Description
Working capital is the capital which necessary for the smooth working of the orgnisation. this capital is required for the short term uses and for day to dat expenses.
EXECUTIVE SUMMARY
? OBJECTIVES OF THE STUDY ? PERIOD OF STUDY ? SOURCES OF DATA ? SCOPE OF THE STUDY ? LIMITATIONS OF THE STUDY
(a) Objective of the study :
The main objectives of this study is to analyses the financial performance of the SIVASHAKTHI . By taking the following financial information into consideration 2002-2003, 2003-2004, 2004-2005,2005-2006,2006-2007. To understand the methods in practice in the sample company Examine the present system of managing working capital in the sample company To analyse the funds position of the organization by application of working capital To understand the concept of working capital management.
(b) Period of the study :
The study of inventory management in sivashakthi is being done by me for one&half month that is from 28-12-2007 to 15-02-2008.
(c) Source of data : Primary data: primary data has been collected through discussions with managers
concerned and officials of the finance department.
Secondary data: secondary data has been collected from internet, journals, circulars,
books, annual reports and other printed materials of sivashakthi.
(d) Scope of the study :
1: Scope of the study is confined to sivashakthi company 2:The study covers a period of 45 days 3: The information / data taken for study covers financial years starting from 20022003 to 2006-2007. Hence the profit and loss A/C, Balance sheet was of past five years. With the help of the data as stated above, parameters for assessing financial performance such as current ratios, liquidity ratios and other relevant ratios of structural nature are computed to facilitate Trend Analysis.
(e) Limitatons of the study :
1: Major limitations on working capital are liquidity constraints 2: The concept of back-to-back payment terms between debtors and creditors requires organizational skills and lot coordination, which are generally wanting in Indian Industry
A PROFILE OF SIVASHAKTHI BIO PLANTTEC LTD
2.2 Industry overview TEAK Agricultural has been main stay of Indian economy even after 60 years of independence in spite of Green Revolution and a comma dance increase in Agricultural products of the country the yield per acre are much lower compare to other many countries. Owing to this the Agricultural scenario in India is under going tremendous change farmers and no more dependant on traditional crops and experimenting with new crops and methods has they have suffered a lot by depending on conventional crops. Today’s new generation and progressive farmer have slowly understood the rehab it’s of modern methods of farming like as Agro forestry expansible cultivation of high value timber yielding trees. Teak Plantations: Teaks scientifically know as “Tectonics Grandees” is one of the world’s premier hard wood timbers very famous for its mellow color fine and high durability of the timber. It occurs naturally only in India, Myanmar, and Thailand. It is naturalized in Java and Indonesia where it was probability introduced some 400 to 600 years above. In addition nit has been established through out tropical Asia as well as tropical, America, Latin America.
The Total volume of Global teak wood product is very meager when compare to other timbers lime manogan, red seeder and rose wood in spite of this Teak enjoy great demand be course of its straight, asestic qualities durability and work ability. Today teak ranks among the top tropical hard wood species it terms of total timber consumed a world wide an especially for specific market of luxury application like ship building, household and office interior and decorative building component. Consencuntly teak has become a major source economy for its main producing country. Till past 20 years the major source of supply for teak wood logs have been natural forestry and habit it’s of its growing countries. During past 20 years supplies of Teak wood from natural forestry haven been dwindling owing toe the tremendous market demand and consumption of teak wood world wide. The dwindling supplies from natural forestry and also due toe policies and legislation bans in the growing countries which severally restrict the harvesting of teak in natural forest. In India clear –felling of teak has been banned in most of the teak growing provinces and since 1986. in 1997 supreme court order placed for the restriction on feeling of any tree in natural forestry area as a result the has been an acute shortage of teak wood and there has been dramatic increased in India teak imports. Owing to the above reasons and circumstances the need felt to cultivate teak as a commercial crops under mixed as well as pure plantation in order to need ever growing demand for the teak wood in demotic market consign this growth of India has started the establishment of Teak Plantation across the country, however these efforts are in sufficient without the participation from the general public (forming community) and private sector. The role of private sector in teak plantation is likely to be significantly improvised and quality seedling to the interested farmers for raising plantations.
Recon sing this great opportunity and use demand for quality teak seedling. SIVASHAKTHI BIO PLANTTEC LTD started its operation in year 1998 with the sole objective to supply high quality Teak Saplings. HORTICULTRAL SAPLINGS It is well know fact that these days formers facing lot of problems in cultivation of regular field crops like Rice, sugarcane, Cotton, Chilies and other related crops. Apart from their huge water requirement which has become a score commodity those regular agricultural crops is highly labor intensive require continues investment from crop to crop and their returns to investment is very less. Also these conventional crops have a high degree of pest and disease problems have haven competently high risk of cyclones, draughts and floods even marketing of these crops is become difficult day by day since. Demand and supply equations are strongly in favor of traders. India with its diverse soil and climate comprising several agro ecological to grow the verity of horticultural crops. These crops from a significant part of the countries total agricultural production, it is estimated that all the Horticultural crops put together cover nearly 11.6 million hectors area with an annual production 91 million tones. Though these cropped area they agricultural output in the country. Horticultural crops play a unique role in India’s economy by improving the income of rural people. Fruits are also rich source of vitamins, minerals proteins carbon hydrates etc, which are essential in human nutrition. Thus cultivation of horticultural crops places a vital role in prosperity of a nation and is direct linked health and happiness of people. Fruits are not only used for domestic consumption and processing various products like pickles, preserves, sauce, jam, jelly etc but also substantial quality are exhorted in fresh and processed form bringing muck needed for the encourage to the country. These groups of crops also provide able
scope for achieving bio-diversity to maintain ecological balance and to create substantial agricultural which can make an impact on the nation economy in the years to come. India with more than 28.2 million tones of fruits with third largest production of fruits in the world next only to Brazil and China. However per capita consumption of fruits in India is only 46 grams against a minimum above 92 grams recommended India council of Medical research & National Institute of Nutrition, Hyderabad. With the present level of population the Annul Requirement of fruits will be of the order of 32.58 million tons. To meet their requirement the national commission on Horticulture has projected as area of 4 million hectors under fruit crops by 2000 AD. The recent emphasis on Horticulture in our country consequent to the recognition of the need for attaining nutrition security and for more profitable land use brought about a significant change in the out look of the growers and formers. Owing to the problem associated with the cultivation agricultural crops today the farmers are switching over to alternative cropping systems especially horticultural fruits crops like Mango, Sputa, Pomegranate & medicinal crops like Amla because of the following benefits. 1. Horticulture crops require only one time investment, if a farmer wants to establish a Mango orchard it is only on time investment. Later on he has to spend only on maintenance. 2. Long term results are assured on average crops like Mango; Sputa & Alma give continuous returns for 30 to 40 years. 3. Labor requirement is less 4. Egg mango or sputa cultivation requires 50-60% less labor compared to traditional groups like chills &cotton .in the initial 2-3 years they require some labor, later the requirement will be less.
5. Profitability of horticulture groups in more investment returns ratio will be more than 1:5. 6. marketing of horticulture groups in easier because awareness and consumption of fruits is increasing day by day .Demand & supply equation is now in favor of producer 7. there is huge export potential for Indian specialty fruits like mango, sapota& alma test and desire problems in case of horticulture problem are comparatively lower than conventional agriculture crops like chilli, cotton & paddy. 8. horticulture crops are being long term perennial in nature the cultural operations are spread out across the whole year without posing any pressure of time frame.where as for agriculture crops the field operations have to be performed with in a stipulated time failing which it will have tremendous impact on the final yield
BUSINESS OVERVIEW
Sivashakthi Bio Planttec Limited was incorporated on 12th January 1996 with the main objective of Production and marketing of high quality of teak wood saplings. Later on it started production of Horticulture plants and recently it has started the manufacturing and marketing of cercal protein Hydrolyses based Plant Growth Promoters. The company has mainly 3 production categories viz., Teak Saplings, Horticulture saplings and Plant Growth Promoters. The Individual production capacities of these products are as under. 1. Teak Saplings 2. Horticulture Saplings - Mango - Amla - Sapota - Pomegranate 5 Lakhs/Annual 5 Lakhs/Annual 5 Lakhs/Annual 2.5 Lakhs/Annual 25 Lakhs /annual
3. CPH based Plant Growth Promoters - Liquid Form - Granule Form 10 Lakhs Kl/annual 100 MT/Annual
Since Production of planting materials like Teak & Horticulture plants is as unorganized sector, presently there are no rules/regulations or any registering authority. As such there are no restrictions to carry on production & marketing of the above planting materials The Company started its operation in 1998, during 1998 only one branch at Vijayawada with 6 employees.
Till recently up to October 2005 the company production the teak sapling by processing stumps from various sources like forestry, private nurseries, farmers due to which there were variations in the final products. Since lot of grading have to been done to obtain un-form product cost production comparatively higher. Later company thought its R & D Department in collaboration with leading scientists in this field conducted an elaborate survey and successfully identify certain areas in different parts of the country to obtain seed material. These seeds are collected from best growing and early maturing plus trees. The Plus trees are mother tree have the following characters. • • • • They have straight main stump These trees grows straightly Have high degree of resist to pests and dieses They have known to yield superior quality timber
Sivashakthi teak saplings are now produced from the seeds of such plus trees ore mother trees Sivashakthi as selected mother orchards in states of Maharashtra, Andhra Pradesh, Karnataka, Madhya Pradesh, Uttar Pradesh Here the Plus trees are selected and the seeds from such trees are collected from for further production using modern propagation and green house technology. The Company has 4 Production Centers at Sangaluru, Lucknow, Indore, Bhubaneswar exclusively to produce stumps through the seeds collected from mother orchards. Here the main purpose is to select best growing and uniform plants. This is achieved through separation of slow growing and un uniform plants of different stages right after seed germination till stumps formation stage. Overall there will be 2 to 3 grading to achieve uniform quality stumps. These Stumps are transfer to secondary production centre for further raising of seedlings in poly bags.
Presently we are having 11 production centers to raise the saplings from stumps. This production centers at Here the main objective is again to select the best quality seedlings the respect uniform growth and vigor of the seedlings.
PRODUCTION PROCESS
FOR TEAK SEEDING: The process involved in production of high quality Teak seedings can be described as follows: 1. In the first step, areas where there is a presence of predominately high number of fast growing, high Vigo red, high quality timber yielding Teak trees are identified in the natural forest areas across the country like western Gnats go Karnataka, Karalla, Maharastra ,Eastern parts of Andhra Pradesh , Madhya Pradesh, Jharkand, Uttar Pradesh and Bihar. The areas are earmarked as mother orchards. 2. From these Mother Orchards specific trees are identified with known characters such as faster rate of growth, high degree of resistance to pests and diseases and which yield high quality timber. These trees are earmarked as “Plus Trees” or Mother Trees. 3. During February-March which is a season for collection of the seeds, the seeds from these plus trees are collected from different Mother Orchards. 4. Seeds treatment is given to break the Dormancy of the seeds by coating the seeds with cow-dung slurry and subjecting them to alternate wetting and drying cycles.
5. These treated seeds are dried under shade and sown on raised feds containing proper mixture of top soil, compost & sand to facilitate better germination. This is done in the month of April-May. 6. Germination takes place with in 30-40 days. The germination % rises between 60-80% depending upon nursery management practices & the seed quality. Here those seeding which germinate early having good vigor and retained and slowly germinating with low vigor and descended.
1. Preparation of stumps
2. Seeding which 12-15 months old with colon die motor of about 2.5to 4cm are used for preparation of stumps for preparation of stumps the seeding is be headed 1cm above the color and routs are tremended further these stumps are transported to secondary production centre.
3. Planting of stumps:
4. The stumps received from primary production centre are painted in poly 5. Bags under plastic tunnels to facilitate faster growth. 6. proper care is taken by spraying pesticides & fungicides to see that the 7. Plants remain healthy. 8. Here again grading is done by selecting the fast growing vigorous and healthy plants and rejecting the slow growing low Vigo red and unhealthy disease affected plants. 9. Only the best quality healthy and vigorous plants are dispatched once they attain 6-8 leaf stage with 1-1 1/2ft height.
Special features of Sivashakthi’s Teak Seedings
Sivashakthi’s Teak plants have the following special characters. ? Plants grow straight in a balanced proportion ? The main step develops into a very strong trunk with less no of side branches ? They have got comparatively high degree of resistance to pests & diseases than ordinary teak plants. ? They yield attractive wood with good color & high quality
Sivashakthi’s special package to the customers:
? Company provides these plants at the door steps of the customers with absolutely no additional transport cost ? Free technical service is provided to the customers through a team of well qualified agricultural officers once in 6 months ? As a gesture of good will and to field a long lasting celadon with the customers, sivasakthi provides one-time free replacements for the dead plants even to the extent of 100% ? Replacement plants are also delivered to the door steps of the customers totally free of cost
Service on call:
Whenever the customers require company’s technical assistance they can call our branch officers and they shall be attended by our technical experts over phone
2.2 History of the organization
Sivashakthi Bioplanttec Ltd was established in the year 1996. The focus of our company has been the economic growth of the Farming community of the Country, as agriculture is the backbone of our economy. Sivashakthi has revolutionized the way modern farming is carried out with its production and marketing of Genetically superior and high yielding Teak and Horticulture plants like Mango, Sapota, Amla etc
2.2 Establishment of the company
VALUES 1) QUALITY: We commit ourselves to constantly improve ourselves, our products and services so as to become the best. 2) LEADERSHIP: We commit to set highest standards in our business. 3) POSITIVE ATTITUDE: We believe that remaining positive and looking ahead is essential to achieve goals.
4) WORK ENVIRONMENT: We build a motivating work place where people can realize their professional ambitions.
5) SOCIETY: We want to contribute to society through economic contributions, positive benefits of our customers. 6) ISO 9001-2000 CERTIFICATION We commit ourselves to get all our products certified as per ISO Standards
A PROFILE OF SIVA SHAKTHI BIO PLANTTEC LIMITED
Opening the Door to new possibilities:
As natural resources and utilities transform economics, Indian agriculture will play an increasingly vital role in connecting the farming community and the technology necessary for growth.SIVASHAKTHI operates at the very center of this vast change, and as a catalyst for progress, fosters entrepreneurship, innovation, efficiency and economic reform. To succeed, we must remain nimble and ready to combine capital with strategic advice to play a constructive role for your clients. In any business environment ,however, certain tenets of our firm remain absolute :A dedication to our customers, a determination to attract and develop talent with unsurpassed expertise and a commitment to our culture of excellence team work and integrity.SIVASHAKTHI with this as focus, We believe we will be well positioned not only to respond change but to anticipate it in ways that best serve our clients for value addition ,to our shareholders for enhancing their funds and to society at for upliftment of growth. MISSION:
To achieve our objectives in an environment of fairness, honesty and courtesy towards our customers, employees, vendors and society at large. Guided by this inspiring credo, we hope to reach many more milestones in endeavors for the quality of human life and the environment VISION: Sivashakthi is a market leader excelling in business, delighting the customers with superior quality products and services with a team of highly competent, committed professionals, respected for ethical business practices and proud of contributing to economic growth of India. FIVE CORE VALUES: SIVASHAKTHI has always sought to be a value driven organization. These values continue to direct the company’s growth and prosparity. The five core values underpinning the way we do our business are:
Integrity: We must conduct our business fairly, with honesty and transparency.
