PROJECT REPORT ON

“WORKING CAPITAL MANAGEMENT OF NAGARJUNA

HERBAL

CONCENTRATES LTD.”

Submitted towards partial fulfillment for the award of the degree of

Bachelor of business administration

By

Project guide

Berhampur ,ganjam

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 CERTIFICATE

This Is Certify That The Project Report Entitled Working Capital

Management At Nagarjuna Herbal Concentrate Ltd. Is The Result Of
Research Work Carried Out By Miss.Sunita Kumari Behera

Under The Guidance And Supervision Of Mr.Aditya Jena.

Signature

Aditya Jena(Senior Lecturer)

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 ACKNOWLEDGMENT

The project work is pursued as a Berhampur University. I would greatly rejoice to express
emphatically with profound sence of gratitude and veneration my sincere thanks to senior
lecture(finance) Aditya jena for giving guidance for this project .

I am very much thankful to my Dr.Radha natha ratha(principal)and Dr.Banamali

panda (course co-ordinator)and my college lecture and staff for their help & support.

Last but not least ,I also thank all those people whome I met at my research work
during my internship and helped me to accomplish my assignment ,most effective manner.

Sunita Ku. Behera

Roll.No-1212BB043

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 DECLARATION

I,SUNITA KUMARI BEHERA ,here by declare that the project report on”working
capital management at nagarjuna herbal concentrate ltd. result of my own
work and indebtedness to the work publication ,if any have been duly
acknowledgement.

Place:
Date:

Sign:

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 TABLE OF CONTENTS
CHAPTER CONTENT PAGE NO.

CHAPTER – I 1.0 INTRODUCTION 0-1

1.1 COMPANY PROFILE 2-4

1.2 STATEMENT OF THE PROBLEM 4

1.3 OBJECTIVE OF STUDY 5

1.4 RESEARCH METHODOLOGY 5

1.5 SCOPE AND SIGNIFICANCE OF STUDY 7

1.6 LIMITATIONS OF STUDY 7

CHAPTER – II 2.0 REVIEW OF LITERATURE 8-23

CHAPTER - III 3.0 DATA ANALYSIS AND DATA 24-50

INTERPRETATION

CHAPTER – IV 4.0 FINDINGS 52

4.1 SUGGETION 53

4.2 RECOMMENDATIONS 52

4.3 CONCLUSION 54

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 4.4BIBLIOGRAPHY 55
TABLE.NO PARTICULARS

3.1 TABLE SHOWING CURRENT RATIO

LIST OF TABLE
3.2 TABLE SHOWING QUICK RATIO
PARTICULARS
3.3 TABLE SHOWING CASH RATIO

3.4 TABLE SHOWING INVENTORY TURNOVER RATIO

3.5 TABLE SHOWING DEBTORS TURNOVER RATIO

3.6 TABLE SHOWING DEBTORS COLLECTION PERIOD

3.7 TABLE SHOWING SOLVENCY RATIO

3.8 TABLE SHOWING FIXED ASSET TURNOVER RATIO

3.9 TABLE SHOWING WORKING CAPITAL TURNOVER

RATIO

3.10 TABLE SHOWING CREDITORS TURNOVER RATIO

3.11 TABLE SHOWING CREDITORS PAYMENT PERIOD

3.12 TABLE SHOWING CURRENT ASSET TURNOVER

RATIO

3.13 -3.16 TABLE SHOWING SCHEDULE OF CHANGES IN

WORKING CAPITAL

3.17 TABLE SHOWING TREND ANALYSIS OF CURRENT

ASSET AND CURRENT LIABILITY

3.18 TABLE SHOWING TREND ANALYSIS OF WORKING

CAPITAL AND NET SALES

3.19 TABLE SHOWING TREND ANALYSIS OF NET PROFIT

3.20 TABLE SHOWING TREND ANALYSIS OF NET SALES

LIST OF CHART
CHART
NO.

3.1 CHART SHOWING CURRENT RATIO

3.2 CHART SHOWING QUICK RATIO

3.3 CHART SHOWING CASH RATIO

3.4 CHART SHOWING INVENTORY TURNOVER

RATIO

3.5 CHART SHOWING DEBTORS TURNOVER

RATIO

3.6 CHART SHOWING DEBTORS COLLECTION

PERIOD

3.7 CHART SHOWING SOLVENCY RATIO

3.8 CHART SHOWING FIXED ASSET TURNOVER

RATIO

3.9 CHART SHOWING WORKING CAPITAL

TURNOVER RATIO

3.10 CHART SHOWING CREDITORS TURNOVER

RATIO

3.11 CHART SHOWING CREDITORS PAYMENT

PERIOD

3.12 CHART SHOWING CURRENT ASSET

TURNOVER RATIO

3.17 CHART SHOWING TREND ANALYSIS OF

CURRENT ASSET AND CURRENT LIABILITY

3.18 CHART SHOWING TREND ANALYSIS OF

WORKING CAPITAL AND NET SALES

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3.19 CHART SHOWING TREND ANALYSIS OF NET
PROFIT

3.20 CHART SHOWING TREND ANALYSIS OF NET

SALES

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 Chapter -1

INTRODUCTION

1.0 INTRODUCTION

The working capital of an organization is the life blood which flows through the arteries and veins. It
gives courage and morale to the brain (management) and the muscles (personnel). It digests to the best degree,
the raw materials used by its constant and regular flow and returns to the heart (cash flow) for another journey.
Hence, when working capital is lacking or slow, the financial bodies have value only as a junk. Funds are
needed for short term purposes viz., for purchase of raw materials, payment of wages and other day-to-day
business expenses.

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 A firm can exist and survive without making profits but cannot survive without working capital funds.
Working capital has acquired a great significance and sound position for the twin objects of “profitability and
liquidity”.

The basic goal is working capital management is to manage current assets and current liabilities of a firm in
such a way that a satisfactory of optimum level of working capital is maintained.

This project is a study on working capital management. The main aim of this study is to provide valuable
suggestion regarding working capital managing efficiency on the basis company’s last 5 year financial records.

The study would analyze the working capital management policy of the company, the ways in which it
maintains balance between the magnitude of working capital and general scale of operation of the company and
to determine with reference to the appropriate levels of components of current assets maintained and pattern of
financing them.

1.1COMPANY PROFILE

Nagarjuna Herbal Concentrates Ltd is a public limited company engaged in the production and
marketing of all kind of Ayurvedic medicines and popularizing the indigenous system of medicines in our
country, is located at Thodupuzha. The construction of the company started in the year 1985, and commissioned
in October 1989.In the beginning company has only 87 agencies but now the authorized agencies are more than
930 and it is spreading throughout the state. At present there are 1000 direct employees and 2000 indirect
employees. The company has a product range of 650 medicines..

The company has not limited its operations to the boundaries of Kerala alone, but has extended to 17
states outside Kerala. The main areas of operations are Karnataka, Tamilnadu, Andhra Pradesh, Goa, Delhi,

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Maharashtra, Gujarat, U.P, M.P, Rajasthan, Orissa and Uttaranchal. Nearly 150 franchisees with service of
doctors and quality medicine are already operating in outside Kerala.

COMPANY MISSION:

Nagarjuna Ayurvedic Group was established with the mission of restoring Ayurveda as a mainstream
health management system. In fulfilling this mission, Nagarjuna is at the forefront of Ayurvedic resurgence by
providing pioneering leadership in the manufacture of quality ayurvedic medicines, establishing health care
centers and specialty clinics and formulating meaningful directions in research in Ayurveda.

Rejuvenating mind and body in harmony with nature is the mission in health care management system.
Train to improve traditional values and strictly adhering to time tested texts. Nagarjuna herbal concentrates also
tries to creating public awareness about the Ayurveda and promoting herbal cultivation.

OBJECTIVES OF THE COMPANIES :

They carry on the business of the manufacturing, processing, formulating and distribution of Ayurvedic
Medicines. The main objectives of the company are as follows;

 To undertake service of Ayurvedic treatment centers.

 To cultivate medical herbs, shrubs and trees.
 To make publication based on Ayurvedic texts.
 To promote charitable organization for popularizing awareness about Ayurvedic.
 Comprehensive, multi-feed development of Ayurveda in all its varied aspects and expensive
propagations of its message.

