working capital management in sirpur paper

INTRODUCTION TO WORKING CAPITAL

Capital required for day to day working in the business concern, for

purchasing raw material, for meeting day to day expenditure on salaries, wages,

rent, rates, advertisement, etc. is called as working capital.

It represents the portion of the business concern total financial resource, which

is put to variable operative purpose .these are two concept of working capital

Gross working capital.

Net working capital.

Gross working capital refers to firm total current assets .It can also

called as circulating capital.

Gross working capital =Total current assets

Net working capital =current assets –current liabilities

Current assets are those assets which have short life span and are

converted into cash in accounting year the major current assets are cash bank

balance, marketable securities, accounts receivable and inventories.

Current liabilities are those liabilities which are intended to be paid in the

ordinary course of business within a year. The basic current liabilities account

payable, bank overdraft, outstanding expenses.

OBJECTIVES OF THE STUDY

To study the organizational profile of the Sirpur Paper Mills Limited.

To analyze the growth of current assets, current liabilities, net working

capital.

To analyze the financial performance of the company, using the working

capital management.

To study the various aspects of working capital management like cash,

account receivable and inventories.

To give conclusion of the study and also offer suitable suggestions for

efficient management of working capital in Sirpur Paper Mills Limited.

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RESEARCH METHODOLOGY

PRIMARY DATA :

The required primary data is sourced from discussions with the

executives of the company and departments of the organization i.e., financial

and accounts department.

SECONDARY DATA :

The most of the data from the study is drawn from secondary data source.

The secondary data is collected from company annual reports, financial

statements and other available report, financial statement and other available

records and statement and text book on financial management.

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LIMITATIONS OF THE STUDY

The study suffers from the following limitations.

The study is conducted within a short period.

The study may not be as detailed, full fledged.

The study was conducted with the data available and analysis.

Due to confidential financial records the data is not expose.

SOURCE OF DATA:-

For conducting the study necessary information has been collected from

only secondary sources of mainly published records of the “SIRPUR PAPER

MILL” and collected from the studies and reports.

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COMPANY PROFILE

ABOUT THE ORGANISATION:

THE SIRPUR PAPER MILLS LTD., marked the year 1938 for its

establishment, in 1942 under the management of "M/s. Hyderabad Construction

Company limited", it commenced production with a capacity of 14.0 M.T. per

day.

In 1953 M/s. BIRLA BROTHERS were entered with management of

company with the change in the management the expansion programmed of the

mill started in a big way and by 1955 the production increased from 15

tones/day to 50 tones/day A third paper machine of 50 tones/day to 50

tones/day. A third paper machine of 50 tones/day increased to production to 100

tones/day by 1959 paper machine No,4 was installed in the year 1966 with a

capacity of 10.0 M.T per day, Later a Board machine with a production

capacity of 60.0 M.T per day was installed in the year 1974. In 1976 paper

machine No.5 was started with production capacity of 10 M.T per day.

At present the mill produces on an average of 220 TPD paper and board of

7 paper machines. The product is located in SIRPUR K.AGHAZNAGAR

District Adilabad of Andhra Pradesh. Covering approximately 100 acres or more of

area by the plants in the company's land. The approximate company's land in 696

acres. Present Installed Capacity 83.550 MT/year of Paper & Board & Operating

95% plant utilization level. The Company's Turnover is Rs.180Crores. To

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improve the operational efficiency of the plant to conserve the resources and

contain & control pollution the Company installed BHEL Recovery Boiler, Two,

and FBL Boilers, Full Hedged W.T, Plant and many of the equipments

THE PRODUCTION HAS INCREASED IN THE SECOND PHASES:

Paper machine no. 2 was commissioned in the year 1953-30 TPD.

A new paper machine no. 3 with the capacity of 60 MT/D was

commissioned in the year 1959.

Installed another machine no. 4 of 10 MT/D production capacities in

1966,

A 60 MT/D, production capacity of board machine was started in the year

1974.

Another 10 MT/D production capacity paper machine No. 5 was

commenced in the year 1976.

7th machine of 68 MT/D capacities was installed and commenced on 21

March 2002.

The installed capacity of the mill today is 83,550 MT, in the financial year

2002-03 the company has achieved its highest annual production of 77,974

MT, The total share capital of SPM Ltd is Rs.8,34,55,980 and its present

face value of the share is Rs.10. In the financial year 2000-01 the company has

achieved its maximum net profit of Rs.1621.17 lacks.

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THE COMPANIES PRESENT PRINCIPAL BANKERS ARE :

Central Bank of India.

State Bank of Hyderabad.

Bank of Borada.

Andhra Bank.

THERE ARE 10 DIRECTORS FOR THE COMPANY INCLUDING CHAIRMAN. THEY

ARE :

Ranjan Kumar Poddar, Chairman

Sundaresan Vice Chairman

S.K. Khare, Executive Director

Devasish Poddar, Director

Sudhir Jalan

M.S. Rajajee

T.S. Appa Rao

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Laxminiwas Sharma

P. Vaman Rao

Utsav Pari

GENERAL:

The paper is made of cellulose fibres. Cellulose is an organics material of

fibrous nature. It occurs in all woody materials mixed with gums, resins and

lignin. Cotton is the present from cellulose. In paper making, cotton is also

used for good quality for paper. But it is costly and not available in plenty

because it is required for textiles also. Therefore major source of paper making

cellulose is obtained from woods, grass, cereals straws and bags. The

percentage of cellulose and hemicelluloses content in different materials are

65%-75%. In India bamboo raw material for paper making. The main source of

fibrous raw materials for SIRPUR PAPER MILLS are bamboo, government

reserve forest spread over 1650 sq km and hardwood from private plantation

through AMC and APFDC.

RAW MATERIAL:

The source of the main raw material Bamboo is from Andhra Pradesh

Government Forest and Hard Wood from social forest. Apart from Bamboo the

raw materials consumed by "S1RPUR PAPER MILLS LTD" are Casuarinas, Bo,

Subabul, Eucalyptus and other local hard wood, Bamboo, imported pulp and

waste paper are the major raw materials used. The main constituents present in

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the wood in cellulose and micelulloses (fiber composition) which is used for

paper manufacturing Bamboo is obtained from forests spread out in the Northern

and Eastern parts of

Andhra Pradesh in the District of Adilabad, Karimnagar. Khammam and

Warangal. The company continued to lay emphasis on obtaining basic

conventional raw materials and has motivated fanners under the various forestry

schemes. The S.P.M. Ltd receives higher qualities of Bamboo as under the lease

Agreement with Government of Andhra Pradesh.

The 75 tones/hour capacity fluidized Bed combustion (FBC) Boiler enabled

the company to use cheaper, Low Grade Coal with higher ash content thus

reducing the dependency on erratic APSEP Power supply and also reducing energy

cost. There are total 8 coal fired boilers in the mills i.e. Six New Boilers and

two FBC Boilers cinder and fly ash are the waste material that is generated from

FBC Boilers. To improve process economy- efficiency, product quality and new

process developments, the company's research and development activities are

carried out. The company had the financial assistance from financial institutions

like IDBI, ICICI, IFCI and UIT around 10Crores from above mentioned

Institutions, The SIRPUR PAPER MILLS LTD is constantly vigilant to its duty

of maintaining clear environment of mills, site and neighborhood. Full fledged

effluent treatment plant in operation to give clear effluent discharge as per

Government specification, The Sirpur Paper Mills Ltd. is also engaged in

community development activities like Construction of Drinking Water Wells,

Community Halls, and School Buildings etc. It is also engaged in welfare activities

by giving monthly aid to some of the school's, In addition to the monthly aid to the

school the management is conducting free eye camp, Health camp, Organizing

Social and Religious Functions. Maintenance of Hospitals and water supply to

some residential wards of SirpurKaghaznagar.

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In the year 1986 "The HRD Training Center1' was started training

programmed on worker Development and productivity orientation is being

conducted for the Development of workmen. The company also allows

undergoing in plan training of various students of different disciplines like

Personnel, Finance, Marketing, Engineering, Computer's etc, of various colleges.

The Company has a well established IT facilities and information support is made

having HP 9000 computer system which is operational in 20 applications areas for

better integration of increased service capabilities the company has further

planned to introduce "Real Time1' Technology Enterprise Resource Planning

(ERP), SAP and it is under implementation.

GENERAL PRODUCTION PROCESS OF SPM LTD :

The S.P.M.L is divided into five process departments. They are as follows:

Pulp Mill

Stock Preparation

Paper Machine

Finishing House

Power Block

PULP MILL :

Pulping is essentially the separation of the cellulose fibers in the raw

materials from lignin, a phenol substance that is the bond with the fiber. The

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pulping stage being linked to the nature of raw materials utilized as well as

characteristics of the end product is the most critical and employees a variety of

mechanical process varies from 85-95% as a percentage of wood

utilized and such process are mainly used for the manufacture of News Print.

