a detail study on working capital management in lakshmi mill
TRANSCRIPT
CHAPTER 1
INTRODUCTION
The Lakshmi group is a vertically integrated organisation in the textile
industry. One of the two in the world and the only one in India which manufactures
the entire range ofextile spinning machinery and textiles. The group has made
substantial contributions to the Indian industry technology. Self reliance exports,
imports substitution ancillary development and economy besides serving social
needs such as public health, education, employment, transfer of technology to third
world countries. In agriculture too, the group has gained and encouraged farmers to
develop superior varieties of cotton.
1. Working Capital
Financial management deal with the managerial activity which is concerned
with the planning and controlling activity of the firms scarce financial resources.
Hence these scarce resouces have to be properly alocated to achieve the best of
funds available. The subject matter of financial management has been defined in
many ways depending upon the study of the subject of that particular period.
The scope of the subject is not so narrow finance function ocupies the area
like raising of funds, effective utilization of funds, allocation of funds, taking sound
financial decision at the appropriate time, evaluating the new adopting techniques
for the growth of assets and for increasing the profitability.
Every business need for working capital to run the day - to day business
activities cannot be over emphasised. A business firm which does not require any
amount of working capital.
The firms aim at maximising the wealth of share holders. In its endeavour to
maximise share holder’s wealth a firm should earn sufficient return from its
operations. Earning a steady amount of profit requires successful sales activities.
2. Research Methodology
The study is based on secondary data which have been collected from the
annual reports taken from the Lakshmi mills company ltd.,
Inferences were drawn from secondary data analysis. The analysis was done
with the help of different tables, graphs etc. Each data were anlysed accordingly to
importance. These data were tabulated accordingly and were analysed and
interpreted in the coming paragraph. It was then well supported by corresponding
illustration and charts.
3. Objectives of the Study
1. To understand the relationship between current assets, current liability
and working capital.
2. To have an insight of the working capital position of the Lakshmi mills
company ltd.,
3. The measure financial operations and performance with the help of the
working capital of the Lakshmi mills company Ltd.,
4. To see nature and extent of working capital which is used in the
organisation.
5. To study the importance of working capital to run the day - to -day
business activities of the Lakshmi mills company ltd.,
6. To indicate the relationship between profits from operations,
distributions of the dividend and raising of new capital or then loans.
4. Scope and Limitations
This report is related to the study of working capital management and covers
the following aspects.
1. History of the company
2. Theoritical background of the study.
3. Past 5 year financial performance for the purpose of analysis.
Limitations
There are different constraints while collecting the data from the organisation
in completing this tasks.
1. It is very difficult to collect all the data which are essential, within a
short period.
2. Changes in cash are more important and relavant for financial
management than the working capital.
3. This study is restricted to secondary data.
4. competitive nature of organisation prevent of revalution of all
confidential details.
5. It is only a rearrangement of data given in financial statements.
5. Profile of the Organisation
The lakshmi mills company ltd., was founded in 1910 as partnership firm in
the form of a modest cotton gaining factory by Mr. G.Kuppuswamy Naidu in the city
of coimbatore. The company served as a fountain Head of testile industry complex.
The Lakshmi mills company ltd., coimbatore, is the most famous composite textile
mills in coimbatore having 2.15 Lac spindles, 672 rotors and 386 Automatic Looms.
It has celebrated the platinum Jubliee . The management is progressive in bringing
about scientific changes.
They have brought professionalism in management, through there was
originally Hereditary management. The Lakshmi mills has grown in its stature to be
called as “ The lakshmi group of companies “ with a lot of diversification of
manufacturing units. The company has four plant as follows.
1. Coimbatore Plant : (Papanaickenpalayam)
It is started in 1933 with 11,000 spindles. The weaving department was
started in 1950 with 184 looms.
2. Kovilpatti Plant
It is started in Tirunelveli district, commenced production in 1941.
3. Palladam Plant
It is started in 1959 in Kuppusamy Naidu Puram near Palladam.
4. Singanallur Plant
It is started in 1929 as Coimbatore cotton mills and it merged with Lakshmi
mills company ltd., in 1979. Weaving is done only in Singanallur and Coimbatore
plants.
Board of Directors
SRI. K.R. Appaswamy Naidu
SRI. K. Ethirajulu
SRI. V. Jaganathan
DR. D. Jayavarthanavelu
SRI. J.K.S. Nicholson
JUSTICE G. Ramanujam (Retd.)
SRI. P. Sabanayagam
SRI. S. Narasimhan (Nominee of LIC)
Managing Directors
SRI. K. Sundaram (Chairman)
SRI. S. Pathy (Vice - Chairman)
Company Secratary
SRI. T. Govindharajan.
Auditors
M/S. Subbachar & Srinivasan
M/S. Fraser & Ross
Bankers :
Central Bank of INDIA
Bank of INDIA
State Bank of MYSORE
State Bank of SAURASHTRA
Corporation Bank
Indian Bank
Registered Office:
11OO, Avinashi road,
Coimbatore . 641018.
Mills at :
Singanullur
Coimbatore
Koivilpatti
Palladam
CHAPTER 2
WORKING CAPITAL MANAGEMENT
Working capital means excess of current assets over current liabilities. It is
necessary for any organisation to run sucessfully its affairs to provide for adequate
working capital. Moreover, the management should also pay due attention in
exercising proper control over working capital.
