KMF

K ARNATAKA M ILK F EDERATION, D HARWAD

Executive Summary

This project is carried out in Dharwad Milk Union, which is a part of Karnataka Milk

Federation (KMF). KMF is a co-operative apex body in the state of Karnataka representing

dairy farmer’s organization and also implementing dairy development activities to achieve

the dairy objectives. KMF has 13 Milk unions and D.M.U. is one among 13 unions. The

project helps to study the practice of short-term requirements by D.M.U. in the past years and

to calculate management’s performance in the past five years.

A working capital plays an important role in the successful operation of business

activities. The need for working capital is very necessary for any business house. Working

capital is a matter of top priority, as it has a light on liquidity, solvency and profitability.

Title of the Project:

“A Study to analyse the firm’s liquidity and to test firm’s efficiency in utilization of its

current assets and resouces at Dharwad Milk Union”


Objectives of the study:

To examine the establishment, organization and operational dimensions of the D.M.U. To know the liquidity position of the firm. To examine the management performance in components of ration analysis. To know how actually finance department works. To test firm’s efficiency in utilization of its assets and resources.

Information Requirements:

To meet the requirement of project title and project objectives, following information would be required:

Various current assets and their proportions. Various current liabilities and their proportions. Cash balance required by the company for various purposes. Investment in debtors by the company.

The study has been taken in the organization for the purpose to interpret the financial

statement so that the strength and weakness of the firm as well as its historical performance

and current financial condition of the firm can be determined.


Research Methodoly

Research methodology is nothing but systematic investigation and study of sources &

materials. It establishes facts and helps in making conclusions.

Measurement Techniques / Statistical Tools

Accounting Ratios.

Financial Statements of the Company.

Sources of Data:

The data has been collected from both primary sources and secondary sources.

Primary Sources:

Primary data are the data gathered at first hand. It is collected by direct interviews and

discussing the subject matter with the management, staff employees and academicians.

Secondary Sources:

Secondary data are the data that have been compiled or derived from other sources

meant for some other purpose. It is collected from book records maintained by administration

department, published books and also collected from the trading and profit and loss account

and balance sheet of last 5 years of D.M.U.


Need for the study

The study is undertaken to know the present liquidity position and working of the Dharwad Milk Union, Dharwad. This project will throw light on firm’s competitiveness with other firms and on the financial position. It also helps to know whether D.M.U. has properly utilized its resources and assets.

The scope of the study is limited to financial aspects of the “Dharwad Milk Union”.

Limitations of the Study:

1. As this an academic efforts, it is limited by time, cost and coverage.

2. This study covers only a part of Dharwad Milk Union.

3. The present study covers only 5 years financial data.

4. It covers the only annual report of the firm.


Industry Profile Dairy Industry In India

The dairy industry plays an important role in the socio-economic development of India.

The dairy industry in India is instrumental in providing cheap nutritional food to the vast

population of India and also generates huge employment opportunities for people in rural

places.

The Department of Animal Husbandry, Dairying, and Fisheries, which falls under the

central Ministry of Agriculture, is responsible for all the matters relating to dairy

development in the country. This department provides advice to the state governments and

Union Territories in formulating programmes and policies for dairy development. It also

looks after all the matters relating to production and preservation of livestock farms (cattle

and sheep). To keep focus on the dairy industry a premier institution known as the National

Dairy Development Board was established. This institution is a statutory body that was

established in 1987. The main aim to set up the board was to accelerate the pace of dairy

development in the country and attract new investments.

India is a wonderland for investors looking for investment opportunities in the dairy

industry. The dairy industry of India holds great potential for investment and promises high

returns to the investors.

The reasons why the industry has huge potential for attracting new foreign

investment are:

There is a basic raw material need for the dairy industry; that is, milk is available in

abundance.

India has a plentiful supply of technically skilled labourers.

There is an easy availability of technological infrastructure.

India has all the key elements required for a free market system.


There are different sectors within the dairy industry that promise great business

investment opportunities:

Biotechnology:

The Indian cattle yield less milk as compared to their foreign counterparts. The Indian

cattle breeders are on the lookout for ways to improve their milk yield through cross-

breeding. Thus, there is a huge potential available for foreign investors to invest in dairy

cattle breeding of high-quality buffaloes with hybrid cows.

There is also great scope for investment in different dairy cultures, including dairy

biologics, enzymes, probiotics, and other coloring materials for food processing.

