CHAPTER I

INTRODUCTION
WORKING CAPTIAL MANAGEMENT
Working capital management is concerned with the decisions which are related with the
current assets and the current liabilities. It means, it concerned with day-to-day management
activities.
The key factor, which is used to differentiate long term financial management and shortterm financial management, is the timing of cash.
Long term financial management by buying capital equipment or issuing debentures,
involve cash which flows over an extended period of time.
But a short term financial decision mainly involves the cash flow within a year, or within
the operating cycle of the firm.

CONCEPTS OF WORKING CAPITAL

The two concepts of working capital are
1. GROSS WORKING CAPITAL
It refers to the investment made by the company in current assets. Current assets are the
assets which can be converted into cash with an accounting year or operating cycle. It
also includes cash, short-term securities, debtors, bills receivable and stock.
2. NET WORKING CAPITAL
The difference between current assets and current liabilities called the net working
capital. Current liabilities are the one which is claimed from the outsiders and are
expected to be returned within an accounting year. It includes creditors, bills payable, and
out siding expenses.Net working capital may be positive or negative. A net working
capital becomes positive only when the current assets exceed current liabilities. A
negative net working capital occurs when current liabilities exceed current assets.

TWO DANGEROUS POINT OF CURRENT ASSETS

Danger of inadequate working capital

1. Inadequate working capital will lead to a condition, on which one cannot pay
its short-term liabilities in time. So there arises a situation where there is a loss
of reputation and tight credit terms.
2. The organizations requirement cannot be fulfilled in bulk; hence it cannot
take the advantage of cash discount.
3. Difficulties will arise in meeting the day-to-day expenses. This will lead to
inefficiency and increase in costs with the minimum profits.
4. Lack of working capital will lead to less favorable marketing conditions and
less profitable projects.
5. Due to scarcity of working capital, fixed assets

are not properly utilized.

Thus this results in the fall of investment return.

Danger of excessive working capital
1. Excessive working capital will lead to low investment in fixed assets. Hence
there will be profits for the business and there can be no proper rate of return
on its investments.
2. The low tare of return on investment will lead to the fall in the value of shares.
3. Excessive working capital will lead to unnecessary purchasing and excessive
amount of inventories. As a result, there are changes of theft and loss.
4. Excessive debtors and defective credit policy are the indication of excessive
working capital. There may be delay in collection and increased indication of
bad debts.
5. Excessive working capital will make the management complacent. This will
lead to overall inefficiency in the organization.

NEED FOR WORKING CAPITAL MANAGEMENT

Beyond the limit, both the current assets i.e., inadequate working capital and excessive
working capital are dangerous. Beyond the limitations of both the level, the common goal of the
organization cannot be achieved.

Working capital management provides effective and efficient decision to allocate the
current assets.

TYPES OF WORKING CAPITAL

The two types of working capital are,
1. Permanent working capital.
2. Temporary working capital.
Permanent working capital
As the operating cycle is a continuous process, the need for current assets is felt
constantly. The magnitude the current assets need not to be the same. It may increase or decrease
over the time.
However, there is a minimum level of current assets which are continuously required by
the firm to continue its business operations. This minimum level of the current assets is known as
permanent or fixed working capital. However the permanent working capital line needs not to be
horizontal.
Temporary working capital
On the other hand, when there is a slack period in the market, the investment made on the
inventories and account receivable will be low.
The change of the extra working capital used to support the production and sales, is
known as fluctuating or variable or temporary working capital.
When the company has a peak period of sales, it will have large amount of inventories,
when compared to their normal sales. This makes the costumers to invest money for credit sales.

INDUSTRIAL PROFILE
Dairy is pace where handling of milk products is done. Technology refers to the
afflictions of scientific knowledge for practical purpose. Dairy technology has been defined as

that branch of dairy science, which deals with the processing of manufacturing of milk products
on industry scale.
In development countries such as the use the year 1850 is seen as the dividing line
between farm and factory scale production various factors contributed to this charges in these
countries, via concentration of population

in cities where job were plentiful, rapid

industrialization improvement of transportation facilities, development of machine and

technology .Etc , rural areas were identified for milk production the urban centres were selected
for the location of milk processing plants and product manufacturing factors.
The Indian dairy industry has made rapid progress since independence. A large number of
modern milk plants and product factors has been establisher these organized dairies have been
successful engaged in routine commercial production of paste section milk and various dairy
products. With modern knowledge of the protection of milk during transportation, it becomes
possible to locate dairies where land was less expensive and corps could be growth more
economically.
In Indian, the market milk technology may be considered to have commenced in 1950,
with the functioning of milk colony, and milk product technology in 1956, with the establishment
of AMUL dairy ANAND.

