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This is to certify that Ankit Goel , a student of Amity International Business School, Noida, undertook a project on Working Capital Analysis at Dharampal Satyapal Ltd. from 1st May09 to 30th June09.

Mr. Ankit Goel has successfully completed the project under the guidance of Mr. Neeraj Goel. He is a sincere and hard-working student with pleasant manners.

We wish all success in his future endeavors.

Signature with date (Name) (Designation) (Company Name)


This is to certify that Mr. Ankit Goel, a student of Post Graduate Degree in MBA-IB (2008-2010), Amity International Business School, Noida has worked in the Dharampal Satyapal Ltd. under the able guidance and supervision of Mr.Neeraj Goel, (Manager finance), Company Birla Power Ltd.

The period for which he was on training was for 8 weeks, starting from 1st May09 to 30th June09. This Summer Internship report has the requisite standard for the partial fulfillment the Post Graduate Degree in International Business. To the best of our, knowledge no part of this report has been reproduced from any other report and the contents are based on original research.




( Student )


I express my sincere gratitude to my industry guide Mr.Neeraj Goel, (Manager Finance), (Company) Birla Power Ltd, for his able guidance, continuous support and cooperation throughout my project, without which the present work would not have been possible.

I would also like to thank the entire team of Dharamal Satyapal Ltd, for the constant support and help in the successful completion of my project.

Also, I am thankful to my faculty guide Col.Mohan of my institute, for his continued guidance and invaluable encouragement.

Signature (Student)

TABLE OF CONTENTSCHAPTER NO. CH.-1.0 Ch.-2.0 2.1 2.2 2.3 2.4 2.5 Ch.-3.0 3.1 Ch.-4.0 4.1 Ch.-5.0 Ch.-6.0 Ch.7.0 Ch.-8.0 Ch.-9.0 9.1 Ch.-10.0 Ch.-11.0 SUBJECT Executive Summary Research Methodology Primary Objectives Methodology Schedule Scope of study Limitations Company Profile Industry Profile Evaluation of financial position comparative studies Critical Review of Literature Findings & Analysis & Observations Recommendations Bibliography Annexture Tables Case Study Sypnosis of project


The management of current assets deals with determination, maintenance, control and monitoring the level of all the individual current assets. Current assets are referred to as assets, which can normally be converted into cash within one year therefore investment in current assets should be just adequate no more no less to the needs of the business. Excessive investments in current assets should be avoided, because it impairs firms profitability, as idle investment in current assets and are non-productive and so they can earn nothing, on the other hand inadequate amount of working capital can threaten solvency of the firm, if it fails to meet its current obligations. Thus the working capital is a qualitative concept 1. It indicates the liquidity position of the firm and2. It suggests the extent to which working capital needs may be

financed by permanent source of fund. Current assets should be sufficiently in excess of current liabilities to constitute a margin or buffer for maturing obligation within the ordinary cycle of business. The basic learning objective behind the study was

Computation of Working Capital Management Operating Cycle of the firm Financial plan estimated for 2007-2008 and projected for 20082009 Working capital credit limits Ratio analysis

On the basis of above calculations following conclusions can be made

Birla power ltd. has both long term as well as short term sources for current asset financing. It implies that company follows matching principle for raising funds. Right now company is following aggressive policy, which means that company is maintaining lower ratio of current assets to fixed assets.

Birla power solutions ltd has high collection peri0od which shows that money has been unnecessarily blocked with the debtors.

So to overcome the above problems following are the recommendations Increase the proportion of current assets over fixed assets to come to proper proportion of current assets and fixed assets as per the basic norms and guidelines. Company should shift from aggressive policy to conservative current assets policy. Company should reduce the holiday period else the company will have to pay high carrying cost.


The project is aimed at evaluating the financial status of Dharampal Satyapal Ltd and then doing the comparative analysis with its competitors Studying the working capital management at Dharampal Satyapal Ltd. and estimating the working capital requirements for 2007-2008 and then forecasting for 2008-2009 To find out if there is any relationship between the working capital, sales and current assets of Birla Power

METHODOLOGY The methodology to be adopted for the project is explained as under:

1. The initial step of the project was studying about the company and then evaluating the financial position of the company on the basis of ratio analysis.2. Comparing the firms financial position with respect to its

competitors i.e. Hindustan Unilever Ltd., ITC and Kothari Products with the help of following ratios ,3. The project will focus on the study of overall working capital

Liquidity ratios Solvency/Leveraging ratios Coverage ratios Activity/turnover ratios Profitability ratios Investors ratios

management at the organizations, for which the following study and analysis will be undertaken: i ) This project is aimed to estimate the operating plan for the year 2007-2008 ii ) This will also include the calculations and analysis of the operating cycle for the company. Iii ) Study of C M A form and to prepare for the current year. Iv) It will also include the ratio analysis of the financial statement so that the profitability and liquidity trade off can be analyzed.

SCHEDULEThe complete project will be for duration of 8 weeks. The project has been divided into 2 stages with approximate time period allotted to each stage. Both the stages along with their approximate timelines are as follows:

STAGE 1 (APPROX 2 WEEKS) The study of companys financial position by doing ratio analysis of the financial statement so that the profitability and liquidity condition of the organization can be studied closely and then comparing it with the financial statements of Coleman Cable Inc, Beacon Power Corp, Powell Industries.

STAGE 2 (APPROX 6 WEEKS) The study of the overall working capital management of the company will be the first stage. Under this stage the operating plan will be prepared and the study and analysis of the C M A form will be done. This will include the estimation of working capital requirement for 2007-2008, forecasting for 2008-2009 and regression analysis and T test for finding out the relationship between working capital, sales and current assets. SCOPE OF THE STUDY Studying working capital management of the Birla Power ltd and benchmarking it with 3 of its competitors. LIMITATIONS In spite of my continued efforts to make the project as accurate and wide in scope as possible, certain limitations are becoming evident while implementing the project. These limitations cannot be removed and have to be accepted as permanent constraints in implementing the project. Some limitations, which have been identified, by me are:1. Generalizations and calculated assumptions had to be

made in some areas while analyzing the financial statements, ratios etc. due to non-availability of complete information. 2. The segment wise and product wise study of the various product segments and units of the company have been

excluded from the scope of the project due to data and time constraints.

COMPANY PROFILE Dharampal Satyapal Group (DS Group) is more than Rs.1400 crores diversified conglomerate, which is committed towards high quality products & credited with several innovations over last seven decades. The sagacity to weave its business around consumer needs has conferred DS Group with a distinct value. Efficient capital structure, cutting edge technology, operational discipline and a widespread distribution network, have together attributed to enhance Brand DS, and enabled the organization to deliver continued growth in all areas of operation. Its undeterred pursuit for Quality & Innovation has led the Company to progress on a path of growth. The Group has consolidated its position into diversified sectors like FMCG, Packaging, Hospitality, Rubber thread, Cement and other businesses. Beginning its journey with Tobacco, DS Group successfully ventured into the arena of Foods & Beverages, alluring the consumers with a wide range of beverages, spices, and ready-to-eat snacks under the brand Catch. While Catch Natural Spring Water and its variants continue getting great response from consumers, Catch Salt & Pepper tabletop dispensers hold their supremacy as Indias first rotatory table top dispensers. Catch Spices excessively continues to be

connoisseurs favorites. The latest products to be introduced under catch brand are Catch Jal Jeera & Catch Nibu Pani. In the Mouth Freshener Category, non-tobacco, Rajnigandha rules the market as the worlds largest selling premium pan masala. Pass Pass has created a new product category all-together as Indias first ever branded all natural non supari assorted mouth freshener. Taking forward the Indian tradition of eating and serving mouth fresheners after meals, Rajnigandha, the premium mouth freshener brand, has introduced a mild new flavour, Meetha Mazaa- the Indian Mouth freshener. Reinforcing the emphasis on the quality at all levels, Meetha Mazaa is revitalizing.

