sudhakar pvc

7/29/2019 Sudhakar Pvc

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INTRODUCTION

Working capital management is significant in financial management due to the fact

that it plays a vital role in keeping the business enterprise running. The management

of the working capital of vital importance and forms a major work load function of

finance manager and his team in every organization. The working capital of any

business is the capital required to fund its current assets .The term current assets

current assets refer to those assets in which the ordinary course of business can be or

will be converted into cash with in a year, without undergoing a diminishment in

value and without disrupting the operations of the firm. The major current assets are

cash, bank balance, marketable securities and account receivables, inventories,

prepaid expenses and short-term advances etc.,

Working capital management is concerned with the problems that arise in

attempting to manage the current assets, current liabilities and inter- relations that

exist between them. The net working capital is the difference between the current

assets and current liabilities.

Current liabilities are those liabilities, which are intended at their inception to

be paid in the ordinary course of business with in a year, out of the current assets or

earning of the concern. The current liabilities includes creditors of purchase of goods,accounts payable, Bills-payable, bank over drafts, short-term borrowings, outstanding

expenses, advances received against the sales, taxes due, dividends payable and other

liabilities maturing with in a year.

Management of working capital is therefore, the management of current assets

and current liabilities of a company.

Gross Working Capital

According to this concept, Working capital refers to the firms investment in current

assets. The amount of current liabilities is not deducted from the total of currents

assets.

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Net Working Capital

The net working capital refers to the difference between current assts and current

liabilities. Positive or negative. Positive net working capital will arise when current

assets exceed current liabilities. A negative net working capital occurs when currents

liabilities are in excess of current assets.

Need for the study:

The need for the working capital or current assets to form the day-to-day business

activities cannot be over emphasized. We can hardly find a business firm that does

not require any amount of working capital. Indeed different requirement of the

working capital. It is well known that any firm aims at maximizing shareholders

wealth. To attain this, a firm should earn a steady amount of profit, which requires

successful sales activity. Current assets are needed because sales cannot convert into

Cash instantly since there is always an operating cycle involved in the conversion of

sales into cash. I opted this topic to identify the various sources to get working

capital to met the day-to-day operations and the maximum utilization of the working

capital in a profitable means.

NEED FOR WORKING CAPITAL

The objective of financial management i.e. maximization of wealth of shareholder,

cannot be attained if the operations of the firm are not optimized. Thus every firm

must have adequate working capital. It should have neither the excessive working

capital nor inadequate working capital. Both the situations are risky and may have

dangerous outcome. The excessive working capital when the investment in working

capital is more than the required level, may result in:

a. Unnecessary accumulation of inventories resulting in waste, theft, damage etc.

b. Delay in collection of receivables resulting in more liberal credit terms to

customers than warranted by the market conditions.

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c. Adverse influence on the performance of the management.

The inadequate working capital situation, when the firm does not have sufficient

working capital to support its operations is also not good for the firm. Such a

situation may have following consequences.

a) The fixed assets may not be optimally used.

b) Firms growth may stagnate.

c) Interruption In production schedule may occur ultimately resulting in lowering of

the firms growth.

d) The firm may not be able to take the benefit of an opportunity.

e) Firms goodwill in the market is affected if it is not in a position to meet its

liabilities on time.

f) Inadequate working capital may result in loss of sales.

g) It may also lead to insolvency of the firm.

Scope of the study:

Working capital is the live blood of any business firm. As a matter of fact, any

Organization, whether profit oriented or otherwise, will not be able to carry on its

day-to-day activities without adequate working capital. It being increasingly realized

that the inadequacy or mismanagement of working capital is the leading cause of the

Business failure. Problems may cause due to the inadequate working capital. Manager

has to forecast the problems of working capital and should suggest the improvement

of the profits; hence I think my project on working capital management will help in

order to maintain sufficient working capital required level of production.

Objectives of the study:

1. To study the existing system of working capital management in M/s.

Integrated Thermoplastics Limited.

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

capital.

3. To examine the feasibility of the present system of managing working

capital.

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

Research methodology & Database:

The methodology of study inter-relations is to understand the procedural aspects of

Thermoplastics Company and then to proceed with analysis of the financial

performance.

Name of data : company profile, financial results of years of period of Study.

Source of data : Annual financial reports.

Collection methods : Directly approached to company.

Tools and techniques : Financial statements.

Limitations of the study:

1. The study is limited to working capital management of SUDHAKAR PVC PIPES

LIMITED only.

2. It may not be suitable for the other PVC pipes manufacturing companies.

3. The analysis may vary from time to time according to different production

schedules.

4. The study is confined to past few years only

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MANAGEMENT OF WORKING CAPITAL

Introduction:

The management of the working capital is vital importance to companies and forms a

major workload function of finance manager and accountant. It is the amount of fund,

which a company must have to finance its day-to-day operations.

It is an integral part of overall corporate management. The working capital of any

business is the capital required to funds its current assets. Working capital

management is concerned with the problems that arise in attempting to manage the

Current Assets, the Current Liabilities and the inter-relations that exist between them.

The Net Working is the difference between the current assets and the liabilities and

the inter-relations that exist between them.

The term current assets refer to those assets in which the ordinary course of business

can be or will be converted in to cash within a year, without undergoing a

diminishment in value and disrupting the operations of the firm. The major current

assets are cash, marketable securities, accounts receivables and inventories. The term

current liabilities are those liabilities that are intended at their inception to be paid in

the ordinary course of business with in a year out of the current assets or earning of

the concern. The current liabilities include accounts payable, bills-payable, bank

overdrafts and outgoing expenses. Management of working capital therefore is the

management of current assets and liabilities of the company.

IMPORTANCE OF WORKING CAPITAL

We will hardly find a running business firm, which does not require same amount of

working capital. Even a fully equipped manufacturing firm is sure to collapse if it

cannot meet any of the following requirements:

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1. An adequate supply of raw material for manufacturing process.

