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Working capital management on Kamal solvent pvt. Ltd.
R.C.E.T, Bhilai MBA 09/11 Page
Workingcapital mangement
Chapter No.Particulars
PageNo.
Certificate I
Acknowledgement II
Declaration III
Contents IV
1 Working Capital Management 7
1.1 Introduction 8
1.2 Need of working capital 9
1.3 Gross W.C. and Net W.C. 9
1.4 Types of working capital 10
1.5 Determinants of working capital 11
2 Research Methodology 13
2.1 Introduction 142.2 Types of research methodology 14
2.3 Objective of study 15
2.4 Scope and limitations of study 16
3 Introduction of company 17
4 Working Capital Size and analysis 41
4.1 Working capital level. 42
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4.2 Working capital trend analysis. 43
4.3 Current assets analysis. 44
4.4 Current liability analysis 45
4.5 Changes of working capital 46
5
5.1
Working Capital Ratio analysis 50
Introduction 51
5.2 Role of ratio analysis 51
5.3 Limitations of ratio analysis 51
5.4 CALCULATIONS 53
6 Conclusions 73
6.1 Conclusion 73
6.2 Bibliography 74
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CHAPTER 1
INTRODUCTION
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WORKING CAPITAL
MEANING OF WORKING CAPITAL: Working capital, also known as net working
capital, is a financial metric which represents operating liquidity available to a business. Along
with fixed assets such as plant and equipment, working capital is considered a part of operating
capital. It is calculated as current assets minus current liabilities. If current assets are less than
current liabilities, an entity has a working capital deficiency; also called a working capital deficit.
A company can be endowed with assets and profitability but short of liquidity if its assets cannot
readily be converted into cash. Positive working capital is required to ensure that a firm is able to
continue its operations and that it has sufficient funds to satisfy both maturing short-term debt
and upcoming operational expenses. The management of working capital involves managinginventories, accounts receivable and payable and cash. An increase in working capital indicates
that the business has either increased current assets (that is received cash, or other current assets)
or has decreased current liabilities, for example has paid off some short-term creditors.
IMPORTANCE OR ADVANTAGE OF ADEQUATE WORKING CAPITAL IN AN
INDUSTRY
SOLVENCY OF THE BUSINESS: Adequate working capital helps in maintaining the
solvency of the business by providing uninterrupted of production.
Goodwill: Sufficient amount of working capital enables a firm to make prompt payments
and makes and maintain the goodwill.
Easy loans: Adequate working capital leads to high solvency and credit standing can
arrange loans from banks and other on easy and favorable terms.
Cash Discounts: Adequate working capital also enables a concern to avail cash discounts
on the purchases and hence reduces cost.
Regular Supply of Raw Material: Sufficient working capital ensures regular supply of
raw material and continuous production.
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Regular Payment Of Salaries, Wages And Other Day TO Day Commitments: It
leads to the 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 working
capital 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.
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DISADVANTAGES OF REDUNDANT OR EXCESSIVE WORKING CAPITAL IN AN
INDUSTRY
1. Excessive working capital means ideal funds which earn no profit for the firm and
business cannot earn the required rate of return on its investments.
2. Redundant working capital leads to unnecessary purchasing and accumulation of
inventories.
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
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.
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FACTORS DETERMINING THE WORKING CAPITAL REQUIREMENTS
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 saleonly 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. LENTH OF PRDUCTION 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. SEASONALS 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.
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.
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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 expansionof 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.
Others FACTORS: These are:
Operating efficiency.
Management ability
Irregularities of supply.
Import policy.
Asset structure Importance of labor.
Banking facilities, etc.
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CLASSIFICATION OF WORKING CAPITAL
Working capital may be classified in two 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, net working
capital and net operating working capital. On the basis of time, working capital may be classified
as:
Permanent or fixed working capital.
