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Transcript of Complete Sandeep
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1.2 OBJECTIVE OF THE STUDY
The principal objective of preparing the project report on Working
Capital Management of Prime seal strap pvt.ltd. Saper, is to asses the
performance of a firm based on the available financial data. The other
objectives are:
To study how the company manages it working capital and its
day to day transaction.
To study the liquidity position of the company.
To check the profitability of the company.
To study the operating cycle at prime seal strap pvt.ltd
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1.3 LIMITATIONS OF THE STUDY
The main limitations faced during the preparation of this project report of
Working Capital Analysis at PRIME SEAL STRAP PVT. Ltd. areas under:
As per certain document & data were confidential, it was not possible to
collect all the information necessary for the deep study.
In this report, information written by me is as per my limited
understanding of the concern subject.
At the time of training, department heads are very busy in his routine
work. Therefore, we get only brief idea of functioning of the organization.
The report is based on the analysis of the later of last 4-5 year which maynot be sufficient in some cases.
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METHDOLOGY
Preparing the project report include the processes of collecting data,
analyzing data and reporting data for absolute results. Research is done to gain
some knowledge so as it may bid in understanding the information gathered on
specific topic. It is a scientific and systematic way of understanding information
on specific and particular subjects. It is a scientific and particulars. It is a
scientific investigation to understand the cause and effect as well as reasons
through investigation. It is an academic activity and it is to be used in technicalsense.
2.1 Research type: Descriptive research.
Descriptive study is fact finding investigation with adequate
interpretation. It is well structured tends to be rigid and its approach can not be
change every now and there. It is more specific than an exploratory study as it
has focused on particular aspect of the problem studied.
2.2 Sources of Data:
This project report is based on the two types of data, i.e. primary data and
secondary data.
1. Primary sources of information
2. Secondary sources of information
1.Primary sources:-
Primary data is that data, which has not been collected, and this data are
collected at the first hand or from the persons of the company directly for the
purpose of the study. But for this project work I have not used primary data.
2.Secondary sources:-
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The data which are collected earlier for some other purposes and used bythe researcher for his present study are called secondary data. For this project
work I have collected the secondary data from various sources such as
companys annual report of previous years, different document prepared by
company and from various reference books.
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3.1 HISTORY
PRIMESEAL STRAPS PVT. LTD.
Rajkot, is a privately managed firm, established in the year 2001, with aresolution to produce high quality, 100% virgin box straps. The companyis situated at Veraval - Shapar, a prime industrial area on the outskirts ofRajkot (Gujarat).
In yesteryears, wooden boxes and metal straps were in use for packingpurpose. These have now been replaced by corrugated paper cartonsand PP straps.
We have been engaged in the manufacturing of PP box straps of varioussizes, for a decade. We have now ventured into the production of 100%virgin box straps, This would cater to all the future requirements of thepackaging industry, keeping in mind the quality as well.
P.S.P.L. has therefore been established to be able to cater to any andevery need of the customer, by providing the right quality as well as thespecific requirements. This would include the printing of the company's
name and logo as well. The motto at P.S.P.L. is to treat each customerwith equal importance and cater to every requirement of the customer.
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LOCATION OF THE FIRM & ITS AREA:
PRIMESEAL STRAP PVT.LTD.
SERVEY NO.125 PLOT NO.85,B/H PANARA AUTO, SIDC PLOTS,
NEAR SANTIDHAM SOCIETY,
SIDC ROAD, VERAVAL (SHAPAR),
T-KOTDASANGANI, D- RAJKOT.
About 10 minutes from Shapar Railway station (East). Firm has a plot area of
about 836.43 sq.mt. Main building covers about 436.36 sq.mt. Total land is
covered by boundary wall of 12 Ft by 5 Ft. within the compound the open space
is covered by plantation.
MANAGEMENT PERSONNEL OF THE FIRM:
Mr. Paresh Sheladiya (M.E) Partner
Mr. Kalpesh Sheladiya (M.B.A) Genera Manager
Mr. Mitul patel (B.E/M.B.A) Production Manager
Mr. Manoj patel (M.B.A) Finance Manager
HEADS OF VARIOUS DEPARTMENTS:
Finance department: Mr. Manoj Patel
Marketing department: Dr. H. M. Patel
Personnel department: Mr. Bipin Patel
Production department: Mr.Mitul Patel
TURNOVER:
The turnover of the firm is approximately Rs. 2.5 crores.
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3.2 PRODUCT PROFILE
PRODUCT LINES:
Product is anything that can be offered to market for attention,
acquisition, use or consumption that might satisfy a want or need.
A product line is a group of products that are closely related because they
perform a similar function, are sold to the same customer. Groups are marketed
through the same channel or make up a particular range.
The mission of Primeseal Straps Pvt. Ltd. is to produce to the highestquality of strapping material for the packaging requirements of various
industries.
The directors of P.S.P.L. felt that a unit for the production of 100%
virgin quality box straps should be produced by a semi-automatic heat sealable
plant which would be the solution for all futuristic needs for the packaging
industry. Hence, the Primeseal brand was established.
P.S.P.L. will be able to cater the various requirements of strapping for
textile, pharmaceutical, electronic, automobile, Plastic, agricultural & various
other industries.Earlier, the consumers were not getting the best quality, even though they
were willing to spend for it. Therefore, it was unilaterallydecided by the
directors and the employees that the consumer should not suffer at any cost.
This resolution has helped us to not only produce the quality according to the
requirements of the industry, but also the produce the required quantity for our
customers / consumers according to their customised and specific requirements.
