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Uttar Pradesh Technical University (Lucknow) In partial fulfillment of the requirement For the award of the degree of
MASTERS OF BUSINESS ADMINISTRATION
SESSION (2009-2011) UNDER GUIDANCE OF: SUBMITTED BY:-
Ankit Rajput
University Roll No.-
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Acknowledgement
It gives me immense pleasure to present this project report on working capital management carried out at Rama Paper Mills Ltd. in partial fulfillment of post graduate course MBA. No work can be carried out without the help and guidance of various persons. I am happy to take this opportunity to express my gratitude to those who have been helpful to me in completing this project report At the outset I would like to thank Mr. Jitendra Mittal sir Head of Account Dept. for their valuable advice and guidance during my project completion, also Mr. Ravinder Rajput sir (Head of bill passing dept.) and Mr. Ravi Sharma, Arun Sharma sir for timely help concerning various aspects account department for help me to complete the summer internship program. I would like be failing in my duty if I do not express my deep sense of gratitude to Dr. Raghavendra Dwivedi sir without his guidance it wouldnt have been possible for me to complete this project work. Lastly I would like to thank my Parents, Friends, and well wishers who encouraged me to do this research work and all those contributed directly or indirectly in completing this project to whom I am obligated to.
DECLARATION
I, ANKIT RAJPUT, STUDENT OF MBA IIND SEMESTER, STUDYING AT I.T.S. COLLEGE MOHAN NAGAR GHAZIABAD, HEREBY DECLARE THAT THE SUMMER TRAINING REPORT ON CRITICAL ANALYSIS OF WORKING CAPITAL SUBMITTED TO UTTAR PRADESH TECHNICAL UNIVERSITY, LUCKNOW IN PARTIAL FULFILLMENT OF DEGREE OF MASTERS OF BUSINESS ADMINISTRATION IS THE ORIGINAL WORK CONDUCTED BY ME. The information and data given in the report is authentic to the best of my knowledge. THIS SUMMER TRAINING REPORT IS NOT BEING SUBMITTED TO ANY OTHER UNIVERSITY FOR AWARD OF ANY OTHER DEGREE, DIPLOMA AND FELLOWSHIP.
(Ankit Rajput)
PREFACE
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Before Investing in any kind of Business, First we have to do Financial Analysis of that particular Company and for making our investment successful we are suppose to do different kind of analysis of that particular company. So that decisions are called as Investing Decisions So Financial Analysis is very Important Activity before investing anywhere. I have tried to put my best effort to complete this task on the basis of skill that I have achieved during the last one year study in the institute. I have tried to put my maximum effort to get the accurate statistical data. However I would appreciate if any mistakes are brought to my by the reader.
Table of Contents
Chapter No. I II III IV V A Particular Certificate Acknowledgement Declaration Preface Contents Page No. 2 3 4 5 6
Company Profile
Paper Industry History in India Company History Vision & Mission Competitors Organization Structure Products Address 10 11 13 14 15 17 19 21 22
B C
Literature Review
1 Working Capital Management Introduction Need for working capital Types of working capital Operating cycle 2 Working capital Components Cash Management Inventory Management Receivable Management 24 25 26 29 31 36 41
Research Methodology
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Introduction Types of research Financial Highlights & Analysis Share Capital Sales Turnover Profit Fixed Assets Dividend Payment E
43 44 46 47 48 49 50
52 53 54 57 59 61 64 67 71 71 72 73 74 80
86 86 89
Estimation of working capital F Conclusions and recommendations Conclusion Limitation of the study Recommendations Bibliography Appendix Balance Sheet Profit & Loss A/C
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92 94 95 96 97 99
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Company Profile
RPML is large paper manufacturing enterprise in U.P. RPML was founded by Shri Pramod Agarwal in the year 1985, and started the production from the year 1987, ushering in the paper indigenous paper industry in U.P., a dream that have been more than realized with a well recognized record of performance. It has been earning profit continuously since 199495.
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At the beginning Time Company was Pvt. Ltd. and in the year 1994 it converted into a public (Ltd.) company. The site of unit is well located, excellent connectivity by road and rail transport makes availability of raw material and inputs easy and also brings finished products markets in close proximity. The company is professionally managed by well-qualified, highly motivated and experienced personnel. It employs around 500 people including skilled semiskilled and unskilled workforce. The company has built a residential colony for its employees which have 36 livable units for its executive and 100 units for workers. RPML manufactures over 10 products under 4 major products group and caters to core sectors of the Indian economy viz, News paper printing Organization, Publication and Industry etc.
The wide network of RPML is, Ram Singh Steels Pvt. Ltd, Harsal Vikas Sasthan, Ram Fin Fortune Pvt. Ltd, Rama Institute of Higher Education and Ram Filling Station. It Services its customers and provides them with suitable product, system and Service efficiently and at competitive prices. The quality and reliability of its products due to emphasis on design and manufacturing to international standards by acquiring and adopting some of the best technologies from leading company in the India, together with technologies developed in its own R&D centers. RPML has acquired certification to quality management system ISO 9001:2000, and environmental management system ISO 14001. 6 MW Bio- mass based co-generation Project of the company had been registered with United Nations Framework Convention on Climate Change (UNFCCC) under Kyoto Protocol for getting the benefit of carbon credits under clean Development mechanism (CDM)
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In the year 2007 of September Company established a power plant and generate electricity power. By it company is capable to manufactures paper on lower cost in compare to competitor firms. For reducing the accident at machine and fraud, company prohibited the cell phone in to the mill area.
