mukesh apc

7/29/2019 Mukesh Apc

1/91

AMERICAN POWER CONVERSION CORPORATION

INTRODUCTION

American Power Conversion provides protection against many of the primary causes of

data loss, hardware damage and downtime. Founded in 1981, APC is a leading provider

of global, end-to-end AC and DC-based back-up power products and services, which

include surge suppressors, uninterruptible power supplies (UPS), power conditioning

Nb equipment, power management software, and DC power systems as well as precision

cooling equipment, and professional and consulting services for Nonstop Networking.

APC, known for Legendary Reliability, sets the standard for quality, innovation and

support for power protection solutions from desktop systems to data center operations to

entire facilities. Its comprehensive solutions, which are designed for both home and

corporate environments, improve the manageability, availability and performance of

sensitive electronic, network, communication and industrial equipment of all sizes.

APC sets itself apart from the competition in several ways:

Global one-stop solutions - APC provides worldwide access to "best-of-breed"

offerings;

Financial strength - APC's financial strength makes it an attractive partner;

Efficient manufacturing- APC provides high quality products to customers

worldwide;

Innovative product offerings - APC designs solutions to address "real" customer

needs.

1


2/91

INFRASTRUCTURE

APCs Infrastructure is on-demand architecture for network-critical physical

infrastructure (NCPI). The Infrastructure design, which integrates power, cooling, rack,

management and services, allows the selection of standardized, modular components to

create a customized solution. This standardization coupled with the APC Design Portal

enables an easily scalable architecture designed to meet changing needs and future

expansion. This patent-pending approach provides increased availability, improved

adaptability and speed of deployment as well as lowered total cost of ownership for IT

environments from wiring closets to computer rooms to data centers.

APC'S CORPORATE MISSION

The mission of APC is to create delighted customers by improving the manageability,

availability, and performance of information and communication systems through rapid

development and delivery of innovative solutions to real customer problems.

GLOBAL PRESENCE

APCs corporate offices are located in West Kingston, Rhode Island. The Company has

sales offices throughout the world; manufacturing facilities in the U.S., Ireland,

Switzerland, Denmark, Philippines, China, India, and Brazil; and ships product to

approximately 160 countries. In 2005, 52% of APCs revenues were in the Americas

(North and Latin America), 30% were in Europe, the Middle East and Africa and 18%

2


3/91

were in Asia. As of December 31, 2005, APC had approximately 7,580 full-time

employees worldwide.

APC HISTORY

Three Massachusetts Institute of Technology (MIT) Lincoln Labs' electronic power

engineers founded American Power Conversion in 1981. At the time, the research and

development efforts of these three men were focused on solar power. Over the next few

years, APC shifted its focus to power protection introducing its first UPS, the 750, in

1984. The need for capital to support this growing business was satisfied in July 1988

when APC became a publicly held company. The stock, trading under the symbol

"APCC," was priced at $7.50, or $.125 per share when adjusted for stock splits.

Over the years, APC has developed a global, end-to-end, product offering targeted at four

strategic application areas: Home/Small Office; Business Networks; Access Providers;

and Data Centers & Facilities. Internal product development has been augmented with

strategic acquisitions to form an industry leading product portfolio. Throughout the

world, the APC brand has become synonymous with quality power back-up and

management solutions.

KEY APPLICATION AREAS

Today, the Company focuses its efforts on four key application areas:

Home/Home Office

3


4/91

Business Networks

Access Provider Networks

Data Centers and Facilities

Each requires customized efforts for products, sales and marketing, but each has a

common theme: high availability is increasingly essential. APC is positioning itself to be

the preferred brand worldwide in all four of these application areas.

RECOGNITION AND AWARDS

Over the years, APC has received hundreds of awards worldwide-- more than any other

UPS manufacturer. Such designations have recognized APC both for its reliable

solutions and its overall business performance. The company is among the most

recentFortune 1000 companies and is part of the closely watched S&P 500 Index and the

Nasdaq 100 Index. For its products, APC receives global recognition for its reliability

and innovation.

APC's Vision & Mission

APC's Vision

APC products ensuring availability wherever data is created, transmitted or stored.

4


5/91

APC's Mission

To create delighted customers by improving the manageability, availability and

performance of information and communication systems through the rapid delivery of

innovative solutions to real customer problems.

APC's Philosophy

To listen to our customers.

Their wants, needs and wishes are our strategic blueprint.

To justify our expenditures as they relate to our goals.

To quantify all aspects of our business in order to create benchmarks for success.

To avoid bureaucracy.

Employees must make direct contributions to our goals.

To emphasize quality.

We believe that good enough never is.

To respond quickly and decisively to opportunity.

To create an environment where ideas are encouraged, recognized and rewarded.

To help employees grow personally and professionally.

To work together toward our goals and be rewarded together when they are achieved.

To commit to leadership in every aspect of our business.

APC History

American Power Conversion, incorporated in March 1981, was founded by three

electronic power engineers from the Massachusetts Institute of Technology. At the time,

the research and development efforts of these three men were focused on solar electricity.

5


6/91

Over the next few years, government funding and incentives in the solar arena began to

dry up. In response, APC

shifted its focus to power

protection, introducing its first

UPS in 1984, the 750. The need

for capital to support this

growing business was satisfied

in July 1988 when APC became

a publicly traded company. The stock, trading under the symbol "APCC," was priced at

$.125 per share when adjusted for stock splits.

During this time, it was well known that computer systems required back-up power

solutions. It was quite common for a mainframe computer to have a large uninterruptible

power supply (UPS) and generator installed in tandem. APC came at the market from a

different perspective. Industry trends involving the personal computer made APC

management realize that smaller UPSs were necessary for the market that included

personal computers, PC servers and their networks.

Over the years, APC has developed a global, end-to-end, product offering targeted at four

strategic application areas: Home/Small Office; Business Networks; Access Providers

and Data Centers & Facilities. Internal product development has been augmented with

strategic acquisitions to form an industry leading product portfolio. Throughout the

world, the APC brand has become synonymous with quality power back-up and

management solutions.

6


7/91

Today, APC is a leader in its industry, employing over 5,000 people worldwide, and is

listed among the prestigious Fortune 1000, Forbes 500, Nasdaq 100 and S&P 500

rankings.

Executive Leadership

Laurent Vernerey

President and CEO

Karen Miranda

Chief Financial Officer

Jim Simonelli

Senior Vice President

Chief Technology

Officer

Neil Rasmussen

Senior Vice President of

Innovation

Rob McKernan

Leonid Mukhamedov

7
http://www.apc.com/site/company/index.cfm/company/executive-leadership/laurent-vernerey/http://www.apc.com/site/company/index.cfm/company/executive-leadership/karen-miranda/http://www.apc.com/site/company/index.cfm/company/executive-leadership/jim-simonelli/http://www.apc.com/site/company/index.cfm/company/executive-leadership/neil-rasmussen/http://www.apc.com/site/company/index.cfm/company/executive-leadership/rob-mckernan/http://www.apc.com/site/company/index.cfm/company/executive-leadership/leonid-mukhamedov/http://www.apc.com/site/company/index.cfm/company/executive-leadership/laurent-vernerey/http://www.apc.com/site/company/index.cfm/company/executive-leadership/karen-miranda/http://www.apc.com/site/company/index.cfm/company/executive-leadership/jim-simonelli/http://www.apc.com/site/company/index.cfm/company/executive-leadership/neil-rasmussen/http://www.apc.com/site/company/index.cfm/company/executive-leadership/rob-mckernan/http://www.apc.com/site/company/index.cfm/company/executive-leadership/leonid-mukhamedov/


8/91

President

Americas

President

Europe, Middle East and Africa

Philippe Arsonneau

President

Asia Pacific and Japan

Chenhong Huang

Senior Vice President

Greater China

WORKING CAPITAL MANAGEMENT LETREATURE

The perfect world does not requires or concentrates about current assets or current

liabilities because there would not be uncertainty, no transaction costs, information

search costs, scheduling costs or production and technology constraints. The unit cost of

production would not vary with the quantity produced. Capital, Labor and products

markets shall be perfectly competitive and would reflect all available information. Thus

8
http://www.apc.com/site/company/index.cfm/company/executive-leadership/philippe-arsonneau/http://www.apc.com/site/company/index.cfm/company/executive-leadership/chenhong-huang/http://www.apc.com/site/company/index.cfm/company/executive-leadership/philippe-arsonneau/http://www.apc.com/site/company/index.cfm/company/executive-leadership/chenhong-huang/


9/91

in such an environment, there would be no advantage for investing in short term assets.