Temporary or variable working capital
ON THE BASIS OF CONCEPT VARIOUS TYPES OF WORKING
CAPITAL
1. Gross Working Capital: The firm's investment in current assets (such as cash and
marketable securities, receivables, and inventory). Gross Working Capital refers to the
firm's investment in Current Assets. It includes cash, short-term securities, debtors
(account receivables or book debts), bills receivables and stock (inventory). The concept
of Gross Working Capital focuses attention on two aspects of Current Assets'
management. They are:
a) Way of optimizing investment in Current Assets.
b) Way of financing current assets.
Gross Working Capital = Total Current Assets of the company during the
financial year.
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2. Net Working Capital: This is a qualitative concept. It indicates the liquidity
position of and suggests the extent to which working Capital needs may be financed by
permanent sources of funds. For every firm a particular amount of net Working Capital in
permanent. The net working capital metric is directly related to the current ratio. Net
Working Capital, is defined as Current Assets minus Current Liabilities. Current
assets include stocks, debtors, cash & equivalents and other current assets. Current
liabilities include all the short-term borrowings. Net Working Capital refers to the
difference between Current Assets and Current Liabilities are those claims of outsiders,
which are expected to mature for payment within an accounting year. It includes
creditors or accounts payables, bills payables and outstanding expenses.
Net Working Capital = Total Current AssetsTotal Current Liabilities
3. Net operating working capital (NOWC):Operating CAOperating CL =
(Cash + Inv. + ACCOUNTS /RECIVEABLE)(Accruals +
ACCOUNTS/PAYABLE)
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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. Schedule of working capital changes & fund flow Statement
RATIO ANALYSIS - A 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 objective of ratio analysis is to help management in analyzing and
interpreting the financial statements, to get adequate information useful for the performance of
various functions like planning, co- ordination, control, communication and forecasting etc .
The following ratios can be calculated for these purposes:
1. Cash ratio.
2. Current ratio
3. Quick ratio
4. Super/Absolute quick ratio.
5. Debtor turnover ratio.
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6. Average collection period.
7. Creditors/Payable turnover ratio.
8. Average payment turnover period.
SCHEDULE OF WORKING CAPITAL CHANGES & FUND FLOW
STATEMENT -
Fund 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:
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.
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CHAPTER 2
RESEARCH METHOLOGY
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RESEARCH METHODOLOGY
Research methodology is a way to systematically solve the research problem, may
be understood as a science of studying now research is done systematically. In that
various steps, those are generally adopted by a researcher in studying his problem
along with the logic behind them. It is important for research to know not only the
research method but also know methodology. The procedures by which
researchers go about their work describing, explaining and predicting phenomenon
are called methodology.
Types of data collection
There are two types of data collection methods available:
1. Primary data collection
2. Secondary data collection
Primary data collection method
The primary data is that data which is collected fresh or first hand, and for firsttime which is original in nature. Primary data can collect through personal
interview, questionnaire etc. to support the secondary data.
Secondary data collection method
The secondary data are those which have already collected and stored. Secondary
data easily get those secondary data from records, journals, annual reports of the
company etc. It will save the time, money and efforts to collect the data. Secondary
data also made available through trade magazines, balance sheets, books etc.
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OBJECTIVES OF THE PROJECT
To analyze the financial statement of KAMAL SOLVENT EXTRACTIONS PVT.LTD.
From the Year 2006-07 to 2008-09.
To find out how industry manage its profitability.
To analyze the working capital management of the industry with the help of various
ratios.
Compare performance with past performance of the industry.
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The Rice Bran Oil industry in India
Rice Bran Oil is a unique vegetable oil produced from the outer brown layer of rice
which is removed in the form of rice bran during the polishing process of the rice milling
industry. Besides having an ideally balanced fatty acid profile, it is rich in natural anti-oxidants
and unique nutrient. A number of scientific studies conducted in India & abroad have well
documented the better cholesterol lowering properties of rice bran oil as compared to other
conventional vegetable oils. All these studies have attributed these properties of the oil to the
presence of unique nutrient in this oil known as Oryzanol & tocotrienolss. Rice Bran Oil is
extensively used in Japan, Korea, China, Taiwan and Thailand as premium edible oil. It is the
conventional & the most favorite cooking medium of the Japanese and is popularly known as
"Heart Oil" in Japan. It has acquired the status of a "Functional Food" or a "Health Food" in
Western Countries.
