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CARBORUNDUM UNIVERSAL LIMITED EXECUTIVE SUMMARY CENTRE FOR MBA/ NILESHWAR 1

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Page 1: Divya Final Project

CARBORUNDUM UNIVERSAL LIMITED

EXECUTIVE SUMMARY

CENTRE FOR MBA/ NILESHWAR 1

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CARBORUNDUM UNIVERSAL LIMITED

EXECUTIVE SUMMARY

The project undertaken is on “Working Capital Management of CUMI”. It describes

about how the company manages its working capital and the various steps that are

required in the management of working capital. Cash is the lifeline of a company. If this

lifeline deteriorates, so does the company's ability to fund operations, reinvest and meet

capital requirements and payments. Understanding a company's cash flow health is

essential to making investment decisions. A good way to judge a company's cash flow

prospects is to look at its Working Capital Management (WCM).

Working capital refers to the cash of a business requires for day-to-day

operations or, more specifically, for financing the conversion of raw materials into

finished goods, which the company sells for payment. Among the most important items

of working capital are levels of inventory, accounts receivable, and accounts payable.

Analysts look at these items for signs of a company's efficiency and financial strength.

The working capital is an important yardstick to measure the company’s operational and

financial efficiency. Any company should have a right amount of cash and lines of credit

for its business need at all times. This project describes how the management of working

capital takes place at CUMI.

There are numerous instances in the history of business world where

inadequacy of working capital has led to business failures when a firm finds it difficult to

meetings day to day affairs. Operating expenses essential out lays may have to be

postponed for want of funds, operating. The project undertaken is on “Working Capital

Management of CUMI” It describes about how the company manages its working capital

and the various steps that are required in the management of working capital. Cash is the

lifeline of a company. If this lifeline deteriorates, so does the company's ability to fund

operations, reinvest and meet capital requirements and payments.

Understanding a company's cash flow health is essential to making investment decisions.

A good way to judge a company's cash flow prospects is to look at its Working Capital

Management (WCM).

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CARBORUNDUM UNIVERSAL LIMITED

Working capital refers to the cash of a business requires for day-to-day operations or,

more specifically, for financing the conversion of raw materials into finished goods,

which the company sells for payment. Among the most important items of working

capital are levels of inventory accounts receivable, and accounts payable. Analysts look

at these items for signs of a company's efficiency and financial strength.

The working capital is an important yardstick to measure the company’s operational and

financial efficiency. Any company should have a right amount of cash and lines of credit

for its business needs at all times. This project describes how the management of working

capital takes place at CUMI.

Thus efficient management of working capital in an important prerequisite for successful

working of a business concern it reduces the chances of business failure generates a

felling of security and confidence in the minds of personnel in the organization it

assurance solvency of steady of the organizational will go out of gear & enterprise

objectives on investment slumps the suppliers & creditors of the firm may have to wait

longer to raise their dues & will hesitate to extend further credit to the firm.

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CARBORUNDUM UNIVERSAL LIMITED

INTRODUCTION

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CARBORUNDUM UNIVERSAL LIMITED

INDUSTRY PROFILE

CUMI manufactures the widest range of bonded and coated abrasives in the world. The

company pioneered the manufacture of coated abrasive in India, besides super

refractory’s, electro minerals, and industrial ceramic fibers. CUMI makes over 20,000

different varieties of abrasives refractory products and electro-minerals manufactured at

14 locations CUMI has the distinction of having all its manufacturing units ISO 9001-

2000 certified.

Products are:

White Fused Alumina (CUMITE-W)

Brown Fused Alumina (CUMITE-B)

Silicon Carbide

In export market, the major threats are the products from China. They can sell products at

lower price because of their cost of production and cost of labour is very low. World total

Alumina comprises 40% from China. Competition is increasing day by day so that the

product development will be the main criteria. Our mineral recourses are limited so there

is a challenge in future development. High capital investment, limited market,

sophisticated technology, availability of substitute products, product differentiation and

import are the principle challenges in its industry.

Market scenario of this industry:-

In recent years there has been a considerable increase in the production capacity in the

Asia pacific region in particular in china, India South Korea and Australia price and

quantity are the major competitive parameters in the industry. The main customer

industries are:-

Automobile industry

General metal cutting industry

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CARBORUNDUM UNIVERSAL LIMITED

Polishing of metal surface

Marine paints

Major alumina producing companies and its market share in India

Alumina oxide industry is one of the major industries in India. Alumina is the most

widely used oxide ceramic material. It’s applications as are widespread, and include

spark plugs, tap washers, electronic substrates, grinding media, abrasion resistant tiles,

cutting tools, bio ceramics and laboratory ware and ware parts etc.

Mechanics of abrasion

Abrasives generally rely upon a difference in hardness between the abrasive and the

material being worked upon, the abrasive being the harder of the two solid materials that

repeatedly rub against each other will tend to wear each other away.

Typically, material used as abrasives are either hard minerals or is synthetic stones,

some of which may be chemically and physically identical to naturally occurring

minerals but which cannot be called minerals as they did not arise naturally. However

even softer minerals like calcium carbonate are used as abrasives, such as polishing

agents in toothpaste. These minerals are either crushed or are already of sufficiently

small size to permit their use as an abrasive. These grains commonly called grit, have

rough edge, often terminating in points which will decrease the surface area in contact

and increase the localized contact pressure. The abrasive and the material to be worked

are brought in to contact wile in relative motion to each other.

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Grind well Norton Ltd. 30%

Snam Abrasives Pvt.Ltd 10-15%

Orient Abrasives 20%

Carborundom Universal Ltd 35-40%

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CARBORUNDUM UNIVERSAL LIMITED

COMPANY PROFILE

CARBORUNDUM UNIVERSAL LIMITED

Carborundum universal ltd is an Indian based coated and bonded abrasive

manufacturing company.Carborundom universal Murugappa India Ltd (CUMI), is an

important segment of the Murugappa group, which is one of the leading business group

offering a wide range of product mix. Murugappa Group is one of India's leading

business conglomerates. Market leaders in diverse areas of business including

Engineering, Abrasives, Finance, General Insurance, Cycles, Sugar, Farm Inputs,

Fertilizers, Plantations, Bio-products and Nutraceuticals, its 29 companies have

manufacturing facilities spread across 13 states in India. The organization fosters an

environment of professionalism and has a workforce of over 32,000 employees.

The major companies of Murugappa Groups are:-

Carborundom Universal Ltd

Cholamandalam Investment and Finance Ltd

Coromandalam Fertilizers Ltd

Eid(Parry) India Ltd

Parry Agro Industries Ltd

Parry confectionary Ltd

Party Nutraceutical Ltd

Tube Investment Ltd

Coromandel Engineering Ltd

The group has grown consistently through its decisive and visionary response to changing

times. Its pioneering efforts, steadfast commitment to ethical business practices and its

dogged pursuit of new areas to extend its business acumen have brought in its wake

several prestigious national and international awards. The Group's business philosophy

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CARBORUNDUM UNIVERSAL LIMITED

Can be summed up in this couplet from the ancient Indian treatise on wealth creation and

governance, the Arthashastra:

"The fundamental principle of economic activity is that no man

you transact with will lose, and then you shall not."

Carborundom universal murugappa India Ltd (CUMI)

The name “Carborundom” is related to “Corundum”, which means naturally formed

minerals and carborundom is artificially or synthetically prepared mineral. Now CUMI

has 5 divisions all over India, manufacturing bonded and coated abrasives, industrial

ceramics, electro minerals, refractory’s, grinding wheels, tubes, plantations, IT enabled

services, financial services, ceramic fibbers, industrial engineering, chains, cycles,

sanitary wares, food products, super refractory’s, confectioneries, fertilizers, sugar.

Pioneered the manufacture of coated and bonded abrasives in India.

Fully integrated manufacturing facilities.

Widest range of bonded and coated abrasives in the world.

52 years of uninterrupted track record of profits.

52 years of uninterrupted track record of dividends(since1957)

Carborundom universal was established in 1954 as a joint venture between murugappa

groups, India: the Carborundum Company, USA and the universal grinding wheel

company ltd. The main business activity of Carborundum universal involves manufacture

of coated abrasives, super –refractoriness, electro minerals industrial ceramics and

ceramic fiber. Further CUMI produces about 20,000 different varieties of abrasive

products, refractory products and electro minerals. Carborundum universal ltd has 10

manufacturing facilities which are meticulously connected with a wide network of

distributors and sub distributors.

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CARBORUNDUM UNIVERSAL LIMITED

CUMI BUSINESS DISTRIBUTION

CUMI is known to be an innovator and exports its products to be 43 countries spread

across North America, Europe, Australia, South Africa and Asia. All the manufacturing

facilities of Carborundum universal ltd are ISO 9001-2001 and ISO 14001 certified for

quality standards and environment friendly manufacturing practices respectively.

Carborundom universal ltd is equipped with a state of the art research and development

centre which works aggressively on product development and efficacy enhancement.

CUMI has its own bauxite mines at okha and Bhatia in Gujarat that fills the abrasives and

refractory grains requirements. Mining operations began in1963 and ever since these

mines have supplied the basic raw materials. The raw materials bauxite mined is calcined

at CUMI plants at edappally and korathy. The plants were commissioned in 1965, which

are ISO 9000 certified, manufacturing a wide range of superior quality aluminium oxide

and silicon carbide grains.

CUMI also exports white aluminium oxide and silicon carbide abrasive grains to

international markets. The R&D wing comes out with constant innovations and product

up gradations, which makes the company a world leader in grinding solutions which

enables maximum grinding efficiencies and reduced cost for customers.

VISION

Mr.M.M.MURUGAPPAN, chairman of CUMI, opines” our vision is to place CUMI on

the global map as an Indian company poised to redefine the scope and applications of

material science. Being market leaders, we have to constantly innovate, especially in

ceramics sciences. There is a huge potential in the post surgical market and the bio

ceramics vertical offers a good opportunity to expand our product portfolio”.

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CARBORUNDUM UNIVERSAL LIMITED

MISSION

1. To support captive need of employees.

2. Speedily grow on white fused alumina exports.

3. Grow aggressively in white and brown fused alumina grains.

4. Manage through business excellence model.

5. Focus on faster new product development.

QUALITY POLICY

The company considers consistently providing quality products and services to focus on

customer satisfaction and achieving this through total employee involvement supported

by proper system and process as the policy targets.

Subsidiary companies

1. CUMI America Inc.

2. CUMI Canada Inc.

3. CUMI Middle East, ras al-Khalifa.

4. Sterling energy development ltd.

5. Prod rite anti corrosive ltd.

6. Web world holdings and management pvt.ltd.

7. Laser world pvt.ltd.

8. Apex abstracting and editing services ltd.

9. Net access (India) pvt.ltd.

Joint ventures companies

1. CUMI Australia pvt.ltd.

2. WENDT (INDIA) LTD.

3. MURUGAPPA Morgan thermal ceramics ltd.

4. Electro minerals division.

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CARBORUNDUM UNIVERSAL LIMITED

EDAPPALLY UNIT

.

In 1962 November 29, sir. V.V.GAURI, Governor of Kerala laid the foundation stone of

Carborundum universal ltd, EDAPPALLY. The work started and supported with the

technological collaboration of Carborundum Company USA and universal grinding

wheel company UK.

Production started in 1965 with a few number of stuff and workers and average

production was 65 tones per month. During 1966-67, 850 tones was the production.

After that, the company gained strength from the committed efforts to staff and workers.

Now the production is around 1800 tones per month. The momentum gained in the

production enhanced the company to export its products. CUMI, edappally bagged the

prestigious commendation award for the energy conservation from Kerala government

for the year 1997-98, in the major industries category. The company started exporting

and started a new plant i.e. plant 2 at edappally unit in the year 1994. The plant has

modern machines and operations carried out in a computerized manner.

