50625023 Project on Working Capital Surendra

8/4/2019 50625023 Project on Working Capital Surendra

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Working capital management on Kamal solvent pvt. Ltd.

R.C.E.T, Bhilai MBA 09/11 Page

Workingcapital mangement

Chapter No.Particulars

PageNo.

Certificate I

Acknowledgement II

Declaration III

Contents IV

1 Working Capital Management 7

1.1 Introduction 8

1.2 Need of working capital 9

1.3 Gross W.C. and Net W.C. 9

1.4 Types of working capital 10

1.5 Determinants of working capital 11

2 Research Methodology 13

2.1 Introduction 142.2 Types of research methodology 14

2.3 Objective of study 15

2.4 Scope and limitations of study 16

3 Introduction of company 17

4 Working Capital Size and analysis 41

4.1 Working capital level. 42


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4.2 Working capital trend analysis. 43

4.3 Current assets analysis. 44

4.4 Current liability analysis 45

4.5 Changes of working capital 46

5

5.1

Working Capital Ratio analysis 50

Introduction 51

5.2 Role of ratio analysis 51

5.3 Limitations of ratio analysis 51

5.4 CALCULATIONS 53

6 Conclusions 73

6.1 Conclusion 73

6.2 Bibliography 74


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CHAPTER 1

INTRODUCTION


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WORKING CAPITAL

MEANING OF WORKING CAPITAL: Working 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 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 managinginventories, accounts receivable and payable and cash. 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.

IMPORTANCE OR ADVANTAGE OF ADEQUATE WORKING CAPITAL IN AN

INDUSTRY

SOLVENCY OF THE BUSINESS: Adequate working capital helps in maintaining the

solvency of the business by providing uninterrupted of production.

Goodwill: Sufficient amount of working capital enables a firm to make prompt payments

and makes and maintain the goodwill.

Easy loans: Adequate working capital leads to high solvency and credit standing can

arrange loans from banks and other on easy and favorable terms.

Cash Discounts: Adequate working capital also enables a concern to avail cash discounts

on the purchases and hence reduces cost.

Regular Supply of Raw Material: Sufficient working capital ensures regular supply of

raw material and continuous production.


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Regular Payment Of Salaries, Wages And Other Day TO Day Commitments: It

leads to the satisfaction of the employees and raises the morale of its employees,

increases their efficiency, reduces wastage and costs and enhances production and profits.

Exploitation Of Favorable Market Conditions: If a firm is having adequate working

capital then it can exploit the favorable market conditions such as purchasing its

requirements in bulk when the prices are lower and holdings its inventories for higher

prices.

Ability To Face Crises: A concern can face the situation during the depression.

Quick And Regular Return On Investments: Sufficient working capital enables a

concern to pay quick and regular of dividends to its investors and gains confidence of the

investors and can raise more funds in future.

High Morale: Adequate working capital brings an environment of securities, confidence,

high morale which results in overall efficiency in a business.

EXCESS OR INADEQUATE WORKING CAPITAL

Every business concern should have adequate amount of working capital to run its business

operations. It should have neither redundant or excess working capital nor inadequate nor

shortages of working capital. Both excess as well as short working capital positions are bad

for any business. However, it is the inadequate working capital which is more dangerous

from the point of view of the firm.


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DISADVANTAGES OF REDUNDANT OR EXCESSIVE WORKING CAPITAL IN AN

INDUSTRY

1. Excessive working capital means ideal funds which earn no profit for the firm and

business cannot earn the required rate of return on its investments.

2. Redundant working capital leads to unnecessary purchasing and accumulation of

inventories.

3. Excessive working capital implies excessive debtors and defective credit policy which

causes higher incidence of bad debts.

4. It may reduce the overall efficiency of the business.

5. If a firm is having excessive working capital then the relations with banks and other

financial institution may not be maintained.

6. Due to lower rate of return n investments, the values of shares may also fall.

7. The redundant working capital gives rise to speculative transactions

DISADVANTAGES OF INADEQUATE WORKING CAPITAL

Every business needs some amounts of working capital. The need for working capital arises due

to the time gap between production and realization of cash from sales. There is an operating

cycle involved in sales and realization of cash. There are time gaps in purchase of raw material

and production; production and sales; and realization of cash.

Thus working capital is needed for the following purposes:

For the purpose of raw material, components and spares.

To pay wages and salaries

To incur day-to-day expenses and overload costs such as office expenses.

To meet the selling costs as packing, advertising, etc.

To provide credit facilities to the customer. To maintain the inventories of the raw material, work-in-progress, stores and spares and

finished stock.


