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CARBORUNDUM UNIVERSAL LIMITED

SUMMARY

EXECUTIVE

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EXECUTIVE SUMMARY The project undertaken is on Working Capital Management of CUMI. It describes about how the company manages its working capital and the various steps that are required in the management of working capital. Cash is the lifeline of a company. If this lifeline deteriorates, so does the company's ability to fund operations, reinvest and meet capital requirements and payments. Understanding a company's cash flow health is essential to making investment decisions. A good way to judge a company's cash flow prospects is to look at its Working Capital Management (WCM). Working capital refers to the cash of a business requires for day-to-day operations or, more specifically, for financing the conversion of raw materials into finished goods, which the company sells for payment. Among the most important items of working capital are levels of inventory, accounts receivable, and accounts payable. Analysts look at these items for signs of a company's efficiency and financial strength. The working capital is an important yardstick to measure the companys operational and financial efficiency. Any company should have a right amount of cash and lines of credit for its business need at all times. This project describes how the management of working capital takes place at CUMI. There are numerous instances in the history of business world where inadequacy of working capital has led to business failures when a firm finds it difficult to meetings day to day affairs. Operating expenses essential out lays may have to be postponed for want of funds, operating. The project undertaken is on Working Capital Management of CUMI It describes about how the company manages its working capital and the various steps that are required in the management of working capital. Cash is the lifeline of a company. If this lifeline deteriorates, so does the company's ability to fund operations, reinvest and meet capital requirements and payments. Understanding a company's cash flow health is essential to making investment decisions. A good way to judge a company's cash flow prospects is to look at its Working Capital Management (WCM).

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Working capital refers to the cash of a business requires for day-to-day operations or, more specifically, for financing the conversion of raw materials into finished goods, which the company sells for payment. Among the most important items of working capital are levels of inventory accounts receivable, and accounts payable. Analysts look at these items for signs of a company's efficiency and financial strength. The working capital is an important yardstick to measure the companys operational and financial efficiency. Any company should have a right amount of cash and lines of credit for its business needs at all times. This project describes how the management of working capital takes place at CUMI. Thus efficient management of working capital in an important prerequisite for successful working of a business concern it reduces the chances of business failure generates a felling of security and confidence in the minds of personnel in the organization it assurance solvency of steady of the organizational will go out of gear & enterprise objectives on investment slumps the suppliers & creditors of the firm may have to wait longer to raise their dues & will hesitate to extend further credit to the firm.

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INTRODU CTION

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INDUSTRY PROFILE CUMI manufactures the widest range of bonded and coated abrasives in the world. The company pioneered the manufacture of coated abrasive in India, besides super refractorys, electro minerals, and industrial ceramic fibers. CUMI makes over 20,000 different varieties of abrasives refractory products and electro-minerals manufactured at 14 locations CUMI has the distinction of having all its manufacturing units ISO 90012000 certified. Products are: White Fused Alumina (CUMITE-W) Brown Fused Alumina (CUMITE-B) Silicon Carbide In export market, the major threats are the products from China. They can sell products at lower price because of their cost of production and cost of labour is very low. World total Alumina comprises 40% from China. Competition is increasing day by day so that the product development will be the main criteria. Our mineral recourses are limited so there is a challenge in future development. High capital investment, limited market, sophisticated technology, availability of substitute products, product differentiation and import are the principle challenges in its industry. Market scenario of this industry:In recent years there has been a considerable increase in the production capacity in the Asia pacific region in particular in china, India South Korea and Australia price and quantity are the major competitive parameters in the industry. The main customer industries are: Automobile industry General metal cutting industry

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Polishing of metal surface Marine paints

Major alumina producing companies and its market share in India

Grind well Norton Ltd. Snam Abrasives Pvt.Ltd Orient Abrasives Carborundom Universal Ltd

30% 10-15% 20% 35-40%

Alumina oxide industry is one of the major industries in India. Alumina is the most widely used oxide ceramic material. Its applications as are widespread, and include spark plugs, tap washers, electronic substrates, grinding media, abrasion resistant tiles, cutting tools, bio ceramics and laboratory ware and ware parts etc. Mechanics of abrasion Abrasives generally rely upon a difference in hardness between the abrasive and the material being worked upon, the abrasive being the harder of the two solid materials that repeatedly rub against each other will tend to wear each other away. Typically, material used as abrasives are either hard minerals or is synthetic stones, some of which may be chemically and physically identical to naturally occurring minerals but which cannot be called minerals as they did not arise naturally. However even softer minerals like calcium carbonate are used as abrasives, such as polishing agents in toothpaste. These minerals are either crushed or are already of sufficiently small size to permit their use as an abrasive. These grains commonly called grit, have rough edge, often terminating in points which will decrease the surface area in contact and increase the localized contact pressure. The abrasive and the material to be worked are brought in to contact wile in relative motion to each other.

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COMPANY PROFILE
CARBORUNDUM UNIVERSAL LIMITED

Carborundum universal ltd is an Indian based coated and bonded abrasive manufacturing company.Carborundom universal Murugappa India Ltd (CUMI), is an important segment of the Murugappa group, which is one of the leading business group offering a wide range of product mix. Murugappa Group is one of India's leading business conglomerates. Market leaders in diverse areas of business including Engineering, Abrasives, Finance, General Insurance, Cycles, Sugar, Farm Inputs, Fertilizers, Plantations, Bio-products and Nutraceuticals, its 29 companies have manufacturing facilities spread across 13 states in India. The organization fosters an environment of professionalism and has a workforce of over 32,000 employees. The major companies of Murugappa Groups are: Carborundom Universal Ltd Cholamandalam Investment and Finance Ltd Coromandalam Fertilizers Ltd Eid(Parry) India Ltd Parry Agro Industries Ltd Parry confectionary Ltd Party Nutraceutical Ltd Tube Investment Ltd Coromandel Engineering Ltd The group has grown consistently through its decisive and visionary response to changing times. Its pioneering efforts, steadfast commitment to ethical business practices and its dogged pursuit of new areas to extend its business acumen have brought in its wake several prestigious national and international awards. The Group's business philosophy

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Can be summed up in this couplet from the ancient Indian treatise on wealth creation and governance, the Arthashastra:

"The fundamental principle of economic activity is that no man you transact with will lose, and then you shall not." Carborundom universal murugappa India Ltd (CUMI) The name Carborundom is related to Corundum, which means naturally formed minerals and carborundom is artificially or synthetically prepared mineral. Now CUMI has 5 divisions all over India, manufacturing bonded and coated abrasives, industrial ceramics, electro minerals, refractorys, grinding wheels, tubes, plantations, IT enabled services, financial services, ceramic fibbers, industrial engineering, chains, cycles, sanitary wares, food products, super refractorys, confectioneries, fertilizers, sugar. Pioneered the manufacture of coated and bonded abrasives in India. Fully integrated manufacturing facilities. Widest range of bonded and coated abrasives in the world. 52 years of uninterrupted track record of profits. 52 years of uninterrupted track record of dividends(since1957)

Carborundom universal was established in 1954 as a joint venture between murugappa groups, India: the Carborundum Company, USA and the universal grinding wheel company ltd. The main business activity of Carborundum universal involves manufacture of coated abrasives, super refractoriness, electro minerals industrial ceramics and ceramic fiber. Further CUMI produces about 20,000 different varieties of abrasive products, refractory products and electro minerals. Carborundum universal ltd has 10 manufacturing facilities which are meticulously connected with a wide network of distributors and sub distributors. 8

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CUMI BUSINESS DISTRIBUTION CUMI is known to be an innovator and exports its products to be 43 countries spread across North America, Europe, Australia, South Africa and Asia. All the manufacturing facilities of Carborundum universal ltd are ISO 9001-2001 and ISO 14001 certified for quality standards and environment friendly manufacturing practices respectively. Carborundom universal ltd is equipped with a state of the art research and development centre which works aggressively on product development and efficacy enhancement. CUMI has its own bauxite mines at okha and Bhatia in Gujarat that fills the abrasives and refractory grains requirements. Mining operations began in1963 and ever since these mines have supplied the basic raw materials. The raw materials bauxite mined is calcined at CUMI plants at edappally and korathy. The plants were commissioned in 1965, which are ISO 9000 certified, manufacturing a wide range of superior quality aluminium oxide and silicon carbide grains. CUMI also exports white aluminium oxide and silicon carbide abrasive grains to international markets. The R&D wing comes out with constant innovations and product up gradations, which makes the company a world leader in grinding solutions which enables maximum grinding efficiencies and reduced cost for customers. VISION Mr.M.M.MURUGAPPAN, chairman of CUMI, opines our vision is to place CUMI on the global map as an Indian company poised to redefine the scope and applications of material science. Being market leaders, we have to constantly innovate, especially in ceramics sciences. There is a huge potential in the post surgical market and the bio ceramics vertical offers a good opportunity to expand our product portfolio.

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CARBORUNDUM UNIVERSAL LIMITED

MISSION 1. To support captive need of employees. 2. Speedily grow on white fused alumina exports. 3. Grow aggressively in white and brown fused alumina grains. 4. Manage through business excellence model. 5. Focus on faster new product development. QUALITY POLICY The company considers consistently providing quality products and services to focus on customer satisfaction and achieving this through total employee involvement supported by proper system and process as the policy targets. Subsidiary companies 1. CUMI America Inc. 2. CUMI Canada Inc. 3. CUMI Middle East, ras al-Khalifa. 4. Sterling energy development ltd. 5. Prod rite anti corrosive ltd. 6. Web world holdings and management pvt.ltd. 7. Laser world pvt.ltd. 8. Apex abstracting and editing services ltd. 9. Net access (India) pvt.ltd. Joint ventures companies 1. CUMI Australia pvt.ltd. 2. WENDT (INDIA) LTD. 3. MURUGAPPA Morgan thermal ceramics ltd. 4. Electro minerals division.

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EDAPPALLY UNIT . In 1962 November 29, sir. V.V.GAURI, Governor of Kerala laid the foundation stone of Carborundum universal ltd, EDAPPALLY. The work started and supported with the technological collaboration of Carborundum Company USA and universal grinding wheel company UK. Production started in 1965 with a few number of stuff and workers and average production was 65 tones per month. During 1966-67, 850 tones was the production. After that, the company gained strength from the committed efforts to staff and workers. Now the production is around 1800 tones per month. The momentum gained in the production enhanced the company to export its products. CUMI, edappally bagged the prestigious commendation award for the energy conservation from Kerala government for the year 1997-98, in the major industries category. The company started exporting and started a new plant i.e. plant 2 at edappally unit in the year 1994. The plant has modern machines and operations carried out in a computerized manner. Products manufactured at CUMI BROWN FUSED ALUMINA (CUMITE B) WHITE FUSED ALUMINA (CUMITE W) COMPANY HISTORY-YEAR EVENTS 1954-1962 The company was incorporated at Chennai. The company manufactured bonded and coated abrasive products, calcined bauxite etc.20, 000 no: of equity shares issued at a premium of RS 25/- each. 1991-1995 713 shares issued to the share holders of wendit (India) ltd. The company offered 15% secured redeemable party convertible debentures of RS 30/-each on right basis to the existing share holders. Another 1, 29,748 debentures were offered to the employees. All were accepted. The company acquired 4740 preference shares and 1, 24,800 equity shares of wend it (India) ltd.

