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of Working Capital
1) Fixed Capital
2) Working Capital
Every business needs funds for two purposes for its establishment
and to carry out its day- to-day operations. Long terms funds are required
to create production facilities through purchase of fixed assets such as
p&m, land, building, furniture, etc. Investments in these assets represent
that part of firm’s capital which is blocked on permanent or fixed basis
and is called fixed capital. Funds are also needed for short-term purposes
for the purchase of raw material, payment of wages and other day – to-
day expenses etc.
The gross working capital is the capital invested in the total current
assets of the enterprises current assets are those
Assets which can convert in to cash within a short period normally one
accounting year.
2) Bills receivables
3) Sundry debtors
a. Raw material
b. Work in process
d. Finished goods
7. Prepaid expenses
8. Accrued incomes.
9. Marketable securities.
3. Dividends payable.
4. Bank overdraft.
6. Bills payable.
7. Sundry creditors.
WORKING CAPITAL
WORKING CAPITAL
CAPITAL
Every business needs some amounts of working capital. The need for
working capital arises due to the time gap between production and
realization of cash from sales. There is an operating cycle involved in
sales and realization of cash. There are time gaps in purchase of raw
material and production; production and sales; and realization of cash.
There are others factors also influence the need of working capital in a
business.
REQUIREMENTS
DEBTORS
Operating efficiency.
Management ability.
Irregularities of supply.
Import policy.
Asset structure.
Importance of labor.
1. Ratio analysis.
3. Budgeting.
1. RATIO ANALYSIS
1. Current ratio.
2. Quick ratio
4. Inventory turnover.
5. Receivables turnover.
1. Liquidity ratios.
A) LIQUIDITY RATIOS
1. CURRENT RATIO
2. QUICK RATIO
3. ABSOLUTE LIQUID RATIO
1. CURRENT RATIO
CURRENT LIABILITES
1) CURRENT ASSETS
2) CURRENT LIABILITES
(Rupees in
crore)
e.g.
Interpretation:-
As we know that ideal current ratio for any firm is 2:1. If we see
the current ratio of the company for last three years it has
increased from 2003 to 2005. The current ratio of company is
more than the ideal ratio. This depicts that company’s liquidity
position is sound. Its current assets are more than its current
liabilities.
2. QUICK RATIO
CURRENT LIABILITES
1) Marketable Securities
3) Debtors.
A high ratio is an indication that the firm is liquid and has the
ability to meet its current liabilities in time and on the other hand
a low quick ratio represents that the firms’ liquidity position is
not good.
e.g. (Rupees in
Crore)
CURRENT LIABILITES
e.g. (Rupees in
Crore)
Interpretation :
These ratio shows that company carries a small amount of
cash. But there is nothing to be worried about the lack of cash
because company has reserve, borrowing power & long term
investment. In India, firms have credit limits sanctioned from
banks and can easily draw cash.
The current ratio and quick ratio give misleading results if current
assets include high amount of debtors due to slow credit
collections and moreover if the assets include high amount of slow
moving inventories. As both the ratios ignore the movement of
current assets, it is important to calculate the turnover ratio.
1. INVENTORY TURNOVER OR STOCK
TURNOVER RATIO :
AVERAGE INVENTORY
(Rupees in Crore)
Year 2003 2004 2005
Cost of Goods sold 110.6 103.2 96.8
Average Stock 73.59 36.42 55.35
Inventory Turnover Ratio 1.5 times 2.8 times 1.75 times
Interpretation :
INVENTORY TURNOVER
RATIO
e.g.
Interpretation :
AVERAGE DEBTORS
2
e.g.
Interpretation :
This ratio indicates the speed with which debtors are being
converted or turnover into sales. The higher the values or
turnover into sales. The higher the values of debtors turnover, the
more efficient is the management of credit. But in the company
the debtor turnover ratio is decreasing year to year. This shows
that company is not utilizing its debtors efficiency. Now their
credit policy become liberal as compare to previous year.
Interpretation :
Networking Capital
e.g.
Interpretation :
INVENTORIES
(Rs. in Crores)
(Rs. in Crores)
DEBTORS :
(Rs. in Crores)
CURRENT ASSETS :
(Rs. in Crores)
Interpretation :
This graph shows that there is 64% increase in current assets
in 2005. This increase is arise because there is approx. 50%
increase in inventories. Increase in current assets shows the
liquidity soundness of company.
CURRENT LIABILITY :
(Rs. in Crores)
Interpretation :
(Rs. in Crores)
Interpretation :
The methodology, I have adopted for my study is the various tools, which
basically analyze critically financial position of to the organization:
V. TREND ANALYSIS
The above parameters are used for critical analysis of financial position.
With the evaluation of each component, the financial position from
different angles is tried to be presented in well and systematic manner. By
critical analysis with the help of different tools, it becomes clear how the
financial manager handles the finance matters in profitable manner in the
critical challenging atmosphere, the recommendation are made which
would suggest the organization in formulation of a healthy and strong
position financially with proper management system.
FINANCIAL STATEMENTS:
Financial statement is a collection of data organized according to logical
and consistent accounting procedure to convey an under-standing of some
financial aspects of a business firm. It may show position at a moment in
time, as in the case of balance sheet or may reveal a series of activities
over a given period of time, as in the case of an income statement. Thus,
the term ‘financial statements’ generally refers to the two statements
Though financial statements are relevant and useful for a concern, still
they do not present a final picture a final picture of a concern. The utility
of these statements is dependent upon a number of factors. The analysis
and interpretation of these statements must be done carefully otherwise
misleading conclusion may be drawn.
5. There are certain factors which have a bearing on the financial position
and operating result of the business but they do not become a part of these
statements because they cannot be measured in monetary terms. The basic
limitation of the traditional financial statements comprising the balance
sheet, profit & loss A/c is that they do not give all the information
regarding the financial operation of the firm. Nevertheless, they provide
some extremely useful information to the extent the balance sheet mirrors
the financial position on a particular data in lines of the structure of assets,
liabilities etc. and the profit & loss A/c shows the result of operation
during a certain period in terms revenue obtained and cost incurred during
the year. Thus, the financial position and operation of the firm.
CALCULATIONS OF RATIOS
Ratios are relationship expressed in mathematical terms between figures,
which are connected with each other in some manner.
CLASSIFICATION OF RATIOS
These are:-
• Composite ratios