Analysis of the firms liquidity and to test firms efficiency in utilization of its current assets and resources at Dharwad

Milk Union
Undertaken at

Dharwad Milk Union, Dharwad

UMESH .N. ALLANNAVAR

K.U.D Examination No. MBA10002083

Company Profile
Company Name Dharwad Co-operative Milk Producers Union Ltd, Lakkammanahalli Industrial Area, P.B.Road, Dharwad580004 Nature of Business Type of Ownership Raw Material Milk Mfg / Service / Semi-agro based Co-operative Unit Co-operative Unit 80,000 LPD, Water 5 to 6 lack liters/day, Coal 4 to 5 tone Capacity of Plant 1,20,000 liters/day,

12 tons milk powder,

10 tons butter, 6 tons ghee Finished Products Milk, Butter, Ghee, Gurtz, Pedha, Milk creams, Curd, Lassi, Khova etc. Total Investment Total Societies at Village Level Rs. 7 crore 551 Societies

Growth of KMF
Particulars
Dairy Co-operatives

Unit
Numbers

1976 - 77
416

2009 - 10
11520

Membership

Numbers

37,000

20,19,265

Milk Procurement

Kgs/Day

50,000

31,23,551/ 72,460(DMU) day per

Milk Sales

Liters/Day

95,050

23,23,03,026

Daily Payments to Farmers

Rs in (Lakhs)

0.90

354

Turnover

Rs in (Crs)

Not Available

2,850

Title of the Project:

A Study to analyse the firms liquidity and to test firms efficiency in utilization of its current assets and resources at Dharwad Milk Union

Objectives of the study:

To examine the establishment, organization and operational dimensions of the D.M.U. To know the practices of finance department in D.M.U. To know the liquidity position of the firm. To test firms efficiency in utilization of its assets and resources.

Limitations of the study:

1.This study covers only Dharwad Milk Union and not KMF as a whole. 2. The present study covers only 3 years financial data.

Measurement Techniques / Statistical Tools

Accounting Ratios. Financial Statements of the Company.

Sources of Data:
The data has been collected from both primary sources as well as secondary sources.

Primary Sources:
Primary data are the data gathered at first hand. It is collected by direct interviews and discussing the subject matter with the management, staff employees and academicians.

Secondary Sources:
Secondary data are the data that have been compiled or derived from other sources meant for some other purpose. It is collected from book records maintained by administration department, published books and also collected from the trading and profit and loss accounts and balance sheets of last 3 years of D.M.U.

Analysis
Sl.No 1 Particulars Current Ratio Formulas Current Assets Current Liabilities 2 Quick Ratio/ Liquidity Ratio Quick current assets Current Liabilities 3 Inventory Turnover Ratio Cost of goods sold 16.20 17.24 24.57 1.04 0.83 1.02 07-08 1.60 08-09 1.30 09-10 1.30

Average inventory
4 Inventory Conversion Period No. of Days in a year Inventory Turnover Ratio 5 Debtors Turnover Ratio Total Sales Debtors 6 Debtors Collection Period No. of Days in a year Debtors Turnover Ratio 7 Creditors Turnover Period Net Purchase Average Creditors 8 Creditors Payment Period No. of Days in a year Creditors Turnover Ratio 9 Working Capital Turnover Ratio Cost of goods Sold Net Working Capital 10 Currents Assets Turnover Ratio Total Sales Current Assets 11 Gross Operating Cycle Inventory Conversion Period + Debtors Collection Period 36 35 27 5.93 8.07 7.48 13.53 28.63 26.03 8 10 6 48.21 39.36 62.07 13 14 12 29.68 27.54 30.51 23 21 15