2. Cash to meet the wage bill and other expenses.

3. The capacity to wait for the market for its finished products sale.

4. The ability to grant credit to their customers.

Similarly, a commercial enterprise virtually good for nothing without merchandising.

Working capital is the live blood of the business organization. As a matter of fact, any

organization, whether profit oriented or otherwise, will not be able to carry on To-day

activities without adequate working capital. For day-to-day operations of a business a

study of working capital is a must. .

Neglect of management of working capital needs may result in technical insolvency

and even liquidation of business unit. Inefficient working capital is dangerous for the

organization.

Factors influencing Working Capital Requirements

Nature of business

The working capital requirement of a firm is closely related to the nature of its

business. Service firms like an electricity undertaking or a transport corporation,

which has a short operating cycle and which sells redominantly on cash basis, has a

modest working capital requirement. On the other hand, a manufacturing concern

like a machine tools unit, which has a long operating cycle and which sells largely on

credit, has a

very substantial working capital requirement

.

Seasonality of operations

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Firms, which have marked seasonality in their operations usually, have highly

fluctuating working capital requirements. To illustrate, consider a firm

manufacturing air coolers. The sale of air coolers reaches a peak during the summer

months and drops sharply during the winter period. The working capita need of such

a firm is likely to increase considerably in summer months and decrease significantly

during the winter period. On the other hand, a firm manufacturing a product like

lamps, which have fairly even sales round the year, tends to have stable working

capital needs.

Production policy

A firm marked by pronounces seasonal fluctuation in its sales may pursue a

production policy, which may reduce the sharp variations in working capital

requirements. For example a manufacturer of air coolers may maintain a steady

production throughout the year rather than intensity the production activity during the

peak business season. Such a production policy may dampen the fluctuations in

working capital requirements.

Market conditions

The degree of competition prevailing in the market place has an important bearing on

working capital needs. When competition is keen, larger inventory of finished goods

is required to promptly serve customers who may not be inclined to wait because

other manufacturers are ready to meet their needs. Further, generous credit terms may

have to be offered to attract customers in a highly competitive market. Thus, market

capital needs tend to be high because of greater investment in finished goods

inventory and accounts receivable.

If the market is strong and competition weak, a firm can manage with a smaller

inventory of finished goods because customers can be served with some delay.

Further, in such a situation the firm can insist on cash payment and avoid lock-up of

funds in accounts receivable it can even ask for advance payment, partial or total.

Conditions of supply

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The inventory of raw materials, spares, and stores depends on the conditions of

supply. If the supply is prompt and adequate, the firm can manage with small

inventory. However, if the supply is unpredictable and scant then the firm, to ensure

continuity of production, Would have to acquire stocks as and when they are

available and carry larger inventory on an average. A similar policy may have to be

followed when the raw material is available only seasonally and production

operations are carried out round the year.

Permanent working capital

The magnitude of the current assets depends upon the firms operating cycle. The

operating cycle is a continuous process and the need for current assets is also

continuous. But the level of current assets needed is not always same. It increases or

decreases over time. However, there is always minimum level of current assets,

which is continuously required by a firm to carry out its business operations. The

minimum level of current assets is called permanent working capital.

Variable working capital

The working capital required over and above the permanent working capital depends

upon the changes in production and sales are called fluctuating or variable working

capital. There may be changes either increase or decrease in working capital.

Working capital is variable mostly in seasonal goods manufacturing companies.

Operating cycle

The time that elapses between the purchase of raw material and collection of cash for

sales is called operating cycle.

Operating cycle period

The length or time duration of the operating cycle of any firm can be defined as the

sum of its inventory conversion period and the receivable conversion period.

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Inventory conversion period

It is the time required for the conversion of raw material in to finished goods. In a

manufacturing firm the inventory conversion period is consisting of raw material

conversion period, work-in-progress conversion period and the finished goods

conversion period.

The raw material conversion period refers to the period for which the raw material is

generally kept in stores before it is issued to the production department. The work-in-

progress conversion period for which the raw materials remain in the production

process before its taken out as a finished unit.

The finished goods conversion period refers to the period for which finished units

remain in stores before being sold to the customers.

Receivables conversion period

Its the time required to convert the credit sales into cash realization. It refers to the

period between the occurrence of credit sales and collection of debtors.

Gross operating cycle = Inventory conversion period + receivables conversion period.

Net operating cycle = Inventory conversion period + receivables conversion period

Deferred period.

Deferred period

The firm might be getting some credit facilities from the supplier of raw materials,

wages/ salaries earners etc., this period for which the payments to these parties are

deferred or delayed is known as deferral period.

Raw material conversion period = Average value of raw material stock

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Average cost of consumption of raw material per day

Work in progress conversion period = Average work-in-progress

Average cost of goods sold per day

Finished goods conversion period= Average stock of finished goods

Average cost of goods sold per day

Debtors conversion period = Average value of receivables

Average value of sales per day

Payables deferral period = Average level of creditors

Average purchases of raw materials per day

Components of working capital

Current Assets:

Current assets defined as either cash or those assets that can be converted into cash

within the current year. The major components of these current assets are cash and

bank balance, inventories, accounts receivable, short-term deposits, investments,

advance payments and prepaid expenses.

Cash and bank balances: Cash and bank balances are most liquid assets. All

payments are made through cash or bank payments.

Inventories: These are the materials, commodities or goods used in day-to-day

operation of production or in the form of finished goods. These include raw materials,

work-in-progress and finished goods.

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Accounts receivables: These are short-term debts owned by company arising from

credit sales made to customers of the firm.

Advances: These represent amount paid for which the goods and services have not yet

received, including advances given to suppliers and employees, advance tax payments

made etc,.

Short-term deposits: These are deposits kept in banks to meet the future expenses

when they fall due. These deposits will earn interest also.

Current liabilities:

Liabilities are the claims against the company to be paid in the ordinary course of

business with in a year, out of earnings of the company.

