CHAPTER 1

INTRODUCTION

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1.INTRODUCTION

1.1 About KSE Limited

KSE Limited was established in 1963, as ‘Kerala Solvent Extractions Ltd.’, now

known as ‘KSE Ltd.’, entered the Solvent Extraction Industry, setting up the very first

solvent extraction plant in Kerala. The solvent extraction plant went on stream in 1972

and in 1976, a new plant was set up to manufacture ready mixed cattle.KSE Limited is a

public limited company with around 4500 shareholders. The shares are listed in BSE &

NSE. They are the largest manufacturer of compound cattle feed in Private sector in the

country. The last three decades have seen KSE emerging as a leader in solvent extraction

and ready mixed cattlefeed in the country. Today KSE commands the resources, expertise

and infrastructure to manufacture a range of livestock feed in high volumes, coconut oil

from coconut oil cake and refined edible oil. Driven by a commitment to high standards

of quality, KSE has not only won customer confidence but also national recognition

through several awards and accolades.With modern manufacturing facilities spread over

three states, KSE caters to the vast belt stretching across Southern India and enjoys a

significant presence in exports too. Since the early days, KSE has endeavoured to supply

its products to customers through an extensive network of dealers and retailers, which

form a dedicated force behind the success of KSE. Its a matter of pride that KSE is a

household name today. With a strong commitment to customers and product quality and

being cost competitive, KSE stands poised to meet new challenges.

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1.2.INDUSTRY PROFILE

1.2.1 SOLVENT EXTRACTION INDUSTRY

The solvent industry has achieved a phenomenal progress and at present there are

520 units having overall oil cake or oil seed processing capacity of more than 9.9

million/year. The solvent extraction plays important role in the oil economy. Solvent

extraction in India was started in 1945. It had to struggle for more than 20 years to

establish itself.

1.2.2 CRISIS OF COCONUT INDUSTRIES IN KERALA IN 1960’

In the 1960’s there was a crisis in coconut oil extraction industry in Kerala. After

conversion from wooden ghani’s to rotaries the cost of the production had increased

considerably. By using this new method they were able to extract more oil from the

coconut cake. Earlier 20% of the oil was retained in the coconut cake, now it has reduced

to 12%.

Although Kerala produces 80% of copra produced in the country large part of it was

sold to other state as copra itself and they were earning good profit when mills in Kerala

wasn’t able to get enough copra for their daily needs. When oil industry in other parts of

the country was thriving in Kerala it was struggling. So they understood the need for

modernization of their mills. At that time Dr. P. S. Lokanathan committee set up to study

the feasibility of starting new industries in Kerala, recommended of establishment of 3

solvent plants in Kerala and it was also proposed that one should be located in Thrissur

itself.

1.2.3 COCONUT OIL MILLER’S CO-OPERATIVE SOCIETY

Lion share of copra went to mills in Bombay and they were able to generate good

profits. To overcome the situation a co-operative society formed by name Coconut Oil

Miller’s Co-operative Society and it was decided that this society would act as an agent

of state trading corporation for distribution of copra.

By seeing the performance of the Bombay group an investigation department was

assigned to investigate it. Then they found out that they were using expeller mills for

extracting oil and was able to reduce the oil content up to 6%. The industries in Kerala

later began to follow it.

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1.2.4 CATTLE FEED INDUSTRY

From the beginning KSE Ltd marketed the buy product obtained from its solvent

extraction division in the brand name of Jersey Copra Cake. Most of the progress in the

cattle feed sector has come about in the past 30 years only. There are only few cattle feed

units in the country especially in Kerala. The cattle industry of the state has been utilizing

the indigenous raw material i.e. coconut cake, which is the residue left after the extraction

of oil from copra which is mainly used as cattle feed. Coconut cake contains 4-5% oil is

generally used for industrial purpose and deoiled cakes is used to make mixed cattle feed.

In Kerala the rotary cake was used as a cattle feed and actually this excessive oil

on cakes reduced the keeping quality of the cake and also upset the digestive system of

the cattle e. In foreign countries, the cattle is feed only with de-oiled cakes and according

to the dairy experts, the milk and fact contend of milk depends solely on the protein

contend of the feed. All these factors stress the importance of having a few cattle field

industry in the state.

Thus in 1996, KSE Ltd. Entered the cattle field industry, setting up the new plant

for manufacturing ready mixed cattle feed. The last three decades have been KSE

emerging as the leader in ready mixed cattle feed in the country. Today KSE Ltd.

Commands the recourses, expertise and infrastructure of manufacture a range of livestock

feed in high volumes, driven by a commitment to high standards of quality

1.2.5 DIARY INDUSTRY

Most of the progress in the dairy sector has come about in the past 25 years only.

Till 1970, the country’s milk production increased merely by 1% a year. But after the

intensification of cattle improvement programme through artificial insemination, using

sasses of exotic breeds and launch of operation flood, the production started rising rapidly

from the mid 19.

The transformation of India from a milk deficit to a milk surplus country is

essentially the result of an intensive campaign launch by the Govt. and semi Govt. bodies

to promote animal husbandry as a means of generating income for the landless poor.

Many of these producers have organized themselves into co-operative under the

umbrella if the National Dairy Development Board (NDDB) which had been running a

highly successful animal husbandry promotion programme named operation flood.

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The private sector has now entered into this field in a big way, capitalizing on the

availability of cheap surplus milk to produce various kinds of dairy products for the

domestic and international market. Several dairy products like skimmed milk powder,

whole milk powder, and infant milk foods of western origin are now being produced in

India. A variety of cheeses, milk drinks, ice creams, pasteurized butter etc. which, were

very common in this country till a few decades ago are now available in abundance in

department stores of big and small cities.

The main objective of this programme is to build a viable and self sustaining

national dairy industry capable of meeting the domestic demand for fresh liquid milk and

milk products and competing in the international area.

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1.3 COMPANY PROFILE

1.3.1 INTRODUCTION

Cattle play a vital role in the economy of India. Majorities of Indian cattle are

seriously underfed particularly cows in rural areas. Due to these reasons, the importance

of the cattle feed industry has been increased in India.

Kerala Solvent Extractions was registered as a public limited company on 25 th

September, 1963. The company was later renamed as KSE Limited and listed in the stock

exchanges of Mumbai, Chennai and Kochi. KSE, a company having annual turn of Rs.

250 crore, is the largest manufacturer of cattle feed. It is marketing annually about 2.2

lakh tones of superior quality cattle feed. KSE is in the oil extraction industry for the past

32 years.The company has secured the National Productivity Award for the year 2001-

2002 for being first in terms of production efficiency in the animal feed sector. KSE, with

a capital base of Rs. 36 crore embarks on an expansion to double its solvent extraction

capacity and add a most modern eco-friendly vegetable oil refining plant.

1.3.2 ORIGIN

Copra crushing has been a native industry of Kerala. But inefficient crushing

methods and competition from the modernized oil mills elsewhere shattered coconut oil

industry in Kerala in early 1960’s. It was as a part of the package program to revive

coconut oil industry in the state of Kerala that oil millers of Irinjalakuda and surrounding

places formed themselves into a corporate body to start a solvent extraction plant.

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1.3.3 HISTORY

In 1963, KSE Ltd was established according to Indian Companies Act 1956. It

was registered as a public limited company on 25th September, 1963. Its first production

was started in 1972 with a capacity of 40 tones per day. In 1980 the capacity of plant was

raised to 60 tonnes per day. In 1983, a fully automatic cattle feed plant was added with a

capacity of 120 tonnes per day capacity. By 1992 the capacity of solvent extraction plant

was further increased to 100 tonnes per day. In 1987, the plant capacity was increased to

180 tonnes over day.

The company’s second production unit with a capacity of 150 tonnes per day

solvent extraction commenced operation at Swaminathapuram. Dildigul district of Tamil

Nadu in 1988 and 1989 respectively. The cattle feed capacity was subsequently increased

to 180 tonnes per day.

