working capital project QCML

CHAPTER- 1

1.1 INTRODUCTION ABOUT THE PROJECT

ABOUT THE STUDY

Meaning of Working Capital:

Capital require for a business can be classified under two main

categories, (a).fixed capital, (b).working capital.

Every business needs funds for two purposes for its establishment

and to carry our it’s day-to-day operations. Long-term funds are

required to create production facilities through purchase of fixed assets such as plant

and machinery, land, building, furniture etc.

DEFINITION:

In the words of shubin, “working capital is the amount of funds

necessary to cover the cost of operating the enterprise”.

CONCEPT OF WORKING CAPITAL:

There are two concept of working capital:

(A).Balance sheet concept,

(B).Operating cycle or circular flow concept.

1

(A).Balance Sheet Concept:

There are two interpretations of working capital under the balance

sheet concept:

1. Gross working capital,

2. Net working capital.

In the broad sense, the term working capital refers to the gross

working capital and represents the amount of funds invested in current assets. This,

the gross working capital is the capital invested in total current assets of the

enterprise.

(B).Operating cycle or circular flow concept:

As discussed earlier, working capital refers to that part of firm’s

capital which is required for financing short-term or current assets keep revolving fast

and are being constantly converted into cash and this cash flow. Hence, it is also

known as revolving or circulating capital.

2

NET WORKING CAPITAL=CURRENT ASSETS-CURRENT LIABILITIES.

CHART NO. 1

(Working capital cycle: circular flow concept)

CLASSIFICATION OR KINDS OF WORKING CAPITAL:

Wording capital may be classified in two ways:

(a)On the basis of concept,

(b)On the basis of time.

On the basis of concept, working capital is classified as gross

working capital and net working capital as discussed earlier. This classification is

important from the point of view of the financial manager. On the basis of time,

wording capital may be classified as:

Cash

Raw materialsDebtors(Receivables)

Work in progressSales

Finished goods

3

1. Permanent or fixed working capital.

2. Temporary or variable working capital.

CHART NO.2

1. Permanent or Fixed working capital:

Permanent or fixed working capital is the minimum amount

which is required to ensure effective utilization of fixed facilities and for maintaining

the circulation of current assets. There is always a min mum level of current assets

which is continuously required by his enterprise to carry out its normal business

KINDS OF WORKING CAPITRAL

On the basic of concept On the basic of time

Gross working capital

Net working capital

Temporary or variable working capital

Regular working capital

Permanent or fixed working capital

Reserve working capital

Seasonal working capital

Special working capital

4

operations. As the business grows, the requirements of permanent working capital

also increase due to the increase in current assets.

2. Temporary or Variable working capital:

Temporary or variable working capital is the amount of working

capital which is required to meet the seasonal demands and some special

exigencies. Variable working capital can be further classified as seasonal working

capital and special working capital. Most of the enterprises have to provide additional

working capital to meet the seasonal and special needs. The capital required to meet

the seasonal needs of the enterprise is called seasonal working capital.

IMPORTANCE OR ADVANTAGES OF ADEQUATE WORKINGCAPITAL:

The main advantages of maintaining adequate amount of working

capital are as follows:

1. Solvency of the Business:

Adequate working capital helps in maintaining solvency of the

business by providing uninterrupted flow of production.

2. Goodwill:

Sufficient working capital enables a business concern to make prompt

payments and hence helps in creating and maintaining goodwill.

5

3. Easy Discounts:

A concern having adequate working capital, high solvency and good

credit standing can arrange loans from banks and others on easy and favorable

terms.

4. Cash Discount:

Adequate working capital also enables a concern to avail cash discounts on

the purchases and hence it reduces costs.

5. Regular supply of Raw Materials:

Sufficient working capital ensures regular supply of raw materials

and continuous production.

6. Regular payment of Salaries, Wages and Other day-to-day

commitments:

A company which has ample working capital can make regular

payment of salaries, wages and other day-to day commitments which raises the

morale of its employees, increases their efficiency, reduces wastages and costs and

enhances production and profits.

6

EXCES OR INADEQUATE WORKING CAPITAL:

Every business concern should have adequate wording capital to

run its business operations. It should have neither redundant or excess working

capital nor inadequate nor shortage of working capital. Both excess as well as short

working capital positions are bad for any business. However, ought of the two, it is

the inadequacy of working capital which is more dangerous from the point of view of

the firm.

THE NEED OR OBJECTS OF WORKING CAPITAL:

The need for working capital cannot be over emphasized. 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. There is

an operating cycle involved in the sales and realization of cash. There are time gaps

in purchaser of raw materials and production; production and sales; and sales and

realization of cash. Thus, working capital is needed for the following purposes:

1. For the purchase of raw materials, components and spares.

2. To pay wages and salaries.

3. To incur day-to-day expenses and overhead costs such as fuel, power and

office expenses, etc.

