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PROJECT REPORT
ON
“WORKING CAPITAL MANAGEMENT”
FOR “MICRO-INDIA ENGINEERING”
SUBMITTED TO
UNIVERSITY OF PUNE
IN THE PARTIAL FULFILLMENT OF TWO YEARS FULL TIME COURSE
MASTER OF BUSINESS ADMINISTRATION (MBA)
SUBMITTED BY
KAMLESH SUNIL BIDKAR
(BATCH 2010-2012)
JSPM’S
JAYAWANT INSTITUTE OF COMPUTER APPLICATIONS
TATHAWADE, PUNE -411033
DECLARATION
I, Kamlesh Sunil Bidkar student of MBA, hereby declare that the
project report entitled, “Working Capital Management” submitted by
me to the University of Pune, in partial fulfillment of the requirement
for the award of degree of Master of Business Administration under
the guidance of Prof. Pravin Thorat is my original work and the
conclusions drawn therein are based on the material collected by
myself.
The Report submitted is my own work and has not been duplicated
from any other source. I shall be responsible for any unpleasure
moment/situation.
Place:
Date: Kamlesh Sunil Bidkar
ACKNOWLEDGEMENT
This acknowledgement is nothing, but a gesture of gratitude towards
all those people who were a driving in the successful completion of
the project.
First of all, I am highly indebted to Mr. Gorakh Pawar (M.D.) & Mr.
Vijay Kapure (Account Officer), MICRO-INDIA ENGINEERING
Pvt. Ltd. for availing me the opportunity to carry out the project in
their esteemed organization and his valuable guidance had helped me
a lot to understand the significance of Working Capital Management.
I would also like to extend my further thanks to all the employees of
MICRO-INDIA ENGINEERING Pvt. Ltd. For providing me a work
friendly environment.
In this context as a student of Jayawant Institute of Computer
Application, Tathawade, Pune. I would like to acknowledge Director
Dr. Ajay Kumar and project guide Prof. Thorat for their timely and
valuable guidance, which helped me to complete the project.
Kamlesh Sunil Bidkar
EXECUTIVE SUMMARY
Management is an art of anticipating and preparing for risk,
uncertainties and overcoming obstacles. An essential precondition for
sound and consistent assets management is establishing the sound and
consistent assets management policies covering fixed as well as
current assets. In modern financial management, efficient allocation
of funds has a great scope, in finance and profit planning, for the most
effective utilization of enterprise resources, the fixed and current
assets have to be combined in optimum proportions.
One of the most important areas in day to day management of the firm
is the management of working capital. Working capital management
is the function area of finance that covers all the current account of
the firm. It is concerned with management of the level of individual
current assets as well as the management of total working capital. The
functions of finance department are procurement of funds and
effective utilization of these procures funds in the business.
Procurement of funds in firstly concerned for financing working
capital requirement of the firm and secondly for financing fixed
assets.
Working capital may be regarded as lifeblood of a business. Its
effective provision can do much ensure the success of a business,
while it’s inefficient management an lead not only to loss of profit but
also to the ultimate downfall of what otherwise might considered as a
promising concern. A study of working capital is so major importance
to internal and external analysis because of its relationship with the
current day to day operations of a business.
The objective behind this project to understand meaning and
importance of working capital , to analyze the various methods of
calculating working capital, to study the various aspect of working
capital and to find out the future requirement of working capital of
MICRO-INDIA ENGINEERING .
In this project the theoretical background include meaning of working
capital, types of working capital, importance of working capital and
working capital cycle. The data analysis includes calculation and
projection of future working capital requirement, working capital
element, working capital and operating cycle ratio analysis, their
interpretation.
SR.NO.
TOPICPAGE NO.
EXECUTIVE SUMMARY
1 INTRODUCTION 1-4 a) AIMS & OBJECTIVES b) SCOPE & LIMITATION
2 COMPANY PROFILE 5-12
3 RESEACH METHODOLOGY 13-14
4 THEROLOGICAL BACKGROUND
15-46
5 DATA….ANALYSIS….AND…..
INTERPRETATION 47-74
6 FINDING
75-76
7 RECOMMONDATION
77
8 CONCLUSION
78
BIBLIOGRAPHY
79
INTRODUCTION
OBJECTIVES:-
1. To study the concept of Working Capital Management
2. To calculate and study the Operating Cycle of the company.
3. To find out and analyze the Working Capital Ratios in
Micro- India Engineering.
4. To find out how to generate cash from the Operating Cycle
of the company.
5. To understand about factors affect on working Capital of
the company.
6. To understand the need & requirement of Operating Cycle
and Working Capital in Micro-India Engineering.
7. To find out importance of Operating Cycle and Working
Capital management in Micro-India Engineering.
SCOPE:-
1) The better a company manages its working capital, the less the
company needs to borrow.
2) If companies with cash surpluses need to manage working capital
to ensure that such surpluses are invested will generate suitable
returns for their investors.
3) Better for excessing current assets over current liabilities
4) Helps for current assets converting into cash flows within a few
weeks or month
5) Helps for generating cash from operating cycle of the company.
6) The better company manages its Operating Cycle in holding
inventories and dealing with receivables and payables helps
company to generate more cash .
LIMITATIONS:-
1. Most of the information used in the analysis was from secondary
sources.
2. Confidential data was not allowed to be accessed or published in
the project report.
3. Time duration for the analysis was very short therefore detailed
analysis was not possible.
4. Due to time constrain all the measures were not considered for
analysis.
5. Analysis for the year 2009-10 is done on the basis of unaudited
balance sheet.
Company profile
COMPANY PROFILE
MICRO INDIA ENGINEERING is one of the leading organizations
with more than 7 years of standing and proven experience in the field
of manufacturing and assembly by adopting safe manufacturing their
product with their environment friendly approach, apart from
maintaining speed of assembly & strong quality standard. Micro India
Engineering is a partnership firm. Company manufactures as well as
assembles different types of precision machined parts as per their
customer specification. Certification DIN ISO 9001:2008 certified
since 2008 they provide customized products to their customers. Their
mantra is “We promise what we can deliver & deliver what we
promise”.
Company manufactures precision machine parts by using CNC
machine, VMC, Drilling Mach., Milling Mach., Cylindrical grinding
And Surface Grinding Mach. Lathe Machine, welding and also
Equipment Testing Machine etc.
MACHINE Used in Plant:
Equipment testing regularly calibrated by an ISO17025 certified
facilities.
Micro-India Engineering is a Company manufactures precision
machined parts & assembly works as per customer’s specification. It
is located near Katraj, Ambegaon Kurd, Jambhulwadi Lake, and
Pune:-411046.It established in the year 2004It is a Partnership firm It
started with a paid up capital of Rs.14.49 lacks Equipments – CNC
Equipments – Testing Equipments - Conventional Product’s as per
their Customer Specifications .Capabilities: - Turning, Milling,
Drilling, Grinding. I t has it’s another branch in Dhankawadi Pune as
a J>B> Industries.
THEIR CAPABILITIES:-
• TURNING
• CNC Turning center : -
– Ø450mm , Length 250mm Accuracy of ± 0.01
mm
• Conventional lathe : -
– Ø700 mm , Length 800 mm Accuracy of ±0.01
mm
– Ø500 mm , Length 1000 mm Accuracy of ±0.05
mm
– Ø300 mm , Length 800 mm Accuracy of ±0.02
mm
• MILLING :-
• V.M.C. : -
– Length 600mm Width 500mm with 3
dimensional profi le Accuracy of ±0.01mm [For
Bore size , paral leled , f latness, Height, W. T.]
