Chapter I INTRODUCTION

INTRODUCTION
In an agriculture intensive country like India, the significance of fertilizers is plain . Equally evident is the complexity involved in

manufacturing fertilizers. Fertilizer has played a very important role in the growth of Indian agriculture. Fertilizer is substance that is added a soil to stimulate plants growth from thousands of years. Farmers use various kinds of natural fertilizers to produce abundant crops. India is the thirds largest producer of chemical fertilizers in the world and also accounts for about 12% of world fertilizer consumption. The country produces several straight nitrogenous fertilizers such as urea, ammonium

sulpahate, calcium, phosphate and several NPK completes urea and DAP are the main fertilizers produced in India. Nagarjuna fertilizers, coromandel

fertilizers and FACT are some of the fertilizer companies in India. Making fertilizers in India is not easy. The Fertilizers and chemicals Travancore Ltd is the first large scale fertilizer unit in India. It was set up in 1943 , on the banks of Periyar at Udyoganmandal near Cochin Port. FACT was set up as a public limited join stock company, under shesharyee Brothers Management . FACT became a Kerala state punlic sector Enterprises on 1 st August 1960 and on 21st November 1962 the Govy. Of India became major

shareholders. The company started its commercial p[roduction in 1947 with single Ammonium sulpahae plant .

PROBLEM FORMULATION The project work is conducted in Fertilizers and Chemicals Travancore Ltd and is mainly focused on the working capital management and profitability during the last 5 financial years (2005-2010)

Working capital means the fund required for meeting day to day operation of an enterprise. Working capital has to be regarded as one of the conditioning factors in the long run operation of a firm. Investment in current asset is also essential for the operation of a business. The management of working capital is an integral part of over all corporate management. Every business needs some amount of working capital. The need for working capital arises due to the time gap between production and realization of cash from sales. So it helps to measure the degree of protection against problems that might cause a shortage of funds. If a firm cants maintain sufficient level of working capital, it is likely to be insolvent and even may be forced in to bankruptcy. Excessive working capital may affect the liquidity position,. Impact of mismanagement, working capital will be very much adverse on the performance of any firm.

A study on working capital is important to internal & external analysis because of its close relationship with the day to day operations of a business. Here the study to analyse the working capital position of FACT, the approach use to finance its working capital ,its management of current assets and the components of current assets. Profit is the engine that drives the business enterprise. A business needs profit not only for its existence but also for expansion ad diversification. Therefore, the organization has to attain maximum economic efficiency. It is necessary to earn sufficient profits in order to produce funds from investors to expansion and growth. The management strives to achieve maximum

operating efficiency and increase return to investors. The management has to

3

increase the confidence of creditors as well as financial institution whom extent financial assistance to the company. These entire objectives are

achieved by measuring the profits earned and available dispersal and adopting new measures to increase profits.

OBJECTIVES OF THE STUDY 1. To analyse the structure and growth of working capital of the FACT for the period of 2005-06 to 2010-11. 2. To analyse and evaluate the working capital position. 3. To ascertain the profitability of the firm 4. To ascertain the duration of operation cycle of the company 5. To analyse the effectiveness of the FACT in managing the different elements of working capital viz cash, receivables& inventory. 6. To analyse to major source of funds and their application in financing the working capital requirements of the firm . 7. To assess the liquidity of the firm. 8. To find out whether the company working capital or not . 9. To appraise financial position of the company through ratios. maintains satisfactory level of

RESEARCH METHODOLOGY The study is undertaken to analyse the working capital management and profitability of the FACT Ltd, undyoghamandal, Eroor, Cochin, and Kerala.

SOURCES OF DATA Both primary and secondary data were used for the study Primary data collected through discussion and interview with the officials of finance department.

 Secondary data was collected from the annual reports of the company books and periodicals and other literature relevant for the study Website of FACT

Tools used for the study The tools used here can be classified as :1. Financial accounting Tools- Ratio Analysis 2. Mathematical of statistical Tools - Trend Analysis , Percentage Analysis

Representation of data Tables Bar chart Line chart Pie chart LIMITATIONS OF THE STUDY 1. The analysis of working capital and profitability study are based on the published annual report of the company. 2. The study is restricted to a period of 5 years. 3. Ratio analysis itself has its own limitations, hence the study may be affected by this. PERIOD OF THE STUDY The period considered for the purpose of the study on FACT is for 5 years i.e from 2005-06 to 2009-2010.

Chapter II ORGANASATIONAL PROFILE

Industry profile Company profile Product profile Organizational structure

INDUSTRY PROFILE

INDUSTRY PROFILE

Fertilizer and Fertilizer industry Fertilizer is generally defined as Any material, organic or inorganic natural and synthetic big supplies one or more of the chemical element required fir plant growth. The essential elements required for the plant

growth consists of both primary as well as secondary nutrients. These are required in micro as well as macro quantities .

Carbon , Oxygen and hydrogen plant are supplied by air and water there is not treated as nutrients by fertilizer industry. Primary nutrients are normally supplied through chemical fertilizers. They are chemical components containing one or more of the primary nutrients sand are important ingredients for the plant growth . Nitrogen, Phosphorus and Potassium which constitute primary nutrients are expressed as percentage of total Nitrogen (N) available phosphate (P205) and soluble (K20).

International Scenario:The use of manure and compost is probably as old as agriculture itself and many other materials such as ground bonds, wood ash from burning the fallen trees, were the employer long before the chemistry of soil. The

disappearance frontiers companied with the improvements in the technology of the fertilizer manufacture ad here transportation led to a growing role fertilizer for producing the need food and fiber.

Worlds leading fertilizer producers are Russia an US,. Other leading producer includes China, Canada, France and India. The Fertilizer industry in US is organized in to separate segment for producing and making Nitrogen,

Phosphate or Potash, intermediates and products. Around 95% of the fertilizer produced in the world is used by farm crops. Industry in the European Union is governed by wide number of manufacturing regulations. A regulation pertaining to the fertilizer industry covers health and safety of employees and general public conditions for safe storage and transportation of manufactured fertilizer natural and intermediates limits on to the mission of atmosphere and water limits on noise level and treatment and disposal of waste products resulting form the production of fertilizer intermediates. All fertilizer manufactures in the European Union strive to minimize the environmental impact of their manufacturing processes both by improving the efficiency of these processes and by reducing wastages.

National Scenario:Indian economy is an agrarian economy. Agriculture is the back bone of the Indian economy. India is the 31 largest producer as well as consumer of fertilizer in the world with population growing at a faster rate food production was given highest priority in India since 1990s . Fertilizers play an important role in agriculture development for ensuring food security of humble beginning in 1906 , when the first manufacturing units of single space phosphate were set up in Ranipet near Chennai with an annual capacity of 6000MT. Fertilizer and chemical industry in India is undergone major transformation . This industry is gradually being decontrolled. Pricing is also being replaced by market determined pricing . The FACT at cochin in Kerala and FCI (Fertilizer corporation of India) in Sindri, Bihar where the first large sized fertilizer plants set up in the forties and fifties with a view to establish an industrial base
9

to achieve self sufficiency in food grains subsequently, Green Revolution in last sixties gave an impetus growth of fertilizer industry in India. seventies and eighties witnessed a significant addition to the fertilizer The

production capacity. The rapid building up of fertilizer production capacity in the country has been achieved as a result of a factorable policy environment facilitating large investment in the public cooperative and private sector.

Presently there are 57 large sized fertilizer plants in the country manufacturing a wide range of Nitrogenous phosphate and complex fertilizers. 13 plants manufactured Ammonium sulphate, Calcium Ammonium, Nitrate and other low analysis nitrogenous fertilizers. . Besides there are about 64 medium and small scale units in operation producing single space phosphate the fertilizer in India consists of three major players. The Government owned public

sectors, the fertilizer industry has IFFCO, KRIBHCO and units from private sectors. The fertilizer industry has organized itself through FAI (Fertilizer Association of India) to co-operative with government of India to achieve the macro economic objectives relate to agricultural sector and to provide other services.

Fertilizer industry in India is almost solely dependent on imported raw materials like phosphoric acid for the production of Phosphate and complex fertilizers . The over dependence and high volatility of prices of feed stock are the major issues controlling the industry.

State scenario:Kerala has high degree of land use and cropping intensity. agricultural productivity is decreasing year to year. The states

The production and

cultivation of rice is decreasing and the farmers are attended to commercial

10

crops like rubber and coconut. Due to the decreasing cultivation of rice the consumption of hit rate and potash has come down.

The per hector consumption of fertilizer in India. The position of Kerala is one of the low ranking states. In Kerala FACT has sold total volume of 2333373 MT against target tons of FACTAMFOS was sold during the year achieving 70 percentage of target. To gain market share FACT is planning to increase its marketing programmes in several areas of Kerala state. The main competitors of FACY are SPIC and Madras fertilizers Ltd.

11

COMPANY PROFILE

12

COMPANY PROFILE
History of the company Agriculture has always been the mainstay of our people and we have been tilling the land and reaping the harvests for hundreds of years. This naturally found us un a situation where the land was becoming less bountiful. The yield was getting lower and lower and in the early half of this century we fund we had to depend on import to meet our minimum food grain requirement. The simple ruth is that land had been losing its fertility for long years of repeated cultivation yawned on us much too late. What we ere putting back in the form of organic nature was hardly adequate to replenish the soil or to correct the imbalance in the fertility status of the land under cultivation. Advanced

countries elsewhere had discovered the answer to this problem in chemical fertilizers and some of the large scale farming entrepreneurs like foreign owned plantations in India also were importing chemical fertilizers for their own use.

The Second World War, which cut off traditional sources of import of food grains, aggravated our problem and famine conditions that prevailed in income part of the country made us sit up and think chemical fertilizers were this answer. But we did not know the technical know-how, raw materials or the resources by setting up fertilizer plants. It was a daring and farsighted

administration of Travancore (Kerala) Dr.C.P. Ramaswamy Iyer had overcome the obstacle and paved his way for setting up a chemical fertilizers factory in a

13

fill then unheard village in Cerala with those little resources that available, and adopting technology and raw materials that could be measured up.

FACT, Indias first large scale fertilizer units was set up in 1943 , on the bank of river periyar at Udyogamandal . FACT was the first scale fertilizer factory in the country. It started its working in 1944 as a public limited joint stock company under the management of M/S Seshasayee Brothers. The company is under the administrative control of the department of fertilizers and ministry of chemicals and fertilizer. In 1947 FACT Udyogamandal started production of Ammonium Sulphate with an installed capacity of 10,000MT Nitrogen. FACT becomes Kerala state Public sector enterprises ion 15* August 1960 and 21st November 1962 the Government of India becomes the major shareholder. The second stage of expansion of FACT was completed in 1962 . The 3 rd stage expansion of FACT was completed Ammonium Sulphate plant. FACT Engineering and Design organization was et up on 24 th July 1965 to meet the emerging need for indigenous capabilities in Intel area of Engineering Design and consultancy for establishing large and modern fertilizer plants . FEDO has since then diversified in to chemicals, Petrochemicals, Hydrometallurgy, Pharmaceuticals and other areas. FEDO offers services in 1965 with setting up of a new

from project identification and evaluation stage to plant design, procurement, project management, site supervision and commissioning of new plant was well as revamping and modernization of old plants. FACT engineering works was established on 13th April 1996 as a unit: o fabricate and install equipments for fertilizer plants.
14

Over the years few

developed

capabilities in the fabrication of pressure vessels and heat

exchangers. FEW have also undertake lying of cross country piping, fabrication and installation of large Denstocks of hydro projects .

