CHAPTER-1

INTRODUCTION

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1.1 INTRODUCTION

The uses of funds of a concern can be divided into two parts namely long-term funds
and short term funds. The long -term investment may be tend as fixed investment. A
major part of the long-term funds is invested in the fixed assets. These fixed assets are
retained in the business to earn profits during the life of the fixed assets. To run the
business operations short term assets are also required. The term working capital is
commonly used for the capital required for day-to-day working in a business concern,
such as for purchasing raw material. For meeting day-to-day expenditure on salaries,
wages, rents rates, advertising etc. But there are much disagreement among various
financial authorities (Financiers, accountants. Businessmen and economists) as to the
exact meaning of the term working capital.

Every business whether big, medium or small, needs finance to carry on its operations
and to achieve its target. In fact, Finance is so indispensable today that its rightly said
to be the lifeblood of an enterprises. Without adequate finance, no enterprise can
possibly accomplish its objectives. So this project deals with study ing various aspects
of working capital management that is necessary to carry out the day to day operations.
The term working capital refers to that part of firm’s capital which is required for
financing short term or current asset such as cash, marketable securities, debtors and
inventories funds invested in current asset keep revolving fast and are being constantly
converted into cash and this cash flows out again in exchange for other current assets.
Hence it is known as revolving or circulating capital. On the whole, working capital
management performs a key function and is of top priority for every finance manager.
All managers must, however, keep in mind that and their pursuit to liquidity, they should
not lose sight of their basic goal of profitability. They should be able to attain a judicious
mix of liquidity and profitability while managing their working capital.

Working capital management deals with the most dynamic fields in finance, which
needs constant interaction between finance and other functional managers. The finance
manager acting alone cannot improve the working capital situation, in recent times a
few case studies regarding management of working capital in selected companies have

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been in order to make in -depth analysis of the several experts of working capital
management. The finding of such studies not only throws new lights on the technical
loopholes of management activities of the concerned companies, but also helps the
scholars and researchers to develop new ideas techniques and methods for effective
management of working capital

Decisions relating to working capital and short-term financing are referred to as

working capital management. These involve managing the relationship between a firms
short term assets and its short term liabilities. The goal of working capital management
is to ensure that the firm is able to continue its operations and that it has sufficient cash
flow to satisfy both maturing short-term debt and upcoming operation expenses. There
is operative aspects of working capital i.e. current assets which is known as funds also
employed to the business process from the gross working capital current asset comprises
cash receivables, inventories, marketable securities held as short term investment and
other items nearer to cash or equivalent to cash. Finance is the life blood of any
organization. The health of every business concern mainly depends on the efficient
handling of finance functions. In simple terms, financial management may be defined
as the management of the finance of funds of a business unit in order to realize the
objective of the firm in an efficient manner. It is broadly concerned with the
mobilization and use of funds by a business firm. Hence the finance function refers to
the process of procurement of funds and judicious use of such funds with a view to
realize the objective functions of a firm more effectively. Management of working
capital is an essential task of the finance manager. He has to ensure that the amount or
working capital available with his concern is neither too large nor too small for its
requirements. So, a firm must be careful in estimating its working capital requirements.

Working capital management shows the relationship between a firms current assets and
current liabilities. The goal of working capital management is to ensure that a firm is
able to continue its operations and it has the ability to meet short term debts.
Management of working capital involves managing inventories, account receivables,
account payable and cash. A good way to judge a company’s cash flow prospects is to
look at it’s working capital management. The company must have adequate working

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capital. It should neither be excessive nor inadequate. Excessive working capital will
result in idle fund laying without earning any profit in the business, where inadequate
working capital shows the company doesn’t have sufficient funds for financing its daily
needs.

1.2 RESEARCH PROBLEM

For every single business organization, it is mandatory to know the working capital
management, in order to take decisions for now and future. Without working capital
management day to day activities cannot get operated and company loses out market
opportunities. Working capital management is important for maintaining the level of
current assets, which changes quickly with the variation of change as well as for
maintaining the firm ‘s profitability. Hence this study is conducted for evaluating the
management of working capital at “The Metal Industries Limited, Shoranur”. The study
helps to identify the important drivers of working capital management that can enhance
their company profitability. It also helps to study how effectively and efficiently manage
the components of working capital has led to business failures.

