working capital management

WORKING CAPITAL MANAGEMENT

INTRODUCTION TO THE TOPIC:-

It involves the relationship between a firm's short-term assets and its short-term

liabilities. The goal of working capital management is to ensure that a firm is able

to continue its operations and that it has sufficient ability to satisfy both maturing

short-term debt and upcoming operational expenses. The management of working

capital involves managing inventories, accounts receivable and payable, and cash.

Working capital is represented by current assets .It constitutes a dominant segment

of investment ,particularly in manufacturing enterprises management of working

capital assumes added significance in the context of small scale and medium sized

industries in our country .most of them have weak financial base and limited

access to the institutional finance .their risk capacity is also low. An effort is to

reduce or optimize its size releases funds and improves profitability working

capital management deals with management of each of the firm’s current assets in

such a way that maximizes the value of the firm.

Shortage of funds for working capital as well as the uncontrolled over

expansion has caused many business to fail and in less severe cases has stunted

their growth .specially in small firms, working capital management may be the

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factor that decides success or failure: in large firms, efficient working capital

management can significantly affect the firm’s risk, returns and share price.

Commercial banks are the major source of finance to the industry and

commerce banks in India provides mainly short term credit for financing working

capital needs .the various types of advances provided by them are: loans cash

credit and overdrafts are running accounts .borrower can draw funds up to the

sanctioned credit limit interest is charged on the daily outstanding amount.

Benara Udyog Limited, established in the early 1970s is one of the premier

manufacturer of Engine Bearings, Bushes and Bi-Metallic Strip for the Automotive

Industry. Presently, Benara Udyog Limited has emarged as one of the India's

largest manufacturer in Technical Collaboration with NTE-South Koria.

This is being undertaken by the quality, and covers a major share of Bearing

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Industries and marching forward for capturing higher percentage share of OEM's.

In addition, we have a In-House R&D center, where we design and validate the

performance of our products.

At Benara Udyog Limited, we understand that the Automotive Industry is one of

the most dynamic industry, where high level of competition and customer

expectations require constant innovation coupled with the continuous process of

research and development. We have undertaken an extensive backward integration

programme to ensure world class quality standards and on-time deliveries.

Clients of benaraudyog

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Our market leadership in Engine Bearing and

Bushes has been attained and preserved by

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successful utilization of our products by major

global and domestic automotive manufacturers.

Our customer base includes more than 20 OEM's

in India and Overseas.

M/S. V.E.

COMMERCIAL

VEHICLES

LIMITED,

PITHAMPUR

M/S. V.E.

COMMERCIAL

VEHICLES

LIMITED,

DEWAS

M/S. YAMAHA

MOTORS

LIMITED,

FARIDABAD

M/S.

MAHINDRA

NAVISTAR

AUTOMOTTVES

LTD,

HYDERABAD

M/S. TAFE

MOTOR &

TRACTOR LTD,

ALWAR

M/S. AVTEC

LIMITED,

PITHAMPUR

M/S. BRAKES

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M/S. GREAVES

COTTON LTD.,

AURANGABA

D

M/s. GREAVES

COTTON LTD.,

RANIPET

M/S. TATA

MOTORS LTD,

LUCKNOW

M/S. TATA

MOTORS LTD,

JAMSHEDPUR

M/S. TATA

MOTORS LTD,

PUNE

M/s.

HINDUSTAN

MOTORS LTD.,

HOOGHLY

INDIA LTD,

CHENNAI

M/S. DAIMLER

INDIA

COMMERCIAL

VEHICLES PVT.

LTD, CHENNAI

M/S.

GHAZTABAD

PRECISION

PRODUCT PVT.

LTD,

GHAZIABAD

M/S. FAIR

FIELD ATLAS

LTD,

KOLHAPUR

M/S. SIMPSON

& COMPANY,

CHENNAI

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M/S.

INTERNATION

AL TRACTOR

LTD,

HOSHIARPUR

M/S. ASHOK

LEYLAND,

CHENNAI

M/S.

MAHINDRA &

MAHINDRA

LTD

(TRACTOR

DIVISION),

MUMBAI

M/S. PREMIER

LTD, PUNE

M/S. WINDALS

AUTO LTD,

PUNE

M/S. V.S.T.

TILLERS

TRACTORS

LTD,

BANGALORE

M/S. KEMS

AUTO

COMPONENTS

LTD,

BANGALORE

WORKING CAPITAL CONCEPT:-

There are two concept of working capital:

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Balance Sheet Concept

Operating Cycle or Circular Flow Concept

Balance Sheet Concept

There are two interpretation of working capital under the Balance sheet

concept.

Gross working capital

Net working capital

Gross working capital :-

The terms “gross working capital “, refers to the firms investment in current

assets .current assets are the assets which can be converted into a cash within an

accounting year .and includes cash, short term securities, debtors bill receivable,

and stock also referred to as total current assets.

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Net working capital :-

The term net working capital can be defined as two ways:

(I) The most common definition of net working capital (NWC) is the difference

B\W

Current assets &current liabilities.

(ii) NWC is that portion of firm’s current assets which is financed with long term

funds.

Working capital management involves not only administration of firm’s

current

assets: viz. cash and marketable securities, receivables and inventory – but

also the

financial needed to support current assets.

Current assets of a typical manufacturing firm account for more than half of its

total

assets Firms invest in inventory, which consist of raw material, work in

progress

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and finished goods .the cost of holding inventory includes not only storage

cost or

risk of obsolescence but also the opportunity cost of capital.

Another important current assets is account receivable. When one company sells

goods to another company or a govt. agency it does not usually expect to be paid

immediately. This trade credit builds up account receivable.

The other important Current Assets is cash & marketable securities. Current

assets may typically vary from industry to industry .A company should monitor

and control inventory and receivables closely. In a typical fast growing company

investment in such assets can go out of control. Too few current assets may result

in frequent shortage and problem in smooth operations of the firm, while excessive

investment in current assets in sub optimal return on investment.

A firm may finance current assets through a variety of short term loans. A typical

small company resorts to current assets financing through current liabilities alone

these firms do not have access to long term capital market. Some firm do get

finance through banks and from other private financers at a high interest rate.

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Short term financial decision involves management of short term assets

and liabilities and usually they are easily reversed .A finance manager responsible

for short term financial decisions does not have look far into the future.

The fundamental issues in management in the working capital are:-

The optimal of investment in the current assets.

The appropriate mix of short term and long term financing used to support

this investment in the current assets.

A. Operating Cycle or Circular Flow Concept.

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The circular flow concept of working capital is based upon this operating or

working cycle of a firm. The cycle starts with the purchase of raw material and

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

goods. It involves purchase of raw material and stores, its conversion into stock

of finished goods through work-in-progress with progressive increment of

labour and service costs, conversion of again from cash to purchase of raw

material and so on. The time duration required to complete one cycle

determines the requirements of working capital-longer the cycle, large is the

requirement of working capital.