The third cattle feed plant of the company started operation at Vedagiri in

Kottayam district of Kerala in 1995. This plant is now working on three shifts producing

around 150 tonnes per day. This plant has a basic installed capacity to go up to 240

tonnes per day. The plant at Irinjalakuda and Vedagiri are fully automatic and key

manufacturing operations are controlled by microprocessors. Vedagiri project costing

around Rs. 6 crore was fully financed out of internal sources of company. Company put

up a vegetable oil refining plant at Irinjalakuda at a cost of Rs. 1 crore in 1995. This

project was also fully financed from internal accruals. The company is reaming solvent

extracted coconut oil and expeller sunflower oil in the refinery plant.

Oil millers of Thrissur are the promoters of the company. It was registered in

1956 and incorporated as a public limited company in 1963 as per Indian Companies

Act.Kerala Solvent Extraction Limited was registered as a public limited company on 25 th

September 1963. The company was later renamed as KSE Limited. The company is listed

in three stock exchanges- Mumbai, Chennai, Cochin.The company started production

in1972 with a solvent extraction capacity of 40 MTS per day. On1976 the company is

modernized to cattle feed industry with a capacity of 50 tons per day.

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KSE Limited is a product oriented company. Cattle feed is the main product of

the company. The other products are oil-cake, de-oiled cake (JERSEY), Milk, Ice cream,

etc.. De-oiled cake is marketed under the brand name “JERSEY”. Their Ice cream

marketed under the brand name “Vesta”, is well accepted in the market. Now they are

trying to expand their milk products.

In the early stages, the company faced financial difficulties, but was assisted by

K.S.I.D.C. (Kerala State Industrial Development Corporation) by subscribing to it’s

twenty five percent equity capital and I.F.C.I. (Industrial Finance Corporation of India).

KSE had computerized its operations way back. In the year 1999, KSE went on to

upgrade its EDP set up further. A custom made ERP soft ware was developed for its

units and head office through M/s R.R. Software Pvt. Ltd. Cochin and online

computerization was fully implemented at all its plants. Being custom made for KSE this

ERP software, with SQL RDBMS front end on Visual basic and Windows NT OS ,

selflessly had integrated all function of the organization viz FA, inventory, billing payroll

,PPC. MIS, share accounting etc.

The head office at irinjalakuda has two servers and 40 Nodes running the

application. Other units, in all, have about 8 servers and about 50 Nodes. Their plant at

Vadagiri, Kottayam, has a computerized control room for monitoring, homogenization,

size reduction, batching, pelletisation , pellet cooling and aspiring system.

The manufacturing processes used in the company are

1) Wooden canes 2) Oil mill

3) Expeller mill 4) Solvent extraction

Now-a-days, the first three processes are out of use. Irinjalakkuda unit of the

company is mainly concentrated on solvent extraction process. Irinjalakuda unit of the

company consists of cattle feed plant and refining plant.

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1.3.4 COMPETITORS

Kerala feeds; Milma, Godrej, Prima, etc. are the main competitors to the

company. But the company is the number one producer of cattle feed in private sector.

Now the company is concentrated on producing more milk products. Projects for this

purpose are on consideration.

1.3.5 SHARE CAPITAL OF THE COMPANY

The authorized share capital of the company is Rs.4 crores and issued and

subscribed capital is Rs. 32 crore. The par at value of one equity share capital is Rs. 10.

The company issued 6000, 135% redeemable cumulative preference shares of Rs. 100

each. The redemption of these shares is at par after ten years but before fifteen years from

the date of their allotment. The company has made 2 bonus issues and one right issue.

The company went in for public issue of shares in 1994. Company shares are listed at the

stock exchanges at Cochin, Chennai, and Mumbai. The present market value of the

company’s share is Rs. 160 as on 22nd December, 2006. The reserves and surplus on 31st

March, 2005 is Rs. 25 crores. The company declared a dividend of 125% for the year

ended 31st March, 2006.

1.3.6 ENVIRONMENT AND SAFETY

The company is maintaining safety standards and ensuring pollution free

environment. The working environment has been made pollution free, noiseless,

conductive atmosphere. The plant was erected in such a way to monitor and maintain

the dust free environment. The safety measures are strictly followed.

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1.3.7 QUALI TY POLICY

Companies quality policy is to produce and distribute good quality compounded

cattle feed in pellet from mineral mixture and other fodder materials through a quality

system, which registers continual improvement by setting and reviewing functional

quality objectives aimed to create enhanced customer satisfaction. The quality policy

objectives aimed to create enhanced customer satisfaction. The quality policy will be

communicated to all and will be reviewed periodically for continued suitability. The

management and staff are determined and committed to achieve this quality policy and

to make dairying.

Quality management principles

Customer focus

Leadership

Involvement of people

Process approach

System approach to management

Continual improvements

Mutually beneficial supplier relationships

The management of KSE ltd recognizes that measurement and monitoring of

customer satisfaction as a vital tool for evaluating the performance of KSE LTD.

Customer complaints revived by customer complaints received by customer care cell are

properly monitored for prompt redressed in the best possible ways to ensure customer

delight and thus keep up the quality level. The finance and accounts department tries to

improve the effectiveness and efficiency of the quality management systems by

providing positively the financial results to the concerned and suggest them for suitable

Improvement actions in the concerned and suggest them for suitable improvement

actions in the monthly performance review meeting.

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FEED ANALYTICAL LAB

Quality control, feed analytical lab is located inside the Kerala feeds ltd campus.

This department was starting functioning from. The department lab equipped with latest

and most modern analytical instrument for analyzing moisture, crude protein, crude

fiber, other extract, sand and silica and aflatoxin for the coded samples of raw materials

in process product and finished product.

VISION

KSE is committed to provide quality livestock feed and service to farmers at a

reasonable cost.

MISSION

Increase the production of balanced compounded cattle feed in pellet form 240

metric tons to 500 metric tons per day

To produce 240 metric tons per day of other livestock feed (goats, buffaloes,

elephants, laboratory animals & pets)

To manufacture appropriate type of feed and feed supplement for different stages

of livestock

To become a market driving company to a market driven company

Educate and train the livestock farmers to practice scientific feed to optimize

livestock productivity

To support the development of knowledge based network on feed related

activities if

To offer consultancy services for the procurement of feeds ingredients, logistics

solution, feed manufacturing, setting up of feed if analytical labs

To achieve the turnover of RS 250 cores

To be active partner in community development programs.

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1.3.8 UNITS OF KSE Ltd.

Head office :- KSE Limited, Irinjalakkuda.

I. Production units (Kerala):

1. Irinjalakkuda unit;

2. Vedagiri unit, Kurumullur;

3. Palakkad unit, Palakkad;

4. Diary unit, Konikkara;

5. Edayar, Cochin;

6. NIDA unit, Kanchikkode, Palakkad;

7. Parapadi unit, Calicut.

II. Tamil nadu:

1. Swaminathapuram unit, Dindugal

2. Diary unit, Thalayuthu.

III. Karnataka:

1. Hinkal, Mysore.

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1.3.9 MILESTONES OF THE COMPANY

Year Events

1976 A new plant was set up to produce 50 MTS of ready mixed cattle feed

1979 Production capacity of cattle feed plant is increased to 60 MTS per day

1983 A fully automatic cattle feed plant started operation. Capacity 120 MTS Per

day

1984 The solvent extraction plant capacity increased to 80 MTS per day

1987 Cattle feed plant capacity increased to 180 MTS per day

1988 Cattle feed plant in Tamil nadu went in to operation. Capacity 100 MTS per

day

1989 The capacity of solvent extraction plant of Tamil nadu unit is expanded to

100 MTS per day

1990 Cattle feed production capacity of Tamil nadu increased to 150 MTS per day

1991 Palakkad branch started

1993 The company enters export market. Keyes forte, the new feed supplement for

cattle introduced. Cattle feed manufacturing capacity of Swaminathapuram

unit increased to 180 MTS per day

1995 Cattle feed production is started in Mysore in Karnataka state. Calicut branch

opened

1996 240 TPD cattle feed plant at Vedagiri in Kottayam district started operation.