This transparency has yielded a reasonable success and our industry has earned
us a lot of goodwill. All the employees at P.S.P.L. are grateful to their patrons
for their valuable support and futuristic vision. We undertake to serve in good
spirit and the best attitude.
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The company has mainly Four product lines.
Semi Automatic Heat Sealable Straps
Manual Sealable Straps
Most UsagesFuture Product
Semi Automatic HeatSealable Straps Manual SealableStraps Fully automaticstrap
List of Box Straps manufactured.
1. 6 m.m. Box Straps.
2. 11 m.m Box Straps.
3. 12 m.m Box straps.4. 15 m.m Box straps.
5. 16 m.m Box straps.
6. 19 m.m Box straps
Semi Automatic Sealable Straps.
Standard Colours : Transparent, White, GoldenYellow, Lemon Yellow, Red, Blue, Green etc.
Core Size and Weight :
(1) 165 x 203 mm (0.800 kg.)(2) 165 x 203 mm (1.000 kg.)
Printing facility is available as per the requirements ofquality, sizes and the available range of colours.
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Specifications :
CodeWidth
mm
Thick
mm
Metre
per kg.
Length per
roll metre
Kg.per
roll
Breakload
kg.
Elongation
%905 9.00 0.50 400.00 2000 5.00 50-55 17.00
906 9.00 0.60 333.00 2000 6.00 70-75 18.00
1205 12.00 0.50 285.00 2000 7.00 85-90 19.00
1206 12.00 0.60 250.00 2000 8.00 100-105 20.00
1505 15.00 0.50 200.00 1000 5.00 100-105 22.00
1506 15.00 0.60 165.00 1000 6.00 120-125 23.00
1806 18.00 0.60 145.00 1000 7.00 155-160 30.00
1807 18.00 0.70 125.00 1000 8.00 175-180 32.00
Average Contents per Package : 2 Rolls
Manul Sealable Straps
Standard Colours : Transparent, White, GoldenYellow, Lemon Yellow, Red, Blue, Green etc.
Core Size and Weight :
(1) 102 x 152 mm (0.250 kg.)(2) 076 x 152 mm (1.150 kg.)
Printing facility is available as per the requirements ofquality, sizes and the available range of colours.
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Specifications :
Code Widthmm Thickmm
Metre
perkg.
Length
per rollmetre
Breakload kg. Elongation %
1205 12.00 0.50 285.00 2000 85-90 19.00
1206 12.00 0.60 250.00 2000 100-105 20.00
1207 12.00 0.70 225.00 2000 120-125 21.00
1505 15.00 0.50 200.00 1000 100-105 22.00
1506 15.00 0.60 165.00 1000 120-125 23.00
1507 15.00 0.70 145.00 1000 135-140 24.00
1806 18.00 0.60 145.00 1000 155-160 30.00
1807 18.00 0.70 125.00 1000 175-180 32.00Packing depends on the Weight of Roll.
Most Usage
Its purity, toughness and other striking qualities will furnish the entire needsof the customer in on-line strapping of textile, pharmaceuticals, electricautomobile, plastic, agricultural items etc.
PRIMESEAL STRAP is basically used in :
Industries such as Steel, Glass, Automobile,Sheets, Corrugated, Hardboard, etc.
Bales such as Man-made Fibre, Cotton, Jute, Coir,Rubber, etc.
Building Materials such as Pipes, Clay buildingbricks, Roofing Tiles, Plasterboards, etc.
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Palletisation such as Medicine Cartons, Film Rolls,Bags, Bottles, other plastic materials, etc.
Consumer Products such as Fruit Cartons,Vegetable Markets, Insecticides, etc.
Paper Products such as News Paper Bundles,Loose Sheets, Stationery etc.
Future Product
Fully Automatic Strap
The future plan of PRIMESEAL STRAPS PVT. LTD. is to
produce fully automatic strap. Fully automatic rolls aremanufactured taking into consideration the precisionrequired at the high speed of strapping in fullyautomatic machine. The straps are made maintainingrigid of quality control to produce curvature-free straps.
Friction Seal Strap
Friction seal strap is used in fully automatic strapping machine and the samerequires a curvature-free strap with minimum size variation. Our straps are fullysuitable for those types of
machines and are available in various strap & core size.
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MAJOR CUSTOMERS
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4.1 CONCEPT OF WORKING CAPITAL
There are two concepts of working capital:
1. Gross concept
2. Net concept
1. GROSS WORKING CAPITAL
Its simply called as working capital refers to the firms investment in'
current assets which can be converted in to cash within an accounting year) or
operating cycle) and include cash, short-term securities, debtors, bills
receivables and stock (inventory).
2. NET WORKING CAPITAL
It refers to the difference between current assets and current liabilities.
Net working capital can be positive or negative. A positive net working capital
will arise when current assets exceeds current liabilities. A negative net
working capital occurs when current liabilities are in excess of current assets.
Net working capital being the difference between current assets and
current liabilities is a qualitative concept. It (a) indicates the liquidity position
of the firm and (b) suggests the extent to which working capital needs may be
financed by permanents sources of funds. Current assets should be sufficiently
excesses 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. However the quality of current
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refrigerators is more and the firm needs low working capital in the periods of
winter, as the demand for the product is low.
3. Production Cycle:
The term production cycle refers to the time involved in the manufacture
of goods. It covers the time span between theprocurement of the raw materialsand the completion of the manufacturing process leading to the production of
goods. As funds are necessarily tied up during the production cycle, the
production cycle has a bearing on the quantum of working capital. The longer
the time span of production cycle, the larger will be the funds tied up and
therefore the larger the working capital needed and vice versa.
