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financial analysis



SUBMITTED TO: Mrs Lecturer Department of management studies



Shiksha Nagar, Lamachaur, Haldwani (Affiliated to Uttarakhand Technical University) Dehradun


I hereby declare that I have undergone training at microqual techno pvt ltd. for a Period of weeks from 10 june to 4 aug. This report is being submitted in partial fulfillment of MASTER OF BUSINESS ADMINISTRATION under UTU.

This project has not been presented in any seminar or submitted elsewhere for the award of any degree or diploma.



Chapter 1 Introduction Objectives Methodology Limitation Scope Chapter 2 Industrial overview Company profile Chapter 3 Data analysis Chapter 4 Finding Suggestion Conclusion Chapter 5 Bibliography

Working Capital Management
Decisions relating to working capital and short term financing are referred to as working capital management. These involve managing the relationship between a firm's short-term assets and its short-term liabilities. The goal of working capital management is to ensure that the firm is able to continue its operations and that it has sufficient cash flow to satisfy both maturing shortterm debt and upcoming operational expenses.

By definition, working capital management entails short term decisions generally, relating to the next one year periods - which are "reversible". These decisions are therefore not taken on the same basis as Capital Investment Decisions (NPV or related, as above) rather they will be based on cash flows and / or profitability.

One measure of cash flow is provided by the cash conversion cycle the net number of days from the outlay of cash for raw material to receiving payment from the customer. As a management tool, this metric makes explicit the inter-relatedness of decisions relating to inventories, accounts receivable and payable, and cash. Because this number effectively corresponds to the time that the firm's cash is tied up in operations and unavailable for other activities, management generally aims at a low net count.

In this context, the most useful measure of profitability is Return on capital (ROC). The result is shown as a percentage, determined by dividing relevant income for the 12 months by capital employed; Return on equity (ROE) shows this result for the firm's shareholders. Firm value is enhanced when, and if, the return on capital, which results from working capital management, exceeds the cost of capital, which results from capital investment decisions as above. ROC measures are therefore useful as a management tool, in that they link short-term policy with long-term decision making. See Economic value added (EVA).

Management Of Working Capital

Guided by the above criteria, management will use a combination of policies and techniques for the management of working capital. These policies aim at managing the current assets (generally cash and cash equivalents, inventories and debtors) and the short term financing, such that cash flows and returns are acceptable.

Cash management. Identify the cash balance which allows for the business to meet day to day expenses, but reduces cash holding costs.

Inventory management. Identify the level of inventory which allows for uninterrupted production but reduces the investment in raw materials - and minimizes reordering costs - and hence increases cash flow; see Supply chain management; Just In Time (JIT); Economic order quantity (EOQ); Economic production quantity Debtors management. Identify the appropriate credit policy, i.e. credit terms which will attract customers, such that any impact on cash flows and the cash conversion cycle will be offset by increased revenue and hence Return on Capital (or vice versa); see Discounts and allowances. Short term financing. Identify the appropriate source of financing, given the cash conversion cycle: the inventory is ideally financed by credit granted by the supplier; however, it may be necessary to utilize a bank loan (or overdraft), or to "convert debtors to cash" through "factoring".

The objectives of the study are as follows: To study the working capital management of Microqual Techno Pvt. Ltd. To understand the different methods of managing inventory at different levels of production in Microqual Techno Pvt. Ltd. To analyze the impact of working capital policies on the overall financial performance of a business concern. To learn the practical techniques adopted for Ratio Analysis.

To analyze the existing and future analysis based on Ratio Analysis

Corporate Mission Objective

1.Without continual growth and progress, such words as improvement achievement and success have no meaning.
-Benjamin Franklin

Growth is the most integral part of the Organization.

2. Customer Satisfaction is the Ultimate target. 3. We are committed to give Solutions to our customers rather than only products.

The methodology describes the process of research work. This contains the overall research design and the data collection methods.

Topic of Research:
The topic of the present study is Information Memorandum.

Data Collection Methods:

Data was collected by the review of published literature that includes official documents of Microqual Techno Pvt. Ltd. and other related documents of the company.

Secondary Data
The secondary data was gathered from the books related to finance and Information Memorandum and articles from websites, Accounting Standard published by institute of Chartered accountants of India.

Primary Data
The primary data has been collected from various employees of the company and onsite observation


This study is limited to two year. The study is restricted to the application of ratio analysis. This study is limited to only one company. The data of this study has been primarily taken from company

annual reports only.

This section provides an overview of key markets that Microqual serves in terms of growth dynamics - till date and going forward. As demand for Microqual solutions is directly correlated to mobile base stations (BTS) installed, this section also outlines in particular the envisaged rollout of mobile communications infrastructure in India in the coming few years. The Indian telecom industry has been witnessing explosive growth rates since 1997. The beginning of internet and mobile telephony coupled with Telecom Regulatory Authority of India (TRAI) coming into existence provided the foundation for this growth. And, with the FDI limit now hiked to 74%, investments of over USD 15 Billion are expected in this sector (over the next 5 yrs). During the year 2005-06, the mobile subscriber base has grown by over 75% from 52 million to over 91 million. The total telecom subscriber base is expected to cross 200 million by the end of 2008-09, at a CAGR of over 30%. The tele-density has also gone up from 2 per cent in 1999 to over 10 per cent currently, and is set to cross 20 percent in the next 5 years. With the government stressing on increasing the rural tele-density, the revenues from

telecoms is expected to almost triple to USD 23-25 billion by 2009 from USD 9 billion in 2002.


Microquals domain of business activities is best understood when viewed in context of its place in the communications ecosystem. The mobile communications ecosystem is composed of three primary participants the Services Operators (Telcos), Core Equipment Suppliers (OEMs) and Infrastructure Solution providers. Key players in each of the areas are illustrated in the accompanying graphic. Microqual is a firmly entrenched player in the RF passive components space which is one of the critical parts of the communications value chain. The RF passive components and installation kits space is relatively fragmented with small, medium and large sized companies specializing in particular areas likes antennae, repeaters, RF cables, electrical installation kits etc. Microqual has over the years pioneered a unique engagement model with its clients in this space wherein it aggregates full system solutions for all three kinds of sites i.e. In Building, Outdoor and Repeater Sites.

In doing so, the Company manufactures most of the critical RF passive components and buys-out hardware items in kitting together a preconfigured solution for its clients. This engagement model has met with highly encouraging response from its clients with the key benefit accruing to them in the form of a complete outsource of configuring and putting together over 40 critical but disparate items of infrastructure (which activity when performed in-house consumes substantial organizational resources for the clients). Further, the Company has over the years developed substantial organizational capabilities and competence in the area of wireless communications infrastructure solutions and particularly in the areas of RF passive components.


Mr. Mahesh Choudhary (Age: 27 yrs, Designation: MD & CEO)

Mr. Mahesh is the principal founder and driving force behind Microqual. He co-founded the company (with family) post his business studies. He is the chief architect of the companys vision and strategy and has guided the Company in becoming the 7th fastest growing tech company in India (Deloitte survey). Mr. Mahesh discharges executive responsibilities in overseeing all strategic and tactical business matters at Microqual . Mr. Varun Choudhary (Age: 22 yrs, Designation: Sales & Marketing Director) Mr. Varun joined Microqual fresh post graduate business studies. He has grown to successfully handle the complete Sales & Marketing portfolio at the Company. Mr. Sushil Choudhary (Age: 38 yrs, Designation: Chief Operating Officer) Graduated in Science (B.Sc. Chem), Mr. Sushil discharges executive responsibilities spanning new initiatives and projects (especially Uttarakhand & Aurangabad). He has honed his operations expertise in managing Prem Dye Chem Industries (the family business) since the last 15 years in managing operating functions of Sales (Exports), Production (4 Units- 2 in Panvel & 2 in Vapi) & Finance. Mr. Premchand Choudhary, Mr. Poonamchand Choudhary, Mr. Balkrishan Choudhary (Age: Late 50s, Designation: Directors)