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CashRaw

Material

Work in Process

Finished Goods

Debtors

Thus gross operating cycle of a firm is equal to the length of the

inventories and receivables conversion period. Thus

Gross Operating Cycle = RMCP + WIPCP + FGCP + RCP

Where: - RMCP = Raw Material Conversion Period

WIPCP = Work-in-process Conversion Period

FGCP = Finished Goods Conversion Period

RCP = Receivables Conversion period

Net operating cycle period = Gross operating cycle Period -Payable

Deferral Period

NEED FOR WORKING CAPITAL

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The need for working capital to run day to day business activities cannot be

overemphasis. We will hardly find a business firm which does not require any

amount of working capital.

We know that the firm aims at maximizing the wealth of the shareholder. In its

endeavor to maximize shareholder wealth the firm should earn sufficient return

from its operation earning a steady amount of profit requires successful sales

activity. The firm has invested enough funds in current assets for the success of

sales activity. Current assets are needed because sales do not convert into cash

instaneously. There is always operating cycle involved in the conversion of

cash.

THE IMPORTANCE OF GOOD WORKING CAPITAL MANAGEMENT

Solvency of the business-

To Maintain good will-

Easy Loans-

Cash Discount-

Regular Supply of Raw Material-

Regular Payment of Salary, Wages, Other day-to-day expenses-

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Exploitation of favorable market conditions-

Ability to face crisis

APPROACHES TO WORKING CAPITAL MANAGEMENT:-

The objective of working capital management is to maintain the optimum balance

of each of the working capital components. This includes making sure that funds

are held as cash in bank deposits for as long as and in the largest amounts possible,

thereby maximizing the interest earned. However, such cash may more

appropriately be "invested" in other assets or in reducing other liabilities.

Ratio analysis can be used to monitor overall trends in working capital and to

identify areas requiring closer management.

The individual components of working capital can be effectively managed by using

various techniques and strategies

When considering these techniques and strategies, departments need to recognize

that each department has a unique mix of working capital components. The

emphasis that needs to be placed on each component varies according to

department. For example, some departments have significant inventory levels;

others have little if any inventory.

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Furthermore, working capital management is not an end in itself. It is an integral

part of the department's overall management. The needs of efficient working

capital management must be considered in relation to other aspects of the

department's financial and non-financial performance

USES OF WORKING CAPITAL MANAGEMENT

Working Capital is the money used to make goods and attract sales. The less

Working Capital used to attract sales, the higher is likely to be the return on

investment. Working Capital management is about the commercial and financial

aspects of Inventory, credit, purchasing, marketing, and royalty and investment

policy. The higher the profit margin, the lower is likely to be the level of Working

Capital tied up in creating and selling titles. The faster that we create and sell the

books the higher is likely to be the return on investment.

MANAGEMENT OF WORKING CAPITAL

Working Capital management involves the problem of decision making regarding

investment in various current assets with an objective of maintaining the liquidity

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of funds of the firm to meet its obligation promptly and efficiently. The basic goal

of working capital management is to manage the current assets and current

liabilities of a firm in such a way that a satisfactory level of working capital is

maintained, it is neither inadequate nor excessive.

The management of working capital has-been studies under the following three

heads-

1- Management of Cash Balance.

2- Management of receivable.

3- Management of Inventory.

1- Management of Cash Balance : -

Cash is one of the current assets of a business. It is needed at all times to keep

business concern should always keep sufficient cash for meeting its obligations.

Any shortage of cash will hamper the operations of a concern and any excess of

it will be unproductive.

Cash not only include hard cash but also include which can be easily

converted into cash with in no time.

Tool for Cash Control:-

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a) Cash Budget.

b) Inflow or Outflow of cash.

c) Ratio Analysis.

2- Management of receivable : -

“Receivable result from credit sales”. A concern is required to allow credit sales

in order to expand its sales volume. It is not always possible to sell goods on

cash basis only. Sometimes, other concerns in that line might have established a

practice of selling goods on credit basis. Under these circumstances, it is not

possible to avoid credit sale without adversely affecting sale.

Tool for receivable control:-

a) Deciding acceptable level of risk.

b) Terms of credit sale.

c) Credit collection policy.

3- Management of Inventory : -

Inventories mean the stock of the product and the components of the product

that is Raw Material, W-I-P, Finish good, Spares. Inventories hold the prime

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position among the current assets in India. In India, about 60% of the current

assets are representing by inventories.

Thus large part of working capital is invested in inventories. The

management of inventories is therefore necessary to avoid heavy losses due

to leakage, theft and wastage because neglecting the management of

inventories may jeopardize the long run profitability of the concern and the

concern may fall ultimately. Inventory management will minimize these

costs.

Tool for Inventories control:-

a) Classification and identification of inventories.

b) Adequate storage facilities.

c) Record of inventories.

d) Standardization and simplification of inventories.

e) Use the appropriate method of inventory control for ex. - JIT, HML,

EOQ, FSN etc.

f) Intelligent and experience person.

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Sources of Working capital

Long term sources (Permanent or Fixed)

Short term Sources (temporary)

Permanent or Fixed Temporary or Variable

Permanent or Fixed Source:-

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

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Commercial bank

Indigenous bankers

Trade creditors

Installments credit

Advances

Account receivable

Accured expenses

Commercial papers

Shares

Debentures

Public deposits

Ploughing back of

profits

Loans from

financial

institutions

current assets. There is a minimum level of current assets which is continuously

required by the enterprise to carry out its business operation.

Characteristics of Permanent Working Capital:-

It is classified on the basis of the time period.

Its Size increase with the growth of business operation

It constantly changes from one asset to another and continues to

remain the business process.

Some of the sources of Permanent Working Capital are given below:-

Shares: Issue of share is the most important source for raising the permanent

or long term capital. A company can issue various types of shares as equity shares,

preference share and differed shares. According to company act, 1956 a public

company cannot issue differed shares. As far as possible, a company should raise

the maximum amount of permanent capital by the issue of share.

Debentures: A debentures is an instrument issued by the company

acknowledging its debt to its holder. It is also an important method of raising long

term or permanent working capital. The debenture holders are the creditors of the

company. A fixed rate of interest is paid on debenture. The interest on debenture is

a charge against profit and loss account.

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Public deposits: public deposits are the fixed deposit accepted by a business

enterprise directly from the public. This source if raising short term and medium

term finance was very popular in absence if banking facilities earlier time period 6

month to 1 year. But now a day even long term deposits for 5 to 7 year are

accepted by the business houses. Public deposit as a source of finance have a large

number of advantages such as very simple and convenient source of finance ,

taxation benefit , trading on equity, no need of securities and an inexpensive source

of finance.

Ploughing Back Of Profit: Ploughing back of profit means the re-investment

by concerns of its surplus earning in its business. It is an internal source of finance

and is most suitable for an established firm for its expansion, modernization and

replacement etc.

Loans from financial institution: Financial Institution such as Commercial

bank, Life Insurance Corporation, Industrial Finance Corporation of India etc. also

provides short term and long term loans. This source of finance is more suitable to

meet the medium of working capital. Interest is charged on such loans at a fixed

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rate and the amount of the loan is to be repaid by way of installments in a number

of years.

Temporary or variable source:-

Temporary Working Capital is the amount of Working Capital which is required to

meet the seasonal demand and some special exigencies.

