CHAPTER FIVE

FINANCIAL MANAGEMENT - LITERATURE REVIEW

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Introduction
5.1 Financial Environment - An Overview
A. Finance* Function

B. Evolution of Finance

C. Development of Financial Management

5.2 Literature Review of Financial Management

A. Research in Financial Management

B. Research in Working Capital Management

C. Research in Dairying

5.3 Conceptual Framework of 1he Study

A. Analysis of Capital Structure

B. Funds Flow Analysis

C. Analysis of Fixed Assets

D. Analysis of Working Capital

E. Capital Profitability Analysis

F. Value Added - As Technique of Evaluation of Perform -

ance

5.4 Conclusions

5.5 REFERENCES

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 179
CHAPTER FIVE

FINANCIAL MANAGEMENT: LITERATURE REVIEW

5.1 INTRODUCTION.

In this chapter, an attempt is made to assess the overall

financial environment while describing the conceptual framework

in regard to finance function, financial management, working capital

management and dairy industry.

As many studies were conducted in the area of financial

management and dairy industry separately, covering various aspects,

considering the recent developments in dairy industry and the complexities

involved in financing it, it was thought fit to undertake a study

in detail about the multi-dimensional aspects of the financial management

in its depth.

Financial management is that managerial activity which

is concerned with planning and controlling of the firm's financial

resources. As a separate activity, or discipline, it is of recent

origin. It was a branch of Economics till 1890. Even today, financial

management does not have its own body and heavily depends on
Economics for its theoretical concepts.1

Financial management is a subject of immense interest

to academicians and the practising managers. As the subject is

still in a developing stage, academicians have a unique opportunity

 180

to contribute to and throw light on the areas of controversies for

which no unanimous solutions are existing. Managers working at

different levels are interested in this subject, in order to have

theoretical and analytical insight while dealing with the finances

of their business concerns, irrespective of the forms of their business

organizations. With the help of theoretical and analytical framework,

they discharge their functions of managing finance very skillfully.

The function they discharge is called as 'finance function'.

Ezra Solomon^ defines the scope of financial management

in terms of the following questions:

How large should the firm be and how fast should

it grow? What should be the composition of
the firm's assets? What should be the composition
of the firm's financing?

Answers to the above questions are obtained by the managers

in the theory of financial management.

A. FINANCE FUNCTION.

Money is an arm or a leg; you either use it

or lose it.
- Henry Ford^

This statement is quite meaningful. It brings home the

significance of money, or finance, which comotes, "the finance

is the lifeblood of business". Thus, finance holds the key to all

human activity. It guides investment and expenditure and endeavours

to squeeze the most out of every available Rupee. No business activity

 181

can ever be pursued without financial support and for survival in

the market, financial viability is the central theme of anybusiness

proposition.

B. EVOLUTION OF FINANCE.

In order to understand better the role of a financial manager

and the evolution of his functions, it is useful to trace the changing

character of finance as an academic discipline. In the early part

of this century, corporation-finance emerged as a separate field

of study, whereas before it was considered primarily as a part

of Economics. At that time, scope of 'corporation finance' was

limited to instruments,institutions and procedural aspects of stock

bf
markets. In the USA, in those days, a large number of combinations

were taking place, US Steel Corporation, in 1990, can be cited

as the largest one. As a result, huge capital blocks, large income

and equity securities was the phenomenon. At the same time, promotion

of new corporations, consolidations, mergers, etc., made the resulations

as to financial record necessary with the developmental innovation

and new industries in 1920 resuslted into an awareness as to the

liquidity and financing and considerable attention was directed to

describe various methods of

external financing as well as, to some
5
extent, internal financing. Arthur S. Dewing came up with new ideas

of financing in 1920. Till then the business firms were interested

in 'Common Stock' as financing source.

In 'thirties, 'depression* focused the study of finance

on the defensive aspects of survival. Attention was paid towards

 182

preservation of liquidity, bankruptcy, liquidation and reorganization.

Conservatism /vas considered to be important and companies started

maintaining sound financial structure. As a result, disclosure of

financial information becams inevitable and the very factor enabled

the financial analysts to compare financial condition and performance

of different companies. Finance, during 'forties, was dominated

by a traditional approach, which was evolved in 'twenties and 'thirties.

According to this approach, the firm was being analysed from the

viewpoint of an investor or lender and not from the point of view

of insiders. However, the analysis of cashflows and planning and

controlling the same from within, did develop in this period.

In 'fifties, capital budgeting created a lot of interest and

the concept of present value attracted the minds while taking investment

decisions by the financial managers. During this period, only the

awareness of funds allocation for different assets in the light of

objectives to be achieved developed, creating a new field of responsi­

bility.

In 'sixties, the Portfolio Theory and its eventual applica­

tion to financial management did develop first, exposited by Markowitz,

which was further extended and refined by Sharpe and Linter.

At present, 'financial management' is considered as:

Business finance can be broadly defined as

the activity concerned with planningraising,»
controlling and administering of funds used
in the business.
- Guthmann 5 Dougall
 183

The finance function is the process of acquiring

and utilizing funds by a business.
- R.C. Osborn

Financing consists in the raising,< providing, >

managing of the money,- capital or funds of

any kind to be used in connection with the
business.
- Somerville & Dewey

Business finance deals primarily with raising,-

administering and disbursing funds by privately
owned business units operating in non-financial
field of industry.
- Prather S Wert

In the words of George Christy and Peter Roden, "To finance

means to arrange payment for it".

According to Encyclopaedia Britamica, "Finance is an act

of providing means of payment".

Financial management is recognized as the most important

branch of business administration. It is very difficult to see any

business activity in isolation from its financial implications. In business

world, financial viability is the basis for decision-making.