Chemical process generally yield 50-65% of pulp as percentage of wood utilized

and are employed for the manufacture of high strength Kraft or writing and

printing papers.

The raw materials like bamboo and hardwood are simultaneously assed to

chipper house in the ratio of 85% and 15% through conveyor. It is cut into pieces

of size between 3mm to 45mm than it is allowed to pass through vibrating screens

and piece of size above 45mm is rejected to Re-chippers from the chipper

house the chips are passed to digester house and the cooking material passes to

blow tank and then to knitters. In Knitters cooked chips are stored and

redirected to digester house and then come to the washing screens.

STOCK PREPARATION :

After Screening and cleaning to remove unwanted matter, followed by

bleaching (if it undesired to produce bleached varieties) the pulp is subjected to

treatment in heaters and refiners for disintegration into individual fibers. The

'Stock' a term used to describe the dilute suspension of fibers in water utilized

to produce a sheet of paper, in prepared by blending different grades of pulp and

mixture of additives to secure the desired properties of the end product.

THE PAPER MACHINE :

At the 'Wet end' of the paper machine, the head box controls the flow of

stock, which is passed over a fine wire mesh (referred to as the 'wire') to form

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the sheet of web of paper, while the water is simultaneously drained. The paper

web is then compressed against a felt to squeeze out the remaining water and

passed through a series of steam heated drying cylinders (the 'dry end’) to

complete the extraction of water, followed by calendaring to achieve surface

finish.

FINISHING :

This is the term which refers to preparation of the paper reel for

marketing and covers a series of operations such as slitting and rewinding of

large reels into smaller ones, sheet cutting and packing. Power Block the

Primary function of the power block is supplying - water -to various

departments supplying power and steam produced to various departments and

treatment of waste water. There are 13 Boilers and 4 Turbines, the other

subsidiary departs.

Chemical ------------- Electrical

Central Laboratory -------------- Mechanical

Civil Department -------------- Soda Recovery

POWER BLOCK :

The function of power block are supplying of water, power and steam

produced to various departments and treatment of wastewater. The company has

got its own power generation plant generating 32MW of power, and gets

3500KVA power from A.P.

TRANSCO; there are 13 boilers and 4 turbines.

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The four turbo generators installed in the mills are:

TA2, TA3 (Metro Politah Vackers, England)

TA4, TA5 (M/s. Jyoliii Tnveni turbines 1 .id, Ranjilnrc)

TA1 (BHEL makes double extraction turbines)

THE CAPACITIES OF EACH TURBO GENERATORS ARE:

TA1 - 9.5 MW

TA2 - 7.5 MW

TA3 - 7.5 MW

TA4 - 2.5 MW

TA5 - 5.0MW

The administrative section consists of various departments, which performs

general management functions. They are:

Personnel Department.

Finance Department.

Marketing/Sales Department.

Systems Department.

WELFARE ACTIVITIES :

The following are the names of the school to which S.P.M. Management is

giving monthly aid.

Bala Bharathi High School.

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Balvidya Mandir High School.

Anwar Urdu Upper Primary School.

Iqbal Urdu School.

Tamil Manran Primary School.

The company has contributed Rs.18 Lacks to unable the Kaghaznagar

Municipal authorities to take up road repairs, roads, formations and

drainages etc.

ORGANISATION STRUCTURE

The “SIRPUR PAPER MILLS LTD" Commenced in the year 1938. It is

located in the remote corner of Andhra Pradesh. The Mill is located at "Sirpur-

Kaghaznagar" District Adilabad; The SPM Ltd is a joint stock company

Registered under companies Act. The registered office is located at 5-9-2/1/1

first floor opposite: New MLA Quarters Gate, Adarshanagar, and Hyderabad-

500463. The Sales Office and corporate office of SPM Ltd is in New Delhi. The

Control of SIRPUR PAPER MILLS LIMITED rests with the Board of Directors

representing Slate Government and other Share Holders. The Board of directors

does formulate the policies enumerating to translate. The board of directors docs

the approval of the annual budget and future Financial outlay.

For convenience the organization structure is divided into two sections as

follows:

Technical Section

Administrative Section

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A brief outline of the Organization structure of S.P.M. Ltd is presented in

the figure.

INTRODUCTION TO PAPER INDUSTRY

A country civilization mostly depends upon its paper consumption. First

we have to know as briefly about the introduction and establishment of paper in

the world, its entrance in INDIA, Again it is essential to know about the

development and progress of paper industry in our country as well as in our state.

The world paper is adopted from the water plant called "PAPYRUS"

which is used to grow around "NILE RIVFR". F.GYPT. the Egypt citizens used

papyrus plant as paper after cutting and drying. It since 3000BC it was sad

that "T. JAMEUM CHAINE" had prepared paper at a tank of mulberry tree in 105

A.D.

In 751 AD the "ARABS" imported the knowledge of paper making" is

spread to "EUROPE" and central countries of the world. It has highly

popularized by the "BOWDDACK" especially by the "DOKSOMONK" through

out the world.

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The first paper mil l the world was started in 1336 AD in GERMANY.

Later paper mills were started in 1586 AD in SWITZERLAND and

HOLLAND and later it spread all over the world.

Firstly in 1789 AD chlorine was used for bleaching of pulp. In 1799

AD "ROBERT INCHOLES" the French scientist designed the first paper machine

in the world. Later "LAGER DIBBT" and "BRIMAN DONKIM" designed

present paper machine with their continuous efforts.

PAPER INDUSTRY IN INDIA (CAPITAL)

HISTORY :

Unlike iron & steel, textile & sugar industry the paper making industry

did not exist in ancient India. For writing purpose “BOJPARTRO” (Bank of

Trees) and ‘TALLAPATRA” (Leaves of Palm) were used.

In newsprint segment there are at present 39 mills (4 in the central public

sector, 2 in the state public sector and 33 in private sector) with an installed

capacity of about 0.836 million TPM at present.

The per capita consumption of paper in India is currently 6 Kgs, against a

world average 45 Kgs with an expected growth rate of 6.7% PA over the next

five years (fig.1)

PER CAPITA CONSUMPTION OF PAPER

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Series-1

INDUSTRY DEMAND:

The demand of paper influenced by various macro-economic factors like

national economic growth, industrial production, promotional expenditure,

population growth and the government allocation for the educational sector.

Paper consumption in India is expected to reach 9.0 MT by the years 2010 and

13 MT by 2015 (fig.2)

Paper Consumption in India

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FRAME WORK OF WORKING CAPITAL MANAGEMENT

Working capital refers to the investment by a company in short-term assets

such as cash, marketable securities, accounts receivables and inventories. A study

of working capital is of major importance to internal and external analysis

because of its close relationship with the current day to day operations of

business.

Business needs funds for the purpose of its establishment and to carry out its

day-to-day operations. Long-term funds are required to create production

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facilities through purchase fixed assets such as plant & machinery, land &

buildings, furniture etc. investment in these assets represents the part of firm's

capital, which is blocked on a permanent or fixed and is called fixed capital,

Funds are also needed for short-term purpose for the purchase of raw materials,

payments of wages and other day-to-day expenses etc., these funds are known as

working capital.

Working capital is one of the most important requirements of any business

concern. Working capital can be compared with the -blood of human beings. As

human cannot survive without blood, in the same way on business cannot survive

without working capital.

Working capital management deals with maintaining the levels of

working capital to optimum, because if a concern has inadequate opportunities if

the working capital is more than required the concern will loose money in form

of interest on the block funds. Therefore working capital management plays a

very vital role in profitability of a company.

DEFINITION AND MEANING:

Working capital is defined as excess of current assets over current

liabilities. Management of working capital includes management of all current-

assets and current liabilities. The interaction between current assets and current

liabilities is the main theme of the theory of working capital management.

Working capital is commonly used for the capital required for day to day working

in a business concern, such as purchasing raw material for meeting day to day

expenditure on salaries, wages, rent rates, advertising etc.

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Working capital management may be said to include in its definitions, needs,

optimum level of current assets, the trade off between profitability and risk

associations with a firm's level of current assets and liabilities financing mix

strategies and so on.

Current Working capital measures how much in assets a company has

available to build its business. The number can be positive or negative,

depending on how much debt the company is carrying. In general, companies

that have a lot of working capital will be more successful since they can expand

and improve their operations. Companies with negative working capital may

lack the necessary for also called net current assets or current capital.

Cash is the lifeline of a company. If this lifeline deteriorates, so does the

company's ability to fund operations, reinvest and meet capital requirements

and payments. Understanding a company's health is essential to making

investment decisions. A good way to judge a company's cash flow prospects is

to look at its Working Capital Management (WCM).

