ANALYSIS OF WORKING

CAPITAL OF PARAG MILK INDUSTRY

SUBMITTED BY

AVINASH KUMAR

MBA (2010 – 2012)

PROJECT REPORT SUBMITTED TO SCHOOL OF MANAGEMENT

IN PARTIAL FULFILMENT OF MBA PROGRAMME

GAUTAM BUDDHA UNIVERSITY

GREATER NOIDA

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Dated: 29 July, 2011

TO WHOM IT MAY CONCERN

This is to certify that Mr. AVINASH KUMAR, a student of MBA 2nd sem, Gautam Buddha

University, Greater Noida, undergone as a summer trainee in Finance Division of this

organization 21/05/2011 to 05/07/2011, project on “Analysis of working capital of parag

milk industry”, at Lucknow Producer’s Co- Operative Milk Union Ltd, Lucknow.

Mr. AVINASH KUMAR has successfully completed the project under my guidance. He is a

sincere and hard working student with pleasant manners.

I wish all success in his future endeavors.

(A.K PANDEY)

Manager (Adm./Per.)

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ACKNOWLEDGEMENT

I express my sincere gratitude to my industry guide Mr. Tapesh Yadav, Finance Manager, PARAG

MILK INDUSTRY LIMITED, Lucknow for his able guidance, continuous support and cooperation

throughout my project, without which the present work would not have been possible.

I would also like to thank the entire team of PARAG MILK INDUSTRY LIMITED, Lucknow for the

constant support and help in the successful completion of my project.

Also, I am thankful to my faculty guide Dr. Prashant Gupta of my institute, for his continued guidance

and invaluable encouragement.

AVINASH KUMAR

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TABLE OF CONTENTS

Acknowledgement

Preface

INTRODUCTION

WORKING CAPITAL MANAGEMENT

WORKING CAPITAL NEED

DEFINITIONS

IMPACT OF WORKING CAPITAL MANAGEMENT ON PROFITTABILIT

PERMAMENT AND TEMPORARY WORKING CAPITAL

FANANCING WORKING CAPITAL

PART-I INDUSTRIAL PROFILE

PARAG DAIRY MARCH TOWARD EXCELLENCE

PART-2

INTRODUCTION OF PROJECT WORKING CAPITAL

FACTORRS DETERMING THE CAPITAL REQUIREMENTS

MANAGEMENT OF WORKING CAPITAL OF PARAG MILK INDUSTRY

ANALYSIS OF WORKING CAPITAL OF PARAG

RATIO ANALYSIS

LIQUIDITY RATIO

CURRENT RATIO

QUICK RATIO

AVERAGE COLLECTION PERIOD

ANALYSIS OF FINANCIAL STATEMEN

CONCLUSION

RECOMMENDATION

REFERENCES

GLOSSARY

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PREFACE

Master in business Administration is a two year full time programme .Pursuing in Gautama Buddha University Greater Noida.

The study and report is based on finance and comparative data among other organization. It present some information regarding working capital of Lucknow Producers Co-op Milk Union Ltd, Lucknow.

To keep things in mind that as the ever –changing competitive business environment. New thought and idea should pour into and research and development to innovate the existing, which should be beyond competitiors comprehension.

This study enable the user with answer to formulate an effective financial strategy with a broader prospective to tap areas where it did not feel the earlier ,hence the decision of whether to penetrate this section or not can be found out at the end of the balance sheet analysis.

It also gives ideas of the potential of our business in the future and fluctuation in price from time to time product to product.

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INTRODUCTION

OBJECTIVE

The following objectives would be met by to understand the financial analysis of Parag milk industry

Analysis of working capital of Parag milk industry’.

What is need of working capital?

When, where and how working capital need fulfill.

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Working Capital Management

A managerial accounting strategy focusing on maintaining efficient levels of both components of working capital, current assets and current liabilities, in respect to each other. Working capital management ensures a company has sufficient cash flow in order to meet its short-term debt obligations and operating expenses.

A few key performance ratios of a working capital management system are the working capital ratio, inventory turnover and the collection ratio. Ratio analysis will lead management to identify areas of focus such as inventory management, cash management, accounts receivable and payable management.

Working Capital Needs

Your working capital is used to pay short-term obligations such as your accounts payable and buying inventory. If your working capital dips too low, you risk running out of cash. Even very profitable businesses can run into trouble if they lose the ability to meet their short-term obligations. The calculator assists you in determining working capital needs for the next year.

Definitions

Annual growth

The percent of growth you expect your business to achieve over the next year.

Total current assets

This is any cash or asset that can be quickly turned into cash. This includes prepaid expenses, accounts receivable, most securities and your inventory.

Total current liabilities

This is a liability in the immediate future. This includes wages, taxes, and accounts payable.

Current ratio

Current Assets divided by current liabilities. Your current ratio helps you determine if you have enough working capital to meet your short-term financial obligations. A general rule of thumb is to have a current ratio of 2.0. Although this will vary by business and industry, a number above two may indicate a poor use of capital. A current ratio under two may indicate an inability to pay current financial obligations with a measure of safety.

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Working capital

Working capital is used by lenders to help gauge the ability for a company to weather difficult financial periods. Working capital is calculated by subtracting current liabilities from current assets. Due to differences in businesses and the fact that working capital is not a ratio but an absolute amount, it is difficult to predict what the ideal amount of working capital would be for your business. To calculate working capital requirements this calculator uses the "Current Ratio" to determine a target amount of working capital.

Impact of Working Capital Management on profitability

The Working capital management is to manage the firm’s current accounts to achieve a required balance among profitability and risk. Working capital management is important factor it is a management of current assets and current liabilities. It is directly affects the profitability of the firm. The main objective of this article is to determine the impact of account receivables days, inventory days, account payables days and cash conversion cycles on return on total assets and to analyze the variation in working capital needs and its impact on profitability.

Working capital management is important due to many reasons, current assets normally accounts for half of the total assets. Excessive level of current assets results in a valuable return on investment, however firm have shortages of current assets may face difficulties in maintaining smooth operations. Critical importance of net working capital is proportion of total financing requirement. Higher working capital results higher profitability.

The main objective of every firm is maximizing profit but companies prevent them from liquidity also, to avoid this there must be a balance between these two objectives of the firm. Working capital meets the short term financing requirements of any business. Lesser working capital may affect the profitability. Working capital management of the firm affects the profitability by different variables like average collection period, average payment period and cash conversion cycle. Working capital and profitability of the firm have opposite relation with each other.

The profitability of the firm can be enhance by adopted following ways first is increase the opportunity cost of the float. Second is transaction cost of moving cash should be increase within and between countries. The profitability of the firm and its value is also effect through the working capital management because profitability and risk of the firm become low due to the greater increase in investment in current assets.

Specific research study on the impact of working capital management on profitability is scanty, especially in Pakistan. This area of study in developing countries and especially in Pakistan is ignored area. The management creates value for the shareholders by increasing inventory level, account receivable. The firms are capable to attaining competitive advantage by using affective and efficient utilization of resources.

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Working capital is the lifeblood of every firm. If it is managing efficiently it is beneficial for firm because it has a direct impact on firm’s profitability but inefficient working. Capital management negatively impacts the firm’s profitability. This article provides essential, additional and different evidence on WCM and its impact on profitability.

Permanent & Temporary Working Capital

There are 2 kinds of working capital. These are

i. Permanent Working capital and ii. Temporary Working capital.

1. Permanent Working capital

Permanent working capital refers to the minimum amount of all current assets that is required at all times to ensure a minimum level of uninterrupted business operations. Some minimum amount of raw materials, work-in-progress, bank balance, finished goods etc., a business has to carry all the time irrespective of the level of manufacturing or marketing operations. This level of working capital is referred to as core working capital or core current assets. But the level of core current assets is not a constant sum at all the times. For a growing business the permanent working capital will be rising, for a declining business it will be decreasing and for a stable business it will almost remain the same with few variations. So, permanent working capital is perennially needed one though not fixed in volume. This part of the working capital a permanent investment needs to be financed through long-term funds.