Financial management has been defined as,

The administrative function in an organization

which have to do with the management of flow
of cash,- so that the organization will have
the means to carry out its objectives as satis­
factorily as possible and
same at the time,'
6 .
meet its obligations as they become due.
 184

But the modern school defined finance as, "an activity concerned

with planning, raising, controlling and administering of funds used

in business".^

It basically deals with the application of principles developed

by the financial managers and those borrowed from accounting,

economics and other fields to the task. As an effective management

and as a 'cash' in this context, it is proper to mention J. Hampton,

Finance has its own theories and principles ,<

but it is fundamentally concerned with applica-
..8
tions.

As financial management has an impact on all the activities

of a firm, its significance cannot be underestimated. Efficient financial

management is a must for any organization, irrespective of its size,

nature of ownership, control and whether it is a private sector,

public sector or a cooperative organization and manufacturing or

service organization. It applies to any activity of an organization,

9
which has financial implications. Finance is inextricably interwoven with

other financial areas of administration, viz., production, marketing

and accounting, and it is as important as any other area.

Success or failure of an organization depends largely on

how efficiently decisions relating to procurement and allocation of

funds, cashflow, estimates, requirements, controls of current performance,

etc., are made. Efficient financial management stimulates growth

of the organization and contributions to national progress; therefore,

 185

it can be considered as a key-determinant of any business organiza­

tion.

C. DEVELOPMENT OF FINANCIAL MANAGEMENT.

According to Donald H. Schuckett and Edward J. Mock^ Finan­

cial Management has undergone considerable change in recent years.

The traditional approach emphasized the procurement of external

funds, with little attention given to their allocation. Over past few

decades, there has been a major shift in emphasis from raising

funds to Ihe management of assets, becauseof growing demand

of investors. This demand has resulted into development of various

analytical techniques to judge the management's effectiveness.

Conveniently raising of funds and allocation of funds became

two important branches of financial management and for their better

nourishment, were looked after by different individuals in small,

medium and large enterprises.

Organogram No. 5.1 PAR1~I

ORGANIZATION OF FINANCE FUNCTION IN

SMALL BUSINESS ENTERPRISE

President
i
Vice-President
(Finance)

Tax Cash Account- Budget-

Management Management ing ing
 186

Organogram No. 5.2 CBART-H

ORGANIZATION OF FINANCE FUNCTION 3N

MEDIUM-SIZED ENTERPRISE

Vice-President
(Finance)

Treasurer Controller

Tax Cash General Cost Planning

Management Management Accounting Accounting S Budgeting

Organogram No. 5.3 CHAPTER-IH

ORGANIZATION OF FINANCE FUNCTION IN

LARGE BUSINESS ENTERPRISE

Vice-President
(Finance)

Treasurer Director of Controller

i internal
Audit

1 . 1--------------- 1--------------- 1--------------- 1---------------- 1

Tax Cash Insu- Credit General Cost Systems Planning
Manag­ Manage­ ranee 5 Coll­ Accoun­ Accoun­ S Proc­ and
ement ment ection ting ting edure Budget-
ing

Thus, development in financial management introduced treasure

for fund-raising, comprising managing tax problems, cash management,

insurance process and credit and collections and a separate person

for controlling, which involves general accounting, cost accounting,

systems and procedures and planning and budgeting.

Thus, financial management involves the following functions:

 187
Raising of Funds:

(a) Cash Management,

(b) Tax Management

(c) Insurance

(d) Credit Management

(e) Recovery Management

(B) Allocation of Funds:

(a) General Accounting

(b) Cost Accounting

(c) Systems and Procedure

(d) Planning and Budgeting

5.2 LITERATURE REVIEW OF FINANCIAL MANAGEMENT.
(A) Research in Financial Management:

The research . activity in financial management gained momentum

in India only from I960.11 Since then, academicians, researchers

and .practitioners have contributed many thought-provoking studies,

which come in the form of books and articles.

The work done so far can be broadly classified into the

following important aspects in the area of financial management:

(i) Corporate financial behaviour;

(ii) Capital structure planning, including valuation

of shares and dividend policies;

(iii) Allocation of capital resources;

(iv) Capital markets, including development banks and

 188

financial corporations;

(v) Management of working capital;

(vi) Financial management of typical organizations like

small enterprises, public enterprises and trans­

national corporations, etc. ^

In what follows, an attempt is made to present an overview

of the research activity carried out in the aspects that have relevance

to the present study. One of the main segments of corporate financial

behaviour is the study of financial trends in individual business

13
units and industries. In this context, Sooraj Babu Choudhary and D.C.
14
Jain made an analytical study of the financial performance of companies
15
in Indian environment. Besides, Saxena analysed the financial behaviour

of Delhi Cloth and General Mills Co. Limited and Kaura and Subramanyam

studied the financial performance of selected Indian cement industries

10
based on the cause-and-effect approach. Chakraborty and Reddy used

'ratio analysis’ as a tool to analyse the performance of firms in

cement industry and the limitations in the analysis of financial state­

ments through financial ratio and other tools were brought out by

Chakraborty and Rajagopalan. Realising the fact that it is difficult

to know the general Financial Soundness or otherwise of a concern

17
by studying each ratio in isolation, Sharma and Rao used multi-variate

analysis to trace corporate -failures.

Regarding the other areas of financial management - Capital

structure planning, many interesting contributions have been made.

1B
Sharma and Hanumantharao tested the applicability of Modigliani
 189
and Miller Hypothesis (influence of debt on the value of the firm)
19
in 30 engineering companies. Garg studied the note of specialized

financial institutions in financing debt capital. Useful contributions

were also made by Hari Karan Nath Mishra,^ Agarwal"^ Singh,^ Batra^
24 25 26
Kohli, Sharma and Murthy Venkataraman and others.

It is heartening to note that quite a number of studies

have been conducted on the financial management of public enterprises.

