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A SUMMER TRAINING REPORT ON
WORKING CAPITAL MANAGEMENT IN FOOD CORPORATION OF INDIA
Submitted for the partial Fulfillment of the requirement for the award of degree in
MASTER OF BUSINESS ADMINISTRATION
Barkatullah University, Bhopal (M. P.) (2009-2011) Guided by: Submitted by:
Prof. SAURAV KADAM
Lakshmi Narain College of Technology Science, Bhopal
(Affiliated to Barkatullah University, Bhopal & Recognized by AICTE New Delhi)
“STUDY ON WORKING CAPITAL MANAGEMENT OF (BHOPAL)” FOOD CORPORATION OF INDIA
A PROJECT REPORT TOWARDS PARTIAL FULFILMENT FOR THE DEGREE MBA IN FINANCE
Guided by: Prof. SAURAV KADAM
Submitted by: JAI SINGH
M.B.A (FIN) BARKATULLA UNIVERSITY, BHOPAL (M.P) 200920011
The underlying aim of the summer training in FCI is a sincere attempt to analyze its Working Management by making use of different financial appraisal techniques. The data for the studies were obtained from the published annual reports of the company. Among all the problems of financial management, the problems of working capital management have probably been recognized as the most crucial one. It is because of the fact that working capital always helps a business concern to gain vitality and life strength. The objective of this study is to critically evaluate working capital management as practiced in FCI. In this study, a sincere attempt has been made to analyze the working of FCI by making use of different financial appraisal techniques like ratio analysis, trend analysis, common-size analysis etc. The period of study was 3 year from 2005- 06 to 2007-08. The data for the studies were obtained form the published annual reports of the company. An effort has been made to appraise the overall financial performance and efficiency of management, but the scope and depth of study remained limited due to the limiting factors of time, and resources. However, it is expected that the study will provide useful information for better and easier understanding of the financial results of the company. This study has been divided into six chapters. The first chapter has been devoted to the introduction and last to the summary of conclusion and suggestion. The second chapter deals with the objectives. Third chapter takes care of introduction to financial analysis. In addition to this fourth chapter deals with significance of working capital, whereas fifth chapter deals with the analysis aspects of working capital. The main source of data has been the annual reports of the company.
I am Jai Singh a student of M.B.A.III semester of LAKSHMI NARAIN
COLLEGE OF TECHNOLOGY AND SCIENCE BHOPAL (2010-2011), here by declared that the following Project report on WORKING CAPITAL MANAGEMENT in FOOD CORPORATION OF INDIA (RCI) at BHOPAL is an authentic work done by me.
The project was undertaken as the part of course curriculum of MBA Program, Barkatullah University Bhopal.
This is to certify that JAI SINGH has completed his project work on the subject entitled WORKING CAPITAL MANAGEMENT IN FOOD CORPORATION OF INDIA which is based on the research study undertaken by him. The project report is completed by the candidate under my supervision. It is an original, unaided research study completed under my supervision to meet the partial requirement of the MBA (FT) degree of Barkatullah University, Bhopal.
unaided research study completed under my supervision to meet the partial requirement of the MBA (FT) degree of Barkatullah University. The project report is completed by the candidate under my supervision. Bhopal.LAKSHMI NARAIN COLLEGE OF TECHNOGY & SCIENCE BHOPAL CERTIFICATE This is to certify that JAI SINGH has completed his project work on the subject entitled WORKING CAPITAL MANAGEMENT IN FOOD CORPORATION OF INDIA which is based on the research study undertaken by him. DATE:PRINCIPAL (LNCT&S BHOPAL) Page 6 . It is an original.
The project report is completed by the candidate under my supervision.LAKSHMI NARAIN COLLEGE OF TECHNOGY & SCIENCE BHOPAL CERTIFICATE This is to certify that JAI SINGH has completed his project work on the subject entitled WORKING CAPITAL MANAGEMENT IN FOOD CORPORATION OF INDIA which is based on the research study undertaken by him. SOURAVKADAM LNCT BHOPAL Page 7 . Bhopal. unaided research study completed under my supervision to meet the partial requirement of the MBA (FT) degree of Barkatullah University. DATE:Prof. It is an original.
Shukla and All staff member of FCI Bhopal. who gave me valuable advice and inputs for our study.K. Human Resource Department for permitting me for Project training otherwise my study could not have been completed if I had not been able to get the reference materials from the company and proper support from them. I am highly obliged Head. this study could not have present shape. I am immensely grateful to Mr. Page 8 .Acknowledgements I got this opportunity to place on record my grateful thanks and sincere gratitude to Mr. D. SOURAV KADAM whose continued and invaluable guidance can never be forgotten by me but for whom.
Analysis of working capital:6. Conclusion and suggestion:References Glossary Page 9 . Company profile:Objective of the project:Introduction to Financial analysis:Significance of the working capital:- 5. 2. 4.CONTENTS 1. 3.
Page 10 ..1 1. 3. Objective of the project 2.1 2.3 3.2 2.1 3.3 Research Methodology………………………………… Type of Research………………………………………….2 3.3 1.4 Overview FCI……………………………………… Brief history……………………………………………..4 3. Concept of financial Statement………………….. Sample of Research……………………………………. Organization structure……………………………… 2.TABLE OF CONTENTS Acknowledgments Preface Abstract Chapterisation 1.2 1. Introduction to financial analysis 3.. Types of Financial Statement………………………. Introduction 1.5 Prelude………………………………………………………. Parties Interest……………………………………………… Financial Appraisal…………………………………………. Objectives………………………………………………….
2 Profitability……………………………………………….2 5. Working capital………………………………………….1 5. Working capital trend analysis………………….3 4.1 6. References Glossary Page 11 .. Concept of working Capital…………………………….2 4.. Conclusions and Recommendations 6.3 Working capital analysis…………………………….. Significance of the working Capital 4. Ratio Analysis……………………………………………….1 4. Analysis of Working capital 5.4 4.5 Introduction of working capital……………………. Importance of working capital analysis…………….4.. 6. Operating and cash conversion cycle………………… Methods and ratios……………………………………………… 5.
