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CARBORUNDUM UNIVERSAL LIMITED
EXECUTIVE SUMMARY
CENTRE FOR MBA/ NILESHWAR 1
CARBORUNDUM UNIVERSAL LIMITED
EXECUTIVE SUMMARY
The project undertaken is on “Working Capital Management of CUMI”. It describes
about how the company manages its working capital and the various steps that are
required in the management of working capital. Cash is the lifeline of a company. If this
lifeline deteriorates, so does the company's ability to fund operations, reinvest and meet
capital requirements and payments. Understanding a company's cash flow health is
essential to making investment decisions. A good way to judge a company's cash flow
prospects is to look at its Working Capital Management (WCM).
Working capital refers to the cash of a business requires for day-to-day
operations or, more specifically, for financing the conversion of raw materials into
finished goods, which the company sells for payment. Among the most important items
of working capital are levels of inventory, accounts receivable, and accounts payable.
Analysts look at these items for signs of a company's efficiency and financial strength.
The working capital is an important yardstick to measure the company’s operational and
financial efficiency. Any company should have a right amount of cash and lines of credit
for its business need at all times. This project describes how the management of working
capital takes place at CUMI.
There are numerous instances in the history of business world where
inadequacy of working capital has led to business failures when a firm finds it difficult to
meetings day to day affairs. Operating expenses essential out lays may have to be
postponed for want of funds, operating. The project undertaken is on “Working Capital
Management of CUMI” It describes about how the company manages its working capital
and the various steps that are required in the management of working capital. Cash is the
lifeline of a company. If this lifeline deteriorates, so does the company's ability to fund
operations, reinvest and meet capital requirements and payments.
Understanding a company's cash flow health is essential to making investment decisions.
A good way to judge a company's cash flow prospects is to look at its Working Capital
Management (WCM).
CENTRE FOR MBA/ NILESHWAR 2
CARBORUNDUM UNIVERSAL LIMITED
Working capital refers to the cash of a business requires for day-to-day operations or,
more specifically, for financing the conversion of raw materials into finished goods,
which the company sells for payment. Among the most important items of working
capital are levels of inventory accounts receivable, and accounts payable. Analysts look
at these items for signs of a company's efficiency and financial strength.
The working capital is an important yardstick to measure the company’s operational and
financial efficiency. Any company should have a right amount of cash and lines of credit
for its business needs at all times. This project describes how the management of working
capital takes place at CUMI.
Thus efficient management of working capital in an important prerequisite for successful
working of a business concern it reduces the chances of business failure generates a
felling of security and confidence in the minds of personnel in the organization it
assurance solvency of steady of the organizational will go out of gear & enterprise
objectives on investment slumps the suppliers & creditors of the firm may have to wait
longer to raise their dues & will hesitate to extend further credit to the firm.
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CARBORUNDUM UNIVERSAL LIMITED
INTRODUCTION
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CARBORUNDUM UNIVERSAL LIMITED
INDUSTRY PROFILE
CUMI manufactures the widest range of bonded and coated abrasives in the world. The
company pioneered the manufacture of coated abrasive in India, besides super
refractory’s, electro minerals, and industrial ceramic fibers. CUMI makes over 20,000
different varieties of abrasives refractory products and electro-minerals manufactured at
14 locations CUMI has the distinction of having all its manufacturing units ISO 9001-
2000 certified.
Products are:
White Fused Alumina (CUMITE-W)
Brown Fused Alumina (CUMITE-B)
Silicon Carbide
In export market, the major threats are the products from China. They can sell products at
lower price because of their cost of production and cost of labour is very low. World total
Alumina comprises 40% from China. Competition is increasing day by day so that the
product development will be the main criteria. Our mineral recourses are limited so there
is a challenge in future development. High capital investment, limited market,
sophisticated technology, availability of substitute products, product differentiation and
import are the principle challenges in its industry.
Market scenario of this industry:-
In recent years there has been a considerable increase in the production capacity in the
Asia pacific region in particular in china, India South Korea and Australia price and
quantity are the major competitive parameters in the industry. The main customer
industries are:-
Automobile industry
General metal cutting industry
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CARBORUNDUM UNIVERSAL LIMITED
Polishing of metal surface
Marine paints
Major alumina producing companies and its market share in India
Alumina oxide industry is one of the major industries in India. Alumina is the most
widely used oxide ceramic material. It’s applications as are widespread, and include
spark plugs, tap washers, electronic substrates, grinding media, abrasion resistant tiles,
cutting tools, bio ceramics and laboratory ware and ware parts etc.
Mechanics of abrasion
Abrasives generally rely upon a difference in hardness between the abrasive and the
material being worked upon, the abrasive being the harder of the two solid materials that
repeatedly rub against each other will tend to wear each other away.
Typically, material used as abrasives are either hard minerals or is synthetic stones,
some of which may be chemically and physically identical to naturally occurring
minerals but which cannot be called minerals as they did not arise naturally. However
even softer minerals like calcium carbonate are used as abrasives, such as polishing
agents in toothpaste. These minerals are either crushed or are already of sufficiently
small size to permit their use as an abrasive. These grains commonly called grit, have
rough edge, often terminating in points which will decrease the surface area in contact
and increase the localized contact pressure. The abrasive and the material to be worked
are brought in to contact wile in relative motion to each other.
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Grind well Norton Ltd. 30%
Snam Abrasives Pvt.Ltd 10-15%
Orient Abrasives 20%
Carborundom Universal Ltd 35-40%
CARBORUNDUM UNIVERSAL LIMITED
COMPANY PROFILE
CARBORUNDUM UNIVERSAL LIMITED
Carborundum universal ltd is an Indian based coated and bonded abrasive
manufacturing company.Carborundom universal Murugappa India Ltd (CUMI), is an
important segment of the Murugappa group, which is one of the leading business group
offering a wide range of product mix. Murugappa Group is one of India's leading
business conglomerates. Market leaders in diverse areas of business including
Engineering, Abrasives, Finance, General Insurance, Cycles, Sugar, Farm Inputs,
Fertilizers, Plantations, Bio-products and Nutraceuticals, its 29 companies have
manufacturing facilities spread across 13 states in India. The organization fosters an
environment of professionalism and has a workforce of over 32,000 employees.
The major companies of Murugappa Groups are:-
Carborundom Universal Ltd
Cholamandalam Investment and Finance Ltd
Coromandalam Fertilizers Ltd
Eid(Parry) India Ltd
Parry Agro Industries Ltd
Parry confectionary Ltd
Party Nutraceutical Ltd
Tube Investment Ltd
Coromandel Engineering Ltd
The group has grown consistently through its decisive and visionary response to changing
times. Its pioneering efforts, steadfast commitment to ethical business practices and its
dogged pursuit of new areas to extend its business acumen have brought in its wake
several prestigious national and international awards. The Group's business philosophy
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CARBORUNDUM UNIVERSAL LIMITED
Can be summed up in this couplet from the ancient Indian treatise on wealth creation and
governance, the Arthashastra:
"The fundamental principle of economic activity is that no man
you transact with will lose, and then you shall not."
Carborundom universal murugappa India Ltd (CUMI)
The name “Carborundom” is related to “Corundum”, which means naturally formed
minerals and carborundom is artificially or synthetically prepared mineral. Now CUMI
has 5 divisions all over India, manufacturing bonded and coated abrasives, industrial
ceramics, electro minerals, refractory’s, grinding wheels, tubes, plantations, IT enabled
services, financial services, ceramic fibbers, industrial engineering, chains, cycles,
sanitary wares, food products, super refractory’s, confectioneries, fertilizers, sugar.
Pioneered the manufacture of coated and bonded abrasives in India.
Fully integrated manufacturing facilities.
Widest range of bonded and coated abrasives in the world.
52 years of uninterrupted track record of profits.
52 years of uninterrupted track record of dividends(since1957)
Carborundom universal was established in 1954 as a joint venture between murugappa
groups, India: the Carborundum Company, USA and the universal grinding wheel
company ltd. The main business activity of Carborundum universal involves manufacture
of coated abrasives, super –refractoriness, electro minerals industrial ceramics and
ceramic fiber. Further CUMI produces about 20,000 different varieties of abrasive
products, refractory products and electro minerals. Carborundum universal ltd has 10
manufacturing facilities which are meticulously connected with a wide network of
distributors and sub distributors.
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CARBORUNDUM UNIVERSAL LIMITED
CUMI BUSINESS DISTRIBUTION
CUMI is known to be an innovator and exports its products to be 43 countries spread
across North America, Europe, Australia, South Africa and Asia. All the manufacturing
facilities of Carborundum universal ltd are ISO 9001-2001 and ISO 14001 certified for
quality standards and environment friendly manufacturing practices respectively.
Carborundom universal ltd is equipped with a state of the art research and development
centre which works aggressively on product development and efficacy enhancement.
CUMI has its own bauxite mines at okha and Bhatia in Gujarat that fills the abrasives and
refractory grains requirements. Mining operations began in1963 and ever since these
mines have supplied the basic raw materials. The raw materials bauxite mined is calcined
at CUMI plants at edappally and korathy. The plants were commissioned in 1965, which
are ISO 9000 certified, manufacturing a wide range of superior quality aluminium oxide
and silicon carbide grains.
CUMI also exports white aluminium oxide and silicon carbide abrasive grains to
international markets. The R&D wing comes out with constant innovations and product
up gradations, which makes the company a world leader in grinding solutions which
enables maximum grinding efficiencies and reduced cost for customers.
VISION
Mr.M.M.MURUGAPPAN, chairman of CUMI, opines” our vision is to place CUMI on
the global map as an Indian company poised to redefine the scope and applications of
material science. Being market leaders, we have to constantly innovate, especially in
ceramics sciences. There is a huge potential in the post surgical market and the bio
ceramics vertical offers a good opportunity to expand our product portfolio”.
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CARBORUNDUM UNIVERSAL LIMITED
MISSION
1. To support captive need of employees.
2. Speedily grow on white fused alumina exports.
3. Grow aggressively in white and brown fused alumina grains.
4. Manage through business excellence model.
5. Focus on faster new product development.
QUALITY POLICY
The company considers consistently providing quality products and services to focus on
customer satisfaction and achieving this through total employee involvement supported
by proper system and process as the policy targets.
Subsidiary companies
1. CUMI America Inc.
2. CUMI Canada Inc.
3. CUMI Middle East, ras al-Khalifa.
4. Sterling energy development ltd.
5. Prod rite anti corrosive ltd.
6. Web world holdings and management pvt.ltd.
7. Laser world pvt.ltd.
8. Apex abstracting and editing services ltd.
9. Net access (India) pvt.ltd.
Joint ventures companies
1. CUMI Australia pvt.ltd.
2. WENDT (INDIA) LTD.
3. MURUGAPPA Morgan thermal ceramics ltd.
4. Electro minerals division.
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CARBORUNDUM UNIVERSAL LIMITED
EDAPPALLY UNIT
.
In 1962 November 29, sir. V.V.GAURI, Governor of Kerala laid the foundation stone of
Carborundum universal ltd, EDAPPALLY. The work started and supported with the
technological collaboration of Carborundum Company USA and universal grinding
wheel company UK.
Production started in 1965 with a few number of stuff and workers and average
production was 65 tones per month. During 1966-67, 850 tones was the production.
After that, the company gained strength from the committed efforts to staff and workers.
Now the production is around 1800 tones per month. The momentum gained in the
production enhanced the company to export its products. CUMI, edappally bagged the
prestigious commendation award for the energy conservation from Kerala government
for the year 1997-98, in the major industries category. The company started exporting
and started a new plant i.e. plant 2 at edappally unit in the year 1994. The plant has
modern machines and operations carried out in a computerized manner.
Products manufactured at CUMI
BROWN FUSED ALUMINA (CUMITE B)
WHITE FUSED ALUMINA (CUMITE W)
COMPANY HISTORY-YEAR EVENTS
1954-1962
The company was incorporated at Chennai. The company manufactured bonded and
coated abrasive products, calcined bauxite etc.20, 000 no: of equity shares issued at a
premium of RS 25/- each.
