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SUMMER TRAINING PROJECT REPORT
ON
STUDY OF WORKING CAPITAL MANAGEMENT OF
FOOD CORPORATION OF INDIA
For the partial fulfillment of the requirement for the award of degree of
MASTERS IN BUSINESS ADMINISTRATION
UNDER THE GUIDANCE OF: UNDER THE SUPERVISION
Dr. AMIT SHARMA Mr.NEERAJ BHARTIYA
USMS, GGSIPU Manager
SUBMITTED BY
ASHU GARG
University School of Management Studies
Guru Gobind Singh Indraprastha University
Sector-16C, Dwarka, New Delhi110075, India
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CERTIFICATE
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DECLARATION
I hereby declare that the project report entitled.A Study of Working
Capital Management of Food Corporation Of India. is the produce of my sincere effort.
This Summer Internship Project Report is being submitted by me alone, at UNIVERSITY
SCHOOL OF MANAGEMENT STUDIES, for the partial fulfillment of the course MBA,
and the report has not been submitted to any otherEducational institutions or for any other
purpose whatsoever.
ASHU GARG
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ACKNOWLEDGEMENT
I am highly thankful to the & for deputing me as a Management Trainee to the highly
acclaimed and renowned organization via Food Corporation of India for the period of 50
Days.
I have all respect forMr. B.L MEENA, AGM Training who assigned me the project on a
study of Working Capital Management of Food Corporation Of India and remained a
Guiding Lantern throughout the tenure of my training.
I wish to express my deep sense of gratitude to my Internal Guides, Mr. Neeraj Bhartia, MrsJyoti, Mr Gyanendra Mehta, and Rajesh Kumar Arora for their able guidance and useful
suggestions, which helped me in completing the project work in time.
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EXECUTIVE SUMMARY
The underlying aim of the summer training in FCI is a sincere attempt to analyze its
Working Management by making use of different financial appraisal techniques. The data for
the studies were obtained from the published annual reports of the company.
Among all the problems of financial management, the problems of working capital
management have probably been recognized as the most crucial one. It is because of the fact
that working capital always helps a business concern to gain vitality and life strength. The
objective of this study is to critically evaluate working capital management as practiced in
FCI.
In this study, a sincere attempt has been made to analyze the working of FCI by making use
of different financial appraisal techniques like ratio analysis, trend analysis, common-size
analysis etc. The period of study was 3 year from 2009-10 to 2011-12. The data for the
studies were obtained from the published annual reports of the company.
An effort has been made to appraise the overall financial performance and efficiency of
management, but the scope and depth of study remained limited due to the limiting factors of
time, and resources. However, it is expected that the study will provide useful information for
better and easier understanding of the financial results of the company.
This study has been divided into six chapters. The first chapter has been devoted to the
introduction and last to the summary of conclusion and suggestion. The second chapter deals
with the objectives. Third chapter takes care of introduction to financial analysis. In additionto this fourth chapter deals with significance of working capital, whereas fifth chapter deals
with the analysis aspects of working capital. The main source of data has been the annual
reports of the company.
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CONTENTS
1. Company Profile:-
2. Objective of the Project:-
3. Literature review:-
4. Analysis of Working Capital:-
5. Conclusion and Suggestions:-
6. References
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TABLE OF CONTENTS
Declaration
Acknowledgments
Executive Summary
CHAPTERIZATION
1. Introduction 9-15
1.1About Food Corporation Of India
1.2Objectives of Food Corporation Of India
1.3Organizational Structure
1.4SWOT Analysis
2. Objective of the study 16-18
2.1 Research Methodology
2.2 Type of Research
2.3 Sample of design
3. Literature Review 19-45
3.1 Concept of Financial Statement
3.2 Types of Financial Statement
3.3Parties Interest
3.4Financial Appraisal
3.5 Introduction of Working Capital
3.6 Concept of Working Capital
3.7 Importance of Working Capital analysis
3.8 Operating and cash conversion cycle
3.9 Methods and ratios
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4. Data Analysis Of Working 46-54
4.1 Working capital analysis
4.2 Working capital trend analysis
4.3 Ratio analysis
5. Conclusion and Recommendations 55-56
6. References 57
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CHAPTER -1
INTRODUCTION OF FCI
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1.1 OVERVIEW OF FCI
Food corporation of India was founded in 1964 by Government of India. It serves mainly the
wheat and rice products. The main headquarters of Food corporation of India is in new Delhi.
Food corporation of India was set up under the food corporation act. The food grains from the
farmers are at the price declared by the government of India. Food corporation Of India do
not hold any kind of authority to take any decisions regarding the supply or related to any
facts and figures about the FCI, all the respective decisions is taken by the government of
India. All the decisions are implemented by the Ministry of Food and Ministry of Agriculture.
There are numbers of FCI district offices that are listed on the official website and are
available for your assistance in most convenient
manner.
FCI is the Largest Corporation in India and
probably the largest supply chain management in
Asia. It operates through 5 zonal offices and 24 regional offices. Each year, the Food
Corporation of India purchases roughly 15-20 per cent of India's wheat output and 12-15 per
cent of its rice output. The purchases are made from the farmers at the rates declared by the
Govt. of India. This rate is called as MSP (Minimum support Price). There is no limit for
procurement in terms of volume, any quantity can be procured by FCI provided the stock
satisfies FAQ (Fair Average Quality) specifications with respect to FCI. The stocks are
transported throughout India and issued under the Public Distribution System (PDS) for the
consumption of the ration card holders at the rates declared by the Govt of India. The
difference between the purchase price and sale price, along with internal costs, are
reimbursed by the Union Government in the form of Food Subsidy. At present the annual
subsidy is around $10 billion. FCI by itself is not a Decision making authority, it does notdecide anything about the MSP, Imports or Exports. It just implements the decisions made by
the Ministry of Food and Ministry of Agriculture.
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1.2 OBJECTIVE OF FCI
The Food Corporation of India was setup under the Food Corporation Act 1964, in
order to fulfill following objectives of the Food Policy:
Effective price support operations for safeguarding the interests of the farmers. Distribution of food grains throughout the country for public distribution system. Maintaining satisfactory level of operational and buffer stocks of food grains to ensure
National Food Security.