4. Production Policy:
The quantum of working capital is also determined by production policy.
In case of the firms having seasonal demand of the products like refrigerators, air
coolers etc., The production policy of the firm determines the amount of working
capital requirement. If the firm has production policy to carry production at a
steady level to meet the peak demand, this will result in a large accumulation of
finished goods (inventories) during the off-seasons and the abrupt sale during the
peak season. The progressive accumulation of finished goods will naturally
require an increasing amount of working capital. If the firm has production
policy to produce only when there is a demand then the firm needs low workingcapital during the slack season and high working capital during season.
5. Credit Policy:
The level of the working capital is also determined by the credit policy, as
the firms credit policy determines the amount of receivables. If the firm has a
liberal credit policy, then the firm needs high working capital and the firm needs
low working capital if the companys credit policy does not allow it to extend
credit to the buyers.
6. Market Conditions:
The working capital requirements are also determined by the market
conditions. In case of the high degree of competition prevailing in the market the
firm has to maintain larger inventories as customers are not inclined to wait for
the product. This needs higher working capital requirements. If there is good
demand for the product and the competition is weak, a firm can manage with
smaller inventory of finished goods, as customers can wait for the product if it is
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not available in the market. Thus, a firm can manage with low inventory and will
need low working capital requirements.
7. Conditions of Supply:
The availability of raw materials and spares also determine the level of
working capital. If there is ready availability of raw materials and spares, a firm
can maintain minimum inventory and need less working capital. If the supply of
raw materials is unpredictable, then the firm has to acquire stocks as and when
they are available for ensuring continuous production. Thus, the firm needs to
maintain larger inventory average and needs larger requirement of working
capital.
The effects of excessive working capital are as followsy It results in unnecessary accumulations of inventories. Thus chances of
inventory mishandlings, waste, theft and losses increase.
y It is an indication of detective credit policy and slack collection periods
consequently higher incidents of bed debts results, which adversely affects
profits.
yExcessive working capital makes management complacement which
degenerates in to managerial in efficiency.
yTendencies of accumulative inventories to make speculative profits grow.
This may tend to make dividend policy liberal and difficult to cope with in
future when the firm is unable to make speculative profits.
Inadequate working capital is also bad and has the
following Effects
y It stagnates growth. It becomes difficult for the firms to under take profitable
projects for non availability of working capital funds.
y It becomes difficult to implement operating plans and achieves the firms
profit target.
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yOperating influences creep in when it become difficult even to meet day-to-
day commitments.
yFixes assets are not efficiently utilized for the lack of working capital funds
thus the firm's profitability would deteriorate.
yPaucity of working capital funds renders the firm unable to avail attractive
credit opportunities etc.
An enlightened management should there for maintain a right amount of
working capital on a continue basis. Only then a proper functioning of the
business operations will be ensured. Sound financial and statistical techniques
supported by judgment should be used to predict the quantum of working
capital needed at different time periods.
4.3 CONCEPT OF OPERATING CYCLE
There is always an operating cycle involved in conversion of sales into
cash. 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 buildings. On the contrary,
investment in current assets is turned over many times in a year. Investment in
current assets such as inventories and book debts is realized during the firmsoperating cycle which is usually less than a year.
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 involves three phases:
1. Acquisition of resources such as raw material, labour & fuel etc.
2. Manufacturing of the product which include conversion of rawmaterial into work in progress in to finished goods.
3. Sales of the product either for cash or on credit, credit sale creature bookdebts for collection.
The title of operating cycle is more expressive in the sense that the
normal business operations of a manufacturing and trading company start with
cash , for through the successive segments of the operating cycle that is raw
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materials, work in progress period, finished goods periods and collection from
debtors before getting back cash along with the profits. The total duration of all
the components' define about a gross operating cycles.
The purchase of raw materials, components' etc. all usually made on
credit basis there by giving rise to the spontaneous current liabilities, viz.
account payable when the payment period of the company to its suppliers is
deducted from the gross. Operating cycle period the resultant period is called
net operating cycle period. It becomes obvious that the short term duration of
operating cycle period; the factor will be the transactions of current assets into
cash.
The companys financial manager is concerned with the smooth and
rapid flow of funds; the more efficient is the usage of each rupee of the working
capital investment. in other words when the flow of working capital is smooth
and rapid, the amount of working capital is required is less.
Operating Cycle of Prime Seal Strap Pvt.Ltd.
Conversion of cash into raw material.
Conversion of raw material into work-in-process.
Conversion of work-in-process into finished goods.
Conversion of finished goods into sales.
Conversion of debtors into cash.
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Cash conversion cycle of a Manufacturing
enterprise is shown in the following figure
The boxes are in the figure represented stock at a point of time, or cash
materials finished goods and sundry debtors. The stock should be maintained at
level appropriate to business turnover. High would lead to blocking of funds or
Cash
Finished goods Work inprogress
Debtors
collection
eriod Raw material
inventory
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low would lead to interpreting of the smooth flow of cash cycle. Thus the
objectives of working capital management are to maintain smooth and rapid
flow of funds over cash.
MEASURING WORKING CAPITAL
REQUIREMENTS
Operating cycle concept penetrates to the understanding of the working
capital management in a more dynamic form. The aim of such an approach is
not only to direct towards management of working capital and its fund inflows
and outflows but also directed to refine the balancing judgments between
liquidity and profitability. In financial planning understanding of the operating
cycle approach is very essential this means that working capital is not only to be
viewed as working funds for meeting the current liabilities but also as a source
of increasing profitability and these by maximize the return on capital
employed.