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The company commissioned a wind farm of 2mw capacity at perrungudi and Tamilnadu. Four wind mill were also added for increasing the capacity to 2.925 mw in order to power requirement of factory. 2000-2008 The company has sold its refractory unit in Visakhapatnam for a sum of RS 7.8 crore. Mr. M V murugappa steps down as the whole time director on the board of the company sells its electro cast refractoriness units at palakkad for RS 31 crores. Appoints Mr. Ramesh agarwal as the managing director. The company acquired a 51% stake in CUMI Australia.pvt.ltd, m m murugappan a new M D for CUMI.CUMI gets award for industrial safety instituted by national safety council Kerala chapter in other industries sector in the small industries category.carborundum universal ties up with South African firm cerdak. Carborundom universal entries into a joint venture with CEEB to take a 49% stake in jingri yanjiao china. CUMI has entered into a business purchase agreement with IVP ltd. For the acquisition of its industrial ceramics division at Aurangabad Maharashtra.

ORGANIZATIONAL PROFILE

Date of establishment No. of employees Company type Office hours Quality assessment Regional office

: : : : : :

1954 1643 head office 9 am to 6 pm electro minerals division P Bno.1, kalamssery Development plot PO Cochin 683109, India

Other locations

kolkatta, hosur, Uttaranchal

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Website

www.cumi.murugappa.com

ORGANISATION STRUCTURE
Board of directors Mr. M Murugappa Mr.subodh Kumar Bhargav Mr. L Palani Kumar Mr. Sridhar Ganesh Mr.shobhan Takor Mr. Lakshmi narayanan Mr.Sanjay Jayavarthana Velu Mr. Srinivasan : : : : : : : : Chairman Non Executive Director Non Executive Director Non Executive Director Non Executive Director Non Executive Director Non Executive Director Managing Director

MANAGING COMMITTEE
CUMIS managing committee steers the organization to meet over all objectives within the Carborundum set by the Board of Directors. The committee comprises: Mr. .K Srinivasan Mr. R Ravi Mr. V Ramesh Mr. M M Muthiah Mr. .R Rajagopalan : : : : : Managing Director President industrial ceramics President chief finance officer Senior vice president HR Senior vice president refractories

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Mr. Deepak Dorairaj

Senior vice president abrasive

PRODUCT PROFILE Carborundum Universal Ltd (CUMI) offers ceramic materials based for industrial applications. The major product offering and applications are as follows:

Business segment Abrasives Ceramics

Product offering Bonded and coated abrasive Industrial ceramics, bonded and Electro cast refractories

Electro minerals

Brown fused alumina grains, white Fused alumina grain sand silicon Carbide grains

Abrasives It is used in a variety of application for material removal, polishing and finishing. Bonded and super abrasives are broadly of three types. Bonded abrasives Coated abrasives Super abrasives

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Bonded and super abrasives are mostly commonly in the form of wheels but also in other shapes such as segments: stock etc. Coated abrasives and are in the form of sheets, belts discs. Major end users industries for abrasive are automobile, ancillaries, construction and wood working and general engineering. There are two manufacturers in India. Ceramics The ceramic division offers two product line viz. Industrial ceramics and refectories Industrial ceramics are high alumina ceramic product like grinding media, were resist liner, lined equipment and metalized ceramic products. These products are like ceramic tiles, mineral processing, resistant products used in steel, glass, cement, petrochemical, fertilizers and ceramic industries are the major users of refectories. Electro minerals These are mainly used by the abrasive and refectory industries. They are also used in blasting for surface preparation and certain other industrial application in the domestic market is created by import from China. In export market, the major thread is the product from China. They can sell products at lower price because of their cost of production and cost of labour is very low. World total production of Alumina comprises 40% from China competition is increasing day by day so that the product development will be the main criteria. There mineral resources are limits so there is challenge in future development. High capital investment, limited market, sophisticated technology, availability of substitute products, product differentiation are import the principle challenges in this industry. Market scenario of this BUSINESS In recent years there has been a considerable increase in the capacity in the Asia pacific region in particular in China, Indian South Korea and Australia. Price and quality are the major competitive parameters in this Business. The main customer industries are: 15

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Automobile industries General metal cutting industries Polishing of metal surface

Marine paints Major products of Alumina and its uses Products White Aluminum Oxide (white Fused Alumina) Brown Aluminum Oxide (brown Fused Alumina) High alumina refractory cement Manufacturing Uses of grinding wheels,

coated abrasives, paints, tiles etc. Manufacturing of grinding wheels, polishing purpose, shot blasting purpose It is used as a binder for all types of cartable refractoriness

CUMI EDAPPALLY has two plants PLANT 1 Brown fused alumina is the main product from plant 1. It is used for grinding metals of high tensile strength. It is because of its thermal property that makes it an excellent material for use in the manufacturing of refractory products. Raw materials calcined bauxite, coke and iron being fused in furnace at approximately 1200 degree Applications 1. Abrasives: extensively used in manufacturing of grinding wheels, annealed malleable iron and in manufacture of abrasive papers and clothes. 2. Refractories: raw material for manufacturing of a variety of fired refractories variety of applications in polishing of granite and stone ware and a blasting media.

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PLANT 2 It was started in the year 1994 with the capacity of 650 tons a month. Main product of unit is white fused alumina (WFA). The company has a furnace which is tilting furnace for producing white alumina. While fused alumina (WFA) is made from calcined alumina and is a friable product. Like brown fused alumina, WFA is used in the manufacturing of grinding wheels (both vitrified and resin bonded) and coated products. These grains are also used for shot blasting purpose and as polishing media and refractory grade: WFA is used as raw materials for high alumina refractories. In customer segment with the improvement in technology the use of sol get synthetic cloth based product etc are having high demand. Company has taken strong measures to improve customer base which will yield greater benefits in years to come.

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DESIGN OF THE STUDY

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IMPORTANCE OF THE STUDY Working capital is a significant facet of a modern financial management. Therefore the financial managers spend a great deal of time on working capital management. The proportional role of working capital plays a great part in earning maximum return on the capital invested with the business enterprise. Management should take care when deciding on working capital requirement of an organization because it represents a segment of total capital employed in a business. Too small quantity of working capital can bring down profits, due to non utilization of available capacity. Similarly excess working capital may lower the rate of return on investment because of non utilization. 1. This project is helpful in knowing the companies position of funds maintenance and setting the standards for working capital inventory levels, current ratio level, quick ratio, current asset turnover level & size of current liability etc. 2. This project is helpful to the managements for expanding the dualism & the project viability &present availability of funds. 3. This project is also useful as it combines the present year data with the previous year data and thereby it shows the trend analysis, i.e. increasing fund or decreasing fund. 5. The project is done as a whole entirely. It will give overall view of the organization and it is useful in further expansion decision to be taken by management. SCOPE OF THE STUDY The working capital of CUMI-EMD shows a positive net working capital during the period of study. The barometer to measure the effectiveness of managing the working capital of CUMI-EMD is the evaluation of the past performance and analyzing the

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financial statements using accounting and statistical tools. The study touched all important constituents of working capital such as cash, receivables and inventory. Thus the study would give a brief description of the performance of CUMI-EMD and suggesting improves its performance. Statement of the problem: The study has been conducted with the aim of analyzing the efficiency of working capital management of CUMI. An attempt is made to analyze the performance of the company for the last five years from 2005-2006 to 2009-2010 In the management of working capital, the firm is faced with two key problems: 1. First, given the level of sales and the relevant cost considerations, what are the optimal amounts of Cash, accounts receivable and inventories that a firm should choose to maintain? 2. Second, given these optimal amounts, what is the most economical way to finance these working capital investments? To produce the best possible results, firms should keep no unproductive assets and should finance with the cheapest available sources of funds. Why? In general, it is quite advantageous for the firm to invest in short term assets and to finance short-term liabilities. Besides this followings are some other problem, a firm is facing. Through this study we try to find answer for these problems. 1. What are root causes of working capital on business? 2. What are the major effects on accounts receivable? 3. What is the nature of relationship between working capital and capital employed? 4. What steps should be taken to ensure that it effect on the profit of the firm will not be negative? 5. How can working capital be managed? 6. What make up the working capital cycle? 7. How can debtors be controlled?

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Objective of the study 1. To analyze the effectiveness of existing working capital management methods. 2. To explain the working capital requirement with the help of relevant accounting ratios. 3. To suggest improvement, wherever possible on the basis of study. 4. Through the net profit ratio & other profitability ratio, understand the Profitability of the company. 5. Evaluating company s performance relating to financial statement Analysis. 6. To know the liquidity position of the company with the help of current Ratio. 7. To find out the utility of financial ratio in credit analysis & determinate financial capacity of the firm. Hypothesis: Existing working capital management methods are effective. Period of study The present study deals with the data collected from annual reports and other relevant documents for the period commencing from financial year 2005-2006 to Financial year 2009-2010 Research methodology Both primary and secondary data were used for the study. Primary data was collected through discussions held with the finance manager and other officers in the finance department of CUMI. Secondary data was collected from annual reports and other published documents. There are several ways of collecting both data-Primary and Secondary data, which differ considerably in context of money, cost, time and other sources at the disposable of the researcher.

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There are two types of data: Primary data Secondary data 1-Primary Data In respect of primary data which the researchers are directly collects data that have not been previously collected. The primary data was gathered through personal interaction with various functional heads and other technical personnel. Some information was also collected by observation. 2-Secondary Data: Secondary data was collected various reports, annual reports, documents charts, management information systems, etc in CUMI, And also collected various magazines, books, newspapers etc. The analysis of the information gathered has been made on the basis of the clarifications sought during the personal discussions with the concerned people and perception during the personal visits to the important areas of services. Type of research The type of research followed is analytical research. In analytical research the researcher has to use facts or information already available and analyze these to make a critical evaluation of the material. Limitations of the study Since the analysis is based on the data in annual report, which is a secondary source inherent limitations of those data will have its impact on this study. 1. The study in limited 4 years (2006-2007) to (2009-2010) performance of the company.

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2. The data used in this study have been taken from published annual report only.

3. This study in conducted within a short period. During the limited period the study may not be retailed, full fledged and utilization in all aspects. 4. Financial accounting does not take into account the price level changes. 5. We cannot do comparisons with other companies unless and until we have the data of other companies on the same subject. 6. Only the printed data about the company will be available and not the backend details. 7. Future plans of the company will not be disclosed to us. 8. Lastly, due to shortage of time it is not possible to cover all the factors and details regarding the subject of study.

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LITERATURE REVIEW
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One school of thought believes that, as all capital resources available to a business organization From shareholders, bondholders, and creditors (secured and unsecured) works up in the business activities to generate revenues and facilitate future expansion and growth; they are to be considered as working capital. Another school of thought links working capital with current assets and current liabilities. According to them, the excess of current assets over current liabilities is to be rightly considered as the working capital of a business organization. Working capital is descriptive of that capital which is not fixed. But, the more common use of working capital is to consider it as the difference between the current assets and the current liabilities. Current assets and current liabilities are assets and liabilities which arise in the course of business. The WC demonstrates the amount of liquid assets that are available to sustain and build the business by measuring companys efficiency and short-term financial health. As such, it carries great value to those who might be interested in investing in business or even purchasing it. The following are the most important definitions of Working capital: Working capital is the difference between the inflow and outflow of Funds. In other words it is the net cash inflow. Working capital represents the total of all current assets. In other Words it is the Gross working capital, it is also known as Circulating capital or Current capital for current assets are rotating in their nature. Working capital is defined as the excess of current assets over Current liabilities and provisions. In other words it is the Net Current assets or net working capital. Capital required for a company can be classified under two main categories via; 1. Fixed capital 2. Working capital

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Every business needs fund for two purposes for its establishment and to carry out its dayto-day operations. Long term funds are required to create production facilities through purchase of fixed assets such as plant and machinery, land, building, furniture, etc.