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Mission
To celebrate all things paper the wonder and the legacy.
Vision
Establish leadership in whatever we do at home and abroad.
Goal
Achieve continued growth through sustained innovation for total customer satisfaction and fair return to all other stakeholders. Meet this objective by producing quality products at optimum cost and marketing them at reasonable price.
Guiding Principle
Toil and sweat to manage our resources of men, material and money in and integrated efficient and economic manner. Earn profit keeping in view commitment to social responsibility and environmental concern.
Quality Perspective
Make quality a way of life.
Work Culture
Experience: work is life, life is work
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Competitors
Mohit Paper Mills Ltd. Hemkund Paper Mills Baddri Kehdar Paper Mills Charu Paper Mills Pvt. Ltd.
Ram Singh Steels Pvt. Ltd. (Kotdwar) Harshal Vikas Sansthan (Kiratpur) Ram Fin Fortune Pvt. Ltd. Rama Filling Station Rama Institute of Higher Education
ORGANIZATION STRUCTURE
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Shri Amar Mittal Shri Prabhat Agarwal Shri H. S. Bhim Rao MANAGERS Mr. Sanjeev Kumar Dixit Mr. Pankaj Mishra Mr. Amit Agarwal Mr. Vikas Rastogi Mr. U.P Srivastava Mr. Bhanupratap Singh Mr. Sunil Singh COMPANY SCRETARY Shri Pankaj Misra AUDITORS Shiam & Co. Chartered Accountant Muzaffarnagar (U.P.)
: : : : : : : : : :
Director Director Director Personnel Manager Finance Manager Marketing Manager Production Manager (Unit-I) Production Manager (Unit-II) Production Manager (Unit-III) Production Manager (Unit-IV)
Products
Unit I: A multi-cylinder mould plant to manufacture coated/ uncoated varieties of duplex board of medium quality. This is used to make small packaging / small cartoons used by pharmaceuticals, soaps, paste, apparels, tea and other similar industries. Products LWC Duplex Board LWC Premium Duplex Board
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Unit II: A fouddinier Wire part MF machine manufactures writing/ Printing, News print and craft grades of paper. Products Deluxe Cream Wove Super Deluxe Cream Wove Prime Cream Wove Super Deluxe Newsprint GSM 50-80 54-80 54-80 48+ Brightness 60+ 66+ 72+ 60+
Unit III: A high speed MF machine manufacture Newsprint and also capable of making other varieties of paper such as writing/ printing paper. The plant has been imported from Germany through Bon Engineering Sweden. It is a second hand refurnished machine. Products Standard Newsprint Deluxe Newsprint GSM 48 48 Brightness 45+ 52+
Unit IV: A new established plant manufactures the tissue and poster paper. The uses of tissue paper in various type product packaging. Products Tissue Paper Poster Paper
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CORPORATE OFFICE 12/22 IInd Floor, East Patel Nagar New Delhi 110008 E-mail delhi@ramapaper.com REGISTRAR & TRANSFER AGENT Indus Portfolio (P) Limited ISIN INE425E01013 G-65, Bali Nagar, New Delhi SEBI Registration No. INR000003845 COST AUDITORS Aseem Jain & Asso. Cost Accountant, New Delhi BANKERS Bank of Baroda State Bank of India Punjab National Bank
5. 6. 7.
To study the way and means of working capital finance of the RPML. To estimate the working capital requirement of RPML. To study the operating and cash Cycle of the company.
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For example, a business requires investment in current assets such as cash, accounts receivable and short-term investment etc, to the extent of Rs. 15,000. A part of this requirement can be financed by the firm by purchasing on credit or postponing certain payments or, in other words, by creation of current liabilities such as accounts payable, outstanding expenses, etc. Suppose the amount of current liabilities comes to Rs. 10,000. This means the business still needs Rs. 5,000 for its working purposes. This amount will have to be financed from long-term sources
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of funds as indicated in the in the definition of Net Working Capital given above. It may be emphasized that both gross and net concepts of working capital are equally important for the efficient management of working capital. There is no precise way to determine the exact amount of gross or net working capital for any firm. The data and problems of each company should be analyzed to determine the amount of working capital.
required for this period in order to sustain the sales activity. In case adequate working capital is not available for this period, the company will not be in a position to purchase raw materials, pay wages and other expenses required for manufacturing the goods to be sold. For that organization maintain its operating cycle.
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This refers to that minimum amount of investment in all current assets which is required at all times to carry out minimum level of business activities. In other words, it represents the current assets required on a continuing basis over the entire year. Tandon committee has referred to this type of working capital as core current assets. The following are the characteristic of this type of working capital: 1. Amount of permanent working capital remains in the business in one form or another. This is particularly important form the point of view of financing. The suppliers of such working capital should not expect its return during the life-time of the firm. 2. It also grows with the size of the business. In other words, greater the size of the business, greater is the amount of such working capital and vice versa.
Permanent working capital is permanently needed for the business and therefore it should be financed out of long-term funds. This is the reason why the current ratio has to be substantially more than 1 as explained in the Chapter Ratio Analysis.
capital is generally financed from short-term source of finance such as bank credit. Working capital is fixed over a period of time, while temporary working capital is fluctuating. The permanent working capital is increasing over a period of time with increase in the level of business activity. This happens in case of a growing company.
