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Transcript of Sudhakar Pvc
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INTRODUCTION
Working capital management is significant in financial management due to the fact
that it plays a vital role in keeping the business enterprise running. The management
of the working capital of vital importance and forms a major work load function of
finance manager and his team in every organization. The working capital of any
business is the capital required to fund its current assets .The term current assets
current assets refer to those assets in which the ordinary course of business can be or
will be converted into cash with in a year, without undergoing a diminishment in
value and without disrupting the operations of the firm. The major current assets are
cash, bank balance, marketable securities and account receivables, inventories,
prepaid expenses and short-term advances etc.,
Working capital management is concerned with the problems that arise in
attempting to manage the current assets, current liabilities and inter- relations that
exist between them. The net working capital is the difference between the current
assets and current liabilities.
Current liabilities are those liabilities, which are intended at their inception to
be paid in the ordinary course of business with in a year, out of the current assets or
earning of the concern. The current liabilities includes creditors of purchase of goods,accounts payable, Bills-payable, bank over drafts, short-term borrowings, outstanding
expenses, advances received against the sales, taxes due, dividends payable and other
liabilities maturing with in a year.
Management of working capital is therefore, the management of current assets
and current liabilities of a company.
Gross Working Capital
According to this concept, Working capital refers to the firms investment in current
assets. The amount of current liabilities is not deducted from the total of currents
assets.
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Net Working Capital
The net working capital refers to the difference between current assts and current
liabilities. Positive or negative. Positive net working capital will arise when current
assets exceed current liabilities. A negative net working capital occurs when currents
liabilities are in excess of current assets.
Need for the study:
The need for the working capital or current assets to form the day-to-day business
activities cannot be over emphasized. We can hardly find a business firm that does
not require any amount of working capital. Indeed different requirement of the
working capital. It is well known that any firm aims at maximizing shareholders
wealth. To attain this, a firm should earn a steady amount of profit, which requires
successful sales activity. Current assets are needed because sales cannot convert into
Cash instantly since there is always an operating cycle involved in the conversion of
sales into cash. I opted this topic to identify the various sources to get working
capital to met the day-to-day operations and the maximum utilization of the working
capital in a profitable means.
NEED FOR WORKING CAPITAL
The objective of financial management i.e. maximization of wealth of shareholder,
cannot be attained if the operations of the firm are not optimized. Thus every firm
must have adequate working capital. It should have neither the excessive working
capital nor inadequate working capital. Both the situations are risky and may have
dangerous outcome. The excessive working capital when the investment in working
capital is more than the required level, may result in:
a. Unnecessary accumulation of inventories resulting in waste, theft, damage etc.
b. Delay in collection of receivables resulting in more liberal credit terms to
customers than warranted by the market conditions.
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c. Adverse influence on the performance of the management.
The inadequate working capital situation, when the firm does not have sufficient
working capital to support its operations is also not good for the firm. Such a
situation may have following consequences.
a) The fixed assets may not be optimally used.
b) Firms growth may stagnate.
c) Interruption In production schedule may occur ultimately resulting in lowering of
the firms growth.
d) The firm may not be able to take the benefit of an opportunity.
e) Firms goodwill in the market is affected if it is not in a position to meet its
liabilities on time.
f) Inadequate working capital may result in loss of sales.
g) It may also lead to insolvency of the firm.
Scope of the study:
Working capital is the live blood of any business firm. As a matter of fact, any
Organization, whether profit oriented or otherwise, will not be able to carry on its
day-to-day activities without adequate working capital. It being increasingly realized
that the inadequacy or mismanagement of working capital is the leading cause of the
Business failure. Problems may cause due to the inadequate working capital. Manager
has to forecast the problems of working capital and should suggest the improvement
of the profits; hence I think my project on working capital management will help in
order to maintain sufficient working capital required level of production.
Objectives of the study:
1. To study the existing system of working capital management in M/s.
Integrated Thermoplastics Limited.
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2. To study the financial ratios etc., this covers the purview of the working
capital.
3. To examine the feasibility of the present system of managing working
capital.
4. To suggest the better way for improving the working capital management.
Research methodology & Database:
The methodology of study inter-relations is to understand the procedural aspects of
Thermoplastics Company and then to proceed with analysis of the financial
performance.
Name of data : company profile, financial results of years of period of Study.
Source of data : Annual financial reports.
Collection methods : Directly approached to company.
Tools and techniques : Financial statements.
Limitations of the study:
1. The study is limited to working capital management of SUDHAKAR PVC PIPES
LIMITED only.
2. It may not be suitable for the other PVC pipes manufacturing companies.
3. The analysis may vary from time to time according to different production
schedules.
4. The study is confined to past few years only
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MANAGEMENT OF WORKING CAPITAL
Introduction:
The management of the working capital is vital importance to companies and forms a
major workload function of finance manager and accountant. It is the amount of fund,
which a company must have to finance its day-to-day operations.
It is an integral part of overall corporate management. The working capital of any
business is the capital required to funds its current assets. Working capital
management is concerned with the problems that arise in attempting to manage the
Current Assets, the Current Liabilities and the inter-relations that exist between them.
The Net Working is the difference between the current assets and the liabilities and
the inter-relations that exist between them.
The term current assets refer to those assets in which the ordinary course of business
can be or will be converted in to cash within a year, without undergoing a
diminishment in value and disrupting the operations of the firm. The major current
assets are cash, marketable securities, accounts receivables and inventories. The term
current liabilities are those liabilities that are intended at their inception to be paid in
the ordinary course of business with in a year out of the current assets or earning of
the concern. The current liabilities include accounts payable, bills-payable, bank
overdrafts and outgoing expenses. Management of working capital therefore is the
management of current assets and liabilities of the company.
IMPORTANCE OF WORKING CAPITAL
We will hardly find a running business firm, which does not require same amount of
working capital. Even a fully equipped manufacturing firm is sure to collapse if it
cannot meet any of the following requirements:
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1. An adequate supply of raw material for manufacturing process.
