Working Capital Management 1

MBA PROJECT AMARAVATHI TEXTILES

FINANCIAL MANAGEMENT

INTRODUCTION

Financial management, as an integral part of over all management is not a

totally independent area. It draws heavily on related disciplines and field of study,

such as Economics, Accounting there disciplines are in related, there are key

references among them.

Financial management refers to its relationship with the closely related

fields, its function, scope and objectives. Financial as academic discipline as

under gone fundamental changes in its scope and coverage. In the early years of

its evolution it was treated synonymously with the rising of funds. In the current

literature pertaining to financial management in addition to procurement of funds

efficient use of resources is universally recognized.

Definition of Financial management:

Ezra Solomon has defined “The Financial Function as the study of the

problems involved in the use and acquisition of funds by a Business”.

Scope of financial management:

The approach to the scope and the functions of financial management is

divided for the purposes of expositions into two broad categories.

WORKING CAPITAL MANAGEMENT AU.CAMPUS..KAKINADA

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a) The traditional approach.

b) The modern approach.

Traditional approach:

The traditional to the scope of financial management refers to its subject

matter in academic literature in the stage its evolution as the separate branch of

academic study. The term “Corporation Finance” was used to describe what is

known in the ac academic world as financial management.

Modern approach:

The modern approach views the term Financial Management in the broad

sense and provider a conceptual and analytical framework for financial decision

making.

Objectives of Financial Management:

The objectives of financial management are

1) Profit maximization approach.

2) Wealth maximization approach.


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1. Profit maximization approach:

According to this approach actions that increase profits should be

undertaken and those that decrease profits are to be avoided. In specific

operational terms as applicable to Financial Management, the profit maximization

criterion implies that the investment, financing and dividend policy decisions of a

firm should be oriented to the maximization of profits.

2. Wealth maximization:

This is also known as value maximization or net present worth

maximization. In current academic literature value maximization is almost

universally accepted an appropriate operational criterion for Financial

Management decisions as it removes the technical limitation which characterizes

the earlier profit maximization criterion. Its operational features satisfy all the

three requirements of a suitable operational objective of financial courses of

actions namely exactness, quality of the benefits and the time value of money.

The financial statements just provide the financial ingredients of a firm.

One should analyze to identify where the strengths and weakness of the company

are hiding. So the study on ratio analysis have been taken by me in order o know

efficiency and liquidity of a firm.


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WORKING CAPITAL

INTRODUCTION

Working capital management involves the relationship between a firm’s

short-term assets and its short-term liabilities. The goal of working capital

management is to ensure that a firm is able to continue its operations and that it

has sufficient ability to satisfy both maturing short-term debt and upcoming

operational expenses. The management of working capital involves managing

inventories, accounts receivable and payable, and cash.

Working capital typically means the firm’s holdings of current, or short-

term, assets such as cash, receivables, inventory and marketable securities. These

items are referred to as circulating assets because of their cyclical nature. In a

retail establishment, cash is initially employed to purchase inventory, which is in

turn sold on credit and results in accounts receivables. Once the receivables are

collected, they become cash-part of which is reinvested in additional inventory

and part going to profit or cash throw-off.

The need for working capital to run the day to day business activities

cannot be overemphasized. We will hardly find a business firm which does not

require any amount of working capital. Indeed, firms differ in their requirements

of the working capital.

There are two concepts of working capital—gross and net.


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Gross working capital refers to the firm’s investment in current assets. Current

assets are the assets which can be converted into cash within an accounting year

an include cash, Short-term securities, debtors, bills receivable and stock.

Net working capital refers to the difference between current assets and current

liabilities. Current liabilities are those claims of outsiders which are expected to

mature for payment within an accounting year and include creditors bills payable,

and outstanding expenses.

Working Capital is the capital that allows businesses to operate on a day-

to-day basis. Depending on the nature and the time period for which the working

capital is held in business, it can be classified as:

KINDSOF WORKING CAPITAL:


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KINDS OF WORKING CAPITAL

ON THE BASIS OF CONCEPT ON THE BASIS OF TIME

GROSSWORKINGCAPITAL

NET WORKINGCAPITAL

PERMINANTWORKINGCAPITAL

TEMPORARY WORKING CAPITAL


PERMANENT (OR) FIXED WORKING CAPITAL:

Permanent Working capital is the minimum amount which is required to

ensure effective capitalization of fixed facilities and for maintaining the

circulation of current assets these are always a minimum level of current assets

which is continuously required by the enterprise to carry out its normal business

operations.

For example every firm has to maintain minimum level of raw materials

work- in –process finished goods & cash balance. This minimum level of current

assets is called permanent or fixed working capital of this part of capital is

permanently blocked in current assets.

TEMPORARY (OR) VARIABLE WORKING CAPITAL:

Temporary Working Capital is the amount of working capital which is

required to meet the seasonal demands and some special emergencies. Variable

Working capital can further classified as reasonable working capital and special

working capital most of the enterprises have to provide additional working capital

to meet the seasonal working capital .special working capital which is required to

meet special exigencies such as marketing research etc.

GROSS WORKING CAPITAL:

It is the amount of funds invested in the various components of current

assets this concept has the following advantages.

Financial managers are profoundly concerned with current assets.


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MBA PROJECT AMARAVATHI TEXTILES This will be provides the current amount of working capital at the right

time.

It enables a firm to realize the greatest return on its investment.

It helps in the fixation of various areas of financial responsibility.

It enables affirm to plan and control funds and to maximize the return on

investment.

NET WORKING CAPITAL:

In reference to the difference between current liabilities net working capita;

can be positive or negative. A positive net working will arise when current assets

exceeds current liabilities. As negative working capital occurs, where current

liabilities are in excess of current assets.

OPERATING CYCLE

Working capital is required because of the time gap between the sales and

their actual realization in cash. This time gap is technically termed as “operating

cycle” of the business.

In case of a manufacturing company, the operating cycle is the length of

time necessary to complete the following cycle of events...


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In case of a “trading firm” the operating cycle will include the length of time

required to convert

i. Cash into Raw Materials.

ii. Raw Materials into Work In Progress.

iii. Work In Progress into Finished Goods.

iv. Finished Goods into Debtors

v. Debtors into Cash

This cycle will be repeated again and again


RAW MATERIAL WORK IN PROGRESS

FINISHEDGOODSCASH

DEBTORS

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NEED OF THE STUDY

Every business enterprise needs some amount of working capital. Working

capital is the lifeblood and nerve center of any business concern. The need for

working capital arises due to the time gap between production & realization of

cash from sales.

1). Solvency of the business: Sufficient working capital helps in maintaining

solvency of the business by providing uninterrupted flow of production.

2). Goodwill: Sufficient working capital enables a business concern to make

prompt payments and hence helps in creating and maintaining goodwill.

3). Easy loans: A concern having adequate working capital high solvency and

good credit standing can arrange loans from banks and others on easy and

favorable terms.

4). Cash discount: Adequate working capital also enables a concern to avail

cash discounts on the purchase and reduces cost.

5). Regular supply of raw-materials: Sufficient working capital ensures regular

supply of raw materials and continuous production.


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6). Regular payment of salaries, wages & other day to day commitments:

Adequate working capital enables regular payment of salaries, wages and

day to day commitments, which enhances production and profits of the

company.

7). Ability to face crisis: Adequate working capital enables a concern to face

business crisis in emergencies such as depression.


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OBJECTIVES OF THE STUDY

1. The main objective of the study is to analyze how working

capital management is carried out in the organization.

2. To study various components of working capital and their management.

3. To evaluate the liquidity management through some of the related working

capital ratios.

4. To know the efficiency of the company in utilizing its current assets.

5. To study the trends in working capital components.


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RESEARCH & METHODOLOGY

The study has been conducted in the organization to examine Working Capital

Management in order to enquire into the issues like liquidity, and Material

Management. The study has been undertaken in the Accounting & Finance

deportments of the organization.

Primary data :

Primary data is the data which has been collected directly from the people of

the organization it is also called as first hand data.

The primary data is collected by discussions with the functional managers,

officers, staff and other members of the organization.

Secondary data :

Secondary data is those which have been already collected by some agency and

which have been processed.

The secondary data is obtained from annual report and financial statement that

is balance sheet and profit and loss account, annual reports, and from the text books of

financial management.

Here the project is done on secondary data.


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LIMITATIONS OF THE STUDY

1. The study is based on the information available in the latest balance sheets

of the company, these balance sheets suffers a few limitations.

2. The study is based on the working capital analysis only.

3. The study is made only through secondary source of data. Normally

this will not facilitate to undertake a deeper study on the subject taken

into consideration.

4. .The study is limited to a period of five years for analyzing the data.

5. Analysis of information is based on ratios. The study is confined only

to a quantitative analysis; quality aspect of AMARAVATHI

TEXTILES PRIVATE LIMITED doesn’t reflect the study.

6. .This study evaluation is based on sum of the related working capital

ratios.


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MBA PROJECT AMARAVATHI TEXTILES PRESENTATION OF THE STUDY

The study is presented in 5 chapters

I Chapter: Need, objectives, research methodology, limitations are

promoted.

II Chapter: company & industry profile is incorporated.

III Chapter: Theoretical frame work related to financial statement analysis

is given

IV Chapter: data analysis & interpretation of AMARAVATHI

TEXTILES PRIVATE Ltd.

V Chapter: Findings, Suggestions, Conclusion of the study are given.


