CHAPTER 1

INTRODUCTION
What is management
Management is the process of planning and organising the resources and activities of a
business to achieve specific goals in the most effective and efficient manner possible.
Efficiency in management refers to the completion of tasks correctly and at minimal
costs. Effectiveness in management relates to the completion of tasks within specific
timelines to yield tangible results

It is a process of getting the work or the task done that is required for achieving the
goals of an organisation in an efficient and effective manner. Process implies the
functions of the management. That is, planning, organising, staffing, directing,
controlling

Importance of management
 Helps in achieving group goals:
Effective management gives a common direction to
individual efforts and guides them towards achieving the overall goals of an
organisation.

 Increases efficiency:
Efficiency reduces costs and increases productivity
in all spheres of an organisation’s work.

 Creates a dynamic organisation:

Management helps its personnel in
adapting to change so that the organisation continues to maintain its
competitive edge. How well an organisation can respond and adapt to
change can mean the difference between its success and failure.

 Helps in achieving personal objectives:

 Effective management fosters team spirit,
cooperation and commitment to achieve the organisational goals as a
group, which helps each term member achieve their personal
objectives.

Definition of cash management

Glen Arnold: Cash management involves controlling the cash flows into and
out of a business to ensure there is enough liquidity to meet short-term
financial obligations.

Robert N. Anthony: Cash management is the process of optimizing the use of cash
resources by minimizing idle cash and maximizing investments to generate returns.

J. Fred Weston: Cash management encompasses the techniques and strategies employed
by a firm to manage its cash position efficiently, considering factors like collections,
disbursements, and short-term investments.

James C. Van Horne: Cash management involves the day-to-day control of a firm’s cash
balances to minimize the cost of holding cash while ensuring the availability of funds for
operational needs.

Importance of cash management

Effective cash management is crucial for businesses as it ensures sufficient liquidity to

meet daily operational needs, pay bills, and invest in growth opportunities.

Ensuring sound cash management practices is the best way to ensure financial stability
and make strategic decisions for growth. Fintech solutions today have automated, tech-
first offerings that make banking for businesses easier than ever.

RazorpayX is one such fintech solution that offers modern-age banking solutions to
entrepreneurs for better financial management. Current accounts powered by
RazorpayX are designed with a smart dashboard, offering a clear picture of the cash
inflows and outflows
Techniques in cash management

 Float Management: Minimizing the time funds are in transit to maximize the
availability of cash for use.
 Cash Forecasting: Predicting future cash flows to anticipate periods of surplus or
shortage and plan accordingly.
 Lockbox Systems: Utilizing bank services to expedite the collection of receivables
and reduce the time it takes for funds to reach the company.
 Zero-Balance Accounts (ZBA): Maintaining separate bank accounts for specific
purposes while centralizing control over funds to eliminate excess balances.
 Sweep Accounts: Automatically transferring excess cash from one account to
another to maximize interest or investment returns.
 Cash Concentration: Consolidating funds from various accounts into a single
central account for better control and management.
 Credit Management: Efficiently managing credit terms to delay payments while
maintaining good relationships with suppliers.
 Short-Term Investments: Investing excess cash in short-term instruments to earn
returns while ensuring quick accessibility when needed.
 Electronic Funds Transfer (EFT): Utilizing electronic methods for fund transfers
to expedite transactions and reduce processing time.
 Ratio Analysis: Regularly analyzing liquidity ratios to assess the financial health
and liquidity position of the company.

Strategies Commonly adopted in cash management

 Maintaining Cash Reserves: Keeping a minimum level of cash to cover day-to-day

operational needs and unexpected expenses.

 Accelerating Receivables: Encouraging customers to pay invoices promptly

through discounts or other incentives to improve the cash conversion cycle.
 Delaying Payables: Negotiating favorable payment terms with suppliers to delay
cash outflows and retain funds for a more extended period.

 Optimizing Inventory Levels: Managing inventory efficiently to avoid overstock

situations, freeing up cash that would otherwise be tied up in excess inventory.

 Short-Term Borrowing: Using short-term loans or lines of credit to cover

temporary cash shortages rather than maintaining high levels of cash reserves.

 Cash Flow Budgeting: Creating and regularly updating cash flow budgets to
forecast and plan for future cash needs and surpluses.

 Investing Excess Cash: Putting surplus cash into short-term investments to earn
returns while maintaining liquidity.

 Implementing Cash Concentration: Centralizing cash in a primary operating

account to gain better control and visibility over available funds.

 Zero-Based Budgeting: Allocating cash based on needs rather than historical

spending patterns, ensuring every expense is justified.