2. Cash to meet the wage bill and other expenses.
3. The capacity to wait for the market for its finished products sale.
4. The ability to grant credit to their customers.
Similarly, a commercial enterprise virtually good for nothing without merchandising.
Working capital is the live blood of the business organization. As a matter of fact, any
organization, whether profit oriented or otherwise, will not be able to carry on To-day
activities without adequate working capital. For day-to-day operations of a business a
study of working capital is a must. .
Neglect of management of working capital needs may result in technical insolvency
and even liquidation of business unit. Inefficient working capital is dangerous for the
organization.
Factors influencing Working Capital Requirements
Nature of business
The working capital requirement of a firm is closely related to the nature of its
business. Service firms like an electricity undertaking or a transport corporation,
which has a short operating cycle and which sells redominantly on cash basis, has a
modest working capital requirement. On the other hand, a manufacturing concern
like a machine tools unit, which has a long operating cycle and which sells largely on
credit, has a
very substantial working capital requirement
.
Seasonality of operations
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Firms, which have marked seasonality in their operations usually, have highly
fluctuating working capital requirements. To illustrate, consider a firm
manufacturing air coolers. The sale of air coolers reaches a peak during the summer
months and drops sharply during the winter period. The working capita need of such
a firm is likely to increase considerably in summer months and decrease significantly
during the winter period. On the other hand, a firm manufacturing a product like
lamps, which have fairly even sales round the year, tends to have stable working
capital needs.
Production policy
A firm marked by pronounces seasonal fluctuation in its sales may pursue a
production policy, which may reduce the sharp variations in working capital
requirements. For example a manufacturer of air coolers may maintain a steady
production throughout the year rather than intensity the production activity during the
peak business season. Such a production policy may dampen the fluctuations in
working capital requirements.
Market conditions
The degree of competition prevailing in the market place has an important bearing on
working capital needs. When competition is keen, larger inventory of finished goods
is required to promptly serve customers who may not be inclined to wait because
other manufacturers are ready to meet their needs. Further, generous credit terms may
have to be offered to attract customers in a highly competitive market. Thus, market
capital needs tend to be high because of greater investment in finished goods
inventory and accounts receivable.
If the market is strong and competition weak, a firm can manage with a smaller
inventory of finished goods because customers can be served with some delay.
Further, in such a situation the firm can insist on cash payment and avoid lock-up of
funds in accounts receivable it can even ask for advance payment, partial or total.
Conditions of supply
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The inventory of raw materials, spares, and stores depends on the conditions of
supply. If the supply is prompt and adequate, the firm can manage with small
inventory. However, if the supply is unpredictable and scant then the firm, to ensure
continuity of production, Would have to acquire stocks as and when they are
available and carry larger inventory on an average. A similar policy may have to be
followed when the raw material is available only seasonally and production
operations are carried out round the year.
Permanent working capital
The magnitude of the current assets depends upon the firms operating cycle. The
operating cycle is a continuous process and the need for current assets is also
continuous. But the level of current assets needed is not always same. It increases or
decreases over time. However, there is always minimum level of current assets,
which is continuously required by a firm to carry out its business operations. The
minimum level of current assets is called permanent working capital.
Variable working capital
The working capital required over and above the permanent working capital depends
upon the changes in production and sales are called fluctuating or variable working
capital. There may be changes either increase or decrease in working capital.
Working capital is variable mostly in seasonal goods manufacturing companies.
Operating cycle
The time that elapses between the purchase of raw material and collection of cash for
sales is called operating cycle.
Operating cycle period
The length or time duration of the operating cycle of any firm can be defined as the
sum of its inventory conversion period and the receivable conversion period.
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Inventory conversion period
It is the time required for the conversion of raw material in to finished goods. In a
manufacturing firm the inventory conversion period is consisting of raw material
conversion period, work-in-progress conversion period and the finished goods
conversion period.
The raw material conversion period refers to the period for which the raw material is
generally kept in stores before it is issued to the production department. The work-in-
progress conversion period for which the raw materials remain in the production
process before its taken out as a finished unit.
The finished goods conversion period refers to the period for which finished units
remain in stores before being sold to the customers.
Receivables conversion period
Its the time required to convert the credit sales into cash realization. It refers to the
period between the occurrence of credit sales and collection of debtors.
Gross operating cycle = Inventory conversion period + receivables conversion period.
Net operating cycle = Inventory conversion period + receivables conversion period
Deferred period.
Deferred period
The firm might be getting some credit facilities from the supplier of raw materials,
wages/ salaries earners etc., this period for which the payments to these parties are
deferred or delayed is known as deferral period.
Raw material conversion period = Average value of raw material stock
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Average cost of consumption of raw material per day
Work in progress conversion period = Average work-in-progress
Average cost of goods sold per day
Finished goods conversion period= Average stock of finished goods
Average cost of goods sold per day
Debtors conversion period = Average value of receivables
Average value of sales per day
Payables deferral period = Average level of creditors
Average purchases of raw materials per day
Components of working capital
Current Assets:
Current assets defined as either cash or those assets that can be converted into cash
within the current year. The major components of these current assets are cash and
bank balance, inventories, accounts receivable, short-term deposits, investments,
advance payments and prepaid expenses.
Cash and bank balances: Cash and bank balances are most liquid assets. All
payments are made through cash or bank payments.
Inventories: These are the materials, commodities or goods used in day-to-day
operation of production or in the form of finished goods. These include raw materials,
work-in-progress and finished goods.
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Accounts receivables: These are short-term debts owned by company arising from
credit sales made to customers of the firm.
Advances: These represent amount paid for which the goods and services have not yet
received, including advances given to suppliers and employees, advance tax payments
made etc,.
Short-term deposits: These are deposits kept in banks to meet the future expenses
when they fall due. These deposits will earn interest also.
Current liabilities:
Liabilities are the claims against the company to be paid in the ordinary course of
business with in a year, out of earnings of the company.
Short-term loans: Money borrowed from various banking and non-banking sources
for short periods of time.
Other liabilities: These include tax payments due with in one year and proposed
dividends and other payments to be made.