1991-1995
713 shares issued to the share holders of wendit (India) ltd. The company offered 15%
secured redeemable party convertible debentures of RS 30/-each on right basis to the
existing share holders. Another 1, 29,748 debentures were offered to the employees. All
were accepted. The company acquired 4740 preference shares and 1, 24,800 equity
shares of wend it (India) ltd.
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CARBORUNDUM UNIVERSAL LIMITED
The company commissioned a wind farm of 2mw capacity at perrungudi and Tamilnadu.
Four wind mill were also added for increasing the capacity to 2.925 mw in order to power
requirement of factory.
2000-2008
The company has sold its refractory unit in Visakhapatnam for a sum of RS 7.8 crore.
Mr. M V murugappa steps down as the whole time director on the board of the company
sells its electro cast refractoriness units at palakkad for RS 31 crores. Appoints Mr.
Ramesh agarwal as the managing director. The company acquired a 51% stake in CUMI
Australia.pvt.ltd, m m murugappan a new M D for CUMI.CUMI gets award for industrial
safety instituted by national safety council Kerala chapter in other industries sector in the
small industries category.carborundum universal ties up with South African firm cerdak.
Carborundom universal entries into a joint venture with CEEB to take a 49% stake in
jingri yanjiao china. CUMI has entered into a business purchase agreement with IVP ltd.
For the acquisition of its industrial ceramics division at Aurangabad Maharashtra.
ORGANIZATIONAL PROFILE
Date of establishment : 1954
No. of employees : 1643
Company type : head office
Office hours : 9 am to 6 pm
Quality assessment : electro minerals division
Regional office : P Bno.1, kalamssery
Development plot PO
Cochin 683109, India
Other locations : kolkatta, hosur, Uttaranchal
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CARBORUNDUM UNIVERSAL LIMITED
Website : www.cumi.murugappa.com
ORGANISATION STRUCTURE
Board of directors
Mr. M Murugappa : Chairman
Mr.subodh Kumar Bhargav : Non Executive Director
Mr. L Palani Kumar : Non Executive Director
Mr. Sridhar Ganesh : Non Executive Director
Mr.shobhan Takor : Non Executive Director
Mr. Lakshmi narayanan : Non Executive Director
Mr.Sanjay Jayavarthana Velu : Non Executive Director
Mr. Srinivasan : Managing Director
MANAGING COMMITTEE
CUMI’S managing committee steers the organization to meet over all objectives
within the Carborundum set by the Board of Directors. The committee comprises:
Mr. .K Srinivasan : Managing Director
Mr. R Ravi : President – industrial ceramics
Mr. V Ramesh : President – chief finance officer
Mr. M M Muthiah : Senior vice president – HR
Mr. .R Rajagopalan : Senior vice president –refractories
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CARBORUNDUM UNIVERSAL LIMITED
Mr. Deepak Dorairaj : Senior vice president – abrasive
PRODUCT PROFILE
Carborundum Universal Ltd (CUMI) offers ceramic materials based for industrial
applications. The major product offering and applications are as follows:
Business segment Product offering
Abrasives Bonded and coated abrasive
Ceramics Industrial ceramics, bonded and
Electro cast refractories
Electro minerals Brown fused alumina grains, white
Fused alumina grain sand silicon
Carbide grains
Abrasives
It is used in a variety of application for material removal, polishing and finishing.
Bonded and super abrasives are broadly of three types.
Bonded abrasives
Coated abrasives
Super abrasives
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CARBORUNDUM UNIVERSAL LIMITED
Bonded and super abrasives are mostly commonly in the form of wheels but also in other
shapes such as segments: stock etc. Coated abrasives and are in the form of sheets, belts
discs. Major end users industries for abrasive are automobile, ancillaries, construction
and wood working and general engineering. There are two manufacturers in India.
Ceramics
The ceramic division offers two product line viz. Industrial ceramics and
refectories Industrial ceramics are high alumina ceramic product like grinding media,
were resist liner, lined equipment and metalized ceramic products. These products are
like ceramic tiles, mineral processing, resistant products used in steel, glass, cement,
petrochemical, fertilizers and ceramic industries are the major users of refectories.
Electro minerals
These are mainly used by the abrasive and refectory industries. They are also used
in blasting for surface preparation and certain other industrial application in the domestic
market is created by import from China.
In export market, the major thread is the product from China. They can sell
products at lower price because of their cost of production and cost of labour is very low.
World total production of Alumina comprises 40% from China competition is increasing
day by day so that the product development will be the main criteria. There mineral
resources are limits so there is challenge in future development. High capital investment,
limited market, sophisticated technology, availability of substitute products, product
differentiation are import the principle challenges in this industry.
Market scenario of this BUSINESS
In recent years there has been a considerable increase in the capacity in the Asia
pacific region in particular in China, Indian South Korea and Australia. Price and quality
are the major competitive parameters in this Business. The main customer industries are:
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CARBORUNDUM UNIVERSAL LIMITED
Automobile industries
General metal cutting industries
Polishing of metal surface
Marine paints
Major products of Alumina and its uses
Products Uses
White Aluminum Oxide
(white Fused Alumina)Manufacturing of grinding wheels,
coated abrasives, paints, tiles etc.
Brown Aluminum Oxide
(brown Fused Alumina)
Manufacturing of grinding wheels, polishing purpose, shot blasting purpose
High alumina refractory cement It is used as a binder for all types of cartable refractoriness
CUMI EDAPPALLY has two plants
PLANT 1
Brown fused alumina is the main product from plant 1. It is used for grinding metals of
high tensile strength. It is because of its thermal property that makes it an excellent
material for use in the manufacturing of refractory products. Raw materials calcined
bauxite, coke and iron being fused in furnace at approximately 1200 degree
Applications
1. Abrasives: extensively used in manufacturing of grinding wheels, annealed malleable
iron and in manufacture of abrasive papers and clothes.
2. Refractories: raw material for manufacturing of a variety of fired refractories variety of
applications in polishing of granite and stone ware and a blasting media.
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CARBORUNDUM UNIVERSAL LIMITED
PLANT 2
It was started in the year 1994 with the capacity of 650 tons a month. Main product of
unit is white fused alumina (WFA). The company has a furnace which is tilting furnace
for producing white alumina.
While fused alumina (WFA) is made from calcined alumina and is a friable product. Like
brown fused alumina, WFA is used in the manufacturing of grinding wheels (both
vitrified and resin bonded) and coated products. These grains are also used for shot
blasting purpose and as polishing media and refractory grade: WFA is used as raw
materials for high alumina refractories.
In customer segment with the improvement in technology the use of sol get synthetic
cloth based product etc are having high demand. Company has taken strong measures to
improve customer base which will yield greater benefits in years to come.
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CARBORUNDUM UNIVERSAL LIMITED
DESIGN OF THE STUDY
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CARBORUNDUM UNIVERSAL LIMITED
IMPORTANCE OF THE STUDY
Working capital is a significant facet of a modern financial management. Therefore
the financial managers spend a great deal of time on working capital management. The
proportional role of working capital plays a great part in earning maximum return on the
capital invested with the business enterprise. Management should take care when
deciding on working capital requirement of an organization because it represents a
segment of total capital employed in a business. Too small quantity of working capital
can bring down profits, due to non utilization of available capacity. Similarly excess
working capital may lower the rate of return on investment because of non utilization.
1. This project is helpful in knowing the companies position of funds maintenance and
setting the standards for working capital inventory levels, current ratio level, quick ratio,
current asset turnover level & size of current liability etc.
2. This project is helpful to the managements for expanding the dualism & the project
viability &present availability of funds.
3. This project is also useful as it combines the present year data with the previous year
data and thereby it shows the trend analysis, i.e. increasing fund or decreasing fund.
5. The project is done as a whole entirely. It will give overall view of the
organization and it is useful in further expansion decision to be taken by
management.
SCOPE OF THE STUDY
The working capital of CUMI-EMD shows a positive net working capital during the
period of study. The barometer to measure the effectiveness of managing the working
capital of CUMI-EMD is the evaluation of the past performance and analyzing the
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CARBORUNDUM UNIVERSAL LIMITED
financial statements using accounting and statistical tools. The study touched all
important constituents of working capital such as cash, receivables and inventory.
Thus the study would give a brief description of the performance of CUMI-EMD and
suggesting improves its performance.
Statement of the problem:
The study has been conducted with the aim of analyzing the efficiency of working capital
management of CUMI. An attempt is made to analyze the performance of the company
for the last five years from 2005-2006 to 2009-2010
In the management of working capital, the firm is faced with two key problems:
1. First, given the level of sales and the relevant cost considerations, what are the optimal
amounts of Cash, accounts receivable and inventories that a firm should choose to
maintain?
2. Second, given these optimal amounts, what is the most economical way to finance
these working capital investments? To produce the best possible results, firms should
keep no unproductive assets and should finance with the cheapest available sources of
funds. Why? In general, it is quite advantageous for the firm to invest in short term assets
and to finance short-term liabilities.
Besides this followings are some other problem, a firm is facing. Through this study we
try to find answer for these problems.
1. What are root causes of working capital on business?
2. What are the major effects on accounts receivable?
3. What is the nature of relationship between working capital and capital employed?
4. What steps should be taken to ensure that it effect on the profit of the firm will not be
negative?
5. How can working capital be managed?
6. What make up the working capital cycle?
7. How can debtors be controlled?
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CARBORUNDUM UNIVERSAL LIMITED
Objective of the study
1. To analyze the effectiveness of existing working capital management methods.
2. To explain the working capital requirement with the help of relevant accounting
ratios.
3. To suggest improvement, wherever possible on the basis of study.
4. Through the net profit ratio & other profitability ratio, understand the
Profitability of the company.
5. Evaluating company s performance relating to financial statement Analysis.
6. To know the liquidity position of the company with the help of current Ratio.
7. To find out the utility of financial ratio in credit analysis & determinate financial
capacity of the firm.
Hypothesis:
Existing working capital management methods are effective.
Period of study
The present study deals with the data collected from annual reports and other relevant
documents for the period commencing from financial year 2005-2006 to
Financial year 2009-2010
Research methodology
Both primary and secondary data were used for the study. Primary data was collected
through discussions held with the finance manager and other officers in the finance
department of CUMI. Secondary data was collected from annual reports and other
published documents.
There are several ways of collecting both data-Primary and Secondary data, which differ
considerably in context of money, cost, time and other sources at the disposable of the
researcher.
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CARBORUNDUM UNIVERSAL LIMITED
There are two types of data:
· Primary data
· Secondary data
1-Primary Data
In respect of primary data which the researchers are directly collects data that have not
been previously collected. The primary data was gathered through personal interaction
with various functional heads and other technical personnel. Some information was also
collected by observation.
2-Secondary Data:
Secondary data was collected various reports, annual reports, documents charts,
management information systems, etc in CUMI, And also collected various magazines,
books, newspapers etc.
The analysis of the information gathered has been made on the basis of the clarifications
sought during the personal discussions with the concerned people and perception during
the personal visits to the important areas of services.
Type of research
The type of research followed is analytical research. In analytical research the researcher
has to use facts or information already available and analyze these to make a critical
evaluation of the material.
Limitations of the study
Since the analysis is based on the data in annual report, which is a secondary source
inherent limitations of those data will have its impact on this study.
1. The study in limited 4 years (2006-2007) to (2009-2010) performance of the company.
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CARBORUNDUM UNIVERSAL LIMITED
2. The data used in this study have been taken from published annual report only.
3. This study in conducted within a short period. During the limited period the study may
not be retailed, full fledged and utilization in all aspects.
4. Financial accounting does not take into account the price level changes.
5. We cannot do comparisons with other companies unless and until we have the data of
other companies on the same subject.
6. Only the printed data about the company will be available and not the back–end
details.
7. Future plans of the company will not be disclosed to us.
8. Lastly, due to shortage of time it is not possible to cover all the factors and details
regarding the subject of study.
