Working capital management

ABSTRACT According to Weston and Brigham working capital refers to the firm’s investment, its shorter current assets and short term securities accounting receivables and inventory. According to the Guttmann and Doug all working capital is excess of current assets over liabilities. According to the Shubin working capital is an amount of funds necessary to cover the cost of operating the enterprise. Working capital management is concerned with the problems that arise in attempting to manage the current assets, and the current liabilities, and their relationships their arise between them. The current assets refers to those assets, which to the ordinary course of business can be, or will be turned into cash within one year without undergoing a diminution in value and with out disrupting the operations of the firm. The major current assets are cash, marketable securities, accounts receivables, and their inception to be paid in the ordinary course of business within a year, out of current assets earnings of the concern. The basis current liabilities are Bills payables, Bank Overdrafts and Outstanding expenses. The goal of working capital management is to manage the firm current assets, and current liabilities in such way that a satisfactory level of working capital is maintained.

INTRODUCTION :

Working capital management is concerned with the problems that arise in attempting to manage the current assets, and the current liabilities, and their relationships their arise between them.

The current assets refers to those assets, which to the ordinary course of business can be, or will be turned into cash within one year without undergoing a diminution in value and with out disrupting the operations of the firm.

The major current assets are cash, marketable securities, accounts receivables, and their inception to be paid in the ordinary course of business within a year, out of current assets earnings of the concern. The basis current liabilities are Bills payables, Bank Overdrafts and Outstanding expenses.

The goal of working capital management is to manage the firm current assets, and current liabilities in such way that a satisfactory level of working capital is maintained.

Thus, the current assets should be large enough to cover its current liabilities in order to ensure a reasonable margin of safety, each of the current assets must be managed efficiently in order to maintain the liquidity of the short term sources of financing must be continuously

managed to ensure that they are obtained and used in a best possible way.

Therefore, interaction between current assets and current liabilities in the main theme of working capital management.

Profits are earned with the help of assets which are partly fixed and partly current. Working capital sometimes referred to as “CIRCULATING CAPITAL”.

OBJECTIVES

1) USE appropriate technology.

2) Identify the potential areas and equipments for Energy Conservation.

3) Periodic In-house Energy Audit, Continuous Monitoring, Review of Targets and Bench Marks for energy consumption.

4) Implement innovative ideas / modifications, improvements and up gradation of the equipments.

5) Explore the possibility of using modern technology to utilize the waste heat to maximum extent.

6) To create awareness through training/seminars among all employees to conserve energy.

METHODOLOGY:For the preparation of a project the collection of data is very essential. They are primary data and secondary data.

PRIMARY DATA :From directing personnel and oral investigation.

SECONDARY DATA :The secondary data is obtained from the 1. Annual reports of the unit.2. Other reports of the unit.3. Brochures.4. House magazines of the unit and5. Internet.

REVIEW OF LITERATURE

Working capitalWorking capital, also known as net working capital, is a financial metric which represents operating liquidity available to a business. Along with fixed assets such as plant and equipment, working capital is considered a part of operating capital. It is calculated as current assets minus current liabilities. If current assets are less than current liabilities, an entity has a working capital deficiency, also called a working capital deficit.A company can be endowed with assets and profitability but short of liquidity if its

SOURCES OF DATA

PRIMARY DATA SECONDARY DATA

assets cannot readily be converted into cash. Positive working capital is required to ensure that a firm is able to continue its operations and that it has sufficient funds to satisfy both maturing short-term debt and upcoming operational expenses. The management of working capital involves managing inventories, accounts receivable and payable and cash.

CalculationCurrent assets and current liabilities include three accounts which are of special importance. These accounts represent the areas of the business where managers have the most direct impact: accounts receivable (current asset)inventory (current assets), and accounts payable (current liability)The current portion of debt (payable within 12 months) is critical, because it represents a short-term claim to current assets and is often secured by long term assets. Common types of short-term debt are bank loans and lines of credit.An increase in working capital indicates that the business has either increased current assets (that is received cash, or other current assets) or has decreased current liabilities, for example has paid off some short-term creditors.Implications on M&A: The common commercial definition of working capital for the purpose of a working capital adjustment in an M&A transaction (ie for a working capital adjustment mechanism in a sale and purchase agreement) is equal to:Current Assets - Current Liabilities excluding deferred tax assets/liabilities, excess cash, surplus assets and/or deposit balances.Cash balance items often attract a one-for-one purchase price adjustment.

Working capital managementDecisions relating to working capital and short term financing are referred to as working capital management. These involve managing the relationship between a firm's short-term assets and its short-term liabilities. The goal of working capital

management is to ensure that the firm is able to continue its operations and that it has sufficient cash flow to satisfy both maturing short-term debt and upcoming operational expenses.

Decision criteriaBy definition, working capital management entails short term decisions - generally, relating to the next one year period - which is "reversible". These decisions are therefore not taken on the same basis as Capital Investment Decisions (NPV or related, as above) rather they will be based on cash flows and / or profitability. One measure of cash flow is provided by the cash conversion cycle - the net number of days from the outlay of cash for raw material to receiving payment from the customer. As a management tool, this metric makes explicit the inter-relatedness of decisions relating to inventories, accounts receivable and payable, and cash. Because this number effectively corresponds to the time that the firm's cash is tied up in operations and unavailable for other activities, management generally aims at a low net count. In this context, the most useful measure of profitability is Return on capital (ROC). The result is shown as a percentage, determined by dividing relevant income for the 12 months by capital employed; Return on equity (ROE) shows this result for the firm's shareholders. Firm value is enhanced when, and if, the return on capital, which results from working capital management, exceeds the cost of capital, which results from capital investment decisions as above. ROC measures are therefore useful as a management tool, in that they link short-term policy with long-term decision making. See Economic value added (EVA).

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

Cash management. Identify the cash balance which allows for the business to

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

Working capital management

Corporate finance is an area of finance dealing with the financial decisions corporations make and the tools and analysis used to make these decisions. The primary goal of corporate finance is to maximize corporate value while managing the firm's financial risks. Although it is in principle different from managerial finance which studies the financial decisions of all firms, rather than corporations alone, the main concepts in the study of corporate finance are applicable to the financial problems of all kinds of firms.The discipline can be divided into long-term and short-term decisions and techniques. Capital investment decisions are long-term choices about which projects receive investment, whether to finance that investment with equity or debt, and when or whether to pay dividends to shareholders. On the other hand, the short term decisions can be grouped under the heading "Working capital management". This subject deals with the short-term balance of current assets and current liabilities; the focus here is

on managing cash, inventories, and short-term borrowing and lending (such as the terms on credit extended to customers).The terms Corporate finance and Corporate financier are also associated with investment banking. The typical role of an investment banker is to evaluate the company's financial needs and raise the appropriate type of capital that best fits those needs.

