Working Capital

INTRODUCTION

Working capital management is concerned with the problems that arise in attempting

to manage the current assets, the current liabilities and the interrelationship that exists

between them. The term current assets refer to those assets which in the ordinary course of

business can be, or will be converted into cash within one year without undergoing a

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

assets are cash marketable securities, accounts receivable and inventory. Current liabilities

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

business, within a year, out of the current assets or earnings of the concern.

The basic current liabilities are accounts payable, bills payable, bank overdraft, and

outstanding expenses. The goal working capital management is to manage the firm’s current

assets and liabilities in such a way that as satisfactory level of working capital is maintained.

This is so because if the firm cannot maintain a satisfactory level of working capital, it is

likely to become insolvent and may even be forced into bankruptcy. The interaction between

current assets and current liabilities, the main theme of the theory of working management.

The important of working capital management is reflected in the fact that financial

managers spend a great deal of time in managing current assets and current liabilities. The

success and efficiency of business enterprise depends largely on its ability to manage its

working capital Even in a well-established business operation, needs careful attention for

effective management of working capital. Arranging short-term financing, negotiating

favorable credit terms, controlling the movement of cash, administering accounts receivable

and monitoring the investment in inventories consume a great deal of time of financial

managers. Working capital is the amount of funds necessary to cover the cost of operating the

enterprise. It refers to that firm’s capital which is required for financing short-term or current

assets such as cash, marketable securities, debtors and inventories.

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Concepts of Working Capital

There are two concepts of working capital.

* Gross working capital

*Net working capital

The term gross working capital is referred to total current assets. The net working capital is

again defined in two ways.

*Net working capital is the difference between current Assets and current liabilities.

*Net working capital is that portion of current assets, which is financial with long-

term funds.

Need For Working Capital

The need for working capital or current assets cannot be overemphasized. The

objective of financial decision making to maximize the shareholders wealth. It is necessary

to generate sufficient profits. A successful sales programmer is, in other words, necessary for

earning profits by any business enterprise.

However, sales do not convert into cash instantly, there is invariably a time-lag

between the sale of goods and the receipt of cash, therefore, a need for working capital in the

form current assets to deal with the problem arising out of the lack of immediate realization

of cash against goods sold. Therefore, sufficient working capital is necessary to sustain

activity.

Net Working Capital and its Implications.

Net Working Capital is commonly defined as the difference between current assets

and current liabilities. The theoretical justifications for the use of net working capital to

measure liquidity is based on the premise that the greater the margin by which the current

assets covers the short-term obligations. The more is ability to pay obligations when they

become due for payment. NWC is necessary the cash outflows and inflows do not co-inside

the non-synchronous nature of cash flows makes NWC necessary. It is very difficult to

predict cash inflows. The more the cash inflows the less Net Working Capital will require.

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Trade Off Between Profitability And Risk

In evaluating a firm’s Net Working Capital position and important consideration is the

trade-off between profitability and risk. The term profitability used in this context is

measured by profits after expenses. The term risk is defined as the probability that a firm will

become technically insolvent so that it will not be able to meet its obligations when they

become due for payment.

Net working capital is used for measuring the risk of becoming technically insolvent.

It is assumed that the greater the amount of NWC, the less risk-prone the firm is or the

greater the NWC the more liquid is the firm and therefore, the less likely it is to become

technically insolvent Conversely, lower levels of NWC and liquidity are associated with

increasing levels of risk. The inter relationship between risk, liquidity and NWC is such that

if the NWC or liquidity increases the firm’s risk decreases.

Trade Off

To get higher profits the firm has to face high risk. Otherwise the more the profit, the

more the risk the firm to face. The trade-off between these variables is that the regardless of

how the firm increases its profitability through the manipulation of working capital, the

consequence is a corresponding increase in risk as measured by the level of Net Working

Capital.

Permanent and Temporary Working Capital

It is necessary for any business enterprise to maintain a minimum level of working

capital to carry on its business on a continuous and uninterrupted basis. For all practical

purpose, this requirement has to be met permanently as with other fixed assets. This

requirement is referred to as permanent or Fixed Working Capital.

Any amount over and above the permanent level of working capital needed to meet

fluctuating or variable working capital. The position of the required working capital is needed

to meet fluctuations in demand consequent upon changes in production and sales as a result

of seasonal changes.

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Changes in Working Capital

The changes in the level of Working capital occur for the following three basic

reasons:

*Changes in level of sales/operating expenses.

* Changes in policy.

* Changes in technology.

Changes In Sales And Operating Expenses.

The first factor causing a change in working capital requirement is a change in the

sales and operating expenses. The changes in the factor may be a long run trend of Change.

For instance the price of raw material may be constantly rising necessitating. The holding of

large inventory secondly the cyclical changes in the Economy leading to ups and downs in

business activity influence the level of working capital, both permanent and temporary and

thirdly the source of change is seasonality in sales activity.

Seasonality peaks and troughs can be said to be the main source of variation, in the

level of temporary working capital. The change in sales and operating expenses may be

either in the form of increase or decrease. An increase in volume of sales is bound to be

accompanied by higher-level Cash Inventory and Receivables. The decline in sales has

exactly the opposite effect a decline in the need for working capital. Similarly a change in

operating expenses rise or fall has a similar effect on the levels of working capital.

Policy Changes

The second major cause of changes in the level of Working Capital is because of

Policy changes initiated by the management. The firm has a wide choice in the matter of

current assets policy. The term current assets- policy may be defined as the relationship

between the current assets and sales volume. The firms, which follow a conservative policy

in this respect having a very high level of Current assets in relation to sales may be

deliberately, opt for a less conservation policy and vice-versa. These conscious managerial

decisions certainly have in impact on the level of working Capital.

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OBJECTIVES OF THE STUDYThe present study is intended to analyze the practice of Working Capital management

in Sri Dhana Lakshmi Cotton & Rice Mills Pvt. Ltd. The efficiency of the Working Capital

Management is determined by the efficient administration on its various components.

Following are the main objectives of the present study.

To present a theoretical framework of working capital Management.

To present a profiles of Cotton Industry & Sri Dhana Lakshmi Cotton &

Rice Mills Pvt. Ltd.

To analyze and evaluate the working capital performance of Sri Dhana Lakshmi

Cotton & Rice Mills Pvt. Ltd.

To analyze the financial soudness and performance of Sri Dhana Lakshmi Cotton &

Rice Mills Pvt. Ltd through Ratios.

To study the financial ability position of Sri Dhana Lakshmi Cotton & Rice Mills Pvt.

Ltd.

To provide Findings & Suggestions and Conclusion of the study.

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METHODOLOGY ADOPTEDMethodology is a systematic process of collecting information in order to analyzes

and verifies a phenomenon The Study carried with the co-operation of the management who

permitted to carry on the study and provided the requisite data is collected from the following

sources.

Primary data

Secondary data

Primary Data

As for the study, primary data is gathered through a series of detailed discussions with

managers, workers and executives of the company. Continuous interaction with the

employees during the study helped me to arrive at certain conclusions about the study, sum of

the information has been verified or supplemented with personal observation conducting

personal interviews with concerned officers of finance department of Sri Dhana Lakshmi

Cotton & Rice Mills Pvt. Ltd.

Secondary Data

The present study is mostly depend on secondary data resources. The secondary data

needed for the study was collection of required data from annual records of the company,

returns and internal records, reference from Textbooks and journals of financial management

and websites also be used.

SIGNIFICANCE OF THE STUDY The study is significant help to the following groups:

The present study focused on various aspects of working capital of SRI

DHANALAKSHMI COTTON&RICE MILLS(P)LIMITED and help the organization

to make improvements in the operation of working

These study useful to the academicians and schedule to make for insights in to the

various aspects of the working capital management in the other similar organizations

This study helps to know the present trends in the working capital management in

others industries

The present study is also useful to policy makers to make necessary changes in the

policies relating to working capital management.

LAMITATIONS OF THE STUDY

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Every study will have its own limitations, the present study is also carried out with the

following limitations.

1. The study is conducted on a 5 year period (2002-03to2006-07) with the assumptions

mentioned above ad hence the accuracy of results may deviate.

2. Entire study is based on the financial statements of Sri Dhana Lakshmi Cotton & Rice

Mills Pvt. Ltd.

3. The study is restricted to only on company of the Sri Dhana Lakshmi Cotton & Rice

Mills Pvt. Ltd hence the implications cannot be extended to other companies.

4. The opinion of the managers of the organization were taken into consideration, hence

there is a chance for personal bias.

5. Time and cost factors are another limitation.

6. Analysis of the financial health is conducted with the help of working capital analysis

only.

INDUSTRY PROFILE

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Cotton:- Cotton is a Natural vegetable fiber of great economic importance as a raw material for

cloth. Its wide spread use is largely due to the ease with which its fiber are spun in to yarn.

Cotton’s strength, absorbency, and capacity to be washed and dyed also make it adoptable to

a considerable variety of textile products. Cotton it’s fashionable, natural and versatile.

HistoryThe oldest cotton fibers and boil fragments, dated from around 5000 B.C. were

discovered in Mexico. In 5000 B.C., the Greek historian Herodotus reported of a pant that

“bore fleece” cotton has been worn in India Egypt forever 5000 years. Cotton was grown by

Native Americans as early as 1500. In English in the 1700s. It was against the law to import

or manufacture fabric made of cotton since to grow lots of cotton, but processing was

difficult. It was not until the 1700s that the cotton industry flourished in the United States.

It was then Slater, an Englishmen, built the first American Cotton Mill. These mills’

converted cotton fibers into yarn and cloth in 1793 Eli Whitney developed the cotton gin,

which mechanically separates the seed from the lint fiber.

Whitney named his machine a “gin, ‘short for me word ‘engine’ technology has

improved over the past centuries making cotton growth and production much more efficient.

Cotton Plant Cotton is produced by small trees and shrubs which bear botanical name

‘GOSSIPIER’ One or two week after showing shoots appear and 50 to 80 days later

flowering begins. First buds are formed. After three weeks blossoms appear after

blossoming the petals fall offend the offspring or the boll develops.

The bolls divided by partition into 3-5 sections contain seeds. Fiber grows on the

seeds. The plant has certainly been grown and used in India for at least 5000 years and

probably for much longer. Cotton was also by the ancient Chinese, Egyptians, and North and

South Americans.

In early spring seeds are planted one to three in seed, by mechanical planters, seed

beds. Plants are irrigated fertilized and weeded, as needed, during the 25 week growing

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cycle. The first true leaves appear after two to four weeks with the bud, also known as a

‘square’ appearing about five seven weeks after planting. The white blossoms become

pollinated, turn light pink and then wither at that are harvested.

The cotton bolls open naturally over time and defoliant chemical is applied by

grounder air to ensure top quality. This helps the leaves dry and fall off and any remaining

closed bolls to open. A mechanical cotton harvester moves through the field picking the

cotton, which then packed into truck load sized ‘modules’ and taken to the gin. The gin

separated the cotton fibers from the seeds. Cleaning equipment removes twigs and other

debris. The fiber, now called lint, is packed into 500 pound bales and then transported to

textile mills.

The cotton is carded roomed, making all of the fibers run parallel, and then spun in to

thread. Some whole cotton seed is fed to cattle. Some seed is future processed. The fine

“linter” fibers are removed and the seed is pressed and cooked, producing cotton seed oil ad

meal.

VarietyThere are five main varieties grown throughout the world Egyptian, American pima,

Sea island, Asiatic and upland. The most permanent types of cotton grown in California are

upland, whose fiber lengths are 13/16” to 11/4” in length, and American pima, whose fiber

lengths are 15/16’ TO 11/2” Seventeen states in the nation produce cotton with over 14

million acres of cotton planted annually.

The figure showing the products obtained from processing the raw cotton.

Seed Cotton

↓

Ginnery ← Cotton Seed ←Cotton Fiber

↓ ↓

Oil Mill Cotton Spinner

↓ ↓

Cotton Seed Oil Cotton Yarn

Source : The cotton Corporation of India Ltd.

Types of Cotton

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India grows all the four major types of cotton – G. arbor turn, G. hirsute, G

herbaceous, and barb dense the first hybrid in the cotton crop was developed in India, in

Surat, by dry C.T Patel (H4 intra hirsute in 1970)- more than 200 varieties and hybrids were

evolved in the subsequent five decades.

Hybrids occupy around 45% of cotton crop in India, as in 1998. Important landmarks

in the Indian cotton history include the development and release of native hybrids like G cot

DH37, G cot DH 9, DDH 2 and drought tolerant straights varieties like SRT 1, Renuka, LRA

5166, Anjali and Rajat.

Cultivation

Successful cultivation of cotton requires alone growing season, plenty of sunshine and

water during the period growth, and dry weather for harvest. It cultivated in countries with

hot climate as India, china. USA, Pakistan Cotton producing areas in India are spread thought

out the country, Panjab, Hariyana, Maharastra, Andhra Pradesh, Tamilnadu and Karnataka

are the major cotton producing states, Cotton is shown around May & June and harvested

around September, to December.

In different parts of the country a number of methods, chemical and mechanical, have

been used to control weeds and grass, including intensive spraying of herbicide before and

after planting. The cultivating rotary heo, and flame cultivator are also used to destroy

weeds.

Cotton Insects and Diseases

In addition to the flowers the underside of each leaf of the cotton plant contains a

small cuplike structure holding nectar. These deposits and the succulent stem make the plant

attractive to a variety of insect pests. Chief among these is the boll weevil. The use of early

maturing strains of cotton plus the application of several comical and control methods have

greatly reduce losses from boll weevil, infestation the boll worm the pink larva of a small

moth is beloved to have been a native of India but is now parasitic on cotton all over the

world. Quarantine, fumigation of seed, and destruction of trash removed from the cotton in

ginning are control measures boll-worm tobacco budworm also is one of the most damaging .

Army worm trips, lygus, and red spider are among other scientific pests.

Processing

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Raw cotton kappa’s which is picked from fields contains seed. To separate the seed

from raw cotton it is taken to machine called gins. Where seed is separated from kappas. The

kappa’s with seeds so generated is called lint. It is in loose form the cotton above lint is

pressed and packed in bal form in hydraulic/pneumatic press and taken to mills.

Uses Like lumber, cotton comes in many varieties and qualities, each suitable for different

purposes. The long lint fibers are used for many things, most of which begin with a thread,

yarn or cotton fabric, as linters, are removed from the seed and are used as stuffing for

furniture and components of linoleum, plastics and insulation.

Commodity ValveCotton is a leading cash crop nationally, ranking just behind corn, soybeans, wheat

and hay, In 2004, California’s crop value was over $796million. Additionally, the 2004 value

of cotton seed was nearly $131 million.

