finance final project 1

8/6/2019 FINANCE Final Project 1

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1.1. INTRODUCTION OF THE COMPANY

KELTRONComponent Complex Ltd (KCCL) was incorporated on 8th October

1974 as an associated company of Kerala State Electronic Development Corporation

Limited (KSEDC). It started its operations in the year 1976. KCCLs head quarters

situated at Trivandrum. It is public limited company established for the manufacture of

aluminum electrolytic capacitors of KSEDC on 28th August 1986. A developing economy

requires an increasing volume of investments not only in fixed asset but also in working

capital. The requirement of working capital is that portion of total capital of business,

which is employed in short term operation. A deeper understanding of the importance of

working capital can lead not only material savings in the economical use of capital but

can also assert in furthering the ultimate aim of business. Incase of trading concern, the

working capital requires depends up on the length of time needed To convert cash into

inventories, inventoriesin to account receivables and account receivables into cash.

For smaller firm working capital management is over more important area and

one of the main reasons is that current asset historically represents more than 60% of the

total asset of the firm. To avoid liquidity crisis, there must be proper management of

working capital.

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KELTRON

Keltron is of the few companies in India which manufactures a wide range of

electronic products starting from discrete components to sub assemblies to equipment and

systems. This strength combined with the technical manpower resources in research and

development, product development, and turnkey project management, has enabled

Keltron to emerge as a total solutions provider integrating talent and technology to design

workable solutions it suite the specific needs of its customers.

WORKING CAPITAL

The management of working capital plays an important role in maintaining the

financial health of the firm during the normal course of the business. The working capital

management is a loop ,which starts from cash and marketable securities account , goes

through the current accruals account as direct labour and materials are purchased and

used to produce inventory, which is in turn sold and generates accounts receivables,

which are finally collected to replenish cash. Working capital is the life blood of the

organization. It should be optimal, it means if working capital is high, it will be idle and if

it is too low, it is very difficult to perform their current operation. It will also affect the

goodwill of the firm.

Efficient working capital management implies two closely related actions. First

the policy may be set regarding the desired levels for each asset component. Second an

administrative frame work must be established for managing and controlling these assets

within the policy guideline. Working capital management policies of a firm have a great

impact on its profitability, liquidity and structural health of the organization.

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WORKING CAPITAL MANAGEMENT OF KCCL

Working capital management of KCCL can be best analyzed by analyzing the

component involved in the working capital. Stock of raw material, stores and spares,

finished goods, and stock in process have been valued at cost or net realizable value,

which ever is low. Major parts of raw material used by KCCL are imported from different

countries like Japan, Korea, Taiwan, China etc, where ever is cheap. Another important

component is receivables. Major sales are on credit basis, because of stiff competition.

Credit period is 75 days and most of the transactions are through banks.

OUT COME OF THE STUDY

Even though there are different studies conducted about the working capital

management in KCCL, through this study we can understand more about the current

position of the firm and what are the main reasons and how can we improve the current

position of the Keltron Component Complex Ltd.

1.2. OBJECTIVES OF THE STUDY

The study was conducted to cover the following objectives

To identify the trend of working capital in KCCL.

To forecast the trend of working capital.

To find out the long-term solvency position of the organization.

To ascertain liquidity position of Keltron by using liquidity ratios.

To analyze and evaluate profitability position of the concern by using Profitability

Ratios.

To analyze schedule of Changes in Working Capital.

To analyze the earning capacity of the organization.

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1.3. PERIOD OF STUDY

The period of study covered by the present study is 5 accounting year (2005-2009)

1.4. LIMITATIONS OF STUDY

The researcher had to encounter deferent constraint in completing this study. The

first and foremost among them was time constraint followed by non availability of data.

The later reason has been huddle in resorting to industry comparison of standard and

making a comparative evaluation of company study. However care has been taken to

collect maximum possible information for the purposes of evaluation of working capital

adequacy and financial stability of the company.

1.5. SCOPE OF THE STUDY

This study is intended to obtain a general view about the working capital

management in KELTRON COMPONENT COMPLEX LIMITED, KANNUR. The major

component of working capital like inventories, receivable, cash and marketable securities,

payables and term loan have give component wise importance to the study. The main

attempt is to know the firms ability to fulfill its short term obligation.

1.6. STATEMENT OF PROBLEM

Every business need fund for two purpose; one for the establishment and the other

to carry out the day to day operation. It needs some amount of working capital to meet daily

obligation. The need for working capital arises due to the time gap between the production

and realization cash from sales. Management of working capital is concerned with the

problem that arises in attempting to manage current asset, current liability and the inter

relationship that exist between them. Effective and efficient working capital management of

a firm has a great effect on its profitability, liquidity and the structural health of

organization

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2.1 INDUSTRY PROFILE

Electronics is the study of properties and behavior of electronics and other

carriers of electric charge especially with reference to technological and industrial

applications.

Electronics play a vital role in the economic and social development of a country,

especially the liberalization policy followed by the government, has enabled the

development of electronic industries in our country. The electronic Devices Industry leads

the Food Chain, Electronic System and the Market Sector within the food chain.

In the Chain, Semiconductor follows Electronics. They play an important role in

the manufacture of competitive Electronic System. The next two parts of the Chain are

again very closely related Semiconductor market.The contribution made by Keltron to a national electronics production is very

significant. Year after year Keltrons share to national production is declining. The reason

may be due to existence of high wage system and Government policy. The main objective

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Electronic Devices

Semiconductors

Semiconductors

Production Equipment

Materials


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of Keltron was to set up Electronic Industrial unit all over Kerala. Electronics occupy a

key position in modern science and technology. It has a vital role to play in the field of

automatic energy education, agricultural and employment generation.

Following are some of the units, which manufacture electrolytic capacitors.

Kerala Statate Electronic Development Corporation ltd.

Meghalaya Industrial Development Corporation Ltd.

Navabharath enterprises, Hyderabad

Pieco Electronics And Electronicals Bombay

Rescon Manufacturing Pvt.Ltd, Pune

Sab Electronics Devices, Sahidabad

Webelsen Capacitors Ltd, Culcutta

In addition to the above, there are quite a few units manufacturing electrolytic

capacitors in small scale. The average capacity of each manufacturer in small scale is in

between .5 to 3 million numbers of electrolytic capacitor per annum. According to a

recent report on the Indian capacitor industry prepared for Electronic Component

Industries Association (ELCINA) by the year 2006 the total demand would be worth

Rs.2750.

The current indigenous production is estimated to be worth 1200mn. The gap is met

by imports. Also the import duty on components including capacitors is expected to be

brought down to 0% as per the WTO agreement. As such the market prices are bound to

fall further even while the demand increases.

2.1.1. INDIAN MARKET FOR ELECTRONIC DEVICES

Despite having population over one billion people India has a relatively small

electronic market being ranked twenty-sixth worldwide. In terms of production the

country is ranked twenty-ninth.

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The consumer electronics sector dominates the industry and has benefited from a

massive and expanding market. Television sets account for 22% of overall production.

Electronic imports have steadily increased in recent years and accounted for 41% of

the market in 2001, up from 16% in 1993. In contrast exports account only for 18% of the

production.

2.1.2. WORLD MARKET FOR ELECTRONIC PRODUCTS

Faster, Better and Cheaper is the slogan that drives todays electronic industry.

Consumers are buying goods at a faster rate than the past. Electronic industry now

follows the slogan Innovate or Perish. Thus we can see number of novel and modified

products in the market today.

Electronics development has not been a steady one it is cyclic in nature. There is

much fluctuation in demand and supply. But since future belongs to the Electronic

Industry as for its providing us compact, simple and innovative products the demand for

the electronic devices can be steadied after some time. Keltron is the sole manufacturing

unit of capacitors in Kerala. These are some of the units, which manufacture electrolyte

capacitors.

Meghalaya Industrial Development Corporation Limited

Navabharath Enterprises, Hyderabad

Pieco Electronics and Electricals Limited, Bombay

Rescon manufacturing Private Limited, Pune

Sab Electronic Devices, Sahidabad

Webel Sen Capacitors limited, Calcutta

In addition to the above, there are quite a few units manufacturing electrolytic

capacitors in small scale. The average capacity of each manufacturer in small scale is in

between 0.5 to 3 million numbers of electrolytic capacitors per annum.

