revised working capital

7/29/2019 Revised Working Capital

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Project onWorking Capital

2013

[Type the author name]

1/1/2013

Sumit Singh

Registration No:-016-1121-0250-10

Roll No: - 301-0063

B-com (Honours), 3rd year

Syma Prasad College


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DECLARATION

I am Sumit Singh Student of SYMA PRASAD COLLEGE Of B-com(

Honours) 3rd Year hereby declare that the project report entitled Working

Capital the outcome of my own work and the same has not been submitted to

any University / Institute for the award of any degree.

Sumit Singh


Roll No: - 301-0063


Syma Prasad College


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ACKNOWLEDGEMENT

Success is the outcome of diligence & perseverance, I, Sumit Singh, student

ofSYMA PRASAD COLLEGE Of B-com( Honours)of 3rd Year would,

like to ascribe to my success in completing my projectWorking Capital

and to my project supervisors My College Faculties who have extended their

sincere help in accomplishing my project. I really want to thank the above

mentioned to all my faculties and my mentors for their continuous support &

guidance during the project, without their help my project would have been a

distant dream.

Sumit Singh


Roll No: - 301-0063


Syma Prasad College


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Table of Contents

1. Executive Summary52. Company Overview.63. Research Methodology.........84. Objective ......85. Introduction of working capital.....96. Concept of Working Capital.97. Implications of Net Working Capital.128. Classification of Working Capital......129. Importance or Advantage of Adequate Working Capital...1310. Excess or Inadequate Working Capital...1411. Factors Determining the Working Capital Requirements.......1612. Principle of Working Capital Management Policy.........1813. Management of Working Capital....1914. Planning Of Working Capital..1915. Working Capital Cycle....2016. Working Capital Analysis...2417. Presentation Of Data Analysis & Interpretation..2618. Finding.....45

19.

Recommendation and Conclusion.......46

20. Bibliography.....47


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WORKING CAPITAL

Executive Summary

The major objective of this Project is for the proper understanding of the working capital

The project undertaken is on Working Capital Management. It describes about how the

company manages its working capital and the various steps that are required in the

management ofworking capital.

In this Project With the help of Kirloskar pneumatic company limited it is shown why working

capital is called cash of a business and why it is required for day-to-day operations. Profit &

loss Account, Balance sheet, statement of working capital of different year is mention so it

become easier to analyze the working capital position of the company. In this project it is also

mention what are strategies that will help in greater productivity, inventory optimization and

also better working capital management and also why working capital is a means to run

business smoothly and profitability.

In this Project three elements of working capital management are mentioned and how they

have impact on the particular business or company and how they can be manage. The Three

elements are cash management receivable management and inventory management..

Working capital policies of a firm have a great effect on its profitability, liquidity and

structured health of the organization.

In this project with the help of Kirloskar pneumatic company limited data it has been shown

why working capital is an important yardstick to measure the companys operational and

financial efficiency and why any company should have a right amount of cash and lines of

credit for its business. This project describes how the management of working capital takes

place.


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KIRLOSKAR PNEUMATIC COMPANY

Established in 1958, Kirloskar pneumatic company limited started with the manufacture of

air compressors and pneumatic tools. Immediately thereafter the company expanded itsactivated in the field of air-conditioning and refrigeration machinery. Further diversification

in the manufacture of hydraulic power transmission equipment followed.

Kirloskar pneumatic is held in high esteem for process system engineering and turnkey

project expertise. The result of its success in this area is reflected in company s association

with virtually every project and industry in the country.

At Kirloskar pneumatic, up to date manufacturing facilities, including CNC machine stringent

quality control procedures and system, Rand D, foundry, heat treatment facilities, screw rotor

machines, gear grinding machines, metallurgical and metrological labs, tool room, and an

integrated computer system have all been set up with the sole idea of achieving the highest

standards of quality and performance.

KPLC is among the first few companies in India to secure the ISO 9001certification in all its

operations. Companies products are manufactured under the survey of renowned inspection

agencies such as Lloyd s, MMD, IRS, NTPC, EIL, PDIL, DGS and D, RITES, And many more

and are well accepted not only in India but also in countries of south East Asia, Africa, gulf,

Middle East, west Asia, Europe, and U.S.


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Financial Department:-

Product Groups

Major

customers

Major

competitors

Approx.

Market share in %

Screw

compressors

diesel driven at

10KG/CM2

well drilling

Operation.

Atlas

Copco,

ELGI.

25

Screw

compressors

electric motor

driven at 7 to

10KG/CM2.

Textile,

granites

industries.

Atlas

copco,

ELGI

10

Balanced

opposed

piston

compressor

driven at 3 to

9 KG/CM2.

Power,

Petrochemic

al, Cement,

Steel

Industries.

CPT,

Ingersol

rand.

55

Vertical

reciprocating

water culled.

Driven at 7 to

9 KG/CM2

All small-

scale

industries.

IR, ELGI20

Centrifugalcompressor

Driven by 7

KG/CM2 &

above.

Cement,

Steel, Textile

industries.

Atlas

copco,

Demag.

