Chapter I INTRODUCTION Finance is the life blood of an industrial system. No business can be started without adequate finance or it can be developed. Provision of sufficient funds at the required time is the key to success of a concern. As a matter of fact, finance is said to be the circulatory system of the economic body, making possible the needed co-operation between the many units of activity. The term capital means the amount invested in business, the amount of money financed to start and maintain a business concern. The funds required by an enterprise can be financed either by owners fund or by a mix of both owners fund and outsider’s fund. The capital; raised concern can be utilized for both long term and short term financial needs. So the capital required by a business concern can be broadly classified in to two.
a. Fixed capital requirement and b. Working capital requirement.
The term fixed capital stands for that amount of capital which is invested in fixed assets such as land and building , plant and machinery, furniture and fixtures etc. working capital is the amount of funds necessary to cover the cost of operating the enterprise. The long term investment may be termed as fixed investment which is invested in fixed assets. These fixed assets are retained in the business to earn profit during life of business. The short term investment or funds are required for financing the duration of the operating cycle in a business, often known as the accounting year. These funds are often used for carrying out routine or regular business operations consist of purchase raw material, payment of direct and indirect expenses, carrying out production, investment stock and stores, credit facility to customers and to be maintained in the form of cash. Thus, the funds for financing the duration of operating cycle in a business are known as working capital. Briefly, working capital denotes funds which are required to carry on day- to-day business operation. Working capital is the life blood and nerve centre of a business. Just as circulation of blood is essential in the human body for maintaining life, working capital is very essential to maintain the smooth running of a business. No business can run successfully without an adequate
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amount of working capital. In adequate amount of working capital means shortage of liquid fund, raw materials, and other inputs. The result will be the part time utilization of the efficiency of fixed assets and the firm is not in the position to pay day to day expenses of it operation. Thus, it will lose it reputation and shall not be to good credit facilities. On the other hand excessive working capital means idle fund, dumped stock inefficient store keeping, excessive receivables etc. excessive working capital earn no profit for the business and hence the business cannot earn a proper rate of return on its investment. So the proper management of working capital is very essential for the success of an enterprise. The basic goal of working capital management is to manage cash of the current assets and current liabilities in such a way that an acceptable level of net working capital is always referred to as liquidity management. Liquidity refers to the company’s ability to meet its current obligation in time. Each current asset must be managed efficiently in order to maintain the firm liquidity. It ultimately assists in increasing the profitability of the concern. Hence the problem of efficient management of working capital is to establish a trade-off between liquidity and profitability.
1.1 STATEMENT OF PROBLEM
In this study, the investigator attempts to evaluate the performance of working capital management in Dhanwanthari Vaidyasala, Thodupuzha. The problem is state as performance of working capital management in Dhanwanthari Vaidyasala, Thodupuzha-An Analysis.
1.2 SIGNIFICANCE OF THE STUDY
Today many undertaking face the serious problem of lack of working capital to meet the day to day operations. Proper management of working capital is very important for the success of an enterprise. Since the liquidity plays a crucial role in the satisfactory on-going of every concern, the proposed study, to evaluate the performance of working capital management in Dhanwanthari Vaidyasala, Thodupuzha is very significant.
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1.3 OBJECTIVES OF THE STUDY This study aimed to evaluate the performance of Dhanwanthari Vaidyasala, Thodupuzha with regards to its current asset management. The objectives of the study are; ??To analyse the liquidity position of the concern ??To analyse the working capital position of the concern ??To identify the financial strengths & weakness of the company. ??To suggest ways and means through the management can improve the working capital position? 1.4 LIMITATION OF THE STUDY Following are some of the important limitation experienced by the investigator during conduct of the study. ??Technical and Administrative aspects were considered in the study. ??Time being a limiting factor; the researcher could not go very deep in analysis the financial position of the company. ??The investigator has to depend mainly on secondary data rather than primary data. ??The study is limited to the period of five year.
1.5 CHAPTERISATION The study, working capital management analysis has been organized and presented in five chapters.
1. The first chapter is all about introduction, scope of study, statement of problem, and significance of the study, working hypothesis, data and methodology, period of study, limitation and chapter scheme. 2. The second chapter contains a theoretical frame work of working capital management. 3. The third chapter includes a brief profile of Dhanwanthari Vaidyasala, Thodupuzha 4. Chapter four is a detailed analysis of working capital position of Dhanwanthari Vaidyasala, Thodupuzha 5. The fifth chapter summarizes the findings and recommendations to improve company’s working capital position.
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WORKING CAPITAL MANAGEMENT THEORETICAL FRAME WORK
Every business needs funds for two purposes for it establishment and to carry out its day to day operations. Long term funds are required to create production facilities through purchase of fixed assets such as plant, and machinery, land and building, furniture etc. investment in these assets represent that part of firms capital is blocked on a permanent or fixed basis and is called fixed capital. Funds are also needed for short term purpose for the purchase of raw material, payment of wages and other day to day expenses etc. These funds are known as working capital. In the simple words working capital refers to that part of the firm’s capital which is required for financing short term or current asset such as cash, marketable securities, debtors and inventories. Working capital management is concerned with the management of both current assets and current liabilities and the interrelationship that exists between them.
2.1 MEANING AND DEFINITION
Working capital is the amount of funds necessary to cover the cost of operating the enterprises. The term working capital is commonly used for the capital required for the day to day working of the business concern. According to Genestnberg working capital current asset of a company that are changed in the ordinary course of business from one form to another, as example from cash to inventories, inventories to receivables, receivables in to cash. “Working capital is the difference between the inflow and outflow of Funds. In other words it is the net cash inflow.”
Working capital represents the total of all current assets. In other words it is the Gross working capital, it is also known as Circulating capital or Current capital for current assets are rotating in their nature.
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2.2 CONCEPT OF WORKING CAPITAL
There are two concept of working capital:-
A. Balance sheet concept B. Operating cycle or circular flow concept
A. Balance sheet concept:
There are two interpretation of working capital under the balance sheet concept:-
a. Gross working capital b. Net working capital
The term working capital refers to the gross working capital and represents the amount of funds invested in current assets. Thus, the gross working capital is the capital invested in total current asset of the enterprise. Current assets are those assets which in the ordinary course of business can be converted into cash within a short period of time normally one accounting year.Net working capital is the excess of current asset over current liabilities. Net working capital= current assets – current liabilities.
Net working capital may be positive or negative. When the current assets exceed the current liabilities the working capital is positive and the negative working capital results when the current liabilities are more than the current assets. Current liabilities are those liabilities, which are intended to be paid in the ordinary course of business within a short period of normally one accounting year out of the current assets or the income of the business. Working capital management is concerned with the problems that crop up in managing the interrelationship between current assets and current liabilities.
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Net Concept
Relationship between current assets& current liabilities
Gross Concept
Individual current assets
Perspective short term & long term
Perspective short term & long term
Evaluation by external parties
Evaluation by management
Optimum balance among risk
Optimum investments in individual CA
Return & liquidity
Financing of current assets
The gross working capital concept is financial or going concern concept whereas net working capital is the accounting concept of working capital.
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B. Operating cycle or Circular flow concept:
Funds invested in current assets keep revolving fast and are being constantly converted into cash and this cash flow out again in exchange for other current assets. Hence, it is also known as revolving or circulating capital. The circular flow concept of working capital is based upon this operating or working capital cycle of a firm. The cycles starts with the purchase of raw material and other resources and ends with the realization of cash from the sale of finished goods through work in progress with progressive incensement of labour service costs, conversion of finished stock into sales, debtors and receivables and ultimately realization of cash and this cycle continues again from cash to purchase of raw material and so on. The speed/time duration required to complete one cycle determines the requirement of working capital longer the period of cycle, larger is the requirement of working capital.
Showing operating cycle (Figure No 2.1)
Cash
Raw materials
Debtor's
Work in Progress
Sales
Finished Goods
Length of the operating cycle mainly depends upon the length of the production and companies credit policies.
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2.3 TYPES OF WORKING CAPITAL The changes in current assets in short term and long term have led to the classification of working capital into two ways:-
1. Permanent or Fixed working capital 2. Temporary or variable working capital
1. Permanent working capital
There is always a minimum level of current assets always required by a firm, to carry on its operations, the minimum level of current assets always known as permanent working capital. It is also called core working capital, regular working capital or fixed working capital. Normally fixed working capital is fixed in nature. But it should be noted that as the business grows, the amount of permanent working capital would also increase. The permanent working capital can further be classified as Regular working capital and Reserve working capital. Regular working capital required to ensure circulation of current assets from cash to inventories, from inventories to receivable and from receivable to cash and so on. Reserve working capital is the excess amount over the requirement for regular working capital, which may be provided for contingencies that may arise at unstated period such as strikes, rise in prices, depreciation, etc.
2. Temporary working capital
Temporary or variable working capital is the amounts of working capital, which is required to meet the seasonal demands and some special exigencies. Variable working capital can be further classified as seasonal working capital and special working capital. Most of the enterprises have to provide additional working capital to meet the seasonal needs of the enterprise is called Seasonal working capital. Special working capital is that part of working capital which is required to meet special exigencies such as launching of extensive marketing campaigns for conducting research etc.
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Figure: 2.2 Permanent and Temporary working capital of a manufacturing firm
Temporary or variable working capital
Permanent or fixed working capital
Figure: 2.3 Permanent and Temporary working capital of a Growing firm
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2.4 DETERMINANTS OF WORKING CAPITAL
The working capital requirement of a concern depend upon a large number of factors such as nature and size of the business, the character of their operations, the length of production cycle, the rate of stock turnover and the state of economic situation. It is not possible to rank them because all such factors are of different importance and the influence of individual factors changes for a firm overtime. However, the following are important factors generally influencing the working capital requirements.
1. Nature and size of business 2. Production policy 3. Length of manufacturing process/production cycle 4. Seasonal variation 5. Working capital cycle 6. Credit policy 7. Business cycle 8. Earning capacity and dividend policy 9. Price level changes 10. Other factors
2.5 SOURCES OF WORKING CAPITAL
All sources of funds can be classified into two groups:-
1. Long term sources 2. Short term sources
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Figure: 2.4 Showing sources of working capital
Sorces of Working Capital
Short Term Sources
Long Term Sources
Internal
External
Equity Capital
Depreciation Fund
Trade Credit
Debenture & Preferance shares
Provision for Tax
Bank Credit
Retained Profits
Accrued Expences
Public
Sale of Fixed Assets
Term Loans
Deposits
Govt.Securities
Credit papers
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2.6 IMPORTANCE OF ADEQUATE WORKING CAPITAL
Working capital is the lifeblood and nerve centre of a business. Just as circulation of blood is essential in the human body for maintaining life, working capital is very essential to maintain the smooth running of a business. No business can run successfully without an adequate amount of working capital. The main advantages of maintaining adequate amount of working capital as follows:-
1. Solvency of the business:Adequate working capital helps in maintaining solvency of the business by providing uninterrupted flow of production. 2. Goodwill:Sufficient working capital enables a business concern to make prompt payments and hence helps in creating and maintaining goodwill. 3. Easy loans:A concern having adequate working capital, high solvency and good credit standing can arrange loans from banks and others on easy and favourable terms. 4. Cash discounts:Adequate working capital also enables a concern to avail cash discount on the purchases and hence it reduces costs. 5. Regular supply of raw materials:Sufficient working capital ensures regular supply of raw materials and continuous production. 6. High morale:Adequacy of working capital creates an environment of security, confidence, and high morale and creates overall efficiency in business.
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2.7 NEED FOR WORKING CAPITAL The basic objective of financial management is to maximize the shareholders wealth. This is possible only when the company earns the sufficient profit. The amount of such profit largely depends upon the magnitude of sales. However sales do not convert into cash immediately. This is always a time gap between the sales of goods and receipts of cash. Working capital is required for this period in order to sustain the sales activity. In case adequate working capital is not available for this period, the company will not be in a position to purchase raw materials, pay wages and other expenses required for manufacturing the goods to be sold.
2.8 OBJECTIVES OF WORKING CAPITAL MANAGEMENT Working capital management is concerned with the problems that arise in attempting to manage the current assets, current liabilities and the interrelationship that exists between them. The basic objectives of working capital management are to manage the firm’s current assets and current liabilities in such a way that the satisfactory level of working capital is maintained, i.e., it is neither in adequate nor excessive. Excessive working capital will dilute the profitability whereas inadequate working capital can threaten the solvency of the firm. The main aim of working capital management is also to decide up on the optional mix of short term funds as well as long term funds. Thus working capital management policies of a firm have a great effect on its profitability, liquidity and structural health of the organization. In this context working capital management is three dimensional in nature. These three dimensions can be represented in the following figure:
Figure 2.5
DIM 1
DIM 3
DIM 2
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Dimension-1 is concerned with formulation of policies with regard to profitability, risk and liquidity. Dimension-2 is concerned with the decision about the composition and level at current assets. Dimension-3 is concerned with the decision about the composition and level of different sources of funds.
2.9 COMPONENTS OF WORKING CAPITAL
Working capital management of different component of working capital such as cash, inventories, accounts receivables, etc. in the absence of such situation, the financial position in respect of the firm’s liquidity may not be satisfactory in spite satisfactory liquidity ratio. The main components of working capital are as follows:
1. MANAGEMENT OF CASH
Cash is the most liquid asset, is vital importance to the daily operations of business. It is generally referred to as the “lifeblood of a business enterprise”. A sound cash management scheme, therefore, maintain the balance between the twin objective of liquidity and cost. The term cash has two meaning with reference to cash management. In narrow sense it includes coins, currency, notes and other generally accepted equivalent of cash such as cheques, drafts and demand deposits held in banks. The brooder’s definition of cash includes marketable securities and time deposits in banks.
