Annu project report

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Submitted To: - Submitted By:-

Mrs.Leena Dixit Anuwant Kaur

(Asst.Professor) B.B.A. VthSem.

Affiliated by Kumaun University, Nainital

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ACKNOWLEDGEMENT

Success is the outcome of diligence & perseverance, I, Anuwant kaur,

student of fifth semester BBA programmed, would, like to ascribe to my

success in completing my summer project Working Capital to Mrs.

Leena dixit & Preeti dixit (Project guide) and to my project supervisor

Mr.Neeraj joshi who have extended their sincere help in accomplishing my

project. I really want to thank the above mentioned persons for their

continuous support & guidance during the project, with out their help my

project would have been a distant dream.

Anuwant kaur

(Projectee)

BBA- Vth SEM

SIMT, Rudrapur

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DECLARATION

I am Anuwant Kaur of BBA-Vth semester of Saraswati Institute of

Mangement & Technology Rudrapur hereby declare that the project

report entitled Working Capital the outcome of my own work and the

same has not been submitted to any University / Institute for the award of

any degree or any professional diploma.

ANUWANT KAUR

BBA- Vth SEM

SIMT, RUDRAPUR

PREFACE

Theory and practice are the two aspects of management education. In order

to produce a dynamic and promising executive, the two have to be blended

together. In India, the industrial training in the domain of management

courses has received pivotal importance. It exposes the potential manager

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to the actual work environment and provides them a rich insight into what

actually goes on in the industrial climate of India. Infact it is the

implementation of theory in practice is the life force of management.

A seven week vocational training is a requirement for the award of the

Bachelor Degree in Business Administration. I had the privilege of doing

my summer training at Karam Industries (Rudrapur); I must say that the

management provided me with an excellent work atmosphere for learning.

The project I worked on during my training at Karam Industries was

Mr. Neeraj Joshi (manager Finance & Accounts) motivated me to undertaken this

topic for my project report.

CONTENTS

SECTION I

OBJECTIVE OF THE STUDY

COMPANY PROFILE

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The objectives for doing my summer training is to make myself capable

for moving forward in corporate world to gain knowledge and experience

and know how to work in the organisation environment . It will help me to

gain more and more about corporate sector which was very essential for

me to do. Therefore I joined KARAM INDUSTRIES to improve my

capabilities.

PRIMARY OBJECTIVES:-

The main purpose of my practical training at Karam Industries Ltd., was

To study the proper working system of the Accounts/Finance

Department within the organization,

To gain the practical knowledge in the Accounts/Finance field,

To manage working capital according to the priorities already setup,

To study the employee's behavior, to trained my -self properly

before working with an organization to properly deal with the

problems in the company.

SECONDARY OBJECTIVES:-

The subsidiary object of this study was to undergone with the

various activities performed within the organization,

To gain the practical knowledge about the jobs,

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Knowing the various welfare programmes & employees services

taken up by the Management of the company and the sort comings

of the programme.

To know about the Industrial environment.

How finance department link to other department.

To know the routine work in the organisation.

To know how the theoretical knowledge apply in practical approach.

COMPANY HISTORY:-

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From the year 1994, it is going stronger by the day.

The beginnings are humble and modest.

Then- A team of two like-minded individuals, backed by only five other

helping hands, besides their own self-determination, and die-hard spirit

Now - A consolidated team of more than 700 people, each marching

towards a common goal, and each backing one-another

Then- Safety Nets being the mainstay product

Now- An exhaustive range of Personal Protection Equipment, covering

Head-to-Toe

Then- A Company, only dreaming to reach out to the world.

Now- A Company that has lived up to its dreams

Then- A vision to acquire excellence in the field of Quality- in both

Product and Service

Now - A stronger vision and a greater commitment towards achieving the

same.

Manufacturing Set-Up at KARAM

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PN INTERNATIONAL

Located in the outskirts of the city of Luck now, about 500kms to the

South-East of New Delhi, the Factory is spread over a span of around

110,000 square feet, with the constructed area being just about the same.

A Unit where all the products are manufactured completely in-house, is

entirely backward-integrated, and hence is unique in its own kind. All the

components of the Fall Protection range of KARAM products are

produced within one large campus, and yarn and steel are credited as being

the only main raw materials for the same. The idea is to have a complete

control over the finest details of manufacturing in order to reach the

highest levels of quality standards.

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Strict quality parameters are laid out for Manufacturing and Systems

operations, and followed to the core. The Company has achieved the

systems certification of ISO 9001-2000 from UKAS (UK), and regular and

stringent audits keep the pace at KARAM ahead at all times.

PN SAFETECH PVT LTD

This Manufacturing set-up is located in the foot-hills of the Himalayan

range, in the small township of Rudrapur, Uttarakhand, India.

