a study on inventory management and its impact on

A Study on INVENTORY MANAGEMENT and its impact

on Profitability at ACHAL INDUSTRIES PVT LTD

Spurthi Byalihal

M.B.A, Global business school.

Dr. Tazeentaj Mahat,

Assistant Professor - Global business school.

ABSTRACT

The paper is majorly focusing on inventory management and its impact on profitability at Achal

Industries Pvt Ltd. The data has been taken from last 5 years. The techniques which are used in

INVENTORY RATIO in this research are – Inventory turnover ratio, Inventory Holding Period,

Raw material turn ratio, Raw material Holding Period, Work in progress turn ratio, Work in

progress Holding period, Finished goods turn ratio, Finished goods Holding Period.

PROFITABILITY – Gross profit ratio, Net profit ratio, Earning per share, Return on equity, Return

on assets. From this paper we conclude that Achal has to incur carrying cost and block available

fund to maintain huge inventory throughout the year.

KEY WORDS

Achal Industry, Cashew, Mangalore, Inventory ratio, Profitability.

LITERATURE REVIEW

Incorporation of appropriate inventory management system plays an important role in

determining the financial health of a manufacturing company. Since it is difficult to apply proper

inventory control model for each item separately because of its huge variety, it is necessary to find

out few significant items using ‘Selective Control’ method. ABC and FSN analyses along with

XYZ analysis are done. The analysis shows the state of the present inventory management. (Das,

Bivash , & Onkar , 2012)

4th International Conference in Quantitative and Qualitative Methodologies in the

Economic and Administrative Sciences. The assets which firms store as inventory in anticipation

of need are raw materials, work in progress, finished goods. Moreover, managers can create profits

for their companies by handling correctly inventory ratios. The following measures were used in

Journal of Information and Computational Science

Volume 10 Issue 1 - 2020

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this study: Inventory Turnover Ratio, Raw Material turnover ratio, Work in process turnover ratio,

finished goods turnover ratio, Gross margin, Capital intensity. (Hyz, 2015)

The inventory management practices of six major companies/institutions in various

industries were compared with recommendations for improvement by using the ABC analysis

inventory management method. The ABC analysis tool was found to be beneficial to most

companies.With several companies already utilizing the basic principles behind the method, either

manually or with the use of an enterprise resource planning (ERP) system. (Smith, 2011)

Information Technology and Management Science Companies need to have inventories in

warehouses in order to fulfill customer demand, meanwhile these inventories have holding costs.

Therefore, the task of inventory management is to find the quantity of inventories that will fulfill

the demand, avoiding overstocks. ABC analysis, demand forecasting methods, inventory

management, replenishment policies. (Shen)

Inventory management has to keep accurate records of goods. It is important for keeping

cost down. The better inventory management will surely help in solving problems the company

would be facing with respect to inventory and will help in reducing huge investment or blocking

of money in inventory. There should be tight control over stocks based upon ABC analysis. If we

execute and follow the all the techniques of inventory management, we will be able to enhance the

profit with minimum cost. (Sharma & Vivek , 2016)

This article made an attempt to review the Competitive Challenge in Cashew industry and

the problems encountered by the industry in Prakasam, East & West Godavari Districts of Andhra

Pradesh. Cashew is often regarded as ‘poor man’s crop and rich man’s food’ and is an important

cash crop and highly valued nut in the global market. The area under cashew cultivation is the

highest in India. However, it is not so in the case of productivity, processing and quality. In reality,

the Indian cashew industry has a high untapped potential to support the livelihood of cashew

farmers, provide numerous employment opportunities and improve returns through global trade.

(KUMAR & T.)

To evaluate the impact of efficient inventory management on the profitability of manufacturing

firms in Ghana. The study revealed that the main variable raw materials inventory management

designed to capture the effect of efficient management of raw material inventory by a company on

its profitability is significantly strong and positive and impacts on the profitability of the

manufacturing firms in Ghana.Therefore, efficient management of raw material inventory is a

major factor to be considered by Ghanaian manufacturers in enhancing or boosting their

profitability. This can be achieved by encouraging large scale mechanized production of the major

raw materials in Ghana and training and re-training of staff from time to time to update their

knowledge and skills in modern manufacturing techniques. (Prempeh, 2015)



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OBJECTIVES:

To study the Inventory based on Ratio Analysis.

To analyze the efficiency of Inventory Management at Achal Industries Pvt Ltd.

To study and analyze the management techniques used in managing the inventory in the company.

