Impact of Deviation on Projected Sales of Working Capital Requirements

OBJECTIVES
The main objectives of the project on Impact of Deviation on Projected Sales of Working Capital Requirements of Sundram Fasteners Limited are: To study of working capital management of the company To study on liquidity and solvency of the company To study on efficiency and profitability of the company To analyze the comparative income statement and comparative balance sheet

of the company

To offer suggestion, findings, conclusion for the working capital To determine the adequate or optimum quantum of investment in working

capital of Sundram Fasteners Limited. To determine the composition or structure of current assets. To maintain a proper balance between liquidity & profitability. To maintain a proper the policy or means of finance for current assets.

Impact of Deviation on Projected Sales of Working Capital Requirements

SCOPE OF THE STUDY

The scope of the study is to assess the liquidity, solvency and profitability position of the agreenco fibre foam pvt limited, the liquidity and solvency position of the firm is analyzed using ratios,comparative income statement and comparative balance sheet. The study is conducted mainly to review the financial strength of the company and analysis was done by considering past five years data.

Impact of Deviation on Projected Sales of Working Capital Requirements

LIMITATIONS OF THE STUDY

The information given in the annual report are taken as the basis of

the study, which are subjected to the corrections and accuracy of the data.

The data for the study has been obtained from secondary sources an

hence the limitations of the secondary data apply to them.

The limitations of the techniques used , namely ratio analysis, gross

working capital and networking capital and schedule of changes in working to analysis and interpret the data are applicable to the study.

The time period was limited to six weeks. The reality and accuracy of calculations depend on the information

found in the balance sheet of the company

Impact of Deviation on Projected Sales of Working Capital Requirements

INTRODUCTION TO THE STUDY

Working capital is the life blood and nerve centre of a business. Just as circulation of blood is essential in the human body for maintaining life, working capital is very essential to maintain the smooth running of a business. No business can run successfully without an adequate amount of working capital. The first step in developing a financial management system is the creation of financial statements. To manage proactively, you should plan to generate financial statements on a monthly basis. Financial statements are formal records of the financial activities of a business, person, or other entity and provide an overview of a business or person's financial condition in both short and long term. They give an accurate picture of a companys condition and operating results in a condensed form. Financial statements are used as a management tool primarily by company executives and investors in assessing the overall position and operating results of the company. Financial analysis is the systematic numerical calculation of the relationship of one financial fact with the other to measure the profitability, operational efficiency solvency and growth potential of the business. The analysis serves the interest of shareholders, debenture holders, potential investors, creditors, bankers; taxation authorities and economists. The analysis of the financial statements make it simple, intelligible and meaningful for all the concerned parties. Financial analysis is in this way is the purposeful and systematic and presentation of the financial statements. Various item of income and position statements are and their interrelationship is established. The use of financial analysis is made to measure the profitability, efficiency and financial soundness of the business, to make comparative studies and effective future plans.

Impact of Deviation on Projected Sales of Working Capital Requirements

Financial statement is prepared at a certain point of time according to established convention .These statements are prepared to suit the requirements of the proprietor. It is, therefore, necessary to analyze financial statements to measure the efficiency, profitability, financial soundness and future prospects of the company. Working capital Capital required for a business can be classified under two main categories is 1. 2. Fixed capital Working capital

Working capital means the excess of current assets over current liabilities. Every business needs funds two purpose for its establishment and to carry out its day to day operations. As

Working Capital = Current assets Current Liabilities In the words of shubin working capital is the amount of funds necessary to cover the cost of operating the enterprise. According to GENESTENBERG, Circulating capital means current asset of a company that are changed in the ordinary course of business from one form to another as for example, from cash to inventories, inventories to receivables, receivables into cash. Importance of working capital Working capital is the life blood and nerve centre of a business. Just as circulation of blood is essential in the human body for maintaining life, working capital is very essential to maintain the smooth running of a business. No business can run successfully without an adequate amount of working capital. The main advantages of maintaining adequate amount of working capital are as the follows; Solvency of the business Goodwill

Impact of Deviation on Projected Sales of Working Capital Requirements

Easy loans Cash discounts Regular supply of wages and other day to day commitments. Exploitation of favorable market conditions Ability to face crisis Quick and regular return on investments

Working capital management Working capital may be regarded as lifeblood of the business. Its effective sprovision can do much to ensure the success of a business. Its inefficient management can lead to loss of profits but also to the downfall of business. Working capital is a major importance to internal to external analysis because of its close relationship with the current day to day operations of a business. Funds are also needed for short term process for the purchases of row materials, payments of wages and other day to day expenses ect., it also know as revolving or circulating capital or short term capital. Concepts of working capital Gross Working Capital The term working capital refers to the gross working capital. This represents the amount of invested in current asset under the gross concept. Working capital is equal to total current assets. Net Working Capital In a narrow sense, working capital refers to the net working capital. It is the excess of current assets over current liabilities. Types of working capital

