“financial statement analysis”sumesh

Working Capital Management

A STUDY

OF

“FINANCIAL STATEMENT ANALYSIS”AT

GARDEN SILK MILLS LIMITED, SURAT[From 1st February 2005 to 31st March, 2005]

A Project Report submitted in partial fulfillment of the requirementsFor the award of the degree of

BACHELOR OF BUSINESS ADMINISTRATIONTO

VEER NARMAD SOUTH GUJARAT UNIVERSITY, SURAT

Under the guidance of DR. M. L. ABALE

Submitted To:THE CO-ORDINATOR

March 2005


CONTENT

Sr No. Particular Page

No.

1 Introduction of the company 1 – 9

- Introduction

- History of the company

- Activities of the company

- Achievement of the company

- General information

- Distribution of the share holdings

- Categories of shareholder

2 Working Capital Management 11 – 27

- Introduction of working capital

- Factor affecting

- Working Capital Finance

- Working Capital Assessment

- Operating Cycle

- Ratio Analysis

3 Working Capital Analysis 28 – 47

- Management of Receivable

- Management of Inventory

- Management of Cash

4 Findings 48 -50

5 Suggestions 51 – 52

Bibliography 54 – 55

Annexure 56 – 58


CHAPTER: 1INTRODUCTION OF THE COMPANY

Introduction of the Company

Garden Vareli group of companies, one of the leading industrial

groups in India, plays a leading role in the field of fashion fabrics. With

annual sales exceeding U.S $ 90 million, they sell their products under a

single banner of quality ‘Garden’.

Garden Silk Mills Ltd. is one of the leading & oldest manufactures

of synthetic in India. Garden Silk Mills Ltd. has been exporting their

products to European markets since late 1970s. The company has made

vertical & horizontal integration from its establishment.

The company has three production plants: one at Village Vareli,

near Kadodara junction, N.H.No.8, the second at Village Jolva, near

Bardoli, and another at Garden Mill’s Complex, Sahara Gate, Surat.

Today the company has total 293 its own retail and authorized outlets all

over India.

The company has achieved a very good brand name in Indian &

International Market of Sarees & Dress Materials.

The company has achieved sales during financial year 1997-1998

of Rs.58,871.04 lacs & Rs.46,044.16 lacs during 1998-1999.


History of the Company

The origins of the business go back to 1920 when

Mr.Amichand Shah installed the first Hattersley looms in Surat. Since

1920 the company expanded not only by increasing the production

capacity and workforce of the business but also by pioneering new

material and processes.

The present Chairman and Managing Director of Garden Silk

Mills Ltd., Mr.Praful Shah is the youngest son of Mr. Amichand Shah.

Mr.Praful Shah taken qualification in USA in 1965 after which he joined

the company, up to that date Garden Silk Mills Ltd. had activities of the

Company to include processing cloth by introducing dying, printing and

finishing processes. As a result of this, the company was able to supply

finished textiles for the first time.

In the 1970s, the company recruited fine arts graduates from

leading institutions. An art studio was set up. The company started

introducing its own design and supplying these designs to the market.

Prior to this, the designs produced had been a function of customer

demand and from this manufacturer. This was the first step in building a

vertically integrated synthetic textile manufacturer and designer.

This move in the early 1970s coincided with the opening of

the first retail shop in Surat. The extension of the policy of vertical

integration into the retailing sector had advantages of uniform pricing,

close market monitoring, improving communication between


manufacturer and consumer, and above all exerting downward pressure

on the final selling price. The dedicated retail network now extends to

some 293 authorized outlets.

In the late 1970s, the company started exporting its product

to European Markets, Given the size of the domestic market; the

proportion of products that are exported remains low at approximately

two percent. The company is in the process of further developing markets

in Africa, Central and Eastern Asia.

In 1980, the company developed a new site, Vareli, some 12

kilometers away from Surat. This has become the main manufacturing

plant and investment of more than Rs.2.0 billion has been made. Most of

this expenditure has been targeted at the expansion and modernization of

plant and equipment, particularly in the weaving and yarn preparatory

sections. As a result, the Company today has one of the most modern and

sophisticated textile plants in India.

In 1995 the company had decided to further its policy of

vertical integration by setting up a new plant, also near Surat, from

which, manufacturing of polyester filament yarn, one of its principal raw-

materials, from polyester chips, is going on. This plant had become on

stream at a cost of approximately 655 million rupees.


Activities of the Company

The company is primarily engaged in the manufacture of

synthetic textile, sarees and dress materials mainly made of polyester

yarns and certain intermediate products. Garden Silk Mills Ltd. has been,

and continues to be, the initiator of the majority of new textile varieties

woven and processed in Surat, is at present, the consumer of

approximately 50 percent of polyester yarn in India. The company

believes that designs are a key factor in its market and used to produce

some 200 different printed designs each month.

