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Submitted in the partial fulfillment for the award of Degree of Master of Business Administration BY MOHD. MOHSIN KHAN MBA IInd Year (Finance & Marketing) Roll No. 1116370020




Last but not the least. I avail this opportunity to express my deep gratitude to them. No words are enough to thank Mr. they always managed time to provide proper guidance.ACKNOWLEDGEMENT I am thankful to management to study the “WORKING CAPITAL MANAGEMENT” for granting the permission. who is not only inspired me to work on this project but also accepted to guide me. In spite of heavy responsibilities and busy schedules. PANKAJ MEHROTRA (Finance Manager). Completion of this report was made possible due to enduring help of many people. LUCKNOW PRODUCER‟S CO-OPERATIVE MILK UNION LTD. . corporation and valuable information for competition of this project. I would like to say that my parents and friends forgiving me their constant support and encouragement in completion of my project.

Banks enjoy a major market share among the borrowers and the Parag are lagging far behind and will slowly lose their market share if adequate steps are not taken. It is a method of financing very large capital intensive projects. Also a borrower chooses a project finance provider mainly due reference and time frame within which the loan would be approved. we undertook this project with an objective of understanding the salient features of project finance. Banks as well as non-banking financial companies provide project financing. The Parag need to take adequate steps to improve their position in the minds of the borrowers so as to stay in the market. As project financing is adopted by a majority of companies at least once in their lifetime. Awareness regarding the nationalized banks providing project finance is more than the Parag providing the same. Banks are usually preferred over Parag due to the security aspect and brand name.EXECUTIVE SUMMARY Considering the growing use of project finance. The Parag should try to inculcate in the minds of the borrowers that Parag is as safe as any bank and should try and develop a feeling of security among borrowers with regard to Parag. we decided to study this concept in detail. where the lenders rely on the assets created for the project as security and the cash flow generated by the project as source of funds for repaying their dues. Also the documentation process is one such aspect which the borrowers find lengthy and tiresome in both the banks and Parag. . with long gestation period.

blood pressure. before making any conclusion regarding the illness and before making his conclusion regarding the illness and before giving the treatment. . The main objectives of the study as related to the topics are as under:-  To find out the concept of working capital and cash flow analysis. To estimate the working capital requirement of the firm . The analysis and interpretation of financial statement is essential to bring out the mystery behind figures in financial statements. Just like a doctor examines his patient by recording his body temperature. To find various alternatives of working capital To analysis the financial position of Parag dairy. a financial analyst analysis the financial statement with various tools and techniques of analysis before commenting upon the financial affairs (positive and negative) & working capital condition of an enterprise. Evaluate working capital requirement in the manufacturing firm.  To find and analysis the group wise composition of working capital in Parag dairy.OBJECTIVES OF THE STUDY The purpose of this project is to diagnose the information contained in financial statement as to judge the profitability and current financial affairs.     Estimation of working capital. etc.  To study the different mechanism to maintain proper working capital in parag dairy.

Data Analysis 3. Limitations 7. Findings 4. Bibliography 8. Appendix . Conclusion 5. Recommendations/Suggestions 6.CONTENTS OR INDEX Section-A (Introduction to Company) Section-B (Introduction to Topic) Section-C (Research Methodology) 1. Research Methodology 2.


The common brand name of the company is “PARAG” the meaning of “PARAG” is the pollen of flower the slogan in the logo is:- “PURE NATURAL & GOOD HEALTH” Parag milk shed is situated in the Lucknow. Barabanki. Thus. around each chilling center. a co-operative milk supply union was organized in Lucknow. in the source of last few decades been thoroughly exploited by small traders and powerful contract or sand well organized private dairies. This milk union continued function for about a decade. The scheme started operating through 12 chilling centers in Eastern Uttar Pradesh. The milk was mainly collected through contractors. Raebareli. the capital of Uttar Pradesh since independence it has formed part of the traditional supply line of agriculture products from the village to the big cities rich in its milk potential the milk shed has. Sitapur. Gradually all the milk union almost becomes de-functioning and was supplying very little quantity of milk during the years 1970-77. Obviously contractors had monopoly and collected major share of milk which was either supplied to Lucknow or to the local population of the city. These chilling centers were mainly coated in thither district of Lucknow. Unnao. These continued functioning in a rather lop-sided manner till 1977. Kanpur. while such intermediaries were retaining large profits the rural milk producers found the imposition deteriorating day by day. which started collecting milk from village and supplied to Lucknow and local markets. etc. . In 1950. 10 milk unions were also found almost at the same time.ABOUT LUCKNOW PRODUCER‟S CO-OPERATIVE MILK UNION LTD. in them earn time Lucknow milk scheme was established by government of India in 1959-60 to ensure cheaper milk to the local pollution of Lucknow.

This programmer was launched in Uttar Pradesh in 1972 and the implementing agency in the was pradeshik co-operative dairy federation limited which was framed in the year. The basic idea was to replicate and pattern societies in Uttar Pradesh. In August- September 1972. Organization of societies in Lucknow district was taken UP Bar out, Mohanlalganj, Amausi blocks. A spear head team from national dairy development board was posted in Lucknow, which started functioning from April 1978 with a team of 27 employees drawn from Lucknow milk 198 milk procurement co-operative societies by the year 1981, when the operation flood-14programme ended. Feeder balancing dairy, Lucknow Producer‟s Co-operative Milk Union Ltd. Was set up under operation flood-1 programmer with the specific purpose of supplying milk of local markets and other districts. Dairies and conversion surplus milk into various dairy products. This dairy is situated in the middle of Lucknow. The dairy was commissioned in April 1978 and processed the liquid milk procured from the then milk shed comprising Lucknow, Raebareli, Barabanki and Unnao. The purpose of establishing feeder balancing dairy, Lucknow cow as to provide remunerative market for milk produced in the milk shed comprising district of Lucknow, Barabanki, Raebareli, Kanpur and Sitapur as envisaged under operation flood-1scheme. Thus feeder balancing dairy was obliged to receive entire surplus milk from the rural areas, through a network of milk co-op. In 1978-79 the average handing of milk per day at FBD-Lucknow Producer‟s Co-operative Milk Union Ltd. Was 49,300kg. With peak handing of 1,04,950kg in the February. In April 1981 Lucknow Producer‟s Co-operative Milk Union Ltd. Launched pasteurized whole milk packed in polythene sachet for local consumers. The supply of milk was gradually extended to other local markets.

As the basic idea of establishing FBD-Lucknow Producer‟s Co-operative Milk Union Ltd. was to convert surplus milk into various dairy-products, this activity started in September1978 with manufacture of skimmed milk powder and ghee. The manufacturing of table butter was started from April1981. In view of milk production procurement and marketing potential of Lucknow Producer‟s Co- operative Milk Union Ltd, and expansion programmed has been undertaken by N.D.D.B. on turn basis. The target set is as under:      Increasing processing capacity from1 lack to 3.5 liters per day. Increasing power plant capacity from 10 tons to 40 tons per day. Increasing the capacity of ghee plant from 1.m.t. to 4.m.t. per day. Increasing the capacity of butter manufacturing up to 16.m.t. per day. The work of expansion has been complete in 1989.

The work of expanded dairy started functioning on full capacity in 1991-1993 year. The liquid milk and products are selling in the market in the brand name of PARAG. The milk product has been marketed by P.C.D.F. Lucknow. The sale of liquid milk has been carried out Lucknow Producer‟s Co-operative Milk Union Ltd. Lucknow. In the year 1983 P.C.D.F. Ltd. started working under Operation Flood–II (White revolution) scheme. Mostly unit milk Sahakari Board where connected under Operation Flood–II, having the name Dugdh Utpadak Sahakari Sangh (D.U.S.S.) Ltd. P.C.D.F. Ltd. Takes royalty of common brand name PARAG and all the important policy taken by Pradeshik Co-operative Dairy Federation Ltd. Who monitor stop all the D.U.S.S. Ltd. i.e. Lucknow, Kanpur, Varanasi.

PARAG provides hygienic, nutritious milk and milk product. In the year 1983 Operation Flood–II scheme was launched; the main objectives of the Operation Flood were following–   To collect the milk directly from the producers (villagers through society). To insure the supply of quality milk collected from the villagers which being sold in the market area of city.  To save the producers, villagers and the customers from the middleman.

The milk is collected firstly to the society level then it comes to D.U.S.S. level finely it comes under the state level i.e. federation. Lucknow is the capital city of Uttar Pradesh. Total area of district is 2528 square km 91588 hectare is cultivated land. Lucknow producer’s cooperative milk union ltd. (Parag dairy Lucknow) was established in 1938. Lucknow milk is the first cooperative dairy established in India. Very few people know the fact the process developed by Lucknow Milk Union was later used in spirit in Gujrat co operative milk movement and is now famous as “anand pattern” . Lucknow milk union was then chosen as one of the model dairy to implement operation flood programme started by national dairy development board (NDDB) in 1970. The aim of Lucknow milk union is to provide reasonable price to farmer t hereb y defending them from exploitation of milk vendors and earn supplementary income part from agriculture. On the other hand the milk union supplies high quality pure milk and milk products at reasonable prices to urban consumer under the brand name “Parag”. The milk union has been running “clean milk mend breed conservation programmes”

UPDASP where milk producer have been educated in producing and supplying milk under clean and hygienic condition and provided the producer with semen of pure Indian breed for the improvement of the present breed of animal. Lucknow milk union is established

The milk union also organizes school children’s visit to its dairy plant to create awareness on milk processing and other related system amongst them. Presently AMCU are running successfully in 259 societies 27 bulk milk coolers are established in various rural area of Lucknow for keeping high quality of milk procured in those area by milk societies Lucknow milk union has set up of teams for quality check and health awareness programme for the urban consumer of milk. 87 all time milk booths (ATM) are established for supply of high quality milk to the consumers round the clock. For coming months lucknow milk union has committed itself to provide a minimum of 160000 liters of high qualities “Parag” milk per day to the urban consumers. The team visit different localities in city. the milk supply vehicles insulated with Japanese ecofriendly standards have already been introduced in various area of the city. Towards this end. Lucknow milk union is able to maintain high quality standards in its milk and milk products through close monitoring of processes in all its stages of production. The organization has a chain of around 2000 agent providing employment to the unemployed youths door to door milk delivery system through mini insulated tanker thru commission agent with attractive . The constant increase in the sales figure of the milk union are a reflection of their sincere efforts and the growing confidence of the consumers in Parag milk products.Auto milk collection unit (AMCU) in societies for giving transparent payment system for milk given by farmer. test their milk and provide on the spot results to the consumer. Apart from selling milk in pouches. the milk union is also gearing itself to provide fresh loose milk to the city consumers. The milk union has obtained ISO and HACCP certification in year 2007. processing and packaging. By the established of this machine farmer are getting full price and actual detail of fat and snf of their milk.

It has something for everyone. sign joint ventures or use India as a sourcing center for regional exports. trying to keep pace with the galloping progress around the world . INDIAN DAIRY INDUSTRY World’s largest food factory. A bagful of “pearls” awaits the international dairy processor in India . The liberalization of Indian economy beckons to MNC‟s and foreign investors alike. Today India is „The Oyster‟ of the Global dairy industry. India has one of the largest livestock populations in the world. He may transfer invites you to world’s highest milk producers. 50000/. Here you can find about answer to every question about dairy. It offers opportunities galore to entrepreneurs Worldwide. and chhachh. Fifty percent of the buffaloes and twenty percent of the cattle in the world are found in India. many profitable options awaits him. in celebration India Dairy. most of which are milk cows and buffaloes. besan laddoo. researchers.As he expands his overseas operations to India . Dairy development in India has been acknowledged the world over as one of modern India’s most successful . And all set to find out more about their achievements. entrepreneurs or the merely curious Indian dairy. The new milk products launched by the milk union such as chhena kheer. Be it investors.The Indian dairy industry is rapidly growing.himself and rest amount comes through bank finance. have begin tickling the taste buds of the consumers giving them great pleasure and value for money.commission rates has been started in the city. The requirement for this system is to have a mini insulated tanker for which one has to arrange finance up to Rs. gulabjamun etc. who wish to capitalize on one of the world’s largest and fastest growing market for milk and milk products.