Everything we do must stand the best of public scrutiny.
Understanding: We must be caring, show respect, compassion and humanity
for our colleagues and customers and always work for the benefit of the communities we serve.
Excellence: We must constantly strive to achieve the highest possible standards
in our day-to-day work and in the quality of goods and services we provide.
Unity: We must work cohesively with our colleagues and customers in building
strong relationship based on tolerance, understanding and mutual cooperation.
Responsibility:
We must continue to be responsible, sensitive to the communities and environments in which we work, always ensuring that what comes from the people goes back to the people many times over.
PURPOSE:
At SIVASHAKTHI, our purpose is to improve the quality of life of the communities we serve. We do this through leadership in sector of national economic significance, to which the company brings a unique set of capabilities. This requires us to grow aggressively in our focused area of business. Our heritage of returning to society what we earn evokes trust among consumers, employees, shareholders and the community. This heritage is being continuously enriched by formalization of high standards of behavior expected from employees. SIVASHAKTHI name is a unique asset representing leadership with trust. Leveraging this asset to enhance our competitiveness is the route to sustained growth and long-term success. CULTURE: Our culture is difficult to describe in words, let alone a paragraph. It is lived. It did not appear overnight, but it is a product of our history. Its hallmarksexcellence, teamwork and integrity –are grounded in strong business judgment and accountability. We believe that talent and motivation can be exponentially more powerful in an environment of mutual respect, trust and collaboration.
OUR FUTURE: In the course of SIVASHAKTHI’S history, the firm has developed FOUR underlying strengths that serve us well today and will, we trust, do so in future,
OUR excellent relationship with the farming community, that we believe we are second to none, OUR best research and development wing and management capabilities and
OUR culture that allows us to attract, develop, motivate and retain exceptional and encourages them to work together in a real spirit of team work. Looking ahead we see favorable conditions buoyed by economic growth and we belive we are well suited to participate in the growth. We are committed to providing our shareholders with return of equity at or near the top of our industry while continuing our successful record of near the top of our industry while continuing our successful record of growing book value and earning per share. FOCUS: ? To achieve a minimum turnover of Rs. 5 billion by the year 2009 ? To concentrate on high value & low volume fertilizers. ? To establish a minimum of 10 production units in every state of India. ? To increase the current market share and remain as market leader. ? To explore business opportunities in overseas markets. ? To increase the product base from 10 to 25 by 2008. ? To diversify into Bio Technology and Bio Medicines.
OUR APPROACH TO GROWTH
INNOVATION & CREATIVITY:
We have reinvented ourselves many times in the services we provide to our customers and it is that reinvention and creativity that keeps us alive. Customers tell us that the quality of our teamwork across our products and after sale services makes real differences to them. As a result, when markets expand and customers grow, we tend to grow with them. TALENTED MANPOWER We belive that our strategy for continuous growth is best executed by giving talented people the resources they need to build new and existing business. We have found that high-quality talent is the most important driver of growth over time. We have demonstrated that over the long tem, our approach can outperform the competition, creating value for our shareholders and career opportunities for our people
RESEARCH AND DEVELOPMENT The heart of SIVASHAKTHI’S research and development is our product pipeline. Our pipeline is an engine for discovering and developing the next generation of commercial products. During the previous year the company invested substantial amounts in researching new solutions for growers. The company concentrates the vast majority of its Research-and –Development (R&D) efforts on new biotech traits, elite germplasm, breeding, new variety and hybrid development and genomic research. Other R&D projects support the company’s current products.
2.4 ALL INNER COMPANIES SSBPL Sivashakthi Bio Partech Ltd.
VNFL
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V N Fertichem Limited
VFL VAIL
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Victor Fertilizers Limited Victor Agri Industries Limited Victor Agri Agencies Private Limited Victor Technologies Limited Nava-Barat Fertilizers Limited Victor Homes Limited
VAAPL VAL NBFL VHL -
MEANING OF WORKING CAPITAL
Capital required for a business can be classified under two main categories viz. Fixed Capital, and Working Capital
Every business needs funds for two purposes-for its establishment and to carry out its day-to-day operations. Long-term funds are required to create production facilities through purchase of fixed assets such as plant and machinery, land, building, furniture etc. Investments in these assets represent that part of firm’s capital, which is blocked on a permanent or fixed basis and is called fixed capital. Funds are also needed for short-term purposes for the purpose of raw materials, payments 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 in required for financing short term or current assets such as cash, marketable securities, debtors and inventories. Funds, thus, invested in current assets keep revolving fast and are being constantly converted into cash and this cash flows out again in exchange for other current assets. Hence, it is also known as revolving or circulating capital or short-term capital.
In the words of Shubin, “Working capital is the amount of funds necessary to cover the cost of operating the enterprise”.
According to Genestenberg, “Circulating capital means current assets of a company that are changed in the ordinary course of business from one form to another, as for example, from cash to inventories, inventories to receivables, receivables into cash”.
DEFINITIONS OF WORKING CAPITAL:-
“Working capital is excess of current assets over current liabilities.” -GUTHAMANN &DOUGALL
“Working capital refers to a firms investment in short term assets, cash, short term securities, accounts receivables and inventories.” -WESTON & BEIGHAM
“Working capital is the amount of funds necessary to cover the cost of operating the enterprise”. -SHUBIN
Business Definition for: Working Capital
1:The funds that are readily available to operate the business.
2:The working capital is the money and the assets (excluding fixed assets i.e. buildings, machinery etc) that a business uses to finance the day-to-day operations that produce the goods and services supplied to the customers. Working capital is also the difference between the current liabilities and current assets and is known as net working capital i.e.
NET
WORKING
CAPITAL
=
CURRENT
ASSETS
–
CURRENT
LIABILITIES
The better a company manages its working capital, the less the company needs to borrow.
Nature of working capital
The core of the working capital concept has been subjected to considerable changes over the years. A few decades ago this concept was viewed as a measure of the debtors ability to meet his obligation in whether or not the current assets were immediately realizable and available to pay debts in the case liquidation
In applying this measure a one year period was frequently used to clarify assets and liabilities were those due within one year. This focus of attention in recent years has shifted from liquidation point of view towards the operating cycle point of view this view emphasizes the ability of the firm to pay its maturing obligations from the funds generated by current operations. According to accounting research bulletin no 43 characterstics working capital as a margin or buffer for meeting obligation within the ordinary operating cycle of the business in this sense working capital is a static measure of the margin or buffer for meeting currently maturity obligations. There is little question that credit grantors,management,stockholders, and others have a need for an analysis and evaluation of working capital. At a minimum two types of analysis can be provided . 1:The presentation of the amount of the working capital at a particular point in the time to indicate a rough measure of the margin or buffer presently available to meet currently maturing obligation (static analysis) and 2:The presentation of the amount of the working capital for past periods and the expected flow covering future periods (dynamic analysis) is the present concept of working capital useful from both of these views.
CONCEPTS OF WORKING CAPITAL
There are two concepts of working capital: Gross Working Capital Net Working Capital
In the broad sense, the term working capital refers to the gross working capital and represents the amount of funds invested in current assets. Thus, the gross working capital invested in total current assets of the enterprise. Current assets are those assets, which in the ordinary course of business can be converted into cash within a short period of normally one accounting year.
S. No. 1. 2. 3. 4. 5.
6. 7. 8.
Constituents of current assets Cash in hand and bank balances Bills Receivables Sundry Debtors (less provision for bad debts) Short-term loans and advances Inventories of stock, as: (a) Raw materials (b) Work-in-progress (c ) Stores and spares (d) Finished goods Temporary Investments of surplus funds Prepaid Expenses Accrued Incomes
In the narrow sense, the term working capital refers to the net working capital. Net working capital is the excess of current assets over current liabilities, or say:
Net working capital = Current assets – Current liabilities.
Net working capital may be positive or negative. When the current assets exceed the current liabilities the working capital is positive and the negative working capital results when the current liabilities are more than the current assets. Current liabilities are those liabilities which are intended to be paid in the ordinary course of business within a short period of normally one accounting year out of the current assets or the income of the business.
S. No 1. 2. 3. 4. 5. 6. 7.
Constituents of current liabilities Bills Payable Sundry Creditors or Accounts Payable Accrued or Outstanding Short- term loans, advances and deposits Dividends Payable Bank Overdraft Provision for taxation, if it does not amount to appropriation of profits.
The gross working capital concept is financial or going concern concept whereas net working capital is an accounting concept of working capital.
CLASSIFICATION Working capital may be classified in two ways: On the basis of concept. On the basis of time.
WORKING CAPITAL
Basis of concept
Basis of time
Gross Fixed working working capital
Net working capital
CONTENTS
Variable working capital
CHAPTER-I ? INTRODUCTION ? EXECUTIVE SUMMARY CHAPTER-II ? COMPANY PROFILE CHAPTER-III ? THEROTICAL STUDY ? AN OVERVIEW CHAPTER-IV ? ANALYSIS OF WORKING CAPITAL ? ANALYSIS OF RATIO ANALYSIS CHAPTER-V ? CONCLUSIONS AND FINDINGS BIBLIOGRAPHY
capital
Seasonal working capital
Special working capital
Regular working capital
Reserve working capital
On the basis of concept, working capital is classified as Gross Working Capital and
Net Working Capital as discussed earlier. This classification is important from the point of view of the financial manager.
On the basis of time, working capital may be classified as
1: Permanent or Fixed Working Capital.
2: Temporary or Variable Working Capital
PERMANENT OR FIXED WORKING CAPITAL
Permanent or fixed working capital is the minimum amount, which is required to ensure effective utilisation of fixed facilities and for maintaining the circulation of current assets. There is always a minimum level of current assets which is continuously required by the enterprise to carry out its normal business operations. The permanent working capital can be further be classified as Regular working capital and reserve working capital required to ensure circulation of current assets from cash to inventories, from inventories to receivables and from receivables to cash and so on. Reserve working capital is the excess amount over the requirement for regular working capital, which may be provided for contingencies that may arise at unstated periods such as strikes, rise in prices, depression, etc.
TEMPORARY OR VARIABLE WORKING CAPITAL Temporary or variable working capital is the amount of working capital, which is required to meet the seasonal demands and some special exigencies. Variable working capital can be further classified as seasonal working capital and special working capital. Most of the enterprises have to provide additional working capital to meet the seasonal and special needs. The capital required to meet the seasonal needs of the enterprise is called seasonal working capital. Special working capital is the part of working capital, which is required to meet special exigencies such as launching of extensive marketing campaigns for conducting research, etc.
Temporary working capital differs from permanent working capital in the sense that it is required for short periods and cannot be permanently employed gaining in the business.
IMPORTANCE OR ADVANTAGE OF ADEQUATE WORKING CAPITAL
Working capital is the life blood and nerve centre of a business. Just as circulation of blood is essential in the human body for maintaining life, working capital is very essential to maintain the smooth running of a business. No business can run successfully without an adequate amount of working capital. The main advantages of maintaining adequate amount of working capital are as follows:
1. Solvency of the business Adequate working capital helps in maintaining solvency of the business by providing uninterrupted flow of production. 2. Goodwill Sufficient working capital enables a business concern to make prompt payments and hence helps in creating and maintaining goodwill. 3. Easy Loans A concern having adequate working capital, high solvency and good credit standing can arrange loans from banks and others on easy and favourable terms. 4. Cash Discount
Adequate working capital also enables a concern to avail cash discounts on the purchases and hence it reduces costs.
5
Regular supply of raw materials
Sufficient working capital ensures regular supply of raw materials and continues production. 6.
Regular payment of salaries, wages and other day-to-day
commitments
A company which has ample working capital can make regular payment of salaries, wages and other day-to-day commitments which raises the morale of its employees, increases their efficiency, reduces wastage’s and costs and enhances production and profits.
Exploitation of favourable market conditions.
Only concerns with adequate working capital can exploit favourable market conditions such as purchasing its requirements in bulk when the prices are lower and by holding its inventories for higher prices.
Ability to face crisis.
Adequate working capital enables a concern to face business crisis in emergencies such as depression because during such periods, generally, there is much pressure on working capital.
Quick and regular return on investments.
Every investor wants a quick and regular return on his investments. Sufficiency of working capital enables a concern to pay quick and regular dividends to its investors as there may not be much pressure to plough back profits. This gains the confidence of its investors and creates a favorable market to raise additional funds in the future.
High morale .
Adequacy of working capital creates an environment of securit7y, confidence, high morale and creates overall efficiency in a business
EXCESS OR INADQUATE WORKING CAPITAL
Every business concern should have adequate working capital to 7run its business operations. It should have neither redundant or excess working capital nor inadequate nor shortage of working capital. Both excess as well as short working capital positions are bad for any business. However, out of the two, it is the inadequacy of working capital, which is more dangerous from the point of view of the firm.
THE NEED OR OBJECTS OF WORKING CAPITAL
The need for working capital cannot be over emphasized. Every business needs some amount 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 the sales and realization of cash. There are time gaps ins purchase of raw materials and production, production and sales, and sales and realization of cash. Thus working capital is needed for the following purposes: For the purchase of raw materials , components and spares. To pay wages and salaries. To incur day-to-day expenses and overhead costs such as fuel, power and office expenses etc. To meet the selling costs as packing, advertising etc. To provide credit facilities to the customers . To maintain the inventories of 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 anew concern, as a growing concern and as one which has attained maturity. A new concern requires a lot of liquid funds to meet initial expenses like promotion, formation etc. These expenses are called
preliminary expenses and are capitalized. The amount needed as working capital in a new concern depends primarily upon its size and the ambitions of its promoters. Greater the size of the business unit, generally, larger will be the requirements of working capital. The amount of working capital needed goes on increasing with the growth and expansion of business till it attains maturity. At maturity the amount of working capital needed its called normal working capital. There are many other factors, which influence the need of working capital in a business,
FACTORS DETERMINING THE WORKING CAPITAL REQUIREMENTS
The working capital requirements of a concern depend upon a large number of factors such as nature and size of business, the character of their operations, the length of production cycles, the rate of stock turnover and the state of economic situation. It is
not possible to rank them because all such factors are of different importance and the influence of individual factors changes for a firm over time. However, the following are important factors generally influencing the working capital requirements. 1.Nature of Character of Business.
