CHAPTER - I INTRODUCTION

1. WORKING CAPITAL MANAGEMENT The accounting principles board of the America Institute of certified public accountants, USA, has defined working capital as follows: Working capital, sometimes called net working capital, is represented by the excess of current assets over current liabilities and identifies the relatively liquid portion of total enterprises capital which constitutes a margin or buffer for maturing obligation within the ordinary operating cycle of the business. 1.1 NEED FOR WORKING CAPITAL The need for working capital arises from two considerations. Firstly, Maintaining of working capital at a reasonable level is essential in any firm, the fixed assets which usually require a huge quantity of investments, can be used at an optimum level only if it is supported by sufficient quantity of working capital and secondly, the working capital involves investment of firms of the firm, If working capital level is not properly maintained and managed, than, it may unnecessary blockage of scares resources of the firm. On the other and the insufficiency of working capital, cause different hindrances in smooth operation of the firm. Therefore proper management of working capital is of utmost importance for all corporate houses. The basic objective of financial management is to maximize shareholders wealth.. This is possible only when the company earns sufficient profit. The amount of such profit largely depends upon the magnitude of sales. However, sales do not convent into cash instantaneously. There is always a time gap between the sale of goods and receipt of cash. Working capital is required for this period in order to sustain the sales actively.

1.2 CONCEPTS OF WORKING CAPITAL There are two concepts of working capital, namely, gross concepts and net concept. 1.2.1 GROSS WORKING CAPITAL According to this concept working capital refers to a firms investment in current assets. The amount of current liabilities is not deducted from the total of current assets. This concept views working capital and aggregate of current assets as two interchangeable terms. This concept is also referred to as current capital or circulating capital. 1.2.2 NET WORKING CAPITAL The net working capital refers to the differences between current assets and current liabilities. Current liabilities are those claims of outsides which are expected to mature for payment within an accounting year and include creditors dues, bills payable, bank overdraft and outstanding expenses. Net working capital can be positive or negative. A positive net working capital will arise when current assets exceed liabilities. A negative net working capital occurs when current liabilities are in excess of current assets. 1.3 KINDS OF WORKING CAPITAL Working capital is classified into two categories 1. Fixed, regular, or permanent working capital and 2. Variable Fluctuating, seasonal, temporary or special working capital.

1.3.1 FIXED WORKING CAPITAL The need for current assets is associated with in the operating cycle. the magnitude of investment in current assets however may not always be the same. The need for investment in current assets may increase or decrease over a periods of time according to the level of production. Nevertheless, there is always certain minimum level of current assets which is essential for the firm to carry on its business irrespective of the level of operations. This is the irreducible minimum amount necessary for maintaining the circulation of the current assets.

The minimum level of investment in current assets is permanently locked up business and is therefore referred to as permanent or fixed or regular working capital. It is permanent in the same way as investment in the firms fixed assets is. 1.3.2 FLUCTUATING WORKING CAPITAL Depending upon the changes in production and sales, the need for working capital, over and above the permanent working capital, fluctuate the need for working capital may also vary on account of seasonal changes or abnormal or unanticipated conditions. Any special advertising campaigns organized for increasing sales or other promotional activities may have to be financed be additional capital, needed to support the changing business activities is called fluctuating working capital. The extra working capital needed to support the changing business activities is called fluctuating working capital. 1.4 IMPORTANCE OF WORKING CAPITAL MANAGEMENT 1. The level of current assets changes constantly and regularly depending upon the level of actual and forecasted sales. This requires that the decisions to bring the levels of current assets should be made at the earliest opportunity and as frequently as required. 2. The changing levels of current assets may also require of the financing pattern. How much working capital needs to be financed be different of financing must be periodically reviewed. 3. Inefficient working capital management may result in loss of sales and consequently decline in the profits of the firm. 4. Inefficient working capital management may also lead to insolvency of the firm. If it is not in a position to meet its liabilities and commitments. 5. Current assets usually represent a sustained portion of the total assets of the firm, resulting in the investment of a larger chunk of funds in the currents assets. 6. There is an obvious and inevitable relationship between the sales growth and the level of current assets. The target sales can be achieved only if supported by adequate working capital. The increase in sales level requires increase in working capital and thus the financial manager must be able to respond quickly in providing and arranging additional working capital.
3

1.5 COMPONENTS OF WORKING CAPITAL The main components working capital are cash, marketable securities, accounts receivable , trade credits and loans from banks , etc., 1.5.1 CASH Cash is one of the most liquid and important component of working capital. It is necessary for a business firm to maintain a certain amount of cash in hand (or) at bank always, even if the other current assets are at a substantial figure. Cash and bank balance have three important functions namely transaction function, precautionary function and speculative function. The transaction function requires a firm to hold cash to conduct its business in the ordinary course. The firm cash primarily to make payment for purchase, wages, operating expenses, taxes, diligence, etc., the precautionary function is the need to hold cash to meet ant contingencies in future. It provides a cushion (or) buffer to withstand some unexpected emergency. The speculative function relates to the holding of cash for investing in profit making opportunities as and when they rise. Often some profitable opportunities come and if they are not immediately exploited it may not be possible to take advantages of them subsequently. It may be necessary therefore to maintain a certain amount of cash balance to en able the firm to exploit such opportunities. 1.5.2 INVENTORY Every enterprise needs inventory for smooth running of its activities .It serves as a link between production and distribution processes. The investment in inventories includes the following things: 1.5.3 RAW MATERIALS Raw material form a major input to the organization. The quantity of raw materials required will be determined by the rate of consumption and the time required for replenishing the supplies.