MOTIVES FOR HOLDING CASH
Cash management is one of the key areas of working capital management. John Maynard Keynes in the general theory of employment, interest and money has been identified four motives for holding cash and size of the firm’s cash balance depends basically upon these four major reasons:-
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a. Transaction motive The transaction motive is the need for cash to make the payments for day to day obligations. Cash fund kept or arrange for making payment in normal course of business are cash funds for transaction motive. b. Precautionary motive All firms anticipate uncertainties. All of a sudden, cash may be required to meet certain unexpected demands for cash. In other words, a firm should take precautions for meeting uncertainties with regards to sudden demands for cash.
c. Speculative motive A firm may want to have ability to take advantage of profitable opportunities. These opportunities do not come in a regular manner. Forecast of such opportunities cannot be made scientifically or precisely. d. Compensation motive
It refers to that portion of cash balance, which is maintain to compensate bank for providing certain services, free of cost or at lower cost.
OBJECTIVES OF CASH MANAGEMENT
The important objectives of cash management are:-
a) Meeting of cash disbursement
The basic objective of cash management is to meet all the payments obligates in time. This requires the maintenance of sufficient cash fund to meet the payment schedules of raw materials, suppliers, workers, brokers etc. b) Minimizing funds held upon cash balances
The second objective of cash management is to minimize cash balances. A large amount of cash balances may ensure the liquidity and all its advantages, but it also implies way high cost as large funds remained idle because cash in a non- earning assets.
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There are basically two approaches to determine an optimal cash balances, namely ? ?Minimizing cost models ? ?Cash budget
2. MANAGEMENT OF INVENTORY
Every enterprise need inventory for smooth running of its activities. It serves as a link between production and distribution process. There is generally, a time lag between the recognition of a need and its fulfilment. The greater time lags the higher the requirement of inventory. The unforeseen fluctuation in demand and supply of goods also necessitate the need for inventory. It also provides a caution for future price fluctuations. The term inventory refers to the assets, which will be sold in future in the normal course of business operations. The term inventory includes raw materials, work in progress and finished goods investment in inventory forms a substantial portion of total assets employed. Short term borrowings from banks are largely affected by inventories. While materials affect the cost of goods sold, short term borrowings for investments affect the interest charges. Both material cost and interest charges can be reduced with better inventory planning and control. This reduction increases profit.
OBJECTIVES OF INVENTORY MANAGEMENT
The main objectives of inventory management are operational and financial. The operational objective means that the materials and spares should be available insufficient quantity so that work is not disrupted for want of inventory. The following are the objective and efficient management of inventories.
? To ensure continuous supply of materials, spares and finished goods, so that
production should not suffer at any time and the customer demand should also be met.
? To avoid both overstocking and under stocking of inventory.
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? To maintain investment in inventories at optimum level as required by the
operational and sales activities.
? To keep material cost under control so that they contribute in reducing cost of
production and overall cost.
? To estimate duplication in ordering replenishing stock. This is possible with the help
of centralized purchasing.
3. MANAGEMENT OF RECEIVABLES
Receivables are asset accounts owned to the firm as a result of sale of goods or service in the ordinary course of business. Receivables are direct result of credit sales. A concern is required to allow credit sales in order to expand it sales volume. It is not always possible to sell goods on cash basis only because of prevailing competition in the market. The increase in the sales essential to increase in profitability. After an increasing level of sales, the increase in sales will not proportionately increase production cost, i.e. each increase in sales will bring in more profits. Even though credit sales ultimately result in pushing up the profits earned by the firm, it results in blocking of funds in accounts receivables. It creates extra cost in terms of interest and also increases chances of bad debts. Thus creation of accounts receivables is beneficial as well as dangerous. Management of account receivables is a process of making decision related to the investment of funds in these assets, which results in maximizing the overall return on the investment of the firms. The objectives of receivables management is to promote profits until that point is reached where the return on investment is further finding of receivables is less than the cost of funds raised to finance that additional credit.
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IMPORTANCE OF RECEIVABLES
? Sales growth: - provision of the facility of credit sales by a firm to its customers is a
powerful stimulant for increasing sales.
? Increasing profit:- this is the indirect result of selling on credit ? Capacity to face competition: - the firm may be able to face the competition by selling
on credit.
OPTIMUM LEVEL OF INVESTMENT IN RECEIVABLES
The optimum level of investment in receivables should be where; there is a trade-off between the costs, profitability and liquidity. It is shown below:-
Figure: 2.6 Trade-off between costs, Profitability and Liquidity
Profitability
In short working capital management is an inevitable task of the financial management. The success or failure of a business concern depends more or less on the efficiency of working capital management.
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2.6 CURRENT ASSET AND FIXED ASSET
A firm needs fixed and current assets to support a particular level of output. However to the same level of output, the firm can have different levels of current assets. The level of current asset can be measured by relating current asset to fixed assets. Dividing current assets by fixed assets gives CA/FA ratio. Assuming a constant level of fixed assets. If CA/FA ratio is higher than it indicates a conservative current asset policy. If CA/FA ratio is lower it shows an aggressive current asset policy. Conservative policy implies greater liquidity and lower risk as more amounts is invested in current asset policy of the most firms may fall between these two policies i.e., average policy. If in the conservative policy indicates high levels of current assets are maintained, but in aggressive policy the level of current asset will be minimum.
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RESEARCH METHODOLOGY RESEARCH DESIGN Research design is the plan, structure and strategy of investigation conceived so as to obtain answers to research questions. A research has to plan his work in advance as to anticipate any obstacles in the course of research. A research design could be defined as a blue print specifying every stage of section in the course of research. Such a design would indicate whether the course of action planned will minimise the use of resources and maximize the outcome. For the present day, descriptive research design is applied as related to study the nature of description refers to the use of already available facts of information for the ascertainment of the level of working capital at present maintained by the DHAWANTHARI VAIDYASALA, THODUPUZHA,IDUKKI METHOD OF DATA COLLECTION Types of Data: There are two types (sources) for the collection of data. (1) Primary Data (2) Secondary Data Primary Data: The primary data are the first hand information collected, compiled and published by organization for some purpose. They are most original data in character and have not undergone any sort of statistical treatment. On this particular study, I collect the primary data through formal and informal discussion and exchange of views with company personal. Secondary Data: The secondary data are the second hand information which are already collected by someone (organization) for some purpose and are available for the present study. The secondary data are not pure in character and have undergone some treatment at least once. The main secondary data sources are as follows:
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Annual Balance Sheet Unpublished Accounts Websites , such as ? Google.com ? Wikipedia.com ? Investpedia.com ? J gate.in ? Dhanwanthari.org
PERIOD OF STUDY The period of study restricted to five years from 2004-2005 to 2009-2010. The accounting year of the undertaking commenced from 1st April to 31st March of the next year. TOOLS FOR ANALYSIS The financial management always strives to maintain an adequate working capital at every time so as to carry on the operations successfully and maximize the return on investment. It has to be vigilant about the trend in the items that make up the working capital. This requires a careful enquiring into the current asset and current liability so as to control the working capital and to conserve it properly. There as a several tools for financial analysis of working capital. The important of them as follows:? RATIO ANALYSIS ? GRAPHS Now a day ratio analysis is used by all business and industrial concerns in their financial analysis. Ratios are considered to be the best guidance for the efficient execution of basic managerial functions like planning, forecasting, control etc. Ratio may be expressed in either in the form of rate or proportions or percentage.
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Chapter II Review of Literature The purpose of this chapter is to present a review of literature relating to the working capital management. Although working capital is an important ingredient in the smooth working of business entities, it has not attracted much attention of scholars. Whatever studies have conducted, those have exercised profound influence on the understanding of working capital management good number of these studies which pioneered work in this area have been conducted abroad, following which, Indian scholars have also conducted research studies exploring various aspects of working capital. Special studies have been undertaken, mostly economists, to study the dynamics of inventory investment which often represented largest component of total working capital. As such the previous studies may be grouped into three broad classes? (1) Studies conducted abroad, (2) Studies conducted in India, and (3) Studies relating to determine of inventory investment. Studies on Working Capital Management Studies adopting a new approach towards working capital management are reviewed here.
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Sagan in his paper (1955), perhaps the first theoretical paper on the theory of working capital management, emphasized the need for management of working capital accounts and warned that it could vitally affect the health of the company. He realized the need to build up a theory of working capital management. He discussed mainly the role and functions of money manager inefficient working capital management. Sagan pointed out the money manager’s operations were primarily in the area of cash flows generated in the course of business transactions. However, money manager must be familiar with what is being done with the control of inventories, receivables and payables because all these accounts affect cash position. Thus, Sagan concentrated mainly on cash component of working capital. Sagan indicated that the task of money manager was to provide funds as and when needed and to invest temporarily surplus funds as profitably as possible in view of his particular
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requirements of safety and liquidity of funds by examining the risk and return of various investment opportunities. He suggested that money manager should take his decisions on the basis of cash budget and total current assets position rather than on the basis of traditional working capital ratios. This is important because efficient money manager can avoid borrowing from outside even when his net working capital position is low. The study pointed out that there was a need to improve the collection of funds but it remained silent about the method of doing it. Moreover, this study is descriptive without any empirical support.
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Walker in his study (1964) made a pioneering effort to develop a theory of working capital management by empirically testing, though partially, three propositions based on riskreturn trade-off of working capital management. Walker studied the effect of the change in the level of working capital on the rate of return in nine industries for the year 1961 and found the relationship between the level of working capital and the rate of return to be negative. On the basis of this observation, Walker formulated three following propositions: Proposition I? If the amount of working capital is to fixed capital, the amount of risk the firm assumes is also varied and the opportunities for gain or loss are increased. Walker further stated that if a firm wished to reduce its risk to the minimum, it should employ only equity capital for financing of working capital; however by doing so, the firm reduced its opportunities for higher gains on equity capital as it would not be taking advantage of leverage. In fact, the problem is not whether to use debt capital but how much debt capital to use, which would depend on management attitude towards risk and return. On the basis of this, he developed his second proposition. Proposition II? The type of capital (debt or equity) used to finance working capital directly affects the amount of risk that a firm assumes as well as the opportunities for gain or loss. Walker again suggested that not only the debt-equity ratio, but also the maturity period of debt would affect the risk-return trade-off. The longer the period of debt, the lower be the risk. For, management would have enough opportunity to acquire funds from operations to meet the debt obligations. But at the same time, long-term debt is costlier. On the basis of this, he developed his third proposition: Proposition III? The greater the disparity between the maturities of a firm’s debt instruments and its flow of internally generated funds, the greater the risk and vice-versa.
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Weston and Brigham (1972) further extended the second proposition suggested by Walker by dividing debt into long-term debt and short-term debt. They suggested that shortterm debt should be used in place of long-term debt whenever their use would lower the average cost of capital to the firm. They suggested that a business would hold short-term marketable securities only if there were excess funds after meeting short-term debt obligations. They further suggested that current assets holding should be expanded to the point where marginal returns on increase in these assets would just equal the cost of capital required to finance such increases.
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Van Horne in his study (1969) , recognizing working capital management as an area largely lacking in theoretical perspective, attempted to develop a framework in terms of probabilistic cash budget for evaluating decisions concerning the level of liquid assets and the maturity composition of debt involving risk-return trade-off. He proposed calculation of different forecasted liquid asset requirements along with their subjective probabilities under different possible assumptions of sales, receivables, payables and other related receipts and disbursements. He suggested preparing a schedule showing, under each alternative of debt maturity, probability distributions of liquid asset balances for future periods, opportunity cost, maximum probability of running out of cash and number of future periods in which there was a chance of cash stock-out. Once the risk and opportunity cost for different alternatives were estimated, the form could determine the best alternative by balancing the risk of running out of cash against the cost of providing a solution to avoid such a possibility depending on management’s risk tolerance limits. Thus, Van Horne study presented a risk-return trade-off of working capital management in entirely new perspective by considering some of the variables probabilistically. However, the usefulness of the framework suggested by Van Horne is limited because of the difficulties in obtaining information about the probability distributions of liquid-asset balances, the opportunity cost and the probability of running out of cash for different alternative of debt maturities.
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Welter, in his study (1970) , stated that working capital originated because of the global delay between the moment expenditure for purchase of raw material was made and the moment when payment were received for the sale of finished product. Delay centres are located throughout the production and marketing functions. The study requires specifying the delay centres and working capital tied up in each delay centre with the help of information regarding average delay and added value. He recognized that by more rapid and precise
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information through computers and improved professional ability of management, saving through reduction of working capital could be possible by reducing the length of global delay by rescuing and/or favourable redistribution of this global delay among the different delay centres. However, better information and improved staff involve cost. Therefore, savings through reduction of working capital should be tried till these saving are greater or equal to the cost of these savings. Thus, this study is concerned only with return aspect of working capital management ignoring risk. Enterprises, following this approach, can adversely affect its short-term liquidity position in an attempt to achieve saving through reduction of working capital. Thus, firms should be conscious of the effect of law current assets on its ability to pay-off current liabilities. Moreover, this approach concentrated only on total amount of current assets ignoring the interactions between current assets and current liabilities.
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Lambrix and Singhvi (1979) adopting the working capital cycle approach to the working capital management, also suggested that investment in working capital could be optimized and cash flows could be improved by reducing the time frame of the physical flow from receipt of raw material to shipment of finished goods, i.e. inventory management, and by improving the terms on which firm sells goods as well as receipt of cash. However, the further suggested that working capital investment could be optimized also (1) by improving the terms on which firms bought goods i.e. creditors and payment of cash, and (2) by eliminating the administrative delays i.e. the deficiencies of paper-work flow which tended to extend the time-frame of the movement of goods and cash.
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Warren and Shelton (1971) applied financial simulation to simulate future financial statements of a firm, based on a set of simultaneous equations. Financial simulation approach makes it possible to incorporate both the uncertainty of the future and the many interrelationships between current assets, current liabilities and other balance sheet accounts. The strength of simulation as a tool of analysis is that it permits the financial manager to incorporate in his planning both the most likely value of an activity and the margin of error associated with this estimate. Warren and Shelton presented a model in which twenty simultaneous equations were used to forecast future balance sheet of the firm including forecasted current assets and forecasted current liabilities. Current assets and current liabilities were forecasted in aggregate by directly relating to firm sales. However, individual working capital accounts can also be forecasted in a larger simulation system. Moreover,
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future financial statements can be simulated over a range of different assumptions to portray inherent uncertainty of the future.
