A

SUMMER TRAINING PROJECT REPORT

ON

“CRITICAL ANALYSIS OF WORKING CAPITAL”

AT

RAMA PAPER MILLS LTD.

KIRATPUR BIJNOR (U.P.)

Submitted to

Uttar Pradesh Technical University (Lucknow)

In partial fulfillment of the requirement
For the award of the degree of
MASTER’S OF BUSINESS ADMINISTRATION
SESSION (2009-2011)

UNDER GUIDANCE OF: - SUBMITTED BY:-

Dr. Raghavendra Dwivedi Ankit Rajput

PLACE : GZB University Roll No.-0903870007

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INSTITUTE OF TECHNOLOGY & SCIENCE MOHAN NAGAR
GZB

2
CERTIFICATE

3
 Acknowledgement

It gives me immense pleasure to present this project report on working

capital management carried out at Rama Paper Mills Ltd. in partial
fulfillment of post graduate course MBA.
No work can be carried out without the help and guidance of various
persons. I am happy to take this opportunity to express my gratitude to
those who have been helpful to me in completing this project report
At the outset I would like to thank Mr. Jitendra Mittal sir Head of
Account Dept. for their valuable advice and guidance during my project
completion, also Mr. Ravinder Rajput sir (Head of bill passing dept.)
and Mr. Ravi Sharma, Arun Sharma sir for timely help concerning
various aspects account department for help me to complete the summer
internship program.
I would like be failing in my duty if I do not express my deep sense of
gratitude to Dr. Raghavendra Dwivedi sir without his guidance it
wouldn’t have been possible for me to complete this project work.
Lastly I would like to thank my Parents, Friends, and well wishers who
encouraged me to do this research work and all those contributed
directly or indirectly in completing this project to whom I am obligated
to.

Ankit Rajput
MBA II Sem.

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 DECLARATION
I, ANKIT RAJPUT, student of MBA IInd Semester, studying at I.T.S.
College Mohan Nagar Ghaziabad, hereby declare that the summer
training report on “CRITICAL ANALYSIS OF WORKING CAPITAL”
submitted to Uttar Pradesh Technical University, Lucknow in partial
fulfillment of Degree of Master’s of Business Administration is the
original work conducted by me.

The information and data given in the report is authentic to the best of
my knowledge.

This summer training report is not being submitted to any other

University for award of any other Degree, Diploma and Fellowship.

(Ankit Rajput)

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 PREFACE

Before Investing in any kind of Business, First we have to do “Financial

Analysis” of that particular Company and for making our investment
successful we are suppose to do different kind of analysis of that
particular company. So that decisions are called as “Investing
Decisions”

So Financial Analysis is very Important Activity before investing

anywhere. I have tried to put my best effort to complete this task on the
basis of skill that I have achieved during the last one year study in the
institute.
I have tried to put my maximum effort to get the accurate statistical data.
However I would appreciate if any mistakes are brought to my by the
reader.

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 Table of Contents

Chapter No. Particular Page No.

I Certificate 2
II Acknowledgement 3
III Declaration 4
IV Preface 5
V Contents 6

A Company Profile
Paper Industry History in India 10
Company History 11
Vision & Mission 13
Competitors 14
Organization Structure 15
Products 17
Address 19

B Objective of the Study 21

Scope of the Study 22

C Literature Review
1 Working Capital Management
Introduction 24
Need for working capital 25
Types of working capital 26
Operating cycle 29
2 Working capital Components
Cash Management 31
Inventory Management 36
Receivable Management 41

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D Research Methodology
Introduction 43
Types of research 44

Financial Highlights & Analysis

Share Capital 46
Sales Turnover 47
Profit 48
Fixed Assets 49
Dividend Payment 50

E Data analysis &

Interpretations
1 Working capital Analysis 52
Working Capital level 53
Working capital trend analysis 54
Current Assets analysis 57
Current Liabilities analysis 59
Changes of working capital 61
Operating Cycle 64
Working capital leverage 67

2 Working Capital Ratio Analysis

Introduction 71
Role of ration analysis 71
Limitation of ratio analysis 72
Classification of ratio 73
Efficiency ratio 74
Liquidity ratio 80

3 Working Capital Finance and

Estimation
Introduction 86
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 Sources of working capital finance 86
Working capital loan and interest 89
Estimation of working capital 91

F Conclusions and
recommendations
Conclusion 92
Limitation of the study 94
Recommendations 95

G Bibliography 96
Appendix
Balance Sheet 97
Profit & Loss A/C 99

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10
 Paper Industry History in India

Paper industry in India is the 15th largest paper industry in the World. It
provides employment to nearly 1.5 million people and contributes Rs.25
billion to the government kitty.
Paper industry is primarily depend upon forest based raw materials. The
first paper mill in India was set up at Sreerampur, West Bangal in the
year 1812. It was based on grasses and jute as raw material. Large scale
mechanized technology of paper making was introduced in India in early
1905.
The Indian pulp and paper industry at present is very well developed and
established. Now, the paper industry is categorized as Forest-based,
agro-based and other (Waste paper, Secondary fibers and market pulp).

In 1951, there were 17 paper mills, and today there are about 515 units
engaged in the manufacture of paper and paper-boards and newsprint in
India. Those paper industries, which have capacity above 24,000 Tone
Per Annum, are designated as large-scale paper industries.

Indian paper Industry has been de-licensed under the Industries

(Development & regulation) Act, 1951 with effect from 17th July, 1997.
The Interested entrepreneurs are now required to file and Industrial
Entrepreneurs’ memorandum (IEM) with the Secretariat for Industrial
Assistance (SIA) for setting up a new paper unit or substantial expansion
of the existing unit in permissible location.

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 Company Profile
RPML is large paper manufacturing enterprise in U.P. RPML was
founded by Shri Pramod Agarwal in the year 1985, and started the
production from the year 1987, ushering in the paper indigenous paper
industry in U.P., a dream that have been more than realized with a well
recognized record of performance. It has been earning profit
continuously since 1994-95.

At the beginning Time Company was Pvt. Ltd. and in the year 1994 it
converted into a public (Ltd.) company.

The site of unit is well located, excellent connectivity by road and rail
transport makes availability of raw material and inputs easy and also
brings finished products markets in close proximity.

The company is professionally managed by well-qualified, highly

motivated and experienced personnel. It employs around 500 people
including skilled semiskilled and unskilled workforce. The company has
built a residential colony for its employees which have 36 livable units
for its executive and 100 units for workers.

RPML manufactures over 10 products under 4 major products group and

caters to core sectors of the Indian economy viz, News paper printing
Organization, Publication and Industry etc.

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The wide network of RPML is, Ram Singh Steels Pvt. Ltd, Harsal Vikas
Sasthan, Ram Fin Fortune Pvt. Ltd, Rama Institute of Higher Education
and Ram Filling Station. It Services its customers and provides them
with suitable product, system and Service efficiently and at competitive
prices.

The quality and reliability of its products due to emphasis on design and
manufacturing to international standards by acquiring and adopting
some of the best technologies from leading company in the India,
together with technologies developed in its own R&D centers.

RPML has acquired certification to quality management system ISO

9001:2000, and environmental management system ISO 14001. 6 MW
Bio- mass based co-generation Project of the company had been
registered with United Nations Framework Convention on Climate
Change (UNFCCC) under Kyoto Protocol for getting the benefit of
carbon credits under clean Development mechanism (CDM)

In the year 2007 of September Company established a power plant and

generate electricity power. By it company is capable to manufactures
paper on lower cost in compare to competitor firms. For reducing the
accident at machine and fraud, company prohibited the cell phone in to
the mill area.

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 Mission
To celebrate all things paper – the wonder and the legacy.

Vision
Establish leadership in whatever we do at home and abroad.

Goal
Achieve continued growth through sustained innovation for total
customer satisfaction and fair return to all other stakeholders. Meet this
objective by producing quality products at optimum cost and marketing
them at reasonable price.

Guiding Principle
Toil and sweat to manage our resources of men, material and money in
and integrated efficient and economic manner. Earn profit keeping in
view commitment to social responsibility and environmental concern.

Quality Perspective
Make quality a way of life.

Work Culture
Experience: “work is life, life is work”

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 Competitors

 Mohit Paper Mills Ltd.

 Hemkund Paper Mills
 Baddri Kehdar Paper Mills
 Charu Paper Mills Pvt. Ltd.