Capital investment decisionsCapital investment decisions [1] are long-term corporate finance decisions relating to fixed assets and capital structure. Decisions are based on several inter-related criteria. Corporate management seeks to maximize the value of the firm by investing in projects which yield a positive net present value when valued using an appropriate discount rate. These projects must also be financed appropriately. If no such opportunities exist, maximizing shareholder value dictates that management return excess cash to shareholders. Capital investment decisions thus comprise an investment decision, a financing decision, and a dividend decision.

The investment decisionManagement must allocate limited resources between competing opportunities ("projects") in a process known as capital budgeting. Making this capital allocation decision requires estimating the value of each opportunity or project: a function of the size, timing and predictability of future cash flows.

Project valuation

In general, each project's value will be estimated using a discounted cash flow (DCF) valuation, and the opportunity with the highest value, as measured by the resultant net present value (NPV) will be selected (applied to Corporate Finance by Joel Dean in 1951; see also Fisher separation theorem, John Burr Williams: Theory). This requires estimating the size and timing of all of the incremental cash flows resulting from the

project. These future cash flows are then discounted to determine their present value (see Time value of money). These present values are then summed, and this sum net of the initial investment outlay is the NPV.The NPV is greatly influenced by the discount rate. Thus selecting the proper discount rate—the project "hurdle rate"—is critical to making the right decision. The hurdle rate is the minimum acceptable return on an investment—i.e. the project appropriate discount rate. The hurdle rate should reflect the risk of the investment, typically measured by volatility of cash flows, and must take into account the financing mix. Managers use models such as the CAPM or the APT to estimate a discount rate appropriate for a particular project, and use the weighted average cost of capital (WACC) to reflect the financing mix selected. (A common error in choosing a discount rate for a project is to apply a WACC that applies to the entire firm. Such an approach may not be appropriate where the risk of a particular project differs markedly from that of the firm's existing portfolio of assets.)In conjunction with NPV, there are several other measures used as (secondary) selection criteria in corporate finance. These are visible from the DCF and include discounted payback period, IRR, Modified IRR, equivalent annuity, capital efficiency, and ROI; see list of valuation topics.

Valuing flexibilityIn many cases, for example R&D projects, a project may open (or close) paths of action to the company, but this reality will not typically be captured in a strict NPV approach. Management will therefore (sometimes) employ tools which place an explicit value on these options. So, whereas in a DCF valuation the most likely or average or scenario specific cash flows are discounted, here the “flexible and staged nature” of the investment is modeled, and hence "all" potential payoffs are considered. The difference between the two valuations is the "value of flexibility" inherent in the project.

The two most common tools are Decision Tree Analysis (DTA) and Real options analysis (ROA): DTA values flexibility by incorporating possible events (or states) and consequent management decisions. In the decision tree, each management decision in response to an "event" generates a "branch" or "path" which the company could follow; the probabilities of each event are determined or specified by management. Once the tree is constructed: (1) "all" possible events and their resultant paths are visible to management; (2) given this “knowledge” of the events that could follow, management chooses the actions corresponding to the highest value path probability weighted; (3) (assuming rational decision making) this path is then taken as representative of project value. See Decision theory: Choice under uncertainty. (For example, a company would build a factory given that demand for its product exceeded a certain level during the pilot-phase, and outsource production otherwise. In turn, given further demand, it would similarly expand the factory, and maintain it otherwise. In a DCF model, by contrast, there is no "branching" – each scenario must be modeled separately.) ROA is used when the value of a project is contingent on the value of some other asset or underlying variable. Here, using financial option theory as a framework, the decision to be taken is identified as corresponding to either a call option or a put option - valuation is then via the Binomial model or, less often for this purpose, via Black Scholes; see Contingent claim valuation. The "true" value of the project is then the NPV of the "most likely" scenario plus the option value. (For example, the viability of a mining project is contingent on the price of gold; if the price is too low, management will abandon the mining rights, if sufficiently high, management will develop the ore body. Again, a DCF valuation would capture only one of these outcomes.)

Quantifying uncertainty

Further information: Sensitivity analysis, Scenario planning, and Monte Carlo

methods in financeGiven the uncertainty inherent in project forecasting and valuation, analysts will wish to assess the sensitivity of project NPV to the various inputs (i.e. assumptions) to the DCF model. In a typical sensitivity analysis the analyst will vary one key factor while holding all other inputs constant, ceteris paribus. The sensitivity of NPV to a change in that factor is then observed (calculated as Δ NPV / Δ factor). For example, the analyst will set annual revenue growth rates at 5% for "Worst Case", 10% for "Likely

Case" and 25% for "Best Case" - and produce three corresponding NPVs.

Using a related technique, analysts may also run scenario based forecasts so as to observe the value of the project under various outcomes. Under this technique, a scenario comprises a particular outcome for economy-wide, "global" factors (exchange rates, commodity prices, etc...) as well as for company-specific factors (revenue growth rates, unit costs, etc...). Here, extending the example above, key inputs in addition to growth are also adjusted, and NPV is calculated for the various scenarios. Analysts then plot these results to produce a "value-surface" (or even a "value-space"), where NPV is a function of several variables. Another application of this methodology is to determine an "unbiased NPV", where management determines a (subjective) probability for each scenario - the NPV for the project is then the probability-weighted average of the various scenarios. Note that for scenario based analysis, the various combinations of inputs must be internally consistent, whereas for the sensitivity approach these need not be so.A further advancement is to construct stochastic or probabilistic financial models - as opposed to the traditional static and deterministic models as above. For this purpose, the most common method is to use Monte Carlo simulation to analyze the projects NPV. This method was introduced to finance by David B. Hertz in 1964, although has only recently become common; today analysts are even able to run simulations in spreadsheet based DCF models, typically using an add-in, such as Crystal Ball.Using simulation, the cash flow components that are (heavily) impacted by uncertainty is simulated, mathematically reflecting their "random characteristics".

The simulation produces several thousand trials (in contrast to the scenario approach above) and outputs a histogram of project NPV. The average NPV of the potential

investment - as well as its volatility and other sensitivities - is then observed. This histogram provides information not visible from the static DCF: for example, it allows for an estimate of the probability that a project has a net present value greater than zero (or any other value). See: Monte Carlo Simulation versus “What If” Scenarios.

Here, continuing the above example, instead of assigning three discrete values to revenue growth, the analyst would assign an appropriate probability distribution (commonly triangular or beta). This distribution - and that of the other sources of uncertainty - would then be "sampled" repeatedly so as to generate the several thousand realistic (but random) scenarios, and the output is a realistic, representative set of valuations. The resultant statistics (average NPV and standard deviation of NPV) will be a more accurate mirror of the project's "randomness" than the variance observed under the traditional scenario based approach.

The financing decisionAchieving the goals of corporate finance requires that any corporate investment be financed appropriately. As above, since both hurdle rate and cash flows (and hence the risk to the firm) will be affected, the financing mix can impact the valuation. Management must therefore identify the "optimal mix" of financing—the capital structure that results in maximum value. (See Balance sheet, WACC, Fisher separation theorem; but, see also the Modigliani-Miller theorem.)

