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Report on Summer project undertaken at
Green plus Solution Pvt Ltd Feb-April 2011 Study of Working Capital. Submitted To :- Mr. Kaushikbhai Patel (Asst. Manager) Green plus Solution Pvt Ltd, S.G Road, Ahmedabad Gujarat. Project Guide:- Mr. Gautam Vaghela Submitted by:Ilesh Vaghela
4th sem Finance M.B.A IIMT, Usmanpura Ahmedabad.
IDEA Institute of Management & Technology.
Greenplus Solution Pvt Ltd
This report has been prepared keeping in mind the curriculum of M.B.A 4th sem Finance of Sikkim Manipal University for training for 90 days. This report seeks to describe the functions of various departments of business organization. The report covers specialized department viz. Finance. The initial part contain brief introduction about the organization and its role functioning with respect to the corporate world in brief. The principal content of this report is to reveal the functioning of the organization and its role in the society as whole. In preparing this report, I have drawn vast amount of information from electronic, communicative internal and personal sources which were nearly impossible without the co-operation from various senior people from the organization and well organized support by various people. I owe intellectual debt to all the people who supported me to prepare and complete a systematic report like this.
IDEA Institute of Management & Technology.
Greenplus Solution Pvt Ltd
This project is an intrigal part of the partial fulfillment of the M.B.A. programme. It is very essential to learn practical knowledge for a management student. I am thankful to Mr. Kulpesh Patel Sr.Executive (HRD) of Green Plus Solution Pvt Ltd. And particularly to Mr. Kaushikbhai Patel, Asst.Manager, Ahmedabad to assign me a summer training and provide me an opportunity to gain practical knowledge, which is very important for enhancing my skill, knowledge and ability. Mr. Gautam sir who provides me a valuable guidance at every stage when I needed. I also extend my gratitude to Mr.Mayur Patel, Mr. Bharat Sir. Ilesh Vaghela 4th Sem.Finance M.B.A. IIMT, Usmanpura. Ahmedabad.
IDEA Institute of Management & Technology.
Greenplus Solution Pvt Ltd
Financial Management is the specific area of finance dealing with the financial decision corporations make, and the tools and analysis used to make the decisions. The discipline as a whole may be divided between long-term and short-term decisions and techniques. Both share the same goal of enhancing firm value by ensuring that return on capital exceeds cost of capital, without taking excessive financial risks. Capital investment decisions comprise the long-term choices about which projects receive investment, whether to finance that investment with equity or debt, and when or whether to pay dividends to shareholders. Short-term corporate finance decisions are called working capital management and deal with balance of current assets and current liabilities by managing cash, inventories, and short-term borrowings and lending (e.g., the credit terms extended to customers). Corporate finance is closely related to managerial finance, which is slightly broader in scope, describing the financial techniques available to all forms of business enterprise, corporate or not.
Role of Financial Managers: The role of a financial manager can be discussed under the following heads: 1. Nature of work 2. Working conditions 3. Employment 4. Training other qualifications and Advancement 5. Job outlook 6. Earnings 7. Related occupations Let us discuss each of these in a detailed manner.
IDEA Institute of Management & Technology.
many financial managers are spending more time developing strategies and implementing the long-term goals of their organization. direct investment activities. government agency and organization has one or more financial managers who oversee the preparation of financial reports. and budget departments. Often. audit. determine credit ceilings. For example. Managers specializing in international finance develop financial and accounting systems for the banking transactions of multinational organizations. supervise cash management activities. Cash managers monitor and control the flow of cash receipts and disbursements to meet the business and investment needs of the firm. . 5 IDEA Institute of Management & Technology. The duties of financial managers vary with their specific titles. and analyses of future earnings or expenses. Risk and insurance managers over see programs to minimize risks and losses that might a rise from financial transactions and business operations undertaken by the institution.Greenplus Solution Pvt Ltd 1. Credit managers over see the firm’s issuance of credit. Nature of work Almost every firm. and risk and insurance manager. objectives. cash flow projections are needed to determine whether loans must be obtained to meet cash requirements or whether surplus cash should be invested in interest-bearing instruments. and implement cash management strategies. They also manage the organization’s insurance budget. Regulatory authorities also in charge of preparing special reports require controllers. credit manager. As computers are increasingly used to record and organize data. and monitor the collections of past-due accounts. They establish credit-rating criteria. and deal with mergers and acquisitions. controllers oversee the accounting. such as income statements. Treasurers and finance officers direct the organization’s financial goals. cash manager. execute capital-raising strategies to support a firm’s expansion. balance sheets. They oversee the investment of funds and manage associated risks. and budgets. treasurer or finance officer. Controllers direct the preparation of financial reports that summarize and forecast the organization’s financial position. which include controller.
is changing in response to technological advances that have significantly reduced the amount of time it takes to produce financial reports. In addition to the general duties described above. . savings and loan associations. credit unions. financial managers must be aware of special tax laws and regulations that affect their industry. or electronic financial services. These areas require extensive. Branch managers of financial institutions administer and manage all of the functions of a branch office. specialized knowledge on the part of the financial manager to reduce risks and maximize profit. government financial managers must be experts on the government appropriations and budgeting processes. trusts. authorize loans. and investments. all financial managers perform tasks unique to their organization or industry. or programs. establishing a rapport with the community to attract business. such as commercial banks. and direct the investment of funds. which may include hiring personnel. particularly in business. These managers may be required to solicit business. some small firms contract out all accounting and financial functions to companies that provide these services. For example. and mortgage and finance companies.Greenplus Solution Pvt Ltd Financial institutions. always adhering to State laws and regulations. Moreover. such as lending. The role of the financial manager. acting as business advisors to top management. They often work on teams. mortgages. operations. employ additional financial managers who oversee various functions. Financial managers play an increasingly important role in mergers and consolidations and in global expansion and related financing. approving loans and lines of credit. Financial managers need to keep abreast 6 IDEA Institute of Management & Technology. and assisting customers with account problems. including sales. Financial managers now perform more data analysis and use it to offer senior managers ideas on how to maximize profits. Financial managers increasingly are hired on a temporary basis to advise senior managers on these and other matters. Financial managers who work for financial institutions must keep a breast of the rapidly growing array of financial services and products. In fact. whereas healthcare financial managers must be knowledgeable about issues surrounding healthcare financing.
changes in State laws and regulations. accounting. 4. They generally are required to attend meetings of financial and economic associations and may travel to visit subsidiary firms or to meet customers. In addition. savings institutions. such as banks. These academic programs develop analytical skills and provide knowledge of the latest financial analysis methods and technology. Training. Employment While the vast majority is employed in private industry. preferably in business administration. Financial managers commonly work long hours. Experience may be more important than formal education for some financial manager positions—notably. or risk management. . although they can be found in every industry. economics. approximately 1 out of 4 are employed by insurance and finance establishments. Other financial managers may enter the profession through formal management training programs offered by the company. Other qualifications and Advancement A bachelor’s degree in finance. Continuing education is vital for financial managers. 2. Working conditions Financial managers work in comfortable offices. and securities dealers. 3. often up to 50 or 60 per week. credit unions. They typically have direct access to state-of-the-art computer systems and information services. Banks typically fill branch manager positions by promoting experienced loan officers and other professionals who excel at their jobs. branch managers in banks. who must cope with the growing complexity of global trade. and the proliferation of 7 IDEA Institute of Management & Technology. economics. However. nearly 1 in 10 works for the different branches of government. often close to top managers and to departments that develop the financial data these managers need. finance companies.Greenplus Solution Pvt Ltd of the latest computer technology in order to increase the efficiency of their firm’s financial operations. or business administration is the minimum academic preparation for financial managers. finance. many employers now seek graduates with a master’s degree.
budget management. financial managers also may broaden their skills and exhibit their competency by attaining professional certification. ability. 8 IDEA Institute of Management & Technology. a broad overview of the business is essential. In some cases. international banking. Persons enrolled prepare extensively at home and then attend sessions on subjects such as accounting management. Although experience. Candidates for financial management positions need a broad range of skills. The Institute of Management Accountants offers a Certified in Financial Management designation to members with a BA and at least 2 years of work experience who pass the institute’s four-part examination and fulfill continuing education requirements.Greenplus Solution Pvt Ltd new and complex financial instruments. this type of special study may accelerate advancement. and information systems. Financial managers must have excellent communication skills to explain complex financial data. Many firms pay all or part of the costs for employees who successfully complete courses. Because financial managers work extensively with various departments in their firm. the Association for Investment Management and Research confers the Chartered Financial Analyst designation on investment professionals who have a bachelor’s degree. financial managers who specialize in accounting may earn the Certified Public Accountant (CPA) or Certified Management Accountant (CMA) designations. often in cooperation with colleges and universities. The Association for Financial Professionals (AFP) confers the Certified Cash Manager credential to those who pass a computer-based exam and have a minimum of 2 years of relevant experience. banking. corporate cash management. and meet work experience requirements. Interpersonal skills are important because these jobs involve managing people and working as part of a team to solve problems. financial analysis. and credit union associations. sponsor numerous national and local training programs. There are many different associations that offer professional certification programs. . Firms often provide opportunities for workers to broaden their knowledge and skills by encouraging employees to take graduate courses at colleges and universities or attend conferences related to their specialty. pass three sequential examinations. For example. Financial management. Also. and leadership are emphasized for promotion.