Company renamed to KSE Limited

1998 Company acquired its fourth manufacturing unit at Palakkad and decided to

manufacture and market poultry feed from this unit.

Company celebrated the silver jubilee of the Irinjalakuda unit on completion

of 25th year of commencement of production.

Feeds and extractions, Swaminathapuram( a unit of KSE Limited) was

renamed as KSE Limited Swaminathapuram.

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1999 A modern children’s park and information centre has been completed for the

benefit of the public. The company introduced ‘KS Deluxe plus’, the new

pelleted feed in HDPE bags for Kerala market.

2000 Company started production and marketing of pasteurized milk and milk

products from Konikkara diary, Thrissur, Kerala, and Thalayuthu diary,

Tamil nadu.

2002 Started operating a solvent extraction plant and oil refineryon lease at

Kanchikkode for processing coconut cake. Cattle feed production capacity of

the Irinjalakuda plant increased to 199 MTS per day. Ice cream ‘Vesta’

launched

2003 Started produced cattle feed at a leased plant at Edayar, Kalamassery.

Cattle feed capacity of Swaminathapuram unit increased to 195 MTS per

day.

‘Vesta’ haven ice cream parlours at Irinjalakuda an Marathakkara started

2004 New project of 200 TPD solvent plant and 100 TPD oil physical refining

plant started. Acquires hand from KINFRA for starting a new project at

Kinfra park, koratty.

2005 Cattle feed production capacity at irinjalakuda unit increased to 210 MTS

per day,

Started producing cattle feed in a leased unit at Erode.

Company acquired its 5th cattle feed manufacturing unit at Mysore.

ISO 9001-2000 accreditation for Vadagiri and Swaminathapuram units.

2006 The 200 TPD solvent extraction plant at Koratty commissioned.

100 TPD physical refining plant at Koratty commissioned.

A branch at Nilamel, Kollam district started.

A branch at coimbatore started for marketing Vesta ice cream.

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1.3.10 BOARD OF DIRECTORS

Board of directors of the company has ten members including the managing director.

NAME DESIGNATION

Mr. M. C. Paul Chairman and Managing director

Mr.P.K. Varghese Executive director

Mr. A. P. George Director and legal advisor

Mr. K. P. John Director

Mr.Joseph Xavier Director

Mr. P. D. Anto Director

Mr. John francis K. Director

Dr. K. C. Vijayaraghavan Director

Mr. T. R. Ragulal Director

Dr.Jose Paul Thaliyath Director

Chief General Manager of the company is Mr. Anand Menon.

Mr. R. Sankaranarayanan is the secretary-cum-chief finance manager.

BANKERS

KSE Limited banks with ICICI BANK LIMITED.

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1.4 PRODUCT PROFILE

In the beginning stage of KSE limited had only solvent unit. After some time the

company started to produce jersey copra Cakes, compound cattle feed & refined

sunflower oil. Jersey copra cake, the coconut cake, which comes out of Solvent

Extraction process is made pure by de-solvent sing & named as ‘Jersey Brand Copra

Cake’.

At present it is marketed in Kerala, Tamil Nadu & Gujarat Company started to

produce ready mix compound cattle feed because it was not able to fulfil the demand of

‘Jersey copra cake’. The company was also producing food supplement for cattle feed .

PRODUCT PROFILE

The main products marketed are

1. K S CATTLE

It includes six types. They are:

K.S

K.S. SUPER

K.S SUPER

K.S DELUX PELLETS

K.S DELUX PLUS PELLETS

K.S SUPREME PELLETS

1.4.1 CATTLE FEED DEVISION

Cattle feed in 1976, the company started manufacturing ready mixed compound

cattle under the brand name “K.S.Cattle Feed”. The balanced ready mix feed

manufactured after due consideration of needs of the cattle in the state is well received all

over Kerala, therefore constituting its share in the milk production of the state.

Fully automatic & sophisticated live stock feed plant at 120 tonne productions per

day was established at Irinjalakuda to meet the increasing demand for cattle & this went

into commercial production in 1983.

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1.4.2 CATTLE FEED SEGMENTATION

Figure 1.4.2.1

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Cattle Feed

Pellet Mash

Ordinary

Mash

Super Mash Special

Mash

JerseySuprem

e

Pellet

Delux

e Plus

Deluex

CHAPTER 2

OBJECTIVE, SCOPE, METHODOLOGY,LIMITATIONS

AND REVIEW LITERATURE

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2.1OBJECTIVES OF THE STUDY

To analyse the management working capital in the company

To analyze the liquidity position of the firm.

To know about the Debtor turnover ratio and Debtors collection period.

To know about the schedule of changes in working capital.

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2.2 SCOPE OF THE STUDY

The achievement of adequate profitability is specific to each situation and outside

the scope of the digest. The problem of liquidity is less dependent on particular

circumstances and it is easier to make useful generalizations. There are two distinct

requirement for liquidity firstly, profitability and secondly, care and thoroughness in

administration.

It is only if a firm is profitable that in the long run it will receive in cash more

than it pays out. This is the most clearly imaginable in the case of trading business which

buys and skills exclusively on cash basis. If such a firm makes losses it is paying out in

cash more than it coming in from sales. It can only sustain its cash balance by injections

of capital or by selling off its assets, processes which cannot continually indefinitely.

Profitability may be necessary but it is not sufficient. A firm must be careful to ensure

that it does not ensure commit itself to payments that it cannot cover. Thus detailed

records require be keeping, ideally on a “real time” basis, of cash in hand and expecting

and cash to be paid. The accounting statement showing this detail is the cash

budget .every item will be tracked in terms of the time of flow, and the whole managed

so that there is never a time when payments cannot be made when due .this is requires

the steady exercise of the bureaucratic virtues of thoroughness, reliability and accuracy,

together with contingency planning to cope with uncertainty

“The scope of the study is confined to analyze and study the management of

working capital for a period of five financial years from 2005-06 to 2009-10”.

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2.3 METHODOLOGY

Collection of data

The data is collected from annual reports of the ‘KSE Ltd., IRINJALAKUDA’.

Source of data

Source of data is mainly collected through the secondary data’s of the company.

Balance sheet of last 5 years

Profit & loss a/c of last 5 years

Cash flow statement of last 5 years

Secondary data

Secondary data’s were collected from various books, annual reports, company’s

documents and from company’s website.

Tools used for analysis of data

Analysis of liquidity posission

1) Current Ratio

2) Quick Ratio or Acid test Ratio or Liquidity Ratio

3) Absolute Liquidity Ratio

Analysing the efficiency of components of working capital

1) Cash to current assets ratio

2) Inventory to current assets ratio

3) Inventory turnover ratio

4) Working capital turnover ratio

5) Debtors turnover ratio

6) Average debt collection period

7) Creditors turnover ratio

8) Average debt payment period

Type of research

The researcher used analytical research for analyzing the working capital

management of the company from its various financial statements.

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2.4 LIMITATIONS OF THE STUDY

Limited time and resources prevented from making a detailed study.

Secondary data was the main source of information.

Reports (trading profit and loss account, balance sheet) of financial year 2010-11

were not available for the study.

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2.5 REVIEW LITERATURE

2.5.1 WORKING CAPITAL

Working capital (abbreviated WC) is a financial metric which represents operating

liquidity available to a business, organization, or other entity, including governmental

entity. Along with fixed assets such as plant and equipment, working capital is considered

a part of operating capital. Net working capital is calculated as current assets minus

current liabilities. It is a derivation of working capital, that is commonly used in valuation

techniques such as DCFs (Discounted cash flows). If current assets are less than

current liabilities, an entity has a working capital

deficiency, also called a working capital deficit.