4. To meet the selling costs as packing, advertising, etc.

5. To provide credit facilities to the customers.

6. To maintain the inventories of raw material, work-in-progress, stores and spares

and finished stock.

7

FACTORS DETERMINING THE WORKING CAPITAL REQUIREMENTS:

The working capital requirements of a concern depend upon a large

number of factors such as nature and size of business, the character of their

operations, the length of production cycles, the rate of stock turnover and the state of

economic situation. It is not possible to rank them because all such factors are of

different importance and the influence of individual factors changes for a firm over

time. However, the following are important factors generally influencing the working

capital requirements.

1. Nature or character of Business:

The working capital requirements of a firm basically depend upon

the nature of its business. Public utility undertakings like electricity, water supply and

railways need very limited working capital because they offer cash sales only and

supply services, not products, and as such no funds are tied up in inventories and

receivables.

2. Size of Business/scale of operations:

The working capital requirements of a concern are directly

influenced by the size of its business which may be measured in terms of scale of

operations. Greater the size of a business unit, generally larger will be the

requirements of working capital.

3. Production policy:

8

In certain industries the demand is subject to wide fluctuations due

to seasonal variations. The requirements of working capital, in such cases, depend

upon the production policy.

4. Manufacturing process/Length of production cycle:

In manufacturing business, the requirements of working capital

increase in direct proportion to length of manufacturing process. Longer the process

period of manufacture, larger is the amount of working capital required.

5. Seasonal Variations:

In certain industries raw material is not available throughout the

year. They have to buy raw materials in bulk during the season to ensure an

uninterrupted flow and process them during the entire year.

6. Rate of Stock Turnover:

There is a high degree of inverse co-relationship between the

quantum of working capital and the velocity or speed with which the sales are

affected. A firm having a high rate of stock turnover will need lower amount of

working capital as compared to a firm having a low rate of turnover.

7. Credit Policy:

9

The credit policy of a concern in its dealings with debtors and

creditors influence considerably the requirements of working capital. A concern that

purchases its requirements on credit and sells its products/services on cash requires

lesser amount of working capital.

8. Business Cycle:

Business cycle refers to alternate expansion and contraction in

general business activity. In a period of boom i.e., when the business is prosperous

there is a need for larger amount of working capital due to increase in sales.

9. Rate of Growth of Business:

The working capital requirements of a concern increase with the

growth and expansion of its business activities. Although, it is difficult to determine

the relationship between the growth in the volume of business and the growth in the

working capital of a business.

10. Earning capacity and Dividend Policy:

Some firms have more earning capacity than others due to quality

of their products, monopoly conditions, etc. such firms with high earning capacity

may generate cash profits from operations and contribute to their working capital.

MANAGEMENT OF WORKING CAPITAL:

10

Working capital, in general practice, refers to the excess of

current assets over current liabilities. Management of working capital therefore, is

concerned with the problems that arise in attempting to manage the current assets,

the current liabilities and the inter-relationship that exists between them. In other

words it refers to all aspects of administration of both current assets and current

liabilities.

Working capital management is three dimensional in nature:

(a) Dimension I is concerned with the formulation of policies with regard to

profitability, risk and liquidity.

(b) Dimension II is concerned with the decisions about the composition and level of

current assets.

(c) Dimension III is concerned with the decisions about the composition and level of

current liabilities.

PRINCIPLES OF WORKING CAPITAL MANAGEMENT/POLICY:

The following are the general principles of a sound working capital

management policy:

1. Principle of Risk Variation:

11

Risk here refers to the inability of a firm to meet its obligations as

and when they become due for payment. Larger investment in current assets with

less dependence on short-term borrowings increases the opportunity for gain or loss.

2. Principle of Cost of Capital:

The various sources of raising working capital finance have

different cost of capital and the degree of risk involved. Generally, higher the risk

lower is the cost and lower the risk higher is the cost. A sound working capital

management should always try to achieve a proper balance between these two

3. Principle of Equity Position:

This principle is concerned with planning the total investment in

current assets. According to this principle, the amount of working capital invested in

each component should be adequately justified by a firm’s equity position.

4. Principle of Maturity of Payment:

This principle is concerned with planning the sources of finance

for working capital. According to this principle, a firm should make every effort to

relate maturities of payment to its flow of internally generated funds.

OBJECTIVES OF THE STUDY

12

1. To study about the effect of working capital management of Quilon Co-operative

Spinning Mills Ltd.