Those with extensive experience and access to sufficient capital may start their own consulting firms. and generating ideas and creative ways to increase profitability will become a major role of corporate financial managers over the next decade. Earnings The Association for Financial Professionals’ 16th annual compensation survey showed that financial officers’ average total compensation in 2006. was $261. They must be comfortable with the latest computer technology. Computer technology has reduced the time and staff required to produce financial reports. financial managers may be needed to oversee the contracts. Even in these cases. and costs. profits.Greenplus Solution Pvt Ltd Financial managers should be creative thinkers and problem-solvers. Some financial managers transfer to closely related positions in other industries. to see the organization through a short-term crisis or to offer suggestions for boosting profits. well-trained. Financial managers who are familiar with computer software that can assist them in this role will be needed. including bonuses and deferred compensation. As financial operations increasingly are affected by the global economy. and salary levels also can depend on the type of industry and location. Job outlook Some companies may hire financial managers on a temporary basis. Large organizations often pay more than small ones. applying their analytical skills to business. financial managers must have knowledge of international finance. Proficiency in a foreign language also may be important. 5. 9 IDEA Institute of Management & Technology. however. Because financial management is critical for efficient business operations. Many financial in both the business and private industry receive additional.800. As a result. . 6. forecasting earnings. Other companies may contract out all accounting and financial operations. experienced financial managers who display a strong grasp of the operations of various departments within their organization are prime candidates for promotion to top management positions.
lending. credit operations. and real estate brokers and sales agents. Deferred compensation in the form of stock options is becoming more common. . 3. securities. financial analysts and personal financial advisors. securities investment. 10 IDEA Institute of Management & Technology. budget analysts. It is beneficial to management of the company by providing crystal clear picture regarding important aspects like liquidity. and financial services sales agents. loan counselors and officers. such as asset management. especially for senior level executives. 7. which also vary substantially by size of firm. insurance underwriters. 4. Workers in other occupations requiring similar training and skills include accountants and auditors. 2. The investors who are interested in investing in the company’s shares will also get benefited by going through the study and can easily take a decision whether to invest or not to invest in the company’s shares. leverage. The study is also beneficial to employees and offers motivation by showing how actively they are contributing for company’s growth. activity and profitability. or insurance risk and loss control.Greenplus Solution Pvt Ltd Compensation in the form of bonuses. Related occupations Financial managers combine formal education with experience in one or more areas of finance. commodities. NEED FOR THE STUDY 1. The study has great significance and provides benefits to various parties whom directly or indirectly interact with the company.
through Working Capital. To evaluate and analyze various facts of the financial performance of the company. 4. To determine the Profitability. To analyze the capital structure of the company with the help of Leverage ratio. The main objectives of resent study aimed as: To evaluate the performance of the company by using working capital as a yardstick to measure the efficiency of the company. To make comparisons between the ratios during different periods. . 11 IDEA Institute of Management & Technology. OBJECTIVES 1. 3. To study the present financial system at genting Green plus Solution Pvt Ltd. profitability and efficiency positions of the company during the study period. 2. To understand the liquidity. To offer appropriate suggestions for the better performance of the organization.Greenplus Solution Pvt Ltd OBJECTIVES The major objectives of the resent study are to know about financial strengths and weakness of Green Plus Solution Pvt Ltd. Liquidity Ratios.
3. Referring standard texts and referred books collected some of the information regarding theoretical aspects. That information was utilized for calculating performance evaluation and based on that.to assess the performance of he company method of observation of the work in finance department in followed. . Method. interpretations were made.Greenplus Solution Pvt Ltd METHODOLOGY The information is collected through secondary sources during the project. 12 IDEA Institute of Management & Technology. 2. Sources of secondary data: 1. Most of the calculations are made on the financial statements of the company provided statements.
which is not sufficient to carry out proper interpretation and analysis. 13 IDEA Institute of Management & Technology. The below mentioned are the constraints under which the study is carried out. The whole study was conducted in a period of 60 days. 3. Every study will be bound with certain limitations. The study provides an insight into the financial. 2. personnel.Greenplus Solution Pvt Ltd LIMITATIONS 1. marketing and other aspects of Green Plus Solution Pvt Ltd. . Time is an important limitation. Most of the information has been kept confidential and as such as not assed as art of policy of company. One of the factors of the study was lack of availability of ample information.
Greenplus Solution Pvt Ltd 2.1 REASEARCH METHODOLOGY: Study objectives :a) To study the nature of working capital. d) To prescribe remedial measures to encounter the problems faced by the firm. concepts and definition of working capital. accountants and officers. Moreover information gathered through practically preparing the data for working capital. b) To examine the effectiveness of working capital management practices of the firm. e) To study the working capital financing or means of financing of the company. Scope of the study :f) Planning of working capital management g) Working capital finance Methods of Data collection :a) Primary data: Basic information collected from the local sources as well as from the company staff like managers. b) Secondary data: 14 IDEA Institute of Management & Technology. c) To find out how adequacy or otherwise of working capital affects commercial operations of the company. .
iv. ii. From the B/S of the company From CMA proposal report From internet From books 15 IDEA Institute of Management & Technology. iii.Greenplus Solution Pvt Ltd i. .
Green Plus Solution Pvt. debtors. Every organization whether profit oriented or not. An inadequate working capital as both the phenomena of over capitalization and under capitalization of working capital generates adverse effects on the profitability and liquidity of the concerned firm. . cash. which finances the day-to-day working expenses during the operating cycle. The efficient Working capital management is the most crucial factor in maintaining survival. Capital to keep an entity working is working capital. marketable securities. Ltd 1. In simplicity. working capital refers to that portion of total fund. needs requisite amount of working capital. Working capital is considered to be life-giving force to an economic entity. Management of working capital is one of the most important functions of corporate management. careful maintenance and trade off between credit receiving. Working capital is necessary to finance current assets which include inventories. liquidity.1 T he importance of working capital in any industry needs no special emphasis. irrespective of its size and nature of business. neither under stocking nor overstocking of raw materials. To be more specific. short term loans and advances. solvency and profitability of the concerned business organization. and funds to meet these expenses are collectively known as working capital. repairs and maintenance expenses etc. The effective working capital necessitates careful handling of current assets to ensure short-term liquidity and solvency of the business. payment of day-today operational expenses including salaries and wages. INTRODUCTION OF WORKING CAPITAL 16 IDEA Institute of Management & Technology. It needs sufficient finance to carry out purchase of raw materials. bank. payment of advance tax and so on. The term "working" here implies continuity of production and distribution of want removing goods and services required by the society.
. Working capital term loan. Working capital demand loan. meets its working capital needs by borrowing Fund based loans and Non-fund based loans from different banks. Ltd Green plus Solution Pvt. Packing Credit. Fund based loans include loans like Cash credit.Green Plus Solution Pvt..Whereas Non-fund based loans include Letter of Credit and Bank Guarantee. Advance against retention money etc. Ltd. Generally in any company the requirements of Non-fund based loans is more than Fund based loans. 17 IDEA Institute of Management & Technology.
bank overdraft. Ltd 5. bills payable. . the current liabilities and the interrelationship that exists between them. marketable securities. it is likely to become insolvent and may even be forced into bankruptcy. converted into cash within one year without undergoing a diminution in value and without disrupting the operations of the firm. need. to be paid in the ordinary course of business.Green Plus Solution Pvt. at their inception. The basic current liabilities are account payable. out of the current assets or earnings of the concern. The goal of working capital management is to manage the firm’s current assets and liabilities in such a way that a satisfactory level of working capital is maintained. Each of the current assets must be managed efficiently in order to maintain the liquidity of the firm while not keeping too high a level of any one of them. The interaction between current assets and current liabilities is. therefore. and outstanding expenses. Each of the short-term sources of financing must be continuously managed to ensure that they are obtained and used in the best possible way. and the trade–off between 18 IDEA Institute of Management & Technology. within a year.1 NATURE OF WORKING CAPITAL: W orking capital management is concerned with the problems that arise in attempting to manage current assets. The term current assets refers to those assets which in the ordinary course of business can be or will be. This is so because if the firm cannot maintain a satisfactory level of working capital. optimum level of current assets. Current liabilities are those liabilities which are intended. the main theme of the theory of the theory of working management. The current asset should be large enough to cover its current liabilities in order to ensure a reasonable margin of safety. The major current assets are cash. accounts receivables and inventory. The basic ingredients of the theory of working capital management may be said to include its definition.
