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Shree Renuka Sugars Ltd.

A Project Report
On

“STUDY ON WORKING CAPITAL MANAGEMENT


WITH FINANCIAL RATIO’S AND
IT’S INTERPRETATIONS”
(With Reference to Shree Renuka Sugars Ltd)

By

Bhagyawanti .I. Naragund

Under the Guidance of

Prof. Ambika Khavaspur

Industry Guide

Ms Dipti Naik

Submitted in partial fulfillment of the requirements for


the degree of PGDBM (IB)

MATS SCHOOL OF BUSINESS

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Shree Renuka Sugars Ltd.

2009-10

Chapter I

Introduction to the Study


1.1:- Need for the study
1.2:- Objectives of the study
1.3:- Hypothesis

1.4:- Research Methodology

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1.1:- Need for the study


A Comprehensive study on Working Capital Management. This Study is
conducted to understand the Applications of Working Capital Management in the
organization. i.e., attainment of Goals in an effective manner through Planning, and
controlling of organizational resources. The study is carried out to understand and learn
the various practices adopted and followed by them and see whether there is any scope
for improvement from the organization’s point of view.

Working capital management is important for any kind of sector including service. The
importance of working capital arises due to following reasons :-

 One of the major and common reasons for industrial sickness is faulty working
capital management

 False working capital management results in either over or under liquidity of capital
including solvency and reputation.

1.2:- Objectives of the study

 To study the effectiveness of working capital.

 To study the cost effectiveness of sources of working capital.

 To study the relationship between profitability and liquidity.

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1.3:- Hypothesis

Ho : Profitability & liquidity is independent of working capital efficiency.

H1 : Profitability & liquidity is dependent of working capital efficiency.

1.4:- Research Methodology

Research Design:- To fulfil above objectives with regards to the study of


working capital , the data will be collected mainly through secondary data.

A) Secondary Data

Secondary data is collected from published annual reports of the company.

Financial Tools:-

 Trend analysis

 Ratio analysis

Limitations of the Study:-

• Access to various confidential matters of the organization is difficult to collect.

Reference:

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I. BOOKS

1. FINANCIAL MANAGEMENT

Pandey I . M , Vikas Publishing House Pvt Ltd , Delhi

2. FINANCIAL MANAGEMENT

Prasanna Chandra, Tata McGraw Hill, Delhi

II.WEBSITES…

www.renukasugars.com

III. COMPANY ANNUAL REPORTS.

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Chapter II

Industry Profile
2.1 :- The Historical Back Ground of Indian Sugar Industry

2.2:- The sector wise break up’s

2.1:-The Historical Back Ground of Indian Sugar Industry:-

Sugar is the one of the oldest industry of our country and India is the second largest
producer of sugar. Sugar Industry in India is the second largest agro-processing industry
in the country after cotton textiles About 50 million sugarcane farmers and a large
number of agricultural labourers are involved in sugarcane cultivation and ancillary

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activities, constituting 7.5% of the rural population. Besides, the industry provides
employment to about 2 million skilled/semi skilled workers and others mostly from the
rural areas. The industry not only generates power for its own requirement but surplus
power for export to the grid based on by-product –Bagasses. It also produces ethyl
alcohol, which is used for industrial and potable uses, and can be used to the manufacture
Ethanol, an ecology friendly and renewable fuel for blending with petrol.

The sugar industry in Indian uses only sugarcane as input, hence sugar Companies have

been established in large sugarcane growing states like Uttar Pradesh, Maharashtra,

Karnataka, Gujarat, Tamil Nadu, and Andhra Pradesh. These six states contribute more

than 85% of total sugar production in the India; Uttar Pradesh and Maharashtra together

contribute more than 57% of total production.

Indian sugar industry has grown horizontally with large number of small sized sugar

plants set up throughout the country as opposed to the consolidation of capacity in the

rest of the important sugar producing countries and sellers of sugar, where greater

emphasis has been laid on larger capacity of sugar plants.

India and Brazil continue to dominate the global sugar production followed by China,
Thailand Mexico and Australia. In SY 2006-07 India and Brazil together contributed
more than 60 million MT out the total 131 million MT of sugar produced from cane. Top
ten countries produced more than 80% of the total production.

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Fig 1.1

(Source: USDA Foreign Agricultural Service).