 Foreign Exchange Management: Managing currency exposure to mitigate the

impact of exchange rate fluctuations on cash positions, especially for
multinational companies.
 PROBLEM DEFINITIONS

Effective cash management is crucial for the financial health and sustainability of
businesses. However, the dynamic nature of financial markets, evolving technology, and
changing economic landscapes pose challenges in optimizing cash resources. This study
aims to investigate the diverse cash management techniques and strategies employed by
organizations across industries.

OBJECTIVES OF THE STUDY

• To study the existing system of cash management in Plantation Corporation of

Kerala Ltd
• To appraise the performance of the cash management system
• To analyze the effect of cash changes in the revenue generation of the firm.
• To find out the liquidity position of the concern through ratio analysis.
• To study the operational efficiency of the firm during the period of study.
• To analyze the current assets and current liabilities of the company.
• To make suggestion and recommendation to improve the cash position of
Plantation Corporation of Kerala Ltd.
• To determine the relationship between sales and average inventory.
• To examine the cash position of Plantation Corporation of Kerala Ltd during the
period of the study
• To check whether the cash management system of Plantation Corporation of
Kerala Ltd is effective or not.
• To define the impact in dependent variable caused by the changes in
independent variable
 SCOPE OF STUDY

• Cash management refers to a systematic way of handling cash inflows and outflows
resulting from business operations. Understanding the basic concepts of cash
management will help business enterprises to plan for the unforeseen eventualities that
nearly every business faces.
• Cash management involves the aspects such as cash planning, managing the cash
outflows, managing optimum cash balance, investing cash. Cash management is also
important because it is difficult to predict cash flows accurately particularly the inflows
and there is no perfect coincidence between inflows and outflows. Cash management
involves the aspects such as cash. Planning, managing the cash outflows, managing
optimum cash balance, investing cash. Cash management is also important because it is
difficult to predict cash flows accurately particularly the inflows and there is no perfect
coincidence between inflows and outflows.
• Cash management involves the aspects such as cash planning, managing the cash
outflows. Managing optimum cash balance, investing cash. Cash management is also
important because it is difficult to predict cash flows accurately particularly the inflows
and there is no perfect coincidence Between inflows and outflows.

LIMITATIONS OF STUDY

 Since data collected used is secondary in nature, this poses the constraints on the
validity and reliability of the data.
 Today, companies are very sensitive regarding their internal data so they are not
ready to provide all the internal data and this causes a hindrance to the study.
 This study was carried out only for 1 month. So it is very difficult to conduct an
in-depth study.
 The findings and suggestions are based only on the secondary sources of
information.
 The study covered the data of past 5 years. So any fluctuations before or after the
study period will not be reflected in this study.
 The analysis is done based on the annual reports and journals of the company.
There is no other sources of data is available.

 It is not possible to conduct an elaborate study by using only 5 year financial

statements.
 CHAPTER – 2
LITERATURE REVIEW
 LITERATURE REVIEW

Peter Drucker: Cost management, according to Peter Drucker, involves the

continuous examination and restructuring of business activities to enhance
efficiency and reduce unnecessary expenses, ensuring resources are
allocated effectively.

Philip Kotler: From a marketing perspective, Philip Kotler sees cost

management as the strategic process of optimizing expenses while
maintaining or improving the value offered to customers, aiming for a
balance between cost reduction and customer satisfaction.

Michael Porter: In the context of competitive strategy, Michael Porter

defines cost management as the pursuit of cost leadership, where
companies strive to be the low-cost producers in their industry, gaining a
competitive advantage through efficient operations.

Vijay Govindarajan: According to Vijay Govindarajan, cost management is a

dynamic approach that involves adapting cost structures to align with
changing business conditions, allowing organizations to stay agile and
competitive in evolving markets.
 CHAPTER – 3
INDUSTRY PROFILE
1.1 BRIEF HISTORY OF THE INDUSTRY
India is the fourth biggest producer and customer of Natural Rubber in the world in
natural India can take. Despite the near total predominance of small holders pride in
having the highest productivity. Rubber is also the best crop compared to all other
major crops in terms of production, growth, area expansion and productivity. The
rubber growers here have also getting the best, prices in the world especially at farm
rate. Since it commercial beginning in 1902 the rubber plantation industry in India had
made significant strides in terms of growth in area, productivity and production.
Considerable expansion of area during the 1950's and 1960's in Kerala, which accounts
for 92% of natural production in India. Kerala together with Kanyakumari district of
Tamil Nadu is the traditional rubber growing region in the country. To meet the
increasing demand for the rubber in the country, the commercial cultivation of this crop
was extended beyond the traditional region; especially to the north east from1960's
onwards the traditional are now accounts for 88% of the area under rubber. Through
the manufacture of rubber based products started in India as early as in 1922. till the
middle of 1930's the industry was not enough to absorb the entire volume of natural
rubber produced in the country, thereafter owing to a host of promotional features, the
situation changed and the plantation industry which was mainly export oriented until
the middle of 1930's gradually found the domestic market sufficient. When the
absorptive capacity of the domestic manufacturing sector was further expanded, supply
was formed insufficient to meet the industries requirements and by 1947 India become
a net importer of natural rubber. A part from consumer synthetic rubber also. Natural
rubber together with synthetic rubber is termed as a customer. In India natural rubber
is preferred customer while natural has only a-share of 40%, in the global customer
consumption in India.
3.2 Industrial performance – Global, National & Regional
1.2 Prospects & Challenge in the Industry