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Permanent & Temporary working capital (If the size of firm increases)
Operating Cycle
From the above, it is clear that working capital is required because of the time gap between the sales and their actual realization in cash. This time gap is technically termed as operation cycle of the business. In case of a manufacturing company, the operation cycle is the length of time necessary to complete the following cycle of events: (i) Conversion of cash into raw material (ii) Conversion of raw materials into work-in-process (iii) Conversion of work-in-process into finished goods (iv) Conversion of finished goods into accounts receivable, and (v) Conversion of accounts receivable into cash. This cycle will be repeated again and again The operation cycle of manufacturing business can be shown as in the following chart.
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In the case of a Trading firm the operating cycle will include the length of time required to convert (i) Cash into inventories, (ii) Inventories into account receivable, (iii) Accounts receivable into cash In the case of a Financing firm the operation cycle includes the length of time taken for (i) Conversion of cash into debtors (ii) Conversion of debtors into cash
MANAGEMENT OF CASH
It is the duty of the Finance Manager to provide adequate cash to all segments of the organization. He has also to ensure that no funds are blocked in idle cash this will involve cost in terms of interest to the business. A sound cash management scheme, therefore, maintains the balance between the twin objectives of liquidity and cost
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This model was suggested by William J. Baumol. It is similar to one use for determination of economic order quantity, explained later in the
chapter. According to this model, optimum cash level is that level of cash where the carrying cost and transactions costs are the minimum. Carrying Costs This refers to the cost of holding cash, namely, the interest foregone on marketable securities. They may also be termed as opportunity cost of keeping cash balance. Transaction Costs This refers to the cost involved in getting the marketable securities converted into cash. This happens when the firm falls short of cash and has to sell the securities resulting in clerical, brokerage, registration and other costs. There is an inverse relationship between the two costs. When one increases, the other decreases. Hence, optimum cash level will be at that point where these two costs are equal. Thus, the optimum cash balance is Rs. 15,000. The average cash balance will be taken at Rs. 7,500 (i.e., 15,000/2). In other words, the firm should make four (i.e. 60,000/15000) transactions regarding sales of marketable securities for conversion into cash during the month. This can be verified as follows: NO. of Conversion Average Transaction Opportunity Total Transaction of cash cost Cost Cost securities Balance Rs. Rs. Rs. Rs. Rs. 2 30,000 15,000 20 75 95 4 15,000 7,500 40 37.5 77.5 6 10,000 5,000 60 25 85
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The above table shows that the total cost of holding cash is the least when the cash balance is kept at Rs. 15,000. This may, therefore, be taken as the optimum cash balance. As will be seen from the table, the transaction cast and opportunity cast are just equal to each other at this level. There are two limitations of the optimum cash model given in the preceding pages: (i) Cash payments are assumed to be steady over the period of time specified. When the cash payment becomes lumpy, it may be appropriate to reduce the period for which calculations are made so that expenditures during the period are relatively steady; (ii) Cash payments are seldom predictable. Hence, the model may not give 100% correct results.
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securities of the value of z-o are sold and the cash balance again goes up to z level. The upper and lower limits are set on the basis of opportunity cost of holding cash, degree of likely fluctuation in cash balances and the fixed costs associated with securities transactions. The optimal value of z, the return point for securities transactions, can be determined by the following formula: 3b ________ A= 3 4t Where b = fixed cost associated with a security transaction A = variance of daily net cash flows t = interest rate per day on marketable securities The optimal value of his simply 3z. With these control limits set, the Miller-Orr Model of cash management minimizes the total costs (fixed and opportunity) of cash management. Since the method assumes that cash flows are random, the average cash balance cannot exactly be determined in advance. However, it is approximately (z+h) 3, which will be higher than that suggested by Baumols EOQ Model. The Miller-Orr Model assumes the transfer cost as independent of the amount of transfer and the direction. It also assumes that net cash flows are completely stochastic. These assumptions may not be true on many occasions. In general, it may be said that the cash model gives the finance manager a bench mark for judging the optimum cash balance. It does not have to be
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used as precise rule governing his behavior. The model merely suggests what would be the optimal balance under a set of assumptions. The actual balance may be more or less if the assumption do not hold good entirely.
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MANAGEMENT OF INVENTORIES
Inventories are goods held for eventual sale by a firm. Inventories are thus one of the major elements which help the firm in obtaining the desired level of sales.
KINDS OF INVENTORIES
Inventories can be classified into three categories: (i) Raw Materials: These are goods, which have not yet been committed to production in a manufacturing firm. They may consist of basic raw materials or finished components. (ii) Work-in-process: This includes those materials which have been committed to production process but have not yet been completed.
(iii) Finished Goods: These are completed products awaiting sale. They are the final output of the production process in a manufacturing firm. In case of wholesalers and retailers, they are generally referred to as merchandise inventory.
(iii) Maintaining sufficient stock of finished goods for smooth sales operations.
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Determination of the quantity for which the order should be placed is one of the important problems concerned with efficient inventory management. Economic Order Quantity refers to the size of the order which gives maximum economy in purchasing any item of raw material or finished product. It is fixed mainly after taking into account the following costs. (i) Ordering Cost: It is the cost of placing an order and securing the supplies. It varies from time to time depending upon the number of orders placed and the number of items ordered. The more frequently the orders are placed, and fewer the quantities purchased on each order, the greater will be the ordering cost and vice versa.