The entrepreneurs have been allowed to set up sugar factories of expand the
existing sugar factories as per the techno-economic feasibility of the project. However,
they are required to maintain a radial distance of 15 kms from the existing sugar factory.
After de-licensing, a number of new sugar plants of varying capacities have been set up
and the existing plants have substantially increased their capacity.

There are 566 installed sugar mills in the country as on March 31 st 2005, with a
production capacity of 180 lack MTs of sugar, of which only 453 are working. These
mills are located in 18 states of the country.

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2.2:- The sector wise break up’s as follows:

Table no#1

Sl. No. Sector No of factories

1. Private 189

2. Public 62

3. Co-operative 315

Total 566

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Chapter III
Company Profile

3.1:- Introduction to Company

3.2:-Business Growth

3.3:- Nature Of Business Carried

3.4:- Product Profile

3.5:- Ownership Pattern

3.6:- Organisation Structure

3.7:- Competitors Information

3.8:- Aims & Objectives

3.9:- Vision & Mission

3.1:- Background of the company:-

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Shree Renuka Sugars is an integrated manufacturing company with strategic focus on


Sugar and its allied products in Power and Ethanol. The Company's registered office is in
Belgaum, Karnataka and Corporate Office is at Mumbai. Its key manufacturing facility is
in Munoli, 70 Kms from Belgaum and also operates a leased facility at Aland in
Karnataka and Ajara, Arag in Maharashtra. The company is working on other
acquisitions, expansions and lease opportunities to strengthen its existing strong
fundamentals and growth prospects.

SRSL has the largest sugar refining capacity in India of 6000 tons per day. It accounts for
over 20% of India’s international sugar trade. SRSL convergence of three businesses in
one organisation i.e Sugar , Biofules , renewable energy.

SRSL has strong global presence the company is the second largest exporter of sugar
from India with a presence in Middle East , South East Asia and East Africa . This export
revenue provides the company with an enhanced trade flow larger than its production ,
acting as a consolidator and enabling it to capitalise on global price as well as purchasing
trends .

The company acquired a stand alone ethanol plant of 100KL expanded to 300 KL , to
cater the ethanol requirements of oil marketing companies (OMC) which are located in
coastal states of Goa Maharashtra and Kerala for exports. The company has also

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acquired a strategic 54% stake in KBK Chem-Engineering Pvt. Ltd. , engaged in turnkey
solutions in the field of distilleries, ethanol plant and biofuels .

The company directly markets sugar to institutional buyers a pattern shift from the
tradition of selling to wholesale agents and dealers. this has rationalised working capital
outlay and has reduced the Company’s dependence on sugar brokers . The company is
working on other acquisitions, expansions and lease opportunities to strengthen its
existing strong fundamentals and growth prospects.

3.2:- Milestone of Shree Renuka Sugars Ltd (SRSL):

1995-SRSL was incorporated.

1998-Initially it acquired a 1250 TCD sick unit from the Nizam Sugars Limited.

1999-The commissioning and trail production took place.

2002-A distillery and ethanol plant of 60kl per day capacity was added.

2006 – Modernization and expansion of it’s Munoli Plant by 7500 TCD, Power Plant of
35.5 MW and Distillery by 120 KLPD.

2009-SRSL acquired Vale Do Ivai S.A (VDI) , a Brazilian sugar and ethanol producer .

3.3:- Nature of Business Carried

Nature of Business carried by SRSL is involved in the activity of manufacturing white


crystal sugar products which is the main product. The process of production involve
collection of
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• Raw sugarcane to sugar,

• Raw sugar into refined sugar

• Molasses, Bagasses are it’s by products

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1) Molasses:

Molasses is the final effluent obtained in the preparation of sugar by repeated


crystallization. Molasses is the brown colored residue after sugar has been traced
from the juice. Molasses still contains some quantity of sugar, but this sugar cannot
be extracted by usual technology. It is the end product from a refining process carried
out to yield Sugar.

Molasses is mainly used for the manufacture of ethyl alcohol (ethanol), Yeast
and cattle feed.

2) Bagasses:

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Bagasse is a fibrous residue of cane stalk that is obtained after crushing an


extraction of juice. It consists of water, Fiber an relatively small quantities of soluble
solids, the composition of bagasse varies based on the variety of sugarcane, Maturity of
cane, Method of harvesting and the efficacy of the sugar mill, the usual bagasse
composition is given below.

Table no#2

CONTENT RANGE %

Moisture 46-52

Fiber 43-52

Soluble solids 2-6

Bagasses is usually used as a combustible to produce steam, which in turn is used


to generate power; it is also used as raw materials for production of paper and as
feedstock for cattle.

