Chapter No.


Page No.

Title Page Declaration Certificate From Company Certificate From Guide Acknowledgement 1


I. Introduction II. Objectives Of The Study III.Need And Importance Of Working Capital IV. Gross W.C And Net W.C V. Types Of Working Capital VI. Determination Of Working Capital VII. Scope & Limitations


I. Introduction II. Type of Research Methodology


I. Company Overview II. Industrial Overview III.Literature Overview


1.1.1 1.1.2 1.1.3 1.1.4 1.1.5 1.1.6 1.1.7

Working Capital Size And Analysis
Working Capital Level Working Capital Trend Analysis Current Asset Analysis Current Liabilities Analysis Change In Working Capital Operating Cycle Working Capital Leverage Introduction Role Of Ratio Analysis Limitation Of Ratio Analysis Classification Of Ratio Efficiency Of Ratio Liquidity Of Ratio Receivable Management Inventory Management Cash Management


2.1.1 2.1.2 2.1.3 2.1.4 2.1.5 2.1.6

Working Capital Ratio Analysis


3.1.1 3.1.2 3.1.3

Working Capital Component

4.1.1 4.1.2 4.1.3 4.1.4

Working Capital Finance & Estimation
Introduction Source Of Working Capital Finance Working Capital Loan & Interest Estimation Of Working Capital



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1) Introduction 2) Need of working capital 3) Gross W.C. and Net W.C. 4) Types of working capital 5) Determinants of working Capital

1.1) Introduction
Working capital management is concerned with the problems arise in attempting to manage the current assets, the current liabilities and the inter relationship that exist between them. The term current assets refers to those assets which in ordinary course of business can be, or, will be, turned in to cash within one year without undergoing a diminution in value and without disrupting the operation of the firm. The major current assets are cash, marketable securities, account receivable and inventory. Current liabilities ware those liabilities which intended at there inception to be paid in ordinary course of business, within a year, out of the current assets or earnings of the concern. The basic current liabilities are account payable, bill payable, bank over-draft, and outstanding expenses. The goal of working capital management is to manage the firm’s current assets and current liabilities in such way that the satisfactory level of working capital is mentioned. The current should be large enough to cover its current liabilities in order to ensure a reasonable margin of the safety.

Definition :
According to Guttmann & Dougall“Excess of current assets over current liabilities”.

According to Park & Gladson“The excess of current assets of a business (i.e. cash, accounts receivables, inventories) over current items owned to employees and others (such as salaries & wages payable, accounts payable, taxes owned to government)”.

1.2) Need of working capital management
The need for working capital gross or current assets cannot be over emphasized. As already observed, the objective of financial decision making is to maximize the shareholders wealth. To achieve this, it is necessary to generate sufficient profits can be earned will naturally depend upon the magnitude of the sales among other things but sales can not convert into cash. There is a need for working capital in the form of current assets to deal with the problem arising out of lack of immediate realization of cash against goods sold. Therefore sufficient working capital is necessary to sustain sales activity.Technically this is refers to operating or cash cycle. If the company has certain amount of cash, it will be required for purchasing the raw material may be available on credit basis. Then the company has to spend some amount for labour and factory overhead to convert the raw material in work in progress, and ultimately finished goods. These finished goods convert in to sales on credit basis in the form of sundry debtors. Sundry debtors are converting into cash after expiry of credit period. Thus some amount of cash is blocked in raw materials, WIP, finished goods, and sundry debtors and day to day cash requirements. However some part of current assets may be financed by the current liabilities also. The amount required to be invested in this current assets is always higher than the funds available from current liabilities. This is the precise reason why the needs for working capital arise.

1.3) Gross working capital and Net working capital

There are two concepts of working capital management :

1) Gross working capital
Gross working capital refers to the firm’s investment I current assets. Current assets are the assets which can be convert in to cash within year includes cash, short term securities, debtors, bills receivable and inventory.

2) Net working capital
Net working capital refers to the difference between current assets and current liabilities. Current liabilities are those claims of outsiders which are expected to mature for payment within an accounting year and include creditors, bills payable and outstanding expenses. Net working capital can be positive or negative. Efficient working capital management requires that firms should operate with some amount of net working capital, the exact amount varying from firm to firm and depending, among other things; on the nature of industries. Net working capital is necessary because the cash outflows and inflows do not coincide. The cash outflows resulting from payment of current liabilities are relatively predictable. The cash inflow are however difficult to predict. The more predictable the cash inflows are, the less net working capital will be required. The concept of working capital was, first evolved by Karl Marx. Marx used the term ‘variable capital’ means outlays for payrolls advanced to workers before the completion of work. He compared this with ‘constant capital’ which according to him is nothing but ‘dead labour’. This ‘variable capital’ is nothing wage fund which remains blocked in terms of financial management, in work-inprocess along with other operating expenses until it is released through sale of finished goods. Although Marx did not mentioned that workers also gave credit to the firm by accepting periodical payment of wages which funded a portioned of W.I.P, the concept of working capital, as we understand today was embedded in his ‘variable capital’.

1.4) Type of working capital :

The operating cycle creates the need for current assets (working capital). However the need does not come to an end after the cycle is completed to explain this continuing need of current assets a destination should be drawn between permanent and temporary working capital.

1) Permanent working capital
The need for current assets arises, as already observed, because of the cash cycle. To carry on business certain minimum level of working capital is necessary on continues and uninterrupted basis. For all practical purpose, this requirement will have to be met permanent as with other fixed assets. This requirement refers to as permanent or fixed working capital.

2) Temporary working capital
Any amount over and above the permanent level of working capital is temporary, fluctuating or variable, working capital. This portion of the required working capital is needed to meet fluctuation in demand consequent upon changes in production and sales as result of seasonal changes. Graph shows that the permanent level is fairly castanet; while temporary working capital is fluctuating in the case of an expanding firm the permanent working capital line may not be horizontal. This may be because of changes in demand for permanent current assets might be increasing to support a rising level of activity.

1.5) Determinants of working capital

The amount of working capital is depends upon a following factors : 1) Nature of business
Some businesses are such, due to their very nature, that their requirement of fixed capital is more rather than working capital. These businesses sell services and not the commodities and that too on cash basis. As such, no founds are blocked in piling inventories and also no funds are blocked in receivables. E.g. public utility services like railways, infrastructure oriented project etc. there requirement of working capital is less. On the other hand, there are some businesses like trading activity, where requirement of fixed capital is less but more money is blocked in inventories and debtors.

2) Length of production cycle
In some business like machine tools industry, the time gap between the acquisition of raw material till the end of final production of finished products itself is quite high. As such amount may be blocked either in raw material or work in progress or finished goods or even in debtors. Naturally there need of working capital is high.

3) Size and growth of business
In very small company the working capital requirement is quit high due to high overhead, higher buying and selling cost etc. as such medium size business positively has edge over the small companies. But if the business start growing after certain limit, the working capital requirements may adversely affect by the increasing size.

4) Business/ Trade cycle
If the company is the operating in the time of boom, the working capital requirement may be more as the company may like to buy more raw material, may increase the production and sales to take the benefit of favorable market, due to increase in the sales, there may more and more amount of funds blocked in stock and debtors etc. similarly in the case of depressions also, working capital may be high as the sales terms of value and quantity may be reducing, there may be

unnecessary piling up of stack without getting sold, the receivable may not be recovered in time etc.

5) Terms of purchase and sales
Some time due to competition or custom, it may be necessary for the company to extend more and more credit to customers, as result which more and more amount is locked up in debtors or bills receivables which increase the working capital requirement. On the other hand, in the case of purchase, if the credit is offered by suppliers of goods and services, a part of working capital requirement may be financed by them, but it is necessary to purchase on cash basis, the working capital requirement will be higher.

6) Profitability
The profitability of the business may be vary in each and every individual case, which is in turn its depend on numerous factors, but high profitability will positively reduce the strain on working capital requirement of the company, because the profits to the extend that they earned in cash may be used to meet the working capital requirement of the company.

7) Operating efficiency
If the business is carried on more efficiently, it can operate in profits which may reduce the strain on working capital; it may ensure proper utilization of existing resources by eliminating the waste and improved coordination etc.