Producing biopreservative ingredients based on dairy fermentation, such as

pediococcin, aciophilin, bulgarican, and Nisin contained in dairy powder, also promise great

investment opportunity.

Dairy/Food Processing Equipment:

Great potential lies for foreign investment for manufacturing and marketing of cost-

effective, top-quality food processing machinery.

Food Packaging Instruments:

There is a tremendous investment opportunity for foreign investors in the

manufacturing of both machinery and packaging materials that aid the development of brand

loyalty and gives a clear edge in the marketing of dairy products.


Retailing:

Retailing of dairy products also promises great investment opportunities for

standardization and upgrading dairy products in the main metropolitan cities.

Manufacture of Ingredients:

Several ingredients are involved in the making of different dairy products like ghee,

condensed milk, and cheese. Manufacturing of ingredients for these products offers a great

potential for foreign investment.

Finished Products:

There is a great scope for investment in the manufacturing of finished dairy products

such as cheese sauce and cheese powders.

Technically Advanced Manufacturing Units:

There is a great opportunity for foreign investors to invest in establishing

manufacturing units for dairy products. The investors can build world-class manufacturing

units and let them for hire. Building manufacturing units supports specialized dairy-related

activities, such as cheese slicing, cheese packaging, butter printing, and dicing lines, which

hold greater potential over other activities.

Thus, the dairy industry in India has huge investment opportunities in a variety of

sectors. The investors are all set to gain profitable returns on their investment.


Industry Profile HISTORY:

Development Of Dairy Industry In India

During the pre-independence era, there was no serious thought given to dairy industry.

In 1886, the department of defence of the British Government established the dairy farms for

the supply of milk to the British troops in Allahabad. Later, in 1920 series steps were taken

by Mr. William Smith, an expert in dairy forming to improve the milk production. There was

discrimination done to the Indians. Hence, this led to the rise of the first milk union in India

in Lucknow, in 1937, called “The Lucknow Milk Producer’s Co-operative Union Ltd”.

The diary and animal husbandry received attention after the independence. There were

lot of progressive steps to taken by the government through five-year plans.Indian councils

for the agriculture research mostly drew up these plans.

Further, our late Prime Minister Lal Bahaddur Shastri felt the need for setting up co-

operative society throughout the country for the sake of rural development. This led to the

formation of “National Dairy Development Board” in 1965. This board was registered under

the Societies Registration Act and The Public Trust Act, having its office at Anand, Gujarat.


Introduction to Karnataka Milk

Federation

The first diary in Karnataka was started in Kudige in Kodagu district in 1955.In 1975,

the World Bank aided dairy development was initiated. The present Karnataka Milk

Federation (KMF) came into existence in 1984 as a result of merging of Karnataka Dairy

Development Co-operation, small co-operatives and Karnataka Milk Producers Development

and loose vendors. The Karnataka Milk Federation is apex body in the state of Karnataka

representing dairy organization and also implementing dairy development activities to

achieve the dairy objectives.

The KMF implements all the project activities. After all project activities are

accomplished, the Federation aims at formulating Marketing strategies in marketing the milk

and milk products. The KMF performs the following functions:

The foremost function of KMF is to co-ordinate the activities between the Unions and

also in making market available so that the production increases.

The federation also manages to market milk and milk products outside the state.

It manages surpluses and deficiencies of liquid milk among the milk unions and helps

in dispatching the milk and milk products at reasonable price.

Training and development of senior managerial personnel, acquiring and applying all

recent technologies, prescribing quality guidelines and norms.

Provides balanced cattle feed, mineral mixture, frozen semen straws and liquid

nitrogen reproduced.


Company Profile-DHARWAD MILK

UNION

Dharwad Milk Union:

Dharwad Milk Union (DMU) came into existence on 3-3-1986 under co-operative Act.

Districts Dharwad, Gadag, Haveri, and Uttar Karnataka come under its operation.

Establishment :

The Dharwad Milk Union is a co-operative society among the 13 establishments under

KMF. The DMU is one of the most modern plants in the country. It is located in the specious

25 acres of land, located in Lakkammanahalli Industrial Area, adjacent to the National

Highway-4.


