Project Report

ON

“FINANCIAL STATEMENT

IN HALDIRAM SNACKS PVT.LTD.”

Submitted to

C.C.S. University, Meerut

For the partial fulfillment of

BACHELOR OF BUSINESS ADMINISTRATION

(2013-2015)

Submitted For: Submitted By:

Mrs. Isha Khurana Mohd. Sadim
BBA VI Sem.
Roll No. 8036531

DEEN DAYAL COLLEGE,

MUZAFFARNAGAR
 CANDIDATE’S DECLARATION

I do hereby declare that the piece of dissertation report entitled “Financial Statement”
has been prepared by me under the avid guidance and supervision of Mr.Sanjay
Singhania (commercial Head) as a part fulfillment for the requirement of the degree in
Bachelor of Business Administration under C.C.S. University, Meerut during the session
2013-15.
To the best of my knowledge & belief, this is my own work and has not been submitted
anywhere earlier for any other degree.

(Mohd. Sadim)

2
 ACKNOWLEDGEMENT

When I embarked this project, it appeared to me an onerous work. Slowly

as I progressed, I did realize that I was not alone after all!! There were friends and
well wishers, who with their magnanimous and generous help and support made it
a relative easier affair.

I wish to express my gratitude to all that concerned persons who have

extended their kind help, guidance and suggestions without which it could not
have been possible for me to complete this project report.

I am deeply indebted to my guide Mr. Sanjay Singhania (commercial

Head) for not only his valuable and enlightened guidance but also for the freedom
he rendered to me during this project work. I would also like to thanks Mr. Hitesh
Khurana (HOD) for helping me to carry my project smoothly.

My heart goes out to my parents who bear with all types of troubles I
caused them with smile during the entire study period and beyond.

Mohd. Sadim

3
TABLE OF CONTENTS

1 - COMPANY INFORMATION
 Introduction
 Company Profile
 History of the Company
 Product Profile
2 - FINANCIAL HIGHLIGHTS
 Company balance sheet
 Profit & loss A\c
 Cash flow
 Share capital
 Reserves & Surplus
3 - WORKING CAPITAL
 Working Capital Definition
 Working Capital cycle
 Working Capital Analysis
 Working Capital management

4 - CONCLUSION AND RECOMMENDATION

 Conclusion
 Recommendation

5 - BIBLIOGRAPHY
 Bibliography.

4
 INTRODUCTION
Financial Statements report what actually happened to assets, earnings and

dividends. Investors use financial statements to predict future

earnings/dividends. Management uses financial statements to help anticipate

future conditions and as starting point for planning actions that will affect

future event.

A Complete set of Financial Statements (Decision Tool), including the

beginning and ending net worth statements, the income statement,

the cash flow statement, the statement of owner equity and the

financial performance measures can help you to do a comprehensive

financial analysis of your business. To help you assess the financial

health of your business, Financial Performance Measures allows you

to give your business a check-up. Interpreting Financial Performance

Measures helps you to understand what these performance

measures mean for your business.

As I have already mentioned analysis of financial statement is a study

of relationship among various financial facts and figures which

actually contain a whole lot of historical data. The complex figures as

5
given in these financial statements are broken up into simple and

valuables elements and significant relationships are established

between the elements of the same statements or different financial

statements. This process of dissection, establishing relationships and

interpretation thereof to understand the working and financial position

of a firm is called the analysis of financial statements.

As in all things financial, beauty is often in the eye of the beholder. It

pays to do your own work! Making good investment decisions does not

require scholars. It requires financial analysis.

I have chosen ‘Analysis of Financial Statements’ as my project title. This

report analyzes the different financial statements of Shree bhageshwari paper

millLtd. and compares the trends over the past 4 years. The data in this

report provides useful way to analyze financial statements and evaluate the

firm’s performance over the period. Financial statements which mainly

consist of Balance Sheet, Income Statement, Cash Flow Statement and

Statement of Retained Earnings summarize the results of the firm’s activities

at a point in time and on operations over some past period which is very

helpful in analyzing the performance of the company during past.

"Analysis of Financial Statements" is a powerful business handbook for

investors, bankers, and other professionals who rely on financial statement

6
understanding and analysis. For investors who need to evaluate why

increased sales didn't lead to higher stock prices...for bankers who need to

know the underlying reasons a customer wants to borrow funds...for any

business person who needs to analyze and understand financial

statements...Let "Analysis of Financial Statements" be your guide to

understanding the language of financial statements.

Analysis of financial statement is the systematic numerical calculation of the

relationship between one fact with the other to measure the profitability,

efficiency, solvency and the growth potential of the business.

It is just a heart of industry. No doubt, fixed tangible asset like land and

building, plant & equipment provide a strong structural base but working

capital is all the more needed as a 'motor force' to make the fixed tangible

more effective and turn out what is mostly needed.

There might be many business in the world, where besides investment in

fixed assets, funds would not be needed for carrying on day to day

operations of the business. But in most companies, it is essential that a

certain proportion of funds be kept invested in the form of different current

assets like inventories, receivables, cash and marketable securities.

The mode of administration of finance and working capital determines to a

very large extent to overall success or failure of the operations of an

7
enterprises. The analysis of financial performance is of vital importance for

the success of a business. The manner of management of finance to a very

large extent determines the success of operation of a concern because

problem of trade off between risk and return is involved.

8
 Slaes of Audit

A sales audit is a review of a company's entire sales process, from the use of
particular types of software, to the staff, to management strategies. This type
of audit is different from a financial audit in which a company evaluates
their operating costs against their sales revenues. A sales audit evaluates the
effectiveness of every aspect of the sales process and helps companies
determine whether or not their methods are cost effective and beneficial in
generating revenue. Some businesses choose to perform this process
themselves, often with the aid of specialized audit software, and others
prefer to have an outside consultant objectively carry out the evaluation.

Sales auditors may begin by analyzing the atmosphere in which a company

works, both externally and internally. The external environment refers to the
market size in which a company markets their product, the market demand
for that product, and the growth trends in that area. The internal environment
refers to the culture of the company itself, including the ways in which the
sales team interact with one another and the nature of their relationships with
their managers. This typically provides a basis for the sales auditor to
evaluate the sales performance a company desires versus what they are
actually achieving.

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Audit of Sales:

1. Checking Sales order approved

2. Any Amendment in the Sale Order the same is approved

3. Sales order terms and conditions

4. Invoice has been raised correctly

5. S.O. quantity and rates are matching with the invoice

6. Tax rated are charged is correct or not

7. Delivery Chalan preparaed as per Invoice

8. D.C. checked and signed by Stores authority along with Invoice

9. Whether all the materials are Dispatched in good condition

10. Any damage is notified to the buyer or any rejections and return

11. Return has been received properly in the stores

12. The Credit has been raised for the same

13. Tax rated are charged accounted as correct out put vat a/c

14. Sales register has been maintained correctly with all the Sales entries

with serially numbered and maintained

10
 RESEARCH
METHODOLOGY

11
 RESEARCH METHODOLOGY

Research Methodology may be defined as a way to systematically solve the

research problem. Research Methodology constitutes of research method,

used in context of research study and explanation of using a particular

method or technique and way other techniques are not used.

It also includes the reasons for taking up a particular problem, the data

collection, its analysis and interpretation.

For this particular project the steps followed or the Methodology followed is

as given below :

 State of Problem

 Extensive Literature Survey

 Designing of Study

 Data Collection

 Analysis of data

 Conclusion & Interpretation of Research

12
1. Problem Defined :

Finance management is one of the important part of business.

Presently in a very tough competitive scenario every business

organisation wants to reduce costs in manufacturing their products so

that they can offer quality product at competitive rates to the

consumers. Also every business concern try to manage their

receivables not making very much human efforts. Working capital

management is one of the problem areas of many organisations as it

affects their profitability as well as their present operations. I

personally feel that many small Indian organisations are facing

working capital problems and so they are even struggle for their

survival. In my project I try to analyse the working capital

management of the company SHREE BHAGESHWARI PAPER

MILLLTD.

2. Extensive Literature Survey :

For the purpose I made a through study of the topic to get in depth

knowledge of the subject. I concerned various books and newspapers

like Economic Times, Business Standard, Magazines, Journals etc., to

get a first head view regarding the problem.

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3. Designing of Study :

We know that to get the best output from the research it has to be

conceptually so that minimum difficulties arise during the conduct of

the research. To make my research successful I planned the

methodology that I have to adopt while doing my project.

4. Collection of Data :

This is the fourth step in the research process. This consisted of

actually gathering the data from various primary and secondary

sources. The methods used for collection of data are as follows:

a) For the collecting of primary data I decided to meet different

managers of different levels of the company and others employees

from different departments and collected related information from

them. I tried to take their views on the various subject matters.

b) Documented Sources of Data: The secondary data was collected

from various documented sources. I referred profit and loss account,

balance sheet, stock register, debtors and creditors registers of the

company and take the required data from that. I also collected various

documents of the company, like various pamphlets of the company,

quality policy, product details and relevant information was extracted

from them. I also referred were Business India, Business World,

14
 Business Today and Newspapers Economic Times, Financial Express,

Business Standard to understand the current scenario of working

capital management.

5. Analysis of Data :

Data Analysis may be defined as the process of computation of certain

parameters along with identification of relationship pattern that may

exist among data groups.

For analysis of data, the following steps were undertaken:

a) Data Editing: A thorough scrutiny of raw collected as done and was

detected in this step.

b) Classification of Data: In this the data was arranged in groups or

classes according to the resemblance and similarities. This process has

made the comparative analysis an easier take.

c) Calculation: From the various figures collected from different

sources I calculate the required results.

d) Tabulation of Graphical Depiction: As we know tabulation is an

orderly arrangement of data in columns and rows. This tabulation was

done to identify the frequency of occurrence of data. In the end

15
 graphical depiction of this tabulated data is made to amplify the study

further.

6 Conclusion :

The last step in the research was putting down the conclusion and its

interpretation as based on the study of primary and secondary data and

its analysis.

The research methodology followed is in such manner that it will make the

study informative and interesting at all the levels.

16
OBJECTIVES OF THE STUDY

The present study, which is under taken as a summer training for the partial

fulfillment of B.B.A. course is aimed to accomplish the following objectives.

1. To know about the financial condition strategies of company

2. To study about the financial condition strategies.

3. To analyses financial strategies of company

4. To suggest for growth of financial conditions of the company

17
 SCOPE OF THE STUDY

The study covers following aspects :

1- Brief Profile of the Company.

2- A thorough study about the theoretical background.

3- Analysis has done on the basis of past four years financial

information or statements of the Company.

18
 ABOUT THE COMPANY

SNACKS FOOD & NAMKEEN INDUSTRY:-

The snacks food and namkeen industry sector in India has remained in the root of
traditionalism in unorganized sector for centuries, because of nature of the business.
It was after the development of modern packing methods and invasion of the
multinationals that this sector started to grow with introduction of modern technology and
hygienic ways of preparation and packing.
As far as the India snacks food sector is concerned, we can safely say the house of
Haldiram is the only brand, which has little competition in its field and is also giving
tough competition to the multinationals in the western fast food sector.

PROMOTERS

 Mr. Manohal Lal Agarwal (Chairman)

 Mr. Anand Agarwal (MD)
 Mr. Ashish Agarwal (Executive Director

"HALDIRAM" – a name associated with discerning consumers for sweets and nankeens
for the past six decades in India and abroad. It made its modest start in the beginning of
way back in 1941 in Bikaner in the State of Rajasthan. The brand name "HALDIRAM
BHUJIAWALA" was introduced during pre-partition era-1941 and never looked back
and ventured first major step in this direction by opening up a shop in 1983 in Chandni
Chowk, the main hub of commercial centre in Delhi. The prime focus was to serve sweets
and namkeens amongst direct consumers and the trade.