25 lakhs tons in 1999-2000. Gujarat. whereas that of malted food is at 65000 tons. casein and improved cheese varieties. The milk surplus states in India are Uttar Pradesh. India is the largest milk producing country in the had risen to 2. milk products including infant milk food. 3600 million which is about one fourth of the total investment made in this sector. largely being imported presently.developmental programme. has good scope. Rajasthan. 1. . Haryana. Some plants are coming-up for producing lactose. The total milk production is over 72 million tones and the demand for milk is estimated at around 80 million tones.Cheese and condensed milk production stands at 5000 and 11000 tons respectively. the value of Indian dairy produce is expected to be Rs. Punjab. Technology Export Potential of Milk and Dairy Sector The production of milk products i. By 2005. In the last six years foreign investment in this sector stood at Rs. Milk and milk products is rated as one of the most promising sectors which deserves appreciation in a big way. Today. India performed much better with percent growth.000. Maharashtra. The trends in production of milk products in India are given in Annexure 1. Andhra Pradesh. Karnataka and Tamil Nadu. Exports of milk products have been decimalized. Manufacture of casein and lactose.000 million. malted food. Production of milk-powder including infant milk.e. When the world milk production registered a negative growth of 2 percent. The manufacturing of milk products is concentrated in these milk surplus States.07 lakhs tones in 1999-2000. condensed milk & cheese stood at 3.

The production of milk in India has been increasing steadily as shown in Annexure 3. buffaloes. Rajasthan.) and Rajasthan (7. highest cattle population was reported in Madhya Pradesh(28. (7.) Bihar (22. (20.63 million nos.) followed by A.44 million nos. M.Livestock Population India is rich in its livestock wealth. M. Technology Export Potential of Milk and Dairy Sector which has since registered a vigorous growth of over 4.15 million nos. Number of milk products manufacturing Plants has come up in these states for Processing of milk. more than half of the world buffalo population.).68 million nos. sheep and goats in the world and in India is given in Annexure 2. As per FAO production year book 1998. Production of Milk and Milk Products The milk production was almost stagnant between 1947 to 1970 with an annual growth rate of merely one percent Livestock population. According to livestock census the highest population of buffaloes is reported in U.P.45 million nos.) followed by Uttar Pradesh (25.8% of the world cattle population.) and West Bengal (17. the population of cattle. The major milk producing states are UP.P. .8% of the world cattle world buffalo population.P.74 million nos). (9. It accounts for nearly 15.) Maharashtra (17. As per the 1992 livestock census of Ministry of Agriculture.5% per annum after the year 1970.P.15 million nos.08 million nos.97 million nos. Punjab. more than half of accounts the for nearly 15.). Maharashtra and Gujarat.

Present Status
The Five Year Plan, achieving an annual output of over 60 million tones of milk. This not only places our industry second in the world after the United States, but represents sustained growth in real availability of milk and milk products for our burgeoning population. Most important, dairying has become an important secondary source of income for millions of rural families. Improved genetic material achieved primarily through cross breeding of cattle and upgrading of the national buffalo herd has played a significant role in increasing the productivity. Gradual extension of improved husbandry practices; increase in consumption of balanced concentrates made possible, in part, through innovations in the field of nutrition; expanded area under fodder; greater access to veterinary care; and advances in the fight against endemic and epidemic cattle diseases have also contributed to increased production and productivity. About three quarters of the milk produced is consumed at the household level. Of the milk supplied to the market, about 9-11 percent is processed in over 275 dairy plants and Dairying has become an important secondary source of millions of rural families.6 Technology Export Potential of Milk and Dairy Sector 83 milk product factories operated by cooperative, private dairy processors, and government milk schemes in the organized sector. Milk channeled through Operation Flood cooperatives is generally processed in dairy plants located in the rural areas and then transported into cities and towns. Operation Flood Milk productions account for about 1 0% of total milk production or 40% of the marketed output. The balance (about 90% of total production) is handled by the private traders and processors. About 45% of milk production is consumed as fluid milk. About 35% is processed into butter or ghee; about 7% is processed into Paneer (cottage cheese) and other cheeses, about 4% is converted into milk powder; and the balance is used for other products such as Dahi (yoghurt) and sweet meats. In recent years, there has been an increasing ice cream production

as foreign companies have invested in India. Industry Segments are:

1. Cheese:
The organized cheese market including its variants like processed cheese, cheese spreads, mozzarella, flavored and spiced cheese, is placed at around Rs 3 bn. processed cheese at 50% of the overall market is Rs. 1.5 bn strong. The next most popular variant is cheese spread claiming a share of around 30% of the total cheese market. The market is primarily an urban phenomenon and is known to be growing at around 15%. The market for cheese cubes slices and tins are growing. The flavored cheese segment has been declining. About 45% of milk production is consumed as fluid milk. About 35% is processed into butter o r or ghee is processed into paneer (cottage cheese) and other cheeses, about 4% is converted into milk powder; and the balance is used for other products such as Dahi (yoghurt) and sweet meats. Technology Export Potential of Milk and Dairy Sector 7 operator in the branded cheese market in India with about 60% market share in the branded market. It pioneered the market for processed, branded cheese. What GCMMF did was to develop the technology to make cheese from buffalo milk. World over it is made from cow milk. Annexure 4 gives the market size of cheese in India. Other cheese manufacturers are: Britannia Industries, Dynamic Dairy Industries (DDI), Hiranandani, ETA and Metro.

2. Ice Cream:
The ice cream market in India is estimated to have reached the level of Rs. 10 bn per annum, of which the organized sector is about Rs. 6 bn. The unorganized market has been shrinking. The per capita ice cream consumption in the country is extremely low at 250 ml per year compared with that of the US, which is about 22 liter. The organized market for ice creams

of about 60 mn liters has been growing at around 15% per annum. The ice cream industry has, in a short span of time, undergone a structural transformation. Annexure 5 (a) and 5 (b) shows the growth of market size of Ice Cream in India and the market structure of this segment respectively.

3. Chocolates:
The Chocolates market is estimated at 35,000 tons valued at approximately Rs. 8.0 bn. The chocolate counter market is worth nearly Rs. 2.5 to 3.5 bn and the rest is made up of chocolate bars. Chocolates in fact make up less than a fourth of the sweet-tooth products including sugar boiled confectionery mints and chewing gums. Sugar confectionery is by far the largest segment with a share market growth rates indicate that the cheese market in India is growing steadily. The organized m arket for ice creams of about 60 mn liters has been growing at around 15% per annum. Technology Export P o t e n t i a l of Milk and Dairy Sector exceeding 60%. Annexure 6 (a) and 6 (b) gives the market size are structure of chocolate market in India.

4. Dairy Whiteners:
The organized dairy industry processes an estimated 15% of the total milk output in India. The industry has maintained a high growth profile, especially in the wake of the Operation Flood, colloquially also termed as White Revolution, initiated in early 1980s. Today India produces over 80 mn tones of milk annually. In terms of value, the total milk economy is estimated at Rs. 1200 bn. The market for dairy whiteners (commercially knows as beverage milk powders and condensed milk) and creamers are around Rs. 2,750 mn. The growth of market size of dairy whiteners in the last 10 years is given in Annexure 7 (a) and 7 (b). Apart from MNCs like Nestle and companies like Britannia, the Indian enterprises have also made perceptible progress. Names like Amul, Sapan, Vijaya, Mohan, Parag and several others

5. baby foods are continued to be given to children older than of two years depending on socio-economic. India is catching up with the rest of the developed . but has yet to enter the Indian market. A reliable. also exist and could be exploited. Baby foods have assumed special significance in the recent years because of greater awareness of hygiene and health and constraints on time of busy mothers. Aseptically packed creamer involves techniques to impart a longer shelf life to the product.Technology Export Potential of Milk and Dairy Sector The potential for exports. especially in the wake of the Operation Flood. colloquially also termed as White Revolution initiated nearly 1980s. healthy. convenient and ready to-use baby food is the requirement of the day. The organized dairy industry output in India. Aseptically packed creamer in miniportions is widely used in the west. The traditional homemade foods have dominated this sector until the induction of packaged foods mostly from multinational companies. Baby Foods: Conventionally.have been seen in the marketplace with their whiteners. the Gulf and Africa. Creamer is fresh milk with increased fat content (up to 12%) and is aseptically packed after undergoing Ultra Heat Treatment (UHT) at 140oC. The concept of packaged baby foods is relatively recent in India. foods (solids. In some cases. however. Its introduction will affect the existing whitener market as a natural milk product with a longer shelf life. It is packed in small cups ready to be poured into a cup of tea or coffee. especially to neighboring countries and the countries in the Middle east. healthrelated and geosocietal conventions. The processes an industry estimated 15 % of the total milk has maintained a high growth profile. semi-solids and liquids) bad ministered to babies of up to two years of age are classified as baby foods.

conforming broadly to the growth rate of GDP. A comparison of growth rates over the last 10 years shows that these have been a steady rise of market size. Biscuits and Bakery Products: The Indian bakery industry is dominated by the small-scale sector with an estimated 50. the industry is widely dispersed. The organized sector is unable to compete at the lower price range due to the excise advantage enjoyed by the informal sector. The packaged food products for babies are broadly classified into a) cereal-based such as Nestum. b) cereal-based with milk such as Farex. Infant milk foods constitute the most significant segment. The . buns.5 mn tones and around 90% of the other bakery products estimated at 0. in this area rater fast. account for 82% of all bakery production. which a re relativel y less pri c e-sensitive. Cerelax. exist and could be exploited. c) milk-based such as Lactogen. The potential for exports. The last includes pastries.6 mn tones. the Gulf and Africa. It also accounts for 80% of the total bread production which is estimated at 1. biscuits and bread. The organized segment in biscuits has witnessed a steady growth of about 6%. Annexure 9 (a) and 9 (b) gives the growth of market size of biscuits over the last ten years. The two major bakery products. especially to neighboring countries and the countries in the Middle East. besides the 15 units in the organized sector. Annexure 8 (a) and 8 (b) gives the market size and the market structure of baby foods in India. rusks and others. The unorganized sector accounts for about two-thirds of the total biscuits production estimated at 1. The organized sector caters to the m e d i u m and prem ium segments. Technology Export Potential of Milk and Dairy Sector. d) ready-to-feed liquids. Apart from the nature of the industry which gravitates to the markets and caters to the local tastes. cakes.000 small and medium-size producers. and e) rusks and biscuits.3 mn tones. Biscuit is estimated to enjoy around 37% share by volume and 75% by value of the bakery industry.

biscuits and bread. In value terms it is less than 50%.000 tones. In the long run it is slated to grow at 8 to 10% annually.000 tones. That translates into 66% market share of the unorganized sector by volume. Biscuit is estimated to enjoy around 37% share by volume and 75% by value of the bakery industry. Technology Export Potential of Milk and Dairy Sector graduated into a branded product with discriminating prices. In 2000. account for 82% of all bakery production. 7. There are about 5. The total volume of the sugar boiled confectionery market in the organized sector (comprising plain / hard-boiled candies. bread has The two major bakery products. Add to this the unorganized sector and the market for all types of confectionery is of the order of 250. toffees. hard boiled candies. The size of the bread market is estimated at Rs. Confectionery: The Indian confectioner y market i ncl udes suga r boiled c o n f e c t i o n e r y . The sector’s expansion at a rate of 25% in 1998 had dropped to 17% in 1999 and registered a negative growth of 2% in 2000. sugar boiled confectionery had penetrated an estimated 15% of the households only. toffees and other sugar based candies.000 tpa. The growth in the size of the confectionery market is gives as Annexure 10 (a). Add to this the unorganized sector and the market for all types .production crossed the one-million tone mark in 1995-96 which has now grown by estimated 30%. There are a number of producers in both sectors. 13 bn. The total volume of the sugar boiled confectionery market in the organized sector is around 125. From a low priced commodity. eclairs and gums) is around 125. suggesting a large potential for growth.000 units catering to the local markets. organized and unorganized.

