hima mohan
TRANSCRIPT
A STUDY 0N WORKING CAPITAL MANAGEMENT OF KERALA AGRO MACHINERY COOPERATION LIMITED,
ATHANI
Submitted in partial fulfillment of the requirements for the award of the
degree of
MASTER OF BUSINESS ADMINISTRATION
Mahatma Gandhi University, Kottayam.
By
HIMA MOHAN
(Enroll. No: 08/101/PF/110)
Under the Supervision of
Ms.Navya A H
ST.JOSEPH’S COLLEGE, IRINJALAKUDA
(M.G.University off-campus study centre)
Centre Code-101
School of Distance Education
Mahatma Gandhi University
Kottayam, Kerala-686560
2008-2010
INTRODUCTION
Finance is the crucial factor in the establishment & success of any
concern. Operation means Production & Sale. Working capital is the amount of
fund used for financing the day to day operation in a business concern such as
Raw materials Meeting expenditure on salaries, wages, rents, rates, advertising
etc. It is that part of capital and credit which enables an enterprise to start and
conduct its operations. The need of working capital arises because receipt and
payment of cash are not continuous. Need of current assets arises on account
of production and consequent of sales, which will not be converted into cash
immediately.
Working capital management is a significant function of finance
manager and he has to spend a great deal of time on working capital
management. To carryout the operations successfully and maximize the return
on investment, a proper management of working capital is highly essential...
Efficient working capital management requires a careful enquiry into the
current assets and current liabilities so as to control and conserve working
capital properly,
In short, profitability depends largely on the efficient management of
working capital. Hence, the study on working capital analysis of KAMCO
assumes importance in the present scenario. It is an integral part of the overall
corporate management.
Statement of the Problem
Working capital is the lifeline of any industry, irrespective of its
operations and a neglect of their major aspect can be highly detrimental to the
efficiency of an organization. Working capital should be optimum to run the
business operations in the most effective manner. The excess or shortage of
working capital would be dangerous to any business.
The excessive working capital can be dangerous; it result into reducing
profits, unnecessary purchasing, accumulation of inventories, chances of theft,
waste and losses, excessive debtors, defective credit policy and lesser
efficiency in the organization.
Inadequate working capital results in difficulty for the firm to exploit
favorable market conditions, inefficiencies, increased costs, reduced profit
stagnant growth and difficulties to implement operating plans.
Effective management and control of various components of working
capital is the most important function of financial management. Hence the
present study is working capital management and profitability position of
KAMCO Ltd.
Objectives of the study
To analyze and evaluate working capital management in KAMCO.
To understand liquidity and profitability position of KAMCO
To assess the effectiveness of inventory of KAMCO
To study the relative significance of various sources of financing of
working capital
To find the working capital requirements of KAMCO
To know the history, growth and development of the company.
To suggest remedies and recommendations for making necessary
improvements in the working capital management of KAMCO.
RESEARCH METHODOLOGY
Research Design:
The study is descriptive in nature as efforts are taken to describe the
various areas of functioning in the management of working capital in KAMCO
Ltd. The study is about the description of the state of affairs, as it existed in the
past.
Sources of data collection:-
1. Research & analysis are based on the previous 5 years annual report.
2. Expert opinion from in house finance professionals & managers at
KAMCO Ltd.
3. Reference to various manuals of finance department of KAMCO Ltd &
Company website.
Tools used for analysis
For the purpose of analysis of data, various statistical & accounting
techniques are used. The accounting techniques include statement of Net
working capital , Ratio Analysis , rend Analysis , Cash flow Analysis & Fund
flow Analysis.
The ratios used in the study:-
1. Liability ratios
2. Working Capital ratios
3. Efficiency or turnover ratios
4. Leverage ratios
5. Profitability ratios
In this study, ratio analysis tries to explain the liquidity, solvency,
efficiency and profitability position of KAMCO Ltd.
Period of the study:-
For the purpose of study, date of five financial years that is 2004-2005
to 2008-200- has been taken into consideration.
Duration of the study:-
The study on working capital management has been done for a period of
2 months from 1/12/2009 to 25/1/2010 in KAMCO Ltd.
Scope of the Study:
The study was conducted in KAMCO Ltd Athani, Aluva. The study
mainly focuses on the working capital investment and profitability analysis of
KAMCO. Working capital investment is the lifeblood of a company.
Adequate and appropriate working capital financing ensures that a firm has
sufficient cash flow to pay its bills as if awaits the full collection of revenue.
Working capital is also needed to undertake activities to improve business
operations and remain competitive. This study will help them to understand
their current working capital position and to improve the man agent of working
capital in a better way. This study provides an idea to the public about the
liquidity and profitability position of KAMCO Ltd
Significance of the Study
The working capital management includes efficient handling of current
assets as well as current liabilities. Proper management of working capital is
almost importance for all corporate houses. It is true that, without proper
management of working capital there will be no purchase of raw material, non-
functioning of production process, no marketing and ultimately no profit. The
present study provides an insight into different aspects of working capital
management in selected unit of five years period. The study would point out
the working capital policies pursued by the company. The study highlights the
usage of ratios and statistical techniques that may be used to solve the problems
in working capital and to explain the liquidity position of the company.
Limitations of the study
Availability of data has been restricted to last five years of annual
reports
The study was conducted within a short period of the time, because of
that time was very limit. So time was the major limiting factor
In house data has been very secretive and this shortcoming can be
reflected in the analysis
The study is based on the published information only.
The result of this study is applicable only for this company and is not
suited for other companies.
Analysis is made only for the post data. So the future variation in all
aspects may be affecting the study.
INDUSTRY PROFILE
India is basically an agrarian nation. There are numerous farmers in
India who are cultivating in large scale or in small scale. There was not much
mechanization in India in the field of agriculture, till recently.
Lack of scientific cultivation and mechanization amounted for the low
productivity in the country. Farmers depended on manually operated and
animal drawn agricultural impellents. Even today they are used extensively.
But mow the old methods of cultivation are giving way to new methods though
in a slow progression.
Mechanization in the field of agriculture increases the productivity and
reduces the unit cost of production. It also reduces the time taken for the
agricultural operation and removes the drudgery and hazards to the human
beings and animals.
Adoption of new methods and mechanization in the agricultural field
increases the necessity of various agricultural machinery and implements.
Tillers and Tractors posses prime positions among the agricultural machineries.
Tractors are widely used in the states like Punjab and Bihar, were Zamindari
system is still prevailing and the farmers possessing vast areas of land and
fields. Tractors are within their reach and they are economical also for them.
A power tiller is a reduced vision of tractor. It has got it name form its
rotary tilling unit. While tractors are usually used for operations in large
holding the tillers are suited to small areas of land so in those places where
there are small scale and middle class farmers tillers are more attractive.
Tillers are suitable than the tractors in the hilly areas also. Moreover the
tilling and ploughing operations done by tillers are better than those done by
tractors. A tiller cost much less than a tractor all this contribute the fact that the
demand for tiller is increasing magnificently in the recent days.
Multiple crop farming appears most common in Bihar and Kerala.
Intercropping is also carried out in coconut gardeners of Kerala. The
interspaces are used for cultivation of banana tapioca, vegetables, clove etc and
are tilled using power tillers. Land preparation, pumping leveling, spraying etc
by means of power tillers has reduced the cost of cultivation. These are not
limited to Kerala. This also attribute to the demand of power tillers
The tillers production in India is not able to meet the demand in the
country. In 1974, there were five tiller manufacturing companies in India,
Russia and Chinese tillers also were imported to meet the demand. But these
tillers gained no significance in the tiller market of India due to the factors of
quality, availability of spare parts etc.
Now in India there are a few companies which manufacture power tillers.
1. Kerala, Agro Machinery Corporation Limited
2. V.S.T. Tillers and Tractors Limited Bangalore.
3. Bhoomi tillers, Hyderabad
4. National Engineering Company, Madras.
5. Dogar Tools, Madhya Pradesh.
But,of these companies KAMCO & V.S.T Tillers and Tractors are the
only two companies which have undertaken significant
production. They both have technical collaboration with Japanese companies.
While KAMCO has collaborated with RUBOTA V.S.T has got collaboration
with Mitsubishi of Japan. These two companies have an aggregate 95% of the
market share in India in their field.
It was expected that the liberalization policy of the government would
bring new competition in the tiller market from the foreign counterparts. But
this has not happened yet. We can say, without any doubt that the tiller
industry in India is in its boom period.