The sources of financing will, generically, comprise some combination of debt and equity. Financing a project through debt results in a liability that must be serviced—and hence there are cash flow implications regardless of the project's success. Equity financing is less risky in the sense of cash flow commitments, but results in a dilution of ownership and earnings. The cost of equity is also typically higher than the cost of

debt (see CAPM and WACC), and so equity financing may result in an increased hurdle rate which may offset any reduction in cash flow risk.Management must also attempt to match the financing mix to the asset being financed as closely as possible, in terms of both timing and cash flows.

One of the main theories of how firms make their financing decisions is the Pecking Order Theory, which suggests that firms avoid external financing while they have internal available and avoid new equity financing while they can engage in new debt financing at reasonably low interest rates. Another major theory is the Trade-Off Theory in which firms are assumed to trade-off the tax benefits of debt with the bankruptcy costs of debt when making their decisions. An emerging area in finance theory is right-financing whereby investment banks and corporations can enhance investment return and company value over time by determining the right investment objectives, policy framework, institutional structure, source of financing (debt or equity) and expenditure framework within a given economy and under given market conditions. One last theory about this decision is the Market timing hypothesis which states that firms look for the cheaper type of financing regardless of their current levels of internal resources, debt and equity.The dividend decisionThe dividend is calculated mainly on the basis of the company's inappropriate profit and its business prospects for the coming year. If there are no NPV positive opportunities, i.e. where returns exceed the hurdle rate, then management must return excess cash to investors. These free cash flows comprise cash remaining after all business expenses have been met.This is the general case, however there are exceptions. For example, investors in a "Growth stock", expect that the company will, almost by definition, retain earnings so as to fund growth internally. In other cases, even though an opportunity is currently NPV negative, management may consider “investment flexibility” / potential payoffs and decide to retain cash flows; see above and Real options.Management must also decide on the form of the distribution, generally as cash dividends or via a share buyback. There are various considerations: where shareholders pay tax on dividends, companies may elect to retain earnings, or to perform a stock buyback, in both cases increasing the value of shares outstanding; some companies will pay "dividends" from stock rather than in cash; see Corporate action. Today, it is generally accepted that dividend policy is value neutral (see Modigliani-Miller theorem).

Working capital managementDecisions relating to working capital and short term financing are referred to as working capital management. These involve managing the relationship between a firm's short-term assets and its short-term liabilities.As above, the goal of Corporate Finance is the maximization of firm value. In the context of long term, capital investment decisions, firm value is enhanced

through appropriately selecting and funding NPV positive investments. These investments, in turn, have implications in terms of cash flow and cost of capital.The goal of Working capital management is therefore to ensure that the firm is able to operate, and that it has sufficient cash flow to service long term debt, and to satisfy both maturing short-term debt and upcoming operational expenses. In so doing, firm value is enhanced when, and if, the return on capital exceeds the cost of capital; See Economic value added (EVA).

Decision criteriaWorking capital is the amount of capital which is readily available to an organization. That is, working capital is the difference between resources in cash or readily convertible into cash (Current Assets), and cash requirements (Current Liabilities). As a result, the decisions relating to working capital are always current, i.e. short term, decisions.In addition to time horizon, working capital decisions differ from capital investment decisions in terms of discounting and profitability considerations; they are also "reversible" to some extent. (Considerations as to Risk appetite and return targets remain identical, although some constraints - such as those imposed by loan covenants - may be more relevant here).

Working capital management decisions are therefore not taken on the same basis as long term decisions, and different criteria are applied here: the main considerations are cash flow and liquidity - cash flow is probably the more important of the two. The most widely used measure of cash flow is the net operating cycle, or cash conversion cycle. This represents the time difference between cash payment for raw materials and cash collection for sales. The cash conversion cycle indicates the firm's ability to convert its resources into cash. Because this number effectively corresponds to the time that the firm's cash is tied up in operations and unavailable for other activities, management generally aims at a low net count. (Another measure is gross operating cycle which is the same as net operating cycle except that it does not take into account the creditor’s deferral period.) In this context, the most useful measure of profitability is Return on capital (ROC). The result is shown as a percentage, determined by dividing relevant income for the 12 months by capital employed; Return on equity (ROE) shows this result for the firm's shareholders. As above, firm value is enhanced when, and if, the return on capital, exceeds the cost of capital. ROC measures are therefore useful as a management tool, in that they link short-term policy with long-term decision making.Management of working capitalGuided by the above criteria, management will use a combination of policies and techniques for the management of working capital. These policies aim at managing the current assets (generally cash and cash equivalents,

inventories and debtors) and the short term financing, such that cash flows and returns are acceptable. Cash management. Identify the cash balance which allows for the business to meet day to day expenses, but reduces cash holding costs. Inventory management. Identify the level of inventory which allows for uninterrupted production but reduces the investment in raw materials - and minimizes reordering costs - and hence increases cash flow; see Supply chain management; Just In Time (JIT); Economic order quantity (EOQ); Economic production quantity (EPQ). Debtors management. Identify the appropriate credit policy, i.e. credit terms which will attract customers, such that any impact on cash flows and the cash conversion cycle will be offset by increased revenue and hence Return on Capital (or vice versa); see Discounts and allowances. Short term financing. Identify the appropriate source of financing, given the cash conversion cycle: the inventory is ideally financed by credit granted by the supplier; however, it may be necessary to utilize a bank loan (or overdraft), or to "convert debtors to cash" through "factoring".Financial risk managementRisk management is the process of measuring risk and then developing and implementing strategies to manage that risk. Financial risk management focuses on risks that can be managed ("hedged") using traded financial instruments (typically changes in commodity prices, interest rates, foreign exchange rates and stock prices). Financial risk management will also play an important role in cash management.This area is related to corporate finance in two ways. Firstly, firm exposure to business risk is a direct result of previous Investment and Financing decisions. Secondly, both disciplines share the goal of creating, or enhancing, firm value. All large corporations have risk management teams, and small firms practice informal, if not formal, risk management.Derivatives are the instruments most commonly used in Financial risk management. Because unique derivative contracts tend to be costly to create and monitor, the most cost-effective financial risk management methods usually involve derivatives that trade on well-established financial markets. These standard derivative instruments include options, futures contracts, forward contracts, and swaps.See: Financial engineering; Financial risk; Default (finance); Credit risk; Interest rate risk; Liquidity risk; Market risk; Operational risk; Volatility risk; Settlement risk.Relationship with other areas in financeInvestment bankingUse of the term “corporate finance” varies considerably across the world. In the United States it is used, as above, to describe activities, decisions and techniques that deal with many aspects of a company’s finances and capital. In the United Kingdom and Commonwealth countries, the terms “corporate finance” and “corporate financier” tend to be associated with investment banking - i.e. with transactions in which capital is raised for the corporation.[2]

Personal and public financeCorporate finance utilizes tools from almost all areas of finance. Some of the tools developed by and for corporations have broad application to entities other than corporations, for example, to partnerships, sole proprietorships, not-for-profit organizations, governments, mutual funds, and personal wealth management. But in other cases their application is very limited outside of the corporate finance arena. Because corporations deal in quantities of money much greater than individuals, the analysis has developed into a discipline of its own. It can be differentiated from personal finance and public finance.

