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PROJECT REPORT ON WORKING CAPITAL MANAGEMENT

CHAPTER -1 INTRODUCTION
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PROJECT REPORT ON WORKING CAPITAL MANAGEMENT

INTRODUCTION
The study on the impact of sales on working capital is of major importance to internal and external analysis because of its relationship with the current day to day operations of business. In order to maintain flow of revenue from operations, every firm needs certain amount of current assets. For instance, funds required either to pay for expenses or to meet obligations for service received or goods purchased etc. by a firm. These funds are known as working capital. Procurement of required amount of working capital and its effective utilization is the important function of working capital management. Working capital management is an important decision making area of financial management in any undertaking. It is essentially concerned with an undertaking of:a) How to raise and allocate financial resources. b) How to relate short-term investments and financial decision to overall objectives of the firm. c) How to relate short-term financial decision to certain long-term financial decisions. STATEMENT OF THE PROBLEM The topic for the study is analysis of sales on working capital management in MILMA Diary. Management of working capital determines the success of operation of business concern. A sense of security feels from a sufficient amount of working capital which creates confidence and loyalty not only throughout the business but also among its customer creditors and business associates. SIGNIFICANCE OF THE STUDY The aim of the study was to understand past performance of company, present financial condition and to find suggestions for improvement in future profitability. A sincere effort has been made to analyze financial position with the data made available and to suggest all feasible methods to improve the companys profitability for future survivals. SCOPE OF THE STUDY The scope of the study aims at analyzing the working capital statements of Milma through various techniques like ratio analysis, comparative balance sheet, etc. The study aims at assessing the working capital position and liquidity position of the company. For conducting the study the financial statements for the past 5 years are used.

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OBJECTIVES OF THE STUDY To find out the current year working capital using Regression analysis by assuming current year sales. To find out the liquidity of the concern by using liquidity ratios. To find out the performance of the concern by using turnover ratios. To find out the profitability of the concern by using profitability ratios. To find out the comparative balance sheet of MILMA. To analyze schedule of changes of working capital.

RESEARCH METHODOLOGY The methodologies of the study included detailed observation and maintain notes, discussion with concerned persons, workers and managers regarding the various processes involved in the respective functional areas. Data collection The data has been collected through secondary sources. The data collection was done during the period from 2005-2006 to 2009 - 2010. Research Design In this project, descriptive type research design is used. It means that this project thoroughly analyses all the detail about this particular topic.

Data analysis techniques The data obtained was analyzed using standard financial and statistical technique. The principle techniques of analysis used in the project is ratio analysis. The ratio analysis is the most commonly used technique which practically deals with each and every aspects of the working capital analysis. For the purpose of financial analysis, the profit and loss account and balance sheet of the company has been analyzed.

SOURCES OF DATA
PRIMARY DATA Primary data are those, which are collected for the first time and are original in nature and character. It is in the shape of raw materials and its collection is time consuming and
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expensive. Primary data are collected by personal discussion with the officials and staff members of the finance department of MILMA-Dairy. SECONDARY DATA Secondary data are those which have already been collected by someone and which are passed through the statistical machine at least once. It needs only less money and time for collection and analysis. Secondary data collected from: Balance sheet of the company for past 5 years. Profit and loss account of the company. Website of the company. DATA ANALYSIS TOOLS AND TECHNIQUES Various tools are being used to analyze and interpret the financial statements of the company like: Regression analysis Ratio analysis. Graphs. LIMITATIONS OF THE STUDY The time allowed for the work is comparatively less. Therefore a detailed study cannot be conducted. Due to several reasons the study is concentrated only in Kollam MILMA dairy. So this result may not cover the entire details of MILMA in Kerala. The major difficulty experienced in connection with the project work is with respect to time allotted for the project work. It was at the flag end of the financial year when all officers and men are busy with the preparation of budgets, financial statement, preparation of accounts and audit. Hence the officers and the staff were too busy to spare the time. PERIOD OF THE STUDY For the purpose of study a period of five years has been taken. The study is conducted for 5 years from 2005 - 2006 to 2009-2010.

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CHAPTER -2 PROFILE
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INDUSTRY PROFILE
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INDUSTRY PROFILE
Milk and milk based industries play a very important role in the world. Internationalization reminds a key focus for almost of the worlds leading dairy farms. All the worlds largest dairy farms operating more than one country and some of them are truly international with activities in every part of the world. The availability and distribution of milk and milk products, in the modern world is blend of the centuries old knowledge of traditional milk products with the application of modern science and technology. Diary is a place where handling of milk and milk products done. In developed dairying countries, the year 1850 is seen as the dividing line between farm and factory scale production. The rural areas were identified for milk production where as the urban centers were selected for the location of milk processing plants and product manufacturing factories. These plants and factories were rapidly expanded and modernized with improved machinery and equipment to secure the various advantages of large scale production. Before 1900, nearly all the milk was delivered as raw milk. Milk was first delivered in bottles on January 11, 1878.Once pasteurization was introduced, it developed rapidly. Mechanical refrigeration helped in the rapid development of the factory system of market milk distribution. A doubling in the price of wholesale milk over the past year is creating havoc among food manufactures, prompting warning about the food price inflation in U.K .Aid organizations have also raised concerns about the depletion of government stockpiles of milk power. In the western world today, cow milk is produced on an industrial scale. It is by far the most commonly consumed form of milk in the world. Commercial dairy farming using automated milking equipments produce the vast majority of milk in the developed countries.

The following are the major global players in this field, Nestle (Switzerland) Dean Foods(USA)
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Kraft (USA) Dairy Farmers of America(USA) Fonterra (New Zealand) Danone (France) Parmalat (Italy) Arla (Denmark)

Nevertheless, in spite of these players, India is the largest producer of dairy products and milk followed by USA and China.

Indian scenario
The dairy sector in India has shown remarkable development in the past decay and India has now become one of the largest producers of milk and value added milk products in the world. The dairy sector has developed through co-operatives in many parts of the state. During 1997 1998 the state has 60 milk processing plants with an aggregate processing capacity of 5.8 million litres per day in addition to these processing plants, 123 government and 33 co-operative milk chilling centers operate in the state. More than 2445 million people economically active in agriculture in the world.probably2/3 or even more of them are wholly or partially depended on livestock farming. India is endeavored with rich flora and fauna and continuous to be vital avenue for employment and income generation, especially in rural areas. India, which has 66% of economically active population engaged in agriculture. In India the market milk technology may be considered to have commenced in 1950, with functioning of the Central Dairy of Aarey Milk Colony and milk product technology in 1956 with the establishment of Amul Dairy, Anand. The industry is still in its infancy and barely 10% of the total milk production undergoes organized handling. India achieved the distinction of becoming the worlds largest milk producer in the year. The milk production in India is over 110million tones with Utter Pradesh leading the highest
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among Indian states. Started in 1970, the three phases of Operation Flood have pushed Indias milk from 21 million tons to 110 million tons in 2008.The growth in the milk definitely surpassed the growth in grains and cereals and today milk is Indias number one farm produce worth Rs 1,00,000 crores annually. In spite of being the Worlds milk producer, Indias milk processing industry is not very large. Only 12% of milk is delivered to dairies against the world average of 70%. Bulk of Indian milk is utilized for drinking or in the unorganized sector processing industry can be divided in to three segments Government/ Semi government Co-operatives Private sector.