The elder members of the Choudhary family are members of the Board at Microqual. They come from business backgrounds of running the family enterprise (Prem DyeChem Industries Pvt. Ltd.) over the last 28 years. They serve in mature guidance and prudent governance of the Company based on values and practices established over time in the family businesses. Mr. B.K Pandey (Age: 59 yrs, Designation: Plant Head) Plant head of rudrapur branch very rich work experience for last 30 years in Auto Component manufacturing


Company Name Business Type Product/Service

MICROQUAL TECHNO (P) LTD Manufacturer Network communications, communication cables, GPS

Company Address:

6, Amruth Nagar Main Road, Konanakunte Cross, Bangalore, Karnataka, India 101 - 500 People

No. of Total Employees:

Ownership & Capital Year Established: Legal Representative/Business Owner: Trade & Market Main Markets: Total Annual Sales Volume: Factory Information No. of R&D Staff: Contract Manufacturing: 11 - 20 People OEM Service Offered Southeast Asia Below US$1 Million 1999 MAHESH CHOUDHARY

Microqual Techno Pvt. Ltd. (Microqual / the Company) is a pioneer in provisioning passive microwave components, services and solutions to Mobile Telecom Operators and Telecom Equipment Manufacturers in India. The company is a specialist in the design, manufacture and sales of

components, systems and services for wireless applications (GSM, CDMA, WiMAx, etc). The company has a leading position in India in the market for In-Building Solutions. This Mumbai based company has been rated and awarded for being the 7th fastest growing technology company in India (and 103rd in Asia) in recent Deloitte Survey (early 2006). The CEO has also been nominated recently (Oct 2006) for the top 10 fast a growth company executives survey. With production facilities in Bangalore, the Company aggregates components based wireless telecom solutions. These are of the nature of Inbuilding, Outdoor and Repeater site infrastructure solutions which are aggregated using passive and active RF components viz. antennae, repeaters, combiners, splitters, couplers, filters, duplexers, RF cables etc. Against the backdrop of the massive RFPs of BSNL and Bharti telecom, and towards addressing the opportunities in the Indian mobile telecom market in general (aggregating to Rs.70 Bn over the next 3-5 yrs for Microquals product markets), the Company intends to aggressively gear up backend operations by Setting up a 2nd manufacturing unit for passive components at Uttarakhand, India Setting up an RF Cables manufacturing unit at Aurangabad, Maharashtra, India Post this expansion, the Company is expected to emerge as a clear dominant player in the RF / Wireless infrastructure solutions space in India. Towards financing the growth plan in this respect, and more specifically with respective to setting up manufacturing facilities in Maharashtra and Uttarakhand and towards meeting heightened working capital requirements

The Company intends to raise equity funds to the tune of USD 10 Million.


Promoted by Mr. Mahesh Choudhary and family, Microqual is a closely held company actively managed by its promoters. The promoter family hail from a background in manufacture and marketing of dyes & chemicals. Strategic and tactical fronts are managed at the Company by Mr. Mahesh, Mr. Varun and Mr. Sushil Choudhary. These three cousins run the company hands on with shared responsibilities in the areas of business development, manufacturing, sales & marketing and finances. At operating levels, the Company is managed professionally by specialists in the areas of RF passive components design and manufacturing.

Performance Highlights:
Ramping up from revenues of Rs. 25 Mn in 2003, Microqual has posted impressive growth (CAGR of 93%) over three years and has closed FY 2006 with revenues of ~ Rs. 180 Mn. The Company has clocked revenues of

Rs.150 Mn for H12007 and is on track to deliver upwards of Rs. 350 Mn for FY 2007. The Company has been ranked - 7th fastest growing tech company in India (and 103rd in Asia) by a recent Deloitte survey.

Microqual has served and has strong relationships with nearly the entire spectrum of mobile telcos in India. The company provisions its solutions by joining hands with equipment manufacturers like Ericsson, Motorola, Nokia et al that undertake O&M and / or network roll out services for or on behalf of the Telcos. A representative list of clients includes Telcos: Orange (Mumbai, Kolkata), Vodafone (Delhi, Bangalore, Kolkata, Chennai), Airtel (Mumbai, Chennai, Bangalore, Bhopal, Cochin, Coimbatore), BPL (Mumbai, Maharashtra), Tata Telecom (Mumbai), Shyam Telelink (Rajasthan), Tata Cellular (Hyderabad), Spice Telecom (Punjab), RPG Cellular / Aircel (Chennai), Idea (Delhi) Telecom Equipment Manufacturers: Erricson, Alcatel, Nortel, Nokia, Motorola

Investment Highlights
Microquals growth story is interwoven with the explosive growth in telecom in India. With wireless telecom (read: mobile services GSM, CDMA, WiMAX etc) leading the growth going forward, the company is uniquely positioned to optimally exploit this immense market opportunity. The big opportunity in the immediate future is w.r.t to the public RFPs of BSNL and Bharti telecom. Coupled with strong apex guidance from Vodafone, Reliance telecom, Idea and other telcos, the mobile telecom infrastructure spend over the next 3-5 yrs is anticipated to be the biggest ever globally. Microqual management believes they are well positioned to garner a significant portion of these spends which aggregate to over Rs.70 Bn for the next 3-5 yrs (relating to product markets served by Microqual). Going ahead, the business plan of the Company looks at aggressively ramping up revenues to around Rs.3.5 Bn in the next 3 years. Also, being the sole domestic manufacturer of significant components of bundled wireless solutions, the Company would swing significant clout in the Indian market and is anticipated to emerge as a clear dominant player in this arena. Given Microquals strong relationships, firm entrenchment in the market and proven execution capabilities the Company stands well heeled to effectively meet the massive market demand coming up. This coupled with

its strategic growth initiatives which afford a clear and strong competitive advantage; the Company is well poised to deliver superlative performance with respect to its aggressive growth plans for the next 3-5 yrs.

The supply chain function at Microqual Techno Pvt. Ltd comprises production planning, dispatch, warehousing and transportation. Since the front end of the supply chain ends at the Clearing Forwarding Agent (CFA) or the stockiest, production planning and dispatch is done to meet the requirements of the CFA. The entire supply chain has been knit together into an efficient unit through Project Garuda an initiative that integrates IT tools and compensation schemes that measure the health of the supply chain. In this, the first year of its implementation, Project Garuda lays down a set of measurable parameters to test the health of the supply chain. The system is divided into two tiers and puts in an evaluation mechanism for each element of the supply chain from forecasting and production planning to inventory management. By utilizing this matrix as a tool for monitoring penalizes performance, the company has been able to devise a variable pay structure that negative deviations. On the IT front, there is complete internal networking through a new SAP platform. The company is exploring to move forward and reach out to stockiest and integrate them into Daburs ERP. This will go a long way to improve the quality of forecasts provided for Production planning.

Recognizing that people are key constituents of Microqual Techno Pvt. Ltd and represent the DNA of the organization, we have been constantly raising our own standards of being an employee friendly organization. The year under review witnessed a significant achievement: of being listed as a Great Place to Work, in a survey conducted by Grow Talent & Company and Great Place to Work Institute, USA. Microqual Techno Pvt. Ltd was listed as the 10th Great Place to Work. The results were published in Business World dated February2006.

As planned, the Companys new SAP based ERP went live on 1 April 2006 across all its operations apart from those in Bangladesh, Nepal and Egypt. Despite initial teething problems the system has been broadly stabilized. We believe that SAP implementation would not only give the Company greater operational flexibility and uniformity but also provide it the necessary tools to make informed and timely strategic business decisions. Going forward, the Company will be rolling out SAP to its businesses in Bangladesh, Nepal and Egypt. In addition, and more importantly, it will also aim at leveraging the entire gamut of enhanced benefits available in the new system.


