Vous êtes sur la page 1sur 78

WORKING CAPITAL MANAGEMENT Introduction: Working capital is the lifeblood of every business.

Its effective provision ensures success and inefficient provision reduces the profit and results in downfall of the company. Mismanagement of business failure. A study of working capital is of major importance to internal and external analysis because of its close relationship with day-do-day operations of a business. Definition: In accounting concept working capital is nothing but, The difference between inflow and outflow of cash. It is also known as the difference between current assets and current liabilities. Current assets consists of cash/bank balance, short from investments, receivables, stocks advance payments etc., current liabilities include creditors, bills payables, bank overdraft, short term loans etc.,

GROSS WORKING CAPITAL WORking capital NET WORKING CAPITAL NEGATIVE WORKING CAPITAL RESERVE WORKING CAPITAL PERMANENT WORKING CAPITAL 1. Gross working capital: It is the amount of funds invested in the various components of current assets. 2. Net working capital: It is the difference between current assets and the current liabilities. The concept of net working capital enables a firm to determine the exact amount available at its disposal for operational requirements. It reflects the companys liquidity position. 3. Negative working capital: When current liabilities exceed current assets negative working capital emerges. Such a situation occurs when a firm is nearing a crisis of some magnitude. 4. Reserve working capital:

It refers to the short term financial arrangement made by the business units to meet uncertainties. Business firms are always exposed to risks, which may be controllable or uncontrollable. In the event of happenings of such events, reserve working capital strengthens the capacity of the company to face the challengers. 5. Permanent working capital: It means the minimum amount of investment in all current assets which is regarded at all times to carry on minimum level of business activities. The operating cycle is a continuous process and therefore, the need for current assets. But, the magnitude of current assets increases and decreases over time. There is always a minimum level of current assets required at all times by the firm to carry on its business operations. The minimum level of current assets is known as permanent working capital or fixed working capital. 6. Temporary working capital: This is also called the fluctuating or variable working capital. The amount of temporary working capital keeps on changing depending upon the changes in production and sales. For example extra inventory of finished goods will have to be maintained to support the peak periods of sale and investment in receivable may also increase during such period. On the other hand investment in raw materials, workin-progress and finished goods will decrease. If the market is black. The extra working capital required to support the changing production and sales activities is known as temporary working capital. The figure above shows that the permanent level is fairly constant while temporary working capital is fluctuating sometimes increasing and sometimes decreasing in accordance with seasonable demands. In the case of an expanding firm the permanent working capital line may not be horizontal this is because the demand for permanent current assets might be increasing or decreasing to support a rising level of activity. Both finds working capital are necessary to facilitate the sales process through the operation cycle. Temporary working capital is created to meet liquidity requirements that are purely transient nature. Need for working capital: The basic objective of financial management is maximizing wealth of shareholders. This can be achieved when a firm earns sufficient returns from its operations. The amount of such earnings largely depends upon the magnitude of sales. There is always a time gap between sales of goods and the final realization of cash. Current assets are required during time gap in order to sustain the sales activity. Adequate working capital is required during this period for the purchase of raw material, payment of images or other expenses required for the manufacturing of goods to be sold. Working capital is also required to run the business smoothly. Operating cycle:

The duration of the time required to complete the following cycle of events in a case of manufacturing firm is called as operating cycle. The operating cycle consists of the following events. 1. Conversion of cash into raw material 2. Conversion of raw material into work-in-progress

3. Conversion of work-in-progress into finished goods

4. Conversion of finished goods into debtors and bills receivable through sales

5. Conversion of debtors and bills receivable into cash

This cycle will be repeated again and again. This can be shown in the following chart.

RAW MATERIAL

CASH

WORK-IN-PROGRESS

ACCOUNT RECIEVABLES

FINISHED GOODS

Determinants of working capital: OPERATING CYCLE

A large number of number of factors influence working capital needs of a firm. The basic objectives of working capital management are to manage the firms current assets and current assets and current liabilities in such a way that a satisfactory level of working capital is maintained.

The following factors determine the amount of working capital. 1. Nature of business:

The composition of current assets is a function of the size of a business and industry to which it belongs. Small companies have smaller proportion of cash, receivables and inventory than large corporations. This difference becomes more marked i.e., large corporations. A public utility concern, for example, mostly employees fixed assets in its operations, while a merchandising department depends generally

on inventory and receivables. Need for working capital is thus determined by the nature of an enterprise. 2. Size of business:

The size of business is also an important impact on its working capital needs. Size may be, measured in terms of scale of operations. A firm with large scale of operation will need more working capital than a small firm.

3. Length of the Manufacturing Process:

Larger the manufacturing process, the higher will be the requirement of working capital and vise versa. This is because of the fact that highly capital-intensive industries require a large amount of working capital to run their sophisticated and long production process. On the same principle of trading concern requires a much lower working capital than a manufacturing concern.

4. Production policy:

The production policies by the management have a significant effect on the requirement on working capital of the business. The production schedule has a great influence on the level of inventories. The decision automation etc., will also have an effect on the working capital requirements.

5. Volume of sales:

This is the most important factor effecting the size and components of working capital. A firm maintains current assets because they are needed to support the operational activities which resulting sales. The volume of sales and size of the working capital are directly related to each other. As the volume of sales increases there is an increase in the investment of working capital.

6. Terms of purchases and sales:

A Firm, which allows liberal credit to its customers, may enjoy higher sales but will need more working capital as compared as compared to a firm enforcing strict credit terms. The working capital requirements are also effected by the credit facilities enjoyed by the firm. 7. Business cycle:

Business expands during the period of prosperity and declines during the period of depression; consequently, more working capital is required during the period of prosperity and less during the period of depression.

8. Growth and expansion:

If a business firm has ambitious plan for expansion, it requires more working capital, to fulfill such requirements. Growth and expansion in business is more essential to exploit the available business opportunity and to increase the existing market share.

9. Fluctuations in the supply of raw materials:

Certain companies have to obtain and maintain large reserve of raw materials due to their irregular sales and intermittent supply. This is particularly true in case of companies requiring special kind of raw materials available only from one or two sources. In such a case a large quantity of raw materials is to be kept in store to avoid an possibility of the production process coming to a dead halt. Thus, the working capital requirements in case of such industries would be large.

10. Price level changes:

The increasing shifts in price levels make the functions of financial managers difficult. He should anticipate the effect of price level changes on working capital requirements of the firm. Generally, rising price levels will require a firm to maintain higher amounts of working capital. The same levels of current assets will need increased investment when prices are increasing.