Introduction of Ratio Analysis
Alexander Wall made the presentation of an elaborate system of ratio analysis in 1919. He criticized the bankers for their lopsided development owing to their decisions regarding the grant of credit on current ratio alone. Alexander Wall, one of the foremost proponents of ratio analysis, pointed out that in order to get a complete picture, it is necessary to consider the other relationship in the financial statement than current ratio. Since then, more & more types of ratios have been developed and are used for analysis and interpretation point of view. Ratio may be defined as “a number expressed in terms of another number.” It shows relationship of one figure with another figure. It is found by dividing one number by the other number. It may be expressed as a percentage or in terms of “times” or proportion or as quotient. According to Robert N. Anthony “A ratio is simply one number expressed in term of another”. Ratio Analysis, therefore, means the process of computing, determining and presenting the relationship of related items and group of items of the financial statement. “The relationship between two accounting figures, expressed mathematically, is known as financial ratio. Ratio analysis is the process of identifying the financial strengths and weakness of an enterprise by properly establishing relationships between the items of the balance sheet and profit and loss account”. “The essence of financial soundness of a company lies in balancing its goals, commercial strategy, product market choices and resultant needs. The company should have financial capability and flexibility to pursue its commercial strategy. Ratio analysis is a very useful analytical technique to raise pertinent question on a

number of managerial issues. It provides bases or clues to investigate such issues in detail”. Ratio analysis is the one of the powerful tools of the financial analysis. “A ratio can be defined as the indicated quotient of mathematical expression” and as “the relationship between two or more things”. Accounting ratios can be expressed in various ways such as: i. ii. iii. A pure ratio, say ratio of current assets to current liabilities is 2:1 or, A ratio, say current assets are two times of current liabilities or A percentage, say current assets are 200% of current liabilities.

Each method of expression has a distinct advantage over the other. The analyst will select that method which will best suit his convenience and purpose. Standard (or Basis) of Comparison of Ratio Analysis: The ratio analysis involves comparison for a senseful interpretation of financial statement. A single ratio in itself does not indicate favourable or unfavourable condition. It should be compared with some standard. According to Anthony, R.N. and Reece, J.S. (Management Accounting Principle PP. 260-263), standard of comparison consist of – 1. Ratio calculated from past financial statement of the same enterprise. 2. Ratio developed using the projected or Performa, financial statements of the same enterprise.

Ratio of some selected enterprise, especially the most progressive and successesful, at the same point of time, and

4. Ratio of the industry to which the enterprise belongs. The easiest way to evaluate the performance of a company is to compare present or current ratio with the past ratios. If financial ratios over a time are compared, it

is known as the time series or trend analysis. The trend analysis provides an indication of the direction of change and reflects the performance of an enterprise.

Importance (or Advantage) of Ratio Analysis:Ratio analysis is the process of determining and presenting the relationship of items and group of items in the financial statements. It is an important technique of financial stability and health of a concern can be judged. The following are the main points of importance or advantages of ratio analysis:
1. Useful in financial position analysis: - Accounting ratios reveal the

financial position of the concern. This helps the banks, insurance companies and other financial institutions in leading and making investment decisions. 2. Useful in simplifying accounting figure: - Accounting ratios simplify, summaries and systematize the accounting figures in order to make them more understandable and in lucid form. They highlight the inter-relationship, which exists between various segments of the business as expressed by accounting statements. 3. Useful in assessing the operational efficiency: - Accounting ratios help to have an idea of a concern. The efficiency of the enterprise becomes evident when analysis is based on accounting ratios. They diagnose the financial health by evaluating liquidity, solvency, profitability etc. This helps the management to assess financial requirements and the capabilities of various business units. 4. Useful in forecasting purpose: - If accounting ratios are calculated for a number of years, than a trend is established. This trend helps in setting up future plans and forecasting. For example, expenses as a percentage of sales can be easily forecasted on the basis of sales and expenses of the past years.

5. Useful in locating the weak spots of the business: - Accounting ratios are of a great assistance in locating the weak spots in the business even through the overall performance may be efficient. Weakness in financial structure due to incorrect policies in the past or present are revealed through accounting ratio. 6. Useful in comparison of performance: - Through accounting ratios

comparison can be made between one department of an enterprise with another of the same enterprise in order to evaluate the performance of various departments in the enterprise. Managers are naturally interested in such comparison in order to know the proper and smooth functioning of such departments. Ratios also help them to make any change in the organization structure.

Limitation of Accounting Ratios(or Ratio Analysis) :Ratio analysis is very important in revealing the financial position and soundness of the business or enterprise. Ratio Analysis is very fashionable these days and useful but it has some limitations also, which restrict its use. These limitations should be kept in mind while making use of ratio analysis for interpreting the financial statements. The following are the main limitations of accounting ratios.
1. False results: -

Ratios are based upon the financial statement. In case,

financial statements are incorrect or the data upon which ratios are based is incorrect, ratios calculated will also be false and defective. The accounting system itself suffers from many inherent weaknesses, so the ratios based upon it cannot be said to be always reliable. For instance, if inventory value is inflated, not only will one have an exaggerated view of profitability of the concern, but also of it financial position. Also the ratios worked out on its basis are to be relied upon.

2. Variation in accounting policies: - Financial results of two enterprises

are comparable with the help of accounting ratios only if they follow the same accounting policy or bases, comparison will become difficult if they two concerns follow different policies for providing depreciation, valuation of stock etc. Similarly, if the enterprises are following different standards and methods, an analysis by reference to the ratio would be misleading. The ratio of the one firm cannot always be compared with the performance of other firm, if they do not adopt uniform accounting policies. 3. Price level changes affect ratios: - The third major limitation of the ratio analysis, as a tool of financial analysis is associated with price level change. This, in fact, is a weakness of the Traditional Financial Statements, which are based on Historical cost. As a result, ratio analysis will not yield strictly comparable and, therefore, dependable results. To illustrate, there are two firms, which have identical rates of return on Investment, say, 15%. But one of these had acquired its Fixed Assets when prices were relatively low while the other one had purchased them when prices were high. The result will be that the book value of fixed assets of the former firm would be lower, while that of the later will be high. From the point of profitability the Return on Investment of the firm with lower book value are over-stated. 4. Absence of standard universally accepted terminology: - Different meanings are given to particular term, such as some firms take profit before interest and after tax, other may take profit before interest and tax. Bank overdraft is taken as current liability but some firms may take it is as non-current. The ratios can be comparable only when both the firms adopt uniform terminology. 5. Ignoring qualitative factors: - Ratio analysis is the quantitative measurement of the performance of the business. It ignores the qualitative aspect

of the firm, how so ever important it may be. It shows that ratio is only one-sided approach to measure the efficiency of the business. 6. No single standard ratio: - There in not a single standard ratio, which can indicate the true performance of the business at all time, and in all circumstances. Every firm has to work in different situations and circumstances, so a particular ratio cannot be supposed to be standard for every one. Strikes, lockouts, floods, wars, etc. materially affect the performance, so it cannot be matched with the circumstances in normal days. 7. Misleading results in the absence of absolute data: - In the absence of actual data, the size of the business cannot be known. If Gross Profit Ratio of two firms is 25% it may be just possible that the gross profit of one is 2,500 and sales Rs. 10,000, whereas the gross profit and sales of the other firm is Rs. 5,00,000 and sales 20,00,000. Profitability of the two firms is the same but the magnitude of their business is quite different. 8. Window dressing: -Many companies, in order to depict rosy picture of their business indulge in manipulation. They conceal the material facts and exhibit false position. It makes the Financial Statements and Ratio Analysis based upon these statements defective. The process of manipulation includes under statement of Current Liability, over statement of Current Assets, recording the transaction in the next financial year, showing the purchases of raw material as purchases of assets etc. Window dress restricts the utility of ratio analysis. Even when the ratios are worked out correctly, it should be remembered that they can at best be used like a Doctor uses symptoms – indication that something is wrong somewhere. Just as the Doctor will try to get to the real reason, in the same manner the analyst should try to identify the real factor leading to the present state of affairs. Suppose the ratio of Gross Profit to Sale is low. The reason may be poor

sales, bad purchasing, defective pricing policy, wastage and losses etc. Ratio thus point out the area that needs investigation –this is only a tool in the hand of the person trying to get at the truth.

Types of Ratios and their uses: Ratios may be classified in a number of ways keeping in view the particular purpose. Ratios indicating profitability are calculated on the basis of the Profit and Loss Account, those indicating financial position are computed on the basis of the Balance Sheet and those which show operating efficiency or productivity or effective use of resources are calculated on the basis of figures in the Profit and Loss Account and the profitability and financial position of the business/company. To achieve this purpose effectively, ratios may be classified into the following four important categories: A. Liquidity Ratio,


Leverage Ratio / Solvency Ratio,


Activity Ratio / Turnover Ratio,


Profitability Ratio.