2. To analyze the liquidity position and current asset movement of the company.

3. To find out the gross and net working capital of the company.

4. To know about the changing position of working capital by comparing current

asset and current liability of two years.

5. To suggest suitable measures for the improvement of working capital.

SCOPE OF THE STUDY

13

Working capital is that part of capital, which makes a business, run

on a continuous basis with out any interruption. The working capital of Quilon Co-

operative Spinning Mills Ltd. shows a negative net working capital during the period

of study. The barometer to measure the effectiveness of managing the working

capital of QCSML is the evaluation of the past performance and analyzing the

financial statements using accounting and statistical tools. The study touched all-

important constituents of working capital such as cash, receivables, and inventory.

Thus the study would give a brief description of the performance of QCSML and

suggestion for its improvement.

LIMITATIONS OF THE STUDY

14

1. The study is limited for the period of five years (2003-2004 to 2007-2008) based

on available data in this period.

2. The study is based on the secondary data such as published annual reports of

the company. The accuracy of calculation depends very much on the

information found in the balance sheet.

3. The fluctuations in current assets and liabilities that may occur between the

Periods of any two balance sheets may have their implications on the Working

capital calculations.

1.2 INTRODUCTION ABOUT THE INDUSTRY

15

TEXTILE INDUSTRY

The textile industry is a group of related industries, which uses a variety of

natural (cotton, wool, etc.) and/or synthetic fibres to produce fabric. It is a significant

contributor to many national economies, encompassing both small and large-scale

operations worldwide. The sequence of the manufacture of textiles is illustrated in

the flow diagram in Figure 1 (see process description).

Subdivision of the textile industry into its various components can be approached

from several angles. According to reference, the classical method of categorizing the

industry involves grouping the manufacturing plants according to the fibre being

processed that is, cotton, wool, or synthetics. The modern approach to textile

industry categorization, however, involves grouping the manufacturing plants

according to their particular operation.

• Wool Scouring

• Wool Finishing

• Dry Processing

• Woven Fabric Finishing

• Knit Fabric Finishing

• Carpet Manufacture

• Stock and Yarn Dyeing and Finishing

.

16

Traditionally, the textile industry is very energy, water, and chemical-

intensive. About 60% of the energy is used by dyeing and finishing operations.

Environmental problems associated with the textile industry are typically those

associated with water pollution. Natural impurities extracted from the fibre being

processed along with the chemicals used for processing are the two main sources of

pollution. Effluents are generally hot, alkaline, strong smelling and colored by

chemicals used in dyeing processes. Some of the chemicals discharged are toxic.

Other environmental issues now considered equally important and relevant to the

textile industry include air emissions, notably Volatile Organic Compounds (VOC).

1.3 INTRODUCTION ABOUT THE COMPANY

17

COMPANY PROFILE

Textile industry in Kerala plays an important role. The handloom industry is

one of the traditional industries of Kerala and products of it are part of Kerala culture.

This is a sector which had employed lacks of Kerelates. The weavers were faced

with the problem of non availability of cotton yarn. The situation is such that the

weavers were almost the verge of facing unemployment. The unemployment is a

universal issue, which every country in the world is facing. In a developing country

like India the problem of unemployment is sever.

In order to cater the needs of weavers and also to provide employment

opportunity to backward areas, the Government of Kerala took decision to start five

spinning mills in the co-operative sector with this object a society named Quilon Co-

operative Spinning Mills Limited was registered on February 13, 1976 having

capacity of 2500 spindles to manufacture cotton and manmade fiber. The area of

operation of the society spread allover Kerala. Initial capital required for Mill was

collected through various sources. The estimated cost of project was 636 lacks. The

total cost of the project when it is completed on 11.12.1986 was Rs.717 lacks.

The capital required for were mobilized from the source like issue of shares,

subsidy from government and other financial institutions like IDBI, ICICI, IFCI, KSCB

and interest areas from these funds. The venture capital required for this project can

be analyzed in the following table.

18

Distribution of venture capital

Components Amounts (in lacks)

Share capital 254.96

Investment subsidy 15.00

Terms loans from IDBI 145.00

Term loans from ICICI 75.00

Term loans from IFCI 70.00

Term loans from KSCB 28.00

Loans from Govt. of Kerala 10.19

Interest areas 118.85

Total 717.00

The capital required for the company were mobilized from the sources like

issue of shares, subsidy from government and other financial institutions like IDBI,

ICICI, IFCI,KSCB and other interest areas of the funds. The venture capital incurred

for this project can be analyzed in the above table.