COMPANY PROFILLE
History
Kerala Agro Machinery Corporation Limited (KAMCO) was
established in year 1973 as la wholly owned subsidiary of Kerala Agro
Industries Corporation Ltd. Subsequently KAMCO become a separate
Government of Kerala undertaking in 1986 with a paid up to capital of Rs.1.61
Crore. During the initial years, the company had a carry over loss of Rs.2.1
Crores up to March 1984. this was completely wiped off by 1989 and the
company is playing dividend to the Government for the last 15 years.
KAMCO is an ISO 9001:2000 certified company with the objective of
manufacturing small agricultural machines mainly intended for the small and
marginal farmers of our country. For the last four decades KAMCO has been
meeting the needs and demands of Indian farmers. KAMCO has completed its
39 years and is running on profit for the last 20 years. Continuously increasing
its production turnover and profit years after year.
The main products of the company are’ KAMCO Power Tiller,
KAMCO Power Reaper and KAMCO Diesel Engine’ Power tiller is a versatile
machine used for primary farming operations like tilling, ploughing, weeding,
hulling, leveling, ridging and transporting. KAMCO Power Reaper is a
compact small harvesting machine suitable for harvesting paddy, wheat, barley
etc. water with a great force.
For the last four decades, KAMCO has been meeting the needs and demand
of Indian farmers. The logo of KAMACO is “Engineering green
Revolution” .KAMCO has been successfully engineering the green revolution
in India through the manufacture of Indigenously and quality agricultural
machineries.
KAMCO has established three more units form its internally generated
resources. The units are located at:-
Kalamassery in Ernakulam District
Kanjikode in Palakkad District
Mala in Thrissur District
KAMCO Yesterday
Kerala Agro Machinery Corporation Limited (KAIC Ltd) Trivandrum
promoted the establishments of Kerala Agro Machinery Corporation Limited
(KAMCO). The KAIC Ltd, entered into a technical collaboration agreement
with M/S Kubota Limited, Japan in February 1972. On 15/11/1972, the Kerala
Industrial and Technical Consultancy organization Limited (KITCO) was
entrusted with the work of preparing the project report for the manufacture of
Kubota power was incorporated on 24-03-1973 with an authorized capital of
Rs.2 crore as a subsidiary of M/S KALC Ltd, which held the entire paid up
capital shares in KAMCO.
KAMCO’s Kalamassery unit was purchased outright from SIDCO
during 1990 and converted as a viable Diesel Engine unit. Moreover, KAMCO
absorbed the workers of the sick unit as permanent employees. As an
expansion activity, a new modern compact unit for manufacturing
power tillers was put up at Kanjikode, Palakkad Dist for a cost of 43Crores
during the beginning of 1995. As a part of diversification activity, the
company developed a compact small harvesting machine KAMCO Power
Reaper” and its production is carried out at Mala unit in Thrissur district. The
project cost of the unit was 4.278 crores.
KAMCO TODAY
KAMCO is synonymous with service to the small and marginal farmers
of the country. KAMCO through their precision and quality is revolutionizing
the small and marginal holdings throughout the country. Today KAMCO
Power tiller is the most sought after tiller in India, enjoying over 50% of the
market share at national level. The year 1998 was the silver jubilee year of
KAMCO. The company with its four plants at Athani, Kalamassery, Kanjikode
and Mala unit is confidently meeting the demands for KAMCO products in
Indian and abroad.. The main markets for the Power Tiller are in lest Bengal,
Assam, Tripura, Meghalaya and Manipur.
A major milestone in the achievements of the company is that KAMCO
got the international quality Excellence certificate under ISO 9002 in October
1996. KAMCO is the 2nd Public sector undertaking the high standards of the
products for their three units. From 15-03-2000 registered company by KPMG
quality Registration accredited by the Data council for Certification.
Objectives of the Company
The objectives of the company are to manufacture in India, either in
collaboration with or otherwise, or import and trade agricultural
machinery like Tractors, Power Tiller, Power Reapers Combine Harvester,
Transplanted ,m Diesel engines, Pump sets, Implements,
accessories and spares there to. The objective also include establishment of
engineering workshops or retail shops to undertake repairs and servicing of
agricultural machinery or other machinery, equipment, implements and tools.
Activities of the Company
KAMCO’s manufacturing facilities include special purpose machines,
specially built general purpose machines & imported machines. The inspection
facilities include modern inspection & testing equipment. KAMCO has their
own metrology, calibration & engine test lab.
The following are the main activities of the company:
Manufacturing & marketing of agricultural machines like power tillers,
tractors, power reaper, diesel engines etc.
Power tillers produced at Athani & Palakkad units. Major components for
power Tillers are manufactured in Athani & all other components bought
out from dedicated vendors in India. There are around 250 vendors now.
Kalamassery unit produce engine for Power tillers
Power reaper produced at Mala.
Trading / manufacturing of their farm machine.
MARKETING
The company has 45 dealers all over India.
New dealers are appointed to cover selected districts in Tamilnadu,
Karnataka, Maharashtra, Orrisa & Andra Pradesh
Close interaction with the Govt of India in the formulation of new
schemes & policies for farm mechanization.
Regular demonstrations & services camps are being organized in various
states.
KAMCO Power Reaper has been exported to lran & Srilanka recently.
Their machines has been well accepted by the customers
HUMAN RESOURCES
Total employee strength is about 567 persons.
Periodical training is being conducted to improve the performance levels
of workmen.
Mainly management development programmes are conducted for
officers.
Training programmes are to suit specific requirements based on
individual needs.
Periodicals assessment of employee’s performance is carried out after
training.
DEPARTMENT PROFILE
FINANCE DEPARTMENT
KAMCO is a Government undertaking company which produces the products
which support the agricultural industry. Both the manufacturing and the sales
of the products are done by the company itself. All these activities should
involve careful finance decisions. Al these decisions are taken by the finance
department of the company.
The finance department is headed by the General Manager (Finance). And the
department also involves other accounting and finance staffs. The important
finance decisions taken by the department are investment decisions and fund
requirement decisions. All the activities in the organization right from the
acquisition of raw materials, manufacturing process, warehousing, and
distribution all involves finance. So the finance department plays a major role
in planning the activities and putting the funds in effective use.
The finance department of KAMCO is able to perform all these functions and
find out success in all its operations. Now KAMCO has a operating profit of
Rs. 95012482 for the year ending March 2008. The important thing is that
KAMCO has no loaned funds as liability. From the above details we can
understand the efficiency of the finance department of the company.
Functions of Finance Department
The account manager looks after the entire function of the company.
The finance department is computerized. The major source of fund includes
share capital. Reserve & surplus and not include loan fund.
The major functions of finance department are
Proper utilization of funds
Developing sufficient funds.
Budget preparing
Pure accounting
Increase profitability
Taxation etc.
The financial function is stands for full planning control and execution
of four activities. The main function of the financial department includes the
receipt and payment of cash, settlement of account proper custody and safe
guard important and valuable document. The other functions are financial
planning, budgeting and also analyzing the company’s current performance
with past performance and inform their performance to the necessary authority.
KAMCO FINACE DEPARTMENT STRUCTURE
MANAGINGDIRECTOR
DY.MANAGER
GENERALMANAGER
MANAGERCOST/AUDIT
ASST.MANAGERCOST/AUDIT
SUPERINTENDENT
ACCOUNTANT ACCOUNTANT
SUPERINENDENT
ASST. MANAGERACCOUNT
DY. MANAGER
DGMFINANCE
MARKETING DEPARTMENT
Marketing of the products is very important; every organization is
having a separate marketing department. KAMCO also has a marketing
department functioning in the firm. It is headed by the General Manager.
In Indian market KAMCO has the market share of 41.5%. The firm does not
make any advertisements for their products; they sell their products through
Government agencies of different states. The main competitor of KAMCO is
VST Tillers and Tractors. The company has 45 dealers all over India. New
dealers appointed to cover selected districts in Tamil Nadu, Karnataka,
Maharashtra, Orissa and Andra Pradesh. KAMCO Power Reaper has been
exported to Iran and Sri Lanka. These machines have been well accepted by the
customers.
Close interaction with the Government of India in the formulation of new
schemes and policies for farm mechanization. Regular demonstrations and
service camps are being organized in various states by the experts.
HUMAN RESOURCE DEPARTMENT
Human Resource is the greatest asset of every company. KAMCO has a
powerful human resource in its hands. These human resources should be
effectively managed in order to get the highest result. Management of these
resources is done in a separate department, Human Resource Department. This
department is headed by the General Manager (HR).
There are 567 employees working in KAMCO in different departments.