Liquidity Ratios
To study the liquidity position of the concern in order to highlight the relative strength of the concern in meeting their current obligation liquidity ratios are calculated. These ratios are used to measure the enterprise’s ability to meet short-term obligations. These ratios compare short-term obligation to short-

term (or current) resources available to meet these obligations. From these ratios, much insight can be obtained about the present cash solvency of the enterprise and the enterprises ability to remain solvent in the event of adversity. A proper balance between the two contradictory requirements, i.e. Liquidity and Profitability is required for efficient financial management. The important liquidity ratios are: -

1. Current Ratio: - This is the most widely used ratio. It is the ratio of Current Assets to Current Liabilities. It shows an enterprise ability to cover its current liabilities with its current assets. It is expressed as follows: -

Current Assets Current Ratio = Current Liabilities

Generally, Current Ratio of 2:1 is considered ideal for any concern i.e. current assets should be twice the amount of current liabilities. If the current assets are two times the current liabilities, there will be no adverse effect on business operations when current liabilities are paid off. If the ratio is less than 2 difficulties may be experienced in the payment of current liabilities and day-to-day operations of the business may suffer. If the ratio is higher than 2, it is very comfortable for the creditors but, for the concern, it indicates accumulation of idle funds and a lack of enthusiasm for work. However this standard of 2:1 is only quantitative and may differ from industry to industry.

2. Liquid or Acid Test or Quick Ratio: - This is the Ratio of Liquid Assets to Liquid Liabilities. It shows an enterprises ability to meet current liabilities with its most liquid (quick assets). It is expressed as follows: -

Quick Assets Liquid Ratio = Current Liabilities

(Quick Assets = Current Assets – Inventory or Stock)

The quick ratio of 1:1 ratio is considered ideal ratio for a concern because it is wise to keep the liquid assets at least equal to the liquid liabilities at all time. Liquid assets are those assets, which can be readily converted into cash and will include cash balance, bills receivable, sundry debtors, and short-term investments. Inventories and prepaid expenses are not included in liquid assets because the emphasis is on the ready availability of cash in case of liquid assets. Liquid liabilities include all items of current liabilities except bank overdraft. This ratio is the “acid test” of a concerns financial soundness.

3. Super Quick or Absolute liquidity Ratio: - Though receivable are generally more liquid than inventories, there may be debts having doubt regarding their realization in time. So, to get idea about the absolute liquidity of a concern, both receivables and inventories are excluded from current assets and only absolute liquid assets, such as cash in hand, cash at bank and readily realizable securities are taken into consideration. Absolute liquidity ratio is computed as follows:

Cash in hand and at bank + short terms marketable securities Super Quick Ratio = Current liabilities Or Current Assets – Stock – Bills Receivable

Current liabilities – Bank overdraft – Bills Payable

The desirable norm for this ratio is 1:2, i.e., Rs. 1 worth of absolute liquid assets are sufficient for Rs 2 worth of current liabilities. Even though the ratio gives a more meaningful measure of liquidity, it is not in much use because the idea of keeping large cash balance or near cash items has long since been disapproved. Cash balance yields no return and as such is barren.

4. Cash Ratio: - Since cash is the most liquid assets, a financial analyst may examine cash ratio and its equivalent to current liabilities. Trade investment or marketable securities are equivalent of cash; therefore, they may be included in the computation of cash ratio:

Cash + Marketable Securities

Cash ratio = Current Liabilities

5. Ratio of inventory to working Capital: - In order to ascertain that there
is no overstocking; the ratio of inventory to working capital should be computed. It is worked out as follows:
Inventory Ratio of inventory to working Capital = Working Capital

Working capital is the excess of current assets over current liabilities. Increase in volume of sales requires increase in size of inventory, but from a sound financial point of view, inventory should not exceed amount of working capital. The desirable ratio is 1:1.

Leverage Ratio / Solvency Ratio
Long term creditors like debenture holders, financial institution etc., are more concerned with long-term financial strength of an enterprise. The leverage/ capital structure ratios are very helpful in judging the long-term solvency position of an enterprise. Leverage ratio may be calculated from the Balance Sheet items to determine the proportion of debt in total financing. Many variations of these ratios exist; all these ratios indicate the same thing i.e., the extent to which the enterprise has relied on debt in financing assets. Leverage ratios are also computed from the

income statement items by determining the extent to which operating profits are sufficient to cover the fixed charges. The important long-term solvency/leverage/capital structure ratios are as follows:

1. Debt-Equity Ratio: - This ratio relates debts to equity or owners funds. Here,

Equity is used in a broader sense as net worth (i.e., capital + retained earnings) while debt normally means long-term interest bearing loans.
Debt (Long-term) Debt-Equity Ratio = Equity Or Net Worth Total Debt Or Shareholder fund Outsider fund

External equities are outsiders fund while internal equities represent shareholders funds. Outsiders’ fund includes Long-term debt / liabilities. Shareholders funds or equity consists of preference share capital, equity share capital, profit & loss a/c (Cr. Balance), Capital reserves, revenue reserves and reserves representing marked surplus, like reserves for contingencies, sinking funds for renewal of fixed assets or redemption of debentures etc., less fictitious assets. In other words, shareholders funds or equity is equal to Equity share capital + preference share capital + reserves & surplus etc. This ratio is very useful for analysis for long-term financial condition. This ratio signifies the excess of proprietor’s funds over outsiders’ funds and thereby indicates the soundness of the financial / capital structure of the business enterprise.
2. Proprietary Ratio:

-This ratio indicates the relationship between proprietary fund

and total assets. The Proprietary funds include Equity Share Capital, Preference Share Capital, Revenue, Capital Reserves and accumulated surplus. Total Assets include Fixed, Current and Fictitious assets.

This ratio is very important for the creditors, because they know the share of Proprietors Funds in the total assets and satisfy how far their loan is secured. The higher the ratio, the more safety will be to the creditor. The ratio also shows the general financial position of the company also. 50% is supposed to be the satisfactory Proprietary Ratio for the creditors. Less than 50% is the sign of risk for creditors. The following formula is used to calculate Proprietary Ratio: -

Shareholders funds Proprietary Ratio = Total Tangible Assets (Total Assets = Fixed Assets + Current Assets) Or

Proprietor’s Fund

Total Assets

3. Debt Ratio: - Several debt ratios may be used to analyze the long-term solvency of an enterprise. The enterprise may be interested in knowing the proportion of the interest bearing debt (also called funded debt) in the capital structure. It may, therefore, compute debt ratio by dividing total debt by capital employed or net assets.

Total Debt Debt Ratio = Total Debt + Net Worth

4. Capital Employed to Net Worth Ratio:

- There is yet another alternative way of

expressing the basic relationship between debt and equity. One may want to know,

how much funds are being contributed together by lenders and owners for each rupee of the owners contribution. This can be found out by calculating the ratio of capital employed or net assets or net worth.

Capital Employed Capital Employed to Net Worth Ratio = Net Worth (Capital Employed = Shareholders fund + Long-term liabilities)

Activity or Turnover Ratio
These ratios are very important for a concern to judge how well facilities at the disposal of the concern are being used or to measure the effectiveness with which a concern uses its resources at its disposal. In short, these will indicate position of assets usage. These ratios are usually calculated on the basis of sales or cost of sales and are expressed in integers rather than as a percentage. Such ratios should be calculated separately for each type of assets. The greater the ratio more will be efficiency of assets usage. The lower ratio will reflect underutilization of the resources available at the command of concern. The concern must always plan for efficient use of the assets to increase the overall efficiency. The following are the important activity or turnover ratios usually calculated by a concern:

1. Sales to capital Employed (or Capital Turnover) Ratio: - This ratio shows the efficiency of capital employed in the business by computing how many times capital employed is turned over in a stated period. The ratio ascertained as follows:
Sales Sales to capital Employed Ratio = Capital Employed (Shareholders Fund +Long-term Liabilities)

The higher the ratio, the greater are the profits. A low capital turnover ratio would mean that sufficient sales are not being made and profits are lower.

2. Sales to Fixed Assets (or Fixed Assets turnover) Ratio: - This ratio measures

the efficiency of the assets use. The efficient use of assets will generate greater sales per rupee invested in all the assets of a concern. The inefficient use of the assets will result in low sales volume coupled with higher overhead changes and under utilization of the available capacity. Hence the management must strive for using total resources at optimum level, to achieve higher ratio. This ratio expresses the number of times fixed assets are being turned over in a stated period. It is calculated as under:

Sales Sales to Fixed Assets = Net Fixed Assets

(Net Fixed Assets = Fixed Assets Less Depreciation)

This ratio shows how well the fixed assets are being used in the business. The ratio is important in case of manufacturing concern because sales are produced not only use of current assets but also by amount invested in fixed assets. The higher in the ratio, the better is the performance. On the other hand, a low ratio indicates that fixed assets are not being efficiently utilized.
3. Sales to working capital (or Working Capital Turnover) Ratio: - This ratio is

shows the number of times working capital is turnover in a stated period. It is calculated as below: Sales Sales to working capital Ratio = Net Working Capital (Net Working Capital = Current Assets – Current Liabilities)

The higher is the ratio, the lower is the investment in working capital and the greater are the profits. However, a very high turnover of working capital is a sign of overtrading which may put the concern into financial difficulties. On the other hand, a low working capital turnover ratio indicates that working capital is not efficiently utilized. 4. Total Assets Turnover Ratio: - This ratio is calculated by dividing the net sales by the value of total assets. Net Sales Total Assets Turnover Ratio = Total Assets (Total Assets = Net Fixed Assets + Investments + Current Assets) A high ratio is an indicator of overtrading of total assets while a low ratio reveals idle capacity. The traditional standard for this ratio is two times.