Working Capital = Current Assets

Net Working Capital = Current Assets − Current Liabilities

Net Operating Working Capital = Current Assets − Non Interest-bearing

Current Liabilities

Equity Working Capital = Current Assets − Current Liabilities − Long-term

Debt

A company can be endowed with assets and profitability but short of liquidity if

its assets cannot readily be converted into cash. Positive working capital is required to

ensure that a firm is able to continue its operations and that it has sufficient funds to

satisfy both maturing short-term debt and upcoming operational expenses. The

management of working capital involves managing inventories, accounts receivable and

payable, and cash.

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2.5.2 CALCULATION OF WORKING CAPITAL

Current assets and current liabilities include three accounts which are of special

importance. These accounts represent the areas of the business where managers have the

most direct impact:

accounts receivable (current asset)

Accounts receivable (A/R) in American English, receivables or debtors in British

English, is money owed to a business by its clients and shown in its accounts as an asset.

It is one of a series of accounting transactions dealing with the billing of a customer for

goods and services that the customer has ordered.

inventory (current assets)

In the USA and Canada the term has developed from a list of goods and materials

to the goods and materials themselves, especially those held available in stock by a

business; and this has become the primary meaning of the term in North American

English, equivalent to the term "stock" in British English. In accounting, inventory or

stock is considered an asset.

accounts payable (current liability)

Accounts payable is a file or account sub-ledger that records amounts that a

person or company owes to suppliers, but has not paid yet (a form of debt), sometimes

referred as trade payables. When an invoice is received, it is added to the file, and then

removed when it is paid. Thus, the A/P is a form of credit that suppliers offer to their

customers by allowing them to pay for a product or service after it has already been

received.

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The current portion of debt (payable within 12 months) is critical, because it

represents a short-term claim to current assets and is often secured by long term assets.

Common types of short-term debt are bank loans and lines of credit.

An increase in working capital indicates that the business has either increased

current assets (that is has increased its receivables, or other current assets) or has

decreased current liabilities, for example has paid off some short-term

creditors.Implications on M&A: The common commercial definition of working capital

for the purpose of a working capital adjustment in an M&A transaction (i.e. for a working

capital adjustment mechanism in a sale and purchase agreement) is equal to:

Current Assets – Current Liabilities excluding deferred tax assets/liabilities,

excess cash, surplus assets and/or deposit balances.Cash balance items often attract a

one-for-one purchase price adjustment.

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2.5.3 WORKING CAPITAL MANAGEMENT

Decisions relating to working capital and short term financing are referred to as

working capital management. These involve managing the relationship between a firm's

short-term assets and its short-term liabilities. The goal of working capital management is

to ensure that the firm is able to continue its operations and that it has sufficient cash flow

to satisfy both maturing short-term debt and upcoming operational expenses.

DECISION CRITERIA

By definition, working capital management entails short term decisions -

generally, relating to the next one year period - which are "reversible". These decisions

are therefore not taken on the same basis as Capital Investment Decisions (NPV or

related, as above) rather they will be based on cash flows and / or profitability.

One measure of cash flow is provided by the cash conversion cycle - the net number

of days from the outlay of cash for raw material to receiving payment from the

customer. As a management tool, this metric makes explicit the inter-relatedness of

decisions relating to inventories, accounts receivable and payable, and cash. Because

this number effectively corresponds to the time that the firm's cash is tied up in

operations and unavailable for other activities, management generally aims at a low

net count.

In this context, the most useful measure of profitability is Return on capital (ROC).

The result is shown as a percentage, determined by dividing relevant income for the

12 months by capital employed; Return on equity (ROE) shows this result for the

firm's shareholders. Firm value is enhanced when, and if, the return on capital, which

results from working capital management, exceeds the cost of capital, which results

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from capital investment decisions as above. ROC measures are therefore useful as a

management tool, in that they link short-term policy with long-term decision making.

Credit policy of the firm: Another factor affecting working capital management is

credit policy of the firm. It includes buying of raw material and selling of finished

goods either in cash or on credit. This affects the cash conversion cycle.

2.5.4 MANAGEMENT OF WORKING CAPITAL

Guided by the above criteria, management will use a combination of policies and

techniques for the management of working capital. These policies aim at managing the

current assets (generally cash and cash equivalents, inventories and debtors) and the

short term financing, such that cash flows and returns are acceptable.

Cash management.

Identify the cash balance which allows for the business to meet day to day

expenses, but reduces cash holding costs.

In United States banking, cash management, or treasury management, is a

marketing term for certain services offered primarily to larger business customers. It may

be used to describe all bank accounts (such as checking accounts) provided to businesses

of a certain size, but it is more often used to describe specific services such as cash

concentration, zero balance accounting, and automated clearing house facilities.

Sometimes, private banking customers are given cash management services.

Inventory management.

Identify the level of inventory which allows for uninterrupted production but

reduces the investment in raw materials - and minimizes reordering costs - and hence

increases cash flow. Besides this, the lead times in production should be lowered to

reduce Work in Progress (WIP) and similarly, the Finished Goods should be kept on as

low level as possible to avoid over production - see Supply chain management; Just In

Time (JIT); Economic order quantity (EOQ); Economic quantity.

27

Debtors management.

Identify the appropriate credit policy, i.e. credit terms which will attract

customers, such that any impact on cash flows and the cash conversion cycle will be

offset by increased revenue and hence Return on Capital (or vice versa); see Discounts

and allowances.

Short term financing.

Identify the appropriate source of financing, given the cash conversion cycle: the

inventory is ideally financed by credit granted by the supplier; however, it may be

necessary to utilize a bank loan (or overdraft), or to "convert debtors to cash" through

"factoring".

28

2.5.5 DETERMINANTS OF WORKING CAPITAL

Working capital requirements of a concern depends on a number of factors, each

of which should be considered carefully for determining the proper amount of working

capital. It may be however be added that these factors affect differently to the different

units and these keeps varying from time to time. In general, the determinants of working

capital which re common to all organization’s can be summarized as under:

1. Nature of business

Need for working capital is highly depends on what type of business, the firm in.

there are trading firms, which needs to invest a lot in stocks, ills receivables, liquid cash

etc. public utilities like railways, electricity, etc., need much less inventories and cash.

Manufacturing concerns stands in between these two extends. Working capital

requirement for manufacturing concerns depends on various factors like the products,

technologies, marketing policies.

2. Production policies

Production policies of the organization effects working capital requirements very

highly.Seasonal industries, which produces only in specific season requires more working

capital . some industries which produces round the year but sale mainly done in some

special seasons are also need to keep more working capital.

3. Size of business

Size of business is another factor to determines the need for working capital

4. Length of operating cycle.

Operating cycle of the firm also influence the working capital . longer the orating

cycle, the higher will be the working capital requirement of the organization.

29

5. Credit policy

Companies; follows liberal credit policy needs to keep more working capital with

them.Efficiency of debt collecting machinery is also relevant in this matter. Credit

availability form suppliers also effects the company’s working capital requirements. A

company doesn’t enjoy a liberal credit from its suppliers will have to keep more working

capital.

6. Business fluctuation

Cyclical changes in the economy also influence the level of working capital.

During boom period, the tendency of management is to pile up inventories of raw

materials and finished goods to avail the advantage of rising prove. This creates demand

for more capital. Similarly, during depression when the prices and demand for

manufactured goods. Constantly reduce the industrial and trading activities show a

downward termed. Hence the demand for working capital is low.

7. Current asset policies.

The quantum of working capital of a company is significantly determined by its

current assets. Policies. A company with conservative assets policy may operate with

relatively high level of working capital than its sales volume. A company pursuing an

aggressive amount assets policy operates with a relatively lower level of working capital.

8. Fluctuations of supply and seasonal variations

Some companies need to keep large amount of working capital due to their

irregular sales and intermittent supply. Similarly companies using bulky materials also

maintain large reserves’ of raw material inventories. This increase the need of working

capital . some companies manufacture and sell goods only during certain seasons.