The working capital requirements of a firm basically depend upon the nature of its business. Public utility undertakings like Electricity, Water Supply and Railways need very limited working capital because they offer cash sales only and supply services, not products, and as such no funds are tied up in inventories and receivables. On the other hand trading and financial firms require less investment in fixed assets but have to invent large amounts in current assets like inventories, receivables and cash; as such they need large amount of working capital. The manufacturing undertakings also require sizeable working capital along with fixed investments.
2. Size of business / scale of operations.
The working capital requirements of a concern are directly influenced by the size of its business which may be measured in terms of scale of operations. Greater the size of a business unit, generally larger will be the requirements of working capital. However, in some cases even a smaller concern may need more working capital due to high overhead charges, inefficient use of available resources and other economic disadvantages of small size.
3. Production Policy. In certain industries the demand is subject to wide fluctuations due to seasonal variations. The requirements of working capital, in such cases, depend upon the production policy. The production could be kept either steady by accumulating inventories during slack periods with a view to meet high demand during the peak season or the production could be circulated during the slack season and increased during the peak season. If the policy is to keep production steady by accumulating inventories it will require higher working capital.
4. Manufacturing Process / Length of Production Cycle In manufacturing business, the requirements of working capital increase in direct proportion to the length of manufacturing process. Longer the process period of manufacture, larger is the amount of working capital required. The longer the manufacturing time, the raw materials and other supplies have to be carried for a longer period in the process with progressive increment of labour and service costs before the finished product is finally obtained. Therefore, if there are alternative
processes of production, the process with the shortest production period should be chosen. 5. Seasonal Variations. In certain industries raw material is not available throughout the year. They have to buy raw materials in bulk during the season to ensure an uninterrupted flow and process them during the entire year. A huge amount is thus, blocked in the form of material inventories during such season, which gives rise to more working capital requirements. Generally, during the busy season, a firm requires larger working capital than in the slack season.
Working Capital Cycle.
In manufacturing concern, the working capital cycle starts with the purchase of raw materials and ends with the realization of cash from the sale of finished goods. This cycle involves purchase of raw materials and stores, its conversion into stocks of finished goods through work-in-progress with progressive increment of labour and service costs, conversion of finished stock into sales, debtors and receivables and ultimately realisation of cash and this cycle continues again from cash to purchase of raw material and so on.
DEBTORS (RECEIVABLES )
CASH FINISHED GOODS
RAW MATERIALS
WORK-INPROGRESS
Fig. Showing working capital/ operating cycle of a manufacturing concern.
The speed with which the working capital completes one cycle determines the requirement of working capital- longer the period of the cycle larger is the requirement of working capital.
7.
Rate of stock Turnover.
There is a high degree of inverse co-relationship between the quantum of working
capital and the velocity or speed with which the sales are effected. A firm having a high rate of stock turnover will need lower amount of working capital as compared to a firm having a low rate of turnover
8. Credit Policy.
The credit policy of a concern in its dealings with the debtors and creditors influence considerably the requirements of working capital. A concern that purchases its requirements on credit and sells its products/services on cash requires lesser amount of working capital. On the other hand a concern buying its requirements for cash and allowing credit to its customers, shall need larger amount of working capital as very huge amount of funds are to be tied up in debtors or bills receivables.
9. Business Cycles. Business cycle refers to alternate expansion and contraction in general business activity. In a period of boom i.e., when the business is prosperous, there is a need for larger amount of working capital due to increase in sales, rise in prices, optimistic expansion of business, etc. On the contrary in the times of depression i.e., when there is a down swing of the cycle, the business contracts, sales decline, difficulties are faced in collection from debtors and firms may have a large amount of working capital lying idle.
10. Rate of growth of business
The working capital requirements of a concern increase with the growth and expansion of its business activities. Although, it is difficult to determine the relationship between the growth in the working capital of a business, yet it may be concluded that for normal rate of expansion in the volume business, we may have
retained profits to provide for more working capital but in fast growing concerns, we shall require large amount of working capital.
11 Earning Capacity and Dividend Policy.
Some firms have more earning capacity than others due to quality of their products, monopoly conditions etc. Such firms with high earning capacity may generate cash profits from operations and contribute to their working capital. The dividend policy of a concern also influences the requirements of its working capital. A firm that
maintains a steady high rate of cash dividend irrespective of its generation of profits needs more working capital than the firm that retains larger part of its profit 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, the rising prices will require the firm to maintain larger amount of working capital, as more funds will be required to maintain the same current assets. The effect of rising prices may be different firms. Some firms may effect much while some others may not be affected at all by the rise in the prices.
13 Other Factors.
Certain other factors such operating efficiency, management ability, irregularities of supply, import policy, asset structure, importance of legal, banking facilities etc. also influence of requirement of working capital.
MANAGEMENT OF WORKING CAPITAL.
Working capital, in general practice, refers to the excess of the current assets over current liabilities. Management of working capital therefore, its concerned with the problems that arise in attempting to manage the current assets, the current liabilities and inter relationship that exists between them. In other words it refers to all aspects of administration of both current assets and current liabilities.
The basic goal of working capital management is to mange 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 inadequate nor excessive. This is so because both inadequate as well as excessive working capital positions are bad for any business. Inadequacy of working capital may lead the firm to insolvency and excessive working capital implies idle funds, which earn no profits for the business. Working capital management policies of a firm have a great effect on its profitability, liquidity and structural health of the organization. In this context, working capital management is three dimensional in nature:
1 Dimension I is concerned with the formulation of policies with regard to profitability, risk and liquidity . 2 Dimension II is concerned with the decision about the composition and level of current assets . 3 Dimension III is concerned with the decision about the composition and level of current liabilities .
PRINCIPLES OF WORKING CAPITAL MANAGEMENT
Principles of working capital management
Principle of risk management
Principle of cost of capital
Principle of equity position
Principle of maturity of payment
1.Principle of risk management
Risk here refers to the inability of a firm to meet its obligations as and when they become due for payment. Larger investment in current assets with less dependence on short-term borrowings increase liquidity, reduces dependence on short-term borrowings increases liquidity, reduces risk and thereby decreases the opportunity for gain or loss. On the other hand less investment in current assets with greater
dependence on short-term borrowings increases risk, reduces liquidity and increases profitability. In other words, there is a definite inverse relationship between the degree of risk and profitability
2.Principle of cost of capital.
The various sources of raising working capital finance have different cost of capital and the degree of risk involved. Generally, higher the risk lower is the cost and lower the risk higher is the cost. A sound working capital management should always try to achieve a proper balance between these two.
3. Principle of equity position
This principal is concerned with planning the total investment in current asset. According to this principal, the amount of working capital invested in each components should be adequately justified by a forms equity position. Every Rs. Invested in the current asset should contribute to the net worth of the form. The level of current asset may be measured with the help of two ratio:
? Current asset as a percentage total assets and ? Current asset as a percentage total sales.
4. Principle of maturity of payment
This principal is concern with planning the sources of finance for working capital. According to this principal, a form should make every effort to relate maturities of payment to its flow of internally generated funds. Maturity have been of various current obligations is an important factors in risk assumptions and risk assessments. Generally, shorter the maturity schedule of current liabilities in relation to expected cash in flows, the greater the inability to meet its obligations in time.
PROJECT ANALYSIS & RATIOS OF SIVASHAKTHI
Raw Material Conversion period (RMCP) PARTICULARS Raw-Material Inventory Opening Closing Average rawmaterial 5650.56 5004.39 5173.97 5445.00 3781.16 Raw-Material 26248.22 32701.28 49307.20 47246.65 41979.11 consumption Avg.RMI/RMC*365 79 56 38 38 26 2002-03 6015.07 5286.05 2003-04 5286.0 4722.74 2004-05 4722.74 5625.19 2005-06 5625.19 4277.65 2006-07 4277.65 1648.53
ANALYSIS:
The Raw-material conversion period for the years has been varying from 79 days to 26 days. The conversion period of the company in the years from 2002-03 to 2006-07 is 79 to 26 days, which resulting to reduce the funds tied up in the process of conversion.
Working-in-progress Conversion period (WIPCP)
PARTICULARS Work-in-progress
2002-03 5694.26
2003-04 6192.52
2004-05 8350.15
2005-06 3876.35
2006-07 4259.86
Inventory Opening Closing Average WIP Cost of produ ction (COP) Avg.WIP/COP*365
6192.52
8350.15
3876.35
4259.86
3372.20
5943.39 7271.34 6113.25 4068.17 3816.03 47777.19 61176.97 67562.26 72054.56 65413.94 45 43 33 21 21
ANALYSIS: The work-in-process conversion period for the years from 2002-03 to 2006-07 is 45 days to 21 days. The years from 2002-03 to 2003-04 has taken long time for the conversion and remaining years, the conversion is within limits except in 2006 and 2007. Its shows the company handle conversion period within shot period.
Finished Goods Conversion period (FGCP)
PARTICULARS Finishedgoods inventory Opening
2002-03 1303.93 1058.57
200304 1058.57 1445.58
200405 1445.58 651.33
200506 651.33 1183.01
200607 1183.01 945.75
Closing Average FGI Cost of goods sold (COG) Avg.FGI/COG*365 ANALYSIS:
1181.25 1252.08 1048.455 917.17 1064.38 52310.49 57474.49 82683.22 78965.66 70139.75 8 8 5 4 6
The Finished Goods Conversion period for the years 2002-03 to 2006-07 was 8 to 6 days. The company is able to maintain the stipulated time period.
Sundry Debtors Collection Period (DCP)
PARTICULARS Book debtors (BD) a. Opening b. Closing Avg. book debtors Sales Avg.BD/Sales*365
2002-03
2003-04
2004-05
2005-06
2006-07
20913.15 21973.04 19343.72 32476.19 44049.43 21973.04 19343.72 32476.19 44049.43 38437.58 21443.09 20658.38 25909.95 38262.81 41243.51 51746.25 60880.59 92595.19 83673.79 66325.40 151 124 102 149 195
ANALYSIS:
The actual collection period of SIVASHAKTHI on an average is very high in the years 2002-03and 2004-05 to 2005-06 ranging from 151,149 and 195 days. It is clearly evident from this table is that there is delay in collection of receivable from debtors.
But in the years 2002-03and 2004-05, the collection period is 124 and 102 days respectively. This shows that there is decrease and moderately increased in collection period.
Payable Deferred Period (PDP)
PARTICULARS Creditors (CR) a. Opening b. Closing Avg. CR Purchases Avg.CR * 365 Purchases ANALYSIS:
2002-03
2003-04
2004-05
2005-06
2006-07
12698.95 14649.26 13020.66 26609.38 25747.52 14649.26 13674.11 24396.52 204 13020.66 1383496 33214.89 152 26609.38 19815.02 50063.88 144 25747.52 26178.45 46749.65 204 23100.43 24423.98 38743.87 230
The Payable deferred period shows the off time the companies can defer the payment to outsiders. So. This implies that as lengthier the period the better off is the company. The payable deferred period has increased in 2002-03 as 204 days when compared to
2003-04 that is 152 days. Again, there is increase in the deferred period for the year 2004-05 and after that there was continuous increase. It reflects on interest.
Net Operation Cycle
PARICULRS 1. RMCP 2.WICP 3.FGCP 4.DCP 5.Gross Operating cycle (1+2+3+4) 6.PDP 7.Net Operating Cycle (5-6) ANALYSIS: 204 79 152 79 144 34 204 8 230 18 2002-03 79 45 8 151 283 2003-04 56 43 8 124 231 2004-05 38 33 5 102 178 2005-06 38 21 4 149 212 2006-07 26 21 6 195 248
The net operating cycle of the company has decreased from 79 to 18 days. The net operating cycle doesn’t exceed the standard norm and slightly increased in 2006-07.
The period of operating cycle show efficient way as in the years, it leads to turnover increase and reduction in interest cost.
CALCULATIONS OF NET WORKING CAPITAL OF SIVASHAKTHI in lakhs
PARTICULARS I. Current assets
2002-03
2003-04
2004-05
2005-06
2006-07
0.40 Interest
0.01
0.01
-
-
accrued on invest Inventories 12559.82 Sundry Debtors 19856.13 Cash & 3316.4 bank balances TOTAL OF CA II.Current liabilities NetWorking Capital (I – II) 35741.79 31038.69 4703.10
1453193 16681.11 21582.58 52795.87 47701.75 5094.12
1015894 31344.53 22820.44 64323.42 51262.12 13061.3
10710.86 42946.87 21182.09 74839.82 60086.42 14753.4
6622.64 36774.52 22570.29 65967.45 62260.09 3707.36
ANALYSIS: The Net Working Capital has increased by 391.02 lakhs from 2002-03 to 2003-04. The main reason for this increase is inventories. There is a significant increase in Net Working Capital. It has increased by 7967.18 lakhs. This increases is due to sundry debtors and cash & bank balances.
In the net working capital has increased by 1692.1 from 2004-05 to 2005-06.The main reason for this increased in sundry debtors and compared to previous years there is decrease in net working capital due to increased in current liabilities.
The net working capital has decreased by 11046.04 lakhs from 2005-06 to 2006-07. The main reason is decreased in inventories and sundry debtors. The current liabilities are increasing and current assets are decreasing, the company would able to maintained proper growth in current assets rather than the current liabilities.
Ratio analysis
Ratio analysis is a widely used tool of financial analysis. It is defined as the
systematic use of ratio to interpret the financial statements so that the strengths and weaknesses of a firm as well as its historical performance and current financial condition can be determined. The tern ratio refers to the numerical or quantitative relationship between two variables.
The management can use the ratio analysis of working capital as means of checking upon the efficiency with which working capital is being used in the enterprise. In other words the ratio analysis indicates whether the financial position of a firm is improving or deteriorating over the years. The significance trend analysis of ratio lies in the fact that the ratio may be low as compared to the standard norms, but the trend may be upward.
Ratio may be used for comparison in any of the following ways
? Comparison of a firm with its own performance in the past. ? Comparison of one firm to another firm in the industry. ? Comparison if an achieved performance with pre-determined standards.
The most important ratios of working capital management being: ? Current ratio
? Quick ratio ? Net Working Capital ratio ? Inventory Turnover ratio ? Debtors Turnover ratio ? Average collection period ? Creditors Turnover ratio ? Average payment period
Assets Turnover ratio
? Net assets turnover ratio ? Total assets turnover ratio ? Fixed assets turnover ratio ? Current assets turnover ratio.
Working capital turnover ratios.
CURRENT RATIO
The current ratio is calculated by dividing current assets by current liabilities.