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FACTORS DETERMINING THE WORKING CAPITAL REQUIREMENTS

1. NATURE OF BUSINESS: The requirements of working is very limited in public utility

undertakings such as electricity, water supply and railways because they offer cash saleonly and supply services not products, and no funds are tied up in inventories and

receivables. On the other hand the trading and financial firms requires less investment in

fixed assets but have to invest large amt. of working capital along with fixed investments.

2. SIZE OF THE BUSINESS:Greater the size of the business, greater is the requirement

of working capital.

3. PRODUCTION POLICY: If the policy is to keep production steady by accumulating

inventories it will require higher working capital.

4. LENTH OF PRDUCTION CYCLE: The longer the manufacturing time the raw

material and other supplies have to be carried for a longer in the process with progressive

increment of labor and service costs before the final product is obtained. So working

capital is directly proportional to the length of the manufacturing process.

5. SEASONALS VARIATIONS: Generally, during the busy season, a firm requires larger

working capital than in slack season.

6. WORKING CAPITAL CYCLE: The speed with which the working cycle completes

one cycle determines the requirements of working capital. Longer the cycle larger is the

requirement of working capital.

7. RATE OF STOCK TURNOVER: There is an inverse co-relationship between the

question of working capital and the velocity or speed with which the sales are affected. A

firm having a high rate of stock turnover will needs lower amt. of working capital as

compared to a firm having a low rate of turnover.

8. CREDIT POLICY: A concern that purchases its requirements on credit and sales its

product / services on cash requires lesser amt. of working capital and vice-versa.


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9. BUSINESS CYCLE: In period of boom, when the business is prosperous, there is need

for larger amt. of working capital due to rise in sales, rise in prices, optimistic expansionof business, etc. On the contrary in time of depression, the business contracts, sales

decline, difficulties are faced in collection from debtor and the firm may have a large

amt. of working capital.

10 RATE OF GROWTH OF BUSINESS: In faster growing concern, we shall require

large amt. of working capital.

Others FACTORS: These are:

Operating efficiency.

Management ability

Irregularities of supply.

Import policy.

Asset structure Importance of labor.

Banking facilities, etc.


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CLASSIFICATION OF WORKING CAPITAL

Working capital may be classified in two ways:

On the basis of concept.

On the basis of time.

On the basis of concept working capital can be classified as gross working capital, net working

capital and net operating working capital. On the basis of time, working capital may be classified

as:

Permanent or fixed working capital.

Temporary or variable working capital

ON THE BASIS OF CONCEPT VARIOUS TYPES OF WORKING

CAPITAL

1. Gross Working Capital: The firm's investment in current assets (such as cash and

marketable securities, receivables, and inventory). Gross Working Capital refers to the

firm's investment in Current Assets. It includes cash, short-term securities, debtors

(account receivables or book debts), bills receivables and stock (inventory). The concept

of Gross Working Capital focuses attention on two aspects of Current Assets'

management. They are:

a) Way of optimizing investment in Current Assets.

b) Way of financing current assets.

Gross Working Capital = Total Current Assets of the company during the

financial year.


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2. Net Working Capital: This is a qualitative concept. It indicates the liquidity

position of and suggests the extent to which working Capital needs may be financed by

permanent sources of funds. For every firm a particular amount of net Working Capital in

permanent. The net working capital metric is directly related to the current ratio. Net

Working Capital, is defined as Current Assets minus Current Liabilities. Current

assets include stocks, debtors, cash & equivalents and other current assets. Current

liabilities include all the short-term borrowings. Net Working Capital refers to the

difference between Current Assets and Current Liabilities are those claims of outsiders,

which are expected to mature for payment within an accounting year. It includes

creditors or accounts payables, bills payables and outstanding expenses.

Net Working Capital = Total Current AssetsTotal Current Liabilities

3. Net operating working capital (NOWC):Operating CAOperating CL =

(Cash + Inv. + ACCOUNTS /RECIVEABLE)(Accruals +

ACCOUNTS/PAYABLE)


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WORKING CAPITAL ANALYSIS - As we know working capital is the life blood

and the centre of a business. Adequate amount of working capital is very much essential for the

smooth running of the business. And the most important part is the efficient management of

working capital in right time. The liquidity position of the firm is totally effected by the

management of working capital. So, a study of changes in the uses and sources of working

capital is necessary to evaluate the efficiency with which the working capital is employed in a

business. This involves the need of working capital analysis. The analysis of working capital can

be conducted through a number of devices, such as:

1. Ratio analysis.2. Schedule of working capital changes & fund flow Statement

RATIO ANALYSIS - A ratio is a simple arithmetical expression one number to another.

The technique of ratio analysis can be employed for measuring short-term liquidity or working

capital position of a firm. The objective of ratio analysis is to help management in analyzing and

interpreting the financial statements, to get adequate information useful for the performance of

various functions like planning, co- ordination, control, communication and forecasting etc .