Subsidiary Firms of the Company

 Ram Singh Steels Pvt. Ltd. (Kotdwar)

 Harshal Vikas Sansthan (Kiratpur)
 Ram Fin Fortune Pvt. Ltd.
 Rama Filling Station
 Rama Institute of Higher Education

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ORGANIZATION STRUCTURE

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Finance Management Structure

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BOARD OF DIRECTORS

Shri Pramod Agarwal : Chairman & Managing Director

Shri Arun Goel : Executive Director
Shri Amar Mittal : Director
Shri Prabhat Agarwal : Director
Shri H. S. Bhim Rao : Director

MANAGERS
Mr. Sanjeev Kumar Dixit : Personnel Manager
Mr. Pankaj Mishra : Finance Manager
Mr. Amit Agarwal : Marketing Manager
Mr. Vikas Rastogi : Production Manager (Unit-I)
Mr. U.P Srivastava : Production Manager (Unit-II)
Mr. Bhanupratap Singh : Production Manager (Unit-III)
Mr. Sunil Singh : Production Manager (Unit-IV)

COMPANY SCRETARY
Shri Pankaj Misra

AUDITORS
Shiam & Co.
Chartered Accountant
Muzaffarnagar (U.P.)

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 Products
Unit –I:
A multi-cylinder mould plant to manufacture coated/ uncoated varieties
of duplex board of medium quality. This is used to make small
packaging / small cartoons used by pharmaceuticals, soaps, paste,
apparels, tea and other similar industries.

Products GSM
LWC Duplex Board 230-410
LWC Premium Duplex Board 230-410

Unit – II:
A fouddinier Wire part MF machine manufactures writing/ Printing,
News print and craft grades of paper.

Products GSM Brightness

Deluxe Cream Wove 50-80 60+
Super Deluxe Cream Wove 54-80 66+
Prime Cream Wove 54-80 72+
Super Deluxe Newsprint 48+ 60+

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Unit – III:
A high speed MF machine manufacture Newsprint and also capable of
making other varieties of paper such as writing/ printing paper. The
plant has been imported from Germany through Bon Engineering
Sweden. It is a second hand refurnished machine.

Products GSM Brightness

Standard Newsprint 48 45+
Deluxe Newsprint 48 52+

Unit – IV:
A new established plant manufactures the tissue and poster paper. The
uses of tissue paper in various type product packaging.

Products GSM
Tissue Paper 40+
Poster Paper 51+

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 Social Responsibility and Environmental
Responsibility

While discharging commercial functions, the company has not forgotten

its responsibilities towards society and environment. The company is
virtually a zero discharge unit. All effluent is fully treated and entire
water is recycled and re-consumed. A waste in the shape of sludge
having left out fibers in converted into Millboard and sold in the market
that yields a good price for waste. Millboard manufacturing equipments
have been installed for this conversion.

The company’s endeavor is to make wealth from waste and proud to be

associated with the national cause of conserving its forest reserve and
making environment green and clean by consuming waste paper.

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 Address of the Company

REGISTERED OFFICE & WORKS

4th KM Stone, Najibabad Road,
Kiratpur-246731
Dist. Bijnor (U.P.)
e-mail – [email protected]
Website – www.ramapaper.com

CORPORATE OFFICE
12/22 IInd Floor, East Patel Nagar
New Delhi – 110008
E-mail – [email protected]

REGISTRAR & TRANSFER AGENT

Indus Portfolio (P) Limited
ISIN INE425E01013
G-65, Bali Nagar, New Delhi
SEBI Registration No. INR000003845

COST AUDITORS
Aseem Jain & Asso.
Cost Accountant, New Delhi

BANKERS
Bank of Baroda
State Bank of India
Punjab National Bank

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 Objective of the Study
Study of the working capital management is important because unless
the working capital in managed effectively, monitored periodically at
regular interval to remove bottlenecks if any company cannot earn
profits and increase its turnover. With this primary objective of the study
the following further objectives are framed for a depth analysis

1. To study the working capital management of RPML.

2. To study the optimum level of current assets and current liabilities
at the company.
3. To study the liquidity position through various working capital
related ratios.
4. To study the working capital components such as Receivables
accounts, Cash management, Inventory position.
5. To study the way and means of working capital finance of the
RPML.
6. To estimate the working capital requirement of RPML.
7. To study the operating and cash Cycle of the company.

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 Scope of the Study

Scope of the Study

The scope of the study is identified after that during the study is
conducted. The study of working capital is based on tools like Trend
Analysis, Ratio Analysis, Working Capital Leverage, Operating Cycle
etc. Further the study is based on last 5 years annual reports of RPML.
And even factors like Competitor’s Analysis, Industry Analysis were
not considered while preparing this project.

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24
 CONCEPT OF WORKING CAPITAL

There are two concepts of Working capital:

Gross Working capital

It refers to the firm’s investment in total current or circulating assets.
Current Assets: Current Assets are the assets which can be converted
into cash within an accounting year and include cash, short-term
securities, debtors, (accounts receivable or book debts) and stock
(inventory)

Net Working Capital

The term “Net Working Capital” has been defined in two different ways:
(i) It is the excess of current assets over current liabilities. This
is, as matter of fact, the most commonly accepted definition.
Some people define it as only the difference between current
assets and current liabilities. The former seems to be a better
definition as compared to the latter.
(ii) It is that portion of a firm’s current assets which is financed
by long-term funds.
Current Liabilities: Current Liabilities are those claims of outsiders
which are expected to mature for payment within an accounting year and
include creditors (accounts payable), bills payable, and outstanding
expenses.

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For example, a business requires investment in current assets such as
cash, accounts receivable and short-term investment etc, to the extent
of Rs. 15,000. A part of this requirement can be financed by the firm
by purchasing on credit or postponing certain payments or, in other
words, by creation of current liabilities such as accounts payable,
outstanding expenses, etc. Suppose the amount of current liabilities
comes to Rs. 10,000. This means the business still needs Rs. 5,000 for
its working purposes. This amount will have to be financed from
long-term sources of funds as indicated in the in the definition of Net
Working Capital given above.

It may be emphasized that both gross and net concepts of working

capital are equally important for the efficient management of working
capital. There is no precise way to determine the exact amount of
gross or net working capital for any firm. The data and problems of
each company should be analyzed to determine the amount of
working capital.

NEED FOR WORKING CAPITAL

It has already been stated on the above that the basic objective of
financial management is to maximize shareholder’s wealth. This is
possible only when the company earns sufficient profit. The amount
of such profit largely depends upon the magnitude of sales. However,
sales do not convert into cash instantaneously. There is always a time
gap between the sale of goods and receipt of cash. Working Capital is

26
 required for this period in order to sustain the sales activity. In case
adequate working capital is not available for this period, the company
will not be in a position to purchase raw materials, pay wages and
other expenses required for manufacturing the goods to be sold. For
that organization maintain its operating cycle.

TYPES OF WORKING CAPITAL

Permanent Working Capital

This refers to that minimum amount of investment in all current assets

which is required at all times to carry out minimum level of business
activities. In other words, it represents the current assets required on a
continuing basis over the entire year. Tandon committee has referred to
this type of working capital as “core current assets”.

The following are the characteristic of this type of working capital:

1. Amount of permanent working capital remains in the business in
one form or another. This is particularly important form the point
of view of financing. The suppliers of such working capital should
not expect its return during the life-time of the firm.
2. It also grows with the size of the business. In other words, greater
the size of the business, greater is the amount of such working
capital and vice versa.

27
 Permanent working capital is permanently needed for the business
and therefore it should be financed out of long-term funds. This is the
reason why the current ratio has to be substantially more than ‘1’ as
explained in the Chapter “Ratio Analysis.”

Temporary Working Capital

The amount of such working capital keeps on fluctuating from time to
time on the basis of business activities. In other words, it represents
additional current assets required at different times during the operation
year. For example, extra inventory has to be maintained to support sales
during peak sales period. Similarly, receivable also increase and must be
financed during period of high sales. On the other hand investment in
inventories, receivables, etc. will decrease in periods of depression.

Suppliers of temporary working capital can expect its return during off
season when it is not required by the firm. Hence, temporary working
capital is generally financed from short-term source of finance such as
bank credit.
Working capital is fixed over a period of time, while temporary working
capital is fluctuating. The permanent working capital is increasing over a
period of time with increase in the level of business activity. This
happens in case of a growing company.

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Permanent & Temporary working capital

Permanent & Temporary working capital

(If the size of firm increases)

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 h
s
a
IP
(i)

C
W
(ii)
(iii)
(iv)
(v)
Operating Cycle
From the above, it is clear that working capital is required because of
the time gap between the sales and their actual realization in cash.
This time gap is technically termed as “operation cycle” of the
business.
In case of a manufacturing company, the operation cycle is the length
of time necessary to complete the following cycle of events:
Conversion of cash into raw material
Conversion of raw materials into work-in-process
Conversion of work-in-process into finished goods
Conversion of finished goods into accounts receivable, and
Conversion of accounts receivable into cash.
This cycle will be repeated again and again
The operation cycle of manufacturing business can be shown as in the
following chart.