Products manufactured at CUMI

BROWN FUSED ALUMINA (CUMITE B)

WHITE FUSED ALUMINA (CUMITE W)

COMPANY HISTORY-YEAR EVENTS

1954-1962

The company was incorporated at Chennai. The company manufactured bonded and

coated abrasive products, calcined bauxite etc.20, 000 no: of equity shares issued at a

premium of RS 25/- each.

1991-1995

713 shares issued to the share holders of wendit (India) ltd. The company offered 15%

secured redeemable party convertible debentures of RS 30/-each on right basis to the

existing share holders. Another 1, 29,748 debentures were offered to the employees. All

were accepted. The company acquired 4740 preference shares and 1, 24,800 equity

shares of wend it (India) ltd.

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CARBORUNDUM UNIVERSAL LIMITED

The company commissioned a wind farm of 2mw capacity at perrungudi and Tamilnadu.

Four wind mill were also added for increasing the capacity to 2.925 mw in order to power

requirement of factory.

2000-2008

The company has sold its refractory unit in Visakhapatnam for a sum of RS 7.8 crore.

Mr. M V murugappa steps down as the whole time director on the board of the company

sells its electro cast refractoriness units at palakkad for RS 31 crores. Appoints Mr.

Ramesh agarwal as the managing director. The company acquired a 51% stake in CUMI

Australia.pvt.ltd, m m murugappan a new M D for CUMI.CUMI gets award for industrial

safety instituted by national safety council Kerala chapter in other industries sector in the

small industries category.carborundum universal ties up with South African firm cerdak.

Carborundom universal entries into a joint venture with CEEB to take a 49% stake in

jingri yanjiao china. CUMI has entered into a business purchase agreement with IVP ltd.

For the acquisition of its industrial ceramics division at Aurangabad Maharashtra.

ORGANIZATIONAL PROFILE

Date of establishment : 1954

No. of employees : 1643

Company type : head office

Office hours : 9 am to 6 pm

Quality assessment : electro minerals division

Regional office : P Bno.1, kalamssery

Development plot PO

Cochin 683109, India

Other locations : kolkatta, hosur, Uttaranchal

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CARBORUNDUM UNIVERSAL LIMITED

Website : www.cumi.murugappa.com

ORGANISATION STRUCTURE

Board of directors

Mr. M Murugappa : Chairman

Mr.subodh Kumar Bhargav : Non Executive Director

Mr. L Palani Kumar : Non Executive Director

Mr. Sridhar Ganesh : Non Executive Director

Mr.shobhan Takor : Non Executive Director

Mr. Lakshmi narayanan : Non Executive Director

Mr.Sanjay Jayavarthana Velu : Non Executive Director

Mr. Srinivasan : Managing Director

MANAGING COMMITTEE

CUMI’S managing committee steers the organization to meet over all objectives

within the Carborundum set by the Board of Directors. The committee comprises:

Mr. .K Srinivasan : Managing Director

Mr. R Ravi : President – industrial ceramics

Mr. V Ramesh : President – chief finance officer

Mr. M M Muthiah : Senior vice president – HR

Mr. .R Rajagopalan : Senior vice president –refractories

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CARBORUNDUM UNIVERSAL LIMITED

Mr. Deepak Dorairaj : Senior vice president – abrasive

PRODUCT PROFILE

Carborundum Universal Ltd (CUMI) offers ceramic materials based for industrial

applications. The major product offering and applications are as follows:

Business segment Product offering

Abrasives Bonded and coated abrasive

Ceramics Industrial ceramics, bonded and

Electro cast refractories

Electro minerals Brown fused alumina grains, white

Fused alumina grain sand silicon

Carbide grains

Abrasives

It is used in a variety of application for material removal, polishing and finishing.

Bonded and super abrasives are broadly of three types.

Bonded abrasives

Coated abrasives

Super abrasives

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CARBORUNDUM UNIVERSAL LIMITED

Bonded and super abrasives are mostly commonly in the form of wheels but also in other

shapes such as segments: stock etc. Coated abrasives and are in the form of sheets, belts

discs. Major end users industries for abrasive are automobile, ancillaries, construction

and wood working and general engineering. There are two manufacturers in India.

Ceramics

The ceramic division offers two product line viz. Industrial ceramics and

refectories Industrial ceramics are high alumina ceramic product like grinding media,

were resist liner, lined equipment and metalized ceramic products. These products are

like ceramic tiles, mineral processing, resistant products used in steel, glass, cement,

petrochemical, fertilizers and ceramic industries are the major users of refectories.

Electro minerals

These are mainly used by the abrasive and refectory industries. They are also used

in blasting for surface preparation and certain other industrial application in the domestic

market is created by import from China.

In export market, the major thread is the product from China. They can sell

products at lower price because of their cost of production and cost of labour is very low.

World total production of Alumina comprises 40% from China competition is increasing

day by day so that the product development will be the main criteria. There mineral

resources are limits so there is challenge in future development. High capital investment,

limited market, sophisticated technology, availability of substitute products, product

differentiation are import the principle challenges in this industry.

Market scenario of this BUSINESS

In recent years there has been a considerable increase in the capacity in the Asia

pacific region in particular in China, Indian South Korea and Australia. Price and quality

are the major competitive parameters in this Business. The main customer industries are:

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CARBORUNDUM UNIVERSAL LIMITED

Automobile industries

General metal cutting industries

Polishing of metal surface

Marine paints

Major products of Alumina and its uses

Products Uses

White Aluminum Oxide

(white Fused Alumina)Manufacturing of grinding wheels,

coated abrasives, paints, tiles etc.

Brown Aluminum Oxide

(brown Fused Alumina)

Manufacturing of grinding wheels, polishing purpose, shot blasting purpose

High alumina refractory cement It is used as a binder for all types of cartable refractoriness

CUMI EDAPPALLY has two plants

PLANT 1

Brown fused alumina is the main product from plant 1. It is used for grinding metals of

high tensile strength. It is because of its thermal property that makes it an excellent

material for use in the manufacturing of refractory products. Raw materials calcined

bauxite, coke and iron being fused in furnace at approximately 1200 degree

Applications

1. Abrasives: extensively used in manufacturing of grinding wheels, annealed malleable

iron and in manufacture of abrasive papers and clothes.

2. Refractories: raw material for manufacturing of a variety of fired refractories variety of

applications in polishing of granite and stone ware and a blasting media.

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PLANT 2

It was started in the year 1994 with the capacity of 650 tons a month. Main product of

unit is white fused alumina (WFA). The company has a furnace which is tilting furnace

for producing white alumina.

While fused alumina (WFA) is made from calcined alumina and is a friable product. Like

brown fused alumina, WFA is used in the manufacturing of grinding wheels (both

vitrified and resin bonded) and coated products. These grains are also used for shot

blasting purpose and as polishing media and refractory grade: WFA is used as raw

materials for high alumina refractories.

In customer segment with the improvement in technology the use of sol get synthetic

cloth based product etc are having high demand. Company has taken strong measures to

improve customer base which will yield greater benefits in years to come.

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CARBORUNDUM UNIVERSAL LIMITED

DESIGN OF THE STUDY

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CARBORUNDUM UNIVERSAL LIMITED

IMPORTANCE OF THE STUDY

Working capital is a significant facet of a modern financial management. Therefore

the financial managers spend a great deal of time on working capital management. The

proportional role of working capital plays a great part in earning maximum return on the

capital invested with the business enterprise. Management should take care when

deciding on working capital requirement of an organization because it represents a

segment of total capital employed in a business. Too small quantity of working capital

can bring down profits, due to non utilization of available capacity. Similarly excess

working capital may lower the rate of return on investment because of non utilization.

1. This project is helpful in knowing the companies position of funds maintenance and

setting the standards for working capital inventory levels, current ratio level, quick ratio,

current asset turnover level & size of current liability etc.

2. This project is helpful to the managements for expanding the dualism & the project

viability &present availability of funds.

3. This project is also useful as it combines the present year data with the previous year

data and thereby it shows the trend analysis, i.e. increasing fund or decreasing fund.

5. The project is done as a whole entirely. It will give overall view of the

organization and it is useful in further expansion decision to be taken by

management.

SCOPE OF THE STUDY

The working capital of CUMI-EMD shows a positive net working capital during the

period of study. The barometer to measure the effectiveness of managing the working

capital of CUMI-EMD is the evaluation of the past performance and analyzing the

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CARBORUNDUM UNIVERSAL LIMITED

financial statements using accounting and statistical tools. The study touched all

important constituents of working capital such as cash, receivables and inventory.

Thus the study would give a brief description of the performance of CUMI-EMD and

suggesting improves its performance.

Statement of the problem:

The study has been conducted with the aim of analyzing the efficiency of working capital

management of CUMI. An attempt is made to analyze the performance of the company

for the last five years from 2005-2006 to 2009-2010

In the management of working capital, the firm is faced with two key problems:

1. First, given the level of sales and the relevant cost considerations, what are the optimal

amounts of Cash, accounts receivable and inventories that a firm should choose to

maintain?

2. Second, given these optimal amounts, what is the most economical way to finance

these working capital investments? To produce the best possible results, firms should

keep no unproductive assets and should finance with the cheapest available sources of

funds. Why? In general, it is quite advantageous for the firm to invest in short term assets

and to finance short-term liabilities.

Besides this followings are some other problem, a firm is facing. Through this study we

try to find answer for these problems.

1. What are root causes of working capital on business?

2. What are the major effects on accounts receivable?

3. What is the nature of relationship between working capital and capital employed?

4. What steps should be taken to ensure that it effect on the profit of the firm will not be

negative?

5. How can working capital be managed?

6. What make up the working capital cycle?

7. How can debtors be controlled?

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CARBORUNDUM UNIVERSAL LIMITED

Objective of the study

1. To analyze the effectiveness of existing working capital management methods.

2. To explain the working capital requirement with the help of relevant accounting

ratios.

3. To suggest improvement, wherever possible on the basis of study.

4. Through the net profit ratio & other profitability ratio, understand the

Profitability of the company.

5. Evaluating company s performance relating to financial statement Analysis.

6. To know the liquidity position of the company with the help of current Ratio.

7. To find out the utility of financial ratio in credit analysis & determinate financial

capacity of the firm.

Hypothesis:

Existing working capital management methods are effective.

Period of study

The present study deals with the data collected from annual reports and other relevant

documents for the period commencing from financial year 2005-2006 to

Financial year 2009-2010

Research methodology

Both primary and secondary data were used for the study. Primary data was collected

through discussions held with the finance manager and other officers in the finance

department of CUMI. Secondary data was collected from annual reports and other

published documents.

There are several ways of collecting both data-Primary and Secondary data, which differ

considerably in context of money, cost, time and other sources at the disposable of the

researcher.

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CARBORUNDUM UNIVERSAL LIMITED

There are two types of data:

· Primary data

· Secondary data

1-Primary Data

In respect of primary data which the researchers are directly collects data that have not

been previously collected. The primary data was gathered through personal interaction

with various functional heads and other technical personnel. Some information was also

collected by observation.

2-Secondary Data:

Secondary data was collected various reports, annual reports, documents charts,

management information systems, etc in CUMI, And also collected various magazines,

books, newspapers etc.

The analysis of the information gathered has been made on the basis of the clarifications

sought during the personal discussions with the concerned people and perception during

the personal visits to the important areas of services.

Type of research

The type of research followed is analytical research. In analytical research the researcher

has to use facts or information already available and analyze these to make a critical

evaluation of the material.

Limitations of the study

Since the analysis is based on the data in annual report, which is a secondary source

inherent limitations of those data will have its impact on this study.

1. The study in limited 4 years (2006-2007) to (2009-2010) performance of the company.

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2. The data used in this study have been taken from published annual report only.

3. This study in conducted within a short period. During the limited period the study may

not be retailed, full fledged and utilization in all aspects.

4. Financial accounting does not take into account the price level changes.

5. We cannot do comparisons with other companies unless and until we have the data of

other companies on the same subject.