India is the second largest producer of paddy in the world after China contributing about
23% to the total world production of paddy. It has a potential to produce over one million tons of
this nutritious oil. Rice Bran Oil extraction started in India about 40 years back. It was in the
middle of 60's that a beginning was made in India for the extraction of oil from rice bran with
the help of solvent extraction process wherein food grade hexane is used to extract oil from rice
bran. Initially the entire quantities of rice bran oil produced in India were used as raw material
for the soaps & detergent industry as the free fatty acid content of the oil was very high.
In the early eighties, the Government of India introduced money credit scheme to
encourage the use of rice bran oil as a product mix in vanaspati (hydrogenated fat) wherein
substantial rebate from the payment of excise duty on vanaspati was given for use of rice bran oil
in the manufacture of vanaspati. In this way government of India encouraged for grooming up
the rice bran industries in India.
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Manufacturers of Rice bran oil in India: Here the following table contains the
information about the name of the some big manufacturers of rice bran oil in India -
Name of the company City
Hemraj Industries pvt. Ltd West Bengal
Jindal oil & fats ltd. Rajasthan
Shree Sita Agro Foods pvt. ltd Durg
Gujrat Ambuja Exports ltd. Ahemdabad
Kumar Metal Industries pvt. Ltd. Mumbai
Kamal solvent Extractions pvt. Ltd Rajnandgaon
Ganpati solvent Rajnandgaon
Jai lakshmi solvent Pvt. Ltd Uttar Pradesh
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FINANCIAL HIGHLIGHT OF THE COMPANY
Gross sales for a period after cash discounts, returns, and freight expenses have been deducted.
Gross sales includes both credit and cash sales of the company.
Interpretation: The sales figures are encouraging as there is a positive trend and the rate of
increase is considerably high.The net sales went up from Rs 49.95 crore in year 2006-07 to Rs
82.46 crore in years 2008-09.Net sales of the company increase because of its various
demandable brands & its shows that company getting good business from its customers. In this
way the percentage increase of sales of the industry is 65.09% from 2006-07 to 2008-09.
0
10
20
30
4050
60
70
80
90
2006-07 2007-08 2008-09
SALES (IN RS. CRORE)
YEAR SALES(IN RS CRORE)
2006-07 49.95
2007-08 59.43
2008-09 82.46
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Profit Before TaxPBT
A profitability measure that looks at a company's profits before the company has to pay
corporate income tax. This measure deducts all expenses from revenue including interest
expenses and operating expenses, but it leaves out the payment of tax. This measure combines all
of the company's profits before tax, including operating, non-operating, continuing operations
and non-continuing operations. PBT exists because tax expense is constantly changing and
taking it out helps to give an investor a good idea of changes in a company's profits or earnings
from year to year.
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
2006-07 2007-08 2008-09
PBT (IN RS CRORE)
PBT (IN RS CRORE)
YEAR PROFIT BEFORE TAX (IN RS. CRORE)
2006-07 0.99.
2007-08 1.24
2008-09 1.51
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Interpretation: The profit before tax is rising in a consistent rate showing a very positive
trend from Rs. 0.99 crore in years 2006-07 to Rs.1.51 crore in 2008-09.
Profit after tax (PAT)
It the net profit earned by the company after deducting all expenses like interest, depreciation
and tax. PAT can be fully retained by a company to be used in the business. However dividend is
paid to the share holders from this residue.
YEAR SALES(IN RS CRORE)
2006-07 0.83
2007-08 0.80
2008-09 1.07
Interpretation: The profit after tax is rising in a consistent rate showing a very positive
trend from Rs. 0.83 Crore in the year 2006-07 to Rs. 1.07 crore in 2008-09.Company paid
dividend to its shareholders from this residual amount.