• Conventional Mill ing : -
– Length 600mm Width 300mm Accuracy
±0.05mm [For paralleled f latness, Height, W. T.
]
• DRILLING :-
• M1TR : -
– Bore up 25mm [with H7 tolerance]
– Center distance for Length 700mm ,
width 400mm
– Accuracy ± 0.05 mm
• GRINDING :-
• Cylindrical Grinding :-
– Ø300 mm , Length 3000 mm
– Accuracy ± 0.01 mm
•
•
•
• Surface Grinding :-
– Length 450mm , width 200 mm ,Height 200mm
– Accuracy of ± 0.01 mm
Their products are:-
BOARD OF DIRECTORS
CHAIRMAN EMARITUS
Shri. K. J. PAWAR
MANAGING DIRECTORS
Shri. Krishna Pawar
(Chairman & Managing Director)
Shri. Gorakh Pawar
(Executive Director)
Shri. Sandip Pawar
(Whole Time Director)
(Director)
Shri. Kanwal Jit Singh
(Director)
BANKERS
The Saraswat Co-op. Bank Ltd.
HDFC Bank Ltd.
AUDITORS
Yeravdekar & Ranade
(Chartered Accountants)
Organization Structure: -
CHAIR PERSON
MANAGING DIRECTOR
MANAGER
DEPARTMENT
FINANCE PRODUCTION MARKETING
ACCOUNTANT SUPERVISOR SALESMEN
LABOURS
CUSTOMER PROFILE: -
• Bharat Electronics Ltd., Pune
• Magplastic Asia Ltd., Hinjewadi, Pune
• Inoxpa India P. Ltd., Pune
• Aesseal India P Ltd., Pune
• GL&V India P Ltd., Pune
• Alfa Laval India Ltd., Pune
• Alfa Laval SPA, Monza, Italy
• Alfa Laval Jiangyin Manufacturing Co. Ltd., Jiang Yin City,
China
CONCEPTUAL BACKGROUND
RESEARCH METHODOLOGY
MEANING OF RESEARCH : Research is defined as a
scientific and systematic search for pertinent information on a
specific topic. The meaning of research is a careful investigation
or inquiry especially through search for new facts in any branch
of knowledge.
This project requires a detailed understanding of the concept –
“Working Capital Management.” Therefore, firstly we need to
have a clear idea of what is working capital, how it is managed
in Micro India Engineering., What are the different ways in
which the financing of working capital is done in the company.
The management of working capital involves managing
inventories, account receivables and payable and cash.
Therefore, one also needs to have knowledge about cash
management, inventory management and receivables
management. Then comes the financing of working capital
requirement, i.e. how the working capital is financed, what are
the various sources through which it is done.
The suggestions and recommendation for better management
and control of working capital are provided. The Research
Methodology is a way to systematically resolve the research
problem. The researcher is require to have knowledge of all the
aspects related to Research Methodology.
METHODOLOGY USED FOR PROJECT
The methodology used for calculating working capital of
Micro India Engineering which had based on working
capital formula and the values from annual report of the
Micro India Engineering .
The methodology used for analyzing the financial ratios of
the Micro India Engineering which had based on formula
and the values from annual report of the Micro India
Engineering
The information on the context of financial ratios and
interpretation is collected through various financial books
and manuals.
Analytical and Quantitative type of research is used in the
project.
SOURCES OF DATA
PRIMARY DATA :-
Primary data are those data which are collected a fresh and for the
first time, and thus happen to be original in character. Primary data is
directly collect for individuals by:-
Survey method
Personal interview
Telephone survey etc.
Primary data was collected through personal unstructured discussion
and interacting with the concerned guide and senior employees of the
Micro India Engineering. This data helps in calculating working
capital, interpretation of ratios.
SECONDARY DATA :-
Secondary data are those data which have already been collected. The
researcher uses this data for further research. Secondary data can be
collected by :-
Previous year’s Annual Reports
Financial Management Books
Internet websites
Reports on Working Capital for Research etc.
The project mainly depends upon the secondary data. Secondary data
related to the project is current annual reports, book on Financial
Management by various authors and internet websites the imp
amongst them being: www.microindiaengineering.com,
www.indiainfoline.com and also previous year’s annual reports ,
reports on working capital for research.
WORKING CAPITAL – Meaning of Working Capital
Every business needs funds for two purposes. Long term funds are
required to create production facilities through purchase of fixed
assets such as Plant and Machinery, Land, Building, Furniture, etc.
Investments in these assets represent that part of firm’s capital which
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 firm’s capital which is required for
financing short term or Current Assets such as Cash, Marketable
Securities. And Debtors & Inventories. Funds. Thus, invested in
current assets keep revolving fast and are being constantly converted
in to cash and these cash flows out again in exchange for other current
assets. Hence, it is also known as revolving or circulating capital or
short term capital.
The prime objective of the company is to obtain maximum profit
thought the business. The amount of profit largely depends upon the
magnitude of sales. However the sale of goods and receipt of cash.
The time gap between the sales and actual realization in cash is
technically termed as operating cycle. Additional capital required to
have uninterrupted business operations, and the amount will be locked
up in the current assets. Regular availability of adequate working
capital is inevitable for sustained business operations. If the proper
find is not provided for the purpose, the business operations will be
effected and hence this part of finance to be managed well.
CONCEPT OF WORKING CAPITAL
There are two concepts of working capital:
1. Gross working capital: It refers to firm’s investment in current
assets. Current assets are the assets, which are easily converted into
cash within a financial year. The gross working capital points to the
need of arranging funds to finance current assets .This concepts does
not consider current liabilities at all reasons given for the concept.
I. When we consider fixed capital as the amount invested in fixed
assets. Then the amount invested in current assets should be
considered as working capital.
Ii. Current asset whatever may be the source of acquisition, are used
in activities related to day to day operations and their forms keep on
changing. Therefore they should be considered as working capital
2. Net working capital: It refers to the difference between current
assets and current liabilities. Net working capital can be positive or
negative. A positive net working capital will arise when current assets
exceed current liabilities. And vice- versa for negative net working
capital. Net working capital is a qualitative concept. It indicates the
liquidity position of the firm and suggests the extent to which working
capital needs may be financed by permanent sources of funds. Net
working capital also resolves the questions of judicious mix of long
term and short term funds for financing current assets.
NET WORKING CAPITAL = CURRENT ASSETS – CURRENT
LIABILITIES
The gross working capital concept is financial or going concern
concept whereas working capital is an accounting concept of working
capital.
CURRENT ASSETS which can convert in to cash within a short
period normally a one accounting year.
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 good
CURRENT LIABILITIES
are those liabilities, which are intended to be paid in the ordinary
course of business within a short period of normally one accounting
year out of the current assets or the income business.
CONSTITUENTS OF CURRENT LIABILITIES
a. Accrued or outstanding expenses
b. Short term loans, advances and deposits.
c. Dividends payable.
d. Bank overdraft.
e. Provision for taxation, if it does not amt. to app. Of profit.
f. Bills payable
g. Sundry creditors.
ADVANTAGES OF WORKING CAPITAL:
1. Solvency of the business : Adequate working capital helps in
maintaining the solvency of the business by providing
uninterrupted of production.
2. Goodwill: Sufficient amount of working capital enables a firm
to make prompt payments and makes and maintain the goodwill.
3. Easy Loans: Adequate working capital leads to high solvency
and credit standing can arrange loans from banks and other easy
and favorable terms.
4. Cash Discounts : Adequate working capital also enables a
concern to avail cash discounts on the purchase and hence
reduces cost.
5. Regular Supply of Raw Material : Sufficient working capital
ensures regular supply of raw material and continuous
production.