1.3 OBJECTIVES OF THE STUDY

The main objective of the study is to evaluate the efficiency in the management of the
working capital of the company. The specific objectives set for the study are as follows:

1. To examine liquidity position of the company

2. To analyse the changes in current assets and liabilities

3. To offer suggestions for the improvements in the efficiency of the

management working capital on the basis of the findings of the study

1.4 SCOPE OF THE STUDY

This study will provide a wide variety of information about the working capital
management of metal industries Ltd, Shoranur for the last 5 years. The result of this
analysis would facilitate to determine the financial performance and liquidity position

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of the company and also helps the management to identify the factors affecting working
capital management. The study of working capital is based on tools like Ratio Analysis,
Statement of changes in working capital.

1.5 RESEARCH METHODOLOGY

1.5.1 RESEARCH DESIGN

The research design followed to study the working capital management in METAL
INDUSTRIES LTD, SHORANUR is descriptive mainly based on secondary data. 1.5.2
PERIOD OF THE STUDY A study on working capital management of METAL
INDUSTRIES LTD, SHORANUR is made on the basis of information abstracted from
the financial statements of the company for the period of 5 years from the financial year
2017-2018 to 2021-2022.

1.5.3 SOURCES OF DATA

1.5.3.1 SECONDARY SOURCES

The study has collected secondary data from the following sources such as articles,
journals and magazines, news papers, annual reports and company website.

1.6 TOOLS FOR DATA ANALYSIS

The study uses both statistical and mathematical tools for analyzing the data.

1. Ratio analysis

2. Schedule of changes in working capital

3. Trend analysis

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1.7 LIMITATIONS OF THE STUDY

1. The study is mainly carried out based on the secondary data provided in the
financial statement.

2. Analysis is purely based on the historical facts and information.

3. The study is related to a period of five years, thus the result extracted does not
indicate the position of the company throughout its life time.

4. The study entirely based on quantitative data, qualitative factors are not taken
in to consideration for the purpose of the study.

1.8 CHAPTERISATION

1. The first chapter explains the introduction about the topic, research problem,
objectives of the study, scope of the study, research methodology, tools for data
analysis and limitations of the study.

2. The second chapter discusses about review of literature.

3. The third chapter deals with theoretical framework.

4. The fourth chapter includes industry profile and company profile of THE
METAL INDUSTRIES LTD, SHORANUR.

5. The fifth chapter includes the data analysis and interpretation.

6. The final chapter explains summary of findings, suggestions and conclusions.

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 CHAPTER -2

LITERATURE REVIEVW

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2.1 INTRODUCTION

A literature review is the synthesis of the available literature regarding the research
topic. This synthesis merges the conclusions of many different sources to explain the
overall understanding of the topic, thus laying a foundation for both the research
question and primary research. Although a literature review will cite sources and should
discuss the credibility of the Sources included, it is more than an annotated
bibliography. The literature review needs to review all the significant sources on a topic,
regardless of whether or not they support the claims. Different researchers have done
studies in the field of working capital management which have been summarized into
following heads:

1. Studies on working capital management

2. Studies on determinants of inventory investment

3. Liquidity management and

4. Relationship between working capital management and profitability

5. Made for long-term funds which affect the profitability.

2.2 REVIEW OF LITERATURE

1.Sarawat B. P. and Agrawal R. S. (2004) have tried to evaluate working capital

position of Nepal cement industry.

The study has the following major objective

a) To find the trend and tendency of working capital

b) To analyses and evaluate working capital management.

c) To suggest an effective way for management of working capital.

The study attributes the losses or low level of profits of the public enterprises in Nepal
to ineffective and inefficient utilization of working capital. The failure of an enterprise
is due to shortage of working capital.