In its 45 years of service to the nation, FCI has played a significant role in India's
success in transforming the crisis management oriented food security into a stable
security system.
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FCI's Objectives are:
To provide farmers remunerative prices. To make food grains available at reasonable prices, particularly to vulnerable section of the
society.
To maintain buffer stocks as measure of Food Security. To intervene in market for price stabilization.
1.3 Organizational Structure
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FCI North Zone
North Zone comprises 8 Regions i.e. Punjab,
Haryana, UP, Rajasthan, J&K, HP, Delhi and
Uttaranchal. It is the largest Zone in FCI having a
workforce of 24447 staff & officers and 31634
laborers against 58104 staff & officers and 64173 laborers in FCI as a whole in the country.
Punjab & Haryana Regions are the major surplus States as far as production/procurement of
food grains is concerned and more than 90% stocks have to be moved to other parts of the
country. During recent years even Rajasthan was self-sufficient as far as its own requirement
was concerned but because of severe drought during last year, stocks were moved from
Haryana & Punjab to Rajasthan Region.
Details of Region / District Offices in North Zone
S.No. Name of the Region No. of Districts District offices
1. Delhi 2 Mayapuri and Shaktinagar.
2. Haryana 5 Gurgaon, Hissar, Kurukshetra,Karnal and Rohtak.
3. Himachal Pradesh 2 Dharamshala and Mandi.
3. Jammu and Kashmir 2 Jammu and Srinagar.
4. Punjab 12 Amritsar, Bhatinda, Chandigarh,Faridkot, Ferozpur, Gurdaspur,Hoshiarpur, Jallandhar,Kapurthala, Ludhiana, Patiala andSangrur.
5. Rajasthan 8 Ajmer, Alwar, Bikaner, Jaipur,Jodhpur, Kota, Sriganganagar and
Udaipur.6. Uttar Pradesh 20 Allahabad, Aligarh, Agra,
Azamgarh, Banda, Barielly,Bullandshahar, Faizabadm,Ghazipur, Gorakhpur, Gonda,Hapur, Jhansi, Kanpur, Lucknow.
7. Uttaranchal 3 Dehradun, Haldwani andSrinagar.
Total 54
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Delhi Region
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1.4 SWOT ANALYSIS
Strengths
Round the year availability of materials Support from central government Strong network of distribution Excellent storage management
Weakness
High requirement of working capital Inadequate automation with regard to information management Leakage
Opportunities
Vast domestic market Improvement in distribution channel Diversify into non-traditional commodities/ activities
Threats
Rapid development Shift in food habits Entry of retail sector
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CHAPTER-2
OBJECTIVE OF THE STUDY
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2.1 OBJECTIVES
To analyze the short-term liquidity The financial stability of a business. To analyze different working capital ratios so to judge the availability and
effective usage of working capital.
2.2 RESEARCH METHODOLOGY(COLLECTION OF DATA)
Data can be obtained from two important sources:
Primary data Secondary Data
Primary data
Primary data are the data that are collected afresh and for the first time. Thus happens
to be in character. Primary data are collected by the following ways:-
a) Observationb) expert opinion
Secondary Data
Secondary data are the data that are already collected and are only analyzed by
different sources these sources are as follows:-
Corporate magazine annual report Books, journals, newspaper
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AREA OF STUDY
The area of Study during the training was Financing & Accounts in Finance Department. The
area of study was working capital was studied.
In this project I have used internet, company brochures, financial statement, and the company
website as a secondary source.
RESEARCH
DESIGN
Exploratory Research
COLLECTION OF
DATA
SECONDARY DATA
Annual Report Internet
ANALYSIS
PATTREN
Bar diagram
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CHAPTER-3
LITERATURE REVIEW
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Introduction to financial analysis
3.1 Financial Analysis
Financial accounting involves recording transaction and preparing report and
financial statement that can be used by management, owners, creditor, government agencies
and other to understand what is happening in the business or nonprofit organization.
Accounting is the process of identifying, measuring and communicating economic
information to permit informed judgment and decision by users of the information.
Concept Of Financial Statements
Financial statement are major means employed by firm to present their financial
situation to stock holders creditors and the public a financial statement is a collection of data
organized accounting to logical and consistent accounting procedure. Its purpose is to convey
an understanding of some financial aspects of a business firm. The and product of financial
accounting is financial statement consisting of the balance sheet, profit and loss accounting
and statement changes in financial position.
Financial statements are major means employed by a firm to present their
financial situation to stock holders, creditors and the general public. Accounting reports on
the result of operation and the current status of a business enterprise by a financial statement.
The balance sheet and income and statement. Since the balance sheet and income statement
are of limited interest the annual report of the company are supplemented by a third statementthe change in financial position and by foot notes which explain and amplify the reported
numerical data.
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3.2 Types Of Financial Statements
(A) The Balance Sheet:-
The balance sheet is called a fundamental accounting report. It provides information
about the financial standing or position of affirm at given instant. The balance sheet can be
visualized, as a snapshot of the financial status of company is a valid for only one day the
reference day. The position of the firm on a preceding day is bound to be different.
The balance sheet of a company indicates to management the financial status of a
company as on a given moment. From an analyst point of view a balance sheet is written
representation of the resources and liabilities of an individual partnership firm an association
of a corporation.
The contents of balance sheet can be divided into three divisions
*Assets: -
Assets are valuable resources owned by a business, which are acquired at a
measurable money cost these are economic resources of a firm which provide economic
benefits to the company.
Liabilities:-
Liabilities are claim of creditors against the enterprises arising out of past activities
that are to be satisfied by the disbursement of utilization of corporate resources. They are
economic obligation of the firm.
*Owners equity:-
The owners equity is the owners current investment in the assets of company.The
entire system of recording business transaction is based on accounting equation. The
accounting equation is an accounting formula expressing equivalence of the two expressions
of assets and liabilities.
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ACCOUNTING EQUATION
(B) The Income Statement:-
The balance sheet, as discussed above, is considered a very significant statement from
the viewpoint of bankers, and other lenders, because it indicates the firms financial position
and strength, as measured by its recourses and obligations, however, editors and financial
analysis have recently started paying more attention to the firms capacity as a measure of its
financial strength. Its income statement revels the firms capacity as a measure of its financial
strength. Its income statement revels the earning potential of the firm.