The following ratios can be calculated for these purposes:

1. Cash ratio.

2. Current ratio

3. Quick ratio

4. Super/Absolute quick ratio.

5. Debtor turnover ratio.


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6. Average collection period.

7. Creditors/Payable turnover ratio.

8. Average payment turnover period.

SCHEDULE OF WORKING CAPITAL CHANGES & FUND FLOW

STATEMENT -

Fund flow analysis is a technical device designated to the study the source from which additional

funds were derived and the use to which these sources were put. The fund flow analysis consists:

Preparing schedule of changes of working capital

Statement of sources and application of funds.

It is an effective management tool to study the changes in financial position (working capital)

business enterprise between beginning and ending of the financial dates.


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CHAPTER 2

RESEARCH METHOLOGY


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RESEARCH METHODOLOGY

Research methodology is a way to systematically solve the research problem, may

be understood as a science of studying now research is done systematically. In that

various steps, those are generally adopted by a researcher in studying his problem

along with the logic behind them. It is important for research to know not only the

research method but also know methodology. The procedures by which

researchers go about their work describing, explaining and predicting phenomenon

are called methodology.

Types of data collection

There are two types of data collection methods available:

1. Primary data collection

2. Secondary data collection

Primary data collection method

The primary data is that data which is collected fresh or first hand, and for firsttime which is original in nature. Primary data can collect through personal

interview, questionnaire etc. to support the secondary data.

Secondary data collection method

The secondary data are those which have already collected and stored. Secondary

data easily get those secondary data from records, journals, annual reports of the

company etc. It will save the time, money and efforts to collect the data. Secondary

data also made available through trade magazines, balance sheets, books etc.


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OBJECTIVES OF THE PROJECT

To analyze the financial statement of KAMAL SOLVENT EXTRACTIONS PVT.LTD.

From the Year 2006-07 to 2008-09.

To find out how industry manage its profitability.

To analyze the working capital management of the industry with the help of various

ratios.

Compare performance with past performance of the industry.


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The Rice Bran Oil industry in India

Rice Bran Oil is a unique vegetable oil produced from the outer brown layer of rice

which is removed in the form of rice bran during the polishing process of the rice milling

industry. Besides having an ideally balanced fatty acid profile, it is rich in natural anti-oxidants

and unique nutrient. A number of scientific studies conducted in India & abroad have well

documented the better cholesterol lowering properties of rice bran oil as compared to other

conventional vegetable oils. All these studies have attributed these properties of the oil to the

presence of unique nutrient in this oil known as Oryzanol & tocotrienolss. Rice Bran Oil is

extensively used in Japan, Korea, China, Taiwan and Thailand as premium edible oil. It is the

conventional & the most favorite cooking medium of the Japanese and is popularly known as

"Heart Oil" in Japan. It has acquired the status of a "Functional Food" or a "Health Food" in

Western Countries.

India is the second largest producer of paddy in the world after China contributing about

23% to the total world production of paddy. It has a potential to produce over one million tons of

this nutritious oil. Rice Bran Oil extraction started in India about 40 years back. It was in the

middle of 60's that a beginning was made in India for the extraction of oil from rice bran with

the help of solvent extraction process wherein food grade hexane is used to extract oil from rice

bran. Initially the entire quantities of rice bran oil produced in India were used as raw material

for the soaps & detergent industry as the free fatty acid content of the oil was very high.

In the early eighties, the Government of India introduced money credit scheme to

encourage the use of rice bran oil as a product mix in vanaspati (hydrogenated fat) wherein

substantial rebate from the payment of excise duty on vanaspati was given for use of rice bran oil

in the manufacture of vanaspati. In this way government of India encouraged for grooming up

the rice bran industries in India.


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Manufacturers of Rice bran oil in India: Here the following table contains the

information about the name of the some big manufacturers of rice bran oil in India -

Name of the company City

Hemraj Industries pvt. Ltd West Bengal

Jindal oil & fats ltd. Rajasthan

Shree Sita Agro Foods pvt. ltd Durg

Gujrat Ambuja Exports ltd. Ahemdabad

Kumar Metal Industries pvt. Ltd. Mumbai

Kamal solvent Extractions pvt. Ltd Rajnandgaon

Ganpati solvent Rajnandgaon

Jai lakshmi solvent Pvt. Ltd Uttar Pradesh


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FINANCIAL HIGHLIGHT OF THE COMPANY

Gross sales for a period after cash discounts, returns, and freight expenses have been deducted.

Gross sales includes both credit and cash sales of the company.