Short-term loans: Money borrowed from various banking and non-banking sources

for short periods of time.

Other liabilities: These include tax payments due with in one year and proposed

dividends and other payments to be made.

Accounts payable: Payable against purchases of raw materials, packing material,

intermediaries and others for manufacture of finished goods. Generally credit period

is allowed for a short period of time.

Bills payable: Against purchase bills may be accepted and payable with in a short

period of time.

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Bank overdraft: With the consonant of the banks a business unit can get short-term

credits and overdrafts. Bank generally allows these credits keeping the view of credit

worthiness of the organization and management. These are to be repaid in short term

to the bank.

Outstanding expenses: Expenses due but not paid.

MEANS TO INCREASE WORKING CAPITAL

1. With a reasonable working capital, a firm can concentrate either;

a). Increase in sales without increasing inventory, receivables and bank

Financing.

b). Reduction in receivables, inventory or blank financing while maintaining

sales at their current levels.

A defensive move is to construct format contingency plan to combat working Capital.

2. Investing surplus cash to earn interest. The investment should be done after

defining the objectives and ruling the benefits, seeking in an order of ranking-

security-maturity-liquidity-and yield.

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Welcome to Sudhakar Group of Industries

SUDHAKAR Group of Industries situated at Andhra

Pradesh, INDIA, playing a significant role in PVC & HDPE pipe sector. SUDHAKAR

Group established in 1971 with a product range to manufacture Electrical Conduits. Over

the years the group emerged as a potential leader in Rigid PVC Pipes & HDPE pipes and

fittings and also made its foray into different piping system solutions. Promoted by a

visionary entrepreneur, this group has played a pioneer role in the field of PVC & HDPE

piping products.

By being innovative and quality conscious, SUDHAKAR Group distinguished itself from

other organizations as a company having an inbuilt culture of High Customer Care.

SUDHAKAR has now progressed from strength to strength, and has bagged many

prestigious awards, millions of happy and satisfied customers and attained leadership in

this field of PVC & HDPE Pipes & Fittings. Nationwide dealership network and service

back up facilities, dedicated sales force and timely delivery makes SUDHAKAR more

closer to customers.

Since SPL has a long production cycle, it has to hold substantial amount of cash,

investment and Receivable accounts to commensurate with its requirement.

SPL sources of Working Capital constitute capital in work in progress, investments,

and inventories, holding of debtors, cash & bank balance, loans & advance and also

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other corporate deposits. SPL also gets Working Capital from various provisions like

provisions for gratuity, depreciation.

Current Liabilities include Sundry Creditors, provisions and other Current Liability

and Out standings.

The unit also has world-class quality assurance systems in place. The company

ensures products of uncompromising quality meeting all relevant ISI, BS, DIN and

ASTM standards with a view to effectively cater, to the needs of the International

markets.

Integrated thermoplastics limited has achieved ISO 9001-2000 accreditation on 2003

in implementing and maintaining quality systems management with the scope of PVC

pipes and became a member of selected brand of elite group of companies. In

addition extensive R&D

facilities provide reliable and committed support for new product development.

TECHNICAL INFORMATION

SPL rigid PVC pipes are manufactured in accordance with Indian

standards specifications 4985:1998 and other international specifications. The

company also manufactures special ranges of commercial pipes under different

ranges to satisfy the customer requirements. SPL PVC pipes are normally

manufactured in uniform length of 6 meters with plain ends both the sides and also

with self socked one side. Varied length can be manufactured according to the

customer requirement. Integrated Thermoplastics Limited is manufacturing rigid

PVC pipes from 20mm to 400 mm in conformity to ISI 4985:2000 and other

international specifications.

QUALITY CONTROL ASSURANCE

Integrated Thermoplastics Limited is having well equipped quality testing

machines in their labs as per the ISI standards for testing of all diameters and gets

excellent result. We at SPL Pipes are proud to say that we follow world-class QCM

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(Quality control management) techniques in our Quality Control lab to achieve the

best quality. Stringent quality control tests are regularly conducted to ensure top

quality production of PVC products.

MAINTENANCE AND SERVICE

This company is better equipped with excellent workshop to provide maintenance and

service of machinery in electrical, mechanical and civil lines all the time, We assure

service at any time to enable our equipment and machinery to perform efficiently,

thus reducing production down time.

EXPLORING NEW HORIZONS: EXPORTS

Integrated Thermoplastics Limited are trying very hard in exporting their products

like rigid PVC pipes of water, electrical conduits and SWR pipes to Middle East,

Europe, Africa and other Asian countries. Taking an example our esteemed overseas

customers, we are proud to say that we are associate with CEYLON ELECTRICTY

BOARD SRILANK supplying electrical conduits to their project requirements.

.

DYNAMIC WORK FORCE

The dynamic work force is the strong base for the success of the company. The

administrative as well as the technical staff are well qualified and skilled. The

company follows the specialization of work, which helps the company to assign the

right job to the right person.

The technical staff at the manufacturing units is well versed in the field of

production, which generates new innovative ideas and concepts. All the workers are

dedicated to work and responsible for their work done.

DISTRIBUTION NETWORK

One of the most important parts of the companys effective functioning in the

competitive market is its distribution network. The company has its own dealers

network with a number of nearly more than 100 dealers through out the state.

The company has its own vehicles for transportation which helps the Sales

department to cater the needs of the customers at the right time and at the right place.

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MARKET NETWORK

Integrated Thermoplastics Limited covers the national level markets, but their

main target market areas are Andhra Pradesh, Karnataka, Tamil Naidu, Maharashtra,

Bihar and Jharkhand etc.