Recognizing the immense potential in the Hospitality Segment, DS Group forayed into this segment with The Manu Maharani at Nainital, in 2001. The Group acquired the Airport Hotel at Kolkata. The hotel is currently being revamped and renovated and will soon emerge as an International standard destination with Five Star Hotel, a budget hotel & large Convention Centre, in addition to a sprawling Commercial area. The five star hotel building projects have also commenced in Guwahati and Jaipur. In addition to the above ventures, land has been acquired in cities like Udaipur, Shimla, Mussorie, Corbett Park, Manali and Goa with plans to set up hotels & resorts. With a boom in tourism sector, the group is all set to emerge as one of the leading players in the hospitality segment. Further pursuing its quest for diversification, DS Group has launched colossal projects in the Packaging sector. DS Canpac Ltd., an eco friendly revolutionary packaging technology, was launched in India in association with Canpac a leading Switzerland based packaging major. A state-of-the-art plant at Noida offers packaging solutions to other FMCG marketers as well as exporters of food products. The group has also commissioned an ultra modern Flexible Packaging Unit in Bonda. A heat resistant latex Rubber thread plant has been set up at Agartala to produce international quality rubber threads. Latex rubber threads are made from natural rubber applying the most sophisticated

European technology. Following close behind is a first-of-its kind Steel sheets plant coming up soon in the North East to produce cold rolled sheets, CRCA and galvanized steel sheets. In line with its vision of diversification, DS Group has entered the fast growing Cement Industry. The Project is located at the Khliehriat sub division of District Jaintia Hills in Meghalaya. The capacity of the upcoming plant will be approximately 1 million tons Per Annum and will have a captive power plant based on coal. This will be one of the largest investments on new projects, by the Group.

As a significant step in Infrastructure Sector, DS Group has signed a MOA with state Govt. of Meghalaya to set up a 240 MW Thermal Power Plant, based on coal. The group has manufacturing units in Noida, Delhi, Baroitwala in HP, Kullu, Assam and Tripura. DS Group boasts of World Class Facilities spread across the length and breadth of the country, to execute its manufacturing processes with full adherence to international standards of quality. Every stage of manufacturing is monitored with utmost care and attention. The company also has a widespread distribution network supported by dealers and retailers. The group constantly upgrades its strength through dealer network expansion, up -gradation of production facilities and bringing greater consumer orientation, while maintaining its commitments to high quality, innovation and consumer value carried forward in all its diversification endeavors. DS Group constantly nurtures its responsibility as a committed corporate citizen, by regarding Corporate Social Responsibility as an integral part of its Business Objectives.The Company has been working in Assam and Tripura, on a wide range of CSR programmes ranging from education to health and making tribal and ethnic communities self reliant. Under the CSR initiatives the group is renovating local schools, setting up a State level College and developing heritage properties and construction of an eco lodge to be owned and run by the tribal community.

While DS Group pursues leadership in its business spheres; it simultaneously endeavors to promote common welfare through multidimensional activities to work towards an all round development of the society DS Group makes constant improvisations in all its manufacturing components, leading to the making of a perfect product. Be it the sourcing of raw materials, the process of production, or packaging of the final product, R&D remains the crux of DS Philosophy. Quality and Innovation are the two core values that DS Group subsists on. In its constant effort towards building trust among its audience, the Group works strongly on the principles of integrity, dedication, resourcefulness and commitment. A wide array of skills and substantial depth of experience has not only led the Group to maintain its leadership in its traditional businesses but has also resulted in gradually gaining market in its relatively nascent forays.

The Stirring Saga of an EnterpriseIn the early 20th century, when trade and commerce had not witnessed the advent of brands and marketing warfare in India, Shri Dharampalji the founder of DS Group, set up a small perfumery shop in Chandni Chowk, Delhi in the year 1929. The urge to create a business around consumer tastes and preferences led Dharampalji to innovate quality products. His sagacity revolutionized the market of chewing tobacco and the shop in Chandni Chowk became renowned not only in Delhi but even amongst the connoisseurs of tobacco in other parts of India and the world. Blending modernity, technology and tradition, Dharampaljis son Satyapalji brought the dawn of a new era an era that saw a revolution. Satyapalji inherited qualities of high virtues, innovation and aspiration for being the best in the business. His in-depth knowledge of perfumes honoured him the title of

Sugandhi (perfumer). He is credited with blending tobacco with various exquisite fragrances. He is also known for bringing the element of quality and research hitherto unknown in this category. Under the able stewardship of Satyapalji, the nations first ever-branded chewing tobacco BABA was launched in 1964 which became an instant success and widely popular in its category. And what followed later was an array of premium brands like Tulsi and a host of others which have established their leadership in their own category and created new markets in its wake. Continuing the fervour of innovation and quality, the Group set new benchmarks in Foods & Beverages. Innovative tabletop sprinklers changed the way Indian households had been enjoying salt and spices. Be it Catch spices or Catch Beverages, today Catch stands for international quality and convenience. Mouth fresheners like Rajnigandha and Pass Pass created new offerings and established new categories. The Group has also ventured into a rapidly growing hospitality sector with extensive five star properties in the larger cities and boutique & heritage properties at tourist destinations. The Group has also successfully ventured into Packaging, Rubber Thread, Steel in the last few years. Since the launch of BABA, the Group has never looked back, reaching for milestones year after year. Thus, evolving from a single product to multiple brands, DS has successfully woven over eight decades legend of innovation and enterprise. And the quest for innovation continues..

Establishing Benchmarks with Innovative First First to offer saffron flavoured chewing tobacco in the world

First to launch branded chewing tobacco in India in metal packaging

First and only chewing tobacco company in India to get ISO 9001:2000 certification

First to introduce various kinds of spices in one-time use packaging

First to launch free flowing salt in revolutionary table top rotatory dispensers in India

First to introduce 100 per cent biodegradable, composite cans packs which are pilfer proof, rust proof and leak proof using brine and through vaccum evaporation process for food products

First to introduce electronically beaten finest malleable silver foils in India.

First in India to bottle natural spring water which has been awarded NSF certification from FDA, US : a hallmark of quality and purity

First to introduce soda processed with natural spring water

First to introduce zero calorie tonic water

First to launch 100% herbal mouth freshener - Pass Pass

Corporate Office

DS Group A-85, Sector 2, Noida 201301 Ph : 0120 4032200 , 3083333 Fax : 0120 2522592 email : [email protected]

Management Team

Overview of FMCG Industry

The Fast Moving Consumer Goods (FMCG) has to do with those consumables which are regularly being consumed. Among the first activities of the FMCG industry there is selling, marketing, financing, purchasing, and so on. Recently this industry has also launched in operations, supply chain, production, general management, etc. The Indian FMCG sector is the fourth largest in the economy and has a market size of US$13.1 billion. Well-established distribution networks, as well as intense competition between the organised and unorganised segments are the characteristics of this sector. FMCG in India has a strong and competitive MNC presence across the entire value chain. It has been predicted that the FMCG market will reach to US$ 33.4 billion in 2015 from US $ billion 11.6 in 2003. The middle class and the rural segments of the Indian population are the most promising market for FMCG, and give brand makers the opportunity to convert them to branded products. Most of the product categories like jams, toothpaste, skin care, shampoos, etc, in India, have low per capita consumption as well as low penetration level, but the potential for growth is huge. The Indian Economy is surging ahead by leaps and bounds, keeping pace with rapid urbanization, increased literacy levels, and rising per capita income. The big firms are growing bigger and small-time companies are catching up as well. According to the study conducted by AC Nielsen, 62 of the top 100 brands are owned by MNCs, and the balance by Indian companies. Fifteen companies own these 62 brands, and 27 of these are owned by Hindustan Lever. Pepsi is at number three followed by Thums Up. Britannia takes the fifth place, followed by Colgate (6), Nirma (7), Coca-Cola (8) and Parle (9). These are figures the soft drink and cigarette companies have always shied away from revealing. Personal care, cigarettes, and soft drinks are the three biggest categories in FMCG. Between them, they account for 35 of the top 100 brands.