1.5.4 WORKING-IN-PROGRESS The work in progress is that stage of stock, which is in between raw materials and finished goods. The raw materials enter the manufacturer but they are yet to attain a final shape of finished goods. The quantum of work-in-progress depends upon the time in the manufacturing process. 1.5.5 FINISHED GOODS Finished goods are both those completely manufactured products, which are ready for sale. The stock of finished goods is required for smooth marketing operations. The need for finished goods will be more when production is undertaken in general without waiting for specific orders. 1.5.6 BOOK DEBTS/RECEIVABLE Receivable constitute a significant portion of current assets of a firm. Receivable represent amounts owed to the firm as a result of sale of goods (or) services in the ordinary course of business. These are claim s of the firm against its customs and form part of its current assets. Receivable are also known as Accounts, receivable, trade receivable, customer receivable (or) book debts. The period of credit and extent of receivable depends upon the credit policy followed by the firm. The purpose of maintain (or) investing in receivable is to meet competition and to increase the sales and profits. The concern incurs the following cost on maintaining receivable, cost of financing receivable, cost of collections and bad debts. 1.5.7 MARKETING SECURITIES A firm has to maintain a reasonable balance of cash. This is necessary because, there is no perfect balancing of inflows and outflows of cash. Sometimes more cash is received than required for quick payment instead of keeping the surplus cash as idle; the firm tries to invest it in marketable securities. It will bring some income to the business.

The cash surplus will be available during slack seasons and will be required when demand picks up again. The investment of cash in securities needs a prudent and cautions approach. The selection of securities for investment should be carefully made so that the amount is raised quickly on demand. 1.5.8 INVENTORY MANAGEMENT Inventories represent substantial amount of a firms current assets. Proper management of inventories is necessary so that this inventory does not become too large as it would result in blocked capital which could be put to productive use elsewhere. On the other hand having too small, an inventory would result in loss of sales (or) loss of customer goodwill. An optimum level of inventory should therefore be maintained. The main objectives of inventory management are operational and financial; the operational objectives mean that investment in inventories should not remain idle and minimum working capital should be locked in it. An effective inventory management should ensure a continuous supply of materials to facilitate uninterrupted production, maintain sufficient stocks of raw materials in a period of short and supply and anticipate price changes, maintain sufficient finished goods for smooth sales and efficient customer services. Reducing the carrying costs and time and control investment in inventories and keep it at an optimum level. Proper control over inventory not only solves the acute problem of liquidity but also increases the annual profits and causes sustainable reduction in the working capital of the firm. 1.5.9 CASH MANAGEMENT Cash management has assumed importance because it is the most significant of all the current assets. It is required to meet business obligation and it is unproductive when not used. Efficient cash management requires proper cash planning, an organization for managing receipt, disbursements, an efficient control and review mechanism. Cash budgeting, lockbox system and cash forecasts are the important strategic, regarding cash management.

1.5.10 RECEIVABLE MANAGEMENT Receivable management is the process of making decision relating to investment in trade debtors. The objective of receivable management is to take sound decision as regards investment in debtors. Maintaining accounts receivables has its costs implications in that the firms monetary resources get tied up. The basic objective of receivables management is to maximum the value of the firm. It does not aims at maximum sales and minimize the risk of bad debt. To put it clearly, sales will be maximized if the firm sells on credit to all. A sound receivable management is needed to expand credit sales to a limit where the risk of bad debt will remain minimum. The management of receivables aims at establishing an optimum credit policy. Credit policy relates to factors that influence the amount of trading credit, in other words, investment in receivable. Certain factors influence the decision making on the amount of trade credit, making on the amount of trade credit or credit policy. Receivable management to be successful should ensure a comparatively slower growth of receivable as against sales, a satisfactory receivable turnover and collection period minimum bad debt losses and effective use of capital use of capital invested. In order to achieve these objectives, the firms formulate sound credit and collection policies. 1.5.11 PAYABLES MANAGEMENT Trade credit is a form of short term financing common to all business. In fact, it is the largest source of short-term funds for business firms collectively, In trade credit, cash discounts and payment period was are two important aspects. Credit terms regarding payment period may be classified in several groups such as cash before delivery, cash on delivery, net terms with discounts and seasonal dating. The firm should maintain a sound working capital position by acquiring the finance from various sources such as bank credit, commercial paper, etc., to reply the short-terms loans and borrowing.

CHAPTER - II 2.1. INDUSTRY PROFILE:

Textile industry in India is the second largest employment generator after agriculture. It holds significant status in India as it provides one of the most fundamental necessities of the people. Textile industry was one of the earliest industries to come into existence in India and it accounts for more than 30% of total exports, in fact Indian textile industry is the second largest in the world, second only to china. Textile Industry is unique in the terms that it is an independent industry, from the basic requirement of raw materials to the final products, with huge value-addition at every stage of processing. Textile industry in India has potential for creation of employment opportunities in the agricultural, industrial, organized and decentralized sectors & rural and urban areas; particularly for women and the disadvantaged Indian textile industry is constituted of the following segments: Readymade garments, Cotton Textiles including Handlooms, Man-made Textiles, Silk Textiles, Handicrafts, Coir and Jute. Till the year 1985, development of textile sector in India took place in terms of general policies, in 1985, for the first time the importance of textile sector recognized and a separate policy statement was announced with regard to development of textile sector. In the year 2000, National Textile Policy was announced. Its main objective was: to provide cloth of acceptable quality at reasonable prices for the vast majority of the population of the country, to increasingly contribute to the provision of sustainable employment and the economic growth of the global market. The policy also aimed at achieving the target of textile and apparel exports of US $ 50 billion by 2010 of which the share of garments will be US $ 25 billion. The main markets for Indian textiles and apparels are USA, UAE, UK, Germany, France, Italy, Russia, Canada, Bangladesh and Japan.

2.1.1 FACTORS  Suitable climate  Cheap and developed transport facilities including parts like Bombay and Canada.  Availability of commercial and financial facilities and enterprising capital.  In recent years, this industry has also spread to a number of other states.

The Reasons for this decentralization:  Cotton fiber could be shifted to long distances without increasing the cost structure too much; hence entrepreneurs preferred to locate their mills at market centre.  Availability of Raw materials in all States.  Development of transport and communication facilities in all these States.  Government encouragement for decentralization.