As per the information available, all the major units of capacitors are working

well. In fact, some of the major units have taken effective steps for their existing units.

The small-scale industries are however facing some problems. The major problem they

are facing is the non-availability of indigenous good quality raw materials. The organized

sector is using 90% to 98% imported raw materials.

The leading Asian products of AEC are as follows,

Japan

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Nippon Chemicon

Nichicon

Elna

Shin EL, Tsushin Kogya

Hitachi Condenser

Toshin Kobyo

South Korea

Korea Elna

Samhwa Electronics

Samsung

Dong Sung

Taiwan

Kaimei Electronics

Yeong hong

Matsushita Taiwan

Teapo

Anodia etc.

The basic technology for manufacturing of Aluminum Electrolytic Capacitors has

changed a little since the first high performance Aluminum Electrolytic Capacitors using

formed and etching aluminum foils was developed in 1930s.

However, over the years, especially with the advent of modern equipment

utilizing integrated circuits and with the demand imposed by improved and consistence

performance over extended period of time, substantial adoption and process improvementhave been made.

The leading overseas manufacturers to the following developments are paying

maximum attention.

Improved materials and their performance

Automation

Reliability and quality assurance

Low ESR

Higher temperature capability

Miniaturization

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For the Indian Aluminum Electrolytic Capacitors industry to improve its

profitability of the company, the following is required.

Increased the capacities with capacity in excess of indigenous demand stated for

exports

Further automation of the system resulting in high international standards yields

Availability at competitive cost of international standard raw materials preferably

from indigenous source

All these factors are closely interrelated.

Basic technology is to of a fairly high order. The manufacture of ECs in the

country is being more or less led by three or four large units which also serve as the

repository of basic technology, some acquired through foreign collaboration and some by

other means such as through drawing/designs and diffusion of skilled personnel. The

small size units squeezed out of the competition arising from both foreign and domestic

companies.

Faster, better, cheaper is the slogan of the electronic industry

2.1.3. MARKET TREND IN ALUMINUM ELECTROLYTIC

CAPACITOR INDUSTRY

The primary market for Aluminum Electrolytic Capacitors remains the consumer

himself. Electronics with Asia pacific the largest region, the area benefiting most from the

move by Japanese manufacturers to locate consumer electronics production offshore and

the strong growth in the indigenous manufacturing base. Flat panel displays, digital

cameras and automotives will drive the growth.

A number of new markets are emerging as performance improves. Axial leaded

aluminum capacitors are now viewed as a mature technology with the number of

manufacturers discontinuing production. The medium to longer-term aluminum will faced

continued competition from base metal multilayer ceramic, developments in super

specialty applications.

The reason indigenous production is increased day by day leading to an increased

in demand. The gap here is met by imports. Also the import duty is supposed to be

brought down as per the WTO agreement. As such the market prices are bound to fall

further even while the demand increases. Thus even with complexities Electronic Industry

has a bright future ahead!

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2.2 COMPANY PROFILE

2.2.1. HISTORY IN BRIEF

Keltron Components Complex Ltd (KCCL) was incorporated on 8th October

1974 as an associate company ofKerala State Electronics Development Corporation

Ltd (KSEDC). A plant for the manufacture of 18 million pieces of Aluminum

Electrolytic Capacitor was established in collaboration with M/s NV Sprague eletromag

Belgium, which was a subsidiary of Sprague Electric co., USA. The company went in to

commercial production in 1978. the expansion of capacitor plant was undertaken in a

phased manner to 55 million pieces by 1984-85 and 150 million pieces by 1990-91. the

company became a subsidiary of KSEDC increased from 8 million pieces in 1978-79 to

145 million pieces in 1999-2000.

.

2.2.2. PRODUCTS

The company started with manufacture of Axial, radial and can type DC

capacitors. Subsequently products were added with in house development. At present the

company manufactures a wide range of Aluminum Electrolytic DC and AC capacitors as

below,

2.2.3. APPLICATION/ CUSTOMERS

Electrolytic capacitors are widely used in TV sets, VCP, VCR, Radios, Tape

Recorders, Telephone Instruments, Electronic Exchanges, communication equipments,

Defense equipments etc. the present customers include major Indian manufactures like,

BEL

ITI

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C-DOT

HCL

TATA TELECOM

BPL TELECOM

ONIDA

SHARP INDIA

VIDEOCON

CROMPTON GREAVES

TEXLA

ECIL etc

2.2.4. COMPETITORS

The major competitors in India for electrolytic capacitors are Punssumi India Ltd.,

Uptron, Webelson, Philips, incap; Elnet etcmost of the competitors are not working to

capacity. With liberalization of economy, and bringing capacitors under OGL, the

company has to compete with international brands like Rubycon, Nichicon, Panasonic,

Samsung, Elna etc

2.2.5. TECHNOLOGY

The company acquired the technology for design development manufacturing and

testing from the collaborators, M/s M.V. Sprague Electromagnet. The manufacturing

process which was mainly semi-automatic and manual in nature was upgraded

subsequently by the company by sourcing state of the art automatic machinery from

Japan during the expansions undertaken. The company could also update the technology

by optaining information from suppliers on the latest development taking place in Japan,

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Korea and Taiwan on size reduction and high temperature categories of capacitors with

its in-house R&D effects.

The major raw materials, viz. aluminum etched and formed Foil was initially

sourced from various countries. The company had developed and mastered the

technology for forming of aluminum foil for low voltage and high voltage use. The

company had indigenously

Fabricated machinery for forming of 1, 25,000 M2 of low voltage foils and 40,000

M2 of high voltage foil thereby reducing dependence on import of basic raw materials.

The company had already developed and demonstrated capability for etching of

high voltage aluminum foils under a grant in aid project with aid from Dept. of

electronics (DEO) the company is at present engaged in development of technology for

etching of low voltage aluminum foils with a 50% cost sharing grant from DOE.The company also engaged in development of electrolytes. Already a few

electrolytes had been developed with in-house R&D and development of other

electrolytes solution are in progress.

The design development and manufacture of the following varies of capacitors

were done by the company as part of in-house development.

1. Miniature capacitors of 85 C (2000 Hrs life)

2. Sub miniature capacitor 7mm height

3. Horizontal correction capacitor

4. 105 C (High Temp) capacitors for automotive applications

5. Aluminum electrolytic motor star AC capacitor

6. Snap mount capacitor for SMPS requirement

7. Lug/Screw Terminal type for power supplies

2.2.6. QUALITY ASSURANCE DEPARTMENT

The need for quality needs no special emphasis. One benefit of quality is increased

productivity results in better profit and builds customer loyalty. Quality control is a staff

function concerned with prevention of defects in manufacturing so that, items maybe made

right at the first time and not to be performed.

There must be inspection and control of incoming raw material to ensure that they

meet the specification; there must be planning and controlling of manufacturing process to

ensure that suitable methods are being used and that machines and equipments are

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performing satisfactorily; there must be in process inspection to ensure that items being

fabricated meet specification; there must be final inspection and testing for product

performances.

The department doing these functions is called quality assurance department. A quality

assurance department provides 100% quality assurance for the capacitors produced. The

required quality can be attained by regular inspection. The inspection is carried out in three

stages:

1. Incoming inspection

2. Patrol inspection

3. Outgoing inspection

2.2.7. AWARDS AND RECOGNITIONS

National Productivity Award for 1988-89 under large scale electronic components units

from National Productivity council, New Delhi.

ELCINA Award 1993 for excellence in Research & Development for work done in the

field of forming technology.

Department of scientific and industrial Research, Ministry of science and Technology,

Govt. of India approval for the in-house Research & Development.

ISO-9001 certification from KPMG-QR, USA, only Electrolytic capacitor manufacture

to have ISO-9001 certification in India.

With the experience and knowledge gained over the year the company is

confident to upgrade technology in the tune with market requirements in the future also.

The present technology of electrolytic capacitors is expected to stay for another ten to

fifteen years with marginal variation. The only development taking place in the developedcountries is in terms of reference mount technology and in India this technology is expected

to be commercialized in another ten to fifteen years only.