Dairy industry in India:

More than 2500 million people economically active in agriculture in the world probably
75% regional of them are wholly or partly dependent on livestock forming. India which has 66%
of economically active population engaged in agriculture. It drives 31% of GDP FROM
agriculture. The share of livestock is estimated at 21% of total agriculture sector.

NATIONAL DAIRY DEVELOPMENT BOARD (NDDP):

The nation dairy board was creating to promote, finance and activities that seek strength
farmer cooperatives and support national policies that are favourable to the growth of such
fundamental to NDDBS effort are cooperative principle and cooperative strategies.
The national dairy development board is an institution of nation importance setup by an
act of parliament of India. The main office is located in Anand, Gujarat with regional offices
throughout the country. NDDBS subsidiaries include mother dairy, Delhi it was founded by
Dr .Varghese kurien and Dr. Amrita Patel is the current chairman of the national dairy
development board Anand.
NDDB has now integrated 96000 dairy cooperative in what it calls the Anand pattern
linking the village society to the state federations in a three-tire structure.

NDDB launched its perspective plan for 4 thrust areas:

1.
2.
3.
4.

Quality assurance,
Productively,
Institution building,
National information.

Dairy co-operative account for the major share of processed liquid milk
marketed in the

country. Milk is processed and marketed by 170 milk producers

co-operative unions, which federate into 15 state co-operative milk marketing

federations.
The diary development boards program and activities seek to strengthen the
functioning of diary co-operatives, as producer-owned and controlled organizations.
NDDB supports the development of diary co-operatives by providing them financial
assistance and technical expertise, insuring a better future for Indian farmers.

Over the years, brands created by co-operatives have become synonymous

with quality and value. Brands like Amul (GCMMF), Vijaya (AP), Verka (Punjab), Saras
(Rajasthan),

Nandini

(Karnataka),

Milma

(Kerala),

Gokul

Aavin(Tamilnadu), are those that have earned customers confidence.

(Kolhapur),

Some of the major diary co-operatives federations include

1.
2.
3.
4.
5.
6.
7.
8.
9.

Andra Pradesh Diary Development Co-operative Federation Ltd.,(APDDCF)

Bihar State Co-operative Milk Producers Federation Ltd.,(COMPFED)
Gujarat Co-operative Milk Marketing Federation Ltd.,(GCMMF)
Hariyana diary Development Co-operative Federation
Himachal Pradesh state Milk Producers Federation Ltd., (HPSCMPF)
Karnataka co-operative Milk Producers Federation Ltd., (KMF)
Kerala state co-operative Milk Producers Federation Ltd., (KCMMF)
Madhya Pradesh state co-operative Dairy Federation Ltd., (MPCDF)
Maharashtra Rajya Shakari Maryadit Dugdh Mahasangh Orissa State Co-

operative Milk Producers Federation Ltd., (OMFED)

10. Prdeshik Co-operative Dairy Federation Ltd., (UP PCDF)
11. Punjab State Co-operative Dairy Federation Ltd., (MILK FED)
12. Rajasthan co-operative Dairy Federation Ltd., (RCDF)
13. Tamilnadu co-operative Dairy Federation Ltd., (TCMPF)
14. West Bengal co-operative Milk Producers Federation Ltd., (WBCMP

OBJECTIVES OF THE DAIRY DEVELOPMENT DEPARTMENT:

Assure a remunerative price for the milk produced by the member of the Milk Producers'
Co-operative Societies through a stable, steady and well organized market support.
Distribution of quality milk and milk products to the consumers at reasonable price.
Keeping these objectives in mind, a number of activities are undertaken by the Dairy
Development Department, viz., Provision of free veterinary health cover to all animals
owned by the members of milk cooperatives, implementation of

