WORKING CAPITAL MANAGEMENT

CONDUCTED AT
PARLE BISCUITS PRIVATE LIMITED
Final Project Report

Submitted To
Institute Of Management Technology
In partial fulfillment of the requirement for the degree of
MASTER OF BUSINESS ADMINISTRATION

Under Supervision:

Submitted By:

***********

***********
Roll-on: *******

Institute Of Management Technology

Centre for Distance Learning,
Ghaziabad
August, 2012
1

WORKING CAPITAL MANAGEMENT

CONDUCTED AT
PARLE BISCUITS PRIVATE LIMITED

Under Supervision of

********

Name

*****

Enrollment No.

**********

Area of Specialization

MBA (Finance)

Title of the Project

Working Capital Management

Conducted At Parle Biscuits Private
Limited

Email

**********

Contact No.

***********

Submitted By:

******

CERTIFICATE
This is to certify that *********

a student of IMT CDL Ghaziabad has

completed project work on titled WORKING CAPITAL MANAGEMENT

CONDUCTED AT PARLE BISCUITS PRIVATE LIMITED

under my

guidance and supervision.

I certify that this is an original work and has not been copied from any source.

Signature of Guide

____________________________

Name of Project Guide

____________________________

Date

__________________________

ACKNOWLEDGEMENT
With Candor and Pleasure I take opportunity to express my sincere thanks and
obligation to my esteemed guide *********** It is because of his able and mature
guidance and co-operation without which it would not have been possible for me
to complete my project.
Finally, I gratefully acknowledge the support, encouragement & patience of my
family, and as always, nothing in my life would be possible without God, Thank
You!

************
Enrollment No: *******

DECLARATION
I hereby declare that this project work titled WORKING CAPITAL
MANAGEMENT

CONDUCTED

AT

PARLE

BISCUITS

PRIVATE

LIMITED is my original work and no part of it has been submitted for any other
degree purpose or published in any other from till date.

***********
ENROLLMENT NO: **********

TABLE OF CONTENTS
ACKNOWLEDGMENT
PREFACE
INTRODUCTION
* HISTORY OF COMPANY
* PRODUCT PROFILE
MANAGERIAL USEFULNESS OF STUDY
CONCEPTS USED IN STUDY
FOCUS OF THE PROBLEMS
OBJECTIVES OF THE PROJECT
SCOPE OF THE WORK
RESEARCH METHODOLOGY
* RESEARCH DESIGN
* COLLECTION OF DATA
DATA ANALYSIS
FINDINGS
RECOMMENDATION
LIMITATIONS
CONCLUSIONS
BIBLIOGRAPHY
ANNEXURE
6

PREFACE
Practical work experience is the integral part of individual learning. An
individual who is learning managerial concepts has to undergo this practical
experience for being a future executive.
Master of Business Administration is a two-year programme that inserts
management knowledge in an individual to make that individual completely
professional for which practical experience is must.
Parle Biscuits Pvt. Ltd. is the market leader in biscuit industry. Neemrana
plant of PBPL offered me a project on Working Capital Management to
understand the current position through dates provided by them.

INTRODUCTION
Parle-G or Parle Glucose biscuits, manufactured by Parle Products
Pvt Ltd, are one of the most popular biscuits in India. Parle-G is one of the
oldest brand names as well as the largest selling brand of biscuits in India.
For decades, the product was instantly recognized by its iconic white and
yellow wax paper wrapper with the depiction of a young girl on the front.
Counterfeit companies have attempted to recreate and sell lower quality
products of similar names with virtually identical package design.The
company's slogan is G means Genius. The name, "Parle-G", is derived from
the name of the suburban rail station, Vile Parle which in turn is based on
village Parle in olden days (there is also area called Irle nearby where the
Parle Agro production factory is based).This popular biscuit is primarily
eaten as a tea-time snack.
Parle-G is the largest selling biscuit in the world. It has 70% market share in
India in the glucose biscuit category followed by Britannia, Tiger (17-18%)
and ITC's Sunfeast (8-9%). The brand is estimated to be worth over Rs 2,000
crore (Rs 20 billion), and contributes more than 50 per cent of the company's
turnover (Parle Products is an unlisted company and its executives are not
comfortable disclosing exact numbers). Last fiscal, Parle had sales of Rs
3,500 crore (Rs 35 billion). It also is popular across the world and is starting
to sell in Western Europe and USA.

AWARDS
Parle products have been shining with the golds and silvers consistently at
the Monde Selection ever since they were first entered in 1971. Monde
Selection is an international institute for assessing the quality of foods and is
currently the oldest and most representative organization in the field of
selecting quality foods worldwide.

Almost all of our products are market leaders and as recognition of their
quality, have won us 111 gold, 26 silver and 4 bronze Monde Selection
medals since 1971.
HOW PARLE FOUGHT TO MAKE BISCUITS AFFORDABLE TO
ALL
Biscuits were very much a luxury food in INDIA, when Parle began
production in 1939. Apart from Glucose and Monaco biscuits, Parle did offer
a wide variety of brands.
However, during the Second World War, all domestic production was
diverted to assist the Indian Soldiers in India and Far East. Apart from this,
the shortage of wheat in those days, made Parle decide to concentrate on the
more popular brands, so that people could enjoy the price benefits.
Thankfully today, theres no dearth of ingredients and the demand for more
premium brands is on the rise. Thats why; we now have a wide range of
biscuits mouthwatering confectioneries to offer.
THE QUALITY COMMITMENT
Parle Product Private Limited has 3 manufacturing plants
1) VILE PARLE in Mumbai (Maharashtra)
2) BHUJ (Gujarat)
3) BANGLORE (Karnataka)
Apart these plants Parle Product Pvt. Ltd. maintain 20 contract base
manufacturing units in all over INDIA. These plants and CMUs produce
sweets and confectionary products.

10

Parle Product Pvt. Ltd. has also a subsidiary company, which is Parle Biscuit
Pvt. Ltd. This subsidiary company produces only biscuits. It also has 2
manufacturing plants
1) BAHADURGARH in Gurgaon (Haryana)
2) NEEMRANA in Alwar (Rajasthan)
Apart these two plants Parle Biscuit Pvt. Ltd. maintain 11 contract base
manufacturing units on different locations, which produce only biscuits.
All these factories are located at strategic locations, so as to ensure a
constant output & easy distribution. Each factory has state-of-the-art
machinery with automatic printing & packaging facilities.
All Parle products are manufactured under the most hygienic conditions.
Great care is exercised in the selection & quality control of raw materials;
packaging materials & rigid quality standard are ensured at every stage of
the manufacturing process. Every batch of biscuits & confectioneries are
thoroughly checked by expert staff, using the most modern equipment.
THE MARKETING STRENGTH
The extensive distribution network built over the years is a major strength
for Parle Products. Parle biscuits and sweets are available to consumer even
in the most remote places and in the smallest of villages with a population of
just 500.
Parle Has nearly 1500 wholesalers catering to 4,25,000 retail outlets directly
or indirectly. A two hundred strong dedicated field force services these
wholesalers and retailers. Additionally there are 40 depots and C&F agents
supplying goods to the wide distribution network.

11

The Parle marketing philosophy emphasizes catering to the masses.

We constantly endeavor at designing products that provide nutrition & fun to
the common man. Most Parle offerings are in the low & midrange price
segments. This is based

on our cultivated understanding of the Indian

consumer psyche. The value for money positioning helps generate large
sales volumes for the products.
Parle-G its first venture became an instant favorite amongst the masses,
leading the glucose category with a huge market share of 65%. It topped
charts worldwide by becoming the WORLDS LARGEST BISCUIT
SELLING

BRAND

as

revealed

by

the

US-BASED

BAKERY

MANUFACTURES ASSOCIATION in 2002.