CONCEPTS

GROSS WORKING CAPITAL :

The Gross Working Capital is the firm’s investment in current assets. The current assets are the assets which can be converted into cash with in as accounting year and include cash. Short term securities like Debtors, Bills Receivables and Investor.

Gross working capital, constituted Current Assets i.e.,

(1) Inventory which are further classified intoA) Raw materialsB) Work in progressC) Finished goods.

(2) Accounts ReceivablesA) Cash and bank balance.

Any business firm needs to provide itself with enough of these Current Assets. So that it can carry on its business operation smoothly

These Assets are essentially circulating in nature. That is to say that the business buys raw materials with cash available and then the raw material are processed into work in process and ultimately these get converted into finished goods. A part of these finished goods like the shape of Accounts receivables as a result or cash sales.

NET WORKING CAPITAL:

Net Working capital refers to the difference between Current Assets and Current Liabilities are those claims of outsides, which are expected to mature, or payment within an accounting year and include creditors, Bills payable and outstanding expenses.

Next working helps the management to look after the permanent sources for its financing working capital under this approach does not increase with increase in short term borrowings.

Profits are earned with the help of assets, which are partly current working capital sometimes referred as “CIRCULATING CAPITAL”.

NEED FOR WORKING CAPITAL:Business firms aim at maximizing the wealth of shareholders. In its endeavor to maximize shareholders wealth a firm should earn sufficient return from its operation. Earning a steady amount of profit required successful sales activity. The firm has to invest enough funds in current assets for the success of sales activity, Current assets are needed because sales do not convert into cash instantaneously, there is always an operating cycle involved in the conversion of sales into cash.

CHANGES IN WORKING CAPITAL:The changes in working capital occur for the following three basic reasons:1. Changes in level of sales and or operating expenses.2. Policy changes.3. Changes in technology

CHANGES IN SALES AND OPERATING EXPENSES:The first factor causing a change in the working capital requirement is a change in the sales and operating expenses. The changes in this factor may occur due top three reasons. First, there may be a long run trend of changes. For instance the price of raw materials, say oil may constantly rise, necessitating the holding of a larger inventory. The secular trends would mainly affect the need for payment current assets. In the second place, cyclical changes in the economy leading to ups and downs in business activity will influence the level of working capital. The third source of change is seasonality in sales activity.

The change is sales always and operating expenses may either in the form of an increase or decrease. An increase in the volume of sales is bound to be accompanying by higher levels of cash, in inventory and receivables. The decline in sales will have exactly the opposite effect a decline in the need for working capital. Changes in the operating expenses rise or fall will have a similar effect on the level of working capital.

POLICY CHANGES:The second major cause of changes in the level of working capital is policy changes initiated by the management. There is a wide choice in the matter of current assets policy. The term current assets and sales volume. A firm following a conservative policy in this respect having a

very level of current assets in relating to sales may deliberately opt foe less conservative policy and vice versa. These conscious managerial decisions will certainly have an impact on the level of working capital.TECHNOLOGICAL CHANGES:Finally, another factor than can cause changes in the level of working capital is technological changes. If a new process emerges as result of technology development, which shortness the operating cycle, it will reduce the need for working capital.

PROBLEMS OF WORKING CAPITAL MANAGEMENT

The firm should maintain a sound working position. It should have adequate working capital to run its business operations excessive as well as inadequate working positions are dangerous from the firm’s point of view.

THE DANGERS OF EXCESSIVE WORKING CAPITAL:

1. It results in unnecessary accumulation of inventories thus chances of inventory miss-handling, waste theft and losses increases.

2. It is an indication of defective credit policy and slacks collection period. Consequently, higher incidence of bad debts results, which adversely effect profits. Excessive working capital makes management complacent, which degenerated into managerial inefficiency.

3. Excessive working capital makes management complacent, which degenerated into managerial inefficiency.

4. Tendencies of accumulating inventories to make speculation profits grow. This may tend to make dividend policy liberal and difficult to cope with in future when the firm is unable to make speculative profits

INADEQUATE WORKING CAPITAL:1. It stagnates growth and become difficult for the firm to undertake profitable project for non-availability of working capital

2. It becomes difficult to implement operating plans and achieve the firms profit target.

3. Operating inefficiencies creep in when it become difficult even to meet day-to-day commitments.

4. Fixed assets are not efficiently utilized for the lack of working capital funds, thus the firms profitability would deteriorate.

5. Paucity of working “capital funds renders the firm unable to avail attractive credit opportunities etc.”

6. This firm looses its reputation when it is not in honor its short term obligation as result, the firm faces tight credit terms.

Thus enlightened management should, therefore maintain a right amount of working capital on continuous basis which helps to develop the organization effectively and efficiently.

ROLE OF FINANCIAL MANAGER IN WORKING CAPITAL MANAGEMENT

1. Working capital management requires most of the finance manager time as it represents a large of investment in assets.

2. Working capital management requires much of the finance manager time as it represents larger portion of investment in assets.

3. Action should be taken to curtail unnecessary investment in current assets.

4. All precautions should be taken for the effective and efficient management of working capital

5. Large firms have to manage their current assets and current liabilities very carefully and should see that the work should be done properly in order to achieve predetermined organizational goals.

6. The financial manager should pay special attention to the management of current assets on continuing basis.MANAGEMENT OF CASH

CASH MANAGEMENT:

Cash is the important assets for the operation of the business. Cash in the basic input to keep the business running on continuous basis. Cash shortage will disrupt the firms manufacturing operation while excessive cash will simply remains without contributing anything towards the firm’s in profitable way.

Cash management is concerned with the managing or cash flow into and out of the firm, cash flow with in the firm, and cash balances held by the firm at appoint of time by financing deficit investing surplus

Cash management is to maintain adequate control over cash position to keep the firm sufficiently liquidated and to use excess cash in some profitable way.

CASH PLANNING:

Cash planning is a technique to plan and control of the use of funds. It protects the financial condition of the firm by developing the overall operating plans of the firms.

USES OF CASH MANAGEMENT:

1. It indicates company’s future financial need especially for its working capital requirements.

2. To help to evaluate proposed capital projects

3. It helps to improve corporate planning

4. Cash forecasting helps to plan for future and to formulate projects carefully.

CASH MANAGEMENT STRATEGIES:

The cash management strategies are intended to minimize the operating cash balance requirement. The basic strategies payable without affecting credit of the firm.

1. Stretching account payable without affecting the credit of the firm.

2. Efficient Inventory management

3. Speedy collection of accounts receivables

Thus the main objectives of cash management are to reconcile and to minimize funds committed to cash.