BACKGROUND OF PROMOTERS & PROGRESS IN THE TRADE

The first shop opened in Chandani Chowk, Delhi in 1983 serving sweets and namkeen
under the name Haldiram Bhujiawala by two brothers Manohar Lal Agarwal and Madhu
Sudan Agarwal. The house of Haldiram was using modern technology and packing
facilities. Under the leadership and dynamism of Mr. Manohal Lal Agarwal and with his
nature of looking ahead of times, the group has decided to go for upgraded technology in
the field of production through highly sophisticated plant and machinery. A new company
Haldiram Marketing Ltd came into existence. The company went into production in April
1992. The company Haldiram Marketing Private Ltd, is today one of the most sought
after fast food centre in Delhi.
Mr. Manohal Lal Agarwal also sensed the change in the taste and preferences of
the Indian consumers and their inclination towards traditional Indian fast food centre and
thus opened Haldiram fast food joint at Mathura road in April 1995. Its success can be

19
judged by the fact that though it is not very centrally located even then it is always
flooded with consumers relishing the preparation, many of them even come from far of
places. Within a period of three years it has undoubtedly became one of the largest fast
food selling centres in Delhi.
In 1997, company Haldiram Manufacturing Pvt Ltd was established to manufacture all
types of nankeens.
The group has opened the outlet under the brand name of Haldiram located on the
main ring road, Lajpat Nagar, New Delhi. The outlet opened in March 99 and is
performing exceedingly well and has surely surpassed the expectations of the promoters.

Encouraged by the tremendous response of consumers, "HALDIRAM" decided to go in

for up-gradation in technology, packing, production etc. with the installation of plant and
machinery of the order of best available state-of-the-art technology and sophistication.
Through dint of hard work, complete dedication, uncompromising quality, -
"HALDIRAM" became a part of each family and no house left without having product of
"HALDIRAM"

20
 STRATEGY
Haldiram Group of companies do not spend too much on advertisement like its
competitors like Pepsi and others in the market who spend a lot on advertisement, even
then it has been able to garner its share through a network of consignee agents spread all
over northern India. These agents then in turn market the products to a chain of
distributors and retailers. The company at present has a network of consignee agents and
approximately two hundred distributors across northern India, catering to thousand of
retail outlets. HALDIRAM’S have a strong network of sales personnel who are also
supplying their products regularly to government organizations like super bazaar etc.
The packing of nankeens is mostly done through imported sophisticated machines.
The company has developed all techniques in house and has no technical tie up with any
other company. The Haldiram`s namkeen and sweets are packed with hygiene and
freshness. A wide range of tangy savories, guaranteed to tickle the palate.

After capturing the indigenous market the group has also spread its wings in the
international market. Haldiram has already been approved and acclaimed by million’s of
people thought the world, this fact was formally recognized when the company bagged
the following awards: -
 International Award for Food and Brewages from Trade Leaders Club in
Barcelona, Spain in 1994.
 The Kashalkar Memorial Award presented by All India Food Preservers
Association in 1996
 Hind Ratan Award.97 given by NRI Welfare Society of India
 Brand Equity Award, 98 of the PHD Chamber of Commerce & Industries
presented by honorable Ex. finance minister Mr. Yashwant Sinha.
 National Award for Outstanding Contribution 1999 from the Fie Foundation,
Maharashtra

Today,

 Haldirams have 4 showrooms located at Mathura Road, Lajpat Nagar, Chandni

Chowk, Gurgaon and Manufacturing unit in Noida.
 Haldiram does not have any policy of franchisees and that all the showrooms are
Owned and Maintained by the Company.
 The company has 25 C&F agents and more than 700 Distributors in the
domestic market (INDIA) and 25 Sole Distributors, more than 35 Buyers in the
international market.
 Company is exporting their products in more than 40 Countries including Nepal,
Sri Lanka, Middle East, Far East, U.S.A., U.K., Germany, Australia, Japan, Italy to name
a few.

21
MISSION:-
“Our perpetual consistent quality, best packing strategy, vast market coverage and the
number of years of experience have given us a cutting edge vis-à-vis our competitors. Our
natural ilk to improve our performance and quality with each passing year has taken us
way ahead of our nearest competitor. The people at Haldiram are very sensitive and
customer friendly about the complaints, which infect is a rare occurrence from the
customers and dealers.”

FOOD SAFETY POLICY:-

“Haldiram Snacks Pvt. Ltd. Is committed to supply nankeens, milk and non-milk sweets,
and ready to eat snacks, which are safe for consumption by all class of customers. These
shall be processed at our state of art plant with automatic and latest machinery with least
possible chances of direct contact with working staff thereof avoiding chances of
contamination and infection.
Our workers will be medically examined periodically and only medically fit workers shall
be allowed to enter the processing area. Necessary training to maintain the level of food
safety and HACCP to international standards shall be provided to the personnel.
To maintain the personnel hygiene standards we undertake to provide clean
uniform to our workers and adequate disinfecting material for the plant hygiene”

1. Haldiram’s Profile
Over a period spanning six and a half decades, the
Haldiram's Group (Haldiram's) had emerged as a
household name for ready-to-eat snack foods in
India. It had come a long way since its relatively
humble beginning in 1937 as a small time sweet
shop in Bikaner, in the Rajasthan state of India. In
FY 2010-08, the turnover of the Haldiram's was
Rs. 6 billion. The group had presence not only in
India but in several countries all over the world.
Till the early 1990s, Haldiram's comprised of three Haldiram’s at Bikaner in 1937
units, one each in Kolkata, Nagpur and NewDelhi .
Haldiram's had many 'firsts' to its credit. It was the first company in India to brand
'nankeens'. The group also pioneered new ways of packaging nankeens. Its packaging
techniques increased the shelf life of nankeens from less than a week to more than six
months. It was also one of the first companies in India to open a restaurant in New Delhi
offering traditional Indian snack food items such as "panipuri," "chatpapri," and so on,
which catered to the needs of hygiene conscious non-resident Indians and other foreign
customers.

22
After 1st shop in Bikaner in 1937, the company opened its first unit in Old Delhi
(Chandani Chok) in 1982, giving quality snacks and sweets to taste and quality lover
populace of great Delhi. Growth story doesn’t stop at Delhi. Company started exporting
its especially hygienically packed Sweets such as Rasgulla, Gulabjambun, Soan Papdi,
Rasbhari and Namkeens such as Navrattan, Aloo Bhujia, Plain Bhujia, Chips, Whoopies,
Takatak, Khatta Mitha in Superstores of USA. The list of Superstores includes Tesco,
Sommerfield, Spinneys and Carrefour.

However, some analysts felt that Haldiram's still had to overcome some hurdles.
The company faced tough competition not only from sweets and snack food vendors in
the unorganized market but also from domestic and international competitors like SM
Foods, Bakeman's Industries Ltd, Frito Lay India Ltd.(Frito Lay), Bikanervala and
Britannia Industries Ltd.

Moreover, the group had to overcome internal problems as well. In the early
1990s, because of the conflict within the Agarwals family, Haldiram's witnessed an
informal split between its three units as they started operating separately offering similar
products and sharing the same brand name. In 1999, after a court verdict these units
started operating as three different companies with clearly defined territories.

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 Company’s Business Activities

Namkeens

Snacks

Sweets
Existing Business
Papad

Syrups

Ready-to-eats

Frozen Foods

Fast Foods

Kiosk based outlets

New Business
Ready to eats

Packed Juices

Cookies

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  Distribution Channel of the company

Production Unit

Direct Sale Institutional Sales#

C & F Agents*

Distributors

Wholesalers Retailers at Institutes

Retailers

Consumer

Note: #  Institutional sale includes sales to Indian Railways, Metro Stations,

Government Canteens, CSDs, Hospitals, Cinema Halls, Chain Stores,
Airports, Hotels, Beer bars & Clubs, Amusement Parks, Colleges and Schools
*  Consignees and Forwarding Agents (Superstockists)

25
2. The Marketing Mix

 Product

Haldiram's offered a wide range of products to its customers. The

product range included Namkeens, Sweets, Sharbats, and Bakery
items, Dairy Products, Papad and Ice-creams. However,
nankeens remained the main focus area for the group
contributing close to 60% of its total revenues.

By specializing in the manufacturing of nankeens, the company

seemed to have created a niche market. While the Nagpur unit
manufactured 110 different varieties of nankeens, the Kolkata unit
manufactured 57 and the Delhi unit 91. The raw materials used to
prepare nankeens were of best quality and were sourced from all
over India.

Haldiram's sought to customize its products to suit the tastes and preferences of
customers from different parts of India. It launched products, which catered to the
tastes of people belonging to specific regions.
For example, it launched 'Murukkus,' a South
Indian snack; ‘Gujarati Mix’ for Gujarati taste
lovers; ‘Kashmiri Mix’ for Kashmiri people.
Similarly, Haldiram's launched 'Bhelpuri,' keeping in
mind customers residing in western India. These
measures helped Haldiram's compete effectively
in a market that was flooded with a variety of snack items in different shapes,
sizes and flavors.

 Pricing

Haldiram's offered its products at competitive

prices in order to penetrate the huge unorganized
market of nankeens and sweets. The company's
pricing strategy took into consideration the price
conscious nature of consumers in India.
Haldiram's launched nankeens in small packets
of 30 grams, priced as low as Rs.5. The company
also launched nankeens in five different packs
with prices varying according to their weights.
(Refer Table 3).

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 Table 3: Price Range of 'Namkeens' Offered By Haldiram's

PACK WEIGHT PRICE (in Rs)

26 - 30 gm 5
85 gm 10
180 gm - 250 gm 18-35
400 gm - 500 gm 40-70
1 kg 95-200

(Source: ICMR)

The prices also varied on the basis of the type of nankeens and the raw materials used to
manufacture it. The cost of metalized packing also had an impact on the price, especially
in the case of snack foods. The company revised the prices of its products upwards only
when there was a steep increase in the raw material costs or additional taxes were
imposed.

 Place

Haldiram’s developed a strong distribution network to ensure the widest possible reach
for its products in India as well as overseas. From the manufacturing unit, the company's
finished goods were passed on to carrying and forwarding (C&F) agents. C&F agents
passed on the products to distributors, who shipped them to retail outlets. While the Delhi
unit of Haldiram's had 25 C&F agents and 700 distributors in India, the Nagpur unit had
25 C&F agents and 375 distributors.

Haldiram's also had 35 sole distributors

in the international market. The Delhi
and Nagpur units together catered to 0.6
million retail outlets in India. C&F
agents received a commission of around
5%, while distributors earned margins
ranging from 8% to 10%. The retail
outlets earned margins ranging from
14% to 30%. At the retail outlet level,
margins varied according to the weight
of packs sold.

Retailers earned more margins ranging from 25% to 30% by selling 30 gm pouches
(priced at Rs.5) compared to the packs of higher weights. Apart from the exclusive

27
showrooms owned by Haldiram's, the company offered its products through retail outlets
such as supermarkets, sweet shops, provision stores, bakeries and ice cream parlors. The
products were also available in public places such as railway stations and bus stations that
accounted for a sizeable amount of its sales.

Haldiram's products enjoyed phenomenal goodwill and stockiest competed with each
other to stock its products. Moreover, sweet shops and bakeries stocked Haldiram's
products despite the fact that the company's products were competing with their own
products.