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Cohn and Pringle in their study (1973) illustrated the extension of Capital Asset Pricing Model (CAPM) for working capital management decisions. They tried to interrelate long-term investment and financing decisions and working capital management decisions through CAPM. They emphasized that an active working capital management policy based on CAPM could be employed to keep the firm’s shares in a given risk class. By risk, he meant unsystematic risk, the only risk deemed relevant by CAPM. Owing to the lumpy nature for long-term financial decisions, the firm is continually subject to shifts in the risk of its equity. The fluid nature of working capital, on the other hand, can be exploited so as to offset or moderate such swings. For example they suggested that a policy using CAPM could be adopted for the management of marketable securities portfolio such that the appropriate risk level at any point in time was that which maintains the risk of the company’s common stock at a constant level. Similarly,
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Copeland and Khoury (1980) applied CAPM to develop a theory of credit expansion. They argued that credit should be extended only if the expected rate of return on credit is greater than or equal to market determined required rate of return. They used CAPM to determine the required rate of return for the firm with its new risk, arising from uncertainty regarding collection due to the extension of credit. Thus, these studies show how CAPM can be used for decisions involved in working capital management. One more approach, used mainly in empirical studies, towards working capital management has been to apply regression analysis to determine the factors influencing investment in working capital. Different studies in the past have considered different explanatory variables to explain the investment in inventory.
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Metzler (1941)
However, his work was mainly on simple acceleration principle
which postulated that firms liked to maintain inventories in proportions to output/sales and they succeeded in achieving the desired level of inventories in a unit time-period. That is to say, any discrepancy between the actual level and desired level of inventories is adjusted within the same time-period. Needless to say, that such an instantaneous adjustment is not a realistic assumption to make. Modifications, therefore, have been introduced in the literature to provide for partial adjustment.
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11
Goodwin (1948)
assumed that firms attempted only a partial adjustment of the
discrepancy between the desired stocks as determined by the level of output and the existing stock.
12
Similarly, Darling and Lovell (1965)
modified Metzler’s formulation based on
simple acceleration principle and obtained, the relationship based on flexible accelerator principle. There are several reasons physical, financial and technical those motivate partial adjustment. Among the physical factors, mention may be made of procurement lags between orders and deliveries. The length of such lags is connected with the source of supply, foreign or domestic availability. Import licensing procedures on account of foreign exchange scarcity could cause further delays in adjustment. Among the financial factors, cost advantages associated with bulk buying and higher procurement costs for speedy delivery are also mentioned. Uncertainties in the market for raw materials and in the demand for final product also play a role in influencing the speed of adjustment. Technically, firms like to make sure that changes in demand are of a permanent character before making full adjustment. The acceleration principle has great relevance in inventory analysis than in the analysis of fixed investment, as there are limits to liquidate fixed capital in the face of declining demand.
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It has been found significant in the studies of Hilton (1976)
and Irwin (1981).
Time-trend is expected to be important because inventories generally accumulate with the expansion of economic activities of the company. Anticipated price changes, measured by changes in wholesale price index of inventories, are taken as an explanatory variable to capture speculative element in inventory. This suggests a positive relationship between price changes and inventory. An increase in sales is expected to increase the demand for stocks to meet orders regularly. An increase in capacity utilization is also expected to increase the demand for stock by increasing the demand for raw materials and increasing the inventories of finished goods. Thus, the variable, capacity utilization, is postulated to have a positive coefficient in the equation.
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Abramowitz (1950)
and Modigliani (1957) highlighted the impact of capacity
utilization on inventory investment. Existing stock of inventories is expected to take account of adjustment process to the desired levels. Thus the variable, existing stock of inventories, is postulated to be negatively related with the desired stock. The ratio of inventory to sales may affect inventory investment positively because a high ratio of stocks to sales in the past
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suggests the maintenance of high levels of inventories in the past and thus also calling for high investment in inventories in the current period.
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The studies of Metzler (1941)
and Hilton (1976) have found this variable,
inventory-sales ratio, to be statistically significant. Fixed investment is generally expected to affect inventory investment inversely because of competing demand for the limited funds. However, in case of an expanding firm, the two components may be complementary. Besides, availability of funds from retained earnings and external sources, may affect investment decision by providing funds for financing inventory investment. Therefore, retained earnings and flow of debt are postulated to have positive coefficients.
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Appavadhanulu (1971) recognizing the lack of attention being given to investment in working capital, analysed working capital management by examining the impact of method of production on investment in working capital. He emphasized that different production techniques require different amount of working capital by affecting goods-inprocess because different techniques have differences in the length of production period, the rate of output flow per unit of time and time pattern of value addition. Different techniques would also affect the stock of raw materials and finished goods, by affecting lead-time, optimum lot size and marketing lag of output disposals. He, therefore, hypothesised that choice of production technique could reduce the working capital needs. He estimated the ratio of work-in-progress and working capital to gross output and net output in textile weaving done during 1960, on the basis of detailed discussions with the producers and not on the basis of balance sheets which might include speculative figures. His study could not show significant relationship between choice of technique and working capital. However, he pointed out that the idea could be tested in some other industries like machine tools, ship building etc. by taking more appropriate ratios representing production technique correctly.
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Chakraborty (1973) approached working capital as a segment of capital employed rather than a mere cover for creditors. He emphasized that working capital is the fund to pay all the operating expenses of running a business. He pointed out that return on capital employed, an aggregate measure of overall efficiency in running a business, would be adversely affected by excessive working capital. Similarly, too little working capital might reduce the earning capacity of the fixed capital employed over the succeeding periods. For knowing the appropriateness of working capital amount, he applied Operating Cycle (OC)
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Concept. He calculated required cash working capital by applying OC concept and compared it with cash from balance sheet data to find out the adequacy of working capital in Union Carbide Ltd. and Madura Mills Co. Ltd. for the years 1970 and 1971.
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He extended the analysis to four companies over the period 1965-69 in 1974 study. The study revealed that cash working capital requirement were less than average working capital as per balance sheet for Hindustan Lever Ltd. and Guest, Keen and Williams Ltd. indicating the need for effective management of current assets. Cash working capital requirements of Dunlop and Madura Mills were more than average balance sheet working capital for all year’s efficient employment of resources. For Union Carbide Ltd., cash working capital requirements were more in beginning years and then started reducing in the later years as compared to conventional working capital indicating the attempts to better manage the working capital. Chakraborty emphasized the usefulness of OC concept in the determination of future cash requirements on the basis of estimated sales and costs by internal staff of the firm. OC concept can also be successfully employed by banks to assess the working capital needs of the borrowers.
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Misra (1975) studied the problems of working capital with special reference to six selected public sector undertakings in India over the period 1960-61 to 1967-68. Analysis of financial ratios and responses to a questionnaire revealed somewhat the same results as those of NCAER study with respect to composition and utilization of working capital. In all the selected enterprises, inventory constituted the more important element of working capital. The study further revealed the overstocking of inventory in regard to its each component, very low receivables turnover and more cash than warranted by operational requirements and thus total mismanagement of working capital in public sector undertakings.
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Agarwal (1983) also studied working capital management on the basis of sample of 34 large manufacturing and trading public limited companies in ten industries in private sector for the period 1966-67 to 1976-77. Applying the same techniques of ratio analysis, responses to questionnaire and interview, the study concluded the although the working capital per rupee of sales showed a declining trend over the years but still there appeared a sufficient scope for reduction in investment in almost all the segments of working capital. An upward trend in cash to current assets ratio and a downward trend in cash turnover showed the accumulation of idle cash in these industries. Almost all the industries had overstocking
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of raw materials shown by increase in the share of raw material to total inventory while share of semi-finished and finished goods came down. It also revealed that long-term funds as a percentage of total working capital registered an upward trend, which was mainly due to restricted flow of bank credit to the industries.
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Kamta Prasad Singh, Anil Kumar Sinha and Subas Chandra Singh (1986) examined various aspects of working capital management in fertilizer industry in India during the period 1978-79 to 1982-93. Sample included public sector unit, Fertilizer Corporation of India Ltd. (FCI) and its daughter units namely Hindustan Fertilizers Corporation Ltd., the National Fertilizer Ltd., Rashtriya Chemicals and Fertilizers Ltd. and Fertilizer (Projects and Development) India Ltd. and comparing their working capital management results with Gujarat State Fertilizer Company Limited in joint sector. On the basis of ratio-analysis and responses to a questionnaire, study revealed that inefficient management of working capital was to a great extent responsible for the losses incurred by the FCI and its daughter units, as turnover of its current assets had been low. FCI and its daughter units had high overstocking of inventory in respect of each of its components particularly stores and spares. Similarly, quantum of receivables had been excessive and their turnover very low. However, cash and liquid resources held by FCI and its daughter units had been much lower in relation to operation requirements. So far as financing of working capital was concerned, long-term funds had been financing a low proportion of current assets due to rapid increase of current liabilities. The profitability providing an internal base for financing of working capital had been very low in these undertakings.
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Verma (1989) evaluated working capital management in iron and steel industry by taking a sample of selected units in both private and public sectors over the period 1978-79 to 1985-86. Sample included Tata Iron and Steel Company Ltd. (TISCO) in private sector and Steel Authority of India Ltd. (SAIL) and Indian Iron and Steel Company, a wholly owned subsidiary of SAIL, in public sector. By using the techniques of ratio analysis, growth rates and simple linear regression analysis, the study revealed that private sector had certainly an edge over public sector in respect of working capital management. Simple regression results revealed that working capital and sales were functionally related concepts. The study further showed that all the firms in the industry had made excessive use of bank borrowings to meet their working capital requirement vis-à-vis the norms suggested by Tandon Committee.
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Vijaykumar and Venkatachalam (1995) studied the impact of working capital on profitability in sugar industry in Tamil Nadu by selecting a sample of 13 companies; 6 companies in co-operative sector and 7 companies in private sector over the period 1982-83 to 1991-92. They applied simple correlation and multiple regression analysis on working capital and profitability ratios. They concluded through correlation and regression analysis that liquid ratio inventory turnover ratio, receivables turnover ratio and cash turnover ratio influenced the profitability of sugar industry in Tamil Nadu. They also estimated the demand functions of working capital and its components i.e. cash, receivables, inventory, gross working capital and net working capital, by applying regression analysis. They showed the impact of sales and interest rate on working capital and its components. When only sales was taken as independent variable, coefficient of sales was more than unity in all the equations of working capital and its components showing more than unity sales elasticity and diseconomies of scale. When sales and interest rate were taken as independent variable, sales elasticity was again more than unity in demand functions of working capital and its components except cash. So far as capital costs were concerned, these had negative signs in all the equations but significant only in inventory, gross working capital and net working capital showing negative impact of interest rates on investment in working capital and its components
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Chapter III DHANWANTHARI VAIDYASALA -A BRIEF PROFILE Ancient India depends on Ayurveda for all its medical needs, but of recently with the advent of modern medicines, Ayurveda seemed to be having a natural deal. But after a long downward trend in popularity, it’s back with resurgence. Its dynamic up wings comes with itself projecting as a holistic health care systems gets worldwide attention. Dhanwnathari Vaidyasala specially set up with the mission to contribute to this resurgence in a creative manner in Kerala and in India since 1933.
3.1. HISTORY OF AYURVEDA Ayurveda (the since of life) is India’s contribution to humanity in its search for health care, well-being and longevity. This wonderful treats on human health is considered as the “Fifth Veda” narrated directly by God to the great specious of the ancient part. It mellowed with the Indian civilization training philosophical science in the history of mankind. Where almost all medicines are of plant origin, they do not have any side effects. It flourished at a time when all the science branches, we now practice where in its rudiments. Physicians the world over, now consider Ayurveda as a system of treatment embodied in nature that couples meditation and reorganized life style. In the modern era, where most of the deceases results from mutations in life styles. We have started to look back in this ancient wisdom, which advocated a therapy that has its roots in nature.
3.2. HISTORY AND EVOLUTION OF DHANWANTHARI AYURVEDA VAIDYASALA Dhanwanthari Ayurveda Vaidyasala was established 1933 by late vaidyan C.N Namboodiri, at the age of 25 years as a humble beginning. After seven years of academic carrier of Gurukulam, a curriculum as per the traditional Kerala culture, he started this firm with only a few manufacturing companies established in Kerala. The modern concept of marketing was very much in wanted, when he was decided to have his passion to a marketing framework designed by him. He was a pioneer in institutionalizing the concept of Ayurveda medicines market in Kerala. He thus had carved out the rich for the firm himself in those days itself, apart from abroad and outside Kerala. He had visited various states in America early 70’s on request from his patients.
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Dhanwanthari Ayurveda Vaidyasala has around 50 branches and more than 100 agencies. It was the first Ayurvedic firm in south India to explore the Delhi market. Its area of operation included Madras, Bangalore, Coimbatore, Selam, Erode and Kanyakumari in Tamilnadu even 1960’s. This network flourished under the meticular management of vaidyan C.N. Namboodiri, Dhanwanthari Ayurveda vaidyasala, set up full-fledged treatment divisions in Thiruvananthapuram, Kottayam,Kannur, and Thodupuzha.
Ayurveda market in India There is about Rs. 1000 crores market in India for Ayurvedic products. The Dabur India is the market leader; Zandu, Aryavaidyasala Kottackal, Nagarguna herbal concentrates etc. are the other wide marketing companies. All these companies have worldwide marketing network of the Ayurveda medicines. Ayurveda Market in Kerala Being the basic medicine of Kerala, today Ayurveda enjoy a leading market in Kerala. Kottackal Aryavaidyasala was the first Ayurvedic Company in Kerala introduced the concept of agency network in the field of Ayurvedic medicines.
3.3 Multi-Dimensional Operations Pharmaceuticals- Traditional Production Methods & Product details
Ayurveda is at least four millennium years old and it survived the test of time by propagation in a traditional curriculum as “smrithi and sruthi” (propagation through oral education and by practice) with related discussions and meditation (mananam). Most of the reference texts we have today were recorded after 1000BC in ‘Thaliyolas’ (dried leaves – an ancient manuscript material). It can be noted that the Principles of Ayurveda are retained intact and the Medical formulations in these text are narrated as examples of this treatment theory for individual deceases. So this science has left ample vacuum for research and development. That is how comparatively modern ailments like hypertension, Syphilis; AIDS etc. come under the therapeutic range of Aurveda.