Working capital requirements of such industries will be higher during certain season of

such industries period.

9. Other factors

Effective co ordination between production and distribution can reduce the need

for working capital . transportation and communication means. If developed helps to

reduce the working capital requirement.

30

CHAPTER 3

ANALYSIS AND INTERPRETATION

31

3.1 ANALYSIS OF LIQUIDITY POSITION OF

KSE Ltd., IRINJALAKUDA

These ratio’s indicate the capacity of the business to meet it’s short term

application. Liquidity is the ability of the firm to meet it’s current liabilities as they fall

due. It is extremely essential for a firm to be able to meet it’s obligations as they become

due. Liquidity ratios measure the ability of a firm to meet it’s short-term financial

strength or solvency.

Theses ratios are much helpful not only to creditors,bankers and other shor-term

lenders ,but also to long-term lenders, employees, management, and the shareholders.

The trade creditors, bankers, and other short –term lenders are very much interested in

obligation out of it’s short-term resourses. The long term lenders are interested in these

ratio’s ,as they would like to know whether the concern would be able to pay the interest

on loans on the due date. The employees of the concern are interested in these ratio’s in

the sense that they would like to know the ability of the concern to pay the remuneration

of the staff in time. The management is interested in it for judging the efficiency with

which the working capital is employed in the business. The shareholders are interested in

these ratio’s in the sense that they would be able to pay the dividend. Following are the

important liquidity ratio’s:

1) Current Ratio

1) Quick Ratio or Acid test Ratio or Liquidity Ratio

2) Absolute Liquidity Ratio

32

1) CURRENT RATIO

Current ratio is the most common ratio for measuring liquidity. It represents the

ratio of current assets to current liabilities. It is also called working capital ratio. It is

calculated by dividing current assets by current liabilities.

CURRENT ASSETS

CURRENT RATIO =

CURRENT LIABILITIES

The current ratio of firm measures it’s short-term solvency. In a sound business a

current ratio of 2:1 is considered as ideal one. A high ratio indicates sound solvency

posission and low ratio indicate inadequate working capital.

CURRENT RATIO (Rs in lakhs)

Year Current assets Current liabilities Current ratio

2005-06 4590.76 1632.56 2.8120

2006-07 3063.73 840.48 3.6452

2007-08 2870.67 1016.37 2.8244

2008-09 3270.91 1142.61 2.8627

2009-10 3277.43 1259.56 2.6020

Source: Annual reports of the companyTable 3.1.1

INTERPRETATION

33

As a conventional rule, idle current ratio should be 2:1. The actual current ratio is

2:1 it can be reasonably being taken as a sign of liquidity or the short term solvency of

concern. The company has maintained the current ratio favorable from 2005-06 to 2009-

10, but the year 2006-2007 the ratio was highly increased to 3.6452.

The main reason for increasing current ratio in the year 2006-2007 is

dipping the sail in that year, it is because of increased price of the products. So the stock

increased. To recover this problem the sales have to increase.

CURRENT RATIO

2005-06, 2.641

2006-07, 3.46752007-08, 2.4704

2008-09, 2.4904

2009-10, 2.1871 2005-06

2006-07

2007-08

2008-09

2009-10

Figure 3.1.2

INFERENCES

From the above diagram current ratio of the company is favorable in the study

period 2005-06 to 2009-10 and in the year 2006-07 it is high because of the increase in

various current assets like rawmaterials and inventory.

34

2) QUICK RATIO OR ACID TEST RATIO

This ratio shows the relation between quick assets to quick liabilities. It is

determined by dividing quick assets by current liabilities or quick liabilities.

QUICK ASSETS QUICK RATIO = CURRENT LIABILITIES

The term quick assets refers to current assets ,which can be converted in to cash

immediately. It consist of all current assets except stock and prepaid expenses. Quick

liabilities compraise current liabilities excluding bank overdraft.

Quick ratio of 1:1 is considered satisfactory as a firm can easily meet all it’s

current liabilities. If the ratio is less than 1:1 then the financial position of the concern is

sound and good.

QUICK RATIO

(Rs in lakhs)

Year Quick assets Current liabilities Quick ratio

2005-06 2535.94 1632.56 1.5534

2006-07 1210.17 840.48 1.4399

2007-08 1328.97 1016.37 1.3076

2008-09 1255.04 1142.61 1.0984

2009-10 1539.95 1259.56 1.2623

Source: Annual reports of the company

Table 3.1.2

35

INTERPRETATION

Quick ratio is expressed as quick asset/quick liability. Quick ratio of 1:1 is

considered to represent a satisfactory financial position. If actual quick ratio is equal or

more than the standard quick ratio of 1:1,the conclusion can be the concern is liquid and

so it can pay of its short-term liability out of its quickly.The company has maintained

quick ratio favorable from 2005-06 to 2009-10. In year 2008-09 the company shows

lower quick ratio because of the company had highest stock in the year.

QUICK RATIO

1.5534, 23%

1.4399, 22%1.3076, 20%

1.0984, 16%

1.2623, 19%2005-06

2006-07

2007-08

2008-09

2009-10

Figure 3.1.3

INFERENCES

From the above diagram quick ratio of the company has favorable in the study

period 2005-06 to 2009-10. In year 2008-09 the company shows lower quick ratio

because of the company had highest stock in the year.

.

36

3) ABSOLUTE LIQUIDITY RATIOS

This ratio is the most rigorous and conservative test of a firm’s liquidity position.

It gives a more meaningful measure of liquidity when used in conjunction with current

and acid test ratio. Absolute liquidity ratio relates the sum of cash and marketable

securities to the current liabilities. It is expressed as follows :

CASH +MARKETABLE SECURITIESABSOLUTE LIQUIDITY RATIO = CURRENT LIABILITIES

The ideal absolute liquidity ratio is 0.75:1. It is fixed at 0.75:1 because for the

payment of quick liabilities besides the 100% cash from the absolute liquid assets, a good

amount of cash may also result from other curret assets like receivables and sundry

debtors. If the absolute liquid ratio is equal to or more than the standard ratio of 0.75:1,

the concern can be taken as liquid. On the other hand , if the actual absolute liquid ratio

is less than 0.75:1, the concern is considered as not liquid.

The absolute liquid ratio of KSE Ltd.is shown in the following table:

ABSOLUTE LIQUIDITY RATIO

(Rs. In lakhs)

Year Cash balance Current liabilities Absolute liquid ratio

2005-06 1813.95 1632.56 1.1111

2006-07 459.80 840.48 0.5471

2007-08 530.99 1016.37 0.5224

2008-09 439.04 1142.61 0.3842

37

2009-10 860.31 1259.56 0.6830

Source: Annual reports of the companyTable 3.1.3

INTERPRETATION

The ideal absolute liquidity ratio is 0.75:1. we can see that except the year 2005-

06 cash position of the company is very weak when we compare it with it’s current

liabilities. Moreover , during the last year KSE’s cash position was abnormally poor the

continuing trend of which shall negatively affect it’s future operations.

ABSOLUTE LIQUIDITY RATIO

1.1111, 34%

0.5471, 17%0.5224, 16%

0.3842, 12%

0.683, 21%2005-06

2006-07

2007-08

2008-09

2009-10

Figure 3.1.4

INFERENCES

From the above diagram shows absolute liquidity ratio of the company has

favorable in the study period 2005-06 to 2009-10 except in the year 2005-06, the

company shows 1.1111 as absolute liquidity ratio. which is less than the ideal ratio 0.75:

1, because of the company’s poor cash position.

.

38

III.2 ANALYSING THE EFFICIENCY OF COMPONENTS OF

WORKING CAPITAL

(ACTIVITY RATIO’S OR TURNOVER RATIO’S)

Activity ratio indicates operational efficiency of the business concern. Activity

ratio’s measure how efficiently the assets are employed by the firm. These ratio’s

indicates the speed with which assets are being converted in to sales. The important

turnover ratio’s are analysed below :

1) CASH

Cash is the money,which a firm can disburse continuously. It is the common

denominator to which all current assets can be reduced because other major current assets

,that is , receivables and inventory get eventually converted in to cash.