27
Ramanathan studied four aspects of the financial problem
28
of public criterion, pricing and financial organization. Bhattacharya

suggested new framework for the appraisal of public undertakings

29
andNigam examined the financial performance of State enterprises,
30
Grewal and Gupta studied the relevance of financial management

techniques to the public sector and A, Basanats C. Raj established

criteria for investments in Indian public enterprises. 31

Chattopadhya 32 carried out research on pricing, profitability

and corporate capitalization of public enterprise in India. Dakshina

Murty and Prasad33 reviewed the structural changes that had taken

place in the sources and uses of funds in government corporate

sector in India during 1961-78 and suggested a few appropriate

ways of augmenting and utilizing the internal and external sources

of funds during the 'eighties.Useful contributions also came from

3^ 35 36 3*7
B.S. Rao , Rajeshwar Rao^ and Subramanya Sarma, Sanyaland

Nagaraja Naidu38 in this area.

39
Surendra Singh and John Kaupisch discussed each management
 190
in a developing economy and tried to establish a relationship between

the academic thoughts and practices. Agarwal analysed the sources

and uses of funds in the corporate sector since Independence, with

emphasis on working capital needs of selected industries. Mathur

49
and Mishra used financial and statistical techniques to measure
41
the efficiency of working capital and Bhattacharya suggested an integrat­

ed approach to working capital management problems in loss-making

companies. Noteworthy contributions also came from Chakraborty, 42

43 44 45
Agarwal , Chari and Bhattacharya.

Considerable research work has also been done on capital

46
budgeting. Kennedy discussed it into two parts. The first part

deals with the analytical description of the steps involved in the

capital budgeting process and the second in-depth study of techniques

47
of project evaluation. Musa discussed the commonly used techniques

for ascertaining profitability of investment proposals and introduced

48 49
the concept of net terminal value. Ananthan and Swami considered the

effect of inflation on capital budgeting decisions and suggested some

modifications in the appraisal of capital budgeting proposals. Mention

may also be made of contributions from Roy and Chaudhari50 and Bharat51

in evaluation of performance of Indian industries.

52 - 53 54
Apart from the above, Kuchhal Varansy, S. Murty, Pandey,
55 56 57 58
A. Basarrt C. Raj , Ramchandran, Ramamurty, Kulkarni and Khan

and Jain59 have contributed literature on financial management, in

general, and with reference to Indian experience in particular.

 191

B. RESEARCH IN WORKING CAPITAL.

Working capital management is the area of financial manage­

ment in which a great deal of studies have been conducted. John

00
Sagan (1955) indicated the need to build up a Theory of Working

Capital and emphasis was laid on cash management. He suggested

that preparation of cash flow . statement and its analysis are very
61
nelpful in cash management. James E. Walter (1957) emphasized, in his

study, that "the lower the level of liquid assets, the greater the

risk of not being able to meet current obligations".

62
A detailed study of N.K. Agarwal (1983) on the management

of working capital in selected undertakings in the private sector

63
in India, further Dr. K. Rajeshwarrao (1985) made a study on work­

ing capital planning and control in public enterprises in India. Most

of these studies have thrown light on the aspects of controlling

measures, followed in the respective sectors and their differences

have been highlighted.

65
In addition to these studies, Dr. Ghan Sham Panda (1985)

made a study on the management of working capital in SSI units.

He pointed out in his study that the poor performance of SSI units

is due to ineffective management of working capital. Similarly, Dr.

65
N.M. Khandwala (1985) also made a study in this and shed light

upon financing problems and working capital practices adopted by

selected sample units. He opined that the SSI units start with inherent

weakness of lower shock bearing capacity as compared to large

scale units, any trouble in the area of working capital becomes

 192
a major factor contributing to a higher degree of incidence of sickness.

66
Besides the above, Dr. Radhe S. Pradian (1986) made a

study on the management of working capital, which is also on the

same line with that of the studies but sample units are from public

enterprises of Nepal. He has studied structure and utilization of

working capital and also estimated demand functions of working capital.

His study throws light upon the risk

return trade off in working
67
capital management. V. Appamdhanula (1971) in his study discussed the

relationship between working capital and choice of technique. He

pointed out the dearth of literature on working capital, management,

S.K. Chakraborty (1973) pointed outthat working capital, as a

segment of capital employed, enables one to observe its management

in a broader perspective. He pointed out that return on capital

employed is an aggregate measure of overall efficiency of a business

and if excessive working capital is employed, it would lower the

capital turnover ratio and consequently, it brings down the overall

return on capital employed. He took Madura Mills and Union Carbide

as sample units for his study.

69
Prof. S.P. Vijayasaradhi (1980) in his study made an attempt

to highlight the problems of working capital management, based on

the study of aggregate financial data of public enterprises and as

revealed by a few case-studies of individual units. The study was

concerned with a fact-finding process rather than applying any technique

concerning working capital management. The study does not take

into consideration current liabilities which form an important part

 193
70
of working capital. Further, Sampat P. Singh in his article on 'Manag­

ing Working Capital' by strategic choice emphasized the need for

understanding the process underlying the cash cycle. He pointed

out that the working capital management in competitive environment

is the investment in inventory and book-debts and taking the related

risks. He illustrated the underlying working capital flows and discussed

the problems from three different approaches in managing working

capital, viz., industry norm, economic model and strategic choice.

71
S.C. Bardia (1987) in his article on working capital

management exposed the importance of working capital management

as an index of corporate performance, which arises from the fact

that while inadequacy of profit may cause sickness, a serious liquidity

72
problem would lead to closure of the units. V.E. Ram Moorthy (1976)

in his study came with various techniques and tools useful for evaluat­

ing efficient working capital management.

C. RESEARCH ON DAIRY INDUSTRY.

In this chapter, different studies related to dairy industry,

covering various aspects, have been reviewed.

73
D.P. Apte (1982) studied Warana Dairy, in which he

suggested to increase plant utilization, to make available the milch

animals and veterinary services to cope up with the incremental

cost. Further, he suggested to the Sangh to go for a new issue

of share capital. He also advised State Government to give second

thought to the transportation, pasturization and conversion rates

 194
they pay to the Sangh. The W.D.P., Warananagar, along with co­

operative units from Gujarat, was also studied by C.G. Mathur et al,
74
(1984) in which they compared a few dairy plants from Maharashtra

State with the Dairy Plants of Gujarat State, in which they observed

that farmers of Gujarat were able to produce milk at lesser cost

as compared to Maharashtra, mainly because Gujarat farmers owned

buffaloes as against cows owned in Maharashtra by the dairy farmers.

