A Study on Working Capital Management in Opt Consultancy Services-data Updated

7/29/2019 A Study on Working Capital Management in Opt Consultancy Services-data Updated

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A STUDY ON WORKING CAPITAL MANAGEMENT IN OPT

CONSULTANCY SERVICES

CONTENTS

Chapter No Particulars Page No.

Acknowledgement

Certificate

Contents

List of Tables

List of Charts

1.

1.1

1.2

1.3

1.4

1.5

Working Capital Management

Introduction

Need of Working Capital Management

Gross W.C and Net W.C

Types of working capital

Determinants of working capital

9

1011

2.

2.1

2.2

2.3

2.4

Research Methodology

Introduction

Types of research methodology

Objective of the study

Scope and Limitation of the study

14

15

16

3.

3.1

3.2

Introduction to the company

Industry Profile

Company Profile

17

22

4.

4.1

4.2

4.3

Data analysis and Interpretation

Working capital Analysis

Ratio Analysis

Trend Analysis

31

36

70

5.

5.1

Findings & Suggestions

Findings 79

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5.2

5.3

Suggestion

Conclusion

80

81

LIST OF TABLES

Table. no Name of Tables Page. no

4.1 Schedule of Changes in Working Capital (2005 06) 31





4.2.1 Current Ratio 42

4.2.2 Quick Ratio 44

4.2.3 Absolute Liquid Ratio 46

4.2.4 Inventory Turnover Ratio 48

4.2.5 Debtors Turnover Ratio 50

4.2.6 Creditors Turnover Ratio 52

4.2.7 Fixed Asset Turnover Ratio 54

4.2.8 Cash to Current Asset Ratio 56

4.2.9 Current Asset Turnover Ratio 58

4.2.10 Inventory to Sales Ratio 60

4.2.11 Working Capital Turnover Ratio 62

4.2.12 Inventory to Current Asset Ratio 64

4.2.13 Gross profit Ratio 66

4.2.14 Administrative Expenses Ratio 68

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LIST OF CHARTS

Figure. no Name of Tables Page. no

4.3.1 Current Assets 71

4.3.2 Fixed Assets 72

4.3.3 Cash & Bank Balances 73

4.3.4 Inventory 74

4.3.5 Sundry Debtors 75

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CHAPTER I

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WORKING CAPITAL MANAGEMENT

1.1) Introduction Working capital management

Working capital management is concerned with the problems that arise while

attempting to manage the current assets, the current liabilities and the inter relationship that

exist between them. The term current assets refers to those assets which in ordinary course of

business can be, or, will be, turned in to cash within one year without undergoing a

diminution in value and without disrupting the operation of the firm. The major current assets

are cash, marketable securities, account receivable and inventory. Current liabilities warethose liabilities which intended at their inception to be paid in ordinary course of business,

within a year, out of the current assets or earnings of the concern. The basic current liabilities

are account payable, bill payable, bank over-draft, and outstanding expenses.

The goal of working capital management is to manage the firms current assets and

current liabilities in such way that the satisfactory level of working capital is mentioned. The

current assets should be large enough to cover its current liabilities in order to ensure a

reasonable margin of the safety.

Definition:-

According to Guttmann & Dougall-

Excess of current assets over current liabilities

According to Park & Gladson-

The excess of current assets of a business (i.e. cash, accounts receivables, inventories)

over current items owned to employees and others (such as salaries & wages payable, accounts

payable, taxes owned to government).

1.2) Need of working capital management

The need for working capital gross or current assets cannot be over emphasized. As

already observed, the objective of financial decision making is to maximize the shareholders

wealth. To achieve this, it is necessary to generate sufficient profits. This will naturally

depend upon the magnitude of the sales among other things but sales cannot convert into

cash. There is a need for working capital in the form of current assets to deal with theproblem arising out of lack of immediate realization of cash against goods sold. Therefore

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sufficient working capital is necessary to sustain sales activity. Technically this is refers to

operating or cash cycle. If the company has certain amount of cash, it will be required for

purchasing the raw material which may be available on credit basis. Then the company has to

spend some amount for labor and factory overhead to convert the raw material in work in

progress, and ultimately finished goods. These finished goods convert in to sales on creditbasis in the form of sundry debtors. Sundry debtors are converted into cash after expiry of

credit period. Thus some amount of cash is blocked in raw materials, WIP, finished goods,

and sundry debtors and day to day cash requirements. However some part of current assets

may be financed by the current liabilities also. The amount required to be invested in this current

assets is always higher than the funds available from current liabilities. This is the precise reason why

the needs for working capital arise

1.3) Gross working capital and Net workingcapital

There are two concepts of working capital management

1. Gross working capital

Gross working capital refers to the firms investment in current assets. Current assets

are the assets which can be convert in to cash within a year includes cash, short term

securities, debtors, bills receivable and inventory .

2. Net working capital

Net working capital refers to the difference between current assets and current

liabilities. Current liabilities are those claims of outsiders which are expected to mature for

payment within an accounting year and include creditors, bills payable and outstanding

expenses. Net working capital can be positive or negative

Efficient working capital management requires that firms should operate with some

amount of net working capital, the exact amount varying from firm to firm and depending,

among other things; on the nature of companies. Net working capital is necessary because the

cash outflows and inflows do not coincide. The cash outflows resulting from payment ofcurrent liabilities are relatively predictable. The cash inflow are however difficult to predict.

The more predictable the cash inflows are, the less net working capital will be required.

The concept of working capital was, first evolved by Karl Marx. Marx used the term

variable capital means outlays for payrolls advanced to workers before the completion of

work. He compared this with constant capital which according to him is nothing but dead

labor. This variable capital is nothing but wage fund which remains blocked in terms of

financial management, in work- in-process along with other operating expenses until it is

released through sale of finished goods. Although Marx did not mentioned that workers also

gave credit to the firm by accepting periodical payment of wages which funded a portioned of

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W.I.P, the concept of working capital, as we understand today was embedded in his variable

capital.

1.4) Types of working capital

The operating cycle creates the need for current assets (working capital). However the

need does not come to an end after the cycle is completed to explain this continuing need of

current assets a destination should be drawn between permanent and temporary working

capital.