Marketing In determining the value of cotton samples are drawn from random bale and evaluated

according to staple, grade, and character, Staple refers to fiber length. Fiber length can be

classified in to three grades i.e. 1. Short Staple, 2. Medium Staple, 3 Long Staple, Grader

refers to color, brightness, and amount of foreign matter. Color groping indicates the degree

of whiteness. Charter refers to the diameter, strength, body, maturity, uniformity, and

smoothness of the fiber.

Cotton SeedOnce a waste – disposal problem for gains, cotton seed is a valuable by product. The

seed goes to oil mills, where it is deleted of its linters in an operation similar to ginning. The

bare seed is then cracked and the kernel removed. The meal that remains after the oil has

been extracted is high in protein. Linters are used for padding in furniture and automobiles,

for absorbent cotton swabs, and for miniature of many cellulose products such as rayon,

plastics, lacquers and smokeless power for munitions. The hulls, or husks, are used as feed

for cattle Kernels, of meats, provide cotton seed oil. The cake and meal are used for feed and

flower, Foots, the sediment left by cotton seed oil refining, provides fatly acids for industrial

products. Also in India cotton seed is directly expelled and cotton seed cake containing oil

up to 6% is directly uses as a cattle feed.

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ProductsCotton is still a principal raw material for the world’s textile industry, but its

dominant position has been seriously eroded by synthetic fiber. Increased global production,

emergence of synthetic as an alternative to cotton textile and improved productivity are

mainly contributing for world supply. World demand for cotton continued to be erotic, and

some group lobbied for increased price-supports, but and up word trend began in the 1980s.

World production of cotton in the early 1990s stood at 18.9 million metric tons annually. The

leading producers include China, India, USA, Pakistan, and turkey Cotton textiles commend

a significant share in exports from India. It accounts for nearly 22% of the total exports.

Top Producing CountriesThe majority of the cotton is produced in the cotton belt of the United States, ranging

along the southern part of the nation from California to Florida and Virginia. In the 2004, cotton was produced in 13 California countries from as for north as glen country ands far south as imperial country, Major production areas Fresno, kings and Merced countries.

TABLE:3.1Production and Consumption Details of Cotton

Year Production (in lakh bales) Consumption (in lakh bales)

1990-91 117.00 115.501996-97 177.90 170.161997-98 158.00 159.011998-99 165.00 165.361999.00 156.00 173.362000-01 140.00 173.002001-02 158.00 171.762002-03 136.00 168.832003-04 177.00 173.962004-05 243.00 194.002005-06 275.60 201.002006-07 296.00 206.602007-08 324.00 212.202008-09 339.00 220.622009-10 362.00 229.622010-11 395.00 236.26

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TABLE:3,2

STATE WISE COTTON CROP SUPPLY DETAILS

COTTON CROP FOR 2006-2007

Lakh bales of 170kg

Crop as per CAB Dt.

07-12-2006

Arrivals Up to

08.04.2007

SUPPLY (1) (2)

Punjab 21.00 - 19.70

Haryana 14.00 12.40

Rajastan 11.00 09.20

Gujarat 80.00 68.00

Maharashtra 46.00 33.25

Madhya Pradesh 15.00 16.40

Andhra Pradesh 30.00 28.25

Karnataka 7.00 04.40

Tamil Nadu 5.50 02.95

Others 01.00 1.00

TOTAL 230.50 195.55

Plus Loose lint 12.00 11.25

All India 242.50 206.80

INDIA COMING ON STRONG IN COTTON PRODUCTION

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Cotton producers in India have made huge strides forward in cotton production,

increasing their average yields from 294 pounds per acre nationally to 391 pounds per acre

over the last three seasons, a 33 percent increase. As a result, Indian cotton production from

10.6 million bales in 2002-03 to 19 million bales in 2004-05. The huge 2004 crop produced

4 million bales of excess supply.

This upsurge in production was due to a combination of great whether and of BT

technology’s ability to reduce risks and costs and save Indian cotton producers from the worn

invasions that used to frequently destroy their crops. The great whether was shared across

almost the entire planet in 2004 and the yields produced will likely go down in history as a

once in a lifetime happening.

Technology’s impact on cotton production in India and around the world is still

evolving. The International cotton advisory committee estimates that 27 percent of World

cotton areas or will be planted to officially approved biotech varieties in 2005-06, up from 2

percent in 1996-97. That 27 percent contributes to 36 percent of world production exports.

Meanwhile, world average yield has climbed from 534 pounds per acre in the 1990s –

before BT technology –to a surprising 652 pounds per acre in 2004-05. For individual

growers higher yields can have the effect of lowering break –even costs, which makes these

farmers competitive at lower prices. It’s sort of a double-edge sword.

The consequence of increasing efficiency in world production could be run of lower

prices over the next decade compared with the 70 percent average of the last 30 years,

according to Gerald Estur, ICAC statistician, speaking at the ICAC’s 64 th plenary meeting in

Liverpool, sept 2002.

India is a country to keep and eye on, as it could start to export more cotton as their

yields increase. In 2002 India’s Genetic Engineering Approval committee approved the

commercial released of three hybrid BT cottons.

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Indian farmers took to the new technology q2uickly because of increased financial

returns. According to a report from the ICAC, the illegal use of BT cotton seed is decreasing,

and the percentage to BT cotton acres is rising.

Indian farmers have found that BT cotton has provided consistent yield and fiber

quality. While BT cotton is only produced in hybrid varieties in India, there is a movement

to place the technology in congenital varieties; Meanwhile India’s imports of raw cotton have

decreased from 1.95 million bales in 2001-02, to around 800,000 bales in 2004-05.

POLICY OF GOVERNMENT OF INDIA TOWARDS COTTON INDUSTRY

The Cotton production policies in India historically have been oriented toward

promoting and supporting the textile industry. The Government of India announces a

minimum support price for each variety of seed cotton (kapas) based on recommendations

from the Commission for Agricultural Costs and prices. The Government of India is also

providing subsidies to the production inputs of the cotton in the areas of fertilizer, power,

etc…

Markets for Indian Cotton

The three major groups in the cotton market are

Private traders,

State-level co-operatives,

The Cotton Corporation of India Limited.

Of these three groups, private traders handle more than 70 percent of cotton seed and

lint, following by co-operatives and the CCI.

The Cotton Corporation of India Ltd. For the year 2006-07 had purchased 60.30 lakh

quintals of kapas equivalent to 11.77 lakh bales valuing Rs.1218 70 crores in Andhra

Pradesh, Maharashtra, Madya Pradesh, Orissa and Karnataka. Beside these the Corporation

had also carried out commercial operations and purchased 2071 lakh bales valuing Rs.285.82

crores in the year 2006-07 as compared to around 1.00 lakh bales valuing Rs.108.81 cores

during the previous year (i.e. for the year 2005-06).

Exports of Cotton

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The main market for Indian cotton export is China. The other markets also include

Talwan, Thailand and Turkey. In July 2001, the union government removed all curbs on

cotton exports. As a result of these, now the exporters are not required, allocation, quality

and quaintly of export. India exported around 25 percent cotton during 2006-07 and it is

estimated nearly 62 per cent exported to China.

During the year 2006-07 the prices of Indian cotton in early part of the season being

lower than the international prices, had been attractive to foreign buyers and there was good

demand for Indian cotton, especially S-6, H-4 and Bunny, which had resulted in sustained

cotton exports, which are estimated at 55.00 lakh bales.

The Cotton Advisory Board estimated an 18-20 percent increase in cotton exports to

65 lakh bales for Oct 2007-Sep 2008, as against its Aug 2007 estimate of 58 lakh bales.

Imports of Cotton

Despite good domestic crops, India is importing cotton because of quality problems or

low world prices particularly for processing into exportable products like yarns and fabrics.

India imported just 721,000 lakh bales of cotton in 2003-04. The imports rose to

1,217,000 lakh bales in 2004-05, 4,700,000 lakh bales in 2005-06 and the anticipated imports

for the year 2006-07 are 550,000 lakh bales. For the year 2006-07 the cotton imports into the

country had once again remained limited mainly to Extra Long staple cottons, like as

previous year, which were in short supply at around 6 lakh bales inclusive of import of

around 2 lakh bales of long staple varieties contracted by mills during April- May 2007.

Role of Cotton seed oil in Indian Economy

The global production of cottonseed oil in the recent years has been at around 4-4.5

million tons. Around 2 lakh tons are traded globally every year. The major seed producers,

viz, China, India, United States, Pakistan are the major producers of oil. United States

(60000 tons) is the major exporter of cottonseed oil, while Canada is the major importer.

Cottonseed is a traditional oilseed of India. In India the average production of cotton

oil, is around 4 lakh tons a year. It is estimated that, if scientific processing is carried out the

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oil production can be increased by another 4 lakh tons, In India, the oil recovery from

cottonseed is around 11%.

Gujarat is the major consumer of cottonseed oil in the country. It is also used for the

manufacture of vanaspati. The price of cottonseed oil is generally dependent on the price

behavior of other domestically produced oils, more particularly groundnut oil.

India used to import around 30000 tons of crude cottonseed oil, before palm and soy

oil became the only imports of the county. Currently, the country does not import cottonseed

oil.

Role of cottonseed meal in Indian Economy

India produces around 2 million tons of cottonseed meal a year. However, in India

mainly undecorticated meal is largely produced. Several associations are promoting the

production of decorticated cake in India and the production of this is expected to increase in

the country.

India used to be a major exported of cottonseed extraction around two decades ago.

However, the demand for other oil meals like soy meal, has lowered the cottonseed demand

globally. In addition, the low availability of decorticated meal in India has also been a major

reason for the fall in exports.

The major importers of Indian cottonseed meal (undecorticated) used to be Thailand.

India in 2002-03 exported only 50 tons of decorticated cottonseed meal. In 2003-04, too

there have been no significant exports. India does not import cottonseed meal.

The Organizations dealing with the promotion of Cotton Industry in

India The organizations that try to promote the quantity and quality of Cotton in India are

1. The Cotton corporation of India Ltd.

2. Cotton Advisory Board.

3. Cotton Association of India.

4. Central Institute of Cotton Research.

1. The Cotton Corporation of India Limited

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The Cotton Corporation of India Ltd. Was established on 31st July 1970 as a

Government Company registered under the Companies Act 1956. In the initial period of

setting up, as an Agency in Public Sector. Corporation was charged with the responsibility

of equitable distribution of cotton among the different constituents of the industry and to

serve as a vehicle for the canalization of imports of cotton.

With the changing cotton scenario, the role and functions of the Corporation were also

reviewed and revised from time to time. As per the Policy directives from the Ministry of

Textiles. Government of India, for undertaking Price Support Operations, whenever the

prices of kapas (seed cotton) touch the support level.

The Cotton Corporation of India Ltd. Operations covers all the cotton growing states

in the country comprising of:

Punjab, Haryana and Rajasthan in Northern Zone.

Gujarat, Maharashtra and Madhya Pradesh in Central Zone.

Andhra Pradesh, Karnataka & Tamil Nadu in Southern Zone.

II. Cotton Advisory Board The Cotton Advisory Board is a representative body of Government /Growers

/Industries/ Traders. It advises the Government generally on matters pertaining to

production, consumption and marketing of cotton, and also provides a forum for liaison

among the cotton textile mill industry, the cotton growers, the cotton trade and the

Government. It functions under the Chairmanship of Textile Commissioner with Deputy

Textile Commissioner as a Member Secretary.

III. The Cotton Association of India

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The Cotton Association of India also called as the East India Cotton Association

(EICA) was declared as the statutory body by the Bombay Cotton Contract Act on 28 th

December, 1922 its purpose is to

Provide and maintain suitable buildings or rooms.

Exchange in the city of Bombay or elsewhere in India.

Provide forms of contracts and regulate the marketing, etc. of the contracts.

Fix and adopt standards or classifications of cotton.

Adjust by arbitration or otherwise useful information connected with the cotton

interests.

IV. Central Institute of Cotton Research With a view to develop a Centre of excellence for carrying out long term research on

fundamental problems limiting cotton production the India Council of Agricultural

Research has established the Central Institute for Cotton Research at Nagpur in April,

1976. CICR was simultaneously established at Coimbatore to cater to the needs of

southern cotton zone. CICR was established at Sirsa in the year 1985, to cater to the

needs of northern irrigated cotton zone.

All the three research farms are well equipped with tractors and other farm

implements and efforts are underway to initiate further developmental work in all the

farms.

The vision of the CICR is to improve production and quality of Indian Cotton with

reduced cost to make cotton production cost effective and competitive in the national and

global market.

The Mission of CICR is to develop economically viable and eco-friendly production

and protection technologies for enhancing quality cotton production by 2-3% every year

on a sustainable basis for the next twelve years (till 2020).

Future of Cotton Industry in India

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The Cotton Advisory Board (CAB) has estimated the cotton crop at 310 lakh bales for

the current season 2010-11 This is a historic high and represents a 11% jump over last

year’s crop estimate of 280 lakh bales. The increase in cotton production area is also

expected to increase to 95.30 lakh bales. The increase in cotton production area is also

expected to increase to 95.30 lakh hectares for the season 2010-11 against 91.42 lakh

hectares of the season 2009-10.

Cotton Advisory Board expects to be higher at 65 lakh bales as against 55 lakh bales in

2009-10. Imports in 2010-11 are projected at 6.50 lakh bales as compared to 5.50 lakh

bales in 2009-10, because mills have to rely on foreign growths to spin finer counts of

yarn.

It is also estimated that the cotton industry is going to provide 12 million new jobs

mainly for the semi-skilled and unskilled labour. Currently, India is responsible for

roughly one-fourth of the planted cotton area in the world with about 22 million acres

planted to cottons. If their yields keep moving toward the world average, the country

could become a big player in world trade very quickly.

COMPANY PROFILE

Page 20

SRI DHANALAKSHMI GROUP with its diverse interests in core areas is surging

ahead with drive and determination, with all the companies superbly integrated in one

single campus, the group harnesses an entrepreneurial spirit, state –of- art technology and

financial strengths to emerge as an industrial force to reckon with.

SRI DHANALAKSHMI GROUP is driven by a passion of be the best in at the areas

it operates. Backed by a high density of advanced technology and sophisticated

manufacturing facilities, it’s only natural that the group is leaf fogging for an outstanding

future. The total group turnover is around 300 crores per annum.

ABOUT THE COMPANY

The founder of SRI DHANALAKSHMI GROUP who has drawn its future planned

growth. A Man whose spirit of Dynamism has helped the group to achieve manifold

growth, thanks to his pioneering vision, the group’s operation grew and market extended.