Accounts payable: Payable against purchases of raw materials, packing material,
intermediaries and others for manufacture of finished goods. Generally credit period
is allowed for a short period of time.
Bills payable: Against purchase bills may be accepted and payable with in a short
period of time.
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Bank overdraft: With the consonant of the banks a business unit can get short-term
credits and overdrafts. Bank generally allows these credits keeping the view of credit
worthiness of the organization and management. These are to be repaid in short term
to the bank.
Outstanding expenses: Expenses due but not paid.
MEANS TO INCREASE WORKING CAPITAL
1. With a reasonable working capital, a firm can concentrate either;
a). Increase in sales without increasing inventory, receivables and bank
Financing.
b). Reduction in receivables, inventory or blank financing while maintaining
sales at their current levels.
A defensive move is to construct format contingency plan to combat working Capital.
2. Investing surplus cash to earn interest. The investment should be done after
defining the objectives and ruling the benefits, seeking in an order of ranking-
security-maturity-liquidity-and yield.
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Welcome to Sudhakar Group of Industries
SUDHAKAR Group of Industries situated at Andhra
Pradesh, INDIA, playing a significant role in PVC & HDPE pipe sector. SUDHAKAR
Group established in 1971 with a product range to manufacture Electrical Conduits. Over
the years the group emerged as a potential leader in Rigid PVC Pipes & HDPE pipes and
fittings and also made its foray into different piping system solutions. Promoted by a
visionary entrepreneur, this group has played a pioneer role in the field of PVC & HDPE
piping products.
By being innovative and quality conscious, SUDHAKAR Group distinguished itself from
other organizations as a company having an inbuilt culture of High Customer Care.
SUDHAKAR has now progressed from strength to strength, and has bagged many
prestigious awards, millions of happy and satisfied customers and attained leadership in
this field of PVC & HDPE Pipes & Fittings. Nationwide dealership network and service
back up facilities, dedicated sales force and timely delivery makes SUDHAKAR more
closer to customers.
Since SPL has a long production cycle, it has to hold substantial amount of cash,
investment and Receivable accounts to commensurate with its requirement.
SPL sources of Working Capital constitute capital in work in progress, investments,
and inventories, holding of debtors, cash & bank balance, loans & advance and also
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other corporate deposits. SPL also gets Working Capital from various provisions like
provisions for gratuity, depreciation.
Current Liabilities include Sundry Creditors, provisions and other Current Liability
and Out standings.
The unit also has world-class quality assurance systems in place. The company
ensures products of uncompromising quality meeting all relevant ISI, BS, DIN and
ASTM standards with a view to effectively cater, to the needs of the International
markets.
Integrated thermoplastics limited has achieved ISO 9001-2000 accreditation on 2003
in implementing and maintaining quality systems management with the scope of PVC
pipes and became a member of selected brand of elite group of companies. In
addition extensive R&D
facilities provide reliable and committed support for new product development.
TECHNICAL INFORMATION
SPL rigid PVC pipes are manufactured in accordance with Indian
standards specifications 4985:1998 and other international specifications. The
company also manufactures special ranges of commercial pipes under different
ranges to satisfy the customer requirements. SPL PVC pipes are normally
manufactured in uniform length of 6 meters with plain ends both the sides and also
with self socked one side. Varied length can be manufactured according to the
customer requirement. Integrated Thermoplastics Limited is manufacturing rigid
PVC pipes from 20mm to 400 mm in conformity to ISI 4985:2000 and other
international specifications.
QUALITY CONTROL ASSURANCE
Integrated Thermoplastics Limited is having well equipped quality testing
machines in their labs as per the ISI standards for testing of all diameters and gets
excellent result. We at SPL Pipes are proud to say that we follow world-class QCM
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(Quality control management) techniques in our Quality Control lab to achieve the
best quality. Stringent quality control tests are regularly conducted to ensure top
quality production of PVC products.
MAINTENANCE AND SERVICE
This company is better equipped with excellent workshop to provide maintenance and
service of machinery in electrical, mechanical and civil lines all the time, We assure
service at any time to enable our equipment and machinery to perform efficiently,
thus reducing production down time.
EXPLORING NEW HORIZONS: EXPORTS
Integrated Thermoplastics Limited are trying very hard in exporting their products
like rigid PVC pipes of water, electrical conduits and SWR pipes to Middle East,
Europe, Africa and other Asian countries. Taking an example our esteemed overseas
customers, we are proud to say that we are associate with CEYLON ELECTRICTY
BOARD SRILANK supplying electrical conduits to their project requirements.
.
DYNAMIC WORK FORCE
The dynamic work force is the strong base for the success of the company. The
administrative as well as the technical staff are well qualified and skilled. The
company follows the specialization of work, which helps the company to assign the
right job to the right person.
The technical staff at the manufacturing units is well versed in the field of
production, which generates new innovative ideas and concepts. All the workers are
dedicated to work and responsible for their work done.
DISTRIBUTION NETWORK
One of the most important parts of the companys effective functioning in the
competitive market is its distribution network. The company has its own dealers
network with a number of nearly more than 100 dealers through out the state.
The company has its own vehicles for transportation which helps the Sales
department to cater the needs of the customers at the right time and at the right place.
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MARKET NETWORK
Integrated Thermoplastics Limited covers the national level markets, but their
main target market areas are Andhra Pradesh, Karnataka, Tamil Naidu, Maharashtra,
Bihar and Jharkhand etc.
DISTRIBUTION CHANNELS
The company has got two levels of distribution channels they are,
1) Zero Level
2) Single Level
ZERO LEVEL
Manufacturer customer
2 SINGLE level
Manufacturer dealer customer
PRODUCTS OF THE COMPANY
Irrigation & Potable water supply systems:
PVC Pipes and Fittings
HDPE Pipes and Fittings
Garden pipes
Plumbing systems:
UPVC Plumbing systems
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PP-RC Plumbing systems
CPVC Plumbing Systems
Water Extraction Systems:
Casing pipes
Bore well Column pipes
Waste & Water disposal systems:
SWR pipes and fittings UG piping systems
Water Conservation Systems:
Drip Irrigation systems
Sprinkler Irrigation Systems
Water Storage systems:
Cylindrical vertical tanks
Rectangular Loft tanks
Cable protection systems:
Electrical Conduits and conduit fittings
UPVC Ducts and accessories
Pre Lubricated HDPE ducts and duct accesso
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SIGNIFICANT ACCOUNTING POLICIES
Basis of accounting
The financial statements are prepared under historical costs convention on an accrual
basis and are in compliance with accounting standards referred to in Section 211 (3c)
of the companies act, 1956, except in case of AS-15 Accounting for Retirement
Benefits in the financial statements of employers.