The term gross working capital. Alternate definition of NWC is that portion of current assets which is financed with long-term funds. iii. NWC can be said to measure the liquidity of the firm. The liquidity of a business firm is measured by its ability to satisfy short-term obligations as they become due.Green Plus Solution Pvt. The most common definition of net working capital(NWC) is the difference between current assets and current liabilities. The task of the financial manager in managing working capital efficiently is to ensure sufficient liquidity in the operations of the enterprise. The three basic measures of a firm overall liquidity are i. but it is quite useful for internal control. 19 IDEA Institute of Management & Technology. also referred to as working capital. Ltd profitability and risk which is associated with the level of current assets and liabilities. The current ratio The acid-test ratio. financing-mix strategies and so on. and Net working capital ratio Net working capital (NWC). 5. as a measure of liquidity is not very useful for comparing the performance of different firms.2 CONCEPT OF WORKING CAPITAL: There are two concepts of working capital: Gross and Net. and 2. The NWC helps in comparing the liquidity of the same firm over time. therefore. ii. means the total current assets. In other words. For purpose of working capital management. The term net working capital can be defined in two ways: 1. . the goal of working capital management is to manage the current assets and liabilities in such a way that an acceptable level of NWC is maintained.
3 DEFINITION : W Orking capital refers to the cash a business requires for day-to-day operations. 5. accounts receivable. Working capital is commonly defined as the difference between current assets and current liabilities. Some companies are inherently better placed than others. The NWC is necessary because the cash outflows and inflows do not coincide. In other words. . rather. for instance. Insurance companies. incur substantial up-front 20 IDEA Institute of Management & Technology. receive premium payments up front before having to make any payments. the more is the ability to pay obligations when they become due for payment. it is the nonsynchronous nature of cash flows that makes NWC necessary. Ltd The two concepts of working capital – Gross and Net – are not exclusive. or. however. for financing the conversion of raw materials into finished goods. and accounts payable. Efficient working capital management requires that firm should operate with some amount of working capital. In general. The theoretical justification for the use of working capital to measure liquidity is based on the premise that the greater the margin by which the current assets cover the short –term obligations. for example. Among the most important items of working capital are levels of inventory. Inventories represent the biggest problem for retailers. they have equal significance from the management viewpoint. insurance companies do have unpredictable outgoings as claims come in. the cash outflows resulting from payment of current liabilities are relatively predictable. Manufacturing companies. Analysts look at these items for signs of a company's efficiency and financial strength. among other things. on the nature of industry.Green Plus Solution Pvt. Normally a big retailer like Wal-Mart has little to worry about when it comes to accounts receivable: customers pay for goods on the spot. which the company sells for payment. the exact amount varying from firm to firm and depending. more specifically.
. Ltd costs for materials and labor before receiving payment. necessary for earning profits by any business enterprise. sufficient working capital is necessary to sustain sales activity.Green Plus Solution Pvt. therefore. among other things. sales do not convert into cash instantly. Therefore. However. 21 IDEA Institute of Management & Technology. upon the magnitude of the sales. in other words. a need for working capital in the form of current assets to deal with the problem arising out of the lack of immediate realization of cash against goods sold. Given the objective of financial decision making to maximize the shareholder’s wealth. The extent to which profits can be earned will naturally depend. it is necessary to generate sufficient profits. A successful sales programme is. there is invariably a time-lag between the sale of goods and the receipt of cash.4 NEED FOR WORKING CAPITAL: The need for working capital (gross) or current assets cannot be overemphasized. Much of the time they eat more cash than they generate. There is. 5.
fluctuating or variable working capital. Any amount over and above the permanent level of working capital is temporary. . For all practical purposes. hence. This requirement is referred to as permanent or fixed working capital. For a company. Ltd 5. This portion of the required working capital is needed to meet fluctuations in demand consequent upon changes in production and sales as a result of seasonal changes.5 TYPES OF WORKING CAPITAL: WORKING CAPITAL Permanent Temporary Initial working capital Regular working capital Seasonal working capital Special working capital Business activity does not come to an end after the realization of cash from customers. the need for a regular supply of working capital. this requirement has to be met permanently as with other fixed assets. the process is continuous and.Green Plus Solution Pvt. 22 IDEA Institute of Management & Technology.
Ltd Amount Of Working capital Temporary Permanent Time Figure shows that the permanent level is fairly constant. it ensures smooth operation of business. In the initial years bank may not grant loans or overdraft. Initial working capital: In the initial period of its operation. Regular working capital: It is the working capital required to continue the regular business operation. a company must have enough money to pay certain expenses before the business yield a cash receipt. while temporary working capital is fluctuating-increasing and decreasing in accordance with seasonal demands. Hence the necessary fund will have to be supplied by the owner in initial year. Sales may be made in credit and may be necessary to make payment to creditors.Green Plus Solution Pvt. Regular working capital is the excess of current assets over current liabilities. It is required to maintain regular stock of raw material and work –in-progress. finished goods. . 23 IDEA Institute of Management & Technology.
however. It covers the time-span between the procurement of raw 24 IDEA Institute of Management & Technology. Sale of services rather than commodities. downward movement of price. cash sales. and 2. Special working capital: In all enterprise some unforeseen events do occur. . probably the least requirement of working capital. and sales during depression. affect different enterprise differently. These factors. In the view of these features. when extra funds are needed to tide over such situation. The two relevant features are: 1. the cash nature of business.Green Plus Solution Pvt. Ltd Seasonal working capital: Some business enterprises require additional working capital during the season. they do not maintain big inventories and have. public utilities have certain features which have a bearing on their working capital needs. therefore. Enterprise falls into some broad depending on the nature of their business. 5. that is.6 DETERMINANTS OF WORKING CAPITAL: A firm should plan its operations in such a way that it should have neither too much nor too little working capital. For instances. General Nature of Business: The working capital requirements of an enterprise are basically related to the conduct of business. They also vary from time to time. The total working capital requirement is determined by a wide variety of factors. The term production or manufacturing cycle refers to the time involved in the manufacture of goods. Production cycle: Another factor which has a bearing on the quantum of working capital is the production cycle. For ex: .sugar mill have to purchase sugarcane in particular season and have to employ additional labor to produce. Some of these events are sudden increase in demand of final product.
Green Plus Solution Pvt. Ltd
materials and the completion of the manufacturing process leading to the production of finished goods. Funds have to be necessarily tied up during the process of manufacture, necessitating enhanced working capital. In other words, there is some time gap before raw material becomes finished goods; to sustain such activities the need for working capital is obvious. Business cycle: The working capital requirements are also determined by the nature of the business cycle. Business fluctuations leads to cyclical and seasonal changes which, in turn, cause a shift in the working capital position, particularly for temporary working capital requirements. The variations in business conditions may be in two directions: 1. Upward phase when boom conditions prevail, and 2. Downswing phase when the economic activity is marked by decline. Production policy: The quantum of working capital is also determined by production policy. In case of certain lines of business, the demand for products is seasonal, that is, they are purchased during certain months of the year. What kind of production policy should be followed in such case? There are two options open to such enterprise: either they confine their production only to periods when goods are purchased or they follow a steady production policy throughout the year. During slack season, the firms have to maintain their working force and physical facilities without adequate production and sale. Credit policy: The credit policy relating to sales and purchase also affects the working capital. The credit policy influences the requirement of working capital in two ways: 1. Through credit terms granted by the firm to its customers , buyers of goods; 2. Credit terms available to the firm from its creditors. The credit terms granted to customers have a bearing on the magnitude of working capital by determining the level of book debts. The credit sales result in higher book debts. Higher book debts mean more working capital. On the other hand, if liberal 25
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Green Plus Solution Pvt. Ltd
credit terms are available from the suppliers of goods, the need for working capital is less. Growth and Expansion: As a company grows, it is logical to expect that a larger amount of working capital is required. It is, of course, difficult to determine precisely the relationship between the growth in the volume of business of a company and the increase in its working capital. The composition of working capital in a growing company also shifts with economic circumstances and corporate practices. Vagaries in the Availability of Raw Material The availability or otherwise of certain raw material on a continuous basis without interruption would sometimes affect the requirement of working capital. There may be some materials which cannot be produced easily either because of their sources are few or they are irregular. To sustain smooth production, therefore the firm might be compelled to purchase and stock them far in excess of genuine production needs. Profit Level: The level of profits earned differs from enterprise. In general, the nature of the product, hold on the market, quality of management and monopoly power would by and large determine the profit earned by a firm. A priori, it can be generalized that a firm dealing in a high quality product, having a good marketing arrangements and enjoying monopoly power in the market, is likely to earn high profits and vice-versa. Level of Taxes: The first appropriation out of profits is payment or provision for tax. The amount of taxes to be paid is determined by the prevailing tax regulations the management has no discretion in this respect. Very often, taxes have to be paid in advance on the basis of the profit of the preceding year. Tax liability is, in a sense, short-term liability payable in cash. An adequate provision for tax payments is, therefore, an important aspect of working capital planning.
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Green Plus Solution Pvt. Ltd
Dividend Policy: Another appropriation of profits which has a bearing on working capital is dividend payment. The payment of dividend consumes cash resources and, thereby, affects working capital to that extent. Conversely, if the firm does not pay dividend but retains the profits, working capital increases. In planning working capital requirements, therefore, a basic question to be decided is whether profits will be retained or paid out to shareholders. Price Level Changes: Changes in the price level also affect the requirements of working capital. Rising prices necessitate the use of more funds for maintaining an existing level of activity. For the same level of current assets, higher cash outlays are required. The effect of rising prices is that a higher amount of working capital is needed.
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Green Plus Solution Pvt. Ltd.
6.1 WORKING CAPITAL CYCLE:
urrent assets are needed because sales do not convert into cash instantaneously. There is always an operating cycle involved in the conversion of sales into cash.