ORGANISATIONAL HIERARCHY OF NAGARJUNA HERBAL CONCENTRATES LTD

Managing Director

Executive Officer

C.E.O

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GM GM Manager GM HR
Production
 g

Manager
Manager Marketin (R&D)
Productio
Marketin g AGM Legal
n Officer AGM
g Manager Finance Advisor
HR
(outside) Kerala

Asst. Productio Chemist Personne

Manager Asst. l Officer
n
Executive Regional MGR
Controlle
Manager r

Senior HR
Commercia Superviso
Manager Executiv
l Officer r
Executive (QC) e

Commercia
l Officer

INFORMATION ABOUT THE IMPORTANT DEPARTMENTAL HEADS

The various functions of the organization will depended on the basis of the size of the business. The
organization structure of the NHCL, Thodupuzha consist of nine major departments. All these departments
comes under the Thodupuzha branch. Most of the departmental heads are supported by senior managers. The
major departments of NHCL are;

 Human resource department

 Purchase department
 Research & development department
 Quality control department
 Production department

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  Sales department
 Marketing department
 Finance department
 Maintenance department

FINANCE DEPARTMENT:

Finance is the life blood of every business enterprise, because in the modern money oriented economy
finance is the basic foundation of all kind of economic activities. It is the master key it has rightly been said that
business need money to make more money. However it is also true that money we gets more money only when
it is properly managed. Hence efficient management of every business enterprise is closely linked with efficient
management of finance.

Functions of Finance Department

 Preparation and maintenance of accounts related document and records

 Recording the bank transaction
 Maintenance of commercial accounts and income tax
 Payment the all company bills like, telephone, electricity, sales tax and CST& VAT.

Auditing:-

The company has an efficient external auditor. The statutory auditors appointed by the
company law board audits the accounts and records of the company. After completing the audits, the copy of
the report will be sent to the Account General Trivandrum and also presented before the shareholders. The
important audits in Nagarjuna are:

 Internal Audit
 Statutory Audit
 Audit of Controller and Audit General of India

Budget:-

The budget is prepared and presented to the Board of Director during January or February of each year.
It is prepared on the basis of sales projection provided by marketing department. Raw materials requirement
will be estimated on the basis of comparison with previous year’s figures.

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Records Maintaining

 Journal book
 Cash Book, Bank Book
 General Ledger
 Asset Register, Salary Register
 Purchase Journals, Sales Day book, Creditors Ledger
 Subsidiary Registers like, TA Advance, Salary Advance, Medical Advance, Festival Advance.

1.2 STATEMENT OF THE PROBLEM

The present study is an attempt to diagnose the working capital management of NAGARJUNA HERBAL
CONCENTRATES LTD IDUKKI. Working Capital Management is concerned with the problems that arise in
attempting to manage the current assets, the current liabilities and interrelationship that exist between them.
When discussion was held with concerned authority the company is keen to know the present working capital
position of the company hence the study was conducted with respect to working capital management of
NAGARJUNA HERBAL CONCENTRATES LTD IDUKKI.

1.3 OBJECTIVES OF THE STUDY

Primary Objective:
 To study and evaluate the working capital management of Nagarjuna Herbal Concentrates Ltd Idukki

Secondary objectives:

 To study the liquidity position of the company. And to analyze the profitability of the company.

1.4 RESEARCH METHODOLOGY

Research Design
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 Type of research used in the study is partially analytical and partially descriptive. The major purpose of
descriptive research is description of state of affairs of the institution as it exists at present. Analytical in
the sense that analyzing the Effectiveness of working capital management of Nagarjuna Herbal
Concentrates Ltd IdukkI.

Collection of data

Secondary data:-The study is done on the basis of secondary data it is collected from already published
sources are like annual report of the company, company website and text books

Period of study

Study has been conducted for a period of 45 days

Statistical tools used:

The tools used for working capital analysis of Nagarjuna Herbal Concentrates Ltd Idukki

 Ratio analysis
 Schedule of changes in working capital.
 Trend analysis.

1.5 SCOPE AND SIGNIFICANCE OF THE STUDY

The entire study is conducted in order to improve the working capital management in Nagarjuna Herbal
Concentrates Ltd Idukki. The study have contributed mainly to the management by helping to the financial
planning, budgeting and control in the performances of a company. It is especially valuable in providing
information for finances and other departments. The study involves the purpose of analyzing and interpreting the
working capital management ofNagarjuna Herbal Concentrates Ltd Idukki.

1.6 LIMITATION OF THE STUDY

 The major part of the study was concerned with financial data.Adequate data was not available because
of the secrecy maintained by the company.
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 The study reveals the findings for the present situations only and will not reflect the future.

 Time was the main constrain .

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 CHAPTER 2

REVIEW OF LITERATURE

2.0 REVIEW OF LITERATURE

Working Capital - Literature Survey:

Every business needs funds for two purposes basically; they are for establishment and to
carry day-to-day operations. Long term funds are required for establishment of the organization,
it is required for production facility through purchase of fixed assets and it needs fixed capital.
Short term funds are needed for the purchase of raw materials, payment of wages, payment of
day today expenses etc. The funds required for these short term purposes are known as working
capital.
Many researchers have studied working capital from different views and in different
environments. The following ones were very interesting and useful for our research

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SamilogluF.and Demirgunes K (2008)3, studied that the effect of working capital
management on firm profitability. In accordance with this aim, to consider statistically
significant relationships between firm profitability and the components of cash conversion cycle
at length, a sample consisting of Istanbul Stock Exchange (ISE) listed

Garcia-Teruel and Martinez-Solano(1996)16.,collected a panel of 8,872 small to medium-

sized enterprises (SMEs) from Spain covering the period 1996 - 2002. They tested the effects of
working capital management on SME profitability using the panel data methodology. The
results, which are robust to the presence of endogeneity, demonstrated that managers could
create value by reducing their inventories and the number of days for which their accounts are
outstanding. Moreover, shortening the cash conversion cycle also improves the firm's
profitability.

THEORETICAL BACKGROUND:

A business enterprise requires not only fixed assets but also current assets for its
efficient functioning. Current assets are required to make effective utilization of fixed assets.
The amount invested in fixed assets is called fixed capital (long term). The amount invested
in current assets is known as working capital (short term). Thus the business enterprise
requires two type of capital, namely, fixed and working capital.

WORKING CAPITAL MANAGEMENT

Working capital management involves the relationship between a short term liabilities.
The goal working capital management is to ensure that a firm is able continue its
operations and that it has sufficient ability to satisfy both maturing short term debt

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and upcoming operational expenses. The management of working capital involves
managing inventories, account receivables and account payables and cash.

MEANANG AND DEFINITION OF WORKING CAPITAL MANAGEMENT :-

According to smith, “working capital management is concerned with the problems that arise
in attempting to manage the current assets, current liabilities and the interrelationship that exist
between them, It involves both formulating working capital policy and carrying policy in day-
today operations. The objectives of working capital management are twofold (1) maintaining of
working capital and (2) availability of sufficient funds at the time of needed

Working capital management ensures a company has sufficient cash flow in order to meet its
short-term debt obligations and operating expenses.

IMPORTANCE OF WORKING CAPITAL

No business can run successfully without adequate amount of working capital. The main
advantages of maintaining adequate amount of working capital are as follows:
 Adequate working capital helps in maintaining solvency of the business by providing the
uninterrupted flow of production.
 Sufficient working capital enables a business concern to make prompt payment and hence
help in increasing and maintaining goodwill.
 A concern having adequate working capital, high solvency and good credit standing can
arrange loans from bank and other on easy and favorable terms.
 Adequate working capital also enables concern to avail cash discount on the purchase and
hence it reduces cost.

 It helps to ensure regular supply of raw materials.

 Only concerns with adequate working capital can exploit favorable market conditions.
 Adequate working capital enables a concern to exploit favorable market conditions.

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  Adequate working capital enables a concern to face business crisis in emergencies such
as depression.
 Sufficiency of working capital enables a concern to pay quick and regular returns on
investment.
 Adequacy of working capital creates an environment of security, confidence, and high
morale and creates overall efficiency in a business.

ADVANTAGES OF WORKING CAPITAL MANAGEMENT

 The firm can avail of the cash discount facilities offered by the suppliers.
 It enhances the liquidity, solvency and creditworthiness of the concern.
 It is possible to meet unseen contingencies and successfully sail through the periods of
crisis.
 It improves the morale of the executives.
 Good relations with banks can be maintained.
 It is possible to utilize fixed assets fully.
 It enables to undertake research, innovation and expansion programmers.
 It increases profitability of the business.

CONCEPTS OF WORKING CAPITAL

1) Gross concept

2) Net concept

1) Gross concept
According to gross concept working capital refers to the amount of funds invested in current
assets. Thus working capital is equal to total current assets. The working capital as per the gross
concept is called gross working capital. This concept used by the management to evaluate the
current working capital position and to ensure the optimum investment in individual in current
assets. Gross concept is a quantitative concept

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Advantages of gross working capital concept:
 This concept is helpful in determining the correct amount of working capital at the right
time.
 It helps in planning and control of individual current assets.
 It helps to maximize the return of investment
 It helps in fixation of financial responsibility

2) Net concept

According to net concept, working capital refers to excess of current assets over current
liabilities. To be more clearly, working capital is equal to total current assets minus total current
liabilities. Thus working capital refers to net current assets. The working capital as per net
concept is called net working capital .the net concept is a qualitative concept because it
establishes a relationship between current assets and current liabilities.

Advantages of net working capital concept

 It measures the firm liquidity.
 It enables the creditors and investors to assess the short term solvency of the firm.
 It indicates the extent to which working capital can be financed with long term funds.
 It is an indicator of the financial soundness of an enterprise.