NEED FOR WORKING CAPITAL:

The basic objective of financial management is to minimize the

shareholder wealth. This is possible only when company earns sufficient profits.

The amount of such profits largely depends upon the magnitude of sales.

However sales convert into cash instantaneously. There is always time gap

between sale for goods and their actual realization working capital required in

order to sustain the sales activities in this period.

In case adequate working capital is not available for this period the company

will not be in a position to purchase raw material, pay wages and other expenses

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required for, manufacturing the goods. Therefore sufficient amount of working

capital is to be maintained at nay point time.

ADEQUACY OF WORKING CAPITAL :

A firm must have -adequate working capital is as much as needed by the firm.

It should neither be excessive nor in adequate. Both the situation is harmful to the

concern. Excessive working capital is the firm as ideal funds which earns no profits for

the firm inadequate working capital means the firm does not have funds to perform

operations which means ultimately results in production interruptions and lowering

down of the profitability.

It will be interesting to understand the relationship between working capital,

risk return in manufacturing concern it is generally accepted that higher levels of

working capital decrees the risk and have the potential of increasing the

profitability also.

ASSUMPTION:

There is a direct relationship risk and profitability, higher the risk higher the

profitability, while lower the risk lower the profitability. Current assets are less

profitable than fixed assets... Short-term funds are less expensive than long-term

funds. On account of above principles, an increasing in the ratio of current assets to

total assets will be result in the decline of the profitability of the firm, This is

because investment in current assets as started above is less profitable than in the

fixed assets, However an increase in the ratio would decrease the risk of the firm

becoming technically insolvent. On the other hand a decrease in the ratio of

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current assets to total assets would increase the profitability of the firm because

investment in fixed assets is more profitable then investment in current assets.

However this increases the risk of becoming insolvent on account of its possible

inability in meeting its commitments in time due to shortage of funds.

CONCEPT OF WORKING CAPITAL:

There are two concepts of working capital. They are:

Gross Working Capital

Net working Capita

GROSS WORKING CAPITAL :

It is the total of all the current assets, which include inventories, sundry

debtors, and cash in hand, and bank, advances, investments, short term deposits etc.,

NET WORKING CAPITAL:

It is the excess of current assets over current liabilities; this is as a

matter of fact the most commonly accepted definition. In other words it can

also be defined as difference between current assets and current assets and

current liabilities.

It is that portion of a firm's current assets, which is financed with long-

term funds.

TYPE OF WORKING CAPITAL :

The working capital may also be classified into permanent and temporary

working capital .permanent working capital refers to the minimum amount of

investment in all current assets which is requires all the time to carry out

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minimum level of business activities . It represent the current assets are called

as core current assets .the amount of permanent working capital remains in the

business in one form or another form of assets .the suppliers of such working

capital are not paid during the life of the firm i.e. the assets concerned are

financed by funds raised from long term sources . Permanent working capital of

the firm increase with the volume of business as illustrated in figure 1

FIG1:It represent that permanent capital is fixed over a period of time while temporary working capital is fluctuating Permanent.

fig2

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Amount of working capital

Permanent

Amount of working capital

Permanent

It represents that: permanent working capital increasing over a period of

time which increases the level of business activity. And temporary working

capital is fluctuating.

The amount of working capital that fluctuates from time to time on the

basis of business activity is called temporary working capital.

It represents additional current assets required at different times during

the accounting year. Temporary working capital requirement are met by fund

raising from short term sources of finance. Suppliers are paid generally during

off range season.

Working capital management is aimed to manage the firm’s current assets

and current liabilities. So that a satisfactory level of working capital is

maintained. If a firm is unable of maintain adequate working capital .The firm

may become insolvent and even be forced into bankruptcy.

A firm must have adequate working capital it should not be excessive

working capital results in idle funds, which yield no profits for the business.

Inadequate working capital results into insufficient of funds for running the

operations of the business smoothly. Sometimes it result into production

interruption and there by reduces the profitability of the business. Working

capital management is concerned with all decision and acts the influence the

size and effectiveness of working capital efficient. Working capital management

requires that the firm should operate with some amount of working capital. The

size of net working capital varies from firm to firm and depend upon the nature

of Business. The use of net working capital is to measure a firm’s liquidity

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requirement cash flow and cash flow out of business does concede. Cash out

flow results forms payment of current liabilities are predictable, whereas cash

inflow are difficult to predict, the more the accuracy of prediction of cash

inflow the lower will be the net working capital requirement.

Working capital is required for a business because of the time gap between the

sales and their actual realization in cash. The time gap is technically called an

operating cycle of the Business fig -3 illustrates the operating cycle of a firm

working capital management involves management of different components of

working capital such as account receivable and i9nventories for determining the

size and method of financing.

OPERATING CYCLE FIG3

A brief description of various issues involved in the management of each of

the component of working capital is here below. Adequate cash balance have to

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Raw material

Work in progress

Cash

Sales

Account receivable

Finished goods

maintained so that no fund are blocked in idle cash which involves costs in

terms if interest. Adequate cash is required to meet business obligation as and

when they raise. Cash requirement also arise to meet unforced contingencies

such as stake, increase in the price of raw material, and fall in the collocation of

the account receivable. The grater is the possibilities of contingencies. The

greater amount of fund required to maintain by the firm.

Adequate cash is also required to take the advantages of unexpected

Business opportunities. The management of cash is aimed to meet the obligation

as per the payment schedule and to minimize the amount of idle cash balance.

Inventories include raw material, work in progress and finished good

inventories. The maintenance of these levels of inventories depend upon the

nature of business.

Adequate inventories protect the firm from the losses on account of

shortage or delay in production price variations and defer ratio of stock.

Accounts receivable constitute a significant portion of the hotel current assets of

a business. Accounts receivable are the results of goods or credit intended

increase the scale volume and thereby increase in the profits of the business.

Management of accounts receivable is aimed to ensure liquidity. Higher level of

accounts receivable to be bad debt and inverse the collection cost.

Working capital can be divided into categories on the basis of time.

Permanent working capital / fixed working capital

Temporary working capital / variable working capita

PERMANENT WORKING CAPITAL :

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This refers to that minimum amount of investment in all current assets,

which is required at all times to carry out minimum levels of business activities.

Permanents working capital represent the current assets required on a continuing

basis over the entire year. Amount of permanent working capital remains in the

business in one form or other. This is particulars important form the point of

view of financing. The suppliers of such working capital should not expect its return

during the lifetime of the firm.

TEMPORARY WORKING CAPITAL:

The amount of such working capital keeps on fluctuating from time to time on

the basis of business activities. Working capital represents additional current

assets required at different times during the operating year.

ESTIMATION OF WORKING CAPITAL :

Since working capital is excess of current assets over current liabilities,

the forecast for working capital requirements can be made only after estimating

the amount of different constituent's working capital.

I. Inventories

Stock of raw materials

Work - in – process

Finished goods

II. Sundry debtors

III. Cash and bank balances

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IV. Sundry creditors

V. Outstanding expenses

I.INVENTORIES:

The terms inventories include stock of raw materials, work - in - process

and finished goods. The estimation of each of them will be made as follows:

STOCK OF RAW MATERIALS: The average amount of raw materials to

be kept in stock will depends upon the quantity of raw material required for

production during a particular period and the average time taken in obtaining a

fresh delivery.

WORK- IN-PROCESS: The cost of work - in - process includes raw

materials, wages and overheads. In determining the amount of work in

process, the time period for which the good will be in the course of

production process, is most important.

FINISHED GOODS: The finished goods are kept in warehouse and according to the

orders of the customers, goods will be delivered.

II.SUNDRY DEBTORS : Debtors are those persons who will be purchase goods on

credit basis. The sundry' debtors will-be calculated on the basis of credit sales.

III.CASH AND BANK BALANCES : The amount of money to be kept as cash in hand

or cash at bank can be estimated on the basis of past experience.

IV.SUNDRY CREDITORS : The lag in payment to suppliers of raw materials, goods,

etc., and likely credit purchase to be made during the period will be help in

estimating the amount of creditors.

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V.OUTSTANDING EXPENSES : The time lag in payment of wages and other

expenses will be help in estimation of outstanding expenses.

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SOURCES OF WORKING CAPITAL

There are mainly two types of sources of working capital, they are

as follows:

PERMANENT OR FIXED OR LONG-TERM WOKI N G CAPITAL :

SHARES : Issue of shares is the most important share for raising the

permanent or long-term capital. A company can issue various types of

shares, preference share and deferred share.