The various activities of Human Resource Department are HR planning,
selection, training and development, employee health and safety, welfare
activities, wages and salary administration, maintain good labor relations,
formulating programs and procedures, maintaining good industrial relations,
personnel research and performance appraisal etc.
The company gives cordial importance to human resource development
activities. Company follow a pre planned training colander covering all areas
and the training is imparted with the help of various institutions. Effectiveness
of training programs is periodically reviewed for further improvement. The
industrial relations in the company are cordial which forms the basis for
sustained growth of the organization.
The main functions of Human Resource Department in KAMCO are the
following
1. Periodical training is being conducted to improve the performance levels
of workmen
2. Mainly management development programs conducted for officers
3. Training programs designed to specific requirements based on
individual needs
4. Periodical assessment of employees’ performance carried out after
training
QUALITY ASSURANCE DEPARTMENT
Quality standards for each and every component and product have been
established by the company and well documented; vendor’s premises and their
manufacturing facilities are also periodically accessed. All components are
subjected to close inspections and observations are documented to ensure trace
ability at any time.
Quality assurance department is equipped with all modern facilities. The
company has got a standards celebration of all measuring instruments. Fully
documented history cards of measuring instruments are maintained so that
periodical celebration of equipments is carried out regularly. The company’s
policy is to equip itself with all modern inspection and testing equipments in
addition to replacement.
Each product are subjected to running tests for predetermined duration
and only those which pass the requirements are accepted and declared ready for
dispatch. Because of these quality standards the company gets ISO 9001-2000.
QUALITY SYSTEMS AND CERTIFICATIONS
Quality Systems
Well defined quality system procedures adopted covering all activities to
ensure quality of products and customer satisfaction.
Improvements are made on regular basis based on the feed back from
the customers and dealers.
Regular interactions with all vendors including site visits to maintain
and improve the acceptance level of components.
KAMCO Power Tiller certified for compliance with the minimum
performance standards of Government of India.
KAMCO Power Reaper has been tested by SRFMT & TI.
ISO 9001-2000 Version
Improvement in the systems and improved customer or dealer
satisfaction.
Comply with the requirement of customers and applicable statutory or
regulatory requirement.
Improvement in the effectiveness of the established quality systems.
Addresses customers, dealers, vendor, society, employees and
shareholders for their requirement and satisfaction.
Quality Policy
Total customer satisfaction through quality products and services with
improved technology and employee participation.
Comply with the requirement of customers and the applicable
statutory/regulatory requirements. The effectiveness of the established quality
management system is continually improved to enable achievement of the
policy.
Quality Objectives
To ensure that the quality requirements of the products and services
offered are maintained at all stages.
To create culture among all employees towards total quality concepts
and productivity through total involvement and commitment of all employees.
To create healthy working environment for the attainment of quality
goals with excellence and to make quality a way of life.
To detect and prevent non conformance and defects as early as possible
to eliminate them through appropriate changes to the Quality Management
System.
To achieve and maintain quality leadership through continuous
technology up gradation, improvement in techniques, systems and procedures.
RESEARCH & DEVELOPMENT DEPARTMENT
There is a separate Research and Development Department is functioning in
KAMCO. This department conducting research studies on their products
according to the needs and expectations of the customers. The research officer
is heading the department.
In order to improve overall output of the present engine of power tiller, action
has been taken to convert the same into direct injection version through
Automotive Research Association of India, Pune. The company had developed
various accessories of power tiller like type IV steel wheel suitable for deep
fields, Potato Digger and Riding seat. A steel wheel cheaper also had been
developed for wetland operations.
PRODUCTION DEPARTMENT
Production is department is one of the important department that
functioning at KAMCO Athani unit. Production department is performance its
operations under the strict control of General Manager (operations). The
department also includes the various section managers and supervisors. The
production department of KAMCO ltd mainly includes the following
operations
Assembling
Pretreatment
Machine shop
All these functions are carried out for manufacturing the products for the firm
The other important departments that are functioning in the organization are the
following
Maintenance Department
Materials Department
Purchase Department
Stores Department
Systems Department
Organization Structure
The Board of Directors governs the company. Board of directors
includes chairman, Managing Director and other Directors. The Managing
Director is the top most official and the government gives delegation of
authority to the managing director as may be entrusted and delegated to him
time to time by the Board. The managing director is the operational Head of
the company supported by the General manager and the Deputy Officer in
decision making. The chief Executive Officer of the company is the
Managing director who
shall execute his function, subject to the overall control and supervision of
the Board. The government of Kerala nominates the Chairman of the
Board.
The various department of KAMCO are production, maintenance,
materials, quality assurance, engineering systems, finance, marketing and
human resource management.
The Deputy General Manager (Finance) is also the company secretary.
All the financial workers of the company are performing with the help of
manager and deputy managers of account department.
Senior Manager (research and development) is the head of Quality
Assurance Department and Engineering Department. He is also the
management representative of lSO system. There is a well versed computer
aided design room for engineering section.
The Manager (HRM) and training officer carries out the human resource
development functions. The General Manager is the Head of production,
stores, materials, maintenance, Civil engineering security and human
resources management departments, Senior Manager, Manager and Deputy
Manager of these functions assist him.
Manager (Marketing – north Zone) will look after the efforts of the
KAMCO’s officers regional outside Kerala. There are seven regional
officers for KAMCO at Trichy, Pondichery, Kolkata, Hyderabad, Ranchi
and Bhopal.
PRODUCTS OF KAMCO LTD
KAMCO’s Products include:-
1. KAMCO Power Tiller:-
KAMCO Power Tiller is a versatile machine primarily used for
preparation of land farming operations. It is popularly known as “complete
farming unit” with suitably designed accessories the machine can be used for
a large number of specific operations like tilling, ploughing, weeding,
pumping, pudding, leveling, hulling, and ridging etc.
Advantages
Automatic fuel controls help to save precious fuel
Unique radiator cooling system helps in non-stop operation.
Simple movements and controls for easy-handling
2. KAMCO Power Reaper
KAMCO Power Reaper is ideally suited for harvesting of paddy,
wheat, barley, and similar crops. If harvests and makes windrows at the rate
of 3-4 hours per hectare. Since the fuel used is Kerosene, cost of operation
is the lowest and it helps the farmer to harvest his field at the lowest cost.
3. KAMCO agra garden tiller
The petrol- engined small Tiller is eco-friendly Power Tiller ideal for
paddy or wheat cultivation, inter-cultivation applications, landscaping or
gardening, potato harvesting and for land preparations at horticultural
farms. This highly fuel efficient and powerful equipment with easy-to-
control operations is ideal for small and medium farmers.
4. KAMCO diesel engine
KAMCO diesel engine is a 12 HP single cylinder Horizontal Diesel
Engine with automatic fuel control mechanism and radiator cooling,
extremely compact and weighing only 140 kg. It has been well received in
the market owing to its virtually trouble free performance
REVIEW OF LITERATURE
The available literature can be divided into two empirical and
conceptual . empirical literature is that which contains studies made earlier and
also it consists of many factors and figures observed in the earlier studies. The
conceptual literature is one which deals with concepts and theories.
EMPIRICAL LITERATURE
1. A study on “FINANCIAL EVALUATION THROUGH RATIO
ANALLYSIS” done by Gouri S Vasrrier at KAMCO Ltd, Aluva during
the year 2007-2008 reveals that the company has a satisfactory financial
performance in terms of profitability, liquidity, returns and earning per
share etc.
2. A study on working capital management done by Vigitha CV at
KAMCO Ltd, Aluva during the year 2008-2009 reveals that the
company is in a position to pay its current obligations. The company is
effectively utilizing its assets. And the company has a sound financial
position.
3. A study on working capital management done by Sandhya at Kerala
Solvent extract Limited, Irinjalakuda during the year 2006 reveals that
KSE Ltd has sound financial position and is making a steady profit. she
also pointed out that with strong commitment to customers and product
quality, KSE stands paired to meet new challenges.
4. A study on working capital management done by LG.B. Prasad and.
DR. SC Rastogi, during the year 2005, reveals that the working capital
is the same as net current assets, and it is an important part of the firm’s
balance sheet. They pointed out that many business become weaker not
because they were unprofitable, but because they suffered from shortage
of working capital.
5. A study on working capital management in Travancore Cochin
Chemicals Limited done by Praveen my natty at Udyogmandal during
the year 2004-2005 reveals that the company has to keep more current
assets in the form of absolute cash so that it will help the company to
maintain good liquidity position in the organization. He also reveals
that the company does not make prompt payment to creditors. He also
point out that the company should take proper steps to reduce working
capital turnover cycle.