The cenex industry is a dynamic and constantly evolving sector, with both opportunities
and challenges facing the industry. Here are some of the prospects and challenges of the
cenex industry

Prospects:

 Benefits of the employees and worker

 Increasing the rubber materials
 Less cost of production

Challenge:

 Exporting of the cenex

 Competition of the industry
 Cost of raw materials
 Rubber diseases
 Climate change
 CHAPTER – 4
COMPANY PROFILE
4.1 Brief History of the organisation & current board
of directors / Organisation chart

The rich quality rubber latex produced form the PCK. estates is
processed in our own in house factories into Concentrated Latex, Crump
Rubber and Crepe Rubber. To process timber of old rubber trees felled for
replanting, the corporation has setup a rubber wood processing factory at
Kodumon in Pathanamthitta District of Kerala. The corporate growth plans
of the Plantation Corporation emphasize on lateral diversification. As
earlier as 1977, PCK had diversified into oil palm cultivation. A subsidiary
company by name Oil Palm India Ltd., was formed with the participation of
the Government of India. Today oil palm India Ltd is an independent
company. From being a purely plantation based organization, the PCK is
now diversifying into the challenging sunrises industries, utilizing the vast
amount of rubber wood generated from its plantations. The modern,
treated wood processing plant is already in operation since 1989. The
treated rubber, wood is an economical alternative to teak and mahogany.
The demand for rubber wood is steadily increasing in Kerala, also help to
arrest deforestation to a certain extend. Kerala is known as "God's own
Country". The estates of PCK are blessed with patches of undisturbed
natural beauty reiterate this truth. Thus the potential of farm Tourism and
Eco-Tourism which is emerging as a high potential commercial activity in
Kerala was identified as a suitable area for diversification by the plantation
corporation. The corporation have identified plenty of spots of science
beauties in its. Plantations are located in different pans of the state of
Kerala. The all natural like captive secondary jungles, rocky patches, rivers,
rivulets, river banks, minor and major waterfalls, dam sites etc, offer
tremendous potential for commercial exploitation from a tourism angle.
ORGANISATION CHARTS
4.2 Mission, Vision statement and Quality policy
followed
VISION
The corporation aims expanding to new areas like tourism and rubber
based industries such as gloves, hoses, mats, automobile spare parts &
sports goods. The corporation also focuses on plantation based on forestry
spices.

MISSION

The main mission of PCK Ltd. is to get ISI specification and Ag mark for all
products and intent the demand of products.

OBJECTIVES OF THE COMPANY

 To Establish Rubber Plantation

 To Establish Cashew Plantation
 To Establish Other Plantation, Crops, Oil Seeds And Other Food Crops
 To Cultivate Spice Crops

QUALITY POLICY

We, at PCK are committed to excel in yhe production and marketing of

plantation crops and strive for ensuring customer satisfaction through
continual improvement of agricultural activities and quality objectives
4.3 Business process of the organisation – product
profile

Kodumon Cenex factory

The Company has two latex centrifuging factories, one Crumb Rubber (ISNR) factory
and one Rubber wood processing Factory. Both centrifuging factories are equipped with
modern imported centrifuging machines and producing concentrated latex above BIS
standard, which empowered the company to hold the leading position in cenex market
in India.

Both factories are also equipped with modern laboratories to maintain the quality
above BIS standard. These Factories are also equipped with scientific effluent treatment
plants, working under the close monitoring of Pollution Control Board.

The Kodumon Group Latex factory can process 36000 liters of Normal latex a day.

4.4 Strategies – Business, Pricing & Management

BUSINESS

Plantation businesses produce Agri-products in vast quantities that are consumed by

thousands of households. Yet, many plantation owners still struggle to make their
businesses profitable. This has highlighted the need for agricultural enterprises to
incorporate smart plantation management strategies to yield significant returns for
their business. Adopting clever plantation management tricks can be quite effective in
boosting your profit margins. By buying inputs in large volumes, plantation owners can
negotiate better and get high discounts as compared to purchasing inputs as and when
required. Eliminating middlemen and making contracts directly with processing
companies can safeguard a massive amount of your profits. With a robust and reliable
drip irrigation system, plantation businesses can successfully meet their goals of
sustainability and profitability with the precise use of water. Using Plantation
management software to digitally keep track of your accounting and farm records can
help you make well-informed business decisions. Taking wise calls related to renting or
buying machinery can also contribute to improving your plantation management efforts
and enhancing your business returns.