2. Temporary Working capital

The temporary or varying working capital varies with the volume of operations. It fluctuates with the scale of operations. This is the additional working capital required from time to time over and above the being permanent or fixed working capital. During seasons, more production/sales take place resulting in larger working capital needs. The reverse is true during off-seasons. As seasons vary, temporary working capital requirement moves up and down. Temporary working capital can be financed through short term funds like current liabilities. When the level of temporary working capital moves up, the business might use short-term funds and when the level for temporary working capital recedes, the business may retire its short-term loans.

Both permanent and temporary working capitals are necessary to facilitate the sales and production process through operating cycle.

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Financing Working Capital

The financing of working capital is of utmost important. What portion of current assets should be financed by current liabilities? What portion should be financed by long-term resources? Decisions on these questions will determine the financing mix.

There are 3 basic approaches to determine an appropriate financing mix. They are

a. Hedging or Matching approach. b. Conservative approach. c. Trade-off between the above two.

a. Hedging approach:

1. The term hedging can be said to refer to a process of matching maturities of debt with the maturities of financial needs. According to this approach, the maturity of the sources of funds should match the nature of the assets to be financed. For the purpose of analysis, the assets can be broadly classified into two Those assets which are required in a certain amount for a given level of operation and hence do not vary over time

2. Those assets which fluctuate over time.

The hedging approach suggests that the long-term funds should be used to finance the fixed portion of current assets requirements. Purely temporary requirements, i.e., the seasonal variations over and above the permanent financing needs should be appropriately financed with short-term funds.

b. Conservative approach:

This approach suggests that the estimated requirements of total funds should be met from long-term sources; the use of short-term funds should be restricted to only emergency situations or when there is an unexpected outflow of funds.

c. Aggressive approach:

This approach uses more of short-term funds to finance even the permanent current assets.

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The following chart gives a summary of the relative costs and benefits of the three different approaches classes:

Factors Hedging Approach

Conservative Approach

Aggressive Approach

Liquidity Moderate More Less

Profitability Moderate Less More

Risk Moderate Less More

The risk preferences of the management shall decide the approach to be adopted. The risk-neutral will adopt the hedging approach, the risk averse the conservative approach and the risk seekers will adopt the aggressive approach.

Debt Vs Equity

Debt financing involves both short-term debt and long-term debt and equity financing involves only long-term financing. The financing mix of the working capital depends upon the risk preferences of the management. Cost of different type of funds, the long-term and short-term, the return on different type of current assets, risk-bearing ability of the concern, liquidity, levels etc., have to be considered to decide the financing of working capital.

Debt financing involves fixed interest rates and allowed as an expense for tax purposes. But the risk involved in debt-financing is also high as the company is liable to pay the fixed interest

periodically. Whereas in equity financing, the risk is comparatively lower than debt financing because there is no fixed obligation on the part of the company to pay periodically their dividends. If the company has sufficient profits, they can decide to pay dividends. They may even decide to retain their earnings to finance future requirements. But the cost of financing through equity would be higher as they are not allowed as an expense for tax purposes.

Companies adopting hedging approach would optimally use long-term funds to finance fixed portion of current assets requirement. In manufacturing companies there may be requirement to always maintain some amount of inventory in raw materials or finished goods to ensure smooth production and business. This fixed portion of current assets may be financed through either debt or equity after evaluating the costs of both types of financing. Whereas, other temporary current assets may be financed through current liabilities or short-term funds like bank-overdraft, short-term loans, accounts payable etc.Companies adopting aggressive approach may finance even the fixed portion of their current assets through short-term funds or may take risk by financing through accounts or notes payables. Companies adopting conservative approach will take less risk and finance even their temporary portion of current assets through long-term sources of finance and especially equity to lesser the risk. Thus, we can say that the risk preference of the company management decides the financing mix of working capital.

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PART-I

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INDUSTRIAL PROFILE

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Parag Dairy – March Towards Excellence

Lucknow is the capital city of Uttar Pradesh. Total area of district is 2528 square km. 91588 hectare

is cultivated land. Wheat and rice is the main agriculture production of district. 69% of farmers are

small and medium level farmers who have about 1 acre land each. Lucknow Producer’s Cooperative

Milk Union Ltd. (Parag Dairy Lucknow) was established in 1938. Lucknow Milk Union is the first

Co-operative Diary established in India. Very few people know the fact that the process developed

by Lucknow Milk Union was later used in spirit in Gujrat co-operative milk movement and is now

famous as “Anand Pattern”. Lucknow Milk Union was then chosen as one of the model dairy to

implement Operation Flood Programme started by the National Dairy Development Board (NDDB)

in 1970. Present handling capacity of plant is 1, 50,000.

The aim of Lucknow Milk Union is to provide reasonable price to farmers thereby defending

then from exploitation of milk vendors and earn supplementary income apart from agriculture. On

the other hand the Milk Union supplies high quality pure Milk & Milk Products at reasonable prices

to urban consumers under the brand name “PARAG”. Presently milk union is procuring milk from

658 functional societies and 32125 milk producer members are getting reasonable price of their milk

production.

The Milk Union has been running “Clean Milk and Breed Conservation Programs” under

UPDASP where milk producers have been educated in producing and supplying milk under clean

and hygienic conditions and provided the producers with semen of pure Indian breed for the

improvement of the present breed of animals. Emergency veterinary treatment service is also

provided by milk union to milk producers/farmers on cost basis. Farmers are purchasing milking

animals Under Mini Dairy Project. Lucknow Milk Union has established women dairy societies in

rural area for assuring the women participation in milk production.

Lucknow Milk Union is establishing Auto Milk Collection Units (AMCU) in societies for

giving transparent payment system for milk given by farmers by the establishment of these machines

farmers are getting full price and actual detail of FAT & SNF of their milk. Presently AMCU are

running successfully in 259 societies. 27 BULK MILK COOLERS are established in various rural

areas of Lucknow for keeping high quality of milk procured in those areas by milk societies

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Lucknow Milk Union provided Dewormer, Mastitis & tic control kit, khurpaka-muhpaka,

Haemorrhagic Septicemia vaccination free of cost to the milk producers of the societies in the

Technical Input Program Under district plan in year- 07-08 and year-08-09. Presently, under

Artificial Insemination Program, the milk union is running breeding program for animals (Cow &

Buffalo) by establishing 30 centers in various societies. This facility is provided to the milk

producers of 125 villages at their home by these A.I. centers.

Lucknow Milk Union is providing emergency Veterinary treatment service at the home of

milk producers on their call/information by competent Veterinary doctors. This facility is provided

by the organization under pilot project from so many years.

Lucknow Milk Union has set up of teams for “Quality Check and Health Awareness

Program” for the urban consumers of milk. The teams visit different localities in city, tests their milk

and provides on the spot results to the consumers. The Milk Union also organizes school children’s

visit to its dairy plant to create awareness on milk processing and other related systems amongst

them. The Milk Union has obtained ISO & HACCP certification in year 2007.

For coming months, Lucknow Milk Union has committed itself to provide a minimum of 1,

60,000 liters of high quality “Parag” milk per day to the urban consumers. Apart from selling milk in

pouches, the Milk Union is also gearing itself to provide fresh loose milk to the city consumers.

Towards this end, the milk supply vehicles insulated with Japanese eco-friendly standards have

already been introduced in various areas of the city. 87 All Time Milk Booths (ATM) are established

for supply of high quality milk to the consumers round the clock.

Lucknow Milk Union is able to maintain high quality standards in its Milk and Milk products

through close monitoring of processes in all its stages of production, processing and packaging.

The constant increase in the sale figures of the Milk Union are a reflection of our sincere

efforts and he growing confidence of the consumers in PARAG Milk Products.

