workingcapital ibase solutions by altaf
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CONTENTS
CHAPTER1
o Introduction
o Need for the study
o Objectives of the study
o Methodology of the study
o Limitations of the study
CHAPTER2o Industry Profile
CHAPTER3o Company Profile
o General Profile & Functional profile
CHAPTER4
o Theoretical Framework of the Working Capital Management
CHAPTER5
o Analysis & Interpretation of data
CHAPTER6
o Findings & Suggestions
o Bibliography
1
INTRODUCTION
Working capital may be regarded as the life blood of the business. A study of
working capital is of major importance to internal and external analysis because of its
close relationship with the current day-to-day operations of a business. As pointed out by
“Ralph Kennedy and Steward Mc Muller”.
Working capital is very essential to maintain the smooth running of a business no
business can run successfully without an adequate amount of working capital.
The goal of working capital management is to manage the firms current assets and
current liabilities in such a way that a satisfactory level of working capital is maintained.
The success of any organization is mainly depends upon the four functional areas of
management namely finance, Production, Marketing, and personnel management.
Finance is de4fined as a provision of money at the time it is required. Therefore, every
enterprise, whether it is big, medium or small needs finance to carry on its operations and
to achieve its targets.
Working capital = current assets-current liabilities.
Software’s is highly perishable product. Factory, Vijayawada was commissioned on 11-
4-1969.
Software’s product factory Vijayawada has the distinction of being the first
product factory in South India. Apart from handling Software’s from Krishna district it
also handles surplus Software’s received from districts of Vizag, East and west
Godavaary, Prakasam and Nellore. The factory had peak handing during 1982-83. With a
view of handling the inceased surplus Software’s from Nellore, Prakasam and Godavari
districts, a second spray drying plant with a latest design to produce about 14MT of
Software’s powder has been established and commissioned during December 1982.
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The surplus Software’s after meeting the required Software’s requirement of
public is converted into products. This Software’s products factory, Vijayawada had the
distinction of being the first public sector organization in the country to produce infant
Software’s food in consumer packs. In addition to above Software’s powder, skim and
whole ice cream mix powder and casein are also being manufactured in this factory. We
will hardly find a business firm, which does not require any amount of working capital.
Indeed, firms differ in their requirements of the working capital.
There is always an operating cycle involved in the conversion of sales into cash.
The firm should maintain a sound working capital position. It should have adequate
working capital to run its business positions are dangerous from the firm’s point of view.
Excessive working capital means ideal funds, which earn no profits for the firm.
3
NEED FOR THE STUDY
IBASE Solutions is big Software’s designing Company and it the Software’s
based products are being produced. The requirement of capital for each department is
very high in an organization like IBASE Solutions. Therefore, I have under taken my
study in this organization to understand the requirement of capital and its effective
allocation of resources in working capital management.
Some important points are taken into consideration.
To understand the requirement of working capital in this organization.
The duration of the work-in-progress state depends of length of the manufacturing
cycle (SDLC), consistency in capacity utilization different stages and efficient
co-ordination of various inputs.
Having this detailed study on working capital management, identify the shortage
of working capital and suggest improving the working capital management in the
company.
4
OBJECTIVES OF THE STUDY
The main objective of the study is to analyze and evaluate the Working Capital
performance of the IBASE Solutions, and if necessary, to give suggestions for the overall
improvement in the working capital management.
To analyze how working capital management is carried out in the organization.
To study various components of working capital and their management.
To ascertain various problems faced in working capital management.
To measure the operational efficiency.
To study the existing system of working capital.
To judge the financial positions.
To determine the profitable trends.
To give appropriate suggestions for the better performance of the company if
necessary.
METHODOLOGY OF THE STUDY
All the data required for completion of the study has been collected from both
primary and secondary sources.
Primary Sources of Data:
The primary sources of data required for the study was collected by the personal
interaction with employees of the IBASE Solutions, in the area of Finance, Production,
HRD, and administration departments. The SWOT Analysis has also been done in order
to identify the major strengths, weaknesses, opportunities and threats of the company and
the likely strategies to be adopted in order to improve the financial performance.
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Secondary Sources of Data:
The secondary data was collected from the company’s.
Annual reports;
Financial reports;
Accounting reports;
Departmental manuals;
Journals.
LIMITATIONS OF THE STUDY
Any study is having its own advantages and certain disadvantages. Among such,
few of the limitations are expressed below such as;
The reliability of the study depends upon the information furnished by the
officials.
Due to time constraints, it is difficult to go into details of the whole organizations.
As working capital management means planning for day-to-day operations,
certain figures are estimated figures only.
The present study is restricted to lonely for a period of 6 years from 2003-2004 to
2008-2009.
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CHAPTER II
INDUSTRY PROFILE
In the present scenario most of the countries over the world have relied upon Indian
software company and firms or Software Companies for the software development
activities, as the country possesses a global competency in the IT sector.
The Software development company India comprises of businesses related to the
production and maintenance of computer software. The roots of the Software Industry
India lies in the IT phenomenon. Services regarding software such as training, consulting
and maintenance are a part of this ever-growing industry.
The Software companies is witnessing a rapid growth and offers lucrative job
opportunities making IT a premium career option for the youth. Infact it is one of the
fastest growing sector of Indian industry.
India is emerging as a Global IT superpower. The success can be attributed to factor
advantage of high quality of software human resources. The Software Industry has
succeeded in converting this comparative advantage to increasing exports. More and
more companies are receiving the ISO 9000 certification and the day is not far when
India will have the highest number of ISO 9000 companies in the world.
Indian Software Industry is estimated to be worth USD 1.2 billion. Unfortunately the
growth has been limited to a few cities around Bangalore, Mumbai, Delhi and Noida.
One problem that software companies in India are facing is that of outflow of IT
professionals. This can be looked into by ensuring the conditions for investment and
growth in the industry are safeguarded by political stability
Wipro, HCL, Tata Consultancy Services, Satyam computer Services, CMC, IBM etc are
some of the major Software development and software consulting firms or companies in
India.
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CHAPTER IIIPROFILE OF THE ORGANISATION
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iBase Solutions is a professional website design and web development company with
offices in Sydney, Adelaide and Melbourne with large client base in Australia and across
the Globe. We specializes in high quality Web Designing, Website Maintenance, Web
Application development, Ecommerce Website, Multimedia presentation - 2D/3D
animation, Web Hosting, Search Engine Optimization (SEO) or Web Promotion, Logo
Designing and custom web solutions for all types of industries. We have good expertise
in the areas mentioned above and focus on delivering websites in time with best quality
and with minimum cost to our Clients.
Backed with 5+ years of expertise as a web solutions providing company we strive to
provide excellence in service, quality, and turnaround time. Progressive businesses and
organizations rely on Web Site Design Company to develop and provide hi-tech, cost
effective solutions to their doorsteps in the shape of competitively priced and best quality
services. Whatever your requirement, be it programming-based or designing-based, or a
strategic combination of both, we offer a cost-effective solution. Our world-class
professional web site designers & web developers focus on ensuring your web site gives
you the best possible returns.
Over the years we have designed, developed and launched search engine friendly
websites by providing affordable web development services to all our clients ranging
from start ups Business package to customized web based application. We make sure that
all our websites are Search Engine Friendly to reach the widest possible audience and
meet clients business objectives.
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Customer satisfaction is the motto of our business. The professional business experience
of our management team also sets us apart from many other website design firms. iBase
web consultants believe in detailed discussion with clients and offer various suggestions.
We work closely with our clients to compose a web site that fits their requirement, taking
advantage of latest technology. We provide both small, Medium and large businesses
with custom web site designs that are very affordable without disturbing your budget. We
have always met our commitment to deliver professional web site design and hosting
solutions along with excellent customer service.
Please go through our portfolio and available services and contact us for a free estimate.
We look forward to provide you web solutions tailored to your requirement.
Our Philosophy
Provide Innovative web design and web development solutions, using latest technologies
to our clients at competitive prices in a most efficient manner.
Vision and Mission
iBase Solutions believes in providing equal opportunity, excellent infrastructure and
work atmosphere to all employees, thereby improving the work environment and
efficiency levels to serve Clients better. Our mission is to provide a web solutions as per
client satisfaction in a most efficient and qualitative manner.
Services:
Web Designing
iBASE offers a variety of web designing services in Sydney, Melbourne, Adelaide
ranging from basic Website Design to complete ecommerce web application
development. Our team of web designers & web developers is creative & innovative with
ability to turn your ideas into reality. Checkout range of iBase web design packages
covering professional web design to advanced web site development solutions.
Website Maintenance
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Web Maintenance Services by third party can surly reduce your costs by eliminating the
need to hire full time website designer or web developer. Our professional Website
Maintenance service deliverers just that. We will ensures that your website gets the
attention to detail and accuracy that is essential for your website's success.
Communications are easily handled with e-mail and telephone. We always try to
accommodate any rush or emergency changes from our clients.