Whereas, the world in which we live is not perfect. It is characterized by considerable

amount of uncertainty regarding the demand, market price, quality and availability of

own products and those of suppliers. There are transaction costs for purchasing or selling

goods or securities. Information is costly to obtain and is not equally distributed. There

are spreads between the borrowing and lending rates for investments and financing of

equal risk. Similarly each organization is faced with its own limits on the production

capacity and technology it can employ. There are fixed as well as variable costs

associated with producing goods. In other words, the markets in which real firms operate

are not perfectly competitive.

These real world facts introduce problems and require the necessity of working capital.

The most important areas in the day to day management of the firm, is the management

of working capital. Working capital management is the functional area of finance that

covers all the current accounts of the firm. It is concerned with management of the level

of individual current assets as well as the management of total working capital. Working

capital management involves the relationship between a firm's short-term assets and its

short-term liabilities. The goal of working capital management is to ensure that a firm is

able to continue its operations and that it has sufficient ability to satisfy both maturing

short-term debt and upcoming operational expenses. The management of working capital

involves managing inventories, accounts receivable and payable, and cash.

9


10/91

For example, an organization may be faced with an uncertainty regarding availability of

sufficient quantity of crucial inputs in future at reasonable price. This may necessitate the

holding of inventory ie., current assets. Similarly an organization may be faced with an

uncertainty regarding the level of its future cash inflows and insufficient amount of cash

may incur substantial costs. This may necessitate the holding of a reserve of short

term marketable securities, again a short term capital asset. The unpredictable and

uncertain global market plays a vital role in working capital. Though the globalization of

economy and free trading of products envisages the continuous availability of products

but how much its cost effective and quality based varies concern to concerns.

Working capital refers to the funds invested in current assets, ie., investment in stocks,

sundry debtors, cash and other current assets. Current assets are essential to use fixed

assets profitably. The term current assets refers to those assets which in the ordinary

course of business can be converted into cash within one year without undergoing

diminish in value and without disrupting the operations of the firm. The current assets are

cash, marketable securities, accounts receivable and inventory. Current liabilities are

those which are to be paid within a year out of the current assets or earnings of the

concern. The current liabilities are accounts payable, bills payable, bank overdraft and

outstanding expenses.

The financial manager plays a vital role in management of working capital. The financial

management of any business organization involves the three following vital functions:

10


11/91

1. Management of Long Term Assets

2. Management of Long Term Capital

3. Management of Short Term Assets and Liabilities

In most of the organizations the first & second one which refers to Capital Budgeting and

Capital Structure respectively will be maintained and cope up with organization growth.

The third one which refers to Working Capital Management requires more skills for

sustaining and steady growth rate for any organization.

The working capital management includes decisions

i. How much stock/inventory to be hold

ii. How much cash/bank balance should be maintained?

iii. How much the firm should provide credit to its customers?

iv. How much the firm should enjoy credit from its suppliers?

v. What should be the composition of current assets?

vi. What should be the composition of current liabilities?

For eg., a machine cannot be used without raw material. The investment on the purchase

of raw material is identified as working capital. It is obvious that a certain amount of

funds is always tied up in a raw material inventories, work in progress, finished goods,

consumable stores, sundry debtors and day to day cash requirements. However the

businessman also enjoys credit facilities from his suppliers who may supply raw material

on credit. Similarly, a businessman may not pay immediately for various expenses. For

11


12/91

instance, the laborers are pain only periodically. Therefore, a certain amount of funds is

automatically available to finance the current assets requirements. However, the

requirements for current assets are usually greater than the amount of funds payable

through current liabilities. The satisfactory level of working capital is the main object of

working capital management. Any organization which fails to maintain satisfactory level

of working capital may be forced to bankruptcy. The current assets should always be

large enough to cover its current liabilities in order to ensure a reasonable margin of

safety. Thus the interaction between current assets and current liabilities is the main aim

of working capital management.

The basic objective of financial management is to maximize shareholders wealth.

This objective can be achieved when the company earns sufficient profits. The amount of

profits largely depends on the magnitude of sales. But, sales do not convert into cash

instantly. There is time lag between the sale of goods and the receipt of cash. Working

capital is required to purchase the materials, pay wages and other expenses in order to

sustain sales activity the time lag. The time gap between the sale of goods and realization

of cash is called operating cycle. What operating cycle stands for?

a. Conversion of cash into raw materials

b. Conversion of raw materials to finished goods

c. Conversion of finished goods into receivables

d. Conversion of receivables into cash

12


13/91

Where is Working Capital Analysis Most Critical?

On the one hand, working capital is always significant. This is especially true from the

lender's or creditor's perspective, where the main concern is defensiveness: can the

company meet its short-term obligations, such as paying vendor bills?

But from the perspective of equity valuation and the company's growth prospects,

working capital is more critical to some businesses than to others. At the risk of

oversimplifying, we could say that the models of these businesses are asset or capital

intensive rather than service or people intensive. Examples of service intensive

companies include H&R Block, which provides personal tax services, and Manpower,

which provides employment services. In asset intensive sectors, firms such as telecom

and pharmaceutical companies invest heavily in fixed assets for the long term, whereas

others invest capital primarily to build and/or buy inventory. It is the latter type of

business - the type that is capital intensive with a focus on inventory rather than fixed

assets - that deserves the greatest attention when it comes to working capital analysis.

These businesses tend to involve retail, consumer goods and technology hardware,

especially if they are low-cost producers or distributors.

2.Concepts & Definitions of Working Capital

There are two concepts of working capital

1.Gross Working Capital: It represents the total current assets and is also referred to as

circulating capital because current capital as current assets, are circulating in nature.

13


14/91

2.Net Working Capital: It is a measure of liquidity and it can be defined in two ways.

a.The most usually implied definition of net working capital is that it represents the

difference between current assets and current liabilities. Some people also define it as

excess of current assets over the current liabilities.

b.It is that portion of the firms current assets, which is financed by long term funds.

Nett working capital as a measure of liquidity is generally not very useful to compare the

performance of different units due to difference in scales of operation, efficiency, and

creditability in the market etc., between the different firms. However it is a very useful

measure for internal control purposes. It can also be used to compare the liquidity

position of the same unit over a period of time. This will help in maintaining the

acceptable level of net working capital.

Implementing an effective working capital management system is an excellent way for

many companies to improve their earnings. The two main aspects of working capital

management are ratio analysis and management of individual components of working

capital.

A few key performance ratios of a working capital management system are the working

capital ratio, inventory turnover and the collection ratio. Ratio analysis will lead

management to identify areas of focus such as inventory management, cash management,

accounts receivable and payable management.

3. Objectives of Working Capital Management

14


15/91

The main objective is to ensure the maintenance of satisfactory level of working capital

in such a way that it is neither inadequate nor excessive. It should not only be sufficient

to cover the current liabilities but ensure a reasonable margin of safety also.

i. To minimize the amount of capital employed in financing the current assets. This also

leads to an improvement in the Return of Capital Employed.

ii. To manage the current assets in such a way that the marginal return on investment in

these assets is not less than the cost of capital acquired to finance them. This will ensure

the maximization of the value of the business unit.

iii. To maintain the proper balance between the amount of current assets and the current

liabilities in such a way that the firm is always able to meet its financial obligations,

whenever due. This will ensure the smooth working of the unit without any production

held ups due to paucity of funds.

4. Types of Working Capital

A. Permanent Working Capital

B. Temporary Working Capital

Permanent Working Capital:

The operating cycle is a continuous feature in almost all the going concerns and therefore

creates the need for working capital and their efficient management. However the

magnitude of working capital required will not be constant, but will fluctuate. At any

15


16/91

time, there is always a minimum level of current assets which is constantly and

continuously required by a business unit to carry on its operations. This minimum amount

of current assets, which is required on a continuous and uninterrupted basis is after

referred to as fixed or permanent working capital. This type of working capital should be

financed (along with other fixed assets) out of long term funds of the unit. However in

practice, a portion of these requirements also is met through short term borrowings from

banks and suppliers credit.

For eg., In a manufacturing unit, basic raw materials required for production has to be

available at all times and this has to be financed without any disturbance.