6. A study on working capital Management of KERALA FEEDS Limited
did MARY NITA at Kallettumkara during the year 2005-2006 reveals
that Kerala Feeds Limited has a sound financial position and to make a
steady profit. The company effectively utilizes its current assets. The
company’s debt management has improved and the company also makes
prompt payment to its creditors. Thus the overall performance of the
company is satisfactory.
7. A study on “:Analysis of working Capital” done by Patel D.M. at color
chemicals Limited during the year 2004 reveals that the current and
quick ratio gives turnover depicts a bright future that is it indicates that
the company is efficiently utilizing its current assets.
CONCEPTUAL LITERATURE
The developing economies generally face the problem of
inefficient utilization of resources available to them. Capital is the most scarce
and highly valuable productive resource in such economies. The proper
utilization of this valuable resource will promote profitability, rate of growth,
cut down cost and above all, improve efficiency of productive system. Hence,
harnessing and monitoring of capital is of paramount importance to any
development policy of institutions.
Generally, the entire capital requirement for every organization
can be classified into two categories, namely fixed capital and working capital.
The management of working capital has largely been ignored, which has
resulted in the sub optimal utilization of available resource.
Working Capital
Working capital is the amount of fund used for financing the day-
to-day operations in a business concern, such as for purchasing raw materials,
meeting expenditure on salaries, wages, rents, rates, advertising etc.
Working Capital in simple terms is an amount of funds, which a
company must have to finance its day-to-day operations. It is a part of the
firm’s capital, which is required for financing short-term expenses like
purchase of raw materials, payment of wages and other day-to-day expenses
etc.
In other words, working capital refers to that part of total capital,
which is used for carrying out the routine or regular business operations.
Working capital management is a significant function of financial
manager and he has to spend a great deal of time on working capital
management. It ensures both profitability and liquidity of an organization. It is
an integral part of overall corporate management.
Definition of working capital
By definition working capital is the excess of current assets over
current liabilities from current assets. It provides an index of financial
soundness of current creditors and is one of the primary indicators of short run
solvency for a business.
According to Genestenburg “working capital or circulating capital
means current assets of a company that are changed in the ordinary course of
business from one form to another, for example, cash to inventories, inventories
to receivables, receivables to cash.”
In the words of shubin, working capital is “the amount of funds
necessary to cover the cost of operating the enterprise”. Working capital in a
going concern is a revolving fund, it consist of cash receipts from sales which are
used to cover the cost of operation.
CLASSIFICATION OF WORKING CAPITAL
Working capital may be classified in two ways:
(a) On the basis of concept
On the basis of concept, working capital is classified as gross
working capital and net working capital.
(b) On the basis of time.
On the basis of time, working capital can be classified into two
categories
(1) Permanent or fixed working capital
(2) Temporary or variable working capital
DIAGRAM SHOWING TYPES OF WORKING CAPITAL
Kinds of Working capital
On the basis of time
Net working capital
On the basis of concept
Permanent or fixed working
capital
Temporary or variable
working capital
Regular working capital
Gross working capital
Special working capital
Seasonal working capital
Reserve working capital
CONCEPT OF WORKING CAPITAL
There are two concepts of working capital:
Gross working capital
Net working capital
Gross working capital
The gross working capital is the capital invested in the total
current assets of the enterprise. Current assets are those assets which in
the ordinary course of business can be converted into cash within a short
period of normally one accounting year. The gross working capital is also
known as circulating capital.
Net working capital
Net working capital is the difference between current assets
and current liabilities. The concept of net working capital represents the
volume of current assets to be financed by long-term sources. Though
current assets and current liabilities are turned over within relatively
shorter period of time, the net balance of current assets is that proportion
which is permanently owned by the company. This concept is also useful to
the members of accountancy profession, investors, and creditors and other
whose task is to judge the liquidity and financial soundness of the business
undertaking. The short-term financiers and creditors are interested in
knowing the margin of protection available to meet their commitment fully
without any loss. It provides a measurement of strength of current assets
and is useful for assessing the financial position of the business.
Factors determining the working Capital Requirements
The working capital requirements of a concern depend upon a
large number of factors. It is not possible to rank them because all such factors
are of different importance and the influence of individual factors changes for a
firm over time. However, the following are important factors generally
influencing the working capital requirements.
Nature of business.
Time consumed in manufacture.
Size of the business.
Turnover.
Terms of trade.
Nature and value of the product.
Seasonal fluctuation.
Fluctuations in supply.
Use of manual labour or machines.
Growth and expansion of business.
Company policies.
METHODS OF ESTIMATING WORKING CAPITAL REQUIREMENTS.
Following are the methods generally used in estimating working
capital requirement:
Conventional Method
According to the conventional method, cash inflows and outflows
are matched with each other. Greater emphasis is laid on current ratio, liquidity
ratio, etc, which pertain to the liquidity of a business.
Net current Asset Forecast Method:-
This is the most practical and widely used method of estimating
working capital requirements. Under this method, first of all, value of each
current asset is estimated. After this an estimation of current liabilities is made.
Difference between the total estimated amount of current asset and current
liabilities gives the net working capital requirement of the firm. To this amount
some extra amount (or safety margin) by way of provision for contingency is
added. This is generally calculated as a fixed percentage of working capital.
Operating Cycle Method:-
The operating cycles starts with the purchase of raw material and
ends with the realization of cash from the sale of finished products. This cycle
involves the purchase of raw materials and stores, its conversion into stock of
finished goods through work-in-progress with progressive increment of labour
and service costs, conversion of finished goods into sales, debtors and
receivables and ultimate realization of cash and this cycle continues again from
cash to purchase of raw material and so on.
Percentage of sales Method:-
It is the traditional and simple method of determining the level of
working capital and its components. In this method, the working capital is
determined on the basis of the past experience. If over the years, the
relationship between the sales and the working capital is found to be stable,
then this relationship can be taken as the base for determining the working
capital for the future.
Regression Analysis Method:-
It is a useful statistical technique applied for forecasting working
capital requirements. It helps in capital requirement projection after
establishing the average relationship between sales and working capital and its
various components in the past years. The method of least squares is used in
this regard.
WORKING CAPITAL MANAGEMENT
Working capital management refers to all aspects of the
administration of both current assets and current liabilities. In other words,
working capital management is concerned with the problems that arise in
attempting to manage the current assets, the current liabilities and the
interrelationships that exist between them.
The basic objective of working capital management is to
manage the firm’s current assets and current liabilities in such a way that the
satisfactory level of working capital is maintained. The current assets should
be sufficient enough to cover current liabilities in order to maintain a
reasonable safety margin. Moreover, different components of working capital
are to be properly balanced. In the absence of such a situation, the financial
position in respect of the firm’s liquidity may not be satisfactory.
\
OBJECTIVES OF WORKING CAPITAL MANAGEMENT
The basic objectives of working capital management are as
follows:
By optimizing the investment in current assets and by reducing the level
of current liabilities, the company can reduce the locking up of funds in
working capital thereby it can improve the return on capital employed in
the business.
The company should always be in a position to meet its current
obligations, which should be properly supported by the current assets
available with the firm. However, maintaining excess funds in working
capital means locking of funds without return.
The firm should manage its current assets in such a way that the marginal
return on investment in these assets is not less than the cost of capital
employed to finance the current assets.
IMPORTANCE OF WORKING CAPITAL MANAGEMENT
The importance of the sound and proper management of working
capital may be studied from the following facts:
1. Near about 50 per cent to 70 per cent capital of a manufacturing
firm is invested in its current assets. In capital budgeting, we consider about
fixed investment in very detail that is nearly 30 per cent to 50 per cent of the
total funds. Hence the management of current assets should get proper
attention of the management.
2. Fixed assets can be acquired even on lease but there is no
alternative for current assets. There is no way of avoiding the investment in
inventory and receivable.
3. There is a positive correlation between the sales of a firm and its
current assets. With an increase in sales a corresponding increase in current
asset is also required. As a result, their proper administration too becomes
important.
4. Working capital requirements are generally financed through
outside sources. So a continuous effort is necessary to utilize them in the
best way. Surveys indicate that most of the part of the financial manager’s
time is devoted to the management of current assets and current liabilities.
5. Working capital management is particularly important for small
firms. A small firm has relatively limited access to the long-term capital
markets. Therefore, it must depend heavily on short-term bank loans and
trade credit.
