CH NO.

: CRITICAL REVIEW OF LITERATURE

WORKING CAPITAL - OVERALL VIEW

Working Capital management is the management of assets that are current in

nature. Current assets, by accounting definition are the assets normally converted in
to cash in a period of one year. Hence working capital management can be
considered as the management of cash, market securities receivable, inventories
and current liabilities. In fact, the management of current assets is similar to that of
fixed assets the sense that is both in cases the firm analyses their effect on its
profitability and risk factors, hence they differ on three major aspects:
1. In managing fixed assets, time is an important factor discounting and
compounding aspects of time play an important role in capital budgeting and
a minor part in the management of current assets.
2. The large holdings of current assets, especially cash, may strengthen the
firm’s liquidity position, but is bound to reduce profitability of the firm as ideal
car yield nothing.
3. The level of fixed assets as well as current assets depends upon the
expected sales, but it is only current assets that add fluctuation in the short
run to a business.
To understand working capital better we should have basic knowledge about the
various aspects of working capital. To start with, there are two concepts of working
capital:
 Gross Working Capital
 Net working Capital

Gross Working Capital: Gross working capital, which is also simply known as
working capital, refers to the firm’s investment in current assets: Another aspect of
gross working capital points out the need of arranging funds to finance the current
assets. The gross working capital concept focuses attention on two aspects of
current assets management, firstly optimum investment in current assets and
secondly in financing the current assets. These two aspects will help in remaining
away from the two danger points of excessive or inadequate investment in current
assets. Whenever a need of working capital funds arises due to increase in level of
business activity or for any other reason the arrangement should be made quickly,
and similarly if some surpluses are available, they should not be allowed to lie ideal
but should be put to some effective use.
Net Working Capital: The term net working capital refers to the difference between
the current assets and current liabilities. Net working capital can be positive as well
as negative. Positive working capital refers to the situation where current assets
exceed current liabilities and negative working capital refers to the situation where
current liabilities exceed current assets. The net working capital helps in comparing
the liquidity of the same firm over time. For purposes of the working capital
management, therefore Working Capital can be said to measure the liquidity of the
firm. In other words, the goal of working capital management is to manage the
current assets and liabilities in such a way that an acceptable level of net working
capital is maintained.

Importance of working capital management:

Management of working capital is very much important for the success of the
business. It has been emphasized that a business should maintain sound working
capital position and also that there should not be an excessive level of investment in
the working capital components. As pointed out by Ralph Kennedy and Stewart MC
Muller, “the inadequacy or mis-management of working capital is one of a few
leading causes of business failure.”
Current assets, in fact, account for a very large portion of the total investment of the
firm.

Table showing Current assets as percentage of Total assets

Year Percentage
2007 39.57%
2008 70.24%
2009 73.77%

80
70
60
50
40
30
20
10
0
2007 2008 2009
It can be visualized from the table that in the first year of our study i.e. 2007 it was
39.57% which was increased to 70.24% in the next year and in 2009 it is 73.77%
shows rising trend.

Determinants of Working Capital:

There is no specific method to determine working capital requirement for a business.
There are a number of factors affecting the working capital requirement. These
factors have different importance in different businesses and at different times. So a
thorough analysis of all these factors should be made before trying to estimate the
amount of working capital needed. Some of the different factors are mentioned here
below:-