The price paid to milk producers in Gujarat was fixed by the dairies,

while in Maharashtra, it is done by the Dairy Commissioner, which

resulted into less margin between cost of production of milk and

the price the milk fetched for the dariry farmers. As a result,

in Gujarat, the farmers were assisted by surplus to the extent of

Rs. 1.08 per litre of milk supplied. They also observed that almost

all the dairies were dependent on the borrowed finance.

75
In 1987, D.P. Apte studied "Economics of Crossbred

Cows in Maharashtra", in which he made very important observations

like 95 per cent of the sample dairy farmers reported dairying

as their subsidiary occupation; on an average, two persons in a

family have been given employment by dairying activity, especially

for female adults. He found A.I. services to be inadequate. The

yearly milk production was 2,640 litres in the case of irrigated

farmers and 2,450 litres in the case of other dairy farmers. Yearly

cash surplus of irrigated farmers was observed to be Rs. 2,136

and Rs. 2,065 in the case of other farmers. He found the cash

surplus adequate to repay the loan taken for buying crossbred

cows.
 195
76
Dr. Jawana Ram (1987) studied "Management of Dairy

Enterprises", in which he covered procurement of milk, processing,

manufacturing and marketing aspects of dairy enterprises, including

personnel. He criticised the dairy cooperatives of Rajasthan for

their dependence on government for providing manpower, input supply

services, appointment as Director of politicians by State Government,

performance of dairy cooperatives in respect of milk collection,

payment of transportation cost by government, irregular payment

to the dairy farmers for the milk supplied, undei—utilization of plant,

distribution channels, pricing, etc., and offered a few suggestions

in this respect.

77
Marty Chen and others studied the Role of Women in

Dairying (1986) through four case-studies of Action Projects in Dairying.

They observed greatest potentiality in dairying to benefit rural poor,

as stated in National Commission on Agriculture Report , 1971. The

Anand Pattern, according to them, is an appropriate tool for the

development of rural poor, especially the women, as dairying is

mainly women':5 work and products and income from dairying can

be controlled by women.

They observed the factors affecting the success of poor

women's cooperatives as: resistance to women as cooperatives'

members, illiteracy and socio-political resistance as poors are generally

78
from the backward castes. V.K. Agarwal's study (1988) as to "Market­

ing of Milk Products in Western U.P." highlighted the effectiveness

of marketing function in dairy industry and observed the absence

 196

of linkage between dairy and consumers; as a result, problems

of the latter are not understood by the dairies. He observed that

the milk availability in Western U.P. to be 213 grams. According

to him, the cost of production of milk in U.P. is high and it is

the leading factor rendering the industry uneconomical, uncompetitive

and less lucrative. He also observed excessive interference of middlemen

in the industry, which subsequently leads to adulteration in dairy

products. He suggested a few ways for controlling the quality of

milk and milk products along with a package of input development

programme.

79
In 1988, R.C. Mascarenhas looked upon dairy cooperatives

in India as 'A Strategy for Rural Development'. He took an overview

of the dairy industry, including animal husbandry and dairy development

of Karnataka State. He observed absence of autonomy in milk pricing

and control of milk processing facilities, despite the fact that in

Karnataka, the social impact has increased the use of modern technology,

commercial approaches, acceptance of animal husbandry practices

and change in values and attitudes and observed that dairy farmers

have started adopting economic rationale. He also appreciated the

involvement of women in dairying. C. Madan Mohan (1989) observes 99

gms. milk consumption in Anchra Pradesh, with low milk yielding

cattles. According to him, in Warangal District, dairy units are

adversely affected by drought conditions. In the management of dairy,

he observes, overstaffing, superior-subordinates relations are not

cordial and suggests that excess staff should be utilized for extension
 197

activities, transfers of managerial personnel is also one of the

reasons of the above cited situation. He found weaknesses in milk

procurement and transportation. He also criticized the 'commission

rate' paid to the 'commission agents', as the commission is meagre.

He suggested that officers should visit villages once in a year and

interact with the dairy farmers. For selling milk, distribution centres

should be set up at vulnerable points, attractive commission should

be given to the distributors.

81
Doombos, Martin and others (1990) studied "Operation Flood"

programme in India. They observed that milk production in rural

area and supply to urban area are interlinked in a policy-making

perception. He considers Operation Flood as an ideal example of

how food-aid could promote development. According to them, during

OF-n Programme, IDC was able to accumulate enormous financial

resources due to large additional donations from EEC.. He considers

that the National Milk Grid System ensures demand and supply of

milk at reasonable cost to both producers and consumers. He concludes

that the OF is successful on account of large donations of foreign

aid by the EEC and the World Bank.

82
George, Shanti (1990) concludes that the criteria for

an appropriate dairy policy can be identified as (a) minimal cost,

(b) optional coordination rather than conflict with crop production

process, (c) realistic safeguards for interests of poor dairy farmers,

(d) satisfaction of rural requirements, (e) maximizing country's

economic self-sufficiency. She suggested that dairy policy of the
 198

country should be amalgamated with general livestock policy, milk

should bedistributed as evenly as possible between towns and villages,

cost of milk must be kept within the budgets of large section of

the country as much as possible. In order to cut down the transit

cost, the city herd should be continued to meet milk requirements.

The Operation Flood studies were further supplemented

83
by Kamath, M.V. in which he took an extensive review of Dr.

V. Kurien's work in dairy management in India (1990) and highlighted

the concerted efforts made by Dr. V. Kurien to make the Operation

Flood programme a grand success. Dr. Kurien's continuous hard

work, his attitude to motivate his fellowmen, strong belief in cooperative

principles could overcome private sector pressures under the leadership

of the then Anand-based dairy-industrialist Mr Poison. Dedicated

efforts of Dr. Kurien's team made Poison-era a historical one and

Kaira Milk Union emerged as a model of Indian dairying entitled

as "Anand Pattern".