1 INTRODUCTION TO THE FCI Page 12 .CHAPTER: .
Distribution of food grains throughout the country for public distribution system Maintaining satisfactory level of operational and buffer stocks of food grains to ensure National Food Security In its 45 years of service to the nation.The Food Corporation of India was setup under the Food Corporation Act 1964. particularly to vulnerable section of the society To maintain buffer stocks as measure of Food Security To intervene in market for price stabilization • • Page 13 . in order to fulfill following objectives of the Food Policy: • • • Effective price support operations for safeguarding the interests of the farmers. FCI's Objectives are: • • To provide farmers remunerative prices To make food grains available at reasonable prices. FCI has played a significant role in India's success in transforming the crisis management oriented food security into a stable security system.
2006 till further order) Shri B.04. Chankya Puri. 23411839 New Delhi. 23381177 Krishi Bhavan.f.2008 for 5 26515160 years or till date of 26967844(FAX) superannuation which is earlier) Shri D. 410.e.f. (w. 15. 23388302(FAX) (w.f.11. 0172. New Delhi 4 24106327 9968265387 C-II/40. M/o CAF&PD. Satya Marg. New Delhi. Tilak Lane.04. Sector-39D. Joint Secretary. Secretary (Food). Secretary & Financial Adviser.10. 23. 15. of Punjab. 0172-742836 New Delhi. Pattanaik.e. Krishi Bhavan. Hqrs.742836 (w. Room No.2010 till further order) Shri Rakesh Garg.e.No Name Office Phone 1 Shri Siraj Hussain. 23384418 New Delhi.e.2010 till further order) Shri Mukesh Khullar. 01. M/o CAF&PD. (w. Krishi Bhavan.f. (w.e. Mini Secretariat. Joint secretary. Grewal. New Delhi110017 5 9872872447 House No. 18. Tilak Lane. 4th 2742836 FAXFloor.e. 3 9999671271 23389458 C-II/36.S. Chairman & Managing Director. Chandigarh 6 26493932 9818372724 A-311. Chandgi Ram Block.04. (w.B.Board of Directors Residence Phone Residence Address Sl.07.2010 till further order) Shri Desh Deepak Verma Addl.f. 0120-2586161 Noida (U. 3009. Sector-61. Sector-9. New 26852826 Delhi.. Managing Director. Asian Village New Delhi110049 Page 14 . Govt. Food 23414074 Corporation of India. Delhi.2010 for two years) 9818518384 A-70.P. Ministry of 2742836 FAXAgriculture. 26.) 2 09414100002 C-II/19. Hauz Khas. Chandigarh.f. Central Warehousing Corporation.
Organizational Structure Page 15 .
Page 16 . The bags themselves are kept on wooden crates/poly pallets to avoid moisture on contact with the floor.FOOD CORPORATION OF INDIA ZONAL OFFICE: WEST (M. on traces of infestation. of stocks is done on an average every 15 days with MALATHION and once in three months with DELTAMETHRIN etc. An on-going programme sees that both prophylactic and curative treatment is done timely and adequately. fumigation to prevent infestation etc.P) Quality control Scientific Management The Food Corporation of India has an extensive and scientific stock preservation system. Further till the bag are dispatched/issued. curative treatment is done with all. fumigated and aerated by qualified trained and experienced personnel. the minute it arrives in the godowns. The preservation of food grain starts. Grain in storage is continuously scientifically graded. Food Corporation of India's testing laboratories spread across the country for effective monitoring of quality of food grains providing quality assurance as per PFA leading improved satisfaction level in producers (farmers) and customers (consumer).
of India Food Policy from time to time. customer focused services.QUALITY POLICY FCI. Our focus shall be: • • • • • Professional excellence in Management of food grain and other commodities Service quality and stake holder orientation Transparency and accountability in transactions Optimum utilization of resources Continual improvement of systems. Transparency in decision making. processes leading to improved customer satisfaction level Accountability for efficiency. responsiveness. is committed to provide credible. Page 17 . as the country's nodal organization for implementing the National Food Policy. performance and minimization of all losses & Wastes Need based up gradation of infrastructure and work environment Need based enhancement of available knowledge & skills. for efficient and effective food security management in the country. effective communication leading to harmonious employee relations Establishing. maintaining and improving ISO 9001:2000 based Quality Management Systems covering all areas of activity. • • • • • • Monitoring of Quality in all major transactions. processes and resources QUALITY OBJECTIVES Fulfillment of all the targets set as per Govt.
CHAPTER: 2 OBJECTIVES OF THE PROJECT Page 18 .
( analysis of facts (results) derived from the financial technique) Present earning capacity and profitability of FCI Ltd Short term liquidity and long term financing Financial stability of business Analyze of different ratio so to judge the availability and effective use of working capital.(financial techniques: working capital ratios) To prepare a financial report after analysis and interpretation of finding from balance sheet and profit and loss account by applying various mathematical and financial tools and techniques. Page 19 .OBJECTIVES CONCEPTUAL: . FACTUAL :.
Thus when we talk about the research methodology.which consist of series of action or steps. Page 20 . 5. we do not talk only research methods but also consider the logic behind the method. Graphics and interpret. RESEARCH COMPRISES FOLLOWING STEPS:1. we use in our context of our research study. so that research results are capable of being evaluated either by the researcher himself or by the others. Research design and sample design. 2.RESEARCH METHODOLOGY • • Research methodology is a systematically solve the research problem. Data analysis and caparison . Analysis of data gathered. 3. Formulating the research problem. It has many dimension and research method constitute a part of the research methodology. • To effectively carry out in research I would use the following research process. 4.
understanding and rephrasing the problem thoroughly and rephrasing the same into meaningful terms from an analysis point of view. 2.e. PREPARING THE RESEARCH DESIGN The function of research design is to provide for the collection of relevant evidences with minimum expenditure of efforts. Page 21 . FORMULATING THE RESEARCH PROBLEM This is the first step under which the problem stated in general way and the ambiguities i. In analytical research. RESEARCH DESIGN • • Type of research Sample design TYPE OF RESEARCH • The type of research under present is an analytical research. The research problem under the present project was to study data of various funds for this research process was to be formulated and execution of which would result in desired data.1. Hence the same would be done • In this project I had collected fact data and information. we use tact’s or information already available these to make a critical evaluation of the material. time and money.