Interpretation: The sales figures are encouraging as there is a positive trend and the rate of

increase is considerably high.The net sales went up from Rs 49.95 crore in year 2006-07 to Rs

82.46 crore in years 2008-09.Net sales of the company increase because of its various

demandable brands & its shows that company getting good business from its customers. In this

way the percentage increase of sales of the industry is 65.09% from 2006-07 to 2008-09.

0

10

20

30

4050

60

70

80

90

2006-07 2007-08 2008-09

SALES (IN RS. CRORE)

YEAR SALES(IN RS CRORE)

2006-07 49.95

2007-08 59.43

2008-09 82.46


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Profit Before TaxPBT

A profitability measure that looks at a company's profits before the company has to pay

corporate income tax. This measure deducts all expenses from revenue including interest

expenses and operating expenses, but it leaves out the payment of tax. This measure combines all

of the company's profits before tax, including operating, non-operating, continuing operations

and non-continuing operations. PBT exists because tax expense is constantly changing and

taking it out helps to give an investor a good idea of changes in a company's profits or earnings

from year to year.

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

2006-07 2007-08 2008-09

PBT (IN RS CRORE)

PBT (IN RS CRORE)

YEAR PROFIT BEFORE TAX (IN RS. CRORE)

2006-07 0.99.

2007-08 1.24

2008-09 1.51


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Interpretation: The profit before tax is rising in a consistent rate showing a very positive

trend from Rs. 0.99 crore in years 2006-07 to Rs.1.51 crore in 2008-09.

Profit after tax (PAT)

It the net profit earned by the company after deducting all expenses like interest, depreciation

and tax. PAT can be fully retained by a company to be used in the business. However dividend is

paid to the share holders from this residue.

YEAR SALES(IN RS CRORE)

2006-07 0.83

2007-08 0.80

2008-09 1.07

Interpretation: The profit after tax is rising in a consistent rate showing a very positive

trend from Rs. 0.83 Crore in the year 2006-07 to Rs. 1.07 crore in 2008-09.Company paid

dividend to its shareholders from this residual amount.

0

0.2

0.4

0.6

0.8

1

1.2

2006-07 2007-08 2008-09

PAT (IN RS CRORE)

PAT (IN RS CRORE)


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PROJECT ON WORKING CAPITAL MANAGEMENT ON

KAMAL SOLVENT EXTRACTIONS PVT LTD

CAPITAL

TYPES OF CAPITAL

Working Capital which is required for a business can be classified under two main categories

via,

1. Fixed Capital: Every business needs funds for two purposes for its establishment

and to carry out its day- to-day operations. Long terms funds are required to create

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

building, furniture, etc. Investments in these assets represent that part of firms capital

which is blocked on permanent or fixed basis and is called fixed capital.

2. Working Capital: Funds are also needed for short-term purposes for the purchase of

raw material, payment of wages and other day to- day expenses etc. These funds are

known as working capital. In simple words, working capital refers to that part of the

firms capital which is required for financing short- term or current assets such as cash,

marketable securities, debtors & inventories. Funds, thus, invested in current assets keep

revolving fast and are being constantly converted in to cash and this cash flow out again


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in exchange for other current assets. Hence, it is also known as revolving or circulating

capital or short term capital.


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CHAPTER 3

INTRODUCTION OF COMPANY


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COMPANY PROFILE

KAMAL SOLVENT EXTRACTIONS PVT LTD

INTRODUCTION: Kamal Solvent Extractions Pvt. Ltd. is Rice Bran oil producing company

established on 1990 focused on specialized, high-value products and services. The companys

principal activities are extracting oil from the rice bran and refining the extracted oil and

marketing the edible oil to the potential market. Company also sells crude oil (non-refined oil) to

big companies like I.T.C and PEPSICO in India. This development process of converting the by-

product into finished goods underpins various processes, which the company executes with full

dedication and concentration with the help of various expertises. The companys head office is at

Rajnandgaon with subsidiary offices in Durg and Raipur in India. Within short period of time

earned an unmatched success and reputation in the region and also in various parts of the

country. Kamal Solvent Extractions Pvt. Ltd. is engaged in the industry as the trusted

manufacturing unit for edible oil viz; Refined Rice Bran Oil and Triple Refined Rice Bran Oil

under the registered brand name KAMAL and RAJKAMAL, NILKAMAL and RSOYEE

respectively. Kamal Solvent Extractions Pvt. Ltd.is rated as a smoke and pollution free industry

in the Chhattisgarh state of India. Water Filter Plant of this industry takes care of pollution free

extraction of Water used in Industrial Production works. The Industry is surrounded with green

trees.


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MISSION & VISION: "At Kamal Solvent Extractions Pvt. Ltd., we have always dreamed big.