The reasons for the fast growth of Textile Industry:  Governments favorable policies on synthetic fabric industry.  Ability of the sector to introduce flexibility in the product mix in line with the market situation.  Low labor cost due to flexible use of labors and their competitive strength  Increase in exports from the power loom sector.

On the other hand, production of the yarn is almost entirely in the organized sector and it has been showing a rising trend. The production of mill yarn which stood at 1700 million Kg in 1989-90 increased to 2090 million in 1994-95.

2.2. COMPANY PROFILE:

Geetha Krishna Spinning Mills Pvt Ltd, 1983 at Rajapalayam, the cotton city of Tamil Nadu is a pioneer in manufacturing combed and carded cotton yarn as we have created several benchmarks and established milestones for the forthcoming generations. Having secured a reputation in the cotton market as one of the leading manufacturers of high quality cotton yarn we take all the necessary efforts to uphold it by investing hugely in modernizing and expanding the plant potentially to meet the ever growing needs. At present, our capacity is 40,000 spindles. The Company machinery is up to date and modernized and strengths are staff and management who are entirely committed to excellence in quality and adherence to delivery schedule.

2.2.1 Management: Mr.V.K.Subramania Raja, the Chairman & Managing Director and Mr. V.S.Rammohan Raja, Director are enterprising business men with three decades of rich managerial experience in manufacturing cotton yarn and trading in different parts of the world. Management team is suitably backed by well experienced and strong technical team in all their endeavors. Geetha Krishna duly focuses on:  Quality of products & Time factors.  Prime concern is in protecting the customers interest with a commitment to assured performance. 2.2.2 Social Responsibility: The Company wishes every child should enjoy a free and compulsory education till they attain 18 years of age. They consider child labor as an issue violation of human rights and hence do not engage children in any form of labor or operation.

10

2.2.3 Product: They envisage playing an active role in quality yarn production by advancing our production process and following various quality check system that are latest in the industry. The Company ensures the quality of the yarn is of high standard and is determined to meet international requirements. Highly qualified professionals with comprehensive knowledge and expertise of the industry put in a lot of effort to give the ideal product that form the base material for Knitting and weaving Industry. 2.2.4 Infrastructure: With an earnest attempt in deploying world class machinery and upgrading it consistently, the company is able to bring you quality yarn. Assisted by a pool of veterans and skilled personnel who are sculpted and motivated to stay with the tides of times and meet out the raising needs, they are capable of reaching greater heights.  Blow Room  Carding  Comber  Drawing  Simplex  Spinning  Autoconer

 Yarn Conditioning Plant

2.2.5 YARN SPINNING A fully fledged spinning mill with a spindle capacity of 20,000 spindles meets our captive production requirement of 10,000 kgs /day.

11

2.2.6 COMPANY HIGHLIGHTS  Excellent sampling development system with creative team of professional  Recognition secured forms all major buyers as an acknowledgement for compiling with their respective code of conduct

2.2.7 QUALITY Quality speaks volumes about the manufacturer and the product. Quality first has always been a watchword all of our processes.

2.2.8 PRODUCTS . The following are the list of products:

 20 counts  24 counts  30 counts  34 counts  40 counts

2.2.9 CANTEEN FACILITIES Token facility is being followed. Permanent workers can get a token book once in a month and the amount will be deducted from their wages. Whereas, the temporary workers have to pay to get a token book.

12

CHAPTER - III REVIEW OF LITERATURE

 Kaushik Chakra borty (2008) Working capital is essential for the day-to-day operations of a business, and hence it is the life-blood of any business. Working capital management is about the management of current assets and current liabilities in such a way that a satisfactory level of working capital.

 Healy and Bernard (2005). Analysis of overall management activities of firms,

comparison of industry environmental factors of firms, business strategies, accounting systems, financial analysis and characteristics of working capital estimation errors were carried out to explain differences in earnings quality among firms.  Mei-Ting (2002) Huang this study attempts to analyze overall management activities of firms, relating to the role of market investors, to provide investors with important reference information for managing their portfolios. The method of Dechow and Dichev (2002) was adopted to measure earnings quality and to develop an working capital estimation errors model. In addition, the "Six Sigmas" principle was used to transform past abstract concepts into quantification to link to financial report analytical concepts and to form an overall structure proposed by Palepu.

 Paul M. Healy and Krishna G. Palepu (2001) financial reporting and disclosure are
potentially important means for management to communicate firm performance and governance to outside investors. We provide a framework for analyzing managers reporting and disclosure decisions in a capital markets setting, and identify key research questions. We then review current empirical research on disclosure regulation, information intermediaries, and the determinants and economic consequences of corporate disclosure. Our survey concludes that current research has generated a number of useful insights. We identify many fundamental questions that remain unanswered, and changes in the economic environment that raise new questions for research.  Michael J. Peel Nicholas Wilson MICHAELJ. PEEL (1997) Very little research has been conducted on the capital budgeting and working capital practices of small firms. The purpose of this paper is to present the results of a preliminary study on the working capital and financial management practices of a sample of small firms located in the north
13

of England. In general, the results of the survey indicated that a relatively high proportion of small firms in the sample claimed to use quantitative capital budgeting and working capital techniques and to review various aspects of their companies' working capital. In addition, the firms which claimed to use the more sophisticated discounted cash flow capital budgeting techniques, or which had been active in terms of reducing stock levels or the debtors' credit period, on average tended to be more active in respect of working capital management practices.  The year 1993 Steven M. Fazzari and Bruce C. Petersen this article presents new tests for finance constraints on investment by emphasizing the often neglected role of working capital as both a use and a source funds. The coefficient of endogenous working capital investment is negative in a fixed-investment regression, as expected if working capital competes with fixed investment for a limited pool of finance. This finding addresses a criticism of previous research on finance constraints, that cash flow may simply proxy shifts in investment demand. In addition, previous studies may have under estimated the impact of finance constraints on growth and investment because firms smooth fixed investment in the short run with working capital.