1) Permanent working capital

The need for current assets arises, as already observed, because of the cash cycle. To

carry on business certain minimum level of working capital is necessary on continues and

uninterrupted basis. For all practical purpose, this requirement will have to be met

permanent as with other fixed assets. This requirement refers to as permanent or fixed

working capital

2) Temporary working capital

Any amount over and above the permanent level of working capital is temporary,

fluctuating or variable, working capital. This portion of the required working capital is

needed to meet fluctuation in demand consequent upon changes in production and sales as

result of seasonal changes

Graph shows that the permanent level is fairly constant; while temporary working capital is

fluctuating in the case of an expanding firm the permanent working capital line may not be

horizontal. This may be because of changes in demand for permanent current assets might be

increasing to support a rising level of activity.

1.5) Determinants of working capital

The amount of working capital is depends upon a following factors

1. Nature of business

Some businesses are such, due to their very nature, that their requirement of fixed

capital is more rather than working capital. These businesses sell services and not the

commodities and that too on cash basis. As such, no funds are blocked in piling inventories

and also no funds are blocked in receivables. E.g. public utility services like railways,infrastructure oriented project etc. their requirement of working capital is less. On the other

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hand, there are some businesses like trading activity, where requirement of fixed capital is

less but more money is blocked in inventories and debtors.

2. Length of production cycle

In some business like machine tools industry, the time gap between the acquisition of

raw material till the end of final production of finished products itself is quite high. As such

amount may be blocked either in raw material or work in progress or finished goods or even

in debtors. Naturally the need of working capital is high.

3. Size and growth of business

In very small company the working capital requirement is quite high due to highoverhead, higher buying and selling cost etc. as such medium size business positively has

edge over the small companies. Once the business grows beyond a certain limit, the working

capital requirements may be adversely affected by the increasing size.

4. Business/ Trade cycle

If the company is operating in the time of boom, the working capital requirement may

be more as the company may like to buy more raw material, may increase the production and

sales to take the benefit of favorable market, due to increase in the sales, there may be moreand more amount of funds blocked in stock and debtors etc. similarly in the case of

depressions also, working capital may be high as the sales terms of value and quantity may be

reducing, there may be unnecessary piling up of stack without getting sold, the receivable

may not be recovered in time etc.

5. Terms of purchase and sales

Some time due to competition or custom, it may be necessary for the company to

extend more and more credit to customers, as result which more and more amount is locked

up in debtors or bills receivables which increase the working capital requirement. On theother hand, in the case of purchase, if the credit is offered by suppliers of goods and services,

a part of working capital requirement may be financed by them, but it is necessary to

purchase on cash basis, the working capital requirement will be higher.

6. Profitability

The profitability of the business may be vary in each and every individual case, which

is in turn its depend on numerous factors, but high profitability will positively reduce the

strain on working capital requirement of the company, because the profits to the extent that

they earned in cash may be used to meet the working capital requirement of the company.

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CHAPTER II

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RESEARCH METHODOLOGY

2.1) Introduction

Research methodology is a way to systematically solve the research problem. It 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 researcher goes about their work of describing,

explaining and predicting phenomenon are called methodology Methods comprise the

procedures used for generating, collecting and evaluating data. All this means that it is

necessary for the researcher to design his methodology for his problem as the same may

differ from problem to problem.

Data collection is important step in any project and success of any project will be

largely depend upon now much accurate you will be able to collect and how much time,money and effort will be required to collect that necessary data, this is also important step.

Data collection plays an important role in research work. Without proper data available for

analysis you cannot do the research work accurately.

2.2) Types of data collection

There are two types of data collection methods available.

1. Primary data collection2. Secondary data collection

1) Primary data

The primary data is that data which is collected fresh or first hand, and for first time

which is original in nature. Primary data can collect through personal interview, questionnaire

etc. to support the secondary data.

2) Secondary data collection method

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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.

This project is based on primary data collected through personal interview of head of

account department, and other concerned staff member of finance department. But primary

data collection had limitations such as matter confidential information thus project is based

on secondary information collected through five years annual report of the company,

supported by various books and internet sides. The data collection was aimed at study of

working capital management of the company

Project is based on

1. Annual report ofOPT Consultancy services, 2006-07





2.3) OBJECTIVES OF THE STUDY

Study of the working capital management is important because unless the working

capital is managed effectively, monitored efficiently planed properly and reviewed

periodically at regular intervals to remove bottlenecks if any, the company cannot earn profits

and increase its turnover. With this primary objective of the study, the following further

objectives are framed for a depth analysis.

1. To study the working capital management of OPT Consultancy services., Chennai

2. To study the optimum level of current assets and current liabilities of the company.

3. To study the liquidity position through various working capital related ratios.

4. To study the financial performance using trend analysis tool

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2.4) SCOPE & LIMITATIONS OF THE STUDY

Scope of the study

The scope of the study is identified after and during the study. The study of working capital is

based on tools like Trend Analysis, Ratio Analysis, working capital leverage, operating cycle

etc. Further the study is based on last 5 years Annual Reports of OPT Consultancy services

And even factors like competitors analysis, industry analysis were not considered while

preparing this project.

Limitations of the study

Following limitations were encountered while preparing this project:

1) Limited data:-

This project has completed with annual reports; it just constitutes one part of data

collection i.e. secondary. There were limitations for primary data collection because of

confidentiality.

2) Limited period:-

This project is based on five year annual reports. Conclusions and recommendations

are based on such limited data. The trend of last five year may or may not reflect the real

working capital position of the company

3) Limited area:-

Also it was difficult to collect the data regarding the competitors and their financialinformation. Industry figures were also difficult to get.

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CHAPTER III

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3.1 INDUSTRY PROFILE

3.2 COMPANY PROFILE

CHAPTER IV

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DATA ANALYSIS AND INTERPRETAITION

4.1 WORKING CAPITAL ANALYSIS

Working capital management is concerned with the problems which arise in

attempting to manage the current assets, the current liabilities and the inter relationship that

exist between them. The term current assets refers to those assets which in ordinary course of

business can be, or, will be, turned in to cash within one year without undergoing a

diminution in value and without disrupting the operation of the firm. The major current assets

are cash, marketable securities, account receivable and inventory. Current liabilities ware

those liabilities which intended at their inception to be paid in ordinary course of business,

within a year, out of the current assets or earnings of the concern. The basic current liabilities

are account payable, bill payable, bank over-draft, and outstanding expenses.