Temporary Working Capital

Any amount over and above the permanent level of working capital is variable,

temporary or fluctuating working capital. This type of working capital is generally

financed from short term sources of finance such as bank credit because this amount is

not permanently required and is usually paid back during off season or after the

contingency. As the name implies, the level of fluctuating working capital keeps on

fluctuating depending on the needs of the unit unlike the permanent working capital

which remains constant over a period of time.

5. Determinants of Working Capital

Working capital management is an indispensable functional area of management.

However the total working capital requirements of the firm are influenced by the large

number of factors. It may however be added that these factors affect differently to the

different units and these keep varying from time to time. In general, the determinants of

working capital which are common to all organizations can be summarized as under:

16


17/91

a. Nature and Size of Business

b. Production Cycle

c. Business Cycle

d. Production Policy

e. Credit Policy

f. Growth & Expansion

g. Proper availability of raw materials

h. Profit level

i. Inflation

j. Operating Efficiency

6. Estimating of working capital requirements

The amount of the different constituents of the working capital such as debtors, cash,

inventories, creditors, etc are estimated separately and the total amount of working capital

requirement is worked out accordingly.

Percent Sales method is the most simple and widely used method in combination with

other scientific methods. A ratio is determined for estimating the future working capital

requirements. This is generally based on the past experience of the management as this

ratio varies from industry to industry and unit to unit within the same industry.

Operating Cycle method points towards the length of time considered necessary to

complete the following cycle of events:

17


18/91

a. Purchase of raw materials by converting cash

b. Storage of raw materials including for buffer stock and safety margin

c. Conversion of raw materials into work in progress

d. Conversion of work in progress into finished goods

e. Conversion of finished goods into debtors and bills receivable

f. Conversion of debtors into cash

Cash Conversion Cycle is a measure of working capital efficiency, often giving valuable

clues about the underlying health of a business. The cycle measures the average number

of days that working capital is invested in the operating cycle. It starts by adding days

inventory outstanding (DIO) to days sales outstanding (DSO). This is because a company

"invests" its cash to acquire/build inventory, but does not collect cash until the inventory

is sold and the accounts receivable are finally collected.

The finance profession recognizes the three primary reasons offered by economist John

Maynard Keynes to explain why firms hold cash. The three reasons are for the purpose of

speculation, for the purpose of precaution, and for the purpose of making transactions.

All three of these reasons stem from the need for companies to possess liquidity.

Speculation: Economist Keynes described this reason for holding cash as creating the

ability for a firm to take advantage of special opportunities that if acted upon quickly will

favor the firm. An example of this would be purchasing extra inventory at a discount that

is greater than the carrying costs of holding the inventory.

Precaution: Holding cash as a precaution serves as an emergency fund for a firm. If

expected cash inflows are not received as expected cash held on a precautionary basis

18


19/91

could be used to satisfy short-term obligations that the cash inflow may have been bench

marked for.

Transaction: Firms are in existence to create products or provide services. For

providing of services and creating of products results in the need for cash inflows and

outflows. Firms hold cash in order to satisfy the cash inflow and cash outflow needs that

they have.

Receivable are essentially loans extended to customers that consume working capital;

therefore, greater levels of DIO and DSO consume more working capital. However, days

payable outstanding (DPO), which essentially represent loans from vendors to the

company, are subtracted to help offset working capital needs. In summary, the cash

conversion cycle is measured in days and equals DIO + DSO DPO:

7. Sources of Working Capital

The working capital necessary and what constitutes working capital have been analyzed

in depth. Now we look out what are the ways we can generate working capital.

a. Trade Credits

b. Bank Credit

c. Current provisions and non-bank short term borrowings: and

d. Long term sources ie., equity share capital, preference share capital and

other long term borrowings.

Short term source of funds are generally available at comparatively lower costs but

theoretically these funds can be called back any moment and therefore it is more

19
http://www.investopedia.com/terms/d/dpo.asphttp://www.investopedia.com/terms/d/dpo.asphttp://www.investopedia.com/terms/d/dpo.asphttp://www.investopedia.com/terms/d/dpo.asphttp://www.investopedia.com/terms/d/dpo.asp


20/91

appropriate to meet at least two thirds of the permanent working capital requirements

from the long term sources. The advantages of long term sources is, it reduces risk as

there is no need to repay the loans at frequent intervals and funds can be employed

gainfully and it increases liquidity.

8. Summary

Traditional analysis of working capital is defensive; it asks, "Can the company meet its

short-term cash obligations?" But working capital accounts also tell you about the

operational efficiency of the company. The length of the cash conversion cycle

(DSO+DIO-DPO) tells you how much working capital is tied up in ongoing operations.

And trends in each of the days-outstanding numbers may foretell improvements or

declines in the health of the business.

Implementing an effective working capital management system is an excellent way for

many companies to improve their earnings. The two main aspects of working capital

management are ratio analysis and management of individual components of working

capital. Thus the importance of adequate of working capital in commercial undertakings

can never be over emphasized. The various studies conducted by the Bureau of Public

Enterprises have shown that one of the reasons for the poor performance of public sector

undertakings in our country has been the large amount of funds locked up in working

capital. This results in over capitalization. Over Capitalization implies that a company has

too large funds for its requirements, resulting in a low rate of return a situation which

implies a less than optimal use of resources. Insolvency risk is there in the case of under

capitalization of working capital. Hence working capital management plays a pivotal role

in growth or to sustain in market for any organization.

20


21/91

INTRODUCTION

Proper management of working capital is very important for the success of an

enterprise. Constant management is required to maintain appropriate levels in the various

working capital components. It aims at protecting the purchasing power of assets and

maximizing the return on investment. It has been found that the major portion of a

financial managers time is utilized in the management of working capital.

21


22/91

The management of working capital also helps the management in evaluating

various existing or proposed financial constraints and financial offerings. The two vital

aspects of corporate business life are liquidity and profitability

WORKING CAPITAL

Meaning:

The term working capital refers to that portion of an organization capital which is

required in the short-run to finance current assets such as debtors, cash balance, bank

balance, marketable securities, bills and inventory. The value of these assets keeps

changing over a period.

Working capital has to be regarded as one of the conditioning factors in the long-

run operations of a firm, which is often inclined to treat it as an issue of short- run

analysis and decision-making. The skills of working management are somewhat unique

thought the goals are the same as in managing warrant asset individually viz. to make

an efficient use of fonder for minimizing the risk of breaks to attain profit objectives.

DEFINITION

Working capital is amount of funds necessary to cover the costs of operating the

enterprise. According to the institute of chartered accountants of India, working capital

means the funds available for day-to-day operations of an enterprise.

22


23/91

CONCEPTS OF WORKING CAPITAL

There are two concepts regarding the meaning of working capital.

a) Net working capital

b) Gross working capital

NET WORKING CAPITAL

The net working capital concept is a qualitative concept indicating the soundness by

the current ratios viz Current assets or current liabilities. The net concept of working

capital is suitable for proprietary, capital and management are united.

Net working capital to the difference between current assets and current liabilities are

those claims of outsiders, which are expected to mature for payment within an accounting

year and include creditors (accounts payable), bills payable and outstanding expenses.

Net working capital can be positive or negative. A positive net working capital will

arise when current assets exceed current liabilities. A negative net working capital occurs

when current liabilities are in excess of current assets. This concept refers to the

differences between, the net working capital help the management loan for permanent

23


24/91

sources for its financing since working capital under this approach does not increase with

increases in short-term borrowings

GROSS WORKING CAPITAL

The working capital refers to the firms total investment in current assets. It is also

called the circulating capital. It is equal to the total sum of current assets only and it may

represent both owned capital as well as loan capital used for financing the current assets.

Current assets are the assets which can be converted into cash within an

accounting year and include cash, short-term securities, and debtors (accounts receivable

or book debts) bills receivables and stock (inventory).

RATIONALITY OF THE STUDY

Working capital management policies have a great effect on firms profitability,

liquidity and its structural health. Therefore, the basic goal of working capital

management is to manage each firms current assets and current liabilities in such a way

that, as acceptable level of net working capital is always maintained in the business.

24


25/91

Each current asset must be managed in order to maintain the firms liquidity wile not

keeping too high level of any one of them. 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.

As a matter of fact a business cannot survive in the absence of a satisfactory ratio

between its current assets and current liabilities. Further more its ability to prosper will

be largely determined by the composition of the current assets pool. Management in

setting policies with respect to general operations, purchasing, financing, expansion and

dividend must work within the limitations set by the working capital position.