OBSERVATIONAL DESIGN (COLLECTION OF DATA) Observational design relates to the condition under which the observations are to be made. Primary data are collected by the following ways:a) Observation b) Interview c) Schedule d) Questionnaire Page 22 . Data can be obtained two important sources: • • Primary data Secondary data PRIMARY DATA Primary data are the data that are collected afresh and for the first time. which should be reliable and appropriate for his report.SAMPLE DESIGN A sample design is a definite plan determined before any data is actually collected for obtaining a sample. Researcher must select a sample design.thus happens to be in character. observational design in respect to research. which differ considerably in context of money. 3. time. There are several ways of collecting data. cost and other resources at the disposal of the researcher.
journals.Secondary data Secondary data are the data that are already collected and only analyzed by different sources these sources are as follows:• • • • Corporate magazine Manuals of various companies Books. news papers Employment exchange The secondary data would be collected from financial statement. journal of national repute. In addition to this internet access will make the study more effective and meaningful. books of national and international author as well as the annual report of the company. Page 23 .
CHAPTER: .3 INTRODUCTION TO FINANCIAL ANAYSIS Page 24 .
measuring and communicating economic information to permit informed judgment and decisions by users of the information. creditor. government agencies and other to understand what is happening in the business or nonprofit organization. Page 25 . “Accounting” is the process of identifying.FINANCIAL ANALYSIS PRELUDE:Financial accounting involves recording transaction and preparing Report and financial statement that can be used by management owner.
The balance sheet and income and statement. creditors and the general public. Accounting reports on the result of operation and the current status of a business enterprise by a financial statement. Page 26 .CONCEPTS OF FINANCIAL STATEMENTS Financial statement are major means employed by firm to present their financial situation to stock holders creditors and the public a financial statement is a collection of data organized accounting to logical and consistent accounting procedure. Since the balance sheet and income statement are of limited interest the annual report of the company are supplemented by a third statement the change in financial position and by foot notes which explain and amplify the reported numerical data. The and product of financial accounting is financial statement consisting of the balance sheet. Financial statements are major means employed by a firm to present their financial situation to stock holders. Its purpose is to convey an understanding of some financial aspects of a business firm. profit and loss accounting and statement changes in financial position.
Liabilities:Liabilities are claim of creditors against the enterprises arising out of past activities that are to be satisfied by the disbursement of utilization of corporate resources. as a snapshot of the financial status of company is a valid for only one day the reference day. Owner’s Equity:The owner’s equity is the owner’s current investment in the assets of company. The position of the firm on a preceding day is bound to be different. The accounting equation is an accounting formula expressing equivalence of the two expressions of assets and liabilities. They are economic obligation of the firm.TYPES OF FINANCIAL STATEMENTS A) The Balance Sheet:The balance sheet is called a fundamental accounting report. which are acquired at a measurable money cost these are economic resources of a firm which provide economic benefits to the company. Page 27 . From an analyst point of view a balance sheet is written representation of the resources and liabilities of an individual partnership firm an association of a corporation.” The contents of balance sheet can be divided into three divisions Assets:Assets are valuable resources owned by a business. The entire system of recording business transaction is based on accounting equation. “The balance sheet of a company indicates to management the financial status of a company as on a given moment. It provides information about the financial standing or position of affirm at given instant. The balance sheet can be visualized.
It summarizes revenues and expenses in a manner that discloses whether a company’s activates in a particular fiscal period have Page 28 . Its income statement reveals the firm’s capacity as a measure of its financial strength. however. is considered a very significant statement from the view point of bankers. because it indicates the firm’s financial position and strength. editors and financial analysis have recently started paying more attention to the firm’s capacity as a measure of its financial strength. as measured by its recourses and obligations. as discussed above. An income statement is a financial statement summarizing the result of a company’s income (profit) making activities for a specific time period.ACCOUNTING EQUATION ASSETS = LIABILITIES+OWNERS’EQUITY OR OWNERS EQUITY = LIABILITIES = ASSETS-LIABILITIES OR ASSET-OWNERS EQUITY (B) The Income Statement:The balance sheet. Its income statement reveals the earning potential of the firm. and other lenders.
Potential lenders and investors. From such a report. management would have a useful tool for budgeting. revenues. management traditionally made use of a wide variety of statement and reports in apprising internal company performance. losses. expenses. expenses and net income (or net loss) of a firm for a period of time. Thus. Today. suppliers and others are having business with the company. revenues deduction (expenses. the income statement and the balance sheet constituted the major financial statement. management could extract valuable information about where working capital and cash come from and how they were used. One popular report for management’s internal use was called the statement of changes in final position. a combination a recorded facts. financial statement reflects. It’s systematic array of the data of the revenues. “The profit and loss account is the condensed and classified record of the gains losses posing change in the owner’s interest in the business for a period of time. Debenture holders.” The income statement or the profit and loss account presents the summary of revenues. The income statement is a scoreboard of the firm’s performance during a particular period of time. If these past events could be projected in future. (C)STATEMENT OF CHANGE IN FINANCIAL POSITION Until 1960. the statement of changes of financial position represents third financial position represents a third financial statement. it serves as measure of the firm’s profit ability. revenue deductions. Following are interested in financial statement:- Credit. accounting convention and personal judgments and the judgments and conventions applied. Credit institutions and banks. affect them materially. PARTIES INTERESTED According to the American institute of certified public accountants.resulted in profit or a loss. However. taxes etc. Page 29 .) Net income and distribution or assignment of the net income to creditors and property investors of a particular period.
Financial statement analysis is a preliminary step towards the evaluation of result dawn by the analysis or management accountant. Financial appraisal is a scientific evaluation if the profitability and financial strength of a business concern. Other prefers companies whose financial statement indicate rend for rapid growth in a company’s short run solvency. as well as the company’s overall profitability and stability. Important customers wishing to make a long standing with the company. Taxation authorities. are concerned about their invested income. income and company’s ability to continue earning cash flow to meet its financial commitments and these are only few of the users. Financial statement analysis is used for the purpose of financial appraisal. Some potential investors are invested in “solid” companies that are companies whose financial statement indicate stable earnings and dividends with little growth in operations. Other departments dealing with the industry in which the company engaged cooperative. Appraisal Page 30 . but they are meant to an end. In fact financial appraisal and analysis of financial statement have nearly the same meaning. The company law board FINANCIAL APPRAISAL A company’s financial statement are intended to summarize the results of its operation and its ending financial condition. Members of parliament. for example. Analytical data are not ending in themselves. Financial appraisal involves the assessment of firm’s past. debt maturities both current as well as long term profitability of a sound dividend policy. the public committee in respect in government companies. critical and comparative evaluation of the profitability and financial health of given concern through the application of financial statement analysis. Current shareholders. and uses of financial statements. Long-term creditors are concerned about the safety of their interest. Financial appraisal is the process of making a scientific proper. ability to pay interest. Financial appraisal is an attempt to determine the significance. Trade unions and employees. Economist and analyst. present and anticipated future financial condition. The information in the statement is studied and related to other information by external users for several reasons. They cannot speak. its ability to pay current obligation as they become due. and meaning of the financial statement data so that forecast may be made of the prospects for future earnings. But the numerical data in the financial statement are quit calm.