APPROACHES FOR FINANCING WORKING CAPITAL

There are two approaches to financing the working capital;

1) Conventional approach
2) Operating cycle approach

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According to accounting technology, “it is the difference between the inflow and outflow of
fund”.

1) Conventional approach

This approach aims at ensuring neither idle funds nor shortage of funds. According to this
approach, cash inflow and out flow are estimated before hand and a firm attempt is made to
match them with each other. If cash inflow and outflow are matched then the firm will not have
any idle cash but at the same time it will be able to discharge the liabilities on due date. This
approach advocates the effective management of individual components current assets and
current liabilities.

2) Operating cycle approach

This approach is more dynamic. It attempt to manage working capital in a realistic way.
Under this approach, working capital is referred to that part of the investment of a business
which helps it to carry out its normal operations by facilitating the use of fixed assets and
facilities. The length of the operating cycle is a function of the nature of business. There are

Four components of operating cycle of a manufacturing concern

 The cycle start with the acquisition of raw material and other input for cash
 Conversion of raw material and other input into finished goods
 Storage of finished goods until finished goods are sold
 Collection of cash and account receivable

According to the operating cycle approach, the larger is the duration of an operating cycle, the
larger is the working capital requirement. Therefore, increasing the profitability and efficiency,
financial management should make efforts to reduce the length of operating cycle, as far as
possible.

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COMPONENTS OF WORKING CAPITAL

The working capital management has mainly three components;

1) CASH MANAGEMENT
2) RECEIVABLE MANAGEMENT
3) INVENTORY MANAGEMENT

1) CASH MANAGEMENT

Cash is a starting point and finishing point of any business. Cash is a non-earning asset. It
contributes nothing. Therefore a firm should keep only adequate cash, neither more nor less.
Cash management simply refers to the management of cash that is cash inflows. It is the process
of forecasting, collecting, disbursing, investing and planning for the cash a company needs to
operate its business smoothly. Good cash management can improve financial results. But it
can’t make a weak business strong. On the other hand, bad cash management can make a strong
company weak to the point of failure.

2) RECEIVABLE MANAGEMENT

Receivables result from credit sale. A concern is required to allow credit in order to increase
its sales volume. It is not always possible to sell goods on cash basis only. Receivables
management is the process of making decisions relating to investment in trade debtors. The
investment in receivable is necessary to increase the sales and profit of the firm. But at the same
time investment in this asset involves cost consideration also. Further there is always a risk of
debt too. Thus the objective of receivables management is to take a sound decision as regard
investment in debtors.

3) INVENTORY MANAGEMENT

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 Every enterprise needs inventory for smooth running of its activities. It serves as a link
between production and distribution process. The investment in inventories constitutes the most
significant part of current assets. The purpose of inventory management is to keep the stock in
such a way that neither there is over stocking nor under stocking. The over stocking will mean a
reduction of liquidity and starving of over production process, under stocking on other hand,
will stoppage of work. The investment in inventory should be kept in reasonable limits.
Inventory management may be defined as the overall way a company manages its inventory
against cost. Although the finance department doesn’t itself manage the firm’s inventory, it has
a responsibility to ensure that the inventory is being managed effectively and efficiently.

SOURES OF WORKING CAPITAL

 SOURCES OF FIXED WORKING CAPITAL

1) Shares
2) Debentures
3) Public deposit
4) Part of profit
5) Loan from financial institutions
 SOURCES OF VARIABLE WORKING CAPITAL
1) Commercial banks
2) Indigenous banks
3) Trade creditors
4) Advances
5) Deferred income
6) Installment credit
7) Accrued expense

FACTORS DETERMING THE WORKING CAPITAL REQUIRMENT

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 The working capital requirements of a concern depend upon a large number of factors
such as nature and size of the business, the characteristics of their operations, the length of
production cycle, the rate of stock turnover and the state of economic situation. However the
following are the important factors generally influencing the working capital requirements.

1. NATURE OR CHARACTERSTICS OF A BUSINESS

The nature and the working capital requirement of enterprises are interlinked. While a
manufacturing industry has a long cycle of operation of the working capital, the same would be
short in an enterprises involve in providing services. The amount required also varies as per the
nature, an enterprises involved in production would require more working capital then a service
sector enterprise.

2. MANAFACTURE PRODUCTION POLICY

Each enterprises in the manufacturing sector has its own production policy, some follow
the policy of uniform production even if the demand varies from time to time and other may
follow the principles of demand based production in which production is based on the demand
during the particular phase of time. Accordingly the working capital requirements vary for both
of them.

3. OPERATIONS:
The requirement of working capital fluctuates for seasonal business. The working capital
needs of such business may increase considerably during the busy.

4. MARKET CONDITION:
If there is a high competition in the chosen project category then one shall need to offer
sops like credit, immediate delivery of goods etc. for which the working capital requirement
will be high. Otherwise if there is no competition or less competition in the market then the
working capital requirements will be low.

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5. AVABILITY OF RAW MATERIAL

If raw material is readily available then one need not maintain a large stock of the same
thereby reducing the working capital investment in the raw material stock. On other hand if raw
material is not readily available then a large inventory stocks need to be maintained, there by
calling for substantial investment in the same.

6. GROWTH AND EXAPNSION

Growth and Expansions in the volume of business result in enhancement of the working
capital requirements. As business growth and expands it needs a larger amount of the working
capital. Normally the needs for increased working capital funds processed growth in business
activities.

7. PRICE LEVEL CHANGES

Generally raising price level requires a higher investment in the working capital. With
increasing prices, the same levels of current assets needs enhanced investments.

CONCEPT OF WORKING CAPITAL:

There are two possible interpretations of working capital concept:
(a) Balance sheet concept
(b) Operating cycle concept
There are two interpretation of working capital under the balance sheet concept. It is
represented by the excess of current assets over current liabilities and is the amount normally
available to finance current operations. However, sometimes working capital is also used as
synonym for gross or total current asset .In that case, the excess of current asset over current
liabilities is called Net working capital or net current asset. Economists like Mead , Malott ,
Baker , and field support the gross concept .They feel that current asset should considered as
working capital as the whole of it helps to earn profit and the management is more concerned

26
with the total current asset as they constitute the total fund available for operational purposes .
On the other hand, economists like Lincoln and Sailors uphold the net concept .They argue that
in the long run, what matters is the surplus of currents asset over
Current liabilities. It is this concept, which helps creditors and investors to judge the financial
soundness of the firm .The contingencies of the firm is met by the excess of current assets and
the net concept helps to explain the financial position of the firm.
Working capital is really a part of long-term finance locked in and used for supporting current
activities. Consequently, the larger the amount of working capital so derived, greater the
proportion of long term capital sources siphoned off to short term activities . It is difficult to say
whether it is right or wrong .Apparently, when firms are warned about tight working capital
situation, the logic of the above definition would perhaps indicate the diversion of long-term
finances for short-term purposes.

OPERATING CYCLE CONCEPT

A company’s operating cycle consists of three activities: purchasing resources, producing the product
and distributing the product. These activities crate funds flows that are both unsynchronized and uncertain.
They are unsynchronized because cash disbursements usually take place before cash receipts. They are
uncertain because future sales and costs,
Which generate the respective receipts and disbursements, cannot be forecasted completely .If the firm is to
maintain liquidity and function properly; it has to invest in various short-term assets during this cycle. It has to
maintain a cash balance to pay the bills as they come due .In addition, the company must invest in inventories to
fill customers’ orders promptly. Finally, the company invests in accounts receivables to extend credit to its
customers.
Operating cycle = inventory conversion period + receivables conversion period

Inventory conversion period = Average inventory

Cost of sales/365
Receivables conversion period = Account receivables
Annual credit sales/365

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FACTORS INFLUENCING WORKING CAPITAL

 The type of products manufactured

 The length of operating cycle
 The sales level
 Inventory policy
 Credit policies
 Efficiency in managing current assets

WORKING CAPITAL MANAGEMENT

Working capital management is the process of planning and controlling the level and the mix of the
current assets of the firm as well as financing these assets. Specifically working capital management requires
financial managers to decide what quantities of cash, other liquid assets, account receivables, and inventories
the firm will hold at any time. In addition, financial managers must decide how these current assets are to be
financed. Financing choices include the mix of current as well as long-term liabilities.