Hence, we can conclude that the strategies of a firm should be in such a way that it

establishes company trade-off between current assets and current liabilities properly for

achieving outstanding results. Thus, the estimation of working capital affects the firms

stability, which follows the basis for this analysis undertaken. This analysis includes not

only finding out reasons for bad outcomes in the past time but also for justifying the

estimations.

LITERATURE REVIEW

FINANCE:

25


26/91

In our present day economy, finance is defined as the provision of money at the time

when it is required. Every enterprise whether big, medium or small, needs finance to

carry on its operations and to achieve its targets. Finance refers to the management of

flow of money through an organization. It concerns wit the application of skills in the

manipulation, use and control of money. In fact, finance is so indispensable today that it

is rightly said that it is the lifeblood of an enterprise. Without adequate finance, no

enterprise can possibly accomplish its objectives.

WORKING CAPITAL:

Working capital is the excess of current assets over current liabilities. It is

required for running the day-to-day affairs of the unit. According to Shabin, working

capital is the amount of funds necessary to cover the cost of operating the enterprise.

According to Genstenberg, working capital means current assets of a company that are

changed in the ordinary course of business from one form to another. For e.g. from

cash to inventories, inventories to receivables, receivables to cash.

NEED FOR WORKING CAPITAL:

Every business needs some amount of working capital. The need for working

capital arises due to the time gap between production and realization of cash from sales.

There are time gaps in purchase of and production of and production; production

and sales and sales and realization of cash. Then, working capital is needed for the

following purposes.

For the purchase of raw materials, components and spares.

26


27/91

To pay wages and salaries.

To incur day-to-day expenses and overhead costs such as fuel power and office expenses.

To meet the selling costs such as packing, advertising etc.

To provide credit facilities to the customers.

To maintain the inventories of raw materials, work-in-progress, store spares and finished

stock.

CONCEPT OF WORKING CAPITAL

There are two concepts of working capital

1. Gross Working Capital

2. Net Working Capital

GROSS WORKING CAPITAL

Gross working capital, simply called as working capital refers to the firms investment in

current assets. Current assets are the assets, which in ordinary course of business can be

converted into cash within an accounting year.

27


28/91

Examples of Current Assets:

Cash and Bank Balances

Short term loans and advances

Bill Receivables

Sundry Debtors

Inventory

Prepaid Expenses

Accrued Income

Money Receivable in 12 month

The gross working capital concept focuses attention of two aspects of current assets

management.

Optimum investment in current assets and

Financing of current assets.

The consideration of the level of investment in current assets should avoid two danger

points-excessive and inadequate investments in current arranging funds to finance current

assets. Whenever a need for working capital funds arises due to the increasing level of

business activity or for any other reason arrangement should be made quickly.

NET WORKING CAPITAL

Net working capital refers to the difference between the current assets and current

liabilities. Current liabilities are those claims of outsides, which are accepted, to mature

28


29/91

for payment with an accounting year and include creditors, bills payable and outstanding

expenses.

Net working capital = current assets current liabilities

Net working capital can be positive or negative. A positive net working capital will arise

when current assets exceeds current liabilities. It is a quantitative concept. It indicates the

liquidity position of the firm and suggests the extent to which working capital needs may

be financed by permanent sources of funds.

TYPES OF WORKING CAPITAL

Working capital can be classified into two categories i.e.

Permanent working capital

Temporary or variable working capital

PERMANENT WORKING CAPITAL

It is the minimum amount of investment in all current assets which is required at all

times to carry out minimum level of business activities. Tandon Committee has reserved

to this type of working capital as Core Current Assets.

CHARECTERISTICS OF PERMANENT WORKING CAPITAL

Amount of permanent working capital remains in the business in one form or

another. It also grows with the size of the business. It is permanently needed for the

business, and therefore, it should be financed out of long term funds.

VARIABLE WORKING CAPITAL

29


30/91

The amount of working capital over permanent working capital is known as

variable working capital. The amount of such working capital keeps on fluctuating from

time to time on the business activities. It may again be subdivided into seasonal working

capital and special working capital. Seasonal working capital is required to meet the

seasonal demands of busy periods occurring at stated intervals on the other hand, special

working capital is required to meet extraordinary needs for contingencies.

APPROCHES FOR FINANCING WORKING CAPITAL

There are three approaches to financing the working capital.

Matching approach

Conservation approach

Aggressive approach

MATCHING CONCEPT

The firm can adopt a financial plan, which matches the expected life of assets with the

expected life of the source of funds raised to finance assets. The firm follows matching

approach, long term financing will be used to finance fixed assets and permanent current

assets and short term financing temporary or variable current assets. However, it should

be realized that exact matching is not possible because of the uncertainty about the

expected life of the assets. The firms fixed assets and permanent current assets are

financed with long-term funds and as the level of these assets increases, the long term

financing level also increases. The temporary or variable current assets are financed with

30


31/91

short-term funds and as their level increases, the level of short-term financing also

increases.

2.COSERVATIVE APPROACH

A firm is practice may adopt a conservative approach in financing its current and fixed

assets. The financing policy of the firm is said to be conservative when it depends more

on long-term funds for financing needs. Under a conservative plan, the firm finances its

permanent assets and also a part of temporary current assets with long term financing. In

the periods when the firm has no need for temporary current assets, the idle long-term

funds can be invested in the tradable securities to conserve liquidity. The conservative

plan relies heavily on long term financing.

3.AGGRESIVE APPROACH

A firm may be aggressive in financing its assets. A firm follows aggressive policy

when it uses more short-term financing than warranted by the matching plan. Under an

aggressive policy, the firm financing a part of its permanent current assets with short-

term financing. Some extremely aggressive firms may even finance a part of their fixed

assets with short-term financing.

DANGER OF EXCESSIVE WORKING CAPITAL

A firm may be tempted to over trade and lose heavily.

Unable to extract benefits of customer credit.

31


32/91

The situation may lead to unnecessary purchases and accumulation of inventories. This

cause more chances of theft, waste, losses etc.

There arises an imbalance between liquidity and profitability.

Excessive working capital means funds are idle.

The situation leads to greater production, which may not be having matching demand.

The excess of working capital leads to carelessness about cost of production.

DETERMINANTS OF WORKING CAPITAL

The need of working capital is not always the same it varies from year to year or even

month to month depending upon a number of factors. There is no set of rules or formulae

to determine the working capital needs of the firm. Each factor has its own importance

and the importance of the factors changes for a firm overtime.

In order to determine the proper amount of working capital of a concern, the following

factors should be considered carefully.

1.NATURE OF BUSINESS

The amount of working capital is basically related to the nature and volume of

business in concerns where the cost of the raw materials to be used in the manufacturing

of a product is very large in proportion to its total cost of manufacturing the requirement

of working capital will be very large.

32


33/91

2.SIZE OF BUSINESS UNIT

The size of the business unit has an important impact on its working capital needs.

Size ma be measured in terms of scale of operation. A firm with larger scale of operation

will need more working capital than a small firm.

3.SEASONAL VARIATION

Seasonal industries require more working capital to stock the raw materials during the

season.

4.TIME CONSUMED IN MANUFACTURING

The average time taken in the process of manufacture is also an important factor in

determining the amount of working capital. The longer the period of manufacturing the

larger the inventory required.

5.TURNOVER OF CIRCULATING CAPITAL

Rapidly of turnover determines the amount of working capital. The faster the sales the

larger the turnover hence less working capital.

6.GROWTH AND EXPANSION

Growing concerns requires more working capital than those that are static. It is

logical to expect larger amount of working capital in a growing concern to meant its

growing needs of funds.

7.INVENTORY TURNOVER

33


34/91

With a better inventory control, a firm is able to reduce its working capital

requirements. If the inventory turnover is high the working capital requirements will be

low.

8.DIVIDEND POLICY

Dividend policy and working capital are interrelated. Management takes a view of

current assets before declaring a dividend.

9.PRICING LEVEL CHANGES

Rising price level requires more working capital to maintain the same level of current

assets.

10.TERM OF PURCHASE AND SALE

Terms of purchase and sales affect the amount of working capital. The practice of

cash purchases with credit sales requires more working capital.