Research and Development (R&D) provides Microqual Techno Pvt. Ltd with critical edge in the market. The activities are focused around two basic domains. First, to continuously develop new products; and second, to test and guarantee their efficacy. R&D activities include research on Ayurvedic and herbal products, organic substances, photochemical, tissue culture, foods, cosmetics, oral care and other personal care. During 2005-06, the company displayed its efficiencies in terms of high speed to market by successfully developing its Vatika Honey & Saffron soap. The entire development process from concept to delivery in the market was carried out in-house and at very fast pace. The companys products regularly go through clinical research and toxicity studies. This is done in collaboration with external organizations like the Microqual Techno Pvt. Ltd Dhanwantry hospital in Chandigarh and a number of other renowned institutions.

Microqual Techno Pvt. Ltd has a robust and well-structured risk management system in place. The entire system is driven by its people and the process goes deep down into lower layers of management. The Chief Risk Officer (CRO) of the company, who is responsible for and ensures

Effective Risk Management both risk identification and mitigation, champions the risk management system. A team of risk officers at each company location supports the CRO. Each employee is entitled to identify risk and report it to the concerned risk officer who in turn reports it to the CRO. The risks are reported in the Risk Register and classified in terms of their impact and probability of occurrence. The Risk Register is an inventory of risks affecting Microqual Techno Pvt. Ltd covering its various functions like marketing, operations, regulatory affairs, finance and human resource development. The risks are further mapped in terms of mitigation action to be taken and the people responsible for taking the actions. The Risk Register is reviewed periodically by senior management and is presented to the Audit Committee on a quarterly basis. While we have a systematic risk identification and mitigation framework in place, there are certain business risks, which are external and intrinsic to the company. Over these risks the company has very little control. Some of these include a general downturn in market demand conditions, loss of value to the ayurveda equity due to false claims about the product constitution or efficacy, look-alike products in the market, escalation in raw material prices and changes in regulatory frameworks pertaining to health related issues. In the past, all our transactional data was stored in a central server at our corporate office in Ghaziabad, UP. One of the important risk reduction initiatives taken during the year was setting up of a disaster recovery site in Mumbai where all the data is stored as a back up.


Microqual Techno Pvt. Ltd has a robust internal audit and control system which is a process overseen by the Board of Directors, management and other personnel, and provides reasonable assurance regarding the effectiveness and efficiency of operations, reliability of financial reporting, and compliance with applicable laws and regulations. Price Waterhouse Coopers is the internal auditor for the company and its subsidiaries. The Companys Internal Audit function is staffed with qualified and experienced people. The Standard Operating Procedures (SOPs) put in place by the company are in line with the best global practices, and have been laid down across the process flows, along with authority controls for each activity. Microqual Techno Pvt. Ltd has implemented the COSO framework for internal controls and adequacy of internal audit. Under this framework, various risks facing the company are identified and assessed routinely across all levels and functions and suitable control activities are designed to address and mitigate the significant risks.


Statements in this management discussion and analysis describing the Companys objectives, projections, estimates and expectations may be forward looking statements within the meaning of applicable laws and regulations. Actual results may differ substantially or materially from those expressed or implied. Important developments that could affect the Companys operations include a downward trend in the domestic FMCG industry, rise in input costs, exchange rate fluctuations, and significant changes in political and economic environment in India, environment standards, tax laws, litigation and labor relations. In the segment wise financials the overseas business is included therefore the financials as per segment reporting above and those stated under the management discussion of each business may differ to that extent.


Annual Report has a detailed Chapter on Management Discussion and Analysis which forms part of this report.

Disclosures on materially significant related party transactions i.e. transactions of the Company of material nature, with its promoters, the Directors or the management, their subsidiaries or relatives, etc. that may have potential conflict with the interests of the Company at large. Dealings in Companys shares on the part of persons in management have been reported to Board periodically and whenever required to the Stock

Exchanges. The material, financial and commercial transactions where persons in management have personal interest exclusively relate to transactions involving Key Management Personnel forming part of the disclosure on related parties referred to in Note in Schedule P to Annual Accounts which was reported to Board of Directors.

Good corporate governance and transparency in actions of the management is key to a strong bond of trust with the Companys stakeholders. Microqual Techno Pvt. Ltd understands the importance of good governance and has constantly avoided an arbitrary decision-making process. Our initiatives towards this end include:

Professionalisation of the board Lean and active Board(reduced from 16 to 10 members) Less number of promoters on the Board More professionals and independent Directors for better management Governed through Board committees for Audit, Remuneration, Shareholder Grievances, Compensation and Nominations Meets all Corporate Governance Code requirements of SEBI

In Microqual Techno Pvt. Ltd knowledge and technology are key resources which have helped the Company achieve higher levels of excellence and efficiency. Towards this overall goal of technology-driven performance,

Microqual Techno Pvt. Ltd is utilizing Information Technology in a big way. This will help in integrating a vast distribution system spread all over India and across the world. It will also cut down costs and increase profitability.

Migration from Baan and Mfg ERP Systems to centralized SAP ERP system for all business units. Implementation of a country wide new WAN Infrastructure for running centralized ERP system. Setting up of new Data Centre at KCO Head Office. Extension of Reach System to distributors for capturing Secondary Sales Data. Roll out of IT services to new plants and CFAs.

Future Challenges
Forward Integration of SAP (system application and product database) with Distributors and Stockiest.

Backward Integration of SAP with Suppliers. Implementation of new POS system at Stockiest point and integration with SAP-ERP. Implementation of SAP HR and payroll. SAP Roll-out to DNPL and other new businesses.

SAP is a part of ERP. There has been implementation of SAP (ECC-6.0 version) from Aug.08 to Jan.09. It majorly covers following areas: PP- production planning MM-material management FICO-financial & controlling SD-sales and distribution Bank and cash entries, preparation of journals, preparing vendors are dealtin FICO


Working Capital is the money used to make goods and attract sales. The less Working Capital used to attract sales, the higher is likely to be the return on investment. Working Capital management is about the commercial and financial aspects of Inventory, credit, purchasing, marketing, and royalty and investment policy. The higher the profit margin, the lower is likely to be the level of Working Capital tied up in creating and selling titles. The faster that we create and sell the books the higher is likely to be the return on investment. Efficient management of working capital is extremely important to any organisation. Holding too much working capital is inefficient, holding too little is dangerous to the organisation's survival.Working capital is the everyday term for what accountants call net current assets. The working capital figure is the total of current assets minus the total of current liabilities. The main current assets are stock, debtors and cash. The current liabilities are creditors and accrued expenses. The key factor in the word

"Current" is that they are expected to turn into cash, or be paid from cash, within twelve months. As a general rule the organisation wants as little money tied up in working capital as possible. However, there are always trade-offs. The most obvious problem is running out of cash so you cannot pay the wages, or being unable to provide a service because you have run out of a vital resource: for example, a meals service being unable to produce the required number of meals because they did not have enough foodstuffs in stock. In order to assess whether you have a "safe" amount of working capital there are two important calculations you can make:

The Current Ratio

The Current Ratio is the relationship between the total current assets and the total current liabilities. Generally speaking a service organisation should have about 1.25 current assets for every 1 of current liabilities. If there are significant trading operations such as shops or mail order selling then the ratio should be closer to 2 of current assests for every 1 of current liabilities.

The Quick Ratio or "Acid Test"

The Quick Ratio is the relationship between the total of debtors and cash compared with current liabilities. Generally the debtors and cash together should approximately equal the current liabilities.

Working capital is the money you will need to keep your business going until you can cover your operating costs out of revenue. As a small business owner, it will be wise to have enough working capital on hand to cover items such as the following during the first few months that you are in business: Replacing inventory and raw materials: You will need to fund the purchase of inventory out of working capital until you start to see cash from sales, which could take months. Paying employees: Even the most loyal worker wants to get paid on time, regardless of how much or how little cash your firm earns during its first months. Paying yourself: Unless you have made other arrangements, you will need to withdraw some money to support yourself. Debt payments: If you have borrowed money to get started, you probably have to begin repaying it right away. Missing your first loan payments will not do your credit rating any good. An emergency fund:

you need some cash on hand to cover unforeseen shortfalls that may result from any number of factors such as delays in getting your space ready, a slow paying client, or slow business. A managerial accounting strategy focusing on maintaining efficient levels of both components of working capital, current assets and current liabilities, in respect to each other. Working capital management ensures a company has sufficient cash flow in order to meet its short-term debt obligations and operating expenses. Implementing an effective working capital management system is an excellent way for many companies to improve their earnings. The two main aspects of working capital management are ratio analysis and management of individual components of working capital. A few key performance ratios of a working capital management system are the working capital ratio, inventory turnover and the collection ratio. Ratio analysis will lead management to identify areas of focus such as inventory management, cash management, accounts receivable and payable management.


