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EXECUTIVE SUMMARY

Mysore Sales International Ltd is a Government of Karnataka Marketing Organization offering

various products & services. It is a public sector enterprise of the Government of Karnataka. It

has the distinction of having earned profits consistently for nearly four decades and was

established in 1966 as a trading house. Now, it has a wide network of offices all over Karnataka

as well as some important locations in the country.

This report is about the training conducted in the corporate headquarters, registered and situated

in Cunningham Road, Bangalore on the title A Study on Working Capital Management.

Working capital management ensures that a company has sufficient cash flow in order to meet its

short term obligations and operating expenses. Any company whatever the business it carries can

ensure profitability only through working capital management. Through the management of the

working capital at Mysore Sales International Ltd, it assures the availability of funds to meet the

required working capital or day to day operations of the firm. Implementing an effective working

capital management system is an excellent way for many companies to improve their earnings.

The report consists of information on the liquor industry, global, national and Karnataka trends.

It consists of details about Mysore Sales International Ltd, where the study has been done. It

includes information on the nature of the study conducted its quality policy and also the products

and services rendered to its clients. The report also covers the structure, the analysis namelySWOT analysis of the organization.

CHAPTER 1

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INDUSTRY ANALYSIS

The alcoholindustry is the commercial industry involved in the manufacturing, distribution, and

sale of alcohol beverages. The industry has been criticized in the 1990s for deflecting attention

away from the problems associated with alcohol use. The alcohol industry has also been

criticized for being unhelpful in reducing the harm of alcohol. The World Bankworks with and

invests in alcohol industry projects when positive effects with regard to public health concerns

and social policy are demonstrated. Alcohol industry sponsored education to reduce the harm of

alcohol actually results in an increase in the harm of alcohol. As a result it has been

recommended that the alcohol industry does not become involved in alcohol policy or

educational programs. In the UK theNew Laborgovernment took the view that working with the

alcohol industry to reduce harm was the most effective strategy. However, alcohol-related harmand alcohol abuse increased. The alcohol industry has been accused of using similar tactics as

thepharmaceutical industryto exaggerate the health benefits of alcohol which is regarded as a

potentially dangerous recreational drug with potentially serious adverse effects on health.

Alcohol Industry in India

The Indian alcohol industry is amongst the fastest growing industry in the world and occupies the

3rdposition in comparison to the same industry in other countries. This industry has seen a major

shift of consumption from the indigenous country liquor to Indian Manufactured Foreign Liquor

because of the rising per capita income of Indian people and a change in their lifestyle.

Alcohol industry is state subject; it means alcohol deals with state government of the country.

Every state government has its own rules and regulations for the alcohol industry.

This industry is a State affair and hence every manufacturer needs to get licenses in every state

they need to operate in and therefore there are few players which are literally national. Separate

licenses are required for production, bottling and distribution of the product, making it aherculean task for a not so well connected and impatient player.

FDI in this industry is 100 per cent and when the case arises in which the owner is a

foreign company but the investor is Indian, then the investment will require a prior approval of

Foreign Investment Promotion Board and it will be for a given licensed capacity. To increase the

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investment, the investor will need a completely new approval. The licensing is done under the

Industrial (Development and Regulation) Act, 1956.

Competitors

The main players coming under alcohol industry in India is given below

Diageo USL Prnord Radicokhtian Jagajith industry John dislleries Thialknagar industries

Pricing strategy

Excise duty, Sales tax, Value Added Tax and various other duties impacts the pricing of the

products to a great extent and also depends upon the markets they deals with. They divide

country into four markets

Free market: In this market the company is free to fix the price but they want to pay theas per the excise duty, sales tax, VAT etc... but the company can directly deals with the

retailers and wholesalers ( for example Pondicherry)

Auction market : The market player decided by the auction conducted by the governmentevery year the person who bids the highest amount will win the market and takes care of

the for next one year ( for example Rajasthan)

Government market : Government will deals each and every thing in the market even thevolume that they want in the market (for example Kerala)

Mixed market : Government will deals the wholesale part and the retail part is deals withprivate companies (for example Karnataka)

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Another importantmatter in the pricing strategy of the company is they will always aware about the

price of their competitors

Nature of demand, supply

Demand of the product will not touch the peak position or to the bottom of the scale. The supply

and the production that will deal by the government, which means that the government will

decide the volume that want in the market and also they will fix the volume of each brands that

they want to produce.

Challenges of the industry

The main challenge that the alcohol industry faces is the rules and regulations of the state

government. Alcohol industry is state subject, i.e. state governments take care of the volume thatthey want to produce by the each company. If the rules and regulations are very strict then that

will difficult by the company to run and make the profit. Another important challenge is the state

government decided the state as dry state that like Gujarat will also problems to the company to

run. Alcohol industry is highly regulated industry.

Types of Market

The alcohol industry in India is a quintessential example of oligopoly market. The products

manufactured can be divided into the following categories:

IMFL (Indian Manufactured foreign liquor) Foreign liquor bottled in India (BII) Foreign liquor bottled in Origin (BIO) Beer Wine Country liquor which includes cheap and spiced indigenous liquor

Although Beer, Country liquor and IMFL occupies almost the same market share in volume but

due to high price of IMFL it occupies almost 65% of market share in terms of value.

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Total market size of this industry in India is about $35 billion and is also showing a growth trend

of 8 percent per annum.

Another feature of oligopoly that is quite evident in Indian liquor industry is a unique form of

elasticity. IMFL and beer is showing an almost constant growth of around 8 percent CAGR per

annum but the growth isnt divided uniformly over the products of different prices. For instance

the growth is considerably higher in cheap to medium category of IMFL but the growth of high

end products is comparatively negligible. The uniqueness in this type of elasticity lies in the fact

that if the prices are made higher, the demand doesnt fall proportionately but the consumers

shift to cheaper products leading to a mass abandonment of the recently price hiked one.

This form of high elasticity results in the market giants locking horns with each other as each one

of them try continuously to drop their prices for retaining and increasing their market shares.

In India the presence of alcohol industry is having a characteristics of an organized market but

illicit activities are dominant especially in the case of country liquor. From the method of

production to the distribution and even pricing are majorly done outside the spectrum of

government laws and owing to its large market value of around Rs 2350 Cr it impacts the

economy substantially. Black marketing and hidden marketing is highly prevalent in this industry

because of the presence of several regional mafias in the distribution and manufacturing of

country liquor.

STRUCTURE Figure 1.1

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MANUFACTURING OF LIQUOR

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PRODUCTION OF RECTIFIED SPIRITS FROM MOLASSES

Figure 1.2

About Karnataka State Beverages Corporation (KSBCL)

The second largest revenue generator in the state is excise department... Despite various

administrative measures from time to time a general perception prevailed prior to 2003 that the

State has not been able to maximize revenue collections from this source due to evasion of duty.

Such a view has also been voiced in the report of the Tax Reforms Commission. Considering the

Sugarcane

Crushing of sugar can in factory

Sugar Bagasse &

Press Mud

Molasses

Molasses storage tanks

Water

Molasses Dilution tanks

Yeast

Ferment for alcohol manufacture

Extra Neutral

Alcohol

Fuel Ethanol Plant

Water Molecule

Rectified SpiritEthanol

Distillation

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potentiality of garnering additional revenue, Government initiated a set of reforms in June 2003,

which broadly consists of reduction and rationalization of excise duty structure, simplification of

procedures and establishment of a Government owned Distribution Company for canalization of

IML, beer and spirit.

Thus, Karnataka State Beverages Corporation Ltd., emerged as a private limited company of the

Government of Karnataka on 02.06.2003 for the purpose of canalizing sale of liquor in the State

and commenced operations from 01.07.2003.

As a canalizing route, the manufacturers, both within and outside the state, keep their stocks in

the Corporationsgo downs across the State of Karnataka for distribution to wholesale licensees

till the end of 30th

June 2006 and effective from 1stJuly 2006 the distribution is now made to the

retail and other licensees subsequent to abolition of wholesale business. To self-sustain its

activity, the Corporation is collecting a margin on the goods transacted as prescribed by the

Government of Karnataka. Initially the distribution was confined only to IML and Beer and later

the Government entrusted the partial canalization of Rectified Spirit with effect 01.11.2003 and

subsequently a total canalization of Spirit was implemented with effect from 01.09.2004.