Thus, a good number of studies have been examined and analysed

from different periodicals and journals of national repute as they

highlight the area of researcher's interest.

Dr. T.C. Dahans (1987) 84- observed that there was consider­

able undei—utilization of capital in operating expenses (short-term

investment) on a majority of sample households under-utilization

of fixed capital in the case of all the households.

Under-utilization of short-term investments are on account

of -
 199
(1) Inability to purchase concentrates, green-fodder and veterinary

medicines for animals

(2) Non-availability of proper credit for operating expenses

at proper time and at proper rate of interest'

(3) Fixed investment in the form of loan for purchasing milch

animals, construction of cattle-sheds and other dairy equip­

ments found to be under-utilized on account of the non­

availability of additional requirement of credit in time.

He, therefore, suggested that further institutional credit

should be made available to the dairy farmers, especially for the

marginal farmers and landless agricultural labourers to make their

investment in dairying activity profitable and continuing.

85
In 1988, K. Jayachandra's study emerged the reasons for

continuous losses of dairy plants as under:

(a) Under-utilization of plant capacity

(b) inadequate procurement of milk

(c) Unremunerative sales prices received for liquid

milk and milk products

(d) Obsolete methods of production

(e) Absence of modernization

(f) Special problems in handling milk

(g) Inefficiency in handling milk, and

(h) Over-capitalization and higher rate of interest.

Such problems, according to him, can be overcome by

 200

better price management, flexible price policy, establishment of

feeder balancing dairies, more working capital availability, better

control on pilferage, spoilage of milk with prompt actions on such

cases, better recording system of milk received and sold and control

over transport, administrative processing costs.

Similar kind of study is also done by R.D. Biradar and

86
T.A. Shiware highlighting the causes of continuous losses incurred

by the Government Milk Schemes in Maharashtra.

87
P.K. Sharma et al. (1988) offered a few suggestions

which can go a long way in bringing the dairy industry in the country

to the position of a more meaningful and lucrative enterprise.

He suggested to government to initiate various dairy develop­

ment programmes in rural areas to meet the requirement of increasing

milk demand of urban area, taking into account nutritional require­

ment of the country. For accelerating productivity of milch animals,

he suggested to improve domestic stock of cows and buffaloes and

pointed out the need of location of milk society in the area of operation

so asto enable the dairy farmer to supply milk. He also felt the

requirement of communication links like roads, telephones, posts

and suggested to train the personnel with proper attitudes and behaviour.

He advocated ban on private milk dairies to control the quality of

milk.

88
Chouhan et al. (1988) recognized the establishment of

mini dairy enterprises as a solution to educated unemployment problems

of the Indian economy, especially in rural areas. With an initial

investment of Rs. 44,000, he claimed, a person can get a net annual

income of Rs. 20, 000 after the fifth year. He further came with

fruitful suggestions to make mini dairy unit a success, such as,

while purchasing a cow , one should look up the record of the cow

in respect of lactation period, dry period, calving interval, milk-

production, fat content, etc.. He suggested to have cattle insurance

coverage and advocated strong financial support for initial cost and

operating expenses from commercial banks linked with bills of milk

supplied. He suggested feeding of quality fodder to milch animals

like berseen, lucern, cow-pea and other cultivated grasses and

recommended 1 kg. concentrate mixture for 3 kg. milk. In respect

of veterinary aid, he suggested extra care for a lactating cow for

a period of 40-90 days after calving should be taken.

89
Sagar, R.L. et al. conducted a study to identify the

aspects related to productivity of milch animals and observed that

farmers having high income are having milch animals of high product­

ivity. Productivity was also found to be correlated with information

source utilization, economic motivation and risk-orientation of the

small and marginal farmers and landless labourers.

Singh, H.N. (1989) 90 observed that bank financing for

dairying has doubled the cattle rearing on the farm. The average

income from dairy activity found between Rs. 713 and Rs. 1,845

per hectare and the income was high in the case of marginal-sized

farmers as compared to small-size farmers and higher income was

received in post-borrowing period on account of the availability

of resources for operating expenses like fodder, concentrates, veterinary

 202
aids and better management. He suggested financing agencies to

be optimistic and supportive towards farmers when they think of

undertaking dairy activity.

Aruna Kumari (1989) 91 found dairying as a project aimed

at bringing about a socio-economic change in the lives of the rural

women by enabling them to undertake dairy development activities,

for which she suggested an extensive training programme on co­

operative awareness, structure, bye-laws, rights and duties of

members, in order to strengthen the process of accountability. She

felt the need for this purpose of organization of regular village-

level camps, regular visits by woman extension officers, cooperation

from financing agencies and veterinary aids in time.

92
Kale, N.K. et al. (1989) studied performance of cooperat­

ive dairies in Konkan and noticed that membership is a dominant

factor in milk collection efforts, subsidy plays an effective role

in undertaking dairy activity in rural area, with low working capital

at society-level, they can register high performance and in Konkan

also, dairying is having a better future.

93
T. Jyoti Rani et al. (1990) found that breed animals have

proved to be beneficial for the dairy farmers and they are really

benefitted in terms of getting productive work throughout the year,

earning improved income and thereby achieved progress in their

living conditions. This activity is very viable for scheduled caste

communities to improve their income and living conditions.

 203

Even in drought-prone areas, dairying is found to be success-

94
ful, as Jayachandra K. found in his study (1990). In his article, he

recommends increase in fodder, provision for better marketing system

and supply of concentrates, veterinary services by the society at

subsidized rates. He claims that each cow can give a gross income

of Rs. 5,620 per year even in drought-prone area.

95concludes
G. KrishnamaRaju (1990) that dairying is one of

the important allied activities to provide employment opportunities

to unemployed people and provides an additional income source in

summer when agricultural employment is low. If dairy development

does not provide all the necessary linkages (for example, fodder

development), the full potential of the programme may not be easily

realised. Providing N.D. buffaloes has helped in increasing income

levels, even if other support was not provided.