6. 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 wastages and costs and
FACTORS DETERMINING WORKING CAPITAL
MANAGEMENT:
1. Nature of business: The requirement of working is very
limited in public utility undertakings such as electricity, water
supply and railways because they offer cash sales 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 investments in fixed assets but have
to large amount of working capital along with fixed investments.
2. Size of the Business: Greater the size of the business, greater is
the requirement of working capital.
3. Production Policy: If the policy is to keep production steady
by accumulating inventories it will require higher working
capital.
4. Length of Production Cycle: The longer the manufacturing
time the raw material and other supplies have to be carried for a
longer in the process with progressive increment of labor and
service costs before the final product in obtained. So working
capital is directly proportional to the length of the
manufacturing process.
5. Seasonal Variations: Generally, during the busy season, a firm
requires larger working capital then 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. Stock Turnover: There is an inverse co- relationship between
the working capital and the velocity or speed with which the
sales are affected. A firm having a high rate of turnover.
8. Credit Policy: A concern that purchases its requirements on
credit and sales its product/ services on cash requires lesser
amount of working capital and vice versa.
9. Business Cycle : In period of boom , the business is prosperous
there is need for larger amount of working capital due to rise in
sales, rise in prices , optimistic expansion of business etc. On the
contrary in time of depression, the business contracts, sales
decline, difficulties are faced in collection from debtor and the
firm may have a large amount of working capital.
10. Rate of Growth of Business: In faster growing concern,
we shall require large amount of working capital
.
11. Earning Capacity and Dividend Policy: Some firms
have more earning capacity than other due to quality of their
products, monopoly conditions, etc. Such firm 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 more working capital
than the firm that retains larger part of its profits and does not
pay rate of cash dividends.
12. Price Level Changes: Changes on the price level also
affect the working capital requirement. Generally rise in prices
leads to increase in working capital.
TYPES OF WORKING CAPITAL
TYPES OF WORKING CAPIATL
ON THE BASIS B/S concept
ON THE BASIS of TIME
GROSS WORKING CAPITAL
NET WORKING CAPITAL
REGULAR WORKING CAPITAL
TEMPORARY WORKING CAPITAL
SPECIFIC WORKING CAPITAL
Significance of Working Capital:
Another important aspect of working capital management is to
analyze the total working capital needs of the firm in order to find out
the permanent and temporary working capital. Working capital is
required because of existence of operating cycle. The lengthier the
operating cycle, greater would be the need for working capital. The
operating cycle is continuous process and therefore, the working
capital is needed constantly and regularly. However the magnitude
Significance of Working Capital
Payment of Suppliers
Dividend Distribution
Easy Loans from Banks
Increase Debt Capacity
Increase Efficiency
Increase In Fix Assets
SEASONAL WORKING CAPITAL
and quantum of working capital is required will not be same all the
times, rather it will fluctuate.
The need for current asset tends to shift over time. Some of these
changes reflects permanent changes in the firm as is the case when
the inventory receivables increases as the firm grows and the sales
become higher and higher. Other changes are seasonal, as is the case
with increased inventory required for a particular festival season still
others are random reflecting the uncertainty associated with growth in
sales due to firm’s specific or general economic factors.
The working capital needs can be bifurcated as :
Permanent working capital
Temporary working capital
Permanent working capital :
There is always a minimum level of working capital, which is
continuously requires by a firm in order to maintain its activities.
Every firm must have a minimum of cash, stock and other current
assets, this minimum level of current assets , which must be
maintained by any firms all the times, is known as Permanent
working capital for that firm. This amount of working capital is
constantly and regularly required in the same way as fixed assets are
required. So , it may also be called fixed working capital.
Temporary working capital:
Any amount over and above the permanent level of working capital
is temporary, fluctuating or variable working capital. The position of
the required working capital is needed to meet fluctuations in demand
consequent upon changes in production and sales as a result of
seasonal changes.
Amt. of Temporary Amt.of
Working Working
Permanent Temporary
Capital Permanent Capital
Time Time
Figure : 3 Figure: 4
The permanent level is constant while the temporary working capital
is fluctuating increasing and decreasing in accordance with seasonal
demands as shown in the figure. In the case of an expanding firm, the
permanent working capital line may not be horizontal. This is because
the demand for permanent current assets might be increasing (or
decreasing) to support a rising level of activity. In the case line would
be rising.
Working Capital Cycle
Cash flows in a cycle into, around and out of a business. It is the
business life blood and every managers primary task is to help keep it
flowing and to use the cash flow to generate cash surpluses. If it
doesn’t generate surpluses, the business will eventually run out of
cash and expire.
The faster a business expands the more cash it will need for working
capital and investment. The cheapest and best sources of cash exist as
working capital right within business. Good management of working
capital will generate cash will help to improve profits and reduce
risks. Bear in mind that the cost of providing credit to customers and
holding stocks can represents a substantial proportion of a firm’s total
profits. There are two elements in the business cycle that absorb cash
– Inventory (stocks and work in progress) and Receivables (debtors
owing you money). The main source of cash is Payables (your
creditors) and Equity and Loans.
WORKING CAPITAL CYCLE FOR MICRO INDIA ENGINEERING
Marketing
Department
Design Department
CASH
Figure No; 5
If you……….. Then……..
Production Planning and Control (PPC)
Material Requirement Planning (MRP)
Purchase of Raw Material
Raw Material Supply for Production
Production Activity takes place & RM is converted into WIP
Completion of Project
Money is received from Customer
Collect receivables ( debtors) fasters
You release cash from the cycle
Collect receivables (debtors) slower
Your receivable soak up cash
Get better credit ( in terms of duration or amount) from suppliers
You increase your cash resources
Shift inventory (stocks) faster
You free up cash
Move inventory (stocks) slower
You consume more cash
It can tempt to pay cash, if available, for fixed assets e.g. computers,
plant, vehicles etc. of 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 water flowing downs a plug whole,
they remove liquidity from the business.
SOURCES OF WORKING CAPITAL:
The company can choose to finance its current assets by
1. Long term sources
2. Short term sources
3. A combination of them
1. Long term sources:
Long term sources of permanent working capital includes equity and
preference shares, retained earnings, debentures and other long term
debts from public deposits and financial institutions. The long term
working capital needs should meet through long term means of
financing. Financing through long term means provides stability,
reduces risk or payments. And increases liquidity of the business
concern. Various types of long term sources of working capital are
summarized as follow
Issue of shares
It is the primary and most important sources of regular or permanent
working capital. Issuing equity shares as it does not create and burden
on the income of the concern. Nor the concern is obliged to refund
capital should preferably raise permanent working capital.
Retained earnings
Retain earning accumulated profits are a permanent sources of regular
working capital. It is regular and cheapest. It creates not charge in
future profits of the enterprises.
Issue of debentures
It creates a fixed charge on future earning of the company. Company
is obliged to pay interest. Management should make wise choice in
procuring funds by issue of debentures.
Long term debt
Company can raise funds from accepting public deposits, debts from
financial institutions like banks, corporations etc. the cost is higher
than the other financial tools. Other sources sale of idle fixed assets,
securities received from employees and customers are example of
other source4s of finance.
2. Short term sources of temporary working capital
Temporary working capital is requiring meeting the day to day
business expenditures. The variable working capital would finance
from short term sources of funds. And only the period needed. It has
the benefits of, low cost and establishes closer relationships with
banker.
Commercial bank
A commercial bank constitutes sources for short or temporary
working capital. This will be in the form of short term loans. Cash
credit, and overdraft and though discounting the bills of exchanges.