If your business is in its first year of operation and has not yet become profitable, then you might have to rely on equity funds for short-term

working capital needs. These funds might be injected from your own personal resources or from a family member, friend or third-party investor.

Trade Creditors:
If you have a particularly good relationship established with your trade creditors, you might be able to solicit their help in providing short-term working capital. If you have paid on time in the past, a trade creditor may be willing to extend terms to enable you to meet a big order. For instance, if you receive a big order that you can fulfill, ship out and collect in 60 days, you could obtain 60-day terms from your supplier if 30-day terms are normally given. The trade creditor will want proof of the order and may want to file a lien on it as security, but if it enables you to proceed, that should not be a problem.

Factoring is another resource for short-term working capital financing. Once you have filled an order, a factoring company buys your account receivable and then handles the collection. This type of financing is more expensive than conventional bank financing but is often used by new businesses.

Line of credit:

Lines of credit are not often given by banks to new businesses. However, if your new business is well-capitalized by equity and you have good collateral, your business might qualify for one. A line of credit allows you to borrow funds for short-term needs when they arise. The funds are repaid once you collect the accounts receivable that resulted from the short-term sales peak. Lines of credit typically are made for one year at a time and are expected to be paid off for 30 to 60 consecutive days sometime during the year to ensure that the funds are used for short-term needs only.

Short-term loan :
While your new business may not qualify for a line of credit from a bank, you might have success in obtaining a one-time short-term loan (less than a year) to finance your temporary working capital needs. If you have established a good banking relationship with a banker, he or she might be willing to provide a short-term note for one order or for a seasonal inventory and/or accounts receivable buildup.


These debt securities are promises made by the issuing company to pay the principal when due and to make timely interest payments on the unpaid balance.

Long-term loan:
Commercial banks make loans to borrowers who can repay the principal with interest, and they will often require collateral for upwards of 85 - 90 percent of the loan value. You will need to demonstrate a track record of sales revenues to justify your ability to make periodic installments. Unfortunately, as a small business or start up, your fledgling business idea probably doesn't have either the sufficient assets or customer base to warrant serious consideration for a bank loan.


Availability of Raw Material Regularly Full Utilization of Fixed Assets. Increase in Credit Rating. Advantage of Favorable Business Opportunity. Facilitates the distribution of Dividend. Facility to Obtaining Bank Loan. Increase in Efficiency of Management. Meeting unseen contingencies.


Nature of Business Size of Business Growth & Expansion plan of Company Business Fluctuations Credit Policy relating to Sales Credit Policy relating ti Purchase Availability of Raw Material Availability of Credit from Banks. Level of taxes Dividend & depreciation policy Efficiency of Management


The objective of working capital management is to maintain the optimum balance of each of the working capital components. This includes making sure that funds are held as cash in bank deposits for as long as and in the

largest amounts possible, thereby maximizing the interest earned. However, such cash may more appropriately be "invested" in other assets or in reducing other liabilities.

Working capital management takes place on two levels: Ratio analysis can be used to monitor overall trends in working capital The individual components of working capital can be effectively

and to identify areas requiring closer management (see Chapter Three).

managed by using various techniques and strategies (see Chapter Four). When considering these techniques and strategies, departments need to recognize that each department has a unique mix of working capital components. The emphasis that needs to be placed on each component varies according to department. For example, some departments have significant inventory levels; others have little if any inventory. Furthermore, working capital management is not an end in itself. It is an integral part of the department's overall management. The needs of efficient working capital management must be considered in relation to other aspects of the department's financial and non-financial performance.

Working Capital Management Manages Flow of Funds

Liquidity to Meet Day-to-Day Expenses and Liabilities is the Goal

Working capital is the cash needed to carry on operations during cash conversion cycle, i.e. the days form paying for raw material to collecting cash form customer.

Raw materials and operating supplies must be bought and stored to ensure uninterrupted production. Wages, salaries, utility charges and other incidentals must be paid for converting the materials into finished products. Customers must be allowed a credit period that is standard in the business. Only at the end of this cycle does cash flow in again.

Working Capital Management Approach

Working capital management involves:

Ratio Analysis:

Ratios such as Working Capital Ratio, Inventory Turnover Ratio and

Receivables Collection Ratio can focus attention on problem areas for management action

Managing Different Components:

Specific solutions are available to manage the individual components

of working capital such as inventory, receivables, cash and financing

Managing Working Capital Components

Management of associated cash inflows and outflows is the basic aim of managing each of the components. Selected solutions must result in acceptable cash flows, and also produce a return in excess of costs. Inventory Management: Inventories of materials are needed to ensure smooth flow of production. Inventories need money to buy, space to store and wages to handle. On the other hand, if you purchase too low quantities, the frequency of orders and incidental material handling costs go up. So you have to identify an economic order quantity that balances the costs. Solutions such as SCM and Just in Time procurement have also been developed to manage inventories.

Receivables Management:
Giving credit has become a standard business practice and it means that collection of cash from customers has to be postponed. Offering discounts to customers who pay promptly (within 10 days, for example) and accounts receivable funding through factoring operations are some important ways to manage receivables.

Cash Management:
Cash in the till does not earn any income. On the other hand it can help:

To exploit opportunities for short-term profitable deployment, Meet maturing liabilities if expected inflows do not materialize and Ensure uninterrupted completion of day-to-day transactions.

Considering these factors, policies are developed for the amount of cash balance to be maintained at all times. Short-Term Financing: Supplier credit is a significant source of working capital finance. You can buy raw materials and use it for 60 or so days before paying for it. During this period you might be able to produce and sell products, and generate funds to pay the supplier in part. The factoring operations mentioned earlier can generate additional funds. Any remaining shortfall is typically financed with short-term bank loans or lines of credit (where you draw funds only if and when needed). Cash Flow Forecasts: Cash flow forecasts are prepared to estimate cash outflows and inflows, and identify the timing and extent of shortfalls in funds availability. Based on these estimates, bank finance or other funding options can be arranged in time. Working capital is distinct from fixed capital in that it is short-term in nature. There is no long-term commitment of funds. As against this, even a short-term liquidity problem can affect the profitability of the business. If the liquidity problem persists, the very survival of the business can be in danger. This is why working capital management has become a critical function.


It is the lifeblood of a company and the most important barometer that investors have. For two main reasons, operating cash flow is a better metric of a company's financial health than net income. First, cash flow is harder to manipulate under GAAP than net income (although it can be done to a certain degree). Second, 'cash is king' and a company that does not generate cash over the longterm is on its deathbed. By operating cash flow I don't mean EBITDA (earnings before interest taxes depreciation and amortization). While EBITDA is sometimes called "cash flow", it is really earnings before the effects of financing and capital investment decisions. It does not capture the changes in working capital (inventories, receivables, etc.). The real operating cash flow is the number derived in the statement of cash flows.

Overview of the Statement of Cash Flows:

The statement of cash flows for non-financial companies consists of three main parts:

Operating flows - The net cash generated from operations (net income and changes in working capital). Investing flows - The net result of capital expenditures, investments, acquisitions, etc. Financing flows - The net result of raising cash to fund the other flows or repaying debt.

By taking net income and making adjustments to reflect changes in the working capital accounts on the balance sheet (receivables, payables, inventories) and other current accounts, the operating cash flow section

shows how cash was generated during the period. It is this translation process from accrual accounting to cash accounting that makes the operating cash flow statement so important.