Website Hosting
The World Wide Web is a massive collection of web sites, all hosted on computers
(called web servers) all over the world. The web server (computer) where your web site's
html files, graphics, etc. reside is known as the web host. Web hosting clients simply
upload their web sites to a shared (or dedicated) webserver, which the ISP maintains to
ensure a constant, fast connection to the Internet.
Domain Registration
Domain name registration is the process by which a company or individual can register a
website name or URL, such as www.yourwebsite.com. Domain registration is done for a
specified period like 1 to 10 years and once you have completed domain registration the
domain becomes yours for the period of the contract. Now once this time period is going
to be over.
Website Promotion
Search engine promtion or optimization is a critical component of your site's success... A
company will spend long hours and valuable resources developing a website to bring in
vast amounts of new business from all over the world. Once the design is done and the
new website published, the expectation is that new business will come from those
millions of people browsing and searching the Internet each day.
Multimedia Presentation
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Our Multimedia & Design Solutions offers a wide variety of professional multimedia
solutions for all of your needs. We offer complete art, animation, photo manipulation,
graphics, interactive presentation CDs, sound/voice/music editing and creation, audio
CDs, FLASH, Director and more. We can help you design and create professional, top
quality, cutting edge multimedia presentation with the latest tools.
Web Application Development
As the Internet grew into a major player on the global economic front, so did the number
of investors who were interested in its development. So, you may wonder, how does the
Internet continue to play a major role in communications, media and news? The key
words are: Web Application Projects. Web applications are business strategies and
policies implemented on the Web Business.
Ecommerce Solutions
All company whether a small trading company or a large business house, requires to be
part of the increasingly important internet market for successful business future. With
internet pentration increasing to many folds in developed and developing nation, Results
in the increasing number of consumers turning to the internet to locate the products and
services they desire.
Content Management System
IBASE offers you CMS - Content managemenment system to manage your website
without any knowledge or experience of web designing. Our CMS is cost-effective and
user-friendly solutions in web site content management that enables you to easily update
website content without any programming training. We provide you with a simple
browser based method to update your content as we separate your content from the
layout, which makes YOU in charge of your own dynamic content for your web site.
Contact Details:
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Australia
Level 2, Suite 15
103 George St
Parramatta, 2150, NSW
P: 0413 752 018
E: info@ibasesolutions.com.au
India
(1) 012, Sushant Tower,
Sushant Lok II, Sector 56,
Gurgaon 122011, Haryana, India
P: 0091 - 124 - 4112136, 4113453
M: 0091 - 9958320320
E: info@ibasesolv.com
(2) Mohammad’s Castle
Plot #128,
Behind Allahabad bank
Madhuranagar, Yousufguda Main Road
Hyderabad – 500 038
Email: info@ibasesolv.com
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CHAPTER – IV
THEORETICAL FRAME WORK
INTRODUCTION TO FINANCE:
Finance is a specialized, functional field found under the general classification of
business administration. The term “Finance” can be defined as the management of the
flows of money through as organization whether it is a corporation, bank, Govt., agency;
e.t.c., Finance concerns itself with the actual flows of money, as well as any claims
against money. As a business discipline, finance can be differentiated from accounting
and economics. Accounting is concerned with the recording, reporting and measuring of
business transaction, where as finance uses the information provided by the accounting
system to make decision to help organizations to achieve their objectives. Economies are
concerned with analyzing the allocation of resources in a society. It studies transactions,
among people involving in a society. It studies transaction, among people involving
goods and services with or without the exchanges of money.
Individual businesses are face problems dealing with the acquisition of funds to
carry on their activities and with the determination of optimum methods of employing
funds. In competitive market place, businessman must actively manage their funds to
achieve their goals. The financial tools help the manage.
Determine which sources offer the lowest cost of funds and which activities will
provide the greatest return on invested capital. A successful business manager for
enterprise uses a goal oriented financial structure. The financial manager performs certain
tasks that help to achieve its operating objective. The important goals of financial
management are:
Wealth maximization of share holders.
Liquidity.
Profitability of the firm.
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FUNCTIONS OF FINANCIAL MANAGEMENT
Although it may be difficult to separate the finance functions from production,
marketing and other functions, yet the functions themselves can be readily identified.
The functions of raising funds, investing in assets and distributing returns earned
from assets, shareholders respectively known as financing, investment and dividend
decision. While performing these functions, a firm attempts to balance cash inflows and
cash outflows. This is called liquidity decision and we add it to the list of important
finance decisions or functions.
a. Investment or long term asset mix decision.
b. Financing or capital mix decision
c. Dividend or profit allocation decision.
d. Liquidity or short term asset mix decision.
A firm performs finance functions simultaneously and continuously in the normal
course of the business. They do not necessarily occur in a sequence. Finance function call
for skillful planning, control and exception of a firm’s activities.
Let us note that outset that share holders are made better off by a finance decision,
which increase value of their shares. Thus while performing the finance functions, the
financial manager should strive to maximize the market value of shares.
INVESTMENT DECISION:
Investment decision or capital budgeting involves the decision of allocation of
capital or commitment of funds to long-term assets, which would yield, benefits in future.
Its one very significant aspect is the task of measuring the prospective profitability of
new investments. Future benefits are difficult future; capital budgeting decision involves
risk. Investment proposals should, therefore be evaluated in terms of both expected return
and risk, besides the decision to commit funds in new investment proposal; capital
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budgeting also involves decision of recommitting funds when an asset becomes less
productive or non profitable.
FINANCING DECISION:
Financing decision is the second important function to be performed by the
financial manager. Broadly, he must decide when, where and how to acquire funds to
meet the firm’s investment needs, the central issue before him is to determine the
proportion of equity and debt. The mix of debt and equity is known as the firm’s capital
structure. The financial manager must strive to obtain the best financing mix or the
optimum capital structure for his firm.
DIVIDEND DECISION:
Dividend decision is the third major financial decision. The financial manager
must decide whether the firm should distribute of all profits, or retain them, or distribute
a portion and retain the balance. Like the debt policy, the dividend policy should be
determined in terms of its impact on the shareholders value. The optimum dividend
policy is one, which maximizes the market value of the firm’s shares. Thus, if
shareholders are not in different to the firm’s dividend policy, the financial manager must
determine the optimum dividend-pay out ratio.
LIQUIDITY DECISION:
Current assets management, which affects a firm’s liquidity, is yet another
important finances function, in addition to the management of long-term assets. Current
assets should be managed efficiently for safeguarding the firm
Against the dangers of insolvency. Investment in current asset affects firm’s
profitability, liquidity and risk. A conflict exists between profitability and liquidity while
managing current assets. If the firm does not invest sufficient funds in current assets, it
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may become illiquid. But it would lose profitability, as idle current assets would not earn
anything. Thus, a proper trade-off must be achieved between profitability and liquidity.
In order to ensure that neither insufficient nor unnecessary funds are invested in current
assets, the financial manager should develop sound techniques of managing current assets
and make sure that funds would be made available when needed.
WORKING CAPITAL MANAGEMENT
INTRODUCTION:
Every business needs funds for two purposes for its establishment and to carry out
its day-to-day operations. Working capital refers to that part of the firm’s capital which is
required for financing short term or current assets such as cash, marketable securities,
debtors and inventories. Working capital is the amount of funds necessary to cover the
cost of operating the enterprise.
The goal of working capital management is to manage the firm’s current assets
and current liabilities in such a way that a satisfactory level of working capital is
maintained. Working capital is the difference between the inflow and outflow of funds.
Net cash inflow defines as the excess of current liabilities over current assets. Working
capital is also revolving or circulating capital or short-term capital.
DEFINITIONS:
1. “Working capital is defined as the difference between current assets and current
liabilities”.
-I.M.PANDEY.
2. “Working capital is the amount of funds necessary to cover the cost of operating
the enterprise”.
-SHUBIN
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3. “Circulating capital means current assets of a company that are changed in the
ordinary course of business from one form to another as for example, cash to
inventories, inventories to B/R, B/R to cash. Working capital is also called as
revolving and short-term capital.
-GENESTEN BERG
OPERATING CYCLE CONCEPT:
A company operating cycle typically consists of three primary activities
purchasing resources, producing the product and distributing (selling) the product. These
activities create funds flows that are both unsynchronized and uncertain. They are
uncertain because future sales and costs, which generate the respective receipts and
disbursement, cannot be forecasted with complete accuracy. If the firm is to maintain
liquidity and function properly it has to invest funds in various short-term assets (working
capital) during this cycle. It has to maintain a cash balance to pay the bills as they come
due. In addition the company must invest in inventories to fill customer orders promptly
and finally the company invests in accounts receivables to extend to its customers.
The operating cycle is equal to the length of the inventory and receivables
conversion periods.
Operating Cycle: Inventory conversion period + receivables conversion period.
The inventory conversion period is the length if time required producing and
selling the products it is defined as follows.
Inventory conversion period = Average inventory cost of sales / 365.
The receivable conversion period or average collection period represents the
length of time required to collect the sales receipts it is calculated as follows.
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Receivables conversion period = Account receivable
Account receivable = Annual Credit sales / 365.