Plant and Machinery

The original and machinery for 18 million pieces per annum of capacitors were

sourced from M/s NV Sprague Electromag Belgium. Subsequently, for the expansion

project the company sourced automatic state of the art machinery from M/s JCCEngineering co., Japan, M/s CKD corporation, Japan and M/s Dons enterprises, Taiwan.

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2.2.8. ORGANIZATION CHART

PLG - Planning

EDP Electronic Data Processing

MFD - Manufacturing

PE Plan Engineering

FIN - Finance

CAL - Calibration

QA Quality Assurance

R&D Research & Development

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PLG

EDP

MFG

PE

FI

N

CAL

QA

R&D

E&F

MA

T

HRD&AD

M

E&D

MK

T

Managing Director


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with decreasing voltage will have increasing voltage formed foil. The standard width of

50mm foil will be slit into 3.0mm based on capacitor size.

The slit foil is stitched with purity tabs to lead out for external circuit. The capacitor

elements and impregnated electrolyte used in the production of Aluminum Electrolyte

Capacitors depends on the working voltage and temperature category of the capacitor.

2.3.2. PRODUCTS

The company started with manufactures of Axial, Radial and Can type Dc

capacitors. Subsequently products were added with in house development. At present the

company manufactures a wide range of Aluminum Electrolytic DC and AC capacitors as

below

Type Designation

1. Radical Capacitors

SA2 Small Sized + 85c (200 hrs)

SM Reduced size 7mm height

SN Bipolar

SH Horizontal correction

SZ Low ESR

SB Professional grade defense approved

SE High temperature, 105c (for automobile

Section)

2. Axial Capacitors

DB Miniature 85c (2000 hrs)

DC Large axial 85c (2000 hrs)

DD Professional (defense approved)

3. Can Type capacitors

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MA PCB mounts high voltage capacitor

MB Snap mounts

MD Double Can motor start AC capacitor

MS Single Can motor start AC capacitor

MP Can type screw terminal

RESEARCH METHODOLOGY

3.1. SOURCES OF DATA

Data required for the analysis is obtained from secondary sources as well as by

personal interview. The data with respect to current assets, current liabilities, sales, purchases

and other balance sheet item were collected from the published annual reports and records of

the company.

3.2. RESEARCH DESIGN

The research design adopted for the study is descriptive in nature. The study

describes the structure, size and working capital, length of operating cycle and also analyses

theefficiency with which working capital has been managed.

3.3. ANALYSIS OF DATA

The collected information has been properly tabulated and wherever possible graphs

have been included. The most commonly used tool for this study is ratio. Objective of the

study

1. To analyze the liquidity position of the KCCL

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2. To identify the turnover ratio of KCCL

3. To analyze structure and growth of working capital.

4. To study the sources and uses of current assets.

5. To give suggestion and recommendation base on the findings for the good working

capital of the firm.

4.1. WORKING CAPITAL CONCEPTS

Working capital is the lifeblood and nerve centre of a business. Working part

of firms capital which is required to finance short term or current assets. According toaccount terminology it is the difference between the inflow and out flow of funds. In

other words it is the net cash flow. Thus, working capital is the amount of funds necessary

to cover the cost of operation of an enterprise.

4.2. CLASSIFICATION OF WORKING CAPITAL

Working capital may be classified into two ways,

1) ON THE BASIS OF CONCEPT

On the basis of concept, there are two types of working capital and Net working

capital.

a) GROSS WORKING CAPITAL

Gross working capital is simply called as working capital refers to the firm

investment current assets. This concept emphasis the quantitative aspect of working

capital (current asset) are the assets which can be converted into cash within an

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accounting year and include cash, short time securities, debtors, bills receivable and

stock.

b) NET WORKING CAPITAL

Net working capital refers to the difference between current assets and current

liabilities. This concept lays emphasis upon the qualitative aspects of the working capital.

Current liabilities are those claims of outsiders, which are expected to mature for payment

with outstanding expenses. Net working capital may be positive or negative. A positive

net working capital will arise when current assets exceeds current liabilities. A negative

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

2) ON THE BASIS OF TIME

On the basis of time, working capital may be classified as permanent of fixed

working capital and temporary or variable working capital.

a) PERMANENT OR FIXED WORKING CAPITAL

Permanent or fixed working capital is the minimum amount, which is required to

ensure effective utilization of fixed facilities and for maintaining the circulation of current

assets. There is always a minimum level of current asset which is continuously required

by the enterprise to carry out its normal business operations.The permanent working capital further be classified as regular working capital and

reserve working capital. Regular working capital required to ensure circulation of current

assets from cash to inventories, from inventories to receivables and from receivables to

cash and so on. Reserve working capital is the excess amount over the requirement of

regular working capital, which may be provided for contingencies that may arise at

unstated period, such as strike, rise in prices depression etc.

b) TEMPORARY OR VARIABLE WORKING CAPITAL

Temporary or variable working capital, which keeps on fluctuating from time to

time on the basis of business activities. In other words it represents additional current

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asset required for different times during the operating year. Supplier of temporary

working capital can expect its return during off-season, when the firm does not require it.

Hence, temporary working capital is generally financed from short term sources of

finance such as credit.

Variable working capital can be further classified as seasonal working capital and

special working capital. Most of the enterprises have to provide additional working

capital to meet the seasonal and special needs. The capital required to meet the seasonal

needs of the enterprise is called seasonal working capital. Special working capital is that

part of working capital, which is required to meet special contingencies such as launching

of extensive marketing campaigns for conducting research etc.

Permanent and Variable Working Capital: -

The magnitude of current assets needed is not always the same; it increases anddecreases over time. However, there is always, a minimum level of current assets, which

is continuously required by the firm to carry on its business operations.

This minimum level of current assets is referred to as permanent, or fixed working

capital. Depending upon the changes in production and sales, the need for working

capital, over and above permanent working capital will fluctuate. The extra working

capital, needed to support the changing production and sales activities is called

fluctuating or variable or temporary working capital.

Both kinds of working capital-permanent and temporary-are necessary to facilitate

production and sale through the operating cycle, but temporary working capital is created

by the firm to meet liquidity requirements that will last only temporarily.

Current Assets Level Policy: -

The financial manager should determine the optimum level of current assets so that

the wealth of shareholders is maximized. A firm needs fixed and current assets to support

a particular level of output.

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However, to support the same level of output, the firm can have different levels of

current assets. The level of current assets can be measured by relating current assets to

fixed assets. Dividing the current assets by fixed assets gives CA/FA ratio.

Assuming a constant level of fixed assets, a higher CA/FA ratio indicates a

conservative current assets policy and a lower CA/FA ratio means an aggressive current

assets policy assuming other factors to be constant.

A conservative policy implies greater liquidity and lower risk.

While aggressive policy indicates higher risk and poor liquidity.

The current asset policy of the most firms may fall between these two extreme

policies, which are called as average policy.

Current Assets Financing Policy: -

After establishing the level of current assets, the firm must determine how these

should be financed. What mix of long-term capital and short-term capital should the firm

employ to support its current assets?

Several strategies are available to a firm for financing its capital requirements.

Three strategies are listed as below.

Strategy A (Conservative Approach): -

Long-term financing is used to meet fixed asset requirement as well as peak

working capital requirement. When the working capital requirement is less than its peak

level, the surplus is invested in liquid assets (cash and marketable securities). A portion

of a fluctuating working capital is financed by long-term sources.

Strategy B (Matching or Hedging Approach): -

Long-term financing is used to meet fixed asset requirements, permanent working

capital requirement. The fluctuating working capital requirement is financed by short-

term financing.

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Strategy C (Aggressive Approach): -

Long-term financing is used to meet fixed asset requirement and part of

permanent working capital requirement. Short-term financing is used to meet fluctuating

working capital requirement & part of permanent working capital.

4.3. FACTORS INFLUENCING WORKING CAPITAL

REQUIREMENTS

a) Nature of Business.

The working capital requirement of a 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.

b) Seasonality of operations.