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 s
IC
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A
ry
o
a
iv
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e
R
lth
b
In the case of a “Trading firm” the operating cycle will include the
length of time required to convert
(i)
(ii)
(iii)

(ii)
Cash into inventories,
Inventories into account receivable,
Accounts receivable into cash

In the case of a “Financing firm” the operation cycle includes the

length of time taken for
(i) Conversion of cash into debtors
Conversion of debtors into cash

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 a
C
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Management of different components of
Working capital
Working Capital Management involves management of different
components of working capital such as cash, inventories, accounts
receivable, creditors, etc. A brief description follows regarding the
various issues involved in the management of each of the above
components of working capital.

MANAGEMENT OF CASH
It is the duty of the Finance Manager to provide adequate cash to all
segments of the organization. He has also to ensure that no funds are
blocked in idle cash this will involve cost in terms of interest to the
business. A sound cash management scheme, therefore, maintains the
balance between the twin objectives of liquidity and cost

Cash Management Models

Several types of cash management models have been recently designed
to help in determining optimum cash balance. These models are

32
interesting and are beginning to be used in practice. Two of such models
are being given below:

(1) Baumol Model

This model was suggested by William J. Baumol. It is similar to one use
for determination of economic order quantity, explained later in the

chapter. According to this model, optimum cash level is that level of

cash where the carrying cost and transactions costs are the minimum.
Carrying Costs
This refers to the cost of holding cash, namely, the interest foregone on
marketable securities. They may also be termed as opportunity cost of
keeping cash balance.
Transaction Costs
This refers to the cost involved in getting the marketable securities
converted into cash. This happens when the firm falls short of cash and
has to sell the securities resulting in clerical, brokerage, registration and
other costs.
There is an inverse relationship between the two costs. When one
increases, the other decreases. Hence, optimum cash level will be at that
point where these two costs are equal.
Thus, the optimum cash balance is Rs. 15,000. The average cash balance
will be taken at Rs. 7,500 (i.e., 15,000/2). In other words, the firm
should make four (i.e. 60,000/15000) transactions regarding sales of

33
marketable securities for conversion into cash during the month. This
can be verified as follows:
NO. of Conversion Average Transactio Opportunit Total
Transactio of cash n cost y Cost Cost
n securities Balance
Rs. Rs. Rs. Rs. Rs.
2 30,000 15,000 20 75 95
4 15,000 7,500 40 37.5 77.5
6 10,000 5,000 60 25 85

The above table shows that the total cost of holding cash is the least
when the cash balance is kept at Rs. 15,000. This may, therefore, be
taken as the optimum cash balance. As will be seen from the table, the
transaction cast and opportunity cast are just equal to each other at this
level.

There are two limitations of the optimum cash model given in the
preceding pages:
(i) Cash payments are assumed to be steady over the period of time
specified. When the cash payment becomes lumpy, it may be
appropriate to reduce the period for which calculations are made so that
expenditures during the period are relatively steady;
(ii) Cash payments are seldom predictable. Hence, the model may not
give 100% correct results.

(2) Miller-orr Model

34
Baumol model is not suitable in those circumstances when the demand
for cash is not steady and cannot be known in advance. Miller-Orr
Model helps in determining the optimum level of cash in such
circumstances. It deals with cash management problems under the
assumption of stochastic or random cash flows by laying down control
limits for cash valances. These limits consist of an upper limit (h), lower
limit (o) and return point (z). When cash balance reaches the upper limit,
a transfer of cash equal to “h-z” is affected to marketable securities.
When it touches the lower limit, a transfer equal to “z-o” from
marketable securities to cash is made. No transaction between cash and

marketable securities to cash is made during the period when the cash
balance stays between the high and low limits.
When cash valance reaches the upper limit, an amount equal to “h-z” is
invested in the marketable securities and cash balance comes down to

“z” level. When cash balance touches the lower limit marketable
securities of the value of “z-o” are sold and the cash balance again goes
up to ‘z’ level.
The upper and lower limits are set on the basis of opportunity cost of
holding cash, degree of likely fluctuation in cash balances and the fixed
costs associated with securities transactions.
The optimal value of z, the return point for securities transactions, can
be determined by the following formula:

3b
________
A= 3
35
 4t

Where
b = fixed cost associated with a security transaction
A = variance of daily net cash flows
t = interest rate per day on marketable securities
The optimal value of his simply 3z.
With these control limits set, the Miller-Orr Model of cash management
minimizes the total costs (fixed and opportunity) of cash management.
Since the method assumes that cash flows are random, the average cash

balance cannot exactly be determined in advance. However, it is

approximately (z+h) 3, which will be higher than that suggested by
Baumol’s EOQ Model.

The Miller-Orr Model assumes the transfer cost as independent of the

amount of transfer and the direction. It also assumes that net cash flows
are completely stochastic. These assumptions may not be true on many
occasions.
In general, it may be said that the cash model gives the finance manager
a bench mark for judging the optimum cash balance. It does not have to
be used as precise rule governing his behavior. The model merely
suggests what would be the optimal balance under a set of assumptions.
The actual balance may be more or less if the assumption do not hold
good entirely.

36
37
 MANAGEMENT OF INVENTORIES

Inventories are goods held for eventual sale by a firm. Inventories are
thus one of the major elements which help the firm in obtaining the
desired level of sales.

KINDS OF INVENTORIES

Inventories can be classified into three categories:

(i) Raw Materials: These are goods, which have not yet been
committed to production in a manufacturing firm. They may
consist of basic raw materials or finished components.

(ii) Work-in-process: This includes those materials which have been

committed to production process but have not yet been completed.

(iii) Finished Goods: These are completed products awaiting sale. They
are the final output of the production process in a manufacturing
firm. In case of wholesalers and retailers, they are generally
referred to as merchandise inventory.

Objective of Inventory Management

(i) Ensuring a continuous supply of materials to production

department facilitation uninterrupted production.
(ii) Maintaining sufficient stock of raw material in period of
short supply.

38
 (iii) Maintaining sufficient stock of finished goods for smooth
sales operations.
(iv) Minimizing the carrying costs.

Techniques of inventory management

Effective inventory management required and effective control over
inventories. Inventory control refers to a system which ensures supply of
required quantity and quality or inventories at the required time and at
the same time prevent unnecessary investment in inventories. The
techniques of inventory control/inventory management are as follows:

1. Determination of Economic Order Quantity (EOQ)

Determination of the quantity for which the order should be placed is

one of the important problems concerned with efficient inventory
management. Economic Order Quantity refers to the size of the order
which gives maximum economy in purchasing any item of raw material
or finished product. It is fixed mainly after taking into account the
following costs.

(i) Ordering Cost: It is the cost of placing an order and securing the
supplies. It varies from time to time depending upon the number of
orders placed and the number of items ordered. The more frequently the
orders are placed, and fewer the quantities purchased on each order, the
greater will be the ordering cost and vice versa.

39
(ii) Inventory Carrying Cost: It is the cost of keeping items in stock.
It includes interest on investment, obsolescence losses, store-keeping
cost, insurance premium, etc. The large the value of inventory, the
higher will be the inventory carrying cost and vice versa.

The former cost may be referred as the “cost of acquiring” whiles the
latter as the “cost of holding” inventory. The cost of acquiring decreases
while the cost of holding increases with every increase in the quantity of
purchase lot. A balance is, therefore, struck between the two opposing
factors and the economic ordering quantity is determined at a level for
which aggregate of two costs is the minimum.
Formula:
1/2
Q= 2U x P
S

Q = Economic Ordering Quantity

U = Quantity (units) purchased in a year (month)
P = Cost of placing an order
S = Annual (monthly) cost of storage of one unit.

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 ABC Analysis

ABC analysis is a technique of exercising selective control over

inventory items. The technique is based on this assumption that a firm
should not exercise the same degree of control on items which are more
costly as compared to those items which are less costly. According to
this approach, the inventory items are divided into three categories- A,
B, C.

Category A may include more costly items, while category B may

consist of less costly items and category C of the least costly items.
Thus, A, B, C analysis concentrates on important items and therefore is
also known control by importance and exception (CIE). This approach is
also known as ‘proportional value analysis” (PVA), since the items are
classified in importance of their relative value.

