INTRODUCTION Working capital management is significant in financial management due to the fact that it plays a vital role in keeping

the business enterprise running. The management of the working capital of vital importance and forms a major work load function of finance manager and his team in every organization. The working capital of any business is the capital required to fund its current assets .The term current assets current assets refer to those assets in which the ordinary course of business can be or will be converted into cash with in a year, without undergoing a diminishment in value and without disrupting the operations of the firm. The major current assets are cash, bank balance, marketable securities and account receivables, inventories, prepaid expenses and short-term advances etc., Working capital management is concerned with the problems that arise in attempting to manage the current assets, current liabilities and inter- relations that exist between them. The net working capital is the difference between the current assets and current liabilities. Current liabilities are those liabilities, which are intended at their inception to be paid in the ordinary course of business with in a year, out of the current assets or earning of the concern. The current liabilities includes creditors of purchase of goods, accounts payable, Bills-payable, bank over drafts, short-term borrowings, outstanding expenses, advances received against the sales, taxes due, dividends payable and other liabilities maturing with in a year. Management of working capital is therefore, the management of current assets and current liabilities of a company. Gross Working Capital According to this concept, Working capital refers to the firms investment in current assets. The amount of current liabilities is not deducted from the total of currents assets.

Net Working Capital The net working capital refers to the difference between current assts and current liabilities. Positive or negative. Positive net working capital will arise when current assets exceed current liabilities. A negative net working capital occurs when currents liabilities are in excess of current assets. Need for the study: The need for the working capital or current assets to form the day-to-day business activities cannot be over emphasized. We can hardly find a business firm that does not require any amount of working capital. Indeed different requirement of the working capital. It is well known that any firm aims at maximizing shareholders wealth. To attain this, a firm should earn a steady amount of profit, which requires successful sales activity. Current assets are needed because sales cannot convert into Cash instantly since there is always an operating cycle involved in the conversion of sales into cash. I opted this topic to identify the various sources to get working capital to met the day-to-day operations and the maximum utilization of the working capital in a profitable means. NEED FOR WORKING CAPITAL The objective of financial management i.e. maximization of wealth of shareholder, cannot be attained if the operations of the firm are not optimized. Thus every firm must have adequate working capital. It should have neither the excessive working capital nor inadequate working capital. Both the situations are risky and may have dangerous outcome. The excessive working capital when the investment in working capital is more than the required level, may result in: a. Unnecessary accumulation of inventories resulting in waste, theft, damage etc. b. Delay in collection of receivables resulting in more liberal credit terms to customers than warranted by the market conditions.

c. Adverse influence on the performance of the management. The inadequate working capital situation, when the firm does not have sufficient working capital to support its operations is also not good for the firm. Such a situation may have following consequences. a) The fixed assets may not be optimally used. b) Firms growth may stagnate. c) Interruption In production schedule may occur ultimately resulting in lowering of the firms growth. d) The firm may not be able to take the benefit of an opportunity. e) Firms goodwill in the market is affected if it is not in a position to meet its liabilities on time. f) Inadequate working capital may result in loss of sales. g) It may also lead to insolvency of the firm. Scope of the study: Working capital is the live blood of any business firm. As a matter of fact, any Organization, whether profit oriented or otherwise, will not be able to carry on its day-to-day activities without adequate working capital. It being increasingly realized that the inadequacy or mismanagement of working capital is the leading cause of the Business failure. Problems may cause due to the inadequate working capital. Manager has to forecast the problems of working capital and should suggest the improvement of the profits; hence I think my project on working capital management will help in order to maintain sufficient working capital required level of production. Objectives of the study: 1. To study the existing system of working capital management in M/s.

Integrated Thermoplastics Limited.

2. capital. 3. capital. 4.

To study the financial ratios etc., this covers the purview of the working

To examine the feasibility of the present system of managing working

To suggest the better way for improving the working capital management.

Research methodology & Database: The methodology of study inter-relations is to understand the procedural aspects of Thermoplastics Company and then to proceed with analysis of the financial performance. Name of data Source of data : company profile, financial results of years of period of Study. : Annual financial reports. : Directly approached to company.

Collection methods

Tools and techniques : Financial statements. Limitations of the study: 1. The study is limited to working capital management of SUDHAKAR PVC PIPES LIMITED only. 2. It may not be suitable for the other PVC pipes manufacturing companies. 3. The analysis may vary from time to time according to different production schedules. 4. The study is confined to past few years only

MANAGEMENT OF WORKING CAPITAL Introduction: The management of the working capital is vital importance to companies and forms a major workload function of finance manager and accountant. It is the amount of fund, which a company must have to finance its day-to-day operations. It is an integral part of overall corporate management. The working capital of any business is the capital required to funds its current assets. Working capital management is concerned with the problems that arise in attempting to manage the Current Assets, the Current Liabilities and the inter-relations that exist between them. The Net Working is the difference between the current assets and the liabilities and the inter-relations that exist between them. The term current assets refer to those assets in which the ordinary course of business can be or will be converted in to cash within a year, without undergoing a diminishment in value and disrupting the operations of the firm. The major current assets are cash, marketable securities, accounts receivables and inventories. The term current liabilities are those liabilities that are intended at their inception to be paid in the ordinary course of business with in a year out of the current assets or earning of the concern. The current liabilities include accounts payable, bills-payable, bank overdrafts and outgoing expenses. Management of working capital therefore is the management of current assets and liabilities of the company. IMPORTANCE OF WORKING CAPITAL We will hardly find a running business firm, which does not require same amount of working capital. Even a fully equipped manufacturing firm is sure to collapse if it cannot meet any of the following requirements:

1. An adequate supply of raw material for manufacturing process. 2. Cash to meet the wage bill and other expenses. 3. The capacity to wait for the market for its finished products sale. 4. The ability to grant credit to their customers. Similarly, a commercial enterprise virtually good for nothing without merchandising. Working capital is the live blood of the business organization. As a matter of fact, any organization, whether profit oriented or otherwise, will not be able to carry on To-day activities without adequate working capital. For day-to-day operations of a business a study of working capital is a must. . Neglect of management of working capital needs may result in technical insolvency and even liquidation of business unit. Inefficient working capital is dangerous for the organization. Factors influencing Working Capital Requirements Nature of business The working capital requirement of a firm is closely related to the nature of its business. Service firms like an electricity undertaking or a transport corporation, which has a short operating cycle and which sells redominantly 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. To illustrate, consider a firm manufacturing air coolers. The sale of air coolers reaches a peak during the summer months and drops sharply during the winter period. The working capita need of such a firm is likely to increase considerably in summer months and decrease significantly during the winter period. On the other hand, a firm manufacturing a product like lamps, which have fairly even sales round the year, tends to have stable working capital needs. Production policy A firm marked by pronounces seasonal fluctuation in its sales may pursue a production policy, which may reduce the sharp variations in working capital requirements. For example a manufacturer of air coolers may maintain a steady production throughout the year rather than intensity the production activity during the peak business season. Such a production policy may dampen the fluctuations in working capital requirements. Market conditions The degree of competition prevailing in the market place has an important bearing on working capital needs. When competition is keen, larger inventory of finished goods is required to promptly serve customers who may not be inclined to wait because other manufacturers are ready to meet their needs. Further, generous credit terms may have to be offered to attract customers in a highly competitive market. Thus, market capital needs tend to be high because of greater investment in finished goods inventory and accounts receivable. If the market is strong and competition weak, a firm can manage with a smaller inventory of finished goods because customers can be served with some delay. Further, in such a situation the firm can insist on cash payment and avoid lock-up of funds in accounts receivable it can even ask for advance payment, partial or total. Conditions of supply

The inventory of raw materials, spares, and stores depends on the conditions of supply. If the supply is prompt and adequate, the firm can manage with small inventory. However, if the supply is unpredictable and scant then the firm, to ensure continuity of production, Would have to acquire stocks as and when they are available and carry larger inventory on an average. A similar policy may have to be followed when the raw material is available only seasonally and production operations are carried out round the year. Permanent working capital The magnitude of the current assets depends upon the firms operating cycle. The operating cycle is a continuous process and the need for current assets is also continuous. But the level of current assets needed is not always same. It increases or decreases over time. However, there is always minimum level of current assets, which is continuously required by a firm to carry out its business operations. The minimum level of current assets is called permanent working capital. Variable working capital The working capital required over and above the permanent working capital depends upon the changes in production and sales are called fluctuating or variable working capital. There may be changes either increase or decrease in working capital. Working capital is variable mostly in seasonal goods manufacturing companies. Operating cycle The time that elapses between the purchase of raw material and collection of cash for sales is called operating cycle. Operating cycle period The length or time duration of the operating cycle of any firm can be defined as the sum of its inventory conversion period and the receivable conversion period.

Inventory conversion period It is the time required for the conversion of raw material in to finished goods. In a manufacturing firm the inventory conversion period is consisting of raw material conversion period, work-in-progress conversion period and the finished goods conversion period. The raw material conversion period refers to the period for which the raw material is generally kept in stores before it is issued to the production department. The work-inprogress conversion period for which the raw materials remain in the production process before its taken out as a finished unit. The finished goods conversion period refers to the period for which finished units remain in stores before being sold to the customers. Receivables conversion period Its the time required to convert the credit sales into cash realization. It refers to the period between the occurrence of credit sales and collection of debtors. Gross operating cycle = Inventory conversion period + receivables conversion period. Net operating cycle Deferred period. Deferred period The firm might be getting some credit facilities from the supplier of raw materials, wages/ salaries earners etc., this period for which the payments to these parties are deferred or delayed is known as deferral period. Raw material conversion period = Average value of raw material stock = Inventory conversion period + receivables conversion period

Average cost of consumption of raw material per day Work in progress conversion period = Average work-in-progress Average cost of goods sold per day Finished goods conversion period= Average stock of finished goods Average cost of goods sold per day Debtors conversion period = Average value of receivables Average value of sales per day Payables deferral period = Average level of creditors

Average purchases of raw materials per day

Components of working capital Current Assets: Current assets defined as either cash or those assets that can be converted into cash within the current year. The major components of these current assets are cash and bank balance, inventories, accounts receivable, short-term deposits, investments, advance payments and prepaid expenses. Cash and bank balances: Cash and bank balances are most liquid assets. All payments are made through cash or bank payments. Inventories: These are the materials, commodities or goods used in day-to-day operation of production or in the form of finished goods. These include raw materials, work-in-progress and finished goods.

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Accounts receivables: These are short-term debts owned by company arising from credit sales made to customers of the firm. Advances: These represent amount paid for which the goods and services have not yet received, including advances given to suppliers and employees, advance tax payments made etc,. Short-term deposits: These are deposits kept in banks to meet the future expenses when they fall due. These deposits will earn interest also.

Current liabilities: Liabilities are the claims against the company to be paid in the ordinary course of business with in a year, out of earnings of the company. Short-term loans: Money borrowed from various banking and non-banking sources for short periods of time. Other liabilities: These include tax payments due with in one year and proposed dividends and other payments to be made. Accounts payable: Payable against purchases of raw materials, packing material, intermediaries and others for manufacture of finished goods. Generally credit period is allowed for a short period of time. Bills payable: Against purchase bills may be accepted and payable with in a short period of time.

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Bank overdraft: With the consonant of the banks a business unit can get short-term credits and overdrafts. Bank generally allows these credits keeping the view of credit worthiness of the organization and management. These are to be repaid in short term to the bank. Outstanding expenses: Expenses due but not paid.