The key differences between accrual accounting and real cash flow are demonstrated by the concept of the cash cycle. A company's cash cycle is the process that converts sales (based upon accrual accounting) into cash as follows:

Cash is used to make inventory. Inventory is sold and converted into accounts receivables (because customers are given 30 days to pay). Cash is received when the customer pays (which also reduces receivables).

There are many ways that cash from legitimate sales can get trapped on the balance sheet. The two most common are for customers to delay payment (resulting in a build up of receivables) and for inventory levels to rise because the product is not selling or is being returned.


A measurement comparing the depletion of working capital to the generation of sales over a given period. This provides some useful information as to how effectively a company is using its working capital to generate sales.

A company uses working capital (current assets - current liabilities) to fund operations and purchase inventory. These operations and inventory are then converted into sales revenue for the company. 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. In a general sense, the higher the working capital turnover, the better because it means that the company is generating a lot of sales compared to the money it uses to fund the sales.


A short-term loan which provides money to buy earning assets. A loan whose purpose is to finance everyday operations of a company. A working capital loan is not used to buy long term assets or investments. Instead it's used to clear up accounts payable, wages, etc. Working capital loan funds provide your business the cash it needs to keep growing until you can cover all operating expenses out of revenue. Without a working capital loan most businesses are unable to generate enough revenue to stay afloat. These funds provide access to cash which can be used to pay rent or mortgage payments, utilities, marketing expenses, inventory, employees, etc. Obtaining capital through this method can be difficult for

many businesses, so it is essential to have good business credit scores established. Building solid business credit scores are the key to obtaining substantial working capital loan funds that can be used to grow your business. Not all types of working capital require business credit history, but it is important to have that in place. Lenders use your business credit scores just like they use personal credit scores when evaluating whether you are worthy of receiving capital. Making sure that your lines of credit help build your credit will put you in the right direction to getting the loans that your business needs to succeed. There are five common types of a working capital loan. They include: Equity: Obtained from personal resources like equity in your house, funds from friends or family members, or from angel investors. Trade Creditor: A trade creditor will extend a loan to you so you can purchase a large quantity from their place of business. They will often check your business credit history before extending credit to you. Factoring/Advances: You can sell future credit card receipts for instant capital if your business accepts credit cards. Another option is to sell your accounts receivable to a factoring company who handles the collection.

Line of Credit: Your business can apply for a bank line of credit, giving you the ability to borrow for short term needs. Good business credit scores will assist with your approval for a line of credit.

Short term loan: A bank can also extend credit to allow you to purchase inventory for a season. This note will typically be less than a year. Again, good established business credit scores will nearly guarantee access to this kind of funding.

Inventories are lists of stocks-raw materials, work in progress or finished goods-waiting to be consumed in production or to be sold. The total balance of inventory is the sum of the value of each individual stock line. Stock records are needed:

to provide an account of activity within each stock line; As evidence to support the balances used in financial reports.

A department also needs a system of internal controls to efficiently manage stocks and to ensure that stock records provide reliable information. Departmental financial reports show only the total inventory balance. Analysts from outside the department can examine this balance by using ratio analysis or other techniques. However, this gives only a limited assessment of inventory management and is not adequate for internal

management. Good financial management necessitates the careful analysis of individual inventory lines. Inventory management is an important aspect of working capital management because inventories themselves do not earn any revenue. Holding either too little or too much inventory incurs costs. Costs of carrying too much inventory are:

opportunity cost of foregone interest; warehousing costs; damage and pilferage; obsolescence; Insurance. stock out costs: - Lost sales; - delayed service. ordering costs:

Costs of carrying too little inventory are:

- Freight; - order administration; - loss of quantity discounts. Carrying costs can be minimized by making frequent small orders but these increases ordering costs and the risk of stock-outs. Risk of stock-outs can be reduced by carrying "safety stocks" (at a cost) and re-ordering ahead of time. The best ordering strategy requires balancing the various cost factors to ensure the department incurs minimum inventory costs. The optimum inventory position is known as the Economic Reorder Quantity (ERQ).

There are a number of mathematical models (of varying complexity) for calculating ERQ. (Any standard accounting text will provide examples of these). Analytical review of inventories can help to identify areas where inventory management can be improved. Slow moving items, continual stock outs, obsolescence, stock reconciliation problems and excess spoilage are signals that stock lines need closer analysis and control. However, it is important to keep an overall perspective. It is not cost-effective to closely manage a large number of low value inventory lines, nor is it necessary. A usual feature of inventories is that a small number of high value lines account for a large proportion of inventory value. The "80/20" rule (PARETO) predicts that 80% of the total value of inventory is represented by only 20% of the number of inventory items. Those high value lines need reasonably close management. The remaining 80% of inventory lines can be managed using "broad-brush" strategies. The overall management philosophy of an organization can affect the way in which inventory is managed. For example, "Just In Time" (JIT) production management organizes production so that finished goods are not produced until the customer needs them (minimizing finished goods carrying costs), and raw materials are not accepted from suppliers until they are needed. (Large organizations have the power to insist that suppliers hold stocks of raw materials and thereby pass the carrying cost back to the supplier). Thus, JIT inventory strategies reduce bottlenecks and stock holding costs. In summary:

There is a trade-off to be made between carrying costs, ordering costs,

and stock out costs. This is represented in the Economic Reorder Quantity (ERQ) model.

Inventories should be managed on a line-by-line basis using the 80/20 Analytical review can help to focus attention on critical areas.


Inventory management is part of the overall management strategy.


A ratio used to measure a company's ability to recover operating costs from annual revenue. This ratio is calculated by taking the company's total annual expenses (excluding depreciation and debt-related expenses) and dividing it by the annual gross income:

The following, easily calculated, ratios are important measures of working capital utilization

Ratio Formulae Stock Turnover Average Stock * (in days) 365/ Cost of Goods Sold

Result = x days

Interpretation On average, you turn over the value of your entire stock every x days. You may need to break this down into product groups for effective stock management. Obsolete stock, slow moving lines will extend overall stock turnover days. Faster production, fewer product lines, just in time ordering will reduce average days. It take you on average x days to collect monies due to you. If your official credit terms are 45 day and it takes you 65 days... why ? One or more large or slow debts can drag out the average days. Effective debtor management will minimize the days. On average, you pay your suppliers every x days. If you negotiate better credit terms this will increase. If you pay earlier, say, to get a discount this will decline. If you simply defer paying your suppliers (without agreement) this will also increase - but your reputation, the quality of service and any flexibility provided by your suppliers may suffer. Current Assets are assets that you can reay turn in to cash or will do so within 12 months in the course of business. Current Liabilities are amount you are

Receiv ables Ratio (in days)

Receivables Ratio (in days)

Debtors * 365/ Sales

= x days

Payables Ratio (in days)

Creditors * 365/ Cost of Sales (or Purchases)

= x days

Current Ratio

Total Current Assets/ Total Current Liabilities

= x times

due to pay within the coming 12 months. For example, 1.5 times means that you should be able to lay your hands on $1.50 for every $1.00 you owe. Less than 1 times e.g. 0.75 means that you could have liquidity problems and be under pressure to generate sufficient Quick Ratio (Total Current Assets - Inventory)/ Total Current Working Capital Ratio Liabilities (Inventory + Receivables Payables)/Sales As % Sales = x times cash to meet oncoming demands. Similar to the Current Ratio but takes account of the fact that it may take time to convert inventory into cash. A high percentage means that working capital needs are high relative to your sales.