Though no define procedure can be laid down for classifying the

inventories in A,B,C categories as this will depend upon a large number
of factors, such as nature and varieties of items, specific requirements of
the business, etc., yet the following method is generally adopted:
(i) The quality of each material expected to be used in a period
is estimated;
(ii) The value of each of the above items of materials is found
out by multiplying the quantity of each item with the price;
(iii) The items are then rearranged in the descending order of their
value irrespective to their quantities;
(iv) A running total of all the values will then be taken;
(v) It will be found that a small number of a first few items may
amount to a large percentage of the total value of the items.
The management ten will have to take a decision as to the
41
 percentages of total value or the total number of items which
have to be covered by A, B, and C categories.

Category % of total value % of total quantity

A 70 10
B 25 35
C 5 55

While exercising control over stores, items of category

A should be given the utmost attention. Their levels of stock should be
strictly controlled. In case of items category B, ordinary stores routine
should be observed but the rules regarding levels of stock may not be so
strictly adhered to as those in category A. items of category C may be
procedure may be dispersed with. However, stock should be kept under
some observation so that fresh supplies may be obtained in time. Order
for these materials may also be given in bulk to economize on ordering
and handling costs.

42
 MANAGEMETN OF ACCOUNTS RRECEIVABLE

Accounts receivable (also popularly termed as receivables) constitute a

significant portion of the total current assets of the business next after
inventories. They are a direct consequence of “trade credit” which has
become an essential marketing tool in modern business.

When a firm sells goods for cash, payments are received immediately
and, therefore, no receivables are created. However, when a firm sells
goods or services on credit, the payments are postponed to future dates
and receivables are created. Usually, the credit sales are made on open
account which means that no formal acknowledgements of debt
obligations are taken from the buyers. The only documents evidencing
the same are purchase order, shipping invoice or even a billing
statement. The policy of open account sales facilities business
transactions and reduces to a great extent the paper work required in
connection with credit sales.

Types of customers on the basis of payment

The firm may categories its customers, at least, in the following three
categories:
(a) Good Accounts: that is, financially strong customers
(b) Bad Accounts: that is, financially very weak, high risk customers
(c) Marginal Accounts: that is, customers with moderate financial health
and risk (falling between good and had accounts).

43
 Research
Methodology

44
Introduction
Research Methodology is a way to systematically solve the research
problem. It may be understood as a science of studying new research is
done systematically. In that various steps, those are generally adopted by
a researcher in studying his problem along with the logic behind them.

It is important for research to know not only the research method but
also know methodology. The Procedures by which researchers go about
their work of describing, explaining and predicting phenomenon are
called methodology. Methods comprise the procedures used for
generating, collection and evaluating data. All this means that tit is
necessary for the researcher to design his methodology for his problem
as the same may differ from problem.
Data collection is important step in any project and success of any
project will be largely depend upon now much accurate you will be able
to collect and how much time, money and effort will be required to
collect and necessary data, this is also important step.

Types of Data Collection

There are two types of data collection methods available.
1. Primary data collection
2. Secondary data collection

45
2. Secondary data collection: The secondary data are those which
are already collected and stored. Secondary data easily get those
secondary data from records, journals, annual reports of the company
etc. It will save time, money and efforts to collect the data. Secondary
data also made available through trade magazines, balance sheet, books
etc.
The project is based on primary data collected through personal
interview of head of Account Department, Head of Marketing
department and other concerned staff member of finance department.
But primary data collection had limitations such as matter confidential
information thus project is based on secondary information collected
through six year annual report of the company, supported by various
books and internet sides. The data collection was aimed at study of
working capital management of the company.
Project is based on
1. Annual report of RPML – 2004-05
2. Annual report of RPML – 2005-06
3. Annual report of RPML – 2006-07
4. Annual report of RPML – 2007-08
5. Annual report of RPML – 2008-09
6. Annual report of RPML – 2009-10

46
 Financial
Highlights &
Analysis

47
 Share capital of the company
Pref. Share Rs.100 each
Equity Share Rs.10 each
Financial year Types of share Capital in Rs. No. of new issue
share

2004-05 Pref. share 5,00,00,000 --------

Equity share 5,08,14,000 --------

2005-06 Pref. share 5,00,00,000 --------

Equity share 7,58,14,000 2,50,00,000

2006-07 Pref. share 5,00,00,000 --------

Equity share 9,66,47,330 20,83,333

2007-08 Pref. share 5,00,00,000 --------

Equity share 9,66,47,330 --------

2008-09 Pref. share 5,00,00,000 --------

Equity share 9,66,47,330 --------

2009-10 Pref. share 5,00,00,000 --------

Equity share 9,66,47,330 --------
120000000

100000000 96647330 96647330 96647330 96647330

80000000 75814000

60000000 50000000 50000000 50000000 50000000 50000000

40000000

20000000

0
2005-06 2006-07 2007-08 2008-09 2009-10

Pref. share capital Column1

48
 Sale of the company
Sales in Rs.

FINANCIAL YEAR SALES GROWTH in %

2004-05 69,53,73,871 13.40

2005-06 76,69,76,308 10.30

2006-07 83,90,31,175 9.40

2007-08 84,50,05,060 .72

2008-09 1,07,00,67,988 26.63

2009-10 1,09,10,08,789 1.96

120

100

80

Axis Title 60 Column2

40

20

0
2005-06 2006-07 2007-08 2008-09 2009-10

49
 Profit of the Company
Profit in Rs.

Financial Year Profit before tax Profit after tax

2004-05 6,03,39,810 4,43,98,810
2005-06 8,50,57,450 5,52,01,850
2006-07 8,12,25,101 3,77,94,074
2007-08 6,53,52,432 3,05,11,398
2008-09 4,11,92,266 2,90,35,592
2009-10 7,21,740 1,03,740

5
Profit befor tax
4 Column1

0
2005-06 2006-07 2007-08 2008-09 2009-10

50
 Dividend Payment

Financial Year Shares Payment EPS

2004-05 Pref. Share NO

Equity Share NO 8.74

2005-06 Pref. Share 6%

Equity Share NO 9.42

2006-07 Pref. Share 6%

Equity Share 5% 4.49

2007-08 Pref. Share NO

Equity Share NO 3.16

2008-09 Pref. Share NO

Equity Share NO 3.00

2009-10 Pref. Share NO

Equity Share NO 3.09

51
 Fixed Assets
Financial Year Assets

2004-05 27,20,29,372

2005-06 25,05,26,311

2006-07 54,78,83,441

2007-08 50,09,61,901

2008-09 60,33,77,919

2009-10 89,64,41,365

90

80

70

60

50
Column2
40

30

20

10

0
2005-06 2006-07 2007-08 2008-09 2009-10

52
 DATA ANALYSIS
&
INTERPRETATIONS

53
Working Capital
Analysis

54
Working capital level:

The consideration of the level investment in current assets should avoid

two danger points excessive and inadequate investment in current assets.
Investment in current assets should be just adequate, not more or less, to
the need of the business firm. Excessive investment in current assets
should be avoided because it impairs the firm’s profitability, as idle
investment earns nothing. On the other hand inadequate amount of
working capital can be threatened solvency of the firms because of its
inability to meet its current obligation. It should be realized that the
working capital need of the firms may be fluctuation with changing
business activity. This may cause excess or shortage of working capital
frequently. The management should be prompt to initiate an action and
correct imbalance.

55
 Size of Working Capital

(In Lac)
Particular 2005-06 2006-07 2007-08 2008-09 2009-10
A Current
Assets
Inventories 690.45 909.38 461.50 891.18 875.76
Sundry Debtors 1645.67 2064.02 3125.41 3002.97 2951.04
Cash & Bank
20.67 52.80 72.45 74.26 42.50
Balance
Other assets 83.46 89.43 97.23 52.53 57.33
Loan& Advance 104.34 382.92 376.18 511.33 774.58
Total of A
2544.59 3498.55 4132.77 4532.27 4701.21
(Gross W.C)
B Current
Liabilities
Current
739.54 872.35 1257.02 1501.70 1694.60
Liabilities
Provision 105.95 170.91 77.47 50.78 1.11
Total B 845.49 1043.26 1334.49 1552.48 1695.71
Net W.C (A-B) 1699.10 2455.29 2798.28 2979.79 3005.50

Working Capital Trend Analysis

In working capital analysis directions at changes over a period of time is
of crucial importance. Working capital is one of the important fields of
management. It is therefore very essential for an analyst to make a study
about the trend and direction of working capital over a period of time.
Such analysis enables as to study the upward and download trend in
current assets and current liabilities and its effect on the working capital
position.