There is a difference between current and fixed assets in terms of their liquidity. A firm requires many years to recover the initial investment in fixed assets such as plant and machinery or land and buildings. Working capital cycle is the time duration required to convert sales, after the conversion of resources into inventories, into cash. The cycle of a manufacturing company involves three phases: 1. Conversion of cash into inventory; 2. Conversion of inventory into receivables; 3. Conversion of receivables into cash.
IDEA Institute of Management & Technology.
Green Plus Solution Pvt. Ltd. . Working capital cycle. net operating cycle. also known as the asset conversion cycle. cash conversion cycle or just cash cycle. is used in the financial analysis of a 29 IDEA Institute of Management & Technology.
The difference between operating cycle and payables deferral period is net operating cycle. also represents the cash conversion cycle. total of these called Gross operating cycle. conversion of raw materials into workin-progress. the longer a firm's money is tied up in business operations and unavailable for other activities such as investing. Inventory conversion period Debtors conversion period.Green Plus Solution Pvt. The length of the operating cycle of a manufacturing firm is the sum of: i. cash gets converted into inventory. business. the inventory is converted into receivables as credit sales are made to customers. when receivables are collected complete the operating cycle.72 * 365 30 IDEA Institute of Management & Technology. In phase I. In phase III. ii. INVENTORY CONVERSION PERIOD Raw material conversion period: RMCP = Raw material inventory * 365 Raw material consumption = 1239. This includes purchase of raw material. The higher the number. . In phase II of the cycle. The cash conversion cycle is the number of days between paying for raw materials and receiving cash from selling goods made from that raw material. finished goods and finally the transfer of goods to stock at the end of the manufacturing process. The operating cycle consists of three phases. Ltd.
75 = 0. Ltd.75 = 5.Green Plus Solution Pvt. 15169. .83 days Work-in-progress inventory conversion period: WIPCP = work-in-progress inventory * 365 Cost of production = 42.21 days DEBTORS CONVERSION PERIOD DCP = Average debtors * 365 Net sales 31 IDEA Institute of Management & Technology.30 * 365 31496.49 days Finished goods conversion period: FGCP = finished goods inventory * 365 Cost of goods sold = 449.34 * 365 31496.72 = 29.
23 = WORKING CAPITAL CYCLE Net operating cycle = Gross operating cycle – Creditors deferral period 41.225 * 365 14539.70 = 20. .28 days (Rs.78 days 32 IDEA Institute of Management & Technology. Ltd.495 * 365 7387.Green Plus Solution Pvt. In Crore) CREDITORS DEFERRAL PERIOD Creditors deferral period: CDP = Average creditors * 365 purchase = 1664. = 410.
Ltd.21 days. .28 days which is quite good.03days Company‘s working capital cycle completes in 14 days. what is required is the holding period of various types of various inventories. Working capital also depends on the budgeted level of activity in terms of production/sales. = = = (RMCP + WIPCP + FGCP + DCP) – CDP (55. So Green Plus Solution Pvt. Ltd. So total inventory conversion period is 35.78) days 14. It is therefore useful to monitor the length of cash cycle. As the working capital requirement is related to the cost excluding depreciation and not to the sale price. working capital is computed with reference to cash cost.Green Plus Solution Pvt. Ltd’s gross operating cycle is 55. As stated above a business should not over invest in working capital.83 days and Work In Progress Inventory Conversion Period is 0. the credit collection period and the credit payment period. The key point to note here is that a longer cash cycle ties up a bigger investment in working capital. 6.49 Days and Finished goods Conversion Period is 5. Raw Material conversion Period is 29. But Creditors Deferral Period is 41.2 WORKING CAPITAL ANALYSIS: The two components of working capital are current assets and current liabilities.03 days. In order to calculate the working capital needs.81 days.53 days while Debtors Conversion period is 20. So Net Working Capital Cycle is 14. and changes in it. is well managing its working capital. 33 IDEA Institute of Management & Technology.78 days.81 – 41. It is better in comparison with the Debtors Conversion period. They have a bearing on the cash operating cycle. to judge whether a business has an excessive working capital level or perhaps whether working capital is inadequate which may lead to liquidity problems. So this is short working capital cycle and it indicates that Green Plus Solution Pvt.
Current Assets: cash. and prepaid expenses Consumed in production of sales revenue Current Liabilities: accounts payable.Green Plus Solution Pvt. investment b) Sale treated as flow which increases working capital 34 expenses IDEA Institute of Management & Technology. taxes payable) Operating cost incurred on credit Inflows. accounts receivable. capitalized added to net income Sale of long term assets a) Land. furniture. inventories. Ltd. marketable securities. accrued expenses. notes receivable. building. and indicates amount of excess current assets relative to current liabilities available to conduct revenue generating operations. equipment. wages payable. supplies. Total current assets minus current liabilities are value of working capital. . interest payable.g.(e. Working capital: excess of current assets compared to current liabilities.Sources of Working Capital: Income from operations a) Accrued income is sales revenue less all expense incurred in producing sales revenue inflow b) Sales revenue generated by cash sales or on credit through receivables c) Expenses incurred by immediate payment of cash or credit through Payable Accrual net income a) Determined after deducting noncash expenses b) To convert net income to increase working capital.
equipment. or current receivable with no effect to current liability Outflows . current assets. Increase in long term liability a) Create or increase loan. Ltd. mortgage. ) 35 IDEA Institute of Management & Technology. current asset withdrawals by owner are reductions to capital investments. expenses have exceeded sales revenue b) Decreases working capital Purchase of long term asset a) Land. investment b) Outflow that decreases working capital Payment of Long term liabilities Payment reducing principal amount owed on long term liability Payment of cash dividends Payable obligations b) In partnership.Green Plus Solution Pvt. or bond achieves this b) Inflow that increases working capital c) Borrowing long tern debt create increase in cash. building. . furniture.Uses of Working Capital: Loss from operations a) When loss occurs.
Ltd. .Green Plus Solution Pvt. CURRENT LIABILITIES Schedule-12 & 13 36 IDEA Institute of Management & Technology.
36 27.66 880. Other statutory liability 6.Other current liabilities 8.21 2.29 12.71 3182.57 6.21 323.79 786.16 19.59 15.23 CURRENT ASSETS 37 IDEA Institute of Management & Technology.53 88. Sundry creditors 3. Provisions 9.15 19.Green Plus Solution Pvt.21 15.22 26. 2008-2009 2007-2008 2006-2007 LIABILITIES CURRENT LIABILITIES 1.31 172. Advance payments from customers 4.29 30. Interest payable 5.08 1371.92 31.95 7. Bank Overdraft 9.89 5.34 161.36 35.82 322.24 303.76 1201. Ltd. .23 7. Total current liabilities 2447. Deposits 7.
55%) 449. Ltd.73%) 42.07%) 26.Debtors (i) Considered as Good (ii) Considered as Doubtful (iii) Other Debts Unsecured (Considered as Good) Less: Prov.25(0.82(51.Cash & Bank balances 10.89(0.34(5.00%) 0.95%) 823.94%) 37. .90(21.Green Plus Solution Pvt.39(16.00%) 359.84(5.26(0.44%) 1320.44%) 0.51%) 28.03%) 28.03%) 0.21%) 2283.47(0.32(4.39(10.04%) 406.56(61.20%) 330.01%) 0.41(0.00%) 2.22%) 7672.04%) Total(Debtors) 11.77(71.58%) 14.10(27.21)(0.26%) 1577.72(0.00(0.76(7.49%) 14.13%) 2.01%) 6081.11(0.01(7.01%) 2.47)(0.63(0.83(5.18%) 1731.03%) 72.44(0. Inventory (i) Raw material (ii) Stock in progress (iii) Finished goods (iv) Stores & Spares (v) Loose Tools (vi) Chemicals & Catalysts (vii) Packing Materials (viii) Construction Material Total(Inventory) 12.56%) 5464.08(0.94(37.49(0.83(0.58%) 3104.92%) (2. Total current assets ( Gross working capital) NET WORKING CAPITAL ( Current assets – Current liability) 407.86%) 290. Schedule-8 to 11 2009-2008 2008-2007 2006-2007 ASSETS CURRENT ASSETS 9.81(0. Loans and Advances 13.50%) 33.21(0.94(0.99 (100%) 959.03(0.23(5.01(0.64%) 174.72%) 311.27(9.61%) 36.45(0.15%) (0.91%) 243.28 (100%) 38 IDEA Institute of Management & Technology.16) 361.68(5.32%) 3541.01)(0.21(3.74(100%) 551.46%) 12.74(5.30%) (0.75(0.78%) 2.32%) 5775.for Doubtful Debt 69.02%) 327.31%) 413.00%) 413.68%) 1.24(3.36(22.49(0.30(0.04%) 30.82(5.68(5.
10 4404. Ltd.Green Plus Solution Pvt.05 39 IDEA Institute of Management & Technology. .17 4880. (13 – 9) 4490.