CASH TO CURRENT ASSETS RATIO

This ratio is calculated by dividing cash by current assets. Cash is compared with

current assets first to know the proportion of cash to current assets ,which directly affects

the profitability of the firm because cash as such is an unproductive asset. Even though

cash is an unproductive asset , it cannot be reduced below a certain limit because

contingencies may arise during the course of business. There is no standard or fixed norm

for this ratio.

CASH AND BANK BALANCECASH TO CURRENT ASSETS RATIO = CURRENT ASSET

39

CASH TO CURRENT ASSETS

(Rs. In lakhs)

Year Cash and bank balance Current assets Cash to current assets(%)

2005-06 1813.95 4590.77 39.51%

2006-07 459.80 3063.73 15.01%

2007-08 530.99 2870.68 18.50%

2008-09 439.04 3270.91 13.42%

2009-10 860.31 3277.43 26.25%

Source:annual reports of the company

Table 3.2.4INTERPRETATION

As per the above table it is found that the percentages of cash to current assets are

39.51,15.01,18.50,13.42, and 26.25 respectively. The higher percentage of cash to current

assets is shown in the year 2005-06. which shows the greater liquidity of the company,

but after that the percentage is gradually decreased. In the year 2009-10 it was 26.25%,

this shows the improvement of liquidity position of the company,because of the increase

of the liquid cash.

40

CASH TO CURRENT ASSETS RATIO

2005-06, 39.51%

2006-07, 15.01%2007-08, 18.50%

2008-09, 13.42%

2009-10, 26.25% 2005-06

2006-07

2007-08

2008-09

2009-10

Figure 3.2.5

INFERENCES

From the above diagram shows variability in the cash to current assets ratio of the

company ,the 2005-06 shows39.51% , but after that itn will decrease. In the year 2009-10

indicates better increase in cash position.

2) INVENTORY TO CURRENT ASSETS

Inventory includes stock of raw materials, spares and stores including goods-in-

transit, goods- in-process, finished goods and others. Every enterprise needs inventory for

smooth functioning of it’s activities. It serves as a link between production and

distribution process.

INVENTORYINVENTORY TO CURRENT ASSETS = CURRENT ASSETS

INVENTORY TO CURRENT ASSETS

(Rs. In lakhs)

Year Inventory Current assets Inventory to current assets(%)

2005-06 2429.82 4590.77 52.93%

2006-07 2217.66 3063.73 73.03%

2007-08 1930.15 2870.68 67.24%

2008-09 2469.86 3270.91 75.51%

41

2009-10 2082.62 3277.43 63.54%

Source:annual reports of the company

Table 3.2.5INTERPRETATION

The tamle shows that the inventory is the largest component of the company’s

current assets. During the period of study the inventory is varied from 52.93% to 75.51%.

This shows the large portion of current assets stands the inventory. As far as a

manufacturing concern is keep such level of investment is justifiable.

However , suspicious investment in inventory should affect the company’s

working capital.

INVENTORY TO CURRENT ASSETS RATIO

2005-06, 52.93%

2006-07, 73.03%

2007-08, 67.24%

2008-09, 75.51%

2009-10, 63.54% 2005-06

2006-07

2007-08

2008-09

2009-10

Figure 3.2.6

INFERENCES

From the above diagram shows variability in the inventory to current assets ratio

of the company ,in 2008-09 shows 75.51% of inventory as the part of current assets.

Increased level of inventory will badly affect the working capital of the company. In

2009-10 it has reduced 10% than the last year.

42

3) INVENTORY TURNOVER RATIO

Inventory turnover ratio indicates whether investment in inventory is efficiently

used or not. It also measures the effectiveness of the firms sales efferts. This ratio shows

the number of times the stock is converted in to sales. A high inventory ratio shows

satisfactory sales. A low inventory turnover ratio results in blocking of funds in

inventory. There is no standared rates for the inventory turnover.

COST OF GOODS SOLDINVENTORY TURNOVER RATIO = AVERAGE STOCK

COST OF GOODS SOLD = SALES GROSS PROFIT ORCOST OF GOODS SOLD = (OPENING STOCK + PURCHASE + DIRECT EXPENSES CLOSSING STOCK)

OPENING STOCK + CLOSSING STOCKAVERAGE STOCK = 2

43

It is also decided to analyse the inventory conversion period which represents the

number of days taken to convert inventory in to cash. A high conversion period indicates

the inefficiency of management.

INVENTORY TURNOVER RATIO &INVENTORY HOLDING PERIOD

(Rs. In lakhs)

Year Cost of goods sold Average inventory Inventory Turnover Ratio(times)

2005-06 22829.11 1659.51 13.76

2006-07 27179.67 1628.34 16.69

2007-08 27988.34 1340.48 20.88

2008-09 33971.92 1394.56 24.36

2009-10 35176.81 1412.97 24.90

Source:annual reports of the company

Table 3.2.6INTERPRETATION

The above table shows the inventory conversion period of KSE Ltd. From the

part of the company ideal period is 20 days. Company is not achieve the inventory

conversion period as ideal in last three years , that is 21,24 and 25 days have takento

convert the stock in to cash in 2007-08,2008-09, and 2009-10 respectively. The reason of

taking this much dates , company purchased rawmaterial in bulk quantity with discount.

44

INVENTORY TURNOVER RATIO (in times )

2005-06, 13.76

2006-07, 16.69

2007-08, 20.882008-09, 24.36

2009-10, 24.9 2005-06

2006-07

2007-08

2008-09

2009-10

Figure 3.2.7

INFERENCES

The diagram shows the inventory turnover ratio , the high ratio shows the delay in

conversion of rawmaterials in to finished goods and finished goods in to cash. The last

three year shows the more than 20 days for the conversion. Because of purchasing raw

materials in bulk for discount.

4) WORKING CAPITAL TURNOVER RATIO

This ratio reflects the turnover of the firms net working capital in the course of the

year. It is a good measure of over trading and under trading .The different use of overall

working capital in a firm can be measured with the help of working capital turnover ratio.

The ratio indiactes the ratio of working capital utilization in the firm. A higher ratio

indicates the efficient utilization of working capital and vice versa

NET SALES WORKING CAPITAL TURNOVER RATIO = NET WORKING CAPITAL

WORKING CAPITAL TURNOVER RATIO (Rs. In lakhs)

Year Net sales Net working capital Working capital turnover ratio

2005-06 24030.84 2958.21 8.12

2006-07 27503.59 2223.25 12.37

45

2007-08 28947.50 1854.30 15.61

2008-09 35007.87 2128.30 16.45

2009-10 37094.10 2017.87 18.38

Source:annual reports of the company

Table 3.2.7INTERPRETATION

The higher ratio indicated efficient utilization of working capital and a low ratio

indicates inefficient utilization. The above table shows the working capital and high ratio

is due to high net working capital. In the year 2005-06 shows the working capital is 8

times but after that year the company getting good working capital utilization.

WORKING CAPITAL TURNOVER RATIO (in times )

2005-06, 8.12

2006-07, 12.37

2007-08, 15.612008-09, 16.45

2009-10, 18.38 2005-06

2006-07

2007-08

2008-09

2009-10

Figure 3.2.8

INFERENCES

From the above diagram shows the working capital turnover ratio is gradually in

creased during the study period 2005-2006. In the year 2009-10 has show 18.38 times. It

shows the efficient utilization of the working capital.