The Cochin Division of FACT, the 2nd production unit was set up at Ambalamedu and the 1st phase was commissioned in 1973 . The 2nd phase of FACT Cochin Division was commissioned in 1976. As diversification plants from the traditional field of fertilizers and chemicals, 50000 TPA Caprolactam plant at Udyogamandal was commissioned in 1990. FACT set up 900 TPD Ammonium plant at Udyogamandal at a cost of 638 crore follwing an order of the High Court of Kerala in February 1994 for the public interest litigation, to decommission the existing imported Ammonia The

storage and handling facility at Wellington Island 9Xohin Port).

Ammonium plant was commissioned in 1998. The companys main business is manufacturing and marketing of (a) fertilizer (b) Caprolactam and Engineering consultancy and fabrication of equipment. FACT DIVISIONS The major divisions of FACT are:UDYOGAMANDAL DIVISION The Udyogamandal Division of FACT can be the mother unit of the entire commissioning of a 50,000 tonnes per annum. Ammonium Sulphate plant in 1947. The oldest division of FACT has undergone several stages of expansion and diversification giving up old and obsolete teaching and installing new and sophisticated plants making use of Naphtha as raw material, Today the Udyogamandal Division has an installed capacity of 76050 tonnes of P2054. Ammonium Sulphate liquor obtained as a by products from the Caprolactam plant of the petrochemical division is converted in to a useful fertilizer product

15

in a new Ammonium Sulphate plant of 225000TAP capacities, put up in October 1990 at cost of Rs. 35 crore.

In the decades that followed multistage expansion programmes were undertaken bringing in the latest technology of the day, which were quickly mastered, and successfully implemented. Today , the division is 35 year old small capacity plants and 2 year old state of the technology plants .

The latest addition to this unit is a 900TPD Ammonium Complex setup with an investment of Rs. 642 crore. FACT Udyogamandal Division is ISO 14001 certified.

COCHIN DIVISION FACT Cochin Division was set up in the 1970s at Ambalamedu, 30 Km from udyogamandal and adjacent to the Cochin Refineries . Phase 1 of the division saw the setting up of integrated Ammonia, Urea Complex utilizing Indian Engineering skills. A large scale complex fertilizer plant of 485 TPA was setup on phase 2 of Cochin Division and Sulphuric Acid and Phosphoric of making plant capacity. PETROCHEMICAL DIVISION FACT diversified in to petro chemicals Caprolactam . in 1990 with the production of

The versatile petro chemical is the raw material in the

manufacture of Nylon-6, which finds extensive application in textiles and engineering products. To its high quality of production has been

acknowledged as among the best in the world. The plant has a production capacity of 50000 tonnes of Caprolactam and 225000 tonnes of Ammonium
16

Sulphate a year . Small qualities of Nitric Acid and Soda Ash are obtained as by products. FACT is only one of the two manufactures of Caprolactam in India; the other is Gujarat State Fertilizers corporation Limited (GSFC), FACTs Caprolactam is exported to china, Taiwan, Thailand and Sri Lanka. Considerable amount of foreign exchange is earned through this export .

The division is located adjacent to the Udyogamandal Division. Co-product Sulphate is transferred for processing fertilizer plant of Udyogamandal Division. In Petro Chemical there are several plants for each step. Waste recovery efficient treatment captive power plant and other water treatment are also there in petro chemical and cautionary measures are taken gas detection, fire protection and prevent productive and pollution control awards are also achieved by this division . The petro chemical Division is ISO 9002 and 14001 Certified .

MARKETING DIVISION

FACT Marketing Division is spread over the southern states of Kerala, Tamil Nadu, Podicherry, Karnataka and Andhra Preadesh. The distribution network consists of 100 Agro services centers, 50 fold storage points and over 7900 retails selling points in these states, and serves the farmers by the supply of fertilizers and agronomy device through innovative farmer education fertilizer promotion and

programmes, FACT has created awareness about

scientific cultivation and fertilizer use. FACT Marketing Division has various departments like: Sales Distribution Marketing research
17

Various processes have been developed and patented by FACT Research and Development division of which has been commercialized successfully. A 150 TPA bio fertilizer plant is set at Research and Development centre.

FACT MANAGEMENT AND DEVELOPMENT CENTRE (MDC) MDS was established in April 1978 and is engaged in the training and development of managerial personnel. The training philosophy spring from the conviction that there exists a compelling need to continuously prepare Managers for tomorrows challenges. The centre has adequate facilities for conducting management training programmes. COMPUTER SERVICE CENTRE FACT computerized its activities since 1965 to meet the growing need for management information in engineering and commercial applications. The centre is equipped with services in all its division connecting by FACT Net and interact network. Today computer service centre is equipped with divisional data base servers at each of the three production division, a corporate server and around 500 PC nodes. The computing nodes are connected via WAN at inter divisional level through 64 kpbs BSNL learned a department level. A

corporate INTRANET on WINDOWS NT platform and are being migrated organizations are developed and maintained in house buy the skilled work force at computer service centre. The include production MIS, payroll system , financial accounting system, materials and maintenance system, Human resources management system, process optimization system and assonance recording system.

In on- line integrated Information System (OHS) linking all functional areas of the enterprises are under the implementation by MIS Tata consultancy
18

service. The integrate system which is based on the oracle 8 platform would optimize the business proceeds of the enterprise and provide information support for speedy decision making.

Consistent with our commitment to environment health all necessary safeguard have been built in to take of water and atmosphere pollution caused by efficient and liquids thrown form factory.

VISION OF THE COMPANY With a decade FACT will emerge as a leader in the business of agricultural inputs, industrial intermediaries and engineering consultancy and construction of industrial infrastructure facilities following things to the company. It wills begins its financial health in the shortest possible time and strive to improve shareholder value . It will attract capital managerial trends through suitable modification to its financial organization and leadership structure. It will become an effective and competitive manufacturer and The above vision would mean the

distributor of products and services with high emphasis on information technology.

It will collaborate with the local industry and also globally. It will design and develop technology to manufacture and distribute new products and services to satisfy customer requirements in the above area or business. It shall faster sustainable development through clean and environment friendly technology process and be responsible corporate citizen.
19

MISSION OF THE COMPANY FACTs mission is to function as a dependable and competitive producer of fertilizer and other allied products and to develop self reliance in the field of engineering and technology especially inn the field of fertilizers, chemicals and petrochemicals, oil and gas industries. The above vision would mean: FACT aims to provide best products and services. Globally competitive supplier means the products and services offered by FACT will match with the quality and price offered by competing international firms. Maximum shareholder value would mean that the company would operate profitability and generate enough resources for growth. To

sustain such growth the company would identify profitable opportunities and diversify.

MILESTONES 22.9.43 26.647 1959-60 15.8.60 21.11.62 1962 24.7.65 13.4.66

incorporation Production started U.D-1st stage expansion completed. FACT came under public sector Government of India Major shareholder. U.D 2nd stage expansion completed FACT Engineering and Design organization Started

FACT Engineering Works

20

 7.6.66 15.10.66 1.10.71 1.10.73 27.4.73 10.11.76 10-12-76 1.4.79 18.5.84 6.8.85 13.12.89 20-12-90 1.3.91 1.3.91 25.9.93 22.3.98

C.D. phase 1 License Issued U.D.3rd stage ammonia plant U.D 4th stage ammonia plant U.D4th stage150T.P.D ammonium, phosphate. C.D-1st urea plant commissioned C.D-11-Sulphuric acid plant commissioned Phosphoric acid plant commissioned C.D. NPK commer5cial production started. P.D Caprolactum, technical collaboration agreement

P.D. caprolactum license issued FEW shifted To Pallurthy C.D- 12 M.W captive power plant P.D. caprolactum commercial production Started

U.D. ammonium sulphate commercial production started

Foundations tone -900 T.P.D ammonia plant 900 T.P.D. ammonia plant commercial

Objectives of the FACT

1. To maintain optimum levels of efficiency and productivity in all activities 2. To generate a reasonable rate of return on investment

21

3. To continuously improve the plant and operational safety to achieve statutory pollution control standards. 4. To carry out R&D activities for recovery of useful material and products and improve the efficiency of fertilizers and chemicals. 5. To make reduction in cost and technology up gradation in order to compete with the rivals and to stay in the business. 6. To invest in new business lines where profit can be made ion a sustainable basis over the long term. 7. To take care the community around SOME SPECIAL FEACTURES OF FACT FACT is one of the largest fertilizer companies using sophisticated process technology . It manufactures Caprolactam, a versatile petrochemical Specialists in engineering design and project consultancy Undertaken fabrication works for process and infrastructure industry. Award winning Research ad Development centre with a number of patents to its credit, A state of art IT centres. Nucleus for training managers of today and tomorrow. The mother unit of fertilizer industry in India .

22

FUTURE PLANS Increasing the sales by reducing the cost. Reduce cost of production Increasing the quality of export by maintaining the good quality. Reducing the promotional cost Expansion of business from south India FACT, Egypt and Syria project Marketing of Organic Fertilizer . Fact intends to setup container freight station at Udyogamandal in association with Container Corporation warehousing corporation. New Urea plant OUT LOOK FOR THE FUTURE On completion of all these projects & implementation of the vision plan for the next 5 years, FACT will become profitable on a substantial basis. The of India Ltd & Central

profitability will increase substantially after FACT is able to switch over from Naphtha to LNG as Feed stock . FACT expects to achieve a 100% increase in its present turnover & profit during the next 5 years. BOARD OF FIRECTORS 1. Dr, Geporge sleeba- chairman and M.D 2. Sri Ashokan .A - director (marketing)

23

3. Sri.K.Madhavan pillai - Director (Finance) 4. Sri. Mathew . C.Kunnumkal IAS- Director 5. Sri rajesh agarwal IAS- Director. 6. Ms. Pratibha Karan - Non official part - time director. 7. Sri. T.M.J.eyachandran - Non-official part -time director. 8. Sri. Khan Masood Ahmad - Non official part -time director . 9. Dr. R.K. Mishra-Non official part- time director . 10.Dr. B.S. Ghuman-Non -official part time director. 11.Dr. R.Kanan phD I.A.S -Chief Vigilance officer. EXECUTIVE DIRECTORS 1. Sri. Venkatakrishnan - executive director (Finance ) 2. Sri.K.V. Balakrishnan - company secretary

24

PRODUCT PROFILE

25

PRODUCT PROFILE
FACT manufactures straight fertilizers , complex fertilizers, fertilizer mixtures, and chemicals . Finished Products Ammonium Sulphare - Udyogamandal Division Ammonium phosphate /Complex fertilizers/ Factamfos - Udyogamandal Division &Cochin Division Caprolactam - Petrochemical Division Bio- fertilizers- research & Deployment Division Exported Products

Carolactam - Petrochemical Division Ammonium Sulphate - Udyogamandal Division

26

ORGANISATIONAL STRUCTURE

27

ORGANISATION STRUCTURE
ORGANIZATION CHART INCDICATING REPORTING RELATIONSHIP BOARD OF DIRECTORS

CMD

CVO

DIR (TECH)

DIR (FIN)

DIR (MAR)

GM CD

GM UC

GM (Per)

GM (CF)

CGR/ED (MAR)

GM(IA) DGM CD

DGM Financing DGM legal DGM Cor mat DGM FEW DGM FEW

DGM Costing

DGM A/C

CM (UD)

CM (PD)

DGM (Adm &co.sec)

Tech ser Safety & Fire Duality assurance stores projects

Production Tech services safety & fire Quality assurance Maintaince R&D Projects

Per .Est. Ind.rel Pub.rel M.D.C Welfare

Sales Distribution Agronomy Area manager Prom. Ser.