The conventional definition of working capital adopts a balance sheetview of resources for sustaining of the current operations of the firm. However
the balance sheet is a static statement of the firm on a certain date and if fails to
indicate the dynamics position of the pressure on cash flows that are combines
in the firms income more profit and loss account which has all operated inflows
and outflows. Working capital derived from such a sources of known as cash
working capital which is considered to be the most practical approach in
context of the working capital management. There is an effect on the item of
the value that flows in and flows out through the series of item comprising the
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components of the profit and loss account and balance sheet. This is more
evident than operating cycle period is calculated.
The inventory conversion period is the total time needed for producing
and selling the product typically it includes:
1. Raw material conversion period
2. Work-in-process conversion period
3. Finished goods conversion period
4. Debtors conversion period
5. Creditors conversion period
1. Raw Material Conversion Period:
Raw Material turnover indicates the velocity with which the raw
materials are consumed & shows the period for which the raw material was
stored before they are released to the production department.T
he lower theturnover, more are the working funds blocked in the material & Vice-Versa.
Shorter the raw material storage period require lesser investment in raw
material turnover & the storage period of raw material further indicates over or
under investment in raw materials inventory. The company has major
production on order basis. Hence, it purchases raw material specific to the
demand. As a result, the storage period of raw materials mainly consist of
inspection of raw material.
The amount of raw material consumed has been divided by value of
inventory of raw materials for computing raw material turnovers. Further tocalculate raw materials storage period, the amount of inventory raw materials
has been multiplied by the number of days in the year and divide by the amount
of raw materials consumed during the year.
2.Work-In-Process Conversion Period:
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Work-In-Process inventories are semi-manufactured products. Theyrepresent that need further processing before they become finished product for
sale. The length of product cycle & current level of operation determines the
size of work-in-process. The longer the production cycle & higher the current
level of operations, greater will be the value of work-in-process.
3.Finished Goods Conversion Period:
The turnover of inventory of finished goods is a benchmark to measure
the number of times inventory of finished goods is sold. A higher turnover is a
reflection of fast movement of stock which denotes lesser amount of working
capital being blocked up in the form of finished goods inventory. A lower
turnover may indicate slump business, excessive production in relation to sales
or over stocking in anticipating of higher price & profits.
Finished goods are built up with additions from production line and are
reduce with sales. The business firm may find it advantageous to maintain high
level of finished goods only for timely execution of orders.
4.Debtors Conversion Period:
The debtors turnover rate measures the liquidity of the debtors of a firm.
In other words, it shows the efficiency achieve in using he fund invested indebtors. Increase in the volume of debtors without corresponding increase in the
total current assets, may decrease in the volume of investment in the other
current assets.
If investment in inventory is reduced, it may in turn affect total sales and
consequently reduce the profit of the firm. The reverse may be true in case of
decrease in volume of receivables. Higher debtors turnover coupled with quick
collection of debtors enable the firm to manage a larger volume of business
without corresponding rise in the investment of debtors. In a competitive
market, where there are many players to same line of product. The company
may have to resort to increase credit period, special incentive to safe guard the
clients.
Thus, an insight into firm turnover in collection period of debtors reveals
the credit policy followed by it.
5.Creditors Deferral / Conversion Period:
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Trade credit is one of the major sources of funds to finance inventories.
The period of volume of trade credit varies from industry to industry & in an
industry from firm to firm. The main advantage of trade credit is that it has
generally no cost, if discount is not a part of credit term. It is spontaneous,
being available without any formalities. Hence, finance manager should try to
exploit this spontaneous short-term source of funds to the fullest possible
extent.
Creditors turnover coupled with slower payment to creditors enables the
firm to maintain sufficient level of inventories at lower cost. Banks now a day
offers various facilities for lending funds for the working capital requirements.
RATIO ANALYSIS
INTRODUCTION
An inventor in interested in information regarding the exact financial
position of the business, its earning capacity and the present position with
regarded to profitability and future possibility of the company. He has only the
published accounts of the company before him, which would enable him to take
any decision with respect to investing his money. The published accounts are P
& L account, Balance sheet, Director's report and Auditor's report and
chairman's speech. The earning capacity and past result could be ascertained
from the profit and loss account. An idea about the financial position can be
derived from the balance sheet. The director's report and chairman's speech
would assist him in foreseeing the future prospects of the company. However,
accurate conclusion cannot be drawn from the mass of figures included in
theses financial statements. Hence they are to be analyzed and interpreted with
the help of a number of devices. Let us at this clarify the meaning of important
terms useful in our study of analysis of accounts.
MEANING
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The relationship between two related items of financial statement isknown as ratio.
ASSUMPTION OF RATIO ANALYSIS:-
1. Financial statement gives the current position of business.
2. Company which is being analyzed its facts (accounting) data are
comparable with other company in the field and also comparable with
whole industry facts
IMPORTANCE OF RATIO ANALYSIS
The following statements show clearly the importance of ratio analysis:
y It simplifies, summarize and systemize a long array of accounting figures. It
means contribution lies in bringing into bold relief to the inter-relationship
which exists between various segments as expressed through accounting
statement and avoiding and distortion that may result from an absolute student
accounting.
y It is an instrument for diagnosis of financial health of an enterprise. It does
by evaluation important aspects of conduct of business like liquidity, solvency,
Profitability, capital gaining, etc.
y Important point is in connection with use of ratio is that in numerous
situation, if your ratio portrait a certain aspect of conduct of business. A sales
management will normally be interested in ratio of sells, selling cost and other
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related aspects, while the production manager will be interested in ratio relating
to the production functions.