PRICING

MANAGEMENT

 Buy agriculture inputs for your plantation in bulk.

 Formulate agreement directly with large processors.
 Set up a durable drip irrigation system.
 Ditch manual record keeping and go digital.
 Making judicious and strategic machinery investment.
4.5 SWOT ANALYSIS OF THE COMPANY

The basic objective of SWOT analysis is to provide frame work to reflect

the firms ability to overcome barriers and avail of the opportunities
emerging in the changing environment.

STRENGTHS

PCK is the largest Public sector undertaking in the plantation sector in

Kerala. It enjoys privilege granted by the Government.

1. Efficient and experienced team of officers staff and workers

2. Unique brand name
3. Customer satisfaction
4. High skilled workers
5. Quality product
6. Talented employees
7. Latest concept and technologies
8. Effective Management

WEAKNESSES

1. High operating expense

2. Very low budget of advertisement

3. Old technology
4. Lack of commitment
5. Limited number of customers
6. Poor quality of production
7. Breakdown of machinery
OPPORTUNITIES

1. Aim of the company is to meet the global standards. This creates the
opportunities to produce quality product
2. Growing market demand
3. Improving quality
4. The idea of Road Rubberisation is getting acceptable
5. Malaysia, one of the major producers of natural in the world has
gradually reduced their production

THREATS

1. Availability of duplicate product in the market.

2. Changing technologies.
3. Well organized plantations like PCK Ltd.
4. Highly fluctuating market value of natural rubber.
 CHAPTER - 5
RESEARCH METHODOLOGY
 RESEARCH METHODOLOGY

Research methodology simply refers to the practical “how” of any given

piece of research. More specifically, it’s about how a researcher
systematically designs a study to ensure valid and reliable results that
address the research aims and objectives. Research methodology is a way
of explaining how a researcher intends to carry out their research. It's a
logical, systematic plan to resolve a research problem. A methodology
details a researcher's approach to the research to ensure reliable, valid
results that address their aims and objectives.
Research methodology refers to the methods and techniques used to
effectively portray the research. Such procedures improve the research
process and make the methods of research clearer to everyone. The
researcher is mostly responsible for how the audience is presented with
the idea and how the research methods are explained. In the research,
several methods are employed to explain the ideas; we will study the
various types in this article. However, the selection of the method is
entirely up to the researcher, and there are no restrictions on the type.

3.2 RESEARCH DESIGN

The research design refers to the overall strategy that you choose to
integrate the different components of the study in a coherent and logical
way, thereby, ensuring you will effectively address the research problem; it
constitutes the blueprint for the collection, measurement, and analysis of
data. A Research Design is simply a structural framework of various
research methods as well as techniques that are utilised by a researcher.
The research design helps a researcher to pursue their journey
into the unknown but with a systematic approach by their side.
The way an engineer or architect frames a design for a structure,
likewise the researcher picks the design from various approaches
in order to check which type of research to be carried out.
Research design refers to the framework of market research
methods and techniques selected by a researcher. The design
chosen by the researchers allows them to use the methods
adapted to the study and to set up their studies successfully in the
future.
The research design can be qualitative, quantitative or mixed.
Among these research designs, researchers can choose between
different types of research methods; experimental studies,
surveys, correlation studies or quasi-experimental survey studies.
There are also subtypes of research methods, namely
experimental design, defining research problems, and descriptive
studies. Research projects also include elements of data
collection, data measurement with respective tools and data
analysis. As a general rule, the research problem a company
wants to work on determines the research project chosen by the
researcher rather than the other way around.
3.2.1EXPLORATORY RESEARCH DESIGN

