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TABLE OF CONTENTS
CHAPTER NO. CH.-1.0 Ch.-2.0 2.1 2.2 2.3 2.4 2.5 Ch.-3.0 3.1 Ch.-4.0 4.1 Ch.-5.0 Ch.-6.0 Ch.7.0 Ch.-8.0 Ch.-9.0 9.1 Ch.-10.0 Ch.-11.0 SUBJECT Executive Summary Research Methodology Primary Objectives Methodology Schedule Scope of study Limitations Company Profile Industry Profile Evaluation of financial position comparative studies Critical Review of Literature Findings & Analysis & Observations Recommendations Bibliography Annexture Tables Case Study Sypnosis of project
The management of current assets deals with determination, maintenance, control and monitoring the level of all the individual current assets. Current assets are referred to as assets, which can normally be converted into cash within one year therefore investment in current assets should be just adequate no more no less” to the needs of the business. Excessive investments in current assets should be avoided, because it impairs firm’s profitability, as idle investment in current assets and are non-productive and so they can earn nothing, on the other hand inadequate amount of working capital can threaten solvency of the firm, if it fails to meet its current obligations. Thus the working capital is a qualitative concept 1. It indicates the liquidity position of the firm and 2. It suggests the extent to which working capital needs may be financed by permanent source of fund. Current assets should be sufficiently in excess of current liabilities to constitute a margin or buffer for maturing obligation within the ordinary cycle of business. The basic learning objective behind the study was• • • • • Computation of Working Capital Management Operating Cycle of the firm Financial plan estimated for 2007-2008 and projected for 20082009 Working capital credit limits Ratio analysis
On the basis of above calculations following conclusions can be made• Birla power ltd. has both long term as well as short term sources for current asset financing. It implies that company follows matching principle for raising funds.
Right now company is following aggressive policy, which means that company is maintaining lower ratio of current assets to fixed assets. Birla power solutions ltd has high collection peri0od which shows that money has been unnecessarily blocked with the debtors. the above problems following are the
So to overcome recommendations— •
Increase the proportion of current assets over fixed assets to come to proper proportion of current assets and fixed assets as per the basic norms and guidelines. Company should shift from aggressive policy to conservative current assets policy. Company should reduce the holiday period else the company will have to pay high carrying cost.
Comparing the firm’s financial position with respect to its competitors i. The initial step of the project was studying about the company and then evaluating the financial position of the company on the basis of ratio analysis.. ITC and Kothari Products with the help of following ratios• • • • • • . 2.RESEARCH METHODOLOGY PROJECT OBJECTIVE • The project is aimed at evaluating the financial status of Dharampal Satyapal Ltd and then doing the comparative analysis with its competitors Studying the working capital management at Dharampal Satyapal Ltd. and estimating the working capital requirements for 2007-2008 and then forecasting for 2008-2009 To find out if there is any relationship between the working capital. 3.e. The project will focus on the study of overall working capital management at the organizations. Hindustan Unilever Ltd. for which the following study and analysis will be undertaken: Liquidity ratios Solvency/Leveraging ratios Coverage ratios Activity/turnover ratios Profitability ratios Investors ratios . sales and current assets of Birla Power • • METHODOLOGY The methodology to be adopted for the project is explained as under: 1.
SCHEDULE The complete project will be for duration of 8 weeks. forecasting for 2008-2009 and regression analysis and T . Both the stages along with their approximate timelines are as follows: STAGE 1 (APPROX 2 WEEKS) The study of company’s financial position by doing ratio analysis of the financial statement so that the profitability and liquidity condition of the organization can be studied closely and then comparing it with the financial statements of Coleman Cable Inc. STAGE 2 (APPROX 6 WEEKS) The study of the overall working capital management of the company will be the first stage. Iii ) Study of C M A form and to prepare for the current year. Powell Industries. The project has been divided into 2 stages with approximate time period allotted to each stage. Beacon Power Corp.i ) This project is aimed to estimate the operating plan for the year 2007-2008 ii ) This will also include the calculations and analysis of the operating cycle for the company. Iv) It will also include the ratio analysis of the financial statement so that the profitability and liquidity trade off can be analyzed. Under this stage the operating plan will be prepared and the study and analysis of the C M A form will be done. This will include the estimation of working capital requirement for 2007-2008.
test for finding out the relationship between working capital. The segment wise and product wise study of the various product segments and units of the company have been excluded from the scope of the project due to data and time constraints. ratios etc. LIMITATIONS In spite of my continued efforts to make the project as accurate and wide in scope as possible. sales and current assets. These limitations cannot be removed and have to be accepted as permanent constraints in implementing the project. Generalizations and calculated assumptions had to be made in some areas while analyzing the financial statements. . SCOPE OF THE STUDY Studying working capital management of the Birla Power ltd and benchmarking it with 3 of its competitors. Some limitations. certain limitations are becoming evident while implementing the project. which have been identified. due to non-availability of complete information. 2. by me are: 1.
Reinforcing the emphasis on the quality at all levels. which is committed towards high quality products & credited with several innovations over last seven decades.COMPANY PROFILE Dharampal Satyapal Group (DS Group) is more than Rs. non-tobacco. The latest products to be introduced under catch brand are Catch Jal Jeera & Catch Nibu Pani.the Indian Mouth freshener”. The sagacity to weave its business around consumer needs has conferred DS Group with a distinct value. Hospitality. Rajnigandha rules the market as the world’s largest selling premium pan masala. Rajnigandha. Cement and other businesses. Its undeterred pursuit for ‘Quality & Innovation’ has led the Company to progress on a path of growth. ‘Catch’ Salt & Pepper tabletop dispensers hold their supremacy as India’s first rotatory table top dispensers. alluring the consumers with a wide range of beverages. cutting edge technology. Packaging. . The Group has consolidated its position into diversified sectors like FMCG. Catch Spices excessively continues to be connoisseurs’ favorites. Rubber thread. Taking forward the Indian tradition of eating and serving mouth fresheners after meals. the premium mouth freshener brand. Efficient capital structure. spices. In the Mouth Freshener Category. has introduced a mild new flavour. and enabled the organization to deliver continued growth in all areas of operation. have together attributed to enhance ‘Brand DS’. “Meetha Mazaa. While ‘Catch’ Natural Spring Water and its variants continue getting great response from consumers. DS Group successfully ventured into the arena of Foods & Beverages. ‘Pass Pass’ has created a new product category all-together as India’s first ever branded ‘all natural’ non supari assorted mouth freshener. and ready-to-eat snacks under the brand ‘Catch’. operational discipline and a widespread distribution network. Beginning its journey with Tobacco. Meetha Mazaa is revitalizing. 1400 crores diversified conglomerate.
A heat resistant latex Rubber thread plant has been set up at Agartala to produce international quality rubber threads. The capacity of the upcoming plant will be approximately 1 million tons Per Annum and will have a captive power plant based on coal. land has been acquired in cities like Udaipur. The group has also commissioned an ultra modern Flexible Packaging Unit in Bonda. DS Group forayed into this segment with “The Manu Maharani’ at Nainital. Manali and Goa with plans to set up hotels & resorts. based on coal.Recognizing the immense potential in the Hospitality Segment.. an eco friendly revolutionary packaging technology. As a significant step in Infrastructure Sector. Further pursuing its quest for diversification. This will be one of the largest investments on new projects. The Project is located at the Khliehriat sub division of District Jaintia Hills in Meghalaya. DS Group has signed a MOA with state Govt. With a boom in tourism sector. The Group acquired the Airport Hotel at Kolkata. CRCA and galvanized steel sheets. The hotel is currently being revamped and renovated and will soon emerge as an International standard destination with Five Star Hotel. In line with its vision of diversification. DS Group has entered the fast growing Cement Industry. DS Canpac Ltd. Corbett Park. In addition to the above ventures. A state-of-the-art plant at Noida offers packaging solutions to other FMCG marketers as well as exporters of food products. Following close behind is a first-of-its kind Steel sheets plant coming up soon in the North East to produce cold rolled sheets. by the Group. was launched in India in association with Canpac – a leading Switzerland based packaging major. a budget hotel & large Convention Centre. DS Group has launched colossal projects in the Packaging sector. the group is all set to emerge as one of the leading players in the hospitality segment. Latex rubber threads are made from natural rubber applying the most sophisticated European technology. The five star hotel building projects have also commenced in Guwahati and Jaipur. . Shimla. Mussorie. of Meghalaya to set up a 240 MW Thermal Power Plant. in 2001. in addition to a sprawling Commercial area.
DS Group constantly nurtures its responsibility as a committed corporate citizen. setting up a State level College and developing heritage properties and construction of an eco lodge to be owned and run by the tribal community. Baroitwala in HP. DS Group boasts of World Class Facilities spread across the length and breadth of the country. or packaging of the final product. the process of production. The company also has a widespread distribution network supported by dealers and retailers. A wide array of skills and substantial depth of experience has not only led the Group to maintain its leadership in its traditional businesses but has also resulted in gradually gaining market in its relatively nascent forays. Every stage of manufacturing is monitored with utmost care and attention. Under the CSR initiatives the group is renovating local schools.The group has manufacturing units in Noida. Assam and Tripura. Delhi.The Company has been working in Assam and Tripura. dedication. While DS Group pursues leadership in its business spheres. innovation and consumer value carried forward in all its diversification endeavors. it simultaneously endeavors to promote common welfare through multidimensional activities to work towards an all round development of the society DS Group makes constant improvisations in all its manufacturing components. . Be it the sourcing of raw materials. up -gradation of production facilities and bringing greater consumer orientation. leading to the making of a perfect product. In its constant effort towards building trust among its audience. by regarding Corporate Social Responsibility as an integral part of its Business Objectives. The group constantly upgrades its strength through dealer network expansion. while maintaining its commitments to high quality. resourcefulness and commitment. Kullu. Quality and Innovation are the two core values that DS Group subsists on. the Group works strongly on the principles of integrity. on a wide range of CSR programmes ranging from education to health and making tribal and ethnic communities self reliant. R&D remains the crux of DS Philosophy. to execute its manufacturing processes with full adherence to international standards of quality.