The company’s lead in different and improved fabric

construction and the emphasis it places on design together with its

modern and efficient plant is key to its future success. The company

operates in a highly fragmented market where no individual manufacturer

has a material market share. It is also the leading integrated textile

manufacturer house, which undertakes all processes from yarn

manufacture to the retailing of dress materials and sarees.

The company, and its wholly owned subsidiary, Garden

Finance are also engaged in providing to the Indian corporate sector trade

and asset finance including the discounting of Bills of exchange.

The company also has a small engineering division, which

assembles a limited range of textile manufacturing machines.


Achievements of the Company

The company was first to setup a polyester filaments yarn

project in South Gujarat. The project is capable of producing multi-

filament & micro-filament yarn having a capacity of 5,000 Tones per

annum in collaboration with NON-VAL LEASINA AG of Switzerland.

This project has a special significance for the company, as polyester

filament yarn is the basic raw material for the product manufactured by

the company. The company was also first in producing of two-for-one

Twister in India.

The company's production facilities boast of one of India's

most sophisticated textile plants at Vareli, Surat (Western India). Its

weaving plant comprising Nissan and Tsudakoma water jet looms - the

highest number of water jet looms under one roof in India - and rapier

looms, automatic shuttle change looms etc, high-tech yarn preparatory

machines viz, ziro-twist-sizing, draw-warping, texturising and twisting

machines, have a capacity of over 42 Lac meters/month of greige fabric.

The plant has an ISO 9002 certification by BVQI. The company also

markets high quality dyed and printed fabrics that it gets manufactured

from associated firms.


General Information of the Company

Board of Director

Praful A. Shah Chairman & Managing Director

Soly J. Bhesania Wholetime Director

Harshad F. Shah Wholetime Director

Shilpa P. Shah Wholetime Director

Sanjay S. Shah Wholetime Director

Rajen P. Shah

Arunchandra N. Jariwala

J.P.Shah

Alok P. Shah

Yatish Parekh

Sunil Sheth

Smita Shah

Madanlal Lankapati

Ravinder Singh Nominee of IFCI Limited

Company Secretary

Kamlesh Vyas

Auditors

Natvarlal Vepari & Co.

Charted Accountants


Bankers

Bank of Baroda

Allahabad Bank

State Bank of Saurashtra

Bank of India

Registered Office

Garden Mills Compound,

Sahara Gate,

Surat-395010.

Corporate Office

Manek Mahal,

90, Veer Nariman Road,

Mumbai-400020.

Plants

i) Garden Mills Compound, Sahara Gate, Surat

ii) Village Vareli, Tal.Palsana, Dist.Surat

iii) Village Jolva, Tal.Palsana, Dist.Surat

Registrars & Transfer Agents

MCS Limited,

Neelam Apartment,

88, Sampatrao Colony,

Behind Federation Building, Alkapuri,


Baroda 390005.

Distribution of shareholding pattern as on 30 th June,

2003

No. of SharesNo. of

Shareholders

% of

Shareholders

No. of

Shares

Held

% of

Shareholding

Upto 500012475

198.49 6796186 17.75

5001-10000 1096 0.87 879711 2.30

10001-20000 412 0.33 623913 1.63

20001-30000 136 0.11 349085 0.91

30001-40000 59 0.05 213981 0.56

40001-50000 42 0.03 198859 0.52

50001-100000 69 0.05 507057 1.32

100001 & Above 105 0.08 28721768 75.01

Total12667

0100.00 38290560 100.00


Categories of Shareholders

CategoryNo. of

Shares Held

Holding

Strength

Promoters 19423891 50.73

Mutual Funds & UTI 3186803 8.32

Bank Financial Ins. & Insurance

Co.639757 1.67

FIIs (including foreign bank &

GDR)275682 0.72

Private Bodies Corporate 2141945 5.59

NRI’s/OCB’s 910433 2.38

Indian Public 10248256 26.76

GDR 1360925 3.55

Others 102868 0.27

Total 38290560 100.00


Organization Structure

Chairman & Managing Director

Finance

Director

General Manage

r Marketi

ng

Import & Export

Director

Production

Director

Head of the

Department

Staff


CHAPTER: 2

WORKING CAPITAL MANAGEMENT

Introduction of Working

Capital

Factor Affecting Capital

Working Capital Finance

Working Capital

Assessment

Operating Cycle

Ratio Analysis


Introduction of Working Capital

The need for working capital to run the day to day business

activities can not be overemphasized. We will hardly find a business firm

that does not require any amount of working capital.

We know that a firm should aim at maximizing the wealth of

its shareholders. In its endeavor to do so, a firm should earn sufficient

return from its operations. Earning a steady amount of profit requires

successful sales activity. The firm has to invest enough funds in current

assets for generating sales. Current assets are needed because sales do not

convert into cash instantaneously. So that working capital is very

important concept of the firm. There are two concept of working capital –

Gross and Net.

Gross Working Capital refers to the firm’s investment in current

assets. Current assets are the assets which can be converted into cash

within an accounting year (or operating cycle) and include cash, short

term securities, debtors, bills receivables and stock.