Fixed Assets
Fixed assets are stated at cost less accumulated depreciation. cost comprises of the
purchase price and any attributable cost of bringing the asset to working condition
less excise duty taken as CENVAT credit, for its intended use.
Depreciation
Depreciation on Fixed Assets is provided on straight-line method at the rates
specified from time to time in Schedule xiv of the Companies Act, 1956.
Depreciation on additions/deductions during the year is calculated pro-rata from/to
date of additions/deductions.
Investments
Long-term investments are carried at cost including accrued interest thereon.
Inventories
Inventories of finished goods are valued at cost or market price whichever is lower.
Whereas, raw material and semi-finished reusable scrap and stores and valued at cost
on FIFO basis.
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Sales
Sales comprises of invoiced value of goods supplied net off discounts and returns.
Miscellaneous expenditure
i) Preliminary Expenditure:
Preliminary and public issue expenses are being written off over a period of ten year.
Staff benefits
The provisions of Accounting Standard 15 on Accounting for Retirement Benefits in
the financial Statement of employers, issued by the council of The institute of
Chartered Accountants of India is being complied with by the company under the
provident fund Act.
Prior period and Extra-Ordinary items
Income and expenditure pertaining to prior period as well as extraordinary items,
where material, are disclosed separately.
Accounting for taxes on income
The company has unabsorbed losses available for set off under the income Tax
Act, 1961. However in view of the present uncertainty regarding generation of
sufficient further taxable income, deferred tax assets at the year end including related
credit for the year have not been recognized in the accounts on prudent basis, as per
the accounting standard 22 Accounting for taxes on income issued by the institute
of Chartered Accountants of India.
Shri. Meela Satyanarayana Founder
Shri. Meela Satyanarayana, the founder of the group is a freedom fighter, teacher turned
businessman and industrialist. His contribution to the plastics industry especially in the
Southern India is acclaimed by many organizations. President of Andhra Pradesh Plastic
Manufacturers Association in 1984, Joint Secretary of All India PVC Pipes
Manufacturers Association, New Delhi in 1985. He is the first entrepreneur to start a
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PVC pipe manufacturing unit in Andhra Pradesh. Municipal Chairperson of Suryapet for
the Period 1989 92, and present term 2006-2010, Chairmen and Founder of the Sudha
Co-Operative Urban Bank Ltd. Suryapet, Andhra Pradesh. He is recipient of many
awards such as
"Bharata Ratna Makshagundam Vishveshwaraiah Memorial Small Scale
Entrepreneur Award"
"Vijayaratna", "HMA Small Scale Entreprenuer Award"
Best Industrialist Award. Govt of Andhra Pradesh, India.
Shri. Meela Satyanarayana is a self made Industrialist and is a good manager. His
valuable suggestions and advices to the boards of all companies will always enhance the
managerial capabilities of the Boards.
WORKING CAPITAL OF SPL
Rs.
Lakhs
PARTICULARS 2005-
06
2006-
07
2007-
08
2008-
09
2009-
10
CURRENT
ASSETS
INVENTORIES 43744 56606 58130 72540 63246
BOOK DEBTS 84558 84880 85001 81237 82829
CASH/BANK
BALANCES
845 957 899 1280 473
LOANS AND
ADVANCES
14287 12859 11763 11612 9104
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SUB TOTAL
(B)
14343
4
15530
2
15579
3
16666
9
155652
CURRENT
LIABILITIES
ADVANCESFROM
CUSTOMERS
29116 28822 31636 32228 44162
SUNDRY
CREDITORS
19484 22543 29738 27610 20637
OTHER
LIABILITIES
4295 4549 2824 2612 3353
PROVISIONS 10843 8376 8931 11977 16838
SUB TOTAL( C)
63738 64290 73129 74427 84990
NET
WORKING
CAPITAL (B)-
(C)
79696 91012 82664 92242 70662
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From the above table SPL, is having a good Working Capital. By comparing the
Working capital of past 5 years we can that there was a steady increase from 2005-06
to 2006-07. Although there was a decrease in 2007-08, the Working Capital has
considerably increased in the financial year 2008-09. And again there is been a
decrease in the year 2009-10 where compared to the remaining years it is due to
decrease in cash balances and also due to maintenance of more provisions.
STATEMENT OF CHANGES IN WORKING CAPITAL
THE YEAR 2004-05 AND 2005-06
(Rs Lakhs)
Particulars 2004
05
2005
06
Increase Decrease
Current Assets:
Inventories 39869 43744 3875
Book debts 71736 84558 12822
Cash/Bank Bal 718 845 127
Loans and Advances 11767 14287 2520
Total(a) 124090 143434
Current Liabilities:Advances From
Customers
28036 29116 1080
Sundry Creditors 13871 19484 5613
Other Liabilities 2877 4295 1418
Provisions 10638 10843 205
Total (b) 55422 63738
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Net Working Capital
(a-b)
68668 79696
Net Increase In
Working Capital
11028 11028
Total 79696 79696 19344 19344
From the above table There is an increase in working capital during this year as
compared to previous year. It is due to increase in inventories and book debts. With
this we can conclude that it is maintaining an efficient working capital.
STATEMENT OF CHANGES IN WORKING CAPITAL
THE YEAR 2005-06 AND 2006-07
(Rs Lakhs)
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From the above table during this year there is a significant increase in working
capital as compared to previous year, it is due to increase in inventories and also due
to the reduction in maintenance of provisions. Overall it has good working capital.