NEED OF FINANCIAL APPRAISAL Page 31 . and financial analysis starts where the summarization of financial data in the form of profit and loss account and balance sheet ends. Everybody interested in the affairs of the company is interested in finding answer to the following searching question:- A. “financial statement analysis attempts to unveil the meaning and significance of the items composed in profit and loss account and balance sheet so as to assist the management in the formation of sound operating financial policies. Does the company earn adequate profit? B.” Similarly it is a reasonable to assume that unless some realistic change take places in the places in the business.A. that would have otherwise been buries in the maze of details. financial strength or weakness and credit worthiness. The appraisal or analysis of financial statement spotlights the significant facts and relationship concerning managerial performance.or evaluation of such results is made thereafter. Does the company process enough funds to meet its obligation as and when they mature? C. Faulke is very correct to say “if a train is moving forward at a known rate of speed. Roy . corporate efficiency. but past events given some indication of what may be expected in future unless some drastic changes take place in business it. it is reasonable to assume that it will continue to move at approximately the same rate unless some obstacle interrupts its progress abruptly or the motive power is increased or decreased. Will continue to move in the same direction in the past. Is investment in the company safe? Appraisal of financial statement alone can answer such queries. it will continue to move in the same general direction as indicated by its comparative trends. in the words of Kenney and MacMillan. Financial appraisal begins where financial analysis ends.” The technique of financial appraisals frequently applied to the study of accounting data with a view to determining continuity or discontinuity of the operating policies and investment value of business. Its true that statement analysis merely reveals what has taken place in the past.
CHAPTER: 4 SIGNIFICANCE AND ANALYSIS OF WORKING CAPITAL Page 32 . For management it servers as means of “self evaluation as it is like a report of its managerial skill and competence a banker can judge the liquidity position a creditor can plan buying and selling of hares of concern on the basis of safety of principal and its capital appearances as wanted by the past record of earning. while a planner can ascertain if the patter of investment reveals the company’s position in relation to labor and its welfare. legislation concerning licensing desirable in the socio economic interested may be based on statement analysis. By using this technique an economist can study the extent of “concentration of economic power” and pitfalls in the financial policies pursued. A debenture holder of a concern can ascertain whether income is generates sufficient margin to pay the interest / answers to different question are provided by financial appraisal.The need of financial appraisal varies accounting to type of users.
discounting and compounding techniques play a significant role in capital budgeting and a minor one in the management of current assets. consequently. Net Working Capital can be positive or negative. The management of fixed and current assets. Net Working Capital:It’s refers to the difference between current assets and current liabilities. Current liabilities are those claims of outsiders which are expected to mature for payments within an accounting year and include creditors (account payable) . debtors. Third. Thus. the large holding of current assets. strengthens the firm’s liquidity position (and reduces riskiness). levels of fixed as well as current assets depend upon expected sales. CONCEPTS OF WORKING CAPITAL Gross working capital:Gross working capital refers to the firm’s investment in current assets are the assets which can be converted into cash within an accounting year and include cash . the firm has a greater degree of flexibility in managing currents. however. Page 33 . Second. Thus a risk-return trade off is involved in holding current assets. but it is only current assets which can be adjusted with sales fluctuations in the short run. especially cash. time is a very important factor. short-term securities. bills payable . (accounts receivable or book debts) bills receivable and stock (inventory). but also reduces the overall profitability. A positive net working capital will arise when current assets exceed current liabilities .a negative net working capital occurs when current liabilities are in excess of current assets.SIGNIFICANCE OF WORKING CAPITAL Introduction:The management of current assets is similar to that of fixed assets in the sense that in both case that a firm analyses their effects on its return and risk. differs in three important ways: first.and outstanding expenses . in managing fixed assets.
But the magnitude of current assets needed is not always the same. work in process and finished goods will fall if the market is slack Temporary or fluctuating Amount of working Permanent capital(Rs) Time VARIABLE OR FLUCTUATING WORKING CAPITAL:Variable or fluctuating working capital the extra working capital needed to support the changing production and sales activities of the firm. investment in raw material. the need for current assets is felt constantly. while temporary working capital is fluctuating – sometimes increasing and sometimes decreasing. the permanent working capital need not be horizontal if the firm’s requirement for permanent capital is increasing (or decreasing) over a period Page 34 . will fluctuate. over and above permanent working capital. On the other hand. The operating cycle is a continuous process and. Both kinds of working capital – permanent or fluctuating (temporary)-are necessary-to facilitate production and sales through the operating cycle. But the firm to meet liquidity requirements that will last only temporary working capital. For example extra inventory of finished goods will have to be minted to support the peak period of sale. working capital is the minimum level of current assets. and investment in debtors (receivable) may also increase during such periods. there for. However. the need for working capital. In figure illustrates differences between permanent and temporary working capital. Permanent or fixed. It is shown that permanent working capital is stable over time. However there is always a minimum level of current assets which is continuously required by a firm to carry on its business operations. it increases and decreases over time. It is permanent in the same way as the firm’s fixed assets are depending upon the changes in production and sales. PERMANENT WORKING CAPITAL:We know that the need of current assets arises because of the operating cycle.