Investments in these assets represents that part of firms capital which is blocked on a permanent or fixed basis and is called fixed capital. Funds are also needed for short term purchase of raw materials, payment of wages and other day-to-day expenses etc. these funds are known as working capital. Funds, thus, invested in current assets keep revolving fast and are being constantly converted into cash and these cash flows out again in exchange for other current assets. Hence, it is also known as revolving or circulating capital or short term capital. In the words of shubin working capital is the amount of funds necessary to cover the cost of operating the enterprise. Characteristics of Working Capital Working capital is the life blood and nerve centre of a business. Just as circulation of blood is essential in the human body for maintaining life, working capital is very essential to maintain the smooth running of a business. No business can run successfully with out an adequate amount of working capital. 1 Short term Needs: Working capital is used to acquire current assets which get converted into cash in a short period. In this respect it differs from fixed capital which represents funds locked in long term assets. The duration of the working capital depends on the length of production process, the time that elapses in the sale and the waiting period of the cash receipt. 2 Circular Movements: Working capital is constantly converted into cash which again turns into working capital. This process of conversion goes on continuously. The cash is used to purchase current assets and when the goods are produced and sold out; those current assets are

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transformed into cash. Thus it moves in a circular away. That is why working capital is also described as circulating capital.

3 An Element of Permanency: Though working capital is a short term capital, it is required always and forever. As stated before, working capital is necessary to continue the productive activity of the enterprise. The working capital that is required permanently is called permanent or regular working capital. 4 An Element of Fluctuation: Though the requirement of working capital is felt permanently, its requirement fluctuates more widely than that of fixed capital. The requirement of working capital varies directly with the level of production. It varies with the variation of the purchase and sale policy; price level and the level of demand also. The portion of working capital that changes with production, sale, price etc. is called variable working capital. 5 Liquidity: Working capital is more liquid than fixed capital. If need arises, working capital can be converted into cash within a short period and without much loss. A company in need of cash can get it through the conversion of its working capital by insisting on quick recovery of its bills receivable and by expediting sales of its product. It is due to this trait of working capital that the companies with a larger amount of working capital feel more secure. 6 Less Risky: Funds invested in fixed assets get locked up for a long period of time and can not be recovered easily. There is also a danger of fixed assets like machinery getting obsolete due to technological innovations. Hence investment in fixed capital is comparatively more risky. As against this, investment in current assets is less risky as it is a short term

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investment. Working capital involves more of physical risk only, and that too is limited. Moreover, working capital gets converted into cash again and again; therefore, it is free from the risk arising out of technological changes.

7 Special Accounting System not needed: Since fixed capital is invested in long term assets, it becomes necessary to adopt various systems of estimating depreciation. On the other hand working capital is invested in short term assets which last for one year only. Hence it is not necessary to adopt special accounting system for them. Among the most important items of working capital are levels of inventory, accounts receivable, and accounts payable. Working capital can be expressed as a positive or a negative number Concepts of working capital There are two concepts of working capital 1. Balance sheet concept 2. Operating cycle concept or circular flow concept. Balance sheet concept There are two interpretations of working capital under the balance sheet concept 1. Gross working capital 2. Net working capital In the broad sense, the term working capital refers to the gross working capital and represents the amount of funds invested in current assets. Thus, the gross working capital is the capital invested in total current assets of the enterprise. Current assets are those assets which in the ordinary course of business converted into cash within a short period of normally one accounting year. Examples of current assets are: 1. Cash in hand and bank balances 2. Bills receivables 3. Sundry debtors.

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4. Short term loans and advances 5. Inventories of stocks, as: 1. Raw materials 2. Work in process 3. Stores and spares 4. Finished goods 5temporary investments of surplus funds 6. Prepaid expenses 7. Accrued income In a narrow sense, the term working capital refers to the net working capital. Net working capital is the excess of current assets over current liabilities, or say: Net working capital=current assets-current liabilities Net working capital may be positive or negative. When the current assets exceed the current liabilities the working capital is positive and the negative working capital results when the current liabilities are more than the current assets. Current liabilities are those liabilities which are intended to be paid in the ordinary course of business within a short period of normally one accounting year out of the current assets or the income of the business. Examples of current liabilities are:I. bills payable. 2. Sundry creditors or accounts payable. 3. Accrued or outstanding expenses 4. Short-term loans, advances and deposits. 5. Dividends payable. 6. Bank over drafts. 7. Provision for taxation The gross working capital concept is financial or going concern concept where as net working capital is an accounting concept of working capital. These two concepts of working capital are not exclusive; rather both have their own merits. The gross concept is sometimes preferred to the net concept of working capital for the following reasons:-

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1.

It enables the enterprise to provide correct amount of working capital at the

right time.

2. 3. 4.

Every management is more interested in the total current assets with which it The gross concept takes into consideration the fact that every increase in the The gross concept of working capital is more useful in determining the rate

has to operate than the sources from where it is made available. funds of the enterprise would increase its working capital. of return on investments in working capital. The net working capital concept, however, is also important for the following reason:1. It is qualitative concept which indicates the firms ability to meet its operating expenses and short term liabilities. 2. It indicates the margin of protection available to the short-term creditors ie, the excess of current assets over current liabilities. 3. It is an indicator of the financial soundness of an enterprise. 4. It suggests the need for financing a part of the working capital requirement out of permanent sources of funds. To conclude, it may be said that, both gross and net concepts of working capital are important aspects of the working capital management. Operating cycle or circular flow concepts Working capital refers to that part of firms capital which is required for financing short term current assets such as cash, marketable securities, debtors, and inventories. Funds, thus, invested in current assets keep revolving fast and are being constantly converted into cash and this cash flow out again in exchange for other current assets.Hence, it is also known as revolving or circulating capital. The cycle starts with the purchase of raw

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materials and other resources and ends with the realization of cash with from the sale of finished goods.

Working capital may be classified in two ways: 1. on the basis of concept 2. on the basis of time Working capital is classified as gross working capital and net working capital, on the basis of concept. On the basis of time, working capital may be classified as 1. Permanent or fixed working capital 2. Temporary or variable working capital

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Kinds of working capital

On the basis of concept

On the basis of time

Gross working capital

Net working capital

Permanent working capital

Variable working capital

Regular working capital

Reserve working capital Seasonal working capital Special working capital

Permanent working capital Permanent working capital is the minimum amount which is required to ensure effective utilization of fixed facilities and maintaining the circulation of current assets. There is always a minimum level of current assets which is continuously required by the enterprise to carry out normal business operations. Temporary working capital Temporary or variable working capital is the amount of working capital which is required to meet the seasonal demands and special exigencies. Variable working capital can be further classified as seasonal working capital and special working capital. The capital 32

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required to meet the seasonal needs of the enterprise is called seasonal working capital. Special working capital is that part of working capital which is required for meet special exigencies such as launching of extensive marketing campaigns for conducting research etc. Temporary working capital differs from permanent working capital in the sense that it is required for short periods and cannot be permanently employed gainfully in the business. Figures given below illustrate the difference between permanent and temporary working capital. Figure 1.2

Value Value
Permanent current asset

Temporary current asset

Permanent working capital

Time Figure 1 figure 2

time

1. Permanent working capital is stable or fixed overtime while the temporary on variable working capital fluctuates. 2. Permanent working capital is also increasing with the passage of time due to expansion of business but even then it does not fluctuate as variable working capital which sometimes increases and sometimes decreases BALANCED WORKING CAPITAL POSITION The firm should maintain a sound working capital position. It should have adequate working capital to run its business operations. Both excessive as well as inadequate

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working capital positions are dangerous from the firm s point of view. Excessive working capital not only impairs the firm s profitability but also result in production interruptions and inefficiencies. Importance or advantages of adequate working capital Working capital is the lifeblood and nerve centre of a business. Just as circulation of blood is essential in the human body for essential maintain the smooth running of a business. No business can run successfully without an adequate amount of working capital. The main advantages of maintaining adequate amount of working capital are as follows 1. Solvency of the business: adequate working capital helps in maintaining solvency of the business by providing uninterrupted flow of production. 2. Good will: sufficient working capital enables a business concern to make prompt payments and hence helps in creating and maintaining good will. 3. Easy loans. A concern having adequate working capital, high solvency and good credit standing can arrange loans from banks and others on easy and favorable terms. 4. Cash discounts: adequate working capital also enables a concern to avail cash discounts on the purchase and hence it reduces costs. 5. Regular supply of raw materials: sufficient working capital ensures regular supply of raw materials and continuous production.

6. Regular payment of salaries, wages and other day-to-day commitments: a company which has ample working can make regular payment of salaries, wages and other morale of its employees, increases their efficiency, reduces wastage and costs and enhances production and profits. 7. Exploitation of favorable market conditions: only concerns with adequate working capital can exploit favorable market conditions such as purchasing its requirements in bulk when the prices are lower and by holding its inventories for higher prices.

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8. Ability to face crisis: adequate working capital enable a concern to face business crisis in emergencies such as depression because during such periods, generally, there is much pressure on working capital. 9. Quick and regular return on investment: every investor wants a quick and regular return on his investments. Sufficiently of working capital enables a concern to pay quick and regular dividends to its investors as there may not be such pressure to plough back profit. 10. High morale: adequacy of working capital creates an environment of security, confidence, high morale, and creates overall efficiency in a business. Excess or inadequate working capital Every business concern should have adequate working capital to run its business operations. It should have neither redundant or excess working capital nor inadequate nor shortage of working capital. Both excess as well as short working capital positions are bad for any business. However, out of the two, it is the inadequacy of working capital which is more dangerous from the point of view of the firm.

Disadvantages of redundant or excessive working capital 1. Excessive working capital means idle funds which earn no profits for the business and hence the business cannot earn a proper rate of return on its investments. 2. When there is a redundant working capital, it may lead to unnecessary purchasing and accumulation of inventories causing more chances of theft, waste and losses.

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3.

Excessive working capital implies excessive debtors and defective credit policy which causes higher incidence of bad debts.

4. 5.

It may reduce the overall efficiency of the business. If a firm is having excessive working capital then the relations with banks and other financial institution may not be maintained.

6.

Due to lower rate of return n investments, the values of shares may also fall.

7.

The redundant working capital gives rise to speculative transactions

Disadvantages of Inadequate Working Capital Every business needs some amounts of working capital. The need for working capital arises due to the time gap between production and realization of cash from sales. There is an operating cycle involved in sales and realization of cash. There are time gaps in purchase of raw material and production; production and sales; and realization of cash. Thus working capital is needed for the following purposes: For the purpose of raw material, components and spares. To pay wages and salaries

To incur day-to-day expenses and overload costs such as office expenses. To meet the selling costs as packing, advertising, etc. To provide credit facilities to the customer. To maintain the inventories of the raw material, work-in-progress, stores and spares and finished stock.