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INDUSTRY PROFILE

Cotton

Cotton is a soft, staple fiber that grows around the seeds of the cotton

plant. It is a natural fiber harvested from the cotton plant. The fiber most often is

spun into yarn or thread and used to make a soft, breathable textile, which is the

most widely used natural-fiber cloth in clothing today.

Processing of Cotton in India

In India the raw cotton, also called as Kapas is processed in a multi-

stage process described as below. The Products of processing are

I. Yarn.

II. Cottonseed Oil.

III. Cottonseed Meal.

I. Production of Yarn

KAPAS TO LINT: Kapas (also known as raw cotton or seed cotton) is unginned

cotton or the white fibrous substance covering the seed that is obtained from the

cotton plant. The first step in the process is, the cotton is vacuumed into tubes that

carry it to a dryer to reduce moisture and improve the fiber quality. Then it runs

through cleaning equipment to remove leaf trash, sticks and other foreign matter.

In ginning a roller gin is used to grab the fiber. The raw fiber, now called lint.


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LINT TO BALE: The lint makes its way through another series of pipes to a

press where it is compressed into bales (lint packaged for market). After baling,

the cotton lint is hauled to either storage yards, textile mills, or shipped to foreign

countries.

NOTE: The cotton seed is delivered to a seed storage area from where it is loaded

into trucks and transported to a cottonseed oil mill.

BALE TO LAP: Here the bales are broken down and a worker feeds the cotton

into a machine called a "breaker" which gets rid of some of the dirt. From here the

cotton goes to a "scutcher". (Operated by a worker also called a scutcher). This

machine cleans the cotton of any remaining dirt and separates the fibers. The

cotton emerges in the form of thin "blanket" called the "lap".

LAP TO CARDING: Carding is the process of pulling the fibers into parallel

alignment to form a thin web. High speed electronic equipment with wire toothed

rollers perform this task. The web of fibers is eventually condensed into a

continuous, untwisted, rope-like strand called a sliver.

SILVER TO ROVING: The silver is then sent to combing machine. Here, the

fibers shorter than half-inch and impurities are removed from the cotton. The

sliver is drawn out to a thinner strand and given a slight twist to improve strength,

then wound on bobbins. These Process is called Roving.


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ROVING TO YARN (SPINNING) : Spinning is the last process in yarn

manufacturing. Spinning draws out the short fibres from the mass of cotton and

twists them together into a long. Spinning machines have a metal spike called a

spindle which the thread winds around.

II. Production of Cotton Seed Oil

Processing of cottonseed in modern mills involves a number of steps. They are as

follows:

The first step is its entry into the shaker room where, through a number of

screens and air equipment, twigs, leaves and other trash are removed.

The cleaned seed is then sent to gin stands where the linters are removed

from the seed (delinted). The linters of the highest grade, referred to as

first-cut linters are used in manufacturing non-chemical products, such as

medical supplies, twine, and candle wicks. The second-cut linters removed

in further delinting steps, are incorporated in chemical products, found in

various foods, toiletries, film, and paper.

The delinted seeds now go to the huller. The huller removes the tough seed

coat with a series of knives and shakers. The knives cut the hulls (tough

outer shell of the seed) to loosen them from the kernels (the inside meat of

the seed, rich in oil) and shakers separate the hulls and kernels.


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The kernels are now ready for oil extraction. They pass through flaking

rollers made of heavy cast iron, spinning at high speeds. This presses the

meats into thin flakes. These flakes then travel to a cooker where they are

cooked at 170 degrees F to reduce their moisture levels. The prepared meats

are conveyed to the extractor and washed with hexane (organic solvent that

dissolves out the oil) removing up to 98% of the oil.

Crude cottonseed oil requires further processing before it may be used for

food. The first step in this process is refining. With the scientific use of

heat, sodium hydroxide and a centrifuge (equipment used to separate

substances through spinning action), the dark colored crude oil is

transformed into a transparent, yellow oil. This clear oil may then be

bleached with a special bleaching clay to produce a transparent, amber

colored oil.

The refined cotton seed oil has several advantages other than edible oils. It

contains mere advantage over other edible oils. It contains a large percentage of

Poly Unsaturated Fatty Acids (PUFA) which maintain cholesterol in the blood at

a healthy level.

The quality of cotton oil depends on the weather prevailing during the time

that cotton stands in the fields after coming to maturity. Hence quality of oil

varies from place to place and season to season. The quality of oil is high in dry

seasons and low when the seed is exposed to wet weather in the fields or handled

or stored with high moisture. Further cotton seed cooking oil has a long span of

life due to the presence of vitamin E.


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III. Production of Cottonseed Meal/Cake/Kapaskhalli

Kapaskhalli (cottonseed extraction/meal) is a byproduct of the cottonseed

industry.

Cottonseed is a by-product of the cotton plant, which is primarily grown for

its fiber. Although cotton has been grown for its fiber for several thousand

years, the use of cottonseed on a commercial scale is of relatively recent

origin.

Cottonseed was a raw agricultural product, which was once largely wasted.

Now it is being converted into food for people; feed for livestock; fertilizer

and mulch for plants; fiber for furniture padding; and cellulose for a wide

range of products from explosives to computer chip boards.

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

Diagram 2.1

Source: The Cotton Corporation of India Ltd.


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Cotton Varieties in India

Bengal Deshi mainly produced in the states of Punjab, Haryana, Rajasthan.

Jayadhar mainly produced in the state of Karnataka.

Bunny (or) Brahma is mainly produced in the states of Maharashtra,

Madhya Pradesh, Andhra Pradesh, Karnataka.

Suvin is another variety produced in the state of Tamil Nadu.

H-4 (or) MECH1 is mainly produced in the states of Maharashtra, Madhya

Pradesh, Andhra Pradesh.

Role of Cotton Industry in Indian Economy

Over the years, country has achieved significant quantitative increase

in cotton production. Till 1970s, country used to import massive quantities of

cotton in the range of 8.00 to 9.00 lakh bales per annum. However, after

Government launched special schemes like intensive cotton production

programmes through successive five-year plans, that cotton production received

the necessary impetus through increase in area and sowing of Hybrid varieties

around mid 70s.


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Since then country has become self-sufficient in cotton production

barring few years in the late 90s and early 20s when large quantities of cotton had

to be imported due to lower crop production and increasing cotton requirements

of the domestic textile industry.

Cotton production Areas in India

India is an important grower of cotton on a global scale. It ranks third

in global cotton production after the United States and China; with 9.50 million

hectares grown each year, India accounts for approximately 21% of the world's

total cotton area and 13% of global cotton production. The Cotton producing areas

in India are spread throughout the country. But the major cotton producing states

which account for more than 95% of the area under and output are:

1. Punjab.

2. Haryana.

3. Rajasthan.

4. Maharastra.

5. Gujarat.

6. Madhya Pradesh.

7. Andhra Pradesh.

8. Tamil Nadu.

9. Karnataka.

Of the nine cotton producing States in India, average yields are

highest in Punjab where most of the cotton area is irrigated.


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But the yields of cotton in India are low, with an average yield of 503

kg/ha compared to the world average of 734 kg/ha. The problem is also

compounded by higher production costs and poor quality in terms of varietals

purity and trash content.

However the Cotton plays an important role in the National economy

providing large employment in the farm, marketing and processing sectors.

Cotton textiles along with other textiles also contribute about 1/3rd of the Indian

exports.

Contribution of Cotton industry for Textile Industry

Cotton is the most important raw material for India's Rs. 1,50,000

crores textile industry, which accounts for nearly 20% of the total national

industrial production.

The cotton Industry is the backbone of our textile industry,

accounting for 70% of total fiber consumption in textile sector. It also accounts

for more than 30% of exports, making it India's largest net foreign exchange

industry. India earns foreign exchange to the tune of $10-12 billion annually from

exports of cotton yarn, thread, fabrics, apparel and made-ups.

The cotton Industry provides employment to over 15 million people.

And the area under cotton cultivation in India (9.5 million ha) is the highest in the

world, i.e., 25% of the world area.


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Steps taken by the Cotton Producers in India

Now-a-days the Indian Cotton producers are continuously working to

up-grade the quality and increase the cotton production to cope up with the

increased global demand for cotton textiles and to meet the needs of the 39

million spindles capacity of the domestic textile industry which presently

consumes about 12-14 million bales annually.

In India, cotton yields increased significantly in the 1980’s and

through the first half of 1980’s but since 1996 there is no increase in yield. In the

past, the increase in cost of production of cotton was partially offset by increase in

yield but now with stagnant yield the cost of production is rising. Besides low

yield, Indian cotton also suffers from inconsistent quality in terms of length,

micronaire and strength.

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…


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Markets for Indian Cotton

The three major groups in the cotton market are

Private traders,

State-level cooperatives,

The Cotton Corporation of India Limited.

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

cottonseed and lint, followed by cooperatives and the CCI.

The Cotton Corporation of India Ltd. for the year 2008-09 had

purchased 60.30 lakh quintals of kapas equivalent to 11.77 lakh bales valuing

Rs.1218.70 crores in Andhra Pradesh, Maharashtra, Madhya Pradesh, Orissa and

Karnataka. Beside these the Corporation had also carried out commercial

operations and purchased 2.71 lakh bales valuing Rs.285.82 crores in the year

2008-09 as compared to around 1.00 lakh bales valuing Rs.108.81 crores during

the previous year (i.e. for the year 2006-07).

Exports of Cotton

The main market for Indian cotton export is China. The other

markets also include Taiwan, 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 to obtain any certificate from the Textile Commissioner

on the registration, allocation, quality and quantity of export.