Chapter 2

COMPANY PROFILE

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MSIL is a premier Government of Karnataka Marketing Organization dealing with various

products & services. It is a unique public sector enterprise of the Government of Karnataka. It

has the distinction of having earned profits consistently for nearly four decades and was

established in 1966 as a trading house. Now, it has a wide network of offices all over Karnataka

as well as some important locations in the country.

Keeping pace with the winds of rapid industrialization that are sweeping Karnataka,

MSIL is today resting on a strong footing of excellent performance coupled with deep routed

trust and confidence amongst its clients.

Mysore Sales International Limited, popularly known as MSIL, is a marketing

organization formed in 1966 to meet the marketing needs of Karnataka. Since then, the company

has grown from, strength to strength, to emerge as a dynamic marketing force with a national

presence and international reach.

A keen sense of business acumen, trade experience, managerial effectiveness and

credibility are few of the hallmarks of this marketing giant. And, its ability to manage a diverse

range of products and services through innovative marketing strategies is the secret of its

success. In a business where the prime motivator is people, MSIL has developed flexibility in its

thinking and management, enabling it to tackle every fresh challenge with an innovative

approach to stay in rhythm with the changing tastes and values.

HISTORY

Commenced commercial operations in 1966, as a centralized marketing unit for a fewState-Owned industrial units.

From 1967 to 1989 marketing of all products of Karnataka Soaps & Detergent Ltd(formerly known as Government Soap Factory) all over the country.

From 1969 to 2007, MSIL was the sole selling agency for the Marketing and Distributionof Karnataka State Lottery tickets.

During the 70s, MSIL handled special projects such as the distribution of importedcement, export of rice and the sales of agricultural implements produced at KIMCO.

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During the 80s, the company was marketing Asian Power Capacitors manufactured byAsian Electronics, Nasik.

In order to facilitate the student community especially in rural areas with qualitynotebooks at a reasonable price, Government of Karnataka has entrusted MSIL with the

responsibility of manufacture and distribution of notebooks. Today Vidya & Lekhak

brands of notebooks are extremely popular.

Since early 80s to May 2008 MSIL has served as Custodian /Administrators of theBangalore Air Cargo complex.

In 1989, MSIL entered the consumer durables market with the hire purchase scheme forgovernment employeesMSIL Homemaker.

For a brief period MSIL also operated a retail showroom for silk products by the name ofMandara.

MSIL also had an exclusive showroom for sale of imported furniture. From 1989 to 2003, MSIL was the sole distributor of Indian Made Foreign Liquor

(IMFL) in Karnataka.

In 1990, MSIL ventured into the travel sector with MSIL Tours & Travels. In 1992, MSIL was a pioneer in introducing solar water heating systems with the brand

name MSIL Hot spring.

In September 2002, MSIL established another joint venture with HAL and CONCOR aspartners to handle Air Cargo Operations.

In 2005, to protect the interests of the small investors, MSIL launched its own Chit fundScheme.

In joint venture with M/s. MSIL also entered into used car market. Subsequent to the ban of Arrack in the state, to ensure that the Quality liquor is available

to public at MRP, Govt. has allotted about 400 retail liquor outlets to MSIL last year to

be opened across the state.

MISSION AND VISION STATEMENT OF MSIL

VISION

To remain customer focused always by constantly providing tangible and measurable

value for money in terms of the products and services.

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MISSION

To look forward and adapt to the times, to offer every consumer the best quality at the

most affordable price.

CORPORATE OFFICE

MSIL (Mysore Sales International Ltd)

MSIL HOUSE

36 CUNNINGHAM ROAD

BANGALORE-560 052

BRANCHES

Belgaum Davanagere Delhi Gulbarga Hubli Mangalore Mumbai Mysore

DEPOTS

Bangalore

Bijapur Davanegere Gulbarga Hassan Hubli

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Mangalore Mysore

FINANCIAL DATA

CAPITAL STRUCTURE

Equity Financed.

Equity Share Capital Rs 25 cr.

Paid up Share Capital Rs 366.23 lakhs and is fully held by Karnataka State Industrial

Investment and Development Corporation (KSIIDC) which is also Govt. Of Karnataka company.

BUSINESS TURNOVER

Rs.97828.66 lakhs (2012-2013)

PROFIT AFTER TAX

Rs2268.35 lakhs. (2012-2013)

RATIOS

LIQUIDITY RATIO

(i) Current ratio = current assets / current liabilities

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TABLE 2.1 CURRENT RATIO

Year 2012-13

Current Assets 2,88,84,79,965

Current Liabilities 1,46,07,90,947

Current Ratio 1.9:1

Significance :- According to accounting principles, a current ratio of 1.97:1 is supposed to be an

ideal ratio as it is close to 2:1..

It means that current assets of a business should, at least, be twice of its current liabilities. The

higher ratio indicates the better liquidity position, the firm will be able to pay its current

liabilities more easily. If the ratio is less than 2:1, it indicate lack of liquidity and shortage of

working capital. The current ratio for the company MSIL is satisfactory.

(ii). Quick ratio = quick assets /current liabilities

Table 2.2 QUICK RATIO

Year 2012-13

Quick Assets 2,438,850,499

Current Liabilities 1,46,07,90,947

Quick Ratio 1.69:1

Significance: - An ideal quick ratio is said to be 1:1. If it is more, it is considered to be better.

This ratio is a better test of short-term financial position of the company. The company has a

quick ratio of 1.69 which is ideal.

LEVERAGE OR CAPITAL STRUCTURE RATIO

(i). Debt Equity Ratio

Debt Equity Ratio=Long term Loans/Shareholders Funds or Net Worth

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TABLE 2.3 DEBT EQUITY RATIO

Year 2012-13

Long term loans 67,33,85,310

Shareholders fund 1,67,30,59,588

Debt equity ratio 0.40:1

Significance: - This Ratio is calculated to assess the ability of the firm to meet its long term

liabilities. Generally, debt equity ratio of 2:1 is considered safe.

If the debt equity ratio is more than that, it shows a rather risky financial position from the long-

term point of view, as it indicates that more and more funds invested in the business are provided

by long-term lenders.

The lower this ratio, the better it is for long-term lenders because they are more secure in that

case. Lower than 2:1 debt equity ratio provides sufficient protection to long-term lenders. The

debt-equity ratio of MSIL is seen to be satisfactory.

(ii) Debt to Total Funds RatioDebt to Total Funds Ratio = Long-term Loans/Shareholders funds + Long-term Loans

TABLE 2.4 DEBT TO TOTAL FUNDS RATIO

Year 2012-13

Long term loans 67,33,85,310

Shareholders fund +long term

loans

23,46,44,4898

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Debt to total funds ratio 0.28:1

Generally, debt to total funds ratio of 0.67:1 (or 67%) is considered satisfactory. In other words,

the proportion of long term loans should not be more than 67% of total funds.

A higher ratio indicates a burden of payment of large amount of interest charges periodically and

the repayment of large amount of loans at maturity. Payment of interest may become difficult if

profit is reduced. Hence, good concerns keep the debt to total funds ratio below 67%. The lower

ratio is better from the long-term solvency point of view. MSILs debt to total funds ratio is 28%

which is seen to be above the standard.

(iii). Proprietary Ratio:-

Proprietary Ratio = Shareholders Funds/Shareholders Funds + Long term loans

TABLE 2.5 PROPRIETARY RATIO

Year 2012-13

Shareholders fund 1,67,30,59,588

Shareholders fund +long term

loans

23,46,44,4898

Proprietary ratio 0.71:1

Significance: - This ratio should be 33% or more than that. In other words, the proportion of

shareholdersfunds to total funds should be 33% or more.

A higher proprietary ratio is generally treated an indicator of sound financial position from

long-term point of view, because it means that the firm is less dependent on external sources

of finance.

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If the ratio is low it indicates that long-term loans are less secured and they face the risk of

losing their money

(iv). Fixed Assets to Proprietors Fund Ratio:-

Fixed Asset to Proprietors Fund Ratio = Fixed Assets/Proprietors Funds (i.e., Net Worth)

TABLE 2.6 FIXED ASSETS TO PROPRIETORS FUND RATIO

Year 2012-13

Shareholders fund 1,67,30,59,588

Fixed assets 1,30,94,80,659

Fixed assets to Proprietary

ratio

3.56:1

Significance: - The ratio indicates the extent to which proprietors (Shareholders) funds are sunk

into fixed assets. Normally, the purchase of fixed assets should be financed by proprietors funds.