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2. Filbeck Greg and Krueger Thomas M. (2005) base their study on the ratings
of working capital management published in CFO magazines. The findings of the study
provides insight into working capital performance and working capital management,
which is explained by macro economic factors, interest rates, competition, etc., and their
impact on working capital management. The article further studies the impact of
working capital management on stock prices.

3. Meszek Westlaw and Polewski Marcin (2006) examine the profiles of selected
construction companies from the viewpoint of working capital formation and their
management strategies applied to working capital. The analysis is based on the financial
ratios. The authors conclude with the observation that complex working capital
management requires controlling methodology to be developed. A specific character of
the construction industry, including operational factor sand market requirements make
working capital management a task exceeding the financial sphere, as it embraces the
issues of organization of investment processes, the organization of production processes
and logistics.

4. Ganesan Vedavinayagam (2007) studies the impact of working capital

management on profitability through ability through ANOVA test where the financial
statements of 349 telecom units or enterprises are analyzed. The relationship between
working capital management efficiency and profitability and the impact of working
capital management on the same has been tested. At the end of the study the author has
minutely observed that the working capital management efficiency in
telecommunication industry is poor. And he suggests that the telecommunication
industry should improve working capital management efficiency.

5.Thappa Sankar (2007) focuses on the importance of proper working capital

management of Sun Pharmaceutical Company. The paper throws light on the concepts
of working capital, working capital policy, components of working capital and factors
affecting working capital in the Sun Pharma Industries Ltd during the last five years,
and identifies certain factors which are responsible for the improvement of working
capital of the company. The article concludes with a warning to the Company that if

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satisfactory level of working capital is not maintained, the company would become
bankrupt.

6. Dinesh M. (2008) explicates the concepts of working capital, the different

challenges being faced by the business firms in managing working capital and the
strategies to be adopted for its prudent management. The author concludes with the
view that most of the businesses failed not for want of profit but for lack of cash. The
fast growth in production and sales may cause the business to utilize all of the financial
resources seeking growth and making assets such as inventories, accounts receivable
and other assets as more liquid.

7. Narender Vunyale Shrijit and Shwetha V. (2008) examine the determinants

of working capital management in cement industry in India. In this article, net liquid
balance and working capital requirements were used by the authors as measures of
investing working capital management of the industry. The factors like size, business
indicator, firm performance, growth of the firm, debt-equity ratio and operating cash
flow are taken into consideration. Overall, the paper concludes with the observation that
only size of firm affects both net liquid balance and working capital ratio in a company’s
working capital management. The results suggest that there is a lack of consistent
evidence of the factors influencing working capital management in the cement industry.

8. Dr.Khatik S. K. and Jain Rashmi (2009) states that the management of working
capital IS one of the most important and key resources of an organization for its day-to-
day operations. Working capital can be taken as funding resources for routine activities
of business. It is the most vital and important part of fund management and profitability
for business. The writer has analysed the working capital position of MPSEB (Madhya
Pradesh State Electricity Board) by ratio analysis technique and it was found that the
position of current ratio, quick ratio, acid test ratio, working capital ratio, inventory
turnover ratio are not up to the standard benchmark.

9. Ramachandran Azhagaiah and Janakiraman Muralidharan (2009) have

attempted to analyse the relationship between working capital management efficiency
and earnings before interest and taxes (EBIT) of the paper industry in India during 1997-

10
98 to 2005-06. To measure the working capital management efficiency three index
values i.e., performance index, utilization index and efficiency index, and EBIT have
been used for all the firms over the period of the study. At the end of the study it was
noted that Indian paper firms performed remarkably well during the period. Industry
overall efficiency index was >1 in 3 out of 9 years for the study period. Though some
of the sanmple units had successfully improved efficiency during the three years, the
existence of a every high degree of inconsistency in this matter clearly points out the
need for adopting sound WCM (working capital management) policy in these firms.