The organization has a chain of around 2000 agents providing employment to the

unemployed youths. “Door to Door Milk Delivery System” through mini insulated tanker thru

commission agents with attractive commission rates has been started in the city. The requirement for

this system is to have a mini insulated tanker for which one has to arrange finances up to Rs.50000/-

himself and rest amount comes through bank finance. The new milk products launched by the Milk

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Union such as Chhena kheer, Besan Laddoo and Arogya Vardhak Chhachh (Butter Milk), Gulab

Jamun, Rasgulla ,Vaccum packed Paneer have begun tickling the taste buds of the consumers giving

them great pleasure and value for money.

The steady sales progress of the Milk Union is reflected from the fact that from an average

sale of 94,460 lit. of liquid milk per day in the year 2002-03 the sale grew to 1,30,333 lit, per day in

the year 2009-10 and during the year i.e. 2010-11 the sale stands at 124016 lit. per day till 30TH

June-10.The sales turnover of the Milk Union has grown from Rs. 64.07 Crores in the year 2002-03

to Rs. 146.52 Crores in the year 2008-09. The net profit the Milk Union has grown from Rs. 0.84

Crores in the year 2002-03 to. Rs. 1.00 Crores in the year 2008-09.

Presently Lucknow Milk Union is providing reasonable price of milk to the farmers of terrain region

linked to Nepal such as district of Lakhimpur, Behraich, Gonda, Basti, Balrampur, Gorakhpur

including Sitapur, Hardoi, Barabanki, Sultanpur, Raibareli, Faizabad, Shahjahanpur near by districts

of Lucknow obtained under the SMG scheme and after processing this milk, milk and milk related

products, it is being sold in Lucknow, Raibareli, Sultanpur, Barabanki and Sitapur at reasonable

rates to the consumers.

Providing the reasonable rates to the farmers of the above mentioned districts and providing

the consumers the milk and milk related products according to their needs, Lucknow Milk Union is

using more than 122% of its handling capacity of milk.

In the coming years Lucknow milk union will not be able to fulfill above mentioned aims by present

capacity of plant so a new dairy plant at Chak Gajariya Farm situated at Sultanpur road of

5.00 lakh liter capacities per day is proposed, Including a 30 ton capacity powder plant and

machinery for value added milk products production is also proposed.

The march of Lucknow Milk Union (PARAG DAIRY) towards success and excellence

continues.

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Background

The study looks at performance of Pradeshik dairy cooperative federation(PCDF), an apex body of dairy cooperative societies in largest state of India where approach to gain benefits from mutual cooperation of villagers could not work while it worked successfully in different part of the country and brought about revolutionary changes in the life of rural poor. The research paper aims to focus on function of mutual cooperation approach for developmental initiatives that integrate masses in an organizational support system. The study has thrust on role of cooperative dairy federation of Uttar Pradesh (UP) and its contribution in value addition and growth of rural economy. Analysis of challenges of the sector in my research is embedded in untapped opportunities in dairy sector by federation of cooperatives in UP. Cooperative movement is considered a milestone in Indian planning process for increasing people’s participation in planning and economic well being of larger segment of the society. In western Indian province of Gujarat, a dairy co-operative movement was instrumental in checking malpractices adopted by vendors and agents of private dairies. They exploited farmers during surplus milk production by deciding prices arbitrarily to maximize profit and compelling farmers to sale their products at minimum cost. The cooperative movement in the area of dairy development also became instrument of change in import reduction of dairy products underpinning import substitution policy of India, poverty alleviation, creation of jobs in non-agriculture sector and inculcating commercial approach in traditional area of animal husbandry.

Operation Flood (OF) programme is basic part of success story of Indian dairy development. It was launched in July 1970 to create a flood of milk by helping producers at village level based on Anand pattern (Singh, K.,et al., 1984) OF appeared as one of the most promising events in the field of rural development. (UN/FAO, 1981) The program expanded production, processing, marketing and professional management capabilities in village and metropolitan centres. OF was positioned in a social context with developmental objectives and an emphasis on grass root level participation. (Kamath, M.V., 1996, 156) It envisaged objective of organising producers for profits who were economically and socially backward in Indian social system of caste based hierarchies. As a result of these efforts, India surpassed United States to become largest producer of milk in the world with production volume of 84 million tons in 2001 but annual milk yield per dairy animal was one tenth of the yield in US and one fifth of the yield of a New Zealand dairy cow. (Planning Commission of India, 2002; 5)OF along with Anand pattern based on three tier cooperative system in diversified conditions has significance in context of UP with reference to organisational efforts by PCDF in replication of the later. PCDF created on April 23, 1962 is an apex cooperative society of the cooperative milk unions.

Dairy apart from economic activity symbolizes integration of rich and poor in socio political arenas including electoral politics as a result of moral and religious sanctity accorded to it. It was asserted by policy makers that promotion of dairy tackled three obstacles of caste, class and power which frustrated earlier programs of rural development. (Attwood, D.W., et al., 1988; 346) Rural poverty alleviation programs experienced hurdles of local politics and social exclusion of down trodden people resulting in poor outcomes. UP apart from being India’s most populated province happens to be world’s largest sub national entity. Poverty being intertwined phenomenon of large population, emphasis of government schemes remained on eradication of poverty through allied activities and PCDF became one of the instrument to achieve this goal. Planners realized importance of other spheres for rural development where dairy provided an unconventional method for engaging people.

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According to the National Sample Survey Organization (NSSO), in 2004-2005 livestock sector created regular employment to about 11.44 million persons in principal status and 11.01 million in subsidiary status, which constitute about 5.50% of the total work force. Out of the 22.44 million in animal husbandry occupation, 16.84 millions are females. Any progress here would automatically enhance balanced development of rural economy. Amenities to farmers, better veterinary services and creation of new dairy processing plants offered prospectus to capture potential markets for milk distribution and catered to demands of urban masses. Consumption of dairy products becomes especially relevant for large vegetarian segment of Indian population as an alternative source of animal protein. (Karmarkar, K.G. et al., 2006). Product demands of vegetarians needed new interventions offered in the form of increased milk production. Dairy sector gained significance after successful implementation of Anand model of cooperatives in Gujarat that offered realistic approach to realize traditional forms of mutual support in modern mechanisms. A comparative achievement of major milk producing states in the country as evident from figure1 raises questions about more efficient system in less milk producing Gujarat Province compared to UP.

Figure 1: Pie chart showing share of UP in milk production in India

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7.44

9.439.16

18.2

Milk Production in Major Provinces in Percentage

Andhra Pradesh Gujrat

Punjab Rajasthan

Uttar Pradesh

(Source: Department of Animal Husbandry, Dairying and Fisheries, Government of India, Year 2007-2008)

Share of UP in total milk population of India was about 16% in 2001 and milk production is 18% while in another north Indian state of Punjab despite the having 2% of the population of country, the milk production was as high as 9%. As per Ministry of Agriculture, Government of India (GOI), (Figure 1) the per capita availability of milk was 273 gms/day in Uttar Pradesh in comparison to Punjab where it was 962 gms/day in 2007-2008. Comparison of per capita consumption of milk show that despite being largest milk producing area it performs poorly in terms of quantity of milk supply to its citizens. Milk consumed on farm is two third of total production and rest of it go to informal channel of markets run by private traders. Economy of India is still based on agriculture and expansion and management of other related occupations are necessary to present better future perspectives for rural poor. Increase in rural household income translates in to better chance of respectful life and bridges gaps of inequality. Even after receiving a substantial amount of loans and

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Raw milk produced on farm

Milk consume on farm Milk sold to trader

Formal Sector Informal Sector

Liquid milk

Milk products

Liquid milk

Milk products

grants during OF, marketing still remains domain of small traders who maximize profit with corrupt practices. Small producers after retaining milk for self-consumption sell the product to middlemen for below market price due to liabilities such as repayment of loans for purchase of animals and for performing social obligations. The buyer sells to direct consumers and in market for processing and conversion to bye-products to informal and formal market agencies. Exploitation of farmers occurs due to lack of marketing facilities for perishable item like milk and compels rural households to sell their product to middleman on lesser prices in the absence of robust marketing infrastructure.