STATEMENT OF CHANGES IN WORKING CAPITAL
THE YEAR 2006-07 AND 2007-08
(Rs.in Lakhs)
Particulars 2006-07 2007-08 Increase Decrease
Current Assets:
Particulars 2005
06
2006
07
Increase Decrease
Current Assets:
Inventories 43744 56606 12862
Book debts 84558 84880 322Cash/Bank Bal 845 957 112
Loans and Advances 14287 12859 1428
Total (a) 1473434 155302
Current Liabilities:
Advances From
Customers
29116 28822 294
Sundry Creditors 19484 22543 3059
Other Liabilities 4295 4549 254
Provisions 10843 8376 2467
Total (b) 63738 64290Net Working
Capital(a-b)
79696 91012
Net Increase In
Working Capital
11316 11316
Total 91012 91012 16057 16057
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Inventories 56606 58130 1524
Book debts 84880 85001 121
Cash/Bank Bal 957 899 58
Loans and Advances 12859 11763 1096
Total (a) 155302 155793
Current Liabilities:Advances From
Customers
28822 31636 2814
Sundry Creditors 22543 29738 7195
Other Liabilities 4549 2824 1725
Provisions 8376 8931 555
Total (b) 64290 73129
Net Working
Capital(a-b)
91012 82664
Net decrease in
Working Capital
8348 8348
Total 91012 91012 11718 11718
From the above table In this year there is a decrease in working capital as
compared to the previous year, it is due to increase in sundry creditors and also
maintenance of more provisions. At last we can conclude that working capital is
unsatisfactory.
STATEMENT OF CHANGES IN WORKING CAPITAL
THE YEAR 2007-08 AND 2008-09
(Rs.in Lakhs)
Particulars 2003
04
2004
05
Increase Decrease
Current Assets:
Inventories 58130 72540 14410
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Book debts 85001 81237 3764
Cash/Bank Bal 899 1280 381
Loans and Advances 11763 11612 151
Total 155793 166669
Current Liabilities:Advances From
Customers
31636 32228 592
Sundry Creditors 29738 27610 2128
Other Liabilities 2824 2612 212
Provisions 8931 11977 3046
Total 73129 74427
Net Working
Capital(a-b)
82664 92242
Net Increase In
Working Capital
9578 9578
Total 92242 92242 17133 17133
From the above table. There is an increase in working capital in this year as
compared to previous year. It is because of increase in inventories and cash balances,
which has increased current assets to current liabilities. Overall we can conclude that
working capital is satisfactory.
STATEMENT OF CHANGES IN WORKING CAPITAL
THE YEAR 2008-09 AND 2009-10
(Rs.in Lakhs)
Particulars 2004 05 2005 06 Increase Decrease
Current Assets:
Inventories 72540 63246 9294
Book debts 81237 82829 1592
Cash/Bank Bal 1280 473 807
Loans and Advances 11612 9104 2508
Total (a) 166669 155652
Current Liabilities:
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Advances From
Customers
32228 44162 11934
Sundry Creditors 27610 20738 6872
Other Liabilities 2612 3253 641
Provisions 11977 16838 4861
Total (b) 74427 84990
Net Working
Capital(a-b)
92242 70662
Net decrease In
Working Capital
21580 21580
Total 92242 92242 30045 30045
From the above table During this year working capital has shown adverse balances
as compared to previous year. it is due to slash down in maintenance of inventories
and cash balances which has lead to decrease in current assets to current liabilities. at
last it has unsatisfactory working capital
RATIO ANALYSIS
INTRODUCTION:
Ratio analysis is one of the techniques of financial analysis where ratios are used as a
yardstick for evaluating the financial condition and performance of a firm. Analysis and
interpretation of various accounting ratios gives skilled and experienced analyst, a better
understanding of the financial condition and performance of the firm than what he could
have obtained only through a perusal of financial statements.MEANING OF RATIOS:
Ratios are relationships expressed in mathematical terms between figures which are
connected with each other in some manner. Obviously, no purpose will be served by
comparing two sets of figures which are not at all connected with each other. Moreover,
absolute figures are also unfit for comparison.
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There are various techniques or models for analyzing information contained in the
financial statements viz. Comparative statements, Common Size Statements, Trend
Percentages, Funds Flow Analysis, Cash Flow Analysis and Ratio Analysis. Financial
analysis is undertaken by the management of the firm or by parties outside to it viz.
owners, creditors, investors etc.
Ratio Analysis is most widely used and powerful tool or technique of financial analysis.
The term ratio refers to the numerical or quantitative relationship between two variables.
It shows arithmetical relationship between two figures, which can be expressed in three
ways.
Percentage
Fraction
Proportion
A study of the trend of strategic ratios helps the management in planning, forecasting and
decision making. It helps in identifying specific work areas. In short, though the
technique of ratio analysis, the firms solvency, efficiency and profitability can be
assessed.
IMPORTANCE OF RATIO ANALYSIS
Ratio analysis helps in simplifying the financial statement for easy understanding.
It helps in drawing out meaningful conclusion from the information provided in
the financial statements which is useful for decision making and framing sound
policies for business in future.
It helps in assessing the financial strength and weakness of the firm and thus
enhances the value of the financial statements.
Comparative study of the ratios between the competing firms helps to know the
efficiency of the firm.
It helps the investor to assess the financial position of the concern in which he is
going to invest.
Ratio analysis helps the employees interested in wage increase and fringe benefits
that are related the volume of profits earned by the concern.
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Ratio analysis provides data for inter firm comparison. Ratios highlight the
factors associated with successful and unsuccessful firms. They also reveal strong
firms and weak firms, over valued and under valued firms.
Ratio analysis helps in planning and forecasting. Over a period of time a firm or
industry develops certain norms that may include future success or failure. If
relationship changes in firms data over different time periods, the ratios may
provide clues on trends and future problems.
Ratio analysis also makes possible comparison of the performance of the different
divisions of the firm. The ratios are helpful in deciding about their efficiency or
otherwise in the past and likely performance in the future.
Thus, ratios can assist management in its basic function of forecasting, Planning,
coordination, control and communication.