Appropriate Technology Celsius temperatures throughout, ensuring ideal conditions for the natural fermenting agents. The vessels for production are either brass or copper in specified shapes. But we have adopted the sterilization of pots; powder etc. to keep up the hygiene standards. For thermal
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processing of decoctions, firewood, that will give controlled and continuous heat are recommended. This is essential for adequate drug extraction and to check the extraction of unwanted alkaloids, Tannins etc. we have adopted modern technology only in pre-processing stage like disintegration, pulverization etc. and in preservation. In Dhanwanthari Vaidyasala, we maintain traditional technology for Ayurvedic medicine preparation. The recommended vessels for preparation of fermented products are earthen vessels. The natural temperature regulation in porous vessel is unique and the medicines will be having 24 to 28 degree of Kashayam. The fact that we have been able to maintain our goodwill and reputation for seven decades vindicates our policy of maintaining traditional processing methods experienced labour strength, care and hygiene of production. Now this is been awarded with GMP Certificate by the concerned authorities.
The Products Several pharmaceutical forms are employed for managing various stages of illness. Dhanwanthari Vaidyasala has got a product list ranging over 300. The medicinal preparations are classified under the following groups mainly Avarthi, Arishtasavam, gulika, Choornam, Ghruthm, Kashayam, Kuzhambu, Lehyam, Lepam, Sevyam, Thailam, Keram.
Quality Control
Our credibility and goodwill makes it imperative that we stick on to the standards we have set which is compatible with Indian Pharmaceutical standards achieved by production as per GMP. Our prime asset acquired through seven decades of our existence, is the goodwill through the superior quality of products. Here, the Q.C Department deals with: Raw material quality control Pre-processing quality control Processing quality control Finished goods quality control Shelf life quality control Therapeutic quality control
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3.4 RESEARCH AND DEVELOPMENT PROGRAMME
The firm is having its own research and development set up. A part from standardization tests, the research and development department is also conducting tests for basic research, new product development and test for improving the production quality. Dhanwanthari Vaidyasala has already developed patented ayurvedic preparations and as they have conducted various trials for the last 3 years. They are ready for market now. They are having tie up with several reputed research institutes. Experts in various fields are invited to tie up and perfect systems. They plan for workshop on specific subjects involving scientists, doctors and technical experts from India and abroad.
Hospital division Hospital division was started to boost the goodwill and credibility of the organization. But later it emerged to be one of the most promising and fast growing activities of the mother firm. Thus we were able to extend our goodwill beyond our expected limits or geographical boundaries. Our objective is to extent health services to the public, incurring minimum cost. We have dedicated ourselves to the cause of Ayurveda and its pure and traditional methodologies. Our Head Office of Health services is in Thodupuzha, which is a 25 bedded set up with full-fledged departments, aided by modern medical care. This will be having different specialty departments like Kayachikitsa (general medicine),
marmachikitsa(orthopaedics), nethrachikitsa (eye specialty), salakyathanthra (E.N.T), vishachikitsa (toxicology&skin), rasayanachikitsa (rejuvenative and Aphrodisiac therapy), manasikam(psychiatry, stress management etc.), salyachikitsa(surgical deceases), and balachikitsa(paediatric). Panchakarma This branch of Ayurveda was developed by physicians in Kerala from “sodhana chikitsa” referred in Ayurvedic texts. This is a unique Kerala treatment now attracting global attention. The therapeutic range of panchakarma extends from common low back pain to cerebral lesion diseases. In healthy humans this treatment tunes up the somatic and mental health enhances the immunity power, strength, vitality, and longevity without any side effects.
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Online Consultation Now that we are in the web net, we have decided to extend the fruits of this science and our experience in the field to our global clientele. That’s why we are opening up an opportunity for consulting us online. One can email us at [email protected] or contact through our online consultation section in www.dhanwanthari.org. Then we will email them back for more clarifications, if needed be. Then our panel of expert doctor’s head by Dr.C.N.Namboothiri will guide them to further course of action. This panel comprises mainly of ayurvedic and Allopathic doctors expertise in various disciplines. Chief physician Dr.C.N.Namboothiri himself is qualified and experienced in both these medical branches.
Herbal Cultivation Dhanwanthiri Vaidyasala has developed a fully-fledged Herbal Nursery in Thodupuzha. This aims at providing seedling and technical support to its projects for Herbal Cultivation in Kerala and TamilNadu. It also has started associating with farmers by providing them with seedling, technical support and buyback arrangement. Now dhanwanthari vaidyasala has projects for herbal cultivations with aids from Central Health Ministry and Central Herbal Board. It also aims at preserving endangered species which is of medicinal use to mankind.
3.5 MAJOR CENTRES 1. Dhanwanthari Vaidyasala & treatment division Head office, Thodupuzha, idukki dist. Kerala state-685584 Phone no. 0486-220436, 222536,227566 Telefax 0486-227566 Email – [email protected] Website – www.Dhanwanthari.org 2. Dhanwathari Vaidyasala &Treatment Centre M.G Road, near govt. Ayurveda College Thiruvananthapuram 3. Dhanwathari Vaidyasala &Treatment Centre Main road, near Y.M.C.A Kottayam Ph. 0484-2563486
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4. Dhanwathari Multi specialty hospital M.G road padma theatre Kochi Ph. 0484-2368878 5. Dhanwathari Vaidyasala &Treatment Centre S.N Park road, near kavitha theatre Kannur Ph. 0497-2764449 6. Dhanwathari Vaidyasala &Treatment Centre Rajamandhir, chalapuram Kozhikode Ph. 0495-2306368 7. Dhanwathari Vaidyasala &Treatment Centre Kalian health care centre Karamcodu p o Chathanoor, kollam Ph. 0474-3094080 8. Dhanwathari Vaidyasala &Treatment Centre Hassan’s home stay Kumily, idukki Ph. 04869-22186
9. Dhanwathari Vaidyasala &Treatment Centre Chandana residency Udumalpetta road, Marayoor Ph. 04865-252322 10. Ayurcare (in association with dhanwanthari) Regional office, plot 500 Behind pantaloons lane Ph. 040-2776688
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ORGANISATIONAL STRUCTURE OF DHANWANTHARI VAIDYASALA
Managing Director
Partner Technical
Partner Commercial
Chief Executive Officer
Production manger
Materials Manager
Marketing Manager
Finance Manager
Health service Manager
Section in charge
Workmen
Production supervisor
Finished product store
Packing material store
Doctor’s marketing
Raw material store
Treatment division
Market supervisor
Accounting staff
R&D officer Staff
Office staff
Workmen
Branch staff
Dispatch
Field executive
Doctor’s
Non-technical staff
Technical staff
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PERFORMANCE OF WORKING CAPITAL MANAGEMENT IN DHANWANTHARI VAIDYASALA -AN ANALYSIS 4.1 INTRODUCTION Working capital management is an integral part of overall financial management. The manner of administration of current assets to very large extent determines the success of operation of a firm. It is concerned with obtaining economic funds, using them in profitable manner and controlling them to maintaining economy. Working capital management should establish a proper balance among risk, profitability and liquidity. The importance of working capital management lies in the fact financial managers spends a great deal of time in managing current asset and current liabilities. An analysis of liquidity aspect of working capital is vital for both short term creditors and the management of business enterprise. The short term creditors get acquainted with the chance of receiving payment in time or the margin of safety which may assure them of eventual payment in full. The analysis helps the management to evaluate their current policies. In this study the performance of working capital management in Dhanwanthari Vaidyasala has been analysed with the help of following measures.
4.2 MEASURES Study of working capital policy of Dhanwanthari Vaidyasala Study of structure of working capital policy in Dhanwanthari Vaidyasala Study of short term solvency of Dhanwanthari Vaidyasala Study of the efficiency achieved by the firm utilizing its working capital
4.3 TOOLS OF WORKING CAPITAL ANALYSIS The financial management always strives to maintain an adequate working capital at every time so as to carry on the operations successfully and maximize the return on investment. It has to be vigilant about the trend in the items that make up the working capital. This requires a careful enquiring into the current asset and current liability so as to control the working capital and to conserve it properly.
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There as a several tools for financial analysis of working capital. The important of them as follows:I. II. Ratio Analysis Graph
4.4 RATIO ANALYSIS In this chapter an earnest attempt is made to analysis the working capital performance of company with the help of ratio analysis. Ratio Analysis is a powerful tool for financial analysis. A ratio is defined as “the indicated quotient of two mathematical expressions” and as “relationship between two or more things”. In financial analysis a ratio is used as the benchmark for evaluating the financial position and performance of a firm. Ratio helps to summarize large quantities of financial data and to make qualitative judgment about the firm’s financial performance. It is an index or yardstick which permits a qualitative judgment to be formed about the firm’s ability to meet its current obligations. It measures the firm’s liquidity. A ratio’s reflecting a quantitative judgment. Such is the nature of all financial ratios. Now a day ratio analysis is used by all business and industrial concerns in their financial analysis. Ratios are considered to be the best guidance for the efficient execution of basic managerial functions like planning, forecasting, control etc. Ratio may be expressed in either in the form of rate or proportions or percentage.
4.4.1 IMPORTANCE OF RATIO ANALYSIS ? It makes it easy to grasp the relationship between various items and helps in understanding the financial statement. ? Ratio indicates trends in important items and thus will help in forecasting. ? Inter-firm comparisons can be made with the help of ratios. ? It helps in simple assessment of liquidity, profitability, solvency and efficiency of the firm. ? Ratio may be used as measure of efficiency.
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4.4.2 LIMITATIONS OF RATIO ANALYSIS ? Ratio analysis gives only a good basis of quantitative analysis of financial problems. But it suffers from qualitative aspects. ? Ratios are computed from historical accounting records. So they also process those limitations of financial accounting. ? It is not possible to calculate exact and well accepted absolute standard for comparison. ? Ratios are only means of financial analysis, but not an end in them.
4.4.3 TYPES OF RATIOS Several ratios can be calculated from the accounting data contained in the financial statement. These ratios can be grouped into various classes according to the financial activities or functions to be evaluated. The parties, which generally undertake financial analysis, are short-term creditors, long-term creditors, owners and management. Short term creditor’s main interest in the liquidity position or the short term solvency of the firm. Long term creditors on the other hand are more interested in the long term solvency and profitability of the firm. Similarly owners concentrate on firm’s profitability analysis and the analysis of the firm’s financial conditions. Management is interested in evaluating every activity of the firm. They have to protect the interest of all parties and that the firm grows profitably. The ratio can be classified into the following four categories.
1. Liquidity ratio Liquidity refers to the ability of firm to meet its obligations in the short run, usually one year. Liquidity ratios are generally based on relationship between current assets (the source for meeting short term obligations) and current liabilities. The important liquidity ratios are current ratio, acid test ratio etc. 2. Leverage ratio Financial leverage refers to the use of debt finance. While debt capital is cheaper source of finance, it is also a riskier source of finance. Leverage ratio helps in assessing the risk arising from the use of debt capital. Two types of ratio are commonly used to analyse financial leverage: structure ratios and coverage ratios.
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3. Activity ratio Activity ratio or turn over ratios, measure how efficiently assets are employed by a firm. These ratios are based on the relationship between the level of activity, represented by sales or cost of goods sold, and levels of various assets. The important turnover ratios are: inventory turnover, average collection period, receivable turn over etc. 4. Profitability ratios Profitability reflects the financial result of business operations. These are two types
of profitability ratios, profit margin ratios and rate of return ratios. Profit margin ratio shows the relationship between profit and sale. The two popular profit margin ratios are: gross profit margin and net profit margin ratios. Rate of return ratios reflect the relationship between profit and investment. The important rates of return measures are: return on total assets, earning power, and return equity. STEPS IN RATIO ANALYSIS ? The first task of financial analysis is to select the information relevant to the decision under consideration from the statements and calculate appropriate ratios. ? To compare the calculated ratios with the ratios of the same firm relating to the past or with the industry ratios. It facilitates in assessing success or failure of the firm. ? Third step is to interpretation, drawing of inferences and report writing, conclusions are drawn after comparison in the shape of report or recommended course of action. BASIS OR STANDARDS OF COMPARISON Ratios are relatively figures reflecting the relation between variables. They enable analyst to draw conclusions regarding financial operations. They use of ratios as a tool of financial analysis involves the comparison with related facts. The basis of ratio analysis is four of types. Past ratios, calculated from past financial statements of the firm. Competitor’s ratio, of the some most progressive and successful competitor firm at the same point of time. Industry ratio, the industry ratios to which the firm belongs to Projected ratios, ratios of the future developed from the projected or pro forma financial statements.
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INTERPRETATIONS OF THE RATIOS The interpretation of ratio is an important factor. The inherent limitations of ratio analysis should be kept in mind while interpreting them. The impact of factors such as price level changes, changes in accounting policies, window dressing etc., should also be kept in mind when attempting to interpret ratios. The interpretation of the ratios can be made in the following ways. ? Single absolute ratio ? Group of ratios ? Historical comparison ? Projected loans ? Inter-firm comparison GUIDELINES OR PRECAUTIONS FOR USE OF RATIOS The calculations of ratios may not be a difficult task but their use is not easy. Following guidelines or factors may be kept in mind while interpreting various ratios is
? Accuracy of financial statements ? Objective or purpose of analysis ? Selection of ratios ? Use of standards ? Calibre of the analysis
CLASSIFICATIONS OF RATIOS The use of ratio analysis is not confined to financial manager only. There are different parties interested in the ratio analysis for knowing the financial position of a firm for different purposes. Various accounting ratios can be classified as follows. 1. Traditional classification 2. Functional classification
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Traditional Classification It includes the following Balance sheet or position statement ratio: they deal with relationship between two balance sheet items, e.g. the ratio of current assets to current liabilities etc., both the items must, however pertain to the same balance sheet. Profit & loss a/c or revenue statement ratio: these ratios deals with the relationship between two profit & loss account items, e.g. the ratio of gross profit to sales etc., Composite or inter statement ratios: these ratios exhibit the relation between a profit a profit & loss account or income statement item and a balance sheet items, e.g. stock turnover ratio of total assets to sales. Functional Classification These include liquidity ratios, long term solvency and leverage ratios, activity ratios and profitability ratios.