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An enlightened management should, therefore, maintain the right amount of working capital on a continuous basis. Only then a proper functioning of business operations will be ensured. Sound financial and statistical techniques, supported by judgment, should be used to predict the quantum of working capital needed at different time periods. A firm s net working capital position is not only important as an index of liquidity but it is also used as a measure of the firm s risk. Risk in this regard means chances of the firm being unable to meet its obligations on due date. The lender considers a positive net working as a measure of safety. All other things being equal, the more the net working capital a firm has, the less likely that it will default in meeting its current financial obligations. Lenders such as commercial banks insist that the firm should maintain a minimum net working capital position. The requirement of the working capital goes on increasing with the growth and expensing of the business till it gains maturity. At maturity the amount of working capital required is called normal working capital. FACTORS DETERMINING THE WORKING CAPITAL REQUIREMENTS There are no set rules or formula to determine the working capital requirements of firms. A large number of factors, each having a different importance, influence working capital needs of firms. Also, the importance of factors changes for a firm over time. Therefore, an analysis of relevant factors should be made in order to determine total investment in working capital. The following is the description of factors which generally influence the working capital requirements of firms.

1. Nature Of Business: The requirements of working is very limited in public utility undertakings such as electricity, water supply and railways because they offer cash sale only and supply services not products, and no funds are tied up in inventories and receivables. On the other hand the trading and financial firms requires less investment in fixed assets but have to invest large amt. of working capital along with fixed investments.

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2. Size of the Business: Greater the size of the business, greater is the requirement of working capital. 3. Production Policy: If the policy is to keep production steady by accumulating inventories it will require higher working capital. 4. Length of Production Cycle: The longer the manufacturing time the raw material and other supplies have to be carried for a longer in the process with progressive increment of labor and service costs before the final product is Obtained. So working capital is directly proportional to the length of the manufacturing process. 5. Seasonal Variations: Generally, during the busy season, a firm requires larger working capital than in slack season. 6. Working Capital Cycle: The speed with which the working cycle completes one cycle determines the requirements of working capital. Longer the cycle larger is the requirement of working capital. 7. Rate of Stock Turnover: There is an inverse co-relationship between the question of working capital and the velocity or speed with which the sales are affected. A firm having a high rate of stock turnover will needs lower amt. of working capital as compared to a firm having a low rate of turnover.

8.

Credit Policy: A concern that purchases its requirements on credit and sales its product / services on cash requires lesser amt. of working capital and viceversa. The credit terms to be granted to customers may depend upon the norms of the industry to which the firm belongs. But a firm has the flexibility of shaping its credit policy within the constraint of industry norms and practices. A liberal credit policy, without rating the creditworthiness of

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customers, will be detrimental to the firm and will create a problem of collections. A high collection period will mean tie- up of large funds in book debts. Slack collection procedures can increase the chance of bad debts. 9. Business Cycle: In period of boom, when the business is prosperous, there is need for larger amt. of working capital due to rise in sales, rise in prices, optimistic expansion of business, etc. On the contrary in time of depression, the Business contracts, sales decline, difficulties are faced in collection from debtor and the firm may have a large amt. of working capital. 10. Rate of Growth of Business: In faster growing concern, we shall require large amt. of working capital. 11. Earning Capacity and Dividend Policy: Some firms have more earning capacity than other due to quality of their products, monopoly conditions, etc. Such firms may generate cash profits from operations and contribute to their working capital. The dividend policy also affects the requirement of working capital. A firm maintaining a steady high rate of cash dividend irrespective of its profits needs working capital than the firm that retains larger part of its profits and does not pay so high rate of cash dividend. 11. Price Level Changes: Changes in the price level also affect the working capital requirements. Generally rise in prices leads to increase in working capital.

12Sales depend on demand conditions. Most firms experience seasonal and cyclical fluctuations in the demand for their products and services. These business variations affect the working capital requirements, specially the temporary working capital requirement of the firm. When there is an upward swing in the economy, sales will increase; correspondingly, the firms investment in inventories and debtors will also

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increase. Under boom, additional investment in fixed assets may be made by some firms to increase their productive capacity. Others FACTORS: These are: Operating efficiency. Management ability. Irregularities of supply. Import policy. Asset structure. Importance of labor Banking facilities

REQUIREMENTS OF FUNDS
Funds Requirements of company

Fixed Capital

Working Capital

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Preliminary Expenses Purchase of Fixed Assets Establishment work exp. Fixed working capital

Raw Material Inventories Goods in Process others

Every company requires funds for investing in two types of capital i.e. fixed capital, which requires long-term funds, and working capital, which requires short-term funds.

SOURCES OF WORKING CAPITAL

Long-term source (Fixed working capital) a) Loan from financial institution b) Floating of Debentures c) Accepting public deposits d) Issue of shares e) Cash credit f) Commercial paper

Short-term source (Temporary working capital) a) Factoring b) Bill discounting c) Bank overdraft d) Trade credit

Sources of additional working capital include the following: Existing cash reserves Profits (when you secure it as cash) Payables (credit from suppliers) New equity or loans from shareholders Bank overdrafts or lines of credit Term loans

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If you have insufficient working capital and try to increase sales, you can easily overstretch the financial resources of the business. This is called overtrading. Early warning signs include: Pressure on existing cash Exceptional cash generating activities e.g. offering high discounts for early cash payment Bank overdraft exceeds authorized limit Seeking greater overdrafts or lines of credit Part-paying suppliers or other creditors Paying bills in cash to secure additional supplies Management pre-occupation with surviving rather than managing Frequent short-term emergency requests to the bank (to help pay wages, pending receipt of a cheque). LONG TERM SOURCES ISSUE OF SHARES Ordinary shares are also known as equity shares and they are the most common form of share in the UK. An ordinary share gives the right to its owner to share in the profits of the company (dividends) and to vote at general meetings of the company. Since the profits of companies can vary wildly from year to year, so can the dividends paid to ordinary shareholders. In bad years, dividends may be nothing whereas in good years they may be substantial. The nominal value of a share is the issue value of the share - it is the value written on the share certificate that all shareholders will be given by the company in which they own shares.

The market value of a share is the amount at which a share is being sold on the stock exchange and may be radically different from the nominal value. When they are issued, shares are usually sold for cash, at par and/or at a premium. Shares sold at par are sold 42

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for their nominal value only - so if Rs.10 share is sold at par; the company selling the share will receive Rs. 10 for every share it issues. If a share is sold at a premium, as many shares are these days, then the issue price will be the par value plus an additional premium. DEBENTURES Debentures are loans that are usually secured and are said to have either fixed or floating charges with them. A secured debenture is one that is specifically tied to the financing of a particular asset such as a building or a machine. Then, just like a mortgage for a private house, the debenture holder has a legal interest in that asset and the company cannot dispose of it unless the debenture holder agrees.If the debenture is for land and/or buildings it can be called a mortgage debenture. Debenture holders have the right to receive their interest payments before any dividend is payable to shareholders and, most importantly, even if a company makes a loss, it still has to pay its interest charges. If the business fails, the debenture holders will be preferential creditors and will be entitled to the repayment of some or all of their money before the shareholders receives anything LOANS FROM OTHER FINANCIAL INSTITUTIONS The term debenture is a strictly legal term but there are other forms of loan or loan stock. A loan is for a fixed amount with a fixed repayment schedule and may appear on a balance sheet with a specific name telling the reader exactly what the loan is and its main details.

SHORT TERM SOURCES FACTORING

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Factoring allows you to raise finance based on the value of your outstanding invoices. Factoring also gives you the opportunity to outsource your sales ledger operations and to use more sophisticated credit rating systems. Once you have set up a factoring arrangement with a Factor, it works this way: Once you make a sale, you invoice your customer and send a copy of the invoice to the factor and most factoring arrangements require you to factor all your sales. The factor pays you a set proportion of the invoice value within a pre-arranged time - typically; most factors offer you 80-85% of an invoice's value within 24 hours. The major advantage of factoring is that you receive the majority of the cash from debtors within 24 hours rather than a week, three weeks or even longer. INVOICE DISCOUNTING Invoice discounting enables you to retain the control and confidentiality of your own sales ledger operations. The client company collects its own debts. 'Confidential invoice discounting' ensures that customers do not know you are using invoice discounting as the client company sends out invoices and statements as usual. Once the client receives payment, it must deposit the funds in a bank account controlled by the invoice discounter. The invoice discounter will then pay the remainder of the invoice, less any charges. The requirements are more stringent than for factoring. OVERDRAFT FACILITIES Many companies have the need for external finance but not necessarily on a long-term basis. A company might have small cash flow problems from time to time but such problems don't call for the need for a formal long-term loan. Under these circumstances, a company will often go to its bank and arrange an overdraft. Bank overdrafts are given on current accounts and the good point is that the interest payable on them is calculated on a daily basis. So if the company borrows only a small amount, it only pays a little bit of interest. Contrast the effects of an overdraft with the effects of a loan.

TRADE CREDIT This source of finance really belongs under the heading of working capital management since it refers to short-term credit. By a 'line of credit' they mean that a creditor, such as a 44

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supplier of raw materials, will allow us to buy goods now and pay for them later. Why do they include lines of credit as a source of finance? They all, if they manage their creditors carefully they can use the line of credit they provide for us to finance other parts of their business. MANAGEMENT OF WORKING CAPITAL Management of working capital is concerned with the problem that arises in attempting to manage the current assets, current liabilities. The basic goal of working capital management is to manage the current assets and current liabilities of a firm in such a way that a satisfactory level of working capital is maintained, i.e. it is neither adequate nor excessive as both the situations are bad for any firm. There should be no shortage of funds and also no working capital should be ideal. WORKING CAPITAL MANAGEMENT POLICES of a firm has a great on its probability, liquidity and structural health of the organization. So working capital management is three dimensional in nature as 1. It concerned with the formulation of policies with regard to profitability, liquidity and risk. 2. It is concerned with the decision about the composition and level of current assets. 3. It is concerned with the decision about the composition and level of current liabilities.

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DATA ANALYSIS AND INTERPR ETATION

TOOLS USED FOR THE STUDY


RATIO ANALYSIS SCHEDULE OF CHANGES IN WORKING CAPITAL 46

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OPERATING CYCLE ANALYSIS RATIO ANALYSIS Financial ratios are one of the most common tools of managerial decision making. Financial ratios involve the comparison of various figures from the financial statements in order to gain information about a company's performance. It is the interpretation, rather than the calculation, that makes financial ratios a useful tool for business managers. Ratios may serve as indicators, clues, or red flags regarding noteworthy relationships between variables used to measure the firm's performance in terms of profitability, asset utilization, liquidity, leverage, or market valuation. A ratio is define as the indicated quotient of two mathematical expressions and as the relationship between two or more things. ROLE OF RATIO ANALYSIS Ratio analysis helps to appraise the firms in the term of there profitability and efficiency of performance, either individually or in relation to other firms in same industry. Ratio analysis is one of the best possible techniques available to management to impart the basic functions like planning and control. As future is closely related to the immediately past, ratio calculated on the basis historical financial data may be of good assistance to predict the future, the ratio analysis may be able to locate the point out the various arias Which need the management attention in order to improve the situation. LIMITATIONS OF RATIO ANALYSIS The basic limitation of ratio analysis is that it may be difficult to find a basis for making the comparison Normally, the ratios are calculated on the basis of historical financial statements. An organization for the purpose of decision making may need the hint regarding the future happiness rather than those in the past. The external analyst has to depend upon the past which may not necessary to reflect financial position and performance in future.