Public deposits
Most of the companies in recent years depend on these sources to
meet their short term working capital requirements ranging from six
month to three years.
Various credits
Trade credit, business credit papers and customer credit are other
sources of short term working capital Credit from suppliers, advances
from customers, bills of exchanges, promissory notes, etc helps to
raise temporary working capital.
Reserves and other funds
Various funds of the company like depreciations fund. Provision for
tax and other provisions kept with company can be used as temporary
working capital. its working capital needs through both long term and
short term funds. It will be appropriating to meet at least 2/3 of the
permanent working capital equipments from long tern sources,
whereas the variables w.c. should be financed from short term
sources.
A) LIQUIDITY RATIOS
Liquidity refers to the ability of the firm to meet its current
obligations as and when these become due. The short term obligations
are met by realizing amounts from current, floating or circulating
assets. The current asset should either be liquid or near about
liquidity. These should be convertible in cash for paying obligations
of short term nature. The sufficiency or in sufficiency of current assets
should be assessed by comparing them with short term liabilities. If
current assets can pay off the current liabilities then the liquidity
position is satisfactory. On the other hand, if the current liabilities
cannot be met out of the current assets then the liquidity position is
bad. To measure the liquidity of a firm, the following ratios can be
calculated:
1. Current ratio
2. Quick ratio
3. Absolute liquid ratio
1. CURRENT RATIO
Current ratio, also known as working capital ratio is a measure of
general liquidity and its most widely used to make the analysis of
short term financial position or liquidity of a firm. It is defined as the
relation between current asset and current liabilities. Thus,
CURRENT ASSETS
CURRENT RATIOS =
CURRENT LIABILITIES
The two components of this ratio are:
CURRENT RATIO =
CORRENT ASSETS
CDURRENT LIABILITIES
Current assets include cash, marketable securities, bill receivable,
sundry debtors, inventories and work in progress.
Current liabilities include outstanding expenses, bill payable, dividend
payable etc. High current ratio is an indication that the firm is liquid
and has the ability to pay its current obligations time. On the hand a
low current ratio represents that the liquidity position of the firm is
not good and the firm shall not be able to pay its current liabilities in
time. A ratio equal or near to the rule of thumb of 1:1.33 i.e. current
assets double the current liabilities considered to be satisfactory.
2. QUICK RATIO:
Quick ratio is a more rigorous test of liquidity than current ratio.
Quick ratio may be defined as the relationship between quick/liquid
assets and current or liquid liabilities. An asset is said to be liquid if it
can be converted into cash with a short period without loss of value. It
measures the firm’s capacity to pay off current obligations
immediately.
QUICK RATIO =
QUICK ASSETS
CURRENT LIABILITIES
Where quick assets are:
Marketable Securities
Cash in hand and Cash at Bank
Debtors.
A high ratio is an indication that the firm is liquid and has the ability
to meet its current liabilities in time and on the other hand a low quick
ratio represents that the firm’s liquidity positions is not good.
As a rule of thumb ratio of 1:1 is considered satisfactory. It is
generally thought that if quick assets are equal to the current liabilities
then the concern may be able to meet its short term obligations.
However, a firm having high quick ratio may not have a satisfactory
liquidity position if it has slow paying debtors. On the other hand, a
firm having a low liquidity position if it has fast moving inventories.
B) TURNOVER RATIOS:
Funds are invested in various assets in business to make sales and
earn profits. The efficiency with which assets are managed directly
affects the volume of sales. The better the management of assets,
larger is the amount of sales and profits. Current assets movement
ratios measure the efficiency with which firm manages it resources.
These ratios are called turnover ratios because they indicate the speed
with which assets are converted or turned over into sales. Depending
upon the purpose, a number of turnover ratios can be calculated.
1. Inventory turnover ratio
2. Inventory conversion ratio
3. Debtors turnover ratio
4. Average collection period
5. Working capital turnover ratio
The current ratio and quick ratio give misleading results if current
assets include high amount of debtors due to slow credit collections
and moreover if the assets include high amount of slow moving
inventories. As both the ratios ignore the movement of current assets,
it is important to calculate the turnover ratio.
1. INVENTORY TURNOVER OR STOCK TORNOVER
RATIO:
Every firm has to maintain a certain amount of inventory of finished
goods so as to meet the requirements of the business. But the level of
inventory should neither be too high nor too low.
Because it is harmful to hold more inventory as some amount of
capital is blocked in it and some cost is involved in it . It will
therefore be advisable to dispose the inventory as soon as possible
INVENTORY TURNOVER RATIO =
COST GOODS SOLD
AVERAGE INVENTORY
Inventory turnover ratio measures the speed with which the stock is
converted into sales. Usually a high inventory ratio indicates an
efficient management of inventory because more frequently the stocks
are sold; the lesser amount of money is required to finance the
inventory. Whereas low inventory turnover ratio indicates the
inefficient management of inventory. A low inventory turnover
implies over investment in inventories, dull business, poor quality of
goods, stock accumulations and slow moving goods and low profits as
compared to total investment.
2. INVENTORY CONVERSION PERIOD:
AVERAGE STOCK =
OPENING STOCK + CLOSING STOCK
2
INVENTORY CONVERSION RATIO =
365(WORKING DAYS)
INVENTORY TURNOVER RATIO
The inventory conversion period ratio represents the average number
of days in which inventory of the firm is converted into cash.
Generally shorter the inventory conversion period the better is the
inventory management.
3. DEBTORS TURNOVER RATIO:
A concern may sell its goods on cash as well as on credit to increase
its sales and a liberal credit policy may result in trying up substantial
funds of a firm in the form of trade debtors. Trade debtors are
expected to be converted into cash within a short period and are
included in current assets. So liquidity position of a concern also
depends upon the quality of trade debtors. Two types of ratios can be
calculated to evaluate the quality of debtors.
DEBTORS TURNOVER RATIO =
CREDIT SALES
Avg. DEBTORS
Debtor’s velocity indicates the number of times the debtor is turned
over during a year. Generally higher the value of debtor turnover ratio
the more efficient is the management of debtor/sales or more liquid re
the debtors. Whereas a low debtors turnover ratio indicates poor
management of debtors/sales and less liquid debtors. this ratio should
be compare with the ratio of firms doing the same business and a
trend may be found to make a better interpretation of the ratio.
AVERAGE DEBTORS =
OPENING DEBTORS+CLOLING DEBORS
2
4. AVERAGE COLLECTION PERIOD :
The average collection period ratio represents the avg. no. of days for
which a firm has to wait before its receivable is converted into cash. It
measures the quality of debtors. Generally, shorter the average
collection period the better is the quality debtors as a short collection
period implies quick payments by debtors and vice versa.
AVERAGE COLLECTION PERIOD =
NO.OF WORKING DAYS
DEBTROS TURNOVER RATIO
AVERAGE COOLECTION PERIOD =
365(NET WORKING DAYS)
DEBTORS TURNOVER RATIO
5. WORKING CAPITAL TURNOVER RATIO:
Working capital turnover ratio indicates the velocity of utilization of the net working capital.\this ratio indicates the number of times the working capital is turned over in the course of the year. This ratio measures the efficiency with which the working capital is used by the firm. A higher ratio indicates efficient utilization of working capital and a low ratio indicates otherwise. But a very high working capital turnover is not a good situation for any firm.