Ratio reflects a quantitative relationship helps to form aquantitative judgment. in every aspect of the financial analysis. The level and historical trends of these ratios can be used to make inferences about a company’s financial condition. The information in the statements is used by • • • Trade creditors. to identify the firm’s ability to meet their claims i. FINANCIAL ANALYSIS The term “Ratio” refers to the numerical and quantitativerelationship between two items or variables.Greenplus Solution Pvt Ltd Ratio Analysis FINANCIAL ANALYSIS Financial analysis is the process of identifying the financial strengths and weaknesses of the firm and establishing relationship between the items of the balance sheet and profit & loss account. This relationship can be exposed as • • • Percentages Fractions Proportion of numbers Ratio analysis is defined as the systematic use of the ratio to interpret the financial statements. Management. Investors. its operations and attractiveness as an investment. as well as its historical performance and current financial condition can be determined. . liquidity position of the company. Financial ratio analysis is the calculation and comparison ofratios. 40 IDEA Institute of Management & Technology. So that the strengths and weaknesses of a firm. which are derived from the information in a company’s financial statements. to know about the present and future profitability of the company and its financial structure. It is the responsibility of the management to maintain sound financial condition in the company.e.
Industry ratio. Competitor’s ratio. ratios of the future developed from the projected or pro forma financial statements NATURE OF RATIO ANALYSIS Ratio analysis is a technique of analysis and interpretation of financial statements. calculated from past financial statements of the firm. drawing of inferences and report writing conclusions are drawn after comparison in the shape of report or recommended courses of action. . BASIS OR STANDARDS OF COMPARISON Ratios are relative figures reflecting the relation between variables. It is the process of establishing and interpreting various ratios for helping in making certain decisions. They enable analyst to draw conclusions regarding financial operations. It facilitates in assessing success or failure of the firm. Third step is to interpretation. There are a number of ratios which can be calculated from the 41 IDEA Institute of Management & Technology. This is the basis of ratio analysis. of the some most progressive and successful competitor firm at the same point of time. Past ratios. To compare the calculated ratios with the ratios of the same firm relating to the pas6t or with the industry ratios. the industry ratios to which the firm belongs to Projected ratios. They use of ratios as a tool of financial analysis involves the comparison with related facts. It is only a means of understanding of financial strengths and weaknesses of a firm. The basis of ratio analysis is of four types.Greenplus Solution Pvt Ltd STEPS IN RATIO ANALYSIS The first task of the financial analysis is to select the information relevant to the decision under consideration from the statements and calculates appropriate ratios.
. The following are the four steps involved in the ratio analysis. Comparison of the calculated ratios with the ratios of the same firm in the past. Selection of relevant data from the financial statements depending upon the objective of the analysis. Calculation of appropriate ratios from the above data.Greenplus Solution Pvt Ltd information given in the financial statements. but the analyst has to select the appropriate data and calculate only a few appropriate ratios. 42 IDEA Institute of Management & Technology. or the ratios developed from projected financial statements orthe ratios of some other firms or the comparison with ratios of theindustry to which the firm belongs.
Greenplus Solution Pvt Ltd INTERPRETATION OF THE RATIOS The interpretation of ratios is an important factor. The impact of factors such as price level changes.. . Following guidelines or factors may be kept in mind while interpreting various ratios are Accuracy of financial statements Objective or purpose of analysis Selection of ratios Use of standards Caliber of the analysis IMPORTANCE OF RATIO ANALYSIS Aid to measure general efficiency Aid to measure financial solvency Aid in forecasting and planning Facilitate decision making Aid in corrective action 43 IDEA Institute of Management & Technology. Single absolute ratio Group of ratios Historical comparison Projected ratios Inter-firm comparison GUIDELINES OR PRECAUTIONS FOR USE OF RATIOS The calculation of ratios may not be a difficult task but their use is not easy. The inherent limitations of ratio analysis should be kept in mind while interpreting them. change in accounting policies. should also be kept in mind when attempting to interpret ratios. window dressing etc. The interpretation of ratios can be made in the following ways.
. 44 IDEA Institute of Management & Technology. There are different parties interested in the ratio analysis for knowing the financial position of a firm for different purposes.Greenplus Solution Pvt Ltd Aid in intra-firm comparison Act as a good communication Evaluation of efficiency Effective tool LIMITATIONS OF RATIO ANALYSIS Differences in definitions Limitations of accounting records Lack of proper standards No allowances for price level changes Changes in accounting procedures Quantitative factors are ignored Limited use of single ratio Background is over looked Limited use Personal bias CLASSIFICATIONS OF RATIOS The use of ratio analysis is not confined to financial manager only. Various accounting ratios can be classified as follows: 1) Traditional Classification 2) Functional Classification 3) Significance ratios 1) Traditional Classification It includes the following.
Leverage ratio C. long term solvency and leverage ratios. The other ratios that support the primary ratio are called secondary ratios. . the ratio of currentassets to current liabilities etc. IN THE VIEW OF FUNCTIONAL CLASSIFICATION THE RATIOS ARE A. which is of the prime importance to a concern. or the ratio of total assets to sales. Profitability ratio 45 IDEA Institute of Management & Technology. Activity ratio D. both the items must. The primary ratio is one. stock turnover ratio.. Profit & loss account (or) revenue statement ratios: These ratios deal with the relationship between two profit & loss account items.g. activity ratios and profitability ratios. Liquidity ratio B. Composite (or) inter statement ratios: These ratios exhibit the relation between a profit & loss account or income statement item and a balance sheet items.g. however. e. e. 3) Significance ratios Some ratios are important than others and the firm may classify them as primary and secondary ratios. the ratio of gross profit to sales etc. e.. 2) Functional Classification These include liquidity ratios.g. pertainto the same balance sheet.Greenplus Solution Pvt Ltd Balance sheet (or) position statement ratio: They deal with the relationship between two balance sheet items.
If current assets can pay off current liabilities. then liquidity position will be satisfactory. The sufficiency (or) insufficiency of current assets should be assessed by comparing them with short-term current liabilities. To measure the liquidity of a firm the following ratios can be calculated Current ratio Quick (or) Acid-test (or) Liquid ratio Absolute liquid ratio (or) Cash position ratio 46 IDEA Institute of Management & Technology. . floating (or)circulating assets The current assets should either be calculated liquid (or)near liquidity. The short term obligations are met by realizing amounts from current. They should be convertible into cash for paying obligations of short term nature.Greenplus Solution Pvt Ltd LIQUIDITY RATIOS Liquidity refers to the ability of a concern to meet its current obligations as & when there becomes due. The short term obligations of a firm can be met only when there are sufficient liquid assets.
081 91.346 72.621 47.884.021.151 69.068 Current Liabilities 79.19 4.616 16.Greenplus Solution Pvt Ltd CURRENT RATIO: Current ratio may be defined as the relationship between current assets and current liabilities.03.48 1. Current Ratio Current Ratio Years 2005 2006 2007 2008 2009 Current Assets 58.328. .199 30.065.208 115.94 3.642.661 Ratio 7.82 47 IDEA Institute of Management & Technology.574.952 31.266.765. This ratio also known as Working capital ratio is a measure of general liquidity and is most widely used to make the analysis of a short-term financial position (or) liquidity of a firm.41 2.117.
94 2005 2006 2007 2008 2009 4.82 7.Greenplus Solution Pvt Ltd Current Ratio 3. In the year 2005. The huge increase in sundry debtors resulted an increase in the ratio.41 1. there is an increase in the provision for tax. The deposits reduced due to the declaration of dividends. 48 IDEA Institute of Management & Technology. . The current liabilities majorly included Lanco Group of company for consultancy additional services. The sundry debtors have increased due to the increase to corporate taxes. the current ratio with 2:1 (or) more is considered as satisfactory position of the firm. When compared with 2008. the loans and advances include majorly the advances to employees and deposits to government.48 2.19 Interpretation As a rule. The other current assets include the interest attained from the deposits. The loans and advances reduced because the employees set off their claims. which is above the benchmark level of 2:1 which shows the comfortable position of the firm. So the other current assets decreased. the cash and bank balance is reduced because that is used for payment of dividends. In the year 2006. because the debtors are raised and for that the provision is created.
903. Quick Ratio Quick Ratio Years 2005 2006 2007 2008 2009 Current Assets 58. Quick ratio may be defined as the relationship between quick or liquid assets and current liabilities.433. An asset is said to be liquid if it is converted into cash with in a short period without loss of value. .574.65 4.661 Ratio 7.151 52.596 115. The term liquidity refers to the ability of a firm to pay its short-term obligations as &when they become due.117.81 49 IDEA Institute of Management & Technology.952 31.41 1.065.884.199 30.883.268 89.620 47.431.336 69.868 Current Liabilities 7.470.616 16.266.35 1.Greenplus Solution Pvt Ltd QUICK RATIO Quick ratio is a test of liquidity than the current ratio.90 3.
9 2005 2006 2007 2008 2009 4.41 1.81 7.Greenplus Solution Pvt Ltd Quick Ratio 3. . So. Compare with 2008.35 1. say to six months. the Quick ratio is increased because the sundry debtors are increased due to the increase in the corporate tax and for that the provision created is also increased. ABSOLUTE LIQUID RATIO 50 IDEA Institute of Management & Technology. the ratio is also increased with the 2008.65 Interpretation Quick assets are those assets which can be converted into cash with in a short period of time. So. here the sundry debtors which are with the long period does not include in the quick assets.