Relational Overview of Dairy and Organisational Structures

Organizational dimensions, socio-economic and political aspects of a successful plan have theoretical conceptualizations determining working environment which affect achievements. Organization can survive with poor performance and dismal outcomes. Continuance of any organizational goal despite its inability to provide returns can be examined through contextual comparison of similar organizations. Cooperatives in India were expected to work as an instrument of rural development because of the assumption of elite idea that rural life embedded in cooperative solidarity and provisions of institutional framework mobilizes shared aims for nation building. (Baviskar, A., 1988) Cooperative institution’s success generates formal and informal cooperation among villagers. Reforms in one administrative entity of same or different geographical area work differently with dissimilar outcomes. In the district dairy, milk union’s administrative complexity exists due to dual structures. Apart from district unions the offices of district dairy development officer (DDOs) coexist in different life words. Replication of any successful model without considering local circumstances as a precondition for positive outcomes can have reverse effect. Entrepreneurship activities of Gujarat presents different outcomes in UP since commitment of local people to realize transformation depend upon many variables present in traditional system or unseen external forces. Adopted strategy was practiced for providing aid to invest in creating infrastructure for dairy development in the country (Mascaenhas, 1988) Patterns for distribution of aid, grants and fund mobilization need further investigations to understand rationale of replication of a model in different or similar working conditions. Milk related activities change with time, distance and context.

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PART-2

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INTRODUCTION OF PROJECT

Project is related to conduct financial analysis performance of Parag milk industry and analysis of working capital of parag industry. I

WORKING CAPITAL

Working Capital Meaning: - Capital required for a business can be classified under two main

categories via,

1)     Fixed Capital

2)     Working Capital

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

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

fixed assets such as p&m, land, building, furniture, etc. Investments in these assets represent that part

of firm’s capital which is blocked on permanent or fixed basis and is called fixed capital. Funds are

also needed for short-term purposes for the purchase of raw material, payment of wages and other

day – to- day expenses etc.

These funds are known as working capital. In simple words, working capital refers to that part

of the firm’s capital which is required for financing short- term or current assets such as cash,

marketable securities, debtors & inventories. Funds, thus, invested in current assts keep revolving

fast and are being constantly converted in to cash and this cash flows out again in exchange for other

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

Working Capital Meaning: - Capital required for a business can be classified under two main

categories via,

1)     Fixed Capital

2)     Working Capital

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        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 p&m, land, building, furniture, etc. Investments in these assets represent that part

of firm’s capital which is blocked on permanent or fixed basis and is called fixed capital. Funds are

also needed for short-term purposes for the purchase of raw material, payment of wages and other

day – to- day expenses etc.

These funds are known as working capital. In simple words, working capital refers to that part

of the firm’s capital which is required for financing short- term or current assets such as cash,

marketable securities, debtors & inventories. Funds, thus, invested in current assts keep revolving

fast and are being constantly converted in to cash and this cash flows out again in exchange for other

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

     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

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.

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To provide credit facilities to the customer.

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

finished stock.

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

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

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

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

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

will be the requirements of the working capital.

The requirement of the working capital goes on increasing with the growth and expensing of the

business till it gains maturity. At maturity the amount of working capital required is called

normal working capital.

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

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 sale

only and supply services not products, and no funds are tied up in inventories and

receivables. On the other hand the trading and financial firms requires less investment in

fixed assets but have to invest large amt. of working capital along with fixed investments.

2.  SIZE OF THE BUSINESS: Greater the size of the business, greater is the requirement of

working capital.

3.  PRODUCTION POLICY: If the policy is to keep production steady by accumulating

inventories it will require higher working capital.

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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.

DEBTORS

CASH                                 FINISHED GOODS

 

RAW MATERIAL                        WORK IN PROGRESS

  

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.

9.     BUSINESS CYCLE: In period of boom, when the business is prosperous, there is need

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

of business, etc. On the contrary in time of depression, the business contracts, sales

25

decline, difficulties are faced in collection from debtor and the firm may have a large amt.

of working capital.

10. RATE OF GROWTH OF BUSINESS: In faster growing concern, we shall require large

amt. of working capital.

11. EARNING CAPACITY AND DIVIDEND POLICY: Some firms have more earning

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

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

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

steady high rate of cash dividend irrespective of its profits needs working capital than the

firm that retains larger part of its profits and does not pay so high rate of cash dividend.

12. PRICE LEVEL CHANGES: Changes in the price level also affect the working capital

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

Others FACTORS: These are:

    Operating efficiency.

     Management ability.

     Irregularities of supply.

     Import policy.

     Asset structure.

     Importance of labor.

     Banking facilities, etc.

 

MANAGEMENT OF WORKING CAPITAL

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

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

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

satisfactory level of working capital is maintained, i.e. it is neither adequate nor excessive as

26

both the situations are bad for any firm. There should be no shortage of funds and also no

working capital should be ideal. WORKING CAPITAL MANAGEMENT POLICES of a

firm has a great on its probability, liquidity and structural health of the organization. So

working capital management is three dimensional in nature as

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

risk.

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

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

 

27

WORKING CAPITAL OF PARAG MILK INDUSTRY

Parag Milk Industry works in three seasons, all season have four months:-

1) Lean season - (May, June, July, August) In this season milk production rate decreases.

2) Mean season - (March , April, September, October ) In this season milk production rate is normal.

3) Plus season – (November, December, January, and February) In this season milk production rate is increasesed.

In winter season milk production rate is high (November, December,January, February) .The demand of milk and all milk product is less in the market. The firm in this season have lots of milk but demand of milk in market is less so then in this season Parag Milk industry’s liquid milk is converted into the Powder milk and Butter.

Firm make stocks of powder milk and butter and maintain own suppliers (raw materials) and timely pays money to own suppliers. Parag Milk Industry finishes the transaction to own suppliers in 10 days as like (1-10days,10-20days and 20 -30 days).

In winter season Milk demand in market is down. Earning of Parag industry falls down but in this condition firm maintains its own suppliers .The winter seasons suppliers provides large amount of milk (raw material) to industry. In this seasons fund is very less in the Parag industry. They take loans from banks and other financial institution forthe powder milk and butter stocks . They submit security to banks in terms of powder milk then bank funds the Parag industry.

In summer seasons suppliers provides milk in very low quantity but in this seasons milk and milk product demand is very high in the market and requirement of milk in the market day by day increases ,milk is limited. In this period Parag industry converts powder milk and butter in to the liquid milk and fulfill market demand. In summer season Parag industry cash transaction is about 45 to 60 lakhs per day. Sale in summer season increases in comparison to other seasons. In winter season Parag industry cash transaction is about 35 to 50 lakhs per day. Parag industry takes loans in winter and pays it of in summers

This process of maintaining cash is known as process of maintaining industrial working capital.

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ANALYSIS OF WORKIG CAPITAL OF PARAG AND RATIO

WORKING CAPITAL ANALYSIS

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

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

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

the firm is totally effected by the management of working capital. So, a study of changes in the uses

and sources of working capital is necessary to evaluate the efficiency with which the working capital

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

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

1.     Ratio analysis.

2.     Fund flow analysis.

3.     Budgeting.

 

1.    RATIO 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 following ratios can be calculated for these purposes:

1. Current ratio.

2. Quick ratio

3.  Absolute liquid ratio

4.  Inventory turnover.

29

5.  Receivables turnover.

6.  Payable turnover ratio.

7.  Working capital turnover ratio.

8.  Working capital leverage

9.  Ratio of current liabilities to tangible net worth.

 

2.    FUND FLOW ANALYSIS

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 of: 

a.      Preparing schedule of changes of working capital

b.     Statement of sources and application of funds.

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

business enterprise between beginning and ending of the financial dates. 