The payables deferred period is the of time the firm is able to differ payment on
its various resource purchases (for example materials, wages and taxes) equation is used
to calculate the payables deferral period.
Payables deferral period = A/C’s payable + salaries, benefits and payroll taxes payable.
(Cost of sales + selling general and admn. expenses) / 365
Finally the cash conversion cycle represents the net time interval between the
collections of cash receipts from product sales and the cash payments for the companies
various receipts purchases. It is calculated as follows cash conversion cycle operating
cycle-payables deferral period.
Types of working capital:
There are two types of working capital.
1. Gross working capital.
2. Net working capital.
Gross working capital:
It is the broad sense the term working capital refers to the gross working capital
and represents the amount of funds invested in the current assets. Thus, the gross working
capital is the capita; invested in total current assets of the enterprise which in the ordinary
course of business can be converted into cash within a short period of time.
Gross working capital = Total of current assets
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Net working capital:
This refers to the difference between current assets and current liabilities. Net
working capital can be either positive or negative. A positive net working will arise when
current assets exceed current liabilities. A negative working capital occurs when current
liabilities are in excess of current assets.
Net working capital = Total of current assets – Total of current Liabilities.
Measuring the working capital:
Working capital is very essential to maintain the smooth running of a business.
No business can run successfully without an adequate amount of working capital.
However, it must also be noted that working capital is a means to run the business
smoothly and profitably, and not an end. Thus, concept of working capital has its own
importance in a going concern. The analysis of working capital can be conducted through
a number of devices, such as.
1. Ratio analysis.
2. Funds flow analysis.
3. Capital Budgeting.
LIST OF CURRENT ASSETS AND CURRENT LIABILITIES:
Current Assets:
Cash in hand.
Cash at bank.
Bills receivables
Sundry debtors
Stock.
Prepaid expenses.
Accrued income
Short term investment.
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Current Liabilities:
Bills payable.
Sundry creditors.
Accrued expenses.
Short term loans.
Dividends payable.
Bank overdraft.
Provision taxation.
OBJECTIVES OF WORKING CAPITAL:
The need for working capital cannot be over emphasized. Every business needs
some amount of working capital. The need for working capital arises due to the time gap
between production and realization of cash from sales.
To pay wages and salaries.
To incur day-to-day expenses and overheads costs such as fuel, power and office
expenses, etc.
To meet the selling costs as packing, advertising, etc.
To provide credit facilities to the customers.
KEY AREAS OF WORKING CAPITAL:
1. Cash management.
2. Receivables management.
3. Payables management.
4. Inventory management.
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SOURCE OF WORKING CAPITAL:
There are two sources of working capital they are:
1. Permanent or Fixed working capital: The fixed proportion of working capital
should be generally financed from the fixed capital sources like:
Shares.
Debentures
Public deposits.
Plugging back of profits.
Loans from financed institutions.
2. Temporary or Variable working capital: Variable or temporary working capital
requirements of a concern may be met from the short-term sources of capital like:
Commercial bankers.
Indigenous bankers.
Trade creditors.
Advances.
Accrued expenses
Commercial papers.
Accounts receivables.
USES OF WORKING CAPITAL:
Losses from business operations.
Purchases on non-current assets.
Redemption of debentures and / or preference shares.
Dividends to shareholders.
CLASSIFICATION OF WORKING CAPITAL:
Working capital may be classified in two ways:
a. On the basis of concept.
b. On the basis of time,
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A. ON THE BASIS OF CONCEPT
1. Gross working capital.
2. Net working capital
B. ON THE BASIS OF TIME
1. Permanent or fixed working capital.
Regular working capital.
Reserve working capital.
2. Temporary or Variable working capital.
Seasonal working capital.
Special working capital.
DETERMINANTS OF WORKIN CAPITAL:
Nature of size of business:
These kinds of institutions require limited working capital to produce goods and
services. (Ex: public utility organization)
These are the institutions, which require of working capital turnover. (Ex : trading
concerns)
This kind of institutions issues shares into orders to moderate the capital
1. Firms’ credit policy: The credit policy of the firm affects the working
capital by influencing the level of debtors. The credit terms to be granted
to customers may depend upon the norms of the industry to which the firm
belongs.
2. Price level changes: The increasing shifts in price level make functions of
financial manager difficult. He should anticipate the effect of price level
changes on working capital.
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Requirements of the firm:
1. Operating efficiency: The operating efficiency of the firm relates to the optimum
utilization of resources at minimum cost. The firm will be effectively contributing
in keeping the working capital investment at a lower level; it is efficient in
controlling operating cost and utilizing current assets.
2. The working capital needs of a firm are related to its sales. It is difficult to
precisely determine the relation b/n volume of sales and working capital needs. In
practice, current assets will have to be employed before growth takes place.
3. Earning capacity and dividend policy : Earning capacity more in quality and
monopoly conditions operates high working capital, high profits in it’s require to
influence dividend policy.
4. Rate of stock turnover: Stock turnover depends upon size and growth business
expansion. If small size organization requires little working capital, if it is larger
size requires high working capital.
5. Business Cycle: In case of boom requires low capital, in case of depression
requires high capital. In 1991 India’s position in market level will face inflation.
6. Other functions:
Assets structure.
Maximum facilities.
Estimating working capital needs:
The most appropriate method of calculating the working capital needs of a firm is
the concept of operating cycle. However we shall illustrate here three approaches, which
have been successfully applied in practice.
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Current assets holding period:
To estimate the working capital requirements on the basis of average holding
period of current assets and relating them to cost based on the companies experience in
the previous years. This method is essentially based on operating cycle concept.
Ratio of sales:
To estimate working capital requirements as a ratio of sales on the assumption
that current assets change with sales.
Rate of fixed investment:
To estimate working capital requirements as a percentage of fixed
investments.
Financing of working capital:
The current assets of the firm are supported by spontaneous current liabilities
(trade creditors and provisions others etc) short-term bank financing and long-term
sources of finance (mainly debentures and equity) the working capital policy of the firm
has to decide between two alternatives.
Current asset financing policy.
Conservative Aggressive current assets financing policy.
A conservative current assets financing policy relies less on short term bank
financing and more on long-term sources such as debentures and internal sources like
reserves and surpluses. The highly conservative policy my seek to replace even long-term
debt by equity.
An aggressive current asset financing policy relies on short-term bank finance and
seeks to reduce dependence on long-term financing. The consequence of those policies is
that the conservative current asset financing policy reduces the risk of the firm from
being unable to repay or replace its short-term debt periodically. But it may result in
enhanced cost of financing as the long-term sources finances debt and equity have an
associated with them. An aggressive current asset financing on the other hand may have
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opposite effects; it exposes the firm to higher of risk but minimizes the average cost
financing.
The working capital policy adopted by a firm can be broadly conservative,
moderate or aggressive with conservative or aggressive current asset financing policy.
The choice of overall working capital policy depends on the risk disposition of the
management.
ADVANTAGES OF ADEQUATE WORKING CAPITAL:
a. Solvency of the business: Adequate working capital helps in maintaining solvency
of the business by providing uninterrupted flow of production.
b. Good will: Sufficient working capital enables a business concern to make prompt
payments and helps in creating and maintaining goodwill.
c. Easy loans: A concern having adequate working capital high solvency and good
credit standing can arrange loans from banks and other an easy and favorable
terms.
d. Cash Discounts: Adequate working capital also enables a concern to avail cash
discounts on the purchases and hence it reduces costs.
e. Regular supply of raw materials: Sufficient working capital ensures regular
supply of raw materials on continuous production.
f. Regular payment of salaries, wages and other day-to-day commitments: A
company which has sample working capital can make regular payment of salaries,
wage and other efficiency, day-to-day commitments which raises the morale of its
employees increases their efficiency, reduces wastage and cost and enhances
production profits.
g. Explanation of favorable market conditions: Adequate working capital can exploit
favorable market conditions such as purchasing its requirements in bulk when the
prices are lower and by holding its inventories for higher prices.
h. Ability to face crisis: Adequate working capital enables a concern to face business
crisis in emergencies such as depression because during such periods, generally
there is much pressure on working capital.
i. Quick and regular return on investments: Every investor wants quick and regular
return on its investments sufficient working capital enables a concern to pay quick
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and regular dividends to its inventories, as there may not be much pressure to
plough bad profits. This gains the confidence of its concern investors and creates
a favorable market to raise additional funds in the future.
j. High morale: Adequacy of working capital creates an environment of security,
confidence, high and morale and creates overall efficiency in business.
DANGERS OF EXCESSIVE WORKING CAPITAL:
If creases in working capital is due to increase in inventories it leads to Un
necessary expenses like storage maintenance costs etc.
Excess cash at hand and banks lead to inefficient utilizations of funds,
which leads to declaiming profitability.
Large amounts of funds towards working capital results in over
capitalization.
Excessive working capital decreases company’s profitability.