DEBENTURES : A debenture is an instrument issued by the company

acknowledging its debts to its holder it is also an important method of

raising long term permanent working capital

PUBLIC DEPOSITS : Public deposits are the fixed deposits accepted by a

business enterprise directly popular in the absence of banking facilities.

LOANS FROM FINANCIAL INSTITUTION : Financial Institutions such

as commercial Banks, industrial finance corporations of India, state

financial corporations.

TEMPORARY OR VARIABLE FOR SHORT-TERM WORKING CAPITAL :

TRADE CREDIT: Trade credit refers to the credit extended by

the suppliers of goods in the normal coerce of business. As

present day commerce is built upon credit, the trade credit

arrangement of a firm with its suppliers is an important source of

short-term finance.

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INDIGENOUS BUSINESS : Private money-lenders and other is

country banks used to be the only sources of finance prior to the

establishment of commercial banks. They used to change very

higher rates of interest and exploited the customers to the largest

extent possible.

DEFERRED INCOMES: Deferred incomes are incomes received

advances before supplying goods or services. They represent

funds received by a firm for which it has to supply goods or

services in future.

COMMERCIAL PAPER : Commercial paper represents unsecured

promissory notes issued by firms to raise short-terms funds. It is an

important money market instrument in advanced countries like

U.S.A. In India, the reserve bank of India introduced commercial

paper in the Indian Money Market on the recommendations of the

working capital upon money market (Vague - Committee)

DETERMINANTS OF WORKING CAPITAL :

Some of the important determinants of working capital are given below:

NATURE OF WORKING CAPITAL : The working capital requirements

of enterprises are basically related to conduct of the business. Public

utility undertaking need very limited working capital as they offer

cash sales only and supply services but not product and as such no

funds are tied up in inventories and receivables, but at the same time

trading firms require large amounts in current assets like inventories,

receivable, cash etc. and has to invest less amount in fixed assets.

31

SIZE OF BUSINESS : The working capital requirements of a concern are

directly influenced by the size of its business, which may be

measured in terms of scale of operations. Greater the size of a

business unit, larger will be the requirements of working capital.

TERMS OF SALES AND PURCHASE: Credit terms granted by the

concern to its customers as well as credit terms granted by its

suppliers also affected the working capital.

MANUFACTURING CYCLE: The length of manufacturing cycle

influences the quantum of working capital needed. Manufacturing

process always involves a time or lag between the time when raw

materials are fed into production line and finished products are

finally turned out by it.

RAPIDITY OF TURNOVER: If the inventory turnover is high, the

working capital requirements will be low, with a better inventory

control, a firm is able to reduce its working capital requirement,

firms should determine, the minimum level stock, which it will be

have to maintain throughout the period of its operation.

SEASONAL VARIATION: The inventory of raw materials, spares

and stores depends on the conditions of supply. If the supply

is prompt and adequate the firm can manage with small inventory.

However if the supply is unpredictable and scant then the firm, to

ensure continuity of production, would have to acquire stocks and

when they are available larger inventory should be carried.

DIVIDEND POLICY: Dividend policy has a dominant influence on the

working capital position of an enterprise. If the management follows

a conservative dividend policy, consequently drains off large

amounts from the pool of working capital.

32

SEASONALITY OF OPERATING: Firms, which have marked seasonality

in their operations usually, have higher fluctuating working capital

requirement. On the other side firms which manufacture products,

which have sales round the year, tend to have stable working capital

needs.

CREDIT POLICY : The credit policy of a concern in its dealings with

debtors and creditors influence considerably the requirements of

working capital. A concern that purchases it requirements on credit

and sells its product/services on cash requires lesser amount of

working capital.

BUSINESS: Business cycle refers to alternate expansion and

contraction in general business activity. In a period of boom i.e.,

when the business is prosperous there is a need for larger amount of

working capital due to increase in sales rise in prices, optimistic

expansion of business etc.

PRICE LEVEL CHANGES : Changes in the price level also affect the

working capital requirements. Generally the rising prices will

require the firm to maintain larger amount of working capital as

more fund will be requirement to maintain the same current assets.

OPERATING CYCLE: Working capital is required because of the time

gap between the sales and their actual realization of cash. This time

gap is technically termed as "Operating Cycle" of the business. In the

case of manufacturing company, the operating cycle is the length of

time necessary to complete the following cycle of events:

Conversion of cash into raw materials

Conversion of raw material into working in process

33

Conversion of work in process into finished goods

Conversion of finished goods into accounts receivable

Conversion of accounts receivables into cash

The cycle will be repeated again and again. In case of a "trading firm' the

operating cycle will include the length of time required.

TO CONVERT :

Conversion of inventories.

Inventories into accounts receivables.

Accounts receivable into cash.

In case of financing firms the operating cycle includes the length of the

time taken for conversion of cash into debtors and debtors into cash.

OBJECTIVE OF CASH MANAGEMENT:

There are two basic objectives of cash management.

To minimize the mount locked up as cash balances

To meet the cash disbursement needs as per the payment schedule.

ADVANTAGES OF SIMPLE CASH FUNDS:

Maintain a good bank relation.

Maintain of goodwill.

Exploration of business opportunities.

Encourage new investment.

Helps to overcome abnormal financial situations.

34

CASH MANAGEMENT – BASIC PROBLEM:

Cash management involves the following four .basic problems

Controlling level of cash.

Controlling inflows of cash.

Controlling outflows of cash.

Optimum investment of surplus.

35

MANAGEMENT OF INVENTORY

Management of inventories means an optimum investment in

inventories, it should neither be too low to effect the production adversely nor

too high to block the funds. Unnecessary investment in inventories is

unprofitable for business.

Inventories are one of the major elements, which help the firm in

obtaining the desired level of sales. Inventories mean the stock of the product

of a company and components of the products, which include raw materials,

work - in - process and finished goods.

TECHNIQUES OF INVENTORY CONTROL:

The following are the techniques to control the size of the inventory

Always Better Control.

High Medium and Low.

Vital Essential and Desirable.

Scarce Difficult and Easy to Obtain.

Fast-moving Slow-moving and Non-moving.

Economic Order Quantity.

Max –Min System.

Two Bin System.

Materials Requirements planning.

Just - in – time.

36

OBJECTIVES . O F INVENTORY:

Avoid both overstocking and under stocking of stock.

Continuous availability of raw material.

Purchase raw material at a reasonable price.

Avoid wastage and damages.

BASIC PROBLEM OF INVENTORY MANAGEMENT :

Maintaining a minimum investment in inventories to minimize the

direct and indirect case associated with holding inventories to maximize the

profitability.

37

RATIOS ANALYSIS

A ratio analysis is a widely – used tool of financial analysis. It

defined as the systematic use of ratio to interpret the financial statement so

that the strength and weakness of the firm as well as historical performance

and the current financial conduction can be determined .The term ratio

refers to the numerical or quantitative relationship between the two

items /variables .this relation can be expressed as:

Percentages say net profits are 25%of sales.

Fraction net profit is one – fourth of sales.

Proportion of number (1:4)

IMPORTANCE AND LIMITATION OF RATIO ANALYSIS: As a tool of

financial management, ratios are of crucial significance. The importance of

ratio analysis lies in the fact that it present facts on a comparative basis and

enables the drawing of inferences regarding the performance of a

firm .ratio analysis is relevant in assessing the performance of a firm.

RESPECT OF FOLLOWING ASPECTS

Liquidity position.

Long term solvency.

Operating efficiency.

Overall profitability.

Inter firm comparisons.

Trend analysis.

38

LIMITATIONS:

Ratio analysis is widely used tool of financial analysis. Yet, it

suffers from various limitations .the operational imprecation of this is that

while using ratios, the conclusion should not be taken on their face

value .some of the limitations which characterized ratio analysis are:

Difficulty in comparison.

Impact of inflation.

Conceptual diversity.

RATIOS CAN BE CLASSIFIED INTO FOUR BROAD GROUPS:

Liquidity ratio.

Leverage ratio.

Activity ratio.

Profitability ratio.

LIQUIDITY RATIO

The importance of adequate liquidity in this sense of the ability of a

firm to meet current short term obligation when they become due for the

payment can hardly be overstressed in fact, liquidity is a prerequisite for

the every of the firm. The short term creditors of the firm are interested in

the fund of the firm, but the liquidity implies, from the viewpoint of

utilization of the fund of the firm, that fund are idle or they earn very little.

A proper balance between the two contradictory requirements, that is,

liquidity and profitability, is required for efficient financial management.

39

The liquidity ratios measure the ability of the firm to meet its short term

obligation and reflect the short term financial strength /solvency of a firm.

The ratio which indicates the liquidity of the firm

Current ratio

Quick ratio /acid ratio

CURRENT RATIO:

These ratio shows a firms ability to cover its current liabilities with

its current assets, generally 2:1 ratio is considered ideal ratio for a concern,

i.e. current assets twice of current liabilities.