6. Only the printed data about the company will be available and not the back–end

details.

7. Future plans of the company will not be disclosed to us.

8. Lastly, due to shortage of time it is not possible to cover all the factors and details

regarding the subject of study.

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CARBORUNDUM UNIVERSAL LIMITED

LITERATURE

REVIEW

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One school of thought believes that, as all capital resources available to a business

organization – From shareholders, bondholders, and creditors (secured and unsecured)

works up in the business activities to generate revenues and facilitate future expansion

and growth; they are to be considered as ‘working capital’.

Another school of thought links working capital with current assets and current liabilities.

According to them, the excess of current assets over current liabilities is to be rightly

considered as the working capital of a business organization.

“Working capital is descriptive of that capital which is not fixed. But, the more common

use of working capital is to consider it as the difference between the current assets and

the current liabilities”. Current assets and current liabilities are assets and liabilities

which arise in the course of business. The WC demonstrates the amount of liquid assets

that are available to sustain and build the business by measuring company’s efficiency

and short-term financial health. As such, it carries great value to those who might be

interested in investing in business or even purchasing it.

The following are the most important definitions of Working capital:

“Working capital is the difference between the inflow and outflow of Funds. In other

words it is the net cash inflow.”

“Working capital represents the total of all current assets. In other

Words it is the Gross working capital, it is also known as Circulating capital or

Current capital for current assets are rotating in their nature.”

“Working capital is defined as the excess of current assets over Current liabilities and

provisions. In other words it is the Net Current assets or net working capital.”

Capital required for a company can be classified under two main categories via;

1. Fixed capital

2. Working capital

Every business needs fund for two purposes for its establishment and to carry out its day-

to-day operations. Long –term funds are required to create production facilities through

purchase of fixed assets such as plant and machinery, land, building, furniture, etc.

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Investments in these assets represents that part of firm’s capital which is blocked on a

permanent or fixed basis and is called fixed capital.

Funds are also needed for short term purchase of raw materials, payment of wages and

other day-to-day expenses etc. these funds are known as working capital. Funds, thus,

invested in current assets keep revolving fast and are being constantly converted into cash

and these cash flows out again in exchange for other current assets. Hence, it is also

known as revolving or circulating capital or short term capital.

In the words of shubin “working capital is the amount of funds necessary to cover the

cost of operating the enterprise.”

Characteristics of Working Capital

Working capital is the life blood and nerve centre of a business. Just as circulation of

blood is essential in the human body for maintaining life, working capital is very

essential to maintain the smooth running of a business. No business can run successfully

with out an adequate amount of working capital.

1 Short term Needs:

Working capital is used to acquire current assets which get converted into cash in a short

period. In this respect it differs from fixed capital which represents funds locked in long

term assets. The duration of the working capital depends on the length of production

process, the time that elapses in the sale and the waiting period of the cash receipt.

2 Circular Movements:

Working capital is constantly converted into cash which again turns into working capital.

This process of conversion goes on continuously. The cash is used to purchase current

assets and when the goods are produced and sold out; those current assets are transformed

into cash. Thus it moves in a circular away. That is why working capital is also described

as circulating capital.

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3 An Element of Permanency:

Though working capital is a short term capital, it is required always and forever. As

stated before, working capital is necessary to continue the productive activity of the

enterprise. The working capital that is required permanently is called “permanent or

regular working capital”.

4 An Element of Fluctuation:

Though the requirement of working capital is felt permanently, its requirement fluctuates

more widely than that of fixed capital. The requirement of working capital varies directly

with the level of production. It varies with the variation of the purchase and sale policy;

price level and the level of demand also. The portion of working capital that changes with

production, sale, price etc. is called “variable working capital”.

5 Liquidity:

Working capital is more liquid than fixed capital. If need arises, working capital can be

converted into cash within a short period and without much loss. A company in need of

cash can get it through the conversion of its working capital by insisting on quick

recovery of its bills receivable and by expediting sales of its product. It is due to this trait

of working capital that the companies with a larger amount of working capital feel more

secure.’

6 Less Risky:

Funds invested in fixed assets get locked up for a long period of time and can not be

recovered easily. There is also a danger of fixed assets like machinery getting obsolete

due to technological innovations. Hence investment in fixed capital is comparatively

more risky. As against this, investment in current assets is less risky as it is a short term

investment. Working capital involves more of physical risk only, and that too is limited.

Moreover, working capital gets converted into cash again and again; therefore, it is free

from the risk arising out of technological changes.

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7 Special Accounting System not needed:

Since fixed capital is invested in long term assets, it becomes necessary to adopt various

systems of estimating depreciation. On the other hand working capital is invested in short

term assets which last for one year only. Hence it is not necessary to adopt special

accounting system for them. Among the most important items of working capital are

levels of inventory, accounts receivable, and accounts payable. Working capital can be

expressed as a positive or a negative number

Concepts of working capital

There are two concepts of working capital

1. Balance sheet concept

2. Operating cycle concept or circular flow concept.

Balance sheet concept

There are two interpretations of working capital under the balance sheet concept

1. Gross working capital

2. Net working capital

In the broad sense, the term working capital refers to the gross working capital and

represents the amount of funds invested in current assets. Thus, the gross working capital

is the capital invested in total current assets of the enterprise. Current assets are those

assets which in the ordinary course of business converted into cash within a short period

of normally one accounting year.

Examples of current assets are:

1. Cash in hand and bank balances

2. Bills receivables

3. Sundry debtors.

4. Short term loans and advances

5. Inventories of stocks, as:

1. Raw materials

2. Work in process

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3. Stores and spares

4. Finished goods

5temporary investments of surplus funds

6. Prepaid expenses

7. Accrued income

In a narrow sense, the term working capital refers to the net working capital. Net working

capital is the excess of current assets over current liabilities, or say:

Net working capital=current assets-current liabilities

Net working capital may be positive or negative. When the current assets exceed the

current liabilities the working capital is positive and the negative working capital results

when the current liabilities are more than the current assets. Current liabilities are those

liabilities which are intended to be paid in the ordinary course of business within a short

period of normally one accounting year out of the current assets or the income of the

business. Examples of current liabilities are:-

I. bills payable.

2. Sundry creditors or accounts payable.

3. Accrued or outstanding expenses

4. Short-term loans, advances and deposits.

5. Dividends payable.

6. Bank over drafts.

7. Provision for taxation

The gross working capital concept is financial or going concern concept where as net

working capital is an accounting concept of working capital. These two concepts of

working capital are not exclusive; rather both have their own merits. The gross concept is

sometimes preferred to the net concept of working capital for the following reasons:-

1. It enables the enterprise to provide correct amount of working capital at the right

time.

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2. Every management is more interested in the total current assets with which it has

to operate than the sources from where it is made available.

3. The gross concept takes into consideration the fact that every increase in the funds

of the enterprise would increase its working capital.

4. The gross concept of working capital is more useful in determining the rate of

return on investments in working capital.

The net working capital concept, however, is also important for the following reason:-

1. It is qualitative concept which indicates the firm’s ability to meet its operating

expenses and short term liabilities.

2. It indicates the margin of protection available to the short-term creditors ie, the

excess of current assets over current liabilities.

3. It is an indicator of the financial soundness of an enterprise.

4. It suggests the need for financing a part of the working capital requirement out of

permanent sources of funds.

To conclude, it may be said that, both gross and net concepts of working capital are

important aspects of the working capital management.

Operating cycle or circular flow concepts

Working capital refers to that part of firm’s capital which is required for financing short

term current assets such as cash, marketable securities, debtors, and inventories. Funds,

thus, invested in current assets keep revolving fast and are being constantly converted

into cash and this cash flow out again in exchange for other current assets.Hence, it is

also known as revolving or circulating capital. The cycle starts with the purchase of raw

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

finished goods.

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Working capital may be classified in two ways:

1. on the basis of concept

2. on the basis of time

Working capital is classified as gross working capital and net working capital, on the

basis of concept.

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

1. Permanent or fixed working capital

2. Temporary or variable working capital

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Kinds of working capital

On the basis of concept

On the basis of time

Net working capital

Gross working capital

Regular working capital

Reserve working capital

Seasonal working capital

Special working capital

Permanent working capital

Variable working capital

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Permanent working capital

Permanent working capital is the minimum amount which is required to ensure effective

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

always a minimum level of current assets which is continuously required by the

enterprise to carry out normal business operations.

Temporary working capital

Temporary or variable working capital is the amount of working capital which is required

to meet the seasonal demands and special exigencies. Variable working capital can be

further classified as seasonal working capital and special working capital. The capital

required to meet the seasonal needs of the enterprise is called seasonal working capital.

Special working capital is that part of working capital which is required for meet special

exigencies such as launching of extensive marketing campaigns for conducting research

etc.

Temporary working capital differs from permanent working capital in the sense that it is

required for short periods and cannot be permanently employed gainfully in the business.

Figures given below illustrate the difference between permanent and temporary working

capital.

Figure 1.2

Value Temporary current asset

Value

Permanent current asset Permanent working capital

Time time

Figure 1 figure 2

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1. Permanent working capital is stable or fixed overtime while the temporary on

variable working capital fluctuates.

2. Permanent working capital is also increasing with the passage of time due to

expansion of business but even then it does not fluctuate as variable working capital

which sometimes increases and sometimes decreases

BALANCED WORKING CAPITAL POSITION

The firm should maintain a sound working capital position. It should have adequate

working capital to run its business operations. Both excessive as well as inadequate

working capital positions are dangerous from the firm s point of view. Excessive working

capital not only impairs the firm s profitability but also result in production interruptions

and inefficiencies.

Importance or advantages of adequate working capital

Working capital is the lifeblood and nerve centre of a business. Just as circulation of

blood is essential in the human body for essential maintain the smooth running of a

business. No business can run successfully without an adequate amount of working

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

follows

1. Solvency of the business: adequate working capital helps in maintaining

solvency of the business by providing uninterrupted flow of production.

2. Good will: sufficient working capital enables a business concern to make

prompt payments and hence helps in creating and maintaining good will.

3. Easy loans. A concern having adequate working capital, high solvency and

good credit standing can arrange loans from banks and others on easy and

favorable terms.

4. Cash discounts: adequate working capital also enables a concern to avail

cash discounts on the purchase and hence it reduces costs.

5. Regular supply of raw materials: sufficient working capital ensures regular

supply of raw materials and continuous production.

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6. Regular payment of salaries, wages and other day-to-day commitments: a

company which has ample working can make regular payment of salaries,

wages and other morale of its employees, increases their efficiency, reduces

wastage and costs and enhances production and profits.

7. Exploitation of favorable market conditions: only concerns with adequate

working capital can exploit favorable market conditions such as purchasing

its requirements in bulk when the prices are lower and by holding its

inventories for higher prices.

8. Ability to face crisis: adequate working capital enable a concern to face

business crisis in emergencies such as depression because during such

periods, generally, there is much pressure on working capital.

9. Quick and regular return on investment: every investor wants a quick and

regular return on his investments. Sufficiently of working capital enables a

concern to pay quick and regular dividends to its investors as there may not

be such pressure to plough back profit.

10. High morale: adequacy of working capital creates an environment of

security, confidence, high morale, and creates overall efficiency in a

business.

Excess or inadequate working capital

Every business concern should have adequate working capital to run its business

operations. It should have neither redundant or excess working capital nor inadequate nor

shortage of working capital. Both excess as well as short working capital positions are

bad for any business. However, out of the two, it is the inadequacy of working capital

which is more dangerous from the point of view of the firm.

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Disadvantages of redundant or excessive working capital

1. Excessive working capital means idle funds which earn no profits for the

business and hence the business cannot earn a proper rate of return on its

investments.

2. When there is a redundant working capital, it may lead to unnecessary

purchasing and accumulation of inventories causing more chances of theft,

waste and losses.