If this ratio is less than 100%, it would mean that proprietors fund are more than fixed assets and

a part of working capital is provided by the proprietors. This will indicate the long-term financial

soundness of business

ORGANISATIONAL STRUCTURE

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CHAPTER 3

BOARD OF DIRECTORS

MANAGING DIRECTOR

CHIEF GENERAL MANAGER

GENERAL MANAGER

DY GENERAL MANAGER

ASSISTANT MANAGER

SUPERVISOR

ASSISTANTS

INTERNS

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FUNCTIONAL DEPARTMENTS

Functional Departments (Bangalore Head Office)

(1) Accounts and Finance includes Administration

(2) Secretarial including legal

(3) Establishment including Human Resources (HR) and Security

(4) Corporate Communication

CORPORATE COMMUNICATION

The corporate communication team is similar to marketing division in any other companies.It

deals with inter as well external communication It does market research and evaluation and

handles media relations for the company.

Planning and strategizing the communication processes with the internal and externalaudience.

To maintain a communication balance between the internal audiences i.e. theorganizations employees, to decrease the communication gap.

Marketing research to find out what is the demand of the audience. To keep an eye on the industry developments. To handle public relations and media relations department of the organization. Periodical research and evaluation to determine the actions or adjustments needed for

social harmony (between the organization and its public).

HUMAN RESOURCE DEPARTMENT

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The human resource department takes care of staff selection, training, Staff retention and welfare

programs. There are 307 staffs working in the company and all the Top management consists of

eminent personalities with IAS Qualification

Advertising job vacancies Notifying staff of promotion opportunities Receiving and recording all job applications, arranging interviews and

notifying candidates of the result.

Arranging staff training and encouraging continuous professional development Monitoring the working conditions of staff Checking health and safety and keeping accident records Recording sick leave and reasons for absence Carrying out company welfare policies, e.g. long-service awards and company loans Keeping records of grievances and disciplinary actions Monitoring the terms and conditions of employment, including wage rates Maintaining staff records

FINANCE DEPARTMENT

The finance department is responsible for preparing various accounts and report and it is their

responsibility to prepare budgets and allocate the necessary funds required.Their other functions

are as follows;

Management of financial resources for meeting the corporations programs of operationsand capital expenditure including investment of surplus fund, if any.

Ensuring uniform financial and accounting policies and procedures to the extent possiblein the division.

Establish and maintain a system of financial scrutiny and internal checks and renderadvice on financial matters including examination of feasibility studies and detailed

project reports.

Establish and maintain an appropriate system of budgetary control and managementinformation system for different levels of the management.

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Carryout periodical studies with a view to control costs, educe expenditure, economy inadministrative expenditure and improve efficiency to maximize profitability of the

corporation.

Maintain the financial accounts, cost accounts and other relevant books and records inaccordance with the various statutory and other requirements. Advise on corporate cash

planning, credit planning and pricing policies of the Corporation.

SECRETARIAL INCLUDING LEGAL

This department are responsible for giving the company advices regarding various

aspects .They represent their company in the court and provide assistance in getting

claims.

Giving advice to the company, its divisions and employees on matters of law and legalprotection

Keeping company activities in strict compliance with new legislation Representing company in all meetings, conferences and public events Preparation of protocols, claims and counter-claims to courts Representation of company in courts Protection of company's rights and interests in judicial sittings Creation of legal documentation requirements Drafting and approving document layout

PRODUCT PROFILE

IPD/CPD

Solar water heaters Led Lights Cables Mustard Oil Water Purifier

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Nivaran 90 Nivaran Digestive Water Total Bar

EXPORTED

Sandalwood Oil Soaps Spices Coffee Rice Garments Iron Ore

Also, the company deals with products like

Packaged Drinking Water Agriculture Products Notebooks Bags Stationeries Leather Tea, Tobacco and Plantation Products

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EMPLOYEE TURNOVER

Minimum being a Public Sector Organization

EMPLOYEES

Total No: of Employees: 307

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CHAPTER 4

SWOT ANALYSIS

STRENGTHS

As Company belongs to Government it ensures a trust and a brand image Well trained employees, most of them having experience in the range of 20-30 years who

provides excellent service.

Headed by Indian Administration staffs whose efficiency and skills help the companysperformance.

WEAKNESS

Some group of employees form an informal organization and resist changes. Products are priced not based on profit motive as the government. Other than the liquor outlets all the products are concentrating on rural Area of the state. More of a social welfare company than a profit making company and it usually doesnt

compete with private sectors.

OPPORTUNITIES

Opportunity to diversify business. The company being a government company will notconstraints regarding establishing a new business like obtaining license. They have

opportunities to diverse to other fields such as Stationary items

Opportunity to improve existing business. They have enough government aided fundsand they can easily start diversifying to fields like stationary

Opportunity to Expand Their Market as they have not explored urban markets till nowonly the beverage divisions has found their way to urban market.

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THREATS

Withdrawal of liquor license by Government. Cut throat competition from private sector

FUTURE PROSPECTS

The company has already ventured into office-cum- warehousing infrastructure sector and to

pursue this, it has already set up state-of-art office-cum-warehousing complexes at Mysore and

Mangalore and the Mysore Warehouse complex has started generating revenue for the company.

The on-going construction of Karnataka Bhawan in Mumbai is expected to complete in the next

financial year. Your company also decided to set up an Integrated Warehousing Complex on

Government allotted plots situated at Devanahalli International Airport, Bangalore. All these

projects would generate additional revenue for the company in the coming years.

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CHAPTER 5

PROBLEM CENTERED STUDY

A STUDY ON WORKING CAPITAL MANAGEMENT

OF BEVERAGES DIVISION, MYSORE SALES INTERNATIONAL LTD

STATEMENT OF THE PROBLEM

The problem selected for the study is A study on working capital management at MSIL LTD

(BEVERAGES DIVISION). This study will try to identify the problem areas and give

suggestions to solve them. As its beverages division deals only with cash its working capital

constitutes mainly of inventory and cash.

OBJECTIVE OF THE STUDY

To analyze the schedule of changes in working capital To analyze the performance of working capital management at MSIL. To study the liquidity position and solvency of the division. To suggest improvement wherever necessary, based on the study.

SCOPE OF STUDY

The study mainly deals with the working capital management at MSIL Beverages Division,

decisions regarding working capital, its nature of operation. The scope of study is to identify the

area of control over various components of working capital. The attempt is to identify the

financial performance of the company from 2010-11 to 2012-2013, companys growth and profit

earned.

RESEARCH METHODOLOGY

This research is a financial research in the field of working capital management of the beverages

division of Mysore Sales International Ltd. It assesses the overall working capital management

of the company by taking into account financial data for the period of four years from 2011 to

2013. Ratio analysis is being used for this purpose. Hence it is essentially a fact finding study.

SOURCES OF DATA

PRIMARY DATA- The primary data where provided by the different managers in the company

as and when approached.

SECONDARY DATA- The sources of the secondary data was obtained from the

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Annual reports, and the official company website.

WORKING CAPITAL ANALYSIS

Working capital is very essential for the smooth running of a business. It is the life blood of a

Company. A study of changes in the sources or working capital is necessary to evaluate the

Efficiency with which the working capital is employed in the company. This involves the

Need of working capital analysis. The analysis of working capital can be conducted through a

Number of ways, such as:

Ratio analysis

Fund flow analysis

Budgeting

LIMITATIONS OF THE STUDY

Efforts have been made to perform a detail study regarding the topic, however the following

Limitations where found:

The study is restricted to the corporate headquarters, Bangalore. The information is availed from the statements, annual reports and records of the

company.

This is limited to the information gathered through the interview and the discussion withthe companys officials and executives.

As each company treats confidential status pertaining to some information and theinformation was needed could not be made public.

A detailed analysis of all the items was not possible.THEORY OF WORKING CAPITAL

Working capital plays an important role in an organization irrespective of the nature and kind of

the organization. Effective management of working capital is a basic requirement for any

organization to function in an efficient manner and grow. This is because a company needs

capital for running its day to day activities. Working capital represents the operating liquidity

available to an organization. Though investment in fixed assets is more or less static, the working

capital keeps constantly changing. In simple terms, working capital means excess of current

assets over current liabilities.