The high degree of divisibility has two important implications for the management of working capital, first, if
the management so chooses, working capital can be acquired piecemeal to meet immediate needs as they arise.
Such hand to mouth policy has advantage of reducing the average investment in working capital, thereby
minimizing the interest charges, insurance expenses and the storage fees necessary to carry the investment.
However, a hand to mouth policy has three advantages: there will be increased ordering costs associated with
greater likelihood that the firm may experience a shortage in working capital,

Because there is no buffer stock to absorb unexpected fluctuations in requirement. By balancing the
savings in carrying costs against the cast of shortage and of more frequent procurement, the management of a
firm will generally find it profitable to maintain its working capital at a level higher than the needed to meet its
immediate needs. However, the relationships among carrying costs, shortage costs, and procurement cost are
such that most firms will find that the

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Working capital management is mainly the decision regarding the following:

a) RECEIVABLES MANAGEMENT

b) INVENTORY MANAGEMENT

c) SHORT TERM FINANCING

d)RECEIVABLES MANAGEMENT

Receivables management refers to the decisions a business makes regarding its overall credit and collection
policies and the evaluation of individual credit applicants. In formulating an optional credit policy, the finance
manager must analyze the marginal benefits and costs associated with changes in credit standards, credit terms,
and collection efforts. Receivables management proves for a firm, both asset and a problem: an asset because of
the promise of a future cash flow and a problem because of the need to obtain financing while waiting for the
future cash flow.
Account receivables are asset accounts representing amounts owed to the firm because of the sale of goods and
services in the ordinary course of business. The value of these claims is carried on the balance sheet under titles
such as account receivables, trade credit or customer receivables. The financial manager can add value to the
company’s shares by properly influencing three areas: the company’s aggregate investment in receivables, its
credit terms and its credit standards.

FACTORS INFLUENCING RECEIVABLES POLICY

Once the finance manager has decided the objective of accounts receivable policy is to promote sales
and profit until that point is reached, the return on investment in the further funding of receivables is more than
the cost of capital.

A)COST:

i) Collection cost

29
Money is spent in preparing and mailing reminders, hiring personnel or agencies to get the payment, in
acquiring credit information and in generally maintaining and operating a credit department.
ii) Capital cost:
The firm must raise funds to finance credit, for the firm must pay its employees, its suppliers and all
others who manufactured or distribute the product while waiting for the customers to pay for the product. This
time gap means that the firm has to go out and raise funds to meet its payments while waiting payments from
the customer. A firm considering changing the size of its accounts receivables must also consider the cost of
additional funds or the savings from tracing funds to calculating the correct financing cost for receivables.
In this case, two additional costs are commonly used:

(i) Cost of long-term depts.

(ii) Cost of existing long-term debt to correctly compute the savings involved in decreasing its debts.
(iii) Delinquency costs:
The failure of the customer to pay on time adds collection costs above those associated with a normal
collection. Delinquency also ties up funds, which would be earning money elsewhere, creating an opportunity
cost for any additional time the funds are tied up after the normal collection period.

Default cost or bad debt losses:

The firm incurs costs when the customer fails to pay at all. In additional to the collection costs, capital costs and
the delinquent costs incurred up to this point, the firm loses the cost of goods sold but not paid for. It has to
write off the entire sale once it decides the delinquent account has defaulted and is no longer collectable.

Benefits:-. The benefits are the increased sales and profit anticipated because of a more liberal policy.

INVENTORY MANAGEMENT
Inventory management is the process of efficiently overseeing the constant flow of units into and out of
an existing inventory. This process usually involves controlling the transfer in of units in order to prevent the
inventory from becoming too high, or dwindling to levels that could put the operation of the company into
jeopardy. Competent inventory management also seeks to control the costs associated with the inventory, both
from the perspective of the total.

30
 Value of the goods included and the tax burden generated by the cumulative value of the inventory.
Balancing the various tasks of inventory management means paying attention to three key aspects of any
inventory.
The first aspect has to do with time. In terms of materials acquired for inclusion in the total inventory,
this means understanding how long it takes for a supplier to process an order and execute a delivery. Inventory
management also demands that a solid understanding of how long it will take for those materials to transfer out
of the inventory be established.
Knowing these two important lead times makes it possible to know when to place an order and how
many units must be ordered to keep production running smoothly.
.

Types of Inventory:
Here is a quick guide to the different types of inventory. There are two basic types: merchandising and
manufacturing. Manufacturing is further divided into three more components: raw material, work in process and
finished goods.
1. Merchandise inventory:
If you buy items from other artists and crafters to sell in your own gallery or shop, you'll have a
merchandise inventory. Remember though - any items in your shop on consignment are not part of your
inventory.
2. Manufacturing inventory:
If you make your own arts and crafts, you'll have a manufacturing inventory. The term 'manufacturing'
might not seem to fit a hand crafted type of business, but a quick review of the classifications within the term,
will make the relationship clearer.
A manufacturing inventory consists of three different parts: raw materials, work in process and finished goods.
Using a leather crafting business as my sample craft company, here are definitions and examples of the three:

a) Raw materials
Everything the crafter buys to make the product is classified as raw materials. That includes leather,
dyes, snaps and grommets. The raw material inventory only includes items that have not yet been put into the
production process.

31
b) Work in process
This includes all the leather raw materials that are in various stages of development. For the leather
crafting business, it would include leather pieces cut and in the process of being sewn together and the leather
belts and purse etc. that are partially constructed.

c) Finished goods
When the leather items are completely ready to sell at craft shows or other venues, they are finished
goods. The finished goods inventory also consists of the cost of raw materials, labor and manufacturing
overhead, now for the entire product.
Inventory is probably one of the largest costs for merchandising and manufacturing businesses.. Find out how to
account for inventory regardless if you are a retailer or manufacturer.

Purpose of holding inventory / Importance

1. Meet demand:-
In order for a retailer to stay in business, it must have the products that the customer wants on hand when
the customer wants them. If not, the retailer will have to backorder the product. If the customer can get the good
from some other source, he or she may choose to do so rather than electing to allow the original retailer to     
meet demand later (through back-order). Hence, in many instances, if a good is not in inventory, a sale is lost
forever.
2. Keep operations running:-
A manufacturer must have certain purchased the dependency the operations. A machine or work center is
often dependent upon the previous operation to provide it with parts to work on. If work ceases at a work center,
then all subsequent centers will shut down for lack of work. If a supply of work-in-process inventory is kept
between each work center, then each. Machine can maintain its operations for a limited time, hopefully until
operations resume at the original center.
3.Lead time:-
Lead time is the time that elapses between the placing of an order (either a purchase order or a production
order issued to the shop or the factory floor) and actually receiving the goods ordered. If a supplier (an external
firm or an internal department or plant) cannot supply the required goods on demand, then the client firm must
keep an inventory of the needed Goods.

32
 The longer the lead time, the larger the quantity of goods the firm must carry in inventory. A just-in-time
(JIT) manufacturing firm, such as Nissan in Smyrna, Tennessee, can maintain extremely low levels of
inventory.

4.Hedge:-
Inventory can also be used as a hedge against price increases and inflation. Salesmen routinely call
purchasing agents shortly before a price increase goes into effect. This gives the buyer a chance to purchase
material, in excess of current need, at a price that is lower than it would be if the buyer waited until after the
price increase occurs.

5.Quantity discount:-
Often firms are given a price discount when purchasing large quantities of a good. This also frequently
results in inventory in excess of what is currently needed to meet demand. However, if the discount is sufficient
to offset the extra holding cost incurred as a result of the excess inventory, the decision to buy the large quantity
is justified.

6.Smoothing requirements:-
Sometimes inventory is used to smooth demand requirements in a market where demand is somewhat,
erratic. Notice how the use of inventory has allowed the firm to maintain a steady rate of output (thus avoiding
the cost of hiring and training new -personnel), while building up inventory in anticipation of an increase in
demand. In fact, this is often called anticipation inventory. In essence, the use of inventory has allowed the firm
to move demand requirements to earlier periods, thus smoothing the demand.

Meaning of Inventory management

The overseeing and controlling of the ordering, storage and use of components that a company will use
in the production of the items it will sell as well as the overseeing and controlling of quantities of finished
products for sale.
A business's inventory is one of its major assets and represents an investment that is tied up until the
item is sold or used in the production of an item that is sold. It also costs money to store, track and insure
inventory. Inventories that are mismanaged can create significant financial problems for a business, whether the
mismanagement results in an inventory glut or an inventory shortage.

33
Successful inventory management involves creating a purchasing plan that will ensure that items are available
when they are needed (but that neither too much nor too little is purchased) and keeping track of existing
inventory and its use.
Need for Inventory management
Inventory is a necessary evil that every organization would have to maintain for various purposes. Optimum
inventory management is the goal of every inventory planner. Over inventory or under inventory both cause
financial impact and health of the business as well as effect business opportunities.
Inventory holding is resorted to by organizations as hedge against various external and internal
factors, as precaution, as opportunity, as a need and for speculative purposes.
Reasons why organizations maintain Raw Material Inventory
Most of the organizations have raw material inventory warehouses attached to the production facilities
where raw materials, consumables and packing materials are stored and issue for production on JIT basis. The
reasons for holding inventories can vary from case to case basis.