SOURCES OF WORKING CAPITAL

After determining the level of working capital on the basis of various determinants the

next step is to consider how it will be financed. A large manufacturing concern may

procure funds from various sources to meet its working capital requirements from time to

time. For the convenience of study the sources of working capital may be classified

under two heads.

34


35/91

Sources of long term or regular working capital

Sources of short term or seasonal working capital

Sources of Long Term Working Capital:

The long term working capital requirements can be met from the following sources.

1.ISSUE OF SHARES

It is the safest way of procuring permanent and regular working capital without any

fixed charges.

2.ISSUE OF DEBENTURE

Regular and long term working capital may be obtained at lower cost of trade on

equity.

3.RETAINED PROFITS

Accumulated large profits are also considered to be a good source of financing long-

term working capital requirements. It is the best and the cheapest source of finance.

4.SALE OF FIXED ASSETS

If there is any idle fixed assets in the firm can be sold out and the proceeds may be

utilized for financing the working capital requirements.

Sources of Short term Working Capital:

The sources of short-term working capital may be classified in two heads.

35


36/91

1. Internal sources

2. External sources

INTERNAL SOURCES

Under this category the sources of working capital are tapped from within the internal

sources are depreciation funds, provision for taxation and accrued expenses.

1.DEPRICIATION FUND

Depreciation funds created out of profits provided they are invested in or represented

by assets.

2.PROVISION FOR TAX

There remains a time lag between making the provision for and payment of taxation.

A company may utilize such provision during the intermittent period temporarily.

3.ACCURED EXPENSES

The company sometimes postpones the payment of certain expenditure due to

finalization of the accounts. These accrued expenses also constitute an important source

of working capital.

EXTERNAL SOURCES

External sources mean the sources providing finance for companys working capital

other than those of internal sources. These may be enumerated as given below.

36


37/91

1.NORMAL TRADE CREDIT

Creditors provide short-term finance to the company by selling the goods, inventories

and equipment on the basis of deferred payment. It is very common source of short-term

finance and normally every concern use this source as a normal trade practice.

2.CREDIT PAPERS

Bills payable or promissory note, which may be discounted from bankers for meeting

short term capital by the drawer.

3.BANK CREDIT

The greater part of the working capital is supplied by commercial banks to their

customers through direct advances in the shape of loans, cash credit or over draft and

through discounting the credit, papers, e.g. bills payable and promissory notes etc.

4.CUSTOMER CREDIT

Advance may also be obtained from customers against the contracts entered into b the

enterprise such advances are generally asked for, by the companies manufacturing large

plants and machinery involving longer time in completing the process of manufacturing

e.g. ship building industries. The amount can be used for purchasing raw materials,

paying wages and so on.

5.PUBLIC DEPOSITS

37


38/91

Most of the companies in recent years depend on this source to meet their working

capital requirements. Under the companies Act 1956 a company is authorized to raise

funds equal to 25% of paid up capital and free reserves b this source.

6.GOVERNMENT ASSISTANCE

Central and state governments of the country provide short-term finances to industries

or businesses by allowing tax concessions, sanctioning direct loans or grants to industries

or a class of industries to assist their production programs etc.

WORKING CAPITAL POLICY

Working capital management policies have a great effect on firms profitability,

liquidity and its structural health. A finance manager should therefore, chalk out

appropriate working capital policies in respect of each competent of working capital so as

to ensure high profitability, proper liquidity and sound structural health of the

organization.

In order to achieve this objective the financial manager has to perform basically

following two functions.

1. Estimating the amount of working capital.

2. Sources from which these funds have to be raised.

38


39/91

OBJECTIVES OF WORKING CAPITAL MANAGEMENT

The objectives of working capital management are twofold:

1. Maintenance of working capital and

2. Ability of ample funds at the time of need.

The basic goal of working capital management is to manage each of the funds current

assets and current liabilities in such a way that an acceptable level of networking capital

is always maintained in the business.

WORKING CAPITAL FORECAST

There are number of methods to determine the working capital needs.

1. By Determining the Amount of Current Assets and Current Liabilities:

The assessment of working capital requirement can be made on the basis of the

current assets required for the business and the credit facilities available for the

acquisition of such current assets from the current liabilities.

2. Cash Forecasting Method:

In this method the position of cash at the end of the period is shown after

considering the receipts and payments to be made during the period. Its form assumes

more or less a summary of cashbook. This shows the deficiency or surplus of cash as the

definite point of time.

3. The Balance Sheet Method:

39


40/91

The Balance sheet method of forecast is made up of the various assets and

liabilities of the business. Afterwards, the difference between the two is taken which will

indicate either cash surplus or deficiency.

4. Profit and Loss adjusted Method:

Under this method the forecasted profits are adjusted after adding the cash

inflows and deducting the cash outflows. The basic idea under this method is to adjust

the estimated profit on cash basis.

5. Working Capital as a Percentage of Sales:

Under this method the working capital is to be related to sales and calculated

as a percentage of sales.

6. Working Capital as a Percentage of Fixed Assets:

In this method working capital is related to fixed capital investment.

Therefore, it is projected as a percentage of fixed capital investment

OPERATING CYCLE:

Working capital is required because of the time gap between the sales and their actual

realization in cash. This time gap is technically terms as operating cycle of the business.

In case of manufacturing company, the operating cycle is the length of time necessary

to complete the following cycle of event.

Conversion of cash into raw materials.

40


41/91

Conversion of raw materials into work in progress.

Conversion of work in progress into finished goods.

Conversion of finished goods into account receivables.

Conversion of accounts receivable into cash.

This cycle is continuous phenomena. In case of Trading Firm the operating cycle

will include the length of time required to:

Cash into inventories.

Inventories into accounts receivables.

Accounts receivables into cash.

In case of Financing Firm the operating cycle includes the length of time taken for 1

year.

Conversion of cash debtors, and

Conversion of debtors into cash.

WORKING CAPITAL TURNOVER RATIO

It measures the efficiency of the employment of working capital. Generally higher the

turnover, greater is the efficiency and larger the sale of profits. Working capital turnover

ratio can be calculated wit help of the following formula.

SALES

Working Capital Turnover Ratio = ---------------------------------------

NET WORKING CAPITAL

41


42/91

Permanent and Variable Working Capital

This minimum level of current assets is referred to as permanent or fixed working

capital. The extra working capital, needed to support the changing production and sales

activities is called fluctuating working capital. Difference between permanent and

temporary working capital .It is shown that permanent working capital is stable over

time, while temporary working capital is fluctuating some time increasing and sometimes

decreasing.

SCOPE OF THE STUDY

The scope of the study is concerned with the proper management of funds, as much to

know how effectively funds are utilized for meeting short-term and long-term needs.

The basic scope of the researcher is to enroll the firms involvement in rising of funds

and their effective utilization keeping in view the overall objectives of the firm.

42


43/91

The scope of the study enabled the researcher to analyze the risk return possibilities in

the employment of funds, applying analytical tools to procure the profitability of the

business.

Ascertaining the working capital will come to know either inadequacy or excess funds

with the concern. The inadequacy of funds will adversely affect the day-to-day working

of the concern where as excess funds may tempt management to include in extravagant

spending.

Analyzing the capital structure, inferences the kind and proportion of different

securities for raising funds and proper decision about the kind of securities to be

employed which influences the short-term and long-term financial planning of an

enterprise.

Finding the investment pattern is essential so that it will come to know the source of

funds. The decision-making technique such as capital budgeting may be applied in

making decision about capital budgeting.

Assessing cash position of the concern will achieve greater task, such as cash

requirements for,

Purchase of raw materials

Making payment to creditors

Meet wage bill

Meet day-to-day expenses

43


44/91

And different sources of cash may be from

Cash sales

Collection of debtors

Preparing cash flow statement is able to find us the various sources and applications.

Some of the financial control devices are,

Return on investment

Budgetary control

Ratio analysis will help in evaluating the performance in various areas and take

corrective measures wherever needed.

7. OBJECTIVES OF THE STUDY

To determine working capital requirement.

To view fluctuations in working capital changes.

To ascertain the trend of sales and working capital for next year.

To analyze the relationship between sales and debtors.

To study ratio analysis of working capital.

To analyze the overall performance of the company.

To suggest measures for improvement, if necessary.