11. Operating efficiency:

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

12. Profit margin:

Firms differ in their capacity to generate profit from business operations. Some firms enjoy a dominant position, due to quality product or good marketing management or monopoly power in the market and earn a high profit margin. Some other firms may have to operate in an environment of intense competition and may earn low margin of profits.

13. Profit appropriations:

Even if the net profits are earned in cash at the end of the period, whole of it is not available for working capital purposes. The contribution towards working capital would be effected by the way in which profits are appropriated. The availability of cash generated from operations thus depends upon taxation, dividend and retention policy and depreciation policy.

14. Credit Policy:

A, company which follows a liberal credit policy to its customers, may have higher sales but will need higher working capital as compared to a company which has an efficient debt collection machinery and observing strict terms. A company enjoying liberal credit facilities from its suppliers will need lower amount of working capital as compared to a company, which does not enjoy such credit facilities.

PRINCIPLES OF WORKING CAPITAL MANAGEMENT:

Principle of risk variation:

Risk here refers to the inability of a firm to maintain sufficient current assets to pay for its obligations, if working capital is varied relative to ales; the amount of risk that a firm assumes is also varied and the opportunity for gain or loss is increased. As the level of working capital relative to sales decreases the degree of risk increases. When the degree of risk increases the opportunity for gain or loss also increases. Thus if the level of working capital goes up the amount of risk goes down and the opportunity for gain or loss is likewise adversely affected. Depending upon this attitude, the management changes the size of working capital.

Principle of cost of capital: This principle emphasizes the different sources of finance, for each source has a different cost of capital. It should be remembered that the cost of capital moves inversely with risk. Thus additional capital results in the decline in the cost of capital.

Principle of equity position:

Accounting to this principle the amount of working capital invested in each corporate should be adequately justified by a firms equity position. Every rupee invested in the working capital should be contributed to the net worth of the firm.

Principle of maturity of payments:

A company should make every effort to relate maturity of payments be it flow of internally generated funds. There should be the least disparity between the maturities of a firms short-term debt instruments and its flow of internally generated funds because a greater risk is generated with greater disparity. A margin of safety however should be provided for short-term debt payments.

Sources of working capital:

There are two approaches for sources of finance:

a. Hedging approach

b. Conservative approach

A. Heading approach:

The term hedging approach is often used in the sense of risk reducing investment strategy involving transactions of simultaneous but opposite nature so that the effect of one is likely to counter balance the effects of the other. With reference to an appropriate financing mix, the term hedging can be said to refer to a process of matching maturity of financial needs. This approach to financing decision to determine an appropriate financing mix is, therefore also called as maturity approach.

According to this approach the maturity of the source of funds should match the nature of the assets to be financed for the purpose of analysis, the assets can be broadly classified into two classes.

1. Those that are required in a certain amount for a given level of operation and hence do not vary over time. 2. Thos that fluctuates over time. When the firm follows marching approach, long term financing will be used to finance permanent working capital. Temporary working capital should be financed out of short-term funds. The rationale underlying marching approach is treat the maturity of sources of funds should match the nature of assets to be financed.

Estimated total funds for company X for the year Y

Months Total Funds required

(Rs) Permanent

Requirements

Seasonal Requirements

January

9500

7900

1600

February

9000

7900

11000

March

8500

7900

600

April

8000

7900

100

May

7900

7900

June

8150

7900

250

July

9000

7900

1100

August

9350

7900

1450

September

9500

7900

1600

October

10000

7900

2100

November

9000

7900

1100

December

8500

7900

600

According to the hedging approach the permanent portion of funds should be financed with long- term funds and the seasonal portion with short-term funds. With the approach, the short term financing requirements (current assets) would be just equal to the short term financing (current liabilities). There would therefore be on net working capital.

B. Conservative approach:

This approach suggests that the estimated requirements of funds should be met from long term sources, the use of short term funds should be restricted to only emergency situations or when there is an unexpected outflow of funds. In the case of Hypothetical Company X in the total requirements, including the entire rupees 10,000 needed in October, will be financed by long term services. The shortterm funds will be used to meet contingencies. The amount given represent the extent to which short term financial needs are being financed by long term funds, that is the net working capital.

Estimated total funds for company X for the year Y

Months

Total Funds require (Rs)

Permanent

Requirements

Seasonal Requirements

January

9500

7900

1600

February

9000

7900

1100

March

8500

7900

600

April

8000

7900

100

May

7900

7900

June

8150

7900

250

July

9000

7900

1100

August

9350

7900

1450

September

9500

7900

1600

October

10000

7900

2100

November

9000

7900

1100

December

8500

7900

600

Other sources of working capital:

1. Loans from financial institutions

2. Floating of debentures

3. Accepting public deposits

4. Rising of funds by internal financing

5. Issue of shares

1. Loans from financial institutions:

The option is ruled out because banks do not finance always for working capital requirement. This facility may not be available to all companies. 2. Floating of debentures:

Probability of sources is less because still Indian capital market could not get popularity. The company not associated with reputed groups fails to attract investors. However issue of convertible bonds is gaining momentum.

3. Accepting public deposits:

The success is directly related to the image of the company problem of low profitability in many companies is very common.

4. Issue of shares:

It can be considered but the companies have to command respect of investors how profit margin and lack of knowledge of the company makes this sources not an attractive one.

5. Raising of funds by internal financing:

It is a problem for many companies because the prices of end products are controlled and do not permit the companies to pay reasonable dividend and retain profit for additional working capital requirement.

However feasible solution lies in increasing the profitability through cost control, reduction, managing cash operating cycle and rationalizing inventory or stock etc.,

MANAGEMENT OF CASH, INVENTORY AND RECEIVABLES

Cash management: What is cash? Cash is the most liquid asset that a business owns. It includes money and such instruments as cheques, money orders and bank drafts. Cash in the business enterprise may be compared to the blood in the human body. In broad sense it includes rear cash items such as time deposits with banks, marketable securities etc., and such securities / deposits can be immediately sold or converted into cash if necessary. The term cash management includes both cash and rear cash assets.

Motives of holding cash:

1. Transaction motive: A firm enters into a variety of business transactions in both in flows and outflows of cash. At time the cash outflows may exceed the cash inflows. In order to meet the business obligations in such

situations, it is necessary to maintain adequate cash balance. The firms with the motive of meeting routine business payments keep this cash balance.

2. Precautionary motive:

A firms cash balance to meet unexpected contingencies such as floods, strikes, presentment of bills for payment earlier than the expected date, unexpected showing down of collection of accounts receivables, sharp increase in price of raw materials etc., the more is the possibility of such contingencies; the more is the amount of cash kept by this firm.