Characteristics of Temporary Working Capital:-

It is not always gainfully employed, though it may change from one asset to

another asset, as permanent capital does.

It is particularly suited to business of a seasonal or cyclical nature

Some of the sources of Temporary Working Capital are given below:-

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Commercial bank: Commercial banks are the most important source

of short term capital. Different forms in which the bank normally provide loans

and advance are as follows-

Loans: When a bank an advance in lump sum against some security it is

called a loan. Commercial bank generally provides short term loans up to 1 year

for meeting working capital requirement.

Overdrafts: Overdrafts means an agreements with a bank by which a

current account holder is allowed to withdraw more than the balance to his credit

up to a certain limit.

The interest is charges of daily overdrawn balances. The main difference between

cash credit & overdraft is that overdraft is allowed.

Indigenous Bankers : Private money lenders and other country bankers

used to be the only source of finance, prior to the establishment of

commercial banks. They charge a very high rate of interest but now a day

with development of commercial banks, they have lost their monopoly but

even today some houses have to depend upon indigenous bankers for

obtaining loans to fulfill their requirement.

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Trade creditors: Trade credit refers to the credit extended by the suppliers of

goods in the normal course of business. The trade credit arrangement of a firm with

its suppliers in an important source of short term finance. The main advantages of

trade credit as a source of short term finance include:

It is an easy and convenient method of finance.

It is flexible as the credit increases with the growth of the

firm.

It is informal and spontaneous source of finance.

Installment Credit: This is another method by which the assets are

purchased and the possession of goods is taken immediately but the payment is

made in installments over a predetermined period of time generally, interest is

charged on the unpaid price or it may be adjusted in the price. But in any case it

provides funds for sometimes and is used as a source of short term working capital

by many business houses which have difficult fund position.

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Advances: Some business houses get advances from their customers and

agents against orders and this source is a short term source of finance for

them. It is a cheap source of finance and in order to minimize their investment

in working capital, some firm having long production cycle, specially the

firms manufacturing industrial products prefer to take advances from their

customer.

Account receivable : Another method of raising short-term finance is

through account receivable credit offered by commercial banks and factors.

Accrued expenses: Accrued expenses are the expenses which have incurred

but not hence not yet paid also. These simply represent a liability that a firm has to

pay for the services already received by it. The most important item of accruals is

wages and salaries, Interest and taxes.

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Commercial papers: Commercial paper represents unsecured promissory notes

issued by the firm to raise short-term funds. It is an important money market

instrument in advance countries like U.S.A. In India, the Reserve Bank of India

introduced commercial paper in the India money market on the recommendation of

the working group on Money Market (Vaughal Committee).

FACTORS DETERMINING WORKING CAPITAL REQUIREMENT

1 Nature or Character of business

2 Size of Business/ Scale of Operation

3 Production policy

4 Manufacturing Process/Length of production Cycle

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5 Seasonal variations

6 Working capital cycle

7 Rate of Stock Turnover

8 Credit policy

9 Business Cycle

10 Rate of Growth of Business

11 Earning Capacity and Dividend Policy

12 Price Level Changes

13 Other Factors

ITEMS AFFECTING THE LEVEL OF WORKING CAPITAL

Items that reduce Working Capital

levels for publishers

Items that increase Working Capital

levels for publishers

1-Increased profit margins 1- Lower profit margins

2- Customers who pay promptly 2- Long print runs except where all the

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books are required on publication e.g.

School and university textbooks

3- Inventory which is sold and paid for

quickly by customers after publication

3- Slow authors who deliver late and

whose manuscripts require substantial

editing

4- Lower Inventory levels by reducing

print quantities and working with

printers who will deliver quickly and

produce low print runs economically

4- Holding paper stock unless market

conditions demand and the savings are

large

5- Successful promotion that speeds up

the rate of sale

5- Slow schedules for the development

of new titles

6- Slow schedules for the development

of new titles

6- Making advance payments to printers

MEASURES TO IMPROVE WORKING CAPITAL MANAGEMENT:-

The essence of effective Working capital management is proper cash flow

forecasting. This should take into account the impact of unforeseen events, market

cycles, loss of a prime customer and actions by competitors. The effect of

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unforeseen demands of Working capital should be factored in.

It pays to have contingency plans to tide over unexpected events. While market-

leaders can manage uncertainty better, even other companies must have risk-

management procedures. These must be based on objective and realistic view of

the role of Working capital.

Addressing the issue of Working capital on a corporate-wide basis has certain

advantages. Cash generated at one location can well be utilized at another. For this

to happen, information access, efficient banking channels, good linkages between

production and billing, internal systems to move cash and good treasury practices

should be in place.

An innovative approach, combining operational and financial skills and an all-

encompassing view of the company’s operations will help in identifying and

implementing strategies that generate short-term cash. This can be achieved by

having the right set of executives who are responsible for setting targets and

performance levels.

Effective dispute management procedures in relation to customers will go along

way in freeing up cash otherwise locked in due to disputes. It will also improve

customer service and free up time for legitimate activities like sales, order entry

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and cash collection. Overall, efficiency will increase due to reduced operating

costs.

Collaborating with your customers instead of being focused only on own

operations will also yield good results. If feasible, helping them to plan their

inventory requirements efficiently to match your production with their

consumption will help reduce inventory levels. This can be done with suppliers

also.

WORKING CAPITAL FINANCING POLICY

HEDGING FINANCING POLICY

CONSERVATIVE FINANCING POLICY

AGGRESSIVE FINANCING POLICY

Hedging financing policy: This requires that financing of each asset would be

offset with a financing of each asset would be offset with a financing instrument of

approximately the same maturity. Short term or seasonal variations in current

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assets would be financed with short term debt. The fixed assets and the permanent

component of current assets would be financed with long term debt or equity. And

the firm can adopt a financial plan which matches the expected life of source of

fund s raised to finance assets.

Conservative financing policy: A firm can adopt a conservative approach in

financing its current and fixed assets. a financial policy of the firm is said to be

conservative when its depends more on long term funds for financing needs .under

a conservative plan, the firm finances its permanent assets and also a part of

temporary current assets, with long term financing .

Aggressive financing policy: A firm may be aggressive in financing its assets. An

aggressive policy is said to be followed by the firm when it uses more short term

financing than warranted by matching plan .under a aggressive policy, the firm

finance a part of permanent current assets with short term financing .

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Principles OF WORKING CAPITAL management

Principle of Risk Variation : Risk here refers to the inability of a

firm to meet its obligations and when they become due for payment. Large

investment in current assets with less dependence on short term borrowing

increases liquidity, reduce risk thereby decreases the opportunity for gain or

loss. On the other hand less investment in current assets with greater

dependence on short –term borrowings increases risk, reduces liquidity and

increases profitability. In other words, there is a definite inverse relationship

between the degree of risk and profitability.

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Principles of Working Capital Management

Principle of Risk Variation

Principle of Cost of Capital Principle of Equity Position

Principle of Maturity of Payment

Principle of Cost of Capital : The various sources of raising working

capital finance have different cost of capital and the degree of risk involved.

