Strategies for Fund Management Using Ratio Analysis

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Project conducted under the subject:Accounting For Manager (MBD - 104)

Submitted by: Arnab Bhattacharya

Roll: BUR DMBA No.: Jan2010/12


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Strategies for Fund Management using Ratio analysis

Arnab Bhattacharya

2

MBD - 104

Acknowledgement

It is delightful to study Accounting for Managers as a subject in our

curriculum. The lessons we are taught in the Personal Contact

Programme sessions from our respected teacher have instilled combined

effects of understanding Accountancy and maneuvering Financial

Management in our mindset. I am indeed indebted to my teachers for

giving me an assignment to study the Annual Reports & Balance sheets of

a reputed company, to make an assessment on Strategies for Fund

Management using Ratio analysis and the corrective steps that need

to be taken by the organization.

There are numerous people without whom this project might never

have been completed. I cordially thank for the support and help given to

me by the teachers of The Burdwan University who have enlighten me for

utility of preparation of the project. I must be grateful to parent for their

enormous motivation and support. I am thankful to ex-superior officers &

colleagues in Sarba Siksha Mission, Government of West Bengal and also

UNICEF while I worked in OPEPA, Govt. of Orissa for having short period

management training at Xaviers Institute of Management Bhubaneswar

and also to my friends and some other persons without whom I could not

finish this project. I am once again grateful to the above mentioned

people and also my family who deserve due credit for enabling me to take

on this project and for being with me till the end.


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Arnab BhattacharyaMBD - 104

IntroductionIn this world, the Financial Management is most urgent aspect to run

an organization properly. For the future plans and growth of the company,

the proper way of financial management is the back-bone or the pillar of

the organization. There are many FMCG organizations so there are lots of

competitions also. Among these solutions everyone wants the best. All the

organizations try to attract investors as well as customers by giving extra

benefits over other competitors. So, they offer many valuable services like

introduction of new products, keeping the product standard high, easy

availability of the product more over good return for theirs investment

either as investors or customers. more. Every organization wants to earn

high percentage of profit in comparison to their competitors. So, they

should chalk out proper planning of procurement of material, stream line

of manufacture and marketing the product timely so that the funds are

utilized properly and in time. There should not be blockage of money in

any channel. It is the job of the finance department to high light the

financial figures for the assessment the jobs of all department. The jobs of

the Financial Management are to analyse the position of the business in

the aspect of the Final Accounts of the House. The easy and best method

of analysis is accounting Ratio. I have collected The Profit & Loss Accounts

and Balance Sheet of M/S. Emami Limited for four years like 2005-06,

2006-07, 2007-08 and 2008-09 from its annual Report and here my

humble efforts are to analyse and justify the figures shown in the Profit &

Loss Account and Balance Sheet of the company by choosing selected

figures from Profit & Loss Account and Balance Sheet of the Company

finding justification and remedy.


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Arnab Bhattacharya

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MBD - 104

Identification of the Research GapOBJECTIVES:

To outline strategy for enhancement of business;To understand the financial position of the business by undertaking

the comparison study year wise;

To find out comparative studies on activities of the business House

year wise and strategy of the future plan;

To get an idea to over come any problem for smooth running of the

business;

Scope of the Project:

The arrangement in my project work was in the field of future fund

arrangement as well as properly running of the business showing a

comparative studies regarding the financial position so that the board of

management have a scope of discussion over the table seeing the

financial position of the company by furnishing year wise accounting

figures relating to the Financial stability of the business house upon those

persons who are involved with the business house. If marketing is the

brain of the business house, accounts is the heart of that house it supply

oxygen to the business house and the said account fix up the strategy

how the house will run and said strategy is to be assessed from the past

performance of the business and past performances are available from the

accounts and the said performance judged from analysing he past Balance

Sheet of the House. It is quite evident that financial stabilities in the

business house are the most vital problems in the world of business

today. In this scenario financial analysis is much creative work and this

creative work not only depend on the proper accounting and best

utilization of funds but also work not only depend on the timely purchase

timely sale and timely production of the material handed in the business

house.. The specific project in which I worked is related to the flow of

funds. The scope of the project depends on the following:


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Arnab Bhattacharya

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MBD - 104

Limitation of the ProjectThe time duration allowed for the project is limited, which has

restricted the scope of extensive study.