3. Speculative motive:

A firm also keeps cash balance to take advantage of unexpected opportunities typically outside the normal cause of the business. Such move is therefore of purely a speculative nature. For example a firm may like to take a payment of immediate cash or delay purchase of materials in the anticipation of declining prices. Similarly, it may like to keep some cash balance to make profit by buying securities in times when prices fall on account of tight money conditioned.

Compensation motive:

Banks provide certain services to their clients free of charge. They therefore, usually require clients to keep minimum cash balance with them, which helps to earn interest and thus compensate them for free services provided.

Business firms normally do not enter into speculative activities and therefore out of four motives of holding cash balance the two most important motives are the cash transactions and compensation motive.

How to have effective cash management?

Big corporations with sizable funds generally display a highly independent management of cash assets. In these firms a responsible fiscal officer is charged with responsibility of managing working cash balance in relation to the needs for the payment of obligations. To search for the optimum cash probably overstates the companys capabilities.

A proper cash management necessitates the development and application of some practical administrative procedures to accelerate the inflow of cash and to improve the utilization of excess funds. This practical administrative procedure includes: 1. Planning of cash requirements

2. Effective control of cash flow

3. Production utilization of exceeds funds

Objectives of cash management:

A highly liquid, vital asset is cash. It is needed to meet every type of expenditure. Hence it should be sufficiently made available. If a firm falls to provide funds to meet the obligations, it will be clear indication of technical insolvency of firm. If the cash position of the firm is strong, it can command business operations. Cash discounts can be obtained on purchases. Obligations can be met immediately. Cost of capital will be minimized. However, it cannot also hold cash in an idle way. It should be made productive. Keeping these two views, viz., liquidity and profitability, the following objectives of cash management can be identified.

i. To make cash payments

j. ii. To maintain minimum cash reserve

To make cash payments:

The very objective of holding cash is to meet the various types of expenditure to be incurred in business operations. Several types of expenditures have to be met at different points of time and the firm should be prepared to make such cash payments. The firm should remain liquid to meet the obligations. Otherwise the business suffers.

It is observed that cash is an oil to lubricate the every turning wheels of business, without it the process of grinds to stop. Thus one of the basic objectives of cash management is to maintain the images of the organization by making a prompt payment to creditors and to avail cash discounts facilities. To maintain minimum cash reserve:

Another important objective of cash management is to maintain reserve. This means in the process of meeting obligations on time, the firm should not maintain unnecessarily heavy cash reserves. It cannot keep cash idle. Excess cash balance should be productive. Maintaining minimum cash reserve is made possible by synchronizing cash inflows and outflows through cash budgeting. Cash collection should be expedited and cash outflows should be controlled to conserve cash resources. Thus as far as possible the firm should maintain minimum cash reserve to attain the objective of profitability.

Importance of cash management:

Cash management assumes more important than other current assets because cash is the most significant and the least productive asset that the firm holds. It is significant because it is used to pay firms obligations. However, cash is unproductive and as such, the aim of cash management is to maintain adequate cash position to keep the firm sufficiently liquid to use excess cash in some profitable way. Management of cash is also important because it is difficult to predict cash flows accurately and that there is not perfect coincidence between inflows and outflows of cash. Thus, during some periods, cash outflows exceed cash inflows, because payments for taxes, dividends, excise duty, seasonal inventory build up etc., are met through it. At other times cash inflows will be more than cash payments, because there may be large cash sales and debtors may be realized in large sums promptly. Cash management is also important cash constitutes the smallest portion of the total current assets;

even then, considered time management is devoted for it.

Strategies of cash management:

1. Cash planning:

Cash inflows and outflows should be planned to project cash surplus or deficit for each period of planning. Cash budget should be prepared for this purpose.

2. Managing cash flows: The inflow and outflow of cash should be property managed. The inflow of cash should be accelerated, while the outflow of cash should be decelerated as far as possible.

3. Optimum cash level:

The firm should decide on the appropriate level of cash balances. The cost of excess cash and the danger of cash deficiency should be matched to determine the optimum level of cash balances.

4. Investing idle cash:

The idle cash or precautionary cash balances should be properly invested to earn profits. The firm should decide on the division of such balances into bank deposits and marketable securities.

Functions of cash management:

1. To forecast cash inflow and outflow.

2. Plant the cash requirement.

3. Determine the safe level of cash.

4. Monitor the safety level of cash.

5. Locate funds needed.

6. Regulate cash inflow.

7. Determine the criteria for investment of excess cash.

8. Regulate cash outflow.

9. Avail banking facilities and maintain good relationship with bankers.

Problems of cash management

1. Impact of inflation on cash flow:

Inflation is growth in value terms and therefore it provides of rapid inflation a firm should expect to find itself in a very unfavorable cash flow position, like that of the firm which is growing very fast. In the words of W.C.F. Hautrey in advances terms it comes dangerously close to compounding a felony.

Timing of cash flow:

Period to another the figure indicates the variation during the different firms with identical cash balances at the beginning and at the end of the year, but with vastly different patterns of cash flow. Most amounts are to be dimensional, which means an annuity multiplied by a price. Cash flow amounts passes the perverse third dimension of time and indeed, it is the time dimension which is at the root of the various problems created by accounting concepts, therefore it the long term profit are aimed at but in short term the cash flow is much more important.

2. Environment:

There are environmental constraints that create cash flow problems for a firm. Such problem may be created by the very nature of its operations, such a location or season ability of the market place. Every firm should, therefore, examine its own position in respect of its environment that will affect its shortterm flow.

3. Managerial decisions:

A cash flow does not flow of its own accord. It is direct consequence of management decisions. The management procedures employed for maximizing the use of cash through the control of payable and related payments are:

Timings payments to vendors so that bills are paid only as they fall due. Establishing procedure that will prevent or minimize the loss of discounts. Centralizing payable and disbursement procedures. Reducing compensating balance a deposit with banks. Improving control over inter-company transfers Utilizing manpower more effectively. Strategic tax planning.

This need not be if management uses strategic tax planning to minimize its tax expenditure. Currently, a management employs the following the techniques to reduce its tax payment. 1. It uses acerbated depreciation method or adopts guidelines and depreciation rate.

2. It uses investment credit to fall advantage by strategic acquisition and disposition of property, plant and equipment. 3. It reduces research and developments, costs and similar expenses in the years in which they are incurred instead of capitalizing them and amortizes such costs over a number of years. 4. It adopts changes in accounting procedures particularly those initiated by the internal reserve service or exploits changes in reporting periods.