An income statement is a financial statement summarizing the result of a companys income
(profit) making activities for a specific time period. It summarizes revenues and expenses in a
manner that discloses whether a companys activates in a particular fiscal period have
resulted in profit or a loss. The income statement is a scoreboard of the firms performance
during a particular period of time. The profit and loss account is the condensed and
classified record of the gains losses posing change in the owners interest in the business for a
period of time.
The income statement or the profit and loss account presents the summary of revenues,
expenses and net income (or net loss) of a firm for a period of time. Thus, it serves as
measure of the firms profit ability. Its systematic array of the data of the revenues, revenues
deduction (expenses, revenues, revenue deductions, expenses, losses, taxes etc.)
Net income and distribution or assignment of the net income to creditors and property
investors of a particular period
ASSETS = LIABILITIES + OWNERS EQUITY
OR
OWNERS EQUITY = ASSETS - LIBILITIES
OR
LIBILITIES = ASSETS - OWNERS EQUITY
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(C)Statement Of Change In Financial Position
Until 1960, the income statement and the balance sheet constituted the major financial
statement. However, management traditionally made use of a wide variety of statement and
reports in apprising internal company performance. One popular report for managements
internal use was called the statement of changes in final position. From such a report,
management could extract valuable information about where working capital and cash come
from and how they were used. If these past events could be projected in future, management
would have a useful tool for budgeting. Today, the statement of changes of financial position
represents third financial position represents a third financial statement.
3.3 Parties Interested
According to the American institute of certified public accountants, financial
statement reflects, a combination a recorded facts, accounting convention and personal
judgments and the judgments and conventions applied, affect them materially.
Following are interested in financial statement:-
Credit, suppliers and others are having business with the company. Debenture holders. Credit institutions and banks. Potential lenders and investors. Trade unions and employees. Important customers wishing to make a long standing with the company. Economist and analyst. Members of parliament, the public committee in respect in government companies. Taxation authorities. Other departments dealing with the industry in which the company engaged
cooperative.
The company law board.
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3.4 Financial Appraisal
A companys financial statement are intended to summarize the results of its
operation and its ending financial condition. The information in the statement is studied andrelated to other information by external users for several reasons. Current shareholders, for
example, are concerned about there invested income, as well as the companys overall
profitability and stability. Some potential investors are invested in solid companies that are
companies whose financial statement indicate stable earnings and dividends with little growth
in operations. Other prefers companies whose financial statement indicate rend for rapid
growth in a companys short run solvency, its ability to pay current obligation as they become
due. Long-term creditors are concerned about the safety of their interest; income and
companys ability to continue earning cash flow to meet its financial commitments and these
are only few of the users, and uses of financial statements.
But the numerical data in the financial statement are quit calm. They cannot speak. Analytical
data are not ending in themselves, but they are meant to an end. Financial appraisal is an
attempt to determine the significance, and meaning of the financial statement data so that
forecast may be made of the prospects for future earnings, ability to pay interest, debt
maturities both current as well as long term profitability of a sound dividend policy. Financial
appraisal involves the assessment of firms past, present and anticipated future financial
condition.
Financial appraisal is a scientific evaluation if the profitability and financial strength of a
business concern. In fact financial appraisal and analysis of financial statement have nearly
the same meaning. Financial statement analysis is used for the purpose of financial appraisal.
Financial appraisal is the process of making a scientific proper, critical and comparative
evaluation of the profitability and financial health of given concern through the application of
financial statement analysis. Financial statement analysis is a preliminary step towards the
evaluation of result dawn by the analysis or management accountant. Appraisal or evaluation
of such results is made thereafter. Financial appraisal begins where financial analysis ends,
and financial analysis starts where the summarization of financial data in the form of profit
and loss account and balance sheet ends.
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In the words of Kenney and Macmillan, financial statement analysis attempts to unveil the
meaning and significance of the items composed in profit and loss account and balance sheet
so as to assist the management in the formation of sound operating financial policies. The
appraisal or analysis of financial statement spotlights the significant facts and relationship
concerning managerial performance, corporate efficiency, financial strength or weakness and
credit worthiness, that would have otherwise been buries in the maze of details.
The technique of financial appraisals frequently applied to the study of accounting data with a
view to determining continuity or discontinuity of the operating policies and investment value
of business. Everybody interested in the affairs of the company is interested in finding answer
to the following searching question:-
a) Does the company earn adequate profit?b) Does the company process enough funds to meet its obligation as and when they mature?c) Is investment in the company safe?
Appraisal of financial statement alone can answer such queries. Its true that statement
analysis merely reveals what has taken place in the past, but past events given some
indication of what may be expected in future unless some drastic changes take place in
business it. Will continue to move in the same direction in the past.
Roy .A. Faulke is very correct to say if a train is moving forward at a known rate of speed,
it is reasonable to assume that it will continue to move at approximately the same rate unless
some obstacle interrupts its progress abruptly or the motive power is increased or decreased.
Similarly it is a reasonable to assume that unless some realistic change take places in the
places in the business, it will continue to move in the same general direction as indicated by
its comparative trends.
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Need Of Financial Appraisal
The need of financial appraisal varies accounting to type of users. For management is
servers as mean s of self evaluation as it is like a report of its managerial skill and
competence a banker can judge the liquidity position a creditor can plan buying and selling of
hares of concern on the basis of safety of principal and its capital appearances as wanted by
the past record of earning. A debenture holder of a concern can ascertain whether income is
generates sufficient margin to pay the interest / answers to different question are provided by
financial appraisal. By using this technique an economist can study the extent of
concentration of economic power and pitfalls in the financial policies pursued, while a
planner can ascertain if the patter of investment reveals the companys position in relation to
labor and its welfare, legislation concerning licensing desirable in the socio economic
interested may be based on statement analysis.
3.5 Introduction of Working Capital
The management of current assets is similar to that of fixed assets in the sense that in
both case that a firm analyses their effects on its return and risk. The management of fixed
and current assets, however, differs in three important ways: first, in managing fixed assets,
time is a very important factor; consequently, discounting and compounding techniques play
a significant role in capital budgeting and a minor one in the management of current assets.