RESEARCH METHODOLOGY:

Data collection:

The data collection is one of the important aspects in research design. Because, it is the way that

how we can get answer to the research questions.

The data is collected in two ways:

Primary data

Secondary data

Primary data:

The source of primary data like organisation details has been collected from the personal

interaction and discussion with the Director, Account Manager & other Assistants of the company.

Secondary data:

The source of secondary data used in the study is company’s annual report i.e. 5 years data has

been taken for analysis, company website & journals. Other information as such has been collected

from the organisation in the form of hard copy.

Tools used in the Analysis:

Inventory turnover ratio.

Other inventory related ratio.

ANALYSIS

CALCULATION OF INVENTORY RATIO

Inventory Turnover Ratio:

Inventory turnover ratio is the ratio, which indicates the number of times the stock is turned over

i.e., sold during the year. This measures the efficiency of the sales and stock levels of the company.

A high ratio means high sales, fast stock turnover and a low stock level. A low stock turnover ratio

means the business is slowing down or with a high stock level.



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INVENTORY TURNOVER RATIO = Net Sales

Closing Inventory

Table No: 01

Year Net Sales Closing

Inventory

Inventory

Turnover

Ratio

2013-2014 319,952,814.42 60,537,429.65 5.29

2014-2015 384,553,722.27 66,735,475.47 5.76

2015-2016 461,113,379.08 101,353,545.70 4.55

2016-2017 641,287,387.89 165,305,065.47 3.88

2017-2018 631,723,637.86 168,934,371.05 3.74

INTERPRETATION:

The above graph shows the changes in each year of the company’s Inventory Turnover Ratio. The

Inventory turnover was highest during the year 2014-2015 while the company maintained average

level during 2015-2018. As the inventory turnover is low, it is suggested for the company to

maintain same level.

This shows the amount of funds is getting locked in the inventory which intern affects there

working capital and profitability.

Inventory Holding Period:

This period measures the average time taken for clearing the stocks. It indicates that how many

days inventories take to convert from raw material to finished goods.

INVENTORY HOLDING PERIOD = Days in year

Inventory Turnover Ratio

Table No: 02

Year Days in Year Inventory Turnover

Ratio

Inventory Holding

Period

2013-2014 365 5.29 69.00

2014-2015 365 5.76 63.37

2015-2016 365 4.55 80.22

2016-2017 365 3.88 94.07

2017-2018 365 3.74 97.59



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INTERPRETATION:

The above graph shows the changes in each year of the company’s Inventory Holding Period.

Where it represents the days of inventory on hand is increasing year after year in the year 2013-

2014 the inventory on hand was 69 days which increased to 63.37 days in 2014-2015, in the year

2017-2018 it went up to 97.59 days which is quite high as compared to past years which indicate

that company is not moving its inventory fast. This could be a sign of low demand for the products.

Raw Material Turnover Ratio:

Raw materials turnover ratio is velocity at which raw material converted into goods ready for sale.

If raw material turnover ratio is high then the company is efficiency converting into finished goods.

The raw materials turnover ratio gauges a company’s ability to efficiency turn raw materials into

finished products.

RAW MATERIAL TURNOVER RATIO = Net Sales

Raw Materials

Table No: 03

Year Net Sales Raw Materials Raw Materials

Turnover Ratio

2013-2014 319,952,814.42 27,668,463.00 11.56

2014-2015 384,553,722.27 32,049,472.00 11.99

2015-2016 461,113,379.08 68,032,302.00 6.77

2016-2017 674,405,232.09 164,517,285.53 4.09

2017-2018 683,795,814.07 73,715,727.38 9.27

INTERPRETATION:

The above graph shows the amount of raw materials consumed in each year of the company’s Raw

Materials Turnover Ratio. When total expenditure on raw material is been taken into consideration

it can clearly observed that in the year 2014-2015 the expenditure on inventory is highest i.e.,

11.99 due to which the company’s profit will decline as the company cannot increase the price of

products. Whereas the company’s profit will be highest in the year 2017-2018 as the expenditure

on inventory is low i.e., 9.27.

Raw Material Holding Period:

Inventory holding period comprises raw material holding period, work-in-progress period and

finished goods holding period.



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RAW MATERIAL HOLDING PERIOD = Days in year

Raw Material Turnover Ratio

Table No:04

Year

Days in Year Raw Materials

Turnover Ratio

Raw Material

Holding Period

2013-2014 365 11.56380875 31.56

2014-2015 365 11.99875375 30.41

2015-2016 365 6.777859422 53.85

2016-2017 365 4.099297104 89.03

2017-2018 365 9.276118386 39.34

INTERPRETATION:

The above graph shows the changes in each year of the company’s Raw Materials Holding Period.