The gross working capital concept focuses attention on two aspects

of current assets management: (a) How to optimize investment in current

assets? (b) How should current assets be financed?

The consideration of the level of investment in current assets

should avoid two danger points- excessive and inadequate investment in

current assets. It should be realized that the working capital needs of the

firm might be fluctuating with changing business activity.

Net Working Capital refers to the difference between current

assets and current liabilities. Current liabilities are those claims of

outsiders that are expected to mature for payment within an accounting

year and include creditors, 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 is a qualitative concept. It indicates the

liquidity position of the firm and suggests the extent to which working

capital needs may be finance by permanent sources of funds. Current

assets should be sufficiently in excess of current liabilities to constitute a

margin or buffer for maturing obligation 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 conventional rule to maintain the level of current

assets twice the level of current liabilities.


Factors affecting working capital

There are no set rules or formulae to determine the working capital

requirements of firms. A large no. of factors, each having a different

importance, influence working capital needs of firms. The following are

the factors that generally influence the working capital requirements of

firms.

Nature of business

Working capital requirements of a firm are basically influenced by

the nature of its business. Trading and financial firms have a very small

investment in fixed assets, but require large stocks of a variety of goods

to satisfy varied and continuous demands of their customers. In contrast,

public utilities have a very limited need for working capital and have to

invest abundantly in fixed assets.

Sales and Demand Conditions


The working capital needs of a firm are related to its sales. It is

difficult to precisely determine the relationship between volume of sales

and working capital. In practice, current assets will have to be employed

before growth takes place. It is, therefore, necessary to make advance

planning of working capital for a growing firm on a continuous basis.

Sales depend on demand condition. Seasonal fluctuation not only affect

working capital requirement but also create production problems for the

firm.

Technology and Manufacturing Policy

The manufacturing cycle comprises of the purchase and use of raw

material and the production of finished goods. Longer the manufacturing

cycle, larger will be the firm’s working capital requirements. An extended

manufacturing time span means a larger tie-up of funds in inventories.

Thus, if there are alternative technologies of manufacturing a product, the

technological process with the shortest manufacturing cycle may be

chosen.

Credit Policy

The credit policy of the firm affects the working capital by

influencing the level of debtors. The credit terms to be granted to

customers may depend upon the norms of the industry to which the firm

belongs. But a firm has the flexibility of shaping its credit policy within

the constraint of industry norms and practices. A liberal credit policy will

create a problem of collecting funds later on.


Availability of Credit

The working capital requirements of a firm also affected by credit

terms granted by its creditors. A firm will need less working capital if

liberal credit terms available to it. Similarly, the availability of credit

from banks also influence the working capital needs of the firm. A firm,

which can get bank credit easily on favorable conditions, will operate

with less working capital than a firm without such a facility.

Operating Efficiency

The operating efficiency of he firm relates to the optimum

utilization of resources at minimum costs. The firm will be effectively

contributing in keeping the working capital investment at a lower level if

it is efficient in controlling operating costs and utilizing current assets.

The use of working capital is improved and pace of cash conversion cycle

is accelerated with operating efficiency.

Price Level Changes

The increasing shifts in price level make functions of financial

manager difficult. He should anticipate the effect of price level changes

on working capital requirements of the firm. Generally, rising price levels

will require a firm to maintain higher amount of working capital. Same

level of current assets will need increased investment when prices are

increasing. However, companies that can immediately revise their

product prices with rising price levels will not face a severe working

capital problem.


Working Capital Financing

Once the level of working capital has been determined, a firm has

to concentrate how the same will be financed, i.e. a firm must have to

find out the sources of funds to finance is current assets. Different

financing policies may be adopted for this purpose.

(i) Long-term financing :

The primary sources of long-term financing are: shares ( equity

& preference ), debentures, retained earnings, debt from financial

institutions, etc.

(ii) Short-term financing :

It includes short-term bank loan, commercial papers and factoring

receivables, etc. A firm must have to arrange this type of finance in

advance.

(iii) Spontaneous financing:

It refers to automic sources of short-term funds. It includes trade

credit and outstanding expenses. Since the sources of this type of finance


are cost free, most of the firms would prefer to use it in order to finance

its current assets and try to utilize it as far as possible.

Therefore, the choice of financing current assets is between short-

term and long-term sources. It should be remembered in this respect that

short-term financing is less expensive than long-term one. But at the same

time, short-term financing involves greater degree of risk. In the

circumstances, the choice of sources between short-tem and long-term for

financing working capital of a firm has to be decided with reference to

risk return trade off. Generally, however, in view of lower cost and

flexibility, management usually finds it more convenient to finance their

working capital requirements by relying more on short-term sources than

on long term sources.

Instead of these many sources Garden Silk Mills Limited working

capital financing is made through Cash Credit from bank in the

consortium arrangement of four banks that is lead by Bank of Baroda by

providing maximum share of 40%.

Four banks in following manner give cash Credit.