THE CUSTOMER CONFIDENCE
The Parle name conjures up fond memories across the length and breadth of
the country. After all, since 1929, the people of India have been growing up
on Parle biscuits & sweets.
Today, the Parle brands have found their way into the hearts and homes of
the people of all over India & abroad. Parle Biscuits & Confectioneries,
continue to spread happiness & joy among people of all ages.
The consumer is the focus of all the activities of Parle. Maximizing value to
consumers and forging enduring customer relationships are the core
endeavors at Parle.
Our efforts are driven towards maximizing customers satisfaction and this is
in synergy with our quality pledge. Parle Products Limited will strive to
provide consistently nutritious & quality food products to meet consumers
satisfaction by using quality materials and by adopting appropriate
12

processes. To facilitate the above we will strive to continuously train our

employee and to provide them an open and participative environment.
EMERGING TRENDS OF THE BRAND
Since its inception in the 30s Parle biscuits have prided itself in offering
quality products that are affordable to the common man. The marketing mix
has evolved with the times
THE PRODUCT
Parle biscuits have a range of variants in its product portfolio. The popular
brands Parle-G, Krackjack, Monaco and its variants (zeera, onion and
methi) are available in packets of various convenient sizes. New products
like Hide & Seek are a foray into the premium segment.
THE PRICING STRATEGY
This biscuit major has not bothered to raise the price of its flagship brand
Parle-G for the past 6-8 years and has always tried to provide its offerings
at nearly 33% discount as compared to other competitive brands.
THE PROMOTION POLICY
The consumer is the focus of all activities at Parle. Maximizing value to
consumers and forging enduring customer relationships are the core
endeavors at Parle. Parle-G My Dream Comes True Contest was one of
its biggest promotional ventures (2.5 crores) which gave contestants a
chance to fulfill their dreams. Discounts, gift offer schemes are other popular
promotional offerings.
THE PLACE

13

A well-entrenched distribution system (the company covers 12-15 lacks

outlets across the country) with 40 depots at strategic points all over the
country. From the depots, the biscuits are sold to wholesalers and further to
retailers.

14

PARLE BISCUITS PRIVATE LIMITED (NEEMRANA)

Parle Biscuit Pvt. Ltd. is a subsidiary of Parle Product Pvt. Ltd.
The manufacturing at Neemrana unit started in 1982 for Parle-G with a
single plant. It is planted in near about 16 acres of land.
Including General Manager 78 employees of Managerial and Officer class
are working in this plant. Production is going on in this plant 24 hours in
three shifts. Number of permanent workers of thrice shifts is 680 and around
400 workers are there on contract basis.
In 1990s Krackjack production began followed by Monaco and Nimkin.
Average Production capacity of Neemrana unit per month is1) Parle-G

3500

Metric Tonnes

2) Krackjack

1600

Metric Tonnes

3) Monaco

800
MetricTonnes

The plant works in coordination with the Mumbai office, Neemrana

(Rajasthan).
DEPARTMENTS IN PLANT
FINANCE
HR & PERSONNEL
QUALITY ASSURANCE
PRODUCTION & PRINTING
EXCISE & DESPATCH
15

 ENGINEERING
I.T.
PURCHASE
STORE
The organization follows a flat structure with less hierarchal levels. The
heads of the different departments report to the General Manager through
direct communication. The working atmosphere is not stressful with
enough work-flexibility given to staff and managers.
The plant also has auditorium and viewing gallery, which is used during
the visit of school children. A retail shop at the Plant provides Parle
Products at M.R.P. rates.
Parle-G Making Process
MIXING:
This is a process where all ingredients are put together in right proportion for
dough formation. These ingredients are then fed into Mixers where mixing is
done and dough is prepared for molding .Major ingredients are flour, fat,
sugar and others as per the product one would like to have.
MOULDING:
In this section we laminate the dough into sheet which then passes down to
gauge rollers and sheet thickness achieved for cutting. Here we have a cutter
or a molder as per the variety where one gets the shape and sizes of biscuits.
BAKING:

16

This is the area where we pass these mounded wet biscuit into baking oven.
The oven temperature is 230C. The biscuits are baked on desired
temperature. The oven which are use very effective.
COOLING:
These baked biscuits are then passed on to cooling conveyors for natural
cooling prior to packing .The temperatures are brought down to room
temperatures.
PACKING:
These biscuit are then stacked and fed into packing machine for packing.
Different packing material are available for packing of these biscuit in
different packs .slug packs, pouch pack or family packs etc. These packs are
then put into secondary packaging like cartons to be transported to retailers.
EQUIPMENT USED FOR AUTOMATED BISCUIT
MANUFACTURING
Mixers Laminators Gauge Rolls or Pre Sheeters Molder / Cutter Baking
Oven Cooling Conveyor Packing
Machines Material Handling Equipments Biscuit / Sugar Grinder Milk/Oil
Sprays Salt / Cashew
Sprinklers
INGREDIENTS USED
Flour , Fat , Sugar , Salt , Ammonium bicarbonate , Milk , Butter , Flavors ,
Emulsifiers , Invert syrups, Dough Improvers and many additives
CREDIT POLICY OF PARLE BISCUITS PVT. LTD.
17

Before coming to the credit policy its necessary to be aware with the goods
distribution policy of Parle Biscuits Pvt. Ltd.
For fulfilling the demand of its customers timely Parle Biscuits Pvt. Ltd.
maintains 40 DEPOTS in all over INDIA. Finished goods are transferred
from production plants to these depots. According to their transportation
facilities customers of Parle Biscuits Pvt. Ltd. ask their demand of different
products to depots.
Then its the responsibility of these depots to fulfill the demand of customers
of Parle Biscuits Pvt. Ltd.
Parle Biscuits Pvt. Ltd. doesnt has credit policy it deals in cash. For the
collection of its payment PBPL deals with 5 banks which are as follows:
1) UTI
2) STANDARD CHARTERED
3) HDFC
4) BANK OF PUNJAB
5) CORPORATION BANK
After collecting the amount of sold goods it is deposited by the depots in any
of these bank.
Parle Biscuits Pvt. Ltd. divided its customers in 4 categories1)

Cheque Parties Cheque parties are those who send their blank
cheques to Depots before receiving the finished goods. Depots fill the
selling amount of the consignment in those cheques and then these

18

cheques are deposited by the depots in the account of PBPL in any of

these 5 banks.
2)

Demand Draft Parties In such cities where anyone of these 5 banks

isnt there customers of those come in this category. Before receiving
the finished goods customers send the draft of the consignment
amount to production plants directly. Then consignment is sent to
those customers by concerned depot.

3)

Credit Parties Those parties to whom maximum 4 days credit

facility is provided are called credit parties. After 4 days these parties
send cheque of consignment amount to depot. And then procedure just
like first category is followed by depot.

4)

Credit Demand Draft Parties - These are those parties to whom 4

days credit facility is provided but they also dont have facility of any
of those 5 banks in their city. After 4 days just like the second
category these parties send the draft of consignment amount directly
to production plant.

19

Product Profile
Over the years, Parle has grown to become a multi-million US Dollar
company. Many of the Parle products, biscuits or confectionaries, are market
leaders in their category and have won acclaim at the Monde Selection, since
1971.
Today, Parle enjoys a 40% share of the total biscuits market and a 15% share
of the total confectionary market in India.
The Parle biscuits brands are:
1)

Hide & Seek

2)

Choc Cream

3)

Elaichi Cream

4)

Orange Cream

5)

Pineapple Cream

6)

Marie Choice

7)

Cheesling

8)

Jeffs

9)

Monaco

10)

Nimkin

11)

Sixer

12)

Glucose

13)

Krackjack

14)

Parle-G

The Parle toffees brands are:

1)

Funtoosh

2)

Mango Bite

3)

Orange Candy
20

4)

Poppins

5)

Roll-A-Cola

6)

Tangy Candy

7)

Boo

8)

Pippermint

9)

Rose Mint

10)

M Choco

11)

Melody

12)

Dairy Toffee

13)

Lux Toffee

14)

Mayfair Toffee

15)

Kismi

16)

Mahakismi

17)

Smoothies

18)

Cafechino

19)

Chox Bar

21

INTRODUCTION OF TOPIC
WORKING CAPITAL AT A GLANCE

INTRODUCTION

TYPES

FEATURES

DETERMINANTS

COMPONENTS

WORKING CAPITAL CYCLE

INTRODUCTION
A successful sales program is necessary for earning profits by any business
enterprise. Sales dont convert into cash instantly. There is a time lag
between the sale of goods and receipt of cash. Therefore, there is 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.
FEATURES
1)

Working capital is regarded as the excess of current assets over

current liabilities.

2)

Working capital indicates circular flow of funds in the day-to-day

activities of business. Thats why it is also called circulating capital.

22

3)

Working capital represents the minimum amount of investment in raw

materials, work-in progress, finished goods, stores and spares,
accounts receivables and cash balance.

TYPES
Working capital can be classified either on the basis of concept or on the
basis of periodicity of its requirement.
1) ON THE BASIS OF CONCEPT
On the basis of concept working capital is of 2 types.
A)

Gross working capital - Gross working capital is represented by the

total Current assets.
Gross working capital = Total current assets

B)

Net working capital - Net working capital is the excess of current

assets over current liabilities.
Net working capital = Current assets Current liabilities

2)

ON THE BASIS OF REQUIREMENT

On the basis of requirement working capital is also of 2 types.