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doc_840909204.pdf
a. Fixed capital requirement and b. Working capital requirement.
The term fixed capital stands for that amount of capital which is invested in fixed assets such as land and building , plant and machinery, furniture and fixtures etc. working capital is the amount of funds necessary to cover the cost of operating the enterprise. The long term investment may be termed as fixed investment which is invested in fixed assets. These fixed assets are retained in the business to earn profit during life of business. The short term investment or funds are required for financing the duration of the operating cycle in a business, often known as the accounting year. These funds are often used for carrying out routine or regular business operations consist of purchase raw material, payment of direct and indirect expenses, carrying out production, investment stock and stores, credit facility to customers and to be maintained in the form of cash. Thus, the funds for financing the duration of operating cycle in a business are known as working capital. Briefly, working capital denotes funds which are required to carry on day- to-day business operation. Working capital is the life blood and nerve centre of a business. Just as circulation of blood is essential in the human body for maintaining life, working capital is very essential to maintain the smooth running of a business. No business can run successfully without an adequate
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amount of working capital. In adequate amount of working capital means shortage of liquid fund, raw materials, and other inputs. The result will be the part time utilization of the efficiency of fixed assets and the firm is not in the position to pay day to day expenses of it operation. Thus, it will lose it reputation and shall not be to good credit facilities. On the other hand excessive working capital means idle fund, dumped stock inefficient store keeping, excessive receivables etc. excessive working capital earn no profit for the business and hence the business cannot earn a proper rate of return on its investment. So the proper management of working capital is very essential for the success of an enterprise. The basic goal of working capital management is to manage cash of the current assets and current liabilities in such a way that an acceptable level of net working capital is always referred to as liquidity management. Liquidity refers to the company’s ability to meet its current obligation in time. Each current asset must be managed efficiently in order to maintain the firm liquidity. It ultimately assists in increasing the profitability of the concern. Hence the problem of efficient management of working capital is to establish a trade-off between liquidity and profitability.
1.1 STATEMENT OF PROBLEM
In this study, the investigator attempts to evaluate the performance of working capital management in Dhanwanthari Vaidyasala, Thodupuzha. The problem is state as performance of working capital management in Dhanwanthari Vaidyasala, Thodupuzha-An Analysis.
1.2 SIGNIFICANCE OF THE STUDY
Today many undertaking face the serious problem of lack of working capital to meet the day to day operations. Proper management of working capital is very important for the success of an enterprise. Since the liquidity plays a crucial role in the satisfactory on-going of every concern, the proposed study, to evaluate the performance of working capital management in Dhanwanthari Vaidyasala, Thodupuzha is very significant.
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1.3 OBJECTIVES OF THE STUDY This study aimed to evaluate the performance of Dhanwanthari Vaidyasala, Thodupuzha with regards to its current asset management. The objectives of the study are; ??To analyse the liquidity position of the concern ??To analyse the working capital position of the concern ??To identify the financial strengths & weakness of the company. ??To suggest ways and means through the management can improve the working capital position? 1.4 LIMITATION OF THE STUDY Following are some of the important limitation experienced by the investigator during conduct of the study. ??Technical and Administrative aspects were considered in the study. ??Time being a limiting factor; the researcher could not go very deep in analysis the financial position of the company. ??The investigator has to depend mainly on secondary data rather than primary data. ??The study is limited to the period of five year.
1.5 CHAPTERISATION The study, working capital management analysis has been organized and presented in five chapters.
1. The first chapter is all about introduction, scope of study, statement of problem, and significance of the study, working hypothesis, data and methodology, period of study, limitation and chapter scheme. 2. The second chapter contains a theoretical frame work of working capital management. 3. The third chapter includes a brief profile of Dhanwanthari Vaidyasala, Thodupuzha 4. Chapter four is a detailed analysis of working capital position of Dhanwanthari Vaidyasala, Thodupuzha 5. The fifth chapter summarizes the findings and recommendations to improve company’s working capital position.
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WORKING CAPITAL MANAGEMENT THEORETICAL FRAME WORK
Every business needs funds for two purposes for it establishment and to carry out its day to day operations. Long term funds are required to create production facilities through purchase of fixed assets such as plant, and machinery, land and building, furniture etc. investment in these assets represent that part of firms capital is blocked on a permanent or fixed basis and is called fixed capital. Funds are also needed for short term purpose for the purchase of raw material, payment of wages and other day to day expenses etc. These funds are known as working capital. In the simple words working capital refers to that part of the firm’s capital which is required for financing short term or current asset such as cash, marketable securities, debtors and inventories. Working capital management is concerned with the management of both current assets and current liabilities and the interrelationship that exists between them.
2.1 MEANING AND DEFINITION
Working capital is the amount of funds necessary to cover the cost of operating the enterprises. The term working capital is commonly used for the capital required for the day to day working of the business concern. According to Genestnberg working capital current asset of a company that are changed in the ordinary course of business from one form to another, as example from cash to inventories, inventories to receivables, receivables in to cash. “Working capital is the difference between the inflow and outflow of Funds. In other words it is the net cash inflow.”
Working capital represents the total of all current assets. In other words it is the Gross working capital, it is also known as Circulating capital or Current capital for current assets are rotating in their nature.
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2.2 CONCEPT OF WORKING CAPITAL
There are two concept of working capital:-
A. Balance sheet concept B. Operating cycle or circular flow concept
A. Balance sheet concept:
There are two interpretation of working capital under the balance sheet concept:-
a. Gross working capital b. Net working capital
The term working capital refers to the gross working capital and represents the amount of funds invested in current assets. Thus, the gross working capital is the capital invested in total current asset of the enterprise. Current assets are those assets which in the ordinary course of business can be converted into cash within a short period of time normally one accounting year.Net working capital is the excess of current asset over current liabilities. Net working capital= current assets – current liabilities.
Net working capital may be positive or negative. When the current assets exceed the current liabilities the working capital is positive and the negative working capital results when the current liabilities are more than the current assets. Current liabilities are those liabilities, which are intended to be paid in the ordinary course of business within a short period of normally one accounting year out of the current assets or the income of the business. Working capital management is concerned with the problems that crop up in managing the interrelationship between current assets and current liabilities.
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Net Concept
Relationship between current assets& current liabilities
Gross Concept
Individual current assets
Perspective short term & long term
Perspective short term & long term
Evaluation by external parties
Evaluation by management
Optimum balance among risk
Optimum investments in individual CA
Return & liquidity
Financing of current assets
The gross working capital concept is financial or going concern concept whereas net working capital is the accounting concept of working capital.
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B. Operating cycle or Circular flow concept:
Funds invested in current assets keep revolving fast and are being constantly converted into cash and this cash flow out again in exchange for other current assets. Hence, it is also known as revolving or circulating capital. The circular flow concept of working capital is based upon this operating or working capital cycle of a firm. The cycles starts with the purchase of raw material and other resources and ends with the realization of cash from the sale of finished goods through work in progress with progressive incensement of labour service costs, conversion of finished stock into sales, debtors and receivables and ultimately realization of cash and this cycle continues again from cash to purchase of raw material and so on. The speed/time duration required to complete one cycle determines the requirement of working capital longer the period of cycle, larger is the requirement of working capital.
Showing operating cycle (Figure No 2.1)
Cash
Raw materials
Debtor's
Work in Progress
Sales
Finished Goods
Length of the operating cycle mainly depends upon the length of the production and companies credit policies.
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2.3 TYPES OF WORKING CAPITAL The changes in current assets in short term and long term have led to the classification of working capital into two ways:-
1. Permanent or Fixed working capital 2. Temporary or variable working capital
1. Permanent working capital
There is always a minimum level of current assets always required by a firm, to carry on its operations, the minimum level of current assets always known as permanent working capital. It is also called core working capital, regular working capital or fixed working capital. Normally fixed working capital is fixed in nature. But it should be noted that as the business grows, the amount of permanent working capital would also increase. The permanent working capital can further be classified as Regular working capital and Reserve working capital. Regular working capital required to ensure circulation of current assets from cash to inventories, from inventories to receivable and from receivable to cash and so on. Reserve working capital is the excess amount over the requirement for regular working capital, which may be provided for contingencies that may arise at unstated period such as strikes, rise in prices, depreciation, etc.
2. Temporary working capital
Temporary or variable working capital is the amounts of working capital, which is required to meet the seasonal demands and some special exigencies. Variable working capital can be further classified as seasonal working capital and special working capital. Most of the enterprises have to provide additional working capital to meet the seasonal needs of the enterprise is called Seasonal working capital. Special working capital is that part of working capital which is required to meet special exigencies such as launching of extensive marketing campaigns for conducting research etc.
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Figure: 2.2 Permanent and Temporary working capital of a manufacturing firm
Temporary or variable working capital
Permanent or fixed working capital
Figure: 2.3 Permanent and Temporary working capital of a Growing firm
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2.4 DETERMINANTS OF WORKING CAPITAL
The working capital requirement of a concern depend upon a large number of factors such as nature and size of the business, the character of their operations, the length of production cycle, the rate of stock turnover and the state of economic situation. It is not possible to rank them because all such factors are of different importance and the influence of individual factors changes for a firm overtime. However, the following are important factors generally influencing the working capital requirements.
1. Nature and size of business 2. Production policy 3. Length of manufacturing process/production cycle 4. Seasonal variation 5. Working capital cycle 6. Credit policy 7. Business cycle 8. Earning capacity and dividend policy 9. Price level changes 10. Other factors
2.5 SOURCES OF WORKING CAPITAL
All sources of funds can be classified into two groups:-
1. Long term sources 2. Short term sources
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Figure: 2.4 Showing sources of working capital
Sorces of Working Capital
Short Term Sources
Long Term Sources
Internal
External
Equity Capital
Depreciation Fund
Trade Credit
Debenture & Preferance shares
Provision for Tax
Bank Credit
Retained Profits
Accrued Expences
Public
Sale of Fixed Assets
Term Loans
Deposits
Govt.Securities
Credit papers
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2.6 IMPORTANCE OF ADEQUATE WORKING CAPITAL
Working capital is the lifeblood and nerve centre of a business. Just as circulation of blood is essential in the human body for maintaining life, working capital is very essential to maintain the smooth running of a business. No business can run successfully without an adequate amount of working capital. The main advantages of maintaining adequate amount of working capital as follows:-
1. Solvency of the business:Adequate working capital helps in maintaining solvency of the business by providing uninterrupted flow of production. 2. Goodwill:Sufficient working capital enables a business concern to make prompt payments and hence helps in creating and maintaining goodwill. 3. Easy loans:A concern having adequate working capital, high solvency and good credit standing can arrange loans from banks and others on easy and favourable terms. 4. Cash discounts:Adequate working capital also enables a concern to avail cash discount on the purchases and hence it reduces costs. 5. Regular supply of raw materials:Sufficient working capital ensures regular supply of raw materials and continuous production. 6. High morale:Adequacy of working capital creates an environment of security, confidence, and high morale and creates overall efficiency in business.
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2.7 NEED FOR WORKING CAPITAL The basic objective of financial management is to maximize the shareholders wealth. This is possible only when the company earns the sufficient profit. The amount of such profit largely depends upon the magnitude of sales. However sales do not convert into cash immediately. This is always a time gap between the sales of goods and receipts of cash. Working capital is required for this period in order to sustain the sales activity. In case adequate working capital is not available for this period, the company will not be in a position to purchase raw materials, pay wages and other expenses required for manufacturing the goods to be sold.
2.8 OBJECTIVES OF WORKING CAPITAL MANAGEMENT Working capital management is concerned with the problems that arise in attempting to manage the current assets, current liabilities and the interrelationship that exists between them. The basic objectives of working capital management are to manage the firm’s current assets and current liabilities in such a way that the satisfactory level of working capital is maintained, i.e., it is neither in adequate nor excessive. Excessive working capital will dilute the profitability whereas inadequate working capital can threaten the solvency of the firm. The main aim of working capital management is also to decide up on the optional mix of short term funds as well as long term funds. Thus working capital management policies of a firm have a great effect on its profitability, liquidity and structural health of the organization. In this context working capital management is three dimensional in nature. These three dimensions can be represented in the following figure:
Figure 2.5
DIM 1
DIM 3
DIM 2
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Dimension-1 is concerned with formulation of policies with regard to profitability, risk and liquidity. Dimension-2 is concerned with the decision about the composition and level at current assets. Dimension-3 is concerned with the decision about the composition and level of different sources of funds.
2.9 COMPONENTS OF WORKING CAPITAL
Working capital management of different component of working capital such as cash, inventories, accounts receivables, etc. in the absence of such situation, the financial position in respect of the firm’s liquidity may not be satisfactory in spite satisfactory liquidity ratio. The main components of working capital are as follows:
1. MANAGEMENT OF CASH
Cash is the most liquid asset, is vital importance to the daily operations of business. It is generally referred to as the “lifeblood of a business enterprise”. A sound cash management scheme, therefore, maintain the balance between the twin objective of liquidity and cost. The term cash has two meaning with reference to cash management. In narrow sense it includes coins, currency, notes and other generally accepted equivalent of cash such as cheques, drafts and demand deposits held in banks. The brooder’s definition of cash includes marketable securities and time deposits in banks.
MOTIVES FOR HOLDING CASH
Cash management is one of the key areas of working capital management. John Maynard Keynes in the general theory of employment, interest and money has been identified four motives for holding cash and size of the firm’s cash balance depends basically upon these four major reasons:-
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a. Transaction motive The transaction motive is the need for cash to make the payments for day to day obligations. Cash fund kept or arrange for making payment in normal course of business are cash funds for transaction motive. b. Precautionary motive All firms anticipate uncertainties. All of a sudden, cash may be required to meet certain unexpected demands for cash. In other words, a firm should take precautions for meeting uncertainties with regards to sudden demands for cash.
c. Speculative motive A firm may want to have ability to take advantage of profitable opportunities. These opportunities do not come in a regular manner. Forecast of such opportunities cannot be made scientifically or precisely. d. Compensation motive
It refers to that portion of cash balance, which is maintain to compensate bank for providing certain services, free of cost or at lower cost.