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India exported around 25 per cent cotton during 2008-09 and it is

estimated nearly 62 per cent exported to China.

During the year 2008-09 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 2009- Sep 2010, as against its Aug 2009

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 bales of cotton in 2004-05. The imports

rose to 1,217,000 lakh bales in 2005-06, 4,700,000 lakh bales in 2006-07 and the

anticipated imports for the year 2007-08 are 550,000 lakh bales.

For the year 2007-08 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 2009.


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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 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 soyoil became the only imports of the country. 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.


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India used to be a major exporter of cottonseed extraction around two

decades ago. However, the demand for other oil meals like soymeal, 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 2003-04 exported only 50 tons of decorticated cottonseed

meal. In 2004-05, 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

I. The Cotton corporation of India Ltd.,

II. Cotton Advisory Board.,

III. Cotton Association of India.

IV. Central Institute of Cotton Research.

I. The Cotton Corporation of India Limited

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 canalisation

of imports of cotton.


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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 in 1985, the

Corporation is nominated as the Nodal Agency of 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 cover 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

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 28th December, 1922. Its purpose is to


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Provide and maintain suitable buildings or rooms or a Cotton

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 controversies between

persons engaged in the cotton trade.

Acquire, preserve or disseminate 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 Indian

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


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MBA PROJECT AMARAVATHI TEXTILES enhancing quality cotton production by 2-3% every year on a sustainable basis for

the next twelve years (till 2020).

The Current Scenario of Cotton Industry (2008-09)

The cotton production in the country has been increasing

continuously since last three years and the same has further gone up by around

11% during cotton season 2008-09 at a record level of 270 lakh bales as against

244 lakh bales during 2007-08. Gujarat has turned into a largest cotton producing

State with a record production-level of 93 lakh bales constituting around 34% of

the country’s total production.

The area under cotton cultivation during 2008-09 has also gone up by

around 6% at 91.58 lakh hectares as against 86.77 lakh hectares during 2007-08.

With wide usage of hybrid seeds throughout the country as well as

changed mindset of cotton farmers for adoption of better and improved farm

practices, the average productivity of cotton has crossed 503 kgs per hectare as

against 478 kgs during the previous year. 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.

Due to expectation of bumper crop, the mill demand in the beginning

of the season was subdued which put pressure on the cotton prices right from the

beginning of the season and has resulted into fall in cotton prices between October

2008 & January 2009. Cotton prices reached its peak level by end-March 2009

and there was some correction in cotton prices in April and May 2009. However,

on the whole, cotton prices remained better by almost Rs.3000 per quintal in

almost all varieties as compared to previous year.


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Future of Cotton Industry in India

Considering the continual capital investments in the textile industry, the

Govt. of India may extend the Technology Upgradation Fund Scheme (TUFS) by

the end of the 11th Five Year Plan (till 2012-2013), in order to support the

industry. Indian textile industry is massively investing to meet the targeted output

of $85bn by the end of 2011, aiming exports of $50bn. There is huge development

foreseen in Indian textile exports from the $17bn attained in 2006-07 to $50bn by

2010-11. The estimation for the exports in the current financial year is about

$19bn. There is substantial potential in Indian exports of technical textiles and

home-textiles, as most European companies want to set up facilities near-by the

emerging markets, such as China and India.

The global demand for apparel and woven textiles is likely to grow by 25

percent by year 2011 to over 35mn tons, and Asia will be responsible for 85

percent output of this growth. The woven products output will also rise in Central

and Southern American countries, however, at a reasonable speed. On the other

hand, in major developed countries, the output of woven products will remain

stable. Weaving process is conducted to make fabrics for a broad range of

clothing assortment, including shirts, jeans, sportswear, skirts, dresses, protective

clothing etc., and also used in non-apparel uses like technical, automotive,

medical etc…


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MBA PROJECT AMARAVATHI TEXTILES It is been forecasted that the woven textile and apparel markets will sustain

their growth from current till 2011.


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The imports of apparel and textiles will rise from developed economies like

the USA and the western countries of Europe and Japan, along with some newly

emerged economies, such as South Korea and Taiwan. Certainly, import growth

has been witnessed vertical rise in the previous year.

Apparel is the most preferred and important of all the other applications.

Woven fabrics are widely used in apparel assortments, including innerwear,

outerwear, nightwear and underwear, as well as in specialized apparels like

protective clothing and sportswear. Home textile also contributes considerably in

woven fabric in products assortments like curtains, furnishing fabrics, carpets,

table cloths etc.

Special kind of woven fabrics are utilized in medical as well as industrial

applications. The medical applications include adhesives, dressing bandages,

plasters etc.

Where as, industrial applications includes;

• Geotextile - interior upholstery, trim, airbags and seat belts and lyre fabrics.

• Sailcloth - tent and fabrics used architectures, transportation and tarpaulins.

And many more applications…

The Indian Industry foresees huge demand for industrial woven products for

medical and automotive applications. Demand for woven fabrics is anticipated to

be rise vertically in the sector of home textiles.


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Non woven sector has great future in terms of global demand, thus major facilities

of cotton yarn are currently concentrating just on home textiles. It is mandatory,

that the peak management of the cotton yarn manufacturers analyze the future

prospect and growing graph of demand for non woven products.

Conclusion

Anticipating massive growth in medical and automobile sectors, these sectors

assures substantial demand for non woven facilities in India. Albeit, home textiles

also will lure higher demand, there are specific demands for home textile facilities

also.

The 7th Five Year Plan has huge consideration on agricultural growth that

also includes cotton textileindustry, resulting a prosperous future forecast for the

textile industry in india. Indian cotton yarn manufacturers should rush forward for

joint ventures and integrated plans for establishing processing and weaving

facilities in home textiles and technical textiles in order to meet export target of

$50bn, and a total textile production of $85bn by 2009-2010.

Future Challenges for the Indian Cotton Industry

The challenges that are going to face by the cotton producers in India

for the season 2009-10 are:

Rupee appreciation

The increase in the value of the rupee gives only smaller import

orders to the cotton producers.


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Cheaper Imports

The appreciated rupee value makes the cotton imports cheaper when

compared to past. So this aspect is also required to consider by the cotton

producers.

Low quality

The Quality of cotton is also far from satisfactory considering the

presence of a large number of contaminants. So the cotton producers are also

required to take care in this aspect.


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COMPANY PROFIL4

AMARAVATHI TEXTILES PRIVATE LIMITED.

AMARAVATHI TEXTILES 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.

AMARAVATHI TEXTILES GROUP is driven by a passion be the best in al

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 AMARAVATHI TEXTILES 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 AMARAVATHI TEXTILES is a multi-activity

group with a Rs.300crores turnover, comprising 6 divisions with diverse

interest in……..

COTTON

SPINNING

TEXTILE


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A TRADITION OF ENTERPRISE

Sri Kandimalla Srinivasa Rao 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 sprite

gleaming in his eyes. His value – oriented strategy and adventurous sprit 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 Kandimalla Srinivasa Rao set up a cotton ginning mill in 1984. 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 AMARAVATHI TEXTILES (P) LTD. Relentless

pursuit of perfection is the hallmark of this young and dynamic B.Tech Textiles

Graduate.


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MBA PROJECT AMARAVATHI TEXTILES His rich and professionals experience in the spinning line enabled

AMARAVATHI Textile’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. Kandimalla Srinivasa Rao is committed to labour welfare

and his visionary leadership has earned him a wealth of respect among the employees

of AMARAVATHI. 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 AMARAVATHI TEXTILES. 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 multi-pronged

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 enlistment.

COTTON DIVISION

The COTTON GINNING & PRESSING UNIT was started in 1984. The

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

Rs.40crores. The company firmly believes that unmatched capabilities plus an 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.


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The division is poised to excel and is confidently geared to post an impressive

growth rate. This Division has stayed big thinking big and keeping an eye on the

details that sustain quality.

SPINNING DIVISION

The AMARAVATHI TEXTILES 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 60,000 spindles. The impressive performance

reflects AMARAVATHI TEXTILESS 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

AMARAVATHI TEXTILES 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. AMARAVATHI TEXTILES magnificent obsession with exports has won for

it important international markets. In fact, over 70% of the produce was exported

major European countries.


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In recognition of its excellent quality conforming to the highest international

standards, the products of Amaravathi 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.

AMARAVATHI VALUES:

v Promptness in execution.

v Transparency in Business

v Integrity in Negotiation

v Innovation that fuels growth

ENVIRONMENTAL PROTECTION AND SAFETY – A TOP PRIORITY

Amaravathi is committed to the conservation of the environment. Our

manufacturing facilities comply with stringent environmental norms and are equipped

for effluent treatment. The Amaravathi Dyeing Plant uses reverse osmosis with a

multi effect vaporator to qualify as a zero discharge unit.

COUNT RANGE : We are running from 50 to 100 counts in single well as

double (TFO) yarns. We are running compact yarn with 12000 spindles (suessen).

We will achieve 25000 spindles compact yarn shortly.


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TEXTILE DIVISION

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.

STATEMENT OF ACCOUNTING POLICIES GENERAL:

The Financial Statements are prepared on historical cost convention and in

accordance with generally accepted accounting practices.

FIXED ASSETS:

Fixed assets are stated at historical cost less accumulated depreciation.

INVESTMENTS:

Long term Investment is stated at cost and income thereon accounted for on

accrual. Provision towards decline in the value of Long Term Investments is made

only when such decline id other than temporary.

