DEVA Working Capital Project

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DESERTATION PROJECT REPORT

ON

A study of WORKING CAPITAL OF SUBHAS JITH

ENGINEERING

Submitted for partial fulfillment of award of POST GRADUATES OF DIPLOMA

IN MANAGEMENT

BY

DEBASHISH ROY

PGDM l Year, 5rd

trimesters

1/3/2012 To 15/3/2012

DAYANANDA SAGAR BUSINESS SCHOOL

Shavige Malleshwara Hills, kumaraswamy layout Bangalore-560078


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ACKNOWLEDGEMENT

I take this as an opportunity to thank with bottom of my hear all those without whom the journey

of doing my project would not have been as pleasant as it has been to me. Working on my project

was a constant learning experience with all sweat and tear which was its due but not without

being richly stimulating experience of life time.

I am very thankful to SUSMITA SARKAR for giving me their valuable advice and guidance

towards fulfillment of the project

Finally I would like to convey my heartiest thanks to all my well wishers for their blessing and

co-operation throughout my study. They boosted me up every day to work with a new and high

spirit.

Debashish Roy


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CONTENTS

TOPIC

Introduction

Introduction of working capital

Objective of study

Scope of study

Introduction of organization

Research Methodology

Data reduction, presentation & interpretation

Ratio analysis

Trend analysis

Summary & Conclusion

Facts &Findings

Recommendation & Suggestion

Bibliography


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INTRODUCTION OF WORKING CAPITAL

Finance is one of the major elements that activate the overall growth of the economy. Finance is

the life blood of economic activity. A well - knit financial system directly contributes to the

growth of the economy. An efficient financial system calls for the efficient performance of

institution, financial instruments and financial markets.

Finance which acts as the lifeblood in the modern business types is one of the most important

consideration for an entrepreneur-company. While Implementing,expanding, diversifying,

modernizing or rehabilitating any project the meaning of finance is better understood. In this

section we have covered finance related information and the process of managing the same.

Finance is a science of managing money and other assets. It is the process of channelization offunds in the form of invested capital, credits, or loans to those economic agents who are in need

of funds for productive investments or otherwise. E.g. On one hand, the consumers, business

firms, and governments need funds for making their expenditures, pay their debts, or complete

other transactions. On the other hand, savers accumulate funds in the form of savings deposits,

pensions, insurance claims, and savings or loan shares, etc which becomes a source of investment

funds. Here, finance comes to the fore by channelling these savings into proper channel of

investment.

In general, finance is that business activity which is concerned with acquisition and Conservation

of capital funds in meeting financial needs and over all objectives of a business entrepreneur.

Finance is the common denominator for a vast range of corporate. Projects and the major part of

any corporate plan must be expressed in financial terms.

The main reasons a business needs finance are to:

Start a business

Finance expansions to production capacity

To develop and market new products

To enter new markets


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Take-over or acquisition

Moving to new premises

To pay for the day to day running of business

MEANING OF WORKING CAPITAL

Working capital refers to the management of current assets.

Working capital refers to that part of total capital which is used for carrying out the routine or

regular business operation. In other words, it is the amount of funds used for financing the day-

to-day operation. In short, it is the capital with which the business is worked over.

Thus, the capital invested and locked up in various current assets, such as stocks of raw material,work in progress , stocks of finished goods account receivable and cash and bank balances

constitutes the working capital.

Working capital may be regarded as life blood of a business. Its effective provision can do much

to ensure the success of a business while its in provision can do much to ensure the success of a

business while its in efficient management can lead not only to loss of profits but also to the

ultimate downfall of what otherwise might be considered as a promising concerns.

> According to shoo-in, Working Capital is the amount of funds necessary to cover the cost of

operating the enterprise. Working Capital is also known as Revolving or Circulating Capital.

> According to Genesterberg, Circulating Capital means current assets of a company that are

changed in the ordinary cause of business from one to another form. Example: From cash to

inventory, inventories to bills receivable and bills receivable to cash.


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Concept of working capital

There are five concepts of working capital:-

Gross Working Capital Net Working Capital

Negative working capital

Permanent working capital

Variable working capital

On the basis of the components or items comprised in working capital, working capital can be

classified into the following types:

Gross Working capital: Simply called as working capital, refers to the firms investment in

current assets. Current assets which can be converted in to cash with in the accounting year (or

operating cycle) and includes cash, short term securities, debtors, Bills receivable and stock

(inventory) .

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 with in

a year and include creditors, Bills payable and outsiders expenses.

Negative working capital or working capital deficit: means the excess of current liabilities over

the current assets. It accurse when the current liabilities exceed the current assets

Permanent working capital or fixed working capital: refer to the minimum amount of investment

in current assets required throughout the year for carrying out the business. In other words , it is

the amount of working capital which remains in the business permanently in one form or other.

Variable working capital or fluctuating working capital: refer to the amount of working capitalwhich goes on fluctuating or changing from time to time with the change in the volume of

business activities.

Ratios :

The term ratio simply means one number expressed in terms of another. It describes in

mathematical terms the quantitative relationship that exists between two numbers.


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NEED FOR WORKING CAPITAL

Every business undertaking requires funds for two purposes, investments in fixed assets &

investment in current assets.

Funds required for investing in inventory, debtors & other current assets keep changing in shape

& volume. Company has some cash in the beginning; this cash may be the source of raw

material, keeping the labor cost & other overheads. These three combined would generate work

in progress, which will be converted into finished goods on the completion of the production

process into debtors & when the debtor pay, the firm may generate cash. Working capital is

needed for sustaining (i.e., maintaining) the sales activities. If adequate working capital is not

maintain for this period ,the firm will not be able to sustain or maintain the sales , since it may

not be in a position to purchase raw material and pay wages and other expenses and produce the

goods required for the sales.