DANGERS OF INADEQUATE WORKING CAPITAL:
It is not possible to utilize production facilities for want of working capital
It become difficult to meet day-to-day constituents and operating
inefficiencies will creep in
It becomes difficult to utilize fixed assets efficiencies due to lack of
working capital funds, thus rate of return an investment slumps
It leads to under capitalization and to greater risk of insolvency.
PRINCIPLES OF WORKING CAPITAL MANAGEMENT:
The following are the general principles of a sound working capital management policy.
1. Principle of risk variation.
2. Principle of cost of capital.
3. Principle of equity position.
4. Principle of maturity of payment.
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CASH MANAGEMENT
Cash is the important current asset for the operations of the business. Cash is the
basic input needed to keep the business running on a continuous basis; it is also the
ultimate output expected to be realized by selling the service or product manufactured by
the firm. The firm should keep sufficient cash, neither more not less. Cash shortage will
disrupt the firm’s manufacturing operation while excessive cash will simple remain idle,
without contributing anything towards the firm’s profitability. Thus, major function of
the financial manager is to maintain a sound cash position.
Cash is the money, which a firm can disburse immediately without any
restriction. The term cash includes coins, currency and check’s held by the firm, and
balances in its bank accounts. Sometimes near-cash items, such as marketable securities
or bank time deposits, are also included in cash. The basic characteristic of near-cash
assets is that they can readily be converted into cash generally, when a firm has excess
cash it invests it in marketable securities. This kind of investment contributes some profit
to the firm.
Cash management is concerned with the managing of:
1. Cash flows into and out of the firm
2. Cash flows within the firm, and
3. Cash balances held by the firm at a point of time by financing deficit surplus cash.
MOTIVES FOR HOLDING CASH:
The precautionary balance may be kept in cash and marketable securities.
Marketable securities play an important role here. The amount of cash set aside for
precautionary reasons is not expected to earn anything.
Precautionary balance should, thus, be held more in marketable securities and
relatively less in cash.
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The Speculative Motive:
The speculative motive relates to the holding of cash for investing in profit
making opportunities as and when they arise. The opportunity to make profit may arise
when the security process change. The firm will hold cash, when it is the firm’s need to
hold cash may be attributed to the following three motives.
The transaction motive
The precautionary motive.
The speculative motive.
The Transaction Motive:
The transaction motive required a firm to hold cash to conduct its business in the
ordinary course. The firm needs cash primarily to make payments for purchases, wages
and salaries, other operating expenses, taxes, dividends etc. the need to hold cash would
not arise is there were perfect synchronization b/w cash receipts and payments, that is
enough cash is received when the payment has to be made. But cash receipts and
payments are not perfectly synchronized.
For those periods, when cash payments exceed cash receipts, the firm should
maintain some cash balance to be able to make required payments. For transaction
purpose, a firm may invest its cash in marketable securities. Usually, the firm will
purchase securities whose maturity corresponds with some anticipated payments, such as
dividends, or meet anticipated payments whose timing is not perfectly matched with cash
receipts.
The Precautionary Motive:
The precautionary motive is the need to hold cash to meet contingencies in future.
It provides a cushion or buffer to withstand some unexpected emergency. The
precautionary amount of cash depends upon the predictability of cash flows. If cash flows
can be predicted with accuracy, less cash will be maintained for an emergency. The
amount of precautionary cash is also influenced by the firm’s ability to borrow at short
notice when the need arises. Stronger the ability of the stronger the ability of the firm to
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borrow a short notice when the need arise stronger the ability of the firm. To borrow at
short notice less the need for precautionary balance.
Expected that interest rates will arise and security process will fall. Securities can
be purchased when the interest rate, is expected to fall, subsequent fall in interest rates
and increase in security prices will benefit the firm. The firm may also speculate on
material prices. When it is expected that material prices will fall the firm can postpone
materials purchasing and make purchases in future when price actually falls.
The firm must decide the quantum of transactions and precautionary balance to be held.
This depends upon the following factors:
The expected cash inflows and outflows based on the cash budget and forecasts
encompassing long and short-range cash needs of the firm.
The degree of deviation between the expected and actual net cash flows.
The maturity structure of the firm’s liabilities.
The firm’s ability to borrow at short notice in the event of any emergency.
The efficient planning and control of cash.
All the factors analyzed together will determine the appropriate level of the transactions
and precautionary balances.
Cash planning:
Cash flows are inseparable part of the business operations of all firms. The firm
needs to invest in inventories, receivables and fixed assets and to make payment for
operating expenses in order to maintain growth in sales and earning.
It is possible that a firm may be consuming cash very fast. The “cash poor”
position of the firm can be corrected if its cash needs are planned in advance. At times, a
firm can have excess cash with it if its cash inflows exceed cash outflows. Such excess
cash inflows and outflows for a given period. The fore castes may be based on the present
operations for the anticipated future operations. As a firm grows and business operations
become complex, cash planning becomes inevitable for its continuing success.
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RECEIVABLE MANAGEMENT
INTRODUCTION:
Receivables are assets which are created as a result of the sale of goods or
services in the ordinary course of business. These are known as “Accounts receivable,
trade receivables or customer receivables”. The receivables represent an important
component of the current assets of a firm. Every business needs to have a proper control
management of receivable.
The first aspect, i.e., credit policies which have two dimensions:
Credit standard defined as the criteria to determine to whom credit should be
extended; and credit analysis.
The second major aspect of receivables management is to credit terms
comprising: a. Cash discount, b. Cash discount period, and c. Credit period.
MEANING:
Receivables represent amounts owed to the firm as a result of sale of goods or
services in the ordinary course of business. The purpose of maintaining or investing in
receivables is to meet competition, and to increase the sales and profits.
CHARACTERISTICS OF MAINTAINING RECEIVABLES:
1. Expansion of sale.
2. Increased Profit.
3. Financing Receivables.
4. Administrative Expenses.
5. Cost of Collection.
6. Bad debts.
MANAGEMENT OF RECEIVABLES
When a firm makes an ordinary sale of goods and does not receive payment the
firm grants trade credit and creates accounts receivable, which would be collected in
future. Thus accounts receivable represent an extension of credit to customers allowing
them a reasonable period of time in which to pay for the goods/services, which they have
received.
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The objective of receivables management is to have a trade-off between the
benefits and costs associated with the extension of credit. The benefits are increased sales
and associated increased profits/marginal contribution. The major categories of cost of
account receivable are collection costs, capital costs delinquency costs and default cost.
PURPOSE OF RECEIVABLES:
Every commitment of financial resources in a firm’s expected to constitute to the
goal of maximizing the present value of the firm in the market place.
The result of maintaining receivables is as follows.
FACTORS INFLUENCING THE RECEIVABLES:
A. Size of credit sales.
B. Credit policies.
C. Terms of trade.
D. Expansion profits.
E. Relation with profits.
F. Credit collection efforts.
G. Habits of customers.
FORECASTING OF RECEIVABLE:
Forecasting age of receivables.
Determining cost of goods sold.
Forecasting administration costs, collection costs and bad debts.
Forecasting discount.
Forecasting average collection period
Forecasting marginal cost of funds tied up in receivables.
DIMENSIONS OF RECEIVABLES MANAGEMENTS:
Forming of credit policy.
Executing the credit policy.
Formulating and executing collection policy.
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PAYABLES MANAGEMENT
INTRODUCTION:
A substantial part of purchases of goods and services in business are on credit
terms rather than against cash payment. While the supplier of goods and services tend to
perceive credit as a lever for enhancing sales. The supplier’s credit is referred to as
Account Payable, Trade credit, trade bill, trade acceptance commercial draft of bills
payables depending on the nature of credit provided. The extent to which this ‘buy-now,
pay-later’ facility is provided will depend upon a variety of factors such as the nature,
quality and volume of items to be purchased. Trade credits or payables constitute a major
segment of current liabilities in may business enterprises. And they primarily finance
inventories which form a major component of current assets in many cases.
SIGNIFICANCE:
Payables constitute a current or short-term liability representing the buyer’s
obligation to pay a certain amount on a date in the near future for value of goods or
services received. They are short-term determents of cash payments that they buyers of
goods and services are allowed by the seller. Trade credits or payables serve as non-
interest baring source of funds in most cases. They provide a spontaneous source of
capital that flows in naturally in the course of business keeping with established
commercial practices or formal understandings.
TYPES OF PAYABLES:
Trade credits or payables could be of three types they are as follows:
Open Accounts.
Promissory Notes.
Bills payables.
OBJECTIVES OF PAYABLES:
Explain the significance of payables as a source of finance.
Identify the factors that influence the payables quantum and duration.
Highlight the advantage of payable and provide hints for effective management of
payables.
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INVENTORY MANAGEMENT
INTRODUCTION:
Every business needs inventory for smooth running of its activities. It serves as
link between production and distribution processes. The unforeseen fluctuations in
demand and supply of goods also necessitate the need for inventory management and also
to minimize investment in inventories.
Managing working capital is synonymous with controlling inventories. Good
inventory management is good finance management an efficient management of
inventory should ultimately result in the maximization of the owner’s wealth. Inventory
management may be defined as the sum total of those. Activities which are necessary for
the acquisition, storage, sale and disposal or use of material.