Generally, higher the risk is the lower is the cost and lower the risk higher

the cost. A sound working capital management should always try to achieve

a proper balance between these two.

Principle of Equity Position : This principle is concerned with planning

the total investment in current assets. According to this principle, the amount

of working a\capital invested in each component should be adequately

justified by a firm’s equity position. Every rupee invested in the current

assets should contribute to the net worth of the firm.

Principle of Maturity of Payment : This principle is concerned with

planning the sources of finance for working capital. According to this

principle, a firm should make every effort to relate maturities of payment to

its flow of internally generated funds.

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FORECAST/ ESIMATE OF WORKING CAPITAL REQUIREMENT

“Working capital is the life blood and controlling never centre of a business.” No

business can be successfully run without an adequate amount of working capital.

To avoid the shortage of working capital at once, an estimate of working capital

requirements should be made in advance. For a manufacturing organization, the

following factors have to be taken into consideration while an estimate of working

capital.

Factor Requiring Consideration While Estimating Working Capital

1 Total costs incurred on material, wages and overheads.

2The length of time for which raw material are to remain In stores before

they are issued for production.

3The length of sales cycle during which finished goods are to be kept

waiting for sales.

4The length of the production cycle or work in process, i.e., the time taken

for conversion of raw material into finished goods.

5 The average period of credit allowed to customers.

6 The amount of cash required to pay day-to-day expenses of the business.

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7 The average amount of cash required to make advance payments, if any.

8 The average credit period expected to be allowed by suppliers.

9 Time-lag in the payment of wages and other expenses.

ANALYSIS OF WORKING CAPITAL:-

There are three Techniques to analysis the working capital

Schedule of change in working capital

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Ratio Analysis

Fund statement

Schedule of change in Working Capital

The working capital of a business concern is subject to change due to several

business transactions. Working Capital represents excess of current assets over

current liabilities. The Schedule of Change in Working Capital presents a detailed

and analytical picture of changes in current assets and current liabilities during two

balance sheet dates.

Ratio Analysis

Ratio is one of the methods of analyzing financial statement. Ratio analysis

measures the Profitability, Efficiency and Financial soundness of the business

According to Myers, ratio analysis is a “study of relationship among the

various financial factors in a business”.

Fund statement

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Fund flow statement is the technique of analyzing and interpreting the financial

statement of business concern. It is a technical device designed to analyze the

changes in the financial or working capital position of a business enterprise

between two dates.

The Fund Flow Statement is a statement, depicting change in working

capital. It is also termed as a ‘statement of source and Application of Funds’,

‘Statement of Change in Financial Position’, ‘Statement of Change in Working

Capital’.

TECHNIQUES OF FORECASTING WORKINGCAPITAL

1. Operating cycle method

2. Forecasting of current assets and current liabilities

3. Cash forecasting method

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4. Projected balance sheet method

5. Profit & loss adjustment method

Operating cycle method:-

Operating cycle is the time duration with in one cycle of business operation is

completed. Business operations involve a number of stages from purchase of raw

material till conversion of receivable into cash.

Forecasting of Current Assets and Current Liabilities:-

This is the Traditional method of forecasting the Working Capital requirements.

Working Capital is the excess of Current Assets over Current Liabilities; its

requirement can easily be forecasted by making the estimate of the amount of each

component of current assets and current liabilities. The procedure for estimating

the component is as under:-

Stock of Raw-materials- The average amount of such stock of

raw-materials would depend upon the quantity of raw-materials required for

production during a particular period as well as upon the average time taken

in obtaining fresh delivery.

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Stock of Work-in-Progress - Raw-materials, wages, overheads are

included in the cost of work-in-progress. In order to determine the stock of

work-in-progress, the time-period for which the inputs will be in the process

of production will be determined.

Finished Goods Stock- Finished goods are not immediately sold these

are to be kept in godowns or warehouses for certain period. This is an

important factor in determining the amount to be locked up in finished goods

stock. On the basis of year’s production, the amount of finished goods for

the storage period may be calculated.

Sundry Debtors- The amount of capital locked up in sundry debtors can be

computed on the basis of credit sales, period of credit allowed/time lag in

collecting the payments.

Cash and Bank Balances- These are estimated on the basis of past

experience

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Sundry Creditors- This is estimated on the basis of credit purchases and the

time lag in payments to creditors/credit period allowed by suppliers of raw-

materials.

Outstanding Expenses – These are ascertained having considered the time

lag in payment of various types of expenses.

Cash forecasting method:

This method is very much related to cash budgeting and it attempts to estimate the

cash surplus and deficiency.

Every operating cycle starts with a cash outflow and after passing through

various channels it ultimately ends with an inflow of cash. A statement of month,

cash forecast is prepared which includes cash inflow and outflow for the various

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methods. The difference between the total cash flow will indicate surplus or

deficiency for which necessary adjustment can be planned in advance.

Cash turnover = No. of days in operating period

Duration of cash cycle in days

Projected balance sheet method:-

Under this method, various items of assets and liabilities (both long-term as well as

short-term) are estimated for the future period. On the basis of these assets and

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liabilities, a projected Balance Sheet is prepared and then Working Capital

estimate is made by deducting current liabilities from the current assets.

Profit & loss adjustment method:-

According to this method, estimated profit is calculated first on the basis of

transactions likely to take place in future. Working Capital magnitude is

ascertained by making necessary adjustments for cash inflow and outflow in the

estimated profit.

I. ACTIVITY RATIOS

1. NET WORKING CAPITAL

Table no: 5.1

44 | P a g e

Source: Annual Reports of BU AGRA

Graph no: 5.1

2004 2005 2006 2007 2008

-3000

-2500

-2000

-1500

-1000

-500

0

YEAR

NET

WORKING CAPITAL

INTERPRETATION AND INFERENCE: From the above table,

networking capital of the BU AGRA shows negative trend that means for the last

45 | P a g e

YEAR CA (Rs in

lakhs)

CL (Rs in

lakhs)

NET

WORKING

CAPITAL

2004 4267.84 4889.1 -621.26

2005 2588.75 5063.93 -2475.18

2006 3576.06 5859.42 -2283.36

2007 3717.33 5583.33 -1866

2008 3457.23 5473.83 -2016.6

five years current asset is less than current liabilities. It reveals that the company

not in a position to meet its day to day obligations. Management must take

adequate interest in increasing the working capital of the company for the coming

years by increasing current assets of the company.

2. WORKING CAPITAL TURNOVER RATIO

Table No: 5.2

YEAR SALES (Rs

in lakhs)

NET

WORKING

CAPITAL

RATIO

2004 9123.33 -621.26 -14.6852

2005 8868.57 -2475.18 -3.583

2006 10877.3 -2283.36 -4.76373

2007 12313.8 -1866 -6.59904

2008 9384.56 -2016.6 -4.65365


Graph No: 5.2

46 | P a g e

2004 2005 2006 2007 2008

-16

-14

-12

-10

-8

-6

-4

-2

0

YEAR

WCT RATI

O

INTERPRETATION AND INFERENCE:

Here all the working capital turnover ratio of BU AGRA is found to be

negative, because of the negative working capital. In all years the current

liabilities exceeds the current assets. If we ignore the negatives all ratios are found

satisfactory. From this, we can understand that the working capital turn over ratio

is fluctuating. That is in the beginning period it shows an increasing trend then

declines and again increases and then shows a decreasing trend.