Working capital is a financial metric which represents the
amount of day-to-day operating liquidity available to a business. Along with
fixed assets such as plant and equipment, working capital is considered a
part of operating capital. For a company to remain solvent, it must be able to
meet its current liabilities and thus have an adequate amount of working
capital. The amount of working capital considered adequate may vary from
one company to another depending on the type of business, composition of
current assets, inventory turnover rate and credit terms.
End Note:
1. Mary Nita, “WORKING CAPITAL MANAGEMENT OF KERALA
FEEDS LIMITED”, 2005-2006.
2. Ligy V.K, “WORKING CAPITAL MANAGEMENT OF SELECTED
AUTOMOBILE COMPANIES IN INDIA”, March 2008.
3. Roy T.S. and Jain C.M, “WORKING CAPITAL MANAGEMENT OF
OIL AND GAS CORPORATION”, volume 2, no.4, July 2005, pp: 48-
52.
4. Marc Deloof, “DOES WORKING CAPITAL MANAGEMENT
AFFECT PROFITABILITY OF BELGIAN FIRMS?” November 2001.
5. Michael J. Peel and Nicholas Wilson, “WORKING CAPITAL AND
FINANCIAL MANAGEMENT PRACTICES IN THE SMALL FIRM
SECTOR”
6. Sushma Vishnani and Bhupesh Kr. Shah, “IMPACT OF WORKING
CAPITAL MANAGEMENT POLICIES ON CORPORATE
PERFORMANCE”
7. Sangeetha.T.Varghese, “WORKING CAPITAL MANAGEMENT OF
LYRIL PLASTICS”, 2003-2004.
8. Veeto Wilson, “WORKING CAPITAL MANAGEMENT OF KERALA
FEEDS LIMITED”, 2002-2003.
9. Praveen Mynatty, “WORKING CAPITAL MANAGEMENT IN
TRAVANCORE COCHIN CHEMICALS LIMITED”, 2004-2005.
10. Danny Thomas, “WORKING CAPITAL MANAGEMENT WITH
SPECIAL REFERENCE TO STAR GROUP OF COMPANIES”,
September 2008.
DATA ANALYSIS AND INTERPRETATION
The analysis and interpretation of financial statement is used to determine the
financial position and results of operations as well. A number of methods or
devices are used for analysis, fund flow analysis, budgeting etc. In this project,
I have used two methods of analysis, such as ratio analysis and trend Analysis.
Statement showing the amount of working capital of KAMCO Ltd
Current Assets 2005 2006 2007 2008 2009
Loose tools 9.86 7.50 5.35 3.85 4.36
Inventories 1781.91 2207.7
8
1948.86 2040.90 2252.04
Sundry debtors 891.42 1025.9
7
1220.42 1989.42 2616.75
Cash&Bank 2771.42 2878.7
5
3922.46 3525.63 3585.66
Other current assets 103.60 102.87 134.62 179.39 198.52
Loans&Advance 648.50 419.43 316.59 175.81 167.74
Total 6206.71 6642.3 7548.30 7915.00 8825.07
0
Current Liabilities
Current liabilities 725.17 836.33 1266.22 1019.63 1257.03
Provision 325.38 133.08 81.46 103.17 72.82
Total 1050.56 969.31 1347.68 1122.80 1329.85
Working capital 5156.15 5672.9
9
6200.62 6792.20 7495.22
Diagram showing working capital of KAMCO Ltd.
RATIO ANALYSIS
Ratio analysis was developed to determine the stability of various
financial aspects of business. It shows the relationship between two figures,
that is two aspects of our business. The ratio is one of the most powerful tools
of financial analysis. It is with the help of ratio that the financial statements
can be analyzed more clearly and decisions can be made form such analysis.
A ratio is a simple arithmetical expression of the relationship of one
number to another. It may be defined as the indicated quotient of the
mathematical expressions.
According to accountants handbook by Wixon Kell and Bedford a ration
is “an expression of the quantitative relationship between two numbers”.
The ratios not only help the managerial persons but also the
shareholders, creditors, employees, government and for the audit requirement
etc.
Analysis and interpretation of various accounting ratios gives a skilled
and experienced analyst, a better understanding of the financial conditions and
performance of the firm that what he could have obtained only through a
personal of financial statements. In every firm it is very important to have a
proper balance in regard to the liquidity, solvency, efficiency, and profitability.
The ratio analysis is helpful to maintain this balance effectively.
The ratios are generally classified into:-]
1. Lilquidity ratios
2 Working capital ratios
3 efficiency or Turnover ratios
4 Leverage ratios
5 Profitability ratios
Liquidity Ratios
Liquidity refers to the ability of a concern to meet its current obligations
when this becomes due. If the current assets can pay off current liabilities, the
liquidity position will be satisfactory. The bankers, suppliers of goods and
other short-term creditors are interested in the liquidity position of the concern.
The following ratios are used to measure the liquidity of a firm:-
1. Current ratio
2. Quick ratio or Acid test ratio
3. Absolute liquidity ratio
1 Current Ratio:-
Current ratio is the most conventional ratio to analyze working capital
position of the firm . Current ratio of 2:1 is considered satisfactory but it also
depends upon industry’s nature, place and custom. It is made more useful for
inter-firm comparison of liquidity. Ratio provides a manager of safety to
creditors.
Current Ratio = Current Assets
Current liabilities
Table showing Current ratio of KAMCO Ltd.
Year Current Assets
(Rs..in Lakhs)
Current liabilities Ratio
2004-05
2005-06
2006-07
2007-08
6206.71
6642.30
7548.30
7915.00
1050.56
969.31
1347.68
1122.80
5.83
6.85
5.60
7.05
2008-09 8825.08 1329.85 6.64
Diagram showing the current ratio of KAMCO Ltd.
Current Ratio
5.83
6.85
5.6
7.056.64
0
1
2
3
4
5
6
7
8
Years
Cur
rent
Rat
io
2004-05
2005-06
2006-07
2007-08
2008-09
Interpretation
The satisfactory level of current ratio is 2:1. The above analysis reveals that
the current ratio is much larger than the satisfactory current ratio. This
indicates that the short term financial position is highly satisfactory.
2. Quick Ratio:-
This ratio also termed as’Acid test ratio’ or ‘Liquidity ratio’ . This ratio
is ascertained by comparing the liquid assets to current liabilities. Prepaid
expenses and stock are not taken as liquid assets. The quick ratio may be
defined as the relationship between quick or liquid assets to current or liquid
liabilities. It depicts the immediate liquid position of the concern. Generally a
ratio of 1:1 is considered satisfactory in quick ratio.
Quick /liquid assets
Quick ratio = Current/liquid liabilities
Table showing quick ratio of KAMCO Ltd.
Year Quick assets Quick liabilities Ratio
2004-05 4424.80 1050.56 4.21
2005-06 4434.52 969.31 4.57
2006-07 5599.44 1347.68 4.15
2007-08 5874.10 1122.80 5.23
2008-09 6573.05 1329.85 4.94
Diagram showing the quick ratio of KAMCO Ltd.
Quick Ratio
4.21 4.574.15
4.945.23
0
1
2
3
4
5
6
2004-05 2005-06 2006-07 2007-08 2008-09
Years
Qu
ick
Rat
io
Quick Ratio
Interpretation
The satisfactory level of quick ratio is 1:1. The above analysis revels
that the quick ratio for five years is above 1:1. This indicates that the company
has a good liquid position
3. Absolute Liquidity Ratio
The absolute liquidity ratio is obtained by dividing cash and marketable
securities by current liabilities. It is also called cash position ratio. When
liquidity is highly restricted in terms of cash equivalents. This ratio should be
calculated. The ideal absolute ratio is taken as 0.5 times.
Cash +marketable securities
Absolute liquidity ratio = Current liabilities
Table showing Absolute liquidity ratio of KAMCO Ltd.
Years Cash= Marketable
securities
Current liabilities Absolute
Liquidity
Ratio
2004--05 3997.06 1050.56 3.80
2005-06 4521.43 969.31 4.66
2006-07 4628.75 1347.68 3.43
2007-08 5575.63 1122.81 4.97
2008-09 5635.66 1329.85 4.24
Diagram showing the Absolute liquidity ratio of KAMCO Ltd
Absolute Liquidity Ratio
3.8
4.66
3.43
4.97
4.24
0
1
2
3
4
5
6
2004--05 2005-06 2006-07 2007-08 2008-09
Years
Qu
ick
Ra
tio 2004--05
2005-06
2006-07
2007-08
2008-09
Interpretation
In the above 5 year the absolute liquidity ratio of the company was
satisfactory. The absolute liquidity ratio is above the ideal value i.e. 0.5 times.