Financing Working Capital of Company

Bankers Portion of Working Capital

Financing

Bank of Baroda 40 %

Allahabad Bank 30 %

State Bank of Saurashtra 20 %


Bank of India 10 %

Working Capital Assessment

1999-00 2000-01 2001-02 2002-03

Current Assets

Inventories 5631.97 5428.34 5878.52 5123.24

Sundry Debtors 6532.28 3120.00 3423.73 3797.57

Cash & Bank Balance 1248.23 1553.20 4457.39 1000.27

Other Current Assets 83.48 -

Total 13495.96 10101.54 13759.64 9921.08

Current Liabilities

Sundry Creditors 2631.58 1696.07 2575.36 2473.88

Interest accrued 81.39 47.89 16.53 22.43

Provision of tax 334.93 279.78 193.15 349.13

Proposed Dividend 459.49 574.36 574.36 957.26

Other liabilities 501.38 579.91 734.10 1681.71

Total 4008.77 3178.01 4093.50 5484.41

Net Working Capital =

C.A. – C.L.9487.19 6923.53 9666.14 4436.67


Net Working Capital Chart


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 involves five phases.

1. Conversion of Cash into Raw-Material

2. Conversion of Raw-Material into Work-in-Progress


3. Conversion of Work-in-Progress into Finished Goods

4. Conversion of Finished Goods into Receivables

5. Conversion of Receivables into Cash

Operating Cycle = R (Raw-Material Storage Period)

+ W (WIP Storage Period)

+ F ( Finished Goods Storage Period)

+ D (Debtors Collection Period)

- C (Creditors Collection Period)

Operating Cycle of the Company

No. Particular 99-00 00-01 01-02 02-03

1 Raw Material Storage Period ( Days) 31 26 27 20

2 Work in Progress Storage Period (Days) 6 3 2 2

3 Finished Goods Storage Period ( Days) 33 23 27 21

4 Debtor Collection Period ( Days) 60 35 26 26

5 Creditors Collection Period ( Days) 46 24 33 30

Length of Operating Cycle (Days) =

1+2+3+4-584 63 49 39


Operating Cycle Chart


RATIO ANALYSIS

Current Ratio

The current ratio is a measure of the firm’s short-term

solvency. It indicates the availability of current assets in rupees for

every one rupee of current liability. A ratio of greater than one means

that the firm has more current assets than current liability to meet

short-term requirements. The current ratio of 2:1 is considered

satisfactory.

Current AssetsCurrent Ratio = ---------------------------

Current Liabilities

Years Current

Assets

Current

Liabilities

Ratio

99-00 13495.96 4008.77 3.36

00-01 10101.54 3178.01 3.18

01-02 13759.64 4093.50 3.36

02-03 9921.08 5721.94 1.73


Quick Ratio

Quick ratio establishes the relationship between quick assets

and current liabilities. Generally, a quick ratio of 1:1 is considered to

represent satisfactory current financial position.

Current Assets - InventoriesQuick Ratio = ----------------------------------

Current Liabilities

Years Quick Assets Current Liabilities Ratio

99-00 7863.99 4008.77 1.96

00-01 4673.20 3178.01 1.47

01-02 7880.92 4093.50 1.93

02-03 4797.84 5721.94 0.84


Net Working Capital Ratio

The difference between current assets and current liabilities is

called net working capital (NWC). Net Working Capital measures the

firm’s potential reservoir of funds. It can be related to net assets or

capital employed.

Net Working CapitalNet Working Capital Ratio = ----------------------------

Net Assets


Years Net WC Net Assets Ratio

99-00 9487.19 31193.29 0.30

00-01 6923.53 31445.76 0.22

01-02 9666.14 38007.83 0.25

02-03 4436.67 43467.45 0.10

Current Assets to Working Capital Ratio

This ratio shows the relationship between current assets and

working capital. It indicates the percentage of current assets to working

capital.


Current AssetsCurrent Assets to Working Capital Ratio = --------------------

Working Capital

Years Current

Assets

Working

Capital

Ratio

99-00 13495.96 9487.19 1.42

00-01 10101.54 6923.53 1.46

01-02 13759.64 9666.14 1.42

02-03 9921.08 4436.67 2.24


CHAPTER: 3WORKING CAPITAL ANALYSIS

Management of Receivable

Management of Inventory

Management of Cash


MANAGEMENT OF RECEIVABLE

The accounts receivables are generated which are collected at a

future date only when the firm grants credit against an ordinary sale of

goods or services without receiving cash. Credit sale is an essential part

of the present competitive economic system. It is granted in order to

increase the volume of sales. As such receivables which are created out of

credit sales are considered as a marketing tool for increasing sales. But

extension of credit involves cost of risk. Therefore, management should

weigh the benefits against cost. As such, the objective of receivables

management is to promote sales and profit until optimum point is

reached.

Receivables are created out of trade credit and which are collected

in the near future. The debtors have got the three distinct characteristics.

(i) It involves risk which should carefully be studied since cash sales

are risk less whereas at the time of credit sales, cash is yet to be

received.