The goal of working capital management is to manage the firm s current assets

and current liabilities in such way that the satisfactory level of working capital is mentioned.

The current should be large enough to cover its current liabilities in order to ensure a

reasonable margin of the safety.

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The consideration of the level investment in current assets should avoid two danger

points excessive and inadequate investment in current assets. Investment in current assets

should be just adequate, not more or less, to the need of the business firms. Excessive

investment in current assets should be avoided because it impairs the firm s profitability, as

idle investment earns nothing. On the other hand inadequate amount of working capital can

be threatened for the solvency of the firms because of its inability to meet its current

obligation. It should be realized that the working capital need of the firms may be fluctuating

with changing business activity. This may cause excess or shortage of working capital

frequently. The management should be prompt to initiate an action and correct imbalance

SCHEDULE OF CHANGES IN WORKING CAPITAL

TABLE 4.1

PARTICULARS

2005

AMOUNT

Rs.

2006

AMOUNT

Rs.

INCREASE

AMOUNT

Rs.

DECREASE

AMOUNT

Rs.

ASSETS:

CURRENT ASSETS

Inventory (ERP Software

Licences)

250940.647 5825092.799 3315686.752 -----

Sundry Debtors 2763427.255 1590439.776 ------ 1172987.479

Cash & Bank Balance 83610.810 58403.077 ------ 25207.733

Loans and Advances 1551164.710 27974575.056 26423410.350 ------

Prepaid Expenses 5649.150 13732.400 8083.250 ------

Accrued Income 79277.450 2925.000 ------ 76352.450

TOTAL CURRENT ASSETS 6992535.422 35465168.108 29747180.35 1274547.662

LESS:CURRENT LIABILITIES

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Sundry Creditors 6453315.833 4106607.313 2346708.520 ------

TOTAL CURRENT

LIABILITIES6453315.833 4106607.313 2346708.520 ------

NET WORKING CAPITAL 539219.589 31358560.79 32093888.87 1274547.662

NET INCREASE IN

WORKING CAPITAL30819341.21 ------ ------ 30819341.21

TOTAL 31358560.79 31358560.79 32093888.87 32093888.87

Thus there is an increase in Net Working Capital compared to the last year. OPT Consultancy

services Financial Position was Increase in the year (2006).

Source: Annual Report OPT Consultancy servicesChennai From 2006-2010


TABLE 4.2

PARTICULARS2006

AMOUNT

Rs.

2007AMOUNT

Rs.

INCREASEAMOUNT

Rs.

DECREASEAMOUNT

Rs.

ASSETS:

CURRENT ASSETS

Inventory 5825092.799 5429251.165 ------ 395841.634

Sundry Debtors 1590439.776 3093057.061 1502617.285 -----

Cash & Bank Balance 58403.077 605026.901 546623.824 ------

Loans and Advances 27974575.056 2128152.721 ------ 25846422.34


Accrued Income 2925.000 396425.127 393500.127 ------

TOTAL CURRENT

ASSETS35465168.108 11668934.86 2446030.719 26242263.97

LESS:

CURRENT LIABILITIES

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Sundry Creditors 4106607.313 15182116.746 ------ 11075509.43

TOTAL CURRENT

LIABILITIES4106607.313 15182116.746 ------ 11075509.43


NET DECREASE IN

WORKING CAPITAL------ 34871742.68 34871742.68 ------

TOTAL 31358560.79 31358560.79 37317773.4 37317773.4

Thus there is a decrease in Net Working Capital in the year 2006 when compared with the

previous year of OPT Consultancy servicesSo the Companys financial position has to be

increased.



TABLE 4.3

PARTICULARS

2007

AMOUNT

Rs.

2008

AMOUNT

Rs.

INCREASE

AMOUNT

Rs.

DECREASE

AMOUNT

Rs.

ASSETS:

CURRENT ASSETS

Inventory 5429251.165 3880115.603 ------ 1549135.562

Sundry Debtors 3093057.061 2311550.508 ------ 781506.553


Loans and Advances 2128152.721 10179277.86 8051125.137 ------


Accrued Income 396425.127 292198.000 104227.127

TOTAL CURRENT

ASSETS11668934.86 17288347.79 80661577.54 2446744.819

LESS:

CURRENT LIABILITIES

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TOTAL CURRENT

LIABILITIES15182116.746 9596597.936 5585518.85 ------

NET WORKING CAPITAL 3513181.88 7691749.854 136516766 2446744.819

NET INCREASE IN

WORKING CAPITAL11204931.74 ------ ------ 112049317.6

TOTAL 7691749.854 7691749.854 13651676.6 13651676.6

Thus there is an increase in Net Working Capital Compared with the last year, OPT

Consultancy services financial position was increased in the year (2007)



TABLE 4.4

PARTICULARS

2008

AMOUNT

Rs.

2009

AMOUNT

Rs.

INCREASE

AMOUNT

Rs.

DECREASE

AMOUNT

Rs.

ASSETS:

CURRENT ASSETS

Inventory 3880115.603 9150310.374 5270194.771 1549135.562

Sundry Debtors 2311550.508 4431187.152 2119636.644 781506.553


Loans and Advances 10179277.86 9251176.824 ------ ------

Advance Tax ------ 311019.826 311019.826

Prepaid Expenses 32054.500 23164.140 ------ 8890.360

Accrued Income 292198.000 226382.200 ------ 65815.800

TOTAL CURRENT

ASSETS17288347.79 23764615.27 8066157.754 2446744.819

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LESS:

CURRENT LIABILITIES


TOTAL CURRENT

LIABILITIES9596597.936 7653014.565 1943583.371 ------


NET INCREASE IN

WORKING CAPITAL8419850.856 ------ ------ 8419850.856

TOTAL 16111600.71 16111600.71 9644434.612 9644434.612

Thus there is an increase in Net Working Capital Compared with the last year OPT

Consultancy servicesfinancial position was increased from in this year.

Source: Annual Report OPT Consultancy services, Chennai From 2005-2009

STATEMENT OF CHANGES IN WORKING CAPITAL

TABLE 4.5

PARTICULARS

2009

AMOUNT

Rs.

