ashu inal projet

7/29/2019 Ashu Inal Projet

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SUMMER TRAINING PROJECT REPORT

ON

STUDY OF WORKING CAPITAL MANAGEMENT OF

FOOD CORPORATION OF INDIA

For the partial fulfillment of the requirement for the award of degree of

MASTERS IN BUSINESS ADMINISTRATION

UNDER THE GUIDANCE OF: UNDER THE SUPERVISION

Dr. AMIT SHARMA Mr.NEERAJ BHARTIYA

USMS, GGSIPU Manager

SUBMITTED BY

ASHU GARG

University School of Management Studies

Guru Gobind Singh Indraprastha University

Sector-16C, Dwarka, New Delhi110075, India


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CERTIFICATE


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DECLARATION

I hereby declare that the project report entitled.A Study of Working

Capital Management of Food Corporation Of India. is the produce of my sincere effort.

This Summer Internship Project Report is being submitted by me alone, at UNIVERSITY

SCHOOL OF MANAGEMENT STUDIES, for the partial fulfillment of the course MBA,

and the report has not been submitted to any otherEducational institutions or for any other

purpose whatsoever.

ASHU GARG


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ACKNOWLEDGEMENT

I am highly thankful to the & for deputing me as a Management Trainee to the highly

acclaimed and renowned organization via Food Corporation of India for the period of 50

Days.

I have all respect forMr. B.L MEENA, AGM Training who assigned me the project on a

study of Working Capital Management of Food Corporation Of India and remained a

Guiding Lantern throughout the tenure of my training.

I wish to express my deep sense of gratitude to my Internal Guides, Mr. Neeraj Bhartia, MrsJyoti, Mr Gyanendra Mehta, and Rajesh Kumar Arora for their able guidance and useful

suggestions, which helped me in completing the project work in time.


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EXECUTIVE SUMMARY

The underlying aim of the summer training in FCI is a sincere attempt to analyze its

Working Management by making use of different financial appraisal techniques. The data for

the studies were obtained from the published annual reports of the company.

Among all the problems of financial management, the problems of working capital

management have probably been recognized as the most crucial one. It is because of the fact

that working capital always helps a business concern to gain vitality and life strength. The

objective of this study is to critically evaluate working capital management as practiced in

FCI.

In this study, a sincere attempt has been made to analyze the working of FCI by making use

of different financial appraisal techniques like ratio analysis, trend analysis, common-size

analysis etc. The period of study was 3 year from 2009-10 to 2011-12. The data for the

studies were obtained from the published annual reports of the company.

An effort has been made to appraise the overall financial performance and efficiency of

management, but the scope and depth of study remained limited due to the limiting factors of

time, and resources. However, it is expected that the study will provide useful information for

better and easier understanding of the financial results of the company.

This study has been divided into six chapters. The first chapter has been devoted to the

introduction and last to the summary of conclusion and suggestion. The second chapter deals

with the objectives. Third chapter takes care of introduction to financial analysis. In additionto this fourth chapter deals with significance of working capital, whereas fifth chapter deals

with the analysis aspects of working capital. The main source of data has been the annual

reports of the company.


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CONTENTS

1. Company Profile:-

2. Objective of the Project:-

3. Literature review:-

4. Analysis of Working Capital:-

5. Conclusion and Suggestions:-

6. References


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TABLE OF CONTENTS

Declaration

Acknowledgments

Executive Summary

CHAPTERIZATION

1. Introduction 9-15

1.1About Food Corporation Of India

1.2Objectives of Food Corporation Of India

1.3Organizational Structure

1.4SWOT Analysis

2. Objective of the study 16-18

2.1 Research Methodology

2.2 Type of Research

2.3 Sample of design

3. Literature Review 19-45

3.1 Concept of Financial Statement

3.2 Types of Financial Statement

3.3Parties Interest

3.4Financial Appraisal

3.5 Introduction of Working Capital

3.6 Concept of Working Capital

3.7 Importance of Working Capital analysis

3.8 Operating and cash conversion cycle

3.9 Methods and ratios


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4. Data Analysis Of Working 46-54

4.1 Working capital analysis

4.2 Working capital trend analysis

4.3 Ratio analysis

5. Conclusion and Recommendations 55-56

6. References 57


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CHAPTER -1

INTRODUCTION OF FCI


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1.1 OVERVIEW OF FCI

Food corporation of India was founded in 1964 by Government of India. It serves mainly the

wheat and rice products. The main headquarters of Food corporation of India is in new Delhi.

Food corporation of India was set up under the food corporation act. The food grains from the

farmers are at the price declared by the government of India. Food corporation Of India do

not hold any kind of authority to take any decisions regarding the supply or related to any

facts and figures about the FCI, all the respective decisions is taken by the government of

India. All the decisions are implemented by the Ministry of Food and Ministry of Agriculture.

There are numbers of FCI district offices that are listed on the official website and are

available for your assistance in most convenient

manner.

FCI is the Largest Corporation in India and

probably the largest supply chain management in

Asia. It operates through 5 zonal offices and 24 regional offices. Each year, the Food

Corporation of India purchases roughly 15-20 per cent of India's wheat output and 12-15 per

cent of its rice output. The purchases are made from the farmers at the rates declared by the

Govt. of India. This rate is called as MSP (Minimum support Price). There is no limit for

procurement in terms of volume, any quantity can be procured by FCI provided the stock

satisfies FAQ (Fair Average Quality) specifications with respect to FCI. The stocks are

transported throughout India and issued under the Public Distribution System (PDS) for the

consumption of the ration card holders at the rates declared by the Govt of India. The

difference between the purchase price and sale price, along with internal costs, are

reimbursed by the Union Government in the form of Food Subsidy. At present the annual

subsidy is around $10 billion. FCI by itself is not a Decision making authority, it does notdecide anything about the MSP, Imports or Exports. It just implements the decisions made by

the Ministry of Food and Ministry of Agriculture.