 The quantitative investigation consists of the statistical analysis namely comparison of

means and correlation analysis of key figures which are calculated from the financial statements of a large sample of firms. The dataset contains 13,287 Swedish manufacturing SMEs of the legal form Aktiebolag. Both hypotheses are confirmed by the results. Empirical evidence is presented which substantiates the supposition that the presence of cash substitutes namely inventory and accounts receivable entails lower cash holdings. Furthermore, it is confirmed that working capital management efficiency measured by the cash conversion cycle is positively related to cash level. The discussion of the empirical findings pays regard to the different subordinate components of both cash substitutes and working capital management efficiency. Implications of the detected findings are highlighted with respect to their potential utility for the achievement and maintenance of a firms target cash level.

 Pedro Juan Garcia-Teruel, Pedro Martinez-Solano the object of the research presented in
this paper is to provide empirical evidence on the effects of working capital management on the profitability of a sample of small and medium-sized Spanish firms.
14

CHAPTER - IV

4.1 OBJECTIVES OF THE STUDY:

 To analyze working capital management in Geetha Krishna spinning mills (p) limited.  To assess the relative significance of various source of working capital.  To observe the relationship between working capital and liquidity position of the company.  To find out the impact of working capital on profitability.

15

4.2 SCOPE OF THE STUDY:

The study covers a period of 5 years from 2005 to 2010. Working capital management refers to the management of current assets and current liabilities. In this study, the importance is given to current assets management rather than the current liabilities management. In the current assets management also, more importance is given to the receivables management and the techniques of working capital management because these are the aspects of management of working capital.

16

4.3 LIMITATIONS OF THE STUDY:

 The study is mainly based on the information presented in the annual report.  Research is based only on the Geetha Krishna spinning mills (p) limited.  The study is confined to a very limited period of five years to analysis about the working capital management of the Geetha Krishna spinning mills (p) limited throughout its life period.  It is based only on secondary data.

17

CHAPTER - V RESEARCH METHODOLOGY

5.1 RESEARCH DESIGN The methodology used in this study is descriptive in nature where the researcher has to use facts (or) information already available and study the characteristics of a particular group respectively and there by analyze to make a critical evaluation of the study. 5.2 DATA COLLECTION Secondary Data The research is primarily based on secondary data, with addition information gathered from the finance department. The main sources are companys five year annual reports and schedules. DATA COLLECTION METHOD  Annual Reports  Internal Reports 5.3 TOOLS USED FOR ANALYSIS DATA The tools used for analyzing the financial performance of the company are  Comparative statement  Ratio analysis  Common size statement

18

5.4 TOOLS OF WORKING CAPITAL ANALYSIS

A working capital analysis can adopt the following tools for analysis of the financial statement. These are also termed as methods of working capital analysis. 5.4.1 Current ratio The current ratio is calculated by dividing current assets by current liabilities. Current Ratio = Current Asset / Current Liabilities As a conventional rule, current ratio of 2:1 or more is considered satisfactory. It is based on the logic that the higher the current ratio the more the firms ability to meet its current obligations. Even though current ratio is a good measure of firms liquidity, it is only a test of quantity and not quality. Liabilities are not subject to any fall in value; they have to be paid. But current assets can decline in value. 5.4.2 Quick ratio This ratio establishes the relationship between quick or liquid assets and current liabilities. An asset is liquid if it can be converted into cash immediately or reasonably soon without a loss of value. Quick Ratio = (Current Assets Inventory) / Current Liabilities Generally quick ratio of 1:1 is considered to represent a satisfactory current financial condition. The quick ratio remains as an important index of the firms liquidity and is a more absolute test than the current ratio. 5.4.3 Inventory turnover ratio Inventory turnover or stock turnover ratio indicates the efficiency of the firms inventory management. Every firm has to maintain a certain level of inventory of finished goods so as to be able to meet the requirement of the business. But the inventory should neither be too high nor too low. The ratio indicates the number of times the stock has been turned over during the period and evaluates the efficiency with which a firm is able to manage its inventory.
19

5.4.4 Debtors turnover ratio When the firm extends credit to its customers, book debts are created in the firms accounts. Book debts are expected to be converted into cash over a short period and therefore are included in Current assets. The liquidity position of the firm depends on the quality of debtors to a great extend. 5.4.5 Current asset turnover ratio Assets are used to generate sales. Therefore a firm should manage its assets efficiently to maximize sales. The relationship between sales and current assets is called current asset turnover ratio. Current Assets Turnover Ratio = Sales / Current Asset A firms ability to produce a large volume of sales for a given amount current assets is the most important aspects of its operating performance. Unutilized or underutilized assets increase the firms need for costly financing as well as expenses for maintenance and upkeep. 5.4.6 Cash to current asset ratio Cash to current asset ratio is calculated by dividing cash by current assets and expressed in percentages. Cash is compared with current assets first to know the proportion of cash in current assets. A high proportion of cash to total assets directly affects the profitability of the firm because large amount of cash is kept as unproductive assets. The lower proportion may lead to higher profitability of the firm. Even though cash is an unproductive asset it cannot be reduced below a certain limit, because in all firms there would be certain contingencies to be met. There is no standard or fixed norm for this ratio.
Cash to current asset ratio = Cash / Current Assets