Just started.


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RESEARCHMETHODOLOGY

Secondary Data:

The data is collected through the secondary sources like:

Annual Reports of the company.

Office manuals of the departmen.

Magazines, Reports in the company.

Policy documents of various departments.

OBJECTIVES:

1. To identify the financial strengths & weakness of the company.2. Through the net profit ratio & other profitability ratio, understand the profitability of

the company.

3. Evaluating company s performance relating to financial statement analysis.4. To know the liquidity position of the company with the help of current ratio.5. To find out the utility of financial ratio in credit analysis & determining the financial

capacity of the firm.


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Introduction of working Capital:

Capital required for a business can be classified under two main categories via,

Fixed Capital Working Capital

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

day operations. Long terms funds are required to create production facilities through purchase

of fixed assets such as Plant Machinery, land, building, furniture, etc. Investments in these

assets represent that part of firms capital which is blocked on permanent or fixed basis and is

called fixed capital. Funds are also needed for short-term purposes for the purchase of raw

material, payment of wages and other day to- day expenses etc. These funds are known as

working capital. In simple words, working capital refers to that part of the firms capital

which is required for financing short- term or current assets such as cash, marketable securities,

debtors & inventories. Funds, thus, invested in current assts keep revolving fast and are being

constantly converted in to cash and this cash flows out again in exchange for other current

assets. Hence, it is also known as revolving or circulating capital or short term capital.

CONCEPT OF WORKING CAPITAL:

There are two concepts of working capital:

Gross working capital Net working capitalThe gross working capital is the capital invested in the total current assets of the enterprises

current assets are those

Assets which can convert in to cash within a short period normally one accounting year.


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CONSTITUENTS OF CURRENT ASSETS

1) Cash in hand and cash at bank

2) Bills receivables

3) Sundry debtors

4) Short term loans and advances.

5) Inventories of stock as:

a. Raw material

b. Work in process

c. Stores and spares

d. Finished goods

6. Temporary investment of surplus funds.

7. Prepaid expenses

8. Accrued incomes.

9. Marketable securities.

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

excess of current assets over current liability, or, say:

NET WORKING CAPITAL = CURRENT ASSETSCURRENT LIABILITIES.

Net working capital can be positive or negative. When the current assets exceeds the current

liabilities are more than the current assets. Current liabilities are those liabilities, which are


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intended to be paid in the ordinary course of business within a short period of normally one

accounting year out of the current assts or the income business.

CONSTITUENTS OF CURRENT LIABILITIES

1. Accrued or outstanding expenses.

2. Short term loans, advances and deposits.

3. Dividends payable.

4. Bank overdraft.

5. Provision for taxation, if it does not amt. to app. Of profit.

6. Bills payable.

7. Sundry creditors.

The gross working capital concept is financial or going concern concept whereas net working

capital is an accounting concept of working capital. Both the concepts have their own merits.

The gross concept is sometimes preferred to the concept of working capital for the following

reasons:

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

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

operate then the source from where it is made available.

3. It take into consideration of the fact every increase in the funds of the enterprise

would increase its working capital.

4. This concept is also useful in determining the rate of return on investments in

working capital.


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Implications of Net Working Capital:

Net working capital is necessary because the cash outflows and inflows do not coincide. In

general the cash outflows resulting from payments of current liability are relatively

predictable. The cash inflows are however difficult to predict. More predictable the cash

inflows are, the less NWC will be required. But where the cash inflows are uncertain, it will

be necessary to maintain current assets at level adequate to cover current liabilities that are

there must be NWC.

For evaluating NWC position, an important consideration is trade off between probability

and risk.

The term profitability is measured by profits after expenses. The term risk is defined as the

profitability that a firm will become technically insolvent so that it will not be able to meet its

obligations when they become due for payment. The risk of becoming technically insolvent is

measured by NWC.

CLASSIFICATION OF WORKING CAPITAL:

Working capital may be classified in to ways:

On the basis of concept. On the basis of time.

On the basis of concept working capital can be classified as gross working capital

and net working capital. On the basis of time, working capital may be classified as:

Permanent or fixed working capital. Temporary or variable working capital

Permanent Or Fixed Working Capital

Permanent or fixed working capital is minimum amount which is required to ensure effective

utilization of fixed facilities and for maintaining the circulation of current assets. Every firm


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has to maintain a minimum level of raw material, work- in-process, finished goods and cash

balance. This minimum level of current assts is called permanent or fixed working capital as

this part of working is permanently blocked in current assets. As the business grow the

requirements of working capital also increases due to increase in current assets.

Temporary Or Variable Working Capital

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

meet the seasonal demands and some special exigencies. Variable working capital can further

be classified as seasonal working capital and special working capital. The capital required to

meet the seasonal need of the enterprise is called seasonal working capital. Special working

capital is that part of working capital which is required to meet special exigencies such as

launching of extensive marketing for conducting research, etc.

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

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

IMPORTANCE OR ADVANTAGE OF ADEQUATE WORKING

CAPITAL:

SOLVENCY OF THE BUSINESS: Adequate working capital helps in maintaining thesolvency of the business by providing uninterrupted of production.