2010

AMOUNT

Rs.

INCREASE

AMOUNT

Rs.

DECREASE

AMOUNT

Rs.

ASSETS:

CURRENT ASSETS

Inventory 9150310.374 4708448.732 ------ 4441861.642

Sundry Debtors 4431187.152 3066217.179 ------ 1364969.973

Cash & Bank Balance 371374.749 925406.415 554031.666 ------

Loans and Advances 9251176.824

9270117.814 18940.99 ------

Advance Tax 311019.826 589869.330 278849.504 ------


Accrued Income 226382.200 169833.300 ------ 565489

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TOTAL CURRENT

ASSETS2376461.527 1887366.163 972426.878 5863380.515

LESS:

CURRENT LIABILITIES

Sundry Creditors 765301.4565 8550106.668 ------ 8970921.103

TOTAL CURRENT

LIABILITIES765301.4565 8550106.668 ------ 897092.103


NET DECREASE IN

WORKING CAPITAL------ 57880457 57880457 ------

TOTAL 16111600.71 16111600.71 6760472.628 6760472.628

Thus there is a Decrease in Net Working Capital in the year 2009 when

compared with the previous year of OPT Consultancy servicesSo the companys financial

position has to be increased.


RATIO ANALYSIS

4.2 MEANING OF RATIO:

A ratio is a mathematical relationship between two items expressed in a

quantitative form. Ratio can be defined as Relationship expressed kin quantitative terms

between figures which have cause and effect relationship which are connected with each

other in some manner or the other.

DEFINITION OF RATIO:

According to Accountants Hand Book by Wixon, Kell and Bedford, a

Ratio Is an expression of the quantitative relationship between two numbers.

LIQUIDITY RATIOS:

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It measures the ability of a company to meet its current obligations, and indicate

the short term financial stability of the company. The parties interested in the liquid ratio

would be employees, bankers and short-term creditors.

CURRENT RARIO:

Current Ratio may be defined as the ratio of Current Assets to Current Liabilities.

It is also known as Working Capital Ratio 2:1 ratio. Current Ratio shows the relationship

between total current assets and total current liabilities expressed as a formula.

Current Assets

CURRENT RATIO =

Current Liabilities

QUICK RATIO:

A measure of companys liquidity and ability to meet its obligations, Quick ratio,

often referred to as acid-test ratio, is obtained by subtracting inventories from current assets

and then dividing by current liabilities. Quick ratio is viewed as a sign of companys financial

strength or weakness (higher number means stronger, lower number means weaker).

Liquid/Quick assets

QUICK RATIO =

Current Liabilities

ABSOLUTE LIQUIDITY RATIO:

This is also known as super Quick Ratio (or) Cash Ratio. This ratio

considers only absolute liquidity available with the firm. Absolute Liquid assets include cash

in hand, cash at bank marketable securities. A standard of 0.5: 1 absolute liquidity ratio is

considered an acceptable norm. It is calculated as follows:

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Cash & Bank Balances

ABSOLUTE LIQUIDITY RATIO =

Current Liabilities

INVENTORY TURNOVER RATIO:

Inventory Turnover Ratio also known as stock turnover ratio in the

traditional language; usually establishes relationship between the cost of goods sold during a

given period and the average amount of Inventory outstanding during that period. Inventory

Turnover Ratio can be calculated by of the following formula:

Net Sales

INVENTORY TURNOVER RATIO =

Average Inventory

DEBTORS TURNOVER RATIO:

Receivables (or) Debtors normally include both debtors and Bill

Receivable and represent the uncollected portion of Credit sales receivables constitute an

important component of Current Assets and therefore the quality of receivables to a great

extent determines the liquidity of a firm. This Ratio can be calculated as follows:

Credit Sales

DEBTORS TURNOVER RATIO =

Debtor

CREDITORS TURNOVER RATIO:

This Ratio is similar to receivable turnover ratio. It compares the

Accounts Payable with the total credit purchases. It signifies the credit period enjoyed by the

firm in paying creditors. Accounts payable include both sundry creditors and bills payable. It

is calculated as follows:

Net Purchase

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CREDITORS TURNOVER RATIO =

Average creditors

FIXED ASSET TURNOVER RATIO:

This ratio indicates the extent to which the investment in fixed assets

contributes towards sales. If compared with a previous period, it indicates whether the

investment in fixed assets has been judicious or not, the Ratio is calculated as follows:

Sales

FIXED ASSET TURNOVER RATIO =

Net Fixed Assets

WORKING CAPITAL TURNOVER RATIO:

A measurement comparing the depletion of working capital to the generation

of sales over a given period, this provides some useful information as to how effectively a

company is using its working capital to generate sales.

Net Sales

WORKING CAPITAL TURNOVER RATIO=

Net Working Capital

CASH TO CURRENT ASSET RATIO:

The cash asset ratio is similar to the current ratio, except that the current

ratio includes current assets such as inventories in the numerator. Some analysts believe that

including current assets makes it difficult to convert them into usable funds for debt

obligations. The cash asset ratio is a much more accurate measure of a firm's liquidity

Cash

CASH TO CURRENT ASSET RATIO=

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Current Assets

CURRENT ASSET TURNOVER RATIO:

The ratio is calculated to ascertain the efficiency of use of current

assets of the concerns. With an increase in sales, current assets are expected to increase.

However, an increase in the ratio shows that current assets turned over faster resulting in

higher sales for a given investment in current assets. Higher ratio is generally an index of

better efficiency and profitability of the concern. This ratio gives a general impression about

the adequacy of working capital in reaction to sales.

Sales

CURRENT ASSET TURNOVER RATIO=

Current Assets

INVENTORY TO SALES RATIO:

Inventory to Sales Ratio indicates the manner in which a firms inventory in

turning. The inventory to sales ratio indicates the efficiency with which inventory turnover

into sales.

Inventory

INVENTORY TO SALES RATIO=

Sales

INVENTORY TO CURRETN ASSETS RATIO:

It indicates the amount of inventory in Current Assets. Any increase

amount of inventory indicates the lower liquidity as compared to the other Current Assets.