It is our vision that has taken us from a pioneer that spear-headed the rice bran revolution to the

recent position. We have been a leading light in the field of Rice bran oil for the past years. We

strive to look beyond the boundaries of competition by being quality centric in our

manufacturing practices. Our vision is to be a world class organization that is a benchmark for

other organizations in the country, setting standards for excellence, and leading the thrust in

adopting environment friendly policies."

R.B.O: Rice Bran Oil, which is commonly known as HEART OIL in Japan, is unique

cooking oil produced from the brown layer of rice paddy, which is removed in the form of rice

bran for producing white rice. The paddy that comes from the fields has a hard outer covering

called the husk. During the de-husking process, this husk is removed from the paddy and what

remains is brown rice. The rice so obtained is brown in colour since it has an oily brown

covering called the Bran. The polished rice which we generally consume is obtained after

removing this bran from the rice. It is important to understand that bran and husk are not same.

The bran which is left behind after the polishing process undergoes the solvent extraction process

in order to obtain crude rice bran oil. This crude oil is further refined in order to obtain rice bran

oil.

In other word, Rice bran is a by-product of the rice milling industry from which rice bran oil is

extracted. Typically rice bran accounts for 7 8 % of the rice produced and the recovery of rice

bran oil from rice bran is usually 15%. Rice bran oil is used for human consumption. Anti-

oxidants of Vitamin E group are naturally occurring in rice bran oil. Appearance of rice bran oil

ranges from cloudy to clear depending on the degree of de-waxing and winterization process

applied. It also has several industrial uses. After oil extraction, the by-product obtained is de-

oiled rice bran.


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Features of Kamal solvent products

The tag line of the company is KAMAL ka kaamal, shakti swaad bemisal. These

tag lines express the quality of the kamal products inspite of it we can discuss about the features

of the kamal products by following ways

Premium quality Kamal produced in world class specially developed process

under highly hygienic condition to give better taste and natural flavor to good health.

Nutritionally superiorKamal contains about 18% saturated,45% monosaturated

and 35% polyunsaturated fatty acid which is close to American heart association

recommendation.

Rich micronutrients & natural antioxidants Kamal contains oryzanol,Tocotrienol and Squalene which provides many benefits for human health.

Cheaper and popularKamal refined rice bran oil is the highly selling product in

all over central India.

In spite of all the above features some more features of the kamal products are

Longer shelf life.

Antiviral capacity

Oil is less sticky so its saves soap.

More stable at high temperature.

Heart food for every happy home.

Frying takes less time, saves energy.

Gives better taste & flavor to food items.

Economical15% less absorption of oil during frying.

Available in small packs also (5 liter, 1 liter pack).

Easily reachable available in all general stores.


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PRODUCTS OF KAMAL SOLVENT - The products of Kamal solvent is divided in

four different brands. The brands which are shown below in diagram are mostly preferable in

Chhattisgarh, Maharashtra, and Madhya Pradesh and Andhra pradesh. The produced oil of the

company is also supplied in bulky quantity to the multinational companies also like PepsiCo,

ITC.

PACKAGING OF THE BRANDS - The brands of Kamal solvent comes in different types of

packaging, quantity and price which can be shown with the help of following table

Types of packaging quantity Per pack price in Rs.

pouch 500ml 21.50

pouch 1 liter 42.50

Can(plastic) 5 liter 107

Can(plastic) 15 liter 690

Tin can 15 k.g 740

Tin can 15 liter 635

NotePrices of the various products of the company which is shown in the above table are

always fluctuating as according to the market condition

PRODUCTBRANDS

KAMAL

RAJKAMAL

NILKAMAL

RASOYEE


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ANALYSIS OF SHORTTERM FINANCIAL POSITION

OR TEST OF LIQUIDITY

The short term creditors of a company such as suppliers of goods of credit and

commercial banks short-term loans are primarily interested to know the ability of a firm to meet

its obligations in time. The short term obligations of a firm can be met in time only when it is

having sufficient liquid assets. So to with the confidence of investors, creditors, the smooth

functioning of the firm and the efficient use of fixed assets the liquid position of the firm must be

strong. But a very high degree of liquidity of the firm being tied up in current assets. Therefore,

it is important proper balance in regard to the liquidity of the firm. So we can calculate the

liquidity ratio and the other important ratios of the company by following ways. Before

calculating the various ratios we show the financial statistics of the firm by following ways

Year 2006-07(In Rs. crore)

2007-08(In Rs.crore)

2008-09(In Rs. crore)

NET SALES 49.95 59.43 82.46

PAT 0.834 0.806 1.075

PBT 0.995 1.24 1.51

DEBT 1.86 3.50 4.14

FIXED

ASSETS

5.29 4.80 4.52

CURRENT

ASSESTS

6.02 9.98 10.81

CURRENT

LIABILITES

1.890 2.533 3.6045

RESERVE

AND

SURPLUS

1.604 2.49 3.566

CAPITAL

EMPLOYED

9.58 12.40 11.912


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ON THE BASIS OF TIME VARIOUS TYPES OF WORKING CAPITAL

1. PERMANENT OR FIXED WORKING CAPITAL - Permanent or fixed working

capital is minimum amount which is required to ensure effective utilization of fixed

facilities and for maintaining the circulation of current assets. Every firm has to maintain

a minimum level of raw material, work- in-process, finished goods and cash balance.