Where it represents the days of raw material holding period on hand is fluctuating year after year

in the year 2013-2014 the raw material on hand was 31.56 days which decreased to 30.41 days in

2014-2015, whereas in the year 2015-2016it went up to 53.85 days, whereas in the year 2016-2017

it went 89.03 in the year 2017-2018 it came down to 39.34 days which is quite low as compared

to previous years which indicate that company is moving its raw material fast.

Work in Progress Turnover Ratio:

WORK IN PROGRESS TURNOVER RATIO = Net Sales

Work in Progress

Table No: 05

Year Net Sales Work in

Progress

Work in

Progress Turnover

Ratio

2013-2014 319,952,814.42 5,485,844.00 58.32

2014-2015 384,553,722.27 6,789,403.00 56.64

2015-2016 461,113,379.08 11,905,734.00 38.73

2016-2017 674,405,232.09 9,397,440.00 71.76

2017-2018 683,795,814.07 17,583,602.00 38.88

INTERPRETATION:

The above graph shows the changes in each year of the company’s Work in Progress Turnover

Ratio. When total work in progress are taken into consideration it is been observed that the



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expenditure on work in progress is lowest in the year 2017-2018 i.e., 38.88 and highest in the year

2016-2017 i.e., 71.76 which indicates that profits are highest in the year 2017-2018 and lowest in

the year 2016-2017.

Work in Progress Holding Period:

The holding period of work in progress is dependent on the length of production cycle i.e., from

the time raw materials are issued and till finished goods are ready for dispatch.

WORK IN PROGRESS HOLDING PERIOD = Days in year

Work in Progress Turnover Ratio

Table No: 06

Year Days in Year Work in

Progress Turnover

Ratio

Work in

Progress Holding

Period

2013-2014 365 58.32 6.25

2014-2015 365 56.64 6.44

2015-2016 365 38.73 66.08

2016-2017 365 71.76 5.08

2017-2018 365 38.88 9.38

INTERPRETATION:

The above graph shows the changes in each year of the company’s Work in Progress Holding

Period. Where it represents the days of work-in-progress on hand is fluctuating year after year in

the year 2013-2014 the work-in-progress on hand was 6.25 days which was similar to previous

year i.e., 6.44 days in 2014-2015, whereas in the year 2015-2016it went up to 66.08 days, whereas

in the year 2016-2017 it decreased 5.08 in the year 2017-2018 it increased to 9.38 days which is

quite low as compared to previous year.

Finished Goods Turnover Ratio:

The turnover rate of finished goods is the ratio of the annual sales of your business

to the average inventory of your business.

FINISHED GOODS TURNOVER RATIO = Net Sales

Finished Goods



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Table No: 07

Year Net Sales Finished

Goods

Finished Goods

Turnover Ratio

2013-2014 319,952,814.42 22,751,991.40 14.06

2014-2015 384,553,722.27 28,509,796.83 13.48

2015-2016 461,113,379.03 44,582,766.80 10.34

2016-2017 674,405,232.09 21,036,858.07 32.05

2017-2018 683,795,814.07 42,493,350.34 16.09

INTERPRETATION:

The above graph shows the changes in each year of the company’s Finished Goods Turnover Ratio.

It is been observed that the expenditure on inventory is highest in the year 2016-2017 i.e., 32.05

whereas the lowest in the year 2015-2016 i.e., 10.34 where as in the remaining expenditure are

somewhat same. Due to which when the finished good are taken into consideration the profits will

be highest in the year 2016-2017 whereas lowest in the year 2015-2016.

Finished Goods Holding Period:

FINISHED GOODS HOLDING PERIOD = Days in Year

Finished Goods Turnover Ratio

Table No: 08

Year

Days in Year Finished Goods

Turnover Ratio

Finished Goods

Holding Period

2013-2014 365 14.06262902 25.95

2014-2015 365 13.48847642 27.06

2015-2016 365 10.34286143 35.29

2016-2017 365 32.05826791 11.38

2017-2018 365 16.09183104 22.68

INTERPRETATION:

The above graph shows the changes in each year of the company’s Finished Goods Holding Period.