LIMITATIONS OF RATIO ANALYSIS
The following are the limitations of ratio analysis:
y Ratios are useful in so far as they give expression to study of the relative
aspect of a problem because ratio is meaningless by itself and carries
signification only when it is studied along with another ratio.
y Another limitation of ratio analysis lies in illusionary aspect of variousaccounting data. In fact, the data are usually estimates regarding the life of
assets, the proper rate of depreciating the assets, provision for doubtful depts.,
etc.
LIQUIDITY RATIO
Liquidity ratio measure the ability of a firm to meet its short term
obligations and reflect the short term financial strength / solvency of the firm.
The ratios which indicate the liquidity of the firm are as follows:
1. Current ratio
2. Acid test ratio
3. Cash ratio
1) CURRENT RATIO:-
Current Ratio is the most widely used ratio shows the proportion of
current assets to current liabilities. The ratio is obtained by dividing current
assets by current liabilities. It is a measure of short term financial strength of
the business and shows whether the business will be able to meet its current
liabilities, as and when they mature.
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Formula: - Current Ratio = Current Assets / Current Liabilities
Current Assets indicate cash and bank balance, stock (inventories) sundry
debtors, loans and advances, investment, bills receivables etc.
Current Liabilities indicates creditors, bank overdraft, provisions, bills
payable, unclaimed dividend etc.
It is generally believe that 2: 1 ratio shows a comfortable working capital
position. Those current assets should be twice more than current liabilities.
However, this rule should not be taken as a hard and fast rule, because a ratio,
which is satisfactory for one business may not be satisfactory for the other. If
the amount for stock-in-trade is unduly appointed by Reserve Bank of India
than it has recommended a current ratio of 2: 1. However, after ward the Chore
Committee, appointed by the RBI recommended a satisfactory current ratio of1.33: 1.
Before giving any opinion about the liquidity of the company base on
current ratio, the types of assets and size must be considered. Some times the
ratio seems to be high, Because of excessive stock included in current assets.
Due to high proportion of obsolete, slow moving stock, the current may be high
but its capacity to pay current liabilities on maturity will be definitely weak.
2) ACID TEST RATIO
The measure of absolute liquidity may be obtained by comparing only
cash and bank balance as well as readily marketable securities with liquid
liabilities. This is very exacting standard of liquidity an it is satisfactory is the
ratio is 0.5: 1. It is calculated by dividing the value of quick assets by liquid
liabilities. The ratio is also considered as "Absolute Liquidity Ratio".
Formula
Acid - Test Ratio = Quick Assets / Current Liabilities
Where,
Quick assets = Cash balance + Bank balance + Debtors + Other
security Inventory.
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Current Liabilities = Creditors + Liability + Provision for taxation.
3) CASH RATIO
The Cash ratio is also known as a "liquid Ratio". A variant of current
ratio is the liquid or quick ratio, which is design to show the amount of each
available to meet immediate payments. It is obtained by dividing Liquid assets
by liquid liabilities.
Liquid assets are obtained by deducting stock in trade from currentassets. Stock is not treated as liquid asset because it can not be readily
converted in to cash as and when required. The current ratio of business does
not reflect the true liquid position if its current assets consists largely of stock in
trade.
The liquid liabilities are obtained by deducting bank over draft from
current liabilities because bank over draft is not likely to be called on demand is
treated as short of permanent mode of financing. Hence, it is not treated as
quick liability.
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Formula
Cash Ratio = Cash and bank balance + Current investment
Current Liabilities
OR
Cash or Liquid Ratio = Liquid Assets / Liquid Liabilities
PROFITABILITY RATIO
GROSS PROFIT RATIO
This ratio expresses the relationship between gross profit and sales. Gross
profit ratio indicates the average margin on the goods sold. It shows whether theselling prices are adequate or not. It also indicates the extent to which selling
prices may be reduced without resulting in losses.
A low gross profit ratio may indicate a higher cost of goods sold due to
higher cost of production. It may also be due to low selling prices. A high gross
profit ratio, on the other hand, indicates relatively lower cost and a sign of good
management.
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FORMULA:-
GROSS PROFIT RATIO = GROSS PROFIT / NET SALES *100
Where,
Net sales = sales - sales return
Gross profit = net sales cost of good sold
NOTE: -This ratio is usually expressed in percentage.
NET PROFIT RATIO
This is the ratio of net profit to net sales. in calculating net profit, all non-
operating expenses and losses (e.g. loss on sale of old assets, provision for legal
damages etc.) are also deducted & all non-operating incomes (e.g. dividendincome, interest received on investment etc.) are added.
A firm with high net profit ratio is in an advantageous position to survive
in the face of rising cost of production and falling selling prices. Where the net
profit ratio is low; the firm will find it difficult to withstand these types of
adverse conditions.
FORMULA:-
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NET PROFIT RATIO = NET PROFIT /NET SALES *100
Where,
Net profit = net operating profit + non-operating incomes - non-operating
expenses.
NOTE:-This ratio is usually expressed in percentage.
RETURN ON TOTAL ASSETS( WORKING CAPITAL)
It is an index of profitability of business and is obtained by the company
net profit with capital employed. The ratio is normally expressed in the
percentage. The term average total assets include fixed assets, investment & net
current assets.
It must be remembered that is in this ratio, net profit is profit before
deducting interest and taxes. The success of enterprise is judge with the help of
this ratio.
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Return on total assets = Net Profit / Average total assets *100
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5.1 STATEMENT OF CHANGES IN WORKING
CAPITAL FOR LAST FOUR YEAR
Statement of changes in working capital for year 2007-2008
Particulars2006-2007
(RS.)
2007-2008
(RS.)