1. Classification of Working Capital
Working capital may be classified in two ways.
1.1 On the basis of concept
1.2 On the basis of time
1.1 On the basis of concept
There are two concepts of working capital
1. Gross working capital
The gross working capital is the capital invested in total current assets of the
enterprise. Current assets are those assets which in the ordinary course of business
can be converted into cash within a short period of normally one accounting year.
2. Net working capital
Net working capital is the excess of current assets over current liabilities.
i.e Net working capital = current assets - current liabilities.
Net working capital may be positive or negative. When the current assets
exceed the current liabilities of the working capital is positive. Liabilities exceeds the
current assets the working capital is negative.
1.2 On the basis of time
1. Permanent or Fixed working capital :
Permanent or fixed working capital is the minimum amount which is required
to ensure effective utilization of fixed facilities and for maintaining the circulation of
current assets. There are always a minimum level of current assets which is
continuously required by the enrerprise to carry out its normal business operations.
Regular working capital required to ensure circulation of current assets from cash to
inventories, from the inventories to receivable and from receivable to cash and so
on.
Reserve working capital is the excess amount over the requirement for the
regular working capital which may be provided for contigenies that may arise at
unstated periods such as strikes, rise in prices, depreciation etc.
2. Temproary or variable working capital.
Temporary or variable working capital can be further classified as seasonal
working capital and special working capital. Most of the enterprise have provide
additional working capital to meet the seasonal needs. The capital required to meet
the seasonal needs of the enterprises is called seasonal working capital special
working capital is that part of working capital which is required to meet special
exigencies such as launching of extensive marketing campaigns for conducting
research etc.
2. Objects of working capital.
Main objectives of the working capital.
1. For the purchase of raw materials, components and spares.
2. To pay wages and Salaries.
3. To incur day to day expenses and over head cost such as fuel, power
and office expenses, etc.,
4. To meet the selling cost as packing, advertising, etc.,
5. To provide credit facilities to the customers.
6. To maintain the inventors of raw materials, work-in-process stores and
spares and finished goods.
3. Componants of working capital
A. Current assets
Current assets sometime also called liquid assets are those resources of a
firm which are either held in the form of cash or are expected to be converted into
cash within the accounting period or the operating cycle of the business.
Current assets include cash marketable securities book debts (accounts
receivable) and stock of raw material work-in-process and finished goods.
i ) Cash
Cash is the most liquid current assets. It is the current purchasing power in
the hands of a firm and can be used for the purposes of acquiring some resources or
paying some obligations cash includes actual money in hand and cash deposits in
bank account.
ii) Marketable securitites
Its are the temporary or short-term investments in shares debentures, bonds
and other securities. These securities are readily marketable and can be converted
into cash within the accounting period. A firm usually invests in marketable
securities when it has temporary surplus cash.
iii) Book debts or account receivable
Book debts are the amounts due from debtors (customers) to whom goods or
services have been sold on credit. These amounts are generally readiable into cash
within the accounting period. All book debts may not be realised by the firm. Debts
which will never be collected are called bed debts.
iv) Bills receivable
It represent the promises made in writing by debtors to pay definite sums of
money after some specified period of time. Bills are written by the firm and become
effective when accepted by debtors.
v) Stock or inventory
Stock include raw materials, work-in-progress and finished goods in case of
manufacturing firms. Raw materials and work-in-progress inventories are needed for
smooth production. Stock of finished goods is kept for serving customers on a
continuing basis. A merchandise as it has no manufacturing activity.
vi) Prepaid expenses and accrued incomes
Prepaid expenses and accrued incomes are also included in current assets
prepaid expenses are the expenses of future period paid in advance. Example of
prepaid expenses are prepaid insurance, prepaid rent or taxes paid in advance.
They are current assets because their benefits which the firms has earned, but they
have not been received in cash yet. They include items such as accrued dividend,
accrued commission or accrued interest.
vii) Loans & advances :
Loan and advances are also included in current assets in India. They include
dues from employees or associates, advances for current suppliers and advances
against acquisition of capital assets expect for the advancement for current
supplies, it is not proper to include loan & advances in current assets.
B) Current liabilities :
Current liabilities are debts payable within an accounting current assets are
converted into cash to pay current liabilities. Some time new current liabilities may
be incurred to liquidate the existing current liabilities. The typical example of current
liabilities are creditors, bills payable, bank over draft, tax payable, outstanding
expenses and income received in advance.
i ) Sundry Creditors :
It represent the current liablities towards suppliers from whom the firm has
purchased raw materials on credit. This liability is also known as accounts payable
and is shown in the balance sheet till the payment has been made to the creditors.
ii) Bills Payable :
Bills payable are the premised made in writing by the firm to make payment
of a specified sum to creditor at some specific date. Bills are written by creditors
over the firm and become bill payable once they are accepted by the firm. Bills
payable have a life of less than a year, therefore, they are shown as current
liabilities in the balance sheet.
iii) bank borrowing :
Bank borrowing forms a substantial part of current liabilities of large number
of companies in India commercial banks advance short term credit to firms for
financing their current assets.
iv) Provisions :
Provisions are other types of current liabilities. They include provisions for
taxes or provision for dividend. Every business has to pay on its income. Usually it
takes some time to finalises the amount of which the tax authorities. Therefore, the
amount of tax is estimated and shown as provision for taxes or tax liability in the
balance sheet.
v) Expenses payable :
Expenses payable (o/s expenses) are also current liabilities. The firm may
owe payments to its employees and others at the end of accounting period for the
service received in the current year. These payments are payable within a very short
period. Examples of o/s expenses are wages payable rent payable or commission
payable.
vi) Income received in advance:
It is yet another example of current liability. A firm can sometimes receive
income for goods or services to be supplied in future. As goods or services have to
be provided within the accounting period, such receipts are shown as current
liabilities in the Balance sheet.
vii) Installments of long term loans:
Installments of long term loans are payable periodically. That portion of the
long-term loan which is payable in the current year will form part of current
liabilities. A form may also raise deposits form public for financing its current assets.