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Gross working capital is the total fund invested in various current assets such as cash in hand and

at the bank, inventories, bills receivables, debtors and short term loans and advances. Gross

working capital is of importance to a firm because financial managers are deeply interested in the

current assets of their firm, it enables the firm to realize the greatest return on its investment and

assign the areas of responsibilities to specific people or departments. Net working capital is the

difference between current assets and current liabilities which include bills payable, creditors and

outstanding expenses.

It is always considered good when current assets are more than current liabilities. This means

that the short term cash that we are receiving from our debtors is more than the short term cash

that we have to pay to our creditors. A positive working capital ensures that the firm is able to

continue its operations and has sufficient capital to meet its short term debt as well as upcoming

operational expenses. A negative working capital would mean that our current liabilities are

greater than our current assets. A negative working capital in most situations means that a

company may be heading towards bankruptcy or some serious financial troubles.

But negative working capital need not necessarily be bad for an organization. Negative working

capital may arise due to reasons like high inventory turnover or for companies with subscriptions

or longer-term contracts. Examples of organizations that have seen to have negative working

capital and yet have been profitable are McDonalds(with negative working capital of $698.5mn

between 1999-00) and amazon.com. In such organizations, the goods or final products are sold

and delivered to the customer even before the organization actually pays for them.

Working capital management involves effectively managing the cash, inventory, receivables and

payables of an organization so as to ensure sufficient cash flow and reduce debt. The level of

working capital needs to be optimum. The cash conversion cycle is a major factor in working

capital management and is the responsibility of all the processes of an organization be it finance,

purchase, sales, manufacturing, etc. Effective working capital management includes planningand controlling the current assets and current liabilities in such a manner that removes the risk of

inability to meet short term debt and also avoids excessive and unnecessary investment in such

assets. It also involves planning the working capital requirement in advance and developing a

working capital model in tune with this.

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A firm could adopt a moderate or an aggressive model based on the requirements and the market

situation of the firm. And based on this model, a firm decides its working capital policies like

credit period for customers and suppliers, short term finance, inventories and securities. The

working capital requirements generally depend on the production levels and the attitude of

management towards risk. The firms should also benchmark their requirements against similar

firms so as to have an idea of where they stand. A sound working capital model can ensure a

balance between profitability and growth.

In todays competitive world, it is mandatory to keep large amount of current assets in the form

of inventory to ensure smooth functioning of the business. Inventory management plays a very

important role in working capital management. It includes analysis and identification of slow-

moving and surplus items so that efforts can be made to convert such items into cash. The

reduction of unnecessary stock leads to great improvements in working capital conditions of the

firm. But it should be seen that there is no understocking as this will lead to dissatisfied

customers and loss in business. Sometimes, the suppliers try to offer lucrative discounts to the

purchase managers for buying in bulk which is often more than what the requirement is. If such

an offer is accepted, it would mean locking up cash in holding this extra inventory. Managers are

tempted to do such transactions as it would not be reflected in the income statement, based on

which the incentives of the managers are decided. But when a cost benefit analysis is done, it is

possible that the holding and carrying cost of this excess inventory is much more than the

discounts that were offered by the supplier. The purchase manager should not fall into such a trap

and should do a CBA (Cost Benefit Analysis) before going in for such discounts and offers. This

same argument applies to other components of working capital such as receivables, credit policy,

average collection period, etc. of the firm as well.

Delaying payment to creditors might be seen as a way to temporarily increase the working

capital. But it is actually counterproductive and inefficient and is a damaging practice for both

the practitioners and the economy as a whole. It also damages the goodwill of the firm as it is not

making timely payments to its creditors and suppliers. Therefore instead of this, other practices

such as inventory and receivables management should be followed.

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The importance of working capital has also been seen during the times of economic recession.

As seen during the downturn of 2008, the companies that were able to manage there working

capital well during the times of recession were the companies that were able to survive that

period and come out as more stronger than others after the recession. Working capital is rightly

called as one of the corner stones in continuing the business.

It is easy to manage and forecast the working capital needs and liquidity position during the

normal times when there is growth and expansion in an organization. However, the real test is

when the economy and the organization is going through an economic downturn. This is the time

when the organization needs to reassess its working capital position and predict the requirement

of the same. During such times, and organization sees a falling demand, a pressure to lower its

prices, the credit and capital start drying up, customers start tightening their belts and the

suppliers/creditors become less and less tolerable towards late payments. This is when the cash is

king and the effective management and control of working capital comes into focus.

An efficient working capital management can play a critical role in freeing up capital and using it

for the advantage of the firm. It ensures regular supply of materials and helps the firm to exploit

favorable market conditions. It can make the difference between success and failure of an

organization. By minimizing the funds trapped in current assets, a firm can easily reduce

financing cost and increase the funds available for expansion plans of the firm. In general, it can

boost up the morale of the organization. Due to all these, working capital management is a very

sensitive area in the field of financial management.

CLASSIFICATION OR KIND OF WORKING CAPITAL:

Working capital may be classified in two ways:

On the basis of concept On the basis of time

On the basis of concept, working capital may be classified as Gross working capital Net working capital.

On the basis of time, working capital may be classified as:

Permanent or Fixed working capital

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Temporary or Variable working capital.ON THE BASIS OF CONCEPT

1. GROSS WORKING CAPITAL.Gross working capital represents the fund invested in the current assets. Current assets include

those items that can be converted into cash in a shorter period of time.

CONSTITUENTS OF CURRENT ASSETS:

Cash in hand and Bank balance

Bills Receivable

Sundry Debtors

Short term Loans and Advances

Inventories of Stock as:

Raw Materials Work in Process Stores and Spaces Finished Goods

Temporary Investments of Surplus Funds

Prepaid Expenses

Accrued Incomes

The importance of working capital:

It enables the enterprise to provide correct amount of working capital at right time. The gross concept takes into consideration that every increase in the funds in the

enterprise will increase its working capital.

This concept is more useful in determining the rate of return of return on investment inworking capital.

2. NET WORKING CAPITALNet working capital is the net current asset, i.e. the excess of current assets over the current

liabilities.

The importance of working capital:

It is qualitative concept, which indicates the firms ability to meet its operating expensesand short term liabilities.

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It indicates the margin of protection available to the short term creditors, i.e. the excessof current assets over current liabilities.

It is the indicator of the financial soundness of the company.NET WORKING CAPITAL MAY BE NEGATIVE OR POSITIVE:

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 of the current assets or the

income of the business. Examples of current liabilities are:

CONSTITUENTS OF CURRENT LIABILITIES:

Bills Payable

Sundry Creditors or Account Payable

Accrued or Outstanding Expenses

Short term Loans, Advances and Deposits

Dividends Payable

Bank Overdraft

Provision for Taxation, If does not amount to appropriation of profits.

The gross working capital concept is financial or going concern concept whereas net working

capital is an accounting concept of working capital.

ON THE BASIS OF TIME

1. PERMANENT OR FIXED WORKING CAPITAL:Permanent or fixed working capital is the minimum amount which is required to ensure effective

utilization of fixed facilities and for maintaining the circulation of current assets. There is always

a minimum level of current assets which is continuously required by the enterprises to carry out

its normal business operations.

2. TEMPRORAY OR VARIABLE WORKING CAPITAL:Temporary or variable working capital is the amount of working capital which is required to

meet the seasonal demands and some special exigencies. Variables working capital can be

further classified as second working capital and special working capital. The capital required to

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meet the seasonal needs of the enterprises is called the seasonal working capital. Temporary

working capital differs from permanent working capital in the sense that is required for short

periods and cannot be permanently employed gainfully in the business.

IMPORTANCE OR ADVANTAGE OF ADEQUATE WORKING CAPITAL:

Working capital is the life blood and nerve center of a business. Just a circulation of a 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 without an adequate amount of

working capital. The main advantages of maintaining adequate amount of working capital are as

follows:

Solvency of the Business

Goodwill

Easy Loans

Cash discounts

Regular supply of Raw Materials

Regular payments of salaries, wages & other day to day commitments.

Exploitation of favorable market conditions

Ability of crisis

Quick and regular return on investments

High morals

THE NEED OR OBJECTIVES OF WORKING CAPITAL:

The need for working capital cannot be emphasized. Every business needs some amount of

working capital. The need of working capital arises due to the time gap between production and

realization of cash from sales. There is an operating cycle involved in the sales and realization of

cash. There are time gaps in purchase of raw materials and production, production and sales, And

sales, and realization of cash, thus, working capital is needed for the following purposes:

For the purchase of raw materials, components and spaces. To pay wages and salaries. To incur day to day expenses and overhead costs such as fuel, power and office expenses

etc.