The export figures of dairy products during the last five years are given in Annexure 11. except when exported as branded products in consumer packs. 1998 has removed the quantitative ceiling for export of powder milk and ghee and their export is now freely allowed. have dechannelised the export of these milk products with effect from mid 1993. Exports: Export of certain milk products like milk powder. will be exempted from the following conditions: 1) Quantitative I ceiling as may be notified by the DGFT from time to time. continues to be under the quantitative ceilings. 48/RE-98/1997-2002 dated 13th October. The Director General of Foreign Trade.2002. With the objective of promoting exports of milk products.of confectionery i s o f t h e order of 250. Products for exports . have dechannelised the export of products with effect from mid 1993. pure milk Ghee and Butter.000 tpa. However. butter. According to the EXIM Policy for 1997. Whole Milk Powder. if exported in packaging exceeding 5 kg in weight. not exceeding 5 kg in weight. Casein etc. the Govt. Butter. are some of the milk products being exported from India. With the objective of promoting exports these milk of milk products. the Govt. . Ghee. ghee and butter was canalized until 1993. Ministry of Commerce vide Public Notice No.Skimmed Milk Powder. Cheese. 2) registration-cum-allocation certificate issued by agricultural and processed Food Products Export Development Authority (APEDA). Condensed Milk. the policy for export of these milk products is as under: Powder milk (skimmed or full Cream) whole and infant milk food.

etc. In the immediate future. have g o o d demand i n the countries where ethnic Indian population is settled.Major Destinations. printing of catalogue brochures and brand publicity through advertisement etc. which also improves the shelf-life of the product. while Australia-New Zealand does not have adequate production capacity. Rusgulla. This will require that exporters ensure quality from the milk animals to the port and beyond. there is prospect of an additional demand of over 3 million tonnes of milk products in the ASEAN region alone. For promotion of these products. under its plan scheme. Equally significant is the rise of Russia as the world’s biggest dairy importer. Although by far the biggest milk producer in Europe. Haluwa. To build the quality. Khoya and Ready-to-Eat-Kheer. Russia and Africa will be the emerging market for Indian dairy products. The shortfall in milk production is estimated to be 13 million tonnes a year. we require export worthy consumer packing. the Russian output has declined by more than 25 percent in the past five years.UAE (43%). The EU dairy exports will become limited by GATT agreements. Potential for value added products Ethnic Indian dairy products like Sweets Shreekhand. Nepal (19%). South East Asia. Technology Export Potential of Milk and Dairy Sector APEDA has initiated following steps to increase export of dairy products: Standards have been laid down for export of dairy products APEDA is offering subsidies for implementation of HACCP and ISO 9000. These major deficits in milk availability offer an opportunity for India to fill this vacuum and to become leading dairy exporting nations. Export m arket development will depend on ensuring the quality. mechanized dairy f a n n i n g . Bangladesh (12%) Future Markets South East Asia. Russia and Africa will be the emerging market for Indian dairy products. installation and up gradation of laboratories and market promotion through sending of samples.

Many countries in the world do not import milk products from India since India is reporting many livestock diseases particularly FMD. there is a need for generic promotion of buffalo‟s milk. Efforts are. can ensure of quality raw material necessary to enter and maintain the position in the international market. therefore.requires encouragement with export oriented processing facilities. It is the cow milk which is recognized in the international market. Manufacturing units linked by contract with large scale producers. . Since India is producing more of buffalo‟s milk. needed to control and eradicate FMD at least in major milk producing States. Creation of chilling facilities at block level village level and transportation of liquid milk to processing units in reefer units.

1 8 .To the growth of such institutions. NDDB‟s programmes and activities. The order requires no permission for units handling less than 10. tradition with modernity. A l the milk p r o d u c t s except malted foods are covered in the category of industries f o r wh i c h f o r e i g n e q u i t y participation upto 51% is automatically allowed. Fundamental to NDDB‟s efforts are co. Mi lk and Milk Products Order (MMPO) regulates mi lk and mi lk products production in the country. finance and support to the following: 1.Seek to strengthen farmer to support national policies that are favorable.NATIONAL DAIRY DEVELOPMENT BOARD (NDDB) The National Dairy Development Board was created to promote. stagnation with growth. 2. Milk and Milk Products Order (MMPO) regulates milk and milk products production in the country. transforming dairying into an instrument for the development of India‟s rural people.operative principles and the Anand Pattern Co-operatives of Cooperation. The National Dairy Development Board (NDDB) was founded to replace exploitation with empowerment. 3.000 litres of liquid milk per day or milk solids upto 500 tpa.Producer owned and controlled organizations.

The various regulations that govern the dairy processing industry can broadly be classified into: Compulsory Legislation Prevention of Food Adulteration Act. To ensure the proper development and growth of this industrial sector. This specifies different standards for various food articles. no license is required for setting up of large scale production facilities for manufacture of ice cream. which was earlier reserved for manufacturing in the small scale sector. has now been dereserved. The standards are . Regulatory Environment in the Dairy Processing Sector in India The Indian processed dairy industry has grown and diversified enormously in the last few years. which are to be adhered to by the industry. Icecream. Bureau of Indian standards has prescribed the necessary standards for almost all milk based products. Subsequent to dechannelisation exports of some milk based products are freely allowed provided these units comply with the compulsory inspection requirements of concerned agencies like: National Dairy Development Board. 1954 This Act is the basic statute that is intended to protect the common consumer against the supply of adulterated food. Export Inspection Council etc.Technology Export Potential of Milk and Dairy Sector All the milk products except malted foods are covered in the category of industries for which foreign equity participation upto 51% is automatically allowed. the Government of India has instituted various laws and regulations. As such.

in terms of minimum quality levelsTechnology Export Potential of Milk and Dairy Sector 1 9 .

Salient Features of the MMPO Order include the following: – Registrations for units handling up to 75.Policies in Milk & Milk Products Intended for ensuring safety in the consumption of these food items and for safeguarding against harmful impurities and adulteration. the Central/State Registering Authorities have till December 2000 registered 666 units with a total processing capacity of 65. 1992. The provisions of the Act are mandatory and contravention of the rules can lead to both fines and imprisonment. Milk and Milk Product Order (MMPO) 1992 The Milk and Milk Product Order (MMPO).8 million litres per day (mlpd). is responsible for the operation of this Act. Ministry of Health and Family Welfare. under the Directorate General of Health Services.000 litres of milk per day are granted by the State Governments . to consumers by regulating its processing and distribution. The Central Committee for Food Standards. 1992 seeks to ensure the supply of liquid milk. issued on June 9. an essential commodity. Within eight years of its operation.

2 0 Technology Export Potential of Milk and Dairy Sector The collection. a proper assignment/allocation of milkshed is critical.000 litres per day capacity are registered by the Central Registering Authority. under the Ministry of Food and Civil Supplies. – Maintenance of specified hygienic conditions in the premises where milk and milk products are handled. The region from which the marketable surplus of milk production finds its way to a processing plant is called a „milkshed‟. – The Certificate also specifies the milkshed area. a) Voluntary Standards . Standards on Weights and Measures (Packaged Commodities) Rules. For an orderly development of the dairy industry. which. 1977 These Rules lay down certain obligatory conditions for all commodities that are packed form. processed. These Rules are operated by the Directorate of Weights and Measures. The concept of milkshed areas is pivotal to the MMPO. under the order is defined as a geographical area demarcated by the Registering Authority for the collection of milk by the registered unit. with respect to declarations on quantities contained. manufactured or stored. transportation and processing of milk normally centres around the operations of a processing plant.and units with more than 75.

vanaspati. 1937. Manufacturers complying with standards laid down by the BIS can obtain and “ISI” mark that can be exhibited on product packages.There are two organizations that deal with voluntary standardization and certification systems in the food sector. The Bureau of Indian Standards looks after standardization of processed foods and standardization of raw agricultural produce is under the purview of the Directorate of Marketing and Inspection. standards for most of processed foods. b) Bureau of Indian Standards (BIS) The activities of BIS are twofold. hygienic conditions under which products are manufactured and packaging and labelling requirements. BIS has identified certain items like food colours/additives. Under this Act. containers for packing. Grade Standards are prescribed for agricultural and allied commodities. c) Directorate of Marketing and Inspection (DMI) The DMI enforces the Agricultural Products (Grading and Marketing) Act. these standards cover rawTechnology Export Potential of Milk and Dairy Sector 21 materials permitted and their quality parameters. for compulsory certification. the formulation of Indian standards in the processed foods sector and the implementation of standards through promotion and through voluntary and third party certification systems. milk powder and condensed milk. These are known as . In general. BIS has on record.

Only a Memorandum has to be submitted to the Secretariat for Industrial Approvals (SIA) and an acknowledgment is to be obtained. Manufacturers who comply with standard the laid down by DMI are allowed to use “Agmark” labels on their products.“Agmark” Standards. However Certificate of Registration is required under the Milk and Milk Products Control Order (MMPO) 1992. Other Government Regulations: 1) Industrial Licence: No licence is required for setting up a Dairy Project in India. as dairying has not been included2 2 Technology Export Potential of Milk and Dairy Sector in the list of High Priority Industries. proposals will be cleared on case to case basis. Grading under the provisions of this Act is voluntary. Automatic approval will be given upto 51% Foreign Investment in High Priority Industries. In case of other Industries. 2) Foreign Investment: Foreign Investment in dairying requires prior approval from the Secretariat of Industrial Approvals. Ministry of Industry. Government may allow 51% .

without enforcing the old limit of 40% applicable under Foreign Exchange Regulations Act at its discretion. .

In Brief: Established Registered First dairy Inspector Board of Directors : 1938 : 23rd March 1938 : Mr. Today 2 lakh liters of milk are handled in the co-operative production unit and turnover has touched Rs.and liters of liquid milk. 50 crore marks. Nirmal Chandra Chaturvedi : Mr.COMPANY PROFILE Lucknow Pradeshik Co-operative Dairy Federation came into being on 23 rd March 1938 via registration number 257 . Bhargava : Mr. the capital invested was only Rs. N. paneer & curd etc. it keep the products safe from the germs and contaminations spreading by hands. Tej Shankar : Mr. full cream milk powder. ghee.K. As the whole process is mechanized. Pushkar Nath Bhatt . Gopal Lal Pandya : Mr. All our products are processed under hygienic conditions. 100/. so that it is safe for our clients to consume. butter. Parag Dairy is one of the India's reputed manufactures and exporters of Milk and Milk Products like skimmed milk powder.

: The entire District In spite of the several setback and hurdle.5 million tones .6% Per capita milk availability : 224 g/days or 78kg/year Milk animals : 57 million cows .Gosaiganj.5 million lpd) Average Annual Growth rate (1995-2000): 5. the Lucknow Pradeshik Co-operative Dairy has steadily progressed and retains its position firmly in the present market and given strength to the operation flood II.3 tones (203.Initial Capital Investment Present Capital : Rs. Human population : 953 million (70 million dairy farmer) Milk production :74. 100/: State Government – 90% :Co-operative – 10% Location Area of Distribution : : : Presently Initial Charbagh Initially Bakshi Ka Talab . 39 million buffalos Milk yield per breed able bovine in-milk :1250 kg Cattle feed production (organized sector) : 1. Tivariganj .

The Apex institute of dairy co-operative was registered under the name „PCDF‟ (Pradeshik Cooperative Dairy Federation) in the year 1962 during the fourth five. At the time of independence four milk supply schemes were operating in Lucknow. LPMU was established in 1938 as the first step towards organized dairy development programme all over India. also entrusted PCDF with the responsibility of implementing the operation flood. and Kanpur cities.P.year plan. being one of them. Gorakhpur and Mathura were adopted later on.P. Allahabad was established. The Agra co-operative dairy came into existence in second five year plans while dairies at Bareilly. when the “Katra Co-operative Milk Society”. . dates back to 1917.P.Turnover of of veterinary pharmaceuticals : Rs. It was to establish cooperative structure in some of the best milk sheds located in ten states in U. 50. Allahabad. 105.500 crores *based on producer‟s price **based on retail price BRIEF HISTORY OF PARAG The history of co-operative dairy industry in U. Varanasi. 550 crores Dairy plants throughout : 20 mlpd Throughout as percentage of total milk output : 10 Value of output of milk group (2007-2008)* : Rs. The Government of U.051 crores Value output of dairy industry** : Rs. Aligarh and Merrut were also proposed to be included in the scheme.