56
In the words of S.P. Gupta, The trend is very commonly used in day-
to-day conversion trend, also called secular or long term need is the
basic tendency of population, sales, income, current assets and current
liabilities to grow or decline over a period of time.
According to R. C.galeziem “The trend is defined as smooth
irreversible movement in the series. It can be increasing or decreasing.
Emphasizing the importance of working capital trend, Man Mohan and
Goel have pointed out that analysis of working capital trends provide as
base to judge whether the practice and privilege policy of the
management with regard to working capital is good enough or an
important is to be made in managing the working capital funds.
Further, any one trend by itself is not very informative and therefore
comparison with. Illustrated their ideas in these words, an upwards
trends coupled with downward trend or sells, accompanied by marked
increase in plant investment especially if the increase in planning
investment by fixed interest obligation.

Working Capital Size

In Crore

Year 2005-06 2006-07 2007-08 2008-09 2009-10

Net W.C 16.99 24.55 27.98 29.79 30.05
(A-B)
W.C 100 145 165 175 177
Indices

57
 Working Capital Indices
200

180 175 177

165
160
145
140

120
100
100

80

60

40

20

0
2005-06 2006-07 2007-08 2008-09 2009-10

Observations:
It was observed that working capital is show continues growth each
year. It was observed that company’s in the year 2009-10 current assets
increased by around 4% and current liabilities increased only by 9%
which affect as working capital increased by 1%. In the year 2006-07 net
working capital increased to Rs. 24.55 Crore from Rs. 16.99 Crore, the
increase in working capital is close to 44.50%. While current assets
increased by 37.48% and current liabilities by 23.39%. It shows that
management is using long term funds to short term requirements. And it
has fallen to Rs. 4101 million in the year 2007 because current assets
gone up by only 12%, current liabilities grown by 35%.
58
This two together pushed down the net working capital to the present
level. The fall in working capital is a clear indication that the company is
utilizing its short terms resources with efficiency.

Current Assets
Analysis of current assets components enable one to examine in which
components the working capital fund has locked. A large tie up of fund
in inventories affect the probability of the business or the major portion
of current asset is made up cash alone, the profitability will be decreased
because cash is non-earning assets.

Components of Current Assets

In Lac

2005-06 2006-07 2007-08 2008-09 2009-10

Particular
Inventories 690.45 909.38 461.50 891.18 875.76
Sundry Debtors 1645.67 2064.02 3125.41 3002.97 2951.04
Cash & Bank
20.67 52.80 72.45 74.26 42.50
balance
Other Assets 83.46 89.43 97.23 52.53 147.44
Loan & advance 104.34 382.92 376.18 511.33 684.47
Total C.A 2544.59 3498.55 4132.77 4532.27 4701.21
Indices of C.A 100 137 162 178 185

59
Indices of Current Assets
200
185
178
180
162
160

140 137

120
100
100

80

60

40

20

0
2005-06 2006-07 2007-08 2008-09 2009-10

Composition of current assets: In %

Chart Title
80
76
70
65 66
63
60 59
Inventory
50 Debtors
Cash & Bank
40 Loan and advance
30
27 26
20 20 19
17
13.5 12
10 11
7
0 1 1.5 2 2 1
2005-06 2006-07 2007-08 2008-09 2009-10

60
Observation:
It was observed that the size of current assets is increasing with
increases in the sales. The excess of current assets is showing positive
liquidity position of the firm but it is not always good because excess
current assets then required, it may adversely affects on profitability.
Current assets include some funds investments for which company pay
interest. The balance of current assets is highly increased in year 2006-
07, because of increase in Inventory & Loan and advance. The balance
of current assets also increased in the year 2009-10, while the inventory,
Debtors cash & Bank balance reduced, but it increased with the help of
Loan and advance. Current assets components show sundry debtors are
the major part in current assets it indicates that the inefficient collection
management. Over investment in the debtor affects liquidity of firm for
that company has raised funds from other sources like short term loan
which incurred the interest.

Current Liabilities
Current liabilities mean the liabilities which have to pay in current year.
It includes sundry Creditors means supplier whose payment is due but
not paid yet, thus creditors called as current liabilities. Current liabilities
also include short term loan and provision as tax provision. Current
liabilities also included bank overdraft. For some current liabilities like –
bank overdraft and short term loan, company has to pay interest thus the
management of current liabilities has importance.

61
 Current Liabilities Size
In Lac

Particular 2005-06 2006-07 2007-08 2008-09 2009-10

Current
739.54 872.35 1257.02 1501.70 1694.60
Liabilities
Provisions 105.95 170.91 77.47 50.78 1.11
Total of
845.49 1043.26 1334.49 1552.48 1695.71
C.L
Indices of
100 123 158 184 200
C.L

Indices of Current Liabilities

250

200
200
184

158
150
123

100
100

50

0
2005-06 2006-07 2007-08 2008-09 2009-10

62
Observation:
Current liabilities show continues growth each year because company
creates the credit in the market by good transaction. To get maximum
credit from suppliers which are profitable to the company it reduces the
need of working capital of firm. AS a current liability increase in the
year 2006-07 by 23.39%, 27% in the year 2007-08 and in the year 2009-
10 it increase 9.74%. But company enjoyed over creditors which may
include indirect cost of credit terms.

Change in working Capital

There are so many reasons of changes in working capital as follow:
1. Changes in Sales & Operating expenses: The changes in sales and
operating expenses may be due to three reasons
(a) There may be long run trend of change e.g. The price of row
material say oil may constantly raise necessity the holding of large
inventory.
(b) Cyclical changes in economy dealing to ups and downs in business
activity will influence the level of working capital both permanent
and temporary.
(c) Changes in seasonality in sales activities.

63
2. Policy Changes:

The second major case of changes in the level of working capital is

because of policy changes initiated by management .The term current
assets policy may be defined as the relationship between current assets
and sales volume.

3. Technology Changes:
The third major point if changes in working capital are changes in
technology because changes in technology to install that technology in
our business more working capital is required.
A change in operating expenses rise of full will have similar effects on
the level of working following working capital statement is prepared on
the base of balance sheet of last two year.

64
 Statement of Change in Working Capital
In Lac
Particular 2008-09 2009-10 Increase Decrease
Current Assets
Inventories 891.18 875.76 15.42
Sundry Debtors 3002.97 2951.04 51.93
Cash & Bank
74.26 42.50 31.76
balance
Other Assets 52.53 147.44 94.91
Loan & advance 511.33 684.47 173.14
Total A 4532.27 4701.21
Current Liabilities
Current liabilities 1501.70 1694.60 192.90
Provision 50.78 1.11 49.67
Total B 1552.48 1695.71
W.C (Total of A-B) 2979.79 3005.50
Net increase in W.C 25.71 --- --- 25.71
Total 3005.50 3005.50 317.72 317.72

Observation:
Working capital in the year 2009 to 2010 because
1. Sales increased by around 2%, where cost of raw material purchase
by 6% and manufacturing expanses reduced by 3.75%
2. Cost of material and manufacturing expanses increased because of
inflation, which was 14.86% in Feb 2010 increased from 11.52%
in 2009.

65
 Operating cycle
 Gross Operating Cycle (GOC)
The firm’s gross operating cycle (GOC) can be determined as inventory
conversion period (ICP) plus debtors’ conversion period (DCP).
Formula
Gross operating = Inventory conversion + Debtors conversion
Cycle period period

GOC = ICP + DCP

 Inventory conversion period: ICP is the sum of raw material

conversion period (RMCP), work-in-process conversion period
(WIPCP) and finished goods conversion period (FGCP)
ICP = RMCP + WIPCP + FGCP

RMCP = RMI x 360 WIPCP= WIPI x 360

RMC COP

FGCP= FGI x 360

CGS
RMI –Raw material inventory RMC – Raw material
consumption
WIPI – Work-in-process COP – Cost of production
inventory
FGI – Finished goods inventory CGS – Cost of goods sold

66
  Debtors (receivable) conversion period: DCP is the average time
taken to convert debtors into cash. DCP represents the average
collection period.

Debtors conversion period = Debtors x 360

Credit sales

 Creditors (payables) deferral period (CDP)

CDP is the average time taken by the firm in paying its suppliers
(creditors).

Creditors deferral period = Creditors x 360

Credit purchases

CASH CONVERSION OR NET OPERATION CYCLE

Net operating cycle (NOC) is the difference between gross operating

cycle and payable deferral period.