I used the exploratory research design. Exploratory research

design is done for a research problem when the researcher has no
previous data or few reference studies. Sometimes this research is
informal and unstructured. It serves as an initial research aid that
provides a hypothetical or theoretical idea of the research
problem. Exploratory research is a methodological approach that
explores research questions that have not been thoroughly
investigated before. Exploratory research is often qualitative in
nature. However, a large exploratory sample survey can also be
quantitative.
Exploratory research is "the preliminary research to clarify the
exact nature of the problem to be solved." It is used to ensure
additional research is taken into consideration during an
experiment as well as determining research priorities, collecting
data and honing in on certain subjects which may be difficult to
take note of without exploratory research.
Exploratory studies usually create scope for future research and
the future research may have a conclusive design.
The primary objective or purpose of exploratory research design
is that of formulating a problem for more precise investigation or
of developing the working hypothesis from an operational
perspective. The main focus in these research projects is on the
discovery of ideas and insights.
One of the most important features of exploratory research is its
potential for future research. Some key characteristics are:
Flexible & Versatile, no structured forms are used, no experiment,
cost incurred is low, wide exploration of views, interactive & open
ended.
Explanatory research helps researchers understand a particular
problem in depth. This can give them a better comprehension on
a specific topic. By conducting explanatory research, individuals
can understand the cause, or hypothesis, behind a phenomenon
and predict future occurrences.
It is usually low cost. It helps lay the foundation of a research,
which can lead to further research. It enables the researcher
understand at an early stage, if the topic is worth investing the
time and resources and if it is worth pursuing.
Exploratory research design is done for a research problem when
the researcher has no previous data or few reference studies.
Sometimes this research is informal and unstructured. It serves as
an initial research tool that provides a hypothetical or theoretical
idea of the research problem. It will not provide concrete
solutions to the problem of research. This research is conducted
to determine the nature of the problem and helps the researcher
develop a better understanding of the problem. Exploratory
research is flexible and forms the first basis for future research.
Exploratory research requires the researcher to explore a variety
of sources, such as published secondary data, data from other
studies, observation of research elements, and opinions about a
company, product or service.
Exploratory research, as the name implies, intends merely to
explore the research questions and does not intend to offer final
and conclusive solutions to existing problems. This type of
research is usually conducted to study a problem that has not
been clearly defined yet. Conducted in order to determine the
nature of the problem, exploratory research is not intended to
provide conclusive evidence, but helps us to have a better
understanding of the problem.
Exploratory research is the process of investigating a problem
that has not been studied or thoroughly investigated in the past.
Exploratory type of research is usually conducted to have a better
understanding of the existing problem, but usually doesn't lead to
a conclusive result.
Researchers use exploratory research when trying to gain
familiarity with an existing phenomenon and acquire new insight
into it to form a more precise problem. It begins based on a
general idea and the outcomes of the research are used to find out
related issues with the topic of the research.
In exploratory research, the process of the research varies
according to the finding of new data or insight. Also referred to as
interpretative research or grounded theory approach, the
outcomes of this research provide answers to questions like what,
how and why.
Here are some benefits of exploratory research:

• Can help make critical decisions:

Exploratory research can help researchers determine whether a
research problem is worth investigating.

• Save Time, Money, and Resources:

If a topic turns out to be unnecessary to study or impractical to
study, the researcher has saved a lot of time, money, and
resources by not continuing research on it
.
• Provides Deeper Context:
Exploratory research provides deeper context and understanding
of a research problem, enabling further research to be conducted
in a well-informed manner.

• Economic:
Exploratory research is generally an economic research method,
especially when mostly secondary data is used.
3.3 SOURCE OF DATA

A data source can be the original place where data is born or

where physical information is first digitized, but even the most
sophisticated data can act as a source as long as another process
can access and use it. Specifically, a data source can be a database,
flat file, real-time measurements from physical devices, scraped
web data, or any other static and streaming data services that
abound on the Internet.

3.3.1PRIMARY DATA

Data that has been generated by the researcher himself/herself,

surveys, interviews, experiments, specially designed for
understanding and solving the research problem at hand.
Data – or information – to help answer questions, understand a
specific issue or test a hypothesis. Researchers in the health and
social sciences can obtain their data by getting it directly from the
subjects they're interested in. This data they collect is called
primary data.
3.3.2SECONDARY DATA

I used secondary data to complete the project work.

Sources of secondary data include books, personal sources,

magazines, newspapers, websites, government documents etc.
Secondary data is known to be readily available compared to
primary data. Very little research and manpower are required to
use these resources.
When data is collected by someone else for a purpose other than
the researcher's current project and has already been subjected
to statistical analysis, it is called secondary data.
Secondary data is readily available from other sources and as
such there are no specific collection methods. The researcher can
obtain data from both internal and external sources to the
organization. Internal sources of secondary data are:
• Financial statements
• Company information
• Management information system
• There are several external sources from which secondary
data can be collected. These are:
• Business magazines
• Libraries
• Internet, where extensive knowledge on different fields is
readily available.

I collected the data from these sources to complete my project

work.

Secondary data can be both qualitative and quantitative.

Qualitative data can be obtained through journals, diaries,
interviews, transcripts, etc. while quantitative data can be
obtained through a survey, balance sheets and statistics. One of
the advantages of secondary data is that it is readily available and
therefore less time is required to collect all relevant information.
It is also less expensive than primary data. But the data may not
be specific to the researcher's needs and at the same time be
incomplete to come to a conclusion. The authenticity of the
research results can also be sceptical. Sources of secondary data
include books, personal sources, journals, newspapers, web sites,
government records etc. Secondary data are known to be readily
available compared to that of primary data.