QUICK RATIO /ACID RATIO:

These ratios show a firm ability to meet its current liabilities with its

most liquid assets. Generally 1:1 is considered ideal ratio, because it is

wise to keep the liquid assert at least equal to the liquid assets at all times.

LEVERAGE RATIO

The second category of the financial ratios is leverage ratio or

capital structure ratio. The long term creditors would judge the soundness

of the firm on the basis of long term financial strength measure in terms of

its ability to pay the interest regularly as well as repay the installment of

the principal on the due date or in one lump sum at the one time of the

maturity.

The long term solvency of the firm can be examined by using

leverage or capital structure ratio. The leverage or capital structure ratios

may be defined as financial ratios which throw light on long term solvency

40

of a firm as reflect in ability to measure the long term creditors with regard

to:

Periodic payment of interest during the period of loan.

Repayment of principal amount on maturity.

Debt - Equity ratio.

Preparatory ratio.

Fixed assets ratio.

Total debt ratio.

Coverage ratio.

Interest coverage ratio.

DEBT EQUITY RATIO:

This ratio shows the relative probation of outsiders fund and shares

holders funds invested in the company. The ratio measures the relative

claims of outsiders against the firms assets. The idle debt equity ratio is

2:1, that means long term liabilities of the Business should ideally be 2

time of shareholders funds.

PREPARATORY RATIO:

A company is Said to be highly geared if the major share of the total

capital is in the form of fixed interest bearing securities (i.e. Debentures

and preference share capital)or this ratio is more than 1.if it is less than one

it is said to low geared. If it exactly 1it is evenly geared.

41

FIXED ASSETS RATIO:

This ratio indicates whether the firm has raised adequate long term funds

to meet its fixed asset requirements. This ratio gives an idea as to what part

of the capital employed has been used in purchasing the fixed assets for the

concern. The ideal ratio is 0.67 or less than 1.

TOTAL DEBT RATIO:

Total debt ratio = long term liabilities + current liabilities /share holders firms.

This ratio shows the relationship between external equity (long term

liabilities +current liabilities) and external equity (share holders funds)

INTEREST COVERAGE RATIO:

This Ratio shows how many times the interest charges or covered by

PBIT out of which they will be paid. In others words, the ratio ascertain

whether the company is capable of meeting interest on the loan and

debentures easily out of profit or not. The PBIT should be ideally 6or7

times of the fixed interest charge.

ACTIVITY RATIO

Activity ratios are concerned with the measuring the efficiency in

the asset management. These ratios are also called efficiency ratios or asset

utilization ratio. The efficiency with which the asset are used would be

reflected in the speed and the rapidly with which assets are converted into

sales. Greater is the rate of turnover or conversion, the more efficient is the

utilization/management, other things being equal. For this reason, such

42

ratios are also designated as turnover ratios. Turnover is the primary mode

for measuring the extent of efficient employment of assets by relating the

assets to sales .an activity ratio may ,therefore, be defined as test of the

relationship between sales (more appropriately with cost of sales) and the

various assets of a firm. Depending upon the various type of assets, there

are various types of activity ratios.

INVENTORY (OR STOCK) TURNOVER RATIO:

This ratio establishes the relationship between costs of goods sold

and average stock and reflects the speed of turning over the stock into

sales. The inventory \ stock turnover measures how quickly inventory is

sold. Promptness of sales indicates better performance of the business. It is

a test of efficient inventory management. Higher inventory turnover ratio

is always beneficial to the concern. A high ratio implies good inventory

management. Lower inventory turnover ratio shows that the stock is

blocked and not immediately sold.

DEBTORS TURN OVER RATIO:

This ratio shows how quickly debtors & bills receivable are

converted into cash. In others words debtors’ turnover ratio is a test of

liquidity of the debtors of a firm.

The higher the debtor turnover ratio and shorter the average

collection period, the better the liquidity of debtors as short collection

period and high debtors turnover ratio imply prompt payment on the part

of debtors. On the other hand low debtor turnover ratio and long collection

period is preferred.

CREDITOR’S TURNOVER RATIO:

43

This ratio explains the velocity with which creditors are paid. In

other words this ratio shows the average credit period enjoyed by the firm

from the creditors. A high ratio indicates that creditors are not paid in time

while a low ratio gives an idea that business is not talking full advantage of

credit period given by creditors. The average payment period indicates the

speed with which payments for credit purchases are made to creditor.

WORKING CAPITAL TURNS OVER RATIO :

This ratio shows the number of times the working capital results in

sales. This ratio reflects the efficiency in the utilization of working capital.

The higher the ratio the lower is the investment in working capital.

However a very high ratio shows overtrading and lower ratio shows under

trading.

FIXED ASSETS TURN OVER RATIO:

This ratio shows how well the fixed assets are being used in

business. The higher is the ratio the better is the performance. On the other

hand a low ratio indicates that the fixed assets are not being effectively

used.

INVENTORY TO NET WORKING CAPITAL:

Inventory is an important port of the current assets. If inventory is

less than the working capital his percentage will decrease. If inventory is

more than the networking capital percentage will increase generally low

ratios will show sound working capital ratio should not exceed 100

percent.

THE CURRENT ASSETS TURNOVER RATIO:

44

Current asset turnover ratio is use to find out the current assets and

also find out the sales.

PROFITABILITY RATIO

Apart from the creditors, both short term and long terms, also interested

in the financial soundness of a firm are the owners and management or the

company itself. The management of the firm is naturally eager to measure

its operating efficiency. Simply, the owners invest their fund in the

expectation of reasonable return. The operating efficiency of the firm and

its ability to ensure adequate returns to its shareholders depends ultimately

on the profit earned by it. The profitability of the form can be measured by

its profitability ratios. In other words, the profitability ratios are designed

to provide answers to the questions such as

Is the profit earned by the firm adequate?

What rate of return does it represent?

What is the rate of profit for various divisions and segments

of the firm?

What is the earning per share?

What was the amount paid in dividend?

GROSS PROFIT RATIO:

Increase in gross profit ratio will mean Profit ability ratio related

tom sales these ratios are based on the premise that a firm should earn

sufficient profit on each rupee of sale. If adequate profits are not earned on

sales, there will be difficulty in meeting the operating expenses and no

45

return will be available to the owner. These ratios consist of Profit margin

and expenses ratio

Profit margin. The profit margin measures the relationship between

profit and sales. As the profit may be gross or net there are two type of

profit margin.

Gross profit margin.

Net profit margin.

RETURN ON ASSETS (ROA):

Here, the profitability ratio is measured in terms of relationship

between net profit and net assets. The ROA may also be called profit to

asset ratio there are various possible approaches to define net profit and

assets.

46

BALANCE SHEET FOR THE LAST FIVE YEARS

PARTICULARS 2003-04 2004-05 2005-06 2006-07 2007-08

LIABLITIES

CAPITAL 834.56 834.56 834.56 1101.38 1500.55RESERVES SURPLUS 15465.1 16048.5 16865.2 19391.5 22263SECURD LOAN 5548.86 6367.67 6311.34 12262.4 22157.7UNSECURED LOAN 187.77 678.87 2680 1697.13 2561.99SUNDRY CREDTORS 3208.74 2667.28 4015.67 4639.62 6638.21ACCEPTANCE 100.73 156.19 94.69 3.71 34.3DIVIDENTS 12.4 14.59 18.64 297.72 26.19INTREST ACCURED 40.83 26.99 17.36 15.15 8.39PROVISIONS 388.07 616.2 662.03 376.45 1198.41OTHER LIABLITIES 921.36 822.06 1210.59 1764.09 2873.36DIFFERED TAX LIABLITIES

2480.94 2501.42 2512.33 2478.09 2143.19

TOTAL 29189.3 30734.4 35222.5 44027.3 61405.3

ASSETS

FIXED ASSETS 20014.6 20647.2 22972.1 32557 49194.5INVESTMENTS 475 254.16 2006.51 1729.39 336.67CURRENT ASSETS INVENTORY 1794.27 2284.39 2682.88 2547.78 2882.49SUNDRY DEBTORS 3132.67 3275.01 2286.55 2429.95 1612.94LOANS & ADVANCES