To meet the selling costs as packing, advertising etc. To provide credit facilities to the customers.

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To maintain the inventories of raw materials, workin- progress, stores and spares andfinished stock.

CONSEQUENCES OF UNDER ASSESMENT OF WORKING CAPITAL:

Growth may be stunted. It may become difficult for the enterprises to undertakeprofitable projects due to non-availability of working capital.

Implementations of operating plans may become difficult and consequently the profitgoals may not be achieved.

Cash crisis may emerge due to paucity of working funds. Optimum capacity utilization of fixed assets may not be achieved due to non-availability

of the working capital.

The business may fail to honor its commitment in time thereby adversely affecting its

creditability. This situation may lead to business closure. The business may be compelled to by

raw materials on credit and sell finished goods on cash. In the process it may end up with

increasing cost of purchase and reducing selling price by offering discounts. Both the situation

would affect profitable adversely. Now availability of stocks due to non-availability of funds

may result in production stoppage. While underassessment of working capital has disastrous

implications on business over assessments of working capital also has its own dangerous.

CONSEQUENCES OF OVER ASSESSMENT OF WORKING CAPITAL:

Excess of working capital may result in unnecessary accumulation of inventories. It may lead to offer too liberal credit terms to buyers and very poor recovery system &

cash management.

It may make management complacent leading to its inefficiency. Over investment in working capital makes capital less productive and may reduce return

on investment.

Working Capital is very essential for success of business & therefore needs efficient

management and control. Each of the components of working capital needs proper management

to optimize profit.

DETERMINANTS OF WORKING CAPITAL:

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A firm should have neither too much nor too little working capital. A large number of factors,

each has a different importance, influencing working capital needs of firms. The importance of

factors also 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. The working capital requirement is determined

by a large number of factors but, in general, the following factors influence the working

capital needs of an enterprise:

(1) Nature of Business:-

Working capital requirements of an enterprise are largely influenced by the nature of its business.

For instance, public utilities such as railways, transport, water, electricity etc. have a very limited

need for working capital because they have invested fairly large amounts in fixed assets. Their

working capital need is minimal because they get immediate payment for their services and do

not have to maintain big inventories. On the other extreme are the trading and financial

enterprises which have to invest fewer amounts in fixed assets and a large amount in working

capital. This is so because the nature of their business is such that they have

to maintain a sufficient amount of cash, inventories and debtors. Working capital needs of most

of the manufacturing enterprises fall between these two extremes, that is, between public utilities

and trading concerns.

(2) Size of Business:-

Larger the size of the business enterprise, greater would be the need for working capital. The size

of a business may be measured in terms of scale of its business operations.

(3) Growth and Expansion:-

As a business enterprise grows, it is logical to expect that a larger amount of working capital willbe required. Growing industries require more working capital than those that are static.

(4) Production cycle:-

Production cycle means the time-span between the purchase of raw materials and its conversion

into finished goods. The longer the production cycle, the larger will be the need for working

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capital because the funds will be tied up for a longer period in work in process. If the production

cycle is small, the need for working capital will also be small.

(5) Business Fluctuations:-

Business fluctuations may be in the direction of boom and depression. During boom period the

firm will have to operate at full capacity to meet the increased demand which in turn, leads to

increase in the level of inventories and

book debts. Hence, the need for working capital in boom conditions is bound to

increase. The depression phase of business fluctuations has exactly an opposite effect on the

level of working capital requirement.

(6) Production Policy:-

The need for working capital is also determined by production policy. The demand for certain

products (such as woolen garments) is seasonal. Two types of production policies may be

adopted for such products. Firstly, the goods may be produced in the months

of demand and secondly, the goods may be produces throughout the year. If the second

alternative is adopted, the stock of finished goods

will accumulate progressively upto the season of demand which requires an increasing

amount of working capital that remains tied up in the stock of finished goods for some months.

(7) Credit Policy Relating to Sales:-

If a firm adopts liberal credit policy in respect of sales, the amount tied up in debtors will also be

higher. Obviously, higher book debts mean more working capital. On the other hand, if the firm

follows tight credit policy, the magnitude of working capital will decrease

(8) Credit Policy Relating to Purchase:-

If a firm purchases more goods on credit, the requirement for working capital will be less. In

other words, if liberal credit terms are

available from the suppliers of goods (i.e., creditors), the requirement for working capital

will be reduced and vice versa.

(9) Availability of Raw Material:-

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If the raw material required by the firm is available easily on a continuous basis, there will be no

need to keep a large inventory of such materials and hence the requirement of working capital

will be less. On the other hand, if the supply of raw material is irregular, the firm will be

compelled to keep an excessive inventory of such raw materials which will result in high level of

working capital. Also, some raw materials are available only during a particular season such

as oil seeds, cotton, etc. They would have to be necessarily purchased in that season and have to

be kept in stock for a period when supplies are lean. This will require more working capital.

(10) Availability of Credit from Banks:-

. If a firm can get easy bank facility in case of need it will operate with less working capital. On

the other hand, if such facility is not available, it will have to keep large amount of working

capital

(11) Volume of Profit:-

The net profit is a source of working capital to the extent it has been

earned in cash. Higher net profit would generate more internal funds thereby contributing the

working capital pool.

(12) Level of Taxes:-

Full amount of cash profit is not available for working capital purpose. Taxes have to be paid out

of profits. Higher the amount of taxes less will be the profits for working capital.

(13) Dividend Policy:-

Dividend policy is a significant element in determining the level of

working capital in an enterprise. The payment of dividend reduces the cash and thereby, affects

the working capital to that extent. On the contrary, if the company does

not pay dividend but retains the profits, more would be the contribution of profits

towards capital pool.

(14) Depreciation Policy:-

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Although depreciation does not result in outflow of cash, it affects the working capital indirectly.

In the first place, since depreciation is allowable expenditure in calculating net profits,

it affects the tax liability. In the second place, higher depreciation also means lower disposable

profits and, in turn, a lower dividend payment. Thus, outgo of cash is restricted to that extent.

(15) Price Level Changes:-

Changes in price level also affect the working capital requirements. If the price level is rising,

more funds will be required to maintain the existing level of production. Same level of current

assets will need increased investment when prices are increasing. However, companies that can

immediately their product prices with rising price levels will not face a severe working capital

problem. Thus, it is possible that some companies may not be affected by rising prices while

others may be badly hit.

(16) Efficiency of Management:-

Efficiency of management is also a significant factor to determine the level of working capital.

Management can reduce the need for working capital by the efficient utilization of resources. It

can accelerate the pace of cash cycle and thereby use the same amount working capital again and

again very quickly.

IMPACT OF WORKING CAPITAL.ON PRPFITABILITY

In order to run the company successfully, the fixed and the current assets play a commendable

role. Managing the working capital is mandatory because, it has a major significance on

profitability and liquidity of the business concern. Usually, it was observed that, if firm wants to

take a bigger risk for bumper profits and losses, it minimizes the dimension of its working capital

in relation to the revenues it generates. If it is willing to improve its liquidity, that in turn raises

the level of its working capital. Nevertheless, this technique might tend to reduce the sales

volume and consequently, it would affect the profitability. Thus, a company needs to have astriking balance between the liquidity and the profitability. This research has analyzed the impact

of working capital on the profitability for a sample of 100 Indian companies listed in the Bombay

Stock Exchange for a period of 2 years from 2010-2011. The various components for measuring

the working capital management include the Receivable days, Inventory turnover days, Payable

days, Cash conversion cycle, Current ratio and Quick ratio on the Net operating profitability of

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the Indian companies. The controlled variables like; Fixed assets on total assets, the Debt ratio

and the size of the firm (measured in terms of natural logarithm of sales) have also been used for

measuring of the working capital management. Descriptive Statistics, Pearsons Correlation,

Regression Analysis are used for analyzing this research. All these tests are used so as to

correlate the theories contributed by the literature by several authors with the statistical results.