The divisional heads discharge their duties within policy frames laid down by the Managing Director and subject of his control & supervision only important performance and control reports.M. be send to the MSD. which will take speedy clearance at the appropriate level. . The division heads of each division is responsible for the performance and of their respective division shall be responsible for the performance and of their respective division not only at head office but also in the units/unions in the field. A copy of all such letters shall be the CPM section the MSD. be routed through the Management Service Division (MSD). The divisional heads see the terms made by them and their officers and purposively designate link officers for each officer in their division. questions involving exceptions to approved policy. Every division has a manager who is responsible to General Manager. All letters to the NDDB shall before dispatch. G. of every division is responsible to managing director.ORGANIZATION STRUCTURE LPCUL has ten divisions. Bill before approval and implementation. systems development and other important matters need to be put up before Managing Director. These officers shall not merely insure achievement of the targets fixed and implementation of systems for their functional areas but promptly attend to the problems of the units/unions. matters. which will check the plan to see whether they are in conformity with other plans and system contradiction occurs.

State-of-the-art vertical liquid milk plant of 4 lakh liters per day(LLPD) capacity. where quality of milk proceeded and packed is second to one. . extendable up to 6 LLPD. . it is also the most modern and automated dairy in North India. Quality – Check Your Self: Laboratory results nerall y ent show that pouch milk low in from some fat local packers i s g e and mo stl y de fi ci in SNF. C o n t a c t u s t o g e t y o u r m i l k t e s t e d f r e e o f c o s t a t y o u r doorstep! Results will make you exclaim in disbelief . A l l proc essing operations are controlled from a c e n t r a l i z e d c o n t r o l r o o m through computers. Thus.E v e n t h e l o o s e m i l k h o m e d e l i v e r e d t o i n c a n s to frothiness)as well as i s invariab l y l ess inquantit y (d ye SNF. .Economy vs. Y o u m a y n o t k n o w t h e amount of SNF in the milk you consume unless it is tested.A rapidly growing distribution network. . It is the most modern and computerized dairy in North India. Parag Dairy c a n h e l p y o u . Some Unique Features of the Dairy: Th is is the fi rst ve r ti c al d ai r y o f Asi a wi th i t s va ri ous se cti ons l o c at ed in t he b as e me n t and three floors of the buildin g. !!! Then you will pay only for fat and SNF (the vital factor) and not for water.

untouched b y h a n d . With the aim of becoming a bests e l l e r h e re as well. . So that your famil y have more milk and thereby. become more healthy. P arag i s no w get tin g clo ser to b eco mi n g a well k n o w n brand in the National Capital Region. P .P. preferences and requirements . efficiently and hygienically PARAG MILK: After having won the hearts of thousands people and becoming youth No. and other regions in north and east. With a n affo rd abl e p ri ce. t o c a t e r t o t h e d e m a n d o f t h e N a t i o n a l C a p i t a l r e g i o n . There has been an increase in the market completion due to the coming up of many private dairies that has introduced their own brand of milk product.Designed to handle and pack liquid milk in poly packs.In view of specific individual needs. in co mp arabl e p u r i t y a n d hygiene.1 m i l k i n U .various types of milk with different special qualities have been developed so as to meet the requirements of all sections of the consumers PRODUCT LINE OF PARAG Dairy products are manufactured under the name PARAG They had a considerable market share in U. AMUL products still have to face a stiff competition in Lucknow with PARAG products due to the efficient distribution network of the marketing division of LMU is liquid milk. Other milk products are: .

PANEER 5. SKIMMED MILK POWDER 7.1. FLAVORED MILK 6. Basic of the dairy work is like this structure – . BUTTER 3. its evolution and organization structure. CURD COLLECTION AND DISTRIBUTION OF MILK This report present detailed information about the Lucknow Milk Union (PARAG). GHEE 4. MATTHA 10. Dairy work happens through various procedures. MILK CAKE 8. ICE-CREAM 9. MILK 2.

looks after salaries and wages and various human resources problems of production. government. . Whereas the marketing is engaged in distribution and proper sale of these products.Milk Collection Mechanism Milk Distribution Mechanism Parag is the brand name of products of Lucknow Producers Co-operative milk union. “PUBLIC RELATION means the effort made by industries. It is a big co-operative unit based on values of understanding and co-operation profit for milk producers and providing quality products to consumers at a cheaper price . occupation. butter etc. The industry unit is engaged in the function of producing various industrial products like milk. butter etc. corporation.“PARAG” does maximum utilization of milk to increase milk efficiency in reasonable costs of production and hence overall costs. unions. Work of „PARAG‟ may be divided into 3 subunits: a) Marketing b) Administration and production c) Industry Unit Administration co-ordinates various functions. Whereas the marketing is engaged in distribution and proper sale of these products like milk. or other organizations to establish productive relationship report and partnership” It is popularly defined as on the other basis of acceptance of well organized efforts by society for welfare and development of entire community.


Section .B Introduction to the Topic .

Current assets .Current Liabilities .Circulating Capital Structure of Working Capital Circulation of Working Capital Classification of Working Capital Importance of Working Capital Management Meaning of Working Capital Management Significance of Working Capital Management • • • • • • • Difference between Working Capital Management and the Fixed Assets Management • • • • • • • • • • • • Theory of Working Capital Management Factors influencing Working Capital Requirements Principles of Working Capital Management The Operating Cycle Duration of Operating Cycle Determinants of Working Capital Forecasting of Working Capital Control of Working Capital Adequacy of Working Capital Sources of Working Capital Structure of Working Capital The Present Study and Methodology .Working Capital Management • Concept of Working Capital Management .

According to qualitative concept the amount of working capital refers to “excess of current assets over current liabilities. To run the business operations short–term assets are also required.‟ A major part of the long-term funds is invested in the fixed assets. „Gross concept‟ is useful.”3 The excess of current assets over current liabilities is termed as „Net working capital‟. Guthmann defined working capital as “the portion of a firm‟s current assets which are financed from long–term funds. whereas in evaluating the liquidity position of an undertaking „Net concept‟ becomes pertinent and preferable. Concept of Working Capital Management There are two concepts of working capital viz.J. The qualitative concept gives an idea regarding source of financing capital. the amount of working capital refers to „total of current assets‟. It is necessary to understand the meaning of current assets and current . “If the objectives is to measure the size and extent to which current assets are being used. „circulating capital‟. What we call current assets? Smith1 called. Both the concepts of working capital have their own points of importance. as gross quantitative and qualitative. The long – term investment may be termed as „fixed investment. In this concept “Net working capital” represents the amount of current assets which would remain if all current liabilities were paid. Current assets are considered to be gross working capital in this concept. These fixed assets are retained in the business to earn profits during the life of the fixed assets.The uses of funds of a concern can be divided into two parts namely long-term funds and short-term funds.”2 L. According to quantitative concept. Some people also define the two concepts concept and net concept.

This liability is also known as accounts payable and shown in the balance sheet till the payment has been made to the creditors.”6 Circulating capital – Working capital is also known as „Circulating capital or current capital.” Structure of Working Capital The different elements or components of current assets and current liabilities constitute the structure of working capital which can be illustrated in the shape of a chart as follows: . (i) short life span.‟ “The use of the term circulating capital instead of working capital indicates that its flow is circular in nature. Cash balance may be held idle for a week or two. which is explained below: Current assets – It i s rightly observed that “Current assets have a short life span. The claims or obligations which are normally expected to mature for payment within an accounting cycle are known as current liabilities. and (ii) swift transformation into other form of assets. account receivable may have a life span of 30 to 60 days.liabilities for learning the meaning of working capital.”4 Fitzgerald defined current assets as.e. and inventories may be held for 30 to 100 days.”5 Current liabilities – The firm creates a Current Liability towards creditors (sellers) from whom it has purchased raw materials on credit. The two important characteristics of such assets are. These type of assets are engaged in current operation of a business and normally used for short– term operations of the firm during an accounting period i. or the creation of other current assets. or the creation of other current liabilities. “cash and other assets which are expected to be converted in to cash in the ordinary course of business within one year or within such longer period as constitutes the normal operating cycle of a business. These can be defined as “those liabilities where liquidation is reasonably expected to require the use of existing resources properly classifiable as current assets. within twelve months.

raw materials and used to pay to creditors. the business becomes lifeless. “The working capital plays the same role in the business as the role of heart in human body. produce finished . wages and overhead expenses are paid which in result goods for sale. The current assets and current liabilities are flowing round in a business like an electric current. Working capital funds are generated and these funds are circulated in the business.1 depicting „Working Capital Cycle‟ makes it clear that the amount of cash is obtained mainly from issue of shares. Circulation of Working Capital At one given time both the current assets and current liabilities exist in the business.”7 Figure No. However. The raw materials are processed. processed. As and when this circulation stops.Structure of Current Assets and Current Liabilities Current Liabilities Bank Overdraft Creditors Current Assets Cash and Bank Balance Inventories: Raw-Materials Work-in-progress Finished Goods Spare Parts Accounts Receivables Bills Receivables Accrued Income Prepaid Expenses Short-term Investments Outstanding Expenses Bills Payable Short-term Loans Proposed Dividends Provision for Taxation. Cash funds are used to purchase fixed assets. borrowing and operations. etc. It is because of this reason that he working capital is known as the circulating capital as it circulates in the business just like blood in the human body.

The sale of goods may be for cash or credit. tax and dividends while remaining is retained in the business. A portion of profit is used for payment of interest. Classification of Working Capital The quantitative concept of Working Capital is known as gross working capital while that under qualitative concept is known as net working capital. are also generated Funds from operation and sale of fixed assets. cash is directly received while in later case cash is collected from debtors. The important classifications are as given below: . Working capital can be classified in various ways. In the former case. This cycle continues throughout the life of the business firm.

Conceptual classification – There are two concept of working viz. Such type of classification is very important for hedging decisions. Deficit of working capital exists where the amount of current liabilities exceeds the amount of current assets. Gross Working Capital = Total Current Assets Net Working Capital = Excess of Current Assets over Current Liabilities Working Liabilities Capital Deficit over Current Assets. Seasonal or variable working capital. quantitative and qualitative. (ii) Balance Sheet Working Capital – The data for Balance Sheet Capital. ”Temporary called as fluctuating or seasonal investment needed during prosperity and the growth of the business. (i) Temporary Working Capital – Temporary Working Capital is also working capital. This concept of working capital has assumed a great significance in recent years as it shows the adequacy of cash flow in business. The above can be summarised as follows: I. viz. This represents It increases capital additional with is the favourable seasons. III. gross Working Capital and Working Capital deficit. (i) permanent or fixed working capital.... II. capital The quantitative concept takes into account as the current assets while the qualitative concept takes into account the excess of current assets over current liabilities. Classification on the Working Capital can be Basis divided of Variability – Gross in two categories viz. = Excess of Current Classification on the basis of financial reports – The information of working capital can be collected from Balance Sheet or Profit and Loss Account. working additional assets required to meet the variations in sales above the permanent level.”8 This can be calculated as follows: . as such the working capital may be classified as follows: (i) Cash Working Capital – This is calculated from the information contained in profit and loss account. It is based on „Operating Cycle Concept‟s which is explained later in this chapter. and (ii) Temporary. On this basis the Working Capital can also be divided in three more types. net Working Working Capital is collected from the balance sheet.