(ii) It is based on present economic value of goods passes immediately,

whereas, the seller expects an equivalent benefit at a latter date.

(iii) It implies futurity. The value of goods or services received by the

buyer will be payable by him at a future date.

No doubt, receivables play a significant role in the total current

assets composition since their position is next to inventories. In India,

they form about one third of total current assets.


Credit Policy

A firm’s investment in accounts receivable depends on the volume

of credit sales and the collection period. There is one way in which the

financial manager can affect the volume of credit sales and collection

period and consequently, investment in account receivables. That is

through the changes in credit policy. The term credit policy is used to

refer to the combination of three decision variables: (I)) Credit Standards,

(ii) Credit Terms, and (iii) Collection efforts, on which the financial

manager has influence.

Credit Standards are criteria to decide the types of customers to whom

goods could be sold on credit. If a firm has more slow-paying customers,

its investment in accounts receivables will increase. The firm will also be

exposed to higher risk of default.

Credit Terms specify duration of credit and terms of payment by

customers. Investment in account receivables will be high if customers

are allowed extended time period for making payments.

Collection Efforts determine the actual collection period. The lower the

collection period, the lower the investment in accounts receivable and

vice versa.

Debtor Collection Period

It refers to the debtors converted into receivables. Debtor turnover

ratio indicates the number of times debtors turnover each year. Generally,

the higher the value of debtors’ turnover, the more efficient is the

management of credit.


Total SalesDebtors Turnover Ratio = ----------------------

Average Debtors 365 days

Collection Period = --------------------------------- Debtors Turnover Ratio

Years Sales Debtors Ratio Collection

Period

99-00 40347.01 6602.79 6.11 60

00-01 44459.79 4263.42 10.43 35

01-02 45167.17 3271.87 13.80 26

02-03 52431.08 3468.61 15.12 24

Debtor Turnover Ratio


Collection Period Chart

MANAGEMENT OF INVENTORY

Inventory management involves the ‘ development &

administration of policies, system & procedures which will minimize

total costs relative to inventory decisions and related function such as

customers service requirements, production schedules, purchasing and

traffic.


Inventories constitute the most significant part of current

assets of a large majority of companies I India. On an average,

inventories are approximately 60 percent of current assets in public

limited companies in India. Because of large size of inventories

maintained by firms, a considerable amount of funds is required to be

committed to them. It is, therefore, absolutely imperative to manage

inventories efficiently and effectively in order to avoid unnecessary

investment.

Nature of Inventories

Inventories are stock of the product a company is

manufacturing for sale and components that make up the product. The

various forms in which inventories exist in manufacturing company are

Raw Materials are those basic inputs that are converted into

finished product through the manufacturing process. Raw material

inventories are those units which have been purchased and stored

for future production.

Work in Progress inventories are semi-manufactured products.

They represent products that need more work before they become

finished product for sale.


Finished goods inventories are hose completely manufactured

products which are ready for sale. Stocks or raw materials and

work in progress facilitate production, while stock of finished

goods is required for smooth marketing operation. Thus,

inventories serve as a link between the production and

consumption of goods.

The level of three kinds of inventories for a firm depends on

the nature of its business. A manufacturing firm will have substantially

high levels of all three kinds of inventories, while a retail or wholesale

firm will have a very high level of finished goods inventories and no raw

material and work in progress inventories.

Need to hold inventories

Transactions Motive emphasizes the need to maintain inventories

to facilitate smooth production and sales operation.

Precautionary Motive necessitates holding of inventories to guard

against the risk of unpredictable changes in demand and supply forces

and other factors.

Speculative Motive influence the decision to increase or reduce

inventory levels to take advantage of price fluctuations.


A company should maintain adequate stock of materials for a

continuous supply to the factory for an uninterrupted production. It is not

possible for a company to procure raw material whenever it is needed. A

time lag exists between demand for materials and its supply. Also, there

exists uncertainty in procuring raw material in time on many occasions.

The procurement of materials may be delayed because of such factors as

strike, transport disruption or short supply. Therefore the firm should

maintain sufficient stock of raw material at a given time to streamline

production.

Work in progress inventory builds up because of the

production cycle. Production cycle is the time span between introduction

of raw material into production and emergence of finished product at the

completion of production cycle. Efficient firms constantly try to make

production cycle smaller by improving their production technique.

Stock of finished goods has to be held because production

and sales are not instantaneous. A firm can not produce immediately

when goods are demanded by customers. Therefore, to supply finished

goods on a regular basis, their stock has to be maintained.


Types of Inventory:-

1) Raw Material Inventory:

These are goods which have not yet been committed to production

in a manufacturing firm. They may consist of basic raw material.

2) Work-In-Process:-

This includes those materials which have been committed to

production process but have not yet been completed.

3) Finished goods:-

These are completed products awaiting sale. They are the final

output of the production process in manufacturing firms.