History:

A group of experienced officers, appointed by the Karnataka Milk Federation surveyed

the whole of Dharwad districts (includes two newly formed districts Gadag and Haveri) and

Uttar Karnataka. Further they found out there as need for a Milk Dairy. They travelled the

surrounding villages, educated the villagers about Milk and Milk products and the benefits

they would get from the Milk Dairy.

Seeing the response, untapped resources and the huge market, the Federation decided

to setup the Milk Union in 1984.

Company Profile:

Company Name Dharwad Co-operative Milk Producers Union Ltd. Lakkammanahalli Industrial Area. P.B.Road Dharwad-580004

Nature of Business Mfg / Service / Semi-agro based Co-operative Unit

Type of Ownership Co-operative Unit

Tel-No 0836-2467643, 2461876, 2468380.

Raw Material Milk 80,000 LPD, Water 5 to 6 lack liters/day, Coal 4 to 5 tone

Capacity of Plant 1,20,000 Liters/day12 Tone milk powder, 10 Tone Butter, 6 Tone Ghee

Finished Products Milk, Butter, Ghee, Gurtz, Pedha, Milk creams, Curd, Lassi, Khova.

Total Investment Rs. 7 crore

Total Societies at Village Level 460 Societies


DMU was Rs. 7crore project of which Government has Rs. 2crore of share capital and

authorized capital of DMU is Rs. 5crore.

DMU formed 551 milk producer’s co-operative societies in Dharwad, Gadag, Haveri,

and Uttar Kannada districts.

DMU is collecting 70 thousand liters of milk per day from its societies and sells 60

thousand liters of milk per day and the remaining milk is used for producing milk products.

Functions Of DMU:

The main function of DMU is to procure milk from villagers and pay them the right

price.

To educate the villagers about milk and its quality.

To make ‘Nandini’ as a part of daily life.

OBJECTIVES OF DMU:

Providing hygienic and good quality of milk to the consumers.

To build the economic strength of the milk products in villages.

To eliminate middlemen in the business so that the milk products receive their

appropriate share of bread.

To provide milk at reasonable rates to the consumers.

To build bridge between masses of rural producers and millions of consumers.

To ensure maximum returns to the milk producers.

To facilitate rural development by providing opportunities for self-development at

village level.

To build village level institutions in co-operative sector to manage the dairy activities.


Organization Structure of KMF


Director

(Elected-8)

Director

(Nominated-3)

Director

(Ex-officer-5)

Managing Director

P & I Production Finance Admin Security Marketing

Deputy

Manager

Deputy

Manager

Deputy

Manager

Deputy

Manager

Deputy

Manager

Senior

Supervisor

Extension

Officer

Q.C

Officer

A/Cs

Assistant

Assistants

Manager

Junior

Supervisor

Assistant

HelperHelperHelperAssistantHelper

Workers

Presidents

Products of DMU

Milk:

Toned milk

Double toned milk

Standard milk

Shubham milk

Milk products:

Ghee

Butter

Ice-cream

Mysore pak

Nandini bite

Paneer

Lassi

Jamoon mix

Pedha

Badam powder

Curd

Butter milk


Departments Of DMU:

1. Administration Department.

2. Purchase Department.

3. Marketing Department.

4. Procurement and Input Department.

5. Production Department.

6. Quality Control Department.

7. Human Resource Department

8. Finance Department.


Administration Department

The administration department controls the overall functioning of the organization. The department looks after administration functions such as payment of salaries, arrangement of meetings, formation of policies etc.

The general functions of this department are as follows:

Up-to-date maintenance of files, records etc. Collecting and presenting data in the form of useful information from records.

Implementing the organization systems, producers and policies in a co-ordinate manner.

Ensuring of smooth running of the office by interfacing with the external agencies as required. For example, payment of telephone bills, electricity, water supply bills etc.

Providing required facilities etc.

The administration department also handles following sub divisions:

Canteen Time keeping machine Security


Structure of administrative department:

Deputy Manager

Asst.Manager(Board)

Admin Superintendent

Admin Assistant

Asst. Manager

(Personnel)

Admin Superintendent

Time Canteen Security


Purchase Department The main work of the purchase department is to make purchase of various materials required by different departments. After ascertaining the stock position by stores department, an indent is sent by different departments duly approved by the managing director. This department then comes into picture to purchase those materials.

It also maintains records of all supplies, calls for tenders, quotations etc. Quotation for lowest rate are sanctioned. Purchase department can make purchases up-to Rs.50,000/- If the purchase amount exceeds Rs.50,000/- , then the approval of board member is must.