MEANING AND NATURE OF INVENTORY:
Inventory is one of the major current assets. The literary meaning of the word
inventory is stock of goods or list of goods. The inventory is understood differently by
various authors. Inventory includes the following things.
Raw material.
Work-in-progress.
Finished Goods.
RAW MATERIAL:
Inventory contains items that purchased by the firm from others and are converted
into finished goods through the manufacturing (production) process. They are the
important inputs for the final product. Here the Raw material is the software’s which are
utilizing for the project.
WORK-IN-PROGRESS:
Inventory consists of items currently being used in the production process. They
are normally partially or semi-finished goods that are at various stages of production in a
multi-stage production process.
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FINISHED GOODS:
It represents final or completed products, which are available for sale. The
inventory of such goods consists of items that have been produced but are yet to be sold.
The job of the Financial Manager is to reconcile the conflicting view points of the
various functional areas regarding the appropriate inventory levels in order to fulfill the
overall objective of maximizing the owner’s wealth. This is nothing but the completion of
the project.
OBJECTIVES OF INVENTORY MANAGEMENT:
The objective of inventory management consists of two counter balancing parts:
To minimize the firms investments in Inventory.
To meet a demand for the product by efficiently organizing the firm’s production
and sales operations.
These two conflicting objectives of inventory management can also be expressed
in terms of cost and benefits associated with inventory. An optimum level of
inventory should be determined on the basis of the trade-off between costs and
benefits associated with the levels of inventory.
VALUATION OF COMPONENTS OF INVENTORY:
Inventory involves certain value, which every manufacturing firm needs to
account for the financial reports, so various firms follow various methods of inventory
valuation methods. Few are mentioned below:
FOR RAW MATERIALS:
FIRST IN FIRST OUT METHOD (FIFO):
In this method the raw materials are received first in the stores ledger are issued
first. The name of the method itself indicates the material first received in is issued first.
LAST IN FIRST OUT METHOD (LIFO):
In this method is opposite to FIFO. In this method the raw materials received last
by stores are issued first. The name itself indicates the materials, which are received last,
are issued first.
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FOR WORK-IN-PROGRESS:
Work-in-progress i.e., immediate are valued at factory cost basis i.e., the value of
raw materials in the process and the costs incurred to that particular point of
manufacturing process.
FOR FINISHED GOODS:
Finished products at the factory are valued at factory cost including head office
expenses and at warehouse are valued after adding freight to factory cost (Factory cost +
Head office cost).
COSTS INVOLVED IN INVENTORY:
One operating objective of inventory management is to minimize the costs
associated with the project. Excluding the cost of merchandise, the costs associated with
inventory fall into two basic categories:
Ordering or Acquisition or Set-up costs, and
Carrying costs.
These costs are an important element of the optimum level of inventory decisions.
ORDERING COSTS:
Such are also known as acquisition or set-up costs. This category of costs is
associated with the acquisition or ordering of project. Firms have to place orders with
suppliers to replenish the project.
The expenses involved are referred to as ordering costs. Apart from placing orders
outside, the various departments have to acquire materials from the stores. Any
expenditure involved here is a part of the ordering costs.
Included in the ordering costs are costs involved in:
Preparing a purchasing order or requisition from and
Receiving, inspecting, and recording the Software’s received.
The cost of the project consists of clerical costs and costs of stationery.
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It is therefore called a set-up cost. They are generally fixed per order placed, or
the more frequent the acquisition of inventory made, the higher are such costs. From a
different perspective, ordering costs. The acquisition costs are inversely related to the size
of inventory: they decline with the level of inventory. Thus, placing can minimize such
costs fewer orders for a larger amount. But acquisition maintenance of inventory, i.e.,
carrying costs.
CARRYING COSTS:
The second board category of costs associated with inventory is the carrying
costs. They are involved in maintaining or carrying inventory.
The cost of holding inventory may be divided into two categories:
Those that arise due to storing the inventory. The main components of this category of
carrying costs are:
Storage cost, i.e., tax, depreciation, insurance, and maintenance of the building,
utilities and janitorial services;
Insurance of inventory against fire and theft;
Deterioration in inventory because of pilferage, fire technical obsolescence, style
obsolescence and price decline;
Serving cost, such as, labor for handling inventory, clerical and accounting costs.
The opportunity cost of funds. This consists of expenses in raising funds (interest on
capital) to finance the acquisition of inventory. If funds were not locked up in inventory,
they would have earned a return. This is the opportunity cost of funds or the financial
cost component of the cost.
The carrying costs and the inventory size are positively related and move in the
same direction. It the level of inventory increases, the carrying costs also increased and
vices versa.
The sum of the order and carrying cost represents the total cost of the inventory.
This is compared with the benefits arising out of inventory to determine the optimum
level of inventory.
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TECHNIQUES OF INVENTORY MANAGEMENT
An optimum level of inventory on the basis of the trade-off b/w cost and benefit
to maximize the owner’s wealth should be aimed. Many sophisticated mathematical
techniques are available to handle inventory management problems.
The below mentioned are some of the inventory management techniques.
1. E.O.Q.
2. A.B.C analysis.
3. Stock levels.
ECONOMIC ORDER QUANTITY (E.O.Q):
Economic order quantity (EOQ) refers to the level of inventory at which the total
cost of inventory comprising the acquisition cost, ordering cost and carrying costs are
minimum. For analyzing the EOQ, as an inventory management technique, several
sophisticated mathematical models are available.
EOQ is the size of the order that yields the optimum total incremental inventory
cost during the given period of the time under the assumption that the demand and the
rate is constant and know. The concept of EOQ applies to the items, which are
replenished periodically into inventory in lots covering several periods’ needs.
FORMULAE:
EOQ = Square root of 2AO/C
Where,
A = Annual demand,
O = Ordering cost,
C = Carrying cost.
Ordering cost = No. of orders placed per year * ordering cost
Per order
No. of orders placed = Annual demand / No. of units per each order.
Carrying cost = (Order quantity / 2) * Carrying cost per unit.
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ANNUAL DEMAND:
The annual demand of the item depends on the number of items ordered in the
year. The annual cost of carrying inventory depends on the total size of the inventory in
stock.
ORDERING COST:
The cost is associated with the placed of an order for the acquisition of
inventories. This is determined on the basis of the expenses incurred in the purchase and
finance departments.
CARRYING COST:
Carrying cost is defined as the cost of holding the material inside and outside the
stores. It is associated with the level of inventories. The greater the order the longer is the
inventory carried as stock in the stores.
OPPORTUNITY COST:
The opportunity cost of funds, consists of the expenses in raising the funds
(interest on capital) to finance the acquisition of inventory. If the funds were not locked
up in the form on inventory, they would have earned a return. This is the opportunity cost
of the financial cost component. The carrying cost and the inventory size are positively
related and move in the same direction. If the level of the inventory increases, the
carrying cost increases and if the level of the inventory decreases the carrying cost also
decreases.
ORDER SIZE:
“How much to order” is one of the important questions to be deciding up on in every
inventory replenishment situation? Material required must be ordered from some source.
The process of ordering involves certain costs the ordering cost. The greater the order, the
longer is the inventory carried in stores and greater is the annual carrying cost of the
inventory. The smaller the quantity, the larger the number of orders placed per year and
the larger the ordering cost
ABC ANALYSIS:
ABC analysis is the selective inventory control technique and this is the first step
in the inventory control process. This is the process in which 1000’s of different types of
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inventories are classified to determine the type and degree of control required for each.
This technique is based on the assumption that the firm should not exercise the same
degree of control on the items of inventory.
On the basis on unit price and consumption, various inventory items are
categorized into 3 classes of this analysis:
A
B
C
“A” group involves the largest investment and inventory control must be rigorous and
intensive and the most sophisticated inventory control technique should be applied to
these items. Type “A’ is of higher cost and highly scare resource without which the
production process cannot be imagined, which will be very less in quantity when
compared to the investor level.
“A” type of item-only about 10% in number,
Account for 75% of the annual inventory usage value.
“B” group stands mid-way. It deserves less attention then “A” and more then “C”.
Employing less sophisticated techniques can also control it. Type “B” is of moderate cost
and moderately important. These are freely available when compared type “A”.
“B” type of item-the next 20% in number,
Account for the next 15% of the annual inventory usage value.
“C” group consists of items of inventory, which involve relatively small investments
although the number of items is fairly large; these items deserve minimum attention.
Type “C” is of lowest cost and of less importance when compared to “A” and “B”. there
evince of these inventories to the main production process market and can be
immediately replaced or purchased.
“C” type of item-the next 70% in number.
Account for only 10% of the annual usage value.
40
THE VARIOUS TYPES OF SELECTIVE CONTROLS ON THE BASIS OF “ABC ANALYSIS”:
Category “A”:
Tight control.
Assess exact requirement.
Frequent reviews.
Quantity control.
Regular and item wise expediting.
Low safety stocks and order point control.
Reduced and stabilize lea-time.