10. Baig Viqar Ali (2009) aims at reporting comparative findings of a survey of
working capital management practices of selected agribusiness firms from diary co-
operatives, private and MNC diary firms as a part of the research thesis completed in
July 2008. Besides, an attempt has been made to know the effect of the ownership,
government regulations, managerial empowerment and cultural factor on the working
capital decision making.

11. Bhunia Amalendu (2010) shows how Indian Pharmaceutical Industry has played
a key role in promoting and sustaining development in the vital field of medicines.
Financial analysis often assesses a firm's production and productivity performance,
profitability performance, liquidity performance, working capital performance, fixed
assets performance, fund flow performance and social performance. The study
concludes with the observation that the financial performance of the selected
pharmaceuticals” liquidity position was strong in case of KAPL and RDPL, thereby
reflecting the ability of companies to pay short term obligations on due dates. Long-
term solvency in case of KAPL and RDPL in all the years shows that companies relied
more on external funds in terms of long-term borrowings, thereby providing a lower
degree of protection to the creditors. Debtors turnover ratio of RDPL needs to be
improved as the solvency of the firm depends upon the sales income generated from the
use of various assets.

12. Singh Swaran and Dr Bansal S. K. (2010) has carried out a study of the
structure of working capital, the management of inventory, accounts receivable,
accounts payable and cash. The authors have used the data from the published annual

11
reports of IFFCO and KRÍBHCO starting from the year 1999-00 to 2006-07.The main
objective of the present study is to examine and evaluate the working capital
management in IFFCO and KRIBHC0. The analysis has been done with the help of
various ratios to derive conclusions. It may be concluded that as far as management of
working capital is concerned, IFFCO was performing better than KRIBHCO.

13. Arunkumar O. N. and Jayakumar S. (2010) explain how working capital is

considered to be the lifeblood and controlling nerve Centre of the business. Profitability
and solvency are two vital aspects of working capital management. The survival and
growth of the company depends upon the ability to meet profitability and solvency.
Here the authors have concentrated on the analysis of liquidity and solvency position of
the major Public Sector Electrical Industries in Kerala such as Kerala Electrical and
Allied Engineering Company Ltd (KEL Jand Transformers and Electrical Kerala Ltd
(TELK) for the financial years 1997-98 to 2007-08 and 1997-98 to 2005-06
respectively. In conclusion the authors have made a few important observations with
regard to the companies. Both the companies show a trend of very low level of solvency
position. The liquidity position of the companies is below the normal value. KEL has a
lower level of net profit compared to TELK for the stated period. In comparison with
KEL, the sensitivity of changes in the level of current assets is high in case of TELK.

14. Rahman Mohammad M. (2011) focuses on the co-relation between working

capital and profitability. An effective working capital management has a positive impact
on profitability of firms. From the study it is seen that in the textile industry profitability
and working capital management position are found to be up to the mark.

15. Sunday Kehinde James (2011) focuses on effective working capital

management within small and medium scale enterprises (SMEs). Most of the SMEs
have little regard for their working capital position and they don’t even have standard
credit policy. They have very weak financial position, and rely on credit facility to
finance their operations. This credit facility is available from accounts payable most of
the time. In conclusion the authors recommend that for SMEs to survive within the
Nigeria economy they must design a standard credit policy and ensure good financial
report and control system. Besides, they must give adequate cognizance to the

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management of working capital. Ail this requires systematic planning for the
management of working capital to ensure continuity, growth and solvency.

16. Singh D. P. (2012) presents the relationship between the working capital
management and profitability in the IT and Telecom industry in India. The purpose of
the study is to investigate the relation between components of working capital ratios
and profitability. To attain the above objective the author theories the relationship
between different components of working capital management and profiability. The
study shows that the telecom industry is operating below average so far as working
capital management is concerned. The profitability was 40% when compared with the
all India all manufacturing average. In the IT and the Telecom industry, working capital
turnover, current ratio, sales to total asset ratio were positively related to profitability.
However, days inventory was negatively related to profitability. 17. Dr Panigrahi
Ashok Kumar (2012) studies the relationship between working capital management
and profitability of ACC Cement Company, the leading cement manufacturer of the
country for assessing the impact of working capital management on profitability during
the period 1999-2000 to 2009-10. The study is based on secondary data. The main
objective of the study was to find whether the working capital management affects the
performance of the firm. It can be deduced that there is a moderate relationship between
working capital Management and the firm’s profitability.