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CARBORUNDUM UNIVERSAL LIMITED
LITERATURE
REVIEW
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CARBORUNDUM UNIVERSAL LIMITED
One school of thought believes that, as all capital resources available to a business
organization – From shareholders, bondholders, and creditors (secured and unsecured)
works up in the business activities to generate revenues and facilitate future expansion
and growth; they are to be considered as ‘working capital’.
Another school of thought links working capital with current assets and current liabilities.
According to them, the excess of current assets over current liabilities is to be rightly
considered as the working capital of a business organization.
“Working capital is descriptive of that capital which is not fixed. But, the more common
use of working capital is to consider it as the difference between the current assets and
the current liabilities”. Current assets and current liabilities are assets and liabilities
which arise in the course of business. The WC demonstrates the amount of liquid assets
that are available to sustain and build the business by measuring company’s efficiency
and short-term financial health. As such, it carries great value to those who might be
interested in investing in business or even purchasing it.
The following are the most important definitions of Working capital:
“Working capital is the difference between the inflow and outflow of Funds. In other
words it is the net cash inflow.”
“Working capital represents the total of all current assets. In other
Words it is the Gross working capital, it is also known as Circulating capital or
Current capital for current assets are rotating in their nature.”
“Working capital is defined as the excess of current assets over Current liabilities and
provisions. In other words it is the Net Current assets or net working capital.”
Capital required for a company can be classified under two main categories via;
1. Fixed capital
2. Working capital
Every business needs fund for two purposes for its establishment and to carry out its day-
to-day operations. Long –term funds are required to create production facilities through
purchase of fixed assets such as plant and machinery, land, building, furniture, etc.
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CARBORUNDUM UNIVERSAL LIMITED
Investments in these assets represents that part of firm’s capital which is blocked on a
permanent or fixed basis and is called fixed capital.
Funds are also needed for short term purchase of raw materials, payment of wages and
other day-to-day expenses etc. these funds are known as working capital. Funds, thus,
invested in current assets keep revolving fast and are being constantly converted into cash
and these cash flows out again in exchange for other current assets. Hence, it is also
known as revolving or circulating capital or short term capital.
In the words of shubin “working capital is the amount of funds necessary to cover the
cost of operating the enterprise.”
Characteristics of Working Capital
Working capital is the life blood and nerve centre of a business. Just as circulation of
blood is essential in the human body for maintaining life, working capital is very
essential to maintain the smooth running of a business. No business can run successfully
with out an adequate amount of working capital.
1 Short term Needs:
Working capital is used to acquire current assets which get converted into cash in a short
period. In this respect it differs from fixed capital which represents funds locked in long
term assets. The duration of the working capital depends on the length of production
process, the time that elapses in the sale and the waiting period of the cash receipt.
2 Circular Movements:
Working capital is constantly converted into cash which again turns into working capital.
This process of conversion goes on continuously. The cash is used to purchase current
assets and when the goods are produced and sold out; those current assets are transformed
into cash. Thus it moves in a circular away. That is why working capital is also described
as circulating capital.
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3 An Element of Permanency:
Though working capital is a short term capital, it is required always and forever. As
stated before, working capital is necessary to continue the productive activity of the
enterprise. The working capital that is required permanently is called “permanent or
regular working capital”.
4 An Element of Fluctuation:
Though the requirement of working capital is felt permanently, its requirement fluctuates
more widely than that of fixed capital. The requirement of working capital varies directly
with the level of production. It varies with the variation of the purchase and sale policy;
price level and the level of demand also. The portion of working capital that changes with
production, sale, price etc. is called “variable working capital”.
5 Liquidity:
Working capital is more liquid than fixed capital. If need arises, working capital can be
converted into cash within a short period and without much loss. A company in need of
cash can get it through the conversion of its working capital by insisting on quick
recovery of its bills receivable and by expediting sales of its product. It is due to this trait
of working capital that the companies with a larger amount of working capital feel more
secure.’
6 Less Risky:
Funds invested in fixed assets get locked up for a long period of time and can not be
recovered easily. There is also a danger of fixed assets like machinery getting obsolete
due to technological innovations. Hence investment in fixed capital is comparatively
more risky. As against this, investment in current assets is less risky as it is a short term
investment. Working capital involves more of physical risk only, and that too is limited.
Moreover, working capital gets converted into cash again and again; therefore, it is free
from the risk arising out of technological changes.
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7 Special Accounting System not needed:
Since fixed capital is invested in long term assets, it becomes necessary to adopt various
systems of estimating depreciation. On the other hand working capital is invested in short
term assets which last for one year only. Hence it is not necessary to adopt special
accounting system for them. Among the most important items of working capital are
levels of inventory, accounts receivable, and accounts payable. Working capital can be
expressed as a positive or a negative number
Concepts of working capital
There are two concepts of working capital
1. Balance sheet concept
2. Operating cycle concept or circular flow concept.
Balance sheet concept
There are two interpretations of working capital under the balance sheet concept
1. Gross working capital
2. Net working capital
In the broad sense, the term working capital refers to the gross working capital and
represents the amount of funds invested in current assets. Thus, the gross working capital
is the capital invested in total current assets of the enterprise. Current assets are those
assets which in the ordinary course of business converted into cash within a short period
of normally one accounting year.
Examples of current assets are:
1. Cash in hand and bank balances
2. Bills receivables
3. Sundry debtors.
4. Short term loans and advances
5. Inventories of stocks, as:
1. Raw materials
2. Work in process
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3. Stores and spares
4. Finished goods
5temporary investments of surplus funds
6. Prepaid expenses
7. Accrued income
In a narrow sense, the term working capital refers to the net working capital. Net working
capital is the excess of current assets over current liabilities, or say:
Net working capital=current assets-current liabilities
Net working capital may be positive or negative. When the current assets exceed the
current liabilities the working capital is positive and the negative working capital results
when the current liabilities are more than the current assets. Current liabilities are those
liabilities which are intended to be paid in the ordinary course of business within a short
period of normally one accounting year out of the current assets or the income of the
business. Examples of current liabilities are:-
I. bills payable.
2. Sundry creditors or accounts payable.
3. Accrued or outstanding expenses
4. Short-term loans, advances and deposits.
5. Dividends payable.
6. Bank over drafts.
7. Provision for taxation
The gross working capital concept is financial or going concern concept where as net
working capital is an accounting concept of working capital. These two concepts of
working capital are not exclusive; rather both have their own merits. The gross concept is
sometimes preferred to the net concept of working capital for the following reasons:-
1. It enables the enterprise to provide correct amount of working capital at the right
time.
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2. Every management is more interested in the total current assets with which it has
to operate than the sources from where it is made available.
3. The gross concept takes into consideration the fact that every increase in the funds
of the enterprise would increase its working capital.
4. The gross concept of working capital is more useful in determining the rate of
return on investments in working capital.
The net working capital concept, however, is also important for the following reason:-
1. It is qualitative concept which indicates the firm’s ability to meet its operating
expenses and short term liabilities.
2. It indicates the margin of protection available to the short-term creditors ie, the
excess of current assets over current liabilities.
3. It is an indicator of the financial soundness of an enterprise.
4. It suggests the need for financing a part of the working capital requirement out of
permanent sources of funds.
To conclude, it may be said that, both gross and net concepts of working capital are
important aspects of the working capital management.
Operating cycle or circular flow concepts
Working capital refers to that part of firm’s capital which is required for financing short
term current assets such as cash, marketable securities, debtors, and inventories. Funds,
thus, invested in current assets keep revolving fast and are being constantly converted
into cash and this cash flow out again in exchange for other current assets.Hence, it is
also known as revolving or circulating capital. The cycle starts with the purchase of raw
materials and other resources and ends with the realization of cash with from the sale of
finished goods.
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Working capital may be classified in two ways:
1. on the basis of concept
2. on the basis of time
Working capital is classified as gross working capital and net working capital, on the
basis of concept.
On the basis of time, working capital may be classified as
1. Permanent or fixed working capital
2. Temporary or variable working capital
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Kinds of working capital
On the basis of concept
On the basis of time
Net working capital
Gross working capital
Regular working capital
Reserve working capital
Seasonal working capital
Special working capital
Permanent working capital
Variable working capital
CARBORUNDUM UNIVERSAL LIMITED
Permanent working capital
Permanent working capital is the minimum amount which is required to ensure effective
utilization of fixed facilities and maintaining the circulation of current assets. There is
always a minimum level of current assets which is continuously required by the
enterprise to carry out normal business operations.
Temporary working capital
Temporary or variable working capital is the amount of working capital which is required
to meet the seasonal demands and special exigencies. Variable working capital can be
further classified as seasonal working capital and special working capital. The capital
required to meet the seasonal needs of the enterprise is called seasonal working capital.
Special working capital is that part of working capital which is required for meet special
exigencies such as launching of extensive marketing campaigns for conducting research
etc.
Temporary working capital differs from permanent working capital in the sense that it is
required for short periods and cannot be permanently employed gainfully in the business.
Figures given below illustrate the difference between permanent and temporary working
capital.
Figure 1.2
Value Temporary current asset
Value
Permanent current asset Permanent working capital
Time time
Figure 1 figure 2
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1. Permanent working capital is stable or fixed overtime while the temporary on
variable working capital fluctuates.
2. Permanent working capital is also increasing with the passage of time due to
expansion of business but even then it does not fluctuate as variable working capital
which sometimes increases and sometimes decreases
BALANCED WORKING CAPITAL POSITION
The firm should maintain a sound working capital position. It should have adequate
working capital to run its business operations. Both excessive as well as inadequate
working capital positions are dangerous from the firm s point of view. Excessive working
capital not only impairs the firm s profitability but also result in production interruptions
and inefficiencies.
Importance or advantages of adequate working capital
Working capital is the lifeblood and nerve centre of a business. Just as circulation of
blood is essential in the human body for essential maintain the smooth running of a
business. No business can run successfully without an adequate amount of working
capital. The main advantages of maintaining adequate amount of working capital are as
follows
1. Solvency of the business: adequate working capital helps in maintaining
solvency of the business by providing uninterrupted flow of production.
2. Good will: sufficient working capital enables a business concern to make
prompt payments and hence helps in creating and maintaining good will.
3. Easy loans. A concern having adequate working capital, high solvency and
good credit standing can arrange loans from banks and others on easy and
favorable terms.
4. Cash discounts: adequate working capital also enables a concern to avail
cash discounts on the purchase and hence it reduces costs.
5. Regular supply of raw materials: sufficient working capital ensures regular
supply of raw materials and continuous production.
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6. Regular payment of salaries, wages and other day-to-day commitments: a
company which has ample working can make regular payment of salaries,
wages and other morale of its employees, increases their efficiency, reduces
wastage and costs and enhances production and profits.
7. Exploitation of favorable market conditions: only concerns with adequate
working capital can exploit favorable market conditions such as purchasing
its requirements in bulk when the prices are lower and by holding its
inventories for higher prices.
8. Ability to face crisis: adequate working capital enable a concern to face
business crisis in emergencies such as depression because during such
periods, generally, there is much pressure on working capital.
9. Quick and regular return on investment: every investor wants a quick and
regular return on his investments. Sufficiently of working capital enables a
concern to pay quick and regular dividends to its investors as there may not
be such pressure to plough back profit.
10. High morale: adequacy of working capital creates an environment of
security, confidence, high morale, and creates overall efficiency in a
business.
Excess or inadequate working capital
Every business concern should have adequate working capital to run its business
operations. It should have neither redundant or excess working capital nor inadequate nor
shortage of working capital. Both excess as well as short working capital positions are
bad for any business. However, out of the two, it is the inadequacy of working capital
which is more dangerous from the point of view of the firm.
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Disadvantages of redundant or excessive working capital
1. Excessive working capital means idle funds which earn no profits for the
business and hence the business cannot earn a proper rate of return on its
investments.
2. When there is a redundant working capital, it may lead to unnecessary
purchasing and accumulation of inventories causing more chances of theft,
waste and losses.
3. Excessive working capital implies excessive debtors and defective credit
policy which causes higher incidence of bad debts.
4. It may reduce the overall efficiency of the business.
5. If a firm is having excessive working capital then the relations with
banks and other financial institution may not be maintained.