3.     Excessive working capital implies excessive debtors and defective credit

policy which causes higher incidence of bad debts.

4.     It may reduce the overall efficiency of the business.

5.     If a firm is having excessive working capital then the relations with

banks and other financial institution may not be maintained.

6.     Due to lower rate of return n investments, the values of shares may also

fall.

7.     The redundant working capital gives rise to speculative transactions

Disadvantages of Inadequate Working Capital

Every business needs some amounts of working capital. The need for working capital

arises due to the time gap between production and realization of cash from sales. There is

an operating cycle involved in sales and realization of cash. There are time gaps in

purchase of raw material and production; production and sales; and realization of cash.

Thus working capital is needed for the following purposes:

       For the purpose of raw material, components and spares.

       To pay wages and salaries

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       To incur day-to-day expenses and overload costs such as office expenses.

       To meet the selling costs as packing, advertising, etc.

       To provide credit facilities to the customer.

       To maintain the inventories of the raw material, work-in-progress, stores and spares and finished stock.

An enlightened management should, therefore, maintain the right amount of working

capital on a continuous basis. Only then a proper functioning of business operations will

be ensured. Sound financial and statistical techniques, supported by judgment, should be

used to predict the quantum of working capital needed at different time periods. A firm s

net working capital position is not only important as an index of liquidity but it is also

used as a measure of the firm s risk.

Risk in this regard means chances of the firm being unable to meet its obligations on due

date. The lender considers a positive net working as a measure of safety. All other things

being equal, the more the net working capital a firm has, the less likely that it will default

in meeting its current financial obligations. Lenders such as commercial banks insist that

the firm should maintain a minimum net working capital position. The requirement of the

working capital goes on increasing with the growth and expensing of the business till it

gains maturity. At maturity the amount of working capital required is called normal

working capital.

FACTORS DETERMINING THE WORKING CAPITAL REQUIREMENTS

There are no set rules or formula to determine the working capital requirements of firms.

A large number of factors, each having a different importance, influence working capital

needs of firms. Also, the importance of factors changes for a firm over time. Therefore,

an analysis of relevant factors should be made in order to determine total investment in

working capital. The following is the description of factors which generally influence the

working capital requirements of firms.

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1.  Nature Of Business: The requirements of working is very limited in public

utility undertakings such as electricity, water supply and railways because

they offer cash sale only and supply services not products, and no funds are

tied up in inventories and receivables. On the other hand the trading and

financial firms requires less investment in fixed assets but have to invest large

amt. of working capital along with fixed investments.

2.  Size of the Business: Greater the size of the business, greater is the

requirement of working capital.

3.  Production Policy: If the policy is to keep production steady by accumulating

inventories it will require higher working capital.

4.  Length of Production Cycle: The longer the manufacturing time the raw

material and other supplies have to be carried for a longer in the process with

progressive increment of labor and service costs before the final product is

Obtained. So working capital is directly proportional to the length of the

manufacturing process.

5.  Seasonal Variations: Generally, during the busy season, a firm requires larger

working capital than in slack season.

6.  Working Capital Cycle: The speed with which the working cycle completes

one cycle determines the requirements of working capital. Longer the cycle

larger is the requirement of working capital. 

7.     Rate of Stock Turnover: There is an inverse co-relationship between the

question of working capital and the velocity or speed with which the sales are

affected. A firm having a high rate of stock turnover will needs lower amt. of

working capital as compared to a firm having a low rate of turnover.

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8.     Credit Policy: A concern that purchases its requirements on credit and sales

its product / services on cash requires lesser amt. of working capital and vice-

versa. The credit terms to be granted to customers may depend upon the

norms of the industry to which the firm belongs. But a firm has the flexibility

of shaping its credit policy within the constraint of industry norms and

practices. A liberal credit policy, without rating the creditworthiness of

customers, will be detrimental to the firm and will create a problem of

collections. A high collection period will mean tie- up of large funds in book

debts. Slack collection procedures can increase the chance of bad debts.

9.     Business Cycle: In period of boom, when the business is prosperous, there is

need for larger amt. of working capital due to rise in sales, rise in prices,

optimistic expansion of business, etc. On the contrary in time of depression, the

Business contracts, sales decline, difficulties are faced in collection from debtor

and the firm may have a large amt. of working capital.

10. Rate of Growth of Business: In faster growing concern, we shall require large

amt. of working capital.

11. Earning Capacity and Dividend Policy: Some firms have more earning capacity

than other due to quality of their products, monopoly conditions, etc. Such firms

may generate cash profits from operations and contribute to their working capital.

The dividend policy also affects the requirement of working capital. A firm

maintaining a steady high rate of cash dividend irrespective of its profits needs

working capital than the firm that retains larger part of its profits and does not pay

so high rate of cash dividend.

11. Price Level Changes: Changes in the price level also affect the working

capital requirements. Generally rise in prices leads to increase in working

capital.

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12Sales depend on demand conditions. Most firms experience seasonal and cyclical

fluctuations in the demand for their products and services. These business variations

affect the working capital requirements, specially the temporary working capital

requirement of the firm. When there is an upward swing in the economy, sales will

increase; correspondingly, the firm’s investment in inventories and debtors will also

increase. Under boom, additional investment in fixed assets may be made by some

firms to increase their productive capacity.

Others FACTORS: These are:

Operating efficiency.

Management ability.

Irregularities of supply.

Import policy.

Asset structure.

Importance of labor

Banking facilities

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REQUIREMENTS OF FUNDS Funds Requirements of company

Fixed Capital Working Capital

Preliminary Expenses Raw Material

Purchase of Fixed Assets Inventories

Establishment work exp. Goods in Process

Fixed working capital others

Every company requires funds for investing in two types of capital i.e. fixed capital,

which requires long-term funds, and working capital, which requires short-term funds.

SOURCES OF WORKING CAPITAL

Long-term source Short-term source(Fixed working capital) (Temporary working capital)

a) Loan from financial institution a) Factoring

b) Floating of Debentures b) Bill discounting

c) Accepting public deposits c) Bank overdraft

d) Issue of shares d) Trade credit

e) Cash credit

f) Commercial paper

Sources of additional working capital include the following:

Existing cash reserves

Profits (when you secure it as cash)

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Payables (credit from suppliers)

New equity or loans from shareholders

Bank overdrafts or lines of credit

Term loans

If you have insufficient working capital and try to increase sales, you can easily over-

stretch the financial resources of the business. This is called overtrading. Early warning

signs include:

Pressure on existing cash

Exceptional cash generating activities e.g. offering high discounts for early cash

payment

Bank overdraft exceeds authorized limit

Seeking greater overdrafts or lines of credit

Part-paying suppliers or other creditors

Paying bills in cash to secure additional supplies

Management pre-occupation with surviving rather than managing

Frequent short-term emergency requests to the bank (to help pay wages, pending

receipt of a cheque).

LONG TERM SOURCES

ISSUE OF SHARESOrdinary shares are also known as equity shares and they are the most common form of

share in the UK. An ordinary share gives the right to its owner to share in the profits of

the company (dividends) and to vote at general meetings of the company.

Since the profits of companies can vary wildly from year to year, so can the dividends

paid to ordinary shareholders. In bad years, dividends may be nothing whereas in good

years they may be substantial. The nominal value of a share is the issue value of the share

- it is the value written on the share certificate that all shareholders will be given by the

company in which they own shares.

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The market value of a share is the amount at which a share is being sold on the stock

exchange and may be radically different from the nominal value. When they are issued,

shares are usually sold for cash, at par and/or at a premium. Shares sold at par are sold for

their nominal value only - so if Rs.10 share is sold at par; the company selling the share

will receive Rs. 10 for every share it issues. If a share is sold at a premium, as many

shares are these days, then the issue price will be the par value plus an additional

premium.

DEBENTURESDebentures are loans that are usually secured and are said to have either fixed or floating

charges with them. A secured debenture is one that is specifically tied to the financing of

a particular asset such as a building or a machine. Then, just like a mortgage for a private

house, the debenture holder has a legal interest in that asset and the company cannot

dispose of it unless the debenture holder agrees.If the debenture is for land and/or

buildings it can be called a mortgage debenture.

Debenture holders have the right to receive their interest payments before any dividend is

payable to shareholders and, most importantly, even if a company makes a loss, it still

has to pay its interest charges. If the business fails, the debenture holders will be

preferential creditors and will be entitled to the repayment of some or all of their money

before the shareholders receives anything

LOANS FROM OTHER FINANCIAL INSTITUTIONS

The term debenture is a strictly legal term but there are other forms of loan or loan stock.

A loan is for a fixed amount with a fixed repayment schedule and may appear on a

balance sheet with a specific name telling the reader exactly what the loan is and its main

details.

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SHORT TERM SOURCES

FACTORING

Factoring allows you to raise finance based on the value of your outstanding invoices.

Factoring also gives you the opportunity to outsource your sales ledger operations and to

use more sophisticated credit rating systems. Once you have set up a factoring

arrangement with a Factor, it works this way:

Once you make a sale, you invoice your customer and send a copy of the invoice to the

factor and most factoring arrangements require you to factor all your sales. The factor

pays you a set proportion of the invoice value within a pre-arranged time - typically; most

factors offer you 80-85% of an invoice's value within 24 hours. The major advantage of

factoring is that you receive the majority of the cash from debtors within 24 hours rather

than a week, three weeks or even longer.

INVOICE DISCOUNTINGInvoice discounting enables you to retain the control and confidentiality of your own

sales ledger operations. The client company collects its own debts. 'Confidential invoice

discounting' ensures that customers do not know you are using invoice discounting as

the client company sends out invoices and statements as usual. Once the client receives

payment, it must deposit the funds in a bank account controlled by the invoice discounter.

The invoice discounter will then pay the remainder of the invoice, less any charges. The

requirements are more stringent than for factoring.

OVERDRAFT FACILITIESMany companies have the need for external finance but not necessarily on a long-term

basis. A company might have small cash flow problems from time to time but such

problems don't call for the need for a formal long-term loan. Under these circumstances, a

company will often go to its bank and arrange an overdraft. Bank overdrafts are given on

current accounts and the good point is that the interest payable on them is calculated on a

daily basis. So if the company borrows only a small amount, it only pays a little bit of

interest. Contrast the effects of an overdraft with the effects of a loan.

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TRADE CREDIT

This source of finance really belongs under the heading of working capital management

since it refers to short-term credit. By a 'line of credit' they mean that a creditor, such as a

supplier of raw materials, will allow us to buy goods now and pay for them later. Why do

they include lines of credit as a source of finance? They all, if they manage their creditors

carefully they can use the line of credit they provide for us to finance other parts of their

business.

MANAGEMENT OF WORKING CAPITAL

Management of working capital is concerned with the problem that arises in attempting

to manage the current assets, current liabilities. The basic goal of working capital

management is to manage the current assets and current liabilities of a firm in such a way

that a satisfactory level of working capital is maintained, i.e. it is neither adequate nor

excessive as both the situations are bad for any firm. There should be no shortage of

funds and also no working capital should be ideal. WORKING CAPITAL

MANAGEMENT POLICES of a firm has a great on its probability, liquidity and

structural health of the organization. So working capital management is three dimensional

in nature as

1.     It concerned with the formulation of policies with regard to profitability,

liquidity and risk.

2.     It is concerned with the decision about the composition and level of current

assets.

3.     It is concerned with the decision about the composition and level of current

liabilities.

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DATA ANALYSIS AND

INTERPRETATION

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TOOLS USED FOR THE STUDY

RATIO ANALYSIS

SCHEDULE OF CHANGES IN WORKING CAPITAL

OPERATING CYCLE ANALYSIS

RATIO ANALYSIS

Financial ratios are one of the most common tools of managerial decision making.