0
0.2
0.4
0.6
0.8
1
1.2
2006-07 2007-08 2008-09
PAT (IN RS CRORE)
PAT (IN RS CRORE)
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PROJECT ON WORKING CAPITAL MANAGEMENT ON
KAMAL SOLVENT EXTRACTIONS PVT LTD
CAPITAL
TYPES OF CAPITAL
Working Capital which is required for a business can be classified under two main categories
via,
1. Fixed 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.
2. Working 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 assets keep
revolving fast and are being constantly converted in to cash and this cash flow out again
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in exchange for other current assets. Hence, it is also known as revolving or circulating
capital or short term capital.
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CHAPTER 3
INTRODUCTION OF COMPANY
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COMPANY PROFILE
KAMAL SOLVENT EXTRACTIONS PVT LTD
INTRODUCTION: Kamal Solvent Extractions Pvt. Ltd. is Rice Bran oil producing company
established on 1990 focused on specialized, high-value products and services. The companys
principal activities are extracting oil from the rice bran and refining the extracted oil and
marketing the edible oil to the potential market. Company also sells crude oil (non-refined oil) to
big companies like I.T.C and PEPSICO in India. This development process of converting the by-
product into finished goods underpins various processes, which the company executes with full
dedication and concentration with the help of various expertises. The companys head office is at
Rajnandgaon with subsidiary offices in Durg and Raipur in India. Within short period of time
earned an unmatched success and reputation in the region and also in various parts of the
country. Kamal Solvent Extractions Pvt. Ltd. is engaged in the industry as the trusted
manufacturing unit for edible oil viz; Refined Rice Bran Oil and Triple Refined Rice Bran Oil
under the registered brand name KAMAL and RAJKAMAL, NILKAMAL and RSOYEE
respectively. Kamal Solvent Extractions Pvt. Ltd.is rated as a smoke and pollution free industry
in the Chhattisgarh state of India. Water Filter Plant of this industry takes care of pollution free
extraction of Water used in Industrial Production works. The Industry is surrounded with green
trees.
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MISSION & VISION: "At Kamal Solvent Extractions Pvt. Ltd., we have always dreamed big.
It is our vision that has taken us from a pioneer that spear-headed the rice bran revolution to the
recent position. We have been a leading light in the field of Rice bran oil for the past years. We
strive to look beyond the boundaries of competition by being quality centric in our
manufacturing practices. Our vision is to be a world class organization that is a benchmark for
other organizations in the country, setting standards for excellence, and leading the thrust in
adopting environment friendly policies."
R.B.O: Rice Bran Oil, which is commonly known as HEART OIL in Japan, is unique
cooking oil produced from the brown layer of rice paddy, which is removed in the form of rice
bran for producing white rice. The paddy that comes from the fields has a hard outer covering
called the husk. During the de-husking process, this husk is removed from the paddy and what
remains is brown rice. The rice so obtained is brown in colour since it has an oily brown
covering called the Bran. The polished rice which we generally consume is obtained after
removing this bran from the rice. It is important to understand that bran and husk are not same.
The bran which is left behind after the polishing process undergoes the solvent extraction process
in order to obtain crude rice bran oil. This crude oil is further refined in order to obtain rice bran
oil.
In other word, Rice bran is a by-product of the rice milling industry from which rice bran oil is
extracted. Typically rice bran accounts for 7 8 % of the rice produced and the recovery of rice
bran oil from rice bran is usually 15%. Rice bran oil is used for human consumption. Anti-
oxidants of Vitamin E group are naturally occurring in rice bran oil. Appearance of rice bran oil
ranges from cloudy to clear depending on the degree of de-waxing and winterization process
applied. It also has several industrial uses. After oil extraction, the by-product obtained is de-
oiled rice bran.
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Features of Kamal solvent products
The tag line of the company is KAMAL ka kaamal, shakti swaad bemisal. These
tag lines express the quality of the kamal products inspite of it we can discuss about the features
of the kamal products by following ways
Premium quality Kamal produced in world class specially developed process
under highly hygienic condition to give better taste and natural flavor to good health.
Nutritionally superiorKamal contains about 18% saturated,45% monosaturated
and 35% polyunsaturated fatty acid which is close to American heart association
recommendation.