A)

Permanent working capital - It is that amount of investment which

should always be there in the fixes or minimum current assets like
inventory, accounts receivables or cash balance etc. to carry out
business smoothly. Such an amount cant be reduced if the firms wants
to carry on business operations without interruption.

23

B)

Variable working capital - The excess the amount of working capital

over permanent working capital is known as variable working capital.
It may also be subdivided into two parts.

C)

Seasonal working capital - Such capital is required to meet out the

seasonal demands of busy periods occurring at stated intervals.

D)

Special working capital - Such capital is required to meet out the

extra-ordinary needs for contingencies. Events like strike, fire,
unexpected competition, rising price tendencies, or initiating a big
advertisement campaign require such capital.

DETERMINANTS
1)

Nature of business The effect of the general nature of the business

on working capital requirements cant be exaggerated. Rail, roads and
other public utility services have large fixes investment so they have
the lower requirements of current assets. Industrial and manufacturing
enterprises, on the other hand, generally require a large amount of
working capital.

2)

Production policies if the production is evenly spread over the

entire year, working capital requirements are greater, because the
inventories will be unnecessarily accumulated during of season
period. But if the production schedule favours a varying production
plan as per the seasonal requirements, working capital is required to a
greater extent during a specified season only. The production policies
are affected by so many factors availability of raw materials, labour,
stocking facility etc & therefore, whatever the productions policies
are, the firm has to arrange its working capital requirements
accordingly.
24

3)

Proportion of the cost of raw materials to total cost - In those

industries where cost of proportion is a large proportion of total cost
of the goods produced, requirements of working capital will be
comparatively large.

4)

Length of period of manufacturing The time which elapses

between the commencement and end of the manufacturing process has
an important bearing upon the requirements of working capital. The
manufacturing cycle may be shorter for certain concerns & longer for
others- it depends on the type of the product to be manufactured, work
to be done through machine labour & hand labour, degree of
rationalization of manufacturing procedures through times, motion &
fatigue studies etc.

5)

Terms of purchase - If suppliers allow continuous credit, payment

can be postponed for some time and can be made out of the sale
proceeds of the goods produced. In such a case, the requirements of
working capital will be reduced.

6)

Dynamic Attitudes As a company grows, it is logical to expect the

large amount of working capital will be required.

7)

Business cycles Requirement of working capital also varies with the

business. When the price level is up due to boom conditions, the
inflationary conditions create demand for more working capital.
During depression also a heavy amount of working capital is needed
due to the inventories being locked unsold and book debts
uncollected.

8)

Requirement of cash - The working capital requirements of a

company are also influenced by the amount of cash required by it for
25

various purposes. The greater the requirement of cash, the higher will
be the working capital needs of the company.
9)

Dividend policy of concern If the management follows a

conservative dividend policy the needs of working capital can be met
with the retained earnings. The relationship between dividend policy
and working capital is well established and mostly companies declare
dividend after a careful study of their cash requirements.

10)

Other Factors - Other factors, which affect the requirement of

working

capital, are lack of co-operation in production and

distribution policies, transport and communication facilities, the fiscal

and tariff policies of the government etc.

26

COMPONENTS
Main components of working capital are as follows:
1)

Cash Cash is the most liquid and important component of working

capital. Holding cash involves cash in the sense that the present worth
of cash held for a year is less than the value of cash on today. During
inflationary situations as exist today the cost of holding includes the
deterioration in the value of the cash due to inflation. Cash, therefore,
results in enhanced liquidity, but lower profitability. Despite in the
cost involved it is pertinent to hold cash because it facilitates the
attainment of some important motives.

2)

Marketable Securities Though marketable securities provides a

such lower yield that the firms operation assets. They serve two
useful functions. Firstly, they act as a substitute for cash, and
secondly, are used as temporary investment. Where these securities
are held in lieu of the cash balance, they act as a substitute for
transactional or precautionary balances. Normally, these arent used as
speculative balances, but only as a guard against the possible shortage
of bank credit.

Marketable securities (as temporary investment) may be held for one of the
following reasons:

Seasonal or cyclical operations

To meet known financial requirements. Construction of

additional plant.

Immediately after the sale of long-term securities.

27

an

3)

Account Receivable - Though accounts receivable are a vital

investment of any business organization, little analytical work as been
done to determine credit policies. Maintaining account receivable has
its cost implications in that the firms monetary resources are tied up.
This is of greater significance in the inflationary economy, because of
the depreciation in the value of money. Basically, this is a two-step
account. When goods are shipped, inventories are reduced and
accounts receivable is created. When payment is made, this account is
reduced and the cash level increases. Accounts receivables are,
therefore a function of the volume of credit sales and the average
length of time between sales and collections.

4)

Inventory Inventories represent a substantial amount of a firms

current assets. Management of inventories should be efficiently
carried out so that this investment doesnt become too large, as it
would result in blocked capital which could put to productive use
elsewhere. On the other hand, having too small an inventory could
result in loss of sale or loss of customer goodwill. An optimum level
of inventory should therefore be maintained.

WORKING CAPITAL CYCLE

Working capital cycle indicates the length of time between a firms paying
for materials entering into stock and receiving the cash from sale of finished
goods. In a manufacturing firm, the duration of time required to complete
the sequence of events is called operating cycle.
In case of a manufacturing company, the operating cycle is the length of
time necessary to complete the following cycle of events: 1)

Conversion of cash into raw materials

28

2)

Conversion of raw materials into work-in-progress

3)

Conversion of work-in-progress into finished goods

4)

Conversion of finished goods into accounts receivable

5)

Conversion of accounts receivable into cash

The above operating cycle is repeated again & again over the period
depending upon the nature of the business & type of product etc. the
duration of the operating cycle for the purpose of estimating working capital
is equal to the sum of duration allowed by the suppliers.
Working capital cycle can be expressed as:

R+W+F+D-C
Where R=Raw Material Storage Period =
Avg. Stock of Raw Material
Avg. Cost of Production per day
W=Work in Progress Holding Period =
Avg. Work in Progress Inventory
Avg. Cost of Production per day

29

F=Finished Goods Storage Period

=
Avg. Stock of Finished Goods

Avg. Cost of Goods Sold per day

D=Debtors Collection Period

Avg. Book Debts

Avg. Credit Sales per day

C=Credit Period Availed

Avg. Trade Creditors

Avg. Credit Purchases per day

30

Classification of Ratio:
CLASSIFICATION OF RATIO

BASED ON FINANCIAL

BASED ON FUNCTION

BASED ON USER

STATEMENT

1] BALANCE SHEET
RATIO
2] REVENUE

1] LIQUIDITY RATIO
2] LEVERAGE RATIO

SHORT TERM

3] ACTIVITY RATIO

CREDITORS

STATEMENT

4] PROFITABILITY

RATIO

RATIO

3] COMPOSITE
RATIO

1] RATIOS FOR

2] RATIO FOR
SHAREHOLDER

5] COVERAGE
RATIO

3] RATIOS FOR
MANAGEMENT
4] RATIO FOR
LONG TERM
CREDITORS

31

Based on Financial Statement

Accounting ratios express the relationship between figures taken from
financial statements. Figures may be taken from Balance Sheet, P& P A/C,
or both. One-way of classification of ratios is based upon the sources from
which are taken.
1] Balance sheet ratio:
If the ratios are based on the figures of balance sheet, they are called Balance
Sheet Ratios. E.g. Ratio of current assets to current liabilities or Debt to
equity ratio. While calculating these ratios, there is no need to refer to the
Revenue statement. These ratios study the relationship between the assets &
the liabilities, of the concern. These ratios help to judge the liquidity,
solvency & capital structure of the concern. Balance sheet ratios are Current
ratio, Liquid ratio, and Proprietary ratio, Capital gearing ratio, Debt equity
ratio, and Stock working capital ratio.
2] Revenue ratio:
Ratio based on the figures from the revenue statement is called revenue
statement ratios. These ratios study the relationship between the profitability
& the sales of the concern. Revenue ratios are Gross profit ratio, Operating
ratio, Expense ratio, Net profit ratio, Net operating profit ratio, Stock
turnover ratio.
3] Composite ratio:
These ratios indicate the relationship between two items, of which one is
found in the balance sheet & other in revenue statement.
There are two types of composite ratios-

32

a)

Some composite ratios study the relationship between the profits &
the investments of the concern. E.g. return on capital employed, return
on proprietors fund, return on equity capital etc.

b)

Other composite ratios e.g. debtors turnover ratios, creditors turnover

ratios, dividend payout ratios, & debt service ratios

Based on Function:
Accounting ratios can also be classified according to their functions in to
liquidity ratios, leverage ratios, activity ratios, profitability ratios & turnover
ratios.
1]

Liquidity ratios:

It shows the relationship between the current assets & current liabilities of
the concern e.g. liquid ratios & current ratios.
2]

Leverage ratios:

It shows the relationship between proprietors funds & debts used in

financing the assets of the concern e.g. capital gearing ratios, debt equity
ratios, & Proprietary ratios.
3]

Activity ratios:

It shows relationship between the sales & the assets. It is also known as
Turnover ratios & productivity ratios e.g. stock turnover ratios, debtors
turnover ratios.
4]

Profitability ratios:

a)

It shows the relationship between profits & sales e.g. operating ratios,
gross profit ratios, operating net profit ratios, expenses ratios
33

b)

It shows the relationship between profit & investment e.g. return on

investment, return on equity capital.