28

FINANCE DEPARTMENT
Finance is considered to be the lifeblood of every organization. Managing finance is very important the success of every organization. The functions within the finance department are diverse with distinct procedures for accounts related to personnel;, purchase, costing, budgets, tax and duties , audit, general a/c, bank and payroll, bills and so on. Accounting Procedure In a multi unit organization , it is necessary to lay down uniform classification in the financial accounts to be followed by all the units . A 9- digit code number is used to record all transitions, First 4 digits indicates the general account, last 5 digits indicates the sub ledger accounts. Main functions of the Finance Department

1. Preparation of final accounts 2. Preparation of bank advice statement 3. Budget preparation 4. Payroll system 5. {reparation of monthly journal, ledger and trial balance 6. Calculation of attendance bonus 7. Auditing 8. Preparation of cost sheet etc.

29

General Accounting section 1. Maintenance of registers for fixed assets, giving details of depreciation and Classification of asset etc 2. Ledger scrutiny 3. Inter unit reconciliation for inter unit transactions Cash and Bank Accounts Section 1. Receipt of cash, cheques, bank drafts, and postal orders 2. Payment of cash, cheques, bank drafts, and letters of authority 3. Handling of bam deposits/withdrawals, custody of cash and interunit Transfer of funds 4. Maintenance of petty cash books and cash book 5. Reconciliation of bank accounts 6. Security arrangement of cash handling 7. Safe custody of valuable documents 8. Cash interests 9. Any other duties assigned buy authorized officer. Payroll Section Functions 1. Preatation and disbursement of salaries and wages to managerial and non- managerial employees 2. Effects various recoveries through payroll and remit the same to concerned Agencies 3. Processing of various personal payments, advances etc 4. Keeps books of a/c for the above transactions
30

Budget Section Budget preparation- every year two separate budgets are prepared 1) Capital Budget 2) Revenue Budget Both the budget is usually prepared during September /October every year. Two types of estimates are prepared for both the budget i.e., the revise Estimate (RE) and Budget Estimate (BE) . RE is the revised budget for the current year and BE is the budget for the next year . Corporate Plan Corporate plan is prepared by taking estimates and future projection for 5 years. The corporate plan is revised every year by deleting one year in the beginning and one year in the end, keeping total budget period as 5 years, This plan projects the companys position for the next 5 years. Capital Budget The capital Budget shows all the items of capital expenditure to be undertaken during the budget period Revenue Budget Control of revenue expenditure is achieved through the revenue budget for the next financial year and revisions of revenue budget for the current year are taken up together.

31

Bills Section Bill section deals with the contract accounts for execution of civil works and other works for construction/ erection/maintenance /service . It Includes :1. Sale of tender form 2. Remittance of EMD 3. Remittance of security deposit 4. Issue of materials o to the extractors. 5. Receipts to certified bill in the specified format 6. Security of running a/c bills and final bill 7. Statutory procedures and formalities in works contract. Foreign Currency management Committee formed to look and take designs on a periodic basis relating to the foreign currency. The committee has been constituted with chief of internal audit as chairman and members being the chief of finance, heads of cochin division, petrochemical division and head office . Stores Accounts Section The section shall maintain quantity and valuable accounts of receipts issues and balances of stores in hand; reconcile the numerical balance held by the stores department with the value account . Insurance Schemes 1. Fire Insurance 2. Machine break down insurance 3. Electronics equipment insurance
32

4. Fidelity insurance and cash in transit/cash at sage/payroll insurance 5. Insurance for vehicles and heavy equipments 6. Open transit risk insurance for all inland and all foreign purchases 7. Loss on profit insurance 8. personal accident insurance 9. Storage -cum-erection insurance 10.Insurance for stock of finished goods, raw materials, & industrial products Cost Accounts Section Cost Center Cost records in production divisions are maintained on the basis of cost centers. A cost center is a location or an equipment or group of both together for which cost can be ascertained separately. An expenditure which is incurred exclusively for a cost centre and can be identified as relating to a specific cost centre will be location or identification to a cost centre is not possible , such expenditure will be apportioned to different cost centers on an accepted or pre determined basis . Cost of Production The process cost system is followed in the production divisions for finding out the cost of production of various products and services . Cost sheet is prepared in two ways. The items in the cost sheet are complied on the baswis of elements of the products, Cost sheet of all the products are prepared both in process wise and elements wise . Compilation of annual accounts; 1. P&L Account 2. Balance sheet
33

Published accounts of the company includes 1. P&L a/c and P&L appropriation a/c 2. Balance sheet 3. Auditors report 4. Board of directors report 5. Information required as per stock exchange requirements Estimation of Working capital needs in FACT The working capital requirement is essential for any iron to meet its day to day requirements. Working capital may be specified as the firms current assets over current liabilities . As a large scale company,. FACT also requires a sufficient working capital to meet its daily requirements. FACT uses letter of credit and bank guarantee mainly for the purpose of financing the import of rasw material. If it has to avail more than the assigned quota the finance department will have to take permission of Board of Directors. FACT approaches different banks to meet its working capital

requirement and FACT maintain a consortium of banks for the same, they are: Cash management techniques in FACT Cash management techniques have done through the preparation of cash budget. It is routinely prepared in FACT and it helps in : Estimating cash requirements Planning short term financing Scheduling payments in connection with capital expenditure Planning purchase of material ]Planning credit policy

34

The cash forecasting prepaed under this method shows the timing and magnitude of the expected cash receipts and payments over the forecasted. Period . It includesd all expected receipts and payments irrespective of how they are classified in accounts.

35

STRUCTURE OF FINANCE DEPARTMENT

DIRECTOR FINANCE

DGM I.A

DGM (F) COSTIN G

DGM (F) BANKING PAYROL

DGM FINANCE

DGM FINANCE &A/C

DY.CM

DY.CM (IA)

DY.CM BANKING

DY. CM GEN

CM(F) SALES

CM(F) BILLS

DY.CM SALES DY.CM COSTI N DY.CM TAX

DY.CM BILLS

AM BANKI NG

AM. PAYRO LL

DY. FINANC E

AM COS

AM FIANC E

Am GEM A/C AM sales

AM BAN K

AM TAX

AM INS
AM RM 36

CO LL AM BILL AM FIN

Chapter III THEORETICAL FRAMEWORK

37

THEORETICAL FRAMEWORK TOOLS USED: Ratio Analysis One of the most important financial tools which have come to be used very frequently for analyzing the financial strengths and weaknesses of the enterprise is ratio analysis. Ratio analysis is the process of determining and presenting in arithmetical terms the relationship between figures and groups of figures drawn from these statements. Ratio may be expressed in either of three ways. It may be a quotient obtained by dividing one value by the other. This unit of expression as times. If the quotient is multiplied by one hundred, the unit of expression becomes percentage. It may also be stated n terms of proportion between the two figures. Thus, times percentages and proportions are three forms of

expressing ratio . Significance of Ratio Analysis Ratios are exceptionally useful tools with which one can judge financial performance of the enterprise over a period of time. The efficiency of the enterprise can also be judged against the industry average. In vertical analysis ratios help0 the analyst to form a judgment whether performance of the firm at a point of time is good or bad. Likewise, use of ratios in horizontal analysis indicates whether the financial condition of the firm is improving or deteriorating and whether the cost, profitability or efficiency is showing an upward or downward trend. A study of the trend of strategic ratios may help the management in the task of planning and forecasting . At times , the investment decisions are based on the condition revealed by certain rations. In this way it serves as handmaid to the management .
38

Limitations of ratio Analysis Ratios should be used with extreme care because they suffer from certain serious drawback. Some of them are listed below: 1. Ratios can sometimes be misleading, if an analyst does not know the reliability and soundness of the figures from which they are computed and the financial position of the business at other times of the year . 2. The mechanics of ratio construction are not as important as the proper interpretation of the ratios. As a matter of fact, ratios are only a

preliminary step in interpretation. They call attention to certain aspects if the business which need detailed investigation before arriving at any final conclusion. 3. Inter firm comparison on the basis of ratio analysis is distorted because of the different practices followed by different firms in respect of

allocation of the cost of fixed assets and inventory utilization as also of the selling and intangible costs between different time periods. Unless there is consistency in adoption of accounting methods, ratios may not prove of greater use . 4. Price level change makes ratio analysis difficult. TYPES OF RATIOS: A. LIQUIDITY RATIOS Liquidity ratios provide test to measure the ability of the firm to cover its short term obligations out of its short term resources. Interpretation of liquidity ratios provides considerable insight into the present cash solvency of the firm and its ability to remain solvent in times of adversities . Two commonly used liquidity ratios are : current ratio and quick ratio.
39

(i)

Current Ratio Current ratio is an indicator of the firms commitment to meet its short term liabilities. Current assets mean asset that will either be used up or converted in to cash with in a years time or normal operating cycle of the business which ever is longer. Current

liabilities mean liabilities payable within a year or during the operating cycle of the business, whichever is longer, out of the existing current assets or by creation of other current liabilities.

(ii)

Quick Ratio This ratio is also known as liquid ratio or acid test ratio. It

establishes the relationship between liquid assets and current liabilities. The term liquid or quick assets includes all the current assets minus inventory and prepaid expenses.

B. ACTIVITY RATIOS Activity ratios reflect how efficiently the firm is managing its resources. These rations express relationships between the level of sales and the investment in various assets: inventories, receivable, fixed assets , etc. (i) Working Capital Turnover ratio

Working capital turnover ratio indicates that whether or not working capital has been effectively utilized in making sales. Working capital turnover ratio indicates the velocity of utilization of net working capital. This ratio represents the number of times the working capital is turned over in the course of business during a year .

40

(ii) Fixed Assets Turnover ratio This ratio is calculated by dividing sales to fixed assets. It is used to highlights the extent of utilization of the firms plant and equipment . A low ratio is indicative of the poor utilization of the existing plant capacity

(iii) Current assets to capital employed ratio This ratio reveals the relationship between amount invested in current asset and total capital employed by the organization. The analysis of current assets to capital employed ratio highlights the importance of

efficient and effective management of current assets in an organization.

