KARNATAKA MILK FEDERATION, DHARWAD

Executive Summary
This project is carried out in Dharwad Milk Union, which is a part of Karnataka Milk Federation (KMF). KMF is a co-operative apex body in the state of Karnataka representing dairy farmers organization and also implementing dairy development activities to achieve the dairy objectives. KMF has 13 Milk unions and D.M.U. is one among 13 unions. The project helps to study the practice of short-term requirements by D.M.U. in the past years and to calculate managements performance in the past five years.

A working capital plays an important role in the successful operation of business activities. The need for working capital is very necessary for any business house. Working capital is a matter of top priority, as it has a light on liquidity, solvency and profitability.

Title of the Project:

A Study to analyse the firms liquidity and to test firms efficiency in utilization of its current assets and resouces at Dharwad Milk Union

KARNATAKA MILK FEDERATION, DHARWAD

Objectives of the study:

To examine the establishment, organization and operational dimensions of the D.M.U. To know the liquidity position of the firm. To examine the management performance in components of ration analysis. To know how actually finance department works. To test firms efficiency in utilization of its assets and resources.

Information Requirements:

To meet the requirement of project title and project objectives, following information would be required:

Various current assets and their proportions. Various current liabilities and their proportions. Cash balance required by the company for various purposes. Investment in debtors by the company.

The study has been taken in the organization for the purpose to interpret the financial statement so that the strength and weakness of the firm as well as its historical performance and current financial condition of the firm can be determined.

KARNATAKA MILK FEDERATION, DHARWAD

Research Methodoly

Research methodology is nothing but systematic investigation and study of sources & materials. It establishes facts and helps in making conclusions.

Measurement Techniques / Statistical Tools

Accounting Ratios. Financial Statements of the Company.

Sources of Data:
The data has been collected from both primary sources and secondary sources.

Primary Sources:
Primary data are the data gathered at first hand. It is collected by direct interviews and discussing the subject matter with the management, staff employees and academicians.

Secondary Sources:
Secondary data are the data that have been compiled or derived from other sources meant for some other purpose. It is collected from book records maintained by administration department, published books and also collected from the trading and profit and loss account and balance sheet of last 5 years of D.M.U.

KARNATAKA MILK FEDERATION, DHARWAD

Need for the study

The study is undertaken to know the present liquidity position and working of the Dharwad Milk Union, Dharwad. This project will throw light on firms competitiveness with other firms and on the financial position. It also helps to know whether D.M.U. has properly utilized its resources and assets.

The scope of the study is limited to financial aspects of the Dharwad Milk Union.

Limitations of the Study:

1. As this an academic efforts, it is limited by time, cost and coverage. 2. This study covers only a part of Dharwad Milk Union. 3. The present study covers only 5 years financial data. 4. It covers the only annual report of the firm.

KARNATAKA MILK FEDERATION, DHARWAD

Industry Profile
Dairy Industry In India
The dairy industry plays an important role in the socio-economic development of India. The dairy industry in India is instrumental in providing cheap nutritional food to the vast population of India and also generates huge employment opportunities for people in rural places. The Department of Animal Husbandry, Dairying, and Fisheries, which falls under the central Ministry of Agriculture, is responsible for all the matters relating to dairy development in the country. This department provides advice to the state governments and Union Territories in formulating programmes and policies for dairy development. It also looks after all the matters relating to production and preservation of livestock farms (cattle and sheep). To keep focus on the dairy industry a premier institution known as the National Dairy Development Board was established. This institution is a statutory body that was established in 1987. The main aim to set up the board was to accelerate the pace of dairy development in the country and attract new investments. India is a wonderland for investors looking for investment opportunities in the dairy industry. The dairy industry of India holds great potential for investment and promises high returns to the investors. The reasons why the industry has huge potential for attracting new foreign investment are: There is a basic raw material need for the dairy industry; that is, milk is available in abundance. India has a plentiful supply of technically skilled labourers. There is an easy availability of technological infrastructure. India has all the key elements required for a free market system.

KARNATAKA MILK FEDERATION, DHARWAD

There are different sectors within the dairy industry that promise great business investment opportunities: Biotechnology: The Indian cattle yield less milk as compared to their foreign counterparts. The Indian cattle breeders are on the lookout for ways to improve their milk yield through crossbreeding. Thus, there is a huge potential available for foreign investors to invest in dairy cattle breeding of high-quality buffaloes with hybrid cows. There is also great scope for investment in different dairy cultures, including dairy biologics, enzymes, probiotics, and other coloring materials for food processing. Producing biopreservative ingredients based on dairy fermentation, such as pediococcin, aciophilin, bulgarican, and Nisin contained in dairy powder, also promise great investment opportunity.