There for. debentures. the financial manager should have knowledge of the sources of working capital funds as well as investment avenues where idle funds may be temporarily invested. Excessive investment in current assets should be avoided because it impairs the firm’s profitability. The management should be prompt to initiate an action and correct imbalances.FOCUSING ON MANAGEMENT OF CURRENT ASSETS The gross working capital concept focuses attention on two aspects of current assets management: 1.excessive or inadequate investment in current assets. and may prove to be harmful for the company’s reputation excessive liquidity is also bad. How should current assets be financed? The consideration of the level of investment in current assets should avoid two danger points. the quality of current assets should be considered in determining the level of current assets vis – a – vis current liabilities. long term debt. a portion of the working capital should be financed with the permanent sources of funds such as equity share capital. Whenever a need for working capital funds arises due to the increasing level of business activity or for any other reason. some surplus funds arise they should not be allowed to remain idle. On the other hand. It is a conventional rule to maintain the level of current assets twice the level of current liabilities. Current assets should be sufficiently in excess of current liabilities to constitute a margin or buffer for maturing obligations within the ordinary operating cycle of a business. Investment in current assets should be just adequate to the needs of the business firm. there is a minimum amount of net working capital which is permanent. Page 35 . In order to protect their interests. short term creditors always like a company to maintain current assets at a higher level than current liabilities. if suddenly. A weak liquidity position poses a threat to the solvency of the company and makes it unsafe and unsound. therefore. 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. as idle investment earns nothing. How to optimize investment in current assets 2. prompt and timely action should be taken by management to improve and correct the imbalances in the liquidity position of the firm. Networking capital concept also covers the equation of judicious mix of long term and short term funds for financing current assets. Thus. This may cause excess or shortage of working capital frequently.term securities. FOCUSING ON LIQUIDITY MANAGEMENT Net working capital is a qualitative concept. For every firm. performance share capital or retained earnings. Therefore. inadequate amount of working capital can threaten solvency of the firms because of its inability to meet its current obligations. Similarly. Financing arrangement should be made quickly. Another aspect of the gross working capital point to the need of arranging funds to finance current assets. Management must. it may be due to mismanagement of current assets. but should be invested in short. However. It should be released that the working capital needs of the firm may be fluctuating with changing business activity. A negative working capital means a negative liquidity.
The operating cycle of a manufacturing company involve three phases: • Acquisition of resources such as raw material. it may be emphasized that both gross and net concepts of working capital are equally important for the efficient management of working capital. There is always an operating cycle involved in the conversion of sales into case. The data and problems of each company should be analyzed to determine the amount of working capital. Credit sales Create account receivable for collection. • Sales of the products either for cash or on credit. In its Endeavour to do so. On the contrary. after the conversion of resources into inventories. • Manufacture of the product which includes conversion of raw Material into work-inprogress into finished goods. a firm should earn sufficient return from its operations. The firm has to invest enough funds in current assets for generating sales. Currents assets are needed because sales do not convert into cash instantaneously. A firm requires many years to recover the initial investment in fixed assets such as plant and machinery or land and building. We know that a firm should aim at maximizing the wealth of its shareholders. There is no specific rule as to how current assets should be financed. labor. We will hardily find a business firm which does not require any amount of working capital. Cash inflows are not certain because sales and collections which give rise to cash inflows are difficult to forecast Page 36 . There is a difference between current and fixed assets in terms of their liquidity. Keeping in view the constraints of the individual company. These phases affect cash flows.decide the extent to which current assets should be financed with equity capital and/or borrowed capital. a judicious mix of long and short term finances should be invested in current assets. Since current assets involve cost of funds. What is an operating cycle? Operating cycle is the time duration required to convert sales. Indeed. OPERATING AND CASH CONVERSION CYCLE The need for working capital to run the day-to-day business activities cannot be overemphasized. are neither synchronized because cash outflows usually occur before cash inflows. into cash. they should be put to productive use. Earning a steady amount of profit requires successful sells activities. which most of the time. There is no precise way to determine the exact amount of gross or net working capital for any firm. It is not feasible in practice to finance current assets by short – term sources only. firms differ in their requirement of the working capital. investment in current assets such as inventories and debtors [account receivable] is realized during the firm’s operating cycle that is usually less than a year. In summary. power and fuel etc.
uninterrupted production and sale. The total of inventory conversion period and debtors conversion period is referred to as gross operating cycle (GOC). Purchase RMCP+WICP+FGCP Inventory convention period payment credit sale collection receivable conversion price gross operation cycle payable net operating cycle Thus. which the firm can defer.. It needs to maintain liquidity to purchase raw materials and pay expenses such as wages and salaries. a firm makes adequate investment in inventories. are spontaneous sources of capital to finance investment in current assets. it includes: (a) raw material conversion period (rmcp). called working capital. Stocks of raw material and work –in. and (c) finished goods conversion period (FGCP). required to invest in current assets for a smooth. and debtors. are relatively certain. if depreciation is excluded from expenses in the computation of operating cycle. uninterrupted functioning. Typically. administrative and selling expenses and taxes are there is hardly a matching between cash inflows and outflow. The creditors (Payables) deferral period (CDP) is the length of time the firm is able to defer payments on various resource purchases. Payables. Debtors (Accounts Receivable) are created because goods are sold on credit for marketing and competitive reasons. for Smooth. How is the length of operating cycle determined? The length operating cycle of a manufacturing firm is the sum of (i) inventory conversion period (ICP) and (ii) debtors (Receivable) conversion period (DCP).it is net time interval between cash collections sale of the product and cash payments fore resources acquired by the firm. therefore. Cash outflows.process are kept to ensure smooth production and to guard against non-availability of raw materials of other components. The debtors’ conversion period is the time required to collect the outstanding amount from the customers. Cash is also held to meet to any future exigencies. In practice. The difference between (gross) operating cycle and payables deferral period is net operating cycle (NOC). It also represents the time interval over which additional funds. (b) work-in-process conversion period (WIPCP). a firm may acquire resources ( such as raw material) on credit and temporarily postpone payment of certain expenses. other manufacturing. The firm is.accurately. on the other hand. should be obtained in order to carry out firm’s Page 37 . The firms hold stock of finished goods to meet the demand of customers on continuous basis and sudden demand from some customers. the net operating cycle also represents the cash conversion cycle(CCC). The inventory conversion period is the total time needed for producing and selling the product.
….. it means further need for negotiated working capital. ….. X … X X X X X X .. …. …. The negotiated sources of working capital financing are called non-spontaneous sources. X … X X X X. If net operating cycle of a firm increases. Consider the statement of cost of sales for a firm given in below- Statement of cost and sales Item Actual 20X1 PROJECTED 20X2 1 purchase of raw material 2 opening of raw material inventory 3 closing raw material inventory 4 raw material consumed (1+2+3) 5 direct labour 6 depreciation 7 Other mfg exp 8 total cost (4+5+6) 9 opening work in process inventory 10 closing work in process inventory 11 cost of production 12 Opening finished goods inventory 13 closing finished goods inventory 14 cost of goods sold (11+12+13) Page 38 X1 X2 X3 X4 X5 X. …. X. The firm has to negotiate working capital from sources such as commercial banks..operations. Let us illustrate the computation of the length of operating cycle. … ….