Second, the large holding of current assets, especially cash, strenghthens the firms liquidity
position (and reduces riskiness), but also reduces the overall profitability. Thus a risk-return
trade off is involved in holding current assets. Third, levels of fixed as well as current assets
depend upon expected sales, but it is only current assets which can be adjusted with sales
fluctuations in the short run. Thus, the firm has a greater degree of flexibility in managingcurrents.
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3.6 Concept of Working Capital
Gross working capital:-Gross working capital refers to the firms investment in current assets are the assets
which can be converted into cash within an accounting year and include cash , short-term
securities, debtors,(accounts receivable or book debts) bills receivable and stock
(inventory).
Gross Working Capital = Total Current Assets
Net Working Capital:-Its refers to the difference between current assets and current liabilities. Current
liabilities are those claims of outsiders which are expected to mature for payments within
an accounting year and include creditors (account payable) , bills payable ,and
outstanding expenses . Net Working Capital can be positive or negative. A positive net
working capital will arise when current assets exceed current liabilities .a negative net
working capital occurs when current liabilities are in excess of current assets.
Net Working Capital = Current Assets - Current Liabilities
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CLASSIFICATION OF WORKING CAPITAL
Fixed/Permanent Working Capital:-We know that the need of current assets arises because of the operating cycle. The
operating cycle is a continuous process and, there for, the need for current assets is felt
constantly. But the magnitude of current assets needed is not always the same; it increases
and decreases over time. However there is always a minimum level of current
assets which is continuously required by a firm to carry on its business operations.
Permanent or fixed, working capital is the minimum level of current assets. it is
permanent in the same way as the firms fixed assets are. Depending upon the changes in
production and sales, the need for working capital, over and above permanent working
capital, will fluctuate. For example extra inventory of finished goods will have to be
minted to support the peak period of sale, and investment in debtors (receivable) may also
increase during such periods. On the other hand, investment in raw material, work in
process and finished goods will fall if the market is slack.
KINDS OF WORKING
CAPITAL
ON THE BASIS OF CONCEPT ON THE BASIS OF TIME
GROSS
WORKING
CAPITAL
NET
WORKING
CAPITAL
FIXED
WORKING
CAPITAL
VARIABLE
WORKING
CAPITAL
REGULARWORKING
CAPITAL
RESERVEWORKING
CAPITAL
SPECIALWORKING
CAPITAL
SEASONALWORKING
CAPITAL
Amount ofworkingcapital (Rs)
Temporary orFluctuating
Time
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Variable Or Fluctuating Working Capital:-Variable or fluctuating working capital the extra working capital needed to support
the changing production and sales activities of the firm. Both kinds of working capital
permanent or fluctuating (temporary)-are necessary-to facilitate production and sales
through the operating cycle. But the firm to meet liquidity requirements that will last only
temporary working capital. In figure illustrates differences between permanent and
temporary working capital. It is shown that permanent working capital is stable over time,
while temporary working capital is fluctuating sometimes increasing and sometimes
decreasing. However, the permanent working capital need not be horizontal if the firms
requirement for permanent capital is increasing (or decreasing) over a period
3.7 Focusing On Management Of Current Assets
The gross working capital concept focuses attention on two aspects of current assets
management:
1. How to optimize investment in current assets?2. How should current assets be financed?
The consideration of the level of investment in current assets should avoid two
danger points- excessive or inadequate investment in current assets. Investment in current
assets should be just adequate to the needs of the business firm. Excessive investment in
current assets should be avoided because it impairs the firms profitability, as idle investment
earns nothing.
Amount ofworking
capital (Rs)
Temporary or
Fluctuating
Permanent
Time
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On the other hand, inadequate amount of working capital can threaten solvency of the firms
because of its inability to meet its current obligations. It should be released that the working
capital needs of the firm may be fluctuating with changing business activity. This may cause
excess or shortage of working capital frequently. The management should be prompt to
initiate an action and correct imbalances.
Another aspect of the gross working capital point to the need of arranging
funds to finance current assets. Whenever a need for working capital funds arises due to the
increasing level of business activity or for any other reason. Financing arrangement should be
made quickly. Similarly, if suddenly, some surplus funds arise they should not be allowed to
remain idle, but should be invested in short- term securities. Thus, the financial manager
should have knowledge of the sources of working capital funds as well as investment avenues
where idle funds may be temporarily invested.
Focusing On Liquidity Management
Net working capital is a qualitative concept. it indicates the liquidity position of the
firm and suggests the extent to which working capital needs may be financed by permanent
sources of funds. Current assets should be sufficiently in excess of current liabilities to
constitute a margin or buffer for maturing obligations within the ordinary operating cycle of a
business. In order to protect their interests, short term creditors always like a company to
maintain current assets at a higher level than current liabilities. It is a conventional rule to
maintain the level of current assets twice the level of current liabilities. However, the quality
of current assets should be considered in determining the level of current assets vis a vis
current liabilities. A weak liquidity position poses a threat to the solvency of the company
and makes it unsafe and unsound. A negative working capital means a negative liquidity, and
may prove to be harmful for the companys reputation excessive liquidity is also bad. it may
be due to mismanagement of current assets. There for, prompt and timely action should be
taken by management to improve and correct the imbalances in the liquidity position of the
firm.
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Networking capital concept also covers the equation of judicious mix of long term and short
term funds for financing current assets. For every firm, there is a minimum amount of net
working capital which is permanent. Therefore, a portion of the working capital should be
financed with the permanent sources of funds such as equity share capital, debentures, long
term debt, performance share capital or retained earnings. Management must, therefore,
decide the extent to which current assets should be financed with equity capital and/or
borrowed capital.
In summary, it may be emphasized that both gross and net concepts of working capital are
equally important for the efficient management of working capital. There is no precise way to
determine the exact amount of gross or net working capital for any firm. The data and
problems of each company should be analyzed to determine the amount of working capital.
There is no specific rule as to how current assets should be financed. It is not feasible in
practice to finance current assets by short term sources only. Keeping in view the
constraints of the individual company, a judicious mix of long and short term finances should
be invested in current assets. Since current assets involve cost of funds, they should be put to
productive use.
3.8 Operating And Cash Conversion Cycle
The need for working capital to run the day-to-day business activities cannot be
overemphasized. We will hardily find a business firm which does not require any amount of
working capital. Indeed, firms differ in their requirement of the working capital.