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1.2 OBJECTIVE OF FCI

The Food Corporation of India was setup under the Food Corporation Act 1964, in

order to fulfill following objectives of the Food Policy:

Effective price support operations for safeguarding the interests of the farmers. Distribution of food grains throughout the country for public distribution system. Maintaining satisfactory level of operational and buffer stocks of food grains to ensure

National Food Security.

In its 45 years of service to the nation, FCI has played a significant role in India's

success in transforming the crisis management oriented food security into a stable

security system.


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FCI's Objectives are:

To provide farmers remunerative prices. To make food grains available at reasonable prices, particularly to vulnerable section of the

society.

To maintain buffer stocks as measure of Food Security. To intervene in market for price stabilization.

1.3 Organizational Structure


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FCI North Zone

North Zone comprises 8 Regions i.e. Punjab,

Haryana, UP, Rajasthan, J&K, HP, Delhi and

Uttaranchal. It is the largest Zone in FCI having a

workforce of 24447 staff & officers and 31634

laborers against 58104 staff & officers and 64173 laborers in FCI as a whole in the country.

Punjab & Haryana Regions are the major surplus States as far as production/procurement of

food grains is concerned and more than 90% stocks have to be moved to other parts of the

country. During recent years even Rajasthan was self-sufficient as far as its own requirement

was concerned but because of severe drought during last year, stocks were moved from

Haryana & Punjab to Rajasthan Region.

Details of Region / District Offices in North Zone

S.No. Name of the Region No. of Districts District offices

1. Delhi 2 Mayapuri and Shaktinagar.

2. Haryana 5 Gurgaon, Hissar, Kurukshetra,Karnal and Rohtak.

3. Himachal Pradesh 2 Dharamshala and Mandi.

3. Jammu and Kashmir 2 Jammu and Srinagar.

4. Punjab 12 Amritsar, Bhatinda, Chandigarh,Faridkot, Ferozpur, Gurdaspur,Hoshiarpur, Jallandhar,Kapurthala, Ludhiana, Patiala andSangrur.

5. Rajasthan 8 Ajmer, Alwar, Bikaner, Jaipur,Jodhpur, Kota, Sriganganagar and

Udaipur.6. Uttar Pradesh 20 Allahabad, Aligarh, Agra,

Azamgarh, Banda, Barielly,Bullandshahar, Faizabadm,Ghazipur, Gorakhpur, Gonda,Hapur, Jhansi, Kanpur, Lucknow.

7. Uttaranchal 3 Dehradun, Haldwani andSrinagar.

Total 54


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Delhi Region


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1.4 SWOT ANALYSIS

Strengths

Round the year availability of materials Support from central government Strong network of distribution Excellent storage management

Weakness

High requirement of working capital Inadequate automation with regard to information management Leakage

Opportunities

Vast domestic market Improvement in distribution channel Diversify into non-traditional commodities/ activities

Threats

Rapid development Shift in food habits Entry of retail sector


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CHAPTER-2

OBJECTIVE OF THE STUDY


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2.1 OBJECTIVES

To analyze the short-term liquidity The financial stability of a business. To analyze different working capital ratios so to judge the availability and

effective usage of working capital.

2.2 RESEARCH METHODOLOGY(COLLECTION OF DATA)

Data can be obtained from two important sources:

Primary data Secondary Data

Primary data

Primary data are the data that are collected afresh and for the first time. Thus happens

to be in character. Primary data are collected by the following ways:-

a) Observationb) expert opinion

Secondary Data

Secondary data are the data that are already collected and are only analyzed by

different sources these sources are as follows:-

Corporate magazine annual report Books, journals, newspaper


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AREA OF STUDY

The area of Study during the training was Financing & Accounts in Finance Department. The

area of study was working capital was studied.

In this project I have used internet, company brochures, financial statement, and the company

website as a secondary source.

RESEARCH

DESIGN

Exploratory Research

COLLECTION OF

DATA

SECONDARY DATA

Annual Report Internet

ANALYSIS

PATTREN

Bar diagram


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CHAPTER-3

LITERATURE REVIEW


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Introduction to financial analysis

3.1 Financial Analysis

Financial accounting involves recording transaction and preparing report and

financial statement that can be used by management, owners, creditor, government agencies

and other to understand what is happening in the business or nonprofit organization.

Accounting is the process of identifying, measuring and communicating economic

information to permit informed judgment and decision by users of the information.

Concept Of Financial Statements

Financial statement are major means employed by firm to present their financial

situation to stock holders creditors and the public a financial statement is a collection of data

organized accounting to logical and consistent accounting procedure. Its purpose is to convey

an understanding of some financial aspects of a business firm. The and product of financial

accounting is financial statement consisting of the balance sheet, profit and loss accounting

and statement changes in financial position.

Financial statements are major means employed by a firm to present their

financial situation to stock holders, creditors and the general public. Accounting reports on

the result of operation and the current status of a business enterprise by a financial statement.

The balance sheet and income and statement. Since the balance sheet and income statement

are of limited interest the annual report of the company are supplemented by a third statementthe change in financial position and by foot notes which explain and amplify the reported

numerical data.


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3.2 Types Of Financial Statements

(A) The Balance Sheet:-

The balance sheet is called a fundamental accounting report. It provides information

about the financial standing or position of affirm at given instant. The balance sheet can be

visualized, as a snapshot of the financial status of company is a valid for only one day the

reference day. The position of the firm on a preceding day is bound to be different.

The balance sheet of a company indicates to management the financial status of a

company as on a given moment. From an analyst point of view a balance sheet is written

representation of the resources and liabilities of an individual partnership firm an association

of a corporation.

The contents of balance sheet can be divided into three divisions

*Assets: -

Assets are valuable resources owned by a business, which are acquired at a

measurable money cost these are economic resources of a firm which provide economic

benefits to the company.

Liabilities:-

Liabilities are claim of creditors against the enterprises arising out of past activities

that are to be satisfied by the disbursement of utilization of corporate resources. They are

economic obligation of the firm.

