smu grand project

8/6/2019 SMU Grand Project.

1/86


2/86

Greenplus Solution Pvt Ltd

PREFACE

This report has been prepared keeping in mind the curriculum of M.B.A 4th sem Finance

of Sikkim Manipal University for training for 90 days.

This report seeks to describe the functions of various departments of business

organization. The report covers specialized department viz. Finance.

The initial part contain brief introduction about the organization and its role functioning

with respect to the corporate world in brief. The principal content of this report is to

reveal the functioning of the organization and its role in the society as whole.

In preparing this report, I have drawn vast amount of information from electronic,

communicative internal and personal sources which were nearly impossible without the

co-operation from various senior people from the organization and well organized

support by various people.

I owe intellectual debt to all the people who supported me to prepare and complete a

systematic report like this.

IDEA Institute of Management &Technology.

2


3/86


Acknowledgement

This project is an intrigal part of the partial fulfillment of the M.B.A. programme. It is

very essential to learn practical knowledge for a management student.

I am thankful to Mr. Kulpesh Patel Sr.Executive (HRD) of Green Plus Solution Pvt Ltd.

And particularly to Mr. Kaushikbhai Patel, Asst.Manager, Ahmedabad to assign me a

summer training and provide me an opportunity to gain practical knowledge, which is

very important for enhancing my skill, knowledge and ability. Mr. Gautam sir who

provides me a valuable guidance at every stage when I needed. I also extend my gratitude

to Mr.Mayur Patel, Mr. Bharat Sir.

Ilesh Vaghela

4th Sem.Finance M.B.A.

IIMT, Usmanpura.

Ahmedabad.


3


4/86


Introduction

Financial Management is the specific area of finance dealing with the financial decisioncorporations make, and the tools and analysis used to make the decisions. The discipline as a

whole may be divided between long-term and short-term decisions and techniques. Both share the

same goal of enhancing firm value by ensuring that return on capital exceeds cost of capital,

without taking excessive financial risks.

Capital investment decisions comprise the long-term choices about which projects receive

investment, whether to finance that investment with equity or debt, and when or whether to pay

dividends to shareholders. Short-term corporate finance decisions are called working capital

management and deal with balance of current assets and current liabilities by managing cash,

inventories, and short-term borrowings and lending (e.g., the credit terms extended to customers).

Corporate finance is closely related to managerial finance, which is slightly broader in scope,

describing the financial techniques available to all forms of business enterprise, corporate or not.

Role of Financial Managers:

The role of a financial manager can be discussed under the following heads:

1. Nature of work

2. Working conditions

3. Employment

4. Training other qualifications and Advancement

5. Job outlook

6. Earnings

7. Related occupations

Let us discuss each of these in a detailed manner.


4


5/86


1. Nature of work

Almost every firm, government agency and organization has one or more financial

managers who oversee the preparation of financial reports, direct investment activities,

and implement cash management strategies. As computers are increasingly used to record

and organize data, many financial managers are spending more time developing strategies

and implementing the long-term goals of their organization.

The duties of financial managers vary with their specific titles, which include controller,

treasurer or finance officer, credit manager, cash manager, and risk and insurance

manager. Controllers direct the preparation of financial reports that summarize and

forecast the organizations financial position, such as income statements, balance sheets,

and analyses of future earnings or expenses. Regulatory authorities also in charge of

preparing special reports require controllers. Often, controllers oversee the accounting,

audit, and budget departments. Treasurers and finance officers direct the organizations

financial goals, objectives, and budgets. They oversee the investment of funds and

manage associated risks, supervise cash management activities, execute capital-raising

strategies to support a firms expansion, and deal with mergers and acquisitions. Credit

managers over see the firms issuance of credit. They establish credit-rating criteria,

determine credit ceilings, and monitor the collections of past-due accounts. Managers

specializing in international finance develop financial and accounting systems for the

banking transactions of multinational organizations.

Cash managers monitor and control the flow of cash receipts and disbursements to meet

the business and investment needs of the firm. For example, cash flow projections are

needed to determine whether loans must be obtained to meet cash requirements or

whether surplus cash should be invested in interest-bearing instruments. Risk and

insurance managers over see programs to minimize risks and losses that might a rise from

financial transactions and business operations undertaken by the institution. They also

manage the organizations insurance budget.


5


6/86

Greenplus Solution Pvt LtdFinancial institutions, such as commercial banks, savings and loan associations, credit

unions, and mortgage and finance companies, employ additional financial managers who

oversee various functions, such as lending, trusts, mortgages, and investments, or

programs, including sales, operations, or electronic financial services. These managers

may be required to solicit business, authorize loans, and direct the investment of funds,

always adhering to State laws and regulations.

Branch managers of financial institutions administer and manage all of the functions of a

branch office, which may include hiring personnel, approving loans and lines of credit,

establishing a rapport with the community to attract business, and assisting customers

with account problems. Financial managers who work for financial institutions must keep

a breast of the rapidly growing array of financial services and products.

In addition to the general duties described above, all financial managers perform tasks

unique to their organization or industry. For example, government financial managers

must be experts on the government appropriations and budgeting processes, whereas

healthcare financial managers must be knowledgeable about issues surrounding

healthcare financing. Moreover, financial managers must be aware of special tax laws

and regulations that affect their industry.

Financial managers play an increasingly important role in mergers and consolidations and

in global expansion and related financing. These areas require extensive, specialized

knowledge on the part of the financial manager to reduce risks and maximize profit.

Financial managers increasingly are hired on a temporary basis to advise senior managers

on these and other matters. In fact, some small firms contract out all accounting and

financial functions to companies that provide these services.

The role of the financial manager, particularly in business, is changing in response to

technological advances that have significantly reduced the amount of time it takes to

produce financial reports. Financial managers now perform more data analysis and use it

to offer senior managers ideas on how to maximize profits. They often work on teams,

acting as business advisors to top management. Financial managers need to keep abreast


6


7/86

Greenplus Solution Pvt Ltdof the latest computer technology in order to increase the efficiency of their firms

financial operations.

2. Working conditions

Financial managers work in comfortable offices, often close to top managers and to

departments that develop the financial data these managers need. They typically have

direct access to state-of-the-art computer systems and information services. Financial

managers commonly work long hours, often up to 50 or 60 per week. They generally are

required to attend meetings of financial and economic associations and may travel to visit

subsidiary firms or to meet customers.

3. Employment

While the vast majority is employed in private industry, nearly 1 in 10 works for the

different branches of government. In addition, although they can be found in every

industry, approximately 1 out of 4 are employed by insurance and finance establishments,

such as banks, savings institutions, finance companies, credit unions, and securities

dealers.

4. Training, Other qualifications and Advancement

A bachelors degree in finance, accounting, economics, or business administration is the

minimum academic preparation for financial managers. However, many employers now

seek graduates with a masters degree, preferably in business administration, economics,

finance, or risk management. These academic programs develop analytical skills and

provide knowledge of the latest financial analysis methods and technology.

Experience may be more important than formal education for some financial manager

positionsnotably, branch managers in banks. Banks typically fill branch manager

positions by promoting experienced loan officers and other professionals who excel at

their jobs. Other financial managers may enter the profession through formal

management training programs offered by the company.

Continuing education is vital for financial managers, who must cope with the growing

complexity of global trade, changes in State laws and regulations, and the proliferation of


7


8/86

Greenplus Solution Pvt Ltdnew and complex financial instruments. Firms often provide opportunities for workers to

broaden their knowledge and skills by encouraging employees to take graduate courses at

colleges and universities or attend conferences related to their specialty. Financial

management, banking, and credit union associations, often in cooperation with colleges

and universities, sponsor numerous national and local training programs. Persons enrolled

prepare extensively at home and then attend sessions on subjects such as accounting

management, budget management, corporate cash management, financial analysis,

international banking, and information systems. Many firms pay all or part of the costs

for employees who successfully complete courses. Although experience, ability, and

leadership are emphasized for promotion, this type of special study may accelerate

advancement.