Firms, which have marked seasonality in their operations usually, have highly

fluctuating working capital requirements. To illustrate, consider a firm manufacturingceiling fans. The sale of ceiling fans reaches a peak during the summer months and drops

sharply during the winter period. The working capital need of such a firm is likely to

increase considerably in summer months and decrease significantly during the winter

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period. On the other hand, a firm manufacturing a product like lamps, which have fairly

even sales round the year, tends to have stable working capital needs.

c) Production policy.

A firm marked by pronounced seasonal fluctuation in its sales may pursue a

production policy, which may reduce the sharp variations in working capital

requirements. For example, a manufacturer of ceiling fans may maintain a steady

production throughout the year rather than intensify the production activity during the

peak business season. Such a production policy may dampen the fluctuations in working

capital requirements.

d) Market Conditions.The degree of competition prevailing in the market place has an important bearing

on working capital needs. When competition is keen, a larger inventory of finished goods

is required to promptly serve customers who may not be inclined to wait because other

manufacturers are ready to meet their needs. Further, generous credit terms may have to

be offered to attract customers in a highly competitive market.

Thus, working capital needs tend to be high because of greater investment in finished

goods inventory and accounts receivable. If the market is strong and competition weak, afirm can manage with a smaller inventory of finished goods because customers can be

served withsome delay. Further, in such a situation the firm can insist on cash payment

and avoid lock-up of funds in accounts receivable-it can even ask for advance payment,

partial or total.

e) Conditions of Supply.

The inventory of raw materials, spares, and stores depends on the conditions ofsupply. If the supply is prompt and adequate, the firm can manage with small inventory.

However, if the supply is unpredictable and scant then the firm, to ensure continuity of

production, would have to acquire stocks as and when they are available and carry larger

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inventory on an average. A similar policy may have to be followed when the raw

material is available only seasonally and production operations are carried out round the

year.

4.4. MANAGEMENT OF WORKING CAPITAL

Working capital is the lifeblood of business enterprise. It has assumed great

significant in the recent past. It has now been established that a small economy inworking capital utilization magnifies the profitability of an enterprise considerably. The

firm has therefore to optimize the use of the limited available resources at their disposal

through their efficient and effective management of working capital.

Liquidity and profitability is the two dimension of an enterprise. An efficient and

effective management of working capital enables an enterprise to maximize the

profitability and maintain adequate liquidity in the business. The manner of management

of working capital determined to a large extent of success and failure of an enterprise.

Many a time, in the event of failure of an enterprise the storage of working capital is

given out as its main reason. But in the ultimate evolution, it may be the mismanagement

of working capital. It is therefore necessary to maintain an optimum level of working

capital so as to ensure profitability and to maintain adequate liquidity in the business.

Working capital management means the problem of decision making regarding

investment in current assets within objective of maintaining the liquidity of funds of the

firm to meet its current obligation. The major areas in working capital management are:

Problem of deciding the optimal level of investment in the current assets

1. Problem of deciding the optimal mix of current and fixed assets

2. Location of sources of short term financing

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3. The importance of working capital management is reflected in the fact that financial

Managers spend a lot of time in managing current assets and current liabilities.

Arranging short term financing negotiating favorable credit terms, controlling the

movement of cash administrating accounts receivables, and monitoring the investment in

inventories consume a great deal of time of financial managers.

4.5. SIGNIFICANCE OF WORKING CAPITAL MANAGEMENT IN

DEVELOPING ECONOMIES

The importance of managing working capital is magnified when it refers to firms

in developing economies. These firms have many problems, such as being small in size and

lack of resources. The list of problems is long and includes low level of product and

process technology, small product market, lack of access to capital, lack of physical

infrastructure and proper institutional frame work. Because of their small size, firms in

developing satisfy the demand they may have the product and this makes inventory

management more relevant.

Both human and financial resources of the firms in developing economies are

very limited. The problem of managing working capital investments and short-term debt

may be increased by such lack of managerial knowledge. Financially, firm in developing

countries lack the opportunity of getting benefit of financial markets as the firms are small

in size and have less opportunity to go public to benefit from financial markets. Banks will

resistant to provide long-term loans to such firms.

So because of these reasons working capital management is even more

important in developing countries than developed countries. It is through the working

capital related activities that they are trying to capitalize in order to create value for the

firms.

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Need for Working Capital

The need for working capital is to run the day to day business cannot be over

emphasized. The need for working capital arises due to the time gap between production

and realization of cash from sales. Thus working capital is

a) For the purchase of raw materials, components and spares.

b) To pay wages and salaries.

c) To meet the day to day expenses and overhead costs like power, office expenses etc.

d) To meet various selling costs as packing, advertising etc.

e) To provide credit facilities to the customers.

f) To maintain the inventories of raw material, work-in-progress, stores and finished

stocks.

Sufficient working capital is necessary to sustain sales activity; this is referred to

Operating or Cash Cycle. The continuing flow from cash to suppliers, to inventories to

accounts receivables, and back into cash is called operating cycle.

In other words, the term cash cycle refers to the length of time necessary tocomplete the following cycles of event:

Conversion of cash into inventory.

Conversion of inventory into receivables.

Conversion of receivables into cash.

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A firms operating cycle typically consists of their primary activities purchasing

resources, manufacturing the products, and sales of the product. These activities create

fund flaw that are both unsynchronized because cash disbursements usually take place

before cash receipts. They are uncertain because future sales and costs, which generate

the respective receipts and disbursements, cannot be forecasted with complete accuracy.

If the firm is to maintain liquidity and needs to function properly, it has to invest fund in

various short term assets during the cycle. It has to maintain a cash balance to pay bills

they becomes due. In addition, the company invests in inventories to fill customers order

properly and finally, the company invests accounts receivables to extend credit to its

customers. Thus a firm should make adequate investments in inventories and debtors for

smooth and uninterrupted production.

[29]

RECEIVABLES

INVENTORY

CASH

Phase 1

Phase 3

Phase 2


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Manufacturing companys three phases of operating cycle: -

The operating cycle of a manufacturing company involves three phases

Acquisition of resources.

Manufacture of the product.

Sale of the product.

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

not certain. They are not 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. The firms gross operating cycle (GOC)

can be determined as inventory conversion period (ICP) plus debtors conversion period

(DCP).

A) GOC = ICP + DCP.

Here GOC = Gross Operating Cycle.

ICP = Inventory Conversion Period.

DCP = Debtors Conversion Period.

B) ICP = RMCP + WIPCP + FGCP.

Here ICP = Inventory Conversion Period.

RMCP = Raw Material Conversion Period.

WIPCP = Work-in-Process Conversion Period.

FGCP = Finished Goods Conversion Period.

C) NOC = GOC PDP.

Here GOC = Gross Operating Cycle.

PDP = Payables Deferral Period.

If the depreciation and profit is excluded from expenses in the computation of

operating cycle, the net operating cycle will be called as Cash Conversion Cycle (CCC).

Pictorial representation of GOC, NOC, ICP, PDP, FGCP, RMCP, WIPCP & DCP can be

viewed in the below mentioned diagram.

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Length of Operating Cycle

The component of working capital such as inventories and debtors enables a firm to

compute the length of the operating cycle. The length of the operating cycle includes the

sum of inventory conversion period. The inventory conversion period is the total time

needed to producing and selling the products. It comprises of raw materials conversion

period, work in progress conversion period is the time required in collecting the outstanding

amount from the customers

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4.7. ELEMENTS OF WORKING CAPITAL

1. CASH MANAGEMENT

Cash is the business enterprise may be compared to the blood of the human body,

blood gives life and strength to the human body, and cash imparts life and strength. Profits

and solvency to the business organizations.

Motives for holding cash:

The firms need for cash may be attributed to the following needs. Transaction

motives, precautionary motive and speculative motive. Some people are of the view that a

business requires cash only for the first two motives while others feel that speculative

motive also remains. These motives are discussed as follows.

Transaction Motives

Precautionary Motives

Speculative Motives

Compensation Motives

Transaction Motives:-

A firm needs cash for making transactions in the day for day operations. The

cash is needed to make purchases, pay expenses, taxes, dividend etc. The cash need

arises due to the fact that there is no complete synchronization between cash receipts

and payments.

Precautionary Motives:-

A firm is required to keep cash for meeting various contingencies. Through cash

inflows and cash outflows are anticipated but there may be variations in these estimates.