616 16. debtors and bills receivable are generally more liquid than inventories.952 31.46 0.884.778 39.14 1.903.18 1. Absolute liquidity ratio Absolute Liquidity Ratio Years Absolute Current Assets 2005 2006 2007 2008 2009 31. 2.620 47.859.199 30.14 3.34 2. yet there may be doubts regarding their realization into cash immediately or in time.065.070 Absolute Current Liabilities 7.850.852 35.34 .542 53.92 2005 2006 2007 2008 2009 51 IDEA Institute of Management & Technology.117.266.92 0.466.004.027 10. Hence.661 Ratio 3.46 1. absolute liquid ratio should also be calculated together with current ratio and quick ratio so as to exclude even receivables from the current assets and find out the absolute liquid assets.18 Absolute liquidity ratio 1.Greenplus Solution Pvt Ltd Although receivable.649.
Greenplus Solution Pvt Ltd Interpretation The current assets which are ready in the form of cash are considered as absolute liquid assets. Here. Accordingly. long term solvency ratios indicate firm’s ability to meet 52 IDEA Institute of Management & Technology. LEVERAGE RATIOS The leverage or solvency ratio refers to the ability of a concern to meet its long term obligations. the cash and bank balance and the interest on fixed assts are absolute liquid assets. In the year 2008. That causes a slight increase in the current year’s ratio. the cash and bank balance is decreased due to decrease in the deposits and the current liabilities are also reduced because of the payment of dividend. .
438.86 2005 2006 2007 0.53 2008 0.061 56.86 0.391 106.572.107 89158.473. Proprietory ratio PROPRIETORY RATIO A variant to the debt-equity ratio is the proprietory ratio whichis also known as equity ratio.231.75 0.013 Absolute Current Liabilities 78. This ratio establishes relationship betweenshare holders funds to total assets of the firm.79 Technology.102 Ratio 0.060.201 129. .679.805. The following ratio serves the purpose of determining the solvency of the concern.6 2009 53 IDEA Institute of Management & 0.219 53.6 0. PROPRIETORY RATIO Proprietory Ratio Years Absolute Current Assets 2005 2006 2007 2008 2009 67.53 0.75 Proprietory Ratio 0.Greenplus Solution Pvt Ltd the fixed interest and costs and repayment schedules associated with its long term borrowings.171 88.652 97.385.301.79 0.834 70. 4.
The shareholder’s funds include capital and reserves and surplus. which resulted an increase in the ratio than older.Greenplus Solution Pvt Ltd Interpretation The proprietary ratio establishes the relationship between shareholders funds to total assets. It determines the long-term solvency of the firm. C. The fixed assets are reduced because of the depreciation and there are no major increments in the fixed assets. Total assets are also increased than previous year. This ratio indicates the extent to which the assets of the company can be lost without affecting the interest of the company. which is caused by the increase of income from services. Total assets. There is no increase in the capital from the year 2006. The current assets are increased compared with the year 2008. . The efficiency with which assets are managed directly effect the volume of sales. Activity ratios measure the efficiency (or) effectiveness with which a firm manages its 54 IDEA Institute of Management & Technology. includes fixed and current assets. The reserves and surplus is increased due to the increase in balance in profit and loss account. ACTIVITY RATIOS Funds are invested in various assets in business to make sales and earn profits.
31 1.Current liabilities It indicates the velocity of the utilization of net working capital.728.211.899.550.Greenplus Solution Pvt Ltd resources (or) assets.902 Working Capital 50.649 96.084 72.26 1. Working capital = Current assets .42 1. Working capital turnover ratio=cost of goods sold/working capital.375.72 1.009 85. WORKING CAPITAL TURNOVER RATIO Working Capital Turnover Ratio Years 2005 2006 2007 2008 2009 Income from Services 36.670.407 Ratio 0. 5. . Working capital turnover ratio Fixed assets turnover ratio Capital turnover ratio Current assets to fixed assets ratio WORKING CAPITAL TURNOVER RATIO Working capital of a concern is directly related to sales.309.13 55 IDEA Institute of Management & Technology.834 53. A higher ratio indicates efficient utilization of working capital and a lower ratio indicates inefficient utilization.460 44. This indicates the no.199 37. These ratios are also called “Turn over ratios” because they indicate the speed with which assets are converted or turned over into sales.355.759 55.730 55.654. of times the working capital is turned over in the course of a year.880.
The income from services is raised and the current assets are also raised together resulted in the decrease of the ratio of 2009 compared with 2008. 56 IDEA Institute of Management & Technology. Fixed assets turnover ratio =cost of sales/net fixed assests. FIXED ASSETS TURNOVER RATIO It is also known as sales to fixed assets ratio.Greenplus Solution Pvt Ltd Working Capital Turnover Ratio 1.26 2007 2008 2009 Interpretation 1. Lower ratio means under-utilization of fixed assets. This ratio measures the efficiency and profit earning capacity of the firm. .13 0. greater is the intensive utilization of fixed assets.72 2005 2006 1. Higher the ratio.31 Income from services is greatly increased due to the extra invoice for Operations & Maintenance fee and the working capital is also increased greater due to the increase in from services because the huge increase in current assets.42 1.
163.649 96.137.759 55.82 4.82 2005 2006 2007 4.084 72.899.69 6. Fixed assets turn over ratio Fixed Assets turn over Ratio Years 2005 2006 2007 2008 2009 Income from Sevices 36.309.317 29.69 IDEA Institute of Management & Technology.24 2008 2009 57 3.993 14.550.834.568.034 Ratio 1.82 6.728. .654.310 15.834 53.26 1.056.82 Fixed Assets turn over Ratio 1.279 17.902 Net fixed Assets 28.24 3.26 1.Greenplus Solution Pvt Ltd Cost of Sales = Income from Services Net Fixed Assets = Fixed Assets – Depreciation 6.
.Greenplus Solution Pvt Ltd Interpretation Fixed assets are used in the business for producing the goods to be sold. Capital invested in the business maybe classified as long-term and shortterm capital or as fixed capital and working capital or Owned Capital and Loaned 58 IDEA Institute of Management & Technology. Finally. though in both cases the same result is expected. CAPITAL TURNOVER RATIOS Sometimes the efficiency and effectiveness of the operations are judged by comparing the cost of sales or sales with amount of capital invested in the business and not with assets held in the business. The ratio indicates the account of one rupee investment in fixed assets. that effected a huge increase in the ratio compared with the previous year’s ratio. This ratio shows the firm’s ability in generating sales from all financial resources committed to total assets. The income from services is greaterly increased in the current year due to the increase in the Operations & Maintenance fee due to the increase in extra invoice and the net fixed assets are reduced because of the increased charge of depreciation.
01 2008 2009 0.309. All Capital Turnovers are calculated to study the uses of various types of capital.654.04 Technology.231.Greenplus Solution Pvt Ltd Capital.0 Capital turnover Ratio Capital turn over Ratio Years 2005 2006 2007 2008 2009 Income Services 36.98 2005 2006 2007 1.00 Capital turn over Ratio 1 0.728.98 59 IDEA Institute of Management & 1.550. Capital turnover ratio = cost of good sold/capital employed Cost of Goods Sold = Income from Services Capital Employed = Capital + Reserves & Surplus 7.060.01 1.834 70.084 72.013 Ratio 0.902 from Capital Employed 37.98 1.892 53.834 53.649 96.175.061 56.301.473.98 1.04 0.599. .652 97.759 55.
A decline in the ratio means that debtors and stocks are increased too much or fixed assets are more intensively used. Current Assets to Fixed Assets Ratio = Current assets/fixed assets 60 IDEA Institute of Management & Technology. CURRENT ASSETS TO FIXED ASSETS RATIO This ratio differs from industry to industry. . Due to huge increase in the net profit the capital employed is also increased along with income from services. Both are effected in the increment of the ratio of current year. The income from services is greaterly increased compared with the previous year and the total capital employed includes capital and reserves & surplus. If current assets increase with the corresponding increase in profit.Greenplus Solution Pvt Ltd Interpretation This is another ratio to judge the efficiency and effectiveness of the company like profitability ratio. The increase in the ratio means that trading is slack or mechanization has been used. it will show that the business is expanding.
081 91. CURRENT ASSETS TO FIXED ASSETS RATIO Current Assets To Fixed Assets Ratio Years 2005 2006 2007 2008 2009 Current Assets 58.93 8.020 18.17 Ratio Current Assets To Fixed Assets Ratio 2.310 15.328.137.524.993 14.151 69.998.672.74 4. .2 6.642.068 Fixed Assets 19.034 2.Greenplus Solution Pvt Ltd 8.056.07 61 IDEA Institute of Management & Technology.17 2005 2006 2007 2008 2009 3.765.021.07 8.163.761 17.346 72.208 115.74 4.20 6.93 3.
The increment in current assets and the decrease in fixed as sets resulted an increase in the ratio compared with the previous year. Because profit is the engine. PROFITABILITY RATIOS The primary objectives of business undertaking are to earn profits. D. that drives the business enterprise. Net profit ratio Return on total assets Reserves and surplus to capital ratio Earnings per share Operating profit ratio Price – earning ratio Return on investments 62 IDEA Institute of Management & Technology.Greenplus Solution Pvt Ltd Interpretation Current assets are increased due to the increase in the sundry debtors and the net fixed assets of the firm are decreased due to the charge of depreciation and there is no major increment in the fixed assets. .