Average Inventory

INVENTOTY TO CURRENT ASSETS RATIO=

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Current Assets

DEBT UTILIZATION RATIOS

The debt utilization ratio measures the proportion of debt and low

efficiently management used the debt capital. The higher the ratio, the greater the amount

other peoples money being used in an attempt to generate profits

DEBT RATIO:

The Debt Ratio measures the proportion of total assets financed by the times

creditor. The lighter the ratio the greater the amount other peoples money being used in an

attempt to generate profits, the ratio is calculated as follows,

Total Liability

DEBT RATIO=

Total Assets

PROFITABILITY RATIOS:

These measures the overall effectiveness in terms of returns generated, with

profits being related to sales and adequacy of such profits as to sales or investment. The

profitability ratios are important to internal management, to bankers, to investors, and to the

owners.

GROSS PROFIT RATIO:

Gross Profit Ratio expresses the relationship of gross profit of sales to net sales

in terms of percentage, representing the percentage of gross profit earned on sales.

Gross Profit

GROSS PROFIT RATIO= *100

Net Sales

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ADMINISTRATIVE EXPENSES RATIO:

This Ratio is also known as supporting ratios operating ratio. They

indicate the efficiency with which business as a whole functions. It is better for the concern to

known how it is able to save or waste over expenditure in respect of different items of

expenses. Therefore each aspect of cost of sales & operation expenses are analyzed.

Administrative Expenses Ratio

ADMINISTRATIVEEXPENSESRATIO= *100

Net Sales

CURRENT RATIO:

Current Asset

CURRENT RATIO =

Current Liabilities

TABLE 4.2.1

Source: Annual Reports OPT Consultancy services, Chennai from 2005-010

27

YEAR CURRENT ASSETS

Rs

CURRENT LIABILTIES

Rs

RATIO

2005-06 35465.16 4106.607 8.63

2006-07 11668.93 15182.11 0.77

2007-08 17288.34 9596.59 1.8

2008-09 23764.61 7653.01 3.11

2009-10 18873.66 8550.106 2.21


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INTERPRETATION:

The Current Ratio measures the ability of the firm to meet its Current Liabilities.

The standard norms of Current Ratio are 2:1. From the above table it can be inferred that

the Current Ratio of OPT Consultancy servicesShows higher in the year 2005-06 (i.e.)

8.63%.But from 2006-07 to 2009-10 there has been continuously decreased (i.e.) 2.21.When

compare to previous years.

CURRENT RATIO:

FIGURE 4.2.1

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QUICK RATIO:

Liquidity Assets

Quick Ratio =

Current Liabilities

Where as (Quick Assets = Current Assets - (Stock + Prepaid Expenses)

29

8.63

0.77

1.8

3.11

2.21

0

1

2

3

4

5

6

7

8

9

RATIOS

2005-06 2006-07 2007-08 2008-09 2009-10

YEARS

CURRENT RATIOS

RATIOS


30/68

TABLE 4.2.2

Source: Annual Reports OPT Consultancy services Chennai from 2005-10

INTERPRETATION:

The Quick Ratio (or) Liquidity ratio gives a measure of Liquidity the expected

industry standard is 1:1. From the above table it can be inferred that the Quick Ratio of OPT

30

YEARS QUICK ASSETS

Rs

CURRENT LIABILTIES

Rs

RATIOS

2005-06 296263430 4106607.313 7.21

2006-07 6222661.813 1518211.675 0.41

2007-08 13376177.687 9596597.936 1.4

2008-09 14591140.756 7653014.565 1.91

2009-10 14021444.04 8550106.668 1.67


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Consultancy servicesincrease in trend from the year 2007-08 to 2009-10(i.e.) 1.40 to1.67.Has

a safe Liquidity position with the ratio of quick assets to current liabilities in the period from

the year 2007-08 to 2009-10 (i.e.) 1.40 to 1.67.When we compared to standard ratio 1:1 the

quick ratios are higher. So the company has good liquidity ratio for all year.

QUICK RATIO

FIGURE 4.2.2

31

7.22

0.41

1.4

1.911.67

0

1

2

3

4

5

6

7

8

RATIOS

2005-06

2006-07

2007-08 2008-09 2009-10

YEARS

QUICK RATIOS

RATIOS


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ABSOLUTE LIQUIDITY RATIO:

Cash & Bank Balances

Absolute Liquidity Ratio =

Current Liability

TABLE 4.2.3

YEARS

CASH & BANK BALANCE

Rs

CURRENT LIABILITIES

Rs RATIOS

2005-06 58403.077 55107605.94 0.001

2006-07 605026.901 15182116.746 0.04

2007-08 593151.324 9596597.936 0.03

2008-09 371374.749 7653014.565 0.01

2009-10 925406.415 8550106.668 0.05


INTERPRETATION:

From the above table it can be inferred that the OPT Consultancy serviceshas a high

Absolute Liquidity Ratio in the year 2007 (i.e.) 0.04 When compare to 2006 and the ratio

decrease from 2007-08 to 2008-09 (i.e.) 0.01 finally the ratio has increased in the year 2009

-10 (i.e.) 0.05.The ideal cash position is .05:1. So the companys cash position ratio is not

satisfactory.

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ABSOLUTE LIQUIDITY RATIO

FIGURE 4.2.3

33

0.001

0.04

0.03

0.01

0.05

0

0.005

0.01

0.015

0.02

0.025

0.03

0.035

0.04

0.045

0.05

RATIOS

2005-06 2006-07 2007-08 2008-09 2009-10

YEARS

ABSOLUTE LIQUIDITY RATIOS

RATIOS


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INVENTORY TURNOVER RATIO:

Net Sales

Inventory Turnover Ratio =

Average Inventory

TABLE 4.2.4

YEAR

NET SALES

Rs

AVERAGE INVENTORY

Rs RATIO

2005-

06

39377253.95

1

5825092.799 6.76

2006-07

57364832.075

5429251.165 10.57

2007-

08

63273345.62

5

3880115.603 16.31

2008-

09

77237254.71

3

9150310.374 8.44

2009-

10

89967678.58

3

4708448.732 19.11


INTERPRETATION:

34


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From the above table it can be inferred that the companys