*Owners equity:-

The owners equity is the owners current investment in the assets of company.The

entire system of recording business transaction is based on accounting equation. The

accounting equation is an accounting formula expressing equivalence of the two expressions

of assets and liabilities.


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ACCOUNTING EQUATION

(B) The Income Statement:-

The balance sheet, as discussed above, is considered a very significant statement from

the viewpoint of bankers, and other lenders, because it indicates the firms financial position

and strength, as measured by its recourses and obligations, however, editors and financial

analysis have recently started paying more attention to the firms capacity as a measure of its

financial strength. Its income statement revels the firms capacity as a measure of its financial

strength. Its income statement revels the earning potential of the firm.

An income statement is a financial statement summarizing the result of a companys income

(profit) making activities for a specific time period. It summarizes revenues and expenses in a

manner that discloses whether a companys activates in a particular fiscal period have

resulted in profit or a loss. The income statement is a scoreboard of the firms performance

during a particular period of time. The profit and loss account is the condensed and

classified record of the gains losses posing change in the owners interest in the business for a

period of time.

The income statement or the profit and loss account presents the summary of revenues,

expenses and net income (or net loss) of a firm for a period of time. Thus, it serves as

measure of the firms profit ability. Its systematic array of the data of the revenues, revenues

deduction (expenses, revenues, revenue deductions, expenses, losses, taxes etc.)

Net income and distribution or assignment of the net income to creditors and property

investors of a particular period

ASSETS = LIABILITIES + OWNERS EQUITY

OR

OWNERS EQUITY = ASSETS - LIBILITIES

OR

LIBILITIES = ASSETS - OWNERS EQUITY


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(C)Statement Of Change In Financial Position

Until 1960, the income statement and the balance sheet constituted the major financial

statement. However, management traditionally made use of a wide variety of statement and

reports in apprising internal company performance. One popular report for managements

internal use was called the statement of changes in final position. From such a report,

management could extract valuable information about where working capital and cash come

from and how they were used. If these past events could be projected in future, management

would have a useful tool for budgeting. Today, the statement of changes of financial position

represents third financial position represents a third financial statement.

3.3 Parties Interested

According to the American institute of certified public accountants, financial

statement reflects, a combination a recorded facts, accounting convention and personal

judgments and the judgments and conventions applied, affect them materially.

Following are interested in financial statement:-

Credit, suppliers and others are having business with the company. Debenture holders. Credit institutions and banks. Potential lenders and investors. Trade unions and employees. Important customers wishing to make a long standing with the company. Economist and analyst. Members of parliament, the public committee in respect in government companies. Taxation authorities. Other departments dealing with the industry in which the company engaged

cooperative.

The company law board.


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3.4 Financial Appraisal

A companys financial statement are intended to summarize the results of its

operation and its ending financial condition. The information in the statement is studied andrelated to other information by external users for several reasons. Current shareholders, for

example, are concerned about there invested income, as well as the companys overall

profitability and stability. Some potential investors are invested in solid companies that are

companies whose financial statement indicate stable earnings and dividends with little growth

in operations. Other prefers companies whose financial statement indicate rend for rapid

growth in a companys short run solvency, its ability to pay current obligation as they become

due. Long-term creditors are concerned about the safety of their interest; income and

companys ability to continue earning cash flow to meet its financial commitments and these

are only few of the users, and uses of financial statements.

But the numerical data in the financial statement are quit calm. They cannot speak. Analytical

data are not ending in themselves, but they are meant to an end. Financial appraisal is an

attempt to determine the significance, and meaning of the financial statement data so that

forecast may be made of the prospects for future earnings, ability to pay interest, debt

maturities both current as well as long term profitability of a sound dividend policy. Financial

appraisal involves the assessment of firms past, present and anticipated future financial

condition.

Financial appraisal is a scientific evaluation if the profitability and financial strength of a

business concern. In fact financial appraisal and analysis of financial statement have nearly

the same meaning. Financial statement analysis is used for the purpose of financial appraisal.

Financial appraisal is the process of making a scientific proper, critical and comparative

evaluation of the profitability and financial health of given concern through the application of

financial statement analysis. Financial statement analysis is a preliminary step towards the

evaluation of result dawn by the analysis or management accountant. Appraisal or evaluation

of such results is made thereafter. Financial appraisal begins where financial analysis ends,

and financial analysis starts where the summarization of financial data in the form of profit

and loss account and balance sheet ends.


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In the words of Kenney and Macmillan, financial statement analysis attempts to unveil the

meaning and significance of the items composed in profit and loss account and balance sheet

so as to assist the management in the formation of sound operating financial policies. The

appraisal or analysis of financial statement spotlights the significant facts and relationship

concerning managerial performance, corporate efficiency, financial strength or weakness and

credit worthiness, that would have otherwise been buries in the maze of details.

The technique of financial appraisals frequently applied to the study of accounting data with a

view to determining continuity or discontinuity of the operating policies and investment value

of business. Everybody interested in the affairs of the company is interested in finding answer

to the following searching question:-

a) Does the company earn adequate profit?b) Does the company process enough funds to meet its obligation as and when they mature?c) Is investment in the company safe?

Appraisal of financial statement alone can answer such queries. Its true that statement

analysis merely reveals what has taken place in the past, but past events given some

indication of what may be expected in future unless some drastic changes take place in

business it. Will continue to move in the same direction in the past.

Roy .A. Faulke is very correct to say if a train is moving forward at a known rate of speed,

it is reasonable to assume that it will continue to move at approximately the same rate unless

some obstacle interrupts its progress abruptly or the motive power is increased or decreased.

Similarly it is a reasonable to assume that unless some realistic change take places in the

places in the business, it will continue to move in the same general direction as indicated by

its comparative trends.