DEPRECIATION:

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

of the companies Act 1956 as follows:

· Under straights –Line Method in respect of the assets of Spinning, Power

and Textile Divisions.

· Under written down valve method on the assets of all other divisions of

the company.


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MBA PROJECT AMARAVATHI TEXTILES INVENTORIES:

Valuation of inventories is made as follows

· Raw-Material and Finished goods at cost or net realizable valve

whichever is lower.

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

· Stores and spares at cost.

· Electronic power at net releasable valve

Excise Duty 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 inclusive of Excise Duty.

TAXES ON INCOME:

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

respect of taxable income for the year ended 31st march, 2003.

Differed tax liability is recognized, subject to the consideration of prudence on

timing differences, being the difference between taxable income and accounting that

originate in one period and are capable of reversal in one or more subsequent

periods...


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MBA PROJECT AMARAVATHI TEXTILES 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 Insurance is routed through L.I.C,

and are charged against the revenue. The company has taken Group Gradually (Cash

Accumulation) scheme with Life Insurance Corporation of India . The premium on

policy and the difference between the amounts 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.


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MBA PROJECT AMARAVATHI TEXTILES 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.

CONTIGENT LIABILITIES:

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

after a careful evaluation of the concerned facts and legal issues involved.

Amaravathi Product: YARN

Commercial performance

Table 2.2: (in rupees)


Year Sales Turnover Domestic Sales

2003-04 28,34,20,669 28,34,20,669

2004-05 34,46,12,983 34,46,12,983

2005-06 44,48,54,723 44,48,54,723

2006-07 52,60,60,377 52,60,60,377

2007-08 68,97,53,568 68,97,53,568

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MBA PROJECT AMARAVATHI TEXTILES BOARD OF DIRECTORS

§ K.Srinivasa Rao. Director

§ K.Bhaskar Director

§ K.Geetha Director

GENERAL MANAGER.

Shri P.Ramesh, D.T.T., B.A.,

ACCOUNTS MANAGER.

Shri N.Veeraiah, B.Com. A.C.A.

BANKERS

State Bank of India , Guntur

State Bank of Mysore , Guntur .

State Bank of Hyderabad , Guntur .

REGISTERED OFFICE

33-263, Kandimalla Road ,

Pandaripuram,

Chilakaluripet-522616

FACTORY

Martur-522301,

Martur Mandal,

Prakasam District, Andhra Pradesh.


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WORKING CAPITAL MANAGEMENT – AN OVERVIEW

Working capital may be regarded as the most important factor of a business;

its effective provision and utilization can do much to ensure the success of a

business.

While the efficient management may not only lead to loss of projects but also

to the ultimate shown fall of what other wise would be considered as promising

concern. A study on working capital is of major importance, because of its close

relationship with current day today operations of a business.

The term working capital stands for that form of capital which is required for

the financially of working or current need of the company. It is usually invested in

raw material work in progress finished goods accounts receivable and saleable

securities.

Management of working capital usually involves planning and controlling

current assets, namely cash and marketable securities, assets receivable and

inventories and also administration of current liabilities.

Working capital or current assets management is one of the most important

aspect of the over all financial management. It is concerned with the problem that

arises in attempting to manage the current assets.


49


The current liabilities and the inter relationships that exists between them.

Current assets are the assets, which can be converted into cash with in an

accounting year and includes cash short-term securities, debtors, bill receivable

and inventories.

Current liabilities are those claims of outside, which are expected to mature

for payment with in an accounting year and include creditor’s bill payable and

outstanding expenses.

The goal of working capital management is to manage the firms current

assets and current liabilities in such a way enough to cover its current liabilities in

order to ensure that they are obtained and used in the best possible way.


50


MEANING OF WORKING CAPITAL

Capital required for a business can be classified under two main categories.

1. Fixed capital

2. Working capital

Working capital is the amounts of funds necessary to cover the cost of

operating of enterprises.

Every business needs funds for two purposes for its establishment sand to

carry out its day-to-day operations. Long-term funds are required to create

production facilities through purchases of fixed assets such as plant, machinery,

land, building, and furniture etc. Investment in these assets represented that part of

firm’s capital, which is blinked on permanent or fixed basis and is called fixed

capital. Funda are also needed for short-term purpose for the purchase of raw

material, payment of wages and other day-to-day expenses. These funds are

known as working capital funds thus invested current assets keep revolving fast

and are being constantly converted into cash and these cash flows ot again in

exchange for other current assets. Hence it is also known as revolving or

circulating capital short-term capital. Circulating capital means current assets of a

company that are changed in the ordinary course of bs8iness from to another.

Role of working capital management in public sector concern

The salient features of working capital management in public sector

undertakings are presented below;


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There is often no provision for working capital margin, when the project

cost is estimated. Hence long –term funds are not made available for

working capital margin. This means that public sector undertakings are

required to raise all the financing required for current assets from short-

term sources.

Most of the public sector undertakings are capital-intensive industries like

steel, heavy engineering, oil refining etc. Hence the ratio of current assets

to fixed assets in public sector undertaking, in general is rather low.

Apparently public sector undertakings do not have much difficulty in

obtaining can now obtain short term financing from all nationalized banks,

which are generally quite accommodations. Since the risk involved in

lending is minimized, commercial banks seem to be quite liberal in

extending credit to the public sector concerns.

Management of inventories in public sector undertakings rather tax. This is

evident from the high inventory to sales ratios found foremost of the public

sector concerns.

PRINCIPLES & CONCEPTS OF WORKING CAPITAL

The need for working capital varies with the changes in the volume of business

due to

Changes in the level of sales /operating expenses

Managerial policy changes

Changes in managerial new technologies


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“WORKING CAPITAL” may be regarded as the life blood of a business its

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

efficient management can lead only to loss of profits but also to the ultimate

downfall of what otherwise might be considered as a promising concern, A study

of working Capital is of major importance to internal and external analysis

because of its close relationship with the current day to day operations of a

business working capital is the leading cause of that position of the assets of a

business which are used in or related to current operations and represented at any

one time by the “Operating Cycle” of such items as against receivables ,

inventories of raw materials , stores., work in progress & finished goods,

merchandize, notes or bills receivables and cash. The assets of this type are

relatively temporary in nature.

The definition of working capital is qualitative in character. Working

capital represents the total of all current assets In other words it is “gross working

capital”. It is also known as CIRCULATING CAPITAL or CURRENT

CAPITAL, of current assets are rotating in their nature. Working capital is

essentially circulating capital that includes cash, inventory and receivables

circulating in nature. In an accounting working capital is the difference between

current assets and current liabilities. This is also termed as “net working capital”.

Concepts o f net working capital enables a firm to determine how much amount is

left for operational requirements.


53


LIST OF CURRENT ASSETS & CURRENT LIABILITIES

Current Assets: Current Liabilities

Cash in hand Bills payable

Cash in bank Sundry creditors

Bills receivables Accrued expenses

Sundry debtor’s Short-term loans

Stock Dividends payable

Prepaid expenses Bank over draft

Accrued income provision for taxation

Short-term investment

OBJECTIVES OF WORKING CAPITAL

The need for working capital cannot be over emphasized. Every business

needs some amount of working capital. The need for working capital arises due to

the time gap between production and realization of cash from sales

For the purchase of materials, components & spares

To pay wages & salaries

To increase day to day expenses & overheads cost such as fuel, power &

office expenses etc

To meet the selling cost as packing, advertising etc

To provide credit facilities to the customer

To maintain the inventors of raw material, work-in –progress, stores, spaces

& finishes stock. There are two important objectives of a working capital i.e.

profitability and liquidity which are conflicting to each other.


54


PROFITABILITY:

It refers to the rate of return on investment with reference to current asset

levels and their use. For higher profitability d, the enterprise should invest less in

current assets and vice-versa. Because funds will not be locked up but are utilized

to the maximum extent. But this may result I n liquidity and stock outs on account

of deficiency of working capital funds. Therefore, the planning and control of

working capital aims at trading of between profitability and liquidity. This is th e

major dimension in the working capital management in practice.

ADVANTAGES OF ADEQUATE WORKING CAPITAL:

Working capital is the lifeblood and nerve center of business. Just as circulation

of blood is essential in the human body for maintaining life, working capital is

very essential without an adequate amount of working capital. The main

advantage of maintaining adequate amount of working capital is as follows:

Solvency of the business

Good will

Easy loans

Cash discounts

Regular supply of raw materials

Regular payment of salaries, wages and other day to day commitments

Exploitation of favorable market conditions

Ability to face crisis

Quick and regular return on investments

High morale


55


INADEQUATE WORKING CAPITAL:

Every business concern should have adequate working capital to run its

business operations. It should have neither redundant excess working capital nor

inadequate / shortage of working capital.

DISADVANTAGES OF EXCESSIVE WORKING CAPITAL:

Excessive working capital means idle funds which earn no profits for the

business and hence the business cannot earn a proper rate of return on its

investments

Where there is a redundant working capital, it may lead to unnecessary

purchasing and accumulations of inventories causing more chances of

theft , waste and losses.

Excessive working capital implies excessive debtors and defective credit

policy, which may cause higher incidence of bad debts

It may result into overall inefficiencies in the organization.

When there is an excessive working capital relations with banks and other

financial institutions may not be maintained

Due to low rate of return on investment, the value of shares may also fall

The redundant working capital gives rise to speculative transactions

DISADVANTAGES OF SHORTAGE WORKING CAPITAL:

A Concern, which has inadequate working capital, cannot pay its short-term

liabilities in time. Thus, it will lose its representation and shall not be able

to get good credit facilities

It cannot buy its requirements in bulk cannot avail of discounts etc


56


It becomes difficult for the firm to exploit favorable market conditions &

undertake projects due to lack of working capital.

