Description
A company can be endowed with assets and profitability but short of liquidity if its assets cannot readily be converted into cash. Positive working capital is required to ensure that a firm is able to continue its operations and that it has sufficient funds to satisfy both maturing short-term debt and upcoming operational expenses.
A STUDY ON “WORKING CAPITAL IN HERITAGE FOODS (INDIA) LIMITED”
A Project report submitted to Jawaharlal Nehru Technological University, Hyderabad, in partial fulfillment of the requirements for the award of the degree of
MASTER OF BUSINESS ADMINISTRATION
By
D. SANTOSH VARMA Reg. No. 10241E0012 Under the Guidance of Y. GAYATHRI
Associate Professor
Department of Management Studies Gokaraju Rangaraju Institute of Engineering & Technology, Hyderabad (Affiliated to JNTUH) 2010-2012
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CERTIFICATE
This is to certify that the project entitled “ A Study on Working Capital Management in Heritage Foods (India) Limited” has been submitted by Mr. D. Santosh Varma (Reg. No. 10241E0012) in partial fulfillment of the requirements for the award of Master of Business Administration from Jawaharlal Nehru Technological University, Hyderabad. The results embodied in the project has not been submitted to any other University or Institution for the award of any Degree or Diploma.
Mrs. Y. Gayathri Internal Guide Associate Professor Department of Management Studies GRIET
Mr. KVS Raju Professor & HOD Department of Management Studies GRIET
Mr. S. Ravindra Chary Project Coordinator Associate Professor Department of Management Studies GRIET
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DECLARATION
I hereby declare that the project entitled “A Study on Working Capital
Management in Heritage Foods (India) Limited” submitted in partial fulfillment
of the requirements for award of the degree of MBA at Gokaraju Rangaraju Institute of Engineering and Technology, affiliated to Jawaharlal Nehru Technological University, Hyderabad, is an authentic work and has not been submitted to any other University/Institute for award of any degree/diploma.
D. SANTOSH VARMA (10241E0012) MBA, GRIET HYDERABAD
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ACKNOWLEDGEMENT
Firstly I would like to express our immense gratitude towards our institution Gokaraju Rangaraju Institute of Engineering & Technology, which created a great platform to attain profound technical skills in the field of MBA, thereby fulfilling our most cherished goal. I would thank all the HR department of Heritage Foods (India) Limited specially Mr. C.V.S. KALESWARA RAO, General Manager-HR, and the employees in the HR department for guiding me and helping me in successful completion of the project
I am very much thankful to our internal guide Gayathri madam for extending her cooperation in doing this project.
I am also thankful to our project coordinator Mr. S. Ravindra Chary for extending his cooperation in completion of Project.. I convey my thanks to my beloved parents and my faculty who helped me directly or indirectly in bringing this project successfully.
D. SANTOSH VARMA (10241E0012)
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INDEX
CONTENTS CHAPTER 1
• • • • • • INTRODUCTION NEED FOR THE STUDY OBJECTIVES OF THE STUDY SCOPE OF THE STUDY LIMITATIONS OF THE STUDY METHODOLOGY
Page No
1 5 6 7 8 9
CHAPTER 2
• LITERATURE REVIEW 10
CHAPTER 3
• • CORPANY PROFILE INDUSTRY PROFILE 33 41
CHAPTER 4
• DATA ANALYSIS AND INTERPRETION 45
CHAPTER 5 • • FINDINGS, CONCLUSIONS, AND SUGGESTIONS BIBLOGRAPHY 5 57 61
CHAPTER -1 INTRODUCTION
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INTRODUCTION
The concept of ‘working capital’ is much confusing in the business circles. It is very unfortunate, there is much disagreement among financiers, accountants, businessmen and economists as to the exact meaning of the term ‘working capital’. According to a few, working capital means current assists. For some others it is an excess of current assets over current liabilities. Some authorities prefer to call it circulating capital in place of working capital.
MEANING OF WORKING CAPITAL:The term working capital is commonly used for the capital required for day-to-day working in business concern. Such as for purchasing raw material for meeting day-to-day expenditure on salaries, wages, rent rates advertising etc. but there is much disagreement among various financial authorities as to the exact meaning of the term working capital
DEFINITION OF WORKING CAPITAL
Working Capital refers to that part of the firm’s capital, which is required for financing short-term or current assets such a cash marketable securities, debtors and inventories. Funds thus, invested in current assets keep revolving fast and are constantly converted into cash and this cash flow out again in exchange for other current assets. Working Capital is also known as revolving or circulating capital or short-term capital.
IMPORTANCE OF WORKING CAPITAL MANAGEMENT:
Working capital management includes a number of aspects that make it especially important for the financial health of the firm. Surveys indicate that the largest portion of the financial manager time is devoted to the day-to-day operations of the firm, which fall under the heading o working capital management. Current assets represent the largest proportion i.e. if total assets forms 1% then current assets are generally above 60%. Moreover current assets fluctuate with sales and sales vary over time. Thus managing current asset is the dynamic process and it requires the financial mange to closely monitor sales to ensure that assets in hand are at the right level for actual sales production levels. 8
DETERMINANTS OF WORKING CAPITAL
• • • • • • • • • • • • • •
Nature of Industry Seasonality of Operations Production Policy Market Conditions Conditions of supply Size of Business Volume of Sales Terms of Purchase and Sales Business Cycle Growth and Expansion of the firm Price Level Changes Operating Efficiency of the firm Profit Appropriation Capital Structure of the firm
STATEMENT OF THE PROBLEM :
The present study is titled “PROBLEM OF WORKING CAPITAL MANAGEMENT ON HERITAGE FOODS INDIA LIMITED” In order to study the statement it is necessary to define important terms used in statement of the problem. The term “working capital management” refers to total current assets of HERITAGE FOODS INDIA LIMITEDDuring a particular period of time. current assets are the assets which can be converted into cash within accounting year. The term working capital management implies determination of requirements of working capital ,financing the requirements and efficient utilization of working capital in HERITAGE FOODS INDIA LIMITED .
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NEED OF THE STUDY
Current assets must be managed efficiently in order to maintain the liquidity of the firm to know about the financial mixed strategies. Hence forth so far researchers not touched with said topic to knowing the information in organization exactly the working capital wants to know the balances of current assets & current liabilities increases or decreases to know the corrected netprofit of balance and we can know the difference of the year of balance how much it is profit or loss will be there in company.
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OBJECTIVES OF STUDY :
• • To study overall position of HERITAGE FOODS INDIA LIMITED. To examine the changes in working capital of HERITAGE FOODS INDIA LIMITED. • To study existing system of working capital management in HERITAGE FOODS INDIA LIMITED. • To analyze financial performance of company with reference to its working capital components. • To know the financial position of a company.
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SCOPE OF THE STUDY:
• The study is confined to HERITAGE FOODS INDIA LIMITED ltd and analysis of its financial statements . • The main aim of the study is to assess the proper mgt of current assets & current liabilities . • The study concentrates more on the working capital mgt of HERITAGE FOODS INDIA LIMITED . • Working capital gives only a good basis for quantitative analysis of financial problem.
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LIMITATIONS OF THE STUDY:
• In present study the analysis is mainly based on secondary data given in annual audited balance sheets , profit and loss a/c and reports of HERITAGE FOODS INDIA LIMITED. • • • • • • The study does not touch all the units of HERITAGE FOODS INDIA LIMITED Limited span of time is a major limitation of this project. The present study cannot be used for inter firm comparision. The result does not reflect the day to day transactions. The study does not cover the all working capital. Balancing liquidity , profitability and risk in managing working capital .
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RESEARCH METHODOLOGY
PERIOD OF THE STUDY: The period of the study of this project of working capital
management on HERITAGE FOODS INDIA LIMITED is two months.
COLLECTION OF DATA:
To achieve a fore said objective the following methodology has been adopted. The information for this report has been collected through the Primary and Secondary sources. 1. Primary Data Sources 2. Secondary Data Sources PRIMARY DATA SOURCES: It is also called as first handed information the data is collected through the observation in the organization and interviews with the accounts and the persons in the financial department. A part from these, some information is collected through the seminars which were held by HERITAGE FOODS INDIA LIMITED SECONDARY DATA SOURCES: These secondary data is existing data which is collected by other sources, i.e. financial journals annual reports of HERITAGE FOODS INDIA LIMITED, website of HERITAGE FOODS INDIA LIMITED and other publication of HERITAGE FOODS INDIA LIMITED
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CHAPTER-2 LITERATURE REVIEW
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REVIEW OF LITERATURE : DEFINITION OF WORKING CAPITAL
Working Capital refers to that part of the firm’s capital, which is required for financing short-term or current assets such a cash marketable securities, debtors and inventories. Funds thus, invested in current assets keep revolving fast and are constantly converted into cash and this cash flow out again in exchange for other current assets. Working Capital is also known as revolving or circulating capital or short-term capital.
MEANING OF WORKING CAPITAL:The term working capital is commonly used for the capital required for day-to-day working in business concern. Such as for purchasing raw material for meeting day-to-day expenditure on salaries, wages, rent rates advertising etc. but there is much disagreement among various financial authorities as to the exact meaning of the term working capital.
WORKING CAPITAL MEANING AND SIGNIFCANCE
The concept of ‘working capital’ is much confusing in the business circles. It is very unfortunate, there is much disagreement among financiers, accountants, businessmen and economists as to the exact meaning of the term ‘working capital’. According to a few, working capital means current assists. For some others it is an excess of current assets over current liabilities. Some authorities prefer to call it circulating capital in place of working capital. The present study is related to working capital management in HERITAGE FOODS INDIA LIMITED , more effective and interacted for research work in corporate sectors . for the assessment of working capital management . T.anitha , jnt university , hyd , researchers evalutated the working capital management on his study on wcm in “HERITAGE FOODS INDIA LIMITED “. That working capital management is consider to involve the administration of current assets and current liabilities in
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such a way that an option level of working capital maintained in the business .she also narrated that firm may resist without making profits but it cannot survive with out liquidity . I therefore based on case study, I have selected my topic on different approach . TOOLS AND TECHNIQUES : Current ratio = Current Assets Current Liabilities
Quick ratio
=
Liquid Assets Current Liabilities
Cash ratio
=
Cash & Bank balances Current Liabilities sales(turnover) Working capital
* 100
Working capital turnover ratio =
debtors turnover ratio
=
sales (turnover) accounts recieveble
Stock turnover ratio
=
Sales (turnover ) inventory
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IMPORTANCE OF WORKING CAPITAL MANAGEMENT:
Working capital management includes a number of aspects that make it especially important for the financial health of the firm. Surveys indicate that the largest portion of the financial manager time is devoted to the day-to-day operations of the firm, which fall under the heading o working capital management. Current assets represent the largest proportion i.e. if total assets forms 1% then current assets are generally above 60%. Moreover current assets fluctuate with sales and sales vary over time. Thus managing current asset is the dynamic process and it requires the financial mange to closely monitor sales to ensure that assets in hand are at the right level for actual sales production levels.
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FACTORS INFLUENCING WORKING CAPITAL NEEDS:1. Nature of Business: - The amount of working capital is basically related to the nature and volume of the business. In concerns, where the cost of raw materials to be used in the manufacture of a product is very large in proportion to its total cost of manufacture the requirements of working capital will be very large. For instance, a cotton or sugar mill requires a large amount of working capital. On the contrary, concerns having large investments in fixed assets require less amount of working capital. 2. Size of Business Unit: - Size of the business unit is also a determining factor in estimating the total amount of working capital. The general principle in this regard is that the bigger the size the larger will be the amount of working capital required as because the larger business units are required to maintain big inventories for the flow of the business. 3. Seasonal Variations: - Strong seasonal movements create certain special problems of working capital in controlling the internal financial swings. A great many companies have to carry on seasonal business such as sugar mills, oil mills or woolen mills etc. and therefore they require large amount of working capital in the season to purchase the raw materials in large quantities and utilize them throughout the year. 4. Time Consumed In Manufacture: - The average time taken in the process of manufacture is also an important factor in determining the amount of working capital. The longer the period of manufacture the large the investor required. 5. Turnover of Circulating Capital: - Turnover means the ratio of annual gross sales to average working assets. In simple words, it means the speed with which circulating capital completes its rounds or the number of times the amount invested in working assets has been converted into cash by sales of the finished goods and reinvested in working assets during a year. 6. Labor Intensive Vs Capital Intensive Industries: - In labor intensive industries, large working capital is required because or regular payment of heavy wage-bills and more time taken in completing the manufacturing process. Conversely, the capital intensive industries require lesser amount of working capital because of the heavy investment in fixed and shorter period in manufacturing process. 19
7. Need to Stockpile Raw Material and Finished Goods: - In industries where it is necessary to stockpile the raw materials and finished goods increase the amount of working capital lied up in stocks and stores in certain lines of business where the materials are bulky and best purchasable in large quantities such as cements stockpiling of raw material is very usual or where labor stoppage is frequent finished goods stock have to be large in stored quantities. 8. Terms of Purchase and Sales: - Terms of purchase and sales also affect the amount of working capital. If a company purchases all goods in cash and sells its finished product on credit also naturally it will require large amount of working capital. On the contrary a concern having credit facilities and allowing no credit to its customers will require lesser amount of working capital 9. Conversion of Current Assets Into Cash: - The need of having cash in hand to meet the day to day requirements payment of wages and salaries rent rates has an important bearing in deciding the adequate amount of working capital. The greater the cash requirement the higher will be the need of working capital but if a company has ample stock of liquid current assets will require lesser amount of working capital because the company can en cashes such assets immediately in the open market. 10. Growth and Expansion of Business: - Growing concerns require more working capital than those that are static. It is logical to expect larger amount of working capital in a growing concern to meet its growing needs of funds for its expansion programmers though it varies with economic condition and corporate practices. 11. Business Cycle Fluctuations: - Business cycle affects the requirement of working capital. At times when the prices are going up and up and boom conditions prevail the tendency management is to pile up a big stock of raw materials and to maintain a big stock of finished goods with an expectation to earn more profits. 12. Profit Margin and Profit Appropriation: - Some firms enjoy a dominant position in the market due to quality product or good marketing management or monopoly power in the market and therefore earn a high profit margin. On the other hand form facing tough competition earn low margin of profit.