Where it represents the days of finished goods on hand is fluctuating year after year in the year

2013-2014 the finished goods on hand was 25.95 days which increased to 27.06 days in 2014-

2015, whereas in the year 2015-2016it went up to 35.29 days, whereas in the year 2016-2017 it



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decreased 11.38 in the year 2017-2018 it increased to 22.68 days which is quite low as compared

to previous year.

Profitability:

Every business concern aims at earning maximum profit. Profit refers to the absolute quantum of

profits. Whereas profitability refers to the ability to earn profits. Profitability ratios are the ratios

which are computed to evaluate the performance and efficiency of the business concern.

Gross Profit Ratio:

It indicates the average mark-up or margin on products sold. It serves as an indicator of general

profitability of the business concern. A high gross profit ratio implies better profitability of the

products sold by the business concern.

GROSS PROFIT RATIO = GROSS PROFIT x 100

NET SALES

Table No: 09

Year Gross Profit Net Sales Gross Profit Ratio

2013-2014 4,38,75,222.00 319,952,814.42 13.71

2014-2015 4,45,60,059.00 384,553,722.27 11.59

2015-2016 3,72,24,354.13 461,113,379.08 8.07

2016-2017 5,69,51,726.00 674,405,232.09 8.44

2017-2018 43455375.00 683,795,814.07 6.36

Interpretation:

The above graph shows the changes in each year of the company’s Gross Profit Ratio. The gross

profit has variation every year. It has increased in the year 2013-2014 but decreased in the year

2017-2018.the sufficient measures are taken to increase the gross profit by increasing the sales and

decreasing the cost of materials consumed in 2017-2018 as a result margin has decreased to 6.36.

Net Profit Ratio:

This ratio is also known as ‘The Net profit to Sales Ratio’. It measures the rate of the net profit per

unit of sales. It is determined by dividing the net profit to the net sales for the period. Net profit

may be net profit before tax or net profit after tax, its formula is as follows

NET PROFIT RATIO = NET PROFIT x 100

NET SALES



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Table No: 10

Year

Net Profit

Net Sales

Net Profit

Ratio

2013-2014 3,13,10,711 319,952,814.42 9.79

2014-2015 1,34,04,251 384,553,722.27 3.49

2015-2016 -5111140.33 461,113,379.08 -1.108

2016-2017 1,598,663.00 674,405,232.09 0.24

2017-2018 -19892002.9 683,795,814.07 -2.909

INTERPRETATION:

In the above graph shows the changes in each year of the company’s Net Profit Ratio. The net

profit in the year 2017-2018 has a huge fall in margin and its negative in comparison to past years.

Reason:

A negative net profit margin results when the balance between revenue and expenses is off. It

means that the money you make from selling your products or services is not enough to cover the

cost of making or selling those products or services.

Earnings Per Share:

This ratio measures profitability from the point of view of the ordinary shareholder. A high ratio

represents better the company.

EARNINGS PER SHARE = Net Profit

Total no of shares outstanding

Table No: 11

Year Net Profit Total no of

Shares Outstanding

Earnings Per

Share

2013-2014 3,13,10,711 4,000,000.00 7.83

2014-2015 1,34,04,251 4,000,000.00 3.35

2015-2016 -5111140.33 4,000,000.00 -1.27

2016-2017 1,598,663.00 4,000,000.00 0.40

2017-2018 -19892002.9 4,000,000.00 -4.97



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INTERPRETATION:

In the above graph shows the changes in each year of the company’s Earnings Per Share Ratio. In

2013-2014 i.e., 7.83 is the highest, then it goes on decreasing in 2017-2018 it is decreased which

has negative value. So there is no improvement in the earning power of the company.

Reason:

A negative EPS on a stock means the issuing company is losing money. A company with consistent

negative price earnings means that it is not able to generate profits for a long period of time. If

there is no net profit EPS can’t give dividend, so it’s showing negative.

Return on Equity:

This ratio measures Profitability of equity fund invested the company. It also measures how

profitably owner’s funds have been utilized to generate company’s revenues. A high ratio

represents better the company.

RETURN ON EQUITY = Profit after Tax

Net worth

Table No: 12

Year Profit after

Tax

Net worth Return on

Equity

2013-2014 20,837,311.75 1,000,000.00 20.84

2014-2015 9,038,612.55 1,000,000.00 9.04

2015-2016 -3532504.33 1,000,000.00 -3.53

2016-2017 778,677.25 1,000,000.00 0.78

2017-2018 -15478486.90 1,000,000.00 -15.47

INTERPRETATION:

In the above graph shows the changes in each year of the company’s Return on Equity. In 2013-

2014 return on equity is highest, then it keeps on decreasing.in the year 2017-2018 it has negative

value which indicates that they are not adequate for handling the company and call for change in

the company structure.