NATURE OF WORKING CAPITAL

In ordinary parlance, Working Capital is taken to be the fund available for meeting day-to-day

requirements of enterprises. It cannot be denied that a part of the fixed or permanent capital is

invested in assets, which are kept in the business or for a long period for the purpose of earning

profit. These are usually known as fixed assets viz. Land & buildings, plant & machinery,

furniture & fitting & intangibles like goodwill, patents, trademarks & long-term investment.

Another part of permanent capital left in the business for supporting the day-to-day normal

operation is known as the Working Capital. This Working Capital generates the important

element of cost viz. Material, wages & expenses. These cost usually lead to production & sales in

case of manufacturing concerns & sales alone in others. These costs occur gradually in a flow &

do not come into being abruptly at a given moment.

Hence the initial investment of cash as working capital for this specific purpose has to be

continued until the sales revenue commences flowing in substantially & in a regular way. From

this stage the business is found to acquire a momentum of its own. The flow of revenue is

expected to continue to replace the cost lost in its day-to-day out flow for the generation of the

revenue mentioned above.


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SOURCE OF WORKING CAPITAL

The financial manager is always interested in obtaining the working capital at the right time, at a

reasonable cost and at the best possible favorable terms. A part of the working capital investment

are permanent investments is fixed assets. The following is snapshot of various source of

working capital.

Sources of working capital divided into two

Long term

Short term

Sources of long term working capital

Issue of shares

Floating of debentures

Ploughing back of profit

Loans

Public deposit

Sources of short-term working capital

Internal sources

Depreciation

Taxation

Accured expenses

External sources

Trade credit

Credit papers

Bank credit

Customers credit

Govt. Assistances

Loans from director

Security of employees


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WORKING CAPITAL CYCLE:-

The working capital of a concern goes on changing in shape and volume. For Instance, a concern

may have some cash in the beginning. The cash may be used by the concern for the purpose of

purchase of raw material, payment of wages and other expenses. These elements of cost or items

of expenses, raw material , wages and overheads , will result in work- in-progress during the

process of manufacture. On the in compilation of the production process, the work- inprogress

becomes finished goods.

Meaning

The length of time involved in this cycle of conversion of cash into raw material, raw material

into work-in progress, work-in-progress into finished goods, finished goods into debtors and

debtors into cash again is called the operating cycle or working capital cycle of the firm, in other

words, it is period between the date raw material are purchased and the date the sale proceeds of

finished goods are realized by concern.

INTER-DEPENDENCE AMOUNG COMPONENTS OF WORKING CAPITAL

OPERATING CYCLE :

A company starting with cash purchase raw materials, components etc., on a cash or credit basis.

These materials will be converted into finished goods after undergoing various stages of work-in-process. For this purpose the company has to make payments towards wages, salaries and

manufacturing costs. Payments to suppliers have to be made on purchases in the case of cash

purchases and on the expiry of the credit purchases. Further, the company has to meet other

operating costs such as selling and distribution costs, general administration costs and non-

operating costs described as financial costs (interest on borrowed capital). In case the company

sells its finished goods on cash basis, it will pass through one more stage, viz, accounts

receivable and gets back cash along with profit on expiry of credit period. Once again the cash

will be used for the purchase of materials and / or payments to suppliers and the whole cycle is

termed as working capital or operating cycle repeats itself. This process indicates the dependents

of each stage or components of working capital on its previous stage or component.


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WORKING CAPITAL MANAGEMENT

Introduction

Working capital management is one of the most important aspects of financial management. It

forms a major function of the finance manager.

Meaning:

Working capital management means management or administrating of all aspect of working

capital, i.e., currents assets and currents liabilities.

In other words of Smith, working capital management is concerned with the problems that arise

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

exists between them.

BASIC OBJECTIVE OF WORKING CAPITAL MANAGEMENT:

The basic objective of working capital management is to manage the firms working capital (i.e.,

currents assets and currents liabilities) in such a way that a satisfactory level of working capital

(i.e., neither excessive nor inadequate working capital) is maintained. This is necessary because,

if the working capital is excessive or large, the liquidity position of the firm would, no doubt,

improve, but its profitability would be adversely affected, as funds would remain idle.

Conversely, if the working capital is too small, the, profitability of the firm may improve, but the

liquidity position of the firm would be adversely affected.

Advantages of working capital:

It helps the business concern in maintaining the goodwill.

It can arrange loans from banks and others on easy and favorable terms.

It enables a concern to face business crisis in emergencies such as depression.

It creates an environment of security, confidence, and overall efficiency in a business.

It helps in maintaining solvency of the business.

Disadvantages of working capital:

Rate of return on investments also fall with the shortage of working capital.

Excess working capital may result into over all inefficiency in organization.


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Excess working capital means idle funds which earn no profits.

Inadequate working capital cannot pay its short term liabilities in time.

OBJECTIVES OF THE PROJECT

The objectives of study

1) To identify the financial strengths & weakness of the company.

2) Through the net profit ratio & other profitability ratio, understand the profitability of the

company.

3) Evaluating company s performance relating to financial statement analysis.

4) To know the liquidity position of the company with the help of current ratio.

5) To find out the utility of financial ratio in credit analysis & determining the financial capacity

of the firm.

Scope of the study

1. From this project we would study the various methods of the working capital

management.

2. The project will be a learning of planning and financing working capital.

3. The project would also be an effective tool for future policies of the companies.

4. This will show different methods of holding inventory and dealing with cash and

receivables.

5. This will show the liquidity position of the company and also how do they maintain a

particular liquidity position.


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COMPANY PROFILE

SUBHAS JITH ENGENEERINGS is a multi-division and multi-location conglomerate. It

possesses 15 manufacturing plants in India. The company was promoted by Subhas jith is the

Managing Director of the Company. It is headquartered in Kolkata, India, and its shares are listed

in the Calcutta Stock Exchange.SUBHAS JITH ENGENEERINGS specialises in the manufacture of Ship Repairer, Fabricator,

Engineering, metal products.