Cash forecasting:

Cash forecasts are required to prepare cash budgets. Cash forecasting may be done on short term or long-term basis. Generally, forecast covering period of one year or less are considered short term, those beyond one year considered long term.

Types of cash forecast

Short term forecast Long term forecast

Short term forecast:

It covers a period of one year or less. The important uses of short term cash forecast are: It helps in determining cash requirements. It helps in anticipating short term financing.

It helps in managing money market investments.

Long-term cash forecasting:

Long-term cash forecasts are prepared to give an idea of the companys financial requirements. Once a company has developed a long term cash forecast, it can be used to evaluate the impact of new product developments or plant acquisition on the firms financial position; three, five or more years in future.

The Major uses of long-term cash forecasts are:

1. It indicates a companys future financial needs, especially for its working capital requirements.

2. It helps in evaluating proposed capital projects. It pinpoints the cash required to finance these projects as the cash to be generated by the company to support them. 3. It helps in improving corporate planning. Long-term cash forecasts compel each division to plan for future and to formulate projects carefully. Long-term cash forecasts may be two, three or five years. How to manage debts?

a. Establish a credit policy:

The company should consider whether it is appropriate to offer credit at all and if so how much, to whom and under what circumstances.

b. Assess customers credit worthiness:

From their banker or other sources before allowing trade credit.

c. Establish effective administration of debtors:

That not goods are dispatched until it has been vouched that the present order will take the customer above his predetermined credit limit. That invoices for supplied on credit go off the customers as soon as possible after the goods are dispatched and this encourages the customers to initiate payments sooner rather than later. That existing debtors are systematically reviewed and that slow payers are sent reminders

d. Establish a policy on bad debts:

The company should decide what is policy on writing off bad debts should be. This policy should be planned except in unusual circumstances. It is important that writing off a bad debt only occurs when all steps mentioned in the policy have been followed. Such writing off should be done at a senior level management.

e. Consider offering discount for prompt payment:

It is possible to enter into agreement with a factoring company. In such cases, payment is received from factoring company immediately after sale.

RATIO ANALYSIS AND CLASSIFICATION OF RATIOS Ratio Analysis:

Ratio analysis is a powerful tool of financial analysis. In such an analysis the ratios are used as yardstick for evaluating the financial condition and performance of the firm. Analysis and interpretation of various accounting ratios give a 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:

The relationship between two accounting figures, expressed mathematically is known as a ratio (financial ratio). The term ratio refers to the numerical or quantitative relationship between two figures. A ratio is the relationship between two figures, and obtained by dividing the former by the later. Radios are designed to show how one number is related to another. Ratios are relative form of financial statements to measure the firms liquidity, profitability and solvency.

Significance of ratio analysis:

Following are the significance of ratio analysis

A. Managerial uses of ratio analysis:

1. Helps in decision-making:

Financial statements are prepared primarily for decision-making. But the information provided in financial statements is not and in itself and no meaningful conclusion can be drawn from these statements alone. Ratio analysis helps in making decisions from the information provided in these financial statements.

2. Helps in financial forecasting and planning:

Ratio analysis is of much help in financial forecasting and planning. Planning is looking ahead and the ratios calculated for a number of years work as a guide for the future. Meaningful conclusions can be drawn for future from these ratios. Thus, ratio analysis helps in forecasting and planning.

3. Helps in communicating: The financial strength and weakness of a firm are communicated in a more easy and understandable manner by the use of ratios. The information contained in the financial statements is conveyed in a meaningful manner to the one for whom it is meant. Thus, ratios help in communication and enhance the value of the financial statements.

4. Helps in co-ordination:

Radios even help in co-ordination, which is of utmost importance in effective business management. Better communication of efficiency and weakness of an enterprise results in better coordination in enterprise. 5. Helps in control:

Ratio analysis even helps in making effective control of the business. Standard ratio can be based upon preformed financial statements and variances and deviations, if any, can be found by comparing the actual with the standards so as to take a corrective action at the right time. The weakness or otherwise, if any, come to the knowledge of the management which helps in effective control of the business.

6. Other uses:

These are so many other uses of the ratio analysis. It is an essential part of the budgetary control and standard costing. Ratios are of immense importance in the analysis and interpretation of financial statements as they bring the strength or weakness of a firm.

B. Utility to share holders / investors:

An investor in the company will like to assess the financial position of the concern where he is going to invest. His first interest will be the security of the investment and then a return in the form of dividend or interest. For the first purpose he will try to assess the value of fixed assets and the loan raised against them. The investor will feel satisfied only if the concern has sufficient amount of assets. Long- term solvency ratios, on the other hand, will be useful to determine profitability position. Ratio analysis will be useful to the investor in making up his mind whether present financial position of the concern warrants further investment or not.

C. Utility to creditors:

The creditors or suppliers extend short-term credit to concern. They are interested to know whether financial position of the concern warrants their payments at a specified time or not. The concern pays short-term creditors out of its current assets. If the current assets are quite sufficient to meet current liabilities then the creditors will not hesitate in extending credit facilities. Current and acid test ratios will be an idea about the current financial position of the concern.

D. Utility to employees:

The employees are also interested in the financial position of the concern especially profitability. Their wage increases and amount of fringe benefits are related to the volume of profits earned by the concern. The employees make use of information available in financial statements. Various profitability ratios relating to gross profit, operating profit, net profit, etc enable employees to put forward their viewpoint for the increase of wages of other benefits.

E. Utility to government:

Government is interested to know the overall strength of the industry. Various financial statements published by industrial units are used to calculate ratios for determining short-term, long term and overall financial position of the concerns. Profitability indexes can also be prepared with the help of ratios. Government may base its future policies on the basis of industrial information available from various units. The ratios may be used as indicators of overall financial strength of public as well as private sector. In the absence of the reliable economic information, governmental plans and policies may not prove successful.

F. Tax audit requirements:

The finance act, 1984, interested section 44 AB in the Income Tax Act. Under this section every assess engaged in any business having turnover or gross receipts exceeding Rs. 40 lacks is required to get the accounts audited by a chartered accountant and submits the tax audit report before the due date for filing the return of income under section 139(1). In case of a professional, a similar report is required if the gross receipts exceed Rs. 10 lacks. Clause 32 of the Income Tax Act requires that the following accounting ratios should be given:

Gross profit / turnover Net profit / turnover Stock-in-trade / turnover Material consumed / finished goods produced.