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Reason:

When return on equity is negative it means its shareholders are losing value. When net income is

negative, return on equity will also be negative.

Return on Assets:

This ratio measures the earning per rupee of assets invested in the company. A high ratio represents

better the company.

RETURN ON ASSETS = Net profit

Total assets

Table No: 13

Year Net Profit Total Assets Return on

Assets

2013-2014 3,13,10,711 159,782,624.47 19.60

2014-2015 1,34,04,251 190,964,774.55 7.02

2015-2016 -5111140.33 272,132,638.48 -1.87

2016-2017 1,598,663.00 370,140,787.97 0.43

2017-2018 -19892002.9 321,070,426.15 -6.19

Chart No: 13

INTERPRETATION:

In the above graph shows the changes in each year of the company’s Return on Assets. In the year

2013-2014 i.e., 19.60 is the highest, then it keeps on decreasing in the year 2017-2018 it has

negative value i.e., -6.19 which indicates that the business was not able to utilize its resources well

in generating income.

Reason:

The return on asset is negative because it is unambiguously unprofitable (loss making) where

investment on assets are not sufficient, and not giving good amount of return.

FINDINGS

As the inventory turnover is low, it is suggested for the company to maintain same level.

The company’s profit will decline as the company cannot increase the price of products.



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Work in Progress Turnover Ratio is when total work in progress are taken into

consideration it is been observed.

When the finished good are taken into consideration the profits will be highest.

Gross Profit Ratio has variation every year. The sufficient measures are taken to increase

the gross profit by increasing the sales and decreasing the cost of materials.

Net Profit Ratio has a huge fall in margin and its negative in comparison to past years.

Earnings Per Share Ratio. So there is no improvement in the earning power of the

company.

Return on Equity it has negative value which indicates that they are not adequate for

handling the company and call for change in the company structure.

Return on Assets which indicates that the business was not able to utilize its resources

well in generating income.

CONCLUSION

Achal industries is an Agro- based industry, which uses raw cashew nut as its main raw

material, which is a seasonal crop. This is a reason why Achal Industries has to invest a large

amount in purchasing of Raw material. Apart from this, due to the bulk purchase of raw materials.

Achal has to incur carrying cost & this blocks available funds (blockage of amount as inventory

cost). Achal industry has to maintain huge inventory throughout the year. There is new technology

that can help us maintain and supervise inventory. What we can do is learn, implement and evaluate

our business.

I expect that firm will have good prospect in future because the government is giving importance

to horticulture growth in the country.

References (n.d.). Retrieved from http://www.achal.in/

Das, S., B. M., & O. N. (2012). A Case Study on Inventory Management Using Selective Control

Techniques. Researchgate. Retrieved from

https://www.researchgate.net/publication/264971297_A_Case_Study_on_Inventory_Managem

ent_Using_Selective_Control_Techniques

Hyz, A. (2015). Inventory Management and its Impact on Firms' Performance. Researchgate. Retrieved

from

https://www.researchgate.net/publication/280597962_Inventory_Management_and_its_Impac

t_on_Firms'_Performance_An_Empirical_study_in_the_region_of_Epirus_Greece

KUMAR, P., & T. S. (n.d.). Competitive challenge of Cashew Industry in Andra Pradesh. . Researchgate.

Retrieved from



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https://www.researchgate.net/publication/241280141_Cashew_Industry_in_India_-

_An_Overview

Prempeh, K. B. (2015). The impact of efficient inventory management on profitability: evidence from

selected manufacturing firms in Ghana. Researchgate, 10. Retrieved from

https://www.researchgate.net/publication/284023064_The_impact_of_efficient_inventory_ma

nagement_on_profitability_evidence_from_selected_manufacturing_firms_in_Ghana

Sharma, A., & V. A. (2016). Study of Inventory Management in Manufacturing Industry. International

Journal of Advanced Engineering and Global Technology. Retrieved from http://ijaegt.com/wp-

content/uploads/2016/03/609068-pp-2012-2021-Aasana-pp.pdf

Shen, H. (n.d.). Case Study on Inventory Management Improvement. Retrieved from

https://www.researchgate.net/publication/293193962_Case_Study_on_Inventory_Managemen

t_Improvement

Smith, A. D. (2011). Inventory management and ABC analysis practices in competitive environments.

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