Formula:
current assets / current liabilities
RS in lakhs
PARTICULARS Current assets Current liabilities Current ratio
2002-03 3574 1.79 3103 8.69 1.15
2003-04 5279 5.87 4770 1.75 1.11
2004-05 6432 3.42 5126 2.12 1.25
2005-06 7483 9.82 6008 6.42 1.25
2006-07 6596 7.45 6226 0.09 1.06
8 0 0 0 0 7 0 0 0 0 6 0 0 0 0 5 0 0 0 0 4 0 0 0 0 3 0 0 0 0 2 0 0 0 0 1 0 0 0 0 0 2 0 0 2 -0 3 2 0 0 3 -0 4 2 0 0 4 -0 5 2 0 0 5 -0 6 2 0 0 6 -0 7 C urrent a ssets C urrent lia bilities C urrent ra tio
ANALYSIS:
The current ratio is a measure of the firm’s short-term solvency; standard current ratio is 2:1, where current assets should be double to current liabilities. Looking at the current ratio of the firm for the years from 2002-03 to 2006-07, it is clearly evident that the ratio is below the standard ratio of 2:1. There is a continuous decrease and increasing in current ratio because of the decrease in current assets and increase in current liabilities, even though current assets are in excess of current liabilities but which are not up to the required level and the company has been able to honor its all commitment of payments and able to manage its working capital efficiently.
QUICK RATIO: The quick ratio is found out by dividing the total of the quick assets by total current liabilities. Formula: quick assets / current assets
PARTICULARS Current assets Inventories Quick assets Current liabilities Quick ratio 2002-03 2003-04 2004-05 35741.79 52795.87 64323.42 12559.82 14531.93 10158.94 23181.97 38263.94 54164.48 31038.6 47701.7 51262.12 9 0.75 5 0.80 1.06 2005-06 748398.82 10710.86 64128.96 60086.42 1.07 2006-07 65967.45 6622.64 59344.81 62260.09 0.95
2002-03 2003-04 2004-05 2005-06 2006-07
Quick assets: current assets – inventories
ANALYSIS: The ratio is also called as liquid ratio or acid test ratio. It is referred to as quick ratio because it is a measurement of firm’s ability to convert its current assets quickly into cash in order to meet its liabilities.
Commonly it is held the quick ratio should be 1:1. If ratio is lower than the standards, it implies that the financial position of the concern to be unsound and real cash will have to be provided for the payment of liabilities. There is difference in comparing of five years current assets and current liabilities and the company performed well to increase the quick ratio.
NET WORKING CAPITAL RATIO
The difference between current assets and current liabilities is called net working capital.
Formula: Net working capital = current assets – current liabilities
Net assets = current assets – current liabilities + fixed assets
PARTICULARS Current assets Current liabilities CA-CL Fixed assets Net assets NWC ratio*100
2002-03 35741.79 31038.69 4703.1 5433.92 10137.02 46.40
2003-04 52795.87 47701.75 5094.12 5552.25 10646.37 47.85
2004-05 64323.42 51262.12 13061.3 7160.15 20221.45 64.59
2005-06 74839.82 60086.42 14753.4 8025.60 22779.00 64.77
2006-07 65967.45 62260.09 3707.36 7255.76 10963.12 33.82
80000 70000 60000 50000 40000 30000 20000 10000 0
ANALYSIS: Net Working capital is sometimes used as a measure of a firm’s liquidity and it also measures the firm’s potential reservoir of funds. The companies have to be careful that the net working capital will not come down drastically, as this would affect the liquidity and consequently the operations of the business. The net working capital ratio for the years from 2002-03 to 2005-06 as constantly increased after that in the year 2006-07 as decreased due to the fixed assets gone away and constantly increased in current liabilities.
C urrent a ssets C urrent liabilities C A-CL F ixedassets Net assets NW Cratio*100 2002-03 2003-042004-05 2005-06 2006-07
INVENTORY TURNOVER RATIO:
It is calculated by dividing the cost of goods sold by the average inventory.
Formula: Cost of goods sold / Average inventor
Cost of goods sold (COG) = sales – gross profit
Average inventory = (opening stock + closing stock) / 2
PARTICULARS Sales Gross profit COG AVG. inventory ITO ratio
2002-03 51746.25 4564.18 47182.07 12797.78 3.69
2003-04 60880.59 9937.16 50943.43 13545.88 3.76
2004-05 92595.19 17372.76 75222.43 12345.44 6.09
2004-05 83673.79 14489.74 69184.05 10434.9 6.63
2006-07 66325.40 6927.01 59398.39 8666.75 6.85
1 00000 9000 0 8000 0 7000 0 6000 0 5000 0 4000 0 3000 0 2000 0 1000 0 0
S ales Gros s profit C OG AV G . inventory ITO ratio
2 002-0 3 200 3-04 2 004-0 5
2004 -05 20 06-07
ANALYSIS:
From the year 2002-03 to 2006-07 it increased from 3.69 to 6.85. Stability in inventory levels coupled with increase in cost of production up to 2004-05. After that it is decreased due to cost of goods sold. The sales as also reflected towards inventory turnover ratio in years 2006-07. This speaks about enhanced liquidity without blocking up of funds in inventories.
DEBTORS TURNOVER RATIO: It is found by dividing credit sales by average debtors. Formula: Credit sales / Avg. debtors.
Avg. debtors = (opening + closing debtors) / 2
PARTICULARS Sales Debtors DTO ratio
2002-03 517462.5 19726.62 2.62
2003-04 60880.59 18273.12 3.33
2004-05 92595.19 24012.57 3.86
2005-06 83673.79 37145.45 2.52
2006-07 66325.40 39860.69 1.93
600 000 500 000 400 000 300 000 200 000 100 000 0 200 2-03 20 03-04 2 004-0 5 2 005-06 2006 -07 S ales D ebtors D TO ratio
ANALYSIS: As there is increase in sales from 2002-03 to 2004-05 years it implies that there will be debtors and remaining years decreased in sales and continuous increase in debtors. Turnover ratio indicates the number of times debtors turnover each year. Generally the higher value of debtors turnover, the more efficient is the management of the credit. The company is able to turnover its debtors 3.33 times in 2003-04 and 2.62 in the year 2002-03, signifying that debtors got converted into cash 3.86 times in a year. The above ratio shows the growth in the sales and debtors of the company. Ultimately this ratio has gone down to 1.93 times during 2006-07.
AVERAGE COLLECTION PERIOD:
The average number of days for which book debts remain outstanding is called the average collection. Formula: Debtors / sales * 365
PARTICULARS Sales Debtors Avg collection ratio
2002-03 51746.25 19726.62 139
2003-04 60880.59 18273.12 110
2004-05 92595.19 24012.57 95
2005-06 83673.79 37145.45 145
2006-07 66325.40 39860.69 189
100000 90000 80000 70000 60000 50000 40000 30000 20000 10000 0 S ales D ebtors Avg collection ratio
2002-03 2003-04 2004-05 2005-06 2006-07
ANALYSIS:
Company’s collection period has been decreasing from 139 to 95 days from the year 2002-03 to 2004-05. The left over years has increased 145 to 189 days from the year 2005-06 to 2006-07. Decrease in the collection period for the particular year indicates that the boo-debt remain outstanding for those days. This will lead to less interest burden.
CREDITORS TURNOVER RATIO: Creditors turnover indicates the number of times creditors turnover each year generally, the higher the value of creditors turnover, the more efficient is the management of credit.
To outside analyst information about credit sales and opening and closing balance of creditors may not be available. Therefore, creditors turnover can be calculated by dividing total sales by the year-end balance of creditors.
Formula: Credit purchases / Avg account payable
Avg creditors = (opening + closing creditors) / 2
Rs in lakhs PARTICULARS Purchases Avg. creditors CTO ratio 2002-03 24396.52 13674.12 1.78 2003-04 33214.89 13834.96 2.40 2004-05 50063.88 19815.02 2.53 2005-06 46749.65 26178.45 1.79 2006-07 38743.87 24423.98 1.59
60000 50000 40000 30000 20000 10000 0 2002- 2003- 2004- 2005- 200603 04 05 06 07 Purchases Avg . creditors CTO ratio
ANALYSIS:
From the above the creditors turnover ratio is increased from 1.78 to 2.53 in years 2002-03 to 2004-05. The creditors turnover ratio indicates the number of times the payables rotate in a year. Payables turnover indicates the relationship between net purchases for the whole year and total payables. The ratios are increased and decreased its shows efficiently payable to creditors.
AVERAGE PAYMENT PERIOD: This ratio gives the average period enjoyed from the creditors and is calculated as under.
Formula: Days / CTO ratio * 365 RS in lakhs
PARTICULARS Purchases Avg. creditors Avg. coll. period
2002-03 24396.52 13674.12 205
2003-04 33214.89 13834.96 152
2004-05 50063.88 19815.02 144
2005-06 46749.65 26178.45 204
2006-07 38743.87 24423.98 230
60000 50000 40000 30000 20000 10000 0 2002- 2003- 2004- 2005- 200603 04 05 06 07 Purchases Av g . creditors Av g . coll. period
ANALYSIS: Company’s payable period has been increasing and decreasing. It has been decreasing from 205 to 144 days. A higher ratio and fewer days indicate the creditors are paid in time. A lower ratio and higher number of days indicate delayed payment of creditors. Depending on the liquidity position of the firm.
WORKING CAPITAL TURNOVER RATIO:
Net Current assets turnover ratio
Formula: Sales / Net current assets
RS in lakhs PARTICULARS 2002-03 Sales 51746.25 Net working capital 4703.1 Working capital ratio 11.00 2003-04 60880.59 5094.2 11.95 2004-05 92595.19 13061.3 7.09 2005-06 83673.79 14753.4 5.67 2006-07 66325.40 3707.36 17.89
100000 90000 80000 70000 60000 50000 40000 30000 20000 10000 0
S ales Net working capital Working capital ratio
2002- 2003- 2004- 2005- 200603 04 05 06 07
ANALYSIS:
From the above calculations it is evident that the ratio has increased enormously from the year 2002-03 to 2003-04 and then moderately decreased and increased in 2006-07. with an efficient working capital management, the company is able to increase turnover and profits while keeping that total quantum of working capital in check.
ASSETS TURNOVER RATIO: Net assets turnover ratio Formula: Sales / Net assets
Net assets = CA – CL + FA RS in lakhs PARTICULARS Sales Net assets Working capital ratio 2002-03 51746.25 10137.02 5.10 2003-04 60880.59 10646.37 5.72 2004-05 92595.19 20221.45 4.58 2005-06 83673.79 22779.0 3.67 2006-07 66325.40 10963.12 6.05
10000 0 90 000 80 000 70 000 60 000 50 000 40 000 30 000 20 000 10 000 0
S ales Net as s ets Working capital ratio
2002 -03 2003-04 2004-0 52 005-06 2 006-07
ANALYSIS:
Assets are used to generate sales. A firm should mange its assets efficiency to maximize sales. The net assets ratio indicates the No. of times the firm is generating production / sales for every one rupee of capital employed in net assets.
Total assets turnover ratio:
Formula: Sales / Total assets
RS in lakhs PARTICULARS Sales Total assets Total assets ratio 2002-03 51746.25 41175.71 1.26 2003-04 60880.59 58348.12 1.04 2004-05 92595.19 71483.57 1.3 2005-06 83673.79 82865.42 1.01 2006-07 66325.40 73223.21 0.91
100000 90000 80000 70000 60000 50000 40000 30000 20000 10000 0
S ales Total as s ets Total as s etsratio
2002-03 2003-04 2004-05 2005-06 2006-07
ANALYSIS:
This ratio indicates the firm’s ability in generating sales from all financial resources committed to total assets. From the above graph it is evident that the total assets ratio is slightly changing ratios. Higher ratios, higher are the sales and the firm is able to operate efficiently.
Fixed assets turnover ratio:
Formula: Sales / Fixed assets
Rs in lakhs PARTICULARS Sales Fixed assets FATO ratio 2002-03 51746.25 5433.92 9.52 2003-04 60880.59 5552.25 10.97 2004-05 92595.19 7160.15 12.93 2005-06 83673.79 8025.60 10.43 2006-07 66325.40 7255.76 9.14
10 0000 9000 0 8000 0 7000 0 6000 0 5000 0 4000 0 3000 0 2000 0 1000 0 0
ANALYSIS:
S ales F ix ed as s ets F ATO ratio
2 002-0 3
2003 -04
2 004-05
2005-06
20 06-07
From the above graph it is evident that the fixed assets has remained more or less same throughout the past five years, which indicated that there is no sale of fixed assets. It is found that the sales have been gradually increased from 2002-03 to 200405 after it decreased. The fixed assets ratio is also increasing and decreasing in 200607 and sales. The increase in this ratio is due to the increase in sales; due to increase in
sales the firm can gain more profits and meet both current and future obligations whenever thy arise.
Current assets turnover ratio:
Formula: Sales / Current assets
RS in lakhs PARTICULARS Sales Current assets FATO ratio 2002-03 51746.25 35741.79 1.45 2003-04 60880.59 52795.87 1.15 2004-05 92595.19 64323.42 1.44 2005-06 83673.79 74839.82 1.19 2006-07 66325.40 65967.45 1.00
100000 90000 80000 70000 60000 50000 40000 30000 20000 10000 0 2002-03 2003-04 2004-05 2005-06 2006-07 S ales C urrent as s ets F ATO ratio
ANALYSIS:
The ratio is calculated to find out the contribution made by the current assets to the sales. This ratio will indicate the relationship between sales and current assets. This relationship will bring out the fact whether current assets are being fully utilized or not. A high ratio is an index of efficiency. The ratio has decreased for the year 2002-03 to 2003-04. The ratio increased in the next year after that again decreased in 2005-06 to 2006-07. This indicates higher efficiency level in utilizing working capital finance.
FINDINGS
? The Net Working Capital has increased by 391.02 lakhs from 2002-03 to 200304. The main reason for this increase is inventories. ? The net working capital ratio for the years from 2002-03 to 2005-06 as constantly increased after that in the year 2006-07 as decreased due to the fixed assets gone away increased in current liabilitieselow the standard ratio of 2:1
? The sales as also reflected towards inventory turnover ratio in years 2006-07. This speaks about enhanced liquidity without blocking up of funds in inventories. ? The company is able to turnover its debtors 3.33 times in 2003-04 and 2.62 in the year 2002-03, signifying that debtors got converted into cash 3.86 times in a year. The above ratio shows the growth in the sales and debtors of the company. ? Company’s collection period has been decreasing from 139 to 95 days from the year 2002-03 to 2004-05. The left over years has increased 145 to 189 days from the year 2005-06 to 200607. o 1.93 times during 2006-07. ? From the above the creditor’s turnover ratio is increased from 1.78 to 2.53 in years 2002-03 to 2004-05. The creditor’s turnover ratio indicates the number of times the payables rotate in a year.
doc_648419583.doc
Working capital is the capital which necessary for the smooth working of the orgnisation. this capital is required for the short term uses and for day to dat expenses.