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Speculative Motives:-

The speculative motives relate to holding for cash for investing its profitable

opportunities as and when they arise. Such opportunities do not come in a regular manner.

Compensation Motives:-

Every business concern enjoys certain services from its bankers fees of charge. So,

it is usually required to deep certain minimum.

Goals of Cash Management

To satisfy day-to-day business requirement.

To provide for scheduled major payments.

To face unexpected cash drains.

To size potential opportunities for profitable long-term investments.

To meet requirements of bank relationship.

To build re survivor for net cash inflows till the availability of better uses of funds

by conscious planning.

To minimize the operation costs of cash management.

Importance of Cash Management

Cash management is one of the areas of working capital management. In fact, cash

management is the most important areas of working capital management. This has

contributed to the Importance of cash management.

A. Cash management assumes more importance than other current assets

because cash is the most significant and the least productive assets that the firm holds.

B. Management of cash is also important because to as difficult to predict

cash inflows accurately and that is no perfect coincidence between inflows and outflows of

cash.

C. Cash management is also important because cash constitutes the smallest

portion of the total current assets; even then, considerable time of management is devoted

for it.

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Objective of Cash Management

Keeping these two views liquidity and profitability, the following objectives can be

identified of cash management.

a. To made cash payments.

b. To maintain minimum cash reserve.

a. To made cash payments.

A very objective of holding cash is to meet the various types of expenditure

to be incurred in business operations. Several types of expenditure have to be met at

different points of time and the firm should be prepared to make such cash payments.

b. To maintain minimum cash reserve.

Another important objective of cash management is to maintain

minimum cash reserve. This means, in the process statements from forecast of expected cash flows

and cash outflows for a given person. The forecast may be based on the present operation or theanticipated future operations.

Advantages of Cash Management:

The availability of cash may be a matter of life of death. A sufficiency if

cash can deep an unsuccessful firm going despite losses. Conversely, an insufficiency of cash can

bring failure in the face of actual or prospective earnings.

I. Cash may be set to be like the blood stream on living body for its very much the

life-blood of business. It must be kept circulating.

II. It helps to avoid uncertainty in the future

III. It gives an inventory of the financial reserves, which are available in the event of a

recession.

IV. It yields a plan as an integral part of the procedure.

V. It views problem in a dynamic context over a period of time.

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Disadvantages of Cash Management

I. It may offer a solution of compensation, which is not justified on the basis of a concrete

notion, particularly which the business economy operates in an uncertain world.

II. It considers economic recession as the main sources of uncertainty but ignores

technological developments shifts in consumer preference political changes etc.

2. INVENTORY MANAGEMENT

Management of inventory

The literally meaning if the world inventory is stock of goods. To the finance

manager inventory connects the value of raw materials, consumable, spares, work-in-progress,

finished goods and scrap in which a companys funds have been invested. He considered control

over inventory.

Nature of inventory

To understand the exact meaning of the word inventory use may study it from the

usage side of from the side of point of entry in the operations. Inventory includes the followingthings.

i. Raw materials.

ii. Work-in-progress.

iii. Consumables.

iv. Finished goods.

v. Spares.

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Raw materials:-

Raw materials form a major input into the organization. They are required to carry out

production activities uninterruptedly. The quantity of raw materials required will be determined

by the rate of consumption and the time required for replenishing the supplies.

Work-in-progress:-

The work-in-progress is that stage of stock, which is in between raw materials and

finished goods. The raw materials enter the process of manufacture but they are yet to attain final

shape of finished goods.

Consumables:-

These are the materials that are needed to smoother the process of production. These

materials do not directly enter production but they act as catalysts, etc. Consumables may be

classified according to their consumption and criticality.

Finished goods:-

These are the goods, which are ready for the consumers. The stock of finished goods

provides a buffer between production and market.

Spares:-

Spares also form a part of inventory. The consumption pattern of raw materials,

consumables, finished goods are different from that of spares.

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4.7.1. BENEFITS OF HOLDING INVENTORY

The benefits of holding inventory arises from the following reasons

Large purchases of raw materials or finished goods may be made to take advantage of

the discounts offered a bulk purchases. Bulk purchases; naturally result in holding of inventories.

Large orders may be placed for goods to cut down the ordering costs, the costs of

checking, handling and payments involved in small orders large orders, naturally result in

holding large inventories.

Holding of sufficient inventories of raw materials or finished goods becomes necessary

in times of scarcity to prevent stoppage of production or business

Vital spares and tools are required to be kept in stock so as to avoid spells of production

break down due to non-availability of important spares parts or tools.

Holding goods in the process of production is a technological necessity. It depends

mainly on the length of manufacturing process.

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4.7.2. FACTORS INFLUENCING INVENTORY REQUIREMENT

Inventory represents the most prominent component of assets in a business enterprise. For

manufacturing firm, it is necessary to have inventory of raw materials, goods-in-progress and

inventory of finished goods. The factors influencing inventory requirements are:-

1) NATURE OF BUSINESS ACTIVITIES:-

For a firm engaged in manufacturing activity sufficiently large amount offends will be

required to carry inventories. Similarly, trading companies in their bid to ensure smooth trading

activity has to employ large funds in holding stocks.

2) INVENTORY TURNOVER:-

Within the same line of business inventory requirement vary markedly in different

firms depending essentially on inventory turnover. Inventory turnover in firms reveals how many

times the inventory turns during a given period of time.

3) METHODS OF INVENTORY VALUATION:-

Methods that a firm follows in valuating inventories have also its affect on the level of

investment in inventory. Two important methods of inventory valuation are First-In-First-Out

(FIFO) and Last-In-First-Out (LIFO).

4) NATURE OF ARRANGEMENTS WITH SUPPLIERS OF GOODS:-

If arrangement made either the supplier of the materials is such that they will supply

materials on order but will demand the payment only on the scale of the finished goods, he firm

need to keep large amount of inventories.

5) SPECIAL CIRCUMSTANCES:-

Finally, the financial manager should study critically the circumstances under which the

firm will operate and which have their direct bearing on inventory level. It would be suitable to

discuss the impact of these situations on the level of different kinds of inventories separately.

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4.7.3. TOOLS AND TECHNIQUES OF INVENTORY MANAGEMENT

The following are the important tools and technique of inventory

management.

i. Determination of stock levels

ii. Determination of safety stock

iii. Selecting a proper system of ordering for inventory

iv. Determination of economic order quantity

v. A.B.C Analysis

vi. VED Analysis

Determination of stock levels:-

Carrying of too much and too little of inventories is detrimental to the firm. Various

stock levels are discussed as such

a. Minimum level

b. Re-ordering levelc. Maximum level

d. Danger level

e. Average stock level

Determination of safety stock:-

Safety stock is a buffer to meet some unanticipated increase in usage. The usage of

inventory cannot be perfectly forecasted. It fluctuates over a period of time.

Selecting a proper system of ordering for inventory:-

The basic problem of inventory is to decide the re-order point. This point indicates an

order should be placed. The re-order print is determined with the help of these things.

a. Average rate.

b. Duration of time.

c. Economic order quantity

ECONOMIC ORDER QUANTITY:-

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Economic order quantity is the size of the lot to be purchased which is economically viable.

This is the quantity of material, which can be purchased at minimum costs.

A.B.C ANALYSIS:-

Under A.B.C Analysis, the materials are divided into three categories viz, A, B, C, past

experience has shown that almost 10% of the items contribute to 70% of value of consumption

and this category is called A category. About 20% of the items contribute about 20% of value

of consumption and this is known as category B materials, category C covers about 70% of

items of materials, which contribute 10% of value of consumption.

VED ANALYSIS:-

The VED Analysis is used generally for spare parts. The requirements and urgency of

spare parts as different from that of materials. Spare parts are classified as Vital(V), Essential(E),

and desirable(D).

Vital (V) means items that, when not available, a production is help up. These are also

called insurance items.

Essential (E) means non-available items, which dislocate production work.

Desirable (D) means items that are necessary, but do not cause any immediate loss of

production.

4.7.4. OBJECTIVES OF INVENTORY MANAGEMENT

The basic objectives of inventory management are

To avoid over and under investment in inventories

To produce the right quality and right quantity of goods at the right time AND at a

reasonable price.