Structure of Purchase Department:

Purchase Officer

Purchase Superintendent

Assistant Purchase Officer

Helpers


Marketing Department This department manages the sale of milk, milk products and the advertisements. It sells the goods in four districts namely Dharwad, Gadag, Haveri and Uttar Karnataka in the brand name Nandini.

Marketing department performs the following functions:

Marketing of milk and milk products through own network. Market development and sales promotion. Reconciliation of sales with all agents, outlets and milk parlours. Consumers’ grievances. Need based marketing (pedha, ghee etc.). To take up suppliers.

Operating areas:

DMU’s Nandini milk is marketed in Hubli-Dharwad, Karwar, Gadag, Haveri, Uttar Karnataka, North Goa and 26 Taluks in Maharashtra. The milk is marketed through retailers.

Marketing department has the following objectives:

To increase the market share of Nandini. To set up more marketing strategies. To be responsive to consumers and channel members. To promote more of Nandini milk and milk products through intense advertising.

Competitors:

The Nandini milk is facing lot of competition in the market. The prime competitors are private brands like Bharat, Krishna, Dutta, Mysore, Gopal, Kazi, Arokya and loose vendors.


Promotional Activities:

To overcome the neck-to-neck competition different promotional activities are followed with the help of KMF and IMDDB for building brand image of Nandini and enhancement of sale of milk and milk products.

Advertisements in all available medias. Sponsoring events viz. cricket match, exhibitions etc. Participation in trade fairs.

Distribution Channels:

DMU has its own marketing channels. However, it follows two types of direct channel:

1.Consumer Market:

DMU is selling directly to the consumers through its special vendors. It also distributes to a total of 800 retailers and milk parlours which sell only KMF products. There is demand of 85,000-90,000 ltrs of milk per day.

2.Instituitional Market:

There is demand for about 4,000 ltrs of milk per hour from various sources like institutions, hospitals, jails, schools, hotels etc.

Strategies adopted by the department to enhance the sale of its products are:

Conducting awareness programme of milk and homogenized processed milk. Attain daily complaints of consumers and retailers. Need for healthy promotional activities against competitors.

Adopting differentiated marketing strategies in place of undifferentiated marketing strategies.


Marketing department has two sub-departments:

1. Stores department

2. Finished goods stores department

1.Stores Department

This department stores the materials required for day-to-day comsumption required in the production process and for other purposes. The stores department in DMU follows the Cordex System (Coded Control System). A card is maintained for each item and a number is allotted. The card attached to each article consists of amount balance, date of issue, purchase etc. This is later recorded in separate ledger book. The inventories are of different kind ranging from mechanical, spares, packing items to animal drugs and satisfactory and veterinary drugs. There are at least 4,000 different inventories.

Functions:

It has to maintain the proper records of the stores. It has to control the storage costs and reduce it as much as possible. It has to send indent from stores to purchase section when there is storage of stock. It has to send stock report to finance department. It has to supply the necessary materials to the entire departments.

Structure of marketing department:

Manager

Deputy Manager

(Account/Audit)

Asst. Manager

(Tech. Officer)

Supervisor

Market Assistant


2.Finished Goods Stores Department

This department works as interface between production department and marketing department. It is mainly concerned with the maintenance of finished goods and its records. The goods stored are mainly non-pre indent sent by marketing department. This department uses the First In First Out (FIFO) method of inventory to manage the stock.

A separate ledger account is maintained for each item and it shows the receipt and dispatch of goods. Before dispatching, approval of the goods by the quality department is mandatory. A consolidated daily and monthly report is submitted to production and finance department.

Structure of Finished Goods Stores Department:

Assistant Manager

Marketing Assistant Account Assistant

Dairy Operator

Daily Workers


Procurement and Input Department Procurement and input department is concerned with procurement of milk and input i.e. technical facilities. Once a milk society is established, the P & I department starts functioning and makes other provisions.

Milk procurement process done all the 365 days and two times a day and DMU procuring milk routes will appear for the purpose of convenience of transportation.

DMU fixes minimum of Rs.14.60 (Fat: 3.5 %, SNF: 8.5 %) for cow milk and Rs.18.60 (Fat: 6 %, SNF: 9 %) for buffalo milk. Sometimes price vary with quality.