. . . X X The firm data and sales are given below Sales and debtors Item Actual20X1 Projected 20X2 Sales (credit) Operating balance of debtors Closing balance of debtors Opening balance of creditors Closing balance of creditors X X . Work-in-process conversion period (WIPCP) and finished goods conversion period (FGCP): Page 39 Debtors + Conversion period . … Gross operating cycle (GOC) The firms gross operating cycle (GOC) can be determined inventory conversion period (ICP) Plus debtors conversion period. Thus.15 selling administrative and gen expenses 16 cost of sales …. ….... X Y Y ... GOC given as follows: Inventory GROSS Operating = Conversion period Inventory conversion Period What determines the inventory conversion period? The inventory conversion (ICP) is the sum of raw material conversion period (RMCP)....
FGCP can be calculated as follows: Finished goods Conversion Period = Finished goods inventory [Cost of goods sold]/360 Page 40 . RMCP depends (a) raw material consumption per day.360). debtors and creditors. The Following formula can be used: Raw material Conversion Period Raw material Inventory [Raw material Consumption]/360 = RMC RMCP = RMI + 360 RMC*360 RMC Work-in-process conversion period (WIPCP):Work-in-process conversion period (WIPCP) is the average time taken to complete the semi-finished or work-in-process. The raw material consumption period is obtained when raw material inventory is divided by raw material consumption per day. Similar Calculations can be made for other inventories.ICP = RMCP + WIPCP+ FGCP Raw material conversion period (RMCP):The raw material conversion period (RMCP) is the average time period taken to convert material in to a work-in-process.(b) raw material consumption per day is given by the number of years (say. It is given by the following formula: Work-in-process Conversion Period = work in process inventory [cost of production]/360 Finished goods conversion period (FGCP) is the average time taken to sell the finished goods.
CGI FGCP = FGI ÷ 360 = FGI*360 CGS Debtors (receivable) conversion period (DCP) Debtor’s conversion period (DCP) is the average time taken to convert debtors into cash. DCP represent the average collection period. = Credit purchases Credit*360 … (7) Gross Net operating = Operating Cycle Cycle = Creditors deferral period …… (8) NOC = GOC .CDP Page 41 . It is calculated as follows: Debtors Conversion Period (DCP) Debtor = Creditor sales/360 Debtors*360 Creditor sales Creditors (payables) deferral period (CDP) Creditors (payables) deferral period (CDP) is the average time taken by the firm in paying its suppliers (creditors). CDP is given as follows: Creditors Deferral Period Creditors = Credit purchases/360 Cash Conversion or Net Operating Cycle Net operating cycle (NOC) is the difference between gross operating cycle and payables deferral period.
the raw material conversion period has declined by 8 days. For example.051 19.5 986 60d 7.1 827 68 d 5.349 12. but the consumption rate has increased) by 36.932 16.9 526 38 d Projected19X2 5.6 498 25d 6. and even the profits.4 percent). Thus.Net operating cycle is also referred to as cash conversion cycle. Table shows detained calculations of the components of a firm’s operating cycle. average figures for the period may be used. We can similarly interpret other calculations in table below:Table:-Operating Cycle Calculation (Hypothetical Example) (Rs. the raw material consumption the projected raw material conversion period is 60 days. Also. Some people argue that depreciation and profit should be excluded in the computation of cash conversion cycle since the firm’s concern is with cash flow associated with conversion at contrary view is that a firm has to ultimately recover total costs should include depreciation.3 995 54d Page 42 .5 325 22d 5.003 13.212 14. in using the above-mentioned formulae. This has happened because both consumption (Rs 16.1 lakh and the company held an ending raw material inventory of Rs827 lakh. Table provides the summary of calculations. Thus. If we assume that this is the average inventory held by the company. Raw materials are the result of daily raw material consumption and total raw material consumption and total raw material consumption and total raw material consumption during a period given the company’s production targets. In lakh) Item 1 Raw Materials Conversion Period (a) Raw material consumption (b) Raw material consumption per day (c) raw material inventory (d) Raw material inventory holding days 2 Work-in-process Conversion Period (a)cost of production* (b)cost of production per day (c)work-in-process inventory (d) Work-in-process inventory holding days 3 Finished Goods Conversion Period (a) Cost of goods sold* (b) Cost of goods sold per day (c) Finished goods inventory (d)Finished goods inventory holding days 4 Collection period Actual19X1 4. raw material inventory is controlled through control over purchases and production.582 18. During 20X1 the daily raw material consumption was Rs 12.5 lakh per day) and level of inventory (Rs 986 lakh) have increased.
9 735 43 d 4. 6. its net operating cycle is expected to increase from 136 days to 148 days How does a company manage its inventories.Summary of Operating Cycle Calculations (Number of Days) Actual GROSS OPERATING CYCLE 1 Inventory Conversion Period (i) Raw material (ii) Work. will have to negotiate higher working capital funds.087 16.653 12. It is expected to increase to 54 days holding from 38 days in the previous year.process (iii) Finished goods 2Debtors Conversion Period 3Gross operating cycle (1 + 2) 4Payment Deferral period NET OPERAING CYCLE (3-4) 68 22 38 128 43 171 35 136 Projected 60 25 54 139 47 186 38 148 We note a significant change in the company’s policy for 20X2 with regard to finished goods inventory. the company. debtors and suppliers’ credit? How can it reduce its operating cycle? The operating cycle concept as shown in Figure relates to a manufacturing firm. One reason could be a conscious policy decision to avoid stock out situations and carry more finished goods inventory to expand sales. Nonmanufacturing firms such as wholesalers and retailers will not have the manufacturing phase.006 22.2 1. in the absence of a significant increase in payables (creditors) deferral period.9 642 38d Table: . service and financial enterprises will not have inventory of goods Page 43 . But this policy has a cost.040 47d 6. **All sales are assumed on credit. Further. In the case of the firm in our example.(a) Credit sales (at cost)** (b) sales per day (c) debtor (d) debtors outstanding days 5 Creditors Deferral Period (a) Credit purchases (b) purchase per day (c) creditors (d) Creditors outstanding day *Depreciation is including.in.091 16. They will acquire stock of finished goods and convert them into debtors (receivable) and debtors into cash.9 454 35 d 8.