Impact of Deviation on Projected Sales of Working Capital Requirements

Permanent working capital Permanent or fixed working capital is the minimum amount required to ensure effective utilization of fixed assets and support the normal operations of the business. There is always a minimum level of current assets which is continuously required by the enterprise to carry out its normal business operations. Temporary or variable working capital It is the amount of working capital keeps on fluctuating from time to time on the basis of business activities is called as temporary or variable working capital. Seasonal working capital Special working capital

NEED FOR WORKING CAPITAL stock. CONSTITUTION OF WORKING CAPITAL WORKING CAPITAL CURRENT ASSETS Cash Marketable securities Accounts receivable Inventory CURRENT LIABILITIES Short-term debt Current portion of long term debt Accounts payable Accrued liabilities The purchase of row materials, spares and components parts To pay wages and salaries To incur day to day expenses. To meet selling costs such as packing, advertising To provide credit facilities to customers. To main inventories of row material, work in progress and finished

Impact of Deviation on Projected Sales of Working Capital Requirements

Prepaid expenses

FORMULA FOR WORKING CAPITAL Working capital = current assets-current liabilities CURRENT ASSETS; Cash in hand Cash at bank Short term loans advances Sundry debtors Inventory such as row materials, working progress, finished goods Prepaid expenses Accrued income

CURRENT LIABILITIE Bills payable Sundry creditors Accounts payable Short term borrowing Dividend payable Bank over draft Statutory liability Outstanding expenses

Impact of Deviation on Projected Sales of Working Capital Requirements

WORKING CAPITAL REQUIRMENT Working capital requirement should be made advance so that arrangement can be made to procure adequate working capital. The estimation of working capital requirement is not an easy and a large number of factors have to be considered before starting this exercise. Total cost incurred on material, wages and over heads. The length of time for which raw material are to remain in stores

before they are issued for production. The length of production cycle or work in process, that is the time

taken for conversion of raw materials into finished goods. The length of sales cycle during which finished goods are to be kept

waiting for sales. business. The average amount of cash required to make advance payment. The average credit period expected to be allowed by suppliers. Time lag in the payment of wages and other expenses. The average period of credit allowed to customers. The amount of cash required to pay day to day expenses of the

RATIO ANALYSIS Ratio analysis is a technique of analysis and interpretation of financial statements. It is the process of determine and interpreting various ratio for helping in making certain decision. MEANING

Impact of Deviation on Projected Sales of Working Capital Requirements

A ratio is a mathematical relationship between two items expressed in a quantitative form. Ratio analysis is a technique of analysis and interpretation of financial statements. DEFINITION Ratio analysis is the process of determining and presenting the relationship of items and groups of items in the financial statements. USES AND SIGNIFICANCE OF RATIO ANALYSIS analysis. enterprise. The use of ratio is not confined to financial managers only but also It is used as a device to analyze and interpret the financial health of The ratio analysis is one of the most powerful tools of financial

used by parties who are interested in the ratio analysis for knowing the financial position of the firm for different purpose. The supplier of goods on credit, banks, financial institutions,

investors, shareholders and management all are use ratio analysis as a tool in evaluating the financial position and performance of a firm for granting credit, providing loans or making investments in the firm. With the use of ratio analysis one can measure the financial condition

of a firm and also make decision regarding whether the performance of the firm is improving or determining. LIMITATIONS OF RATIO ANALYSIS Limited use of a single ratio Lack of adequate standards Inherent limitations of accounting

Impact of Deviation on Projected Sales of Working Capital Requirements

Changes of accounting procedure Personal bias. Absolute figure decorative.

CLASSIFICATION OF RATIOS Ratio analysis helps to summarize the large quantities of financial data. It helps to make quantitative judgments about the firms financial position. Ratios are classified as: Short term solvency ratio Long term solvency ratio Profitability ratios Activity or turnover ratios

SHORT TERM SOLVENCY RATIOS This ratio is also called as liquidity ratios. This is used to measure the ability of the concern to meet its current obligations. The short-term obligations are met by realizing amounts from current, floating or circulating assets. The current assets should either be liquid or near liquidity. These assets should be convertible into cash for paying obligations of short term nature. The sufficiency of current assets should be assessed by comparing them with short term liabilities. 1. Current Ratio 2. Quick Ratio CURRENT RATIO Current ratio defined the relationship between current assets and current liabilities. This concept is also similar to calculating the working capital. It is a tool used to measure the short term solvency of the business by calculating division of current asset divided by current

Impact of Deviation on Projected Sales of Working Capital Requirements

liabilities. A current ratio of 2:1 is considered as ideal. If the ratio is more than two, it is a indicator of ideal finds.