He is also known for bringing the element of quality and research hitherto unknown in this category. Blending modernity. set up a small perfumery shop in Chandni Chowk. today Catch stands for international quality and convenience. The Group has also ventured into a rapidly growing hospitality sector with extensive five star properties in the larger cities and boutique & heritage properties at tourist destinations. And what followed later was an array of premium brands like Tulsi and a host of others which have established their leadership in their own category and created new markets in its wake. The urge to create a business around consumer tastes and preferences led Dharampalji to innovate quality products. Rubber Thread. the Group set new benchmarks in Foods & Beverages. the . He is credited with blending tobacco with various exquisite fragrances. Since the launch of BABA. innovation and aspiration for being the best in the business. Under the able stewardship of Satyapalji. His sagacity revolutionized the market of chewing tobacco and the shop in Chandni Chowk became renowned not only in Delhi but even amongst the connoisseurs of tobacco in other parts of India and the world. Satyapalji inherited qualities of high virtues. Mouth fresheners like Rajnigandha and Pass Pass created new offerings and established new categories. Steel in the last few years. Dharampalji’s son Satyapalji brought the dawn of a new era an era that saw a revolution. Be it Catch spices or Catch Beverages.The Stirring Saga of an Enterprise In the early 20th century. The Group has also successfully ventured into Packaging. Delhi in the year 1929. the nation’s first ever-branded chewing tobacco BABA was launched in 1964 which became an instant success and widely popular in its category. when trade and commerce had not witnessed the advent of brands and marketing warfare in India. Shri Dharampalji – the founder of DS Group. Innovative tabletop sprinklers changed the way Indian households had been enjoying salt and spices. His in-depth knowledge of perfumes honoured him the title of “Sugandhi” (perfumer). technology and tradition. Continuing the fervour of innovation and quality.
evolving from a single product to multiple brands. Establishing Benchmarks with Innovative First • First to offer saffron flavoured chewing tobacco in the world • First to launch branded chewing tobacco in India in metal packaging • First and only chewing tobacco company in India to get ISO 9001:2000 certification • First to introduce various kinds of spices in one-time use packaging • First to launch free flowing salt in revolutionary table top rotatory dispensers in India • First to introduce 100 per cent biodegradable. DS has successfully woven over eight decades legend of innovation and enterprise. composite cans packs which are pilfer proof. reaching for milestones year after year. rust proof and leak proof using brine and through vaccum evaporation process for food products ..Group has never looked back. And the quest for innovation continues……. Thus.
US : a hallmark of quality and purity • First to introduce soda processed with natural spring water • First to introduce zero calorie tonic water • First to launch 100% herbal mouth freshener .• First to introduce electronically beaten finest malleable silver foils in India.Pass Pass Overview of FMCG Industry . • First in India to bottle natural spring water which has been awarded NSF certification from FDA.
Recently this industry has also launched in operations. financing. Fifteen companies own these 62 brands. The middle class and the rural segments of the Indian population are the most promising market for FMCG. have low per capita consumption as well as low penetration level. Well-established distribution networks. increased literacy levels. Nirma (7). Among the first activities of the FMCG industry there is selling. The big firms are growing bigger and small-time companies are catching up as well. and the balance by Indian companies. marketing. and give brand makers the opportunity to convert them to branded products. followed by Colgate (6). Coca-Cola (8) and Parle (9). The Indian Economy is surging ahead by leaps and bounds. 62 of the top 100 brands are owned by MNCs. These are figures the soft drink and cigarette companies have always shied away from revealing. purchasing. shampoos. and 27 of these are owned by Hindustan Lever. toothpaste. According to the study conducted by AC Nielsen. Personal care. in India. Between them. cigarettes. etc. skin care.4 billion in 2015 from US $ billion 11. as well as intense competition between the organised and unorganised segments are the characteristics of this sector. Britannia takes the fifth place. FMCG in India has a strong and competitive MNC presence across the entire value chain. and soft drinks are the three biggest categories in FMCG.1 billion. etc. Exhibit I THE TOP 10 COMPANIES IN FMCG SECTOR . The Indian FMCG sector is the fourth largest in the economy and has a market size of US$13. they account for 35 of the top 100 brands. Pepsi is at number three followed by Thums Up. but the potential for growth is huge.The Fast Moving Consumer Goods (FMCG) has to do with those consumables which are regularly being consumed. Most of the product categories like jams. general management. It has been predicted that the FMCG market will reach to US$ 33. production. keeping pace with rapid urbanization.6 in 2003. and so on. supply chain. and rising per capita income.
9. and others. dominates the biscuits category and has launched a series of products at various prices.799 crore or 54% of the personal care category. 10.. ITC. has a good presence in the food category with its ice-creams. 4. Vicks. milk. Amul. 6. butter. curd. This category seems to have faster development than the stagnating personal care category. 4.S.e.637 crore. aggregating Rs. There are 11 HLL brands in the 21.com The companies mentioned in Exhibit I. The foods category in FMCG is gaining popularity with a swing of launches by HLL. 21. The food category has also seen innovations like softies in ice creams. Fair and Lovely. followed by Reckitt's Mortein at Rs 149 crore. This category has 18 major brands. ITC (Indian Company) Nestlé India GCMMF (AMUL) Dabur India Asian Paints (India) Cadbury India Britannia Industries Procter & Gamble Hygiene and Health Care Marico Industries Tobacco Source: Naukrihub. Godrej. 8. is worth above Rs 217 crore. Lifebuoy. are the leaders in their respective sectors. cheese. and just below the personal care category. In the . chapattis by HLL. India's largest foods company. i. NO. 1. 7. Britannia also ranks in the top 100 FMCG brands. and so on. Goodknight from Godrej. In the household care category (like mosquito repellents). aggregating Rs. ITC alone accounts for 60% volume market share and 70% by value of all filter cigarettes in India. Nestle and Amul slug it out in the powders segment. The personal care category has the largest number of brands. ready to eat rice by HLL and pizzas by both GCMMF and Godrej Pillsbury. 2. inclusive of Lux. 3. 3. 5. and Ponds. Cigarettes account for 17% of the top 100 FMCG sales. Godrej and Reckitt are two players. Companies Hindustan Unilever Ltd.
Dabur Chyawanprash.15. Vatika. USA. Middle East. but today. Asian Paints is India's largest paint company.22. Forbes Global magazine.6 billion (USD 380 Million) Marico is a leading Indian group in consumer products and services in the Global Beauty and Wellness space. Clinic is nearly double the size of Sunsilk. HLL's Clinic and Sunsilk make it to the top 100. ranked Asian Paints among the 200 Best Small Companies in the World Cadbury India is the market leader in the chocolate confectionery market with a 70% market share and is ranked number two in the total food drinks market. Asian Paints is enjoying a formidable presence in the Indian sub-continent. Eclairs. clothes of different brands are available and the same consumers are willing to pay more for branded quality clothes. Dabur is among the top five FMCG companies in India and is a herbal specialist.shampoo category. promotion and innovation of products. although P&G's Head and Shoulders and Pantene are also trying hard to be positioned on top.6 billion (around USD 513 million). which can drive many sectors. Dabur has brands like Dabur Amla. Far East. and Gems. 5 Star. It's the quality. Earlier. Africa and Europe. Caribbean. . Its popular brands include Cadbury's Dairy Milk. South Pacific. The Rs. Outlook There is a huge growth potential for all the FMCG companies as the per capita consumption of almost all products in the country is amongst the lowest in the world. With a turnover of Rs. Indian consumers were using non-branded apparel. Hajmola and Real. with a turnover of Rs. 19 billion (approx. Again the demand or prospect could be increased further if these companies can change the consumer's mindset and offer new generation products. US$ 420 million) in 2005-2006. Southeast Asia.
TERM LIQUIDITY) Liquidity ratios measure the short term solvency. The higher the current ratio. The ratio is calculated as follows: Current ratio = Current assets Current liabilities Objective. stock. A ratio under 1 suggests that the . outstanding expenses. bank overdraft. bank balances. prepaid expenses. i. ‘Current liabilities’ means liabilities repayable in as short time like sundry creditors. Commercial banks and short-term creditors may be basically interested in the ratios under this group. marketable securities. • • The ratio is mainly used to give an idea of the company's ability to pay back its short-term liabilities with its short-term assets..FINANCIAL ANALYSIS LIQUIDITY RATIOS (SHORT. sundry debtors. bills receivables. the firm’s ability to pay its current dues and also indicate the efficiency with which working capital is being used. ‘current assets’ means the assets that are either in the form of cash or cash equivalents or can be converted into cash or cash equivalents in short time(say within a year) like cash. They comprise of following ratios: • CURRENT RATIO OR WORKING CAPITAL RATIO Current ratio is a relationship of current assets to current liabilities.e. the more capable the company is of paying its obligations. bills payable. Computation.