LIMITATIONS OF RATIO ANALYSIS
Ratios are of limited use and thus single ratio may not be useful. Better
interpretation is possible with the calculation of number of ratios, which may lead
to confusion to the analyst in making any meaningful conclusion.
Ratios are calculated on the basis of past results, which may not necessarily true
indicators of the future, if the business policies are constantly changing.
Change in accounting procedure may be misleading for ratio analysis. For
example, change in inventory valuation methods from LIFO to FIFO may also
influence in the analysis.
Ratio analysis considers only quantitative aspect, but not qualitative factors.
Ratio analysis may give misleading results if the effects of price level changes are
not considered.
Ratio analysis when interpreted by different people in different way may
encounter with the personal bias or prejudice of the analyst.
CLASSIFICATION OF RATIOS
Ratios are classified in a number of ways, depending upon the basis of classification. The
basis for classification can be
1. The financial statements from which the figures for comparison of ratios are
derived. It is called Traditional classification.
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2. The tests or functions of the ratios. It is called Functional classification.
3. The importance of the ratios.
4. The point of time in relation to which ratios are calculated.
5. The usage of ratios.
6. The nature of ratios.
1. Traditional Classification: Ratios are classified on the basis of the financial
statements from which the figures used for calculation are taken. The ratios are
classified as Balance sheet ratios, Profit and Loss Account ratios and Mixed
ratios.
2. Functional Classification: Ratios are classified as liquidity ratios, profitability
ratios and earning ratios. Liquidity ratios test the liquidity of business i.e. its
ability to repay its short term liabilities out of short term assets (eg. Current ratio,
Quick ratio, Stock Turnover ratio, Creditors Turnover ratio etc). Profitability
ratios indicate the profitability of the business (eg. Gross profit ratio, Return on
Capital Employed etc). Earnings ratios indicate the return to the owners or
shareholders of the business (eg. Earnings per share, Dividend pay out ratio etc)
3. Classification on the basis of importance of Ratios: Ratios are classified as
Primary ratios and secondary or supporting ratios. Primary ratios are more
4. important for the purpose of analysis and interpretation (eg. Return on capital
Employed). The other ratios which support or explain the primary ratio are called
secondary ratios (eg. Operating Profit ratio etc.)
5. Classification on the basis of point of time: Ratios are classified as Structural
ratios and Trend ratios. Structural ratios are calculated from the data relating to
some point of time, say a particular accounting year. Trend ratios are computed
from the data relating to different periods of time.
6. Classification on the basis of usage: Ratios are classified as Ratios for
Management, Ratios for Creditors and Ratios for Shareholders. Ratios for
management indicates efficiency of management (eg. Operating ratios, stock
turnover ratios etc). Ratios for creditors help in ascertaining the short term, long
term solvency of the business undertaking (eg. Current ratio, creditor turnover
ratio, Debt Equity ratio etc) Ratios for shareholders help the shareholders in
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assessing the fruitfulness of their investment (eg. Earnings per share, Return on
capital employed etc).
7. Classification on the basis of nature of ratios: Ratios are classified in to liquidity
(or short term solvency) ratios, leverage (or capital structure or long term
solvency) ratios, Turnover (or Activity or Performance) ratios and Profitability
ratios. This is the most widely accepted classification of ratios and this
classification has been followed for explaining the various ratios.
Ratios may be classified in a number of ways keeping in view the particular purpose.
Ratios indicating profitability are calculated on the basis of the profit and loss account,
those indicating financial position are computed on the basis of the balance sheet and
those which show operating efficiency or productivity or effective use of resources are
calculated on the basis of figures in the profit and loss account and the balance sheet.
This classification is rather crude and unsuitable to determine the profitability and
financial position of the business. To achieve this effectively, ratios are classified as.
1. Liquidity ratios
2. Leverage ratios
3. Coverage ratios
4. Activity ratios (or) turnover ratios
5. Profitability ratios
1. LIQUIDITY RATIOS:
Liquidity Ratios is also known as short term solvency. These ratios are used to measure
the firms ability to meet short term obligations. They compare short term obligation
to short term (or current) resources available to meet these obligations. From these ratios,
much insight can be obtained into the present cash solvency of the firm and the firms
ability to remain solvent in the event of adversity. The creditors of the firm are primarily
interested in the short term solvency of the firm. A firms liquidity should be neither
too high nor too low but adequate.
Low liquidity implies the firms inability to meet its maturing obligations. This will result
in bad credit rating, loss of creditors confidence or even technical insolvency, ultimately
leading to the closure of the firm.
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A very high liquidity position is also bad. It means that the firms current assets are too
high in proportion to maturing obligations. Idle assets earn nothing to the firm. The firms
funds will be unnecessarily locked up in current assets, which if, released can be used to
generate profits to the firm.
The ratios, which measure, and indicate the extent of a firms liquidity, are known as
liquidity ratios or short term solvency ratios. Commonly used liquidity ratios include.
Current ratio (or) working capital ratio
Quick ratio (or) acid test ratio
Cash position ratio (or) super stock quick ratio
2. LEVERAGE RATIO:
These ratios are also known as Capital Structure ratios or Solvency ratios or Capital
Gearing ratios. The long term creditors are more concerned with the firms long term
financial position. They judge the financial soundness of the firm in the firm in term of
the ability to pay interest promptly as well as making repayment of the principal. The
long term solvency of the firm can be examined with the help of leverage ratios. They
measure the funds supplied by owners as compared with the financial provided only a
small proportion of total financing, the risks of the business are borne mainly by the
creditors.
Firm with low leverage have less risk of loss, but they also have lower expected returns.
Conversely, firms with high leverage ratios have the risk of large losses but also have a
chance of earning huge profits. Therefore, before deciding whether a firm should have
debt, it must balance higher expected returns against increased risks. The most commonly
examined leverage: ratios are
Debt equity ratio
Proprietary ratio
Debt to capital ratio
Gross fixed assets to shareholders funds
Fixed assets ratio
3. COVERAGE RATIOS:
These ratios indicate the extent to which the interests of the persons entitled to get a fixed
return (i.e., interest or dividend) or a scheduled repayment as per agreed terms are safe.