The time period used in the project is small, which might have an

effect on the degree of accuracy.

As this is a self acquired data for the project there has been some

restrictions.

ObjectiveTo highlight the financial condition of the business before the

management for making the strategy of rising fund of the business

availability of the response through survey and analysis.

MissionIt tries to fulfill its vision by analysis of the past four years Balance

Sheet to enable the Board of Director to manage more funds for businesspromotion through this project.

To familiar with the business house by knowing at least one out of

every 50 Indians.

Enhancement of business for availability of products of the business

house in every market point.

To create extensive sale of products of the business house.


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Arnab Bhattacharya

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MBD - 104

StatisticsI am giving the figures some major Head of accounts available from the

Profit & Loss Accounts and Balance Sheet of a large Business House say

Emami Limited for the purpose of the analysis

Head of the Accounts 2005-06 2006-07 2007-08 2008-09

(All figures are Rs in lacs)

INCOME

Sale after Ex. Duty 21879.75 30087.56 57281.53 72234.9

EXPENDITURES

Cost of Goods Sold 12609.33 17543.71 23746.73 30876.9

Profit Before Tax 3449.98 5699.56 10492.88 10175.6

Profit After Tax 2943.66 5030.58 9274.88 8751.5

LIABILITIES (Source Of Funds)

Equity Capital 1223 1243 1243 1313

Secured and Unsecured Loan35637.92 36999.3 3825.82 44819

Current Liabilities &Provisions

2 046.72 3905.45 9544.14 15058.8

ASSETS

Application Of Funds

Fixed Assets 21458.64 19317.53 7781.86 61257

Investments

Current Assets, Loan & AdvancesStock in Trade 3674.58 3662.46 4009.97 7319.81

Sundry Debtors 3524.79 3667.52 3499.34 5074.98

Cash & Bank Balance 34.43 82.12 280.27 1077.07

Sub Total 7233.8 7412.1 7789.58 13461.9

Loans & Advances 3195.8 4537.37 15267.63 7687.71

Sub Total 10429.6 11949.5 23057.63 21159.6

From the above selected important figures of the Company final Account

for the year mention herein above, a table is prepared for the study of

financial stability of that that organization.


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Arnab Bhattacharya

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MBD - 104

0

0.05

0.1

0.15

0.2

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

Net Prof i t Rat io

Net Profit Ratio

Ratio Analysis 2005-06 2006-07 2007-08 2008-09

Net Profit Ratio 0.15768 0.18943 0.18318 0.14087

Equity Capital Ratio

Inventory Turnover Ratio 3.629 4.7901 5.9219 4.2183

Net capital employedTurnover Ratio 0.0821 1.3182 9.5038 1.2108

Current Ratio 3.5343 1.8979 1.0325 0.8939

Liquid Ratio 3.5343 0.9601 0.501 0.4085

Working capital 5187.08 3505.45 (-)1754.66 (-)1596.93

Debtor % on Sale 16.11% 12.19% 6.11% 7.03%

General Expenses% on Sales 28.92% 24.97% 42.35% 45.14%

1. Net Profit Ratio:

Net Profit to sales ratio indicate how many Paise of Net Profit is earned per

Rupees of Turnover i.e. Paise per Rupee left to management after

deducting costs etc. Although the Ratio is not likely to be constant from

year to year, it gives an idea as to the ultimate profitability of sales. The

Net Profit ratio sometime found out with the capital employed with what

degree of profitability the capital is employed. The calculation is in the

following formula.

here the Net Profit ratio of the House of the three years, mostly

ascending,

except the

figure indicate

in the last year

it was down by

0.04231 lacs, it

might be due

to availing of

secure loan by

the House so in

due course this down fall will be recovered by the House. Graphically the

year wise trends represented herein.