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Need Of Financial Appraisal

The need of financial appraisal varies accounting to type of users. For management is

servers as mean s of self evaluation as it is like a report of its managerial skill and

competence a banker can judge the liquidity position a creditor can plan buying and selling of

hares of concern on the basis of safety of principal and its capital appearances as wanted by

the past record of earning. A debenture holder of a concern can ascertain whether income is

generates sufficient margin to pay the interest / answers to different question are provided by

financial appraisal. By using this technique an economist can study the extent of

concentration of economic power and pitfalls in the financial policies pursued, while a

planner can ascertain if the patter of investment reveals the companys position in relation to

labor and its welfare, legislation concerning licensing desirable in the socio economic

interested may be based on statement analysis.

3.5 Introduction of Working Capital

The management of current assets is similar to that of fixed assets in the sense that in

both case that a firm analyses their effects on its return and risk. The management of fixed

and current assets, however, differs in three important ways: first, in managing fixed assets,

time is a very important factor; consequently, discounting and compounding techniques play

a significant role in capital budgeting and a minor one in the management of current assets.

Second, the large holding of current assets, especially cash, strenghthens the firms liquidity

position (and reduces riskiness), but also reduces the overall profitability. Thus a risk-return

trade off is involved in holding current assets. Third, levels of fixed as well as current assets

depend upon expected sales, but it is only current assets which can be adjusted with sales

fluctuations in the short run. Thus, the firm has a greater degree of flexibility in managingcurrents.


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3.6 Concept of Working Capital

Gross working capital:-Gross working capital refers to the firms investment in current assets are the assets

which can be converted into cash within an accounting year and include cash , short-term

securities, debtors,(accounts receivable or book debts) bills receivable and stock

(inventory).

Gross Working Capital = Total Current Assets

Net Working Capital:-Its refers to the difference between current assets and current liabilities. Current

liabilities are those claims of outsiders which are expected to mature for payments within

an accounting year and include creditors (account payable) , bills payable ,and

outstanding expenses . Net Working Capital can be positive or negative. A positive net

working capital will arise when current assets exceed current liabilities .a negative net

working capital occurs when current liabilities are in excess of current assets.

Net Working Capital = Current Assets - Current Liabilities


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CLASSIFICATION OF WORKING CAPITAL

Fixed/Permanent Working Capital:-We know that the need of current assets arises because of the operating cycle. The

operating cycle is a continuous process and, there for, the need for current assets is felt

constantly. But the magnitude of current assets needed is not always the same; it increases

and decreases over time. However there is always a minimum level of current

assets which is continuously required by a firm to carry on its business operations.

Permanent or fixed, working capital is the minimum level of current assets. it is

permanent in the same way as the firms fixed assets are. Depending upon the changes in

production and sales, the need for working capital, over and above permanent working

capital, will fluctuate. For example extra inventory of finished goods will have to be

minted to support the peak period of sale, and investment in debtors (receivable) may also

increase during such periods. On the other hand, investment in raw material, work in

process and finished goods will fall if the market is slack.

KINDS OF WORKING

CAPITAL

ON THE BASIS OF CONCEPT ON THE BASIS OF TIME

GROSS

WORKING

CAPITAL

NET

WORKING

CAPITAL

FIXED

WORKING

CAPITAL

VARIABLE

WORKING

CAPITAL

REGULARWORKING

CAPITAL

RESERVEWORKING

CAPITAL

SPECIALWORKING

CAPITAL

SEASONALWORKING

CAPITAL

Amount ofworkingcapital (Rs)

Temporary orFluctuating

Time


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Variable Or Fluctuating Working Capital:-Variable or fluctuating working capital the extra working capital needed to support

the changing production and sales activities of the firm. Both kinds of working capital

permanent or fluctuating (temporary)-are necessary-to facilitate production and sales

through the operating cycle. But the firm to meet liquidity requirements that will last only

temporary working capital. In figure illustrates differences between permanent and

temporary working capital. It is shown that permanent working capital is stable over time,

while temporary working capital is fluctuating sometimes increasing and sometimes

decreasing. However, the permanent working capital need not be horizontal if the firms

requirement for permanent capital is increasing (or decreasing) over a period

3.7 Focusing On Management Of Current Assets

The gross working capital concept focuses attention on two aspects of current assets

management:

1. How to optimize investment in current assets?2. How should current assets be financed?

The consideration 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.

Amount ofworking

capital (Rs)

Temporary or

Fluctuating

Permanent

Time


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On the other hand, inadequate amount of working capital can threaten solvency of the firms

because of its inability to meet its current obligations. It should be released that the working

capital needs of the firm may be fluctuating with changing business activity. This may cause

excess or shortage of working capital frequently. The management should be prompt to

initiate an action and correct imbalances.

Another aspect of the gross working capital point 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 any 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 be temporarily 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 a margin or buffer for maturing obligations within the ordinary operating cycle of a

business. In order to protect their interests, short term creditors always like a company to

maintain current assets at a higher level than current liabilities. It is a conventional rule to

maintain the level of current assets twice the level of current liabilities. However, the quality

of current assets should be considered in determining the level of current assets vis a vis

current liabilities. A weak liquidity position poses 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. There for, prompt and timely action should be

taken by management to improve and correct the imbalances in the liquidity position of the

firm.


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Networking capital concept also covers the equation of judicious mix of long term and short

term funds for financing current assets. For every firm, there is a minimum amount of net

working capital which is permanent. Therefore, a portion of the working capital should be

financed with the permanent sources of funds such as equity share capital, debentures, long

term debt, performance share capital or retained earnings. Management must, therefore,

decide the extent to which current assets should be financed with equity capital and/or

borrowed capital.

In summary, 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 for any firm. The data and

problems of each company should be analyzed to determine the amount of working capital.

There is no specific rule as to how current assets should be financed. It is not feasible in

practice to finance current assets by short term sources only. Keeping in view the

constraints of the individual company, 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.

3.8 Operating And Cash Conversion Cycle

The need for working capital to run the day-to-day business activities cannot be

overemphasized. We will hardily find a business firm which does not require any amount of

working capital. Indeed, firms differ in their requirement of the working capital.