This minimum level of current assets is called permanent or fixed working capital as this

part of working is permanently blocked in current assets. As the business grow the

requirements of working capital also increases due to increase in current assets.

2. TEMPORARY OR VARIABLE WORKING CAPITAL - Temporary or variable

working capital is the amount of working capital which is required to meet the seasonal

demands and some special exigencies. Variable working capital can further be classified

as seasonal working capital and special working capital. The capital required to meet the

seasonal need of the enterprise is called seasonal working capital. Temporary working

capital differs from permanent working capital in the sense that is required for short

periods and cannot be permanently employed gainfully in the business.


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CHAPTER 4

DATA ANALYSIS & INTERPRETATION


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CALCULATION OF GROSS WORKING CAPITAL, NET WORKING CAPITAL

& NET OPREATING WORKING CAPITAL

1. GROSS WORKING CAPITAL - We can calculate the gross working capital of

the industry with the help of following formula

Gross Working Capital = Total Current Assets of the company during the

financial year.

INTERPRETATION - From the graph it is clear that current assets of the industry increases

simultaneously from the financial year 2006-07 to 2008- 09.

0

5

10

15

2006-072007-08

2008-09

GROSS WORKING CAPITAL (in Rs. crore)

YEAR CURRENT ASSETS (In Rs. crore)

2006-07 6.02

2007-08 9.98

2008-09 10.81


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2. NET WORKING CAPITAL - We can calculate the net working capital of the

industry with the help of following formula

Net Working Capital = Total Current AssetsTotal Current Liabilities

YEAR CURRENT ASSETS

(In Rs. crore)

CURRENT

LIABILITIES (In Rs.

crore)

NETWORKING

CAPITAL (In Rs.

crore)

2006-07 6.02 1.89 4.13

2007-08 9.98 2.53 7.45

2008-09 10.81 3.60 7.21

0

2

4

6

8

2006-072007-08

2008-09

NET WORKING CAPITAL (in Rs. crore)


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INTERPRETATION From the above graph it is clear that the net working capital of the

increase in the year 2007-08 comparison with the previous year than it again decreases in the

year 2008-09 with very small difference but the current assets of the company is always more

than current liabilities in all the financial years.

3. NET OPREATING WORKING CAPITAL - We can calculate the net operating

working capital of the industry with the help of following formula

Net operating working capital (NOWC) = Operating CAOperating CL or

(Cash + Inv. + ACCOUNTS /RECIVEABLE)(Accruals +

ACCOUNTS/PAYABLE)

YEAR OPREATING

CURRENT ASSETS

(In Rs. crore)

OPREATING

CURRENT

LIABILITIES (In Rs.

crore)

NET OPREATING

WORKING

CAPITAL In Rs.

crore)

2006-07 3.77 1.89 1.88

2007-08 5.93 2.53 3.4

2008-09 5.55 3.60 1.95


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INTERPRETATION From the above graph it is clear that net operating working capital

varies in different financial years it is 1.88 crore in the year 06-07 than it increases and became

3.4 crore in the year 07-08 and then it again decreases and became 1.95 crore in the year 08-09.

CASH RATIO: This is the ratio between cash and bank balance to current liabilities.

Cash ratio = cash balance / current liabilities

0

1

2

3

4

2006-072007-08

2008-09

NET OPREATING WORKING CAPITAL (in Rs.

crore)

YEAR CASH &

BANK

BAL.(in Rs.

crore)

CURRENT

LIABILITIES(in

Rs. crore)

CASH

RATIO

2006-07 0.43 1.89 0.22

2007-08 0.82 2.53 0.32

2008-09 1.31 3.60 0.36


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Interpretation The cash ratio of the company increase from0.22 in the year 2006-07 up to

0.36 in the year 2007-08 and the calculated ratios shows that company have sufficient portion of

cash and bank balance against its current liabilities.

2. Current Ratio

The current ratio is a popular financial ratio used to test a company's liquidity (also

referred to as its current or working capital position) by deriving the proportion of current assets

available to cover current liabilities.