44


45/91

STATEMENT OF NET WORKING CAPITAL FOR 2010

PARTICULARS 2010

CURRENT ASSETS

Sundry Debtors 58.69

Stock 632.08

Cash and Bank 2.20

Loans & Advances 223.32

TOTAL 916.29

Current Liability & Provisions

Current Liability & Provisions 1087.94

45


46/91

TOTAL 1087.94

NET WORKING CAPITAL = CURRENT ASSETS CURRENT LIABILITY

CURRENT ASSETS = 916.29

CURRENT LIABILITY = 1087.94

-------------

NET WORKING CAPITAL = (171.65)

-------------


PARTICULARS 2011

CURRENT ASSETS


Stock 1541.18

Cash and Bank 8.41


TOTAL 1878.45



TOTAL 1877.68

46


47/91




-------------

NET WORKING CAPITAL = 0.77

-------------


PARTICULARS 2012

CURRENT ASSETS


Stock 1726.59

Cash and Bank 5.24


TOTAL 2243.04



TOTAL 1169.35



47


48/91


-------------

NET WORKING CAPITAL = 1073.69

-------------

SCHEDULE OF CHANGES IN WORKING CAPITAL FOR 2010-2011

PARTICULARS 2010

lakhs)

2011

(lakhs)

CHANGES IN WORKING CAPITAL

INCREASE

(lakhs)

DECREASE

(lakhs)

CURRENT

ASSETS

Sundry debtors 58.69 115.97 - 57.28

Stock 632.08 1541.18 - 909.10

Cash and Bank 2.20 8.41 6.21 -

Loans & Advances 223.32 212.89 - 10.43

Total Current

Asset

916.29 1878.45

CURRENT

LIABILITIES

Current Liability

Provisions

1087.94 1877.68 789.74

Total current

Liability

1087.94 1877.68

Working Capital 171.65 0.77

Decrease in

Working Capital

- 170.88 1760.44

Total 171.25 171.25 1766.65 1766.55

48


49/91

INTERPRETATION:

There is a Net Decrease in working Capital of 170.88 lakhs due to decrease in current

assets like Sundry debtors, cash & bank, Loans & Advances, increase in current assets

(Fixed deposits) and also decrease in current liability (Liability and Provisions). The Net

effect is Net Decrease in Working Capital.

SCHEDULE OF CHANGES IN WORKING CAPITAL FOR 2011-2012

49


50/91

PARTICULARS 2011

(lakhs)

2012

(lakhs)

CHANGES IN WORKING CAPITAL

INCREASE

(lakhs)

DECREASE

(lakhs)

CURRENT

ASSETS

Sundry debtors 115.97 33.36 - 82.61

Stock 1541.18 1511.51 - 29.61

Cash and Bank 8.41 11.50 3.09 -

Loans & Advances 212.89 385.56 172.67 -

Total Current

Asset

1878.45 1941.93

CURRENT

LIABILITIESCurrent Liability

Provisions

1877.68 1374.73 - 566.49

Total Current

Liability

1877.68 1374.73

Working Capital 0.77 567.2

Increase in working

capital

566.43 - 566.43

Total 567.2 567.2 678.71 678.71I

INTERPRETATION:

There is a Net increase in working Capital of 566.43 lakhs due to decrease in current

assets such as fixed deposits, increase in current assets like sundry Debtors, Cash &

Bank, Loans & Advances and also decrease in current liability like Provisions. The Net

effect is Net Increase in Working Capital.

INTERPRETATION:

50


51/91

There is a Net increase in working Capital of 506.49 lakhs due to increase in current

assets like sundry Debtors, Cash & Bank, Loans & Advances and also decrease in current

liability like Provisions. The Net effect is Net Increase in Working Capital.

RATIO ANALYSIS

INTRODUCTION

Analysis and interpretation of financial statements with help of ratios is termed as

ratio analysis involves the process of computing, determining and presenting the

relationship of items or groups of items of financial statements ratio analysis was

pioneered by ALEXANDER WALL who presented a system of ratio analysis in the year

51


52/91

1909. Alexander contention was that interpretation of financial statements can be made

easier by establishing quantitative relationships between various items of financial

statements.

MEANING OF RATIO

A ratio is mathematical relationship between two items expressed in a quantitative

form.

Ratios can be defined as Relationships expressed in quantitative terms, between

figures which have cause and effective relationships or which are connected with each

other in some manner or the other.

Accounting ratios are designed to show how one number is related to another and the

meaning of such relationships. The ratio is worked out by dividing one number by

another number. Accounting ratios measure and indicate efficiency of an in all aspects.

STEPS IN RATIO ANALYSIS

Selection of relevant information: the first step in ratio analysis is to select a

relevant information from financial statements and calculate appropriate ratios required

for decision under consideration.

52


53/91

Comparison of calculated ratios: in order to assess the relative meaning, the ratios

calculated are compared with the past ratios and industry ratios.

Interpretation and reporting: the third in ratio analysis is to interpret the significance of

various ratios draw inferences and write a report. The report may recommend specific

action in the matter of the decision situation or may present alternatives with comparative

merits or it may just state the facts and interpretation.

ADVANTAGES OF RATIO ANALYSIS:

Forecasting: rations reveal the trends in costs, sale, profit and other interrelated facts,

which will be helpful in forecasting future events. Managerial control : ratios can be used

in instrument of control regarding sales, cost and profit.

Facilitates communication: ratios facilitate the communication function of

Management as ratios convey the information relating to the present and

the future quickly, force fully and clearly.

Measuring efficiency: - ratio help to know operational efficiency comparison of present

ratios with those of the past working and also with those of the other firms in the

industry.

Facilitating investment decisions: ratios are helpful in computing return on

investment. This helps the management in exercising effective decisions

regarding profitable avenues of investment.

53


54/91

LIMITATIONS OF RATIO ANALYSIS

Practical knowledge: the analyst should have through knowledge and experience

the firm and industry.

Ratios are means: ratios are not end in themselves but they are mean to achieve a

practical purpose or end.

Interrelationship: ratios are inter-related and therefore a single ratio cannot convey and

meaning. It has to be interpreted by reference to other related ratios to draw meaningful

conclusions.

Non Availability of standards and norms: ratios will be meaningful if they can be

compared with standards or norms. Expect for a few financial ratios, other ratios are lack

standards which are universally recognized

Change in price level: ratio analysis becomes redundant during periods of heavy price

fluctuations.

RATIOS

54


55/91

CURRENT RATIO

Current assets mean assets that will either be used up or converted into cash

within a years of time or normal operating cycle of the business, whichever is longer.

Current liabilities mean liabilities payable within a year or during the operating cycle of

the business, whichever is longer.

An ideal current ratio is 2. The ratio of 2 is considered as a safe margin of

solvency due to the fact that if the current assets are reduced to half, i.e., 1 instead of 2,

then also the creditors will be able to get their payments in full.

A higher current ratio would indicate inadequate employment of funds while a

poor current ratio is a danger signal to the management. It shows that business is trading

beyond its resources.

CURRENT RATIO = CURRENT ASSETS

CURRENT LIABILITIES

TABLE SHOWING CURRENT RATIO FOR THE YEAR 2008-2012

YEAR CURRENT CURRENT CURRENT

55


56/91

ASSETS LIABILITIES RATIO

2008-2009 916.29 1087.94 0.84

2009-2010 1878.45 1877.68 1.00

2010-2011 1941.93 1374.73 1.41

2011-2012 2243.04 1169.35 1.92

CURRENT RATIO FOR THE YEAR 2009-2012

56


57/91

INFERENCE:

The current ratio of 2:1 is considered as ideal ratio . the current ratio for

the last 4 accounting period shows increasing trend. The current ratio is stepping up due

to decreases in current liabilities. The ratio is health ratio

LIQUID RATIO

CURRENT RATIO

0.84 11.41

1.92

0

0.5

1

1.5

2

2.5

2009 2010 2011 2012

57


58/91

The liquid ratio gives a better picture of the firms capacity to meet is short term

obligations out of the short-term assets. However it is difficult to establish a standard fo

this ratio and it is also dangerous to rely too much on a 1:1.