Goodwill: Sufficient amount of working capital enables a firm to make promptpayments and makes and maintain the goodwill.

Easy loans: Adequate working capital leads to high solvency and credit standing canarrange loans from banks and other on easy and favorable terms.

Cash Discounts: Adequate working capital also enables a concern to avail cashdiscounts on the purchases and hence reduces cost.

Regular Supply of Raw Material: Sufficient working capital ensures regular supply ofraw material and continuous production.


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Regular Payment Of Salaries, Wages And Other Day TO Day Commitments: It leads tothe satisfaction of the employees and raises the morale of its employees, increases their

efficiency, reduces wastage and costs and enhances production and profits.

Exploitation Of Favorable Market Conditions: If a firm is having adequate workingcapital then it can exploit the favorable market conditions such as purchasing its

requirements in bulk when the prices are lower and holdings its inventories for higher

prices.

Ability to Face Crises: A concern can face the situation during the depression. Quick And Regular Return On Investments: Sufficient working capital enables a

concern to pay quick and regular of dividends to its investors and gains confidence of

the investors and can raise more funds in future.

High Morale: Adequate working capital brings an environment of securities,confidence, high morale which results in overall efficiency in a business.

EXCESS OR INADEQUATE WORKING CAPITAL:

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

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

shortages of working capital. Both excess as well as short working capital positions are bad for

any business. However, it is the inadequate working capital which is more dangerous from the

point of view of the firm.

DISADVANTAGES OF REDUNDANT OR EXCESSIVE WORKING

CAPITAL:

Excessive working capital means ideal funds which earn no profit for the firm andbusiness cannot earn the required rate of return on its investments.

Redundant working capital leads to unnecessary purchasing and accumulation ofinventories.

Excessive working capital implies excessive debtors and defective credit policy whichcauses higher incidence of bad debts.

It may reduce the overall efficiency of the business.


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If a firm is having excessive working capital then the relations with banks and otherfinancial institution may not be maintained.

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

For studying the need of working capital in a business, one has to study the business under

varying circumstances such as a new concern requires a lot of funds to meet its initial

requirements such as promotion and formation etc. These expenses are called preliminary

expenses and are capitalized. The amount needed for working capital depends upon the size of

the company and ambitions of its promoters. Greater the size of the business unit, generally

larger will be the requirements of the working capital.

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.


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There are others factors also influence the need of working capital in a business.

FACTORS DETERMINING THE WORKING CAPITAL

REQUIREMENTS:

NATURE OF BUSINESS: The requirements of working is very limited in public utilityundertakings 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.

SIZE OF THE BUSINESS: Greater the size of the business, greater is the requirementof working capital.

PRODUCTION POLICY: If the policy is to keep production steady by accumulatinginventories it will require higher working capital.

LENTH OF PRDUCTION CYCLE: The longer the manufacturing time the rawmaterial 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.

SEASONALS VARIATIONS: Generally, during the busy season, a firm requireslarger working capital than in slack season.

WORKING CAPITAL CYCLE: The speed with which the working cycle completesone cycle determines the requirements of working capital. Longer the cycle larger is the

requirement of working capital.


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DEBTORS

CASH FINISHED GOODS

RAW MATERIAL WORK IN PROGRESS

RATE OF STOCK TURNOVER: There is an inverse co-relationship between thequestion of working capital and the velocity or speed with which the sales are affected.

A firm having a high rate of stock turnover wuill needs lower amt. of working capital as

compared to a firm having a low rate of turnover.

CREDIT POLICY: A concern that purchases its requirements on credit and sales itsproduct / services on cash requires lesser amt. of working capital and vice-versa.

BUSINESS CYCLE: In period of boom, when the business is prosperous, there is needfor larger amt. of working capital due to rise in sales, rise in prices, optimisticexpansion 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.

RATE OF GROWTH OF BUSINESS: In faster growing concern, we shall requirelarge amt. of working capital.

EARNING CAPACITY AND DIVIDEND POLICY: Some firms have more earningcapacity 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.


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PRICE LEVEL CHANGES: Changes in the price level also affect the working capitalrequirements. Generally rise in prices leads to increase in working capital.

Others FACTORS: These are:

Operating efficiency. Management ability. Irregularities of supply. Import policy. Asset structure. Importance of labour etc.

PRINCIPLE OF WORKING CAPITAL MANAGEMENT POLICY:

Principle of Risk VariationRisk here refers to the inability of a firm to meet its obligations as and when they become

due for payment. Larger investment in current Assets with less dependence on short term

borrowings, increase liquidity, reduces risk and thereby decreases the opportunity for gain

or loss. On the other hand less investments in current assets with greater dependence onshort term borrowings, reduces liquidity and increase profitability. In other words there is a

definite inverse relationship between the degree of risk and profitability. In other words,

there is a definite inverse relationship between the risk and profitability. A conservative

management prefers to minimize risk by maintaining a higher level of current assets or

working capital while a liberal management assumes greater risk by reducing working

capital. However, the goal of management should be to establish a suitable trade off

between profitability and risk.