These can be grouped as

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Availability of materials: -All type of materials should be available at all times so

that production should not suffer.

Best service to customer: -By producing finished quality goods to the satisfaction of

customers & maintaining the delivery periods.

Wastage minimization: -To minimize wastage at all levels.

Promotion of manufacturing efficiency: - By providing the right kind of

materials & by improving the morale of the workers.

Optimum investment: - These will be no unnecessary hold of money, if optimum

levels of inventories are held. Capital can be efficiently used.

Purchase economy: -It offers several advantages & economies in purchasing because

of bulk purchase & favourable market conditions.

Optimum level of inventories: - This saves lots money & avoids the out stock

danger.

Production level control: - proper inventory control helps in increasing &

maintaining the buffer stock of raw materials to meet any eventually.

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5. RATIO ANALYSIS OF KCCL

5.1 SHORT TERM FINANCIAL POSITION.

)a CURRENT RATIO:

Current ratio establishes relationship between current assets and

current liabilities. The ratio is also known as working capital ratio.

This ratio is widely used to analyze short term financial position of the firm. A higher ratio

indicates the firms ability to pay its current obligation in time and lower ratio represents the

liability position of the firm is not good. The accepted norm for current ratio is 2:1 i.e., the firm

having current asset.

YEAR Current Assets Current Liability Ratio

2004-05 2306.08 978.67 2.36

2005-06 2180.34 1069.59 2.04

2006-07 1970.60 1160.61 1.70

2007-08 2203.96 1130.02 1.95

2008-09 2142.58 781.69 2.74

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Current Ratio= Current assets/Current liabilities


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INTERPRETATION

Relatively high current ratio is an indication that the firm is liquid and has the ability to pay its

current obligation in time as and when they become due. Here the position of current ratio of

KCCL is the range of 1.70 to 2.74 times over current liabilities. At the outset current ratio of the

firm is with in the range of manageable limit.

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CURRENT RATIO

0

0.5

1

1.5

2

2.5

3

2004-05 2005-06 2006-07 2007-08 2008-09

Year

Ratio

)b QUICK RATIO

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Its expresses the relationship between quick asset and quick liability. This is also known as

acid test ratio.

Quick ratio is to measure the liquidity position of the firm. It measures the firms

capacity to pay off its current obligation immediately. A quick ratio of 1:1 is considered to

be satisfactory

YEAR CURRENT ASSETS CURRENT LIABILITY RATIO

2004-05 824.64 978.67 .84

2005-06 775.81 1069.59 .73

2006-07 681.87 1160.61 .59

2007-08 832.17 1130.02 .74

2008-09 1107.60 781.68 1.42

INTERPRETATION

High quick ratio is an indication that the firm is liquid and has the ability to meet its current

or liquid liabilities in time.

The quick ratio of KCCL is with in the range of 0.59 to 1.42 this shows that the quick ratio

of KCCL not sufficient to meets its liabilities. The firms liquidity position has to be

increased.

[45]

Quick Ratio=Quick Asset/Current liability


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QUICK RATIO

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

2004-05 2005-06 2006-07 2007-08 2008-09

YEAR

RATIO

5.2 CURRENT ASSET MOVEMENTS/ACTIVITY RATIO

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a) INVENTORY TURN OVER RATIO:

Inventory turnover ratio indicates the efficiency of the firm producing selling its

product. It is calculated by dividing the sales by inventory; and Days of Inventory

Holdings (DIH) are calculated by dividing the number of days in a year (say 360) by

inventory turnover.

The higher the ratio better is the performance of the company and vice versa.

Year Cost of goods sold Average Inventory Ratio

2004-05 2858.91 1481.44 1.93

2005-06 2770.49 1404.53 1.97

2006-07 2632.09 1288.73 2.04

2007-08 2565.28 1371.79 1.87

2008-09 2437.02 1536.39 1.59

INTERPRETATION

[47]

Inventory Turnover Ratio=Cost of goods sold/Average inventory


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Inventory turn over ratio indicates the velocity of conversion of stock into sales.

Here the ratios range from 1.59 to 2.04. A high ratio indicates efficient management of

inventory because the stocks are sold frequently. A lower ratio indicate that the firm is

having over investment in investment, dull business, poor quality of goods, stock

accumulations, accumulation of obsolete and slow moving goods and low profit as

compared to total investment.

Here the firm maintains a good and well build inventory turn over ratio.

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INVENTORY TURN OVER RATIO

0

0.5

1

1.5

2

2.5

2004-05 2005-06 2006-07 2007-08 2008-09

Year

Ratio

b) AVERAGE INVENTORY HOLDING PERIOD[49]


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The ratio indicates average time taken for clearing stock. This period is calculated by

dividing the number of days by inventory turnover ratio.

Year No. of days Inventory Turnover

Ratio

Period

2004-05 360 1.93 187

2005-06 360 1.97 183

2006-07 360 2.04 176

2007-08 360 1.87 193

2008-09 360 1.59 226

INTERPRETATION

The ratio shows that the inventories are converted into cash during the year.

The company should convert this stock an average of 200 days.

[50]

Inventory Holding Period= (360/Inventory Turn over ratio)


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AVERAGE INVENTORY HOLDING PERIOD

0

50

100

150

200

250

2004-05 2005-06 2006-07 2007-08 2008-09

Year

Period

c) DEBTORS TURN OVER RATIO:

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Debtors turn over ratio indicates the velocity of debt collection of firm. In simple

words it indicates the number of time the average debtors are turned over during a

year.

INTERPRETATION

Generally the higher value of debtors turn over ratio indicates the firm is more efficient in

managing the debtors. But here the firm is lacking behind in this field of managing the debtors.

[52]

Year Sales Debtors Ratio

2004-05 2455.23 714.24 3.44

2005-06 2455.20 649.92 3.78

2006-07 2044.34 599.20 3.41

2007-08 2159.42 552.03 3.91

2008-09 3089.85 981.88 3.15

Debtors Turnover ratio=Net credit sales/Average debtors


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DEBTORS TURN OVER RATIO

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

2004-05 2005-06 2006-07 2007-08 2008-09

Year

Ratio

d) AVERAGE COLLECTION PERIOD

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The average collection period represents the average number of days for which a firm

has to wait before its receivables are converted into cash.

Year No. of days Debtors Turnover

ratio

Average

collection

period2004-05 360 3.44 105

2005-06 360 3.78 95

2006-07 360 3.41 106

2007-08 360 3.91 92

2008-09 360 3.15 114

INTERPRETATION

From the table we can understand that the average collection period of the firm is

varying from 2005 to 2009. During the year 2004 it had the collection period around

105 days but during the year 2008 it shrink down to 92 days. During the year 2009 it

increases around 114. The firm has to take a perfect concentration on this part.

[54]

Average collection period=Number of working days/Debtors turnover ratio


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AVERAGE COLLECTION PERIOD

0

20

40

60

80

100

120

2004-05 2005-06 2006-07 2007-08 2008-09

Year

Period

e) CREDITORS TURNOVER RATIO

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A supplier of goods is naturally interested in finding out how much time the firm is

likely to take in repaying its trade creditors.

Year Credit Purchase Average Account

Payable

Ratio

2004-05 1121.62 668.06 1.68

2005-06 1309.02 717.07 1.83

2006-07 1207.27 778.60 1.55

2007-08 1318.97 725.99 1.82

2008-09 1619.54 821.83 1.97

INTERPRETATION

This Ratio shows that the credit worthiness is going to be affected adversely. The firm

has to take proper actions in controlling the creditors turnover ratio. The firms credit

turnover ratio is very low which an unsatisfactory condition is.

[56]

Creditors Turnover Ratio=Credit Purchase / Average Account Payable


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CREDITORS TURNOVER RATIO

0

0.5

1

1.5

2

2.5

2004-05 2005-06 2006-07 2007-08 2008-09

Year

Ratio

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f) AVERAGE PAYMENT PERIOD

It is the average number of day taken by a firm to pay its creditors. Generally lower

the ratio, the better is the liquidity position of the firm.