These may be therefore classified under current liabilities. It may be noted that
public deposits may be raised for a duration of one year through three years.
4. Factors determining the working capital requirements:
1) Nature or character of Business
Working capital also depends upon the nature of the business. The public
utility concerns like railways, electricity, etc., have very little need for working
capital since most of their transactions are on cash basis and moreover they do not
require large inventories.
2) Size of Business / Scale of operations:-
Greater the size of a business unit generally longer will be the requirements
of working capital. Smaller concern may need more working capital due to high O/H
charges, inefficient use of available resources and other economic disadvantages.
3) Production Policy
The production could be kept either steady by accumulating inventories
during slack periods with a view to meet high demand during the peak season. If the
policy is to keep production steady by accumulating inventories it will require higher
W.C.
4) The Length of Production Cycle:-
The longer the manufacturing time the raw materials and other supplies have
to be carried for a longer period in the process with progressive increment of labour
and service costs before the furnished product is finally obtained.
5) Sales Growth:-
The working capital needs of the firm increase as it sales grow. It is difficult to
precisely determine the relationship between volume of sales and working capital
needs. In practice, current assets will have to be employed before growth takes
place. It is, therefore, necessary to make advance planning of working capital for a
growing firm on a continuous basis.
6) Price Level Changes:-
The increasing shifts in price Level make functions of financial manager
difficult. He should anticipate the effect of price level changes of working capital
requirements of the firm. Generally raising price levels will require a firm amount of
working capital. Same levels of current assets will need increased investment when
prices are increasing.
7) Availability of Credit:-
The working capital requirements of a firm also affected by credit terms
granted by its creditors. A firm will need less working capital if liberal credit terms
are available to it. Similarly the availability of credit from banks also influences the
working capital needs of the firm.
5. Need for working capital:-
The Need for working capital to run the day-to-day business activities cannot
be over emphasied. We will hardly find a business firm which does not require any
amount of working capital.
We know that firms aim at maximising the wealth of shareholders in its
endeavour to maximise shareholder’s wealth a firm should earn sufficient return
from its operations. Earning a steady amount of profit requires successful sales
activity.
5.1 Operating cycle:-
Operating cycle is the time duration required to convert sales after the
conversion of resources into inventories, into cash. The operating cycle of a
manufacturing company involve three phases:-
i. Acquisition Of Resources such as raw materials, labour, power &
fuel, etc.,
ii. Manufacturer Of The Product which includes conversion of raw
materials into the work-in-process into finished goods.
Sales Of The Product either for cash or on credit. Credit sale creates book debts
for collection.
Operating Cycle a Manufacturing Firm.
RMCP + WIPCP+ FGCP
Payment Credit Sale Collection
Payables NOC
RCPICP
GOC
RMCP - Raw material conversion period.
WIPCP - Work in progress conversion period.
FGCP - Finished goods conversion period.
ICP - Inventory conversion period.
RCP - Receivables conversion period.
NOC - Net Operating cycle.
GOC - Gross operating cycle.
The length of the operating cycle of a manufacturing firm is the sum of
(1) Inventory conversion period, and
(2) Book debts conversion period.
The inventory conversion period is the total time needed for producing and
selling the product. Typically it includes,
(a) Raw material conversion period
(b) Work-in-progress
( C) Finished goods conversion period.
The book debts conversion period is the time required to collect outstanding
amount from customers. The total of inventory conversion period and book debts
conversion period is sometimes referred to as gross operating cycle.
5.2 Permanent and variable working capital.
The need for current assets arises because of the operating cycle. The
operating cycle is a continuous process and therefore the need for current assets is
felt constantly. However, there is always a minimum level of current assets which is
continuously required by the firm to carry on its business operations. The minimum
level of current assets is referred to as permanent or fixed working capital.
Permanent and Variable Working Capital
Temporary (or) variable
Permanent
Am
ount
of
Work
ing C
apit
al in
Rs.
Time
Depending upon changes in production and sales, the need for working
capital, over and above permanent working capital, will fluctuate. The extra working
capital needed to support the changing production and sales activities is called
fluctuating or variable working capital.
5.3 Adequacy of working capital
The dangers of excessive working capital are as follows:
i. It results in unecessary accumulation of inventories. Thus changes of
inventory mishanding waste, theft and losses increase.
ii. It is an indication of defective credit policy and slack collection period.
Consequently higher incidence of bad debts results, which adversely
affects profits.
iii. Excessive working capital makes management complacent which
degenerates into managerial inefficiency.
iv. Excessive working capital makes management complement which
teads to overall inefficiency in the organisation.