1. Meet variation in Production Demand

Production plan changes in response to the sales, estimates, orders and stocking patterns. Accordingly
the demand for raw material supply for production varies with the product plan in terms of specific SKU as well
as batch quantities.
Holding inventories at a nearby warehouse helps issue the required quantity and item to production just in time.
2. Cater to Cyclical and Seasonal Demand
Market demand and supplies are seasonal depending upon various factors like seasons; festivals etc. and
past sales data help companies to anticipate a huge surge of demand in the market well in advance. Accordingly
they stock up raw materials and hold inventories to be able to increase production and rush supplies to the
market to meet the increased demand.
3. Economies of Scale in Procurement
Buying raw materials in larger lot and holding inventory is found to be cheaper for the company than buying
frequent small lots. In such cases one buys in bulk and holds inventories at the plant warehouse.
4. Take advantage of Price Increase and Quantity Discounts
If there is a price increase expected few months down the line due to changes in demand and supply in the
national or international market, impact of taxes and budgets etc., the company’s tend to buy raw materials in
advance and hold stocks as a hedge against increased costs.Companies resort to buying in bulk and holding raw

34
material inventories to take advantage of the quantity discounts offered by the supplier. In such cases the
savings on account of the discount enjoyed would be substantially higher that of inventory carrying cost.

Objectives of Inventory Management

 Through the efficient Management of Inventory of the wealth of owners will be maximized. To reduce
the requirement of cash in business, inventory turnover should be maximized and management should
save itself from loss of production and sales, arising from its being out of stock.
 The main objective of inventory management is to maintain inventory at appropriate level so that it is
neither excessive nor short of requirement Thus, management is facedwith2conflicting objectives
1. To keep inventory at sufficiently high level to perform production and sales activities smoothly
2. To minimize investment in inventory at minimum level to maximize profitability
 To ensure that the supply of raw material & finished goods will remain continuous so that production
process is not halted and demands of customers are duly met.
 To minimize carrying cost of inventory.
 To keep investment in inventory at optimum level.
 To reduce the losses of theft, obsolescence & wastage etc.
 To make arrangement for sale of slow moving items.
 To minimize inventory ordering costs.

SHORT TERM FINANCING

Working capital management is the management the firm’s short-term assets and liabilities. This include
decisions as the level of cash balance to maintain the account of cash to be invested in securities over the
weekend, when the particular suppliers are to be paid,
Whether a credit limit for a customer should be increased, or the borrowing to be done under the line of credit
for the month. The main types of short-term financing are:
1.TRADE CREDIT: Whenever a business receives a merchandise ordered from a supplier and the is
permitted to wait a specified period before having to pay, it is receiving trade credit. Trade credit is the most
important source of short term financing for business firms.

2.ACCRUED EXPENSES

35
 Accrued expenses – such as accrued wages, taxes and interest – represent liabilities for services rendered to
the firm that have not paid for by the firm. As such, they constitute an interest free source financing.

3. DEFERRED INCOME
Deferred income consists of payments received for goods and services that the firm has agreed to deliver at
some future date. Because these payments increase the firm’s liquidity and assets – namely, cash—they
constitute a source of funds.
4. COMMERCIAL PAPER
Commercial paper consists of short – term unsecured promissory notes issued by major corporations.
Maturities on commercial paper at the time of issue range from several days to months. Large issue of
commercial papers normally attempts to tailor the maturity and amounts of an issue to the needs of an investor.
5. BANK CREDIT ARRANGEMENT

Single payment loan

The simplest credit arrangement is a single payment loan, or note. It is frequently granted for a specific
purpose, with a definite beginning and ending time. The note can be either a discount note or add-on note. For a
discount note, the amount of cash advanced under the loan agreement is the face value of the loan less the
amount interest for the period covered. For an add-on note, the interest is added to the principal to determine the
cash flow at maturity.

36
 CHAPTER 3

DATA ANALYSIS AND INTERPRETATION

37
 3.0 DATA ANALYSIS AND INTERPRETATION :

 LIQUIDITY RATIO

The term liquidity refers to the firm’s ability to meet its current liabilities when they become due.
Liquidity ratios are used to measure the liquidity position or short term financial position of a firm. The bankers
and creditors for materials are interested in the liquidity position. The ratios which reflect the short term
solvency of a business unit are current ratio, Quick ratio, working capital turnover ratio, fixed asset turnover
ratio etc…

 CURRENT RATIO

This ratio measures the solvency of the company in the short term. It shows the firm’s ability to cover
the current liabilities with current asset. Generally 2:1 is considered ideal for a concern i.e.: current assert
should be twice of the current liabilities. It expressed as follows.

Current Assets
Current Ratio =
Current Liabilities

It is an index of the strength of working capital. The higher the current ratio, greater the firm’s ability to
meet short term debts. Avery high current ratio indicates that funds are not being economically used in the firm.
There may be excessive inventories or accounts receivable or large idle cash balance. Avery low current ratio
indicates that the firm wills it difficult to pay of its debts. It is essential that a firm should have a reasonable
current ratio

38
  QUICK RATIO OR LIQUID RATIO

As regards the ability to honor day-to-day commitment, liquid ratio is a better tool. It is the ratio
between liquid assets and liquid liabilities. From balance sheet, liquid Assets are calculated by deducting
inventories and pre – paid expenses from current assets. Liquid liabilities are current liabilities less bank
overdraft.

ses

Liquidity
Liquid Ratio = assets/Current
liLiabilities

Liquid asset = Current asset – (stock + prepaid expenses)

Quick ratio of 1:1 is considered as satisfactory or ideal. It means that the liquid assets are just equal quick /
current liabilities. If the quick ratio is 1:1 or more than 1:1, the financial position of the firm is said to be good.
It indicates that quick asset is sufficient to pay off the short term obligations. If the ratio is less than 1:1, the
financial position is said to be unsound. This means that the firm will not be able to pay off its current liabilities
when they become due.

 CASH RATIO

It is relationship between cash and current liabilities.

Cash

Current liabilities

ACTIVITY RATIO

Activity ratios show how efficiently a firm uses its available resources or assets .These ratios indicate
efficiency in asset management. These ratios are also known as efficiency ratios or asset utilization ratios. These
ratios indicate the speed with which the resources are turned over or converted in to sales. Important activity
turnover ratios are:-

39
  INVENTORY TURNOVER RAITO OR STOCK TURNOVER RATIO

This is also called as Inventory Ratio or Stock Velocity Ratio. This ratio is a relationship between the
cost of goods sold during a particular period of time and the cost of average inventory during a particular
period. It is expressed in number of times. Stock turnover ratio/Inventory turnover ratio indicates the number of
time the stock has been turned over during the period and evaluates the efficiency with which a firm is able to
manage its inventory. This ratio indicates whether investment in stock is within proper limit or not.

Cost of Goods Sold

Stock Turnover Ratio = ….………....………………

Average Inventory at Cost

Cost of goods sold = Opening stock + purchases + direct expenses – closing stock (or)

Cost of goods sold = sales – gross profit , Average stock=opening stock+closing stock/2

 INVENTORY CONVERSION PERIOD

The inventory conversion period is the time required to obtain materials for a product in order to manufacture
and sell it. The inventory conversion period is essentially the time period during which a company must invest
cash while it converts materials in to a sale.

Inventory conversion period = Days/months in a year

Inventory turnover ratio

 DEBTOR’S TURNOVER RATIO

Debtor’s Turnover Ratio is also termed as Receivable Turnover Ratio or Debtor’s Velocity. Receivables and
Debtors represent the uncollected portion of credit sales. Debtor’s velocity indicates the number of times the
receivables are turned over in business during a particular period. In other words, it represents how quickly the
debtors are converted into cash. It is used to measure the liquidity position of a concern. This ratio establishes
the relationship between receivables and sales.

Net Credit Sales

Debtor’s Turnover Ratio = ……………………….

40
 Debtors

 DEBTORS COLLECTION PERIOD

This ratio is related with and dependent upon debtor’s turnover ratio. Average collection period means
the number of days or months for which debtors and bills receivable remain outstanding.

Debtors collection period = Days/ months in a year

Debtor’s turnover ratio

 WORKING CAPITAL TURNOVER RATIO

Working Capital Turnover Ratio highlights the effective utilization of working capital with regard to
sales. This ratio represents the firm’s liquidity position. It indicates the number of times the working capital is
converted to sales.

Cost of goods sold

Working Capital Turnover Ratio =

Net Working capital

 FIXED ASSET TURNOVER RATIO

This ratio measures the efficiency of the assets used. The efficient use of asset will generate generated
greater sales per rupees invested in all the assets but also of a concern. This ratio important in case of
manufacturing concern because sales are produced ot only by of current assets but also by amount invested in
fixed assets. It is calculated as under

Fixed asset turnover ratio =net sale/fixed assets

CURRENT ASSET TURNOVER RATIO

This ratio shows relationship between sales and current asset of the company. More clearly, turnover of current
assets with regards to sales of the company. It is calculated by using the formula given below.

Net sales

Current asset turnover ratio = ……………………...