Financial ratios involve the comparison of various figures from the financial statements

in order to gain information about a company's performance. It is the interpretation,

rather than the calculation, that makes financial ratios a useful tool for business

managers. Ratios may serve as indicators, clues, or red flags regarding noteworthy

relationships between variables used to measure the firm's performance in terms of

profitability, asset utilization, liquidity, leverage, or market valuation.

A ratio is define as “the indicated quotient of two mathematical expressions” and as “the

relationship between two or more things”.

ROLE OF RATIO ANALYSIS

Ratio analysis helps to appraise the firms in the term of there profitability and efficiency

of performance, either individually or in relation to other firms in same industry. Ratio

analysis is one of the best possible techniques available to management to impart the

basic functions like planning and control. As future is closely related to the immediately

past, ratio calculated on the basis historical financial data may be of good assistance to

predict the future, the ratio analysis may be able to locate the point out the various arias

Which need the management attention in order to improve the situation.

LIMITATIONS OF RATIO ANALYSIS

The basic limitation of ratio analysis is that it may be difficult to find a basis for

making the comparison

Normally, the ratios are calculated on the basis of historical financial statements.

An organization for the purpose of decision making may need the hint regarding

the future happiness rather than those in the past. The external analyst has to

depend upon the past which may not necessary to reflect financial position and

performance in future.

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The technique of ratio analysis may prove inadequate in some situations if there is

differs in opinion regarding the interpretation of certain ratio.

As the ratio calculates on the basis of financial statements, the basic limitation

which is applicable to the financial statement is equally applicable In case of

technique of ratio analysis also i.e. only facts which can be expressed in financial

terms are considered by the ratio analysis.

The technique of ratio analysis has certain limitations of use in the sense that it

only highlights the strong or problem arias, it dose not provide any solution to

rectify the problem arias.

Ratio analysis is very important for the franchisor to establish norms and seek patterns of

financial operations over a period of time. Unfortunately, few franchisors (or any kind of

business) use ratio analysis -- it is estimated that just two percent compute financial ratios

And use them in managing their businesses. The franchisor can use ratio analysis also to

obtain a bank loan.

CLASSIFICATION OF WORKING CAPITAL RATIO

Working capital ratio means ratios which are related with the working capital

management e.g. current assets, current liabilities, liquidity, profitability and risk turnoff

etc. these ratio are classified as follows

EFFICIENCY RATIO

The ratios compounded under this group indicate the efficiency of the organization to use

the various kinds of assets by converting them the form of sale. This ratio also called as

activity ratio or assets management ratio. As the assets basically categorized as fixed

assets and current assets and the current assets further classified according to individual

components of current assets viz. investment and receivables or debtors or as net current

assets, the important of efficiency ratio as follows:

1) Working capital turnover ratio

2) Inventory turnover ratio

3) Receivable turnover ratio

4) Current assets turnover ratio

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LIQUIDITY RATIO

The ratios compounded under this group indicate the short term position of the

organization and also indicate the efficiency with which the working capital is being

used. The most important ratio under this group is follows

1. Current ratio

2. Quick ratio

3. Absolute liquid ratio

EFFICIENCY RATIO

WORKING CAPITAL TURNOVER RATIO

It signifies that for an amount of sales, a relative amount of working capital is needed. If

any increase in sales contemplated working capital should be adequate and thus this ratio

helps management to maintain the adequate level of working capital. The ratio measures

the efficiency with which the working capital is being used by a firm. It may thus

compute net working capital turnover by dividing sales by working capital.

Working Capital Turnover Ratio = Sales / Net Working Capital

Working capital=current asset-current liability

Working capitals turn over ratio (in million)

YEAR SALES WORKING CAPITAL

WORKING CAPITAL TURNOVER RATIO

2005-2006 4242.42 1087.26 3.92006-2007 5267.72 1370.93 3.82007-2008 6567.75 1867.41 3.52008-2009 7091.69 2325.27 3.042009-2010 7760.09 2036.07 3.8

Table 1

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Chart of working capital turnover ratio.

0

0.5

1

1.5

2

2.5

3

3.5

4

1 2 3 4 5 6 7

YEAR

working capital turnover ratio

Interpretation

A higher ratio indicates efficient utilization of working capital and a low ratio indicates

otherwise. In the year 2005-06 the working capital turnover ratio is 3.8 times which

indicates efficient utilization of working capital compared to other years. In the years

2006-07, 2007-08 and 2008-09 the utilization of working capital is low. But in the year

2009-2010, ratio is 3.8 times i.e., firm utilization

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INVENTORY TURNOVER RATIO:Inventory turnover ratio, defined as how many times the entire inventory of a company

has been sold during an accounting period, is a major factor to success in any business

that holds inventory. It shows how well a company manages its inventory levels and how

frequently a company replenishes its inventory. In general, a higher inventory turnover is

better because inventories are the least liquid form of asset. Inventory turnover ratio

explanations occur very simply through an illustration of high and low turnover ratios.

Despite this, many businesses do not survive due to issues with inventory.

Average inventory and cost of goods sold are the two elements of this ratio. Average

inventory is calculated by adding the stock in the beginning and at the end of the period

and dividing it by two. In case of monthly balances of stock, all the monthly balances are

added and the total is divided by the number of months for which the average is

calculated. A low inventory turnover ratio shows that a company may be overstocking or

deficiencies in the product line or marketing effort. It is a sign of ineffective inventory

management because inventory usually has a zero rate of return and high storage cost.

Higher inventory turnover ratios are considered a positive indicator of effective inventory

management. However, a higher inventory turnover ratio does not always mean better

performance. It sometimes may indicate inadequate inventory level, which may result in

decrease in sales.

It also opens the company up to trouble should prices begin to fall.

(a) [Inventory Turnover Ratio = Cost of goods sold / Average inventory at cost]

(b) [Inventory Turnover Ratio = Net Sales / Average Inventory at Cost]

(c) [Inventory Turnover Ratio = Net Sales / Average inventory at Selling Price]

(d) [Inventory Turnover Ratio = Net Sales / Inventory]

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INVENTORY TURN OVER RATIO (in million)

YEAR NETSALES AVERAGE INVENTORY

INVENTORY TURNOVER RATIO

2005-2006 3721.53 514.41 7.232006-2007 4645.56 738.68 6.292007-2008 5830.10 945.57 6.172008-2009 6519.00 1165.47 5.592009-2010 7310.10 1191.54 6.14

Table 2

Chart of inventory turnover ratio

0

1

2

3

4

5

6

7

8

2005-06 2006-07 2007-08 2008-09 2009-10

inventory turnover ratio

inventory turnover ratio

Interpretation

Inventory turn over ratio measures the velocity of conversion of stock into sales. A high

inventory turnover or a stock velocity indicates efficient management of inventory

because more frequently the stocks are sold; the lesser amount of money is required to

finance the inventory. A low inventory turnover implies over investment in inventories,

dull business, poor quality of goods and low profits as compared to total investments.

Here we can see that in the year 2005-06, 7.23 shows efficient management of

inventory.2006-07, 2007-08 and 2009-10 also shows efficient management. But in the

year 2008-09 is 5.59, shows low inventory turnover.

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DEBTORS TURNOVER RATIO

Debtors turnover ratio or accounts receivable turnover ratio indicates the velocity of debt

collection of a firm. In simple words it indicates the number of times average debtors (receivable)

are turned over during a year.

Formula of Debtors Turnover Ratio:

[Debtors Turnover Ratio = Net Credit Sales / Average Trade Debtors]

The two basic components of accounts receivable turnover ratio are net credit annual

sales and average trade debtors. The trade debtors for the purpose of this ratio include the

amount of Trade Debtors & Bills Receivables. The average receivables are found by

adding the opening receivables and closing balance of receivables and dividing the total

by two. It should be noted that provision for bad and doubtful debts should not be

deducted since this may give an impression that some amount of receivables has been

collected. But when the information about opening and closing balances of trade debtors

and credit sales is not available, then the debtor’s turnover ratio can be calculated by

dividing the total sales by the balance of debtors (inclusive of bills receivables) given and

formula can be written as follows.

[Debtors Turnover Ratio = Total Sales / Debtors]

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DEBTORS TURNOVER RATIO (in million)

YEAR TOTAL SALES DEBTORS DEBTORS TURNOVER RATIO

2005-2006 4242.42 824.90 5.142006-2007 5267.72 937.43 5.622007-2008 6567.75 1322.86 4.962008-2009 7091.69 1529.64 4.642009-2010 7760.09 1600.22 4.85

Table 3Chart of debtors turnover ratio

debtorsturnover ratio

0

1

2

3

4

5

6

2005-06 2006-07 2007-08 2008-09 2009-10

debtorsturnover ratio

Interpretation

Debtor’s velocity indicates the number of times the debtors are turned over during a year.

Generally, the higher the value of debtor’s turnover the more efficient is the management

of debtors and low debtors turnover implies inefficient management of debtors. Here we

can see that in the year 2006-2007 it shows that they have efficiently managed the

debtors.

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CURRENT ASSETS TURNOVER RATIO

Current assets are a major component of the balance sheet and represent assets that are

expected to be sold or used, typically within the next 12 months. They are also an

important measure of a company’s liquidity position. Current assets have become a very

important factor in evaluating the financial strength of a company, in the event of a weak

economic environment or one of lower demand. Many of the popular financial ratios will

utilize the current assets when performing analysis to gauge financial performance and

stability.

Current Assets Turnover ratio shows the productivity of the company's current assets.

The formula is the following:

= turnover / average (current assets, other + stocks + debtors + cash & equivalents)

Current assets turnover ratio is calculate to know the firms efficiency of utilizing the

current assets. Current assets includes the assets like inventories, sundry debtors, bills

receivable, cash in hand or bank, marketable securities, prepaid expenses and short term

loans and advances. This ratio includes the efficiency with which current assets turn into

sales. A higher ratio implies a more efficient use of funds thus high turnover ratio

indicate to reduced the lock up of funds in current assets. An analysis of this ratio over a

period of time reflects working capital management of a firm.

Current assets TOR= Sales / Current assets

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CURRENT ASSET TURNOVER RATIO (in million)

year Total sales Current

asset

Current asset

Turnover ratio

2005-2006 4242.42 1733.71 2.45

2006-2007 5267.72 2228.35 2.36

2007-2008 6567.75 2898.31 2.27

2008-2009 7091.69 3431.45 2.07

2009-2010 7760.09 3282.58 2.36

Table 4

Chart of current asset turnover ratio

1.8

1.9

2

2.1

2.2

2.3

2.4

2.5

2005-06 2006-07 2007-08 2008-09 2009-10

current asset turnover ratio

current asset turnover ratio

Interpretation

It was observed that the current asset turnover ratio followed a decreasing trend upto

2009 after that in 2010 it was in increased. The sales is almost double the current asset is

considered to be satisfactory.

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LIQUIDITY RATIO

CURRENT RATIO

Current ratio may be defined as the relationship between current assets and current

liabilities. This ratio is also known as "working capital ratio". It is a measure of general

liquidity and is most widely used to make the analysis for short term financial position or

liquidity of a firm. It is calculated by dividing the total of the current assets by total of the

current liabilities.

The ratio is mainly used to give an idea of the company's ability to pay back its short-

term liabilities (debt and payables) with its short-term assets (cash, inventory,

receivables). The higher the current ratio, the more capable the company is of paying its

obligations. The current ratio can give a sense of the efficiency of a company's operating

cycle or its ability to turn its Product into cash. Companies that have trouble getting paid

on their receivables or have long inventory turnover can run into liquidity problems

because they are unable to alleviate their obligations. Because business operations differ

in each industry, it is always more useful to compare companies within the same industry.

This ratio is similar to the acid-test ratio except that the acid-test ratio does not include

inventory and pre paid as assets that can be liquidated. The components of current ratio

(current assets and current liabilities) can be used to derive working capital (difference

between current assets and current liabilities). Working capital is frequently used to

derive the working capital ratio, which is working capital as a ratio of sales.