3260.59 3572.27 4183.13 3991.68 5524.01

CASH & BANK BALANCE

446.96 685.54 881.93 631.08 1701.37

MIS EXP 65.2 15.77 209.37 140.4 153.31

TOTAL 29189.3 30734.4 35222.5 44027.3 61405.3

29124.1 30718.6 35013.1 43886.9 61252

47

NET WORKING CAPITAL OF S.P.M LTD FOR 2003-04 TO 2007-08

PARTICULARS 2003-04 2004 -05 2005-06 2006-07 2007-08

CURRENT ASSETSINVENTORIES 1794.27 2284.39 2682.88 2547.78 2882.49SUNDRY DEBTOR 3132.67 3275.01 2286.55 2429.95 1612.94LOANS ADVANCES 3260.59 3572.27 4183.13 3991.68 5524.01CASH &BANK BALANCE

446.96 685.54 881.93 631.08 1701.37

TOTAL(A) 8634.49 9817.21 10034.49 9600.49 11720.81

CURRENT LIABLITIESCREDITORS 3208.74 2667.28 4015.67 4639.62 6638.21ACCEPTANCE 100.73 156.19 94.69 3.71 34.30DIVIDENTS 12.40 14.59 18.64 297.72 26.19INTREST ACCURED 40.83 26.99 17.36 15.15 8.39PROVISIONS 388.07 616.20 662.03 376.45 1198.41OTHER LIABLITIES 921.36 822.06 1210.59 1764.09 2873.36TOTAL(B) 4672.13 4303.31 6018.98 7096.74 10778.8

6Net working capital(A-B)

3962.36 5513.9 4015.51 2503.75 941.95

The Net working capital of the company is 3962.36lakhs in 2003-

04, 5513.9lakhs in 2004-05; 4015.51lakhs in 2005-06, 2503.75 lakhs

in2006-07,941.95 lakhs in 2007-08.The net working capital requirement of

the company during the five years period indicate slight (or) abnormal

fluctuation. From the above table it is observe that the Net working capital

requirement of the company has decreased in the year 2007-08 from which

shows net decreased of 3020.41 when compared to 2003-04.

48

STATEMENT OF CHANGES IN WORKING CAPITAL

The primary source of the statement is to explain the net changes in the net

working capital. In this statement all current assets and current liabilities

are individually listed. Against each account the figures pertaining to the

account at the beginning at the end of the account period is shown.


FOR THE YEAR 2003-04 TO 2004-05.

(Rs in lakhs)PARTICULARS 2003-04 2004-05 Increase Decrease

CURRENTS ASSETSInventories 1724.38 1794.27 69.89 -

Sundry debtors 2280.17 3132.67 852.5 -

Cash in bank 263.48 446.96 783.48 -

Loan & advances 3501.40 3260.59 - 240.81

Miscellaneous exp

119.35 60.20 - 54.15

Total (A): 7888.78 8699.69 - -

CURRENT LIABILITIESCurrent liabilities 4226.53 4284.06 - 657.53

Provisions 292.70 388.07 - 95.37

Total (B): 4519.23 4672.13 - -

WORKING CAPITAL (A-B)

3369.55 4027.56 - -

Increase in working capital

658.01 - - 658.01

Total: 4027.56 4027.56 1705.87 1705.87


49

FOR THE YEAR 2004-05 TO 2005-06.

(Rs in lakhs)

PARTICULARS 2004-05 2005-06 Increase Decrease


Sundry debtors 3132.67 3302.44 169.80 -

Cash in bank 446.96 679.81 232.82 -

Loan & advances 3260.59 3524.24 263.65 -

Miscellaneous exp 65.20 14.27 - 50.96

Total (A): 8699.69 9808.05 - -

CURRENT LIABILITIESCurrent liabilities 4284.06 3683.08 600.98 -

Provisions 388.07 616.20 - 228.13

Total (B): 4672.13 4299.28 - -


4027.56 5508.77 - -


1481.21 - - 1481.21

Total: 5508.77 5508.77 1760.27 1760.27


50

FOR THE YEAR 2005-06 TO 2006-07.

(Rs in lakhs)PARTICULARS 2005-06 2006-07 Increase Decrease


Sundry debtors 3302.44 2286.55 - 1015.80

Cash in bank 679.81 881.93 202.10 -

Loan & advances 3524.24 4183.13 658.90 -

Miscellaneous exp 14.27 209.37 195.10 -

Total (A): 9808.05 10243.86 - -


Provisions 616.20 662.03 - 45.83

Total (B): 4299.28 6018.98 - -


5508.77 4224.88 - -


- 1283.89 1283.89 -

Total: 5508.77 5508.77 2735.53 2735.53


51

FOR THE YEAR 2006-07 TO 2007-08.

(Rs in lakhs)

PARTICULARS 2006-07 2007-08 Increase Decrease

CURRENTS ASSETSInventories 2682.88 2379.81 - 303.07

Sundry debtors 2286.55 2429.95 143.40 -

Cash in bank 881.93 631.08 - 250.90

Loan & advances 4183.13 3991.68 - 191.50

Miscellaneous exp 209.37 140.40 - 68.97

Total (A): 10243.86 9572.92 - -


Provisions 662.03 376.45 285.70 -

Total (B): 6018.98 7096.74 - -


4224.88 2476.18 - -


- 1748.70 1748.70 -

Total: 4224.88 4224.88 2177.80 2177.80

52

COMPARATIVE BALANCE SHEET

(2003-2004)

Particulars As on31-3-03

As on31-3-04

Increase (or)Decrease


ASSETSA. Current assets Inventories Sundry debtors Cash & bank Loans & advances Investment

1724.382280.17263.483501.40465.00

1794.273132.67446.973260.59475.00

69.89 852.50 783.48 (240.81) 10.00

4.053 37.39 297.35 (6.87) 2.15

Total (A): 8334.43 9109.49 875.06 10.63

B. Fixed assets Net block Capital work in progress and advance

20228.93189.85

19771.58243.04

(457.37)53.19

(2.26) 28.01

Total (B): 20418.78 20014.62 (404.16) (1.98)

C. Miscellaneous exp Preliminary exp 119.35 65.20 (54.15) (45.37)

Total (C): 119.35 65.20 (54.15) (45.37)

Total (A+B+C): 28772.58 29189.31 416.73 1.45

53

LIABILITIES

A. Current liabilities & provisions: liabilities provisions differed tax liabilities

4226.53292.702224.00

4284.06 388.07 2480.94

657.53 95.37 256.94

1.36 32.50 11.55

Total (A): 6743.23 7153.07 409.84 6.08

B. Shareholders funds& loans: Share capital Reserves & surplus secured loans unsecured loans

834.5614941.27

5990.04263.46

834.5615465.05

5548.86187.77

- 523.78

(441.18) (75.69)

- 3.51

(7.37) (28.72)

Total (B): 22029.30 22036.30 (6.91) (32.58)

Total (A+B): 28772.53 29189.37 416.75 1.45

54


(2004-2005)

ParticularsAs on

31-3-04As on

31-3-05

Increase (or)

Decrease

Increase (or)

DecreaseASSETSA. Current assets Inventories Sundry debtors Cash & bank Loans & advances Investment

1794.273132.67446.963260.59

475.00

2287.293302.44679.813524.24

576.19

493.02169.80232.82263.65

101.19

27.48 5.42 52.09 8.09

21.30

Total (A): 9109.49 10369.97 1260.48 13.84


19771.58243.04

20293.96343.80

522.38100.76

2.64 41.40

Total (B): 20014.62 20637.76 623.14 3.12


Total (C): 65.20 14.27 (50.93) (78.10)

Total (A+B+C): 29189.31 31022 1832.69 6.28

55

LIABILITIESA. Current liabilities & provisions: liabilities provisions differed tax liabilities

4284.063880.72480.94

3683.08616.202512.33

(600.98)228.1331.39

14.0357.781.26

Total (A): 7153.07 6811.60 341.46 4.78


834.5615464.05

5548.86187.77

834.5616329.29

6367.67678.87

-864.24

818.80491.00

- 5.59

14.75261.49

Total (B): 22036.30 24210.40 2174.04 9.87

Total (A+B): 29189.37 31022 2515.50 8.61


56

(2005-2006)

ParticularsAs on

31-3-05As on

31-3-06Increase (or)

Decrease

Increase (or)


2287.293302.44679.813524.24

576.19

2682.882286.55881.934183.13

2006.51

395.6(1015.80)202.1658.90

1430.32

17.2930.7629.7018.70

248.20

Total (A): 10369.97 12041 2686.90 25.90


20293.96343.80

21690.391281.69

1396.43937.90

6.90273

Total (B): 20637.76 22972.10 2334.40 11.31

C. Miscellaneous exp Preliminary exp 14.27 209.37 195.10 1367.20

Total (C): 14.27 209.37 195.10 1367.20

Total (A+B+C): 31022 35222.5 4200.5 13.54

57

LIABILITIES


3683.00616.20

2512.33

5356.95662.03

2512.33

1673.9045.83

-

45.45 7.40 -

Total (A): 6811.60 8531.30 1719.70 25.25


834.56

16329.29

6367.67678.87

834.56

16865.24

6311.342680.00

-

535.95

(56.33)2001.13

-

3.28

(0.88) 294.80

Total (B): 24210.39 26691.20 2537.08 10.48

Total (A+B): 31022 35223 4201 13.55

58


(2006-2007)