580 40.899.586.654.227 18.902 63 IDEA Institute of Management & Technology.759 55.125.084 72.Greenplus Solution Pvt Ltd NET PROFIT RATIO Net profit ratio establishes a relationship between net profit (after tax) and sales and indicates the efficiency of the management in manufacturing.59 0.359 from Ratio 0.33 0.550.42 Services 36.942 16. NET PROFIT RATIO =Net profit after tax/net sales Net Profit after Tax = Net Profit (–) Depreciation (–) Interest (–) Income Tax Net Sales = Income from Services PROFITABILITY RATIOS GENERAL PROFITABILITY RATIOS 9.30 0. selling administrative and other activities of the firm. NET PROFIT RATIO Net Profit Ratio Years 2005 2006 2007 2008 2009 Net Profit after Income Tax 21. .728.123.259.649 96.834 53.039.23 0.929.474 16.
High net profit ratio will help the firm service in the fall of income from services. .33 0.Greenplus Solution Pvt Ltd Net Profit Ratio 0. rise in cost of production or declining demand.23 Interpretation The net profit ratio is the overall measure of the firm’s ability to turn each rupee of income from services in net profit. The net profit is increased because the income from services is increased. The increment resulted a slight increase in 2009 ratio compared with the year 2008. 64 IDEA Institute of Management & Technology. If the net margin is inadequate the firm will fail to achieve return on shareholder’s funds.3 2008 2009 0.59 2005 2006 2007 0.42 0.
The overall profitability can be known. . Returen on assets = Net Profit/ total assets Net Profit = Earnings before Interest and Tax Net Profit = Earnings before Interest and Tax 11. This ratio is also known as profit-to-assets ratio.Greenplus Solution Pvt Ltd RETURN ON TOTAL ASSETS Profitability can be measured in terms of relationship between net profit and assets. It measures the profitability of investments.0 Return on total assets ratio Return on Total Assets Ratio 65 IDEA Institute of Management & Technology.
580 40.31 Ratio Return on Total Assets Ratio 2005 2006 2007 2008 2009 Interpretation 66 IDEA Institute of Management & Technology.19 0.359 Total Assets 78.125. .201 129.391 106.17 0.227 18.18 0.586.572.107 89.438.171 88.102 0.474 16.259.929.385.805.Greenplus Solution Pvt Ltd Years 2005 2006 2007 2008 2009 Net Profit after Tax 21.27 0.158.942 16.123.
599.781 37.79.554 51.719. RESERVES AND SURPLUS TO CAPITAL RATIO It reveals the policy pursued by the company with regard to growth shares. 2008.719.280 31. The net profit is increased in the current year because of the increment in the income from services due to the increase in Operations &Maintenance fee.75 2.54 1.280 18. The ratio indicates the return on total assets in the form of profits.920 18.e. Reserves & surplus to capital = Reserve & surplus/capital 12.02 Ratio 67 IDEA Institute of Management & Technology.719.582.372 Capital 20. Higher the ratio better will be the position.0 Reserve & Surplus to capital Ratio Reserve & Surplus to Capital Ratio Years 2005 2006 2007 2008 Reserve & Surplus 65.Greenplus Solution Pvt Ltd This is the ratio between net profit and total assets.754.85 2. The fixed assets are reduced due to the charge of depreciation and no major increments in fixed assets but the current assets are increased because of sundry debtors and that effects an increase in the ratio compared with the last year i. A very high ratio indicates a conservative dividend policy and increased ploughing back to profit.511.280 18. .299 34.
733 18.75 1.19 2.85 2005 2006 2007 2008 2009 31. .19 Reserve & Surplus to Capital Ratio 4.280 4.340.Greenplus Solution Pvt Ltd 2009 78.02 2.719.54 68 IDEA Institute of Management & Technology.
992 1. So the increase in the reserves & surplus caused a greater increase in the current year’s ratio compared with the older.928 101.359 No. of Equity Shares 2.474 16.56 8.928 1. of Equity shares 13.125.68 Ratio 69 IDEA Institute of Management & Technology. The reserves & surplus is decreased in the year 2008.580 40.61 9.871.227 18. EARNINGS PER SHARE Earnings Per Share Years 2005 2006 2007 2008 2009 Net Profit after Tax 21. of equity shares. EARNINGS PER SHARE Earnings per share is a small verification of return of equity and is calculated by dividing the net profits earned by the company and those profits after taxes and preference dividend by total no. due to the payment of dividends and in the year 2009 the profit is increased.07.04 9.Greenplus Solution Pvt Ltd Interpretation The ratio is used to reveal the policy pursued by the company a very high ratio indicates a conservative dividend policy and vice-versa.259. Earnings per share = Net Profit after tax/No.928 1. . But the capital is remaining constant from the year 2006.942 16.75 21.123.871.871.871.586.928 1.929. Higher the ratio better will be the position.
75 9.68 9.Greenplus Solution Pvt Ltd Earnings Per Share 21.61 101.56 2005 2006 2007 2008 2009 Interpretation 70 IDEA Institute of Management & Technology.04 8. .
928 shares of Rs.550. That is the amount which is available to the shareholders to take. There are 1. the remaining amount will be distributed by all the Shareholders.654.each.Greenplus Solution Pvt Ltd Earnings per share ratio are used to find out the return that the shareholder’s earn from their shares.51 0.41 0. .70 Ratio 71 IDEA Institute of Management & Technology.899.877 27. The share capital is constant from the year 2006.57 0.99 0.834 53. Due to the huge increase in net profit the earnings per share is greaterly increased in 2009.094. After charging depreciation and after payment of tax.039.759 55.902 0.084 72.718 67.576.586.540.649 96.728.599 31.10/. Operation ratio = Operating cost/Net sales Operating profit = Net sales .Operating cost Operating Profit ratio = Operating profit/sales 14.814 29.0 Operating Profit Ratio Operating Profit Ratio Years 2005 2006 2007 2008 2009 Operating Profit 36.677 Income from Services 36.192.871. Net profit after tax is increased due to the huge increase in the income from services. OPERATING PROFIT RATIO Operating ratio establishes the relationship between cost of goods sold and other operating expenses on the one hand and the sales on the other.
57 0.7 0. 72 IDEA Institute of Management & Technology.51 0. it will decide.41 Interpretation The operating profit ratio is used to measure the relationship between net profits and sales of a firm. .99 2005 2006 2007 2008 2009 0. Depending on the concept.Greenplus Solution Pvt Ltd Operating Profit Ratio 0.
The ratio is calculated to make an estimate of appreciation in the value of a share of a company and is widely used by investors to decide whether (or) not to buy shares in a particular company. .30 Ratio 73 IDEA Institute of Management & Technology.54 28. Price – Earning Ratio = Market Price Per Share/ Earning Per Share Market Per Share =Capital + Reserve & Surplus/No Of Equity Shares Earning Per Share = Earning before interest & tax/No of equity shares 14. PRICE .56 8.EARNING RATIO Price earning ratio is the ratio between market price per equity share and earnings per share. the ratio is increased slightly compared with the previous year. higher the price-earning ratio.47 Earning per Share 101.32 3. Generally.Greenplus Solution Pvt Ltd The operating profit ratio is increased compared with the last year.61 0. the better it is. the management should look into the causes that have resulted into the fall of the ratio. The earnings are increased due to the increase in the income from services because of Operations & Maintenance fee. If the price earning ratio falls.0 Price earnings (P/E) Ratio Price Earnings (P/E) Ratio Years 2005 2006 Market Price Per Share 32. So.
09 Interpretation The ratio is calculated to make an estimate of application in the value of share of a company.17 51. 74 IDEA Institute of Management & Technology.3 2005 2006 2007 2008 2009 4.15 3.Greenplus Solution Pvt Ltd 2007 2008 2009 37.09 2.52 30.85 9.32 3. .15 3.04 9.75 21.68 4.39 0.39 Price Earnings (P/E) Ratio 2.
0 Return on Investment Return on Investment Years 2005 2006 2007 2008 2009 Net Profit after Tax 21.Greenplus Solution Pvt Ltd The market price per share is increased due to the increase in the reserves & surplus. the ratio is decreased compared with the previous year. .219 53.31 0. popularly known as Return on investments (or) return on share holders or proprietor’s funds is the relationship between net profit (after interest and tax) and the proprietor’s funds.580 40. So.301.473. Return on shareholder’s investment = Net Profit( After interest & tax)/Shareholder’s Fund 15.231.42 Ratio 75 IDEA Institute of Management & Technology.123.359 Shareholders Fnd 67.060.227 18.125.24 0.834 70.013 0.30 0.929. RETURN ON INVESTMENTS Return on share holder’s investment.474 16.32 0.652 97.259.942 16.679.586. The earnings per share are also increased greaterly compared with the last year because of increase in the net profit.061 56.