LIQUID RATIO = LIQUID ASSETS

CURRENT LIABILITIES

10.3.2TABLE SHOWING LIQUID RATIO FOR THE YEAR 2009-2012

YEAR LIQUID ASSETS CURRENT

LIABILITIES

RATIO

2008-2009 284.21 1087.94 0.26

2009-2010 337.28 1877.68 0.18

2010-2011 430.42 1374.73 0.31

2011-2012 516.45 1169.35 0.44

58


59/91

0

0.05

0.1

0.15

0.2

0.25

0.3

0.35

0.4

0.45

0.5

2009 2010 2011 2012

INFERENCE:

The liquid ratio refers to asset quickly convertible into cash .The liquid ratio

for the last 4 years is increasing. The last year (2012) ratio is 0.44. It is not in good liquid

position

59


60/91

CASH POSITION RATIO:

This ratio is also called Absolute Liquidity ratio or super quick ratio. This ratio is

calculated when liquidity is highly restricted in terms of cash and cash equivalents. This

ratio measures liquidity in terms of cash and near cash items and short term current

liabilities.

Cash & Bank Balances

CASH POSITION RATIO = ---------------------------------------

Current liabilities

TABLE SHOWING CASH POSITION RATIO FOT THE YEAR 2009-2012

YEAR CASH &BANK

BALANCE

CURRENT

LIABILITIES

RATIO

2008-2009 2.20 1087.94 0.20

2009-2010 8.41 1877.68 0.45

2010-2011 11.50 1374.73 0.84

2011-2012 5.24 1169.35 0.45

60


61/91

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

CASH RATIO

2009

2010

2011

2012

INFERENCE:

The ideal cash position ratio is called super quick ratio. The standard

norm for the cash position ratio is 75:1 But the company to meet the ideal standard for

the year (2010-2011) ratio is 0.84.The other years ratio is low.

61


62/91

OPERATING PROFIT RATIO:

The operating profit is the ratio of profit made from operating sources to sales, usually

shown as percentage. It is a measure of the managements efficiency in running the

routine operations of the firm.

PROFIT BEFORE INTEREST, DEP & TAX

OPERATING PROFIT RATIO = --------------------------------------------*100

NET SALES

TABLE SHOWING OPERATING PROFIT RADIO FOR THE YEAR2009-2012

YEAR PBT &I &DEP NET SALES RATIO

2008-2009 94.47 1448.81 6.52

2009-2010 286.63 3794.99 7.55

2010-2011 400.73 4752.99 8.43

2011-2012 507.94 4671.77 10.87

62


63/91

0

2

4

6

8

10

12

OPERATING

RATIO

20092010

2011

2012

INFERENCE:

This analysis is used to measure of management efficiency in running the

routine operations of the business. The higher the ratio in the year (2012) indicates higher

efficiency.

NET PROFIT RATIO:

63


64/91

This ratio indicates what portion of sales is left to the firm after all costs, charges, and

expenses have been deducted. It is extremely useful to the firm being an indication of

cost control and sales promotion.

NET PROFIT

NET PROFIT RATIO = ------------------------- * 100

NET SALES

TABLE SHOWING NET PROFIT RATIO FIR THE YEAR 2005-2008

YEAR NET PROFIT NET SALES RATIO

2008-2009 52.37 1448.81 3.59

2009-2010 94.33 3794.99 2.49

2010-2011 270.27 4752.99 5.68

2011-2012 402.43 4671.77 8.61

5. NET PROFIT RATIO:

INFERENCES:

64

3.59

2.49

5.68

8.61

0

2

4

6

8

10

2009 2010 2011 2012

NET PROFIT RATIO


65/91

This analysis measures the efficiency of the business from the owners

point of view the higher ratio in the year (2012) its indicates higher efficiency of the

business during that period increases in sales. The lower the ratio may be due to low

efficiency or increases the cost of raw material etc

CURRENT ASSET TURNOVER RATIO

CURRENT ASSET TURNOVER RATIO = SALES

--------------------------

CURRENT ASSET

TABLE SHOWING CURRENT ASSET TURNOVER RATIO FOR THE

YEAR2009-2012

YEAR SALES CURRENT ASSET RATIO

2008-2009 1448.82 916.29

1.58

2009-2010 3794.99 1878.45

2.02

2010-2011 4752.99 1941.93

2.45

2011-2012 4671.77 2243.04

2.08

65


66/91

0

0.5

1

1.5

2

2.5

3

CURRENTRATIO

2009

2010

2011

2012

INFERENCE:

This ratio show continuous increases in ratios. In the middle year(2011)is ratio is

fluctuating the radio is 2.45, because the sales in the year is increases.

DEBTORS TURN OVER RATIO

Debtors Turnover or debtors velocity indicates the velocity of debt collection of a

firm. In simple words, it indicates the number of times average debtors

66


67/91

(Receivables) are turned over during a year, thus:

Debtors Turnover ratio( Debtors velocity)

=Net credit sales / Average Trade Debtors

=No of time

Trade debtors = Sundry debtors + Bills Receivables

DEBTORS TURNOVER RATIIO = NET CREDIT SALES

SUNDRY DEBTORS

TABLE SHOWING DEBTORS TURNOVER RATIO FOR THE YEAR

2009-2012

YEAR SALES SUNDRY DEBTORS RATIO

67


68/91

2008-2009 1448.82 58.6924.68

2009-2010 3794.99 115.9732.72

2010-2011 4752.99 33.36142.47

2011-2012 4671.77 71.7365.13

7.DEBTORS TURN OVER RATIO

0

20

40

60

80

100

120

140

160

DEBTORS RATIO

2009

2010

2011

2012

INFERENCE:

68


69/91

Debtors turnover ratio for the sale is 65.13 in 2012. which shows efficient management of

debtors. Debtors Turnover Ratio for the year 2010-2011 is 142.47 as the ratio increases

because of growth in sales.

CAPITAL TURNOVER RATIO:

Managerial efficiency is also calculated by establishing the relationship between

sales with the amount of capital invested in the business. Higher ratio indicates higher

efficiency and lower ratio indicates ineffective usage of capital.

SALES

CAPITAL TURNOVER RATIO = -----------------------------------

CAPITAL EMPLOYED

TABLE SHOWING CAPITAL TURNOVER RATIO FOR THE YEAR 2005-5008

YEAR SALES CAPITAL

EMPLOYED

RATIO

69


70/91

2008-2009 1448.82 89.00

16.27

2009-2010 3794.99 1011.63

3.75

2010-2011 4752.99 1757.63

2.702011-2012 4671.77 2250

2.07

8.CAPITAL TURNOVER RATIO:

0

2

4

6

8

10

12

14

16

18

CAPITAL

TURNOVER

RATIO

2009

2010

2011

2012

INFERENCE:

70


71/91

The Capital turnover ratio is constantly decreasing from 2009 to

2012, it is mainly due to continuous increase in sales. In the ratio is decreased due to

increase in capital employed when compared to increase in sales. High ratio indicates the

effective usage of the capital.

FIXED ASSETS TURNOVER RATIO:

The fixed assets turnover ratio determines efficiency of utilization of fixed

assets and profitability of a business concern. Higher the ratio, more is the efficiency in

utilization of fixed assets. A lower ratio is the indication of under utilization of fixed

assets.

FIXED ASSET TURNOVER RATIO = __SALE_____

FIXED ASSET

TABLE SHOWING FIXED ASSETS TURNOVER RATIO FOR THE YEAR 2005-

2008

71


72/91


73/91

The fixed assets turnover ratio shows an increasing trend for the 4 years

(2009-2012) .The ratio in the year (2009) 1.37 which indicates the under utilization of

fixed assets which is due to increase in net fixed assets.

DEBT EQUITY RATIO:

The debt equity ratio is determined to ascertain the soundness of the long-

term financial policies f the company. It is also known as external-internal equity ratio.

The debt equity ratio is calculated by dividing total long-term debt by share holders

funds. The share holders funds includes shares capital plus reserves and surplus. The

ideal ratio for the debt equity ratio is 1:1.