WORKING CAPITAL TURNOVER RATIO =
SALES
NET WORKING CAPITAL
C) Financial Ratio:
1. Debt Equity Ratio
This ratio is calculated to measure the comparative proportion of borrowed funds and share holder funds invested in the firm. A firm raises funds through owned funds, which are also called as “shareholders fund”, or “proprietor’s fund” as well as borrowed funds. The proportion between these, two sources should be properly balanced; otherwise the firm may face problems. This ratio indicates this proportion and is calculated as shown below:
OPERATING CYCLE OF MICRO INDIA ENGINEERING :-
The time lag between the purchases of raw materials and
the collection of cash for sales is referred to as the Operating Cycle
for the company.
DEBT EQUITY RATIO =
LONG TERM DEBT
SHARE HOLDERS FUND
The time lag between the payment for raw materials purchases and
the collection of cash from sales is referred to as The Cash Cycle
Figure No.:- 6
Operating cycle is the time duration required to convert raw materials
into cash. The operating cycle of a production unit involves three
phases:
Acquisition of resources such as raw material, labor, etc.
Production of the product.
Conversion of raw materials into finished products. Sales of the
finished products either for cash or credit.
CASH PURCHASE OF
PROCESS ON RAW MATERIAL
RECEIVABLES FINISHED WORK
–IN
PRODUCTS
PROCESS
Figure No.:- 7
Diagram shows Production Cycle. Working capital is required for
each and every stage of production. The current assets are required
because the operations do not convert into cash immediately.
Following is the Working Capital Cycle.
IMPORTANT FORMULAS
1) INVENTORY HOLDING PERIOD= AVERAGE DEBTORS x
365
ANNUAL COST OF GOODS
SOLD
(ANNUAL COST OF GOODS SOLD = MATERIAL
CONSUMED+COST OF EMPLOYMENT+MANUFACTURING
EXPENSES)
2) DEBTORS COLLECTION PERIOD=
AVERAGE DEBTORSX365
CREDIT SALES
3) CREDIT PERIOD = AVERAGE CREDIT X365
PURCHASE
4) OPERATING CYCLE=
INVENTORYHOLDINGPERIOD+DEBTOS
COLLECTION PERIOD-CREDITORS PERIOD
DATA ANALYSIS AND INTERPRETATION
CALCULATION OF NET OPERATING CYCLE:
1) Raw Material Holding Period:-
Raw Material = Average Inventory 365
Holding Period Annual Cost of Goods Sold
Particulars 31.03.06 31.03.07 31.03.08 31.03.09 31.03.10Average inventory 49.81 68.81 106.24 95.48 169.86Cost of goods sold 149.98 225.49 330.16 280.18 370.50Raw Material Holding Period 25 28 15 11 39
Graph No.: - 1
INTERPRETATION
Raw material holding period shows the increase and decrease in
each year, it’s average ratio is 23.6
From 2007 the raw material holding period decreases the
requirement of working capital decreases
In 2010 there is increase in raw-material holding period hence
requirement of working capital has increased.
2) Finished Goods Holding Period
FG Holding Period = Average FG 365
Sales
Particulars31.03.06
31.03.07
31.03.08
31.03.09 31.03.10
Average Finished Goods 81.42 83.28 63.58 75.59 88.85Sales 149.98 225.49 330.16 280.18 370.5FG Holding Period 41 42 14 38 46
Graph No. ; - 2
INTERPRETATION
The finished goods holding period is inversely proportional to
average ratio i.e. 36.2 from last five years on average finished
goods to sales
In 2009 finished goods cost decreases and sales increases then
the finished goods holding period also decreases shown in graph
In 2010 average finished goods cost increased up to 88.85 as
well as sale also increased up to Rs. 370.50 there finished goods
holding period has also increased up to 46 days.
3) Debtors Collection Period :-
Debtors Collection = Average Debtors 365
Period Sales
Average Debtors = opening debtor + Closing Debtor 2
Particulars 31.03.06 31.03.07 31.03.08 31.03.09 31.03.10 Sales 149.98 225.49 330.16 280.18 370.5 Debtors 30.12 29.18 47.09 32.04 39.13 In days 73 47 52 42 38
Graph No. : - 3
INTERPRETATION
Debtors Collection Period is inversely proportional to the sales,
In 2006- 2010sales increase inversely debtors decrease as well
as debtors collection period also decrease
When sale increases, the receivable holding period w decreased.
As debtors’ collection period decreases, the requirement of
working capital is low.
4) Gross Operating Cycle :-
Gross Operating Cycle = Raw Material Holding Period
+ Finished Goods Holding Period
+ Debtors Collection Period
Particular 2005-06 2006-07 2007-08 2008-09 2009-10
Raw Material
Holding Period25 Days 28 Days 15 Days 11 Days
39 Days
Finished Goods
Holding Period
41 Days 42 Days 14 Days 38 Days 46 Days
Debtors Collection 73 Days 47 Days 52 Days 42 Days 38 Days
Period
Gross Operating
Cycle
139 Days117 Days 81 Days 91 Days123 Days
Graph No.: - 4
INTERPRETATION :-
From 2006- 2010 shows gross operating cycle is directly
proportional to the Raw material holding period, i.e. 39days as
finished goods holding period i.e. 46 days and Receivables holding
period is 38 days
In 2008 cost of goods sold and sale increases, the Raw material
holding period, finished goods holding period and Receivables
holding period decreases.
As a result of that the gross operating cycle also decreases. As gross
operating period decreases, the requirement of working capital is
low.
5) Payment Deferral (Creditors) Period :-
Creditors Period = Average Creditors 365
Purchases
Particulars31.03.06
31.03.07
31.03.08
31.03.09 31.03.10
Average creditors
18.01 29.14 44.05 20.01 50.09
Purchases 139.98 214.39 319.07 269.09 358.04Cr. Period ( in 49 50 27 51
days) Avg.Cr./Pur.*365 47
Graph No. : - 5
INTERPRETATION :-
From 2006-2008 the company’s creditor’s period is
continuously increasing each year i.e. from 47days to 50 days.
In 2009 it has shown decrease i.e.27 days.
But again in 2010 it has increased up to 51 days that means the
requirement of working capital has increased in 2010
6) Net Operating Cycle :-
Net Operating Cycle = Gross Operating Cycle – Creditors Period
Particular 2005-06 2006-07 2007-08 2008-09 2009-10
Gross Operating Cycle139 Days117 Days81 Days 91 Days 123 Days
Creditors Period 47Days
49 Days
50 Days
27 Days
51 Days
Net Operating Cycle 92 Days 68 Days 31 Days 64 Days 72 Days
Graph No.: -6
INTERPRETATION
In 2006-2008the gross operating period has decreased by increase in
cost of goods sold and sale.
As a result in 2006- 2008 of that the Net Operating Cycle has
decreased.
Year 2007-08 shows the lowest requirement of working capital.
Calculation of Working Capital for MICRO INDIA ENGINEERING
Rs. In lacks
Current Assets, Loans & Advances
2005-06
2006-07
2007-08
2008-09
2009-10
(a)Inventories 49.81
68.81 106.24
95.48 69.86
(b)Sundry Debtors 30.12
29.18 47.09 32.04 39.01
(c)Cash and Bank Bal. 13.68
44.13
53.43 47.34 61.03
(d)Other Current Assets
57.70
86.77
95.44 78.53 96.20
(e)Loans and Advances
59.42
93.95
194.91 86.03 90.71
Total (A) 218.73 329.84.
497.50 339.42 355.81
Less: - Current Liabilities & Provisions
(a) Liabilities 60.12 90.04 118.37 79.02
88.60
(b) Provisions 58.06 89.64 110.76 50.77
61.99
Total (B) 118.18 179.68
228.13 129.79
149.79.