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13. Price level changes: - The financial manager should also anticipate the effect of price level changes on working capital requirements of the firm. Generally, rising price levels will require a higher amount of working capital because to maintain the same levels of current assets will require higher investment. However if companies may revise their product prices will not face a severe working capital problem. The effects of rising price levels will be different for different firms depending upon their price policies nature of the product etc. 14. Dividend policy: - There is a well established relationship between dividend and working capital in companies where conservation dividend policy is followed. The changes in working capital position bring a about an adjustment in dividend policy. With a view to maintain and established dividend policy is the management before declaring a dividend gives due consideration to its effects on cash and cash requirements.
WORKING CAPITAL MANAGEMNENT-AN OVER VIEW
Working capital of a firm may be different as the amount by which its current assets exceed its current liabilities. Working capital management is concerned with the problem that arises attempting to manage current assets, current liabilities and the interrelationship that exists between them. The current assets to those assets, which in the ordinary course of the business can be, or will be, turned into cash with in 1 year without disrupting the operations of the firm. The major current assets are cash marketable securities account receivable and inventories. Current liabilities are those liabilities, which are intended at their inception to be payee in the ordinary course of business with in the year, out of current assets or earning of the concern. The basic current liabilities are account payable, bills payable, bank overdraft and outstanding expenses. The goal of working capital management is to manage the firm’s current assets and current liabilities in such a way that the satisfactory level of the working capital is maintained. The Interaction between the current assets and current liabilities is the main theme of the theory of the working capital management. 21
The important elements of working capital includes inventory management, cash management, credit and collection policy and short term borrowings where as long term financial analysis is primarily concerned with strategic planning, working capital management is primarily concerned with day to day operations making shore, production lines out stop as firms run our of the raw material and thus preventing the slowing down of the process. Obviously with out good working capital management no firm can be efficient and profitable.
CONCEPT OF WORKING CAPITAL
There are two possible interpretations of working capital concept: 1. Balance sheet concept 2. Operating cycle concept
Balance sheet concept :
There are two interpretations of working capital under the balance sheet concept. a. Excess of current assets over current liabilities b. gross or total current assets • Excess of current assets over current liabilities are called the net working capital or net current assets. • Working capital is really what a part of long term finance is locked in and used for supporting current activities. • • The balance sheet definition of working capital is meaningful only as an indication of the firm’s current solvency in repaying its creditors. When firms speak of shortage of working capital they in fact possibly imply scarcity of cash resources. • In fund flow analysis an increase in working capital, as conventionally defined, represents employment or application of funds.
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Operating cycle concept :
A company’s operating cycle typically consists of three primary activities: • • • • Purchasing resources, Producing the product and Distributing (selling) the product. These activities create funds flows that are both unsynchronized and uncertain. Unsynchronized because cash disbursements (for example, payments for resource purchases) usually take place before cash receipts (for example collection of receivables). The firm has to maintain cash balance to pay the bills as they come due. • • • In addition, the company must invest in inventories to fill customer orders promptly. And finally, the company invests in accounts receivable to extend credit to customers. Operating cycle is equal to the length of inventory and receivable conversion periods.
TYPES OF WORKING CAPITAL
WORKING CAPITAL
BASIS OF CONCEPT Gross Working Capital Net Working Capital
BASIS OF TIME Permanent / Fixed WC Temporary / Variable WC Special WC
Seasonal WC Regular Reserve TYPES OF WORKING CAPITAL WC WC
•
Permanent working capital 23
•
Temporary or variable working capital
Permanent working capital = minimum amount of investment in all current assets which is required at all times to carry out minimum level of business activities. Permanent working capital = core current assets Temporary working capital: The amount of temporary working capital fluctuates depending upon the changes in the production and sales. Temporary working capital = fluctuating working capital - variable working capital
MANAGEMENT OF WORKING CAPITAL ( WCM )
Management of working capital is concerned with the problems that arise in attempting to manage the current assets, the current liabilities and the inter-relationship that exists between them. In other words, it refers to all aspects of administration of CA and CL. Working Capital Management Policies of a firm have a great effect on its profitability, liquidity and structural health of the organization
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3D Nature of Working Capital Management
Dimension I Profitability, Risk, & Liquidity
Dimension II Composition & Level of CA
Dimension III Composition & Level
OBJECTIVES OF WOEKING CAPITAL MANAGEMENT : To study on working capital a large portion of total investment in assets . To study on working capital requires much of financial managers time . To study on working capital changes in price level . To study on working capital day-to-day activities . To study on working capital current assets and current liabilities .
RATIO ANALYSIS
Meaning of Ratio:- A ratio is simple arithmetical expression of the relationship of one number to another. It may be defined as the indicated quotient of two mathematical expressions. According to Accountant’s Handbook by Wixon, Kell and Bedford, “a ratio is an expression of the 25
quantitative relationship between two numbers”. Ratio Analysis:- Ratio analysis is the process of determining and presenting the relationship of items and group of items in the statements. According to Batty J. Management Accounting “Ratio can assist management in its basic functions of forecasting, planning coordination, control and communication”. It is helpful to know about the liquidity, solvency, capital structure and profitability of an organization. It is helpful tool to aid in applying judgement, otherwise complex situations.
Ratio may be expressed in the following three ways :
1. Pure Ratio or Simple Ratio :- It is expressed by the simple division of one number by another. For example , if the current assets of a business are Rs. 200000 and its current liabilities are Rs. 100000, the ratio of ‘Current assets to current liabilities’ will be 2:1.
2. ‘Rate’ or ‘So Many Times :- In this type , it is calculated how many times a figure is, in comparison to another figure. For example , if a firm’s credit sales during the year are Rs. 200000 and its debtors at the end of the year are Rs. 40000 , its Debtors Turnover Ratio is 200000/40000 = 5 times. It shows that the credit sales are 5 times in comparison to debtors.
3. Percentage :- In this type, the relation between two figures is expressed in hundredth. For example, if a firm’s capital is Rs.1000000 and its profit is Rs.200000 the ratio of profit capital, in term of percentage, is 200000/1000000*100 = 20%
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Types of ratios (working capital associated ratios)
1)
CURRENT RATIO: Current Ratio may be defined as the relationship between current assets and current
liabilities. This ratio is also known as working capital ratio, is a measure of general liquidity and is most widely used to make the analysis of a short-term financial position or liquidity of a firm. It is calculated by dividing total current assets by total of the current liabilities.
Current Assets Current Liabilities
Current Ratio =
2)
QUICK RATIO: Quick ratio is a ratio of assets to quick liabilities. Quick assets are assets that can be
converted into cash very quickly without much loss. Quick liabilities one liabilities, which have to he necessarily paid with in one year. The acid test ratio is a measure of liquidity designed to over come of firms ability to convert its current assets quickly into cash in order to meet its current liabilities. Thus, it is measure of quick or acid liquidity. The acid test ratio is the ratio between current assets and current liabilities and is calculated by dividing the quick assets by the current liabilities.
Quick Assets Current Liabilities
Quick Ratio =
Quick Assets = Current Assets – (Inventory + Prepaid Expenses)
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3)
CASH RATIO (SUPER QUICK RATIO):
Definition
Total dollar value of cash and marketable securities divided by current liabilities. For a bank this is the cash held by the bank as a proportion of deposits in the bank. The cash ratio measures the extent to which a corporation or other entity can quickly liquidate assets and cover short-term liabilities, and therefore is of interest to short-term creditors. also called liquidity ratio or cash asset ratio.
cash & bankbalances Current Liabilities
Cash Ratio =
4)
WORKING CAPITAL TURNOVER RATIO:
Working capital of a concern is directly related to sales. The working capital is taken as: Working capital = Current assets – Current Liabilities
Sales x100 Net Working Capital
Working Capital Turnover Ratio =
The working capital turnover ratio indicates the velocity of the utilization of net working capital.
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5)
DEBTORS TURNOVER RATIO
Definition: Debtors turnover ratio indicates the velocity of debt collection of a firm. In simple words it indicates the number of times average debtors (receivable) are turned over during a year. Formula of Debtors Turnover Ratio: Debtors Turnover Ratio = Net Credit Sales / Average Trade Debtors The two basic components of the ratio are net credit annual sales and average trade debtors. The trade debtors for the purpose of this ratio include the amount of Trade Debtors & Bills Receivables. The average receivables are found by adding the opening receivables and closing balance of receivables and dividing the total by two. It should be noted that provision for bad and doubtful debts should not be deducted since this may give an impression that some amount of receivables has been collected. But when the information about opening and closing balances of trade debtors and credit sales is not available, then the debtors turnover ratio can be calculated by dividing the total sales by the balance of debtors (inclusive of bills receivables) given. and formula can be written as follows.
Debtors Turnover Ratio = Total Sales / Debtors 6) STOCK TURNOVER/INVENTORY TURNOVER RATIO: DEFINITION:
Stock turn over ratio and inventory turn over ratio are the same. This ratio is a relationship between the cost of goods sold during a particular period of time and the cost of average inventory during a particular period. It is expressed in number of times. Stock turn over ratio/Inventory turn over ratio indicates the number of time the stock has been turned over during the period and evaluates the efficiency with which a firm is able to manage its inventory. This ratio indicates whether investment in stock is within proper limit or not.
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Formula of Stock Turnover/Inventory Turnover Ratio: The ratio is calculated by dividing the cost of goods sold by the amount of average stock at cost. (a) Inventory Turnover Ratio = Cost of goods sold / Average inventory at cost
Generally, the cost of goods sold may not be known from the published financial statements. In such circumstances, the inventory turnover ratio may be calculated by dividing net sales by average inventory at cost. If average inventory at cost is not known then inventory at selling price may be taken as the denominator and where the opening inventory is also not known the closing inventory figure may be taken as the average inventory.
b) [Inventory Turnover Ratio = Net Sales / Average Inventory at Cost] c) [Inventory Turnover Ratio = Net Sales / Average inventory at Selling Price] d) [Inventory Turnover Ratio = Net Sales / Inventory]
Every business needs adequate liquid resources in order to maintain day-to-day cash flow. It needs enough cash to pay wages and salaries as they fall due and to pay creditors if it is to keep its workforce and ensure its supplies. Maintaining adequate working capital is not just important in the short-term. Sufficient liquidity must be maintained in order to ensure the survival of the business in the long-term as well. Even a profitable business may fail if it does not have adequate cash flow to meet its liabilities as they fall due. Therefore, when businesses make investment decisions they must not only consider the financial outlay involved with acquiring the new machine or the new building, etc, but must also take account of the additional current assets that are usually involved with any expansion of activity.
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Increased production tends to engender a need to hold additional stocks of raw materials and work in progress. Increased sales usually means that the level of debtors will increase. A general increase in the firm’s scale of operations tends to imply a need for greater levels of cash.
Introduction of Working Capital Management
Working capital management is the device of finance. It is related to manage of current assets and current liabilities. After learning working capital management, commerce students can use this tool for fund flow analysis. Working capital is very significant for paying day to day expenses and long term liabilities.
Meaning and Concept of Working Capital and its management
Working capital is that part of company’s capital which is used for purchasing raw material and involve in sundry debtors. We all know that current assets are very important for proper working of fixed assets. Suppose, if you have invested your money to purchase machines of company and if you have not any more money to buy raw material, then your machinery will no use for any production without raw material. From this example, you can understand that working capital is very useful for operating any business organization. We can also take one more liquid item of current assets that is cash. If you have not cash in hand, then you can not pay for different expenses of company, and at that time, your many business works may delay for not paying certain expenses. If we define working capital in very simple form, then we can say that working capital is the excess of current assets over current liabilities.
Types Of Working Capital
1.Gross working capital
Total or gross working capital is that working capital which is used for all the current assets. Total value of current assets will equal to gross working capital.
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2. Net Working Capital Net working capital is the excess of current assets over current liabilities.
Net Working Capital = Total Current Assets – Total Current Liabilities
This amount shows that if we deduct total current liabilities from total current assets, then balance amount can be used for repayment of long term debts at any time.
3. Permanent Working Capital
Permanent working capital is that amount of capital which must be in cash or current assets for continuing the activities of business.
4. Temporary Working Capital Sometime, it may possible that we have to pay fixed liabilities, at that time we need working capital which is more than permanent working capital, then this excess amount will be temporary working capital. In normal working of business, we don’t need such capital.
In working capital management, we analyze following three points Ist Point
What is the need for working capital?
After study the nature of production, we can estimate the need for working capital. If company produces products at large scale and continues producing goods, then company needs high amount of working capital. 32
2nd Point
What is optimum level of Working capital in business?
Have you achieved the optimum level of working capital which has invested in current assets? Because high amount of working capital will decrease the return on investmentand low amount of working capital will increase the risk of business. So, it is very important decision to get optimum level of working capital where both profitability and risk will be balanced. For achieving optimum level of working capital, finance manager should also study the factors which affects the requirement of working capital and different elements of current assets. If he will manage cash, debtor and inventory, then working capital will automatically optimize.
3rd Point
What are main Working capital policies of businesses?
Policies are the guidelines which are helpful to direct business. Finance manager can also make working capital policies.
1st Working capital policy
Liquidity policy Under this policy, finance manager will increase the amount of liquidity for reducing the risk of business. If business has high volume of cash and bank balance, then business can easily pays his dues at maturity. But finance manger should not forget that the excess cash will not produce and earning and return on investment will decrease. So liquidity policy should be optimized.
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2nd Working Capital Policy
Profitability policy Under this policy, finance manger will keep low amount of cash in business and try to invest maximum amount of cash and bank balance. It will sure that profit of business will increase due to increasing of investment in proper way but risk of business will also increase because liquidity of business will decrease and it can create bankruptcy position of business. So, profitability policy should make after seeing liquidity policy and after this both policies will helpful for proper management of working capital.
