adequate? ii) What rate of return it does represent? iii) What is the rate of profit for different divisions &
segments of the firm? Etc. Profitability ratios can be determined on the basis of either sales or investments &
they are:-
Rate of Return on Asset:-
Where asset turnover tells an investor the total sales for each rupee of assets, return on assets tells an
investor how much profit a company generated for each rupee in assets. The return on assets figure is also a
sure-fire way to gauge the asset intensity of a business. Return on assets measures a company’s earnings in
relation to all of the resources it had at its disposal. Thus, it is the most stringent and excessive test of return
to shareholders. If a company has no debt, it the return on assets and return on equity figures will be the
same.
The lower the profit per rupee of assets, the more asset-intensive a business is. The higher the profit per
rupee of assets, the less asset-intensive a business is. All things being equal, the more asset-intensive a
business, the more money must be reinvested into it to continue generating earnings. This is a bad thing.
Rate of Return on Asset
Rate of Return on Asset

EAT as percentage Asset Turnover
of sales Multiplied by
EAT Divided by Sales Sales Divided by Total Asset
Fixed Asset Current Asset
Return on Assets
Table:9
2015-2016 2016-2017 2017-2018

1. Net Sales 163,385,009.76 213,519,108.79 356,474,611.89
2. Net Profit 2,029,990.94 - 8,799,119.7
3. Total Assets 142,777,071.43 177,050,910.64 232,826,707.47
4. Profit Margin (2/1) (per cent) 1.24 - 2.46

5. Asset Turnover (1/3) (times) 1.14 - 1.53
6. ROA ratio (4*5) (per cent) 1.41 - 3.76
Gross Profit Margin Ratio:-
A company's cost of sales, or cost of goods sold, represents the expense related to labor, raw materials and
manufacturing overhead involved in its production process. This expense is deducted from the company's
net sales/revenue, which results in a company's first level of profit, or gross profit. The gross profit margin is
used to analyze how efficiently a company is using its raw materials, labor and manufacturing-related fixed
assets to generate profits. A higher margin percentage is a favorable profit indicator. Here’s the formula to
calculate it:
Gross Profit
------------------- (divided by) -----------------* 100
SalesGross Profit:-
Table:10
2015-2016 2016-2017 2017-2018

A) Net Sales 163,385,009.76 213,519,108.79 356,474,611.89
B) Less :- COGS 116,243,362.24 160,226,545.41 266,201,553.58
Gross Profit [A – B] 47,141,647.52 53,292,563.38 90,273,058.31
Table:11
2015-2016
Gross Profit 47,141,647.52 24.61%
Sales 191,525,318.50
2016-2017
Gross Profit 53,292,563.38 20.66%
Sales 257,921,563.30
2017-2018
Gross Profit 90,273,058.31 21.25%
Sales 424,702,112.00
Normally the gross profit has to rise proportionately with sales. The ratio above shows the decreasing trend
in the gross profit since the ratio has gone down from 24.61% in 2015-16 to 20.66% in 2016-17 & then
increased slightly to 21.25% in 2017-2018. If we will reduce the Gross Profit Margin from 100 per cent we
will get the Percentage increase/decrease of Cost of goods sold ratio which seems to be increasing in this
case. The cost of goods sold ratio shows what percentage share of sales is consumed by cost of goods sold
& conversely, what proportion is available for meeting expenses such as selling & general distribution
expenses as well as financial expenses consisting of taxes, interest & dividends, & so on. This means that
the rate in increase in cost of goods sold is more than rate of increase in sales here, hence the decreased
efficiency. It also indicates that if a company's raw materials and factory wages go up a lot, the gross profit
margin will go down unless the business increases its selling prices at the same time.
Net Profit Margin:-
The Net profit margin tells you how much profit a company makes for every rupee it generates in revenue.
Profit margins vary by industry, but all else being equal, the higher a company’s profit margin compared to
its competitors, the better. Several financial books, sites, and resources tell an investor to take the after-tax
net profit divided by sales. While this is standard and generally accepted, some analysts prefer to add
minority interest back into the equation, to give an idea of how much money the company made before
paying out to minority “owners”. All companies must be compared on the same basis. It calculated as
below:-
Profit After Tax
------------------ (divided by) ----------------- * 100
Net Sale
Net Profit Calculation
Table:12
2015-16 2016-17 2017-18