 Artificial Insemination Program, supply of balanced cattle feed and inculcation of

farmers with the modern animal husbandry methods and practices.
All activities, which are essential for the up gradation of the milk animals and improving
their productivity in the long run, have been undertaken.
Provision of necessary infrastructure facilities for marketing milk and milk products and
supply of quality milk to the consumer has been made by way of establishing new
chilling centre, pasteurization plants and adoption of modern processing system

COMPANY PROFILE
THE COIMBATORE DISTRICT CO-OPERATIVE MILK PRODUCERS UNION LTDPACHAPALAYAM
The dairy development department was established in 1958 at tamilnadu. The
administrative and statutory control over all the milk co-operative in the state were transferred to
the dairy development was made as the functional limited was registered in the state on 1 st Feb
1981.
The commercial activities of the development such as milk procurement, processing,
chilling, packing and sale of milk to the consumers etc hither to dealt with by the tamilnadu
dairy development corporation ltd, were transferred to the newly registered tamilnadu. Cooperative milk producers federation limited, popularly known as aavin.

In the wake of liberalization policy, private dairies have also entered into field of
dairying. As per the directions of the humble chief minister of tamilnadu high priority has been
given for performance of milk co-operative by adopted a systematic approach and strategy in
milk co-operative societies, union and federation in the state of tamilnadu.
The cattle population in India is approximately 15% of total cattle population in the world
India stood no.1 position in milk production tamilnadu is one of the leading state in milk
production. The milk production in tamilnadu per is 45.88 lakhs litres.
THIS UNION WAS STARTED ON 15/09/1979
Registered societies

=655

Functioning societies

=527

Total members

=112597

Female members

=29607

Daily avg. milk procurement/day

=143000 lists

Daily avg. milk sales/day

=110000 lists

OBJECTIVES OF THE DAIRY DEVELOPMENT DEPARTMENT:

1. Assure a remuneration price for the producers by the members of the milk producers
cooperative societies through a stable steadily and well organized market support.
2. Distribution of quality milk and milk products to the consumer at reasonable price.
3. Keeping these objectives in mind, a number of activities are undertaken by the dairy
development department.
Provision of tree veterinary health cover to all animals owned by the

members of milk cooperatives.

Implementation of artificial insemination of farmers with the modern

animal husbandry methods and practice.

All activities which are essential for the up gradation of the mulch
animals and improving productivity.

FUNCTIONS OF DISTRICT CO OPERATIVES:

There are 17 district cooperatives milk producers union functioning in the state of
tamilnadu covering 30 districts. There are 15 districts in district cooperative milk producers
union with an installed processing of 19.42llpd. There are 36 chilling capacities of 13.55llpd.
1. Establishment of chilling centers.
2. Formation of new milk router to collect milk produced by the members of the
societies.
3. Collection of milk from society process and part in modern dairy plants by
4.
5.
6.
7.
8.

maintaining quality standards.

Supply of quality milk to Chennai metro under hygienic conditions.
Fixation of procurement and selling price of milk.
Increase of liquid milk sales by introducing innovative sales promotional activities.
Supply of input to the members of the societies.
Render veterinary health service and emergency service to the cattle of members of
primaries to impart training on first aid and an artificial insemination to the staff of

members societies.
9. Extending artificial insemination service to the cattle owned by the members of milk
cooperatives societies.
10. Providing milk cans milk o testers and LN2 container

CHAPTER II
REVIEW OF LITERATURE
Working capital management involves the relationship between a firms 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.
Decisions relating to working capital and short-term financing are referred to as working
capital management. These involve managing the relationship between a firms short-term assets
and it short-term liabilities. The goal of working capital management is to ensure that the firm is
able to continue its operations and that it has sufficient cash flow to satisfy both maturing shortterm debt and upcoming operations expenses.
By definition, working capital management entails short-term decisions-generally,
relating to the next one year period-which are reversible. These decisions are therefore not
taken on the same basis as Capital Investment Decisions (NPV or related, as above) rather they
will be based on cash flows or profitability.