Haldiram's also offered its products through the Internet. The company tied up with
indiatimes.com, a website owned by the Times of India group to sell its products over the
Internet. Haldiram's products could be ordered through a host of other websites in India
and abroad. Giftstoindia.com, giftssmashhits.com, tohfatoindia.com and
channelindia.com enabled people residing abroad to send Haldiram's gift packs to
specified locations in India.

Region-specific websites enabled people to send gifts to specified regions. These include
indiamart.com (Delhi and surrounding areas), mumbaiflowersgifts.com (Mumbai), and
chennaiflowersgifts.com (Chennai and other parts of Tamilnadu). These websites
competed on issues such as delivery time, which varied between 48 hrs to one week,
delivery charges (some websites offered free delivery of products) and value added
services (like sending personal messages along with the gift packs).

 Promotion

Haldiram's product promotion had been low key until competition intensified in the snack
foods market. The company tied with ‘Profile Advertising’ for promoting its products.
Consequently, attractive posters, brochures and mailers were designed to enhance the
visibility of the Haldiram's brand. Different varieties of posters were designed to appeal
to the masses.

The punch line for Haldiram's products was, ‘Always in good taste.’ Advertisements
depicting the entire range of Haldiram's sweets and nankeens were published in the print
media (magazines and newspapers). These advertisements had captions such as ‘millions

Of tongues can't go wrong,’ ‘what are you waiting for, Diwali?’ and ‘Keeping your taste
buds on their toes’.

'To increase the visibility of the Haldiram's brand, the company placed its hoardings in
high traffic areas such as train stations, Delhi metro stations and bus stations. For those
customers who wanted to know more about Haldiram's products, special brochures were
designed which described the products and gave information about the ingredients used to

28
make it. Mailers were also sent to loyal customers and important corporate clients as a
token of appreciation for their patronage.

Packaging was an important aspect of Haldiram's product promotion. Since nankeens

were impulse purchase items, attractive packaging in different colors influenced
purchases. Haldiram's used the latest technology (food items were packed in nitrogen
filled pouches) to increase the shelf life of its products. While the normal shelf life of
similar products was under a week, the shelf life of Haldiram's products was about six
months. The company projected the shelf life of its products as its unique selling
proposition. Posters highlighting the shelf life of its products carried the caption ‘six
months on the shelf and six seconds in your mouth.’ During festival season, Haldiram's
products were sold in attractive looking special gift packs.

The showrooms and retail outlets of Haldiram's gave importance to point of purchase
(POP) displays. Haldiram's snacks were displayed on special racks, usually outside retail
outlets. The showrooms had sign boards displaying mouth-watering delicacies with
captions such as ‘Chinese Delight,’ ‘Simply South,’ ‘The King of all Chats’. Posters
containing a brief account of the history of Haldiram's, along with pictures of its products,
were also on display at these showrooms.

Haldiram's restaurants in Delhi also used innovative ways to attract customers. The
restaurant located at Mathura road had special play area for children. To cater to NRIs
and foreign tourists, who hesitated to consume snack foods sold by the roadside vendors
since it was not prepared in a hygienic manner, the Haldiram's restaurant located in South
Delhi used specially purified water to make snack foods including Pani Puri and Chat
Papri. These promotional strategies helped Haldiram's to compete effectively with local
restaurant chains such as Nathus, Bikanervala and Agarwals and with western fast food
chains such as McDonald's and Pizza Hut.

 Positioning

The above initiatives helped Haldiram's to uniquely position its brand. Haldiram's also
gained an edge over its competitors by minimizing promotion costs. Appreciating the
company's efforts at building brand, an analyst said, “Haldiram’s once was just another
sweet maker but it has moved into trained brands first by improving the product quality
and packaging.”

Through its clever products and brilliant distribution it had moved into the star category
of brands. Haldiram's earned recognition both in India and abroad.

29
 3. Analysis of Primary Survey

 Type of Products Liked

Gender
100

Male
Female

80

60
Percent

40

20

0
Fresh Food Semi-processed Food
Packed food Ready-to-eat Food
What type of product do you like?

Out of 100 % (64 numbers) respondents, 65 % of female prefers Fresh Foods which is not
a category where Haldiram’s has its products. Haldiram’s is in two categories of food
articles: packed food and ready-to-eat food. 28 % and 20 % of male respondents like to
have packed foods, respectively.

30
  Most Preferred Brands (Namkeen/Chips/Sweets)

50

40
Percent

30

20

10

Haldiram Bingo Lays Uncle Chips

Please rate the brands based on your liking. (Most Like - 5,
Least Like - 1)

45 % of 64 respondents preferred lays as their favorite brands in Snacks category; while

rest of 55 % respondents were equally divided among Haldiram, Bingo and Uncle Chips.

It is clear that respondent’s preference is affected by effective advertising tools such as

TV, Hoardings and Banners; and of course quality of product.

31
  Preferred Sweets Brand

Please rate quality of Sweets brand wise on 1-5 scale:

(5 - Most Preferred, 1- Least Preferred)

Sweets Brands Frequency Percent Cumulative

Percent

Nathu 3 4.7 4.7

Bikano 14 21.9 26.6

Haldiram 33 51.5 78.1

Agarwal 8 12.5 90.6

Evergreen 6 9.4 100.0

Out Total 64 100.0 of 64

respondents, almost half of the respondents like Haldiram’s sweets such as Soan Papdi
and Rasgulla. On second number, there in Bikano from the house of Bikanervala.

There is concern for Nathu which placed bottom rank in the tally, taking only 3
respondents in its favour out of 64.

32
  Age Group and Preferred Sweets (Brand wise)

Age Group
14

16-20 years
21-30 years
12 31-40 years
Above 41 years

10
Count

0
Nathu Bikano Haldiram Agarwal Evergreen
Please rate quality of Sweets brand wise on
1-5 scale: (5 - Most Preferred, 1- Least
Preferred)

For Haldiram’s, potential liker for its sweets products comes from age group 21 – 30
years. On second place, there are two age groups 16 – 20 years and 31 – 40 years who
love Haldiram’s sweets for its quality.

33
  Beverage and Pack Size of Namkeen

With which
100
beverage do you
take Haldiram's
namkeen? (You can
choose more than
one option.)
80

Tea/Coffee
Cold Drinks
Hard Drinks

60
Percent

40

20

0
26-35 gm 65-70 gm 200-250 gm 400-500 gm
Which pack size of Namkeen/Chips is
preferred by you?

70 % of Hard Drinkers prefer 200 – 250 gm of pack size of namkeen greatly; while 60 %
of Cold Drinkers also prefers 200 – 250 gm namkeen. Tea taker gave mix response when
question asked about which pack size they prefer.

34
 4. The Road Ahead

The competition in the ready-to-eat snack foods market in India was intensifying. Frito
Lay India Ltd. (Frito Lay), one of Haldiram's major competitors, was expanding its
market share. Instead of directly competing with the market leader Haldiram's, the
company launched innovative products in the market and backed them with heavy
publicity. Frito Lay's product range consisted of a mixture of traditional Indian and
western flavors which appealed to younger and older generations. Its products included
Leher Namkeens, Leher Kurkure (snack sticks), Lays (flavored Chips), Cheetos (snack
balls), Uncle Chips and Nutyumz (nut snacks). Frito-Lay was the first company to launch
small 35 gm packs nankeens priced at Rs. 5 and also the first company in the organized
sector to launch Aloo Bhujia.

Another competitor, SM Foods, introduced a range of innovative products. The company

launched India's first non-wafer chips in 1988. SM offered products under two main
brands - Peppy and Piknik. Under Peppy, it had sub brands such as Cheese Balls, Ringos,
Hi Protein Crispies, Potato Rackets, Hearts, Veggie Treat, Mixtures and Minerette. Under
Piknik, it had Protein Pin, Junior and Corn Puffs.

35
Findings of the Study

 Out of 100 % (64 numbers) respondents, 65 % of female prefers Fresh

Foods which is not a category where Haldiram’s has its products. Haldiram’s is in
two categories of food articles: packed food and ready-to-eat food. 28 % and 20 %
of male respondents like to have packed foods, respectively.
 For Haldiram’s, potential liker for its sweets products comes from age
group 21 – 30 years. On second place, there are two age groups 16 – 20 years and
31 – 40 years who love Haldiram’s sweets for its quality.
 70 % of Hard Drinkers prefer 200 – 250 gm of pack size of namkeen
greatly; while 60 % of Cold Drinkers also prefers 200 – 250 gm namkeen. Tea
taker gave mix response when question asked about which pack size they prefer.
 Out of 64 respondents, almost half of the respondents like Haldiram’s
sweets such as Soan Papdi and Rasgulla. On second number, there in Bikano from
the house of Bikanervala. There is concern for Nathu which placed bottom rank in
the tally, taking only 3 respondents in its favour out of 64.
 45 % of 64 respondents preferred lays as their favorite brands in Snacks
category; while rest of 55 % respondents were equally divided among Haldiram,
Bingo and Uncle Chips. It is clear that respondent’s preference is affected by
effective advertising tools such as TV, Hoardings and Banners; and of course
quality of product.
 The rapid expanse in availability (distribution channel)the intensive
promotional support in sweets and namkeen categories and overall vibrance in
terms of pricing and packaging has undoubtedly aided this sector.

 Indians have become fervent consumers of brand snack foods or

‘Namkeens’. In the fiscal year 2005-06, the market for branded packaged
‘Namkeens’ has grown by a whopping 34 %.
 Organized sweets market is the new emerging category in FMCG basket
with 11.6 % in terms of value growth in fiscal year 2005-06. While the underlying
factor driving sales remains ‘commodity branding’ with manufacturers packaging
and branding this product which has traditionally been purchased loose, other
sociological factors are also at play.
 Retailers earned more margins ranging from 25% to 30% by selling. Apart
from the exclusive showrooms owned by Haldiram's, the company offered its
products through retail outlets such as supermarkets, sweet shops, provision
stores, bakeries and ice cream parlors. The products were also available in public
places such as railway stations and bus stations that accounted for a sizeable
amount of its sales.

36
In their own words:-
“We at Haldiram were very keen to come to London to see for ourselves why it is such a
special place to Indians who now call it home. And we wanted to service that community
with a taste of their homeland – our range of snacks and sweets. A memory, if you like.
“So the key was to establish a presence here.

“We were very impressed with the help that Think London gave us on setting up
business in London. Their wealth of expertise, the way they could present a huge array of
statistics about populations and our target market – it all pointed to London as the best
launchpad for us.

“Especially because of the city’s great connectivity, proximity to Heathrow for

logistics, availability of skilled workforce and target customers and, crucially, a homely
atmosphere for our workers – all make London the perfect place for us.

“Think London made the whole process seamless. They advised us on our
business plan, helped us sort premises, gave us time whenever we needed it and told us
who to talk to on things like tax and employment. All for free!

“What we had dreamed of was an easy process. What we got was exactly that.”