Principle of cost of capital:-The various source of raising working capital finance have different cost of capital and the

degree of risk involved. Generally, higher and risk however the risk lower is the cost and

lower the risk higher is the cost. A sound working capital management should

always try to achieve a proper balance between these two.


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Principle of Equity PositionThe principle is concerned with planning the total investments in current assets. According to

this principle, the amount of working capital invested in each component should be adequately

justified by a firms equity position. Every rupee invested in current assets should contribute

to the net worth of the firm. The level of current assets may be measured with the help of two

ratios:

i. Current assets as a percentage of total assets andii. Current assets as a percentage of total sales

While deciding about the composition of current assets, the financial manager may consider

the relevant industrial averages.

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

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

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

PLANNING OF WORKING CAPITAL:

Working capital is required to run day to day business operations. Firm s aim is to maximize

the wealth of share holders and to earn sufficient return from its operations.

WCM is a significant facet of financial management. Its importance stems from two reasons:


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Investment in current asset represents a substantial portion of total

investment.

Investment in current assets and level of current liability has to be geared

quickly to change in sales.

The importance of WCM is reflected in the fact that financial managers spend a great deal of

time in managing current assets and current liabilities.

The extent to which profit can be earned is dependent upon the magnitude of sales. Sales are

necessary for earning profits. However, sales do not convert into cash instantly; there is

invariably a time lag between sale of goods and the receipt of cash. WC management affect

the profitability and liquidity of the firm which are inversely proportional to each other, hence

proper balance should be maintained between two. To convert the sale of goods into cash,

there is need for WC in the form of current asset to deal with the problem arising out of

immediate realization of cash against good sold. Sufficient WC is necessary to sustain sales

activity. This is referred to as the operating or cash cycle.

WORKING CAPITAL CYCLE:


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A firm requires many years to recover initial investment in fixed assets. On contrary the

investment in current asset is turned over many times a year. Investment in such current assets

is realized during the operating cycle ofthe firm.

Each component of working capital (namely inventory, receivables and payables) has two

dimensions ... TIME ......... and MONEY. When it comes to managing working capital - TIME

IS MONEY. Reduce the cost of bank interest or you'll have additional free money available

to support additional sales growth or investment. Similarly, if you can negotiate improved

terms with suppliers e.g. get longer credit or an increased credit limit; you effectively create

free finance to help fund future sales.

It can be tempting to pay cash, if available, for fixed assets e.g. computers, plant, vehicles etc.

If you do pay cash, remember that this is now longer available for working capital. Therefore,

if cash is tight, consider other ways of financing capital investment - loans, equity, leasing

etc. Similarly, if you pay dividends or increase drawings, these are cash outflows and, like

waterflowing down a plughole, they remove liquidity from the business

Operating cycle:

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 labour 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 canbeagain 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 tomeet 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.


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In the form of an equation, the operating cycle process can be expressed as follows:

Operating cycle for manufacturing firm:

The firm is therefore, required to invest in current assets for smooth and uninterrupted


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Functioning.

RMCP- Raw Material Conversion Period

WIPCP- Work in Progress Conversion Period FGCP -

Finished Goods Conversion Period

ICP - Inventory Conversion Period

RCP - Receivables Conversion Period Payables

PDP - Payables Deferral Period NOC

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. PDP is the result of such an incidence and

it represent the length of time the firm is able to defer payments on various resources

purchased.

The difference between GOC and PDP is know 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


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WORKING CAPITAL ANALYSIS:

As we know working capital is the life blood and the centre of a business. Adequate amount of

working capital is very much essential for the smooth running of the business. And the most

important part is the efficient management of working capital in right time. The liquidity

position of the firm is totally effected by the management of working capital. So, a study of

changes in the uses and sources of working capital is necessary to evaluate the efficiency with

which the working capital is employed in a business. This involves the need of working capital

analysis.

The analysis of working capital can be conducted through a number of devices, such as:

1. Ratio analysis.2. Fund flow analysis.3. Budgeting.

1. RATIO ANALYSISA ratio is a simple arithmetical expression one number to another. The technique of ratio

analysis can be employed for measuring short-term liquidity or working capital position of a

firm. The following ratios can be calculated for these purposes:

Current ratio. Quick ratio Absolute liquid ratio Inventory turnover. Receivables turnover. Payable turnover ratio. Working capital turnover ratio. Working capital leverage Ratio of current liabilities to tangible net worth.


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2. FUND FLOW ANALYSISFund flow analysis is a technical device designated to the study the source from which

additional funds were derived and the use to which these sources were put. The fund flow

analysis consists of:

Preparing schedule of changes of working capital Statement of sources and application of funds.

It is an effective management tool to study the changes in financial position (working capital)

business enterprise between beginning and ending of the financial dates.