3.4 DATA ANALYSIS TECHNIQUES

Although many groups, organizations, and experts have different

ways of approaching data analytics, most can be distilled into a
unified definition. Data analysis is the process of cleaning,
modifying and processing raw data and extracting useful and
relevant information that helps companies make informed
decisions. The procedure helps reduce the risks inherent in the
decision-making process by providing useful insights and
statistics, often presented in graphs, images, tables and graphs.
The important analytical tools used in this study are:

 Correlation analysis
 Ratio analysis
 Trend Analysis

3.4.1CORRELATION ANALYSIS

Correlation analysis in research is a statistical method used to

measure the strength of the linear relationship between two
variables and compute their association. Simply put - correlation
analysis calculates the level of change in one variable due to the
change in the other. Correlation analysis is a statistical method
used to find out if there is a relationship between two variables /
data sets and how strong that relationship can be. In terms of
market research, this means that correlation analysis is used to
analyze quantitative data collected from research methods such
as polls and surveys, to determine if there are any significant
links, patterns or trends between the two.
Correlation shows the strength of a relationship between two
variables and is expressed numerically by the correlation
coefficient. Correlation coefficient values range from -1.0 to 1.0.
A perfect positive correlation means that the correlation
coefficient is exactly equal to 1. This implies that when one
security goes up or down, the other security moves in parallel in
the same direction. A perfect negative correlation means that two
assets move in opposite directions, while a zero correlation
implies no linear relationship.

FORMULA

n(∑ xy )−(∑ x)(∑ y )

r= √ [n∑ x 2(∑ x )² ][n ∑ y ²−(∑ y)² ]

Where,

r = coefficient of correlation

n = Total number of observations

∑ x= Total of first variable value

∑ y = Total of the second variable value

∑ x y = Sum of the product of first and second value

∑x² = sum of the squares of the first value

∑y² = sum of the squares of the second value

3.4.2RATIO ANALYSIS

Ratio analysis is a quantitative method of gaining insight into a

company's liquidity, operational efficiency, and profitability by
studying its financial statements such as the balance sheet and
income statement. Ratio analysis is a cornerstone of fundamental
equity analysis.
Ratio analysis is called the review or analysis of the items
included in the company's financial statements. Various factors of
a business such as profitability, liquidity, solvency and efficiency
of the business or company can be checked.
Ratio analysis is mostly performed by external analysts, as
financial statements are the primary source of information for
external analysts.
Analysts rely heavily on current and past financial statements to
provide important data for analysing company financial
performance. The data or information thus obtained from the
analysis is useful in determining whether the financial situation of
a company is improving or deteriorating.

 CURRENT RATIO
The current ratio is a liquidity ratio that measures a company's
ability to pay short-term obligations or those due within one year.
It tells investors and analysts how a company can maximize the
current assets on its balance sheet to satisfy its current debt and
other payables. Generally current ratio of 2:1 is accepted as a
standard ratio.
FORMULA

Current Ratio = 𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑎𝑠𝑠𝑒𝑡𝑠

𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠

 QUICK RATIO

The quick ratio is an indicator of a company’s short-term

liquidity position and measures a company’s ability to meet
its short-term obligations with its most liquid assets.
Since it indicates the company’s ability to instantly use its
near-cash assets (assets that can be converted quickly to
cash) to pay down its current liabilities, it is also called the
acid test ratio. An "acid test" is a slang term for a quick test
designed to produce instant results. Quick asset is calculated
by deducting stock and prepaid expenses from the current
asset.
FORMULA

QUICK 𝑅𝐴𝑇𝐼𝑂 =

 ABSOLUTE LIQUID RATIO

𝑄𝑈𝐼𝐶𝐾 𝐴𝑆𝑆𝐸𝑇𝑆

𝐶𝑈𝑅𝑅𝐸𝑁𝑇 𝐿𝐼𝐴𝐵𝐼𝐿𝐼𝑇𝐼𝐸𝑆

The relationship between the absolute liquid assets and

current liabilities is established by this ratio. Absolute Liquid
Assets take into account cash in hand, cash at bank, and
marketable securities or temporary investments. The most
favourable and optimum value for this ratio should be 1: 2.

FORMULA

𝐴𝐵𝑆𝑂𝐿𝑈𝑇𝐸 𝐿𝐼𝑄𝑈𝐼𝐷 𝑅𝐴𝑇𝐼𝑂 =

𝐴𝐵𝑆𝑂𝐿𝑈𝑇𝐸 𝐿𝐼𝑄𝑈𝐼𝐷 𝐴𝑆𝑆𝐸𝑇 CURRENT LIABILITY

3.4.3TREND ANALYSIS

Trend analysis is a technique used in technical analysis that

attempts to predict future stock price movements based on
recently observed trend data. Trend analysis uses historical data,
such as price movements and trade volume, to forecast the long-
term direction of market sentiment. In project management, trend
analysis is a mathematical technique that uses historical results to
predict future outcome. This is achieved by tracking variances in
cost and schedule performance. In this context, it is a project
management quality control tool.