MEANS TO INCREASE WORKING CAPITAL 1. With a reasonable working capital, a firm can concentrate either; a). Increase in sales without increasing inventory, receivables and bank Financing. b). Reduction in receivables, inventory or blank financing while maintaining sales at their current levels. A defensive move is to construct format contingency plan to combat working Capital. 2. Investing surplus cash to earn interest. The investment should be done after defining the objectives and ruling the benefits, seeking in an order of rankingsecurity-maturity-liquidity-and yield.

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Welcome to Sudhakar Group of Industries

SUDHAKAR Group of Industries situated at Andhra Pradesh, INDIA, playing a significant role in PVC & HDPE pipe sector. SUDHAKAR Group established in 1971 with a product range to manufacture Electrical Conduits. Over the years the group emerged as a potential leader in Rigid PVC Pipes & HDPE pipes and fittings and also made its foray into different piping system solutions. Promoted by a visionary entrepreneur, this group has played a pioneer role in the field of PVC & HDPE piping products. By being innovative and quality conscious, SUDHAKAR Group distinguished itself from other organizations as a company having an inbuilt culture of High Customer Care. SUDHAKAR has now progressed from strength to strength, and has bagged many prestigious awards, millions of happy and satisfied customers and attained leadership in this field of PVC & HDPE Pipes & Fittings. Nationwide dealership network and service back up facilities, dedicated sales force and timely delivery makes SUDHAKAR more closer to customers. Since SPL has a long production cycle, it has to hold substantial amount of cash, investment and Receivable accounts to commensurate with its requirement. SPL sources of Working Capital constitute capital in work in progress, investments, and inventories, holding of debtors, cash & bank balance, loans & advance and also

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other corporate deposits. SPL also gets Working Capital from various provisions like provisions for gratuity, depreciation. Current Liabilities include Sundry Creditors, provisions and other Current Liability and Out standings. The unit also has world-class quality assurance systems in place. The company ensures products of uncompromising quality meeting all relevant ISI, BS, DIN and ASTM standards with a view to effectively cater, to the needs of the International markets. Integrated thermoplastics limited has achieved ISO 9001-2000 accreditation on 2003 in implementing and maintaining quality systems management with the scope of PVC pipes and became a member of selected brand of elite group of companies. In addition extensive R&D facilities provide reliable and committed support for new product development. TECHNICAL INFORMATION SPL rigid PVC pipes are manufactured in accordance with Indian standards specifications 4985:1998 and other international specifications. The company also manufactures special ranges of commercial pipes under different ranges to satisfy the customer requirements. SPL PVC pipes are normally manufactured in uniform length of 6 meters with plain ends both the sides and also with self socked one side. Varied length can be manufactured according to the customer requirement. Integrated Thermoplastics Limited is manufacturing rigid PVC pipes from 20mm to 400 mm in conformity to ISI 4985:2000 and other international specifications. QUALITY CONTROL ASSURANCE Integrated Thermoplastics Limited is having well equipped quality testing machines in their labs as per the ISI standards for testing of all diameters and gets excellent result. We at SPL Pipes are proud to say that we follow world-class QCM

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(Quality control management) techniques in our Quality Control lab to achieve the best quality. Stringent quality control tests are regularly conducted to ensure top quality production of PVC products. MAINTENANCE AND SERVICE This company is better equipped with excellent workshop to provide maintenance and service of machinery in electrical, mechanical and civil lines all the time, We assure service at any time to enable our equipment and machinery to perform efficiently, thus reducing production down time. EXPLORING NEW HORIZONS: EXPORTS Integrated Thermoplastics Limited are trying very hard in exporting their products like rigid PVC pipes of water, electrical conduits and SWR pipes to Middle East, Europe, Africa and other Asian countries. Taking an example our esteemed overseas customers, we are proud to say that we are associate with CEYLON ELECTRICTY BOARD SRILANK supplying electrical conduits to their project requirements. . DYNAMIC WORK FORCE The dynamic work force is the strong base for the success of the company. The administrative as well as the technical staff are well qualified and skilled. The company follows the specialization of work, which helps the company to assign the right job to the right person. The technical staff at the manufacturing units is well versed in the field of production, which generates new innovative ideas and concepts. All the workers are dedicated to work and responsible for their work done. DISTRIBUTION NETWORK One of the most important parts of the companys effective functioning in the competitive market is its distribution network. The company has its own dealers network with a number of nearly more than 100 dealers through out the state. The company has its own vehicles for transportation which helps the Sales department to cater the needs of the customers at the right time and at the right place.

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MARKET NETWORK Integrated Thermoplastics Limited covers the national level markets, but their main target market areas are Andhra Pradesh, Karnataka, Tamil Naidu, Maharashtra, Bihar and Jharkhand etc. DISTRIBUTION CHANNELS The company has got two levels of distribution channels they are, 1) Zero Level 2) Single Level

ZERO LEVEL Manufacturer 2 SINGLE level Manufacturer dealer customer customer

PRODUCTS OF THE COMPANY Irrigation & Potable water supply systems:

PVC Pipes and Fittings HDPE Pipes and Fittings Garden pipes

Plumbing systems:

UPVC Plumbing systems 16

PP-RC Plumbing systems CPVC Plumbing Systems

Water Extraction Systems:

Casing pipes Bore well Column pipes

Waste & Water disposal systems:

SWR pipes and fittings UG piping systems

Water Conservation Systems:

Drip Irrigation systems Sprinkler Irrigation Systems

Water Storage systems:

Cylindrical vertical tanks Rectangular Loft tanks

Cable protection systems:

Electrical Conduits and conduit fittings UPVC Ducts and accessories Pre Lubricated HDPE ducts and duct accesso

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SIGNIFICANT ACCOUNTING POLICIES

Basis of accounting The financial statements are prepared under historical costs convention on an accrual basis and are in compliance with accounting standards referred to in Section 211 (3c) of the companies act, 1956, except in case of AS-15 Accounting for Retirement Benefits in the financial statements of employers.