Net Operating = Gross operating – Creditors deferral

Cycle cycle period

NOC = GOC - CDP

Calculation of operating cycle

67
To calculate the operating cycle of RPML used last 5 years data.
Operating cycle of the RPML vary year to year as changes in policy of
management about credit policy and operating control.
Current Projected
Year
Gross Operating cycle
1.Inventory
(i) Raw Material 68 60
(ii) WIP 22 25
(iii) Finished Goods 38 128 54 139
2. Debtors Conversion 43 47
Period
3. Gross Operating Cycle 171 186
(1+2)
4. Payment Deferral Period 35 38
Net Operating Cycle (3-4) 136 148

68
 Working Capital Leverage
One of the important objectives of working capital is by maintaining the
optimum level of investment in current assets and by reducing the level
of investment in current assets and by reducing the level of investment
in current liabilities the company can minimize the investment in the
working capital thereby improvement in return on capital employed is
achieved. The term working capital leverage refers to the impact of level
of working capital on company’s profitability. The working capital
management should improve the productivity of investment the current
assets and ultimately it will increase the return on capital employed.
Higher level of investment in current assets than is actually required
means increase in the cost of interest charges on short term loans and
working capital finance raised from banks etc. and will result in lower
return on capital employed and vice versa. Working capital leverage
measures the responsiveness of ROCE (Return on Capital Employed) for
change in current assets. It is measures by applying the following
formula.
Working capital leverage = % change in ROCE
% changes in current assets

Return on capital employed = EBIT

Total assets

The working capital reflects the sensitivity of return on capital employed

to changes in level of current assets. Current assets leverage would be
less in the case of capital intensive capital employed is same working
capital leverage expresses the relation of efficiency of working
management with the profitability of company.

69
 Calculation of working leverages

Year 2005-06 2006-07 2007-08 2008-09 2009-10

ROCE % 14.34 8.92 5.86 3.17 3.54

% change in ROCE 2.30 -5.42 -3.06 -2.69 0.37

% change in C.A 11.19 37.49 18.13 9.67 3.73

W.C leverage % 20.55 -14.45 -16.87 -27.81 9.92

Working capital leverage

30

20.55
20

9.92
10

0
2005-06 2006-07 2007-08 2008-09 2009-10

-10

-14.45
-20 -16.87

-30 -27.81

-40

70
Observations:

Working capital leverage of the company has increased in the year 2009-
10 as compare to the year 2008-09. Increase in working capital shows
the effective current assets management. From the year 2005-06 to Year
2009-10 the current assets has increased continuously by high rate of
11%, 37%, 18%, 7% and 4% respectively. It adversely affects on ROCE,
which increase by only rate of .37% in the year 2009-10, that resulted in
push down the working capital leverage to 27.81% in the year 2008-09
and grow up 9.92 in the year 2009-10. When investment in current
assets is more than requirement that increases the cost of funds raised
from short term sources may be bank loan, which affected on
profitability of the RPML.

71
 Working
Capital Ratio
Analysis

72
 Working Capital Ratio Analysis

Introduction
Ratio analysis is the potential tool of financial statement analysis. A
ratio is defined as the indicated quotient of two mathematical
expressions and as the relationship between two or more things. The
absolute figures reported in the financial statement do not provide
meaningful understanding of the performance and financial position of
the firm. Ratio helps to summaries large quantities of financial data and
to make qualitative judgment of the firm’s financial performance.

Role of Ratio Analysis

Ratio analysis helps to appraise the firms in the term of there

profitability and efficiency of performance, either individually or in
relation to other firms in same industry. Ratio analysis is one of the best
possible techniques available to management to impart the basic
function like planning and control. As future is closely related to the
immediately past, ratio calculated on the basis historical financial data
may be of good assistance to predict the future. E.g. on the basis of
inventory turnover ratio or debtors turnover ratio in the past, the level of
inventory and debtors can be easily ascertained for any given amount of
sales. Similarly, the ratio analysis may be able to locate the point out the
various arias which need the management attention in order to improve
the situation. E.g. current ratio which shows a constant decline trend
may be indicate the need for further introduction of long term finance in

73
order to increase the liquidity position. As the ration analysis is
concerned with all the aspect of the firm’s financial analysis liquidity,
solvency, activity, profitability and overall performance, it enables the
interested persons to know the financial and operational characteristics
of an organization and take suitable decision.

Limitation of Ratio Analysis

1. The basic limitation of ratio analysis is that it may be difficult to

find a basis for making the comparison.
2. Normally, the ratios are calculated on the basis of historical
financial statements. An organization for the purpose of decision
making may need the hint regarding the future happiness rather
than those in the past. The external analyst has to depend upon the
past which may not necessary to reflect financial position and
performance in future.
3. The technique of ratio analysis may prove inadequate in some
situations if there is differs in opinion regarding the interpretation
of current ratio.
4. As the ratio calculates on the basis of financial statements, the
basis limitation which is applicable to the financial statement is
equally. In the case of technique of ratio analysis also i.e. only
facts which can be expressed in financial terms are considered by
the ratio analysis.
5. The technique of ratio analysis has certain limitation of use in the
sense that it only highlights the strong or problem areas; it does not
provide any solution to rectify the problem areas.

74
 Classification of Working Capital Ratio

Working capital ratio means ratios which are related with the working
capital management e.g. current assets, current liabilities, and liquidity
ratio are classified as follows.

(a) Efficiency Ratio: The ratios compounded under this group indicate
the efficiency of the organization to use the various kinds of assets by
converting them form of sale. The ratio also called as activity ratio or
assets management ratio. As the assets basically categorized as fixed
assets and current assets and the current assets further classified
according to individual components of current assets viz. investment and
receivables or debtors or as net current assets, the important of
efficiency ratio as follow.

1. Working capital turnover ratio

2. Inventory turnover ratio
3. Receivable turnover ratio
4. Current assets turnover ratio

(b) Liquidity Ratio: The ratios compounded under this group indicate
the short term position of the organization and also indicate the
efficiency with which the working capital is being used. The most
important ratio under this group is follows.

1. Current Ratio
2. Quick Ratio
3. Absolute liquid Ratio

75
Efficiency Ratio

Working Capital Turnover Ratio: It signifies that for an amount of

sales, a relative amount of working capital is needed. If any increase in
sales contemplated working capital should be adequate and thus this
ratio helps management to maintain the adequate level of working
capital. The ratio measures the efficiency with which the working capital
is being used by a firm. It may thus compute net working capital
turnover by dividing sales by working capital.

Working capital turnover ratio = Sales +

Net working capital

Working capital turnover

Rs. in Crore.
Particular 2005-06 2006-07 2007-08 2008-09 2009-10
Sales 76.69 83.90 84.50 107.00 109.10
Net W.C 16.99 24.55 27.98 29.79 30.05
W.C Turnover 4.51 3.42 3.02 3.59 3.63

76
Chart
120

107 109.1
100

83.9 84.5
80
76.69

Sales
60 Net W.C
W.C Turnover
40

27.98 29.79 30.05

24.55
20
16.99

4.51 3.42 3.02 3.59 3.36

0
2005-06 2006-07 2007-08 2008-09 2009-10

Observations:
High working capital ratio indicates the capability of the organization to
achieve maximum sales with minimum investment in working capital.
Company’s working capital ratio shows mostly more than two, except
for the year 2005-06 because of excess of cash inventory in current
assets. In the year 2007 to 2010 the ratio was around 3 to 4, it indicates
that the capability of the company to achieve maximum sales with the
minimum investment in working capital.

Inventory Turnover Ratio: Inventory turnover ratio indicates the

efficiency of the firm in producing and selling its products. It is
calculated by dividing the cost of goods sold by average inventory.

Inventory turnover ratio = Cost of goods sold

Average Inventory

77
The average inventory is the average of opening and closing balance of
inventory in a manufacturing company like RPML, average inventory of
Raw material, WIP and finished goods is used to calculate inventory
turnover ratio.

Inventory turnover
In Crore
Particular 2005-06 2006-07 2007-08 2008-09 2009-10
Cost of goods sold 60.37 68.86 64.72 87.13 89.01
Average inventory 3.42 6.01 4.29 3.43 3.31
Inventory turnover
17.65 11.45 15.08 25.40 26.89
ratio

30
26.89
25.4
25

20
17.65
15.08
15
11.45
10

0
2005-06 2006-07 2007-08 2008-09 2009-10

Observation:

It was observed that inventory turnover ratio indicates maximum sales

achieved with the minimum investment in the inventory. As such the
78
general rule high inventory turnover ratio may not necessary indicates
the profitable situation. An organization, in order to achieve a large sales
volume may sometime sacrifice on profit, inventory ratio may not result
into high amount of profit.