Current asset

41
 PROFITABILITY RATIOS

The term profitability refers to the ability of a firm to earn maximum profit from best utilization of its
resources. The profitability of a firm can be easily measured its profitability ratios. Profitability ratios measure
the ability of a firm to earn an adequate return on sales, total assets and invested capital. There are two types of
Profitability ratios .First profitability ratios based on sales and second profitability ratios based on investment.
The important profitability ratios are:-

 GROSS PROFIT RATIO

Gross Profit Ratio established the relationship between gross profit and net sales. This ratio is calculated
by dividing the Gross Profit by Sales. It is usually indicated as percentage.

Gross Profit

Gross Profit Ratio = ………………. .x 100

Net Sales

 NET PROFIT RATIO

Net profit ratio is also termed as Sales Margin Ratio (or) Profit Margin Ratio (or) Net profit to sales
Ratio. This ratio reveals the firm’s overall efficiency in operating the business. Net profit ratio is used to
measure the relationship between net profit (either before or after taxes) and sales.

Net profit

Net profit ratio = ………………… x100

Net sales

 OPERATING RATIO

Operating ratio expresses the relationship between operating cost and sales. It indicates the overall efficiency in
operating the business .The operating ratio expressed as:

Operating ratio = Cost of goods sold + Operating expenses

42
 …………………………………… x100

Net Sales

Operating Expense = Cost of goods sold +Office &administration + Selling expenses

 INVENTORY TO WORKING CAPITAL RATIO

Inventory is a part of working capital. This shows the relationship between inventory and working capital. This
helps to know the influence of inventory on working capital of the company. This is calculated by using the
formula given below.

Inventory

Inventory turnover ratio = ………………….

Working capital

STATEMENT OF CHANGES IN WORKING CAPITAL

Statement of changes in working capital is prepared with the help of current assets and current liabilities .This
statement shows changes in current asset and current liabilities. The purpose of this statement is to find out the
net changes in working capital. Working capital is the difference between current assets and current liabilities. It
is also called working capital variation statement.

The rules in preparation of schedule of changes in working capital:

 Increase in current asset will increase the working capital

 Decrease in current asset will increase the working capital
 Increase of current liabilities will decrease the working capital
 Decrease in current liabilities will increase the working capital

CURRENT RATIO = CURRENT ASSETS/CURRENT

LIABILITY 43
 Table no 3.1 (Current ratio)

YEAR CURRENT CURRENT RATIO

ASSETS LIABILITY

2008-2009 126722770 48712477 2.60

`
2009-2010 153099083 64688453 2.36

2010-2011 152641298 59972229 2.54

2011-2012 155872097 57307462 2.71

2012-2013 162630668 59126321 2.75

(Source: annual report) chart no.3.1

CURRENT RATIO
2.8
2.7
2.6
2.5 CURRENT RATIO
2.4
2.3
2.2
2.1
2008-2009 2009-2010 2010-2011 2011-2012 2012-2013

Interpretation: - The standard current ratio is 2:1. Table is revealing current ratios in last 5 years it is found to be higher
than standard ratio. The movements of ratios are not consistent. The current ratio very high in 2012-2013 it is 2.75. The
table is showing that after 2009-2010 the current ratio is increasing. 2012- 2013 the current ratio is very high. It is higher

44
than standard ratio. This indicates company has properly maintained the current ratio during the period 2012-2013. Hence
the liquidity position is satisfactory

QUICK RATIO = QUICK ASSETS/CURRENT LIABILITY

Table no.3.2 (Quick ratio))

YEAR QUICK ASSETS CURRENT RATIO

LIABILITY

2008-2009 56412915 48712477 1.15

2009-2010 63943186 64688483 .99

2010-2011 65036464 59972229 1.08

2011-2012 69497707 57307462 1.21

2012-2013 73511780 59126321 1.24

(Source: annual report) Chart no 3.2

QUICK RATIO
1.4
1.2
1
0.8 QUICK ASSET
0.6
0.4
0.2
0
2008-2009 2009-2010 2010-2011 2011-2012 2012-2013

45
Interpretation: - The standard quick ratio is 1:1. A table shows quick ratio of company is higher than standard
ratio from the 2009-2013. From the analysis the highest quick ratio was found in 2012-2013 it is 1.24

CASH RATIO = CASH AND BANK+ SHORT TERM SECURITIES

/CURRENT LIABILITY

Table no 3.3(Cash ratio )

YEAR CASH AND BANK + SHORT CURRENT RATIO

TERM SECURITIES LIABILITY

2008-2009 1984628 48712477 0.04

2009-2010 7412543 64688453 .11

2010-2011 10109729 59972229 .16

2011-2012 14021207 57307462 .24

2012-2013 11103117 59126321 .18

(Source: annual report) Chart no 3.3

CASH RATIO
0.3
0.25
0.2
Cash ratio
0.15
0.1
0.05
0
2008-2009 2009-2010 2010-2011 2011-2012 2012-2013

46
Interpretation: - The standard ratio is .5. Chart is showing very low absolute liquidity ratios during the period 2009-
2013. From the analysis highest absolute liquidity ratio was found in 2011-2012.The lowest absolute liquidity ratio was in
2008-2009. Comparing to standard ratio absolute liquidity ratio is low. This indicates the cash and cash equivalents are
not being properly used in financing the company.

INVENTORY TURNOVER RATIO = COST OF GOODS SOLD OR SALES /

AVERAGE STOCK

Table no 3.4

(Inventory turnover ratio)

YEAR SALES AVERAGE RATIO

STOCK

2008-2009 183036578 57492574 3.1

2009-2010 224243415 65284487 3.4

2010-2011 265764540 70951436 3.7

2011-2012 265042554 73908183 3.5

2012-2013 285029616 79337709 3.5

(Source: annual report) Chart no 3.4

47
 INVENTORY TURNOVER RATIO
3.8
3.6
3.4
3.2
3
2.8
2.6
2008-2009 2009-2010 2010-2011 2011-2012 2012-2013

INVENTORY TURN OVER RATIO

Interpretation: -By the analyzing the five years it has been found in the initial stock turnover ratio was moving
in a slow pace the ratio. During the five years study period the stock turnover ratio is consistent the average
stock turn over ratio is 3.44

DEBTORS TURN OVER RATIO =CREDIT SALES/AVERAGE

DEBTORS

Tableno 3.5

(Debtor’s turnover ratio)

YEAR CREDIT SALES AVERAGE DEBTORS

DEBTORS TURN OVER
RATIO

2008-2009 183036578 40681100 4.4

2009-2010 224243415 51739967 4.3

2010-2011 265764540 54525500 4.8

2011-2012 265042554 52220050 5.0

48
 2012-2013 285029616 55345209 5.1

(Source: annual report) chart no.3.5

DEBTORS TURNOVER RATIO

5

4.6

4.2

3.8
2008-2009 2009-2010 2010-2011 2011-2012 2012-2013
debtors turnoveratio

Interpretation: -Generally a low debtor’s turnover ratio a better cash flow. The ratio indicates the time at which the
debtors are collected on an average during the year. Needless to say that a high debtor turnover ratio implies short term
collection period made by the customer. From the analysis of five year data the company’s debtor’s turnover ratio is the
increasing year by the year. So the company is becoming efficient collect their debt from debtors .

DEBTORS COLLECTION PERIOD =360 DAYS/ DEBTORS TURNOVER

RATIO

Table no 3.6

(Debtor’s collection period)

DAYS IN YEAR DEBTORS DEBTORS

COMPANY TURNOVER COLLECTION
YEAR OPERATING RATIO PERIOD

2008-2009 360 4.4 82

2009-2010 360 4.3 83

2010-2011 360 4.8 75

49
 2011-2012 360 5.0 72

2012-2013 360 5.1 70

(Source: annual report)

Chart no 3.6

debtors collection period

85
80
75
70
65
60
2008-2009 2009-2010 2010-2011 2011-2012 2012-2013

debtors collection period

Interpretation: - debtor’s collection period indicates the time taken to convert the receivables in to cash by the firm.
Debtor’s collection period of the company during 2008-2009 was 82 days it has become is 70 days during 2012-2013.
Actually the company is allowing the debtors to pay within 90 days. Company is collecting the entire debt within 90 days
hence through analysis it was found that the company is able to collect the debt from the debtors before the allotted time.