By making use of bagasses, sugar mills have been successful in reducing


dependence on state electric boards for power supply, Further this bagasse based
cogeneration plant is eligible for carbon credit compensation under the Kyoto protocol.

The residue product from distillery operation blended with chemicals is being
sold as bio-fertilizers.

The company is having rich German technology machines and equipment that are
installed in the production area. The power plant machines and Turbines are of Bharath
Heavy Electricals Limited.

3) Power generation plant:

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Power plant uses the fiber of the processed sugar cane (bagasse) as fuel to
generate electricity in an environmentally responsible manner. An integrated 11.2 M.W.
power generates and supplies electricity to the state grid produced from sugar cane waste
used to rotate turbines 7 M.W. power is utilized in the plant remaining power is supplied
to KPTCL.

4) Distillery plant:

Distillery plant uses by-product of sugar mill viz; Molasses as raw material for
production of spirits and alcohol namely rectified spirit, ethanol and extra neutral
alcohol. The capacity of plant was 120 KLPD in November 2006. which has been
increased upto 900 KLPD in September 30,2009.

3.4:- PRODUCT PROFILE

MAIN PRODUCT-

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WHITE CRYSTAL SUGAR:

The main product of the sugar manufacturing process is white crystal sugar.

This white crystal sugar is manufactured in the following grades:

1) L-30 [Large size sugar]

2) M-30 [Medium size sugar]

3) S1-30 [small size sugar]

4) S2-30 [very small size]

3.5:- OWNERSHIP PATTERN:

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Shree Renuka Sugar LTD is one of the privatized sugar manufacturing company.
Under the entrepreneur of Vidya Murkumbi, established its branches in various part of
Karnataka and Maharashtra with the share capital of 200 millions of Indian Rupees.

Board of Directors:

Sl. No Name of the Directors Nature of Directorship

1 Mrs. Vidya M. Murkumbi Executive Chairperson

2 Mr. Narendra .M. Murkumbi Vice Chairman &


Managing Director

3 Dr. B.P. Baliga Independent Director

4 Mr.Hrishikesh Parandekar Independent Director

5 Mr. J.J Bagath Independent Director

6 Mr. Sanjay. K. Asher Independent Director

7 Mr.Jonathan Kingsman Independent Director

8 Mr. Nandan .V. Yalgi Whole Time Director

9 Mr.Robert Taylor Independent Director

10 Mr. S M Kaluti Non-Executive Director

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3.6:- ORGANIZATION STRUCTURE

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3.7:- Competitors Information:

The main competitors are as follows:

• Ugar sugar industry Ltd.

Crushing capacity-10000 TCD

Recovery-11.5%

Sugar production-12000 Qtls (per day)

• Godavari sugar Ltd.

Crushing capacity-3500 TCD

Recovery-10.5%

Sugar production-4000 Qtls (per day)

• Shree Prabulingeshwar sugar works Ltd.

Crushing capacity-4500 TCD

Recovery-11.2%

Sugar production-9000 Qtls (per day)

corporate customers :
• Hindustan Coca Cola Beverages Private Limited,
• Pepsico, ITC Limited,
• Britannia Industries Limited
• Nestle India Limited,
• Cadbury India Limited,
• Hindustan Unilever Limited and
• Pantaloons (Big Bazaar).

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Sugar is used for various ranges of products such as soft drinks, baby food, milk and
dairy products.

3.8 :- AIMS & OBJECTIVES

Shree Renuka Sugars Ltd aims to become the most efficient and market driven integrated
processor of sugarcane in the world, while enabling the team to grow in a learning and
motivating atmosphere, participating in the all round development of the community and
delivering consistently on returns to all our shareholders.

3.9:- VISION & MISSION

Vision: – The Company’s vision is –

“To become the most efficient processor of sugar and the largest market of sugar and
ethanol in the country.”

Mission: – The Company’s mission is-

“ To meet the objectives that are to expand its installed capacity , achieve end-to-end
integration for all its plants to improve margin and reduce cyclicality of business ,
achieve great raw material security , increase its focus of corporate and high value of
consumers , to reduce price risk in sugar by heading ,maintaining a strong presence in
export market and expand for ethanol .”