The technique of ratio analysis may prove inadequate in some situations if there is differs in opinion regarding the interpretation of certain ratio. 47

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As the ratio calculates on the basis of financial statements, the basic limitation which is applicable to the financial statement is equally applicable In case of technique of ratio analysis also i.e. only facts which can be expressed in financial terms are considered by the ratio analysis. The technique of ratio analysis has certain limitations of use in the sense that it only highlights the strong or problem arias, it dose not provide any solution to rectify the problem arias. Ratio analysis is very important for the franchisor to establish norms and seek patterns of financial operations over a period of time. Unfortunately, few franchisors (or any kind of business) use ratio analysis -- it is estimated that just two percent compute financial ratios And use them in managing their businesses. The franchisor can use ratio analysis also to obtain a bank loan. CLASSIFICATION OF WORKING CAPITAL RATIO Working capital ratio means ratios which are related with the working capital management e.g. current assets, current liabilities, liquidity, profitability and risk turnoff etc. these ratio are classified as follows EFFICIENCY RATIO The ratios compounded under this group indicate the efficiency of the organization to use the various kinds of assets by converting them the form of sale. This ratio also called as activity ratio or assets management ratio. As the assets basically categorized as fixed assets and current assets and the current assets further classified according to individual components of current assets viz. investment and receivables or debtors or as net current assets, the important of efficiency ratio as follows: 1) Working capital turnover ratio 2) Inventory turnover ratio 3) Receivable turnover ratio 4) Current assets turnover ratio LIQUIDITY RATIO

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The ratios compounded under this group indicate the short term position of the organization and also indicate the efficiency with which the working capital is being used. The most important ratio under this group is follows 1. Current ratio 2. Quick ratio 3. Absolute liquid ratio EFFICIENCY RATIO
WORKING CAPITAL TURNOVER RATIO

It signifies that for an amount of sales, a relative amount of working capital is needed. If any increase in sales contemplated working capital should be adequate and thus this ratio helps management to maintain the adequate level of working capital. The ratio measures the efficiency with which the working capital is being used by a firm. It may thus compute net working capital turnover by dividing sales by working capital. Working Capital Turnover Ratio = Sales / Net Working Capital Working capital=current asset-current liability Working capitals turn over ratio (in million)

YEAR

SALES

WORKING CAPITAL 1087.26 1370.93 1867.41 2325.27 2036.07

2005-2006 2006-2007 2007-2008 2008-2009 2009-2010

4242.42 5267.72 6567.75 7091.69 7760.09


Table 1

WORKING CAPITAL TURNOVER RATIO 3.9 3.8 3.5 3.04 3.8

Chart of working capital turnover ratio.


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4 3.5 3 2.5 2 1.5 1 0.5 0 1 2 3 4 5 6 7 YEAR working capital turnover ratio

Interpretation A higher ratio indicates efficient utilization of working capital and a low ratio indicates otherwise. In the year 2005-06 the working capital turnover ratio is 3.8 times which indicates efficient utilization of working capital compared to other years. In the years 2006-07, 2007-08 and 2008-09 the utilization of working capital is low. But in the year 2009-2010, ratio is 3.8 times i.e., firm utilization

INVENTORY TURNOVER RATIO:

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Inventory turnover ratio, defined as how many times the entire inventory of a company has been sold during an accounting period, is a major factor to success in any business that holds inventory. It shows how well a company manages its inventory levels and how frequently a company replenishes its inventory. In general, a higher inventory turnover is better because inventories are the least liquid form of asset. Inventory turnover ratio explanations occur very simply through an illustration of high and low turnover ratios. Despite this, many businesses do not survive due to issues with inventory. Average inventory and cost of goods sold are the two elements of this ratio. Average inventory is calculated by adding the stock in the beginning and at the end of the period and dividing it by two. In case of monthly balances of stock, all the monthly balances are added and the total is divided by the number of months for which the average is calculated. A low inventory turnover ratio shows that a company may be overstocking or deficiencies in the product line or marketing effort. It is a sign of ineffective inventory management because inventory usually has a zero rate of return and high storage cost. Higher inventory turnover ratios are considered a positive indicator of effective inventory management. However, a higher inventory turnover ratio does not always mean better performance. It sometimes may indicate inadequate inventory level, which may result in decrease in sales. It also opens the company up to trouble should prices begin to fall. (a) [Inventory Turnover Ratio = Cost of goods sold / Average inventory at cost] (b) [Inventory Turnover Ratio = Net Sales / Average Inventory at Cost] (c) [Inventory Turnover Ratio = Net Sales / Average inventory at Selling Price] (d) [Inventory Turnover Ratio = Net Sales / Inventory]

INVENTORY TURN OVER RATIO

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(in million)

YEAR 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010

NETSALES 3721.53 4645.56 5830.10 6519.00 7310.10


Table 2

AVERAGE INVENTORY 514.41 738.68 945.57 1165.47 1191.54

INVENTORY TURNOVER RATIO 7.23 6.29 6.17 5.59 6.14

Chart of inventory turnover ratio


inventory turnover ratio 8 7 6 5 4 3 2 1 0 2005-06 2006-07 2007-08 2008-09 2009-10 inventory turnover ratio

Interpretation Inventory turn over ratio measures the velocity of conversion of stock into sales. A high inventory turnover or a stock velocity indicates efficient management of inventory because more frequently the stocks are sold; the lesser amount of money is required to finance the inventory. A low inventory turnover implies over investment in inventories, dull business, poor quality of goods and low profits as compared to total investments. Here we can see that in the year 2005-06, 7.23 shows efficient management of inventory.2006-07, 2007-08 and 2009-10 also shows efficient management. But in the year 2008-09 is 5.59, shows low inventory turnover.

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DEBTORS TURNOVER RATIO


Debtors turnover ratio or accounts receivable turnover ratio indicates the velocity of debt collection of a firm. In simple words it indicates the number of times average debtors (receivable) are turned over during a year. Formula of Debtors Turnover Ratio: [Debtors Turnover Ratio = Net Credit Sales / Average Trade Debtors]

The two basic components of accounts receivable turnover ratio are net credit annual sales and average trade debtors. The trade debtors for the purpose of this ratio include the amount of Trade Debtors & Bills Receivables. The average receivables are found by adding the opening receivables and closing balance of receivables and dividing the total by two. It should be noted that provision for bad and doubtful debts should not be deducted since this may give an impression that some amount of receivables has been collected. But when the information about opening and closing balances of trade debtors and credit sales is not available, then the debtors turnover ratio can be calculated by dividing the total sales by the balance of debtors (inclusive of bills receivables) given and formula can be written as follows.
[Debtors Turnover Ratio = Total Sales / Debtors]

DEBTORS TURNOVER RATIO (in million)


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YEAR 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010

TOTAL SALES 4242.42 5267.72 6567.75 7091.69 7760.09


Table 3

DEBTORS 824.90 937.43 1322.86 1529.64 1600.22

DEBTORS TURNOVER RATIO 5.14 5.62 4.96 4.64 4.85

Chart of debtors turnover ratio


debtorsturnover ratio 6 5 4 3 2 1 0 2005-06 2006-07 2007-08 2008-09 2009-10 debtorsturnover ratio

Interpretation Debtors velocity indicates the number of times the debtors are turned over during a year. Generally, the higher the value of debtors turnover the more efficient is the management of debtors and low debtors turnover implies inefficient management of debtors. Here we can see that in the year 2006-2007 it shows that they have efficiently managed the debtors.

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CURRENT ASSETS TURNOVER RATIO Current assets are a major component of the balance sheet and represent assets that are expected to be sold or used, typically within the next 12 months. They are also an important measure of a companys liquidity position. Current assets have become a very important factor in evaluating the financial strength of a company, in the event of a weak economic environment or one of lower demand. Many of the popular financial ratios will utilize the current assets when performing analysis to gauge financial performance and stability. Current Assets Turnover ratio shows the productivity of the company's current assets. The formula is the following: = turnover / average (current assets, other + stocks + debtors + cash & equivalents) Current assets turnover ratio is calculate to know the firms efficiency of utilizing the current assets. Current assets includes the assets like inventories, sundry debtors, bills receivable, cash in hand or bank, marketable securities, prepaid expenses and short term loans and advances. This ratio includes the efficiency with which current assets turn into sales. A higher ratio implies a more efficient use of funds thus high turnover ratio indicate to reduced the lock up of funds in current assets. An analysis of this ratio over a period of time reflects working capital management of a firm.
Current assets TOR= Sales / Current assets

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CURRENT ASSET TURNOVER RATIO

(in million)

year 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010

Total sales 4242.42 5267.72 6567.75 7091.69 7760.09

Current asset 1733.71 2228.35 2898.31 3431.45 3282.58

Current asset Turnover ratio 2.45 2.36 2.27 2.07 2.36

Table 4 Chart of current asset turnover ratio


c u rre n t a s s e t t u rn o ve r ra t io 2.5 2.4 2.3 2.2 2.1 2 1.9 1.8 2 0 0 5 -0 6 2 0 0 6 -0 7 2 0 0 7 -0 8 2 0 0 8 -0 9 2 0 0 9 -1 0 c u rre n t a s s e t t u rn o ve r ra t io

Interpretation It was observed that the current asset turnover ratio followed a decreasing trend upto 2009 after that in 2010 it was in increased. The sales is almost double the current asset is considered to be satisfactory.

LIQUIDITY RATIO
CURRENT RATIO

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Current ratio may be defined as the relationship between current assets and current liabilities. This ratio is also known as "working capital ratio". It is a measure of general liquidity and is most widely used to make the analysis for short term financial position or liquidity of a firm. It is calculated by dividing the total of the current assets by total of the current liabilities. The ratio is mainly used to give an idea of the company's ability to pay back its shortterm liabilities (debt and payables) with its short-term assets (cash, inventory, receivables). The higher the current ratio, the more capable the company is of paying its obligations. The current ratio can give a sense of the efficiency of a company's operating cycle or its ability to turn its Product into cash. Companies that have trouble getting paid on their receivables or have long inventory turnover can run into liquidity problems because they are unable to alleviate their obligations. Because business operations differ in each industry, it is always more useful to compare companies within the same industry. This ratio is similar to the acid-test ratio except that the acid-test ratio does not include inventory and pre paid as assets that can be liquidated. The components of current ratio (current assets and current liabilities) can be used to derive working capital (difference between current assets and current liabilities). Working capital is frequently used to derive the working capital ratio, which is working capital as a ratio of sales. [Current Ratio = Current Assets / Current Liabilities] Components: The two basic components of this ratio are current assets and current liabilities. Current assets include cash and those assets which can be easily converted into cash within a Short period of time, generally, one year, such as marketable securities or readily realizable investments, bills receivables, sundry debtors, (excluding bad debts or provisions), inventories, work in progress, etc.