20

5.4.7 Receivables to current assets ratio This ratio is calculated by dividing the receivables by current assets and expressed in percentage. If the ratio is very high it indicates that a higher amount is invented in accounts receivable. It may be due to liberal credit policy. A lower ratio is preferable. Receivables to Current Assets Ratio= Receivables / Current Assets 5.4.8 Inventory to current assets ratio Inventory is an idle resource and has to be managed with care so that the profitability is not unduly affected. Proper inventory management should ensure a continuous supply of materials to facilitate uninterrupted production and keep sufficient stock of raw materials to facilitate uninterrupted production and keep sufficient also ensure that the selling operation is made as smooth as possible by maintaining sufficient finished goods. All these would mean the inventory should be kept at reasonable level. Too much inventory resulting in certain explicit cost such as handling cost and storage cost, spoilage cost and interest on capital inventories. Under investment in inventory also leads for extra planning and leads to increase in ordering costs. Hence it may be correctly said that there can be neither over investment nor under investment in inventory . Therefore there should be an optimum or ideal investment in inventory as it is essential to improve the profitability.
Inventory to current asset ratio = (Inventory / Current Assets) x 100

5.4.9 Operating cycle analysis The Operating Cycle of a firm begins with the acquisition of raw materials and ends with the collection of receivables. It may be divided into four stages. 1) Raw materials and stores storage stage 2) Work in process stage 3) Finished goods inventory stage 4) Debtors collection stage

21

5.4.10 Duration of operating cycle The duration of operating cycle is equal to the sum of the durations of each of these stages less the credit period allowed by the suppliers of the firm. In symbols: O=R+W+F+DC Where, O = duration of operating cycle R = raw materials and stores storage period W = Work in progress period F = Finished goods storage period D = Debtors collection period C = Creditors payment period

INVENTORY OF RAW MATERIALS Usually a firm has to maintain several types of inventories. It is not desirable to keep same degree of control on all the items. The firm should pay maximum attention to those items whose value is the highest. The firm should therefore, classify inventories to identify which items should receive the most effect of the firm in controlling. Thus, the firm should be selective in its approach to control investment in various types of inventories.

22

CHAPTER - VI DATA ANALYSIS AND INTERPRETATIONS

RATIO ANALYSIS (2005-2010)

6.1. ACTIVITY RATIOS

1. Working Capital turnover ratio 2. Fixed Assets turnover ratio 3. Debtors turnover ratio 4. Creditors turnover ratio 5. Inventory turnover ratio

6.2. LIQUIDITY RATIOS

1. Current ratio 2. Liquidity ratio 3. Absolute liquid ratio

6.3. SOLVENCY RATIOS

1. Debt equity ratio 2. Comparative statement analysis (2005-2010) 3. Common size statement analysis (2005-2010)

23

6.1. ACTIVITY RATIOS 6.1.1 WORKING CAPITAL TURNOVER RATIO:

Working Capital = Current assets Current Liabilities Working Capital Turnover Ratio = Sales / Network Capital (Rupees in lakhs) Year Sales Network Capital Working Capital Turnover 6.017 5.611 2.966 2.246 2.264

2005-06 2006-07 2007-08 2008-09 2009-10

16836.54 21296.81 28344.90 27387.51 33923.12

2797.99 3795.33 9554.71 12192.03 14980.42

7 6.017 6 5 4 2.966 3 2.246 2 1 0 2005-06 2006-07 2007-08 2008-09 2009-10 2.264 5.611

24

Interpretation
The working capital turnover ratio measures the efficiency with which the working capital is being used by a firm. The higher ratio indicates that the company was good in efficient management of working capital in the year 2005-06 and from the subsequent years it starts decreasing again it start increasing at 2009-10.

25

6.1.2 FIXED ASSETS TURNOVER RATIO:

Fixed Assets Turnover Ratio = Sales / Fixed assets

(Rupees in lakhs) Year Sales Fixed assets Fixed Assets Turnover Ratio 0.984 1.661 2.863 3.303 3.870

2005-06 2006-07 2007-08 2008-09 2009-10

16836.54 21296.81 28344.90 27387.51 33923.12

17100.28 12819.75 9900.61 8428.33 8765.33

4.5 4 3.5 3 2.5 2 1.5 0.984 1 0.5 0 2005-06 2006-07 2007-08 2008-09 2009-10 1.661 2.863 3.303 3.87

Interpretation
The fixed asset ratio shows the efficiency of the company in the efficient utilization of fixed assets to generate sales. From the table it is clear that the company is good in making use of the fixed assets for sales.
26

6.1.3 DEBTORS TURNOVER RATIO:

Debtors Turnover Ratio = Sales / Sundry Debtors (Rupees in lakhs) Year 2005-06 2006-07 2007-08 2008-09 2009-10 Sales 16836.54 21296.81 28344.90 27387.51 33923.12 Sundry Debtors 1660.09 1549.96 1908.45 1881.73 2314.75 Ratio (times) 10.142 13.74 14.852 14.793 14.655

16 13.74 14 12 10.142 10 8 6 4 2 0 2005-06 2006-07

14.852

14.793

14.655

2007-08

2008-09

2009-10

Interpretation
The debtors turnover ratio is increasing and also decreasing on the following year. Any way they maintain a debtor ratio according to the company.

27

6.1.4 CREDITORS TURNOVER RATIO:

CTR = Credit purchase / Creditors. (Rupees in lakhs) Year 2005-06 2006-07 2007-08 2008-09 2009-10 Credit purchase 6234.12 6904.52 9358.75 12391.38 13328.25 Creditors 1677.55 1781.63 2208.56 2427.52 2545.12 CTR 3.717 3.876 4.238 5.105 5.236

6 5.105 5 4.238 4 3 2 1 0 2005-06 2006-07 2007-08 2008-09 2009-10 3.717 3.876 5.236

Interpretation
The creditors turnover ratio is increasing year by year. So the company is good in paying the debts.

28

6.1.5 INVENTORY TURNOVER RATIO:

Inventory Turnover Ratio = Cost of goods sold / Average Inventory (Rupees in lakhs) Year 2005-06 2006-07 2007-08 2008-09 2009-10 Cost of goods sold 18891.23 21550.27 22434.67 26574.01 29766.04 Average Inventory 3744.37 3081.44 4220.69 6210.06 6651.47 Ratio (times) 5.045 6.993 5.315 4.279 4.475

8 6.993 7 6 5.045 5 4 3 2 1 0 2005-06 2006-07 2007-08 2008-09 2009-10 5.315 4.279 4.475

Interpretation
The above table shows that the inventory turnover ratio is decreasing. Because the property movement of inventory has been reduced on the following years.