OBJECTIVES OF CASH MANAGEMENT
The important objectives of cash management are:-
a) Meeting of cash disbursement
The basic objective of cash management is to meet all the payments obligates in time. This requires the maintenance of sufficient cash fund to meet the payment schedules of raw materials, suppliers, workers, brokers etc. b) Minimizing funds held upon cash balances
The second objective of cash management is to minimize cash balances. A large amount of cash balances may ensure the liquidity and all its advantages, but it also implies way high cost as large funds remained idle because cash in a non- earning assets.
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There are basically two approaches to determine an optimal cash balances, namely ? ?Minimizing cost models ? ?Cash budget
2. MANAGEMENT OF INVENTORY
Every enterprise need inventory for smooth running of its activities. It serves as a link between production and distribution process. There is generally, a time lag between the recognition of a need and its fulfilment. The greater time lags the higher the requirement of inventory. The unforeseen fluctuation in demand and supply of goods also necessitate the need for inventory. It also provides a caution for future price fluctuations. The term inventory refers to the assets, which will be sold in future in the normal course of business operations. The term inventory includes raw materials, work in progress and finished goods investment in inventory forms a substantial portion of total assets employed. Short term borrowings from banks are largely affected by inventories. While materials affect the cost of goods sold, short term borrowings for investments affect the interest charges. Both material cost and interest charges can be reduced with better inventory planning and control. This reduction increases profit.
OBJECTIVES OF INVENTORY MANAGEMENT
The main objectives of inventory management are operational and financial. The operational objective means that the materials and spares should be available insufficient quantity so that work is not disrupted for want of inventory. The following are the objective and efficient management of inventories.
? To ensure continuous supply of materials, spares and finished goods, so that
production should not suffer at any time and the customer demand should also be met.
? To avoid both overstocking and under stocking of inventory.
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? To maintain investment in inventories at optimum level as required by the
operational and sales activities.
? To keep material cost under control so that they contribute in reducing cost of
production and overall cost.
? To estimate duplication in ordering replenishing stock. This is possible with the help
of centralized purchasing.
3. MANAGEMENT OF RECEIVABLES
Receivables are asset accounts owned to the firm as a result of sale of goods or service in the ordinary course of business. Receivables are direct result of credit sales. A concern is required to allow credit sales in order to expand it sales volume. It is not always possible to sell goods on cash basis only because of prevailing competition in the market. The increase in the sales essential to increase in profitability. After an increasing level of sales, the increase in sales will not proportionately increase production cost, i.e. each increase in sales will bring in more profits. Even though credit sales ultimately result in pushing up the profits earned by the firm, it results in blocking of funds in accounts receivables. It creates extra cost in terms of interest and also increases chances of bad debts. Thus creation of accounts receivables is beneficial as well as dangerous. Management of account receivables is a process of making decision related to the investment of funds in these assets, which results in maximizing the overall return on the investment of the firms. The objectives of receivables management is to promote profits until that point is reached where the return on investment is further finding of receivables is less than the cost of funds raised to finance that additional credit.
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IMPORTANCE OF RECEIVABLES
? Sales growth: - provision of the facility of credit sales by a firm to its customers is a
powerful stimulant for increasing sales.
? Increasing profit:- this is the indirect result of selling on credit ? Capacity to face competition: - the firm may be able to face the competition by selling
on credit.
OPTIMUM LEVEL OF INVESTMENT IN RECEIVABLES
The optimum level of investment in receivables should be where; there is a trade-off between the costs, profitability and liquidity. It is shown below:-
Figure: 2.6 Trade-off between costs, Profitability and Liquidity
Profitability
In short working capital management is an inevitable task of the financial management. The success or failure of a business concern depends more or less on the efficiency of working capital management.
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2.6 CURRENT ASSET AND FIXED ASSET
A firm needs fixed and current assets to support a particular level of output. However to the same level of output, the firm can have different levels of current assets. The level of current asset can be measured by relating current asset to fixed assets. Dividing current assets by fixed assets gives CA/FA ratio. Assuming a constant level of fixed assets. If CA/FA ratio is higher than it indicates a conservative current asset policy. If CA/FA ratio is lower it shows an aggressive current asset policy. Conservative policy implies greater liquidity and lower risk as more amounts is invested in current asset policy of the most firms may fall between these two policies i.e., average policy. If in the conservative policy indicates high levels of current assets are maintained, but in aggressive policy the level of current asset will be minimum.
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RESEARCH METHODOLOGY RESEARCH DESIGN Research design is the plan, structure and strategy of investigation conceived so as to obtain answers to research questions. A research has to plan his work in advance as to anticipate any obstacles in the course of research. A research design could be defined as a blue print specifying every stage of section in the course of research. Such a design would indicate whether the course of action planned will minimise the use of resources and maximize the outcome. For the present day, descriptive research design is applied as related to study the nature of description refers to the use of already available facts of information for the ascertainment of the level of working capital at present maintained by the DHAWANTHARI VAIDYASALA, THODUPUZHA,IDUKKI METHOD OF DATA COLLECTION Types of Data: There are two types (sources) for the collection of data. (1) Primary Data (2) Secondary Data Primary Data: The primary data are the first hand information collected, compiled and published by organization for some purpose. They are most original data in character and have not undergone any sort of statistical treatment. On this particular study, I collect the primary data through formal and informal discussion and exchange of views with company personal. Secondary Data: The secondary data are the second hand information which are already collected by someone (organization) for some purpose and are available for the present study. The secondary data are not pure in character and have undergone some treatment at least once. The main secondary data sources are as follows:
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Annual Balance Sheet Unpublished Accounts Websites , such as ? Google.com ? Wikipedia.com ? Investpedia.com ? J gate.in ? Dhanwanthari.org
PERIOD OF STUDY The period of study restricted to five years from 2004-2005 to 2009-2010. The accounting year of the undertaking commenced from 1st April to 31st March of the next year. TOOLS FOR ANALYSIS The financial management always strives to maintain an adequate working capital at every time so as to carry on the operations successfully and maximize the return on investment. It has to be vigilant about the trend in the items that make up the working capital. This requires a careful enquiring into the current asset and current liability so as to control the working capital and to conserve it properly. There as a several tools for financial analysis of working capital. The important of them as follows:? RATIO ANALYSIS ? GRAPHS Now a day ratio analysis is used by all business and industrial concerns in their financial analysis. Ratios are considered to be the best guidance for the efficient execution of basic managerial functions like planning, forecasting, control etc. Ratio may be expressed in either in the form of rate or proportions or percentage.
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Chapter II Review of Literature The purpose of this chapter is to present a review of literature relating to the working capital management. Although working capital is an important ingredient in the smooth working of business entities, it has not attracted much attention of scholars. Whatever studies have conducted, those have exercised profound influence on the understanding of working capital management good number of these studies which pioneered work in this area have been conducted abroad, following which, Indian scholars have also conducted research studies exploring various aspects of working capital. Special studies have been undertaken, mostly economists, to study the dynamics of inventory investment which often represented largest component of total working capital. As such the previous studies may be grouped into three broad classes? (1) Studies conducted abroad, (2) Studies conducted in India, and (3) Studies relating to determine of inventory investment. Studies on Working Capital Management Studies adopting a new approach towards working capital management are reviewed here.
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Sagan in his paper (1955), perhaps the first theoretical paper on the theory of working capital management, emphasized the need for management of working capital accounts and warned that it could vitally affect the health of the company. He realized the need to build up a theory of working capital management. He discussed mainly the role and functions of money manager inefficient working capital management. Sagan pointed out the money manager’s operations were primarily in the area of cash flows generated in the course of business transactions. However, money manager must be familiar with what is being done with the control of inventories, receivables and payables because all these accounts affect cash position. Thus, Sagan concentrated mainly on cash component of working capital. Sagan indicated that the task of money manager was to provide funds as and when needed and to invest temporarily surplus funds as profitably as possible in view of his particular
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requirements of safety and liquidity of funds by examining the risk and return of various investment opportunities. He suggested that money manager should take his decisions on the basis of cash budget and total current assets position rather than on the basis of traditional working capital ratios. This is important because efficient money manager can avoid borrowing from outside even when his net working capital position is low. The study pointed out that there was a need to improve the collection of funds but it remained silent about the method of doing it. Moreover, this study is descriptive without any empirical support.
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Walker in his study (1964) made a pioneering effort to develop a theory of working capital management by empirically testing, though partially, three propositions based on riskreturn trade-off of working capital management. Walker studied the effect of the change in the level of working capital on the rate of return in nine industries for the year 1961 and found the relationship between the level of working capital and the rate of return to be negative. On the basis of this observation, Walker formulated three following propositions: Proposition I? If the amount of working capital is to fixed capital, the amount of risk the firm assumes is also varied and the opportunities for gain or loss are increased. Walker further stated that if a firm wished to reduce its risk to the minimum, it should employ only equity capital for financing of working capital; however by doing so, the firm reduced its opportunities for higher gains on equity capital as it would not be taking advantage of leverage. In fact, the problem is not whether to use debt capital but how much debt capital to use, which would depend on management attitude towards risk and return. On the basis of this, he developed his second proposition. Proposition II? The type of capital (debt or equity) used to finance working capital directly affects the amount of risk that a firm assumes as well as the opportunities for gain or loss. Walker again suggested that not only the debt-equity ratio, but also the maturity period of debt would affect the risk-return trade-off. The longer the period of debt, the lower be the risk. For, management would have enough opportunity to acquire funds from operations to meet the debt obligations. But at the same time, long-term debt is costlier. On the basis of this, he developed his third proposition: Proposition III? The greater the disparity between the maturities of a firm’s debt instruments and its flow of internally generated funds, the greater the risk and vice-versa.
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Weston and Brigham (1972) further extended the second proposition suggested by Walker by dividing debt into long-term debt and short-term debt. They suggested that shortterm debt should be used in place of long-term debt whenever their use would lower the average cost of capital to the firm. They suggested that a business would hold short-term marketable securities only if there were excess funds after meeting short-term debt obligations. They further suggested that current assets holding should be expanded to the point where marginal returns on increase in these assets would just equal the cost of capital required to finance such increases.
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Van Horne in his study (1969) , recognizing working capital management as an area largely lacking in theoretical perspective, attempted to develop a framework in terms of probabilistic cash budget for evaluating decisions concerning the level of liquid assets and the maturity composition of debt involving risk-return trade-off. He proposed calculation of different forecasted liquid asset requirements along with their subjective probabilities under different possible assumptions of sales, receivables, payables and other related receipts and disbursements. He suggested preparing a schedule showing, under each alternative of debt maturity, probability distributions of liquid asset balances for future periods, opportunity cost, maximum probability of running out of cash and number of future periods in which there was a chance of cash stock-out. Once the risk and opportunity cost for different alternatives were estimated, the form could determine the best alternative by balancing the risk of running out of cash against the cost of providing a solution to avoid such a possibility depending on management’s risk tolerance limits. Thus, Van Horne study presented a risk-return trade-off of working capital management in entirely new perspective by considering some of the variables probabilistically. However, the usefulness of the framework suggested by Van Horne is limited because of the difficulties in obtaining information about the probability distributions of liquid-asset balances, the opportunity cost and the probability of running out of cash for different alternative of debt maturities.
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Welter, in his study (1970) , stated that working capital originated because of the global delay between the moment expenditure for purchase of raw material was made and the moment when payment were received for the sale of finished product. Delay centres are located throughout the production and marketing functions. The study requires specifying the delay centres and working capital tied up in each delay centre with the help of information regarding average delay and added value. He recognized that by more rapid and precise
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information through computers and improved professional ability of management, saving through reduction of working capital could be possible by reducing the length of global delay by rescuing and/or favourable redistribution of this global delay among the different delay centres. However, better information and improved staff involve cost. Therefore, savings through reduction of working capital should be tried till these saving are greater or equal to the cost of these savings. Thus, this study is concerned only with return aspect of working capital management ignoring risk. Enterprises, following this approach, can adversely affect its short-term liquidity position in an attempt to achieve saving through reduction of working capital. Thus, firms should be conscious of the effect of law current assets on its ability to pay-off current liabilities. Moreover, this approach concentrated only on total amount of current assets ignoring the interactions between current assets and current liabilities.
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Lambrix and Singhvi (1979) adopting the working capital cycle approach to the working capital management, also suggested that investment in working capital could be optimized and cash flows could be improved by reducing the time frame of the physical flow from receipt of raw material to shipment of finished goods, i.e. inventory management, and by improving the terms on which firm sells goods as well as receipt of cash. However, the further suggested that working capital investment could be optimized also (1) by improving the terms on which firms bought goods i.e. creditors and payment of cash, and (2) by eliminating the administrative delays i.e. the deficiencies of paper-work flow which tended to extend the time-frame of the movement of goods and cash.
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Warren and Shelton (1971) applied financial simulation to simulate future financial statements of a firm, based on a set of simultaneous equations. Financial simulation approach makes it possible to incorporate both the uncertainty of the future and the many interrelationships between current assets, current liabilities and other balance sheet accounts. The strength of simulation as a tool of analysis is that it permits the financial manager to incorporate in his planning both the most likely value of an activity and the margin of error associated with this estimate. Warren and Shelton presented a model in which twenty simultaneous equations were used to forecast future balance sheet of the firm including forecasted current assets and forecasted current liabilities. Current assets and current liabilities were forecasted in aggregate by directly relating to firm sales. However, individual working capital accounts can also be forecasted in a larger simulation system. Moreover,
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future financial statements can be simulated over a range of different assumptions to portray inherent uncertainty of the future.