4) Supplies:-

A fourth kind of inventory, Supplies or what is called consumable -

stores are also maintained by the firms. These materials are of low value

& they do not enter the production process, for example oil, fuel, bulbs,

soaps etc.

5) Scrap:-

The waste of materials arising during manufacturing process is also

a part of the inventory. Even defective pieces to be disposed off are a part

of in inventory.


Techniques of inventory Management:-

(a) Economic order quantity Model

(b) ABC Analysis

(a) Economic order quantity Model:-

Economic order quantity is that quantity order at which that total

ordinary cost and inventory cost will be the minimum cost. It is ordering

also known as Economic lot size. If orders are placed for a relatively

small quantity frequently, the company will have to place order against

and against during a year, it will have to incur a considerable costs in the

form of transportation cost & clerical expenses.

Inventory carrying cost refers to the cost of maintaining inventory

of goods thus there are two type of cost

Cost that arise due to storing the inventory

The opportunity cost of funds e.g. if the fund were not

locked in inventory, it would have earned interest in

bank deposit etc.

Ordering cost includes clerical expenses and times

involved in sending enquiry & cost of placing order. It

also includes involved in sending remainder to

suppliers inspection and recording of goods received

checking involves making payment thereof, etc. so, the

larger the order lower is the ordering cost.

When inventory carrying cost and ordering cost are balanced, total

cost of ordering quantity is lowest and therefore it is called economic

order quantity.


There are basically two methods of determining EOQ

1. Graphical Method

2. Formula Method.

1. Graphical Method:

Total cost Inventory carrying cost

CostIn Rs.

Ordering cost

EOQ Quantity

The total cost is lowest when OX quantity is ordered per orders,

So, OX is the economic order quantity. It should be remember the

economic order quantity is always obtain at the point of inter section

between inventory carrying cost line & ordering cost line.

2. Formula Method:-

EOQ = √ 2AO C

Where,

A = Annual consumption

O = Ordering cost

C = Carrying cost per unit.


(b) ABC (Always Best Control) Analysis: -

In large companies the inventory consists of thousand of items and

a number of employees are employed to control them. There salaries and

other expenses run into lacs into or Rupees. In order to affect economy in

controlling such large inventory or a system known as ABC has been

widely used.

It has been found from experience that all items includes in

inventory are not of equal importance. A few items in the inventory

represent a large proportion of total value of inventory. Hence, more

attention must be developed to the control of such item. The entire items

are divided in to three parts.

Group: A: It includes those items which are very important and of high

value but form use a small proportion of total quantity of inventory.

Group: B: Items included in category B are not as important as those in

group ‘A’ but are important enough for its proper record to be

maintained.

Group: C: The remaining items must be placed in category C.


Hypothetical Example:

ClassNo. of items ( In % of

total no. of items)

Value of items (in % of total

value of inventory

A 10 75

B 25 20

C 65 05

100 5%

95

20%

75

C

Group

A B

75% Group

10 35 100

Implementation of System:-

Step: 1: A list of all items must be prepared in order to determine how

many items is there, what the consumption of each of them is and

what is the price.

Step: 2: Calculate total cost by multiplying items price with number of

units of consumption.

Step: 3: Ranks must be given to each items on the basis of total value as

calculated in step 2. First rank must be allotted to the items


having highest value and this way the rank must be given in

descending order.

Step: 4: Determine the % of each item. Firstly % of no. of each item with

total number and secondly % of total value of each items with

total of all items.

Step: 5: All item must be grouped into A, B, C categories.

Stock Turnover Ratio

Inventory turnover ration indicates the efficiency of the firm in

producing and selling its product. This ratio is percentage of inventory to

the total sales.

Total SalesStock Turnover Ratio = ------------------

Inventory 365 days

Holding Days of Inventory = ----------------------------- Stock Turnover Ratio

Years Sales Inventory Ratio Holding Days of Inventory

99-00 40347.01 5631.97 7.16 50

00-01 44459.79 5428.34 8.19 45

01-02 45167.17 5878.52 7.68 48

02-03 52431.08 5123.24 10.23 36


Stock turnover Ratio

Holding Days of Inventory


MANAGEMENT OF CASH

Cash is the important current assets for the operations of the

business. Cash is the basic input needed to keep the business running on a

continuous basis, it is also the ultimate output expected to be realized by

selling the service or product manufactured by the firm. The firm should

keep sufficient cash, neither more nor less. Cash shortage will disrupt the

firm’s manufacturing operations while excessive cash will simply remain

idle, without contributing anything towards the firm’s profitability. Thus,

a major function of the financial manager is to maintain a sound cash

position.

Motives for holding cash

1. Transaction motive

The transaction motive requires a firm to hold cash to

conduct its business in the ordinary course. The firm needs cash primarily

to make payments for purchases, wages and salaries, other operating

expenses, taxes, dividends etc. The need to hold cash would not arise if

there were perfect synchronization between cash receipts and cash

payments. For transaction purpose, firms nay invest its cash in marketable

securities. Usually, the firm will purchase securities whose maturity

corresponds with some anticipated payments, such as dividends, or taxes

in the future.