3. WORKING CAPITAL BUDGETA budget is a financial and / or quantitative expression of business plans and polices to be

pursued in the future period time. Working capital budget as a part of the total budge ting

process of a business is prepared estimating future long term and short term working capital

needs and sources to finance them, and then comparing the budgeted figures with actual

performance for calculating the variances, if any, so that corrective actions may be taken in

future. He objective working capital budget is to ensure availability of funds as and needed,

and to ensure effective utilization of these resources. The successful implementation of

working capital budget involves the preparing of separate budget for each element of working

capital, such as, cash, inventories and receivables etc.


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PRESENTATION OF DATA ANALYSIS & INTERPRETATION &

FINDING

QUICK ASSETS

Acid Test Ratio = .

QUICK LIABILITIES

Particulars 2006-07 2007-08 2008-09 2009-10 2010-11Q.A 12,136.80 12051.57 10880.77 10423.08 10996.5

Q.L. 8385.47 7917.32 8431.19 8605.39 9336.43A.T.R. 1.45 1.52 1.29 1.21 1.17

Interpretation: -

A quick ratio of 1:1 or more is considered as satisfactory or of sound liquidity position. In the

year 2007-08, compared to previous year, quick assets and current assets decreased but the

decreased rate of current liabilities is greater than the decreased rate of quick ratios, so quick

ratio increased from 1.45 to 1.52. In 2008-09 and 09-10 there was a decrease in quick assets

and increase in current liabilities, so quick ratio decreased from 1.52 to 1.29 and 1.29 to 1.21

in 2008-09 and 09-10 respectively. And it has further decreased to 1.17 in 2010-11.

0%

20%

40%

60%

80%

100%

2006-072007-08

2008-092009-10

1.451.52

1.291.21 A.T.R.


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Inventory Holding Period: -

12 MONTHS

Inventory Holding Period = ----------------------------------------------

INVENTORY TURNOVER RATIO

Interpretation: -

In the year 2007-08 there was a decrease in inventory turnover ratio. This shows an increase

in inventory holding period. In 2008-09there was an increase in holding period and in 2009-

10 it was 2.28 that suggests that there was an increase in sales and decrease in inventory

turnover ratio. In the year 2010-11 it is 3.63.

A.T.R.

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

2006-072007-08

2008-092009-10

2010-11

1.45 1.52

1.29

1.21

1.17

A.T.R.

Particular 2006-07 2007-08 2008-09 2009-10 2010-11

I.T.R 6.26 5.30 4.94 5.26 3.31

Period in

months

12 12 12 12 12

I.H.P 1.92 2.26 2.43 2.28 3.63


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Debtors Collection Period: -

12 MONTHS

Debtors collection period = -------------------------------------------

DEBTORS TURNOVER RATIO

Interpretation: -

There is an increase in both debtors and sales, so avg. collection period is decreasing year by

year. That shows that recovery from debtors is improving.

6.59

5.58

5

4.04

0

1

2

3

4

5

6

7

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

D.C.P

Particular 2006-07 2007-08 2008-09 2009-10 2010-11

D.T.R 1.82 2.15 2.4 3 3

Period in

months

12 12 12 12 12

D.C.P

(Months)

6.59 5.58 5 4.04 4


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29

Creditors Turnover Ratio: -

12 MONTHS

Creditors payment period = ------------------------------------------

CREDITOR TURNOVER RATIO

Interpretation: -

In case of KPCL, There is continuous increase in purchases and continuous decrease in

creditors, so payment period is decreasing year by year.

C.P.P

0

2

4

6

8

10

12

2006-072007-08

2008-092009-10

10.9

8.05

5.35

4.07

C.P.P

Particular 2006-07 2007-08 2008-09 2009-10 2010-11

Period in

months

12 12 12 12 12

C.T.R 1.10 1.49 2.24 2.95 3.43

C.P.P.(Months) 10.9 8.05 5.35 4.07 3.50


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30

Interest Coverage Ratio: -

EBIT

Interest coverage ratio = ---------------------------

INTEREST

Interpretation: -

In case of KPCL, in the year 2007-08 there was a decrease in interest and increase in

EBIT so ratio increased from 0.37 to 1.16, in the year 2008-09. There was a decrease ininterest as well as EBIT but the decrease rate is higher than the decrease rate of EBIT, so

the ratio increased from 1.06 to 1.16 and in the year 2009-110there was decrease in

interest and increase in EBIT so the ratio increased from 1.16 to 1.30 and further it is

increasing from 1.30 to 3.50 in 2010-11 because EBIT has increased with a substantial

amount.

0.37

1.06

1.16

1.3

I.C.R

2006-07

2007-08

2008-09

2009-10

Particulars 2006-07 2007-08 2008-09 2009-2010 2010-2011

INTEREST 1458.92 852.91 587.35 521.07 488.42

EBIT 542.35 907.98 683.35 676.88 1710.83

I.C.R 0.37 1.06 1.16 1.30 3.50


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31

Gross Profit Margin: -

GROSS PROFITS

Gross Profit Margin = --------------------------- x 100

SALES

Particulars 2006-07 2007-08 2008-09 2009-2010 2010-2011

G/P 265.74 339.70 376.53 386.67 1489.7

SALES 17267.61 19396.94 21646.75 26173.86 30365.16

G/P Margin 1.54 1.75 1.74 1.48 4.90

Interpretation: -

In the year 2007-08 there was an increase in sales as well as increase in gross profit so ratio

of GP increased from 1.54 to 1.75, in the year 2008-09 there was decrease in sales and in

gross profit, (percentage of increase in gross profit is lower than the percentage of increase in

sales), so the ratio of GP and sales has slightly decreased from 1.75 to 1.74 and in the year

2009-10 similar to 2007-08there was an increase in sales and a decrease in gross profit, so

ratio of GP has decreased from 1.74 to 1.48 and in the year 2010-11 it has shot up to 4.90.