We know that a firm should aim at maximizing the wealth of its shareholders.Earning a

steady amount of profit requires successful sells activities. There is always an operating cycle

involved in the conversion of sales into case.

There is a difference between current and fixed assets in terms of their liquidity. A firm

requires many years to recover the initial investment in fixed assets such as plant and

machinery or land and building. On the contrary, investment in current assets such as

inventories and debtors [account receivable] is realized during the firms operating cycle that

is usually less than a year.


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What is an 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:

Acquisition of resources such as raw material, labor, power and fuel etc. Manufacture of the product which includes conversion of raw material into work-in-

progress into finished goods.

Sales of the products either for cash or on credit. Credit sales create accountreceivable for collection.

These phases affect cash flows, which most of the time, are neither synchronized because

cash outflows usually occur before cash inflows. Cash inflows are not certain because sales

and collections which give rise to cash inflows are difficult to forecast accurately. Cash

outflows, on the other hand, are relatively certain. 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 are there is hardly a matching between cash

inflows and outflow. The firms hold stock of finished goods to meet the demand of customers

on continuous basis and sudden demand from some customers. Debtors (Accounts

Receivable) are created because goods are sold on credit for marketing and competitive

reasons.

Purchase Payment Credit Sale Collection

RMCP+WIPCP+FGCP

Inventory convention period Receivableconversion price

Gross operation cycle

Payable Net operating cycle

Operating Cycle of a manufacturing firm


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Thus, a firm makes adequate investment in inventories, and debtors, for smooth,

uninterrupted production and sale.

How is the length of operating cycle determined?

The length operating cycle of a manufacturing firm is the sum of (i) inventory conversion

period (ICP) and (ii) debtors (Receivable) conversion period (DCP). The inventory

conversion period is the total time needed for producing and selling the product. Typically, it

includes: (a) raw material conversion period (rmcp) ,(b)work-in-process conversion period

(WIPCP), and (c) finished goods conversion period (FGCP). The debtors conversion period

is the time required to collect the outstanding amount from the customers. The total of

inventory conversion period and debtors conversion period is referred to as gross operating

cycle (GOC).

In practice, a firm may acquire resources ( such as raw material) on credit and temporarily

postpone payment of certain expenses. Payables, which the firm can defer, are spontaneous

sources of capital to finance investment in current assets,. The creditors (Payables) deferral

period (CDP) is the length of time the firm is able to defer payments on various resource

purchases. The difference between (gross) operating cycle and payables deferral period is net

operating cycle (NOC). if depreciation is excluded from expenses in the computation of

operating cycle, the net operating cycle also represents the cash conversion cycle(CCC).it is

net time interval between cash collections sale of the product and cash payments fore

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 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.


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Let us illustrate the computation of the length of operating cycle. Consider the statement of

cost of sales for a firm given in below-

Statement of Cost of Sales

( Rs in lakh)

ITEMACTUAL

20X1

PROJECTED

20X2

1 Purchase of raw material X1 X.

2 Opening raw material inventory X2 ..

3 Closeing raw material inventory X3 ..

4 Raw material consumed (1+2-3) X4 X.

5 Direct labour X5 X.

6 Depriciation X.. X.

7 Other mfg. expences X X.

8 Total cost (4+5+6+7) .. X.

9 Opening work-in-process inventory X.. X.

10 Closing work-in-process inventory X.

11 Cost of production (8+9-10) .. X.

12 Opening finished goods inventory .. X.

13 Closing finished goods inventory .. X.

14 Cost of goods sold (11+12-13) .. X.

15 Selling administrtive and gen expences .. X.

16 cost of sales (14+15) .. X.


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The firm's data for sales and debtors and creditors are given below :

Sales and Debtors

(Rs in lakh)

ITEMACTUAL

20X1PROJECTED

20X2

Sales (Credit) X Y

Opening balance of debtors X. Y.

Closing balance of debtors .. ..

opening balance of creditors .. ..

closing balance of creditors X. ..

Gross operating cycle (GOC)The firms gross operating cycle (GOC) can be determined as inventory conversion

period (ICP) plus debtors conversion period (DCP).Thus, GOC is given as follows:

Gross operating =Inventory

+Debtors

Conversion period Conversion period

.. (1)

Inventory conversion periodWhat determines the inventory conversion period? The inventory conversion (ICP) is

the sum of raw material conversion period (RMCP), work-in-process conversion period

(WIPCP) and finished goods conversion period (FGCP):

ICP = RMCP +WIPCP +FGCP

(2)


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Raw material conversion period (RMCP):-The raw material conversion period (RMCP) is the average time period taken to

convert material in to work-in-process. RMCP depends pm: (a) raw material

consumption per day, and (b) raw material inventory. Raw material consumption per

day is given 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. Similar calculations can be made for other inventories, debtors and creditors.

The following formula can be used:

Raw material

Raw material Inventory

Conversion =

Period [Rawmaterial

consumption]/360

RMC RMC*360

RMCP = RMI = (3)

360 RMC

Work-in-process conversion period (WIPCP):-Work-in-process conversion period (WIPCP) is the average time taken to complete

the semi-finished or work-in-process. It is given by the following formula:

Work-in-process

Work-in-process Inventory

Conversion =

Period [Cost of production]/360


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Finished goods conversion period (FGCP):-Finished goods conversion period (FGCP) is the average time taken to sell the

finished goods. FGCP can be calculated as follows:

Finished goods

Finished goods Inventory

Conversion =Period [Cost of goods sold]/360

CGI FGI*360

FGCP = FGI = ..(5)360 CGS

Debtors (receivable) conversion period (DCP) :Debtors conversion period (DCP) is the average time taken to convert debtors into

cash. DCP represent the average collection period. It is calculated as follows:

Debtors Debtor Debtors*360

Conversion = = ....(6)

Period (DCP) Creditor sales/360 Creditor sales

Creditors (payables) deferral period (CDP) :Creditors (payables) deferral period (CDP) is the average time taken by the firm in

paying its suppliers (creditors). CDP is given as follows:

Creditors Creditors Credit*360

Deferral = = (7)

Period Credit purchases/360 Credit purchases


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Cash Conversion or Net Operating Cycle :Net operating cycle (NOC) is the difference between gross operating cycle and

payables deferral period.