Pankaj Agarwal,

(Managing Director Haldiram)

37
 Balance Sheet As at 31st March, 2013
(Amount in Rs.)

PARTICULAR SCHEDULE CURRENT PREVIOUS

YEAR YEAR
SOURCES OF FUND
SHAREHHOLDERS FUNDS
Share capital 1 110,000,000 110,000,000
REVERSES &SURPLUS 2 279,252,397 226,372,466
LOAN FUNDS 541,331,653 254,345,398
Secured loans 3 180,330,038 114,711,777
Unsecured loans 4 19,280,389 26,770,654
DEFERRED TAX LIABILITY
1,130,194,477 732,200,295
APPLICATION OF FUNDS
FIXED ASSETS 5
Gross block 948,021,032 822,760,834
Less: Deprecation 239,698,163 165,005,003
-------------------- --------------------
708,322,868 657,755,831
Net Block 301,663,394 52,879,823
Capital Work in Progress
INVESTMENTS 6 2,144,704 2,144,704
CURRENT ASSETS, LOANS& 7
ADVANCES 129,551,762 91,855,553
Inventory 16,080,722 9,368,200
Sundry Debtors 74,190,357 42,045,083
Cash & Bank Balances 101,307,353 45,761,638
Loans and Advances

321,130,194 189,030,474

Less: CURRENT LIABILITIES & 8 207,772,770 175,108,089

PROVISIONS

NET CURENT ASEETS 113,357,424 13,922,385

MISCELLANEOUS EXPENDITURE
(to the extent not written off or adjusted)
Deferred Revenue Expenditure 4,499,522 5,129,822
Preliminary Expenses 176,564 327,730
Amalgamation Expenses 30,000 40,000
-------------------- --------------------
1,130,194,477 732,200,295

38
 Profit & Loss A/c for the year ended on 31st March, 2013

PARTICULAR SCHEDULE CURRENT PREVIOUS

YEAR YEAR
INCOME
Sales 1,623,623,720 1,167, 413,879
Less: Excise Duty 3,025,640 2,950,567
1,620,598,080 1,164,463,312

Other Income 10,286,752 3,088,458

Profit on Sale of fixed assets 9 247,357 12,567,706
Increase/(Decrease) in Finished stock 6,668,301 (1,067,707)

1,357,800,490 1,179,051,769
EXPENDITURE

Manufacturing Exp. 10 837,772,543 530,786,516

Administrative, Selling, and Other Exp. 11 599,662,388 489,483,395
Interest & Other Financial Charges 12 36,495,262 20,347,944
Loss on Sale of Fixed Assets 276,434 900,244
Deferred Revenue Exp. Written off 630,300 630,300
Amalgamation Exp. W/O 10,000 10,000
Preliminary Exp. W/O 151,166 151,166

1,474,98,093 1,042,309,565
Profit before Dep. & Tax 162,802,397 136,742,204
Less: Dep. 75,996,899 58,090,499
Profit for the year 86,805,498 78,651,706
Less: Provision for current tax 39,730,161 28,317,807
Less: Provision for FBT 1,645,568 1,209,928
Less: Provision for Wealth Tax 40,103 6,807
Add: Provision for Deferred Tax(Reversed) 2,600,240
Less: Provision for Deferred Tax (7,490,266)

39
Profit for the year after Tax 52,879,932 51,717,404
Profit brought forward from previous year 119,816,846 68,099,442
Profit carried over to Balance Sheet 172,696,777 119,816,846
PARTICULAR For the year ended For the year ended
31.03.2010 31.03.2006

(Amount in Rs.)

Cash flow statement for the year ended 31st March, 2013
(Amount in Rs.)

40
Cash flow from operating Activities
Net profit before tax 8,68,05,498 7,86,51,706
Adjustment for
Dividend received 2,275 (3,500)
Depreciation 7,59,96,899 5,80,90,499
Preliminary expenses W/O 1,51,166 1,51,166
Deferred Revenue Exp. W/O 6,30,300 6,30,300
Amalgamation Exp. W/O 10,000 10,000
Interest paid 3,64,95,262 2,03,47,944
Loss on sale of Fixed Assets 2,76,434 9,00,244
Interest Received (19,00,372) (22,98,931)
Provision for Contingency 1,68,08,155 1,40,91,688
Provision for doubtful Advance ---------------- ---------------
Income tax Paid 4,41,48,958 (2,54,07,468)
Profit on sale of asset (2,47,357) (1,25,67,706)
Operating profit before working capital 17,08,74,752 13,25,95,941
Change Adjusted for :
Inventories (3,76,96,209) (71,30,779)
Trade Receivable (67,12,521) 75,44,348
Loan &Advance (1,13,96,757) 1,13,61,998
Trade Payable (3,23,35,575) 2,67,34,857
Cash Generated From operation 8,27,33,690 17,11,06,365
Cash for investing Activities
Purchases of fixed assets (37,78,25,875) (19,43,08,466)
Dividend Received 2,275 3,500
Sales of fixed assets 24,49,291 1,46,06,955
Interest Received 19,00,372 22,98,931
Exchange Fluctuation Charges -------------- -------------
Cash used in investment activity (37,34,73,937) (17,73,99,080)
Cash from Finance Activities
Interest Paid (3,64,95,262) (2,03,47,944)
Increase/Decrease in share Application Money -------------- -------------
Share Capital -------------- 3,10,16,680
Increase in Secured Lone 29,3762,522 (1,18,61,597)
Share Premium -------------- 4,65,25,020
Increase/Decrease in Unsecured Loan 6,56,18,261 (2,34,88,765)
Increase in deferred revenue -------------- (2,40,161)
Cash used in Financing activity 32,28,85,521 2,16,03,233
Net increase in cash and cash equiv 3,21,45,274 1,53,10,520
Opening Balance 4,20,45,083 2,67,34,563
Closing Balance 7,41,90,357 4,20,45,083

41
Schedule ‘1’

SHARE CAPITAL

(Amount in Rs.)
PARTICULAR CURRENT YEAR PREVIOUS YEAR

AUTHORISED CAPITAL

15000000Equity shares of Rs. 10/-each 150,000,000 150,000,000

150,000,000
150,000,000

Issued, Subscribed & Paid up

Capital
11,000,000 (Pre year 11000,000)
Full paid up Equity Share of Rs. 10/- each
(Out of which 374662 Equity share of
Rs.10/- each allotted to the shareholder of
Competent Indexpo Ltd Persuant to
scheme of amalgamation)
110,000,000 110,000,000

------------------- ---------------------
110,000,000 110,000,000

42
Schedule ‘2’

RESERVES & SURPLUS

(Amount in Rs.)
PARTICULAR CURRENT YEAR PREVIOUS YEAR

Capital subsidy 5,000,000 5,000,000

Share Premium

Opening Balance 101,555,620 55,030,300

……………. 46,525,020
Addition during the year
-------------------------- -------------------------
101,555,620 101,555,620

Profit & Loss Account 172,696,777 119,816,846

279,252,397 226,372,466

43
 Definition
Working capital management is concerned with the management of current assets. It is
important part of financial management as short-term survival is a prerequisite long-term
success.
In the word of Shubin, “Working capital is the amount of funds necessary to cover the
cost of operating the enterprise,”
On the other word circulating capital means current assets of a company that
are change in ordinary course of business from one from to another, as for example, from
case to inventories, inventories to receivables, receivable to cash.

The importance of working capital management:

 Regulate supply of raw material.
 Cash discount.
 Regulate payment of salaries, wages &other day to day commitment.
 In cries Goodwill.
 Ability to face crisis.
 Quick & regular return on investment.
 Easy loans.

Concept of Working Capital:-

There are two concepts of working capital -

1. Gross working capital

2. Net working capital

Gross Working Capital:-

Gross working capital refers to the firm’s investment in current assets.
Current assets are assets, which can be converted into cash within an accounting year.
The main components of current assets are cash, debtors, marketable securities and stock.
The gross working capital concept focuses attention on two aspects of current asset
management.
A. Optimum investment in current assets.

44
B. Financing of current assets.
The Ratios of Current Assets and Fixed Assets of Different Industries are as follow:-
Current Assets % Fixed Assets % Industries
10-20 80-90 Hotels and Restaurants
20-30 70-80 Elec. Generation and Distribution
30-40 60-70 Aluminium Shipping
40-50 50-60 Iron and Steel Basic Industries
50-60 40-50 Tea Plantation
60-70 30-40 Cotton Textiles and Sugar
70-80 20-30 Edible Oil and Tobacco
80-90 10-20 Trading and Construction etc.
The consideration of level of investment in current asset should be to avoid two danger
points: excessive and inadequate investment in current assets. Investment in current assets
should be just adequate, not more nor less to the needs of business firm. Excessive
investment in current assets should be avoided as its Impairs firm’s profitability. On the
other hand inadequate amount of working capital can threaten solvency of the firm.
Another aspect of gross working capital points to the need of arranging funds to finance
current assets. Whenever a need for working capital arises, financing arrangements
should be made quickly. Similarly surplus arising shall be invested in short-term
securities.

Net Working Capital:-

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. Current liabilities include creditors, bills payable and
outstanding expense. Net working capital can be positive or negative.
Net working capital is a qualitative concept. It indicate the liquidity position of the firm
and suggests the Extend to which working capital needs may be financed by permanent
source of funds such as shares, debentures, long term debts etc. It covers the question of
judicial mix of long and short-term funds for financing current assets.
In order to protect their interest, short-term creditors like a company to maintain a
positive N.W.C. conventionally the ratio of C.A. and C.L. is 2:1. A negative N.W.C
means a negative liquidity, which may prove to be harmful to company, reputation. It
poses a threat on the company’s solvency and makes it unsafe and unsound.

45
Trade-Off between profitability and risk:-
In evaluating the firm’s working capital position’ an important consideration is the trade-
off between profitability and risk. In other words’ the level of N.W.C has a bearing on
profitability as well as risk.
The term profitability used in this context is measured by profit after expenses.
The term risk is defined as the profitability that a firm will become technically insolvent
so that it will not be able to meet its obligation when they become due for payment.
It is assured that greater the amount of N.W.C, the less risk prone the firm is, or
greater the N.W.C the more liquid is the firm and therefore the less likely it is to become
technically insolvent. Conversely lower level of N.W.C and liquidity are associated with
increasing level of risk.
A firm must have adequate W.C. It should neither be excessive nor inadequate.
Excessive W.C means the firm has idle funds, which earn no profit for the firm. This
situation decreases both risk and profitability of the firm. Inadequate W.C. means the firm
does not have sufficient fund for running its operations, which ultimately results in
production interruptions, and lowering down the profitability.
Lower level of WC increase the risk but have the potentiality of increasing the
profitability also.
The above principle based on following assumptions:-

1. There is direct relationship between profitability and risk

2. Current assets are less profitable than fixed assets.
3. Short-term funds are less expensive than long-term funds.
Effect of level of C.A\c on the profitability risk trade off:

The effect of level of C.A\c on profitability risk and trade off can be shown using the ratio
of C.A\c to T.A\c This ratio indicates the percentages of T.A\c that are in forms of C.A\c
An increase in the ratio will lead to decline in profitability because C.A\c is less profitable
than FAs. It would also increase risk of technical insolvency because increase in C.A\c
assuming no change in C.Lwill increase N.W.C. Conversely a decrease in ratio will result
in increase in profitability as well as risk.
Effect of Level of CL on risk profitability trade-off:

The effect of C.L can be demonstrated by using the ratio of C.L to Task this portion of
short term financing which is less expensive as compared to long term financing. This
will, therefore, be a decline in cost and corresponding rise in profitability.
The increased ratio will also increase risk because assuming no change in C.A this would
decrease in N.W.C.
The consequence of decrease in the ratio is exactly opposite to the result of an increase.

46
That is it will lead to decrease in profitability as well as risk.

Need for Working Capital:-

The basic objective of financial management is to maximize shareholder’s wealth. For
this it is necessary to generate sufficient profits. The extent to it, which the profit can be,
earn, largely depend on the magnitude of sales. However sales do not convert into cash
instantly. There is invariable the time gap between the sale of goods and receipt of cash.
There is, therefore, a need for working capital in the form of C/A to deal with the problem
arising. Out of the lack of immediate realization of cash again goods sold. Therefore,
sufficient W.C.Is necessary to sustain sales activity.
The operating cycle can be said to be at the heart of the need for WC. The
continuing flow from cash to suppliers, to inventory, to account receivables and back into
cash is known as operating cycle.
The operating cycle of a manufacturing Company involves three phases:
 Acquisition of resources – such as raw materials, labor, power and fuel etc.