3.    WORKING CAPITAL BUDGET

A budget is a financial and / or quantitative expression of business plans and polices to be

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

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

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

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

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

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

30

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

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

ANALYSIS OF SHORT – TERM 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. Two

types of ratios can be calculated for measuring short-term financial position or short-term

solvency position of the firm.

1.     Liquidity ratios.

2.     Current assets movements ‘ratios.

 

A)   LIQUIDITY RATIOS

Liquidity refers to the ability of a 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 assts. The current assets should either be liquid or near about liquidity. These

should be convertible in cash for paying obligations of short-term nature. The sufficiency or

insufficiency 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

31

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 assets and current liabilities. Thus,

CURRENT RATIO = CURRENT ASSETS 

                                     CURRENT LIABILITES

The two components of this ratio are:

1)     CURRENT ASSETS

2)     CURRENT LIABILITES

Current assets include cash, marketable securities, bill receivables, sundry debtors,

inventories and work-in-progresses. Current liabilities include outstanding expenses, bill

payable, dividend payable etc.

A relatively high current ratio is an indication that the firm is liquid and has the ability to

pay its current obligations in 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 2:1 i.e. current assets double

the current liabilities is considered to be satisfactory.

32

CALCULATION OF CURRENT RATIO

                                                                              (Rupees in crore)

e.g.

Year 2006 2007 2008

Current Assets 81.29 83.12 13,6.57

Current Liabilities 27.42 20.58 33.48

Current Ratio 2.96:1 4.03:1 4.08:1

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 years it has increased from 2006 to 2008. The current ratio of

company is more than the ideal ratio. This depicts that company’s liquidity position is

sound. Its current assets are more than its current liabilities.

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 firms’ capacity to pay off current obligations immediately.

QUICK RATIO = QUICK ASSETS

                               CURRENT LIABILITES

Where Quick Assets are:

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1)           Marketable Securities

2)           Cash in hand and Cash at bank.

3)           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 firms’ liquidity

position 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.

CALCULATION OF QUICK RATIO

e.g.                                                              (Rupees in Crore)

Year 2005 2009 2010

Quick Assets 44.14 47.43 61.55

Current Liabilities 27.42 20.58 33.48

Quick Ratio 1.6 : 1 2.3 : 1 1.8 : 1

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. Company’s quick ratio is more than

ideal ratio. This shows company has no liquidity problem.

3. ABSOLUTE LIQUID RATIO

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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 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 LIABILITES

ABSOLUTE LIQUID ASSETS = CASH & BANK BALANCES.

e.g.                                                          (Rupees in Crore)

Year 2005 2009 2010

Absolute Liquid Assets 4.69 1.79 5.06

Current Liabilities 27.42 20.58 33.48

Absolute Liquid Ratio .17 : 1 .09 : 1 .15 : 1

Interpretation :

       These ratio shows 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. In India, firms have credit limits sanctioned from banks and can easily

draw cash.

B) CURRENT ASSETS MOVEMENT 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, large is the amount of sales and profits. Current assets movement

ratios measure the efficiency with which a firm manages its resources. These ratios are

called turnover ratios because they indicate the speed with which assets are converted or

35

turned over into sales. Depending upon the purpose, a number of turnover ratios can be

calculated. These are :

1.                 Inventory Turnover Ratio

2.                 Debtors Turnover Ratio

3.                 Creditors Turnover Ratio

4.                 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 TURNOVER 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 OF GOOD 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. Where as low inventory turnover ratio indicates the inefficient

management of inventory. A low inventory turnover implies over investment in

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inventories, dull business, poor quality of goods, stock accumulations and slow

moving goods and low profits as compared to total investment.

AVERAGE STOCK  =   OPENING STOCK + CLOSING STOCK

                                                                 2

                                                      (Rupees in Crore)

Year 2005 2009 2010

Cost of Goods sold 110.6 103.2 96.8

Average Stock 73.59 36.42 55.35

Inventory Turnover Ratio 1.5 times 2.8 times 1.75 times

Interpretation :

       This ratio shows how rapidly the inventory is turning into receivable through sales. In

2007 the company has high inventory turnover ratio but in 2008 it has reduced to 1.75

times. This shows that the company’s inventory management technique is less efficient as

compare to last year.

2.                 INVENTORY CONVERSION PERIOD:

INVENTORY CONVERSION PERIOD =   365 (net working days)

                                                INVENTORY TURNOVER RATIO

e.g.

Year 2005 2009 2010

Days 365 365 365

Inventory Turnover Ratio 1.5 2.8 1.8

Inventory Conversion Period 243 days 130 days 202 days

37

Interpretation :

       Inventory conversion period shows that how many days inventories takes to convert

from raw material to finished goods. In the company inventory conversion period is

decreasing. This shows the efficiency of management to convert the inventory into cash.

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 tying 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 ratio can be calculated to evaluate the quality of debtors.

a)       Debtors Turnover Ratio

b)      Average Collection Period

DEBTORS TURNOVER RATIO = TOTAL SALES (CREDIT)

                                                         AVERAGE DEBTORS

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

year. Generally higher the value of debtor’s turnover ratio the more efficient is the

management of debtors/sales or more liquid are the debtors. Whereas a low debtors

turnover ratio indicates poor management of debtors/sales and less liquid debtors. This ratio

should be compared with ratios of other firms doing the same business and a trend may be

found to make a better interpretation of the ratio.

AVERAGE DEBTORS= OPENING DEBTOR+CLOSING DEBTOR

                                                     2

38

e.g.

Year 2005 2009 2010

Sales 166.0 151.5 169.5

Average Debtors 17.33 18.19 22.50

Debtor Turnover Ratio 9.6 times 8.3 times 7.5 times

Interpretation :

       This ratio indicates the speed with which debtors are being converted or turnover into

sales. The higher the values or turnover into sales. The higher the values of debtors

turnover, the more efficient is the management of credit. But in the company the debtor

turnover ratio is decreasing year to year. This shows that company is not utilizing its

debtors efficiency. Now their credit policy becomes liberal as compare to previous year.

4.                 AVERAGE COLLECTION PERIOD:

Average Collection Period =    No. of Working Days

                                             Debtors Turnover Ratio

The average collection period ratio represents the average number of days for which a

firm has to wait before its receivables are converted into cash. It measures the quality of

debtors. Generally, shorter the average collection period the better is the quality of debtors

as a short collection period implies quick payment by debtors and vice-versa.

Average Collection Period =      365 (Net Working Days)  

                                             Debtors Turnover Ratio

Year 2005 2009 20010

Days 365 365 365

Debtor Turnover Ratio 9.6 8.3 7.5

Average Collection Period 38 days 44 days 49 days

39

Interpretation :

          The average collection period measures the quality of debtors and it helps in

analyzing the efficiency of collection efforts. It also helps to analysis the credit policy

adopted by company. In the firm average collection period increasing year to year. It shows

that the firm has Liberal Credit policy. These changes in policy are due to competitor’s

credit policy.

5.                 WORKING CAPITAL TURNOVER RATIO :

Working capital turnover ratio indicates the velocity of utilization of 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 =           Cost of Sales

                                                        Net Working Capital

 

Working Capital Turnover       =                   Sales                

                                                        Networking Capital

 

e.g.

Year 2005 2009 2010

Sales 166.0 151.5 169.5

Networking Capital 53.87 62.52 103.09

Working Capital Turnover 3.08 2.4 1.64

40

Interpretation :

          This ratio indicates low much net working capital requires for sales. In 2008,

the reciprocal of this ratio (1/1.64 = .609) shows that for sales of Rs. 1 the company requires

60 paisa as working capital. Thus this ratio is helpful to forecast the working capital

requirement on the basis of sale.

INVENTORIES

(Rs. in Crores)

Year 2005-2006 2006-2007 2007-2008

Inventories 37.15 35.69 75.01

Interpretation :

       Inventories is a major part of current assets. If any company wants to manage its

working capital efficiency, it has to manage its inventories efficiently. The graph shows that

inventory in 2005-2006 is 45%, in 2006-2007 is 43% and in 2007-2008 is 54% of their

current assets. The company should try to reduce the inventory upto 10% or 20% of current

assets.