The current ratio can give a sense of the efficiency of a company's operating cycle or its ability to turn its product into cash.35 ITC 1. a blind comparison of actual current ratio with the standard current ratio may lead to unrealistic conclusions. However.as there are many ways to access financing . For Kothari product the ratio is high mainly due to significantly high debtors and . poor investment policies of the management and poor inventory control. An acceptable current ratio varies by industry. • While this shows the company is not in good financial health.48 Inference DS Group is in a better position to meet its short term obligations as can be seen by a current ratio.66 Kothari products 3.60 HUL 0.but it is definitely not a good sign. A standard CR for a healthy business is close to 2.5 is an acceptable CR. This is mainly due to high proportion of Loans & Advances and a significantly low proportion of Debtors. The CR in case of HUL is less than 1 implying that it would not be able to meet its obligations if they fall due at that time since current liabilities exceed current assets which is not a healthy proposition. A very high ratio indicates idleness of funds. The ratio is acceptable in case of ITC.company would be unable to pay off its obligations if they came due at that point. while a lower ratio indicates lack of liquidity and shortage of working capital. it does not necessarily mean that it will go bankrupt . • • • Current ratio 2008 DS Group 2. For most industrial companies 1.
The ratio tells creditors how much of the company's short term debt can be met by selling all the company's liquid assets at very short notice. Liquid assets are those assets which are either in the form of cash or cash equivalents or can be converted into cash within a short period. • . It is fairly stringent measure of liquidity. The ratio is calculated is as under: Liquid ratio= Liquid assets Current liabilities Objective.Advances. This ratio is the most stringent measure of how well the company is covering its short-term obligations. Similarly. excluded from liquid assets. • The ratio of current assets less inventories to total current liabilities. since the ratio only considers that part of current assets which can be turned into cash immediately (thus the exclusion of inventories). Computation. • Liquid ratio or Quick ratio or Acid test ratio Liquid ratio is a relationship of liquid assets with current liabilities. prepaid expenses do not provide cash at all and are thus. Liquid assets are computed by deducting stock and prepaid expenses from the current assets. Stock is excluded from liquid assets because it may take some time before it is converted into cash. also called acid-test ratio.
91 ITC 0. may land the company in difficulties. A decline in the liquid ratio indicates over-trading. The company should try to keep ratio greater than 1. Liquid ratio is considered as a refinement of current ratio as non-liquid portion of current assets is eliminated to calculate the liquid assets. if serious.67 HUL 0.27 Kothari products 3. there is a rupee of quick assets. May be that ITC and HUL are indulged in over-trading. Thus it is a better indicator of liquidity. Kothari product is also in an excellent position with a high Quick R SOLVENCY/LEVERAGE SOLVENCY) RATIOS (LONG-TERM The term ‘solvency’ implies ability of an enterprise to meet its long term indebt ness and thus. solvency ratios convey the long term financial prospects of the company. debenture . which. The shareholders. since for every rupee of current liabilities. A quick ratio of 1:1 is considered standard and ideal.• The current ratio does not indicate adequately the ability of the enterprise to discharge the current liabilities as and when they fall due.35 Inference DS Group is better off than ITC and HUL in meeting the short -term debts by selling all liquid assets of the company at a very short notice. • Quick Ratio 2008 DS Group 1.
e. it portrays the proportion of total funds acquired by a firm by way of loans. This ratio expresses a relationship between debt (external equities) and the equity (internal equities). It also indicates the extent to which the firm depends upon outsiders for its existence. i. Computation. preference share capital. In other words. Debt means long-term loans.. A very high debtequity ratio may make the proposition of investment in the organization a risky one. reserves less losses and fictitious assets like preliminary expenses..equity. loans (long term) from financial institutions. public deposits. equity share capital. debentures. i. Following are the different solvency ratios: • Debt-equity Ratio The debt-equity ratio is worked out to ascertain soundness of the long term financial policies of the firm.e. A high debt-equity ratio may indicate that the financial stake of the creditors is more than that of the owners. Te ratio is calculated as under: Debt-Equity Ratio = Debt (Long-term Loans) Equity (shareholder’s funds) Objective. • • .holders and other lenders of the long-term finance/term loans may be basically interested in the ratios falling under this group. Equity means shareholder’s funds. • The objective of this ratio is to arrive at an idea of the amount of capital supplied to the concern by the proprietors and of asset ‘cushion’ or cover available to its creditors on liquidation of the organization.
• While a low ratio indicates safer financial position.5. However. basically due to two reasons: a) The expectations of the creditors in the form of return on their investment are comparatively less as compared to the returns expected by the equity shareholders. a very low ratio may mean that the borrowing capacity of the organization is being underutilized. . b) The return on investment paid to the creditors is a tax-deductible expenditure.21 • ITC 0. For example. while personal computer companies have a debt/equity of under 0. underwriting commission. Debt Ratio 2008 Equity DS Group 0. For DS Group and HUL the proportion of debt to shareholders fund is almost same. Borrowing capacity is being underutilised. fictitious assets like preliminary expenses. The debt/equity ratio also depends on the industry in which the company operates. • Total Assets to Debts Ratio The total asset to debt ratio establishes a relationship between total assets and the total long-term debts. capital-intensive industries such as auto manufacturing tend to have a debt/equity ratio above 2. there is greater use of long term debt in DS as compared to HUL. However. • The readers of financial management may remember that to borrow the funds from outsiders is one of the best possible ways to increase the earnings available to the equity shareholders. Total assets include fixed as well as current assets.02 HUL 0.20 Inference In ITC there is greater use of capital being supplied by the proprietor.
a low ratio represents a risky financial position as it means that the business depends on outside loans for its existence. In case of ITC there is greater safety margin available to the providers of long term de In case of HUL it is satisfactory. A higher ratio represents higher security to lenders for extending the long-term loans to the business. It includes debentures. discount on issue of shares/debentures. This ratio is computed as under: Total Assets to Debt Ratio = Total Assets Long-term debts Objective. It measures the extent of coverage provided to long term debts by the assets o the firm. • Proprietary Ratio The proprietary ratio establishes a relationship between proprietor’s fund and total assets. . Longterm debts refer to debts that will mature after one year. and debit balance of profit and loss account are not included. DS Group 6 • Total Assets to Debt Ratio 2008 ITC 79. etc. and loans from financial institutions.58 Inference In case of DS Group there is greater dependence on outside loans for financing the as which is not a healthy sign. • This ratio is computed to measure the safety margin available to the providers of long-term debts.. Computation.share issue expenses. bonds.48 HUL 64. On the other hand.
As these sources of funds are cheaper. should be deducted. This ratio is a test of credit strength as too low a proprietary ratio would mean that the enterprise is relying a lot more on its creditors to supply its working capital. The higher this Proprietary ratio denotes that the shareholders have provided the funds to purchase the assets of the concern instead of relying on other sources of funds like bank borrowings. Funds payable to others should not be added. This ratio is worked out as follows: Proprietor’s Ratio = Proprietor’s Fund or Shareholders Fund Total Assets Objective. Loss. Proprietary DS ITC HUL Kothari . However. the inability to make use of it might lead to lower earnings and hence a lower rate of dividend payout. This ratio is of particular importance to the creditors as it helps them to ascertain the proportion of shareholder’s funds in the total assets employed in the firm. too high a proprietary ratio say 100%Â means that management has not effectively utilize cheaper sources of finance like trade and long term creditors.Proprietor’s fund means share capital plus reserves and surplus both of capital and revenue nature. This ratio throws a light on the general financial position of the concern. Computation. trade creditors and others. if any. It shows the extent to which shareholders own the business.
• Total Debt Ratio Total debt ratio is a relationship of Total Debt of a firm to its Capital Employed.69 0.35 0. A debt ratio of greater than 1 indicates that a company has more debt than assets. meanwhile. a debt ratio of less than 1 indicates that a company has more assets than debt. DS Group and HUL are majorly dependent on outsiders for funding the assets / workin For ITC it is on a better side with major funding done by proprietors.23 Products 0. Used in conjunction • .Ratio 2008 Group 0. This ratio is calculated as under.50. DS Group should increase the shareholders fund and try to bring the ratio above 0. The measure gives an idea to the leverage of the company along with the potential risks the company faces in terms of its debt-load. Computation. Total Debt Ratio = Debt Capital Employed Objective. • A ratio that indicates what proportion of debt a company has relative to its assets.89 Inference Highest ratio is for Kothari products indicating shareholders have provided majority of to purchase the assets instead of relying on others sources of funds.
Computation.02 HUL 0.23 ITC 0. Total Ratio 2008 Debt DS Group 0. This ratio is calculated as follows: Fixed Assets to Capital Employed = Net Fixed assets x 100 . the debt ratio can help investors determine a company's level of risk.with other measures of financial health. Fixed Assets to Capital Employed Ratio Fixed assets to Capital employed ratio gives the amount of fixed assets as a percentage of the capital employed of the company.07 Inference DS Group uses a greater proportion of debt as compared to ITC and HUL. ITC has a very low ratio debt ratio indicating there is more reliance on capital provided by the proprietors.
• • This ratio indicates the extent to which the long term funds are sunk into fixed assets.13 ITC 1 HUL 1 Kothari Products 1 Inference This ratio indicates that a major portion of long-term funds is utilized for the purpose of fixed assets leaving a small portion for the investment in current assets or working capital. and this part may be in the form of permanent working capital.Capital Employed Objective. • • Fixed Assets to Capital Employed Ratio 2008 DS Group 0. • Inventory to Net Working Capital Ratio . In DS group a small proportion of capital employed is used for the purpose of fixed assets. It has been an accepted principle of financial management that not only fixed assets should be financed by way of long-term loans but also a part of current assets or working capital should be financed by way of long-term funds. A very high trend of this ratio may indicate that a major portion of long term funds is utilized for the purpose of fixed assets leaving a small proportion for the investment in the current assets or working capital. A very low trend of this ratio coupled with a constant declining trend of current ratio may indicate an urgent for the introduction of long-term funds for financing the working capital in the business.