31 2005 2006 2007 2008 2009 0.3 0. The ratio is generally calculated as percentage multiplying with 100.Greenplus Solution Pvt Ltd Return on Investment 0.24 Interpretation This is the ratio between net profits and shareholders funds. .32 0. 76 IDEA Institute of Management & Technology.42 0.
finished goods and receivables typically fluctuates during the year. In Fund based loans there is no limit utilization whereas in Non77 IDEA Institute of Management & Technology. In GREENPLUS SOLUTION PVT. The main sources of working capital financing. GREENPLUS SOLUTION PVT.Greenplus Solution Pvt Ltd The net profit is increased due to the increase in the income from services ant the shareholders funds are increased because of reserve &surplus. raw material. bank credit. Non-fund based loans are given by bank to other parties on the behalf of a company. LTD has divided its working capital needs which can be satisfied by two ways. So. Difference between Fund based and Non-fund based loan Fund based loans are actually received in cash whereas Non-fund based loans are not received in cash. such assets working capital is virtually exclusively supported by short-term sources. A fter determining the level of working capital. trade credit. The need for financing arise mainly because the investment in working capital/current assets. The present chapter discusses the main sources of finances for working capital. a firm has to decide how it is to be financed. . work-in-progress. namely. that is. LTD working capital financing is mainly divided into two parts: 1) Fund based working capital financing 2) Non-fund based working capital financing. commercial papers and factoring. the ratio is increased in the current year. Although long-term funds partly finance current assets and provide margin money for working capital.
Hence no impact on credit-deposit ratio.based finance for exporters are considered at all times by the bankers in view of the necessity to earn foreign exchange. the non-fund based limits confers to both the bankers and the exporters.Greenplus Solution Pvt Ltd fund based loans there is certain limit to which it can be utilized. The non-fund-based limits are necessary to enable the parties concerned to get the requisite goods without the necessity of parting with the funds in advance. Banks are able to earn hefty income from commission without advancing any fund. 2. The computation of the credits for the exporter is taken up in the usual way as for any working capital limits. No blocking of funds. . The maximum permissible bank finance is arrived at and the exporter is asked to bring in his share or stake.1 MARKET SCENARIO: Financial Assistance provided by financial institutions & commercial banks mainly includes following products. Based on the guarantee extended by the purchaser’s bank the supplier sells the items and thereafter claims under the L/C. 8. 1. 78 IDEA Institute of Management & Technology. We may be aware that fund.
.Greenplus Solution Pvt Ltd Financial Products Fund Based Working capital Line of Credit Bill Finance Term Loan Short-term Corporate loan Bridge Loan Project Finance Over Draft Non-fund Based Letter of Credit Bank Guarantee Deferred Payment Guarantees Solvency Certificate Credit Reports Today. Fund based financing can be classified into sub parts like 1) Cash Credit 2) Short term loans from Banks 79 IDEA Institute of Management & Technology. LTD LTD: These two pats are further divided into subparts. Modifying some of the product features can distinguish the service provider but there is very less scope in that front as the current products are almost in line with its most innovative nature. The only difference that the provider can make is the differentiation through its services.2 FINANCIAL INSTRUMENTS USED BY GREENPLUS SOLUTION PVT. 8. Companies utilize this product according to its nature of business as well as financial terms agreed with its supplier and customers. the market providing financing solutions to corporate is very competitive.
.Greenplus Solution Pvt Ltd Non-fund based working capital can be divided into sub parts like 1) Bank Guarantee or Letter of Guarantee 2) Letter of Credit or Line of Credit FINDINGS. SUMARRY & CONCLUSION FINDINGS OF THE STUDY 80 IDEA Institute of Management & Technology.
from 2003 – 07.69.. and 3. 1. It indicates that the company is efficiently utilizing the fixed assets. The net profit is increased greaterly in the current year. 3.41.e. .07 and 8. 4. The capital is constant. It increased in the current year as 1.82.93. That is decreased in the following years because number of equity shares are increased and the net profit is decreased. So the return on total assets ratio is increased from 0. 6. The company’s present liquidity position is Satisfactory. the long term solvency of the firm is increased. and 3.72 to 1.81. 2. The Reserves and Surplus to Capital ratio is increased to 4. 4.82). 1.19 from 2.82 during 2003 of which indicates a continuous increase in both current assets and current liabilities.Greenplus Solution Pvt Ltd The current ratio has shown in a fluctuating trend as 7. The proprietory ratio has shown a fluctuating trend.26. 1. 1.19. and 6.01. The net profit ratio is in fluctuation manner. The absolute liquid ratio has been decreased from 3. 18.104.22.168 to 0.04) and decreased in 2006to 0.24. 3. In the current year the net profit is increased due to 81 IDEA Institute of Management & Technology.92 to 1. 101. It increased in the current year compared with the previous year form 0.02.20. So. The earnings per share was very high in the year 2003 i.74. and 22.214.171.124 in the year 2003 – 07.41.42. The current assets to fixed assets ratio is increasing gradually from 2003 – 07 as 2. The quick ratio is also in a fluctuating trend through out the period 2003 – 07 resulting as 126.96.36.199.18. 4. The proprietory ratio is increased compared with the last year. The fixed assets turnover ratio is in increasing trend from the year 2003 – 07 (1.17.98. The capital turnover ratio is increased form 2003 – 05 (0.33 to 0. It shows that the current assets are increased than fixed assets. The working capital increased from 0. but the reserves and surplus is increased in the current year.31.00. 4.
41. 0. which majorly help to the growth of the organisation. the company status is better. 82 IDEA Institute of Management & Technology.39. The company is utilising the fixed assets.99. It is reduced from 3. The operating profit ratio is in fluctuating manner as 0.57 and 0. The company profits are huge in the current year.42 compared with the previous year.51. because the Net working capital of the company is doubled from the last year’s position.32 to 0. . The company should maintain that perfectly. SUMMARY After the analysis of Financial Statements.09 to 2. Both the profit and shareholders funds increase cause an increase in the ratio. The return on investment is increased from 0. it is better to declare the dividend to shareholders. 0.69 from 2003 – 07respectively. Price Earnings ratio is reduced when compared with the last year.Greenplus Solution Pvt Ltd the increase in operating and maintenance fee. So the earnings per share is increased. because the earnings per share is increased. 0.
it gives the other income i. PANDEY 83 IDEA Institute of Management & Technology.I. It is better for the organization to diversify the funds to different sectors in the present market scenario.e. CONCLUSION The company’s overall position is at a good position. . Interest on fixed deposits..Greenplus Solution Pvt Ltd The company fixed deposits are raised from the inception. M. BIBLIOGRAPHY REFFERED BOOKS FINANCIAL MANAGEMENT . Particularly the current year’s position is well due to raise in the profit level from the last year position.
428 99.280 78.94.350 59.PILLAI & BAGAVATI MANAGEMENT ACCOUNTING – SHARMA & GUPTA INTERNET SITE www.org www.719. .596 2007-2008 18.441 31.ercap.nwda.280 37.com www.340.767.in Balance Sheet as on 31st March 2009 Particular 1} Shareholder’s Funds A} Capital B} Reserve and Surplus 2} Deferred Tax Liability Total Application of Funds 1} Fixed Assets A} Gross Block 2008-09 18.gov.372 27.733 24.538.057.wikipedia.268.002 29.78.754.Greenplus Solution Pvt Ltd MANAGEMENT ACCOUNTANCY .979 84 IDEA Institute of Management & Technology.719.
445 75.712.792.33.306.896 57.661 85.892 96.211.Greenplus Solution Pvt Ltd B} LESS: Depreciation C} Net Block 2} Current Assets.936.649 22.902 23.326 8.441 14.690.349.265 8. & Advances A} Sundry Debtors B} Cash & Bank C} Other Current Assets D} Loans & Advances LESS: Current Liabilities & Provisions A} Liabilities B} Provisions Net Current Assets TOTAL 1} INCOME Income from Services Other Income TOTAL 2} Expenditure Administrative & other 81.710. Loans.516 21.334.599.305 Reimbursable under Operations & Maintenance Agreement TOTAL 31.986 15.599.745 30.85.474.101 85 IDEA Institute of Management & Technology.860.199 44.538.719 75.266.654.669.750 expenses 81.220 99.916 8.375.596.545 188.8.131.521.827 31.586.053.550.677 depreciation and taxation 4} Profit before taxation Provision for taxation 65.420 51.520 1.163.056.117.228 7.034 80.122 55.804 34.52.750 LESS: Expenditure 49.856.043.525.894.407 99.002 26.753 9.57.009.993 37.801 3} Profit before 67.009 59.718 29.334. .268.562 14.709 38.719 49.934 47.249.
000 (3.257 Surplus through forward 26.580 44.211.078.359 10.431 4.680.586.359) 4.495. .699.140 15.285.Greenplus Solution Pvt Ltd Current Deferred Fringe Benefit 5} Profit after taxation 24.069 26.185 28.922) 4.617 86 IDEA Institute of Management & Technology.851 63.257 form previous year 6} Profit available for 67.951. 15 -----------Per equity share ( 2005NIL) Provision for dividend -----------distribution tax 7} Balance carried balance sheet to 67.617 appropriations Transfer to general reserve -----------Interim Dividend Rs.285.34.699.46.663 40.920 3.440 (67.15.292.938.259.