With expectation of a few units, the processing industry is largely involved either in a liquid pasteurized milk of conversion of milk to milk powder and ghee. Most domestic processor does not have the quality or the marketing knowledge to access the international market. In India, majority of the milk market remains with the co-operatives which were formed under Operational Flood all over India. The Milk Marketing Federations and its affiliated Districts Milk Unions control majority of the milk market in the organized sector. The major brands in India are Amul (Gujarat) Verka (Punjab) Milma (Kerala) Nandini (Karnataka) Vijay (Andhra Pradesh)

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Aavin (Tamilnadu) Parag (Maharashtra) Mother Diary (Delhi) There are few other major private companies which are in the forefront of the diary product

marketing such as Britannia, Nestle and Cadbury etc. New international players such as Anchor Fonterra, Compina, Landolakes etc are expected to enter the Indian market within a short period of time. Indian diary sector is said to witness a number of new alliances and partnerships. Consolidation is already taking place in the market with Mother Dairy entering into the joint ventures with the various state co-operatives and Britannia in tie-up with Fonterra etc. Overall the Indian industry is experiencing an upheaval with the new products launches, repositioning of brands and entry of newer players.

Operation Flood
During 1960s milk production in India was concentrated only in rural areas. In Gujarat the farmers owned Co-operative Societies formed namely Anand Milk Union Ltd (AMUL). It was mainly integrated in production, procurement and processing and marketing on Co-operative lines. Operation Flood was launched in 1970 and the main objective of the program was to increase the milk production in rural areas and to supply the excess milk to the nearest dairies. Operation Flood was introduced under National Dairy Development Board (NDDB) which functions as the technical consultant. This NDDB was stated under the Societies Act and these societies are known as Anand Pattern Co-operative Societies (APCOS). These societies get financial aid from Indian Dairy Corporate. Operation Flood is intended to reduce regional imbalances in dairy development in underdeveloped regions. It was a remuneration linking of rural milk procuring centers with urban demand centers. The various phase of Operation Flood include; First phase aims at the procurement of milk from rural surplus areas. MILMA KOLLAM DAIRY Page 10 areas to the urban deficit

PROJECT REPORT ON WORKING CAPITAL MANAGEMENT

Second phase was started during 1980s its outlay was 29 crores and was utilized for the construction of dairies. Kerala was included in the second phase of Operation Flood.

Anand Pattern
A success story on the dairy scheme in India during the sixties was the farmer owned Amul cooperative in Anand (Khaira district, Gujarat) with its integrated approach to production, procurement, processing and making on co-operative lines. Over the years this evolved in to a model based on self-rule by farmers ensuring maximum returns to them. This model came to be known as Anand pattern. The efficiency of this model was worth replication. There for a dairy programme called OPERATION FLOOD was launched in 1970 under the aegis of National Dairy Development Board (NDDB) ANAND Pattern is a 3-tier structure consisting of Village level primary co-operative society called APCOS Regional co-operative milk producers union State level milk marketing federation

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COMPANY PROFILE
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HISTORY OF THE COMPANY Kerala co-operative milk marketing federation (KCMMF) popularly known as "M1LMA" was established in 1980, with its head office at Thiruvananthapuram for the successful implementation of the second programme "OPERATION FLOOD" in Kerala. During the last 3 decades the sector witnessed uninterrupted growth in terms of animal population and milk production. Milk co-operative is a form of economic organization in which farmers willfully and voluntarily pool their resources on the basis of equality for the advancement of their economic interest. The guiding principle of a cooperative is basically "self-help through mutual help". This basic idea has been defined in various forms such as "each for all and all for each", of the people, by the people, and for the people", "common welfare through common action" etc. Cooperative dairying is the most outstanding form of agricultural co-operation. The co-operative dairy is an agency, which carries out the functions of promotions procurement, processing and marketing of milk and milk products. The main aim of dairy co-operative is to ensure continuous hygienic liquid milk to consumers and remunerative return to producers. In India one organized efforts were made for the development of dairy co-operatives before the launching of five year plans. The Anand Milk Union Limited (AMUL) was the pioneer venture in cooperative Dairy sector. It provided a model for the milk producer's cooperative in Gujarat and other states, which played an important role not only in increasing milk production but improving the status of the members too. In Kerala, a major breakthrough in this direction was made with the establishment of the Kerala Co-operative Milk Marketing Federation (KCMMF) popularly known as MILMA in 1980. The launching of MILMA was part of the "OPERATION FLOOD" second programme, the central objectives of which was to channelize milk from surplus rural areas to deficit urban areas in such a way as to maximize the return of both producers and consumers. Eventually, in April 1983 MILMA took over the revenue earning activities of all the dairies and chilling plants from Kerala Live Stock Development and milk Marketing Board (KLD&MMB). THE OBJECTIVES OF MILMA To channelize marketable surplus milk from the rural areas to urban deficit areas to maximize the returns to the producer and provide quality milk and milk products to the consumers. To carry out activities for promoting production, procurement, processing and marketing of milk products for the farming community. To built up a viable industry in the state.
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To provide constant market and stable price farmers for their produce.

QUALITY POLICY Continually improve the effectiveness of the system. Provide consistent quality products and services to customers and producers. The organization follows the statutory standards and rules as per the PFA (prevention of food adulteration) Act. Milma having a three tier structure with primary milk cooperative societies known as APCOS. Regional Co-operative Producers Union are (TRCMPU, ERCMPU, MRCMPU) at Thiravananthapuram, Ernakulam. Calicut these unions federate at state level to from state federation namely Kerala co-operative Milk Marketing Federation. TRCMPU The regional union covers Trivandrum regional Co-operative milk producers union was established in the year 1985 as a part of implementation of the flood programme in the state of Kerala. The union covers the southern regions of Kerala. This covers the districts of Tvm, Kollam, Pathanamthitta and Alappuzha. ERCMPU The Ernakulam Regional Co-operative Milk Producers Union was established in the year 1986, is the central society of primary milk co-operative organized by Anand pattern. This union covers the central regions of Kerala. The areas of operation of this union are four central kerala districts are Thrissur, Ernakulam, Kottayam and Idukki. MRCMPU The Malabar Regional Co-operative Milk Producers Union Limited which stated functioning from 1990, is the youngest one among the three regions of Kerala, viz Kasargode, Kanoor, Vayanadu, Kozhikode, malappuram and Palakkad. Thiruvananthapuram milk dairy is the biggest milk dairy in Kerala. It is also the first dairy with ISO 9001-2000 certified company. Its head office is at Ksheera Bhavan Pattom, Thiruvananthapuram. The dairy has a processing capacity of two lakhs liters of milk per day and also with an annual turn of 10 crores. There are 250 employees in this dairy which is headed by the General Manager.