CASH BNAK BALANCE :

(Rs. in Crores)

Year 2005-2006 2006-2007 2007-2008

Cash Bank Balance 4.69 1.79 5.05

Interpretation :

       Cash is basic input or component of working capital. Cash is needed to keep the

business running on a continuous basis. So the organization should have sufficient cash to

meet various requirements. The above graph is indicate that in 2006 the cash is 4.69 crores

41

but in 2007 it has decrease to 1.79. The result of that it disturb the firms manufacturing

operations. In 2008, it is increased upto approx. 5.1% cash balance. So in 2008, the

company has no problem for meeting its requirement as compare to 2007.

DEBTORS :

Interpretation :

       Debtors constitute a substantial portion of total current assets. In India it constitute one

third of current assets. The above graph is depict that there is increase in debtors. It

represents an extension of credit to customers. The reason for increasing credit is

competition and company liberal credit policy.

 

CURRENT ASSETS :

(Rs. in Crores)

Interpretation :

       This graph shows that there is 64% increase in current assets in 2008. This increase is arise

because there is approx. 50% increase in inventories. Increase in current assets shows the liquidity

soundness of company.

 

CURRENT LIABILITY :

(Rs. in Crores)

Year 2004- 2005 2009-2010

Current Liability 27.42 20.58

42

Year 2004-2005 2009-2010

Current Assets 81.29 83.15

Interpretation :

       Current liabilities shows company short term debts pay to outsiders. In 2008 the current

liabilities of the company increased. But still increase in current assets are more than its

current liabilities.

 

NET WOKRING CAPITAL :

(Rs. in Crores)

Year 2004-2005 2009-2010

Net Working Capital 53.87 62.53

Interpretation :

       Working capital is required to finance day to day operations of a firm. There should be

an optimum level of working capital. It should not be too less or not too excess. In the

company there is increase in working capital. The increase in working capital arises because

the company has expanded its business.

43

RESEARCH METHODOLOGY

The methodology, I have adopted for my study is the various tools, which basically analyze critically

financial position of to the organization: 

I. COMMON-SIZE P/L A/C

II. COMMON-SIZE BALANCE SHEETIII. COMPARTIVE P/L A/CIV. COMPARTIVE BALANCE SHEETV. TREND ANALYSIS

VI. RATIO ANALYSIS

 

The above parameters are used for critical analysis of financial position.  With the evaluation of each

component, the financial position from different angles is tried to be presented in well and systematic

manner. By critical analysis with the help of different tools, it becomes clear how the financial

manager handles the finance matters in profitable manner in the critical challenging atmosphere, the

recommendation are made which would suggest the organization in formulation of a healthy and

strong position financially with proper management system.

I sincerely hope, through the evaluation of various percentage, ratios and comparative analysis, the

organization would be able to conquer its in efficiencies and makes the desired changes.

ANALYSIS OF FINANCIAL STATEMENTS

 

FINANCIAL STATEMENTS:

Financial statement is a collection of data organized according to logical and consistent accounting procedure to convey an under-standing of some financial aspects of a business firm. It may show position at a moment in time, as in the case of balance sheet or may reveal a series of activities over a

44

given period of time, as in the case of an income statement. Thus, the term ‘financial statements’ generally refers to the two statements

(1) The position statement or Balance sheet.

(2) The income statement or the profit and loss Account.

OBJECTIVES OF FINANCIAL STATEMENTS:

According to accounting Principal Board of America (APB) states

The following objectives of financial statements: -

1. To provide reliable financial information about economic resources and obligation of a business firm.

2. To provide other needed information about charges in such economic resources and obligation.

3. To provide reliable information about change in net resources (recourses less obligations) missing out of business activities.

4. To provide financial information that assets in estimating the learning potential of the business.

LIMITATIONS OF FINANCIAL STATEMENTS:

Though financial statements are relevant and useful for a concern, still they do not present a final picture a final picture of a concern. The utility of these statements is dependent upon a number of factors. The analysis and interpretation of these statements must be done carefully otherwise misleading conclusion may be drawn.

Financial statements suffer from the following limitations: -

1. Financial statements do not given a final picture of the concern. The data given in these statements is only approximate. The actual value can only be determined when the business is sold or liquidated.

2. Financial statements have been prepared for different accounting periods, generally one year, during the life of a concern. The costs and incomes are apportioned to different periods with a view to determine profits etc. The allocation of expenses and income depends upon the personal judgment of the accountant. The existence of contingent assets and liabilities also make the statements imprecise. So financial statement are at the most interim reports rather than the final picture of the firm.

3. The financial statements are expressed in monetary value, so they appear to give final and accurate position. The value of fixed assets in the balance sheet neither represent the value for which fixed assets can be sold nor the amount which will be required to replace these assets. The balance sheet is prepared on the presumption of a going concern. The concern is expected to continue in future. So

45

fixed assets are shown at cost less accumulated deprecation. Moreover, there are certain assets in the balance sheet which will realize nothing at the time of liquidation but they are shown in the balance sheets.

4. The financial statements are prepared on the basis of historical costs Or original costs. The value of assets decreases with the passage of time current price changes are not taken into account. The statement are not prepared with the keeping in view the economic conditions. the balance sheet loses the significance of being an index of current economics realities. Similarly, the profitability shown by the income statements may be represent the earning capacity of the concern.

5. There are certain factors which have a bearing on the financial position and operating result of the business but they do not become a part of these statements because they cannot be measured in monetary terms. The basic limitation of the traditional financial statements comprising the balance sheet, profit & loss A/c is that they do not give all the information regarding the financial operation of the firm. Nevertheless, they provide some extremely useful information to the extent the balance sheet mirrors the financial position on a particular data in lines of the structure of assets, liabilities etc. and the profit & loss A/c shows the result of operation during a certain period in terms revenue obtained and cost incurred during the year. Thus, the financial position and operation of the firm.

 

FINANCIAL STATEMENT ANALYSIS

It is the process of identifying the financial strength and weakness of a firm from the available accounting data and financial statements.

 

46

CLASSIFICATION OF RATIOS

Ratios can be classified in to different categories depending upon the basis of classification

The traditional classification has been on the basis of the financial statement to which the

determination of ratios belongs.

 These are:-

1. Profit & Loss account ratios

2. Balance Sheet ratios

3. Composite ratios

47

CONCLUSIONS

48

CONCLUSIONS

In 2007 there is increase in current assets by 24% than 2006and there is increase in current liability by 17%, because of  greater increase in current assets than in current liabilities, the position of Working capital has improved.

The % of Fixed Assets has come down in 2007 from 2006.

As per current ratio firm is able to pay its current liability.

Q u i c k r a t i o p r e s e n t s a b e t t e r t e s t o f s h o r t t e r m f i n a n c i a l  position, which shows better working capital position of firm.

D e b t e q u i t y r a t i o a n d d e b t t o t o t a l f u n d r a t i o p r e s e n t s  protection to long term lenders and shows sufficient working capital in the firm.

G.P. and N.P. have increased from previous year.

Cash flow statement indicates outflow of cash in comparison to past year.

Due to be t t e r long t e rm and shor t t e rm f inanc ia l cond i t ion firm’s working capital position is better than that of previous year.

49

SUGGESTIONAND

RECOMMANDATION

50

SUGGESTION AND RECOMMANDATION

The management of Working Capital is equal important as the management of long- term financial investment. The goal of working capital management is to ensure that the firm is able to continue its operations and that it has sufficient cash flow to satisfy both maturing short term debt and upcoming operational expenses.

The various possible steps that Parag Milk industry takes to improve its Working Capital management are as follows-

Availing more credit from its suppliers. Prompt collection it debtors.

51

LIMITATIONS

52

LIMITATIONS

Based on financial statements these statements suffer from certain limitations.