6. Due to lower rate of return n investments, the values of shares may also
fall.
7. The redundant working capital gives rise to speculative transactions
Disadvantages of Inadequate Working Capital
Every business needs some amounts of working capital. The need for working capital
arises due to the time gap between production and realization of cash from sales. There is
an operating cycle involved in sales and realization of cash. There are time gaps in
purchase of raw material and production; production and sales; and realization of cash.
Thus working capital is needed for the following purposes:
For the purpose of raw material, components and spares.
To pay wages and salaries
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To incur day-to-day expenses and overload costs such as office expenses.
To meet the selling costs as packing, advertising, etc.
To provide credit facilities to the customer.
To maintain the inventories of the raw material, work-in-progress, stores and spares and finished stock.
An enlightened management should, therefore, maintain the right amount of working
capital on a continuous basis. Only then a proper functioning of business operations will
be ensured. Sound financial and statistical techniques, supported by judgment, should be
used to predict the quantum of working capital needed at different time periods. A firm s
net working capital position is not only important as an index of liquidity but it is also
used as a measure of the firm s risk.
Risk in this regard means chances of the firm being unable to meet its obligations on due
date. The lender considers a positive net working as a measure of safety. All other things
being equal, the more the net working capital a firm has, the less likely that it will default
in meeting its current financial obligations. Lenders such as commercial banks insist that
the firm should maintain a minimum net working capital position. The requirement of the
working capital goes on increasing with the growth and expensing of the business till it
gains maturity. At maturity the amount of working capital required is called normal
working capital.
FACTORS DETERMINING THE WORKING CAPITAL REQUIREMENTS
There are no set rules or formula to determine the working capital requirements of firms.
A large number of factors, each having a different importance, influence working capital
needs of firms. Also, the importance of factors changes for a firm over time. Therefore,
an analysis of relevant factors should be made in order to determine total investment in
working capital. The following is the description of factors which generally influence the
working capital requirements of firms.
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1. Nature Of Business: The requirements of working is very limited in public
utility undertakings such as electricity, water supply and railways because
they offer cash sale only and supply services not products, and no funds are
tied up in inventories and receivables. On the other hand the trading and
financial firms requires less investment in fixed assets but have to invest large
amt. of working capital along with fixed investments.
2. Size of the Business: Greater the size of the business, greater is the
requirement of working capital.
3. Production Policy: If the policy is to keep production steady by accumulating
inventories it will require higher working capital.
4. Length of Production Cycle: The longer the manufacturing time the raw
material and other supplies have to be carried for a longer in the process with
progressive increment of labor and service costs before the final product is
Obtained. So working capital is directly proportional to the length of the
manufacturing process.
5. Seasonal Variations: Generally, during the busy season, a firm requires larger
working capital than in slack season.
6. Working Capital Cycle: The speed with which the working cycle completes
one cycle determines the requirements of working capital. Longer the cycle
larger is the requirement of working capital.
7. Rate of Stock Turnover: There is an inverse co-relationship between the
question of working capital and the velocity or speed with which the sales are
affected. A firm having a high rate of stock turnover will needs lower amt. of
working capital as compared to a firm having a low rate of turnover.
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8. Credit Policy: A concern that purchases its requirements on credit and sales
its product / services on cash requires lesser amt. of working capital and vice-
versa. The credit terms to be granted to customers may depend upon the
norms of the industry to which the firm belongs. But a firm has the flexibility
of shaping its credit policy within the constraint of industry norms and
practices. A liberal credit policy, without rating the creditworthiness of
customers, will be detrimental to the firm and will create a problem of
collections. A high collection period will mean tie- up of large funds in book
debts. Slack collection procedures can increase the chance of bad debts.
9. Business Cycle: In period of boom, when the business is prosperous, there is
need for larger amt. of working capital due to rise in sales, rise in prices,
optimistic expansion of business, etc. On the contrary in time of depression, the
Business contracts, sales decline, difficulties are faced in collection from debtor
and the firm may have a large amt. of working capital.
10. Rate of Growth of Business: In faster growing concern, we shall require large
amt. of working capital.
11. Earning Capacity and Dividend Policy: Some firms have more earning capacity
than other due to quality of their products, monopoly conditions, etc. Such firms
may generate cash profits from operations and contribute to their working capital.
The dividend policy also affects the requirement of working capital. A firm
maintaining a steady high rate of cash dividend irrespective of its profits needs
working capital than the firm that retains larger part of its profits and does not pay
so high rate of cash dividend.
11. Price Level Changes: Changes in the price level also affect the working
capital requirements. Generally rise in prices leads to increase in working
capital.
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12Sales depend on demand conditions. Most firms experience seasonal and cyclical
fluctuations in the demand for their products and services. These business variations
affect the working capital requirements, specially the temporary working capital
requirement of the firm. When there is an upward swing in the economy, sales will
increase; correspondingly, the firm’s investment in inventories and debtors will also
increase. Under boom, additional investment in fixed assets may be made by some
firms to increase their productive capacity.
Others FACTORS: These are:
Operating efficiency.
Management ability.
Irregularities of supply.
Import policy.
Asset structure.
Importance of labor
Banking facilities
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REQUIREMENTS OF FUNDS Funds Requirements of company
Fixed Capital Working Capital
Preliminary Expenses Raw Material
Purchase of Fixed Assets Inventories
Establishment work exp. Goods in Process
Fixed working capital others
Every company requires funds for investing in two types of capital i.e. fixed capital,
which requires long-term funds, and working capital, which requires short-term funds.
SOURCES OF WORKING CAPITAL
Long-term source Short-term source(Fixed working capital) (Temporary working capital)
a) Loan from financial institution a) Factoring
b) Floating of Debentures b) Bill discounting
c) Accepting public deposits c) Bank overdraft
d) Issue of shares d) Trade credit
e) Cash credit
f) Commercial paper
Sources of additional working capital include the following:
Existing cash reserves
Profits (when you secure it as cash)
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Payables (credit from suppliers)
New equity or loans from shareholders
Bank overdrafts or lines of credit
Term loans
If you have insufficient working capital and try to increase sales, you can easily over-
stretch the financial resources of the business. This is called overtrading. Early warning
signs include:
Pressure on existing cash
Exceptional cash generating activities e.g. offering high discounts for early cash
payment
Bank overdraft exceeds authorized limit
Seeking greater overdrafts or lines of credit
Part-paying suppliers or other creditors
Paying bills in cash to secure additional supplies
Management pre-occupation with surviving rather than managing
Frequent short-term emergency requests to the bank (to help pay wages, pending
receipt of a cheque).
LONG TERM SOURCES
ISSUE OF SHARESOrdinary shares are also known as equity shares and they are the most common form of
share in the UK. An ordinary share gives the right to its owner to share in the profits of
the company (dividends) and to vote at general meetings of the company.
Since the profits of companies can vary wildly from year to year, so can the dividends
paid to ordinary shareholders. In bad years, dividends may be nothing whereas in good
years they may be substantial. The nominal value of a share is the issue value of the share
- it is the value written on the share certificate that all shareholders will be given by the
company in which they own shares.
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The market value of a share is the amount at which a share is being sold on the stock
exchange and may be radically different from the nominal value. When they are issued,
shares are usually sold for cash, at par and/or at a premium. Shares sold at par are sold for
their nominal value only - so if Rs.10 share is sold at par; the company selling the share
will receive Rs. 10 for every share it issues. If a share is sold at a premium, as many
shares are these days, then the issue price will be the par value plus an additional
premium.
DEBENTURESDebentures are loans that are usually secured and are said to have either fixed or floating
charges with them. A secured debenture is one that is specifically tied to the financing of
a particular asset such as a building or a machine. Then, just like a mortgage for a private
house, the debenture holder has a legal interest in that asset and the company cannot
dispose of it unless the debenture holder agrees.If the debenture is for land and/or
buildings it can be called a mortgage debenture.
Debenture holders have the right to receive their interest payments before any dividend is
payable to shareholders and, most importantly, even if a company makes a loss, it still
has to pay its interest charges. If the business fails, the debenture holders will be
preferential creditors and will be entitled to the repayment of some or all of their money
before the shareholders receives anything
LOANS FROM OTHER FINANCIAL INSTITUTIONS
The term debenture is a strictly legal term but there are other forms of loan or loan stock.
A loan is for a fixed amount with a fixed repayment schedule and may appear on a
balance sheet with a specific name telling the reader exactly what the loan is and its main
details.
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SHORT TERM SOURCES
FACTORING
Factoring allows you to raise finance based on the value of your outstanding invoices.
Factoring also gives you the opportunity to outsource your sales ledger operations and to
use more sophisticated credit rating systems. Once you have set up a factoring
arrangement with a Factor, it works this way:
Once you make a sale, you invoice your customer and send a copy of the invoice to the
factor and most factoring arrangements require you to factor all your sales. The factor
pays you a set proportion of the invoice value within a pre-arranged time - typically; most
factors offer you 80-85% of an invoice's value within 24 hours. The major advantage of
factoring is that you receive the majority of the cash from debtors within 24 hours rather
than a week, three weeks or even longer.
INVOICE DISCOUNTINGInvoice discounting enables you to retain the control and confidentiality of your own
sales ledger operations. The client company collects its own debts. 'Confidential invoice
discounting' ensures that customers do not know you are using invoice discounting as
the client company sends out invoices and statements as usual. Once the client receives
payment, it must deposit the funds in a bank account controlled by the invoice discounter.
The invoice discounter will then pay the remainder of the invoice, less any charges. The
requirements are more stringent than for factoring.
OVERDRAFT FACILITIESMany companies have the need for external finance but not necessarily on a long-term
basis. A company might have small cash flow problems from time to time but such
problems don't call for the need for a formal long-term loan. Under these circumstances, a
company will often go to its bank and arrange an overdraft. Bank overdrafts are given on
current accounts and the good point is that the interest payable on them is calculated on a
daily basis. So if the company borrows only a small amount, it only pays a little bit of
interest. Contrast the effects of an overdraft with the effects of a loan.
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TRADE CREDIT
This source of finance really belongs under the heading of working capital management
since it refers to short-term credit. By a 'line of credit' they mean that a creditor, such as a
supplier of raw materials, will allow us to buy goods now and pay for them later. Why do
they include lines of credit as a source of finance? They all, if they manage their creditors
carefully they can use the line of credit they provide for us to finance other parts of their
business.
MANAGEMENT OF WORKING CAPITAL
Management of working capital is concerned with the problem that arises in attempting
to manage the current assets, current liabilities. The basic goal of working capital
management is to manage the current assets and current liabilities of a firm in such a way
that a satisfactory level of working capital is maintained, i.e. it is neither adequate nor
excessive as both the situations are bad for any firm. There should be no shortage of
funds and also no working capital should be ideal. WORKING CAPITAL
MANAGEMENT POLICES of a firm has a great on its probability, liquidity and
structural health of the organization. So working capital management is three dimensional
in nature as
1. It concerned with the formulation of policies with regard to profitability,
liquidity and risk.
2. It is concerned with the decision about the composition and level of current
assets.
3. It is concerned with the decision about the composition and level of current
liabilities.
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DATA ANALYSIS AND
INTERPRETATION
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TOOLS USED FOR THE STUDY
RATIO ANALYSIS
SCHEDULE OF CHANGES IN WORKING CAPITAL
OPERATING CYCLE ANALYSIS
RATIO ANALYSIS
Financial ratios are one of the most common tools of managerial decision making.
Financial ratios involve the comparison of various figures from the financial statements
in order to gain information about a company's performance. It is the interpretation,
rather than the calculation, that makes financial ratios a useful tool for business
managers. Ratios may serve as indicators, clues, or red flags regarding noteworthy
relationships between variables used to measure the firm's performance in terms of
profitability, asset utilization, liquidity, leverage, or market valuation.
A ratio is define as “the indicated quotient of two mathematical expressions” and as “the
relationship between two or more things”.