Chapter IV

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Analysis & Interpretation

4.1:- Working Capital Management


4.2:- Concept Of Working capital
4.3:- Operating Cycle
4.4:- Types of working capital

4.5:-Factors Influencing Working Capital


Requirements

4.6:- Working Capital Policy


4.7:-

4.1 WORKING CAPITAL MANAGEMENT

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One of the most important areas in the day-to-day management of the affairs of a
firm is the management of working capital. Working Capital Management is the
functional area of finance that covers all current accounts of the firm. It is
concerned with management of the level of individual current assets as well as
management of total working capital. The success of the any firm depends upon
the efficient management of working capital and hence the working capital is
often described as the lifeblood of the business.

4.2 CONCEPT OF WORKING CAPITAL:-

There are two concepts of working capital :-

WORKING CAPITAL

GROSS WORKING CAPITAL

NET WORKING CAPITAL

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1. Gross working capital :-

Gross working capital refers to the firm’s investment in current asset. Current
assets are those assets which can be converted into cash within an accounting year or
Operating cycle and include cash, short-term securities, debtors (accounts receivable or
book debts) bills receivable and stock (Inventory).

2. Net working capital :-


Net working capital refers to the difference between current assets and current
liabilities. Current liabilities are those claims of outsiders which are expected to mature
for payment within an accounting year and include creditors(accounts payable), bills
payable, and out standing expenses .Net working Capital can be positive or negative .A
positive net working capital occurs when current assets are in excess of current
liabilities. A Negative net working capital occurs when current liabilities are in excess of
current assets.

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4.3 OPERATING CYCLE:-

Operating cycle is the time duration required to convert sales after the collection of
resources into inventories into cash. The operating cycle of a manufacturing company
involves three phases.

 Acquisition of resources:- such as raw material, labor, power and fuel. Etc.
 Manufacture of the product:- which includes collection of raw material into
work –in-progress into finished goods.
 Sale of product:- either for cash or on credit. Credit sales create account
receivable for collection.

The operating cycle refers to the length of the time necessary to complete the following
cycle events.

Raw
cash materi
als

Sundry
Debtors/
B/R Work in

Or Progress

B/R

Finished
goods

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Fig 1.1

The cycle will repeat again and again over the period depending upon the nature of the
business and type of the product.

4.4 Types of working capital:-

• Permanent working capital

• Variable or temporary working capital

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Permanent working capital :-

This refers to minimum amount of investment required in all current assets


which is required at all times to carry out minimum level of business activities. In other
words , it represents the current assets required over the entire life of business . Tandon
committee has referred to this type of working capital as ‘core current assets’ or hard
core working capital.
Working capital

Fixed / permanent
working
capital

Time

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Fig 1.2 Fixed working capital

Temporary working capital :-


The amount of such working capital keeps on fluctuating from time to time on the
basis of business activities. In other words, it represents additional current assets required
at different times during the operating year. The changing working capital may also vary
on account of seasonal changes or price level changes or unanticipated conditions. For
example , raising price of materials , labour rate and other expenses may lead to an
increase in amount of funds invested in the stock of raw materials, work in progress as
well as finished goods . Sometimes additional working capital may be required to face
the cut-throat competition in market.
Working capital

Fluctuating
working capital

Fixed / permanent
working
capital

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Time

Fig 1.3 working capital Fluctuating over time

4.5 FACTORS INFLUENCING WORKING CAPITAL


REQUIREMENTS :-

The working capital needs of a firm are influenced by numerous factors.

The important ones are:

Nature of business

The working capital requirement of a firm is closely related to the nature of its
business. A service firm, like an electricity undertaking which has a short operating
cycle, which sells predominantly on cash basis, has a modest working capital
requirement. On the other hand, a manufacturing concern like a machine tools unit,

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which has a long operating cycle and which sells largely on credit, has a very substantial
working capital requirement.

Seasonality of operations

Firms which have marked seasonality in their operations usually have highly
fluctuating working capital requirements. For example , consider a firm manufacturing
ceiling fans. The sale of ceiling fans reaches a peak during the summer season and drops
sharply during the winter period.

Production policy

A firm marked by pronounced seasonal fluctuation in its sales pursues a production


policy, which may reduce the sharp variations in working capital requirements.

Market conditions

The degree of competition prevailing in the market place has an important bearing
on working capital needs. When competition is keen, a larger inventory of finished goods
is required to promptly serve customers who may not be inclined to wait because other
manufacturers are ready to meet there needs.