Fixed Assets Fixed assets are stated at cost less accumulated depreciation. cost comprises of the purchase price and any attributable cost of bringing the asset to working condition less excise duty taken as CENVAT credit, for its intended use. Depreciation Depreciation on Fixed Assets is provided on straight-line method at the rates specified from time to time in Schedule xiv of the Companies Act, 1956. Depreciation on additions/deductions during the year is calculated pro-rata from/to date of additions/deductions.

Investments Long-term investments are carried at cost including accrued interest thereon. Inventories Inventories of finished goods are valued at cost or market price whichever is lower. Whereas, raw material and semi-finished reusable scrap and stores and valued at cost on FIFO basis.

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Sales Sales comprises of invoiced value of goods supplied net off discounts and returns. Miscellaneous expenditure i) Preliminary Expenditure:

Preliminary and public issue expenses are being written off over a period of ten year. Staff benefits The provisions of Accounting Standard 15 on Accounting for Retirement Benefits in the financial Statement of employers, issued by the council of The institute of Chartered Accountants of India is being complied with by the company under the provident fund Act. Prior period and Extra-Ordinary items Income and expenditure pertaining to prior period as well as extraordinary items, where material, are disclosed separately. Accounting for taxes on income The company has unabsorbed losses available for set off under the income Tax Act, 1961. However in view of the present uncertainty regarding generation of sufficient further taxable income, deferred tax assets at the year end including related credit for the year have not been recognized in the accounts on prudent basis, as per the accounting standard 22 Accounting for taxes on income issued by the institute of Chartered Accountants of India.

Shri. Meela Satyanarayana Founder Shri. Meela Satyanarayana, the founder of the group is a freedom fighter, teacher turned businessman and industrialist. His contribution to the plastics industry especially in the Southern India is acclaimed by many organizations. President of Andhra Pradesh Plastic Manufacturers Association in 1984, Joint Secretary of All India PVC Pipes Manufacturers Association, New Delhi in 1985. He is the first entrepreneur to start a

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PVC pipe manufacturing unit in Andhra Pradesh. Municipal Chairperson of Suryapet for the Period 1989 92, and present term 2006-2010, Chairmen and Founder of the Sudha Co-Operative Urban Bank Ltd. Suryapet, Andhra Pradesh. He is recipient of many awards such as

"Bharata Ratna Makshagundam Vishveshwaraiah Memorial Small Scale Entrepreneur Award" "Vijayaratna", "HMA Small Scale Entreprenuer Award" Best Industrialist Award. Govt of Andhra Pradesh, India.

Shri. Meela Satyanarayana is a self made Industrialist and is a good manager. His valuable suggestions and advices to the boards of all companies will always enhance the managerial capabilities of the Boards.

WORKING CAPITAL OF SPL

Rs. Lakhs PARTICULARS CURRENT ASSETS INVENTORIES BOOK DEBTS CASH/BANK BALANCES LOANS AND ADVANCES 43744 84558 845 14287 56606 84880 957 12859 58130 85001 899 11763 72540 81237 1280 11612 63246 82829 473 9104 200506 200607 200708 200809 200910

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SUB

TOTAL

14343 4

15530 2

15579 3

16666 9

155652

(B) CURRENT LIABILITIES ADVANCES FROM CUSTOMERS SUNDRY CREDITORS OTHER LIABILITIES PROVISIONS SUB ( C) NET WORKING CAPITAL (C) (B)TOTAL

29116

28822

31636

32228

44162

19484 4295 10843 63738

22543 4549 8376 64290

29738 2824 8931 73129

27610 2612 11977 74427

20637 3353 16838 84990

79696

91012

82664

92242

70662

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From the above table

SPL, is having a good Working Capital. By comparing the

Working capital of past 5 years we can that there was a steady increase from 2005-06 to 2006-07. Although there was a decrease in 2007-08, the Working Capital has considerably increased in the financial year 2008-09. And again there is been a decrease in the year 2009-10 where compared to the remaining years it is due to decrease in cash balances and also due to maintenance of more provisions.

STATEMENT OF CHANGES IN WORKING CAPITAL THE YEAR 2004-05 AND 2005-06 (Rs Lakhs) Particulars Current Assets: Inventories Book debts Cash/Bank Bal Loans and Advances Total(a) Current Liabilities: Advances From Customers Sundry Creditors Other Liabilities Provisions Total (b) 2004 05 39869 71736 718 11767 124090 28036 13871 2877 10638 55422 2005 06 43744 84558 845 14287 143434 29116 19484 4295 10843 63738 1080 5613 1418 205 3875 12822 127 2520 Increase Decrease

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Net Working Capital (a-b) Net Increase In

68668 11028 79696

79696 11028 79696 19344 19344

Working Capital Total

From the above table There is an increase in working capital during this year as compared to previous year. It is due to increase in inventories and book debts. With this we can conclude that it is maintaining an efficient working capital.

STATEMENT OF CHANGES IN WORKING CAPITAL THE YEAR 2005-06 AND 2006-07 (Rs Lakhs)

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Particulars Current Assets: Inventories Book debts Cash/Bank Bal Loans and Advances Total (a) Current Liabilities: Advances From Customers Sundry Creditors Other Liabilities Provisions Total (b) Net Working Capital(a-b) Net Increase Working Capital Total In

2005 06 43744 84558 845 14287 1473434 29116 19484 4295 10843 63738 79696 11316 91012

2006 07 56606 84880 957 12859 155302 28822 22543 4549 8376 64290 91012

Increase

Decrease

12862 322 112 1428 294 3059 254 2467

11316 91012 16057 16057

From the above table during this year there is a significant increase in working capital as compared to previous year, it is due to increase in inventories and also due to the reduction in maintenance of provisions. Overall it has good working capital.