2. Precautionary motive

The precautionary motive is the need to hold cash to meet

contingencies in the future. It provides a cushion or buffer to withstand

some unexpected emergency. The precautionary amount of cash depends

upon the predictability of cash flows. If cash flows can be predicted with

accuracy, less cash will be maintained for an emergency. The amount of

precautionary cash is also influenced by the firm’s ability to borrow at

short notice when the need arises. Stronger the ability of the firm to

borrow at short notice less the need for precautionary balance.

3. Speculative motive

The speculative motive relates to the holding of cash for investing

in profit-making opportunities as and when hey arises. The opportunity to

make profit may arise when his security prices change. The firm will hold

cash, when it is expected that interest rates will arise and security prices

will fall. Securities can be purchased when the interest rate is expected to

fall, the firm will benefit by the subsequent fall n interest rates an increase

in security prices.

4. Compensating Motive

Banks provide differed types of services like clearance of cheque,

transfer of fund etc. against a nominal fee or commission. Generally,

clients (firms) are required to maintain a minimum cash balance at the

bank which cannot be utilized by then for compensating balance.


Cash Collection Instruments in India

The main instruments of collection used in India are : (i) Cheque ,

(ii) Drafts, (iii) Documentary Bills, (iv) Trade Bills, and (v) Letter of Credit.


Instruments Pros Cons

1.Cheques No charge Payable through clearing Can be discounted after receipt Low discounting chare of Rs.3.50 per Rs.1000 Requires customers limits which are inter-changeable with overdraft limits.

Can bounce Collection time can be long Collection charge of Rs.2 per Rs.1000 with a maximum of Rs.1000

2.Drafts Payable in local clearing Chances of bouncing are less

Cost Rs.2 per Rs.1000 subject to a max of Rs.1000 Buyers account debited on day one

3.Documentary Bills

Theoretically, goods are not released till payment is made or the bill is accepted Low discounted charge of Rs.3.50 per Rs.1000

Not payable through clearing Collection cost of Rs.4.50 per Rs.1000 subject to a maximum of Rs.1000 Long delays

4.Trade bills No charge except stamp duty Can be discounted Discipline of payment on due date

Procedure is cumbersome Buyers are reluctant to accept the due date discipline

5.Letters of Credit

Good credit control as goods are released on payment of acceptance bill Seller forced to meet delivery schedule because of expiry date

Opening charges Transit period interest Negotiation charges Need bank lines to open LC Stamp duty on usance bills


Cash Ratio

Cash is the most liquid asset, a financial analyst may

examine cash ratio and is equivalent to current liabilities

365Cash Turnover Ratio = ---------------------------------

Operating Cycle Period

Years Cash Current

Liabilities

O.S.

Period

Cash

Turnover

Ratio

99-00 1248.23 4008.77 84 4.34

00-01 1553.20 3178.01 63 5.79

01-02 4457.39 4093.50 49 7.45

02-03 1000.27 5721.94 39 9.36

Cash Turnover Ratio


FINDINGS


The requirement of working capital is not stable in the

company. It was 9487.19 Lacs in 1999-00, 6923.53 Lacs in 2000-

01, and 9666.14 Lacs in 2001-02, and 4436.67 lacs in 2002-03 .

The main reason behind it is that company came across the

depression in textile business between this period although

compnay was able to survive in the market and in the last year

working capital requirement increase with the expansion of

production.

Operating cycle time is decreasing year by year. It was 84 days

in 1999-00, 63 days in 2000-01, and 49 days in 2001-02, and 39

days in 2002-03. So in last year operating cycle time is about 1.6

months, it means money realised after 1.6 months which is good in

the competitive market.

Current ratio of the company is between 1.73 to 3.36 in last four

years. The satisfectory ratio is 2:1 and the company have higher

ratio which indicates compnay can be in better position to meet

current obligation.

Quick ratio of the company is between 1.98 to 0.84 in last four

years. The satisfactory ratio is 1:1 and the company have near to it

or slightly higher ratio which is quite satisfactory.

Debtor turnover ratio was 6.11 times in 1999-00, 10.43 times in

2000-01, and 13.80 times in 2001-02, 26.23 times in 2002-03. The

receivables collection period is 60 days, 35 days, 26 days, 24 dayd

respectively. So collection days are improving day by day which is

good sign for the company.


Stock turnover ratio is 7.16 in 1999-00, 8.19 in 2000-01 and

7.68 in 2001-02 and holding days is 50 days, 45 days, 48 days

respectively. It was highest in the 2002-03 i.e 10.23 when holding

days are lowest 36 days. So some care should be taken.

Company having good management system and cash turnover

rate is 4.35 in 1999-00, 5.79 in 2000-01 and 7.45 in 2001-02, and

9.36 in 2002-03.

So I conclude that company made much improvement in 2002-03

comparing to last three year as far as working capital and its management

is concern.