Dairy/Food Processing Equipment: Great potential lies for foreign investment for manufacturing and marketing of costeffective, top-quality food processing machinery.

Food Packaging Instruments: There is a tremendous investment opportunity for foreign investors in the manufacturing of both machinery and packaging materials that aid the development of brand loyalty and gives a clear edge in the marketing of dairy products.

KARNATAKA MILK FEDERATION, DHARWAD

Retailing: Retailing of dairy products also promises great investment opportunities for standardization and upgrading dairy products in the main metropolitan cities.

Manufacture of Ingredients: Several ingredients are involved in the making of different dairy products like ghee, condensed milk, and cheese. Manufacturing of ingredients for these products offers a great potential for foreign investment.

Finished Products: There is a great scope for investment in the manufacturing of finished dairy products such as cheese sauce and cheese powders.

Technically Advanced Manufacturing Units: There is a great opportunity for foreign investors to invest in establishing manufacturing units for dairy products. The investors can build world-class manufacturing units and let them for hire. Building manufacturing units supports specialized dairy-related activities, such as cheese slicing, cheese packaging, butter printing, and dicing lines, which hold greater potential over other activities. Thus, the dairy industry in India has huge investment opportunities in a variety of sectors. The investors are all set to gain profitable returns on their investment.

KARNATAKA MILK FEDERATION, DHARWAD

Industry Profile
HISTORY:

Development Of Dairy Industry In India

During the pre-independence era, there was no serious thought given to dairy industry. In 1886, the department of defence of the British Government established the dairy farms for the supply of milk to the British troops in Allahabad. Later, in 1920 series steps were taken by Mr. William Smith, an expert in dairy forming to improve the milk production. There was discrimination done to the Indians. Hence, this led to the rise of the first milk union in India in Lucknow, in 1937, called The Lucknow Milk Producers Co-operative Union Ltd.

The diary and animal husbandry received attention after the independence. There were lot of progressive steps to taken by the government through five-year plans.Indian councils for the agriculture research mostly drew up these plans.

Further, our late Prime Minister Lal Bahaddur Shastri felt the need for setting up cooperative society throughout the country for the sake of rural development. This led to the formation of National Dairy Development Board in 1965. This board was registered under the Societies Registration Act and The Public Trust Act, having its office at Anand, Gujarat.

KARNATAKA MILK FEDERATION, DHARWAD

Introduction to Karnataka Milk Federation

The first diary in Karnataka was started in Kudige in Kodagu district in 1955.In 1975, the World Bank aided dairy development was initiated. The present Karnataka Milk Federation (KMF) came into existence in 1984 as a result of merging of Karnataka Dairy Development Co-operation, small co-operatives and Karnataka Milk Producers Development and loose vendors. The Karnataka Milk Federation is apex body in the state of Karnataka representing dairy organization and also implementing dairy development activities to achieve the dairy objectives.

The KMF implements all the project activities. After all project activities are accomplished, the Federation aims at formulating Marketing strategies in marketing the milk and milk products. The KMF performs the following functions:

The foremost function of KMF is to co-ordinate the activities between the Unions and also in making market available so that the production increases. The federation also manages to market milk and milk products outside the state. It manages surpluses and deficiencies of liquid milk among the milk unions and helps in dispatching the milk and milk products at reasonable price. Training and development of senior managerial personnel, acquiring and applying all recent technologies, prescribing quality guidelines and norms. Provides balanced cattle feed, mineral mixture, frozen semen straws and liquid nitrogen reproduced.

KARNATAKA MILK FEDERATION, DHARWAD

Company Profile-DHARWAD MILK UNION

Dharwad Milk Union:
Dharwad Milk Union (DMU) came into existence on 3-3-1986 under co-operative Act. Districts Dharwad, Gadag, Haveri, and Uttar Karnataka come under its operation.

Establishment:
The Dharwad Milk Union is a co-operative society among the 13 establishments under KMF. The DMU is one of the most modern plants in the country. It is located in the specious 25 acres of land, located in Lakkammanahalli Industrial Area, adjacent to the National Highway-4.

KARNATAKA MILK FEDERATION, DHARWAD

History:
A group of experienced officers, appointed by the Karnataka Milk Federation surveyed the whole of Dharwad districts (includes two newly formed districts Gadag and Haveri) and Uttar Karnataka. Further they found out there as need for a Milk Dairy. They travelled the surrounding villages, educated the villagers about Milk and Milk products and the benefits they would get from the Milk Dairy. Seeing the response, untapped resources and the huge market, the Federation decided to setup the Milk Union in 1984.