1.54

1.75

1.74

1.48

4.92006-07

2007-08

2008-09

2009-10

2010-2011


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32

Net Profit Ratio: -

NET PROFIT (AFTER TAX & INTEREST)

Net Profit Ratio = --------------------------------------------------------X 100

SALES

Interpretation: -

Net profit ratio is increasing year after year, except for 2006-07, where there was a loss.

After that there is a continuous increase in PAT as well as in sales from 2007-08 to 2010-

11. Therefore, it shows a continuous increase

-6

-5

-4

-3

-2

-1

0

1

2

3

4

2006-07 2007-08 2008-09 2009-10 2010-11

-5.32

0.25 0.44 0.578

3.5

NET PROFIT

Particulars 2006-07 2007-08 2008-09 2009-2010 2010-2011

PAT (918.77) 48.99 95.31 152.78 1066.20

SALES 17267.61 19396.94 21646.75 26173.86 30365.16

NET PROFIT(LOS (5.32) 0.250 0.440 0.578 3.500


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33

Fixed Assets turnover ratio:

NET SALES

Fixed Assets turnover ratio: - ---------------------------------

AVG. FIXED ASSET

Interpretation: -

Here we have seen there has been a continuous increase in sales. In the year 2006-07,there was an increase in average fixed assets as well as in sales but the growth rate of

average fixed assets was higher, so ratio decreased from 11.37 to 9.03. In the year 2007-

08 and 2008-09 there was a decrease in average fixed assets and an increase in sales, so

ratio increased from 9.03 to 11.11 and from 11.11 to 13.70 respectively. But it is slightly

decreasing in 2010-11.

0

2

4

6

8

10

12

14

2006-072007-08

2008-092009-10

2010-11

F.A.T.R

Particulars 2006-07 2007-08 2008-09 2009-2010 2010-2011

FIXED ASSETS 3036.28 4295.38 3895.62 3821.94 4486.98

AVG. FIXEDASSETS 1518.14 2147.69 1947.81 1910.97 2243.49

SALES 17267.61 19396.94 21646.75 26173.86 30365.16

F.A.T.R. 11.37 9.03 11.11 13.70 13.53


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34

Current Assets turnover ratio: -

SALES

Current assets turnover ratio: - -------------------------------------

AVG. CURRENT ASSETS

Interpretation:-

A better current assets turnover ratio is always good for a firm and in case of our

organization, the turnover ratio is moving positively during the past 4 years. Current assets

had decreased in 2007-08 and 2009-10 and increased in 2008-09, but as the growth rate of

sales is higher when compared to decreased rate of current assets so the ratio has decreased

from 1.53 to 1.28 in 2006-07 to 2007-08. Further it has increased to 1.43 in 2008-09 and to

2.07 in 2010-11.

1.53

1.28

1.43

1.76

2.07

0%

50%

100%

150%

200%

250%

2006-07 2007-08 2008-09 2009-10 2010-11

C.A.T.R

Particulars 2006-07 2007-08 2008-09 2009-2010 2010-2011

CURRENT ASSETS 22574.65 30223.54 30170.04 29790.71 29277.35

AVG. FIXEDASSETS 11287.3 15111.7 15085 14895.3 14638.6

SALES 17267.61 19396.94 21646.75 26173.86 30365.16

C.A.T.R. 1.53 1.28 1.43 1.76 2.07


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35

Working Capital turnover ratio

NET SALES

Working Capital turnover ratio = -----------------------------------

NET WORKING CAPITAL

Interpretation:-

A high working capital turnover ratio indicates efficiency in utilization of resources and the ratio

has improved from 2.52 in 2006-07 to 5.7 in 2010-11. Hence we can see that the component of

working capital is consistently reducing which is considered as a positive sign from the point view

Particulars 2006-07 2007-08 2008-09 2009-2010 2010-2011

WORKING CAPITAL 6846.03 7074.72 6746.81 6007.32 5328.20

SALES 17267.61 19396.94 21646.75 26173.86 30365.16

W.C.T.R. 2.52 2.74 3.21 4.36 5.7

2.522.74

3.214.36

5.7

W.C.T.R.