STATEMENT OF CHANGES IN WORKING CAPITAL THE YEAR 2006-07 AND 2007-08 (Rs.in Lakhs) Particulars Current Assets: 24 2006-07 2007-08 Increase Decrease

Inventories Book debts Cash/Bank Bal Loans and Advances Total (a) Current Liabilities: Advances From Customers Sundry Creditors Other Liabilities Provisions Total (b) Net Working Capital(a-b) Net decrease Working Capital Total in

56606 84880 957 12859 155302 28822 22543 4549 8376 64290 91012

58130 85001 899 11763 155793 31636 29738 2824 8931 73129 82664 8348

1524 121 58 1096 2814 7195 1725 555

8348 11718 11718

91012

91012

From the above table In this year there is a decrease in working capital as compared to the previous year, it is due to increase in sundry creditors and also maintenance of more provisions. At last we can conclude that working capital is unsatisfactory.

STATEMENT OF CHANGES IN WORKING CAPITAL THE YEAR 2007-08 AND 2008-09 (Rs.in Lakhs) Particulars Current Assets: Inventories 2003 04 58130 2004 05 72540 14410 Increase Decrease

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Book debts Cash/Bank Bal Loans and Advances Total Current Liabilities: Advances From Customers Sundry Creditors Other Liabilities Provisions Total Net Working Capital(a-b) Net Increase Working Capital Total In

85001 899 11763 155793 31636 29738 2824 8931 73129 82664 9578 92242

81237 1280 11612 166669 32228 27610 2612 11977 74427 92242

3764 381 151

592 2128 212 3046

9578 92242 17133 17133

From the above table. There is an increase in working capital in this year as compared to previous year. It is because of increase in inventories and cash balances, which has increased current assets to current liabilities. Overall we can conclude that working capital is satisfactory. STATEMENT OF CHANGES IN WORKING CAPITAL THE YEAR 2008-09 AND 2009-10 (Rs.in Lakhs) Particulars Current Assets: Inventories Book debts Cash/Bank Bal Loans and Advances Total (a) Current Liabilities: 2004 05 2005 06 Increase Decrease

72540 81237 1280 11612 166669

63246 82829 473 9104 155652

9294 1592 807 2508

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Advances

From

32228 27610 2612 11977 74427 92242

44162 20738 3253 16838 84990 70662 21580 6872

11934

Customers Sundry Creditors Other Liabilities Provisions Total (b) Net Working Capital(a-b) Net decrease Working Capital Total In

641 4861

21580 30045 30045

92242

92242

From the above table

During this year working capital has shown adverse balances

as compared to previous year. it is due to slash down in maintenance of inventories and cash balances which has lead to decrease in current assets to current liabilities. at last it has unsatisfactory working capital

RATIO ANALYSIS
INTRODUCTION: Ratio analysis is one of the techniques of financial analysis where ratios are used as a yardstick for evaluating the financial condition and performance of a firm. Analysis and interpretation of various accounting ratios gives skilled and experienced analyst, a better understanding of the financial condition and performance of the firm than what he could have obtained only through a perusal of financial statements. MEANING OF RATIOS: Ratios are relationships expressed in mathematical terms between figures which are connected with each other in some manner. Obviously, no purpose will be served by comparing two sets of figures which are not at all connected with each other. Moreover, absolute figures are also unfit for comparison. 27

There are various techniques or models for analyzing information contained in the financial statements viz. Comparative statements, Common Size Statements, Trend Percentages, Funds Flow Analysis, Cash Flow Analysis and Ratio Analysis. Financial analysis is undertaken by the management of the firm or by parties outside to it viz. owners, creditors, investors etc. Ratio Analysis is most widely used and powerful tool or technique of financial analysis. The term ratio refers to the numerical or quantitative relationship between two variables. It shows arithmetical relationship between two figures, which can be expressed in three ways.

Percentage Fraction Proportion

A study of the trend of strategic ratios helps the management in planning, forecasting and decision making. It helps in identifying specific work areas. In short, though the technique of ratio analysis, the firms solvency, efficiency and profitability can be assessed. IMPORTANCE OF RATIO ANALYSIS

Ratio analysis helps in simplifying the financial statement for easy understanding. It helps in drawing out meaningful conclusion from the information provided in the financial statements which is useful for decision making and framing sound policies for business in future.

It helps in assessing the financial strength and weakness of the firm and thus enhances the value of the financial statements. Comparative study of the ratios between the competing firms helps to know the efficiency of the firm. It helps the investor to assess the financial position of the concern in which he is going to invest. Ratio analysis helps the employees interested in wage increase and fringe benefits that are related the volume of profits earned by the concern.

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Ratio analysis provides data for inter firm comparison. Ratios highlight the factors associated with successful and unsuccessful firms. They also reveal strong firms and weak firms, over valued and under valued firms.

Ratio analysis helps in planning and forecasting. Over a period of time a firm or industry develops certain norms that may include future success or failure. If relationship changes in firms data over different time periods, the ratios may provide clues on trends and future problems.

Ratio analysis also makes possible comparison of the performance of the different divisions of the firm. The ratios are helpful in deciding about their efficiency or otherwise in the past and likely performance in the future.

Thus, ratios can assist management in its basic function of forecasting, Planning, coordination, control and communication. LIMITATIONS OF RATIO ANALYSIS

Ratios are of limited use and thus single ratio may not be useful. Better interpretation is possible with the calculation of number of ratios, which may lead to confusion to the analyst in making any meaningful conclusion.