ROLE OF RATIO ANALYSIS
Ratio analysis helps to appraise the firms in the term of there profitability and efficiency
of performance, either individually or in relation to other firms in same industry. Ratio
analysis is one of the best possible techniques available to management to impart the
basic functions like planning and control. As future is closely related to the immediately
past, ratio calculated on the basis historical financial data may be of good assistance to
predict the future, the ratio analysis may be able to locate the point out the various arias
Which need the management attention in order to improve the situation.
LIMITATIONS OF RATIO ANALYSIS
The basic limitation of ratio analysis is that it may be difficult to find a basis for
making the comparison
Normally, the ratios are calculated on the basis of historical financial statements.
An organization for the purpose of decision making may need the hint regarding
the future happiness rather than those in the past. The external analyst has to
depend upon the past which may not necessary to reflect financial position and
performance in future.
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The technique of ratio analysis may prove inadequate in some situations if there is
differs in opinion regarding the interpretation of certain ratio.
As the ratio calculates on the basis of financial statements, the basic limitation
which is applicable to the financial statement is equally applicable In case of
technique of ratio analysis also i.e. only facts which can be expressed in financial
terms are considered by the ratio analysis.
The technique of ratio analysis has certain limitations of use in the sense that it
only highlights the strong or problem arias, it dose not provide any solution to
rectify the problem arias.
Ratio analysis is very important for the franchisor to establish norms and seek patterns of
financial operations over a period of time. Unfortunately, few franchisors (or any kind of
business) use ratio analysis -- it is estimated that just two percent compute financial ratios
And use them in managing their businesses. The franchisor can use ratio analysis also to
obtain a bank loan.
CLASSIFICATION OF WORKING CAPITAL RATIO
Working capital ratio means ratios which are related with the working capital
management e.g. current assets, current liabilities, liquidity, profitability and risk turnoff
etc. these ratio are classified as follows
EFFICIENCY RATIO
The ratios compounded under this group indicate the efficiency of the organization to use
the various kinds of assets by converting them the form of sale. This ratio also called as
activity ratio or assets management ratio. As the assets basically categorized as fixed
assets and current assets and the current assets further classified according to individual
components of current assets viz. investment and receivables or debtors or as net current
assets, the important of efficiency ratio as follows:
1) Working capital turnover ratio
2) Inventory turnover ratio
3) Receivable turnover ratio
4) Current assets turnover ratio
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LIQUIDITY RATIO
The ratios compounded under this group indicate the short term position of the
organization and also indicate the efficiency with which the working capital is being
used. The most important ratio under this group is follows
1. Current ratio
2. Quick ratio
3. Absolute liquid ratio
EFFICIENCY RATIO
WORKING CAPITAL TURNOVER RATIO
It signifies that for an amount of sales, a relative amount of working capital is needed. If
any increase in sales contemplated working capital should be adequate and thus this ratio
helps management to maintain the adequate level of working capital. The ratio measures
the efficiency with which the working capital is being used by a firm. It may thus
compute net working capital turnover by dividing sales by working capital.
Working Capital Turnover Ratio = Sales / Net Working Capital
Working capital=current asset-current liability
Working capitals turn over ratio (in million)
YEAR SALES WORKING CAPITAL
WORKING CAPITAL TURNOVER RATIO
2005-2006 4242.42 1087.26 3.92006-2007 5267.72 1370.93 3.82007-2008 6567.75 1867.41 3.52008-2009 7091.69 2325.27 3.042009-2010 7760.09 2036.07 3.8
Table 1
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Chart of working capital turnover ratio.
0
0.5
1
1.5
2
2.5
3
3.5
4
1 2 3 4 5 6 7
YEAR
working capital turnover ratio
Interpretation
A higher ratio indicates efficient utilization of working capital and a low ratio indicates
otherwise. In the year 2005-06 the working capital turnover ratio is 3.8 times which
indicates efficient utilization of working capital compared to other years. In the years
2006-07, 2007-08 and 2008-09 the utilization of working capital is low. But in the year
2009-2010, ratio is 3.8 times i.e., firm utilization
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INVENTORY TURNOVER RATIO:Inventory turnover ratio, defined as how many times the entire inventory of a company
has been sold during an accounting period, is a major factor to success in any business
that holds inventory. It shows how well a company manages its inventory levels and how
frequently a company replenishes its inventory. In general, a higher inventory turnover is
better because inventories are the least liquid form of asset. Inventory turnover ratio
explanations occur very simply through an illustration of high and low turnover ratios.
Despite this, many businesses do not survive due to issues with inventory.
Average inventory and cost of goods sold are the two elements of this ratio. Average
inventory is calculated by adding the stock in the beginning and at the end of the period
and dividing it by two. In case of monthly balances of stock, all the monthly balances are
added and the total is divided by the number of months for which the average is
calculated. A low inventory turnover ratio shows that a company may be overstocking or
deficiencies in the product line or marketing effort. It is a sign of ineffective inventory
management because inventory usually has a zero rate of return and high storage cost.
Higher inventory turnover ratios are considered a positive indicator of effective inventory
management. However, a higher inventory turnover ratio does not always mean better
performance. It sometimes may indicate inadequate inventory level, which may result in
decrease in sales.
It also opens the company up to trouble should prices begin to fall.
(a) [Inventory Turnover Ratio = Cost of goods sold / Average inventory at cost]
(b) [Inventory Turnover Ratio = Net Sales / Average Inventory at Cost]
(c) [Inventory Turnover Ratio = Net Sales / Average inventory at Selling Price]
(d) [Inventory Turnover Ratio = Net Sales / Inventory]
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CARBORUNDUM UNIVERSAL LIMITED
INVENTORY TURN OVER RATIO (in million)
YEAR NETSALES AVERAGE INVENTORY
INVENTORY TURNOVER RATIO
2005-2006 3721.53 514.41 7.232006-2007 4645.56 738.68 6.292007-2008 5830.10 945.57 6.172008-2009 6519.00 1165.47 5.592009-2010 7310.10 1191.54 6.14
Table 2
Chart of inventory turnover ratio
0
1
2
3
4
5
6
7
8
2005-06 2006-07 2007-08 2008-09 2009-10
inventory turnover ratio
inventory turnover ratio
Interpretation
Inventory turn over ratio measures the velocity of conversion of stock into sales. A high
inventory turnover or a stock velocity indicates efficient management of inventory
because more frequently the stocks are sold; the lesser amount of money is required to
finance the inventory. A low inventory turnover implies over investment in inventories,
dull business, poor quality of goods and low profits as compared to total investments.
Here we can see that in the year 2005-06, 7.23 shows efficient management of
inventory.2006-07, 2007-08 and 2009-10 also shows efficient management. But in the
year 2008-09 is 5.59, shows low inventory turnover.
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CARBORUNDUM UNIVERSAL LIMITED
DEBTORS TURNOVER RATIO
Debtors turnover ratio or accounts receivable turnover ratio indicates the velocity of debt
collection of a firm. In simple words it indicates the number of times average debtors (receivable)
are turned over during a year.
Formula of Debtors Turnover Ratio:
[Debtors Turnover Ratio = Net Credit Sales / Average Trade Debtors]
The two basic components of accounts receivable turnover ratio are net credit annual
sales and average trade debtors. The trade debtors for the purpose of this ratio include the
amount of Trade Debtors & Bills Receivables. The average receivables are found by
adding the opening receivables and closing balance of receivables and dividing the total
by two. It should be noted that provision for bad and doubtful debts should not be
deducted since this may give an impression that some amount of receivables has been
collected. But when the information about opening and closing balances of trade debtors
and credit sales is not available, then the debtor’s turnover ratio can be calculated by
dividing the total sales by the balance of debtors (inclusive of bills receivables) given and
formula can be written as follows.
[Debtors Turnover Ratio = Total Sales / Debtors]
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CARBORUNDUM UNIVERSAL LIMITED
DEBTORS TURNOVER RATIO (in million)
YEAR TOTAL SALES DEBTORS DEBTORS TURNOVER RATIO
2005-2006 4242.42 824.90 5.142006-2007 5267.72 937.43 5.622007-2008 6567.75 1322.86 4.962008-2009 7091.69 1529.64 4.642009-2010 7760.09 1600.22 4.85
Table 3Chart of debtors turnover ratio
debtorsturnover ratio
0
1
2
3
4
5
6
2005-06 2006-07 2007-08 2008-09 2009-10
debtorsturnover ratio
Interpretation
Debtor’s velocity indicates the number of times the debtors are turned over during a year.
Generally, the higher the value of debtor’s turnover the more efficient is the management
of debtors and low debtors turnover implies inefficient management of debtors. Here we
can see that in the year 2006-2007 it shows that they have efficiently managed the
debtors.
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CARBORUNDUM UNIVERSAL LIMITED
CURRENT ASSETS TURNOVER RATIO
Current assets are a major component of the balance sheet and represent assets that are
expected to be sold or used, typically within the next 12 months. They are also an
important measure of a company’s liquidity position. Current assets have become a very
important factor in evaluating the financial strength of a company, in the event of a weak
economic environment or one of lower demand. Many of the popular financial ratios will
utilize the current assets when performing analysis to gauge financial performance and
stability.
Current Assets Turnover ratio shows the productivity of the company's current assets.
The formula is the following:
= turnover / average (current assets, other + stocks + debtors + cash & equivalents)
Current assets turnover ratio is calculate to know the firms efficiency of utilizing the
current assets. Current assets includes the assets like inventories, sundry debtors, bills
receivable, cash in hand or bank, marketable securities, prepaid expenses and short term
loans and advances. This ratio includes the efficiency with which current assets turn into
sales. A higher ratio implies a more efficient use of funds thus high turnover ratio
indicate to reduced the lock up of funds in current assets. An analysis of this ratio over a
period of time reflects working capital management of a firm.
Current assets TOR= Sales / Current assets
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CARBORUNDUM UNIVERSAL LIMITED
CURRENT ASSET TURNOVER RATIO (in million)
year Total sales Current
asset
Current asset
Turnover ratio
2005-2006 4242.42 1733.71 2.45
2006-2007 5267.72 2228.35 2.36
2007-2008 6567.75 2898.31 2.27
2008-2009 7091.69 3431.45 2.07
2009-2010 7760.09 3282.58 2.36
Table 4
Chart of current asset turnover ratio
1.8
1.9
2
2.1
2.2
2.3
2.4
2.5
2005-06 2006-07 2007-08 2008-09 2009-10
current asset turnover ratio
current asset turnover ratio
Interpretation
It was observed that the current asset turnover ratio followed a decreasing trend upto
2009 after that in 2010 it was in increased. The sales is almost double the current asset is
considered to be satisfactory.
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CARBORUNDUM UNIVERSAL LIMITED
LIQUIDITY RATIO
CURRENT RATIO
Current ratio may be defined as the relationship between current assets and current
liabilities. This ratio is also known as "working capital ratio". It is a measure of general
liquidity and is most widely used to make the analysis for short term financial position or
liquidity of a firm. It is calculated by dividing the total of the current assets by total of the
current liabilities.
The ratio is mainly used to give an idea of the company's ability to pay back its short-
term liabilities (debt and payables) with its short-term assets (cash, inventory,
receivables). The higher the current ratio, the more capable the company is of paying its
obligations. The current ratio can give a sense of the efficiency of a company's operating
cycle or its ability to turn its Product into cash. Companies that have trouble getting paid
on their receivables or have long inventory turnover can run into liquidity problems
because they are unable to alleviate their obligations. Because business operations differ
in each industry, it is always more useful to compare companies within the same industry.
This ratio is similar to the acid-test ratio except that the acid-test ratio does not include
inventory and pre paid as assets that can be liquidated. The components of current ratio
(current assets and current liabilities) can be used to derive working capital (difference
between current assets and current liabilities). Working capital is frequently used to
derive the working capital ratio, which is working capital as a ratio of sales.
[Current Ratio = Current Assets / Current Liabilities]
Components:
The two basic components of this ratio are current assets and current liabilities. Current
assets include cash and those assets which can be easily converted into cash within a
Short period of time, generally, one year, such as marketable securities or readily
realizable investments, bills receivables, sundry debtors, (excluding bad debts or
provisions), inventories, work in progress, etc.