Gross Creditors

Net operating = Operating = deferral

Cycle Cycle period

NOC = GOC - CDP

(8)

Net operating cycle is also referred to as cash conversion cycle. Some people argue that

depreciation and profit should be excluded in the computation of cash conversion cycle since

the firms concern is with cash flow associated with conversion at contrary view is that a firm

has to ultimately recover total costs should include depreciation, and even the profits. Also, in

using the above-mentioned formulae, average figures for the period may be used.

For example, Table shows detained calculations of the components of a firms operating

cycle. Table provides the summary of calculations.

During 20X1 the daily raw material consumption was Rs 12.1 lakh and the company held an

ending raw material inventory of Rs827 lakh. If we assume that this is the average inventory

held by the company, the raw material consumption the projected raw material conversion

period is 60 days. This has happened because both consumption (Rs 16.5 lakh per day) and

level of inventory (Rs 986 lakh) have increased, but the consumption rate has increased) by

36.4 percent). Thus, the raw material conversion period has declined by 8 days. Raw

materials are the result of daily raw material consumption and total raw material consumption

and total raw material consumption and total raw material consumption during a period given

the companys production targets. Thus, raw material inventory is controlled through control

over purchases and production. We can similarly interpret other calculations in table below


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Table:-Operating Cycle Calculation (Hypothetical Example)

( Rs. In lakh)

ItemActual19X1 Projected 19X2

1 Raw Materials Conversion Period

(a) Raw material consumption

(b) Raw material consumption per day

(c) raw material inventory

(d) Raw material inventory holding days

2 Work-in-process Conversion Period

(a)cost of production*

(b)cost of production per day

(c)work-in-process inventory(d) Work-in-process inventory holding days

3 Finished Goods Conversion Period

(a) Cost of goods sold*

(b) Cost of goods sold per day

(c) Finished goods inventory

(d)Finished goods inventory holding days

4 Collection period

(a) Credit sales (at cost)**

(b) sales per day

(c) debtor

(d) debtors outstanding days

5 Creditors Deferral Period

(a) Credit purchases

(b) purchase per day

(c) creditors

(d) Creditors outstanding day

*Depreciation is including.

**All sales are assumed on credit.


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Table :-Summary of Operating Cycle Calculations

(Number of Days)

Actual Projected

GROSS OPERATING CYCLE

1 Inventory Conversion Period

(i) Raw material

(ii) Work- in- process

(iii) Finished goods

2 Debtors Conversion Period

3 Gross operating cycle (1 + 2)

4 Payment Deferral period

NET OPERAING CYCLE (3-4)

We note a significant change in the companys policy for 20X2 with regard to finished

goods inventory. It is expected to increase to 54 days holding from 38 days in the previous

year. One reason could be a conscious policy decision to avoid stock out situations and carry

more finished goods inventory to expand sales. But this policy has a cost; the company, in the

absence of a significant increase in payables (creditors) deferral period, will have to negotiate

higher working capital funds, In the case of the firm in our example, its net operating cycle is

expected to increase from 136 days to 148 days How does a company manage its inventories,debtors and suppliers credit? How can it reduce its operating cycle?

The operating cycle concept as shown in Figure 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 (receivable) 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.


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3.9 Ratios Of Working Capital

Current ratio Quick ratio Absolute ratio Stock or inventory ratio Working capital turnover ratio

Current RatioCurrent ratio is one of the important ratios used in testing liquidity of a concern.

this is a good measure of the ability of company to maintain solvency over a short run. This is

computed by dividing the total current assets by the total current liabilities and is expressed

as:

The current assets of a firm represent those assets, which can be in the ordinary

course of business, converted into cash within one accounting year. The current liabilities are

defines as obligation maturing within a short period (usually one accounting year). Excess of

current assets over current liabilities is known as working capital and since these two (current

assets and current liabilities) are used in current ratio therefore, this ratio is also known as

working capital ratio.

With the help of this ratio the analyst can review the extent to which the company can covert

such liabilities with current assets. The current ratio gives the analyst a general picture of the

adequacy of the working capital of a company and ability of the company to meet its day-to-

day payment obligation. it likewise measures the margin of safety provided for paying

current debts in the event of a reduction in the values of current assets.


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The current ratio is very useful as a measure of short terms debt prying ability but it is tricky

to interpret this ratio. Experts are of the view that the value of current assets should be at least

double the amount if current liabilities.

Walker and Bough have the same view when they ay a good current ratio may mean a good

umbrella for creditors against the rainy days.But to the management it reflects bad financial

planning or presence of idle assets or over capitalization

Idle Current Ratio: 2:1

If this ratio is higher than standards than it is assumed Very good shortterm liquidity/solvency. Excess stocks, bad debts and idle cash. Under trading

If this ratio is lower than standards than it is assumed

Unsatisfactory short-term liquidity. Shortage of stocks, less credit sales, shortage of cash. Over trading

Quick RatioThe solvency of a company is batter indicated by quick Rato.the fundamental this

Ratio is to enable the financial management of a company to ascertain that would happen If

current creditors press for immediate payment and either not Possible to push up the sales of

closing or it sold, a heavy loss is likely to be suffered. This problem arises because closing

stock is two steps away from the cash and their price more or less uncertain according to

market demand.


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The term quick assets include all current assets except inventories and prepaid expenses. It

shows the relationship of quick assets and current liabilities. The Ratio is calculated as

following:

An indicator of a company's short-term liquidity. The quick ratio measures a

company's ability to meet its short-term obligations with its most liquid assets.

The higher the quick ratio, the better the position of the company. Also known as the "acid-

test ratio" or the "quick assets ratio".