EXECUTIVE SUMMARY
? OBJECTIVES OF THE STUDY ? PERIOD OF STUDY ? SOURCES OF DATA ? SCOPE OF THE STUDY ? LIMITATIONS OF THE STUDY
(a) Objective of the study :
The main objectives of this study is to analyses the financial performance of the SIVASHAKTHI . By taking the following financial information into consideration 2002-2003, 2003-2004, 2004-2005,2005-2006,2006-2007. To understand the methods in practice in the sample company Examine the present system of managing working capital in the sample company To analyse the funds position of the organization by application of working capital To understand the concept of working capital management.
(b) Period of the study :
The study of inventory management in sivashakthi is being done by me for one&half month that is from 28-12-2007 to 15-02-2008.
(c) Source of data : Primary data: primary data has been collected through discussions with managers
concerned and officials of the finance department.
Secondary data: secondary data has been collected from internet, journals, circulars,
books, annual reports and other printed materials of sivashakthi.
(d) Scope of the study :
1: Scope of the study is confined to sivashakthi company 2:The study covers a period of 45 days 3: The information / data taken for study covers financial years starting from 20022003 to 2006-2007. Hence the profit and loss A/C, Balance sheet was of past five years. With the help of the data as stated above, parameters for assessing financial performance such as current ratios, liquidity ratios and other relevant ratios of structural nature are computed to facilitate Trend Analysis.
(e) Limitatons of the study :
1: Major limitations on working capital are liquidity constraints 2: The concept of back-to-back payment terms between debtors and creditors requires organizational skills and lot coordination, which are generally wanting in Indian Industry
A PROFILE OF SIVASHAKTHI BIO PLANTTEC LTD
2.2 Industry overview TEAK Agricultural has been main stay of Indian economy even after 60 years of independence in spite of Green Revolution and a comma dance increase in Agricultural products of the country the yield per acre are much lower compare to other many countries. Owing to this the Agricultural scenario in India is under going tremendous change farmers and no more dependant on traditional crops and experimenting with new crops and methods has they have suffered a lot by depending on conventional crops. Today’s new generation and progressive farmer have slowly understood the rehab it’s of modern methods of farming like as Agro forestry expansible cultivation of high value timber yielding trees. Teak Plantations: Teaks scientifically know as “Tectonics Grandees” is one of the world’s premier hard wood timbers very famous for its mellow color fine and high durability of the timber. It occurs naturally only in India, Myanmar, and Thailand. It is naturalized in Java and Indonesia where it was probability introduced some 400 to 600 years above. In addition nit has been established through out tropical Asia as well as tropical, America, Latin America.
The Total volume of Global teak wood product is very meager when compare to other timbers lime manogan, red seeder and rose wood in spite of this Teak enjoy great demand be course of its straight, asestic qualities durability and work ability. Today teak ranks among the top tropical hard wood species it terms of total timber consumed a world wide an especially for specific market of luxury application like ship building, household and office interior and decorative building component. Consencuntly teak has become a major source economy for its main producing country. Till past 20 years the major source of supply for teak wood logs have been natural forestry and habit it’s of its growing countries. During past 20 years supplies of Teak wood from natural forestry haven been dwindling owing toe the tremendous market demand and consumption of teak wood world wide. The dwindling supplies from natural forestry and also due toe policies and legislation bans in the growing countries which severally restrict the harvesting of teak in natural forest. In India clear –felling of teak has been banned in most of the teak growing provinces and since 1986. in 1997 supreme court order placed for the restriction on feeling of any tree in natural forestry area as a result the has been an acute shortage of teak wood and there has been dramatic increased in India teak imports. Owing to the above reasons and circumstances the need felt to cultivate teak as a commercial crops under mixed as well as pure plantation in order to need ever growing demand for the teak wood in demotic market consign this growth of India has started the establishment of Teak Plantation across the country, however these efforts are in sufficient without the participation from the general public (forming community) and private sector. The role of private sector in teak plantation is likely to be significantly improvised and quality seedling to the interested farmers for raising plantations.
Recon sing this great opportunity and use demand for quality teak seedling. SIVASHAKTHI BIO PLANTTEC LTD started its operation in year 1998 with the sole objective to supply high quality Teak Saplings. HORTICULTRAL SAPLINGS It is well know fact that these days formers facing lot of problems in cultivation of regular field crops like Rice, sugarcane, Cotton, Chilies and other related crops. Apart from their huge water requirement which has become a score commodity those regular agricultural crops is highly labor intensive require continues investment from crop to crop and their returns to investment is very less. Also these conventional crops have a high degree of pest and disease problems have haven competently high risk of cyclones, draughts and floods even marketing of these crops is become difficult day by day since. Demand and supply equations are strongly in favor of traders. India with its diverse soil and climate comprising several agro ecological to grow the verity of horticultural crops. These crops from a significant part of the countries total agricultural production, it is estimated that all the Horticultural crops put together cover nearly 11.6 million hectors area with an annual production 91 million tones. Though these cropped area they agricultural output in the country. Horticultural crops play a unique role in India’s economy by improving the income of rural people. Fruits are also rich source of vitamins, minerals proteins carbon hydrates etc, which are essential in human nutrition. Thus cultivation of horticultural crops places a vital role in prosperity of a nation and is direct linked health and happiness of people. Fruits are not only used for domestic consumption and processing various products like pickles, preserves, sauce, jam, jelly etc but also substantial quality are exhorted in fresh and processed form bringing muck needed for the encourage to the country. These groups of crops also provide able
scope for achieving bio-diversity to maintain ecological balance and to create substantial agricultural which can make an impact on the nation economy in the years to come. India with more than 28.2 million tones of fruits with third largest production of fruits in the world next only to Brazil and China. However per capita consumption of fruits in India is only 46 grams against a minimum above 92 grams recommended India council of Medical research & National Institute of Nutrition, Hyderabad. With the present level of population the Annul Requirement of fruits will be of the order of 32.58 million tons. To meet their requirement the national commission on Horticulture has projected as area of 4 million hectors under fruit crops by 2000 AD. The recent emphasis on Horticulture in our country consequent to the recognition of the need for attaining nutrition security and for more profitable land use brought about a significant change in the out look of the growers and formers. Owing to the problem associated with the cultivation agricultural crops today the farmers are switching over to alternative cropping systems especially horticultural fruits crops like Mango, Sputa, Pomegranate & medicinal crops like Amla because of the following benefits. 1. Horticulture crops require only one time investment, if a farmer wants to establish a Mango orchard it is only on time investment. Later on he has to spend only on maintenance. 2. Long term results are assured on average crops like Mango; Sputa & Alma give continuous returns for 30 to 40 years. 3. Labor requirement is less 4. Egg mango or sputa cultivation requires 50-60% less labor compared to traditional groups like chills &cotton .in the initial 2-3 years they require some labor, later the requirement will be less.
5. Profitability of horticulture groups in more investment returns ratio will be more than 1:5. 6. marketing of horticulture groups in easier because awareness and consumption of fruits is increasing day by day .Demand & supply equation is now in favor of producer 7. there is huge export potential for Indian specialty fruits like mango, sapota& alma test and desire problems in case of horticulture problem are comparatively lower than conventional agriculture crops like chilli, cotton & paddy. 8. horticulture crops are being long term perennial in nature the cultural operations are spread out across the whole year without posing any pressure of time frame.where as for agriculture crops the field operations have to be performed with in a stipulated time failing which it will have tremendous impact on the final yield
BUSINESS OVERVIEW
Sivashakthi Bio Planttec Limited was incorporated on 12th January 1996 with the main objective of Production and marketing of high quality of teak wood saplings. Later on it started production of Horticulture plants and recently it has started the manufacturing and marketing of cercal protein Hydrolyses based Plant Growth Promoters. The company has mainly 3 production categories viz., Teak Saplings, Horticulture saplings and Plant Growth Promoters. The Individual production capacities of these products are as under. 1. Teak Saplings 2. Horticulture Saplings - Mango - Amla - Sapota - Pomegranate 5 Lakhs/Annual 5 Lakhs/Annual 5 Lakhs/Annual 2.5 Lakhs/Annual 25 Lakhs /annual
3. CPH based Plant Growth Promoters - Liquid Form - Granule Form 10 Lakhs Kl/annual 100 MT/Annual
Since Production of planting materials like Teak & Horticulture plants is as unorganized sector, presently there are no rules/regulations or any registering authority. As such there are no restrictions to carry on production & marketing of the above planting materials The Company started its operation in 1998, during 1998 only one branch at Vijayawada with 6 employees.
Till recently up to October 2005 the company production the teak sapling by processing stumps from various sources like forestry, private nurseries, farmers due to which there were variations in the final products. Since lot of grading have to been done to obtain un-form product cost production comparatively higher. Later company thought its R & D Department in collaboration with leading scientists in this field conducted an elaborate survey and successfully identify certain areas in different parts of the country to obtain seed material. These seeds are collected from best growing and early maturing plus trees. The Plus trees are mother tree have the following characters. • • • • They have straight main stump These trees grows straightly Have high degree of resist to pests and dieses They have known to yield superior quality timber
Sivashakthi teak saplings are now produced from the seeds of such plus trees ore mother trees Sivashakthi as selected mother orchards in states of Maharashtra, Andhra Pradesh, Karnataka, Madhya Pradesh, Uttar Pradesh Here the Plus trees are selected and the seeds from such trees are collected from for further production using modern propagation and green house technology. The Company has 4 Production Centers at Sangaluru, Lucknow, Indore, Bhubaneswar exclusively to produce stumps through the seeds collected from mother orchards. Here the main purpose is to select best growing and uniform plants. This is achieved through separation of slow growing and un uniform plants of different stages right after seed germination till stumps formation stage. Overall there will be 2 to 3 grading to achieve uniform quality stumps. These Stumps are transfer to secondary production centre for further raising of seedlings in poly bags.
Presently we are having 11 production centers to raise the saplings from stumps. This production centers at Here the main objective is again to select the best quality seedlings the respect uniform growth and vigor of the seedlings.
PRODUCTION PROCESS
FOR TEAK SEEDING: The process involved in production of high quality Teak seedings can be described as follows: 1. In the first step, areas where there is a presence of predominately high number of fast growing, high Vigo red, high quality timber yielding Teak trees are identified in the natural forest areas across the country like western Gnats go Karnataka, Karalla, Maharastra ,Eastern parts of Andhra Pradesh , Madhya Pradesh, Jharkand, Uttar Pradesh and Bihar. The areas are earmarked as mother orchards. 2. From these Mother Orchards specific trees are identified with known characters such as faster rate of growth, high degree of resistance to pests and diseases and which yield high quality timber. These trees are earmarked as “Plus Trees” or Mother Trees. 3. During February-March which is a season for collection of the seeds, the seeds from these plus trees are collected from different Mother Orchards. 4. Seeds treatment is given to break the Dormancy of the seeds by coating the seeds with cow-dung slurry and subjecting them to alternate wetting and drying cycles.
5. These treated seeds are dried under shade and sown on raised feds containing proper mixture of top soil, compost & sand to facilitate better germination. This is done in the month of April-May. 6. Germination takes place with in 30-40 days. The germination % rises between 60-80% depending upon nursery management practices & the seed quality. Here those seeding which germinate early having good vigor and retained and slowly germinating with low vigor and descended.
1. Preparation of stumps
2. Seeding which 12-15 months old with colon die motor of about 2.5to 4cm are used for preparation of stumps for preparation of stumps the seeding is be headed 1cm above the color and routs are tremended further these stumps are transported to secondary production centre.
3. Planting of stumps:
4. The stumps received from primary production centre are painted in poly 5. Bags under plastic tunnels to facilitate faster growth. 6. proper care is taken by spraying pesticides & fungicides to see that the 7. Plants remain healthy. 8. Here again grading is done by selecting the fast growing vigorous and healthy plants and rejecting the slow growing low Vigo red and unhealthy disease affected plants. 9. Only the best quality healthy and vigorous plants are dispatched once they attain 6-8 leaf stage with 1-1 1/2ft height.
Special features of Sivashakthi’s Teak Seedings
Sivashakthi’s Teak plants have the following special characters. ? Plants grow straight in a balanced proportion ? The main step develops into a very strong trunk with less no of side branches ? They have got comparatively high degree of resistance to pests & diseases than ordinary teak plants. ? They yield attractive wood with good color & high quality
Sivashakthi’s special package to the customers:
? Company provides these plants at the door steps of the customers with absolutely no additional transport cost ? Free technical service is provided to the customers through a team of well qualified agricultural officers once in 6 months ? As a gesture of good will and to field a long lasting celadon with the customers, sivasakthi provides one-time free replacements for the dead plants even to the extent of 100% ? Replacement plants are also delivered to the door steps of the customers totally free of cost
Service on call:
Whenever the customers require company’s technical assistance they can call our branch officers and they shall be attended by our technical experts over phone
2.2 History of the organization
Sivashakthi Bioplanttec Ltd was established in the year 1996. The focus of our company has been the economic growth of the Farming community of the Country, as agriculture is the backbone of our economy. Sivashakthi has revolutionized the way modern farming is carried out with its production and marketing of Genetically superior and high yielding Teak and Horticulture plants like Mango, Sapota, Amla etc
2.2 Establishment of the company
VALUES 1) QUALITY: We commit ourselves to constantly improve ourselves, our products and services so as to become the best. 2) LEADERSHIP: We commit to set highest standards in our business. 3) POSITIVE ATTITUDE: We believe that remaining positive and looking ahead is essential to achieve goals.
4) WORK ENVIRONMENT: We build a motivating work place where people can realize their professional ambitions.
5) SOCIETY: We want to contribute to society through economic contributions, positive benefits of our customers. 6) ISO 9001-2000 CERTIFICATION We commit ourselves to get all our products certified as per ISO Standards
A PROFILE OF SIVA SHAKTHI BIO PLANTTEC LIMITED
Opening the Door to new possibilities:
As natural resources and utilities transform economics, Indian agriculture will play an increasingly vital role in connecting the farming community and the technology necessary for growth.SIVASHAKTHI operates at the very center of this vast change, and as a catalyst for progress, fosters entrepreneurship, innovation, efficiency and economic reform. To succeed, we must remain nimble and ready to combine capital with strategic advice to play a constructive role for your clients. In any business environment ,however, certain tenets of our firm remain absolute :A dedication to our customers, a determination to attract and develop talent with unsurpassed expertise and a commitment to our culture of excellence team work and integrity.SIVASHAKTHI with this as focus, We believe we will be well positioned not only to respond change but to anticipate it in ways that best serve our clients for value addition ,to our shareholders for enhancing their funds and to society at for upliftment of growth. MISSION:
To achieve our objectives in an environment of fairness, honesty and courtesy towards our customers, employees, vendors and society at large. Guided by this inspiring credo, we hope to reach many more milestones in endeavors for the quality of human life and the environment VISION: Sivashakthi is a market leader excelling in business, delighting the customers with superior quality products and services with a team of highly competent, committed professionals, respected for ethical business practices and proud of contributing to economic growth of India. FIVE CORE VALUES: SIVASHAKTHI has always sought to be a value driven organization. These values continue to direct the company’s growth and prosparity. The five core values underpinning the way we do our business are:
Integrity: We must conduct our business fairly, with honesty and transparency.