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CHAPTER-3 C O M P A N Y P R O F ILE & IN D U S TR Y P R O F I LE
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COMPANY PROFILE
Heritage at a Glance:
The Heritage Group, founded in 1992 by Sri Nara Chandra Babu Naidu, is one of the fastest growing Private Sector Enterprises in India, with three-business divisions viz., Dairy, Retail and Agri under its flagship Company Heritage Foods (India) Limited (HFIL), one infrastructure subsidiary - Heritage Infra Developers Limited and other associate Companies viz., Heritage Finlease Limited, Heritage International Limited and Heritage Agro Merine Private Limited. The annual turnover of Heritage Foods crossed Rs.347 crores in 2006-07 and is aiming for Rs.700 crores during 2007-08. Presently Heritage’s milk products have market presence in Andhra Pradesh, Karnataka, Kerala, Tamil Nadu and Maharashtra backbone to retail operations. In the year 1994, HFIL went to Public Issue to raise resources, which was oversubscribed 54 times and its shares are listed under B1 Category on BSE (Stock Code: 519552) and NSE (Stock Code: HERITGFOOD) and its retail stores across Bangalore, Chennai and
Hyderabad. Integrated agri operations are in Chittoor and Medak Districts and these are
About the founder:
Sri Chandra Babu Naidu is one of the greatest Dynamic, Pragmatic, Progressive and Visionary Leaders of the 21st Century. With an objective of bringing prosperity in to the rural families through co-operative efforts, he along with his relatives, friends and associates promoted Heritage Foods in the year 1992 taking opportunity from the Industrial Policy, 1991 of the Government of India and he has been successful in his endeavour. 36
At present, Heritage has market presence in all the states of South India. More than three thousand villages and five lakh farmers are being benefited in these states. On the other side, Heritage is serving more than 6 lakh customers needs, employing more than 700 employees and generating indirectly employment opportunity to more than 5000 people. Beginning with a humble annual turnover of just Rs.4.38 crores in 1993-94, the sales turnover has reached close to Rs.300 crores during the financial year 2005-2006. Sri Naidu held various coveted and honorable positions including Chief Minister of Andhra Pradesh, Minister for Finance & Revenue, Minister for Archives & Cinematography, Member of the A.P. Legislative Assembly, Director of A.P. Small Industries Development Corporation, and Chairman of Karshaka Parishad. Sri Naidu has won numerous awards including " Member of the World Economic Forum's Dream Cabinet" (Time Asia ), "South Asian of the Year " (Time Asia ), " Business Person of the Year " (Economic Times), and " IT Indian of the Millennium " ( India Today). Sri Naidu was chosen as one of 50 leaders at the forefront of change in the year 2000 by the Business Week magazine for being an unflinching proponent of technology and for his drive to transform the State of Andhra Pradesh .
Forward looking statements:
“We have grown, and intended to grow, focusing on harnessing our willingness to experiment and innovate our ability to transform our drive towards excellence in quality, our people first attitude and our strategic direction.
Mission:
Bringing prosperity into rural families of India through co-operative efforts and providing customers with hygienic, affordable and convenient supply of " Fresh and Healthy " food products.
37
Vision:
To be a progressive billion dollar organization with a pan India foot print by 2012.To achieve this by delighting customers with "Fresh and Healthy" food products, those are a benchmark for quality in the industry. We are committed to enhanced prosperity and the emfoodment of the farming community through our unique "Relationship Farming" Model. To be a preferred employer by nurturing entrepreneurship, managing career aspirations and providing innovative avenues for enhanced employee prosperity.
Heritage Slogan:
When you are healthy, we are healthy When you are happy, we are happy We live for your "HEALTH & HAPPINESS"
Quality policy of HFIL:
We are committed to achieve customer satisfaction through hygienically processed and packed Milk and Milk Products. We strive to continually improve the quality of our products and services through upgradation of technologies and systems. Heritage's soul has always been imbibed with an unwritten perpetual commitment to itself, to always produce and provide quality products with continuous efforts to improve the process and environment. Adhering to its moral commitment and its continuous drive to achieve excellence in quality of Milk, Milk products & Systems, Heritage has always been laying emphasis on not only reviewing & re-defining quality standards, but also in implementing them successfully. All
38
activities of Processing, Quality control, Purchase, Stores, Marketing and Training have been documented with detailed quality plans in each of the departments. Today Heritage feels that the ISO certificate is not only an epitome of achieved targets, but also a scale to identify & reckon, what is yet to be achieved on a continuous basis. Though, it is a beginning, Heritage has initiated the process of standardizing and adopting similar quality systems at most of its other plants.
Commitments: Milk Producers:
Change in styles of rural families in terms of: • • • • • • • • • • • Regular high income through co-operative efforts. Women participation in income generation . Saved from price exploitation by un-organized sector . Remunerative prices for milk . Increase of milk productivity through input and extension activities Shift from risky agriculture to dairy farming Heritage Financial support for purchase of cattle; insuring cattle Establishment of Cattle Health Care Centers Supplying high quality Cattle feed Organizing "Rythu Sadasu" and Video programmes for educating the farmers in dairy farming
Customers:
• • • Timely Supply of Quality & Healthy Products Supply high quality milk and milk products at affordable prices Focused on Nutritional Foods 39
• • •
More than 4 lakh happy customers High customer satisfaction 24 hours help lines ( <10 complaints a day)
Employees:
• Enhancing the Technical and Managerial skills of Employees through continuous training and development • • • Best appraisal systems to motivate employees Incentive, bonus and reward systems to encourage employees Heritage forges ahead with a motto "add value to everything you do"
Shareholders:
Returns: Consistent Dividend Payment since Public Issue (January 1995) Service: • Highest impotence to investor service; no notice from any regulatory authority since 2001 in respect of investor service • Very transparent disclosures
Suppliers:
Doehlar: technical collaboration in Milk drinks, yogurts drinks and fruit flavoured drinks Alfa-Laval: supplier of high-end machinery and technical support Focusing on Tetra pack association for products package.
Society:
• Potential Employment Generation 40
more than 3500 employees are working with heritage more than 9500 procurement agents got self employment in rural areas more than 5000 sales agents associated with the company • Employment for the youth by providing financial and animal husbandry support for establishing MINI DAIRIES • Producing highly health conscious products for the society
Qualities of management principles:
1. Customer focus to understand and meet the changing needs and expectations of customers. 2. People involvement to promote team work and tap the potential of people. 3. Leadership to set constancy of purpose and promote quality culture trough out the organization. 4. Process approach to assess the efficiency and effectiveness of each process. 5. Systems approach to understand the sequence and interaction of process. 6. Factual approach to decision making to ensure its accuracy. 7. Continual improvement processes for improved business results. 8. Development of suppliers to get right product and services in right time at right place.
Product/Market wise performance:
The total turnover is Rs 341 Crores during the financial year 2006-07 against the turnover of 292.02 Crores in 2005-06. Today Heritage distributes quality milk & milk products in the states of A.P, Karnataka, Kerala & Tamil nadu. During the year 2006-07 liquid milk sales was Rs.28329.79 lakhs against Rs.24525.23 lakhs in the previous year. The sales of miik products including bulk sales of cream, ghee and butter were recorded Rs 5781.59 lakhs against Rs 4677.21 lakhs. 41
Milk sales:
23% growth was recorded in AP 2.38 lakhs litres per day(LLPD) in 2006-07 against 1.93 LLPD in 2005-06. 13% growth was recorded in Tamilnadu-1.53 LLPD in 2006-07 against 1.35 LLPD in 2005-06. Over all growth of 6% was recorded- 5.49 LLPD in 2006-07 against 5.16 LLPD. Flavoured milk sales recorded a growth rate of 77% over 2005-06. Butter milk sales have gone up by 45% over 2005-06.
Outlook:
Considering the growth potential in the liquid milk market, the company has drawn plans to increase its market share in the existing markets and to enter into new markets there by doubling revenues in dairy business in the next 3 years. To achieve this object, company is undertaking major expansion in dairy business by inverting over Rs20 crores during 2006-07 and over Rs10 crores during the current year to strengthen the milk procurement.
BRANCHES OF HFIL:
HFIL has 3 wings. They are 1. Dairy 2. Retail 3. Agribusiness
1. Dairy:
It is the major wing among all. The dairy products manufactured by HFIL are Milk, curd, butter, ghee, flavoured milk, paneer, doodhpeda, ice cream.
2. Retail:
In the retail sector HFIL has outlets namely “Fresh@”. In those stores the products sold are vegetables, milk& milk products, grocery, pulses, fruits etc. 42
In Hyderabad 19 retail shops are there. In Bangalore& Chennai, 3&4 respectively are there. Totally there are 26 retail shops are there. Fresh@ is a unique chain of retail stores, designed to meet the needs of the modern Indian consumer. The store rediscovers the taste of nature every day making grocery shopping a never before experience. The unique& distinctive feature of Fresh@ is that it offers the widest range of fresh fruits and vegetables which are directly hand picked from the farms. Freshness lies in their merchandise and the customers are always welcomed with fresh fruits and vegetables no matter what what time they walk in.
3. Agri Business:
In this business HFIL employees will go to farmers and have a deal with them. Those farmers will sell their goods like vegetables, pulses to HFIL only. And HFIL will transport the goods to retail outlets. The agricultural professors will examine which area is suitable to import vegetables from and also examine the vegetables, pulses and fruits in the lab. And finally they report to the HeadAgribusiness. Representatives as per the instructions given by the agri professors will approach the farmers directly and make a deal with them. It is the process of registering the farmers.
43
4.0 INDUSTRY PROFILE
India is the world's second largest producer of food next to China, and has the potential of being the biggest with the food and agricultural sector. The total food production in India is likely to double in the next ten years and there is an opportunity for large investments in food and food processing technologies, skills and equipment, especially in areas of Canning, Dairy and Food Processing, Specialty Processing, Packaging, Frozen Food/Refrigeration and Thermo Processing. Fruits & Vegetables, Fisheries, Milk & Milk Products, Meat & Poultry, Packaged/Convenience Foods. India is one of the worlds major food producers but accounts for less than 1.5 per cent of international food trade. This indicates vast scope for both investors and exporters. Food exports in 1998 stood at US $5.8 billion whereas the world total was US $438 billion. The Indian food industries sales turnover is Rs 140,000 crore (1 crore = 10 million) annually as at the start of year 2000. India's food processing sector covers fruit and vegetables; meat and poultry; milk and milk products, alcoholic beverages, fisheries, plantation, grain processing and other consumer product groups like confectionery, chocolates and cocoa products, Soya-based products, mineral water, high protein foods etc. We cover an exhaustive database of an array of suppliers, manufacturers, exporters and importers widely dealing in sectors like the -Food Industry. The most promising sub-sectors includes -Soft-drink bottling, Confectionery manufacture, Fishing, aquaculture, Grain-milling and grain-based products, Meat and poultry processing, Alcoholic beverages, Milk processing, Tomato paste, Fast-food, Ready-to-eat breakfast cereals, Food additives, flavors etc. The food industry is the complex, global collective of diverse businessesthat together supply much of the food energy consumed by the world population. Only subsistence farmers, those who survive on what they grow, can be considered outside of the scope of the modern food industry. The food industry includes: 44
•
Regulation: local, regional, national and international rules and regulations for food production and sale, including • food quality and food safety, and industry lobbying activities Education: academic, vocational, consultancy
• •
Research and development: food technology Financial services, credit Manufacturing: agrichemicals, seed, farm machinery and supplies, agricultural construction, etc. Agriculture: raising of crops and livestock, seafood Food processing: preparation of fresh products for market, manufacture of prepared food products
•
•
Marketing: promotion of generic products (e.g. milk board), new products, public opinion, through advertising, packaging, public relations , etc Wholesaleanddistribution: warehousing, transportation, logistics Retail: supermarket chains and independent food stores, direct-to-consumer, restaurant , food services
• •
•
Consumer: End user has one of the highest influences on the food industry through things like preference
The Economic Research Service of the USDA uses the term food system to describe the same thing:
"The U.S. food system is a complex network of farmers and the industries that link to them. Those links include makers of farm equipment and chemicals as well as firms that provide services to agribusinesses, such as providers of transportation and financial services. The system also includes the food marketing industries that link farms to consumers, and which include food and fiber processors, wholesalers, retailers, and foodservice establishments."
45
History
Food processing dates back to the prehistoric ages when crude processing incorporated slaughtering, fermenting, sun drying, preserving withsalt, and various types of cooking (such as roasting, smoking, steaming, and oven baking). Salt-preservation was especially common for foods that constituted warrior and sailors' diets, up until the introduction of canning methods. Evidence for the existence of these methods exists in the writings of the ancient Greek , Chaldean, Egyptian and Romancivilizations as well as archaeological evidence from Europe, North and South America and Asia. These tried and tested processing techniques remained essentially the same until the advent of the industrial revolution. Examples of ready-meals also exist from pre industrial revolution times such as the Cornish pasty and the Haggis Modern food processing technology in the 19th and 20th century was largely developed to serve military needs. In 1809Nicolas Appert invented a vacuumbottling technique that would supply food for French troops, and this contributed to the development of tinning and then canning by Peter Durand in 1810. Although initially expensive and somewhat hazardous due to the lead used in cans, canned goods would later become a staple around the world Pasteurization. discovered by Louis Pasturing 1862, was a significant advance in ensuring the micro-biological safety of food. In the 20th century, World War II, the space race and the rising consumer society in developed countries (including the United States) contributed to the growth of food benzoate processing with such advances asspray drying, juice concentrates, freeze dryingand the introduction of artificial sweeteners, colouring agents, and preservatives such as sodium . In the late 20th century products such as dried instant soups, reconstituted fruits and juices, and self cooking meals such asMRE food ration were developed. In western Europe and North America, the second half of the 20th century witnessed a rise in the pursuit of convenience, food processors especially marketed their products to middle-class working wives and mothers. Frozen foods (often credited to Clarence Birdseye) found their success in sales of juice concentrates and "TV dinners". Processors utilised the perceived value of time to appeal to the postwar population, and this same appeal contributes to the success of convenience foodstoday.