In some cases, financial managers also may broaden their skills and exhibit their

competency by attaining professional certification. There are many different associations

that offer professional certification programs. For example, the Association for

Investment Management and Research confers the Chartered Financial Analyst

designation on investment professionals who have a bachelors degree, pass three

sequential examinations, and meet work experience requirements. The Association for

Financial Professionals (AFP) confers the Certified Cash Manager credential to those

who pass a computer-based exam and have a minimum of 2 years of relevant experience.

The Institute of Management Accountants offers a Certified in Financial Management

designation to members with a BA and at least 2 years of work experience who pass the

institutes four-part examination and fulfill continuing education requirements. Also,

financial managers who specialize in accounting may earn the Certified Public

Accountant (CPA) or Certified Management Accountant (CMA) designations.

Candidates for financial management positions need a broad range of skills. Interpersonal

skills are important because these jobs involve managing people and working as part of a

team to solve problems. Financial managers must have excellent communication skills to

explain complex financial data. Because financial managers work extensively with

various departments in their firm, a broad overview of the business is essential.


8


9/86

Greenplus Solution Pvt LtdFinancial managers should be creative thinkers and problem-solvers, applying their

analytical skills to business. They must be comfortable with the latest computer

technology. As financial operations increasingly are affected by the global economy,

financial managers must have knowledge of international finance. Proficiency in a

foreign language also may be important.

Because financial management is critical for efficient business operations, well-trained,

experienced financial managers who display a strong grasp of the operations of various

departments within their organization are prime candidates for promotion to top

management positions. Some financial managers transfer to closely related positions in

other industries. Those with extensive experience and access to sufficient capital may

start their own consulting firms.

5. Job outlook

Some companies may hire financial managers on a temporary basis, to see the

organization through a short-term crisis or to offer suggestions for boosting profits. Other

companies may contract out all accounting and financial operations. Even in these cases,

however, financial managers may be needed to oversee the contracts.

Computer technology has reduced the time and staff required to produce financial

reports. As a result, forecasting earnings, profits, and costs, and generating ideas and

creative ways to increase profitability will become a major role of corporate financial

managers over the next decade.

Financial managers who are familiar with computer software that can assist them in this

role will be needed.

6. Earnings

The Association for Financial Professionals 16th annual compensation survey showed

that financial officers average total compensation in 2006, including bonuses and

deferred compensation, was $261,800.

Large organizations often pay more than small ones, and salary levels also can depend on

the type of industry and location. Many financial in both the business and private industry

receive additional.


9


10/86

Greenplus Solution Pvt LtdCompensation in the form of bonuses, which also vary substantially by size of firm.

Deferred compensation in the form of stock options is becoming more common,

especially for senior level executives.

7. Related occupations

Financial managers combine formal education with experience in one or more areas of

finance, such as asset management, lending, credit operations, securities investment, or

insurance risk and loss control. Workers in other occupations requiring similar training

and skills include accountants and auditors; budget analysts; financial analysts and

personal financial advisors; insurance underwriters; loan counselors and officers;

securities, commodities, and financial services sales agents; and real estate brokers and

sales agents.

NEED FOR THE STUDY

1. The study has great significance and provides benefits to various parties whom directly

or indirectly interact with the company.

2. It is beneficial to management of the company by providing crystal clear picture

regarding important aspects like liquidity, leverage, activity and profitability.

3. The study is also beneficial to employees and offers motivation by showing how

actively they are contributing for companys growth.

4. The investors who are interested in investing in the companys shares will also get

benefited by going through the study and can easily take a decision whether to invest or

not to invest in the companys shares.


10


11/86


12/86


METHODOLOGY

The information is collected through secondary sources during the project. That

information was utilized for calculating performance evaluation and based on that,

interpretations were made.

Sources of secondary data:

1. Most of the calculations are made on the financial statements of the company provided

statements.

2. Referring standard texts and referred books collected some of the information

regarding theoretical aspects.

3. Method- to assess the performance of he company method of observation of the work

in finance department in followed.


12


13/86


LIMITATIONS

1. The study provides an insight into the financial, personnel, marketing and other aspects

of Green Plus Solution Pvt Ltd. Every study will be bound with certain limitations.

2. The below mentioned are the constraints under which the study is carried out.

3. One of the factors of the study was lack of availability of ample information. Most of

the information has been kept confidential and as such as not assed as art of policy of

company.

Time is an important limitation. The whole study was conducted in a period of 60 days,

which is not sufficient to carry out proper interpretation and analysis.


13


14/86


Study objectives :-

a) To study the nature of working capital, concepts and definition of working

capital.

b) To examine the effectiveness of working capital management practices

of the firm.c) To find out how adequacy or otherwise of working capital affects

commercial operations of the company.

d) To prescribe remedial measures to encounter the problems faced by the

firm.

e) To study the working capital financing or means of financing of the

company.

Scope of the study :-

f) Planning of working capital management

g) Working capital finance

Methods of Data collection :-

a) Primary data:

Basic information collected from the local sources as well as

from the company staff like managers, accountants and officers. Moreover

information gathered through practically preparing the data for working

capital.

b) Secondary data:


14

2.1 REASEARCH METHODOLOGY:


15/86

Greenplus Solution Pvt Ltdi. From the B/S of the company

ii. From CMA proposal report

iii. From internet

iv. From books


15


16/86

Green Plus Solution Pvt. Ltd

T

he importance of working capital in any industry needs no special emphasis. Working

capital is considered to be life-giving force to an economic entity. Management of

working capital is one of the most important functions of corporate management. Every

organization whether profit oriented or not, irrespective of its size and nature of business,

needs requisite amount of working capital. Capital to keep an entity working is working

capital. The efficient Working capital management is the most crucial factor in

maintaining survival, liquidity, solvency and profitability of the concerned business

organization. It needs sufficient finance to carry out purchase of raw materials; payment

of day-today operational expenses including salaries and wages, repairs and maintenanceexpenses etc. and funds to meet these expenses are collectively known as working

capital.

In simplicity, working capital refers to that portion of total fund, which finances

the day-to-day working expenses during the operating cycle. The term "working" here

implies continuity of production and distribution of want removing goods and services

required by the society. Working capital is necessary to finance current assets which

include inventories, debtors, marketable securities, bank, cash, short term loans and

advances, payment of advance tax and so on. An inadequate working capital as both the

phenomena of over capitalization and under capitalization of working capital generates

adverse effects on the profitability and liquidity of the concerned firm. The effective

working capital necessitates careful handling of current assets to ensure short-term

liquidity and solvency of the business. To be more specific, neither under stocking nor

overstocking of raw materials, careful maintenance and trade off between credit

receiving.


1.1 INTRODUCTION OF WORKING CAPITAL

16


17/86


Green plus Solution Pvt. Ltd. meets its working capital needs by borrowing Fund based

loans and Non-fund based loans from different banks. Fund based loans include loans

like Cash credit, Working capital term loan, Working capital demand loan, Packing

Credit, Advance against retention money etc..Whereas Non-fund based loans include

Letter of Credit and Bank Guarantee. Generally in any company the requirements of

Non-fund based loans is more than Fund based loans.


17


18/86


W

orking capital management is concerned with the problems that arise in attempting to

manage current assets, the current liabilities and the interrelationship that exists between

them. The term current assets refers to those assets which in the ordinary course of

business can be or will be, converted into cash within one year without undergoing a

diminution in value and without disrupting the operations of the firm. The major current

assets are cash, marketable securities, accounts receivables and inventory. Current

liabilities are those liabilities which are intended, at their inception, to be paid in the

ordinary course of business, within a year, out of the current assets or earnings of the

concern. The basic current liabilities are account payable, bills payable, bank overdraft,

and outstanding expenses.