Procurement of milk varies season wise. During flash season i.e. from September to December, the milk productivity will be high. During summer, it will come down.

Milk collected from the societies will be taken to the nearest chilling centre. Here the quality i.e. fat and SNE content of milk will be checked and confirmed with that of the checklist sent by the society.

Then milk is loaded into tankers to be taken to the union. There are nearly 6 chilling centres under the Dharwad Milk Union and about 600 milk societies. Once milk is brought to the union, it is rechecked for the quality and freshness and then down loaded and directed to the production department.

If the milk is spoiled, it is brought to the notice of the society immediately. But in case of far away, the driver and the contractor will be held responsible for the loss, if milk by tankers spoils due to the delay. As per the law of the society recommended by the union

states that the members should supply milk only to the union and other agency. The extension officer at various chilling centres take care of this.


To upgrade the functioning and expand the productive capacity of each society the union provides many facilities:

Remunerative price for the milk produced.

Animal husbandry and veterinary health care programmed for the member animals.

Cross breeding programmers.

Supplying power seeds for animal development.

Imparting training to all the members of co-operatives for smooth functioning of co-operatives.

Subsidized cattle feed to the members of the society.

DMU has 13 doctors to provide door-to-door service.

First aid centers in every co-operative society.

Conducting animal health camp every 2 weeks.

Procurement and input department structure.


Procurement and Input Department Structure:

Manager

Procurement Manager

Deputy Manager Deputy Manager

Assistant Manager Assistant Manager

Extension Officer

Clerks Helpers

Technical Wing


Production Department

The main object of this department is to follow up production schedule as per plan and maintain close and co-operative relationship with other departments and ensures to upgrade the technical efficiency of production. Most of the production equipments are imported from Sweden and Denmark. The entire production has procedure and at every stage of production, proper care is taken to maintain the quality and freshness of milk and milk production.

Production Procedure:

When the milk is received from the cans and tankers, it is tested for quality. From these tanks the milk is sent though steel pipes to undergo pasteurization, cooled to 4-5 degree C. After pasteurization, the milk is taken to the cream separator machine (to get other milk products) where the cream is separated according to the standard norms. This is called skimmed milk. It is then directed towards standardization process to procure for variety of milk by mixing with appropriate proportion of cream. These varieties of milk are then packed in different packets and stored in cold storage for dispatch. Other milk production such as butter, ghee, milk powder, curd, lassi, pedha are also produced and stored in cold storage.


Structure of Production Department:

Manager( Dairy)

Deputy Manager

Asst. Manager

Asst.(Accounts)

Technical Officer

Clerk Typist

Senior Supervisor

Junior Supervisor

Office Staff

Asst.( Stores )

Dairy Operators Dairy Technician


Quality Control Department

The main task of the quality control department is checking the quality of milk and milk products in the plant. There are various tests conducted by the officers to meet this requirement. If any product does not pass the quality standards then that would be rejected. Even before dispatching the products, they undergo testing and they must get approved by the quality department.

Tests conducted at quality department:

Alcohol test Clot on boiling test( COB) Taste Flavour Acidity Corrected lactometer reading (CLR) Gender method for the test Milk tester method Moisture test Solid no test Solid not fat test (SNF)

Dairy Worker


Quality Control Department Structure:

Deputy Manager

Asst. Manager Asst. Manager

Quality Asst. Officer

(Chemicals)

Quality Asst. Officer

(Bacteriology)

Quality Analyst

Lab Asst


Human Resource Department This department looks after the recruitment, selection and welfare of the employees. It also conducts training and orientation programmes and facilitates the following for employees:

Transportation Medical Uniform Canteen Provident fund Gratuity Women’s pregnancy allowance

Quality Asst.


Finance Department

This department controls the financial activities such as preparation of annual report, maintenance of accounts etc. This department is responsible for keeping all the inward and outward flow of money of unions. It prepares budget every year and financial rules for receipts and payments are framed.

Functions:

To prepare monthly accounts (Receipts & Payment A/c, Profit & Loss A/c, Balance Sheet).

To prepare quarterly financial statements. To prepare integrated business plans. To prepare year ending financial statement. To get accounts audited from statutory books of accounts.