Debtors (Accounts Receivable) are customers who have not yet made payment for goods or services which the department has provided. The objective of debtor management is to minimize the time-lapse between completion of sales and receipt of payment. The costs of having debtors are:

opportunity costs (cash is not available for other purposes); Bad debts. management includes both pre-sale and debt collection


strategies.Pre-sale strategies include:

offering cash discounts for early payment and/or imposing penalties agreeing payment terms in advance; requiring cash before delivery; setting credit limits; setting criteria for obtaining credit; billing as early as possible; Requiring deposits and/or progress payments. Placing the responsibility for collecting the debt upon the center that Identifying long overdue balances and doubtful debts by regular Having an established procedure for late collections, such as - a reminder; - a letter; - cancellation of further credit; - telephone calls; - use of a collection agency; - legal action.

for late payment;

Post-sale strategies include:

made the sale;

analytical reviews;


Creditors (Accounts Payable) are suppliers whose invoices for goods or services have been processed but who have not yet been paid. Organizations often regard the amount owing to creditors as a source of free credit. However, creditor administration systems are expensive and time-consuming to run. The over-riding concern in this area should be to minimized costs with simple procedures. While it is unnecessary to pay accounts before they fall due, it is usually not worthwhile to delay all payments until the latest possible date., Regular weekly or fortnightly payment of all due accounts is the simplest technique for creditor management. Electronic payments (direct credits) are cheaper than cheque payments, considering that transaction fees and overheads more than balance the advantage of delayed presentation. Some suppliers are reluctant to receive payments by this method, but in view of the substantial cost advantage (and the advantages to the suppliers themselves) departments may wish to encourage suppliers to accept this option. However, electronic payments are likely to be used in conjunction with, rather than as a replacement for, cheque payments.


Good cash management can have a major impact on overall working capital management. The key elements of cash management are:

cash forecasting; balance management; administration;

Internal control.

Cash Forecasting.
Good cash management requires regular forecasts. In order for these to be materially accurate, they must be based on information provided by those managers responsible for the amounts and timing of expenditure. Capital expenditure and operating expenditure must be taken into account. It is also necessary to collect information about impending cash transactions from other financial systems, such as creditors and payroll. Balance Management. Those responsible for balance management must make decisions about how much cash should at any time be on call in the Departmental Bank Account and how much should be on term deposit at the various terms available. There are various types of mathematical model that can be used. One type is analogous to the ERQ inventory model. Linear programming models have been developed for cash management, subject to certain constraints. There are also more sophisticated techniques. Administration. Cash receipts should be processed and banked as quickly as possible because:

They cannot earn interest or reduce overdraft until they are banked;

Information about the existence and amounts of cash receipts is

usually not available until they are processed. Where possible, cash floats (mainly petty cash and advances) should be avoided. If, on review, the only reason that can be put forward for their existence is that "we've always had them", they should be discontinued. There may be situations where they are useful, however. For example, it may be desirable for peripheral parts of departments to meet urgent local needs from cash floats rather than local bank accounts. Internal Control. Cash and cash management is part of a department's overall internal control system. The main internal cash control is invariably the bank reconciliation. This provides assurance that the cash balances recorded in the accounting systems are consistent with the actual bank balances. It requires regular clearing of reconciling items.


Working capital, defined as the difference between current assets and current liabilities, may also include the following factors:

prepayments to creditors; current portions of long-term liabilities; revenue received before it has been earned; Provisions.


When planning the short- or long-term funding requirements of a business, it is more important to forecast the likely cash requirements than to project profitability etc. Whilst profit, the difference between sales and costs within a specified period, is a vital indicator of the performance of a business, the generation of a profit does not necessarily guarantee its development, or even the survival.

CASH FLOW VS PROFIT Sales and costs and, therefore, profits do not necessarily coincide with their associated cash inflows and outflows. While, a sale may have been secured and goods delivered, the related payment may be deferred as a result of giving credit to the customer. At the same time, payments must be made to suppliers, staff etc., cash must be invested in rebuilding depleted stocks, new equipment may have to be purchased etc. The net result is that cash receipts often lag cash payments and, whilst profits may be reported, the business may experience a short-term cash shortfall. For this reason it is essential to forecast cash flows as well as project likely profits.


Normally, the main sources of cash inflows to a business are receipts from sales, increases in bank loans, proceeds of share issues and asset disposals, and other income such as interest earned. Cash outflows include payments to suppliers and staff, capital and interest repayments for loans, dividends, taxation and capital expenditure. Net cash flow is the difference between the inflows and outflows within a given period. A projected cumulative positive net cash flow over several periods highlights the capacity of a business to generate surplus cash and, conversely, a cumulative negative cash flow indicates the amount of additional cash required to sustain the business. Cash flow planning entails forecasting and tabulating all significant cash inflows relating to sales, new loans, interest received etc. and then analyzing in detail the timing of expected payments relating to suppliers, wages, other expenses, capital expenditure, loan repayments, dividends, tax, interest payments etc. The difference between the cash inand out-flows within a given period indicates the net cash flow. When this net cash flow is added to or subtracted from opening bank balances, any likely short-term bank funding requirements can be ascertained.

PLANNING TO PROJECT CASHFLOW Before using a model for short-term cash flow forecasting, a manager or entrepreneur should:

Decide the central purpose of the exercise (internal planning and control, negotiate a loan etc.). Identify the target audience (directors, bank manager etc.)

Set the time intervals and horizon (e.g. monthly for twelve months) Sort out the level of detail required. Check that all the necessary key assumptions and data are to hand and have been adequately researched. Compile opening balances for all items which will involve cash flows within the forecasting period.


Useful for Short - term financial planning. Useful for preparing the Cash Budget. Comparison with the Cash Budget. Study of the Trends of Cash Receipts & Payments. It Explains the Deviation of Cash from Earnings. Helpful in making Dividend Decisions.


Gross Cash Accrual Share Capital & Share Premium Term Loan Cash Credit Increase in Creditors Increase in Provisions SUB-TOTAL (A) 0.00 3.63 281224.92 152205.05 2885749.83 47826995.13 44507811.71

Increase in Fixed Assets Pre-operative Expenditure Repayment of Cash Credit Repayment of Term Loan Increase in Inventories Increase in Debtors SUB-TOTAL (B) Opening Bal. Surplus/(Deficit) Closing Bal. 149.44 0.00 210918.69 1.15 55809.35 14231091.81 14497970.44 650.00 33329024.69 33329674.69


30+ Ways of Improving Net Cash flow 1. Increase sales (particularly those involving cash payments). 2. Reduce direct and indirect costs and overhead expenses. 3. Defer discretionary projects which cannot achieve acceptable cash paybacks (e.g. within one year). 4. Increase prices especially to slow payers. 5. Review the payment performances of customers - involve sales force. 6. Become more selective when granting credit. 7. Seek deposits or multiple stage payments. 8. Reduce the amount/time of credit given to customers. 9. Bill as soon as work has been done or order fulfilled. 10.Improve systems for billing and collection. 11.Use the 80/20 rule to control inventories, receivables and payables. 12.Improve systems for paying suppliers. 13.Generate regular reports on receivable ratios and aging. 14.Establish and adhere to sound credit practices - train staff. 15.Use more pro-active collection techniques. 16.Add late payment charges or fees where possible. 17.Increase the credit taken from suppliers. 18.Negotiate extended credit from suppliers. 19.Make prompt payments only when worthwhile discounts apply. 20.Reduce inventory (stock) levels and improve control over work-inprogress.

21.Sell off or return obsolete/excess inventory. 22.Utilize factoring, or discount facilities, to accelerate receipts from sales. 23.Defer or re-stage all capital expenditure. 24.Use alternative financing methods, such as leasing, to gain access to the use (but not ownership) of productive assets. 25.Re-negotiate bank facilities to reduce charges. 26.Seek to extend debt repayment periods. 27.Net off or consolidate bank balances. 28.Sell off surplus assets or make them productive. 29.Enter into sale and lease-back arrangements for productive assets. 30.Defer dividend payments. 31.Raise additional equity. 32.Convert debt into equity.


Cash flows in a cycle into, around and out of a business. It is the business's life blood and every manager's primary task is to help keep it flowing and to use the cash flow to generate profits. If a business is operating profitably, then it should, in theory, generate cash surpluses. If it doesn't generate surpluses, the business will eventually run out of cash and expire.