We know that a firm should aim at maximizing the wealth of its shareholders.Earning a
steady amount of profit requires successful sells activities. There is always an operating cycle
involved in the conversion of sales into case.
There is a difference between current and fixed assets in terms of their liquidity. A firm
requires many years to recover the initial investment in fixed assets such as plant and
machinery or land and building. On the contrary, investment in current assets such as
inventories and debtors [account receivable] is realized during the firms operating cycle that
is usually less than a year.
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What is an operating cycle?
Operating cycle is the time duration required to convert sales, after the conversion of
resources into inventories, into cash. The operating cycle of a manufacturing company
involve three phases:
Acquisition of resources such as raw material, labor, power and fuel etc. Manufacture of the product which includes conversion of raw material into work-in-
progress into finished goods.
Sales of the products either for cash or on credit. Credit sales create accountreceivable for collection.
These phases affect cash flows, which most of the time, are neither synchronized because
cash outflows usually occur before cash inflows. Cash inflows are not certain because sales
and collections which give rise to cash inflows are difficult to forecast accurately. Cash
outflows, on the other hand, are relatively certain. It needs to maintain liquidity to purchase
raw materials and pay expenses such as wages and salaries, other manufacturing,
administrative and selling expenses and taxes are there is hardly a matching between cash
inflows and outflow. The firms hold stock of finished goods to meet the demand of customers
on continuous basis and sudden demand from some customers. Debtors (Accounts
Receivable) are created because goods are sold on credit for marketing and competitive
reasons.
Purchase Payment Credit Sale Collection
RMCP+WIPCP+FGCP
Inventory convention period Receivableconversion price
Gross operation cycle
Payable Net operating cycle
Operating Cycle of a manufacturing firm
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Thus, a firm makes adequate investment in inventories, and debtors, for smooth,
uninterrupted production and sale.
How is the length of operating cycle determined?
The length operating cycle of a manufacturing firm is the sum of (i) inventory conversion
period (ICP) and (ii) debtors (Receivable) conversion period (DCP). The inventory
conversion period is the total time needed for producing and selling the product. Typically, it
includes: (a) raw material conversion period (rmcp) ,(b)work-in-process conversion period
(WIPCP), and (c) finished goods conversion period (FGCP). The debtors conversion period
is the time required to collect the outstanding amount from the customers. The total of
inventory conversion period and debtors conversion period is referred to as gross operating
cycle (GOC).
In practice, a firm may acquire resources ( such as raw material) on credit and temporarily
postpone payment of certain expenses. Payables, which the firm can defer, are spontaneous
sources of capital to finance investment in current assets,. The creditors (Payables) deferral
period (CDP) is the length of time the firm is able to defer payments on various resource
purchases. The difference between (gross) operating cycle and payables deferral period is net
operating cycle (NOC). if depreciation is excluded from expenses in the computation of
operating cycle, the net operating cycle also represents the cash conversion cycle(CCC).it is
net time interval between cash collections sale of the product and cash payments fore
resources acquired by the firm. It also represents the time interval over which additional
funds, called working capital, should be obtained in order to carry out firms operations. The
firm has to negotiate working capital from sources such as commercial banks. The negotiated
sources of working capital financing are called non-spontaneous sources. If net operating
cycle of a firm increases, it means further need for negotiated working capital.
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Let us illustrate the computation of the length of operating cycle. Consider the statement of
cost of sales for a firm given in below-
Statement of Cost of Sales
( Rs in lakh)
ITEMACTUAL
20X1
PROJECTED
20X2
1 Purchase of raw material X1 X.
2 Opening raw material inventory X2 ..
3 Closeing raw material inventory X3 ..
4 Raw material consumed (1+2-3) X4 X.
5 Direct labour X5 X.
6 Depriciation X.. X.
7 Other mfg. expences X X.
8 Total cost (4+5+6+7) .. X.
9 Opening work-in-process inventory X.. X.
10 Closing work-in-process inventory X.
11 Cost of production (8+9-10) .. X.
12 Opening finished goods inventory .. X.
13 Closing finished goods inventory .. X.
14 Cost of goods sold (11+12-13) .. X.
15 Selling administrtive and gen expences .. X.
16 cost of sales (14+15) .. X.
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The firm's data for sales and debtors and creditors are given below :
Sales and Debtors
(Rs in lakh)
ITEMACTUAL
20X1PROJECTED
20X2
Sales (Credit) X Y
Opening balance of debtors X. Y.
Closing balance of debtors .. ..
opening balance of creditors .. ..
closing balance of creditors X. ..
Gross operating cycle (GOC)The firms gross operating cycle (GOC) can be determined as inventory conversion
period (ICP) plus debtors conversion period (DCP).Thus, GOC is given as follows:
Gross operating =Inventory
+Debtors
Conversion period Conversion period
.. (1)
Inventory conversion periodWhat determines the inventory conversion period? The inventory conversion (ICP) is
the sum of raw material conversion period (RMCP), work-in-process conversion period
(WIPCP) and finished goods conversion period (FGCP):
ICP = RMCP +WIPCP +FGCP
(2)
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Raw material conversion period (RMCP):-The raw material conversion period (RMCP) is the average time period taken to
convert material in to work-in-process. RMCP depends pm: (a) raw material
consumption per day, and (b) raw material inventory. Raw material consumption per
day is given by the number of days in the year (say, 360). The raw material conversion
period is obtained when raw material inventory is divided by raw material consumption
per day. Similar calculations can be made for other inventories, debtors and creditors.