The goal of working capital management is to manage the firms current assets

and liabilities in such a way that a satisfactory level of working capital is maintained.

This is so because if the firm cannot maintain a satisfactory level of working capital, it is

likely to become insolvent and may even be forced into bankruptcy. The current asset

should be large enough to cover its current liabilities in order to ensure a reasonable

margin of safety. Each of the current assets must be managed efficiently in order to

maintain the liquidity of the firm while not keeping too high a level of any one of them.

Each of the short-term sources of financing must be continuously managed to ensure that

they are obtained and used in the best possible way. The interaction between current

assets and current liabilities is, therefore, the main theme of the theory of the theory of

working management.

The basic ingredients of the theory of working capital management may be said to

include its definition, need, optimum level of current assets, and the tradeoff between


5.1 NATURE OF WORKING CAPITAL:

18


19/86

Green Plus Solution Pvt. Ltdprofitability and risk which is associated with the level of current assets and liabilities,

financing-mix strategies and so on.

There are two concepts of working capital: Gross and Net.

The term gross working capital, also referred to as working capital, means the total

current assets.

The term net working capital can be defined in two ways:

1. The most common definition of net working capital(NWC) is the difference

between current assets and current liabilities; and

2. Alternate definition of NWC is that portion of current assets which is financed

with long-term funds.

The task of the financial manager in managing working capital efficiently is to

ensure sufficient liquidity in the operations of the enterprise. The liquidity of a business

firm is measured by its ability to satisfy short-term obligations as they become due. The

three basic measures of a firm overall liquidity are

i. The current ratioii. The acid-test ratio, and

iii. Net working capital ratio

Net working capital (NWC), as a measure of liquidity is not very useful for

comparing the performance of different firms, but it is quite useful for internal control.

The NWC helps in comparing the liquidity of the same firm over time. For purpose of

working capital management, therefore, NWC can be said to measure the liquidity of the

firm. In other words, the goal of working capital management is to manage the current

assets and liabilities in such a way that an acceptable level of NWC is maintained.


5.2 CONCEPT OF WORKING CAPITAL:

19


20/86

Green Plus Solution Pvt. LtdThe two concepts of working capital Gross and Net are not exclusive; rather, they

have equal significance from the management viewpoint.

Orking capitalrefers to the cash a business requires for day-to-day operations,

or, more specifically, for financing the conversion of raw materials into finished

goods, which the company sells for payment. Among the most important items of

working capital are levels of inventory, accounts receivable, and accounts payable.

Analysts look at these items for signs of a company's efficiency and financial strength.

W

Working capital is commonly defined as the difference between current assets and

current liabilities. Efficient working capital management requires that firm should operate

with some amount of working capital, the exact amount varying from firm to firm and

depending, among other things, on the nature of industry. The theoretical justification for

the use of working capital to measure liquidity is based on the premise that the greater the

margin by which the current assets cover the short term obligations, the more is the

ability to pay obligations when they become due for payment. The NWC is necessary

because the cash outflows and inflows do not coincide. In other words, it is the non-

synchronous nature of cash flows that makes NWC necessary. In general, the cash

outflows resulting from payment of current liabilities are relatively predictable.

Some companies are inherently better placed than others. Insurance companies,

for instance, receive premium payments up front before having to make any payments;

however, insurance companies do have unpredictable outgoings as claims come in.

Normally a big retailer like Wal-Mart has little to worry about when it comes to accounts

receivable: customers pay for goods on the spot. Inventories represent the biggest

problem for retailers. Manufacturing companies, for example, incur substantial up-front


5.3 DEFINITION :

20
http://www.investopedia.com/terms/w/workingcapital.asphttp://www.investopedia.com/terms/w/workingcapital.asp


21/86

Green Plus Solution Pvt. Ltdcosts for materials and labor before receiving payment. Much of the time they eat more

cash than they generate.

The need for working capital (gross) or current assets cannot be overemphasized.

Given the objective of financial decision making to maximize the shareholders wealth, it

is necessary to generate sufficient profits. The extent to which profits can be earned will

naturally depend, among other things, upon the magnitude of the sales. A successful sales

programme is, in other words, necessary for earning profits by any business enterprise.

However, sales do not convert into cash instantly; there is invariably a time-lag between

the sale of goods and the receipt of cash. There is, therefore, a need for working capital in

the form of current assets to deal with the problem arising out of the lack of immediate

realization of cash against goods sold. Therefore, sufficient working capital is necessary

to sustain sales activity.


5.4 NEED FOR WORKING CAPITAL:

21


22/86


WORKING CAPITAL

Business activity does not come to an end after the realization of cash from

customers. For a company, the process is continuous and, hence, the need for a regular

supply of working capital. For all practical purposes, this requirement has to be met

permanently as with other fixed assets. This requirement is referred to as permanent orfixed working capital.

Any amount over and above the permanent level of working capital istemporary, fluctuating or variable working capital. This portion of the requiredworking capital is needed to meet fluctuations in demand consequent upon changes inproduction and sales as a result of seasonal changes.


Permanent Temporary

Initial workingcapital

Regular workingcapital

Seasonalworking capital

Special workingcapital

5.5 TYPES OF WORKING CAPITAL:

22


23/86


24/86

Green Plus Solution Pvt. LtdSeasonal working capital:

Some business enterprises require additional working capital during the season.

For ex: - sugar mill have to purchase sugarcane in particular season and have to employ

additional labor to produce.

Special working capital:In all enterprise some unforeseen events do occur, when extra funds are needed to

tide over such situation. Some of these events are sudden increase in demand of final

product, downward movement of price, and sales during depression.

A firm should plan its operations in such a way that it should have neither too

much nor too little working capital. The total working capital requirement is determined

by a wide variety of factors. These factors, however, affect different enterprise

differently. They also vary from time to time.

General Nature of Business:The working capital requirements of an enterprise are basically related to the

conduct of business. Enterprise falls into some broad depending on the nature of their

business. For instances, public utilities have certain features which have a bearing on

their working capital needs. The two relevant features are:

1. the cash nature of business, that is, cash sales, and

2. Sale of services rather than commodities.

In the view of these features, they do not maintain big inventories and have,

therefore, probably the least requirement of working capital.

Production cycle:Another factor which has a bearing on the quantum of working capital is the

production cycle. The term production or manufacturing cycle refers to the time involved

in the manufacture of goods. It covers the time-span between the procurement of raw


5.6 DETERMINANTS OF WORKING CAPITAL:

24


25/86

Green Plus Solution Pvt. Ltdmaterials and the completion of the manufacturing process leading to the production of

finished goods. Funds have to be necessarily tied up during the process of manufacture,

necessitating enhanced working capital. In other words, there is some time gap before

raw material becomes finished goods; to sustain such activities the need for working

capital is obvious.

Business cycle:The working capital requirements are also determined by the nature of the

business cycle. Business fluctuations leads to cyclical and seasonal changes which, in

turn, cause a shift in the working capital position, particularly for temporary working

capital requirements. The variations in business conditions may be in two directions:

1. Upward phase when boom conditions prevail, and

2. Downswing phase when the economic activity is marked by decline.

Production policy:The quantum of working capital is also determined by production policy. In case

of certain lines of business, the demand for products is seasonal, that is, they are

purchased during certain months of the year. What kind of production policy should be

followed in such case? There are two options open to such enterprise: either they confine

their production only to periods when goods are purchased or they follow a steady

production policy throughout the year. During slack season, the firms have to maintaintheir working force and physical facilities without adequate production and sale.

Credit policy:The credit policy relating to sales and purchase also affects the working capital.