Ratios are calculated on the basis of past results, which may not necessarily true indicators of the future, if the business policies are constantly changing. Change in accounting procedure may be misleading for ratio analysis. For example, change in inventory valuation methods from LIFO to FIFO may also influence in the analysis.

Ratio analysis considers only quantitative aspect, but not qualitative factors. Ratio analysis may give misleading results if the effects of price level changes are not considered. Ratio analysis when interpreted by different people in different way may encounter with the personal bias or prejudice of the analyst.

CLASSIFICATION OF RATIOS Ratios are classified in a number of ways, depending upon the basis of classification. The basis for classification can be 1. The financial statements from which the figures for comparison of ratios are derived. It is called Traditional classification.

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2. The tests or functions of the ratios. It is called Functional classification. 3. The importance of the ratios. 4. The point of time in relation to which ratios are calculated. 5. The usage of ratios. 6. The nature of ratios. 1. Traditional Classification: Ratios are classified on the basis of the financial statements from which the figures used for calculation are taken. The ratios are classified as Balance sheet ratios, Profit and Loss Account ratios and Mixed ratios. 2. Functional Classification: Ratios are classified as liquidity ratios, profitability ratios and earning ratios. Liquidity ratios test the liquidity of business i.e. its ability to repay its short term liabilities out of short term assets (eg. Current ratio, Quick ratio, Stock Turnover ratio, Creditors Turnover ratio etc). Profitability ratios indicate the profitability of the business (eg. Gross profit ratio, Return on Capital Employed etc). Earnings ratios indicate the return to the owners or shareholders of the business (eg. Earnings per share, Dividend pay out ratio etc) 3. Classification on the basis of importance of Ratios: Ratios are classified as Primary ratios and secondary or supporting ratios. Primary ratios are more 4. important for the purpose of analysis and interpretation (eg. Return on capital Employed). The other ratios which support or explain the primary ratio are called secondary ratios (eg. Operating Profit ratio etc.) 5. Classification on the basis of point of time: Ratios are classified as Structural ratios and Trend ratios. Structural ratios are calculated from the data relating to some point of time, say a particular accounting year. Trend ratios are computed from the data relating to different periods of time. 6. Classification on the basis of usage: Ratios are classified as Ratios for Management, Ratios for Creditors and Ratios for Shareholders. Ratios for management indicates efficiency of management (eg. Operating ratios, stock turnover ratios etc). Ratios for creditors help in ascertaining the short term, long term solvency of the business undertaking (eg. Current ratio, creditor turnover ratio, Debt Equity ratio etc) Ratios for shareholders help the shareholders in

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assessing the fruitfulness of their investment (eg. Earnings per share, Return on capital employed etc). 7. Classification on the basis of nature of ratios: Ratios are classified in to liquidity (or short term solvency) ratios, leverage (or capital structure or long term solvency) ratios, Turnover (or Activity or Performance) ratios and Profitability ratios. This is the most widely accepted classification of ratios and this classification has been followed for explaining the various ratios. Ratios may be classified in a number of ways keeping in view the particular purpose. Ratios indicating profitability are calculated on the basis of the profit and loss account, those indicating financial position are computed on the basis of the balance sheet and those which show operating efficiency or productivity or effective use of resources are calculated on the basis of figures in the profit and loss account and the balance sheet. This classification is rather crude and unsuitable to determine the profitability and financial position of the business. To achieve this effectively, ratios are classified as. 1. Liquidity ratios 2. Leverage ratios 3. Coverage ratios 4. Activity ratios (or) turnover ratios 5. Profitability ratios 1. LIQUIDITY RATIOS: Liquidity Ratios is also known as short term solvency. These ratios are used to measure the firms ability to meet short term obligations. They compare short term obligation to short term (or current) resources available to meet these obligations. From these ratios, much insight can be obtained into the present cash solvency of the firm and the firms ability to remain solvent in the event of adversity. The creditors of the firm are primarily interested in the short term solvency of the firm. A firms liquidity should be neither too high nor too low but adequate. Low liquidity implies the firms inability to meet its maturing obligations. This will result in bad credit rating, loss of creditors confidence or even technical insolvency, ultimately leading to the closure of the firm.

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A very high liquidity position is also bad. It means that the firms current assets are too high in proportion to maturing obligations. Idle assets earn nothing to the firm. The firms funds will be unnecessarily locked up in current assets, which if, released can be used to generate profits to the firm. The ratios, which measure, and indicate the extent of a firms liquidity, are known as liquidity ratios or short term solvency ratios. Commonly used liquidity ratios include.

Current ratio (or) working capital ratio Quick ratio (or) acid test ratio Cash position ratio (or) super stock quick ratio LEVERAGE RATIO:

2.

These ratios are also known as Capital Structure ratios or Solvency ratios or Capital Gearing ratios. The long term creditors are more concerned with the firms long term financial position. They judge the financial soundness of the firm in the firm in term of the ability to pay interest promptly as well as making repayment of the principal. The long term solvency of the firm can be examined with the help of leverage ratios. They measure the funds supplied by owners as compared with the financial provided only a small proportion of total financing, the risks of the business are borne mainly by the creditors. Firm with low leverage have less risk of loss, but they also have lower expected returns. Conversely, firms with high leverage ratios have the risk of large losses but also have a chance of earning huge profits. Therefore, before deciding whether a firm should have debt, it must balance higher expected returns against increased risks. The most commonly examined leverage: ratios are

Debt equity ratio Proprietary ratio Debt to capital ratio Gross fixed assets to shareholders funds Fixed assets ratio

3. COVERAGE RATIOS: These ratios indicate the extent to which the interests of the persons entitled to get a fixed return (i.e., interest or dividend) or a scheduled repayment as per agreed terms are safe.

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The higher the cover the better it is. Under this category the following ratios are calculated.