Increase in
workingcapital
Decrease
in workingcapital
Current Assets:
Inventories 2667531 1852552 - 814979
Sundry debtors 6520141 7611703 1091562 -
Cash & bank balance 61657 404570342913
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STATEMENT OF CHANGES IN WORKING CAPITAL FOR THE YEAR
2008-2009
Particulars2007-2008
(RS.)
2008-2009
(RS.)
Increase in
working
capital
Decrease in
working
cap
ital
Current Assets: -
Inventories 1852552 1593934 258618
Sundry debtors 7611703 6534058 1077645
Cash & bank balance 404570 1095919 691349
Loans & advances 545465 643773 98308
Loans & advances 412138 545465 133327 -
Total Current
Assets:9661467 10414290 - -
Current Liabilities:
Current liabilities 4846582 4124459 722123
Total Current
Liabilities:4846582 4124459 - -
Working Capital: 4814885 6289831 - -
Changes in working
capital:1474946 - - 1474946
Total: 6289831 6289831 2289925 2289925
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Total Current Assets: 10414290 9867684
Current Liabilities:
Current liabilities 4124459 3536082 588377
Total Current Liabilities: 4124459 3536082 - -
Working Capital:6289831
6331602 - -
Changes in working
capital: 4177
1 4177
1
Total: 8213480 1378034 1378034
STATEMENT OF CHANGES IN WORKING CAPITAL FOR THE YEAR
2009-2010
Particulars2008-2009
(RS.)
2009-2010
(RS.)
Increase in
working capital
Decrease in
working
capital
Current Assets:
Inventories 1593934 2620508 1026574
Sundry debtors 6534058 6853267 319209
Cash & bank balance 1095919 358487 737432
Loans, advances & 643773 1075598 431825
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deposits
Total Current Assets: 9867684 10907860 - -
Current liabilities :
Current liabilities 3536082 4921259 1385177
Total Current
Liabilities:3536082 4921259 - -
Working Capital: 6331602 5986601 - -
Changes in working
capital:
345001345001
Total: 6331602 6331602 2122609 2122609
AFTER SOURCES OF WORKING CAPITAL
YEAR CURRENT
ASSETS
(RS.)
CURRENT
LIABILITIES
(RS.)
WORKING
CAPITAL
(RS.)
CHANGES
WORKING
CAPITAL
(RS.)
2007-2008 10414290 4124459 6289831 1474946
2008-2009 9867684 3536082 6331602 41771
2009-2010 10907860 4921259 5986601 345001
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By analyzing the data of the company regarding changes in
working capital we find the following changes
In year 2007-2008 the working capital shows the amount
by 6289831/- Rs. And in the year 2008-2009 it get increase by 41771/-Rs. Only. And in current year it is decrease by 345001/-Rs. However the
liquidity position of the company is not been at the level of
satisfaction.
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5.2 STATEMENT OF COST OF SALES
Particulars 2007-2008
(RS.)
2008-2009
(RS.)
2009-2010
(RS.)
Opening stock of raw
material
889177 617517 531311
+ Purchase11128713 8068042 14820311
- Closing stock of rawmaterial
617517 531311 873502
Raw material
consumed
11400373 8154248 14478120
+ Manufacturing exp. 2632655 1359394 1742670
+ Depreciation 256844 238627 223565
+ Operating exp. 1083428 973740 1836521
15
37
3300 107
26
009 18280876
+ Opening stock of WIP 296392 205839 177103
-Closing stock of WIP 205839 177103 291168
Cost of Production 15463853 10754745 18166811
+ Opening stock of
finished goods
1481962 1029196 885520
- Closing stock of
finished goods
1029196 885520 1455838
Cost of Good Sold 15916619 10898421 17596493
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5.3 CONVERSION PERIOD OF OPERATING CYCLE
Raw material conversion period:-
Raw Material Conversion Period = Raw Material inventory x 300Raw material consumption
YEAR RAW MATERIALINVENTORY
(RS.)
RAW MATERIALCONSUMED
(RS.)
RAW MAT.CONVERSION
PERIOD (DAYS)
2007-2008 617517 11400373 16
2008-2009 531311 8154248 20
2009-2010 873502 14478120 18
CONCLUSION:-Raw material conversion period in days is 16 in 2007-2008 and it has
increased by 4 days in 2008-2009. And in 2009-2010 it again decrease by 2days. Shorter raw material conversion period is beneficial whereas longer rawmaterial conversion period requires more investment and funds get blocked in
it.
RAW MAT. CONVERSION PERIOD
(DAYS)
16
2018
0
5
10
15
20
25
2007-08 2008-09 2009-10
YEARS
DAYS
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Work-In-Process Conversion Period:-
Work-In-Process conversion Period = Work in process inventory x300
Cost of production
YEAR WIPINVENTORY
(RS.)
COST OFPRODUCTION
(RS.)
WIPCONVERSION
PERIOD(DAYS)
2007-2008 205839 15463853 4
2008-2009 177103 10754745 5
2009-2010 291168 18166811 5
CONCLUSION:-
WIP conversion period is only 4 days in 2007-2008. In 2008-2009, It isincrease by 1day only and in 2009-2010 it remain same. so it has no impact on
companys funds.
WIP CONVERSION PERIOD (DAYS)
4
5 5
0
1
2
3
4
5
6
2007-08 2008-09 2009-10
YEARS
DAYS
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Finished Goods Conversion Period:-
Finished Goods Conversion Period = Finished goods Inventory x300Cost of goods sold
YEAR FINISHED
GOODS
INVENTORY
(RS.)
COST OF
GOODS SOLD
(RS.)