OBJECTIVES OF THE MILL

19

The main objectives of the QCSML are;

1. To supply cotton yarn to members.

2. To promote industrial development in rural areas.

3. To provide gainful employment to rural people.

4. To safeguard the weaker section from exploitation of large sellers.

LOCATION

The QCSML is situated at Karamcodu, Chathannur about 20 km. away from

Kollam town and 53 km. away from Thiruvananthapuram. The nearest railway station

is at Paravoor, which is about 12km. away from the mill. The total land area of the

mill is 21.74acers. The main advantage of mills location is.

1. It has facilities of good network of transportation.

2. It is situated beside NH47.

3. It has good working environment.

4. It has an good accessibility for its workers and officers.

5. the location being industrially backward area avails the society many benefits

from the government like subsidies, allowance, tax concession etc,

CAPITAL STRUCTURE

20

The authorized capital of QCSML at the beginning was Rs.3 cores, then it

increased to 4 cores. The paid-up capital of QCSML can be summarized in the

following table.

Capital structure

Component of capital Amount % of component of

capital

Co-operative society 1471100 5.39

Individuals 44900 1.65

Govt. of Kerala 249556200 91.49

Others 389100 1.43

Share application money 2206 0.008

Total 28863506 100

On analyzing the above table, it was found that the Govt. of Kerala is the

major share holder of the QCSML. They have taken 91.49% share of the company.

Co-operative society and others take the balance.

ORGANIZATIONAL STRUCTURE

21

QCSML is one of the medium scale industry registered under the co-

operative societies Act and cones under industrial development. The supreme

authority of QCSML is vested in the hands of board of directors. The entire

management of the firm is controlled by board of directors and they are appointed by

the Govt. of Kerala. The day-to-day activities of the mill are vested M.D., state

government has the authority to appoint this M.D. He will be appointed for five years.

Board of directors is the decision making body and managing director is the

implementing authority.

The Quilon Co-operative Spinning Mills Ltd. Consist of line and staff

organization. The line portion provides stability and discipline and staff provides

expert knowledge and advice. Here the authority flows from top to bottom. The

managing director gives induction to departments.

CHART NO. 3

ORGANIZATION CHART

22

1.4 REVIEW OF LITERATURE

Board of Directors

Managing Director

Financial ControllerWelfare Officer

23

Mill Manager

Spinning Master

Deputy Spinning Master

Account OfficerTime Officer

Supervisor

Worker

The aim of this chapter is to review briefly and critically the empirical work

done in the areas evolving working capital management. This is intensified to reveal

some prominent facts and to highlight the nature of the present study. The

researcher has given a review of various studies both in India and abroad in

connection with the present study.

Literature relating to working capital management:

1. ABDUL RAHEMAN AND MOHAMED NASR- 2007, Working Capital

Management has its effect on liquidity as well on profitability of the firm. The cash

conversion cycle increases it will lead to decreasing profitability of the firm, and

managers can create a positive value for the shareholders by reducing the cash

conversion cycle to a possible minimum level. We find that there is a significant

negative relationship between size of the form and its profitability. There is also a

significant negative relationship between debt used by the firm and its profitability.

2. ELJELLY-2004, Elucidated that efficient liquidity management involves planning

and controlling current assets and current liabilities in such a manner that eliminates

the risk of inability to meet due short-term obligations and avoids excessive

investment in these assets.

24

3. DELOOF-2003, Discussed that most firms had a large amount of cash invested in

working capital. It can therefore be expected that the way in which working capital is

managed will have a significant impact of profitability of those firms. On basis of

these results he suggested that managers could create value for their shareholders

by reducing the number of days’ accounts receivable and inventories to a reasonable

minimum.

4. GOSH AND MAJI-2003, In this paper made an attempt to examine the efficiency

of working capital management of the Indian cement companies during 1992-1993 to

2001-2002. For measuring the efficiency of working capital management,

performance utilization, and overall efficiency indices were calculated instead of

using some common working capital management ratios.

5. REL Consultancy Group has for year’s conducted and annual survey of corporate

working capital management performance for CFO Magazine, which CFO Magazine

then reports. Their 2005 survey report points out, there is a high positive correlation

between the efficiency of a corporation’s working capital policies and its return on

invested capital.

6. SHIN AND SOENEN-1998, Point out that a corporation’s working capital is the

result of the time lag between the expenditure for the purchase of raw materials and

the collection from the sale of finished goods. As such, it involves many different

aspects of corporate operate operational .

25

7. NUNN-1981 Uses the PIMS database to examine why some product lines have

low working capital requirements, while other product lines have high working capital

requirements. In addition, Nunn is interested in “permanent” rather than temporary

working capital investment as he uses data averaged over four years.