(iv) Receivables /Debtors turnover ratio This ratio means that relationship between credit sales during a

particular period and the average receivables outstanding during the period. Debtors turn over ratio indicates the number of times the debtors turnover each year. (v) Average collection period Average collection period is a measure of receivable turnover. Its

computation involves two steps . In the first instance, annual sales are dividedly 365 to get the average daily sales. In the second stage, daily sales are divided in to accounts receivable t5io find the number of days sales tied up in receivables. This gives average collection period because it represents the average length of time that the firm must wait after making a sale before receiving cash. This ratio show the credit and collection policies of the firm and the effectiveness of collection machinery

41

(vi) Payable/creditors turnover ratio This ratio indicates the speed with which the payments are made to the trade creditors. It establishes the relationship between net credit purchases and average accounts payable.

(vii) Average payment period It measures the average credit period enjoyed from the creditors (viii) Inventory Turnover Inventory turnover is computed by dividing the cost of goods sold by the average inventory for the period . This ratio gives the number of times the inventory is replaced during a given usually a year. Presumably higher the turn over, better is the performance of the company for it has managed to operate with a relatively small average locking up of funds. Low sales to inventory ratio ma indicate a slow moving inventory suffering possible from obsolescence or non-too-aggressive sales force. (ix) Total Aseets Turnover Ratio This ratio expresses relationship between the amount invested in the assets and the results accruing in terms of sales. This is calculated by dividing the net sales by total assets. Total assets turnover indicates the efficiency with which assets of the firm have been utilized. A higher ratio would mean better utilization and viceversa. C. SOLVENCY RATIOS Solvency ratios are generally designed to measure the contribution of the firms owned vice-versa the funds provided by its creditors. These ratios are computed to solicit information along the following lines (i)the firms ability to weather times of stress and to cover all its obligations including short term
42

and long term obligations, (ii) the margin of safety afforded to the creditors, (iii) the extent of control of the stockholders over the firm, and (iv) the potential earnings from the use of long funds. (i) Debt Equity ration This ratio relates all the creditors claims on assets to the owner claims. It is computed by dividing the total debt both current and long term of the business by its tangible net worth consisting of common stock and reserves and surplus. If the ratio is greater it would mean that the creditors have more invested in the business then the owners. This is why creditors prefer low debt equity ratio . A low debt-equity ratio might, however, indicate that the firm is not taking advantage of a proper mix of debt and equity and may be passing up an opportunity to engage in financial leverage and thus increase its earnings. D. PROFITABILITY RATIOS Profitability reflects the final result of business operations. The important profitability ratios are:1. Gross profit ratio Gross profit ratio measures the relationship of profit to net sales and is usually represented in percentage./ This ratio is an index margin available to business to cover indirect expenses. 2. Net profit ratio This profitability ratio measure the relationship between net profit and sales of a business unit 3. Operating profit ratio Operating profit ratio established the relationship between operating profit and sales. It measures the operating efficiency of a business unit.
43

WORKING CAPITAL MANAGEMENT Working capital is the amount of funds necessary to cover the cost of

operating the firm. Working capital means the capital required for meeting day to day expenses. It refers to the amount of funds invested in current assets of a firm . It is also known as Revolving or circulating capital. Working capital management is concerned with the problems that arise in attempting to manage the current assets, the current liabilities and the inter relationship that exist between them. The term current assets refer to those assets, which can be converted into cash within a year without undergoing a diminution in value and without disrupting the operations of the firm. The major current assets are cash, marketable securities, accounts receivable and inventory. Current liabilities are those liabilities, which are intended to be paid in an ordinary course of business, with in a year./ The basic current liabilities are accounts payable, bills payable, bank overdraft and outstanding expenses. The goal of the working capital management is to manage the current assets and current liabilities of the firm in such away that the satisfactory level of working capital is maintained . The interaction between current assets and current liabilities are therefore the main theme of the theory of working capital management. Working capital management is a significant part of financial management. It s importance stems from two reason: Investment in current assts represents a substantial portion of total investment

44

 Investment in current assets and the level of current liabilities have to be geared quickly to changes in sales. To be sure, fixed asset

investment and long term financing are also responsive to variations is sales. CONCEPTS OF WORKING CAPITAL There are two concepts of working capital 1. Gross Concept 2. Net Concept 1. Gross Concept It is simply called as working capital. It refers to the firms investment in the current assets. The gross concept focus attention of two aspects of current assert management. 1. Optimum investment in current assets 2. Financing of current assets Investment in current asset should be adequate it should be neither inadequate nor to be excess. Excessive investment impairs profitability and inadequate investment can threaten the solvency of the firm. According to the changes in the business the working g capital needs will also changes. So the

management should be very much alert to initiate an action and handle the imbalances. The financial manager should be veil addressed with the sources of the working capital and investment avenues where idle funds may be invested.

45

2. Net concept According to this concept, working capital is the difference between the current assets and the current liabilities. Networking capital =Current Assets- Current liabilities The short-term creditors of the firm will always interest in maintaining a positive, working capital for the firm. Weak liquidity passes threat to the mismanagement of assets. Therefore the management should promptly correct the imbalance in the liquidity position. Net working capital also coverts the judicious mix of long term and short term funds for financing current assets. Determinants or Factors affecting working capital Nature of business/industry. Size of business units/scale of operations. Growth and expansion of business Manufacturing cycle. Production policies Rapidity of turnover. Seasonal variations Length of the operating cycle Fluctuations in the supply of raw materials. Terms of purchase and sales. Price level changes Conversion of current assets into cash Business cycle Operating efficiency Profit level changes
46

 Conversion of current assets into cash Business cycle Operating efficiency Profit margin ] P[profit appropriation Taxes Dividend policy Depreciation policy Government regulations Operating Cycle The operating cycle can be said to be at the heart of need for working capital. The continuing flow of cash from to supplier, to inventory, to accounts receivable and back 9into cash is what is called as the operating cycle. In other words, the term cash cycle refers to the length of time necessary to complete the following cycle of events: a) Conversion of cash into inventory b) Conversions of inventory into cash c) Conversion of receivables into cash PLANNING OF WORKING CAPITAL The planning of source of working capital can be confined to 1. Net gains from operations 2. Sale of Fixed Assets 3. Raising long term and short term debt

47

4. Additional issue of shares 5. Retirement of current liabilities below book value Next profit constitutes a potential permanent source f working capital. Funds from current operations are the most desirable course of working capital, as it does not burden the firms external obligations. The main limitation of the type of sources is that it cant produce much funds on short notice and also, managed may be paid away as dividends. All other sources of funds, besides net gains from operations, are irregular. Sale of fixed asset is an external and irregular source and management cannot usually depend up on fixed assets. CLASSIFICATION OF WORKING CAPITAL Generally speaking to amount of funds required for operating needs varies from time to time in every business. However, there is always a certain amount of assets in the form of working capital which is continuously required by the firm to carry on its business operations. Those two types of

requirements-permanent and variable are the basis for a convenient classification of working capital. PERMANENT OR FIXED WORKING CAPITAL The minimum level of current asset which is continuously required by the firm to carry on its business operation is referred to as permanent or fixed working capital .

48

The permanent working capital can again

be subdivided in to1) Regular

working capital and 2) reserve margin or cushion working capital ,. Regular working capital is the minimum amount of liquid capital needed to keep up the capital from cash to inventories, to receivables and again to cash Reserve margin or cushion working capital is the excess over the regular working capital that should be kept in reserve for contingencies that may arise at any time. VARIABLE WORKING CAPITAL Variable working capital changes with the increase or decrease in the volume of business. It can also be sub-divided into (1) seasonal and (2) special

working capital. The working capital required to meet the seasonal liquidity of the business is seasonal working capital . Special working capital, on the other hand, is that part of the variable working capital which is required for financing special operations. MANAGEMENT OF WORKING CAPITAL Investment in fixed assets alone is not only sufficient to run the business, but concerns must make investments in current assets also, such as cash, receivables etc,. MANAGEMENT OF CASH Cash , the most liquid assets, is of vital importance to the daily operations of business firms. The term cash includes coins, currency and cheques held buy the firms, bank balance and near cash items such as marketable securities or fixed deposits. The basic feature of near cash assets is that they can be readily concerted into cash.
49

Cash management is one of the key areas of working capital management. Apart from the fact it is the most liquid asset, cash is the common denominator to which all current assets can be reduced because current assets like inventory and receivables can be eventually converted into cash. Cash management assumes more importance than other current assets because cab is the most significant and the least productive asset that a firm holds. It is significant because to pay the firms obligations. The aim of can management should be to maintain adequate cash position to keep the firm sufficiently liquid and to use excess cans in some profitable way. The management of cash is also important because it is difficult to predict cash flows accurately and there is no perfect coincidence between the inflows and outflows of cash. MOTIVES FOR HOLDING CASH There are four primary motives for maintaining cash balances. They are: Transaction motives. Precautionary motives Speculative motives and Compensation motives MANAGEMENT OF RECEVABLES Trade credit is the most prominent force of the modern business,. It is considered as an essential marketing tool to aid the sale of goods. A firm grants trade credit to predict to predict its sales from the competitors and to attract potential customers to buy its products at favorable terms. When the
50

firm sells its products or services and does not receive cash for it, immediately the firm is said to have granted trade credit to customers. Trade credit, thus create receivables or book debts, which the firm is expected to collect in the near future. MANAGEMENT OF INVENTORY The term inventory refers to the stock of goods or list of goods . Investment consisting of raw materials, work-in-progress and finished good represent a significant proportion of total assets, generally varying between 15 and 45 percent of total assets, in India. Stocks of raw materials, work-inprogress facilitate production while stock if finished goods is required for smooth marketing operations. Thus inventories serve as a link between the production and conceptions of goods. IMPORTANCE OF WORKING CAPITAL MANAGEMENT The importance of working capital management can be judged from the following facts. 1. Here is direct and positive correlation between Sales and working capital needs of the firm. An increase in the sale of product requires a correcsponding increase in current assets. Hence current assets are to be managed properly and efficiently.