46
The Indian packaged processed foods industry is estimated at US$ 10.87 billion – US$ 13.05 billion, including biscuits, chocolates, ice-cream, confectionery, snacks, cheese and butter. Growing at a healthy 14-15 per cent over the past two-three years, major players in the sector include Britannia, Nestle, Amul, ITC Foods, Parle, Kellogg’s, GlaxoSmithKline, Wrigley and Frito-Lay, among others. The industry received foreign direct investments (FDI) totalling US$ 143.80 million in 2007-08 against US$ 5.70 million in the previous fiscal. The cumulative FDI received by the industry from April 2000-August 2009 stood at US$ 878.32 million. However, India’s share in exports of processed food in global trade is only 1.5 per cent; whereas the size of the global processed-food market is estimated at US$ 3.2 trillion and nearly 80 per cent of agricultural products in the developed countries get processed and packaged. In order to further grow the food processing industry, the government has formulated a Vision-2015 action plan under which specific targets have been set. This includes tripling the size of the food processing industry from around US$ 70 billion to about US$ 210 billion, raising the level of processing of perishables from 6 per cent to 20 per cent, increasing value addition from 20 per cent to 35 per cent, and enhancing India’s share in global food trade from 1.5 per cent to 3 per cent. This would require an investment of US$ 20.6 billion. According to an Ernst and Young (E&Y) presentation, the food processing industry in India will grow 30-40 per cent as against the present 15 per cent in the next 10-years. Prime Minister Dr Manmohan Singh on October 6, 2009 laid out a blueprint for rapid growth in the country’s food processing sector. The Prime Minister said that this can be achieved by simplifying the tax structure, formulating a National Food Processing Policy and improving rural infrastructure. Moreover, according to Union Minister for Food Processing Industries, Subodh Kant Sahai the central government is envisaging an investment of US$ 21.50 billion in the food processing industry over the next five years, a major chunk of which it plans to attract from the private sector and financial institutions. 47
CHAPTER-4 DATA ANALYSIS AND INTERPRETATION
48
STATEMENT OF CHANGES IN WORKING CAPITAL FOR 2010-2011
(Rupees in lakhs)
Particulars Current Assets Inventories Sundry Debtors Cash and Bank Balance Bills Receivables Loan and Advances Total Current Assets (1) Current Liabilities Sundry Creditors Deposits Other Liabilities and Provisions Interest Total Current Liabilities (2) Working Capital [ (1) - (2 )]
31-3- 2010
31-3-2011
Increase
Decrease
26239.45 165665.88 3710.39 49400.06 15655.14 260668.92
39388.49 148917.78 3982.41 93617.55 3450.92 289357.15
13149.04 16748.10 274.02 44217.49 12204.22 28688.23
62687.38 25563.52 52077.46 9853.22 150181.58 110487.34
61718.05 44903.20 88800.73 7107.69 202529.67 86827.48 23659.86
969.33 19339.68 36723.27 2745.53 52348.09
23659.86
Increase in working capital :
110487.34
110487.34
52348.09
52348.09
Source : annual reports of HERITAGE FOODS INDIA LIMITEDfor the year 2010-11
49
STATEMENT OF CHANGES IN WORKING CAPITAL FOR 2009-10
(Rupees in lakhs)
Particulars Current Assets Inventories Sundry Debtors Cash and Bank Balance Bills Receivables Loan and Advances Total Current Assets (1) Current Liabilities Sundry Creditors Deposits Other Liabilities and Provisions Interest Total Current Liabilities (2) Working Capital [ (1) - (2) ]
31-3- 2009
31-3-2010
Increase
Decrease
28885.48 197944.41 7072.47 29846.01 8703.41 272451.78
26239.45 165665.88 3710.39 49400.06 15655.14 260668.92
2646.03 32278.03 3364.10 19554.05 6951.73 11782.86
39994.47 19860.10 45820.78 8724.02 115710.51 156741.27
62687.38 25563.52 52077.46 9853.22 150181.58 110487.34 46253.93 46253.93
22692.91 5703.44 6256.68 1129.2 34471.07
Increase in working capital :
156741.27
156741.27
46253.93
46253.93
Source : annual reports of HERITAGE FOODS INDIA LIMITEDfor the year 2009-10
50
STATEMENT OF CHANGES IN WORKING CAPITAL FOR 2008-09
(Rupees in lakhs)
Particulars Current Assets Inventories Sundry Debtors Cash and Bank Balance Bills Receivables Loan and Advances Total Current Assets (1) Current Liabilities Sundry Creditors Deposits Other Liabilities and Provisions Interest Total Current Liabilities (2) Working Capital [ (1) - (2) ]
31-3- 2008
31-3-2009
Increase
Decrease
22831.69 203161.62 1681.45 10242.06 9722.43 247639.25
28885.48 197944.41 7072.47 29846.01 8703.41 272451.78
6053.79 5217.21 5391.02 19603.95 1019.02 24812.53
49046.67 17691.49 43097.96 8289.46 118776.14 128863.11 27878.16
39994.47 19860.10 45820.78 8724.02 115710.51 156741.27
2168.59 9052.2 2722.82 434.56 3065.63
27878.16 27878.16 27878.16
Decrease in working capital :
156741.27
156741.27
Source : annual reports of HERITAGE FOODS INDIA LIMITEDfor the year 2008-09
51
STATEMENT OF CHANGES IN WORKING CAPITAL FOR 2007-2008
(Rupees in lakhs)
Particulars
31-3- 2007
31-3-2008
Increase
Decrease
Current Assets Inventories Sundry Debtors Cash and Bank Balance Bills Receivables Loan and Advances Total Current Assets (1) Current Liabilities Sundry Creditors Deposits Other Liabilities and Provisions Interest Total Current Liabilities (2) Working Capital [ (1) - (2) ] 86965.65 17163.61 25337.85 6112.18 136171.60 110227.87 18635.24 49046.67 17691.49 43097.96 8289.46 118776.14 128863.11 18635.24 37918.98 527.88 17760.11 2177.28 17395.46 28791.65 186198.50 6202.27 12467.18 12739.87 246399.47 22831.69 203161.62 1681.45 10242.06 9722.43 247639.25 5959.96 16963.12 4520.82 2225.12 3017.44 1239.78
Decrease in working capital :
128863.11
128863.11
18635.24
18635.24
Source : annual reports of HERITAGE FOODS INDIA LIMITEDfor the year 2007-08
52
STATEMENT OF WORKING CAPITAL FOR 2007-11
(Rupees in lakhs)
Year
Current assets
Current liabilities
Working Capital
N et Working Capital Increase Decrease 18635.24 27878.16 46253.93 23659.86
2007-08 2008-09 2009-10 2010-11
247639.25 272451.78 260668.92 289357.15
118776.14 128863.11 115710.51 156741.27 150181.58 110487.34 202529.67 86827.48
Interpretation: • • • • For the periods 2007-08 and 2008-09 the net working capital is decreased due to high of current assets and current liabilities . For the periods 2007-08 and 2008-09 increase in working capital due to remaining year figures, because in these 2 years current assets are high and current liabilities are low. In the year 2009-10 the current liabilities are very low & current assets are high ,so the working capital is increased. In the year 2010-11 the current liabilities are low & current assets are high,so the working capitial is increased.
53
COMPARISION OF INCREASE AND DECREASE OF WORKING CAPITAL
Year
N et Working Capital Increase /Decrease (-)18635.24 (-)27878.16 (+)46253.93 (+)23659.86
2007-08 2008-09 2009-10 2010-11
Interpretation: • For the periods 2007-08 and 2008-09 the net working capital is decreased due to lower investments in acquisition of fixed assets and making less payments to the payables • For the periods 2010-11 and 2009-2010increase in working capital leads to major investments in fixed assets as well as capital expenditure.
54
1. Calculation of Current Ratio: Principle Current Ratio = Current Assets Current Liabilities 2007-08 247639.25 118776.14 =2.104 2008-09 272451.78 115710.51 =2.354 2009-10 260668.92 150181.58 =1.735 2010-11 289357.15 202529.67 =1.428
Interpretation: • Variance of current ratio in the year 2008-09 shows that increase in current assets as well as decrease in current liabilities when compare to 2007-08 figures. For the year 2010-11 and 2009-2010the current ratio has been declined due to increase in current liabilities and decrease in current assets. The above ratio clearly indicates that for the period 2010-11 and 2009-2010the current ratio is below 2 hence it indicates that the firm has not maintaining sufficient current assets to meet current liabilities.
•
•
55
2. Calculation of Quick Ratio: Principle Quick Ratio = Liquid Assets Current Liabilities 2007-08 224807.56 118776.14 =1.892 2008-09 243566.30 115710.51 =2.104 2009-10 234429.47 150181.58 =1.560 2010-11 249968.66 202529.67 =1.234
Interpretation: • For the years 2007-08 and 2008-09 the firm has maintained sufficient current assets (excluding inventory of stock) in order to meet its current liabilities. Due to the increase in current liabilities for the year 2010-11 and 2009-2010it leads to decrease in Quick ratios when compare to 2007-08 and 2008-09 figures
•
56
3. Calculation of Cash Ratio:
Principle Cash Ratio = Cash & Bank balances Current Liabilities
2007-08 1681.45 118776.14 =0.014
2008-09 7072.47 115710.51 =0.061
2009-10 3710.39 150181.58 =0.024
2010-11 3982.41 202529.67 =0.019
Interpretation:
• •
The cash ratio of the organization clearly indicates that the firm has maintaining moderate cash balances to meet its current liability obligations In order to maintain sufficient cash balance the firm has to maintain control over its credit sales (Debtors) and making payments to the suppliers
57
4.
Calculation of Working Capital Turn Over Ratio:
2007-08 417255.56 128863.11 =3.237 2008-09 388868.06 156741.27 =2.480 2009-10 419999.51 110487.34 =3.801 2010-11 461703.22 86827.48 =5.317
Principle Working Capital Turn Over Ratio = Sales (Turn Over) Working Capital
Interpretation: • • • The overall position of the working capital turn over ratio is positive For the year 2010-11 and 2009-2010there is a substantial growth in sales turn over due to this the firm has huge working capital turn over ratio for the above said periods For the period 2008-09 the sales turn over of the firm has been decreased when compare to 2007-08 figures due to this the working capital turn over ratio is declined.
58
5.
Calculation of debtors Turn Over Ratio:
2007-08 417255.56 203161.62 = 2.053 2008-09 388868.06 197944.41 = 1.964 2009-10 419999.51 165665.88 = 2.535 2010-11 461703.22 148917.78 = 3.100
Principle Debtors Turn Over Ratio = Sales (Turn Over) Accounts recieveble
•
Account recieveble includes sundry debtors and bills recieveble
Interpretation: • • The debtors turn over ratio of the firm is ideal for the year 2007-08 There is substantial decrease in sundry debtors for the year 2008-09 due to this the debtors turn over ratio is decreased when compare to 2007-08 and remaining years figures . For the year 2010-11 and 2009-2010the firm has maintained sufficient debtors turn over ratio.
•
59
6. Calculation of stock or inventory Turn Over Ratio:
Principle Stock Turn Over Ratio = Sales (Turn Over) inventory 2007-08 417255.56 22831.69 = 18.275 2008-09 388868.06 28885.48 = 13.462 2009-10 419999.51 26239.45 = 16.006 2010-11 461703.22 39388.49 = 11.721
Interpretation: • • The stock turn over ratio of the firm is ideal for the year 2010-11 There is substantial decrease in stock for the year 2007-08 due to this the stock turn over ratio is decreased in 2009-2010when compare to 2007-08 and remaining years figures . In the year 2007-08 the firm has maintained sufficient stock turn over ratio.
•
60
CHAPTER -5 FINDINGS, SUGGESTIONS AND CONCLUSIONS
61
FINDINGS
• The profits are in the increasing trend. There is a drastic improvement in profit from
the year 2010-11 to 2009-2010where the profit is almost doubled. This indicates the good financial soundness of the company.
• Sundry Debtors have been reduced which indicates increase in realisation of amount
from debtors which indicates higher liquidity of the business.
• Sundry Creditors showed a fluctuating trend. Concentrating on the last two years we
can see that though the profit have been increasing, creditors have decreased indicating more cash purchases than credit purchases.
• It is obvious that as the net profit ie., profit before tax is increased the tax paid are
also shown an increasing trend.
• The working capital has increased for the first three years. But in 2010-11 and 20092010 working capital reduced ,though the net profit is increased during the years. This shows that more of cash transactions have taken place and cash if available in excess is the least productive asset.
• For the year 2010-11 and 2009-2010the firm has maintained sufficient working
capital turn over ratio . 62
CONCLUSIONS
• The efficiency of management at financial position of HERITAGE FOODS INDIA
LIMITED is good
• From the analysis it is clear that the share capital remained intact during the five years
upto 2009-2010and the reserves and surplus reached to 19763.59 Lakhs.
• From the observation it is clear that capital expenditure on fixed assets is increased
gradually over the period of time which might be due to construction and commission of new thermal and hydel projects.
• Company inventories observed an increment except in the year 2007-08. • Cash and bank balances was increased during the years 2008-09 and 2010-11. • Miscellaneous expenses observed decrement over the years and is Nil during the year
2010-11.
• Current liabilities also increased
clearance of liabilities.
from 2003-04 to 2009-2010which shows prompt
• The HERITAGE FOODS INDIA LIMITED uses more of long term loans/debts than
owner’s equity.
• From the observation it is clear that equity share capital of HERITAGE FOODS
INDIA LIMITED remained fixed over the years. There is no preference share capital in HERITAGE FOODS INDIA LIMITED.
• Based on the analysis made the total financial position is good.
63
SUGGESTIONS
As the working capital has been reduced in 2010-11 and 2009-2010 though the profit has increased, the company is advised to take all necessary steps to find out the reasons for reduction in the working capital. • • • • • • High availability ensuring minimum cost of generation To add generating capacity, with in prescribed time and cost To maintain the financial soundness of HERITAGE FOODS INDIA LIMITED Managing financial operations in accordance with good commercial utility practices To develop R&D for achieving improved plant reliability In order to increase the working capital, discount should be given to debtors and see that the average collection period reduces. • Reference to Andhra Pradesh gazette, the generating company and distribution license may actually agree to a maximum rebate of 2% on bill amount. these provisions in the act may utilize by HERITAGE FOODS INDIA LIMITED .
•
64
BIBLIOGRAPHY
65
BIBLIOGRAPHY
Author BOOKS : Financial management Financial management Financial management Im pandey khan & jain Prasad chandra
Edition 9th 4th 2nd
Publications
vikas publishers tata mc.graw hills tata mc.graw hills
WEB SITES :
www.heritage foods india limited.com www.askmgt.com www.google.com
66
doc_387096206.pdf
A company can be endowed with assets and profitability but short of liquidity if its assets cannot readily be converted into cash. Positive working capital is required to ensure that a firm is able to continue its operations and that it has sufficient funds to satisfy both maturing short-term debt and upcoming operational expenses.