46

5) DEBTORS TURNOVER (DRs VELLOCITY)

The purpose of this ratiois to discuss the credit collection process and policy of

the firm. This ratio shows relation between accounts receivable and net credit sales of the

period. The term accounts receivable include debtors and bills receivable. The higher the

ratio the better it is :

NET CREDIT SALESDEBTORS TURNOVER RATIO = AVERAGE ACCOUNTS RECIEVABLES

AVERAGE DEBT COLLECTION PERIOD :-

This ratio measures the quality of debtors . it shows the average number of days

allowed in between the receipt of the invoice and the actual payment of the invoice. A

short collection period implies prompt payment by debtors. A shorter cpllection period

reduces the chance of bad debts. A longer collection period implies inefficient credit

collection performance.

47

AVERAGE DEBT ( DEBTORS + BILLS RECIEVABLES) * 365COLLECTION PERIOD = (IN DAYS) NET CREDIT SALES OR ADCP(in month) ( DEBTORS + BILLS RECIEVABLES) * 12 = NET CREDIT SALES

DEBTORS TURNOVER RATIO & AVERAGE DEBT COLLECTION

PERIOD

(Rs. In lakhs)

Year Net sales Average Trade Debtors

Debtors Turnover Ratio

Average Collection Period(days)

2005-06 24030.84 96.88 248.52 1.47

2006-07 27503.59 47.25 582.08 0.63

2007-08 28947.50 39.42 734.33 0.50

2008-09 35007.87 31.70 1104.35 0.33

2009-10 37094.10 32.21 1151.63 0.32

Source: annual reports of the company

Table 3.2.8

INTERPRETATION

It is an indicative of credit management. The shorter the average collection period

the better the trade credit management and liquidity of debtors. The ratio is gradually

48

increased this shows the better position of the company . The lower collection period in

2009-10 ,0.32 which reduces firms baddebts.

The reason is inceasing of cash sales and better collection performance.

DEBTORS TURNOVER RATIO

2005-06, 248.52

2006-07, 582.08

2007-08, 734.33

2008-09, 1104.35

2009-10, 1151.632005-06

2006-07

2007-08

2008-09

2009-10

Figure 3.2.9

INFERENCES

The above diagram shows debtors turnover ratio of the company. The increased

ratio shows the chances to increase bad debt. Here the ratio is increased in every

year.1151.63 times in the year 2009-10.

49

AVERAGE DEBT COLLECTION PERIOD

2005-06, 1.47

2006-07, 0.63

2007-08, 0.5

2008-09, 0.33

2009-10, 0.322005-06

2006-07

2007-08

2008-09

2009-10

Figure 3.2.10

INFERENCES

The above diagram shows average debt collection period of the company. The

low collection period shows power of the company to collect the amount from it’s

debtors. The collection period of the year 2009-10 is 0.32 days. The company has win to

keep their collection period as low in past five years. Which help the company to get

enough working capital assistance.

6) CREDITORS TURNOVER RATIO (Crs VELLOCITY)

This ratio indicates the number of times the accounts payablerotate in a

year.accouts payable include trade creditors and bills payable. This ratio shows the

relationship between net credit purchase and accounts payable.

NET CREDIT PURCHASECREDITORS TURNOVER RATIO = AVERAGE ACCOUNTS PAYABLES

AVERAGE DEBT PAYMENT PERIOD:-Average credit payment period indicates credit period enjoyed by the firm

payingto it’s creditors.

50

( CREDITORS + BILLS PAYABLES)*365AVERAGE DEBT PAYMENT PERIOD = (IN DAYS) NET CREDIT PURCHASE ( CREDITORS + BILLS PAYABLE)*12ADPP (in month) = NET CREDIT PURCHASE

Both the creditors turnover ratio and average debt payment period indicate about

the promptness in making payment for credit purchases.

CREDITORS TURNOVER RATIO & AVERAGE DEBT PAYMENT PERIOD

(Rs. In lakhs)Year Annual

PurchaseAve. trade creditors

Creditors turnover ratio

Ave. paymemt(in days)

2005-06 17987.75 787.61 22.84 15.98

2006-07 21910.96 418.80 52.32 6.98

2007-08 23071.44 491.29 46.96 7.77

2008-09 29308.93 557.82 52.54 6.95

2009-10 29794.75 451.95 65.92 5.54

Source: annual reports of the companyTable 3.2.9

INTERPRETATION

51

Higher the average payment period shows the company can enjoy the

considerable time from it’s suppliers before they can claim dues from the company. The

table shows higher payment period in the year 2005-06 during the study period .

CREDITORS TURNOVER RATIO

2005-06, 22.84

2006-07, 52.32

2007-08, 46.962008-09, 52.54

2009-10, 65.92 2005-06

2006-07

2007-08

2008-09

2009-10

Figure 3.2.11

INFERENCES

The above diagram shows average debt payment period of the company. This

shows the considerable increase in debt payment period during the study period. In the

year 2005-06 turnover ratio is 22.84 times , but it is increased in last year 2009-10,it is

65.92 times. Increase in turnover affect the company’s working capital.

AVERAGE DEBT PAYMENT PERIOD

2005-06, 15.98

2006-07, 6.982007-08, 7.77

2008-09, 6.95

2009-10, 5.54 2005-06

2006-07

2007-08

2008-09

2009-10

Figure 3.2.12

52

INFERENCES

The above diagram shows the average debt payment period of the company. The

payment period was decreased in to 5.54 day’s in the year 2009-10. The decrease in

payment period reduce company’s time for paying credit amount.

53

CHAPTER – 4FINDINGS, SUGGESSIONS

ANDCONCLUSION

FINDINGS

The current ratio of the company is faire during the study period. It shows more than

2 as ratio.

The quick ratio of the company is satisfactory. In the study period it shows more than

1:1.

The ratio of cash to the current liabilities of the company is very poor during the

study period except in the year 2005-06.

The ratio of cash to current assets is very poor. In the year 2005-06 it shows 39.51%.

The low percentage shows the liquidity position of the company is very low.

54

The major portion of the current assets is inventory. This will reduce the company’s

working capital availability. Only reason is bulky purchase of rawmaterials.

The working capital turnover ratio of the company is icreased from 8.12 to 18.38

during study period.

Debtors turnover ratio and average debt collection period shows working capital

efficiency of the company.

Creditors turnover ratio and average payment period shows working capital

availability and better management of the company.

The management of working capital in the company is satisfied. They have to reduce

cost of the rawmaterials through bulky purchase. But it shows rduction in quick cash

liquidity.

The company’s liquidity position is sound , when we analyse the liquidity ratio’s.

The debtors turnover and collection period shows better management of the working

capital of the company.

The changes in the schedule of working capital is increased over the years. The

company try to utilize maximam sources of working capital.

SUGGESSIONS

The liquidity position of the company is better, but working capital is fluctuating over

the years. So, the company try to maintain a stable working capital position by giving

better attention and diligence to the working capital management.

The major part of the company’s current assets is inventory. This will rduce

company’s liquidity position. So ,company should place timely order for raw materials and

ensure it’s availability on time. The following factors will consider when determining the

optimum level of stock:-

55

the average level of daily sales (adjusted for seasonal variations);

the lead time between ordering goods and their delivery;

the reliability of suppliers;

the type of good and the danger of their perishing or becoming obsolete;

the cost of re-ordering stock;

storage and security costs;

other factors such as rumours of a shortage or an increase in price.

The companies debt collection period is more than 30 days . So,with this in mind an

effective credit control policy is necessary. This should include the following:

Before allowing credit, an organisation should check the credit rating of potential

customers, where necessary seeking references from a third party. Often this will involve

using the services of a credit agency such as Dunn and Bradstreet.

Based upon the results of a credit check, credit limits can be set. Once the credit limit

is reached it cannot be exceeded without the authorisation of senior management.

Credit customers should be informed in writing of the normal credit period (for

example 30 days after the invoice date).

A small cash discount is often used as an incentive to encourage early payment by

debtors. For example, many firms offer a discount of 2.5% of the invoice value for

payment within seven working days of the invoice date.

It is essential that an organisation maintains accurate records detailing all transactions

with customers and the amounts owing. An aged debtors' list detailing the length of time

that a debt has been owing is useful since it highlights those debts which management

needs to concentrate on.