Rich micronutrients & natural antioxidants Kamal contains oryzanol,Tocotrienol and Squalene which provides many benefits for human health.
Cheaper and popularKamal refined rice bran oil is the highly selling product in
all over central India.
In spite of all the above features some more features of the kamal products are
Longer shelf life.
Antiviral capacity
Oil is less sticky so its saves soap.
More stable at high temperature.
Heart food for every happy home.
Frying takes less time, saves energy.
Gives better taste & flavor to food items.
Economical15% less absorption of oil during frying.
Available in small packs also (5 liter, 1 liter pack).
Easily reachable available in all general stores.
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PRODUCTS OF KAMAL SOLVENT - The products of Kamal solvent is divided in
four different brands. The brands which are shown below in diagram are mostly preferable in
Chhattisgarh, Maharashtra, and Madhya Pradesh and Andhra pradesh. The produced oil of the
company is also supplied in bulky quantity to the multinational companies also like PepsiCo,
ITC.
PACKAGING OF THE BRANDS - The brands of Kamal solvent comes in different types of
packaging, quantity and price which can be shown with the help of following table
Types of packaging quantity Per pack price in Rs.
pouch 500ml 21.50
pouch 1 liter 42.50
Can(plastic) 5 liter 107
Can(plastic) 15 liter 690
Tin can 15 k.g 740
Tin can 15 liter 635
NotePrices of the various products of the company which is shown in the above table are
always fluctuating as according to the market condition
PRODUCTBRANDS
KAMAL
RAJKAMAL
NILKAMAL
RASOYEE
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ANALYSIS OF SHORTTERM FINANCIAL POSITION
OR TEST OF LIQUIDITY
The short term creditors of a company such as suppliers of goods of credit and
commercial banks short-term loans are primarily interested to know the ability of a firm to meet
its obligations in time. The short term obligations of a firm can be met in time only when it is
having sufficient liquid assets. So to with the confidence of investors, creditors, the smooth
functioning of the firm and the efficient use of fixed assets the liquid position of the firm must be
strong. But a very high degree of liquidity of the firm being tied up in current assets. Therefore,
it is important proper balance in regard to the liquidity of the firm. So we can calculate the
liquidity ratio and the other important ratios of the company by following ways. Before
calculating the various ratios we show the financial statistics of the firm by following ways
Year 2006-07(In Rs. crore)
2007-08(In Rs.crore)
2008-09(In Rs. crore)
NET SALES 49.95 59.43 82.46
PAT 0.834 0.806 1.075
PBT 0.995 1.24 1.51
DEBT 1.86 3.50 4.14
FIXED
ASSETS
5.29 4.80 4.52
CURRENT
ASSESTS
6.02 9.98 10.81
CURRENT
LIABILITES
1.890 2.533 3.6045
RESERVE
AND
SURPLUS
1.604 2.49 3.566
CAPITAL
EMPLOYED
9.58 12.40 11.912
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ON THE BASIS OF TIME VARIOUS TYPES OF WORKING CAPITAL
1. 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 has to maintain
a minimum level of raw material, work- in-process, finished goods and cash balance.
This minimum level of current assets 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.
2. 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. 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.
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CHAPTER 4
DATA ANALYSIS & INTERPRETATION
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CALCULATION OF GROSS WORKING CAPITAL, NET WORKING CAPITAL
& NET OPREATING WORKING CAPITAL
1. GROSS WORKING CAPITAL - We can calculate the gross working capital of
the industry with the help of following formula
Gross Working Capital = Total Current Assets of the company during the
financial year.
INTERPRETATION - From the graph it is clear that current assets of the industry increases
simultaneously from the financial year 2006-07 to 2008- 09.