2006-07

2007-08

2008-09

2009-10

2010-11


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36

Profit and Loss account

Particular

Year

Amount(Rs.lacs)

Amount(Rs.lacs)

Amount(Rs.lacs)

Amount(Rs.lacs)

Amount(Rs.lacs)

Amount(Rs.lacs)

2006-07 2007-08 2008-09 2009-10 20010-11 2011-12

(A) INCOME

Sales 17058.47 19360.52 21624.68 26414.22 30365.16 33693.00

Add. Other Income 2633.59 683.91 835.02 621.45 736.58 557.65

Total Income 19691.06 20044.43 22459.72 27035.67 31101.75 34250.65

(B) EXPENDITURE

Materials Consumed:-

Materials Consumed: 8870.04 10866.21 12412.56 15817.46 17573.95

Stores & spaces

consume: 505.99 593.58 688.84 895.23 1116.39

WIP & finish goods 223.94 192.63 -380.95 -120.27 -188.12

9599.97 11652.42 12720.45 16592.42 18502.22 20215.8

Manufacturing

Expenses: 1636.51 1424.12 1443.96 1913.07 3250.81 2526.97Employee'sEmoluments: 3597.64 3115.99 3336.03 3681.32 3598.01 4007.77

Interest & other Fin.Charges 1458.91 852.9 587.35 521.05 488.42 346.37

Sundry Expenses: 4037.1 2722.47 4060.27 3946.17 4718.76 5084.25

Depreciation: 277.49 223.68 214.74 225.8 249.37 260

Total Expenditure 20607.62 19991.58 22362.8 26879.83 30807.59 32441.16

Net Profit before Tax(A-B) -916.56 52.85 96.92 155.84 294.16 1809.49

Provision for Tax 2.2 6.08 1.75 3.03 82 597.13

Net Profit After Tax -918.76 46.77 95.17 152.81 212.16 1212.36


37/47

BALANCE SHEET

ASOURCES OF

FUNDS:2006-07 2007-08 2008-09 2009-10 2010-11 2011-12

1 Shareholdersfunds:

a) Capital 128422345 128443380 128443380 128443380 128443380 128443380

b) Reserve &Surplus

203935113 207620112 216184117 230239120 335195910 457620000

2 Loan Funds:

a) Secured

loans663645876 640463151 581576924 514380917 380016497 391862000

b) Unsecured

loans

106008244 97272888 78335147 27727313 20376994 13285000

TOTAL 1102011578 1073799531 1004539568 900790730 864032781 991210380

BAPPLICATIO

N OF FUNDS:

1 Fixed asset:

a) Gross Block 749985197 745342117 717930907 718557289 777226949 777226949

b) Less-

Depreciation 529139497 542178336 537061079 524722052 533470985 575222000

Net block 220845700 203163781 180869828 193835237 243755964 202004949

Capital WIP

exp. To date 2764184 2764184 2764184 4723646 6384589 NIL

Total 223609884 205927965 183634012 198558883 250140553 202004949

2Technical

Know-how 9816315 30106210 27037298 23968386 20799000

3 Investment 72534904 61043727 55600632 42967882 36106881 36106881

4

Current Asset,Loans &Advances Contd


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38

1) Inventories 309469261 294045465 429724069 418963322 366814500 401247000

2) SundryDebtors 849477102 875751450 884099843 897711768 904486832 938053000

3) Cash &

Bank balance 22043337 26143472 8159330 5590022 74504328 801369

4) Loans &

advances 342161013 303263771 195816844 139006705 120658554 123800000

Less - Current

Liabilities &

provisions

1) Liabilities 820733336 774132429 842943606 860236799 918023088 725400000

2) Provisions 17812993 17600025 175000 303000 15620580 16700000

Net Current

Assets 684604384 707471704 674681480 600732018 532820546 721801369

5

Miscellaneous

Expenditure

(To the extentnot written off

or adjusted)

Deferredrevenue

expenditure in

respect of VRS 118562406 89539820 60517234 31494649 20996415 10498181

Pension

scheme 2700000 NIL NIL NIL NIL NIL

TOTAL 1102011578 1073799531 1004539568 900790730 864032781 991210380


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39

Statement of changes in working capital (2008-09).

Particulars 2007-08 2008-09 Increase Decrease

A) Current Assets

a) Inventories

b) Sundry debtors

c) Cash and bank

d) Loans &

advances

Total Current Assets

B) Current Liabilities

a) Sundry creditorsb) Provisions.

Total Current Liabilities

Net Current Assets

Decrease in working capital

3094.70

8494.77

220.43

3421.61

2940.45

8757.51

261.43

3032.66

262.74

41.00

154.25

388.95

15231.50 14992.03

8207.33

178.12

7741.32

176.00

466.01

2.12

8385.46 7917.32

6846.04 7074.71

771.87 543.20

228.67 228.67


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40



A) Current Assetsa) Inventories

b) Sundry debtors

c) Cash and bank

d) Loans &

advances



a) Sundry creditors

b) Provisions.


Net Current Assets


2940.45

8757.51

261.43

3032.64

4297.24

8841

81.59

1958.17

1356.79

83.49

179.84

1074.47

14992.03 15178.00

7741.32

176.00

8429.44

1.75 174.25

688.12

7917.32 8431.19

6560.94 6746.81

1614.53 1942.43

327.9 327.9

Interpretation:

This statement shows the decrease in Working Capital in the year 2008-09 by

decrease in cash & bank balance & loans & advances.