A STUDY ON “WORKING CAPITAL IN HERITAGE FOODS (INDIA) LIMITED”
A Project report submitted to Jawaharlal Nehru Technological University, Hyderabad, in partial fulfillment of the requirements for the award of the degree of
MASTER OF BUSINESS ADMINISTRATION
By
D. SANTOSH VARMA Reg. No. 10241E0012 Under the Guidance of Y. GAYATHRI
Associate Professor
Department of Management Studies Gokaraju Rangaraju Institute of Engineering & Technology, Hyderabad (Affiliated to JNTUH) 2010-2012
1
CERTIFICATE
This is to certify that the project entitled “ A Study on Working Capital Management in Heritage Foods (India) Limited” has been submitted by Mr. D. Santosh Varma (Reg. No. 10241E0012) in partial fulfillment of the requirements for the award of Master of Business Administration from Jawaharlal Nehru Technological University, Hyderabad. The results embodied in the project has not been submitted to any other University or Institution for the award of any Degree or Diploma.
Mrs. Y. Gayathri Internal Guide Associate Professor Department of Management Studies GRIET
Mr. KVS Raju Professor & HOD Department of Management Studies GRIET
Mr. S. Ravindra Chary Project Coordinator Associate Professor Department of Management Studies GRIET
2
DECLARATION
I hereby declare that the project entitled “A Study on Working Capital
Management in Heritage Foods (India) Limited” submitted in partial fulfillment
of the requirements for award of the degree of MBA at Gokaraju Rangaraju Institute of Engineering and Technology, affiliated to Jawaharlal Nehru Technological University, Hyderabad, is an authentic work and has not been submitted to any other University/Institute for award of any degree/diploma.
D. SANTOSH VARMA (10241E0012) MBA, GRIET HYDERABAD
3
ACKNOWLEDGEMENT
Firstly I would like to express our immense gratitude towards our institution Gokaraju Rangaraju Institute of Engineering & Technology, which created a great platform to attain profound technical skills in the field of MBA, thereby fulfilling our most cherished goal. I would thank all the HR department of Heritage Foods (India) Limited specially Mr. C.V.S. KALESWARA RAO, General Manager-HR, and the employees in the HR department for guiding me and helping me in successful completion of the project
I am very much thankful to our internal guide Gayathri madam for extending her cooperation in doing this project.
I am also thankful to our project coordinator Mr. S. Ravindra Chary for extending his cooperation in completion of Project.. I convey my thanks to my beloved parents and my faculty who helped me directly or indirectly in bringing this project successfully.
D. SANTOSH VARMA (10241E0012)
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INDEX
CONTENTS CHAPTER 1
• • • • • • INTRODUCTION NEED FOR THE STUDY OBJECTIVES OF THE STUDY SCOPE OF THE STUDY LIMITATIONS OF THE STUDY METHODOLOGY
Page No
1 5 6 7 8 9
CHAPTER 2
• LITERATURE REVIEW 10
CHAPTER 3
• • CORPANY PROFILE INDUSTRY PROFILE 33 41
CHAPTER 4
• DATA ANALYSIS AND INTERPRETION 45
CHAPTER 5 • • FINDINGS, CONCLUSIONS, AND SUGGESTIONS BIBLOGRAPHY 5 57 61
CHAPTER -1 INTRODUCTION
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7
INTRODUCTION
The concept of ‘working capital’ is much confusing in the business circles. It is very unfortunate, there is much disagreement among financiers, accountants, businessmen and economists as to the exact meaning of the term ‘working capital’. According to a few, working capital means current assists. For some others it is an excess of current assets over current liabilities. Some authorities prefer to call it circulating capital in place of working capital.
MEANING OF WORKING CAPITAL:The term working capital is commonly used for the capital required for day-to-day working in business concern. Such as for purchasing raw material for meeting day-to-day expenditure on salaries, wages, rent rates advertising etc. but there is much disagreement among various financial authorities as to the exact meaning of the term working capital
DEFINITION OF WORKING CAPITAL
Working Capital refers to that part of the firm’s capital, which is required for financing short-term or current assets such a cash marketable securities, debtors and inventories. Funds thus, invested in current assets keep revolving fast and are constantly converted into cash and this cash flow out again in exchange for other current assets. Working Capital is also known as revolving or circulating capital or short-term capital.
IMPORTANCE OF WORKING CAPITAL MANAGEMENT:
Working capital management includes a number of aspects that make it especially important for the financial health of the firm. Surveys indicate that the largest portion of the financial manager time is devoted to the day-to-day operations of the firm, which fall under the heading o working capital management. Current assets represent the largest proportion i.e. if total assets forms 1% then current assets are generally above 60%. Moreover current assets fluctuate with sales and sales vary over time. Thus managing current asset is the dynamic process and it requires the financial mange to closely monitor sales to ensure that assets in hand are at the right level for actual sales production levels. 8
DETERMINANTS OF WORKING CAPITAL
• • • • • • • • • • • • • •
Nature of Industry Seasonality of Operations Production Policy Market Conditions Conditions of supply Size of Business Volume of Sales Terms of Purchase and Sales Business Cycle Growth and Expansion of the firm Price Level Changes Operating Efficiency of the firm Profit Appropriation Capital Structure of the firm
STATEMENT OF THE PROBLEM :
The present study is titled “PROBLEM OF WORKING CAPITAL MANAGEMENT ON HERITAGE FOODS INDIA LIMITED” In order to study the statement it is necessary to define important terms used in statement of the problem. The term “working capital management” refers to total current assets of HERITAGE FOODS INDIA LIMITEDDuring a particular period of time. current assets are the assets which can be converted into cash within accounting year. The term working capital management implies determination of requirements of working capital ,financing the requirements and efficient utilization of working capital in HERITAGE FOODS INDIA LIMITED .
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NEED OF THE STUDY
Current assets must be managed efficiently in order to maintain the liquidity of the firm to know about the financial mixed strategies. Hence forth so far researchers not touched with said topic to knowing the information in organization exactly the working capital wants to know the balances of current assets & current liabilities increases or decreases to know the corrected netprofit of balance and we can know the difference of the year of balance how much it is profit or loss will be there in company.
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OBJECTIVES OF STUDY :
• • To study overall position of HERITAGE FOODS INDIA LIMITED. To examine the changes in working capital of HERITAGE FOODS INDIA LIMITED. • To study existing system of working capital management in HERITAGE FOODS INDIA LIMITED. • To analyze financial performance of company with reference to its working capital components. • To know the financial position of a company.
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SCOPE OF THE STUDY:
• The study is confined to HERITAGE FOODS INDIA LIMITED ltd and analysis of its financial statements . • The main aim of the study is to assess the proper mgt of current assets & current liabilities . • The study concentrates more on the working capital mgt of HERITAGE FOODS INDIA LIMITED . • Working capital gives only a good basis for quantitative analysis of financial problem.
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LIMITATIONS OF THE STUDY:
• In present study the analysis is mainly based on secondary data given in annual audited balance sheets , profit and loss a/c and reports of HERITAGE FOODS INDIA LIMITED. • • • • • • The study does not touch all the units of HERITAGE FOODS INDIA LIMITED Limited span of time is a major limitation of this project. The present study cannot be used for inter firm comparision. The result does not reflect the day to day transactions. The study does not cover the all working capital. Balancing liquidity , profitability and risk in managing working capital .
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RESEARCH METHODOLOGY
PERIOD OF THE STUDY: The period of the study of this project of working capital
management on HERITAGE FOODS INDIA LIMITED is two months.
COLLECTION OF DATA:
To achieve a fore said objective the following methodology has been adopted. The information for this report has been collected through the Primary and Secondary sources. 1. Primary Data Sources 2. Secondary Data Sources PRIMARY DATA SOURCES: It is also called as first handed information the data is collected through the observation in the organization and interviews with the accounts and the persons in the financial department. A part from these, some information is collected through the seminars which were held by HERITAGE FOODS INDIA LIMITED SECONDARY DATA SOURCES: These secondary data is existing data which is collected by other sources, i.e. financial journals annual reports of HERITAGE FOODS INDIA LIMITED, website of HERITAGE FOODS INDIA LIMITED and other publication of HERITAGE FOODS INDIA LIMITED
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CHAPTER-2 LITERATURE REVIEW
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REVIEW OF LITERATURE : DEFINITION OF WORKING CAPITAL
Working Capital refers to that part of the firm’s capital, which is required for financing short-term or current assets such a cash marketable securities, debtors and inventories. Funds thus, invested in current assets keep revolving fast and are constantly converted into cash and this cash flow out again in exchange for other current assets. Working Capital is also known as revolving or circulating capital or short-term capital.
MEANING OF WORKING CAPITAL:The term working capital is commonly used for the capital required for day-to-day working in business concern. Such as for purchasing raw material for meeting day-to-day expenditure on salaries, wages, rent rates advertising etc. but there is much disagreement among various financial authorities as to the exact meaning of the term working capital.
WORKING CAPITAL MEANING AND SIGNIFCANCE
The concept of ‘working capital’ is much confusing in the business circles. It is very unfortunate, there is much disagreement among financiers, accountants, businessmen and economists as to the exact meaning of the term ‘working capital’. According to a few, working capital means current assists. For some others it is an excess of current assets over current liabilities. Some authorities prefer to call it circulating capital in place of working capital. The present study is related to working capital management in HERITAGE FOODS INDIA LIMITED , more effective and interacted for research work in corporate sectors . for the assessment of working capital management . T.anitha , jnt university , hyd , researchers evalutated the working capital management on his study on wcm in “HERITAGE FOODS INDIA LIMITED “. That working capital management is consider to involve the administration of current assets and current liabilities in
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such a way that an option level of working capital maintained in the business .she also narrated that firm may resist without making profits but it cannot survive with out liquidity . I therefore based on case study, I have selected my topic on different approach . TOOLS AND TECHNIQUES : Current ratio = Current Assets Current Liabilities
Quick ratio
=
Liquid Assets Current Liabilities
Cash ratio
=
Cash & Bank balances Current Liabilities sales(turnover) Working capital
* 100
Working capital turnover ratio =
debtors turnover ratio
=
sales (turnover) accounts recieveble
Stock turnover ratio
=
Sales (turnover ) inventory
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IMPORTANCE OF WORKING CAPITAL MANAGEMENT:
Working capital management includes a number of aspects that make it especially important for the financial health of the firm. Surveys indicate that the largest portion of the financial manager time is devoted to the day-to-day operations of the firm, which fall under the heading o working capital management. Current assets represent the largest proportion i.e. if total assets forms 1% then current assets are generally above 60%. Moreover current assets fluctuate with sales and sales vary over time. Thus managing current asset is the dynamic process and it requires the financial mange to closely monitor sales to ensure that assets in hand are at the right level for actual sales production levels.
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FACTORS INFLUENCING WORKING CAPITAL NEEDS:1. Nature of Business: - The amount of working capital is basically related to the nature and volume of the business. In concerns, where the cost of raw materials to be used in the manufacture of a product is very large in proportion to its total cost of manufacture the requirements of working capital will be very large. For instance, a cotton or sugar mill requires a large amount of working capital. On the contrary, concerns having large investments in fixed assets require less amount of working capital. 2. Size of Business Unit: - Size of the business unit is also a determining factor in estimating the total amount of working capital. The general principle in this regard is that the bigger the size the larger will be the amount of working capital required as because the larger business units are required to maintain big inventories for the flow of the business. 3. Seasonal Variations: - Strong seasonal movements create certain special problems of working capital in controlling the internal financial swings. A great many companies have to carry on seasonal business such as sugar mills, oil mills or woolen mills etc. and therefore they require large amount of working capital in the season to purchase the raw materials in large quantities and utilize them throughout the year. 4. Time Consumed In Manufacture: - The average time taken in the process of manufacture is also an important factor in determining the amount of working capital. The longer the period of manufacture the large the investor required. 5. Turnover of Circulating Capital: - Turnover means the ratio of annual gross sales to average working assets. In simple words, it means the speed with which circulating capital completes its rounds or the number of times the amount invested in working assets has been converted into cash by sales of the finished goods and reinvested in working assets during a year. 6. Labor Intensive Vs Capital Intensive Industries: - In labor intensive industries, large working capital is required because or regular payment of heavy wage-bills and more time taken in completing the manufacturing process. Conversely, the capital intensive industries require lesser amount of working capital because of the heavy investment in fixed and shorter period in manufacturing process. 19
7. Need to Stockpile Raw Material and Finished Goods: - In industries where it is necessary to stockpile the raw materials and finished goods increase the amount of working capital lied up in stocks and stores in certain lines of business where the materials are bulky and best purchasable in large quantities such as cements stockpiling of raw material is very usual or where labor stoppage is frequent finished goods stock have to be large in stored quantities. 8. Terms of Purchase and Sales: - Terms of purchase and sales also affect the amount of working capital. If a company purchases all goods in cash and sells its finished product on credit also naturally it will require large amount of working capital. On the contrary a concern having credit facilities and allowing no credit to its customers will require lesser amount of working capital 9. Conversion of Current Assets Into Cash: - The need of having cash in hand to meet the day to day requirements payment of wages and salaries rent rates has an important bearing in deciding the adequate amount of working capital. The greater the cash requirement the higher will be the need of working capital but if a company has ample stock of liquid current assets will require lesser amount of working capital because the company can en cashes such assets immediately in the open market. 10. Growth and Expansion of Business: - Growing concerns require more working capital than those that are static. It is logical to expect larger amount of working capital in a growing concern to meet its growing needs of funds for its expansion programmers though it varies with economic condition and corporate practices. 11. Business Cycle Fluctuations: - Business cycle affects the requirement of working capital. At times when the prices are going up and up and boom conditions prevail the tendency management is to pile up a big stock of raw materials and to maintain a big stock of finished goods with an expectation to earn more profits. 12. Profit Margin and Profit Appropriation: - Some firms enjoy a dominant position in the market due to quality product or good marketing management or monopoly power in the market and therefore earn a high profit margin. On the other hand form facing tough competition earn low margin of profit.