5]

Coverage ratios:

It shows the relationship between the profit on the one hand & the claims of
the outsiders to be paid out of such profit e.g. dividend payout ratios & debt
service ratios.
Based on User:
1]

Ratios for short-term creditors:

Current ratios, liquid ratios, stock working capital ratios

2]

Ratios for the shareholders:

Return on proprietors fund, return on equity capital

3]

Ratios for management:

Return on capital employed, turnover ratios, operating ratios, expenses ratios

4]

Ratios for long-term creditors:

Debt equity ratios, return on capital employed, proprietor ratios.

34

35

Liquidity Ratio: Liquidity refers to the ability of a firm to meet its short-term (usually up to 1
year) obligations. The ratios, which indicate the liquidity of a company, are
Current ratio, Quick/Acid-Test ratio, and Cash ratio. These ratios are
discussed below

36

Current Ratio
Meaning:
This ratio compares the current assets with the current liabilities. It is also
known as working capital ratio or solvency ratio. It is expressed in the
form of pure ratio.
E.g. 2:1
Formula:
Current assets
Current ratio =
Current liabilities

The current assets of a firm represents those assets which can be, in the
ordinary course of business, converted into cash within a short period time,
normally not exceeding one year. The current liabilities defined as liabilities
which are short term maturing obligations to be met, as originally
contemplated, with in a year.
Current ratio (CR) is the ratio of total current assets (CA) to total current
liabilities (CL). Current assets include cash and bank balances; inventory of
raw materials, semi-finished and finished goods; marketable securities;
debtors (net of provision for bad and doubtful debts); bills receivable; and
prepaid expenses. Current liabilities consist of trade creditors, bills payable,
bank credit, and provision for taxation, dividends payable and outstanding
expenses. This ratio measures the liquidity of the current assets and the
ability of a company to meet its short-term debt obligation.
CR measures the ability of the company to meet its CL, i.e., CA gets
converted into cash in the operating cycle of the firm and provides the funds
37

needed to pay for CL. The higher the current ratio, the greater the short-term
solvency. This compares assets, which will become liquid within
approximately twelve months with liabilities, which will be due for payment
in the same period and is intended to indicate whether there are sufficient
short-term assets to meet the short- term liabilities. Recommended current
ratio is 2: 1. Any ratio below indicates that the entity may face liquidity
problem but also Ratio over 2: 1 as above indicates over trading, that is the
entity is under utilizing its current assets.
Liquid Ratio:
Meaning:
Liquid ratio is also known as acid test ratio or quick ratio. Liquid ratio
compares the quick assets with the quick liabilities. It is expressed in the
form of pure ratio. E.g. 1:1.
The term quick assets refer to current assets, which can be converted into,
cash immediately or at a short notice without diminution of value.

Formula:
Quick assets
Liquid ratio

=
Quick liabilities

Quick Ratio (QR) is the ratio between quick current assets (QA) and CL. QA
refers to those current assets that can be converted into cash immediately
without any value strength. QA includes cash and bank balances, short-term
marketable securities, and sundry debtors. Inventory and prepaid expenses
are excluded since these cannot be turned into cash as and when required.
38

QR indicates the extent to which a company can pay its current liabilities
without relying on the sale of inventory. This is a fairly stringent measure of
liquidity because it is based on those current assets, which are highly liquid.
Inventories are excluded from the numerator of this ratio because they are
deemed the least liquid component of current assets. Generally, a quick ratio
of 1:1 is considered good. One drawback of the quick ratio is that it ignores
the timing of receipts and payments.
Cash Ratio:
Meaning:
This is also called as super quick ratio. This ratio considers only the absolute
liquidity available with the firm.
Formula:
Cash + Bank + Marketable securities
Cash ratio

=
Total current liabilities

Since cash and bank balances and short term marketable securities are the
most liquid assets of a firm, financial analysts look at the cash ratio. If the
super liquid assets are too much in relation to the current liabilities then it
may affect the profitability of the firm.

Investment/ Shareholder
39

EARNING PER SHARE:Meaning:

Earnings per Share are calculated to find out overall profitability of the
organization. Earnings per Share represent earning of the company whether
or not dividends are declared. If there is only one class of shares, the earning
per share are determined by dividing net profit by the number of equity
shares.
EPS measures the profits available to the equity shareholders on each share
held.
Formula:
Net Profit after Tax
Earnings per share =
Number of equity share
The higher EPS will attract more investors to acquire shares in the company
as it indicates that the business is more profitable enough to pay the
40

dividends in time. But remember not all profit earned is going to be

distributed as dividends the company also retains some profits for the
business
Dividend Per Share:Meaning:
DPS shows how much is paid as dividend to the shareholders on each share
held.
Formula:
Dividend Paid to Ordinary Shareholders
Dividend per Share =
Number of Ordinary Shares
Dividend Payout Ratio:Meaning:
Dividend Pay-out Ratio shows the relationship between the dividends paid
to equity shareholders out of the profit available to the equity shareholders.
Formula:
Dividend per share
Dividend Payout ratio =

*100
Earning per share

D/P ratio shows the percentage share of net profits after taxes and after
preference dividend has been paid to the preference equity holders.

41

Gearing

CAPITAL GEARING RATIO:Meaning:

Gearing means the process of increasing the equity shareholders return
through the use of debt. Equity shareholders earn more when the rate of the
return on total capital is more than the rate of interest on debts. This is also
known as leverage or trading on equity. The Capital-gearing ratio shows the
relationship between two types of capital viz: - equity capital & preference
capital & long term borrowings. It is expressed as a pure ratio.
Formula:
Preference capital+ secured loan
Capital gearing ratio =
Equity capital & reserve & surplus

42

Capital gearing ratio indicates the proportion of debt & equity in the
financing of assets of a concern.
Profitability
These ratios help measure the profitability of a firm. A firm, which generates
a substantial amount of profits per rupee of sales, can comfortably meet its
operating expenses and provide more returns to its shareholders. The
relationship between profit and sales is measured by profitability ratios.
There are two types of profitability ratios: Gross Profit Margin and Net
Profit Margin.

43

GROSS PROFIT RATIO:Meaning:

This ratio measures the relationship between gross profit and sales. It is
defined as the excess of the net sales over cost of goods sold or excess of
revenue over cost. This ratio shows the profit that remains after the
manufacturing costs have been met. It measures the efficiency of production
as well as pricing. This ratio helps to judge how efficient the concern is I
managing its production, purchase, selling & inventory, how good its control
is over the direct cost, how productive the concern , how much amount is
left to meet other expenses & earn net profit.
Gross profit
Gross profit ratio

* 10
Net Sales

Net Profit Ratio:Meaning:

Net Profit ratio indicates the relationship between the net profit & the sales
it is usually expressed in the form of a percentage.
Formula:
NPAT
Net profit ratio =

* 100
Net sales

This ratio shows the net earnings (to be distributed to both equity and
preference shareholders) as a percentage of net sales. It measures the overall
efficiency of production, administration, selling, financing, pricing and tax

44

management. Jointly considered, the gross and net profit margin ratios
provide an understanding of the cost and profit structure of a firm.
Return on Capital Employed:Meaning:
The profitability of the firm can also be analyzed from the point of view of
the total funds employed in the firm. The term fund employed or the capital
employed refers to the total long-term source of funds. It means that the
capital employed comprises of shareholder funds plus long-term debts.
Alternatively it can also be defined as fixed assets plus net working capital.
Capital employed refers to the long-term funds invested by the creditors and
the owners of a firm. It is the sum of long-term liabilities and owner's equity.
ROCE indicates the efficiency with which the long-term funds of a firm are
utilized.
Formula:
NPAT
Return on capital employed =