Net Sales 163,385,009.76 213,519,108.79 356,474,611.89
(-) Cost of Goods Sold 116,243,362.24 160,226,545.41 266,201,553.58
Gross Profit 47,141,647.52 53,292,563.38 90,273,058.31
(-) Selling & Admin. 43,230,457.37 55,779,407.88 80,567,908.83
Expenses
Operating Income/Loss 3,911,190.15 -2,486,844.5 9,705,149.48
(+) Other Income 628,435.10 1,009,408.79 4,130,290.09
EBIT 3,282,755.05 - 1,477,435.71 13,835,439.57
(-) Interest 293,077.68 388,774.45 876,500.40
Profit before Tax 2,989,677.37 -1,866,240.16 12,958,939.17
(-) Tax 30% 896,903.21 - 3,887,681.75
2,092,774.16 - 9,071,257.42
(-) Surcharge 10% - - -
(-) Education cess 3% 62,783.22 - 272,137.72
Profit after Tax 2,029,990.94 - 8,799,119.7
Net Profit Margin
Table:13
2015-2016
Profit After Tax 2,029,990.94 1.24%
Net Sales 163,385,009.76
2016-2017
Profit After Tax - -
Net Sales 213,519,108.79
2017-2018
Profit After Tax 8,799,119.7 2.46%
Net Sales 356,474,611.89
In some cases, lower profit margins represent a pricing strategy. Here it can be said that the net profit margin
ratio of 1.24% in 2015-16 & 2.46% in 2017-2018 is not at all fair. In fact the company is showing loss in
2016-2017. It reflects that the company is spending much more on Distribution, Administrative & Selling
expenses.
Operating Expenses Ratio:-
Another Profitability Ratio related to sales is Expenses Ratio. It is computed by dividing expenses by sales.
The term expenses includes Cost of goods sold, administrative expenses, selling & distribution expenses,
financial expenses but excludes taxes, dividends & extraordinary losses due to theft of goods, goods
destroyed by fire & so on. There are different variants of expenses ratios. That is:-
Operating Expenses
--------------------- (divided by) --------------------- * 100
Net Sale
Table:14
2015-16
Operating Expenses 43,230,457.37 26.45%
Net Sales 163,385,009.76
2016-17
Net Sales 213,519,108.79
2017-18
Net Sales 356,474,611.89
The expense ratio is closely related to the profit margin, gross as well as net. Here in the case of Engineering
division operating ratio is for first two years is near about same as there is decrease of a fraction but it has
gone down in 2017-18 to 22.60% which is a good sign for the company as it will increase the operating
profit margin for the company. When the operating expense ratio is subtracted from 100 per cent we will get
the operating profit margin. It implies here that the total operating expenses including cost of goods sold
26.45% in 2015-16, 26.12% in 2016-17 & 22.60% in 2017-18 of the sales revenue of the firm & the
remaining is left for meeting interest & tax obligations as also retaining profits for future expansion. As the
working proposition, low expense ratio is favorable as it reveals the operational efficiency of the company.
The expenses ratio is very important for analyzing the profitability of the firm. Here the expenses ratio is
being favorable for the company it may reveal changes in the selling price or operating expenses.
WORKING CAPITAL MANAGEMENT
INTRODUCTION
For increasing shareholder's wealth a firm has to analyze the effect of fixed assets and current assets on its
return and risk. Working Capital Management is related with the Management of current assets. The
Management of current assets is different from fixed assets on the basis of the following points:
1. Current assets are for short period while fixed assets are for more than one Year.
2. The large holdings of current assets, especially cash, strengthens Liquidity position but also reduces
overall profitability, and to maintain an optimum level of liquidity and profitability, risk return trade off is
involved holding Current assets.
3. Only Current Assets can be adjusted with sales fluctuating in the short run. Thus, the firm has greater
degree of flexibility in managing current Assets. The management of Current Assets helps affirm in building
a good market reputation regarding its business and economic condition.
Paradigms of Working Capital Management
CONCEPT OF WORKING CAPITAL:
The concept of Working Capital includes Current Assets and Current Liabilities both. There are two
concepts of Working Capital they are Gross and Net Working Capital.
1. Gross Working Capital: Gross Working Capital refers to the firm's investment in Current Assets. Current
Assets are the assets, which can be converted into cash within an accounting year or operating cycle. It
includes cash, short-term securities, debtors (account receivables or book debts), bills receivables and stock
(inventory).
2. Net Working Capital: Net Working Capital refers to the difference between Current Assets and Current
Liabilities are those claims of outsiders, which are expected to mature for payment within an accounting
year. It includes creditors or accounts payables, bills payables and outstanding expenses. Net Working
Copulate can be positive or negative. A positive Net Working Capital will arise when Courtney Assets
exceed Current Liabilities and vice versa.

Concept of Gross Working Capital
The concept of Gross Working Capital focuses attention on two aspects of Current Assets' management.
They are:
a) Way of optimizing investment in Current Assets.
b) Way of financing current assets.
a. Optimizing investment in Current Assets: Investment in Current Assets should be just adequate i.e.,
neither in excess nor deficit because excess investment increases liquidity but reduces profitability as idle
investment earns nothing and inadequate amount of working capital can threaten the solvency of the firm
because of its inability to meet its obligation. It is taken into consideration that the Working Capital needs of
the firm may be fluctuating with changing business activities which may cause excess or shortage of
Working Capital frequently and prompt management can control the imbalances.
b. Way of financing Current Assets: This aspect points to the need of arranging funds to finance Country
Assets. It says whenever a need for working Capital arises; financing arrangement should be made quickly.
The financial manager should have the knowledge of sources of the working Capital funds as wheel as
investment avenues where idle funds can be temporarily invested.
Concept of Net Working Capital