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13. Price level changes: - The financial manager should also anticipate the effect of price level changes on working capital requirements of the firm. Generally, rising price levels will require a higher amount of working capital because to maintain the same levels of current assets will require higher investment. However if companies may revise their product prices will not face a severe working capital problem. The effects of rising price levels will be different for different firms depending upon their price policies nature of the product etc. 14. Dividend policy: - There is a well established relationship between dividend and working capital in companies where conservation dividend policy is followed. The changes in working capital position bring a about an adjustment in dividend policy. With a view to maintain and established dividend policy is the management before declaring a dividend gives due consideration to its effects on cash and cash requirements.
WORKING CAPITAL MANAGEMNENT-AN OVER VIEW
Working capital of a firm may be different as the amount by which its current assets exceed its current liabilities. Working capital management is concerned with the problem that arises attempting to manage current assets, current liabilities and the interrelationship that exists between them. The current assets to those assets, which in the ordinary course of the business can be, or will be, turned into cash with in 1 year without disrupting the operations of the firm. The major current assets are cash marketable securities account receivable and inventories. Current liabilities are those liabilities, which are intended at their inception to be payee in the ordinary course of business with in the year, out of current assets or earning of the concern. The basic current liabilities are account payable, bills payable, bank overdraft and outstanding expenses. The goal of working capital management is to manage the firm’s current assets and current liabilities in such a way that the satisfactory level of the working capital is maintained. The Interaction between the current assets and current liabilities is the main theme of the theory of the working capital management. 21
The important elements of working capital includes inventory management, cash management, credit and collection policy and short term borrowings where as long term financial analysis is primarily concerned with strategic planning, working capital management is primarily concerned with day to day operations making shore, production lines out stop as firms run our of the raw material and thus preventing the slowing down of the process. Obviously with out good working capital management no firm can be efficient and profitable.
CONCEPT OF WORKING CAPITAL
There are two possible interpretations of working capital concept: 1. Balance sheet concept 2. Operating cycle concept
Balance sheet concept :
There are two interpretations of working capital under the balance sheet concept. a. Excess of current assets over current liabilities b. gross or total current assets • Excess of current assets over current liabilities are called the net working capital or net current assets. • Working capital is really what a part of long term finance is locked in and used for supporting current activities. • • The balance sheet definition of working capital is meaningful only as an indication of the firm’s current solvency in repaying its creditors. When firms speak of shortage of working capital they in fact possibly imply scarcity of cash resources. • In fund flow analysis an increase in working capital, as conventionally defined, represents employment or application of funds.
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Operating cycle concept :
A company’s operating cycle typically consists of three primary activities: • • • • Purchasing resources, Producing the product and Distributing (selling) the product. These activities create funds flows that are both unsynchronized and uncertain. Unsynchronized because cash disbursements (for example, payments for resource purchases) usually take place before cash receipts (for example collection of receivables). The firm has to maintain cash balance to pay the bills as they come due. • • • In addition, the company must invest in inventories to fill customer orders promptly. And finally, the company invests in accounts receivable to extend credit to customers. Operating cycle is equal to the length of inventory and receivable conversion periods.
TYPES OF WORKING CAPITAL
WORKING CAPITAL
BASIS OF CONCEPT Gross Working Capital Net Working Capital
BASIS OF TIME Permanent / Fixed WC Temporary / Variable WC Special WC
Seasonal WC Regular Reserve TYPES OF WORKING CAPITAL WC WC
•
Permanent working capital 23
•
Temporary or variable working capital
Permanent working capital = minimum amount of investment in all current assets which is required at all times to carry out minimum level of business activities. Permanent working capital = core current assets Temporary working capital: The amount of temporary working capital fluctuates depending upon the changes in the production and sales. Temporary working capital = fluctuating working capital - variable working capital
MANAGEMENT OF WORKING CAPITAL ( WCM )
Management of working capital is concerned with the problems that arise in attempting to manage the current assets, the current liabilities and the inter-relationship that exists between them. In other words, it refers to all aspects of administration of CA and CL. Working Capital Management Policies of a firm have a great effect on its profitability, liquidity and structural health of the organization
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3D Nature of Working Capital Management
Dimension I Profitability, Risk, & Liquidity
Dimension II Composition & Level of CA
Dimension III Composition & Level
OBJECTIVES OF WOEKING CAPITAL MANAGEMENT : To study on working capital a large portion of total investment in assets . To study on working capital requires much of financial managers time . To study on working capital changes in price level . To study on working capital day-to-day activities . To study on working capital current assets and current liabilities .
RATIO ANALYSIS
Meaning of Ratio:- A ratio is simple arithmetical expression of the relationship of one number to another. It may be defined as the indicated quotient of two mathematical expressions. According to Accountant’s Handbook by Wixon, Kell and Bedford, “a ratio is an expression of the 25
quantitative relationship between two numbers”. Ratio Analysis:- Ratio analysis is the process of determining and presenting the relationship of items and group of items in the statements. According to Batty J. Management Accounting “Ratio can assist management in its basic functions of forecasting, planning coordination, control and communication”. It is helpful to know about the liquidity, solvency, capital structure and profitability of an organization. It is helpful tool to aid in applying judgement, otherwise complex situations.
Ratio may be expressed in the following three ways :
1. Pure Ratio or Simple Ratio :- It is expressed by the simple division of one number by another. For example , if the current assets of a business are Rs. 200000 and its current liabilities are Rs. 100000, the ratio of ‘Current assets to current liabilities’ will be 2:1.
2. ‘Rate’ or ‘So Many Times :- In this type , it is calculated how many times a figure is, in comparison to another figure. For example , if a firm’s credit sales during the year are Rs. 200000 and its debtors at the end of the year are Rs. 40000 , its Debtors Turnover Ratio is 200000/40000 = 5 times. It shows that the credit sales are 5 times in comparison to debtors.
3. Percentage :- In this type, the relation between two figures is expressed in hundredth. For example, if a firm’s capital is Rs.1000000 and its profit is Rs.200000 the ratio of profit capital, in term of percentage, is 200000/1000000*100 = 20%
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Types of ratios (working capital associated ratios)
1)
CURRENT RATIO: Current Ratio may be defined as the relationship between current assets and current
liabilities. This ratio is also known as working capital ratio, is a measure of general liquidity and is most widely used to make the analysis of a short-term financial position or liquidity of a firm. It is calculated by dividing total current assets by total of the current liabilities.
Current Assets Current Liabilities
Current Ratio =
2)
QUICK RATIO: Quick ratio is a ratio of assets to quick liabilities. Quick assets are assets that can be
converted into cash very quickly without much loss. Quick liabilities one liabilities, which have to he necessarily paid with in one year. The acid test ratio is a measure of liquidity designed to over come of firms ability to convert its current assets quickly into cash in order to meet its current liabilities. Thus, it is measure of quick or acid liquidity. The acid test ratio is the ratio between current assets and current liabilities and is calculated by dividing the quick assets by the current liabilities.
Quick Assets Current Liabilities
Quick Ratio =
Quick Assets = Current Assets – (Inventory + Prepaid Expenses)
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3)
CASH RATIO (SUPER QUICK RATIO):
Definition
Total dollar value of cash and marketable securities divided by current liabilities. For a bank this is the cash held by the bank as a proportion of deposits in the bank. The cash ratio measures the extent to which a corporation or other entity can quickly liquidate assets and cover short-term liabilities, and therefore is of interest to short-term creditors. also called liquidity ratio or cash asset ratio.
cash & bankbalances Current Liabilities
Cash Ratio =
4)
WORKING CAPITAL TURNOVER RATIO:
Working capital of a concern is directly related to sales. The working capital is taken as: Working capital = Current assets – Current Liabilities
Sales x100 Net Working Capital
Working Capital Turnover Ratio =
The working capital turnover ratio indicates the velocity of the utilization of net working capital.
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5)
DEBTORS TURNOVER RATIO
Definition: Debtors turnover ratio indicates the velocity of debt collection of a firm. In simple words it indicates the number of times average debtors (receivable) are turned over during a year. Formula of Debtors Turnover Ratio: Debtors Turnover Ratio = Net Credit Sales / Average Trade Debtors The two basic components of the ratio are net credit annual sales and average trade debtors. The trade debtors for the purpose of this ratio include the amount of Trade Debtors & Bills Receivables. The average receivables are found by adding the opening receivables and closing balance of receivables and dividing the total by two. It should be noted that provision for bad and doubtful debts should not be deducted since this may give an impression that some amount of receivables has been collected. But when the information about opening and closing balances of trade debtors and credit sales is not available, then the debtors turnover ratio can be calculated by dividing the total sales by the balance of debtors (inclusive of bills receivables) given. and formula can be written as follows.
Debtors Turnover Ratio = Total Sales / Debtors 6) STOCK TURNOVER/INVENTORY TURNOVER RATIO: DEFINITION:
Stock turn over ratio and inventory turn over ratio are the same. This ratio is a relationship between the cost of goods sold during a particular period of time and the cost of average inventory during a particular period. It is expressed in number of times. Stock turn over ratio/Inventory turn over ratio indicates the number of time the stock has been turned over during the period and evaluates the efficiency with which a firm is able to manage its inventory. This ratio indicates whether investment in stock is within proper limit or not.
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Formula of Stock Turnover/Inventory Turnover Ratio: The ratio is calculated by dividing the cost of goods sold by the amount of average stock at cost. (a) Inventory Turnover Ratio = Cost of goods sold / Average inventory at cost
Generally, the cost of goods sold may not be known from the published financial statements. In such circumstances, the inventory turnover ratio may be calculated by dividing net sales by average inventory at cost. If average inventory at cost is not known then inventory at selling price may be taken as the denominator and where the opening inventory is also not known the closing inventory figure may be taken as the average inventory.
b) [Inventory Turnover Ratio = Net Sales / Average Inventory at Cost] c) [Inventory Turnover Ratio = Net Sales / Average inventory at Selling Price] d) [Inventory Turnover Ratio = Net Sales / Inventory]
Every business needs adequate liquid resources in order to maintain day-to-day cash flow. It needs enough cash to pay wages and salaries as they fall due and to pay creditors if it is to keep its workforce and ensure its supplies. Maintaining adequate working capital is not just important in the short-term. Sufficient liquidity must be maintained in order to ensure the survival of the business in the long-term as well. Even a profitable business may fail if it does not have adequate cash flow to meet its liabilities as they fall due. Therefore, when businesses make investment decisions they must not only consider the financial outlay involved with acquiring the new machine or the new building, etc, but must also take account of the additional current assets that are usually involved with any expansion of activity.
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Increased production tends to engender a need to hold additional stocks of raw materials and work in progress. Increased sales usually means that the level of debtors will increase. A general increase in the firm’s scale of operations tends to imply a need for greater levels of cash.
Introduction of Working Capital Management
Working capital management is the device of finance. It is related to manage of current assets and current liabilities. After learning working capital management, commerce students can use this tool for fund flow analysis. Working capital is very significant for paying day to day expenses and long term liabilities.
Meaning and Concept of Working Capital and its management
Working capital is that part of company’s capital which is used for purchasing raw material and involve in sundry debtors. We all know that current assets are very important for proper working of fixed assets. Suppose, if you have invested your money to purchase machines of company and if you have not any more money to buy raw material, then your machinery will no use for any production without raw material. From this example, you can understand that working capital is very useful for operating any business organization. We can also take one more liquid item of current assets that is cash. If you have not cash in hand, then you can not pay for different expenses of company, and at that time, your many business works may delay for not paying certain expenses. If we define working capital in very simple form, then we can say that working capital is the excess of current assets over current liabilities.
Types Of Working Capital
1.Gross working capital
Total or gross working capital is that working capital which is used for all the current assets. Total value of current assets will equal to gross working capital.
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2. Net Working Capital Net working capital is the excess of current assets over current liabilities.
Net Working Capital = Total Current Assets – Total Current Liabilities
This amount shows that if we deduct total current liabilities from total current assets, then balance amount can be used for repayment of long term debts at any time.
3. Permanent Working Capital
Permanent working capital is that amount of capital which must be in cash or current assets for continuing the activities of business.
4. Temporary Working Capital Sometime, it may possible that we have to pay fixed liabilities, at that time we need working capital which is more than permanent working capital, then this excess amount will be temporary working capital. In normal working of business, we don’t need such capital.
In working capital management, we analyze following three points Ist Point
What is the need for working capital?
After study the nature of production, we can estimate the need for working capital. If company produces products at large scale and continues producing goods, then company needs high amount of working capital. 32
2nd Point
What is optimum level of Working capital in business?
Have you achieved the optimum level of working capital which has invested in current assets? Because high amount of working capital will decrease the return on investmentand low amount of working capital will increase the risk of business. So, it is very important decision to get optimum level of working capital where both profitability and risk will be balanced. For achieving optimum level of working capital, finance manager should also study the factors which affects the requirement of working capital and different elements of current assets. If he will manage cash, debtor and inventory, then working capital will automatically optimize.
3rd Point
What are main Working capital policies of businesses?
Policies are the guidelines which are helpful to direct business. Finance manager can also make working capital policies.
1st Working capital policy
Liquidity policy Under this policy, finance manager will increase the amount of liquidity for reducing the risk of business. If business has high volume of cash and bank balance, then business can easily pays his dues at maturity. But finance manger should not forget that the excess cash will not produce and earning and return on investment will decrease. So liquidity policy should be optimized.
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2nd Working Capital Policy
Profitability policy Under this policy, finance manger will keep low amount of cash in business and try to invest maximum amount of cash and bank balance. It will sure that profit of business will increase due to increasing of investment in proper way but risk of business will also increase because liquidity of business will decrease and it can create bankruptcy position of business. So, profitability policy should make after seeing liquidity policy and after this both policies will helpful for proper management of working capital.