Inadequate working capital is also bad and has the following dangers.
i. If concern which has inadequate working capital cannot pays its short-
term liabilities its time.
ii. It cannot by its requirements in bulk and take advantages of cash
discounts.
iii. Leads to inefficiencies increase in costs and reduction in profit.
iv. iv)Leads to decrease in return on investment.
v. Fixed assets are not efficiently utilised for the {labour}* of working
capital funds.
6. Estimating working capital needs
A number of methods in addition to the operating cycle concept, may be
used to determine working capital needs in practice. We shall illustrate have three
approaches which have been successfully applied in practice.
1. Current assets holding period
To ensure estimate working capital requirements on the basis of average
holding period of current assets and relating them to costs based on the company’s
experience in the previous hear.
2. Ratio of sales
To estimate working capital requirements as a ratio of sales on the
assumption that current assets change with sales.
3. Ratio of fixed investment
To estimate working capital requirements as a percentage of fixed
investment.
7. Financing current assets.
Three types of financing may be distinguished.
1. Long-term,
2. Short-term and
3. Spontaneous financing
The important sources of long-term financing are shares, debentures,
preference shares, retained earnings and long-term debt from financial institutions
short-term financing refers to those sources of short-term credit that the firm must
average in advance. These sources include short-term bank loans, commercial
papers, factoring receivables and public deposits. Spontaneous financing refers to
the automatic sources of short-term funds arising in the normal course of a
business.
Depending on the mix of short-term and long-term financing, the approach
followed by a company may be referred to us.
A. Matching approach
B. Conservative approach
C. Aggressive approach.
A. Matching approach
The firm can adopt a financial plan which matches the expected use of assets
with the expected life of the source of funds raised to finance assets. Thus, a ten-
year loan may be raised to finance a plant with an expected life of ten years. Stock
of goods to be sold in thirty days may be financed with a thirty-day bank loan and so
on.
When the firm follows matching approach (also known as hedging approach)
long-term financing will be used to finance fixed assets and permanent current
assets and short-term financing to finance temporary or variable current assets.
Permanent C.A
Ass
ets
Time
B D F
E
CATemporary C.A
Fixed assets
Short term financing
Long term financing
A B - in conservative approach
C D - in aggressive approach
E F - in matching approach
B. Conservative approach
A firm in practice may adopt a conservative approach in financing its current
and fixed assets. The financing policy of the firm is said to be conservative when it
depends more on long-term funds for financing needs under a conservative plan,
the firm finances its permanent assets and also a part of temporary current assets
with long-term financing. In the period when the firm has no need for temporary
current assets, the idle long-term funds can be invested in the tradable securities to
conserve liquidity. The conservative plan relies hearly on long-term financing and
therefore, the firm has less risk of facing the problem of shortage of funds.
C. Aggressive approach
A firm may be aggressive in financing its assets. An aggressive policy is said
to be followed by the firm when it uses more short-term financing than warranted by
the matching plan. Under an aggressive policy, the firm finances a part of its
permanent current assets with short-term financing some extremely aggressive
firms may even finance a part of their fixed assets with short-term financing.
CHAPTER 3
ANALYSIS OF WORKING CAPITAL
Size of working capital
The basic objective of financial management is to maximise shareholders
wealth. This is possible only when the company earns sufficient profit. The amouht
of such profits longly depends upon the magnitude of sales. However sales do not
converet into cash instaneously. There is always a time gap between the sales of
goods and receipts of cash working capital is required for the period in order to
sustain the sales activily.
Table : 3.1
Size of working capital
(Rs. in lakhs)
Year Current assets Current liabilities Working capital
1993-94 6513 3148 3365
1994-95 9000 2051 6949
1995-96 10835 3569 7266
1996-97 8054 2523 5531
1997-98 8475 2456 6019
Interpretation :
The above table shows the working capital position of Lakshmi mills company
for the last five years. The working capital was positive position due to the increase
in loans & advances, sundry debtors.
From this table, we can see that during the 1995-96 working capital was
increased, beceuse of the company utilised those money for inventory, advances
and sundry debtors.
During the 1996-97 the working capital was decreased because during these
years company’s inventory, advances and sundry debtors were decreased.
Table: 3.2
Composition of working capital
Year % inventory % of % of cash & % of loan & Sales
to C.A debtors to C.A
bank balance to C.A
advances to C.A
1993-94 45 16 20 19 15494
1994-95 55 14 18 13 20125
1995-96 57 14 15 14 20866
1996-97 43 15 22 20 19834
1997-98 42 15 22 21 21078
Average 48 15 19 18
Interpretation :
From this table, shows that composites of working capital during 1993 to 98.
It shows that the stock have decreased from 45% to 42% (nearly) and cash & bank
balances have increased from 20% to 22% (nearly) of the total current assets. Also
sales was increased properly. Thus the cash & bank balances position of the
company would be rather comfortable.