This is a qualitative concept. It indicates the liquidity position of and suggests the extent to which working
Capital needs may be financed by permanent sources of funds. Current Assets should be optimally more
than Courtney Liabilities. It also covers the point of right combination of long term and short-term funds for
financing court Assents. For every firm a particular amount of net Working Capital in permanent. Therefore
it can be financed with long-term funds.
Thus both concepts, Gross and Net Working Capital, are equally important for the efficient management of
Working Capital. There are no specific rules to determine a firm's Gross and Net Working Capital but it
depends on the business activity of the firm.
Working capital management is concerned with the problems that arise while managing the current assets
the current liabilities and the interrelationship that exits between them. Thus, the WC management refers to
all aspects of a administration of both current assets the current liabilities.
Every business concern should not have neither redundant nor cause excess WC nor into should be short of
W.C. both condition are harmful and unprofitable for any business. But out of these two the shortage of WC
is more dangerous for the well being of the firms.
Impact/Harm of Redundant Or Excessive Working Capital
* Excessive WC means idle funds, which earn no profits for the business, cannot earn proper rate of return
on its investment.
* When there is a redundant WC, it may lead to unnecessary purchasing and accumulation of inventories
causing more chances if theft, waste and losses.
* Excessive WC implies excessive debtors and defective credit policy, which may cause higher incidences
of bad debts.
* It may result into overall inefficiency in the organizations.

* When there is excessive WC relation with banks and other financial institutions may not be maintained.
* The redundant WC gives rise to speculative transaction.
* Due to low rate of return on investments the value of shares may also fall.
* In case of redundant WC there is always a chance of financing long terms assets from short terms funds,
which is very harmful in long run for any organization.
Dangers of Short or Inadequate Working Capital concern, which had adequate WC, cannot pay its short-term
liabilities in time. Thus it will lose its reputation and should be not be able to get good credit facilities.
* It cannot by its requirements in bulk and cannot avail of discounts. It stagnate growth.
* It becomes difficult for the firms to exploit favorable market conditions and undertake profitable projects
due to non-availability of WC funds.
* The firm cannot pay day-to-day expenses of its operations and its credit inefficiencies, increases cost and
reduces the profits of the business.
* It becomes impossible to utilize efficiently the fixed assets due to non-availability of liquid funds thus the
firms’ profitability would deteriorate.
* The rate of return on investments also falls with the shortage of WC.
Need for Working Capital

For earning profit and continue production activity, the firm has to invest enough funds in Current Assets in
generating sales. Current Assets are needed because sometimes sales do not convert into cash
instantaneously and it includes an operating cycle.
Operating Cycle: Operating cycle is the time duration required to convert sales, after the conversion of
resources into inventories, into cash. Investment in current assets such as inventories and debtors is realized
during the firm's operating cycle, which is usually less than a year.
The operating cycle of a manufacturing company involves three phases: -
1. Acquisition of resources such as raw material, labor, power and fuel etc.
2. Manufacture of the product which includes conversion into work-in-progress into finished goods.
3. Sale of the product either for cash or on credit.
These phases affect cash flows because sometimes sale is done on credit and it takes sometimes to realize
FinishedValue
goodsad ded conversion
Work-in-progress
Sales
Wages, Salary &
overhead
expenses
Production
Payment
Debtors Cash Raw
Collection Pay
material
Payment
Fig. 2 Supply
Creditors
Cash flows in a cycle into, around and out of a business. It is the business's life blood and every manager's
primary task is to help keep it flowing and to use the cash flow to generate profits. If a business is operating
profitably, then it should, in theory, generate cash surpluses. If it doesn't generate surpluses, the business will
eventually run out of cash and expire.
The faster a business expands the more cash it will need for working capital and investment. The cheapest
and best sources of cash exist as working capital right within business. Good management of working
capital will generate cash which will help to improve profits and reduce risks. Bear in mind that the cost of
providing credit to customers and holding stocks can represent a substantial proportion of a firm's total
profits.
There are two elements in the operating cycle that absorb cash - Inventory and Receivables. The main
sources of cash are Payables (your creditors) and Equity and Loans.
Length or Duration of the Operating Cycle: The length of the operating cycle of a manufacturing firm in
the sum of the following:
1. Inventory Conversion period
2. Debtors Conversion periods.
The total of Debtors Conversion Period and Inventory Conversion Period is referred to as Gross Operating
Cycle.
1. Inventory Conversions Period: The Inventory Conversion Period is the total time needed for Producing
and selling the product. It includes:
a. Raw Material Conversion Period.
b. Work-in-progress Conversion Period.
c. Finished Goods Conversion Period.
2. Debtors Conversion Period: It is the time required to collect the outstanding amount from the customers.
Net Operating Cycle: Generally, a firm may resources (raw materials) on credit and temporarily postpones
payment of certain expenses. Payables, which the firm can defer, are spontaneous sources of capital to
finance investment in Courtney Assets.
The length of the time in which the firm is able to defer payments on various resource purchases is Payables
Deferral period. The deference between Gross Operating Cycle and payables Deferral Period is called Net
Operating Cycle. If depreciation is excluded from Net Operating Cycle, the computation repercussion
represents Cash Conversion Cycle. It is net time interval between cash outflow.
Operating Cycle also represent the time interval over which additional funds, called Working Capital, should
be obtained in order to carry out the firm's operations. The firm has to negotiate Working Capital from
sources such as banks. The negotiated sources of Working Capital financing are called non-spontaneous
sources. If net Operating Cycle of a firm increases it means further need for negotiated Working Capital.
Calculation of Operating Cycle: The calculation of operating cycle helps to know the exact period of WC
turnover i.e. how long it takes to convert cash again into cash? Through this calculation one can ascertain the
WC period.
FORMULAE: -
1) Raw Material Holding Period
360 days * Stock of Raw Materials