The following formula can be used:
Raw material
Raw material Inventory
Conversion =
Period [Rawmaterial
consumption]/360
RMC RMC*360
RMCP = RMI = (3)
360 RMC
Work-in-process conversion period (WIPCP):-Work-in-process conversion period (WIPCP) is the average time taken to complete
the semi-finished or work-in-process. It is given by the following formula:
Work-in-process
Work-in-process Inventory
Conversion =
Period [Cost of production]/360
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Finished goods conversion period (FGCP):-Finished goods conversion period (FGCP) is the average time taken to sell the
finished goods. FGCP can be calculated as follows:
Finished goods
Finished goods Inventory
Conversion =Period [Cost of goods sold]/360
CGI FGI*360
FGCP = FGI = ..(5)360 CGS
Debtors (receivable) conversion period (DCP) :Debtors conversion period (DCP) is the average time taken to convert debtors into
cash. DCP represent the average collection period. It is calculated as follows:
Debtors Debtor Debtors*360
Conversion = = ....(6)
Period (DCP) Creditor sales/360 Creditor sales
Creditors (payables) deferral period (CDP) :Creditors (payables) deferral period (CDP) is the average time taken by the firm in
paying its suppliers (creditors). CDP is given as follows:
Creditors Creditors Credit*360
Deferral = = (7)
Period Credit purchases/360 Credit purchases
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Cash Conversion or Net Operating Cycle :Net operating cycle (NOC) is the difference between gross operating cycle and
payables deferral period.
Gross Creditors
Net operating = Operating = deferral
Cycle Cycle period
NOC = GOC - CDP
(8)
Net operating cycle is also referred to as cash conversion cycle. Some people argue that
depreciation and profit should be excluded in the computation of cash conversion cycle since
the firms concern is with cash flow associated with conversion at contrary view is that a firm
has to ultimately recover total costs should include depreciation, and even the profits. Also, in
using the above-mentioned formulae, average figures for the period may be used.
For example, Table shows detained calculations of the components of a firms operating
cycle. Table provides the summary of calculations.
During 20X1 the daily raw material consumption was Rs 12.1 lakh and the company held an
ending raw material inventory of Rs827 lakh. If we assume that this is the average inventory
held by the company, the raw material consumption the projected raw material conversion
period is 60 days. This has happened because both consumption (Rs 16.5 lakh per day) and
level of inventory (Rs 986 lakh) have increased, but the consumption rate has increased) by
36.4 percent). Thus, the raw material conversion period has declined by 8 days. Raw
materials are the result of daily raw material consumption and total raw material consumption
and total raw material consumption and total raw material consumption during a period given
the companys production targets. Thus, raw material inventory is controlled through control
over purchases and production. We can similarly interpret other calculations in table below
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Table:-Operating Cycle Calculation (Hypothetical Example)
( Rs. In lakh)
ItemActual19X1 Projected 19X2
1 Raw Materials Conversion Period
(a) Raw material consumption
(b) Raw material consumption per day
(c) raw material inventory
(d) Raw material inventory holding days
2 Work-in-process Conversion Period
(a)cost of production*
(b)cost of production per day
(c)work-in-process inventory(d) Work-in-process inventory holding days
3 Finished Goods Conversion Period
(a) Cost of goods sold*
(b) Cost of goods sold per day
(c) Finished goods inventory
(d)Finished goods inventory holding days
4 Collection period
(a) Credit sales (at cost)**
(b) sales per day
(c) debtor
(d) debtors outstanding days
5 Creditors Deferral Period
(a) Credit purchases
(b) purchase per day
(c) creditors
(d) Creditors outstanding day
*Depreciation is including.
**All sales are assumed on credit.
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Table :-Summary of Operating Cycle Calculations
(Number of Days)
Actual Projected
GROSS OPERATING CYCLE
1 Inventory Conversion Period
(i) Raw material
(ii) Work- in- process
(iii) Finished goods
2 Debtors Conversion Period
3 Gross operating cycle (1 + 2)
4 Payment Deferral period
NET OPERAING CYCLE (3-4)
We note a significant change in the companys policy for 20X2 with regard to finished
goods inventory. It is expected to increase to 54 days holding from 38 days in the previous
year. One reason could be a conscious policy decision to avoid stock out situations and carry
more finished goods inventory to expand sales. But this policy has a cost; the company, in the
absence of a significant increase in payables (creditors) deferral period, will have to negotiate
higher working capital funds, In the case of the firm in our example, its net operating cycle is
expected to increase from 136 days to 148 days How does a company manage its inventories,debtors and suppliers credit? How can it reduce its operating cycle?
The operating cycle concept as shown in Figure relates to a manufacturing firm. Non-
manufacturing firms such as wholesalers and retailers will not have the manufacturing phase.
They will acquire stock of finished goods and convert them into debtors (receivable) and
debtors into cash. Further, service and financial enterprises will not have inventory of goods
(cash will be their inventory). Their operating cycles will be the shortest. They need to
acquire cash, then lend (create debtors) and again convert lending into cash.
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3.9 Ratios Of Working Capital
Current ratio Quick ratio Absolute ratio Stock or inventory ratio Working capital turnover ratio
Current RatioCurrent ratio is one of the important ratios used in testing liquidity of a concern.
this is a good measure of the ability of company to maintain solvency over a short run. This is
computed by dividing the total current assets by the total current liabilities and is expressed
as:
The current assets of a firm represent those assets, which can be in the ordinary
course of business, converted into cash within one accounting year. The current liabilities are
defines as obligation maturing within a short period (usually one accounting year). Excess of
current assets over current liabilities is known as working capital and since these two (current
assets and current liabilities) are used in current ratio therefore, this ratio is also known as
working capital ratio.
With the help of this ratio the analyst can review the extent to which the company can covert
such liabilities with current assets. The current ratio gives the analyst a general picture of the
adequacy of the working capital of a company and ability of the company to meet its day-to-
day payment obligation. it likewise measures the margin of safety provided for paying
current debts in the event of a reduction in the values of current assets.
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The current ratio is very useful as a measure of short terms debt prying ability but it is tricky
to interpret this ratio. Experts are of the view that the value of current assets should be at least
double the amount if current liabilities.
Walker and Bough have the same view when they ay a good current ratio may mean a good
umbrella for creditors against the rainy days.But to the management it reflects bad financial
planning or presence of idle assets or over capitalization
Idle Current Ratio: 2:1
If this ratio is higher than standards than it is assumed Very good shortterm liquidity/solvency. Excess stocks, bad debts and idle cash. Under trading
If this ratio is lower than standards than it is assumed
Unsatisfactory short-term liquidity. Shortage of stocks, less credit sales, shortage of cash. Over trading
Quick RatioThe solvency of a company is batter indicated by quick Rato.the fundamental this
Ratio is to enable the financial management of a company to ascertain that would happen If
current creditors press for immediate payment and either not Possible to push up the sales of
closing or it sold, a heavy loss is likely to be suffered. This problem arises because closing
stock is two steps away from the cash and their price more or less uncertain according to
market demand.