The concept behind this ratio is to ascertain whether a company's short-term assets (cash,

cash equivalents, marketable securities, receivables and inventory) are readily available to pay

off its short-term liabilities (notes payable, current portion of term debt, payables, accrued

expenses and taxes). In theory, the higher the current ratio, the better. Current assets normally

include cash, marketable securities, accounts receivable and inventories. Current liabilitiesconsist of accounts payable, short term notes payable, short-term loans, current maturities of long

term debt, accrued income taxes and other accrued expenses (wages).

2006-07

24%

2007-08

36%

2008-09

40%

cash ratio


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Rule of thumb -

1. Relatively high ratio values mean that the business is liquid, but cash is not working.

2. If the current ratio is greater than 1.0, the business is liquid.

3. If the current ratio is less than 1.0, the business is illiquid.

Current ratio = total current assets / total current liabilities

Current assets = cash + marketable securities + bill receivables + sundry debtors +

inventories.

Current liabilities = outstanding expenses + bill payable + dividend payable etc.

YEAR CURRENT ASSETS

(in Rs. crore)

CURRENT

LIABILITIES (in Rs.

crore)

CURRENT

RATIO

2006-07 6.02 1.89 3.18

2007-08 9.98 2.53 3.94

2008-09 10.81 3.6045 3.00


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Interpretation As we know that ideal current ratio for any firm is 2:1. If we see the current

ratio of the company for last three financial years it has increased from 2006-07 to 2007-08 but

decrease in the year 2008-09 in spite of this it is more than 1.0 it means the business is liquid

and in all the years current ratio of company is more than the ideal ratio. This depicts that

companys liquidity position is sound and the current assets of the company is sufficient to fulfill

its short-term liabilities obligation.

3.Quick ratio -

The quick ratio -the quick assets ratio or the acid-test ratio -is a liquidity indicator that

further refines the current ratio by measuring the amount of the most liquid current assets there

are to cover current liabilities. The quick ratio is more conservative than the current ratio because

it excludes inventory and other current assets, which are more difficult to turn into cash.

Therefore, a higher ratio means a more liquid current position.

Rule of thumb -

1. Relatively high ratio values mean that the business is liquid, but cash is not working.

2. If the current ratio is greater than 1.0, the business is liquid.

3. If the current ratio is less than 1.0, the business is illiquid.

0 1 2 3 4 5

2006-07

2007-08

2008-09

current ratio

current ratio


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Quick ratio = Total current assetsinventory / Total current liabilities

YEAR CURRENT

ASSETS(inRs. crore)

PREPAID

EXPENSES(in

Rs. crore)

INVENTORIES(in

Rs. crore)

CURRENT

LIABILITIES(in

Rs. crore)

QUICK

RATIO

2006-07 6.02 0.057 3.34 1.89 1.38

2007-08 9.98 0.118 5.12 2.53 1.87

2008-09 10.81 0.0718 4.24 3.60 1.80

Interpretation A quick ratio is an indication that the firm is liquid and has the ability to meet

its current liabilities in time. The ideal quick ratio is 1:1. Companys quick ratio is more than

ideal ratio. This shows company has no liquidity problem.

4. SUPER /ABSOLUTE QUICK RATIO -

Although receivables, debtors and bills receivable are generally more liquid than

inventories, yet there may be doubts regarding their realization into cash immediately or in time.

So absolute liquid ratio should be calculated together with current ratio and acid test ratio so as

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1.8

2

2006-07 2007-08 2008-09

Quick ratio

Quick ratio


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to exclude even receivables from the current assets and find out the absolute liquid assets.

Absolute Liquid Assets

includes:

Absolute liquid ratio

= Absolute liquid

assets / current liabilities

Absolute liquid assets

= cash & bank

balances + investment in

govt. securities.

Quick liabilities = current liabilitiesbank overdraft

0

0.05

0.1

0.15

0.2

0.25

0.3

0.35

0.4

2006-07 2007-08 2008-09

SUPER QUICK RATIO

SUPER QUICK RATIO

YEAR

CASH &

BANK

BAL.(in Rs.

crore)

CURRENT

LIABILITIES(in

Rs. crore)

SUPER

QUICK

RATIO

2006-07 0.43 1.89 0.22

2007-08 0.82 2.53 0.32

2008-09 1.31 3.60 0.37


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Interpretation: From the above super quick ratio it is clear that company carries a small

amount of cash. But there is nothing to be worried about the lack of cash because company has

reserve, borrowing power & long term investment.

5. RECEIVABLE/DEBTORS TURN OVER RATIOWith the help of this ratio we can

easily measure the predictable amount which is has to receive from the debtors. If the

debtors turnover ratio is more than this condition is good for our business because if the

ratio is more than it means company will receive the amount from debtors very quickly.