3. COMPONENTS OF CURRENT ASSETS

Table No: 5.3

YEAR INVENTAR

Y(Rs in

lakhs)

DEBTOR

S(Rs in

lakhs)

CASH

(Rs in

lakhs)

LOANS

AND

ADVANC

E(Rs in

TOTA

L (Rs

in

lakhs)

47 | P a g e

lakhs)S

2004 1336.39 1175.4 710.4

1

1045.64 4267.

84

2005 644.19 954.67 166.1

7

823.72 2588.

75

2006 967 1098.56 124.1

2

1386.38 3576.

06

2007 1044.91 1424.95 139.2

8

1108.19 3717.

33

2008 1018.27 1229.14 115.2

6

1094.56 3457.

23


Graph No: 5.3

2004 2005 2006 2007 20080

200

400

600

800

1000

1200

1400

1600

INVENTARYDEBTORSCASH

YEAR

COMPONENTS

48 | P a g e


The table shows that the different components of current assets in last

five years. Debtors is the main component in current assets allover the years.

Loans and advances also have major part in current assets of the company. But the

amount of each component is varies over the years. It also shows that current

assets of the company fluctuating over the years. The above graph shows that the

different components of current assets in last five years.

INVENTORY MANAGEMENT

4. INVENTORY AS A PERCENTAGE OF CURRENT ASSETS

Table No: 5.4

YEAR CA (Rs

in

lakhs)

INVENTOR

Y(Rs in lakhs)

PERCENTA

GE

2004 4267.84 1336.39 31.31

2005 2588.75 644.19 24.88

2006 3576.06 967 27.04

2007 3717.33 1044.91 28.11

2008 3457.23 1018.27 29.45


Graph no: 5.4

49 | P a g e

20042005

20062007

2008

0

5

10

15

20

25

30

35

YEAR

PERCENTAGE


The table shows that the percentage of inventory shows a gradual increase

in the last four years. In 2005, inventory’s percentage was 24.88%. It was

gradually increased to 29.45% in 2008. It shows that inventory in current assets is

increased in recent years.

1. INVENTORY TURNOVER RATIO

Table No: 5.5

YEAR NET

SALES

(Rs in

lakhs)

AVERAGE

INVENTOR

Y (Rs in

lakhs)

RATIO

2004 9123.33 1336.39 6.826847

50 | P a g e

2005 8868.57 644.19 13.76701

2006 10877.3 967 11.2485

2007 12313.8 1044.91 11.78456

2008 9384.56 1018.27 9.21618

Source: Annual Reports Of BU AGRA

Graph No: 5.5

2004 2005 2006 2007 20080

2

4

6

8

10

12

14

16

YEAR

RATI

O


Inventory turnover ratio measures the velocity of conversion of stock into

sales. The Inventory Turnover Ratio is fluctuating over the years. The lower ratio

indicates the smooth movement of stock from the company to the market. The ratio

of BU AGRA shows an almost steady level of movement of goods to the market.

In the last year the inventory turnover ratio is decreased, it is a bad sign of decrease

in sales. If sales decrease, the inventory cost can be increased.

51 | P a g e

2. INVENTORY CONVERSION PERIOD

Table No: 5.6

YEAR DAYS IN

A YEAR

INVENTORY

TURNOVER

RATIO

PERIOD

2004 365 6.826847 53.46538

2005 365 13.76701 26.51266

2006 365 11.248501 32.44877

2007 365 11.784556 30.97274

2008 365 9.2161804 39.60426


Graph No: 5.6

2004 2005 2006 2007 20080

10

20

30

40

50

60

YEAR

PERI

OD


52 | P a g e

Inventory conversion period measures the average time taken for clearing

the stocks. This inventory conversion period of BU AGRA shows a fluctuating

trend. In 2004, it was very high, but later it decreased. In later period, it shows an

increasing trend. In 2008, it is 39 days.

The above graph shows the fluctuating trend of inventory conversion

period of BU AGRA .

RECEIVABLES MANAGEMENT

3. DEBTORS AS A PERCENTAGE OF CURRENT ASSETS

Table No: 5.7

YEAR CA (Rs in

lakhs)

DEBTORS

(Rs in

lakhs)

PERCENTAG

E

2004 4267.84 1175.4 27.54

2005 2588.75 954.67 36.88

2006 3576.06 1098.56 30.72

2007 3717.33 1424.95 38.33

2008 3457.23 1229.14 35.55


Graph No: 5.7

53 | P a g e

20042005

20062007

2008

0

5

10

15

20

25

30

35

40

PERCENTAGE

YEAR

PERCENTAGE


The amount of debtors in current assets is fluctuating over the years. In 2004,

it was 27.54%, after that it is increasing in to 36.88% in next year. But it shows

fluctuating trend after 2005. In 2008, it shows 2.78% decreased from 2006-2007.

The above bar diagram shows the fluctuating nature of percentage of debtors in

current assets.

8. DEBTORS TURNOVER RATIO

Table No: 5.8

YEAR SALES

(Rs in

lakhs)

DEBTOR

S(Rs in lakhs)

RATIO

2004 9123.33 1175.4 7.761894

2005 8868.57 954.67 9.289671

54 | P a g e

2006 10877.3 1098.56 9.901416

2007 12313.8 1424.95 8.641566

2008 9384.56 1229.14 7.635062


Graph No: 5.8

2004 2005 2006 2007 20080

2

4

6

8

10

12

RATIO

YEAR

RATI

O


Debtors’ turnover ratio measures the liquidity of the company and also

discusses credit collection power and policy of the firm. Debtors’ turnover ratio of

BU AGRA shows variation in each year. In 2004 it was 7.76%, after that it is

increased till 2006, but later it shows decreasing trend. But it runs under

satisfactory level. It shows that company’s credit policy is effective. The above

graph shows the variation of debtors’ turnover ratio over the study period.

9. AVERAGE COLLECTION PERIOD

55 | P a g e

Table No: 5.9

YEAR NO OF

WORKING

DAYS

DEBTORS

TURNOVER

RATIO

PERIOD

2004 360 7.7618938 46.38043

2005 360 9.2896708 38.75272

2006 360 9.9014164 36.35843

2007 360 8.6415664 41.65911

2008 360 7.6350619 47.15089


Graph No: 5.9

2004 2005 2006 2007 20080

5

10

15

20

25

30

35

40

45

50

PERIOD

YEAR

PERI

OD


The average collection period ratio represents the average number of days

for which a firm has to wait before its receivables are converted into cash.

56 | P a g e

Generally, the shorter period is better to the company. Average collection period

of BU AGRA shows an increasing trend in recent years. It is not well for the

company.

In 2006, average collection period is 36 days, after that it is increased to 47 days

in 2008. It is not satisfactory.