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CHAPTER-3 C O M P A N Y P R O F ILE & IN D U S TR Y P R O F I LE
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COMPANY PROFILE
Heritage at a Glance:
The Heritage Group, founded in 1992 by Sri Nara Chandra Babu Naidu, is one of the fastest growing Private Sector Enterprises in India, with three-business divisions viz., Dairy, Retail and Agri under its flagship Company Heritage Foods (India) Limited (HFIL), one infrastructure subsidiary - Heritage Infra Developers Limited and other associate Companies viz., Heritage Finlease Limited, Heritage International Limited and Heritage Agro Merine Private Limited. The annual turnover of Heritage Foods crossed Rs.347 crores in 2006-07 and is aiming for Rs.700 crores during 2007-08. Presently Heritage’s milk products have market presence in Andhra Pradesh, Karnataka, Kerala, Tamil Nadu and Maharashtra backbone to retail operations. In the year 1994, HFIL went to Public Issue to raise resources, which was oversubscribed 54 times and its shares are listed under B1 Category on BSE (Stock Code: 519552) and NSE (Stock Code: HERITGFOOD) and its retail stores across Bangalore, Chennai and
Hyderabad. Integrated agri operations are in Chittoor and Medak Districts and these are
About the founder:
Sri Chandra Babu Naidu is one of the greatest Dynamic, Pragmatic, Progressive and Visionary Leaders of the 21st Century. With an objective of bringing prosperity in to the rural families through co-operative efforts, he along with his relatives, friends and associates promoted Heritage Foods in the year 1992 taking opportunity from the Industrial Policy, 1991 of the Government of India and he has been successful in his endeavour. 36
At present, Heritage has market presence in all the states of South India. More than three thousand villages and five lakh farmers are being benefited in these states. On the other side, Heritage is serving more than 6 lakh customers needs, employing more than 700 employees and generating indirectly employment opportunity to more than 5000 people. Beginning with a humble annual turnover of just Rs.4.38 crores in 1993-94, the sales turnover has reached close to Rs.300 crores during the financial year 2005-2006. Sri Naidu held various coveted and honorable positions including Chief Minister of Andhra Pradesh, Minister for Finance & Revenue, Minister for Archives & Cinematography, Member of the A.P. Legislative Assembly, Director of A.P. Small Industries Development Corporation, and Chairman of Karshaka Parishad. Sri Naidu has won numerous awards including " Member of the World Economic Forum's Dream Cabinet" (Time Asia ), "South Asian of the Year " (Time Asia ), " Business Person of the Year " (Economic Times), and " IT Indian of the Millennium " ( India Today). Sri Naidu was chosen as one of 50 leaders at the forefront of change in the year 2000 by the Business Week magazine for being an unflinching proponent of technology and for his drive to transform the State of Andhra Pradesh .
Forward looking statements:
“We have grown, and intended to grow, focusing on harnessing our willingness to experiment and innovate our ability to transform our drive towards excellence in quality, our people first attitude and our strategic direction.
Mission:
Bringing prosperity into rural families of India through co-operative efforts and providing customers with hygienic, affordable and convenient supply of " Fresh and Healthy " food products.
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Vision:
To be a progressive billion dollar organization with a pan India foot print by 2012.To achieve this by delighting customers with "Fresh and Healthy" food products, those are a benchmark for quality in the industry. We are committed to enhanced prosperity and the emfoodment of the farming community through our unique "Relationship Farming" Model. To be a preferred employer by nurturing entrepreneurship, managing career aspirations and providing innovative avenues for enhanced employee prosperity.
Heritage Slogan:
When you are healthy, we are healthy When you are happy, we are happy We live for your "HEALTH & HAPPINESS"
Quality policy of HFIL:
We are committed to achieve customer satisfaction through hygienically processed and packed Milk and Milk Products. We strive to continually improve the quality of our products and services through upgradation of technologies and systems. Heritage's soul has always been imbibed with an unwritten perpetual commitment to itself, to always produce and provide quality products with continuous efforts to improve the process and environment. Adhering to its moral commitment and its continuous drive to achieve excellence in quality of Milk, Milk products & Systems, Heritage has always been laying emphasis on not only reviewing & re-defining quality standards, but also in implementing them successfully. All
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activities of Processing, Quality control, Purchase, Stores, Marketing and Training have been documented with detailed quality plans in each of the departments. Today Heritage feels that the ISO certificate is not only an epitome of achieved targets, but also a scale to identify & reckon, what is yet to be achieved on a continuous basis. Though, it is a beginning, Heritage has initiated the process of standardizing and adopting similar quality systems at most of its other plants.
Commitments: Milk Producers:
Change in styles of rural families in terms of: • • • • • • • • • • • Regular high income through co-operative efforts. Women participation in income generation . Saved from price exploitation by un-organized sector . Remunerative prices for milk . Increase of milk productivity through input and extension activities Shift from risky agriculture to dairy farming Heritage Financial support for purchase of cattle; insuring cattle Establishment of Cattle Health Care Centers Supplying high quality Cattle feed Organizing "Rythu Sadasu" and Video programmes for educating the farmers in dairy farming
Customers:
• • • Timely Supply of Quality & Healthy Products Supply high quality milk and milk products at affordable prices Focused on Nutritional Foods 39
• • •
More than 4 lakh happy customers High customer satisfaction 24 hours help lines ( <10 complaints a day)
Employees:
• Enhancing the Technical and Managerial skills of Employees through continuous training and development • • • Best appraisal systems to motivate employees Incentive, bonus and reward systems to encourage employees Heritage forges ahead with a motto "add value to everything you do"
Shareholders:
Returns: Consistent Dividend Payment since Public Issue (January 1995) Service: • Highest impotence to investor service; no notice from any regulatory authority since 2001 in respect of investor service • Very transparent disclosures
Suppliers:
Doehlar: technical collaboration in Milk drinks, yogurts drinks and fruit flavoured drinks Alfa-Laval: supplier of high-end machinery and technical support Focusing on Tetra pack association for products package.
Society:
• Potential Employment Generation 40
more than 3500 employees are working with heritage more than 9500 procurement agents got self employment in rural areas more than 5000 sales agents associated with the company • Employment for the youth by providing financial and animal husbandry support for establishing MINI DAIRIES • Producing highly health conscious products for the society
Qualities of management principles:
1. Customer focus to understand and meet the changing needs and expectations of customers. 2. People involvement to promote team work and tap the potential of people. 3. Leadership to set constancy of purpose and promote quality culture trough out the organization. 4. Process approach to assess the efficiency and effectiveness of each process. 5. Systems approach to understand the sequence and interaction of process. 6. Factual approach to decision making to ensure its accuracy. 7. Continual improvement processes for improved business results. 8. Development of suppliers to get right product and services in right time at right place.
Product/Market wise performance:
The total turnover is Rs 341 Crores during the financial year 2006-07 against the turnover of 292.02 Crores in 2005-06. Today Heritage distributes quality milk & milk products in the states of A.P, Karnataka, Kerala & Tamil nadu. During the year 2006-07 liquid milk sales was Rs.28329.79 lakhs against Rs.24525.23 lakhs in the previous year. The sales of miik products including bulk sales of cream, ghee and butter were recorded Rs 5781.59 lakhs against Rs 4677.21 lakhs. 41
Milk sales:
23% growth was recorded in AP 2.38 lakhs litres per day(LLPD) in 2006-07 against 1.93 LLPD in 2005-06. 13% growth was recorded in Tamilnadu-1.53 LLPD in 2006-07 against 1.35 LLPD in 2005-06. Over all growth of 6% was recorded- 5.49 LLPD in 2006-07 against 5.16 LLPD. Flavoured milk sales recorded a growth rate of 77% over 2005-06. Butter milk sales have gone up by 45% over 2005-06.
Outlook:
Considering the growth potential in the liquid milk market, the company has drawn plans to increase its market share in the existing markets and to enter into new markets there by doubling revenues in dairy business in the next 3 years. To achieve this object, company is undertaking major expansion in dairy business by inverting over Rs20 crores during 2006-07 and over Rs10 crores during the current year to strengthen the milk procurement.
BRANCHES OF HFIL:
HFIL has 3 wings. They are 1. Dairy 2. Retail 3. Agribusiness
1. Dairy:
It is the major wing among all. The dairy products manufactured by HFIL are Milk, curd, butter, ghee, flavoured milk, paneer, doodhpeda, ice cream.
2. Retail:
In the retail sector HFIL has outlets namely “Fresh@”. In those stores the products sold are vegetables, milk& milk products, grocery, pulses, fruits etc. 42
In Hyderabad 19 retail shops are there. In Bangalore& Chennai, 3&4 respectively are there. Totally there are 26 retail shops are there. Fresh@ is a unique chain of retail stores, designed to meet the needs of the modern Indian consumer. The store rediscovers the taste of nature every day making grocery shopping a never before experience. The unique& distinctive feature of Fresh@ is that it offers the widest range of fresh fruits and vegetables which are directly hand picked from the farms. Freshness lies in their merchandise and the customers are always welcomed with fresh fruits and vegetables no matter what what time they walk in.
3. Agri Business:
In this business HFIL employees will go to farmers and have a deal with them. Those farmers will sell their goods like vegetables, pulses to HFIL only. And HFIL will transport the goods to retail outlets. The agricultural professors will examine which area is suitable to import vegetables from and also examine the vegetables, pulses and fruits in the lab. And finally they report to the HeadAgribusiness. Representatives as per the instructions given by the agri professors will approach the farmers directly and make a deal with them. It is the process of registering the farmers.
43
4.0 INDUSTRY PROFILE
India is the world's second largest producer of food next to China, and has the potential of being the biggest with the food and agricultural sector. The total food production in India is likely to double in the next ten years and there is an opportunity for large investments in food and food processing technologies, skills and equipment, especially in areas of Canning, Dairy and Food Processing, Specialty Processing, Packaging, Frozen Food/Refrigeration and Thermo Processing. Fruits & Vegetables, Fisheries, Milk & Milk Products, Meat & Poultry, Packaged/Convenience Foods. India is one of the worlds major food producers but accounts for less than 1.5 per cent of international food trade. This indicates vast scope for both investors and exporters. Food exports in 1998 stood at US $5.8 billion whereas the world total was US $438 billion. The Indian food industries sales turnover is Rs 140,000 crore (1 crore = 10 million) annually as at the start of year 2000. India's food processing sector covers fruit and vegetables; meat and poultry; milk and milk products, alcoholic beverages, fisheries, plantation, grain processing and other consumer product groups like confectionery, chocolates and cocoa products, Soya-based products, mineral water, high protein foods etc. We cover an exhaustive database of an array of suppliers, manufacturers, exporters and importers widely dealing in sectors like the -Food Industry. The most promising sub-sectors includes -Soft-drink bottling, Confectionery manufacture, Fishing, aquaculture, Grain-milling and grain-based products, Meat and poultry processing, Alcoholic beverages, Milk processing, Tomato paste, Fast-food, Ready-to-eat breakfast cereals, Food additives, flavors etc. The food industry is the complex, global collective of diverse businessesthat together supply much of the food energy consumed by the world population. Only subsistence farmers, those who survive on what they grow, can be considered outside of the scope of the modern food industry. The food industry includes: 44
•
Regulation: local, regional, national and international rules and regulations for food production and sale, including • food quality and food safety, and industry lobbying activities Education: academic, vocational, consultancy
• •
Research and development: food technology Financial services, credit Manufacturing: agrichemicals, seed, farm machinery and supplies, agricultural construction, etc. Agriculture: raising of crops and livestock, seafood Food processing: preparation of fresh products for market, manufacture of prepared food products
•
•
Marketing: promotion of generic products (e.g. milk board), new products, public opinion, through advertising, packaging, public relations , etc Wholesaleanddistribution: warehousing, transportation, logistics Retail: supermarket chains and independent food stores, direct-to-consumer, restaurant , food services
• •
•
Consumer: End user has one of the highest influences on the food industry through things like preference
The Economic Research Service of the USDA uses the term food system to describe the same thing:
"The U.S. food system is a complex network of farmers and the industries that link to them. Those links include makers of farm equipment and chemicals as well as firms that provide services to agribusinesses, such as providers of transportation and financial services. The system also includes the food marketing industries that link farms to consumers, and which include food and fiber processors, wholesalers, retailers, and foodservice establishments."
45
History
Food processing dates back to the prehistoric ages when crude processing incorporated slaughtering, fermenting, sun drying, preserving withsalt, and various types of cooking (such as roasting, smoking, steaming, and oven baking). Salt-preservation was especially common for foods that constituted warrior and sailors' diets, up until the introduction of canning methods. Evidence for the existence of these methods exists in the writings of the ancient Greek , Chaldean, Egyptian and Romancivilizations as well as archaeological evidence from Europe, North and South America and Asia. These tried and tested processing techniques remained essentially the same until the advent of the industrial revolution. Examples of ready-meals also exist from pre industrial revolution times such as the Cornish pasty and the Haggis Modern food processing technology in the 19th and 20th century was largely developed to serve military needs. In 1809Nicolas Appert invented a vacuumbottling technique that would supply food for French troops, and this contributed to the development of tinning and then canning by Peter Durand in 1810. Although initially expensive and somewhat hazardous due to the lead used in cans, canned goods would later become a staple around the world Pasteurization. discovered by Louis Pasturing 1862, was a significant advance in ensuring the micro-biological safety of food. In the 20th century, World War II, the space race and the rising consumer society in developed countries (including the United States) contributed to the growth of food benzoate processing with such advances asspray drying, juice concentrates, freeze dryingand the introduction of artificial sweeteners, colouring agents, and preservatives such as sodium . In the late 20th century products such as dried instant soups, reconstituted fruits and juices, and self cooking meals such asMRE food ration were developed. In western Europe and North America, the second half of the 20th century witnessed a rise in the pursuit of convenience, food processors especially marketed their products to middle-class working wives and mothers. Frozen foods (often credited to Clarence Birdseye) found their success in sales of juice concentrates and "TV dinners". Processors utilised the perceived value of time to appeal to the postwar population, and this same appeal contributes to the success of convenience foodstoday.