Today SRI DHANALAKSHMI is a multi-activity group with a Rs. 300crores turnover,

comprising 6 divisions with divers interest in …

COTTON

RICE

OIL

SPINNING

POWER &

TEXTILE

A Star who shone in all his brilliance and dazzled everyone with his visionary

leadership abilities and caliber. Unfortunately fate nipped his sparking career in the

bud. Though short-lived, his visionary dedication continues to guide the spirit of

achievement and enterprise of SRI DHANALAKSHMI across various activities.

A Tradition of Enterprise

Page 21

As per back as 1956 Sri Sadineni Chowadraiah left in pursuit of a dream.

With just two bags of grain, he ventured to cultivate 100 acres of land. And with the

tell tale spirit gleaming in his eyes. This man had set the ball of a 120 crore

conglomerate rolling. His value oriented strategy and adventurous spirit bore fruit

consistently. His farmland grew and from a model farmer he evolved into a

dynamitic entrepreneur. He proved that success starts with a proactive attitude. A

vigorous confidence that one can effectively integrate ideas with enterprise.

Sadineni’s first trip to RUSSIA gave him the power of conviction to stride boldly into

the industrial environment. And, valiantly into the future.

The Birth Of A Dream SRI SADINENI CHOWDARAIAH set up a cotton ginning mill in 1973. The

operations grew rapidly to lay solid foundations for giant surging ahead in diverse

environments. To the group, the future is rich in possibilities. A future where the

best of minds and men will work. And will have the most resources to draw upon.

It’s vision of the future where change will be embraced as the very basis of

opportunity and endeavor.

The managing Director of SRI DHANALAKSHMI COTTON&RICE MILLS

(P) LTD. Relentless pursuit of perfection is the hallmark of this young and dynamic

B.Tech Textiles Graduate. His rich and professionals experience in the spinning line

enabled SRI DHANALAKHMI’s Spinning Division to scale new heights. His

enterprising zeal and cautious planning have been the pivotal points in driving the

group towards trailblazing progress.

Mr. RAGHAVA RAO is committed to labor welfare and his visionary

leadership has earned him a wealth of respect among the employees of SRI

DHANALAKSHMI. Astute professionals by habit, he is forever aiming higher. He

is widely acknowledged as the man who has fostered a ‘can do’ culture which starts at

top and filters down to every employee at SRI DHANALAKSHMI. He is powered by

just one belief………

“Success is a matter of excellence, and not chance”.

Social service has always been a matter of prime concern to him. Which is

why he perennially strives to provide the best education and undertake multipronged

Page 22

schemes towards the betterment of the community. While nurturing a corporate

culture that encourages individual growth, he is committed to a vision that

encompasses everybody’s upliftment.

Cotton Division

The COTTON GINNING & PRESSING UNIT was started in 1873. The

Division maintains 54 Gins and 1 Hydraulic press with an annualized turnover of Rs.

40 crores. The company firmly believes that unmatched capabilities plus and in depth

knowledge of various cotton growing areas alone can put it on the path to speedy

growth.

This Division also processes India’s best long staple cotton DCH-32 at

Dharwad Branch, Karnataka. The division is poised to excel and is confidently geared

to post an impressive growth rate. This Division has stayed big thinking big and eye

on the details that sustain quality.

Manufacture of cotton i.e. by Ginning & Pressing Activities.

LECENSED : Licensed under Industries (D&R) Act, 1951

PROCESSING : 12000 MTs of cotton seed

INSTALLED CAPACITY : 600 MTs of seed per day of 24 hours working

RAW MATERIAL : Cotton kapas

FINISHED PRODUCTS : Cotton lint

Cotton Lint will be supplied to Spinning Mills and Cotton Seed to Oil Mills.

Oil Division

Page 23

A totally Integrated Agro Industry extensively engaged in extracting both

Crude Oil and Edible Oil from high quality Cotton Seed Oil is a popular cooking

medium to its low fat and nutritional content. On the other hand. Crude oil finds an

immediate Industrial application. Besides these two core oil extractions, the division

has also extensively diversified into high quality extractions from aVariety of other

seeds and beans. Capability on its competence and knowledge of agro industry, the

division was set up in 1981.

The Mills capacity of processing Cotton Seed and Cotton Seed Cake has

jumped to 80 tones. At this division, the De-oiled Cake is further processed in the

solvent extraction plant which gives about 3-4% oil. The De-oiled Cake is then

utilized as Cattle, Poultry and Fish feed which is immensely popular.

Success comes with a fierce will to perform. This philosophy to excel has

placed the division on the summit. The Division has consistently bagged excellence

awards for highest Cotton Seed processing and crushing. These awards recognize SRI

DHANALAKSHMI’s pursuit of excellence which is achieved through enhanced

productivity, quality, up gradation and a shared of commitment, Indeed this

outstanding recognitions sets an example to all the other oil and extracting industries

in the country.

Oil Division consist of cotton seed processing Plant. Expellet (Oil Mill),

Refinery and solvent Extraction Plant.

LICENSED : Registered with D.G. T.D. New Delhi.

MANUFACTURING : Double Refined Oil

INSTALLED CAPACITY : 50 M.Ts of Edible Oil per Day of 24 Hours

Working

RAW MATERIAL : Cotton seed, sunflower Seed, soya been seed,

Rice bran Oil, etc.

FINISHED PRODUCTS : Edible refined Oil

: Hulls

: Extractions

Spinning Division

Page 24

The SRI DHANALAKSHMI SPINNING MILLS DIVISION has been a trend setter

ever since it’s commissioning. Established in 1991, the plant started commercial production of

World class yarn to the requirement of global markets as well as indigenous markets.

Conceived in a sprawling area in the midst of rich cotton fields of GUNTUR District,

the division is on its way to dizzy heights on the cotton horizon. We are having a capacity of

63,600 spindles. The impressive performance reflects SRI DHANALAKSHMI’s

commitment to continue machine modernization.

The division through a concerted Endeavour assures exemplary quality by undertaking

rigid quality control measures which start right at the at the stage of procuring raw material

ingredients down to the last level. It is the dedicated quality consciousness that as paved the

way for a phenomenal demand for SRI DHANALAKSHMI products.

All this translates into utmost customer satisfaction. The unit is enviably well-

entrenched as a leading player for the highly competitive export markets ever since 1996. SRI

DHANALAKSHMI’s magnificent obsession with exports has won for it important

international markets. In fact, over 70% of the produce was exported major European

countries. In recognition of its excellent quality conforming to the highest international

standards, the products of SRI DHANALASHMI have won widespread appreciation and

repeat orders. By exporting world class cotton yarn globally, the mill is leap fogging for the

further growth. The thrust on higher capacity utilization, uncompromising productivity

standards, quality management, astute focus on niche markets, prompt delivery schedules

combined with competitive pricing have resulted in higher sales and profits.

Environmental Protection And Safety – A Top Priority

Page 25

We believe that environmental protection requires attitude, action and right application

of technology. The group is an eco-friendly entity whose concern is preservation of life and

environment. The division does not release any toxic waster and pollutants. And, across every

unit of the group, humidity, moisture and temperature are constantly monitored to ensure top

most safety. The very fact that we have made wearing of masks mandatory for the personnel

bears amp witness to our commitment to industrial safety.

The environmental protection commitment of the company firmly believes that when

use the bounties of mother earth, we have to give back, an environment that is conductive to

healthy living.

Count Range:

We are running from 50 to 100 counts in single as well as double (TFO) yarns. We are

running compact yarn with 12000 spindles (suessen). We will achive 25000 spindles compact

yarn shortly.

This unit manufactories Cotton yarn by processing of cotton lint.

LICENSED : Registered with office of the Textile

Commissioner.

: Registered with Ministry of Commerce & Industry

: Secretariats for Industrial Assistance, New Delhi.

INSTALLED CAPACITY : 63,600Spindles,84 Looms

RAW METERIAL : Cotton Lint

FINISHED PRODUCTS : Cotton yarn.

Rice Division

This Division conduct Rice Milling Activities

PARA BOILED RICE MILL : Milling of 240 aQtls of paddy per day of 24 hrs Working

RICE MILL : Paddy

FINISHED PRODUCTS : Rice, Bran

Textile Division

Page 26

The Division was started in 2005. The Units equipped with modern imported

machinery. Presently we are running with 48 Brand New Looms. We have sucker

wrapping and sizing. Total plant planned for 98 Looms. In phased manner we are

expanding the Looms capacity.

Present Monthly Details

Air jet Looms : Tsudakoma. Model No.ZAX9100, No. of Looms -36

Sulzer : Model No. P7300 which is latest brand New. No of Looms -12

Humidification : LUWA

Presently Running Sorts : 200TC, 300TC, 400TC, 600TC, 620TC.

We are doing plan satin, percale, micro Keck’s and Dobby design’s sort Details:

40* 40, 132*72, 63*plain

60*60,175*58/2, 120* plain satin

60*80,175*72/3*,

80*100,205*95/4, 120”plain satin

100*100,225*95/4,120” plain satin

We are making sheet sets (Bed Lenin’s) in 600 TC in plan satin as well as stripe satin and

Dobby Designs.

LICENSE : Industry Secretariat for Industrial Assistance

New Delhi.

PROCESS : 48 Looms

INSTALLED CAPACITY : 48 Looms

Power Division

The future is a limitless expanse of challenges waiting for the stronger to step in and

conquer. Only those with all the answers will emergency victorious. In the wake of fast

depleting fuel resources and an increasing drive for self-reliance, SRI DHANALAKSHMI

GROUP realizes the alarming global concern. To reach the goal of self-reliance, the

progressive, dynamic and growth oriented group has naturally moved into the core sector-

power. A mere 40 kms away from the company’s factories at Ganapavaram.

The power project will not only serve as a major boost to the company but will meet

the ever growing captive consumption needs. To SRI DHANALAKSMI, reliability is an

Page 27

acronym missionary self-confidence. Reason why SRI DHANALAKSHMI is fully geared to

meet any emerging power need. SRI DHANALAKSHMI is harnessing its technology

resources and internet strengths to gain the competitive edge. SRI DHANALAKSHMI is

standing shoulder to shoulder with all those corporate bigwigs who lead the industry in self-

reliance.

Production

6M;W. Mini Hyde Power Stations (3Stations of 2 M.W. each)

Other Services

SRI SADINENI CHAOWDARAIAH, The founder, is a man of core values and a deep

rooted willingness to reach out to the deprived and less fortunate. A philanthropist by virtue

he is blessed with a helping hand. He has launched diverse community development

programmers in educational, healthcare and communication areas. He has helped translate

many dreams into glorious realities. He has commitment lies SRI SADINENI

CHOWDARAIAH EDUCATIONAL TRUST.

He has set up many schools and colleges in and around Chilakaluripet. He started the

professionally oriented “ SRI SADINENI CHOWDARAIH SCIENCE & ARTS COLLEGE”.

Affiliated to Acharya Nagarjuna University at Maddirala village to impart high quality

education.

This college is special in the sense that it offers a range of vocational and specialized

courses which are aimed at self- employment for youth.

The Navodaya Vidyalaya in Maddirala Village, Guntur, has been constructed on 30

acres of prime land donated by him. The site is adjacent to his Degree College which

is run by Ministry of Human Resources, Government of India.

SRI SADINENI CHOWDARAIAH Residential Public School, Chilakaluripet,

affiliated to CBSE, has so far accomplished 12 outstanding batches of students who

have secured 100% 1st class.

He has donated 2acre of land at Chilakaluripet towards the construction of a Health &

Recreation Club

A new Junior College is being built near the power project at Muppalla.

BOARD OF DIRECTORS

SRI. N.RAGHAVA RAO. B.E.- CHAIRMAN & MD

Page 28

SRI. P. RAGHAVA REDDY. B.E. Electronics – DIRECTOR

SRI. M. LINGAIAH. M.sc – DIRICTOR

SRI. S. HANUMANTH RAO. B.Com – DIRECTOR

SRI. CA PV. NARAYANA ACA., ACS – DIRECTOR & SECRETARY.

Bankers

UNION BANK OF INDIA, LAKSHMIPURAM, GUNTUR.

STATE BANK OF INDIA, COMMERICAL, GUNTUR

Auditors M/S. MASTANAIAH

CHARTED ACCOUNTANT

GUNTUR.

Registered Office & Factory GANAPAVARAM

VIA. CHILAKALURIPETA,

GUNTUR DISTRICT,

ANDHRA PRADESH,

PIN-522 619.

Hydel Power Plant A. MUPPALLA,

EPURU MANDAL,

GUNTUR DISTRICT,

ANDHRA PRADESH,

PIN – 522 661J.

Textile Division

BOPPUDI VILLAGE,

CHILAKALURIPETA MANDAL,

Page 29

GUNTUR DISTRICT,

PIN-522 616.

Statement Of Accounting Policies General The accountings are prepared on historical cost convention and in accordance with

normally accepted Accounting Principles.

Fixed Assets Fixed assets are stated at cost less accumulated depreciation. Cost of acquisition of

fixed assets is inclusive of directly attributable cost of bringing the assets to their working

condition for the intended use and interest on borrowings till the date of commissioning of the

assets, CENVATIVAT credit availed, if any, on fixed assets is not included in the cost of such

fixed assets capitalized.

Depreciation Depreciation is a written off in accordance with the provisions of schedule XIV of the

companies Act 1956 as follows.

Under straight line method in respect of the assets of spinning power and textile

divisions.

Under Written down Value method on the assets of all other divisions of the company.

InventoriesValuation of inventories is made as follows:

Raw-Material and Finished goods at cost or net realizable value whichever is lower.

Work-in-Progress at cost inclusive of direct production overheads.

Stores and spares at cost.

Electronic power at net releasable value

Excise Duty

Page 30

Liability on finished goods is accounted for as and when goods are cleared from

factory and there is no liability on closing stock of finished goods at the year end.

Sales

Sales are exclusive of sales tax collections due to implementation of A.P. VAT Act

2005.

Taxes On Income

Current taxes is determined as per the provisions of income Tax Act 1961 in

respect of taxable income for the year ended 31st March, 2007. Differed tax liability is

recognized, subject to the consideration of timing differences, being the difference

between the taxable income and accounting income the originate in one period and are

capable of reversal in one or more subsequent periods. In case of power division

which eligible for tax Holiday. Deferred Tax Asset / liabilities for timing differences

which reverse after the Tax Holiday period are recognized.