Conditions of supply

The inventory of raw materials, spares, and stores depends on the conditions of
supply. If the supply is prompt and adequate, the firm can manage with small inventory.

Operating cycle

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The term “production cycle” or “manufacturing cycle” refers to the time


involvement from cash to purchase of raw materials and completion of finished goods and
receipt of cash from sales. If the operating cycle requires a longer time span between cash
to cash , the requirement of working capital will be more because of larger tie up of funds
in all the processes .If there is any delay in a particular process of sales or collection there
will be further increase in the working capital requirements. A distillery is to make a
relatively heavy investment in working capital .

O=(R+W+F+D) –C

Where O= Duration of operating cycle

R= Raw material average storage period

W= Average period of work-in-progress

F= finished goods average storage period

D= Debtors Collection period

C= Creditors payment period

Each of the components of the operating cycle can be calculated as follows:-

R= Average stock of raw materials and stores

Average RM and stores consumptions per day

W= Average work-in-progress inventory

Average cost of production per day

D= Average book debts

Average credit sales per day

C= Average trade creditors

Average credit purchases per day

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After computing the period of one operating cycle, the total number of operating
cycles that can be computed during a year can be computed by dividing 365 days with
number of operating days in a cycle. The total expenditure in the year when divided by
the number of operating cycles in a year will give the average amount of the working
capital requirement.

4.6 WORKING CAPITAL POLICY:-

It refers to the various phases involved in the working capital, the current
assets should be utilized to the maximum extent. Therefore the firm should have the
adequate working capital.

The following are the different policies, which are adopted by the firm for
maintenance of current assets:

a. Conservative policy
b. Aggressive policy
c. Average policy

Conservative policy

Average policy
Level of
current
assets
Aggressive policy
to fixed
assets
Fixed assets
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Output
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Fig 1.4

a. Conservative policy:
The current assets maintained are naturally more than required. It is called
conservative because the risk attached in this policy is very less. Therefore as a
precautionary measure more, current assets are maintained to reduce the risk and increase
the liquidity. The main drawback is it reduces profitability.

b. Aggressive policy:

It is another extreme of conservative policy. It is called aggressive because the


risk attached is more leading to more profitability and decrease in liquidity. The current
assets maintained are just minimum, which leads to inadequate working capital and
chances of the firm becoming technically insolvent, is more.

c. Average policy:

It matches between both conservative and aggressive policies. It is trade off


between these two policies as the risk is minimized and the profitability is increases. The
current assets are just adequate which leads to a situation called optimum working capital.

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COMPONENTS OF WORKING CAPITAL:

1) MANAGEMENT OF CASH:

It is the duty of the finance manager to provide adequate cash to all segments of
the organization. He also has to ensure that no funds are blocked in idle cash since this
will involve cost in terms of interest to the business. A sound cash management scheme,
therefore, maintains the balance between the twin objectives of liquidity and cost.

Meaning of cash

The term “cash” with reference to cash management is used in two senses. In a narrower
sense it includes coins, currency notes, cheques, bank drafts held by a firm with it and the
demand deposits held by it in banks.

In a broader sense it also includes “near-cash assets” such as, marketable


securities and time deposits with banks. Such securities or deposits can immediately be
sold or converted into cash if the circumstances require. The term cash management is
generally used for management of both cash and near-cash assets.

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Motives for holding cash

A distinguishing feature of cash as an asset, irrespective of the firm in which it is held, is


that it does not earn any substantial return for the business. In spite of this fact cash is
held by the firm with following motives.

1. Transaction motive

A firm enters into a variety of business transactions resulting in both inflows and
outflows. In order to meet the business obligation in such a situation, it is necessary to
maintain adequate cash balance. Thus, cash balance is kept by the firms with the motive
of meeting routine business payments.

2. Precautionary motive

A firm keeps cash balance to meet unexpected cash needs arising out of
unexpected contingencies such as floods, strikes, presentment of bills for payment earlier
than the expected date, unexpected slowing down of collection of accounts receivable,
sharp increase in prices of raw materials, etc.

3. Speculative motive

A firm also keeps cash balance to take advantage of unexpected opportunities,


typically outside the normal course of the business. Such motive is, therefore, of purely a
speculative nature.

For example, A firm may like to take advantage of an opportunity of purchasing raw
materials at the reduced price on payment of immediate cash or delay purchase of raw
materials in anticipation of decline in prices.