--------------------- (divided by) ---------------------
Cost of Raw Material Consumed
2) Work-in-Process Holding Period

360 days * Stock of WIP
--------------------- (divided by) ---------------------
Cost of Goods Manufactured
3) Finished Goods Holding Period
360 days * Stock of Finished Goods

--------------------- (divided by) ---------------------
Cost of Goods Sold
4) Debtors Collection Period
360 days * Debtors

--------------------- (divided by) ---------------------
Sales
5) Payable Deferral Period
360 days * Creditors

--------------------- (divided by) ---------------------
Purchases
Duration of operating cycle of G & I Engineering Division:-
Table:14
2015-2016 2016-2017 2017-2018
1) Inventory
Conversion Period
Raw Material 118.49 59.77 42.44
Conversion Period
Work in Process 0.68 18.64 16.34
Conversion Period
Finished Goods 20.11 20.77 9.05
Conversion Period
139.28 99.18 67.83
2) Debtors Collection 114 108 90
Period
3) Gross Operating 253.28 205.44 182.44
Cycle (1+2)
4) Payble Deferral 147.81 163.73 129.64
Period
5) Net Operating Cycle 137.48 41.72 52.80
(3-4)
Note:
 360 working days in a year are taken to calculate per day average.
 Depreciation is excluded while calculating cost of production & sales as it is a non-fund expense and
does not require working capital.
Each component of working capital (namely inventory, receivables and payables) has two dimensions
........TIME ......... and MONEY. When it comes to managing working capital - TIME IS MONEY. If we
can get money to move faster around the cycle (e.g. collect monies due from debtors more quickly) or
reduce the amount of money tied up (e.g. reduce inventory levels relative to sales), the business will
generate more cash or it will need to borrow less money to fund working capital.
Cost of bank interest or will have additional free money available to support additional sales growth or
investment. Similarly, if we can negotiate improved terms with suppliers e.g. get longer credit or an
increased credit limit; you effectively create free finance to help fund future sales.
Table:15
If you……………… Then………………
← Collect receivables (debtors) faster You release cash from the cycle
← Collect receivables (debtors) slower Your receivables soak up cash
← Get better credit (in terms of duration or You increase your cash resources
amount) from suppliers
← Shift inventory (stocks) faster You free up cash
← Move inventory (stocks) slower You consume more cash
It can be tempting to pay cash, if available, for fixed assets e.g. computers, plant, vehicles etc. If you do pay
cash, remember that this is now longer available for working capital. Therefore, if cash is tight, consider
other ways of financing capital investment - loans, equity, leasing etc. Similarly, if you pay dividends or
increase drawings, these are cash outflows and, like water flowing down a plug hole, they remove liquidity
from the business.
Handling Receivables (Debtors)
Cash flow can be significantly enhanced if the amounts owing to a business are collected faster. Every
business needs to know.... who owes them money.... how much is owed.... how long it is owing.... for what it
is owed.
Slow payment has a crippling effect on business; in particular on small businesses who can least afford it. If
you don't manage debtors, they will begin to manage your business as you will gradually lose control
due to reduced cash flow and, of course, you could experience an increased incidence of bad debt. The
following measures will help in managing debtors:
1. Have the right mental attitude to the control of credit and make sure that it gets the priority it
deserves.
2. Establish clear credit practices as a matter of company policy.
3. Make sure that these practices are clearly understood by staff, suppliers and customers.
4. Be professional when accepting new accounts, and especially larger ones.
5. Check out each customer thoroughly before you offer credit. Use credit agencies, bank references,
industry sources etc.
6. Establish credit limits for each customer... and stick to them.
7. Continuously review these limits when you suspect tough times are coming or if operating in a
volatile sector.
8. Keep very close to your larger customers.
9. Invoice promptly and clearly.
10. Consider charging penalties on overdue accounts.
11. Consider accepting credit /debit cards as a payment option.
12. Monitor your debtor balances and ageing schedules, and don't let any debts get too large or too old.
Recognize that the longer someone owes you, the greater the chance you will never get paid. If the average
age of your debtors is getting longer, or is already very long, you may need to look for the following
possible defects:
 weak credit judgment
 poor collection procedures
 lax enforcement of credit terms
 slow issue of invoices or statements
 errors in invoices or statements
 Customer dissatisfaction.
Debtors due over 90 days (unless within agreed credit terms) should generally demand immediate attention.
Look for the warning signs of a future bad debt. For examples:-
 longer credit terms taken with approval, particularly for smaller orders
 use of post-dated checks by debtors who normally settle within agreed terms
 evidence of customers switching to additional suppliers for the same goods