Advantages of ratio analysis:

Simplifies financial statements Facilitates inter-firm comparison Makes inter-firm comparison possible Helps in planning

Limitations of ratio analysis:

The ratio analysis is one of the most powerful tools of financial management. Though ratios are simple to calculate and easy to understand, they suffer from some serious limitations.

1. Limited use of a single ratio:

A single ratio, usually, does not convey much of a sense. To make a better interpretation a number of ratios have to be calculated which is likely to continue the analyst than help him in making any meaningful conclusions.

2. No fixed standards:

No fixed standards can be laid down for ideal ratios. There are not well-accepted standards or rules of thumb for all ratios, which can be accepted as norms. It renders interpretation of the ratios difficult.

3. Inherent limitation of accounting:

Like financial statements, ratios also suffer from the inherent weakness of accounting records such as their historical nature. Ratios of the past are not necessarily true indicators of the future.

4. Change of accounting procedure:

Change in accounting procedure by a firm often makes ratio analysis misleading, example, a change in the valuation of methods of inventories, from FIFO to LIFO increases the cost of sales and reduces considerably the value of closing stocks which makes stock turnover ratio to be lucrative and an unfavorable gross profit ratio.

5. Window dressing:

Financial statements can easily be window dressed to present a better picture of its financial and profitability position to outsiders. Hence, one has to be very careful in making a decision from ratios calculated from such financial statements. But it may be very difficult for an outsider to know about the window dressing made by a firm.

6. Personal bias:

Ratios are only means of financial analysis and not an end in itself. Ratios have to be interpreted and different people may interpret the same ratio in different ways.

7. Incomparable:

Not only industries differ in their nature but also the forms of the similar business viable differ in their size and accounting procedures, etc., It makes comparison of ratios difficult and misleading. Moreover, comparisons are made difficult due to differences in definitions of various financial terms used in the ratio analysis.

8. Absolute figure distractive:

Ratios devoid of absolute figures may prove decorative, as ratio analysis is primarily a quantitative analysis and not a qualitative analysis.

9. Price level changes:

While making ratio analysis, no consideration is made to changes in price levels and this makes the interpretation of ratio invalid. If the price level changes are considered for ratio analysis, then it may lead to misleading results.

10. Ratios are a composite of many figures:

Ratios are a composite of many different figures. Some over a time period, others are at an instant of time while still others are only averages.

FUNCTIONAL CLASSIFICATION OF THE RATIOS

1. Liquidity ratios or short-term solvency ratios: Liquidity refers to the ability of a firm to meet its obligations in the short run, certain the financial condition of a firm. Liquidity ratios are calculated by establishing relationships between current assets and current liabilities. To measure the liquidity of a firm, the following ratios can be calculated.

A. Current ratio: Current ratio may be defined as the relationship between current assets and current liabilities. This ratio, also know as working capital ratio. This ratio is most widely used to make the analysis of a shortterm financial position or liquidity of a firm. It is calculated by dividing the total of current assets by current liabilities. Thus,

Current ratio = Current Assets

Current liabilities

Components of current ratio: Current assets: 1. Cash in hand

2. Cash at bank

3. Debtors

4. Bill receivable

5. Prepaid expenses

6. Money at calls and short notice

7. Stock

8. Sundry supplies

9. Other amounts receivable with in a year

Current liabilities:

1. Creditors

2. Bill payable

3. Bank overdraft

4. Expenses outstanding

5. Interest due or payable 6. Reserve for unbilled expenses

7. Installment payable on long-term loans

8. Any other amount which is payable in short period (one year)

Significance of current ratio:

1. Current ratio indicates the firms ability to pay its current liabilities i.e., day-to-day financial obligations. 2. It shows short-term financial strength and solvency of a firm.

3. It is a test of a credit strength and solvency of a firm.

4. It indicates the strength of the working capital.

5. It indicates the capacity to carry on work effective operations.

6. It discloses the over-trading or under-capitalization.

7. It shows the tendency of over investment in inventory.

8. Higher the ratio i.e., more than 2:1 indicates inadequate working capital.

9. Lower ratio i.e., less than 2:1 indicates inadequate working capital.

10. It discloses the quantity of working capital position.

Ideal Ratio:

A ratio equal or near to the thumb of 2:1 i.e., current assets double the current liabilities is considered to be satisfactory

B. Quick ratio: Quick ratio is also known as liquid ratio or acid test ratio or near money ratio. It is the ratio between quick or liquid assets and quick liabilities. The term quick asset refers to current assets, which can be converted into cash immediately or at a short notice without diminution of value. Liquid assets comprise all current assets minus stock and prepaid expenses. Liquid assets liabilities comprise all current liabilities minus bank overdraft The quick ratio can be calculated by dividing the total of the quick assets by total current liabilities. Thus,

Quick ratio = Quick or liquid assets

Liquid or current liabilities Sometimes bank overdraft is not included in current liabilities while calculating quick or acid test ratio, on the argument that bank overdraft is generally a permanent way of financing and is not subject to be called on demand. In such cases, the quick ratio is found by dividing the total quick assets by quick liabilities (i.e., current liabilities bank overdraft). Significance of quick ratio:

1. It is the true test of business solvency.

2. Higher ratio i.e., more than 1:1 indicates financial difficulty.

3. Lower ratio i.e., less than 1:1 indicates financial difficulty.

4. This is an important ratio of financial institutions.

5. It is a stringent test of liquidity.

6. It gives better picture of firms ability to meet its short-term debts out of short-term assets.

7. If the current ratio is more than 2:1 but liquid ratio is less than 1:1 it indicates excessive inventory. 8. It is more of qualitative nature of test.

Ideal Ratio:

An acid test ratio of 1:1 is considered satisfactory as a firm can easily meet current claims. It is the true test of the firms solvency. It gives a better picture of firms ability to pay its short-term debts out of short-term assets. It is more of a qualitative nature of test.

C. Absolute liquidity ratio or cash position ratio: It is a variation of quick ratio. When liquidity is highly restricted in terms of cash and cash equivalents, this ratio should be calculated. Liquidity ratio measures the relationship between cash and near cash items on the one hand, and immediately maturing obligations on the other. The inventory and the debtors are excluded from current assets, to calculate this ratio.

Cash position ratio

Cash + Marketable securities

Current Liabilities

Generally, 0.75:1 ratio is recommended to ensure liquidity. This test is more rigorous measure of a firms liquidity position. If the ratio is 1:1, then the firm has enough cash on hand to meet all current liabilities. This type of ratio is not widely used in practice

D. Inventories to working capital ratio:

It represents the relationship between inventory or stocks and working capital of the firm. Inventory or stock refers to closing stock of raw materials, work-in-progress (i.e., semi-finished good) and finished goods. Working capital is the excess of current assets over current liabilities. It is usually expressed as a percentage. It is expressed as:

Inventory

Inventory to working capital ratio =

x 100

Working capital

The ratio indicates the portion of working capital tied up in inventories or stocks and thereby throws some light on the liquidity of a concern. It also indicates whether there is overstocking or under stocking. As per the standard or ideal inventory to working capital ratio, the inventories should not absorb more than 75% of working capital.