Exhibit I THE TOP 10 COMPANIES IN FMCG SECTOR S. NO. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. Companies Hindustan Unilever Ltd. ITC (Indian Tobacco Company) Nestl India GCMMF (AMUL) Dabur India Asian Paints (India) Cadbury India Britannia Industries Procter & Gamble Hygiene and Health Care Marico Industries

Source: The companies mentioned in Exhibit I, are the leaders in their respective sectors. The personal care category has the largest number of brands, i.e., 21, inclusive of Lux, Lifebuoy, Fair and Lovely, Vicks, and Ponds. There are 11 HLL brands in the 21, aggregating Rs. 3,799 crore or 54% of the personal care category. Cigarettes account for 17% of the top 100 FMCG sales, and just below the personal care category. ITC alone accounts for 60% volume market share and 70% by value of all filter cigarettes in India. The foods category in FMCG is gaining popularity with a swing of launches by HLL, ITC, Godrej, and others. This category has 18 major brands, aggregating Rs. 4,637 crore. Nestle and Amul slug it out in the powders segment. The food category has also seen innovations like softies in ice creams, chapattis by HLL, ready to eat rice by HLL and pizzas by both GCMMF and Godrej Pillsbury. This category seems to

have faster development than the stagnating personal care category. Amul, India's largest foods company, has a good presence in the food category with its ice-creams, curd, milk, butter, cheese, and so on. Britannia also ranks in the top 100 FMCG brands, dominates the biscuits category and has launched a series of products at various prices. In the household care category (like mosquito repellents), Godrej and Reckitt are two players. Goodknight from Godrej, is worth above Rs 217 crore, followed by Reckitt's Mortein at Rs 149 crore. In the shampoo category, HLL's Clinic and Sunsilk make it to the top 100, although P&G's Head and Shoulders and Pantene are also trying hard to be positioned on top. Clinic is nearly double the size of Sunsilk. Dabur is among the top five FMCG companies in India and is a herbal specialist. With a turnover of Rs. 19 billion (approx. US$ 420 million) in 2005-2006, Dabur has brands like Dabur Amla, Dabur Chyawanprash, Vatika, Hajmola and Real. Asian Paints is enjoying a formidable presence in the Indian sub-continent, Southeast Asia, Far East, Middle East, South Pacific, Caribbean, Africa and Europe. Asian Paints is India's largest paint company, with a turnover of Rs.22.6 billion (around USD 513 million). Forbes Global magazine, USA, ranked Asian Paints among the 200 Best Small Companies in the World Cadbury India is the market leader in the chocolate confectionery market with a 70% market share and is ranked number two in the total food drinks market. Its popular brands include Cadbury's Dairy Milk, 5 Star, Eclairs, and Gems. The Rs.15.6 billion (USD 380 Million) Marico is a leading Indian group in consumer products and services in the Global Beauty and Wellness space. Outlook There is a huge growth potential for all the FMCG companies as the per capita consumption of almost all products in the country is amongst the lowest in the world. Again the demand or prospect could be increased further if these companies can change the consumer's mindset and offer new generation products. Earlier, Indian consumers were using non-branded apparel, but today, clothes of different brands are available and the same consumers are willing to pay more for branded quality clothes. It's the quality, promotion and innovation of products, which can drive many sectors.

FINANCIAL ANALYSISLIQUIDITY RATIOS (SHORT- TERM LIQUIDITY)Liquidity ratios measure the short term solvency, i.e., the firms ability to pay its current dues and also indicate the efficiency with which working capital is being used. Commercial banks and short-term creditors may be basically interested in the ratios under this group. They comprise of following ratios: CURRENT RATIO OR WORKING CAPITAL RATIO

Current ratio is a relationship of current assets to current liabilities. current assets means the assets that are either in the form of cash or cash equivalents or can be converted into cash or cash equivalents in short time(say within a year) like cash, bank balances, marketable securities, sundry debtors, stock, bills receivables, prepaid expenses. Current liabilities means liabilities repayable in as short time like sundry creditors, bills payable, outstanding expenses, bank overdraft. Computation. The ratio is calculated as follows: Current ratio = Current assets

Current liabilities

Objective. The ratio is mainly used to give an idea of the company's ability to pay back its short-term liabilities with its short-term assets. The higher the current ratio, the more capable the company is of paying its obligations. A ratio under 1 suggests that the company would be unable to pay off its obligations if they came due at that point. While this shows the company is not in good financial health, it does not necessarily mean that it will go bankrupt - as there are many ways to access financing - but it is definitely not a good sign. The current ratio can give a sense of the efficiency of a company's operating cycle or its ability to turn its product into cash. An acceptable current ratio varies by industry. For most industrial companies 1.5 is an acceptable CR. A standard CR for a healthy business is close to 2. However, a blind comparison of actual current ratio with the standard current ratio may lead to unrealistic conclusions. A very high ratio indicates idleness of funds, poor investment policies of the management and poor inventory control, while a lower ratio indicates lack of liquidity and shortage of working capital.

Current ratio 2008

DS Group 2.35

ITC 1.60

HUL 0.66

Kothari products 3.48


DS Group is in a better position to meet its short term obligations as can be seen by a current ratio. This is mainly due to high proportion of Loans & Advances and a significantly low proportion of Debtors. The CR in case of HUL is less than 1 implying that it would not be able to meet its obligations if they fall due at that time since current liabilities exceed current assets which is not a healthy proposition. The ratio is acceptable in case of ITC. For Kothari product the ratio is high mainly due to significantly high debtors and Loans Advances.

Liquid ratio or Quick ratio or Acid test ratioLiquid ratio is a relationship of liquid assets with current liabilities. It is fairly stringent measure of liquidity. Liquid assets are those assets which are either in the form of cash or cash equivalents or can be converted into cash within a short period. Liquid assets are computed by deducting stock and prepaid expenses from the current assets. Stock is excluded from liquid assets because it may take some time before it is converted into cash. Similarly, prepaid expenses do not provide cash at all and are thus, excluded from liquid assets. Computation. The ratio is calculated is as under: Liquid ratio= Liquid assets Current liabilities Objective.

The ratio of current assets less inventories to total current liabilities. This ratio is the most stringent measure of how well the company is covering its short-term obligations, since the ratio only considers that part of current assets which can be turned into cash immediately (thus the exclusion of inventories). The ratio tells creditors how much of the company's short term debt can be met by selling all the company's liquid assets at very short notice. also called acid-test ratio. The current ratio does not indicate adequately the ability of the enterprise to discharge the current liabilities as and when they fall due. Liquid ratio is considered as a refinement of current ratio as non-liquid portion of current assets is eliminated to calculate the liquid assets. Thus it is a better indicator of liquidity. A quick ratio of 1:1 is considered standard and ideal, since for every rupee of current liabilities, there is a rupee of quick assets. A decline in the liquid ratio indicates over-trading, which, if serious, may land the company in difficulties.

Quick Ratio 2008

DS Group 1.91

ITC 0.67

HUL 0.27

Kothari products 3.35


DS Group is better off than ITC and HUL in meeting the short -term debts by selling all liquid assets of the company at a very short notice. May be that ITC and HUL are indulged in over-trading. The company should try to keep ratio greater than 1. Kothari product is also in an excellent position with a high Quick R

SOLVENCY/LEVERAGE RATIOS (LONG-TERM SOLVENCY)The term solvency implies ability of an enterprise to meet its long term indebt ness and thus, solvency ratios convey the long term financial prospects of the company. The shareholders, debenture holders and other lenders of the long-term finance/term loans may be basically interested in the ratios falling under this group. Following are the different solvency ratios:

Debt-equity RatioThe debt-equity ratio is worked out to ascertain soundness of the long term financial policies of the firm. This ratio expresses a relationship between debt (external equities) and the equity (internal equities). Debt means long-term loans, i.e., debentures, public deposits, loans (long term) from financial institutions. Equity means shareholders funds, i.e., preference share capital, equity share capital, reserves less losses and fictitious assets like preliminary expenses.

Computation. Te ratio is calculated as under: Debt-Equity Ratio = Debt (Long-term Loans) Equity (shareholders funds)

Objective. The objective of this ratio is to arrive at an idea of the amount of capital supplied to the concern by the proprietors and of asset

cushion or cover available to its creditors on liquidation of the organization.equity. It also indicates the extent to which the firm depends upon outsiders for its existence. In other words, it portrays the proportion of total funds acquired by a firm by way of loans. A high debt-equity ratio may indicate that the financial stake of the creditors is more than that of the owners. A very high debtequity ratio may make the proposition of investment in the organization a risky one. While a low ratio indicates safer financial position, a very low ratio may mean that the borrowing capacity of the organization is being underutilized. The debt/equity ratio also depends on the industry in which the company operates. For example, capital-intensive industries such as auto manufacturing tend to have a debt/equity ratio above 2, while personal computer companies have a debt/equity of under 0.5. The readers of financial management may remember that to borrow the funds from outsiders is one of the best possible ways to increase the earnings available to the equity shareholders, basically due to two reasons: a) The expectations of the creditors in the form of return on their investment are comparatively less as compared to the returns expected by the equity shareholders.

b) The return on investment paid to the creditors is a tax-deductible expenditure.Debt Equity Ratio 2008 DS Group 0.21

ITC 0.02

HUL 0.20

InferenceIn ITC there is greater use of capital being supplied by the proprietor. Borrowing capacity is being underutilised. For DS Group and HUL the proportion of debt to shareholders fund is almost same.

However, there is greater use of long term debt in DS as compared to HUL.