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The higher the cover the better it is. Under this category the following ratios are
calculated.
Fixed interest coverage ratio
Fixed dividend coverage ratio
Debt service coverage ratio
3. ACTIVITY RATIO (OR) TURNOVER RATIO:
The finances obtained by the firm from its owners and creditors will be inverted in assets,
which the firm uses to generate sales and profits. The amount of sales generated and the
profit earned depend on the effective and efficient management of these assets by the
firm. Activity ratios measure the efficiency with which the firm manages and uses its
assets. That is why activity ratios are known as efficiency ratios, because these ratios are
converted or turned over in to sales.
Thus, the turnover or activity ratios measure the relationship between sales on one side
and various assets on the other side. Higher the turnover ratio, the better the profitability
and use of capital.
Many activity ratios can be calculated to measure the efficiency of assets utilization.
Following are some of the important activity ratios:
Total assets turnover ratio
Capital employed turnover ratio
Fixed assets turnover ratio
Current assets turnover ratio
Working capital turnover ratio
Stock turnover ratio
Debtors turnover ratio
Creditors turnover ratio
4. PROFITABILITY RATIOS:-
Profitability is the ability to make profits. Every firm should earn adequate profits in
order to survive in the immediate present and grow in future. In fact, profit is what makes
the business run. Profitability is the net results of a large number of policies and
decisions. Profitability ratios give final answers about how efficiency the firm is
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managed. The profitability ratios relate profits earned by a firm by its parameters like
sales, capital employed and net worth. But while making ratio analysis relating to profits,
it should be remembered that there are different concepts of profit such as contribution,
gross profits, net profits, EBIT, operating profits, profits before depreciation and before
tax etc. Profitability ratios are important for a concern. These ratios are calculated to
enlighten the end results of business activities, which is the sole criterion of the overall
efficiency of a business concern. The following are the important profitability ratio which
are based on.
1. Sales
2. Investment
Gross profit ratio
Operating raito
Operating profit ratio
Net profit ratio
Return on capital employed
Return on shareholders equity
Return on total assets
Earning per share
Dividend pay out ratio
1. CURRENT RATIO:
In times
YEAR CURRENT ASSETS CURRENT
LIABILITIES
RATIO
2005-06 143434 63738 2.25
2006-07 155302 64290 2.41
2007-08 155793 73129 2.13
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2008-09 166669 74427 2.23
2009-10 155652 84990 1.83
The ratio equal to or near to 2:1, i.e., current assets double the current liabilities isconsidered to be satisfactory. In the context of SPL, the current ratio is more than
standard. It has always been above 2. Thus it is an indication of efficiency of the
firm of maintaining current assets. But as on the year 2009-10 there is a slight
decrease of 0.2% , as it does not make much difference.
2. QUICK RATIO
In times
YEAR QUICK ASSETS CURRENT
LIABILITIES
RATIOS
2005-06 99690 63738 1.56
2006-07 98696 64290 1.53
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2007-08 97663 73129 1.33
2008-09 94129 74427 1.26
2009-10 92406 84990 1.09
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As a convention Quick Ratio of 1:1 is considered satisfactory. From the above
analysis we can see that Quick Ratio for the past five years has been above 1 which
is good, even though it is in a decreasing trend.
3. ABSOLUTE QUICK RATIO (OR) CASH RATIO
(In times)
YEAR LIQUID ASSETS CURRENT LIABILITIES RATIO
2005-06 845 63738 0.013
2006-07 957 64290 0.014
2007-08 899 73129 0.012
2008-09 1280 74427 0.017
2009-10 473 84990 0.005
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The acceptable norm for this ratio is 50% or 0.5:1 or 1:2, but the ratios for
2009 as shown in the trend are not according to the standard norms there is no proper
maintenance of cash in the current assets.
4. INVENTORY TURNOVER RATIO
(In times)
YEAR COST OF
GOODS SOLDAVERAGE
INVENTORY(OR)C.S
RATIO
2005-06 104269 41806 2.49
2006-07 127545 56606 2.25
2007-08 130749 58130 2.25
2008-09 121566 72540 1.67
2009-10 129833 63246 2.05
C.S=closing stock
Cost of goods sold=gross turnover net of exercise duty profit before tax
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We can see that the I.T.R of SPL is rapidly decreasing from 2005-02 to 2008-09. This
shows that the rate at which the stock is turned over, during the accounting period,
over the past five years is becoming lesser and lesser. And again at the period of
2009-10 there was an increase by 2.05 %.
5. INVENTORY CONVERSION PERIOD
YEAR NO.OF DAYS IN
A YEAR
INVENTORY
TURNOVER RATIO
INV.CONV.
PERIOD
2005-06 365 2.49 146
2006-07 365 2.25 162
2007-08 365 2.25 162
2008-09 365 1.67 218
2009-10 365 2.05 178
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From the above we can say that the Inventory Conversion Period has shown a steady
inverse from 2005-06 to 2006-07, although there was a fall in 2007-08. But in the
financial year 2008-09 the conversion period has increased by 56 days. As then
there was a decrease by 40 days in the year 2009-10.
6. DEBTORS TURNOVER RATIO
(In times)
YEAR TURNOVER AVG DEBTORS RATIO
2005-06 132265 78147 1.69
2006-07 131972 84719 1.56
2007-08 153205 84940.5 1.80
2008-09 137838 83119 1.66
2009-10 174490 82033 2.13
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The debtors turnover ratio of SPL has been considerably decreasing from 1.69 in
the accounting year 2005-06 to 1.56 in 2006-07, which increased to 1.80 in 2008-09.
However, in the next year it again decreased to 1.7 and again there was an increase by
2.13 in the current year 2009-10
.