29

6.2. LIQUIDITY RATIOS 6.2.1CURRENT RATIO

Current Ratio = Current Asset / Current Liabilities (Rupees in lakhs) Year 2005-06 2006-07 2007-08 2008-09 2009-10 Current Assets 7290.70 8201.33 14333.63 17383.73 20378.62 Current Liabilities 7314.11 8932.62 10166.07 12428.14 10948.98 Ratio 1.00 0.918 1.490 1.398 1.861

2 1.8 1.6 1.4 1.2 1 1 0.8 0.6 0.4 0.2 0 2005-06 2006-07 2007-08 2008-09 0.918 1.49 1.398

1.861

2009-10

Interpretation
The above table shows that the current ratio is less than standard norms. i.e. 2:1. So they have to make sufficient investments in current assets.

30

6.2.2 QUICK RATIO

Quick Ratio = (Current Assets Inventory) / Current Liabilities (Rupees in lakhs) Year 2005-06 2006-07 2007-08 2008-09 2009-10 Liquid Assets 3546.33 5119.89 10112.94 11173.67 13727.15 Current Liabilities 7314.11 8932.62 10166.07 12428.14 10948.98 Ratio 0.485 0.573 0.994 0.899 1.253

1.4 1.253 1.2 0.994 1 0.8 0.573 0.6 0.4 0.2 0 2005-06 2006-07 2007-08 2008-09 2009-10 0.485 0.899

Interpretation
The above table shows that the quick ratio is less than the standard norms of 1:1. So they are not good in meeting the contingencies.

31

6.2.3 ABSOLUTE LIQUID RATIO

Absolute Liquid Ratio = Absolute Liquid Assets / Liquid Liabilities (Rupees in lakhs) Year 2005-06 2006-07 2007-08 2008-09 2009-10 Current Assets 512.91 2017.16 6132.12 6172.64 9609.83 Current Liabilities 7314.11 8932.62 10166.07 12428.14 10948.98 Ratio 0.0731 0.2257 0.6031 0.496 0.878

1 0.9 0.8 0.7 0.6031 0.6 0.496 0.5 0.4 0.3 0.2 0.1 0 2005-06 2006-07 2007-08 2008-09 2009-10 0.0731 0.2257 0.878

Interpretation
The above table shows that the absolute liquid ratio is very less than the liabilities so they have to make more investments in short term assets.

32

6.3. SOLVENCY RATIO 6.3.1 DEBT EQUITY RATIO

Debt Equity Ratio = Outsiders fund / Shareholders Fund (Rupees in lakhs) Year 2005-06 2006-07 2007-08 2008-09 2009-10 External Equity 12970.28 8688.76 5769.79 4297.62 4180.52 Internal Equity 5290.17 5038.67 10306.65 12601.41 17313.15 Dept Equity 2.4517 1.7246 0.5598 0.3410 0.241

3 2.4517 2.5 2 1.5 1 0.5598 0.5 0 2005-06 2006-07 2007-08 2008-09 2009-10 0.341 0.241

1.7246

Interpretation
Debt equity ratio helps us to find how far the company is depended on outsiders fund or shareholders fund for its survival. From the table we can infer that in the year 2005-06 the company had more outsiders fund. Then in the following years it started decreasing.
33

6.3.2.1 COMPARATIVE STATEMENT ANALYSIS COMPARATIVE STATEMENT OF WORKING CAPITAL FOR THE YEAR ENDED (2005-2006) [Rupees in lakhs] As at 31st march 2005 As at 31st march 2006 % of increase % of decrease

Particulars Current Assets: Inventories Sundry Debtors Cash & Bank balances Interest Receivable Loan & Advances Total current Assets Current Liabilities Sundry creditors Advances received Security Deposits Interest accrued Bank Credit Unclaimed matured deposits Interest accrued on matured deposits Other liabilities

4042.17 1389.44 415.96 94.18 1189.16 7130.91

3744.37 1660.09 512.91 90.59 1282.74 7290.70

-19.48 23.31 -7.86 2.24

7.37 --3.81 ---

1850.17 257.04 183.24 1082.35 0.42 13.66 3.82 1282.64

1677.17 250.52 191.92 997.91 0.37 15.11 4.35 1354.76

9.32 2.87 -7.80 11.90 ----

-4.74 --10.61 13.87 5.62 --

Total current liabilities

4674.24

4492.71

3.88

--

34

INTERPRETATION The above table shows that there is a good increase in current assets such as cash and bank balances, sundry debtors and loans and advances and there is decrease in current liabilities. So they are good in meeting the debts.

35

6.3.2.2 COMPARATIVE STATEMENT ANALYSIS COMPARATIVE STATEMENT OF WORKING CAPITAL FOR THE YEAR ENDED (2006-2007) [Rupees in lakhs] As at 31st march 2006 As at 31st march 2007 % of increase % of decrease

Particulars Current Assets: Inventories Sundry Debtors Cash & Bank balances Interest Receivable Loan & Advances Total current Assets Current Liabilities Sundry creditors Advances received Security Deposits Interest accrued Bank Credit Unclaimed matured deposits Interest accrued on matured deposits Other liabilities

3744.37 1660.09 512.91 90.59 1282.74 7290.70

3081.44 1549.96 2017.16 86.18 1466.59 8201.33

--293.28 -14.38 12.49

17.70 6.63 -4.86 ---

1677.17 250.52 191.92 997.91 0.37 15.11 4.35 1354.76

1780.81 364.59 191.83 839.93 0.26 11.82 2.19 1214.57

--0.47 15.83 29.73 21.77 49.65 10.35

6.14 45.55 -------

Total current liabilities

4492.71

4406.00

1.93

--

36

INTERPRETATION The above table shows that there is a good increase in current assets such as cash and bank balances and loans and advances but there is not much decrease in current liabilities so they have to concentrate on current liabilities.