”9 This is also called as regular working capital. Amount Working of such is the investment is called as permanent working capital. There is always a minimum level of cash. to assure the firm‟s long. Both. Shortage or bad management of cash may result in loss of cash discount and loss of reputation due to on due dates.”10 Adequate working capital provides a cushion for bad days.Temporary Working Capital = Total Current Assets – permanent Current Assets (ii) Permanent Working Capital – It is a part of total current assets which is not changed due to variation in sales. O‟ Donnel et al. Like-wise facility of credit sale is also very essential for sales promotions.11 An enterprise should maintain adequate working capital for its smooth functioning.term success and to achieve the overall goal of maximization of the shareholders. to utilize fixed assets gainfully. fund. “Permanent Capital amount of working capital that persists over time regardless of fluctuations in sales. It is rightly observed that “many a working capital. adequate amount of working capital is very essential. non-payment of obligation Insufficient inventories may be the main cause of production held up and it may compel the enterprises to purchase raw materials at unfavourable rates. Importance of Working Capital Management For smooth running an enterprise. a concern requires funds to finance inventories and receivables. inventories.” The adequacy of cash and current assets together with their efficient handling virtually determines the survival or demise of a concern. and accounts receivables which is always maintained in the business even if sales are reduced to a minimum. . correctly explained the significance of adequate working capital and mentioned that “to avoid times business failure takes place due to lack of interruption in the production schedule and maintain sales. Efficiency in this area can help. as a concern can pass its period of depression without much difficulty.

Liberal credit . Reckless purchase of materials. regarding delay in payments. At the same time it may increase the cost due to mishandling. Sometimes. Carelessness . 8. 7. It is difficult to pay dividend due to lack of funds. Implementation of operating plans becomes difficult and a concern may not achieve its profit target. Paucity of working capital is also bad and has the following dangers: commitments. Liberal credit facility can increase bad debts and wrong practices will start. size of accounts receivables will also increase. Stagnates growth as the funds are not available for new projects. 5. This may create situation of over capitalisation. This will hamper the image of a concern in future when speculative loss may start. An enterprise looses its reputation when it becomes difficult even to meet day-to.Inventory is purchased recklessly which results in dormant slow moving and obsolete inventory.Excessive working capital will lead to carelessness about costs profitability. Speculative tendencies - Speculative tendencies may increase and if profit is increased dividend distribution will also increase. 3. The danger of excessive working capital are as follows: Heavy investment in fixed assets – A concern may invest heavily in its fixed assets which is not justified by actual sales.Due to liberal credit. 2. a concern may be bound to sale its product at a very reduced rates to which will adversely affect the . theft. Bargaining capacity is reduced in credit purchases and cash discount could not be availed. waste. 4.excessive working capital and inadequate working capital will impair the profitability and general health of a concern. 6. A concern will have to borrow funds at an exorbitant rate of interest in case of need. etc. Operating inefficiencies may creep in when a concern cannot meet it financial promises.

collect funds which may harm its image. The alternatives pleasant. A firm can exist and survive without making profit but cannot survive without working capital funds. each firm must decide how to balance the amount of working capital it holds. “There is usually a distinction made between the investment decisions concerning current assets and the financing of working capital. Bankruptcy is one alternative. bankruptcy but. current liabilities and inter-relationship between them is termed as working capital management.” Significance of Working Capital Management Funds are needed in every business for carrying on day. the working capital is one of the most important areas requiring management review. If a firm is not earning profit it may be termed as „sick‟. the following two aspects of working capital management emerges: (1) To determine the magnitude of current assets or “level of working capital” and (2) To determine the mode of financing or “hedging decisions.”14 Working capital has acquired a great significance and sound position in the recent past for the twin objects of profitability and liquidity. Thus. not having working capital in order to capital may cause its are not working survive. “Working capital management is concerned with problems that arise in attempting to manage the current assets.”13 From the above.”12 In practice. Being acquired on unfavourable term as another. the current liabilities and the inter-relationship that exist between them. against the risk of failure. Working capital funds are regarded as the life blood of a business firm. .to-day operations. Meaning of Working Capital Management The management of current assets. In period of rising capital costs and scare funds.

“Constant management review is appropriate levels in the various working capital accounts. Importance of working capital management stems from two reasons. dividend declaration.”16 It consumes a great deal of time to increase profitability as well as to maintain proper liquidity at minimum risk. and (ii) level of current assets and current liabilities will change quickly with the variation in sales. However. plan and control them.”15 Mainly management the success of a ofworking concern capital required to maintain depends so upon proper capital “working management has been looked upon as the driving seat of financial manaser. Failure of any enterprise management is undoubtedly due to poor and absence of management skill. rising price level. but its response will be weak. increase in salaries and wages. management three important capital management in managing fixed assets time is very important. In fact we need to know when to look for working capital funds. There are many aspects of working capital management which make it an important function of the finance manager.It is rightly observed that. etc. Though fixed assets investment and long-term borrowing will also response to the changes in sales. new product line. put added strain on working capital maintenance. discounting and compounding aspects of time element play .. viz. Sales expansion. (i) A substantial portion of total investment is invested in current assets. how to use them and how measure. working Firstly. fixed and ways. Consequently.A of working capital management is very important study foe internal and external experts. plants expansion.. Difference between the Working Capital Management and the Fixed Assets Management In fact management of working capital is similar to that of fixed assets management in the sense that in both cases a firm on its analyses their effects assets differ in profitability and risk.

“There is no precise way to determine the exact amount of gross or net working capital for every enterprise. which can be adjusted with sales fluctuations in the short-run. large holdings of current assets specially cash. The goal of working capital management is to manage a firm‟s current assets and current liabilities in such a way that a satisfactory level of working capital is maintained. It is rightly observed that. but it is only current assets.a significant role in capital budgeting and a minor one in the working capital management. therefore.relationship that exist between them. Briefly. the current liabilities and the inter. Nature of business--Trading and industrial concerns require more funds for working optimum level of current assets depends upon following . Factors Influencing Working Capital Requirement Numerous factors can influence the size and need of working capital in a concern. So no set rule or formula can be framed. the level of fixed as well as current assets depends upon the expected sales. strengthen a firm‟s liquidity position (and reduce risks). Theory of Working Capital Management The interaction between current assets and current management. the main theme of the theory of working capital Working capital management is concerned problem that arises in attempting to manage the current assets. Thirdly. with the liabilities is. The data and problem of each company should be analysed to determine the amount of working capital. Secondly. the determinants. but they also reduce overall profitability.

capital.If the supply of inventory is prompt and adequate. In addition to it. less working capital will be needed.It is not always possible to shift the burden of production and sale to slack period. less funds will be needed. Credit Availability-. if the supply is seasonal or unpredictable. In order to ensure that unnecessary funds are not tied up in book debts. it will invest more in fixed assets. Credit policy of enterprises-In some enterprises most of the sale is at cash and even it is received in advance while. Conditions of supply-. But. sales department may follow a policy of off-season discount. and the production technique. the enterprise should follow a rationalized credit policy based on the credit standing of the customers and other relevant factors. For example. depending upon the size of business.If credit facility is available from banks and suppliers on favourable terms and conditions. the nature of the product. if a concern is engaged in electric supply. in case of sugar mill more working capital will be needed at the time of crop and manufacturing.In case of seasonal fluctuations in sales. Investment in working capital will fluctuate in case of seasonal nature of supply of raw materials. In former case less working capital is needed than the later. spare parts and stores. For example. production will fluctuate accordingly and ultimately requirement of working capital will also fluctuate. firstly due to cash nature of the transactions and secondly due to sale of services. it will need less current assets. However. Concerns engaged in public utility services need less working capital. variations in working capital requirement are avoided. in other sales is at credit and payments are received only after a month or two. Production policy-. the investment varies concern to concern. . If such facilities are not available more working capital will be needed to avoid risk. Seasonal Operations-. more funds will be invested in inventory. However. so that production can be distributed sales smoothly and throughout the year and sharp. The credit terms depend largely on norms of industry but enterprise some flexibility and discretion.

It is clear that advance planning is essential for a growing concern. etc. however. from finished goods to accounts receivable and from accounts receivable to cash.The need of working capital is increasing with the growth and expansion of an enterprise. When working capital in relation to sales is increased it will reduce risk and profitability on one side and will increase liquidity on the other side. transport facility. The effect of rising prices will be different for different enterprises. with the increase in sales more working capital is needed for finished goods and debtors. Price level change─ With the increase in price level more and more working capital will be needed for the same magnitude of current assets.Growth and expansion-. The critical fact. means of communication. Principles of Working Capital Management . is that the need for increased working capital funds does not follow growth in business activities but precedes it.e. Management ability ─ distribution Proper co-ordination of goods in production may reduce and the requirement of working capital. It is difficult to precisely determine the relationship between volume of sales and the working capital needs. needs of working capital is reduced because it can be available as and when needed. Liquidity and profitability-There is a negative relationship between liquidity and profitability. non-recoverable debts. from cash to material. its vice versa is also true. form work-in-progress to finished goods. Circulation of working capital─ Less working capital will be needed with the increase in circulation of working capital and vice-versa. as minimum funds will be invested in absolute inventory. etc. Circulation means time required to complete one cycle i. from material to work-in-progress.This is directly indicated with working capital requirement.. External Environment ─ With development of financial institutions. Volume of sale-.

the amount of risk that a firm assumes is also varied and the opportunity for gain or loss is increased. Conversion of finished goods into debtors and bills receivables through sales. As a firm assumes more risk.The following are the principles of working capital management: Principles of the risk variation─ Risk here refers to the inability of firm to maintain sufficient current assets to pay its obligations. and vice-versa. . If working capital is varied relative to sales. In other words. It should be remembered that the cost of capital moves inversely with risk. be provided for any short-term debt Operating Cycle The duration of time required to complete the following sequence of events. there is a definite relationship between the degree of risk and the rate of return. Every rupee invested in the working capital should contribute to the net worth of the firm. Principle of maturity of payment─ A company should make every effort to relate maturity of payments to its flow of internally generated funds. 4. Conversion of raw materials into work-in. the opportunity for gain and loss also increases. if the level of working capital goes up. Principle of equity position─ According to this principle. 3. Conversion of work in process into finished goods. the opportunity for gain or loss increases. however. Thus. A margin of safety should. 2. Principle of cost of capital─ This principle emphasizes that different sources of finance have different cost of capital. There should be the least disparity between the maturities of a firm‟s short-term debt instruments and its flow of internally generated funds. in case of manufacturing firm. because a greater risk is generated with greater disparity. Conversion of cash into raw materials. When the degree of risk increases. the amount of working capital invested in each component should be adequately justified by a firm‟s equity position. is called the operating cycle: 1. Thus. the degree of risk increases. the opportunity for gain is like-wise adversely affected. additional risk capital results in decline in the cost of capital. amount of risk goes down.progress. As the level of working capital relative to sales decreases. payment.

Financial Concerns have a shortest operating cycle. The length of cycle will depend on the nature of business. . Conversion of debtors and bills receivables into cash.5. service concerns and financial concerns will not have raw material and workin-process so their cycle will be shorter. Non manufacturing concerns.

Operating Cycle of Manufacturing Concerns .

A number of factors influence the need and quantum of the working capital of a firm. and C = creditors payment period. W= work-in-process period. The components of the operating cycle may be calculated as follows: Average stock of raw materials and stores R= Average raw material and stores consumption per day Average work-in-process inventory Average cost of production per day W= Average finished goods inventory F= Average cost of goods sold per day per day D= Average book debts Average credit sales per day Average trade creditors Average credit purchase per day C= Determinants of Working Capital There are no set rules or formulas to determine the working capital requirement of a firm. Need of . In symbols. O = R + W + F + D – C Where. R = raw material storage period. O = duration of operating cycle. requirements and inventory than large corporations. These are discussed below: Nature of industry– The composition of an asset is related to the size of a business and the industry to which it belongs. F= finished goods storage period. Small companies have smaller proportion of cash. D=debtors collection period.Duration of the Operating Cycle The duration of the operating cycle is equal to the sum of the duration of each of these stages less the credit period allowed by the suppliers of the firm.