 Manufacturing of product – Which includes conversion of raw material into

WIP into finished goods?

 Sale of the product – either on cash or on credit. Credit sales create account
receivable for collection.
This phase affect cash flows, which most of the time are neither synchronized nor certain.
They are not synchronized because cash out flows

Usually occur before cash inflows. Cash inflows are uncertain because sales &
collections are difficult to forecast. Cash outflows, on the other hand are relatively
certain. The firm is therefore required to invest in CAs for smooth uninterrupted
functioning. Firs need to keep cash or invest in liquid securities so that they will be able
to meet obligations when they become due. Similarly the firm must have adequate
inventory to provide a cushion again out of stock. For being competitive the firms must
sell goods on credit, which necessitates holding of accounts receivables.

The following Figure illustrates the determination of length of Operating cycles:-

47
 PURCHASE PAYMENT CREDIT SALE COLLECTION

(RMCP+WIPCP+FGCP) RECEIVABLE

(Inventory Conversion)

Period Conversion Period

Payables Net Operating Cycles

Gross Operating Cycles

Types of Working Capital:

There are two types of working capital visa:

(a) Permanent working capital
(b) Temporary working capital.

Permanent Working Capital:-

The O.C .creates the needs for C.A, however the need does not come to an end after the
cycle is completed. It continues to exist and therefore the need for C.A is felt
continuously. But the magnitude of C.A is not constant but fluctuating.
However there is always a minimum level of C.As, which is continuously required
by the firm to carry on its business operations. The minimum level of C.As is referred to
as permanent or fixed W.C. It is permanent in the same way as the firm’s FAs are.
The following are the characteristics of permanent working capital:-

1. Amount of permanent working capital remains in the business is one form or the
other. The suppliers of such W.C. should not accept its return during the lifetime of
the firm.
2. It grows with the size of the firm.
Permanent W.C. is permanently needed for the business and therefore, it should be
financed out of long term funds.

48
Temporary Working Capital:-

The amount of temporary working capital keeps on fluctuating on time to time on the
basis of business activities. In other words it represents the additional current assets
required at different time during the operating year. For example, extra inventory of
finished goods will have to be maintained to support the peak period of sales and
investment in receivable may also increase during such period. On the other hand
investment in raw material, WIP and finished goods will fall if the market is in depression
period.

The amount over and above permanent working capital is temporarily variable or
fluctuating. The position of the required WC is needed to meet fluctuation in demand
consequent upon changes in production and sales, as a result of seasonal changes.
Suppliers of total WC can expect its return during off-seasons when the firm does not
require it. Hence total WC is generally financed from short-term sources of finance such
as bank credit etc.

Amm. Temporary Assets

Of
W.C

Permanente Assets

Time
Temporary
working capital

49
 Permanente and Temporary Working Capital (WC) of a Stable Firm:-
It is shown in the above diagram that permanent WC is stable while temporary WC is
fluctuating and increasing and decreasing in accordance with seasonal demands.
In the case of an expanding firm the permanent WC line may not be horizontal.
This is because the demand for permanent CA might be increasing (or decreasing) to
support a rising level of activities. In that case line should be raising one as follows:
Both kind of WC are necessary to facilitate the sales process through the operating
cycle. Temporary WC is created to meet liquidity requirement that are of purely transient
nature.

Amount
Of
WC Temporary WC

Permanente WC

Permanente and Time Temporary W.C. of a Raising

Firm

Components of Working Capital:-

There are two basic components of Working Capital

(a) Current assets
(b) Current liabilities.
Effective management of working capital calls for effective management of these
components. Current assets management includes management of cash, inventories,
account receivables etc. And current liabilities management includes creditor’s
management etc.

50
 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.

51
Each component of working capital (namely inventory, receivables and payables)
has two dimensions........ TIME ......... and MONEY. When it comes to managing
working capital - TIME IS MONEY. If you can get money to move faster around
the cycle (e.g. collect monies due from debtors more quickly) or reduce the
amount of money tied up (e.g. reduce inventory levels relative to sales), the
business will generate more cash or it will need to borrow less money to fund
working capital. As a consequence, you could reduce the cost of bank interest or
you'll have additional free money.

Available to support additional sales growth or investment. Similarly, if you can

negotiate improved terms with suppliers e.g. get longer credit or an increased
credit limit; you effectively create free finance to help fund future sales.

If you....... Then......
 Collect receivables You release cash
(debtors) faster from the cycle

 Collect receivables Your receivables

(debtors) slower soak up cash

 Get better credit (in terms You increase your

of duration or amount) cash resources
from suppliers

 Shift inventory (stocks) You free up cash

faster

 Move inventory (stocks) You consume

slower more cash

It can be tempting to pay cash, if available, for fixed assets e.g. computers, plant,
vehicles etc. If you do pay cash, remember that this is now longer available for
working capital. Therefore, if cash is tight, consider other ways of financing
capital investment - loans, equity, leasing etc. Similarly, if you pay dividends or
increase drawings, these are cash outflows and, like water flowing downs a plug
hole, they remove liquidity from the business.

52
 “More businesses fail for lack of cash than for want of profit”

Sources of Additional Working Capital

Sources of additional working capital include the following:

 Existing cash reserves

 Profits (when you secure it as cash!)
 Payables (credit from suppliers)
 New equity or loans from shareholders
 Bank overdrafts or lines of credit
 Long-term loans

If you have insufficient working capital and try to increase sales, you can easily over-
stretch the financial resources of the business. This is called overtrading. Early warning
signs include:

 Pressure on existing cash

 Exceptional cash generating activities e.g. offering high discounts for early cash
payment
 Bank overdraft exceeds authorized limit
 Seeking greater overdrafts or lines of credit
 Part-paying suppliers or other creditors
 Paying bills in cash to secure additional supplies
 Management pre-occupation with surviving rather than managing
 Frequent short-term emergency requests to the bank (to help pay wages, pending
receipt of a cheques).

53
 Comparative Working Capital Statement of Haldiram Pvt.Ltd
As per Financial Statement of Company up to 31 March 2013

Particulars Schedules 31-03-13 31-03-12 31-03-11

A) Current Assets

Current Investment ------------ ------------- --------------

Inventory 129,551,762 91,855,533 84,724,774

Sundry Debtors 16,080,722 9,368,200 16,912,548

Cash & Bank Balance 74,190,357 42,045,083 26,734,563

Other current assets -------------- ------------- --------------

Loans & Advances 101,307,353 45,761,638 34,974,571

Total Of C.A. 321,130,194 189,030,474 163,318,217

B) Current Liabilities

Liabilities 84,319,556 111,488,311 166,570,772

Provision 123,453,214 63,619,585 22,747,445

Total of C.L. 207,772,770 175,108,089 189,318,217

Increase/Decrease in WC 113,357,424 13,922,385 (25,971,761)

54
 Working capital management

Efficient management of working capital is extremely important to any

organization. Holding too much working capital is inefficient, holding too little is
dangerous to the organization’s survival.

Working capital is the everyday term for what accountants call net current
assets. The working capital figure is the total of current assets minus the total of
current liabilities. The main current assets are stock, debtors and cash. The current
liabilities are creditors and accrued expenses. The key factor in the word "Current"
is that they are expected to turn into cash, or be paid from cash, within twelve
months. As a general rule the organization wants as little money tied up in working
capital as possible. However, there are always trade-off. The most obvious
problem is running out of cash so you cannot pay the wages, or being unable to
provide a service because you have run out of a vital resource: for example, a
meals service being unable to produce the required number of meals because they
did not have enough foodstuffs in stock.

Each of the areas of working capital has different problems and these are
discussed separately in the following sections:

 Stock control

 Debtor control

 Cash flow management guidelines

 Creditor control

In order to assess whether you have a "safe" amount of working capital there are
two important calculations you can make:

 The Current Ratio

The Current Ratio is the relationship between the total current assets and the total
current liabilities. Generally speaking a service organization should have about

55
£1.25 current assets for every £1 of current liabilities. If there are significant
trading operations such as shops or mail order selling then the.

Ratio should be closer to £2 of current assets for every £1 of current liabilities.

 The Quick Ratio or "Acid Test"

The Quick Ratio is the relationship between the total of debtors and cash compared
with current liabilities. Generally the debtors and cash together should
approximately equal the current liabilities.

Documents in this section:

 Accounting policy: cash or accrual?
 Audit committee: model terms of reference.
 Becoming an Independent Examiner.
 Cash flow management.
 Controls on expenditure.
 Controls on fixed assets.
 Controls on income and debtors.
 Creditor control.
 Debtor control: bad debt.
 Debtor control: invoicing and collection.
 Developing spreadsheets to implement budgetary controls.
 Financial difficulties: facing insolvency.
 Financial difficulties: how to recognize and avoid.
 Financial difficulties: managing a crisis.
 Financial health’s check.
 Finding and working with financial management advisors.
 How to find an internal auditor.
 How to select and tender for audit.
 Internal audit.
 Making management accounts effective tools.

56
  Model Finance Director/Manager Job description.
 Model internal auditor job description.
 Model management accountant job description.
 Petty cash.
 Prepare for Charity Commission visits.
 SORP and SOFA.
 Stock control.
 Understanding financial statements.
 Understanding SORP.
 Using an Independent Examiner to scrutinize accounts.
 What is an audit?
 What is an Independent Examination?
 Working capital management.
 Working with auditors.

 Stock control

Stock control is particularly important where: The organization is involved in

quasi-commercial trading, such as running shops or mail-order businesses

 There are stocks crucial to the operation of the organization - for example,
dressings in a care home.

Not all organizations have significant stocks. If your organization has only about a
hundred pounds tied up in stationery, for example, then it is not cost effective to
have complicated procedures to manage your stock.

The Problems:-

If too much stock is held, the organization wastes money through a variety of
factors:

 Money is tied up in stock when it could be put to better use.

 There are superfluous warehousing and storage costs.

57
  Stock may deteriorate.
 There is a potentially greater risk of theft.

On the other hand, too little stock can lead to stock- outs which can:

 Halt activity
 Lose income
 Cause discomfort or distress to clients

However, finding the correct level of stock for any one particular item is complex.
This is because there are many influencing factors including the anticipated
demand for the items and the cost-efficient use of the organization’s resources.
The aim is to find the right balance.

The solution:-

The first place to start is to look at your income forecast. This will give you an
indication of your demand and how much stock you will need to meet it. If you do
not currently forecast income in any detail then an analysis of past demand can
help. Go back through your figures for the last two or three years to see if you can
identify any demand patterns.

Your analysis need not cover the whole of your stock needs. A large
proportion of your stock value is likely to be tied up in a small proportion of the
total items. This is sometimes called the 80:20 rules: it is likely that 80% of the
value is contained in 20% of the items. Concentrate your management time on
these.

When determining your stock levels you will also need to look at lead
times. Lead-time is the time it takes from ordering a product to the point at which
it is received. Something which can be obtained within a few hours is much less of
a problem than something which has to be imported and can take up to a month to
arrive. The major difficulty is deciding how much of the demand you want to
keep in stock at any one moment. Should you have sufficient to meet one week's
needs? One month? Three months?