The credit policy influences the requirement of working capital in two ways:

1. Through credit terms granted by the firm to its customers , buyers of

goods;

2. Credit terms available to the firm from its creditors.

The credit terms granted to customers have a bearing on the magnitude of

working capital by determining the level of book debts. The credit sales result in higher

book debts. Higher book debts mean more working capital. On the other hand, if liberal


25


26/86

Green Plus Solution Pvt. Ltdcredit terms are available from the suppliers of goods, the need for working capital is

less.

Growth and Expansion:As a company grows, it is logical to expect that a larger amount of working

capital is required. It is, of course, difficult to determine precisely the relationship

between the growth in the volume of business of a company and the increase in its

working capital. The composition of working capital in a growing company also shifts

with economic circumstances and corporate practices.

Vagaries in the Availability of Raw MaterialThe availability or otherwise of certain raw material on a continuous basis without

interruption would sometimes affect the requirement of working capital. There may be

some materials which cannot be produced easily either because of their sources are few

or they are irregular. To sustain smooth production, therefore the firm might be

compelled to purchase and stock them far in excess of genuine production needs.

Profit Level:The level of profits earned differs from enterprise. In general, the nature of the

product, hold on the market, quality of management and monopoly power would by and

large determine the profit earned by a firm. A priori, it can be generalized that a firm

dealing in a high quality product, having a good marketing arrangements and enjoying

monopoly power in the market, is likely to earn high profits and vice-versa.

Level of Taxes:The first appropriation out of profits is payment or provision for tax. The amount

of taxes to be paid is determined by the prevailing tax regulations the management has no

discretion in this respect. Very often, taxes have to be paid in advance on the basis of the

profit of the preceding year. Tax liability is, in a sense, short-term liability payable in

cash. An adequate provision for tax payments is, therefore, an important aspect of

working capital planning.


26


27/86

Green Plus Solution Pvt. LtdDividend Policy:

Another appropriation of profits which has a bearing on working capital is

dividend payment. The payment of dividend consumes cash resources and, thereby,

affects working capital to that extent. Conversely, if the firm does not pay dividend but

retains the profits, working capital increases. In planning working capital requirements,

therefore, a basic question to be decided is whether profits will be retained or paid out to

shareholders.

Price Level Changes:Changes in the price level also affect the requirements of working capital. Rising

prices necessitate the use of more funds for maintaining an existing level of activity. For

the same level of current assets, higher cash outlays are required. The effect of rising

prices is that a higher amount of working capital is needed.


27


28/86

Green Plus Solution Pvt. Ltd.

urrent assets are needed because sales do not convert into cash instantaneously.

There is always an operating cycle involved in the conversion of sales into cash.

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

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

machinery or land and buildings.

C

Working capital cycle is the time duration required to convert sales, after the

conversion of resources into inventories, into cash. The cycle of a manufacturing

company involves three phases:

1. Conversion of cash into inventory;

2. Conversion of inventory into receivables;

3. Conversion of receivables into cash.


6.1 WORKING CAPITAL CYCLE:

28


29/86


30/86

Green Plus Solution Pvt. Ltd.business. The higher the number, the longer a firm's money is tied up in business

operations and unavailable for other activities such as investing. The cash conversion

cycle is the number of days between paying for raw materials and receiving cash from

selling goods made from that raw material.

The operating cycle consists of three phases. In phase I, cash gets converted into

inventory. This includes purchase of raw material, conversion of raw materials into work-

in-progress, finished goods and finally the transfer of goods to stock at the end of the

manufacturing process. In phase II of the cycle, the inventory is converted into

receivables as credit sales are made to customers. In phase III, when receivables are

collected complete the operating cycle.

The length of the operating cycle of a manufacturing firm is the sum of:

i. Inventory conversion period

ii. Debtors conversion period, total of these called Gross operating cycle.

The difference between operating cycle and payables deferral period is net

operating cycle, also represents the cash conversion cycle.

Raw material conversion period:

RMCP = Raw material inventory * 365

Raw material consumption

= 1239.72 * 365


INVENTORY CONVERSION PERIOD

30
http://en.wikipedia.org/wiki/Businesshttp://en.wikipedia.org/wiki/Moneyhttp://en.wikipedia.org/wiki/Investmenthttp://en.wikipedia.org/wiki/Materialhttp://en.wikipedia.org/wiki/Moneyhttp://en.wikipedia.org/wiki/Businesshttp://en.wikipedia.org/wiki/Moneyhttp://en.wikipedia.org/wiki/Investmenthttp://en.wikipedia.org/wiki/Materialhttp://en.wikipedia.org/wiki/Money


31/86

Green Plus Solution Pvt. Ltd.15169.72

= 29.83 days

Work-in-progress inventory conversion period:

WIPCP = work-in-progress inventory * 365

Cost of production

= 42.30 * 365

31496.75

= 0.49 days

Finished goods conversion period:

FGCP = finished goods inventory * 365

Cost of goods sold

= 449.34 * 365

31496.75

= 5.21 days

DCP = Average debtors * 365

Net sales


DEBTORS CONVERSION PERIOD

31


32/86

Green Plus Solution Pvt. Ltd.= 410.495 * 365 (Rs. In Crore)

7387.70

= 20.28 days

Creditors deferral period:

CDP = Average creditors * 365

purchase

= 1664.225 * 365

14539.23

= 41.78 days

Net operating cycle = Gross operating cycle Creditors deferral period


CREDITORS DEFERRAL PERIOD

WORKING CAPITAL CYCLE

32


33/86

Green Plus Solution Pvt. Ltd.= (RMCP + WIPCP + FGCP + DCP) CDP

= (55.81 41.78) days

= 14.03days

Companys working capital cycle completes in 14 days. Raw Material conversion

Period is 29.83 days and Work In Progress Inventory Conversion Period is 0.49 Days and

Finished goods Conversion Period is 5.21 days. So total inventory conversion period is

35.53 days while Debtors Conversion period is 20.28 days which is quite good. So Green

Plus Solution Pvt. Ltds gross operating cycle is 55.81 days. But Creditors Deferral

Period is 41.78 days. It is better in comparison with the Debtors Conversion period. So

Net Working Capital Cycle is 14.03 days. So this is short working capital cycle and it

indicates that Green Plus Solution Pvt. Ltd. is well managing its working capital. As

stated above a business should not over invest in working capital. The key point to note

here is that a longer cash cycle ties up a bigger investment in working capital. It is

therefore useful to monitor the length of cash cycle, and changes in it, to judge whether a

business has an excessive working capital level or perhaps whether working capital is

inadequate which may lead to liquidity problems.

The two components of working capital are current assets and current liabilities.

They have a bearing on the cash operating cycle. In order to calculate the working capital

needs, what is required is the holding period of various types of various inventories, the

credit collection period and the credit payment period. Working capital also depends on

the budgeted level of activity in terms of production/sales. As the working capital

requirement is related to the cost excluding depreciation and not to the sale price,

working capital is computed with reference to cash cost.


6.2 WORKING CAPITAL ANALYSIS:

33


34/86


Working capital: excess of current assets compared to current liabilities, and indicates

amount of excess current assets relative to current liabilities available to conduct revenue

generating operations.