The firm cannot pay day today expenses of its operations and it creates

inefficiencies, increase cost& reduces the profits of the business

It becomes impossible to utilize efficiency the fixed assets due to non-

availability of liquid funds.

The rate of return on investments also falls with shortage of working capital

FACTORS DETERMINING WORKING CAPITAL REQUIREMENTS:

1 Nature or character of business

2 Size of Business/sale of operations

3 Production policy

4 Manufacturing process/length of the production cycle

5 Seasonal variations

6 Working capital cycle

7 Stock turnover ratio

8 Credit policy

9 Business cycle

10 Rate of growth of business

11 Earning capacity and dividend policy

12 Price level changes

13 Other factors


57

MBA PROJECT AMARAVATHI TEXTILES WORKING CAPITAL CYCLE:

OPERATING CYCLE:

The duration of time required to complete the following sequence of events

cash of manufacturing firm is called the operating cycle

Conversation of cash into work process

Conversation of raw material into work in process

Conversation work in process onto finished goods into debtors & bill

receivable through sales

Conversation of debtors & bill receivables into cash


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Debtors (Receivables)

CASHFINISHED GOODS

Raw materialWork in progress

MBA PROJECT AMARAVATHI TEXTILES TYPES OF WORKING CAPITAL:

1 . Gross working capital:

It is the amount of funds invested in the various components of currents assets.

This concept has the following advantages.

Financial managers are profoundly concerned with current assets.

This will be provides the current amount of working capital at the right time

It enables a firm to realize the greatest return on its investment

It helps in the fixation of various areas of financial responsibility

It enables affirm to plan and control funds and to maximize the return on

investment.

2.Net working capital:

In reference to the difference between current liabilities net working capital

can be positive or negative. A positive net working will arise when current assets

exceeds current liabilities. As negative working capital occurs where current

liabilities are in excess of current assets.

INFLUENCING FACTORS OF WORKING CAPITAL REQUIREMENTS:

The working capital needs of firm are influenced by numerous factors. The

important ones are


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Nature of business

Seasonality of operations

Production policy

Market conditions

Conditions of supply

NATURE OF BUSINESS:

The working capital requirements of firms are closely related to the nature of its

business. A services firm, like an electricity undertaking or a transport

corporation, which has a short operating cycle and which sells predominantly on

cash basis, has a modest working capital requirement.

SEASONALITY OF OPERATIONS:

Firms, which have marked seasonality in their operations usually, have

highly fluctuating working capital requirements. For example, consider a firm

manufacturing ceiling fans. The sale of ceiling fans reaches a peak during the

summer months and drops sharply during the winter period.

PRODUCTION POLICY:

A Firm marked by pronounced seasonal fluctuation in its sales may have a

production policy which may reduce the sharp variations in working capital

requirements.


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MARKET CONDITIONS:

The degree of competition prevailing in the market place has an important

bearing on working capital needs. When competition is keen a larger inventory of

finished goods all required to promptly serving customers who may not be

inclined to wait because other manufacturing are ready to meet their needs.

SOURCES OF WORKING CAPITAL

A large scale manufacturing company may procure funds from various

sources to meet its working capital from time to time. Sources of working capital

may be classified under 2 heads.

a) Sources of long term or Regular working capital

b) Sources of short term or Seasonal working capital

Sources of working capital

Long term working capital Short-term working capital

Internal External


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Long-term working capital:

Issue of share

Issue of debentures

Profits

Sale of fixed assets

Security from employees and from customers

Term loan

Short-Term working capital:

1. Internal sources:

Deprecation fund

Provision of taxation

Accrued expenses

2.External sources:

Normal trade credit

Credit papers

Bank credit

Customer credit

Public deposits

Loans from managing directors

Government assistance


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KEY AREAS OF WORKING CAPITAL MANAGEMENT

The following are the key areas of working capital management.

1. Cash management

2. Receivable management

3. Inventory management

1.CASH MANAGEMENT:

Cash management is one of the key areas of working capital. The term cash

with reference to cash management is uses in two senses. In a narrow sense it is

used broadly to cover currency and generally accepted equivalence of cash such

as cheques, drafts and demand deposits in banks

Motives for holding cash:

Keynes has identified five motives for cash holding those are:

1. Transaction motive:

Need for cash to meet payments arising in the ordinary course of action. These

payments include such things as purchase, labor taxes and dividends etc.

2. Precautionary motive:

This precautionary balance maintenance will act as a casher of buffer to meet it

unforeseen and unexpected contingencies. More predictable cash flow of

business, the less will also influence this balance.

3. Speculative motive:

This is holding of cash management will ensure is resolving uncertainly both cash

flow and cash out flow


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4. Investment motive:

a) For meeting operational requirements

b) For providing liquidity reserve against

Routine net out flows of cash

Schedule of major outlays

Exploitation of possible particulars for advantages long term investment

Unexpected drains of cash

c) Maintenance of bank relationship

d) Building of an investment image and other such intangibles.

e) Constructing a reservoir for net cash inflow, pending an opportunity

for a better use of funds.

5. Compensation motive:

Banks provide a variety of services to business firms, such as clearance of

cheque, supply of credit information, transfer of funds etc. While for some of the

services, a bank charges a commission/ fee for other they seek indirect

compensation. Such balances are called compensation balance.

For effective cash management the following points are to be kept in mind

Planning of cash requirements

Effective control of cash flow

Productive utilization of excess funds.

OBJECTIVES OF CASH MANAGEMENT:

Meeting the payments schedule

Minimizing funds committed to cash balances


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2) RECEIVABLES MANAGEMENT:

Receivables are assets, which are created as a result of the sale of goods or

services in the ordinary courses of business. These are known as “ accounts

receivables, trade receivables or customer receivables”.

The receivables represent an important component of the current assets of a

firm. Every business needs to have a proper control management of receivables.

Meaning: Receivables represents amount owed to the firm as a result of sale of

goods or services on the ordinary course of business. The purpose of maintaining

or investing in receivables is to meet competition and to the sales and profits.

Characteristics of maintaining receivables:

Expansion of sales

Increased profit

Financing receivables

Administrative expenses

Cost of collection

Bad debts

Factors influencing the receivables management:

Size of credit sales

Credit policies

Terms of trade

Expansion plans

Relations with profits

Credit collection efforts

Habits of customers


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MBA PROJECT AMARAVATHI TEXTILES 3) INVENTORY MANAGEMENT:

Every business needs inventory for smooth running of its activities .It

serves as link between production & distribution process. The unforeseen

fluctuations in demand & supply of goods also necessitate the need for inventory.

It is also provides a cushion for future price fluctuation. The purposes of ensure

availability of materials in sufficient quantity as and when require & also to

minimize inventories.

Meaning & nature of inventory management: Inventory is one of the major

current asserts. The literary meaning of work inventory is stock of goods or list of

goods. Various authors understand the inventory differently. Inventory includes

the following things.

Raw material

Work in process

Consumables

Finished goods

Spares

OBJECTIVES OF INVENTORY MANAGEMENT:

The main objective of the availability of materials is for the efficient &

uninterrupted production.

Minimize investment I in inventory to maximize profitability

To minimize carrying costs & order cost of inventory

To facilitate purchasing economy

To have an efficient stores organizations


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MBA PROJECT AMARAVATHI TEXTILES Optimum consumption of materials so that materials cost of a finished

goods is kept at minimum

To maintain sufficient finished goods inventory for smooth sales operation

& efficient customer services.

To minimize obsolescence in stores

To avoid excessive & inadequate stocks

To contribute profitability

To dispose surplus items & scrap at appropriate time

To provide a check against losses of materials through pilferage & theft.

TOOLS AND TECHNIQUES OF INVENTORY MANAGEMENT

Effective inventory management requires an effective control system for

inventories. A proper inventory control not only helps in solving the acute

problems of liquidity but also increase profits and causes substantial reduction in

the working capital of the concern. The following are the important tools and

techniques of inventory management and control.

Determining of stock levels

Determining of safety stocks

Selecting a proper system of ordering for inventory

Determination of economic order quantity

ABC analysis

VED analysis


67

MBA PROJECT AMARAVATHI TEXTILES Inventory turnover ratios

Aging schedule of inventories

Classification and codification of inventories

Preparation of inventory reports

ADVANTAGES OF HOLDING INVENTORY

Quick services

Discounts

Reduction in order cost

Efficient production runs

Protection against shortages


68


TABLE:4.1 STATEMENTS OF CHANGES IN WORKING CAPITAL FOR THE YEAR 2003-2004 to 2004-2005: Rs In Lakhs

Particulars 2003-2004 2004-2005 Changes in Working Capital

Increase Decrease

CURRENT ASSETSInventory 6,59,75,061 14,66,66,238 8,06,91,177 ---------Sundry debtors 1,46,15,361 42,57,736 --------- 1,03,57,625Cash on hand 24,17,745 7,02,984 --------- 17,14,761Other current assets 28,155 9,721, --------- 18,434

Loans & Advances 2,98,71,968 2,84,49,035 -------- 14,22,933Total Current Assets (A)

11,29,08,290 18,00,85,714

Current liabilities Sundry creditors 2,21,20,270 3,37,28,550 --------- 1,16,08,280Advance received against sales

--------- 1,19,99,737 --------- 1,19,99,737

Interest accured but not due 3,781 --------- 3,781 ---------

Provisions Provision for taxation

1,08,00,000 1,24,50,000 --------- 16,50,000

Provision for gratuity 19,80,610 21,66,085 --------- 1,85,475Provision for earned leave en cashment

1,90,000 1,90,273 273

Total Current liabilities (B)

3,50,94,661 6,05,34,645

Networking Capital (A-B) [7,78,13,629]

[11,95,51,069]

Increase / Decrease 4,17,37,440

[4,17,37,440]

11,95,51,069 11,95,51,069 8,06,94,958 8,06,94,958


69

MBA PROJECT AMARAVATHI TEXTILES INTERPRETATION

1. It was observed that the above working capital calculations for the year

2003-2004 we can notice that the working capital is increased by

53.63% compared to the previous financial year

2. There is overall increase of 59.49% in total current assets during the

year 2003-2004 when compared to the previous financial years.