Company Profile:
Company Name Nature of Business Type of Ownership Tel-No Raw Material Milk
Dharwad Co-operative Milk Producers Union Ltd. Lakkammanahalli Industrial Area. P.B.Road Dharwad-580004 Mfg / Service / Semi-agro based Co-operative Unit Co-operative Unit 0836-2467643, 2461876, 2468380. 80,000 LPD, Water 5 to 6 lack liters/day, Coal 4 to 5 tone 1,20,000 Liters/day 12 Tone milk powder, 10 Tone Butter, 6 Tone Ghee Milk, Butter, Ghee, Gurtz, Pedha, Milk creams, Curd, Lassi, Khova. Rs. 7 crore 460 Societies

Capacity of Plant

Finished Products Total Investment Total Societies at Village Level

KARNATAKA MILK FEDERATION, DHARWAD

DMU was Rs. 7crore project of which Government has Rs. 2crore of share capital and authorized capital of DMU is Rs. 5crore. DMU formed 551 milk producers co-operative societies in Dharwad, Gadag, Haveri, and Uttar Kannada districts. DMU is collecting 70 thousand liters of milk per day from its societies and sells 60 thousand liters of milk per day and the remaining milk is used for producing milk products.

Functions Of DMU:
The main function of DMU is to procure milk from villagers and pay them the right price. To educate the villagers about milk and its quality. To make Nandini as a part of daily life.

OBJECTIVES OF DMU:
Providing hygienic and good quality of milk to the consumers. To build the economic strength of the milk products in villages. To eliminate middlemen in the business so that the milk products receive their appropriate share of bread. To provide milk at reasonable rates to the consumers. To build bridge between masses of rural producers and millions of consumers. To ensure maximum returns to the milk producers. To facilitate rural development by providing opportunities for self-development at village level. To build village level institutions in co-operative sector to manage the dairy activities.

KARNATAKA MILK FEDERATION, DHARWAD

Organization Structure of KMF

Presidents

Director (Elected-8)

Director (Ex-officer-5)

Director (Nominated-3)

Managing Director

P&I

Production

Finance

Admin

Security

Marketing

Deputy Manager

Deputy Manager

Deputy Manager

Deputy Manager

Senior Supervisor

Deputy Manager

Extension Officer

Q.C Officer

A/Cs Assistant

Assistants Manager

Junior Supervisor

Assistant

Helper

Assistant Workers

Helper

Helper

Helper

KARNATAKA MILK FEDERATION, DHARWAD

Products of DMU

Milk:
Toned milk Double toned milk Standard milk Shubham milk

Milk products:
Ghee Butter Ice-cream Mysore pak Nandini bite Paneer Lassi Jamoon mix Pedha Badam powder Curd Butter milk

KARNATAKA MILK FEDERATION, DHARWAD

Departments Of DMU:

1. Administration Department. 2. Purchase Department. 3. Marketing Department. 4. Procurement and Input Department. 5. Production Department. 6. Quality Control Department. 7. Human Resource Department 8. Finance Department.

KARNATAKA MILK FEDERATION, DHARWAD

Administration Department
The administration department controls the overall functioning of the organization. The department looks after administration functions such as payment of salaries, arrangement of meetings, formation of policies etc.

The general functions of this department are as follows: Up-to-date maintenance of files, records etc. Collecting and presenting data in the form of useful information from records. Implementing the organization systems, producers and policies in a co-ordinate manner. Ensuring of smooth running of the office by interfacing with the external agencies as required. For example, payment of telephone bills, electricity, water supply bills etc. Providing required facilities etc.

The administration department also handles following sub divisions:

Canteen Time keeping machine Security

KARNATAKA MILK FEDERATION, DHARWAD

Structure of administrative department:

Deputy Manager

Asst.Manager(Board)

Asst. Manager (Personnel)

Admin Superintendent

Admin Superintendent

Admin Assistant Time Canteen Security

KARNATAKA MILK FEDERATION, DHARWAD

Purchase Department
The main work of the purchase department is to make purchase of various materials required by different departments. After ascertaining the stock position by stores department, an indent is sent by different departments duly approved by the managing director. This department then comes into picture to purchase those materials.

It also maintains records of all supplies, calls for tenders, quotations etc. Quotation for lowest rate are sanctioned. Purchase department can make purchases up-to Rs.50,000/- If the purchase amount exceeds Rs.50,000/- , then the approval of board member is must.