They want the amount of security in assets which are greater than liabilities. A firm maintains current assets because they are needed to support the operational activities which results in sales. As the volume of sales increases. The volume of sales and the size of the working capital are directly related to each other. They are relatively low in public utility concerns in which inventories and receivables are rapidly converted into cash. however. and invest large Volume of sales– This is the most important factor affecting the size and component of working capital. Working capital requirements depends upon the general nature and its activity on work.working capital is thus determined by the nature of an enterprise. If the time is longer.The level of working capital depends upon the time required to manufacture goods. the amount of working capital depends upon inventory turnover and the unit cost of goods that are sold. receivables. there is an increase in the investment of working capital in the cost of operations. Moreover. less cash will be invested in inventory. the amount of working capital required is greater and vice-versa. Cash should be adequate and properly utilized. Time. the larger is the amount of working capital. A minimum level of cash is always needed to keep the operations going. Manufacturing organisations. General nature of business– The general nature of a business important determinant of the level of is an the working capital. Cash requirements– Cash is one of the current assets which essential for the successful operations are of the production cycle. face problems of slow turn-over of inventories and amount in working capital. They want their advances to be sufficiently covered. Demand of creditors– Creditors are interested in the security of loans. working capital requirements can be reduced as a firm gets . With more favourable credit terms. The greater this cost. in inventories and in receivables. Terms of purchases and sales– If the credit terms of purchases are more favourable and those of sales less liberal.

With good and efficient inventory control. should choose between liquidity and profitability and decide about its working capital requirements accordingly. It makes it possible for management to . Business cycle– Business expands during periods of prosperity and decline during a period of depression. Variation in sales– A seasonal business requires the maximum amount of working capital for a relatively short period of time. A firm. Profit planning and control– The level of working capital is decided by management in accordance with its policy of profit planning and control. Liquidity and profitability– If a firm desires to take a greater risk for bigger gains or losses. However. If it is interested in improving its liquidity. therefore. Receivables turnover– It is necessary to have effective control over receivables.time for payment to creditors or suppliers. Production cycle– The time taken to convert raw material into finished products is referred to as the production cycle or operating cycle. Adequate profit assists in the generation of cash. of profitability. this policy is likely to result in a reduction of sales volume and. Utmost care should be taken to shorten the period of the production cycle in order to minimize working capital requirements. it increases the level of its working capital. the working capital requirements will be low. Inventory turnover– If the inventory turnover is high. it reduces the size of its working capital in relation to its sales. a firm is able to reduce its working capital requirements. the greater is the requirement of working capital. Prompt collection of receivables and good facilities for setting payables result into low working capital requirements. Consequently. The longer the duration of production cycle. therefore. more working capital is required during periods of prosperity and less during the periods of depression.

0 .000 = Rs. The expected working capital requirement would be. The duration of the raw material stage depends on regularity of supply. the following points should borne in mind: 1.000 x 73 + 5. The firm plans to reduce its operating cycle to 73 days and desired cash balance is Rs. Expects its cost of goods sold for the forthcoming year to be Rs.000 365 . Forecasting of Working Capital To forecast the working capital requirement for the next year the following formula may be used : (Estimated cost of goods sold x Operating Cycle) + Desired Cash Balance Control of Working Capital Working capital requirement depends upon the level of operation and the length of operating cycle. Example – X Ltd. transportation time. In this context.00.00.plough back a part of earnings into the business and substantially build up internal financial resources. Monitoring the duration of the operating cycle is an important ingredient of working capital control. 5 lakh.00. 2 crore. 45. 2. price fluctuations and economy of bulk purchase. For imported materials it takes a longer time. Activities of the firm– A firm‟s stocking of heavy inventory or selling on easy credit term calls for a higher level of working capital than a firm selling services or making cash sales. The present operating cycle of the firm is 78 days.

working capital is considered as the life blood and the controlling nerve centre of a business. a firm has to maintain a sound working capital. The duration at the debtors stage depends on the credit period granted. The duration of the finished goods depends on the pattern of throughout the year production and sales. In time series analysis the duration of the operating cycle and its individual components is compared over a period of time for same analysis the duration of firm. The duration of finished goods tends to be long.2. 4. and efficiency and rigour of collection efforts. and efficient coordination of various inputs.”19 Hence. Donnell and Milton S. In cross section the operating cycle and its individual components is compared with that of other firms of a comparable nature. 3. The duration of the work-in-process depends on the length of manufacturing cycle.20 Therefore. Gladberg observe “Many a times business failure takes place due to lack of working capital. discounts offered for prompt payment. O. Adequacy of Working Capital The importance of adequacy of working capital can hardly be over- emphasized. Inadequate working capital is business ailment. It should be adequate foe the following reasons: . If production is fairly uniform but sales are highly seasonal or vice versa. consistency in capacities at different stages. For this purpose time series analysis and cross section analysis may be done. It is helpful to monitor the behaviour of overall operating cycle and its individual components. John L.

. (14) fixed asset. Increasing price may necessitate bigger investments in inventories and Source of Working Capital Conventional generalizations relating to financing of working capital suggest that an amount equal to the basic minimum of current assets should be financed from . (3) It ensures. the maintenance of a company‟s credit standing and provides for such emergencies as strikes. floods. fires etc. The management may fail to obtain funds from other sources for purposes of expansion. There may be excessive non-operating or extraordinary losses. (2) It is possible to pay all the current obligations promptly and to take advantage of cash discounts. (11) (12) (13) There may be an unwise dividend policy Current funds may be invested in non-current assets The management may fail to accumulate funds necessary for meeting debentures on maturity.(1) It protects a business form the adverse effects of shrinkage in the values of current assets. etc. There may be operating losses or decreased retained earnings. (5)` (6) It enables a company to extend favourable credit terms to its customers. It enables a company to there is operate its business more efficiently because no delay in obtaining materials. (4) It permits the carrying of inventories at a level that would enable a business to serve satisfactorily the needs of its customers. (7) (8) (9) (10) It enables a business to withstand periods of depression smoothly. to a greater extent. because of credit difficulties.

elements of various working capital deserves: Inventory– Inventory is major item of current assets. Raw material inventories– Uncertainties about the future demand for finished goods. Current usually comprise bank tax and following points mention borrowings. together with the cost of adjusting production to change in demand will cause a financial manager to desire some level of raw material inventory. attempts to purchases hastily the needed raw material may necessitate payment of premium purchases prices to obtain quick delivery and. unavoidable delays in acquiring raw material may cause the production process to shut down and then re-start again raising cost of production. unpaid dividends relating to trade credits. Structure of Working Capital The study of structure of working capital is another name for the study of working capital cycle. inventory.21 It is obvious that such an arrangement helps to keep the cost of working capital finance to the minimum for an enterprise and gives a rise to its rate of return on the total funds employed. goods-in-process and finished goods is an important factor in the short-run liquidity positions and long-term profitability of the company. cash and bank balances and other liquid resources like short-term or temporary investments. In other words. it can be said that the study of structure of working capital is the study of the elements of current assets viz. Viewed thus. assessed The liabilities or any other such things. thus. raises cost of production. The management of inventories – raw material. these order costs may demandare become relatively large. the sources of working finance can be classified into permanent and the current sources of working capital finance. Under these conditions the company cannot respond promptly to changes in demand without sustaining . receivable. If changes in frequent. the company could respond to increased demand for finished goods only by incurring explicit clerical and other transactions costs of ordinary raw material for processing into finished goods to meet that demand. Moreover.long-term source and that only seasonal needs of working capital should be financed from short-term sources. Finally. In the absence of such inventory.

Till the production cycle is completed. than the cost of storing the material. the cost of carrying inventory.high costs. Thus. because the additional finished goods are not immediately available or sustain high costs of rapid additional production. unanticipated increases in customer demand would require sudden increases in the rate of production to meet the rate the of demand. Skilled labour also cannot be hired and fired at will. Modern requirements are also urgent. the stock of work. The flexibility afforded by such an inventory allows a meet unanticipated company customer to demands at relatively lower costs than if such an inventory is not held. the management needs to know about the functions of inventory. Since requirements cannot wait and since the cost of keeping machine and men idle is higher. stores and spare parts. Hence. Customer‟s demand for finished goods is uncertain and variable. Finished goods inventory– Finished goods are required for reasons similar to those causing the company to hold raw materials inventories. Determining its proper level requires an assessment of costs of buying and holding inventories and a inventories. Work-in-process inventory– This inventory is built up due to production cycle. (2) To keep down: . Production cycle is the time-span between introduction of raw material into comparison with the costs of maintaining insufficient level of production and emergence of finished product at the completion of production cycle. economic order quantity and safety stock. Rather than loss of sales. The objectives of inventory management are: (1) To minimize idle cost of men and machines causes by shortage of raw has to be maintained. some level of raw materials inventory has to be held to reduce such costs. it may be cheaper to hold a finished goods inventory. Such production may be rapid very increase in expensive to accomplish. to develop successfully optimum inventory policies. Industrial machinery is usually very costly and it is highly uneconomical to allow it to lie idle. it is economical to hold inventories to the required extent. If a company carries no finished goods inventory.

It is far cheaper for accumulating electricity usage and bill once a month. (b) Inventory carrying cost. the extension of credit by a firm and the resulting investment in receivables occurs because it pays a firm to do so. Therefore. Customers confined to cash purchases may tend to purchase goods when cash is available to them. Therefore. an electric supply company employing a person at every house constantly reading electricity meter and collecting cash from him every minute as electricity is consumed. Even if customers do obtain credit elsewhere. and (iii) increase in the level of near-term sales. Customers need not wait to accumulate necessary cash to purchase an item but can acquire it immediately on credit. (i) reduction of collection costs over cash collection. It may also be true that the extension of credit by the firm to its customers may reduce the variability of sales over time. cost of adjusting production to changes in the level of sales should be reduced. is a decision to carry receivables on the part of the company. Finally. the cost of that policy may be very high relative to costs associated with delaying the receipt of cash by extension of credit. This of course. Capital investment in inventories. Costs of collecting revenues and . they must incur additional cost of search in arranging for a loan costs that can be estimated when credit is given by a supplier. the extension of credit by firms may act to increase near-term sales. (ii) Reduction in the variability of sales. This behaviour has the effect of shifting future sales close to the present time. While immediate collection of cash appears to be in the interest of shareholders.. for example. To the extent that sales are smoothed.(a) (c) Inventory ordering cost. Erratic and perhaps cyclical purchasing patterns may then result unless credit can be obtained elsewhere. Imagine. The practice of carrying receivables has several advantages viz. (d) Obsolescence losses Receivables – Many firms make credit sales and as a result thereof carry receivable as a current asset. extension of credit to customers may well smooth out of the pattern of sales and cash inflows to the firm over time since customers need not wait for some inflows of cash to make a purchase.