Segment Reporting

The accounting policies adopted for segment reporting are in line with the

accounting policies of the company with the following additional policies for segment

reporting. Inter-segment Revenue has been accounted for based on the market related

prices. Revenue and Expenses other than interest have been identified to segments on

the basis of their relationship to the operating activities of the segment. Revenue and

expense which related to the enterprise as a whole and are not allocable to segments on

a reasonable basis have been included under “Unallocated” head.

Retirement Benefits

The Company makes regular monthly contribution to provident fund which are

deposited with the Government and Group term Insurances is routed through L.I.C. and are

charged against the revenue. The company has taken Group Gradually (Cash Accumulation)

scheme with L.I.C. of India.

32

Page 31

The premium on policy and the difference between the amount of gratuity paid on

retirement and recovered from the Life Insurance Corporation of India debited to profit and

Loss Account. Leave encashment is accounted as and when the employees claimed and paid.

Proposed Dividend

Provision is made in the account for the dividend payable (Including of all tax thereon)

by the company as recommended by the Board of Directors, Pending approval of the

shareholders at the annual General Meeting.

Foreign Currency Transactions

Import of material /capital Equipment is accounted at the rates at which actual

payments are effected.

The profit/Loss arising out of foreign Exchange transactions on sale of goods are

accounted on actual realization basis.

Foreign Currency loans covered by forward contracts are stated at the forward

contracts rates while those not covered are calculated at year end rate.

Impairment Of Assets

At the date of each balance sheet the company evaluates internally. Indications of the

impairment if any, to carrying amount of its fixed and other assets. No impairment loss has

been recognized.

Contingent Liabilities

Contingent Liabilities are not recognized in the accounts, but are disclosed after a

careful evaluation of the concerned facts and legal issues involved.

Foreign Exchange Earning And Outgo

The company has earned foreign exchange of Rs.725.72 lacs of its finished goods and

Rs.1493.16 lacs by export through merchant /trade house of its finished goods, company has

spent Rs. 58.95 lacs of foreign exchange towards import of raw- material, Rs.4.18 lacs

towards import of components & spare parts, Rs. 1166.37 lacs towards import of capital

goods including advance paid, Rs. 5.02 lacs towards interest on foreign currency loan and Rs.

11.90 lacs towards freight, commission & travelling.

Page 32

TABLE : 3.3

Raw Material & Finished Goods

Raw Material Finished Goods

Cotton Division 1) Cotton Kappas 1) Cotton Lint

2) Cotton Seed

Oil Division 1) Cotton Seed

2) Sunflower Seed

3) Soyabeen seed

4) Rice Bran

5) Other seeds

1) Cotton Linters

2) Edible Refined Oil

3) Hulls

4) Extractions

Rice Division 1) Paddy 1) Rice

2) Bran

Spinning Division 1) Cotton Lint 1) Cotton Yarn

Page 33

TABLE: 3.4

Commercial Performance (Rs in Lakhs)

Year Sales Turnover Domestic Sales Exports

2006-07 1962483183 1740594875 221888308

2007-08 2381902558 2069233437 312669121

2008-09 2468612971 2148553325 320059646

2009-10 2902363337 2401603522 500759815

2010-11 3238442122 2685363414 553078708

0

500000000

1000000000

1500000000

2000000000

2500000000

3000000000

3500000000

2006-07 2007-08 2008-09 2009-10 2010-11

Sales Turnover

Domestic Sales

Exports

ACHIEVEMENTS & AWARDS

1987-89:

1989- Best Exporter Award from Govt. of AP.

Page 34

1988-89 Stood first in India in scientific processing of cotton seed.

1988-99- Stood first in India in domestic sales of cotton seed Extraction.

1989-90:

1989-90- Stood first in India in scientific processing of cotton seed.


1989-90- Stood first in India in Export sales of cotton seed Extraction.

1990-91:

1990-91-Stood first in India in scientific processing of cotton seed.

1990-91-Stood first in India in domestic sales of cotton seed Extraction.

1990-91-Stood first in India in Export sales of cotton seed Extraction.

1991-92:



1992-93:



1993-94:



1994-95:



Page 35

1995-96:



1996-97:



1997-98:



1998-99:



1999-00:



2000-01:



2001-02:



2002-03:



→2003-04:


Page 36


2004-05:



2005-06:



2006-07:



2008-09:



2009-10



2010-11



Man Power In Dhanalakshmi Group

Oil Division 300

Spinning Division 250

Textile Division 100

Rice Division 30

Power Division 46

Page 37

Director’s Responsibility Statement

Pursuant to section 21(2AA) of the Companies Act. 1956, your directors state that:

In the opinion of the board of Director’s is the preparation of the Annual Accounts,

the applicable Accounting Standards has been followed and there were no material

departures there from.

The benefit of encashment of leave is given to the employees of the company during

their service and while retired, through there is no defined

Retirement benefit scheme in this regard. Employees can Ancash the accumulated

leave while in service which is accounted as and when claimed and paid. Hence in the

opinion of the Board of Directors the applicable Accounting standards have been

followed.

The Directors have selected such accounting policies and applied them consistently

and made judgment and estimate that are reasonable and prudent so as to give a true

and fair view of the state of affairs of company at the end of the financial year and of

the profit/loss of the company for that period.

The directors have taken proper and sufficient care for the maintenance of adequate

accounting records in accordance with the provisions of this Act for safeguard the

assets of the company and for preventing and detecting fraud and other irregularities.

The directors have prepared the annual accounts on a going Concern basis.

Acknowledgement

The Directors wish to place on record their appreciation for the sincere co-operation

extended by various departments of central and state Government. Industries development

bank of in India Limited, ICICI Bank Ltd. Union bank of India, State Bank of India, Export

import bank of India, Auditors, Suppliers and Customers of the company. For and on behalf

of the Board.

N. Raghava Rao, Chairman & M.D.

P. Raghava Reddy, Director,

Page 38

P.V. Narayana, Director & Secretary.

Notice To Shareholders Notice is hereby given that the Twenty Ninth Annual General meeting of the

members of the company will be held at the Registered Office of the company at Ganapavaram on Friday, the 28th September, 2010 at 3-00 p.m. to transact the following business

Ordinary Business To receive, consider and adopt the Audited Balance Sheet as at 31st March, 2007 and

the profit and loss Account for the year ended 31st March 2010 and the report of Directors

and Auditors thereon.

To appoint Directors in the place of Sri. P. Raghava Reddy who retires on the data of

Annual General Meeting and to re-appoint him if thought fit.

To appoint Directors in the place of CA. P.V. Narayana who retires on the date of


To appoint Directors in the place of Sri. S. Hanumanth Rao who retires on the data of


To appoint Directors in the place of Sri. M. Lingaiah who retires on the data of


To declare a dividend.

To appoint Auditors to hold office from the conclusion of this meeting until the

conclusion of the next Annual General Meeting and to fix their remuneration.

By order of the Board

N. Raghava Rao

Chairman & Managing Director

Notes

Every member who is entitled to attend and vote may appoint a proxy to attend and

vote instead of himself and the proxy need not be a member. The proxies should, however, be

deposited at the Registered Office of the Company not later than 48 hours before the

commencement of the meeting.

Future Outlook

Operations on consolidated basis continue to pose healthy trends. However, changes

in the industrial trends are bound to influence spinning operations. Company has acquired 48

Page 39

looms under first phase of project implementation for textile division. Textile operations have

come out of teething problem but have to reach estimated levels in operations and profits.

This shall take some more time in view of dip in dollar valuation and decline in exports.

Thus, company has to grapple with an industrial scenario that calls for alert and

caution.

Oil division is showing immense potential to reach higher levels in all spheres of

operations.

Power division shall perform well in the current year also.

In view of this, we are hopeful of improved performance in 2010-11 despite the

difficulties posed.

Contact

SRI DHANALKSHMI COTTON & RICE MILLS Pvt. LTD.

GANAPAVARAM – 522619,

VIA-CHILAKALURIPET,

GUNTUR Dt.

PHONE: +91-8647-254921 to 254924.

FAX: + 91-8647-254925,254927,254883,[email protected]

THEORETICAL FRAME WORK

DETERMINATS OF WORKING CAPITAL

Nature of Business

The working capital requirements of an enterprise are basically related to the conduct

of business. For instance, public utilities have certain features are like one is the cash nature

of business, that is, cash sale and another is sale and another is sale of services rather than

commodities, they do not maintain big inventories and have, therefore, probably the least

requirement of working capital. Where as the other extreme are trading and financial

Page 40

enterprises such that they have to maintain sufficient amount of cash, inventories and book

debts. They maintain large amounts in Working Capital.

Production Cycle

Another factor which has a bearing on the quantum of working capital is the

production cycle. It refers to the time involved in the manufacture of goods. Funds have to

be necessarily tied-up during the process of manufacture, necessitating enhanced Working

Capital. In other words, there is some time gap before raw materials become finished goods,

to sustain such activities need for working capital. If the production cycle larger will be the

tied-up funds and, therefore, the large is the working capital and vice versa.

Business Cycle

Business fluctuations lead to cyclical and seasonal changes which, in turn, cause a

shift in the working capital position, particularly for temporarily working capital

requirements. The variations in business conditions may be in two directions:

*Upward.

* Down swing phases.

During the Upswing of business activity the need for working capital is likely to grow

to cover the lag between increased sales and receipt of cash as well as to finance purchase of

additional material. The down swing phase of the Business cycle has exactly an opposite

effect on the level of working capital requirement.

Production Policy

A firm marked by pronounced seasonal fluctuation in its sales may pursue a production

policy which may reduce the sharp variations in working capital requirements. When the

peak business season, the firms have to operate at full capacity to meet the demand, such a

production policy may dampen the fluctuations in working capital requirements.

Growth and Expansion

When a company grows, it is logical to expect that a large amount of working capital is

required. The composition of working capital in a growing company also shifts with

Page 41

economic circumstances and corporate practice other things being equal, growth industries

require more working capital.

Credit Policy

The Credit policy of the firm affects the working capital by influencing the level of

debtors. The credit terms to be granted to customers may depend upon the norms of the

industry to which the firm belong. The firm should use discretion in granting credit terms to

its customers, depending upon the individual case: a liberal credit policy, without rating the

credit worthiness of customers will be determined to the firm and will create a problem of

collecting funds later on. The firm should be promot in making collections, a high collection

period will mean tie up of large funds in bad debts, slack collection procedures can increase

the chance of bad debts.

Availability of Credit

The working capital requirements of the firm are also affected by its creditors. A firm

will need less working capital if liberal terms are available to it, Similarly, the availability of

credit from banks also influences the working capital needs of the firm. A firm, which can

get bank credit easily on favorable conditions, Will Operate with less working capital than a

firm without such a facility.

Operating Efficiency

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

minimum costs. The firm will be effectively contributing in keeping the working capital

investment at a lower level if it is efficient in controlling operation costs and utilizing current

assets. The use of working capital is improved and pace of cash conversion cycle is

accelerated with operating efficiency. Better utilization of resources improves profitability

and, thus, helps in releasing the pressure on working capital. Although it may not be possible

for a firm to control prices of materials wages of labor, it can certainly ensure efficient and

effective use of its materials, labor and other resources.

Page 42

Level of Current Assets

An important working capital policy decision is concerned with the level of investment in

current assets under a flexible policy (also refer to as a conservative policy), the investments

in current assets are high. This means that the firm maintains a huge balance of cash and

marketable securities. Carries large amounts of inventories, and grant generous terms of

credit to customers, which leads to high level of debtors.

Under a Restrictive policy, the investment in current assets is low. This means that the

firm keeps a small balance of cash and marketable securities, manages with small amounts of

inventories, and offer stiff terms of credit, which leads to a low level of debtors. Determining

the optimal level of current assets involves a trade off between costs that rise with current

assets an costs that fall with current assets the former are referred to as carrying costs and the

latter as shortage costs.

Carrying costs is mainly in the nature of the cost of financing a higher level of current

assets. Shortage costs are mainly in the form of disruption in production schedule, loss of

sale, and loss of customer goodwill.

Current Assets Financing Policy

After establishing the level of current assets, the firm must determine how these should be

financed. What mix of long-term capital and short-term debt should the firm employ to

support its current assets. The investment in current assets may be broken into two parts i.e.

Permanent current assets and temporary current assets. Several strategies are available to a

firm for financing its capital requirements. Following are three strategies namely A,B and C.

Page 43

*Strategy A: Long term financing is used to meet fixed assets requirements as well peak

working capital, requirement when the working capital requirement is less than its peak its

peak level, the surplus is invested in liquid assets.

*Strategy B: Long term financing is used to meet fixed asset requirements, permanent

working capital requirement, and a portion of fluctuating working capital requirement.

During seasonal down swings, surplus is invested in liquid assets.

*Strategy C: Long term financing is used to meet fixed asset requirements, permanent

working capital requirement. Short- term financing is used to meet working capital

requirement.

Computation of Working Capital

There are two major components of working capital are current assets and current

liabilities. They have a bearing on the cash operating cycle. In order to calculate the working

capital needs, what is required is the holding period of various types of inventories, the credit

collection payment period.

Working capital also depends on the budgeted level of activity in terms of

production/sales. The calculation of working capital based on the assumption that the

production/sales is carried on evenly throughout the year and all costs accrue similarly.

As the working capital requirements are related to the cost excluding depreciation and not

to the sale price. Working capitals is computed with reference to cash cost. The cash cost

approach is comprehensive and superior to the operating cycle approach based on holding

period of debts and inventories and payment period of creditors.

Approaches for Determining Financing MixOne of the important ingredients of the theory of working capital management is

determining the financing mix. In other words, involved in the management of working

capital is how current assets will be financial. There are two sources from which funds can be

raised for current asset financing.

Page 44

*Short term sources.

* Long term sources.

There are three basic approached to determine an appropriate finance mix:

* Hedging approach.

* Conservative approach

* Trade –off between these two.

Hedging Approach

The term Hedging is often used in the sense of a risk reducing investment strategy. This

approach to the financing decision to determine an appropriate financing mix is, therefore

also called as matching approach. According to this approach, the maturity of the source of

funds should match the nature of the assets to be financed. For the purpose of analysis, the

current assets can be broadly classified into two classes.

*Those which are required in a certain amount for a given level of operation and, hence do

not vary over time.

*Those which fluctuate over time.

This approach, therefore divides the requirements of total funds into permanent and

seasonal components, each being financed by a different source. According to the hedging

approach the permanent portion of funds required with long-term funds and the seasonal

portion with short-term funds.

Conservative Approach

This approach suggests that the estimated requirement of total funds should be met form

long-term sources, and the use of short-term funds should be restricted to only emergency

situations or when there is an unexpected outflow of funds.