MOTIVE OF HOLDING CASH:

The firm needs to hold cash to the following three motives.:1. Transaction Motive.2. Precautionary Motive.3. Speculative Motive

RECEIVABLES MANAGEMENT:

The Receivables represent as important component of the Current Asset of a firm. The term receivables are defined as “Debt owned to the firm by customers arising from sale of goods or service in the ordinary course of business. Receivables Management is also called “Trade Credit Management”. The maintenance of receivables involves direct and indirect costs. Direct cost includes the cost of investments, allowance and concession to customers and also losses on account of bad debts. Administrative costs connected with collection of receivables, the recording of bills and preparing statement, inflationary costs legal expenses are indirect costs.

OBJECTIVES OF RECEIVABLE MANAGEMENT:The goals of Receivables Management are: To maintain an optimum level of investment in receivables. To keep down the average collection of sales. To obtain the optimum volume of sales. To control the cost of credit allowed and to keep it at the minimum possible level.

The three crucial decision areas Receivables Management are:o Credit Policieso Credit Termso Collection Policies.

INVENTORY MANAGEMENT

Inventories are stock of the product a company is manufacturing for sale and components that make up the product. The various forms in which ventures exist in a manufacturing company are Raw Material, work in progress, and Finished goods. The levels of three kinds of inventories for a firm depend on the nature of its business.

RAW MATERIALS:Raw Materials are those basic inputs that are converted into finished product through the manufacturing process. Raw materials are those which have been purchased and stored for future production.

WORK-IN-PROGRESS:Inventories are semi-manufactured products they represent that need more before they become finished products for sale.

FINISHED GOODS:Finished goods inventories are those completed manufactures products, which are ready for sale. Stocks of raw material and work-in- progress facilitate

production while stock of finished goods is required for smooth marketing operations.

Excessive level of inventory consumes the finds of a firm, which cannot be used for any other purpose and thus, involves an opportunity cost. The carrying costs, such as the cost of storage and handling insurance also increase in proportion to the volume of inventory.

Maintaining a liquidates level of inventory is also dangerous. The consequences of inadequate investment in inventory are production holds up failure to meet delivery commitments. If inventory is not sufficient to meet the demand of the customers regularly that may shift to other competitors, which will amount to a permanent loss to a firm.

OBJECTIVES OF INVENTORY MANAGEMENT:

1. To maintain sufficient stocks of raw material in period of short supply and anticipate price charges.

2. To ensure a continuous supply of raw material to facilitate uninterrupted production.

3. To maintain sufficient finished goods inventory for smooth sales operation and efficient customer service.

4. To minimize the carrying costs and time.

5. To control investment in inventories and keep it at an optimum level.

INVENTORY MANAGEMENT TECHNIQUES:

The firm should determine the optimum level of inventory efficiently controlled inventories make the firm flexible.

Determining an optimum level involves two types of costs.a) Ordering Costs.b) Carrying Costs.

BENEFITS OF HOLDING INVENTORY:

It acts as a buffer to decouple or uncouple the various activities of a firm so that all do not have to be pursued exactly the same rate.

Since inventory enables uncoupling of the key activities of a firm each of them can be operated at the most efficient rate.

An inventory enables firms in the short-run to product at a rate than purchase of raw materials and vice-versa, or sell at rate greater than production and vice-versa.

The maintenance of inventory also helps a firm to enhance its sales efforts.

By holding less inventory cost can be minimized, but there is a risk that the operation will be disturbed, as the emerging demands cannot be met.

By holding a large inventory, the chances of disruption of operations are reduced, but the cost will increase.

The appropriate level of inventory should determine in term of a trade off between the benefits the costs associated with maintaining inventory.

DEBTORS TURN OVER RATIO:

This Ratio indicates the number of items on an average debtors or receivables turnover each year. Generally, the higher value of debtor’s turnover, the most efficient is the management of assets. Debtor’s turnover Ratio expresses the relation between debtors and sales. It is calculated as expenses are very high during the study period; because of these expenses the firm does not have profitability position. Expenses are very high during the study period; because of these expenses the firm does not have profitability position.

RATIO ANALYSIS

For the analysis and interpretation of Financial Account Data there are a various tools and techniques available of which the Ratio Analysis technique is an important one. The technique reveals the weakness and soundness of various aspects of Financial Management viewed from difference angles. The analysis techniques is the most convenient and acceptable technique for the analysis and interpretation of Financial Statement.

The term Ratio refers to the numerical or Quantitative relationship between two items variables. The term analysis implies computing and commenting up on the accounting ratios.

IMPORTANCE OF RATIO ANALYSIS:

As a tool of financial management they are two crucial significance. The importance of Ratio Analysis lies in the fact that it presents facts on a comparative basis and enables the drawing of inferences. The performance of

the firm. Ratio Analysis is relevant in assessing the performance of the firm in the following aspects.

LIQUIDITY POSITION:

The liquidity position of a firm would be satisfactory, if it is able to meet its Current obligations when they become due. This ability reflected in the liquidity ratios of a firm.

1. LONG TERM SOLVENCY:

Ratio Analysis is equally useful for assessing the long term financial viability of firm. The long-term solvency of a firm is measured by the leverage/ capital structure and profitability ratios, which focus on earning power and operation efficiency

TYPES OF RATIOS:

Several ratios calculated from the accounting data, can be grouped into various classes according to financial activity. The parties interested in financial analysis are short and long term creditors, owners and management short-term creditors are mainly interested in the liquidity position or short-term solvency of the firm. On the other hand Long- term creditors are more interested in the long-term solvency and profitability of the firm. Similarly owners are more interested on the firm’s profitability and financial condition. Management is interested in evaluating every aspect of the firms performance. They have to protect interest of all the parties.

The ratios are classified into three types;

(a) Liquidity ratios.(b) Leverage ratios.(c) Profitability ratios.

LIQUIDITY RATIOS:

Liquidity ratio measure the ability of the firm to meet the current obligations. The analysis of liquidity needs the preparation of ash budgets and cash fund flow statements, but liquidity ratios by establishing relationship between cash and other current assets to current obligations, provide a quick measure of liquidity. A firm should ensure that it does not suffer from lack of liquidity, and also it obligations due to lack of sufficient liquidity will result in poor credit worthiness, loss of creditors confidence or even in legal

tangles resulting in the closure of the company. A very high degree of liquidity is also bad assets which earn nothing.

The firm’s funds will be unnecessarily tied up in current assets.

LIQUIDITY OR SHORT TERM SOLVENCY RATIOS:

Liquidity ratios measure the short term solvency of the firm. The following are the important liquidity ratios.

1. CURRENT RATIO OF WORKING CAPITAL RATIO:

Current ratio is the ratio of the current liabilities. Current assets are assets which can be converted into cash within one year and include cash in hand and cash at bank, bills receivables, net sundry debtors, stock of raw materials, prepaid expenses and short term or temporary investments, et., current liabilities are liabilities, which are to be repaid within a period of 1 year and include bills payable, sundry creditors, Bank Overdraft, Outstanding Expenses, Short term loans and Advances, etc., are repayable within 1 year.

Current Ratio= Current Assets/ Current liabilitiesA Current ratio of 2:1 is considered as ideal. If current ratio is less than 2 it

indicates that the business does not enjoy adequate liquidity. However a high current ratio of more than 3 indicates that the firm is having idle funds and has not invested them properly.