The factors to consider when deciding how much to hold include:

58
  Purchasing Costs

It may be possible to reduce the cost of purchases by placing a large order: this
will reduce average unit delivery costs and may result in being given quantity
discounts. However, it is not worth having to carry five years supplies in order to
get a 1% discount.

 Essential Supplies

There may be some items of stock that it is absolutely vital not to run out of. A
good supply of these must be kept.

 Stock Holding Costs

Here you have to consider costs of insuring, warehousing, and any bank interest
paid or foregone as a result of holding that amount of stock.

 Nature of the Organization

A cake shop or a florist attached to a hospice will require minimum stocks,

perhaps sufficient only to cover one day's sales. However, a charity selling goods
made by the disabled in developing countries will need much higher levels.

THEORY OF FINANCIAL STATEMENT

A financial statement is an organized collection of data according to logical

and consistent accounting procedures. Its purpose is conveying an

understanding of some financial aspect of a business firm. It may show a

position at a moment of time as in the case of a balance sheet, or may reveal

a series of activities over a given period of time, as in the case of an income

statement.

59
 The term financial statements generally refer to 4 basic statements;

(1) The income statement,

(2) The balance sheet. Of course, a business may also prepare

(3) A statement of retained earnings, and

(4) A statement of changes in financial position.

FINANCIAL STATEMENTS

STATEMENT
INCOME BALANCE STATEMENT OF OF
STATEMENT SHEET RETAINED CHANGES IN
EARNINGS FINANCIAL
I POSITION

INCOME STATEMENT

The income statement is generally considered to be the most useful of all

financial statement. the nature of the ‘income” which ie focus of the income

statement can be well understood if a business is taken as an organization

that uses ‘inputs” to ‘produce” output. The outputs are the goods and

services that the business provides to its customers. The values of these

outputs are the amounts paid by the customers for them. These amounts are

60
called “revenues” in accounting. The inputs are the economic resources used

by the business in providing these goods & services.

BALANCE SHEET

It is a statement of financial position of a business at a specified moment of

time it represent all assets owned by the business at a particular moment of

time. The important distinction between an income statement and a balance

sheet is that the income statement is for a period while balance sheet is on a

particular date. Income statement is a flow report, as contrasted with the

balance sheet which is a static report. However, both are complementary to

each other.

STATEMENT OF RETAINED EARNINGS

The term retained earning means the accumulated excess of earning over

losses and dividend. it is fundamentally a display of things that have caused

the beginning-of- the- period retained earning balance to be changed into the

one shown in the end-of –the- period balance sheet.

The statement is also termed as profit and loss appropriation account in case

of companies.

61
STATEMENT OF CHANGES IN FINANCIAL POSITION

The balance sheet shows the financial condition of the business at a

particulars moment of time while the income statement discloses the result

of operations of business a period of time. This information is available in

the statement of changes in financial position of the business.

62
 TYPES OF FINANCIAL ANALYSIS

 ON THE BASIS OF MATERIAL USED: According to this basis,

financial analysis can be of two types.

 External analysis: This analysis is done by those who are Outsider for
the business. The position of these analysis has improved in
recent times on account of increased governmental control over
companies and governmental regulations requiring more detailed
disclosure of information by the companies in their financial statement
 Internal analysis: This analysis is done by persons who have Access
to the books of account & other Information related to the business.

 ON THE BASIS OF MODUS OPERANDI: According to this

basis, Financial analysis can also be of two types:

 Horizontal analysis: financial statement for a number of years are

reviewed and analyzed. Te current year’s figures are compared with
the standard or base year. Such an analysis gives the management
considerable insight into levels and areas of strength and weakness.
It is also termed as “dynamic analysis”.
 Vertical analysis: Analysis a study is made of the quantitative
Relationship of the various items in the financial statement on a
particular date. It is also called “static analysis”.

63
 IMPORTANCE OF FINANCIAL STATEMENT

The information given in the financial statement is very useful to a number

of parties as given below;

 OWNERS; The owners provide funds for the operations of a

business and they want to know whether their funds are being
properly utilized or not. The financial statements prepared from time
to time satisfy their curiosity.
 CREDITORS; The creditors want to know the financial position
of a concern before giving loans or granting credit. The financial
statement helps them in judging such position.
 INVESTORS: prospective investors, who want to invest money
in a firm, would like to make an analysis of the financial statement of
what firm to know how safe proposed investment will be.
 EMPLOYEES: employees are interested in the financial position
of a concern they serve, particularly when payment of bonus depend
upon the size of the profit earned.
 GOVERNMENT: Central and state governments are interested
in the financial statement because they reflect the earnings for a
particular period for purpose of taxation.
 RESEARCH SCHOLARS: the financial statements, being a
mirror of the financial position of a firm, are of immense value to the
research scholars who wants to make a study into financial
operations of a particular firm.

64
 CONSUMERS: consumers are interested in the establishment
of good accounting control so that cost of production may be reduced
with the resultant reduction of the prices of goods they buy.
 MANAGERS: management is the art of getting things done
through others. This requires that the subordinates are doing work
properly. Financial statements are an aid in this respect because they
serve the manager is appraising the performance of the subordinates.

65
STAGES OF FINANCIAL STATEMENT ANALYSIS

The following are the stages of financial statement analysis.

1. ESTABLISHED RELATIONSHIP: A relationship is established

among financial statements with the help of tools and techniques of

analysis such as ratio, trend, common-size, fund flow etc.

2. RE-ARRANGEMENT: Whatever information is available must be

re-arrangement with a view to derive the maximum information from

the analysis of financial statement. Re-arrangement depends upon the

purpose of analysis.

3. COMPARISION: It is also required to connect data in such a from

whereby comparison is done easily. For this purpose data of some

more years is required.

4. ANALYSIS AND INTERPRETATION: Data is analyzed as per

purpose and them interpreted. Interpretation should be precise.

5. CONCULUSION: The conclusion draws from interpretation are

presented to the management in the form of report.

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 LIMITATION OF ANALYSIS OF FINANCIAL
STATEMENT
Analysis of financial statement is most important device but the

person using this device must keep in mind its limitation. The

following are the main limitation of the analysis:

 HISTORICAL NATURE OF FINANCIAL STATEMENT: The basic

nature of these statements is historical, i.e., relating to the past

period. Past can never be a precise and infallible index of the future

and can never be hundred per cent helpful for the future forecast and

planning.

 FINANCIAL ANALYSIS IS ONLY A MEANS: Financial analysis is a

means to an end and not the end itself. The analysis should be used

as a starting point and the conclusion should be drawn not in

isolation, but keeping in overall picture and the prevailing economic

and political situation.

 FINANCIAL STATEMENT IS ESSENTIALLY INTERIM REPORT: The

profit shown by profit and loss account and the financial position as

depicted by the balance sheet is not exact. The exact position can be

known only when the business is closed down.

 CHANGE IN ACCOUNTING METHOD: Analysis will be effective if

the figures derived from the financial statement are comparable. Due

67
 to change in accounting methods, the figures of the current period

may have no comparable base, and then the whole exercise of

analysis will become futile and will be of little value.

 SHORTCOMING OF THE TOOL OF ANALYSIS: There are different

tools of analysis available to the analyst. Which tool is to be used in a

particular situation depends on the skill, training, and expertise of the

analyst.

 IGNORING QUALITATIVE ASPECT: Financial analysis does not

measure the qualitative aspect of the business. It is the quantitative

measurement of performance. It means that analysis of financial

statement measures only the one sided performance of the business.

 IGNORING PRICE LEVEL CHANGE: The comparability of ratio

suffers if the prices of the commodities in two different years are not

the same. Change in price affects the cost of production, sales and

also the value of assets.

 FINANCIAL STATEMENTS IS ONLY A TOOL, NOT THE FINAL

REMEDY: Analysis of financial statement is a tool to measure the

profitability, efficiency and financial soundness of the business. It

should be noted that personal judgment of the analyst are most

important in financial analysis. We should not rely on single ratio.

68
69
 TECHNIQUES OF FINANCIAL ANALYSIS

A financial analysis can adopt one or more of the following

techniques/tools of financial analysis:

FINANCIAL ANALYSIS
TECHNIQUES

COMPARATIVE CASH FLOW RATIO

STATEMENT ANALYSIS ANALYSIS

70
 COMPARATIVE STATEMENT: A Comparatives statement is those

in which figures reported are converted into percentages to some

common base. In the income statement the sale figure is assumed to

be 100 and all figures are expressed as a percentage of this total.

The comparative statements show the percentages of each item to the total

in each period but not variations in respective items from period to period.

On account of this reason comparative statement are not much useful for

financial analysis. However, comparative statements are useful for studying

the comparative financial position of two or more business.

Advantages of comparative statement:

 Such statements are easily understandable;

 It helps in the comparison between two or more years or two or

more firms

 Variations are in proportions instead of being absolute

 Analysis becomes qualitative instead of qualitative

 Qualitative analysis helps in the formulation of future financial

policies.

 CASH FLOW STATEMENT: cash plays very important role in

the entire economic life of business. It is very essential for a business

71
to maintain an adequate balance of cash. Cash flow statement is a

statement of changes of financial position in business due to inflow or

outflow of cash and their statement is required for short-range

business premises. A cash flow statement summarizes the causes of

change in cash position of a business enterprise between dates of

two balance sheets. A cash flow statement is useful for short-term

planning. Cash flow analysis is an important financial tool for the

management.

Advantages of cash flow statement:

 Helps in efficient cash management

 Helps in internal financial management

 Discloses success or failure of cash planning

 Helps in declaring dividends etc.

72
 CONCEPT OF RATIO ANALYSIS

This is most important tool available to financial Analysis for this

work. An accounting ratio shows the relationship in mathematical

terms between two interrelated accounting figures. Ratio analysis is a

technique of analysis and interpretation of financial statements. It is

the process of establishing and interpreting various ratios for helping

in making certain decisions. Thus, ratio analysis measures the

profitability, efficiency and financial soundness of the business.

Objective of ratio analysis:

 Measuring the profitability

 Judging the operational efficiency of business

 Assessing the solvency of the business

 Measuring short and long-term financial position of the

company

 Facilitating comparative analysis of the performance

73
 Advantages of ratio analysis:

 Helpful in financial analysis

 Helpful in explaining financial health of the enterprise

 Helpful in locating shortcomings/weaknesses

 Helpful in future forecasting

 Helpful in comparing inter-firm performance

 Helpful in simplifying accounting figure

 Helpful in assessing operating efficiency of the business

74
 TYPES OF RATIOS

 CURRENT RATIO: Current Ratio depicts the relationship

between Current Assets and Current Liability. Current ratio is

required to evaluate the ability of a firm to meet its short term

obligations in time. It helps to access the short term financial

position of the business enterprise. It shows how many times

current assets are in excess of current liability.

CURRENT RATIO = Current Assets

Current liability

 QUICK RATIO: Also known as Liquid Ratio or Acid Test Ratio.

Quick Ratio establishes the relationship between Liquid Assets

and Current Liability. In current assets, a rupee of cash is

considered equal to a rupee of inventory but in fact a rupee of

cash is more liquid to meet obligations than a rupee of

inventory. Considering this fact, liquid ratio offers a better

measure to immediately evaluate the short-term liquidity of the

firm. Here liquid assets refers to those current assets which can

be immediately converted into cash without any loss.

75
 QUICK RATIO = Liquid Assets

Current Liabilities

 DEBTORS TURNOVER RATIO: Debtors Turnover Ratio

establishes the relation between Receivables and Net Credit

Sales . It shows with which debtors or receivables are

converted into cash. Its tests the liquidity of debtors of a firm.