Spanning an area of more than 22,000 square feet, this Factory

works in an extremely organized manner to fulfill the demands of the

market. Also accredited with the ISO 9001:2000 Certification, the

unit is committed to provide the finest quality products to the valued

customers of KARAM INDUSTRIES.

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KARAM INDUSTRIES...expanding our vision

KARAM Industries...the new sister concern of our P. N. Safe-tech Pvt. Ltd

brings with it a new and higher level of developmental structure, with its

manufacturing base located in Sitarganj (Uttarakhand).

The company has been established with this new name, so as to highlight

the progressive changes which it has made in terms of having better

technological advances, and building its name around the already well

established brand of KARAM in the field of Safety.

The product range that KARAM Industries offers shall come with the

promise of quality defined by the high standards set by its parent company,

and reflected in the ever increasing value of the brand- KARAM.

ACHIEVEMENT OF KARAM INDUSTRIES:-

1994 The Company was founded in the year 1994, with a small scale

Safety Net Manufacturing Unit and two offices at New Delhi &

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Luck now, UP in India. Conceived as a professional organization

specializing in Design, Development, Manufacturing and

Marketing of Quality Fall Protection Devices.

1997 Set up the First Safety Belt Manufacturing Unit in Luck now, UP,

India. Bureau of Indian Standards, Govt. of India, Awarded the

quality certification for Safety Belts as per ISI: 3521: 1989.

1998 Achieved approval from the Director General of Mines and

Services, Government of India.

1999 Became the first Indian Company to achieve CE Certification on

Fall Protection Equipment. All the equipment is now

manufactured as per European Norms duly CE certified.

2003 Awarded a Trophy by the Government of India for achieving Best

Exports of Safety Equipment from the state of Uttar Pradesh,

India.

2004 Set up a Second Manufacturing Unit - a 100% Export Oriented

Unit, for Manufacturing Fall Protection Equipment in Luck now,

UP, India.

2004 Achieved the systems Certification of ISO 9001-2000 from

UKAS (UK)

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2005 Set up a Manufacturing Unit in Rudrapur, Uttarakhand, India, to

cater to the market needs of the country.

2006 Launched a new range of Personal Protective Equipment- the

Safety Eyewear, CE certified and conforming to the EN norms

2007 Doubled up the Infrastructure in both the Manufacturing as well

as the Marketing Set-ups in the country.

2007 Full Body harnesses, now complying with the American and

Australian Norms as well.

2007 Progressing steadily to cover Personal Protective Equipment

range from Head-to-Toe, KARAM launched Ear-Protection gear,

conforming to the EN norms and CE certified.

2008 Launched the Range of CE Certified Safety Shoes in the Indian

Market. Expanded our Range of CE Certified Retractable Blocks

from 5 to 15 meters both in plastic and aluminum casing.

Launched an exclusive Range of Mountaineering Equipments.

2009 Successfully achieved Malaysian Certification from Malaysias

Govt. Body (SIRIM) QAS International SDN. BHD. Malaysia.

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RESEARCH METHODOLOGY

STATEMENT OF PROJECT

Evaluation, analysis & interpretation of working capital

management of Karam Industries.

Suggesting ways to improve its working capital utilization.

OBJECTIVE OF RESEARCH

Estimation of working capital requirement

Evaluation of working capital management

Evaluation of Liquidity position & working capital utilization

Analysis of relationship between working capital and profitability

Analysis & sources of working capital

Analyzing the level of current assets with relation to current

liabilities.

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COLLECTION OF DATA:

Data has been collected from various sources like:

Annual reports of last three years

Manual of concerned departments

Consultants and personnel of Karam industries.

Internet sites like www.google.com,

[email protected]

Calculation of net working capital requirements.

METHODS OF QUANTATIVE ANALYSIS

Ratio analysis.

Operating cycle & cash cycle

Cash flow analysis

Determining the Financing mix

Statistical tools like graphical presentation

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ASSUMPTIONS

Year is taken of 365 days

All purchases have been taken as credit purchases and all sales have

been taken as credit sales.

In the absence of relevant data the data from internet site is taken as

the relevant information.

LIMITATIONS

The data is mostly secondary in nature

Data has been recalculated & regrouped wherever necessary

In the absence of sufficient data personnel judgment have been taken

on reasonable assumption.

In the absence of sufficient data in-depth study of cash, Receivables

and inventory management was not possible.

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INTRODUCTION OF WORKING CAPITAL

The net working capital of business is its current assets less its current

liabilities.

Current Assets include:

Stock of Raw Material

Work in Progress

Finished Goods

Trade Debtors

Prepaid Expenses

Cash Balances

Current Liabilities include:

Trade Creditors

Accruals

Taxation Payable

Dividends Payable

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Short term Loans

Every business needs adequate liquid resources in order to maintain day

to day cash flows. It needs enough cash to by wages and salaries as they

fall due and to pay creditors if it is to keep its workforce and ensure its

supplies. Maintaining adequate working capital; is not just important in

the short term.