Total Assets to Debts RatioThe total asset to debt ratio establishes a relationship between total assets and the total long-term debts. Total assets include fixed as well as current assets. However, fictitious assets like preliminary expenses, underwriting commission, share issue expenses, discount on issue of shares/debentures, etc., and debit balance of profit and loss account are not included. Longterm debts refer to debts that will mature after one year. It includes debentures, bonds, and loans from financial institutions. Computation. This ratio is computed as under: Total Assets to Debt Ratio = Total Assets Long-term debts Objective.

This ratio is computed to measure the safety margin available to the providers of long-term debts. It measures the extent of coverage provided to long term debts by the assets o the firm. A higher ratio represents higher security to lenders for extending the long-term loans to the business. On the other hand, a low ratio represents a risky financial position as it means that the business depends on outside loans for its existence.DS Group 6

Total Assets to Debt Ratio 2008

ITC 79.48

HUL 64.58


In case of DS Group there is greater dependence on outside loans for financing the as which is not a healthy sign. In case of ITC there is greater safety margin available to the providers of long term de In case of HUL it is satisfactory.

Proprietary RatioThe proprietary ratio establishes a relationship between proprietors fund and total assets. Proprietors fund means share capital plus reserves and surplus both of capital and revenue nature. Loss, if any, should be deducted. Funds payable to others should not be added. Computation. This ratio is worked out as follows: Proprietors Ratio = Proprietors Fund or Shareholders Fund Total Assets

Objective. This ratio throws a light on the general financial position of the concern. It shows the extent to which shareholders own the business. This ratio is of particular importance to the creditors as it helps them to ascertain the proportion of shareholders funds in the total assets employed in the firm. The higher this Proprietary ratio denotes that the shareholders have provided the funds to purchase the assets of the concern instead of relying on other sources of funds like bank borrowings, trade creditors and others. However, too high a proprietary ratio say 100% means that management has not effectively utilize cheaper sources of finance like trade and long term creditors. As these sources of funds are cheaper, the inability to make use of it might lead to lower earnings and hence a lower rate of dividend payout.

This ratio is a test of credit strength as too low a proprietary ratio would mean that the enterprise is relying a lot more on its creditors to supply its working capital.

Proprietary Ratio 2008

DS Group 0.35

ITC 0.69

HUL 0.23

Kothari Products 0.89


Highest ratio is for Kothari products indicating shareholders have provided majority of to purchase the assets instead of relying on others sources of funds.

DS Group and HUL are majorly dependent on outsiders for funding the assets / workin For ITC it is on a better side with major funding done by proprietors. DS Group should increase the shareholders fund and try to bring the ratio above 0.50.

Total Debt RatioTotal debt ratio is a relationship of Total Debt of a firm to its Capital Employed. Computation. This ratio is calculated as under. Total Debt Ratio = Debt Capital Employed Objective.

A ratio that indicates what proportion of debt a company has relative to its assets. The measure gives an idea to the leverage of the company along with the potential risks the company faces in terms of its debt-load. A debt ratio of greater than 1 indicates that a company has more debt than assets, meanwhile, a debt ratio of less than 1 indicates that a company has more assets than debt. Used in conjunction with other measures of financial health, the debt ratio can help investors determine a company's level of risk.

Total Debt Ratio 2008

DS Group 0.23

ITC 0.02

HUL 0.07

InferenceDS Group uses a greater proportion of debt as compared to ITC and HUL. ITC has a very low ratio debt ratio indicating there is more reliance on capital provided by the proprietors.

Fixed Assets to Capital Employed RatioFixed assets to Capital employed ratio gives the amount of fixed assets as a percentage of the capital employed of the company.

Computation. This ratio is calculated as follows:

Fixed Assets to Capital Employed = Net Fixed assets x 100 Capital Employed Objective. This ratio indicates the extent to which the long term funds are sunk into fixed assets. It has been an accepted principle of financial management that not only fixed assets should be financed by way of long-term loans but also a part of current assets or working capital should be financed by way of long-term funds, and this part may be in the form of permanent working capital. A very high trend of this ratio may indicate that a major portion of long term funds is utilized for the purpose of fixed assets leaving a small proportion for the investment in the current assets or working capital. A very low trend of this ratio coupled with a constant declining trend of current ratio may indicate an urgent for the introduction of long-term funds for financing the working capital in the business.

Fixed Assets to Capital Employed Ratio 2008

DS Group 0.13



Kothari Products 1

InferenceThis ratio indicates that a major portion of long-term funds is utilized for the purpose of fixed assets leaving a small portion for the

investment in current assets or working capital. In DS group a small proportion of capital employed is used for the purpose of fixed assets.

Inventory to Net Working Capital RatioInventory to Net working Capital Ratio tells how much of a companys funds are tied up in inventory. Computation. The formula is as under:

Inventory to Net Working Capital = Inventory Net Working Capital


Keeping track of inventory levels is crucial to determine the financial health of a business. It is preferable to run a business as little inventory as possible on hand, while not affecting potential sales opportunities. If this ratio is high compared to the average for the industry, it could mean that the business is carrying too much inventory.

Inventory to Net Working Capital Ratio 2008

DS Group 0.33

ITC 1.56


Kothari Products 0.05


In DS Group Inventory form nearly one-third of the working capital unlike in ITC where Inventories form majority of the Working capital which is not a healthy proposition.

PROFITABILITY RATIOSProfit as compared to the capital employed indicated profitability of the concern. A measure of profitability is the overall measure of efficiency. The different profitability ratios are as follows:

Net Profit ratioThe Net profit ratio establishes the relationship between net profit and net sales, expressed in percentage form. Net Profit is derived by deducting administratitive and marketing expenses, finance charges and making adjustments for non-operating expenses and incomes. Computation. This ratio is calculated as follows: Net Profit ratio = Net Profit after taxes x 100 Net Sales Objective. The net profit ratio determines the overall efficiency of the business.It indicates that proportion of sales available to the owners after the consideration of all types of expenses and costs either operating or non-operating or normal or abnormal. A high net profit indicates profitability of the business. Hence, higher the ratio, the better the business is.

Net Profit Ratio

DS Group



Kothari Products






InferenceKothari product has been able to generate a high Net profit ratio among the four. For DS Group the ratio is on a lower side so it should aim to achieve a higher ratio.

COVERAGE RATIOS Interest Coverage RatioThe interest coverage Ratio establishes the relationship between PBIT (Profits before interest and taxes) and Debt interest. Computation. It is calculated as: Interest Coverage Ratio = Profit before Interest and Taxes Debt Interest The numerator considers the profit before income tax and interest on both term and working capital borrowings. The denominator considers the interest charges, which are in the form of interest on long-term borrowings and not the interest on working capital facilities. Objective.

Interest coverage is a financial ratio that provides a quick picture of a companys ability to pay the interest charges on its debt.

The 'coverage' aspect of the ratio indicates how many times the interest could be paid from available earnings, thereby providing a sense of the safety margin a company has for paying its interest for any period. A company that sustains earnings well above its interest requirements is in an excellent position to weather possible financial storms. As a general rule of thumb, investors should not own a stock that has an interest coverage ratio under 1.5. An interest coverage ratio below 1.0 indicates the business is having difficulties generating the cash necessary to pay its interest obligations. The ratio suffers from the following limitations: installments of long-term borrowings are not considered.

a) The fixed obligations in the form of preference dividend or b) The funds available for meeting the obligations of interest

payments may not be necessarily in the form of p[profits before interest and taxes only, as the amount of [profits so calculated may consider the amount of depreciation debited to Profit and Loss Account which does not involve any outflow of funds.

Interest Coverage Ratio 2008

DS Group 4

ITC 41.37

HUL 74.48

Kothari Products 361.63


Maximum interest coverage is available in case of HUL indicating it is in good capacity the interest charges on debt. For ITC it is also good.

However, in case of DS Group it is lowest. All companies have been able to generate e Profit necessary to meet their interest obligations. This ratio indicates that the cash available for the repayment of the interest will be more than profit, as depreciation will also be added in profit (because it is a non-cash expense). So rather than maintaining such high cash firm should try to reinvest its earnings rather then blocking the available resources.

ACTIVITY (TURNOVER OR PERFORMANCE) RATIOSTurnover indicates the speed with which capital employed is rotated in the process of doing business. Activity ratios measure the effectiveness with which a concern uses resources at its disposal. The following are the important activity (turnover or performance) ratios:

Capital Turnover RatioCapital Turnover ratio establishes between the Net Sales and the Capital Employed of a firm. Computation. This ratio is computed with the help of the following formula: Capital turnover ratio = Net sales Capital Employed Objective.