Ideal Ratio:

As per the standard, in the inventory to working capital ratio, the inventories should not absorb more than 75 percentage of working capital.

3. Activity ratios or turnover ratio:

It is also refers to as assets management ratios measures the efficiency or effectiveness with which a firm manages its resources or assets. The ratios are called turnover ratios because they indicate the speed with which assets are converted or turned over into sales. These ratios are calculated by establishing relationship between sales and assets. The various turnover ratios are as follows:

A. Inventory turnover ratio:

This is also known as stock velocity. This ratio is calculated to consider the adequacy of the quantum of capital and its justification for investing in inventory. A firm must have reasonable stock in comparison to sales. It is the ratio of cost of sales and average inventory. This ratio helps the financial manager to evaluate inventory policy. This ratio reveals the number of times finished stock is turned over during a given accounting period. This ratio is used for measuring the profitability. The various ways in which stock turnover ratios may be calculated are as follows:

Stock turnover ratio = Cost of goods sold

Average stock

Cost of goods sold may be calculated as under:

Cost of goods sold

= Opening stock + purchases + Direct

Expenses closing stock

This ratio indicates whether investment is inventory is within proper limit or not. The quantum of stock should be sufficient to meet the demands of the business but it should not be too large to indicate unnecessary lock-up of capital in stock and danger of stock-items obsolete and getting it wasted by passing of time. The inventory turnover ratio measures how quickly inventory is sold. It is a test of efficient inventory management. To judge whether the ratio of the firm is satisfactory or not, it should be compared over time on the basis of trend analysis

Cost of Goods Sold Includes = Opening Stock + Purchases + Manufacturing expenses-Closing stock

Average Stock =Opening stock + Closing stock/2

B. Debt collection period ratio:

It indicates the numbers of time on the average the receivable are turnover in the each year. The higher the value of ratio, the more is the efficient management of debtors. It measures the accounts receivable (trade debtors and bill receivables) in terms of number of days of credit sales during a particular period. It is calculated as follows:

Average debtors

Debt collection period= Net credit sales

x 365

The purpose of this ratio is to measure the liquidity of the receivables or to find out the period over which receivable remain uncollected.

Ideal Ratio:

The shorter the collection period the better is the quality of debtors as a short collection period implies quick payment by debtors. Similarly a higher collection period implies an inefficient collection performance, which in turn adversely affects the liquidity or short term paying capacity of a firm out of its current liabilities.

Analysis and Interpretation:

Debtors turnover ratio indicates the number of times the debtors are turn over during a year. Higher debtors velocity shows good management while low debtors velocity shows inefficient management of debtors/sales and less liquid are the debtors. But a precaution is needed while interpreting a very high debtors turnover ratio because a very high ratio may imply a firms inability due to lack of resources to sell on credit.

C. Debt payment period ratio:

This is also known as accounts payable or creditors velocity. A business firm usually purchases on credit goods, raw materials and services from other firms. The amount of total payables of a business concern depends upon the purchases policy of the concern, the quantity of purchases and suppliers credit policy. Longer the period of outstanding payable is, lesser is the problem of working capital of the firm. But when the firm does not pay off its creditors within time, it may have adverse effect on the business.

Creditors turnover indicates the number of times the payable rotate in a year. It signifies the credit period enjoyed by the firm paying creditors. Accounts payable include sundry creditors and bills payable. Payables turnover shows the relationship between net purchases for the whole year and total payable (average or outstanding at the end of the year).

Accounts creditors

Debt payment ratio =

x 365

Net credit purchase

Net purchase = all credit purchases purchase returns

Ideal Ratio:

A higher ratio shows that the creditors are not paid in time. A lower ratio shows that the business is not taking the full advantage of credit period allowed by the creditors.

Analysis & Interpretation:

A higher payment period implies that greater credit period is enjoyed by the firm and consequently larger the benefit reaped by the credit suppliers. A higher ratio may also imply lesser discount facilities availed or higher prices paid for the goods purchased on credit.

From the above table, one can ascertain that the company is moderately using its used its credit facilities provided to it by its creditors.

D. Cash turnover ratio: Its calculated as

Cash turnover ratio = Net annual sales

Cash

Cash for the purpose means cash in hand, cash at bank, and readily realized marketable securities. Turnover refers to the total annual sales (cash sales credit sales) effected during the year however, sales means net annual sales i.e., total sales sales returns. This ratio indicates the extent to which cash resources are efficiently utilized by the enterprise. It also helps in determining the liquidity of the concern.

Analysis & Interpretation:

This ratio measures the velocity of sales turnover with a minimum cash balance. From the above information it is clear that the company has achieved favorable sales figure in the year 2002-03 as well as in the preceding years.

E. Working capital turnover ratio: This ratio is a measure of the efficiency of the employment of the working capital. It indicates over trading and under trading and is harmful for the smooth conduct of business. This ratio finds out the relation between cost of sales and working capital. It helps in determining the liquidity of a firm in as much as it gives the rate at which inventories are converted to sales and then to cash.

Working capital turnover ratio = Net sales

Net working capital

(Net working capital = current assets current liabilities)

A higher sale in comparison to working capital means overtrading and lower sales in comparison to working capital means under trading. A higher working capital turnover ratio shows that there is low investment in working capital and there is more profit.

Analysis & Interpretation:

Higher sales in comparison to working capital mean over trading &lower sales in comparison to working capital means under trading. A higher working capital turnover ratio shows that there is low investment in working capital &there is more profit.

F. Fixed assets turnover ratio: It is also known as sales to fixed asset ratio. This ratio measures the efficiency and profit earning capacity of the firm. Higher the ratio, greater is the intensive utilization of fixed assets. Lower ratio means under-utilization of fixed assets.

Fixed asset turnover ratio = Net sales

Net fixed assets

(Net fixed assets = value of assets depreciation)

G. Total assets turnover ratio: This is the ratio between sales and total assets and it shows whether or not the total assets have been properly utilized and measures the effective use of capital. The higher the ratio, the greater will be the return but too high a ratio means over trading.