0
5
10
15
2006-072007-08
2008-09
GROSS WORKING CAPITAL (in Rs. crore)
YEAR CURRENT ASSETS (In Rs. crore)
2006-07 6.02
2007-08 9.98
2008-09 10.81
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2. NET WORKING CAPITAL - We can calculate the net working capital of the
industry with the help of following formula
Net Working Capital = Total Current AssetsTotal Current Liabilities
YEAR CURRENT ASSETS
(In Rs. crore)
CURRENT
LIABILITIES (In Rs.
crore)
NETWORKING
CAPITAL (In Rs.
crore)
2006-07 6.02 1.89 4.13
2007-08 9.98 2.53 7.45
2008-09 10.81 3.60 7.21
0
2
4
6
8
2006-072007-08
2008-09
NET WORKING CAPITAL (in Rs. crore)
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INTERPRETATION From the above graph it is clear that the net working capital of the
increase in the year 2007-08 comparison with the previous year than it again decreases in the
year 2008-09 with very small difference but the current assets of the company is always more
than current liabilities in all the financial years.
3. NET OPREATING WORKING CAPITAL - We can calculate the net operating
working capital of the industry with the help of following formula
Net operating working capital (NOWC) = Operating CAOperating CL or
(Cash + Inv. + ACCOUNTS /RECIVEABLE)(Accruals +
ACCOUNTS/PAYABLE)
YEAR OPREATING
CURRENT ASSETS
(In Rs. crore)
OPREATING
CURRENT
LIABILITIES (In Rs.
crore)
NET OPREATING
WORKING
CAPITAL In Rs.
crore)
2006-07 3.77 1.89 1.88
2007-08 5.93 2.53 3.4
2008-09 5.55 3.60 1.95
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INTERPRETATION From the above graph it is clear that net operating working capital
varies in different financial years it is 1.88 crore in the year 06-07 than it increases and became
3.4 crore in the year 07-08 and then it again decreases and became 1.95 crore in the year 08-09.
CASH RATIO: This is the ratio between cash and bank balance to current liabilities.
Cash ratio = cash balance / current liabilities
0
1
2
3
4
2006-072007-08
2008-09
NET OPREATING WORKING CAPITAL (in Rs.
crore)
YEAR CASH &
BANK
BAL.(in Rs.
crore)
CURRENT
LIABILITIES(in
Rs. crore)
CASH
RATIO
2006-07 0.43 1.89 0.22
2007-08 0.82 2.53 0.32
2008-09 1.31 3.60 0.36
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Interpretation The cash ratio of the company increase from0.22 in the year 2006-07 up to
0.36 in the year 2007-08 and the calculated ratios shows that company have sufficient portion of
cash and bank balance against its current liabilities.
2. Current Ratio
The current ratio is a popular financial ratio used to test a company's liquidity (also
referred to as its current or working capital position) by deriving the proportion of current assets
available to cover current liabilities.
The concept behind this ratio is to ascertain whether a company's short-term assets (cash,
cash equivalents, marketable securities, receivables and inventory) are readily available to pay
off its short-term liabilities (notes payable, current portion of term debt, payables, accrued
expenses and taxes). In theory, the higher the current ratio, the better. Current assets normally
include cash, marketable securities, accounts receivable and inventories. Current liabilitiesconsist of accounts payable, short term notes payable, short-term loans, current maturities of long
term debt, accrued income taxes and other accrued expenses (wages).
2006-07
24%
2007-08
36%
2008-09
40%
cash ratio
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Rule of thumb -
1. Relatively high ratio values mean that the business is liquid, but cash is not working.
2. If the current ratio is greater than 1.0, the business is liquid.
3. If the current ratio is less than 1.0, the business is illiquid.
Current ratio = total current assets / total current liabilities
Current assets = cash + marketable securities + bill receivables + sundry debtors +
inventories.
Current liabilities = outstanding expenses + bill payable + dividend payable etc.
YEAR CURRENT ASSETS
(in Rs. crore)
CURRENT
LIABILITIES (in Rs.
crore)
CURRENT
RATIO
2006-07 6.02 1.89 3.18
2007-08 9.98 2.53 3.94
2008-09 10.81 3.6045 3.00
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Interpretation As we know that ideal current ratio for any firm is 2:1. If we see the current
ratio of the company for last three financial years it has increased from 2006-07 to 2007-08 but
decrease in the year 2008-09 in spite of this it is more than 1.0 it means the business is liquid
and in all the years current ratio of company is more than the ideal ratio. This depicts that
companys liquidity position is sound and the current assets of the company is sufficient to fulfill
its short-term liabilities obligation.