Statement of changes in working capital in 1994-95
(Rs. in Lakhs)
Particulars 1994 1995 Increase Decrease
Current assets :
1. Cash 4 7 3 -
2. Cash at bank 1309 1626 317 -
3. Raw materials 965 2067 1102 -
4. Stock in process 246 354 108 -
5. Other inventories 1700 2527 827 -
6. Sundry Debtors 1039 1237 198 -
7. Loans & Advances 1250 1182 68
Total 6513 9000
Current liabilities
1. Sundry creditors 1393 344 1049 -
2. Unclaimed dividend 3 3 - -
3. Provisions 751 467 284 -
4. Other liabilities 1001 12377 - 236
Total 3148 2051
Increase in working capital 3584
Total 3888 3888
Statement of changes in working capital in 1995-96
(Rs. in Lakhs)
Particulars 1995 1996 Increase Decrease
Current assets :
1. Cash 7 5 - 2
2. Cash at bank 1626 1669 43 -
3. Raw materials 2067 3814 1747 -
4. Stock in process 354 374 20 -
5. Other inventories 2527 2036 - 491
6. Sundry Debtors 1237 1493 256 -
7. Loans & Advances 1182 1444 262 -
Total 9000 10835 -
Current liabilities
1. Sundry creditors 344 2106 - 1762
2. Unclaimed dividend 3 5 - 2
3. Provisions 467 376 91 -
4. Other liabilities 1237 1082 155 -
Total 2051 3569
Increase in working capital 317
Total 2574 2574
Statement of changes in working capital in 1996-97
(Rs. in Lakhs)
Particulars 1996 1997 Increase Decrease
Current assets :
1. Cash 5 4 - 1
2. Cash at bank 1669 1808 139 -
3. Raw materials 3814 1316 - 2498
4. Stock in process 374 366 - 8
5. Other inventories 2036 1806 - 230
6. Sundry Debtors 1493 1237 - 256
7. Loans & Advances 1444 1517 73 -
Total 10835 8054
Current liabilities
1. Sundry creditors 2106 1410 696 -
2. Unclaimed dividend 5 5 - -
3. Provisions 376 430 - 54
4. Other liabilities 1082 678 404 -
Total 3569 2523
Decrease in working capital 1735
Total 3047 3047
Statement of changes in working capital in 1997-98
(Rs. in Lakhs)
Particulars 1997 1998 Increase Decrease
Current assets :
1. Cash 4 5 1 -
2. Cash at bank 1808 1869 61 -
3. Raw materials 1316 1160 - 156
4. Stock in process 366 378 12 -
5. Other inventories 1806 2071 265 -
6. Sundry Debtors 1237 1283 46 -
7. Loans & Advances 1517 1709 192 -
Total 8054 8475
Current liabilities
1. Sundry creditors 1410 1280 130 -
2. Unclaimed dividend 5 5 - -
3. Provisions 430 426 4 -
4. Other liabilities 678 745 - 67
Total 2523 2456
Increase in working capital 488
Total 711 711
CHAPTER 4
WORKING CAPITAL RATIOS
1. Current Ratio
The current ratio is calculated by dividing cueernt assets by curreent
liabilities
Current ratio = Current assets/ Current liabilities
Table: 4.1
Current ratio
(Rs. in lakhs)
Year Current assets Current liabilities Ratio
1993-94 6513 3148 2.07
1994-95 9000 2051 4.39
1995-96 10835 3569 3.04
1996-97 8054 2523 3.19
1997-98 8475 2456 3.45
Average : 3.23
Interpretation
From this table, we can see the last five year current ratio level. The Lakshmi
mills company ltd., current ratio is normal level. The company should maintain the
normal level otherwise the company may fail in the long run.
One company keeps current ratio 1:1 company’s short term financial position
good. Here, The Lakshmi mills company ltd keep the ratio more than one in the last
year.
2. Working capital turnover ratio :
This ratio indicate whether or not working capital has been effectively utilised
in making sales. In case a company has achived a higher volumes of sales with
relatively small amount of working capital it is an indication of the operating
efficiency of the company
Working Capital Turnover ratio = Net sales/ working capital
Table: 4.2
Working capital turnover ratio
(Rs. in lakhs)
Year Net sales Working capital Ratio
1993-94 15494 3365 4.60
1994-95 20125 6949 2.90
1995-96 20866 7266 2.87
1996-97 19834 5531 3.59
1997-98 21078 6019 3.50
Interpretation :
From this analysis it is clear that the company utilised its working capital
properly in working capital. In 1993-94 working capital turnover ratio was good. In
1994-95 and 1995-96 working capital turnover ratio was low level working capital
commonly, we can say that the last two years working capital position of The
Lakshmi mills company ltd., is good.
3 Inventory Turnover Ratio :
Inventory turnover ratio points the effieciency of the firm in maintaining and
utilising the inventory. The higher the inventory turn over the larger the amount of
profit,the smaller the amount of capital tied up in inventory and the more current
the merchandise stock.
Inventory turn over ratio = Cost of goods sold/ Average inventory
Table: 4.3
Inventory turn over ratio
(Rs. in lakhs)
Year Cost of goods sold Average inventory Ratio
1993-94 16826 2911 5.78
1994-95 16331 4949 3.30
1995-96 13123 6224 2.11
1996-97 16707 3488 4.79
1997-98 16910 3609 4.69
Interpretation :
The ratio gives the number of times the inventory is replace during a given
period. Higher the ratio better the performance of the company for it has managed
to operate with a relatively small average loading up of funds. The conclude The
Lakshmi mills company Ltd., Kept inventory at an average of 2 times for the last 5
years which is a satisfactory level.