DMU follows 2 types of auditing:

1. Pre-audit system: done by Finance and Account Department every year.

2. Statutory System: done by private Charted Accountants every year.


Structure of Finance Department:

DEPUTY MANAGER

ASSISTANT MANAGER

ASSISTANT ACCOUNT OFFICERS

ASSISTANT ACCOUNT


Financial Statement A financial statement is an organized collection of data according to logical and

consistent accounting procedures. Its purpose is to convey understanding of some financial

aspects of business firm. It may show a position at a moment in time as in the case of b/s or

may reveal a series of activities over a given period of time as in case of income statement.

Financial statement are prepared for the management to deal with,

a. Status of investments.b. Results achieved during a given period under review a financial statement

generally refers to the following;

1. Income Statement: The income statement also termed as (profit or loss account) is

generally considered to be the most useful of all financial statements. It explains what has

happened to a business as a result of operations between two balance sheet dates. It discloses

the revenue realized from the sale of goods and the costs incurred in the process of producing

the scheme. It tells the story of Progress or decline over given period and why and how an

indicated result was achieved.

2. Balance Sheet: it is statement of financial position of a business at particular moment of

time and the claims of the owners and outside against those assets at that time.

3. Statement of Retained Earnings: the term retained earnings means the accumulated

excess of earnings over losses and dividends. The balance shown income statement is

transferred to the balance through this statement, after making necessary appropriations. It is

thus a connecting link between the B/S and income statement. This statement is also termed

as project and loss appropriation account in case of companies.


Working Capital ManagementIntroduction:

Management of the working capital is nothing but the management of current assets.

The management of the current assets includes inventory, received, debtors, book debts,

short-term assets cash and bank balances. The management of fixed and current assets,

however differs in three important ways.

1. In managing fixed assets time is a very important factor. Consequently, discounting

and compounding techniques play significant roles in capital budgeting and minor one in the

management of current assets.

2. The large holding of current assets, especially cash strengthens the firm’s liquidity

position (reduces riskiness) but also reduces the overall profitability. Thus a risk returns trade

off is involved in holding current assets.

3. Level of fixed as well as current assets depends upon expected sales but it is only

current assets, which can be adjusted with sales fluctuations in the short run. Thus the firm

has a greater degree of flexibility in managing current assets.

Working Capital refers to the amount of capital which is readily available to an

organization. That is, working capital is the difference between resources in cash and readily

convertible into cash (current assets) and organizational commitments for which cash will

soon be required (current liabilities).

Thus, working capital involves activities such as arranging the short-term finance,

negotiating favourable credit terms, controlling the movement of cash, administrating

accounts receivables and monitoring the investments also a great deal of time.


Types of Working Capital:

A) On the Basis of Concepts:

There are two concepts of working capital –

1. Gross Working Capital:

It refers to the firm’s investment in current assets. Current assets are the assets which

can be converted into cash within an accounting year and include cash, short-term securities,

debtors, bills receivables and stock (inventory).

2. Net Working Capital:

It refers to the difference between current assets and current liabilities. Current

liabilities are those claims of outsiders which are expected to mature for payment within an

accounting year and include creditors, bills payable and outstanding expenses.

Net working capital can be positive or negative. A positive net working capital will

arise when current assets exceed current liabilities. A negative net working capital occurs

when current liabilities are in excess of current assets.

The gross working capital concept focuses attention on two aspects of current

assets management:

(a) How to optimise investment in current assets?

(b) How should current assets be financed?

The level of investment in current assets should avoid two danger points- excessive and

inadequate investment in current assets. Investment in current assets should be just adequate,

not more, not less, to the needs of the business firm. Excessive investment in current assets

should be avoided because it impairs firm’s profitability, as idle investment earns nothing. On

the other hand, inadequate amount of working capital can threaten solvency of the firm


because of its inability to meet its current obligations. The working capital needs of the firm

may be fluctuating with changing business activity.

B). On the Basis of Time:

1. Permanent Working Capital:

Permanent Working Capital is permanently locked up in the circulation of current

assets. It covers the minimum amount required for maintaining the circulation of current

assets.

(a) Initial Working Capital:

At its inception and during the formative period of its operations, a company must have

enough cash fund to meet its obligations. The need for initial working capital is for every

company to consolidate its position.

(b) Regular Working Capital:

It refers to the minimum amount of liquid capital required to keep up the circulation of

the capital from the cash inventories to account receivable and from account receivables to

back again cash. It consists of adequate cash balance on hand and at bank, adequate stock of

raw materials and finished goods and amount of receivables.