It helps in determining the optimum level of working capital in the firm. Has been made by two techniques vis.16 84836477.2 27218462.24 18632795. It facilitates the adequacy and management of working capital.4 . Such an analysis enables us to study upward and downward trend in current liabilities and its effect on the working capital position. In the present study the analysis of working capital of FCI ltd. Realizing the impotence of working capital in financial management the analysis of working capital becomes an essential phenomenon. The trend analysis is a tool of financial appraisal where the changes in the factors are compared with the base year assuming the base year as 100.(cash will be their inventory).51 35936348.16 77115112.6 2007-2008 836439.88 300805197. then lend (create debtors) and again convert lending into cash. it is a great achievement for the business. The management of working capital provides a careful inquiry into its components so as to control the working capital and to conserve it properly.92 356580000. They need to acquire cash.65 311027760. In the present study a statement – showing trend of working capital as well as its structure has been made.88 71220809.7 Page 44 2006-2007 855819. STRUCTURE AND TREND OF WORKING CAPITAL OF FCI 2005 TO2008 PERTICULAR CURRENT ASSETS CASH BANK LOAN AND ADVANCES DEBTORS 2005-2006 322389. It is it scientific and important study because each component of working capital has got the relationship of causes and effects. The process of measurement and analysis of working capital is performed on the basis of financial statements of the business enterprise for past few years. If there is an adequate amount of working capital and it is utilized in the right manner. Following table below shows the structure and trend of working capital of FCI Ltd. The excess of working capital causes financial stringency and brings the business to a standstill.. trend analysis and ratio analysis. current liabilities and working capital over a period of time. Their operating cycles will be the shortest. Analysis of working capital is an essential part of financial management. WORKING CAPITAL TREND ANALYSIS The working capital trend analysis represents a picture of variation in current assets. during the period under review.
converted into cash within one accounting year.STOCK TOTAL (A) CURRENT LIABILITIES CURRENT LIABILITIES AND PROVISIONS TOTAL (B) NET WORKING CAPITAL (A-B) 377580243.5 926798588.7 768561436.7 512950750. this ratio is also known as working capital ratio. This is computed by dividing the total current assets by the total current liabilities and is expressed as: The current assets of a firm represent those assets. The ratio analysis of working capital can be used by management as a means of checking upon the efficiency in working capital management of the company. Page 45 .4 STRUCTURE AND TREND OF WORKING CAPITAL OF FCI RATIO ANALYSIS OF WORKING CAPITAL Trend analysis shows the trend of current assets. which can be in the ordinary course of business. whereas. Current ratio Quick ratio Absolute ratio Stock or inventory ratio Working capital turnover ratio CURRENTRATIO Current ratio is one of the important ratios used in testing liquidity of a concern.8 442009648. current liabilities and working capital only.7 512950750. This is a good measure of the ability of company to maintain solvency over a short run.4 526439722 526439722 242121714. Excess of current assets over current liabilities is known as working capital and since these two (current assets and current liabilities) are used in current ratio therefore. The current liabilities are defines as obligation maturing within a short period (usually one accounting year). Following ratio haven used to analysis and interpret working capital of FCI ltd.4 427327384.7 347033040 465048573. it can be done easily by ratio analysis. It do not interpret the contribution of each item of working capital in the trend.8 859983790.8 484788939.2 442009648.
It is also known as the "acid-test ratio" or the "quick assets ratio". a heavy loss is likely to be suffered.With the help of this ratio the analyst can review the extent to which the company can covert such liabilities with current assets.” The current ratio is very useful as a measure of short terms debt prying ability but it is tricky to interpret this ratio. “it likewise measures the margin of safety provided for paying current debts in the event of a reduction in the values of current assets. the better the position of the company. The current ratio gives the analyst a general picture of the adequacy of the working capital of a company and ability of the company to meet its day-to-day payment obligation. Walker and Bough have the same view when they ay “a good current ratio may mean a good umbrella for creditors against the rainy days. Experts are of the view that the value of current assets should be at least double the amount if current liabilities. It shows the relationship of quick assets and current liabilities. The fundamental of this Ratio is to enable the financial management of a company to ascertain that would happen.”But to the management it reflects bad financial planning or presence of idle assets or over capitalization”. If current creditors press for immediate payment and either not Possible to push up the sales of closing or it is sold.7 Page 46 CURRENT LIABILITIES (C) 526439722 QUICK RATIO (B)/(C) 0. The term quick assets include all current assets except inventories and prepaid expenses. DURING 2005 TO 2008 YEAR (A) 2005-2006 QUICK ASSETS (B) 390981192. QUICK RATIO OF FCI. This problem arises because closing stock is two steps away from the cash and their price more or less uncertain according to market demand. The Ratio is calculated as following: Current Assets – Inventories Quick Ratio = Current Liabilities It is an indicator of a company's short-term liquidity.74 . The higher the quick ratio. The quick ratio measures a company's ability to meet its short-term obligations with its most liquid assets. QUICK RATIO The solvency of a company is batter indicated by quick Ratio.
2006-2007 2007-2008 INFERENCE:- 432656405.8 0. Quick ratio for the year 2007-08 is above the ideal standard. this ratio is calculated.67 512950750.04 36792167.7 0. The table shown on the next page reflects the absolute liquidity ratio FCI Ltd. which indicates that for every Re1 of current liability the company has Rs 1. Expressed in formula. at least 50% of their claim should be satisfied at once. It is 1. The idea behind the norm id that if all creditors for demand for payment. if current liabilities are to pay at once.7 442009648.12 526439722 0. Therefore.04:1. to measure the absolute liquidity of a business. only balance of Cash and marketable securities will be utilized.06 INFERENCE Page 47 . hence the company is in sound position in terms of working capital position.8 0. the ratio is: Cash + Marketable Securities= Absolute Liquidity Ratio Current Liabilities The term liquid assets include cash bank balance and marketable securities.04 Although it is less idle ratio still it has increasing trend that shows dairy’s improving condition of short term solvency of FCI.36 442009648. ABSOLUTE LIQUDITY RATIO The absolute liquid ratio between absolute liquid assets and current liabilities is calculated by dividing the liquid assets and current liabilities.07 28054901.7 512950750.84 1.9 461750014. ABSOLUTE LIQUIDITY RATIO OF FCI DURING 2005 TO 2008 YEAR YEAR (A) 2005-2006 2006-2007 2007-2008 ABSOLUTE CURRENT ABSOLUTE LIQUID ASSETS LIABILITIES RATIO (B) (C) (B)/(C) 18955185.04 of current assets.