Cash flows in a cycle into, around and out of a business. It is the business's life blood and every manager's primary task is to help keep it flowing and to use the cash flow to generate profits. If a business is operating profitably, then it should, in theory, generate cash surpluses. If it doesn't generate surpluses, the business will eventually run out of cash and expire. The faster a business expands the more cash it will need for working capital and investment. The cheapest and best sources of cash exist as working capital right within business. Good management of working capital will generate cash will help improve profits and reduce risks. Bear in mind that the cost of providing credit to customers and holding stocks can represent a substantial proportion of a firm's total profits. There are two elements in the business cycle that absorb cash Inventory (stocks and work-in-progress) and Receivables (debtors owing you money). The main sources of cash are Payables (your creditors) and Equity and Loans.

Each component of working capital (namely inventory, receivables and payables) has two dimensions ........TIME ......... and MONEY. When it comes to managing working capital - TIME IS MONEY. If you can get money to move faster around the cycle (e.g. collect monies due from debtors more quickly) or reduce the amount of money tied up (e.g.

reduce inventory levels relative to sales), the business will generate more cash or it will need to borrow less money to fund working capital.

Collect receivable (debtors) faster Collect receivable(debtors) slower Get better credit (in terms of cash duration or amount) from suppliers

You release cash from the cycle Your receivables soak up cash You increase your cash resources

Shift inventory (stock) faster Move inventory(stock) slower

You free up cash You consume more cash

Sources of Additional Working Capital

Sources of additional working capital include the following: Existing cash reserves Profits (when you secure it as cash!) Payables (credit from suppliers) New equity or loans from Bank overdrafts or lines of credit Long-term loans


If you have insufficient working capital and try to increase sales, you can easily over-stretch the financial resources of the business. This is called overtrading.

Early warning signs include: Pressure on existing cash Exceptional cash generating activities e.g. offering high discounts for early cash payment Bank overdraft exceeds authorized limit Seeking greater overdrafts or lines of credit Part-paying suppliers or other creditors Paying bills in cash to secure additional supplies Management pre-occupation with surviving rather than managing


Ratio analysis measures the profitability, efficiency and financial soundness of the businesses. The relationships between tow facts i.e., gross profit and sales or current assets and current liabilities is studied and the result is presented in the form of simple ratios Ratio analysis is a study of relationship among the various financial factors in a business
The technique of ratio analysis can be employed for measuring short-term liquidity or working capital position of a firm. The following ratios can be calculated for these purposes: The following ratios can be calculated for these purposes: Profitability ratios: Gross profit ratio Net profit Expenses ratio Return on investment or capital employed Return on equity capital Earning per share

Activity or performance or turnover ratios: Stock or inventory turnover ratio Total capital turnover ratios Working capital turnover ratio Fixed assets turnover ratio Debtors turnover ratio

Creditors turnover ratio Stock or inventory turnover ratio Financial ratios: a) Liquidity ratio shorterm financial or solvency ratios i) Current ratio ii) Liquidity ratio

b) Solvency ratios or longterm financial ratios: i) Debt equity ratio i) Interest coverage or debt service ratio ii) Fixed assets ratio Proprietary ratio Solvency ratio Capital gearing ratio. Liquidity ratio shorterm financial or solvency ratios i) Current ratio ii) Liquidity ratio Solvency ratios or long term financial ratios: i) Debt equity ratio ii) Total debt ratio iii) Interest coverage or debt service ratio iv) Fixed assets ratio Proprietary ratio Solvency ratio Capital gearing ratio.

b) c) d) e) f)

g) h) i)

MICROQUAL TECHNO PVT LTD. RUDRAPUR (2007-2008) Ratio analysis 1-Apr-2007 to 31 march-2008 Principal Group Working capital (current assets current liabilities) Cash-in-hand Amount 32196383.85(Dr) Particular Current ratio (current assets current liabilities) Quick Ratio (current assetsstock-in-hand: current liabilities) Debt/equity ratio Gross profit % Sundry debtors Sundry creditors Sales account 48464242.99(Dr) 34015783.43(Cr) 213670539.71(Cr) Operating cost % 68.12% (as percentage of sale account) Recv. Turnover in days Return on investment % 82.27 days 100.00% Stock-in-hand 47221613.47(Dr) Net profit % 31.88% Ratios 1.52:1



Bank account


:1 39.05%

Purchase account 169938927.97

(net profit/ capital account +net profit)% Net profit 68118029.71(Cr) Return on working capital % (net profit / working capital) % 211.57%

Working capital turnover (sale account / working capital Inventory turnover (sales account / closing stock)



MICROQUAL TECHNO PVT LTD. RUDRAPUR (2008-2009) Ratio analysis 1-Apr-2008 to 31 march-2009 Principal Group Working capital (current assets current liabilities) Cash-in-hand Amount 65671484.27(Dr) Particular Current ratio (current assets current liabilities) Quick Ratio (current assetsstock-in-hand: current liabilities) Ratios 29.92:1



Bank account Sundry debtors Sundry creditors Sales account

426261.56(Dr) 51151549.65(Dr) 15833562.18(Cr)

Debt/equity ratio Gross profit %

:1 25.62%

Net profit %


210663321.18(Cr) Operating cost % 81.77% (as percentage of sale account) 81.84days 100.00%

Purchase account 144045544.59(Dr) Recv. Turnover in days Stock-in-hand Return on investment % (net profit/ capital account +net profit)% 38400954.94(Cr) Return on working capital % (net profit / working capital) %

Net profit


Working capital turnover (sale account / working capital Inventory turnover (sales account / closing stock)




(RS. IN LACS) Year Sales Average Debtors Debtor Turnover Ratio Interpretation: This ratio indicates the speed with which debtors are being converted or turnover into sales. The higher the values or turnover into sales. The higher the values of debtors turnover, the more efficient is the management of credit. But in the company the debtor turnover ratio is decreasing year to year. This shows that company is not utilizing its debtors efficiency. Now their credit policy becomes liberal as compare to previous year. 2008 2136.70 484.64 4.40 times 2009 2106.63 511.51 4.22times


(Rs. In lacs) Year Inventory 2007-2008 4.52 2008-2009 0.00

5 4 3 2 1 0 2007-2008 2008-2009 IN NT R T NO R VE O Y UR VE

Interpretation: This ratio establishes the relationship between costs of goods sold and average stock and reflects the speed to turning over the stock into sales. In 2008 the company has higher inventory turnover ratio as compare to 2009 year. This shows that the companys inventory management technique is efficient in 2008.


Year Current Ratio

2007-2008 1.52

2008-2009 29.92

30 25 20 15 10 5 0 2007-2008 2008-2009 C URRENT RA TIO

A current ratio of 2:1 is considered as ideal i.e. if C.R. is 2 or more it means that the concern has the ability to meet current obligations. Here the C.R. in 2008 is 1.52 which less than 2 it indicates that the concern has difficulty in meeting its current obligations, but in 2009 it is 29.92 means short term financial position is sound in enterprise.. Increase in current ratio shows the liquidity soundness of company.

Conclusion: The current ratio of the company in 2008 is 1.52:1 which is less than 2:1, hence the short term solvency of the is not favorable, but in 2009 it is 29.92 which is much more than idle ratio and hence the short term solvency is favorable.

(Rs. in lacs) Year QUICK RATIO: 2007-2008 0.76 2008-2009 29.92

30 25 20 15 10 5 0 2007-2008 2ndQtr20082009 QUICKR IO AT

Interpretation : The Quick ratio shows the liquidity position of the firm. Generally a quick ratio of 1:1 is considered ideal. Although the quick ratio is more penetrating test of liquidity than the C.R, yet it should be used more cautiouslyQuick ratio shows company short term debts pay to outsiders. In 2009 the current liabilities of the company increased. But still increase in current assets are more than its current liabilities.

Here the quick ratio in2008 is 0.76:1, which is less than the ideal quick ratio 1:1, which shows that the short term solvency of the company is not proper, but in 2009 the ratio is 29.92 which is much greater then ideal quick ratio, which shows that the short term solvency of the company is good Generally the quick ratio is more reliable than C.R. now we conclude that the short term solvency the company is sound in 2009.