5. Inventory or Stock Turnover Ratio: - This ratio indicates the number of times inventory is rotated during the year. It is calculated as follows:
Cost of good sold Inventory or Stock Turnover Ratio = Average Inventory

(Average Inventory = (Opening inventory + Closing Inventory) 2 and Cost of goods sold = Sales – Gross profit )

If only closing inventory data is given and opening inventory data is not available then the formula will be as follows:
Cost of Good Sold Inventory Turnover = Closing Inventory

However, this formula should be applied only when the opening inventory figures are not available. The inventory turnover ratio measures how quickly stock is sold. It is really a test of stock (inventory) management. In general high inventory turnover ratio is good. Yet a very high inventory turnover ratio requires careful analysis. Because very high ratio will lower investment in inventory, and lower investment in inventory is considered to be very dangerous. Similarly, very low inventory turnover is also dangerous as there will be very heavy amount invested in inventory.

6. Receivable (or Debtors) Turnover Ratio: - Receivable turnover ratio is the comparison of sales with uncollected amounts from debtors or customers to whom goods were sold on credit basis. If the enterprise is having a large amount of debtors, it will have a low ratio. Conversely, with prompt collection from debtors, the debtor’s balance will be low and the debtors’ turnover ratio will be high. In other words, the debtors or receivable turnover is the test of liquidity of a business enterprise.
Credit Sales Debtor Turnover Ratio = Average Debtors + Average Bills Receivable

If some information, i.e. figures for Credit sales, opening figures of debtors or bills receivable etc., is not available them the following formula can be used:
Total Sales Debtor Turnover Ratio = Debtors + Bills Receivable

It should be noted that the first formula is superior to second formula as the question of speed of conversion of sales into cash arises only in case of credit sales. 7. Creditors Turnover (or Accounts Payable) Ratio: - This ratio gives the average credit period enjoyed from the creditors and is calculated as under:
Credit Purchases Creditors Turnover Ratio = Average Account payable

(Average Account Payable = (Average Creditors + Average Bills Payable)

A low ratio indicates that the creditors are not paid in time while a high ratio gives an idea that the business in not taking full advantages of credit period allowed.

Profitability Ratio
Profitability is the overall measures of the companies with regard to efficient and effective utilization of resources at their command. It indicates in a nutshell the effectiveness of the decision taking by the management from time to time. Profitability ratios are of at most importance for a concern. These ratios are calculated to enlighten the end result of business activities, which is the sole criterion of the overall efficiency of a business concern. The following are the important profitability ratios:

1. Gross Profit Ratio: - This ratio tells gross profit on trading and is calculated as under:
Gross Profit Gross Profit Ratio = Net Sales

(Gross Profit = Net Profit + Interest + Prior Period Item + Extra Ordinary Expense –Extra Ordinary Income) Higher the ratio the better it is, a lower ratio indicates unfavorable trends in the form of reduction in selling prices not accompanied by proportionate decrease in cost of goods or increase in cost of production.

A high gross profit margin ratio is a good sign to management or owners. This high ratio can be due to: (i) High sales price, cost of good sold remaining constant, (ii) Lower cost of good sold, sales prices remaining constant, (iii) An increase in the proportionate volume of higher margin items. (iv) A combination of variations in sales prices and costs, the margin widening. A low gross profit margin ratio may be due to: (i) Higher cost of goods sold as the enterprise is not getting the raw materials at lower prices. (ii) Inefficient utilization of production capacity. (iii) Over-investment in plant and machinery. 2. Gross Margin Ratio: - This is also known as gross margin. It is calculated by diving gross margin by net sales. Thus
Gross Margin Gross Margin Ratio = Net Sales × 100

(Gross Margin = Gross Profit + Depreciation of P/L + Depreciation of Sch 10(SOH) + Extra Ordinary expenses – Extra Ordinary Income)

3. Net Profit Ratio: - This ratio explains per rupee profit generating Capacity of sales. If the cost of sales is lower, then the net profit will be higher and then we divide it with the net sales, the result is the sales efficiency. The concern must try for achieving greater sales efficiency for maximizing the Ratio. This ratio is very useful to the proprietors and prospective investors because it reveals the over all profitability of the concern. This is the ratio of net profit after taxes to net sales and is calculated as follows:

Net Profit After Tax Net Profit Ratio = Net Sales

The ratio differs from the operating profit ratio in as much as it is calculated after deducting non-operating expenses, such as loss on sale of fixed assets etc., from operating profit and adding non-operating income like interest or dividends on investments, profit on sale of investments or fixed assets etc., to such profit. Higher the ratio, the better it is because it gives idea improved efficiency of the concern. 4. Operating Expenses Ratio: - It is an important ratio. It explains the changes in the profit margin ratio. The operating expenses ratio is calculated as follows:
Operating Expenses Operating Expenses Ratio = Sales (Operating Expenses = Net sales - Net Profit before Tax )  100

Note: - Interest on loans will not be included in operating expenses. A higher operating expenses ratio is not favorable, as it will leave a very small amount of operating income to meet interest and dividend etc.

5. Expenses Ratio =

× 100 Sales

6. Return on capital Employed: - This ratio is an indicator of the earning capacity of the capital employed in the business. This ratio is calculated as follows:
Operating profit Return on capital Employed = Capital Employed  100

(Operating Profit = Profit before interest on long-term borrowings and tax)

Capital Employed = Equity Share Capital + Preference Share Capital + Undistributed profit + Reserve & Surplus + Long-term Liabilities – Fictitious Assets – Non-business Assets ) Or Tangible Fixed Assets and Intangible Assets + Current Assets – Current Liabilities.

This ratio considered being the most important ratio because it reflects the overall efficiency with which capital is used. This ratio is a helpful tool for making capital budgeting decisions; a project yielding higher return is favored. 6. Return on Investment (ROI): - The term investment may refer to total assets or net assets. The funds employed in net assets are known as capital employed. Net Assets = Net Fixed Assets + Current Assets – Current Liabilities (excluding Bank loans) Or Capital Employed – Net Work + Debt.

Earning Before Interest and Tax (EBIT) I. Return on Investment = Net Assets or Capital Employed

Higher the ratio, better it is.


Research Methodology
1) Introduction 2) Types of research methodology 3) Objective of study 4) Scope and limitations of study

2.1) Introduction
Research methodology is a way to systematically solve the research problem. It may be understood as a science of studying now research is done systematically. In that various steps, those are generally adopted by a researcher in studying his problem along with the logic behind them. It is important for research to know not only the research method but also know methodology. ”The procedures by which researcher go about their work of describing, explaining and predicting phenomenon are called methodology.” Methods comprise the procedures used for generating, collecting and evaluating data. All this means that it is necessary for the researcher to design his methodology for his problem as the same may differ from problem to problem. Data collection is important step in any project and success of any project will be largely depend upon now much accurate you will be able to collect and how much time, money and effort will be required to collect that necessary data, this is also important step. Data collection plays an important role in research work. Without proper data available for analysis you cannot do the research work accurately.

2.2) Types of data collection

There are two types of data collection methods available. • Primary data collection • Secondary data collection

1) Primary data
The primary data is that data which is collected fresh or first hand, and for first time which is original in nature. Primary data can collect through personal interview, questionnaire etc. to support the secondary data.

2) Secondary data collection method
The secondary data are those which have already collected and stored. Secondary data easily get those secondary data from records, journals, annual reports of the company etc. It will save the time, money and efforts to collect the data. Secondary data also made available through trade magazines, balance sheets, books etc. This project is based on primary data collected through personal interview of head of account department, head of SQC department and other concerned staff member of finance department. But primary data collection had limitations such as matter confidential information thus project is based on secondary information collected through five years annual report of the company, supported by various books and internet sides. The data collection was aimed at study of working capital management of the company

Project is based on

Annual report of SECL 2005-06

• • • •

Annual report of SECL 2006-07 Annual report of SECL 2007-08 Annual report of SECL 2008-09 Annual report of SECL 2009-10

Study of the working capital management is important because unless the working capital is managed effectively, monitored efficiently planed properly and reviewed periodically at regular intervals to remove bottlenecks if any the company cannot earn profits and increase its turnover. With this primary objective of the study, the following further objectives are framed for a depth analysis.