DISTRIBUTION CHANNELS

The company has got two levels of distribution channels they are,

1) Zero Level

2) Single Level

ZERO LEVEL

Manufacturer customer

2 SINGLE level

Manufacturer dealer customer

PRODUCTS OF THE COMPANY

Irrigation & Potable water supply systems:

PVC Pipes and Fittings

HDPE Pipes and Fittings

Garden pipes

Plumbing systems:

UPVC Plumbing systems

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PP-RC Plumbing systems

CPVC Plumbing Systems

Water Extraction Systems:

Casing pipes

Bore well Column pipes

Waste & Water disposal systems:

SWR pipes and fittings UG piping systems

Water Conservation Systems:

Drip Irrigation systems

Sprinkler Irrigation Systems

Water Storage systems:

Cylindrical vertical tanks

Rectangular Loft tanks

Cable protection systems:

Electrical Conduits and conduit fittings

UPVC Ducts and accessories

Pre Lubricated HDPE ducts and duct accesso

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SIGNIFICANT ACCOUNTING POLICIES

Basis of accounting

The financial statements are prepared under historical costs convention on an accrual

basis and are in compliance with accounting standards referred to in Section 211 (3c)

of the companies act, 1956, except in case of AS-15 Accounting for Retirement

Benefits in the financial statements of employers.

Fixed Assets

Fixed assets are stated at cost less accumulated depreciation. cost comprises of the

purchase price and any attributable cost of bringing the asset to working condition

less excise duty taken as CENVAT credit, for its intended use.

Depreciation

Depreciation on Fixed Assets is provided on straight-line method at the rates

specified from time to time in Schedule xiv of the Companies Act, 1956.

Depreciation on additions/deductions during the year is calculated pro-rata from/to

date of additions/deductions.

Investments

Long-term investments are carried at cost including accrued interest thereon.

Inventories

Inventories of finished goods are valued at cost or market price whichever is lower.

Whereas, raw material and semi-finished reusable scrap and stores and valued at cost

on FIFO basis.

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Sales

Sales comprises of invoiced value of goods supplied net off discounts and returns.

Miscellaneous expenditure

i) Preliminary Expenditure:

Preliminary and public issue expenses are being written off over a period of ten year.

Staff benefits

The provisions of Accounting Standard 15 on Accounting for Retirement Benefits in

the financial Statement of employers, issued by the council of The institute of

Chartered Accountants of India is being complied with by the company under the

provident fund Act.

Prior period and Extra-Ordinary items

Income and expenditure pertaining to prior period as well as extraordinary items,

where material, are disclosed separately.

Accounting for taxes on income

The company has unabsorbed losses available for set off under the income Tax

Act, 1961. However in view of the present uncertainty regarding generation of

sufficient further taxable income, deferred tax assets at the year end including related

credit for the year have not been recognized in the accounts on prudent basis, as per

the accounting standard 22 Accounting for taxes on income issued by the institute

of Chartered Accountants of India.

Shri. Meela Satyanarayana Founder

Shri. Meela Satyanarayana, the founder of the group is a freedom fighter, teacher turned

businessman and industrialist. His contribution to the plastics industry especially in the

Southern India is acclaimed by many organizations. President of Andhra Pradesh Plastic

Manufacturers Association in 1984, Joint Secretary of All India PVC Pipes

Manufacturers Association, New Delhi in 1985. He is the first entrepreneur to start a

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PVC pipe manufacturing unit in Andhra Pradesh. Municipal Chairperson of Suryapet for

the Period 1989 92, and present term 2006-2010, Chairmen and Founder of the Sudha

Co-Operative Urban Bank Ltd. Suryapet, Andhra Pradesh. He is recipient of many

awards such as

"Bharata Ratna Makshagundam Vishveshwaraiah Memorial Small Scale

Entrepreneur Award"

"Vijayaratna", "HMA Small Scale Entreprenuer Award"

Best Industrialist Award. Govt of Andhra Pradesh, India.

Shri. Meela Satyanarayana is a self made Industrialist and is a good manager. His

valuable suggestions and advices to the boards of all companies will always enhance the

managerial capabilities of the Boards.

WORKING CAPITAL OF SPL

Rs.

Lakhs

PARTICULARS 2005-

06

2006-

07

2007-

08

2008-

09

2009-

10

CURRENT

ASSETS

INVENTORIES 43744 56606 58130 72540 63246

BOOK DEBTS 84558 84880 85001 81237 82829

CASH/BANK

BALANCES

845 957 899 1280 473

LOANS AND

ADVANCES

14287 12859 11763 11612 9104

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SUB TOTAL

(B)

14343

4

15530

2

15579

3

16666

9

155652

CURRENT

LIABILITIES

ADVANCESFROM

CUSTOMERS

29116 28822 31636 32228 44162

SUNDRY

CREDITORS

19484 22543 29738 27610 20637

OTHER

LIABILITIES

4295 4549 2824 2612 3353

PROVISIONS 10843 8376 8931 11977 16838

SUB TOTAL( C)

63738 64290 73129 74427 84990

NET

WORKING

CAPITAL (B)-

(C)

79696 91012 82664 92242 70662

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

Working capital of past 5 years we can that there was a steady increase from 2005-06

to 2006-07. Although there was a decrease in 2007-08, the Working Capital has

considerably increased in the financial year 2008-09. And again there is been a

decrease in the year 2009-10 where compared to the remaining years it is due to

decrease in cash balances and also due to maintenance of more provisions.

STATEMENT OF CHANGES IN WORKING CAPITAL

THE YEAR 2004-05 AND 2005-06

(Rs Lakhs)

Particulars 2004

05

2005

06

Increase Decrease

Current Assets:

Inventories 39869 43744 3875

Book debts 71736 84558 12822

Cash/Bank Bal 718 845 127

Loans and Advances 11767 14287 2520

Total(a) 124090 143434

Current Liabilities:Advances From

Customers

28036 29116 1080

Sundry Creditors 13871 19484 5613

Other Liabilities 2877 4295 1418

Provisions 10638 10843 205

Total (b) 55422 63738

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Net Working Capital

(a-b)

68668 79696

Net Increase In

Working Capital

11028 11028

Total 79696 79696 19344 19344

From the above table There is an increase in working capital during this year as

compared to previous year. It is due to increase in inventories and book debts. With

this we can conclude that it is maintaining an efficient working capital.