Structure of Purchase Department:

Purchase Officer

Purchase Superintendent

Assistant Purchase Officer

Helpers

KARNATAKA MILK FEDERATION, DHARWAD

Marketing Department
This department manages the sale of milk, milk products and the advertisements. It sells the goods in four districts namely Dharwad, Gadag, Haveri and Uttar Karnataka in the brand name Nandini. Marketing department performs the following functions: Marketing of milk and milk products through own network. Market development and sales promotion. Reconciliation of sales with all agents, outlets and milk parlours. Consumers grievances. Need based marketing (pedha, ghee etc.). To take up suppliers.

Operating areas: DMUs Nandini milk is marketed in Hubli-Dharwad, Karwar, Gadag, Haveri, Uttar Karnataka, North Goa and 26 Taluks in Maharashtra. The milk is marketed through retailers.

Marketing department has the following objectives: To increase the market share of Nandini. To set up more marketing strategies. To be responsive to consumers and channel members. To promote more of Nandini milk and milk products through intense advertising.

Competitors: The Nandini milk is facing lot of competition in the market. The prime competitors are private brands like Bharat, Krishna, Dutta, Mysore, Gopal, Kazi, Arokya and loose vendors.

KARNATAKA MILK FEDERATION, DHARWAD

Promotional Activities:
To overcome the neck-to-neck competition different promotional activities are followed with the help of KMF and IMDDB for building brand image of Nandini and enhancement of sale of milk and milk products.

Advertisements in all available medias. Sponsoring events viz. cricket match, exhibitions etc. Participation in trade fairs.

Distribution Channels:
DMU has its own marketing channels. However, it follows two types of direct channel: 1.Consumer Market: DMU is selling directly to the consumers through its special vendors. It also distributes to a total of 800 retailers and milk parlours which sell only KMF products. There is demand of 85,000-90,000 ltrs of milk per day.

2.Instituitional Market: There is demand for about 4,000 ltrs of milk per hour from various sources like institutions, hospitals, jails, schools, hotels etc.

Strategies adopted by the department to enhance the sale of its products are: Conducting awareness programme of milk and homogenized processed milk. Attain daily complaints of consumers and retailers. Need for healthy promotional activities against competitors. Adopting differentiated marketing strategies in place of undifferentiated marketing strategies.

KARNATAKA MILK FEDERATION, DHARWAD Marketing department has two sub-departments:

1. Stores department 2. Finished goods stores department 1.Stores Department This department stores the materials required for day-to-day comsumption required in the production process and for other purposes. The stores department in DMU follows the Cordex System (Coded Control System). A card is maintained for each item and a number is allotted. The card attached to each article consists of amount balance, date of issue, purchase etc. This is later recorded in separate ledger book. The inventories are of different kind ranging from mechanical, spares, packing items to animal drugs and satisfactory and veterinary drugs. There are at least 4,000 different inventories. Functions: It has to maintain the proper records of the stores. It has to control the storage costs and reduce it as much as possible. It has to send indent from stores to purchase section when there is storage of stock. It has to send stock report to finance department. It has to supply the necessary materials to the entire departments.

Structure of marketing department: Manager Deputy Manager (Account/Audit) Asst. Manager (Tech. Officer) Supervisor Market Assistant

KARNATAKA MILK FEDERATION, DHARWAD

2.Finished Goods Stores Department

This department works as interface between production department and marketing department. It is mainly concerned with the maintenance of finished goods and its records. The goods stored are mainly non-pre indent sent by marketing department. This department uses the First In First Out (FIFO) method of inventory to manage the stock. A separate ledger account is maintained for each item and it shows the receipt and dispatch of goods. Before dispatching, approval of the goods by the quality department is mandatory. A consolidated daily and monthly report is submitted to production and finance department.

Structure of Finished Goods Stores Department: Assistant Manager

Marketing Assistant

Account Assistant

Dairy Operator

Daily Workers

KARNATAKA MILK FEDERATION, DHARWAD

Procurement and Input Department

Procurement and input department is concerned with procurement of milk and input i.e. technical facilities. Once a milk society is established, the P & I department starts functioning and makes other provisions.

Milk procurement process done all the 365 days and two times a day and DMU procuring milk routes will appear for the purpose of convenience of transportation.

DMU fixes minimum of Rs.14.60 (Fat: 3.5 %, SNF: 8.5 %) for cow milk and Rs.18.60 (Fat: 6 %, SNF: 9 %) for buffalo milk. Sometimes price vary with quality.