 new customers who are reluctant to give credit references
 Receiving part payments from debtors.
The act of collecting money is one which most people dislike for many reasons and therefore put on the long
finger because they convince themselves there is something more urgent or important that demand their
attention now. There is nothing more important than getting paid for your product or service. A
customer who does not pay is not a customer. Here are a few ideas that may help in collecting money
from debtors:
 Develop appropriate procedures for handling late payments.
 Track and pursue late payers.
 Get external help if your own efforts fail.
 Don't feel guilty asking for money.... its yours and you are entitled to it.
 Make that call now. And keep asking until you get some satisfaction.
Managing Payables (Creditors)
Creditors are a vital part of effective cash management and should be managed carefully to enhance the cash
position.
Purchasing initiates cash outflows and an over-zealous purchasing function can create liquidity problems.
Consider the following:
 Who authorizes purchasing in your company - is it tightly managed or spread among a number of
(junior) people?
 Are purchase quantities geared to demand forecasts?
 Do you use order quantities which take account of stock-holding and purchasing costs?
 Do you know the cost to the company of carrying stock?
 Do you have alternative sources of supply? If not, get quotes from major suppliers and shop around
for the best discounts, credit terms, and reduce dependence on a single supplier.
 How many of your suppliers have a returns policy?
 Are you in a position to pass on cost increases quickly through price increases to your customers?
 If a supplier of goods or services lets you down can you charge back the cost of the delay?
 Can you arrange (with confidence!) to have delivery of supplies staggered or on a just-in-time basis?
There is an old adage in business that if you can buy well then you can sell well. Management of your
creditors and suppliers is just as important as the management of your debtors. It is important to look after
your creditors - slow payment by you may create ill-feeling and can signal that your company is inefficient
(or in trouble!).
A good supplier is someone who will work with you to enhance the future viability and profitability of your
company.
Inventory Management
Managing inventory is a juggling act. Excessive stocks can place a heavy burden on the cash resources of a
business. Insufficient stocks can result in lost sales, delays for customers etc.
The key is to know how quickly your overall stock is moving or, put another way, how long each item of
stock sit on shelves before being sold. Obviously, average stock-holding periods will be influenced by the
nature of the business. For example, a fresh vegetable shop might turn over its entire stock every few days
while a motor factor would be much slower as it may carry a wide range of rarely-used spare parts in case
somebody needs them.
Nowadays, many large manufacturers operate on a just-in-time (JIT) basis whereby all the components to be
assembled on a particular today, arrive at the factory early that morning, no earlier - no later. This helps to
minimize manufacturing costs as JIT stocks take up little space, minimize stock-holding and virtually
eliminate the risks of obsolete or damaged stock. Because JIT manufacturers hold stock for a very short
time, they are able to conserve substantial cash. JIT is a good model to strive for as it embraces all the
principles of prudent stock management.

The key issue for a business is to identify the fast and slow stock movers with the objectives of establishing
optimum stock levels for each category and, thereby, minimize the cash tied up in stocks. Factors to be
considered when determining optimum stock levels include:
 What are the projected sales of each product?
 How widely available are raw materials, components etc.?
 How long does it take for delivery by suppliers?
 Can you remove slow movers from your product range without compromising best sellers?
Stock sitting on shelves for long periods of time ties up money which is not working for you. For better
stock control:-
 Review the effectiveness of existing purchasing and inventory systems.
 Know the stock turn for all major items of inventory.
 Apply tight controls to the significant few items and simplify controls for the trivial many.
 Sell off outdated or slow moving merchandise - it gets more difficult to sell the longer you keep it.
 Consider having part of your product outsourced to another manufacturer rather than make it
yourself.
 Review your security procedures to ensure that no stock "is going out the back door !"
Higher than necessary stock levels tie up cash and cost more in insurance, accommodation costs and interest
charges.
Permanent and Variable Working Capital
There is always a minimum level of current Assets, which is continuously required by the firm to carry on its
business operations. The minimum level of Current Assets is referred to as permanent of fixed Working
Capital. It is permanent in the same way as the firm's fixed assets are. The extra Working Capital, needed to
support the changing production and sales activities are called fluctuating or variable or temporary Working
Capital.
Both Kinds of Working Capital, permanent and temporary, are necessary to facilitate production and sale
through the operating Cycle.
Estimating Working Capital Needs
Working Capital needs can be estimated by three different methods, which have been successfully applied in
practice. They are follows:
1. Current Assets Holding Period: To estimate Working Capital requirements on the basis of average
holding period of Current Assets and relating them to costs based on the company's experience in the
previous years. This method is based on the operating cycle concept.
2. Ratio of Sales: To estimate Working Capital requirements as a ratio of sales on assumption that Current
Assets change with sales.
3. Ratio of fixed Investment: To estimate Working Capital requirements as a percentage of fixed
investment.
The most appropriate method of calculating the Working Capital needs of firm is the concept of operating
cycle. There are some limitations with all the three approaches therefore some factors govern the choice of
method of Working Capital.
Factors considered are seasonal variations in operations, accuracy sales forecasts, investment cost and
variability in sales price would generally be considered. The production cycle and credit and collection
policy of the firm would have an impact on Working Capital requirements.