THE YEAR 2005-06 AND 2006-07

(Rs Lakhs)

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From the above table during this year there is a significant increase in working

capital as compared to previous year, it is due to increase in inventories and also due

to the reduction in maintenance of provisions. Overall it has good working capital.


THE YEAR 2006-07 AND 2007-08

(Rs.in Lakhs)

Particulars 2006-07 2007-08 Increase Decrease

Current Assets:

Particulars 2005

06

2006

07

Increase Decrease

Current Assets:

Inventories 43744 56606 12862

Book debts 84558 84880 322Cash/Bank Bal 845 957 112


Total (a) 1473434 155302

Current Liabilities:

Advances From

Customers

29116 28822 294



Provisions 10843 8376 2467

Total (b) 63738 64290Net Working

Capital(a-b)

79696 91012

Net Increase In

Working Capital

11316 11316

Total 91012 91012 16057 16057

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Inventories 56606 58130 1524

Book debts 84880 85001 121



Total (a) 155302 155793


Customers

28822 31636 2814



Provisions 8376 8931 555

Total (b) 64290 73129

Net Working

Capital(a-b)

91012 82664

Net decrease in

Working Capital

8348 8348

Total 91012 91012 11718 11718

From the above table In this year there is a decrease in working capital as

compared to the previous year, it is due to increase in sundry creditors and also

maintenance of more provisions. At last we can conclude that working capital is

unsatisfactory.


THE YEAR 2007-08 AND 2008-09

(Rs.in Lakhs)

Particulars 2003

04

2004

05

Increase Decrease

Current Assets:

Inventories 58130 72540 14410

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Book debts 85001 81237 3764



Total 155793 166669


Customers

31636 32228 592



Provisions 8931 11977 3046

Total 73129 74427

Net Working

Capital(a-b)

82664 92242

Net Increase In

Working Capital

9578 9578

Total 92242 92242 17133 17133

From the above table. There is an increase in working capital in this year as

compared to previous year. It is because of increase in inventories and cash balances,

which has increased current assets to current liabilities. Overall we can conclude that

working capital is satisfactory.


THE YEAR 2008-09 AND 2009-10

(Rs.in Lakhs)

Particulars 2004 05 2005 06 Increase Decrease

Current Assets:

Inventories 72540 63246 9294

Book debts 81237 82829 1592



Total (a) 166669 155652

Current Liabilities:

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Advances From

Customers

32228 44162 11934



Provisions 11977 16838 4861

Total (b) 74427 84990

Net Working

Capital(a-b)

92242 70662

Net decrease In

Working Capital

21580 21580

Total 92242 92242 30045 30045

From the above table During this year working capital has shown adverse balances

as compared to previous year. it is due to slash down in maintenance of inventories

and cash balances which has lead to decrease in current assets to current liabilities. at

last it has unsatisfactory working capital

RATIO ANALYSIS

INTRODUCTION:

Ratio analysis is one of the techniques of financial analysis where ratios are used as a

yardstick for evaluating the financial condition and performance of a firm. Analysis and

interpretation of various accounting ratios gives skilled and experienced analyst, a better

understanding of the financial condition and performance of the firm than what he could

have obtained only through a perusal of financial statements.MEANING OF RATIOS:

Ratios are relationships expressed in mathematical terms between figures which are

connected with each other in some manner. Obviously, no purpose will be served by

comparing two sets of figures which are not at all connected with each other. Moreover,

absolute figures are also unfit for comparison.

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There are various techniques or models for analyzing information contained in the

financial statements viz. Comparative statements, Common Size Statements, Trend

Percentages, Funds Flow Analysis, Cash Flow Analysis and Ratio Analysis. Financial

analysis is undertaken by the management of the firm or by parties outside to it viz.

owners, creditors, investors etc.

Ratio Analysis is most widely used and powerful tool or technique of financial analysis.

The term ratio refers to the numerical or quantitative relationship between two variables.

It shows arithmetical relationship between two figures, which can be expressed in three

ways.

Percentage

Fraction

Proportion

A study of the trend of strategic ratios helps the management in planning, forecasting and

decision making. It helps in identifying specific work areas. In short, though the

technique of ratio analysis, the firms solvency, efficiency and profitability can be

assessed.

IMPORTANCE OF RATIO ANALYSIS

Ratio analysis helps in simplifying the financial statement for easy understanding.

It helps in drawing out meaningful conclusion from the information provided in

the financial statements which is useful for decision making and framing sound

policies for business in future.

It helps in assessing the financial strength and weakness of the firm and thus

enhances the value of the financial statements.

Comparative study of the ratios between the competing firms helps to know the

efficiency of the firm.

It helps the investor to assess the financial position of the concern in which he is

going to invest.

Ratio analysis helps the employees interested in wage increase and fringe benefits

that are related the volume of profits earned by the concern.

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Ratio analysis provides data for inter firm comparison. Ratios highlight the

factors associated with successful and unsuccessful firms. They also reveal strong

firms and weak firms, over valued and under valued firms.

Ratio analysis helps in planning and forecasting. Over a period of time a firm or

industry develops certain norms that may include future success or failure. If

relationship changes in firms data over different time periods, the ratios may

provide clues on trends and future problems.

Ratio analysis also makes possible comparison of the performance of the different

divisions of the firm. The ratios are helpful in deciding about their efficiency or

otherwise in the past and likely performance in the future.

Thus, ratios can assist management in its basic function of forecasting, Planning,

coordination, control and communication.

LIMITATIONS OF RATIO ANALYSIS

Ratios are of limited use and thus single ratio may not be useful. Better

interpretation is possible with the calculation of number of ratios, which may lead

to confusion to the analyst in making any meaningful conclusion.

Ratios are calculated on the basis of past results, which may not necessarily true

indicators of the future, if the business policies are constantly changing.