Net sale

Net ProfitNet Profit Ratio =


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Arnab Bhattacharya

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MBD - 104

0

1

2

3

4

5

6

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

Inven to ry Turnover Ra t io

Inventory Turnover Ratio

Fixed Assets + Working Capital

Cost of Good SoldNet Capital employed Turnover Ratio =

2. Stock Turnover Ratio:

This ratio measures how fast the stock is moving through the business

House. It is also called the stock velocity. The calculation is in thefollowing formula

Stock Turnover

ratio indicates

the number of

times the

average stock

has turned

over during

the period.

Generally high

inventory turn

over is good for liquidity point of view and implies sound inventory

management. 2005-06, 2006-07 and 2007-2008 the stock management

was good but last year the figure abnormally fall down. It should be

necessary for management to be alert for stock control. Graphically the

comparison of the year wise position depicted herein.

3. Net Capital employed Turnover Ratio:

This ratio measures efficiency of the business House in managing its in

capital employed. It is defined as

Average Stock

Cost of Good SoldInventory Turnover Ratio =


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Arnab Bhattacharya

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Net Capital employed Turnover Ratio

0

1

2

3

4

56

7

8

910

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

Net Capital employed

Turnover Rat io

0

0.5

1

1.5

2

2.5

3

3.5

4

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

Current Rat io

Current Ratio

Initial in the year 2005=06 the ratio was very low, in 2006-07 it

recovered

and in 2007-

08 it wasreasonably

high .the

high Capital

employed

Ratio may be

caused by a

low level of

fixed assets representing old and substantially depreciated Assets. Here

considering the House procured new Assets investing huge money in this

head by availing loan. Graphically the trend shows the position of Capital

employed Ratio with sales.

4. Current Ratio:

This ratio is the basic measure of judging the ability of the business House

to pay off the short term obligations. It represents the relation between

Current Assets and Current Liabilities. This is also known as Quick ratio.

Higher the

current

ratio,

greater is

the margin

of safely to

short term

credit. The

standard

figure of

current ratio is 1.5 which indicates the current assets should be 1.5 time

of current liabilities. Here the current Ratio is gradually reducing every


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Arnab Bhattacharya

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MBD - 104

0

0.5

1

1.5

2

2.5

3

3.5

4

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

Liquid Rat io

Liquid Ratio

year rather currently giving negative figures which is indicating the poor

performance in the business in handing of payment of short term

obligations. It is very alarming for the House.

5. Liquid Ratio:

The test as regard the ability to honour day to day commitment is better

supplied by. It is ratio between Liquid assets (easy encashable) and Liquid

liability. This is also known as acid test or Quick ratio. It indicates the

availability of cash for meeting immediate commitments. Normally 1:1

Ratio is consider as satisfactory. The Formula is like this. The House never

followed the concept of keeping Liquid assets and Liquid Liabilities same.

2005-06 the Liquid assets value was lower than the liabilities and there

after the amount of liabilities are gradually rising. Which indicate the

House is unable to clear liabilities.

Current Liabilities

Current AssetsCurrent Ratio =

Liquid Liabilities

Liquid AssetsLiquid Ratio =


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Arnab Bhattacharya

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MBD - 104

Working Capital

-3000-2000

-1000

0

1000

2000

3000

4000

5000

6000

Working capital

Years

2005-06

2006-07

2007-08

2008-09

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

16.00%

18.00%

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

Debtor %age on Sa le

Debtor % on Sale

6. Working Capital:

Working Capital = Current Assets - Current Liabilities

Working capital is

a theoretical

concept for the

liquidity of the

House. In all case

the Working

capital will a

positive figure as

it is such fund

which helps the

House for running

In the House though the amount of working capital. In the standard

cases current assets should be 1.5 time of the current Liabilities. In the

House under study shows the current Liabilities are higher than the

current assets indicating the House incapable to clear short term

obligation. It is a dangerous situation. The house should take appropriate

to take proper step to raise the fund of the House for its survival.