This leads to the question as to what is the optimum level of this idle resource. is a non-earning asset. because it is a form of liquid capital which is available for assignment to any use. Cash-in- hand. This optimum depends on various factors such as the manufacturing cycle.adapting to fluctuating customer demands may make it desirable to offer the convenience associated with credit to firm‟s customers. It also depends upon the liquidity of other current assets and the matter of expansion. however. the sale and collection cycle. extension of credit is made even more attractive for the firm. The decision to expand a business may availability of will frequently cash and be dictated be determined by of the funds the borrowing by cash position. While a liberal maintenance of cash provides a sense of . Cash and interest-bearing liquid assets– Cash is one of the most important tools of day-to-day operation. Cash is often the primary factor which decides the course of business destiny. age of the bills and on the maturing of debt. To the extents that near sales are also increased.

in the ultimate analysis. However.”22 The proper management of working capital is. The collected data have been analyzed with the help of statistical techniques and computer software. It has not become a practice with business enterprises to avoid too much redundant cash by investing a portion of their earnings in assets which are susceptible to easy conversion into cash. The analysis. therefore. the companies given in CMIE-Prowess-Database-Package. a lack of sufficiency of cash hampers day-to-day operations. Methodology– There were many cement companies in India. One reason for analyzing the .security. conclusions and suggestions have been presented in the form of this study. Such assets may include government securities. the manner of administration of working capital determined to a very large extent. findings. The Present Study and Methodology The importance of the study is emphasized by the fact that as pointed out earlier in this chapter. Many times. for the success of an enterprise which involves the administration of all current assets. and sometimes an excuse of business failure. author visited some of the companies and discussed various issues with the management of the respective companies. shortage of working capital is given out as its main cause. bonds. therefore. reports of The annual these companies have been collected from financial statement data of In addition. of crucial importance. it may be mismanagement o f r es ou r ce s of the firms that converted. requires that no more cash should be kept on hand than the optimum required for handling miscellaneous transactions over the counter and petty disbursements etc. Prudence. debentures and shares that are known to be readily marketable and that may be liquidated at a moment‟s notice when cash is needed. in the event of the failure of a business concern. the success or failure of overall operations of an enterprise. otherwise successful business into an unsuccessful one “Inadequacy of working capital is a symptom. Analysis of working capital methods– Various reasons may make it essential to analyse the working capital position of a business enterprise.

for each aspect of analysis certain ratios are computed and then results are drawn on the basis of trends shown by them against those fixed as guide– posts. if the unexpected should arise which may indicate whether the working capital is sufficient.or under-invested the cash in its operating cycle. One is the funds flow analysis and the other is ratio analysis. 2. The comparison of current assets and current liabilities. In this technique. To the former it communicates . There are two important tools for analyzing the working capital position of an enterprise. Various ratios are used in analyzing the various aspects of the working capital position of an enterprise: (a) Liquidity of Working Capital– An analysis of the liquidity of working capital is of use for both the short.term creditors and internal management or a business enterprise. A second reason is to enable management to detect trends and take corrective steps when the analysis indicates need for them. the extent to which a concern has over. as shown in the balance sheet at the beginning and at the end of a specific period.working capital position of a company is to see what will be found when financial statements are examined. 1.the chances of receiving payment at the time of maturity. Two appropriate tests of this important feature of the working capital analysis are to be found in the computation of current and quick ratios. A third reason is to see what changes have taken place in the company over a period of time so that this knowledge may be used in setting guidelines. Ratio Analysis of Working Capital– This is the most commonly used technique which deals practically with each and every aspect of working capital analysis. this technique does not throw light on the question whether the working capital is being used most effectively and whether the current financial position of the enterprise has improved. This technique helps to analyze changes in working capital components between two data. However. the margin of safety. shows changes in each type of current assets as well as the sources from which working capital has bean obtained. Funds Flow Analysis of Working Capital– This analysis shows how funds have been procured for a business and how they have been employed. The details of the current and quick ratios have been discussed in the chapter where ratios .

The details of the above ratios have been given in the respective chapters. It helps an analyst to know whether the size of working capital maintained by an enterprise is excessive or short of or adequate to its requirements.have been computed and analyzed. Various ratios can be computed working capital to know the sufficiency of the size of and movements in the quantum of working capital in successive or “months‟ cost “months‟ periods.” The results of these ratios when compared with the quide-posts (as prevailing in the enterprise or in the industry). Receivables turnover ratio. inadequate or of an excessive order. inventory amount. Since the net concept of working capital has been taken . The two most important tools in this connection are the computation of the size of working capital in terms of production” and average sales turn. This aspect of the analysis o f w o r k i n g c a p i t a l focuses on the level of working capital.over. are calculated which show efficiency of the use of working capital in each or its components as well as on the whole. The attempts to determine the efficiency study and of index numbers. For this purpose various turnover ratios such as inventory turnover ratio. Generally the higher the level of these turnover ratios.e. cash and bank balances and various current liabilities. the smaller would be the working capital requirements of an enterprise. capital. cash turnover ratio etc. (b) Circulation of working capital– An analysis of circulation of working capital highlights the efficiency which working capital is being utilized. A comparison of working capital with other variables such as the output and sales over various years may also give a hint to an analyst about the trends in the growth of working use ratios may help to accomplish this task. Scope and Purpose of Present Study The present study “Working Capital Management in Cement Industry In India” analyses the efficiency of the working capital management and its components i. The percentages and effectiveness of management in each segment of working capital. show whether the size or working capital maintained is of sufficient.

That external sources of finance particularly bank borrowing are being liberally utilized in financing the working capital requirement of industry in the present study. Objectives of the study The present study has been undertaken to achieve the following objectives with regard to management of working capital in Cement Industry of India: . This will enable to increase the profitability of the concern and the firm could be able to meet its obligation will in time. Hypotheses of the study The study has been pursued to test the following hypotheses with reference to Cement Industry in India: 1. 2. 4. That the scope for improvement in the management of working capital is greater in inventory as well as receivables management than in cash management. We often start with as assertion or a hypothesis and use our research data to prove or to disprove it. The business concern has therefore to optimize the use of available resources through the efficient and effective management of the current assets and current liabilities. Every hypothesis put to test with know statistical procedure and unless such tests are carried out a research is not complete. The efficient and effective management of working capital is of crucial importance for the success of a business. That proper management of working capital improves both „Liquidity current and Profitability‟ position of a business firm. management of both current assets and current liabilities will be critically reviewed The importance of the study is emphasized by the fact that the manner of administration of current asset and current liabilities determined to a very large extent the success or failure of a business. 3. That the private sector of the industry is definitely in a better than the public sector. as far position as management of working capital is concerned. which involves the management of the current assets and the current liabilities.

To analyze new technique in cement industry with a view cutting costs and increasing efficiency to in production and distribution so as to raise the level of production and consumption. 10. . companies due to its nature of demand and supply. 5. To suggest on the basis of conclusions. 7. Methods of Study In the present study.1. 9. working capital. To analyze and evaluate working capital management of selected units. receivable and cash management performance 3. To analyze the impact of cement industry on the national economy. working capital. the company will be selected on the basis of capital employed. To compare the selected units of the private sector regarding To assess the relative significance of various sources of financing of management of working capital. Obviously. innovation in the management of working capital in Cement Industry in India. To analyse the growth in the sector of production and installation policies and capacities during five year plans. 2. it will be a comparative study through empirical methods of the study. These companies are: (i) (ii) (v) ACC Gujarat Ambuja (iii) Mangalam Cement Shree Cement (iv) Indian Cement To know the profitability of cement industry and its impact on As the case study of five companies. production. 8. 41 To find out the fluctuations arising in working capital in various cement 6. government policies thereto. 4. top five cement companies have been selected out of more than 50 cement companies in India. To evaluate the inventory.

interview of top official in these companies would arranged to make the empirical aspect be more the of basically a meaningful. policies and procedures followed in the management working capital in the selected units have been collected through personal discussions with the top executives the units. coefficient of correlation and . various selected statements and ratios have been calculated. Besides these empirical methods of study. various newspapers and articles relating to industry. aspect of as the the management is working management human problem.Simultaneously. a histro. In addition to this primary data about practices. That is why interviews have been planned in the course of study. fund flow and cash flow statements have been prepared and interpreted through different statistical techniques analysis of variance. of by journals. With the help of data related to the study.descriptive method would also be used in order to make the study and practically academically important exercise. This information collected data from was supplemented books. It is expected that direct interviews may provide insight into practical and behavioural capital. significant The data relating to management of working capital of cement industry and its selected units has been collected from the published annual reports of the companies for the year 2003-04 to 2007-2008 which were directly obtained from the registered offices of respective companies.

given value of independent the linear regression equations have been used. (i) Arithmetic mean– It gives a single value to describe the whole data. use of various accounting statistical techniques have been and made. With the help of conclusions drawn.05. if exceed. (ii) Chi-square test– If the calculated value of Chi-square exceeds the tabulated value at . receivable and current liabilities) have been explained at the relevant places in different chapters. Further. Accounting technique includes ratio analysis and funds flow statement. Ratio Analysis– The purpose of the ratio analysis has been three-size analysis. is not significant. If less than .05. in this type of analysis the value of Chi-square have been computed in order to ascertain the closeness of the relationship between dependent and independent variables. composition analysis and efficiency analysis. suggestions have been presented to improve the efficiency of management of working capital in the industry. (iv) Linear Regression Analysis: To make projection of dependent variables (such as working variables capital. (iii) Trend Indices– In order to measure the change in the relative proportion of various components of the working capital to the total such indices have been computed. receivables and cash) for a (sales) possible. Various ratios computed in order to analyse the size.regression etc. significant at 1 percentage level. inventory. Adding the value of all observations and dividing it by the numbers of observations have obtained simple arithmetic mean of each series of different ratio. In the course of analysis in the study. 01 values. it indicates that the difference between Chi-square and ╧ is significant at 5 percent level. . composition and circulation of working capital and its various components (Inventory.

The practices of dispatching material which could not be billed immediately is not be encouraged head of the unit shall personally reviewed goods dispatched but pending for more then three month on regular basis. A focused presentation on this has to be made to the budget team units must strive hard to control the increase in differed debts and also old and held outstanding. bills under verifications. The inventory against AMA‟s need to be reviewed & reduced. turn over recognized but not billed due to various reasons etc. . Book Debts Units and business sector should continued with their vigorous efforts to achieve minimum level of 180 days to turn over at the company level. without immediate billing and corresponding billing and corresponding cash collections are to be reviewed thoroughly and the billing schedule with the customer may be reviewed thoroughly and the billing schedule with the customer may be reviewed for changes. II.MANANGEMENT OF WORKING CAPITAL I. The dispatches. The areas to be focused a part from the collectable out standing from the current bills are. which only add to turn over. INVENTORY It is time to review our inventory level and ensure reduction as number of days of turn over. dues against different debts. Sincere effort should be made for liquidation of non / slow moving inventory.

DIVERSTMENT OF UN PROFITABLE PRODUCT LINE As part of budget exercise the unit shall have a detailed review of the market share . The units should also generates free cash flow from their operations. 451. Allocation of funds to units with negative balance at any point of time will be done with my approval. The free cash flow for R. CAPITAL EMPLOYED In 2007-08. from Rs. Increases in capital employed due to the recent investment in modernization scheme should also give the return commitment in the project report.6 cr is outstanding against final payment which could be realized by the solving to the contract closing issues.E-2006-07 B. Better working capital management will help us to reduce the capital employed.49cr. the capital employed has increased to Rs.51 cr. CONTRACT CLOSING ISSUES Miner supply from units to settle outstanding commercial disputes in respect of project completed in the part of contract were of are yet to closed. CASH FLOWS Units should ensure positive net flows through the year.E-2007-08 should be presented to directors. Units shall make focused presentation on their action plan to the budget team.III. VI. V.3. should also be fully included in the budget to insure expenditious closure of old contract and realization of large overdue outstanding an amount of Rs. 447. in 2006-07. IV. This will also enable to withdraw huge amount of provision created for contractual obligation.

in constitution with business sectors and develop strategie .

This process takes three main forms (although. The research room at the New York Public Library. Secondary research Using secondary sources. interpretation of. which tests theories and proposes solutions to a problem or question. i. original documents and data.e. a synthesis of.e. i.  Empirical research. which tests the feasibility of a solution using empirical evidence. ... an example of secondary research in progress. There are two ways to conduct research: Primary research Using primary sources. as previously discussed. Constructive research. which helps to identify and define a problem or question. or discussions about primary sources.RESEARCH METHODOLOGY Meaning of Research Methodology: The goal of the research process is to produce new knowledge or deepen understanding of a topic or issue. the boundaries between them may be obscure):   Exploratory research.