➢ ➢
➢ ➢ ➢

➢ ➢

To study the working capital management of SECL. To study the optimum level of current assets and current liabilities of the company. To study the liquidity position through various working capital related ratios. To study the working capital components such as receivables accounts, cash management, Inventory position etc. To study the way and means of working capital finance of the SECL. To estimate the working capital requirement of SECL. To study the operating and cash cycle of the company. To examine the effectiveness of working capital management polices with the help of accounting ratio.

➢ To evaluation the financial performance of the company. ➢ To make suggestions for policy makers for effective management of working capital.

2.4) SCOPE & LIMITATIONS OF THE STUDY Scope of the study
The scope of the study is identified after and during the study is conducted. The study of working capital is based on tools like trend Analysis, Ratio Analysis, working capital leverage, operating cycle etc. Further the study is based on last 5 years Annual Reports of Jain Irrigation Systems Ltd. And even factors like competitor’s analysis, industry analysis were not considered while preparing this project.

Limitations of the study
Following limitations were encountered while preparing this project:

1) Limited data:This project has completed with annual reports; it just constitutes one part of data collection i.e. secondary. There were limitations for primary data collection because of confidentiality.

2) Limited period:This project is based on five year annual reports. Conclusions and recommendations are based on such limited data. The trend of last five year may or may not reflect the real working capital position of the company.

3) Limited area:Also it was difficult to collect the data regarding the competitors and their financial information. Industry figures were also difficult to get.



INTRODUCTION Coal has been and shall remain the prime source of commercial energy in India. It meets nearly 60 % of the total commercial energy requirement of our country. Since coal India contributed almost 90 % of the coal produced in the country it can be perceived to be the synonym of Indian coal industry. India is currently the third largest coal producing country in the world after China & U.S.A. The Coal India has to play a significant role in shaping the destiny of industries of the nation at large. We currently witness changes that are sweeping economic & social life of our country, as well as, that of the world. Products, services and manufacturing goods or no longer limited to any national boundary but are getting across to countries where they find acceptance. The liberalization and the economic reforms initiated in our country, in real earnest, since the mid of 1991,are attempt to bring India in to the economic main stream of global market. Performance for the competence, if I may say so, is the key word for any company or corporation. Undoubtedly these moves effect our life, as well as our thinking.

History of Coal Industry in India:

Figure: 2 A vision of coal mine.

Coal and oil are two primary natural fuels. Coal constitutes approximately 85% of total fossil fuel reserves in the world. The Gondwana coal contributes about 99% of the country’s coal resources. They are located in peninsular India and the too in the southeastern quadrant bounded by 78E longitudes & 24° N latitude, thus

leaving a major part of country devoid of any coal deposits. The major Gondwana Coalfields are represented by isolated basins, which occur along prominent present day rivers viz Damodar, Sone, Mahanadi, and Kanhan & Godavari. The relative minor resources of tertiary coal are located on the either extremities of peninsular India. State and Area wise Coal reserves in India: S. No 1 2 3 4 5 6 7 8 State name Madhya Standard Actual Reserve 7565.50 Reserve 9258.38 27432.89 295.82 2432.18 30793.07 6158.17 26.83 40.11 40.89 1.35 Expected Total Reserve 2934.49 4439.06 1992.17 14295.56 2584.25 34.01 18.89 300.71 15.16 Reserve 19758.37 41442.10 1061.80 9076.74 61999.26 17145.60 375.43 90.23 459.43 19.94 25123.00 64371.00 864.00 241786.90 % Of Reserve 8.17 17.14 0.44 3.75 25.64 7.09 0.16 0.04 0.19 0.01 10.39 26.62 0.36 100.00

Pradesh Chhattisgarh 9570.15 Uttar 765.98 Pradesh Maharashtra Orissa Andhra Pradesh Assam Arunanchal 4652.39 16910.63 8403.18 314.59 31.23

Pradesh 9 Meghalaya 117.83 10 Nagaland 3.43 11 West Bengal 12 Jharkhand 13 North East Total

The mining industry in India is next to agriculture in terms of resource generation and employment opportunity. Coal mining occupies a major position, contributing nearly

60 % of commercial energy requirement of India, followed by iron-ore, limestone and bauxite. Coal has traditionally been a vital input to the industrial heritage of India nearly 200 year ago, in Ranigunj coal field, about 120 miles west of Calcutta. Coal mining gradually spread to other parts of India as the railway network developed. By 1900, almost 80% of the country's coal production of 6 million tons came from Jharia and Raniganj coalfields. In 1975 the government consolidated control over the coal industry by transferring the ownership & management of all nationalized coalmines to the newly established coal India limited headquarter in Kolkata Coal India presently contributes 90% of the total coal production in India. It is the largest public sector in terms of employment to the 636,000 people producing 250 million tons of coal per year. It operates through eight subsidiaries. l. ECL - 1975: Eastern coalfield ltd, comprising of the eastern division of CMAL with head quarter at Burdwan. 2. BCCL - 1975: Bharat Coking Coal Ltd. Comprising of BCCL together with Sudanidin & Moonidih mines of NCDC with head quarter at Dhanbad. 3. CCL - 1975: Central coalfield ltd, comprising of the central division of CMAL/ NCDC with head quarter at Ranchi. 4. NCL-1986: northern coal field ltd, with its registered office at Israeli (M.P). tune of

5. WCL-1975: (Maharastra). 6. SECL-1986:





its registered office at Napery



ltd, comprising of western division of

CMAL with head quarter at Nagpur. 7. CMPDIL-1975: central mining planning & design institute ltd, with head quarter at Ranchi. 8. MCL-1992: Mahanadi coalfields ltd, with its registered office at Sambalpur (Orrisa). All the shares of above-mentioned subsidiaries are held by the President of India through the holding company of coal industries holds all the shares of abovementioned subsidiaries. Coal India currently operates 449 mines & 15 washeries spread over nine states to produce & beneficent coal for meeting the demand of the consumers all over the country. 4 major consuming sector i.e. power, steel, railway & the organized industrial sector units of varying size numbering about 2000 consume cement. 18% presently consume Seventy five percent of coal. The balance 7% is consumed by a very large no. of consumers viz brick kilns, domestic consumer etc through coal depots & retail shops.

Formation of Coal India Ltd:

Figure: 3 Mono of South Eastern Coal-Field Limited. With the dawn of independence a greater need for efficient coal production was felt in the first five-year plan. Coal being the most crucial energy resource, was considered necessary to expedite development of modernization of the coal industry. Thus, by the end of 1955-56 our country produced 38.4 million tones. During the second five-year plan too the coal production was stepped up further to 60 million tonnes per annum. In 1956, National Coal Development Corporation (NCDC) was formed with 11 collieries belonging to railways as its nucleus. NCDC was given the task of exploring new coal fields and expediting development of new coal mines in the out laying coal fields. Subsequently, in the context of conservation, safety, scientific development of coal reserves, systematic and proper mining of coking coal and increasing demands from iron and steel industries the Govt. of India took over all the coking coal mines on 16 th of October 1971 and nationalized them on 1st of May 1972. A company known as Bharat Coking Coal Ltd. was formed to manage the coking coal mines.

The Objectives of Nationalization were:

1. 2. 3. 4. 5.

Planned development of available coal resources. Improvement of safety standards. Ensuring adequate investment for optimal utilization consistent with growth. Improving the quality of life of the work force. Prohibiting wasteful, selective and slaughter mining.

With the takeover of coking coal mines by the Govt. as mentioned above, the private coal mine owners stopped capital investment for renewal of machineries/equipments as well as for the development of new mines. The living conditions of the miners remained sub-standard. The private mine owners indulged in unhealthy mining practices including slaughter mining with the sheer objective of maximizing their short-term gains. For nearly seven to ten years, the non – cooking mines were owned by the Coal Mines Authority Ltd. and were managed through three divisions i.e. Eastern, Western and Central Divisions. On 1st Nov. 1975, Coal India Ltd was formed as a Holding Company with its registered office at 10, Netaji Subhash Road, Calcutta. 700001. BCCL and NCDC were transferred to CIL. Coal India Ltd has seven coal producing Subsidiary Companies and one Subsidiary for planning, designing and research.

Figure: 4

Coal India & Its Subsidiaries.

The Head Quarters of Coal India Ltd and its subsidiary companies are as below: S. No 1. 2. 3. 4. 5. 6. 7. 8. Name of the Company Coal India Ltd. (Holding Co.) Eastern Coal Fields Ltd. Bharat Coking Coal Ltd. Central Coal Fields Ltd. Western Coal Fields Ltd. South Eastern Coal Fields Ltd. Northern Coal Fields Ltd. Mahanadi Coal Fields Ltd. formation 1972 1975 1973 1975 1975 1986 1986 1992 Head Quarters Kolkata (West Bengal) Sanetoria (West Bengal) Dhanbad (Jharkhand) Ranchi (Jharkhand) Nagpur (Maharashtra) Bilaspur (Chhattisgarh) Singrauli (Madhya Pradesh) Sambalpur (Orissa)




1 9 8 7 6 5 4 3 2 AL 0


Figure: 5

Shows Coal and Lignite resources in India.