2. Variable Working Capital:

It refers to the working capital that changes with the volume of business, it may be

divided into two classes.

(a) Seasonal Working Capital:

There is many line of business where the volumes of operations are different and hence

the amount of working capital varies with seasons. The capital required to meet the seasonal

needs of the enterprise knows as Seasonal Working Capital.

(b) Special Working Capital:

The capital required to meet any special operations such as experiments with new

products or new techniques of production and making interior advertising campaign etc, is

also known as Special Working Capital.


Needs of Working Capital:

The need for working capital to run the day-to-day business activities cannot be

overemphasized. We will hardly find a business firm which does not require any amount of

working capital. Indeed, firms differ in their requirements of the working capital.

The firm’s aim is maximizing the wealth of shareholders. Earning a steady amount of

profit requires successful sales activity. The firm has to invest enough funds in current assets

for generating sales activity. Current assets are needed because sales do not convert into cash

instantaneously. There is always an operating cycle involved in the conversion of sales into

cash.

Therefore working capital is required for:

To meet the cost of inventories including total of raw materials, purchased parts,

operating supplies, work in progress, finished goods.

To pay wages, salaries for indirect labor, clerical staff, managerial and supervision

staff.

To meet overhead costs including those of maintenance services activities, fuel,

power charges, taxes and general expense administration.

To bear the expansion (with regard to promotion of sales) e.g. expenses on packing,

advertisement, salesmanship, sales servicing, credit facilities, delivery services, etc.


Importance of Working Capital Management:

Adequate working capital creates certainty, security and confidence in the minds of the

persons in the management as well as in the minds of creditors and workers.

It creates a good credit standing for the firm because credit standing depends upon the

ability to pay promptly. A Company with adequate working capital is always able to

meet current liabilities.

It ensures solvency and stability of the enterprises. It also ensures continuity in

production and sales.

It enables the company to take advantage of cash discount offered by the suppliers of

raw materials or merchandise.

It enhances the prestige of the company and moral of its workers because a company

with adequate working capital is always able to pay wages and salaries promptly and

regularly.

It enables the company to procure loans from banks on easy and competitive terms.

Objectives of WC management:

Deciding optimum level of investment in various WC assets.

Decide optimal mix of short-term and long-term capital.

Decide appropriate means of short term financing.


Components of Working Capital:

There are two components of Working Capital

A. Current Assets.

B. Current Liabilities.

A) Current Assets:

Components of Current Assets are as follows:

1. Cash and bank balance

2. Stock of raw materials at cost- work in process and finished goods.

3. Advanced recoverable in cash or kind for value to be received.

4. Deposits under the company scheme.

5. Advanced payment of income takes credit certificates.

6. Outstanding debts for a period exceeding six months.

7. Balance with central excise authorities.

B) Current Liabilities:

Components of Current Liabilities are as follows:

1. Sundry Creditors for the goods and expenses.

2. Income tax deducted at sources from contractors.

3. Expenses Payable.

4. Unclaimed Dividend.

5. Security Deposits.

6. Liabilities for bills discounted.

7. Bank overdraft acceptance.


Operating Cycle:

Operating cycle or working capital cycle indicates the length of time between a firm’s

paying for raw materials entering into finished stock and receiving cash on the sales of such

finished stock.

This operating cycle differs from firm to firm. Longer the operating cycle greater will

be the amount of Working Capital required and vice versa. Thus it plays an important role in

determining the Working Capital needs of a firm.

Cash Raw Materials

Work In Process

Milk & Milk Products

Sales

Debtors

Operating Cycle is the time duration required to convert sales, after the conversion of

resources into inventories, into cash. The operating cycle of a DMU involves three phases.

1. Acquisition of resources such as raw material, labor, power and fuel etc.


2. Manufacture of the product which includes conversion of raw material into work-

In- progress into finished goods.

3. Sales of the product either for cash or on credit. Credit sales creates book Debts for

collection.

In the Dharwad Milk Union (manufacturing concern), the working capital operating

cycle starts with the purchase of raw materials and ends with the realization of cash from the

sale of finished products. It is also called as cash conversion cycle, production cycle etc. It

involves the purchase of raw materials and stores, fits into stocks of finished goods through

the work-in-progress with the progressive increment of labour and service costs, conversion

of finished goods (Milk & Milk Products) into sales, debtors and receivables and ultimately

realization of cash and this cycle continuous again from cash to purchases of raw material

and so on.