(ii) Inventory Carrying Cost: It is the cost of keeping items in stock. It includes interest on investment, obsolescence losses, store-keeping cost, insurance premium, etc. The large the value of inventory, the higher will be the inventory carrying cost and vice versa.
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The former cost may be referred as the cost of acquiring whiles the latter as the cost of holding inventory. The cost of acquiring decreases while the cost of holding increases with every increase in the quantity of purchase lot. A balance is, therefore, struck between the two opposing factors and the economic ordering quantity is determined at a level for which aggregate of two costs is the minimum. Formula: 1/2 Q= 2U x P S Q U P S = Economic Ordering Quantity = Quantity (units) purchased in a year (month) = Cost of placing an order = Annual (monthly) cost of storage of one unit.
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ABC Analysis
ABC analysis is a technique of exercising selective control over inventory items. The technique is based on this assumption that a firm should not exercise the same degree of control on items which are more costly as compared to those items which are less costly. According to this approach, the inventory items are divided into three categories- A, B, C. Category A may include more costly items, while category B may consist of less costly items and category C of the least costly items. Thus, A, B, C analysis concentrates on important items and therefore is also known control by importance and exception (CIE). This approach is also known as proportional value analysis (PVA), since the items are classified in importance of their relative value. Though no define procedure can be laid down for classifying the inventories in A,B,C categories as this will depend upon a large number of factors, such as nature and varieties of items, specific requirements of the business, etc., yet the following method is generally adopted: (i) The quality of each material expected to be used in a period is estimated; (ii) The value of each of the above items of materials is found out by multiplying the quantity of each item with the price; (iii) The items are then rearranged in the descending order of their value irrespective to their quantities; (iv) A running total of all the values will then be taken; (v) It will be found that a small number of a first few items may amount to a large percentage of the total value of the items. The management ten will have to take a decision as to the percentages of total value or the total number of items which have to be covered by A, B, and C categories.
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Category A B C
% of total value 70 25 5
% of total quantity 10 35 55
While exercising control over stores, items of category A should be given the utmost attention. Their levels of stock should be strictly controlled. In case of items category B, ordinary stores routine should be observed but the rules regarding levels of stock may not be so strictly adhered to as those in category A. items of category C may be procedure may be dispersed with. However, stock should be kept under some observation so that fresh supplies may be obtained in time. Order for these materials may also be given in bulk to economize on ordering and handling costs.
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Research Methodology
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Introduction
Research Methodology is a way to systematically solve the research problem. It may be understood as a science of studying new research is done systematically. In that various steps, those are generally adopted by a researcher in studying his problem along with the logic behind them. It is important for research to know not only the research method but also know methodology. The Procedures by which researchers go about their work of describing, explaining and predicting phenomenon are called methodology. Methods comprise the procedures used for generating, collection and evaluating data. All this means that tit is necessary for the researcher to design his methodology for his problem as the same may differ from problem. Data collection is important step in any project and success of any project will be largely depend upon now much accurate you will be able to collect and how much time, money and effort will be required to collect and necessary data, this is also important step.
2. Secondary data collection: The secondary data are those which are already collected and stored. Secondary data easily get those secondary data from records, journals, annual reports of the company etc. It will save time, money and efforts to collect the data. Secondary data also made available through trade magazines, balance sheet, books etc. The project is based on primary data collected through personal interview of head of Account Department, Head of Marketing department and other
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concerned staff member of finance department. But primary data collection had limitations such as matter confidential information thus project is based on secondary information collected through six year annual report of the company, supported by various books and internet sides. The data collection was aimed at study of working capital management of the company. Project is based on 1. Annual report of RPML 2004-05 2. Annual report of RPML 2005-06 3. Annual report of RPML 2006-07 4. Annual report of RPML 2007-08 5. Annual report of RPML 2008-09 6. Annual report of RPML 2009-10
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Types of share Pref. share Equity share Pref. share Equity share Pref. share Equity share Pref. share Equity share Pref. share Equity share Pref. share Equity share
Capital in Rs. 5,00,00,000 5,08,14,000 5,00,00,000 7,58,14,000 5,00,00,000 9,66,47,330 5,00,00,000 9,66,47,330 5,00,00,000 9,66,47,330 5,00,00,000 9,66,47,330
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Dividend Payment
Financial Year 2004-05 2005-06 2006-07 Shares Pref. Share Equity Share Pref. Share Equity Share Pref. Share Equity Share
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Payment NO NO 6% NO 6% 5%
Pref. Share Equity Share Pref. Share Equity Share Pref. Share Equity Share
NO NO NO NO NO NO
Fixed Assets
Financial Year 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 Assets 27,20,29,372 25,05,26,311 54,78,83,441 50,09,61,901 60,33,77,919 89,64,41,365
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Particular 2005-06 2006-07 2007-08 2008-09 2009-10 A Current Assets Inventories 690.45 909.38 461.50 891.18 875.76 Sundry Debtors 1645.67 2064.02 3125.41 3002.97 2951.04 Cash & Bank 20.67 52.80 72.45 74.26 42.50 Balance Other assets 83.46 89.43 97.23 52.53 57.33 Loan& Advance 104.34 382.92 376.18 511.33 774.58 Total of A 2544.59 3498.55 4132.77 4532.27 4701.21 (Gross W.C) B Current Liabilities Current 739.54 872.35 1257.02 1501.70 1694.60 Liabilities Provision 105.95 170.91 77.47 50.78 1.11 Total B 845.49 1043.26 1334.49 1552.48 1695.71 Net W.C (A-B) 1699.10 2455.29 2798.28 2979.79 3005.50
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In the words of S.P. Gupta, The trend is very commonly used in day-today conversion trend, also called secular or long term need is the basic tendency of population, sales, income, current assets and current liabilities to grow or decline over a period of time. According to R. C.galeziem The trend is defined as smooth irreversible movement in the series. It can be increasing or decreasing. Emphasizing the importance of working capital trend, Man Mohan and Goel have pointed out that analysis of working capital trends provide as base to judge whether the practice and privilege policy of the management with regard to working capital is good enough or an important is to be made in managing the working capital funds. Further, any one trend by itself is not very informative and therefore comparison with. Illustrated their ideas in these words, an upwards trends coupled with downward trend or sells, accompanied by marked increase in plant investment especially if the increase in planning investment by fixed interest obligation.