*100
Capital employed

Financial
These ratios determine how quickly certain current assets can be converted
into cash. They are also called efficiency ratios or asset utilization ratios as
they measure the efficiency of a firm in managing assets. These ratios are
based on the relationship between the level of activity represented by sales
or cost of goods sold and levels of investment in various assets. The
important turnover ratios are debtors turnover ratio, average collection

45

period, inventory/stock turnover ratio, fixed assets turnover ratio, and total
assets turnover ratio. These are described below:

DEBTORS TURNOVER RATIO (DTO)

Meaning:
DTO is calculated by dividing the net credit sales by average debtors
outstanding during the year. It measures the liquidity of a firm's debts.
Net credit sales are the gross credit sales minus returns, if any, from
customers. Average debtors are the average of debtors at the beginning
and at the end of the year. This ratio shows how rapidly debts are
collected. The higher the DTO, the better it is for the organization.
Formula:
Credit sales
Debtors turnover ratio =
Average debtors

46

Inventory or Stock Turnover Ratio (ITR)

Meaning:
ITR refers to the number of times the inventory is sold and replaced during
the accounting period.
Formula:
Cost of Goods Sold
Stock Turnover Ratio =
Average stock
ITR reflects the efficiency of inventory management. The higher the ratio,
the more efficient is the management of inventories, and vice versa.
However, a high inventory turnover may also result from a low level of
inventory, which may lead to frequent stock outs and loss of sales and
customer goodwill. For calculating ITR, the average of inventories at the
beginning and the end of the year is taken. In general, averages may be used
when a flow figure (in this case, cost of goods sold) is related to a stock
figure (inventories).
Fixed Assets Turnover (FAT)
The FAT ratio measures the net sales per rupee of investment in fixed assets.
Formula:
Net Sales
Fixed assets turnover =
Net Fixed Assets

This ratio measures the efficiency with which fixed assets are employed. A
high ratio indicates a high degree of efficiency in asset utilization while a
47

low ratio reflects an inefficient use of assets. However, this ratio should be
used with caution because when the fixed assets of a firm are old and
substantially depreciated, the fixed assets turnover ratio tends to be high
(because the denominator of the ratio is very low).
Proprietors Ratio:
Meaning:
Proprietary ratio is a test of financial & credit strength of the business. It
relates shareholders fund to total assets. This ratio determines the long term
or ultimate solvency of the company.
In other words, Proprietary ratio determines as to what extent the owners
interest & expectations are fulfilled from the total investment made in the
business operation.
Proprietary ratio compares the proprietor fund with total liabilities. It is
usually expressed in the form of percentage. Total assets also know it as net
worth.
Formula:
Proprietary fund
Proprietary ratio

OR
Total fund Shareholders fund

Proprietary ratio =
Fixed assets + current liabilities

48

Stock Working Capital Ratio:

Meaning:
This ratio shows the relationship between the closing stock & the working
capital. It helps to judge the quantum of inventories in relation to the
working capital of the business. The purpose of this ratio is to show the
extent to which working capital is blocked in inventories. The ratio
highlights the predominance of stocks in the current financial position of the
company. It is expressed as a percentage.
Formula:
Stock
Stock working capital ratio =
Working Capital
Stock working capital ratio is a liquidity ratio. It indicates the composition &
quality of the working capital. This ratio also helps to study the solvency of
a concern. It is a qualitative test of solvency. It shows the extent of funds
blocked in stock. If investment in stock is higher it means that the amount of
liquid assets is lower.
Debt Equity Ratio:
Meaning:
This ratio compares the long-term debts with shareholders fund. The
relationship between borrowed funds & owners capital is a popular measure
of the long term financial solvency of a firm. This relationship is shown by
debt equity ratio. Alternatively, this ratio indicates the relative proportion of
debt & equity in financing the assets of the firm. It is usually expressed as a
pure ratio. E.g. 2:1
49

Formula:
Total long-term debt
Debt equity ratio =
Total shareholders fund
Debt equity ratio is also called as leverage ratio. Leverage means the process
of the increasing the equity shareholders return through the use of debt.
Leverage is also known as gearing or trading on equity. Debt equity ratio
shows the margin of safety for long-term creditors & the balance between
debt & equity.
Return on Proprietor Fund:
Meaning:
Return on proprietors fund is also known as return on proprietors equity or
return on shareholders investment or investment ratio. This ratio
indicates the relationship between net profits earned & total proprietors
funds. Return on proprietors fund is a profitability ratio, which the
relationship between profit & investment by the proprietors in the concern.
Its purpose is to measure the rate of return on the total fund made available
by the owners. This ratio helps to judge how efficient the concern is in
managing the owners fund at disposal. This ratio is of practical importance
to prospective investors & shareholders.

50

Formula:
NPAT
Return on proprietors fund =

* 100
Proprietors fund

Creditors Turnover Ratio:

It is same as debtors turnover ratio. It shows the speed at which payments
are made to the supplier for purchase made from them. It is a relation
between net credit purchase and average creditors
Net credit purchase
Credit turnover ratio =
Average creditors
Months in a year
Average age of accounts payable =
Credit turnover ratio
Both the ratios indicate promptness in payment of creditor purchases. Higher
creditors turnover ratio or a lower credit period enjoyed signifies that the
creditors are being paid promptly. It enhances credit worthiness of the
company. A very low ratio indicates that the company is not taking full
benefit of the credit period allowed by the creditors.
Importance of Ratio Analysis:
As a tool of financial management, ratios are of crucial significance. The
importance of ratio analysis lies in the fact that it presents facts on a
comparative basis & enables the drawing of interference regarding the
performance of a firm. Ratio analysis is relevant in assessing the
performance of a firm in respect of the following aspects:
51

1]

Liquidity position

2]

Long-term solvency

3]

Operating efficiency

4]

Overall profitability

5]

Inter firm comparison

6]

Trend analysis.

1]

Liquidity position: -

With the help of Ratio analysis conclusion can be drawn regarding the
liquidity position of a firm. The liquidity position of a firm would be
satisfactory if it is able to meet its current obligation when they become due.
A firm can be said to have the ability to meet its short-term liabilities if it has
sufficient liquid funds to pay the interest on its short maturing debt usually
within a year as well as to repay the principal. This ability is reflected in the
liquidity ratio of a firm. The liquidity ratio is particularly useful in credit
analysis by bank & other suppliers of short term loans.
2]

Long-term solvency: -

Ratio analysis is equally useful for assessing the long-term financial viability
of a firm. This respect of the financial position of a borrower is of concern to
the long-term creditors, security analyst & the present & potential owners of
a business. The long-term solvency is measured by the leverage/ capital
structure & profitability ratio Ratio analysis s that focus on earning power &
operating efficiency.
Ratio analysis reveals the strength & weaknesses of a firm in this respect.
The leverage ratios, for instance, will indicate whether a firm has a
52

reasonable proportion of various sources of finance or if it is heavily loaded

with debt in which case its solvency is exposed to serious strain. Similarly
the various profitability ratios would reveal whether or not the firm is able to
offer adequate return to its owners consistent with the risk involved.
3]

Operating efficiency:

Yet another dimension of the useful of the ratio analysis, relevant from the
viewpoint of management, is that it throws light on the degree of efficiency
in management & utilization of its assets. The various activity ratios
measure this kind of operational efficiency. In fact, the solvency of a firm is,
in the ultimate analysis, dependent upon the sales revenues generated by the
use of its assets- total as well as its components.
4]

Overall profitability:

Unlike the outsides parties, which are interested in one aspect of the
financial position of a firm, the management is constantly concerned about
overall profitability of the enterprise. That is, they are concerned about the
ability of the firm to meets its short term as well as long term obligations to
its creditors, to ensure a reasonable return to its owners & secure optimum
utilization of the assets of the firm. This is possible if an integrated view is
taken & all the ratios are considered together.

5]

Inter firm comparison:

Ratio analysis not only throws light on the financial position of firm but also
serves as a stepping-stone to remedial measures. This is made possible due
to inter firm comparison & comparison with the industry averages. A single
figure of a particular ratio is meaningless unless it is related to some
53

standard or norm. One of the popular techniques is to compare the ratios of a

firm with the industry average. It should be reasonably expected that the
performance of a firm should be in broad conformity with that of the
industry to which it belongs. An inter firm comparison would demonstrate
the firms position vice-versa its competitors. If the results are at variance
either with the industry average or with those of the competitors, the firm
can seek to identify the probable reasons & in light, take remedial measures.
6]

Trend analysis:

Finally, ratio analysis enables a firm to take the time dimension into account.
In other words, whether the financial position of a firm is improving or
deteriorating over the years. This is made possible by the use of trend
analysis. The significance of the trend analysis of ratio lies in the fact that
the analysts can know the direction of movement, that is, whether the
movement is favorable or unfavorable. For example, the ratio may be low as
compared to the norm but the trend may be upward. On the other hand,
though the present level may be satisfactory but the trend may be a declining
one.