8. HAWAWINI, VIALLET, AND VORA-1986, examine the influence of a firm’s

industry on its working capital management. Using data o 1,181 U.S. firms over the

period 1960 to 1979. From these studies, we conclude that sales growth and industry

practices are important factors influencing a firm’s investment in working capital.

26

CHAPTER- 2

RESEARCH METHODOLOGY

Meaning of Research:

Research in common parlance refers to a search for knowledge. The

advanced learner’s dictionary of current English lays down the meaning of research

as “a careful investigation or inquiry specially through sear for new facts in any

branch of knowledge.”

Definition:

According to Woody, “Research comprises defining and redefining

problems formulating hypothesis or suggested solution collecting organizing and

evaluating, data making deduction and researching concessions and at last carefully

the concessions to determine whether they fit the formulating the hypothesis.”

Methods of Data Collection:

There are two types of data.

1. Primary data

2. Secondary data

1. Primary data:

27

The primary data are those which are collected a fresh and for the first

time, and thus happens to be original in character.

Primary data was collected of discussions with Managers, Accountants and Other

staff of Quilon Co-operative Spinning Mills Limited.

2. Secondary data:

The secondary data, on the other hand, are those which have already

been collected by someone else and which have already been passed though the

statistical process.

Secondary data was collected form Balance Sheet and annual reports

of the company, Magazines, Books of Accounts, Other books, etc.

Sources of data:

The data needed to the study was collected from company’s financial

records and annual reports.

Tools used for Analysis:

1. Gross Working Capital

2. Net Working Capital

3. Schedule of Changes in Working Capital

4. Ratio Analysis

Period of study:

28

The study is carried out for 30 days by collecting data for a period of

five years from 2003-2004 to 2007-2008.

29

CHAPTER- 3

ANALYSIS AND INTERPRETATION

SCHEDULE SHOWING CAHNGES IN WORKING CAPITAL:

Schedule showing changes in working capital is an important tool to

study the changes in working capital of the concern and can also throw light on

cause for these changes. Working capital means the excess of current asset over

current liabilities. Statement of changes in working capital is prepared to show the

changes in the working capital between the two balance sheet dates. This statement

is prepared with the help of current assets and current liabilities derived from the two

balance sheets.

As, WORKING CAPITAL= CURRENT ASSETS- CURRENT LIABILITIES. So,

(i). An increase in current assets increases working capital.

(ii). An decrease in current assets decreases, working capital.

(iii). An increase in current liabilities decreases working capital, and

(iv). An decrease in current liabilities increase working capital.

30

Table No. 3

Schedule of changes in Working Capital for (2003 – 2004)

Particulars

Year Effect on working capital

2003 2004 increase Decrease

A. CURRENT ASSETS

Cash and bank balanceInventories Sundry debtorsDepositsOther current assetsAdvances for expensesAdvances for employees

Total

B.CURRENT LIABILITIES AND PROVISIONS

Current liabilitiesProvisions

Total

Working capital (A-B)

Net decrease in Working Capital

15288311156669358398062161884644111156255

1455643

15349261007288832854755609831803372132299

1347866

6095------

3439947159261

------

34018

15314917

---14938052554331

------

23956107777

14774369

23361231 22786657

425852941409135

573596631375117

43994429 58734780

20633206

15314917

35948123

35948123 35948123 19053567 19053567

31

INFERENCE:

The above table shows that schedule of changes in working capital as on

2003-2004. The current asset have decreased from 23361231 to 22786657 in the

year 2003-2004. Current liability for the year 2003 was 43994429. It has increased to

58734780 in the year 2004. The net decrease in working capital is 15314917.

32

Table No. 4


Particulars


2004 2005 Increase Decrease

A. CURRENT ASSETS


Total



Total



153492610072888

32854755609831

803372132299

1347866

1862586870944843897552154884

543125125145443049

327660---

1104280------------

1729958

2865845

----1363440

---3454947

2602477154

904817

37138

22786657 18227992

573596631375117

556297051412255

58734780 57041960

35948123

2865845

38813968

38813968 38813968 6027743 6027743

33

INFERENCE:


2004-2005. The current assets have decreased from 22786657 to 18227992 in the

year 2004-2005. Current liability for the year 2004 was 58734780. It has decreased

to 57041960 in the year 2005. The net decrease in working capital is 2865845.

34

Table No. 5


Particulars



A. CURRENT ASSETS


Total



Total



1862586870944843897552154884

543125125145443049

2176290620884944399502184884

181967115629594222

313704---

5019530000

------

151173

---54601

30688144

---2500599

------

3611589516

---

28416544---

18227992 15901791

556297051412255

840462491357654

57041960 85403903

38813968

30688144

69502112

69502112 69502112 31287817 31287817

INFERENCE:

35


2005-2006. The current asset have decreased from 18227992 to 15901791 in the

year 2005-2006. The net decrease in working capital is 30688144.