Trade-off between these two

Page 45

According the hedging approach is associated with high profits as well as high risk, while

the conservative approach provides low profits and low risk obviously, neither approach by

itself would serve the purpose of efficient working capital management. A trade-off between

these two extremes would give an acceptable financing strategy.

The exact trade-off between risk an profitability will differ from case to case depending

on risk perception of the decision makers. This level of requirement of funds may be financed

through long run sources and for any additional financing need, short-term funds may be

used.

Working Capital Policy

Working capital management policies have a great effect on firm’s profitability, liquidity

and its structural health. A finance manager should therefore, chalk out appropriate working

capital policies in respect of each competent of working capital so as to ensure high

profitability, proper liquidity and sound structural health of the organization. In order to

achieve this objective the financial manager has to perform basically following two functions.

*Estimating the amount of working capital.

*Sources from which these funds have to be raised.

Sources and Uses of Working Capital

The sources of funds section summarizes all transactions of the business that caused and

increase in its working capital. The uses of funds section of the statement summarizes all

transactions that caused a decrease in working capital During the period. For the

convenience of study the sources of working capital may be classified as under.

SOURCES OF FUNDS

*Funds Generated From Operation: The earnings of a business represent one of the

principal sources of funds. In order determine working capital provided by operations, it is

necessary to deduct from revenues only those expenses which required on expenditure of

funds and therefore caused a decrease in working capital. A convenient way of determining

working capital from operations is simply to add back to net income all those expenses,

which did not require and outlay of funds.

Page 46

*Increase in Share Capital: If a business has issued share capital during a period, the

amount for which the shares were sold is a source of funds.

*Increase in Long-Term Liabilities: The change in the amount of funds from long-term

borrowings can be calculated by subtracting the balance at the end of the period from the

balance at the beginning of the period. If a positive, it is a source of funds; if long-term

liabilities have decreased. It is a use of funds.

*Sale of Non Current Assets: One of the major use of funds is the purchase of non-current

assets will be another source of funds, equal to the net proceeds from the sale.

USES OF FUNDS

Transactions that decrease working capital are classified as uses of funds, typical uses of

working capital include:

*Purchase of Non-Current Assets: One of the major use of funds is the purchase of non-

current assets, the amount funds used to purchasing machinery, buildings etc., cannot be

calculated by taking the difference between net value at the beginning and end of the year.

Non-current asset accounts are affected not only by purchases but also by the amount of

depreciation taken during the year and the sale or disposition of assets during the year.

*Dividends: The declaration of a cash divided to be paid at a later date is also a use of funds.

Working capital is reduced at the time the declaration

is made because a current liability, dividends payable, is incurred and recorded at that time.

The subsequent payment of the cash dividend do not affect working capital because cash, a

current asset and dividends payable a current liability are reduced by equal amounts

*Decrease in Long-Term Liabilities: Funds may be used to pay-off long-term liabilities.

The amount the balanced of long-time liabilities at the beginning of the period from the

balance at the end of the period. A decrease in long-term liabilities is a use of funds, an

increase in long-term liabilities is a source of funds.

Page 47

WORKING CAPITAL FORECAST

There are number of methods to determine the working capital needs.

*By Determining the Amount of Current Assets and Current Liabilities: The assessment

to working requirement can be made on the basis of the current assets required for the

business and the credit facilities available for the acquisition of such current assets from the

current liabilities.

*Cash Forecasting Method: In this method the position of cash at the end of the period is

shown after considering the receipts and payments to be made up of the periods. Its form

assumes more or less a summary of cash book. This shows the deficiency or surplus of cash

as the definite point of time.

*The Balance Sheet Method: The balance sheet method of forecast is made up of the

various assets and liabilities of the business. Afterwards, the difference between the two is

taken which will indicate either cash surplus or deficiency.

*Profit And Loss Adjustment Method: Under this method the forecasted profits are

adjusted after adding the cash inflows and deducting the cash outflows. The basic idea under

this method is to adjust the estimated profit on cash basis.

*Working Capital as a Percentage of Sales: Under this method the working capital is to be

related to sales and calculated as a percentage of sales.

*Working Capital as a Percentage of Fixed Assets: In this method working capital is

related to fixed capital investment. Therefore it is projected as a percentage of fixed capital

investment.

WORKING CAPITAL TURNOVER RATIO

Page 48

It measures the efficiency of the employment of working capital. Generally higher the

turnover Ration can be calculated with the help of the following formula.

Working capital turnover ratio = Sales

Net Working Capital

Working Cycle / Operating Cycle

Investment in working capital is influenced by four key events in the reduction and sales

cycle.

*Purchase of raw materials

*Payment of raw materials

*Sale of finished goods

*Collection of cash for sales.

The firm begins with the purchase of raw material, which are paid for after a delay, which

represents the accounts payable period. The firm converts the raw materials into finished

goods and then sells the same. The time lag between the purchase of raw material and sale of

finished goods is the inventory period. Customers pay their bills some time after the sale.

The period that elapses between the dates of sales and the date of collection of receivables is

the accounts receivables period.

The time that elapses between the purchase of raw material and the collection of cash for

sales is referred to as the operating cycle, where as the time length between the payment of

raw materials purchase and the collection of Cash for sales is referred to as the cash cycle.

The operating cycle is the sum of the inventory period and the accounts receivable period,

where as the cycle is equal to the operating cycle less accounts payable period. From the

financial statements of the firm, we can estimate the inventory period, the accounts receivable

period, and the accounts payable period.

Operating Cycle

Page 49

Work in progress

Raw meterial Work in progress

Finished Goods

Sales Debtors Cash 0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1

Column1

Column1

Finished Goods

The opening cycle of the firm begins with acquisition of raw materials and ends with the

collection of receivable. It may be divided into four stages.

*Raw material and stores stage.

* Work in progress stage.

* Finished goods inventory stage.

*Debtor’s collection stage.

Use of Operating Cycle

The operating cycle is helpful to the company in two ways.

*It helps in forecasting Working Capital requirements.

*Control of Working Capital can be done efficiently by the use of operating cycle.

How to Improve Working Capital Management

“Cash is the lifeblood of business” is an often repeated maxim amongst financial

mangers. Working capital management refers to the management of current or short-term

assets and short-term liabilities. Components of short-term assets include inventories, loans

and advances, debtors, investments and cash and bank balances. Short-term liabilities include

creditors, trade advances, borrowings and provisions.

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The major emphasis is, however, on short-term assets, since shot-time liabilities arise in the

context of short-term assets. It is important that companies minimize risk by prudent

working capital management.

What Affects Working Capital Management

*Organizations are generally focused on cash, accounts payable, and supply chain issues.

However, external issues like the legal and business environment, or internal mechanisms

like organization structure and information systems, can significantly impact working capital.

*Owing to market pressures, companies are led to paying a lot of attention to producing good

quarterly results quarter after quarter. Undue focus on this may sometimes produce a

flattering but inaccurate snapshot of working capital performance. This also happens in

companies that have a marked seasonality of operations with working capital requirements

varying widely from quarter to quarter.

Measures to Improve Working Capital Management

*The essence of effective working capital management is proper cash flow forecasting. This

should take into account the impact of unforeseen events, market cycles, loss of a prime

customer, and actions by competitors. The effect of unforeseen demands on working capital

should be factored in.

* It pays to have contingency plans to tide over unexpected events. While market leaders can

manage uncertainly better, other companies must have risk management procedures. These

must be based on an objective and realistic view of the role of working capital

*Addressing the issue of working capital on a corporate – wide basis has certain advantages,

Cash generated at one location can well be utilized at another. For this to happen, information

access, efficient banking channels, good linkages between production and billing, internal

systems to move cash and good treasury practices should be in place.

*An innovative approach, combining operational and financial skills and an all encompassing

view of the company’s operations will help in identifying and implementing strategies that

generate short term cash. This can be achieved by having the right set of executives who are

responsible for setting targets and performance levels. They are than held accountable for

delivering. They are also encouraged to be enterprising and to act as change agents.

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* Effective dispute management procedures in relationship to customers will go along way in

freeing up cash otherwise locked in due to disputes. It will also improve customer service

and free up time for legitimate activities like sales, order entry, and cash collection. Overall,

efficiency will increase due to reduced operating costs.

* Collaborating with your customers instead of being focused only on your own operations

will also yield good results. If feasible, helping them to plan their inventory requirements

efficiently. This aspect must form part of the company’s strategic and operational thinking.

Efforts should constantly be made to improve the working capital position. This will yield

greater efficiency and improve customer satisfaction.

Inventory Management

Inventory is one of the major current asset. The term inventory refers to the stockpile of

the products a firm is offering for sale and the components that make up the products. In

other words inventory is composed of assets that will be sold in future in the normal course of

business operations the assets which forms store as inventory in anticipation of need are: (1)

raw material, 2) work in process (semi- finished goods) and (3) finished goods.

The raw material inventory contains items that are purchased by the firm form others and

are converted into finished goods through the manufacturing process, they are an important

input of the final product.

The work in process inventory consists of items currently be used in the production

process. They are normally semi-finished goods that are at various stages of production in

multi stage production process. Finished goods represent final or completed products, which

are available for sale. They inventory of such goods consist of items that have been produced

are yet to be sold.

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Objectives

The basic responsibility of the financial manager is to make sure the firm’s cash flows are

managed efficiently. Efficient management of inventory should ultimately result in the

maximization of owner’s wealth. The objective of inventory management consists of two

counterbalancing parts.

*To minimize investments in inventory.

* To meet a demand for the product by efficiently organizing the production and sales

operations. These two conflicting objectives of inventory management can also be expressed

in terms of ‘cost benefit’ associated with inventory.

That the firm should minimize investment in inventory implies that maintaining inventory

involves cost, such that the smaller the inventory, the low is the cost to the firm. It provides

to the extent that facility to smooth functioning of the firm, the larger the inventory should be

determined on the basis of the trade-off between costs and benefits associated with the level

of inventory.

Costs Associated With Inventory

One of the operating objectives of inventory management is to minimize cost. The cost

associated with inventory fall into 2 basic categories.

1. Ordering costs

2. Carrying costs.

*Ordering Costs: The expenses involved are referred to as ordering costs. A part from

placing orders outside, the various production departments have to acquire materials from

stores. Any expenditure involved here is also apart of the ordering cost.

Carrying Costs: The second broad category of costs associated with inventory is the

carrying costs. They are involved to maintaining or carrying inventory. The cost of holding

inventory may be divided into two categories.

1. Those that arise due to the storing of inventory.

2. The opportunity cost of funds.

Page 53

If the level of inventory increases, the carrying costs also increase and vice-versa. The

sum of the order and carrying costs represents the total cost of inventory. This is compared

with the benefits arising out of inventory to determine the optimum level of inventory.

Inventory Control Models

A number of inventory control models are available that can help in determining the

optimal inventory level of each item. These models range from the relatively simple to the

extremely complex, those are:

ABC Analysis

EOQ Model

JIT Approach

1. ABC Analysis

The ABC method divides a company’s inventory items into 3 groups group A consists of

those items with a relatively large value but relatively small percentage of the total items.

Group C contains those items with a small value but a large percentage of total items. Group

B contains the items which are in between Group A and C. Even though the actual cut-off

between the groups is somewhat arbitrary, The ABC method provides management with

information that can be used to determine how closely different inventory items should be

controlled.

2. EOQ Model

The EOQ model assumes the annual demand or usage for a particular item is known with

certainty. In other words, seasonal fluctuations in the rate of demand are ruled out. Finally,

the model assumes that orders to replenish the inventory of an item are filled instantaneously

given a known demand and a zero lead time for replenishing inventories, there is no need for

a company to maintain additional inventories, or safety stocks, to protect against stock outs.

This model assumes that the costs of placing and receiving an order are the same for each

order and independent of the number of units ordered. The primary objective of the EOQ

model is to find the order quantity that minimizes total annual inventory costs.

Mathematical Approach

Page 54

The economic order quantity can using a short-cut method, be calculated

by the following equation.

EOQ = 2AB

C

Where A= Annual usage of inventory (units)

B = Buying cost per order

C = Carrying cost per unit.

3. Just –In – Time Approach

Just-in- time inventory management systems are part of a manufacturing approach that

seeks to reduce the company’s operating cycle and associated cost by eliminating wasteful

procedures. This system is based on the idea that all required inventory items should be

supplied to the production process at exactly the right time be supplied to the production

process at exactly the right time and in exactly the right quantities.

This approach was first developed by the Toyota Motor Company in the 1950’s. This

approach works best for companies engaged in-respective manufacturing operations. A key

part of Just-in Time techniques is the replacement of production in large batches with a

continuous flow of smaller quantities. This inventory system requires close co-ordination

between a company and its supplies, because any disruption any disruption in the flow of

parts and materials from the supplier can result in costly production delays and lost sales.

Management of Cash

Cash management is one of the key areas of Working Capital Management Cash is the

most liquid asset it is the common denominator to which all current assets can be reduced

more over receivables and inventory get eventually converted in to cash.

Motives for Holding Cash

With reference to cash management, the term cash is used into two senses; they are

narrow sense and broad sense. In narrow sense, it is used to broadly cover currency and the

generally accepted equivalents of cash; such as cherubs, drafts, and handiest in banks. The

broad view of cash also includes cash assets such as marketable securities and time deposits

in banks. The main characteristics of these is that they can be readily sold and converted into

cash. There are four primary motives for maintaining cash balance. They are:

Page 55

*Transaction Motive

*Precautionary Motive

* Speculative Motive

* Compensating Motive

Transaction MotiveThis refers to holding of cash to meet routine cash requirements to finance the

transaction, which a firm carries on in the ordinary course of business. To ensure that the firm

can meet its obligations when payments are due in a situation in which disbursements are in

excess of current cash receipts it must have adequate cash balance. The requirement of cash

balances to meet routine cash needs is known as transaction motive and such motive refers to

the holding of cash anticipated Obligations whose timing is not perfectly synchronized with

cash receipts.

Precautionary Motive In addition to the non-synchronization of anticipated cash inflows and out flows in the

ordinary course of business, a firm may have to pay cash for purpose, which cannot be

predicted or anticipated. The unexpected cash needs may be the result of;

* Floods, strike and failure of important customers.

* Bills may be presented for settlement earlier than expected.

* Unexpected slow down in collection of accounts receivable.

* Cancellation of some order for goods as the customer is not satisfied.

* Sharp increase in cost of raw material.

The cash balance held in reserve for such random and unforeseen fluctuations these cash

flows are called as precautionary balances. This other word, precautionary motive of holding

cash implies the need to meet unpredictable obligations. Thus, Precautionary cash balances

serves to provide a cushion to meet unexpected Contingencies.