4. Raw material turnover ratio :
It is computed so as to analysis the speed with which the raw materials are
being consumed by the firms. A high raw material turnover ratio is an indication of
fast moving on items.
Raw material consumedRaw material turnover ratio = ---------------------------------------------
Average stock of raw materials
Month in the yearAverage consumption period = -----------------------------------------
Raw material turnover ratio
Table: 4.4
Raw material turnover ratio
(Rs. in lakhs)
Year Raw material consumed
Average stock of raw materials
Ratio Average consumption period
1993-94 8158 965 8.45 43 days
1994-95 10684 2067 5.17 70 days
1995-96 11261 3814 2.95 123 days
1996-97 9806 1316 7.45 48 days
1997-98 9895 1160 8.53 42 days
Interpretation :
The ratio gives the number of times the raw materials is replaced during a
given period. Higher the ratio better the performance of the company for it has
manged to operate with a relatively small average loading up of funds commonly.
The Lakshmi mills company ltd., kept satisfactory raw material turnover.
5 Finished goods turnover ratio :
Finished goods turnover ratio is the number of times the finished goods have
been turned into sales during a period and the time taken for such process.
Cost of productionFinished goods turnover ratio = ------------------------------------
Average finished goods
365 daysAverage period for sales = ------------------------------------------
Finished goods turnover ratio
Table: 4.5
Finished goods turn over ratio
(Rs. in lakhs)
Year Cost of production
Average of finished goods
Ratio Average sales period
1993-94 17219 1286 13.4 27 days
1994-95 16681 1657 10 37 days
1995-96 13055 1798 7.3 50 days
1996-97 16452 1637 10 37 days
1997-98 17225 1667 10.3 35 days
Interpretation :
Here the replacement of finished goods during the year 1993-94 was high. In
the consequent year it declined replacement of finished goods at an average of 37
days during the last 5 year. It is a satisfactory level.
6. Net profit ratio :
This ratio of net profit to sales essentially expenses the cost price
effectiveness of the operation. A high net profit would ensure adequate return to the
owners as well as enable the firm to withstand advances economic conditions when
selling price is declining cost of production is raising demand for product is falling.
Net profitNet profit ratio = ----------------- x 100
Sales
Table: 4.6
Net profit ratio
(Rs. in lakhs)
Year Net profit Sales Ratio
1993-94 270.65 15494 1.75%
1994-95 372.34 20125 1.85%
1995-96 113.99 20866 0.55%
1996-97 125.83 19834 0.63%
1997-98 424.61 21078 2.01%
Interpretation :
The company earn low profit in the year 1995-96. The next year 1996-97
sales Rs.1032 lakhs decreased but profit is sufficient level compared with 1995-
96. 1997-98 profit and sales in sufficient level.
7. Earning per share :
If we adopt minimising earnings per share as the financial objective of the
firm, this will also not ensure the minimisation of the owner of economic welfare. If
the market value is not function of EPS, than maxiamtion of the latter will not
necessary result in the highest possible price for the company’s share.
Profit after TaxEarning per share = -------------------------------
No. of equity shares
Table: 4.7
Earning per share
(Rs. in lakhs)
Year Profit after Tax No. of equity shares EPS
1993-94 27065000 463700 58.37
1994-95 37234000 695550 53.53
1995-96 11399000 695550 16.39
1996-97 12583000 695550 18.09
1997-98 42461000 695550 61.05
Interpretation :
EPS was decreasing 1993-94 to 1995-96 respectively. The last two years
company’s EPS was increasing respectively . 1997-98 EPS was sufficient level and
profit was increased to 4,24,61,000
8. Profit margin ratio :
It is arrived at after dividing profits by sales. If we divide the gross profit by
sales the ratio is called the gross profit margin. But when operating profit is divided
by sales the ratio is known as profit margin.
EBITProfit margin ratio = ----------- x 100
Sales
Table 4.8
Profit margin ratio
` (Rs. in lakhs)
Year EBIT Sales Profit margin ratio
1993-94 950 15494 6.13%
1994-95 1220 20125 6.06%
1995-96 1351 20866 6.48%
1996-97 1485 19834 7.49%
1997-98 1720 21078 8.16%
Interpretation :
From the above analysis we can see that the profit was increasing the every
year and earning before interest and tax also increasing in the sales turnover and it
affects the operations of the firm.
9. Return on share holders fund :
Common share holders are entitled to the residual profit. The rate of common
dividend is not fixed the earnings may be distributed to them or retained in the
profit. Return on share holders fund indicates how well the firm used the resources
of owners.
EBITReturn on share holders fund = ----------------------------
Share holders fund
Table : 4.9
Return on share holders fund
(Rs. in lakhs)
Year EBIT Share holders fund Return on share holders fund
1993-94
950 2423 0.39
1994-95
1220 2680 0.46
1995-96
1351 2616 0.52
1996-97
1485 2619 0.57
1997-98
1720 2921 0.59
Interpretation :
From the analysis we can say that the company maintained a good return to
the share holders fund. It creates the good name for the company between the
share holders. So the company earn more profit in coming years to turn the share
holders fund.
10. Working capital leverage
The working capital leverage of the last five year for a 25% reduction in
current assets.