Procurement of milk varies season wise. During flash season i.e. from September to December, the milk productivity will be high. During summer, it will come down.

Milk collected from the societies will be taken to the nearest chilling centre. Here the quality i.e. fat and SNE content of milk will be checked and confirmed with that of the checklist sent by the society.

Then milk is loaded into tankers to be taken to the union. There are nearly 6 chilling centres under the Dharwad Milk Union and about 600 milk societies. Once milk is brought to the union, it is rechecked for the quality and freshness and then down loaded and directed to the production department.

If the milk is spoiled, it is brought to the notice of the society immediately. But in case of far away, the driver and the contractor will be held responsible for the loss, if milk by tankers spoils due to the delay. As per the law of the society recommended by the union states that the members should supply milk only to the union and other agency. The extension officer at various chilling centres take care of this.

KARNATAKA MILK FEDERATION, DHARWAD

To upgrade the functioning and expand the productive capacity of each society the union provides many facilities: Remunerative price for the milk produced. Animal husbandry and veterinary health care programmed for the member animals. Cross breeding programmers. Supplying power seeds for animal development. Imparting training to all the members of co-operatives for smooth functioning of cooperatives. Subsidized cattle feed to the members of the society. DMU has 13 doctors to provide door-to-door service. First aid centers in every co-operative society. Conducting animal health camp every 2 weeks. Procurement and input department structure.

KARNATAKA MILK FEDERATION, DHARWAD

Procurement and Input Department Structure:

Manager

Procurement Manager

Technical Wing

Deputy Manager

Deputy Manager

Assistant Manager

Assistant Manager

Extension Officer

Clerks

Helpers

KARNATAKA MILK FEDERATION, DHARWAD

Production Department
The main object of this department is to follow up production schedule as per plan and maintain close and co-operative relationship with other departments and ensures to upgrade the technical efficiency of production. Most of the production equipments are imported from Sweden and Denmark. The entire production has procedure and at every stage of production, proper care is taken to maintain the quality and freshness of milk and milk production.

Production Procedure:

When the milk is received from the cans and tankers, it is tested for quality. From these tanks the milk is sent though steel pipes to undergo pasteurization, cooled to 4-5 degree C. After pasteurization, the milk is taken to the cream separator machine (to get other milk products) where the cream is separated according to the standard norms. This is called skimmed milk. It is then directed towards standardization process to procure for variety of milk by mixing with appropriate proportion of cream. These varieties of milk are then packed in different packets and stored in cold storage for dispatch. Other milk production such as butter, ghee, milk powder, curd, lassi, pedha are also produced and stored in cold storage.

KARNATAKA MILK FEDERATION, DHARWAD Structure of Production Department:

Manager( Dairy)

Office Staff Deputy Manager

Asst. Manager Asst.(Accounts) Technical Officer Asst.( Stores )

Clerk

Typist

Senior Supervisor

Junior Supervisor

Dairy Operators

Dairy Technician

Dairy Worker

KARNATAKA MILK FEDERATION, DHARWAD

Quality Control Department

The main task of the quality control department is checking the quality of milk and milk products in the plant. There are various tests conducted by the officers to meet this requirement. If any product does not pass the quality standards then that would be rejected. Even before dispatching the products, they undergo testing and they must get approved by the quality department.

Tests conducted at quality department:

Alcohol test Clot on boiling test( COB) Taste Flavour Acidity Corrected lactometer reading (CLR) Gender method for the test Milk tester method Moisture test Solid no test Solid not fat test (SNF)

KARNATAKA MILK FEDERATION, DHARWAD

Quality Control Department Structure:

Deputy Manager

Asst. Manager

Asst. Manager

Quality Asst. Officer (Chemicals)

Quality Asst. Officer (Bacteriology)

Quality Analyst

Lab Asst

Quality Asst.

KARNATAKA MILK FEDERATION, DHARWAD

Human Resource Department

This department looks after the recruitment, selection and welfare of the employees. It also conducts training and orientation programmes and facilitates the following for employees:

Transportation Medical Uniform Canteen Provident fund Gratuity Womens pregnancy allowance

KARNATAKA MILK FEDERATION, DHARWAD

Finance Department
This department controls the financial activities such as preparation of annual report, maintenance of accounts etc. This department is responsible for keeping all the inward and outward flow of money of unions. It prepares budget every year and financial rules for receipts and payments are framed.

Functions:

To prepare monthly accounts (Receipts & Payment A/c, Profit & Loss A/c, Balance Sheet). To prepare quarterly financial statements. To prepare integrated business plans. To prepare year ending financial statement. To get accounts audited from statutory books of accounts.