History of Coal India Limited
The Indian energy sector is largely dependent on coal as the prime source of energy. After the Indian independence, a greater need for coal production was felt in the First Five Year Plan. In 1951 a Working Party for the coal industry was set up, which suggested the amalgamation of small and fragmented producing units. Thus the idea of a nationalised, unified coal sector was born. In the pre-nationalised era coal mining was controlled by private owners, and suffered from their lack of interest in scientific methods, unhealthy mining practices and sole motive of profiteering. The miners lived in sub-standard conditions as well. 1n 1956, the National Coal Development Corporation (NCDC) was formed with 11 collieries with the task of exploring new coalfields and expediting development of new coal mines. Factors leading to the nationalisation of Indian coal industry Nationalisation of the Indian coal industry in the early 1970s was a fall-out of two events. The first was the oil price shock, which led the country to take up a close scrutiny of its energy options. A Fuel Policy Committee set up for this purpose identified coal as the primary source of commercial energy. Secondly, muchneeded investment for growth of this sector was not forthcoming from the private sector. Subsequently, in the context of safety, conservation and scientific development, the Government of India took over all coking coal mines on October 16, 1971 and nationalised them on May 1, 1972. Bharat Coking Coal Limited (BCCL) was thus born. Following the state takeover of non-coking coal mines, Coal Mines

Authority Limited (CMAL) was formed in 1973, leading to the formation of a formal holding company - Coal India Limited – on November 1, 1975. Timeline 2008 : 2007 : 2000 : 1992 : 1985 : Coal India accorded ‘Navratna’ status Coal India and four of its subsidiaries NCL, SECL, MCL, WCL accorded ‘Mini Ratna’ status De-regulation of coal pricing and distribution Mahanadi Coalfields Limited (MCL) formed out of SECL to manage the Talcher and IB Valley Coalfields in Orissa Northern Coalfields Limited (NCL) and South Eastern Coalfields Limited (SECL) carved out of CCL and WCL Coal India Limited formed as a holding company with 5 subsidiaries: Bharat Coking Coal Limited (BCCL), Central Coalfields Limited 1975 : (CCL), Western Coalfields Limited (WCL), Eastern Coalfields Limited (ECL) and Central Mine Planning and Design Institute Limited (CMPDIL). Non-coking coal nationalised; Coal Mines Authority Limited 1973 : (CMAL) set up to manage these mines; NCDC operations bought under the ambit of CMAL Coking coal industry nationalised; Bharat Coking Coal Limited 1972 : 1956 : 1955-56 : (BCCL) formed to manage operations of all coking coal mines of Jharia Coalfield National Coal Development Corporation (NCDC) formed to explore and expand coal mining in the Public Sector Focus on coal industry; capacity up to 38.4 million tonnes



India is the 3rd largest coal producing country.

Figure: 1 Picture of front wing of SECL head office Bilaspur.

SECL is the largest coal producing company. It is one of the subsidaries of Coal India Ltd. A government of India undertaking under ministry of coal .SECL, the prime coal company of Coal India ltd, is having 89 coal mines situated in the sate of Madhya Pradesh and Chhattisgarh. The coal mines are geographically located at the heart of country in CG and in M.P. inhabited by simple minded hard working people. Ever since the formation in 1986-87 SECL has exceeded its physical and financial targets.

Coal mining is the most prominent industry in C.G. and in M.P. in terms of employment generation and infrastructure development. The coal mining areas are spread over from Sarguja and Korba district of C.G. up to Shadol and Umaria district further North west in M.P. due to opening of coal mines in these region, rail connection, power supply, telecommunication, other industries etc. have expanded over the past decades. South eastern coalfields: A Profile SECL is the largest coal producing company in the country. It is one of the eight subsidiaries of CIL (A Govt. undertaking under Ministry of Coal). SECL, Coal India’s premier coal company is operating its coal mines in the state of Madhya Pradesh and Chhattisgarh state which is also geographically located at the heart of the country. Chhattisgarh and Madhya Pradesh inhabited by simple minded and hard working tribes with a rich cultural heritage. Chhattisgarh is not only the rice bowl if India but also rich in mineral resources with coal being the prime mineral resource that is being exploited commercially for about a century. STATUS OF CAPTIVE MINE BLOCK IN COMMAND AREA OF SECL A new area known as Dipka Area has been separated from Gevra Area w.e.f. 1st of April 2006. Coal mining is the most prominent industry in Chhatisgarh in terms of employment generation, economic infrastructure development and generation of revenue for the state and the central Govt. Due to opening of coal mines in this region, rail connections and power supply lines, roads and tele-communication have expanded over the past decades and a large number of power houses and other industries have come up. The coal based industry have in turn generated multiplier effect in the economy of Chhatisgarh and Madhya Pradesh and the region has become the most important center of industrial economy of Chhatisgarh and Madhya Pradesh.

The Statewise, type wise composition of those 90 mines is given in Table below:
Type of Mine UG Mines OC Mines Mixed Mines Total Chhattisgarh 41 11 01 53 Madhya Pradesh 29 08 37 Total 70 19 01 90

Districts where SECL is spreaded: MADHYA PRADESH
1. 2. 3.


Sohagpur area Johilla area Hasdeo & j&k area Korba, Gevra & Kusmunda Raigarh area Baikunthpur,Chirimiri & Hasdeo area Bishrampur & Bhatgaon SECL HQ.

1. 2. 3. 4. 5.



A. B. C. D. E. F. G. H. I.


MISSION OF THE COMPANYTo produce & market the planned quantity of coal efficiency and economically with due attention to safety, conservation and quality.

Optimum utilization of resources with human value. To improve the quality of life. To treats the employees not as recourses, but as a human. Human touch in behavior at work place. To enhance the morale of employees though welfare means.

   


Figure: 5

Shows organization structure of SECL management.

Finance department play a major role in any organization. Its main objective to provide strength and stability to organization. All activities of industries and concern are fully depending on finance. Therefore, in SECL, all section are properly arranged and planed. This organization is run by ministry of government so and this organization is undertaking by SECL. All plan and procedure of finance is prepared under the authority of SECL. All sections have one finance department. All fund are decided and polices are making related to distribution and section of funds. Finance department of CWS is arranging fund for the each shop which is required to the fulfill the needs of section of workshop. As per requirement of section fund is issue by the finance department. Like in planning section fund is issue to purchase of material, in engine repair shop fund is issue to repair of engine etc. Financial planning is done annually basis. Generally all financial plans are prepare with the help of previous year data of each section of shop. Required fund is issue by the finance manager.

Functions of Finance Department:

Construction of bills: This is the main function of Finance department, under this, the whole project estimation can be done and company makes necessary fund allocation to those projects.


Supply Bill: This section concerned with supply of all necessary inputs required to the plant.


Maintenance Bills: In this, section the whole maintenance of the plant and machinery.


G.M. D.G.M. A.G.M. A.O. A.A.O. Sr.Asst. Asst.


General Manager Deputy General Manager Assistant General Manager Account Officer Assistant Account Officer Senior Assistant Assistant


Liquidity Ratio
1. Current Ratio
Current Ratio = Current Assets /Current Liabilities Rs. In Lakhs Particulars Current Assets Current Liabilities Current Ratio 2007-08 7338.08 5685.49 1.29 2008-2009 8942.38 7038.05 1.27 2009-10 9395.96 7854.99 1.20

Comment: -

From the above figures it is evident that Current Ratio has

decreased from 1.29 to 1.20. The decrease has been on account of decrease in Cash and Bank balances and Advances. Ideal Current Ratio is taken as 2:1 however it is quantitative rather than qualitative thus despite the Current Ratio being less than 2 the company’s liquidity position is sound.

2. Quick Ratio Quick Ratio = Quick Assets / Current Liabilities Particulars Quick Assets Current Liabilities Current Ratio 2007-08 6891.45 5685.49 1.20 2008-2009 8448.16 7038.05 1.20 2009-10 8730.96 7854.99 1.11

Comment: -

Generally Quick Ratio / Liquid Ratio of 1:1 is considered satisfactorily. As we can see the company’s Quick / Liquid Ratio has decreased from 1.20 to 1.11. This decrease is mainly on account of decrease in Cash and Bank balance and Loan and Advances This shows sound liquidity position of the company.

3. Ratio of Inventory To Working Capital Ratio of Inventory to Working Capital = Inventory / Working Capital Particulars Inventory Working Capital Ratio 2007-08 518.64 1652.59 0.31 2008-2009 494.24 1904.33 0.26 2009-10 645.00 1540.97 0.42

Comment: Generally the Inventory to Working Capital Ratio less than 1 is considered satisfactorily. Working Capital has increased from 0.31 in year 2007-08 to 0.42 in the year 2009-2010, which shows sound working capital position of the company.