1. Nature of business: Nature of business is an important factor in determining

the working capital requirements. There are some businesses which require a
very nominal amount to be invested in fixed assets but a large chunk of the
total investment is in the form of working capital. There businesses, for
example, are of the trading and financing type. There are businesses which
require large investment in fixed assets and normal investment in the form of
working capital.
2. Size of business: It is another important factor in determining the working
capital requirements of a business. Size is usually measured in terms of scale
of operating cycle. The amount of working capital needed is directly
proportional to the scale of operating cycle i.e. the larger the scale of
operating cycle the large will be the amount working capital and vice versa.
3. Business Fluctuations: Most business experience cyclical and seasonal
fluctuations in demand for their goods and services. These fluctuations affect
the business with respect to working capital because during the time of boom,
due to an increase in business activity the amount of working capital
requirement increases and the reverse is true in the case of recession.
Financial arrangement for seasonal working capital requirements are to be
made in advance.
4. Production Policy: As stated above, every business has to cope with
different types of fluctuations. Hence it is but obvious that production policy
has to be planned well in advance with respect to fluctuation. No two
companies can have similar production policy in all respects because it
depends upon the circumstances of an individual company.
5. Firm’s Credit Policy: The credit policy of a firm affects working capital by
influencing the level of book debts. The credit term is fairly constant in an
industry but individuals also have their role in framing their credit policy. A
liberal credit policy will lead to more amount being committed to working
capital requirements whereas a stern credit policy may decrease the amount
of working capital requirement appreciably but the repercussions of the two
are not simple. Hence a firm should always frame a rational credit policy
based on the credit worthiness of the customer.
6. Availability of Credit: The terms on which a company is able to avail credit
from its suppliers of goods and devices credit/also affects the working capital
requirement. If a company in a position to get credit on liberal terms and in a
short span of time then it will be in a position to work with less amount of
working capital. Hence the amount of working capital needed will depend
upon the terms a firm is granted credit by its creditors.
7. Growth and Expansion activities: The working capital needs of a firm
increases as it grows in term of sale or fixed assets. There is no precise way
to determine the relation between the amount of sales and working capital
requirement but one thing is sure that an increase in sales never precedes
the increase in working capital but it is always the other way round. So in
case of growth or expansion the aspect of working capital needs to be
planned in advance.
8. Price Level Changes: Generally increase in price level makes the
commodities dearer. Hence with increase in price level the working capital
requirements also increases. The companies which are in a position to alter
the price of these commodities in accordance with the price level changes will
face fewer problems as compared to others. The changes in price level may
not affect all the firms in same way. The reactions of all firms with regards to
price level changes will be different from one other.
CIRCULATION SYSTEM OF WORKING CAPITAL
In the beginning the funds are obtained by issuing shares, often supplemented by
long term borrowings. Much of these collected funds are used in purchasing fixed
assets and remaining funds are used for day to day operation as pay for raw
material, wages overhead expenses. After this finished goods are ready for sale and
by selling the finished goods either account receivable are created and cash is
received. In this process profit is earned. This account of profit is used for paying
taxes, dividend and the balance is ploughed in the business.
Working capital is considered to efficiently circulate when it turns over quickly. As
circulation increases, the investment in current assets will decrease. Fast turnover
current assets results in a better rate on investment.

Table showing Current Assets Turnover Ratio

Year Ratio (in times)

2007 6.18
2008 3.84
2009 5.03
Average: 5.02

7
6
5
4
3
2
1
0
2007 2008 2009
The ratio average is 5.02 times in the study period of 3 years. In 2007 current assets
turnover ratio is highest one i.e. 6.18 during the 3 year study.

Working Capital Cycle

The working capital requirement of a firm depends, to a great extent upon the
operating cycle of the firm. The operating cycle may be defined as the time duration
starting from the procurement of goods or raw material and ending with the sales of
realization. The length and nature of the operating cycle may differ from one firm to
another depending upon the size and nature of the firm. In a trading concern, there
is a series of activities starting from procurement of goods (saleable goods) and
ending with the realization of sales revenue (at
the time of sale itself in the case of cash sales and at the time of debtors realization
in case of credit sales).similarly in case of manufacturing concern, this series starts
from the procurement of raw materials and ending with the sales realization of
finished goods. In both the cases, however, there is a time gap between the
happening of the first event and the happening of the last event. This time gap is
called the operating cycle.

Thus, the operating cycle of a firm consists of the time required for the completion of
the chronological sequences of some or all of the following:
1. Procurement of raw material and services.
2. Conversion of raw material into work-in-progress.
3. Conversion of work-in-progress into finished goods.
4. Sale of finished good (cash or credit)
5. Conversion of receivable into cash
 Raw-material WIP

Cash Finished goods

Account
receivables Sales

WORKING CAPITAL CYCLE (OPERATING CYCLE)

Cash Conversion Cycle

The cash conversion cycle is a measure of working capital efficiency, often giving
valuable clues about the underlying health of a business. The cycle measures the
average number of days that working capital is invested in the operating cycle. It
starts by adding days inventory outstanding (DIO) to days sales outstanding (DSO).
This is because a company "invests" its cash to acquire/build inventory, but does not
collect cash until the inventory is sold and the accounts receivable are finally
collected.