SOLVENCY RATIO = TOTAL DEBT/ TOTAL ASSET

Table no 3.7
(Solvency ratio )

YEAR TOTAL DEBT TOTAL ASSET RATIO

2008-2009 75504033 163635164 .46

2009-2010 91439137 194181820 .98

2010-2011 102339187 209718738 .48

50
 2011-2012 95541996 202333422 .47

2012-2013 95879340 201874092 .47

(Source: annual report) chart no.3.7

SOLVENCY RATIO
1.2
1
0.8
0.6
0.4
0.2
0
2008-2009 2009-2010 2010-2011 2011-2012 2012-2013

Interpretation: - The standard total debt ratio is 1:1. It is clear from the table that the total debt ratios of the company
during the last 5 years is found to be very low. The lowest total debt ratio is in 2008-2009 it is .46. While in 2009-2010 it
has slightly gone up by .98 a lower total debt ratio is not good sign for the company. This indicates the company is not
utilizing the benefits from debt opportunities. It shows the inefficiency of the company in managing its debt financing

FIXED ASSET TURNOVER RATIO= SALES/FIXED ASSET

Table no 3.8
(Fixed asset turnover ratio )

YEAR SALES FIXED ASSET RATIO

2008-2009 183036578 42248773 4.3

2009-2010 224243415 41077531 5.45

51
 2010-2011 265764540 39173510 6.78

2011-2012 265042554 38202395 6.93

2012-2013 285029616 40684495 7

(Source: annual report) Chart no.3.8

FIXES ASSET TURNOVER RATIO

8
7
6
5 FIXED ASSET TURNOVER
4 RATIO
3
2
1
0
2008- 2009- 2010- 2011- 2012-
2009 2010 2011 2012 2013

Interpretation: - Fixed asset turnover ratio indicates how effectively fixed assets are used to generate sales.
The table shows, that fixed asset turnover ratio is consistently increasing over the years. This indicates
utilization of fixed assets in generating sales. The highest ratio is in 2012-13 and the lowest ratio is in 2009-
1013.

WORKING CAPITAL TURNOVER RATIO = NET SALES / WORKING

CAPITAL
Table no 3.9

Working capital turnover ratio

YEAR NET SALES WORKING RATIO

CAPITAL

183036578

52
 2008-2009 69901901 2.6

2009-2010 224243415 78010292 2.8

2010-2011 265764540 88410629 3.0

2011-2012 265042554 92669069 2.6

2012-2013 285029616 98564635 2.8

(Source: annual report) chart no.3.9

working capital turnover ratio

3.2 3
2.8 2.8 working capital
2.8 2.6 2.6 turnover ratio
2.4
2008- 2009- 2010- 2011- 2012-
2009 2010 2011 2012 2013

Interpretation: - Standard working capital turnover ratio is 7 or 8 times. The table reveals that shows it is clear that the
working capital turnover ratio is very low during the 5 years. This indicates the working capital is not effectively used in
generating sales. The chart clearly revels that the working capital turnover ratio is moving upward and downward of
irrespective of year .A very high ratio indicate over standing this means there is low investment in working capital.

CREDITORS TURNOVER RATIO= NET CREDIT PURCHASES /

AVERAGE CEDITORS

Table no 3.10

(Creditor’s turnover ratio )

YEAR CREDIT AVERAGE CREDIT TURN

PURCHASE CREDITORS OVER RATIO

53
 2008-2009 82394278 44680182 1.8

2009-2010 107092251 51820849 2.0

2010-2011 115486762 55774424 2.0

2011-2012 143203584 548219075 2.6

2012-2013 186164659 54323822 3.4

(Source: annual report) Chart no 3.10

creditors turnover ratio

3
2.5
2
1.5
1
0.5
0
2008-2009 2009-2010 2010-2011 2011-2012 2012-2013

creditors turnover ratio

Interpretation: - the table shows the creditors turn over ration reveals the ability of the firm to avail the credit facility
from the suppliers throughout the year. Generally a low creditor’s turn over ration implies favorable since the firm enjoy
lengthy credit period. If the analysis of five year data it was found creditors turnover ratio of the company showing an
increasing trend year by year.

CREDITORS PAYMENT PERIOD =360 DAYS/ CREDITORS

TURNOVER RATIO
Table no 3.11
( Creditors Payment period)

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 YEAR DAYS IN YEAR CREDITORS CREDITORS
COMPANY TURNOVER PAYMENT
OPERATING RATIO
PERIOD

2008-2009 360 1.8 200

2009-2010 360 2.0 180

2010-2011 360 2.0 180

2011-2012 360 2.6 138

2012-2013 360 3.4 105

(Source: annual report) Chart no 3.11

creditors payment period

250
200 creditors payment
150 period
100
50
0
2008- 2009- 2010- 2011- 2012-
2009 2010 2011 2012 2013

Interpretation:Creditor’spayment period indicates the time taken to make payment of dues by the firm. Creditor’s
payment period of the company was 200 days during the year 2008-2009 it is showing a decreasing trend throughout the
study period it has come 105 days during the period of 2012-2013. The creditors of the company are providing an average
150 days for making their payments During the initial years study the company was not able to make their due to suppliers
on time but the present operation cycle of the company is very much production it has reduced the payment period due to
the implementation of highly innovated and sophisticated technology for the production

CURRENT ASSET TURNOVER RATIO = NET SALES / CURRENT

ASSET
55
 Table no 3.12 (Current asset turnover ratio)

YEAR NET SALES CURRENT RATIO

ASSET

2008-2009 183036578 126722770 1.4

2009-2010 224243415 153099083 1.46

2010-2011 265764540 152641298 1.74

2011-2012 265042554 15872097 1.7

2012-2013 285029616 162630668 1.75

(Source: annual report) Chart no 3.12

CURRENT ASSET TURNOVER RATIO

2 1.74 1.7 1.75
1.4 1.46
1.5
1
0.5

0
2008-2009 2009-2010 2010-2011 2011-2012 2012-2013

Interpretation: - The table and chart reveals that the current asset turnover ratio from 2008-2013. In 2008-2009
the ratio was 1.4 and it increased to 1.74 in 2010-2011.In 2012-2013 the ratio has increased to 1.75. This shows
that the company is managing assets efficiently. The sales and current assets are increasing year by year which
is a benefit to the company.

56
SCHEDULE OF CHANGES IN WORKING CAPITAL FOR THE YEAR2008-2009 AND 2009-2010

Table no 3.13

Particulars 2008-2009 2009-2010 Increase in Decrease

in
WC (Rs) WC (Rs)

Current Assets:-
Inventories 56618141 58367007 1748866

Debtors 34296182 47066018 12769836

Cash 5354196 1984628 3369568

Other current Assets 96145 105976 9831

Loans & advances 14185126 19199141 5014015

Total current Assets 110549789 126722770

Current
liabilities :
provision 40647887 48712478 8064589
Net working capital 69901901 78010292

Increase in WC 8108391 8108391

78010292 78010292 19542548 19542548

Interpretation: -The table shows the schedule of changes in Working capital, from the analysis it is clear that the Current
assets like Inventories, Sundry debtors has shown an increment from 2008 to year 2010 along loans and advances and
other current assets have increased . So the total current assets have increased. the current liabilities provisions has
decreased while current liabilities has increased, which made positive effect on net working capital and it has increased .
From the analyzed it was found that most of the funds are used for increasing their working capital and to purchase fixed
assets. Deposits, borrowings, funds from operation are major sources of funds .Therefore the overall working capital has
increased from 2008-2009 to 2009-2010.

57
SCHEDULE OF CHANGES IN WORKING CAPITAL FOR THE YEAR2009-2010 AND 2010-2011

Table no Particulars 2009-2010 2010-2011 Increase in Decrease in 3.14

WC (Rs) WC (Rs)
Current Assets:-
Inventories 58367007 72201967 13834960
Debtors 47066018 56413916 9347898
Cash 1984628 7412543 5427915
Other current Assets 105976 121941 15965
Loans & advances 19199141 16948715 2250426
Total current Assets 126722770 153099082

Current liabilities :-
provisions 48712478 64688453 15975975
Networking capital 78010292 88410629
Increase o in WC 10400337 10400337

88410629 88410629 28626738 28626738

Interpretation:- The above table shows the schedule of changes in Working capital ,from the analysis it is clear
that the Current assets like Inventories, Sundry debtors has shown increment from 2009-2010 to the year 2010-
2011 and loans and advances and other current assets has increased . The total current assets have increased.
Among the current liabilities provisions have decreased and current liabilities has increased, which made
positive effect on net working capital. Therefore the overall working capital has increased from 2009-2010 to
2010-2011.

58
 SCHEDULE OF CHANGES IN WORKING CAPITAL FOR THE YEAR2010-2011 AND 2011-2012

Table no 3.15
Particulars 2010-2011 2011-2012 Increase in Decrease in
WC (Rs) WC (Rs)
Current Assets:-
Inventories 72201967 69700906 2501061
Debtors 56413916 52637084 3776832
Cash 7412543 10109729 2697186
Other current Assets 121941 65925 56016
Loans & advances 16948715 20127654 3178939
Total current Assets 153099082 152641298

Current liabilities &

provisions 48712478 59972229 4716224
Networking capital 78010292 92669069
Increase in WC 4258440 4258440

10592349 10592349
92669069 92669069

Interpretation: - The table shows the schedule of changes in Working capital, from the analysis it is clear that
the Current assets like Inventories, Sundry debtors has shown decreased from 2008 to year 2010 along loans

59
and advances and other current assets have increased. So the total current assets have increased. The current
liabilities provisions have increased which made positive effect on net working capital and it has increased.
From the analyzed it was found that most of the funds are used for increasing their working capital and to
purchase fixed assets. Deposits, borrowings, funds from operation are major sources of funds .Therefore the
overall working capital has increased from 2010-2011 to 2011-2012.