Receivable Turnover Ratio:

The derivation of this ratio is made in following way

Receivable turnover ratio = Gross sales

Average account receivable

Gross sales are inclusive of excise duty and scrap sales because both may enter
into receivables by credit sales. Average receivable calculate by opening plus
closing balance divide by 2. Increasing volume of receivables without matching
increases in sales is reflected by a low receivable turnover ratio. It is indication of
showing down of the collection system or an extend line of credit being allowed
by customer organization. The later may be due to the fact that the firm is losing
out to competition. A credit manager engage in the task of granting credit or
monitoring receivable should take the hint from a falling receivable turnover ratio
use his market intelligence to find out the reason behind such failing trend.
Debtors turnover indicates the number of times debtors turnover each
year. Generally the higher the value of debtor’s turnover, the more is the
management of credit.

Debtors turnover ratio = Credit Sales

Average Debtors

Calculation of Debtors turnover ratio

In crore
Particular 2005-06 2006-07 2007-08 2008-09 2009-10

79
Credit Sales 77.44 84.78 85.09 107.19 109.71
Average Debtors 16.45 20.64 31.25 30.02 29.51
Debtors Turnover
4.70 4.10 2.72 3.57 3.71
Ratio

Debtors Turnover Ratio

5
4.7
4.5
4.1
4
3.71
3.57
3.5

3 2.72
2.5

1.5

0.5

0
2005-06 2006-07 2007-08 2008-09 2009-10

Observation:
It is observed from debtor turnover ratio that debtors turned around the
sales were less than 4.25 times. The actual collection period was more
than normal collection period allowed to customer. It concludes that
over investment in the debtors which adversely affect on requirement of
the working capital finance and cost of such finance.

Current Assets Turnover Ratio:

80
Current assets turnover ratio is calculate to know the firms efficiency of
utilizing the current assets. This ratio includes the efficiency with which
current assets turn into sales. A higher ratio implies a more efficient use
of funds thus high turnover ratio indicate to reduced the lock up of funds
in current assets. An analysis of this ratio over a period of time reflects
working capital management of a firm.

Current assets turnover ratio = Sales

Current Assets

Calculation of Current Assets Turnover Ratio

(In Crore)
Particular 2005-06 2006-07 2007-08 2008-09 2009-10
Sales 76.69 83.90 84.50 107.00 109.10
Current Assets 25.44 34.98 41.32 45.32 47.01
C.A. Turnover
3.01 2.39 2.04 2.36 2.32
Ratio

Current Assets Turnover Raito

3.5
3.01
3
2.5 2.39 2.36 2.32
2.04
2
1.5
1
0.5
0
2005-06 2006-07 2007-08 2008-09 2009-10

Column3

Observation:

81
It was observed that currents turnover ratio does not indicate any trend
over the period of time. Turnover ratio was 3.01 in the year 2005-06. It
decreased in the year 2006-07 and 2007-08, because of high cash
balance and loan & advance. Cash did not help to increase in sales
volume, as cash is non earning assets. In the year 2008-09 company
increased its sales with increased investment in current assets, thus
current assets turnover increased to 2.36 from 2.04.

Liquidity Ratio

Current Ratio:
The current ratio is calculated by dividing current assets by current
liabilities.

Current Ratio = Current Assets

Current Liabilities

Current Ratio indicates the availability of current assets in rupees for

every rupee of current liability.

Current Ratio
(In crore)
Particular 2005-06 2006-07 2007-08 2008-09 2009-10
Current Assets 25.44 34.98 41.32 45.32 47.01
Current Liabilities 8.45 10.43 13.34 15.52 16.95
Current Ratio 3.01 3.35 3.09 2.92 2.77

Current Ratio

82
 4

3.5

2.5

Axis Title 2
Column2
1.5

0.5

0
2005-06 2006-07 2007-08 2008-09 2009-10
Axis Title

A higher ratio indicates that there were sufficient assets available with
the organization which can be converted in cash, without any reduction
in the value. As ideal current ratio is 2:1, where current ratio of the firm
is more than 2:1, it indicates the unnecessarily investment in the current

assets in the form of debtors and cash balance. Ratio is higher in the year
2006-07 where cash balance is more than requirement.

Quick Ratio:

Quick ratio establishes the relationship between quick or liquid assets

and liabilities. An asset is liquid if it can be converting in to cash
immediately or reasonable soon without a loss of value. Cash is the most

83
liquid assets. Other assets which are considered to be relatively liquid
and include in quick assets are debtors and bills receivable and
marketable securities. Inventories are considered as less liquid.
Inventory normally required some time for realizing into cash. Their
value also is tendency to fluctuate. The quick ratios found out by
dividing quick assets by current liabilities.

Quick Ratio = Quick Current Assets

Current Liabilities

Quick Ratio
In Crore
Particular 2005-06 2006-07 2007-08 2008-09 2009-10
Liquid Current 17.49 22.06 32.95 31.29 35.09
Assets
Current Liabilities 8.45 10.43 13.34 15.52 16.95
Quick Ratio 2.06 2.11 2.47 2.02 2.07

Quick Ratio
3

2.5

Axis Title 1.5

1 Column2

0.5

0
2005-06 2006-07 2007-08 2008-09 2009-10
Axis Title

84
Observation:
Quick ratio indicates that the company has sufficient balance for the
payment of current liabilities. The liquid ratio of 1:1 is suppose to be
standard or ideal but here ratio is more than 1:1 over the period of time.
It indicates that the firm maintains the over liquid assets than actual
requirement of such assets. In the year 2009-10 company had Rs. 2.07
cash for every 1 rupee of expenses such a policy is called conservative
policy of finance for working capital, Rs. 1.07 is the ideal investment
which affects on the cost of the fund and return on the funds.

Absolute Liquid Ratio

Even though debtors and bills receivable are considered as more liquid
then inventories, it cannot be converted in to cash immediately or in
time. Therefore while calculation of absolute liquid assets as like cash in
hand, at bank, short term marketable securities are taken into

consideration to measure the ability of the company in meeting short

term financial obligation. It calculates by absolute assets dividing by
current liabilities.

Absolute Liquid Ratio = Absolute liquid assets

Current Liabilities

85
Absolute Liquid Ratio

(Rs in Crore)
Particular 2005-06 2006-07 2007-08 2008-09 2009-10
Absolute Liquid
1.04 1.42 1.69 1.26 1.89
Assets
Current Liabilities 8.45 10.43 13.34 15.52 16.95
Absolute Liquid
.12 .14 .13 .08 .11
Ratio

Cash and Bank to Current Liabilities

18
16.95
16 15.52

14 13.34

12
10.43
10
8.45
8

2
0.12 0.14 0.13 0.08 0.11
0
2005-06 2006-07 2007-08 2008-09 2009-10

Observation:
Absolute liquid ratio indicates the availability of cash with company is
sufficient because company also has other current assets to support
current liabilities of the company. In the year 2009-10 absolute liquid
ratio increase because of company carry more cash balance, as a cash
balance is ideal assets company has to take control on such availability
of funds which is affect on cost of the funds.
86
 Working
Finance and
Capital
Estimation

87
 Working Capital Finance

Introduction:
Funds available for period of one year or less is called short term
finance. In India short term finance are used as working capital fiancé.
Two most significant short term source of finance of working capital are
trade credit and bank borrowing. Trade credit ratio of current assets is
about 40%, it is indicated by reserve Bank of India data that trade credit
has grown faster than the growth in sales. Bank borrowing is the next
source of working capital finance. The relative importance of this varies
from time to time depending on the prevailing environment. In India the
primary source of working capital financing are trade credit and short
term bank credit. After determine the level of working capital, a firm has
to consider haw it will finance. Following are source of working capital
finance.

Source of Working Capital

1. Trade credit
2. Bank Finance

Trade Credit:
Trade credit refers to the credit tht a customer gets from suppliers of
goods in the normal course of business. The buying firms do not have to
pay cash immediately for the purchase made. This deferral of payments
is a short term financing called traded credit. It is major source of
88
financing for firm. Particularly small firms are heavily depend on trade
credit as a source of finance since they find it difficult to raised funds
from banks or other sources in the capital market. Trade credit is mostly
an informal arrangement, and it granted on an open account basis. A
supplier sends goods to the buyers accepts, and thus, in effect, agree to
pay the amount due as per sales terms in the invoice. Trade credit may
take the form of bills payable. Credit terms refer to the condition under
which the supplier sells on credit to the buyer, and the buyer required
repaying the credit. Trade credit is the spontaneous of the financing. As
the volume of the firm’s purchase increase trade credit also expand. It
appears to be cost free since it does not involve explicit interest charges
but in practice, it involves implicit cost. The cost of credit may be
transferred to the buyer via the increased price of goods supplied by him.

Bank Finance for Working Capital:

Banks are main institutional source of working capital finance in India.
After the trade credit, bank credit is the most important source of
financing working capital in India. A bank considers a firms sales and
production plan and desirable requirements. The amount approved by
bank for the firm’s working capital is called credit limit. Credit limit is
the maximum funds which a firm can obtain from the banking system. In
practice banks do not lend 100% credit limit, they deduct margin money.