Leverage Ratio
( Solvency Ratios) 1. Debt-Equity Ratio – Dept-Equity Ratio = Debt/Equity or Net Worth +total debt Particulars Debt Equity 2007-08 337.30 4459.52 2008-2009 392.18 4766.81 0.08 2009-10 314.80 5397.65 0.06

Debt Equity Ratio 0.08

Comment: This ratio reflects share of debt in the Net Worth. The company’s Ratio of 0.06 indicates a moderate level of debt in the company. Reduction of Debt – Equity Ratio shows that the company has liquidated its debt in time. The Debt-Equity of 0.06 also shows that the company is mainly relying on shareholders fund for doing the business. 2. Proprietary Ratio Proprietary Ratio = Shareholders Fund / Total Assets Particulars Shareholders Fund Total Assets Proprietary Ratio 2007-08 4459.53 10847.60 0.41 2008-2009 4766.81 12831.56 0.37 2009-10 5397.65 13669.15 0.39

Comment: -

Creditors loan is safe because Proprietary Ratio is 0.39 as against the satisfactory ratio of 0.5 times.

3. Debt Ratio – Debt Ratio = Total Debt / Total Debt + Net Worth Particulars Total Debt 2007-08 337.30 2008-2009 392.18 2009-10 314.80

Total Debt + Net Worth Debt Ratio







Comment: -

This ratio reflects share of debt in the Capital Employed. The company’s ratio of 0.05 in 09-10 indicates a low level of Debt in the company. Reduction of Debt Ratio from 0.07 in 09-10 to 0.05 in 09-10 shows that the company is continuously relying on own funds.

4. Capital Employed to Net Worth Ratio Capital Employed to Net Worth Ratio = Capital Employed / Net Worth particulars 2007-08 2008-2009 4380.28 4766.81 0.92 2009-10 4360.76 5397.65 0.81

Capital Employed 3814.60 Net Worth 4459.52 0.86

Comment: This shows that as on 31 March 2010 for every rupee of owner’s contribution. Re

0.81 is contributed together by Lenders and Owners. This reflects that the company is not dependent on borrowed capital.

Activity Turnover Ratio
1. Sales to Capital Employed ( Capital Turnover Ratio) CTR = Net Sales / Capital Employed Particulars Net Sales 2007-08 7181.59 2008-2009 8485.67 2009-10 9371.56

Capital Employed 3814.60 Capital Turnover 1.88 Ratio

4380.28 1.94

4360.76 2.15

Comment: This Ratio ensures whether the capital employed has been effectively used or not. The increase in the ratio to 2.15 in 09-10 from 1.94 in 08-09 shows better utilization of resources in the year 09-10.

2. Fixed Assets Turnover Ratio – FA Turnover Ratio = Sales / Net FA particulars Sales Net Fixed Assets FA Ratio 2007-08 7181.60 2162.01 2008-2009 8485.67 2475.95 3.48 2009-10 9371.57 2819.78 3.32

Turnover 3.32

Comment: As we know in case of Sales to Fixed Assets Ratio that the higher the ratio the better in the performance. From the above data there is decrease in ratio from 3.48 to 3.32. This means that the utilization of fixed assets is very ineffective.

3. Working Capital Turnover Ratio – WCT Ratio = Sales / Working Capital particulars 2007-08 2008-2009 Sales Working Capital WCT Ratio 7181.59 1652.59 4.35 8485.67 1904.33 4.46

2009-10 9371.57 1540.97 6.08

Comment: -

This shows that the company could manage to achieve better result in 08-09 with less Working Capital. This above ratio also shows that during the year 09-10 the company could utilize its resources in the better way it is utilized in 08-09.

4. Total Assets Turnover Ratio – Total Assets Turnover Ratio = Net Sales / Total Assets particulars Net Sales Total Assets Total Assets Turnover Ratio 2007-08 7181.59 10847.60 0.66 2008-2009 8485.67 12831.56 0.66 2009-10 9371.57 13669.15 0.69

Comment: The increase in the ratio in 09-10 shows better utilization of its resources.

5. Inventory Turnover Ratio ITR = Cost of Sales/Average Stock C.G.S. = Sales – Gross Profit

Particulars Cost of Goods Sold Average Stock Inventory Turnover Ratio

2007-08 5092.23 518.63 9.82

2008-2009 6648.74 494.21 13.45

2009-10 6257.40 645.01 9.70

6. Receivable Turnover Ratio – Receivable Turnover Ratio = Credit Sales / Particulars Cost of Goods Sold Average Stock Receivable Turnover Ratio 25.98 42.73 44.13 2007-08 2008-2009 2009-10

7. Creditors Turnover Ratio particulars 2007-08 2008-2009 2009-10

Creditors Turnover Ratio

Profitability Ratios
1. Gross Profit Ratio GPR = (Gross Profit/Net Sales)*100 Particulars Gross Profit Net Sales Gross Profit Ratio 2007-08 2089.36 7181.60 29.09% 2008-2009 1836.93 8485.68 21.56% 2009-10 3114.17 4371.57 33.23%

Comment: -

The increase in the ratio shows the better performance of the company in the year 09-10 as compared to 08-09.

2. Debtors in No. of Months Sales (DMS) – DMS = Sundry Debtors / per month gross sales . Per month gross sales = gross sales /12 particulars Sundry Debtors Per Month Gross Sales DMS 2007-08 276.41 727.34 0.38 2008-2009 198.61 847.22 0.23 2009-10 212.35 934.92 0.23

Comment: -

The decrease in ratio in the year 2009-10 shows better realization position of the company against its sales.

3. Stores of Stock & Spares in nos. of Months Consumptions ( Revenue Mines) (Inventory of Stores / Consumption of Stores per month) Particulars Inventory of Stores Consumption per month 2007-08 226.10 78.04 2008-2009 226.76 89.21 2009-10 232.22 92.08

Stores in no. of Months




Comment: -

The reduction in the ratio in 09-10 shows better utilization of fund and better inventory management of the company. It also shows that the company has avoided unnecessary locking of its funds in inventory.

4. Net Profit Ratio – NPR = (Profit after tax / Sales) * 100

particulars Net Profit After Tax Sales NPR

2007-08 2067.37 7181.60 28.79%

2008-2009 1817.93 8485.68 21.42%

2009-10 3063.57 9371.57 32.69%

Return on Investment = EBIT/Capital Employed

particulars EBIT Capital Employed RoI

2007-08 2089.60 3814.60 0.55

2008-2009 1836.93 4380.28 0.42

2009-10 3114.17 4360.76 0.71

Operating Ratio –

(Net Sales – Net Profit)/ Net Sales





Net Sales Net Profit Operating Ratio

5114.23 7181.60 0.71

6667.75 8485.68 0.79

6307.99 9371.56 0.67

Working Capital Level and Analysis W. C. Level
Size of Working Capital Particulars 2007-08 2008-09 2009-10

A) Current Assets
Interest Accrued on Investment Inventories Sundry Debtors Cash and Bank Loans and Advances

44.49 518.63 276.41 3996.21 2502.33 7338.07

39.26 494.21 198.61

34.02 645.01 212.35

5451.36 6995.23 2758.94 1509.36 8942.38 9395.97

B) Current Liabilities

Current Liabilities Provisions Total(B)

4257.89 2090.72

5657.38 6409.56 2072.83 1628.84

6348.61 7730.2 8038.4 1 0 989.46 1212.1 1357.5 7 7

Net Working Capital (A-B)

2. Working Capital Trend Analysis
Net Working Capital

2007-08 2008-09 2009-10 989.46 100 1212.17 1357.57 122.51 137.20

W.C. Indices

3. Current Assets Analysis Size of CA
Particulars 2007-08 2008-09 2009-10

Interest Accrued on Investment Inventories Sundry Debtors Cash and Bank Loans and Advances

44.49 518.63 276.41 3996.21 2502.33 7338.07 100

39.26 494.21 198.61

34.02 645.01 212.35

5451.36 6995.23 2758.94 1509.36 8942.38 9395.97 121.86 128.04

Total CA Indices

Composition of Current Assets
A) Current Assets
Interest Accrued on Investment Inventories Sundry Debtors Cash and Bank Loans and Advances