This ratio also provides help to reduce doubtful debt and on the second hand it provides

help to the firm for the creation of the various funds which is useful for the other

profitability activates of the company. The formula for calculating receivable turnover

ratio

Receivable turnover ratiocredit sales / debtors + bills receivable

YEAR DEBTORS .(in

Rs. crore)

CREDIT

SALES .(in Rs.

crore)

DEBTOR

TURNOVER

RATIO

2006-07 1.86 49.95 27

2007-08 3.50 59.43 17

2008-09 4.14 82.46 20


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Interpretation: From the above graph it is clear that in the various different year the Debtors

turnover ratio is also different and with the help of this ratio company can easily measure

predictable receive amount from the debtors.

6. AVREAGE/DEBT COLLECTION PERIODWith the help of this ratio we

can easily find out that in how many days the amount of credit sales will receive. Every

industry has set its own standard for the average collection period. If the calculated

average collection period is less than standard one than this situation is good for the

company but if it is more than this situation is not consider good for the company. The

formula for calculating average collection period is

Average collection period = Debtors + bills receivable / credit sales 365

0

5

10

15

20

25

30

2006-07 2007-08 2008-09

Debtors turnover

Debtors turnover


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Interpretationso with the help of this ratio we can easily find out that in how many days

the amount of credit sales will receive. Every industry has set its own standard for average

collection period. If the calculated average collection period is less than standard than it is good

for the industry but ifits more than standard one than it is not consider good for the industry.

0

5

10

15

20

25

2006-07 2007-08 2008-09

Average collection period

YEAR DEBTORS .(in

Rs. crore)

SALES.(in Rs.

crore)

DAYS

2006-07 1.86 49.95 14

2007-08 3.50 59.43 22

2008-09 4.14 82.46 18


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7. CREDITORS/PAYMENT TURNOVER RATIO - This is ratio is just

reverse of the debtors turnover ratio the only difference is that with the help of this ratio

we can easily find out the condition or the level of the firm for the payment of the credit

purchase. The formula for calculating payment turnover ratio is

Payment turnover ratio = credit purchase/creditors + bills payable

18.2

18.4

18.6

18.8

19

19.2

19.4

19.6

2006-07 2007-08 2008-09

payment turnover

payment turnover

YEAR CREDITORS.(in

Rs. crore)

CREDIT

PURCHASE.(in

Rs. crore)

PAYMENT

TURN OVER

RATIO

2006-07 1.89 36.90 19.52

2007-08 2.53 47.95 18.92

2008-09 3.60 67.47 18.71


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Interpretation - So from the above graph we got different creditors turnover ratio in different

years and this ratios shows the company ability or level for the payment to its creditors.

8. AVERAGE PAYMENT PERIOD - With the help of this ratio we can easily find out that in

how many days company will pay to its creditors.

The formula for calculating average payment period is

Average payment period = creditors + bills payable / credit purchase 365

YEAR CREDITORS CREDIT

PURCHASE

PAYMENT

TURN OVER

RATIO2006-07 1.89 36.90 19

2007-08 2.53 47.95 19

2008-09 3.60 67.47 19


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Interpretation - This ratio is similar with average collection period the only difference is

that with the help of this ratio we can find out that in how many days company will pay to its

creditors.This ratio is very important for the business from the creditors point of view.

0

5

10

15

20

2006-072007-08

2008-09

Average payment period

Average paymentperiod


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CHAPTER 5

SUGGETION


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CHAPTER 6

CONCLUSION


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Conclusion

Working capital management is important aspect of financial management. The study of working

capital management of KAMAL SOLVENT EXTRACTIONS PVT.LTD. has revealed that the

current ratio was as per the standard industrial practice but the liquidity position of the company

showed an increasing trend. The study has been conducted on gross working capital, net working

capital and net operating working capital and ratio analysis of working capital . So following are

the various conclusive points generate after the study

1. Working capital of the industry was increasing and showing positive working capital per year.

It shows good liquidity position.

2. Positive working capital indicates that industry has the ability of payments of short terms

liabilities.

3. Working capital increased because of increment in the current assets is more than increase in

the current liabilities.

4. Companys current assets were always more than requirement it affect on profitability of the

company.

5. Current assets are more than current liabilities indicate that industry used long term funds for

short term requirement.


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CHAPTER 7

BIBLIOGRAPHY


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Sources and Bibliography

www.wikipedia.com

www.google.co.in

Official website of the company

MANAGEMENT ACCOUNTING Dr. S.P. Gupta

FINANCIAL MANAGEMENT - Dr. S.P. Gupta
http://www.wikipedia.com/http://www.wikipedia.com/http://www.google.co.in/http://www.google.co.in/http://www.google.co.in/http://www.wikipedia.com/

Documents

50625023 Project on Working Capital Surendra