96
The study conducted by Sharma, A.K. et al. (1988) revealed

that there is enough scope for increasing income and employment

in the rural areas through dairying, i.e., if better quality of animals

and marketing facilities are made available in the rural areas, the

socio-economic status of cultivator-cum-milk-producers will be improved.

Biradar, R.D. observed in his study (1986) that though India

possesses the largest number of cattle, it lags behind in milk product­

ion as well as consumption. Though India has 26 types of cattle

and 7 types of buffaloes, only 5 per cent of the cattle and buffaloes

are treated as dairy animals. Therefore, it is an urgent need of

India to upgrade non-descriptive cattle and buffaloes. To hybridize

the cattle and to make available green fodder are the inevitable

requirements for making the dairy plant operations efficient.

98
Dutt Sekhar (1990) observed in his study that:

(i) In the households of villages having dairy development

programmes, the food intake is higher as compared to

the households of villages without dairy development programm­

es. The consumption of milk, ' milk-products, other non­

vegetarian food and vegetables is substantially higher in

average calorie and protein is also higher in dairy villages;

(ii) The consumption of milk products, vegetables and non­

vegetarian items was higher amongst the landless and

marginal farmers in dairy villages, supporting the contention

that dairy development helps the poor;

(iii) The major determinants of income are: (a) irrigated form

size, and (b) the number of non-descript (ND) buffaloes;

(iv) During the lean months, dairy development has helped

in reducing the variability in food intake for the landless

as well as the marginal farmers.

CONCLUSION.

We can conclude from the different studies reviewed in

this chapter that none of the studies conducted throws light on the

financial management aspects, which can be done by the study in

hand.
 205

5.3 CONCEPTUAL FRAMEWORK OF STUDY.

A. ANALYSIS OF CAPITAL STRUCTURE:

'Capital Structure' means the financial planning, according

to which the assets of the unit have been financed. According to

L.D. Schall and Charles W. Haley, "the term 'capital structure'

means the proportion of different types of securities issued by a

99
firm" According to S.C. Kuchhal, 'capital structure is only a

part of financial structure within the framework of equating the

rate of return and the cost of capital, the capital structure is sought

by using a proportion of debt such that the correct degree of trading

on equity leading to financial leverage will cause the highest market

value of the ordinary shares".1^ Thus, capital structure means

long term sources of finance from which the assets of the enterprise

have been financed. It is the entire left-hand side of the Balance-

sheet, excluding trade-credits and other short-term sources of finance.

B .ANALYSIS OF CAPITAL STRUCTURE ANALYSIS:

To analyse capital structure of the business enterprise,

the following capital structure ratios are used:

(i) Debt to Equity Ratio: To measure relationship between outsiders'

funds and shareholders' funds. As a common rule, 1:1

101
ratio is acceptable. The Controller of Capital issues
recommended 2:1 or 66:66 ratio. ^

(ii) Total Debt to Total Assets Ratio: It indicates the percentage

of assets that are financed through debt. The ratio should

be 1:2, implying more supply of funds by an outsider

 206
103
without sharing the risks and profits of the business.

(iii) Debt to Capital Ratio: It gives the idea of internal sources,

which will remainin the concern for a long period and

recommendsthat long term debts should not be more than

104
67 per cent of the permanent capital.

(iv) Net Worth to Total Assets Ratio: This ratio is often called

' proprietory ratio1. It is the ratio of funds belonging

to the shareholders to the total assets. Financial analysi-

sts are of the opinion that normally the proportion of

the net-•worth to total assets should be 20 per cent to

40 per cent. A very low ratio indicates that in the event

of financial difficulties, the shareholders may receive little

return.

(v) Interest Coverage Ratio: This ratio measures debt servicing

capacity of a firm, insofar as fixed assets are concerned.

A higher ratio is desirable, but too high a ratio indicates

that the firm is very conservative in using the debts.

A lower ratio indicates excessive use of debts or inefficient

.. 105
operations.

Ratios of Capital Structure Analysis Formulae:

Outsiders1 Funds
(i) Debt Equity Ratio
Shareholders' Equity

(ii) Debt Ratio Total Debts

Total Assets

(iii) Debt to Total Long Term Debts

Capital Ratio Permanent Capital
 207

(iv) Net Worth to total Net Worth

Assets Ratio Total Assets

Net Profit-before
(v) Interest Coverage
Interest and Taxes
Ratio
Interest Charges

B.FUNDS FLOW ANALYSIS:

Financial data in the form of Trading and Profit and Loss

Account and Balance-sheet do provide all the necessary inputs for

a major investigation and decision-naking. Under such circumstances,

a statement of change in the financial position can show summarized

impact of profit on the financial position. It gives the idea how

funds are generated and utilized. The statement is called the 'funds

flow statement'.

1
According to J.R. Manga, "funds flow" means changes in

funds or in the working capital, which involves movement of funds

as a flow in and out of working capital. The Accounting Principles Board

107
of the USA states that the concept of funds analysis is the changes

in all the assets of a company. All transactions that are the exchange

of one asset for another are analysed in detail. The funds-statement

is widely used because it throws enough light on the funds generated

110
and fheir utilization. According to Charles T. Horngren, "the funds flow

statement should be treated as a major financial statement. It would

be presented in all reports of business corporations and be covered

by the auditors' short-term report".

The furtds-flow statement contributes to the financial managers

 208

to answer such questions as:

1 Why were the current assets down, though the net income

was up or vice versa?

2 How was the expansion of machinery financed?

3 How was it possible to distribute dividend in excess of

the current earnings or in the presence of net loss for

the period?

4 What happened to the proceeds of sale of plant and equip-

merit?

5 How was the retirement of debt is accomplished?

6 What happened to the proceeds of share issue or debenture

issue?