Sufficient liquidity must be maintained in order to ensure the

survival of business in the long term as well. Even a profitable business

may fail if it does not have adequate cash flows to meet its liabilities as

they fall a due. Therefore when business make investment decisions they

must not only consider the financial outlay involved with acquiring the

new machine or the new building etc, but must also take account of the

additional current assets that are usually involved with any expansion of

activity .

Increase production tends to engender a need to hold additional stocks of

raw material & work in progress.

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Increased sales usually mean that the level of debtor will increase. A

general increase in the firms scales of operation tends to imply a need

for greater level of cash.

MEANING OF WORKING CAPITAL:

Capital required for a business can be classifies under two main categories:

Fixed Capital

Working Capital

Every business needs funds for two purposes for its establishments and to

carry out day to day operations. Long term funds are required to create

production facilities through purchase of fixed assets such as plant and

machinery, land and building, furniture etc. Investments in these assets are

representing that part of firms capital which is blocked on a permanent or

fixed basis and is called fixed capital. Funds are also needed for short term

purposes for the purchasing of raw materials, payments of wages and other

day to day expenses etc. These funds are known as working capital. In

simple words, Working capital refers to that part of the firms capital

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which is required for financing short term or current assets such as cash,

marketable securities, debtors and inventories.

CONCEPTS OF WORKING CAPITAL:

There are two concepts of working capital:

Balance Sheet concepts

Operating Cycle or circular flow concept

BALANCE SHEET CONCEPT:

There are two interpretation of working capital under the balance sheet

concept:

Gross Working Capital

Net Working Capital

The term working capital refers to the Gross working capital and

represents the amount of funds invested in current assets. Thus, the gross

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

enterprises. Current assets are those assets which are converted into cash

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within short periods of normally one accounting year. Example of current

assets is:

Constituents of Current Assets:

Cash in hand and Bank balance

Bills Receivable

Sundry Debtors

Short term Loans and Advances

Inventories of Stock as:

Raw Materials

Work in Process

Stores and Spaces

Finished Goods

Temporary Investments of Surplus Funds

Prepaid Expenses

Accrued Incomes

The term working capital refers to the net working capital. Net working

capital is the excess of current assets over current liabilities or say:

Net Working Capital = Current Assets Current Liabilities.

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NET WORKING CAPITAL MAY BE NEGATIVE OR POSITIVE:

When the current assets exceed the current liabilities, the working capital

is positive and the negative working capital results when the current

liabilities are more than the current assets. Current liabilities are those

liabilities which are intended to be paid in the ordinary course of business

within a short period of normally one accounting year of the current assets

or the income of the business. Examples of current liabilities are:

CONSTITUENTS OF CURRENT LIBILITIES:

Bills Payable

Sundry Creditors or Account Payable

Accrued or Outstanding Expenses

Short term Loans, Advances and Deposits

Dividends Payable

Bank Overdraft

Provision for Taxation, If does not amount to appropriation of

profits

The gross working capital concept is financial or going concern concept

whereas net working capital is an accounting concept of working capital.

OPERATING CYCLE OR CIRCULATING CASH FORMAT:

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Working Capital refers to that part of firms capital which is required for

financing short term or current assets such as cash, marketable securities,

debtors and inventories. Funds thus invested in current assets keep

revolving fast and being constantly converted into cash and these cash

flows out again in exchange for other current assets. The circular flow

concept of working capital is based upon this operating or working capital

cycle of a firm. The cycle starts with the purchase of raw material and

other resources and ends with the realization of cash from the sales of

finished goods. It involves purchase of raw material and stores, its

conversion into stocks of finished goods through work in progress with

progressive increment of labor and service cost, conversion of finished

stocks into sales, debtors and receivables and ultimately realization of cash

and this cycle continuous again from cash to purchase of raw materials and

so on. The speed/ time of duration required to complete one cycle

determines the requirements of working capital longer the period of cycle,

larger is the requirement of working capital.

Receivable conversion period Raw materialstorage

(RCP) conversion period

(RMSCP)

Cash received form

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Debtors and paid to suppliers

Of raw materials

Sales of finished Raw materialsGoods introduced into process

Finished Goods

Produced

Finished goods conversion Work inprocess

Period (FGCP) Conversion

period

(WIPCP)

The gross operating cycle of a firm is equal to the length of the inventories

and receivables conversion periods. Thus,

Where,

RMCP = Raw Material Conversion Period

WIPCP = Work in- Process Conversion Period

FGCP = Finished Goods Conversion Period

RCP = Receivables Conversion Period

However, a firm may acquire some resources on credit and thus defer

payments for certain period. In that case, net operating cycle period can be

calculated as below:

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Gross Operating Cycle = RMCP + WIPCP + FGCP + RCP

Net Operating Cycle Period = Gross Operating Cycle Period Payable Deferral period


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Further, following formula can be used to determine the conversion

periods.