18. Kushalappa S.and Kunder Sharmila (2012) closely study the relationship
between working capital management policies and profitability of the thiteen listed
manufacturing firms in Ghana. At the end of the study, a significantly negative
relationship between profitability and accounts receivable days is found to exist.
Profitability is significantly positively influenced by the firm’s cash conversion cycle
(CCC), current assets ratio and current asset turnover. It is also suggested that managers
can create value for the shareholders by creating incentives to reduce their accounts
receivable to 30 days

19. Kaur Harsh V. and Singh Sukhdev (2013) analyse empirically BSE 200
manufacturing companies spread over 19 industries for the period 2000 to 2010.The
study explores scope to increase the efficiency and profitability of l45companies by

13
improving the parameters of analysis. The study tests the relationship between the
working capital score and profitability measured by income to current assets and income
to average total assets. This article concentrates on cash conversion efficiency and
planning the operating cycle days. At the end, the study emphasizes that efficient
management of working capital significantly affects profitability.

20. Akoto Richard K., Vitor Dadson A. and Angmor Peter L. (2013) closely
study the relationship between working capital management policies and profitability
of the thirteen |listed manufacturing firms in Ghana. At the end of the study, a
significantly negative relationship between profitability and accounts receivable days is
found to exist. Profitability is significantly positively influenced by the firm’s cash
conversion cycle (CCC), current assets ratio and current asset turnover. It is also
suggested that managers can create value for the shareholders by creating incentives to
reduce their accounts receivable to 30 days.

21. Gurumurthy N. and Reddy Jayachandra K. (2014) have conducted study on

working capital management of for pharmaceutical companies APSPDCL, APEPDCL,
APNPDCL, APCPDCL and have come to conclusion that the existing system of
working capital management was not up to the mark and needed to be improved.

22. Hoan-Lan Le,Kieu-Trang Vu,Ngoc-Khanh Du,Manh Dung Tran(2018)

Investigated the impact of working capital management on financial performance by
using the data collected from listed firms on Ho Chin Minh Stock Exchange(HOSE).
They used the variable cash conversion cycle as measurement for working capital
management by taking the following variables in to consideration which includes
growth,cash flow,liquidity.risk leverage. The results imply that working capital
management positively impacts the financial performance of firms in the sample. Their
study also gives insights to the managers on how to improve the financial performance
with working capital management.

23. Sawarni KS,Narayanasamy S and Ayyalusamy K(2020) investigated the

impact of the efficiency of working capital management on the performance of a sample
of Indian companies and explore how the nature of the firms business influences the

14
significance and direction of this impact. The data for this study was collected for the
period of 2012-2018 for 414 non financial firms listed in Bombay Stock Exchange.
Working capital efficiency has a significant impact on the performance of the sample
firms. Non financial Indian firms deliver better Ahancial performance by maintaining
lower Net Trade Cycle. The significance of relationship Varies depending upon the
nature of the fim’s business.

2.3 CONCLUSION

From the above discussion, it is clear that most of the authors only a few of them
approached Working capital management in different ways and at varying level of
analysis. Most of them Use ratio analysis for identifying the working capital and
liquidity of the company. With this View the present study has been conducted. Though
there are various approaches, can be considered in this study. Different tools are used
for finding the efficiency in management of the working capital of different
organization.

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REFERENCE

I. Sarawat, B. P., and AgrawalR. S., (2004), “Working Capital Trends of Cement
Industry in Nepal. * Indian Journal of Accounting, Vol. XXXV, No. 1, pp. 26-35.

2. Ganesan Vedavinayagam, (2007), An Analysis of Working Capital Management

Efficiency in Telecommunication Equipment Industry, Rivier Academic Journal, Vol.
3, No. 2, pp. 1-10.