Year No. of days Creditors Turnover

Ratio

Average Payment Period

2004-05 360 1.68 214

2005-06 360 1.83 197

2006-07 360 1.55 232

2007-08 360 1.82 198

2008-09 360 1.97 183

INTERPRETATION

From the analysis conducted it is found that the company takes about 200 days for

its repayment of cash to its creditors. This firm should take initiative in paying back the

amount by any other mean or should control in purchasing the raw materials and other

machineries in credit.

[58]

Average Payment Period = No. of working days / Creditors turnover ratio


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AVERAGE PAYMENT PERIOD

0

50

100

150

200

250

2004-05 2005-06 2006-07 2007-08 2008-09

Year

Period

g) FIXED ASSET TURNOVER RATIO

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This ratio indicates whether there are adequate invests. An increase in this ratio

is a good indicator of financial performance and vice versa.

Year Net Sales Fixed Asset Ratio

2004-05 2455.23 298.31 8.23

2005-06 2455.20 276.13 8.89

2006-07 2044.34 247.96 8.24

2007-08 2159.42 281.05 7.68

2008-09 3089.85 366.02 8.44

INTERPRETATION

In the study it is found that the company is trying to improve its fixed asset turnover

ratio. In the year 2005 the ratio shows 8.23 lakhs. It was increasing in the next year to

8.89. In the year 2009 it grew down to 8.44. Though it has an increasing trend the

company must take necessary steps in improving the fixed assets turnover ratio.

[60]

Fixed Asset Turnover Ratio=Net Sales/Fixed Assets


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Fixed Asset Turnover Ratio

0

1

2

3

4

5

6

7

8

9

10

2004-05 2005-06 2006-07 2007-08 2008-09

Year

Ratio

h) WORKING CAPITAL TURNOVER RATIO

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Year Sales Net Working

Capital

Ratio

2004-05 2455.23 1327.41 1.85

2005-06 2455.20 1110.75 2.21

2006-07 2044.34 809.99 2.25

2007-08 2159.42 1073.94 2.01

2008-09 3089.85 1360.89 2.27

INTERPRETATION

In the working capital turnover ratio of the firm is very low; the number of times

the working capital turnover in course of year is very low. The firm should work hard

in increasing the asset of the company and also decreasing the ability of the firm.

Thus it can bring some improvement in the working capital turnover ratio.

[62]

Working Capital Turnover Ratio = Sales / Net Working Capital


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WORKING CAPITAL TURNOVER RATIO

0

0.5

1

1.5

2

2.5

2004-05 2005-06 2006-07 2007-08 2008-09

Year

Ratio

5.3. LONG TERM FINANCIAL POSITION

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a) DEBT EQUITY RATIO

This ratio indicates the relationship between the external equities or the

outsiders fund and the internal equities or the shareholders fund. It is calculated to

measure the relative claims of outsider and the owner against the firm asset.

Debt equity ratio establishes the relationship between borrowed capital and

equity capital. It provides a clear view regarding the liability of the industry to outsiders.

Shareholders fund include equity share capital, capital reserve, revenue reserve and

surplus like reserve for contingencies sinking funds.

Year Outsiders Fund Shareholders Fund Ratio

2004-2005 2302.51 264.73 8.70

2005-2006 2054.22 575.73 3.57

2006-2007 1982.04 575.73 3.44

2007-2008 2108.16 805.75 2.62

2008-2009 2217.75 812.73 2.73

;

INTERPRETATION

[64]

Debt Equity Ratio = Outsiders Fund / Shareholders Fund


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The ratio gives an idea about the cushion available to outsiders on the liquidation of

the firm. But the study tells that the outsiders fund have dominated on the owners fund.

However the owner wants to do with the maximum of outsiders fund in order to take

lesser risk of their investment and to increase their earnings.

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DEBT EQUITY RATIO

0

1

2

3

4

5

6

7

8

9

10

2004-05 2005-06 2006-07 2007-08 2008-09

Year

Ratio

b) PROPRIETARY RATIO

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This ratio establishes the relationship between share holders fund to total asset of the

firm. The ratio of proprietors fund to total funds is an important ratio for determining long

term solvency of a firm. The components of this ratio are shareholders fund or proprietors

fund to total assets.

Year Shareholders Fund Total Assets Ratio

2004-2005 264.73 2911.77 .09

2005-2006 575.73 2746.57 .21

2006-2007 575.73 2514.96 .23

2007-2008 805.75 2779.33 .29

2008-2009 812.73 3342.51 .24

INTERPRETATION

As equity ratio represents the relationship of owners fund to total asset, higher the

ratio of the share of the shareholders in the total capital of the company, better is the long

term solvency position of the company. The ratio indicates the extent to which the asset

of the company can be lost without affecting the interest of the creditors of the company.

[67]

Proprietary Ratio = Shareholders Fund / Total Assets


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PROPRIETARY RATIO

0

0.05

0.1

0.15

0.2

0.25

0.3

0.35

2004-05 2005-06 2006-07 2007-08 2008-2009

Year

Ratio

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5.4. PROFITABILITY RATIO

.A GENERAL PROFITABILITY

a) GROSS PROFIT RATIO

Gross profit ratio measures the relationship of gross profit to net sales and is

usually represented as a percentage. Thus it is calculated by dividing the gross profit by

sales.

Year Gross Profit Net Sales Ratio

2004-2005 -403.68 2455.23 -16.44

2005-2006 -315.29 2455.20 -12.84

2006-2007 -249.59 2044.34 -12.21

2007-2008 -60.24 2159.42 -2.79

2008-2009 -53.42 2864.85 -1.86

INTERPRETATION

The ratio reflects how efficient the firm is in producing its product. The study shows

that the firm is inefficient in producing its products. During the year 2005, it had a slight

improvement in the GP ratio, but the continuing year till 2009 it is again going to

negatives. So the company should take proper care in producing its product in the most

effective manner.

[69]

Gross Profit ratio = Gross profit / Net sales * 100


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GROSS PROFIT RATIO

-18

-16

-14

-12

-10

-8

-6

-4

-2

0

2004-05 2005-06 2006-07 2007-08 2008-09

Year

Ratio

b) NET PROFIT RATIO[70]


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The ratio explains per rupees profit generation capacity if sales. If the cost of

sales is lower than the net profit will be higher and we divide it with the sales, the result is

the sales efficiency. If lower the net profit per rupee of sales lower will be the sales

efficiency. The concern must try for achieving greater sales efficiency for maximizing the

return on investment. This ratio is very useful to the proprietors and prospective investors

because it reveals the overall profitability of the concern. Net profit ratio establishes the

relationship between net profit (after tax) and sales, and indicates the efficiency of the

management in manufacturing, selling, administrative and the other activities of the firm.

The ratio is the overall measure of the firms profitability.

YEAR NET PROFIT NET SALES RATIO

2004-05 -706.13 2455.23 -28.76

2005-06 -1014.95 2455.20 -41.34

2006-07 -1263.40 2044.34 -61.80

2007-08 -1314.78 2159.42 -60.89

2008-09 -1519.17 2864.85 -53.02

INTERPRETATION

When all the expenses including the office expenses are included the net profit

ratio comes down to negatives. So the firm has to take proper concentration in the

production of the products and thus make procedures for increasing the profit ratio,

without which the firm can complete in the market.

[71]

Net Profit ratio = Net profit / Net sales * 100


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NET PROFIT RATIO

-70

-60

-50

-40

-30

-20

-10

0

2004-05 2005-06 2006-07 2007-08 2008-09

Year

Ratio

c) OPERATING RATIO

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Operating ratio establishes the relationship between the cost of goods sold and

other operating expenses on the one hand and the sales of the other hand. It excludes

income and expenses which it can also which can also include be calculated by the

formula.

YEAR

NET PROFIT

RATIO

OPERATING

RATIO

2004-05 100 -28.76 128.76

2005-06 100 -41.34 141.34

2006-07 100 -61.80 161.80

2007-08 100 -60.89 160.89

2008-09 100 -53.02 153.02

INTERPRETATION

Here the study shows the firm having a silent higher operating ratio which is

unfavorable. Normally 75 to 85 percentages may be considered to be a good ratio in case

of manufacturing undertaking. So the firm should try to reduce the operating profit ratio

as early possible.