DMU follows 2 types of auditing:

1. Pre-audit system: done by Finance and Account Department every year. 2. Statutory System: done by private Charted Accountants every year.

KARNATAKA MILK FEDERATION, DHARWAD

Structure of Finance Department: DEPUTY MANAGER

ASSISTANT MANAGER

ASSISTANT ACCOUNT OFFICERS

ASSISTANT ACCOUNT

KARNATAKA MILK FEDERATION, DHARWAD

Financial Statement
A financial statement is an organized collection of data according to logical and consistent accounting procedures. Its purpose is to convey understanding of some financial aspects of business firm. It may show a position at a moment in time as in the case of b/s or may reveal a series of activities over a given period of time as in case of income statement.

Financial statement are prepared for the management to deal with,

a. b. Status of investments. Results achieved during a given period under review a financial statement generally refers to the following;

1. Income Statement: The income statement also termed as (profit or loss account) is
generally considered to be the most useful of all financial statements. It explains what has happened to a business as a result of operations between two balance sheet dates. It discloses the revenue realized from the sale of goods and the costs incurred in the process of producing the scheme. It tells the story of Progress or decline over given period and why and how an indicated result was achieved.

2. Balance Sheet: it is statement of financial position of a business at particular moment of

time and the claims of the owners and outside against those assets at that time.

3. Statement of Retained Earnings: the term retained earnings means the accumulated
excess of earnings over losses and dividends. The balance shown income statement is transferred to the balance through this statement, after making necessary appropriations. It is thus a connecting link between the B/S and income statement. This statement is also termed as project and loss appropriation account in case of companies.

KARNATAKA MILK FEDERATION, DHARWAD

Working Capital Management

Introduction:
Management of the working capital is nothing but the management of current assets. The management of the current assets includes inventory, received, debtors, book debts, short-term assets cash and bank balances. The management of fixed and current assets, however differs in three important ways. 1. In managing fixed assets time is a very important factor. Consequently, discounting

and compounding techniques play significant roles in capital budgeting and minor one in the management of current assets. 2. The large holding of current assets, especially cash strengthens the firms liquidity

position (reduces riskiness) but also reduces the overall profitability. Thus a risk returns trade off is involved in holding current assets. 3. Level of fixed as well as current assets depends upon expected sales but it is only

current assets, which can be adjusted with sales fluctuations in the short run. Thus the firm has a greater degree of flexibility in managing current assets. Working Capital refers to the amount of capital which is readily available to an organization. That is, working capital is the difference between resources in cash and readily convertible into cash (current assets) and organizational commitments for which cash will soon be required (current liabilities). Thus, working capital involves activities such as arranging the short-term finance, negotiating favourable credit terms, controlling the movement of cash, administrating accounts receivables and monitoring the investments also a great deal of time.

KARNATAKA MILK FEDERATION, DHARWAD Types of Working Capital:

A) On the Basis of Concepts:
There are two concepts of working capital

1. Gross Working Capital:

It refers to the firms investment in current assets. Current assets are the assets which can be converted into cash within an accounting year and include cash, short-term securities, debtors, bills receivables and stock (inventory).

2. Net Working Capital:

It refers to the difference between current assets and current liabilities. Current liabilities are those claims of outsiders which are expected to mature for payment within an accounting year and include creditors, bills payable and outstanding expenses. Net working capital can be positive or negative. A positive net working capital will arise when current assets exceed current liabilities. A negative net working capital occurs when current liabilities are in excess of current assets. The gross working capital concept focuses attention on two aspects of current assets management: (a) How to optimise investment in current assets? (b) How should current assets be financed? The level of investment in current assets should avoid two danger points- excessive and inadequate investment in current assets. Investment in current assets should be just adequate, not more, not less, to the needs of the business firm. Excessive investment in current assets should be avoided because it impairs firms profitability, as idle investment earns nothing. On the other hand, inadequate amount of working capital can threaten solvency of the firm

KARNATAKA MILK FEDERATION, DHARWAD

because of its inability to meet its current obligations. The working capital needs of the firm may be fluctuating with changing business activity.

B). On the Basis of Time: 1. Permanent Working Capital:

Permanent Working Capital is permanently locked up in the circulation of current assets. It covers the minimum amount required for maintaining the circulation of current assets. (a) Initial Working Capital: At its inception and during the formative period of its operations, a company must have enough cash fund to meet its obligations. The need for initial working capital is for every company to consolidate its position. (b) Regular Working Capital: It refers to the minimum amount of liquid capital required to keep up the circulation of the capital from the cash inventories to account receivable and from account receivables to back again cash. It consists of adequate cash balance on hand and at bank, adequate stock of raw materials and finished goods and amount of receivables.