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Current liabilities are those obligations which are payable within a short period of tie generally one year and include outstanding expenses, bills payable, sundry creditors, bank overdraft, accrued expenses, short term advances, income tax payable, dividend payable, etc. Limitations of Current Ratio: This ratio is measure of liquidity and should be used very carefully because it suffers from many limitations. It is, therefore, suggested that it should not be used as the sole index of short term solvency. 1 It is crude ratio because it measures only the quantity and not the quality of the current assets. 2 Even if the ratio is favorable, the firm may be in financial trouble, because of more stock and work in process which is not easily convertible into cash, and, therefore firm may have less cash to pay off current liabilities. 3 Valuation of current assets and window dressing is another problem. This ratio can be very easily manipulated by overvaluing the current assets. An equal increase in both current assets and current liabilities would decrease the ratio and similarly equal decrease in current assets and current liabilities would increase current ratio.

CURRENT RATIO (in million)

YEAR 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010

CURRENT ASSET 1733.71 2228.35 2898.31 3431.45 3282.58 Table 5

CURRENT LIABILITY 646.45 857.42 1030.90 1106.18 1246.51

CURRENT RATIO 2.68 2.60 2.81 3.10 2.63

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Chart of current ratio


c urrent ratio

3.1 3 2.9 2.8 2.7 2.6 2.5 2.4 2.3 200 5-06 2006-07 2 007-08 2008-09 2009-10 c urrent ratio

Interpretation A ratio equal or near to the thumb rule 2:1 i.e., current assets double the current liabilities is considered to be satisfactory. We can see in the year 2006,2007,2008,2009 and 2010 the current ratios are 2.68, 2.60, 2.81, 3.10 and 2.63 respectively. Here the current assets are double the current liabilities.

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QUICK RATIO The quick ratio, defined also as the acid test ratio, reveals a company's ability to meet short-term operating needs by using its liquid assets. It is similar to the current ratio, but is considered a more reliable indicator of a companys short-term financial strength. The difference between these two is that the quick ratio subtracts inventory from current assets and compares the quick asset to the current liabilities. Similar to the current ratio, value for the quick ratio analysis varies widely by company and industry. In theory, the higher the ratio is, the better the position of the company is. However, a better benchmark is to compare the ratio with the industry average. Quick ratios are often explained as measures of a companys ability to pay their current debt liabilities without relying on the sale of inventory. Compared with the current ratio, the quick ratio is more conservative because it does not include inventories which can sometimes be difficult to liquidate. For lenders, the quick ratio is very helpful because it reveals a companys ability to pay off under the worst possible condition. Quick Ratio Formula Quick Ratio = (Current assets Inventories) / Current liabilities Quick ratio calculation is a useful skill for any business that may face cash flow issues. Quick assets include those current assets that presumably can be quickly converted to cash at close to their book values. It normally includes cash, marketable securities, and some accounts receivables. The quick ratio, sometimes called the acid-test, is a more stringent test of liquidity than the current ratio. A business has to find a buyer if it wants to liquidate inventory, or turn it into cash. Finding a buyer is not always easy. Quick ratios establish the relationship between quick or liquid assets and liabilities. An asset is liquid if it can be converting in to cash immediately or reasonably soon without a loss of value. Cash is the most liquid asset .other assets which are consider to be relatively liquid and include in quick assets are debtors and bills receivable and marketable securities. Inventories are considered as less liquid.

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Inventory normally required some time for realizing into cash. Their value also is tendency to fluctuate. The quick ratio is found out by dividing quick assets by current liabilities.

QUICK RATIO

(in million)

YEAR 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010

QUICK ASSETS CURRENT LIABILITIES 1219.30 646.45 1489.67 857.42 1952.74 1030.90 2265.98 1106.18 2091.04 1246.51

QUICK RATIO 1.86 1.74 1.89 2.05 1.68

Table 6 Chart of quick ratio


quick ratio

2.5 2 1.5 quick ratio 1 0.5 0

2005-06

2006-07

2007-08

2008-09

2009-10

Interpretation As a rule of thumb or as a convention quick ratio of 1:1 is considered satisfactory. It is generally thought that if quick assets are equal to current liabilities then the concern may be able to meet its short term obligations. We can see in the years 2006,2007,2008,2009 and 2010 shows that it is equal to current liabilities. In the year 2009 the quick ratio is 2.05 i.e., the quick assets double the current liabilities. This shows that the concern may be able to meet its short term obligations.

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Absolute Quick ratio


The ratio shows very clearly whether a concern is liquid or not. In other words, it is the real measure of the liquidity or short-term solvency of a concern Even though debtors and bills receivables are considered as more liquid then inventories; it can not be converted in to cash immediately or in time. Therefore the while calculation of absolute liquid ratio only the absolute liquid assets as like cash in hand cash at bank, short term marketable securities are taken in to consideration to measure the ability of the company in meeting short term financial obligation. It calculates by absolute assets dividing by current liabilities.
Absolute Liquid Ratio = Absolute Liquid assets / Quick Liabilities

ABSOLUTE QUICK RATIO

YEAR 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010


Table 7

ABSOLUTE CURRENT QUICK ASSETS LIABILITIES 145.80 273.26 169.71 343.21 61.32 646.45 857.42 1030.90 1106.18 1246.51

(in million) ABSOLUTE QUICK RATIO .23 .32 .16 .31 .05

Chart of absolute quick ratio


absolute quick ratio 0.35 0.3 0.25 0.2 0.15 0.1 0.05 0 2005-06 2006-07 2007-08 2008-09 2009-10 absolute quick ratio

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Interpretation The acceptance norm for this ratio is 50%or .5:1 or 1:2.here we can see that all the years, absolute liquid ratio is slightly low. In all, the company needs to improve its short term financial position. PROFITABILITY RATIOS Profitability ratio measures overall performance and effectiveness of the firm. Besides the management of the company, creditors and owners are interested in the profitability of the firm. NET PROFIT RATIO Net profit ratio establishes a relationship between net profit and sales and indicates the efficiency of the management in manufacturing, selling, administrative and other activities of the firm. This ratio is the overall measures of firm profitability. Net profitability = Net profit after tax Net sales

NET PROFIT RATIO

(in million)

YEAR 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010

NET PROFIT 766.13 586.61 971.70 597.17 580.10

NET SALES 3721.53 4645.56 5830.10 6519.00 7310.10

NET PROFIT RATIO 21% 13% 17% 9% 8%


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Table 8

Chart of net profit ratio


net profit ratio

25% 20% 15% net profit ratio 10% 5% 0%

2005-06

2006-07

2007-08

2008-09

2009-10

Interpretation The ratio indicates the firms capacity to face adverse economic conditions. Higher the ratio, the better is the profitability. But while interpreting the ratio, it should be kept in mind that the performance of profits must also be seen in relation to investment or capital of the firm and not only in relation to sales. Here we can see that the ratios are decreasing from year to year. It shows lower profitability.

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GROSS PROFIT RATIO Cash and short-term assets expected to be converted to cash within a year. Businesses use the calculation of gross working capital to measure cash flow. Gross working capital does not account for current liabilities, but is simply the measure of total cash and cash equivalent on hand. Gross working capital tends not to add much to the business' assets, but helps keep it running on a day-to-day basis
GROSS PROFIT RATIO (in million)

YEAR 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010

GROSS PROFIT NET SALES 4205.13 4859.77 6714.84 7092.87 7622.40


Table 9

3721.53 4645.56 5830.10 6519.00 7310.10

GROSS PROFIT RATIO 113% 105% 115.18% 109% 104.27%

Chart of gross profit ratio

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gross profit ratio

116% 114% 112% 110% 108% 106% 104% 102% 100% 98% 2005-06 2006-07 2007-08 2008-09 2009-10 gross profit ratio

Interpretation There is no standard norm for gross profit ratio and it may vary from business to business but the gross profit should be adequate to cover the operating and to provide for fixed charges. Higher the gross profit ratio, better the result. A low gross profit ratio generally indicates high cost of goods sold. In the year 2005-2006 and 2007-2008 shows high gross profit ratio and in other years shows low gross profit ratio.

Operating cycle analysis

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The working capital cycle refers to the length of time between the firms paying the cash for materials, etc., entering into production process/stock & the inflow of cash from debtors (sales), suppose a company has certain amount of cash it will need raw materials. Some raw materials will be available on credit but, cash will be paid out for the other part immediately. Then it has to pay labor costs & incurs factory overheads. These three combined together will constitute work in progress. After the production cycle is complete, work in progress will get converted into sundry debtors. Sundry debtors will be realized in cash after the expiry of the credit period. This cash can be again used for financing raw material, work in progress etc. thus there is complete cycle from cash to cash wherein cash gets converted into raw material, work in progress, finished goods and finally into cash again. Short term funds are required to meet the requirements of funds during this time period. This time period is dependent upon the length of time within which the original cash gets converted into cash again. The cycle is also known as operating cycle or cash cycle. A companys operating cycle typically consists of three primary activities: purchasing resources, producing the product, and distributing (selling) the product. These activities create funds flow that is both unsynchronized and uncertain. They are unsynchronized because cash disbursements (for example, payments for resources purchases) usually take place before cash receipts (for example, collection of receivables). They are uncertain because future sales and costs, which generate the respective receipts and disbursements, cannot be forecasted with complete accuracy. If the firm is to maintain liquidity and function properly, it has to invest funds in various short-term assets (working capital) during this cycle.

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It has to maintain a cash balance to pay the bills as they come due. In addition, the companies most invest in inventories to fill customer orders promptly. And finally, the company invests in accounts receivable to extend credit to its customers. Operating cycle is the time duration required to convert sales after conversation of resources into inventories into cash. The operating cycle of a manufacturing company involves three phases: Acquisition of resources such as, raw material, labour, power and fuel etc. Manufacturing of a product which includes conversion of raw material into workin-progress into finished goods. Sales of the product either for cash on credit.

The operating cycle of a firm begins with the acquisition of raw materials and ends with the collection of receivables stocks of raw material and other components. The firm holds stocks of finished goods to meet the demand of customers on continuous basis and sudden demand from source customers.

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Operating cycle Receipt from Debtors cash purchase of raw material, parts&components creation of A/Cs payable (Creditors)

Creation of A/C Receivable (creditors)

payment of creditors

Sales of finished Goods

manufacturing Operation (Added cost) Wages&saleries office selling &distribution expenses

Warehousing of finished goods

Working capital cycle can be determined by adding the number of days required for each stage in the cycle. For example, company holds raw material on average for 60 days, it gets credit from the supplier for 15 days, finished goods are held for 30 days & 30 days credit is extended to debtors. The total days are 120, i.e., 60 15 + 15 + 15 + 30 + 30 days is the total of working capital. Thus the working capital cycle helps in the forecast, control & management of working capital. It indicates the total time lag & the relative significance of its constituent parts. The duration may vary depending upon the business policies. In light of the facts discusses above we can broadly classify the operating cycle of a firm into three phases viz. 1 Acquisition of resources. 2 Manufacture of the product and 3 Sales of the product (cash / credit).