• • • Keeping track of inventory levels is crucial to determine the financial health of a business. while not affecting potential sales opportunities. The formula is as under: Inventory to Net Working Capital = Inventory Net Working Capital Objective. PROFITABILITY RATIOS .56 HUL - Kothari Products 0. Computation. It is preferable to run a business as little inventory as possible on hand. Inventory to Net Working Capital Ratio 2008 DS Group 0. If this ratio is high compared to the average for the industry. it could mean that the business is carrying too much inventory.33 ITC 1.Inventory to Net working Capital Ratio tells how much of a company’s funds are tied up in inventory.05 Inference In DS Group Inventory form nearly one-third of the working capital unlike in ITC where Inventories form majority of the Working capital which is not a healthy proposition.
• The net profit ratio determines the overall efficiency of the business. finance charges and making adjustments for non-operating expenses and incomes. Net Profit is derived by deducting administratitive and marketing expenses. A high net profit indicates profitability of the business. • Net Ratio 2008 Profit DS Group 0.11 ITC 0.38 Inference . higher the ratio. The different profitability ratios are as follows: • Net Profit ratio The Net profit ratio establishes the relationship between net profit and net sales. Hence. the better the business is. This ratio is calculated as follows: Net Profit ratio = Net Profit after taxes x 100 Net Sales Objective.Profit as compared to the capital employed indicated profitability of the concern.14 Kothari Products 0. Computation.It indicates that proportion of sales available to the owners after the consideration of all types of expenses and costs – either operating or non-operating or normal or abnormal. expressed in percentage form. A measure of ‘profitability’ is the overall measure of efficiency.22 HUL 0.
The denominator considers the interest charges. Interest coverage is a financial ratio that provides a quick picture of a company’s ability to pay the interest charges on its debt. Objective. thereby providing a sense of the safety margin a company has for paying its interest for any period. It is calculated as: Interest Coverage Ratio = Profit before Interest and Taxes Debt Interest The numerator considers the profit before income tax and interest on both term and working capital borrowings.Kothari product has been able to generate a high Net profit ratio among the four. Computation. The 'coverage' aspect of the ratio indicates how many times the interest could be paid from available earnings. which are in the form of interest on long-term borrowings and not the interest on working capital facilities. . For DS Group the ratio is on a lower side so it should aim to achieve a higher ratio. COVERAGE RATIOS • Interest Coverage Ratio The interest coverage Ratio establishes the relationship between PBIT (Profits before interest and taxes) and Debt interest.
Interest Coverage Ratio 2008 DS Group 4 ITC 41. This ratio indicates that the cash available for the repayment of the interest will be more than profit. All companies have been able to generate e Profit necessary to meet their interest obligations. For ITC it is also good. A company that sustains earnings well above its interest requirements is in an excellent position to weather possible financial storms.48 Kothari Products 361. investors should not own a stock that has an interest coverage ratio under 1. as depreciation will also be added in . as the amount of [profits so calculated may consider the amount of depreciation debited to Profit and Loss Account which does not involve any outflow of funds.37 HUL 74. However. b) The funds available for meeting the obligations of interest payments may not be necessarily in the form of p[profits before interest and taxes only.63 Inference Maximum interest coverage is available in case of HUL indicating it is in good capacity the interest charges on debt. The ratio suffers from the following limitations: a) The fixed obligations in the form of preference dividend or installments of long-term borrowings are not considered.5. As a general rule of thumb. An interest coverage ratio below 1. in case of DS Group it is lowest.0 indicates the business is having difficulties generating the cash necessary to pay its interest obligations.
This ratio indicates the effectives of the organization with which the capital employed is being utilized. The following are the important activity (turnover or performance) ratios: • Capital Turnover Ratio Capital Turnover ratio establishes between the Net Sales and the Capital Employed of a firm.30 Capital Turnover Ratio 2008 DS Group 0.profit (because it is a non-cash expense). Activity ratios measure the effectiveness with which a concern uses resources at its disposal. ACTIVITY (TURNOVER OR PERFORMANCE) RATIOS Turnover indicates the speed with which capital employed is rotated in the process of doing business. So rather than maintaining such high cash firm should try to reinvest its earnings rather then blocking the available resources.57 ITC 1. It indicates that the capital turnover ratio better will be the situation.17 HUL 9. Kothari Products 0.11 . This ratio is computed with the help of the following formula: Capital turnover ratio = Net sales Capital Employed Objective. A high capital turnover ratio indicates the capability of the organization to achieve maximum sales with minimum amount of capital employed. Computation.
These operations and inventory are then converted into sales revenue for the company. In other words. Capital employed is utilised most effectively in case of HUL as it has been successfully generate good amount of sales with the capital employed. A company uses working capital (current assets . The ratio is calculated as follows: Working capital turnover ratio = Net sales Working capital Objective.Inference In DS Group and kothari products capital employed is not being utilised effectively to g maximum sales. It indicates that the capital employed is turned over in the form of sales more number of times. The working capital turnover ratio is used to analyze the relationship between the money used to fund operations and the sales generated from these operations. This ratio indicates that the organization is able to achieve maximum sales with minimum amount of capital employed. A careful handling of the short-term assets and funds will mean a reduction in the amount of capital employed thereby improving turnover. Working capital is computed by deducting current liabilities from current assets. . Computation. Capital turnover ratio indicates that the firm’s capital employed is being efficiently used. In case of ITC it is satisfactory. this ratio shows the efficiency in the use of short-term funds for achieving sales.current liabilities) to fund operations and purchase inventory. • Working Capital Turnover Ratio The working capital turnover ratio indicates the number of times a unit invested in working capital produces sale.
In a general sense, the higher the working capital turnover, the better because it means that the company is generating a lot of sales compared to the money it uses to fund the sales.
A high, or increasing Working Capital Turnover is usually a positive sign, showing the company is better able to generate sales from its Working Capital. Either the company has been able to gain more Net Sales with the same or smaller amount of Working Capital, or it has been able to reduce its Working Capital while being able to maintain its sales. As such, higher this ratio, the better will be the situation. However, a very high ratio may indicate overtrading – the working capital being meager for the scale of operations.
Working Capital Turnover Ratio 2008
DS Group 1.44
Kothari Products 0.93
For HUL it is coming out to be negative. In ITC there is better use of working capital for generating sales. In DS Group the management needs to utilize the working capital in a better manner so that it can increase the sales.
• Inventory Turnover ratios
a) Raw Material Inventory Turnover Computation. This ratio is calculated as follows: Raw Material Inventory Turnover Ratio = Consumed Inventory
Raw Material Inventory Turnover 2008
Raw Material Average Raw Material
DS Group 3.24
Kothari Products 10.72
Raw material inventory turnover ratio is increasing for the DS Group. Which indicates the increasing efficiency in the management of the inventory This shows that the company is having sufficient of sales.
b) Finished goods Inventory Turnover Computation. This ratio is calculated as follows: Net sales Average Finished Goods Inventory
Finished Goods Inventory Turnover
Objective. • A high inventory turnover ratio indicates that maximum sales turnover is achieved with the minimum investment in inventory. As such, as a general rule, high inventory turnover ratio is desirable. However, the high inventory turnover ratio should be viewed from some more angles. Firstly, it may indicate that there is under investment in inventory whereby the organization may loose customer patronage f it is unable to maintain the delivery schedule. Secondly, high inventory turnover ratio may not necessarily indicate profitable situation. An organization, in order to achieve a large sales volume, may sometimes sacrifice on profits, whereby a high inventory turnover ratio may not result into high amount of profits. On the other hand, a low inventory turnover ratio may indicate over investment in inventory, existence of excessive or obsolete/nonmoving inventory, improper inventory management, accumulation of inventories at the year end in anticipation of increased prices or sales volume in near future and so on. There can be no standard inventory turnover ratio which may be considered ideal. It may depend on nature of industry and marketing strategies followed by the organization.
DS Group has the highest ratio among the category which is a good sign as it indicates the increasing efficiency in the management of the inventory. This shows that the company is having sufficient amount of sales. This ratio indicates that maximum sales turnover is achieved with the minimum investment in inventory.
• Assets Turnover Ratios
e. This ratio is calculated as follows: Fixed Assets Turnover Ratio = Net Sales Fixed Assets Fixed assets include net fixed assets. It indicates that the assets are turned over in the form of sales more number of times. better will be the situation. a) Total Assets Turnover Computation. A high Assets turnover ratio indicates the capability of the organization to achieve maximum sales with the minimum investment in assets.27 b) Fixed Assets Turnover Computation. i. while those with high profit margins have low asset turnover. This ratio is computed using the following formula: Total Assets Turnover Ratio = Net Sales Total Assets Total Assets Turnover 2008 DS Group 0.. higher the ratio. Asset turnover measures a firm's efficiency at using its assets in generating sales or revenue . It also indicates pricing strategy: companies with low profit margins tend to have high asset turnover. fixed assets after providing for depreciation .83 HUL 2.the higher the number the better.11 Kothari Products 0. S such.44 ITC 0.
.67 .00 HUL 4. Fixed Assets Turnover 2008 DS Group 4.07 Kothari Products 0.17 ITC 1.82 ITC 2.40 Kothari Products 7. Current Assets Turnover 2008 DS Group 0. better will be the situation. It indicates that the assets are turned over in the form of sales more number of times.96 c) Current Assets Turnover Computation. S such. • • A high Assets turnover ratio indicates the capability of the organization to achieve maximum sales with the minimum investment in assets.87 HUL 7. This ratio is calculated s follows: Current Assets turnover Ratio = Net Sales Current Assets Objective. higher the ratio.