Everything we do must stand the best of public scrutiny.
Understanding: We must be caring, show respect, compassion and humanity
for our colleagues and customers and always work for the benefit of the communities we serve.
Excellence: We must constantly strive to achieve the highest possible standards
in our day-to-day work and in the quality of goods and services we provide.
Unity: We must work cohesively with our colleagues and customers in building
strong relationship based on tolerance, understanding and mutual cooperation.
Responsibility:
We must continue to be responsible, sensitive to the communities and environments in which we work, always ensuring that what comes from the people goes back to the people many times over.
PURPOSE:
At SIVASHAKTHI, our purpose is to improve the quality of life of the communities we serve. We do this through leadership in sector of national economic significance, to which the company brings a unique set of capabilities. This requires us to grow aggressively in our focused area of business. Our heritage of returning to society what we earn evokes trust among consumers, employees, shareholders and the community. This heritage is being continuously enriched by formalization of high standards of behavior expected from employees. SIVASHAKTHI name is a unique asset representing leadership with trust. Leveraging this asset to enhance our competitiveness is the route to sustained growth and long-term success. CULTURE: Our culture is difficult to describe in words, let alone a paragraph. It is lived. It did not appear overnight, but it is a product of our history. Its hallmarksexcellence, teamwork and integrity –are grounded in strong business judgment and accountability. We believe that talent and motivation can be exponentially more powerful in an environment of mutual respect, trust and collaboration.
OUR FUTURE: In the course of SIVASHAKTHI’S history, the firm has developed FOUR underlying strengths that serve us well today and will, we trust, do so in future,
OUR excellent relationship with the farming community, that we believe we are second to none, OUR best research and development wing and management capabilities and
OUR culture that allows us to attract, develop, motivate and retain exceptional and encourages them to work together in a real spirit of team work. Looking ahead we see favorable conditions buoyed by economic growth and we belive we are well suited to participate in the growth. We are committed to providing our shareholders with return of equity at or near the top of our industry while continuing our successful record of near the top of our industry while continuing our successful record of growing book value and earning per share. FOCUS: ? To achieve a minimum turnover of Rs. 5 billion by the year 2009 ? To concentrate on high value & low volume fertilizers. ? To establish a minimum of 10 production units in every state of India. ? To increase the current market share and remain as market leader. ? To explore business opportunities in overseas markets. ? To increase the product base from 10 to 25 by 2008. ? To diversify into Bio Technology and Bio Medicines.
OUR APPROACH TO GROWTH
INNOVATION & CREATIVITY:
We have reinvented ourselves many times in the services we provide to our customers and it is that reinvention and creativity that keeps us alive. Customers tell us that the quality of our teamwork across our products and after sale services makes real differences to them. As a result, when markets expand and customers grow, we tend to grow with them. TALENTED MANPOWER We belive that our strategy for continuous growth is best executed by giving talented people the resources they need to build new and existing business. We have found that high-quality talent is the most important driver of growth over time. We have demonstrated that over the long tem, our approach can outperform the competition, creating value for our shareholders and career opportunities for our people
RESEARCH AND DEVELOPMENT The heart of SIVASHAKTHI’S research and development is our product pipeline. Our pipeline is an engine for discovering and developing the next generation of commercial products. During the previous year the company invested substantial amounts in researching new solutions for growers. The company concentrates the vast majority of its Research-and –Development (R&D) efforts on new biotech traits, elite germplasm, breeding, new variety and hybrid development and genomic research. Other R&D projects support the company’s current products.
2.4 ALL INNER COMPANIES SSBPL Sivashakthi Bio Partech Ltd.
VNFL
-
V N Fertichem Limited
VFL VAIL
-
Victor Fertilizers Limited Victor Agri Industries Limited Victor Agri Agencies Private Limited Victor Technologies Limited Nava-Barat Fertilizers Limited Victor Homes Limited
VAAPL VAL NBFL VHL -
MEANING OF WORKING CAPITAL
Capital required for a business can be classified under two main categories viz. Fixed Capital, and Working Capital
Every business needs funds for two purposes-for its establishment and to carry out its day-to-day operations. Long-term funds are required to create production facilities through purchase of fixed assets such as plant and machinery, land, building, furniture etc. Investments in these assets represent that part of firm’s capital, which is blocked on a permanent or fixed basis and is called fixed capital. Funds are also needed for short-term purposes for the purpose of raw materials, payments 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 in required for financing short term or current assets such as cash, marketable securities, debtors and inventories. Funds, thus, invested in current assets keep revolving fast and are being constantly converted into cash and this cash flows out again in exchange for other current assets. Hence, it is also known as revolving or circulating capital or short-term capital.
In the words of Shubin, “Working capital is the amount of funds necessary to cover the cost of operating the enterprise”.
According to Genestenberg, “Circulating capital means current assets of a company that are changed in the ordinary course of business from one form to another, as for example, from cash to inventories, inventories to receivables, receivables into cash”.
DEFINITIONS OF WORKING CAPITAL:-
“Working capital is excess of current assets over current liabilities.” -GUTHAMANN &DOUGALL
“Working capital refers to a firms investment in short term assets, cash, short term securities, accounts receivables and inventories.” -WESTON & BEIGHAM
“Working capital is the amount of funds necessary to cover the cost of operating the enterprise”. -SHUBIN
Business Definition for: Working Capital
1:The funds that are readily available to operate the business.
2:The working capital is the money and the assets (excluding fixed assets i.e. buildings, machinery etc) that a business uses to finance the day-to-day operations that produce the goods and services supplied to the customers. Working capital is also the difference between the current liabilities and current assets and is known as net working capital i.e.
NET
WORKING
CAPITAL
=
CURRENT
ASSETS
–
CURRENT
LIABILITIES
The better a company manages its working capital, the less the company needs to borrow.
Nature of working capital
The core of the working capital concept has been subjected to considerable changes over the years. A few decades ago this concept was viewed as a measure of the debtors ability to meet his obligation in whether or not the current assets were immediately realizable and available to pay debts in the case liquidation
In applying this measure a one year period was frequently used to clarify assets and liabilities were those due within one year. This focus of attention in recent years has shifted from liquidation point of view towards the operating cycle point of view this view emphasizes the ability of the firm to pay its maturing obligations from the funds generated by current operations. According to accounting research bulletin no 43 characterstics working capital as a margin or buffer for meeting obligation within the ordinary operating cycle of the business in this sense working capital is a static measure of the margin or buffer for meeting currently maturity obligations. There is little question that credit grantors,management,stockholders, and others have a need for an analysis and evaluation of working capital. At a minimum two types of analysis can be provided . 1:The presentation of the amount of the working capital at a particular point in the time to indicate a rough measure of the margin or buffer presently available to meet currently maturing obligation (static analysis) and 2:The presentation of the amount of the working capital for past periods and the expected flow covering future periods (dynamic analysis) is the present concept of working capital useful from both of these views.
CONCEPTS OF WORKING CAPITAL
There are two concepts of working capital: Gross Working Capital Net Working Capital
In the broad sense, the term working capital refers to the gross working capital and represents the amount of funds invested in current assets. Thus, the gross working capital invested in total current assets of the enterprise. Current assets are those assets, which in the ordinary course of business can be converted into cash within a short period of normally one accounting year.
S. No. 1. 2. 3. 4. 5.
6. 7. 8.
Constituents of current assets Cash in hand and bank balances Bills Receivables Sundry Debtors (less provision for bad debts) Short-term loans and advances Inventories of stock, as: (a) Raw materials (b) Work-in-progress (c ) Stores and spares (d) Finished goods Temporary Investments of surplus funds Prepaid Expenses Accrued Incomes
In the narrow sense, the term working capital refers to the net working capital. Net working capital is the excess of current assets over current liabilities, or say:
Net working capital = Current assets – Current liabilities.
Net working capital may be positive or negative. When the current assets exceed the current liabilities the working capital is positive and the negative working capital results when the current liabilities are more than the current assets. Current liabilities are those liabilities which are intended to be paid in the ordinary course of business within a short period of normally one accounting year out of the current assets or the income of the business.
S. No 1. 2. 3. 4. 5. 6. 7.
Constituents of current liabilities Bills Payable Sundry Creditors or Accounts Payable Accrued or Outstanding Short- term loans, advances and deposits Dividends Payable Bank Overdraft Provision for taxation, if it does not amount to appropriation of profits.
The gross working capital concept is financial or going concern concept whereas net working capital is an accounting concept of working capital.
CLASSIFICATION Working capital may be classified in two ways: On the basis of concept. On the basis of time.
WORKING CAPITAL
Basis of concept
Basis of time
Gross Fixed working working capital
Net working capital
CONTENTS
Variable working capital
CHAPTER-I ? INTRODUCTION ? EXECUTIVE SUMMARY CHAPTER-II ? COMPANY PROFILE CHAPTER-III ? THEROTICAL STUDY ? AN OVERVIEW CHAPTER-IV ? ANALYSIS OF WORKING CAPITAL ? ANALYSIS OF RATIO ANALYSIS CHAPTER-V ? CONCLUSIONS AND FINDINGS BIBLIOGRAPHY
capital
Seasonal working capital
Special working capital
Regular working capital
Reserve working capital
On the basis of concept, working capital is classified as Gross Working Capital and
Net Working Capital as discussed earlier. This classification is important from the point of view of the financial manager.
On the basis of time, working capital may be classified as
1: Permanent or Fixed Working Capital.
2: Temporary or Variable Working Capital
PERMANENT OR FIXED WORKING CAPITAL
Permanent or fixed working capital is the minimum amount, which is required to ensure effective utilisation of fixed facilities and for maintaining the circulation of current assets. There is always a minimum level of current assets which is continuously required by the enterprise to carry out its normal business operations. The permanent working capital can be further be classified as Regular working capital and reserve working capital required to ensure circulation of current assets from cash to inventories, from inventories to receivables and from receivables to cash and so on. Reserve working capital is the excess amount over the requirement for regular working capital, which may be provided for contingencies that may arise at unstated periods such as strikes, rise in prices, depression, etc.
TEMPORARY OR VARIABLE WORKING CAPITAL Temporary or variable working capital is the amount of working capital, which is required to meet the seasonal demands and some special exigencies. Variable working capital can be further classified as seasonal working capital and special working capital. Most of the enterprises have to provide additional working capital to meet the seasonal and special needs. The capital required to meet the seasonal needs of the enterprise is called seasonal working capital. Special working capital is the part of working capital, which is required to meet special exigencies such as launching of extensive marketing campaigns for conducting research, etc.
Temporary working capital differs from permanent working capital in the sense that it is required for short periods and cannot be permanently employed gaining in the business.
IMPORTANCE OR ADVANTAGE OF ADEQUATE WORKING CAPITAL
Working capital is the life blood and nerve centre of a business. Just as circulation of blood is essential in the human body for maintaining life, working capital is very essential to maintain the smooth running of a business. No business can run successfully without an adequate amount of working capital. The main advantages of maintaining adequate amount of working capital are as follows:
1. Solvency of the business Adequate working capital helps in maintaining solvency of the business by providing uninterrupted flow of production. 2. Goodwill Sufficient working capital enables a business concern to make prompt payments and hence helps in creating and maintaining goodwill. 3. Easy Loans A concern having adequate working capital, high solvency and good credit standing can arrange loans from banks and others on easy and favourable terms. 4. Cash Discount
Adequate working capital also enables a concern to avail cash discounts on the purchases and hence it reduces costs.
5
Regular supply of raw materials
Sufficient working capital ensures regular supply of raw materials and continues production. 6.
Regular payment of salaries, wages and other day-to-day
commitments
A company which has ample working capital can make regular payment of salaries, wages and other day-to-day commitments which raises the morale of its employees, increases their efficiency, reduces wastage’s and costs and enhances production and profits.
Exploitation of favourable market conditions.
Only concerns with adequate working capital can exploit favourable market conditions such as purchasing its requirements in bulk when the prices are lower and by holding its inventories for higher prices.
Ability to face crisis.
Adequate working capital enables a concern to face business crisis in emergencies such as depression because during such periods, generally, there is much pressure on working capital.
Quick and regular return on investments.
Every investor wants a quick and regular return on his investments. Sufficiency of working capital enables a concern to pay quick and regular dividends to its investors as there may not be much pressure to plough back profits. This gains the confidence of its investors and creates a favorable market to raise additional funds in the future.
High morale .
Adequacy of working capital creates an environment of securit7y, confidence, high morale and creates overall efficiency in a business
EXCESS OR INADQUATE WORKING CAPITAL
Every business concern should have adequate working capital to 7run its business operations. It should have neither redundant or excess working capital nor inadequate nor shortage of working capital. Both excess as well as short working capital positions are bad for any business. However, out of the two, it is the inadequacy of working capital, which is more dangerous from the point of view of the firm.
THE NEED OR OBJECTS OF WORKING CAPITAL
The need for working capital cannot be over emphasized. Every business needs some amount 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 the sales and realization of cash. There are time gaps ins purchase of raw materials and production, production and sales, and sales and realization of cash. Thus working capital is needed for the following purposes: For the purchase of raw materials , components and spares. To pay wages and salaries. To incur day-to-day expenses and overhead costs such as fuel, power and office expenses etc. To meet the selling costs as packing, advertising etc. To provide credit facilities to the customers . To maintain the inventories of 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 anew concern, as a growing concern and as one which has attained maturity. A new concern requires a lot of liquid funds to meet initial expenses like promotion, formation etc. These expenses are called
preliminary expenses and are capitalized. The amount needed as working capital in a new concern depends primarily upon its size and the ambitions of its promoters. Greater the size of the business unit, generally, larger will be the requirements of working capital. The amount of working capital needed goes on increasing with the growth and expansion of business till it attains maturity. At maturity the amount of working capital needed its called normal working capital. There are many other factors, which influence the need of working capital in a business,
FACTORS DETERMINING THE WORKING CAPITAL REQUIREMENTS
The working capital requirements of a concern depend upon a large number of factors such as nature and size of business, the character of their operations, the length of production cycles, the rate of stock turnover and the state of economic situation. It is
not possible to rank them because all such factors are of different importance and the influence of individual factors changes for a firm over time. However, the following are important factors generally influencing the working capital requirements. 1.Nature of Character of Business.