Fixed interest coverage ratio Fixed dividend coverage ratio Debt service coverage ratio ACTIVITY RATIO (OR) TURNOVER RATIO:

3.

The finances obtained by the firm from its owners and creditors will be inverted in assets, which the firm uses to generate sales and profits. The amount of sales generated and the profit earned depend on the effective and efficient management of these assets by the firm. Activity ratios measure the efficiency with which the firm manages and uses its assets. That is why activity ratios are known as efficiency ratios, because these ratios are converted or turned over in to sales. Thus, the turnover or activity ratios measure the relationship between sales on one side and various assets on the other side. Higher the turnover ratio, the better the profitability and use of capital. Many activity ratios can be calculated to measure the efficiency of assets utilization. Following are some of the important activity ratios:

Total assets turnover ratio Capital employed turnover ratio Fixed assets turnover ratio Current assets turnover ratio Working capital turnover ratio Stock turnover ratio Debtors turnover ratio Creditors turnover ratio PROFITABILITY RATIOS:-

4.

Profitability is the ability to make profits. Every firm should earn adequate profits in order to survive in the immediate present and grow in future. In fact, profit is what makes the business run. Profitability is the net results of a large number of policies and decisions. Profitability ratios give final answers about how efficiency the firm is

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managed. The profitability ratios relate profits earned by a firm by its parameters like sales, capital employed and net worth. But while making ratio analysis relating to profits, it should be remembered that there are different concepts of profit such as contribution, gross profits, net profits, EBIT, operating profits, profits before depreciation and before tax etc. Profitability ratios are important for a concern. These ratios are calculated to enlighten the end results of business activities, which is the sole criterion of the overall efficiency of a business concern. The following are the important profitability ratio which are based on. 1. Sales 2. Investment

Gross profit ratio Operating raito Operating profit ratio Net profit ratio Return on capital employed Return on shareholders equity Return on total assets Earning per share Dividend pay out ratio

1. CURRENT RATIO: In times YEAR 2005-06 2006-07 2007-08 CURRENT ASSETS 143434 155302 155793 CURRENT LIABILITIES 63738 64290 73129 RATIO 2.25 2.41 2.13

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2008-09 2009-10

166669 155652

74427 84990

2.23 1.83

The ratio equal to or near to 2:1, i.e., current assets double the current liabilities is considered to be satisfactory. In the context of SPL, the current ratio is more than standard. It has always been above 2. Thus it is an indication of decrease of 0.2% , as it does not make much difference. 2. QUICK RATIO In times YEAR 2005-06 2006-07 QUICK ASSETS 99690 98696 CURRENT LIABILITIES 63738 64290 RATIOS 1.56 1.53 efficiency of the firm of maintaining current assets. But as on the year 2009-10 there is a slight

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2007-08 2008-09 2009-10

97663 94129 92406

73129 74427 84990

1.33 1.26 1.09

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As a convention Quick Ratio of 1:1 is considered satisfactory. From the above analysis we can see that Quick Ratio for the past five years has been above 1 which is good, even though it is in a decreasing trend. 3. ABSOLUTE QUICK RATIO (OR) CASH RATIO (In times) YEAR 2005-06 2006-07 2007-08 2008-09 2009-10 LIQUID ASSETS 845 957 899 1280 473 CURRENT LIABILITIES 63738 64290 73129 74427 84990 RATIO 0.013 0.014 0.012 0.017 0.005

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The acceptable norm for this ratio is 50% or 0.5:1 or 1:2, but the ratios for 2009 as shown in the trend are not according to the standard norms there is no proper maintenance of cash in the current assets.

4. INVENTORY TURNOVER RATIO (In times) YEAR COST OF GOODS SOLD 2005-06 2006-07 2007-08 2008-09 2009-10 C.S=closing stock Cost of goods sold=gross turnover net of exercise duty profit before tax 104269 127545 130749 121566 129833 AVERAGE INVENTORY(OR)C.S 41806 56606 58130 72540 63246 RATIO

2.49 2.25 2.25 1.67 2.05

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We can see that the I.T.R of SPL is rapidly decreasing from 2005-02 to 2008-09. This shows that the rate at which the stock is turned over, during the accounting period, over the past five years is becoming lesser and lesser. And again at the period of 2009-10 there was an increase by 2.05 %. 5. INVENTORY CONVERSION PERIOD YEAR 2005-06 2006-07 2007-08 2008-09 2009-10 NO.OF DAYS IN A YEAR 365 365 365 365 365 INVENTORY TURNOVER RATIO 2.49 2.25 2.25 1.67 2.05 INV.CONV. PERIOD 146 162 162 218 178

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From the above we can say that the Inventory Conversion Period has shown a steady inverse from 2005-06 to 2006-07, although there was a fall in 2007-08. But in the financial year 2008-09 the conversion 6. DEBTORS TURNOVER RATIO (In times) YEAR 2005-06 2006-07 2007-08 2008-09 2009-10 TURNOVER 132265 131972 153205 137838 174490 AVG DEBTORS 78147 84719 84940.5 83119 82033 RATIO 1.69 1.56 1.80 1.66 2.13 period has increased by 56 days. As then there was a decrease by 40 days in the year 2009-10.