Current assetsWorking capital leverage = ----------------------------------------------------
Total assets - 25 % of Current assets
Table : 4.10
Working capital leverage
(Rs in Lakhs)
Year Fixed Assets Current Assets
Non - current Assets
Total assets
Ratio
1993-94 2247 6513 237 8997 0.88
1994-95 2665 9000 296 11961 0.93
1995-96 3157 10835 423 14416 0.93
1996-97 3033 8054 693 11780 0.82
1997-98 2817 8475 902 12194 0.84
Interpretation :
Looking at the working capital leverage of the last five year. 1995 and 1996
year working capital leverage is the highest level in the last five year position. We
can say that the sensitivity of earnings for changes in the level of current assets of
1998 is for greater than that of 1997.
CHAPTER 5
FINDINGS
1. Here the financial position means only the working captial position of
finance. The Lakshmi mills have a satisfactory financial position indicates
the ability of the company to pay off the current liabilities within a short
span of time.
2. Current ratio is another indicater of short term financial position of a
concern. If one company keeps 1:1 company’s short term financial position
is good. Here the Lakshmi mills company ltd., keeps the ratio more than
one all the five years. This is an satisfactory position of Lakshmi mills
company ltd.,
3. The Lakshmi mills company ltd., an average of 15% of its current assets in
the form of debtors.
4. The current assets most of the parts is covered by the inventory. The stock
holding of the Lakshmi mills company ltd., is high through put the five
years more than 24% of the current assets were kept in the form of stock.
From the analysing stock shows increasing in the year 1995 and then
decresing in the year 1996 & 1997. The inventory turnover ratio shows an
upward and also downward trend.
5. The Lakshmi mills company ltd., is maintaining a good working capital
position through out the last two years out of 4 years. During the year
1993-94 company’s working capital turnover ratio was very high (4.60) and
during the year 1993-94 company utilised its working capital properly and
during that year company sales was 15494 lakhs with a working capital of
3365 lakhs.
6. The working capital helped in the lakshmi mills company ltd in the way of
Inventory, sundry debtors, cash & bank balance and sundry creditors.
Assessment of working capital
Estimate for the year ending (Rs. in Lakhs)
Particulars 1994 1995 1996 1997 1998
1. Gross sales 15494 20125 20866 19834 21078
2. Cost of sales
i) Raw materials 11261 10684 8159 9806 9895
ii) Salaries & wages 2205 2123 2023 2637 2633
iii) Power & fuel 1955 1737 1262 2026 2507
iv) Store consumed 633 640 493 633 722
v) Repairs 420 654 353 485 534
vi) Processing charges 73 294 236 45 83
vii) Other expenditure 206 210 140 308 364
viii)Depreciation 491 447 409 504 499
Sub Total 17244 16789 13075 16444 17237
Add : Opening stock in process 221 246 354 374 366
17465 17035 13429 16818 17603
Less : Closing stock in progress 246 354 374 366 378
Cost of Production 17219 16681 13055 16452 17225
Add : Opening stock of finished goods
1089 1482 1832 1764 1509
18308 18163 14887 18216 18734
Less : Closing stock of finished goods
1482 1832 1764 1509 1824
Total Cost of Sales 16826 16331 13123 16707 16910
Particulars 1994 1995 1996 1997 1998
3. Selling & administration expenses
897 1189 958 915 1049
Total 17723 17520 14081 17622 17959
Operating profit 1457 1378 1381 1554 1790
less:
Interest 579 778 1237 1119 948
Graduity 477 127 - - -
Modernisation & Special repairs 31 31 31 69 71
Net profit for the year before taxation
370 442 113 366 771
Less :
1. Bonus relating to previous year
- - - 201 240
2. Expenses relating to earlier year
- - - 16 -
3. Taxation 100 70 - 23 107
270 372 113 126 424
As per balance sheet as at
(Rs. In lakhs)
Particulars 1994 1995 1996 1997 1998
Liabilities
Current liabilities
1. Sundry creditors 1393 344 2106 1410 1280
2. Sales tax ( Net) 4 28 28 [38] 14
3. Unclaimed dividend 3 3 5 5 5
4. provisions 751 467 376 430 426
5. Other Liabilities 997 1209 1054 716 731
Total Current Liabilities 3148 2051 3569 2523 2456
Term liabilities :
1. Debenture 298 1198 1198 1198 1073
2. Loans from financial institutions 588 1161 834 295 -
3. Loan from banks 2243 4179 5763 4785 5289
4. Unclaimed loan 296 692 435 360 454
Total Term Liabilities 3425 7230 8230 6638 6816
Particulars 1994 1995 1996 1997 1998
Net worth
1. Ordinary share capital 464 696 696 696 696
2. Capital reserve 47 47 47 9 9
3. General reserve 1175 1400 1415 1430 1462
4. Other reserve 738 537 459 484 755
Total Net Worth 2424 2680 2617 2619 2922
Total Liabilities 8997 11961 14416 11780 12194
Assets :
Current Assets :
1. Cash 4 7 5 4 5
2. Cash at bank 1309 1626 1669 1808 1869
3. Raw materials 965 2067 3814 1316 1160
4. Stock in process 246 354 374 366 378
5. Other inventories 1700 2527 2036 1806 2071
6. Sundry debtors 1039 1237 1493 1237 1283
7. Deposit with ltd company 20 20 20 20 20