54

OPERATING CYCLE OF MANUFACTURING BUSINESS

REALIZATION

Accounts
Receivables

SALES

Cash

Finished

Goods

PURCHASES

PRODUCTION

PROCESS

PRODUCTION

Raw Materials

Work-in-Process
PROCESS

55

METHOD OF ASSESMENT OF WORKING CAPITAL

Operating cycle
Raw material =

No. of days
916.53

7.9

.088

9.13

4.22

114.84
Stock in Process =

10.12
114.84

Finished goods =

1054.1
115.36

Debt collection period

(Calculating in ratios)

_____________

Total length of Operating Cycle

SALES per month

67829.07

21.34 Days

= 5652.422 Rs.

12
Total EXPENSES

60450.77 = 5037.66 Rs.

Per month

12

56

WORKING CAPITAL REQUIRED =

Total Length of Operating Cycle X

Monthly Expenses

30

= 21.34X

5037.66
30

= 3583.45Rs.

Working Notes:
1. Raw Material (Mentioned in P&L Account)
Opening Stock + Purchases Closing Stock
2010-11:
Annual Consumption

= 36047.27Rs

1 Months Consumption = 36047.27/12 = 3003.94Rs

2011-12:
Annual Consumption

= 38058.07Rs

1 Months Consumption

= 38058.07/12 = 3171.50 Rs.

2. Stock In Process -57

Raw Material + Power + Labour + Repairs

+ Other Manufacturing Expenses + Depreciation
+ Opening Stock Closing Stock
2010-11:
Cost of Production

= 40125.5 Rs.

1Months Stock In Process = 40125.5/12 = 3343.81Rs.

2011-12
Cost of Production

= 41315.08 Rs.

1MonthS Stock In Process = 41315.08/12 = 3442.92 Rs.

3. Finished Goods -Cost of Production + Opening Stock - Closing Stock
2010-11:
Cost of Goods Sold

= 40275.31Rs.

1 Months Finished Goods = 40275.31/12 = 3356.27Rs.

2011-12:
Cost of Goods Sold

= 41529.54Rs.

1 Months Finished Goods = 41529.54/12 = 3460.85Rs.

58

THEORTICAL

ASPECTS

OF WORKING

CAPITAL MANAGEMENT
NATURE OF WORKING CAPITAL MANAGEMENT
Working capital management is three dimensional in nature1)

It is concerned with the formulation of policies with regard to

profitability, liquidity and risk.

2)

It is concerned with the decisions about the composition and level of

current assets.

3)

It is concerned with the decisions about the composition and level of

current liabilities.

Policies regarding to Profitability

Liquidity and Risk

Composition of Level
of Current Liabilities

Composition of Level
of Current Assets

DIMENSIONS OF WORKING CAPITAL

59

GOAL OF WORKING CAPITAL MANAGEMENT

Working capital management is concerned with the problems that
arise in attempting to manage the current assets, the current liabilities and
the interrelationship that exists between them.
The term current assets refer to those assets which is the ordinary
course of business can be converted into cash within one year. Major current
assets are cash, marketable securities, accounts receivable 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. Current liabilities are accounts
payable, bills payable, bank overdraft, and outstanding expenses.
Working capital is that portion of firms assets which is financed by longterm funds.
Interaction between current assets and current liabilities is the main theme
of the theory of working capital management.
Goal of working capital management is to manage the firms current
assets and liabilities in such a way so that a satisfactory level of working
capital is maintained.
The second important segment of working capital management is deciding
the optimum level of investment in various current assets. There are three
important current assets cash, accounts receivables and inventory

60

INVENTORY MANMAGEMENT IN PARLE BISCUITS PVT. LTD.

For inventory management in Neemrana plant of PBPL certain things are
considered which are completely practical

As market generally fluctuates so if there is any perception of the

increment in the price level of any commodity in future then that
particular commodity is stored.

All the materials of the mixture, which is used in making biscuits, can
be stored maximum only for 3 days. Because store of plant is
designed like this that more than 3 days storage cant be maintained in
it.

Minimum levels of inventories are maintained in plant in wake of

lead-time, govt. policies, and one-day safety stock for transportation
problem.

Re-order levels of inventories are maintained in the plant in wake of

per day consumption level of inventories and lead-time in days.

61

The position of inventory at the end of last two years is as followsNAME OF THE COMMODITY

YEAR

AMOUNT
(In Rs/-)

Stores and spares

Raw Materials

Packing Material

Finished Goods

2010-11

82, 91,000

2011-12

57, 29,000

2010-11

10, 21,52,000

2011-12

8,11,54,000

2010-11

5,82,08,000

2011-12

7,08,06,000

2010-11

11,61,33,000

2011-2012

62

9,46,87,000

CASH MANAGEMENT IN PARLE BISCUITS PVT. LTD.

Cash management in Parle Biscuits Pvt. Ltd. is as followsAverage daily collection of the Parle Biscuits Pvt. Ltd. is 2 crores.

Salaries and Wages are distributed in Parle Biscuits Pvt. Ltd on

monthly basis.

50,00,000-75,00,000 salaries and wages are

distributed in one month. Like this all other daily transactions are
completed by daily collection.

In case of strike or any contingency supply of demand is completed

by another

plant of Parle Biscuits Pvt. Ltd. and by 11 CMUS.

Supply doesnt disturb.

Authority for getting the benefit of any opportunity is given to

Mumbai office of Parle Biscuits Pvt. Ltd. That decides the policy
regarding to any market opportunity.

Parle Biscuits Pvt. Ltd. doesnt have any credit policy. It deals in
cash. Thats why it doesnt has any cash problem.

Distribution channel of Parle Biscuits Pvt. Ltd. is very short only

depots are there as a middleman between plant & open market. Thats
why there isnt any necessity of more cash.

Biscuits come in FMCG product. So circulation of cash is smooth &

fast.

Production cycle is short. Thats why Parle Biscuits Pvt. Ltd has less
demand of cash.

63

FINANCING OF WORKING CAPITAL

INTRODUCTION
A firm has to decide how it is to be financed. The need for financing arises
mainly because the investment in Working Capital/Current Assets that is raw
materials, work/stock-in-progress, finished goods and receivables typically
fluctuates during the year.
The main sources of Working Capital financing are Trade Credit, Bank
Credit,

RBI

framework/regulation

of

bank

credit/finance/advances,

Factoring, Commercial Papers and Internal Sources.

TRADE CREDIT
Trade Credit refers to the credit extended by the supplier of goods and
services in the normal course of transaction/business/sale of the firm.
According to trade practices, cash is not paid immediately for purchases but
after an agreed period of time. Thus, deferral of payment (trade credit)
represents a source of finance for credit purchases.
BANK CREDIT
Bank Credit is the primary institutional source of Working Capital finance in
India. In fact, it represents the most important source for financing of
Current Assets.
Working Capital finance is provided by banks in five ways:
1)

Cash Credits/Overdrafts

2)

Loans

3)

Purchase/Discount Bills
64

4)

Letter of Credit

5)

Working Capital term loans

RESERVE BANK OF INDIA FRAMEWORK FOR /REGULATION

OF BANK CREDIT
In order to secure alignment of Bank Credit with planning priorities and
measures to direct Bank Credit to priority sectors and enforce a measure of
financial discipline among industrial borrowers.
However, the basic character of Bank financing of Industry, namely over
borrowing and domination of cash credit system did not materially alter.
COMMERCIAL PAPERS
Commercial Paper is a short-term unsecured negotiable instrument,
consisting of usance promissory notes with a fixed maturity. It is issued on a
discount on face value basis but it can also be issued in interest bearing
form. A Commercial Paper when issued by a company directly to the
investor is called a Direct Paper. The companies announce current rates of
Commercial Papers of various maturities, and investors can select those
maturities, which closely approximate their holding period. When
Commercial Papers are issued by security dealers/dealers on behalf of their
corporate customers, they are called Dealer Paper. They buy at a price less
than the commission and sell at the highest possible level.

65

FACTORING
Factoring provides resources to finance receivables as well as facilitates the
collection of receivables. Although such services constitute a critical
segment of the financial services scenario in the developed countries, they
appeared in the Indian financial scene only in the early nineties as a result of
RBI initiatives. There are two bank-sponsored organizations, which provide
such services:
1)

SBI Factors and Commercial Services Ltd.