ParticularsAs on

31-3-06As on

31-3-07

Increase (or)

Decrease

Increase (or)


2682.882286.55881.93

4183.132006.51

2379.812429.95631.08

3991.681729.39

(303.07)143.40(250.90)

(191.50)(277.12)

11.306.27(28.40)

(4.6)(13.80)

Total (A): 12041 11161.90 (879.10) (7.3)


21690.391281.69

20239.6912317.29

(1450.77)11035.60

(6.70)861.10

Total (B): 22972.08 32556.98 9585.70 41.7


Total (C): 209.37 140.40 (68.97) (32.90)

Total (A+B+C): 35222.50 43860.10 8637.60 24.52

59

LIABILITIES


5356.95662.032512.33

6720.29376.452478.09

1363.40(285.60)(34.24)

25.5043.10(1.36)

Total (A): 8531.30 9574.80 1043.5 12.23


834.5616865.246311.342680.00

1101.3819391.5212262.401697.13

266.822526.305931.06(982.90)

31.9714.9094.3036.70

Total (B): 26691.20 34452.40 7761.20 29.07

Total (A+B): 35223 44027.20 8804.20 24.99


60

(2007-2008)

Particulars As on31-3-07

As on31-3-08



ASSETSA. Current assets Inventories Sundry debtors Cash & bank Loans & advances Investment

2379.812429.95

631.08

3991.68

1729.39

2882.491612.94

1701.37

5524.01

336.67

502.68(817.01)

1070.29

1532.33

(1392.72)

21.12(33.62)

169.59

38.38

(80.50)

Total (A): 11161.90 12057.48 895.58 8.02


20239.6912317.29

22037.8627156.61

1798.1714839.30

8.88120.47

Total (B): 32557.80 49194.47 16636.70 51.09

C. Miscellaneous exp Preliminary exp 140.40 153.31 12.91 9.19

Total (C): 140.40 153.31 12.91 9.19

Total (A+B+C): 43860.10 61405.30 17545.20 40.00

61

LIABILITIES


6720.29376.45 2478.09

9580.451198.412143.19

2860.16821.96(334.90)

42.60218.3013.51

Total (A): 9574.80 12922.05 3347.25 34.95


1101.3819391.52

12262.401697.13

1500.5522263.02

22157.652561.99

399.172871.50

9895.30864.90

36.2414.80

80.7050.96

Total (B): 34452.40 48483.20 14030.80 40.73

Total (A+B): 44027.20 61405.30 17378 39.47

CALCULATION OF RATIO ANALYSIS

LIQUIDITY RATIO

CURRENT RATIO:

62

Current assetsCurrent ratio = -----------------------

Current liabilities

YEARSCURRENT

ASSETS

CURRENT LIABILITIES

CURRENT RATIO

2003-04 8634.49 4672.13 1.85

2004-05 9817.21 4303.31 2.282005-06 10034.49 6018.98 1.67

2006-07 9600.49 7096.74 1.35

2007-08 1172.81 1077.86 1.09

INTERPRETATION :

The ideal ratio is 2:1.The firms current Ratio is highest in 2004-

2005 i.e. 2.28 and lowest in 2007-2008 i.e. 1.09, It ability to meet current

liability is good and has greater Short-term solvency.

QUICK RATIO:

Quick Assets.Quick Ratio = -------------------------

Current Liabilities.

63

2003-04 2004-05 2005-2006 2006-07 2007-08

Years Quick assets Current liabilities

Quick Ratio

2003-04 6840.22 4672.13 1.46

2004-05 7532.82 4303.31 1.75

2005-06 7351.61 6018.98 1.22

2006-07 7052.71 7096.74 0.99

2007-08 8838.32 10778.86 0.82

INTERPRETATION:

The ideal ratio is 1:1. The firm’s Quick ratio is highest in 2003-2004

i.e. 1.75 and lowest in 2007-2008 i.e. 0.82.Quick Ratio exclude inventories

as they are deemed to be less liquid component as such firms liquidity

position is good.

LEVERAGE RATIO

DEBIT-EQUITY RATIO:

Long Term Liabilities Debt-Equity Ratio = ----------------------------

64

2003-04 2004-05 2005-2006 2006-07 2007-08

Shareholders Funds

YEARS

LONG TERM DEBT

SHARE HOLDERS EQUITY

DEBT-EQUITY

RATIO

2003-04 5736.63 16299.61 0.35

2004-05 7046.54 16883.10 0.42

2005-06 8991.34 17699.80 0.51

2006-07 13959.53 20492.90 0.68

2006-07 24719.64 23763.57 1.04

INTERPRETATION:

The ideal ratio is 2:1; the firm’s debt-equity ratio is highest in 2007-

2008 i.e., 1.04 and lowest in 2003-2004 i.e., 0.35. Lower is considered

safer. Lower the degree of equity higher the degree of protection enjoyed

by creditors.

PROPRIETARY RATIO:

Prop Fund or Net Worth Proprietary Ratio = -----------------------------------

Total Assets

65

2003-04 2004-05 2005-2006 2006-07 2007-08

YEAR NET WORTH TOTAL ASSETSPROPRIETARY

RATIO

2003-04 16299.61 29124.11 0.56

2004-05 16883.10 30718.60 0.55

2005-06 17699.80 35013.08 0.51

2006-07 20492.90 43886.86 0.47

2007-08 23763.57 61251.95 0.39

INTERPRETATION:

The ideal ratio is 0.5. 0.5 is the satisfactory proprietary ratio. The

firm’s proprietary ratio is highest in 2003-2004 i.e., 0.56 and lowest in

2007-2008 i.e. 0.39. Higher is safer.

FIXED ASSETS RATIO:

Fixed Asset RatioFixed Assets Ratio = -------------------------

Capital employed

66

2003-04 2004-05 2005-2006 2006-07 2007-08

YEAR FIXED ASSETS CAPITAL EMPLOYED

FIXED ASSET RATIO

2003-04 20014.62 21971.04 0.91

2004-05 20647.23 23913.87 0.86

2005-06 22972.08 26481.77 0.87

2006-07 32556.98 34312.03 0.95

2007-08 49194.47 49329.9 0.99

INTERPRETATION:

The ideal ratio is (0.67 or less than 1). The firm’s fixed assets ratio is

highest in 2007-2008 i.e., 0.99 and lowest in 2004-2005 i.e., 0.86. This

ratio indicates whether the firm has raised adequate long-term funds to

meet its fixed assets requirement.

TOTAL DEBT RATIO:

Long term liabilities + current liabilitiesTotal Debt Ratio = ------------------------------------------------------

Shareholders Funds

67

2003-04 2004-05 2005-2006 2006-07 2007-08

YEARS L T LIAB+C L SHARE HOLDERS FUND TOTAL DEBT

RATIO

2003-04 12889.7 16299.61 0.790798

2004-0513851.27 16883.10 0.820422

2005-06 17522.65 17699.80 0.989991

2006-07 23534.36 20492.90 1.148415

2007-08 37641.69 23763.57 1.584008

INTERPRETATION:

The firms total debt ratio is highest in 2007-2008 i.e. 1.58 and

lowest in 2003-2004 i.e., 0.79. This ratio shows the relationship between

external equity (Long term liabilities + current liabilities) and external

equity.

INTEREST COVERAGE RATIO :

PBITInterest Coverage Ratio = -----------------------

Interest

68

2003-04 2004-05 2005-2006 2006-07 2007-08

YEARS PBIT INTERESTINT.COVER-AGE RATIO

2003-04 -254.81 45.192 -5.64

2004-05 2151.04 159.9 13.45

2005-06 1801.95 212.93 8.46

2006-07 1964.66 365.34 5.38

2007-08 1747.37 214.98 8.13

INTERPRETATIONS:

The PBIT should be ideally 6 to 7 time’s fixed interest charges.

Interest coverage ratio is highest in 2004-2005 i.e., 13.45 and lowest in

2003- 2004 i.e., -5.64. Highest is considered it can easily meet its interest

burden even PBIT suffer a decline.

ACTIVITY RATIO

INVENTORY TURNOVER RATIO:

Net salesInventory Turnover Ratio = ------------------

69

2003-04 2004-05 2005-2006 2006-07 2007-08

Closing Stock

YEARS NET SALES CLOSING STOCKINV.TURNOVER

RATIO

2003-04 20405.30 321.97 63.38

2004-05 21657.22 302.55 71.58

2005-06 22025.48 487.93 45.14

2006-07 23331.99 439.47 53.09

2007-08 24186.10 394.8 61.26

INTERPRETATION:

The ideal ratio is (Higher or 8 times). The ratio is highest in 2005-

2006 i.e., 71.58 & lowest in 2006-2007 i.e., 45.14. The high inventory

turnover indicates efficient management of inventory.