This ratio indicates the effectives of the organization with which the capital employed is being utilized. A high capital turnover ratio indicates the capability of the organization to achieve maximum sales with minimum amount of capital employed. It indicates that the capital turnover ratio better will be the situation.DS Group ITC HUL Kothari

Capital Turnover

Ratio 2008 0.57 1.17 9.11

Products 0.30


In DS Group and kothari products capital employed is not being utilised effectively to g maximum sales. In case of ITC it is satisfactory. Capital employed is utilised most effectively in case of HUL as it has been successfully generate good amount of sales with the capital employed. Capital turnover ratio indicates that the firms capital employed is being efficiently used. This ratio indicates that the organization is able to achieve maximum sales with minimum amount of capital employed. It indicates that the capital employed is turned over in the form of sales more number of times.

Working Capital Turnover RatioThe working capital turnover ratio indicates the number of times a unit invested in working capital produces sale. In other words, this ratio shows the efficiency in the use of short-term funds for achieving sales. Working capital is computed by deducting current liabilities from current assets. A careful handling of the short-term assets and funds will mean a reduction in the amount of capital employed thereby improving turnover. Computation. The ratio is calculated as follows: Working capital turnover ratio = Net sales Working capital Objective. A company uses working capital (current assets - current liabilities) to fund operations and purchase inventory. These operations and inventory are then converted into sales revenue for the company.

The working capital turnover ratio is used to analyze the relationship between the money used to fund operations and the sales generated from these operations. In a general sense, the higher the working capital turnover, the better because it means that the company is generating a lot of sales compared to the money it uses to fund the sales.

A high, or increasing Working Capital Turnover is usually a positive sign, showing the company is better able to generate sales from its Working Capital. Either the company has been able to gain more Net Sales with the same or smaller amount of Working Capital, or it has been able to reduce its Working Capital while being able to maintain its sales. As such, higher this ratio, the better will be the situation. However, a very high ratio may indicate overtrading the working capital being meager for the scale of operations.

Working Capital Turnover Ratio 2008

DS Group 1.44

ITC 5.35

HUL -7.84

Kothari Products 0.93

InferenceFor HUL it is coming out to be negative. In ITC there is better use of working capital for generating sales. In DS Group the management needs to utilize the working capital in a better manner so that it can increase the sales.

Inventory Turnover ratiosa) Raw Material Inventory Turnover Computation. This ratio is calculated as follows: Raw Material Inventory Turnover Ratio = Consumed InventoryRaw Material Inventory Turnover 2008

Raw Material Average Raw Material

DS Group 3.24

ITC 1.45

HUL 2.34

Kothari Products 10.72

InferenceRaw material inventory turnover ratio is increasing for the DS Group. Which indicates the increasing efficiency in the management of the inventory This shows that the company is having sufficient of sales.

b) Finished goods Inventory Turnover Computation. This ratio is calculated as follows: Net sales Average Finished Goods InventoryFinished Goods DS Group ITC HUL

Inventory Turnover 2008 26.42 13.36 18.70


A high inventory turnover ratio indicates that maximum sales turnover is achieved with the minimum investment in inventory. As such, as a general rule, high inventory turnover ratio is desirable. However, the high inventory turnover ratio should be viewed from some more angles. Firstly, it may indicate that there is under investment in inventory whereby the organization may loose customer patronage f it is unable to maintain the delivery schedule. Secondly, high inventory turnover ratio may not necessarily indicate profitable situation. An organization, in order to achieve a large sales volume, may sometimes sacrifice on profits, whereby a high inventory turnover ratio may not result into high amount of profits. On the other hand, a low inventory turnover ratio may indicate over investment in inventory, existence of excessive or obsolete/nonmoving inventory, improper inventory management, accumulation of inventories at the year end in anticipation of increased prices or sales volume in near future and so on. There can be no standard inventory turnover ratio which may be considered ideal. It may depend on nature of industry and marketing strategies followed by the organization.

InferenceDS Group has the highest ratio among the category which is a good sign as it indicates the increasing efficiency in the management of the inventory. This shows that the company is having sufficient amount of sales. This ratio indicates that maximum sales turnover is achieved with the minimum investment in inventory.

Assets Turnover Ratios Asset turnover measures a firm's efficiency at using its assets in generating sales or revenue - the higher the number the better. It also indicates pricing strategy: companies with low profit margins tend to have high asset turnover, while those with high profit margins have low asset turnover. A high Assets turnover ratio indicates the capability of the organization to achieve maximum sales with the minimum investment in assets. It indicates that the assets are turned over in the form of sales more number of times. S such, higher the ratio, better will be the situation.

a) Total Assets Turnover Computation. This ratio is computed using the following formula: Total Assets Turnover Ratio = Net Sales Total Assets

Total Assets Turnover 2008

DS Group 0.44

ITC 0.83

HUL 2.11

Kothari Products 0.27

b) Fixed Assets Turnover Computation. This ratio is calculated as follows: Fixed Assets Turnover Ratio = Net Sales Fixed Assets

Fixed assets include net fixed assets, i.e., fixed assets after providing for depreciation .Fixed Assets Turnover 2008 DS Group 4.40 Kothari Products 7.17

ITC 1.87

HUL 7.96

c) Current Assets Turnover Computation. This ratio is calculated s follows: Current Assets turnover Ratio = Net Sales Current Assets Objective. A high Assets turnover ratio indicates the capability of the organization to achieve maximum sales with the minimum investment in assets. It indicates that the assets are turned over in the form of sales more number of times. S such, higher the ratio, better will be the situation.

Current Assets Turnover 2008

DS Group 0.82

ITC 2.00

HUL 4.07

Kothari Products 0.67

Debtors Turnover Ratio Computation. The ratio will be computed as: Debtors Turnover ratio = Net credit sales Average sundry debtors Objective. This ratio indicates the speed at which the sundry debtors are converted in the form of cash. However this intention is not correctly achieved by making the calculations in this way.

Debtors turnover Ratio 2008

DS Group 43

ITC 18

HUL 29

Kothari Products 5

As such this ratio is normally supported by the calculations of Average Collection Period which is calculated as under: a) Calculation of Daily Sales Net credit Sales No of Working Day

Daily Sales 2008

DS Group 151

ITC 4016

HUL 3812

Kothari Products 47


It is highest in case of ITC followed by HUL and DS Group respectively. b) Calculation of Average Collection Period: Average Sundry Debtors Daily Sales The average collection period as computed above should be compared with the normal credit period extended to the customers. If the average collection period is more than normal credit period allowed to the customers, it may indicate over investment in debtors which may be the result of over-extension of credit period, liberalization of credit terms and ineffective collection procedures.

Average Collection Period 2008

DS Group 8

ITC 20

HUL 12

Kothari Products 74

InferenceThe firm should try to reduce its debtors holding period . By this, the funds which are blocked with the customers, and hence are becoming idle, can be reduced and that money can be utilized for other profitable purposes.

Creditors Turnover RatioCreditors Turnover Ratio 2008 DS Group 6.30

ITC 1.97

HUL 1.64

Creditor Days 2008

DS Group 57

ITC 182

HUL 219

InferenceThe firm is having low credit holding period it can try to increase is so that, those funds can remain with it for a longer period and can be utilized for fulfilling the working capital requirement. For this purpose firm can use little strict credit standards it can also adopt discount policy.

RETURN ON INVESTMENTThe ratios computed in this group indicate the relationship between the profits of a firm and investment in the firm. There can be three ways in which the term investment may be interpreted, i.e., Assets, Capital Employed and Shareholders Funds. As such, there can be three broad classifications of ROI:

Return on Assets (ROA)Computation. This ratio is calculated as: ROA = EBIT Average Total Assets Objective. An indicator of how profitable a company is relative to its total assets. ROA gives an idea as to how efficient management is at using its assets to generate earnings.

The assets of the company are comprised of both debt and equity. Both of these types of financing are used to fund the operations of the company. The ROA figure gives investors an idea of how effectively the company is converting the money it has to invest into net income. The higher the ROA number, the better, because the company is earning more money on less investment.

Return on Assets (ROA) 2008

DS Group 0.07

ITC 0.29

HUL 0.29

Kothari Products 0.13


For ITC and HUL it is on same side indicating that assets have been utilised well to generate earnings. In case of DS Group and kothari products it is on a lower side so the management nee make sure it utilises the assets well enough to generate good earnings.

Return on Capital Employed (ROCE)

Computation. The ratio is calculated as: Profit Before Interest & Taxes x 100 Average Capital employed

Objective. It is used in finance as a measure of the returns that a company is realising from its capital employed.