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Cohn and Pringle in their study (1973) illustrated the extension of Capital Asset Pricing Model (CAPM) for working capital management decisions. They tried to interrelate long-term investment and financing decisions and working capital management decisions through CAPM. They emphasized that an active working capital management policy based on CAPM could be employed to keep the firm’s shares in a given risk class. By risk, he meant unsystematic risk, the only risk deemed relevant by CAPM. Owing to the lumpy nature for long-term financial decisions, the firm is continually subject to shifts in the risk of its equity. The fluid nature of working capital, on the other hand, can be exploited so as to offset or moderate such swings. For example they suggested that a policy using CAPM could be adopted for the management of marketable securities portfolio such that the appropriate risk level at any point in time was that which maintains the risk of the company’s common stock at a constant level. Similarly,
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Copeland and Khoury (1980) applied CAPM to develop a theory of credit expansion. They argued that credit should be extended only if the expected rate of return on credit is greater than or equal to market determined required rate of return. They used CAPM to determine the required rate of return for the firm with its new risk, arising from uncertainty regarding collection due to the extension of credit. Thus, these studies show how CAPM can be used for decisions involved in working capital management. One more approach, used mainly in empirical studies, towards working capital management has been to apply regression analysis to determine the factors influencing investment in working capital. Different studies in the past have considered different explanatory variables to explain the investment in inventory.
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Metzler (1941)
However, his work was mainly on simple acceleration principle
which postulated that firms liked to maintain inventories in proportions to output/sales and they succeeded in achieving the desired level of inventories in a unit time-period. That is to say, any discrepancy between the actual level and desired level of inventories is adjusted within the same time-period. Needless to say, that such an instantaneous adjustment is not a realistic assumption to make. Modifications, therefore, have been introduced in the literature to provide for partial adjustment.
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Goodwin (1948)
assumed that firms attempted only a partial adjustment of the
discrepancy between the desired stocks as determined by the level of output and the existing stock.
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Similarly, Darling and Lovell (1965)
modified Metzler’s formulation based on
simple acceleration principle and obtained, the relationship based on flexible accelerator principle. There are several reasons physical, financial and technical those motivate partial adjustment. Among the physical factors, mention may be made of procurement lags between orders and deliveries. The length of such lags is connected with the source of supply, foreign or domestic availability. Import licensing procedures on account of foreign exchange scarcity could cause further delays in adjustment. Among the financial factors, cost advantages associated with bulk buying and higher procurement costs for speedy delivery are also mentioned. Uncertainties in the market for raw materials and in the demand for final product also play a role in influencing the speed of adjustment. Technically, firms like to make sure that changes in demand are of a permanent character before making full adjustment. The acceleration principle has great relevance in inventory analysis than in the analysis of fixed investment, as there are limits to liquidate fixed capital in the face of declining demand.
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It has been found significant in the studies of Hilton (1976)
and Irwin (1981).
Time-trend is expected to be important because inventories generally accumulate with the expansion of economic activities of the company. Anticipated price changes, measured by changes in wholesale price index of inventories, are taken as an explanatory variable to capture speculative element in inventory. This suggests a positive relationship between price changes and inventory. An increase in sales is expected to increase the demand for stocks to meet orders regularly. An increase in capacity utilization is also expected to increase the demand for stock by increasing the demand for raw materials and increasing the inventories of finished goods. Thus, the variable, capacity utilization, is postulated to have a positive coefficient in the equation.
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Abramowitz (1950)
and Modigliani (1957) highlighted the impact of capacity
utilization on inventory investment. Existing stock of inventories is expected to take account of adjustment process to the desired levels. Thus the variable, existing stock of inventories, is postulated to be negatively related with the desired stock. The ratio of inventory to sales may affect inventory investment positively because a high ratio of stocks to sales in the past
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suggests the maintenance of high levels of inventories in the past and thus also calling for high investment in inventories in the current period.
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The studies of Metzler (1941)
and Hilton (1976) have found this variable,
inventory-sales ratio, to be statistically significant. Fixed investment is generally expected to affect inventory investment inversely because of competing demand for the limited funds. However, in case of an expanding firm, the two components may be complementary. Besides, availability of funds from retained earnings and external sources, may affect investment decision by providing funds for financing inventory investment. Therefore, retained earnings and flow of debt are postulated to have positive coefficients.
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Appavadhanulu (1971) recognizing the lack of attention being given to investment in working capital, analysed working capital management by examining the impact of method of production on investment in working capital. He emphasized that different production techniques require different amount of working capital by affecting goods-inprocess because different techniques have differences in the length of production period, the rate of output flow per unit of time and time pattern of value addition. Different techniques would also affect the stock of raw materials and finished goods, by affecting lead-time, optimum lot size and marketing lag of output disposals. He, therefore, hypothesised that choice of production technique could reduce the working capital needs. He estimated the ratio of work-in-progress and working capital to gross output and net output in textile weaving done during 1960, on the basis of detailed discussions with the producers and not on the basis of balance sheets which might include speculative figures. His study could not show significant relationship between choice of technique and working capital. However, he pointed out that the idea could be tested in some other industries like machine tools, ship building etc. by taking more appropriate ratios representing production technique correctly.
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Chakraborty (1973) approached working capital as a segment of capital employed rather than a mere cover for creditors. He emphasized that working capital is the fund to pay all the operating expenses of running a business. He pointed out that return on capital employed, an aggregate measure of overall efficiency in running a business, would be adversely affected by excessive working capital. Similarly, too little working capital might reduce the earning capacity of the fixed capital employed over the succeeding periods. For knowing the appropriateness of working capital amount, he applied Operating Cycle (OC)
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Concept. He calculated required cash working capital by applying OC concept and compared it with cash from balance sheet data to find out the adequacy of working capital in Union Carbide Ltd. and Madura Mills Co. Ltd. for the years 1970 and 1971.
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He extended the analysis to four companies over the period 1965-69 in 1974 study. The study revealed that cash working capital requirement were less than average working capital as per balance sheet for Hindustan Lever Ltd. and Guest, Keen and Williams Ltd. indicating the need for effective management of current assets. Cash working capital requirements of Dunlop and Madura Mills were more than average balance sheet working capital for all year’s efficient employment of resources. For Union Carbide Ltd., cash working capital requirements were more in beginning years and then started reducing in the later years as compared to conventional working capital indicating the attempts to better manage the working capital. Chakraborty emphasized the usefulness of OC concept in the determination of future cash requirements on the basis of estimated sales and costs by internal staff of the firm. OC concept can also be successfully employed by banks to assess the working capital needs of the borrowers.
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Misra (1975) studied the problems of working capital with special reference to six selected public sector undertakings in India over the period 1960-61 to 1967-68. Analysis of financial ratios and responses to a questionnaire revealed somewhat the same results as those of NCAER study with respect to composition and utilization of working capital. In all the selected enterprises, inventory constituted the more important element of working capital. The study further revealed the overstocking of inventory in regard to its each component, very low receivables turnover and more cash than warranted by operational requirements and thus total mismanagement of working capital in public sector undertakings.
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Agarwal (1983) also studied working capital management on the basis of sample of 34 large manufacturing and trading public limited companies in ten industries in private sector for the period 1966-67 to 1976-77. Applying the same techniques of ratio analysis, responses to questionnaire and interview, the study concluded the although the working capital per rupee of sales showed a declining trend over the years but still there appeared a sufficient scope for reduction in investment in almost all the segments of working capital. An upward trend in cash to current assets ratio and a downward trend in cash turnover showed the accumulation of idle cash in these industries. Almost all the industries had overstocking
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of raw materials shown by increase in the share of raw material to total inventory while share of semi-finished and finished goods came down. It also revealed that long-term funds as a percentage of total working capital registered an upward trend, which was mainly due to restricted flow of bank credit to the industries.
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Kamta Prasad Singh, Anil Kumar Sinha and Subas Chandra Singh (1986) examined various aspects of working capital management in fertilizer industry in India during the period 1978-79 to 1982-93. Sample included public sector unit, Fertilizer Corporation of India Ltd. (FCI) and its daughter units namely Hindustan Fertilizers Corporation Ltd., the National Fertilizer Ltd., Rashtriya Chemicals and Fertilizers Ltd. and Fertilizer (Projects and Development) India Ltd. and comparing their working capital management results with Gujarat State Fertilizer Company Limited in joint sector. On the basis of ratio-analysis and responses to a questionnaire, study revealed that inefficient management of working capital was to a great extent responsible for the losses incurred by the FCI and its daughter units, as turnover of its current assets had been low. FCI and its daughter units had high overstocking of inventory in respect of each of its components particularly stores and spares. Similarly, quantum of receivables had been excessive and their turnover very low. However, cash and liquid resources held by FCI and its daughter units had been much lower in relation to operation requirements. So far as financing of working capital was concerned, long-term funds had been financing a low proportion of current assets due to rapid increase of current liabilities. The profitability providing an internal base for financing of working capital had been very low in these undertakings.
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Verma (1989) evaluated working capital management in iron and steel industry by taking a sample of selected units in both private and public sectors over the period 1978-79 to 1985-86. Sample included Tata Iron and Steel Company Ltd. (TISCO) in private sector and Steel Authority of India Ltd. (SAIL) and Indian Iron and Steel Company, a wholly owned subsidiary of SAIL, in public sector. By using the techniques of ratio analysis, growth rates and simple linear regression analysis, the study revealed that private sector had certainly an edge over public sector in respect of working capital management. Simple regression results revealed that working capital and sales were functionally related concepts. The study further showed that all the firms in the industry had made excessive use of bank borrowings to meet their working capital requirement vis-à-vis the norms suggested by Tandon Committee.
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Vijaykumar and Venkatachalam (1995) studied the impact of working capital on profitability in sugar industry in Tamil Nadu by selecting a sample of 13 companies; 6 companies in co-operative sector and 7 companies in private sector over the period 1982-83 to 1991-92. They applied simple correlation and multiple regression analysis on working capital and profitability ratios. They concluded through correlation and regression analysis that liquid ratio inventory turnover ratio, receivables turnover ratio and cash turnover ratio influenced the profitability of sugar industry in Tamil Nadu. They also estimated the demand functions of working capital and its components i.e. cash, receivables, inventory, gross working capital and net working capital, by applying regression analysis. They showed the impact of sales and interest rate on working capital and its components. When only sales was taken as independent variable, coefficient of sales was more than unity in all the equations of working capital and its components showing more than unity sales elasticity and diseconomies of scale. When sales and interest rate were taken as independent variable, sales elasticity was again more than unity in demand functions of working capital and its components except cash. So far as capital costs were concerned, these had negative signs in all the equations but significant only in inventory, gross working capital and net working capital showing negative impact of interest rates on investment in working capital and its components
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Chapter III DHANWANTHARI VAIDYASALA -A BRIEF PROFILE Ancient India depends on Ayurveda for all its medical needs, but of recently with the advent of modern medicines, Ayurveda seemed to be having a natural deal. But after a long downward trend in popularity, it’s back with resurgence. Its dynamic up wings comes with itself projecting as a holistic health care systems gets worldwide attention. Dhanwnathari Vaidyasala specially set up with the mission to contribute to this resurgence in a creative manner in Kerala and in India since 1933.
3.1. HISTORY OF AYURVEDA Ayurveda (the since of life) is India’s contribution to humanity in its search for health care, well-being and longevity. This wonderful treats on human health is considered as the “Fifth Veda” narrated directly by God to the great specious of the ancient part. It mellowed with the Indian civilization training philosophical science in the history of mankind. Where almost all medicines are of plant origin, they do not have any side effects. It flourished at a time when all the science branches, we now practice where in its rudiments. Physicians the world over, now consider Ayurveda as a system of treatment embodied in nature that couples meditation and reorganized life style. In the modern era, where most of the deceases results from mutations in life styles. We have started to look back in this ancient wisdom, which advocated a therapy that has its roots in nature.
3.2. HISTORY AND EVOLUTION OF DHANWANTHARI AYURVEDA VAIDYASALA Dhanwanthari Ayurveda Vaidyasala was established 1933 by late vaidyan C.N Namboodiri, at the age of 25 years as a humble beginning. After seven years of academic carrier of Gurukulam, a curriculum as per the traditional Kerala culture, he started this firm with only a few manufacturing companies established in Kerala. The modern concept of marketing was very much in wanted, when he was decided to have his passion to a marketing framework designed by him. He was a pioneer in institutionalizing the concept of Ayurveda medicines market in Kerala. He thus had carved out the rich for the firm himself in those days itself, apart from abroad and outside Kerala. He had visited various states in America early 70’s on request from his patients.
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Dhanwanthari Ayurveda Vaidyasala has around 50 branches and more than 100 agencies. It was the first Ayurvedic firm in south India to explore the Delhi market. Its area of operation included Madras, Bangalore, Coimbatore, Selam, Erode and Kanyakumari in Tamilnadu even 1960’s. This network flourished under the meticular management of vaidyan C.N. Namboodiri, Dhanwanthari Ayurveda vaidyasala, set up full-fledged treatment divisions in Thiruvananthapuram, Kottayam,Kannur, and Thodupuzha.
Ayurveda market in India There is about Rs. 1000 crores market in India for Ayurvedic products. The Dabur India is the market leader; Zandu, Aryavaidyasala Kottackal, Nagarguna herbal concentrates etc. are the other wide marketing companies. All these companies have worldwide marketing network of the Ayurveda medicines. Ayurveda Market in Kerala Being the basic medicine of Kerala, today Ayurveda enjoy a leading market in Kerala. Kottackal Aryavaidyasala was the first Ayurvedic Company in Kerala introduced the concept of agency network in the field of Ayurvedic medicines.
3.3 Multi-Dimensional Operations Pharmaceuticals- Traditional Production Methods & Product details
Ayurveda is at least four millennium years old and it survived the test of time by propagation in a traditional curriculum as “smrithi and sruthi” (propagation through oral education and by practice) with related discussions and meditation (mananam). Most of the reference texts we have today were recorded after 1000BC in ‘Thaliyolas’ (dried leaves – an ancient manuscript material). It can be noted that the Principles of Ayurveda are retained intact and the Medical formulations in these text are narrated as examples of this treatment theory for individual deceases. So this science has left ample vacuum for research and development. That is how comparatively modern ailments like hypertension, Syphilis; AIDS etc. come under the therapeutic range of Aurveda.