3. Filbeck Greg and Krueger Thomas M., (2005), An Analysis of Working Management
Results Across Industries, American Journal of Business Finance, Vol. 20, No. 2, pp.
5-11

4. Meszek, Wieslaw, and Polewski, Marcin, (2006), Certain Aspects of Working

Capital in a Construction Company, Technological and Economic Development of
Economy, Vol. 12, No.3, pp. 222-226

5. Ganesan Vedavinayagam, (2007), An Analysis of Working Capital Management

Efficiency in Telecommunication Equipment Industry, Rivier Academic Journal, Vol.
3, No. 2, pp. 1-10

6. Thappa Sankar, (2007), Working Capital Management in Sun Pharmaceutical

Industries Ltd.-A Case Study, Tecnia Journal of Management Studies, Vol. 2, No. 1,
pp. 45-52

7. Narender Vunyale, Menon Shrijit and Shwetha V.. (2008), Factors Determining
Working Capital Management in Cement Industry, South Asian Journal of
Management, Vol. 15, No. 4, pp. 64-78

8. Dr.Khatik S. K. and Jain Rashmi, (2009), Working Capital Analysis of Public State
Undertaking (A Case Study of Madhya Pradesh State Electricity Board, Indian Journal
of Finance, Vol. 3, No. 5, pp. 31-38

16
9.Ramachandran Azhagaiah and Janakiraman Muralidharan, (2009), The Relationship
between Working Capital Management Efficicncy and EBIT, Managing Global
Transactions, Vol. 7, No. 1, pp. 61-74

10. Baig Viqar Ali, (2009), Working Capital Management: A Comparative Study of
Different Ownerships, Management and Change, Vol. 13, No. I, pp.85-13

11. Bhunia Amalendu, (2010), Financial Performance of Indian Pharmaceutical

Industry -A Case Study, Asian Journal of Management Research, Vol. 1, No. 2, pp.
427-451

12. Singh Swaran and Dr Bansal S. K.. (2010), Management of Working Capital in
IFFCO and KRIBHC0-A Comparative Study, Indian Journal of Finance, Vol. 4, No. 2,
pp. 8-15

13. Arunkumar O. N. and Jayakumar S. (2010), Analysis of Working Capital

Management in Major Public Sector Electrical Industries in Kerala, Udyog Pragati, Vol.
34, No.1, pp. 45 55

14. Rahman Mohammad M., (2011), Working Capital Management and Profitability:
A study on Textiles Industry, ASA University Review, Vol. 5, No. 1, pp. 115-132

15. Sunday Kehinde James, (2011), Efective Working Capital Management in Small
and Medium Scale Enterprises, International Journal of Business and Management,
Vol.6 No. 9. Pp.271-279

16. Singh D. P., (2012), Working Capital Management and Profitability in the IT and
Telecom Industry in India, Indian Journal of Finance, Vol. 6, No. 3, pp. 54-61

17. Dr Panigrahi Ashok Kumar, (2012), Impact of Working Capital Management on

Profitability -A Case Study of ACC Ltd, Asian Journal of Management, Vol. 3, No. 4,
PP. 210-218

18. Kushalappa S., and Kunder Sharmila, (2012), Working Capital Management in
Manufacturing Industry: A Sudy With Reference to Selected Manufacturing Industries
in India, International Journal of Research in Computer Application and Management,
Vol. 2, No. 12, pp. 101-105

17
19. Kaur Harsh v., and Singh Sukhdev, (2013), Managing Efficiency and Profitability
Through Working Capital: An Empirical Analysis of BSE 200 Companies, Asian
Journal of Business Management, Vol. 5, No. 2, pp. 197-207

20. Akoto Richard K., Vitor Dadson A. and Angmor Peter L., (2013), Working Capital
Management and Profitability: Evidence from Ghanaian Listed Manufacturing Firms,
Journal of Economics and International Finance, Vol. 5, No. 9, pp. 373-37