The results depict that, there is a strong negative association between the components of the

working capital management and the profitability ratios of the Indian firms which indicates that,

as the cash conversion cycle increases it would tend to reduce the profitability of the company,

and the managers might increase the shareholders value by shortening this cash conversion

cycle to a minimum level. It is also observed that the negative association also persists between

the liquidity and the profitability of the Indian firms. Nevertheless, there is a positive relationship

between the size and the profitability of the firm. This indicates that, as the size of the firm

increases the profitability of the firm also increases.

Finally a negative relationship is observed between the debt and profitability of the Indian firms.

The results derived from this research signify that, the managers might able to raise their profits

by diminishing the time period for the debtors and inventories so that, time period for payables

would increase.

The role of working capital in investment process

For operating a firm working capital is as crucial as fixed capital. It is the net amount of short

term assets current assets minus current liabilities of the firm which gives it some latitude at

several activities.

Or instance, by holding inventories at various stages of the production process the firm can run

larger batches and is less vulnerable to strikes, and the presence of accounts receivable on the

balance sheet reflects the fact that the firm is willing to sell goods to customers that are solvent

but short of cash.

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The decline in working capital affects investment directly since it implies a fall in internal funds,

and indirectly by raising the cost of external funds. When its liquidity decreases or when

prospects concerning future sales deteriorate, the cost of external finance rises.

It is conceivable that firms also save working capital in order to make sure that it can carry out an

investment plan that takes years without interruption due to lack of cash.

Working capital will be used to smooth investments in the case of convex adjustment costs. If a

fixed costs component dominates, investments decisions will seem irreversible. The size of the

stock of working capital influences the timing (delay) of investment. The firms of higher credit

quality dont need to accumulate working capital as a buffer against fluctuations in cash flow as

they have access to the commercial paper market.

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Data analysis, interpretation and learnings

Net Working Capital

An analysis of the Net Working Capital of the company will help us in getting an overview of

the operating efficiency of the company. The net working capital is calculated as follows

Table 5.1 NWC

Years Current assets Current Liabilities NWC

2010-11 2,76,70,79,794 1,61,47,86,979 1152292815

2011-12 2,55,70,36,920 1,27,47,89,052 1282246941

2012-13 2,88,84,79,965 1,46,07,90,947 1427689018

Figure5.1

The above chart shows that in the year 2011, the company has a net working capital of

Rs 1152292815. In the year 2012, we see a slight increase to Rs 1282246941. After this there has

0

500000

1000000

1500000

2011 2012 2013

Working capital (amount in

thousands)

Working capital

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been an increase in the year 2013 with Rs 1427689018 All these years show a positive position

of net working capital for the company.

Components of Working Capital

Table 5.2

2010-11 2011-12 2012-13

Inventories 237640356 418675861 449629466

Sundry debtors 73115263 67344665 62950757

Cash and bank

balances

1465262560 1418906539 1603030929

Other current assets 49059927 56570936 125274185

Loans and advances 872803030 595538919 647594628

Stock with hirers 69198658 0 0

Current assets 2767079794 2557036920 2888479965

creditors 997614151 627439528 770769651

Other current liability 181599767 250637947 263074066

Short term borrowings 0 2354925 0

Provisions 435573061 394356652 426947230

Current liabilities

and provisions

1614786979 1274789052 1460790947

CURRENT ASSETS (amounts in thousands)

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Figure 5.2

0.00

500000.00

1000000.00

1500000.00

2000000.00

2500000.00

3000000.00

20112012 2013

Stock with hirer

other

short term loan and advances

cash

trade recievables

inventories

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CURRENT LIABILITY

Figure 5.3

Following is an analysis of the various components of working capital:

The inventories have been increasing over the period of past 3 years. The inventories in2011 were Rs 237640356 which increased by a huge margin of 76% to Rs 418675861 in

the year 2012. Further, there was a 79% increase in the inventories from 2012 to 2013,the inventories of 2013 being Rs 449629466. The most likely cause for this increase in

the inventories is the expansion and acquisition activities being carried.

The company has hold a good consistent record of debtors. In the year 2011 the debtorswere amounting to Rs 73115263 which decreased to Rs 67344665 in the year 2012 and it

further decreased to 62950757 Rs in the year 2013. The decreasing trend shows the

decrease in credit sales or quick and timely payments from debtors. Even though sundry

debtors form a part of current assets, but having excess of debtors is not good for the

company due to the risk of them turning into bad debts.

The Cash and bank balances were Rs 1465262560 as on 2011 which reduced slightly by3 pc to Rs 1418906539 but in the next year there showed an increase in the cash balance.

The balance as on march 31st2013 stood as Rs1603030929

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

20112012

2013

Provision

Borrowings

other

Creditors

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The Other current assets in 2011 stood at Rs 49059927. In 2012, there was an increase by15% in the other current assets and the value was Rs 56570936

The value of other current assets increased by 121% in 2013 to Rs 125274185

The other current assets include various items like interest accrued on investments, on

deposits and rent receivables.

The Loans and advances of the company in 2011 were Rs 872803030. There was a 31%decrease in the next year, the value in 2012 being Rs 595538919 lakh. 2013 saw a 8%

increase in the loans and advances to Rs 647594628

The year 2011 the company had a stock with hirers which amounted to Rs69198658which the company did not hold to it through the next years.

The Current liabilities increased in a less constant manner from 2011 to 2013In 2011, their value was Rs 1614786979 which decreased by 21% in 2012 to

Rs 1274789052 and they increased by 14% in 2013 to Rs 1460790947.

There an increase in the Other Current Liabilities like Current maturities of long term

debts, Current maturities of finance lease obligations, Book overdrafts, Advances from

patients/customers, Sundry deposits, Interest accrued and due on borrowings, Deferred

revenue, Premium payable on redemption of redeemable preference shares, Capital

creditors, Derivative financial instruments, etc.

The provisions of the company stood at Rs 435573061 in 2011. They decreased by 9% toRs 394356652 in 2012. In 2013, there was an increase by 8% to Rs 426947230. .

Figure 5.4 CURRENT ASSETS

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If we see the overall current assets, in 2011 they stood at Rs 2767079794. This amount increased

by 7% in 2012 to Rs 2557036920. There was a sudden increase in the current assets in 2013 to

Rs 2888479965 which showed an increase by 13%.

2300000

2400000

2500000

2600000

2700000

2800000

2900000

3000000

2011 2012 2013

Current assets (in thousands)

Current assets

0

200,000,000

400,000,000

600,000,000

800,000,000

1,000,000,000

1,200,000,000

1,400,000,000

1,600,000,000

2011 2012 2013

Current liability

Current liability

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Figure 5.5

In case of the total current liabilities, the value in 2011 was Rs 1614786979 which decreased by

21% in 2012 to Rs 1274789052 and increased by 14% in 2013 to Rs 1460790947.

ROTA (Return on Total Assets)

A B C D=B/C

Year EBIT Total assets ROTA

2010-11 8,69,92,494 3,30,67,59,853 0.026

2011-12 33,65,28,430 3,6200,18,871 0.092

2012-13 36,57,80,029 4,19,79,60,624 0.087

Table 5.3 ROTA

ROTA (Return on Total Assets) indicates how effectively the company is using all its assets togenerate income before contractual obligations like Interest and Tax need to be paid. It is

calculated by dividing the Earnings before Interest and Tax. Here we have deducted the

amortization and depreciation from the earnings.

The return on total assets in MSIL is showing a positive increase in the year 2012 which shows a

good performance of the company .In the next year the total assets amount has increased which

led to a decline in ROTA in the year 2013.The company should have made more efforts to

increase the profit with the expansion programs

Gearing ratio

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Table 5.4Gearing ratio

A B C=A+B D E=C/D

Years Loan Funds

Current

Liabilities Total debt Total assets

Gearin

g ratio

2011 76,43,40,624 1,20,38,47,179 1,968,187,803 3,30,67,59,853 0.595

2012 89,47,49,808 1,27,47,89,052 2,169,238,860 3,62,00,18,871 0.599

2013 67,33,85310 1,46,07,90,947 2,134,176,257 4,19,79,60,624 0.508

Gearing ratio shows the degree to which a firm's activities are funded by owner's funds versus

creditor's funds. Here total debt versus total assets is used to show how much of the companys

assets have been financed by debt. A gearing ratio with a higher value means that a firm is more

vulnerable to downturns in the business cycle because the company must continue to service its

debt regardless of how bad sales/revenues are. . In our case, the gearing ratio was 0.595 for 2011,

0.599 for 2012, and 0.508 for 2013 which shows a stable trend with slight fluctuations. Here the

ratio is above 50 percent which is a not sigh and company must concentrate on revealing from

these loans slowly.