The importance of cash flow is not new to the finance literature. Over twenty years ago, largely
and Stickney (1980) reported that the then-recent bankruptcy of W.T. grant, a nationwide chain of
department stores, should have been anticipated because the corporation had been running a deficit cash
flow from operations for 8 of the last 10 years of its corporate life. As part of a study of the fortune 500s
financial management practices, Gilbert and richer (1995) find that time value of money cash flow
analysis is used to select projects in 91 percent of the firms. Accounts receivable management models are
used in 59 percent of these firms, while inventory management models were used in 60 percent of the
companies.
Recently, farragoes, Klein and sadhu (1999) find that 55 percent of firms in the S&P industrial
index complete some form of a cash flow assessment, but did not present insights regarding accounts
receivable and inventory management, or variations of any current account assets or current accounts
liabilities across industries.
Theoretical determination of optimal trade credit limits are the subject of many articles over the
years (e.g., Schwartz, 1974 and Scherer, 1996), with scant attention paid to actual accounts receivable
management.
Across a limited sample, pinscher(1998) observes a tendency of firms with low levels of current
ratios to also have low levels of current liabilities. Combining accounts receivable and payable into one
issue is hill, stories and Fergusons (1984) finding that payees define date of payment as the date payment
is received, while payers view payment as the postmark date. Additional WCM insight across firms,
industries and time is needed! Maness and zietlow (2002, pp. 51, 496) presents two models of value
creation through effective short-term financial management activities.
However, these models are generic models and do not consider unique firm or industry
influences. Maness and zietlow discuss industry influences in a short paragraph that includes the
observation that an industry a company any is located in may have more influence on that company
fortunes that overall gap.
In fact, a careful review of this 627-page textbook finds only sporadic information on actual firm
levels of WCM dimensions, virtually nothing on industry factors except for some boxed items with titles
such as should a retailer offer an in house credit card and nothing on WCM stability over time. This
research will attempt to fill in this void space.
How are the readings connected if there any other text out based one in the last paragraph. The
first annual working capital survey, a joint project with consultancy group, was published in the June

1997 issue .It is a London, England- based management consulting firm specializing in working capital
issues for its global list of clients. The original survey report several working capital benchmarks for
public companies using data for 1996.
Each company is ranked against its peers and also against the entire field of 1000 companies.
Real continues to update the original information on an annual basis. The industries that include at least 8
companies over the 1996-2000 periods are listed below.

DEFINITION OF WORKING CAPITAL

The term working capital refers to the amount of capital which is readily available to an
organization. That is, working capital is the difference between resources in cash or readily
convertible into cash (current assets) and organizational commitments for which cash will soon
be required (current liabilities).
Current assets are resources which are in cash or will soon be converted into cash in the
ordinary course of business.
Current liabilities are commitments which will soon require cash settlement in the
ordinary course of business.
WORKING CAPITAL=CURRENT ASSETS- CURRENT LIABILITIES
In a departments statement of financial position, these components of working capital
are reported under the following headings:
CURRENT ASSETS:

Liquid assets (cash and bank deposits)

Inventory

Debtors and receivables

CURRENT LIABILITIES:

Bank overdraft

Creditors and payables

Other short term liabilities

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, there by maximizing the interest
earned. However, such cash may more appropriately be invested in other assets or in reducing
other liabilities.
Working capital management takes place on two levels:

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, department 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 if any inventory.
Furthermore, working capital management is not an end in itself. It is an integral part of the
departments overall management. The needs of efficient working capital management must be

considered in relation to other aspects of the departments financial and non- financial
performance.
Financial ratio analysis calculates and compares ratios of amounts and balances taken from
the financial statements.
The main purposes of working capital ratio analysis are:

To indicate working capital management performance.

To assist in identifying areas requiring closer management.

Three key points need to taken into account when analyzing financial ratios:

The results are based on highly summarized information. Consequently, situations which
require control might not be apparent, or situations which do not warrant significant
effort might be unnecessarily highlighted.

Different department face very different situations. Comparison between them, or with
global ideal ratio values, can be misleading.

Ratio analysis is somewhat one-sided favorable results mean little, where as unfavorable
results are usually significant.