3. The inventory is increase to 122.31%

4. But there are decrease in sundry debtors, cash, other current assets, loans

and advances by 70.87%, 70.92%, 65.47, and 4.76.

5. There is overall increase of 72.49% in total current liabilities during the

year 2003-2004 when compared to the previous financial year.

6. This is due of the increase of sundry creditors, advance received against

sales, tax, gratuity and provision earned by 52.48%, 100%, 15.28%,

9.36% above 0.14% respectively, but there is a decrease in interest by

100%


70


TABLE:4.2 STATEMENTS OF CHANGES IN WORKING CAPITAL FOR THE YEAR 2004-2005 to 2005-2006:

In Rupees

Particulars 2004-2005 2005-2006 CHANGES IN WORKING CAPITAL

Increase DecreaseCURRENT ASSETSInventory 14,66,66,238 15,46,04,872 79,38,634 ---------Sundry debtors 42,57,736 2,42,23,172 1,99,65,436 ---------Cash on hand 7,02,984 18,65,440 11,62,456 ---------Other current assets 9,721, 18,906 9,185 ---------Loans & Advances 2,84,49,035 4,08,46,737 1,23,97,702 ---------Total Current Assets (A)

18,00,85,714 22,15,59,127

Current liabilitiesSundry creditors 3,37,28,550 3,65,53,421 --------- 28,24,871Advance received against sales

1,19,99,737 7,99,037 1,12,00,700 ---------

Provisions Provision for taxation

1,24,50,000 2,32,56,000 --------- 1,08,06,000

Provision for gratuity

21,66,085 23,80,031 --------- 2,13,946

Provision for earned leave encashment

1,90,273 2,06,763 --------- 16,490

Total Current liabilities (B)

6,05,34,645 6,31,95,252

Networking Capital (A-B)

[11,95,51,069]

[15,83,63,875]

Increase / Decrease 3,88,12,806

[3,88,12,806]

15,83,63,875 15,83,63,875 5,26,74,003 5,26,74,113


71


INTERPRETATION

It was observed that the above working capital calculations for the year 2004-2005

we can notice that the working capital is increased by 32.46% compared to the

previous financial year

1. There is overall increase of 23.03% in total current assets during the year 2004-

2005 when compared to the previous financial years.

2. This is due of the increase inventory, sundry debtors, cash, other current assets,

loans and advances with 5.41%, 468.92%, 165.36%, 94, 49% and 43.58%

respectively.

3. There is overall increase of 4.40% in total current liabilities during the year

2004-2005 when compared to the previous financial year.

4. This is due of the increase in sundry creditors, tax, gratuity and provision earned

by 8.38%, 86.80%, 9.88%, 49.28%, 100%, and 8.67% respectively.

5. But there is a decrease of advance received against sales by 93.34%.


72


TABLE:4.3 STATEMENTS OF CHANGES IN WORKING CAPITAL FOR THE YEAR 2005-2006 to 2006-2007: In Rupees


Increase DecreaseCURRENT ASSETSInventory 15,46,04,872 17,65,51,218 2,19,46,346 ---------Sundry debtors 2,42,23,172 2,71,64,018 29,40,846 ---------

Cash on hand 18,65,440 13,63,596 --------- 5,01,844

Other current assets 18,906 3,48,414 3,29,508 ---------

Loans & Advances 4,08,46,737 7,74,01,413 3,65,54,676 ---------

TotalCurrentAssets (A) 22,15,59,127 28,28,28,659

Current liabilities

Sundry creditors 3,65,53,421 4,47,70,381 --------- 82,16,960

Advancereceived against

sales7,99,037 17,07,769 --------- 9,08,732

Provisions

Provision for taxation 2,32,56,000 3,23,31,000 --------- 90,75,000

Provision for gratuity 23,80,031 25,61,320 --------- 1,81,289

Provision for earned

leave encashment2,06,763 2,04,443 2,320 ---------

TotalCurrentliabilities(B) 6,31,95,252 8,15,74,913

NetworkingCapital(A-B) [15,83,63,875

]

[20,12,53,746

]

Increase / Decrease [4,28,89,871] [4,28,89,871]


73


20,12,53,746 20,12,53,746 6,17,73,696 6,17,73,696

INTERPRETATION:

1) It was observed that the above working capital calculations for the year

2005-2006 we can notice that the working capital is increased by -11.73%

compared to the previous financial year

2) There is overall increase of 27.65% in total current assets during the year

2005-2006 when compared to the previous financial years.

3) This is due of the increase inventory, sundry debtors, other current assets,

loans and advances with 14.20%, 12.14%, 1742.88%, and 89.49%

respectively. But there is a decrease in cash by 26.90% respectively.

4) There is overall increase of 29.08% in total current liabilities during the


5) This is due of the increase of sundry creditors; advance received against

sales, tax, gratuity by 22.48%, 113.73 %, 39.02 %, 7.62 % respectively.

6) There is decrease in provision earned by 1.12 %.


74


TABLE:4. 4 STATEMENTS OF CHANGES IN WORKING CAPITAL FOR THE YEAR 2006-2007 to 2007-2008:

In Rupees


Increase DecreaseCURRENT ASSETSInventory 17,65,51,218 22,91,60,365 5,26,09,147 ---------Sundry debtors 2,71,64,018 4,19,93,041 1,48,29,023 ---------Cash on hand 13,63,596 4,00,95,172 3,87,31,576 ---------Other current assets 3,48,414 5,47,621 1,99,207 ---------Loans & Advances 7,74,01,413 14,08,42,555 6,34,41,142 ---------TotalCurrentAssets (A) 28,28,28,659 45,26,38,754 CURRENT LIABILITIESSundry creditors 4,47,70,381 4,34,30,156 13,40,225 ---------Advancereceived against sales

17,07,769 14,54,844 2,52,925 ---------

Provisions Provision for taxation 3,23,31,000 5,15,25,000 --------- 1,91,94,000Provision for gratuity 25,61,320 30,07,183 --------- 4,45,863Provision for earned leave encashment 2,04,443 2,84,246 --------- 79,803

Total Current liabilities (B) 8,15,74,913 9,97,01,429

Networking Capital (A-B)

[20,12,53,746]

[35,29,37,325]

Increase / Decrease [15,16,83,579]

[15,16,83,579]

35,29,37,325 35,29,37,325

17,14,03,245

17,14,03,245


75



76


INTERPRETATION

1) It was observed that the above working capital calculations for the year

2007-2008 we can notice that the working capital is increased by 75.37%

compared to the previous financial year.

2) There is overall increase of 60.04% in total current assets during the year


3) This is due of the increase inventory, sundry debtors, and cashes in

hand, other current assets, loans &advance by 29.80%, 54.59%,

2840.40%, 57.18%and 81.96%.

4) There is overall increase of 22.22% in total current liabilities during the


5) .This is due of the increase in tax, gratuity and provision earned by 59.37

%,17.41 %, 39.03% respectively. .

6) But decrease of sundry creditors, advance received against sales by 2.99%,

14.81.


77


Particulars 2007-2008 2008-2009 Changes in working capital

Increase Decrease

CURRENT ASSETS

Inventory 22,91,60,365 26,90,46,994 3,98,86,629 ---------

Sundry debtors 4,19,93,041 7,28,27,064 3,08,34,023 ---------

Cash on hand 4,00,95,172 5,20,02,856 1,19,07,684 ---------

Other current assets 5,47,621 15,42,861 9,95,240 ---------

Loans & Advances14,08,42,555 25,78,53,360

11,70,10,805

---------

TotalCurrentAssets (A)

45,26,38,754 65,32,73,135

Current liabilities

Sundry creditors 4,34,30,156 6,82,59,442 --------- 2,48,29,286

Advance received against sales 14,54,844 35,41,107 --------- 20,86,263

Provisions

Provision for taxation 5,15,25,000 9,58,25,000 --------- 4,43,00,000

Provision for gratuity 30,07,183 39,91,065 --------- 9,83,882

Provision for earned leave en cashment

2,84,246 4,39,501 --------- 1,55,255

Total Current liabilities (B) 9,97,01,429 17,20,56,115

TABLE:4. 5 STATEMENTS OF CHANGES IN WORKING CAPITAL FOR THE YEAR 2008-2009


78

MBA PROJECT AMARAVATHI TEXTILES In Rupees


79


INTERPRETATION:

1. It was observed that the above working capital calculations for the year

2008-2009 we can notice that the working capital is increased by

36.35% compared to the previous financial year

2. There is overall increase of 44.33% in total current assets during the year


3. This is due of the increase inventory, sundry debtors, and cashes in hand,

other current assets, loans &advance by 17.41%, 73.43%, 29.70%,

181.74%and 83.08%.