Total margin

A B C D=C/B

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Table 5.5 Total Margin

Total margin includes all other sources of revenue and expenses that are not related to operations

unlike the operating margin that looks only at revenue derived from operations. Total margin

may differ significantly from the operating margin if substantial amounts of non-operating

revenue or expenses are reported. For this company, the total margin has shown a good trend and

has been increasing from 2011 to 2012ie .046 to .056... But it has decreased in 2013 to 0.46

which is not good.

Current ratio

Table 5.6 Current ratio

A B C=A/B

Years Current assets Current Liabilities NWC

2010-11 2,40,81,29,457 1,20,38,47,179 2.00

Year

Total revenue (1)

Total operating

expenses (2)

Operating

Income Total margin

2010-11 2,86,53,63,126 2,73,62,70,632 1,29,092,494 0.046

2011-12 6,00,41,74,222 5,68,23,92,441 3,21,781,781 0.056

2012-13 8,29,90,45,077 7,93,09,53,482 3,68,091,595 0.046

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2011-12 2,55,70,36,920 1,27,47,89,052 2.00

2012-13 2,88,84,79,965 1,46,07,90,947 1.97

Current Ratio is an index of the firms financial stability. The standard ratio is 2:1. The division

has maintained a current ratio more than the standard indicating that it has maintained liquidity

throughout the period. It is always higher the better because a higher current ratio shows that a

company is more capable of paying its short term liabilities. The current ratio for MSIL has been

favorable throughout till 2013. The current ratio for 2011 was 2 and for 2012 it was 2. For the

year 2013, its 1.97 which is idle for the company

Quick ratio

Where,

Table 5.7 Quick ratio

A B C=A/B

Years Quick assets Current Liabilities Quick ratio

2010-12 2,101,290,433 1,20,38,47,179 1.745

2011-12 2,138,361,059 1,27,47,89,052 1.677

2012-13 2,438,850,499 1,46,07,90,947 1.669

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The quick ratio of the division is above the standard ratio of 1:1 all through the years and is at a

satisfactory level. It means that the company has liquid asset sufficient to provide a cover to

current liability. The ratio shows a stable solvability throughout the three years. Which is a good

sign for the company.

Absolute liquid ratio

Where

Table 5.8 Absolute liquid ratio

A B C D =(B/C)

Years Absolute liquid assets Current Liabilities Absolute liquid ratio

2010-11 1,46,52,62,560 1,20,38,47,179 1.217

2011-12 1,41,89,06,539 1,27,47,89,052 1.113

2012-13 1,60,30,30,929 1,46,07,90,947 1.097

Absolute liquid ratio takes into consideration only the most liquid assets which are Cash and

bank balances and the marketable securities. This ratio was 1.217in 2011 and showed a slight

declining trend in the next two years it stands as 1.113 and 1.097 respectively. An absolute liquid

ratio of 0.5 or more is considered good and for this company in most of the years its less than

that. The company shows a positive sign regarding this ratio.

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Current assets to total assets ratio

Table 5.9 Current assets to total assets ratio

A B C=A/B

Years

Current Assets,

Loans & Advances Total assets

Current assets/

Total assets

2010-11 2,40,81,29,457 3,30,67,59,853 0.728

2011-12 2,55,70,36,920 3,62,00,18,871 0.706

2012-13 2,88,84,79,965 4,19,79,60,624 0.688

The current assets to total assets ratio shows what portion of the total assets of a company is in

the form of current assets. The current asset to total assets is showing a declining trend in the

company

Table 5.10 Current liabilities to total assets ratio

A B C=A/B

YearsCurrent Liabilities& Provisions Total assets

Current liabilities/Total assets

2010-11 1,20,38,47,179 3,30,67,59,853 0.10

2011-12 1,27,47,89,052 3,62,00,18,871 0.14

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2011-12 6,73,44,665 2,55,70,36,920 0.026

2012-13 6,29,50,757 2,88,84,79,965 0.021

This ratios shows the role of debtors in the current assets of the company. Debtors even though

they provide regular business is always a risk, a risk of bad debt. Hence it is always better to

have a small ratio of debtors .Msil has done exactly that their debt ratios are 3,2 and 2 %

respectively for years 2011,2012 and 2013

Current asset turnover ratio

Table 5.13Current asset turnover ratio

A B C=A/B

Years Operating Income

Current Assets,

Loans & Advances

Current assets turnover

(Operating Income/CA)

2010-11 1,29,092,494 2,40,81,29,457 0.053

2011-12 3,21,781,781 2,55,70,36,920 0.125

2012-13 3,68,091,595 2,88,84,79,965 0.127

This ratio shows the relation between the current assets and the sales. This shows the efficiency

of management to generate sales out of current assets.

The current assets ratio is not consistent during the years, it keeps on increasing year by year

indicating that the division is able to generate more sales out of its current assets.

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Working capital turnover ratio

Table 5.14Working capital turnover ratio

A B C=A/B

Years

Revenue from

operations Net Working Capital

Working capital

turnover ratio

2010-11 2,86,53,63,126 1,15,22,92,815 2.486

2011-12 6,00,41,74,222 1,28,22,46,941 4.682

2012-13 8,29,90,45,077 1,42,76,89,018 5.812

This ratio indicates the velocity of the utilization of the net working capital. This ratio indicates

the number of times the working capital is turned over in the course of the year. This ratio

measures the efficiency with which the working capital is being used by the firm.

The working capital turnover ratio is seen to increase in the years, the highest in the year 2011-

2012 and 2013. The division didnt have any shortage of working capital in the period of study.

Higher ratio is the indication of lower investment of working capital and more profits. The

increasing trend shows the effective utilization of working capital.

Cash conversion cycle

Table 5.15Cash conversion cycle

2010-11 2011-12 2012-13

Inventory turnover days 9.05 7.80 9.36

Debtors turnover days 70.31 78.50 61.67

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Creditors turnover days 185.23 147.99 260.03

Following is an analysis of the cash conversion cycle of Mysore Sales International Limited

Inventory turnover days

Table 5.16Inventory turnover days

A B C=A/B D D/C

Years

Operating

Revenue Inventories

Inventory

turnover

ratio

No. of days

in the

period

Inventory

turnover

days

2010-11 2,86,53,63,126 30,68,39,014 9.338 365 39.087

2011-12 6,00,41,74,222 41,86,75,861 14.340 365 25.453

2012-13 8,29,90,45,077 44,96,29,466 18.457 365 19.775

Inventory turnover days

The inventory turnover days shows how many times a company's inventory is sold and replaced

over a period. The inventory turnover ratio is calculated by dividing the sales by the inventory.We can obtain the inventory turnover days by dividing the number of days in that period by the

inventory turnover ratio and for 2011 its39.087 and 25 in 2012 and 19 in 2013. This means that

the inventory gets converted into cash in these many number of days. The company is showing a

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positive trend as the inventory days are getting shorter in the years but still should work on

inventory turnover days.

Debtorsturnover days

Table 5.17

A B C=A/B D D/C

Years

Operating

Income

Sundry

debtors

Debtors

turnover

Ratio

No. of days

in the

period

Debtors

turnover

days

2010-11 2,86,53,63,126 7,31,15,263 39.18 365 9.315

2011-12 6,00,41,74,222 6,73,44,665 89.15 365 4.094

2012-13 8,29,90,45,077 6,29,50,757 131.833 365 2.76

Debtorsturnover days

Debtors turnover days are the number of days in which the debtors or the receivables of the

company are turned into cash. The debtorsturnover ratio is calculated by dividing the net credit

sales by the debtors/receivables. We can obtain the debtors turnover days by dividing the number

of days in that period by the debtors turnover ratio. These days are lesser the better since it

would mean that receivables are getting converted into cash in less days also reducing the

chances of bad debts. For this company, the debtorsturnover days are 9for the year 2011 which

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reduced to 4 and 2 in the next two years. The trend has been more or less decreasing over the

period of time which is a good thing. Since it is a beverage industry also itsalways better to

have shorter debt turnover days.