CASH MANAGEMENT

10. CASH AS A PERCENTAGE OF CURRENT ASSETS

Table No: 5.10

YEAR CA (Rs in

lakhs)

CASH (Rs

in lakhs)

PERCENTAGE

2004 4267.84 710.41 16.65

2005 2588.75 166.17 6.42

2006 3576.06 124.12 3.47

2007 3717.33 139.28 3.75

2008 3457.23 115.26 3.33


Graph No: 5.10

57 | P a g e

20042005

20062007

2008

0

2

4

6

8

10

12

14

16

18

PERCENTAGE

YEAR

PERCENTAGE


The above table and graph shows cash position in the company. In 2004,

company have better cash balance, but later it shows declining trend. In the study

period, higher percentage 16.65% shows in 2003-2004. Lower percentage shows

in 3.33% in 2007-2008. Moreover, we cannot neglect the fact that, as a

government company, like BU AGRA will get short-term funds easily, and can

meet its short-term liabilities in time.

11. ABSOLUTE LIQUID RATIO

Table No: 5.11

YEAR

CASH

(Rs in

lakhs)

CL (Rs in

lakhs)RATIO

2004 710.41 4889.1 0.145305

2005 166.17 5063.93 0.032814

58 | P a g e

2006 124.12 5859.42 0.021183

2007 139.28 5583.33 0.024946

2008 115.26 5473.83 0.021057


Graph No: 5.11

2004 2005 2006 2007 20080

0.02

0.04

0.06

0.08

0.1

0.12

0.14

0.16

RATIO

YEAR

RATI

O


Here the Absolute Liquidity Ratio of BU AGRA is not Satisfactory, as it

never touches the standard level of 0.75. The highest ratio is 0.24 in 2006-2007 and

the lowest ratio was 0.02 in 2005-2006. As a government company, like BU

AGRA will get short-term funds easily, and can meet its short-term liabilities in

time. BU AGRA is keeping a very low amount of cash to meet the requirements.

59 | P a g e

Therefore, we can interpret that available funds are properly utilized and no funds

are kept idle.

12. COMPONENTS OF CURRENT LIABILITIES

TABLE NO: 5.12

YEAR CREDITO

RS (Rs in

lakhs)

OTHER

LIABILITIE

S(Rs in lakhs)

PROVISIO

N(Rs in

lakhs)

TOTA

L (Rs

in

lakhs)

2004 4054.14 828.03 6.93 4889.1

2005 4184.11 879.82 0 5063.9

3

2006 4519.02 1292.35 48.05 5859.4

2

2007 3950.05 1580 53.28 5583.3

3

2008 3577.14 1893.15 3.54 5473.8

3


Graph NO: 5.12

60 | P a g e

2004 2005 2006 2007 20080

500

1000

1500

2000

2500

3000

3500

4000

4500

5000

CREDITORSOTHER LIABILITIESPROVISION

YEAR

COMPONENTS


The above table and graph shows the components of current liabilities. In

every year creditors have major part in current liabilities of the company.

Provision is comparatively lower in current liabilities. BU AGRA ’s liquidity

position is not satisfactory. Company’s current assets are lower than its current

liabilities. So company tries to decrease the current liabilities, through payment of

creditors in time. It will help the company to decrease the amount of creditors.

13. CREDITORS AS A PERCENTAGE OF CURRENT LIABILITIES

Table No: 5.13

YEAR CL (Rs in

lakhs)

CREDITOR

S(Rs in lakhs)

PERCENTAG

E

2004 4889.1 4054.14 82.92

2005 5063.93 4184.11 82.63

61 | P a g e

2006 5859.42 4519.02 77.12

2007 5583.33 3950.05 70.75

2008 5473.83 3577.14 65.35


Graph No: 5.13

2004 2005 2006 2007 20080

10

20

30

40

50

60

70

80

90

PERCENTAGE

YEAR

PERCENTAGE


Here, we analyze that, creditors is the major portion of the current liabilities.

In the study period creditors shows a declining trend. It shows company try to pay

its creditors in time. It is good sign for the company because, decrease in creditors

help the company to control its current liabilities. Creditors is the major portion

of current assets all over the years.

62 | P a g e

14. CREDITORS TURNOVER RATIO

Table No: 5.14

YEAR PURCHAS

ES (Rs in

lakhs)

CREDITOR

S (Rs in

lakhs)

RATIO

2004 1160.96 3910.37 0.296893

2005 1031.98 4119.13 0.250533

2006 1593.88 4351.57 0.366277

2007 1647.65 4234.54 0.389098

2008 1253.26 3763.6 0.332995


Graph No: 5.14

2004 2005 2006 2007 20080

0.05

0.1

0.15

0.2

0.25

0.3

0.35

0.4

0.45

RATIO

YEAR

RATI

O


63 | P a g e

The creditors turnover ratio indicates the velocity with which the creditors

are turned over in relation to purchase. Generally higher the creditors’ velocity

better it is or otherwise lower the creditors velocity, less favorable are the results.

BU AGRA ’s creditors’ turnover ratio shows a fluctuating trend all over the study

period. Higher ratio is 0.38 in 2006-2007. Last year shows a decreasing trend, it

is better to the company.

15. OTHER LIABILITIES AS A PERCENTAGE OF CURRENT LIABILITIES

Table No: 5.15

YEAR CL (Rs in

lakhs)

OTHER

LIABILITIES

(Rs in lakhs)

PERCENTAGE

2004 4889.1 828.03 16.94

2005 5063.93 879.82 17.37

2006 5859.42 1292.35 22.06

2007 5583.33 1580 28.3

2008 5473.83 1893.15 34.59


Graph No: 5.15

64 | P a g e

2004 2005 2006 2007 20080

5

10

15

20

25

30

35

PERCENTAGE

YEAR

PERCENTAGE


Here we analyze that the proportion of other liabilities in current liabilities.

The above table and graph shows the percentage of other liabilities in current

liabilities, it shows a gradual increase in the study period, in 2007-2008, other

liabilities is 34% of the current liabilities.

16. PROVISION AS A PERCENTAGE OF CURRENT LIABILITIES

Table No: 5.16

YEAR CL

(Rs in

lakhs)

PROVISIO

N(Rs in

lakhs)

PERCENTA

GE

2004 4889.1 6.93 0.14

65 | P a g e

2005 5063.9

3

0 0

2006 5859.4

2

48.05 0.82

2007 5583.3

3

53.28 0.95

2008 5473.8

3

3.54 0.06


Graph No: 5.16

2004 2005 2006 2007 20080

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1

PERCENTAGE

YEAR

PERCENTAGE


66 | P a g e

In the above table and graph, we interpret that provision is the least portion

of the current liabilities in all over the study period. The higher portion is 0.95%,

in 2005-2006. But in the last year, provision is only 0.06% of the current

liabilities. In 2004-2005, there is no provision in the company.