DEBTORS TURNOVER RATIO = Net credit sales

Average Debtors

 AVERAGE COLLECTION PERIOD: It is a step further for

measuring the liquidity of firms debtors. Average age of

receivables is the time margin between credit sales and its

conversion into cash.

AVERAGE COLLECTION PERIOD = Days in a year

Debtors Turnover

 WORKING CAPITAL TURNOVER RATIO: This ratio shows the

number of times working capital is turned over in a stated

period. Also, it indicates the extent to which the working capital

funds have been employed in the business towards sales. This

ratio indicates the efficiency in the utilization of short-term funds

76
 in making the sales. Interestingly, amount of capital employed

can be easily reduced by handling short-term assets with due

care, thereby improving the resulting turnover.

WORKING CAPITAL TURNOVER RATIO = Net Sales

Net Working Capital

 CURRENT ASSETS TURNOVER RATIO: This ratio measures

the relationship between net sales and current assets. This ratio

shows how efficiently the current assets are utilised in achieving

the targetted sales of the business enterprise.

CURRENT ASSETS TURNOVER RATIO = Net Sales

Current Assets

 NET PROFIT RATIO: This ratio establishes the relationship

between net profit and net sales. Increase in net profit ratio

indicates better efficiency of the business enterprise. It shows

the net results of operational activities of business enterprise.

NET PROFIT RATIO = Net Profit × 100

Net Sales

INVENTORY TURNOVER RATIO: It indicates the number

of times inventory is replaced during the year. It shows the

77
 relationship between the cost of goods sold and the inventory

level. It is also called Stock or Merchandise Turnover Ratio.

The point to be noted here is that cost of goods sold is

considered as against sales because stock account is maintained

at cost price.

INVENTORY TURNOVER RATIO = Sales

Average Inventory

 CREDITORS TURNOVER RATIO: It establishes the relation

between Payables and Net Credit Purchases. It shows the

speed with which creditors or payable are to be paid. The

entities, to whom amount is owed by the business enterprise,

on account of credit purchases of goods and services are

known as creditors and when bills are accepted in lieu of such

credit purchases such bills are known as bills payables.

CREDITORS TURNOVER RATIO = Net Credit Purchases

Average Creditors

78
 STRUCTURE OF CURRENT ASSETS AND CURRENT
LIABILITIES

CURRENT ASSETS :-

1. Cash & Bank Balances.

2. Investment held for short-term purposes and also securities which

are easily marketable (Money Market Securities and other like

Instruments).

3. Short - term Fixed Deposit (with in one year maturity).

4. Sundry Debtors or Receivables (Bill purchasing & discounting by

Bank / non-banking financial institutions included).

5. Deferred receivables limited to installments due with in one year.

6. Raw Material in transit.

7. Raw materials / components in stock and is used in course of normal

production.

8. Stock of work - in - progress.

9. Finished goods and goods in transit.

10. Consumable stores.

11. Pre-paid expenses including advance payment of tax.

12. Advances to suppliers for raw materials, consumables etc.

79
13. Security / Earnest Money Deposit returnable within reasonable

production cycle.

CURRENT LIABILITIES :-

1. Creditors for raw materials, consumables etc.

2. Advance payment or stage payment received from customers.

3. Deposit from authorized agents and the like.

4. Deferred installment payable within a year whether for repayment

of term loan / debenture or deferred payment for credit.

5. Interest / other charges payable.

6. Public deposit repayable within a year.

7. Unsecured loans payable within a year.

8. Statutory liabilities like ESI, Co-operative Dues, P.E., Sales Tax,

Excise Duty, Salaries and Wages.

9. Other current liabilities like dividend, gratuity payable yearly, other

similar liabilities for expenses.

80
 MANAGEMENT OF ACCOUNTS RECEIVABLE

Meaning of Account Receivable :-

Selling goods is the most prominent force of modern business. Modern firms

resort to credit sales for increasing the volume of their sales and earning

maximum profits. Selling goods on deferred payment basis is termed as

'trade credit'. Trade credit is also known as account receivables or book debts

or sundry debtors. Thus, accounts receivables, popularly termed as

receivables, are a direct consequence of trade credit which become an

inevitable marketing tool in modern business. Receivable constitute a

significant portion of the total current assets of the firm, next to inventories

and cash. Generally, 5 to 25 percent of the total assets of the companies

account for the investment in account receivables, depending upon the nature

of business. This percentage varies between 5 to 10 percent in case of

manufacturing companies, and 20 to 25 percent in cash of trading

companies.

It is, therefore, necessary on the part of the financial manager to pay to due

attention to the management of account receivables. A contant vigilance in

respect of the level of receivables, credit policy and procedures is essential

for the growth and expansion of the firm.

81
Receivables or account receivable are the asset account representing amount

receivable by the firm on account of sale of goods and services on deferred

payment basis.

Receivable therefore, represent the claim of the firm against its customers,

and are carried to the assets sides of the balance sheet under titles such as

book debts, account receivables, trade receivables or customer receivables.

Trade credit is a very useful source of finance. Controlling trade credit

requires different techniques which are different from those applies to assets

because the decision process is different.

It we presume that a discount is offered by supplier at 2% if payment is

made with 10 days as against usual period of payment of 45 days. Here the

buyer will have to take decision whether he will pay within 10 days and avail

of 2% discount or he will pay on 45 days. In such cases, the simplest way is

to compare the rate of investment opportunity the buyer may get by not

paying within 10 days with the rate of discount offered if payment is made

within 10 days. Thus if the amount of trade credit Rs.100, the buyer will

have to pay latest on 10th day Rs.98 (Rs.100-Rs.2)

The rate come to 2/98*100% = 2.04%

This 2.04% return on investment applies for 35 days and hence to find out

annual rate equivalent we get :

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 2.04*365/35% = 21%

This 21% is the annual before tax cost of trade credit for the supplier who

has offered this discount.

This rate is compared with buyer's investment rate to take the discount' If he

can earn more than 21% on the comparable low risk investment, it will be

advisable to delay the payment till 45 days and reject the offer of discount.

In case where there is a problem of cash flow and the suppler cannot be paid

within 10 days for availing of discount of 2%, it will be wise to arrange a

Bank overdraft of 10% interest than forego a discount of 21%.

83
 Management of Inventory

The term inventory refers to the stock of the products a firm is offering for sale and
the components that make up the product. That is, inventory is composed of assets
that will be sold in future in the normal course of business operations. These assets
are i) Raw materials, ii) Work-in-progress and iii) Finished goods. The views
concerning the appropriate level of inventory would differ among the different
functional areas.

Objectives:
Efficient management of inventory should ultimately result in the
maximization of owners’ wealth. The inventory should be turned over as quickly
as possible, avoiding stock-outs that might result in closing down the production
line or lead to a loss of sales. It implies that while the management should try to
pursue the financial objectives of turning inventory as quickly as possible, it
should at the same time ensure sufficient inventories to satisfy production and sale
demand, that is, these two conflicting requirements have to be reconciled.
Alternatively, we can say that the objective of inventory management is to
minimize investment is inventory and also to meet a demand for the product by
efficiently organizing the production and sales operation. That is to say, an
optimum level of inventory should be determined on the basis of the trade-off
between costs and benefits associated with the level of inventory.

COST OF HOLDING INVENTORY:

The objective of inventory management is to minimize costs. The costs
associated with the inventory fall into two basic categories: i) ordering costs, and
ii) carrying costs. These costs are an important element of the optimal level of
inventory decisions and are described as under:

 Ordering costs; these are the costs associated with the acquisition or
ordering of inventory. It is the fixed cost of placing and receiving an inventory
order. Included in the ordering costs are costs involved in one i)preparing a
purchase order or requisition form and ii) receiving, inspecting and recording of
the goods received to ensure both quality and quantity. These are generally fixed
irrespective of the amount of order. Hence, such costs can be minimized by
placing fewer orders for a larger amount. However, acquisition of large quantity
would increase the costs associated with the maintenance of the inventory, that is,
carrying costs.

84
 Carrying costs: these costs are the variable costs per unit of holding an
item in inventory for a specified time period. These costs can be divided into two
categories. i) those that arise due to

 storing of inventory: the main components of this category of costs are a)

the storage costs, insurance, maintenance of the building b) insurance of
inventories against fire and theft, c) deterioration in inventory because of pilferage,
fire, technical obsolescence, d) serving costs such as labor for handling, ii)
opportunity costs: this consists of expenses in raising funds. If funds were not
blocked up in inventory, they would have earned a return. This is the opportunity
cost of funds.
The sum of ordering and carrying costs represents the total cost of inventory.
Benefits of holding inventory:
The secondary element in the optimum inventory decision deals with the
benefits associated with holding inventory. The major benefits of holding
inventory is that they enable firms in the short run to produce at a rate greater than
purchase of raw materials and vice-versa, or sell at rate greater than production and
vice-versa.
Inventory Management Techniques:
Many sophisticated mathematical techniques are available to handle
inventory management problems.

 Classification System: A B C System;

The ABC system is a widely used classification technique to identify

various items of inventory for the purposes of inventory control. This technique is
based on the assumption that firm should not exercise the same degree of control
on all items of inventory. It should rather keep a more rigorous control on items
that are most costly and or slowest turning, while items that are less expensive
should be given a less control. Hence, ABC system is an inventory management
technique that divides inventory into three categories of descending importance
based on rupee investment in each. The items included in group A involve the
largest investment. Therefore, inventory control should be most rigorous and
intensive and the most sophisticated inventory control, techniques should be
applied to these items. The C group items consist of items of inventory which
involve relatively small investments, although the number of items is fairly large.
These items deserve minimum attention. The group B stands mid-way. It deserves
less attention than a but more than C. It can be controlled by employing less
sophisticated techniques.

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The task of inventory management is to classify all the inventory items into one
of these groups/categories.

 Order quantity problem: EOQ model;

Economic order quantity model is the inventory management technique
for determining items optimum order quantity which is the one that minimizes the
total of its ordering and carrying costs. It balances fixed ordering cost against
variable ordering costs. It is also known as economic lot size. Mathematically it
can be calculated by the following equation:
EOQ = √2AO
√C
Where A= Annual usage in units
B= Ordering Cost
C= Carrying Cost

Setting of various stock levels:

 Minimum level; It indicates the lowest figure of inventory balance, which

must be maintained in hand at all times so that there is no stoppages of production
due to non-availability of inventory. The main considerations for fixation of
minimum level of inventory are as follows:
1. Information about maximum consumption period and maximum delivery
period in respect of each item to determine its re-order level.
2. Average rate of consumption for each inventory.
3. Average delivery period for each item.
The formula for calculation is as under:

Minimum level of inventory = Re-order level – (Average rate of consumption

x Average time of inventory delivery)

 Maximum Level: It indicates the maximum figure of inventory quantity

held in stock at any time. The important considerations which should govern the
fixation of maximum levels of inventory are as follows:
1. The information about its re-order level since it itself depends upon its
maximum rate of consumption and maximum delivery period.
2. Knowledge about minimum consumption and minimum delivery period for
each inventory should also be known.
3. The figure of EOQ.