Particulars 1994 1995 1996 1997 1998
8. Other deposits 161 164 218 223 235
9. Advance tax 214 329 305 54 32
10. Income receivable 66 40 89 192 82
11. Other current assets 789 629 812 1028 1340
Total Current Assets 6513 9000 10835 8054 8475
Fixed assets
Gross Block 6423 7095 8038 8366 8584
Less : Depreciation 4176 4430 4881 5333 5767
Net Block 2247 2665 3157 3033 2817
Non Current Assets:
1. Capital work in process 9 36 30 58 -
2. Investment 133 199 171 211 211
3. Miscellaneous Expenditure
a) Modernisation special repairs 91 61 222 314 602
b) Differed Revenue Expenses 4 - - 110 89
Total Assets 8997 11961 14416 11780 1219
4
Net working capital 3365 6949 7266 5531 6019
CONTENTS
Chapter No. Title
SUB-TITLE
LIST OF TABLE
LIST OF FIGURES
ACKNOWLEDGEMENT
I INTRODUCTION
II WORKING CAPITAL MANAGEMENT
III ANALYSIS OF WORKING CAPITAL
IV WORKING CAPITAL RATIOS
V FINDINGS
VI SUGGESTIONS
APPENDIX
BIBLIOGRAPHY
SUB TITLES
CHAPTER I
Introduction
No. Particulars
1. Working capital
2. Research methodology
3. Objectives of the study
4. Scope and limitations of study
5. Profile of the organisation
CHAPTER II
Working capital management
No. Particulars
1. Classification of working capital
2. Objectives of working capital
3. Components of working capital
4. Factors determining the working capital requirements
5. Needs for working capital
6. Estimating working capital needs
7. Financing current assets
CHAPTER 6
SUGGESTIONS
1. The lakshmi mills company ltd is having a satisfactory working capital
pssition. So the company can pay its current liabilities within a short period.
2. The company can maintain the current ratio in the same level (1:3) for the
coming years.
3. Even though the company is having a good size of working capital,it can
increase the current assets to achieve a exellent working capital.
4. The inventory turnover ratio shows an upward and also downward trend. So
the company can try to get finished goods turnover within a 35 days.
5. Generally, the last four years (1995 to 1998) Working Capital position is
good. The company should continue this Working capital position.
BIBLIOGRAPHY
1. Financial Management - I. M. Pandey.
2. Principles of Management Accounting - S. N. Maheshwari.
3. Financial Management - S. P. Jain & Narang
4. Financial Management - Sharma
5. Financial Management - P.V.Kulkarni
6. Management Accounting - R.K.Sharma & Gupta
LIST OF figures
No. Particulars
4.1 Current ratio
4.2 Working capital turnover ratio
4.3 Inventory turnover ratio
4.4 Rawmaterial turnover ratio
4.5 Finished goods turnover ratio
4.6 Net profit ratio
4.7 Earning per share
4.8 Profit margin ratio
4.9 Return on share holders fund
4.10 Working capital leverage
LIST OF TABLES
No. Particulars
3.1 Size of the Working Capital
3.2 Composition of Working Capital
4.1 Current ratio
4.2 Working capital turnover ratio
4.3 Inventory turnover ratio
4.4 Rawmaterial turnover ratio
4.5 Finished goods turnover ratio
4.6 Net profit ratio
4.7 Earning per share
4.8 Profit margin ratio
4.9 Return on share holders fund
4.10 Working capital leverage
KSR Institute of ManagementKSR COLLEGE OF ARTS & SCIENCE
(Affiliated to University of Madras)
CERTIFICATE
This is to certify that the project report is entitled “A DETAIL STUDY ON
WORKING CAPITAL MANAGEMENT IN LAKSHMI MILLS COMPANY LTD.,
COIMBATORE “ is a bonafide record of work done by A.RAJENDRAN, Reg.
No. MB70677 during the academic year 1998 - 99.
Faculty Guide Director
Submitted for Viva-voce Examination held on ..........................
Internal Examiner External Examiner
ACKNOWLEDGEMENT
My overwhelming and delightful thanks to our winsome Correspondent Dr.
Lion K.S.RANGASAMY, MJF for providing me an opportunity to undergo Masters
Degree in Business Administration in this college.
I take this opportunity to thank Prof. A.Y.NARASIMHAM, B.Sc., B.E., MBA
(USA), for having permitted me to undertake this project work.
I express my sincere gratitude to my project guide Mr.D.S.SELVAKUMAR,
M.Com., M.Ed., M.Phil., for his valuable guidance and assistance throughout my
endeavour.
I am deeply indebted to Mr. V. PRABAKARAN, Account Department in
Lakshmi Mills Company Limited, Coimbatore for his whole hearted co-operation and
support which played a vital role in a successful completion of this project work.
A. Rajendran
DECLARATION
I, A. RAJENDRAN, Register No. MB 70677 declare that the project report on
“A DETAIL STUDY ON WORKING CAPITAL MANAGEMENT IN LAKSHMI MILLS
COMPANY LTD., COIMBATORE “, is the result of the original work done by me
and to the best of my knowledge. A similar work has not been submitted earlier to
the University of Madras or any other institution for the fulfilment of the
requirements of a course of study. This project is submitted on partial fulfilment of
the requirement of all award of the Degree of MASTER OF BUSINESS
ADMINISTRATION (M.B.A) of UniversZity of Madras
Place : Signature
Date :
(A. RAJENDRAN)