Inventory increase in year 2005-06 to 2009-10 (i.e.) 6.76 to 19.11.has been increased in the

year 2010 (i.e.) 19.11.when compared to previous years

INVENTORY TURN OVER RATIO:

FIGURE 4.2.4

35

6.76

10.57

16.31

8.44

19.11

0

2

4

6

8

10

12

14

16

18

20

RATIOS

2005-06 2006-07 2007-08 2008-09 2009-10

YEARS

INVENTORY TURNOVER RATIO

RATIOS


36/68

DEBTORS TURNOVER RATIO:

Credit Sales

Debtors Turnover Ratio =

Debtors

TABLE 4.2.5

YEAR CREDIT SALES

Rs

DEBTORS

Rs

RATIO

2005-

06 39377253.95

1590439.77

6 24.76

2006-

07 57364832.08

3093057.06

1 18.55

2007-

08 63273345.63

2311550.50

8 27.372008-

09 77237254.71

4431187.15

2 17.43

2009-

10 89967678.53

3066217.17

9 29.34


36


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INTERPRETATION:

From the above table it can be inferred that the Debtors Turnover Ratio of

OPT Consultancy servicesincrease in the year 2005-06 to 2009-10 (i.e.) 24.76 to 29.34.shows

high in the year 2010 (i.e.) 29.34.When compare to previous years.

DEBTORS TURN OVER RATIO:

FIGURE 4.2.5

37


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Net Purchase

Creditors Turnover Ratio =

Average Creditors

TABLE 4.2.6

38

24.76

18.55

27.37

17.43

29.34

0

5

10

15

20

25

30

RATIOS

2005-06 2006-07 2007-08 2008-09 2009-10

YEARS

DEBTORS TURN OVER RATIO

RATIO


39/68

YEAR

NET PURCHASE

Rs

AVERAGE CREDITORS

Rs RATIO

2005-

06 34098754.434 4106607.313 8.30

2006-07 55053121.762 15182116.746 3.63

2007-

08 56214265.402 9596597.936 5.86

2008-

09 75714393.653 7653014.565 9.89

2009-

10 77310587.362 8550106.668 9.04


INTERPRETATION:

From the above table it can be inferred that the OPT Consultancy

servicescompanys creditors turnover ratio in year 2005-06 to 2007-08 (i.e.) 8.30 to 5.86 .has

been decreased by 29% in the year 2008 and the ratio finally increases in the year 2010 (i.e.)

9.04 when compared to the previous years.


FIGURE 4.2.6

39


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Sales

Fixed Assets Turnover Ratio =

Net Fixed Assets

TABLE4.2.7

40

8.3

3.63

5.86

9.89

9.04

0

1

2

3

4

5

6

7

8

9

10

RATIOS

2005-06 2006-07 2007-08 2008-09 2009-10

YEARS

CREDITORS TURNOVER RATIO

RATIO


41/68

YEAR SALES

Rs

NET FIXED ASSETS

Rs

RATIO

2005-

06

39377253.9

5 740010.6 53.21

2006-

07

57364832.0

8 986728.6 58.14

2007-

08

63273345.6

3 1700745.121 37.2

2008-

09

77237254.7

1 1621368.217 47.63

2009-

10

89967678.5

3 1664269.636 54.05


INTERPRETATION:

From the above table it can be inferred that the Fixed Asset Turnover Ratio of

OPT Consultancy services has increased by 58.14% in the year 2007, and the ratio finally

decreases in the year 2010 (i.e.) 54.05 when compare to previous years.


FIGURE 4.2.7

41


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Cash

Cash to Current Asset Ratio=

42

53.21

58.14

37.2

47.63

54.05

0

10

20

30

40

50

60

RATIOS

2005-06 2006-07 2007-08 2008-09 2009-10

YEARS

FIXED ASSET TURNOVER RATIO

RATIO


43/68

Current Assets

TABLE 4.2.8

YEAR CASH

Rs

CURRENT ASSET

Rs

RATIO

2005-

06 58403.077 35465168.1 1.65

2006-

07 605026.901 11668934.86 0.05

2007-

08 593151.324 17288347.79 0.03

2008-09 371374.749 23764615.27 0.02

2009-

10 925406.415 18873661.63 0.05


INTERPRETATION:

From the above table it can be inferred that the Ratio increase in the year 2005-06 to

2009-10 (i.e.) 1.65 to 0.05.The Cash to Current Asset Ratio shows higher in the year 2005-

06 (i.e.) 1.65.But from 2006-07 to 2009-10 there has been continuously decreased (i.e.) 0.05

when compared to previous year.

43


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FIGURE4.2.8


Sales

44

1.65

0.05 0.03 0.02 0.050

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1.8

RATIOS

2005-06 2006-07 2007-08 2008-09 2009-10

YEARS

CASH TO CURRENT ASSET RATIO

RATIO


45/68

Current Asset Turnover Ratio =

Current Assets

TABLE 4.2.9

YEAR SALES

Rs

CURRENT ASSETS

Rs

RATIO

2005-

06

39377253.9

5 335465168.1 1.11

2006-

07

57364832.0

8 11668934.86 4.92

2007-

08

63273345.6

3 17288347.79 3.66

2008-

09

772237254.

7 23764615.27 3.25

2009-

10

89967678.5

8 18873661.63 4.77


INTERPRETATION:

From the above table it can be inferred that the Current Asset Turnover Ratio

of OPT Consultancy servicesin year 2005-06 to 2009-10 (i.e.) 1.11 to 4.77.has been increased

which shows the satisfactory level of current asset correspondence to the sales in the

subsequent years and the ratio finally increases in the year 2010 (i.e.) 4.77 when compared to

the previous years


45


46/68

FIGURE 4.2.9


Inventory

Inventory to Sales Ratio=

46

1.11

4.92

3.66

3.25

4.77

0

0.5

1

1.5

2

2.5

33.5

4

4.5

5

RATIOS

2005-06 2006-07 2007-08 2008-09 2009-10

YEARS

CURRENT ASSET TURNOVER RATIO

RATIO


47/68

Sales

TABLE 4.2.10

YEAR INVENTORY

Rs

SALES

Rs RATIO

2005-

06 5825092.799

39377253.9

5 0.15

2006-

07 5429251.165

57364832.0

8 0.09

2007-

08 3880115.603

63273345.6

3 0.06

2008-

09 9150310.374

77237254.7

1 0.11

2009-

10 4708448.732

89967678.5

8 0.05


INTERPRETATION:

From the above table it can be inferred that the Inventory to Sales Ratio of OPT

Consultancy servicesHas been increased in the year 2008 (i.e.) 0.11.When compared to

previous years. But I the year2009, the ratio have been fall down to 0.05.