2)

Canarabank Factors Ltd.

The first private sector factoring company, Foremost Factors Ltd,

started operations since the beginning of 1997.

INTERNAL SOURCES
This is also another major source for financing of Working Capital. Internal
Sources include profits, reserves etc.
FINANCING OF WORKING CAPITAL IN PARLE BISCUITS PVT.
LTD.
In Parle Biscuits Pvt. Ltd financing of Working Capital is done through only
internal sources. Profits and reserves of Parle Biscuits Pvt. Ltd. are enough
to fulfill the demand of its Working Capital.
Parle Biscuits Pvt. Ltd. doesnt use any other source apart internal for
financing its Working Capital.

66

MANAGERIAL USEFULNESS OF STUDY

Today in the business line every man want to know about his company
financial condition. A working capital is a part of finance. The working
capital are calculated by the current assets and current liabilities which are
related to annual report of the company. With the help of working capital
management we can calculated the liquidity position of the company. If the
current assets are more than the current liabilities thus we can say that the
liquidity position of the company is satisfactory, the usefulness of study is
included the signification of the working capital. Working capital
management is manage the operating process in the organization &
company.
All the businessmen want to know how much they have gained or lost
during the year; how much capital is invested in the business at the end (if
the year; how much amount, they are liable to pay and to whom they owe it;
how much is owed to them and by whom etc. In order to attain such
information, it is essential to keep a complete and systematic record of each
and every business transaction entered into during the year.
By keeping a complete and systematic record of every business dealing the
businessman can know how much the amount of purchases is; how much is
the amount of sales; what are his total expenses and what is the amount of
profit earned or loss incurred during the year. Furthermore, he can ascertain
the financial position of his business, such as, how much capital it has at the
end for the year and how that capital stands invested in various assets; how
much amount he has to take and from whom and how much amount he is
liable to pay and to whom. Besides, the properly maintained accounts are
helpful in the assessment of Income-tax and Sales

67

CONCEPT USED IN STUDY

In this project I used working the ratio which are used for calculating for the
financial conditions of Parle Biscuit Pvt. Ltd. I have used the ratio which are
networking capital ratio, current ratio, average collection ratio and quick
ratio. These ratio are very useful to understand the topic because we can
calculate the working capital by the help of these ratio. I have used these
ratio by the declaration of financial manager of Parle Biscuit Pvt. Ltd. These
ratio are shows the liquidity position in the financial competition. Ratio help
to summaries the large quantities of financial data and to make qualitative
judgment about the firms financial performance. The project is developed
keeping in mind the security of working capital of the company. That is
possible with the help of ratio analysis.
Focus of the Problem
The main purpose of study the account process is to find the main reason or
decision which can improve the business of the company. The main purpose
or focus of the problem is to know that which product should be used in the
company and why and how can it be effective for the company?
The main focus of the problem is to find out output of the economical
business. Since a special reference has been made towards Parle Biscuits
Pvt. Ltd. business has also become equally important and unless we know
the methodology adopted by Parle Biscuits Pvt. Ltd. our study will not give
the true picture. In nutshell, the focus of our study is find the amount
consolidation of the entire group.
Our study is focused on to know about the amount consolidation of the
entire group and the international financial market.

68

The study is also focused on satisfaction of the customer, job satisfaction

level of the employees and the effectives handling of accounts with
computer & related software.

69

OBJECTIVE OF PROJECT
Right from the beginning and also in present scenario, Confectionary has
carved for itself a strong place in the international market with around half
of the global primary demand of confectionary products. Now-a-days
confectionary products are also a means to economic power. Most of the
nations including developing countries like INDIA have placed adequate
emphasis on self-reliance technology in confectionary industry.
1.

Primary : To find out the operating and day to day

financial functions which reflects how the company operates its
operating cycle and manage financial flow in day to day business
activity.

2.

Secondary :
1.

To know the functioning of the finance deppt.

Of Parle Biscuits Pvt. Ltd.

2.

To analyze the liquidity position of the

organization

3.

To examine

profitability

position

of

management.
4.

To prepare report on study thus conducted.

70

the

RESEARCH METHODOLOGY
Research Design
The research design involves taking the decision on type of data sources
from which the data is to collected and the contact methods. The research
design selected by me was descriptive cum analytical as this the best suited
to analyze the fact which already exist and choose the best one for welfare of
the employees.
METHODS OF DATA COLLECTION
To deal with real life problems it is often found that data at hand are
inadequate and hence it becomes necessary to collect data appropriate.
As the project is on working capital information include was collected from
the finance dept. for this purpose data collection was done through
secondary data.
1)

Secondary Data

Secondary data consists of information that already exists somewhere and

was collected for another purpose which may not be the same.
Secondary Data used here
-

Various files of accounts

Magazine and Books

Performas and Websites

Annual financial reports of parle

I have used secondary data in the completion of this summer training report.
71

Tool and Techniques:1. Ratio analysis

2. Fund flow statement .
3. Operating cycle method

72

DATA ANALYSIS
ANALYSIS OF WORKING CAPITAL MANAGEMENT
In this chapter an analysis over the Working Capital of Parle Biscuits Pvt.
Ltd. has been done. But before going further let us have a look on the current
position of Working Capital.
The Working Capital of the last two years is as follows
(Amount in 00s Rs/-)
YEAR

SALES

INVESTMENTS

WORKING
CAPITAL

%
OF
WORKING
CAPITAL TO
SALES

2010-11

5282907

939194

299640

5.67

2011-12

5505061

1175683

288828

5.24

In year 2010-11 Working Capital of Parle Biscuits Pvt. Ltd. was

299640 Rs/- while in the same period the sales was noticed 5282907 Rs/then % of Working Capital to sale was 5.67 but in the next year 2011-12
sales was 550506 Rs/- and Working Capital was 288828 Rs/-. So in year
2011-12 % of Working Capital to sales was 5.24.

73

CALCULATION OF WORKING CAPITAL

2010-11
2011-12

Amount in 00s

74

RATIO ANALYSIS
It is a powerful tool of financial analysis. A ratio is defined as the indicated
quotient of two mathematical expressions and as the relationship between
two or more things. Ratio helps to summaries the large quantities of
financial data and to make qualitative judgment about the firms financial
performance. The point to note is that a ratio indicates a quantitative
relationship, which can be turn, used to make a qualitative judgment.
Here are some of the calculated ratios of the financial year of Parle Biscuits
Pvt. Ltd.
All the ratios are calculated in 00s Rs/- figures.
1)

Net Working Capital Ratio

Net Working Capital

Capital Employed

2010-11

2011-12
Net Working Capital

299640

Net Assets or Capital employed

288828

1403616

1716615
Ratio

.21: 1

.17: 1

The difference between Current Assets and Current Liabilities excluding

short-term borrowings is called Net Working Capital or Net Current Assets.
75

The position of Net Working Capital in the year 2010-11 is better as

compared with the year 2011-12. The important thing to say is that this
organization has healthy Current Assets.
2)

Current Ratio:Current Assets

Current Liabilities

2010-11

2011-12

Current Assets

596878

646067

Current Liabilities

297238

357239

Ratio

2: 1

1.80: 1

Current Assets include cash and those assets, which can be converted
into cash within a year. All obligations maturing within a year are included
in current liabilities.
As a conventional rule a current ratio 2: 1 or more is considered
satisfactory. The current ratio doesnt represent margin of safety i.e. a
cushion of protection for creditors.

76

2010-11

2011-12

77

3)

Average Collection Ratio

Debtors*360
Sales

2010-11

2011-12

Debtors*360
Sales

172716*360

188725*360

5282907

5505061
Days

11.77

12.34

The average collection period shows the efficiency of debtors. It tells

the PBL doesnt has credit policy & if is given then in rare case.

78

2010-11

2011-12

79

4)

Quick Ratio or Acid Test

Current Assets - Inventories

Current Liabilities

2010-11

2011-12
Current Assets Inventories

596878-270934

289272
Current Liabilities

297238

357239

Ratio

1.09 : 1

.99 : 1

Generally a quick ratio of 1:1 is considered to represent a satisfactory

position. But it cant be said tat a company having quick ratio of less than
1:1 isnt financially sound, Because it depends upon the nature of debtors. If
the debtors are slow paying the quick ratio of more than 1:1 can become
harmful. But if debtors are liquid like in this organization than even less than
1:1 can work out to be satisfactory.
As debtors of this organization arent slow paying so that quick ratio is
satisfactory.
The above made calculation of various ratios has told us about the various
aspects of Working Capital of Parle Biscuits Pvt. Ltd. The system is well
under control an effective but still in some areas a little more concentration
to be needed.