• Debtors Turnover Ratio Computation. • This ratio indicates the speed at which the sundry debtors are converted in the form of cash. . However this intention is not correctly achieved by making the calculations in this way. The ratio will be computed as: Debtors Turnover ratio = Net credit sales Average sundry debtors Objective. Debtors turnover Ratio 2008 DS Group 43 ITC 18 HUL 29 Kothari Products 5 As such this ratio is normally supported by the calculations of Average Collection Period which is calculated as under: a) Calculation of Daily Sales Net credit Sales No of Working Day Daily Sales 2008 DS Group 151 ITC 4016 HUL 3812 Kothari Products 47 Inference It is highest in case of ITC followed by HUL and DS Group respectively.
By this.64 Creditor Days 2008 DS Group 57 ITC 182 HUL 219 .30 ITC 1. the funds which are blocked with the customers. it may indicate over investment in debtors which may be the result of over-extension of credit period. If the average collection period is more than normal credit period allowed to the customers. can be reduced and that money can be utilized for other profitable purposes.97 HUL 1. liberalization of credit terms and ineffective collection procedures. and hence are becoming idle.b) Calculation of Average Collection Period: Average Sundry Debtors Daily Sales The average collection period as computed above should be compared with the normal credit period extended to the customers. Average Collection Period 2008 DS Group 8 ITC 20 HUL 12 Kothari Products 74 Inference The firm should try to reduce its debtors holding period . • Creditors Turnover Ratio Creditors Turnover Ratio 2008 DS Group 6.
Assets. RETURN ON INVESTMENT The ratios computed in this group indicate the relationship between the profits of a firm and investment in the firm. As such.. An indicator of how profitable a company is relative to its total assets. This ratio is calculated as: ROA = EBIT Average Total Assets Objective. i. Capital Employed and Shareholder’s Funds. The assets of the company are comprised of both debt and equity.e. Both of these types of financing are used to fund the . ROA gives an idea as to how efficient management is at using its assets to generate earnings. those funds can remain with it for a longer period and can be utilized for fulfilling the working capital requirement. there can be three broad classifications of ROI: Return on Assets (ROA) Computation. For this purpose firm can use little strict credit standards it can also adopt discount policy. There can be three ways in which the term ‘investment’ may be interpreted.Inference The firm is having low credit holding period it can try to increase is so that.
29 Kothari Products 0. because the company is earning more money on less investment. Return on Assets (ROA) 2008 DS Group 0.operations of the company.29 HUL 0.13 Inference For ITC and HUL it is on same side indicating that assets have been utilised well to generate earnings. The ROA figure gives investors an idea of how effectively the company is converting the money it has to invest into net income. It is commonly used as a measure for comparing the performance between businesses and for assessing whether a business generates enough returns to pay for its cost of capital.07 ITC 0. In case of DS Group and kothari products it is on a lower side so the management nee make sure it utilises the assets well enough to generate good earnings. The higher the ROA number. the better. • Return on Capital Employed (ROCE) Computation. It is used in finance as a measure of the returns that a company is realising from its capital employed. The ratio is calculated as: Profit Before Interest & Taxes x 100 Average Capital employed Objective. .
Return on Capital Employed 2008 DS Group 0.14 Inference A high ratio in case of HUL indicates a better and profitable use of long term funds of owners and creditors.01 Kothari Products 0. A high ROCE indicates a better and profitable use of long-term funds of owners and creditors.09 ITC 0. a high ROCE will always be preferred.13 ITC 0.38 HUL 1. As such. However. In case of ITC it is satisfactory. As such. this ratio is the most crucial one from the owners/shareholders point of view.11 . • Return on Shareholder’s Funds It is calculated as: Profit After Tax x 100 Shareholder’s funds • This is the most popular ratio to measure whether the firm has earned sufficient returns for its shareholders or not.26 HUL 1. Return On Equity 2008 DS Group 0. Higher the ratio better will be the situation. ROCE measures the profitability of the capital employed in the business.28 Kothari Products 0. for DS Group and kothari products it is low.
Inference HUL has been able to generate exceptionally high ROSF. increasing EPS may indicate the increasing trend of current [profits per equity share. INVESTOR RATIOS • Earnings per Share (EPS) Computation. per DS Group 26.69 .99 Kothari Products 97. However. Higher the return more satisfied will be the shareholders.39 HUL 8.) 2008 ITC 8.19 • Earnings share (Rs. The ratio is calculated as: Net Profit after Taxes – preference Dividend Number of Equity shares Outstanding Objective. Kothari product has the lo return among the category. EPS is calculated on the basis of current profits and not on the basis of retained profits. As such. • It is widely used ratio to measure the profits available to the equity shareholders on a per share basis. For DS Group and ITC it is good but slightly on a lower side. EPS does not indicate how much of the earnings are paid to the owners by way of dividend and how much of the earnings are retained in the business.
short term securities. Current assets are the assets which can be converted into cash within an accounting year and include cash. and include creditors (accounts payable).CONCEPTS OF WORKING CAPITAL There are two concepts of working capital – Gross and Net • Gross Working Capital refers to the firm’s investment in current assets. which are expected to mature for payment within an accounting year. Net working capital can be positive or negative. • Focusing on management of current assets The gross working capital concept focuses attention on two aspects of current assets management: a) How to optimize investment in current assets? . Current liabilities are those claims of outsiders. Net Working Capital refers to the difference between current assets and current liabilities. A positive net working capital will arise when current asset exceed current liabilities. A negative net working capital occurs when current liabilities are in excess of current assets. bills payable and outstanding expenses. bills receivable (accounts receivables or book debts) and stock. debtors.
as idle investment earns nothing. Therefore. financing arrangement should be made quickly. Whenever a need for working capital funds arises due to the increasing level of business activity or for nay other reason. It should e realized that the working capital needs of the firm may be fluctuating with changing business activity. the financial manager should have knowledge of the sources of working capital funds as well as investment avenues where idle funds may temporarily are invested. short. if suddenly. the quality of current assets should be considered in determining level of current assets vis-à-vis current liabilities. Current assets should be sufficiently in excess of current liabilities to constitute margin or buffer for maturing obligations within the ordinary operating cycle of business. However. Investment in current assets should be just adequate to the needs of the business firm. In order to protect their interests. Similarly. A negative working capital means a negative liquidity. Excessive liquidity is also bad.term creditors always like a company to maintain current assets at a higher level than current liabilities. It may be due to mismanagement of current assets. The management should be prompt to initiate an action and correct imbalances. inadequate amount of working capital can threaten solvency of the firm because of its inability to meet its current obligations. Focusing on Liquidity management Net working capital is a qualitative concept. but should be invested in short term securities.b) How should current assets be financed? The considerations of the level of investment in current assets should avoid two danger points. On the other hand. A weak liquidity position possesses a threat to the solvency of the company and makes it unsafe and unsound. and may prove to be harmful for the company’s reputation. It indicates the liquidity position of the firm and suggests the extent to which working capital needs may be financed by permanent sources of funds. . prompt and timely action should be taken by management to improve and correct the imbalances in the liquidity position of the firm. Thus. Another aspect of the gross working capital points to the need of arranging funds to finance current assets. Excessive investment in current assets should be avoided because it impairs the firm’s profitability. some surplus funds arise they should not be allowed to remain idle.excessive or inadequate investment in current assets.
. so the firm should earn sufficient returns from its operations. Investment in current assets such as inventories and debtors (accounts receivable) is realized during the firm’s operating cycle that is usually less than a year. There is no precise way to determine the exact amount of gross or net working capital of a firm. after the conversion of resources into inventories. which is permanent. therefore. It may be emphasized that both gross and net concepts of working capital are equally important for the efficient management of working capital. Management must.For every firm. labor power and fuel etc. Manufacture of the product which includes conversion of raw materials into work-in-progress into finished goods. debentures. There is always an Operating cycle involved in the conversion of sales into cash. Therefore. investment in current assets is turned over many times in a year. there is a minimum amount of net working capital. The operating cycle of manufacturing company involves three phases: • • Acquisition of resources such as raw material. On the contrary. they should be put to productive use. Current assets are needed because sales do not convert into cash instantaneously. OPERATING CYCLE is the time duration required to convert sales. preference share capital or retained earnings. OPERATING AND CASH CONVERSION CYCLE A firm should aim at maximizing the wealth of its shareholders. long-term debt. There is difference between current and fixed assets in terms of their liquidity. A judicious mix of long and short term finances should be invested in current assets. decide the extent to which the current assets should be financed with equity capital or borrowed capital. A firm requires many years to recover the initial investment in fixed assets such as plant and machinery or land and building. a portion of working capital should be financed with permanent sources of funds such as equity share capital. Since current assets involve cost of funds. The firm has to invest enough funds in current assets for generating sales. into cash. Earning a steady amount of profit requires successful sales activity.
Credit sales create account receivable for collection. on the other hand. Cash inflows are uncertain because sales and collections which give rise to cash inflows are difficult to forecast accurately. It needs to maintain liquidity to purchase raw materials and pay expenses such as wages and salaries. The firm holds stock of finished goods to meet the demand of customers on continuous basis and sudden demand from some customers. required to invest in current assets for a smooth. Cash is also held to meet any future exigencies. administrative and selling expenses and taxes as there is hardly a matching between cash inflows and outflows. other manufacturing. They are not synchronized because cash flows usually occur before cash inflows. These phases affect cash flows. Length of Operating Cycle The length of the operating cycle can be calculated in two ways: a) Gross Operating Cycle b) Net Operating Cycle a) Gross Operating Cycle The grass operating cycle of a manufacturing concern is the sum of Inventory Conversion Period and debtors (receivable) conversion period. Debtors are created because goods are sold on credit for marketing and competitive reasons.• Sale of the product either for cash or on credit. Thus. are relatively certain. are neither synchronized nor certain. therefore. uninterrupted production and sale. The firm is. and debtors. which most of the time. for smooth. Stocks of raw materials and work-in-progress are kept to ensure smooth production and to guard against non-availability of raw material and other components. Gross Operating Cycle is gives as follows: Inventory conversion Period + Debtors Conversion Period . a firm makes adequate investment in inventories. Thus. uninterrupted functioning.