Receivables are essentially loans extended to customers that consume working

capital; therefore, greater levels of DIO and DSO consume more working capital.
However, days payable outstanding (DPO), which essentially represent loans from
vendors to the company, are subtracted to help offset working capital needs. In
summary, the cash conversion cycle is measured in days and equals DIO + DSO –
DPO

To calculate Cash Conversion Cycle, below are some data that have been extracted
from Financial Statement of year 2008 & 2009 of URMUL Dairy:

URMUL DAIRY, BIKANER 2008 2009

From income statement

Net Sales 44, 96, 15,967.85 63, 97,
25,962.42
Cost of goods sold (COGS) 38, 46, 29,178.33 57, 55,
16,647.39

Assets (from balance sheet)

 Current asset:
Closing stock 7, 63, 31,292.31 7, 20, 62,076.24
Sundry debtors 2, 89, 32,658.26 5, 17, 21,936.43

Liabilities (from balance sheet)

Current liabilities:
Sundry creditors 15, 51, 24,583.57 18, 36, 42,314.93

Circled in green are the accounts needed to calculate the cash conversion cycle.
From the income statement, you need net sales and COGS. From the balance
sheet, you need receivables, inventories and payables. Below, we show the two-
step calculation. First, we calculate the three turnover ratios: receivables turnover
(sales/average receivables), inventory turnover (COGS/average inventory) and
payables turnover (purchases/average payables). The turnover ratios divide into an
average balance because the numerators (such as sales in the receivables turnover)
are flow measures over the entire year.
Also, for payables turnover, some use COGS/average payables. That's okay,
but it's slightly more accurate to divide average payables into purchases, which
equals COGS plus the increase in inventory over the year (inventory at end of year
minus inventory at beginning of the year). This is better because payables finance all
of the operating dollars spent during the period (that is, they are credit extended to
the company). And operating dollars, in addition to COGS, may be spent to increase
inventory levels.
The turnover ratios do not mean much in isolation; they are used to compare
one company to another. But if you divide the turnover ratios into 365 (for example,
365/receivables turnover), you get the "days outstanding" numbers.

URMUL DAIRY

Turnover Ratios:
Receivables (Sales / Avg. Receivables) 11.15
= 44, 96, 15,967.85 / Avg. of (2, 89, 32,658.26 & 5, 17, 21,936.43)
 Inventory (COGS / Avg. Inventory)
5.18
= 38, 46, 29,178.33 / Avg. of (7, 63, 31,292.31 & 7, 20, 62,076.24)

Payables (Purchases / Avg. Payables) 2.29

= [38, 46, 29,178.33 + (7, 63, 31,292.31-7, 20, 62,076.24)] / Avg. of
(15, 51, 24,583.57 & 18, 36, 42,314.93)

Days Outstanding (365 / Turnover ratios):

Days Sales Out. (DSO) 33 Days
= 365 / 11.15

Days Inventory Out. (DIO) 70 Days

= 365 / 5.18

Days Payable Out. (DPO) 159 Days

= 365 / 2.29

Cash Conversion Cycle:

CCC = DSO + DIO – DPO = 33 + 70 -159 = (56 Days)

Interpretation:
When a company is paid for sales before it pays for the product it sells, it has much
more financial flexibility. This is called having a negative cash conversion cycle. In
the event that the business is delaying payment on the raw materials until the
finished goods are paid for by the customer, there may also be additional finance
charges that run up the overall raw materials costs. Negative cash cycles can
indicate there is a problem somewhere in the process. A policy of strict collections
and lax payments is not always sustainable.

Analysis of Working Capital

Analysis of working capital is an essential part of financial management. If there is

an adequate amount of working capital and it is utilized in the right manner, it is a
great achievement for the business. The excess of working capital causes financial
stringency and brings the business to a standstill.

Realizing the importance of working capital in financial management the analysis of

working capital becomes an essential phenomenon. It facilitates the adequacy and
management of working capital. The management of working capital provides a
careful inquiry into its components so as to control the working capital and to
conserve it properly. It helps in determining the optimum level of working capital in
the firm. The process of measurement and analysis of working capital is performed
on the basis of financial statements of the business enterprise for past few years.

In the present study the analysis of working capital of URMUL dairy has been made
by two techniques vis., trend analysis and ratio analysis.

Working Capital Trend Analysis

The working capital trend analysis represents a picture of variation in current assets,
current liabilities and working capital over a period of time. Such an analysis enables
us to study upward and downward trend in current liabilities and its effect on the
working capital position. The trend analysis is a tool of financial appraisal where the
changes in the factors are compared with the base year assuming the base year as
100.

In the present study a statement – showing trend of working capital as well as its
structure has been made. It is it scientific and important study because each
component of working capital has got the relationship of causes and effects.