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STRATEGIC INTENT
VISION "To ensure prosperity through milk , be it for the producers or consumers" Its dream is to ensure prosperity through milk be it for the producer or the consumer. They look for a bright future for the farmers organization and retrieve and resolve to strive relentlessly to make this a full- fledged cooperative of the fanners who would along with the organization. MISSION "Farmers prosperity through consumer satisfaction" The mission of this cooperative milk producers organization is the elimination of middlemen and organize institutions owned and managed by producers themselves by employing professionals. Achieve economies of scale and to ensure maximum returns to the milk producers , at the same time providing wholesome milk at reasonable prize to urban consumers. Ultimately the complex network of cooperative organization should build strong bridge between masses of rural producers and millions of urban consumers and achieve a socio- economic revolution in the vicinity of the territory. MOTTO "Your health is our concern" CAPTION "The goodness kerala wakes up to

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The name M1LMA represents: 2,658 primary milk co-operative societies. 7.5 lakhs farmer members. Three Regional Co-operative Milk Producer's Union. Eleven dairies capable of handling 9.90 lakhs liters of milk per day. Thirteen milk chilling centers. Two cattle feed plants with cumulative capacity of 600 metric ton per day. One milk powder plant of 10 metric ton per day capacity. A well established training center. 5,200 retail outlets. Over 32,000 people working either directly or indirectly for of MILMA. And serving millions of consumers day -in and day-out.

the

functioning

COMPETITION New entrant with new brands in the field of milk marketing creates a lot of competition of milk. There are several new firms dealing with very low volume of milk with new brand names are strictly in competition with milma at several places which affects marketing of the company . even though is popular in the milk marketing system of various new firms in these field will certainly affect the marketing of milma in due course. The various competitors in Kerala are: Royal Milk KCAMilk Malanadu Kamadhenu Sakthi Maveli
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Penta Shabari Pooja The competitors of refresh drinks are: Fruity Maa juice Maaza

Market share Milma is still the major player in the milk market of kerala with a share of 60% .Recently there has been the entry of large number of other players in the packet milk segment in Kerala. These are not a major threat against Milma on an individual basis but in combination they give strong competition to Milma.

Kollam Diary The kollam diary comes under the jurisdiction of the TRCMPU . it was established in 1985 and is situated in Thevally. The Kollam Diary is situated in lO acres of land . The objective of Kollam Diary is Procurement, Processing, and Marketing of Quality of Milk and its products to customers. The area of operation of Kollam Diary is the area comprising of Kollam and as part of Alappuzha and kollam district it collects milk from societies pasteurizes it and distributes it.

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DEPARTMENTS
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DIFFERENT DEPARTMENTS IN MILMA DAIRY


FINANCE AND ACCOUNTS DEPARTMENT Financial management of KCMMF and its units. Liaison with financial institutions for availing loan for creation of Infrastructure. Liaison with government for availing government financial assistance. Long term repayment and scheduling of loans. Capital management schemes for primary co-operative societies. Recommend remuneration of APCOS employees.

HUMAN RESOURCE DEPARTMENT Family has 2098 skilled, efficient and qualified personnel excellent labour relationship. Takes active role in fanning personnel policies and services rules Finalize long term wage settlement, bonus etc. Milma Placement and career development activities. and has an

MARKETING DEPARTMENT Brand management Bulk trading of surplus products. Institutional supply contracts Co-ordinate promotional development Procurement &consumer pricing.

PURCHASE DEPARTMENT Centralized purchase of dairy consumables Purchase of raw materials for cattle feed plants Purchase functions of KCMMF Head Office. QUALITY CONTROL DEPARTMENT Render technical and legal assistance to Regional Milk Unions. Liaison and maintain quality of milk standards.
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primary

dairy

co-operatives

and

and milk products

as per the

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Liaison with statutory authorities for bringing statutes. Attend to consumer complaints on quality problems.

in

suitable

amendments

in

PROJECTS DEPARTMENT Planning and execution of projects for creating infrastructure for Regional Milk Unions and KCMMF. Providing consultancy for execution of projects. Liaisoning with statutory authorities like Factories and Boilers, Electrical Inspectorate Dept.of Explosive etc for obtaining approval and implementation of projects Liaisoning with government for land allocation, water, power and other amenities. Estate management and assistance in maintenance of Plant and Machinery of KCMMF Unit.

PLANNING AND SYSTEMS Maintenance of systems at KCMMF, Units and Regional Milk Unions. Development of software to support various functions. Purchase of Hardware and Software. Support Management Information System. Networking. Conducts training programs for development of computer skills.

PROCUREMENT AND INPUT DEPARTMENT Formation and supervision of primary milk societies. Training and development of diary farmer and society staff. Rural milk production enhancement activities. Providing input services to farmer like vetinary and fodder development etc. Ensuring regular cattle field supply. Providing scholarship to children, death benefit, pension, medical facilities etc.

PRODUCTION DEPARTMENT
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Processing and packing of milk as per standards. Production planning and control. Products manufacturing as per standards. New product development.

MAINTENANCE DEPARTMENT Upkeep and maintenance of machines. Ensuring timely processing, through supply of steam, chilled water, power etc.

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ACCOUNTS AND FINANCE DEPARTMENT

Finance Manager

Assistant Manager

Assistant Accounts Officer

Junior Superintendents

Senior Assistant

Junior Assistant

Office Attenders

The accounts and finance department consist of a manager, assistant accounts officer, junior superintendent, senior assistant and office assistants. The department has to keep records about the interest paid to NDDB, the insurance provided for building, vehicles plant and machinery etc. The departments prepare profit and loss account and balance sheet and send it to the Head Office. The department has to ensure that the salaries due to employees are paid in time. They are also considered with the preparation the budget and ensuring that the entries are properly posted in the books of accounts. They also see that the tax is paid in time; the store consumption account is also kept to prepare the profit and loss.

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ACCOUNTING SYSTEM: The accounting system of the unit is the double entry system i.e. for every credit there is a debit. All the transactions are computerized. Trial balance and profit and loss account are repaired half yearly. A uniform system is designed according to the NDDB. Separate books are maintained for each items. AUDIT: The section is computerized, hence auditing is an easy task. There are three types of audits:- internal audit, statuary audit, and co-operative audit Internal audits are done on the daily basis and for this, the auditors are appointed by the dairy. Government does the statutory audits and their remuneration is paid by the union. Co-operative audits are done every year. BUDGET: The budget prepared every year considering the procurement sales, increment in salary and other expenses. Budgets are prepared on the policies set by the KCMMF. All the payments and allocations of funds to other department are strictly on the basis of budgets. Each department, if needed to the renewed should check the amount allocated to each department. The budget prepared is submitted to head office and get approval. Budgets are prepared considering the annual turnover.