Large orders with phased delivery.
Tight control on scrap.
Value analysis and standardization.
Special care in prevention.
Category “B”:
Moderate control.
Individual postings.
Assess frequent reviews.
Less frequent reviews.
0Lead time control
Category “C”:
Minimum control.
Simple checks.
Estimate appropriate requirements
Group postings.
In frequent reviews.
Visual control.
Limited are periodic expediting.
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Minimum lead-time control.
Large safety stocks.
Large order size.
Stocking at point of view.
STEPS FOR CONDUCTING ABC ANALYSIS ARE:
Obtain unit cost of each manufactured or purchased item in inventory.
Obtain the usage in units for each item or estimate the usage over a period of time.
Obtain the net value of the usage by multiplying unit cost and the usage.
Arrange the items in descending order of the usage value.
The no. of items and their values are accumulated on a % of total basis.
Roughly divide the total list into 3 groups, namely, A-items of high usage value which
accounts for 70-75% of the usage value of inventories, and about 10-15%
In number, B-items of medium usage value which accounts for the next 15-20% of the
usage value in the inventories, C-items of low usage value, which would be the remaining
group of items.
WHILE APPLYING THE ABC ANALYSIS, THE FOLLOWING
POINTSSHOULD BE TAKEN INTO CONSIDERATION:
Although every party of the item is important for the repair of machine, the items
with Low value can be given a loose control.
Tight control of the high value stock must reduce costs sufficiently to more than
off set the increased costs caused by lesser controls on the low value items. When
applying the ABC principle, some high value items, which will not be required due to
being in excess, should actually be considered for disposal at a worthwhile price.
The ABC analysis in variable involves only items moving items since the annual
consumption value is based on consumption besides unit cost. The items, which arenon-
moving, have also been considered separately for retention.
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STOCK LEVEL
Re-order level:
Re-order level (ROL) Refers to the level of inventory, which gives an indication that
action replenishment and proposals for purchase of a particular item are to be
imitated. This level is fixed between minimum and maximum levels.
ROL = Maximum consumption during the year * Maximum period required for
delivery.
Minimum stock level:
Minimum stock level is also called as safety stock or buffer stock. This represents the
lower limit below, which the stock of any, item should not be normally to non-
availability of raw materials.
Minimum stock level = ROL-(Normal usage * average delivery period)
Maximum stock level:
Maximum stock level is the level, which should not be exceeded or maintained.
Maximum stock level = ROL+ROQ-(Minimum usage * Minimum delivery period)
Where, ROQ = Re-order Quantity,
Average stock level lies between the min and max stock levels.
Average stock levels = Minimum stock level + ROQ/2
Therefore,
ABC analysis, helps in categorizing the 100’s of spare parts in inventory and
allots them with 3 different classes basing on their cost and consumption.
EOQ technique helps in determining the ordering cost and the carrying cost of the order
size, through which the right ordering quantities can be fixed and minimize the ordering
and carrying costs of the inventory.
A stock level helps to determine the level of stock to be maintained. It decides the re-
order level and the quantity of the inventory; it forecasts the minimum and maximum
levels of inventory to be maintained without any disturbance in the production process.
Hence, these are the techniques of inventory management for the effective control
of the inventory, which helps to provide a smooth production process without any
hindrances.
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PROBLEM BASED ON STOCK LEVELS:Two components, A and B are used as follows.
Normal usage = 50 units each per week.
Minimum usage = 25 units each per week.
Maximum usage = 75 units each per week.
Re-order quantity A = 300 units, B = 500 units
Re-order period A = 4 to 6 weeks, B = 2 to 4 weeks
Calculate the following for each component
Re-order level
Minimum level
Maximum level
Average stock level
Solution: Re-order level = Maximum usage * Maximum delivery time.
A = 75*6 weeks = 450 units
B = 75*4 weeks = 300units
b. Minimum level = Re-order level - (normal usage * average delivery time) A = 450
units – (50units * 5 weeks)
= 450 unit - 250 units
= 200 units.
B = 300 units – (50 units * 3 weeks)
= 300 units – 150 units
= 150 units.
c. Maximum level = Re-order level – (minimum usage * minimum delivery time) +
Re-order quantity
A = 450 units – (25*4) + 300units
= 450 units – 100+300 units
= 450 units + 200 units
= 650 units
B = 300 units – (25*2) + 500units
= 300 units – 50+500 units
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= 300 units + 450 units
= 750 units
d. Average stock level = Minimum level + Re-order quantity /2
A = 200+300/2
= 200 + 150
= 350 units
B = 150+500/2
= 150 + 250
= 400 units
IMPORTANCE OF INVENTORIES IN WORKING CAPITAL MANAGEMET:
Inventory plays a leading role in determining the liquidity status of the
organization. From the operating cycle. We can obtain the number of items the working
capital is turned as shown in the operating cycle.
The endeavor of an aggressive management will be to reduce this period so that
the same quantum of working capital can be turned more number of items. A case in
point is of a pan shop selling chewing pans, etc. his turnover of working capital is more
than 300 times as he deals with perishable leaves. There are no concepts of work-in-
progress and he does not allow credit.
This clearly brings out importance of inventory control and he benefits it accures
to the organization from the increased profitability view and better return on investment
considerations. It should be emphasized that necessary corrections should be applied for
any changes in the tax structure.
Consequently an efficient management of working capital has become a must for the
smooth and successful operation of the business organization. Price and profits depend
more on the material content and interest burden. The short-term bank borrowing is
largely affected by financing and inventories. The interest for servicing the working
capital, the major constituent of which is the inventory. Better inventory control is
reducing the material cost and the interest burden reflecting in increased profits.
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CHAPTER VCHANGES IN WORKING CAPITAL POSITION IN THE IBASE Solutions
Working Capital Management
ParticularsYear WC2003-04(RS. IN LAKHS)
2004-05(RS. IN LAKHS)
Increase(RS. IN LAKHS)
Decrease(RS. IN LAKHS)
A. Current Assets1. Inventory 1,183.66 1,136.13 47.532. Cash & Bank balances 227.09 78.55 148.543. Receivables 744.94 773.62 28.684.subsidiry receivablesLoans & Advances1. Advances to employees 12.82 13 0.182. Advances for purchases 52.72 46.88 5.843. Prepaid expenses 21.9 19.19 2.71Total Current Assets 2,243.13 2,067.37B. Current Liabilities1.for software’s purchase 299.27 428.6 129.332. For expenses 478.68 480.04 1.36Sundry Creditors a. Sundry Creditors 436.72 239.44 197.28b. Security Deposits 109.19 120.25 22.01Total Current Liabilities 1,323.86 1,268.33Networking Capital- 919.27 799.04 Increase / decrease working capital 120.23 120.33
919.27 919.27 554.60 554.60
INTERPRETATION
During 2004-05 the net working capital of the IBASE Solutions decreased by Rs
120.33 lakhs. This is mainly due to an increase in current liabilities for software’s
purchase.
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CHANGES IN WORKING CAPITAL POSITION IN THE IBASE Solutions
Working Capital Management
ParticularsYear WC2004-05(RS. IN LAKHS)
2005-06(RS. IN LAKHS)
Increase(RS. IN LAKHS)
Decrease(RS.IN LAKHS)
A. Current Assets1. Inventory 1,136.13 1,224.84 88.712. Cash & Bank balances 78.55 439.13 360.583. Receivables 773.62 835.75 62.134.subsidiry receivablesLoans & Advances1. Advances to employees 13 13.21 .212. Advances for purchases 46.88 67.09 20.213. Prepaid expenses 19.19 10.81 8.38Total Current Assets 2,067.37 2,590.83B. Current Liabilities1.for software’s purchase 428.6 307.56 121.042. For expenses 480.04 705.43 225.39Sundry Creditors--a. Sundry Creditors 239.44 284.78 45.34b. Security Deposits 120.25 142.26 22.01Total Current Liabilities 1,268.33 1,440.03 Networking Capital- 799.04 1,150.80 Increase / decrease working capital 351.76 351.76
1,150.80 1,150.80 652.88 652.88
INTERPRETATION
During 2005-06 the net working capital of the IBASE Solutions increased by Rs
351.76 lakhs. This is mainly due to an increase in current assets for inventory, cash &
bank balances.
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CHANGES IN WORKING CAPITAL POSITION IN THE IBASE SOLUTIONS
Working Capital Management
ParticularsYear WC2005-06(RS.IN LAKHS)
2006-07(RS. IN LAKHS)
Increase(RS.IN LAKHS)
Decrease(RS.IN LAKHS)
A. Current Assets1. Inventory 1,224.84 1,125.61 99.232. Cash & Bank balances 439.13 336.75 102.383. Receivables 835.75 713.75 122.004.subsidiry receivables - -Loans & Advances1. Advances to employees 13.21 12.06 1.152. Advances for purchases 67.09 107.85 40.763. Prepaid expenses 10.81 18.13 7.32Total Current Assets 2,590.83 2,314.15B. Current Liabilities1.for Software’s purchase 307.56 374.68 67.122. For expenses 705.43 555.29 150.14Sundry Creditorsa. Sundry Creditors 284.78 272.22 12.56b. Security Deposits 142.26 167.04 24.78Total Current Liabilities 1,440.03 1,369.23Networking Capital- 1,150.80 944.92Increase / decrease working capital 205.88 205.88
1,150.80 1150.8 416.66 416.66
INTERPRETATION
During 2006-07 the net working capital of the IBASE Solutions decreased by
Rs 205.88lakhs. This is mainly due to increase in current liabilities for Software’s
purchase and sundry creditor.