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CARBORUNDUM UNIVERSAL LIMITED
Current liabilities are those obligations which are payable within a short period of tie
generally one year and include outstanding expenses, bills payable, sundry creditors,
bank overdraft, accrued expenses, short term advances, income tax payable, dividend
payable, etc.
Limitations of Current Ratio:
This ratio is measure of liquidity and should be used very carefully because it suffers
from many limitations. It is, therefore, suggested that it should not be used as the sole
index of short term solvency.
1 It is crude ratio because it measures only the quantity and not the quality of the current
assets.
2 Even if the ratio is favorable, the firm may be in financial trouble, because of more
stock and work in process which is not easily convertible into cash, and, therefore firm
may have less cash to pay off current liabilities.
3 Valuation of current assets and window dressing is another problem. This ratio can be
very easily manipulated by overvaluing the current assets. An equal increase in both
current assets and current liabilities would decrease the ratio and similarly equal decrease
in current assets and current liabilities would increase current ratio.
CURRENT RATIO (in million)
YEAR CURRENT ASSET
CURRENT LIABILITY
CURRENT RATIO
2005-2006 1733.71 646.45 2.682006-2007 2228.35 857.42 2.602007-2008 2898.31 1030.90 2.812008-2009 3431.45 1106.18 3.102009-2010 3282.58 1246.51 2.63
Table 5
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CARBORUNDUM UNIVERSAL LIMITED
Chart of current ratio
2.3
2.4
2.5
2.6
2.7
2.8
2.9
3
3.1
2005-06 2006-07 2007-08 2008-09 2009-10
current ratio
current ratio
Interpretation
A ratio equal or near to the thumb rule 2:1 i.e., current assets double the current
liabilities is considered to be satisfactory. We can see in the year 2006,2007,2008,2009
and 2010 the current ratios are 2.68, 2.60, 2.81, 3.10 and 2.63 respectively. Here the
current assets are double the current liabilities.
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CARBORUNDUM UNIVERSAL LIMITED
QUICK RATIO
The quick ratio, defined also as the acid test ratio, reveals a company's ability to meet
short-term operating needs by using its liquid assets. It is similar to the current ratio, but
is considered a more reliable indicator of a company’s short-term financial strength. The
difference between these two is that the quick ratio subtracts inventory from current
assets and compares the quick asset to the current liabilities. Similar to the current ratio,
value for the quick ratio analysis varies widely by company and industry. In theory, the
higher the ratio is, the better the position of the company is. However, a better benchmark
is to compare the ratio with the industry average.
Quick ratios are often explained as measures of a company’s ability to pay their current
debt liabilities without relying on the sale of inventory. Compared with the current ratio,
the quick ratio is more conservative because it does not include inventories which can
sometimes be difficult to liquidate. For lenders, the quick ratio is very helpful because it
reveals a company’s ability to pay off under the worst possible condition.
Quick Ratio FormulaQuick Ratio = (Current assets – Inventories) / Current liabilities
Quick ratio calculation is a useful skill for any business that may face cash flow issues.
Quick assets include those current assets that presumably can be quickly converted to
cash at close to their book values. It normally includes cash, marketable securities, and
some accounts receivables. The quick ratio, sometimes called the acid-test, is a more
stringent test of liquidity than the current ratio. A business has to find a buyer if it wants
to liquidate inventory, or turn it into cash. Finding a buyer is not always easy. Quick
ratios establish the relationship between quick or liquid assets and liabilities.
An asset is liquid if it can be converting in to cash immediately or reasonably soon
without a loss of value. Cash is the most liquid asset .other assets which are consider to
be relatively liquid and include in quick assets are debtors and bills receivable and
marketable securities. Inventories are considered as less liquid.
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CARBORUNDUM UNIVERSAL LIMITED
Inventory normally required some time for realizing into cash. Their value also is
tendency to fluctuate. The quick ratio is found out by dividing quick assets by current
liabilities.
QUICK RATIO (in million)
YEAR QUICK ASSETS CURRENT LIABILITIES
QUICK RATIO
2005-2006 1219.30 646.45 1.862006-2007 1489.67 857.42 1.742007-2008 1952.74 1030.90 1.892008-2009 2265.98 1106.18 2.052009-2010 2091.04 1246.51 1.68
Table 6Chart of quick ratio
0
0.5
1
1.5
2
2.5
2005-06 2006-07 2007-08 2008-09 2009-10
quick ratio
quick ratio
Interpretation
As a rule of thumb or as a convention quick ratio of 1:1 is considered satisfactory. It is
generally thought that if quick assets are equal to current liabilities then the concern may
be able to meet its short term obligations. We can see in the years 2006,2007,2008,2009
and 2010 shows that it is equal to current liabilities. In the year 2009 the quick ratio is
2.05 i.e., the quick assets double the current liabilities. This shows that the concern may
be able to meet its short term obligations.
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CARBORUNDUM UNIVERSAL LIMITED
Absolute Quick ratio
The ratio shows very clearly whether a concern is liquid or not. In other words, it is the
real measure of the liquidity or short-term solvency of a concern Even though debtors and
bills receivables are considered as more liquid then inventories; it can not be converted in
to cash immediately or in time. Therefore the while calculation of absolute liquid ratio
only the absolute liquid assets as like cash in hand cash at bank, short term marketable
securities are taken in to consideration to measure the ability of the company in meeting
short term financial obligation. It calculates by absolute assets dividing by current
liabilities.
Absolute Liquid Ratio = Absolute Liquid assets / Quick Liabilities
ABSOLUTE QUICK RATIO (in million)YEAR ABSOLUTE
QUICK ASSETSCURRENT LIABILITIES
ABSOLUTE QUICK RATIO
2005-2006 145.80 646.45 .232006-2007 273.26 857.42 .322007-2008 169.71 1030.90 .162008-2009 343.21 1106.18 .312009-2010 61.32 1246.51 .05
Table 7Chart of absolute quick ratio
absolute quick ratio
0
0.05
0.1
0.15
0.2
0.25
0.3
0.35
2005-06 2006-07 2007-08 2008-09 2009-10
absolute quick ratio
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Interpretation
The acceptance norm for this ratio is 50%or .5:1 or 1:2.here we can see that all the years,
absolute liquid ratio is slightly low. In all, the company needs to improve its short term
financial position.
PROFITABILITY RATIOS
Profitability ratio measures overall performance and effectiveness of the firm. Besides the
management of the company, creditors and owners are interested in the profitability of
the firm.
NET PROFIT RATIO
Net profit ratio establishes a relationship between net profit and sales and indicates the
efficiency of the management in manufacturing, selling, administrative and other
activities of the firm. This ratio is the overall measures of firm profitability.
Net profitability = Net profit after tax
Net sales
NET PROFIT RATIO (in million)
YEAR NET PROFIT NET SALES NET PROFIT RATIO
2005-2006 766.13 3721.53 21%2006-2007 586.61 4645.56 13%2007-2008 971.70 5830.10 17%2008-2009 597.17 6519.00 9%2009-2010 580.10 7310.10 8%
CENTRE FOR MBA/ NILESHWAR 62
CARBORUNDUM UNIVERSAL LIMITED
Table 8
Chart of net profit ratio
0%
5%
10%
15%
20%
25%
2005-06 2006-07 2007-08 2008-09 2009-10
net profit ratio
net profit ratio
Interpretation
The ratio indicates the firm’s capacity to face adverse economic conditions. Higher the
ratio, the better is the profitability. But while interpreting the ratio, it should be kept in
mind that the performance of profits must also be seen in relation to investment or capital
of the firm and not only in relation to sales. Here we can see that the ratios are decreasing
from year to year. It shows lower profitability.
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CARBORUNDUM UNIVERSAL LIMITED
GROSS PROFIT RATIO
Cash and short-term assets expected to be converted to cash within a year. Businesses use
the calculation of gross working capital to measure cash flow. Gross working capital does
not account for current liabilities, but is simply the measure of total cash and cash
equivalent on hand. Gross working capital tends not to add much to the business' assets,
but helps keep it running on a day-to-day basis
GROSS PROFIT RATIO (in million)
YEAR GROSS PROFIT NET SALES GROSS PROFIT RATIO
2005-2006 4205.13 3721.53 113%2006-2007 4859.77 4645.56 105%2007-2008 6714.84 5830.10 115.18%2008-2009 7092.87 6519.00 109%2009-2010 7622.40 7310.10 104.27%
Table 9
Chart of gross profit ratio
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CARBORUNDUM UNIVERSAL LIMITED
98%
100%
102%
104%
106%
108%
110%
112%
114%
116%
2005-06 2006-07 2007-08 2008-09 2009-10
gross profit ratio
gross profit ratio
Interpretation
There is no standard norm for gross profit ratio and it may vary from business to business
but the gross profit should be adequate to cover the operating and to provide for fixed
charges. Higher the gross profit ratio, better the result. A low gross profit ratio generally
indicates high cost of goods sold. In the year 2005-2006 and 2007-2008 shows high gross
profit ratio and in other years shows low gross profit ratio.
Operating cycle analysis
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CARBORUNDUM UNIVERSAL LIMITED
The working capital cycle refers to the length of time between the firms
paying the cash for materials, etc., entering into production process/stock & the inflow of
cash from debtors (sales), suppose a company has certain amount of cash it will need raw
materials. Some raw materials will be available on credit but, cash will be paid out for the
other part immediately. Then it has to pay labor costs & incurs factory overheads. These
three combined together will constitute work in progress. After the production cycle is
complete, work in progress will get converted into sundry debtors. Sundry debtors will be
realized in cash after the expiry of the credit period.
This cash can be again used for financing raw material, work in progress etc. thus there is
complete cycle from cash to cash wherein cash gets converted into raw material, work in
progress, finished goods and finally into cash again. Short term funds are required to
meet the requirements of funds during this time period. This time period is dependent
upon the length of time within which the original cash gets converted into cash again.
The cycle is also known as operating cycle or cash cycle.
A company’s operating cycle typically consists of three primary activities: purchasing
resources, producing the product, and distributing (selling) the product. These activities
create funds flow that is both unsynchronized and uncertain. They are unsynchronized
because cash disbursements (for example, payments for resources purchases) usually take
place before cash receipts (for example, collection of receivables). They are uncertain
because future sales and costs, which generate the respective receipts and disbursements,
cannot be forecasted with complete accuracy. If the firm is to maintain liquidity and
function properly, it has to invest funds in various short-term assets (working capital)
during this cycle.
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CARBORUNDUM UNIVERSAL LIMITED
It has to maintain a cash balance to pay the bills as they come due. In addition, the
companies most invest in inventories to fill customer orders promptly. And finally, the
company invests in accounts receivable to extend credit to its customers.
Operating cycle is the time duration required to convert sales after conversation of
resources into inventories into cash. The operating cycle of a manufacturing company
involves three phases:
Acquisition of resources such as, raw material, labour, power and fuel etc.
Manufacturing of a product which includes conversion of raw material into work-
in-progress into finished goods.
Sales of the product either for cash on credit.
The operating cycle of a firm begins with the acquisition of raw materials and ends with
the collection of receivables stocks of raw material and other components. The firm holds
stocks of finished goods to meet the demand of customers on continuous basis and
sudden demand from source customers.
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Operating cycle
Receipt from cash purchase of raw material, creation of Debtors parts&components A/Cs payable (Creditors)
Creation of A/C payment ofReceivable (creditors) creditors
Sales of finished Goods manufacturing Operation (Added cost) Wages&saleries
Warehousing of finished goods office selling &distribution expenses Working capital cycle can be determined by adding the number of days required for each
stage in the cycle. For example, company holds raw material on average for 60 days, it
gets credit from the supplier for 15 days, finished goods are held for 30 days & 30 days
credit is extended to debtors. The total days are 120, i.e., 60 15 + 15 + 15 + 30 + 30 days
is the total of working capital.
Thus the working capital cycle helps in the forecast, control & management of working
capital. It indicates the total time lag & the relative significance of its constituent parts.
The duration may vary depending upon the business policies. In light of the facts
discusses above we can broadly classify the operating cycle of a firm into three phases
viz.