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The term quick assets include all current assets except inventories and prepaid expenses. It
shows the relationship of quick assets and current liabilities. The Ratio is calculated as
following:
An indicator of a company's short-term liquidity. The quick ratio measures a
company's ability to meet its short-term obligations with its most liquid assets.
The higher the quick ratio, the better the position of the company. Also known as the "acid-
test ratio" or the "quick assets ratio".
Absolute Liqudity RatioThe absolute liquid ratio between absolute liquid assets and current liabilities
is calculated by dividing the liquid assets and current liabilities. Expressed in formula,
the ratio is:
Cash + Marketable Securities
= Absolute Liquidity RatioCurrent Liabilities
The term liquid assets include cash bank balance and marketable securities, if current
liabilities are to pay at once, only balance of Cash and marketable securities will be
utilized. Therefore, to measure the absolute liquidity of a business, this ratio iscalculated.
Idle Ratio: 0.5: 1
The idea behind the norm id that if all creditors for demand for payment, at least 50%
of their claim should be satisfied at once
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Stock Or Inventory RatioEvery firm has to maintain a certain level of inventory of finished good so as to be able
to meet the requirements of the business. But the level of inventory should neither to be high
not to be low. It to high inventory means higher carrying cost and higher risk of stocks
becoming obsolete whereas to low inventory may mean the loss of business opportunities. it
is very essential to keep sufficient stock in business .
It is express in number of time . Stock turnover ratio or inventory turn over ratio indicates the
no. of times the stock has been turned over during the period and evaluates the efficiency
with which a firm a able to manage its inventory. This ratio indicates whether investment in
stock is with in proper limit or not.
HIGHER RATIO INDICATES:-
Stock is sold out fast.Same volume of sales from less stock or more sales from
Same stock
Too high ratio shows stock outs or over trading.Less working capital requirement.
LOWER RATIO REVEALS:-
Stock a sold out at a slow speed.Same volume of sale for more stock or less sale from same stock.More working capital requirement.Too low ratio show obsolete stock or under trading.
Formula of stock turn over ratio:-
The ration is calculated by dividing the cost of goods sold by the amount of average stock at
cost.
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Inventory turnoverRatio =
Inventory turnover ratio measures the velocity of conversion of stock in to sales.
Usually a high inventory turnover / stock velocity indicates efficient management of
inventory because more frequently the stock are sold, the lesser amount of money is required
to finance the inventory. Low inventory turn over ration indicate inefficient management of
inventory. in low inventory turn over implies over investment in inventories, the business,
poor quality of goods, stock accumulation, accumulation of absolute and slow moving good
and low profit as compared to total investment the inventory turn over ratio is also an index
profitability where a high ratio signifies more profit a low ratio signifies low profit some
time a high inventories.
Working capital turnover ratio:A measurement comparing the depletion of working capital to the generation of sales
over a given period. This provides some useful information as to how effectively a company
is using its working capital to generate sales.
A company uses working capital (current assets - current liabilities) to fund operations and
purchase inventory. These operations and inventory are then converted into sales revenue forthe company. The working capital turnover ratio is used to analyze the relationship between
the money used to fund operations and the sales generated from these operations. In a general
sense, the higher the working capital turnover, the better because it means that the company
is generating a lot of sales compared to the money it uses to fund the sales.
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CHAPTER-4
DATA ANALYSIS
AND INTERPRETATION
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4.1 Working capital analysis
Analysis of working capital is an essential part of financial management. If there is an
adequate amount of working capital and it is utilized in the right manner, it is a great
achievement for the business. The excess of working capital causes financial stringency and
brings the business to a standstill.
Realizing the impotence of working capital in financial management the analysis of working
capital becomes an essential phenomenon. It facilitates the adequacy and management of
working capital. The management of working capital provides a careful inquiry into its
components so as to control the working capital and to conserve it properly. It helps in
determining the optimum level of working capital in the firm. The process of measurementand analysis of working capital is performed on the basis of financial statements of the
business enterprise for past few years.
In the present study the analysis of working capital of FCI ltd. Has been made by two
techniques vis., trend analysis and ratio analysis.
4.2 Working capital trend analysis
The working capital trend analysis represents a picture of variation in current assets,
current liabilities and working capital over a period of time. Such an analysis enables us to
study upward and downward trend in current liabilities and its effect on the working capital
position. The trend analysis is a tool of financial appraisal where the changes in the factors
are compared with the base year assuming the base year as 100.
In the present study a statementshowing trend of working capital as well as its structure has
been made. It is it scientific and important study because each component of working capitalhas got the relationship of causes and effects.
Following table below shows the structure and trend of working capital of FCI ltd.during the
period under review.
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STRUCTURE AND TREND OF WORKING CAPITAL OF FCI
2009 TO 2012
PERTICULAR 2009-2010 2010-2011 2011-2012CURRENT ASSETS
CASH 322389.24 855819.51 836439.2
BANK 18632795.88 35936348.16 27218462.16
LOAN AND ADVANCES 71220809.88 84836477.65 77115112.92
DEBTORS 300805197.7 311027760.6 356580000.4
STOCK 377580243.7 427327384.8 465048573.5
TOTAL (A) 768561436.4 859983790.7 926798588.2
CURRENT LIABILITIES
CURRENT LIABILITIES ANDPROVISIONS
526439722 512950750.7 442009648.8
TOTAL (B) 526439722 512950750.7 442009648.8
NET WORKING CAPITAL (A-B) 242121714.4 347033040 484788939.4
Inference
Current Assets increase to 20.59% in the year of 2011-2012 asCompare to in the year 2009-2010.
Current Liabilities in the year 2011-2012 got decreased by 16.04%As compared to the year 2009-2010.
In the year 2010-2011 the growth in working capital was 43.33%As compare to the year 2009-2010 similarly working capital in the year 2011-2012 has grownto 100.03% as compared to the working capital in the year 2009-2010
The analysis shows the effective and efficient management of working capital by the
FCI.