The working capital requirements of a firm basically depend upon the nature of its business. Public utility undertakings like Electricity, Water Supply and Railways need very limited working capital because they offer cash sales only and supply services, not products, and as such no funds are tied up in inventories and receivables. On the other hand trading and financial firms require less investment in fixed assets but have to invent large amounts in current assets like inventories, receivables and cash; as such they need large amount of working capital. The manufacturing undertakings also require sizeable working capital along with fixed investments.
2. Size of business / scale of operations.
The working capital requirements of a concern are directly influenced by the size of its business which may be measured in terms of scale of operations. Greater the size of a business unit, generally larger will be the requirements of working capital. However, in some cases even a smaller concern may need more working capital due to high overhead charges, inefficient use of available resources and other economic disadvantages of small size.
3. Production Policy. In certain industries the demand is subject to wide fluctuations due to seasonal variations. The requirements of working capital, in such cases, depend upon the production policy. The production could be kept either steady by accumulating inventories during slack periods with a view to meet high demand during the peak season or the production could be circulated during the slack season and increased during the peak season. If the policy is to keep production steady by accumulating inventories it will require higher working capital.
4. Manufacturing Process / Length of Production Cycle In manufacturing business, the requirements of working capital increase in direct proportion to the length of manufacturing process. Longer the process period of manufacture, larger is the amount of working capital required. The longer the manufacturing time, the raw materials and other supplies have to be carried for a longer period in the process with progressive increment of labour and service costs before the finished product is finally obtained. Therefore, if there are alternative
processes of production, the process with the shortest production period should be chosen. 5. Seasonal Variations. In certain industries raw material is not available throughout the year. They have to buy raw materials in bulk during the season to ensure an uninterrupted flow and process them during the entire year. A huge amount is thus, blocked in the form of material inventories during such season, which gives rise to more working capital requirements. Generally, during the busy season, a firm requires larger working capital than in the slack season.
Working Capital Cycle.
In manufacturing concern, the working capital cycle starts with the purchase of raw materials and ends with the realization of cash from the sale of finished goods. This cycle involves purchase of raw materials and stores, its conversion into stocks of finished goods through work-in-progress with progressive increment of labour and service costs, conversion of finished stock into sales, debtors and receivables and ultimately realisation of cash and this cycle continues again from cash to purchase of raw material and so on.
DEBTORS (RECEIVABLES )
CASH FINISHED GOODS
RAW MATERIALS
WORK-INPROGRESS
Fig. Showing working capital/ operating cycle of a manufacturing concern.
The speed with which the working capital completes one cycle determines the requirement of working capital- longer the period of the cycle larger is the requirement of working capital.
7.
Rate of stock Turnover.
There is a high degree of inverse co-relationship between the quantum of working
capital and the velocity or speed with which the sales are effected. A firm having a high rate of stock turnover will need lower amount of working capital as compared to a firm having a low rate of turnover
8. Credit Policy.
The credit policy of a concern in its dealings with the debtors and creditors influence considerably the requirements of working capital. A concern that purchases its requirements on credit and sells its products/services on cash requires lesser amount of working capital. On the other hand a concern buying its requirements for cash and allowing credit to its customers, shall need larger amount of working capital as very huge amount of funds are to be tied up in debtors or bills receivables.
9. Business Cycles. Business cycle refers to alternate expansion and contraction in general business activity. In a period of boom i.e., when the business is prosperous, there is a need for larger amount of working capital due to increase in sales, rise in prices, optimistic expansion of business, etc. On the contrary in the times of depression i.e., when there is a down swing of the cycle, the business contracts, sales decline, difficulties are faced in collection from debtors and firms may have a large amount of working capital lying idle.
10. Rate of growth of business
The working capital requirements of a concern increase with the growth and expansion of its business activities. Although, it is difficult to determine the relationship between the growth in the working capital of a business, yet it may be concluded that for normal rate of expansion in the volume business, we may have
retained profits to provide for more working capital but in fast growing concerns, we shall require large amount of working capital.
11 Earning Capacity and Dividend Policy.
Some firms have more earning capacity than others due to quality of their products, monopoly conditions etc. Such firms with high earning capacity may generate cash profits from operations and contribute to their working capital. The dividend policy of a concern also influences the requirements of its working capital. A firm that
maintains a steady high rate of cash dividend irrespective of its generation of profits needs more working capital than the firm that retains larger part of its profit 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, the rising prices will require the firm to maintain larger amount of working capital, as more funds will be required to maintain the same current assets. The effect of rising prices may be different firms. Some firms may effect much while some others may not be affected at all by the rise in the prices.
13 Other Factors.
Certain other factors such operating efficiency, management ability, irregularities of supply, import policy, asset structure, importance of legal, banking facilities etc. also influence of requirement of working capital.
MANAGEMENT OF WORKING CAPITAL.
Working capital, in general practice, refers to the excess of the current assets over current liabilities. Management of working capital therefore, its concerned with the problems that arise in attempting to manage the current assets, the current liabilities and inter relationship that exists between them. In other words it refers to all aspects of administration of both current assets and current liabilities.
The basic goal of working capital management is to mange 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 inadequate nor excessive. This is so because both inadequate as well as excessive working capital positions are bad for any business. Inadequacy of working capital may lead the firm to insolvency and excessive working capital implies idle funds, which earn no profits for the business. Working capital management policies of a firm have a great effect on its profitability, liquidity and structural health of the organization. In this context, working capital management is three dimensional in nature:
1 Dimension I is concerned with the formulation of policies with regard to profitability, risk and liquidity . 2 Dimension II is concerned with the decision about the composition and level of current assets . 3 Dimension III is concerned with the decision about the composition and level of current liabilities .
PRINCIPLES OF WORKING CAPITAL MANAGEMENT
Principles of working capital management
Principle of risk management
Principle of cost of capital
Principle of equity position
Principle of maturity of payment
1.Principle of risk management
Risk here refers to the inability of a firm to meet its obligations as and when they become due for payment. Larger investment in current assets with less dependence on short-term borrowings increase liquidity, reduces dependence on short-term borrowings increases liquidity, reduces risk and thereby decreases the opportunity for gain or loss. On the other hand less investment in current assets with greater
dependence on short-term borrowings increases risk, reduces liquidity and increases profitability. In other words, there is a definite inverse relationship between the degree of risk and profitability
2.Principle of cost of capital.
The various sources of raising working capital finance have different cost of capital and the degree of risk involved. Generally, higher the risk lower is the cost and lower the risk higher is the cost. A sound working capital management should always try to achieve a proper balance between these two.
3. Principle of equity position
This principal is concerned with planning the total investment in current asset. According to this principal, the amount of working capital invested in each components should be adequately justified by a forms equity position. Every Rs. Invested in the current asset should contribute to the net worth of the form. The level of current asset may be measured with the help of two ratio:
? Current asset as a percentage total assets and ? Current asset as a percentage total sales.
4. Principle of maturity of payment
This principal is concern with planning the sources of finance for working capital. According to this principal, a form should make every effort to relate maturities of payment to its flow of internally generated funds. Maturity have been of various current obligations is an important factors in risk assumptions and risk assessments. Generally, shorter the maturity schedule of current liabilities in relation to expected cash in flows, the greater the inability to meet its obligations in time.
PROJECT ANALYSIS & RATIOS OF SIVASHAKTHI
Raw Material Conversion period (RMCP) PARTICULARS Raw-Material Inventory Opening Closing Average rawmaterial 5650.56 5004.39 5173.97 5445.00 3781.16 Raw-Material 26248.22 32701.28 49307.20 47246.65 41979.11 consumption Avg.RMI/RMC*365 79 56 38 38 26 2002-03 6015.07 5286.05 2003-04 5286.0 4722.74 2004-05 4722.74 5625.19 2005-06 5625.19 4277.65 2006-07 4277.65 1648.53
ANALYSIS:
The Raw-material conversion period for the years has been varying from 79 days to 26 days. The conversion period of the company in the years from 2002-03 to 2006-07 is 79 to 26 days, which resulting to reduce the funds tied up in the process of conversion.
Working-in-progress Conversion period (WIPCP)
PARTICULARS Work-in-progress
2002-03 5694.26
2003-04 6192.52
2004-05 8350.15
2005-06 3876.35
2006-07 4259.86
Inventory Opening Closing Average WIP Cost of produ ction (COP) Avg.WIP/COP*365
6192.52
8350.15
3876.35
4259.86
3372.20
5943.39 7271.34 6113.25 4068.17 3816.03 47777.19 61176.97 67562.26 72054.56 65413.94 45 43 33 21 21
ANALYSIS: The work-in-process conversion period for the years from 2002-03 to 2006-07 is 45 days to 21 days. The years from 2002-03 to 2003-04 has taken long time for the conversion and remaining years, the conversion is within limits except in 2006 and 2007. Its shows the company handle conversion period within shot period.
Finished Goods Conversion period (FGCP)
PARTICULARS Finishedgoods inventory Opening
2002-03 1303.93 1058.57
200304 1058.57 1445.58
200405 1445.58 651.33
200506 651.33 1183.01
200607 1183.01 945.75
Closing Average FGI Cost of goods sold (COG) Avg.FGI/COG*365 ANALYSIS:
1181.25 1252.08 1048.455 917.17 1064.38 52310.49 57474.49 82683.22 78965.66 70139.75 8 8 5 4 6
The Finished Goods Conversion period for the years 2002-03 to 2006-07 was 8 to 6 days. The company is able to maintain the stipulated time period.
Sundry Debtors Collection Period (DCP)
PARTICULARS Book debtors (BD) a. Opening b. Closing Avg. book debtors Sales Avg.BD/Sales*365
2002-03
2003-04
2004-05
2005-06
2006-07
20913.15 21973.04 19343.72 32476.19 44049.43 21973.04 19343.72 32476.19 44049.43 38437.58 21443.09 20658.38 25909.95 38262.81 41243.51 51746.25 60880.59 92595.19 83673.79 66325.40 151 124 102 149 195
ANALYSIS:
The actual collection period of SIVASHAKTHI on an average is very high in the years 2002-03and 2004-05 to 2005-06 ranging from 151,149 and 195 days. It is clearly evident from this table is that there is delay in collection of receivable from debtors.
But in the years 2002-03and 2004-05, the collection period is 124 and 102 days respectively. This shows that there is decrease and moderately increased in collection period.
Payable Deferred Period (PDP)
PARTICULARS Creditors (CR) a. Opening b. Closing Avg. CR Purchases Avg.CR * 365 Purchases ANALYSIS:
2002-03
2003-04
2004-05
2005-06
2006-07
12698.95 14649.26 13020.66 26609.38 25747.52 14649.26 13674.11 24396.52 204 13020.66 1383496 33214.89 152 26609.38 19815.02 50063.88 144 25747.52 26178.45 46749.65 204 23100.43 24423.98 38743.87 230
The Payable deferred period shows the off time the companies can defer the payment to outsiders. So. This implies that as lengthier the period the better off is the company. The payable deferred period has increased in 2002-03 as 204 days when compared to
2003-04 that is 152 days. Again, there is increase in the deferred period for the year 2004-05 and after that there was continuous increase. It reflects on interest.
Net Operation Cycle
PARICULRS 1. RMCP 2.WICP 3.FGCP 4.DCP 5.Gross Operating cycle (1+2+3+4) 6.PDP 7.Net Operating Cycle (5-6) ANALYSIS: 204 79 152 79 144 34 204 8 230 18 2002-03 79 45 8 151 283 2003-04 56 43 8 124 231 2004-05 38 33 5 102 178 2005-06 38 21 4 149 212 2006-07 26 21 6 195 248
The net operating cycle of the company has decreased from 79 to 18 days. The net operating cycle doesn’t exceed the standard norm and slightly increased in 2006-07.
The period of operating cycle show efficient way as in the years, it leads to turnover increase and reduction in interest cost.
CALCULATIONS OF NET WORKING CAPITAL OF SIVASHAKTHI in lakhs
PARTICULARS I. Current assets
2002-03
2003-04
2004-05
2005-06
2006-07
0.40 Interest
0.01
0.01
-
-
accrued on invest Inventories 12559.82 Sundry Debtors 19856.13 Cash & 3316.4 bank balances TOTAL OF CA II.Current liabilities NetWorking Capital (I – II) 35741.79 31038.69 4703.10
1453193 16681.11 21582.58 52795.87 47701.75 5094.12
1015894 31344.53 22820.44 64323.42 51262.12 13061.3
10710.86 42946.87 21182.09 74839.82 60086.42 14753.4
6622.64 36774.52 22570.29 65967.45 62260.09 3707.36
ANALYSIS: The Net Working Capital has increased by 391.02 lakhs from 2002-03 to 2003-04. The main reason for this increase is inventories. There is a significant increase in Net Working Capital. It has increased by 7967.18 lakhs. This increases is due to sundry debtors and cash & bank balances.
In the net working capital has increased by 1692.1 from 2004-05 to 2005-06.The main reason for this increased in sundry debtors and compared to previous years there is decrease in net working capital due to increased in current liabilities.
The net working capital has decreased by 11046.04 lakhs from 2005-06 to 2006-07. The main reason is decreased in inventories and sundry debtors. The current liabilities are increasing and current assets are decreasing, the company would able to maintained proper growth in current assets rather than the current liabilities.
Ratio analysis
Ratio analysis is a widely used tool of financial analysis. It is defined as the
systematic use of ratio to interpret the financial statements so that the strengths and weaknesses of a firm as well as its historical performance and current financial condition can be determined. The tern ratio refers to the numerical or quantitative relationship between two variables.
The management can use the ratio analysis of working capital as means of checking upon the efficiency with which working capital is being used in the enterprise. In other words the ratio analysis indicates whether the financial position of a firm is improving or deteriorating over the years. The significance trend analysis of ratio lies in the fact that the ratio may be low as compared to the standard norms, but the trend may be upward.
Ratio may be used for comparison in any of the following ways
? Comparison of a firm with its own performance in the past. ? Comparison of one firm to another firm in the industry. ? Comparison if an achieved performance with pre-determined standards.
The most important ratios of working capital management being: ? Current ratio
? Quick ratio ? Net Working Capital ratio ? Inventory Turnover ratio ? Debtors Turnover ratio ? Average collection period ? Creditors Turnover ratio ? Average payment period
Assets Turnover ratio
? Net assets turnover ratio ? Total assets turnover ratio ? Fixed assets turnover ratio ? Current assets turnover ratio.
Working capital turnover ratios.
CURRENT RATIO
The current ratio is calculated by dividing current assets by current liabilities.