7.AVERAGE COLLECTION PERIOD
YEAR NO.OF DAYS IN
A YEAR
DEBTORS
TURNOVER RATIO
AVG. COLL. PER
2005-06 365 1.69 216
2006-07 365 1.56 234
2007-08 365 1.80 203
2008-09 365 1.66 220
2009-10 365 2.13 171
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The Average Collection Period i.e., the duration provided for the collection of
debts has been increasing from 216 days in2005-06 to 234 days in 2006-07 but it
decreased in 2007-08 to 203 days and again it has increased to 220 in the year 2008-
09 and that after there is a decrease to 171 in financial year 2009-010
8.CREDITORS TURNOVER RATIO
(In times)
YEAR CREDIT
PURCHASES
AVG.
CREDITORS
RATIO
2005-06 65934 16677.5 3.95
2006-07 79819 21013.5 3.80
2007-08 78387 26140.5 3.00
2008-09 72202 28674 2.52
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2009-10 78006 24174 3.23
Here the Creditors Turnover Ratio was 3.95 in the year 2005-06 and has decreased
rapidly to 2.43 in 2008-09, which shows that the management is making its paymentsin time, thus providing its efficiency, and again in the financial year 2009-10 there
was an increase by 3.23 even by this there no difference in the efficiency of the
management.
9.AVERAGE PAYMENT PERIOD
YEAR NO.OF DAYS IN
A YEAR
CREDITORS
TURNOVER RATIO
A.P.P
2005-06 365 3.95 92
2006-07 365 3.80 96
2007-08 365 3.00 112
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2008-09 365 2.52 145
2009-10 365 3.23 113
The Average Payment Period has steadily increased from 92 days in 2005-06 to 145
days in 2008-09; this shows the confidence of the creditors in the organization. And
suddenly there is a fall by 113 days in the financial year 2009-10 though there is
decrease the confidence of the creditors with the organization has no difference.
10.WORKING CAPITAL TURNOVER RATIO
In times
YEAR TURNOVER WORKING
CAPITAL
RATIO
2005-06 132265 79696 1.66
2006-07 131972 91012 1.45
2007-08 153205 82664 1.85
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2008-09 137838 92242 1.49
2009-10 174490 70662 2.46
A higher Working Capital Turnover Ratio indicates efficient utilization of Working
Capital. But for SPL IS ratio has been decreasing from 1.66 in 2005-06 to 1.49 in
2008-09, although it showed a slight increase of 1.85 in 2007-08 it again decreased in
the next year. Again there was an increase in the ratio by 2.46 in current year 2009-10
by which we can tell that there is an efficient utilization of Working Capital.
11.RAW MATERIAL INVENTORY TURNOVER RATIO
Rs. Lakhs
YEAR RAWMATERIAL
CONSUMED
AVERAGERAW
MATERIAL
INVENTORY
RATIO
2005-06 63265 8890.5 7.12
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2006-07 76903 8953.5 8.59
2007-08 73677 10753 6.85
2008-09 65085 14353.5 4.53
2009-10 75818 16478.5 4.60
The Raw Material Inventory turnover Ratio for the organization has been increasing
at a fast pace from 7.12 in 2005-06 to 8.59 in 2006-07,but in the subsequent year
2008-09 there was a decrease and again an increase by 4.60 in the financial year.
CONCLUSIONS
1. The ratio equal to or near to 2:1, i.e., current assets double the current liabilities is
considered to be satisfactory. In the context of SPL, the current ratio is more than
standard. It has always been above 2. Thus it is an indication of efficiency of the
firm of maintaining current assets. But as on in the year 2009-10 there is a slight
decrease of 0.2% , as it does not make much difference.
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2. The acceptable norm for this ratio is 50% or 0.5:1 or 1:2, but the ratios for 2009
as shown in the trend are not according to the standard norms there is no proper
maintenance of cash in the current assets.
3.We can see that the I.T.R of SPL is rapidly decreasing from 2005-06 to 2009-10.
This shows that the rate at which the stock is turned over, during the accounting
period, over the past five years is becoming lesser and lesser. And again at the period
of 2009-10 there was an increase by 2.05 %.
4.Here the Creditors Turnover Ratio was 3.95% in the year 2005-06 and has
decreased rapidly to 2.43% in 2008-09, which shows that the management is making
its payments in time, thus providing its efficiency, and again in the financial year
2009-10 there was an increase by 3.23% even by this there no difference in the
efficiency of the management.
5. The Average Payment Period has steadily increased from 92 days in 2005-06 to
145 days in 2008-09; this shows the confidence of the creditors in the organization.
And suddenly there is a fall by 113 days in the financial year
6. A higher Working Capital Turnover Ratio indicates efficient utilization of Working
Capital. But for SPL IS ratio has been decreasing from 1.66% in 2005-06 to 1.49 in
2008-09, although it showed a slight increase of 1.85% in 2007-08 it again decreased
in the next year. Again there was an increase in the ratio by 2.46% in current year
2005-06 by which we can tell that there is an efficient utilization of Working Capital.
7.The Raw Material Inventory turnover Ratio for the organization has been increasing
at a fast pace from 7.12% in 2005-06 to 8.59% in 2006-07,but in the subsequent year
2008-09 there was a decrease and again an increase by 4.60% in the financial year.
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SUGGESTIONS
The Net Working Capital is positive for all the past five years except in the year
2009-10, therefore surplus amount should be invested in the short-term bonds.
There has been an increase in the Finished Goods Conversion Period, which is
mainly due to the increase in the manufacturing cycle time. Thus, it is recommended
to reduce the Operating Cycle time to the possible extent.
SPL is using ABC analysis partly in the inventory control. It is suggestible to
point other methods, such as JIT (Just in Time) and VED (vital Essential Desirable)
for managing inventory, wherever applicable, so as to reduce the Cycle period and
blockage of excess funds in inventory.
As SPL is following the centralized cash management it would be better for the
company to follow decentralized system, so that the company can take immediateaction to any requirements.
The Company should make more efforts to quickly transform the accounts
receivables into cash, as the collection period is above the ideal period i.e., 3-4
months or maximum of 120 days.
Compared to the 2008-09 scraps, 2009-10 has been increased to 100%, as this
indicated a negative sign. Company has to assess its production capability and
reasons for pile up of scrap. In addition, it is advisable to dispose sc
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