It can be calculated as followsFinished goods inventory [Cost of goods sold]/360 . and (b) Raw material inventory. It is the sum of (1) raw material conversion period. Raw material conversion period = Raw material inventory [Raw material consumption]/360 • Work-in-progress conversion period Work-in-progress conversion period is the average time taken to complete the semi-finished or work-in-progress. Raw material consumption par day is given by the total raw material consumption divided by the number of days in the year (say 360). It is given by the following formula: Work-in-progress conversion period = work-in-progress inventory [Cost of production]/360 • Finished goods conversion period Finished goods conversion period is the average time taken to sell the finished goods. Raw material conversion period depends on: (a) Raw material consumption per day. (2) work-in-progress conversion period.Inventory Conversion Period: The inventory conversion period is the total time needed for producing and selling the product. The raw material conversion period is obtained when raw material inventory is divided by raw material consumption per day. • Raw material conversion period The raw material conversion period is the average time period taken to convert material into work-in-progress. and (3) finished goods conversion period.
It is calculated as follows: Creditors [Credit purchases]/360 In practice. The negotiated sources of working capital financing are called non-spontaneous sources. Payables. Creditor’s deferral period: Creditor’s deferral period is the average time taken by the firm in paying its suppliers. It is the net time interval between cash collections from sale of the product and cash payments for resources acquired by the firm. If net operating cycle . should be obtained in order to carry out the firm’s operations. which a firm can defer. It also represents the time interval over which additional funds. a firm may acquire resources (such as raw materials) on credit and temporarily postpone payment of certain expenses.Debtor’s conversion period: Debtor’s conversion period is the average time taken to convert debtors into cash. are spontaneous sources of capital to finance investment in current assets. The firm has to negotiate working capital from sources such as commercial banks. called working capital. Net operating cycle is also referred to as cash conversion cycle. It represents the average collection period. The creditor’s deferral period is the length of time the firm is able to defer payments on various resource purchases. It is calculated as follows: Debtors [Credit sales]/360 b) cash conversion or Net operating cycle Net operating cycle is the difference between Gross operating cycle and creditors (payables) Deferral period.
BALANCED WORKING CAPITAL POSITION The firm should maintain a sound working capital position. which earn no profits for the firm. They need to acquire cash. It should have adequate working capital to run its business operations. The above operating cycle concept relates to a manufacturing firm. They will acquire stock of finished goods and convert them into debtors and debtors into cash. therefore the calculation of operating cycle should include depreciation. Non-manufacturing firms such as wholesalers and retailers will not have the manufacturing phase. Both excessive as well as inadequate working capital positions are dangerous from the firm’s point of view. which adversely affects profits. Excessive working capital means holding costs and idle funds. Excessive working capital makes management complacent which degenerates into managerial inefficiency. theft and losses increase. Further. • • . higher incidence of bad debts results. depreciation is a non-cash item and profits re not costs. service and financial enterprises will not have inventory of goods (cash will be their inventory). One is that depreciation and profit should be excluded in the computation of cash conversion cycle since the firm’s concern is with cash flows associated with conversion at cost. waste. The dangers of excessive working capital are as follows: • It results in unnecessary accumulation of inventories. chances of inventory mishandling. then lend (create debtors) and again convert lending into cash. A contrary view air that a firm has to ultimately recover total costs and make profits. Their operating cycles will be the shortest. Consequently. It is an indication of defective credit policy and slack collection period. it means further need for negotiated working capital.of a firm increases. Thus. There are two ways of calculations of cash conversion cycle. and even the profits.
This may tend to make dividend policy liberal and difficult to cope with in future when the firm is unable to make speculative profits. the firm faces tight credit terms. It becomes difficult to implement operating plans and achieve the firm’s profit target. The lenders consider a positive net working capital as a measure of safety. the more the net working capital a firm has. The firm looses its reputation when it is not in a position to honor its short-term obligations. Fixed assets are not efficiently utilized for the lack of working capital funds Paucity of working capital funds render the firm unable to avail attractive credit opportunities etc. All other things being equal. Inadequate working has the following dangers: • • • • • • It stagnates growth. As a result. Operating inefficiencies creep in when it becomes difficult even to meet day-to-day commitments. the less likely that it will default in meeting it current financial obligations. DETERMINANTS OF WORKING CAPITAL Nature of business: . It becomes difficult for the firm to undertake profitable projects for non-availability of working capital funds. Risk in this regard means chances of the firm’s being unable to meet its obligation on due date. A firm’s net working capital position is not only important as an index of liquidity but it is also used as a measure of the firm’s risk. An enlightened management should. Inadequate working capital is also bad as it not only impairs the firm’s profitability but also results in production interrupts and in efficiencies and sales disruptions. therefore maintain the right amount of working capital on a continuous basis.• Tendencies of accumulating inventories tend to make speculative profits grow.
On the other hand. Thus. Seasonality of operations: Firms. etc. like an electricity undertaking or a transport corporation. the working capital requirements tend to be high because of greater investment in finished goods inventory and account receivables. It may ask customer to pay in advance or to wait for some time after placing the order. which has a long operating cycle and which sells largely on credit. after placing an order. Market conditions: The market competitiveness has an important bearing on the working capital needs of a firm. which may reduce the sharp variations in working capital requirements. has a very substantial working capital requirement. If goods as . On the other hand. a monopolistic firm may not require larger working capital. In view of competitive conditions prevailing in the market the firm may have to offer liberal credit terms to the customers resulting in higher debtors. Production policy: A firm marked by pronounced seasonal fluctuations in its sales may pursue a production policy. a large inventory of finished goods is required to promptly serve customers who may not be inclined to wait because other manufactures are ready to meet their needs. has a modest working capital requirement. Conditions of Supply: The time taken by a supplier of raw materials. When the competition is keen. a manufacturing concern like a machine tools unit. have highly fluctuating working capital requirements. which have marked seasonality in their operations usually. A service firm. which has a short operating cycle and which sells predominantly on cash basis. goods.The working capital requirement of the firm is closely related to the nature of its business. If the operations are smooth and even through out the year the working capital requirement will be constant and will not be affected by the seasonal factors. also determines the working capital requirement.
which may require the review of the working capital requirement e. the credit policy of the supplier of raw materials..g. Otherwise. also effect the working capital requirement. ISSUES IN WORKING CAPITAL MANAGEMENT . There are various reasons.soon as or in a short period after placing an order. In case of recession period there is usually dullness in business activities and there will be an opposite effect on the level of wor5king capital requirement. the working capital requirement of a firm is determined by a host of factors. change in sales volume. recovery etc. Business Cycle Fluctuations: Different phases of business cycle i. For example. then the purchaser will not like to maintain a high level of inventory f that good. There will be a fall in inventories and cash requirement etc. Operating Cycle: Time taken from the stage when cash is put into the business up to the stage when cash is realized. a firm might be purchasing goods and services on credit terms but selling goods only for cash. Further. Thus. Every consideration is to be weighted relatively to determine the working capital requirement. recession. the credit policy relating to credit which it extends to its customers. the firm while deciding the credit policy has to take care of the credit policy o the market. boom. change in credit policy. rather a continuous review must be made in order to assess the working capital requirement in the changing situation. the determination of working capital requirement is not once a whole exercise. etc. in case of imported goods.. A firm has to interact with two types of credit policies at a time. etc. One. The working capital requirement of this firm will be lower than that of a firm. which is purchasing cash but has to sell on credit basis.. and two.e. goods. Credit policy: The credit policy means the totality of terms and conditions on which goods are sold and purchased. larger inventories should be kept e. In both the cases. however.g.
The need for working capital is directly related to the firm’s growth. Working capital management has great significance for all firms but it is very critical for small firms. The financial manager must determine levels and composition of current assets. they face difficulties in raising long-term finances. debtors (receivables). • • Liquidity vs. Small firms in India face a severe problem of collecting their dues debtors. while an aggressive policy produces higher return and risk. • • Time. He must see that right sources are tapped to finance current assets. These policies involve riskreturn trade-offs. would mea interrupted production and sales. the firm needs to invest more in inventories and debtors. Criticality. because of frequent stock-outs and inability to pay creditors in time due to restrictive policy. There are many aspects of working capital management which make it an important function of the financial manager. its current assets holdings will depend upon its working capital policy. Growth. . as. Investment. as excess investment in current assets will not earn enough return. sales and demand conditions. and stock (inventories) and creditors (payables). As sales grow. and that current liabilities are paid in time. marketable securities. the role of current liabilities is more significant in case of small firms. on the other hand. Continuous growth in sales may also require additional investment in fixed assets.Working capital management refers to the administration of all components of working capital – cash.. Actions should be taken to curtail unnecessary investment in current assets. unlike large firms. Working capital management requires much of the financial manager’s time. A smaller investment in current assets. Further. Given a firm’s technology and production policy. Profitability: Risk-Return Trade-off A large investment in current assets under certainty would mean a low rate of return on investment for the firm. A conservative policy means lower return and risk. operating efficiency etc. Working capital represents a large portion of the total investment in assets.