[73]

Operating ratio = 100 Net profit ratio


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OPERATING RATIO

0

20

40

60

80

100

120

140

160

180

2004-05 2005-06 2006-07 2007-08 2008-09

Year

Ratio

.B OVERALL PROFITABILITY

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a) RETURN ON INVESTMENT

Return on shareholders investments, popularly known as ROI or

return on shareholders/proprietors fund is the relationship between net profit (after

interest and tax) and the proprietors fund.

YEAR NET PROFIT SHAREHOLDERSFUND

RATIO

2004-2005 -706.13 264.73 -2.67

2005-2006 -1014.95 575.73 -1.76

2006-2007 -1263.40 575.73 -2.19

2007-2008 -1314.78 805.75 -1.63

2008-2009 -1519.17 812.73 -1.87

INTERPRETATION

The overall efficiency of the firm is very weak. Its lying in negatives. As the

primary objectives of business is to maximize its earnings, this ratio indicates the extent

to which this primary objective of business is achieved as this ratio reveals how well theresource of the firm are being used, the higher the ratio better are the results.

[75]

Return on Shareholders Investment = Net profit / Shareholders fund


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RETURN ON INVESTMENT

-3

-2.5

-2

-1.5

-1

-0.5

0

2004-05 2005-06 2006-07 2007-08 2008-09

Year

Ratio

5.5. OPERATING CYCLE

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The firm requires many years to recover the initial investment in fixed assets.

On the contrary the investment made in current assets is turned over many times in a year.

INTERPRETATION

The operating cycle shows that the time interval over which no additional

spontaneous working capital financing is required to carry out the firms activities. It

represents the net time interval between the collection of each receipt and sales of a

product.

[77]

Operating Cycle = Inventory conversion period (icp) + debtors

collection period (dcp) Creditors payment period (cpp)

YEAR ICP(DAYS) DCP(DAYS) CPP(DAYS) OC(DAYS)

2004-05 182 105 214 73

2005-06 196 95 197 94

2006-07 185 106 232 59

2007-08 187 92 198 81

2008-09 216 104 224 96


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OPERATING CYCLE

0

20

40

60

80

100

120

2004-05 2005-06 2006-07 2007-08 2008-09

Year

Days

5.6. WORKING CAPITAL OF KCCL

[78]

WORKING CAPITAL = CURRENT ASSETS CURRENT LIABILITIES


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YEAR

CURRENT

ASSETS (Rs in

lakhs)

CURRENT

LIABILITIES (Rs

in lakhs)

WORKING

CAPITAL(Rs in

lakhs)

2004-05 2306.08 978.67 1327.41

2005-06 2180.34 1069.59 1110.76

2006-07 1970.60 1160.61 809.99

2007-08 2203.96 1130.02 1073.94

2008-09 2142.58 781.69 1360.89

INTERPRETATION

Current assets of KCCL consist of inventories, debtors, and cash and bank balance.

Working capital gap can be analyzed by measuring net assets. Net assets referred to

current assets minus current liabilities. On an average for the past four years, there is a

decrease in working capital margin of KCCL. But in the year 2007 onwards there is an

increase in working capital of KCCL.

STATEMENT SHOWING CHANGES IN WORKING CAPITAL

(2004-2005)

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PARTICULARS 2004 2005 INCREASE DECREASE

CURRENT

ASSETSa) Inventories 1536.39 1481.44 54.95

b) Sundry debtors 981.88 714.24 267.64

c) Cash and bank 125.72 110.40 15.32

TOTAL 2643.99 2306.08

CURRENT

LIABILITIES

a) Current liability 837.86 679.48 158.38

b) Provision 252.83 299.19 46.36

TOTAL 1090.69 978.67

NET WORKING

CAPITAL

1553.30 1327.41

Decrease in

working Capital

225.89 225.89

1553.30 1553.30 384.27 384.27

INTERPRETATION

The study reveals that the inventories, sundry debtors, cash and bank balance,

provision has decreased.

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Current liabilities have increased.

The net working capital of the firm has decreased in the year 2005.


(2005-2006)

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CURRENT

ASSETS

a) Inventories 1481.44 1404.53 76.91

b) Sundry debtors 714.24 649.92 64.32

c) Cash and bank 110.40 125.89 15.49

TOTAL 2306.08 2180.34

CURRENT

LIABILITIES


b) Provision 299.19 340.15 40.96

TOTAL 978.67 1096.59

NET WOEKING

CAPITAL

1327.41 1110.45

Decrease in

Working Capital

216.66 216.66

1327.41 1327.41 232.15 232.15

INTERPRETATION

In the year 2006, there is a steep decrease in inventories, sundry debtors.

Whereas cash and bank balance has increased by 15.49 lakhs.

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Total current liabilities and provision have decreased.

Net working capital has reduced in this year.


(2006-2007)

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CURRENT

ASSETSa) Inventories 1404.53 1288.73 115.80

b) Sundry debtors 649.92 599.20 50.72

c) Cash and bank 125.89 82.67 43.22

TOTAL 2180.34 1970.60

CURRENT

LIABILITIES


b) Provision 340.15 369.07 28.92

TOTAL 1069.59 1060.61

NET WORKING

CAPITAL

1110.75 809.76

Decrease in

Working Capital

300.76 300.76

1110.75 1110.75 300.76 300.76

INTERPRETATION

In the year 2007 almost all current assets and current liabilities has decreased.

Net working capital has reduced in this year.

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(2007-2008)

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CURRENT

ASSETS

a) Inventories 1288.73 1371.79 83.06

b) Sundry debtors 599.20 552.03 47.17

c) Cash and bank 82.67 280.14 197.47

TOTAL 1970.60 2203.96

CURRENT

LIABILITIES


b) provision 369.07 392.29 23.22TOTAL 1160.61 1130.02

NET WORKING

CAPITAL

809.99 1073.94

Increase in Working

Capital

263.95 263.95

1073.94 1073.94 334.34 334.34

INTERPRETATION

The study reveals that the inventory, cash and bank balance, current liabilities

has increased. The sundry debtors, provision has decreased.

Net working has increased in this year.

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(2008-2009)


CURRENT

ASSETS

a) Inventories 1371.79 1476.39 124.60

b) Sundry Debtors 552.03 296.88 255.15

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c) Cash and bank 280.14 369.31 89.17

TOTAL 2203.96 2142.58

CURRENT

LIABILITIES

a) current liability 737.73 528.86 208.87

b) Provision 392.29 252.83 139.46

TOTAL 1130.02 781.69

NET WORKING

CAPITAL

1073.94 1360.89

Increase in

Working Capital

286.95 286.95

1360.89 1360.89 562.10 562.10

INTERPRETATION

The study reveals that the inventories, sundry debtors, cash and bank balance,

provision has decreased.

Current liabilities have increased.

The net working capital of the firm has increased in the year 2009.

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6.1. FINDINGS

From the liquidity analysis it is found that the company is having a satisfactory

level of working capital. The liquidity position i.e.; the ability to meet its short

term liability is satisfactory. But the firm has to take proper attention in improving

its standard ratio.

Current ratio is high. So the company is able to pay its current obligation in time

and when they become due.

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Quick Ratio shows increasing trend. It becomes high in the last year. So the

organization is able to meet current & liquid liabilities in time.

The inventory turnover ratio and average inventory holding period has to be

shortened down.

Debtors turnover ratio has been good but the firm failed to maintain its ratio

according to the needs. It has to provide procedure for the collection of debts.

Creditors turnover ratio is unsatisfactory. More concentration has to be made on

the payment of the creditors. Otherwise it will affect the credit worthiness of the

firm.

The debt equity ratio shows that the firm has dominants of outsiders fund over the

shareholders capital.

Inventory holding period also shows the stock velocity of conversion of stock into

sales. In this organization the inventory holding period is high. It shows the

negative trend.

Generally the higher value of debtors turnover ratio indicates the firm is more

efficient in managing the debtors. But in this organization shows a decreasing

trend in debtors turnover ratio. This organization is lacking to managing the

debtors.

Average collection period is increase during the year 2007. In the year 2008 it

decreases to 97. But the last year it again increased to 114.

The creditors turnover ratio is ve

finance final project 1

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