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The debtors turnover ratio of SPL has been considerably decreasing from 1.69 in the accounting year 2005-06 to 1.56 in 2006-07, which increased to 1.80 in 2008-09. However, in the next year it again decreased to 1.7 and again there was an increase by 2.13 in the current year 2009-10 . 7.AVERAGE COLLECTION PERIOD YEAR 2005-06 2006-07 2007-08 2008-09 2009-10 NO.OF DAYS IN A YEAR 365 365 365 365 365 DEBTORS TURNOVER RATIO 1.69 1.56 1.80 1.66 2.13 AVG. COLL. PERIOD 216 234 203 220 171

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The Average Collection Period i.e., the duration provided for the collection of debts has been increasing from 216 days in2005-06 to 234 days in 2006-07 but it decreased in 2007-08 to 203 days and again it has increased to 220 in the year 200809 and that after there is a decrease to 171 in financial year 2009-010

8.CREDITORS TURNOVER RATIO (In times) YEAR 2005-06 2006-07 2007-08 2008-09 CREDIT PURCHASES 65934 79819 78387 72202 AVG. CREDITORS 16677.5 21013.5 26140.5 28674 RATIO 3.95 3.80 3.00 2.52

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2009-10

78006

24174

3.23

Here the Creditors Turnover Ratio was 3.95 in the year 2005-06 and has decreased rapidly to 2.43 in 2008-09, which shows that the management is making its payments in time, thus providing its efficiency, and again in the financial year 2009-10 there was an increase by 3.23 even by this there no difference in the efficiency of the management. 9.AVERAGE PAYMENT PERIOD YEAR 2005-06 2006-07 2007-08 NO.OF DAYS IN A YEAR 365 365 365 CREDITORS TURNOVER RATIO 3.95 3.80 3.00 A.P.P 92 96 112

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2008-09 2009-10

365 365

2.52 3.23

145 113

The Average Payment Period has steadily increased from 92 days in 2005-06 to 145 days in 2008-09; this shows the confidence of the creditors in the organization. And suddenly there is a fall by 113 days in the financial year 2009-10 though there is decrease the confidence of the creditors with the organization has no difference. 10.WORKING CAPITAL TURNOVER RATIO In times YEAR 2005-06 2006-07 2007-08 TURNOVER 132265 131972 153205 WORKING CAPITAL 79696 91012 82664 RATIO 1.66 1.45 1.85

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2008-09 2009-10

137838 174490

92242 70662

1.49 2.46

A higher Working Capital Turnover Ratio indicates efficient utilization of Working Capital. But for SPL IS ratio has been decreasing from 1.66 in 2005-06 to 1.49 in 2008-09, although it showed a slight increase of 1.85 in 2007-08 it again decreased in the next year. Again there was an increase in the ratio by 2.46 in current year 2009-10 by which we can tell that there is an efficient utilization of Working Capital. 11.RAW MATERIAL INVENTORY TURNOVER RATIO Rs. Lakhs YEAR RAW MATERIAL CONSUMED 2005-06 63265 AVERAGE RAW MATERIAL INVENTORY 8890.5 7.12 RATIO

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

76903 73677 65085 75818

8953.5 10753 14353.5 16478.5

8.59 6.85 4.53 4.60

The Raw Material Inventory turnover Ratio for the organization has been increasing at a fast pace from 7.12 in 2005-06 to 8.59 in 2006-07,but in the subsequent year 2008-09 there was a decrease and again an increase by 4.60 in the financial year. CONCLUSIONS 1. The ratio equal to or near to 2:1, i.e., current assets double the current liabilities is considered to be satisfactory. In the context of SPL, the current ratio is more than standard. It has always been above 2. Thus it is an indication of decrease of 0.2% , as it does not make much difference. 46 efficiency of the firm of maintaining current assets. But as on in the year 2009-10 there is a slight

2. The acceptable norm for this ratio is 50% or 0.5:1 or 1:2, but the ratios for 2009 as shown in the trend are not according to the standard norms there is no proper maintenance of cash in the current assets. 3.We can see that the I.T.R of SPL is rapidly decreasing from 2005-06 to 2009-10. This shows that the rate at which the stock is turned over, during the accounting period, over the past five years is becoming lesser and lesser. And again at the period of 2009-10 there was an increase by 2.05 %. 4.Here the Creditors Turnover Ratio was 3.95% in the year 2005-06 and has decreased rapidly to 2.43% in 2008-09, which shows that the management is making its payments in time, thus providing its efficiency, and again in the financial year 2009-10 there was an increase by 3.23% even by this there no difference in the efficiency of the management.

5. The Average Payment Period has steadily increased from 92 days in 2005-06 to 145 days in 2008-09; this shows the confidence of the creditors in the organization. And suddenly there is a fall by 113 days in the financial year 6. A higher Working Capital Turnover Ratio indicates efficient utilization of Working Capital. But for SPL IS ratio has been decreasing from 1.66% in 2005-06 to 1.49 in 2008-09, although it showed a slight increase of 1.85% in 2007-08 it again decreased in the next year. Again there was an increase in the ratio by 2.46% in current year 2005-06 by which we can tell that there is an efficient utilization of Working Capital. 7.The Raw Material Inventory turnover Ratio for the organization has been increasing at a fast pace from 7.12% in 2005-06 to 8.59% in 2006-07,but in the subsequent year 2008-09 there was a decrease and again an increase by 4.60% in the financial year.

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SUGGESTIONS

The Net Working Capital is positive for all the past five years except in the year 2009-10, therefore surplus amount should be invested in the short-term bonds. There has been an increase in the Finished Goods Conversion Period, which is mainly due to the increase in the manufacturing cycle time. Thus, it is recommended to reduce the Operating Cycle time to the possible extent. SPL is using ABC analysis partly in the inventory control. It is suggestible to point other methods, such as JIT (Just in Time) and VED (vital Essential Desirable) for managing inventory, wherever applicable, so as to reduce the Cycle period and blockage of excess funds in inventory. As SPL is following the centralized cash management it would be better for the company to follow decentralized system, so that the company can take immediate action to any requirements. The Company should make more efforts to quickly transform the accounts receivables into cash, as the collection period is above the ideal period i.e., 3-4 months or maximum of 120 days. Compared to the 2008-09 scraps, 2009-10 has been increased to 100%, as this indicated a negative sign. Company has to assess its production capability and reasons for pile up of scrap. In addition, it is advisable to dispose sc

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