Total assets turnover ratio = Net sales

Total assets

4. Profitability ratio:

It measures the overall performance of business profit margin ratios and rate of return ratios. Profit margin ratios show the relationship between profit and sale. Rate of return ratios reflect the relationship between profit and investments. The various profitability ratios are as follows.

A. Gross profit ratio: The gross profit ratio is also known as gross margin ratio, trading margin ratio etc., it is expressed as a Per Cent Ratio. The difference between net sales and cost of goods sold is known as gross profit. Gross profit is highly significant. The earning capacity of the business can be ascertained by taking the margin between cost of goods sold and sales. It is very useful as a test of profitability and management efficiency. It is generally contented that the margin of gross profit should be sufficient enough to recover all operating expenses and other expenses and also leave adequate amount as net profit in

relation to sales and owners equity. Thus, in a trading business, gross profit is net sales minus trading cost of sales.

International Business School, Bangalore 53 Gross profit

Gross profit ratio

x 100

Net sales

OR

Sales cost of goods sold

Gross profit ratio

x 100

Net sales

Gross profit ratio shows the gap between revenue and trading costs. Maintenance of steady gross profit ratio is important. An analysis of gross profit margin should be carried out in the light of information relating to purchasing, increasing or reducing the sales price of goods sold by mark up and mark downs, credit and collections and merchandising policies.

A higher ratio may be the result of one or all of the following:

1. Increase in the selling price of goods sold without any corresponding increase in the cost of goods sold. 2. Decrease in the cost of goods sold without corresponding decrease in selling price.

3. Both selling price and cost of goods sold may have changed, the combined effect being increase in gross margin. 4. Out of sales-mixes, product having higher gross profit margin, should have been sold in larger quantity. 5. Under-valuation of opening stock or over-valuation of closing stock.

6. On the other hand, if the gross profit ratio is very low, it may be an indicator of lower and poor profitability. A lower ratio may be the result of the following factors:

1. Decrease in the selling price of goods sold, without corresponding decrease in cost of goods sold.

2. Increase in cost of goods sold without any increase in selling price.

3. Unfavorable purchasing policies.

4. Over-valuation of opening stock or under-valuation of closing stock.

5. Inability of management to improve sales volume.

6. Higher ratio is better. A ratio of 25% to 30% may be considered good.

B. Net profit ratio:

It establishes the relationship between net profit (after tax) and sales and indicates the efficiency of the management in manufacturing, selling, administrative and other activities of the firm. This ratio is used to measure the overall profitability and it is calculated as:

Net profit

Net profit ratio =

x 100

Net sales

This ratio indicates the firms capacity to face adverse economic conditions such as price competition, low demand, etc., Higher the ratio, the better is the profitability.

Analysis & Interpretation:

The company ratio of the company for all the three financial years is on a healthier side as it is showing favorable trend of growth to the outsiders about the percentage net profit after tax on its net sales this ratio reveals the true picture of companys financial position.

C. Operating ratio:

This ratio establishes the relationship between total operating expenses and sales. Total operating expenses include cost of goods, administrative expenses, financial expenses and selling expenses. Cost of goods sold is also known as direct operating expenses. Operating ratio is generally expressed in percentages.

Cost of goods sold + operating expenses

Operating ratio =

x 100

Net sales Cost of goods sold = operating stock + purchase closing stock

Operating expenses = administrative expenses + financial expenses

+ Selling expenses

D. Return on capital employed ratio:

This is also known as return on investment or rate of return. The prime objective of making investments in any business is to obtain satisfactory return on capital invested. It indicates the percentage of return on the capital employed in the business and it can be used to show the efficiency of the business as a whole.

Operating profit

Return on capital employed =

x 100

Capital employed

The term capital employed refers to long-term funds supplied by the creditors and owners of the firm. It can be computed in two ways. First, it is equal to non-current liabilities (long-term liabilities) plus owners equity. Alternatively, it is equivalent to net working capital plus fixed assets. Thus, the capital employed basis provides a test of profitability related to the sources of long-term funds. A comparison of this ratio with similar firms, with the industry average and over time would provide sufficient insight into how efficiently the long-term funds of owners and creditors are being used. The higher the ratio, the more efficient use of the capital employed.

Analysis & Interpretation:

The operating ratio is showing a favorable trend and is considered to be a good ratio as the company is a manufacturing undertaking. This shows that the company has enough funds from its margin to cover interest, income tax, dividends and reserves. This reveals the operating efficiency of the company.

E. Return on owners fund ratio:

This ratio establishes the profitability from the shareholders point of view.

Net profit

Return on owners fund =

x 100

Shareholders fund

The term net profit as used here means net income after payment of interest and tax including net nonoperating income (i.e. non-operating income minus non-operating expenses). It is the final income that is available for distribution as dividends to shareholders. Shareholders funds include both preference and equity share capital and all reserves and surplus belonging to shareholders.

For the purpose of the study, only those ratios concerning working capital and fund flows has been considered and analysis and interpretation has been done in the next chapters.

FUND FLOW STATEMENT

Techniques of analysis & interpretation of financial statements:

The following method is generally used for the purpose of analysis and interpretation of financial statements: 1. Comparative Statement

2. Common Size Statements

3. Trend Analysis

4. Ratio Analysis

5. Cash flow statements

6. Fund flow statements

Fund Flow Statement

The fund flow statement is a statement, which shows the movement of funds and is a report of the financial operations of the business undertaking.

The fund flow statement shows how the attitude of a business organization is financed or how the available financial resources have been used during the particular period of time. It indicates in a summarized form the various means through which the funds were collected during a particular period and the ways in which these funds were employed.

Fund flow statement is a widely used tool in the hands of financial executives for analyzing the financial performance of a concern. The fund flow statement is made up of three words, i.e., funds, flow and statement. 'FUND' according to the fund flow statement means: Cash Money

Marketable securities

Working capital

However the concept of fund as working capital is the most popular one and considered appropriate. The study of sources and uses of funds is beneficial to management and organization at large since it reveals the soundness and solvency of the organization.

The term FLOW means movement and includes both 'inflow' and 'outflow'. The term 'flow of funds' means transfer of economic values from one asset of equity to another.

The fund flow statement is a method by which we study changes in the financial position of a business enterprise and financial statements ending date. It is a Statement showing sources and uses of funds for a given period of time.

A fund flow statement is an essential tool for the financial analysis and is of primary importance to the financial management. The basic purpose of a fund flow statement is to reveal the changes in the working capital on the two balance sheet dates. It reveals how the expansion and development activity of an enterprise is financed also tells the financial needs of the enterprise.