1 Acquisition of resources.
2 Manufacture of the product and
3 Sales of the product (cash / credit).
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CARBORUNDUM UNIVERSAL LIMITED
First and second phase of the operating cycle result in cash outflows, and be predicted
with reliability once the production targets and cost of inputs are known. However, the
third phase results in cash inflows which are not certain because sales and collection
which give rise to cash inflows are difficult to forecast accurately.
Operating cycle consists of the following:
Conversion of cash into raw-materials;
Conversion of raw-material into work-in-progress;
Conversion of work-in-progress into finished stock;
Conversion of finished stock into accounts receivable through sales; and Conversion of
accounts receivable into cash. In the form of an equation, the operating cycle process can
be expressed as follows:
OPERATING CYCLE = RMCP + WIPCP + FGCP + DCP-CCP
RMCP = Raw material conversion period
W IPCP = Work in progress conversion period
F GCP = Finished goods conversion period
DCP = Debtors collection period
CCP = Creditors conversion period
ICP = Inventory Conversion Period
RCP = Receivables Conversion Period
Payables (PDP) = Payables Deferral Period
NOC = Net Operating Cycle
GOC = Gross Operating Cycle
Here, the length of GOC is the sum of ICP and RCP. ICP is the total time needed for
producing and selling the products. Hence it is the sum total of RMCP, WIPCP and
FGCP. On the other hand, RCP is the total time required to collect the outstanding
amount from customers. Usually, firm acquires resources on credit basis.
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CARBORUNDUM UNIVERSAL LIMITED
PDP is the result of such an incidence and it represents the length of time the firm is able
to defer payments on various resources purchased.The difference between GOC and PDP
is known as Net Operating Cycle and if Depreciation is excluded from the expenses in
computation of operating cycle, the NOC also represents the cash collection from sale
and cash payments for resources acquired by the firm and during such time interval
between cash collection from sale and cash payments for resources acquired by the firm
and during such time interval over which additional funds called working capital should
be obtained in order to carry out the firms operations. In short, the working capital
position is directly proportional to the Net Operating Cycle.
Calculations:
On the basis of financial statement of an organization we can calculate the inventory
conversion period. Debtors / receivables conversion period and the creditor’s conversion
period and based on such calculations we can find out the length of the operating cycle
(in days) both gross as well as net operating cycle.
As mentioned above, on the basis of information presented in the Balance sheet and
CMA statement of CUMI, the length of gross as well as net operating cycle is calculated
as follows:
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CARBORUNDUM UNIVERSAL LIMITED
Particulars 2005-06 2006-07 2007-08 2008-09 2009-10MaterialCost
147.71 245.41 332.19 472.74 386.07
Labour cost 340.17 382.09 505.93 565.69 629.82Direct expenses
…………
………….
………….
………….
………….
Prime cost 487.88 627.5 838.12 1038.43 1015.89Manufacturing expenses
1314.15 1633.33 2026.29 2292 2287.42
Cost of production
1802.03 2260.83 2864.41 3330.43 3303.31
+opening WIP
121.30 149.78 242.22 233.85 284.66
-closing WIP 149.78 242.22 233.85 284.66 313.50Cost of goods produced
1773.55 2168.39 2872.78 3279.62 3274.47
+opening FG 165.10 193.57 272.30 272.30 315.63-closing FG 193.57 272.30 315.63 315.63 334.68Cost of good sold
1745.08 2089.66 2829.45 3236.29 3255.42
Operating cycle for the year 2005-2006
RMCP = AVERAGE STOCK X 360 ANNUAL CONSUMPTION
= 147.71 X 360 1241.55 = 42 DAYS
WIPCP = AVERAGE STOCK X 360 COST OF PRODUCTION
= 135.54 X 360 1802.83
= 27 DAYS
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CARBORUNDUM UNIVERSAL LIMITED
FGCP = AVERAGE STOCK X 360 COST OF GOODS SOLD
= 223.62 X 360 1745.08
= 46 DAYS
DEBTORS CONVERSION PERIOD = AVERAGE TRADE DEBTORS X 360 AVERAGE CREDIT SALES
= 824.90 X 360 4242.42
= 70 DAYS
CREDITORS CONVERSION PERIOD = AVERAGE TRADE CREDITORS X 360 AVERAGE CREDIT PURCHASE
= 378.52 X 360
1241.55 = 110 DAYS
GROSE OPERATING CYCLE= 42+27+46+70 =185 DAYS
NET OPERATING CYCLE = 87+21+38+70-110=75 DAYS
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CARBORUNDUM UNIVERSAL LIMITED
Operating cycle (IN DAYS)
PARTIC-ULARS
2005-06 2006-07 2007-08 2008-09 2009-10 AVERAGE
RMCP 42 51 53 63 44 51
WICP 27 33 30 28 33 30
FGCP 46 44 30 33 36 38
DCP 70 65 73 78 74 72
GOC 185 193 186 202 187 191
CCP 110 112 102 98 102 105
NOC 75 81 84 104 85 86
Interpretation
The above table shows that the operating cycle of the firm over a period of five years
from 2006-2010. It indicates that the raw material conversion period is increased up to 63
days in 2008-2009 and then it is decreased to a level of 44 days. Finished goods
conversion period shows a decreasing trend up to 2008-2009 and then it is increased.
Debtor’s conversion period and creditor’s conversion period shows variable trends.
Similarly net operating cycle shows a increasing trend up to 2008-2009 and then it is
decreased.
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CARBORUNDUM UNIVERSAL LIMITED
SCHEDULE OF CHANGES IN WORKING CAPITAL
The working capital position at the beginning of a period is changed to a different
position at the end of the period. A schedule of working capital is prepared to depict the
changes of working capital. This statement or schedule to prepared with current assets
and current liabilities as appearing in the balance sheet under consideration. The
statement shows the changes in individual items of current assets and current liabilities
and their effect of working capital. The total increase and the total decrease in the end is
compared and the difference of total increase and the total decrease shows net increase or
net decrease in the working capital. If the working capital at the end of current year is
more than the working capital at the previous year the excess is called, “increase in
working capital”, if the previous year working capital is more than the current year
working capital, the excess is called, “decrease in working capital”.
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CARBORUNDUM UNIVERSAL LIMITED
Schedule of changes in Net working capital of CUMISl no particulars 2005-06 2006-07 Increase Decrease Percent-
age(%)
1 Petty cash &bank
117.6 153.07 35.47 30.16
2 Receivables /debtors
824.90 937.43 112.53 13.64
3 Stock 514.41 738.68 224.27 43.594 Loans
&advances248.60 278.98 30.38 12.22
5 Deposits 28.20 120.19 91.99 326.186 Total current
assets1733.71 2228.35 494.64
7 creditors 378.52 528.03 149.51 39.498 Accruals 67.68 165.56 97.88 144.629 Provision 200.25 163.83 36.42 (18.18)10 Total current
liability646.45 857.42 36.42 247.39
11 Net working capital
1087.26 1370.93 531.06 247.39
12 Increase/ decrease in net working capital
283.67 283.67
13 TOTAL 1087.26 1087.26 247.39 247.39
INTERPRETATION
The above table specifies that net working capital of the company is in increasing
trend .inventories was more than the previous year. All the current assets and current
liabilities were in increasing trend. The net working capital shows a positive balance in
both the year 2006 and 07. It shows that company’s financial position is satisfactory.
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Schedule of changes in Net working capital of CUMI (in million)
Serial no
Particulars 2006-07
2007-08
Increase Decrease Percentage
1. Petty cash &bank
153.07 104.4 48.67 (31.79)
2. Receivables /debtors
937.43 1322.86 385.43 30.44
3. Stock 738.68 945.57 206.89 28.004. Loans
&advances278.98 460.17 181.19 64.94
5. Deposits 120.19 65.31 54.88 (45.66)6. Total
current assets
2228.35 2898.31 773.51 103.49
7. creditors 528.03 643.72 115.69 21.908. Accruals 165.56 171.59 6.03 03.649. Provision 163.83 215.19 51.36 31.3410. Total
current liability
857.42 1030.90 …….. 173.48 20.23
11. Net working capital
1370.93 1867.41 773.51 276.97
12. Increase/ decrease in net working capital
496.48 496.48
13. TOTAL 1370.93 1370.93 276.97 276.97
INTERPRETATION
The above table shows increase in net working capital of the firm in the year 2008 when
compared to the year 2007.total debtor’s level increased by 30.44 %. The cash level
decreased. Total current assets and current liabilities were in increasing trend.net working
capital shows a positive balance, which shows that the company’s financial position is
satisfactory.
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Schedule of changes in Net working capital of CUMI (in million)Serial no
particulars 2007-08
2008-09
Increase Decrease Percentage(%)
1 Petty cash &bank
104.4 193.21 88.81 85.06
2 Receivables /debtors
1322.86 1529.64 206.78 15.63
3 Stock 945.57 1165.47 219.9 23.254 Loans
&advances460.17 393.13 67.04 (14.46)
5 Deposits 65.31 150.00 84.69 129.676 Total
current assets
2898.31 3431.45 600.18 67.04
7 creditors 643.72 739.44 95.72 48.698 Accruals 171.59 153.19 18.4 (14.86)9 Provision 215.19 213.55 1.64 (10.72)10 Total
current liability
1030.90 1106.18 20.04 95.72
11 Net working capital
1867.41 2325.27 620.22 162.76
12 Increase/ decrease in net working capital
457.86 457.86
13 TOTAL 1867.41 1867.41 162.76 162.76
Interpretation
The above table specifies that the net working capital of the company in the year 2009
shows a positive balance. Compared to the previous it is increased. Total current were
more than the current liabilities. Debtors and cash level were also in increasing trend. The
above table shows that company’s having a sound financial position.
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Schedule of changes in Net working capital of CUMI in millionSl no
particulars 2008-09
2009-10
Increase Decrease Percentage
1 Petty cash &bank
193.21 53.22 139.99 (72.5)
2 Receivables /debtors
1529.64 1600.22 70.58 04.61
3 Stock 1165.47 1191.54 26.07 02.23
4 Loans &advances
393.13 429.50 36.37 09.25
5 Deposits 150.00 8.10 141.9 (94.6)
6 Total current assets
3431.45 3282.58 133.02 281.89
7 creditors 739.44 890.20 150.76 20.38
8 Accruals 153.19 145.64 7.55 (4.92)
9 Provision 213.55 210.67 2.88 (1.34)
10 Total current liability
1106.18 1246.51 10.43 150.76
11 Net working capital
2325.27 2036.07 143.45 432.65
12 Increase/ decrease in net working capital
289.2 289.2
13 TOTAL 2036.27 2036.07 143.45 143.45
Interpretation
The above table shows decrease in net working capital of the form in the year 2010 when
compared to the year 2009. The bank deposits were decreased by 94%. The current assets
level also decreased when compared to the previous year. The net working capital of the
company in the year 2010 shows a positive balance, which shows that the company’s
financial position in not satisfactory.
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FINDINGS AND
SUGGESTIONS
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Summary of findings
CARBORUNDUM UNIVERSAL LTD involves the business activities are
manufacturing the coated abrasives, bonded abrasives and super refractories, electro
minerals, industrial ceramics and ceramic fibers. CUMI has 10 manufacturing facilities
across the India and these manufacturing facilities are meticulously connected with wide
network of distributors and sub distributors. CUMI’s equipped with a state of the art
research and development center which works aggressively on products development and
enhancement.
1. The company has a good solvency position.
2. In 2007-2008 CUMI’S net profit has increased to maximum which indicates that
the firm is able to with stand adverse economic conditions.
3. The firm enjoyed more credit in the year 2008 compared to other 4 years.
4. The company has not maintained stability in its working capital turnover ratio
which is an indication of ineffective use of working capital.
5. Positive working capital indicates that company has the ability of payments of
short terms liabilities.
6. Working capital increased because of increment in the current assets is more than
increase in the current liabilities.
7. In the year 2010 working capital decreased because of increased the expenses as
manufacturing expenses and increase the price of raw material as increased in the
inflation rate.
8. When Working capital is compared with net sales it is in increasing trend
indicating the effective utilization of the net working capital.