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4. Compensation motive

Banks provide certain services to their clients free of charge. They, therefore,
usually require clients to keep minimum cash balance with them, which help them to earn
interest and thus compensate them for the free services so provided.

OBJECTIVES OF CASH MANAGEMENT:

• To study the financial performance of the company with the help of Cash
management.

• Understanding the requirement of cash and arranging for it.

• To know the liquidity position of the company.

• To know the efficiency of the cash management.

2)MANAGEMENT OF INVENTORIES

Inventories are goods held for eventual sale by a firm. Inventories are thus one of the
major elements, which help the firm in obtaining the desired level of sales.

Kinds of inventories

Inventories can be classified into three categories.

(i) Raw materials:

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These are goods, which have not yet been committed to production in a manufacturing
firm. They may consist of basic raw materials or finished components.

(ii) Work-in-progress:

This includes those materials, which have been committed to production process but have
not yet been completed.

(iii) Finished goods:

These are completed products awaiting sale. They are the final output of the production
process in a manufacturing firm. In case of wholesalers and retailers, they are generally
referred to as merchandise inventory. The levels of the above three kinds of inventories
differ depending upon the nature of the business.

3) MANAGEMENT OF ACCOUNTS RECEIVABLES

Accounts receivables (also properly termed as receivables) constitute a significant


portion of the total currents assets of the business next after inventories. They are direct
consequences of “trade credit” which has become an essential marketing tool in modern
business.

When a firm sells goods for cash, payments are received immediately and,
therefore, no receivables are credited. However, when a firm sells goods or services on
credit, the payments are postponed to future dates and receivables are created. Usually,
the credit sales are made on open account, which means that, no, formal
acknowledgements of debt obligations are taken from the buyers. The only documents

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evidencing the same are a purchase order, shipping invoice or even a billing statement.
The policy of open account sales facilities business transactions and reduces to a great
extent the paper work required in connection with credit sales.

Meaning of receivables

Receivables are assets accounts representing amounts owed to the firm as a result
of sale of goods / services in the ordinary course of business.

They, therefore, represent the claims of a firm against its customers and are carried to the
“assets side” of the balance sheet under titles such as accounts receivables, customer
receivables or book debts. They are, as stated earlier, the result of extension of credit
facility to then customers a reasonable period of time in which they can pay for the goods
purchased by them.

Purpose of receivables

Accounts receivables are created because of credited sales. Hence the purpose of
receivables is directly connected with the objectives of making credited sales.

The objectives of credited sales are as follows:

(i) Achieving growth in sales:

If a firm sells goods on credit, it will generally be in a position to sell more goods than if
it insisted on immediate cash payments. This is because many customers are either not
prepared or not in a position to pay cash when they purchase the goods. The firm can sell
goods to such customers, in case it resorts to credit sales.

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(ii) Increasing profits:

Increase in sales results in higher profits for the firm not only because of increase in the
volume of sales but also because of the firm charging a higher margin of profit on credit
sales as compared to cash sales.

(iii) Meeting competition:

A firm may have to resort to granting of credit facilities to its customers because of
similar facilities being granted by the competing firms to avoid the loss of sales from
customers who would buy elsewhere if they did not receive the expected output.

The overall objective of committing funds to accounts receivables is to generate a large


flow of operating revenue and hence profit than what would be achieved in the absence
of no such commitment.

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4.7 SOURCES OF WORKING CAPITAL:-

Sources of Working Capital

Permanent sources Long-term sources Medium-term sources Short- term


sources

a) Share capital a) Preference shares a) Working capital

b) Retained earnings b) Debentures term loans

c) Long-term loans b) Public fixed deposits

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4.8 REASONS FOR ADEQUATE WORKING CAPITAL: -

• A firm must have adequate working capital, i.e., as much as needed by the firm.
• It should neither have excessive nor inadequate. Both situations are dangerous.
Excessive working capital means the firm has idle funds, which earn no profit for
the firm. Inadequate working capital means the firm does not have sufficient
funds for running its operations, which ultimately results in production
interruptions, and lowering down the profitability.
• It will be interesting to understand the relation between working capital, risk and
return. In a manufacturing concern, it is generally accepted that higher levels of
working capital decrease the risk and decrease the profitability too.
• While lower levels of working capital increase the risk but have the potentiality of
increasing the profitability also.

This principle is based on the following assumptions: -

(i) There is direct relationship between risk and profitability --- higher is the risk, higher
is the profitability, while lower is the risk, lower is the profitability.