17. RETURN ON INVESTMENT

Table No: 5.17

YEAR NET

PRO(Rs

in

lakhs

)FIT

SHAREHOLDER'

S FUNDS (Rs in

lakhs)

PERCENTAG

E

2004 83.23 2131.19 3.90533

2005 -829.24 2131.19 -38.9097

2006 523.01 2131.19 24.54075

2007 48.52 2131.19 2.276662

2008 27.67 2131.19 1.298336


Graph No: 5.17

67 | P a g e

2004 2005 2006 2007 2008

-50

-40

-30

-20

-10

0

10

20

30

PERCENTAGE

YEAR

PERCENTAGE


Return on investments is one of the most important ratio used for measuring

the overall efficiency of the firm. It reveals, how well the resources of a firm are

being used, higher the ratio, better are the results. In 2004-2005, company shows

negative (-38%) return of investment. Butter later company recovers, the very

next year company shows higher ratio (24.54%) in 2005-2006. But later it shows a

declining trend. In last year, company has 1.30% return on investment.

II. LIQUIDITY RATIOS

18. CURRENT RATIO

Table No: 5.18

YEAR CA (Rs in

lakhs)

CL (Rs in

lakhs)

CURRENT

RATIO

68 | P a g e

2004 4267.84 4889.1 0.87

2005 2588.75 5063.93 0.51

2006 3576.06 5859.42 0.61

2007 3717.33 5583.33 0.67

2008 3457.23 5473.83 0.63


Graph No: 5.18

2004 2005 2006 2007 20080

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1

CURRENT RATIO

YEAR

RATI

O


Standard current ratio of a sound business is two and BU AGRA ’s current

ratio is below one for the last five years. The highest ratio was 0.87 in 2003-2004,

and the lowest was in 2004-2005 i.e, 0.51. Therefore, we can interpret that the

company is suffering from inadequate working capital. That is they cannot meet

their short-term obligations in time. The main reason for the decrease in current

69 | P a g e

ratio is that, in all the five years the current liabilities of the company are more than

the CA.

19. QUICK RATIO

Table No: 5.19

YEAR QA (Rs in

lakhs)

CL (Rs in

lakhs)

QUICK

RATIO

2004 2887.77 4889.1 0.59

2005 1921.74 5063.93 0.38

2006 2568.69 5859.42 0.44

2007 2644.85 5583.33 0.47

2008 2414.75 5473.83 0.44


Graph No: 5.19

2004 2005 2006 2007 20080

0.1

0.2

0.3

0.4

0.5

0.6

0.7

QUICK RATIO

YEAR

RATIO

70 | P a g e


Here in the case of BU AGRA the Acid Test Ratio for the five years are

below one therefore the financial position of BU AGRA shall be deemed unsound.

In most cases, the quick ratio of BU AGRA could not achieve the standard quick

ratio of 1:1. The highest Quick Ratio was 0.59 in 2003-2004 and the lowest is 0.38

in 2004-2006.The greater amount of current liability is the main reason for the low

Quick Ratio of the company.

III. PROFITABILITY RATIOS

20. GROSS PROFIT RATIO

Table No: 5.20

YEAR GROSS

PROFIT

(Rs in

lakhs)

SALES (Rs

in lakhs)

G/P RATIO

2004 90.16 9123.33 0.988236

2005 -829.24 8868.57 -9.35032

2006 581.08 10877.3 5.342135

2007 61.87 12313.8 0.502444

2008 43.69 9384.56 0.465552


71 | P a g e

Graph No: 5.20

2004 2005 2006 2007 2008

-12

-10

-8

-6

-4

-2

0

2

4

6

8

G/P RATIO

YEAR

RATIO


Gross profit ratio indicates the degree to which selling price per unit may

decline without resulting in losses from operations to the firm. An increase in the

gross profit ratio may be due to an increase in the selling price without a

corresponding increase in the cost of goods sold or due to a decrease in the cost of

goods sold without a corresponding decrease in the selling price of goods.

21. NET PROFIT RATIO

Table No: 5.21

YEAR NET PROFIT

(Rs in lakhs)

SALES (Rs in

lakhs)

N/P RATIO

2004 83.23 9123.33 0.912277

2005 -829.24 8868.57 -9.35032

72 | P a g e

2006 523.01 10877.3 4.80827

2007 48.52 12313.8 0.394029

2008 27.67 9384.56 0.294846


Graph No: 5.21

2004 2005 2006 2007 2008

-12

-10

-8

-6

-4

-2

0

2

4

6

N/P RATIO

YEAR

RATI

O


Net profit ratio is used to measure the overall profitability of the

organization. Here the company is running at a loss in 2004-2005. In the year,

2004-2005 the company is incurred a loss of Rs.829.24 lakh. This is reported

mainly due to the unabsorbed depreciation of Rs.472.86 lakh, written of advance

amounting to Rs. 237.91 lakh. The cost of raw material is increasing day by day

and the company could not increase the selling price.

73 | P a g e

TREND ANALYSIS

1. TREND ANALYSIS OF WORKING CAPITAL

Table No: 5.22

YEAR

NET

WORKING

CAPITAL (Rs

in lakhs) TREND

INCREASE/

DECREASE

2004 -621.26 100 0

2005 -2475.18 398.4129 298.4129

2006 -2283.36 367.5369 267.5369

2007 -1866 300.3573 200.3573

2008 -2016.6 324.5984 224.5984


Graph No: 5.22

74 | P a g e

2004 2005 2006 2007 20080

50

100

150

200

250

300

350

400

450

TREND

YEAR

TREND PERCENTAGE


Here we analyze the trend of net working capital of BU AGRA . This analysis

shows that networking capital shows a fluctuating trend during the study period.

Fluctuations in working capital is high in allover the years.

2. TREND ANALYSIS OF INVENTORY

Table No: 5.23

YEAR INVENTORY

(Rs in lakhs)

TREND INCREASE OR

DECREASE

2004 1336.39 100 0

2005 644.19 48.20374 -51.7963

2006 967 72.35912 -27.6409

2007 1044.91 78.189 -21.811

2008 1018.27 76.19557 -23.8044

75 | P a g e


Graph No: 5.23

2004 2005 2006 2007 20080

20

40

60

80

100

120

TREND

YEAR

TREND PERCENTAGE


The above table and graph shows the trend of inventory in the study period,

it also shows a fluctuating trend. In2004-2005 it shows a high decline, later it

recovers. But compared to 2003-2004, now company shows a decreasing trend.

BU AGRA has high amount of inventory in 2003-2004.

3. TREND ANALYSIS OF DEBTORS

Table No: 5.24

YEAR DEBTORS (Rs

in lakhs)

TREND INCREASE OR

DECREASE

2004 1175.4 100 0

76 | P a g e

2005 954.67 81.22086 -18.7791

2006 1098.56 93.46265 -6.53735

2007 1424.95 121.2311 21.23107

2008 1229.14 104.5721 4.572061


Graph No: 5.24

2004 2005 2006 2007 20080

20

40

60

80

100

120

140

TREND

YEAR

TREND PERCENTAGE


Trend of debtors of BU AGRA Company shows fluctuating trend.