COMPANY PROFILE

My Home Industries Limited was the most ambitious diversification of the My Home Group, which was founded by Dr Rameswar Rao J Chairman and Managing Director. Under his leadership, company has grown by leaps and bounds. My Home Industries Limited started as 600 TPD mini cement plant in 1998, is now a major plant with a production capacity of 3.40 Million Tonnes per annum. The second Unit has been designed and installed as a much more efficient and modern unit. This is one of the very few highly energy efficient plants in the world and it is very friendly to ecology and environment. Unit – 3, which is expected to be commissioned during Dec 2006, has a production capacity of 1.20 million tones per annum. Here again, all the state of art technology is incorporated. Thus, in a short span of one decade, My Home Industries has vertically grown very fast in capacity, from a meager 600 tonnes per day to a massive 10,000

tonnes per day. In addition group has Construction Division dealing with Estate development and Transport, Power Generation Units and also Consultancy for power plants. The total Group annual turnover is Rs 800 Crore.

Vision:

In line with philosophy of using waste materials like Fly ash and to conserve limestone and other materials like coal etc., they are having the following plans and started implementing during this year. They have gradually phased out the production of OPC and converting the same to PPC. From 29% of Fly ash addition last year, this year they are planning to go up to 33% In the recent past, they have substituted imported coal in place of indigenous coal to get more heat value. Continuous monitoring of energy norms fixed by Expert Committee based on latest Bench Marking data of CMA. Energy Cell members are being sent to energy conservation seminars for getting new ideas of energy saving and find the ways to implement the same. Visit to other Cement Plants. Periodic discussions with equipment supplier on latest technological development in field. Energy cell members have been asked to identify energy deficient areas / equipment to make the areas / equipment energy efficient. Monitoring of Benchmarking activity. Mission:

The cost of energy as part of the total production costs in the Cement industry is significant, warranting attention for energy efficiency to improve the bottom line. Management is deeply committed to continuously make efforts to reduce energy cost through technological innovation ,in house R&D efforts, and usage of large quantities of additives in Blended Cement & through Quality Circles & & TPM activities. Company is on the right track to sustain its reputation as one of the most efficient cement manufacturers in the world. A energy conservation Team in

the form of an Energy Cell which is headed by AVP(Tech), supported by functional heads of various departments followed by the dedicated , committed & motivated cross sectional teams to continuously make efforts to monitor & reduce energy consumption & implement ideas for energy savings. a) ACHIEVEMENTS, AWARDS AND FELICITATIONSIntroduction of MFR Cooler in I Grate during Kiln up gradation, our Thermal Energy consumption has reduced from 760 to 720 KCL per Kg. of clinker. Variable frequency drive in all Cooler fans were installed to minimize the power consumption and to have a stable operation of Cooler. This plant was started producing ‘POZZALONA PORTLAND CEMENT’ by adding Fly ash from 2002. For the last 3 years, the Fly ash addition is gradually increased from 14% and last year it was to the extent of 30%.

Replaced the pre heater top cyclones with LP Cyclones which has resulted in power saving to the tune of 0.67 Kwh per tonne of clinker Introduced the deflector plate in the VRM Nozzle Ring and Dynamic Separator, which has resulted 7 M T per hour production increase and thereby reduced the power consumption of 0.40 KWH per M T of the material. Replaced Multi cones with ESP for Cooler vent air which in turn helped to reduce the power consumption by 40 kwh of Cooler ID Fan (because of reduction of pressure drop) Production of Blended Cement increased to 40.3% of the total production of cement Total power savings for the year 2005 – 2006 38,29,298 Kwh. Cost Savings for the above Rs.115.85 lakhs

DATA ANALYSIS AND INTERPERTATION

STATEMENT SHOWING CHANGES IN WORKING CAPITAL

BETWEEN 2000-2001TO 2001- 2002 (RS. In lakhs)

PARTICULARS 2001 2002 Increase Decrease

CURRENT ASSETS

Inventories 14531.93 10158.94 4372.99Sundry Debtors 16681.11 31344.03 14662.92

Cash & Bank Balance 21582.82 22820.44 1237.62

Loans & Advances 6292.02 7164.07 872.05Interest accrued on Investments

.01 .01

TOTAL(a) 59087.89 71487.49

CURRENT LIABILITIESCurrent Liabilities 47701.75 51262.12 3560.37Provision 2492.28 677.22 1815.06

TOTAL(b) 50194.03 51939.34

WORKING CAPITAL(a-b)

8893.86 19548.15

Net Increase/Decrease in Working Capital

10654.29 10654.29

Total of Working Capital

19548.15 19548.15 18587.65 18587.65

INTERPRETATION :

The above statement shows that the net working capital has increased 10654.29. cash and bank balance has increased from 1237.62

STATEMENT SHOWING CHANGES IN WORKING CAPITAL

BETWEEN 2002-2003TO 2003- 2004 (RS. In lakhs)

PARTICULARS 2003 2004 Increase Decrease

CURRENT ASSETS

Inventories 10158.94 10710.86 551.92Sundry Debtors 31344.03 42946.87 11602.84Cash & Bank Balance 22820.44 21182.09 1638.35

Loans & Advances 7164.07 17095.65 9931.58

Interest accrued on Investments

.01 0 .01

TOTAL(a) 71487.49 91935.47

CURRENT LIABILITIESCurrent Liabilities 51262.12 60086.42 8824.3Provision 6671.22 9475.48 2804.26

TOTAL(b) 57933.34 69561.90

WORKING CAPITAL(a-b)

13554.15 22373.57

Net Increase/Decrease in Working Capital

8819.42 8819.42

Total of Working Capital

22373.57 22373.57 22086.34 22086.34

INTERPRETATION : The above statement shows that the net working capital has decrease by Rs.8819.42 cash and bank balance has decreased from 1638.35

STATEMENT SHOWING CHANGES IN WORKING CAPITAL

BETWEEN 2004-2005TO 2005- 2006 (RS. In lakhs)

PARTICULARS 2005 2006 Increase Decrease

CURRENT ASSETS

Inventories 10710.86 6622.64 4088.22Sundry Debtors 42946.87 58074.98 15127.11Cash & Bank Balance 21182.09 22570.29 1388.20

Loans & Advances 17095.65 11749.57 5346.08Interest accrued on Investments

0 0

TOTAL(a) 91935.47 99017.48

CURRENT LIABILITIESCurrent Liabilities 60086.42 61561.31 1474.89Provision 9475.48 12454.11 2978.63

TOTAL(b) 69561.9 74015.42

WORKING CAPITAL(a-b)

22373.57 25002.06

Net Increase/Decrease in Working Capital

2628.49 2628.49

Total of Working Capital

25002.06 25002.06 13887.82 13887.82

INTERPRETATION: The above statement shows that the net working capital has increase by Rs 2628.49 cash and bank balance has increased from 1388