Following table below shows the structure and trend of working capital of URMUL
dairy during the period under review.
 WORKING CAPITAL OF URMUL DAIRY BIKANER DURING
2007 TO 2009
Particulars Amount
(In Rs.)
2006-2007 2007-2008 2008-2009

Current Assets
Famine Fodder Revolving 8,161.87 1,253.55 1,253.55
Fund
Closing Stock 4,15,34,935.59 7,63,31,292.31 7,20,62,076.24
Loan and Advances 14,87,015.44 19,70,333.14 17,06,846.16
Sundry Debtors 2,15,82,465.76 2,89,32,658.26 5,17,21,936.43
Cash-in-Hand 2,99,513.00 38,916.00 1,11,206.00
Bank Accounts 44,97,509.83 98,21,008.62 16,50,820.37
Rent-ParlorATM Receivable - - 10,500.00
(A)Total Current Assets 6,94,09,601.49 11,70,95,461.88 12,72,64,638.75

Current Liabilities
Outstanding Liabilities 1,01,18,291.50 22,88,376.70 24,04,644.00
Security Deposit 73,66,989.65 93,13,498.05 79,54,573.05
Duties & Taxes 1,35,396.38 6,43,107.00 7,88,255.12
Sundry Creditors 14,12,26,186.81 15,51,24,583.57 18,36,42,314.93
Due to staff & staff loan 97,51,686.80 2,41,84,698.70 2,03,59,659.75
Still Cheque A/C - - 77,797.00
Stock tr. to Units 9,43,503.23 3,69,575.09 11,97,455.73
(B) Total Current Liabilities 16,95,42,054.37 19,19,23,839.11 21,64,24,699.58

Working capital (A-B) (10,01,32,452.8) (7,48,28,377.23) (8,91,60,060.83)

Interpretation:
The working capital requirement is the minimum amount of resources that a
company requires to effectively cover the usual costs and expenses necessary to
operate the business. Situation in which the current liabilities of a firm exceed its
current assets. For example, if the total of cash, Marketable Securities, Accounts
Receivable and notes receivable, inventory and other current assets is less than the
total of Accounts Payable short-term notes payable, long-term debt due in one year,
and other current liabilities, the firm has a negative working capital. Unless the
condition is corrected, the firm will not be able to pay debts when due, threatening its
ability to keep operating and possibly resulting in bankruptcy.
If the working capital requirement reveals a higher negative ratio from
previous periods even though long-term debt was reduced, this may indicate an
issue with decreased sales and earnings or other factors that are causing a
lessening of needed capital.

Ratios Useful To Analyze Working Capital Management

The ratio analysis of working capital can be used by management as a means of

checking upon the efficiency in working capital management of the company.
Following ratios have been used to analysis and interpret working capital of URMUL
dairy.
 Current ratio
 Quick ratio
 Absolute ratio
 Stock or inventory turnover ratio
 Working capital turnover ratio

CURRENT RATIO: -

Meaning: -Current Ratio is the relationship between total current assets and total
current liabilities. Current Ratio is calculated to find out the firm’s short-
term solvency. It indicates the rupees of current assets available for each
rupee of current liabilities.
current Assets
Formula: - Current Ratio = current liabilitie s
Composition: - Current Assets means those assets which can be, in ordinary
course of business, converted into cash within a period not exceeding one year such
as cash, bank, debtors, bills receivables, stock, prepaid expenses. Current
Liabilities means those obligations which are to be paid within a period of one year
out of current assets or by creation of current liabilities such as creditors, bills
payable, bank overdraft, short term loans, outstanding expenses, provision for tax.

Ideal Ratio: - 2:1

Significance: -The higher the current ratio, the larger the amount of rupees
available per rupee of current liabilities, the more the firm’s ability to meet the current
obligations and the greater the safety of funds to short term creditors. Thus current
ratio, in a way, provides a margin of safety to the creditors. “A good current ratio may
mean a good umbrella for creditors against raining days, but to the management it
reflects bad financial planning or presence of idle assets or over capitalization.”

CURRENT RATIO

CURRENT CURRENT LIABILITIES

YEAR CURRENT RATIO
ASSETS
(A) (B) (C) (B)/(C)
2006-2007 6,94,09,601.49 16,95,42,054.37 0.41
2007-2008 11,70,95,461.88 19,19,23,839.11 0.61
2008-2009 12,72,64,638.75 21,64,24,699.58 0.59
 0.7
0.6
0.5
Current Ratio

0.4
0.3
0.2
0.1
0
2006-07 2007-08 2008-09

Interpretation:
Table reveals that Current Ratio of URMUL is very low throughout the study period.
Current Ratio was 0.61 in 2007-08 and 0.41 in 2006-07 which are the highest and
lowest in the study period.