Net Current Assets (A-B)
99.82 150.06
269.37 210.63
206.02
Graph No. : - 7
INTERPRETATION :-
In Graph No. 7 year 2005-06 working capital is Rs.99.82 lakhs
were as in 2006-07 it is 150.06 lacs which shows increases is
current assets 32 % where as current liabilities decreases by 5%.
Therefore working capital is more than double.
In year 2007-08 working capital is Rs.269.37 lacs , as compared
to previous year increase in assets is by 53% whereas in
liabilities has increase more than one third i.e.85%
In year 2008-2009 working capital is Rs210.63 lacs which is
decreased by Rs 59.74 lacs, as compared to previous year assets
increase by 33% whereas liabilities has increased . Due to
increase in inventory by Rs 109.01, this year shows highest
increase in inventory.
In year 2009-2010 working capital is Rs206.02 lacs, due to
decrease in assets by 6% whereas liabilities show increase by
9%. This shows very less fluctuations.
Statement showing change in working Capital in MICRO INDIA ENGINEERING
Rs.In Lacks.
Current Assets, Loans & Advances
2005-06
2006-07
2007-08
Increase (+)
Decrease(-)
Increase (+)
Decrease(-)
a)Inventories 49.81 68.81 106.24
19.04 37.43
b)Sundry Debtors 30.12 29.18 47.09 0.94 17.91c)Cash and Bank Balances
13.68 44.13 53.43 30.46 9.3
d)Other Current Assets
57.70 86.77 95.43 29.07 8.66
e)Loans and Advances
59.42 93.95 194.91
34.53 100.96
Total (A) 218.73
329.8 497.50
111.09
Less: - Current Liabilities & Provisions(a) Liabilities 60.12 90.04 118.3
729.92 28.33
(b) Provisions 58.06 89.64 110.76
31.58 21.12
Total (B) 118.18
179.68
228.13
48.45
Net Current Assets (A-B)
99.82 150.06
269.37
50.24 119.31
Statement showing change in working Capital in MICRO INDIA ENGINEERING
Rs.In Lacks.
Current Assets, Loans & Advances
07-08 08-09 09-10Increase (+)
Decrease(-)
Increase (+)
Decrease(-)
(a)Inventories106.24 95.48
3169.86
10.76 74.389
(b)Sundry Debtors 47.09 32.04
1 39.01
15.051 6.978(c)Cash and Bank Bal
53.43 47.346
111.03 6.091 63.579
(d)Other Current Assets
95.43 78.534
186.2016.901 107.666
(e)Loans and Advances
194.91 86.039
183.71108.88 97.671
Total (A)497.50
339.42 355.89158.091 46.467
Less: - Current Lias & Provisions(a) Liabilities 118.37 79.02 238.91 39.359 159.89
(b) Provisions110.76
50.77111.946 39.351 61.179
Total (B) 228.13 129.79 149.79 98.347 220.01
Net Curr Asst (A-B)
269.37 210.63 206.0258.74 128.58
INTERPRETATION :-
The above table shows the change in working capital by
comparison made between the each two years.
The statement shows the increase and decrease of assets and
liabilities in each year.
Comparison made for 2005-06 &2006-07 shows that there is
increase in assets by 52 % as we can see in the table that every
asset increased.
In year 2007-08 increase in asset by 72% than previous year this
shows that the business is increasing and requirement in
working capital are increasing.
In year 2008-09 assets has decreased by 37% where as liabilities
increased 58% here we can say that the company is maintaining
its assets and liabilities to fulfill the requirement of working
capital.
Year 2009-10 shows increase in asset by 6% the percentage of
increase is less because of decrease in loans & advances
whereas the provisions has decreased by 20% so the liabilities
shows increase.
Table showing comparison between sales & working capital
Rs. In lacs
Years 2005-06
2006-07 2007-08 2008-09 2009-10
Sales 149.98 225.49 330.16 280.15 370.5Working capital
99.82 150.06 269.37 210.63 206.02
Graph No. 8
INTERPRETATION:-
In the above graph we see that the sales increases continuously
till 2007-08 but it decreased in 2008-09 by 9%This year shows
increase in asset by 6%
In 2005-06 working capital is 20% of net sales while as in 2006-
07 are increased more than twice and it is 30% of net sales.
In the year 2008-09 working capital was decreased by 9% of net
sales
COMPARISON BETWEEN OPERATING CYCLE AND NET
WORKING CAPITAL
CHANGE IN WORKING CAPITAL & SALES
0
50
100
150
200
25000
300
400
350
2005-06 2006-07 2007-08 2008-09 2009-10
YEARS
RS
.(IN
LA
CS
)
Working capital
Sales
Year Operating Cycle
(Days)
Net Working
Capital
(Lakhs)
2005-06
92 Days
99.82
2006-07
68 Days
150.06
2007-08
31 Days
269.37
2008-09
64Days
210.63
2009-10
72 Days
206.02
INTERPRETATION:-
In the year 2005-06, operating cycle was 92 days and net
working capital was Rs.99.82 Lacks as working capital was
used more efficiently.
In the year 2006-07, operating cycle decreased to 68 days and
net working capital increased to Rs.150.06. This is because
there is hike in prices in raw material that resulted into increase
in working capital requirement.
In the year 2007-08, operating cycle again decreased to 31 days
and net working capital is increased to Rs.269.37 lack. This is
because there is hike in prices in raw material that resulted into
increase in working capital requirement.
In 2008-09, operating cycle again increased to 64 days and so
the working capital decreased to Rs.210.63lakh
In the year 2009-10 operating cycle days were 72 Days and so
there was decrease in requirement of working capital
i.e.Rs.206.02 Lacks
Even though there is decrease in operating day’s cycle we can
see increase in working capital requirement as there increase in
Sales each year.
ANALYSIS OF VARIOUS COMPONENTS OF WORKING CAPITAL
1) INVENTORY ANALYSIS:-
Inventory is total amount of goods and materials content in a store of
factory at any given time
Inventory 31.03.06 31.03.07 31.03.08 31.03.09 31.03.10Stock- in-hand 12.81 18.81 31.14 60.46 75.46Working process 37.00 50.00 75.10 35.02 94.40TOTAL 49.81 68.81 106.24 95.48 169.86
Rs.In Lacks
Graph:-
Graph No. 9
INTERPRETATION:-
From the above table we can see that inventory of 2006-07 shows
increase by 45% to previous year.
The year 2008 shows decrease in inventory by 28% as compared to
previous year it’s a good sign as the liquidity of company is not
blocked in material.
INVENTORY
0
25
50
75
100
150
200
31.03.2006 31.03.2007 31.03.2008 31.03.2009 31.03.2010
YEARS
RS (IN Lakhs)
Stock in hand
Work in process
In 2009 increase in inventory is more than thrice this is because the
stock in hand as well as WIP has increased as compared to
previous year.
After analyzing WIP as per AS 7 issued by ICAI all the entities
involved in execution of manufactured product has to follow a
percentage of completion method of accounting.
Under this method of contract the revenue is recognized in
statement of Profit & Loss in accounting period in which work is
performed.
Hence WIP is a part of work done but bill is not certified by
client .if it is certified till the year end then WIP is reduced and
sundry debtors increases.
In next year i.e. 2010 the increase in inventory is by 10% compared
to previous 2009
2) SUNDRY DEBTORS ANALYSIS:-
Debtors or an account receivable is an important component of
working capital and fall under current assets. Debtors will arise only
when credit sales are made.