The quantitative research designs are experimental. Researchers choose one of these two tracks according to the nature of the research problem they want to observe and the research questions they aim to answer: Maurice Hilleman is credited with saving more lives than any other scientist of the 20th century. Quantitative research Systematic empirical investigation of quantitative properties and phenomena and their relationships.[15] Statistics derived from quantitative research .There are two major research designs: qualitative research and quantitative research. and typically limited to a single set of research subjects. This type of research looks to describe a population without attempting to quantifiably measure variables or look to potential relationships between variables. Asking a broad question and collecting word-type data that is analyzed searching for themes. Asking a narrow question and collecting numerical data to analyze utilizing statistical methods.[14] Qualitative research Understanding of human behavior and the reasons that govern such behavior. Qualitative research is often used as a method of exploratory research as a basis for later quantitative research hypotheses. and survey (or descriptive). correlation. It is viewed as more restrictive in testing hypotheses because it can be expensive and time consuming.

variable. the term should be in technical sense. The Quantitative data collection methods rely on random sampling and structured data collection instruments that fit diverse experiences into predetermined response categories. and generalize. Quantitative research is concerned with testing hypotheses derived from theory and/or being able to estimate the size of a phenomenon of interest. These methods produce results that are easy to summarize. One can define Research as a scientific and systematic search for pertinent information on a specific topic. formulating hypothesis or suggested solutions . the researcher will employ probability sampling to select participants. Depending on the research question.[16] Research in common parlance refers to a search of knowledge. In fact Research is an art of scientific investigation.can be used to establish the existence of associative or causal relationships between variables. or outcome. compare. participants may be randomly assigned to different treatments (this is the only way that a quantitative study can be considered a true experiment). organizing and evaluating data . Research comprises defining and redefining problems. . the researcher may collect data on participant and situational characteristics in order to statistically control for their influence on the dependent. collecting . It is an academic activity and as such . If this is not feasible. making deductions and reaching conclusions and at last carefully testing the conclusions to determine whether they fit the formulating hypothesis. If the intent is to generalize from the research participants to a larger population.

formulating the hypothesis . collecting the facts or data. It is the persuit of truth with the help of study . In short . a movement from the known to unknown.Research is thus an original contribution to the existing stock of knowledge making for its advancement. As such the term Research to the systematic method concerning the enunciating the problem. . analysis the facts and reaching certain conclusions either in the form of solutions towards the concerned problem or in certain generalizations for some theretical formulation.It is actually a voice of dictionary. Some people consider Research as a movement. The systematic approach concerning generalization and the formulation of the theory is also a research. compression and experiment. observation . the search of knowledge through objective and systematic method of finding solution to a problem.

000 lit/day (3 yrs) 600000 lit/day (4 yrs) I II. Working days Total projected investment 365 800 laks . Maximum plant capacity Actual production of plant 600.METHODOLOGY Following are the information about PPM plant installation : I.000 lit/day (2 yrs) 400. II.000 lit/day 100.000 lit/day (1 yrs) 300. I V.

INITIAL INVESTMENT 1 Yrs – Civil investment Building investment 2 Yrs – Civil investment Building investment 100 lacs 80 lacs 225 lacs 225 lacs INTERPRITATION .

438 .412 5 yrs 1.RETURN ON INVESTMENT: = EBIT(1-T)/Total assets Years Return on investment: 1 yrs 2 yrs -.55 4 yrs 1.20 3 yrs .09 .

55 3.412 (which is near about thrice the before amount) and reached to 1. Return on investment become positive in 2 nd and 3 rd year and reaches to . In fourth year. Civil investment Building investment = = 80 lacs 60 lacs Depreciation – building Civil = = 15% 10% Cost of capital = 8. Return on investment is negative in first year by -.5% MRP Trade Margin = p/l = 18.438 in fifth year.5 avg Rs.09 2.NOTE: 1. company has attained full capacity of production . due to which Return on investment has shut upto 1. 1% VARIABLE COST: .

p/l .80 paisa p/l 1 Rs p/l Fixed Cost = 100 lacs DEBT SERVICE COVERAGE RATIO : = Total cost+interest+depreciation/interest+loan repayment/(1-T) .Raw material Wages General expenses = = = 16 Rs.

table butter and cheese. Their operating margins are also much higher than the western dairy products.SWOT ANALYSIS OF PARAG DAIRY STRENGTH : The major strength of the traditional dairy product sector is the mass appeal enjoyed by the wide variety of products . . The preparation and marketing of these products is generally done by Halwais and that limits development in these sector.The market for these products far exceeds that for western dairy products like milk powder . The incresing demand for these products presents a great opportunity for the organized dairies in the country to modernize and scale up production. WEAKNESS : The major weakness of this sector is the practice of inadequate hygine in the preparation and handling of these products and relatively short shelf life.

THREATS: The company can always be faced a problem in sales when any new product of brand of milk is launched in respected place of the market MARKET SHARE OF PRODUCERS IN LUCKNOW During the project work . . a survey is been conducted to know the market share of the PARAG in Lucknow city. as has been demonstrated at the NDDB‟s Sugam Dairy. This survey is been done among 50 people .OPPORTUNITY : The expanding business prospects provided by these products and their accompanying value – addition . It would facilitate an increase in the production and marketing of hyginenically prepared and properly packed products to meet the demand of growing population. call for a thorough study of this sector. This is shown with the help of following table and Pie chart.

1 Duration Number of consumers Percentage Parag Amul Deva Local suppliers Total 26 15 6 3 50 52% 30% 12% 6% 100% . 1.Table No.

6% of market share is captured by Local Suppliers. 24% of the market share is captured by AMUL 3. .Buying Behaviour morning 46% evening 24% both time 30% It is clear from the graph that : 1. 52% of market share is captured by PARAG. 4. 12% of market share is captured by DEVA. 2.

44% consumer are using PARAG products daily . 92% consumers are satisfied with the quality of PARAG products . 32% consumers have positive response to switch over . and 12% are using monthly. whereas 80% of consumers are dissatisfied. 60% consumers are satisfied with the price of PARAG products . 15 consumers are using AMUL . if other brands are available at same quality & 68% consumers have no response. . 6 consumers are using DEVA and 3 consumers are using Fresh Milk. among which 26 are using PARAG milk .ANALYSIS AND INTERPRETATION OF DATA Out of 50 consumers . 88% consumers want more number of PARAG booths to be setup in their locality & 12% have no effect. 64% consumers are satisfied with taste and quality of PARAG products and 36% consumers are dissatisfied. whereas 40% customers are dissatisfied. I contacted 50 consumers . 50% consumers are using weekly .

The importance of .SCOPE AND LIMITATIONS OF THE STUDY Working Capital is considered as central nervous system of the firm.

Adequate working capital needs to be maintained in order to discharge day to day liabilities and protect the business from adverse effects in times of calamities and emergenxies. To determine the various sources of working capital. To speed up the flow of funds or to minimize the stagnation of funds. receivables. the proportion of long term and short term capital to financial current assets). To decide the structure of current assets (i. determination the level of current assets).working capital is reflected in fact that financial managers spend most of their time in managing current assets and current liabilities. Limitation of study Unnecessary accumulation of inventories. It aims at protection the purchasing power of assets and maximizing a firm‟s profits.e. To strike a balance between the twin objective of liquidity and profitability in the use of funds. Adequate working capital needs to be maintained in order to discharge day to day liabilities. which leads to mishandling of inventories. .e. Scope Determining the total funds required to meet the current operations of the firm (i. To ensure adequate flow of funds for current operations. To ensure optimum investment in current assets. inventory). To evolve suitable policies. procedures and reporting systems for controlling the individual components of current assets ( mainly cash.

Excessive of working capital in indication of defective credit policy and slack in collection period. It becomes difficult to implement operating plans and achieve the firm‟s target profits. It leads to inefficient utilization of fixed assets. FINANCIAL ASPECTS IN RUNNING MILK PLANT . It makes management complacent which degenerates in to managerial inefficiency. Inadequate working capital stagnates growth. These leads to higher bad debts losses that reduce profits.waste theft and losses in increase.

The packing capacity was further Expanded TO 1 lakh litres . vendor development group has recommended setting up of 6 lakh litres per day of milk packeging facility in the adjoining plot and also increasing existing milk processing facility from 4 LLPD to 10 LLPD at Dairy. However. However initially on experimental basis in the existing premises polypack operation of 50.5 lac litres per day. Looking into space constraint further expansion in the existing premise is not possible.000 LPD was made operational using existing available services with minimum investment. There is no surplus packing capacity available with existing co-packers. by further adding 2 no packing machines the total packing facility from existing premises has been increased to 1. In view of the above to take care of the next five years requirement of additional milk in pouches . Meanwhile sale of milk in pouches is increasing day by day and average growth per year is more than 15% .To meet the growing demand of milk in pouches . . it was envisaged to setup in house polypack capacity of 6 lakh litres at dairy in the adjoining plot of dairy. It is also necessary to have some percentage of own packing facility from strategic point of view.

To setup and run the facility at dairy will be very cost effective due to availbility of infrastructure at dairy. based on need. 3. which can be in actually shared . 2. It is necessary to create a production facility to meet the market demand to keep edge over the competitors in the field. 4. The proposed packing plant will be a role model for other Co-packers to adopt in their plants from layout of plant to deliver final milk quality in pouches and dispatch.OBJECTIVE 1. . The water quality and quantity of underground tube wells at dairy is very good to the nearby river Hindon. The facility can be setup at dairy in minimum time due to availability of good quality of required land. The main input for setting up many dairy is availability of good quality fresh water. 5.

CAPITAL BUDGETING TECHNIQUES 1.5 558301 549301 PBP= Year before full recovery=uncovered cost at start of year/cash flow during year =3+2128445/5583010 . PAY BACK PERIOD YEAR 2007 2008 2009 2010 2012 CASH FLOW 13900000 127909 358333.

If the payback period calculated is less than sum maximum expectable payback is rejected. c.the project would be accepted. . The required payback period were 3 year.=3. Pay back period is the period of time required for the expected cash flow from investment project to equal the initial cash flow.the proposal is expected. NOTE: a.if not.381 Yr. b.

5583010*.93 4. 543031574.25 8. 72805751.80 7.66 . 5493010*. 5484005*.30 3. 881131994. 482636644. 35333350*. 5493010*. 331826173.75% according to SBI (1+K)n=1.n)-ICO Years(n) 1. 613422385.2. 5493010*. 5583010*. 422334529. 372065371. 5583010* .65 2.13 5.12 n=10 Discounted net cash flow=FV(PVIFi. DISCOUNTED PAYBACK PERIOD: K=Interest rate 12. 1279090*. 693869025.76 9.43 6.

291617781.13=3.99/3031574. .5484005*.47 3+2270842.10. which is similar to regular payback period .7496 NOTE: The discounted payback period . except that expected cash flows are discounted by the project cost of capital.

5583010*. NET PRESENT VALUE CF1/(1+K)1+CF2/(1+K)2+…+CFn/(1+K)n-ICO=K=12. 543031574. 613422385.80 7.43 6.76 .65 2. 482636644. 422334529. 5493010*. 881131994. 372065371.30 3. 1279090*. 72805751. 35333350*.3.13 5. 3422385.25 8. 5493010*. 5583010*.75 YEARS(n) 1. 5583010*. 5493010*.93 4.

it is rejected.9.99/3031574. The present value is the present value of an investment projects net cash flow less the project initial cash outflow.38 -13900000.00 10840232. the project is accepted .47 Total Less(ICO) Net Total 24741232. b. 5484005*.if not. If an investment project‟s NPV is zero or more . 291617781. .5484005*. 331826173.13=3.38 3+2270842.66 10.7496 NOTE: a.

in turn. the investment proposal is expectable because our profitability index is greator than one implies that our project PV is greator than its initial cash outflow which . future net cash flow to the project‟s initial cash out flow.38/13900000 =1.598 NOTE: a.4. b. As long as PI is 1 or greator . implies that NPV is greator than zero. INTERNAL RATE OF RETURN . PROFITABILITY IN PV OF FUTURE CASH FLOW/INITIAL COST =Ent+1CFT/(1+K)1/CFo =22216056. 5. Profitability index is the ratio of present value of the projects.

35333350. 5493010.83=1065482 2.27=1532549. 5484005. 5493010. 1279090.23=1279871. 5583010.8 4.6=24868345 3.8 5.PV(inflow)=PV(investment cost) NPV= Ent +1 CFT/(1+RR)1 =0 IRR = 20% YEARS: 1.4 7.48=2691010.19=113296.8 8.16=94608.81 TOTAL LESS (ICO) = 38962256 = 13900000 = 250625062256 .5484005.57=3232562.3 9. 5493010. 5583010.97 10. 5583010.40=2244370 6.33=1840158.

Internal Rate of Return is the discount rate that equates the present value of the future cash flows from an investment project with the project’s initial cash outflow. . 2.02417% which in this case is very close to our approximate answer. Solving for IRR by computer yields 20.NOTE: 1.

BIBLIOGRAPHY . Working Capital Management -By Dhiraj Sharma (Himalayan Publishing House) 6. Financial Management -By I M Pandey 4.workingcapital.investopedia. Working Capital Management -By Krish Rangarajan & Anil Mishra 2. www. www. 5.