Appropriate Technology Celsius temperatures throughout, ensuring ideal conditions for the natural fermenting agents. The vessels for production are either brass or copper in specified shapes. But we have adopted the sterilization of pots; powder etc. to keep up the hygiene standards. For thermal
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processing of decoctions, firewood, that will give controlled and continuous heat are recommended. This is essential for adequate drug extraction and to check the extraction of unwanted alkaloids, Tannins etc. we have adopted modern technology only in pre-processing stage like disintegration, pulverization etc. and in preservation. In Dhanwanthari Vaidyasala, we maintain traditional technology for Ayurvedic medicine preparation. The recommended vessels for preparation of fermented products are earthen vessels. The natural temperature regulation in porous vessel is unique and the medicines will be having 24 to 28 degree of Kashayam. The fact that we have been able to maintain our goodwill and reputation for seven decades vindicates our policy of maintaining traditional processing methods experienced labour strength, care and hygiene of production. Now this is been awarded with GMP Certificate by the concerned authorities.
The Products Several pharmaceutical forms are employed for managing various stages of illness. Dhanwanthari Vaidyasala has got a product list ranging over 300. The medicinal preparations are classified under the following groups mainly Avarthi, Arishtasavam, gulika, Choornam, Ghruthm, Kashayam, Kuzhambu, Lehyam, Lepam, Sevyam, Thailam, Keram.
Quality Control
Our credibility and goodwill makes it imperative that we stick on to the standards we have set which is compatible with Indian Pharmaceutical standards achieved by production as per GMP. Our prime asset acquired through seven decades of our existence, is the goodwill through the superior quality of products. Here, the Q.C Department deals with: Raw material quality control Pre-processing quality control Processing quality control Finished goods quality control Shelf life quality control Therapeutic quality control
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3.4 RESEARCH AND DEVELOPMENT PROGRAMME
The firm is having its own research and development set up. A part from standardization tests, the research and development department is also conducting tests for basic research, new product development and test for improving the production quality. Dhanwanthari Vaidyasala has already developed patented ayurvedic preparations and as they have conducted various trials for the last 3 years. They are ready for market now. They are having tie up with several reputed research institutes. Experts in various fields are invited to tie up and perfect systems. They plan for workshop on specific subjects involving scientists, doctors and technical experts from India and abroad.
Hospital division Hospital division was started to boost the goodwill and credibility of the organization. But later it emerged to be one of the most promising and fast growing activities of the mother firm. Thus we were able to extend our goodwill beyond our expected limits or geographical boundaries. Our objective is to extent health services to the public, incurring minimum cost. We have dedicated ourselves to the cause of Ayurveda and its pure and traditional methodologies. Our Head Office of Health services is in Thodupuzha, which is a 25 bedded set up with full-fledged departments, aided by modern medical care. This will be having different specialty departments like Kayachikitsa (general medicine),
marmachikitsa(orthopaedics), nethrachikitsa (eye specialty), salakyathanthra (E.N.T), vishachikitsa (toxicology&skin), rasayanachikitsa (rejuvenative and Aphrodisiac therapy), manasikam(psychiatry, stress management etc.), salyachikitsa(surgical deceases), and balachikitsa(paediatric). Panchakarma This branch of Ayurveda was developed by physicians in Kerala from “sodhana chikitsa” referred in Ayurvedic texts. This is a unique Kerala treatment now attracting global attention. The therapeutic range of panchakarma extends from common low back pain to cerebral lesion diseases. In healthy humans this treatment tunes up the somatic and mental health enhances the immunity power, strength, vitality, and longevity without any side effects.
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Online Consultation Now that we are in the web net, we have decided to extend the fruits of this science and our experience in the field to our global clientele. That’s why we are opening up an opportunity for consulting us online. One can email us at [email protected] or contact through our online consultation section in www.dhanwanthari.org. Then we will email them back for more clarifications, if needed be. Then our panel of expert doctor’s head by Dr.C.N.Namboothiri will guide them to further course of action. This panel comprises mainly of ayurvedic and Allopathic doctors expertise in various disciplines. Chief physician Dr.C.N.Namboothiri himself is qualified and experienced in both these medical branches.
Herbal Cultivation Dhanwanthiri Vaidyasala has developed a fully-fledged Herbal Nursery in Thodupuzha. This aims at providing seedling and technical support to its projects for Herbal Cultivation in Kerala and TamilNadu. It also has started associating with farmers by providing them with seedling, technical support and buyback arrangement. Now dhanwanthari vaidyasala has projects for herbal cultivations with aids from Central Health Ministry and Central Herbal Board. It also aims at preserving endangered species which is of medicinal use to mankind.
3.5 MAJOR CENTRES 1. Dhanwanthari Vaidyasala & treatment division Head office, Thodupuzha, idukki dist. Kerala state-685584 Phone no. 0486-220436, 222536,227566 Telefax 0486-227566 Email – [email protected] Website – www.Dhanwanthari.org 2. Dhanwathari Vaidyasala &Treatment Centre M.G Road, near govt. Ayurveda College Thiruvananthapuram 3. Dhanwathari Vaidyasala &Treatment Centre Main road, near Y.M.C.A Kottayam Ph. 0484-2563486
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4. Dhanwathari Multi specialty hospital M.G road padma theatre Kochi Ph. 0484-2368878 5. Dhanwathari Vaidyasala &Treatment Centre S.N Park road, near kavitha theatre Kannur Ph. 0497-2764449 6. Dhanwathari Vaidyasala &Treatment Centre Rajamandhir, chalapuram Kozhikode Ph. 0495-2306368 7. Dhanwathari Vaidyasala &Treatment Centre Kalian health care centre Karamcodu p o Chathanoor, kollam Ph. 0474-3094080 8. Dhanwathari Vaidyasala &Treatment Centre Hassan’s home stay Kumily, idukki Ph. 04869-22186
9. Dhanwathari Vaidyasala &Treatment Centre Chandana residency Udumalpetta road, Marayoor Ph. 04865-252322 10. Ayurcare (in association with dhanwanthari) Regional office, plot 500 Behind pantaloons lane Ph. 040-2776688
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ORGANISATIONAL STRUCTURE OF DHANWANTHARI VAIDYASALA
Managing Director
Partner Technical
Partner Commercial
Chief Executive Officer
Production manger
Materials Manager
Marketing Manager
Finance Manager
Health service Manager
Section in charge
Workmen
Production supervisor
Finished product store
Packing material store
Doctor’s marketing
Raw material store
Treatment division
Market supervisor
Accounting staff
R&D officer Staff
Office staff
Workmen
Branch staff
Dispatch
Field executive
Doctor’s
Non-technical staff
Technical staff
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PERFORMANCE OF WORKING CAPITAL MANAGEMENT IN DHANWANTHARI VAIDYASALA -AN ANALYSIS 4.1 INTRODUCTION Working capital management is an integral part of overall financial management. The manner of administration of current assets to very large extent determines the success of operation of a firm. It is concerned with obtaining economic funds, using them in profitable manner and controlling them to maintaining economy. Working capital management should establish a proper balance among risk, profitability and liquidity. The importance of working capital management lies in the fact financial managers spends a great deal of time in managing current asset and current liabilities. An analysis of liquidity aspect of working capital is vital for both short term creditors and the management of business enterprise. The short term creditors get acquainted with the chance of receiving payment in time or the margin of safety which may assure them of eventual payment in full. The analysis helps the management to evaluate their current policies. In this study the performance of working capital management in Dhanwanthari Vaidyasala has been analysed with the help of following measures.
4.2 MEASURES Study of working capital policy of Dhanwanthari Vaidyasala Study of structure of working capital policy in Dhanwanthari Vaidyasala Study of short term solvency of Dhanwanthari Vaidyasala Study of the efficiency achieved by the firm utilizing its working capital
4.3 TOOLS OF WORKING CAPITAL ANALYSIS The financial management always strives to maintain an adequate working capital at every time so as to carry on the operations successfully and maximize the return on investment. It has to be vigilant about the trend in the items that make up the working capital. This requires a careful enquiring into the current asset and current liability so as to control the working capital and to conserve it properly.
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There as a several tools for financial analysis of working capital. The important of them as follows:I. II. Ratio Analysis Graph
4.4 RATIO ANALYSIS In this chapter an earnest attempt is made to analysis the working capital performance of company with the help of ratio analysis. Ratio Analysis is a powerful tool for financial analysis. A ratio is defined as “the indicated quotient of two mathematical expressions” and as “relationship between two or more things”. In financial analysis a ratio is used as the benchmark for evaluating the financial position and performance of a firm. Ratio helps to summarize large quantities of financial data and to make qualitative judgment about the firm’s financial performance. It is an index or yardstick which permits a qualitative judgment to be formed about the firm’s ability to meet its current obligations. It measures the firm’s liquidity. A ratio’s reflecting a quantitative judgment. Such is the nature of all financial ratios. Now a day ratio analysis is used by all business and industrial concerns in their financial analysis. Ratios are considered to be the best guidance for the efficient execution of basic managerial functions like planning, forecasting, control etc. Ratio may be expressed in either in the form of rate or proportions or percentage.
4.4.1 IMPORTANCE OF RATIO ANALYSIS ? It makes it easy to grasp the relationship between various items and helps in understanding the financial statement. ? Ratio indicates trends in important items and thus will help in forecasting. ? Inter-firm comparisons can be made with the help of ratios. ? It helps in simple assessment of liquidity, profitability, solvency and efficiency of the firm. ? Ratio may be used as measure of efficiency.
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4.4.2 LIMITATIONS OF RATIO ANALYSIS ? Ratio analysis gives only a good basis of quantitative analysis of financial problems. But it suffers from qualitative aspects. ? Ratios are computed from historical accounting records. So they also process those limitations of financial accounting. ? It is not possible to calculate exact and well accepted absolute standard for comparison. ? Ratios are only means of financial analysis, but not an end in them.
4.4.3 TYPES OF RATIOS Several ratios can be calculated from the accounting data contained in the financial statement. These ratios can be grouped into various classes according to the financial activities or functions to be evaluated. The parties, which generally undertake financial analysis, are short-term creditors, long-term creditors, owners and management. Short term creditor’s main interest in the liquidity position or the short term solvency of the firm. Long term creditors on the other hand are more interested in the long term solvency and profitability of the firm. Similarly owners concentrate on firm’s profitability analysis and the analysis of the firm’s financial conditions. Management is interested in evaluating every activity of the firm. They have to protect the interest of all parties and that the firm grows profitably. The ratio can be classified into the following four categories.
1. Liquidity ratio Liquidity refers to the ability of firm to meet its obligations in the short run, usually one year. Liquidity ratios are generally based on relationship between current assets (the source for meeting short term obligations) and current liabilities. The important liquidity ratios are current ratio, acid test ratio etc. 2. Leverage ratio Financial leverage refers to the use of debt finance. While debt capital is cheaper source of finance, it is also a riskier source of finance. Leverage ratio helps in assessing the risk arising from the use of debt capital. Two types of ratio are commonly used to analyse financial leverage: structure ratios and coverage ratios.
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3. Activity ratio Activity ratio or turn over ratios, measure how efficiently assets are employed by a firm. These ratios are based on the relationship between the level of activity, represented by sales or cost of goods sold, and levels of various assets. The important turnover ratios are: inventory turnover, average collection period, receivable turn over etc. 4. Profitability ratios Profitability reflects the financial result of business operations. These are two types
of profitability ratios, profit margin ratios and rate of return ratios. Profit margin ratio shows the relationship between profit and sale. The two popular profit margin ratios are: gross profit margin and net profit margin ratios. Rate of return ratios reflect the relationship between profit and investment. The important rates of return measures are: return on total assets, earning power, and return equity. STEPS IN RATIO ANALYSIS ? The first task of financial analysis is to select the information relevant to the decision under consideration from the statements and calculate appropriate ratios. ? To compare the calculated ratios with the ratios of the same firm relating to the past or with the industry ratios. It facilitates in assessing success or failure of the firm. ? Third step is to interpretation, drawing of inferences and report writing, conclusions are drawn after comparison in the shape of report or recommended course of action. BASIS OR STANDARDS OF COMPARISON Ratios are relatively figures reflecting the relation between variables. They enable analyst to draw conclusions regarding financial operations. They use of ratios as a tool of financial analysis involves the comparison with related facts. The basis of ratio analysis is four of types. Past ratios, calculated from past financial statements of the firm. Competitor’s ratio, of the some most progressive and successful competitor firm at the same point of time. Industry ratio, the industry ratios to which the firm belongs to Projected ratios, ratios of the future developed from the projected or pro forma financial statements.
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INTERPRETATIONS OF THE RATIOS The interpretation of ratio is an important factor. The inherent limitations of ratio analysis should be kept in mind while interpreting them. The impact of factors such as price level changes, changes in accounting policies, window dressing etc., should also be kept in mind when attempting to interpret ratios. The interpretation of the ratios can be made in the following ways. ? Single absolute ratio ? Group of ratios ? Historical comparison ? Projected loans ? Inter-firm comparison GUIDELINES OR PRECAUTIONS FOR USE OF RATIOS The calculations of ratios may not be a difficult task but their use is not easy. Following guidelines or factors may be kept in mind while interpreting various ratios is
? Accuracy of financial statements ? Objective or purpose of analysis ? Selection of ratios ? Use of standards ? Calibre of the analysis
CLASSIFICATIONS OF RATIOS The use of ratio analysis is not confined to financial manager only. There are different parties interested in the ratio analysis for knowing the financial position of a firm for different purposes. Various accounting ratios can be classified as follows. 1. Traditional classification 2. Functional classification
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Traditional Classification It includes the following Balance sheet or position statement ratio: they deal with relationship between two balance sheet items, e.g. the ratio of current assets to current liabilities etc., both the items must, however pertain to the same balance sheet. Profit & loss a/c or revenue statement ratio: these ratios deals with the relationship between two profit & loss account items, e.g. the ratio of gross profit to sales etc., Composite or inter statement ratios: these ratios exhibit the relation between a profit a profit & loss account or income statement item and a balance sheet items, e.g. stock turnover ratio of total assets to sales. Functional Classification These include liquidity ratios, long term solvency and leverage ratios, activity ratios and profitability ratios.
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