Year Working Capital Turnover

2007-2008 6.64

2008-2009 3.21

7 6 5 4 3 2 1 0 2007-2008 2008-2009 WO K GCAPIT T N VE R IN AL UR O R

Interpretation: This ratio measures the relationship between working capital and sale. The ratio shows the number of times the working capital results, in sales. This ratio must be normal. Excess ratio shows overtrading and lower ratio shoes under trading. Both the situations of overtrading and under trading show the weaknesses of the enterprise. It indicates how much net working capital requires for sales. In 2008, the reciprocal of this ratio (1/6.64 = .15) shows that for sales of Rs. 1 the company requires .15 paisa as working capital

whereas in 2009 the reciprocal of this ratio (1/3.21= .31) shows that for sale of Rs. 1 the company requires 31 paisa as working capital. Thus this ratio is helpful to forecast the working capital requirement on the basis of sale.



2007-2008 39.05%

2008-2009 25.62%

40 35 30 25 20 15 10 5 0 2007-2008 2008-2009 G OS P OF I R IO R S R T AT

The high gross profit margin ratio is a symbol of good management if the actual gross profit ratio is lower than the expectations than it provides that the profit in the business is not sufficient in comparison to sales this situation is not healthy for the business. Hence a low gross profit margin

ratio should be carefully investigated. The reasons for this may be higher cost of production inefficient utilization of plant and machinery etc.

Here the gross profit ratio in year 2008 is 39.05% depicts that the company is working efficiently and carries a sound management but in 2009 it is just 25.62 which is less than 2008, there is no ideal standard measure for gross profit ratio but it should be sufficient to cover the selling price expenses of the firm.

NET PROFIT RATIO: YEAR NET PROFIT RATIO 2007-2008 31.88% 2008-2009 18.23%

35 30 25 20 15 10 5 0 2007-2008 2008-2009 NE PR ITR IO T OF AT


Net profit ratio is the symbol of profitability and efficiency of the business. Decrease in the ratio indicates managerial inefficiency and excessive selling and distribution expenses. in the same way increase shows better performance..

Here the ratio in 2008 is 31.88 and in 2009 it is 18.23 it shows that the performance of the management decreased. net profit of 31.88% is quiet satisfactory but 18.23 is not as compare to 2008.the management have to find out causes for the decline in the net profit be made and corrective action should be taken to remove the causes responsible for the fall in the net profit ratio.


(Rs. In lacs) Year Cash Bank Balance 2007-2008 5.57 2008-2009 4.44

6 5 4 3 2 1 0 2007-208 2008-2009 CAS B H ANKB ALANCE

Interpretation :

Cash is basic input or component of working capital. Cash is needed to keep the business running on a continuous basis. So the organization should have sufficient cash to meet various requirements. The above graph is indicate that in 2008 the cash is 5.57 lac but in 2009 it has decreased to 4.44 lac

(Rs. In lacs) Year DEBTORS 2007-2008 484.64 2008-2009 511.51

520 510 500 490 480 470 2007-2008 2008-2009 DE T R BO


Debtors constitute a substantial portion of total current assets. In India it constitute one third of current assets. The above graph is depicting that there is increase in debtors. It represents an extension of credit to customers. The reason for increasing credit is competition and company liberal credit policy


An increase in the current ratio indicates that the company is

strengthening its liquidity position. As the company current ratio is increasing rapidly and it is much greater than the conventional norm (2:1) but it is prolific for the Company to maintain an optimum level of liquidity to earn a maximum Return on investment.
The net profit of the company decreasing year to year this means

management need to take corrective action to remove the causes responsible for the fall in the net profit ratio.
During the study period, the liquid ratio is found fluctuating every

year. Companys quick ratio is less than ideal ratio (1:1) in previous year which indicate that company had liquidity problem but in Current year company has no liquidity problem because it is much more than an ideal ratio.

The company working capital turnover ratio is decreasing which

indicates that the company is not using its working capital efficiently.
The number of debtors of the company increasing, this shows the

increasing credit is competition and company liberal credit policy The company debtor turnover ratio is decreasing year to year. This shows that company is not utilizing its debtors efficiently. Now their credit policy becomes liberal as compare to previous year.

On the basis of the analyses few suggestion are as follows:
The company is a profit seeking one; it has to commit all of its

resources to achieve its goal as it is trying to enhance the value of its own and thereby to its shareholders. To achieve this, profitability, liquidity and solvency position are crucial elements to be monitored carefully, thereby the trade off can be reached.
Overall performance and effectiveness of the firm are satisfactory but

the company has to make effective working capital management. The company should concentrate on working capital management and it should be managed effectively and reviewed periodically and thereby optimum Utilization of fixed assets is possible.

Company should also take finite steps to:


Improve operational efficiency by way of increase in production and reduction in consumptions like power, raw material, packing material, stores & spaces etc.

2) Drastically reduce operational capital expenditure. 3) Defer non-essential capacity expenditure and capacity expansion. 4) Put on hold any plans for acquisitions unless considered strategically critical. 5) Reduce unproductive expenditure/ travelling expenditures. overheads like telephone,

6) Reduce the repairs and maintenance expenditure, building repairs and machinery repairs etc. 7) Defer non essential capital expenditure. 8) The entire inventory like raw material, stores & spares, packing material, chemicals, felt; wire etc. to be reduced kept at minimum level. 10) Sales department must see that finished goods stock is kept at minimum

Working capital plays an important role in a business enterprise it should be at optimal level and to maintain this level, efficient management and control

is needed. Each of the components of the working capital needs proper management to optimize profit. The study reveals that the liquidity position of this company is comparatively good in year 2008-09 as compare to previous years. The ratios reveal that the companys ability in managing the current assets is found inadequate which require generation of more sales. On the whole, it can be concluded that the companys overall working capital management is not at desired level and we have made the realistic recommendation for the improvement in operational and managerial efficiency of the company as to maintain and increase further by effective utilization and control of all the assets.

BIBLIOGRAPHY Books: Pandy I M, Financial Management Vikas Publishing House (P) Ltd. Gupta S P, Financial Management Sultan Chand & Sons Kothari C.R. Research Methodology Method & Techniques Wishwa Prakashan , Daryaganj , New Delhi-110 002

WEB SITES: www.Business

Acid Test Ratio: - It is also termed as quick ratio and is calculated by

dividing the current assets excluding inventory and pre-paid expenses by current liability. It is the best measure for the liquidity of a firm.
Current ratio: - A measure of liquidity. It is the ratio of current assets

and current liabilities.

Debtors Collection Period: - The period taken to collect debtors. It is

equal to number of days in a year dividing by debtors turnover.

Inventory Turnover: - Equal to sales divided by total inventory. Quick Ratio: - Current assets (quick assets) divided by current

liabilities. It is the best measure of liquidity.

Total Assets Turnover: - A ratio indicative of the efficiency with

which a firm uses its assets. It is calculated by dividing annual sales by total assets.
Return on Investment: - It is calculated by dividing net profit after

taxes by total assets or by multiplying its net profit margin by the total assets turnover. It is some times also called the return on total assets.
Block of Assets: - A group of assets falls within a class of assets being

building, machinery, plant or furniture in respect of which the same rate of depreciation is charged.
Common-Size Statement: - Balance sheet or income statement in

which items are expressed in %rather than in absolute rupees.

Current assets: - Assets which can be converted in the ordinary course

of business in to cash with in a year or length or operating cycle whichever is higher.

Current Liabilities: - Liability that is intended to be paid within a year

in the ordinary course of business from the date of inception.

EBIT/PBIT: - Earning before interest and tax / Profit before interest

and tax.

Financial Analysis: - The use of financial data to evaluate the

financial position of a firm.

Gross Profit Margin: - Calculated by dividing gross profit by net sales. Income Statement: -It presents the net income of a firm for a period of

time (says a quarter or year).

Net working Capital: - The excess of current assets over the current

Ratio Analysis: - Uses of financial ratios to evaluate the performance

such as liquidity, solvency and profitability.

Solvency: - Ability of a firm to meet its obligations when they become