STATEMENT SHOWING CHANGES IN WORKING CAPITAL

BETWEEN 2006-2007TO 2007- 2008 (RS. In lakhs)

PARTICULARS 2007 2008 Increase Decrease

CURRENT ASSETS

Inventories 6622.64 7681.96 1059.32

Sundry Debtors 58072 .98 79468.68 21393.70

Cash & Bank Balance 22570.29 18940.94 3629.35

Loans & Advances 11749.57 13655.98 1906.41Interest accrued on Investments

0 0

TOTAL(a) 99015.48 119747.56

CURRENT LIABILITIESCurrent Liabilities 61561.31 80273.70 18712.39Provision 12454.11 11504.19 949.92

TOTAL(b) 74015.42 91777.89

WORKING CAPITAL(a-b)

25002.06 27969.67

Net Increase/Decrease in Working Capital

2967.61 2967.61

Total of Working Capital

27969.67 27969.67 25309.35 25309.35

INTERPRETATION: The above statement shows that the net working capital has decrease by Rs 2967.61 cash and bank balance has increased from 3629.35

DEBTORS TURNOVER RATIO = CURRENT SALES AVERAGE DEBTORS

DEBTORS TURNOVER RATIO = TOTAL SALES CLOSING DEBTORS

Years Net sales Debtors Ratios2004 67411.65 16681.11 4.042005 100055.98 31344.03 3.202006 93455.40 42946.87 2.182007 77066.76 36774.52 2.102008 70029.03 79468.68 0.88

INTERPRETATION:The above table shows the debtors turn over ratio of the company. Generally the higher the debtor turnover the greater the efficient of credit management. Compared to previous year, the current year ratio has been decreased by 0.88 which shows there is lesser efficiency of credit management

AVERAGE COLLECTION PERIOD:

This ratio is other device used to measure the quality of debtors. It shows the nature of the firm’s credit policy too, the shorter period. The better the quality of debtors since the shorter collection period implies prompt payment be debtors. An excessively long period implies a too long, and liberal and inefficient credit and collection performance where as a too low period indicates a very strict credit and collection policy.

DEBTORS TURNOVER

Years Month in a year Debtors Turnover Ratio

Ratios

2004 12 4.04 2.972005 12 3.20 3.752006 12 2.18 5.502007 12 2.10 5.712008 12 0.88 13.64

Interpretation:

The above table shows the average collection period of the company. Generally, higher the ratio more the chance of bad debts and the lower there ratio, less the chance of bad debts. The ratio was recorded as 13.64 months in 2005-06, which is very high. It shows that the company is unable to collect the money from the

customer in proper time. So it is suggested to the company that should try to reduce this credit period because there is more chance of bad debts. But when compared to previous year this ratio has increased from 5.71 to 13.64 higher than 2004 -2005. The management must take effective recovery measures so that Average collection period reduces as bad debts will lock the funds available to the company.

RATIO ANALYSIS

Years Current Assets Current Liabilities Ratios2004 67411.65 47701.75 1.242005 100055.98 51262.12 1.392006 93455.40 60086.42 1.532007 77066.76 61561.31 1.612008 70029.03 80273.70 1.49

INTERPRETATION :

The general norm for current ratio is 1.33. The higher the current ratio, the greater the short term solvency. The above table shows the current ratio has been decreased when compare to previous year by 1.49% in the year 2005-06.

2. QUICK RATIO OR ACID TEST RATIO:

Quick Ratio is defined as the relationship between quick assets and Current liabilities. Quick assets are those assets than can be converted into cash very quickly without much loss. Current liabilities are those liabilities which does not included Bank Overdraft.

QUICK RATIO = Current Assets / Current LiabilitiesThe standard ratio is 1:1 IDEAL. A quick ratio of less than 1 is indicative of inadequate liquidity of the business. As very quick ratio is also not advisable, as Funds can be more profitably employed.

3. ABSOLUTE LIQUID RATIO:

It is the ratio of absolute Liquid Assets to Quick Liabilities. However, for calculation purpose it is taken as ratio of Absolute Liquid Assets to Current Liabilities. Absolute Liquid Assets include cash in hand, cash at bank and short term or Temporary investment.

Absolute Liquid Assets = Absolute Liquid Assets / Current liabilities

Absolute Liquid Assets = Cash in hand + cash at bank + Short Term

The Ideal Absolute Liquid Ratio is taken as 1:2 or 0.5.

Years Cash in hand & Bank

Current Liabilities Ratios

2004 21582.82 47701.75 45.252005 22820.44 51262.12 44.522006 21182.09 60086.42 35.252007 22570.26 61561.31 36.662008 18940.94 80273.70 23.60

INTERPRETATION:From the above table it can be interpreted that the absolute liquid ratio is also not up to the standard ratio that is 0.51:1 In the previous year 2005 it was increased and in the current year 2006 it was decreased.

II. LEVERAGE OR CAPITAL STRUCTURE RATIOS:

Leverage ratios indicate the relative interests of owners and creditors in a business. The significant leverage ratios are.DEBIT EQUITY RATIO:

This ratio examines the relationship between borrowed funds and owner’s funds of a firm. In other words it measures the relative claims of creditors and shareholders against the assets of a business. Debt usually, refers to long-term liabilities. Equity and preference share capital and reserves. This Ratio is also known as debt to net worth ratio.

DEBIT EQUITY RATIO = LONG TERM LIABILITIESSHARE HOLDER’SFUNDS

The Debt Equity Ratio is 2:1 considered as Ideal.

PROPRIETORY RATIO:

It expresses the relationship between net worth and total assets. PROPRIETORY RATIO = NET WORTH/TOTAL ASSETS

NET WORTH = Equity share capital + Preference share capital + PreferenceShare capital + Reserves – Fictitious Assets

TOTAL ASSETS = Fixed Assets + Current Assets

(Excluding fictitious assets)

ANALYSIS :

In this ratio it shows that the proprietary ratio position is increasing year by year. A high proprietary ratio is indicative of strong financial position of the company. It indicates that the higher proprietary ratio shows that the better position of the company.

Years Net worth Total assets Ratio2004 14610.77 64844.20 0.232005 20167.76 80045.07 0.252006 29927.58 101687.25 0.292007 32154.16 107878.19 0.302008 36342.74 129316.53 0.28

INTERPRETATION:

The ratio is increasing and it becomes .023 in 2002-2003 and then 0. 25 in 2003-2004. Then in 2006 it was decreased to 0.28.

1. FIXED ASSETS RATIO:

This Ratio shows the relationship between Fixed Asset and Capital employed. This Ratio indicates the mode of financing of fixed assets financially manage company will have its fixed assets finance by long term funds. So fixed asset ratio should never be more then one.

FIXED ASSETS RATIO = FIXED ASSET CAPITAL EMPLOYED

Capital Employed = Equity share capital + Preference share capital + Reserves +Long term liabilities – Fictitious Assets.