46
The Indian packaged processed foods industry is estimated at US$ 10.87 billion – US$ 13.05 billion, including biscuits, chocolates, ice-cream, confectionery, snacks, cheese and butter. Growing at a healthy 14-15 per cent over the past two-three years, major players in the sector include Britannia, Nestle, Amul, ITC Foods, Parle, Kellogg’s, GlaxoSmithKline, Wrigley and Frito-Lay, among others. The industry received foreign direct investments (FDI) totalling US$ 143.80 million in 2007-08 against US$ 5.70 million in the previous fiscal. The cumulative FDI received by the industry from April 2000-August 2009 stood at US$ 878.32 million. However, India’s share in exports of processed food in global trade is only 1.5 per cent; whereas the size of the global processed-food market is estimated at US$ 3.2 trillion and nearly 80 per cent of agricultural products in the developed countries get processed and packaged. In order to further grow the food processing industry, the government has formulated a Vision-2015 action plan under which specific targets have been set. This includes tripling the size of the food processing industry from around US$ 70 billion to about US$ 210 billion, raising the level of processing of perishables from 6 per cent to 20 per cent, increasing value addition from 20 per cent to 35 per cent, and enhancing India’s share in global food trade from 1.5 per cent to 3 per cent. This would require an investment of US$ 20.6 billion. According to an Ernst and Young (E&Y) presentation, the food processing industry in India will grow 30-40 per cent as against the present 15 per cent in the next 10-years. Prime Minister Dr Manmohan Singh on October 6, 2009 laid out a blueprint for rapid growth in the country’s food processing sector. The Prime Minister said that this can be achieved by simplifying the tax structure, formulating a National Food Processing Policy and improving rural infrastructure. Moreover, according to Union Minister for Food Processing Industries, Subodh Kant Sahai the central government is envisaging an investment of US$ 21.50 billion in the food processing industry over the next five years, a major chunk of which it plans to attract from the private sector and financial institutions. 47
CHAPTER-4 DATA ANALYSIS AND INTERPRETATION
48
STATEMENT OF CHANGES IN WORKING CAPITAL FOR 2010-2011
(Rupees in lakhs)
Particulars Current Assets Inventories Sundry Debtors Cash and Bank Balance Bills Receivables Loan and Advances Total Current Assets (1) Current Liabilities Sundry Creditors Deposits Other Liabilities and Provisions Interest Total Current Liabilities (2) Working Capital [ (1) - (2 )]
31-3- 2010
31-3-2011
Increase
Decrease
26239.45 165665.88 3710.39 49400.06 15655.14 260668.92
39388.49 148917.78 3982.41 93617.55 3450.92 289357.15
13149.04 16748.10 274.02 44217.49 12204.22 28688.23
62687.38 25563.52 52077.46 9853.22 150181.58 110487.34
61718.05 44903.20 88800.73 7107.69 202529.67 86827.48 23659.86
969.33 19339.68 36723.27 2745.53 52348.09
23659.86
Increase in working capital :
110487.34
110487.34
52348.09
52348.09
Source : annual reports of HERITAGE FOODS INDIA LIMITEDfor the year 2010-11
49
STATEMENT OF CHANGES IN WORKING CAPITAL FOR 2009-10
(Rupees in lakhs)
Particulars Current Assets Inventories Sundry Debtors Cash and Bank Balance Bills Receivables Loan and Advances Total Current Assets (1) Current Liabilities Sundry Creditors Deposits Other Liabilities and Provisions Interest Total Current Liabilities (2) Working Capital [ (1) - (2) ]
31-3- 2009
31-3-2010
Increase
Decrease
28885.48 197944.41 7072.47 29846.01 8703.41 272451.78
26239.45 165665.88 3710.39 49400.06 15655.14 260668.92
2646.03 32278.03 3364.10 19554.05 6951.73 11782.86
39994.47 19860.10 45820.78 8724.02 115710.51 156741.27
62687.38 25563.52 52077.46 9853.22 150181.58 110487.34 46253.93 46253.93
22692.91 5703.44 6256.68 1129.2 34471.07
Increase in working capital :
156741.27
156741.27
46253.93
46253.93
Source : annual reports of HERITAGE FOODS INDIA LIMITEDfor the year 2009-10
50
STATEMENT OF CHANGES IN WORKING CAPITAL FOR 2008-09
(Rupees in lakhs)
Particulars Current Assets Inventories Sundry Debtors Cash and Bank Balance Bills Receivables Loan and Advances Total Current Assets (1) Current Liabilities Sundry Creditors Deposits Other Liabilities and Provisions Interest Total Current Liabilities (2) Working Capital [ (1) - (2) ]
31-3- 2008
31-3-2009
Increase
Decrease
22831.69 203161.62 1681.45 10242.06 9722.43 247639.25
28885.48 197944.41 7072.47 29846.01 8703.41 272451.78
6053.79 5217.21 5391.02 19603.95 1019.02 24812.53
49046.67 17691.49 43097.96 8289.46 118776.14 128863.11 27878.16
39994.47 19860.10 45820.78 8724.02 115710.51 156741.27
2168.59 9052.2 2722.82 434.56 3065.63
27878.16 27878.16 27878.16
Decrease in working capital :
156741.27
156741.27
Source : annual reports of HERITAGE FOODS INDIA LIMITEDfor the year 2008-09
51
STATEMENT OF CHANGES IN WORKING CAPITAL FOR 2007-2008
(Rupees in lakhs)
Particulars
31-3- 2007
31-3-2008
Increase
Decrease
Current Assets Inventories Sundry Debtors Cash and Bank Balance Bills Receivables Loan and Advances Total Current Assets (1) Current Liabilities Sundry Creditors Deposits Other Liabilities and Provisions Interest Total Current Liabilities (2) Working Capital [ (1) - (2) ] 86965.65 17163.61 25337.85 6112.18 136171.60 110227.87 18635.24 49046.67 17691.49 43097.96 8289.46 118776.14 128863.11 18635.24 37918.98 527.88 17760.11 2177.28 17395.46 28791.65 186198.50 6202.27 12467.18 12739.87 246399.47 22831.69 203161.62 1681.45 10242.06 9722.43 247639.25 5959.96 16963.12 4520.82 2225.12 3017.44 1239.78
Decrease in working capital :
128863.11
128863.11
18635.24
18635.24
Source : annual reports of HERITAGE FOODS INDIA LIMITEDfor the year 2007-08
52
STATEMENT OF WORKING CAPITAL FOR 2007-11
(Rupees in lakhs)
Year
Current assets
Current liabilities
Working Capital
N et Working Capital Increase Decrease 18635.24 27878.16 46253.93 23659.86
2007-08 2008-09 2009-10 2010-11
247639.25 272451.78 260668.92 289357.15
118776.14 128863.11 115710.51 156741.27 150181.58 110487.34 202529.67 86827.48
Interpretation: • • • • For the periods 2007-08 and 2008-09 the net working capital is decreased due to high of current assets and current liabilities . For the periods 2007-08 and 2008-09 increase in working capital due to remaining year figures, because in these 2 years current assets are high and current liabilities are low. In the year 2009-10 the current liabilities are very low & current assets are high ,so the working capital is increased. In the year 2010-11 the current liabilities are low & current assets are high,so the working capitial is increased.
53
COMPARISION OF INCREASE AND DECREASE OF WORKING CAPITAL
Year
N et Working Capital Increase /Decrease (-)18635.24 (-)27878.16 (+)46253.93 (+)23659.86
2007-08 2008-09 2009-10 2010-11
Interpretation: • For the periods 2007-08 and 2008-09 the net working capital is decreased due to lower investments in acquisition of fixed assets and making less payments to the payables • For the periods 2010-11 and 2009-2010increase in working capital leads to major investments in fixed assets as well as capital expenditure.
54
1. Calculation of Current Ratio: Principle Current Ratio = Current Assets Current Liabilities 2007-08 247639.25 118776.14 =2.104 2008-09 272451.78 115710.51 =2.354 2009-10 260668.92 150181.58 =1.735 2010-11 289357.15 202529.67 =1.428
Interpretation: • Variance of current ratio in the year 2008-09 shows that increase in current assets as well as decrease in current liabilities when compare to 2007-08 figures. For the year 2010-11 and 2009-2010the current ratio has been declined due to increase in current liabilities and decrease in current assets. The above ratio clearly indicates that for the period 2010-11 and 2009-2010the current ratio is below 2 hence it indicates that the firm has not maintaining sufficient current assets to meet current liabilities.
•
•
55
2. Calculation of Quick Ratio: Principle Quick Ratio = Liquid Assets Current Liabilities 2007-08 224807.56 118776.14 =1.892 2008-09 243566.30 115710.51 =2.104 2009-10 234429.47 150181.58 =1.560 2010-11 249968.66 202529.67 =1.234
Interpretation: • For the years 2007-08 and 2008-09 the firm has maintained sufficient current assets (excluding inventory of stock) in order to meet its current liabilities. Due to the increase in current liabilities for the year 2010-11 and 2009-2010it leads to decrease in Quick ratios when compare to 2007-08 and 2008-09 figures
•
56
3. Calculation of Cash Ratio:
Principle Cash Ratio = Cash & Bank balances Current Liabilities
2007-08 1681.45 118776.14 =0.014
2008-09 7072.47 115710.51 =0.061
2009-10 3710.39 150181.58 =0.024
2010-11 3982.41 202529.67 =0.019
Interpretation:
• •
The cash ratio of the organization clearly indicates that the firm has maintaining moderate cash balances to meet its current liability obligations In order to maintain sufficient cash balance the firm has to maintain control over its credit sales (Debtors) and making payments to the suppliers
57
4.
Calculation of Working Capital Turn Over Ratio:
2007-08 417255.56 128863.11 =3.237 2008-09 388868.06 156741.27 =2.480 2009-10 419999.51 110487.34 =3.801 2010-11 461703.22 86827.48 =5.317
Principle Working Capital Turn Over Ratio = Sales (Turn Over) Working Capital
Interpretation: • • • The overall position of the working capital turn over ratio is positive For the year 2010-11 and 2009-2010there is a substantial growth in sales turn over due to this the firm has huge working capital turn over ratio for the above said periods For the period 2008-09 the sales turn over of the firm has been decreased when compare to 2007-08 figures due to this the working capital turn over ratio is declined.
58
5.
Calculation of debtors Turn Over Ratio:
2007-08 417255.56 203161.62 = 2.053 2008-09 388868.06 197944.41 = 1.964 2009-10 419999.51 165665.88 = 2.535 2010-11 461703.22 148917.78 = 3.100
Principle Debtors Turn Over Ratio = Sales (Turn Over) Accounts recieveble
•
Account recieveble includes sundry debtors and bills recieveble
Interpretation: • • The debtors turn over ratio of the firm is ideal for the year 2007-08 There is substantial decrease in sundry debtors for the year 2008-09 due to this the debtors turn over ratio is decreased when compare to 2007-08 and remaining years figures . For the year 2010-11 and 2009-2010the firm has maintained sufficient debtors turn over ratio.
•
59
6. Calculation of stock or inventory Turn Over Ratio:
Principle Stock Turn Over Ratio = Sales (Turn Over) inventory 2007-08 417255.56 22831.69 = 18.275 2008-09 388868.06 28885.48 = 13.462 2009-10 419999.51 26239.45 = 16.006 2010-11 461703.22 39388.49 = 11.721
Interpretation: • • The stock turn over ratio of the firm is ideal for the year 2010-11 There is substantial decrease in stock for the year 2007-08 due to this the stock turn over ratio is decreased in 2009-2010when compare to 2007-08 and remaining years figures . In the year 2007-08 the firm has maintained sufficient stock turn over ratio.
•
60
CHAPTER -5 FINDINGS, SUGGESTIONS AND CONCLUSIONS
61
FINDINGS
• The profits are in the increasing trend. There is a drastic improvement in profit from
the year 2010-11 to 2009-2010where the profit is almost doubled. This indicates the good financial soundness of the company.
• Sundry Debtors have been reduced which indicates increase in realisation of amount
from debtors which indicates higher liquidity of the business.
• Sundry Creditors showed a fluctuating trend. Concentrating on the last two years we
can see that though the profit have been increasing, creditors have decreased indicating more cash purchases than credit purchases.
• It is obvious that as the net profit ie., profit before tax is increased the tax paid are
also shown an increasing trend.
• The working capital has increased for the first three years. But in 2010-11 and 20092010 working capital reduced ,though the net profit is increased during the years. This shows that more of cash transactions have taken place and cash if available in excess is the least productive asset.
• For the year 2010-11 and 2009-2010the firm has maintained sufficient working
capital turn over ratio . 62
CONCLUSIONS
• The efficiency of management at financial position of HERITAGE FOODS INDIA
LIMITED is good
• From the analysis it is clear that the share capital remained intact during the five years
upto 2009-2010and the reserves and surplus reached to 19763.59 Lakhs.
• From the observation it is clear that capital expenditure on fixed assets is increased
gradually over the period of time which might be due to construction and commission of new thermal and hydel projects.
• Company inventories observed an increment except in the year 2007-08. • Cash and bank balances was increased during the years 2008-09 and 2010-11. • Miscellaneous expenses observed decrement over the years and is Nil during the year
2010-11.
• Current liabilities also increased
clearance of liabilities.
from 2003-04 to 2009-2010which shows prompt
• The HERITAGE FOODS INDIA LIMITED uses more of long term loans/debts than
owner’s equity.
• From the observation it is clear that equity share capital of HERITAGE FOODS
INDIA LIMITED remained fixed over the years. There is no preference share capital in HERITAGE FOODS INDIA LIMITED.
• Based on the analysis made the total financial position is good.
63
SUGGESTIONS
As the working capital has been reduced in 2010-11 and 2009-2010 though the profit has increased, the company is advised to take all necessary steps to find out the reasons for reduction in the working capital. • • • • • • High availability ensuring minimum cost of generation To add generating capacity, with in prescribed time and cost To maintain the financial soundness of HERITAGE FOODS INDIA LIMITED Managing financial operations in accordance with good commercial utility practices To develop R&D for achieving improved plant reliability In order to increase the working capital, discount should be given to debtors and see that the average collection period reduces. • Reference to Andhra Pradesh gazette, the generating company and distribution license may actually agree to a maximum rebate of 2% on bill amount. these provisions in the act may utilize by HERITAGE FOODS INDIA LIMITED .
•
64
BIBLIOGRAPHY
65
BIBLIOGRAPHY
Author BOOKS : Financial management Financial management Financial management Im pandey khan & jain Prasad chandra
Edition 9th 4th 2nd
Publications
vikas publishers tata mc.graw hills tata mc.graw hills
WEB SITES :
www.heritage foods india limited.com www.askmgt.com www.google.com
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