(ii) Current assets are less profitable than fixed assets.

(iii) Short-term funds are less expensive than long-term funds.

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4.9 CRITERIA FOR JUDGING THE EFFICIENCY OF WORKING


CAPITAL MANAGEMENT:-

The efficiency of working capital management can be judged through accounting


ratios that could be used for judging the efficiency of working capital management are

Accounting
Ratios

Comparative Statement Analysis Ratio Analysis


Trend Analysis

I. COMPARATIVE STATEMENT ANALYSIS:

 Gross working capital.


 Net working capital.

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II. TREND ANALYSIS:

Current Assets.
Current Liabilities.
III. RATIO ANALYSIS:

 Current Ratio.
 Quick Ratio.
 Current assets to net worth Ratio.
 Current assets turnover Ratio.
 Working capital turnover Ratio.
 Debtor’s turnover Ratio.
 Inventory turnover Ratio.

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1) CURRENT RATIO: The current ratio of a unit measures firm’s short term
solvency, which reflects firm’s ability to meet short term obligations. The higher
the current ratio is, greater the business units ability to meet current obligation.
By convention 2:1 is considered as good i.e. current assets double the current
liabilities is considered as satisfactory.

CURRENT RATIO = CURRENT ASSETS

CURRENT LIABILITIES

Table no-1

(Amounts in Mn)

YEARS 2006- 07 2007-08 2008-09

CURRENT ASSETS 3352.45 5336.47 19869.28

CURRENT LIABILITIES 1212.09 2175.28 9439.36

CURRENT RATIO 2.76 2.45 2.10

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3 2.76
2.45
2.5 2.1

1.5

1 CURRENT RATIO

0.5

0
2006-07 2007-08 2008-09

INTERPRETATION:

The higher is the ratio, the greater is the margin of safety. The larger amount of
current assets in relation to current liabilities to meet its current obligations.

In case of Shree Renuka Sugars Limited the current ratio has decreased for the
year, 2008-09 is 2.10 as compared to 2007-08 was 2.45. But the ratio is above the
standard ratio 2:1

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2) QUICK RATIO:
Quick ratio is concerned with the relationship between quick assets and quick
liabilities. It is intended to supplement the information furnished by a current ratio. A
Raito of 1:1 is considered as an ideal one. It shows a measure the firm’s ability to pay off
short term obligations without relying on sale of inventories.
Generally a quick ratio of 1:1 is considered to represent a satisfactory current financial condition.
If the quick ratio is equal or more than standard, it indicates the sufficient liquidity.

On the other hand, if actual ratio is less than standard, it indicates that the concern is not liquid.

Quick Ratio or Acid Test Ratio = QUICK ASSETS


QUICK LIABILITIES

QUICK ASSETS: - Current assets-Inventories.

QUICK LIABILITIES: - Current liabilities-Bank Over Draft

Table no#2

(Amounts in Mn)

YEARS 2006- 07 2007-08 2008-09

9846.07
QUICK ASSETS 2350.71 3467.39

9439.36
QUICK LIABILITIES 1212.09 2175.28

QUICK RATIO 1.93 1.59 1.04

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1.93
1.59
2
1.5 1.04

1
0.5
0
2006-07 2007-08 2008-09

INTERPRETATION: QUICK RATIO

In case of Shree Renuka Sugars Limited the Quick Ratio is decreasing in the year 2008-
09 i.e 1.04 as against 1.59 in the year 2007-08. It is well within the standards prescribed.
so the company is not facing any liquidity problem

CURRENT ASSET TO NET WORTH RATIO:

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CURRENT ASSET TO NET WORTH RATIO = CURRENT ASSET

NET WORTH

Table # 3

YEARS 2006- 07 2007-08 2008-09

CURRENT ASSETS 3352.45 5336.47 19869.28

12625
NET WORTH 3336 6383

RATIO 1 0.83 1.57

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2 1 0.83
1.5 1.57
1
0.5
0
2006- 07 2007-08 2008-09
CAPITA
EQUITY

iNTERPREATION:

From the above graph it shows the company has sufficient current assets. In the year
2008-09 is very high i.e 1.57 compare to 2006-07 & 2007-08 is 1 & 0.83which is very
low.

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3) WORKING CAPITAL TURNOVER RATIO:

The working capital turnover ratio measures the efficiency of the firm in
managing the net working capital. Higher the ratio more is the efficiency of the
management of net working capital.