The company's metal packaging products Large Diesel Engine, Gene-sets, Air-compressors,Pumps of all types, heat-exchangers, Electrical machines, limited to 440 volts, any sort of

fabrication jobs, like small M. S. Reservoirs, M. S. Gates or similar structures, according to

Customers Specifications. Kindly note that our Organisation is fully equipped with all types

machines

Needed for repairs, including Machine Shop, good nos of welding sets. Etc. We are having a

team of highly skilled operatives, well experienced in all sorts repair jobs, as detailed above, anda team of Marine Engineers & Naval Architects in our Consulting as well as in supervising

panels.

The company has now diversified into the production of rolled products, secondary specification

alloys and galvanised steel.

The companys wholly owned subsidiary in Raipur, and is the market leader in ROPP caps and

crown corks in Raipur. It has also set up facilities for the manufacture of galvanised steel, metal

colour coated sheets and coils and secondary specification alloys.

The main markets of Subhas jith Engineerings:-

North America

South America

Western Europe

Eastern Europe

South east Asia

Mid East

Africa

Oceania


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RESEARCH DESIGN

General Methodology

The study was carried on an explorative basis using accounting and financial data.

The procedures followed in this study consist of following steps:

1) The research includes figurative and diagrammatic interpretation for the ease of

comparison.

2) Understanding of ship building industry in domestic scenario.

3) Determining the demand and supply in near future to understand the future prospect of

the industry.

Research Methodology

Research methodology that is used here was purely exploratory because we know it is

used when one is seeking insight in to the general nature of the problem possible decision

alternatives and relevant variables that need to be considered.

This resistance also help full / use full for establishing priorities among research questions

and for learning about practical problems of carrying out the research.


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e) The communication of that has happened between two accounting the dates are revealed

effective Action.

f) Simple assessments of liquidity, solvency profitability efficiency of the firm are indicted by

ratio analysis. Ratios meet comparisons much more valid.

Disadvantages:

Ratio analysis is to calculate and easy to understand and such statistical calculation stimulation

thinking and develop understanding. But there are certain drawbacks and dangers they are.

i)There is a trendy to use to ratio analysis profusely.

ii)Accumulation of mass data obscured rather than clarifies relationship.

iii) Wrong relationship and calculation can lead to wrong conclusion.

1. In case of inter firm comparison no two firm are similar in size, age and product unit.(for

example) one firm may purchase the asset at lower price with a higher return and another firm

witch purchase the asset at asset at higher price will have a lower return)

2. Both the inter period and inter firm comparison are affected by price level changes. A change

in price level can affect the validity of ratios calculated for different time period.

3. Unless varies terms like group profit, operating profit, net profit, current asset, current liability

etc., are properly define, comparison between two variables become meaningless.

4. Ratios are simple to understand and easy to calculate. The analyst should not take decision

should not take decision on a single ratio. He has to take several ratios into consideration.

STANDARDS OF COMPARISION:

1. Ratios calculated from the past financial statements of the same firm.

2. Ratio developed using the projected or perform financial statement of the same firm

3. Ratios of some selected firm especially the most progressive and successful, at the same point

of time.

4. Ratios of the industry to which the firm belongs.


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IMPORTANCE OF RATIO ANALYSIS

In the preceding discussion in the form, we have illustrated the compulsion and implication of

important ratios that can be calculated from the Balance Sheet and Profit & Loss account of a

firm. As a tool of financial management, they are of crucial significance. The importance of ratio

analysis lies in the fact and enables the drawing of inferences regarding the performance of a

firm. Ration analysis is a relevant in assessing the performance of a firm in respect of the

following aspect.

CAUTION IN USING RATIOS:

1. It is difficult to decide on the proper bases of comparison.

2. The comparison rendered difficult because of difference in situation of two companies or of

one-company for different years.

3. The price level change makes the interpretation of ratios invalid.

4. The difference in the definition of items in the balance sheet and Profit & Loss statement make

the interpretation of ratios difficult.

5. The ratios calculated at a point of time are less informative and defective as they suffer from

sort term changes.

6. The ratios are generally calculated from the past financial statement and thus are no indicators

of future


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CURRENT RATIO : The relationship of current assets to current liabilities is known as current

ratio. It is also known as bankers ratio or working capital ratio.

1. CURRENT RATIO

It is relationship between firms current assets and current liability.

Current assets

Current ratio = _______________________________

Current liability

TABLE 1

STATEMENT SHOWING CURRENT RATIO

Rs in lakhs

YEAR 2006 -2007 2007-2008 2008-2009 2009-2010 2010-11

CURRENT

ASSETS

1633078 2106400 2770400 3690107 4293481

CURRENT

LIABILITIES

1032002 1442000 2002230 2833290 3244172

CURRENT RATIO 1.58 1.46 1.38 1.30 1.32

SOURCE: SECONDARY DATA FROM SUBHAS JITH ENGENEERINGS ANNUAL REPORTS

INTERPRETATION

The current ratio is a test of the short term solvency of the business enterprise since this ratio

assumes current assets could be converted into cash to meet current liabilities.

It is often accepted that current assets should be 2times the current liabilities.


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Current ratio during the year 2006 -2007 was 1.58 and its come down in 1.46 at 2007-2008 and

its again decreased 20082009 and 2009-2010 and its slightly increased in 1.32 at 2010-2011.

The standard norm for this ratio is 2:1 required.

SUBHAS JITH ENGENEERINGS should maintain sufficient amount of current assets in order

to maintain the standard form of current ratio.

CHART 1

CURRENT RATIO

0

0.2

0.4

0.6

0.8

11.2

1.4

1.6

1.8

2006-2007 2007-2008 2008-2009 2009-2010 2010-2011

current ratio

current ratio


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QUICK RATIO: It establishes the relationship of a companys current assets that can be quickly

converted into cash and its current liabilities.

QUICK RATIO

It is relationship between liquid assets and current liabilities.