However, financial ratio analysis is valuable because it raises questions and indicates directions
for more detailed investigation.
The following ratios are of interest to those managing working capital:

Working capital ratio

Liquid interval measure

Stock turnover

Debtors ratio

Creditors ratio

WORKING CAPITAL RATIO

Current assets
Current liabilities

The working capital ratio or current ratio attempts to measure the level of liquidity that is
the level of safety provided by the excess of current assets over current liabilities.
The quick ratio a derivative, excludes inventories from the current asset, considering
only those assets most swiftly realizable. There are also other possible refinements.
There is no particular benchmark value or range can be recommended as suitable for all
government departments. However, if a department tracks its own working capital ratio over a
period of time, the trends- the way in which the liquidity is changing will become apparent.
LIQUID INTERVAL RATIO
Liquid assets
Average operating expenses

This is another measure of liquidity. It looks at the number of days that liquid assets (for
example, inventory) could service daily operating expenses (including salaries).

STOCK TURNOVER RATIO

Cost of sales

Average stock level

This ratio applies only to finished goods. It indicates the speed with inventory is sold-or,
to look at it from the other angle, how long inventory items remain on the shelves. It can be used
for the inventory balance as a whole, for classes of inventory, or for individual inventory items.
The figure produced by the stock turnover ratio is not important in itself, but the trend
over time is a good indicator of the validity of charges in inventory policies.
In general, a higher turnover ratio indicates that a lower level of investment is required to
serve the department.
Most departments do not hold significant inventories of finished goods, so this ratio will
have only limited relevance.
DEBTOR RATIO
There is a close relationship between debtors and credit sales to third parties (that
is, sales other than to the crown). If sales increase, debtors will increase and conversely, if sales
decrease debtors will decrease.
The best way to explain this relationship is to express it as the number of days that credit
sales are carried on the books.
Credit sales per period*days per period
Average debtors
Where trading terms are 30 days net cash, and customers buy from day-to-day during the
30 day period and pay 30 days after a statement is rendered, a collection period of 45 days (the
average between 30 and 40 days) would be satisfactory.

If the average collection period extends beyond 60 days, debtors are holding cash that
should have flowed into the department. This means that the department is unable to satisfy
pressing liabilities or to invest that cash.
The debtor ratio does not solve the collection problem, but it acts as an indicator that an
adverse trend is developing. Remedial action can then be instigated.
CREDITOR RATIO
The ratio is mush the same as the debtor ratio. It expresses the relationship between credit
purchases and the liability to creditors. It can be stated as the number of days that credit
purchases are carried on the books.
Credit purchase per period* days per period
Average creditors

CHAPTER III
RESEARCH METHODOLOGOY
RESEARCH DESIGN
A research design is the arrangement of conditions for collection and analysis of data in a
manner that aims to combine relevance to the research purpose with economy in procedure.
The formidable problem that follows the task of defining the research problem is the
preparation of the design of the research project, popularly known as the research design.
Decisions regarding what, where, when how much, by what means concerning an inquiry or a
research study constitute a research design.

DESCRIPITVE RESEARCH DESIGN:

Descriptive research design is one that simply describes something such as
demographic characteristic of respondents who use the product any also how two variables very

with each other. The descriptive study is typically concerned with determining the frequency
with which something occurs. The study is typically guide by an initial hypothesis.
PERIOD OF STUDY:
For the purpose of study only 2months, January, February in the year 20010 alone were
considered.
DATA SOURCE:
Both the primary and secondary of data were employs for the study.
1. PRIMARY DATA:
Primary data collected with the help of questionnaires cum schedules in
which the researcher had taken down the answers given by consumer the questions are
structured and undisguised.

2. SECONDRY DATA:
Secondary data means that are already available i.e. they refer to the data
which have already been collection and analyzed by someone else.
Secondary data may either be published data or unpublished data. Usually published data
are available in various publications of the central, state, local governments. Also in technical
and trade journals, books, magazines and newspapers, reports and publications of various
associations connected with business and industry, banks, stock exchanges reports prepared by
research scholar universities in different fields.
This study is period for the annual reports and statements of account extended
from the years.
ANALYTICAL TOOL FOR THE STUDY
During the course of research for the researcher for analysis and interpretation 0 data is
given below has applied various tools.

Ratios analysis

Comparative balance sheet

Trend analysis