Rs.In Lacks
Sundry Debtors 31.03.06 31.03.07 31.03.08 31.03.09 31.03.10Retention money with Client 12.00 11.06 15.04 11.77 11.13Security deposit with client 14.00 14.34 21.02 16.42 18.40Debt outstanding more than six months 02.01 4. 05 7.01 9.64 3.11other Debts 2 .11 1.00 4.02 4.05 7.40TOTAL 30.12 29.18 47.09 32.04 39.01
Graph :-
Sundry Debtors
Graph No. - 10
INTERPRETATION:-
In the table and graph we see that there is rise and decrease in
the debtor’s of Micro India Engineering in the successive years.
A simple logic is that debtors increase only when sales increase
and if Debtors increases it is good sign for growth. We can see
that there is increase in 2008 as compared to 2007 and slight
decrease in 2007 and again increase in 2009 by 25% of previous
year so there is no steady position.
We can say that it is a good sign as well as negative also.
Company policy of debtors is very good but a risk of bad debts
is always high in debtors. When sales are increasing with a great
speed the profit also increases.
In Lac
Co. can use the money in many investment plans.
3) CASH AND BANK BALANCE ANALYSIS
Cash is called the most liquid asset and vital current assets; it is an
important component of working capital. securities and time deposits
with bank In Lacks.
Cash and Bank balances
31.03.06
31.03.07
31.03.08
31.03.09
31.03.10
Cash in hand 2.61 4.85 5.6 3.01 5.67Bank bal. with Sch..bankscurrent account 3.03 12.33 19.4 15.68
18.83deposit A/c for big margin money 6.62 22.24 29.33 29.54
38.97
Bank bal with BankCurrent account 1.25 0.1 0.1 0.1 0.1Deposit account 1.14 6.6 0 0 0Total 13.68 44.13 53.43 47.34 61.03
Graph No. : - 11
INTERPRETATION:-
From the above table and graph we can see that there is increase
in balance by 66% in 2007 compared to 2006 this increasing
trend shows a good sign till 2008 we can see increase is
21%..Year 2009 shows a decrease in balance by 24% this has
caused by industrial slow down but again we can see boom in
2010 by 36% which is good sign.
Cash & Bank Balance
0
20
40
60
70
90
110
31.03.2006 31.03.2007 31.03.2008 31.03.2009 31.03.2010
YearsRs.(in lakhs)
WORKING CAPITAL RATIOS:-
1) Position of Debtors Turnover ratio in MICRO INDIA ENGINEERING
Rs. In lacks
Debtors Turnover 31.03.06 31.03.07 31.03.08 31.03.09 31.03.10Sales 149.98 225.49 330.16 280.18 370.50Debtors 75.12 83.51 95.94 57.82 65.15Sales/Debtors 1.98 2.71 3.47 4.91 5.69
Graph No.12
INTERPRETATION:-
In Graph No.:- 12. Generally a low receivable ratio implies that it
considered congenial for the business as it implies better cash flow.
The ratio indicates the time at which the debts are collected on an
average during the year. Needless to say that a high Debtors
Turnover Ratio implies a shorter collection period which indicates
prompt payment made by the customer.
Now if we analyze the five year data we can say that it holds a
moderate risk while receiving its money from its debtors.
Debtor’s turnover ratio shows increasing trends which indicate that
the company has been able to collect its debtors faster.
2) Position of Creditors Turnover in MICRO INDIA ENGINEETING
Rs. In lacks
Creditors turnover 31.03.06 31.03.07 31.03.08 31.03.09 31.03.10 Credit Purchases 139.01 128.06 157.05 319.02 274.06Creditors 60.12 90.04 118.37 79.02 138.60Creditors Ratio Credit Purchases / Creditors 2.31 1.42 1.32 4.04 2.01
Graph No. : - 13
INTERPRETATION:-
Actually this ratio reveals the ability of the firm to avail the credit
facility from the suppliers throughout the year. Generally a low
creditor’s turnover ratio implies favorable since the firm enjoys
lengthy credit period
Now if we analyze the five years data we find that in the year
2009 the ratio was very high which means that its position of
creditors that year was not good, but year 2006 and 2007 2008
and 2010 years it is seen that the ratio is very less as compared to
2009 years which is very good sign for the company. So we can
say it enjoys a very good credit facility from the supplier.
3) POSITION OF CURRENT RATIO IN MICRO INDIA ENGINEERING Rs. In lacks
Current Ratio 31.03.06
31.03.07
31.03.08
31.03.09
31.03.10
Current Assets, Loans & Advances
05-06 06-07 07-08 08-09 09-10
a)Inventories 49.81
68.81 106.24 95.48 69.86
b)Sundry Debtors 30.12
29.18 47.09 32.04 39.01
c)Cash and Bank Balances
13.68 44.13 53.43 47.34 61.03
d)Other Current Assets
57.70 86.77 91.44 78.53 96.71
e)Loans and Advances
59.42
93.95 194.91 86.03 90.71
Total (A) 218.73
329.84
497.50 339.42 355.81
Less: - Curr. Lia.& Prov.
(a) Liabilities 60.12 90.04 118.37
79.02 88.60
(b) Provisions 58.06 89.64 110.76 50.77 61.99
Total (B) 118.18 179.68 228.13 129.79 149.79
Current Asset/Current Lia
1.85 1.84 2.20 2.62 2.38
Graph No. : - 14
INTERPRETATION :-
In Graph no.14 This ratio reflects the financial stability of the
enterprise. The standard of the normal ratio is 2:1
These five years data holds a stable position all throughout
period as it is near up to the standard ratio to some extend as
there is increase in current asset as compared to its liabilities and
so it helps to stable the position of the company. Company must
try to maintain it throughout.
4) POSITION OF QUICK RATIO in MICRO INDIA ENGINEERING
Rs. In Lack
Quick Ratio31.03.06
31.03.07
31.03.08 31.03.09
31.03.10
Current Assets, Loans & Advances
2005-06
2006-07 2007-08
2008-09
2009-10
(a)Inventories 49.81
68.81 106.24
95.24 69.86
(b)Sundry Debtors
30.12
29.18 47.09
32.04 39.01
(c)Cash and Bank Bal
13.68
44.13 53.43
47.34 61.03
(d)Other Curr. Assets
57.70
86.77 95.44
78.53 96.71
(e)LoansandAdvance
59.42
93.95 194.91
86.03 90.71
Total 218.73
329.84 497.50
339.42 355.81
(a)Inventories less
49.81
68.81 106.24
95.24 69.86
Total (A) 168.92 261.03
391.26 244.18
425.67
Less: - Curr.Lia. & Pro.
(a) Liabilities 60.13
99.04 118.37
79.02 88.60
(b) Provisions 58.06
80.64 110.76
50.77 61.99
Total (B) 118.18 179.68 228.13 129.79 149.79
Quick ratio A/B 1.42 1.45 1.71 1.88 2.84
Graph No. 15
INTERPRETATION :-
It is the ratio between quick liquid assets and quick liquid
liabilities. The normal value for such ratio is 1:1.It is used as an
assessment tool for testing the liquidity position of the firm.
In the above graph It indicates the relationship between liquid
assets whose realizable value is almost certain on one hand and on
liquid liabilities on other hand. Liquid assets comprises of all
current assets minus stock.
By analyzing the 5 years data we can say that the position was
strong for 5 years from 2006 to 2010 but in 2010 it slightly below
than 2009 because the quick liquid assets &quick liquid liabilities
less than year 2009.
On an average we can say that the liquidity position of MICRO
INDIA ENGINEERING is stable.
Years 31.03.2006 31.03.2007 31.03.2008 31.03.2009 31.03.2010Net Working Capital
99.82 150.06 269.37 210.63 206.02
Net Sales 149.98 225.49 330.16 280.15 370.50Net Sales/ Net Working Capital 1.50 1.62 1.22 1.77 2.6
5) Proportion of WORKING CAPITAL on SALES in MICRO INDIA ENGINEERING
In Lacks.