If the fir maintains a relatively large investment in current assets. ESTIMATING WORKIN CAPITAL NEEDS • Current Assets Holding Period. When the firm does so. To have higher profitability. used in the technical sense. that is. it will have no difficulty in paying claims of creditors when they become due and will be able to fill all sales orders and ensure smooth production.The two important aims of the working capital management are: profitability and solvency. To estimate working capital requirements as a percentage of fixed investment. it will hardly experience a cash shortage or a stock-out situation. a liquid firm has less risk of insolvency. • • . This method is essentially based on the operating cycle concept. the firm’s profitability will suffer. Solvency. Thus. To estimate working capital requirement on the basis of average holding period of current assets and relating them to costs based on the company’s experience in the previous years. To estimate working capital requirements as a ratio of sales on the assumption that current change with sales Ratio of Fixed Investment. However. but its solvency would be threatened and would be exposed to greater risk of cash shortage and stock-outs. refers to the firm’s continuous ability to meet maturing obligations. A considerable amount of the firm’s will be tied up in current assets. and to the extent this investment is idle. its profitability will improve as fewer funds are tied up in idle current assets. there is a cost associated with maintaining a sound liquidity position. Ratio of Sales. the firm may sacrifice solvency and maintain a relatively low level of current assets.
the approach followed by a company may be refereed to as: • • • Matching approach Conservative approach Aggressive approach Matching Approach The firm following matching approach (also known as hedging approach) adopts a financial plan which matches the expected life of the sources of funds raised to finance assets. commercial paper.POLICIES FOR FINANCING FIXED ASSETS A firm can adopt different financing policies vis-à-vis current assets. debentures. once the spontaneous sources of financing have been fully utilized. Depending on the mix of short-term and long-term financing. since the purpose of financing is to pay for the assets. the source of financing for short-term . It includes working capital funds from banks.. factoring of receivables etc Spontaneous Financing.g. It is arranged in advance from banks and other surplus of short-term finance in the money market. • • The real choice of financing current assets. long-term borrowings from financial institutions and reserves and surplus (retained earnings). Trade (supplier’s) credit and outstanding expenses are examples of spontaneous financing. The justification for the exact matching is that. It refers to the automatic sources of short-term funds arising in the normal course of a business. Three types of financing may be distinguished: • Long-term Financing. a ten-year loan may be raised to finance a plant with an expected life of ten years. preference share capital. The short-term financing is obtained for a period less than one year. is between the long-term and short-term sources of finance. public deposits. For e. Short-Term Financing. The sources of long-term financing include ordinary share capital.
The conservative plan relies heavily on long-term financing and. Similarly. The firm’s fixed assets and permanent current assets are financed with long-term funds and as the level of these assets increases. therefore.assets is expensive. the firm finances its permanent assets and also a part of temporary currents assets with long-term financing. the idle long-term funds can be invested in the tradable securities to conserve liquidity. financing the long-term assets with short-term financing is costly as well as inconvenient as arrangement for the new short-term financing will have to be made on a continuing basis. as funds will not be utilized for the full period. Temporary current assets Financing Short-term . the level of short-term financing also increases. Conservative approach Under a conservative plan. the firm has less risk of facing the problem of shortage of funds. In the periods when the firm has no need for temporary current assets. Temporary Current Assets Short-term financing Current Assets Permanent Current Assets Long-term financing The above figure illustrated the matching approach over time. the longterm financing level also increases. The temporary or variable current assets are financed with short-term funds and as their level increases.
g. the long-term funds released can be invested in marketable securities to build up the liquidity position of the firm. at (a) and (b)].. It can be seen that when the firm has no temporary current assets [e. Aggressive approach An aggressive approach policy is said to be followed by the firm when it uses more short-term financing than warranted by the matching .Current Assets (a) (b) Permanent current assets Fixed assets Financing Time Long-term The above figure illustrates conservative approach over time.
Temporary current assets Short-term Financing Current Assets (a) (b) Permanent current assets financing Long-term Fixed Assets Time INVENTORY MANAGEMENT . The relatively more use of short-term financing makes the firm more risky.plan. The firm finances a part of its permanent current assets with short term financing.
INTRODUCTION: Inventories constitute the most significant part of current assets of a. Raw materials inventories are those units. to a great extent up on operating cycle of the firm. which have been purchased and stored for future productions. They represent those products that need more work before they become finished products for sale. Finished goods inventories are those completely manufactured products. Thus the inventories serve as a link between the production and the consumption of goods. The operating cycle may be defined . there will be differences. therefore. a considerable amount of funds is required to be committed to them. The various forms in which inventories exist in a manufacturing company are: Raw materials are those basis inputs that re converted into finished product through the manufacturing process. Work-in-progress inventories are semi-manufactured products. Stocks of the raw materials and work-in-process facilitate production. inventories are approximately 60 % of current assets in public limited companies in India. On an average. THE OPERATING CYCLE AND WORKING CAPITAL The working capital requirement of a firm depends. absolutely imperative to manage inventories efficiently and effectively in order to avoid unnecessary investment. large number majority of companies in India. while stock of finished goods is required for smooth marketing operations. It is. The levels of the three kinds of inventories for the firm depend on the nature of the business. Because of the large size of the inventories maintained by the firm. which are ready for sale. A manufacturing firm will have substantially high level of finished goods inventories and no raw material and workin progress inventories within manufacturing firm. Inventories are stock of the product a company is manufacturing for sale and components that make up the product.
which are paid for after a delay. . The length or time duration of the operating cycle of any firm can be defined as the sum of its inventory conversion period and the receivables conversion period. work-in-progress conversion period (WPCP). A) Inventory Conversion period (ICP): The time lag between the purchase of raw material and the sale of finished goods is the inventory conversion period. which represents the accounts payable period. It refers to the period between the occurrence of credit sales and collection from debtors.as the time duration starting from the procurement of goods or raw material and ending with the sales realization the length and nature of the operating cycle may differ from one firm to another depending on the size and nature of the firm. B) Receivables conversion period (RCP): It is the time required to convert the credit sales into cash realization. The FGCP refers to the period for which finished goods remain in stores before being sold to a customer. In the manufacturing firm ICP consists of raw materials conversion period (RPCP). The time that. and the finished goods conversion period (FGCP). elapses between the purchase of raw material and the collection of cash for the sales is referred to as the operating cycle. RMCP refers to the period for which the raw material is generally kept in stores before it is used by the production department. The investment in working capital is influenced by four key events in the production and sales cycle form: Purchase of raw materials payment of raw materials sale of finished goods collection of cash for sales Operating cycle period: the firm begins with the purchase of raw material. The WPCP refers to the period for which the raw material remains in the production process before it is taken out s a finished product. The firm converts raw material into finished goods and then sell the same.
b) The figure “365” represents number of days in a year. finished goods/ Total cost of goods sold)*365 RCP = (Avg. NOC is also known as cash cycle. if only the closing balance is available. The denominator is calculated at cost-basis and the profit margin has been excluded. raw material stock/ Total raw materials stock)*365 WPCP = (avg. However. the following points are note worthy: a) The “Average” value in the numerator is the average of opening balance and closing balance of the respective item. Working Capital . c) The “total” figure in the denominator refers to the total value of the item in a particular year. The Net Operating Cycle (NOC) of the firm is arrived at by deducting the DP fro the TOCP. receivables / Total credit purchase)*365 DP = (Avg. WPCP. debtors and creditors are given below in the table.The total of ICP and RCP is also known as Total Operating Cycle period (TOCP). work-in process/ Total work-in-process)*365 FGCP = (Avg. RMCP = (AVG. The firm might be getting some credit facilities from the supplier o a material. The working capital ratios are calculated for the Birla Powers’s solutions ltd. etc. The reason big that there is no investment of funds in profit as such. creditors / Total credit purchase)*365 In respect of these formulations. and final holding month for the inventories. wage earners. d) In the calculation of RMCP. ad FGCP. this period for which the payment of these parties are deferred or delayed is known as Deferral Period (DP). It may also be taken as “360” for the ease of calculation. then even the closing balance may be taken as the “Average”.
DISCOUNTING OF BILLS Under the purchase or discounting of bills.64 Net Operating Cycle = TOC – DP = 2.For the year 2005 Total Operating Cycle = RMCP + WP/FGCP + RCP = . he can draw periodically to the extent of his requirement and repay by depositing surplus funds in his cash credit account. 2.. He amount provided under this agreement is covered within the overall cash credit or overdraft limit . It is the most poplar method of bank finance for working capital in India.37 + 1. Cash credit is sanctioned against the security of current assets.64 .48 + .57 = 2. He is not required to borrow the entire sanctioned credit once. rather.79 = 2.07 WORKING CAPITAL LIMITS FUND BASED CREDIT LIMITS 1. a borrower can obtain credit from a bank against its bills. The bank purchase or discounts the borrower’s bills. a borrower is allowed to withdraw funs from the bank up to the cash credit limit. Cash credit is the most flexible arrangement from the borrower’s point of view. CASH CREDIT/PACKING CREDIT: The cash credit facility is similar to the overdraft arrangement. Under the cash credit facility.
