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CONTENTS
1.1 Introduction
1.2 Objectives of the study
1.3 Research Methodology
1.4 Hypotheses
1.5 Scope of the study
1.6 Limitations of the study
1.1 INTRODUCTION
The two main aspects of company’s life are liquidity and profitability.
These cannot gain momentum unless working capital is properly managed. So
the company must balance between liquidity and profitability. Some of the
significant failures of the business concern are due to the inadequacy and mis-
management of working capital.
3. To know the cash and bank balance at the end of the each year of Grasim,
1.3. METHODOLOGY
1.4 HYPOTHESIS
1. Most of the companies consider cash, debtors and inventories are the only
current asset tp determine the optimal level of working capital.
2. Maintenance of working capital management is satisfactory.
CONTENTS
The current assets refer to those assets which are in the ordinary course of
business can be converted into cash within a short period without undergoing a
dilution in value and without disrupting of the firm.
Current liabilities are those variables, which are intended and to be paid
in ordinary course of the business i.e., within a short period.
Current assets should avoid two danger points excessive and inadequate
investment in current assets. An excessive current asset should be avoid because
it impairs the firm’s profitability. An idle investment earns nothing. On the
other hand inadequate amount of working capital can threaten solvency of the
firm because of its ability to meet its current obligations.
Net working capital concept also covers the question of judicious mix of
long term and short term funds for finance in current assets. For every firm,
there is minimum amount of net working capital, which is permanent.
Management must therefore, decide the extent to which current assets should be
financed with quity capital and for borrowed capital.
Credit control includes such factors as the volume of credit sales, the
terms of credit sales, the collection policy, etc. With a sound credit control
policy, it is possible for a firm to improve its cash inflow.
3. Size of Business:
The size of business has also an important impact on its working capital
needs. Size may be major interms of scale of operations. A firm with larger
scale of operation will need more working capital then a small firm.
The need for working capital to run day to day business activities cannot
be over emphasized. The firm has to invest enough funds in current asset for
generating sales. Sales do not convert into cash instantaneously. There is an
operating cycle involved in the conversion of sales into cash.
The operating cycle is a continuous process and therefore the need for the
current asset is felt constantly. But the magnitude of current assets needed is not
always the same, it increases and decreases overtime. However there is always a
minimum level of current assets which is continuously required by the firm to
carry on its business operations.
2.6 CONCLUSION
Inventory Management
CONTENTS
3.1. Introduction
3.2. Objectives of Inventory Control
3.3. Need to Hold Inventories
3.4. Techniques of Inventory Control
4.1.INTRODUCTION
1. Provide a supply of required materials and parts for efficient and un-
interrupted production.
3. Store materials with a minimum of handling time and cost and protect
them form loss by fire, theft and the damage through handling.
1. Transactionary motive
2. Precautionary motive
Transactionary motive
I.T.R = Sales
Avg.Inventory
Where,
Avg.Inventory = Opening stock of + Closing stock of
Finished goods finished goods
2
12
No.of Days
10
8
6 series1
4
2
0
2002- 2003- 2004-
2003 2004 2005
Year
Inventory turnover ratio is very low in the year 2002-2003 and days of
inventory holding period is high in the year 2002-2003 and low in the year
2003-2004
ABC Analysis
Just-in-time(JIT)
1. ABC Analysis
It can be seen that 10 percent of the items held in stock accout for 70
percent of the total value. Obviously these items need to be controlled carefully
and very strict levels of stock should be maintained. Items of medium value
represent 35 percent of total quantity, but account for 25 percent of the value.
These items should be subject to the usual material control routine, but levels of
stock set need not be quite so rigidly adhered as those in ‘A’ category. Finally,
low value items in category ‘C’ represent the largest quantity in use but account
for only 5 percent of the total value. These items may be considered as ‘free
issue’, no records being maintained. However, their stocks are kept under some
observation so as to ensure the reordering of fresh supplies when necessary.
2. Just In-Time(JIT)
CONTENTS
5.1. Introduction
5.2. Liquidity Ratio
5.3. Activity Ratio
5.4. Profitability Ratio
5.5. Leverage Ratio
5.1 INTRODUCTION
In this chapter the comparison has been made on the basis of historical
data with at of the present performance of the company and thereby inferences
are drawn as to know whether ratios are improved or deteriorated. But main
drawback of this method is that it may some times lead to comparison of poor
ratios of the past with that of poor ratios of present, which may give misleading
figure.
The most common ratio which indicate the extent of liquidity or lack of it are;
2.25
2.2
2.15
2.1
Ratio
2.05 series1
2
1.95
1.9
1.85
2002-2003 2003-2004 2004-2005
Year
Quick ratios are used as a complementary ratio to the current ratio. The ratio is
concerned with the establishment of relationship between the liquid assets and
liquid liabilities. The liquid assets are those, which can be immediately or at a
short notice can be converted into cash without loss of or diminution in value.