4. There is overall increase of 72.57% in total current liabilities during the


5. This is due of the increase in sundry creditors, advance received against

sales, tax, gratuity and provision earned by 57.17%, 143.40%, 85.98%,

32.72%, and 54.62% respectively. .


80


RATIO’S

1. CURRENT RATIO:

It may be defined as the relationship between current assets and current

liabilities. This ratio is known as working capital ratio. It is a measure of general

liquidity and is most widely used to make the analysis of a short-term financial

position or liquidity of a firm. It is calculated by dividing the total of current

assets by total of the current liabilities. Thus,

Current assets include:

Cash at Bank, Cash in hand, Debtors, Bills Receivable, Stock, repaid

Expenses, and Short Term investments etc.

Current liabilities include:

Creditors, Bills payable, out standing expenses, Short-term loan, Bank over

draft etc.

Current Assets

(A)Current Ratio = ________________

Current Liabilities


81


TABLE 4.6Year Current Assets Current Liabilities Current ratio

2004-0518,00,85,714 6,05,34,645 2.97:1

2005-0622,15,59,127 6,31,95,252 3.50:1

2006-0728,28,28,659 8,15,74,913 3.47:1

2007-0845,26,38,754 9,97,01,429 4.54:1

2008-0965,32,73,135 17,20,56,115 3.80:1


82


INTERPRETATION:

1. In the above table current ratio of Amaravathi textiles pvt ltd is

fluctuating under the period of study from one year to another.

2. In the year 2004-05 Amaravathi textiles pvt ltd has current ratio is

2.97:1, In the year 2005-06 the current ratio increased to 3.50:1, In

the year 2006-07 the current ratio decreased to 3.47:1, In the year

2007-08 the current ratio increased to 4.54:1, In the year 2008-09 the

current ratio increased to 3.80:1.

3. The company has maximum CR of 4.54 in the year of 2007-08.Due

to the higher increase in CA corresponding to the increase in CL. The

more than proportionate increase in CA & slighter increase in CL

caused to the maximum CR for the year 2008-09.The minimum

value of CR is 2.97 in the year of 2004-05.

4. The current ratio of Amaravathi textiles pvt ltd has been more

satisfactory & above the idle ratio of 2:1 for entire period of the

study is 2004-05 to 2008-09.

5. In the year 2007-08the current ratio has to reach the maximum level.

It has more liquid more than the required.


83


(2)Quick Ratio:

It is also known as acid test or liquid ratio is more rigorous test of liquidity

than the current ratio. Quick ratio may be defined as the relationship between the

quick/ liquid assets and current/ liquid liabilities. An asset is said to be liquid if it

can converted into cash within a short period without loss of value. Inventories

cannot be termed to be liquid assets because they can’t be converted in to cash

immediately. A Quick Ratio 1:1 usually considering idle Ratio.

Quick assets= Current assets - Inventories

Quick assets include:

Cash at Bank, Cash in hand, Debtors, Bills Receivable, Prepaid Expenses,

and Short Term investments etc.


Creditors, Bills payable, out standing expenses, Short-term loan,

Bank over draft etc.

Quick assets

Quick ratio = ______________________

Current liabilities


84

MBA PROJECT AMARAVATHI TEXTILES TABLE 4.7

Year Quick Assets Current Liabilities ratio

2004-05 3,34,19,476 6,05,34,645 0.55:1

2005-06 6,69,54,256 6,31,95,252 1.06:1

2006-07 10,62,77,441 8,15,74,913 1.30:1

2007-08 22,34,78,389 9,97,01,429 2.24:1

2008-09 38,42,26,141 17,20,56,115 2.23:1

INTERPRETATION:


85

MBA PROJECT AMARAVATHI TEXTILES 1. In the above table Quick ratio of Amaravathi Textiles pvt ltd is


2. In the year 2004-05 Amaravathi Textiles pvt ltd has Quick ratio is

0.55:1, In the year 2005-06 the Quick ratio increased to 1.06:1, In the

year 2006-07 the Quick ratio increased to 1.30:1, In the year 2007-08

the Quick ratio increased to 2.24:1, In the year 2008-09 the Quick

ratio decreased to 2.23:1.

3. It was observed that the maximum Quick ratio of 2.24 in the year of

2007-08.There is a increased in the quick assets .So that the ratio is

increased in this year .The minimum value of Quick ratio is 0.55 in

the year of 2004-05. There is a decreased in the quick assets .So that

the ratio is decreased in this year

4. The Quick ratio of Amaravathi textiles pvt ltd has been more

satisfactory & above the idle ratio of 1:1 for entire period of the

study is 2004-05 to 2008-09

5. Amaravathi textiles pvt ltd is more than the required .So Amaravathi

textiles pvt ltd to pay off its current obligations.

6. The over all trend of the quick ratio increasing pattern .And the

percentage change in 3.07 between the period 2004-5and 2008-9

(3) CASH RATIO:


86

MBA PROJECT AMARAVATHI TEXTILES Cash is the most liquid asset; a financial analyst may examine cash ratio

and its equivalent to current liabilities. Trade investment and marketable

securities are equivalent of cash.

Super Quick assets

Cash and marketable securities and account receivables.


Creditors, Bills payable, out standing expenses, Short-term loan, Bank over

draft etc.

Cash +marketable securities

Cash ratio = ____________________________________

Current liabilities


87


TABLE 4.8


Year Cash+marketable

securities

Current liabilities ratio

2004-05 7,02,984 6,05,34,645 0.011:1

2005-06 18,65,440 6,31,95,252 0.030:1

2006-07 13,63,596 8,15,74,913 0.021:1

2007-08 4,00,95,172 9,97,01,429 0.400:1

2008-09 5,20,02,856 17,20,56,115 0.302:1

88


INTERPRETATION:

1) In the above table cash ratio of Amaravathi textiles pvt ltd is


2) In the year 2004-05 Amaravathi textiles pvt ltd has cash ratio is 0.011,

In the year 2005-06 the cash ratio increased to 0.030,In the year 2006-

07 the cash ratio decreased to 0.021, In the year 2007-08 the cash ratio

increased to 0.4, In the year 2008-09 the cash ratio is 0.302.

3) It was observed that the company has maximum cash ratio of 0.400 in

the year of 2007-08.There is a decreased in the current liabilities .So

that the ratio is increased in this year .The minimum value of cash ratio

is 0.011 in the year of 2004-05. There is a increased in the current

liabilities .So that the ratio is decreased in this year


89

MBA PROJECT AMARAVATHI TEXTILES 4) It was observed that the cash ratio of Amaravathi textiles pvt ltd has

been UN satisfactory & above the idle ratio of 0.5:1 for entire period of

the study is 2003-04 to 2008-09.

5) The over all trend of the quick ratio is increasing pattern & percentage

change in 35.36 between the period 2004-05and 2008-09.


90


(4) TURNOVER RATIOS

Another way of examining the liquidity is to determine how quickly certain

current assets are converted into cash. The ratios to measure these are referred to

as turn over ratio.

Relevant turnover ratios are….

1. Inventory turnover ratio

2. Debtors turnover ratio.

3. Working capital turnover ratio.

4. Current assets turnover ratio.

1. INVENTORY TURNOVER RATIO:

This ratio, also known as stock turnover ratio establishes the relationship

between cost of goods sold during a given period and the average amount of

inventory held during that period. It indicates the number of times inventory is placed

during the year or how quickly the goods are sold. It is a test of efficient inventory us

management. Higher the ratio, the better it is because it shows that finished stock is

rapidly turned-over. On the other head, a low stock turnover ratio is not desirable

because it reveals the accumulation of obsolete stock, or the carrying too much stock.

This ratio is calculated as follows;


91


Stock turnover ratio= cost of goods sold/ average stock

Cost of goods sold = opening stock+ purchase+ manufacturing expenses- closing

stock

Average stock= opening stock + closing stock /2

(Or)

Sales

Inventory turnover ratio = -------------

Inventory


92


The below table showing the calculation of inventory turnover ratio:

TABLE 4.9

Year Sales Inventory Ratio

2004-05 28,34,20,669 14,66,66,238 1.93

2005-06 34,46,12,983 15,46,04,872 2.23

2006-07 44,48,54,723 17,65,51,218 2.52

2007-08 52,60,60,377 22,91,60,365 2.30

2008-09 68,97,53,568 26,90,46,994 2.56


93

MBA PROJECT AMARAVATHI TEXTILES INTERPRETATION:

1) In the above table inventory or stock turn over ratio of Amaravathi textiles

pvt ltd is fluctuating under the period of study from one year to another &

the above table shows relationship between Sales and closing inventory.

2) The inventory or stock turn over ratio of the Amaravathi textiles pvt ltd in

the year 2004-2005as1.93 it has been increased to 2.23 in the year 2005-

06 & further increased 2.52 in the year2006-07It had decreased to 2.30 in

the year2007-08 At present the inventory or stock turn over ratio of the

company was 2.56 in the year 2008-09.

3) It was observed that the inventory or stock turn over ratio of the

Amaravathi textiles pvt ltd is maximum (2.56) the reason for increase in

sales and decrease in cl.stock in the year 2008-09.

4) It was observed that the inventory or stock turn over ratio of the Amaravathi

textiles pvt ltd is minimum (1.93) the reason for decrease in sales and

increase in cl.stock in the year 2004-05.

5) The over all trend of the inventory or stock turn over ratio is increasing

pattern & percentage change in 0.32 between the period 2004-05and 2008-

09.