51

2. Fixed assets can be required on lease but there is no alternative for current assets. 3. Working capital needs are generally financed thorough outside sources. So continuous care is necessary to utilize them in the best way. DISADVANTAGE OF INADEQUATRE WORKING CAPITAL Following are the disadvantages of insufficient working capital 1. A concern which has inadequate working capital cannot pay its short-term liabilities in time. Thus it will lose its reputation and shall not be able to get good credit facilities. 2. It cannot buy its requirements in bulk and cannot avail of discount etc. 3. It becames difficult for the firm to exploit favorable market conditions and undertake profitable projects due to lack of working capital. 4. The firm cannot pay-to-day expenses of its operations and it creates inefficiencies, increases cost and reduces cost and reduces the profits of the business. 5. It becomes impossible to utilize efficiently the fixed assets due to non availability of liquid funds. 6. The rate of return on investments also falls with the shortage of working capital .
52

TOOLS USED: Ratio Analysis One of the most important financial tools which have come to be used very frequently for analyzing the financial strengths and weaknesses of the

enterprise is ratio analysis. Ration analysis is the process of determining and presenting in arithmetical terms the relationship between figures and groups of figures drawn from these statements. Ratio may be expressed in either of three ways. It may be a quotient obtained by dividing one value by the other. This unit of expression is called as times . it the quotient is multiplied buy one hundred, the unit of expression becomes percentage. It may also be stated in terms of proportion between the two figures,. Thus, times, percentages and proportions are three forms of

expressing ratio. Significance of Ratio Analysis Ratios are exceptionally useful tools with which one can judge financial performance of the enterprise over a period of time. The efficiency of the enterprise can also be judged against the industry average. In vertical analysis ratios help the analyst to form a judgment whether performance of the firm at a point of time is good or bad, Likewise, use of ratios in horizontal analysis indicates whether the financial condition of the firm is improving or deteriorating and whether the cost, profitability or efficiency is showing an
53

upward or downward trend. A study of the trend of strategic ratios may help the management in the task of planning and forecasting . At times, the

investment decisions may help the management in the task of planning and forecasting . At times, the investment decisions are based on the condition In this way it serves as handmaid to the

revealed by certain rations. management . Limitations of ratio Analysis

Rations should be used with extreme care because they suffer from certain serious drawback . some of them are listed below. 1. Ratios can sometimes be misleading, if an analyst does not know the reliability and soundness of the figures from which they are computed and the financial; position of the business at other times of the year . 2. The mechanics of ratio construction are not as important as the proper interpretation of the ratios. As a matter of fact, ratios are only a

preliminary step in interpretation. They call attention to certain aspects of the business which need detailed investigation before arriving at any final conclusion. 3. Inter firm comparison on the basis of ratio analysis is distorted because of the different practices followed by different firms in respect of allocation of the cost of fixed assets and inventory utilization as also of the selling and intangible costs between different time periods,. Unless
54

there is consistency 8in adoption of accounting methods, ratios may not prove of greater use. 4. Price level change makes ratio analysis difficult. TYPES OF RATIOS: A. LIQUIDITY RATIOS Liquidity ratios provide test to measure the ability of the firm to cover its short terms obligations out of its short term resources,. Interpretation of

liquidity ratios provides considerable insight into the present cash solvency o the firm and its ability to remain solvent in times of adversities . commonly used liquidity ratios are : current ratio and quick ratio. (i) Current ratio Two

Current ratio is an indicator of the firms commitment to meet its short term liabilities. Current assets mean s\asset that will either by used up or converted in to cash with in the years time or normal; operating cycle of the business which ever is longer. Current liabilities mean liabilities payable within a year or during the operating cycle of the business whichever is longer, out of the existing current assets or by creation of other current liabilities. (ii) Quick Ratio

This ratio is also known as liquid ratio or acid test ratio. It establishes the relationship between liquid asserts and current liabilities. The term liquid or

55

quick assets includes all the current assets minus inventory and prepaid expenses. B.ACTIVITY RATIOS Activity ratios reflect how efficiently the firm is managing its resources.

These ratios express relationship between the level of sales and the investment in various assets: inventories , receivable, fixed assets, etc. (i) Working Capital Turnover Ratio

Working capital turnover ratio indicates that whether or not working capital has been effectively utilized in making sales . Working capital ,. This ratio represents the number of times the working capital s turned over in the course of business during a year. (ii) Fixed Assets Turnover Ratio

This ratio is calculated by dividing sales to fixed assets. It is used to highlights the extent of utilization of the firms plant and equipment . A low ratio is indicative of the poor utilization of the existing plant capacity (iii) Current assets to capital employed ration

This ratio reveals the relationship between amount invested in current asset and total capital employed buy the organization. The analysis of current assets to capital employed ratio highlights the importance of efficient and effective management of current assets in an organization .

56

(iv)

Receivables /Debtors turnover ratio

This ratio means that relationship between credit sales during a particular period and the average receivables outstanding during the period . Debtors turn over ratio indicates the number of times the debtors turnover each year. (v) Average collection period its

Average collection period is a measure of receivable turnover . computation involves two steps./

In the first instance, annual sales are

dividedly 365 to get the average daily sales. In the second stage, daily sales are divided in to accounts receivable to find the number of days sales tied up in receivables. This gives average collection period because it represents the average length of time that the firm must wait after making a sale before reveling cash., This ratio show the credit and collection policies of the firm and effectiveness of collection machinery. (vi) Payable/creditors turnover ratio

This ratio indicates the speed with which the payments are made to the trade creditors. It establishes the relationship between net credit purchases and average accounts payable. (vii) Average payment period It measures the average credit period enjoyed from the creditors.]

57

(viii) Inventory Turnover Inventory turnover is computed by dividing the cost of goods sold by the average inventory for the period . This ratio gives the number of times the inventory is replaced during a given usually a year. Presumably higher the turn over, better is the performance of the company for it has managed to operate with a relatively small average locking up of funds. Low sales to inventory ratio may indicate a slow moving inventory suffering possible from obsolescence or non-too-aggressive sales force. (ix) Total Assets Turnover Ratio This ratio expresses relationship between the amount invested in the assets and the results accruing in terms of sales. This is calculated by dividing the net sales by total assets. Total assets turnover indicates the efficiency with which assets of the firm have been utilized. A higher ratio would mean better utilization and vice versa. C.SOLVENCY RATIOS Solvency ratios are generally designed to measure the contribution of the firms owned vice-versa the funds provided by its creditors,. These ratios are computed to solicit information along the following lines (i) the firms ability to weather times of stress and to cover all its obligations including short term and long term obligations, (ii) the margin of safety afforded to the creditors,
58

(iii) the extent of control of the stockholders over the firm , and (iv) the potential earnings from the use of loan funds. (i) Debt Equity ratio

This rtio relates all the creditors claim on assets to the owner claims . It is computed by dividing the total debt both current and long term of the business by its tangible net work consisting of common stock and reserves and surplus. If the ratio is greater it would mean that the creditors have more invested in the business than the owners,. This is why creditors prefer low debt equity ratio. A low debt-equity ratio might m, however, indicate that the firm is not taking advantage of a proper mix of debt and equity and may be passing up an opportunity to engage in financial leverage and thus increase its earnings. D. PROFITABILITY RATIOS Profitability reflects the final result of business operations. The important profitability ratios are:1. Gross profit ratio Gross profit ratio measures the relationship of profit to net sales and it usually represented in percentage. This ratio is an index margin available to business to cover indirect expenses. 2. Net profit ratio This profitability ratio measures the relationship between net profit and sales of a business unit .
59

3. Operating profit ration Operating profit ratio established the relationship between operating profit and sales. It measures the operating efficiency of a business unit . WORKING CAPITAL MANAGEMENT Working capital is the amount of funds necessary to cover the cost of operating the firm. Working capital means the capital required for meeting day to day expenses. It is also known as Revolving or circulating capital. Working capital management is concerned with the problems that arise in attempting to manage the current assets, the current liabilities and the inter relationship that exist between them. The term current assets refer to those assets, which can be converted into cash within a year without undergoing a diminution in value and without disrupting the operations of the firm. The major current assets are cash, marketable securities, accounts receivable and inventory. Current liabilities are those liabilities, which are intended to be paid in an ordinary course of business, with in a year ,. The basic current liabilities are accounts payable, bills payable, bank overdraft and outstanding expenses. The goal of the working capital management is to manage the current assets and current liabilities of the firm in such away that the satisfactory level of working capital is maintained. The interaction between current assets and current liabilities are therefore the main theme of the theory of working capital management.
60

Working capital management is a significant part of financial management . its importance stems from two reasons: Investment in current assets represents a substantial portion of total investment. Investment in current assets and the level of current liabilities have to be geared quickly to changes in sales. To be sure, fixed asset investment and long term financing are also responsive to variations in sales.

CONCEPTS OF WORKING CAPITAL There are two concepts of working capital 1. Gross Concept 2. Net Concept Gross Concept It is simply called as working capital. It refers to the firms investment in the current assets. The gross concept focus attention of two aspects of current assert management. 1. Optimum investment in current assets 2. Financing of current assets Investment in current asset should be adequate it should be neither inadequate nor to be excess. Excessive investment impairs profitability and inadequate

61

investment can threaten the solvency of the firm. According to the changes in the business the working capital needs will also changes. So the

management should be very much alert to initiate an action and handle the imbalances. The financial manager should be veil addressed with the sources of the working capital and investment avenues where idle funds may be invested. Net concept According to this concept, working capital is the difference between the current assets and the current liabilities. Networking capital =Current Assets- Current liabilities The short-term creditors of the firm will always interest in maintaining a positive, working capital for the firm. Weak liquidity passes threat to the mismanagement of assets. Therefore the management should promptly correct the imbalance in the liquidity position. Net working capital also coverts the judicious mix of long term and short term funds for financing current assets. Determinants or Factors affecting working capital Nature of business/industry. Size of business units/scale of operations. Growth and expansion of business Manufacturing cycle. Production policies Rapidity of turnover. Seasonal variations Length of the operating cycle
62

 Fluctuations in the supply of raw materials. Terms of purchase and sales.

Price level changes Conversion of current assets into cash Business cycle Operating efficiency Profit level changes Conversion of current assets into cash Business cycle Operating efficiency Profit margin profit appropriation Taxes Dividend policy Depreciation policy Government regulations Operating Cycle The operating cycle can be said to be at the heart of need for working capital. The continuing flow of cash from to supplier, to inventory, to accounts receivable and back 9into cash is what is called as the operating cycle. In other words, the term cash cycle refers to the length of time necessary to complete the following cycle of events: d) Conversion of cash into inventory e) Conversions of inventory into cash f) Conversion of receivables into cash
63

PLANNING OF WORKING CAPITAL The planning of source of working capital can be confined to 6. Net gains from operations 7. Sale of Fixed Assets 8. Raising long term and short term debt 9. Additional issue of shares 10.Retirement of current liabilities below book value Next profit constitutes a potential permanent source f working capital. Funds from current operations are the most desirable course of working capital, as it does not burden the firms external obligations. The main limitation of the type of sources is that it cant produce much funds on short notice and also, managed may be paid away as dividends. All other sources of funds, besides net gains from operations, are irregular. Sale of fixed asset is an external and irregular source and management cannot usually depend up on fixed assets. TYPES OF WORKING CAPITAL Working capital is of two types:a) Permanent working capital b) Temporary working capital The operating cycle creates the need for current assts. However the need does not come to an end after the cycle is completed . It continues to exist. To

64

explain this continuing need of current assets, a distinction should be drawn between permanent working capital and temporary working capital. . Business

activity does not come to an end after the realization of cash from customers. For a company , the process continues and , hence, the need for the regular supply of working capital arises. To carry on business, a minimum level of working capital is necessary , on continuous and uninterrupted basis. For all practical purposes, the requirement to as permanent or fixed working capital . Any amount over and above the permanent level of working capital is temporary, fluctuating or variable working capital. This portion of the required working capital is needed to meet the fluctuations in demand consequent u on changes in production and sales as a result of seasonal changes.