Speculative Motive

Page 56

It refers to the desire of a firm to take advantage of opportunities which present

themselves at unexpected moments and which are typically outside the normal course of

business. While the precautionary motive is defensive in nature in that firms must make

provision to tide over unexpected contingencies, the speculative motive represents a positive

and; aggressive approach.

Firms aim to exploit opportunities and keep cash in reserve to do so. The speculative

motive helps to make advantage of;

*An opportunity to purchase raw materials at a reduced price on payment of immediate cash.

*A chance to speculate on interest rate movements by buying securities when interest rates

are expected to decline.

*Delay purchases of raw materials on the anticipation of decline in prices.

*Make purchase at favorable prices.

Compensating Motive

Yet another motive to hold cash balances is to compensate banks for providing certain

services and loans. Bank provide a variety of services to business firms, such s clearance of

cheque, supply of credit information, transfer of funds, and o on, while; for some of these

services banks charge a commission or fee, for others they seek Indirect; Compensation.

Usually clients are required to maintain a minimum balance of cash at the bank. Since the

firms for transaction purpose cannot utilize this balance, the banks themselves can use the

amount to earn a return. Such balances are compensating balances.

Objectives of Cash Management

The basic objectives of cash management are two fold:

To meet the cash disbursement needs (payment schedule).

To minimize funds committed to cash balances.

These are Conflicting and mutually contradictory and the task of cash management are to

reconcile them.

A) Meeting Payment Schedule

Page 57

In the normal course of business, the firms have to make payments of cash on a

continuous and regular basis to suppliers of goods, employees and so on. At the same time,

there is a constant inflow of cash through collection from debtors. Cash is, therefore, aptly

described as the ‘oil to lubricate the ever-turning wheels of business: without it the process

grinds to a stop’.

The basic objective of cash management is to meet the Payment Schedule that is to have

sufficient cash to meet the cash disbursement needs of a firm. The important of sufficient

cash to meet the payment schedule can hardly be Firm the important of sufficient cash to

meet payment schedule can hardly be overemphasized. The advantages of adequate cash are

It prevents insolvency or bankruptcy arising out of Inability of a firm to meet its

obligations.

The relationship with the bank is not strained. It helps in fostering good relations with

trade creditors and suppliers of raw materials.

A cash discount can be availed of if payment is made within the due date.

It leads to a strong credit rating which enables the firm to purchase the goods on

favorable terms and to maintain its line of credit with banks and sources of credit.

To take advantage of favorable business opportunities that may be available

periodically.

The firm can meet unanticipated expenditure with a minimum of strain during

emergencies, such as strikes, fires a new marketing campaign by competitors.

RECEIVABLES MANAGEMENT

The term Receivable is defined as “debt owed to the firm by customers arising from sale

of goods or services in the ordinary course of business”. The receivable represent an

important component of current assets of a firm. When a firm makes an ordinary sale of

Page 58

goods or services and does not receive payment, the firm grants trade credit and creates

accounts receivables, which could be collection in the future. Receivables Management is

also called ‘Trade credit management’. Thus accounts receivable represent an extension of

credit to customers, allowing them a reasonable period of time in which to pay for the goods

received.

In the modern competitive economic systems the sale of goods on credit is an essential

part to the firm, therefore receivables are treated as a marketing tool to aid the sale of goods.

The main objective of receivables management is to promote sales and profits until that point

is reached where the return on investment in further funding receivable is loss than the cost of

funds raised to finance that additional credit.

Costs associated in Receivables Management

The major categories of costs associated with the extension of credit and accounts

receivable are:

1. Collection cost

2. Capital cost

3. Delinquency cost

4. Default cost

1. Collection Cost

Collection costs are administrative costs incurred in colleting the receivables from the

receivables from the customers to whom credit sales have been made. This type of cost

includes maintenance of credit department with staff, records, stationery items, the expenses

would not be incurred if the firm does not sell on credit.

2. Capital Cost

The increases level of accounts receivable is an investment in assets. They have to be

financed there by involving a cost. The firm should arrange for additional funds to meet its

own obligations while waiting for payment from its customers. The cost on the use of

additional capital to support credit sales.

Page 59

3. Delinquency Cost

The cost arises out the failure of the customers to meet their obligations when payment on

credit sales becomes due after the expiry of the credit period.

Such costs are called delinquency cost. The important components are

A) Blocking –up of funds for an extended period

B) Cost associated with steps that have to be initialed to collect the over dues, legal

charges.

4. Default Cost

Finally, the firm may not be able to recover the over dues because of the in-ability of the

customers. Such debts are treated as bad debts and have to be written off as they cannot be

realized. Such costs are known as defaults costs.

BENEFITS

The benefits are the increased sales and anticipated profits because of a more liberal

policy. The impact of a liberal trade credit policy is likely to take Forms one is oriented to

sales expansion. Secondly, the firm may extend credit to protect its current sales against

emerging competition.

Therefore, Accounts receivable management should aim at a trade-off between profit and

risk. That is to say, the decision to commit funds to receivables will be based on a

comparison of the benefits and costs involved, while determining the optimum level of

receivables. The costs and benefits to be incremental benefits and costs that result from a

change in the receivables of trade credit policy.

TABLE:4.3

Statement showing changes in Working Capital during the period 2008-2009

Page 60

Particulars

2007-2008

(Rs)

2008-2009 (Rs) Changes in Working

Capital

Increase Decrease

Current Assets (A)

a) Inventories 34,75,33,063 36,20,50,215 1,45,17,152

b) Sundry Debtors 15,20,08,848 13,39,96,417 1,80,12,431

c) Cash & Bank

balance 1,53,60,979 1,73,76,708 20,15,729

d) Loans & Advances 3,92,46,987 6,44,77,058 2,52,30,071

e) Other Current

Assets 8,62,969 7,56,243 1,06,726

Total Current Assets 55,50,12,846 57,86,56.641

Current Liabilities (B)

a) Sundry Creditor 12,79,95,918 9,91,72,912 2,88,23,006

b) Provisions 43,70,154 26,04,251 17,65,903

c) Advances Received

Against Sales

57,04,081 50,56,270 6,47,811

Total Current

Liabilities

13,80,70,153 10,68,33,433

Working Capital (A-B) 41,69,42,693 47,18,23,208

Increase in Working

Capital

5,48,80,515 5,48,80,515

47,18,23,208 47,18,23,208 7,29,99,672 7,29,99,672

INTERPRETATION

Page 61

From the Working Capital changes statement it reveals the working capital

performance of Sri Dhana Lakshmi Cotton and Rice Mills (P) Ltd in the year 2009.

There is significant in Current assets and Current liabilities.

The important changes in Currents assets are, Inventories have been increased by Rs

1,45,17,152, Debtors decreased by Rs.1,80,12,431, Cash & Bank balances increased

by Rs47,42,453, Loans & Advances are increased by Rs. 2,52,30,071 and other

current assets are decreased by Rs.1,06,726 when compared with the year 2008.

The important changes in Currents liabilities are, Sundry creditors have been

decreased by Rs.2,88,23,006, Advances on Sales decreased by Rs. 6,47,811 and

Provisions are decreased by Rs.17,65,903 compared with the previous year 2008.

During the year 2009 the working capitals shows increasing trend. Due to the reason

that there is an increase in Current assets when compared with previous year 2008.

TABLE :4,4


Page 62

Particulars

2008-2009

(Rs)

2009-2010

(Rs)


Increase Decrease

Current Assets (A)

a) Inventories 36,20,50,215 47,48,32,825 11,27,82,610

b) Sundry Debtors 13,39,96,417 14,73,79,463 1,33,83,046

c) Cash & Bank

balance 1,73,76,708 1,67,09,680 6,67,028

d) Loans &

Advances 6,44,77,058 5,40,82,370 1,03,94,688

e) Other Current

Assets

7,56,243 3,78,183 3,78.060

Total Current

Assets

57,86,56,641 69,33,82,521

Current Liabilities

(B)

a) Sundry Creditor 9,91,72,912 9,29,69,440 62,03,472

b) Provisions 26,04,251 28,82,723 2,78,472

c) Advances

Received Against

Sales

50,56,270 65,06,698 14,50,428

Total Current

Liabilities

10,68,33,433 10,23,58,861

Working Capital

(A-B)

47,18,23,208 59,10,23,660

Increase in

Working Capital

11,92,00,452 11,92,00,452

11,92,00,452 11,92,00,452 13,23,69,128 13,23,69,128

INTERPRETATION

Page 63

From the Working Capital changes statement it reveals the working capital

performance of Sri Dhana Lakshmi Cotton and Rice Mills (P) Ltd in the year 2010.

There is significant in Current assets and Current liabilities.

The important changes in Currents assets are, Inventories have been increased by Rs

11,27,82,610, Debtors decreased by Rs.1,33,83,046, Cash & Bank balances increased

by Rs 6,67,028, Loans & Advances are increased by Rs. 1,03,94,688 and other current

assets are decreased by Rs.3,78,060 when compared with the year 2009.

The important changes in Currents liabilities are, Sundry creditors have been

decreased by Rs.62,03,472, Advances on Sales decreased by Rs. 2,78,472, and

Provisions are decreased by Rs.14,50,428 compared with the previous year 2009.

During the year 2007 the working capitals shows increasing trend. Due to the reason

that there is an increase in Current assets when compared with previous year 2009.

TABLE :4,4

Statement showing changes in Working Capital during the period

Page 64

2009-2010 2010-2011

Particulars

2009-2010

(Rs)

2010-2011

(Rs)


Increase Decrease

Current Assets (A)

a) Inventories 736503190 1056523566 320120376 -

b) Sundry Debtors 307466109 2600593905 - 46872204

c) Cash & Bank

balance

9681460 12090701 2409241 -

d) Loans &

Advances

75032917 126588017 51555100 -

e) Other Current

Assets

166224 279340 113116 -

Total Current

Assets

1128849900 1456075519 - -

Current Liabilities

(B)

a) Sundry Creditor 105167525 148232876 - 43065351

b) Provisions 1142919 12224723 - 785804

c) Advances

Received Against

Sales

7741343 6279309 1462034 -

Total Current

Liabilities

124347787 166736908 - -

Working Capital

(A-B)

1004502113 1289338611 - -

Increase in

Working Capital

284836498 - - 284836498

1289338611 1289338611 375559857 375559857

TABLE :4,4


Page 65

Particulars

2009-2010

(Rs)

2010-2011

(Rs)


Increase Decrease

Current Assets (A)

a) Inventories 47,48,32,825 63,84,19,859 16,35,87,034

b) Sundry Debtors 14,73,79,463 20,59,73,689 5,85,94,226

c) Cash & Bank

balance 1,67,09,980 2,20,57,637 53,47,957

d) Loans &

Advances

5,40,82,521 6,05,52,682 64,70,312

e) Other Current

Assets

3,78,183 4,24,994 46,811

Total Current

Assets

69,33,82,521 92,74,28,861

Current Liabilities

(B)

a) Sundry Creditor 9,29,69,440 12,13,82,531 2,84,13,091

b) Provisions 10,23,58,861 13,11,39,985 2,84,81,124

c) Advances

Received Against

Sales

28,82,723 25,32,022 3,50,701

Total Current

Liabilities

10,52,41,584 25,32,022

Working Capital

(A-B)

47,18,23,208 59,10,23,660

Increase in

Working Capital

11,92,00,452 67,23,74,323

11,92,00,452 23,43,97,041 23,43,97,041

RATIO ANALYSIS Ratio analysis is a powerful tool of financial analysis. A ration is defined as “the

relationship between two or more things” In financial analysis a ratio is used as a benchmark

Page 66

for evaluating the financial position and; performance of a firm. The relationship between to

accounting figures expressed mathematically is known as a financial ratio. Ratio helps to

summaries large quantities of financial data and to make qualitative judgment about the

firm’s financial performance.

Advantages Of Ratio Analysis

Ratio analysis simplifies the understanding of financial statements.

Ratios bring out the inter relationship among various financial figures and bring to

light their financial significance. Ratio analysis is a device to analysis and interpret

the financial health of the enterprise.

Ratios contribute significantly towards effective planning and forecasting A study of a

trend in the past works as a helpful guide for the future.

Ratios facilities inter firms and intra firm comparison, thereby bringing out the

strengths, weaknesses, efficiency of the firms and their department of a standard

costing system and budgetary control.

Ratios cater to the particular information person, depending upon his interest in the

business for which ratios are to be calculated. A creditor may be interested in liquidity

ratios, while an investor may want to study profitability ratios.

Use And Significance Of Ratio Analysis:

The ratio analysis is one of the most powerful tools of financial analysis. It is used as a

device to analysis and interpret the financial health of enterprise. The use of rations is not

confined to financial managers only. The supplier of goods on credit, banks financial

institutions, investors and management all make use of ratio analysis as a tool in evaluating

the financial position and performance of a firm for granting credit, providing loans or

making investments in the firm. The following are some of the uses:

1. Managerial uses which include decision making, financial forecasting, co- ordination etc.

2. Utility to shareholder/investors

3. Utility to creditors

Page 67

4. Utility to employed

5. Utility to government

Guideliness Or Prcaution For Use of Ratios

The calculation of ratios may not be a difficult task but their use is not easy. Following

guidelines or factors may be kept in mind while interpreting various ratios:

1. Accuracy of financial statements

2. Objective on purpose of analysis

3. Selection of ratios

4. Use of standards

5. Caliber of the analysis.

Standards Of Comparison

The ratio analysis involve comparison for a useful interpretation of the financial

statements. A single ratio in it self does not indicate favorable or unfavorable condition. It

should be compared with some standard. Standard of compared comparison may consist of :

Past Ratios, i.e. ratios calculated from past financial statements of the same firm;

Competitor’s ratios, i.e.., rations of some selected firms, especially the most

progressive and successful competitor, at the same point of time, most progressive

and successful competitor, at the same point of time.

Industry Ratios, i.e. ratios of the industry to which the firm belongs; and

Project Ratios, i, e, ratios developed using projected or preformed, financial

statements of the same firm.

TYPES OF RATIOS

Page 68

Several ratios. Calculated from the accounting data, can be grouped in to various classes

according to financial activity or function to be evaluated. As stated earlier, the parties

interested in financial analysis are short-and long-term creditors, owners and managements.

Short-time creditor’s main interest is in the liquidity position or the short term solvency of the

firm.

Management is interested in evaluating every aspect of the firm’s performance. They

have to protect the interests of all parties and see that the firm gross profitability, in view of

the requirements of the various users of ratios, we may classify them in to the following

important categories.

Liquidity Ratios.

Leverage Ratios.

Activity Ratios.