[Current Ratio = Current Assets / Current Liabilities]

Components:

The two basic components of this ratio are current assets and current liabilities. Current

assets include cash and those assets which can be easily converted into cash within a

Short period of time, generally, one year, such as marketable securities or readily

realizable investments, bills receivables, sundry debtors, (excluding bad debts or

provisions), inventories, work in progress, etc.

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Current liabilities are those obligations which are payable within a short period of tie

generally one year and include outstanding expenses, bills payable, sundry creditors,

bank overdraft, accrued expenses, short term advances, income tax payable, dividend

payable, etc.

Limitations of Current Ratio:

This ratio is measure of liquidity and should be used very carefully because it suffers

from many limitations. It is, therefore, suggested that it should not be used as the sole

index of short term solvency.

1 It is crude ratio because it measures only the quantity and not the quality of the current

assets.

2 Even if the ratio is favorable, the firm may be in financial trouble, because of more

stock and work in process which is not easily convertible into cash, and, therefore firm

may have less cash to pay off current liabilities.

3 Valuation of current assets and window dressing is another problem. This ratio can be

very easily manipulated by overvaluing the current assets. An equal increase in both

current assets and current liabilities would decrease the ratio and similarly equal decrease

in current assets and current liabilities would increase current ratio.

CURRENT RATIO (in million)

YEAR CURRENT ASSET

CURRENT LIABILITY

CURRENT RATIO

2005-2006 1733.71 646.45 2.682006-2007 2228.35 857.42 2.602007-2008 2898.31 1030.90 2.812008-2009 3431.45 1106.18 3.102009-2010 3282.58 1246.51 2.63

Table 5

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Chart of current ratio

2.3

2.4

2.5

2.6

2.7

2.8

2.9

3

3.1

2005-06 2006-07 2007-08 2008-09 2009-10

current ratio

current ratio

Interpretation

A ratio equal or near to the thumb rule 2:1 i.e., current assets double the current

liabilities is considered to be satisfactory. We can see in the year 2006,2007,2008,2009

and 2010 the current ratios are 2.68, 2.60, 2.81, 3.10 and 2.63 respectively. Here the

current assets are double the current liabilities.

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QUICK RATIO

The quick ratio, defined also as the acid test ratio, reveals a company's ability to meet

short-term operating needs by using its liquid assets. It is similar to the current ratio, but

is considered a more reliable indicator of a company’s short-term financial strength. The

difference between these two is that the quick ratio subtracts inventory from current

assets and compares the quick asset to the current liabilities. Similar to the current ratio,

value for the quick ratio analysis varies widely by company and industry. In theory, the

higher the ratio is, the better the position of the company is. However, a better benchmark

is to compare the ratio with the industry average.

Quick ratios are often explained as measures of a company’s ability to pay their current

debt liabilities without relying on the sale of inventory. Compared with the current ratio,

the quick ratio is more conservative because it does not include inventories which can

sometimes be difficult to liquidate. For lenders, the quick ratio is very helpful because it

reveals a company’s ability to pay off under the worst possible condition.

Quick Ratio FormulaQuick Ratio = (Current assets – Inventories) / Current liabilities

Quick ratio calculation is a useful skill for any business that may face cash flow issues.

Quick assets include those current assets that presumably can be quickly converted to

cash at close to their book values. It normally includes cash, marketable securities, and

some accounts receivables. The quick ratio, sometimes called the acid-test, is a more

stringent test of liquidity than the current ratio. A business has to find a buyer if it wants

to liquidate inventory, or turn it into cash. Finding a buyer is not always easy. Quick

ratios establish the relationship between quick or liquid assets and liabilities.

An asset is liquid if it can be converting in to cash immediately or reasonably soon

without a loss of value. Cash is the most liquid asset .other assets which are consider to

be relatively liquid and include in quick assets are debtors and bills receivable and

marketable securities. Inventories are considered as less liquid.

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Inventory normally required some time for realizing into cash. Their value also is

tendency to fluctuate. The quick ratio is found out by dividing quick assets by current

liabilities.

QUICK RATIO (in million)

YEAR QUICK ASSETS CURRENT LIABILITIES

QUICK RATIO

2005-2006 1219.30 646.45 1.862006-2007 1489.67 857.42 1.742007-2008 1952.74 1030.90 1.892008-2009 2265.98 1106.18 2.052009-2010 2091.04 1246.51 1.68

Table 6Chart of quick ratio

0

0.5

1

1.5

2

2.5

2005-06 2006-07 2007-08 2008-09 2009-10

quick ratio

quick ratio

Interpretation

As a rule of thumb or as a convention quick ratio of 1:1 is considered satisfactory. It is

generally thought that if quick assets are equal to current liabilities then the concern may

be able to meet its short term obligations. We can see in the years 2006,2007,2008,2009

and 2010 shows that it is equal to current liabilities. In the year 2009 the quick ratio is

2.05 i.e., the quick assets double the current liabilities. This shows that the concern may

be able to meet its short term obligations.

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Absolute Quick ratio

The ratio shows very clearly whether a concern is liquid or not. In other words, it is the

real measure of the liquidity or short-term solvency of a concern Even though debtors and

bills receivables are considered as more liquid then inventories; it can not be converted in

to cash immediately or in time. Therefore the while calculation of absolute liquid ratio

only the absolute liquid assets as like cash in hand cash at bank, short term marketable

securities are taken in to consideration to measure the ability of the company in meeting

short term financial obligation. It calculates by absolute assets dividing by current

liabilities.

Absolute Liquid Ratio = Absolute Liquid assets / Quick Liabilities

ABSOLUTE QUICK RATIO (in million)YEAR ABSOLUTE

QUICK ASSETSCURRENT LIABILITIES

ABSOLUTE QUICK RATIO

2005-2006 145.80 646.45 .232006-2007 273.26 857.42 .322007-2008 169.71 1030.90 .162008-2009 343.21 1106.18 .312009-2010 61.32 1246.51 .05

Table 7Chart of absolute quick ratio

absolute quick ratio

0

0.05

0.1

0.15

0.2

0.25

0.3

0.35

2005-06 2006-07 2007-08 2008-09 2009-10

absolute quick ratio

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Interpretation

The acceptance norm for this ratio is 50%or .5:1 or 1:2.here we can see that all the years,

absolute liquid ratio is slightly low. In all, the company needs to improve its short term

financial position.

PROFITABILITY RATIOS

Profitability ratio measures overall performance and effectiveness of the firm. Besides the

management of the company, creditors and owners are interested in the profitability of

the firm.

NET PROFIT RATIO

Net profit ratio establishes a relationship between net profit and sales and indicates the

efficiency of the management in manufacturing, selling, administrative and other

activities of the firm. This ratio is the overall measures of firm profitability.

Net profitability = Net profit after tax

Net sales

NET PROFIT RATIO (in million)

YEAR NET PROFIT NET SALES NET PROFIT RATIO

2005-2006 766.13 3721.53 21%2006-2007 586.61 4645.56 13%2007-2008 971.70 5830.10 17%2008-2009 597.17 6519.00 9%2009-2010 580.10 7310.10 8%

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Table 8

Chart of net profit ratio

0%

5%

10%

15%

20%

25%

2005-06 2006-07 2007-08 2008-09 2009-10

net profit ratio

net profit ratio

Interpretation

The ratio indicates the firm’s capacity to face adverse economic conditions. Higher the

ratio, the better is the profitability. But while interpreting the ratio, it should be kept in

mind that the performance of profits must also be seen in relation to investment or capital

of the firm and not only in relation to sales. Here we can see that the ratios are decreasing

from year to year. It shows lower profitability.

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GROSS PROFIT RATIO

Cash and short-term assets expected to be converted to cash within a year. Businesses use

the calculation of gross working capital to measure cash flow. Gross working capital does

not account for current liabilities, but is simply the measure of total cash and cash

equivalent on hand. Gross working capital tends not to add much to the business' assets,

but helps keep it running on a day-to-day basis

GROSS PROFIT RATIO (in million)

YEAR GROSS PROFIT NET SALES GROSS PROFIT RATIO

2005-2006 4205.13 3721.53 113%2006-2007 4859.77 4645.56 105%2007-2008 6714.84 5830.10 115.18%2008-2009 7092.87 6519.00 109%2009-2010 7622.40 7310.10 104.27%

Table 9

Chart of gross profit ratio

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98%

100%

102%

104%

106%

108%

110%

112%

114%

116%

2005-06 2006-07 2007-08 2008-09 2009-10

gross profit ratio

gross profit ratio

Interpretation

There is no standard norm for gross profit ratio and it may vary from business to business

but the gross profit should be adequate to cover the operating and to provide for fixed

charges. Higher the gross profit ratio, better the result. A low gross profit ratio generally

indicates high cost of goods sold. In the year 2005-2006 and 2007-2008 shows high gross

profit ratio and in other years shows low gross profit ratio.

Operating cycle analysis

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The working capital cycle refers to the length of time between the firms

paying the cash for materials, etc., entering into production process/stock & the inflow of

cash from debtors (sales), suppose a company has certain amount of cash it will need raw

materials. Some raw materials will be available on credit but, cash will be paid out for the

other part immediately. Then it has to pay labor costs & incurs factory overheads. These

three combined together will constitute work in progress. After the production cycle is

complete, work in progress will get converted into sundry debtors. Sundry debtors will be

realized in cash after the expiry of the credit period.

This cash can be again used for financing raw material, work in progress etc. thus there is

complete cycle from cash to cash wherein cash gets converted into raw material, work in

progress, finished goods and finally into cash again. Short term funds are required to

meet the requirements of funds during this time period. This time period is dependent

upon the length of time within which the original cash gets converted into cash again.

The cycle is also known as operating cycle or cash cycle.

A company’s operating cycle typically consists of three primary activities: purchasing

resources, producing the product, and distributing (selling) the product. These activities

create funds flow that is both unsynchronized and uncertain. They are unsynchronized

because cash disbursements (for example, payments for resources purchases) usually take

place before cash receipts (for example, collection of receivables). They are uncertain

because future sales and costs, which generate the respective receipts and disbursements,

cannot be forecasted with complete accuracy. If the firm is to maintain liquidity and

function properly, it has to invest funds in various short-term assets (working capital)

during this cycle.

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It has to maintain a cash balance to pay the bills as they come due. In addition, the

companies most invest in inventories to fill customer orders promptly. And finally, the

company invests in accounts receivable to extend credit to its customers.

Operating cycle is the time duration required to convert sales after conversation of

resources into inventories into cash. The operating cycle of a manufacturing company

involves three phases:

Acquisition of resources such as, raw material, labour, power and fuel etc.

Manufacturing of a product which includes conversion of raw material into work-

in-progress into finished goods.

Sales of the product either for cash on credit.

The operating cycle of a firm begins with the acquisition of raw materials and ends with

the collection of receivables stocks of raw material and other components. The firm holds

stocks of finished goods to meet the demand of customers on continuous basis and

sudden demand from source customers.

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Operating cycle

Receipt from cash purchase of raw material, creation of Debtors parts&components A/Cs payable (Creditors)

Creation of A/C payment ofReceivable (creditors) creditors

Sales of finished Goods manufacturing Operation (Added cost) Wages&saleries

Warehousing of finished goods office selling &distribution expenses Working capital cycle can be determined by adding the number of days required for each

stage in the cycle. For example, company holds raw material on average for 60 days, it

gets credit from the supplier for 15 days, finished goods are held for 30 days & 30 days

credit is extended to debtors. The total days are 120, i.e., 60 15 + 15 + 15 + 30 + 30 days

is the total of working capital.

Thus the working capital cycle helps in the forecast, control & management of working

capital. It indicates the total time lag & the relative significance of its constituent parts.

The duration may vary depending upon the business policies. In light of the facts

discusses above we can broadly classify the operating cycle of a firm into three phases

viz.