3.Quick ratio -
The quick ratio -the quick assets ratio or the acid-test ratio -is a liquidity indicator that
further refines the current ratio by measuring the amount of the most liquid current assets there
are to cover current liabilities. The quick ratio is more conservative than the current ratio because
it excludes inventory and other current assets, which are more difficult to turn into cash.
Therefore, a higher ratio means a more liquid current position.
Rule of thumb -
1. Relatively high ratio values mean that the business is liquid, but cash is not working.
2. If the current ratio is greater than 1.0, the business is liquid.
3. If the current ratio is less than 1.0, the business is illiquid.
0 1 2 3 4 5
2006-07
2007-08
2008-09
current ratio
current ratio
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Quick ratio = Total current assetsinventory / Total current liabilities
YEAR CURRENT
ASSETS(inRs. crore)
PREPAID
EXPENSES(in
Rs. crore)
INVENTORIES(in
Rs. crore)
CURRENT
LIABILITIES(in
Rs. crore)
QUICK
RATIO
2006-07 6.02 0.057 3.34 1.89 1.38
2007-08 9.98 0.118 5.12 2.53 1.87
2008-09 10.81 0.0718 4.24 3.60 1.80
Interpretation A quick ratio is an indication that the firm is liquid and has the ability to meet
its current liabilities in time. The ideal quick ratio is 1:1. Companys quick ratio is more than
ideal ratio. This shows company has no liquidity problem.
4. SUPER /ABSOLUTE QUICK RATIO -
Although receivables, debtors and bills receivable are generally more liquid than
inventories, yet there may be doubts regarding their realization into cash immediately or in time.
So absolute liquid ratio should be calculated together with current ratio and acid test ratio so as
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
1.8
2
2006-07 2007-08 2008-09
Quick ratio
Quick ratio
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to exclude even receivables from the current assets and find out the absolute liquid assets.
Absolute Liquid Assets
includes:
Absolute liquid ratio
= Absolute liquid
assets / current liabilities
Absolute liquid assets
= cash & bank
balances + investment in
govt. securities.
Quick liabilities = current liabilitiesbank overdraft
0
0.05
0.1
0.15
0.2
0.25
0.3
0.35
0.4
2006-07 2007-08 2008-09
SUPER QUICK RATIO
SUPER QUICK RATIO
YEAR
CASH &
BANK
BAL.(in Rs.
crore)
CURRENT
LIABILITIES(in
Rs. crore)
SUPER
QUICK
RATIO
2006-07 0.43 1.89 0.22
2007-08 0.82 2.53 0.32
2008-09 1.31 3.60 0.37
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Interpretation: From the above super quick ratio it is clear that company carries a small
amount of cash. But there is nothing to be worried about the lack of cash because company has
reserve, borrowing power & long term investment.
5. RECEIVABLE/DEBTORS TURN OVER RATIOWith the help of this ratio we can
easily measure the predictable amount which is has to receive from the debtors. If the
debtors turnover ratio is more than this condition is good for our business because if the
ratio is more than it means company will receive the amount from debtors very quickly.
This ratio also provides help to reduce doubtful debt and on the second hand it provides
help to the firm for the creation of the various funds which is useful for the other
profitability activates of the company. The formula for calculating receivable turnover
ratio
Receivable turnover ratiocredit sales / debtors + bills receivable
YEAR DEBTORS .(in
Rs. crore)
CREDIT
SALES .(in Rs.
crore)
DEBTOR
TURNOVER
RATIO
2006-07 1.86 49.95 27
2007-08 3.50 59.43 17
2008-09 4.14 82.46 20
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Interpretation: From the above graph it is clear that in the various different year the Debtors
turnover ratio is also different and with the help of this ratio company can easily measure
predictable receive amount from the debtors.