The low degree of current ratio indicates the poor financial strength in short term.
Generally the current ratio should be 2:1 .It means that firm should have 2 Rs for the
liability of Rs 1 but URMUL is having Rs. 0.59 in year 2008-09 against Rs. 1
liabilities, which indicates less liquidity and hence less amount of working capital.
Thus creditors are not safe in URMUL.

QUICK (LIQUIDITY) RATIO: -

Meaning: - Quick Ratio is the measure of the instant debt paying ability of the
business enterprise. It is a ratio between liquid assets and current liabilities.
liquid assets
Formula: - Quick Ratio = current liabilitie s
Composition: - Liquid Assets refers to all the current assets except inventory and
prepaid expenses. Current Liabilities include creditors, bank overdraft, bills payable,
outstanding expenses, short-term loans etc.

Ideal Ratio: - 1:1

Significance: - Liquidity Ratio 1:1 shows that liquid assets of the firm are just equal
to current liabilities. If the liquid ratio is more than 1:1, the financial position of the
firm is sound and good. On the other hand, if the ratio is less than 1:1 then the
financial position of
the firm is not good.

QUICK RATIO

CURRENT
YEAR QUICK ASSETS LIABILITIES QUICK RATIO
(A) (B) (C) (B)/(C)
2006-07 2,78,74,665.90 16,95,42,054.37 0.16
2007-08 4,07,64,169.57 19,19,23,839.11 0.21
2008-09 5,52,02,562.51 21,64,24,699.58 0.26
 0.3

0.25

0.2
Quick Ratio

0.15

0.1

0.05

0
2006-07 2007-08 2008-09

Interpretation:

Table reveals that Quick Ratio of URMUL is continuously increasing, although it is

less than the idle ratio still it shows dairy’s improving condition of short term
solvency. The Quick Ratio was 0.26 in 2008-09 and 0.16 in 2006-07 which are
highest and lowest throughout the study period.
Generally quick ratio should be 1:1.In the year 2008-09 the quick ratio is 0.26,
it means that for every 1 rupee of liability we have only 26 paisa .It indicate that firm
is not healthy. In such a condition management should try to maintain suitable
amount of quick assets so that it can pay immediate payment to creditors.

ABSOLUTE RATIO:-

Meaning: - Absolute ratio also known as Cash ratio considers only absolute liquidity
available with the firm. Absolute liquid asset include cash in hand, cash at bank and
marketable securities.
Formula: - Absolute Ratio = Cash & Bank + Marketable Securities
Current Liabilities

Idle Ratio: - 0.5: 1

Significance: - The idea behind the norm is that if all creditors demand for payment,
at least 50% of their claim should be satisfied at once.

ABSOLUTE LIQUIDITY RATIO

ABSOLUTE LIQUID CURRENT

YEAR
ASSETS LIABILITIES ABSOLUTE RATIO
(A) (B) (C) (B)/(C)
2006-07 47,97,022.83 16,95,42,054.37 0.03
2007-08 98,59,924.62 19,19,23,839.11 0.05
2008-09 17,62,026.37 21,64,24,699.58 0.008

0.05

0.04
Absolute Ratio

0.03

0.02

0.01

0
2006-07 2007-08 2008-09
Interpretation:
This ratio is very below from idle ratio. It is making insecure creditors claim. Table
reveals that there is no stable trend regarding absolute ratio of URMUL dairy
throughout the study period. In year 2007-08 it was 0.05 and in 2008-09 it was 0.008
which was highest and lowest throughout the three year period.

STOCK TURNOVER RATIO: -

Meaning: -This ratio shows the relationship between the cost of good sold during a
particular period & stock kept during that period. This ratio measures how many
times the average stock is sold during the year.

Formula: - Stock Turnover Ratio = COGS

Avg. stock

Composition: - Cost of good sold = opening stock + purchase + direct expenses –

Closing-stock
Average Stock = (opening stock + closing stock) /2

Significance: - Promptness of sales shows better performance of the business.