7 How was the increase in working capital financed?

8 Where did the profit go'?

C. ANALYSIS OF FIXED ASSETS.

Assets are economic resources possessed by the firm

108
to carry on business operations in future. R.N. Anthony observes that

assets are valuable resources owned by a business, which are

acquired at a measurable money cost.110

Assets are further classified as 'fixed assets' and 'current

assets'. 'Fixed assets' may be defined as "material items to be

used in a business for more than one year or the assets, which

are permanently committed to the business and not required for

sale and to make profit". H.4. Femey and H.E. Miller observe

f
 209
that fixed assets are the assets of a relatively permanent nature
111
used in the operation of the business and not intended for sale.

Further, the assets are classified as 'tangible-intangible1 .

Analysis of Fixed Assets:

A complete appraisal of a business enterprise cannot be

done without the analysis of fixed assets. This task of analysing

'fixed assets' is interrupted by the problem of valuation of fixed

assets. As the fixed assets are always recorded at historical costs

as per 'Cost principle' of financial accounting, they do not match

with current market values,112 as recording of fixed assets at

market prices is practically impossible on the ground that market

values are subject to frequent changes. Inspite of the valuation

problem of fixed assets, their utilization by the concern can be

analysed with the following ratios:

1 Structure of fixed assets

2 Growth rate of fixed assets

3 Fixed Assets Turnover Ratio

4 Fixed Assets Funded Debts

5 Fixed Assets to Net Worth Ratio

6 Depreciation to Sales Ratio.

The ratios mentioned above are made use of for achieving

the following objectives:

(i) To find out the growth rate of assets over a period of

time covered under study;

 210
(ii) To analyse the impact of fixed assets on sale and profit

margin;

(iii) To determine the efficiency with which the fixed assets

are utilized; and

(iv) To know the adequacy of long term Hinds for fixed assets.

Formulae for the Financial Ratios used:

1 Structure of Individual fixed assets

Fixed Assets items x 100
Total fixed assets

2 Average Annual Percent change in last year (1990-91)

Growth over first year (1979-80)
Number of years (12)

3 Fixed Assets Turnover

Turnover Net Fixed Assets

4 Fixed Assets to Fixed Assets

Funded Debts Funded Debts

5 Fixed Assets to Fixed Assets

Net Worth Net Worth

6 Depreciation to Depreciation
Sales Sales

All the ratios mentioned in the present chapter can be

calculated at historical costs as well as at the current costs to

present realistic position of the sample units and the performance.

D. ANALYSIS OF WORKING CAPITAL.

Working capital plays a dominant role in the area of financial

management, as it is closely related to the day-to-day operations

of a business. Inadequate or weak working capital management is

 211
113
one of the leading causes of business failure. Working capital means

funds required to meet day-to-day financial needs such as purchase

of material, payment of wages, meeting overheads, etc.. According

to Weston and Brigham, working capital refers to firm's investment

in short-term assets, such as stock, receivables, bank balances,

etc. 114 Gross working capital is defined as firm' s total investment

in current assets. Net working capital means excess of current

assets over current liabilities and J. Batty115 supports this view. P.V.
Kulkarni^^ defines working capital as the excess of current assets

over current liabilities and provisions and many others are of the

same opinion.

The net working capital concept represents an index of

■financial soundness or margin of protection for current creditors.

117
Mohsin observes the net working capital concept as

a qualitative one and gross working capital as quantitative in nature.

118
I.M. Pandye focuses on the two aspects of current assets manage­

ment, (a) optimum investment in current assets, and (b) financing

of current assets.

Different dimensions of working capital, leading to two

kinds of working capital have been advocated, like Permanent and

Temporary (or Variable) working capital. Negative working capital

means an excess of current liabilities over current assets, a negative

i-
liquidity. 119

The working capital management can be analysed through

 212
120 T
size-wise analysis and through ratio analysis. In the study in hand,

extensive use of both methods has been made. For ratio analysis,

the following ratios have been made use of:

(i) Current Ratio

(ii) Acid-test Ratio

(ill) Net Working Capital Turnover Ratio

(iv) Inventory to. Working Capital

(v) Long-term Liabilities to Net Working Capital

(vi) Current Assets Turnover

(vii) Inventory Turnover Ratio

(viii) Debtors' Turnover Ratio

(ix) Cash to Working Capital Ratio

Formulae for the Ratios Used for Analysis:

Current Ratio Current Assets

Current Liabilities

Acid-test Ratio Quick Assets

Current Liabilities

Net Working Capital Sales

Turnover Ratio Net Working Capital

Inventory to Working Inventory

Capital Net Working Capital

Long Term Liabilities Long Term Liabilities

to Net Working Capital Nez Working Capital

Current Assets Sales

Turnover Current Assets
Sales
Inventory Turnover
Inventory

Sales
Debtors' Turnover
Debtors
 213

Cash-to- Working Cash

Capital Debtors

Average Collection Debtors + Days in a year

Period Sales

OR

Days in a year
Debtors' Turnover

E. CAPITAL PROFITABILITY ANALYSIS.

Lord Keynesremarked, "Profit is the engine that drives

the business enterprise. It is indeed a magic eye that mirrors all

121
aspects of entire business operations including the quality of output".

The statement shows the importance of profit in survival of the

business enterprise. Therefore, management efforts are always aimed

at maximizing profits and minimizing losses. The efficiency of management

is gauged in the 'test-tube' of profitability. According to Duk and

Jervi, "The principalmotivating force behind conducting business

is profit, perhaps most important reason for keeping accounts is

the content of such record which enables measurement of performance

122
and progress of the enterprise".

The profitabilityis an ability of given investment to earn

123
a return from its use. Profitability is considered, to a great

extent, to be one ofthe main criteriato judge the management

and the success of management in maximizing profits or minimizing

losses, if any.
 214

RATIOS FOR PROFITABILITY ANALYSIS.

Importance of profitability analysis has further been heightened

in recent years because it helps in critically analysing and interpreting

current and prospective earning capacity of business enterprises.