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First and second phase of the operating cycle result in cash outflows, and be predicted with reliability once the production targets and cost of inputs are known. However, the third phase results in cash inflows which are not certain because sales and collection which give rise to cash inflows are difficult to forecast accurately. Operating cycle consists of the following: Conversion of cash into raw-materials; Conversion of raw-material into work-in-progress; Conversion of work-in-progress into finished stock; Conversion of finished stock into accounts receivable through sales; and Conversion of accounts receivable into cash. In the form of an equation, the operating cycle process can be expressed as follows: OPERATING CYCLE = RMCP + WIPCP + FGCP + DCP-CCP RMCP W IPCP F GCP DCP CCP ICP RCP NOC GOC = = = = = = = = = Raw material conversion period Work in progress conversion period Finished goods conversion period Debtors collection period Creditors conversion period Inventory Conversion Period Receivables Conversion Period Payables Deferral Period Net Operating Cycle Gross Operating Cycle

Payables (PDP) =

Here, the length of GOC is the sum of ICP and RCP. ICP is the total time needed for producing and selling the products. Hence it is the sum total of RMCP, WIPCP and FGCP. On the other hand, RCP is the total time required to collect the outstanding amount from customers. Usually, firm acquires resources on credit basis.

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PDP is the result of such an incidence and it represents the length of time the firm is able to defer payments on various resources purchased.The difference between GOC and PDP is known as Net Operating Cycle and if Depreciation is excluded from the expenses in computation of operating cycle, the NOC also represents the cash collection from sale and cash payments for resources acquired by the firm and during such time interval between cash collection from sale and cash payments for resources acquired by the firm and during such time interval over which additional funds called working capital should be obtained in order to carry out the firms operations. In short, the working capital position is directly proportional to the Net Operating Cycle. Calculations: On the basis of financial statement of an organization we can calculate the inventory conversion period. Debtors / receivables conversion period and the creditors conversion period and based on such calculations we can find out the length of the operating cycle (in days) both gross as well as net operating cycle. As mentioned above, on the basis of information presented in the Balance sheet and CMA statement of CUMI, the length of gross as well as net operating cycle is calculated as follows:

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Particulars Material Cost Labour cost Direct expenses Prime cost Manufacturin g expenses Cost of production +opening WIP -closing WIP Cost of goods produced +opening FG -closing FG Cost of good sold

2005-06 147.71 340.17 487.88 1314.15 1802.03 121.30 149.78 1773.55 165.10 193.57 1745.08

2006-07 245.41 382.09 . 627.5 1633.33 2260.83 149.78 242.22 2168.39 193.57 272.30 2089.66

2007-08 332.19 505.93 . 838.12 2026.29 2864.41 242.22 233.85 2872.78 272.30 315.63 2829.45

2008-09 472.74 565.69 . 1038.43 2292 3330.43 233.85 284.66 3279.62 272.30 315.63 3236.29

2009-10 386.07 629.82 . 1015.89 2287.42 3303.31 284.66 313.50 3274.47 315.63 334.68 3255.42

Operating cycle for the year 2005-2006

RMCP = = = WIPCP = = =

AVERAGE STOCK X 360 ANNUAL CONSUMPTION 147.71 X 360 1241.55 42 DAYS AVERAGE STOCK X 360 COST OF PRODUCTION 135.54 X 360 1802.83 27 DAYS

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FGCP = = =

AVERAGE STOCK X 360 COST OF GOODS SOLD 223.62 X 360 1745.08 46 DAYS

DEBTORS CONVERSION PERIOD = AVERAGE TRADE DEBTORS X 360 AVERAGE CREDIT SALES = 824.90 X 360 4242.42 = 70 DAYS CREDITORS CONVERSION PERIOD = AVERAGE TRADE CREDITORS X 360 AVERAGE CREDIT PURCHASE = 378.52 X 360 1241.55 = 110 DAYS GROSE OPERATING CYCLE= 42+27+46+70 =185 DAYS NET OPERATING CYCLE = 87+21+38+70-110=75 DAYS

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Operating cycle
PARTICULARS RMCP 2005-06 2006-07 2007-08 2008-09 (IN DAYS) 2009-10 AVERAGE

42

51

53

63

44

51

WICP

27

33

30

28

33

30

FGCP

46

44

30

33

36

38

DCP

70

65

73

78

74

72

GOC

185

193

186

202

187

191

CCP

110

112

102

98

102

105

NOC

75

81

84

104

85

86

Interpretation The above table shows that the operating cycle of the firm over a period of five years from 2006-2010. It indicates that the raw material conversion period is increased up to 63 days in 2008-2009 and then it is decreased to a level of 44 days. Finished goods conversion period shows a decreasing trend up to 2008-2009 and then it is increased. Debtors conversion period and creditors conversion period shows variable trends. Similarly net operating cycle shows a increasing trend up to 2008-2009 and then it is decreased.

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SCHEDULE OF CHANGES IN WORKING CAPITAL The working capital position at the beginning of a period is changed to a different position at the end of the period. A schedule of working capital is prepared to depict the changes of working capital. This statement or schedule to prepared with current assets and current liabilities as appearing in the balance sheet under consideration. The statement shows the changes in individual items of current assets and current liabilities and their effect of working capital. The total increase and the total decrease in the end is compared and the difference of total increase and the total decrease shows net increase or net decrease in the working capital. If the working capital at the end of current year is more than the working capital at the previous year the excess is called, increase in working capital, if the previous year working capital is more than the current year working capital, the excess is called, decrease in working capital.

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Schedule of changes in Net working capital of CUMI Sl no particulars 2005-06 2006-07 Increase 1 2 3 4 5 6 7 8 9 10 11 12 Petty cash &bank Receivables / debtors Stock Loans &advances Deposits Total current assets creditors Accruals Provision Total current liability Net working capital Increase/ decrease in net working capital TOTAL 117.6 824.90 514.41 248.60 28.20 1733.71 378.52 67.68 200.25 646.45 1087.26 153.07 937.43 738.68 278.98 120.19 2228.35 528.03 165.56 163.83 857.42 1370.93 283.67 35.47 112.53 224.27 30.38 91.99 494.64

Decreas e

Percentage (%) 30.16 13.64 43.59 12.22 326.18

149.51 97.88 36.42 36.42 531.06 283.67 247.39 247.39

39.49 144.62 (18.18)

13

1087.26

1087.26

247.39

247.39

INTERPRETATION The above table specifies that net working capital of the company is in increasing trend .inventories was more than the previous year. All the current assets and current liabilities were in increasing trend. The net working capital shows a positive balance in both the year 2006 and 07. It shows that companys financial position is satisfactory.

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Schedule of changes in Net working capital of CUMI Serial Particulars no 1. Petty cash &bank 2. Receivable s /debtors 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. Stock Loans &advances Deposits Total current assets creditors Accruals Provision Total current liability Net working capital Increase/ decrease in net working capital TOTAL 200607 153.07 937.43 738.68 278.98 120.19 2228.3 5 528.03 165.56 163.83 857.42 1370.9 3 200708 104.4 1322.8 6 945.57 460.17 65.31 2898.3 1 643.72 171.59 215.19 1030.9 0 1867.4 1 496.48

(in million) Percentage (31.79) 30.44 28.00 64.94

Increase Decreas e 48.67 385.43 206.89 181.19 773.51 54.88 103.49 115.69 6.03 51.36 173.48 276.97

(45.66)

.. 773.51 496.48

21.90 03.64 31.34 20.23

13.

1370.9 3

1370.9 3

276.97

276.97

INTERPRETATION The above table shows increase in net working capital of the firm in the year 2008 when compared to the year 2007.total debtors level increased by 30.44 %. The cash level decreased. Total current assets and current liabilities were in increasing trend.net working capital shows a positive balance, which shows that the companys financial position is satisfactory.

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Schedule of changes in Net working capital of CUMI (in million) Serial particulars 20072008Increase Decreas Percentage no 08 09 e (%) 1 Petty cash 104.4 193.21 88.81 85.06 &bank 2 Receivable 1322.8 1529.6 206.78 15.63 s /debtors 6 4 3 4 5 6 7 8 9 10 11 12 Stock Loans &advances Deposits Total current assets creditors Accruals Provision Total current liability Net working capital Increase/ decrease in net working capital TOTAL 945.57 460.17 65.31 2898.3 1 643.72 171.59 215.19 1030.9 0 1867.4 1 1165.4 7 393.13 150.00 3431.4 5 739.44 153.19 213.55 1106.1 8 2325.2 7 457.86 219.9 67.04 84.69 600.18 67.04 95.72 18.4 1.64 20.04 620.22 457.86 95.72 162.76 48.69 (14.86) (10.72) 23.25 (14.46) 129.67

13

1867.4 1

1867.4 1

162.76

162.76

Interpretation The above table specifies that the net working capital of the company in the year 2009 shows a positive balance. Compared to the previous it is increased. Total current were

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more than the current liabilities. Debtors and cash level were also in increasing trend. The above table shows that companys having a sound financial position.

Schedule of changes in Net working capital of CUMI in million Sl particulars 20082009Increase Decrease Percentage no 09 10 193.21 53.22 139.99 (72.5) 1 Petty cash &bank 04.61 2 Receivables 1529.64 1600.22 70.58 /debtors 3 4 5 6 7 8 9 10 11 12 Stock Loans &advances Deposits Total current assets creditors Accruals Provision Total current liability Net working capital Increase/ decrease in net working capital TOTAL
1165.47 393.13 150.00 3431.45 1191.54 429.50 8.10 3282.58 26.07 36.37 141.9 281.89 02.23 09.25 (94.6)

133.02

739.44 153.19 213.55 1106.18

890.20 145.64 210.67 1246.51

150.76 7.55 2.88 10.43

20.38 (4.92) (1.34)

150.76

2325.27

2036.07

143.45

432.65

289.2

289.2

13

2036.27

2036.07

143.45

143.45

Interpretation The above table shows decrease in net working capital of the form in the year 2010 when compared to the year 2009. The bank deposits were decreased by 94%. The current assets
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level also decreased when compared to the previous year. The net working capital of the company in the year 2010 shows a positive balance, which shows that the companys financial position in not satisfactory.

FINDINGS SUGGESTIONS
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Summary of findings
CARBORUNDUM UNIVERSAL LTD involves the business activities are manufacturing the coated abrasives, bonded abrasives and super refractories, electro minerals, industrial ceramics and ceramic fibers. CUMI has 10 manufacturing facilities across the India and these manufacturing facilities are meticulously connected with wide network of distributors and sub distributors. CUMIs equipped with a state of the art research and development center which works aggressively on products development and enhancement. 1. The company has a good solvency position. 2. In 2007-2008 CUMIS net profit has increased to maximum which indicates that the firm is able to with stand adverse economic conditions. 3. The firm enjoyed more credit in the year 2008 compared to other 4 years. 4. The company has not maintained stability in its working capital turnover ratio which is an indication of ineffective use of working capital. 5. Positive working capital indicates that company has the ability of payments of short terms liabilities. 6. Working capital increased because of increment in the current assets is more than increase in the current liabilities. 7. In the year 2010 working capital decreased because of increased the expenses as manufacturing expenses and increase the price of raw material as increased in the inflation rate. 8. When Working capital is compared with net sales it is in increasing trend indicating the effective utilization of the net working capital.