Liquid assets

Quick ratio = _________________________

Liquid Liabilities

TABLE2

STATEMENT SHOWING QUICK RATIO

Rs in lakhs

YEAR 2006 -2007 2007-2008 2008-2009 2009-2010 2010-2011

LIQUID ASSETS 1258640 1684600 2216978 2906405 3369935

LIQUID

LIABILITIES

1032002 1442000 2002230 2833290 3244172

LIQUID RATIO 1.22 1.17 1.10 1.03 1.04


INTERPRETATION

It is in fact the measure of the Instant debt paying ability of the business enterprise.

The quick ratio in the year 2006-2007 was 1.22 and its decreased 0.04% at 2007 and 2008 (1.17)

and in 2008-2009 get decreased 0.06% (1.10) and 2009-2010 get decreased 0.063% (1.03) and its

get increase in slightly on 2010-2011 at 0.001%(1.04). The standard norm for this ratio is 1:1,

means for every 1 rupee of current liability, company must have 1 rupee of quick assets.


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Objectives of cash management:

There are two basic objectives of cash management. They are-

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

To minimize the amount locked up as cash balances.

Basic problems in Cash Management:

Cash management involves the following four basic problems.

Controlling level of cash

Controlling inflows of cash

Controlling outflows of cash and

Optimum investment of surplus cash.

Determining safety level for cash:

The finance manager has to take into account the minimum cash balance that the firm must keep

to avoid risk or cost ofrunning out of funds. Such minimum level may be termed as safety level

of cash. The finance manager determines the safety level of cash separately both for normalperiods and peak periods. Under both cases he decides about two basic factors. They are-

Desired days of cash:

It means the number of days for which cash balance should be sufficient to cover payments.

Average daily cash flows:

This means average amount of disbursements which will have to be made daily.


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Criteria for investment of surplus cash:

In most of the companies there are usually no formal written instructions for investing the surplus

cash. It is left to the discretion and judgment of the finance manager. While exercising such

judgment, he usually takes into consideration the following factors-

Security:

This can be ensured by investing money in securities whose price remains more or less stable.

Liquidity:

This can be ensured by investing money in short term securities including short term fixed

deposits with banks.

Yield:

Most corporate managers give less emphasis to yield as compared to security and liquidity of

investment. So they prefer short term government securities for investing surplus cash.

Maturity:

It will be advisable to select securities according to their maturities so the finance manager can

maximize the yield as well as maintain the liquidity of investments.


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Cash Management in Subhas jith Engineerings :

The cash management is carried out in seaways by CTM (Corporate Treasury Management).

CTM is a commonly followed procedure in most of the companies.

Now we see the cash ratio / quick ratio in Subhas jith Engineerings

CASH RATIO

It is relationship between cash and current liabilities.

Cash

Cash ratio = _______________________

Current liabilities

STATEMENT SHOWING CASH RATIO

TABLE 3

Rs in lakhs

YEAR 2006 -2007 2007-2008 2008-2009 2009-2010 2010-2011

CASH 413398 580900 838600 1031467 979008

CURRENT

LIABILITIES

1032002 1442000 2002230 2833290 3244172

CASH RATIO 0.40 0.40 0.42 0.36 0.30


INTERPRETATION

The Cash ratio of SUBHAS JITH ENGENEERINGS in the 2006-2011 was fluctuation in 2010-2011 it

was 0.30 times and in 2007-2008 it was 0.40 times and 2008-2009 it was reduced to 0.42.

The standard norms of absolute quick ratio are 0.5:1. From the above table the firms not

maintain the sufficient level of quick assets because of the day-to-day expenses .It is fluctuating

between the standard norms for this ratio is 1:2 means for every 2 rupees of current Liabilities,


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Company must have 1 rupee of cash and bank balance and marketable securities.

CHART- 3

CASH RATIO

RECEIVABLES MANAGEMENT

Introduction:

Receivables constitute a significant portion of the total assets of the business. When a

firm seller goods or services on credit, the payments are postponed to future dates and

receivables are created. If they sell for cash no receivables created.

Meaning:

Receivable are asset accounts representing amounts owed to the firm as a result of sale of goods

or services in the ordinary course of business.

0

0.05

0.1

0.15

0.2

0.25

0.3

0.35

0.4

0.45

2006-2007 2007-2008 2008-2009 2009-2010 2010-2011

cash ratio

cash ratio


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Purpose of receivables:

Accounts receivables are created because of credit sales. The purpose of receivables is directly

connected with the objectives of making credit sales. The objectives of credit sales are as

follows-

Achieving growth in sales.

Increasing profits.

Meeting competition.

Factors affecting the size of Receivables:

The main factors that affect the size of the receivables are-

Level of sales.

Credit period.

Cash discount.

Costs of maintaining receivables:

The costs with respect to maintenance of receivables are as follows-

Capital costs:

This is because there is a time lag between the sale of goods to customers and the payment by

them. The firm has, therefore to arrange for additional funds to meet its obligations.

Administrative costs:

Firm incur this cost for manufacturing accounts receivables in the form of salaries to the staff

kept for maintaining accounting records relating to customers.

Collection costs:

The firm has to incur costs for collecting the payments from its credit customers.


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Defaulting costs:

The firm may not able to recover the over dues because of the inability of customers. Such debts

treated as bad debts.

Receivables management:

Receivables are direct result of credit sale. The main objective of receivables management is to

promote sales and profits until that point is reached where the ROI in further funding of

receivables is less than the cost of funds raised to finance that additional credit (i.e.; cost of

capital). Increase in receivables also increases chances of bad debts. Thus, creation of receivables

is beneficial as well as dangerous. Finally management of accounts receivable means as the

process of making decisions relating to investment of funds in this asset which result in

maximizing the overall return on the investment of the firm.

Receivables management and Ratio Analysis:

Ratio Analysis is one of the important techniques that can be used to check the efficiency with

which receivables management is being managed by a firm. The most important ratios for

receivables management are as follows-


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INTERPRETATION

Debtors constitute an important constituent of current assets and therefore the quality of the

debtors to a great extent determines a firms liquidity. It shows how quickly receivables or

debtors are converted into cash. In other words, the DTR is a test of the liquidity of the debtors of

a firm. The liquidity of firms receivables can be examined in two ways they are DTR and

Average Collection Period. .The higher the ratio, the better it is, since it would indicate that debts

are being collected promptly.