Change in accounting procedure may be misleading for ratio analysis. For

example, change in inventory valuation methods from LIFO to FIFO may also

influence in the analysis.

Ratio analysis considers only quantitative aspect, but not qualitative factors.

Ratio analysis may give misleading results if the effects of price level changes are

not considered.

Ratio analysis when interpreted by different people in different way may

encounter with the personal bias or prejudice of the analyst.

CLASSIFICATION OF RATIOS

Ratios are classified in a number of ways, depending upon the basis of classification. The

basis for classification can be

1. The financial statements from which the figures for comparison of ratios are

derived. It is called Traditional classification.

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2. The tests or functions of the ratios. It is called Functional classification.

3. The importance of the ratios.

4. The point of time in relation to which ratios are calculated.

5. The usage of ratios.

6. The nature of ratios.

1. Traditional Classification: Ratios are classified on the basis of the financial

statements from which the figures used for calculation are taken. The ratios are

classified as Balance sheet ratios, Profit and Loss Account ratios and Mixed

ratios.

2. Functional Classification: Ratios are classified as liquidity ratios, profitability

ratios and earning ratios. Liquidity ratios test the liquidity of business i.e. its

ability to repay its short term liabilities out of short term assets (eg. Current ratio,

Quick ratio, Stock Turnover ratio, Creditors Turnover ratio etc). Profitability

ratios indicate the profitability of the business (eg. Gross profit ratio, Return on

Capital Employed etc). Earnings ratios indicate the return to the owners or

shareholders of the business (eg. Earnings per share, Dividend pay out ratio etc)

3. Classification on the basis of importance of Ratios: Ratios are classified as

Primary ratios and secondary or supporting ratios. Primary ratios are more

4. important for the purpose of analysis and interpretation (eg. Return on capital

Employed). The other ratios which support or explain the primary ratio are called

secondary ratios (eg. Operating Profit ratio etc.)

5. Classification on the basis of point of time: Ratios are classified as Structural

ratios and Trend ratios. Structural ratios are calculated from the data relating to

some point of time, say a particular accounting year. Trend ratios are computed

from the data relating to different periods of time.

6. Classification on the basis of usage: Ratios are classified as Ratios for

Management, Ratios for Creditors and Ratios for Shareholders. Ratios for

management indicates efficiency of management (eg. Operating ratios, stock

turnover ratios etc). Ratios for creditors help in ascertaining the short term, long

term solvency of the business undertaking (eg. Current ratio, creditor turnover

ratio, Debt Equity ratio etc) Ratios for shareholders help the shareholders in

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assessing the fruitfulness of their investment (eg. Earnings per share, Return on

capital employed etc).

7. Classification on the basis of nature of ratios: Ratios are classified in to liquidity

(or short term solvency) ratios, leverage (or capital structure or long term

solvency) ratios, Turnover (or Activity or Performance) ratios and Profitability

ratios. This is the most widely accepted classification of ratios and this

classification has been followed for explaining the various ratios.

Ratios may be classified in a number of ways keeping in view the particular purpose.

Ratios indicating profitability are calculated on the basis of the profit and loss account,

those indicating financial position are computed on the basis of the balance sheet and

those which show operating efficiency or productivity or effective use of resources are

calculated on the basis of figures in the profit and loss account and the balance sheet.

This classification is rather crude and unsuitable to determine the profitability and

financial position of the business. To achieve this effectively, ratios are classified as.

1. Liquidity ratios

2. Leverage ratios

3. Coverage ratios

4. Activity ratios (or) turnover ratios

5. Profitability ratios

1. LIQUIDITY RATIOS:

Liquidity Ratios is also known as short term solvency. These ratios are used to measure

the firms ability to meet short term obligations. They compare short term obligation

to short term (or current) resources available to meet these obligations. From these ratios,

much insight can be obtained into the present cash solvency of the firm and the firms

ability to remain solvent in the event of adversity. The creditors of the firm are primarily

interested in the short term solvency of the firm. A firms liquidity should be neither

too high nor too low but adequate.

Low liquidity implies the firms inability to meet its maturing obligations. This will result

in bad credit rating, loss of creditors confidence or even technical insolvency, ultimately

leading to the closure of the firm.

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A very high liquidity position is also bad. It means that the firms current assets are too

high in proportion to maturing obligations. Idle assets earn nothing to the firm. The firms

funds will be unnecessarily locked up in current assets, which if, released can be used to

generate profits to the firm.

The ratios, which measure, and indicate the extent of a firms liquidity, are known as

liquidity ratios or short term solvency ratios. Commonly used liquidity ratios include.

Current ratio (or) working capital ratio

Quick ratio (or) acid test ratio

Cash position ratio (or) super stock quick ratio

2. LEVERAGE RATIO:

These ratios are also known as Capital Structure ratios or Solvency ratios or Capital

Gearing ratios. The long term creditors are more concerned with the firms long term

financial position. They judge the financial soundness of the firm in the firm in term of

the ability to pay interest promptly as well as making repayment of the principal. The

long term solvency of the firm can be examined with the help of leverage ratios. They

measure the funds supplied by owners as compared with the financial provided only a

small proportion of total financing, the risks of the business are borne mainly by the

creditors.

Firm with low leverage have less risk of loss, but they also have lower expected returns.

Conversely, firms with high leverage ratios have the risk of large losses but also have a

chance of earning huge profits. Therefore, before deciding whether a firm should have

debt, it must balance higher expected returns against increased risks. The most commonly

examined leverage: ratios are

Debt equity ratio

Proprietary ratio

Debt to capital ratio

Gross fixed assets to shareholders funds

Fixed assets ratio

3. COVERAGE RATIOS:

These ratios indicate the extent to which the interests of the persons entitled to get a fixed

return (i.e., interest or dividend) or a scheduled repayment as per agreed terms are safe.

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

calculated.