WC TURNOVER RATIO = NET ANNUAL SALES

NET WORKING CAPITAL

YEARS 2006- 07 2007-08 2008-09

18241.6
SALES 7323.69 9 22342.17

NET WORKING
CAPITAL 2140.31 3161.19 10429.92
RATIO 3.42 5.77 2.14

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6 5.77

4 3.42

3
2.14

2 W C TURUNOVER RATIO
1

0
2006- 07 2007-08 2008-09

INTREPERTATION:

Here the working capital ratio is positive for all the three years. In the year 2007-2008 the ratio
increased by 5.77 as compared with other two years. But in the year 2008-2009 the ratio dropped
down by 2.14. Thus it indicates that the turnover ratio has decreased in the year 2008-2009 as
there in increase in the net working capital as compared to increased in sales.

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CURRENT ASSET TURNOVER RATIO:-

Assets are used to generate sales. So the firm should manage


its assets efficiently to make maximum sales.

CURRENT ASSETS TURNOVER RATIO = NET SALES

CURRENT ASSETS

YEARS 2006- 07 2007-08 2008-09

NET SALES 7323.69 18241.69 22342.17

CURRENT ASSETS 3352.45 5336.47 19869.28

RATIO 2.18 3.41 1.12

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3.5 3.41
3
2.18
2.5
2
1.12
CURRENT ASSET
1.5 TURNOVER RATIO
1
0.5
0
2006- 07 2007-08 2008-09

INTERPRETATION:

There is no standard ratio for current assets turnover ratio. Current


assets turnover ratio is high in the year 2007-2008 as is better utilization of
current assets compared with other two years and has decreased in the year
2008-2009 by 1.12.

DEBTORS TURNOVER RATIO:-

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The computation of average collection period also helps in


determination of quality receivables as it point towards the rapidity of their
collect ability. The shorter the collection period, the better the quality of
consumers and lower the collection expenses.

DEBTORS TURNOVER RATIO = SALES

AVG DEBTORS

YEARS 2006- 07 2007-08 2008-09

NET SALES 7323.69 18241.69 22342.17

AVG DEBTORS 462.98 873.25 1529.05

RATIO 15.81 20.88 14.61

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INTERPRETATION:

Higher the value of debtors turnover, the more efficient the management of
credit. In the 2007-2008 the debtors turnover ratio is high as the compared
other two years. It indicates that in the year 2007-08 the company was able
to recover its debts more efficiently compared with other two years i.e,
20.88.

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DEBTORS COLLECTION PERIOD:-

Debtor collection period is the time to collect the outstanding amount from the
customers. Debtor’s collection period depends on credit sales per day and the debtors. It
helps to avoid excessive investment and large amount of funds blocked out with the
customers. Debtors’ collection period can be ascertained with the help of following
formula.

Debtors Collection Period (DCP): = NO OF DAYS IN YEAR


DTR

YEARS 2006- 07 2007-08 2008-09

NO OF DAYS IN YEAR 360 360 360

DEBTORS TURNOVER
RATIO 15.81 20.88 14.61

RATIO 22.77 17.24 24.64

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INTERPRETATION:

From the above graph it is clear that the company is maintaining the good liquidity because
the debt collection period is very less i-e It is recovering its debts as early as possible,
which is very good for the company. Shorter collection period betters the quality of
debtor’s as a short collection period implies prompt payment by debtors.

In the year 2007-08 the debtors collection period is rapid as compared with other two
years i.e, 17 days. In the year 2008-09 the debtors collection period has decreased by 8
days as compared to 2007-08.

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INVENTORY TURNOVER RATIO :-

Inventory Turnover Ratio (ITR): = COST OF GOODS SOLD


AVG INVENTORY

YEARS 2006- 07 2007-08 2008-09

SALES 7323.69 18241.69 22342.17

AVG INVENTORY 1061.76 1435.38 5946.14

RATIO 6.89 12.70 3.75

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14
12
10 12.70

8
6 6.89 INVENTORY
TURNOVER RATIO
3.75
4
2

0
2006- 07 2007-08 2008-09
Interpretation:
The higher the ratio it indicate that the firm has conducted more business with
proportionally less investment in inventories, which results in saving of investment cost
and low ratio may reflect dull business.

In the year 2007-08 the inventory turnover ratio increased by 12.70 and in the
year 2008-09 it decreased to 3.75. therefore it indicates in the year 2007-08 demand was
too high as compared with other two years.

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