2. Variable Working Capital:

It refers to the working capital that changes with the volume of business, it may be divided into two classes. (a) Seasonal Working Capital: There is many line of business where the volumes of operations are different and hence the amount of working capital varies with seasons. The capital required to meet the seasonal needs of the enterprise knows as Seasonal Working Capital. (b) Special Working Capital: The capital required to meet any special operations such as experiments with new products or new techniques of production and making interior advertising campaign etc, is also known as Special Working Capital.

KARNATAKA MILK FEDERATION, DHARWAD

Needs of Working Capital:

The need for working capital to run the day-to-day business activities cannot be overemphasized. We will hardly find a business firm which does not require any amount of working capital. Indeed, firms differ in their requirements of the working capital. The firms aim is maximizing the wealth of shareholders. Earning a steady amount of profit requires successful sales activity. The firm has to invest enough funds in current assets for generating sales activity. Current assets are needed because sales do not convert into cash instantaneously. There is always an operating cycle involved in the conversion of sales into cash.

Therefore working capital is required for: To meet the cost of inventories including total of raw materials, purchased parts, operating supplies, work in progress, finished goods. To pay wages, salaries for indirect labor, clerical staff, managerial and supervision staff. To meet overhead costs including those of maintenance services activities, fuel, power charges, taxes and general expense administration. To bear the expansion (with regard to promotion of sales) e.g. expenses on packing, advertisement, salesmanship, sales servicing, credit facilities, delivery services, etc.

KARNATAKA MILK FEDERATION, DHARWAD

Importance of Working Capital Management:

Adequate working capital creates certainty, security and confidence in the minds of the persons in the management as well as in the minds of creditors and workers. It creates a good credit standing for the firm because credit standing depends upon the ability to pay promptly. A Company with adequate working capital is always able to meet current liabilities. It ensures solvency and stability of the enterprises. It also ensures continuity in production and sales. It enables the company to take advantage of cash discount offered by the suppliers of raw materials or merchandise. It enhances the prestige of the company and moral of its workers because a company with adequate working capital is always able to pay wages and salaries promptly and regularly. It enables the company to procure loans from banks on easy and competitive terms.

Objectives of WC management:
Deciding optimum level of investment in various WC assets. Decide optimal mix of short-term and long-term capital. Decide appropriate means of short term financing.

KARNATAKA MILK FEDERATION, DHARWAD

Components of Working Capital:

There are two components of Working Capital

A. Current Assets. B. Current Liabilities.

A) Current Assets:
Components of Current Assets are as follows: 1. Cash and bank balance 2. Stock of raw materials at cost- work in process and finished goods. 3. Advanced recoverable in cash or kind for value to be received. 4. Deposits under the company scheme. 5. Advanced payment of income takes credit certificates. 6. Outstanding debts for a period exceeding six months. 7. Balance with central excise authorities.

B) Current Liabilities: Components of Current Liabilities are as follows: 1. Sundry Creditors for the goods and expenses. 2. Income tax deducted at sources from contractors. 3. Expenses Payable. 4. Unclaimed Dividend. 5. Security Deposits. 6. Liabilities for bills discounted. 7. Bank overdraft acceptance.

KARNATAKA MILK FEDERATION, DHARWAD

Operating Cycle:
Operating cycle or working capital cycle indicates the length of time between a firms paying for raw materials entering into finished stock and receiving cash on the sales of such finished stock. This operating cycle differs from firm to firm. Longer the operating cycle greater will be the amount of Working Capital required and vice versa. Thus it plays an important role in determining the Working Capital needs of a firm.

Cash

Raw Materials

Debtors

Sales

Milk & Milk Products

Work In Process

Operating Cycle is the time duration required to convert sales, after the conversion of resources into inventories, into cash. The operating cycle of a DMU involves three phases. 1. Acquisition of resources such as raw material, labor, power and fuel etc.

KARNATAKA MILK FEDERATION, DHARWAD

2. Manufacture of the product which includes conversion of raw material into workIn- progress into finished goods. 3. Sales of the product either for cash or on credit. Credit sales creates book Debts for collection.

In the Dharwad Milk Union (manufacturing concern), the working capital operating cycle starts with the purchase of raw materials and ends with the realization of cash from the sale of finished products. It is also called as cash conversion cycle, production cycle etc. It involves the purchase of raw materials and stores, fits into stocks of finished goods through the work-in-progress with the progressive increment of labour and service costs, conversion of finished goods (Milk & Milk Products) into sales, debtors and receivables and ultimately realization of cash and this cycle continuous again from cash to purchases of raw material and so on.