It is commonly used as a measure for comparing the performance between businesses and for assessing whether a business generates enough returns to pay for its cost of capital. ROCE measures the profitability of the capital employed in the business. A high ROCE indicates a better and profitable use of long-term funds of owners and creditors. As such, a high ROCE will always be preferred.

Return on Capital Employed 2008

DS Group 0.09

ITC 0.38

HUL 1.01

Kothari Products 0.14

InferenceA high ratio in case of HUL indicates a better and profitable use of long term funds of owners and creditors. In case of ITC it is satisfactory. However, for DS Group and kothari products it is low.

Return on Shareholders Funds

It is calculated as: Profit After Tax x 100 Shareholders funds

This is the most popular ratio to measure whether the firm has earned sufficient returns for its shareholders or not. As such, this ratio is the most crucial one from the owners/shareholders point of view. Higher the ratio better will be the situation.

Return On Equity 2008

DS Group 0.13

ITC 0.26

HUL 1.28

Kothari Products 0.11


HUL has been able to generate exceptionally high ROSF. Higher the return more satisfied will be the shareholders. For DS Group and ITC it is good but slightly on a lower side. Kothari product has the lo return among the category.


Earnings per Share (EPS)

Computation. The ratio is calculated as: Net Profit after Taxes preference Dividend Number of Equity shares Outstanding Objective. It is widely used ratio to measure the profits available to the equity shareholders on a per share basis. EPS is calculated on the basis of current profits and not on the basis of retained profits. As such, increasing EPS may indicate the increasing trend of current [profits per equity share. However, EPS does not indicate how much of the earnings are paid to the owners by way of dividend and how much of the earnings are retained in the business.DS Group 26.99 Kothari Products 97.19

Earnings per share (Rs.) 2008

ITC 8.39

HUL 8.69

CONCEPTS OF WORKING CAPITALThere are two concepts of working capital Gross and Net

Gross Working Capital refers to the firms investment in current assets. Current assets are the assets which can be converted into cash within an accounting year and include cash, short term securities, debtors, bills receivable (accounts receivables or book debts) and stock. Net Working Capital refers to the difference between current assets and current liabilities. Current liabilities are those claims of outsiders, which are expected to mature for payment within an accounting year, and include creditors (accounts payable), bills payable and outstanding expenses. Net working capital can be positive or negative. A positive net working capital will arise when current asset exceed current liabilities. A negative net working capital occurs when current liabilities are in excess of current assets.

Focusing on management of current assets

The gross working capital concept focuses attention on two aspects of current assets management: a) How to optimize investment in current assets? b) How should current assets be financed? The considerations of the level of investment in current assets should avoid two danger points- excessive or inadequate investment in current assets. Investment in current assets should be just adequate to the needs of the business firm. Excessive investment in current assets should be avoided because it impairs the firms profitability, as idle investment earns nothing. On the other hand, inadequate amount of working capital can threaten solvency of the firm because of its inability to meet its current obligations. It should e realized that the working capital needs of the firm may be fluctuating with changing business activity. The management should be prompt to initiate an action and correct imbalances. Another aspect of the gross working capital points to the need of arranging funds to finance current assets. Whenever a need for working capital funds arises due to the increasing level of business activity or for nay other reason, financing arrangement should be made quickly. Similarly, if suddenly, some surplus funds arise they should not be allowed to remain idle, but should be invested in short term securities. Thus, the financial manager should have knowledge of the sources of working capital funds as well as investment avenues where idle funds may temporarily are invested. Focusing on Liquidity management Net working capital is a qualitative concept. It indicates the liquidity position of the firm and suggests the extent to which working capital needs may be financed by permanent sources of funds. Current assets should be sufficiently in excess of current liabilities to constitute margin or buffer for maturing obligations within the ordinary operating cycle of business. In order to protect their interests, short- term creditors always like a company to maintain current assets at a higher level than current liabilities. However, the quality of current assets should be considered in determining level of current assets vis--vis current liabilities. A weak liquidity position possesses a threat to the solvency of the company and makes it unsafe and unsound. A negative working capital means a negative liquidity, and may prove to be harmful for the companys reputation. Excessive liquidity is also bad. It may be due to mismanagement of current assets. Therefore, prompt

and timely action should be taken by management to improve and correct the imbalances in the liquidity position of the firm. For every firm, there is a minimum amount of net working capital, which is permanent. Therefore, a portion of working capital should be financed with permanent sources of funds such as equity share capital, debentures, long-term debt, preference share capital or retained earnings. Management must, therefore, decide the extent to which the current assets should be financed with equity capital or borrowed capital. It may be emphasized that both gross and net concepts of working capital are equally important for the efficient management of working capital. There is no precise way to determine the exact amount of gross or net working capital of a firm. A judicious mix of long and short term finances should be invested in current assets. Since current assets involve cost of funds, they should be put to productive use.

OPERATING AND CASH CONVERSION CYCLEA firm should aim at maximizing the wealth of its shareholders, so the firm should earn sufficient returns from its operations. Earning a steady amount of profit requires successful sales activity. The firm has to invest enough funds in current assets for generating sales. Current assets are needed because sales do not convert into cash instantaneously. There is always an Operating cycle involved in the conversion of sales into cash. There is difference between current and fixed assets in terms of their liquidity. A firm requires many years to recover the initial investment in fixed assets such as plant and machinery or land and building. On the contrary, investment in current assets is turned over many times in a year. Investment in current assets such as inventories and debtors (accounts receivable) is realized during the firms operating cycle that is usually less than a year. OPERATING CYCLE is the time duration required to convert sales, after the conversion of resources into inventories, into cash. The operating cycle of manufacturing company involves three phases:

Acquisition of resources such as raw material, labor power and fuel etc. Manufacture of the product which includes conversion of raw materials into work-in-progress into finished goods. Sale of the product either for cash or on credit. Credit sales create account receivable for collection.

These phases affect cash flows, which most of the time, are neither synchronized nor certain. They are not synchronized because cash flows usually occur before cash inflows. Cash inflows are uncertain because sales and collections which give rise to cash inflows are difficult to forecast accurately, on the other hand, are relatively certain. The firm is, therefore, required to invest in current assets for a smooth, uninterrupted functioning. It needs to maintain liquidity to purchase raw materials and pay expenses such as wages and salaries, other manufacturing, administrative and selling expenses and taxes as there is hardly a matching between cash inflows and outflows. Cash is also held to meet any future exigencies. Stocks of raw materials and work-in-progress are kept to ensure smooth production and to guard against non-availability of raw material and other components. The firm holds stock of finished goods to meet the demand of customers on continuous basis and sudden demand from some customers. Debtors are created because goods are sold on credit for marketing and competitive reasons. Thus, a firm makes adequate investment in inventories, and debtors, for smooth, uninterrupted production and sale.

Length of Operating CycleThe length of the operating cycle can be calculated in two ways: a) Gross Operating Cycle b) Net Operating Cycle a) Gross Operating Cycle The grass operating cycle of a manufacturing concern is the sum of Inventory Conversion Period and debtors (receivable) conversion period. Thus, Gross Operating Cycle is gives as follows:

Inventory conversion Period + Debtors Conversion Period Inventory Conversion Period: The inventory conversion period is the total time needed for producing and selling the product. It is the sum of (1) raw material conversion period, (2) work-in-progress conversion period, and (3) finished goods conversion period. Raw material conversion period

The raw material conversion period is the average time period taken to convert material into work-in-progress. Raw material conversion period depends on: (a) Raw material consumption per day, and (b) Raw material inventory. Raw material consumption par day is given by the total raw material consumption divided by the number of days in the year (say 360). The raw material conversion period is obtained when raw material inventory is divided by raw material consumption per day. Raw material conversion period = Raw material inventory [Raw material consumption]/360 Work-in-progress conversion period

Work-in-progress conversion period is the average time taken to complete the semi-finished or work-in-progress. It is given by the following formula: Work-in-progress conversion period = work-in-progress inventory [Cost of production]/360 Finished goods conversion period

Finished goods conversion period is the average time taken to sell the finished goods. It can be calculated as followsFinished goods inventory