SOURCES OF FUNDS: A main source of procurement of funds is NDDB. There are several funds that help to meet the uncertainties. They are price Equalization funds, corpus funds, and farmers welfare funds etc. The working capital is collected from the head office once in fifteen days. ADVANCE REGISTER: It contains cash advance details. Profit and loss account is prepared every month while balance sheet and budget is prepared yearly. Every year auditing takes place in the daily. Register of co-operative societies come and audit every year. The Ambalathara Dairy receives funds from the Head Office and remits all receipt to the Head Office. The Head Office plans and sanctions all the financial budget of the dairy. The Accounting system of the Dairy is Double Entry System. All the transactions are computerized. Trail Balance and Profit and Loss Account are prepared monthly and balance sheets are prepared half yearly .a uniform accounting system is computerized, hence auditing is
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an easy take. There are 3 types of Audit, internal audit, statutory audit and corporate audit. Internal are done on daily basis and for this the auditors are appointed by the dairy. Government does the statutory audits and there remuneration is paid by the union. Corporate Audit is done at the end of every year. The budget is prepared every year considering the procurement, sales, increment in salary and other expenses. Budgets are prepared based on the policies set by KCMMF. All the payment and allocations of funds to other departments are strictly on the basis of budgets. The budget prepared is submitted to the Head Office to get approval. Budgets are prepared considering the annual turnover. A main source of procurement of fund is National Diary Development Board in the form of grant and loan. Every fortnight they send request to the Head Office for giving or estimation of fund requirement The working capital is collected from the Head office once in every fortnight. The total revenue 90% is received from the sale of milk and the rest 10% from the milk products. Every year 1.25% (maximum up to 15 lakhs) of the total turnover has to be paid to KCMMF as loyalty. The total turnover in the year 2008 was Rs. 188 crores. During the deficit of milk in the state, the Dairy will procure milk from other states. They will have certain milk contracts with other states. The payment mode varies from state to state. For Kamataka state, it is on credit weekly payment, where as for Tami! Nadu, the payment is made in advancement mode. Important books and records maintained in the Department are: Cash book: This book is maintained for cash receipts and payments. Bank book: It contains cash receipts and payments with the Bank. General Ledger: bank transactions, Cash transactions etc. Journals: Other than cash and bank transactions, every other details come in journals, i.e., all the credit transactions. Cash book, Bank book, General Ledger and Journals are computerized, while subsidiary registers are manual. Subsidiary registers include: Direct payment register: Security charges, Building Insurance which includes Fire insurance, break down insurance etc. details of taxes and license like provision tax, Building tax, Factory license, Boiler license etc. Purchase details and cash handling of Wages and Salaries of employees. Bill Register: it includes details of purchase bills and service bills.
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PRODUCT PROFILE
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PRODUCT PROFILE
PRODUCTS:Milrna has a range of products. A marketing chain consisting of nearly 4000 retail outlets, across the state ensures availability of milma's products to consumers. Milma with its motto your health is our concern has become synonymous with assured quality of milk and milk products. Milrna's spectrum of products adheres to the PFA rules and is released for distribution only after stringent quality checks. PASTEURIZED MILK Milma pasteurized vitamin A enriched milk comes in three varieties. Jersey milk which contains 3.5% fat and 8.5% SNF. Toned milk which contains 3.0%fat and 8.5% SNF. Smart milk which contains 1.5% fat and 9.0% SNF.

Conveniently packed in 500 ml and 1 liter sachets, the fat content range of MILMA's milk has made it the popular health drink of young and old alike. ICECREAM Milma ice-cream is available in a range of lip smacking flavors: vanilla, chocolate, mango, strawberry and fruit & nut. The only ice-cream in Kerala market which is manufactured in a dairy and hence most fresh ice cream. SAMBHARAM Sambharam (butter milk) a favorite beverage of Kerala. Milma sambharam, the only product of its kind in the market, is very popular throughout the state. It comes in convenient 200ml throw away sachets. CURD It is a fermented product prepared from pasteurized skim milk using curd culture from National Dairy Research Institute (NDRI). It is delicious, tasty, free from cholesterol and available in 500ml and bulk. GHEE Ghee is a key ingredient in most Indian delicious. Milma produces good quality, pure ghee from butter or cream at all dairies. The ghee is available in convenient packs of 50g to 15kg.

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BUTTER Milma butter prepared from the cream of milk contains 81% fat and less than 15.6% water. This is available in convenient lOOgrn, 200gm,and 500gm family packs. Available in salted and unsalted varieties. SIP-UP Made from pasteurized skim milk, sweetened and flavoured. Available in 25ml polyethylene tube in flavours like vanilla, pineapple, strawberry, mango, and rose etc., and served in chilled condition. It is a safe and nutritious substitute to all other sip-ups. SRIKHAND Srikhand is a semi-soft sweetish sour, whole milk product prepared from lactic fermented curd. The basic ingredient of srikhand is jack fruit. REFRESH In addition to milk drinks, Milma also has a mango drink in the market. Refresh , Milma's mango drink is a favorite in the drink sector, 200ml terra pack and 500ml pet bottles are available. PEDA An indigenous milk product manufactured by evaporating water content from wholesome cow's milk and sweetened with cane sugar. It is a nutritious and delicious sweet bite for children. It is available in 20gm. FLAVORED MILK Milma offers a range of flavored health drinks in hygienic 200ml bottle. Cardamom milk has already captured the market and are available at all milma outlets and strawberry, chocolate, pineapple, and mango flavors are also available in the market.

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ASSOCIATES OF THE COMPANY Milma is in constant touch with other organizations in this sector. It is only through this active exchange that rnilma grew from a small dairy cooperative to the position it holds in Kerala today. The company's chief associates are: National Dairy Development Board NDDB, under Dr. V Kurian's guidance set up KCMMF in 1980. Ever since then, there has been a very close co-operation between NDDB and the federation. NDDB are the originators of the Operation Flood Programme and have been our funding agent for the Operation Flood Projects in Kerala Amul The dairy co-operatives of Gujarat have been the inspiration for the development of such a vast network of dairy co-operatives in kerala. Among the co-operatives in Gujarat, the Kerala District co-operative Milk Producers Unions(Amul) is the first in this sector. Our cooperatives are called "Anand Pattern Co-operative Societies" following the illustrious lineage of "Amul". Government of Kerala The phenomenal success of the dairy co-operatives in Kerala could not have been achieved, without the foundation of animal husbandry activities, led by the Animal Husbandry Department, Dairy development and Kerala Livestock Development Board, of the Government of Kerala.