Length of operating cycle: When raw materials remain in store pending issue for production for a less duration, when raw materials gets converted into WIP in a short duration, when finished goods remain in warehouse pending for sales for a short duration only, and when cash realizations out of sales are made quickly and finally when payment to creditors is made slowly, the operating cycle would be smaller and consequently the working capital will also be reasonable. Thus shorter duration of operating cycle indicates an efficient working capital management.

KARNATAKA MILK FEDERATION, DHARWAD Determinants of Working Capital:

The following is the description of factors which generally influence the working capital requirements of Dharwad Milk Union :

1. Nature of Business:
This is one of the primary factors influencing the working capital requirements of a firm. The DMU is a manufacturing firm, has a longer operating cycle for manufacturing the products, and investing more funds in its current assets. Therefore, it requires much more working capital.

2. Manufacturing Cycle:
It comprises of the purchase and use of raw materials and the production of finished goods. Longer the manufacturing cycle, large will be the firms working capital requirements.

3. Credit Policy:
The credit policy relating to sales and purchases also affects the working capital. The credit policy influences the requirement of working capital in two ways: 1) 2) Credit terms generated by the firm to its customers. Credit terms available to the firm from its creditors.

4. Growth & Expansion:

As a firm grows, it is logical to expect that a large amount of working capital is required. The growth in volume of the business effects the requirements of working capital. If the firm goes on diversifying its activities, the working capital is also increases.

KARNATAKA MILK FEDERATION, DHARWAD

5. Price Level Changes:

Changes in the price level also affect the requirements of working capital. The rising price levels will require a firm to maintain higher amount of working capital. Same level of current assets will need increased investment when price are increasing.

6.Operating Efficiency & Performance:

The operating efficiency of the firm relates to the optimum utilization of resources at minimum costs. The firm will be effectively contributing to its working capital if it is efficient in controlling operating costs. The use of working capital is improved and pace of cash cycle is accelerated with operating efficiency.

7.Level of Taxes:
Tax liability is the short-term liability day able in cash. The amount of taxes to be paid in advance creates the need for working capital. If the tax liability increases, it leads to an increase in the requirement of working capital and vice versa. The need for working capital varies with the tax rates and advance tax provisions.

8.Sales Growth:
The working capital needs of the firm increase as it sales grow. The growing firm may need to invest funds in fixed assets in order to sustain its growing production and sales. This will in turn, increase investment in current assets to support enlarged scale of operations.

KARNATAKA MILK FEDERATION, DHARWAD Working Capital Management concerned with the following aspects:
1. Cash Management:
Cash is the important current asset for the operation of the business. Cash is the basic input needed to keep the business running on a continuous basis; it is also the ultimate output expected to be realized by selling the service or product manufactured by the firm. The firm should keep sufficient cash, neither more nor less. Cash is the liquid form of an asset. It is the ready money available in the firm or with the business, essential for its operations. A firm needs the cash for the following three purposes: (a) The Transaction Motive: (b) The Precautionary Motive: (c) The Speculative Motive:

2. Receivables Management:
Receivable represents amounts owed to the firm as a result of sale of goods or services on the ordinary course of business. These are claims of the firm against its customers and form part of its current assets. These receivables are carried for the customers. The period of credit and extent of receivables depends upon the credit policy followed by the firm. The main purpose of maintaining or investing in receivables is to meet competitors, to increase sales, and to maintain a cordial relationship with the clients.

3. Inventory management:
Every enterprise needs inventory for smooth running of its activities. It serves as a link between production and distribution process. There is, generally a time lag between the recognition of a need and its fulfillment. The greater the time lag, the higher the requirements for inventory. The unforeseen fluctuations in demand and supply of goods necessitate the need for inventory. Moreover, it provides a cushion for future price fluctuations.

KARNATAKA MILK FEDERATION, DHARWAD Sources of Working Capital:

There are two type of sources for financing the working capital requirement . 1. Permanent/Long term sources 2. Temporary/ Short term sources

1. Permanent/Long term sources: Shares capital Debentures Public deposits Ploughing back of profits Loan from financial instituitions

2.Temporary/ Short term sources: Indigenous bankers are the short term source for financing the working capital Trade credits Instalment credits Income received in advance Customers advance Bank loans which include cash credit and overdraft Commercial papers Purchasing and discounting of bills

KARNATAKA MILK FEDERATION, DHARWAD