Table No. 6

36


Particulars



A. CURRENT ASSETS


Total



Total



2176290620884944399502184884

181967115629594222

176757310450073

27621932154884

185510106123760348

---4241224

------

3543---

166125

---83664

24408863

408717---

167775730000

---9506

---

26777440---

15901791 18186704

840462491357654

1108236891273990

85403903 112097679

69502112

24408863

93910975

93910975 93910975 28903420 28903420

INFERENCE:

37


2006-2007. The current asset have increased from 15901791 to 18186704 in the

year 2006-2007. Current liability for the year 2006 was 85403903. It has increased to

112099779 in the year 2007. The net decrease in working capital is 24408863.

Table No. 7


38

Particulars



A. CURRENT ASSETS


Total



Total



176757310450073

27621932154884

185510106123760348

21715069263822513356521548841138456

177503664228

403933---

2371372---

95294671380

---

------

5735408

---1186251

------------

96120

8096902155766

18186704 20703964

1108236891273990

1189205911429756

112097679 120350347

93910975

5735408

99646383

99646383 99646383 9535039 9535039

INFERENCE:

39


2007-2008. The current assets have increased from 18186704 to 20703964 in the

year 2007-2008. Current liability for the year 2007 was 112099779. It has increased

to 120350347 in the year 2008.The net decrease in working capital is 5735408.

RATIO ANALYSIS

40

1) CURRENT RATIO:

Current ratio explains the relationship between current assets and

current liabilities. The general norms are to maintain 2:1 ratio. It can be calculated by

dividing current assets by current liabilities.

CURRENT ASSETS

CURRENT RATIO =

CURRENT LIABILITIES

Table No. 8

STATEMENT SHOWING CURRENT RATIO

YEAR 2003-2004 2004-2005 2005-2006 2006-2007 2007-2008

CA 22786660 18227994 15901791 18186704 20703963

CL 58734780 57041960 85403903 112097679 120350346

CR 0.38:1 0.32:1 0.19:1 0.16:1 0.17:1

INTERFERENCE:

Current ratio of Quilon Co-operative Spinning Mills Ltd shows that the

company is running bad position. The company’s current ratio is bellow the arbitrary

standard of liquidity. In 2005-2006 the ratio decreased from 0.32 to .16 because of a

41

high increase in the current liabilities. The ratio shows the liquidity position of the

company is very bad.

CHART NO: 4

CURRENT RATIO

0.38

0.32

0.190.16 0.17

0

0.05

0.1

0.15

0.2

0.25

0.3

0.35

0.4

2003-2004 2004-2005 2005-2006 2006-2007 2007-2008

YEAR

CU

RR

EN

T R

ATI

O

42

2) QUICK RATIO:

The quick ratio tells about the relationship between quick assets and

current liabilities. It is calculated by dividing quick assets by current liabilities. The

ideal norm is 1:1. Quick assets are obtained by subtracting prepaid expenses and

inventories from current assets.

QUICK ASSETS

QUICK RATIO =

CURRENT LIABILITIES

QUICK ASSETS = SUNDRY DEBTORS + CASH & BANK BALANCE + LOANS & ADVANCES

Table No. 9

STATEMENT SHOWING QUICK RATIO

YEAR 2003-2004 2004-2005 2005-2006 2006-2007 2007-2008

QA 6300566 682535 7326089 5396236 8146800

CL 58734780 57041960 85403903 112097679 120350346

QR .11:1 .12:1 .08:1 .04:1 .06:1

INFERENCE:

From the above table reveals that, Quick ratio of the company is

above the unsatisfactory level that is the concern is not able to meet its short-term

43

obligations. In the year 2006-2007 the ratio is .04, where it shows huge decrease in

current assets. The ratios show that the company is in bad liquidity position.

CHART NO: 5

QUICK RATIO

0.110.12

0.08

0.04

0.06

0

0.02

0.04

0.06

0.08

0.1

0.12

0.14

2003-2004 2004-2005 2005-2006 2006-2007 2007-2008

YEAR

QU

ICK

RA

TIO

44

3) ABSOLUTE LIQUID RATIO:

Absolute liquid ratio shows the relationship between the sum of cash

and marketable securities to the total current liabilities. The ideal ratio is 0.5:1.