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Liquidity ratios 1. Current ratio shows satisfactory figures in all years. The current assets of CUMI are enough to meet the short term obligations. 2. Quick ratio shows satisfactory figures in all years. This shows firm is able to meet current obligations. 3. Absolute liquid ratio is slightly low in all years. 4. Current assets are increasing every year and it improves the financial performance of the company. 5. The company is having good liquidity position. 6. The current assets position of the company is more than the ideal, which shows that some amount of current asset are blocked up in the working capital. Activity ratios 1. In CUMI, debtors turnover ratio shows that they have to manage the debtors efficiently. So that the company is able to collect the receivables from the debtors without delay. 2. Inventory turnover ratio shows efficient management of inventory because more frequently the stocks are sold. 3. The working capital turnover ratio of CUMI indicates the efficient the efficient utilization of working capital. 4. By comparing the working capital of 5 years, it is to be clear that working capital shows an increasing trend. 5. Current assets components shows sundry debtors were the major part in current assets it shows that the efficient receivables collection management. Profitability ratios 1. Gross profit should be adequate to cover the operating and to provide for fixed changes. 2. The net profit ratio shows the overall profit of the company is in decline due to the inefficiency of the purchase system or increase in the cost of raw materials.

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3. The company is earning a sufficient amount of operating income to meet its fixed expenses such as salaries, wages &bonus managerial remuneration, interests &bank charges & depreciation. 4. The companys profitability position has increased in the 5 years when compared with the average of 5 years. The overall profitability of the firm is good. 5. The company is depending more on debt capital.

Suggestions and recommendations


1. Current ratio and liquid ratios are more than the ideal norms, so that it is very favourable. In case of absolute liquid assets, the company needs to improve its short term financial position. The current assets are held by the company in order to meet the current liabilities as and when they become due. This improves the liquidity position of the company, but decreases the profitability. So there should be trade off between the liquidity and profitability of net working capital. 2. The company should take effective steps for the proper utilization of total assets to increase the net profit. The profitability has declined during the recent years. This is mainly because of the increase in the cost of raw materials. The company can also control other costs like cost of goods sold. 3. To have an efficient working capital management the short term funds of the company should be efficiently used in the operations. By increasing the percentage of receivables helps to reduced the bad debt. The management should take necessary steps to make financial position constant. 4. In 2007-08 the company has a good profit and it must be maintained in future also. 5. The concern should also try to increase the assets turnover ratio a bit more as than years we see that there is only a margin increase in this ratio.

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6. The company should improve the efficiency of the debt collection machinery by adopting intensive debt collection policy and by making every effort to avoid the bad debts. 7. The company can use low cost debt contents in the capital structure to acquire fixed asset. This will increase the profitability of the concern. As a growing concern company can retain major position of the profits for the further expansion.

8. An internal audit system should be strengthened because a good system of internal audit appraises the activities of the unit ensures that the business runs according to plan prevents fraud and improves personnel efficiency. 9. Sufficient training &incentives should be provided to worker to boost morale &to improve efficiency &productivity and hence the profitability of the firm. 10. Company should raise funds through short term sources for short term requirement of funds, which comparatively economical as compare to long term funds. 11. Company has to take control on cash balance because cash is non earning assets and increasing cost of funds. 12. The current assets should be managed more effectively so as to avoid unnecessary blocking of capital that could be used for other purposes. 13. There are various global challenges that are faced by every company n the present competitive environment and CUMI is not any exemption. To face the present global challenges the human resources department should be develop to improve various skills among the employees specially the motivational skills and having the regular training for the employees about various developments in the market.

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CONCLUSION

Conclusion
The dissertation analysis of working capital management of Carborundum universal ltd was made with simple statistical tool of ratio analysis. The study helped to assess the working capital management of the company. Working capital is the life blood of every company. CUMI is now running in profit. The working capital of the company is in satisfactory position. It is analyzed that, it is easy to make profit in future. This will not affect the existence of the company. All the precautions should be taken by the company for the effective management of working capital. It is concluded that the overall working capital management techniques is satisfactory as per analysis. Current assets are sufficient to meet the current liabilities even though company should maintain an optimum investment in inventories to maximize the profitability. The various ratios calculated are an indicator as to the fact that the profitability of the firm and sales are on a rise and also the deletion of the inefficiencies in the working capital management. The firm has not compromised on profitability despite the high liquidity is commendable. Thus we conclude that our hypothesis is accepted. Hence: existing working capital management methods are effective.

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BIBLIOGRAPHY
FINANCIAL MANAGEMENT: I M PANDEY FINANCIAL MANAGEMENT: PRASSANNA CHANDRA. WEBSITE OF CUMI
Websites www.cumi,com www.google.com

GOOGLE. FINANCIAL MANAGEMENT: SATISH INAMDAR. ANNUAL REPORTS OF CARBORUNDUM UNIVERSAL. LTD WORKING CAPITAL MANAGEMENT: KRISH RANGANATHAN& ANIL MISRA

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AN NEXURE

BALANCE SHEET AS AT 31ST MARCH 2007 (in million) Schedule 31.3.2007 31.3.2006 SOURCES OF FUNDS Shareholders funds Share capital 186.71 186.71 Reserves and surplus 2553.02 2187.45 2739.73 2374.16 Loan funds Secured loans 1797.02 652.11 Unsecured loans 60.55 Long term lease liability 17.49 10.74 1814.51 723.40 Deferred tax liability(net) 206.54 176.88 total 4760.78 3274.44 APPLICATION OF FUNDS Fixed assets Gross block 3570.95 2676.90 Less: depreciation 1467.78 1425.44 Net block 2103.17 1251.46 Capital work in-progress 389.32 424.95 (including capital advances) 2492.49 1676.41 investments 897.36 510.77 Current assets, loans & advances inventories 738.68 514.41 Sundry debtors 937.43 824.90

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Cash & bank balances Loans &advances Less: current liabilities & provisions Current liabilities provisions Net current assets TOTAL

273.26 278.98 2228.35 693.59 163.83 857.42 1370.93 4760.78

145.80 248.60 1733.71 446.20 200.25 646.45 1087.26 3274.44

BALANCE SHEET as at 31st march 2008 (in million) Schedule 31.3.2008 SOURCES OF FUNDS Shareholders Funds Share capital 186.71 Reserves and surplus 3332.04 3518.75 Loan Funds Secured loans 2267.27 Unsecured loans 726.93 Long term lease liability 15.84 3010.04 Deferred tax liability(net) 282.61 Total 6811.40 APPLICATIONS OF FUNDS Fixed assets Gross block 4282.04 Less: depreciation 1641.63 Net block 2640.41 Capital work-in-progress 605.90 (including capital advances) 3246.31 investments 1697.68 Current assets, loans & advances inventories 945.57

31.3.2007 186.71 2553.022 2739.73 1797.02 17.49 1814.51 206.54 4760.78

3570.95 1467.78 2103.17 389.32 2492.49 897.36 738.68

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Sundry debtors Cash &bank balances Loans & advances Less: current liabilities & provisions Current liabilities provisions Net current assets TOTAL

1322.86 169.71 460.17 2898.31 815.71 215.19 1030.90 1867.41 6811.40

937.43 273.26 278.98 2228.35 693.59 163.83 857.42 1370.93 4760.78

BALANCE SHEET as at 31st march 2009 (in million) Schedule 31.3.2009 SOURCES OF FUNDS Shareholders Funds Share capital 186.71 Reserves and surplus 3721.85 3908.56 Loan Funds Secured loans 2872.76 Unsecured loans 593.41 Long term lease liability 13.55 3479.72 Deferred tax liability(net) 368.23 Total 7756.51 APPLICATIONS OF FUNDS Fixed assets Gross block 5418.73 Less: depreciation 1917.86 Net block 3500.87 Capital work-in-progress 208.66 (including capital advances) 3709.53 investments 1721.71 Current assets, loans & advances inventories 1165.47

31.3.2008 186.71 3332.04 3518.75 2267.27 726.93 15.84 3010.04 282.61 6811.40

4282.04 1641.63 2640.41 605.90 3246.31 1697.68 945.57

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Sundry debtors Cash &bank balances Loans & advances Less: current liabilities & provisions Current liabilities provisions Net current assets TOTAL

1529.64 343.21 393.13 3431.45 892.63 213.55 1106.18 2325.27 7756.51

1322.86 169.71 460.17 2898.31 815.71 215.19 1030.90 1867.41 6811.40

BALANCE SHEET as at 31st march 2010 (in million) schedule 31.3.2010 SOURCES OF FUNDS Shareholders Funds Share capital 186.71 Reserves and surplus 4101.93 4288.64 Loan Funds Secured loans 2648.06 Unsecured loans 176.35 Long term lease liability 13.94 2838.35 Deferred tax liability(net) 415.30 Total 7542.29 APPLICATIONS OF FUNDS Fixed assets Gross block 5676.54 Less: depreciation 2219.32 Net block 3457.22 Capital work-in-progress 330.64 (including capital advances) 3787.86 investments 1718.36 Current assets, loans & advances

31.3.2009 186.71 3721.85 3908.56 2872.76 593.41 13.55 3479.72 368.23 7756.51

5418.73 1917.86 3500.87 208.66 3709.53 1721.71

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inventories Sundry debtors Cash &bank balances Loans & advances Less: current liabilities & provisions Current liabilities provisions Net current assets TOTAL

1191.54 1600.22 61.32 429.50 3282.58 1035.84 210.67 1246.51 2036.07 7542.29

1165.47 1529.64 343.21 393.13 3431.45 892.63 213.55 1106.18 2325.27 7756.51

Profit and loss account for the 5 years (in million) particulars Sh 31.3.06 31.3.07 INCOME Gross sales Less: excise duty Net sales Income from work bills and services Profit on sale of fixed assets Other income EXPENDITURE Raw material consumed (accretion) to stock Employee cost other cost depreciation Less: transfer from fixed assets revolution reserve Interest and finance charges 4242.42 520.89 3721.53 . .. 483.60 4205.13 1241.55 (32.74) 513.51 1314.15 134.70 .73 133.97 28.08 3198.52 5267.72 622.16 4645.56 . 70.35 143.86 4859.77 1702.65 (94.42) 525.45 1633.33 168.92 .73 168.19 71.25 4006.45

31.3.08 6567.75 737.65 5830.10 38.22 567.52 279.00 6714.84 2265.23 (63.04) 692.99 2026.69 252.75 .68 252.07 169.06 5343.00

31.3.09 7091.69 572.69 6519.00 59.14 291.40 62.11 6931.65 2699.71 (94.14) 764.84 2130.78 298.46 .68 297.78 271.88 6070.85

31.3.10 7760.09 449.99 7310.10 71.06 5.24 236.00 7622.40 3141.37 (47.89) 807.69 2287.42 354.10 .68 353.42 238.69 6780.70

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Profit before tax Less: provision for income tax Current tax Deferred tax Fringe benefit tax Profit after tax Add: inappropriate profits from previous year Profit available for appropriation Appropriations Transfer to general reserve Dividend Special interim nil (Previous year @120%) Proposed @75% (Previous year@60%) Proposed @100% (previous year @75%) Dividend tax Balance carried over to balance sheet

1006.61 191.50 38.30 10.68 766.13 203.05 969.18 300.00 300.00 224.05 112.03 47.13 383.21 285.97

853.32 199.50 58.31 8.90 586.61 285.97 872.58 58.66 58.66 140.03 23.80 163.83 650.09

1371.84 309.50 76.53 14.11 971.70 650.09 1621.79 97.17 97.17 186.71 28.48 215.19 1309.43

860.80 167.00 85.63 11.00 597.17 1309.43 1906.60 59.72 59.72 . . 186.71 26.84 213.55 1602.08

841.70 214.50 47.07 .. 580.13 1602.08 2182.21 300.00 300.00 . 186.71 23.96 210.67 1640.29

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