47


48/68


FIGURE 4.2.10

WORKING CAPITAL TURNOVER RATIO:

48

0.15

0.09

0.06

0.11

0.05

0

0.02

0.04

0.06

0.08

0.1

0.12

0.14

0.16

RATIOS

2005-06 2006-07 2007-08 2008-09 2009-10

YEARS

INVENTORY TO SALES RATIO

RATIO


49/68

Net Working Capital

WORKING CAPITAL TURNOVER RATIO =

Current Liabilities

TABLE 4.2.11

YEAR NET WORKING CAPITAL

Rs

CURRENT LIABILITIES

Rs

RATIO

2005-

06 31358560.79 4106607.313 7.63

2006-

07 3513181.88 15182116.75 0.23

2007-

08 7691749.854 9596597.936 0.8

2008-

09 16111600.71 7653014.565 2.1

2009-

10 10323554.96 8550106.668 1.2


INTERPRETATION:

From the above table it can be inferred that the Working Capital Turnover Ratio of OPT

Consultancy servicesThe Working Capital Turnover Ratio shows higher in the year 2006 i.e.

7.63% But from 2007 to 2010 there has been continuously decreased (i.e.) when compared to

previous years.

49


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WORKING CAPITAL TURNOVER RATIOS

FIGURE 4.2.15

50

7.63

0.23

0.8

2.1

1.2

0

1

2

3

4

5

6

7

8

RATIOS

2005-06 2006-07 2007-08 2008-09 2009-10

YEARS

WORKING CAPITAL TURNOVER

RATIO

RATIOS


51/68

INVENTORY TO CURRE NT ASSET RATIO:

Average Inventory

Inventory to Current Asset Ratio =

Current Assets

TABLE 4.2.12

51

YEAR

AVERAGE INVENTORY

Rs

CURRENT ASSET

Rs RATIO

2005-

06 5825092.799 35465168.1 0.16

2006-

07 5429251.165 11668934.86 0.47

2007-

08 38801156.503 17288347.79 0.22

2008-09 9150310.374 2376415.27 0.39

2009-

10 4708448.732 18873661.63 0.25


52/68


INTERPRETATION:

From the above table it can be inferred that the companys Inventory to

Current Asset Ratio in the year 2005-06 to 2009-10 (i.e.) 0.16 to 0.25.has increased by 0.25%

in the year 2010 when compare to previous year.

INVENTORY TO CURRENT ASSET RATIO

FIGURE 4.2.12

52


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GROSS PROFIT RATIO:

Gross Profit

Gross Profit Ratio= * 100

Net Sales

53

0.16

0.47

0.22

0.39

0.25

0

0.05

0.1

0.15

0.2

0.25

0.3

0.35

0.4

0.45

0.5

RATIOS

2005-06 2006-07 2007-08 2008-09 2009-10

YEARS

INVENTORY TO CURRENT ASSET

RATIO

RATIO


54/68

Where as (Gross Profit = Net Sales- Cost of Goods Sold)

Cost of Goods Sold = (Opening Stock+ Purchase Less Returns-Current

Liabilities)

Net Sales = (Sales- Sales Return).

TABLE 4.2. 13

YEAR GROSS PROFIT

Rs

CURRENT ASSET

Rs

RATIO

2005-

06 3753475.257 39377253.951 9.53

2006-

07 4171996.853 57364832.075 7.27

2007-

08 5509944.653 63273345.625 8.71

2008-

09 6793055.831 77237254.713 8.80

2009-

10 8215229.528 89967678.583 9.13


INTERPRETATION:

From the above table it can be inferred that the companys Gross Profit Ratio

increase in year 2005-06 (i.e.) 9.53. But from 2005-06 to 2009-10 there has been slowdown

to some extent, when comparing to the previous years.

GROSS PROFIT RATIO

FIGURE 4.2.13

54


55/68

ADMINISTRATIVE EXPENSES RATIO:

Administrative Expenses

Administrative Expenses Ratio= *100

Net Sales

55

9.53

7.27

8.71 8.89.13

0

1

23

4

5

6

7

8

9

10

RATIOS

2005-06 2006-07 2007-08 2008-09 2009-10

YEARS

GROSS PROFIT RATIO

RATIO


56/68

TABLE 4.2.14

YEAR

ADMINISTRATIVE EXPENSES RATIO

Rs NET SALESRs

RATIO

2005-

06 6660618.145 39377253.951 16.91

2006-

07 9805865.796 57364832.075 17.09

2007-

08

11598635.776 63273345.62

5

18.33

2008-09 13919612.840 77237254.713 18.02

2009-

10

14236372.803 89967678.58

3

15.82


INTERPRETATION:

From the above table it can be inferred that the companys

Administrative Expenses Ratio in year 2005-06 to 2009-10 (i.e.) 16.91 to 15.82.has been

increased in the year 2006 (i.e.) 16.91. In the year 2010 the Administrative Expenses Ratio

has been decreased (i.e.) 15.82.When compared to previous years


56


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FIGURE 4.2.14

TREND ANALYSIS

57

16.9117.09

18.33

18.02

15.82

14.5

15

15.5

16

16.5

17

17.5

18

18.5

RATIOS

2005-06 2006-07 2007-08 2008-09 2009-10

YEARS


RATIO


58/68

4.3 MEANING TREND ANALYSIS:

Trend analysis is one of the important tools of analyzing the financial

data. It computes the percentage changes for different variables over a long period and then

makes a comparative study of them. The trend percentage helps the analyst to study the

changes that have occurred darning the period. Such an analysis indicates the progress by

showing ups and downs in its activities

FINANCIAL TREND ANALYSIS is the process of analyzing financial statements of

a company for any continuing relationship. Generally, an analysis is made to find out what

direction a concern is going, how rapidly, and whether there are enough resources to

complete proposed projects.