FINISHED GOODS
CONVERSION
PERIOD (DAYS)
2007-2008 1029196 15916619 19
2008-2009 885520 10898421 24
2009-2010 1455838 17596493 25
CONCLUSION:-
In the year 2007-2008 the finished goods inventory period is 19 days
which is increase to 24 days in 2008-2009 and it again slowly increase in 2009-2010 by 1 days. It show increase trend, so the investment of company is more
blocking in finished goods.
FINISHED GOODS CONVERSION
PERIOD (DAYS)
19
24 25
0
5
10
15
20
2530
2007-08 2008-09 2009-10
YEARS
DAYS
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Debtors Conversion Period
Debtors Conversion Period = Debtors x300Credit sales
YEAR DEBTORS
(RS.)
CREDIT SALES
(RS.)
DEBTORS
CONVERSIONPERIOD (DAYS)
2007-2008 7611703 18421726 124
2008-2009 6534058 12451717 157
2009-2010 6853267 19000911 108
CONCLUSION:-The investment in sundry debtors has change a lot in this three year. It
increase more in 2008-2009 by 33 days And in 2009-2010 it is decrease to 108.It consider beneficial because it is lesser days. But overall the Debt collectionperiod is very long so lots of fund of company is blocked.
NOTE:
All sales on credit bases.
DEBTORS CONVERSION PERIOD
(DAYS)
124
157
108
0
50
100
150
200
2007-08 2008-09 2009-10
YEARS
DAYS
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Creditors Conversion Period
Creditors Conversion Period = Creditors x300Credit purchase
YEAR CREDITORS
(RS.)
CREDIT
PURCHASE
(RS.)
CREDITORS
CONVERSION
PERIOD (DAYS)
2007-2008 3518908 11128713 95
2008-2009 2962434 8068042 110
2009-2010 4449415 14820311 90
`CONCLUSION:-
As it is shown that creditors payment period is so long it is concluded that
the companys good will in market is very high . The payment period to creditorsis 95 days in 2007-2008 and it increase by 15 days in 2008-2009 and it is
decrease in next year 2009-2010 to90 days. So it is concluded that in the year
2009-2010 payment period is less and it is not beneficial for company.
NOTE:All purchase on credit bases.
CREDITORS CONVERSION PERIOD
(DAYS)
95110
90
0
20
40
60
80100
120
2007-08 2008-09 2009-10
YEARS
DAYS
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5.4 NET OPERATING CYCLE
PERTICULARS 2007-
2008
(DAYS)
2008-
2009
(DAYS)
2009-
2010
(DAYS)
(1) RAW MATERIALCONVERSION PERIOD
16 20 18
(2) WIP CONVERSION PERIOD4 5 5(3) FINISHED GOODS
CONVERSION PERIOD21 27 28
(4) INVENTORY CONVERSION
PERIOD (1+2+3)41 52 51
(5) DEBTORS CONVERSIONPERIOD
124 157 108
(6)GROOS OPERATING CYCLE
(4+5)
165 209 159
(7) CREDITORS CONVERSIONPERIOD
95 110 90
NET OPERATING CYCLE(6-7) 70 99 69
Conclusion:-
The gross operating cycle of the company in 2007-2008, 2008-2009&2009-2010 are 165days, 209 days & 159 days respectively. so there is a
fluctuation in gross operating cycle. In 2008-2009 it is increases by 44 days butin 2009-2010 it decreases to 159days.Therefore, we can say that the company is
converting its raw material into sales and then into cash very fast.
The net operating cycle is also high in 2008-2009. It is 99 days and itdecrease in next year. That it decreases in 2009-2010 is 69 days. So there is afluctuation in net operating cycle.
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CONCLUTION:-
Current ratio indicates the working capital position. Normally, this ratio shouldbe 2: 1 Prime Strap Pvt.Ltd current ratio in current year is 2.22: 1. The ratio ofthe company is satisfactory because this ratio shows a comfortable working
position over the stipulated ratio of 2: 1. The company's ratio is higher than theideal proportion of ratio. this ratio for the company is satisfactory. and in 200 8-
09 it was 2.79:1 & in 2007-2008 it was 2.52:1.
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2. ACID-TEST RATIO:
Acid-Test Ratio = Quick AssetsQuick liability
Year Quick Assets
(RS.)
Current liability
(RS.)
2007-2008 85617384124459
2008-2009 8273750
35360822009-2010 8287352 4921259
ACID-TEST RATIO:
YEAR ACID TEST RATIO
2007-2008 2.07:1
2008-2009 2.33:1
2009-2010 1.68:1
CONCLUSION:-Normally, this ratio should be 1:1. However, it is a reasonably satisfactory ratio
of 1:1. In the year 2007-2008 the company's acid-test ratio was 2.07:1 and yearafterwas 2.33:1. In the year 2009 - 2010, this ratio was 1.68:1 which is atsatisfactory level but as compared to previous 2 years it is low. In the graph
drawn above clearly 'shows that there is lot of fluctuations in the acid -test ratioof the firm. This is due to cyclical fluctuations in the industry.
ACID-TEST RATIO: RATIO
2.072.33
1.68
0
0.5
1
1.5
2
2.5
2007-08 2008-09 2009-10
YEARS
RATIO
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3. CASH RATIO:
Cash ratio = Cash & bank + current investment
Current liabilities
YEAR CASH & BANK BAL.(RS.)
CURRENT LIABILITIES
(RS.)