Fixed interest coverage ratio

Fixed dividend coverage ratio

Debt service coverage ratio

3. ACTIVITY RATIO (OR) TURNOVER RATIO:

The finances obtained by the firm from its owners and creditors will be inverted in assets,

which the firm uses to generate sales and profits. The amount of sales generated and the

profit earned depend on the effective and efficient management of these assets by the

firm. Activity ratios measure the efficiency with which the firm manages and uses its

assets. That is why activity ratios are known as efficiency ratios, because these ratios are

converted or turned over in to sales.

Thus, the turnover or activity ratios measure the relationship between sales on one side

and various assets on the other side. Higher the turnover ratio, the better the profitability

and use of capital.

Many activity ratios can be calculated to measure the efficiency of assets utilization.

Following are some of the important activity ratios:

Total assets turnover ratio

Capital employed turnover ratio

Fixed assets turnover ratio

Current assets turnover ratio

Working capital turnover ratio

Stock turnover ratio

Debtors turnover ratio

Creditors turnover ratio

4. PROFITABILITY RATIOS:-

Profitability is the ability to make profits. Every firm should earn adequate profits in

order to survive in the immediate present and grow in future. In fact, profit is what makes

the business run. Profitability is the net results of a large number of policies and

decisions. Profitability ratios give final answers about how efficiency the firm is

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managed. The profitability ratios relate profits earned by a firm by its parameters like

sales, capital employed and net worth. But while making ratio analysis relating to profits,

it should be remembered that there are different concepts of profit such as contribution,

gross profits, net profits, EBIT, operating profits, profits before depreciation and before

tax etc. Profitability ratios are important for a concern. These ratios are calculated to

enlighten the end results of business activities, which is the sole criterion of the overall

efficiency of a business concern. The following are the important profitability ratio which

are based on.

1. Sales

2. Investment

Gross profit ratio

Operating raito

Operating profit ratio

Net profit ratio

Return on capital employed

Return on shareholders equity

Return on total assets

Earning per share

Dividend pay out ratio

1. CURRENT RATIO:

In times

YEAR CURRENT ASSETS CURRENT

LIABILITIES

RATIO

2005-06 143434 63738 2.25

2006-07 155302 64290 2.41

2007-08 155793 73129 2.13

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2008-09 166669 74427 2.23

2009-10 155652 84990 1.83

The ratio equal to or near to 2:1, i.e., current assets double the current liabilities isconsidered to be satisfactory. In the context of SPL, the current ratio is more than

standard. It has always been above 2. Thus it is an indication of efficiency of the

firm of maintaining current assets. But as on the year 2009-10 there is a slight

decrease of 0.2% , as it does not make much difference.

2. QUICK RATIO

In times

YEAR QUICK ASSETS CURRENT

LIABILITIES

RATIOS

2005-06 99690 63738 1.56

2006-07 98696 64290 1.53

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2007-08 97663 73129 1.33

2008-09 94129 74427 1.26

2009-10 92406 84990 1.09

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As a convention Quick Ratio of 1:1 is considered satisfactory. From the above

analysis we can see that Quick Ratio for the past five years has been above 1 which

is good, even though it is in a decreasing trend.

3. ABSOLUTE QUICK RATIO (OR) CASH RATIO

(In times)

YEAR LIQUID ASSETS CURRENT LIABILITIES RATIO

2005-06 845 63738 0.013

2006-07 957 64290 0.014

2007-08 899 73129 0.012

2008-09 1280 74427 0.017

2009-10 473 84990 0.005

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The acceptable norm for this ratio is 50% or 0.5:1 or 1:2, but the ratios for

2009 as shown in the trend are not according to the standard norms there is no proper

maintenance of cash in the current assets.

4. INVENTORY TURNOVER RATIO

(In times)

YEAR COST OF

GOODS SOLDAVERAGE

INVENTORY(OR)C.S

RATIO

2005-06 104269 41806 2.49

2006-07 127545 56606 2.25

2007-08 130749 58130 2.25

2008-09 121566 72540 1.67

2009-10 129833 63246 2.05

C.S=closing stock

Cost of goods sold=gross turnover net of exercise duty profit before tax

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We can see that the I.T.R of SPL is rapidly decreasing from 2005-02 to 2008-09. This

shows that the rate at which the stock is turned over, during the accounting period,

over the past five years is becoming lesser and lesser. And again at the period of

2009-10 there was an increase by 2.05 %.

5. INVENTORY CONVERSION PERIOD

YEAR NO.OF DAYS IN

A YEAR

INVENTORY

TURNOVER RATIO

INV.CONV.

PERIOD

2005-06 365 2.49 146

2006-07 365 2.25 162

2007-08 365 2.25 162

2008-09 365 1.67 218

2009-10 365 2.05 178

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From the above we can say that the Inventory Conversion Period has shown a steady

inverse from 2005-06 to 2006-07, although there was a fall in 2007-08. But in the

financial year 2008-09 the conversion period has increased by 56 days. As then

there was a decrease by 40 days in the year 2009-10.

6. DEBTORS TURNOVER RATIO

(In times)

YEAR TURNOVER AVG DEBTORS RATIO

2005-06 132265 78147 1.69

2006-07 131972 84719 1.56

2007-08 153205 84940.5 1.80

2008-09 137838 83119 1.66

2009-10 174490 82033 2.13

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The debtors turnover ratio of SPL has been considerably decreasing from 1.69 in

the accounting year 2005-06 to 1.56 in 2006-07, which increased to 1.80 in 2008-09.

However, in the next year it again decreased to 1.7 and again there was an increase by

2.13 in the current year 2009-10

.

7.AVERAGE COLLECTION PERIOD

YEAR NO.OF DAYS IN

A YEAR

DEBTORS

TURNOVER RATIO

AVG. COLL. PER

2005-06 365 1.69 216

2006-07 365 1.56 234

2007-08 365 1.80 203

2008-09 365 1.66 220

2009-10 365 2.13 171

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The Average Collection Period i.e., the duration provided for the collection of

debts has been increasing from 216 days in2005-06 to 234 days in 2006-07 but it

decreased in 2007-08 to 203 days and again it has increased to 220 in the year 2008-

09 and that after there is a decrease to 171 in financial year 2009-010

8.CREDITORS TURNOVER RATIO

(In times)

YEAR CREDIT

PURCHASES

AVG.