Ratio Analysis Technique helps in this area a lot. According to I.M.

Pandye, "Profitability ratios are of two types, those showing profitability

in relation to sales and those showing profitability in relation to

investment". In the present study, for analysing profitability of

industrial units, the following ratios have beenmade use of:

(1) Return on Capital Employed: To know how well the management

has used funds supplied bycreditors and owners, thus

they highlight the productivity of capital and the profitability.

Here capital employed is the capitalization, which means

share capital reserves, deposits and long-term borrowings.

The higher ratio indicates efficient use of capital employed.

If loss is incurred, in that case, gross return is considered

for the purpose of calculations.

(2) Return on Net Worth: Return on net worth is the profit

earned after paying taxes in relation to net worth. Here,

net worth means shareholders' equity, i.e., share capital,

reservesand current profits. The ratio indicates how

well the firm has used its resources supplied by owner,

obviously higher ratio indicates better utilization of -funds

provided by the owners. Inter-firm comparison helps in

arriving at a conclusion. If net loss is incurred, for

comparing purpose, gross ■ return can also give indications.

Return on Total Assets; Income earned is an indication

of productive use of assets, more income indicates more

profitability. The Return on Total Assets Ratio is a useful

measure of profitability of financial resources invested

in the firm's assets. Higher ratio indicates more productive

use of assets.

Return on Operating Assets: This ratio measures the efficiency

of operating assets. Total assets minus non-operating assets

like investments in the shares of other companies, etc.,

are excluded.

Net Profit Margin Ratio: The ratio shows the percentage

of net profit to sales. The net profit margin ratio is arrived

at by dividing the net profit by sales, which indicates

managements' efficiency in manufacturing, administering

and selling the products. Higher ratio indicates higher

proportion of profit in a Rupee sale. The business enterprise

having high net margin ratio can adjust with adverse market

situation like fell in prices, low demand and rising cost

of production.

Sales to Total Assets Ratio: The ratio indicates the frequency

with which the assets are utilized. A firm which manages its

funds properly keeps them in constant use, produces at optimum

level, keeps the level of inventory scientifically, optimizes the

production time, distributes its finished goods efficiently and

 216
realises its debts in time will have a good Total Assets Turnover

ratio.

(7) Sales to Net Worth Ratio: Sales in relation to net worth

is a good index of capital utilisation and highlights the

profit earning capacity. Very high amount of sales in relation

to capital amounts to overtrading and hence is not considered

as a good sign.

(8) Debt Service Margin Ratio: The ratio indicates ability of

a concern to serve the principal portion of the long term

debt and lease obligations. A higher debt service margin

is considered desirable which provides enough cushion

to lenders.

Earnings
i) Return of Capital Employed = Capital Employed

ii) Return on Net worth = Return after interest S Tax

Net Worth

Earnings
iii) Return on Total Assets =
Total Assets

Earnings
iv) Return on Operating Assets =
Operating Assets
Net Profit after Tax
v) Net Profit Margin Ratio =
Sales

Sales
vi) Sales to Total Assets Ratio =
Total Assets

Sales
vii) Sales to Net Work =
Net Worth
Earnings
viii) Debt Service Margin Ratio =
Debts
Cosst of goods sold+
ix) Operating Ratio Operating Expenses
Sales
 217
5.4 VALUE ADDED - AS A TECHNIQUE OF
F. PERFORMANCE EVALUATION.

The concept of 'value added' (VA) is not of recent origin

but its use has been increased since the publication of "The Corporate

Report" by the Accounting Standard Steering Committee, London,

1975 and "The Future of Company Reports", a consultative document

125
of British Government, published by HMSO London in July, 1977. In
126
India also it has gained importance as observed by Badhani (1989). In

a study conducted by Badhani he found that out of 36 Public enterprises

studied 14 were making use of VA statements and 2 out of 20 leading

private enterprises included value added statements (VAS) in their

127
financial reports.

CONCEPT OF VALUE ADDED STATEMENTS (VAS):

Value added is a measure of wealth created in a business

enterprise by employees, financiers and owners. John Sizer defined

that "Value added is the value created by a company with its employees'
1 O Q

effort in a period".

Advantages of Value Added:

There are a number of advantages of this approach, a

few of them are given below:

(1) It can be a morale booster which may be used to develop

a feeling of team-spirit among the employees.

(2) The value added index can be used as the basis for incentive

scheme.
 218

(3) It can be considered as a yardstick for measuring labour

productivity.

(4) VAS combined with final account and funds flow statement

provides better communication to the interested parties.

Format of VAS:

Accounting Standard Committee, London suggested the following

format:

Name of the Company

Statement of Value Added for the year ...

Item
Value Added Rs

Sales Revenue

Less cost of brought in goods

Total value added

Value Applied:

To the employees

To the providers of capital

To the government

To re-investment

TOTAL VALUE ADDED

5.4 CONCLUSION

In conclusion it may be said that analysis of capital structure,

capital profitability, funds flow, working capital, fixed assets and

value added as technique of evaluation of performance provide a

 219

better insight into the performance of business enterprises to form

the opinion about their managerial effectiveness in general and financial

management in particular.

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104 Ibid., p. 65.

105 Ibid., p. 68.

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114 Weston and Brigham. Essentials of Managerial Finance.

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115 Batty, J . and Hoogland.

116 Kulkarni, P.V. Financial Management. Himalaya Publishing

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117 Mohain M. Financial Planning and Control. Vikas Publishing

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118 Pandey, I.M. Management Accounting. Vikas Publishing

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119 Jain, P. Financial Management. Pointer Publishers Jaipur

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120 Ibid., p. 143.

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 230
122 Sylvan, D. Schwartzman. Ball E. Richard. Elements of

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124 Pandey, I.M. Financial Management. Vikas Publishing House

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127 Badhani, K.N. et ai. Value Added Statements - Need for

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127 Ibid., p. 327.

128 John Sizer - An Insight into Management Accounting. Pitman

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