Profitability Ratios.

Liquidity ratios measure the firm’s ability to meet current obligations.

Leverage Ratios show the proportion of debt and equity in financing the firm’s assets.

Activity Ratios reflect the firm’s efficiency in utilizing its assets, and

Profitability Ratios measure overall performance and effectiveness of the firm.

LIQUIDITY RATIOS:

Liquidity Ratios measure the firms ability to meet its current obligations. We analysis the

liquidity needs by the preparation of cash budgets, cash and funds flow statements, but we

can calculate liquidity ratios, by establishing a relationship between cash and other current

Page 69

assets to current obligations, provide a quick measure of liquidity. A firm should ensure that

it does not suffer from the lack of liquidity and that it does not have excess liquidity. There

should be a proper balance between high liquidity and lack of liquidity. To measure the

liquidity of a firm, the following rations are calculated.

*Current Ratio

* Quick Ratio

*Cash Ratio

*Net Working Capital Ratio

CURRENT RATIO:

The current ratio is the ratio of total current assets to total current liabilities. It is

calculated by dividing current assets by current liabilities.

The current assets of a firm, represent those assets which, can be converted into cash

within a short period of time, normally not exceeding one year and include cash and bank,

marketable securities, inventory, debtors, bills receivable and prepaid expenses. The current

liabilities defined as liabilities which are short-term maturing obligations to be met, as

originally contemplated, within a year, consist of trade creditors, bills payable, bank credit,

provision for taxation, outstanding expenses.

Current Ration = Current Assets

Current Liabilities

TABLE:4.5

STATEMENT OF CURRENT RATIO FOR FIVE YEARS 2004-08

Page 70

Year Current Assets Current Liabilities Ratio

2006-07 693382521 102358861 6.77

2007-08 927428861 131535985 7.05

2008-09 856981023 120843915 7.09

2009-10 1128849900 124347787 9.07

2010-11 1456075529 166736908 8.73

CHART : 4.5

TITLE OF THE CHART: CURRENT RATIO

0

200000000

400000000

600000000

800000000

1000000000

1200000000

1400000000

1600000000

1 2 3 4 5 6

Year

Current Assets

Current Liabilities

Ratio

INTERPRETATION :

Page 71

The Current Ratio of Sri Dhana Lakshmi Cotton & Rice Mills (P) Ltd in the year

2006-07 recorded as 3.06, it has increased in the year 2007-08 to 5.17, further

decreased to 4.02 in the year 2008-09.

In the year 2006-07 the ratio has increased to 5.42 and at 2010-11 the ratio of the

company is again increased to 6.77.

A current ratio of 2:1 is considered satisfactory. The current ratio of the company is

recorded maximum as 6.77 in the year 2010-11 the reason for is due to increase in

current assets especially in Inventory and decrease in current liabilities especially in

Sundry Creditors.

The current ratio of the company is recorded minimum as 3.06 in the year 2006-07

because of there is an increase in Current liabilities especially in Sundry Creditors.

The over all trend of the ration is in increasing pattern throughout the study period

except in the year 2008-09 and the firm will able to meet its current obligations in

full. Thus, the firm with the higher current ratio has better liquidity solvency.

QUICK /ACID-TEST RATIO:

Page 72

Quick ratio establishes a relationship between quick or liquid assets and current

liabilities. It refers to current assets, which can be converted into cash immediately without

diminution of value. Include in this category of current assets are cash and bank short-term

marketable securities and debtors. Thus the current assets, which are, exclude inventory. The

exclusion of inventory is based on the reasoning that it is not easily convertible into cash. The

quick ratio is found out by dividing quick assets by current liabilities.

Quick Ratio = Current Assets – Inventories.

Current Liabilities

TABLE:4.6


Year Quick Assets Current Liabilities Ratio

2006-07 218549696 102358861 2.14

2007-08 289009002 131535985 2.19

2008-09 260707727 120843915 2.15

2009-10 392346710 124347787 3.15

2010-11 409551963 166736908 2.45

CHART : 4.6

TITLE OF THE CHART: CURRENT RATIO

Page 73

0

50000000

100000000

150000000

200000000

250000000

300000000

350000000

400000000

450000000

1 2 3 4 5 6

Year Quick Assets

Current Liabilities

Ratio

INTERPRETATION :

The Quick Ratio of Sri Dhana Lakshmi Cotton & Rice Mills (P) Ltd in the year

2006-07 recorded as 1.19, it has increased in the year 2007-08 to 1.77, further




Quick ratio of 1:1 is considered satisfactory. The current ratio of the company is

recorded maximum as 2.14 in the year 2010-11 the reason for is due to increase in

current assets especially in Inventory and decrease in current liabilities especially in

Sundry Creditors.

The quick ratio of the company is recorded minimum as 1.19 in the year 2006-07

because of there is an increase in Current liabilities especially in Sundry Creditors.

The quick ratio of Sri Dhana Laksmi Cotton & Rice Mills (P) Ltd is more than

standard norm in all years of study period. The over all trend of the ratio is in

increasing pattern except in the year 2008-09. Thus, the firm can easily meet all

current claims and the firm’s short-term financial positions is satisfactory.

CASH RATION OR ABSOLUTE LIQUID RATIO:

Page 74

Cash ratio is a ratio of cash held by a firm to current liabilities. SDC & R MILLS (P)

LTD is maintaining almost an average cash of around 0.03 for the past six accounting

periods. This is because as mentioned earlier cash holding is kept at minimum except for

some petty cash needs. The cash ratio of SDC & R MILLS (P) LTD, for the last five

accounting period is given below in the table. The cash ration is calculate by dividing cash

and bank balance by current liabilities.

Cash Ratio = Cash + Bank Balance

Current Liabilities.

TABLE:4.7


Year Cash & Bank Current Liabilities Ratio

2006-07 16079680 102358861 0.16

2007-08 220057637 131535985 0.16

2008-09 17001772 120843915 0.14

2009-10 9681460 124347787 0.07

2010-11 12090701 166736908 0.07

CHART : 4.7

TITLE OF THE CHART: CASH RATIO

Page 75

0

50000000

100000000

150000000

200000000

250000000

1 2 3 4 5 6

Year Cash & Bank

Current Liabilities

Ratio

INTERPRETATION :

The Cash Ratio of Sri Dhana Lakshmi Cotton & Rice Mills (P) Ltd in the year 2006-

07 recorded as 0.08, it has increased in the year 2007-08 to 0.12, further decreased to

0.11 in the year 2008-09.



The Cash ratio of the company is recorded maximum as 0.06 in the years 2009-10

and 2010-11, the reason for is due to increase in Cash and Bank balances and decrease

in Current liabilities especially in especially in sundry creditors.

The Cash ratio of the company is recorded minimum as 0.08 in the year 2006-07

because of there is an increase in Current liabilities especially in Sundry Creditors and

decrease in Cash and Bank balances.

The over all trend of the ratio is in increasing pattern under the period of study, except

in the year 2008-09. Thus, the firm maintains high cash ratio.

ACTIVITY RATIOS:

Page 76

Activity ratios are concerned with measuring the efficiency in asset management. The

efficiency with which the assets are used would be reflected in the speed and rapidity with

which assets are converted into sales.

INVENTORY TURNOVER RATIO:

This ratio indicates the number of times inventory is replaced during the year. It

means the relationship between the Sales and Closing inventory. It is calculated by dividing

the Sales by the Closing inventory.

Inventory Turnover Ratio = Sales /Closing Inventory

TABLE:4.8

STATEMENT OF INVENTORY TURNOVER RATIO FOR THE

FIVE YEARS 2007-11

Year Sales Closing Inventory Ratio

2006-07 1962483183 474832825 4.13

2007-08 2381902558 638419859 3.73

2008-09 2468612971 596273296 4.14

2009-10 2902363337 736563190 3.94

2010-11 3238442122 1056523566 3.06

CHART : 4.8

TITLE OF THE CHART: INVENTORY TURNOVER RATIO

Page 77

0

500000000

1000000000

1500000000

2000000000

2500000000

3000000000

3500000000

2006-07 2007-08 2008-09 2009-10 2010-11

Sales Closing Inventory

Ratio

INTERPRETATION :

The Inventory turnover Ratio of Sri Dhana Lakshmi Cotton & Rice Mills (P) Ltd in

the year 2006-07 recorded as 5.69, it has increased in the year 2007-08to 4.69, further




The Inventory turnover ratio of the company is recorded maximum as 5.69 in the

years 2006-07, the reason for is due to increase in Sales.

The Inventory turnover ratio of the company is recorded minimum as 4.13 in the year

2010-11 because of excessive Inventory.

The over all trend of the ratio is in decreasing pattern under the period of study,

except in the year 2009-10. In general, a high inventory turnover ratio is better than a

low ratio, it implies good inventory management, but the firm’s inventory

management is not favorable because of low inventory turnover ratio.

RECEIVABLE TURN OVER RATIO:

This ratio shows how quickly receivables or debtors are converted into cash. In

other words, the debtors turnover ratio is a test of the liquidity of the debtors of a firm.

Page 78

The liquidity of a firm’s receivables can be examined in two ways receivables

turnover, (ii) average collection period.

The Debtors Turnover shows the relationship between sales and debtors of a firm.

It can be calculated by dividing Sales by Debtors and Bills receivable.

Receivables Turnover Ratio = Sales /Debtors.

TABLE:4.9

STATEMENT OF RECEIVABLES TURNOVER RATIO FOR THE

FIVE YEARS 2007-11

Year Sales Debtors + Bills

receivable Ratio

2006-07 1962483183 147379463 13.31

2007-08 2381902558 205973689 11.56

2008-09 2468612971 137534380 17.94

2009-10 2902363337 307466109 9.4

2010-11 3238442122 260593905 12.43

CHART : 4.9

TITLE OF THE CHART: RECEIVABLE TURN OVER RATIO

Page 79

0

500000000

1000000000

1500000000

2000000000

2500000000

3000000000

3500000000

Year 2006-07

2007-08

2008-09

2009-10

2010-11

INTERPRETATION :

The Debtors turnover Ratio of Sri Dhana Lakshmi Cotton & Rice Mills (P) Ltd in the

year 2006-07 recorded as 11.71, it has increased in the year 2007-08 to 12.33, further


During the year 2009-10 the ratio has increased to 13.09 and at 2010-11 the ratio of

the company is again increased to 13.31.

The Debtors turnover ratio of the company is recorded maximum as 13.31 in the years

2010-11, the reason for is due to increase in Sales.

The Debtors turnover ratio of the company is recorded minimum as 10.34 in the year

2008-09 because of there is an decrease in Sales.

The over all trend of the ratio is in increasing pattern during the study period except in

the year 2007-08. The debtors turnover ratio is a test of the liquidity of the debtors of a

firm. Thus, the firm Maintains higher turnover ratio is the better trade credit management

and the better liquidity of debtors.

AVERAGE COLLECTION PERIOD:

This ratio is used for measuring the liquidity of a firm’s debtors is the average

collection period. This is, in fact, interrelated with, and dependent upon the receivable

turnover ratio, since it indicates the speed of their collections. The shorter average

Page 80

collection period, the better the quality of debtors, since a short collection period

implies the prompt by debtors. The average collection period should be compared

against the firm’s credit terms and policy to judge its credit and collection efficiency.

Average Collection Period = No. of Days in a year

Debtors turnover

TABLE:4.10

STATEMENT OF AVERAGE COLLECTION PERIOD FOR THE

FIVE YEARS 2007-11

Year No. of Days in a year DebtorsTurnover Ratio

Collection period

2006-07 365 13.31 31

2007-08 365 11.56 30

2008-09 365 17.94 35

2009-10 365 9.4 28

2010-11 365 12.43 27

CHART : 4.10

STATEMENT OF AVERAGE COLLECTION PERIOD

Page 81

0

50

100

150

200

250

300

350

400

2006-07

2007-08

2008-09

2009-10

2010-11

No. of Days in a year Debtors

Collection period

INTERPRETATION :

The Debtors collection period of Sri Dhana Lakshmi Cotton & Rice Mills (P) Ltd in

the year 2006-07 recorded as 31 days; it has decreased in the year 2007-08 to 30

days, further decreased to 35 days in the year 2008-09.

In the year 2009-10the collection period has decreased to 28 days and at 2010-11 the

collection period of the company is again increased to 27 days.

The Debtors collection period of the company is recorded maximum as 35 in the years

2008-09, the reason for is due to increase in Debtors.

The Debtors collection period of the company is recorded minimum as 35 in the year

2008-09 because of there is an decrease in Sales.

The Debtors collection period of the company is recorded minimum as 27 days in the

year 2010-11 because of less Credit Sales.

The over all trend of the collection period of Sri Dhana Lakshmi Cotton & Rice Mills

(P) Ltd is in decreasing pattern through the study period, except in the year 2005-06.

In general, high turnover ratio and short collection period is preferable. Thus, the

company maintains adequate collection effort and better trade credit management.

WORKING CAPITAL TURN OVER RATIO:

Page 82

It measures the efficiency of the employment of working capital. Generally higher

the turnover, greater is the efficiency and large the sale of profits. Working capital

turnover Ratio can be calculated with the help of the following formula.

Working Capital Turnover Ratio = Sales

Net Working Capital

TABLE:4.11

STATEMENT OF WORKING CAPITAL TURN OVER FOR THE

FIVE YEARS 2007-11

Year Sales Net Working Capital Ratio

2006-07 1962483183 591023660 3.32

2007-08 2381902558 795892876 2.99

2008-09 2468612971 736137108 3.35

2009-10 2902363337 1004502113 2.89

2010-11 3238442122 1289338621 2.51

CHART : 4.11

Page 83

TITLE OF THE CHART : WORKING CAPITAL TURNOVER RATIO

0

500000000

1000000000

1500000000

2000000000

2500000000

3000000000

3500000000

2006-07 2007-08 2008-09 2009-10 2010-11

Sales

Net Working Capital

Ratio

INTERPRETATION :

The Working capital turnover ratio of Sri Dhana Lakshmi Cotton & Rice Mills (P)

Ltd in the year 2006-07 recorded as 5.17: it has decreased in the year 2007-08 to 3.82,

further decreased to 3.77 in the year 2008-09.

In the year 2009-10 the collection period has decreased to 3.72 and at 2010-11 the

collection period of the company is again increased to 3.32.

The Working capital turnover ratio of the company is recorded maximum as 3.32 in

the years 2010-11, because of less efficiency employed of Working capital.

The over all trend of the ratio of the company is in decreasing pattern, Generally

higher the turnover ratio indicates efficiency of firm, but the firm maintains less

efficiency employed of working capital. It is not favorable to the company.