Total current assets minus current liabilities are value of working capital. Current Assets: cash, marketable securities, notes receivable, accounts receivable,

inventories, supplies, and prepaid expenses

Consumed in production of sales revenue

Current Liabilities: accounts payable, accrued expenses,(e.g. wages payable, interest

payable, taxes payable)

Operating cost incurred on credit

Inflows- Sources of Working Capital: Income from operations

a) Accrued income is sales revenue less all expense incurred in producing

sales revenue inflow

b) Sales revenue generated by cash sales or on credit through receivables

c) Expenses incurred by immediate payment of cash or credit through

Payable

Accrual net income

a) Determined after deducting noncash expenses

b) To convert net income to increase working capital, capitalized expenses

added to net income

Sale of long term assets

a) Land, building, furniture, equipment, investment

b) Sale treated as flow which increases working capital


34


35/86

Green Plus Solution Pvt. Ltd. Increase in long term liability

a) Create or increase loan, mortgage, or bond achieves this

b) Inflow that increases working capital

c) Borrowing long tern debt create increase in cash, current assets, or current

receivable with no effect to current liability

Outflows - Uses of Working Capital: Loss from operations

a) When loss occurs, expenses have exceeded sales revenue

b) Decreases working capital

Purchase of long term asset

a) Land, building, furniture, equipment, investment

b) Outflow that decreases working capital

Payment of Long term liabilities

Payment reducing principal amount owed on long term liability

Payment of cash dividends

Payable obligations

b) In partnership, current asset withdrawals by

owner are reductions to capital investments.


35


36/86


CURRENT LIABILITIES

Schedule-12 & 13


36


37/86


CURRENT ASSETS


2008-2009 2007-2008 2006-2007

LIABILITIES

CURRENT LIABILITIES

1. Bank Overdraft 9.29 12.23 7.21

2. Sundry creditors 2447.66 880.79 786.95

3. Advance payments

from customers 7.29 5.21 6.15

4. Interest payable 30.22 15.16 19.59

5. Other statutory liability 26.36 19.36 15.92

6. Deposits 35.24 27.53 31.34

7.Other current liabilities 303.82 88.21 161.31

8. Provisions 322.71 323.08 172.76

9. Total current liabilities 3182.89 1371.57 1201.23

37


38/86

Green Plus Solution Pvt. Ltd.Schedule-8 to 11

2009-2008 2008-2007 2006-2007

ASSETS CURRENT ASSETS

9.Cash & Bank balances 69.63(0.91%) 243.32(4.20%) 330.84(5.44%)

10.Debtors

(i) Considered as Good 0.41(0.01%) 0.75(0.01%) 2.00(0.03%)

(ii) Considered as

Doubtful0.01(0.00%) 0.21(0.00%) 2.47(0.04%)

(iii) Other DebtsUnsecured

(Considered as Good)

Less: Prov.for Doubtful

Debt

406.82(5.30%)

(0.01)(0.00%)

413.01(7.15%)

(0.21)(0.00%)

359.68(5.92%)

(2.47)(0.04%)

Total(Debtors) 407.23(5.31%) 413.76(7.16) 361.68(5.95%)

11. Inventory

(i) Raw material 823.39(10.73%) 959.39(16.61%) 551.27(9.07%)

(ii) Stock in progress 42.30(0.55%) 36.89(0.64%) 26.44(0.44%)

(iii) Finished goods 449.34(5.86%) 174.24(3.02%) 1320.90(21.72%)

(iv) Stores & Spares 290.21(3.78%) 327.83(5.68%) 311.74(5.13%)

(v) Loose Tools 2.03(0.03%) 1.83(0.03%) 2.25(0.04%)

(vi) Chemicals & Catalysts 72.49(0.94%) 28.94(0.50%) 30.81(0.51%)

(vii) Packing Materials

(viii) Construction Material

37.49(0.49%)

14.11(0.18%)

33.26(0.58%)

14.72(0.26%)

28.08(0.46%)

12.45(0.21%)

Total(Inventory) 1731.36(22.56%) 1577.10(27.32%) 2283.94(37.58%)

12. Loans and Advances 5464.77(71.22%) 3541.56(61.32%) 3104.82(51.01%)

13. Total current assets

( Gross working capital) 7672.99 (100%) 5775.74(100%) 6081.28 (100%)

NET WORKING CAPITAL

( Current assets Current

liability)


38


39/86

Green Plus Solution Pvt. Ltd.(13 9) 4490.10 4404.17 4880.05


39


40/86


Ratio Analysis

FINANCIAL ANALYSIS

Financial analysis is the process of identifying the financial strengths and

weaknesses of the firm and establishing relationship between the items of the balancesheet and profit & loss account.

Financial ratio analysis is the calculation and comparison ofratios, which are

derived from the information in a companys financial statements. The level and

historical trends of these ratios can be used to make inferences about a companys

financial condition, its operations and attractiveness as an investment. The information in

the statements is used by

Trade creditors, to identify the firms ability to meet their claims i.e. liquidity

position of the company.

Investors, to know about the present and future profitability of the company and

its financial structure.

Management, in every aspect of the financial analysis. It is the responsibility of

the management to maintain sound financial condition in the company.

FINANCIAL ANALYSIS

The term Ratio refers to the numerical and quantitativerelationship between two items

or variables. This relationship can be exposed as

Percentages

Fractions

Proportion of numbers

Ratio analysis is defined as the systematic use of the ratio to interpret the financial

statements. So that the strengths and weaknesses of a firm, as well as its historical

performance and current financial condition can be determined. Ratio reflects a

quantitative relationship helps to form aquantitative judgment.

40



41/86


STEPS IN RATIO ANALYSIS The first task of the financial analysis is to select the information relevant to

the decision under consideration from the statements and calculates

appropriate ratios.

To compare the calculated ratios with the ratios of the same firm relating to

the pas6t or with the industry ratios. It facilitates in assessing success or

failure of the firm.

Third step is to interpretation, drawing of inferences and report writing

conclusions are drawn after comparison in the shape of report or

recommended courses of action.

BASIS OR STANDARDS OF COMPARISON

Ratios are relative figures reflecting the relation between variables. They enable

analyst to draw conclusions regarding financial operations. They use of ratios as a tool of

financial analysis involves the comparison with related facts. This is the basis of ratio

analysis. The basis of ratio analysis is of four types.

Past ratios, calculated from past financial statements of the firm.

Competitors ratio, of the some most progressive and successful competitor firm

at the same point of time.

Industry ratio, the industry ratios to which the firm belongs to

Projected ratios, ratios of the future developed from the projected or pro forma

financial statements

NATURE OF RATIO ANALYSIS

Ratio analysis is a technique of analysis and interpretation of financial statements.It is the process of establishing and interpreting various ratios for helping in making

certain decisions. It is only a means of understanding of financial strengths and

weaknesses of a firm. There are a number of ratios which can be calculated from the

41



42/86


information given in the financial statements, but the analyst has to select the appropriate

data and calculate only a few appropriate ratios. The following are the four steps involved

in the ratio analysis.

Selection of relevant data from the financial statements depending upon the

objective of the analysis.

Calculation of appropriate ratios from the above data.

Comparison of the calculated ratios with the ratios of the same firm in the past, or

the ratios developed from projected financial statements orthe ratios of some other

firms or the comparison with ratios of theindustry to which the firm belongs.

42



43/86


INTERPRETATION OF THE RATIOS

The interpretation of ratios is an important factor. The inherent limitations of ratio

analysis should be kept in mind while interpreting them. The impact of factors such as

price level changes, change in accounting policies, window dressing etc., should also be

kept in mind when attempting to interpret ratios. The interpretation of ratios can be madein the following ways.

Single absolute ratio

Group of ratios

Historical comparison

Projected ratios

Inter-firm comparison

GUIDELINES OR PRECAUTIONS FOR USE OF RATIOS

The calculation of ratios may not be a difficult task but their use is not easy.