37

6.3.2.3 COMPARATIVE STATEMENT ANALYSIS COMPARATIVE STATEMENT OF WORKING CAPITAL FOR THE YEAR ENDED (2007-2008) [Rupees in lakhs] As at 31st march 2007 As at 31st march 2008 % of increase % of decrease

Particulars Current Assets: Inventories Sundry Debtors Cash & Bank balances Interest Receivable Loan & Advances Total current Assets Current Liabilities Sundry creditors Advances received Security Deposits Interest accrued Bank Credit Unclaimed matured deposits Unclaimed matured bonds Interest accrued on matured deposits Other liabilities

3081.44 1549.96 2017.16 86.18 1466.59 8201.33

4220.69 1908.45 6135.12 142.18 1930.19 14333.63

36.97 23.13 203.99 64.98 31.61 74.77

-------

1780.81 364.59 191.83 839.93 0.26 11.82 -2.19 1214.57 4406.00

2207.50 524.47 209.67 524.75 0.19 11.03 0.83 4.37 1293.11 4778.92

---37.17 26.92 6.68 -----

23.96 43.85 9.30 ---100 99.54 6.47 8.46

Total current liabilities

38

INTERPRETATION The above table shows that there is a very good increase in all the current assets and they are good in meeting the current liabilities also.

39

6.3.2.4 COMPARATIVE STATEMENT ANALYSIS COMPARATIVE STATEMENT OF WORKING CAPITAL FOR THE YEAR ENDED (2008-2009) [Rupees in lakhs] As at 31st march 2008 As at 31st march 2009 % of increase % of decrease

Particulars Current Assets: Inventories Sundry Debtors Cash & Bank balances Interest Receivable Loan & Advances Total current Assets Current Liabilities Sundry creditors Advances received Security Deposits Interest accrued Bank Credit Unclaimed matured deposits Unclaimed matured bonds Interest accrued on matured deposits Other liabilities Total current liabilities

4220.69 1908.45 6135.12 142.18 1930.19 14333.63

6210.06 1181.73 6172.64 85.48 3033.82 17383.73

47.13 -0.66 -57.12 21.28

-1.40 -39.88 ---

2207.50 524.47 209.67 524.75 0.19 11.03 0.83 4.37 1293.11 4778.92

2427.36 536.26 232.30 375.82 3.27 5.14 0.60 2.59 1608.36 5191.70

---28.79 -53.40 27.71 40.73 ---

9.96 2.25 10.79 -1621.05 ---24.41 8.64

40

INTERPRETATION From the above table we can infer that there is an increase in current assets such as inventories and loan and advances but their current liabilities has shown a significant improvement in the case of bank credit.

41

6.3.2.5 COMPARATIVE STATEMENT ANALYSIS COMPARATIVE STATEMENT OF WORKING CAPITAL FOR THE YEAR ENDED (2009-2010) [Rupees in lakhs] As at 31st march 2009 As at 31st march 2010 % of increase % of decrease

Particulars Current Assets: Inventories Sundry Debtors Cash & Bank balances Interest Receivable Loan & Advances Total current Assets Current Liabilities Sundry creditors Advances received Security Deposits Interest accrued Bank Credit Unclaimed matured deposits Unclaimed matured bonds Interest accrued on matured deposits Other liabilities Total current liabilities

6210.06 1881.73 6172.64 85.48 3033.82 17383.73

6651.47 2314.75 9609.83 152.56 1650.01 20378.62

7.11 23.01 55.68 18.47 -78.47

----45.61 --

2427.36 536.26 232.30 375.82 3.27 5.14 0.60 2.59 1608.36 5191.70

2545.07 631.68 257.76 198.79 4.30 2.19 0.20 0.74 1757.47 5398.20

---47.01 -57.88 66.67 71.43 ---

4.85 17.79 1096 -31.49 ---9.26 3.98

42

INTERPRETATION The above table shows that there is a good increase in current assets and they are good in repaying the current liabilities also.

43

6.3.3.1 COMMON SIZE STATEMENT ANALYSIS COMMON SIZE STATEMENT ANALYSIS FOR THE YEAR (2005-2006) [Rupees in lakhs] Particulars Current Assets: Inventories Sundry Debtors Cash & Bank balances Interest Receivable Loan & Advances Total current Assets Current Liabilities Sundry creditors Advances received Security Deposits Interest accrued Bank Credit Unclaimed matured deposits Interest accrued on matured deposits Other liabilities Total current liabilities 4492.71 100.00 1677.17 250.52 191.92 997.91 0.37 15.11 4.35 1354.76 37.34 5.58 4.27 22.21 0.02 0.34 0.09 30.15 3744.37 1660.09 512.91 90.59 1282.74 7290.70 51.36 22.77 7.04 1.24 17.59 100.00 As at 31st march 2006 % of Total

44

6.3.3.2 COMMON SIZE STATEMENT ANALYSIS COMMON SIZE STATEMENT ANALYSIS FOR THE YEAR (2006-2007) [Rupees in lakhs] Particulars Current Assets: Inventories Sundry Debtors Cash & Bank balances Interest Receivable Loan & Advances Total current Assets Current Liabilities Sundry creditors Advances received Security Deposits Interest accrued Bank Credit Unclaimed matured deposits Interest accrued on matured deposits Other liabilities 1780.81 364.59 191.83 839.93 0.26 11.82 2.19 1214.57 40.42 8.27 4.35 19.10 0.03 0.27 0.50 27.56 3081.44 1549.96 2017.16 86.18 1466.59 8201.33 37.57 18.90 24.59 1.05 17.88 100.00 As at 31st march 2007 % of Total