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CHANGES IN WORKING CAPITAL POSITION IN THE IBASE SOLUTIONS
Working Capital Management
Particularsyear WC2006-07(RS. IN LAKHS)
2007-08 (RS. IN LAKHS)
Increase(RS. IN LAKHS)
Decrease(RS. IN LAKHS)
A. Current Assets1. Inventory 1,125.61 1,065.57 60.042. Cash & Bank balances 336.75 543.33 206.583. Receivables 713.75 701.41 12.344.subsidiry receivables - -Loans & Advances1. Advances to employees 12.06 16.78 4.722. Advances for purchases 107.85 60.68 47.173. Prepaid expenses 18.13 12.78 5.35Total Current Assets 2,314.15 2400.55B. Current Liabilities1.for Software’s purchase 374.68 405.93 31.252. For expenses 555.29 610.46 55.17Sundry Creditors 0.00a. Sundry Creditors 272.22 222.02 50.20b. Security Deposits 167.04 216.59 49.55Total Current Liabilities 1,369.23 1,455.00Networking Capital- 944.92 945.55Increase / decrease working capital 4.37 4.37
949.92 949.92 265.87 265.87
INTERPRETATION
During 2007-08 the net working capital of the IBASE Solutions decreased by Rs
4.37 lakhs. This is mainly due to increase in current libilities for Software’s purchase and
sundry creditor.
49
CHANGES IN WORKING CAPITAL POSITION IN THE IBASE SOLUTIONS
Working Capital Management
ParticularsYear WC2007-08 (RS. IN LAKHS)
2008-09 (RS. IN LAKHS)
Increase(RS. IN LAKHS)
Decrease(RS. IN LAKHS)
A. Current Assets1. Inventory 1,065.57 1,442.27 376.72. Cash & Bank balances 543.33 578.46 35.133. Receivables 701.41 687.09 14.344.subsidiry receivables - -Loans & Advances1. Advances to employees 16.78 11.01 5.772. Advances for purchases 60.68 48.23 12.453. Prepaid expenses 12.78 10.64 2.14Total Current Assets 2400.55 2777.70B. Current Liabilities1.for Software’s purchase 405.93 460.62 54.692. For expenses 610.46 809.65 199.19Sundry Creditorsa. Sundry Creditors 222.02 313.57 91.55b. Security Deposits 216.59 233.49 16.95Total Current Liabilities 1,455.00 1,817.33Networking Capital- 945.55 960.37Increase / decrease working capital 14.82 14.82
960.37 960.37 411.83 411.83
INTERPRETATION
During 2007-08 the net working capital of the IBASE Solutions decreased by Rs
14.82 lakhs. This is mainly due to increase in current libilities for Software’s purchase,
outstanding expenses and sundry creditor.
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WORKING CAPITAL TURNOVER RATIO
Working capital Turnover Ratio indicates the velocity of the utilization of net
working capital.
Working Capital Turnover Ratio = Sales / Working Capital
(RS. IN LAKHS)
Year Sales Working Capital Ratio
2003-04 10,297.69 919.27 11.20
2004-05 11,388.74 799.04 12.39
2005-06 11,782.55 1,150.80 10.24
2006-07 11,985.11 944.92 12.68
2007-08 13,204.29 945.55 14.03
2008-09 14,352.23 960.33 14.94
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The working capital of IBASE Solutions. increased from Rs. In Lakhs 919.27 in
2003-04 to Rs. lakhs 960.33 in 2005-06.
The working capital ratio has increased from 2003-04 to 2004-05 from 11.20 to
12.39 it again decreased in 2005-06 to 10.24 and increased to 2006-07 to 2008-09 from
12.68 to 14.94.
The highest working capital turnover ratio was quoted in 2008-09 that is 14.94.
CURRENT RATIO
Current Ratio may be defined as the relationship between current assets and
current liabilities. This ratio, also known as working capital ratio, is a measure of general
liquidity and is most widely used to make the analysis of a short-term financial position
or liquidity of a firm.
Current Ratio =Current Assets / Current Liabilities
(RS. IN LAKHS)
Year Current Assets Current Liabilities Ratio
2003-04 2,243.13 1,323.86 1.69
2004-05 2,067.37 1,268.33 1.63
2005-06 2,590.83 1,440.03 1.83
2006-07 2,314.15 1,369.23 1.69
2007-08 2,400.55 1,455.00 1.64
2008-09 2,777.70 1,817.33 1.53
52
The current ratio in IBASE Solutions., shown on table 1. The current assets
increased year after year from Rs. lakhs 2343.13 to 2777.70 in 2006.
The current ratio varied between 1.69 to 1.53 times. It increased in 2005-06 to
1.83 times. The current ratio in the year 2004-05 is 1.64 times. The current ratio was
decreased in the year 2008-09 is 1.53 times.
The company is not maintain is up to the a standard norm of 2:1 in all the years.
CURRENT ASSETS TO TOTAL ASSETS
Current Assets to total assets = Current Assets / Total Assets
(RS. IN LAKHS)Year Current Assets Total assets Ratio
2003-04 2,243.13 3,985.93 0.56
2004-05 2,067.37 3,810.55 0.54
2005-06 2,590.83 4,029.23 0.64
2006-07 2,314.15 4,369.70 0.52
2007-08 2,400.55 4,319.66 0.55
2008-09 2,777.70 4,718.39 0.58
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INTERPRETATION:
The table 3 reveals about current assets as a percentage of total assets. The current
assets increased year after year from Rs 2243.13 to Rs2777.70 lakhs and also total assets
increased from Rs 3985.93 to Rs 4718.39 in 2005-06
The current assets formed nearly 58% of total assets in 2008-09. From all the
above facts it can be considered that the current assets as a percentage of total assets are
very high in IBASE Solutions.
QUICK RATIO
Quick ratio, also known as Acid Test or Liquid Ratio, is a more rigorous test of
liquidity than the current ratio. The term “liquidity” refers to the ability of a firm to pay
its short-term obligations as and when they become due. The two determinants of current
ratio, as a measure of liquidity, are current assets and current liabilities. Current assets
include inventories and prepaid expenses which are not easily convertible into cash
54
within a short period. Quick ratio may be defined as the relationship between
quick/liquid assets and current or liquid liabilities. An asset is said to be liquid if it can
be converted into cash within a short period without loss of value.
Quick Ratio= Quick Assets / Current Liabilities
(RS. IN LAKHS)
Year Quick Assets Current Liabilities Ratio
2003-04 1,059.47 1,323.86 0.80
2004-05 931.24 1,268.33 0.73
2005-06 1,365.99 1,440.03 0.95
2006-07 1,188.54 1,369.23 0.86
2007-08 1,334.98 1,455.00 0.91
2008-09 1335.43 1,817.33 0.73
55
The table 2 discloses the quick ratio of IBASE Solutions. The quick assets increased from
Rs. lakhs 1,059.47 in 2000-01 to 1,335.43 in 2008-09. The current liabilities increased
from Rs. Lakhs 1,323.86 to 1,817.33.
The quick ratio increased from 0.80 times in 2003-04 to 0.73 times in 2008-09 it
is conduced that the quick ratio is not satisfactory as it is not maintaing the standard norm
of 1:1.
QUICK ASSETS TO TOTAL SALES
Quick assets to Total Sales ratio = Quick assets / total sales(RS. IN LAKHS)
Year Quick Assets Total sales Ratio
2003-04 1,059.47 1,0297.69 0.10
2004-05 931.24 1,1388.74 0.08
2005-06 1,365.99 1,1782.55 0.11
2006-07 1,188.54 1,1985.11 0.09
2007-08 1,334.98 1,3204.29 0.10
2008-09 1,335.43 1,4352.23 0.09
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INTERPRETATION:
The table represents quick assets as a percentage of sales revenue I in IBASE
Solutions.
The quick assets are increased from 1059.47 to 1335.43 with certain fluctuations
the sales revenue has also increased from 10297.69 to 14352.23 in 2005-06.
The percentage has varied between 0.08 to 0.11and in 2008-09 It has increased to
0.09 in 2008-09. By this we can conclude that quick assets as a percentage of sales
revenue is low in IBASE Solutions.