1. Sundry creditors
2. Trade advances and deposits
3. Interest accrued but not given
4. Unclaimed dividends
1.5
Ratio
1 series1
0.5
0
2002-2003 2003-2004 2004-2005
Year
In the year 2002-2003, Quick ratio is high (1.75), low in the year
2003-2004(1.37 )
Comparison of Current assets with Quick assets is shown in graph
1500
Current assets
1000
quick assets
500
0
2002-2003 2003-2004 2004-2005
(Rs.in Crores)
Year Net Working Capital employed NWCCE Ratio
Capital
2002-2003 743.12 5678.88 0.13
2003-2004 743.91 6308.56 0.11
2004-2005 1026.04 6936.19 0.14
0.16
0.14
0.12
0.1
Ratio
0.08 Series1
0.06
0.04
0.02
0
2002-2003 2003-2004 2004-2005
Year
Net working capital to capital employed ratio is highest in the year 2004-
2005 and the lowest in the year 2003-2004. Net working capital is highest in
the year 2004-2005 and the lowest in the year 2002-2003. Capital employed is
highest in the year 2004-2005 and lowest in the year 2002-2003.
Current asset turnover ratio is the ratio between current assets ad sales.
4.5
4
3.5
3
Ratio
2.5
series1
2
1.5
1
0.5
0
2002-2003 2003-2004 2004-2005
Year
The activity ratio reflects the firm efficiency in utilization of its assets. It is
the rate at which the different short term assets are converted into cash and how
promptly the liabilities can discharge.
Net Working capital turnover ratio is the ratio between working capital and
turnover.
Net Working capital is the excess of current assets over current liabilities.
Turnover means net sales, i.e., total sales less sales returns.
8.5
8
Ratio in times
7.5
Series1
7
6.5
6
2002-2003 2003-2004 2004-2005
Year
The fixed assets turnover ratio is the ratio between fixed assets and turnover.
Fixed assets, here, means net fixed assets, i.e., fixed assets less depreciation.
2.5
2
Ratio in times
1.5
Series1
1
0.5
0
2002-2003 2003-2004 2004-2005
Year
Though, there are no standard norms for thus ratio, a very high ratio I,e.,
1.67 times indicates that the company is over trading on its fixed assets. In the
Current assets Sales turnover ratio is the ratio between current assets and
turnover or sales (i.e., net sales)
4.2
4
3.8
Ratio
Series1
3.6
3.4
3.2
2002-2003 2003-2004 2004-2005
Year
The main reason for decrease in the current asset turnover ratio is when
the current assets increase; the sale does not increase to the proportion of the
current assets.
Net profit ratio is the ratio of net profit to sales. Net profit means final
balances of operating and non=operating incomes after meeting all expenses,
i.e., both operating and non-operating.
Sales mean total sales, but net sales, i.e., total sales minus sales returns.
14
12
10
Ratio
8
series1
6
4
2
0
2002- 2003- 2004-
2003 2004 2005
Year
As in the year 2003-2004 the Net Profit ratio is 12.71, it indicates that the
profitability of the concern is good.
Leverage ratios are ratios which measure the relative interests of the owners
and the creditors in the enterprise.
22.4
22.2
22
21.8
Ratio
21.6 Series1
21.4
21.2
21
2002- 2003- 2004-
2003 2004 2005
Year
2500
2000
Rs in Crores
1500 Series1
1000 Series2
500
0
2002- 2003- 2004-
2003 2004 2005
Year
CONTENTS
6.1. Introduction
6.2. Need for Holding the Cash
6.3. Cash Planning
6.4. Cash Forecast and Budgeting
6.5. Cash Management and Ratios
CASH MANAGEMENT
6.1. INTRODUCTION
Cash management is regarded as the heart of the current asset. Cash is the
basic input needed to keeps business running on a continuous basis and it is also
ultimate output expected to be realized by selling the product or service
manufactured by the firm.
Cash is the money, which a firm can disburse immediately without any
restriction. The term cash includes coins, currency and cheques held by the
firm, and balance in its Bank accounts.
(i) Cash flows into the firm and out of the firm.
(iii) Cash balances held by the firm at a point of time by financing deficit or
investing surplus cash.
Cash budget is the most significant device to plan for and control cash
receipts and payments. A cash budget is a summarized statement of cash
inflows and outflows over a projected time period.
On the other hand, cash forecasts are needed to prepare cash budget, cash
forecasting may be done on short term or long term.
Table – 6.1: Cash and Bank balance, net sales, current asset and current
Liability of Grasim.
The cash management of the firm usually monitors the following ratios.
(Rs.in Crores)
Year Cash and Bank Current Asset CCAR
balance
2002-2003 110.11 1495.61 7.36
2003-2004 227.48 1496.01 15.20
2004-2005 86.70 1853.93 4.67
16
14
12
10
Ratio
Series1
8
6
4
2
0
2002- 2003- 2004-
2003 2004 2005
Year
35
30
25
20
ratio
Series1
15
10
5
0
2002- 2003- 2004-
2003 2004 2005
Year
Cash turnover ratio is the ratio between cash and turnover or sales. Cash
for this purpose, means cash in hand, cash at bank and readily realizable
investments or securities.
Turnover refers to total annual sales (i.e., cash sales plus credit sales)
effected during the year. However, sales means net annual sales, i.e., total
annual sales minus returns.
(Rs.in Crores)
Year Cash & Bank Sales CSR
Balance
2002-2003 110.11 4606.20 2.39
2003-2004 227.48 5212.21 4.36
2004-2005 86.70 6229.26 1.39
3
Ratio
Series1
2
0
2002-2003 2003-2004 2004-2005
Year