Raw Material Conversion Period = Average Stock of Raw

Material.

Raw Material Consumption per day

Work in process Conversion Period = Average Stock of Work-in-Progress

Total Cost of Production per day

Finished Goods Conversion Period = Average Stock of Finished Goods

Total Cost of Goods sold per day

Receivables Conversion Period = Average Accounts Receivables

Net Credit Sales per day

Payable Deferral Period = Average Payable

Net Credit Purchase per day

CLASSIFICATION OR KIND OF WORKING CAPITAL:

Working capital may be classified in two ways:

On the basis of concept

On the basis of time

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

working capital and net working capital. The classification is

important from the point of view of the financial manager.

On the basis of time, working capital may be classified as:

Permanent or Fixed working capital

Temporary or Variable working capital.

t

On the basis of concept On the basis of time

Net Working

Capital

Permanent or

Fixed Working

Capital

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Gross Working

Capital

Temporary or

Variable Working

Capital

Kinds of Working Capital


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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 minimum

level of current assets which is continuously required by the enterprises to

carry out its normal business operations.

2. TEMPRORAY OR VARIABLE WORKING CAPITAL:

Seasonal Working

Capital

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Reserve Working

Capital

Regular

Working Capital

Special Working

Capital


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Temporary or variable working capital is the amount of working capital

which is required to meet the seasonal demands and some special

exigencies.Varibles working capital can be further classified as second

working capital and special working capital. The capital required to meet

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

Temporary working capital differs from permanent working capital in the

sense that is required for short periods and cannot be permanently

employed gainfully in the business.

IMPORATNCE OR ADVANTAGE OF ADEQUATE WORKING

CAPITAL:

Working capital is the life blood and nerve centre of a business. Just a

circulation of a blood is essential in the human body for maintaining life,

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

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

working capital. The main advantages of maintaining adequate amount of

working capital are as follows:

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Solvency of the Business

Goodwill

Easy Loans

Cash discounts

Regular supply of Raw Materials

Regular payments of salaries, wages & other day to day

commitments.

Exploitation of favorable market conditions

Ability of crisis

Quick and regular return on investments

High morals

THE NEED OR OBJECTS OF WORKING CAPITAL:

The need for working capital cannot be emphasized. Every business needs

some amount of working capital. The need of 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 purchase of raw materials and production, production and

sales,

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And sales, and realization of cash, thus, working capital is needed for the

following purposes:

For the purchase of raw materials , components and spaces

To pay wages and salaries

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

and office expenses etc.

To meet the selling costs as packing, advertising etc.

To provide credit facilities to the customers.

To maintain the inventories of raw materials, work in- progress,

stores and spares and finished stock.

FACTORS DETERMINING THE WORKING CAPITAL

REQUIRMENT:

The working capital requirements of a concern depend upon a large

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

characteristics of their operations, the length of production cycle, the rate

of stock turnover and the state of economic situation. However the

following are the important factors generally influencing the working

capital requirements.

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NATURE OR CHARACTERSTICS OF A BUSINESS: The

nature and the working capital requirement of enterprises are

interlinked. While a manufacturing industry has a long cycle of

operation of the working capital, the same would be short in an

enterprises involve in providing services. The amount required also

varies as per the nature, an enterprises involved in production would

required more working capital then a service sector enterprise.

MANAFACTURE PRODUCTION POLICY: Each enterprises in

the manufacturing sector has its own production policy, some follow

the policy of uniform production even if the demand varies from

time to time and other may follow the principles of demand based

production in which production is based on the demand during the

particular phase of time. Accordingly the working capital

requirements vary for both of them.

OPERATIONS: The requirement of working capital fluctuates for

seasonal business. The working capital needs of such business may

increase considerably during the busy season and decrease during

the off season.

MARKET CONDITION: If there is a high competition in the

chosen project category then one shall need to offer sops like credit,

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immediate delivery of goods etc for which the working capital

requirement will be high. Otherwise if there is no competition or less

competition in the market then the working capital requirements will

be low.

AVAILABILITY OF RAW MATERIAL: If raw material is

readily available then one need not maintain a large stock of the

same thereby reducing the working capital investment in the raw

material stock. On other hand if raw material is not readily available

then a large inventory stocks need to be maintained, there by calling

for substantial investment in the same.

GROWTH AND EXPANSION: Growth and Expansions in the

volume of business result in enhancement of the working capital

requirements. As business growth and expands it needs a larger

amount of the working capital. Normally the needs for increased

working capital funds processed growth in business activities.

PRICE LEVEL CHANGES: Generally raising price level requires

a higher investment in the working capital. With increasing prices,

the same levels of current assets needs enhanced investments.