Following guidelines or factors may be kept in mind while interpreting various ratios are

Accuracy of financial statements

Objective or purpose of analysis

Selection of ratios

Use of standards

Caliber of the analysis

IMPORTANCE OF RATIO ANALYSIS

Aid to measure general efficiency

Aid to measure financial solvency

Aid in forecasting and planning

Facilitate decision making

Aid in corrective action

43



44/86


Aid in intra-firm comparison

Act as a good communication

Evaluation of efficiency

Effective tool

LIMITATIONS OF RATIO ANALYSIS

Differences in definitions

Limitations of accounting records

Lack of proper standards

No allowances for price level changes

Changes in accounting procedures

Quantitative factors are ignored

Limited use of single ratio

Background is over looked

Limited use

Personal bias

CLASSIFICATIONS OF RATIOS

The use of ratio analysis is not confined to financial manager only. There are

different parties interested in the ratio analysis for knowing the financial position of a

firm for different purposes. Various accounting ratios can be classified as follows:

1) Traditional Classification

2) Functional Classification

3) Significance ratios

1) Traditional Classification

It includes the following.

44



45/86


Balance sheet (or) position statement ratio: They deal with the relationship

between two balance sheet items, e.g. the ratio of currentassets to current

liabilities etc., both the items must, however, pertainto the same balance

sheet.

Profit & loss account (or) revenue statement ratios: These ratios deal with

the relationship between two profit & loss account items, e.g. the ratio of

gross profit to sales etc.,

Composite (or) inter statement ratios: These ratios exhibit the relation

between a profit & loss account or income statement item and a balance

sheet items, e.g. stock turnover ratio, or the ratio of total assets to sales.

2) Functional Classification

These include liquidity ratios, long term solvency and leverage ratios, activityratios and profitability ratios.

3) Significance ratios

Some ratios are important than others and the firm may classify them as primary

and secondary ratios. The primary ratio is one, which is of the prime importance to a

concern. The other ratios that support the primary ratio are called secondary ratios.

IN THE VIEW OF FUNCTIONAL CLASSIFICATION THE RATIOS ARE

A. Liquidity ratio

B. Leverage ratio

C. Activity ratio

D. Profitability ratio

45



46/86


LIQUIDITY RATIOS

Liquidity refers to the ability of a concern to meet its current obligations as &

when there becomes due. The short term obligations of a firm can be met only when there

are sufficient liquid assets. The short term obligations are met by realizing amounts from

current, floating (or)circulating assets The current assets should either be calculated

liquid (or)near liquidity. They should be convertible into cash for paying obligations of

short term nature. The sufficiency (or) insufficiency of current assets should be assessed

by comparing them with short-term current liabilities. If current assets can pay off current

liabilities, then liquidity position will be satisfactory.

To measure the liquidity of a firm the following ratios can be calculated

Current ratio

Quick (or) Acid-test (or) Liquid ratio

Absolute liquid ratio (or) Cash position ratio

46



47/86


CURRENT RATIO:

Current ratio may be defined as the relationship between current assets and

current liabilities. This ratio also known as Working capital ratio is a measure of general

liquidity and is most widely used to make the analysis of a short-term financial position

(or) liquidity of a firm.

Current Ratio

Current RatioYears Current Assets Current

Liabilities

Ratio

2005 58,574,151 79,03,952 7.412006 69,765,346 31,884,616 2.19

2007 72,021,081 16,065,621 4.48

2008 91,328,208 47,117,199 1.94

2009 115,642,068 30,266,661 3.82

47



48/86


Interpretation

As a rule, the current ratio with 2:1 (or) more is considered as satisfactory

position of the firm. When compared with 2008, there is an increase in the provision for

tax, because the debtors are raised and for that the provision is created. The current

liabilities majorly included Lanco Group of company for consultancy additional services.

The sundry debtors have increased due to the increase to corporate taxes.

In the year 2006, the cash and bank balance is reduced because that is used for

payment of dividends. In the year 2005, the loans and advances include majorly the

advances to employees and deposits to government. The loans and advances reduced

because the employees set off their claims. The other current assets include the interest

attained from the deposits. The deposits reduced due to the declaration of dividends. So

the other current assets decreased.The huge increase in sundry debtors resulted an increase in the ratio, which is

above the benchmark level of 2:1 which shows the comfortable position of the firm.

48


Current Ratio

7.41

2.194.48

1.94

3.82

2005

2006

2007

2008

2009


49/86


QUICK RATIO

Quick ratio is a test of liquidity than the current ratio. The term liquidity refers tothe ability of a firm to pay its short-term obligations as &when they become due. Quick

ratio may be defined as the relationship between quick or liquid assets and current

liabilities. An asset is said to be liquid if it is converted into cash with in a short period

without loss of value.

Quick Ratio

Quick RatioYears Current Assets Current

Liabilities

Ratio

2005 58,574,151 7,903,952 7.41

2006 52,470,336 31,884,616 1.65

2007 69,883,268 16,065,620 4.35

2008 89,433,596 47,117,199 1.90

2009 115,431,868 30,266,661 3.81

49



50/86


Interpretation

Quick assets are those assets which can be converted into cash with in a short

period of time, say to six months. So, here the sundry debtors which are with the long

period does not include in the quick assets.

Compare with 2008, the Quick ratio is increased because the sundry debtors are

increased due to the increase in the corporate tax and for that the provision created is also

increased. So, the ratio is also increased with the 2008.

ABSOLUTE LIQUID RATIO

50


Quick Ratio

7.41

1.654.35

1.9

3.81

2005

2006

2007

2008

2009


51/86


Although receivable, debtors and bills receivable are generally more liquid than

inventories, yet there may be doubts regarding their realization into cash immediately or

in time. Hence, absolute liquid ratio should also be calculated together with current ratio

and quick ratio so as to exclude even receivables from the current assets and find out theabsolute liquid assets.

Absolute liquidity ratio

Absolute Liquidity RatioYears Absolute

Current Assets

Absolute

Current

Liabilities

Ratio

2005 31,004,027 7,903,952 3.92

2006 10,859,778 31,884,616 0.34

2007 39,466,542 16,065,620 2.46

2008 53,850,852 47,117,199 1.14

2009 35,649,070 30,266,661 1.18

51


Absolute liquidity ratio

3.92

0.34

2.46

1.14

1.18

2005

2006

2007

2008

2009


52/86


53/86


the fixed interest and costs and repayment schedules associated with its long term

borrowings.

The following ratio serves the purpose of determining the solvency of the concern.

Proprietory ratio

PROPRIETORY RATIO

A variant to the debt-equity ratio is the proprietory ratio whichis also known as equity

ratio. This ratio establishes relationship betweenshare holders funds to total assets of the

firm.

4. PROPRIETORY RATIO

Proprietory RatioYears Absolute

Current Assets

Absolute

Current

Liabilities

Ratio

2005 67,679,219 78,572,171 0.86

2006 53,301,834 88,438,107 0.6

2007 70,231,061 89158,391 0.79

2008 56,473,652 106,385,201 0.53

2009 97,060,013 129,805,102 0.75

53


Proprietory Ratio

0.86

0.6

0.79

0.53

0.75

2005

2006

2007

2008

2009


54/86


Interpretation

The proprietary ratio establishes the relationship between shareholders funds to

total assets. It determines the long-term solvency of the firm. This ratio indicates the

extent to which the assets of the company can be lost without affecting the interest of the

company.

There is no increase in the capital from the year 2006. The shareholders funds

include capital and reserves and surplus. The reserves and surplus is increased due to the

increase in balance in profit and loss account, which is caused by the increase of income

from services.

Total assets, includes fixed and current assets. The fixed assets are reduced

because of the depreciation and there are no major increments in the fixed assets. The

current assets are increased compared with the year 2008. Total assets are also increased

than previous year, which resulted an increase in the ratio than older.

C. ACTIVITY RATIOS

Funds are invested in various assets in business to make sales and earn profits.

The efficiency with which assets are managed directly effect the volume of sales.

Activity ratios measure the efficiency (or) effectiveness with which a firm manages its

54



55/86


resources (or) assets. These ratios are also called Turn over ratios because they indicate

the speed with which assets are converted or turned over into sales.