1 Acquisition of resources.

2 Manufacture of the product and

3 Sales of the product (cash / credit).

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First and second phase of the operating cycle result in cash outflows, and be predicted

with reliability once the production targets and cost of inputs are known. However, the

third phase results in cash inflows which are not certain because sales and collection

which give rise to cash inflows are difficult to forecast accurately.

Operating cycle consists of the following:

Conversion of cash into raw-materials;

Conversion of raw-material into work-in-progress;

Conversion of work-in-progress into finished stock;

Conversion of finished stock into accounts receivable through sales; and Conversion of

accounts receivable into cash. In the form of an equation, the operating cycle process can

be expressed as follows:

OPERATING CYCLE = RMCP + WIPCP + FGCP + DCP-CCP

RMCP = Raw material conversion period

W IPCP = Work in progress conversion period

F GCP = Finished goods conversion period

DCP = Debtors collection period

CCP = Creditors conversion period

ICP = Inventory Conversion Period

RCP = Receivables Conversion Period

Payables (PDP) = Payables Deferral Period

NOC = Net Operating Cycle

GOC = Gross Operating Cycle

Here, the length of GOC is the sum of ICP and RCP. ICP is the total time needed for

producing and selling the products. Hence it is the sum total of RMCP, WIPCP and

FGCP. On the other hand, RCP is the total time required to collect the outstanding

amount from customers. Usually, firm acquires resources on credit basis.

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PDP is the result of such an incidence and it represents the length of time the firm is able

to defer payments on various resources purchased.The difference between GOC and PDP

is known as Net Operating Cycle and if Depreciation is excluded from the expenses in

computation of operating cycle, the NOC also represents the cash collection from sale

and cash payments for resources acquired by the firm and during such time interval

between cash collection from sale and cash payments for resources acquired by the firm

and during such time interval over which additional funds called working capital should

be obtained in order to carry out the firms operations. In short, the working capital

position is directly proportional to the Net Operating Cycle.

Calculations:

On the basis of financial statement of an organization we can calculate the inventory

conversion period. Debtors / receivables conversion period and the creditor’s conversion

period and based on such calculations we can find out the length of the operating cycle

(in days) both gross as well as net operating cycle.

As mentioned above, on the basis of information presented in the Balance sheet and

CMA statement of CUMI, the length of gross as well as net operating cycle is calculated

as follows:

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Particulars 2005-06 2006-07 2007-08 2008-09 2009-10MaterialCost

147.71 245.41 332.19 472.74 386.07

Labour cost 340.17 382.09 505.93 565.69 629.82Direct expenses

…………

………….

………….

………….

………….

Prime cost 487.88 627.5 838.12 1038.43 1015.89Manufacturing expenses

1314.15 1633.33 2026.29 2292 2287.42

Cost of production

1802.03 2260.83 2864.41 3330.43 3303.31

+opening WIP

121.30 149.78 242.22 233.85 284.66

-closing WIP 149.78 242.22 233.85 284.66 313.50Cost of goods produced

1773.55 2168.39 2872.78 3279.62 3274.47

+opening FG 165.10 193.57 272.30 272.30 315.63-closing FG 193.57 272.30 315.63 315.63 334.68Cost of good sold

1745.08 2089.66 2829.45 3236.29 3255.42

Operating cycle for the year 2005-2006

RMCP = AVERAGE STOCK X 360 ANNUAL CONSUMPTION

= 147.71 X 360 1241.55 = 42 DAYS

WIPCP = AVERAGE STOCK X 360 COST OF PRODUCTION

= 135.54 X 360 1802.83

= 27 DAYS

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FGCP = AVERAGE STOCK X 360 COST OF GOODS SOLD

= 223.62 X 360 1745.08

= 46 DAYS

DEBTORS CONVERSION PERIOD = AVERAGE TRADE DEBTORS X 360 AVERAGE CREDIT SALES

= 824.90 X 360 4242.42

= 70 DAYS

CREDITORS CONVERSION PERIOD = AVERAGE TRADE CREDITORS X 360 AVERAGE CREDIT PURCHASE

= 378.52 X 360

1241.55 = 110 DAYS

GROSE OPERATING CYCLE= 42+27+46+70 =185 DAYS

NET OPERATING CYCLE = 87+21+38+70-110=75 DAYS

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Operating cycle (IN DAYS)

PARTIC-ULARS

2005-06 2006-07 2007-08 2008-09 2009-10 AVERAGE

RMCP 42 51 53 63 44 51

WICP 27 33 30 28 33 30

FGCP 46 44 30 33 36 38

DCP 70 65 73 78 74 72

GOC 185 193 186 202 187 191

CCP 110 112 102 98 102 105

NOC 75 81 84 104 85 86

Interpretation

The above table shows that the operating cycle of the firm over a period of five years

from 2006-2010. It indicates that the raw material conversion period is increased up to 63

days in 2008-2009 and then it is decreased to a level of 44 days. Finished goods

conversion period shows a decreasing trend up to 2008-2009 and then it is increased.

Debtor’s conversion period and creditor’s conversion period shows variable trends.

Similarly net operating cycle shows a increasing trend up to 2008-2009 and then it is

decreased.

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SCHEDULE OF CHANGES IN WORKING CAPITAL

The working capital position at the beginning of a period is changed to a different

position at the end of the period. A schedule of working capital is prepared to depict the

changes of working capital. This statement or schedule to prepared with current assets

and current liabilities as appearing in the balance sheet under consideration. The

statement shows the changes in individual items of current assets and current liabilities

and their effect of working capital. The total increase and the total decrease in the end is

compared and the difference of total increase and the total decrease shows net increase or

net decrease in the working capital. If the working capital at the end of current year is

more than the working capital at the previous year the excess is called, “increase in

working capital”, if the previous year working capital is more than the current year

working capital, the excess is called, “decrease in working capital”.

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Schedule of changes in Net working capital of CUMISl no particulars 2005-06 2006-07 Increase Decrease Percent-

age(%)

1 Petty cash &bank

117.6 153.07 35.47 30.16

2 Receivables /debtors

824.90 937.43 112.53 13.64

3 Stock 514.41 738.68 224.27 43.594 Loans

&advances248.60 278.98 30.38 12.22

5 Deposits 28.20 120.19 91.99 326.186 Total current

assets1733.71 2228.35 494.64

7 creditors 378.52 528.03 149.51 39.498 Accruals 67.68 165.56 97.88 144.629 Provision 200.25 163.83 36.42 (18.18)10 Total current

liability646.45 857.42 36.42 247.39

11 Net working capital

1087.26 1370.93 531.06 247.39

12 Increase/ decrease in net working capital

283.67 283.67

13 TOTAL 1087.26 1087.26 247.39 247.39

INTERPRETATION

The above table specifies that net working capital of the company is in increasing

trend .inventories was more than the previous year. All the current assets and current

liabilities were in increasing trend. The net working capital shows a positive balance in

both the year 2006 and 07. It shows that company’s financial position is satisfactory.

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Schedule of changes in Net working capital of CUMI (in million)

Serial no

Particulars 2006-07

2007-08

Increase Decrease Percentage

1. Petty cash &bank

153.07 104.4 48.67 (31.79)

2. Receivables /debtors

937.43 1322.86 385.43 30.44

3. Stock 738.68 945.57 206.89 28.004. Loans

&advances278.98 460.17 181.19 64.94

5. Deposits 120.19 65.31 54.88 (45.66)6. Total

current assets

2228.35 2898.31 773.51 103.49

7. creditors 528.03 643.72 115.69 21.908. Accruals 165.56 171.59 6.03 03.649. Provision 163.83 215.19 51.36 31.3410. Total

current liability

857.42 1030.90 …….. 173.48 20.23

11. Net working capital

1370.93 1867.41 773.51 276.97

12. Increase/ decrease in net working capital

496.48 496.48

13. TOTAL 1370.93 1370.93 276.97 276.97

INTERPRETATION

The above table shows increase in net working capital of the firm in the year 2008 when

compared to the year 2007.total debtor’s level increased by 30.44 %. The cash level

decreased. Total current assets and current liabilities were in increasing trend.net working

capital shows a positive balance, which shows that the company’s financial position is

satisfactory.

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Schedule of changes in Net working capital of CUMI (in million)Serial no

particulars 2007-08

2008-09

Increase Decrease Percentage(%)

1 Petty cash &bank

104.4 193.21 88.81 85.06

2 Receivables /debtors

1322.86 1529.64 206.78 15.63

3 Stock 945.57 1165.47 219.9 23.254 Loans

&advances460.17 393.13 67.04 (14.46)

5 Deposits 65.31 150.00 84.69 129.676 Total

current assets

2898.31 3431.45 600.18 67.04

7 creditors 643.72 739.44 95.72 48.698 Accruals 171.59 153.19 18.4 (14.86)9 Provision 215.19 213.55 1.64 (10.72)10 Total

current liability

1030.90 1106.18 20.04 95.72

11 Net working capital

1867.41 2325.27 620.22 162.76

12 Increase/ decrease in net working capital

457.86 457.86

13 TOTAL 1867.41 1867.41 162.76 162.76

Interpretation

The above table specifies that the net working capital of the company in the year 2009

shows a positive balance. Compared to the previous it is increased. Total current were

more than the current liabilities. Debtors and cash level were also in increasing trend. The

above table shows that company’s having a sound financial position.

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Schedule of changes in Net working capital of CUMI in millionSl no

particulars 2008-09

2009-10

Increase Decrease Percentage

1 Petty cash &bank

193.21 53.22 139.99 (72.5)

2 Receivables /debtors

1529.64 1600.22 70.58 04.61

3 Stock 1165.47 1191.54 26.07 02.23

4 Loans &advances

393.13 429.50 36.37 09.25

5 Deposits 150.00 8.10 141.9 (94.6)

6 Total current assets

3431.45 3282.58 133.02 281.89

7 creditors 739.44 890.20 150.76 20.38

8 Accruals 153.19 145.64 7.55 (4.92)

9 Provision 213.55 210.67 2.88 (1.34)

10 Total current liability

1106.18 1246.51 10.43 150.76

11 Net working capital

2325.27 2036.07 143.45 432.65

12 Increase/ decrease in net working capital

289.2 289.2

13 TOTAL 2036.27 2036.07 143.45 143.45

Interpretation

The above table shows decrease in net working capital of the form in the year 2010 when

compared to the year 2009. The bank deposits were decreased by 94%. The current assets

level also decreased when compared to the previous year. The net working capital of the

company in the year 2010 shows a positive balance, which shows that the company’s

financial position in not satisfactory.

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FINDINGS AND

SUGGESTIONS

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Summary of findings

CARBORUNDUM UNIVERSAL LTD involves the business activities are

manufacturing the coated abrasives, bonded abrasives and super refractories, electro

minerals, industrial ceramics and ceramic fibers. CUMI has 10 manufacturing facilities

across the India and these manufacturing facilities are meticulously connected with wide

network of distributors and sub distributors. CUMI’s equipped with a state of the art

research and development center which works aggressively on products development and

enhancement.

1. The company has a good solvency position.

2. In 2007-2008 CUMI’S net profit has increased to maximum which indicates that

the firm is able to with stand adverse economic conditions.

3. The firm enjoyed more credit in the year 2008 compared to other 4 years.

4. The company has not maintained stability in its working capital turnover ratio

which is an indication of ineffective use of working capital.

5. Positive working capital indicates that company has the ability of payments of

short terms liabilities.

6. Working capital increased because of increment in the current assets is more than

increase in the current liabilities.

7. In the year 2010 working capital decreased because of increased the expenses as

manufacturing expenses and increase the price of raw material as increased in the

inflation rate.

8. When Working capital is compared with net sales it is in increasing trend

indicating the effective utilization of the net working capital.

Liquidity ratios

1. Current ratio shows satisfactory figures in all years. The current assets of CUMI

are enough to meet the short term obligations.