94


(5)INVENTORY HOLDING PERIOD: -

12 months or 365 days

Inventory holding period = ---------------------------

Inventory turnover ratio

Table 4.10

Year 12 months / 365

days

Inventory turnover

ratio

Ratio (days)

2004-2005 365 days 1.93 189

2005-2006 365 days 2.23 163

2006-2007 365 days 2.52 144

2007-2008 365 days 2.30 158

2008-2009 365 days 2.56 142


95


INTERPRETATION

1. Inventory holding period of Amaravathi Textiles private Limited is

fluctuating.

2. It has maximum of 189days in the year 2004-2005while it was minimum

of 142days in the year 2008-2009.

3. Inventory turnover ratio is influence to the inventory holding period.

Inventory turnover ratio has been fluctuating from the year 2004-2005to

2008-2009.


96

MBA PROJECT AMARAVATHI TEXTILES (6)DEBTORS TURNOVER RATIO

It indicates the efficiency of receivables management & shows how quickly

trade credit is collected. When a firm sells goods on credit, book debts are created.

Debtors are expected to be converted into cash over a short period. To a great extent,

the amount and quickly of debtors determine the liquidity position of the firm.

Debtor’s turnover or receivables turnover is calculated by dividing credit sales by

average debtors. This ratio indicates the number of times, on an average the debtors.

This ratio indicates the number of times, on an average the debtors or receivables

turnover each year. Generally, the higher the value of debtor’s turnover, the more

efficiency is the management of assets. Sometimes, data relating to credit sales,

opening balance and closing balance of debtors may not be available. Then debtor’s

turnover can be calculated by dividing total sales by closing balance of debtors.

Debtors turnover ratio= credit sales/ average debtors

(Or)

Debtors turnover ratio= total sales/ closing debtors


97

MBA PROJECT AMARAVATHI TEXTILES The below table showing calculation of debtor’s turnover ratio:

TABLE 4.11 Year Sales Closing Debtor’s Ratio

2004-2005 28,34,20,669 42,57,736 66.57

2005-2006 34,46,12,983 2,42,23,172 14.23

2006-2007 44,48,54,723 2,71,64,018 16.38

2007-2008 52,60,60,377 4,19,93,041 12.53

2008-2009 68,97,53,568 7,28,27,064 9.47

INTERPRETATION:


98

MBA PROJECT AMARAVATHI TEXTILES 1) In the above table Debtors Turnover ratio of Amaravathi textiles pvt ltd is

fluctuating under the period of study from one year to another & the above

table shows relationship between Sales and closing debtors.

2) The debtors turn over ratio of the Amaravathi textiles pvt ltd in the year

2004-05 66.57 it has been decreased to 14.23 in the year 2005-06 And

further increased 16.38 in the year2006-07It had decreased to 12.53 in the

year2007-08 At present the debtors turn over ratio of the company was 9.47

in the year 2008-09.

3) The debtors turn over ratio of the Amaravathi textiles pvt ltd is maximum

(66.57) the reason for decrease in debtors and increase in sales in the year

2004-05.

4) The debtors turn over ratio of the Amaravathi textiles pvt ltd is minimum

(9.47) the reason for increase sales and increase in debtors in the year 2008-

09.

5) The over all trend of the debtors turn over ratio is decreasing pattern. And

percentage change in 6.02 between the period 2004-05and 2008-2009.

(7) DEBTORS COLLECTION PERIOD:

12 months or 365 days


99

MBA PROJECT AMARAVATHI TEXTILES Debt collection period = ---------------------------

Debtor’s turnover ratio

Table - 4.12

Year 12 months /

365 days

Debtor’s

turnover ratio

Ratio

(days)

2004-2005 365 days 66.57 5.48

2005-2006 365 days 14.23 25.65

2006-2007 365 days 16.38 22.28

2007-2008 365 days 12.53 29.13

2008-2009 365 days 9.47 38.54


100


1. Debt collection period of Amaravathi textiles private Limited is fluctuating.

2. It has maximum of 38.54 days in the year 2008-2009while it was minimum of

5.48 in the year 2004-2005.

3. Debtor’s turnover ratio is influence to the Debt collection period. Debtor’s

turnover ratio has been fluctuating from the year 2004-2005to 2008-2009.

WORKING CAPITAL TURNOVER RATIO

This is the ratio used to the relation between the working capital and net sales.

This ratio calculated by dividing the working capital with the net sales. This shows

the how much working capital is in organization at how many times to the net sales.

This ratio is calculated as under

Net sales


101

MBA PROJECT AMARAVATHI TEXTILES Working capital turnover ratio = -------------------

Net working capital

The below table showing the calculation of working capital turnover ratio:

Table - 4.13

Year Net Sales Net working

Capital

Ratio

2004-2005 28,34,20,669 11,95,51,069 2.37

2005-2006 34,46,12,983 15,83,63,875 2.18

2006-2007 44,48,54,723 20,12,53,746 2.21

2007-2008 52,60,60,377 35,29,37,325 1.49

2008-2009 68,97,53,568 48,12,17,020 1.43


102


1) In the above table Working capital Turnover ratio of Amaravathi

textiles pvt ltd is fluctuating under the period of study from one year to

another & the above table shows relationship between Sales and

working capital.

2) The working capital turns over ratio of the Amaravathi textiles pvt ltd

in the year 2004-05 is2.37 it has decreasedto 2.10 in the year 2005-06

And further increased 2.21 in the year2006-07It had decreased to 1.49

in the year2007-08 At present the working capital turn over ratio of the

company was 1.43 in the year 2008-09.


103


3) It was observed that the working capital turn over ratio of the

Amaravathi textiles pvt ltd is maximum (2.37) the reason for decrease

in working capital and increase in sales in the year 2004-05.

4) It was observed that the working capital turn over ratio of the

Amaravathi textiles pvt ltd is minimum (1.43) the reason for increase in

working capital and decrease in net sales in the year 2008-09.

5) The over all trend of the working capital turn over ratio is decreasing

pattern .And percentage change in 0.65 between the period 2004-05and

2008-09.


104


(8)FIXED ASSETS TURN OVER RATIO:

The fixed assets turnover ratio indicates the extent to which the investments

on fixed assets contribute to sales. This ratio will explain about the amount of net

sales that are arises by utilizing fixed assets. Generally a high fixed assets

turnover ratio indicates efficient utilization of fixed assets in generation of sales.

Sales

Fixed assets turnover ratio = -----------------------

Net fixed assets

TABLE – 4.14

Year Net Sales Fixed assets Ratio

2004-2005 28,34,20,669 15,38,42,230 1.84

2005-2006 34,46,12,983 15,51,02,769 2.21

2006-2007 44,48,54,723 25,41,59,811 1.75

2007-2008 52,60,60,377 54,85,61,649 0.95

2008-2009 68,97,53,568 78,75,33,337 0.88


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INTERPRETATION:

1) In the above table fixed Turnover ratio of Amaravathi textiles pvt ltd

is fluctuating under the period of study from one year to another &

the above table shows relationship between Sales and fixed assets.

2) The fixed assets turn over ratio of the Amaravathi textiles pvt ltd in

the year 2004-05 was 1.84 it has been increased to 2.21 in the year

2005-06. And further decreased 1.75 in the year2006-07.It had

decreased to 0.95 in the year2 007-08. At present the fixed assets turn

over ratio of the company was 0.88 in the year 2008-09.


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3) It was observed that the fixed assets turn over ratio of the Amaravathi

textiles pvt ltd is maximum (2.21) the reason for decrease in fixed

assets and increase in sales in the year 2004-05.

4) It was observed that the fixed assets turn over ratio of the Amaravathi

textiles pvt ltd is minimum (0.88) the reason for increase in fixed

assets and decrease in sales in the year 2008-09.

5) The over all trend of the fixed assets turn over ratio is decreasing

pattern. percentage change in 1.51 between the period 2004-05and

2008-09.


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FINDINGS

1. Amaravathi Textiles Private Limited has been maintaining favorable

working capital from the last 5 years (2004-2005 to 2008-2009).

2. By observing the working capital statement of 2004-2005 it is noticed

that the working capital is increased by 53.63% compared to the

previous financial year.


that working capital is increased by 32.46% compared to the previous

year.



year.



year.



year.


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7. Debtor’s turnover ratio is fluctuating from the year 2004-2005 to 2008-

2009. The company debt collection period is also fluctuating. Debt

collection period is influenced by the debtor’s turnover ratio.

8. The inventory turnover ratio is also fluctuating through out all the years.

The inventory holding period also fluctuating.

9. The fixed assets turnover ratio is also fluctuating.

10. The current ratio of Amaravathi Textiles Private Limited is having better

standards.

11. Quick ratio of Amaravathi Textiles Private Limited is also having good

standards.

12. The performance of net working capital is increasing every year.


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SUGGESTIONS

1. The debtor’s turnover ratio is fluctuating throughout all the years. Though it is

fluctuating it is showing positive or improvement as a result it is good. So the

company is suggested to maintain the same in future. As well as the debtors

collection period.

2. It is suggested that maintain the inventories very effectively. .

3. It is suggested that improve fixed assets .

4. Company does not maintaining the current idle ratio Company try to improve

its current assets...

5. Company needs to improve its quick ratio .

6. It is suggested that the company needs to maintain enough investment in

current assets in order to ensure the proper liquidity for the company.


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ANNUAL REPORTS OF AMARAVATHI TEXTILES PRIVATE LIMITED


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Documents

Working Capital Management 1