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4. Availability of funds, storage space, nature of items and their price per unit
are also important for the fixation of maximum level.
The formula for calculation is as under:
Maximum level of inventory = Re-order level + re-order quantity - (Minimum
consumption x Minimum re-order period)

 Re-order Level: This level lies between the maximum and minimum
levels in such a way that before the material ordered is received into the stores,
there is sufficient quantity on hand to cover both normal and abnormal
consumption situations. In other words, it is the level at which fresh order should
be placed for replenishment of the stock.
The formula for calculation is as under:
Re-order level of inventory = Maximum re-order period x Maximum usage
OR Minimum Level + (Average Rate of consumption x Average Time to
obtain fresh supplies)
 Danger Level: It is the level at which normal issues of the raw material
inventory are stopped and only emergency issues are made.
The formula for calculation is as under:

Danger level of inventory = Average consumption x Lead time for emergency

purchases

Continuous stock verification: The checking of physical inventory is an

essential feature of every sound system of material control. Such a checking may
be periodic or continuous.

 Debtor control: invoicing and collection

Commercial organizations normally give credit to their customers in order to

encourage sales. In the case of charities it is less likely that you are encouraging
additional sales by giving credit and more likely that your clients will want credit
and will wish to dictate the terms on which they will pay. Therefore, for voluntary
organizations, management is more about dealing with credit than deciding on a
control policy.’ It is better to have cash in your bank account than in your
customers'!

 If you get the money in quickly you can use it for other purposes, which
will advance the organization’s objectives.
 Giving credit costs money, even if it is only a small amount of interest
foregone. If you have an overdraft, the costs rise sharply.

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  If a large client demands an unreasonable amount of credit you may have to
simply walk away from the contract. You cannot afford to risk running out
of cash.
 If stage payments are delayed, you may perhaps have to say, for example,
that you will be unable to complete the contract; this may help with
negotiations.

So what should you be aiming for in terms of the credit you offer? The key
objective should be to try and shorten the period each year rather than lengthen it.
So, for example, if you agree with your client’s 30 days and you collect in this,
you are doing very well!

A general rule of thumb is agreed time plus 33%. You need to improve your
collection procedures as soon as it slips towards this point.

Reducing the cost of debtors:-

 Send invoices promptly

The quicker invoices are sent the sooner they are paid. The best time to send them
is at the same time as dispatching an order or completing a service. Do not wait
until the end of the month as this automatically gives additional credit.

 Send statements monthly

Some organizations pay only on statement, though this is less common now, and it
acts as a reminder for all debtors.

 Phone the client

When you see an invoice that has gone over your credit terms and your statement
produced no response you should try to find out why. The best person to call is not
always the person who gave you the order especially in large organizations. The
purchase (or bought) ledger clerk probably knows most about the delay. If you
have a few important clients it is often worthwhile getting to know the name of
this person and speaking directly with them. They sometimes have the ability to
speed up payment dramatically.

 Send a reminder letter

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After about 60 days you should remind the client of the debt by letter asking for
payment within 14 days.

 Phone again

If the reminder letter was unsuccessful, something may be wrong. Try to find out
what and rectify the situation if possible

 Send a final reminder

When all the above fail, send a letter requesting payment within seven days. This
should state that you would take further measures, legal action or withdrawal of
services, if payment were not received.

 Stop supplies of goods or services

We reach a point where it is vital to stop throwing good money after bad.

 Send a Solicitor's letter

By this time the relationship between you and your client will have broken down.
Place the matter in the hands of your solicitor. Ask them to write to the
organization asking for payment before taking any other action.

 Take legal action

Legal action needs careful consideration. If there is a dispute over the goods or
services, you must have a good case for taking legal action. Otherwise,
hopefully, you would have been able to resolve this issue earlier.

Managing bad and aged debts:-

80% of your debts are probably from 20% of your clients or customers, so
concentrate management effort on these.

An easy way of monitoring debts is to set up the finance system to produce lists of
aged debtors at monthly intervals. Then all debts of, say, over £500 (depending
on the size of the organization) or more than three months old can be picked for
intensive chasing. Alternatively, you could create a list of all debtors, the amounts
and how old they are.

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Part of your procedure to control bad debts should be that only a senior
member of staff or the project leader could be allowed to write off bad debts.
Similarly, the decision to sue should normally be reviewed for likely costs by the
Finance manager to assess whether it is worthwhile, and by a lawyer to assess the
chances of success.

Decreasing your debtor level:-

There are a number of tactics you can employ to encourage early, or at least
discourage late payment.

 Offer discounts

Offering (say) 2.5% discount for payment within 14 days may result in early
payment. However, some organizations may then pay at their normal time but take
the discount anyway. It will seldom be worthwhile to sue for the difference. All
you have then is a 2.5% reduction in your price which the client or customer may
expect to continue!

Furthermore, you have no control over whether the client will take up a
discount. This makes cash forecasting more difficult. Also, you are at the mercy
of interest rates - a discount, which is worthwhile at one level of bank interest, may
not be advantageous if interest rates change, but you will have your contracts and
stationery printed up in advance, and cannot immediately change them.

 Wait for cheque to clear

If you are selling goods by mail order or catalogue, you could consider not sending
them out until cheque has cleared.

 Use merchant accounts

It may be worth setting up the necessary merchant accounts so that you can
accept online orders with a debit or credit card - debit cards work out cheaper.

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 Key Ratios of Working Capital
These are some Ratios to Calculate the Capital Utilization. With the help of these
Ratios we can easily calculate the Current Economic Situation and thus it is
helpful in “WORKING CAPITAL MANAGEMENT”.

Ratio Formulae Result Interpretation

LIQUIDITY RATIOS

Current Assets are assets that you can

readily turn in to cash or will do so
within 12 months in the course of
business. Current Liabilities are amount
you are due to pay within the coming 12
Total Current =321130194/
months. So in the Current Situation, 1.53
Assets/ 207772770
Current Ratio times means that you should be able to
Total Current =1.54
lay your hands on Rs.1.54 for every
Liabilities Times
Rs.1.00 you owe. Less than 1 time e.g.
0.75 means that you could have liquidity
problems and be under pressure to
generate sufficient cash to meet
oncoming demands.

Similar to the Current Ratio but takes

account of the fact that it may take time
(Total Current
to convert inventory into cash. There
Assets - =191578432/
Company is in the Situation of Pay their
Quick Ratio Inventory)/ 207772770
Debts 0.92 times for every 1.00 Rs. It is
Total Current =0.92 times
the Good Sign of Company.
Liabilities

(Cash & Bank =306584558/

Cash Ratio Balance 207772770
+Current In the Cash Ratio we calculate the cash

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 Investment)/ =1.56 times availability in respect of paying Debts.
Current In this ratio we take only Cash Balance
Liabilities and Bank Balance in calculating the
Cash availability in the firm. Here in the
Haldiram Current Cash Ratio is 1.56
which very Beneficial for the company.
It means that Company has 1.56 times
more cash availability to Redeemed their
Loans.

LEVERAGES RATIOS

Debts-Equity Debts/ 110000000/

In the Debts-Equity Ratio we calculate
Ratio Equity 721,661,691
the Owner’s money in respect of
company’s debts.

In the Debts-Assets Ratios we calculate

the Ratios between Debts and Total
Debts-Assets Total 1,130,194,47 Assets and Check the Total Assets value
Ratio Assets/debt 7/1.3125 in respect of Debts.
ratio

TURNOVER RATIOS

The Company may need to break this

Inventory or Cost of Goods down into product groups for effective
Stock Sold/ stock management.
Turnover Average Obsolete stock, slow moving lines will
(in days) Inventory extend overall stock turnover days.
Faster production, fewer product
lines, Just in time ordering will reduce
average days.

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Receivables Net Sales /
1,623,623,72 One or more large or slow debts can
Ratio Average
0/16,080,722 drag out the average days. Effective
(in days) Debtors
=100.94 debtor management will minimize the
days.

Fixed Assets Turnover Ratios shows that

the Company can handle their Net Fixed
Fixed Assets Net Sales/ =1620598080
Assets by the Net sales. Here this ratio is
Turnover Average Net /708322868
2.28 days, which is very good for the
Ratio Fixed Assets =2.28 days
company.

This Ratios Shows that total Assets of

Total Assets Total Sales / 19920116 / the company can be handle by the Total
Turnover Average Total 18327744 Sales. In the Current time this ratio is
Ratio Assets =1.09 days 1.09 days

Working
1620598080/ This ratio shows that utilization of
Capital Net sales/
113,357,424 working capital is being effectively. The
turnover Working capital
= 14.88 times higher the ratio the better it is.
Ratio

Other working capital measures include the following:

 Bad debts expressed as a percentage of sales.

 Cost of bank loans, lines of credit, invoice discounting etc.
 Debtor concentration - degree of dependency on a limited number of
customers.

Once ratios have been established for your business, it is important to track them
over time and to compare them with ratios for other comparable businesses or
industry sectors.

When planning the development of a business, it is critical that the impact

of working capital be fully assessed when making cash flow forecasts. Our
financial planning software packages - Exl-Plan and Cash flow Plan - can

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facilitate this task as they provide for the setting of targets for receivables,
payables and inventory.

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 CONCLUSION

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

assets & current liabilities of a firm in such way that a satisfactory level of
working capital is maintained, i.e., It is neither inadequate nor excessive.
This is so because both inadequate as well as excessive working capital
positions are bad for any business. Inadequate of working capital may lead
the firm to insolvency &excessive working capital implies idle funds which
earn no profits for a Business.

1. By studding last 3 year performance of the company. We say that

working capital of the company is increment.

2. The operational performance of the company is contineuseley rising

because of the in cries in sales of the company product.

3. The data equity ratio of the company is increasing as company. Is now

paying its debt. Due to which the company liquidity reaction is falling.

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 RECOMMENDATION

Loans & Advances

Special efforts should be made to analyze loans & advances, which are between
35% to 56% of current assets. This can be classified between production /
operation relation related and non-production / operation related. No production
related cases might be financed from other sources like debenture etc. and treated
separately.

Cash & Bank

This is the most liquid element in current asset and target shall be fixed most
cautiously. Too high a figure of 20% of total current assets of Haldiram Pvt. Ltd.
In 2005-06 as against 11.5% of TCS may be apparently too good to look at, but
this may be lead to wastage of cash .This amount only use of payment so fallow
the creditor payment strategy.

Ratios
The company should try to improve its current situation. The ratios, which are
taken in this research to evaluate the company’s position, are Current ratio, Quick
ratio and Activity ratio. These ratios show the actual position of the company. The
Quick ratio is declining since 2006-07 till now. There is a drastic declining in the
working capital turnover ratio. This ratio goes to –be position in current year
compared to previous. The Debts collection period is 359 days for Exporters. This
shows the poor collection policy. The current ratio is 1.02 in 2005-06, which is not
up to the ideal ratio. This shows that the current assets are equal to the current
liabilities. Not satisfactory.

Inventory

Inventory should be reviewed constantly to identify show / dead / obsolete item

and then disposed until 2005-06 level is again achieved.
Optimum level should be revised periodically, keeping in view,
Distance of suppliers, production lead time of supplier, transport problem if any
and reliability of suppliers. This will help to avoid obsolesce and dead inventory.

Debtors
A study may be conducted if required by experts to pinpoint reason behind
Haldiram Pvt. Ltd. high correction period of 95 days in 2004-05 against 50 days

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of TCS It is due to quality of products, quality of customer, the segment of
customers marketing effort, distribution pattern or other reasons.

Creditors
Though high payout days may be apparently beneficial for the company. It has it
very heavy long term cost like high interest cost, bad credit ratings and shyness of
good quality / standard suppliers.

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 BIBLIOGRAPHY

Reference Books
1. Financial Management, Khan and Jain, 2003, 6th Edition.
2. Ratio Analysis, S.K Bhattacharya, 1995, 8th Edition.
3. ICAI’s Module.

Referred Sites
1. www.google.com
2. www.answers.com
3. www.yahoo.com
4. www.amazon.com
5. www.haldiram.com

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