Compared to 2003-2004, company has better debtor position in 2006-07 and 2007-

08. But in last year it shows a decreasing trend from previous year.

4. TREND ANALYSIS OF CREDITORS

Table No: 5.25

77 | P a g e

YEAR CREDITORS

(Rs in lakhs)

TREND INCREASE OR

DECREASE

2004 4054.14 100 0

2005 4184.11 103.2059 3.205859

2006 4519.02 111.4668 11.4668

2007 3950.05 97.4325 -2.5675

2008 3577.14 88.23425 -11.7658


Graph No: 5.25

2004 2005 2006 2007 20080

20

40

60

80

100

120

TREND

YEAR

TRND PERCENTAGE


Here we analyze that company’s creditors shows a fluctuating trend. In 2004-

05 and 2005-06 company’s creditors have increasing trend but later it shows a

78 | P a g e

decreasing trend. In 2007-08 company’s creditors have least amount compared to

other years in study period. It is good sign for the company.

5. COMBINED TRENDS OF INVENTORY, DEBTORS AND CREDITORS

Table No: 5.26

YEA

R

INVENTOR

Y (Rs in

lakhs)

TREND DEBTO

R(Rs in

lakhs)S

TREND

CREDITOR

S(Rs in lakhs)

TREND

20041336.39

1001175.4

1004054.14

100

2005

644.19

48.2037

4 954.67

81.2208

6 4184.11

103.205

9

2006

967

72.3591

2 1098.56

93.4626

5 4519.02

111.466

8

2007

1044.91

78.189

1424.95

121.231

1 3950.05

97.4325

2008

1018.27

76.1955

7 1229.14

104.572

1 3577.14

88.2342

5



79 | P a g e

From the above table, we analyze the trend of BU AGRA ’s inventory,

debtors and creditors. These changes highly affect the changes in working capital

of the company. From the table we can see that, all components has fluctuating

trend all over the years. First two years, all components show a increasing trend.

But later creditors decrease to 97% and 88%. But inventory shows a constant trend

in last two years. In case of debtors, in 2006-07, it have high increase but later it

shows a decreasing trend (104%).

Graph No: 5.26

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2004 2005 2006 2007 20080

20

40

60

80

100

120

140

INVENTORY'S TREND DEBTOR'S TRENDCREDITOR'S TREND

YEAR

TREND PERCENTAGE


The above graph shows combined trends of inventory, debtors and creditors of

BU AGRA . First two years in study period creditors trend is much higher than

debtors and inventory. In 2004-05, inventory and debtors shows a decreasing trend,

but creditors have increasing trend. In 2005-06, all components shows a increasing

trend. But later years creditors show a decreasing trend and others shows

increasing trend, it is good sign for the company.

CHAPTER - 6

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FINDINGS

The company shows negative working capital for the last five years, due to

the increase in current liabilities and decrease in current assets. The major

reason is the existing loan of nearly 40 lakhs from the Government.

Current ratio of the company shows a fluctuating trend. An ideal current

ratio is 2:1. Average current ratio of the company for the last five years is

0.66. Showing that the liquidity position of the company is not satisfactory.

Company’s average quick ratio for the last five years is 0.46. The standard

norm fixed for quick ratio is 1:1; this again shows that the company’s

liquidity position is not satisfactory. This is unfavorable to the creditors.

The quick ratio is decreasing year to year. But the last year it is slightly

increased.

The average absolute liquidity ratio is 0.05. The acceptable ratio is 1:2.

This shows that the company’s financial position is not satisfactory.

During the year 2003-2004 and 2004-2005, the company had satisfactory

Gross profit ratios. Which indicating increasing sales. A high profit margin

in ratio is a sign of good and efficient management.

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Net profit ratio shows a downward trend. It has declined over the five

years, and has not increased as fast as the gross profit margin. This implies

that the operating expenses relative to sales have been increasing.

Operating ratio is an indicator of the growth the business. The operating

profit ratio shows a declining trend, the reason pertaining is the increasing

operating cost.

The average inventory turnover ratio is 10.57. A high inventory turnover

ratio is indicative of good inventory management.

The average debtors turn over ratio is 8.65 times. This is satisfactory. It

shows that the company’s credit policy is effective. The average debt

collection period is 42 days.

The profitability ratios such as net profit ratio, operating ratio and earnings

pr share are also found unsatisfied.

The company is the one and only chlor-alkali industry in Kerala, and meets

the demand of Kerala. The new technology of membrane cell has the

advantage of pollution free environment.

Networking capital shows a fluctuating trend during the study period.

Fluctuations in working capital is high in allover the years.

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In 2004-05 and 2005-06 company’s creditors have increasing trend but

later it shows a decreasing trend. In 2007-08 company’s creditors have

least amount compared to other years in study period. It is good sign for

the company.

Trend of debtors of BU AGRA Company shows fluctuating trend.

Compared to 2003-2004, company has better debtor position in 2006-07

and 2007-08. But in last year it shows a decreasing trend from previous

year.

CHAPTER - 7

SUGGESTIONS

The company shows a negative working capital since 2003. This should be

maintained through adequate current assets for its daily operations. The

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company should increase the current assets by increasing its cash and bank

balance.

The increasing liabilities should be controlled by the company and adequate

measures are to be taken henceforth.

Inventory management of the company is not satisfactory. Therefore the

company should reduce the holding period as much as possible.

The liquidity position of the company being unsatisfactory should be tried

to be in par with required ratio.

The debtors of the company is fluctuating over the years, company should

adopt a competent credit policy to attract the customers. Increasing debtors

is a solution to over come the liquidity problem.

The company can reduce the cost of production and try to improve its

profitability.

The operating expenses of the company must be put to check as there exist

a wide gap between gross profit and net profit. The net profit ratio is also

under the ratio requirements. This should be brought to control for the

effective running of the company.

The cash management should be done effectively as a major portion

comprises of current assets which are present in the company.

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High creditors’ payment period will affect the regular supply of raw

materials, so company can make necessary steps to pay its creditors at

reasonable time period.

CHAPTER - 8

CONCLUSION

In this study an attempt has been made to analyze the working capital

position of BU AGRA . The study shows that the overall performance of the

company is not satisfactory. Through the company is a profit making

organization, its profit is not up to the mark with respect to the asset employed in

the organization. Since the working capital amount shows a negative trend it

reveals that the company is not in a position to meet its day to day obligations.

The analysis and interpretation of various data relating to working capital

management helped to reach into a conclusion that the efficiency of the working

capital is not sufficient. Since the working capital shows a negative balance. But

this cannot be blamed, as this is a government run company and the major portion

of the current liability is the loan taken from the govt. it is also reveals that the

company is not having a satisfactory liquidity and profitability position.

The overall success of any company depends upon the working capital

position. So it should be handled properly because it shows the efficiency and

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financial strength of the company. Therefore the company should adhere to strict

measures in every sphere of its activities to bring the company back to sufficient

working capital position and improve its financial performance.

BIBLIOGRAPHY

Kevin .S, securities and portfolio management, First edition (2008),

Prentice hall India Pvt Limited.

Shashi K. Gupta, Sharma R.K, Management Accounting, 10 th edition

(2005), Kalyani Publishers.

Khan M.Y, Jain P.K, Financial Management,

4th edition (2004), Tata McGraw Publishing Company Limited.

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www.BU AGRA kerala.com

www.moneycontrol.com

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http://www.moneycontrol.com/

http://www.tcckerala.com/

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