Liquidity ratios
1. Current ratio shows satisfactory figures in all years. The current assets of CUMI
are enough to meet the short term obligations.
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2. Quick ratio shows satisfactory figures in all years. This shows firm is able to meet
current obligations.
3. Absolute liquid ratio is slightly low in all years.
4. Current assets are increasing every year and it improves the financial performance
of the company.
5. The company is having good liquidity position.
6. The current assets position of the company is more than the ideal, which shows
that some amount of current asset are blocked up in the working capital.
Activity ratios
1. In CUMI, debtor’s turnover ratio shows that they have to manage the debtors
efficiently. So that the company is able to collect the receivables from the debtors
without delay.
2. Inventory turnover ratio shows efficient management of inventory because more
frequently the stocks are sold.
3. The working capital turnover ratio of CUMI indicates the efficient the efficient
utilization of working capital.
4. By comparing the working capital of 5 years, it is to be clear that working capital
shows an increasing trend.
5. Current assets components shows sundry debtors were the major part in current
assets it shows that the efficient receivables collection management.
Profitability ratios
1. Gross profit should be adequate to cover the operating and to provide for fixed
changes.
2. The net profit ratio shows the overall profit of the company is in decline due to
the inefficiency of the purchase system or increase in the cost of raw materials.
3. The company is earning a sufficient amount of operating income to meet its fixed
expenses such as salaries, wages &bonus managerial remuneration, interests
&bank charges & depreciation.
4. The company’s profitability position has increased in the 5 years when compared
with the average of 5 years. The overall profitability of the firm is good.
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5. The company is depending more on debt capital.
Suggestions and recommendations
1. Current ratio and liquid ratios are more than the ideal norms, so that it is very
favourable. In case of absolute liquid assets, the company needs to improve
its short term financial position. The current assets are held by the company
in order to meet the current liabilities as and when they become due. This
improves the liquidity position of the company, but decreases the
profitability. So there should be trade off between the liquidity and
profitability of net working capital.
2. The company should take effective steps for the proper utilization of total
assets to increase the net profit. The profitability has declined during the
recent years. This is mainly because of the increase in the cost of raw
materials. The company can also control other costs like cost of goods sold.
3. To have an efficient working capital management the short term funds of the
company should be efficiently used in the operations. By increasing the
percentage of receivables helps to reduced the bad debt. The management
should take necessary steps to make financial position constant.
4. In 2007-08 the company has a good profit and it must be maintained in future
also.
5. The concern should also try to increase the assets turnover ratio a bit more as
than years we see that there is only a margin increase in this ratio.
6. The company should improve the efficiency of the debt collection machinery
by adopting intensive debt collection policy and by making every effort to
avoid the bad debts.
7. The company can use low cost debt contents in the capital structure to acquire
fixed asset. This will increase the profitability of the concern. As a growing
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concern company can retain major position of the profits for the further
expansion.
8. An internal audit system should be strengthened because a good system of
internal audit appraises the activities of the unit ensures that the business runs
according to plan prevents fraud and improves personnel efficiency.
9. Sufficient training &incentives should be provided to worker to boost morale
&to improve efficiency &productivity and hence the profitability of the firm.
10. Company should raise funds through short term sources for short term
requirement of funds, which comparatively economical as compare to long
term funds.
11. Company has to take control on cash balance because cash is non earning
assets and increasing cost of funds.
12. The current assets should be managed more effectively so as to avoid
unnecessary blocking of capital that could be used for other purposes.
13. There are various global challenges that are faced by every company n the
present competitive environment and “CUMI” is not any exemption. To face
the present global challenges the human resources department should be
develop to improve various skills among the employees specially the
motivational skills and having the regular training for the employees about
various developments in the market.
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CONCLUSION
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Conclusion
The dissertation “analysis of working capital management of Carborundum universal
ltd” was made with simple statistical tool of ratio analysis. The study helped to assess the
working capital management of the company. Working capital is the life blood of every
company. CUMI is now running in profit. The working capital of the company is in
satisfactory position. It is analyzed that, it is easy to make profit in future. This will not
affect the existence of the company. All the precautions should be taken by the company
for the effective management of working capital. It is concluded that the overall working
capital management techniques is satisfactory as per analysis. Current assets are
sufficient to meet the current liabilities even though company should maintain an
optimum investment in inventories to maximize the profitability. The various ratios
calculated are an indicator as to the fact that the profitability of the firm and sales are on a
rise and also the deletion of the inefficiencies in the working capital management. The
firm has not compromised on profitability despite the high liquidity is commendable.
Thus we conclude that our hypothesis is accepted.
Hence: “existing working capital management methods are effective”.
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BIBLIOGRAPHY
FINANCIAL MANAGEMENT: I M PANDEY
FINANCIAL MANAGEMENT: PRASSANNA CHANDRA.
WEBSITE OF CUMI
Websites
www.cumi,com
www.google.com
GOOGLE.
FINANCIAL MANAGEMENT: SATISH INAMDAR.
ANNUAL REPORTS OF CARBORUNDUM UNIVERSAL. LTD
WORKING CAPITAL MANAGEMENT: KRISH RANGANATHAN& ANIL MISRA
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AN
NEXURE
BALANCE SHEET AS AT 31ST MARCH 2007 (in million)Schedule 31.3.2007 31.3.2006
SOURCES OF FUNDSShareholder’s fundsShare capital 186.71 186.71Reserves and surplus 2553.02 2187.45
2739.73 2374.16Loan fundsSecured loans 1797.02 652.11Unsecured loans - 60.55Long term lease liability 17.49 10.74
1814.51 723.40Deferred tax liability(net) 206.54 176.88total 4760.78 3274.44APPLICATION OF FUNDSFixed assetsGross block 3570.95 2676.90Less: depreciation 1467.78 1425.44Net block 2103.17 1251.46Capital work –in-progress(including capital advances)
389.32 424.95
2492.49 1676.41investments 897.36 510.77Current assets, loans & advancesinventories 738.68 514.41Sundry debtors 937.43 824.90
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Cash & bank balances 273.26 145.80Loans &advances 278.98 248.60
2228.35 1733.71Less: current liabilities & provisionsCurrent liabilities 693.59 446.20provisions 163.83 200.25
857.42 646.45Net current assets 1370.93 1087.26TOTAL 4760.78 3274.44
BALANCE SHEET as at 31st march 2008 (in million)Schedule 31.3.2008 31.3.2007
SOURCES OF FUNDSShareholder’s FundsShare capital 186.71 186.71Reserves and surplus 3332.04 2553.022
3518.75 2739.73Loan FundsSecured loans 2267.27 1797.02Unsecured loans 726.93 ……Long term lease liability 15.84 17.49
3010.04 1814.51Deferred tax liability(net) 282.61 206.54Total 6811.40 4760.78APPLICATIONS OF FUNDSFixed assets Gross block 4282.04 3570.95Less: depreciation 1641.63 1467.78Net block 2640.41 2103.17Capital work-in-progress(including capital advances)
605.90 389.32
3246.31 2492.49investments 1697.68 897.36Current assets, loans & advancesinventories 945.57 738.68
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Sundry debtors 1322.86 937.43Cash &bank balances 169.71 273.26Loans & advances 460.17 278.98
2898.31 2228.35Less: current liabilities & provisionsCurrent liabilities 815.71 693.59provisions 215.19 163.83
1030.90 857.42Net current assets 1867.41 1370.93TOTAL 6811.40 4760.78
BALANCE SHEET as at 31st march 2009 (in million)Schedule 31.3.2009 31.3.2008
SOURCES OF FUNDSShareholder’s FundsShare capital 186.71 186.71Reserves and surplus 3721.85 3332.04
3908.56 3518.75Loan FundsSecured loans 2872.76 2267.27Unsecured loans 593.41 726.93Long term lease liability 13.55 15.84
3479.72 3010.04Deferred tax liability(net) 368.23 282.61Total 7756.51 6811.40APPLICATIONS OF FUNDSFixed assets Gross block 5418.73 4282.04Less: depreciation 1917.86 1641.63Net block 3500.87 2640.41Capital work-in-progress(including capital advances)
208.66 605.90
3709.53 3246.31investments 1721.71 1697.68Current assets, loans & advancesinventories 1165.47 945.57
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Sundry debtors 1529.64 1322.86Cash &bank balances 343.21 169.71Loans & advances 393.13 460.17
3431.45 2898.31Less: current liabilities & provisionsCurrent liabilities 892.63 815.71provisions 213.55 215.19
1106.18 1030.90Net current assets 2325.27 1867.41TOTAL 7756.51 6811.40
BALANCE SHEET as at 31st march 2010 (in million)schedule 31.3.2010 31.3.2009
SOURCES OF FUNDSShareholder’s FundsShare capital 186.71 186.71Reserves and surplus 4101.93 3721.85
4288.64 3908.56Loan FundsSecured loans 2648.06 2872.76Unsecured loans 176.35 593.41Long term lease liability 13.94 13.55
2838.35 3479.72Deferred tax liability(net) 415.30 368.23Total 7542.29 7756.51APPLICATIONS OF FUNDSFixed assets Gross block 5676.54 5418.73Less: depreciation 2219.32 1917.86Net block 3457.22 3500.87Capital work-in-progress(including capital advances)
330.64 208.66
3787.86 3709.53investments 1718.36 1721.71Current assets, loans & advances
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inventories 1191.54 1165.47Sundry debtors 1600.22 1529.64Cash &bank balances 61.32 343.21Loans & advances 429.50 393.13
3282.58 3431.45Less: current liabilities & provisionsCurrent liabilities 1035.84 892.63provisions 210.67 213.55
1246.51 1106.18Net current assets 2036.07 2325.27TOTAL 7542.29 7756.51
Profit and loss account for the 5 years (in million)particulars Sh 31.3.06 31.3.07 31.3.08 31.3.09 31.3.10
INCOMEGross sales 4242.42 5267.72 6567.75 7091.69 7760.09Less: excise duty 520.89 622.16 737.65 572.69 449.99Net sales 3721.53 4645.56 5830.10 6519.00 7310.10Income from work bills and services
……. ……. 38.22 59.14 71.06
Profit on sale of fixed assets
…….. 70.35 567.52 291.40 5.24
Other income 483.60 143.86 279.00 62.11 236.004205.13 4859.77 6714.84 6931.65 7622.40
EXPENDITURERaw material consumed
1241.55 1702.65 2265.23 2699.71 3141.37
(accretion) to stock (32.74) (94.42) (63.04) (94.14) (47.89)Employee cost 513.51 525.45 692.99 764.84 807.69other cost 1314.15 1633.33 2026.69 2130.78 2287.42depreciation 134.70 168.92 252.75 298.46 354.10Less: transfer from fixed assets revolution reserve
.73 .73 .68 .68 .68
133.97 168.19 252.07 297.78 353.42Interest and finance charges
28.08 71.25 169.06 271.88 238.69
3198.52 4006.45 5343.00 6070.85 6780.70
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Profit before tax 1006.61 853.32 1371.84 860.80 841.70Less: provision for income taxCurrent tax 191.50 199.50 309.50 167.00 214.50Deferred tax 38.30 58.31 76.53 85.63 47.07Fringe benefit tax 10.68 8.90 14.11 11.00 …..Profit after tax 766.13 586.61 971.70 597.17 580.13Add: inappropriate profits from previous year
203.05 285.97 650.09 1309.43 1602.08
Profit available for appropriation
969.18 872.58 1621.79 1906.60 2182.21
AppropriationsTransfer to general reserve
300.00 58.66 97.17 59.72 300.00
300.00 58.66 97.17 59.72 300.00Dividend Special interim nil(Previous year @120%)
224.05 …… …… ……. …….
Proposed @75%(Previous year@60%)
112.03 140.03 …… ……. ……
Proposed @100%(previous year @75%)
…… …… 186.71 186.71 186.71
Dividend tax 47.13 23.80 28.48 26.84 23.96383.21 163.83 215.19 213.55 210.67
Balance carried over to balance sheet
285.97 650.09 1309.43 1602.08 1640.29
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