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CHAPTER -3 LITERATURE REVIEW


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REVIEW OF LITERATURE
"Cash is the lifeblood of business" is an oft- repeated aphorism amongst financial managers. Working Capital Management refers to the management of current or short term assets and short term liabilities. Components of short term assets include inventories, loans and advances, debtors, investments and cash and bank balances. Short term liabilities include creditors, trade advances, borrowings and provisions. The major emphasis is however on short term assets, since short-term liabilities arise in the context of short terms assets. It is important that companies minimize risk by prudent working capital management.

What affects working capital management? Organizations are generally focused on cash, accounts payable and supply chains issues. The other hand, external issues like the legal and business environment or internal mechanisms like organization structure, information systems can significantly impact working capital. Owing to market pressures, companies are led to paying a lot of attention to producing good quarterly results quarter after quarter. Undue focus on this may sometime produce a flattering but inaccurate snapshot of working capital performance. This also happens in companies that have a marked seasonality of operations with working capital requirements varying widely from quarter to quarter.

Measures to improve working capital management The essence of effective working capital management is proper cash flow forecasting. This should take into account the impact of unforeseen events, market cycles, loss of a prime customer and actions by competitors. The effect of unforeseen demands of working capital should be factored in. It pays to have contingency plans to tide unexpected events. While market leaders can manage uncertainty better, even other companies must have risk management procedures. These must be based on objective and realistic view of the role of working capital. Addressing the issue of working capital on a corporate wide basis has certain advantages. Cash generated at one location can well be utilized at another. For this to happen, information access, efficient banking channels, good linkages between production and billing, internal systems to move cash and good treasury practices should be in place.

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Milma Dairy and its system of Management Major decisions on raising and allocating funds or financial resources, policies regarding management of working capital are done by senior officers of finance department.

Components of working capital of Milma Dairy It should be noted that components off working capital may vary from concern to concern. This is because it depends upon several factors like nature of the firm and size of the organization and requirement in particular. An appraisal of the balance sheet of the milma dairy gives the following list of components of current assets and liabilities.

Classification of Working Capital Like any other concern Milma dairy too has a classification for working capital. It has classified its working capital requirement into permanent working capital and temporary working capital. Permanent Working Capital: The minimum amount of current assets which are kept by a firm over the entire year to ensure uninterrupted course of operation. The minimum amount of current assets referred to as permanent working capital. It is also termed as regular working capital or core working capital or fixed working capital. It may be noted that this amount of fixed working capital vary from years to year, depending upon the changes in production and sales as a result of seasonal changes. Temporary Working Capital: Any amount over and above the permanent level of working capital. It represents additional current assets required to meet fluctuations during the operating years. As it fluctuates according to the level of operation, it is termed as fluctuating in inventories will fluctuate or fall. Practically temporary working capital is required to meet the liquidity requirements for short term obligations.

MODE OF FINANCING WORKING CAPITAL The financial executives are always interest in obtaining the working capital at the right time, at a reasonable cost and at the best possible favorable terms. In any concern a part of working capital investment are permanent are permanent investments in fixed assets. Because there always minimum level of current assets which are continuously required by the enterprise.

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LONG TERM SOURCES OF WORKING CAPITAL Issue of shares: This is the most common method of raising the permanent working capital. Every company generally uses this method. The maximum amount of permanent working capital can be raised by the issue of shares. Floating of debentures: It is also an important source of long term working capital. Long term loans: Long term loans are one of the important sources of permanent working capital. Financial institutions and commercial banks provide loans for augmenting long term working capital needs and for meeting additional margin money requirements for working capital arising increase in volume of operations, expansions, diversifications etc. Public deposits /loans: The next alternative is public deposits. Many companies accept deposits as permanent working capital from their members, directors and the general public. This mode of raising funds is becoming popular these days on account of bank credit becoming quiet costlier. Sale of Unwanted Assets: it is also one of the alternative source of permanent working capital. Considerable amount or unutilized assets of land, building, machinery, furniture, scrap and loose tools etc. Private loans: Lending private institutions and private banks are granting permanent working capital at a fixed rate of interest against securities to meet the operational expenses. Equipment leasing: Companies can get the permanent working capital assistance by offering equipment leasing facilities. Financial institutions and commercial banks provide facilities for leases indigenously procured imported machinery and equipment for a period of 5 to 8 years with a 90% principal amortization through lease rentals over the period.

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MEDIUM AND SHORT TERM SOURCES OF WORKING CAPITAL

INTERNAL SOURCE 1. Depreciation: Depreciation means decrease in the value of asset due to wear and tear, lapse of time, obsolescence, exhaustion and accidents. Depreciation reserve provides a good source of funds for working capital. As it is a non cash expense, and it doesn't represent any cash out lay with the result that part of the profits adjusted for depreciation can be used by management to increase any of the current assets or pay taxes, dividend etc. 2. Taxation provision: Provision for taxation is one of the internal source of medium and short term working capital. Normally there is a time lag between the creations of the provision for taxes and for the actual this provision which remain within the enterprise may be used as a source of working capital. 3. Accrued expenses: Accrued expenses otherwise known as outstanding expenses. The firm can postpone the payment of expenses for shorter period. This constitute as a internal source of medium and short term working capital. 4. Private loans: Lending private institutions and private banks are granting medium and short term working capital at a fixed rate of interest against securities to meet the operational expenses. 5. Reserve and Provisions: it is provided for meeting prospective losses or liabilities, creation of reserves and provision to increase the working capital in the business and strengthen its financial position. Sometimes the amount is not kept in the business as additional working capital but is invested in purchase of outside securities then it is called reserve fund.

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EXTERNAL SOURCES 1. Bank Credit: Bank credit is one of the important sources of medium and short term source of working capital. It is arranged by which a banker allow his customer to borrow money up to a certain limit. 2. Trade Credit: It is a form of medium and short term financing common in all types of business firm, in an advanced technology most buyers are not granted by the seller of raw materials and goods to manufactures and/or wholesalers. It generally takes the form of discount for cash payment on delivery and net future payment. 3. Discounting bills: Companies can get the medium and short term source of working capital assistance by discounting their bills of exchange and promissory notes. These documents are discounted by the banks at a price lower than their face value. 4. Account Receivables Financing: Under this arrangement, the accounts receivables of a business concern is bought by a financing company or money may be advanced on securing of accounts receivables. Normally Milma Dairy provides accounts receivables only for government hospitals 5. Government Assistance: Government undertake a variety of promotional activities which include providing subsidies and short term working capital assistance for the acquisition and installation of energy conversion equipment. It extends the facility of granting loans, tax concession for projects involving in the development and use of indigenous technology and for adopting and development of imported technology as well as high risk and high return ventures. 6. Customer Credit: This is also known as installment credit as it is usually allowed by retailers for selling consumer durable goods. Some portion of the cost price of the asset is paid at the time of delivery and the balance is paid in number of installments along with interest. Financial companies or commercial banks grant sometimes installment credit, which has special arrangement with the suppliers. 7. Loans from Directors: A business firm may resort to miscellaneous source of finance. There are two elements in the business cycle that absorb cash. Inventory (stocks and work-in-progress) and Receivables (debtors owing you money). The main sources of cash are payables (your creditor) and Equity and Loans.