Observations: It was observed that working capital is show continues growth each year. It was observed that companys in the year 2009-10 current assets
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increased by around 4% and current liabilities increased only by 9% which affect as working capital increased by 1%. In the year 2006-07 net working capital increased to Rs. 24.55 Crore from Rs. 16.99 Crore, the increase in working capital is close to 44.50%. While current assets increased by 37.48% and current liabilities by 23.39%. It shows that management is using long term funds to short term requirements. And it has fallen to Rs. 4101 million in the year 2007 because current assets gone up by only 12%, current liabilities grown by 35%.
This two together pushed down the net working capital to the present level. The fall in working capital is a clear indication that the company is utilizing its short terms resources with efficiency.
Current Assets
Analysis of current assets components enable one to examine in which components the working capital fund has locked. A large tie up of fund in inventories affect the probability of the business or the major portion of current asset is made up cash alone, the profitability will be decreased because cash is non-earning assets.
2005-06 2006-07 2007-08 2008-09 2009-10 Particular Inventories Sundry Debtors Cash & Bank balance Other Assets Loan & advance Total C.A Indices of C.A 690.45 1645.67 20.67 83.46 104.34 2544.59 100 909.38 2064.02 52.80 89.43 382.92 3498.55 137
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Observation: It was observed that the size of current assets is increasing with increases in the sales. The excess of current assets is showing positive liquidity position of the firm but it is not always good because excess current assets then required, it may adversely affects on profitability. Current assets include some funds investments for which company pay interest. The balance of current assets is highly increased in year 2006-07, because of increase in Inventory & Loan and advance. The balance of current assets also increased in the year 2009-10, while the inventory, Debtors cash & Bank balance reduced, but it increased with the help of Loan and advance. Current assets components show sundry debtors are the major part in current assets it indicates that the inefficient collection management. Over investment in the debtor affects liquidity of firm for that company has raised funds from other sources like short term loan which incurred the interest.
Current Liabilities
Current liabilities mean the liabilities which have to pay in current year. It includes sundry Creditors means supplier whose payment is due but not paid yet, thus creditors called as current liabilities. Current liabilities also include short term loan and provision as tax provision. Current liabilities also included bank overdraft. For some current liabilities like bank overdraft and short term loan, company has to pay interest thus the management of current liabilities has importance.
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Particular 2005-06 2006-07 2007-08 2008-09 2009-10 Current 739.54 872.35 1257.02 1501.70 1694.60 Liabilities Provisions 105.95 170.91 77.47 50.78 1.11 Total of 845.49 1043.26 1334.49 1552.48 1695.71 C.L Indices of 100 123 158 184 200 C.L
Observation: Current liabilities show continues growth each year because company creates the credit in the market by good transaction. To get maximum credit from suppliers which are profitable to the company it reduces the need of working capital of firm. AS a current liability increase in the year 2006-07 by 23.39%, 27% in the year 2007-08 and in the year 2009-10 it increase 9.74%. But company enjoyed over creditors which may include indirect cost of credit terms.
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(b) (c)
Cyclical changes in economy dealing to ups and downs in business activity will influence the level of working capital both permanent and temporary. Changes in seasonality in sales activities.
2. Policy Changes: The second major case of changes in the level of working capital is because of policy changes initiated by management .The term current assets policy may be defined as the relationship between current assets and sales volume. 3. Technology Changes: The third major point if changes in working capital are changes in technology because changes in technology to install that technology in our business more working capital is required. A change in operating expenses rise of full will have similar effects on the level of working following working capital statement is prepared on the base of balance sheet of last two year.
2008-09 891.18
2009-10 875.76
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Increase
Decrease 15.42
Sundry Debtors Cash & Bank balance Other Assets Loan & advance Total A Current Liabilities Current liabilities Provision Total B W.C (Total of A-B) Net increase in W.C Total
3002.97 74.26 52.53 511.33 4532.27 1501.70 50.78 1552.48 2979.79 25.71 3005.50
2951.04 42.50 147.44 684.47 4701.21 1694.60 1.11 1695.71 3005.50 --3005.50 94.91 173.14
51.93 31.76
Observation: Working capital in the year 2009 to 2010 because 1. Sales increased by around 2%, where cost of raw material purchase by 6% and manufacturing expanses reduced by 3.75% 2. Cost of material and manufacturing expanses increased because of inflation, which was 14.86% in Feb 2010 increased from 11.52% in 2009.