Graph No. 16
INTERPRETATION:-
Graph no. 16 indicates that in 2008-09-10 the Proportion of
working capital on sales this ratio indicates whether the
investments in current assets or net current assets (i.e., working
capital) have been properly utilized.
It shows the relationship between sales and working capital.
Higher the ratio lower is the investment in working capital and
higher is the profitability. But too high ratio indicates over
trading.
This proportion is an important indicator about the working
capital position. Now if we analyze the five years data, we
found that it follows an increasing and decrease trend which
means that its investment in working capital is lower and the
company is utilizing more of its profit. I fonnd that proportion
has increased at a faster rate in 2007 which is not a good sign for
the company and the company is required to look into these
matters closely.
The year 2008 shows decrease in proportion because of increase
in assets by 33% and sales is more than twice.
Year 2009 shows Increase in net current asset by 16%.
In 2010 shows Increase in Net current asset by 35 % of previous
year.
6) Position of STOCK TURNOVER RATIO in MICRO INDIA ENGINEERING
Rs. In Lacks.
Inventory Turnover ratio 31.03.06 31.03.07 31.03.08 31.03.09 31.03.10Average Stock(A) 10.81 18.56 21.99 11.64 46.96Cost of goods sold (B) 149.98 225.49 330.16 280.15 370.50
Stock turnover ratio B/A 14 12 15.03 24.05 9
` Graph No. 17
INTERPRETATION :-
In Graph no.17 this ratio tells the story by which stock is
converted into sales. A high stock turnover ratio reveals the
liquidity of the inventory i.e., how many times on an average,
inventory is turned over or sold during the year. If a firm
maintains a minimum stock level in order to maximize sales by
quick rotation of inventory and the holding cost of inventory
will be minimum. A low stock turnover ratio reveals undesirable
accumulation of obsolete stock.
By analyzing the five year data we seen that in the year 2006 to
2007 it is more or less double which has been rectified in the
year 2008. But it is needless to say that ratio of the company
maintains is very high and the company is required to take
measures to lower down this ratio as it affects the working
capital cycle of company and the flow of cash in the company
To previous so again the number of days of operation has
increased In 2009
In 2010 also there is decrease in number of days of operation i.e.
9 days.
Finding:
In Working Capital Management funds are needed for short term
purposes for the purchase of Raw-material, Wages & other day to day
expenses these funds are known as Working Capital.
Working refers to that part of the firm’s capital which is required for
finding short- term or current assets. Such as Cash, Inventories,
Debtors etc.
Working Capital with Sales:-
Sale of a company increased from 149.98 lacks to 370.50 lacks from
2006-2010.
Working capital wit sales ratio increased from the year 2006 i.e. 1.5 to
2.60 in 2010.
Hence need of a working capital increased from 99.82 lacks to 206.2
lacks in 2010.
Higher the Ratio lower is the investment in working capital of the
company
Working Capital with Ratio:-
Debtor Turnover Ratio:-
In 2006 the Co.’s Debtor Turnover Ratio was 1.98 and in 2010 it
increased upto 5.69.
It indicates good sign for the company because higher the value of
Debtor turnover ratio
The more efficient is the management of Debtors.
Creditor Turnover Ratio:-
In the year 2009 Credit Turnover Ratio was very high i.e. 4.04 that
means positions of creditors that year was not good.
And In 2010 Creditors Turnover Ratio decreased upto 2.01 which is
very good sign for the company.
Company enjoying a very good facility from the suppliers.
Current Ratio of the Micro India Engineering:-
This ratio indicates the financial stability of the company. The
standard of the normal ratio is near up to standard ratio is 2:1 .
Current Assets increased as compare to current liabilities of the firm.
Position of Quick Ratio in Micro-India Engineering:-
It is used as an assessment tool for testing the liquidity position of the
firm .Liquid assets comprises all Current assets – Stock. By analyzing
5 years data liquidity position of Micro- India Engineering is Stable.
Operating Cycle Of Micro-India Engineering:-
Operating Cycle is the time duration required to convert raw material
into cash.
Net operating Cycle = Gross operating cycle – Creditors Period.
Gross operating cycle includes Raw material holding period, Finished
goods holding period and Debtors collection period.
In the year 2006 Gross operating cycle period was 139 days, in 2007-
117 days, in 2008 – 81 days, in 2009 & 2010 it was 91 days and 123
days.
Gross operating cycle decreased hence requirement of working
capital also decreased.
In year 2010, Gross operating cycle increased therefore requirement
of working capital also increased.
IN year 2009 creditors period is decreased up to 27 days , hence
requirement of working capital also decreased.
In the year 2008 Net operating cycle decreased up to 31 days it shows
the lowest requirement of working capital.
In the year 2010 Net operating cycle increased up to 72 days it shows
high requirement of working capital for the company
SUGGESTIONS
The company should try to keep the net operating cycle period
low by minimizing raw material holding period, finished goods
holding period and debtors turnover ratio.
Currently, Current Ratio of MICRO INDIA ENGINEERING is
1:5 Company should take measures so that its Current Ratio is
maintained and it’s not too below from standard by increasing
current assets.
MICRO INDIA ENGINEERING has its quick ratio up to
standard in 2009-10. Company should maintain this ratio
throughout.
Conclusion:-
Working Capital involves the relationship between the firms current
or short term assets and its current or short term liabilities The aim of
working capital management is to ensure that the firm is able to
continue its operation and that it has sufficient ability to satisfy both
maturing short term liabilities with its current assets ( cash , Account
receivables, inventory )
It shoes the relationship between sales and working capital. Higher is
the ratio lower is the investment in working capital and higher is the
profitability. In 2006 ratio was 1.50 and it increased up to 2.60 in year
2010.
Debtors are the valuable current assets in the working capital
management . Higher the value of Debtor Turnover Ratio the more
efficient is the management of debtors/sales. A low Debtor Turnover
Ratio indicates poor management of debtor/sales. Management of
debtors turnover ratio is more efficient in working capital
management , because in year 2006debtoe turnover ratio was 1.98 and
it increased up to 5.69 in 2010
In Micro-India Engineering Credit turnover ratio was up to 4.04 it
means position of creditors in that year was not so good, and in year
2010 ratio decreased up to 2.01 it is good sign for the company. So it
indicates that company enjoying a very good credit facility from their
supplier.
Financial position of Micro-India Engineering is up to standard of the
normal ratioi.e.2:1.Current Ratio shows the financial stability of the
company. Current assets increased from 218.73 lacks to 355.81 lacks
as compared to increased in the liabilities i.e. from 118.8 lacks to
149.79 lacks
Quick Ratio used for an assessment tool for testing the liquidity
position of the firm. Liquid assets comprise all current assets –stock.
By analyzing 5 years data to conduct that liquidity position of Micro-
India Engineering is stable.
Operating Cycle is the time duration required to convert raw material
into cash.
Net operating Cycle = Gross operating cycle – Creditors Period.
Gross operating cycle includes Raw material holding period, finished
goods holding period and Debtors collection period.
The operating cycle of a production unit involves 3 phases:-
Acquisition of resources such as raw material labour etc.
Companies production of the product
Conversion of raw material into finished products
Sale of the finished products either for cash or credit.
BIBLIOGRAPHY :-
Financial Management- Mr. Prasanna Chandra, 1st edition
Financial Management- Mr. Vechlekar, 2nd edition.
WEBLIOGRAPHY
1. www.microindiamfg.com
2. www.mieinfoline.com
3. www.google.com