21. Gurumurhy N. and Reddy jayachandra k. (2014) working capital Management in

Power Distribution on Companies in Andra Pradesh -A

22. Hoan-Lan Le,Kieu-Trang Vu.Ngoc-Khanh Du and Manh Dung Tran,(2018),Impact

of Working Capital Management on Financial Performance:The case of Vietnam,
International Journal of Applied Economics,3(1), I5-20

23. Sawarni K.S,Narayanasamy S and Ayyalusamy K,(2020), Working Capital

Management, firm performance and nature of business:An empirical evidence from
India,Internatinal Journal of Productivity and Performance Management, 1, 179-200

18
 CHAPTER-3

INDUSTRY& COMPANY PROFILE

19
3.1 INTRODUCTION

Metal industries are an indispensable part of an Indian economy; they form the
backbone of industrial development of any country. Metal ís a key sector as it meets the
requirements of a wide range of important industries. Being a core sector, it tracks the
overall economic growth in the long term. India basic metals industry experienced big
changes in the 90s with the onset of the liberalization and open market policies. With
the new form and sources of investments, the infrastructure pertaining to the industries
was altered. More and more efficient and technologically advanced methods improved
the production processes and in turn the output of the industry increased along with the
quality of the products. The India basic metals industry is growing up with the
innovative techniques as it is helping the product market to enlarge. Metals and their
varied usage, makes it the backbone of an economy. They mark the economic growth
of a country.

3.2 INDUSTRY PROFILE

Metal industries are an indispensable part of an Indian economy; they form the
backbone of industrial development of any country. Metal is a key sector as it meets the
requirements of a wide range of important industries. Being a core sector, it tracks the
overall economic growth in the long term. India holds a fair advantage in cost of
production and conversion cost in steel and alumina. India currently produces around
88 minerals which mainly include 50 non metallic, 24 minor, 10 metallic, 4 fuel and 3
atomic minerals. The metal industry primarily engaged in manufacturing all types of
metals such as iron, steel, alumina, base metals and precious metals. Metal Industry is
primarily concerned with metallurgy and metalworking. At first metals are extracted
from the metal-ores found in their natural state deep within the earth and then these ores
are purified through a detailed procedure to obtain the metals in their pure form, these
processes comprise metallurgy. Then the pure form of metal so obtained is used to
manufacture structures as well as different machines and parts of machines and other
useful items from the metals so obtained through the metallurgical processes constitute

20
metal working. The global metal industry has been going through major changes since
1970. China has emerged as a major producer and consumer, as has India to a lesser
extent. Consolidation has been rapid in Europe.

The volume of metal consumed has been the barometer for measuring development and
economic progress. Whether it is construction or industrial goods, metal is the basic raw
material. Lighter metals and stronger alloys have been developed. Plastics and
synthetics have replaced metal in many areas

Metal is made from ores still found in abundance around the world. Technological
developments have brought down the time for transformation from iron ore to metal to
within a day. Even after decades of use, it can be sent back to the furnaces as scrap,
melted and remade into new qualities of metal. It is the most recycled material in the
world. In developed countries, recycling accounts for almost half of the metal produced.

Another major feature is the continuous improvement of metal grades. Half of today’s
metal grades were not available ten years ago. Just take the example of the most
commonly used metal -rods or bars, used as reinforcement material with cement
concrete. It used to be plain million tons in 2005. That much above the production in
2005 of Japan at 112.47 million tons, the USA at 93.90 million tons and Russia at 66.15
million tons. For details of country wise metal production see Metal production by
country.

3.2.1 HISTORY OF THE INDUSTRY

In India the industrial development began with the setting up of TATA Iron and Steel
Company (TISCO) at Jamshedpur in 1907. It is started its production in 1912. Then
come up bourn pour and Bhadravathi Steel plants in 1919 and 1923 respectively. It was,
however, only after the independence that the steel industry has been able to find its fe.
Barring the Jamshedpur plant of the TATA all are on public sector and looked after by
the Steel Authority of India Ltd (SAIL) Bhilali and bokaro plants were set up with the
soviet collaboration. Durgapur and Rourkela came up with the British and German
technologies know how respectively.