Findings
1. The Current Ratio shows that for the year 2009-10, the liquidity position of the Dharwad Milk Union is less i.e. 1.30. This ratios standard norm is 2:1. So it is struggling to recover the current ratio of the firm. 2. The Quick Ratio of the Dharwad Milk Union for the year 2009-10 is 1.02.This ratios standard norm is 1:1. So DMU seems to have maintained good quick ratio in its financial activities. 3. The Inventory Turnover Ratio of the Dharwad Milk Union has shown a considerable increase over the years and shows 24.57 for the year 2009-10. To substantiate this, we can also see that the company has improved its inventory conversion period from year to year and shows 15 days for the year 2009-10. It indicates the fast conversion of inventories & the faster sale of its goods. 4. In the year 2009-10, the debts turnover ratio is 30.50 and it is higher compared to other 2 years. To substantiate this, we can also see that for the year 2009-10, the debts collection period seems to have decreased by 2 days. This shows prompt payment made by the customers compared to the previous years and the more efficient management of debtors or more liquid the debtors are.

5. Though there have been ups & downs in the credit turnover ratio, for the year 2009-10, it has increased to 62.07.To substantiate this we can also see that for the year 2009-10 creditors payment period has been decreased by 4 days compared to last year. It indicates that D.M.U has been paying credit properly.

6. There are ups and downs in the working capital and current assets turnover ratio and has decreased for the year 2009-10. This calls for a focus on utilisation of working capital and current assets.
7. The gross and net operating cycles have improved over the years and have shown better performance.

Suggestions
1. It is suggested that the Dharwad Milk Union (DMU) has to increase its current ratio and has to also maintain stability in its quick ratio. These ratios are affected by the piling up of inventory, inefficiency in collection of debtors, high balances in cash and bank accounts without proper investment. So these ratios which are indicators of liquidity position can be improved by taking care of the above mentioned factors and by efficient performances in the above areas. 2. The firms performance is better in selling its products. So it is suggested that the Dharwad Milk Union (DMU) has to maintain the same stability in managing its inventory turnover ratio and conversion period and improve still better if possible. It can do so by adopting other inventory management methods such as ABC analysis method, Just-In-Time method along with the existing FIFO ( First In First Out ) method which is being practiced there as DMU has at least 4,000 different inventories of different kinds ranging from mechanical, spares, packing items to animal drugs and satisfactory and veterinary drugs. 3.The higher debtors turnover ratio and the shorter debt collection period shows the more efficient management of debtors or conveys more liquid the debtors are . For the recent year, the firm has shown better debtors turnover ratio and debt collection period which shows prompt payment by debtors. So firm has to maintain that stability and improve over time which can happen by having credit policy which is neither too liberal nor too restrictive and by having efficient collection efforts .

4.A high creditors turnover ratio or a lower credit period ratio signifies that the creditors are being paid promptly. This situation enhances the credit worthiness of the company. It seems that the firm has maintained high creditors turnover ratio and lower credit period for the recent year accordingly. So along with managing the credit worthiness of the company, firm has to also make efficient usage of credit policy offered by the suppliers as the operation of the company are being financed interest free by suppliers of funds. 5.For the recent year, there has been a decrease in the working capital turnover ratio compared to last year. This may be remedied by increasing sales or by disposing of certain assets or both. DMU can increase its sales by undertaking sales promotion measures like free home delivery to urban consumers. This also helps to increase the market share through increased sales. 6. Dharwad Milk Union (DMU) should have to appoint skilled and qualified employees and also new technology in machineries. It increases efficiency and quality of the firm. 7. DMU should have to computerize all the departments in order to increase efficiency and productivity of employees

Conclusion
The study on Liquidity position and utilisation of current assets and resources in DMU was satisfactory. The study of the last three years liquidity position of the company is better. In the last three years, company has faced several ups and downs in finance, marketing & promotional activities. D.M.U has suffered losses due to less quantity of milk supply and increased competition in the previous years but in the recent year it sounds to be in better position. It shows that D.M.U has been improving its financial conditions and also has been utilizing its assets and resources properly. If D.M.U continues the same performance in the current financial year, it can earn more profits.

Thank You