Operating cycle
Gross Operating Cycle (GOC) The firms gross operating cycle (GOC) can be determined as inventory conversion period (ICP) plus debtors conversion period (DCP). Formula Gross operating = Inventory conversion + Debtors conversion Cycle period period
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Inventory conversion period: ICP is the sum of raw material conversion period (RMCP), work-in-process conversion period (WIPCP) and finished goods conversion period (FGCP) ICP = RMCP + WIPCP + FGCP RMCP = RMI x 360 RMC FGCP= RMI Raw material inventory WIPI Work-in-process inventory FGI Finished goods inventory FGI x 360 CGS RMC Raw material consumption COP Cost of production CGS Cost of goods sold WIPCP= WIPI x 360 COP
Debtors (receivable) conversion period: DCP is the average time taken to convert debtors into cash. DCP represents the average collection period.
Debtors conversion period = Debtors x 360 Credit sales Creditors (payables) deferral period (CDP) CDP is the average time taken by the firm in paying its suppliers (creditors).
Net operating cycle (NOC) is the difference between gross operating cycle and payable deferral period. Net Operating = Gross operating Creditors deferral Cycle cycle period
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5.86
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Observations: Working capital leverage of the company has increased in the year 200910 as compare to the year 2008-09. Increase in working capital shows the effective current assets management. From the year 2005-06 to Year 2009-10 the current assets has increased continuously by high rate of 11%, 37%, 18%, 7% and 4% respectively. It adversely affects on ROCE, which increase by only rate of .37% in the year 2009-10, that resulted in push down the working capital leverage to 27.81% in the year 2008-09 and grow up 9.92 in the year 2009-10. When investment in current assets is more than requirement that increases the cost of funds raised from short term sources may be bank loan, which affected on profitability of the RPML.
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3. 4.
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or debtors or as net current assets, the important of efficiency ratio as follow. 1. 2. 3. 4. Working capital turnover ratio Inventory turnover ratio Receivable turnover ratio Current assets turnover ratio
(b) Liquidity Ratio: 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. 2. 3. Current Ratio Quick Ratio 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
Rs. in Crore.
Particular 2005-06 2006-07 2007-08 2008-09 2009-10 Sales 76.69 83.90 84.50 107.00 109.10 Net W.C 16.99 24.55 27.98 29.79 30.05 W.C Turnover 4.51 3.42 3.02 3.59 3.63
Chart
Observations: High working capital ratio indicates the capability of the organization to achieve maximum sales with minimum investment in working capital. Companys working capital ratio shows mostly more than two, except for the year 2005-06 because of excess of cash inventory in current assets. In the year 2007 to 2010 the ratio was around 3 to 4, it indicates that the capability of the company to achieve maximum sales with the minimum investment in working capital. Inventory Turnover Ratio: Inventory turnover ratio indicates the efficiency of the firm in producing and selling its products. It is calculated by dividing the cost of goods sold by average inventory. Inventory turnover ratio = Cost of goods sold Average Inventory
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The average inventory is the average of opening and closing balance of inventory in a manufacturing company like RPML, average inventory of Raw material, WIP and finished goods is used to calculate inventory turnover ratio.
Inventory turnover
In Crore
Particular 2005-06 2006-07 2007-08 2008-09 2009-10 Cost of goods sold 60.37 68.86 64.72 87.13 89.01 Average inventory 3.42 6.01 4.29 3.43 3.31 Inventory turnover 17.65 11.45 15.08 25.40 26.89 ratio
Observation: It was observed that inventory turnover ratio indicates maximum sales achieved with the minimum investment in the inventory. As such the general rule high inventory turnover ratio may not necessary indicates the profitable situation. An organization, in order to achieve a large sales volume may sometime sacrifice on profit, inventory ratio may not result into high amount of profit.
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Receivable Turnover Ratio: The derivation of this ratio is made in following way Receivable turnover ratio = Gross sales Average account receivable
Gross sales are inclusive of excise duty and scrap sales because both may enter into receivables by credit sales. Average receivable calculate by opening plus closing balance divide by 2. Increasing volume of receivables without matching increases in sales is reflected by a low receivable turnover ratio. It is indication of showing down of the collection system or an extend line of credit being allowed by customer organization. The later may be due to the fact that the firm is losing out to competition. A credit manager engage in the task of granting credit or monitoring receivable should take the hint from a falling receivable turnover ratio use his market intelligence to find out the reason behind such failing trend. Debtors turnover indicates the number of times debtors turnover each year. Generally the higher the value of debtors turnover, the more is the management of credit. Debtors turnover ratio = Credit Sales Average Debtors
Particular 2005-06 2006-07 2007-08 2008-09 2009-10 Credit Sales 77.44 84.78 85.09 107.19 109.71 Average Debtors 16.45 20.64 31.25 30.02 29.51 Debtors Turnover 4.70 4.10 2.72 3.57 3.71 Ratio
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Observation: It is observed from debtor turnover ratio that debtors turned around the sales were less than 4.25 times. The actual collection period was more than normal collection period allowed to customer. It concludes that over investment in the debtors which adversely affect on requirement of the working capital finance and cost of such finance. Current Assets Turnover Ratio: Current assets turnover ratio is calculate to know the firms efficiency of utilizing the current assets. 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 turnover ratio = Sales Current Assets
Particular 2005-06 2006-07 2007-08 2008-09 2009-10 Sales 76.69 83.90 84.50 107.00 109.10 Current Assets 25.44 34.98 41.32 45.32 47.01 C.A. Turnover 3.01 2.39 2.04 2.36 2.32 Ratio
decreased in the year 2006-07 and 2007-08, because of high cash balance and loan & advance. Cash did not help to increase in sales volume, as cash is non earning assets. In the year 2008-09 company increased its sales with increased investment in current assets, thus current assets turnover increased to 2.36 from 2.04.