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4.3 Ratio analysis
The ratio analysis of working capital can be used by management as a means of
checking upon the efficiency in working capital management of the company. Following
ratio haven used to analysis and interpret working capital of FCI ltd.
a) Current ratiob) Quick ratioc) Absolute ratiod) Stock or inventory ratioe) Working capital turnover ratio
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a) Current Ratio:-
Current Rat io = Current Asse t s / Current L iab i l i t y
Idea l Rat io = 2 : 1
Years Current Assets Current Liabilities Current Ratio
2009-2010 768561436.4 526439722 1.46
2010-2011 859983790.7 512950750.7 1.68
2011-2012 926798588.2 442009648.8 2.01
INFERENCE:-
This table reveals that current ratio has increased that is making
improvements in its short term solvency. It is because of increase in current assets as
compared to current liabilities. Still this is lower than standard current assets ratio that shows
a little bit unsatisfactory liquidity position of the company.
The Current Ratio for the year 2011-2012 has taken the Value of 2.01:1, which is very
satisfactory and as per the standard required (2:1).The current ratio of 2.01:1 indicates, that
for every Rs 1 of current liability the company Rs 2 of current assets, which indicates more
liquidity and hence more amount of working capital.
0
0.5
1
1.5
2
2.5
current
ratio
2009-2010
2010-20112011-2012
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b) Liquid Ratio:
Liqu id Rat io = Liqu id Asse t s / Current L iab i l i t i e s
Idea l Rat io = 1 : 1
Years Liquid Assets Current Liabilities Liquid Ratio
2009-2010 390981192.7 526439722 0.74
2010-2011 432656405.9 512950750.7 0.84
2011-2012 461750014.7 442009648.8 1.04
INFERENCE:-
Although it is less idle ratio still it has increasing trend that shows dairys improving
condition of short term solvency of FCI.
Quick ratio for the year 2011-12 is above the ideal standard. It is 1.04:1, which indicates that
for every Re1 of current liability the company has Rs 1.04 of current assets, hence the
company is in sound position in terms of working capital position.
0
0.2
0.4
0.6
0.8
1
1.2
Quick ratio
2009-10
2010-11
2011-12
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c) Absolute ratio
Cash + Marketable Securities = Absolute Liquidity RatioCurrent Liabilities
Idle Ratio: 0.5: 1
Years
Absolute Liquid
Assets Current Liabilities Absolute Ratio
2009-2010 18955185.12 526439722 0.04
2010-2011 36792167.67 512950750.7 0.07
2011-2012 28054901.36 442009648.8 0.06
INFERENCE
This ratio is very below from idle ratio. It is making insecure creditors claim but it is
getting increasing trend. It is needed to maintain this trend.
Ratios for all the above mentioned years right from 2009 up to 2012 are close to the standard.
For year 2011-12, the ratio is well above the standard, which indicates the healthy picture of
the company in terms of availability of working capital (quick assets) in order to meet currentliabilities.
0
0.01
0.02
0.03
0.04
0.05
0.06
0.07
Absolute
liquidityratio
2009-10
2010-11
2011-12
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d) Inventory Ratio
Inventory turnover Ratio = S al e / A ve rag e In ven to ry
INFERENCE:-
As compared to year 2009-2010, in the year 2010-11, the inventory turnover increased
to 8.19 times. Similarly, in the year 2011-12 it increased to 8.59 times, which indicates that
the times taken in converting raw material into finished product and finally selling it got
reduced considerably and hence indicates quick release of working capital..
7.4
7.6
7.88
8.2
8.4
8.6
Inventory
turnover
ratio
2009-10
2010-11
2011-12
YEAR COST OF
GOOD SOLD
AVERAGE
INVENTORY
INVENTORY
TURNOVER(TIMES)
INVENTORY
TURNOVER(DAYS)
(A) (B) (C) (D) = (B)/(C) (E)= 365/D
2009-2010 2955076031 377580243.7 7.83 46.64
2010-2011 3501014350 427327384.8 8.19 44.55
2011-2012 3995104641 465048573.5 8.59 42.49
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E) Working Capital Turnover Ratio
YEAR NET SALES WORKING CAPITAL CURRENT RATIO
(A) (B) (C) (B)/(C)
2008-2009 3207510314 242121714.4 13.24
2009-2010 3747805031 347033040 10.8
2010-2011 4266143965 484788939.4 8.8
INFERENCE:
In spite of an increase in Net Working Capital, the Working capital turnover ratio of
FCI got reduced to 10.8 times in the year 2009- 2010, as compared to the year 2010-11.
Similarly, in the year 2011-12, the working capital turnover ratio further reduced to 8.8 times
as compared to 13.24 times in the year 2009-10. The reduction in working capital turnover
ratio is on account of massive growth in net working capital as compared to a slight growth in
the sales of the company.
0
2
4
6
8
10
12
14
Working
capital ratio
2009-10
2010-11
2011-12
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CHAPTER-5
CONCLUSION AND
RECOMMENDATION
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5.1 Conclusion
By analysis the working result i.e. Profit and loss account of FCI. It was found that the netprofit before interest and tax of the FCI is showing increasing trends.
Sales of the company is continuously increasing which result in higher profit the current ratio of the company is more than the standard ratio which indicates more
liquidity and more amount of working capital in the organization.
Companys quick asset ratio is below the idle ratio it means though the all sales is in cash The reduction in working capital turnover ratio is on account of massive growth in net
working capital as compared to a slight growth in the sales of the company. The value of
ratio could be better in near future , if the growth in sales matches with the growth in net
working capital.
Finance structure of company is very sound which help in getting financial help frominstitution very easily.
5 .2 Recommendat ion /Sugges t ions :
Operating expenses, admn. Expenses should be specially considered to be reduced. Inventory should be reduced extent that would help to recover blocking money in
inventory.
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REFERENCES
I.M.Pandey, (1978), financial management, Ninth addition, UBS Publication NewDelhi.
Van Horn,(2002),Financial Management and Policy,12th edition, Publisher DorlingKindersley India ltd.
Horne Wwachonicz, J.R.Bhaduri (2005), Fundamentals and Financial management,12th edition, Pearson publisher.
MY Khan, P.K.Jain (1981), Financial Management,5 th edition, Publisher Mc graw hillcompanies.
Financial statement for the year ended 2011-12 as obtained from FCIAnnual-Report 2011-12 of FCIwww.fciweb.nic.in