ABSALUTE LIQUID ASSETS

ABSOLUTE LIQUID RATIO =

CURRENT LIABILITIES

ABSLOUTE LISQUID ASSETS = CASH & BANK +MARKETABLE SECURITIES

Table No. 10

STATEMENT SHOWING ABSOLUT LIQUID RATIO

YEAR 2003-2004 2004-2005 2005-2006 2006-2007 2007-2008

Absolute Asset

1534926 1862586 2176289 1767573 2171506

CL 58734780 57047960 85403903 112097679 120350346

ALR .026:1 .032:1 .025:1 .015:1 .018:1

INFERENCE:

From the above table shows that the company‘s absolute liquid ratio

is less than the ideal ratio. In all the year the ratio is below the satisfactory level. This

is because of low cash and bank balance of the firm.

45

CHART NO: 6

ABSOLUTE LIQUID RATIO

0.026

0.032

0.025

0.015

0.018

0

0.005

0.01

0.015

0.02

0.025

0.03

0.035

2003-2004 2004-2005 2005-2006 2006-2007 2007-2008

YEAR

AB

SO

LUTE

LIQ

UID

RA

TIO

46

4) WORKING CAPITAL TURNOVER RATIO:

The ratio is calculated by dividing sales by working capital. It shows

the number of times the working capital of the company is turned into sales.

WORKING CAPITAL NET SALES

TURN OVER RATIO =

NET WORKING CAPITAL

Table No. 11

STATEMENT SHOWING WORKING CAPITAL TURNOVER RATIO

YEAR 2003-2004 2004-2005 2005-2006 2006-2007 2007-2008

Net Sales 77881005 83962637 71752204 55763969 53098257

Net Working Capital

-35948123 -38813968 -69502112 -93910975 -99646383

Working Capital

turnover Ratio

-2.17 times -2.16 times -1.03 times -0.59 times -0.53 times

INFERENCE:

Working capital of a company is directly related to sales. The above table, it is

inferred that the working capital turnover ratio is in a lower status. This shows the

firm is inefficient to utilize the working capital.

47

CHART NO: 7

WORKING CAPITAL TURN OVER RATIO

WORKING CAPITAL TURNOVER RATIO

-2.17

-2.16

-1.03

-0.59

-0.53

2003-2004

2004-2005

2005-2006

2006-2007

2007-2008

48

5) INVENTORY TURN OVER RATIO:

It measures the velocity of conversion of the stock into sales. It is

obtained by dividing sales by average inventories. Usually a higher inventory

turnover indicates efficient management of inventory.

SALES

INVENTORY TURN OVER RATIO =

INVENTORY

Table No. 12

STATEMENT SHOWING INVENTORY TURNOVER RATIO

YEAR 2003-2004 2004-2005 2005-2006 2006-2007 2007-2008

Net sales 77881005 83962637 71752204 55763969 53098257Average

Inventory 10072888 8709448 6208849 10450073 9263822

Stock turnover

ratio7.73 times 9.64 times 11.56 times 5.34 times 5.73 times

INFERENCE:

The above table shows the inventory turn over ratio of QCSML is a

decreasing trend. This is because of the firm’s over investment in inventories. This

analysis shows the inefficiency of management in managing the inventories.

49

CHART NO: 8

INVENTORY TURN OVER RATIO

INVENTERY TURNOVER RATIO

7.73

9.64

11.56

5.34

5.73

2003-2004

2004-2005

2005-2006

2006-2007

2007-2008

50

6) DEBTORS TURNOVER RATIO:

Normally almost all the firms try to improve sales by giving credit. So

the debtors and receivables are inevitable. It indicates the velocity of the debt

collection of the firms. In simple words it indicates the number of times average

debtors are turned over during the year. It is calculated as,

NET CREDIT SALES

DEBTORS TURNOVER RATIO =

AVERAGE TRADE DEBTORS

Table No. 13

STATEMENT SHOWING DEBTORS TURNOVER RATIO

YEAR 2003-2004 2004-2005 2005-2006 2006-2007 2007-2008Net credit

Sales 77881005 83962637 71752204 55763969 53098257Average Trade

Debtors4562640 3837615 4414852 3601071 3947879

Debtors turnover


INFERENCE:

It indicated the numbers of time debtors are turned over during a year.

Generally higher the value of debtors turnover ratio, the more efficient in the

management of debt. Here the debtor’s turnover ratio of the company shows an

51

increasing trend. But this is not in a satisfied condition. There is a slight increase in

the debtors turnover ratio.

CHART NO: 9

DEBTORS TURNOVER RATIO

17.07

21.88

16.25 15.4813.45

0

5

10

15

20

25

2003-2004 2004-2005 2005-2006 2006-2007 2007-2008

YEAR

DE

BTO

RS

TU

RN

OV

ER

RA

TIO

Series2

Series1

52

7) AVERAGE COLLECTION PERIOD:

The average collection period represents the average number of days

for which a firm has to wait before its receivables are converted into cash. It is

calculated by dividing the debtors by credit sales per day.