In the year 2010 - 2011 the debt is 1.59 comparing to the previous year came downwards.

CHART- 4

DEBTOR TURNOVER RATIO

DEBT COLLECTION PERIOD

Debtors collection period is nothing but the period required to collect the money from the

customers after the credit sales. A speed collection reduces the length of operating cycle and vice

versa. The more quickly the customers pay, the less risk from bad debts, the lower the expenses

of collection and more liquid the nature of of this asset.

1.45

1.5

1.55

1.6

1.65

1.7

1.75

1.8

1.85

1.9

debtor turnover ratio

debtor turnover ratio


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It indicates the speed with which debts are collected.

Days/months in a year

Debt collection period = _______________________________

Debtors turnover ratio

TABLE 5

Rs in lakhs

YEAR 2006 -2007 2007-2008 2008-2009 2009-2010 2010-2011

DAYS 365 365 365 365 365

DEBT

TURNOVER

RATIO

1.87 1.78 1.61 1.64 1.59

DEBT

COLLECTION

PERIOD195 205 227 223 230


INTERPRETATION

The debt collection period of SUBHAS JITH ENGENEERINGS in the 2005-2006 was

195 days and in goes to 2010 - 2011 it was increased in (0.18%) 230 days. Standard Debt

Collection Period of a firm is less than 90 days. But, above tables consists of increased of DCP

in rapidly.


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CHART 5

DEBT COLLECTION PERIOD

170

180

190

200

210

220

230

debtor collection period

debtor collection period


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CREDITORS TURNOVER RATIO

The ratio shows on an average the number of times creditors turned over during the year.

Credit purchase

Creditors turnover ratio = ________________________

Average creditors

TABLE 6

Rs in lakhs

YEAR 2006 -2007 2007-2008 2008-2009 2009-2010 2010-2011

CREDIT

PURCHASE709940 1018186 1182087 1762005 2067232

SUPPLIERS /

CREDITORS280409 353895 442400 585285 757980

CREDITORS

TURNOVER

RATIO

2.53 2.88 2.67 3.01 2.73


INTERPRETATION

The Creditors turnover ratio of SUBHAS JITH ENGENEERINGS was fluctuating duringthe year 2006 2011. It was upward in (20092010) was 3.01 times and it was downward in

20102011 is 2.73 times.

Greater the CTR the more time firm has to pay to their creditors.


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CHART -6

CREDITORS TURNOVER RATIO

2.2

2.3

2.4

2.5

2.6

2.7

2.8

2.9

3

3.1creditor turnover ratio

creditor turnover ratio


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TABLE7

CASH TO CURRENT ASSETS RATIO

Rs in lakhs

YEAR 2006 -2007 2007-2008 2008-2009 2009-2010 2010-2011

CASH 413398 580900 838600 1031467 979008

CURRENT

ASSETS

1633078 2106400 2770400 3690107 4293481

CAS TO

CURRENT

ASSETS RATIO

0.25 0.27 0.30 0.28 0.23


INTERPRETATION

The Cash to current assets turnover ratio of SUBHAS JITH ENGENEERINGS was fluctuating

during the year 20062010. It was upward in (20062009) was 0.25 times to 0.30 times and it

was downward in 20092011 is 0.23 times.


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CHART -7

CASH TO CURRENT ASSETS RATIO

0

0.05

0.1

0.15

0.2

0.25

0.3

caash to current assets ratio

caash to current assets

ratio


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TABLE8

CASH TURNOVER RATIO

Rs in lakhs

YEAR 2006 -2007 2007-2008 2008-2009 2009-2010 2010-2011

SALES 1337403 1723753 1930464 2621233 3286144

CASH 413398 580891 838602 1031467 979008

CASH

TURNOVER

RATIO

3.24 2.97 2.31 2.54 3.36


INTERPRETATION

The cash turnover ratio in the years 2006-2010 it was on fluctuating ratios, in the year

20010-2011 it was increased (0.037%) 3.36.

0

0.5

1

1.5

2

2.5

3

3.5

4

cash turnover ratio

cash turnover ratio


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INVENTORY MANAGEMENT

Introduction:

Inventories are stock of the product a company is manufacturing for sale and components. That

makeup the products. The various forms in which inventories exist in a manufacturing company

are: Raw-materials, work-in-process, finished goods.

Raw-Materials: - Are those basic inputs that are converted into finished products through

the manufacturing process. Raw-materials inventories are those units, which have been

purchased and stored for future production.

Work-In-Process inventories are semi-manufactured products. The represent products that

need more work before they become finished products for sale.

Finished Goods inventories are those completely manufactured products, which are ready

for sale. Stocks of raw-materials and work-in-process facilitate production which stock of

finished goods is required for smooth marketing operations. These inventories serve as a link

between production and consumption of goods.

Stores and spares are also maintained by some firms. This includes office and plant

cleaning materials like soaps, brooms, oil, fuel, light, bulbs etc. These materials do not directly

enter in production. But are necessary for production process.

Need to holding inventory

The question of managing inventories arises only when the company holds inventories.

Maintaining inventories involves tying up of the company's funds and incurrence of storage and

handling cost. It is expensive to maintain inventories, why does company hold inventories? There

are three general motives for holding inventories.

1. Transaction Motive: - Emphasizes the need to maintain inventories to facilitate

smooth production and sales operations.

2. Precautionary motive: - Necessitates holding of inventories to guard against the risk

of unpredictable changes in demand and supply forces and other factors.


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3. Speculative motive: - Influences the decision to increase or reduce inventory levels to

take advantages of price influences.