Liquidity Ratio
Current Ratio:
The current ratio is calculated by dividing current assets by current liabilities. Current Ratio = Current Assets Current Liabilities Current Ratio indicates the availability of current assets in rupees for every rupee of current liability.
Current Ratio
(In crore)
2005-06 2006-07 2007-08 2008-09 2009-10 25.44 34.98 41.32 45.32 47.01 8.45 10.43 13.34 15.52 16.95 3.01 3.35 3.09 2.92 2.77
Current Ratio
A higher ratio indicates that there were sufficient assets available with the organization which can be converted in cash, without any reduction in the
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value. As ideal current ratio is 2:1, where current ratio of the firm is more than 2:1, it indicates the unnecessarily investment in the current assets in the form of debtors and cash balance. Ratio is higher in the year 2006-07 where cash balance is more than requirement. Quick Ratio: Quick ratio establishes the relationship between quick or liquid assets and liabilities. An asset is liquid if it can be converting in to cash immediately or reasonable soon without a loss of value. Cash is the most liquid assets. Other assets which are considered to be relatively liquid and include in quick assets are debtors and bills receivable and marketable securities. Inventories are considered as less liquid. Inventory normally required some time for realizing into cash. Their value also is tendency to fluctuate. The quick ratios found out by dividing quick assets by current liabilities. Quick Ratio = Quick Current Assets Current Liabilities
Quick Ratio
In Crore
Particular 2005-06 2006-07 2007-08 2008-09 2009-10 Liquid Current 17.49 22.06 32.95 31.29 35.09 Assets Current Liabilities 8.45 10.43 13.34 15.52 16.95 Quick Ratio 2.06 2.11 2.47 2.02 2.07
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Quick Ratio
Observation: Quick ratio indicates that the company has sufficient balance for the payment of current liabilities. The liquid ratio of 1:1 is suppose to be standard or ideal but here ratio is more than 1:1 over the period of time. It indicates that the firm maintains the over liquid assets than actual requirement of such assets. In the year 2009-10 company had Rs. 2.07 cash for every 1 rupee of expenses such a policy is called conservative policy of finance for working capital, Rs. 1.07 is the ideal investment which affects on the cost of the fund and return on the funds.
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(Rs in Crore)
Particular 2005-06 2006-07 2007-08 2008-09 2009-10 Absolute Liquid 1.04 1.42 1.69 1.26 1.89 Assets Current Liabilities 8.45 10.43 13.34 15.52 16.95 Absolute Liquid .12 .14 .13 .08 .11 Ratio
Capital Estimation
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Trade Credit: Trade credit refers to the credit tht a customer gets from suppliers of goods in the normal course of business. The buying firms do not have to pay cash immediately for the purchase made. This deferral of payments is a short term financing called traded credit. It is major source of
financing for firm. Particularly small firms are heavily depend on trade credit as a source of finance since they find it difficult to raised funds from banks or other sources in the capital market. Trade credit is mostly an informal arrangement, and it granted on an open account basis. A supplier sends goods to the buyers accepts, and thus, in effect, agree to pay the amount due as per sales terms in the invoice. Trade credit may take the form of bills payable. Credit terms refer to the condition under
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which the supplier sells on credit to the buyer, and the buyer required repaying the credit. Trade credit is the spontaneous of the financing. As the volume of the firms purchase increase trade credit also expand. It appears to be cost free since it does not involve explicit interest charges but in practice, it involves implicit cost. The cost of credit may be transferred to the buyer via the increased price of goods supplied by him. Bank Finance for Working Capital: Banks are main institutional source of working capital finance in India. After the trade credit, bank credit is the most important source of financing working capital in India. A bank considers a firms sales and production plan and desirable requirements. The amount approved by bank for the firms working capital is called credit limit. Credit limit is the maximum funds which a firm can obtain from the banking system. In practice banks do not lend 100% credit limit, they deduct margin money.
Forms of Bank Finance 1. Term Loan 2. Overdraft 3. Cash credit 4. Purchase or discounting of bills Term Loan: In this case, the entire amount of assistance is disbursed at one time only, either in cash or the companys account. The loan may be paid repaid in installments will charged on outstanding balance. Overdraft: In this case, the company is allowed to withdraw in excess of the balance standing in its Bank account. However, a fixed limni8t is stipulated able to overdraw the amount. Legally, overdraft is a demand assistance given by the bank i.e. bank can ask repayment at any paint of time.
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Cash Credit: In practice the operations in cash credit facility are similar to those of overdraft facility except the fact that the company need not have a formal current account. Here also a fixed limit is stipulated beyond which the company is not able to withdraw the amount. Bills Purchase / Discounted: This form of assistance is comparatively of recent origin. This facility enables the company to get the immediate payment against the credit bills/ invoice raised by the company. The bank hold the bills as a security tell the payment is made by the customer. The entire amount of bill is not paid to the company. The company gets only the present worth of amount of bill from of discount charges .On maturity, Bank collects the full amount of bill from the customer. In this case the exporter and the importer are unknown to each other. Under these circumstances, exporter is worried as to whether he will get goods or not. In this case, the importer applies to his Bank in his country to open a letter of credit in favor of the exporter whereby the importers Bank undertakes to pay the exporter or accept the bills or draft drawn by the exporter on the exporter fulfilling the terms and condition specified in the letter and condition specified in the letter of credit.