ANALYSIS:

This ratio indicates the modes of financing the fixed assets. A financially well managed company will its fixed assets financed by long term funds. Therefore, the fixed assets ratio should never be more than 1. A ratio of 0.67 is considered ideal. The fixed assets ratio is not getting properly so that this ratio of the company is very less from the ideal point of view

Years Fixed Assets Capital Employed

Ratios

2004 5308.26 14202.12 0.37372005 6564.64 20118.79 0.32632006 7411.88 31524.27 0.23512007 7207.96 33627.91 0.21432008 6942.72 35329.79 0.1965

INTERPRETATION:

The above table shows the fixed assets ratio during the study period. The lowest ratio was recorded as 0.1965 in 2005-06 the highest ratio was recorded as 0.3737 in 2002. which is also too below from the standard ratio 0.67:1. It means the firm does no raise adequate long-term, funds to meet its fixed asset requirements. SO it is suggested to the company that should try to improve this ratio by investing more in fixed assets.

2. GROSS FIXED ASSET TO SHARE HOLDERS FUNDS:

This Ratio measures the extent to shareholders funds have been used to finance the Fixed Assets and it is calculated as:

GROSS FIXED ASSET TO SHARE HOLDERS FUNDS = FIXED ASSETSNet worth = Equity Share Capital + Preference Share Capital + ReservesFixed Asset = Fixed Assets (Excluding assets)

Years Fixed assets Net worth Ratio2004 5308.26 14610.77 0.37492005 6564.64 20167.76 0.32552006 7411.88 29927.58 0.24772007 7207.96 32154.16 0.22422008 6942.72 36342.74 0.1910

INTERPRETATION:

The above table shows the ratio of gross fixed assets to share holder’s funds. The lowest ratio which we got 0.1910:1 in 2006 and the highest ratio, we got 0.3749 in 2002 which is also very low. That indicated a low shareholders funds have been used to finance the fixed assets. The company should try to improve this ratio by investing more in fixed assets.

III. ACTIVITY RATIOS OR TURNOVER RATIOS:

Activity ratios measure the efficiency or effectiveness with which a firm manages. Its resources or assets. They calculate the speed with which various assets, in which funds are blocked up, get converted into sales. The significant activity or turnover ratios are.

1. TOTAL ASSET TURNOVER RATIO:

Overall performance and efficiency of the firm are measured by this ratio. This ratio is calculated by dividing the annual sales value by the value of total assets. The norm that is usually adopted for this ratio is 2:1. A lower ratio indicated that the assets are laying idle while a higher ratio may indicate that there is over trading. A high ratio is an indicator of over trading.

Years Net sales Total assets Ratio2004 67411.65 64844.20 1.042005 100055.98 80045.07 1.252006 93455.40 101687.25 0.922007 77066.76 107878.19 0.712008 70029.03 1293165.53 0.54

INTERPRETATION:

.From the above table it shows that in the year 2006 , the lowest ratio was recorded as 0.54. and the highest ratio was recorded as 1.25 in the year 2003

FIXED ASSET TURNOVER RATIO:

The efficiency with which a firm uses its fixed assets is measured by its measured by this ratio. This ratio assumes importance for firms having large investments in fixed assets.

FIXED ASSET TURNOVER RATIO = NET SALES

FIXED ASSETS

Years Net sales Fixed assets Ratios2004 67411.65 5308.26 12.702005 100055.98 6564.64 15.242006 93455.40 7411.88 12.612007 77066.76 7207.96 10.692008 70029.03 6942.72 10.09

INTERPRETATION:

The above table shows the fixed assets turn over ratio during the pried 2002 to 2006. The lowest ratio was recorded as 10.09 in 2006, and the highest ratio was recorded as 15.242 in 2003. It indicates that the firm does not efficiently utilized fixed assets. So it is suggested that the firm should properly utilize its fixed assets.

CURRENT ASSETS TURNOVER RATIO:

The ratio measured the efficiency of current asset generation. It is calculated by dividing the net sales value by current assets value.

CURRENT ASSETS TURNOVER RATIO = TOTAL SALESCURRENT ASSETS

Years Net sales Current Assets Ratios2004 67411.65 59087.89 1.102005 100055.98 71487.49 1.122006 93455.40 91935.47 1.112007 77066.76 99015.48 1.092008 70029.03 119747.56 1.08

INTERPRETATION:

The above table shows the current assets turn over ratio, which shows the contribution of current assets in generating of sales, the highest ratio was recorded as 1.12 in 2003. But in the year 2006 it has been decreased by 1.08 which indicates there is lower contribution of current asset to the organization. So it is suggested that the firm should properly utilize the current assets.

CAPITAL EMPLOYED TURNOVER RATIO:

This ratio is also known as sales net worth ratio. Capital employed is equal to the owner’s equity plus non-current liabilities. This represents the long-term funds. This ratio measures the effectiveness with capital employed is used by the firm.

CAPITAL EMPLOYED TURNOVER RATIO = SALES CAPITAL EMPLOYED

Capital Employed = Equity share capital + preference share capital + Reserves + Long term loans and Debentures – Fictitious assets – non-operating assets.

Years Net sales Capital Employed Ratios2004 67411.65 14202.12 4.752005 100055.98 20118.79 4.972006 93455.40 31524.27 2.962007 77066.76 33627.91 2.292008 70029.03 35329.79 1.98

INTERPRETATION:The table shows the capital employed turn over ratio in the year 2006 is 1.98 which is a lower ratio than compare to the ratio 4.97 of 2003 which was the indicate sufficient sales has been made and higher are the profits.

FINDINGS & CONCLUSIONS

On the basis of the analysis the following conclusions have been found out.

The proprietary ratio is near to the standards in the year 2001-2002. But after that year, the ratio is gradually increased.

Capital employed ratio is also very poor during the study and profits are lower. It means that sufficient sales are not being made.

The fixed assets ratio is very less that indicates the company is utilizing very less capital funds to invest in fixed assets.

The company’s gross profit ratio is quite good during the study period.

Operating expenses are very high during the study period; because of these expenses the firm does not have profitability position.

Gross Fixed Assets shareholder’s fund of the firm was decreasing year by year.

The debt equity of the company are nil during stable period which is favorable to the firm.

SUGGESTIONS & RECOMENDATIONS

The policy of developing new markets with accreditation of ISO-9001 and C.E. making for certain products should be continued as it will help in developing the confidence of foreign buyers.

The sundry debtors should be efficiently managed so that the outstanding are to be cleared at short intervals. The company should appoint consultants in different areas on a successful basis to collect the debtors.

The current assets should be managed more effectively so as to avoid unnecessary blocking capital that could be used for other purposes.

BIBILOGRAPHY

BOOKS REFERRED:

FINANCIAL MANAGEMENT - BY I.M.PANDEY

FINANCIAL ACCOUNTING AND ANALYSIS - BY S.P.JAIN &- K.L.NARANG

PROJECTS PREPARATION APPRISAL BUDGETING AND IMPLEMENTATION

- BY PRASANNA- CHANDRA

WEBSITES REFERRED: www.myhomeindustries.com www.mahacements.com