CREDITORS

RATIO

2005-06 65934 16677.5 3.95

2006-07 79819 21013.5 3.80

2007-08 78387 26140.5 3.00

2008-09 72202 28674 2.52

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2009-10 78006 24174 3.23

Here the Creditors Turnover Ratio was 3.95 in the year 2005-06 and has decreased

rapidly to 2.43 in 2008-09, which shows that the management is making its paymentsin time, thus providing its efficiency, and again in the financial year 2009-10 there

was an increase by 3.23 even by this there no difference in the efficiency of the

management.

9.AVERAGE PAYMENT PERIOD

YEAR NO.OF DAYS IN

A YEAR

CREDITORS

TURNOVER RATIO

A.P.P

2005-06 365 3.95 92

2006-07 365 3.80 96

2007-08 365 3.00 112

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2008-09 365 2.52 145

2009-10 365 3.23 113

The Average Payment Period has steadily increased from 92 days in 2005-06 to 145

days in 2008-09; this shows the confidence of the creditors in the organization. And

suddenly there is a fall by 113 days in the financial year 2009-10 though there is

decrease the confidence of the creditors with the organization has no difference.

10.WORKING CAPITAL TURNOVER RATIO

In times

YEAR TURNOVER WORKING

CAPITAL

RATIO

2005-06 132265 79696 1.66

2006-07 131972 91012 1.45

2007-08 153205 82664 1.85

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2008-09 137838 92242 1.49

2009-10 174490 70662 2.46

A higher Working Capital Turnover Ratio indicates efficient utilization of Working

Capital. But for SPL IS ratio has been decreasing from 1.66 in 2005-06 to 1.49 in

2008-09, although it showed a slight increase of 1.85 in 2007-08 it again decreased in

the next year. Again there was an increase in the ratio by 2.46 in current year 2009-10

by which we can tell that there is an efficient utilization of Working Capital.

11.RAW MATERIAL INVENTORY TURNOVER RATIO

Rs. Lakhs

YEAR RAWMATERIAL

CONSUMED

AVERAGERAW

MATERIAL

INVENTORY

RATIO

2005-06 63265 8890.5 7.12

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2006-07 76903 8953.5 8.59

2007-08 73677 10753 6.85

2008-09 65085 14353.5 4.53

2009-10 75818 16478.5 4.60

The Raw Material Inventory turnover Ratio for the organization has been increasing

at a fast pace from 7.12 in 2005-06 to 8.59 in 2006-07,but in the subsequent year

2008-09 there was a decrease and again an increase by 4.60 in the financial year.

CONCLUSIONS

1. The ratio equal to or near to 2:1, i.e., current assets double the current liabilities is

considered to be satisfactory. In the context of SPL, the current ratio is more than

standard. It has always been above 2. Thus it is an indication of efficiency of the

firm of maintaining current assets. But as on in the year 2009-10 there is a slight

decrease of 0.2% , as it does not make much difference.

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2. The acceptable norm for this ratio is 50% or 0.5:1 or 1:2, but the ratios for 2009

as shown in the trend are not according to the standard norms there is no proper

maintenance of cash in the current assets.

3.We can see that the I.T.R of SPL is rapidly decreasing from 2005-06 to 2009-10.

This shows that the rate at which the stock is turned over, during the accounting

period, over the past five years is becoming lesser and lesser. And again at the period

of 2009-10 there was an increase by 2.05 %.

4.Here the Creditors Turnover Ratio was 3.95% in the year 2005-06 and has

decreased rapidly to 2.43% in 2008-09, which shows that the management is making

its payments in time, thus providing its efficiency, and again in the financial year

2009-10 there was an increase by 3.23% even by this there no difference in the

efficiency of the management.

5. The Average Payment Period has steadily increased from 92 days in 2005-06 to

145 days in 2008-09; this shows the confidence of the creditors in the organization.

And suddenly there is a fall by 113 days in the financial year

6. A higher Working Capital Turnover Ratio indicates efficient utilization of Working

Capital. But for SPL IS ratio has been decreasing from 1.66% in 2005-06 to 1.49 in

2008-09, although it showed a slight increase of 1.85% in 2007-08 it again decreased

in the next year. Again there was an increase in the ratio by 2.46% in current year

2005-06 by which we can tell that there is an efficient utilization of Working Capital.

7.The Raw Material Inventory turnover Ratio for the organization has been increasing

at a fast pace from 7.12% in 2005-06 to 8.59% in 2006-07,but in the subsequent year

2008-09 there was a decrease and again an increase by 4.60% in the financial year.

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SUGGESTIONS

The Net Working Capital is positive for all the past five years except in the year

2009-10, therefore surplus amount should be invested in the short-term bonds.

There has been an increase in the Finished Goods Conversion Period, which is

mainly due to the increase in the manufacturing cycle time. Thus, it is recommended

to reduce the Operating Cycle time to the possible extent.

SPL is using ABC analysis partly in the inventory control. It is suggestible to

point other methods, such as JIT (Just in Time) and VED (vital Essential Desirable)

for managing inventory, wherever applicable, so as to reduce the Cycle period and

blockage of excess funds in inventory.

As SPL is following the centralized cash management it would be better for the

company to follow decentralized system, so that the company can take immediateaction to any requirements.

The Company should make more efforts to quickly transform the accounts

receivables into cash, as the collection period is above the ideal period i.e., 3-4

months or maximum of 120 days.

Compared to the 2008-09 scraps, 2009-10 has been increased to 100%, as this

indicated a negative sign. Company has to assess its production capability and

reasons for pile up of scrap. In addition, it is advisable to dispose sc

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sudhakar pvc

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