[Cost of goods sold]/360

Debtors conversion period:Debtors conversion period is the average time taken to convert debtors into cash. It represents the average collection period. It is calculated as follows: Debtors [Credit sales]/360 b) cash conversion or Net operating cycle Net operating cycle is the difference between Gross operating cycle and creditors (payables) Deferral period. Creditors deferral period: Creditors deferral period is the average time taken by the firm in paying its suppliers. It is calculated as follows: Creditors [Credit purchases]/360 In practice, a firm may acquire resources (such as raw materials) on credit and temporarily postpone payment of certain expenses. Payables, which a firm can defer, are spontaneous sources of capital to finance investment in current assets. The creditors deferral period is the length of time the firm is able to defer payments on various resource purchases. Net operating cycle is also referred to as cash conversion cycle. It is the net time interval between cash collections from sale of the product and cash payments for resources acquired by the firm. It also represents the time interval over which additional funds, called

working capital, should be obtained in order to carry out the firms operations. The firm has to negotiate working capital from sources such as commercial banks. The negotiated sources of working capital financing are called non-spontaneous sources. If net operating cycle of a firm increases, it means further need for negotiated working capital. There are two ways of calculations of cash conversion cycle. One is that depreciation and profit should be excluded in the computation of cash conversion cycle since the firms concern is with cash flows associated with conversion at cost; depreciation is a non-cash item and profits re not costs. A contrary view air that a firm has to ultimately recover total costs and make profits; therefore the calculation of operating cycle should include depreciation, and even the profits. The above operating cycle concept relates to a manufacturing firm. Non-manufacturing firms such as wholesalers and retailers will not have the manufacturing phase. They will acquire stock of finished goods and convert them into debtors and debtors into cash. Further, service and financial enterprises will not have inventory of goods (cash will be their inventory). Their operating cycles will be the shortest. They need to acquire cash, then lend (create debtors) and again convert lending into cash.

BALANCED WORKING CAPITAL POSITIONThe firm should maintain a sound working capital position. It should have adequate working capital to run its business operations. Both excessive as well as inadequate working capital positions are dangerous from the firms point of view. Excessive working capital means holding costs and idle funds, which earn no profits for the firm. The dangers of excessive working capital are as follows:

It results in unnecessary accumulation of inventories. Thus, chances of inventory mishandling, waste, theft and losses increase. It is an indication of defective credit policy and slack collection period. Consequently, higher incidence of bad debts results, which adversely affects profits.

Excessive working capital makes management complacent which degenerates into managerial inefficiency. Tendencies of accumulating inventories tend to make speculative profits grow. This may tend to make dividend policy liberal and difficult to cope with in future when the firm is unable to make speculative profits.

Inadequate working capital is also bad as it not only impairs the firms profitability but also results in production interrupts and in efficiencies and sales disruptions. Inadequate working has the following dangers:

It stagnates growth. It becomes difficult for the firm to undertake profitable projects for non-availability of working capital funds. It becomes difficult to implement operating plans and achieve the firms profit target. Operating inefficiencies creep in when it becomes difficult even to meet day-to-day commitments. Fixed assets are not efficiently utilized for the lack of working capital funds Paucity of working capital funds render the firm unable to avail attractive credit opportunities etc. The firm looses its reputation when it is not in a position to honor its short-term obligations. As a result, the firm faces tight credit terms.

An enlightened management should, therefore maintain the right amount of working capital on a continuous basis. A firms net working capital position is not only important as an index of liquidity but it is also used as a measure of the firms risk. Risk in this regard means chances of the firms being unable to meet its obligation on due date. The lenders consider a positive net working capital as a measure of safety. All other things being equal, the more the net working capital a firm has, the less likely that it will default in meeting it current financial obligations.


Nature of business: The working capital requirement of the firm is closely related to the nature of its business. A service firm, like an electricity undertaking or a transport corporation, which has a short operating cycle and which sells predominantly 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: Firms, which have marked seasonality in their operations usually, have highly fluctuating working capital requirements. If the operations are smooth and even through out the year the working capital requirement will be constant and will not be affected by the seasonal factors. Production policy: A firm marked by pronounced seasonal fluctuations in its sales may pursue a production policy, which may reduce the sharp variations in working capital requirements. Market conditions: The market competitiveness has an important bearing on the working capital needs of a firm. When the competition is keen, a large inventory of finished goods is required to promptly serve customers who may not be inclined to wait because other manufactures are ready to meet their needs. In view of competitive conditions prevailing in the market the firm may have to offer liberal credit terms to the customers resulting in higher debtors. Thus, the working capital requirements tend to be high because of greater investment in finished goods inventory and account receivables. On the other hand, a monopolistic firm may not require larger working capital. It may ask customer to pay in advance or to wait for some time after placing the order. Conditions of Supply:

The time taken by a supplier of raw materials, goods, etc. after placing an order, also determines the working capital requirement. If goods as soon as or in a short period after placing an order, then the purchaser will not like to maintain a high level of inventory f that good. Otherwise, larger inventories should be kept e.g. in case of imported goods. Business Cycle Fluctuations: Different phases of business cycle i.e., boom, recession, recovery etc. also effect the working capital requirement. In case of recession period there is usually dullness in business activities and there will be an opposite effect on the level of wor5king capital requirement. There will be a fall in inventories and cash requirement etc. Credit policy: The credit policy means the totality of terms and conditions on which goods are sold and purchased. A firm has to interact with two types of credit policies at a time. One, the credit policy of the supplier of raw materials, goods, etc., and two, the credit policy relating to credit which it extends to its customers. In both the cases, however, the firm while deciding the credit policy has to take care of the credit policy o the market. For example, a firm might be purchasing goods and services on credit terms but selling goods only for cash. The working capital requirement of this firm will be lower than that of a firm, which is purchasing cash but has to sell on credit basis. Operating Cycle: Time taken from the stage when cash is put into the business up to the stage when cash is realized. Thus, the working capital requirement of a firm is determined by a host of factors. Every consideration is to be weighted relatively to determine the working capital requirement. Further, the determination of working capital requirement is not once a whole exercise; rather a continuous review must be made in order to assess the working capital requirement in the changing situation. There are various reasons, which may require the review of the working capital requirement e.g., change in credit policy, change in sales volume, etc.

ISSUES IN WORKING CAPITAL MANAGEMENT Working capital management refers to the administration of all components of working capital cash, marketable securities, debtors (receivables), and stock (inventories) and creditors (payables). The financial manager must determine levels and composition of current assets. He must see that right sources are tapped to finance current assets, and that current liabilities are paid in time. There are many aspects of working capital management which make it an important function of the financial manager.

Time. Working capital management requires much of the financial managers time. Investment. Working capital represents a large portion of the total investment in assets. Actions should be taken to curtail unnecessary investment in current assets. Criticality. Working capital management has great significance for all firms but it is very critical for small firms. Small firms in India face a severe problem of collecting their dues debtors. Further, the role of current liabilities is more significant in case of small firms, as, unlike large firms, they face difficulties in raising long-term finances. Growth. The need for working capital is directly related to the firms growth. As sales grow, the firm needs to invest more in inventories and debtors. Continuous growth in sales may also require additional investment in fixed assets.

Liquidity vs. Profitability: Risk-Return Trade-off A large investment in current assets under certainty would mean a low rate of return on investment for the firm, as excess investment in current assets will not earn enough return. A smaller investment in current assets, on the other hand, would mea interrupted production and sales, because of frequent stock-outs and inability to pay creditors in time due to restrictive policy. Given a firms technology and production policy, sales and demand conditions, operating efficiency etc., its current assets holdings will depend upon its working capital policy. These policies involve riskreturn trade-offs. A conservative policy means lower return and risk, while an aggressive policy produces higher return and risk.

The two important aims of the working capital management are: profitability and solvency. Solvency, used in the technical sense, refers to the firms continuous ability to meet maturing obligations. If the fir maintains a relatively large investment in current assets, it will have no difficulty in paying claims of creditors when they become due and will be able to fill all sales orders and ensure smooth production. Thus, a liquid firm has less risk of insolvency; that is, it will hardly experience a cash shortage or a stock-out situation. However, there is a cost associated with maintaining a sound liquidity position. A considerable amount of the firms will be tied up in current assets, and to the extent this investment is idle, the firms profitability will suffer. To have higher profitability, the firm may sacrifice solvency and maintain a relatively low level of current assets. When the firm does so, its profitability will improve as fewer funds are tied up in idle current assets, but its solvency would be threatened and would be exposed to greater risk of cash shortage and stock-outs.


Current Assets Holding Period. To estimate working capital requirement on the basis of average holding period of current assets and relating them to costs based on the companys experience in the previous years. This method is essentially based on the operating cycle concept. Ratio of Sales. To estimate working capital requirements as a ratio of sales on the assumption that current change with sales Ratio of Fixed Investment. To estimate working capital requirements as a percentage of fixed investment.