An aspect of technical analysis that tries to predict the future movement of a stock based on

past data. Trend analysis is based on the idea that what has happened in the past gives traders

an idea of what will happen in the future.

There are three main types of trends: short-, intermediate- and long-term.

CURRENT ASSET:

58


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TABLE 4.3.1

Y = a + bX Where a = Y ; b = XY

n X2

Current assets value for 2010 11 will be about Rs.34, 06, 45,447

CURRENT ASSET: FIGURE 4.3.1

FIXED ASSET:

59

YEAR

CURRENT ASSET

(Y) X XY X2 Y = a + b x

2005-

06

35465168.1 -2 -70930336.2 4 17194678.994

2006-

07

11668934.86 -1 -11668934.86 1 19303412.247

2007-

08

17288347.79 0 0 0 21412145.52

2008-

09

23764615.27 1 23764615.27 1 25629611.91

2009-

10

18873661.63 2 37747323.26 4 29847078.32

Y=107060727.7 X=0 XY=2108733

2.53

X2=1

0


60/68

TABLE 4.3.2


n X2

Fixed assets value for 2010 11 will be about Rs. 2, 08, 75,71.738

FIXED ASSET FIGURE 4.3.2

CASH & BANK BALANCE:

60

YEAR

FIXED ASSET

(Y) X XY X2 Y = a + b x

2005-06

740010.600 -2 -1480021.2 4 845992.897

2006-07

986728.600 -1 -986728.6 1 1094308.666

2007-08

1700745.121 0 0 0 1342624.435

2008-09

1621368.217 1 1621368.217 1 1590940.204

2009-10

1664269.636 2 3328539.272 4 1839255.973

Y=6713122.174 X=0 XY=2483157.689 X2=10


61/68

TABLE 4.3.3


n X2

Cash Requirement for 2010 11 will be about Rs. 96, 07,788.49

CASH & BANK BALANCES

FIGURE 4.3.3

INVENTORY

61

YEAR CASH & BANK X XY X2 Y = a + b x

2005-06

58403.077 -2 -116806.154 4 210601.589

2006-

07

605026.901 -1 -605026.901 1 360637.041

2007-

08

593151.324 0 0 0 510672.493

2008-

09

371374.749 1 371374.749 1 660707.945

2009-

10

925406.415 2 1850812.83 4 810743.397

Y=2553362.466 X=0 XY=1500354.524 X2=10


62/68

TABLE 4.3.4


n X2

Stock level for 2010 11 will be about Rs. 6, 24, 49,75.056

INVENTORY

FIGURE 4.3.4

SUNDRY DEBTORS

62

YEARS INVENTORY X XY X2 Y = a + b x

2005-06 5825092.799 -2 -11650185.6 43879602.726

2006-07

5429251.165 -1 -5429251.165 1

5649866.627

2007-08

3880115.603 0 0 0

5798643.734

2008-09 9150310.374 1 9150310.374 1

5947420.841

2009-10

4708448.732 2 9416897.464 4

6096197.948

Y=28993218.67 X=0 XY=1487771.073 X2=10


63/68

TABLE 4.3.5


n X2

Sundry Debtors for 2010 11 will be about Rs. 3, 63, 33,95.805

SUNDRY DEBTORS

FIGURE 4.3.5

63

YEARS SUNDRY DEBTORS

(Y)

X XY X2 YC= a + b x

2005-061590439.776 -2 -3180879.552 4 1488553.358

2006-07 3093057.061 -1 -3093057.061 1 1917521.847

2007-082311550.508 0 0 0 2346490.336

2008-094431187.152 1 4431187.152 1 2775458.825

2009-103066217.179 2 6132434.358 4 3204427.314

Y=11732451.68 X=0 XY=4289684.897 X2=10


64/68

CHAPTER V

FINDINGS:

In the year of 2005-06, 2006-2007 and 2007-2008 shows increase in

64


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Working Capital. This indicates that the company has ability of

payment of short-term Liability.

The fixed assets ratio indicates that the working capital of thiscompany is funded by long-term funds which indicate efficient funds

management.

The Short term Liquidity and long- term Liquidity position of the

concern were studied to evaluate the Working Capital of the concern.

During the study period 2005 - 2006 to 2009-2010 the current ratio

of the concern varied from 8.63 to 2.21.But 2007-08 to 2008-09 is

varied from 0.77 to 1.80. This was much less than the prescribed of

2:1. The inference is that the Current Liability may not be easily met

out of Current Asset by the Company.

The Quick ratio of the concern during the period 2005-06 to 2009-10

the study is varied from 7.22 to 1.67.Which was much greater than

the prescribed standard of 1:1.So the company Liquidity level issatisfactory.

In Trend analysis the Cash &Bank Balance have been increased from

2005-05 to 2008-09.So it shows the Cash position of the company is

good.

SUGGESTION:

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The company is a profit seeking one; it has to commit all of its

resources to achieve its goal. To achieve this, profitability, liquidity

and solvency position a crucial elements to be monitored carefully,

thereby the trade off can be reached

This companys ability to meet its current obligations is satisfactory

though it does not meet the conventional norm. This company

maintains current liabilities more than the amount of current assets

which has to be viewed seriously and improvement of this ratio is

required to achieve the optimum level.

Stock Turnover Ratio should be maintained at the constant level.

The Cash & Bank Balances of the company is good.

Using trend analysis it can be suggested that the fixed assets curve

shows steady upward direction much than the current assets curve,

which enable us to understand the companys funds are dumped in

fixed asset, it is not a favorable condition to the company

CONCLUTION:

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The present study reveals that the liquidity position of this company is comparatively good

as it approaches the standard norms throughout the period of study. On the

whole, it can be concluded that the companys overall risk evaluation process is

not at desired level and the author has made the realistic recommendation for

the improvement in operational and managerial efficiency of the company as to

maintain and increase further by effective utilization and control of all the

assets.

BIBILIOGRAPHY

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Management accounting - S.N.MAHESHWARY

Financial management - I.M.PANDEY

Research methodology - C.R.KOTHARI

Management accounting - R.S.N.PILLAI

&

BAGAVATHI

Web site:

www.google.com

www.finance.org
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A Study on Working Capital Management in Opt Consultancy Services-data Updated