QUICK ASSETS TO TOTAL ASSETS
Quick assets to Total Assets Ratio = Quick assets / Total Assets
(RS. IN LAKHS)Year Quick Assets Total Assets Ratio
2003-04 1,059.47 3,985.93 0.26
2004-05 931.24 3,810.55 0.24
2005-06 1,365.99 4,029.23 0.33
2006-07 1,188.54 4,369.70 0.27
2007-08 1,334.98 4,319.66 0.31
2008-09 1,335.43 4,718.39 0.28
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INTERPRETATIONS:
The table reveals about quick assets as percentage of total assets in IBASE
Solutions. The quick assets have increased from Rs. Lakhs1059.47 in 2000-01 to Rs.
lakhs 1335.43 in 2005-06.
But the total assets have decreased and increased year after year there has been
fluctuation in the total assets. The quick assets percentage of total assets has increased
from 0.28 in 2008-09. Hence it can be concluded that quick assets as a percentage of total
assets is low in this organization.
INVENTORY TURN OVER RATIO
Inventory turnover ratio also known as stock velocity is normally calculated as
sales/average inventory or cost of goods sold/ average inventory. It would indicate
whether inventory has been efficiently used or not. The purpose is to see whether only
the required minimum funds have been locked up in inventory. Inventory turnover Ratio
indicates the number of times the stock has been turned over during the period and
evaluated the efficiency with which a firm is able to manage its inventory.
58
Inventory turnover ratio = Sales / Inventory
(RS. IN LAKHS)
Year Sales Inventory Ratio
2003-04 10,297.69 1,183.66 8.70
2004-05 11,388.74 1,136.13 10.02
2005-06 11,782.55 1,224.84 9.46
2006-07 11,985.11 1,125.61 10.64
2007-08 13,204.29 1,060.57 12.45
2008-09 14,352.23 1,442.27 9.95
INTERPRETATION:
The relationship between inventory and sales revenue is presented in the table.
The inventory turnover increased from 8.70 times to 9.95 times and it recorded highest in
2007-08 at 12.45 times. Hence it can be conclude that inventory turnover ratio is near to
the satisfactory level in IBASE Solutions.
59
RECEIVABLES TURN OVER RATIO
Receivables turn over ratio = Sales / Receivables
(RS. IN LAKHS)
Year Total sales Receivables Ratio
2003-04 1,0297.69 844.38 12.19
2004-05 1,1388.74 773.62 14.72
2005-06 1,1782.55 835.75 14.09
2006-07 1,1985.11 713.75 16.79
2007-08 1,3204.29 701.41 18.82
2008-09 1,4352.23 687.09 20.88
INTERPRETATION:
The receivable turn over ratio has been gradually increase in change from year on year.
Their might be a slight fluctuation for the first three years and later it may continuously in
positive side from 12.19 to 20.88. It is indicating that the company sales are improved
much better and it is good for the company and it should continue the same in future also.
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CASH TO CURRENT ASSETS
Cash to Current assets ratio = Cash / Current assets
(RS. IN LAKHS)Year Cash Current Assets Ratio
2003-04 227.09 2243.13 0.10
2004-05 78.55 2067.37 0.04
2005-06 439.13 2590.83 0.17
2006-07 336.75 2314.15 0.14
2007-08 543.33 2400.55 0.22
2008-09 578.46 2777.70 0.21
INTERPRETATION:
The cash balance has continuous decrease from 2003-04 i.e. Rs. lakhs 227.09 to
Rs. lakhs 78.55 in 2001-02 and it recorded highest in 2008-09 at Rs. lakhs 578.46, and it
decrease from Rs. lakhs 439.13 in 2005-06 to Rs. lakhs 336.75 in 2003-04 and increase to
Rs. lakhs 578.46 in 2008-09.
61
The current assets has from 2243.13 in 2003-04 to Rs. lakhs 2,067.37 and there
has been decrease from 2004-05 i.e. 2,590.83 to 2003-04 to 2,314.15 increase to 2,400.55
in 2007-08 to and increase to2777.70 in 2008-09. The ratio varied between 0.04 to 0.21.
CASH TO TOTAL ASSETS
Cash to Total assets ratio = Cash / Total Assets
(RS. IN LAKHS)Year Cash Total Assets Ratio
2003-04 227.09 3,985.93 0.06
2004-05 78.55 3,810.55 0.02
2005-06 439.13 4,029.23 0.11
2006-07 336.75 4,369.70 0.07
2007-08 543.33 4,319.66 0.12
2008-09 578.46 4,718.39 0.12
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INTERPRETATION:
Cash balances has decreased from Rs. lakhs 227.09 in 2003-04 to Rs. lakhs 78.55
in 2004-05 and it again increased to Rs. lakhs 336.75 in 2006-07 and it is increased to
Rs. lakhs 578.46 in 2008-09 where the total assets has experienced an alternate decrease
and increase.
Cash as a percentage of total assets has decreased from 6% in 2003-04 to 2% in
2004-05 and increased to 11% in 2005-06. And decreased from 7% in 2005-06 to 12% in
2008-09 as whole cash in reduction to total assets is satisfactory in IBASE Solutions.
Hence it is advised to the company to improve the cash and bank balances
significantly.
STATEMENT OF CHANGES IN WORKING CAPITAL(RS. IN LAKHS)
Year Current Assets
Current Liabilities
Networking Capital
Increase Decrease
2003-04 2,243.13 1,323.86 919.27 420.85 -
2004-05 2,067.37 1,268.33 799.04 - 120.23
2005-06 2,590.83 1,440.03 1,150.80 351.76 -
2006-07 2,314.15 1,369.23 944.92 - 205.88
2007-08 2,400.55 1,455.00 945.55 - 4.37
2008-09 2,777.70 1,817.33 960.37 14.82 -
63
FLUCTUATIONS IN WORKING CAPITAL
INTERPRETATION:
Net working capital in 2003-04 was 919.27 and it decreased to 799.9 in 2004-05.
In 2005-2006 net working capital is Rs. lakhs 1,150.80 and it decreased to 944.92 in
2006-07. In 2007-08 net working capitals is Rs. Lakhs 945.55 and it increasing to 960.37
in 2008-09. The change in networking capital is alternative increase and decrease.
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CHAPTER-VI
FINDINGS
It is observed that, the Net working capital of the organization is positive
through out the study period. Though the net working capital is positive, it
should be maintained at satisfactory level for all the years. But, in the final
year it is negative.
It found that, the quick ratio of this company varied between 0.80 times to
0.86 times during the period between 2003-04 to 2006-07 and 0.91 times in
2007-08; in 2008-09 it is 0.73 times.
Therefore, the quick ratio is very low at the beginning of the years but later it
is registered at higher rate in this organization.
It is recognized that, the inventory ratio varied between 8.70 times in 2003-04
and 9.95 times in 2008-09. As a whole the inventory turnover ratio is
maintained satisfactorily.
It is observed that, the receivables turnover is abnormally low in 2003-04 i.e.,
12.19% but in next five years the ratio is decreased and increased to 20.88%
in 2008-09. In other words the company is collecting the receivables
efficiently and effectively in 2008-09 than compared to other years.
Cash to Total Assets has been gradually fluctuating from increase and
decrease from year on year. It is too good for the change of the company.
Hence we suggest that the company has to improve the cash and bank
balance for the easy liquidity.
65
Net working capital position is too falling down from year on year due to
over withdrawal of the personnel expenditure by the company. Hence we
suggest that the company has to decrease their personnel expenditure and it
reflects on the company dissolution.
The Cash to Current Assets Ratio it is conclude that the cash balance has
been gradually increasing from year on year. The increase in cash block may
clearly indicate that the company has not utilizing their funds properly.
Hence we suggest that the company has to use of their funds in a proper way.
So, that it could be safe from the closers.
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SUGGESTIONS
1. It is suggested that, the fluctuations existed in the Net working capital
must be controlled by properly maintaining the ratio of current assets and current
liabilities. Then automatically changes identified during the period would have been
be minimized. Even in future also if it is maintained the proper ratio, the company
can effectively run without such deficiencies.
2. It is advised that, the yardstick for the Quick ratio is 1:1 where as it is
very low in the organization. Therefore, the company should need to raise its quick
assets first to over come the existing problem in order to meet the requirements.
Fortunately, it reached to the good stage but, if they fail to maintain good cushion of
the quick assets at any movement of time it may face the same problem. So, the quick
ratio should be maintaining as per the requirement to shows the sound position of the
company.
3. It is suggested that, properly maintaining the inventory turn over ratio is
also very good symbol for the organization. Therefore, it is advised to maintain the
same and it should try to increasing the same year by year.
This ratio shows the inner strength & capability of the company.
4. It is observed that, fluctuations taken place in receivables turn over ratio
up to the year 2004-2005. Afterwards for the rest of the years it is registered as
increase. Hence, the receivable turn over ratio is high in the company. Therefore, it
shows the good turn for the sales position of the company.
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BIBLIOGRAPHY
Books:
Financial Management KHAN & JAIN
Financial Management I.M. PANDY
Financial Management PRASANNA CHANDRA
(Theory & Practice)
Financial Accounting S.P.JAIN & K.L. NARANG
Financial Services SHASHI K.GUPTA NISHA AGGARWAL
Web Sites:
www.ibasesolutions.com.au
www.ibasesolv.com
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