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MANUFACTURING CYCLE: The manufacturing cycle starts

with the purchase of raw material and is completed with the

production of finished goods. If the manufacturing cycle involves a

longer period the need for working capital would be more. At time

business needs to estimate the requirement of working capital in

advance for proper control and management. The factors discussed

above influence the quantum of working capital in the business. The

assessment of the working capital requirement is made keeping this

factor in view. Each constituents of the working capital retains it

form for a certain period and that holding period is determined by

the factors discussed above. So for correct assessment of the

working capital requirement the duration at various stages of the

working capital cycle is estimated. Thereafter proper value is

assigned to the respective current assets, depending on its level of

completion. The basis for assigning value to each component is

given below:

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The following are the general principles of a sound working capital

management policy:

1. PRINCIPLE OF RISK VARAITAION (CURRENT ASSETS

POLICY):

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, increase liquidity, reduces

risk and thereby decreases the opportunity for gain or loss. On the other

hand less investments in current assets with greater dependence on short

term borrowings, reduces liquidity and increase profitability. In other

words there is a definite inverse relationship between the degree of risk

and profitability. In other words, there is a definite inverse relationship

between the risk and profitability. A conservative management prefers to

minimize risk by maintaining a higher level of current assets or working

capital while a liberal management assumes greater risk by reducing

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PRINCIPLES OF WORKING CAPITAL MANAGEMNT POLICY

PRINCIPLES OF

RISK

VARIATIONS

PRINCIPLES OF

COST OF

CAPITAL

PRINCIPLES OF

EQUITY

PRINCIPLES

PRINCIPLES OF

MATURITY OF

PAYMENTS


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working capital. However, the goal of management should be to establish a

suitable trade off between profitability and risk.

2. PRINCIPLES OF COST OF CAPITAL: The various source of

raising working capital finance have different cost of capital and the degree

of risk involved. Generally, higher and risk however 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: The principle is concerned

with planning the total investments in current assets. According to this

principle, the amount of working capital invested in each component

should be adequately justified by a firms equity position. Every rupee

invested in current assets should contribute to the net worth of the firm.

The level of current assets may be measured with the help of two ratios:

1. Current assets as a percentage of total assets and

2. Current assets as a percentage of total sales

While deciding about the composition of current assets, the financial

manager may consider the relevant industrial averages.

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4. PRINCIPLES OF MATURITY OF PAYMENT: The principle is

concerned with planning the source of finance for working capital.

According to the principles, a firm should make every effort to relate

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

pattern of various current obligations is an important factor in risk

assumptions and risk assessments. Generally shorter the maturity schedule

of current liabilities in relation to expected cash inflows, the greater the

inability to meet its obligations in time.

CONSEQUENCES OF UNDER ASSESSMENT OF WORKING CAPITAL:

Growth may be stunted. It may become difficult for the enterprises

to undertake profitable projects due to non availability of working

capital.

Implementations of operating plans may brome difficult and

consequently the profit goals may not be achieved.

Cash crisis may emerge due to paucity of working funds.

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Optimum capacity utilization of fixed assets may not be achieved

due to non availability of the working capital.

The business may fail to honour its commitment in time thereby adversely

affecting its creditability. This situation may lead to business closure.

The business may be compelled to by raw materials on credit and sell

finished goods on cash. In the process it may end up with increasing cost

of purchase and reducing selling price by offering discounts. Both the

situation would affect profitable adversely.

Now avaibility of stocks due to non availability of funds may result in

production stoppage. While underassessment of working capital has

disastrous implications on business overassesments of working capital also

has its own dangerous.

CONSEQUENCES OF OUR OWN ASSESSMNET OF WORKING

CAPITAL:

Excess of working capital may result in unnecessary accumulation

of inventories.

It may lead to offer too liberal credit terms to buyers and very poor

recovery system & cash management.

It may make management complacent leading to its inefficiency.

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Over investment in working capital makes capital less productive

and may reduce return on investment.

Working Capital is very essential for success of business & therefore needs

efficient management and control. Each of the components of working

capital needs proper management to optimize profit.

INVENTORY MANAGEMNT: Inventory includes all type of stocks.

For effective working capital management, inventory needs to be managed

effectively. The level of inventory should be such that the total cost of

ordering and holding inventory is the least. Simultaneously stock out costs

should be minimized. Business therefore should fix the minimum safety

stock level reorder level of ordering quantity so that the inventory costs is

reduced and outs management become efficient.

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RECEIVABLE MANAGEMENT: Given a choice, every business would

prefer selling its produce on cash basis. However, due to factors like trade

policies, prevailing market conditions etc. Business are compelled to sells

their goods on credit. In certain circumstances a business may deliberately

extend credit as a strategy of increasing sales. Extending credit means

creating current assets in the form of debtors or account receivables.