POLICIES FOR FINANCING FIXED ASSETSA firm can adopt different financing policies vis--vis current assets. Three types of financing may be distinguished:

Long-term Financing. The sources of long-term financing include ordinary share capital, preference share capital, debentures, long-term borrowings from financial institutions and reserves and surplus (retained earnings). Short-Term Financing. The short-term financing is obtained for a period less than one year. It is arranged in advance from banks and other surplus of short-term finance in the money market. It includes working capital funds from banks, public deposits, commercial paper, factoring of receivables etc Spontaneous Financing. It refers to the automatic sources of short-term funds arising in the normal course of a business. Trade (suppliers) credit and outstanding expenses are examples of spontaneous financing.

The real choice of financing current assets, once the spontaneous sources of financing have been fully utilized, is between the long-term and short-term sources of finance. Depending on the mix of short-term and long-term financing, the approach followed by a company may be refereed to as: Matching approach Conservative approach Aggressive approach

Matching Approach The firm following matching approach (also known as hedging approach) adopts a financial plan which matches the expected life of the sources of funds raised to finance assets. For e.g., a ten-year loan may be raised to finance a plant with an expected life of ten years. The justification for the exact matching is that, since the purpose of financing is to pay for the assets, the source of financing for short-term

assets is expensive, as funds will not be utilized for the full period. Similarly, financing the long-term assets with short-term financing is costly as well as inconvenient as arrangement for the new short-term financing will have to be made on a continuing basis.

Temporary Current Assets Short-term financing Current Assets

Permanent Current Assets

Long-term financing

The above figure illustrated the matching approach over time. The firms fixed assets and permanent current assets are financed with long-term funds and as the level of these assets increases, the longterm financing level also increases. The temporary or variable current assets are financed with short-term funds and as their level increases, the level of short-term financing also increases. Conservative approach Under a conservative plan, the firm finances its permanent assets and also a part of temporary currents assets with long-term financing. In the periods 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 heavily on long-term financing and, therefore, the firm has less risk of facing the problem of shortage of funds.

Temporary current assets Financing


Current Assets (a)


Permanent current assets Fixed assets Financing Time Long-term

The above figure illustrates conservative approach over time. It can be seen that when the firm has no temporary current assets [e.g., at (a) and (b)], the long-term funds released can be invested in marketable securities to build up the liquidity position of the firm.

Aggressive approach An aggressive approach policy is said to be followed by the firm when it uses more short-term financing than warranted by the matching

plan. The firm finances a part of its permanent current assets with short term financing. The relatively more use of short-term financing makes the firm more risky.

Temporary current assets Short-term Financing Current Assets (a) (b)

Permanent current assets financing


Fixed Assets Time


INTRODUCTION: Inventories constitute the most significant part

of current assets of a; large number majority of companies in India. On an average, inventories are approximately 60 % of current assets in public limited companies in India. Because of the large size of the inventories maintained by the firm, a considerable amount of funds is required to be committed to them. It is, therefore, absolutely imperative to manage inventories efficiently and effectively in order to avoid unnecessary investment. Inventories are stock of the product a company is manufacturing for sale and components that make up the product. The various forms in which inventories exist in a manufacturing company are: Raw materials are those basis inputs that re converted into

finished product through the manufacturing process. Raw materials inventories are those units, which have been purchased and stored for future productions. Work-in-progress inventories are semi-manufactured products.

They represent those products that need more work before they become finished products for sale. Finished goods inventories are those completely manufactured

products, which are ready for sale. Stocks of the raw materials and work-in-process facilitate production, while stock of finished goods is required for smooth marketing operations. Thus the inventories serve as a link between the production and the consumption of goods. The levels of the three kinds of inventories for the firm depend on the nature of the business. A manufacturing firm will have substantially high level of finished goods inventories and no raw material and workin progress inventories within manufacturing firm, there will be differences.

THE OPERATING CYCLE AND WORKING CAPITAL The working capital requirement of a firm depends, to a great extent up on operating cycle of the firm. The operating cycle may be defined

as the time duration starting from the procurement of goods or raw material and ending with the sales realization the length and nature of the operating cycle may differ from one firm to another depending on the size and nature of the firm. The investment in working capital is influenced by four key events in the production and sales cycle form: Purchase of raw materials payment of raw materials sale of finished goods collection of cash for sales

Operating cycle period: the firm begins with the purchase of raw material, which are paid for after a delay, which represents the accounts payable period. The firm converts raw material into finished goods and then sell the same. The time that, elapses between the purchase of raw material and the collection of cash for the sales is referred to as the operating cycle. 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 receivables conversion period.A) Inventory Conversion period (ICP): The time lag

between the purchase of raw material and the sale of finished goods is the inventory conversion period. In the manufacturing firm ICP consists of raw materials conversion period (RPCP), work-in-progress conversion period (WPCP), and the finished goods conversion period (FGCP). RMCP refers to the period for which the raw material is generally kept in stores before it is used by the production department. The WPCP refers to the period for which the raw material remains in the production process before it is taken out s a finished product. The FGCP refers to the period for which finished goods remain in stores before being sold to a customer. B) Receivables conversion period (RCP): It is the time required to

convert the credit sales into cash realization. It refers to the period between the occurrence of credit sales and collection from debtors.

The total of ICP and RCP is also known as Total Operating Cycle period (TOCP). The firm might be getting some credit facilities from the supplier o a material, wage earners, etc. this period for which the payment of these parties are deferred or delayed is known as Deferral Period (DP). The Net Operating Cycle (NOC) of the firm is arrived at by deducting the DP fro the TOCP. NOC is also known as cash cycle. RMCP = (AVG. raw material stock/ Total raw materials stock)*365 WPCP = (avg. work-in process/ Total work-in-process)*365 FGCP = (Avg. finished goods/ Total cost of goods sold)*365 RCP = (Avg. receivables / Total credit purchase)*365 DP = (Avg. creditors / Total credit purchase)*365 In respect of these formulations, the following points are note worthy: a) The Average value in the numerator is the average of opening balance and closing balance of the respective item. However, if only the closing balance is available, then even the closing balance may be taken as the Average. b) The figure 365 represents number of days in a year. It may also be taken as 360 for the ease of calculation. c) The total figure in the denominator refers to the total value of the item in a particular year. d) In the calculation of RMCP, WPCP, ad FGCP. The denominator is calculated at cost-basis and the profit margin has been excluded. The reason big that there is no investment of funds in profit as such. The working capital ratios are calculated for the Birla Powerss solutions ltd. and final holding month for the inventories, debtors and creditors are given below in the table.

Working Capital

For the year 2005 Total Operating Cycle = RMCP + WP/FGCP + RCP = .48 + .37 + 1.79 = 2.64 Net Operating Cycle = TOC DP = 2.64 - .57 = 2.07

WORKING CAPITAL LIMITSFUND BASED CREDIT LIMITS 1. CASH CREDIT/PACKING CREDIT: The cash credit facility is similar to the overdraft arrangement. It is the most poplar method of bank finance for working capital in India. Under the cash credit facility, a borrower is allowed to withdraw funs from the bank up to the cash credit limit. He is not required to borrow the entire sanctioned credit once, rather, he can draw periodically to the extent of his requirement and repay by depositing surplus funds in his cash credit account. Cash credit is sanctioned against the security of current assets. Cash credit is the most flexible arrangement from the borrowers point of view. 2. DISCOUNTING OF BILLS Under the purchase or discounting of bills, a borrower can obtain credit from a bank against its bills. The bank purchase or discounts the borrowers bills. He amount provided under this agreement is covered within the overall cash credit or overdraft limit

Before purchasing or discounting the bills, the bank satisfies itself as credit worthiness of the drawer. Though, the item bills purchased implies that the bank becomes owner of the bill. In practice, bank hold bills as security for the credit. When a bill is discounted, the borrower is paid he discounted amount of the bills, (visa, full amount of bill minus the discount charged by the bank). The bank collects full amount on maturity. The major part of bank borrowings comes through Discounting Bills. On this firm has to pay interest of 12%.


Commonly used in international trade, the letter o credit is now used in domestic trade as well. A letter of credit, or L/C, is used by a bank on behalf of its customers (buyer) to the seller. As per this document, the bank agrees to honor drafts on it for the supplies made to the customer if the seller fulfills the conditions laid down in the L/C. The L/C serves several useful functions: (i) (ii) (iii) It virtually eliminates credit risk, if the bank has a good standing. It reduces uncertainty, as the seller knows the conditions that should be fulfilled receive payment. It offers safety to the buyer who wants to ensure that payment is made only in conformity with the cond