3.5 THEORETICAL FRAMEWORK

The theoretical framework is the structure that can hold or

support a theory of a research study. The theoretical framework
introduces and describes the theory that explains why the
research problem under study exists. It helps researchers to
generalize the various aspects of an observed phenomenon from
simply describing it and also identifies their limits. By validating
and challenging theoretical assumptions, it facilitates the
understanding of concepts and variables as per the given
definitions and builds new knowledge.
A theoretical framework consists of concepts and, together with
their definitions and reference to relevant scholarly literature,
existing theory that is used for your particular study. The
theoretical framework must demonstrate an understanding of
theories and concepts that are relevant to the topic of your
research paper and that relate to the broader areas of knowledge
being considered.
The theoretical framework is most often not something readily
found within the literature. You must review course readings and
pertinent research studies for theories and analytic models that
are relevant to the research problem you are investigating. The
selection of a theory should depend on its appropriateness, ease
of application, and explanatory power.
A theoretical framework is used to limit the scope of the relevant
data by focusing on specific variables and defining the specific
viewpoint [framework] that the researcher will take in analysing
and interpreting the data to be gathered. It also facilitates the
understanding of concepts and variables according to given
definitions and builds new knowledge by validating or
challenging theoretical assumptions

3.5.1 LIQUIDITY

The liquidity of the company refers to its ability to meet its

current obligations as and when they expire.
It can also be referred to as day-to-day asset management.
Investments in current assets affect the liquidity, profitability and
risk of the company. The more current assets a company has, the
more liquid it is. This means that the company has a lower risk of
default. Liquidity is therefore the proportion of a company's
current assets to its current liabilities. The result is net current
assets and / or net current liabilities, generally referred to as
work capital (WC).
Liquidity management can be defined as the planning and control
of cash flow by owner- managers to meet their daily obligations,
Collins and Jarvis (2000). Liquid assets refers to the level of
liquidity and quasi-monetary assets held, as well as the cash
inflows and outflows of these resources, McMahon and Stanger
(1995). According to Renato (2010), liquidity measures the ability
of a company to cope with its short term liabilities using its most
liquid assets. In other words, balance sheet liquidity is the ease
with which a The business can pay its bills and debts over the
next year, especially if it has to convert its Convert assets into
cash. Two common methods of measuring accounting liquidity
are the current report and quick report.
Liquidity provides financial freedom in the form of buying power.
Liquid assets in an account provide account holders with
immediate access for a large or small purchase. Investors and
consumers holding cash can act quickly to get a good deal on
everything from clothing to real estate.
Liquid funds are ideal for low-risk investors looking to park
surplus cash for the short term. The biggest advantage of liquid
funds is that it offers superior returns than bank deposits. But the
returns on liquid funds is not guaranteed. This is the biggest
disadvantage of liquid funds.
Financial liquidity also plays a vital part in the short-term
financial health of a company or individual. Each have bills to pay
on a reoccurring basis; without sufficient cash on hand, it doesn't
matter how much revenue a company makes or how expensively
an individual's house is valued at.

3.5.2 PROFITABILITY

Profitability is a measure of the net of revenue and expenses.

Revenue is money generated from the activities of the business,
while expenses are the expenditures incurred in the process of
carrying out of the activities of the business. Operating profit is a
measure of a company’s earning power from its ongoing
operations, equal to earnings before deduction of interest and
taxes. Profitability is the most important measure of the success
of the business.
A business that is not profitable may not survive while a business
that is highly profitable has the ability to reward its owners with
large returns on their investment Kithii (2008). A firm that is
profitable is also able to expand and increase its value.
Profitability is thus the primary goal of all business ventures.
Without profitability, the business will not survive in the long run.
So measuring current and past profitability and projecting future
profitability is very important. Gross profit is the profit before
selling expenses, general and administrative costs like
depreciation and interest; it is the sales less direct cost of goods
(or services) sold (COGS) while net profit is the sales of the firm
less costs like wages, rent, fuel, raw materials, interest on loans
and depreciation. Costs such as depreciation and amortisation
tend to be ambiguous, Mathur (2002). Measures of profitability
include Return on Equity (ROE), determined by taking net income
divided by average shareholder’s equity and Return on Assets
(ROA), determined by taking the company’s net income divide by
average total assets.
The success of any business depends on its ability to continually
earn profits. Profit equals a company's revenues minus expenses.
Earning a profit is important to a business because profitability
impacts whether a company can secure financing from a bank,
attract investors to fund its operations and grow its business.
Profitability depicts a retailer's ability to sustain its business.
Setting an objective for the total revenue a business will make
after all its bills are paid can help retail management do
everything from make important hiring decisions to decide when
and where to build additional locations.
There are four key areas that can help drive profitability. These
are reducing costs, increasing turnover, increasing productivity,
and increasing efficiency. You can also expand into new market
sectors, or develop new products or services.