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SOURCES OF WORKING CAPITAL OF MILMA DAIRY The long term sources are granted from NDDB and fund from head office. The medium and short term sources are depreciation, taxation provision, reserves and provisions, trade credit and accounts.

FORECASTING OF WORKING CAPITAL REQUIREMENTS Forecast of the overall working capital position is an important tool of cash planning. Working capital analysis forecast the value of current assets and current liabilities to know the cash position of the business. In Milma Dairy forecasting is done at every 15 days to check the cash position of the business.

CONCEPTS OF WORKING CAPITAL There are two concepts of working capital - Gross and Net 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 and include cash, short term securities, debtors, bills receivable (accounts receivables or book debts) 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 (accounts payable), bills payable and outstanding expenses. Net working capital can be positive or negative. A positive net working capital will arise when current asset exceed current liabilities. A negative net working capital occurs when current liabilities are in excess of current assets. ESTIMATING WORKING CAPITAL NEEDS Current Assets Holding Period. To estimate working capital requirement on the basis of average holding period of current assets and relating them to costs based on the company's experience in the previous years. This method is essentially based on the operating cycle concept. Ratio of Sales. To estimate working capital requirements as a ratio of sales on the assumption that current change with sales. Ratio of Fixed Investment. To estimate working capital requirements as a percentage of fixed investment.

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DETERMINANTS OF WORKING CAPITAL Nature of business: The working capital requirement of the firm is closely related to the nature of its business. A service 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. On the other hand, a manufacturing concern like a machine tools unit, which has a long operating cycle and which sells largely on credit, has a very substantial working capital requirement. Seasonality of operations: Firms, which have marked seasonality in their operations usually, have highly fluctuating working capital requirements. If the operations are smooth and even throughout the year the working capital requirement will be constant and will not be affected by the seasonal factors. Production policy: A firm marked by pronounced seasonal fluctuations in its sales may pursue a production policy, which may reduce the sharp variations in working capital requirements. Market conditions: The market competitiveness has an important bearing on the working capital needs of a firm. When the competition is keen, a large inventory of finished goods is required to promptly serve customers who may not be inclined to wait because other manufactures are ready to meet their needs. In view of competitive conditions prevailing in the market the firm may have to offer liberal credit terms to the customers resulting in higher debtors. Thus, the working capital requirements tend to be high because of greater investment in finished goods inventory and account receivables. On the other hand, a monopolistic firm may not require larger working capital. It may ask customer to pay in advance or to wait for some time after placing the order. Conditions of Supply: The time taken by a supplier of raw materials, goods, etc. after placing an order, also determines the working capital requirement. If goods as soon as or in a short period after placing an order, then the purchaser will not like to maintain a high level of inventory f that good. Otherwise, larger inventories should be kept e.g. in case of imported goods. Business Cycle Fluctuations: Different phases of business cycle i.e., boom, recession, recovery etc. also effect the working capital requirement. In case of recession period there is usually dullness in business

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activities and there will be an opposite effect on the level of wor5king capital requirement. There will be a fall in inventories and cash requirement etc Credit policy: The credit policy means the totality of terms and conditions on which goods are sold and purchased. A firm has to interact with two types of credit policies at a time. One, the credit policy of the supplier of raw materials, goods, etc., and two, the credit policy relating to credit which it extends to its customers. In both the cases, however, the firm while deciding the credit policy has to take care of the credit policy o the market. For example, a firm might be purchasing goods and services on credit terms but selling goods only for cash. The working capital requirement of this firm will be lower than that of a firm, which is purchasing cash but has to sell on credit basis.

WORKING CAPITAL CYCLE Cash flows in a cycle into, around and out of a business. It is the business's life blood and every manager's primary task is to help keep it flowing and to use the cash flow to generate profits. If a business is operating profitably, then it should, in theory, generate cash surpluses. If it doesn't generate surpluses, the business will eventually run out of cash and expire. The faster a business expands, the more cash it will need for working capital and investment. The cheapest and best sources of cash exist as working capital right within business. Good management of working capital will generate cash will help improve profits and reduce risks. Bear in mind that the cost of providing credit to customers and holding stocks can represent a substantial proportion of a firm's total profits. There are two elements in the business cycle that absorb cash - Inventory (stocks and work-in-progress) and Receivables (debtors owing you money). The main sources of cash are Payables (your creditors) and Equity and Loans.

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DIAGRAM OF WORKING CAPITAL CYCLE

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OPERATING CYCLE
Operating cycle is also known as Cash Cycle. There is a time lag between the sale of a product and the realization of cash. In order to earn sufficient profits a firm has to depend on its sales activities apart from others. The continuing flow is from cash to supplier, suppliers to investors, investors to accounts receivables and back in cash. The duration of time required to complete the following sequence of events, in case of a manufacturing firm is called the operating cycle. In other words, the time gap is technically termed as operating cycle. 1. Conversion of cash into raw materials 2. Conversion of raw materials into work-in-progress 3. Conversion of work-in-progress into finished goods 4. Conversion of finished goods into accounts receivables and 5. Conversion of accounts receivables into cash. In the case of non-manufacturing firm, the operating cycle will include the length of time required to convert Cash into inventories Inventories into accounts receivables Accounts receivables into cash. In the case of service, financial concerns may not have any inventory at all. Thus the operating cycle include the length of time taken for conversion of cash into debtors and then into cash.

RECEIVABLES MANAGEMENT Account receivables describe the amount of cash, goods or services owed to business by a client or customer. The manner, in which the collection of outstanding bills is handled, especially in a small business, can be a pivotal factor in determining a company's profitability. Getting the sale is the first step of the cash flow process, but all the sales in the world are of little use if monetary compensation is not forth coming. Moreover, when a business has trouble collecting what it is owed; it also often has trouble paying off the bills (accounts payable) it owes to others.

CASH MANAGEMENT Cash plays a vital role in the entire economic life of a business. Cash is the basic component of input, required to make payment to its suppliers, to meet day to day operating expenses of any firm. Therefore, it is essential for a business to maintain adequate balance of
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cash. Thus cash management is one of the key areas of working capital management. The basic objective of financial management is to match the inflows and outflows of cash and ensure the liquidity and adequate of a concern during a particular period.