A company should maintain adequate stock of materials for a continuous supply to the

factory for the uninterrupted production. It is not possible for a company to procure raw materials

whenever it is needed. A time lag exists between demand for materials and its supply. Also there

exists uncertainty in procuring raw materials in time on many occasions. The procurement of

materials may be delayed because of such factors as strike, transport disruption or short supply.

Therefore, the firm should maintain sufficient stock of raw materials at a given time to stream

line,production.

Objective of Inventory Management

In the context of inventory management the firm is faced with the problem of meeting

two conflicting needs;

To maintain a large size of inventory for sufficient and smooth production and sales

operations.

To maintain a minimum investment in inventories to maximize profitability.

Both excessive and inadequate inventories are not desirable. These are two dangerouspoints within which the firm should operate. The objective of inventory management should be

to determine and maintain optimum level of inventory investment. The optimum level of

inventory will lie between the two danger points of excessive and inadequate inventories.

The firm should always avoid a situation of over investment or under investment in

inventories. The major dangerous of over investment are,

Unnecessary tie-up of the firms funds losses of profit

Excessive carrying cost

Risk of quality

The aim of inventory management thus should be to avoid excessive and inadequate

levels of inventories and to maintain sufficient inventory for smooth production and sales

operations. Efforts should be made to place an order at the right time with the right source to

acquire the right quantity at the right price and quality. An effective inventory management

should


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Ensure a continuous supply of raw materials to facilitate uninterrupted production.

Maintain sufficient stock of raw materials in periods of short supply and anticipate price

changes.

Maintain sufficient finished goods inventory for smooth sales operations and efficientcustomer service.

Minimize the carrying cost and time.

Control investment in inventories and keep it at an optimum level.

Inventory management techniques :

In managing inventories the firm objective should be in consonance with the

shareholders' wealth maximization principle. To achieve this firm should determine the optimum

level of inventory. Efficiently controlled inventories make the firm flexible. Inefficient inventory

control results in unbalanced inventory and inflexibility-the firm ma sometimes run out of stock

and sometimes may pileup unnecessary stocks. This increases level of investment and makes the

firm unprofitable.

To manage inventories efficiency, answers should be sought to the following two questions.

1) How much should be ordered?

2) When should it be ordered?

The first question how much to order, relates to the problem of determining economic

order quantity (EOQ), and is answered with an analysis of costs of manufacturing certain level of

inventories. The second question when to order arise because of determining the reorder point.

When the order is placed for raw material certain raw material is in transit, such raw

material is called as raw material in transit.

ExampleRaw material on overseas.

The raw material can be transfer from unit to another unit or from one department to

another is called transfer-intransit. It is nothing but to the transfer of raw material among the

inter-firm units of SUBHAS JITH ENGENEERINGS.


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The raw material, which is production process, is called work-in process. The work in

process becomes finished goods inventory. The finished should not be kept for a longer time.

They should be sold off to clear off the entire inventory. However, finished goods inventory is

not there for SUBHAS JITH ENGENEERINGS, since production is mainly done on customer

order and specifications. The raw material is purchased and the whole process is repeated againwhich we call it as inventory cycle.

Inventory turnover Ratio:-

Inventory turnover ratio indicates the efficiency of the firm in producing and selling its products.

It is calculated by dividing the cost of goods sold by the average inventory. The average

inventory is the average of open and closing balance of inventory.

Balance sheet of the company

Balance Sheet as at March 31, 2010 31.3.2011Schedule AS AT 31.03.2010 AS AT 31.03.2009SOURCES OF FUNDSShareholders FundShare Capital 1 489.52 489.52Reserves & Surplus 2 15427.84 15917.36Loan FundsSecured Loans 3 0.00Unsecured Loans 4 127.75 127.75

APPLICATION OF FUNDSFixed AssetsGross Block 5 6580.14Less: Depreciation/Amortisation to-date 4150.52

2429.62Less : Lease Adjustment Account 14.22Net Block 2415.40 1470.40Capital Work-in-Progress 6 1529.55 3944.95Investments 7 79.84Deferred Tax Assets Net (Refer note no. 23 of Schedule 19) 1527.23Current Assets, Loans and AdvancesCurrent Assets 8Inventories 9235.46Sundry Debtors 20688.75Cash & Bank Balances 9790.08Other current assets 406.85Loans and advances 9 2813.67

42934.81Less:Current Liabilities & ProvisionsCurrent Liabilities 10 28023.74Provisions 11 4417.98

32441.72Net current assets 10493.09

16045.11


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Profit and loss of the company

Profit & Loss Account for the year ended 31st March, 2011For the year ended For the year endedSchedule 31.03.2011EARNINGSTurnover (Gross) 12 34153.76Less: Excise duty & Service Tax 1292.32Turnover (Net) 32861.44Other income 12A 1648.29Accretion/Decretion to Work-in-progress & Finished Goods 13 786.65

35296.38OUTGOINGSConsumption of Material, Erection and EngineeringExpenses 14 20672.32Employees remuneration & benefits 15 6449.17Other expenses of Manufacture, 16 2155.02Administration, Selling and DistributionProvisions (net) 17 -934.15

Interest & other borrowing costs 18 33.50Depreciation and amortisation 5 458.01Less: Cost of jobs done for internal use 120.87

28713.00Profit before prior period items 6583.38Add/(Less): Prior period items (Net) 18A 7.27Profit before tax 6590.65Less: Provision for taxationFor Current Year- Current Tax 2006.14(incl. wealth tax Rs. 0.14 crore (Previous year Rs. 0.17 crore))- Fringe Benefit Tax -- Deferred Tax 313.07

2319.21For earlier years- Tax (incl. Income Tax abroad Rs. 26.77 crore

(prev. year Rs. 8.48 crore)) -34.58 -77.72- Fringe Benefit Tax -4.62 0.562280.01

Profit after tax 4310.64Add: Balance of profit brought forward from last year 595.46Foreign Project Reserves written back 1.38Profit available for appropriation 4907.48Less: Appropriation-- General Reserve 3000.00- Dividend (incl interim dividend of Rs. 538.47 crore,previous year Rs.440.57 crore) 1140.58- Corporate Dividend tax (incl Rs. 91.51 crore on 191.51 4332.09interim dividend, previous year Rs.74.87 crore)Balance carried to Balance Sheet 575.39Basic and Diluted Earning per share (in Rs.) 88.06(Refer note no. 22 of Schedule 19)

Notes to Accounts 19Schedules 5,12 to 19 & Significant accounting policies form an integral part of the Profit & Loss AccountBasic and Diluted Earning per

share (in Rs.) 88.06 64.11


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TABLE9

INVENTORY TURNOVER RATIO

It indicates the inventories turning into receivables through sales.