65

Chapter IV ANALYSIS AND INTERPRATATION

66

ANALYSIS AND INTERPRATATION OF THE STUDY WORKING CAPITAL MANANGEMENT Gross working capital is the firms investment in current assets Table 5.1 Structure of Gross working capital in FACT
Particulars Inventories Sundry Debtors Cash & Bank Balance Other Current Assets Loans & Advances Total Current Assets (A) 2005-06 25996.71 14817.4 3462.62 11.59 9969.59 54257.91 2006-07 34615.62 19233.92 7781.95 730.39 9668.21 72030.09 2007-08 31844.48 7585.22 6746.39 501.98 11068.34 57746.41 2008-09 41260.03 27137.12 2242.06 1071.17 10642.31 82352.69 2009-10 57584.37 50978.94 2818.28 1138.18 15574.87 128094.6

Source : Complied from annual report Interpretation The above table shows the structure of gross working capital. It is evident from the table that the total current assets are dominated by inventories during the period of study. Next to inventories sundry debtors occupies an important position in the working capital composition.
67

NET WORKING CAPITAL OF FACT Net working capital =Current asset-Current liability Tables 5.2 Statement showing Net working capital
Particulars Inventories Sundry Debtors Cash & Bank Balance Other Current Assets Loans & Advances Total Current Assets (A) Current liabilities Provisions Total Current liabilities (B) Net Working capital (A-B) 2005-06 25996.71 14817.4 3462.62 11.59 9969.59 54257.91 2006-07 34615.62 19233.92 7781.95 730.39 9668.21 72030.09 2007-08 31844.48 7585.22 6746.39 501.98 11068.34 57746.41 2008-09 41260.03 27137.12 2242.06 1071.17 10642.31 82352.69 2009-10 57584.37 50978.94 2818.28 1138.18 15574.87 128094.6

37086.51 1939.89 39026.4

39098.07 2282.53 41380.6

25414.43 3596.65 29011.08

35122.53 4097.67 39220.2

57191.56 9954.25 67`45.81

15231.51

30649.49

28735.33

4312.49

60948.83

Source: Complied from Annual report Interpretation

68

From the above table, it is found that the networking capital of the company was highest in the year 2009-2010, i.e. 60948.83 lakhs. From 2007-2008 onwards the net working capital shows increasing trend.

WORKING CAPITAL ANALYSIS OF FACT Ratio Analysis A. Liquidity Ratio 1. Current Ratio Current ratio is also known as working capital ratio. The standards level of current ratio is 2:1 liabilities . Current ratio= Total Current Assets Total Current liabilities It is the ratio of total current assets to total current

Table 5.3 Table showing Current Ratio

SI.No 1 2 3 4 5 Year 2005-06 2006-07 2007-08 2008-09 2009-10 Total Current Assets 54257.91 72030.09 57746.41 82352.69 128094.6 Total Current Liabilities 39026.4 41380.6 29011.08 39220.2 67145.81 Current Ratio 1.390287344 1.740672924 1.990495011 2.099751914 1.907708016

Interpretation : Here the current ratio of FACT is increasing , which shows the company is running in short working capital. In the year 2008-2009, only the current ratio of the company is in satisfactory level of 2.1 Current ratio is very low in the
69

year 2005-2006. There is a small increase in current ratio during from 20052006 to 2008-2009 .

Current ratio
2.5 2 1.5 Current ratio 1 0.5 0 2008-09 2005-06 2006-07 2009-10 2007-08

2. Quick Ratio Quick ratio is known as liquid ratio or acid test ratio. It establishes a relationship between liquid assets and current liabilities .

Quick ratio = Quick assets Current Liabilities Quick assets include all the current assets exclude stock and prepaid expenses.

70

Tables 5-4 Tables showing Quick Ratio

SI.No 1 2 3 4 5 Year 2005-06 2006-07 2007-08 2008-09 2009-10 Quick Assets 28261.2 37414.47 25901.93 41092.66 70510.23 Total Current Liabilities 39026.4 41380.6 29011.08 39220.2 67145.81 Quick 0.724155956 0.904154846 0.892828878 1.047742235 1.050106179

Interpretation : The ideal quick ratio is 1. The quick ratio of FACT is around one, which is satisfying from 2008-2009 onwards . Form 2005-2006. It shows a decreasing trend, and in 2006-2007 the ratio raises to a high value of 0.90 and in the 2007-2008 the quick ratio is falls to 0.89 which shows that the firm is running in short of receivable . Quick Ratio
1.2

0.8

0.6

Quick Ratio

0.4

0.2

0 2005-06 2006-07 2007-08 2008-09 2009-10

71

B. Activity Ratio 1. Working Capital Turnover Ratio Working capital Turnover ratio establishes relationship between sales and net working capital. As working capital has direct and close relationship with cost of good sold, therefore, the ratio provides useful idea of how efficiently or actively working capital is being used,. Increasing ratio indicates that working capital is more active, it is supporting comparatively, higher level of production and sales., it is being used more intensively

Working capital turn over ratio = Annual Net Sales Net Working capital Tables 5.5 Tables Showing Working Capital Turnover Ratio
SI.No Year Sales Working capital Working Capital T/O ratio 2.703302909 4.754293465 2.97658179 4.90897465 3.437023976

1 2 3 4 5

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

138494.29 145716.67 85533.06 211736.3 209482.59

15231.51 30649.49 28735.33 43132.49 60948.83

Interpretation : When we analyze the working capital turnover ratio of FACT , we can see the firm shows an upward trend from 2005-2006 to 2006-2007 . It is a sign for excellent management and better utilization of current assets,. In the 2006-

72

2007 the ratio made big leap of 4.75 . But in the 2007-2008 and in the year 2009 -2010 shows the declined nature

Working Capital Turnover Ratio

6

0 2005-06 2006-07 2007-08 2008-09 2009-10

2)Fixed Assets Turnover Ratio Fixed assets turnover ratio indicates the efficiency with which a firm uses all its assets to generate sales .

Fixed Assets Turnover Ratio = Net Sales Fixed Assets Tables 5.6 Table showing Fixed turnover ratio
SI.No 1 Year 2005-06 Sales 138494.3 Fixed Assets 50826.14
73

F.A.T.O Ratio 2.724863427

1/F.T/O Ratio 0.36699087

2 3 4 5

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

145716.7 85533.06 211736.3 209482.6

44762.93 42419.8 38606.11 36349.83

3.255297855 2.016347555 5.484528226 5.762959277

0.307191552 0.495946246 0.182331088 0.173521962

Interpretation : In the case of FACT till 2007-2008 the fixed assets turnover ratio is in a declining trend. But from 2008-2009 gives a sign of reversing trend. The existing trend shows that the firm has the capacity to overcome the

situations without any additional investments . The last column of the tables shows the amount of fixed asset FACT need while generating every single rupee sale. In 2008-3009 FACT need 0.18 ps for each rupees sale, in 20092010 it requires only 0.17ps rupees sale.

F.A.T.O ratio
0.6

0.5

0.4

0.3

F.A.T.O ratio

0.2

0.1

0 2005-06 2006-07 2007-08 2008-09 2009-10

3 Current Assets to capital Employed Turnover Ratio

74

This ratio reveals the relationship between amount invested in current assets and total capital employed by the organization. This ratio helps to understand how much percentage of total capital employed is represented by the current assets of the firm.

Current Assets to capital Employed Turnover ratio = Current Assets Capital Employed

Tables 5.7 Tables Showing Current Assets to Capital employed ratio

SI.No 1 2 3 4 5 Year 2005-06 2006-07 2007-08 2008-09 2009-10 Current Assets 54257.91 72030.09 57746.41 82352.69 128094.6 Capital Employed 64806.53 64802.36 64798.36 64794.23 64790.31 CA/CE T.O Ratio 0.837 1.111 0.891 1.270 1.977

Interpretation : Tables shows that in FACT Current asset to capital employed turnover ratio is an increasing trend. From 2007-2008 onwards the ratio s moving to high. In 2007-2008 shows the low value. It indicates that the current assets played a vital role in the working cap[ital management of the firm

75

CA/CE T.O Ratio

2.5

1.5 CA/CE T.O Ratio 1

0.5

0 2005-06 2006-07 2007-08 2008-09 2009-10

C) Solvency ratio Debt Equity Ratio It measures the ratio f long- term total debts to share holders equity. D.E.R is a popular measure of the long-term financial solvency of a firm . A higher ratio shows a large share of financing by the creditors of the firm and low ratio implies the smaller claim of the debtors .

Debt Equity Ratio = Total Debt Net Worth Table 5.8 Table Showing Debt Equity Ratio
SI.No 1 2 3 Year 2005-06 2006-07 2007-08 Debt 14817.4 19233.92 7585.22
76

Net Worth 64806.53 64802.36 64798.36

Debt Equity Ratio 0.228 0.296 0.117

4 5

2008-09 2009-10

27137.12 50978.94

64794.23 64790.31

0.418 0.786

Interpretation : The debt equity ratio of FACT is showing the increasing trend during the years from 2005-2006 to 2009-2010 in the last financial year 2009-2010. It reaches 0.786 The debt equity ratio is comfortable position

Debt Equity Ratio

0.9 0.8 0.7 0.6 0.5 Debt Equity Ratio 0.4 0.3 0.2 0.1 0 2005-06 2006-07 2007-08 2008-09 2009-10

77

ANALYSIS OF WORKING CAPITAL COMPONENTS

Cash Management Management of Receivables Inventory Management

78

CASH MANAGEMENT Cash is the money, which a firm can disburse immediately without any restriction. Cash includes coins, currency and cheques held by the firm and balance in its bank account. A firm cash mainly for two reasons: To meet the needs of day-to-day transactions and To protect the firm against uncertainties characterizing its cash flows Cash management is concerned with the meaning of a. Cash flows into and out of the firm b. Cash flows with in the firm c. Cash balances held by the firm at a point of time by financing deficit or investing surplus cash CASH MANANGEMENT IN FACT The following items constitute cash and bank balance in FACT a. Cash in Hand Cash and bank cheques and stamps in hand b. Cash Balance 1. In current a/c 2. Post office treasury saving a/c 3. Short term deposit with scheduled bank 4. Remittance in Transit. Sources and Uses of Cash in FACT

79

a. The main sources of cash in FACT are . 1. Cash sales 2. Realization from Debtors 3. Subsidy from central govt. 4. Insurance claims 5. Loans & other deposits b. The main uses of cash in FACT are : 1. Purchase of raw material, stores and spares 2. Salary and allowances 3. Power,. Electricity and fuel 4. Packing and transportation expenses 5. Interest and other charges 6. Insurance 7. Loan repayment and adjustments Cash Management techniques in FACT Cash budget is routinely prepared in FACT and it helps in: 1. Estimating cash requirements 2. Planning short term financing 3. Scheduling payments in collection with capital expenditure . 4. Planning purchase of materials 5. Planning credit policy.
80

The cash forecasting prepared under this method shows the timing and magnitude of the expected cash receipts and payments over the forecasted period . The basis of cash budgeting is: 1. Revenue budget 2. Capital budget 3. Statutory dues 4. Outstanding dues 5. Company policy for payments of personal and other advances. 6. Credit and collection policy as well as past trends etc. For monitoring cash budget as well as cash and bank balance , the following tools and techniques are normally adopted. 1. Cash flow analysis and reporting - monthly./weekly/daily 2. Cash and bank balance reporting - monthly/weekly/daily 3. Periodic reconciliation of bank statements with cash book 4. Timely accounting of time based cheques. 5. Periodic physical verification of cash and bank balances 6. Adequate internal check system to avoid the possibility of cash defalcation.