DEBTORS TURNOVER RATIO:

Net annual credits Debtors Turnover Ratio = -----------------------------

Trade Debtors

70

2003-04 2004-05 2005-2006 2006-07 2007-08

YEARS CREDIT SALESTRADE

DEBTORS

DR.TURNOVER RATIO

2003-04 20405.30 3132.67 6.51

2004-05 21657.22 4868.78 4.45

2005-06 22025.48 3937.91 5.59

2006-07 23331.99 3573.30 6.53

2007-08 24186.10 2827.92 8.55

INTERPRETATION:

The ratio is highest in 2007-2008 i.e., 8.55 & lowest in 2004-2005

i.e. 4.45. Highest ratio shows the efficient management of credit.

CREDITOR TURNOVER RATIO:

Net PurchasesCreditor Turnover Ratio = --------------------------------

Avg.Creditor Period

71

2003-04 2004-05 2005-2006 2006-07 2007-08

YEARS NET PUR A CR+BPCR.TURNOVER

RATIO

2003-04 4731.57 26993.47 0.18

2004-05 6016.93 23902.44 0.25

2005-06 6429.29 3298.96 1.95

2006-07 6320.05 4249.13 1.49

2007-08 7132.68 5468.79 1.30

INTERPRETATION:

The ideal ratio is (lower is the best). This ratio is highest in 2005-

2006 i.e., 1.95. The lowest in 2003-2004 i.e., 0.18. This ratio explains

velocity with which creditors are paid. High ratio indicates that creditors

are not paid in times.

WORKING CAPITAL TURNOVER RATIO:

Net salesWorking Capital Turnover Ratio = ----------------------------

Net Working Capital

72

2003-04 2004-05 2005-2006 2006-07 2007-08

YEARS NET SALESNETWORKING

CAPITAL

WR.CAP.TURNOVE

R RATIO

2003-04 20405.3 3962.36 5.15

2004-05 21657.22 5513.9 3.93

2005-06 22025.48 4015.51 5.48

2006-07 23331.99 2503.75 9.32

2007-08 24186.1 941.95 25.67

INTERPRETATION:

The higher is the best. The working capital turnover ratio is highest

in 2007-2008 i.e., 25.67 and lowest in 2004-2005 i.e., 3.93. The higher is

safer.

FIXED ASSETS TURNOVER RATIO:

SalesFixed Assets Turnover Ratio = -------------------

Fixed Assets

73

2003-04 2004-05 2005-2006 2006-07 2007-08

YEAR SALES FIXED ASSETS

FIXED ASSET TURNOVER

RATIO

2003-04 23190.14 20014.62 1.16

2004-05 21662.43 20647.23 1.05

2005-06 22024.17 22972.08 0.96

2006-07 23331.99 32556.98 0.72

2007-08 24126.1 49194.47 0.49

INTERPRETATION:

Fixed assets turnover ratio is highest in 2003-2004 i.e., 1.16 and

lowest in 2007-2008 i.e., 0.49. The higher the ratio the higher ratio is the

better is the performance on the other hand a low ratio indicates that the

fixed assets are not being effectively used.

INVENTORY TO NET WORKING CAPITAL:

Closing inventoriesInventory to Net Working Capital = ------------------------------

Net Working

74

2003-04 2004-05 2005-2006 2006-07 2007-08

YEARCLOSING

INVENTORIES

NET WORKING CAPITAL

INV.TO NET WORKING CAPITAL

2003-04 1794.27 3962.36 0.45

2004-05 2284.39 5513.9 0.41

2005-06 2682.88 4015.51 0.67

2006-07 2547.78 2503.75 1.02

2007-08 2882.49 941.95 3.06

INTERPRETATION:

Inventory to net working capital is highest in the year 2007-2008

i.e., 3.06 & lowest in the year 2004-2005 i.e., 0.41. This analysis indicates

that the ratio is always less than 1, which is a healthy sign as to

management of inventory in terms of working capital.

CURRENT ASSETS TURNOVER RATIO:

Current Asset Current Assets Turnover Ratio = ----------------------

Sales

75

2003-04 2004-05 2005-2006 2006-07 2007-08

YEARCURRENT

ASSETSSALES C.A.T RATIO

2003-04 8634.49 23190.14 0.37

2004-05 9817.21 21662.43 0.45

2005-06 10034.49 22024.17 0.46

2006-07 9600.49 23331.99 0.41

2007-08 11720.81 24126.1 0.48

INTERPRETATION :

The current assets turnover ratio is shows in times. This ratio is

highest in the year 2007-2008 i.e., 0.48 & lowest in 2003-2004 i.e., 0.37.

This ratio is use to find out the current assets and also find out sales.

PROFITABILITY RATIO

NET PROFIT RATIO:

Earnings After Interest And Taxes (EAT)

76

2003-04 2004-05 2005-2006 2006-07 2007-08

Net Profit Ratio = --------------------------------------------------------- X 100 Sales

YEAR EAT SALES N.P RATIO

2003-04 1246.66 23190.14 5.38

2004-05 1792.00 21662.43 8.27

2005-06 1409.94 22024.17 6.40

2006-07 1459.33 23331.99 6.25

2007-08 1332.39 24126.10 5.52

INTERPRETATION :

This ratio is shows that the higher is the better. This ratio highest in

2004-2005 i.e., 8.27 and lowest in 2003-2004 i.e., 5.38. There is a high

net profit in 2007-2008 which means there is efficiency of production,

administration, selling financing, pricing and tax management.

RETURN ON ASSETS:

Net Profit After Interest And TaxReturn on Assets = -------------------------------------------------- X100

Total Assets

77

2003-04 2004-05 2005-2006 2006-07 2007-08

YEAR NET PROFIT AFTER INTEREST AND TAX

TOTAL ASSETS

RETURN ON ASSETS

2003-04 1246.66 29189.31 4.27

2004-05 1792.00 30734.37 5.83

2005-06 1409.94 35222.45 4.00

2006-07 1459.33 44027.26 3.31

2007-08 1332.39 61405.26 2.17

INTERPRETATION:

This ratio is shows that the higher is the better. This ratio highest in

2004-2005 i.e., 5.83 & lowest in 2007-2008 i.e., 2.17. Here the

profitability ratio is measured in terms of relationship between net profit

and net assets.

CONCLUSION

78

2003-04 2004-05 2005-2006 2006-07 2007-08

The net working capital requirements of the company indicate slight

(or) abnormal fluctuations. The net working capital decreased in the

year 2007-2008 by 3020.42,when compared to 2003-2004.

Statement of change in working capital shows increasing trend for

the years 2003-2008, which is a good sign.

In Comparative balance sheet the current asset shows increasing

trend and the current liability shows decreasing trend. But in 2007-

2008 there is a slight change.

The current assets are higher than current liabilities. The company

has better liquidity position.

Debt-equity ratio is low which means greater degree of protection

enjoyed by the creditors.

The fixed assets turnover ratio is high and there is greater efficiency

in assets management and utilization.

Working capital turnover ratios are high. It is due to the effective

management of working capital.

SUGGESTIONS

79

The following suggestion based on the analysis of balance sheet,

working capital offered from ensuring effective management of

working capital.

Working capital requirements of the company are to be estimated

well before the commencement of final year, so that performance is

evaluated and corrective steps can be initiated.

S.P.M.Ltd has focused the attention to reduce the investment in

loans and advances and sundry debtors. In the area surplus are pure

spare have been identified in various projects.

The optimum level of various components of current assets is to be

determined so that a high level or low level of particular component

can be observed.

The company has to adopt the inventory control technology such as

ABC analysis and ordering level.

The company must prepare the cash budget in advance for the next

account period.

The over all company performance is extremely well and over all

working capital is also satisfactory.

80

BIBILOGRAPHY

Prasanna Chandra : FINANCIAL MANAGEMENT

Khan & Jain: FINANCIAL MANAGEMENT

Van Horne Wachowicz: FUNDAMENTALS OF FINANCIAL

MANAGEMENT

I.M. Panday : FINANCIAL MANAGEMENT

Van Horne Wachowicz: FUNDAMENTALS OF FINANCIAL

MANAGEMENT

Neveu Raymond.r: FUNDAMENTAL OF MANAGERIAL OF

FINANCE

Website:

“http://www.sirpurpaper.com

“[email protected]

81

working capital management in sirpur paper

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