Lower inventory turnover ratio shows that the stock is blocked & not immediately
sold. It shows the poor performance of the business & inefficiency of the
management. So every business has to keep optimum quantity of stock so that
production work may be carried on smoothly.
 INVENTORY TURNOVER RATIO
INVENTORY INVENTORY
YEAR COST OF AVERAGE TURNOVER(time TURNOVER(DAYS
GOOD SOLD INVENTORY ) )
(D) = (B)/
(A) (B) (C) (C) (E)= 365/D
36,84,94,331.6 4,15,34,935.5
2006-07 9 9 8.87 41
7,63,31,292.3
2007-08 38,46,29,178.33 1 5.04 72
7,20,62,076.2
2008-09 57,55,16,647.39 4 7.99 46
 9
8

Stock Turnover Ratio

7
6
5
4
3
2
1
0
2006-07 2007-08 2008-09

Interpretation:
Table reveals that Stock Turnover Ratio of URMUL is not stable throughout the
study period. In 2006-07 stock turnover ratio was 8.87 times & in 2007-08 it
becomes 5.04 which are highest and lowest in the study period.
In the year 2008-09 it increased to 7.99 times, which indicates the times taken
in converting raw material into finished product and finally selling it and hence
indicates quick release of working capital Usually a high inventory turnover / stock
velocity indicates efficient management of inventory because more frequently the
stock are sold, the lesser amount of money is required to finance the inventory.

WORKING CAPITAL TURNOVER RATIO: -

Meaning: - Working Capital Turnover Ratio is calculated for knowing whether the
organization has used its working capital efficiently or not. This ratio is used to
analyze the relationship between the money used to fund operations and the sales
generated from these operations. It is calculated by dividing net sales by working
capital.
Formula: - Working Capital Turnover Ratio = Net Sales
Net Working Capital

Composition: -Cost of sales = Opening stock +purchase + direct expenses –

closing stock
Net Working Capital = current assets -current liabilities

Interpretation: -If this ratio is more, then it is assumed that working capital is used
efficiently and if this ratio is less it is assumed that working capital is not used
efficiently. Too much high ratio shows over trading & too much less ratio shows
under trading

WORKING CAPITAL TURNOVER RATIO

TURNOVER
YEAR NET SALES WORKING CAPITAL RATIO(times)
(A) (B) (C) (B)/(C)
2006-07 42,88,92,396.89 (10,01,32,452.88) (4.28)
2007-08 44,96,15,967.85 (7,48,28,377.23) (6.01)
2008-09 63,97,25,962.42 (8,91,60,060.83) (7.17)
 8
7

Working Capital Turnover

6

5
4
3
2
1

0
2006-07 2007-08 2008-09

Interpretation:

Table reveals that working capital of URMUL is decline continuously throughout the
study period. In 2006-07 working capital turnover ratio was (4.28) times & in 2008-09
it becomes (7.17) which are highest and lowest in the study period. In URMUL
working capital turnover ratio shows negative value it shows that the working capital
has not been utilized properly.

It is concluded that working capital of URMUL is not efficiently used and low
degree of working capital turnover ratio indicates that URMUL is having under
trading.

Inventory Turnover Ratio

Meaning: -This ratio shows the relationship between the cost of good sold during a
particular period & stock kept during that period. This ratio measures how many
times the average stock is sold during the year.

Formula: - Stock Turnover Ratio = COGS

 Avg. stock

Composition: - Cost of good sold = opening stock + purchase + direct expenses –

Closing-stock
Average Stock = (opening stock + closing stock) /2

Significance: - Promptness of sales shows better performance of the business.

Lower inventory turnover ratio shows that the stock is blocked & not immediately
sold. It shows the poor performance of the business & inefficiency of the
management. So every business has to keep optimum quantity of stock so that
production work may be carried on smoothly.

INVENTORY TURNOVER RATIO

INVENTORY INVENTORY
YEAR COST OF AVERAGE TURNOVER(time TURNOVER(DAYS
GOOD SOLD INVENTORY ) )
(D) = (B)/
(A) (B) (C) (C) (E)= 365/D
36,84,94,331.6 4,15,34,935.5
2006-07 9 9 8.87 41
7,63,31,292.3
2007-08 38,46,29,178.33 1 5.04 72
7,20,62,076.2
2008-09 57,55,16,647.39 4 7.99 46
 9
8

Stock Turnover Ratio

7
6
5
4
3
2
1
0
2006-07 2007-08 2008-09

Interpretation:
Table reveals that Stock Turnover Ratio of URMUL is not stable throughout the
study period. In 2006-07 stock turnover ratio was 8.87 times & in 2007-08 it
becomes 5.04 which are highest and lowest in the study period.
In the year 2008-09 it increased to 7.99 times, which indicates the times taken
in converting raw material into finished product and finally selling it and hence
indicates quick release of working capital Usually a high inventory turnover / stock
velocity indicates efficient management of inventory because more frequently the
stock are sold, the lesser amount of money is required to finance the inventory.