Estimated Working Capital for the year 2017-18
The working Capital requirement for the year 2017-18 has been calculated on the basis of estimated sales of
50 crores.
Table:16
A) Current Asset :
Inventory :
1) Raw Material
Raw Material-Chem-Ind 2029.00
Raw Material-Engg-Ind 23056894.67
Raw Material-Engg-Imp 2363718.51
25422642.18
2) Stores & Spares
Stores & Spares-chem-Ind 75974.04
Stores & Spares-Engg-Ind 8856833.74
Stores & Spares-Eng-Imp 1829516.83
GIT 44043.03
ohd Ldg on Stk-Fab 4691301.04
15497668.68
3) Work in Process 13487609.99
4) Finished Goods 7527778.28
5) Total ( 1+2+3+4) 61935699.13
6) Debtors
Sundry Debtors-Trade 152850215.70
Sundry Debtors-Expor 39504.90
152889720.60
7) Cash Balance 4584942.41
8) Other assets 70349.41
9) Loans & advances 24417733.15
Total W .C. ( 5+6+7+8+9) 243898444.70
B) Current Liabilities :
Current Liabilities 144531223.84
Provision 8131275.80
Total Current Liabilities 152662499.63
Net Working Capital Req.(A – B) 91235945.07

Current Assets Financing
A firm can adopt different financing policies for Current Assets Three types of financing used can be:
1. Long-term financing such as shares, debentures etc.
2. Short-term financing such as public deposits, commercial papers etc.
3. Spontaneous financing refers to the automatic sources of short-term funds arising in the normal course of
a business such as trade credit (suppliers) and outstanding expenses etc.
The real choice of financing Current Assets is between the long term and short-term sources of finances. The
three approaches based on the mix of long and short-term mix are:
1. Matching Approach: When the firm follows matching approach (also known as hedging approach), long
term financing will be used to finance Fixed Assets and permanent Current Assets and short-term financing
to finance temporary or variable Current Assets. The justification for the exact matching is that, since the
purpose of financing is to pay for assets, the source of financing and the assets should be relinquished
simultaneously so that financing becomes less expensive and inconvenient. However, exact matching is not
possible because of the uncertainty about the expected lives of assets.
2. Conservative Approach: The financing policy of the firm is said to be a conservative when it depends
more on long-term funds for financing needs. Under a conservative plan, the firm finances its permanent
assets and also a part of temporary Current Assets with long term financing. In the periods when the firm has
no need for temporary Current Assets, the idle long-term funds can be invested in the tradable securities to
conserve liquidity. Thus, the firm has less risk of shortage of funds.
3. Aggressive Approach: An aggressive approach is said to be followed by the firm when it uses more short
term financing than warranted by the matching approach. Under an aggressive approach, the firm finances a
part of its permanent current assets with short term financing. Some firms even finance a part of their fixed
assets with short term financing which makes the firm more risky.
Managing Current Assets: Management of Current Assets is done in three parts. They are:
1) Management of cash and cash equivalents.
2) Management of inventory.
3) Management of accounts receivable and factoring.
Thus, the basic goal of WC management is to manage the current assets the current liabilities of the firm in
such a way that a satisfactory level of WC is maintained, i.e. it is neither inadequate nor excessive WC
management policies of a firms have a great effect on its Profitability, Liquidity and Structural health of the
organization.
WC management is an integral part of overall corporate management. For proper WC management the
financial manager has to perform the following basic functions:-
· Estimating the WC requirement.
· Determining the optimum level of current assets.
· Financing of WC needs.
· Analysis and control of WC.

WC management decisions are three dimensional in nature i.e. these decisions are usually related to these
there sphere or fields.
· Profitability, risk and liquidity.
· Composition and level of current assets.
· Composition and level of current liabilities.
PRINCIPLES OF WORKING CAPITAL
There are four principle of working capital management. They are being depicted as below :
(i) Principle of Risk Variation: - The goal of WC management is to establish a suitable trade between
profitability and risk. Risk here refers to a firm's ability to honor its obligation as and when they become due
for payments. Larger investment in current assets will lead to dependence. Short term borrowings increases
liquidity, reduces risk and thereby decreases the opportunity for gain or loss On the other hand the reserve
situation will increase risk and profitability And reduce liquidity thus there is direct relationship between
risk and profitability and inverse relationship between liquidity and risk.
(ii) Principle of Cost Capital: - The various sources of raising WC finance have different cost of capital and
the degree of risk involved. Generally higher the cost lower the risk, Lower the risk higher the cost. A sound
WC management should always try to achieve the balance between these two.
(iii) Principle of Equity Position: - This principle is considered with planning the total investment in
current assets. As per this principle the amount of WC investment in each component should be adequately
justified by a firms equity position Every rupee contributed 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. They are:
· Current assets as a percentage of total assets.
· Current assets as a percentage of total sales.