Sales

Inventory turnover ratio =__________________________

Inventory

Rs in lakhs

YEAR 2006 -2007 2007-2008 2008-2009 2009-2010 2010-2011

SALES 1337403 1723753 1930464 2621233 3286144

INVENTORY 374437 421767 573640 783702 923546

INVENTORY

TURNOVER

RATIO

3.57 4.09 3.37 3.34 3.56

SOURCE: SECONDARY DATA FROM SUBHAS JITH ENGENEERINGS ANNUAL REPORT

INTERPRETATION

This ratio indicates the liquidity of the inventory, that is, how quickly, on the average, the

inventory was sold during the year and consequently the significance of the inventory for the

debt paying purposes.


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A high stock turnover ratio is generally considered desirable because it is indicative of efficient

performance since an improvement in the ratio shows hat volume of sales has been either

maintained or increased without additional investment in stock.

Inventory turnover of SUBHAS JITH ENGENEERINGS for 2007 2008 was 4.09. In 2008-

2009 the inventory turnover ratio was high up to 3.37 and it was high in 2010-2011 at 3.56.

CHART9

INVENTORY TURNOVER RATIO

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

inventory turnover ratio

inventory turnover ratio


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CHART9

INVENTORY HOLDING PERIOD

0

20

40

60

80

100

120

inventory holding period

inventory holdingperiod


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TABLE-11

WORKING CAPITAL TURNOVER RATIO

Rs in lakhs

YEAR 2006 -2007 2007-2008 2008-2009 2009-2010 2010-2011

SALES 1337403 1723753 1930464 2621233 3286144

NET WORKING

CAPITAL 601076 664286 788388 856817 1049309

WORKING

CAPITAL

TURNOVER

RATIO

2.23 2.59 2.45 3.06 3.13


INTERPRETATION

Working capital turnover ratio for the year 2010 - 2011 was 3.13 times. It is higher when

comparing the past four years. The working capital management has to improve by more

concentration on collection strategies.


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CHART-11

WORKING CAPITAL TURNOVER RATIO

TABLE12

WORKING CAPITAL FOR TREND ANALYSIS

Rs in lakhs

YEAR 2006 -2007 2007-2008 2008-2009 2009-2010 2010-2011

CURRENT

ASSETS1633078 2106297 2770472 3690107 4293481

CURRENT

LIABILITIES

1032002 1442011 1982084 2833290 3244172

WORKING

CAPITAL601076 664286 788388 856817 1049309


0

0.5

1

1.5

2

2.5

3

3.5

2006-20072007-20082008-20092009-20102010-2011

working capital turnover ratio

working capital

turnover ratio


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INTERPRETATION

In this current asset is increasing during the period of study. Current liability is also increased

during the period of study. And working capital is also increasing..

CHART 12

WORKING CAPITAL FOR TREND ANALYSIS

0

500000

1000000

1500000

2000000

2500000

3000000

35000004000000

4500000

5000000

current assets

current liabilities

working capital


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TABLE13

ANALYSIS OF VARIOUS COMPONENTS IN WORKING CAPITAL

CURRENT ASSETS

Rs in lakhs

Particulars2006 -

2007

2007-

2008

2008-

2009

2009-

2010

2010-

2011

inventories 22.93

43.90

25.30

0.52

7.35

20.03

46.03

27.58

0.95

5.41

20.71

43.22

30.27

1.52

4.28

21.24

43.29

27.95

0.95

6.57

21.52

48.18

22.80

0.95

6.55

Sundry debtors

C& B balance

Other assets

Loans and advances

Total 100 100 100 100 100

SOURCE: SECONDARY DATA

INTERPRETATION

In this period 20062011 Sundry debtors and other current assets was only maintained in stable for

the period of study. Subhas jith engeneerings must be extra care about cash and bank balance in

future. In the period of 2008-2011 inventory ratios are increased. All about Subhas jith

engeneerings should be very care and must maintain in adequate current assets in future.


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CHART 13

ANALYSIS OF VARIOUS COMPONENTS IN WORKING CAPITAL

GRAPH 13 .1 INVENTORY

GRAPH 13 .2 SUNDRY DEBTORS

inventory

18

19

20

21

22

23

inventory

inventory

40

41

42

43

44

45

46

47

48

49

2006-2007 2007-2008 2008-2009 2009-2010 2010-2011

sundry debtor

sundry debtor


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GRAPH 13

CASH AND BANK BALANCES

GRAPH 13

OTHER CURRENT ASSETS

C& B balance

0

10

20

30

40

C& B balance

C& B balance

00.2

0.4

0.6

0.8

1

1.2

1.4

1.6

other assets

other assets


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GRAPH 13

LOANS AND ADVANCES

GROSS PROFIT RATIO :

Gross profit margin shows the company can return income at the gross level. This ratio helps to control

inventory usage and production performance and fixing unit price of goods.

Loans and advances0

2

4

6

8

Loans and advances

Loans and advances


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TABLE 14

ANALYSIS OF GROSS PROFIT RATIO

Rs in lakhs

Particulars 2006-2007 2007-2008 2008 - 2009 2009-2010 2010-2011

Gross Profit /

Profit before tax256435 373607 443039 484885 659065

Total Sales 1337403 1723753 1930464 2621233 3286144

Gross Profit ratio 0.192 0.217 0.230 0.185 0.201

GRAPH 14 - GROSS PROFIT RATIOS


19%

21%

22%

18%

20%

GROSS PROFIT RATIO

2006 -2007 2007-2008 2008-2009 2009-2010 2010-11


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GRAPH 15

NET PROFIT RATIOS


INTERPRETATION

In this period of research of study Net profit of the Subhas jith engeneerings company goes

downwards from 20082010 comparing previous year achievements.