It indicates that the company was in a good position in terms of cash to meet its
current liabilities.
Leverage Ratio
This ratio measures the long term financial position of the enterprise.
The term solvency refers to the ability of a concern to meet its long term
obligations. Analysis of long term financial position or test of solvency
includes:-
a) Debt Equity Ratio
b) Proprietary Ratio
a) Debt equity Ratio:-
Debt Equity Ratio also known as external- internal equity ratio. It is
calculated to measure the relative claims of outside and owners against the
firm’s assets. This ratio indicates the relationship between the external equities
or the outsiders fund and the internal equities or shareholders funds. It is
calculated by using the formula as follows:-
Debt Equity Ratio = Outsiders fund
Shareholders fund
A ratio of 1:1 is considered to be a satisfactory ratio. In some business, a high
ratio of 2:1n or even more may be considered satisfactory.
Table showing Debt Equity Ratio of KAMCO Ltd
Year Outsiders fund
(Rs. In lakhs)
Shareholders fund
(Rs. In lakhs)
Ratio
2004-05 725.17 6014.14 .12
2005-06 836.24 6481.73 .13
2006-07 1266.22 6997.67 .18
2007-08 1019.63 7566.55 .13
2008-09 1257.03 8274.40 .16
Diagram showing Debt Equity Ratio of KAMCO Ltd.
Debt Equity ratio
0.120.13
0.18
0.13
0.16
0
0.02
0.04
0.06
0.08
0.1
0.12
0.14
0.16
0.18
0.2
2004-05 2005-06 2006-07 2007-08 2008-09
Years
Deb
t E
qu
ity
Rat
io
Ratio
Interpretation
The satisfactory level of debt equity ratio 1:1 .The debt equity ratio was
highest in 2006-2007 and lowest in 2004-2005 with the values 0.18 and 0.12
respectively. The above analysis reveals that the debt equity ratio is less than
the satisfactory level. It indicates that the company is not making good use of
the financial leverage and increasing the return to equity shareholders.
Proprietary Ratio
Proprietary ratio relates the shareholders funds to total assets. It is variant of
the debt equity ratio. This ratio shows the long term or future solvency of the
business. It is calculated by using the formula.
Shareholders fund
Proprietary Ratio = Total assets
The ideal ratio is 1:3. This ratio shows the general strength of the company.
Table showing Proprietary Ratio of KAMCO Ltd
Years Shareholders fund
(Rs. In lakhs)
Total Assets
(Rs. In lakhs)
Ratio
2004-05 6014.14 7096.63 .85
2005-06 6481.73 7481.98 .87
2006-07 6997.67 8372.68 .84
2007-08 7566.55 8725.84 .87
2008-09 8274.40 9646.28 .86
Diagram showing proprietary ratio of KAMCO Ltd
Proprietory Ratio
0.85
0.87
0.84
0.87
0.86
0.825
0.83
0.835
0.84
0.845
0.85
0.855
0.86
0.865
0.87
0.875
2004-05 2005-06 2006-07 2007-08 2008-09
Years
Pro
pri
eto
ry R
ati
o
Ratio
Interpretation
The ideal proprietary ratio is 1:3. the above analysis reveals that the
proprietary ratio is much less than proportion of net worth is invested in fixed
assets. This will adversely affect the long-term solvency of the firm.
Profitability Ratio
The primary objective of a business undertaking is to earn profits. The
business needs profits not only for its existence, but also for expansion and
diversification. Profitability is an indication of the efficiency with which the
operations of the business are carried on. The important profitability ratios are:-
i. Gross Profit Ratio
ii Net profit ration
iii Net worth Ratio
i. Gross profit Ratio
Gross profit Ratio measures the relationship of gross profit to net sales and is
usually represented as a percentage. It can be computed as:-
Gross profit Ratio = Gross Profit*100
Net sales
Table showing Gross Profit ratio of KAMCO Ltd
Years Gross Profit Net Sales Ratio
2004-05 908.55 7934.39 11.45
2005-06 405.40 7998.07 5.06
2006-07 1187.80 9114.09 13.03
2007-08 1071.51 10118.62 10.59
2008-09 1219.93 12027.57 10.14
Diagram showing Gross Profit ratio of KAMCO Ltd
Gross Profit Ratio
11.45
13.03
10.59 10.14
5.06
0
2
4
6
8
10
12
14
2004-05 2005-06 2006-07 2007-08 2008-09
Years
Gro
ss
Pro
fit
Ra
tio
Ratio
Interpretation
The above analysis shows that the gross profit ratio is fluctuating year
after year. This indicates the increasing level of price and high cost of
production.
ii. Net Profit Ratio:-
Net profit ratio is the ratio of net profit to sales and indicates the efficiency
of the management in manufacturing, selling, administrative and other
activities of the firm. It is calculated by suing the following formula.
Net Profit Ratio = Net Profit*100
Net Sales
The higher the ratio the better it is. Net Profit ratio reflects the profitability of
the firm. Increases/decreases in net profit ratio indicates a change in profit.
Table showing Net Profit Ratio of KAMCO Ltd.
Years Net ProfitGross
Profit
Net Sales Ratio
2004-05 467.83 7934.39 5.89
2005-06 522.82 7998.07 6.54
2006-07 572.60 9114.09 6.28
2007-08 625.55 10118.62 6.18
2008-09 764.52 12027.57 6.36
Diagram showing Net Profit ratio of KAMCO Ltd
Net Profit Ratio
6.54 6.28 6.18 6.365.89
0
1
2
3
4
5
6
7
8
2004-05 2005-06 2006-07 2007-08 2008-09
Years
Net
Pro
fit
Rat
io
Ratio
Interpretation
The above analysis shows that the net profit ratio is fluctuating year after
year. It shows an increasing trend except the years 2006-2007 and 2007-2008.
it indicates that the administrative and selling expenses are high in some year
than other years. So they need to give more attention to administrative and
selling expenses.
iii. Net worth Ratio
Net worth ratio is also known as return on shareholders investment. This
ratio indicates the profitability from shareholders point of view. The term net
profit as used here means net income after payment of interest and tax
including net non operating income. It is the final income that is available for
distribution as dividend to shareholders. Shareholders fund include preference
and equity share capital, all reserve and surplus belonging to shareholders. It
is calculated by using the following formula.
Net worth Ratio = Net Profit after Interest and tax
Shareholders fund
Table showing Net worth Ratio of KAMCO Ltd.
Years Net Profit after
interest & tax
Shareholders fund Ratio
2004-05 467.83 6014.14 7.79
2005-06 522.82 6481.73 8.07
2006-07 572.60 6997.67 8.18
2007-08 625.55 7566.55 8.27
2008-09 764.52 8274.4 9.24
Diagram showing Net Worth Ratio of KAMCO Ltd
Net Worth Ratio
7.79 8.07 8.18 8.27
9.24
0
1
2
3
4
5
6
7
8
9
10
2004-05 2005-06 2006-07 2007-08 2008-09
Years
Net
Wo
rth
Rai
o
Ratio
Interpretation
The above diagram and table shows the net worth ratio of KAMCO Ltd.
The analysis indicates that the net worth ratio shows an increasing trend, which
indicates that the overall efficiency of the company is satisfactory.
Efficiency ratio/Turnover Ratios
This ratio is also known as activity ratio. These ratio indicates how
effectively or efficiently the resources are utilized by a firm in the asset
management. This ratio highlight upon the activity and operational efficiency
of the business.
The turnover ratios are divided into manly four, which are as follows:-
1. Inventory Turnover Ratio
2. Debtors Turnover Ratio
3. Creditors Turnover Ratio
4. Working capital Turnover Ratio
1. Inventory Turnover Ratio:
The inventory turnover ratio increases the velocity of conversion of
stock into sales.. Promptness of sale indicates better performance of the
business. It also shows efficiency of the concern. Immediate sake of goods
produced require further production, which consequently activated the
productive process and is responsible for rapid development of businss. The
ratio is calculated by dividing the cost of goods sold by the amount of average
inventory cost.
Inventory Turnover Ratlio = Cost of goods sold
Average Inventory
Inventory conversion period = 365
Inventory turnover ratio
Usually higher inventory turnover ratio is always beneficial
to the concern. Lower inventory turnover ratio shows that the stock is blocked
and not immediately sold. It shows the poor performance of the business and
inefficiency of the management. The ratio measures the effectiveness of the
stock policy if the management. It should be the constant effort so the
management to dispose off the stock at the earliest .