Absolute Liqudity RatioThe absolute liquid ratio between absolute liquid assets and current liabilities

is calculated by dividing the liquid assets and current liabilities. Expressed in formula,

the ratio is:

Cash + Marketable Securities

= Absolute Liquidity RatioCurrent Liabilities

The term liquid assets include cash bank balance and marketable securities, if current

liabilities are to pay at once, only balance of Cash and marketable securities will be

utilized. Therefore, to measure the absolute liquidity of a business, this ratio iscalculated.

Idle Ratio: 0.5: 1

The idea behind the norm id that if all creditors for demand for payment, at least 50%

of their claim should be satisfied at once


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Stock Or Inventory RatioEvery firm has to maintain a certain level of inventory of finished good so as to be able

to meet the requirements of the business. But the level of inventory should neither to be high

not to be low. It to high inventory means higher carrying cost and higher risk of stocks

becoming obsolete whereas to low inventory may mean the loss of business opportunities. it

is very essential to keep sufficient stock in business .

It is express in number of time . Stock turnover ratio or inventory turn over ratio indicates the

no. of times the stock has been turned over during the period and evaluates the efficiency

with which a firm a able to manage its inventory. This ratio indicates whether investment in

stock is with in proper limit or not.

HIGHER RATIO INDICATES:-

Stock is sold out fast.Same volume of sales from less stock or more sales from

Same stock

Too high ratio shows stock outs or over trading.Less working capital requirement.

LOWER RATIO REVEALS:-

Stock a sold out at a slow speed.Same volume of sale for more stock or less sale from same stock.More working capital requirement.Too low ratio show obsolete stock or under trading.

Formula of stock turn over ratio:-

The ration is calculated by dividing the cost of goods sold by the amount of average stock at

cost.


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Inventory turnoverRatio =

Inventory turnover ratio measures the velocity of conversion of stock in to sales.

Usually a high inventory turnover / stock velocity indicates efficient management of

inventory because more frequently the stock are sold, the lesser amount of money is required

to finance the inventory. Low inventory turn over ration indicate inefficient management of

inventory. in low inventory turn over implies over investment in inventories, the business,

poor quality of goods, stock accumulation, accumulation of absolute and slow moving good

and low profit as compared to total investment the inventory turn over ratio is also an index

profitability where a high ratio signifies more profit a low ratio signifies low profit some

time a high inventories.

Working capital turnover ratio:A measurement comparing the depletion of working capital to the generation of sales

over a given period. This provides some useful information as to how effectively a company

is using its working capital to generate sales.

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 forthe 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.
http://en.wikipedia.org/wiki/Inventory_turnoverhttp://en.wikipedia.org/wiki/Inventory_turnover


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CHAPTER-4

DATA ANALYSIS

AND INTERPRETATION


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4.1 Working capital analysis

Analysis of working capital is an essential part of financial management. If there is an

adequate amount of working capital and it is utilized in the right manner, it is a great

achievement for the business. The excess of working capital causes financial stringency and

brings the business to a standstill.

Realizing the impotence of working capital in financial management the analysis of working

capital becomes an essential phenomenon. It facilitates the adequacy and management of

working capital. The management of working capital provides a careful inquiry into its

components so as to control the working capital and to conserve it properly. It helps in

determining the optimum level of working capital in the firm. The process of measurementand analysis of working capital is performed on the basis of financial statements of the

business enterprise for past few years.

In the present study the analysis of working capital of FCI ltd. Has been made by two

techniques vis., trend analysis and ratio analysis.

4.2 Working capital trend analysis

The working capital trend analysis represents a picture of variation in current assets,

current liabilities and working capital over a period of time. Such an analysis enables us to

study upward and downward trend in current liabilities and its effect on the working capital

position. The trend analysis is a tool of financial appraisal where the changes in the factors

are compared with the base year assuming the base year as 100.

In the present study a statementshowing trend of working capital as well as its structure has

been made. It is it scientific and important study because each component of working capitalhas got the relationship of causes and effects.

Following table below shows the structure and trend of working capital of FCI ltd.during the

period under review.


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STRUCTURE AND TREND OF WORKING CAPITAL OF FCI

2009 TO 2012

PERTICULAR 2009-2010 2010-2011 2011-2012CURRENT ASSETS

CASH 322389.24 855819.51 836439.2

BANK 18632795.88 35936348.16 27218462.16

LOAN AND ADVANCES 71220809.88 84836477.65 77115112.92

DEBTORS 300805197.7 311027760.6 356580000.4

STOCK 377580243.7 427327384.8 465048573.5

TOTAL (A) 768561436.4 859983790.7 926798588.2

CURRENT LIABILITIES

CURRENT LIABILITIES ANDPROVISIONS

526439722 512950750.7 442009648.8

TOTAL (B) 526439722 512950750.7 442009648.8

NET WORKING CAPITAL (A-B) 242121714.4 347033040 484788939.4

Inference

Current Assets increase to 20.59% in the year of 2011-2012 asCompare to in the year 2009-2010.

Current Liabilities in the year 2011-2012 got decreased by 16.04%As compared to the year 2009-2010.

In the year 2010-2011 the growth in working capital was 43.33%As compare to the year 2009-2010 similarly working capital in the year 2011-2012 has grownto 100.03% as compared to the working capital in the year 2009-2010

The analysis shows the effective and efficient management of working capital by the

FCI.


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4.3 Ratio analysis

The ratio analysis of working capital can be used by management as a means of

checking upon the efficiency in working capital management of the company. Following

ratio haven used to analysis and interpret working capital of FCI ltd.

a) Current ratiob) Quick ratioc) Absolute ratiod) Stock or inventory ratioe) Working capital turnover ratio


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a) Current Ratio:-

Current Rat io = Current Asse t s / Current L iab i l i t y

Idea l Rat io = 2 : 1

Years Current Assets Current Liabilities Current Ratio

2009-2010 768561436.4 526439722 1.46

2010-2011 859983790.7 512950750.7 1.68

2011-2012 926798588.2 442009648.8 2.01

INFERENCE:-

This table reveals that current ratio has increased that is making

improvements in its short term solvency. It is because of increase in current assets as

compared to current liabilities. Still this is lower than standard current assets ratio that shows

a little bit unsatisfactory liquidity position of the company.