When a bill is discounted. the bank satisfies itself as credit worthiness of the drawer.22 Projn.Before purchasing or discounting the bills. the borrower is paid he discounted amount of the bills. BANK GURANTEE Bank Guarantee is very similar to Letter of Credit but it is provided for much longer period compared to letter of credit. In practice. Very small portion of working capital is funded by Bank Guarantee.93 2.07 Estim.84 2. the bank agrees to honor drafts on it for the supplies made to the customer if the seller fulfills the conditions laid down in the L/C. 2. 2007 2. as the seller knows the conditions that should be fulfilled receive payment.e. bank hold bills as security for the credit. OBSERVATIONS Audited 2005 2. It offers safety to the buyer who wants to ensure that payment is made only in conformity with the conditions of the L/C. The L/C serves several useful functions: (i) (ii) (iii) It virtually eliminates credit risk. the letter o credit is now used in domestic trade as well. On this firm has to pay interest of 12%. (visa. is used by a bank on behalf of its customers (buyer) to the seller. 0. NON-FUND BASED 1.5%. As per this document. The major part of bank borrowings comes through Discounting Bills.22 .27 Audited 2004 TOP (months) NOP (months) 2. The bank collects full amount on maturity. if the bank has a good standing. LETTER OF CREDIT Commonly used in international trade. the item “bills purchased” implies that the bank becomes owner of the bill. or L/C.89 2. A letter of credit. Letter of credit is non-fund based source credit that is why it is available at very low rate i. It reduces uncertainty. Though.89 2. 2006 2. full amount of bill minus the discount charged by the bank).
RECOMMENDATIONS Current assets to fixed assets ratio Birla Power Solutions Ltd. can be reduced and tat money can be utilized for other profitable purposes. 2005 Average collection period/debtors holding period (days) 99. By this.31 2007 50.5 2007 33. For this purpose firm can be little strict credit standards it can also adopt discount policy.91 2006 48. The selection of right kind of policy is very necessary for the full utilization of fixed assets. 50 days for the year 2005). which are blocked with the customers. and hence are becoming idle. Birla power solutions ltd. It needs current assets and fixed assets to support a particular level of current assets. approx. As the firm’s output and sales are increasing and .56 The firm should try to reduce its debtor holding period especially domestic debtor holing period which is slightly high (i.53 The firm is having low credit holding period it can try to increase is so that. the funds. should determine the optimal level of current assets so that the wealth of the shareholder’s is maximized. Because of low inventory level. is having low holding period for the inventories which shows that it is following aggressive policy. the firm may not be able to fulfill its customers’ instantaneous needs. which might result in loss of sales. those funds can remain with it for a longer period n can be utilized for fulfilling the working capital requirements. in my opinion the firm should try to shift towards more “conservative policy”. 2005 creditor days/ credit holding period 27.54 2006 97. Therefore.e.
it shows that company needs to increase the current assets.72 75426.33 audited 2007 32012. This implies that company is incurring high risk and low liquidity but in projected year 2007 company is moving from aggressive policy to conservative policy in which there will be greater liquidity and lower risk. . CA/FA ratio. 2009 42004 71524 0.64 74792. however. The following table shows the ratio between the long term and short term sources for Birla Power Solutions ltd. It.38 0.45 audited 2006 24986. have a higher cost associated with them.42 estimated 2008 37672 73579 0. audited 2005 27802. debt and equity. So I would suggest the company to maintain conservative policy rather than the aggressive one so as to cope up with the anticipated changes and operating condition. 2284 lacks in 2005 in 2006 it is estimated to be Rs. The level of current assets can be measured by relating current assets to fixed assets. Conservative policy on one hand reduces the risk that the firm will be unable to repay or replace its short-term debt periodically.63 0.88 61493.51 projn. 3477 lacks which decreased to Rs. Current assets Financing Policy Two types of policies.93 0.will also increase in projected year 2007. enhances the cost of financing because the long term sources of finance. Dividing current assets by fixed assets vs.59 year Current assets Fixed assets CA/FA Company has an aggressive policy till 2005. In 2005 the financial charges were Rs. a higher CA/FA ratio indicates a conservative assets policy and a lower CA/FA ratio means an aggressive current policy other factors remaining constant.conservative which depends upon long-term sources like debentures and aggressive which depends heavily upon short term bank finance and seek to reduce dependence on long term financing are suggested. Assuming a constant level of fixed assets.
Birla power solutions Ltd. then it has excessive liquidity. is presently not in a position to honor its obligations because it carries too little cash.term financing as it may reduce the interest cost which will increase profitability in return. Should try to anticipate more in short-term funds than long-term funds as it will reduce the interest rate and will increase the liquidity. Thus. Reduce the Operating cycle Birla Power ltd. This will adversely affect the credit worthiness of Birla Power ltd. Thus company should maintain its current asse6s at the level where the sum of both-cost of liquidity and cost of illiquidity is minimized. Flexibility It is relatively easy to refund short-term funds when for funds diminishes. as funds tied up in idle cash and stocks earn nothing and high level of debtors reduces profitability. Hence. Hence . the cost increases with the level of current assets. That’s why unnecessarily company blocked its money with debtors. It shows that company collecting period is very high. The Cost Trade Off It is a different way of looking into risk-return trade off in terms of the cost of maintaining a particular level of current assets. Hence it would be suggested to go for more short. This may force Birla Power ltd to borrow at high rate of interest.2261 lacks. Long-term funds such as debenture loan or preference capital cannot be refunded before time. The cost of illiquidity is the cost of holding insufficient current assets. Birla power ltd. Should try to reduce its operating cycle. There are two types of cost involved—the cost of liquidity and the cost of illiquidity If the firm’s level of current assets is very high. In year ended 2005 company debtor collection period is 50 days. Its return on assets will be low.
company should try to adopt new policies like cash credit policy and discount credit policy. BIBLIOGRAPHY I.M PANDEY Financial mgt using Financial modeling by Ruzbeh J. Bodhanwala .
P Rustogi Synopsis of the project Birla Power Solutions Ltd. M.Y KHAN R. Student’s Name: Industry Guide: Faculty Guide: .
working capital refers to the administration of current assets. marketable securities. Working capital management may be defined as the management of firm’s resources and use of working capital in order to maximize the wealth of shareholders. a) b) c) d) Raw Materials Work-in-progress Finished goods Receivables etc. sales and current assets of Birla Power • • The project deals with the working capital management in Birla Power solutions ltd. Because working capital requirements may differ vastly according to the profile of industry. For the study of working capital in the first of all I have looked on the company profile.Objective. . Birla Power deals with the production of gensets Working capital. debtors. The efficient management of working capital is important from the point of view of both liquidity and profitability. stock (inventories) and current liabilities. also called as net current assets.e. A firm should maintain a sound working capital position and there should be optimum investment in the working capital. Then I will analyze the working capital management and fulfillment policies of the company. • The project is aimed at evaluating the financial status of Birla Power and then doing the comparative analysis with its competitors Studying the working capital management at Birla Power and estimating the working capital requirements for 2007-2008 and then forecasting for 2008-2009 To find out if there is any relationship between the working capital. The project will be dealing with the various components of working capital i. is the excess of current assets over current liabilities. namely cash.
Calculation of operating cycle period and its analysis will also be apart of this project. spoilage and interest on borrowed funds needed to finance inventory acquisition. Inventory management involves a trade-of between the costs associated with the keeping inventory versus the benefit of holding inventory. The operating cycle consists of the time required for the completion of the chronological sequence of some or all of the following: i) ii) iii) iv) v) procurement of raw material and services conversion of raw material into work-in-progress conversion of work-in-progress in finished goods Sale of finished goods Conversion of receivables into cash. However. While it may appear advisable to sale against cash only. The operating cycle may be defined as the time duration starting from the procurement of the goods or raw material and ending with the sales realization. market strategy. Moreover. type of buyers. therefore. The working capital requirement of the firm depends. insurance. Higher inventory results in increased cost from storage. to a large extent upon the operating cycle of the firm. credit allowed by the competitors. an increase in inventory lowers the possibility of the loss of sales due to stock outs and the incidence of production slowdowns from inadequate inventory. extending the credit often results in higher sales and hence higher profits.An industry had s to hold raw materials and work-in-progress (semifinished goods) to maintain production flow and finished goods to meet the timely needs of its customers. pricing policy. These receivables are influenced by a number of factors like credit policy. might compel a company to give credit in order to affect sales. conditions in the market like a highly competitive one. . The working capital requirement is. directly linked with the inventory and the time taken by the purchasers of the goods to pay the account. etc. Accounts receivables arise due to credit sales affected y the firm.
With the help of ratio analysis liquidity and profitability of the firm is analyzed. a firm will have to provide money towards the purchase of raw material. the difference would be the amount of money the firm has to find against the working capital requirements. wage earners. The Net Operating Cycle (NOC) of the firm is arrived at by deducting the Deferral period from the Total Operating Cycle period. payment of salaries of employees. b) Receivables conversion period: It is the time required to convert the credit sales into cash realization. In the manufacturing firm it consists of raw material conversion period. from the total requirement of funds for the operational purposes. etc.Operating cycle period: The length or the time period of the operating cycle of any firm can be defined as the sum of its inventory conversion period and the receivables conversion period. The firm might he getting some credit facilities from the supplier of raw material. However the firm can secure part of these funds from its own suppliers of raw material and other needed suppliers. It refers to the period between the occurrence of credit sales and collection from debtors The total on Inventory conversion period and receivables conversion period is known as Total Operating Cycle Period (TOCP). For the day-to-day operations. the credit the firm can obtain from others is deducted. . Therefore. a) Inventory conversion period: It is the time required for the conversion of the raw material into finished goods sales. to extent the credit to buyers of goods as well as to meet other day-today obligations. work-in-progress conversion period and finished goods conversion period. Financing of working capital: The funds that are deployed on short term are mainly used for the working capital or operating purposes. this period for which the payment of these parties are deferred or delayed is known as Deferral Period (DP). Ratio Analysis of various factors will be done.