7. Debtors percentage on sale:

It indicates the

percentage of

credit facilities on

sale. Normally in

most cases a three

month credit

facilities are

allowed. If the

amount of

percentage is reduced it will indicate that the House not keeping huge


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Arnab Bhattacharya

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MBD - 104

Genera l Expenses %age on Sa les

0.00%5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

35.00%

40.00%

45.00%

50.00%

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

General Expenses% on

Sales

money unpaid in recovery of credit sale money. Graphical presentation is

shown here.

8. General expenses percentage on sale:It indicates the

percentage of

general expenses

on sale. Normally

this is calculated to

control the

expenditure of the

House. The

expenditure of the

House has

increased tremendously in last two years. If the expenditures of the House

are not reduced for the want of fund the house will suffer. The year wise

figure is shown in a graphical representation to see the variation.

Plan of Work:

From the year wise figures in the last four years in the year before last

and last year the House Sold out a good number of Fixed Assets and

spend huge money toward Fixed Assets for purchasing new machineries,

by taking Loan from elsewhere. The Sale proceeds have been increased to

a considerable amount, However for the increase of secured Loan an

additional load towards the payment of interest has occurred and due to

increase of monitory inflation the General expenses percentage relating to

Sale has gone up to a alarming Stage. In spite of increase of sale

proceeds the House is in a good position to check the Debtors of the

House within a reasonable credit Limit. The Liquidity Ratio depends on the

Current ratio and Quick Ratio of the House. Here the current ratio is low

and Quick Ratio is not favorable as Quick Liability is higher than the Quick

Assets. For renovation or other purpose the house borrowed money and


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Arnab Bhattacharya

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MBD - 104

for the it paid interest and the general expenses percentage has reached

to a alarming stage. The working capital is negative so the House will face

acute cash deficiency very soon and for recovery of the said situation the

house need to float the share in the market for raising funds. From thefigure collected in the long run the House may face difficulties in paying

the debt of the House. By year wise comparison due to flexibility of the

figure availed for analysis the growth of the business can not be properly

high lighted. In case of a production unit growth of the company assures

the bright future of the business House.


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Arnab Bhattacharya

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BibliographyBooks:

Hrishikesh Chakraborty. Advanced Accounting. Kolkata: Nababharat

Publishers, 1966.

Munro, Andrew & Palmer, Alfred. Book Keeping and Accountancy.

London: Sir Isaac Pitman & Sons, Ltd, 1957.

Arindam Das.Accounting For Managers Block I Book I. Study Material

for 3Years MBA (Distance) Course. Burdwan: Directorate of Distance

Education - University of Burdwan, 2010.

Dr. Goutam Mitra. Accounting For Managers Block I Book II. Study

Material for 3Years MBA (Distance) Course. Burdwan: Directorate of

Distance Education - University of Burdwan, 2010.

Dr. Debashish Sur & Dr. Debdas Rakshit. Accounting For Managers

Block II Book I. Study Material for 3Years MBA (Distance) Course.

Burdwan: Directorate of Distance Education - University of Burdwan,

2010.

Dr. Chittaranjan Sarkar & Dr. Debdas Rakshit. Accounting For

Managers Block II Book II. Study Material for 3Years MBA (Distance)

Course. Burdwan: Directorate of Distance Education - University of

Burdwan, 2010.

Webpage:

Emami Limited. Emami - Financial Information. October 2010
http://www.emamiltd.in/investor-relations.asphttp://www.emamiltd.in/investor-relations.asp

Documents

Strategies for Fund Management Using Ratio Analysis