SCHEDULE OF CHANGES IN WORKING CAPITAL FOR THE YEAR2011-2012 AND 2012-2013

Table no 3.16
Particulars 2011-2012 2012-2013 Increase in Decrease in
WC (Rs) WC (Rs)
Current Assets:-
Inventories 69700906 78115460 8414554
Debtors 52637084 51803016 834068
Cash 10109729 14021207 3911478
Other current Assets 65925 30899 35026
Loans & advances 20127654 11901515 8226139

Total current Assets 152641298 155872097

Current liabilities &

provisions 59972229 57307462 2664767
Networking capital 92669069 98564635
Increase or decrease in 5895566
WC

14990799 14990799
98564635 98564635

60
Interpretation:-From the above table it was analyzed that most of the funds were used for increase in working
capital, to purchase fixed assets. Deposits, borrowings, funds from operation are major sources of
funds .Therefore the overall working capital has increased from 2011-2012 to 2012-2013.

CURRENT ASSETS & CURRENT LIABILITIES

Table no.3.17

YEAR 2008-2009 2009-2010 2010-2011 2011- 2012-2013

2012

CURRENT
ASSETS
12672277 15309908 15264129 1587209 16263066
0 3 8 7 8

CURRENT 4871247 64688453 59972229 5730746 59126321

LIABILITIES 7 2

TREND
PERCENTAG
E 2008-2009 2009-2010 2010-2011 2011- 2012-2013
2012

CURRENT
ASSETS
100 120.81 120.45 123.00 128.33

CURRENT
LIABILITIES
100 132.79 123.11 117.64 121.37

(Source: annual report)

Chart no 3.13

61
 140
120
100
80
CURRENT ASSETS
60
40 CUURENT LIABILITY
20
0
2008-2009 2009-2010 2010-2011 2011-2012 2012-2013

Interpretation: The above table shows the trend analysis of current assets & current liabilities of Nagarjuna Ltd. for the period from
2008-2009 to 2012-2013. Here the base year is taken as 2008-2009, it is 100.The current assets has increased from 100% to 120% in
2009-2010 together increased to 123% in 2011-2012.In 2012-2013 it has increased to 128%. The Current liabilities has increased
from 100% to 132% in 2009- 2010 and then moving on the base of decreasing to 123% 2010-2011, then it is decreasing to 117% in
2011-2012.In 2012-2013 it has increased to 121 %. The figure indicates that current assets are increasing year by year, while the
current liabilities decreasing year by year. This data reveals that the firm has less liability. The current position reveals that the
company can manage current liability.

NETSALES & WORKING CAPITAL

Table3.18

(Source:annual report)

Chart no
3.14
YEAR 2008-2009 2009-2010 2010-2011 2011-2012 2012-2013

NET SALES 18303657 224243415 265764540 26504255 285029616

8 4

WORKING
CAPITAL
69901901 78010292 88410629 92669069 98564635

TREND
PERCENTAGE
2008-2009 2009-2010 2010-2011 2011-2012 2012-2013

SALES 100 122.51 145.19 144.80 155.72

WORKING
CAPITAL
100 111.59 126.47 132.57 141.00
62
Interpretation: the above table shows the trend analysis of working capital and sales of Nagaruna ltd for the
period of 2008-2009 to 2012-2013 here the working capital has increased to 111 in 2010-2011 and it moving on
every year and in 2012-2013 it has increased to 141. The analysis revel that in 2009-2010 net sales has
increased from 100% to 122% further increased to 155%. The data revels increasing trend in net sales the
working capital has increased ever year which reveals that firm’s working capital is effectively utilized for sales

NET PROFIT

Table no.3.19

year 2008-2009 2009-2010 2010-2011 2011-2012 2012-2013

NET PROFIT 30217881 28522954 20927322 23003964 27388432

TREND 2008-2009 2009-2010 2010-2011 2011-2012 2012-2013

PERCENTAGE

`
NET PROFIT 100 94.39 69.2 76.1 90.6
(Source : annua report)

Chart no 3.15

63
 NET PROFIT
120
100
80
60
40
20
0
2008-2009 2009-2010 2010-2011 2011-2012 2012-2013

NET PROFIT

Interpretation: The above table reveals thetrend analysis of net profitof Nagarjuna ltd for the period from
2008-2009 to 2012-2013. Here 2008-2009 is taken as base year, it is 100.The net profit is showing a fluctuating
trend, in 2009-2010 it has decreased from 100% to 94.39% and it decreased to 69.2% in 2010-2011. In 2011-
2012 it has again increased to 76.1% and in 2012-2013 it further increased to 90.6%, the net profit is shows the
increasing trend recently. The firm is showing efficiency in both profitability and performance because of
reduced expenses.

NET SALE

(Table no 3.20)

YEAR 2008-2009 2009-2010 2010-2011 2011-2012 2012-2013

NET SALES 183036578 224243415 265764540 265042554 285029616

TREND 2008-2009 2009-2010 2010-2011 2011-2012 2012-2013

PERCENTAG
E

SALES 100 122.51 145.19 144.80 155.72

(Source:annual report)

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 Chart no.3.16

NET SALES
200

150

100 NET SALES

50

0
2008-2009 2009-2010 2010-2011 2011-2012 2012-2013

Interpretation: - The above table shows the trend analysis of net sales of Nagarjuna Ltd. for the period from
2008-2009 to 2012-2013. Here 2008-2009 is taken as base year. The analysis reveal that in 2009-2010 net sales
have increased from 100% to122% further increased to 155% in 2012-2013, The data reveals that there is
increasing trend in net sales, which shows that the sales is increasing year by year which means it is efficiently
utilizing.

65
 Chapter-4
FINDINGS, CONCLUSIONS

AND SUGGESTIONS

4.1 SUGGESTIONS.

 Since the absolute cash ratio of the company Nagarjuna Ltd is below the standard that is 0.50,
throughout the study period the company must have to invest a lump sum from the sales proceeds as
cash and cash equivalents.
 The company is not having good liquidity position, hence it is suggested to upgrade and expand their
market through advertisement and increase profitability.
 The company can plan of investing more amounts on research and development. So that innovative
product can be developed in order to sustain in the competitive environment
 The company can use modern techniques to upgrade the product quality.

4.0 FINDINGS:

 As per the study found that Current ratio of the company for all the years under study is above the
standard of 2:1. So the current position of the company is satisfactory.(table 3.1)

66
  Quick ratio is an indicator of short- term solvency of the company. Short term Solvency means ability to meet the
short term liability. It can be conclude from the analysis that the short term solvency of the company is high.(table
3.2)
 Comparing to standard ratio, the absolute liquidity ratio is very less.This indicates the cash and cash
equivalents are not properly used in financing the company’s activities .(table 3.3)
 Inventory turnover ratio during the five years study period revealed to be consistent. The average stock turnover
ratio is 3.44 (table 3.4)
 Debtor’s turnover ratio of the company is increasing year by year. This revealed that the company is becoming
more efficient in collect their debt from debtors (table 3.5)
 Average Debtors collection period of the company throughout the study period is 76 days since the company
allowed 90 days to their debtors (table 3.6)
 From this analysis of total debt ratios of the company during the last 5 years are found to be very low. A
lower current ratio is not good for the company. This indicates the company is not utilizing the benefits
from debt opportunities. It shows the inefficiency of the company in managing its debt financing.(table
3.7)

4.2 CONCLUSION:-

The study was conducted on the topic “A study on impact of working capital management on profit and
liquidity position with special reference to Nagarjuna Herbal Concentrates Ltd Idukki”has thrown light into
financial position of the firm with respect to its working capital.

The overall aim of the study is to analyze the Working capital position of Nagarjuna Herbal
Concentrates Ltdby using financial ratios, schedule of changes in working capital and trend analysis. The net
working capital in 2008-09 to2012-013 indicates there is efficiency in working capital for day to-day
operations.

67
 Therefore the net working capital position in Nagarjuna Herbal Concentrates Ltdis satisfactory
throughout the study period.

BIBILIOGRAPhy

4.3 BIBLIOGRAPHY

BOOKS

 Vijaykumar and A. Venkatachalam, “Working Capital and Profitability – An Empirical

Analysis,”sixth edition The Management Accountant, October 1995 p. 748-750;
 John Sagan, “Towards a Theory of Working Capital Management,” The Journal of Finance, May 1955
pp. 121-129.

68
 Ernest W. Walker, “Towards a Theory of Working Capital,”second edition The Engineering
Economist, winter 1964 pp. 21-35.

WEBSITES

 http://www.nagarjuna.com
 www.investopedia.com/terms/w/workingcapitalmanagement.asp

 www.studymode.com/.../review-of-literature-for-working-capital-management

 www.J-Gate plus.com/working capital management.

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