Affected by window dressing.

Company provides only secondary data, so certain type of bias is in study.

Unsuitable for forecasting 

53

ACRONYMS

54

ACRONYMS

BMC Bulk Milk Cooler

BO Butter Oil

ECA Essential Commodities Act

EEC European Economic Community

FAO Food And Agriculture Organization

FAOSTAT Food and Agriculture Organization Corporate Statistical Database

GATT General Agreement on Tariffs and Trade

GCMMF Gujrat Cooperative Milk Marketing Federation Limited

GDP Gross Domestic Product

GOI Government of India

GOUP Government of Uttar Pradesh

ICA International Cooperative Alliance

IGA Income Generating Activity

IRMA Institute of Rural Management

LLPD Lac Litre Per Day

MC Milk Commissioner

MCO Milk Commissioner Office

NABARD National Bank of Agricultrue and Rural Development

NCDFI National Cooperative Dairy Federation of India

NDDB National Dairy Development Board

NPC Nominal Protection Coefficients

NSSO National Sample Survey Organization

OF Operation Flood

PCDF Pradeshik Cooperative Dairy Federation

SHG Self Help Group

SMP Skimmed Milk Powder

UP Uttar Pradesh

UPDASP Uttar Pradesh Deivesified Agriculture support Project

US United States

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VMPCS Village Milk Prinmary Cooperative Socities

Glossary

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Glossary

Accounting period -- the period of time over which profits are calculated. Normal accounting periods are months, quarters, and years (fiscal or calendar).

Accounts payable -- amounts owed by the company for the goods or services it has purchased from outside suppliers.

Accounts receivable -- amounts owed to the company by its customers.

Accrual basis, system, or method -- an accounting system that records revenues and expenses at the time the transaction occurs, not at the time cash changes hands. If you buy a coat and charge it, the store records or accrues the sale when you walk out with the coat, not when you pay your bill. Cash basis accounting is used by individuals. Accrual basis accounting is used by most businesses.

Accrued expenses, accruals -- An expense which has been incurred but not yet paid for. Salaries are a good example. Employees earn or accrue salaries each hour they work. The salaries continue to accrue until payday when the accrued expense of the salaries is eliminated.

Aging -- a process where accounts receivable are sorted out by age (typically current, 30 to 60 days old, 60 to 120 days old, and so on.) Aging permits collection efforts to focus on accounts that are long overdue.

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Amortize -- To charge a regular portion of an expenditure over a fixed period of time. For example if something cost $100 and is to be amortized over ten years, the financial reports will show an expense of $10 per year for ten years. If the cost were not amortized, the entire $100 would show up on the financial report as an expense in the year the expenditure was made. (See entries on Expenditure and Expense.)

Appreciation -- An increase in value. If a machine cost $1,000 last year and is now worth $1,200, it has appreciated in value by $200. (The opposite of depreciation.)

Assets -- things of value owned by a business. An asset may be a physical property such as a building, or an object such as a stock certificate, or it may be a right, such as the right to use a patented process.

Current Assets are those assets that can be expected to turn into cash within a year or less. Current assets include cash, marketable securities, accounts receivable, and inventory.

Fixed Assets cannot be quickly turned into cash without interfering with business operations. Fixed assets include land, buildings, machinery, equipment, furniture, and long-term investments.

Intangible Assets are items such as patents, copyrights, trademarks, licenses, franchises, and other kinds of rights or things of value to a company, which are not physical objects. These assets may be the most important ones a company owns. Often they do not appear on financial reports.

Audit -- a careful review of financial records to verify their accuracy.

Bad debts -- amounts owed to a company that are not going to be paid. An account receivable becomes a bad debt when it is recognized that it won't be paid. Sometimes, bad debts are written off when recognized. This is an expense. Sometimes, a reserve is set up to provide for possible bad debts. Creating or adding to a reserve is also an expense.

Balance sheet -- a statement of the financial position of a company at a single specific time (often at the close of business on the last day of the month, quarter, or year.) The balance sheet normally lists all assets on the left side or top while liabilities and capital are listed on the right side or bottom. The total of all numbers on the left side or top must equal or balance the total of all numbers on the right side or bottom. A balance sheet balances according to this equation: Assets = Liabilities + Capital.

Bond -- a written record of a debt payable more than a year in the future. The bond shows amount of the debt, due date, and interest rate.

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Book value -- total assets minus total liabilities. (See also net worth.) Book value also means the value of an asset as recorded on the company's books or financial reports. Book value is often different than true value. It may be more or less.

Breakeven point -- the amount of revenue from sales which exactly equals the amount of expense. Breakeven point is often expressed as the number of units that must be sold to produce revenues exactly equal to expenses. Sales above the breakeven point produce a profit; below produces a loss.

Capital -- money invested in a business by its owners. (See equity.) On the bottom or right side of a balance sheet. Capital also refers to buildings, machinery, and other fixed assets in a business. A capital investment is an investment in a fixed asset with a long-term use.

Capitalize -- to capitalize means to record an expenditure on the balance sheet as an asset, to be amortized over the future. The opposite is to expense. For example, research expenditures can be capitalized or expensed. If expensed, they are charged against income when the expenditure occurs. If capitalized, the expenditure is charged against income over a period of time usually related to the life of the products or services created by the research.

Cash -- money available to spend now. Usually in a checking account.

Cash flow -- the amount of actual cash generated by business operations, which usually differs from profits shown.

Chart of accounts -- a listing of all the accounts or categories into which business transactions will be classified and recorded. Each account usually has a number. Transactions are coded by this number for manipulation on computers.

Contingent liabilities -- liabilities not recorded on a company's financial reports, but which might become due. If a company is being sued, it has a contingent liability that will become a real liability if the company loses the suit.

Cost of sales, cost of goods sold -- the expense or cost of all items sold during an accounting period. Each unit sold has a cost of sales or cost of the goods sold. In businesses with a great many items flowing through, the cost of sales or cost of goods sold is often computed by this formula: Cost of Sales = Beginning Inventory + Purchases During the Period - Ending Inventory.

Credit -- an accounting entry on the right or bottom of a balance sheet. Usually an increase in liabilities or capital, or a reduction in assets. The opposite of credit is debit. Each credit in a balance sheet has a balancing debit. Credit has other usages, as in "You have to pay cash, your credit is no good." Or "we will credit your account with the refund."

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Debit -- an accounting entry on the left or top of a balance sheet. Usually an increase in assets or a reduction in liabilities. Every debit has a balancing credit.

Deferred charges -- see prepaid expenses.

Deferred income -- a liability that arises when a company is paid in advance for goods or services that will be provided later. For example, when a magazine subscription is paid in advance, the magazine publisher is liable to provide magazines for the life of the subscription. The amount in deferred income is reduced as the magazines are delivered.

Depreciation -- an expense that is supposed to reflect the loss in value of a fixed asset. For example, if a machine will completely wear out after ten year's use, the cost of the machine is charged as an expense over the ten-year life rather than all at once, when the machine is purchased. Straight line depreciation charges the same amount to expense each year. Accelerated depreciation charges more to expense in early years, less in later years. Depreciation is an accounting expense. In real life, the fixed asset may grow in value or it may become worthless long before the depreciation period ends.

Discounted cash flow -- A system for evaluating investment opportunities that discounts or reduces the value of future cash flow. (See present value.)

Dividend -- a portion of the after-tax profits paid out to the owners of a business as a return on their investment.

Double entry -- a system of accounting in which every transaction is recorded twice -- as a debit and as a credit.

Earnings per share -- a company's net profit after taxes for an accounting period, divided by the average number of shares of stock outstanding during the period.

80 - 20 rule -- a general rule of thumb in business that says that 20% of the items produce 80% of the action -- 20% of the product line produces 80% of the sales, 20 percent of the customers generate 80% of the complaints, and so on. In evaluating any business situation, look for the small group which produces the major portion of the transactions you are concerned with. This rule is not exactly accurate, but it reflects a general truth, nothing is evenly distributed.