Total current liabilities

4406.00

100.00

45

6.3.3.3 COMMON SIZE STATEMENT ANALYSIS COMMON SIZE STATEMENT ANALYSIS FOR THE YEAR (2007-2008) [Rupees in lakhs] Particulars Current Assets: Inventories Sundry Debtors Cash & Bank balances Interest Receivable Loan & Advances Total current Assets Current Liabilities Sundry creditors Advances received Security Deposits Interest accrued Bank Credit Unclaimed matured deposits Unclaimed matured bonds Interest accrued on matured deposits Other liabilities 2207.50 524.47 209.67 527.75 0.19 11.03 0.83 4.37 1293.11 4778.92 Total current liabilities 46.19 10.97 4.39 11.04 0.01 0.23 0.02 0.09 27.06 100.00 4220.69 1908.45 6135.12 142.18 1930.19 14333.63 29.45 13.31 42.78 0.99 13.47 100.00 As at 31st march 2008 % of Total

46

6.3.3.4 COMMON SIZE STATEMENT ANALYSIS COMMON SIZE STATEMENT ANALYSIS FOR THE YEAR (2008-2009) [Rupees in lakhs] Particulars Current Assets: Inventories Sundry Debtors Cash & Bank balances Interest Receivable Loan & Advances Total current Assets Current Liabilities Sundry creditors Advances received Security Deposits Interest accrued Bank Credit Unclaimed matured deposits Unclaimed matured bonds Interest accrued on matured deposits Other liabilities Total current liabilities 2427.36 536.26 232.30 3.27 5.14 0.60 2.50 2.59 1608.36 5191.70 46.75 10.33 4.47 7.24 0.06 0.10 0.02 0.05 30.98 100.00 6210.06 1881.73 6172.64 85.48 3033.82 17383.73 35.72 10.82 35.51 0.49 17.49 100.00 As at 31st march 2009 % of Total

47

6.3.3.5 COMMON SIZE STATEMENT ANALYSIS COMMON SIZE STATEMENT ANALYSIS FOR THE YEAR (2009-2010) [Rupees in lakhs] Particulars Current Assets: Inventories Sundry Debtors Cash & Bank balances Interest Receivable Loan & Advances Total current Assets Current Liabilities Sundry creditors Advances received Security Deposits Interest accrued Bank Credit Unclaimed matured deposits Unclaimed matured bonds Interest accrued on matured deposits Other liabilities Total current liabilities 2545.07 631.68 257.76 198.79 4.30 2.19 0.20 0.74 1757.47 5398.20 47.15 11.70 4.77 3.68 0.08 0.04 0.01 0.02 32.55 100.00 6651.47 2314.75 9609.83 152.56 1650.01 20378.62 32.44 11.36 47.15 0.75 8.10 100.00 As at 31st march 2010 % of Total

48

CHAPTER - VII FINDINGS:

 The working capital turnover ratio indicates that the company was good in efficient management of working capital in the year 2005-06 and from the subsequent years it starts decreasing.  The fixed asset ratio shows that the company is good in making use of the fixed assets for sales.  The debtors turnover ratio is increasing year by year so the company is efficient in the management of debtors.  The creditors turnover ratio is increasing year by year. So the company is good in paying the debts.  The stock turnover ratio is decreasing. Because of the proper movement of inventory.  From the comparative statement of working capital for the year 2005-06, we can infer that there is a good increase in current assets such as cash and bank balances, sundry debtors and loans and advances and there is decrease in current liabilities. So they are good in meeting the debts.  The comparative statement of working capital for the year 2006-07 shows that there is a good increase in current assets such as cash and bank balances and loans and advances but there is not much decrease in current liabilities so they have to concentrate on current liabilities.  From the comparative statement of working capital for the year 2007-08 we can infer that there is a very good increase in all the current assets and they are good in meeting the current liabilities also.  From the comparative statement of working capital for the year 2008-09 we can see that there is an increase in current assets such as inventories and loan and advances and their current liabilities has shown a significant improvement in the case of bank credit.  From the comparative statement of working capital for the year 2009-10 we can interpret that there is a good increase in current assets and they are good in repaying the current liabilities also.

49

CHAPTER - VIII SUGGESTIONS:

 From the activity ratio we can infer that the company is good in making the turnover. So they are efficient in conducting the business.  From the liquid ratio it can be seen that the company does not meet the standard norms so they have to concentrate in maintaining the current assets to meet the contingencies.  From the solvency ratio we can suggest that the company can reduce the borrowings.  From the comparative statements of working capital we can say that the company has made significant improvement. Their current assets are increasing but they can decrease borrowing.

50

CHAPTER - IX CONCLUSION:
Finance is the lifeblood of every business. Working capital is a vital element in it. A company should maintain balanced working capital because excess working capital will result in unnecessary accumulation of inventories, defective credit policy, etc. Inadequate working capital will affect the growth and the net profit of the organization. Geetha Krishna Spinning Mills (p) Limited, Rajapalayam has got good working capital in last five years. A balanced approach should be followed by the organization to finance permanent current assets by long-term sources and temporary current assets by short term sources of finance.

51

CHAPTER - X BIBLIOGRAPHY
1. C.R.Kothari (2008),Research Methodology, 2nd edition, New Age International Publishers, Chennai. 2. I.M.Pandey (2008), Financial Management, 9th Edition, Vikas Publishing House Private Ltd. 3. T.S.Reddy and Dr. Y. Hari Prasad Reddy (2006), Management Accounting 3rd Edition, Margham Publications, Chennai. 4. Maheshwari.S.N (2006), Principal of management accounting 4th edition, Sultan chand and sons, New Delhi. 5. Hrishikes Bhattacharya (2003), Working Capital Management strategies and Techniques, Prentice-Hall India publications. 6. Satish B.Mathur (2000), Working Capital Management and Control, New Age International Publications. 7. http://search.ebscohost.com 8. www.ask.com 9. www.wikipedia.com

52