Working Capital = Current Assets - Current Liabilities

Working Capital = Total Current Assets - Total Current Liabilities

Important of fund flow

The fund flow statement analysis the causes of changes in the firms working capital position. It is more informative and comprehensive in indicating the change in the firms financial positions.

Current Assets: It refers o cash and other assets or resources commonly identified as those, which are reasonably expected to be realized in cash or sold or consumed during the normal operating period of the company.

Current Liabilities: It refers to all obligations which are likely to mature within one year in the normal course of business operations and which are cleared off by creating current liabilities or out of the current assets. Components of Current Assets and Current Liabilities

Current assets Cash Balance

Current Liabilities Accounts payable / Bills payable

Bank Balance Sundry creditors Inventory/Stock of goods Bank overdraft Temporary Investments Outstanding expenses Pre-paid expenses Unclaimed dividend outstanding incomes Provision for taxation Accounts receivable Proposed dividend Bill receivable Short-term loan Sundry Debtors Any provision against current assets

Non-Current Assets / Liabilities:

It refers to all those assets and liabilities other than current assets and current

Liabilities.

Components of Non current assets and Non-current Liabilities

Non-Current Liabilities Share Capital

Non-Current assets Fixed Assets

Long term loans Debentures

Fictitious Assets like goodwill Patents Rights, Trade Marks Long term Investments

Share premium A/c. Profit and Loss A/c. (Debit balance) Forfeited shares A/c. Discount on issue of shares and Debentures Profit and Loss A/c (Credit balance) Deferred expenditures like preliminary Expenses, advertising expenses

Appropriation of profits Provisions like provision for tax,

Provision for deprecations Capital reserve

It helps in analysis of financial operations The financial statements reveal the net effect of various transactions on the operational and financial position of a concern. The Balance Sheet gives a static time. But it does not disclose the cause for changes in the assets and liabilities between two different points. The fund flow statement explains the causes for such changes and also effects of such changes on the liquidity position of the company. It helps in the formation of a realistic dividend policy. Sometimes a firm has sufficient profits available for distribution as dividend but yet it may not be advisable to distribute dividend for lack of liquid or cash reserves. In such cases, fund flow statement helps to formulate a realistic dividend policy. It helps in proper allocation of funds. The resources of a concern are always limited and it wants to make the best use of these resources. A projected fund flow statement constructed for the future helps in making managerial decisions. It helps in taking corrective action if there is any imbalance between the sources and uses of the funds.

Preparation of Fund Flow Statement:

The financial information required for preparing the fund flow statement is obtained from the balance sheet of two periods and other required information from the books of accounts of the organization. In the process of fund flow statement these statements are prepared,

It helps in analysis of financial operations The financial statements reveal the net effect of various transactions on the operational and financial position of a concern. The Balance Sheet gives a static time. But it does not disclose the cause for changes in the assets and liabilities between two different points. The fund flow statement explains the causes for such changes and also effects of such changes on the liquidity position of the company. It helps in the formation of a realistic dividend policy. Sometimes a firm has sufficient profits available for distribution as dividend but yet it may not be advisable to distribute dividend for lack of liquid or cash reserves. In such cases, fund flow statement helps to formulate a realistic dividend policy. It helps in proper allocation of funds. The resources of a concern are always limited and it wants to make the best use of these resources. A projected fund flow statement constructed for the future helps in making managerial decisions. It helps in taking corrective action if there is any imbalance between the sources and uses of the funds.

Preparation of Fund Flow Statement:

The financial information required for preparing the fund flow statement is obtained from the balance sheet of two periods and other required information from the books of accounts of the organization. In the process of fund flow statement these statements are prepared,

1. Statement of changes in working capital,

2. Statement which indicate funds from operation (for determining funds generated every year through the business activity) 3. Sources and application of funds.

Statement of Changes in Working Capital:

Statement of changes in the working capital is prepared in order to ascertain the increase or decrease in working capital between two accounting periods. This statement is prepared with the help of current assets and current liabilities. The net difference between current assets and current liabilities indicate either increase or decrease in the working capital. The decrease will appear as a source and the increase as an application.

Funds from Operation:

The funds from operation form the main source of funds of any organization. The funds from operation will not be equal to profits as shown by profits and loss account. The net profit as per the profit and loss

account is the balance arrived at after deducting from revenues, a number of expenses which do not represent current outflow of funds such as depreciation, loss on sale of assets etc. to arrive at precisely the funds from operation an adjusted profit and loss account or a statement of funds from operation is prepared. Statement of Sources and Application of Funds: After the preparation of statement of changes in the working capital the statement of sources and application of funds is prepared. The statement of sources and application of funds saves as a bridge between successive balance sheets. It ties-up the balance sheet and profit and loss account together by using information taken from both statements. This statement contains two main groups of items. One is the mean by which resources are acquired and the other their deployment.

Cash flow statement for the year ended March 31, 2009

Table

CASH FLOW FROM OPERATING ACTIVITIES Current Year

Rs 000 Previous Year Rs 000

Amounts received from Policyholders Amounts paid to Policyholders Amounts received / (paid) to Reinsures Amounts paid as Commission Payments to Employees and Suppliers Deposit with Reserve Bank of India Taxes Paid Others

Net Cash from Operating Activities 54,747,190 (5,248,135) (550,719) (4,156,520) (16,025,349) (2,627) (219,808) 765,819

29,309,851 47,554,360 (4,224,779) (415,081) (3,377,762) (8,621,462) (8,758) (214,763)

30,691,755

CASH FLOW FROM INVESTING ACTIVITIES Purchase of Fixed Assets Sale of Fixed Assets Investments (Net) Income from Investments Net Cash Flow from Investing Activities

CASH FLOW FROM FINANCING ACTIVITIES Issue of Shares during the year Share application money received pending allotment

Net Cash Flow from Financing Activities

(578,182) 319 (38,958,793) 4,592,227 (34,944,429)

5,250,000

5,250,000

(663,248) 368 (36,020,822) 2,711,629 (33,972,073)

4,697,391 (287,391)

4,410,000

Net Increase in Cash and Cash Equivalents

(384,578)

1,129,682

Cash and Cash Equivalents as at the beginning of the year

CASH AND CASH EQUIVALENTS AT THE END OF THE YEAR 4,493,238

4,108,660 3,363,556

4,493,238

The company has also diverted its funds appropriately in proper channels like purchase of various fixed assets, which in turn increases the overall productivity of the organization.

The company has paid sufficient amount of dividends to its share holders and has also transferred reasonable amount of cash to its reserves & surplus account. To meet its capital expenditures the company has also raised own funds.