87

PAYABELS TURN OVER RATIO:

Page 84

It is a ratio between credit purchases and the average amount of creditors

outstanding during the year. It indicates the number of times management is able to

convert accounts payable into purchases. It is calculated with the help of the following

formula.

Creditors Turnover Ratio = Credit Purchases

Average Creditors

TABLE:4.12

STATEMENT OF CREDITORS TURNOVER FOR THE

FIVE YEARS 2007-011

Year Purchases Average Creditors Ratio

2006-07 1314624594 96071176 13.68

2007-08 1667871201 107373986 15.53

2008-09 1668305586 115294676 14.56

2009-10 2123031960 106989174 19.84

2010-11 2318120416 126700200 18.30

CHART : 4.12

TITLE OF THE CHART : CREDITORS TURNOVER RATIO

Page 85

0

500000000

1000000000

1500000000

2000000000

2500000000

2006-07 2007-08 2008-09 2009-10 2010-11

Purchases Average Creditors

Ratio

INTERPRETATION :

The Creditors turnover ratio of Sri Dhana Lakshmi Cotton & Rice Mills (P) Ltd in

the year 2006-07 recorded as 10.12: it has decreased in the year 2007-08 to 7.50

further decreased to 9.93 in the year 2005-06.

In the year 2009-10 the ratio has decreased to 9.57 and at 2010-11 the collection

period of the company is again increased to 13.40.

The Creditors turnover ratio of the company is recorded maximum as 13.40 in the

years 2010-11, the reason for is due to increase in Credit Purchases.

The Creditors turnover ratio of the company is recorded minimum as 7.50 in the year

2007-08 because of decrease in Credit Purchases.

The over all trend of the ratio of the company is fluctuating through out the period of

study. A low turnover ratio reflects liberal credit terms granted by suppliers, while a high

ratio shows that accounts are to be settled rapidly. Thus, the firm’s payable management is

not favorable.

Leverage Ratios:

Page 86

The long-term solvency of a firm can be examined by using leverage or capital structure

ratios. The long-term creditors would judge the soundness of a firm on the basis of the long-

term financial strength measured in terms of its ability to pay the interest regularly a swell as

replay the installment of the principal on due dates or in one lump sum at the time to

maturity.

Debt- Equity Ratio:

This ratio indicates the relationship between borrowed funds and owner’s capital is a

popular measure of the long-term financial solvency of a firm. This relationship is shown by

the debt-equity ratios.

Debt Equity Ratio = Long – term debt

Shareholder’s equity

TABLE:4.13

STATEMENT OF DEBT-EQUITY RATIO FOR THE

FIVE YEARS 2007-11

Year Long –term Debt Shareholders’ Equity Ratio

2006-07 614427853 810886431 0.75

2007-08 610897582 942896023 0.65

2008-09 624365431 1016825186 0.61

2009-10 568958988 1191237728 0.47

2010-11 750415556 1485879189 0.50

CHART : 4.13

TITLE OF THE CHART : DEBT-EQUITY RATIO

Page 87

0

200000000

400000000

600000000

800000000

1000000000

1200000000

1400000000

1600000000

1 2 3 4 5 6

Year Long –term Debt

Shareholders’ Equity

Ratio

INTERPRETATION :

The Debt-Equity ratio of Sri Dhana Lakshmi Cotton & Rice Mills (P) Ltd in the year

2006-07 recorded as 0.88; it has decreased in the year 2007-08 to 0.79, further

increased to 0.80 in the year 2008-09

In the year 2009-10 the ratio has decreased to 0.69 and at 2010-11 the ratio of the

company is increased to 0.75.

The Debt-Equity ratio of the company is recorded maximum as 0.88 in the year’s

2006-07 , the reason for is due to decrease in Shareholder’s funds.

The Debt-Equity ratio of the company is recorded minimum as 0.69 in the year 2009-

10 because of there is an increase in Shareholder’s funds.

The over all trend of the ratio of the company is in fluctuation pattern means one year

increase and one year decrease. It has important implications from the viewpoint of

the creditors. Thus, the company maintains low ratio, therefore a safety margin to the

creditors and it is able to meet the creditors claim.

Profitability Ratios:

Page 88

The management of the firm is naturally eager to measure its operating efficiency.

Similarly, the owners invest their funds in the expectation of reasonable returns. The

operating efficiency of a firm and its ability to ensure adequate returns to its shareholders

depends ultimately on the profits earned by it. The profitability of a firm can be measured by

its profitability ratios.

Net Profit Ratio: This ratio is based on the premise that a firm should earn sufficient profit on each rupee

of sales. The Net profit is indicative of management’s ability to operate the business with

sufficient success not only to recover from revenues of the period, the cost of merchandise or

service, the expensed of operating the business and the cost of the borrowed funds, but also to

leave a margin of reasonable compensation to the owners for providing their capital at risk.

Net profit ration Ratio = Earnings after interest and taxes

Sales

TABLE:4.14

STATEMENT OF NET PROFIT RATIO FOR THE

FIVE YEARS 2007-11

Year Earnings after tax Sales Ratio

2006-07 163200297 1962483183 0.083

2007-08 138679655 2381902558 0.058

2008-09 78414753 2468612971 0.031

2010-11 301325421 3238442122 0.093

Page 89

CHART : 4.14

TITLE OF THE CHART : NET PROFIT RATIO

0

500000000

1000000000

1500000000

2000000000

2500000000

3000000000

3500000000

1 2 3 4 5 6 7 8 9 10 11

Year Earnings after tax

Sales

Ratio

INTERPRETATION :

The Net profit ratio of Sri Dhana Lakshmi Cotton & Rice Mills (P) Ltd in the year 2006-07 recorded as 0.018; it has decreased in the year 2007-08 to 0.021, further increased to 0.061 in the year 2008-09.

In the year 2009-10 the ratio has decreased to 0.092 and at 2010-11 the ration of the company is increased to 0.083.

The Net profit ratio of the company is recorded maximum as 0.092 in the years 2009-10, the reason for is due to increase in Earnings after taxes.

The Net profit ratio of the company is minimum as 0.018 in the year 2006-07 the reason for is due to less Earnings after taxes.

The over all trend of the ratio of the company is in increasing pattern through the study period. Generally a high net profit margin would ensure adequate return to the owners. Thus, the company enables to withstand adverse economic conditions when selling price is declining, because the company maintains optimal Net profit ratio.

Page 90

FINDINGS

The following are the findings after a detailed study detailed study about Working Capital

Management in “Sri Dhana Lakshmi Cotton & Rice Mills (P) Ltd”.

From the study is its observed that the Net Working capital position of Sri Dhana

Lakshmi Cotton & Rice Mills (P) Ltd. is gradually increasing throughout the study

period 2006-07 due to increasing in Current assets.

The study result reveals that the Current Ratio is more than the standard norm i.e. 2:1

throughout the period of study 2006-10.Because of Current assets are more than the

Current liabilities.

From the study it is found that the Quick ration Sri Dhana Lakshmi Cotton &Rice

Mills (P) Ltd. shows increasing trend due to increase in Quick assets during the period

of study 2006-10.

The study result reveals that the Cash ratio of Sri Dhana Lakshmi Cotton & Mills (P)

Ltd increasing gradually throughout the study period of 2006-10. Because of there is

an increase in Sales.

The study result indicated that the Debtors turnover ratio shows increasing trend

through the study period, except in the year 2010-11 due to the reason that there is a

decrease in Sales.

Page 91

The study result indicates that the Debtors turnover ratio shows increasing trend

throughout the study period, except in the year 2007-08 due to the reason that there is

a decrease in Sales.

The study result reveals that the Debtors average collection period of Sri Dhana

Lakshmi Cotton & Rice Mills (P) Ltd is falling down year by year Under the period of

study except in the year 2004-05 due to increase in Debtors.

From the study it is observed that the Working capital turnover ratio of Sri Dhana Lakshmi Cotton & Rice Mills (P) Ltd has been decreasing gradually throughout the study period of 2003-07 due to less efficiency employed of Working capital.

From the study it is found that the Creditors turnover ratio of Sri Dhana Lakshmi Cotton & Rice Mills (P) Ltd is under fluctuating throughout the study period 2003-07 due to fluctuations in Creditors.

The study result reveals that the Long-term debt of Sri Dhana Lakshmi Cotton & Rice Mills (P0 Ltd is less than the Shareholder’s Equity because of increasing in Net worth year to year throughout the study period.

From the study it is observed that the Net profit ratio of Sri Dhana Lakshmi Cotton & Rice Mills (P) Ltd is increasing trend throughout the study period 2007-11. Because of increasing in Earnings after taxes.

Page 92

SUGGESITONS

Based on the study it is suggested to maintain same levels of Quick ration for the up coming years also to meet all current claims of Sri Dhana Lakshmi Cotton & Rice Mills (P) Ltd. From the study it is found that the Net Working Capital of Sri Dhana Lakshmi Cotton &Rice Mills (P) Ltd has been increasing year to year. It is suggested to the company to maintain the same levels in future also to make the profits.

As the study findings it is observed that the Current ratio is more than the standard norm. So, it is suggested to the company to maintain the same in the near future also to meet its current obligations in full.

As the study findings it is found that the company cash and bank balanced are increasing gradually year to year. Hence it is suggested to maintain the same in future also to meet the liquidity operations.

From the study it is found that the Inventory turnover ratio of Sri Dhana Lakshmi Cotton & Rice Mills (P) Ltd is in decreasing trend. So, it is suggested to the company to maintain optimum inventory levels for to meet the stock requirements.

As the study findings it is found that the Debtors turnover ratio is satisfactory. Hence it is suggested to maintain the same levels in future also for better liquidity of Debtors.

Based on the study it is suggested that to maintain same collection period of debtors for better trade credit management in future also.

From the study it is found the working capital turnover ratio of Sri Dhana Lakshmi Cotton & Rice Mills (P) Ltd was decreasing year to year. So, it is suggested to the company to improve it and make more sales by utilization of working capital.

Based on the study the company payables management is fluctuating. So, it is suggested to make necessary actions to improve the payable management for better trade credit management with Creditors.

From the study it is found that the Debt-Equity ratio of Sri Dhana Lakshmi Cotton & Rice Mills (P) Ltd. shows that the total debt is less than the total share holder’s funds. Hence it is suggested to maintain the same proportion in future also to make better financial soundness of the company.

Page 93

As the study findings it is found that the Net profit ratio of Sri Dhana Lakshmi Cotton &Rice Mills (P)Ltd. shows increasing trend. Hence it is suggested to maintain the same ratio in near future also for ensure adequate returns to the owners.

From the entire study it reveals that the short-term financial ability and long-term solvency of Sri Dhana Lakshmi Cotton & Rice Mills (P) Ltd is under satisfactory position. Hence it is suggested to the company to maintain the same position in future also to meet its all financial obligations.

Page 94

CONCLUSION

By observing the study it may conclude that, the present study has been

conducted to analyze and evaluate the working capital position of Sri Dhana

Lakshmi Cotton & Rice Mills (P) Ltd through Working capital changes

statements and Ratios.

The liquidity position of the company is under satisfactory condition.

Thus, the company is in a position which can satisfy the current obligations.

There is some fluctuations in Turnover Ratios. The profitability of the firm

increasing significantly throughout the study period of 2003-07 and the long-

term solvency of the firm is under satisfactory position.

The recommendations and suggestions given if adopted will improve the

position of the company substantial and optimal profitability coupled with better

service and satisfactions for the investors may be achieved.

Page 95

SRI DHANA LAKSHMI COTTON & RICE MILLS PRIVATE LIMITED BALANCE SHEET AS 31st MARCH 2006

PARTICULARS AMOUNT (Rs)

1.

II.

Sources of Funds:

1. Share holders’ Funds: Capital Reserve & Surplus

2. Loans Funds: Secured Loans Unsecured Loans 3. Deferred Tax Liability

Application of Funds:

1. Fixed Assets: Gross Block Less : Depreciation Net Block Capital Work – in – progress

2. Investments 3. Current Assets, Loans & Advances: Inventories Sundry Debtors Cash & Bank Balances Other Current Assets Loans & Advances

Less : Current Liabilities & Provisions

Total (1+2+3)

-3,19,50,00065,21,71,725

45,22,96,2121857091068653367

1223642213

1114332198 372116407 742215791 8145764

750361555 1457450

36205021713399641717376708756243

64477058

578656641106833433

471823208

122364221

Page 96



1.

II.

Sources of Funds:







Total (1+2+3)

3,19,50,000810886431

614427853 1446045278804729

1550529464

1285276650 421785401 863591249 94662106

9581533551352450

47483282514737946316709680378183

54082370

693382521102358861

591023660

1550529264

Page 97



1.

II.

Sources of Funds:







Total (1+2+3)

3,19,50,00094,28,96,023

61,12,93,582 11,27,99,5649,38,13,344

179,27,52,513

145,25,43,717 47,54,68,041 97,70,75,676 1,80,40,511

99,51,16,187 13,47,450

63,84,19,85920,59,73,6892,20,57,637

4,24,9946,05,52,682

92,74,28,86113,11,39,985

79,62,88,876

179,27,52,513

Page 98



1.

II.

Sources of Funds:







Total (1+2+3)

3,19,50,0001016825186

624365431 169284816132085294

1974510727

1785185652555990895

12291947577326912

12370216691351950

596273296137534380

17001772108978

106062597856981023120843915

736137108

1974510727

Page 99



1.

II.

Sources of Funds:







Total (1+2+3)

3,19,50,0001485879189

754015556 4102108027225073290

29059542052

2332087060 746911278

1585175782

2942139

16145971801498261

1056523566

26057390512090701279840

126588017

1456074529166736905

1289338621

2905426062

Page 100

THE WORKING CAPITAL :

That company is to pay if it is short Liabilities

THE WORKING CAPITAL :

Currently is unable to meet to its short term liabilities with its current assets.

Both also know as net working capital.

Page 101

BIBLIOGRAPHY

Text Books:

Title Of The Book Author Name Publications

Financial Management Text And Problems

M.Y. Khan & P.K. Jain Tata Mcgraw – Hill Publishing Company Limited, New Delhi

Financial Management Theory And Practice I. M. Pandey Vikas Publishing House

Pvt. Ltd. New Delhi

Financial Management And Policy V.K. Bhalla Anmol Publications Pvt.

Ltd, New Delhi.

Financial Management theory and Practice.

Prasanna Chandra Tata Mcgraw – Hill Publishing Campany Limited, New Delhi

Websites:

*www.sridhanalakshmi.com

*www.cottoninindia.com

Page 102

Documents

Working Capital