6. AVREAGE/DEBT COLLECTION PERIODWith the help of this ratio we
can easily find out that in how many days the amount of credit sales will receive. Every
industry has set its own standard for the average collection period. If the calculated
average collection period is less than standard one than this situation is good for the
company but if it is more than this situation is not consider good for the company. The
formula for calculating average collection period is
Average collection period = Debtors + bills receivable / credit sales 365
0
5
10
15
20
25
30
2006-07 2007-08 2008-09
Debtors turnover
Debtors turnover
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Interpretationso with the help of this ratio we can easily find out that in how many days
the amount of credit sales will receive. Every industry has set its own standard for average
collection period. If the calculated average collection period is less than standard than it is good
for the industry but ifits more than standard one than it is not consider good for the industry.
0
5
10
15
20
25
2006-07 2007-08 2008-09
Average collection period
YEAR DEBTORS .(in
Rs. crore)
SALES.(in Rs.
crore)
DAYS
2006-07 1.86 49.95 14
2007-08 3.50 59.43 22
2008-09 4.14 82.46 18
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7. CREDITORS/PAYMENT TURNOVER RATIO - This is ratio is just
reverse of the debtors turnover ratio the only difference is that with the help of this ratio
we can easily find out the condition or the level of the firm for the payment of the credit
purchase. The formula for calculating payment turnover ratio is
Payment turnover ratio = credit purchase/creditors + bills payable
18.2
18.4
18.6
18.8
19
19.2
19.4
19.6
2006-07 2007-08 2008-09
payment turnover
payment turnover
YEAR CREDITORS.(in
Rs. crore)
CREDIT
PURCHASE.(in
Rs. crore)
PAYMENT
TURN OVER
RATIO
2006-07 1.89 36.90 19.52
2007-08 2.53 47.95 18.92
2008-09 3.60 67.47 18.71
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Interpretation - So from the above graph we got different creditors turnover ratio in different
years and this ratios shows the company ability or level for the payment to its creditors.
8. AVERAGE PAYMENT PERIOD - With the help of this ratio we can easily find out that in
how many days company will pay to its creditors.
The formula for calculating average payment period is
Average payment period = creditors + bills payable / credit purchase 365
YEAR CREDITORS CREDIT
PURCHASE
PAYMENT
TURN OVER
RATIO2006-07 1.89 36.90 19
2007-08 2.53 47.95 19
2008-09 3.60 67.47 19
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Interpretation - This ratio is similar with average collection period the only difference is
that with the help of this ratio we can find out that in how many days company will pay to its
creditors.This ratio is very important for the business from the creditors point of view.
0
5
10
15
20
2006-072007-08
2008-09
Average payment period
Average paymentperiod
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CHAPTER 5
SUGGETION
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CHAPTER 6
CONCLUSION
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Conclusion
Working capital management is important aspect of financial management. The study of working
capital management of KAMAL SOLVENT EXTRACTIONS PVT.LTD. has revealed that the
current ratio was as per the standard industrial practice but the liquidity position of the company
showed an increasing trend. The study has been conducted on gross working capital, net working
capital and net operating working capital and ratio analysis of working capital . So following are
the various conclusive points generate after the study
1. Working capital of the industry was increasing and showing positive working capital per year.
It shows good liquidity position.
2. Positive working capital indicates that industry has the ability of payments of short terms
liabilities.
3. Working capital increased because of increment in the current assets is more than increase in
the current liabilities.
4. Companys current assets were always more than requirement it affect on profitability of the
company.
5. Current assets are more than current liabilities indicate that industry used long term funds for
short term requirement.
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CHAPTER 7
BIBLIOGRAPHY
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Sources and Bibliography
www.wikipedia.com
www.google.co.in
Official website of the company
MANAGEMENT ACCOUNTING Dr. S.P. Gupta
FINANCIAL MANAGEMENT - Dr. S.P. Gupta
http://www.wikipedia.com/http://www.wikipedia.com/http://www.google.co.in/http://www.google.co.in/http://www.google.co.in/http://www.wikipedia.com/Recommended