80

646067-

2010-11

2011-12

81

5)

Gross Profit Margin

Gross Profit Margin = gross profit*100/sales

2010-11

2011-12

829287

846824

Sales

5282907

5505061

Ratio

15.70

15.38

Gross profit

Profit Margin of the firm has decreased from 15.70% to 15.38% which
means that margin of profit on sales has decreased.

6)

Net Profit Margin

Net Profit Margin= PAT*100/Sales

2010-11

2011-12

PAT

262056

347142

Sales

5282907

5505061

Ratio

4.96

6.31

Profit Margin of the firm has increased from 4.96% to 6.31% which means
that margin of profit on sales has increased.

82

7)

Asset Turnover Ratio

Net Asset turnover ratio= sales/net assets

2010-11

2011-12

Sales

5282907

5505061

Net Assets

1403616

1716615

3.76

3.21

Ratio

NATR has decreased from 3.76 to3.21 which means Parle is producing 3.76
times of sales for one rupee of capital employed in net assets in 2010-1\10 to
decreased a 3.21 times of sales for one rupee of capital employed in net
assets in 2011-12.

83

FUND FLOW ANALYSIS

The statement of change in financial position, prepared to determine only the
sources and uses of working capital between dates of the two Balance Sheets
is known as the Fund Flow Statement. Working Capital is defined as the
difference between Current Assets and Current Liabilities. Working
determines the liquidity of the firm.
The Working Capital flow or fund arises when the net effect of transaction is
to increase or decrease the amount of Working Capital. Normally, a firm will
have some transactions that will change Net Working Capital and some that
ill cause no change in Net Working Capital. The transaction will cause Net
Change of Working Capital only when one of the accounts affected is a
current account (Current Liability) and account is non-current account
(Long-term Assets or Long term Liability).
The concepts of Working Capital may be summarized as follows:
The Net Working Capital increases or decreases when a transaction
involves a current account and a non-current asset account.
The Net Working Capital remains unaffected when a transaction
involves only Current accounts.
The Net Working Capital remains unaffected when a transaction
involves only non current accounts.
Now let us examine the Working Capital flow of Parle Biscuits Pvt.
Ltd. through the statement of change in Working Capital.

84

SCHEDULE OF CHANGE IN WORKING CAPITAL

Particulars

2010-11

2011-12 Effect

on

Working

capital
Increase Decrease
Current
Assets
Inventories

270934

289272

18338

Debtors

172716

188725

16009

Cash

153228

168070

14842

Accured Income

816122

868345

52223

Total

1413000

1514412

C/L (Cr.)

297238

357239

60001

Provisions

1111814

1151815

40001

Total

1409052

1509054

W.C (A-B)

3948

5358

Current Liabilities

Pos. Inc. in W.C

101412

100002

1410

The project is developed keeping in mind the security of Working

Capital of the company. Means that no one can enter in the confidential data
of the company and without permission the senior officer one cant enter in
the main programme whether he is Manager, Employee or the Guest.

85

FINDINGS
It is very difficult to make the project or the analysis in such a way that can
solve all the problems according to the requirements. In this project it is
being tried to give more and more facilities but in a short period of training
time, as much as possible has been done.

In year 2010-11 Working Capital of Parle Biscuits Pvt. Ltd. was

299640 Rs/- while in the same period the sales was noticed 5282907
Rs/- then % of Working Capital to sale was 5.67 but in the next year
2011-12 sales was 550506 Rs/- and Working Capital was 288828
Rs/-. So in year 2011-12 % of Working Capital to sales was 5.24.

The Position of Net Working Capital in the year 2010-11 is better as

compared with the year 2011-12. The important thing to say is that
this organization has healthy current assets.

As a Conventional rule a current ratio 2:1 or more is considered

satisfactory the current ratio dont represent margin of safety i.e. a
cushion of protection for creditors.

The average Collection period shows the efficiency of the debtors, it

tells that Parle Biscuit Pvt. Ltd doesnt has credit policy and if is given
then in rare cases.
.

86

RECOMMENDATIONS

Total Current assets need to be increased.

Total Liabilities of outsiders should be decreased.

Overall Management should be improved.

Expenditure should be decreased.

Organization has healthy current assets but it needs to improve its

liquidity power.

87

LIMITATIONS OF THE STUDY

The major limitations of my study are as under.

Limited Time : Although the staff of Parle Company Pvt. Ltd. was
very efficient and highly co-operative and devoted enough of their
valuable time to us. But because of time constant. We were not able to
devote as much time with their employees.

Secrecy: Some of the information was kept confidential and was not
disclosed to any person who so ever.

Lack of Comparative Data : Due to non availability of other

industries in the same line we were not able to compare the data of
one organization with other one. Inspire of these difficulties we still
put our best efforts to try to do the full justice subject matter and in
completion of the report.

88

CONCLUSIONS
Success is achieved by those who try where there is
nothing to loose by trying a great deal to gain if
successful, by all means try.
W.Clement Stone
The study has its own importance in its own way. With the help of this study
one can know about the struggle and success of Parle Biscuits Pvt. Ltd.
Efforts, which is due to its efficient management.
The study will definitely increase the morale of each employee and by
studying this managers come to know that what effective measures can be
taken to maintain the effective use of working capital in the organization and
thus to achieve goals of the organizations.

89

BIBLIOGRAPHY
Text Books
D.C.Sharma & K.G.Gupta
M.Y.Khan & P.K.Jain

Management Accounting
Financial Management

Annual Reports
1) Parle Biscuits Pvt. Ltd. annual report 2010-11
2) Parle Biscuits Pvt. Ltd. annual report 2011-12

90

ANNEXURE
Profit and Loss Account
Particulars

2010-11

2011-12

(in 00s)

(in 00s)

5282907

5505061

Opening Stock

137107

136933

Add: Raw Material Consumed

3067148

3268256

Packing Material Consumed

723740

666587

Payment to an Provisions for employees

171429

126067

Store and Spare Parts Consumed

43975

40306

Power and Fuel

120505

142037

Conversion Charges

257928

305061

Rates and Taxes

68721

78051

Less: Closing Stocks

136933

105061

Gross Profit

829287

846824

Repair and Maintenance

44499

40507

Advertisement and Sales/ Marketing Expenses

187875

250507

Communication Expenses

2103

2209

Cash Discount

20440

25061

Traveling and Convince Expenses

6312

7051

4636

2051

Sales
Less: Cost of Goods Sold

Less : Operating Expenses

Selling and Distribution expenses

General and Administrative Expenses

Rent
91

Printing and Stationary

2276

2051

Insurance

3531

3033

Legal and Professional

3642

4050

Financial Expenses
Depreciation

103900 95061

Miscellaneous

5488

Operating Profit

327846 396336

6057

Add : Not Operating Income

Income from Investment

87622

146251

Other Incomes

10606

21872

Less : Non Operating Expenses

Net income before Tax

426074 564459

Less : [email protected]%

164038 217317

Net Income

262036 347142

92

Common Size Statement

Profit and loss Account

Particulars

2010-11

2011-12

Sales

100

100

Less Cost of Good Sold

84.3

84.62

Gross Profit

15.7

15.38

Selling and Distribution Expenses

7.15

6.14

General and Administration Expenses

.27

.20

Financial Expenses

1.97

1.72

Misc. Expenses

.10

.11

Total Operating Expenses

9.5

8.18

Operating Profit

6.21

7.2

Total Income

1.86

3.05

Income Before Tax

8.07

10.25

Less : Provision for Tax

3.11

3.95

Income after Tax

4.96

6.3

Less : Operating Expenses

Less : Other Expenses

Balance Sheet

Particulars

2010-11
93

2011-12

Liabilities
Share Capital

4950

4950

Reserves and Surplus

1494788

1759852

a) Current Liabilities(Creditors)

297238

357239

b) Provisions

1111814

1151815

Total

2908790

3273856

Particulars

2010-11

2011-12

Fixed Assets

556596

583761

Investment

939194

1175683

Stock

270934

289272

Debtors

172716

188725

Cash

153228

168070

816122

868345

2908790

3273856

Secured Loans
Unsecured Loans
Current Liabilities and Provisions

Contingent Liabilities

Assets

Current Assets, Loans and Advances

a) Current assets

b) Loans and Advances

Misc. Expenditure
Profit and Loss A/c(Dr. Balance)
Total

94

95