The number of production units, production per unit, direct costs,

value per unit, mix of enterprises, and overhead costs all interact
to determine profitability. The most basic factor affecting profit in
any business is the number of production units.
A company's profitability is the extent to which its total income
exceeds its total expenses for any given period. Profitability is an
accounting concept that is sometimes referred to as net profit or
net income.

3.5.3 EFFECT OF LIQUIDITY ON PROFITABILITY

Efficient working capital management has got a positive

relationship with a firm’s profitability and return on assets.
According to Deloof and Jegers (1996), firms may have an optimal
level of working capital that maximises their value. Large
inventory and generous trade credit policy may lead to high sales;
larger inventory reduces the risk of stock-outs; trade credit may
stimulate sales since it allows customers to assess product quality
before paying; and delaying payments to suppliers allows a firm
to assess the quality of the products, and can be an inexpensive
and flexible source of financing for the firm. All the above working
capital management procedures are aimed at improving
profitability and consequently a higher return on assets.
Working capital management (WCM) is very important due to
many reasons. WCM is an important component of corporate
finance because it directly affects the liquidity and profitability of
firms. The top-line (sales) of the company may grow in a given
year, but the bottom-line (net profit) could have been weighed
down by various factors like rising inventory levels, higher levels
of accounts receivable, resulting in increased borrowing to
finance the operations, and hence higher interest payments
Murali (2000). This would lead to reduced profitability and hence
low return on assets. From a shareholder’s perspective, the most
important aspect is the effective management of working capital
by a company. Prudent and effective management of working
capital becomes necessary as neither does it come free nor does it
come cheap. There is an opportunity cost attached to
management of working capital besides the inevitable interest
burden that comes due to short term bank borrowings. The cost
of working capital can be especially high during times of
economic slowdowns as inventories and receivables would rise,
bloating the current assets considerably. In addition, current
liabilities would not keep pace with current assets as creditors
would shy away in such cases. With a wide gap building up
between current assets and current liabilities, it becomes more
expensive to finance working capital, and the result is a huge hit
on the profitability, Murali (2000). Kiprono (2004) studied the
relationship between cash flows and earnings performance
measures for companies listed in the Nairobi securities Exchange
(NSE). The results showed that there is a negative or indirect
association between cash flows from financing and investing
activities and returns performance indicators. There was a weak
relationship between cash flows and performance indicators.
Hirigoyen (1985) argues that over the medium and long run, the
relationship between liquidity and profitability could become
positive, in the sense that a low liquidity would result in a lower
profitability due to greater need for loans, and low profitability
would not generate sufficient cash flows, thus forming a viscous
cycle. Eljelly (2004), in the study of the relationship between
profitability and liquidity as measured by current ration and cash
gap (cash conversion cycle – CCC), found significant negative
relation between the firm’s profitability and its liquidity level.
This relationship was more evident in firms with high current
ratios and longer conversion cycles. At the industry level,
however, the study found that the cash conversion cycle or the
cash gap was of more importance as a measure of liquidity than
the current ratio that affects profitability. According to him, the
management of working capital becomes even more important
during crises periods. Various studies have been carried out on
the effect of liquidity on profitability of various organisations.
Profitability and liquidity are the most important topics in the
context of corporate finance. The concept of financial liquidity is
not very linear as it has various aspects, although it generally
refers to the management of current assets and liabilities.
Financial liquidity as well as profitability are the main categories
of business activities that the business should consider as equally
important to operate effectively. The growth of financial liquidity
can negatively affect the profitability of the company. Deciding on
liquidity or profitability is all about effectively planning the work
of each organization. Planning aspects can be visualized from
marketing, production, personnel and financial plans. There must
be a proper flow of funds for efficient business operations. The
fund is called working capital, which is also defined as net
working capital.
Liquidity is a prerequisite for companies to meet their short-term
obligations. A company must ensure that it does not suffer from a
lack of excess cash to meet its short-term obligations. While
profitability is a measure of the amount by which a company's
revenue exceeds the relevant expenses. Profitability measures are
used to assess management's ability to generate revenue from
revenue generating bases within the organization. Managers, on
the other hand, want to measure operational performance against
profitability
Chapter – 6

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