SUGGESTIONS


Net working capital ratio is 0.10 in 2002-03 which is desirebale

but it was highest in 1999-00 i.e. 0.30. So some attention is

required to increase the ratio.

Current Assets to Working Capital ratio is one of the important

factor for the industries. The ratio is 1.46 in 2000-01 which shows

that current assets is 1.46 times than working capital. But it was

highest in 2002-03 i.e. 2.24. So it requires to take corrective

measures.

Quick ratio of the company is between 0.84 in 2002-03. The

satisfactory ratio is 1:1 and the company have lower ratio which is

not satisfactory. But it was highest in 1999-00 i.e. 1.96. So

considerable attention is by the management.

As far as cash management is concerned, cash inflow is

efficiently undertaken, but improvement in cash out flows i.e.

payments & disbursement of cash requires considerable attention.

As managerial point of view, different collection center will be

established for prompt collection and centralize payment of money

from head bank to various suppliers of materials are required.

Holding days of inventory were decreased in last year as

compared to 2001-02 i.e. 48 days. So, timely review of inventory

by production department managers required. More attention on

opening and closing stock of material of A item and high value H

item require.


So all above suggested recommendations are part of working

capital management. By throughly observing these suggestions, company

can be able to realize money quickly and break greater speed increasing

requirement of working capital.


ANNEXURE


Annexure:1: Profit & Loss A/c

Particulars 2000-01 2001-02 2002-03

Income

Sales & Job Charges

-Excise Duty

44459.79

1930.04

45167.17

1776.57

52431.08

1285.80

Income From Financial

Operation

Other Income

352.57

195.16

337.77

726.55

360.47

444.81

Total 43077.48 44454.92 51950.56

Expenditure

Consumption of RM

(Increase)/Decrease In Stock

Purchases

Mfg. & Other Expenses

24079.43

273.70

3698.66

10543.71

23611.85

424.70

3093.56

11225.45

29673.28

307.73

2216.49

11376.46

Total 38595.50 38595.50 43573.96

Profit before financial

charges, dep. and tax

- Financial Charges

4481.98

906.26

6948.76

787.05

8376.80

1243.84

Profit before dep. & Tax

- Depreciation

3575.72

1511.38

6161.71

2245.21

7132.76

2407.81

Net Profit before Tax

- Provision for tax

Current

Deferred

Earlier Years

2064.34

2.50

0.00

0.00

3916.50

3.00

986.01

0.98

4724.95

163.00

703.00

0.00

Net profit after Tax

+ Balance B/F

2061.84

4147.37

2926.51

26.27

3858.95

28.42

Balance for Appropriation 6209.21 3002.78 3887.37


Annexure – 2 : Balance Sheet

Particulars 2000-01 2001-02 2002-03Sources Of Fund1. Shareholder Fund Share Capital 3829.06 3829.06 3829.06 Reserve & Surplus 30224.60 26653.49 27078.95

34053.66 30482.55 30908.012. Loan Funds Secured Loan 9512.75 9336.48 9939.26 Unsecured Loan 84.40 4764.55 7224.22

9597.15 14101.03 17163.48Total 43650.81 44583.58 48071.49Application Of Fund1. Fixed Assets Gross Block 39640.88 43320.78 55686.81 Less : Depreciation 16594.55 18783.39 21000.06 Net Block 23046.33 24537.39 34686.12 Less : Lease Adjs. A/C 6.89 6.89 0.00 Capital Wip 1482.79 3811.19 2657.82

24522.23 28341.69 37343.942. Investment 5760.96 4070.30 3284.613. Current Assets Inventories 5428.34 5878.52 5123.24 Sundry Debtors 3120.00 3423.73 3797.57 Cash & Bank Balance 1553.20 4457.39 1000.27 Loan & Advances Other Current Assets

6390.400.00

5915.060.00

7352.98

16491.94 19674.70 17274.06 Less : Current Liabilities 2323.87 3325.99 4292.90 Provision 854.14 761.51 1429.04

3178.01 4093.50 5721.9413313.93 15581.20 11552.12

4. Deferred Tax Liability 0.00 -3507.73 4210.735. Misleading Expenses 53.69 98.12 101.55

43650.81 44583.58 48071.49


BIBLIOGRAPHY


Books

Financial Management

By I.M.Pandey (Sixth Edition)

Financial Management – P.N. Reddy

Financial Management & Policy – V. K. Bhalla

Management Accounting - By Bhagavati & Pillai (Second Edition)

Financial Management – Prasanna Chandra

Management Accounting – Ravi M. Kishore

Annual Report of Garden Silk Mills Limited

CMA data report for working capital

Websites

www.GardenVareli.com

www.CorporateInformation.com

http://www.GardenVareli.com/

http://www.CorporateInformation.com/


CHAPTER: 1

INTRODUCTION OF THE COMPANY

Introduction

History of the Company

Activities of the Company

Achievement of the

Company

General Information

Distribution of the

Company

Categories of Shareholders

“financial statement analysis”sumesh

Documents