DEBTORS EQUITY RATIO = LONG TERM DEBT

SHARE HOLDERS FUND

TABLE SHOWING DEBT EQUITY RATIO FOR THE YEAR 2005-2008

73


74/91

YEAR LONG TERM DEBT SH. HOLDER

FUNDS

RATIO

2008-2009 676.50 213.523.17

2009-2010 779.69 231.933.36

2010-2011 1161.38 596.241.95

2011-2012 1460.54 790.451.85

.DEBT EQUITY RATIO

0

0.5

1

1.5

2

2.5

3

3.5

DEBT EQUITY

RATIO

2009

2010

2011

2012

INFERENCE:

74


75/91

The debt equity ratio indicates that the company does not view debt as a

source of funds on it is self sufficient with huge internal cash balances. The ideal ratio for

debt equity ratio is 1. The ratio is continuous decreases because issue of fresh share

capital is issued in 2011

PROPRIETARY RATIO

PROPRIETARY RATIO = SHARE HOLDER FUNDS

----------------------------------------

TANGIBLE ASSETS

TABLE SHOWING PROPRIETARY RATIO FOR THE YEAR 2009-2012

75


76/91

YEAR SH. HOLDER

FUNDS

TANGIBLE ASSET RATIO

2008-2009 213.52 1974.39

0.11

2009-2010 231.93 2886.63

0.08

2010-2011 596.24 3129.75

0.19

2011-2012 790.45 3411.08

0.23

11. PROPRIETARY RATIO

0

0.05

0.1

0.15

0.2

0.25

PROPRITARY

RATIO

2009

2010

2011

2012

INFERENCES:

76


77/91

In this proprietary ratio are increases in 2011 & 2012. In the middle year

(2010) ratio is low, because the values of share holder funds are 231.93. In Ratio is

increasing in other two year in issue of fresh share capital.

CASH TO CURRENT ASSET

Cash is important and sensitive current assets. Cash is also viewed as most liquid asset.

When the proportion of cash is high in current assets, company can viewed as more liquid

one. This kind of analysis will be helpful to the managers to understand the turnover

capacity of the concern.

CASH TO CURRENT ASSET = CASH

------------------------

CURRENT ASSET

TABLE SHOWING CASH CURRENT ASSET FOR THE YEAR 2009-2012

YEAR CASH CURRENT ASSET RATIO

77


78/91

2008-2009 2.20 916.29

0.24

2009-2010 8.41 1878.45

0.45

2010-2011 11.50 1941.930.59

2011-2012 5.24 2243.04

0.23

0

0.1

0.2

0.3

0.4

0.5

0.6

2009

2010

2011

2012

INFERENCE

From the above we can see that cash played a very small role in all the years. But

in the year 2010-2011 it occupies a major place in current assets. The high level of cash

& bank balances in the year may be due to substantial collection from debtors during

2010-2011 financial year.

78


79/91

CASH TO CURRENT LIABILITIES

Percentage of cash in relation to current liabilities will enable us to understand the

creditors repayment capacity of the concern without damaging the regular operation.

CASH TO CURRENT LIABILITIES = CASH

---------------------------------

CURRENT LIABILITIES

TABLE SHOWING CASH TO CURRENT LIABILITIES FOR YEAR 2009-2012

YEAR CASH CURRENT

LIABILITIES

RATIO

2008-2009 2.20 1087.94

0.20

2009-2010 8.41 1877.08

0.45

2010-2011 11.50 1374.73

0.84

2011-2012 5.24 1169.35

0.04

79


80/91


81/91

TABLE SHOWING CURRENT ASSETS TO TOTAL ASSETS FOR THE YEAR

2009-2012

YEAR CURRENT ASSET TOTAL ASSET RATIO

2008-2009 916.29 1974.39

46.41

2009-2010 1878.45 2886.63

65.07

2010-2011 1941.93 3129.75

62.05

2011-2012 2243.04 3411.08

65.76

0

10

20

30

40

50

60

70

CURRENT

ASSET TO

TOTAL

ASSET

2009

2010

2011

2012

81


82/91

CURRENT ASSETS TO TOTAL ASSETS

INFERENCE

This ratio indicates the proportion of current assets to total assets of the

company. This ratio is fluctuating in nature. The higher ratio in the year 2012(65.76)

indicates maintenance of sufficient cash balance and inventories. The lower ratio in the

year 2009(46.41) indicates lower level of inventory and cash balance.

CURRENT LIABILITIES TO TOTAL LIABILITIES

CURRENT LIABILITIES TO TOTAL LIABILITIES = CURRENT LIABILITIES

---------------------------------

TOTAL LIABILITIES

82


83/91

TABLE SHOWING CURRENT LIABILITIES TO TOTAL LIABILITIES

FOR THE YEAR 2009-2012

YEAR CURRENT

LIABILITIES

TOTAL LIABILITIES RATIO

2008-2009 1087.94 1764.44

61.67

2009-2010 1877.68 2657.37

70.66

2010-2011 1374.73 2536.11

54.21

2011-2012 1169.35 2629.90

44.46

CURRENT LIABILITIES TO TOTAL LIABILITIES

0

10

20

30

40

50

60

70

80

CURRENTLIABILITY TO

TOTAL

LIABILITY

200

201

201

201

83


84/91

INFERENCE

This indicates the proportion of current liability to total liability of the

company. Generally current liability will be short term in nature. This is mainly taken to

meet or carry out day-to-day requirements of the business. The current liability increase

in accordance with the volume of operation but not proportionately to total liability. The

current liabilities are such liability that has to met in the immediate future.

COMMON SIZE BALANCE SHEET FOR THE YEAR 2009 AND 2010

84


85/91

PARTICULARS 2009 2010

AMOUNT PERCENTAGE AMOUNT PERCENTAGE

(RS) (%) (RS) (%)

ASSETS

CURRENT ASSETS

S.DRS 58.69 2.97 115.97 4.02

STOCK 632.08 31.96 1541.18

53.34

CASH AND BANK BALANCES 2.20 0.11 8.41 0.29

LOAN AND ADVANCES 223.32 11.29 212.89 7.37

OTHER 3.57 0.18 2.67 0.09

TOTAL CURRENT ASSET 919.86 1881.72 65.11

FIXED ASSETS

Fixed assts 1058.10 53.49 1008.18 34.89

Total assets 1977.96 100 2889.30 100

Liabilities and capital

Current liabilities

Current liabilities & provision 1087.94 55 1877.68 64.99

Loan funds 676.50 34.20 779.69 26.98

Total liabilities 1764.44 89.21 2657.37 91.97

Capital and reserves

Share capital & Reserves and surplus 213.52 10.79 231.93 8.03

Total share holders funds 213.52 10.79 231.93 8.03Total liabilities and capital 1977.96 100 2889.30 100

COMMON SIZE BALANCE SHEET FOR THE YEAR 2011 AND 2012

PARTICULARS 2011 2012

AMOUNT PERCENTAGE AMOUNT PERCENTAGE

(RS) (%) (RS) (%)

ASSETS

CURRENT ASSETS

S.DRS 115.97 4.02 33.36 1.07

STOCK 1541.18

53.34

1511.51 48.25

CASH AND BANK BALANCES 8.41 0.29 11.50 0.37

LOAN AND ADVANCES 212.89 7.37 385.56 12.31

85


86/91

OTHER 2.67 0.09 2.60 0.08

TOTAL CURRENT ASSET 1881.72 65.11 1944.53 62.08

FIXED ASSETS

Fixed assts 1008.18 34.89 1187.82 37.92

Total assets 2889.30 100 3132.35 100

Liabilities and capital

Current liabilities

Current liabilities & provision 1877.68 64.99 1374.73 43.89

Loan funds 779.69 26.98 1161.38 37.08

Total liabilities 2657.37 91.97 2536.11 80.97

Capital and reserves

Share capital & Reserves and surplus 231.93 8.03 596.24 19.03

Total share holders funds 231.93 8.03 569.24 19.03

Total liabilities and capital 2889.30 100 3132.35 19.03FINDINGS

The increase in working capital is due to the increase in sales in 2009-2010

the company has a better current ratio which is equal to the ideal ratio.

In 2006 and 2008 company maintained overstocking of materials.

This can be understood by the quick ratio of the company.

The fixed asset ratio of the company shows how efficiently the funds are utilized

for working capital than fixed asset.

Debtors turnover ratios for the year 2008-2009 show better performance of the

company.

The current asset proportion towards total asset for the year 2012 shows

86


87/91

better utilization of funds as it shows an higher increases.

However there was an operating profit during the years 2010-2011 and 2011-2012

due to increase in sales and reduction in manufacturing and other expenses.

Cash flows of the company seems to be good. It is observed that the company is

continuously looking for the better sources of fund over the period of years.

Issue of fresh share capital can help to reduce the radio debt equity.

The cash position ratio has been decreasing due to increase in current liabilities.

The net working capital has been increasing continuously due to continuous

increase in current assets over current liabilities.

The continuous increase in operating profit for the past four years shows more

income over expenditure

Share capital & Reserves and surplus of the company is showing an increasing

trend

mukesh apc

Documents