Gross Profit to Net Profit Ratio:

Analysis of ratios G.P. to N.P is very important in every firm. It helps to find out the cost of

expense increased in production or administrative level and other hand it helps to control in overall

financial expenses.

0

0.02

0.040.06

0.08

0.1

0.12

0.14

0.16

net profit ratio

net profit ratio


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TABLE 16

ANALYSIS OF G.P. TO N.P RATIO

Rs in lakhs

Particulars 2006-2007 2007-2008 2008 - 2009 2009-2010 2010-2011

Gross Profit 256435 373607 443039 484885 659065

Net Profit 167916 241470 285934 313821 431064

G.P. - N.P. RATIO 1.53 1.55 1.55 1.55 1.53

GRAPH 16

G.P. TO N.P. RATIO


INTERPRETATION

In this period of research of study Gross Profit and Net Profit are equal. Subhas jith engeneerings

control his marginal and administrative cost in his control. There is no variation and its goes to

stable.

1.52

1.525

1.53

1.535

1.54

1.545

1.55

GP.NP

GP.NP


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TREND ANALYSIS

Particulars 2006 2007 2008 2009 2010

Current Assets :

Inventories / Stock 100 112.64 153.20 209.30 246.65

Debtors

100 135.26 167.06 222.87 288.62

Cash and Bank Balances

100 140.52 202.86 249.51 236.82

Other Current Assets

100 236.33 498.33 414.45 481.48

Loans & Advances

100 95.08 98.87 201.99 234.50

Current Liabilities :

Liabilities

100 135.08 188.20 265.19 318.17

Provisions

100 166.79 214.54 329.01 292.14


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INTERPRETATION

Above Table Inventory and debtors goes to growth level in all the years. Loans and Advances and

Other Current assets show high level of improvement in all the years. Cash and Bank balances are

fluctuating ratio in the year 2009 2011. Current Liabilities are increasing in all the years and

Provisions are fluctuating in the year 2010 compared to previous years.


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FINDINGS

1) Standard current ratio is 2:1 and for industry it is 1.33:1. SUBHAS JITH ENGENEERINGS S

ratio satisfactory.

2) Acid test ratio is more than one but it does not mean that company has excessive liquidity & firm

quick ratio is declining from 2006-07 to 2010-11

3) Debtors of the company were high; they were increasing year by year, so more funds were

blocked in debtors. But now recovery is becoming faster.

4) Debtors turnover ratio is fluctuating from 2006-07 to 2010-11, which means inventory is not

utilized in better way so it is not a good sign for the company.

5) Inventory turnover ratio is improving from 2006-07 to 2008-09.increase in ratio is beneficial for

the company because as ratio increases the number of days of collection for debtors decreases.

6) Working capital turnover ratio is continuously increasing that shows increasing needs of working

capital.

7) Production capacity is not utilized to the full extent


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CONCLUSIONThe study is basically done to have a deep knowledge about WORKING CAPITAL of the

SUBHAS JITH ENGENEERINGS . SUBHAS JITH ENGENEERINGS, is having an appropriate

working capital management of the organizations. NET PROFIT growth rate is 13.10% in 2010-

2011, it is showing a nominal increase in net profit as compared to last year. The GROSS PROFIT of

SUBHAS JITH ENGENEERINGS more or less is maintaining same margin of profit.

The firm DCP is rising every year which is major concern for firm as larger the DCP greater the

chances of bad debts. DTR is also decreasing in 2006-07 it was 1.87times now it has drop down to

1.59times.

Current ratio is also below the standard norm in the financial year 2007-08 it was 1.58 now it has

decreased up to 1.32.The firm should maintain the adequate level of current assets in order to

discharge its current liabilities.

As far as cash ratio is concerned the firms not maintain the sufficient level of quick assets because of

the day-to-day expenses. It is fluctuating between the standard norms for this ratio is 1:2 means for

every 2 rupees of current Liabilities.

Company must have 1 rupee of cash and bank balance and marketable securities.


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SUGGESTIONS

1)It can be said that overall financial position of the company is normal but it is required to be

improved from the point of view of profitability.

2) Net operating cycle is increasing that means there is a need to make Improvements in

Receivables/debtors management.

3) Company should stretch the credit period given by the suppliers.

4) Company should not rely on Long-term debts.

5) Company should try to increase Volume based sales so as to stand in the competition.

Since the SUBHAS JITH ENGENEERINGS is a profit making company and the interests of the

investors are also safe so for making more profit and for increasing the net profit as well as gross

profit the organization should curtail its operating, administrative & non productive expense.

Company is having good marketability, profitability and liquidity so the company can raise its fund.

Company should not forget its Quality Policy i.e. we at SUBHAS JITH ENGENEERINGS, should

aim to achieve and sustain excellence in all our activities.

We are committed to total customer satisfaction by providing producers and services which meet or

exceed the customer expectation.

Modernization of the manufacturing facilities, stress on technological innovation and training of

employees at all levels shall be continuous process in SUBHAS JITH ENGENEERINGS.


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LIMITATIONS

The study does not consider the market fluctuations in all its calculations.

Analysis is very much dependent on the companies internal bulletin.


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BIBLIOGRAPHY

Reports

Annual Report (2006-2011)

Bonus issue bulletin 2006

Websites

www.SUBHAS JITH ENGENEERINGS.com

Books

Basic corporate accounting CA Dr. Girish Ahuja

Financial Management R.P Rustagi,
http://www.bhel.com/http://www.bhel.com/http://www.bhel.com/

Documents

DEVA Working Capital Project