Creditorsturnover days

Table 5.18Creditors turnover days

A B C=A/B D D/C

Year Purchases

Sundry

creditors

Creditors

turnover

Ratio

No. of days

in the period

Creditors

turnover

days

2010-11 2,28,17,23,656 64,14,42,762 3.557 365 102.614

2011-12 5,14,88,49,593 62,74,39,528 8.206 365 44.47

2012-13 7,11,69,67,846 77,07,69,651 9.233 365 39.532

Creditorsturnover days

Creditors turnover days are the number of days in which the company pays off its

suppliers/creditors. The creditors turnover ratio is calculated by dividing the purchases by the

trade creditors/payables. We can obtain the creditors turnover days by dividing the number of

days in that period by the creditors turnover ratio .In this case, the creditors turnover days are 102

which was not good at the beginning. Itsnot good to keep liabilities in our side waiting. The

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number of days for 2012 reduced to 44 which is a good sign and 40 in the next year. This is idle

for the company the turnover days are not long nor that short.

Statement of changes in working capital

Net working capital is the excess of current assets over current liabilities therefore an increase in

net working capital is a use of funds and decrease in net working capital is a source. Changes in

net working capital lead to inflow and outflow of cash. When the current assets increase there is

an outflow of cash and when current assets decrease there is an inflow of cash. Similarly when

current liabilities increase there is an inflow of cash as the added liabilities such as short term

loans and borrowings add money and when current liabilities decrease there is an outflow of

cash. Therefore the changes in working capital are also included in the Cash flow statement

under Cash from operations.

This statement is prepared by comparing the values of the current assets and current liabilities of

a firm of two periods/financial years and it is determined whether these current assets and

liabilities and the working capital in total are increasing or decreasing. When changes in working

capital are positive, it means that the firm is selling off/reducing the current assets or it may be

increasing its current liabilities. When changes in working capital are negative, it means that the

firm is investing in current assets or is reducing its current liabilities.

Statement of changes in working capital for 2011-2012

Table 5.19Statement of changes in working capital for 2011-2012

Effect on working capital

Particulars As at As at Increase Decrease

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31 March 2011 31 March 2012

Current assets

Inventories 30,68,39,014 41,86,75,861 11,18,36,847

Sundry debtors 7,31,15,263 6,6663,554 64,51,709

Cash and bank balances 1,46,52,62,560 1,41,89,06,539 4,63,56,021

Loans and advances 51,38,52,693 59,55,38,919 8,16,86,226

Other current assets 4,90,59,927 5,72,52,047 81,92,120

Current liabilities and

provisions

Short term borrowings 31,39,900 23,54,925 7,84,975

Trade Payables 64,14,42,762 62,74,39,528 1,40,03,234

Other Current liability 16,61,35,203 25,06,37,947 8,45,02,744

Short term Provisions 39,31,29,314 39,43,56,652 12,27,338

Total Current liabilities

(B)

1,20,38,47,179 1,27,47,89,052

Net Working Capital (A-

B)

1,20,42,82,278 1,28,22,47,868 21,65,03,402 13,85,37,812

Increase in NWC 7,79,65,590

1,28,22,47,868 1,28,22,47,868

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There is an increase in current assets and liabilities. There is a net increase of working capital by

Rs 7, 79, 65,590compared to previous year. This is because the division has opened 142 new

outlets in the year 2012.

Statement of changes in working capital for 2012-2013

Table 5.20Statement of changes in working capital for 2012-2013

Effect on working capital

Particulars As at

31 March 2012

As at

31 March 2013 Increase Decrease

Current assets

Inventories 41,86,75,861 44,96,29,466 3,09,53,605 -

Sundry debtors 6,6663,554 6,29,50,757 37,12,797-

Cash and bank balances 1,41,89,06,539 1,60,30,30,929 18,41,24,390 -

Loans and advances 59,55,38,919 64,75,94,628 5,20,55,709 -

Other current assets 5,72,52,047 12,52,74,185 6,80,22,138 -

Total Current assets (A) 2,55,70,36,920 2,88,84,79,965

Current liabilities and

provisions

Short term borrowings 23,54,925 - 23,54,925 -

Trade Payables 62,74,39,528 77,07,69,651 1,43,33,0123

Other Current liability 25,06,37,947 26,30,74,066 1,24,36,119

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Short term Provisions 39,43,56,652 42,69,47,230 3,25,90,578

Total Current liabilities

(B)

1,27,47,89,052

1,46,07,90,947

NWC 1,28,22,47,868 1,42,76,89,018 33,75,10,767 19,20,69,617

Increase in NWC 14,54,41,150

1,42,76,89,018

In the above statement we can see that the net working capital has increased by a huge amount of

Rs 14,54,41,150 The main factor leading to this increase is the increase in the cash and bank

balances under the current assets. There has been an increase of Rs 18,41,24,390 in the cash and

bank balances.

All other items in the current assets have also increased moderately. And so have the items under

current liabilities. But the overall increase in the current assets is much more than the overall

increase in the current liabilities which has led to a net increase in the working capital of the firm

in 2013.

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Table 5.21 Percentage change in current assets

From the above data the most striking two points are the inventories which increased from the

year 2011 .Sundry debtors was found declining which is a very good sign for the company .Cash

balance showed a decline in the year 2012 which is certainly good for the company but the

company regained it in the next year i.e. 2013.Loans and advances is fount increasing which is a

good sign for the company. Another striking event was that other assets increased to 119 %in the

year 2013 i.e. because of the interest accrued on deposits increased in the year. Itsagain a good

sign for the company.

Current assets 2011 2012 2013 %incr

ease or

decrea

se

(2011-

12)

%increas

e or

decrease

(2012-13)

%change

Inventories 30,68,39,014 41,86,75,861 44,96,29,466 36.44 7.39-

Sundry debtors 7,31,15,263 6,6663,554 6,29,50,757 8.824 5.56-

Cash and bank

balances

1,46,52,62,560 1,41,89,06,539

1,60,30,30,929

3.16

12.97-

Loans and advances 51,38,52,693 59,55,38,919 64,75,94,628 15.89 8.74-

Other current assets 4,90,59,927 5,72,52,047 12,52,74,185 16.69 118.81-

Total Current

assets (A) 2,41,81,29,457

2,55,70,36,920

2,88,84,79,965

-

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CHAPTER 6

FINDINGS,SUGGESSTIONS AND CONCLUSION

6.1 FINDINGS The working capital has been seen increasing in the company throughout the years. The

year 2012-2013 showed a tremendous increase in working capital the reason for this is

that the other assets account has increased in the last year.

Current liabilities is showing a declining trend because the company paid out their short term loans, 87,28,03,030 was converted into 64,75,94,628 The company is able to create more sales out of its current assets. It is evident from the

increasing trend of current assets turnover ratios.

Net working capital ratios is showing an increasing trend that is 2.48,4.68 and 5.81 forthe last three years .This shows the efficiency in which the company is managing working

capital and this also shows that there is no visible shortages of working capital in the past

three years.

The statement showing the changes in working capital states that there is an increase of77,96,550 between the financial years 2010-2011 and 2011- 2012

The next year the statement shows an increase which is almost the double from the lastyear which is Rs 1,45,44,190 .The main reason for this is that in that year there was an

increase in cash and bank balances.

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6.2 SUGGESTIONS

Since my findings and the company reports states that the company is showing an increasing

trend regarding working capital, it might lead to some problems because there is an excess in

working capital when compared to the requirements

Since this is a concern I have the following suggestions

Since there is excess of Working capital the company should be concerned aboutinventory acquiring and should purchase only as per requirements as storing costs money

like warehouse rent or electricity bills etc.

With an adequate or excess working capital in hand the company as a whole will remainpleased and satisfied and they will lose the focus on their productivity and efficiency in

operations. The company should avoid this scenario.

I feel the company should start focusing on urban markets as well as a little more onprofitability to withstand the completion in the market by the private sector businesses

Company seems to have a conservative approach to working capital management theycan try out much more riskier practices in order to achieve more profits.

6.3 CONCLUSIONS

Over the three year period, on an average, current assets of the Beverages Divisioncomprise of 61.1% inventory, 14% loans and advances, 16% bank balance 8.1% cash inhand and .80% sundry debtors. This shows that the major part of current assets is getting

held up as inventory.

The division has enough current assets to manage its current liabilities. While comparingthe total current assets and the total current liabilities curves, it is observed that the

current assets are much in excess of the current liabilities, and there is highly positive net

working capital with the division which remains as idle funds.

Current Ratio is an index of the firms financial stability. The standard ratio is 2:1. Thedivision has maintained a c