81

ANALYSIS OF CASH MANAGEMENT IN FACT 1. Cash/Current Liabilities Cash is the most liquid asset in any organization cash must available to pay bill that would be due in the future. So it is very important for every organization to maintain and adequate level of liquid cash. The cash to current liabilities helps us in identifying the ability of the firm to pay off immediate current liabilities .

Table 5.9 Tables showing Cash/Current Liabilities

YEARS
2005-2006 2006-2007 2007-2008 2008-2009 2009-2010

CASH
3462.62 7781.95 6746.39 2242.06 2818.28

CURRENT LIABILITIES
39026.4 41380.6 29011.08 39220.2 67145.81

CASH/C.L
0.088 0.188 0.232 0.057 0.041

Interpretation In the case of FACT cash/current liabilities ratio is varying ground ./ The cash to current liabilities of company indicates the amount of current liabilities which are payable through cash. It is to be noted that FACT is going on with almost ideal cash to current liabilities ratio

82

Table 5.10 Table showing Cash/Total Assets YEARS

2005-2006 2006-2007 2007-2008 2008-2009 2009-2010

CASH
3462.62 7781.95 6746.39 2242.06 2818.28

TOTAL ASSETS
105653.06 118115.36 101128.51 149776.01 194216.48

CASH/TOTAL ASSETS
0.032 0.165 0.066 0.014 0.014

2.

Cash/Total Assets

It indicates to total asset ratio indicates the level of cash as a component in the firms over all asset mixture. This basically tells us the management

perception regarding keeping high liquidity assets or investing in fixed assets.

Cash /Total Assets = Cash Total Assets

CASH TO TOTAL ASSETS RATIO Interpretation In the case of FACT cash/total assets is moving around .01 during the past 5 yrs. It is not favorable for the company . 3. Cash/Current Assets Cash to current asset is very important because it tell us the cash position in current assets . Cash is a constituent of current assets. If the cash reserves in current assets are too low, then in needy hours will not be in our hands .

83

Cash Current Assets = Cash

Current Assets

Table 5.11 Table showing Cash to current Assets

YEARS CASH CURRENT Assets Cash Current Assets 0.063 0.108 0.116 0.027 0.022 Cssh /C.A * 100

2005-2006 2006-2007 2007-2008 2008-2009 2009-2010

3462.62 7781.95 6746.39 2242.06 2818.28

54257.91 72030.09 57746.41 82352.69 128094.6

6.3 10.8 11.6 2.7 2.2

Interpretation The table shows that cash to total current assets. The cash holding is highest in the year 2007-2008 during the period of study .i.e, 11.6 From 2008-2009, the ratio shows a decreasing trend till the last financial year ./ This shows that the stands in the ,lowest position n the component of current assets . 4. Cash Turnover ratio

This ratio tells us about how cash place an important role in the activities of sales generation. It gives an idea of cash requirement of the company. When the cash turnover ratio is high the company requires less cash and when the ratio is less, the company requires lot of cash .

84

Cash Turn over ratio = Cash Sales Table 5.12 Table showing Cash Turnover ratio
S.L. No. 1 2 3 4 5 YEARS 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010 CASH 3462.62 7781.95 6746.39 2242.06 2818.28 Sales 138494.29 145716.67 85533.06 211736.3 209482.59 Cash Turnover ratio 0.025001897 0.053404665 0.078874648 0.010588926 0.013453529

Interpretation From the table is clear that FACT is able to generate sales by maintaining low cash level . In order to be competitive market the firm must maintain sufficient amount of money in its pocket. Hence FACT is using its cash balances effectively .
Cash Turnover Ratio
0.09 0.08 0.07 0.06 0.05 0.04 0.03 0.02 0.01 0 2005-06 2006-07 2007-08 2008-09 2009-10 Cash Turnover Ratio

85

MANAGEMENT OF RECEIVABLES Receivables are one of the most important parts of current assets. The term receivables are defend as debt owned to the firm by customers arising from sale of goods or services in the ordinary courses of business. The period of credit and the extent of receivables depend up on the credit policy allowed by the firm. The object or receivables management is to achieve a trade off between risk and profitability. The aim of receivables management is neither to maximize the sales nor to reduce the risk of bad debts. Factors influencing the size of receivables Following factors directly and indirectly affects the size of receivables they are : a. Size of credit sales The volume of credit sale is a first factor which increases or decreases the size of receivables . b. Credit Policy A firm with conservative credit policy will have a low size of receivables, while a firm with liberal credit policy will be increasing this figure. c. Terms of trade The period of credit allowed and rate of discount given will also affects the amount receivables .

86

d. Credit collection effort The collection of credit should be streamlined . An efficient credit collection effort will reduce the size of the receivables . e. Habits of customers The paying habits of customers also have a bearing on the size of receivables . COST OF MAINTAINING RECEIVABLES The maintenance of receivables involves a credit sanction and it involves costs. The major categories of cost associate with the

extension of credit and accounts receivables are :1. Collection cost 2. Capital cost 3. Administrative cost 4. Default costs 5. Delinquency cost

87

ANALYSIS OF REVEIVABLES MANAGEMENT IN FACT 1. Receivables /Debtors turn over Ratio The analysis of debtors turn over ratio supplements the information regarding the liquidity of one component of currents and as such has direct influence on working capital position of the company. This ratio how rapidly debts are converted into cash. A high ratio is an indicative of shorter time lag between credit sales and cash collection and low \ratio shows that debts are not being collected rapidly.

Receivables/ Debtors turn over ratio

Annual net credit sales Average debtors

Tables 5.13 Table showing Debtors Turnover ratio

S.L No 1 2 3 4 5 Year 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010 Credit Sales 101916.61 105500.96 56296.97 70689.03 108966.01 Average Debtors 14817.4 19233.92 7585.22 27137.12 50978.94 Debtors T/O Ratio 6.878170934 5.485151233 7.421929753 2.604883274 2.137471081

Interpretation The table shows that a declining trend of ratio till 2006-07. But in 2007-08 it made a good come back, the ratio has increased to 7.42. During 2008-09 and

88

2009-2010 the ratio

decreases to 2.60 and 2.13 simultaneously.

The

decreasing ratio implies that a lot of cash has locked up as debtors. This would mean that more working capital has to be raised in order to smoothly carry out of the operations. If the dues from the debtors are properly collected, the cash collected can be used to finance working capital requirement .
Debtors T/O Ratio
8 7 6 5 4 3 2 1 0 2005-06 2006-07 2007-08 2008-09 2009-10 Debtors T/O Ratio

2. Average Collection period (ACP) Average collection period means the average number of days which bad debts remains outstanding .
Average Collection Period 360 Debtors Turnover ratio

89

Tables 5.14 Average Collection Period (ACP)

S.L No 1 2 3 4 5 Year 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010 No.of days 360 360 360 360 360 Debtors Trunover Ratio 6.878170934 5.485151233 7.421929753 2.604883274 2.137471081 Average Collection Period (Days ) 52.33949599 65.63173643 48.50490533 138.20197 168.4233313 94.6196

Interpretation From the above table it could be seen that the average collection period is fluctuating year after year. There was a high increase in collection period in 2009-10, 168 and 138. But it is declined to 48 days and 52 days in 2007-08 and 2005-06. The average collection period of the company is 94 days. Average Collection Period (ACP )
180 160 140 120 100 80 60 40 20 0 2005-06 2006-07 2007-08 2008-09 2009-10 Year Collection Period (Days)

90

3. Payable/Creditors Turnover ratio It is ration between net credit purchase and the amount of Sunday creditors. A high creditors turn over shows that creditors are being suppliers. It indicates the speed with which the payments are made to the trade creditors.
Payable /Creditors Turnover Ratio Credit Purchase Average Creditors

Tables 5.15 Table showing Creditors Turnover ratio

S.L No 1 Year 2005-2006 Credit Purchase 95576.09 Average Creditors 23481.43 Collection Period (Days ) 4.07028405

2 3 4 5

2006-2007 2007-2008 2008-2009 2009-2010

108897.55 60204.28 162726.89 150865.6

24547.85 9890.48 8718.79 37809.27

4.436133918 6.087093852 18.66393043 3.990174896

Interpretation From the table we can see that the creditors turn over ratio is increasing year from 2005-06 o wards. It shows that company has get liberal credit facility from the suppliers. On the average of 3.90 on creditors turn over during the period of study .

91

Creditors T/O ratio

20 18 16 14 12 10 8 6 4 2 0 2005-06 2006-07 2007-08 2008-09 2009-10 Creditors T/O ratio

4. Average Payment s period Average payment period gives the credit period enjoyed from the creditors. A low creditors payment period signifies that the creditors are paid promptly , thus enhancing the credit worthiness of the company . Creditors Payment Period 365 Creditors Turnover ratio Tables 5.16

Table showing Average Payment Period

S.L No 1 2 3 4 5 Year 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010 No.of days 365 365 365 365 365 Creditors Trunover Ratio 4.07 4.436 6.087 18.663 3.99 Payment Period (Days ) 89.68058968 82.28133454 59.9638574 19.55741306 91.47869674

92

Interpretation From the above table it could be seen that the average collection periods is fluctuating year after year. In 2009-10 it was high ie, 91 days. The average collection period of the company is 95 days.