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RPML takes huge working capital loan to fulfill the requirement of working capital, thus company had paid huge amount of interest on working capital loan. Company raised the funds for working capital through terms loan from bank and working capital loan from consortium of banks. RPML also used cash credit account but cash credit in not cost free source of working capital because it involves implicit cost. The supplier extending trade credit incurs cost in the form of opportunity cost of funds invested in accounts receivables. The annual opportunity cost of forgoing cash discount can be very high. Therefore RPML should compare the opportunity cost of trade credit with the cost of other sources of credit while making its financial decisions.Estimation of
Working Capital
After considering the various factors affecting the working capital needs, it is necessary to forecast the working capital requirements. For this purpose, first of all estimation of all current assets should be followed by the estimation of all current liabilities. Difference between the estimated Current Assets and Current Liabilities will represent the working capital requirement. The estimation of working capital of RPML is based on few assumptions such a follows. 1. 2. 3. 4. 5. Gross sales will increase by 40% Receivables collection period will be 90 days as per standard fixed by company. Unnecessary balance of cash may reduce by finance management. For working capital finance company can use maximum trade credit. Inventory holding period can be 60 days instead of present 95 days.
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Conclusion
Working capital management is important aspect of financial management. The study of working capital management of Rama Paper Mills Ltd. has revealed that the current ratio was as per the standard industrial practice but the liquidity position of the company should an increasing trend. The study has been conducted on working ratio analysis working capital leverage, working capital components which helped the company to manage its working capital efficiency and affectively. 1. 2. 3. 4. Working capital of the company was increasing and showing positive working capital per year. It shows good liquidity position. Positive working capital indicates that company has the ability of payment of short terms liabilities. Working capital increased because of increment in the current assets is more than increase in the current liabilities. Company current assets were always more than requirement it affect on profitability of the company.
5.
Current assets are more than current liabilities indicate that company used long term fund for short term requirement, when long term funds are more costly then short term funds. Current assets components shows sundry debtors were the major part in Current assets it shows that the inefficient receivables collection management.
6.
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7.
In the year 2009-10 working capital not increased as previous years because of the expenses as manufacturing expenses and increases the price of raw material as increased in the inflation rate. Inventory was supporting to sales, thus inventory turnover ratio was increasing but company increased the raw material holding period. Study of the cash management of the company shows that company lost control on cash management in the year 2009-10 were cash came from fixed deposit and Funds, company failed to make proper investment of available cash.
8. 9.
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Recommendations
Recommendation can be used by the firm for the betterment increased of the firm after study and analysis of project report on study and analysis of working capital. I would like to recommend. 1. Company should raise funds through short term sources for short term requirement of funds, which comparatively economical as compare to long term funds.
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2. 3. 4.
Company should take control on debtors collection period which is major part of current assets. Company has to take control on cash balance because cash is nonearning assets and increasing cast of funds. Company should reduce the inventory holding period with use of zero inventory concepts.
Over all, company has good liquidity position and sufficient funds to repayment of liabilities. Company has accepted conservative financial policy and thus maintaining more current assets. Company is increasing sales value per year which supported to company for sustain 2nd position in U.P. state.
BIBLIOGRAPHY
I. M. Pandey, Financial Management, Vikas Publishing house (9th edition) Dr. P. Periasamy, Working Capital Management, Himalaya Publishing House (1st edition) RPML Manual www.ramapaper.com www.google.com www.ask.com www.wickipedia.com www.answer.com
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APPENDIX
ANNEXURE ANNUAL REPORTS
Balance Sheet
Rama Paper Mills Limited Kiratpur (Bijnor) Balance Sheet as at 31st March, 2010
Particular Source of Funds Share Holders Funds Share Capital Reserve & Surplus Loan Fund Secured Loans Unsecured Loans Deferred Tax Current Year
Application of Funds Fixed Assets Gross Block 1257630415 Less: Depreciation 361189050 Net Block 896441365 Add: Capital Working in Prog. Including advance 56090961 952532326
Current Assets, Loan & Advances Inventories 87576064 Sundry Debtors 295104348 Cash & Bank Balance 4250640 Loan & Advances 83192094
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470123146 Less: Current Liabilities & provision Net Current Assets 169572192 300550954 Total Rs.
1253083280
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Particular Income Sales Less: Excise Duty Other Income Accretion/ (Decretion) in Stocks Total. Rs. Expenditure Raw Material Consumed Manufacturing Expenses Staff Costs Administrative Expenses Selling & Distribution Expenses Finance Charges Depreciation 1,09,71,71,452 61, 62,663
Current Year
1,09,10,08,789 2,17,134 44,96,243 1,09,57,22,166 58,07,65,782 30,87,12,039 4,09,75,267 2,15,66,911 2,49,42,428 6,73,42,176
Total Rs. PROFIT FOR THE YEAR Paid/provision for tax Current tax 1,11,510 Mat credit Entitlement (1,11,510) Fringe Benefit Tax Deferred Tax 61800 PROFIT AFTER TAX Add: Profit brought forward from previous year
BALANCE CARRIED OVER TO BALANCE SHEET
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