2007-08 2008-09 2009-10

7.07 37.7 54.6 34.10 0.60

5.53 2.22 60.96 30.85 0.44

6.87 2.26 74.45 16.06 0.36





4. Current Assets Analysis Size of Current Assets
Current Liabilities

2007-08 2008-09 2009-10

Current Liabilities Provisions

4257.89 2090.72

5657.38 6409.56 2072.83 1628.84


6348.61 7730.2 8038.4 1 0 121.76 126.62

Current 100 Liabilities Indices

Current Liabilities

2007-08 2008-09 2009-10

Current Liabilities Provisions Total

67.07 32.93 100

73.90 26.81 100

79.74 20.26 100

Changes in Working Capital
Particulars 2008-09 2009-10 Changes in Working Capital Increase A) Current Assets Decrease

Interest Accrued on Investment Inventories Sundry Debtors Cash and Bank





494.21 198.61 5451.36

645.01 212.35 6995.23

150.80 13.75


1543.87 -

Loans and Advances Total(A)
B) Current Liabilities




8942.38 9395.97

Current Liabilities Provisions Total(B) Net Working Capital (A-B) Net Increase in WC Total

5657.38 2072.83

6409.56 1628.84

7730.21 8038.40 1212.17 1357.57 145.40 1357.57 1357.57 2152.4 1 145.40 2152.41

Working Capital Leverage

W.C. Leverage =

%Change in RoCE % Chance in C.A

Return on Capital Employed

2007-08 200809 2089.60 1836.9 3 7338.08 8942.3 8 0.28 0.21

200910 3114.1 7 9395.9 6 0.33

Current Assets RoCE

Working Capital Leverage
% Chance in RoCE

2007-08 200809 -3.45%


+33.33 27.27% % +11.54 11.72%

% Change in +16.49 CA %

WC Leverage

Working Capital Components 1. Receivables Management

Particulars Debtors Indices

2007-08 200809 276.41 100 198.61 71.85

200910 212.35 76.82

Average Collection Period –
Receivables Turnover Ratio= Gross SalesAverage Receivables Average Collection Period= 365Receivables Turnover Ratio

Average Collection Period :

Gross Sales

2007-08 200809 8728.04 10166. 61 198.61 51.19

200910 11219. 02 212.35 52.83

Average 276.41 Receivables Receivables 31.58 Turnover Ratio Average Collection Period 11.56 Days

7.13 Days

6.91 Days


Inventory Management –

Size of Inventory:


2007-08 200809 236.91 14.18 16.76 267.85 91.33 15.72 25.76 293.26 100

200910 348.25 22.01 34.96 405.22 138.18

Raw Material 251.78

W.I.P Finished Goods Total Inventory Indices

Inventory Holding Period –
Inventory Turnover Ratio= Cost of Goods SoldAverage Inventory Inventory Holding Period= 365Inventory Turnover Ratio

Inventory Turnover Ratio

2007-08 200809 9.82 13.45

200910 9.70

Days of Holding Inventory





Management of Cash –

Size of Indices of Cash

Cash and Bank

2007-08 200809 3996.21 5451.3 6 100 136.41

200910 6995.2 3 175.05


Cash Cycle

Inventory Holding Period

2007-08 200809 37.17 27.14

200910 37.62

+ Average Receivable

Period + Average Payment Period Cash Cycle

Working capital management is important aspect of financial management. The study of working capital management of Jain Irrigation system ltd. has revealed that the current ration was as per the standard industrial practice but the liquidity position of the company showed an increasing trend. The study has been conducted on working capital ratio analysis, working capital leverage, working capital components which helped the company to manage its working capital efficiency and affectively.

· Working capital of the company was increasing and showing positive working capital per year. It shows good liquidity position. · Positive working capital indicates that company has the ability of payments of short terms liabilities.

· Working capital increased because of increment in the current assets is more than increase in the current liabilities. · Company’s current assets were always more than requirement it affect on profitability of the company. · Current assets are more than current liabilities indicate that company used long term funds for short term requirement, where long term funds are most costly then short term funds. · Current assets components shows sundry debtors were the major part in current assets it shows that the inefficient receivables collection management. · In the year 2006-07 working capital decreased because of increased the expenses as manufacturing expenses and increase the price of raw material as increased in the inflation rate.

· Inventory was supporting to sales, thus inventory turnover ratio was increasing, but company increased the raw material holding period. · Study of the cash management of the company shows that company lost control on cash management in the year 2005-06, where cash came from fixed deposits and ZCCB funds, company failed to make proper investment of available cash.

Reco mmendations
Recommendation can be use by the firm for the betterment increased of the firm after study and analysis of project report on study and analysis of working capital. I would like to recommend.

· Company should raise funds through short term sources for short term

requirement of funds, which comparatively economical as compare to long term funds. · Company should take control on debtor’s collection period which is major part of current assets. · Company has to take control on cash balance because cash is non earning assets and increasing cost of funds. · Company should reduce the inventory holding period with use of zero inventory concepts.

Over all company has good liquidity position and sufficient funds to repayment of liabilities. Company has accepted conservative financial policy and thus maintaining more current assets balance. Company is increasing sales volume per year.


Books Referred

ß I. M. Pandey - Financial Management - Vikas Publ ishing House Pvt. Ltd. - Ninth Edition 2006 ß M.Y. Khan and P.K. Jain, Financial management – Vikas Publishing house ltd., New Delhi.

• ß K.V. Smith- management of Working Capital- Mc-GrowHill New York

ß Satish Inamdar- Principles of Financial ManagementEverest Publishing House

Websites References • • • •

Working Notes
Sl. No. 2003-04 1. 2. Current Assets Current Liabilities 2534.10 2869.70407.61 = 2462.09 3. Liquid Assets 2534.10414.53 = 2115.57 4. 5. 6. Cash Inventory Working Capital 477.87 414.53 2534.10Terminology Calculation of Amount (Rs Crore) 2004-05 3670.99 3520.54456.54 = 3064.00 3670.99437.29 = 3233.70 1443.86 437.29 3670.99Balance Sheet (B/S) Current Liabilities Balance Sheet -Gratuity Sch J Current Assets (Ref Sl no. 1) – Inventory Sch F Sch H Sch F Refer Sl 1 and 2 Reference

2462.09 = 72.01 7. Total Debt 453.66 + 46.65 = 500.31 8. Net Worth / Shareholders Fund 9. Net Fixed Assets 10. Total Assets 2039.82+1231 .62 + 2534.10 = 5805.54 359.70 + 2054.73 = 2414.43 2039.82

3064.00 = 606.99 420.66 + 39.26 = 459.92 359.70 + 2586.87 = 2946.57 1974.09 Secured Loans Sch C –I + Unsecured Loan Sch C-II Share Capital Sch A + Reserve & Surplus Sch B Balance Sheet

1974.09+1231 .62 + 3670.99 = 6876.70

Net Fixed Assets (Ref Sl no.9) + Investment Sch E + Current Assets (Ref Sl 1) Net Worth (Ref Sl 8) + Total Debt (Ref Sl 7) Profit & Loss a/c Sch G Sch 1 Sch F


Capital Employed

2414.43 + 500.31 = 2914.74

2946.57. + 459.92 = 3406.49 5494.85 423.14 6544.52 234.64

12. 13. 14. 15.

Net Sales Sundry Debtors Gross Sales Inventory of Stores

4430.40 430.99 5338.04 219.70


Consumption of Stores (Revenue

624.20 - 0.55 = 623.65

744.38 - 3.13 = 741.25

Sch 6

Mines) 17. 18. Prior Period Extra Ordinary Income and Expenditure 19. Gross Profit (G.P.) 7.45 (157.03+295.1 0)-115.03 = 410.13 (1314.21+19.7 1+ 7.45) – (157.03 + 295.10 -115.03) =(1341.37410.13) = 931.24 20. Total Depreciation 216.05 + 10.67 = 226.72 21. Gross Margin (1341.37 + 216.05 + 10.67) – 410.13 = 1157.96 22. Profit after Tax 1314.21 – 410.13 = 904.08 23. Operating Expenses 4430.40 (1314.375494.85– 1580.93 1580.93 Net Profit as per P/L Extra Ordinary Item ref. Sl no. 18 Net Sales ref. Sl no. 11 – (Net Profit 213.55 + 11.92 = 225.47 1600.52 + 213.55 + 11.92 = 1827.40 Depreciation Profit & Loss a/c + Depreciation Sch 10 (G.P. + Total Depreciation ref. Sl no 20)– Extra Ordinary Item ref. Sl no. 18 1580.93 + 13.78 + 5.81 = 1600.52 5.81 Nil Sch 15 Interest Sch 4 – Provision for Bad Debts Sch 14 (Net Profit as per P & L a/c +Interest Sch 12+Prior Period Exp. Sch 15) – Extra Ordinary Item ref. Sl no. 18

410.13) = 3526.32 24. EBIT 1341.37 – 410.13 = 931.24 1600.52 = 3913.92

Extra Ordinary Item ref. Sl no. 18) Gross Profit ref. Sl no.19 - Extra Ordinary Item ref. Sl no. 18

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