QUICK RATIO It is also known as acid test or liquid test ratio because it is the acid test of concerns financial soundness. It is more rigorous test of liquidity then the current ratio. The term liquidity refers to ability of a firm to pay its short-term obligations as when they become due. The standard norm is 1:1. LONG TERM SOLVENCY RATIOS The term solvency refers to the ability of a concerns to meet its long term indebtedness of a firm includes debenture holders, financial institution providing medium and long term loans and other creditors selling goods on installment basis. According to long term solvency ratios, its indicating that the firms ability to meet the fixed interest, cost and repayment schedules associated with its long term borrowings. The long term ratios are; 1. Debt-Equity Ratio 2. Proprietary Ratio 1. DEBT-EQUITY RATIO It is also known as external-internal equity ratio. It is used to measure the relative claims of outsiders and the owners against the firm assets. This ratio indicates the relationship between the external equities or the outsiders funds and internal equities or the shareholders funds. 2. PROPRITARY RATIO A variant to the debt-equity ratio is the proprietary ratio which also known as equity ratio or shareholders to total equities or net worth to total asset ratio. The ratio establishes the relationship between shareholders funds to total assets of the firm

Impact of Deviation on Projected Sales of Working Capital Requirements

PROFITABILITY RATIO The primary objectives of a business to earn profits. Profit earning is considered essential for survival of business. Lord Keynes defines, profit is the engine that drives the business enterprise. A business needs profits not only for its existence but also for expansion and diversification. The profitability ratios are: Gross Profit Ratio Net Profit Ratio Operating Ratio Return On Capital Employed

GROSS PROFIT RATIO This ratio expresses the relationship between gross profit and net sales. It indicates the efficiency of production or trading operations. A high gross profit ratio is a sign of good management as it implies that the cost of production is relatively low. NET PROFIT RATIO This ratio measures the relationship between net profit and net sales. It indicates the efficiency of the overall operations of the firm. An increase in net profit ratio year after year is an indication of improving working condition and vice versa. OPERATING RATIO Operating ratio matches cost of goods sold and other operating expenses with sales. A lower ratio is more favorable as it would leave a higher margin for operating profit. Operating expenses include selling and distribution expenses and administration expenses. RETURN ON CAPITAL EMPLOYED Return on capital employed ratio establishes the relationship between profits and the capital employed. It is most widely used to measure the overall profitability and efficiency of the business.

Impact of Deviation on Projected Sales of Working Capital Requirements

ACTIVITY TURNOVER RATIOS Activity ratios measure the efficiency of asset management. Activity ratios the relationship between sales and various assets of the firm . The activity ratios are: 1. Stock turnover ratio 2. Debtors turnover ratio 3. Creditors turnover ratio 4. Fixed assets turnover ratio 1. STOCK TURNOVER RATIO This ratio is also called as Inventory ratio. This ratio indicates the number of times stock is turned over or re-placed during a year. A high ratio indicates quick movement of stock and vice versa. 2. DEBTORS TURNOVER RATIO Debtors turnover ratio indicates the velocity of debt collection of firm. In simple words, it indicates the number of times average debtors are turned over during a year. This ratio establishes the relationship between net sales of the year and average receivables. The higher ratio indicates efficiency in asset management and vice versa. This ratio is also called as average collection period. 3. CREDITORS TURNOVER RATIO This ratio shows on an average, the number of times creditors are turned over during a year. The analysis for creditors turnover is basically same as of debtors turnover ratio except that in the place of trade debtors. A higher value indicates quick settlement of dues and a lower ratio reflects liberal credit term granted by suppliers. This ratio is also called as Average Payment Period.

4. FIXED ASSETS TURNOVER RATIO

Impact of Deviation on Projected Sales of Working Capital Requirements

Fixed asset turnover ratio explains the relationship between sales and fixed assets. This ratio indicates the sales generated by every rupee invested in fixed assets. A higher ratio is an indicator of greater efficiency.

STATEMENT OF THE PROBLEM

Working capital is the life blood of the business. Every business needs fund for two purposes, one for establishment and the other to carry out the day to day operations. It needs some amount of working capital to meet daily obligations. The need for working capital arises due to the time gap between the production and realization of cash from sales. Working capital management is concerned with the problems that arise in attempting to manage current assets, the current liabilities and interrelationship that exists between them. Effective and efficient working capital management of a firm has to great effect on its profitability, liquidity, and structural health of the organization.