Investment in the type of current assets needs proper and effective

management as, it gives rise to costs such as:

Cost of carrying receivables

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Cost of bad debts losses

Thus the objective of any management policy pertaining to accounts

receivables would be to ensure the benefits arising due to the

receivables are more then the costs incurred for the receivables and the

gap between benefit and costs increased resulting in increase profits.

An effective control of receivables

Help a great deal in properly managing it. Each business should therefore

try to find out coverage credit extends to its clients using the below given

formula:

Average Credit = Total amount of receivable

(Extend in days) Average credit sale per day

Each business should project expected sales and expected investments

in receivable based on various factor, which influence the working

capital requirement. From this it would be possible to find out the

average credit days using the above given formula. A business should

continuously try to monitor the credit days and see that the average.

Credit offer to clients is not crossing the budgeted period otherwise the

requirement of investment in the working capital would increase and as

a result, activities may get squeezed. This may lead to cash crisis.

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CASH BUDGET: Cash budget basically incorporates estimates of

future inflow and outflows of cash cover a projected short period of

time which may usually be a year, a half or a quarter year. Effective

cash management is facilated if the cash budget is further broken down

into months, weeks or even a daily basis.

There are two components of cash budget are:

1. Cash inflows

2. Cash outflows

The main source for thses flows are given here under:

1. Cash Sales

2. Cash received from debtors

3. Cash received from Loans, deposits etc.

4. Cash receipts other revenue income

5. Cash received from sale of investment or assets.

CASH OUTFLOWS:

1. Cash Purchase

2. Cash payments to Creditors

3. Cash payment for other revenue expenditure

4. Cash payment for assets creation

5. Cash payments for withdrawals, taxes.

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6. Repayments of Loan etc.

A suggestive for, at for cash budget is given below:

MONTHS

PARTICULARS JANUARY FERBUARY MARCH

Estimated cash inflows

.

I. Total cash inflows

Estimated cash outflows

..

.. II. Total cash outflows

III. Opening cash balances IV. Add/deduct surplus/deflictduring the month ( I-

II)

V. Closing cash balances (III -IV)

VI. Minimum level of cash balance

VII. Estimated excess or short fall of cash (V-VI)

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WORKING CAPITAL ESTIMATION

Current assets Loans & advances FY 06-07 FY 07-08 FY 08-09

Currents assets

Inventories

stock in trade 223.94 662.87 1176.85

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work in progress 2528.4 4563.76 8714.56

raw materials 7224.96 8145.37 9242.58

stores and spare parts 1131.8 1463.13 1810.73

Total Inventories 11109.1 14835.13 20944.72

Debtors 5516.14 7402.6 14211.12

Cash & Bank balances 1027.1 8042.12 5225.01

(subtracting FCCB issue unutilized -6910.46 -5272.52

money as it amounts to long term

liability)

loans and advances 3249.1 7529.5 8647.1

Net current assets 20901.44 30898.89 43755.43

Current Liabilities FY 06-07 FY07-08 FY 08-09

Sundry Creditors 1476.37 1589.57 3748.82

Creditors for capital expenditure 1456.05 365.64 258.4other liabilities 342.26 645.34 621.04

unclaimed dividend 21.33 31.66 35.29

sundry deposits 174.14 229.23 321.66

advances from customers 217.21 362.59 73.55

interest accrued but not due on loan 7.04 20.05 32.12

Net current liabilities 3694.404 3244.08 5090.88

INVENTORIES

In the context of Karam Industries the major increase in the present three

financial years has been of the inventory.

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Reasons:

The pile up of inventory that is used in trial run, before hand to be

used in the checking the machinery & the newly installed production

capacity.

The increased inventory to produce more goods so as to utilize the

new plant set up.

DEBTORS AND AVERAGE RECEIVABLES

The debtors are increasing heavily in the financial year 07-08 because of a

sales boom that has accounted for huge accounts receivables increase.

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CASH AND BANK BALANCES

Cash and bank balance as per the balance sheet it is seen to be increasing

but from the above chart it is seen to be decreasing. This discrepancy can

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be attributed to the fact that balance sheet figures carry additional cash

balance of unutilized FCCB issue proceeds which amount to long term

liability as well. Thus the actual figures are distorted because the money

from FCCB issue has to be returned and it is a kind of long term loan

which the company has sought for expansion purpose. As a result to find

the actual outlay of cash the unutilized money has been subtracted. Also

we should take note of the fact that the FCCB money can only be used for

expansion purpose and not as money for usual application of working

capital.

LOANS AND ADVANCES

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Loans & advances are increasing on the part of increased advances that are

given to pile up inventory when the company went for the expansion

mode.

CURRENT ASSETS includes cash & those assets which can be easily

converted into cash within a short period generally one year such as

marketable securities , bills receivables, sundry debtors, inventories, work

in progress, prepaid expenses etc .The total current assets are the sum of

below contingency i.e.Current Assets = Stock/ Inventory + Sundry Debtors + Advances +

Cash and bank balances + other current assets

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Conclusions: The trend of the current assets in Karam industries

throughout the period from 2006-09 are shown in the pie-chart .it is

evident from the table that the current assets in Karam industries has

increased except in year 2007-08.