The Current Ratio for the year 2011-2012 has taken the Value of 2.01:1, which is very

satisfactory and as per the standard required (2:1).The current ratio of 2.01:1 indicates, that

for every Rs 1 of current liability the company Rs 2 of current assets, which indicates more

liquidity and hence more amount of working capital.

0

0.5

1

1.5

2

2.5

current

ratio

2009-2010

2010-20112011-2012


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b) Liquid Ratio:

Liqu id Rat io = Liqu id Asse t s / Current L iab i l i t i e s

Idea l Rat io = 1 : 1

Years Liquid Assets Current Liabilities Liquid Ratio

2009-2010 390981192.7 526439722 0.74

2010-2011 432656405.9 512950750.7 0.84

2011-2012 461750014.7 442009648.8 1.04

INFERENCE:-

Although it is less idle ratio still it has increasing trend that shows dairys improving

condition of short term solvency of FCI.

Quick ratio for the year 2011-12 is above the ideal standard. It is 1.04:1, which indicates that

for every Re1 of current liability the company has Rs 1.04 of current assets, hence the

company is in sound position in terms of working capital position.

0

0.2

0.4

0.6

0.8

1

1.2

Quick ratio

2009-10

2010-11

2011-12


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c) Absolute ratio

Cash + Marketable Securities = Absolute Liquidity RatioCurrent Liabilities

Idle Ratio: 0.5: 1

Years

Absolute Liquid

Assets Current Liabilities Absolute Ratio

2009-2010 18955185.12 526439722 0.04

2010-2011 36792167.67 512950750.7 0.07

2011-2012 28054901.36 442009648.8 0.06

INFERENCE

This ratio is very below from idle ratio. It is making insecure creditors claim but it is

getting increasing trend. It is needed to maintain this trend.

Ratios for all the above mentioned years right from 2009 up to 2012 are close to the standard.

For year 2011-12, the ratio is well above the standard, which indicates the healthy picture of

the company in terms of availability of working capital (quick assets) in order to meet currentliabilities.

0

0.01

0.02

0.03

0.04

0.05

0.06

0.07

Absolute

liquidityratio

2009-10

2010-11

2011-12


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d) Inventory Ratio

Inventory turnover Ratio = S al e / A ve rag e In ven to ry

INFERENCE:-

As compared to year 2009-2010, in the year 2010-11, the inventory turnover increased

to 8.19 times. Similarly, in the year 2011-12 it increased to 8.59 times, which indicates that

the times taken in converting raw material into finished product and finally selling it got

reduced considerably and hence indicates quick release of working capital..

7.4

7.6

7.88

8.2

8.4

8.6

Inventory

turnover

ratio

2009-10

2010-11

2011-12

YEAR COST OF

GOOD SOLD

AVERAGE

INVENTORY

INVENTORY

TURNOVER(TIMES)

INVENTORY

TURNOVER(DAYS)

(A) (B) (C) (D) = (B)/(C) (E)= 365/D

2009-2010 2955076031 377580243.7 7.83 46.64

2010-2011 3501014350 427327384.8 8.19 44.55

2011-2012 3995104641 465048573.5 8.59 42.49
http://en.wikipedia.org/wiki/Inventory_turnoverhttp://en.wikipedia.org/wiki/Inventory_turnover


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E) Working Capital Turnover Ratio

YEAR NET SALES WORKING CAPITAL CURRENT RATIO

(A) (B) (C) (B)/(C)

2008-2009 3207510314 242121714.4 13.24

2009-2010 3747805031 347033040 10.8

2010-2011 4266143965 484788939.4 8.8

INFERENCE:

In spite of an increase in Net Working Capital, the Working capital turnover ratio of

FCI got reduced to 10.8 times in the year 2009- 2010, as compared to the year 2010-11.

Similarly, in the year 2011-12, the working capital turnover ratio further reduced to 8.8 times

as compared to 13.24 times in the year 2009-10. The reduction in working capital turnover

ratio is on account of massive growth in net working capital as compared to a slight growth in

the sales of the company.

0

2

4

6

8

10

12

14

Working

capital ratio

2009-10

2010-11

2011-12


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CHAPTER-5

CONCLUSION AND

RECOMMENDATION


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5.1 Conclusion

By analysis the working result i.e. Profit and loss account of FCI. It was found that the netprofit before interest and tax of the FCI is showing increasing trends.

Sales of the company is continuously increasing which result in higher profit the current ratio of the company is more than the standard ratio which indicates more

liquidity and more amount of working capital in the organization.

Companys quick asset ratio is below the idle ratio it means though the all sales is in cash The reduction in working capital turnover ratio is on account of massive growth in net

working capital as compared to a slight growth in the sales of the company. The value of

ratio could be better in near future , if the growth in sales matches with the growth in net

working capital.

Finance structure of company is very sound which help in getting financial help frominstitution very easily.

5 .2 Recommendat ion /Sugges t ions :

Operating expenses, admn. Expenses should be specially considered to be reduced. Inventory should be reduced extent that would help to recover blocking money in

inventory.


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REFERENCES

I.M.Pandey, (1978), financial management, Ninth addition, UBS Publication NewDelhi.

Van Horn,(2002),Financial Management and Policy,12th edition, Publisher DorlingKindersley India ltd.

Horne Wwachonicz, J.R.Bhaduri (2005), Fundamentals and Financial management,12th edition, Pearson publisher.

MY Khan, P.K.Jain (1981), Financial Management,5 th edition, Publisher Mc graw hillcompanies.

Financial statement for the year ended 2011-12 as obtained from FCIAnnual-Report 2011-12 of FCIwww.fciweb.nic.in

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