INVENTORY MANAGEMENT Managing inventory is a juggling act. Excessive stocks can place a heavy burden on the cash resources of a business. Insufficient stocks can result in lost sales, delays for customers etc. the key is to know how quickly your overall stock is moving or put another way how long each item of stock sit on shelves before being sold. Obviously average stock-holding periods will be influenced by the nature of the business. Inventories are stock of the product a company is manufacturing for sale and components that make up the product. The various forms in which inventories exist in a manufacturing company are: Raw materials are those basis inputs that re converted into finished product through the manufacturing process. Raw materials inventories are those units, which have been purchased and stored for future productions. Work-in-progress inventories represent those products that products for sale. are semi-manufactured products. They need more work before they become finished

Finished goods inventories are those completely manufactured products, which are ready for sale. Stocks of the raw materials and work-in-process facilitate production, while stock of finished goods is required for smooth marketing operations. Thus the inventories serve as a link between the production and the consumption of goods. The levels of the three kinds of inventories for the firm depend on the nature of the business. A manufacturing firm will have substantially high level of finished goods inventories and no raw material and work-in progress inventories within manufacturing firm, there will be differences.

OBJECTIVES OF INVENTORY To study the inventory policies and practices in Milma. To analyze the distribution network of Milma products. To find out the ratios using management of inventory. To analyze the performance of stores. To give suggestions.
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INVENTORY MANAGEMENT IN MILMA


The term inventory implies the aggregate of tangible assets which are finished goods, work-in-progress and materials and supplies. Since inventories reflect the investment of firms funds, it is necessary to have an efficient management of inventory. A firm in order to survive should have requisite level of inventories means interruption of production and sales operations whereas excessive inventories means accumulation of idle funds and increase in carrying cost. Therefore with the help of an efficient inventory management a proper balance between these 2 extreme situations should be maintained for smooth operation of the business. The prime objective for all supply chain is to provide customers with what they want, when they want it. Inventory management plays a central role in every chain need to satisfy its customers. Despite its importance to supply chain, inventory is not universally well understood. It is variously characterized, both positively and negatively, as an economic asset to a noneconomic producing use of capital fund. Only when considered in light of all quality, customer service and economic factors from the view points of purchasing, manufacturing, sales and finance does the whole picture of inventory become clear. The view point, effective inventory management is essential to supply chain competitiveness. An attempt has been made in this study to evaluate the performance of Trivandrum Dairy through the technique of inventory management.

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RATIO ANALYSIS
Ratio analysis is a widely used tool of financial analysis. The term ratio in it refers to the relationship expressed in mathematical terms between two individual figures or groups of figures connected with each other in some logical manner and are selected from financial statements of the concern. The ratio analysis is based on the fact that a single accounting figure by itself may not communicate any meaningful information but when expressed as a relative to some other figure, it mat definitely provide some significant information. A ratio helps to express the relationship between two accounting figures in such a way that users can draw conclusions about performance, strengths and weakness of firms. A 'ratio' is an arithmetical expression of relationship between two related or interdependent items .When ratio are calculated on the basis of accounting information they are called 'Accounting Ratio'. Accounting ratio is the arithmetical relationship between two accounting variables but they assume significance if these variable have cause and effect relationship. The ratio are designed to show how one number is related to another .It is worked out by dividing one number by another. Ratio are customarily presented either in the form of a co efficient or a percentage or as a proportion .The ratio analysis is the one of the most important tools of financial analysis. It is the process of establishing and interpreting various ratios. Financial ratios provide clues to the financial portion of a concern. Ratio analysis involves methods of calculating and interpreting financial ratios to assess the firm's performance. Ratio analysis of a firm's financial statement is of interest to shareholders, creditors and firms own management. Ratio analysis is the starting point in developing the information desired by the analyst. Ratio analysis provides only a single snapshot, the analysis being for one given point or period in time. In ratio analysis it is possible to compare the company ratio with a standard one. It is the way by which financial stability and health of a concern can be judged .these are indicators of financial strengths, soundness, positions or weakness of an enterprise. The following four steps are involved in the ratio analysis: Selection of relevant data from the financial statement depending upon the objectives of the analysis Calculation of appropriate ratios from the above data. Comparison of the calculated ratios with the ratio of the same firm in the past or the ratios developed from projected financial statements. Interpretation of the ratios

OBJECTIVES OF RATIO ANALYSIS Ratios are regarded as the true test of earning capacity, financial soundness and operating efficiency of a business organization. In other words, the objectives of using ratios in accounting and financial position and operating efficiency of an enterprise.
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When the relationship between two figures of the balance sheet is established the ratio so calculated is called balance sheet ratio eg: current ratio, quick ratio etc. if the relationship between the figures of profit and loss account is established the result so found is regarded as income statement ratio. E.g.: Net Profit Ratio, Return on equity share holder fund, return on total assets etc. When the relationship of figures in income statement and balance sheet is established it is called combined ratio or inter statement ratio. E.g.: Net profit to total capital employed etc.

SIGNIFICANCE OF RATIO ANALYSIS AS A TOOL OF FINANCIAL ANALYSIS Ratios are exceptionally useful tool with one can judge financial performance of enterprise over a period of time. The efficiency of the enterprise can also be judged against the industry average. The ratio analysis helps the analyst to form a judgment whether performance of the firm at a point of time is good, questionable or poor. The analysis will also indicate whether the financial conditions of the firm is improving or deteriorating and whether the cost, profitability or efficiency is showing an upward or downward trend. Ratio should be used with extreme care and considered judgment because they suffer from serious drawn back. Some of them are Ratios can sometimes be misleading if an analyst does not know the reliability and soundness of the figures from which they are computed and the financial position of the business at other times of the year. The mechanics of ratio construction are not as important as the proper interpretation of the ratios. They call attention to certain aspects of the business, which need detailed investigation before arriving at any final conclusion. Price level changes make ratio analysis difficult. Ratio can never be the substitute of raw figures. At the time of interpretation, therefore raw figures should also be referred to.

WORKING CAPITAL RATIO ANALYSIS Working capital ratios indicate the ability of a business concern in its current obligation as well as its efficiency in managing the current assets for generation of sales.

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These ratios are applied to evaluate the efficiency with which the firm manages and utilizes its current assets. The following are the two important categories of ratios used for analyzing efficiency of working capital management in Milma-Dairy.

FINANCIAL ANALYSIS
LIQUIDITY RATIOS (SHORT- TERM LIQUIDITY) Liquidity ratios measure the short term solvency, i.e., the firm's ability to pay its current dues and also indicate the efficiency with which working capital is being used. Commercial banks and short-term creditors may be basically interested in the ratios under this group. They comprise of following ratios:

Current ratio Current ratio is a relationship of current assets to current liabilities. 'Current assets' means the assets that are either in the form of cash or cash equivalents or can be converted into cash or cash equivalents in short time (say within a year) like cash, bank balances, marketable securities, sundry debtors, stock, bills receivables, and prepaid expenses.