2007-2008 9500354124459
2008-2009 17396923536082
2009-2010 1434085 4921259
YEAR CASH RATIO
2007-2008 0.23:1
2008-2009 0.49:1
2009-2010 0.29:1
CONCLUSION:-
If the current assets are equal to or more than current liabilities, the
condition of cash ratio is satisfactory. In the year 2007-2008 the companys cashratio is 0.23:1. in the next year 2008-2009 it increase to 0.49:1 and in year 2009-
2010 it decrease to 0.29:1. Thus the cash ratio of company is fluctuating.PROFITABILITY RATIO
CASH RATIO
0.23
0.49
0.29
0
0.1
0.2
0.3
0.4
0.5
0.6
2007-08 2008-09 2009-10
YEARS
RATIO
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RETURN ON TOTAL ASSETS
YEAR NET PROFIT
(RS.)
TOTAL ASSETS
(RS.)
2007-2008 2505107 12290878
2008-2009 1553296 11537644
2009-2010 1404418 12493763
YEAR RETURN ON ASSETS
2007-2008 20 %
2008-2009 13.46 %
2009-2010 11.24 %
CONCLUSION:-
The return on assets ratio shows the decreasing trend in the year 2008-
2009 and in 2009-2010 i.e. 13.46% and 11.24% as camper to 2007-2008. But theprofit in 2009-2010 is still optimum i.e. 11.24%.
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OVERALL CONCLUSION
From calculation of conversion cycle it is concluded that the net operatingcycle in the year 2009-2010 is beneficial to the company because it has less days
and in 2008-2009 it take more time. the operating cycle shows downward
movement.
The liquidity ratio measures the ability of the firm to meet its short termobligations with the help of liquidity rat io the conclusion can be drawn regardingposition of the company.
The current ratio of the company is 2.52:1, 2.79:1 and 2.22:1 which saws
satisfactory level.
The acid test ratio of the company is 2.07:1, 2.33:1 and 1.68:1 This ratio isfluctuating.
The cash ratio of the company for last three years is 0.23:1, 0.49:1 and
0.29:1 This ratio is also fluctuating, thus the liquidity ratio of the company isincrease and decrease, but still it is satisfactory.
The profitability ratio is valuable for the purpose of ascertaining the
overall profitability.
Return on total assets or working capital is highest in 2007-2008 and it islowest in current year 2009-2010. So it is fluctuating the earning power ofcompany but it is still satisfactory in year 2009-2010.
The statement of changes in working capital indicates the increase and
decrease in working capital requirement. The changes in working capital are as
follows for last 3 years.
YEAR CHANGES WORKING CAPITAL
(RS.)
2007-2008 1474946
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2008-2009 41771
2009-2010 345001
The working capital of the company is very high in the year
2008-2009. In the year 2009-2010 it is lowest. This position is
satisfactory for the company to generate efficient management
position.
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BIBLIOGRAPHY
I M PANDEY, Financial Management , Vikas
Publishing Pvt. New Delhi, Sixth Edition, 1996. M.y.Khan &P.K. Jain, Financial Management ,
Tata MC Graw hill publishing company ltd;
New Delhi, 2nd
edition, 1999.
The last 4 years Annual Report of Treffer
Pharmaceutical Ltd. Navsari.
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ANNEXURE
M/S PRIMESEAL STRAP PVT.LTD
BALANCE SHEET AS ON 31ST MARCH 2008
LIABILITIES AMOUNT
(RS.)
ASSEST AMOUNT
(RS.)
CAPITAL 1340349 FIXED ASSEST 1752128
SECURED LOAN 1499274 SUNDERY
DEBTORS
6520141
UNSECURED LOAN 3727390 CLOSING
STOCK
2667531
SUNDERY
CREDITORS
4462742 RECOVERALE
IN CASH
412138
OTHER CURRENT
LIABILITES
383840 CASH AND
BANK
BALANCE
61657
11413595 11413595
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M/S PRIMESEAL STRAP PVT.LTD
BALANCE SHEET AS ON 31ST MARCH 2006
LIABILITIES AMOUNT
(RS.)
ASSEST AMOUNT
(RS.)
CAPITAL 2312524 FIXED ASSEST 1876588
SECURED LOAN 2624248 SUNDERY
DEBTORS
7611703
UNSECURED LOAN 3229647 CLOSING
STOCK
1852552
SUNDERY
CREDITORS
3518908 RECOVERALE
IN CASH
545465
OTHER CURRENT
LIABILITES
605551 CASH AND
BANK
BALANCE
404507
12290878 12290878
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M/S PRIMESEAL STRAP PVT.LTD
BALANCE SHEET AS ON 31ST MARCH 2007
LIABILITIES AMOUNT
(RS.)
ASSEST AMOUNT
(RS.)
CAPITAL 2912440 FIXED ASSEST 1669960
SECURED LOAN 2213444 SUNDERY
DEBTORS
6534058
UNSECURED LOAN 2875678 CLOSING
STOCK
1593934
SUNDERY
CREDITORS
2962434 RECOVERALE
IN CASH
643773
OTHER CURRENT
LIABILITES
573648 CASH AND
BANK
BALANCE
1095919
11537644 11537644
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M/S PRIMESEAL STRAP PVT.LTD
BALANCE SHEET AS ON 31ST MARCH 2008
LIABILITIES AMOUNT
(RS.)
ASSEST AMOUNT
(RS.)
CAPITAL 3076433 FIXED ASSEST 1585903
SECURED LOAN 24490968 SUNDERY
DEBTORS
6853267
UNSECURED LOAN 2005103 CLOSING
STOCK
2620508
SUNDERY
CREDITORS
4449415 RECOVERALE
IN CASH
1075598
OTHER CURRENT
LIABILITES
471844 CASH AND
BANK
BALANCE
12493763 12493763