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2. Quick ratio shows satisfactory figures in all years. This shows firm is able to meet

current obligations.

3. Absolute liquid ratio is slightly low in all years.

4. Current assets are increasing every year and it improves the financial performance

of the company.

5. The company is having good liquidity position.

6. The current assets position of the company is more than the ideal, which shows

that some amount of current asset are blocked up in the working capital.

Activity ratios

1. In CUMI, debtor’s turnover ratio shows that they have to manage the debtors

efficiently. So that the company is able to collect the receivables from the debtors

without delay.

2. Inventory turnover ratio shows efficient management of inventory because more

frequently the stocks are sold.

3. The working capital turnover ratio of CUMI indicates the efficient the efficient

utilization of working capital.

4. By comparing the working capital of 5 years, it is to be clear that working capital

shows an increasing trend.

5. Current assets components shows sundry debtors were the major part in current

assets it shows that the efficient receivables collection management.

Profitability ratios

1. Gross profit should be adequate to cover the operating and to provide for fixed

changes.

2. The net profit ratio shows the overall profit of the company is in decline due to

the inefficiency of the purchase system or increase in the cost of raw materials.

3. The company is earning a sufficient amount of operating income to meet its fixed

expenses such as salaries, wages &bonus managerial remuneration, interests

&bank charges & depreciation.

4. The company’s profitability position has increased in the 5 years when compared

with the average of 5 years. The overall profitability of the firm is good.

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5. The company is depending more on debt capital.

Suggestions and recommendations

1. Current ratio and liquid ratios are more than the ideal norms, so that it is very

favourable. In case of absolute liquid assets, the company needs to improve

its short term financial position. The current assets are held by the company

in order to meet the current liabilities as and when they become due. This

improves the liquidity position of the company, but decreases the

profitability. So there should be trade off between the liquidity and

profitability of net working capital.

2. The company should take effective steps for the proper utilization of total

assets to increase the net profit. The profitability has declined during the

recent years. This is mainly because of the increase in the cost of raw

materials. The company can also control other costs like cost of goods sold.

3. To have an efficient working capital management the short term funds of the

company should be efficiently used in the operations. By increasing the

percentage of receivables helps to reduced the bad debt. The management

should take necessary steps to make financial position constant.

4. In 2007-08 the company has a good profit and it must be maintained in future

also.

5. The concern should also try to increase the assets turnover ratio a bit more as

than years we see that there is only a margin increase in this ratio.

6. The company should improve the efficiency of the debt collection machinery

by adopting intensive debt collection policy and by making every effort to

avoid the bad debts.

7. The company can use low cost debt contents in the capital structure to acquire

fixed asset. This will increase the profitability of the concern. As a growing

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concern company can retain major position of the profits for the further

expansion.

8. An internal audit system should be strengthened because a good system of

internal audit appraises the activities of the unit ensures that the business runs

according to plan prevents fraud and improves personnel efficiency.

9. Sufficient training &incentives should be provided to worker to boost morale

&to improve efficiency &productivity and hence the profitability of the firm.

10. Company should raise funds through short term sources for short term

requirement of funds, which comparatively economical as compare to long

term funds.

11. Company has to take control on cash balance because cash is non earning

assets and increasing cost of funds.

12. The current assets should be managed more effectively so as to avoid

unnecessary blocking of capital that could be used for other purposes.

13. There are various global challenges that are faced by every company n the

present competitive environment and “CUMI” is not any exemption. To face

the present global challenges the human resources department should be

develop to improve various skills among the employees specially the

motivational skills and having the regular training for the employees about

various developments in the market.

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CONCLUSION

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Conclusion

The dissertation “analysis of working capital management of Carborundum universal

ltd” was made with simple statistical tool of ratio analysis. The study helped to assess the

working capital management of the company. Working capital is the life blood of every

company. CUMI is now running in profit. The working capital of the company is in

satisfactory position. It is analyzed that, it is easy to make profit in future. This will not

affect the existence of the company. All the precautions should be taken by the company

for the effective management of working capital. It is concluded that the overall working

capital management techniques is satisfactory as per analysis. Current assets are

sufficient to meet the current liabilities even though company should maintain an

optimum investment in inventories to maximize the profitability. The various ratios

calculated are an indicator as to the fact that the profitability of the firm and sales are on a

rise and also the deletion of the inefficiencies in the working capital management. The

firm has not compromised on profitability despite the high liquidity is commendable.

Thus we conclude that our hypothesis is accepted.

Hence: “existing working capital management methods are effective”.

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BIBLIOGRAPHY

FINANCIAL MANAGEMENT: I M PANDEY

FINANCIAL MANAGEMENT: PRASSANNA CHANDRA.

WEBSITE OF CUMI

Websites

www.cumi,com

www.google.com

GOOGLE.

FINANCIAL MANAGEMENT: SATISH INAMDAR.

ANNUAL REPORTS OF CARBORUNDUM UNIVERSAL. LTD

WORKING CAPITAL MANAGEMENT: KRISH RANGANATHAN& ANIL MISRA

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AN

NEXURE

BALANCE SHEET AS AT 31ST MARCH 2007 (in million)Schedule 31.3.2007 31.3.2006

SOURCES OF FUNDSShareholder’s fundsShare capital 186.71 186.71Reserves and surplus 2553.02 2187.45

2739.73 2374.16Loan fundsSecured loans 1797.02 652.11Unsecured loans - 60.55Long term lease liability 17.49 10.74

1814.51 723.40Deferred tax liability(net) 206.54 176.88total 4760.78 3274.44APPLICATION OF FUNDSFixed assetsGross block 3570.95 2676.90Less: depreciation 1467.78 1425.44Net block 2103.17 1251.46Capital work –in-progress(including capital advances)

389.32 424.95

2492.49 1676.41investments 897.36 510.77Current assets, loans & advancesinventories 738.68 514.41Sundry debtors 937.43 824.90

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Cash & bank balances 273.26 145.80Loans &advances 278.98 248.60

2228.35 1733.71Less: current liabilities & provisionsCurrent liabilities 693.59 446.20provisions 163.83 200.25

857.42 646.45Net current assets 1370.93 1087.26TOTAL 4760.78 3274.44

BALANCE SHEET as at 31st march 2008 (in million)Schedule 31.3.2008 31.3.2007

SOURCES OF FUNDSShareholder’s FundsShare capital 186.71 186.71Reserves and surplus 3332.04 2553.022

3518.75 2739.73Loan FundsSecured loans 2267.27 1797.02Unsecured loans 726.93 ……Long term lease liability 15.84 17.49

3010.04 1814.51Deferred tax liability(net) 282.61 206.54Total 6811.40 4760.78APPLICATIONS OF FUNDSFixed assets Gross block 4282.04 3570.95Less: depreciation 1641.63 1467.78Net block 2640.41 2103.17Capital work-in-progress(including capital advances)

605.90 389.32

3246.31 2492.49investments 1697.68 897.36Current assets, loans & advancesinventories 945.57 738.68

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Sundry debtors 1322.86 937.43Cash &bank balances 169.71 273.26Loans & advances 460.17 278.98

2898.31 2228.35Less: current liabilities & provisionsCurrent liabilities 815.71 693.59provisions 215.19 163.83

1030.90 857.42Net current assets 1867.41 1370.93TOTAL 6811.40 4760.78

BALANCE SHEET as at 31st march 2009 (in million)Schedule 31.3.2009 31.3.2008

SOURCES OF FUNDSShareholder’s FundsShare capital 186.71 186.71Reserves and surplus 3721.85 3332.04

3908.56 3518.75Loan FundsSecured loans 2872.76 2267.27Unsecured loans 593.41 726.93Long term lease liability 13.55 15.84

3479.72 3010.04Deferred tax liability(net) 368.23 282.61Total 7756.51 6811.40APPLICATIONS OF FUNDSFixed assets Gross block 5418.73 4282.04Less: depreciation 1917.86 1641.63Net block 3500.87 2640.41Capital work-in-progress(including capital advances)

208.66 605.90

3709.53 3246.31investments 1721.71 1697.68Current assets, loans & advancesinventories 1165.47 945.57

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Sundry debtors 1529.64 1322.86Cash &bank balances 343.21 169.71Loans & advances 393.13 460.17

3431.45 2898.31Less: current liabilities & provisionsCurrent liabilities 892.63 815.71provisions 213.55 215.19

1106.18 1030.90Net current assets 2325.27 1867.41TOTAL 7756.51 6811.40

BALANCE SHEET as at 31st march 2010 (in million)schedule 31.3.2010 31.3.2009

SOURCES OF FUNDSShareholder’s FundsShare capital 186.71 186.71Reserves and surplus 4101.93 3721.85

4288.64 3908.56Loan FundsSecured loans 2648.06 2872.76Unsecured loans 176.35 593.41Long term lease liability 13.94 13.55

2838.35 3479.72Deferred tax liability(net) 415.30 368.23Total 7542.29 7756.51APPLICATIONS OF FUNDSFixed assets Gross block 5676.54 5418.73Less: depreciation 2219.32 1917.86Net block 3457.22 3500.87Capital work-in-progress(including capital advances)

330.64 208.66

3787.86 3709.53investments 1718.36 1721.71Current assets, loans & advances

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inventories 1191.54 1165.47Sundry debtors 1600.22 1529.64Cash &bank balances 61.32 343.21Loans & advances 429.50 393.13

3282.58 3431.45Less: current liabilities & provisionsCurrent liabilities 1035.84 892.63provisions 210.67 213.55

1246.51 1106.18Net current assets 2036.07 2325.27TOTAL 7542.29 7756.51

Profit and loss account for the 5 years (in million)particulars Sh 31.3.06 31.3.07 31.3.08 31.3.09 31.3.10

INCOMEGross sales 4242.42 5267.72 6567.75 7091.69 7760.09Less: excise duty 520.89 622.16 737.65 572.69 449.99Net sales 3721.53 4645.56 5830.10 6519.00 7310.10Income from work bills and services

……. ……. 38.22 59.14 71.06

Profit on sale of fixed assets

…….. 70.35 567.52 291.40 5.24

Other income 483.60 143.86 279.00 62.11 236.004205.13 4859.77 6714.84 6931.65 7622.40

EXPENDITURERaw material consumed

1241.55 1702.65 2265.23 2699.71 3141.37

(accretion) to stock (32.74) (94.42) (63.04) (94.14) (47.89)Employee cost 513.51 525.45 692.99 764.84 807.69other cost 1314.15 1633.33 2026.69 2130.78 2287.42depreciation 134.70 168.92 252.75 298.46 354.10Less: transfer from fixed assets revolution reserve

.73 .73 .68 .68 .68

133.97 168.19 252.07 297.78 353.42Interest and finance charges

28.08 71.25 169.06 271.88 238.69

3198.52 4006.45 5343.00 6070.85 6780.70

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Profit before tax 1006.61 853.32 1371.84 860.80 841.70Less: provision for income taxCurrent tax 191.50 199.50 309.50 167.00 214.50Deferred tax 38.30 58.31 76.53 85.63 47.07Fringe benefit tax 10.68 8.90 14.11 11.00 …..Profit after tax 766.13 586.61 971.70 597.17 580.13Add: inappropriate profits from previous year

203.05 285.97 650.09 1309.43 1602.08

Profit available for appropriation

969.18 872.58 1621.79 1906.60 2182.21

AppropriationsTransfer to general reserve

300.00 58.66 97.17 59.72 300.00

300.00 58.66 97.17 59.72 300.00Dividend Special interim nil(Previous year @120%)

224.05 …… …… ……. …….

Proposed @75%(Previous year@60%)

112.03 140.03 …… ……. ……

Proposed @100%(previous year @75%)

…… …… 186.71 186.71 186.71

Dividend tax 47.13 23.80 28.48 26.84 23.96383.21 163.83 215.19 213.55 210.67

Balance carried over to balance sheet

285.97 650.09 1309.43 1602.08 1640.29

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