89
 Forms of Bank Finance
1. Term Loan
2. Overdraft
3. Cash credit
4. Purchase or discounting of bills

Term Loan:
In this case, the entire amount of assistance is disbursed at one time
only, either in cash or the company’s account. The loan may be paid
repaid in installments will charged on outstanding balance.

Overdraft:
In this case, the company is allowed to withdraw in excess of the
balance standing in its Bank account. However, a fixed limni8t is
stipulated able to overdraw the amount. Legally, overdraft is a demand
assistance given by the bank i.e. bank can ask repayment at any paint of
time.

Cash Credit:
In practice the operations in cash credit facility are similar to those of
overdraft facility except the fact that the company need not have a
formal current account. Here also a fixed limit is stipulated beyond
which the company is not able to withdraw the amount.

90
Bills Purchase / Discounted:

This form of assistance is comparatively of recent origin. This facility

enables the company to get the immediate payment against the credit
bills/ invoice raised by the company. The bank hold the bills as a
security tell the payment is made by the customer. The entire amount of
bill is not paid to the company. The company gets only the present worth
of amount of bill from of discount charges .On maturity, Bank collects
the full amount of bill from the customer.
In this case the exporter and the importer are unknown to each other.
Under these circumstances, exporter is worried as to whether he will get
goods or not. In this case, the importer applies to his Bank in his country
to open a letter of credit in favor of the exporter whereby the importers
Bank undertakes to pay the exporter or accept the bills or draft drawn by
the exporter on the exporter fulfilling the terms and condition specified
in the letter and condition specified in the letter of credit.

Working Capital Loan & Interest

Banks have been certain norms in granting working capital finance to
companies. These norms have been greatly influenced by
recommendation of various committees appointed by the Reserve Bank
of India from time to time. The norms of working capital finance
followed by Bank since mid-70 were mainly based on the
recommendations of the Tandan Committee. The Chore Committee
made further recommendations to strengthen the procedure and norms
for working capital finance by Banks.

91
 Format of Working Capital Loan and Interest
Particular Amount

W.C term loan from Bank ----------

Consortium of Bank ----------
W.C demand Loan ----------
Foreign current demand Loan ----------
Cash credit account ----------
Export packing credit ----------
Foreign bill discounted from bank ----------
Letter of credit ----------
Total ----------
Interest on W.C ----------

RPML takes huge working capital loan to fulfill the requirement of

working capital, thus company had paid huge amount of interest on
working capital loan. Company raised the funds for working capital
through terms loan from bank and working capital loan from consortium
of banks. RPML also used cash credit account but cash credit in not cost
free source of working capital because it involves implicit cost. The
supplier extending trade credit incurs cost in the form of opportunity
cost of funds invested in accounts receivables. The annual opportunity
cost of forgoing cash discount can be very high. Therefore RPML
should compare the opportunity cost of trade credit with the cost of other
sources of credit while making its financial decisions.
92
Estimation of Working Capital

After considering the various factors affecting the working capital needs,
it is necessary to forecast the working capital requirements. For this
purpose, first of all estimation of all current assets should be followed by
the estimation of all current liabilities. Difference between the estimated
Current Assets and Current Liabilities will represent the working capital
requirement.
The estimation of working capital of RPML is based on few assumptions
such a follows.

1. Gross sales will increase by 40%

2. Receivables collection period will be 90 days as per standard fixed
by company.
3. Unnecessary balance of cash may reduce by finance management.
4. For working capital finance company can use maximum trade
credit.
5. Inventory holding period can be 60 days instead of present 95
days.

93
 Conclusion

Working capital management is important aspect of financial

management. The study of working capital management of Rama Paper
Mills Ltd. has revealed that the current ratio was as per the standard
industrial practice but the liquidity position of the company should an
increasing trend. The study has been conducted on working ratio
analysis working capital leverage, working capital components which
helped the company to manage its working capital efficiency and
affectively.

1. Working capital of the company was increasing and showing

positive working capital per year. It shows good liquidity position.

2. Positive working capital indicates that company has the ability of

payment of short terms liabilities.

3. Working capital increased because of increment in the current

assets is more than increase in the current liabilities.

4. Company current assets were always more than requirement it

affect on profitability of the company.

94
5. Current assets are more than current liabilities indicate that
company used long term fund for short term requirement, when
long term funds are more costly then short term funds.

6. Current assets components shows sundry debtors were the major

part in Current assets it shows that the inefficient receivables
collection management.

7. In the year 2009-10 working capital not increased as previous

years because of the expenses as manufacturing expenses and
increases the price of raw material as increased in the inflation rate.

8. Inventory was supporting to sales, thus inventory turnover ratio

was increasing but company increased the raw material holding
period.

9. Study of the cash management of the company shows that

company lost control on cash management in the year 2009-10
were cash came from fixed deposit and Funds, company failed to
make proper investment of available cash.

95
 Limitation of the Study

Following limitations were encountered while preparing this project.

1. Limited Data: This project has completed with annual reports, it just
constitutes one part of data collection i.e. Secondary. There were
limitations for primary data collection because of confidentiality.
2. Limited Period: This project is based on six year annual reports
conclusion and recommendations are based on such limited data. The
Trend of last six year may or nay not reflect the real working capital
position of the company.
3. Limited Area: Also it was difficult to collect the data regarding the
competitors and their financial information. Industry figures were also
difficult to get.

96
 Recommendations

Recommendation can be used by the firm for the betterment increased of

the firm after study and analysis of project report on study and analysis
of working capital. I would like to recommend.

1. Company should raise funds through short term sources for short
term requirement of funds, which comparatively economical as
compare to long term funds.
2. Company should take control on debtors collection period which is
major part of current assets.
3. Company has to take control on cash balance because cash is non-
earning assets and increasing cast of funds.
4. Company should reduce the inventory holding period with use of
zero inventory concepts.

Over all, company has good liquidity position and sufficient funds to
repayment of liabilities. Company has accepted conservative financial
policy and thus maintaining more current assets. Company is increasing
sales value per year which supported to company for sustain 2 nd position
in U.P. state.

97
 BIBLIOGRAPHY

 I. M. Pandey, Financial Management, Vikas Publishing house (9th

edition)
 Dr. P. Periasamy, Working Capital Management, Himalaya
Publishing House (1st edition)
 RPML Manual

 www.ramapaper.com
 www.google.com
 www.ask.com
 www.wickipedia.com
 www.answer.com

98
 APPENDIX
ANNEXURE –ANNUAL REPORTS
Balance Sheet

Rama Paper Mills Limited Kiratpur (Bijnor)

Balance Sheet as at 31st March, 2010

Particular Current Year

Source of Funds
Share Holders Funds
Share Capital 146647330
Reserve & Surplus 258352632 404999962
Loan Fund
Secured Loans 698685318
Unsecured Loans 38974000 737659318
Deferred Tax 110424000
Total Rs. 1253083280
Application of Funds
Fixed Assets
Gross Block 1257630415

99
 Less: Depreciation 361189050
Net Block 896441365
Add: Capital Working in Prog.

Including advance 56090961 952532326

Current Assets, Loan & Advances

Inventories 87576064
Sundry Debtors 295104348
Cash & Bank Balance 4250640
Loan & Advances 83192094
470123146
Less: Current Liabilities
& provision 169572192
Net Current Assets 300550954

Total Rs. 1253083280

100
PROFIT & LOSS ACCOUNT FOR THE YEAR ENDED 31.03.2010

Particular Current Year

Income
Sales 1,09,71,71,452
Less: Excise Duty 61, 62,663 1,09,10,08,789

Other Income 2,17,134

Accretion/ (Decretion) in Stocks 44,96,243
Total. Rs. 1,09,57,22,166
Expenditure
Raw Material Consumed 58,07,65,782
Manufacturing Expenses 30,87,12,039
Staff Costs 4,09,75,267
Administrative Expenses 2,15,66,911
Selling & Distribution Expenses 2,49,42,428
Finance Charges 6,73,42,176
Depreciation

5,06,95,823
Total Rs. 1,09,50,00,426
PROFIT FOR THE YEAR 7,21,740
Paid/provision for tax
Current tax 1,11,510
Mat credit Entitlement (1,11,510)
Fringe Benefit Tax -
Deferred Tax 61800 61800
101
PROFIT AFTER TAX 1,03,740
Add: Profit brought forward from previous year 14,15,18,222
BALANCE CARRIED OVER TO BALANCE SHEET 14,16,21,962

102