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CURRENT LAIBILITIES

These are those obligations which are payable within a short period of

generally one year and includes outstanding expenses, bills payable,

sundry creditors, accrued expenses, bank overdraft, short term advances,

income tax payable.

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Conclusion: The trend of Current Liabilities of Karam industries

throughout the period from 2006-2009 are shown in the table. It is evident

from the table that it shows increasing trends in the year 2006 to 2009. It

shows that the Karam industry has stability in trends of Current Liabilities.

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CREDITORS AND CREDITORS OF CAPITAL EXPENDITURE

Creditors of Karam industry limited are increasing from 70 Cr (FY 06-07)

to 18 Cr (FY 07-08) to 12 Cr (FY 08-09). The main reason for the

increase in can be attributed to the heavy purchase of the inventory for

stocking it up for trial run & use before the expansion mode.

Creditors for capital expenditure seem to be decreasing over the three years

i.e. from 18Cr (FY 06-07) to 12 Cr (FY 07-08) which is in sync with the

fact that the expansion work that has been in process and all preparations

for that are coming to an end.

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RATIO ANALYSIS

CURRENT RATIO

Current ratio is defined as the relationship between current assets and

current liabilities. It is a measure of general liquidity & is most widely

used to make the analysis of short term financial position of a firm. Current

FY 06-07

FY 07-

08 FY 08-09

Current assets 29843.52

47163.7

2 61410.49

current liabilities 7611.44 6597.95 7459.4

quick assets 12759.32

14530.4

6 20880.64

quick liabilities 7611.44 6597.95 7459.4

Net turnover (sales) 45503 52527.1 81786.93

working capital 22232.08

40565.7

7 53951.09

average inventory (average of opening & closing stock

of year) 8594.615

14476.4

65 22666.83

cost of goods sold = cost of sales 37398

47018.3

1 67855.4

total assets 87666

124436.

12 138465.6

total annual expenses -(depreciation +debt expenses) 37313.16

27364.0

6 23898.65

average gross income 97754.89

63633.3

7 51858

PROFIT before interest and taxes 5998 8120.16 14612.92

Total interest 747.8 2653.75 5214.77

Net Profit after tax (NPAT) 4115 3893.37 7383.56

capital employed (FA+CA-CL ) 89529.68

106917.

71 111772.7

investment (FA+CA) 97141.12

113515.

66 119232.1

Fixed assets 67297.6

66351.9

4 57821.59

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ratio is the ratio of current assets to current liabilities. A relatively higher

ratio is an indication that the firm is liquid and has the ability to pay its

current obligations on time. On the other hand a low current ratio indicates

that the Liquidity position of the firm is not good and shall not be able to

pay its current liabilities in time. Current Ratio:

The Current ratio is calculated by dividing current assets by current

liabilities:

Current ratio = current assets

Current ratio

QUICK RATIO: Quick ratio or liquid ratio is a more rigorous test of

liquidity than the current ratio. The term liquidity refers to the ability of the

firm to pay short term obligations as and when they become due. Quick

ratio may be defined as ratio of quick assets to quick liabilities. Liquid

assets include all the current assets excluding inventories & prepaid

FIANANCIAL

YEAR

CURRENT

ASSETS

CURRENT

LAIBILITIES CURRENT RATIO

FY 2006-2007 29843.52 7611.44 3.92

FY 2007-2008 47163.72 6597.95 7.14

FY2008-2009 61410.49 7459.4 8.23

FIANANCIAL YEAR

QUICK ASSETS

QUICKLIABILITITES CURRENT LAIBILITIES QUICK RATIO

FY 2006-2007 12759.32 7611.44 1.67

FY 2007-2008 14530.46 6597.95 2.2

FY2008-2009 20880.64 7459.4 2.78

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expenses. Liquid liabilities mean all liabilities excluding bank overdraft.

Inventories & prepaid expenses are not termed as liquid assets because

they cannot be converted into cash immediately without a loss of value.

CURRENT SCENERIO INTERPRETATION

While interpreting the figures of both the above ratios we should keep in

mind the following one point

Karam industries is a manufacturing concern

Since it is manufacturing concern the an excess of inventory as compared

to other industry models such as the services sector is an integral fact. As a

result it is bound to have higher current ratio and quick ratio as compared

to other industries.

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The sharp rise of current ratio from 20% (FY 06-07) to 37% (FY 07-08)

to 43 %( FY 08-09) Can be attributed to-

a. Higher pile up of inventory which was to be used up for trial run in

producing new products from the new plant set up.

b. Higher prepaid expenses related to advances given so as to pile up

the inventory so that when the inventory is needed for trial run, its

available.

c. An increase in average receivables which was in sync with increased

capacity of production and also increased sales.