(iv) Principle of Maturity Payment: - This principle is concerned with planning the source of finance for
WC. As per this principle a firm should make every effort to relate maturities of its flow of internally
generated funds in other words it should plan its cash inflow in such a way that it could easily cover its cash
out flows or else it will fail to meet its obligation in time.
Working Capital Financing
A) Trade Credit:-
Trade Credit refers to the credit extended by the supplier of goods & services in the normal course of
business of the firm. According to trade practices, cash is not paid immediately for purchases but after an
agreed period of time. Therefore, deferral of payment represents a source of finance for credit purchase.
It is an informal arrangement between the buyer & the seller. There are no legal acknowledgements of debt
which are granted on an open account basis. Such credit appears on the record of the buyer of goods as
sundry creditors. A variant of accounts payable is bills payable. Unlike the open account nature of accounts
payable, bills payable represents documentary evidence of credit purchases & a formal acknowledgement of
obligations to pay for credit purchases on a specified date failing which legal action for recovery will follow.
However it creates a legally enforceable obligation on the buyer of goods to pay on maturity whereas the
accounts payable have more flexible obligations.
B) Bank Credit:-
Bank credit is the primary institutional source of working capital finance in India. In fact it represents the
most important source of financing current asset.
Working Capital provided by banks the following ways:-
1)Cash Credit/Overdraft
Under cash credit bank finance, the bank specifies a predetermined borrowings/credit limit. The borrower
can draw up to the stipulated credit limit. Within the specified limit any number of drawings are possible to
the extent of his borrowing periodically. Similarly, repayments can be made whenever desired during the
period. The interest is determined on the basis of amount the running balance/amount actually utilized by the
borrower & not on the sanctioned amount. This form of bank financing of working capital is highly
attractive to the borrowers because, firstly, it is flexible in that although borrowed funds are repayable on
demand, banks usually do not recall for cash advances /roll them over &, secondly, the borrower has the
freedom to draw the amount in advance as & when required while the interest liability is only on the amount
actually outstanding.
2) Loans
Under this arrangement, the entire amount of borrowings is credited to the current account of the borrower
or released in cash. The borrower has to pay interest on the total amount. The loans are repayable on demand
or in periodic installments. They can also be renewed from time to time. As a form of financing, loans are
imply a financial discipline on the part of the borrower.
3) Purchase/Discount bill
This arrangement is of recent origin in India. With the introduction of the new bill market schemes in 1970
by the Reserve Bank of India, bank credit is being made available through discounting of usance bills by
bank. The RBI envisaged the progressive use of bills as an instrument of credit as against the prevailing
practice of using the widely prevailing cash credit arrangement for financing working capital. The cash
credit arrangements give rise to unhealthy practices. The amount made available under this arrangement is
covered by cash credit & overdraft limit. Before discounting the bill, the bank satisfies itself about the
creditworthiness of the drawer & the genuiness of the bill. The buyer who buys goods on credit cannot use
the same goods as a source of obtaining bank credit.
4) Letter of Credit
While other forms of bank credit are direct forms of financing in which banks provide funds as well as bear
risk, letter of credit is an indirect form of working capital financing & banks only assumes the risk, the credit
being provided by the supplier himself.
The purchaser of goods on credit obtains a letter of credit from a bank. The bank undertakes the
responsibility to make payment to the supplier in case the buyer fails to meet his obligations. Banks provide
credit on the basis of the following modes of security:-
i) Hypothecation ii) Pledge iii) Mortgage iv) Lien
C) Commercial Papers:-
The Commercial Paper is short-term unsecured negotiable instrument consisting of usance primary notes
with a fixed maturity, thus, indicating the short-term obligation of an issuer. It is generally issued by
companies as a means of raising short-term debt & by a process of securitization; intermediation of the bank
is eliminated. It is issued on a discount to face value basis but it can also be issued in interest bearing form.
The issuer promises the buyer a fixed amount at a future date but pledges no assets. His liquidity & earning
power are the only guarantee. In other words the commercial paper is not tied to any self liquidating trade
transaction in contrast to the commercial bills that arise out of specific trade transaction. The commercial
papers can be issued by company directly to the investors or through the merchant banks. When the
companies directly deal with the investor, rather than use a securities dealer as an intermediary, the
commercial paper is called direct paper & when commercial paper issued by security dealer on behalf of
their corporate customers, they are called dealer papers.
D) Certificate of Deposits (CDs)
A Certificate Deposit of title to time deposit & can be distinguished from a conventional time deposit in
respect of its free negotiability &, hence marketability. In other words, certificate deposits are a marketable
receipt of funds deposited in a bank for a fixed period at a specified interest rate. They are bearer documents
& are readily negotiable. They are attractive both to the bankers & the investors in the sense that the former
is not required to encash the deposit prematurely, while the latter can sell the certificate deposits in the
secondary market before its maturity & thereby the instrument has ready marketability.
E) Factoring
Factoring provides resources to finance receivables as well as facilitates the collection of receivables.
Although such services constitute a critical segment of the financial services scenario in the developed
countries, they appeared in the Indian financial scene only in the early nineties as result of RBI initiatives.
There are two bank sponsored organizations which provide such services:- i) SBI Factors & Commercial
services Ltd. & ii) Canbank Factors Ltd.
Functions of Factor
Depending on the type of factoring, the main functions of factor, in general terms are classified into five
categories:-
 Financing Facility/ trade debts;
 Maintenance of sales ledger;
 Collection of accounts receivables;
 Assumption of credit risk & credit restriction; &
 Provision of advisory services