Working capital turnover ratio

Fixed assets turnover ratio

Capital turnover ratio

Current assets to fixed assets ratio

WORKING CAPITAL TURNOVER RATIO

Working capital of a concern is directly related to sales.

Working capital = Current assets - Current liabilities

It indicates the velocity of the utilization of net working capital. This indicates the no. of

times the working capital is turned over in the course of a year. A higher ratio indicatesefficient utilization of working capital and a lower ratio indicates inefficient utilization.

Working capital turnover ratio=cost of goods sold/working capital.

5. WORKING CAPITAL TURNOVER RATIO

Working Capital Turnover RatioYears Income from

Services

Working

Capital

Ratio

2005 36,309,834 50,670,199 0.72

2006 53,899,084 37,880,730 1.42

2007 72,728,759 55,355,460 1.31

2008 55,550,649 44,211,009 1.26

2009 96,654,902 85,375,407 1.13

55



56/86


Interpretation

Income from services is greatly increased due to the extra invoice for Operations &

Maintenance fee and the working capital is also increased greater due to the increase in

from services because the huge increase in current assets.

The income from services is raised and the current assets are also raised together

resulted in the decrease of the ratio of 2009 compared with 2008.

FIXED ASSETS TURNOVER RATIO

It is also known as sales to fixed assets ratio. This ratio measures the

efficiency and profit earning capacity of the firm. Higher the ratio, greater is the

intensive utilization of fixed assets. Lower ratio means under-utilization of fixed

assets.

Fixed assets turnover ratio =cost of sales/net fixed assests.

56


Working Capital Turnover Ratio

0.72

1.42

1.31

1.26

1.13

2005

2006

2007

2008

2009


57/86


Cost of Sales = Income from Services

Net Fixed Assets = Fixed Assets Depreciation

6. Fixed assets turn over ratio

Fixed Assets turn over RatioYears Income from

Sevices

Net fixed Assets Ratio

2005 36,309,834 28,834,317 1.26

2006 53,899,084 29,568,279 1.82

2007 72,728,759 17,137,310 4.24

2008 55,550,649 15,056,993 3.69

2009 96,654,902 14,163,034 6.82

57


Fixed Assets turn over Ratio

1.26

1.82

4.24

3.69

6.82 2005

20062007

2008

2009


58/86


Interpretation

Fixed assets are used in the business for producing the goods to be sold. This ratio shows

the firms ability in generating sales from all financial resources committed to total

assets. The ratio indicates the account of one rupee investment in fixed assets.

The income from services is greaterly increased in the current year due to the increase

in the Operations & Maintenance fee due to the increase in extra invoice and the net fixed

assets are reduced because of the increased charge of depreciation. Finally, that effected a

huge increase in the ratio compared with the previous years ratio.

CAPITAL TURNOVER RATIOS

Sometimes the efficiency and effectiveness of the operations are judged by

comparing the cost of sales or sales with amount of capital invested in the business

and not with assets held in the business, though in both cases the same result is

expected. Capital invested in the business maybe classified as long-term and short-

term capital or as fixed capital and working capital or Owned Capital and Loaned

58



59/86


Capital. All Capital Turnovers are calculated to study the uses of various types of

capital.

Capital turnover ratio = cost of good sold/capital employed

Cost of Goods Sold = Income from ServicesCapital Employed = Capital + Reserves & Surplus

7.0 Capital turnover Ratio

Capital turn over RatioYears Income from

Services

Capital

Employed

Ratio

2005 36,309,834 37,175,892 0.98

2006 53,599,084 53,301,834 1.01

2007 72,728,759 70,231,061 1.04

2008 55,550,649 56,473,652 0.98

2009 96,654,902 97,060,013 1.00

59


Capital turn over Ratio

0.98

1.01

1.04

0.98

1

2005

2006

2007

2008

2009


60/86


Interpretation

This is another ratio to judge the efficiency and effectiveness of the company like

profitability ratio.

The income from services is greaterly increased compared with the previous year and

the total capital employed includes capital and reserves & surplus. Due to huge increase

in the net profit the capital employed is also increased along with income from services.

Both are effected in the increment of the ratio of current year.

CURRENT ASSETS TO FIXED ASSETS RATIO

This ratio differs from industry to industry. The increase in the ratio means

that trading is slack or mechanization has been used. A decline in the ratio means that

debtors and stocks are increased too much or fixed assets are more intensively used.

If current assets increase with the corresponding increase in profit, it will show that

the business is expanding.

Current Assets to Fixed Assets Ratio = Current assets/fixed assets

60



61/86


8. CURRENT ASSETS TO FIXED ASSETS RATIO

Current Assets To Fixed Assets RatioYears Current Assets Fixed Assets Ratio2005 58,524,151 19,998,020 2.93

2006 69,765,346 18,672,761 3.74

2007 72,021,081 17,137,310 4.20

2008 91,328,208 15,056,993 6.07

2009 115,642,068 14,163,034 8.17

61


Current Assets To Fixed Assets Ratio

2.93

3.74

4.2

6.07

8.172005

2006

2007

2008

2009


62/86


InterpretationCurrent assets are increased due to the increase in the sundry debtors and the net

fixed assets of the firm are decreased due to the charge of depreciation and there is no

major increment in the fixed assets.

The increment in current assets and the decrease in fixed as sets resulted an

increase in the ratio compared with the previous year.

D. PROFITABILITY RATIOS

The primary objectives of business undertaking are to earn profits. Because profit

is the engine, that drives the business enterprise.

Net profit ratio

Return on total assets

Reserves and surplus to capital ratio

Earnings per share

Operating profit ratio

Price earning ratio

Return on investments

62



63/86


NET PROFIT RATIO

Net profit ratio establishes a relationship between net profit (after tax) and

sales and indicates the efficiency of the management in manufacturing, sellingadministrative and other activities of the firm.

NET PROFIT RATIO =Net profit after tax/net sales

Net Profit after Tax = Net Profit () Depreciation () Interest () Income Tax

Net Sales = Income from Services

PROFITABILITY RATIOS

GENERAL PROFITABILITY RATIOS

9. NET PROFIT RATIO

Net Profit RatioYears Net Profit after

Tax

Income from

Services

Ratio

2005 21,123,474 36,039,834 0.59

2006 16,125,942 53,899,084 0.30

2007 16,929,227 72,728,759 0.23

2008 18,259,580 55,550,649 0.33

2009 40,586,359 96,654,902 0.42

63



64/86


65/86


RETURN ON TOTAL ASSETS

Profitability can be measured in terms of relationship between net profit and

assets. This ratio is also known as profit-to-assets ratio. It measures the profitability

of investments. The overall profitability can be known.

Returen on assets = Net Profit/ total assets

Net Profit = Earnings before Interest and Tax

Net Profit = Earnings before Interest and Tax

11.0 Return on total assets ratio

Return on Total Assets Ratio

65



66/86


Years Net Profit after

Tax

Total Assets Ratio

2005 21,123,474 78,572,171 0.27

2006 16,125,942 88,438,107 0.18

2007 16,929,227 89,158,391 0.192008 18,259,580 106,385,201 0.17

2009 40,586,359 129,805,102 0.31

Interpretation

66


Return on Total Assets Ratio

2005

2006

2007

2008

2009


67/86


This is the ratio between net profit and total assets. The ratio indicates the return

on total assets in the form of profits.

The net profit is increased in the current year because of the increment in the income

from services due to the increase in Operations &Maintenance fee. The fixed assets arereduced due to the charge of depreciation and no major increments in fixed assets but the

current assets are increased because of sundry debtors and that effects an increase in the

ratio compared with the last year i.e. 2008.