An important point to note here is that an excess of cash balance arising

out of idle money coming out of FCCB issue expense has been deducted as

correspondingly it accounts for long term liability (debentures) which have

no effect on working capital management.

The quick ratio is a more important indicator of liquid position of Karam

industries as it hardly varies from 25% (FY 07-08) to 33% (FY 08-09).

Obviously the effect of inventories has been negated.

EFFICIENCY RATIO

From the perspective of working capital management we would be

discussing three important ratios they are.

Sales to working capital ratio

Inventory turnover ratio.

Current assets turnover ratio.

SALES TO WORKING CAPITAL RATIO

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This ratio is computed by dividing working capital by sales. This ratio

helps to measure efficiency of the utilization of net working capital. It

signifies that for an amount of sales. A relative amount of working capital

is needed. If any increase in sales in contemplated, working capital should

be adequate & thus this ratio helps management to maintain the adequate

level of working capital

Financial Year FY 06-07 FY 07-08 FY 08-09

Sales to working capital

ratio 2.046727 1.294863 1.51595


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As seen from the above table the ratio has decreased from 2 (FY 06-07)

to 1.29 in (FY 07-08) and then increased to 1.5 (FY 08-09). This ratio is

again indicative of the fact that the year in which the expansion took

place the sales did not match up with the scale of expansion. Otherwise

it would have remained intact and not decreased. The slight increase

from 1.29 to 1.51 is indicative of the fact that the full impact of

expansion is being slowly realized & sales are slowly increasing.

INVENTORY TURNOVER RATIO

This ration indicates the effectiveness and efficiency of inventory

management. This ratio is calculated as cost of goods sold: average

inventory shows how speedily the inventory is turned into accounts

receivables through sales. The higher the inventory turnover ratio (also

called stock velocity) the more the efficient inventory management.

Financial Year FY 06-07 FY 07-08 FY08-09inventory turnover ratio/ stock

velocity

4.3513

29

3.24791

38 2.9936

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The stock velocity is decreasing subsequently from 4.35 (FY 07-08) to

2.99 (FY 08-09) which shows inefficiency on the part of inventory

management.

Partly the reason for the fall can be attributed to stocking up of inventory

for the trail run & using them in testing the expansion mode machinery.

CURRENT ASSETS TURNOVER RATIO

This ratio is indicated by sales upon current assets. This ratio indicates the

efficiency with which the current assets turn into sales & higher currentassets turnover ratio implies by & large a more efficient use of funds in

current assets. Thus, a high turnover rate indicates reduced lock up of

funds in current assets. An analysis of this ratio over a period reflects

working capital management of the firm

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Financial Year FY 06-07 FY 07-08 FY08-09current assets turnover

ratio 1.52472 1.11371834 1.331807


The ratio is slightly decreasing from 1.52 (FY 06-07) to 1.11 (FY 07-08)

& then increasing to 1.33 (FY 08-09) which shows that sales increase is

not matched by the increase in current assets in the expansion phase of

Karam industries . The reason can be well attributed to the piling up of trial

stock and not full use of the expanded production capacity.

OPERATING RATIOS

Working ratio

Interest coverage ratios

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WORKING RATIO

A ratio used to measure a company's ability to recover operating costs

from annual revenue. This ratio is calculated by taking the company's

total annual expenses (excluding depreciation and debt-related

expenses) anddividing itby the annual gross income. A working ratio

below 1 implies that the company is able to recover operating costs,

whereas a ratio above 1 reflects the company's inability to do so.

Financial Year FY 06-07 FY 07-08 FY08-09

working ratio 0.381701 0.43002689 0.460848


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efficiency of a department; optimum use will help to generate maximum

return.

Karam industries is also using SAP 6.0 versions which is very advanced

to do every transaction of any organization. SAP 6.0 also applicable for

e-transaction.

FINDINGS

The sharp rise of current ratio finding 20% (FY 06-07) to 37% (FY

07-08) to 43% (FY 08-09).

The debtors are increasing heavily in the financial year 07-

08because of a sales boom that has accounted for huge accounts

receivables increase.

The current asset in Karam industries has increased except in year

2007-2008.

The current liabilities of Karam industries in the year 2006-2009. It

shows stability in trends of current liabilities.

The stock velocity is decreasing subsequently from 4.35(FY 07-08)to 2.99(FY 08-09).

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BIBLOGRAPHY

BOOKS:-

Financial Management theory and practice by Rosanna Chandra

Financial Management theory and practice by Shashi .K. Gupta &

R.K. Sharma.

NEWS PAPERS:-

Times of India

Economic times

MAGAZINES:-

Business Today

Money Menter

WEB SITES:-

Www. Google.com,

Www. Wikepidia.com

Annu project report

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