Payment period (Days )

100 90 80 70 60 50 40 30 20 10 0 2005-06 2006-07 2007-08 2008-09 2009-10

Payment period (Days )

5. Debt current assets Ratio Debtors / current assets ratio shows the relation between debtors and current assets and t reveals the percentage of debtors in total current assets . Debtors Debt to current assets ratio (Debtors as percentage of current assets) x 100 Current Assets

93

Tables 5.17 Table showing Debt To Current Assets ratio

Year Current Assets Debtors 54150.00 72030.09 57746.41 82352.69 128094.64 Debtors Ratio Debtors/C.A *100 23.7 26.7 11.6 32.9 39.7

2005-2006 2006-2007 2007-2008 2008-2009 2009-2010

14817.40 19233092 6746.39 27137.12 50978.94

0.273 0.267 0.116 0.329 0.397

Interpretation The table shows the position of debtors in total current assets. In 2005-06 financial year 23.7% of the current assets are debtors . In 2006-07 it went up to 26.7%, it is the highest ratio during the last five years. In 2007-08 the credit sales is slow and subsequently the ratio is only 11.6 % . The last financial year a small increase of the ratio from the pervious year INVENTORY MANAGEMENT IN FACT 1. Inventory/Current Asset ratio Inventory/current asset ratio reveals how much contribute the inventory to the total current assets of the firm. This helps to decide in advance the amount to be invested in inventory/stock. Inventory to current assets ratio Inventory /Stock Current Assets

94

Tables 5.18 Table showing Inventory To Current Assets ratio

Year 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010 Inventory 25530.00 34615.62 31844.48 41260.03 57584.37 Current Assets 54150.00 72030.09 57746.41 82352.69 128094.64 Invetary C.A 0.471 0.480 0.551 0.501 0.449 Inventory /C.A*100 47.1 48.0 55.1 50.1 44.9

Interpretation In the case of FACT, in inventory/Current asset ratio moves around 40% in the last 5 years./ The ratio is high in the year 2007-08 i.e. 55% and low in the year 2009-10 i.e. As per as FACT is concerned, a proper management of inventory is at importance , since inventory contributes minimum 40% of the total current asset6s of the firm during the last 5 years .
60

50

40

30

20

10

0 2005-06 2006-07 2007-08 2008-09 2009-10

95

2. Inventory Turnover Ratio Inventory turnover ratio give the number of times inventory has been turned over during a year . Inventory Turnover Ratio Cost of goods sold Average Inventory

Average Inventory

OpeningStock + ClosingStock 2

Tables 5.19 Table showing Inventory Turnover ratio

Year 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010 Cost of Goods Sold 65285.25 65338.93 27060.88 70358.24 84449.43 Average Inventory 13518.25 17016.41 12614.09 6318.30 32896.16 Inventory Turnover ratio 4.829 3.839 2.145 11.135 2.567

Interpretation This ratio is an indication of efficiency of the inventory management.. A high ratio shows efficient inventory control , sound sales policies. Low turnover ratio shows possibility of slow moving products, over investment in stock . The inventory turn over ratio of FACT shows a fluctuating trend. The highest ratio 11.13 in 2008-2009.

96

Inventory turnover ratio

12 10 8 6 4 2 0 2008-09 2005-06 2006-07 2009-10 2007-08 Inventory turnover ratio

ANALYSIS OF OPERATING CYCLE The Operating Cycle refers to the length of time required to convert noncash current assets in to cash, it is the time involved to convert cash in to inventory, inventory in to receivables and receivables in to cash. A firm needs working capital, because the production, sales and cash flows are not instantaneous. There is always a time gap between the sale of goods and receipt of cash. Working capital is required for this period in order ot sustain the sales activity. The firm needs cash to purchase raw materials and pay expenses as there may not perfect matching between cash inflows and cash outflows. Cash may also help t meet future contingencies./ The stocks of finished goods have to be carried out to meet the demands of the customers on a continuous basis and sudden demands from some customers. Goods are sold on credit for competitive reasons. Thus adequate amount of funds has to be invested in current assets for a smooth and interrupted production and sales
97

process. Because of the circulating nature of current assets, working capital is sometimes called as Circulating Capital. The operating cycle can be explained as the continuing flow from cash to suppliers, to inventory, to accounts receivable and back in to cash. It is the time duration required to convert sales after the conversion of resources in to inventories , in to cash. The operating cycle includes:a. Raw material conversion Period (RMCP) b. Work in Progress conversion period(WIPCP) c. Finished Goods conversion period (FGCP) d. Receivables conversion Period 9RCP) e. Payable Difference Period Gross Operating Cycle = RMCP +WIPCP+FGCP+RCP The difference between Gross Operating Cycle and Payable difference period is Net Operating Cycle (NOC)

98

The following figure gives a snapshot of the operating cycle of the manufacturing firm .

Account Receivable

Cash

Finished Goods

Raw Material

Work in Progress

The operating cycle should be of a lesser period to reduce the amount of working capital .

PROCEDURE FOLLOWED The components of the operating cycle are obtained using the following formula:1. Raw material conversion period = Average Stock of raw materials Raw material consumption per day (RMCP)

2. Work in progress conversion period (WIPCP) = Average stock of WIP Total cost of production per day

99

3. Finished Goods Conversion Period (FGCP) = Average stock of Finished Goods Total cost of sales per day 4. Receivables Conversion Period (R,C.P) Average accounts receivables Total cost of sales per day

= 5. Payable Difference Period =

Average accounts Payable Net credit purchase per day

6. Gross operating cycle

= RMCP +WIPCP +FGCP + RCP

Net operating cycle = Gross operating cycle - payable Difference period

The following table summarises the operating cycle of FACT over a period of 5 years ie, from 2005-06 to 20092010. It analysis the efficiency of the firm in converting the sale of products theough conversion of resources into inventories and final realization of cash. The operating cycle of the firm is determined by comparing grows operating cycle and the payable difference period .

100

Tables 5.20 OPERATING CYCLE ANALYSIS OF FACT from the period 2005-06 to 2009-2010 (in days)
Year Raw material conversion period (RMCP) Work in Progress Conversion Period (WIPCP) Finished Goods Conversion Period Receivables Conversion Period (RCP) Gross Operating Cycle 9RMCP+WIPCP+F GCP+RCP) Payable Difference Period Net operating cycle. (Gross operating cycle-payable Difference Period ) 80 66 58 38 87 66 94 103 114 76 89 95 174 169 172 114 176 16 84 94 89 32 69 74 56 38 46 39 61 48 29 22 30 38 35 31 2005-06 6 2006-07 15 2007-08 6 2008-09 5 2009-10 Average 11 9

101

The tables shows that te firm had taken ans average of 66 days to complete the process of Operating Cycle. It also indicates that the raw material holding eriod of the firm stood at an average of 8 days ,. The longest raw material cionversion period was 2006-07 ie, 15 days ; this is due to the higher stock of raw materials duering that period. The financial year 2008-09 had the shortest period for the conversion of raw material ie, 5 days. The work in profgress conversion period of the firm stands art an aferage of 31 days over a peripd of 5 years. The financial year 2008-09 was the longest period for the conversion of work in profgress (38 days ). The firm requires only 22 days in 2006-07 for work inoroggress conversion. The Finished Good Conversion Period took an average of 48 days to convert the semi-finished goods in to finishewd goods, In 2009 -10 the conversion period for finshed goods -61 days . it is the lingest period for the conversion of finshed goods during the last 5 years. But in 2006-07 the firm requires only 38 days for the vonversuion.

The firm was able to convert its debtors an average of 74 days . revivals conversion period was very low in 2008-09 qs compared to other years. This is due to the liberal credit policy of the firm. By analyzing the table, the Gross operating cycle consists raw materials, work in progress,. Finished
102

goods and debtors conversion period, at an average of 161 days for the last five years . Gross operating cycle was higher in the year 2009-10 (176 days) and lower in the year 2008-09 (114 day).

FACT stood at an average of 95 days. In 2008-09 payable difference period is low as compared to other years. We can seen that average time period required , buy FACT for the Net Operating Cycle is 66 days during the last 5 yrs. The longest Net Operating Cycle was in 2009-10 (87days) shortest in 2008-09 (38days ) . From the table it is evident that FACT requires an average of 66 days to convert cash into inventory in to receivables and receivables into cash.

103

Chapter V FINDINGS AND SUGGESTIONS

104

FINDINGS Net working capital of the FACT shows that, increasing trend in the working capital w. Which indicates that working capital is more active, supporting comparatively, higher level of production and sales and it is being used more intensively. The current liabilities of the FACT show an increasing trend. It affects the liquidity and solvency position of the company. The current ratio shows a declining it tend for the last few years. Deceasing ratio signals that there has been deterioration in the liquidity position of the business The quick ratio is increasing . The liquidity position of the company is increasing . It indicates that sound financial position of the company. The cash ratio of the company is also decreasing. The cash ratio sign indicate that the company is going to face serious liquidity crisis. The working capital turnover ratio of FACT shows an upward or satisfactory level . This implies that the firm has efficient management and effective utilization of assets. It shows the firms velocity of utilization of net working capital.

105

 The fixed assets turnover tration is showing an upward trend, after being made a declining trend till 2007-08. In operational terms it implies that the firm can expand its activity ( in terms of production and sales ) with out requiring additional investment . Debt equity ratio of FACT is showing increasing trend during the last few years. It indicates that company is moving an favorable situation. The cash management in FACT shows that : The firm has ideal cash to pay ff its current liabilities. The level of cash as a component in the firms total assets is very low. Cash stands in the lowest position in the component of current assets. FACT is able to generate sales by maintaining low cash level. These from the Government and Banks. The receivables management in FACT shows that : The Debtors turnover ratio of FACT has been successfully made a turn around from the declining trend in 2007-08. Decreasing ratio shows that a lost of cash has locked up us debtors. The average period for collection is 94 days. If the dues from the debtors can

106

properly collected, the cash collected can be used to finance working capital requirement

The Inventory Management of FACT shows that : Inventory turn over ratio shows the efficiency of management of inventory. FACT has achieved the highest I.T.O.R in 2007-08. Till 2008-09 the ratio shows an increasing trend but after it starts declining.

107

SUGGESTION 1. Company should take immediate step to increase its liquidity position. The working capital of the company should be increased by increasing cash and bank balances by adopting efficient marketing strategies. 2. Inventory management of the company is not satisfactory. The raw material and work in progress inventory holding periods are high . reduce the holding period as much as possible. 3. The debtors of the company are decreasing over the year. The company should adopt a competent credit policy to attract the customer. Increasing debtors is a solution to over come the liquidity problem. 4. The company has adequate internal control system with its size and nature of business. 5. In order to became competitive in each line of business, the FACT has to focus on cost reduction and technology up graduation. 6. In order to meet the needs of the customers, FACT has to constantly innovate and develop new products. 7. The availability of sufficient working capital will enable FACT to operate with positive working results.
108

CONCLUSION Working capital management is important part in firm financial management decision. The ability of the firm to continuously operate in linger period is depends on how they deal with investment in working capital management. The optimal of working capital management is could be achieve by firm that manage the trade off between profitability and liquidity. The purpose of this study is to investigate the relationship between working capital management and firm profitability . The project study on working capital; management and profitability study constitute the basis to analyze the structure and growth of working capital and to ascertain the profitability of fertilizers and Chemicals Travancore Ltd., Eloor, Cochin. FACT Ltd is the first large scale fertilizer unit in India. It has been found that the company has suffered a sever financial crisis during the last four years (from 2007-08) and also has a shortage in working capital. Even though the company has a good capital structure, it requires a financial relief package for the survival of FACT. Cabinet committee on economic affairs has approved a financial; relief package for the company. This helps to support the

company to attain a good net profit . Effective measures of financial controls can surely help the company in future activities.
109

BIBLIOGRAPHY

110

BIBLIOGRAPHY J Khan & Jin, Financial Management , Tata Me Graw Hill 4th Edition. Khan & Jain, Basic Financial Management, Tata Me Graw Hills 3rd Edition . J Maheswari S.N, Financial Management Sulthan Chand And Sons Publishers . Mohan Juneja.C.& Rajesh Bagga Kalyani Publishers. Pandey I.M Financial Management , Vikas Publishing House Pvt. Ltd 8th Edition, New Delhi 1996. *** Prasanna Chandra, financial Management , Tata Me Graw Hill. Publishing Company Ltd 3rd Edition 1994. Annual reports of FACT. Web reference www.fact.co.in www.fertilisers india.com

111