FINDINGS
This study has been taken up with main intention of analyzing the profitability and financial soundness of
Engineering Division. The finding is results of analyzing the data of three years with respect to the financial
position, operational efficiency and profitability of the company. Findings are as follows:
 Standard current ratio is 2:1 & the Current Ratios of Engineering Division are not satisfactory & also
decreasing year by year.
 Acid test ratio is more than one but it does not mean that company has excessive liquidity.
 Inventory turnover ratio is showing a great improvement, which means inventory is used in better
way so it is good for the company.
 Debtors turnover ratio is improving &increase in ratio is beneficial for the company because as ratio
increases the number of days of collection for debtors decreases.
 Working capital turnover ratio is continuously increasing that shows increasing needs of working
capital.
 Interest coverage ratio is increasing from last three years.
 Production capacity is not utilized to the full extent
 The requirement of working capital finance is ever increasing.

RECOMMENDATIONS
 It can be said that overall financial position of the company is normal but it is required to be
improved from the point of view of profitability.
 Net Profit Margin is very low for the engineering division because of the heavy administrative,
distribution & selling expenses. So, the management should try to reduce these expenses.
 Company should try stretch the credit period given by the suppliers.
 Company should not rely on Long-term debts.
 Company should try to increase Volume based sales so as to stand in the competition.
CONCLUSION
 By implementing various turnaround strategic programmes in year 2017-18, company has recovered
from the financial crisis in the year 2016-2017 & reached to safe position. The company s
profitability ratios have shown some kind of improvement.
 The business environment of the company is reasonably good. The company s track record is
oriented towards profitable growth and with strong fundamentals.
 As major portion of working capital is invested in sundry debtors, company has to adopt factoring
services so that cash realization will be faster.
 Company should take corrective actions to write off or sell off the inventory, which is of no use and
occupies unnecessary space.
 Action on priority basis should be taken against pending jobs for more than three months. Smooth
functioning will release locked up capital and improve the cash flow.
BIBLOGRAPHY
 INTERNET WEBSITES
 https://efinancemanagement.com/financial-analysis/days-working-capital-dwc
 Annual reports of Ganpati Impex Pvt Ltd
 http://www.investopedia.com/
 https://en.wikibooks.org/wiki/SAP_ERP/Financial_Accounting

Financial Statement Analysis Sip.... Bhagyashree

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A

GANPATI IMPEX Pvt Ltd

Under the Guidance of

PRATIBHA INSTITUTE OF BUSINESS MANAGEMNET

by these people will always add a great learning experience in my career.

privilege of working under her & completing this study.

successfully completing the project.

Place: Pune BHAGYASHREE RANE

the Academic year 2019-2020.

Dr. Mahima Singh Dr. Sachin Borgave

Project Guide Director

Prof. Gururaj Dangare External Examiner

Table no. Particulars Page no.

Figure No. Particulars Page no.

Sr No. Particulars Page No.

current liabilities have to be geared quickly to change sales.

 To identify the financial strengths & weakness of the company.

 Evaluating company s performance relating to financial statement analysis.

improvement in Return on Capital Employed.

should ensure a reasonable margin of safety also.

Types of data which helped to prepare this report:

financial reports of the company.

Impex Pune, thus creating Ganpati Impex Pvt. Ltc., Dehuroad.

The Company also has overseas braches in Thailand & China.

adapted itself to the modern tools of the industrial world.

Financial Ratio Analysis

revenues of a company, expressed in percentage terms.

Analyzing the Financial Ratios

accessible and comprehensible.

Purposes and Considerations of Ratios and Ratio Analysis

potential problem areas.

in and out of our industry.

another or when comparing the financial ratios of two or more companies.

same time span.

accounting policies between our company and industry norms.

cases, these adjustments can significantly affect the ratios.

1) Time Series Analysis:-

Trends can be thought of as three main types,

II. Intermediate and

III. Long term

performance has improved, deteriorated or remained constant over time.

2) Cross- Sectional Analysis:-

financial position, correlative actions should be initiated.

forma Analysis only.

finances and operations. An overview of some of the categories of ratios is as follows:-

obligations over the short term.

extent of liquidity or lack of it are:-

current assets available to cover current liabilities.

current ratio, the better.

ratios are more

almost unchanged; debtors have increased by 40%, and cash by 300%.

not be of any significance.

stocks for no longer than 4 or 5 days - a good greengrocer anyway.

(Current Asset – Inventory)

-----------------------(divided by) -----------------------

understand what is happening to the business:

Engineering Division’s stocks are not that large either.

higher the better.

(Cash + Marketable Securities)

----------------------- (divided by) -----------------------

Interest Coverage Ratio:-

and taxes) by the total interest expense.

interest it owes: in fact it must have because its still in business