An organisation should issue regular statements (normally monthly), and where

necessary these should be followed up with reminders and phone calls/letters.

56

CONCLUSION

KSE Ltd. ,IRINJALAKUDA was established in the year 1963. Now KSE Ltd.

have different units in south India and also they have farm and ice cream factory. Mainly

they have concentrated on cattle feed industry. Now it has the largest private sector cattle

feed company in an India.

During the course of this project we have looked at the items which make up

working capital and considered how organisations can improve their management of

working capital. We have seen that the ideal level of working capital is difficult to

calculate and will vary from one organisation to another depending upon the industry in

which they operate. What is essential is that a business avoids both the situation of too

little or too much working capital.

57

The project entitled “A STUDY ON WORKING CAPITAL MANAGEMENT

IN KSE Ltd. ” was undertaken with the object of creating an idea about the management

of the working capital of the business firm. The study in KSE Ltd. helped me to attain a

good knowledge about practices inworking capital management and I conclude that the

study was a successful and a memorable one.

BIBLIOGRAPHY

REFERENCESBooks

1) Dr.K.G.Chandrasekharan Nair and Dr. Jayakumar ‘CORPORATE ACCOUNTING’

Chapter 8,’ Ratio analysis’,page no:8.1 – 8.46

Websites

1) www.kselimited.com

2) http://en.wikipedia.org/wiki/Working_capital

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3) www.studyfinance.com/lessons/workcap/

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APPENDICES

BALANCE SHEET , PROFIT & LOSS A/C, ANDCASH FLOW STATEMENT

Appendix-1BALANCE SHEET OF KSE Ltd. , IRINJALAKUDA ---------------IN RS . Cr.----------

Mar '06 Mar '07 Mar '08 Mar '09 Mar '1012 mths 12 mths 12 mths 12 mths 12 mths

Sources Of FundsTotal Share Capital 3.20 3.20 3.20 3.20 3.20

Equity Share Capital 3.20 3.20 3.20 3.20 3.20Share Application Money 0.00 0.00 0.00 0.00 0.00Preference Share Capital 0.00 0.00 0.00 0.00 0.00

Reserves 23.51 22.12 23.50 24.83 29.37Revaluation Reserves 0.00 0.00 0.00 0.00 0.00

Networth 26.71 25.32 26.70 28.03 32.57Secured Loans 26.06 14.77 13.35 24.04 20.97

Unsecured Loans 6.98 12.51 6.45 5.95 8.26

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Total Debt 33.04 27.28 19.80 29.99 29.23Total Liabilities 59.75 52.60 46.50 58.02 61.80

Mar '06 Mar '07 Mar '08 Mar '09 Mar '1012 mths 12 mths 12 mths 12 mths 12 mths

Application Of FundsGross Block 47.20 52.65 52.86 54.53 68.60

Less: Accum. Depreciation 19.77 22.38 24.48 26.13 29.63Net Block 27.43 30.27 28.38 28.40 38.97

Capital Work in Progress 3.78 0.51 1.00 9.98 0.97Investments 0.02 0.03 0.03 0.08 4.08Inventories 24.30 22.18 19.30 24.70 20.83

Sundry Debtors 0.97 0.47 0.39 0.32 0.32Cash and Bank Balance 2.62 4.39 5.00 3.47 6.77

Total Current Assets 27.89 27.04 24.69 28.49 27.92Loans and Advances 2.84 4.31 4.07 3.46 3.21

Fixed Deposits 15.52 0.21 0.31 0.92 1.83Total CA, Loans & Advances 46.25 31.56 29.07 32.87 32.96

Deffered Credit 0.00 0.00 0.00 0.00 0.00Current Liabilities 12.21 8.89 10.37 11.24 11.21

Provisions 5.51 0.87 1.62 2.05 3.96Total CL & Provisions 17.72 9.76 11.99 13.29 15.17Net Current Assets 28.53 21.80 17.08 19.58 17.79

Miscellaneous Expenses 0.00 0.00 0.00 0.00 0.00Total Assets 59.76 52.61 46.49 58.04 61.81

Contingent Liabilities 0.17 0.15 4.38 1.72 1.74Book Value (Rs) 83.46 79.13 83.44 87.60 101.80

Appendix-2PROFIT & LOSS A/C OF KSE Ltd. ,IRINJALAKUDA ---------------IN RS . Cr.----------

Mar '06 Mar '07 Mar '08 Mar '09 Mar '1012 mths 12 mths 12 mths 12 mths 12 mths

IncomeSales Turnover 240.60 275.06 289.51 350.28 370.97Excise Duty 0.30 0.02 0.03 0.03 0.03Net Sales 240.30 275.04 289.48 350.25 370.94Other Income 0.35 0.43 0.95 -0.41 1.31Stock Adjustments -1.28 0.59 0.04 0.60 0.49Total Income 239.37 276.06 290.47 350.44 372.74ExpenditureRaw Materials 190.68 238.24 249.31 305.40 318.31Power & Fuel Cost 5.43 6.02 5.55 6.87 7.51Employee Cost 10.12 10.35 10.81 12.77 14.99

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Other Manufacturing Expenses 6.22 6.66 5.74 6.58 4.86Selling and Admin Expenses 13.19 10.36 8.32 7.07 6.52Miscellaneous Expenses 1.35 0.82 0.74 0.79 0.85Preoperative Exp Capitalised 0.00 0.00 0.00 0.00 0.00Total Expenses 226.99 272.45 280.47 339.48 353.04

Mar '06 Mar '07 Mar '08 Mar '09 Mar '1012 mths 12 mths 12 mths 12 mths 12 mths

Operating Profit 12.03 3.18 9.05 11.37 18.39PBDIT 12.38 3.61 10.00 10.96 19.70Interest 1.82 2.50 2.88 3.52 3.23PBDT 10.56 1.11 7.12 7.44 16.47Depreciation 1.57 2.81 2.87 2.59 3.84Other Written Off 0.00 0.00 0.00 0.00 0.00Profit Before Tax 8.99 -1.70 4.25 4.85 12.63Extra-ordinary items -0.11 0.17 -0.01 0.21 0.02PBT (Post Extra-ord Items) 8.88 -1.53 4.24 5.06 12.65Tax 2.85 -0.57 1.62 1.87 4.38Reported Net Profit 5.91 -1.01 2.58 3.21 8.27Total Value Addition 36.32 34.22 31.16 34.07 34.72Preference Dividend 0.00 0.00 0.00 0.00 0.00Equity Dividend 4.00 0.32 1.12 1.60 3.20Corporate Dividend Tax 0.56 0.05 0.19 0.27 0.53Per share data (annualised)Shares in issue (lakhs) 32.00 32.00 32.00 32.00 32.00Earning Per Share (Rs) 18.48 -3.16 8.07 10.02 25.85Equity Dividend (%) 125.00 10.00 35.00 50.00 100.00Book Value (Rs) 83.46 79.13 83.44 87.60 101.80

Appendix-3

CASH FLOW OF KSE Ltd. ,IRINJALAKUDA ---------------IN RS . Cr.----------

Mar '06 Mar '07 Mar '08 Mar '09 Mar '1012 mths 12 mths 12 mths 12 mths 12 mths

Net Profit Before Tax 8.88 -1.75 4.21 5.01 12.66Net Cash From Operating Activities

12.04 -0.17 10.50 2.28 17.52

Net Cash (used in)/fromInvesting Activities

-9.96 -2.38 -1.34 -11.40 -9.34

Net Cash (used in)/from Financing Activities

12.41 -10.99 -8.45 8.20 -3.97

Net (decrease)/increase In Cash and Cash Equivalents

14.49 -13.54 0.71 -0.92 4.21

Opening Cash & Cash 3.65 18.14 4.60 5.31 4.39

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EquivalentsClosing Cash & Cash Equivalents

18.14 4.60 5.31 4.39 8.60

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