Table showing inventory Turnover Ratio of KAMCO Ltd.
Years Cost of goods sold
(Rs. In lakh)
Average inventory Ratio
2004-05 7025.84 1789.42 3.93
2005-06 7592.67 1994.85 3.80
2006-07 7926.29 2078.12 3.81
2007-08 9047.09 1994.88 4.53
2008-09 10807.67 2146.47 5.05
Diagram showing Inventory Turn over Ratio of KAMCO Ltd
Inventory Turn over Ratio
3.93 3.8 3.81
5.054.53
0
1
2
3
4
5
6
2004-05 2005-06 2006-07 2007-08 2008-09
Years
Inve
nto
ry T
urn
ove
r R
atio
2004-05
2005-06
2006-07
2007-08
2008-09
Interpretation
From the above analysis it is clear that the inventory turnover ratio shows
a increasing trend over the five year. This indicates that there is a good
inventory management in the company.
b) Debtors Turnover Ratio
The debtors turnover ratio indicates the number of times the debtors are
turned over during the year. Generally , the higher the values of debtors
turnover, the more liquid are the debtors.
The average collection period measures the equality of debtors. It
indicates the rapidity ir slowness of turnover . The shorter the collection period,
the better the quality of debtors ie, it implies the prompt payment of customers.
But too shorter period id not favorable . It may reduce bad but it will be
considered as very restrictive measures which effect the sale . it is calculated by
using the formula.
Debtors turnover ratio = Total sale
Debtors
Average collection period = 365
Debtors turnover ratio
Table showing the debtors turnover ratio of KAMCO Ltd
Years Sales
(Rs. In lakhs)
Debtors
(Rs. In lkhs)
Debtors
turnover
Ratio
Average
collection
period
2004-05 7934.39 891.42 8.90 41 days
2005-06 7998.07 1025.97 7.79 47 days
2006-07 9114.09 1220.42 7.47 49 days
2007-08 10118.63 1989.42 5.09 72 days
2008-09 12027.57 2616.75 4.60 79 days
Diagram showing the Debtors turnover ratio of KAMCO Ltd
Debtors Turn over Ratio
8.9
7.797.47
5.094.6
0
2
4
6
8
10
2004-05
2005-06
2006-07
2007-08
2008-09
Years
De
bto
rs T
urn
ov
er
Ra
tio
Debtors Turn overRatio
Interpretation :-
The above analysis the debtors turnover ratio shows an decreasing trend
and the collection period shows an increasing trend. It indicates that the
inefficient management of debtors or sale and lieu liquid debtors
c) Creditors turnover Ratio :-
The Ratio shows the number of days of credit enjoyed by the firm for the
purchase of raw materials . it is computed by using following formula.
Creditors Turnover Ratio = Credit purchase
Sundry creditors
Average payment period = 365
Creditors’ turnover Ratio
A high creditor’s turnover ratio shows that the creditors are being paid
promptly. While a low turnover ratio reflect liberal credit terms credited by the
suppliers.
Table showing creditors turnover Ratio of KAMCO Ltd
Years Purchase
(Rs. In lakhs)
Creditors
(Rs. In lkhs)
Creditors
turnover
Ratio
Average
collection
period
2004-05 5234.04 509.57 10.27 35 days
2005-06 5848.26 486.17 12.03 30 days
2006-07 6128.86 652.10 9.39 38 days
2007-08 7340.87 829.01 8.05 41 days
2008-09 9139.08 1095.88 8.34 44 days
Diagram showing the creditors turnover ratio of KAMCO Ltd
10.2712.03
9.398.05 8.34
0
2
4
6
8
10
12
14
Creditors Turnover
Ratio
2004-05 2005-06 2006-07 2007-08 2008-09
Years
Creditors Turnover Ratio
Series1
Interpretation :-
The above analysis shows that the creditors turnover ratio fluctuate year
after year. In the year 2004- 2005 creditors turnover ratio is 10.27% and
collection period is 35 days. During the next year there was slightly increase in
the ratio. But in 2006-07 and 2007-08 it shows a decrease in trend and in 2008-
09 ratio increase slightly to 8.34%. It reflects liberal credit term granted by
suppliers.
D) Working capital turnover ratio
The efficiency of short term funds utilize can be tested with working
capital turnover ratio . The analysis of this ratio over a period indicates the
efficiency of working capital in supporting sale. It is calculated by using the
formula.
Working Capital Turnover Ratio = Sales
Net working Capital
Working capital turnover indicate the velocity of the utilization of net
working capital. This ratio indicated the number of times the working capital is
turned over in the course of year. This ratio measure the efficiency with which
the working capital is being used by a firm. A higher ratio indicated efficient
utilization of working capital and low ratio indicated otherwise.
Table showing working capital turnover ratio.
Diagram showing Working Capital turn over Ratio of KAMCO Ltd
Years Sales
(Rs. In lakhs)
Net working
Capital
Ratio
2004-05 7934.39 5156.18 1.54
2005-06 7998.07 5672.99 1.41
2006-07 9114.09 6200.62 1.47
2007-08 10118.63 6792.20 1.49
2008-09 12027.57 7495.24 1.60
Interpretation:-
Higher working capital ratio indicates the effective utilization of
working capital and low ratio indicates lesser or inefficient / ineffective
utilization of working capital . In the year 2004-05 working capital ratio was
1.54% , which decrease to 1.41% in the year 2005-06 .
But in the next year it shows an increase in trend i.e., it increase to 1.47
in the year 2006-07, 1.49 in the year 2007-08 and it 1.60 in the year 2008-09
this indicates efficient utilization of working capital
Working Capital Ratios
1.541.41 1.47 1.49
0.250.5
0.751
1.251.5
1.752
Working capital Ratio
2004-05 2005-06 2006-07 2007-08
Years
Working Capitl Ratio
Series1
The net working capital is divided in to mainly four which are as follows :-
1. Net working capital ratio
2. current asset to working capital ratio
3. Current liability to working capital ratio
4. current Asset to Fixed Assets
1 Net working Capital Ratio :-
This ratio shows the liquidity of the firm. High amount of working capital
increase the liquidity of the firm, and low amount of working capital decrease
the liquidity position of the firm. It is calculated by dividing the net working
capital by net asset
Net working capital ratio = Net working capital
Net Assets
Table showing the net working capital of KAMCO Ltd
Diagram showing Net Working Capital Ratio of KAMCO Ltd
Years Net working
Capital
(Rs. In lakhs)
Net assets Net
working
capital
Ratio
2004-05 5156.18 7096.63 0.73
2005-06 5672.99 7481.98 0.76
2006-07 6200.62 8372.68 0.74
2007-08 6792.20 8725.84 0.77
2008-09 7495.24 9646.28 0.78
Net Working Capital Ratio
0.73
0.76
0.74
0.770.78
0.7
0.72
0.74
0.76
0.78
0.8
2004-05 2005-06 2006-07 2007-08 2008-09
Years
Net
wo
rkin
g c
apit
al
Rat
io
Interpretation:-
The first two years the net working capital ratio shows an increasing
trend but in the next year 2006-07, the net working capital ratio shows
decreasing trend. During the year the ratio decreased to .74% . During the next
year 2007-08 and 2008-09 the ratios slightly increased from 0.77% to 0.78%. It
shows an increasing trend in the net working capital ratio. This shows that
liquidity Position of KAMCO Ltd is increasing .
2 Current Asset to Working Capital Ratio
This Ratio shows the relationship between current assets and working
Capital. Very high and very low current assets to working capital .ratio is not
good for a business concern, because that shows more working capital or less
working capital is contained in the current assets. The ratio is calculated by
using the following the formula.
Current Asset to Working Capital Ratio = Current Assets
Net Working Capital
Table showing Current assets to working capital Ratio of KAMCO Ltd
Diagram showing Current assets to working capital Ratio of KAMCO Ltd
Years
Current Assets Net working
capital
Current
assets to
working
capital
Ratio
2004-05 6206.71 5156.18 1.20
2005-06 6642.30 5672.99 1.17
2006-07 7548.30 6200.62 1.22
2007-08 7915.00 6792.20 1.17
2008-09 8825.08 7495.24 1.18
2004-05 2005-06 2006-07 2007-08 2008-09
S1
1.21.17
1.221.17 1.18
years
Current assets to working
capital Ratio
Curent Assets to working capital Ratio
Interpretation:-
The figure shows that the working capital of company forms a small part
of current assets. This indicates the funds do not remain idle in the company.
The working capital is used more effectively and efficiently.