'Current liabilities' means liabilities repayable in as short time like sundry creditors, bills payable, outstanding expenses, bank overdraft. The ratio is calculated as follows: Current ratio = current assets current liabilities

Liquid ratio or Quick ratio or Acid test ratio Liquid ratio is a relationship of liquid assets with current liabilities. It is fairly stringent measure of liquidity. Liquid assets are those assets which are either in the form of cash or cash equivalents or can be converted into cash within a short period. Liquid assets are computed by deducting
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stock and prepaid expenses from the current assets. Stock is excluded from liquid assets because it may take some time before it is converted into cash. Similarly, prepaid expenses do not provide cash at all and are thus, excluded from liquid assets. The ratio is calculated is as under: Liquid ratio = liquid assets current liabilities

SOLVENCY/LEVERAGE RATIOS (LONG-TERM SOLVENCY) The term 'solvency' implies ability of an enterprise to meet its long term indebtness and thus, solvency ratios convey the long term financial prospects of the company. The shareholders, debenture holders and other lenders of the long-term finance/term loans may be basically interested in the ratios falling under this group. Following are the different solvency ratios:

Debt-equity Ratio The debt-equity ratio is worked out to ascertain soundness of the long term financial policies of the firm. This ratio expresses a relationship between debt (external equities) and the equity (internal equities). Debt means long-term loans, i.e., debentures, public deposits, loans (long term) from financial institutions. Equity means shareholder's funds, i.e., preference share capital, equity share capital, reserves less losses and fictitious assets like preliminary expenses. Te ratio is calculated as under: Debt Equity Ratio = Debt (long term loans) equity (shareholders fund)

Total Assets to Debts Ratio The total asset to debt ratio establishes a relationship between total assets and the total long-term debts. Total assets include fixed as well as current assets. However, fictitious assets like preliminary expenses, underwriting commission, share issue expenses, discount on issue of shares/debentures, etc., and debit balance of profit and loss account are not included. Long-

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term debts refer to debts that will mature after one year. It includes debentures, bonds, and loans from financial institutions. This ratio is computed as under: Total assets to debt ratio = Total asset long-term debts

Proprietary ratio The proprietary ratio establishes a relationship between proprietor's fund and total assets. Proprietor's fund means share capital plus reserves and surplus both of capital and revenue nature. Loss, if any, should be deducted. Funds payable to others should not be added. This ratio is worked out as follows: Proprietor's Ratio = proprietors fund or shareholders fund Total assets

Total Debt Ratio Total debt ratio is a relationship of Total Debt of a firm to its Capital Employed. This ratio is calculated as under. Total debt ratio = Debt Capital Employed

Fixed Assets to Capital Employed Ratio Fixed assets to Capital employed ratio gives the amount of fixed assets as a percentage of the capital employed of the company. This ratio is calculated as follows: Fixed assets to capital employed = Net fixed assets Capital employed x 100

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Inventory to Net Working Capital Ratio Inventory to Net working Capital Ratio tells how much of a company's funds are tied up in inventory. The formula is as under: Inventory to Net Working Capital = Inventory Net Working Capital

PROFITABILITY RATIOS Profit as compared to the capital employed indicated profitability of the concern. A measure of 'profitability' is the overall measure of efficiency. The different profitability ratios are as follows:

Net Profit ratio The Net profit ratio establishes the relationship between net profit and net sales, expressed in percentage form. Net Profit is derived by deducting administratitive and marketing expenses, finance charges and making adjustments for non-operating expenses and incomes. This ratio is calculated as follows: Net Profit Ratio = Net Profit After Taxes Net Sales x 100

Return on Total Assets Profitability can be measured in terms of relationship between net profit an total assets. This ratio is also known as return on gross capital employed. It measures the profitability of investment. The overall profitability can be known by applying this ratio.

Return on Total Asset =


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Net Profit After Tax 100 Total Asset


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COVERAGE RATIOS Interest Coverage Ratio The interest coverage Ratio establishes the relationship between PBIT (Profits Before Interest and taxes) and Debt interest. It is calculated as: Interest Coverage Ratio = Profit Before Interest and Taxes Debt Interest

ACTIVITY (TURNOVER OR PERFORMANCE) RATIOS Turnover indicates the speed with which capital employed is rotated in the process of doing business. Activity ratios measure the effectiveness with which a concern uses resources at its disposal. The following are the important activity (turnover or performance) ratios:

Capital Turnover Ratio Capital Turnover ratio establishes between the Net Sales and the Capital Employed of a firm. This ratio is computed with the help of the following formula: Capital Turnover Ratio = Net sales Capital Employed

Working Capital Turnover Ratio The working capital turnover ratio indicates the number of times a unit invested in working capital produces sale. In other words, this ratio shows the efficiency in the use of short-term funds for achieving sales. Working capital is computed by deducting current liabilities from current assets. A careful handling of the short-term assets and funds will mean a reduction in the amount of capital employed thereby improving turnover.
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The ratio is calculated as follows: Working Capital Turnover Ratio = Net Sales Working Capital

Inventory Turnover ratios a) Raw Material Inventory Turnover This ratio is calculated as follows: Raw Material Inventory Turnover Ratio = Raw Material Consumed Average raw Material Inventory b) Finished Goods Inventory Turnover Ratio This ratio is calculated as follows: Finished Goods Inventory Turnover Ratio = Net Sales Average Finished Goods Assets Turnover Ratios Asset turnover measures a firms efficiency at using its assets in generating sales or revenue - the higher the number the better. It also indicates pricing strategy: companies with low profit margins tend to have high asset turnover, while those with high profit margins have low asset turnover. A high asset turnover ratio indicates the capability of the organization to achieve maximum sales with the minimum investment in assets. It indicates that the assets are turned over in the form of sales more number of times. Higher the ratio, better will be the situation. a) Total Assets Turnover This ratio is computed using the following formula: Total Assets Turnover Ratio = Net Sales Total Assets b) Fixed Assets Turnover This ratio is calculated as follows: Fixed Assets Turnover Ratio = Net Sales Fixed Assets Fixed assets include net fixed assets, i.e., fixed assets after providing for depreciation

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c) Current Assets Turnover Current Assets Turnover Ratio = Net Sales Current Assets

Debtors Turnover Ratio The ratio will be computed as: Debtors Turnover Ratio = Net credit sales Average Sundry Debtors

Creditors Turnover Ratio It implies the credit period enjoyed by the firm in paying creditors. Creditors Turnover Ratio = Net Credit Purchase Sundry Creditors + Bills Receivables This ratio also expressed in days. Then it is known as creditor's payment period or creditor's velocity

Creditors Velocity = Creditors + Bills Payable Net Credit Purchase x 360

Return On Investment [ROI] The overall objective of a business is to earn a satisfactory return on capital invested. The management and owners are very much interested in the rate of earning on the capital employed. The rate of earning on capital employed is referred to as ROI. This is the overall profitability ratio. This is used as a measure of success of a business. It is computed as follows:ROl = Operating Net Profit Capital Employed x 100

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