DAYS IN AN YEAR

AVERAGE COLLECTION PERIOD =

DEBTORS TURNOVER RATIO

Table No. 13

STATEMENT SHOWING AVERAGE COLLECTION PERIOD

YEAR 2003-2004 2004-2005 2005-2006 2006-2007 2007-2008Days in an

year 365 365 365 365 365Debtors turnover

ratio17.07 21.88 16.25 15.48 13.45

Average Collection

period21 days 17 days 22 days 24 days 27 days

INFERENCE:

The above table reveals that, average collection period for the year 2004-

2005 has been decreased when compare to previous year. It shows the firm takes

17 days to convert receivables into cash. Where as in the year 2006-2007 the firms

53

take longer period of 23 days to convert into cash and 27 in 2007-2008. this is not a

satisfactory one.

CHART NO: 10

AVERAGE COLLECTION PERIOD

2117

22 2427

0

5

10

15

20

25

30

AV

ER

AG

E C

OL

LE

CT

ION

PE

RIO

D

2003-2004 2004-2005 2005-2006 2006-2007 2007-2008

YEAR

54

8) CREDITORS TURN OVER RATIO:

The creditor’s turnover ratio indicates the velocity, which the creditors

are turned over in relation to purchase. Higher the ratio, better it is otherwise lower

the creditors velocity, the more is the time taken for payment. Finding out how much

time the firm is likely to take in repaying its made creditors.

NET CREDIT PURCHASE

CREDITORS TURNOVER RATIO =

AVERAGE ACCOUNT PAYABLE

Table No. 14

STATEMENT SHOWING CREDITORS TURNOVER RATIO

YEAR 2003-2004 2004-2005 2005-2006 2006-2007 2007-2008Net Credit Purchase 53305182 57158835 46350827 37279647 37276154

Average a/c payable 51201027 48070959 73104140 96567480 102773624

Creditors turnover


INFERENCE:

The above table shows creditors velocity of the concern is decreased year by

year and in 2007-2008 it reaches its lowest minimum. This lowest credit velocity is

not favorable to the concern.

55

CHART NO: 11

CREDITORS TURNOVER RATIO

1.041.19

0.63

0.39 0.36

0

0.2

0.4

0.6

0.8

1

1.2

CREDITORS TURNOVER

RATIO

2003-2004 2004-2005 2005-2006 2006-2007 2007-2008

YEAR

56

CHAPTER- 4

FINDINGS

1. The net working capital of the mill shows a decreasing trend, during

the study period of 2003-2004 to 2007-2008. Moreover negative

balance through out these years.

2. The current ratio and quick ratio is below the standard norms in all the

years. The company is inefficient to meet the current obligations in

time.

3. Absolute liquid ratio shows that the cash position of the firm is not

good.

4. The working capital turnover ratio reveals that it is not favorable for the

firm.

5. Inventory turnover ratio indicates a decreasing trend during these

years. This is because of the firm’s over investment in inventories.

57

6. The study reveals that the debtor’s turnover ratio is not in a satisfactory

level. The firm is not efficient in handling the debt.

7. Creditors turnover ratio reveals that the creditors velocities are

decreased year by year.

8. The average collection period shows a increase in trend, it is not

satisfactory for the firm.

58

CHAPTER- 5

RECOMMENDATIONS

1. The management have improve their efficiency in collecting the debts.

2. For avoiding the shortage of raw material, the company have to find

more easy available sources.

3. The firm have to implement modern equipments in production, it helps

to producing quality products.

4. The firm have to increase their efficiency to settlement of loans through

dear cut plans.

5. The firm should try to reduce the inventory turnover ratio by keeping standard

credit policies. The company may take effects to collect the debts promptly.

The customers should be sent periodical reminders if they failed to pay in

time.

59

6. The company can try to reduce the excess of investment in current assets,

especially in the debtors. The higher investment in current assets will

severally affect the profitability of the firm.

CHAPTER- 6

60

CONCLUSION

Working capital is the life-blood & controlling nerve centre of a

business. No business can be successfully run without an adequate amount of

working capital. It is very essential to maintain the smooth running of a business.

The concept of working capital has its own importance in a going concern.

Generally negative balance is generally offset soon.

This study explains the management of working capital by the

QCSML management. The net working capital of the concern decrease year by

year. Now it is badly reaches in a negative position. Because of the high increase

in the cost of raw materials, the current liability reaches its maximum and this

badly affected to the management and they were failed to settled the loans and

other liabilities. This study shows that the management is failed to handle the

management of working capital and they facing a big loss.

61

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