Current Liability to Working Capital Ratio
This ratio shows the relationship between the current liabilities to net
working capital . If the current liability to net working capital ratio is high, it
indicates that more working capital is contained in the current liabilities.
Otherwise ie, if the ratio is low it means less amount of working capital is
contained in the current liabilities. The ratio is calculated by using the
following formula.
Current liability to working capital Ratio= Current Liabilities
Net working capital
Table showing Current liability to working capital Ratio of KAMCO Ltd
Diagram showing Current liabilities to working capital Ratio of KAMCO Ltd
Years Current
Liabilities
Net working
capital
Current
liabilities
to working
capital
Ratio
2004-05 1050.56 5156.18 .20
2005-06 969.31 5672.99 .17
2006-07 1347.68 6200.62 .22
2007-08 1122.81 6792.20 .17
2008-09 1329.85 7495.24 .18
Current liabilities to working capital Ratio
0.2 0.170.22
0.17 0.18
0
0.05
0.1
0.15
0.2
0.25
2004-05 2005-06 2006-07 2007-08 2008-09
years
Cu
rren
t li
abil
itie
s to
w
ork
ing
cap
ital
Rat
io
Series2
Interpretation:-
The above analysis shows a favorable financial posit6ion of KAMCO
Ltd . The above analysis indicates that less amount of working capital is
contained in the current liabilities. So the working capital is effectively used.
Current Assets to Fixed Assets
The level of current assets can be measured by relating current assets to
fixed assets. Higher current assets to fixed assets ratio indicates a conservative
current assets policy whereas lower ratio indicates an aggressive current asset
policy . it is calculated by using the following formula
Current assets to fixed assets ratio = Current Assets
Fixed Assets
Table showing Current asset to fixed assets Ratio of KAMCO Ltd
Diagram showing Current assets to fixed assets Ratio of KAMCO Ltd
Years Current Assets Fixed Assets Current
asset to
fixed
assets
Ratio
2004-05 6206.71 714.92 8.68
2005-06 6642.30 664.68 9.99
2006-07 7548.30 649.38 11.62
2007-08 7915.00 605.82 13.06
2008-09 8825.08 616.20 14.32
Current assets to fixed assets
8.689.99
11.6213.06
14.32
0 2 4 6 8 10 12 14 16
2004-05
2005-06
2006-07
2007-08
2008-09
year
s
Current assets to fixed assets
Series1
Interpretation:
The above analysis shows that KAMCO Ltd followed a higher current
assets to fixed assets ratio. This indicates that KAMCO Ltd followed a
conservative policy. This shows that company was not ready to take a high risk
and hence it was in a high liquidity position.
TREND ANALYSIS OF WORKING CAPITAL
In this study method of least squares are used to find out the
requirement of gross working capital in the year 2008-2009.
Straight line trend equation:
Y= a + bX
The two normal equations are
∑Y= na + b∑X
∑XY= a∑X + b∑X2
∑Y= na
∑XY=b∑X2
Table showing trend value of working capital
Year Gross
working
capital(Y)
Deviation
from
middle
year(X)
XY X2 Trend
value
2005 5156.18 -2 -10312.36 4 5103.98
2006 5672.99 -1 -5672.99 1 5683.71
2007 6200.62 0 0 0 6263.44
2008 6792.20 1 6792.20 1 6843.17
2009 7495.22 2 14990.44 4
Total 31317.21 5797.29 10
Diagram showing trend value of working capital
Interpretation
The trend analysis of working capital requirements of KAMCO Ltd
reveals that the working capital requirements of the company has increased
year after year. The above analysis shows the working capital position of the
company from 2004-2005 to 2008-2009.The entire graph gives a positive trend.
TREND VALUE OF SALES
Straight line trend equation:
Y= a + bX
The two normal equations are
∑Y= na + b∑X------------ (1)
∑XY= a∑X + b∑X2------------ (2)
∑Y= na
∑XY=b∑X2
Year Sales Deviation
from
middle
year(X)
XY X2 Trend
value
2005 7934.39 -2 -15868.78 4 7377.17
2006 7998.07 -1 -7998.07 1 8407.86
2007 9114.09 0 0 0 9438.55
2008 10118.63 1 10118.63 1 10469.24
2009 12027.57 2 24055.14 4 11499.93
Total 47192.75 10306.92 10
Diagram showing trend value of sales
Interpretation
This figure shows the net sales position of the company from 2004-2005
to 2008-2009 Based on this analysis the company shows a satisfactory trend
value in sales.
Findings
The working capital position of the company shown on increasing
trend. This means the company is managing its working capital
efficiently.
The current ration of the company shows an increasing trend . It
indicates that liquidity position of the company is good.
The quick ration of the company shows an increasing trend . So the
current financial position of the company is satisfactory.
The debt equity ratio of KAMCO Ltd shows an increasing trend. It
has not reached at satisfactory level.
The proprietary ratio of KAMCO ltd shows an increasing trend. It
has not reached at satisfactory level.
The gross profit ratio shows a fluctuating tendency. But every year
the firm has gross profit. The cost of production & other expenses
are fluctuating normally.
The net profit ratio shows a decreasing trend. But every year the firm
has net profit. The operating & administrative expenses are
increasing day by day. So net profit ratio will be decreasing
normally.
Net worth ratio of the company shows an increasing trend. It
indicates that the overall efficiency of the company is satisfactory.
The inventory turnover ratio shows an increasing trend. It indicates
that the stock are frequently sold & less amount of money is required
to finance the inventory.
The debtors turnover ratio shows a decreasing trend. It indicates that
there is a delay in the collection of debt.
Creditors turnover ration shows a decreasing trend showing that the
company does not follow an efficient t payment policy. Creditors
management of the company is not satisfactory.
Working capital turnover ratio shows an increasing trend. It indicates
the efficient utilization of working capital.
Suggestions
The working capital of the company is showing an increasing trend.
The Company has to maintain this condition so that the short term
solvency can be increased.
The debt equity ratio of the company is not ideal. It should try to
maintain a proper balance between debt & equity.
Gross profit shows fluctuating trend because of the increasing price
of raw materials & high cost of production . So the company must
try to reduce the cost of production.
Net profit ratio shows a decreasing trend because of high operating
expenses. So the company has to take proper remedial measures to
control the operating expenses
The management should also take step to ensure prompt payment to
it creditors
The net worth ratio of the company is good So it is to be maintained
Management of inventory is efficient, but the company can prepare
inventory reports.
CONCLUSION
The study deals with the analysis of working capital management with
special reference to KAMCO Ltd. As far as the company is concerned working
capital management is important. it is useful for knowing the efficiency &
liquidity position of the company.
The analysis of five years reveals that the
company is in a position to pay its current obligation. The company is
effectively utilizing its assets. The company’s debt management has improved
and they are also making prompt payment to its creditors. Thus the overall
performance of the company is satisfactoruy,
BIBLIOGRAPHY
I -BOOKS
1. Banerjee Subir Kumar “ Financial Management “ , New Delhi, Sulthan
Chan d & Company Ltd 2006.
2. Bhalla .V.K. “ Working Capital Management “ New Delhi, Anmal
Publication 2008
3. Chandra Prasanna , “ Financial Management “ , New Delhi, Thalameraw
Hill Publishing Company 2007
4. Gupta S.P.” Flementary Statistical Method”, New Delhi, Sulthan Chand
& Sons 2003
5. Kishore Ravi M, “ Financial Management” New Delhi, Taxman Allied
Service 2005
6. Kuchhal S.C., “ Financial Management “, Allahabad, Chaitanya
Publishing House , 2005
7. Pandey I.M. “ Financial Management “, New Delhi , Vikar Publishing
Ltd 2008
8. Vinod A. “ Management Accounting “ Calicut , Central Co Operation
Stores Ltd 2003.
II-JOURNALS
1. Patel D.M. , Analysis of Working Capital, ACCST Research Journal,
Volume III, No. I, January 2005
2. Prasad G.B.K. & Dr Rastogi, Working Capital Management , The
Chartered Accountant Students , Volume 9, No.6, November 2005
3. Roys.T.S. & Jain C.M., Working Capital Management of oil & Natural
Gas Corporation, The Journal of Business Studies Volume 2 , No.4 July
2005
III REPORTS
1. Annual Reports From 2004-05 to 2008-09
2. Manual of Finance Department of KAMCO LTD
IV WEBSITES
1. WWW.KAMCOindia.com
2. WWW.Wikepedia.com
3. WWW.Google .com
4. WWW. Businessline.com