Equity – the owners' share of a business.

Expenditure -- an expenditure occurs when something is acquired for a business -- an asset is purchased, salaries are paid, and so on. An expenditure affects the balance sheet when it occurs. However, an expenditure will not necessarily show up on the income statement or affect profits at the time the expenditure is made. All expenditures eventually show up as expenses, which do affect the income statement

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and profits. While most expenditures involve the exchange of cash for something, expenses need not involve cash. (See expense below.)

Expense -- an expenditure which is chargeable against revenue during an accounting period. An expense results in the reduction of an asset. All expenditures are not expenses. For example, a company buys a truck. It trades one asset - cash - to acquire another asset. An expenditure has occurred but no expense is recorded. Only as the truck is depreciated will an expense be recorded. The concept of expense as different from an expenditure is one reason financial reports do not show numbers that represent spendable cash. The distinction between an expenditure and an expense is important in understanding how accounting works and what financial reports mean. (To expense is a verb. It means to charge an expenditure against income when the expenditure occurs. The opposite is to capitalize.)

Fiscal year -- an accounting year than begins on a date other than January 1.

Fixed asset -- see asset.

Fixed cost -- a cost that does not change as sales volume changes (in the short run.) Fixed costs normally include such items as rent, depreciation, interest, and any salaries unaffected by ups and downs in sales.

Goodwill -- in accounting, the difference between what a company pays when it buys the assets of another company and the book value of those assets. Sometimes, real goodwill is involved - a company's good reputation, the loyalty of its customers, and so on. Sometimes, goodwill is an overpayment.

Income -- see profit.

Interest -- a charge made for the use of money.

Inventory -- the supply or stock of goods and products that a company has for sale. A manufacturer may have three kinds of inventory: raw materials waiting to be converted into goods, work in process, and finished goods ready for sale.

Inventory obsolescence -- inventory no longer salable. Perhaps there is too much on hand, perhaps it is out of fashion. The true value of the inventory is seldom exactly what is shown on the balance sheet. Often, there is unrecognized obsolescence.

Inventory shrinkage -- a reduction in the amount of inventory that is not easily explainable. The most common cause of shrinkage is probably theft.

Inventory turnover -- a ratio that indicates the amount of inventory a company uses to support a given level of sales. The formula is: Inventory Turnover = Cost of Sales Average Inventory. Different businesses have different general turnover levels. The

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ratio is significant in comparison with the ratio for previous periods or the ratio for similar businesses.

Invested capital -- the total of a company's long-term debt and equity.

Journal -- a chronological record of business transactions.

Ledger -- a record of business transactions kept by type or account. Journal entries are usually transferred to ledgers.

Liabilities -- amounts owed by a company to others. Current liabilities are those amounts due within one year or less and usually include accounts payable, accruals, loans due to be paid within a year, taxes due within a year, and so on. Long-term liabilities normally include the amounts of mortgages, bonds, and long-term loans that are due more than a year in the future.

Liquid -- having lots of cash or assets easily converted to cash.

Marginal cost, marginal revenue -- marginal cost is the additional cost incurred by adding one more item. Marginal revenue is the revenue from selling one more item. Economic theory says that maximum profit comes at a point where marginal revenue exactly equals marginal cost.

Net worth -- total assets minus total liabilities. Net worth is seldom the true value of a company.

Opportunity cost -- a useful concept in evaluating alternate opportunities. If you choose alternative A, you cannot choose B, C, or D. What is the cost or loss of profit of not choosing B, C, or D? This cost or loss of profit is the opportunity cost of alternative A. In personal life you may buy a car instead of taking a European vacation. The opportunity cost of buying the car is the loss of the enjoyment of the vacation.

Overhead -- a cost that does not vary with the level of production or sales, and usually a cost not directly involved with production or sales. The chief executive's salary and rent are typically overhead.

Post -- to enter a business transaction into a journal or ledger or other financial record.

Prepaid expenses, deferred charges -- assets already paid for, that are being used up or will expire. Insurance paid for in advance is a common example. The insurance protection is an asset. It is paid for in advance, it lasts for a period of time, and expires on a fixed date.

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Present value -- a concept that compares the value of money available in the future with the value of money in hand today. For example, $78.35 invested today in a 5% savings account will grow to $100 in five years. Thus the present value of $100 received in five years is $78.35. The concept of present value is used to analyze investment opportunities that have a future payoff.

Price-earnings (p/e) ratio -- the market price of a share of stock divided by the earnings (profit) per share. P/e ratios can vary from sky high to dismally low, but often do not reflect the true value of a company.

Profit -- the amount left over when expenses are subtracted revenues. Gross profit is the profit left when cost of sales is subtracted from sales, before any operating expenses are subtracted. Operating profit is the profit from the primary operations of a business and is sales minus cost of sales minus operating expenses. Net profit before taxes is operating profit minus non-operating expenses and plus non-operating income. Net profit after taxes is the bottom line, after everything has been subtracted. Also called income, net income, earnings. Not the same as cash flow and does not represent spendable dollars.

Retained earnings -- profits not distributed to shareholders as dividends, the accumulation of a company's profits less any dividends paid out. Retained earnings are not spendable cash.

Return on investment (ROI) -- a measure of the effectiveness and efficiency with which managers use the resources available to them, expressed as a percentage. Return on equity is usually net profit after taxes divided by the shareholders' equity. Return on invested capital is usually net profit after taxes plus interest paid on long-term debt divided by the equity plus the long-term debt. Return on assets used is usually the operating profit divided by the assets used to produce the profit. Typically used to evaluate divisions or subsidiaries. ROI is very useful but can only be used to compare consistent entities -- similar companies in the same industry or the same company over a period of time. Different companies and different industries have different ROIs.

Revenue -- the amounts received by or due a company for goods or services it provides to customers. Receipts are cash revenues. Revenues can also be represented by accounts receivable.

Risk -- the possibility of loss; inherent in all business activities. High risk requires high return. All business decisions must consider the amount of risk involved.

Sales -- amounts received or due for goods or services sold to customers. Gross sales are total sales before any returns or adjustments. Net sales are after accounting for returns and adjustments.

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Stock -- a certificate (or electronic or other record) that indicates ownership of a portion of a corporation; a share of stock. Preferred stock promises its owner a dividend that is usually fixed in amount or percent. Preferred shareholders get paid first out of any profits. They have preference. Common stock has no preference and no fixed rate of return. Treasury stock was originally issued to shareholders but has been subsequently acquired by the corporation . Authorized by unissued stock is stock which official corporate action has authorized but has not sold or issued. (Stock also means the stock of goods, the stock on hand, the inventory of a company.)

Sunk costs -- money already spent and gone, which will not be recovered no matter what course of action is taken. Bad decisions are made when managers attempt to recoup sunk costs.

Trial balance -- at the close of an accounting period, the transactions posted in the ledger are added up. A test or trial balance sheet is prepared with assets on one side and liabilities and capital on the other. The two sides should balance. If they don't, the accountants must search through the transactions to find out why. They keep making trial balances until the balance sheet balances.

Variable cost - A cost that changes as sales or production change. If a business is producing nothing and selling nothing, the variable cost should be zero. However, there will probably be fixed costs.

Working capital - Current assets minus current liabilities. In most businesses the major components of working capital are cash, accounts receivable, and inventory minus accounts payable. As a business grows it will have larger accounts receivable and more inventory. Thus the need for working capital will increase.

Write-down -- the partial reduction in the value of an asset, recognizing obsolescence or other losses in value.

Write-off -- the total reduction in the value of an asset, recognizing that it no longer has any value. Write-downs and write-offs are non-cash expenses that affect profits.

REFERENCES

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Fundamentals of financial management (JAMES C.VAN HORNE,JONH M.WACHWICZ)

Financial accounting (R.NARAYANASWAMY)

www.fnbnews.com

www.google.com

www.Financialexpress.com

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