RESERVES AND SURPLUS TO CAPITAL RATIO

It reveals the policy pursued by the company with regard to growth shares. A

very high ratio indicates a conservative dividend policy and increased ploughing back

to profit. Higher the ratio better will be the position.

Reserves & surplus to capital = Reserve & surplus/capital

12.0 Reserve & Surplus to capital Ratio

Reserve & Surplus to Capital RatioYears Reserve &

Surplus

Capital Ratio

2005 65,599,299 20,79,920 31.54

2006 34,582,554 18,719,280 1.85

2007 51,511,781 18,719,280 2.75

2008 37,754,372 18,719,280 2.02

67



68/86


2009 78,340,733 18,719,280 4.19

68


Reserve & Surplus to Capital Ratio

31.54

1.85

2.75

2.02

4.19

2005

2006

2007

2008

2009


69/86


Interpretation

The ratio is used to reveal the policy pursued by the company a very high ratio

indicates a conservative dividend policy and vice-versa. Higher the ratio better will be the

position.The reserves & surplus is decreased in the year 2008, due to the payment of dividends

and in the year 2009 the profit is increased. But the capital is remaining constant from the

year 2006. So the increase in the reserves & surplus caused a greater increase in the

current years ratio compared with the older.

EARNINGS PER SHARE

Earnings per share is a small verification of return of equity and is calculated

by dividing the net profits earned by the company and those profits after taxes and

preference dividend by total no. of equity shares.

Earnings per share = Net Profit after tax/No. of Equity shares

13. EARNINGS PER SHARE

Earnings Per ShareYears Net Profit after

Tax

No. of Equity

Shares

Ratio

2005 21,123,474 2,07,992 101.56

2006 16,125,942 1,871,928 8.61

2007 16,929,227 1,871,928 9.04

2008 18,259,580 1,871,928 9.75

2009 40,586,359 1,871,928 21.68

69



70/86


Interpretation

70


Earnings Per Share

101.56

8.61

9.04

9.75

21.68

2005

2006

2007

2008

2009


71/86


Earnings per share ratio are used to find out the return that the shareholders earn

from their shares. After charging depreciation and after payment of tax, the remaining

amount will be distributed by all the Shareholders.

Net profit after tax is increased due to the huge increase in the income from services.That is the amount which is available to the shareholders to take. There are 1,871,928

shares of Rs.10/- each. The share capital is constant from the year 2006. Due to the huge

increase in net profit the earnings per share is greaterly increased in 2009.

OPERATING PROFIT RATIO

Operating ratio establishes the relationship between cost of goods sold and

other operating expenses on the one hand and the sales on the other.

Operation ratio = Operating cost/Net sales

Operating profit = Net sales - Operating cost

Operating Profit ratio = Operating profit/sales

14.0 Operating Profit Ratio

Operating Profit RatioYears Operating Profit Income from

Services

Ratio

2005 36,094,877 36,039,834 0.99

2006 27,576,814 53,899,084 0.51

2007 29,540,599 72,728,759 0.41

2008 31,586,718 55,550,649 0.572009 67,192,677 96,654,902 0.70

71



72/86


Interpretation

The operating profit ratio is used to measure the relationship between net profits

and sales of a firm. Depending on the concept, it will decide.

72


Operating Profit Ratio

0.99

0.510.41

0.57

0.7

2005

2006

2007

2008

2009


73/86


The operating profit ratio is increased compared with the last year. The earnings are

increased due to the increase in the income from services because of Operations &

Maintenance fee. So, the ratio is increased slightly compared with the previous year.

PRICE - EARNING RATIO

Price earning ratio is the ratio between market price per equity share and

earnings per share. The ratio is calculated to make an estimate of appreciation in the

value of a share of a company and is widely used by investors to decide whether (or)

not to buy shares in a particular company.

Generally, higher the price-earning ratio, the better it is. If the price earning ratio falls,

the management should look into the causes that have resulted into the fall of the ratio.

Price Earning Ratio = Market Price Per Share/ Earning Per Share

Market Per Share =Capital + Reserve & Surplus/No Of Equity Shares

Earning Per Share = Earning before interest & tax/No of equity shares

14.0 Price earnings (P/E) Ratio

Price Earnings (P/E) Ratio

Years Market PricePer Share

Earning perShare

Ratio

2005 32.54 101.56 0.32

2006 28.47 8.61 3.30

73



74/86


2007 37.52 9.04 4.15

2008 30.17 9.75 3.09

2009 51.85 21.68 2.39

Interpretation

The ratio is calculated to make an estimate of application in the value of share of a

company.

74


Price Earnings (P/E) Ratio

0.32

3.3

4.15

3.09

2.39

2005

2006

2007

2008

2009


75/86


The market price per share is increased due to the increase in the reserves & surplus.

The earnings per share are also increased greaterly compared with the last year because

of increase in the net profit. So, the ratio is decreased compared with the previous year.

RETURN ON INVESTMENTS

Return on share holders investment, popularly known as Return on

investments (or) return on share holders or proprietors funds is the relationship

between net profit (after interest and tax) and the proprietors funds.

Return on shareholders investment = Net Profit( After interest &

tax)/Shareholders Fund

15.0 Return on Investment

Return on Investment

Years Net Profit after

Tax

Shareholders

Fnd

Ratio

2005 21,123,474 67,679,219 0.31

2006 16,125,942 53,301,834 0.30

2007 16,929,227 70,231,061 0.24

2008 18,259,580 56,473,652 0.32

2009 40,586,359 97,060,013 0.42

75



76/86


Interpretation

This is the ratio between net profits and shareholders funds. The ratio is generally

calculated as percentage multiplying with 100.

76


Return on Investment

0.31

0.3

0.24

0.32

0.42

2005

2006

2007

2008

2009


77/86


The net profit is increased due to the increase in the income from services ant the

shareholders funds are increased because of reserve &surplus. So, the ratio is increased in

the current year.

fter determining the level of working capital, a firm has to decide how it is to be

financed. The need for financing arise mainly because the investment in working

capital/current assets, that is, raw material, work-in-progress, finished goods and

receivables typically fluctuates during the year. The present chapter discusses the main

sources of finances for working capital. Although long-term funds partly finance current

assets and provide margin money for working capital, such assets working capital is

virtually exclusively supported by short-term sources. The main sources of working

capital financing, namely, trade credit, bank credit, commercial papers and factoring.

A

GREENPLUS SOLUTION PVT. LTD has divided its working capital needs which can

be satisfied by two ways.

In GREENPLUS SOLUTION PVT. LTD working capital financing is mainly divided

into two parts:

1) Fund based working capital financing

2) Non-fund based working capital financing.

Difference between Fund based and Non-fund based loanFund based loans are actually received in cash whereas Non-fund based loans are

not received in cash. Non-fund based loans are given by bank to other parties on the

behalf of a company. In Fund based loans there is no limit utilization whereas in Non-

77



78/86


fund based loans there is certain limit to which it can be utilized. We may be aware that

fund- based finance for exporters are considered at all times by the bankers in view of the

necessity to earn foreign exchange. The computation of the credits for the exporter is

taken up in the usual way as for any working capital limits. The maximum permissiblebank finance is arrived at and the exporter is asked to bring in his share or stake.

The non-fund-based limits are necessary to enable the parties concerned to get the

requisite goods without the necessity of parting with the funds in advance. Based on the

guarantee extended by the purchasers bank the supplier sells the items and thereafter

claims under the L/C. the non-fund based limits confers to both the bankers and the

exporters.

1. No blocking of funds. Hence no impact on credit-deposit ratio.

2. Banks are able to earn hefty income from commission without advancing

any fund.

Financial Assistance provided by financial institutions & commercial banks mainly

includes following products.

78

IDEA Institute of Management &Technolo

smu grand project

Documents