Formula:
current assets / current liabilities
RS in lakhs
PARTICULARS Current assets Current liabilities Current ratio
2002-03 3574 1.79 3103 8.69 1.15
2003-04 5279 5.87 4770 1.75 1.11
2004-05 6432 3.42 5126 2.12 1.25
2005-06 7483 9.82 6008 6.42 1.25
2006-07 6596 7.45 6226 0.09 1.06
8 0 0 0 0 7 0 0 0 0 6 0 0 0 0 5 0 0 0 0 4 0 0 0 0 3 0 0 0 0 2 0 0 0 0 1 0 0 0 0 0 2 0 0 2 -0 3 2 0 0 3 -0 4 2 0 0 4 -0 5 2 0 0 5 -0 6 2 0 0 6 -0 7 C urrent a ssets C urrent lia bilities C urrent ra tio
ANALYSIS:
The current ratio is a measure of the firm’s short-term solvency; standard current ratio is 2:1, where current assets should be double to current liabilities. Looking at the current ratio of the firm for the years from 2002-03 to 2006-07, it is clearly evident that the ratio is below the standard ratio of 2:1. There is a continuous decrease and increasing in current ratio because of the decrease in current assets and increase in current liabilities, even though current assets are in excess of current liabilities but which are not up to the required level and the company has been able to honor its all commitment of payments and able to manage its working capital efficiently.
QUICK RATIO: The quick ratio is found out by dividing the total of the quick assets by total current liabilities. Formula: quick assets / current assets
PARTICULARS Current assets Inventories Quick assets Current liabilities Quick ratio 2002-03 2003-04 2004-05 35741.79 52795.87 64323.42 12559.82 14531.93 10158.94 23181.97 38263.94 54164.48 31038.6 47701.7 51262.12 9 0.75 5 0.80 1.06 2005-06 748398.82 10710.86 64128.96 60086.42 1.07 2006-07 65967.45 6622.64 59344.81 62260.09 0.95
2002-03 2003-04 2004-05 2005-06 2006-07
Quick assets: current assets – inventories
ANALYSIS: The ratio is also called as liquid ratio or acid test ratio. It is referred to as quick ratio because it is a measurement of firm’s ability to convert its current assets quickly into cash in order to meet its liabilities.
Commonly it is held the quick ratio should be 1:1. If ratio is lower than the standards, it implies that the financial position of the concern to be unsound and real cash will have to be provided for the payment of liabilities. There is difference in comparing of five years current assets and current liabilities and the company performed well to increase the quick ratio.
NET WORKING CAPITAL RATIO
The difference between current assets and current liabilities is called net working capital.
Formula: Net working capital = current assets – current liabilities
Net assets = current assets – current liabilities + fixed assets
PARTICULARS Current assets Current liabilities CA-CL Fixed assets Net assets NWC ratio*100
2002-03 35741.79 31038.69 4703.1 5433.92 10137.02 46.40
2003-04 52795.87 47701.75 5094.12 5552.25 10646.37 47.85
2004-05 64323.42 51262.12 13061.3 7160.15 20221.45 64.59
2005-06 74839.82 60086.42 14753.4 8025.60 22779.00 64.77
2006-07 65967.45 62260.09 3707.36 7255.76 10963.12 33.82
80000 70000 60000 50000 40000 30000 20000 10000 0
ANALYSIS: Net Working capital is sometimes used as a measure of a firm’s liquidity and it also measures the firm’s potential reservoir of funds. The companies have to be careful that the net working capital will not come down drastically, as this would affect the liquidity and consequently the operations of the business. The net working capital ratio for the years from 2002-03 to 2005-06 as constantly increased after that in the year 2006-07 as decreased due to the fixed assets gone away and constantly increased in current liabilities.
C urrent a ssets C urrent liabilities C A-CL F ixedassets Net assets NW Cratio*100 2002-03 2003-042004-05 2005-06 2006-07
INVENTORY TURNOVER RATIO:
It is calculated by dividing the cost of goods sold by the average inventory.
Formula: Cost of goods sold / Average inventor
Cost of goods sold (COG) = sales – gross profit
Average inventory = (opening stock + closing stock) / 2
PARTICULARS Sales Gross profit COG AVG. inventory ITO ratio
2002-03 51746.25 4564.18 47182.07 12797.78 3.69
2003-04 60880.59 9937.16 50943.43 13545.88 3.76
2004-05 92595.19 17372.76 75222.43 12345.44 6.09
2004-05 83673.79 14489.74 69184.05 10434.9 6.63
2006-07 66325.40 6927.01 59398.39 8666.75 6.85
1 00000 9000 0 8000 0 7000 0 6000 0 5000 0 4000 0 3000 0 2000 0 1000 0 0
S ales Gros s profit C OG AV G . inventory ITO ratio
2 002-0 3 200 3-04 2 004-0 5
2004 -05 20 06-07
ANALYSIS:
From the year 2002-03 to 2006-07 it increased from 3.69 to 6.85. Stability in inventory levels coupled with increase in cost of production up to 2004-05. After that it is decreased due to cost of goods sold. The sales as also reflected towards inventory turnover ratio in years 2006-07. This speaks about enhanced liquidity without blocking up of funds in inventories.
DEBTORS TURNOVER RATIO: It is found by dividing credit sales by average debtors. Formula: Credit sales / Avg. debtors.
Avg. debtors = (opening + closing debtors) / 2
PARTICULARS Sales Debtors DTO ratio
2002-03 517462.5 19726.62 2.62
2003-04 60880.59 18273.12 3.33
2004-05 92595.19 24012.57 3.86
2005-06 83673.79 37145.45 2.52
2006-07 66325.40 39860.69 1.93
600 000 500 000 400 000 300 000 200 000 100 000 0 200 2-03 20 03-04 2 004-0 5 2 005-06 2006 -07 S ales D ebtors D TO ratio
ANALYSIS: As there is increase in sales from 2002-03 to 2004-05 years it implies that there will be debtors and remaining years decreased in sales and continuous increase in debtors. Turnover ratio indicates the number of times debtors turnover each year. Generally the higher value of debtors turnover, the more efficient is the management of the credit. The company is able to turnover its debtors 3.33 times in 2003-04 and 2.62 in the year 2002-03, signifying that debtors got converted into cash 3.86 times in a year. The above ratio shows the growth in the sales and debtors of the company. Ultimately this ratio has gone down to 1.93 times during 2006-07.
AVERAGE COLLECTION PERIOD:
The average number of days for which book debts remain outstanding is called the average collection. Formula: Debtors / sales * 365
PARTICULARS Sales Debtors Avg collection ratio
2002-03 51746.25 19726.62 139
2003-04 60880.59 18273.12 110
2004-05 92595.19 24012.57 95
2005-06 83673.79 37145.45 145
2006-07 66325.40 39860.69 189
100000 90000 80000 70000 60000 50000 40000 30000 20000 10000 0 S ales D ebtors Avg collection ratio
2002-03 2003-04 2004-05 2005-06 2006-07
ANALYSIS:
Company’s collection period has been decreasing from 139 to 95 days from the year 2002-03 to 2004-05. The left over years has increased 145 to 189 days from the year 2005-06 to 2006-07. Decrease in the collection period for the particular year indicates that the boo-debt remain outstanding for those days. This will lead to less interest burden.
CREDITORS TURNOVER RATIO: Creditors turnover indicates the number of times creditors turnover each year generally, the higher the value of creditors turnover, the more efficient is the management of credit.
To outside analyst information about credit sales and opening and closing balance of creditors may not be available. Therefore, creditors turnover can be calculated by dividing total sales by the year-end balance of creditors.
Formula: Credit purchases / Avg account payable
Avg creditors = (opening + closing creditors) / 2
Rs in lakhs PARTICULARS Purchases Avg. creditors CTO ratio 2002-03 24396.52 13674.12 1.78 2003-04 33214.89 13834.96 2.40 2004-05 50063.88 19815.02 2.53 2005-06 46749.65 26178.45 1.79 2006-07 38743.87 24423.98 1.59
60000 50000 40000 30000 20000 10000 0 2002- 2003- 2004- 2005- 200603 04 05 06 07 Purchases Avg . creditors CTO ratio
ANALYSIS:
From the above the creditors turnover ratio is increased from 1.78 to 2.53 in years 2002-03 to 2004-05. The creditors turnover ratio indicates the number of times the payables rotate in a year. Payables turnover indicates the relationship between net purchases for the whole year and total payables. The ratios are increased and decreased its shows efficiently payable to creditors.
AVERAGE PAYMENT PERIOD: This ratio gives the average period enjoyed from the creditors and is calculated as under.
Formula: Days / CTO ratio * 365 RS in lakhs
PARTICULARS Purchases Avg. creditors Avg. coll. period
2002-03 24396.52 13674.12 205
2003-04 33214.89 13834.96 152
2004-05 50063.88 19815.02 144
2005-06 46749.65 26178.45 204
2006-07 38743.87 24423.98 230
60000 50000 40000 30000 20000 10000 0 2002- 2003- 2004- 2005- 200603 04 05 06 07 Purchases Av g . creditors Av g . coll. period
ANALYSIS: Company’s payable period has been increasing and decreasing. It has been decreasing from 205 to 144 days. A higher ratio and fewer days indicate the creditors are paid in time. A lower ratio and higher number of days indicate delayed payment of creditors. Depending on the liquidity position of the firm.
WORKING CAPITAL TURNOVER RATIO:
Net Current assets turnover ratio
Formula: Sales / Net current assets
RS in lakhs PARTICULARS 2002-03 Sales 51746.25 Net working capital 4703.1 Working capital ratio 11.00 2003-04 60880.59 5094.2 11.95 2004-05 92595.19 13061.3 7.09 2005-06 83673.79 14753.4 5.67 2006-07 66325.40 3707.36 17.89
100000 90000 80000 70000 60000 50000 40000 30000 20000 10000 0
S ales Net working capital Working capital ratio
2002- 2003- 2004- 2005- 200603 04 05 06 07
ANALYSIS:
From the above calculations it is evident that the ratio has increased enormously from the year 2002-03 to 2003-04 and then moderately decreased and increased in 2006-07. with an efficient working capital management, the company is able to increase turnover and profits while keeping that total quantum of working capital in check.
ASSETS TURNOVER RATIO: Net assets turnover ratio Formula: Sales / Net assets
Net assets = CA – CL + FA RS in lakhs PARTICULARS Sales Net assets Working capital ratio 2002-03 51746.25 10137.02 5.10 2003-04 60880.59 10646.37 5.72 2004-05 92595.19 20221.45 4.58 2005-06 83673.79 22779.0 3.67 2006-07 66325.40 10963.12 6.05
10000 0 90 000 80 000 70 000 60 000 50 000 40 000 30 000 20 000 10 000 0
S ales Net as s ets Working capital ratio
2002 -03 2003-04 2004-0 52 005-06 2 006-07
ANALYSIS:
Assets are used to generate sales. A firm should mange its assets efficiency to maximize sales. The net assets ratio indicates the No. of times the firm is generating production / sales for every one rupee of capital employed in net assets.
Total assets turnover ratio:
Formula: Sales / Total assets
RS in lakhs PARTICULARS Sales Total assets Total assets ratio 2002-03 51746.25 41175.71 1.26 2003-04 60880.59 58348.12 1.04 2004-05 92595.19 71483.57 1.3 2005-06 83673.79 82865.42 1.01 2006-07 66325.40 73223.21 0.91
100000 90000 80000 70000 60000 50000 40000 30000 20000 10000 0
S ales Total as s ets Total as s etsratio
2002-03 2003-04 2004-05 2005-06 2006-07
ANALYSIS:
This ratio indicates the firm’s ability in generating sales from all financial resources committed to total assets. From the above graph it is evident that the total assets ratio is slightly changing ratios. Higher ratios, higher are the sales and the firm is able to operate efficiently.
Fixed assets turnover ratio:
Formula: Sales / Fixed assets
Rs in lakhs PARTICULARS Sales Fixed assets FATO ratio 2002-03 51746.25 5433.92 9.52 2003-04 60880.59 5552.25 10.97 2004-05 92595.19 7160.15 12.93 2005-06 83673.79 8025.60 10.43 2006-07 66325.40 7255.76 9.14
10 0000 9000 0 8000 0 7000 0 6000 0 5000 0 4000 0 3000 0 2000 0 1000 0 0
ANALYSIS:
S ales F ix ed as s ets F ATO ratio
2 002-0 3
2003 -04
2 004-05
2005-06
20 06-07
From the above graph it is evident that the fixed assets has remained more or less same throughout the past five years, which indicated that there is no sale of fixed assets. It is found that the sales have been gradually increased from 2002-03 to 200405 after it decreased. The fixed assets ratio is also increasing and decreasing in 200607 and sales. The increase in this ratio is due to the increase in sales; due to increase in
sales the firm can gain more profits and meet both current and future obligations whenever thy arise.
Current assets turnover ratio:
Formula: Sales / Current assets
RS in lakhs PARTICULARS Sales Current assets FATO ratio 2002-03 51746.25 35741.79 1.45 2003-04 60880.59 52795.87 1.15 2004-05 92595.19 64323.42 1.44 2005-06 83673.79 74839.82 1.19 2006-07 66325.40 65967.45 1.00
100000 90000 80000 70000 60000 50000 40000 30000 20000 10000 0 2002-03 2003-04 2004-05 2005-06 2006-07 S ales C urrent as s ets F ATO ratio
ANALYSIS:
The ratio is calculated to find out the contribution made by the current assets to the sales. This ratio will indicate the relationship between sales and current assets. This relationship will bring out the fact whether current assets are being fully utilized or not. A high ratio is an index of efficiency. The ratio has decreased for the year 2002-03 to 2003-04. The ratio increased in the next year after that again decreased in 2005-06 to 2006-07. This indicates higher efficiency level in utilizing working capital finance.
FINDINGS
? The Net Working Capital has increased by 391.02 lakhs from 2002-03 to 200304. The main reason for this increase is inventories. ? The net working capital ratio for the years from 2002-03 to 2005-06 as constantly increased after that in the year 2006-07 as decreased due to the fixed assets gone away increased in current liabilitieselow the standard ratio of 2:1
? The sales as also reflected towards inventory turnover ratio in years 2006-07. This speaks about enhanced liquidity without blocking up of funds in inventories. ? The company is able to turnover its debtors 3.33 times in 2003-04 and 2.62 in the year 2002-03, signifying that debtors got converted into cash 3.86 times in a year. The above ratio shows the growth in the sales and debtors of the company. ? Company’s collection period has been decreasing from 139 to 95 days from the year 2002-03 to 2004-05. The left over years has increased 145 to 189 days from the year 2005-06 to 200607. o 1.93 times during 2006-07. ? From the above the creditor’s turnover ratio is increased from 1.78 to 2.53 in years 2002-03 to 2004-05. The creditor’s turnover ratio indicates the number of times the payables rotate in a year.
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