24 times in the year 2005-06. For year 2007-08. the working capital turnover ratio further reduced to 8. Similarly. In a general sense. the higher the working capital turnover.8 INFERENCE: In spite of an increase in Net Working Capital. DURING 2005 TO 2008 YEAR (A) 2005-2006 2006-2007 2007-2008 NETSALES (B) 3207510314 3747805031 4266143965 WORKING CAPITAL (C) 242121714. The reduction in working capital turnover ratio is on account of massive growth in net working capital as compared to a slight growth in the sales of the company.4 347033040 484788939.24 10. It is making insecure creditors claim but it is getting increasing trend. as compared to the year 2005-07.2007. in the year 2007-08. which indicates the healthy picture of the company in terms of availability of working capital (quick assets) in order to meet current liabilities.4 CURRENT RATIO (B)/(C) 13. Ratios for all the above mentioned years right from 2005 up to 2008 are close to the standard.8 8. This provides some useful information as to how effectively a company is using its working capital to generate sales . the better because it means that the company is generating a lot of sales compared to the money it uses to fund the sales WORKING CAPITAL RATIO OF FCI LTD. It is needed to maintain this trend.8 times as compared to 13.current liabilities) to fund operations and purchase inventory. Page 48 . These operations and inventory are then converted into sales revenue for the company. the Working capital turnover ratio of FCI got reduced to 10. WORKING CAPITAL TURNOVER A measurement comparing the depletion of working capital to the generation of sales over a given period.8 times in the year 2006.This ratio is very below from idle ratio. 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. the ratio is well above the standard. SALES WORKING CAPITAL TURNOVER = WORKING CAPITAL A company uses working capital (current assets .
Page 49 . Financial appraisal techniques include ration analysis common size analysis trend analysis.CONCLUSION AND SUGGESTION Financial analysis is analysis of financial statements of and enterprise. fund flow analysis etc. Financial statement reorganized collection of data according to logical and constituent accounting procedures. Financial appraisal is scientific evaluation of profitability and financial strength of any business concern. is no exception to it. However financial statements in their traditional from giving historical data and information are of little us to these who use them to draw certain conclusion. these techniques may be applied in the financial appraisal of any entity and FCI Ltd.
• Inventory is the biggest items of balance sheet that must have demanded a large amount of maintaining cost.Expenses should be specially considered to be reduced. This is very good for FCI. • The service staff should be given proper training and better environment for work. It was found that the net profit before interest and tax of the FCI is showing increasing trends. Hence long term borrowing should be reduced so that the earnings are satisfactorily earmarked with them. Inventory should be reduced extent that would help to recover blocking money in inventory. • Dairy has to pay large fix interest charged. efficient inventory management should be done. Profit and loss account of FCI. Operating expenses administration:. Page 50 . The increase in the profits is nearly 24% more than previous year the reason is good sales growth between years. • Proper cost control is required and cost control technique should be adopted for it. So. For this following suggestion should be considered.PROFITABILITY The measurement of profitability is a tool of overall measurement of efficiency an overall study profitability of FCI has been Dade in relation to sales operating assets capital employed and its net worth.e. By analysis the working result i.
It is 1. The management should follow the same trend in near future too so to have considerable appreciation in working capital every year. • Absolute quick ratio for the years right from 2005 up to 2008 are close to the standard.01:1 indicates. The same position should be sustained in near future too.5:1). In near future it would be more profitable for the company. if the value of ratio gets increased to 11. in the year 2007-08 it increased to 8. in the year 2007-08. The company needs to further enhance the value of ratio. that for every Rs 1 of current liability the company Rs 2 of current assets. For year 2007-08.01:1. • As compared to year 2005-2006. the inventory turnover increased to 8. Similarly.14%.19 times.WORKING CAPITAL • In the year 2006-2007 the growth in working capital was 43. which is very satisfactory and as per the standard required (2:1). in the year 2006-07. which indicates that for every Re1 of current liability the company has Rs 1.8 times in the year 2006. • The Current Ratio for the year 2007-2008 has taken the Value of 2.04 of current assets.33%As compare to the year 2005-2006 similarly working capital in the year 2007-2008 has grown to 100.59 times. as compared to the year 2005-07. the ratio is well above the standard (0. • In spite of an increase in Net Working Capital. which indicates that the times taken in converting raw material into finished product and finally selling it got reduced considerably and hence indicates quick release of working capital.04:1. It would be better for the company if in near future it could further enhance the value of the ratio. which indicates more liquidity and hence more amount of working capital.2007.The current ratio of 2. which indicates the healthy picture of the company in terms of availability of working capital (quick assets) in order to meet current liabilities. the Working capital turnover ratio of FCI got reduced to 10. the working capital turnover Page 51 . Similarly. hence the company is in sound position in terms of working capital position.03% as compared to the working capital in the year 2005-2006. • Quick ratio for the year 2008-09 is above the ideal standard (1:1).
5th edition. (1978). Van Horn.8 times as compared to 13.R. Financial Management and Policy. Financial Management. P. J. (2002). financial management.ratio further reduced to 8. Ninth addition. UBS Publication New Delhi. The reduction in working capital turnover ratio is on account of massive growth in net working capital as compared to a slight growth in the sales of the company.nic. Fundamentals and Financial management. Publisher Dorling Kindersley India ltd.24 times in the year 200506. Financial statement for the year ended 2007-08 as obtained from FCI Annual-Report 2006-07 of FCI Study module on financial management Financial dailies Economic Times Business Standard Business Magazines Business India Business World Internet Portals www. The value of ratio could be better in near future.com Page 52 .Pandey.fciweb.M. Horne Wwachonicz.in www. BIBLIOGRAPHY I. Pearson publisher. 12th edition.Bhaduri (2005). MY Khan. Publisher McGraw Hill companies. 12th edition.K.wikipedia. if the growth in sales matches with the growth in net working capital.Jain (1981).
the industry can better assure consumers that its products are as safe as good science and technology allows. This effort is designed to focus specifically on food safety.GLOSSARY HACCP: HACCP stands for Hazard Analysis and Critical Control Points. Page 53 . public health protection is strengthened. By strictly monitoring and controlling each step of the process. By controlling major food risks. including food safety in retail establishments. or the Hazard Analysis Critical Control Point system. is a process control system that identifies where hazards might occur in the food production process and puts into place stringent actions to take to prevent the hazards from occurring. HACCP is an industry-wide effort approved by the scientific community as well as regulatory and industry practitioners. HACCP is important because it prioritizes and controls potential hazards in food production. chemical and physical contaminants. such as microbiological. By reducing food borne hazards. HACCP. there is less chance for hazards to occur.