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41



A) Current Assets

a) Inventories

b) Sundry debtors

c) Cash and bank

d) Loans &

advances



a) Sundry creditors

b) Provisions.


Net Current Assets


4297.24

8841

81.59

1958.17

4189.63

8977.12

55.9

1390.07

136.12

107.61

25.69

568.1

15178.00 14612.72

8429.44

1.75

8602.37

3.03

172.93

1.28

8431.19 8605.4

6746.81 6007.32

136.12 875.61

739.49 739.49

Interpretation:

The statement shows the decrease in Working Capital in the year 2009-10bydecrease in cash & Bank balance, inventories, loans & advances.


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42



A) Current Assets

a) Inventories

b) Sundry debtors

c) Cash and bank

d) Loans &

advances



a) Sundry creditors

b) Provisions.


Net Current Assets


4189.63

8977.12

55.9

1390.07

3668.14

9044.86

745.04

1206.58

67.74

689.14

521.49

183.49

14612.72 14664.64

8602.37

3.03

9180.23

156.20

577.86

153.17

8605.4 9336.43

6007.32 5328.20

756.88 1436.01

679.12 679.12

Interpretation:

This statement shows the increase in Working Capital in the year 2010-11 byincrease in cash & bank balance, inventories & debtors. In the final analyses


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43



A) Current Assets

a) Inventories

b) Sundry debtors

c) Cash and bank

d) Loans &

advances



a) Sundry creditorsb) Provisions.


Net Current Assets

Increase in working capital

3668.14

9044.86

745.04

1206.58

4012.47

9280.53

108.02

1238.00

344.33

235.67

31.42

637.02

14664.64 14639.01

9180.23

156.20

7254.00

167.00

1926.23

10.80

9336.43 7421.00

5328.21 7218.01

2537.65 647.82

1889.81 1889.81


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44

Statement showing Net Current Assets / Net Working Capital

Particulars 2006-07 2007-08 2008-09 2009-10 2010-11 20011-12

A] C. Assets

a) Inventories

b) S. Debtors

c) Cash & bank

balance.

d) Loans &

Advances

Total Amt.

B] C. Liabilitiesa) Creditors

b) Provisions

Total Amt.

Net Currentliabilities [A-B]

3094.70

8494.77

220.43

3421.61

2940.45

8757.51

261.43

3032.64

4297.24

8841

81.59

1958.17

4189.63

8977.12

55.9

1390.07

3668.14

9044.86

745.04

1206.58

4012.47

9280.53

108.01

1238.00

15231.50 14992.03 15178 14612.72 14664.64 14639.01

8207.33

178.12

7741.32

176

8429.44

1.75

8602.37

3.03

9180.23

156.20

7254.00

167.00

8385.46 8431.19 8431.19 8605.4 9336.43 7241.00

6846.04 6606.57 6746.81 6007.32 5328.20 7398.01

Interpretation:

This table shows the Working Capital position for the last 5 years & the projected

Working Capital for 2011-12.


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45

FINDINGS

1. Defence sales order of Rs. 9 cr was not there for the first quarter of 2010-11, so thesales have decreased.

2. Standard current ratio is 2:1 and for industry it is 1.33:1. KPCL s ratios satisfactory.3. Acid test ratio is more than one but it does not mean that company has excessive

liquidity.

4. Debtors of the company were high; they were increasing year by year, so more fundswere blocked in debtors. But now recovery is becoming faster.

5. Inventory turnover ratio is improving from 2006-07 to 2010-11, which meansinventory is used in better way so it is good for the company.

6. Debtors turnover ratio is improving from 2006-07 to 2010-11.increase in ratio isbeneficial for the company because as ratio increases the number of days of collection

for debtors decreases.

7. Working capital turnover ratio is continuously increasing that shows increasing needsof working capital.

8. Interest coverage ratio is increasing from last four years.9. Production capacity is not utilized to the full extent


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46

RECOMMENDATIONS AND CONCLUSION

1. It can be said that overall financial position of the company is normal but it isrequired to be improved from the point of view of profitability.

2. Net operating cycle is increasing that means there is a need to make improvementsin receivables/debtors management.

3. Company should stretch the credit period given by the suppliers.4. Company should not rely on Long-term debts.5. Company should try to increase Volume based sales so as to stand in the

competition.

Working capital policies of a firm have a great effect on its profitability, liquidity and

structured health of the organization. Every concern should adopt some new tread

management strategies that will help in greater productivity, inventory optimization and

also better working capital management. So, it is noted that working capital is a means to

run business smoothly and profitability. Thus, the concept of working capital has its own

important in a going concern.


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BIBLIOGRAPHY

Financial Mangement Prasanna Chandra Financial Management Satish Inamdar www.investopedia.com. www.kriloshker.com www.moneycontrol.com
http://www.investopedia.com/http://www.kriloshker.com/http://www.moneycontrol.com/http://www.moneycontrol.com/http://www.kriloshker.com/http://www.investopedia.com/

revised working capital

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