Length of operating cycle:

When raw materials remain in store pending issue for production for a less duration,

when raw materials gets converted into WIP in a short duration, when finished goods remain

in warehouse pending for sales for a short duration only, and when cash realizations out of

sales are made quickly and finally when payment to creditors is made slowly, the operating

cycle would be smaller and consequently the working capital will also be reasonable. Thus

shorter duration of operating cycle indicates an efficient working capital management.


Determinants of Working Capital:

The following is the description of factors which generally influence the working capital

requirements of Dharwad Milk Union :

1. Nature of Business:

This is one of the primary factors influencing the working capital requirements of a firm. The

DMU is a manufacturing firm, has a longer operating cycle for manufacturing the products,

and investing more funds in its current assets. Therefore, it requires much more working

capital.

2. Manufacturing Cycle:

It comprises of the purchase and use of raw materials and the production of finished goods.

Longer the manufacturing cycle, large will be the firm’s working capital requirements.

3. Credit Policy:

The credit policy relating to sales and purchases also affects the working capital. The credit

policy influences the requirement of working capital in two ways:

1) Credit terms generated by the firm to its customers.

2) Credit terms available to the firm from its creditors.

4. Growth & Expansion:

As a firm grows, it is logical to expect that a large amount of working capital is required. The

growth in volume of the business effects the requirements of working capital. If the firm goes

on diversifying its activities, the working capital is also increases.


5. Price Level Changes:

Changes in the price level also affect the requirements of working capital. The rising price

levels will require a firm to maintain higher amount of working capital. Same level of current

assets will need increased investment when price are increasing.

6.Operating Efficiency & Performance:

The operating efficiency of the firm relates to the optimum utilization of resources at

minimum costs. The firm will be effectively contributing to its working capital if it is

efficient in controlling operating costs. The use of working capital is improved and pace of

cash cycle is accelerated with operating efficiency.

7.Level of Taxes:

Tax liability is the short-term liability day able in cash. The amount of taxes to be paid in

advance creates the need for working capital. If the tax liability increases, it leads to an

increase in the requirement of working capital and vice versa. The need for working capital

varies with the tax rates and advance tax provisions.

8.Sales Growth:

The working capital needs of the firm increase as it sales grow. The growing firm may need

to invest funds in fixed assets in order to sustain its growing production and sales. This will in

turn, increase investment in current assets to support enlarged scale of operations.


Working Capital Management concerned with the following aspects:

1. Cash Management:

Cash is the important current asset for the operation of the business. Cash is the basic input

needed to keep the business running on a continuous basis; it is also the ultimate output

expected to be realized by selling the service or product manufactured by the firm. The firm

should keep sufficient cash, neither more nor less.

Cash is the liquid form of an asset. It is the ready money available in the firm or with the

business, essential for its operations. A firm needs the cash for the following three purposes:

(a) The Transaction Motive:

(b) The Precautionary Motive:

(c) The Speculative Motive:

2. Receivables Management:

Receivable represents amounts owed to the firm as a result of sale of goods or services on the

ordinary course of business. These are claims of the firm against its customers and form part

of its current assets. These receivables are carried for the customers. The period of credit and

extent of receivables depends upon the credit policy followed by the firm. The main purpose

of maintaining or investing in receivables is to meet competitors, to increase sales, and to

maintain a cordial relationship with the clients.

3. Inventory management:

Every enterprise needs inventory for smooth running of its activities. It serves as a link

between production and distribution process. There is, generally a time lag between the

recognition of a need and its fulfillment. The greater the time lag, the higher the requirements

for inventory. The unforeseen fluctuations in demand and supply of goods necessitate the

need for inventory. Moreover, it provides a cushion for future price fluctuations.


Sources of Working Capital:

There are two type of sources for financing the working capital requirement .

1. Permanent/Long term sources

2. Temporary/ Short term sources

1. Permanent/Long term sources:

Shares capital

Debentures

Public deposits

Ploughing back of profits

Loan from financial instituitions

2.Temporary/ Short term sources:

Indigenous bankers are the short term source for financing the working capital

Trade credits

Instalment credits

Income received in advance

Customers’ advance

Bank loans which include cash credit and overdraft

Commercial papers

Purchasing and discounting of bills


Documents

KMF