21
Iron and steel industry is by nature a heavy industry, proximity to raw materials and
access to efficient transportation network is crucial to this industry. The Chotanagpur
plateau bordering West Bengal, Bihar, Orissa, and Madhya Pradesh, therefore has been
the natural core of this industry.

Besides, Iron and Steel industry, heavy engineering and machine tools industries are the
main dealers of maters. These industries have witnessed a phenomenal growth and
produce whole range of capital goods and consumer durables. The capital goods are
required for textiles industry, fertilizer plants, mining, construction and agricultural
machineries such as equipment for irrigation projects, diesel engines, pumps and
tractors, transport vehicles, etc. are being produced indigenously.

The heavy engineering corporation Ltd. set up at Ranchi In 1958 fabricates huge
machines required for the iron and steel industry. Locomotive are manufactured by three
units, via, locomotive works, Chittarangan (West Bengal), Diesel locomotive works,
Varanasi (Uttarpradesh) And TELCO Jamshedpur.

Most metal manufacturing produce some hazardous waste. If use any solvents, strong
acid and alkaline solution. Plating solutions, paints, cyanide solutions or any solutions
containing heavy metals, is it likely that operation generates hazardous waste.

Facilities that generate hazardous waste might be subject to Resource Conservations

and Recovery Act (RCRA) requirement’s covering the generation, transportation, and
management of hazardous waste. The business is classified under metal manufacturing
are:

o Metal furniture works, shelves, lockers, cabinets and fixtures.

o Primary metal products
o Fabricated metal products
o Storage or primary batteries.
o Motor vehicles parts and accessories.
o Measuring, analyzing, or controlling instruments.
o Machinery, including electrical and electronic machinery, equipment supplies.

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o Other metal item like clocks and watches; costume and precious metal jewelry;
needles pins and similar notions sing advertising displays; burial caskets;
silverware or stainless flatware.

3.2.2 METALS NDUSTRY IN INDIA

India basic metals industry experienced big changes in the 90s with the onset of the
liberalization and open market policies. With the new form and sources of
investments, the infrastructure pertaining to the industries was altered. More and
more efficient and technologically advanced methods improved the production
processes and in turn the output of the industry increased along with the quality of
the products. The India basic metals industry is growing up with the innovative
techniques as it is helping the product market to enlarge. Metals and their varied
usage, makes it the backbone of an economy. They mark the economic growth of a
country. Metal industry has two main segments: Non-ferrous metals and ferrous
metals

NON-FERROUS:-Demand for non-ferrous metals comes from sectors such as

agriculture, automobiles, railways, telecommunications, construction and
chemicals. Non-ferrous metals include aluminum, copper, zinc, lead, nickel and tin.

Copper: India is among top 20 major producers copper globally. Falling prices of
copper in international markets would benefit India, as it is one of the world’s
biggest importers of the metal, alongside China, Japan, South Korea and Germany.
As a consequence, volatility in prices of the metal on the LME has a significant
bearing on Indian copper trading.

Aluminium: It is a light weight, silver-white, metallic element, that makes up

approximately 7 per cent of the earth’s crust. It weighs about one third as much as
steel (7480-8000 Kg/ cubic meter) or copper (8930 Kg/cubic meter). Aluminium is
malleable, ductile, easily casted and has excellent corrosion resistance and
durability. It is mined in the form of bauxite ore and exists primarily in combination
with oxygen as alumina.

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Zine: It is the fourth most widely used metal globally, after stcel, aluminum and
copper. Zinc Was being produced from its oxide ores, before more abundant
sulphides became a major Source of supply. In 1916, the clectrolytic process
replaced the pyrometallurgical process as the dominating production method.

FERROUS:-Ferrous metals such as cast and wrought iron or carbon steel are
known for their tensile strength and durability. As a result, materials such as carbon
steel are widely used in the Construction industry to build the structures of bridges
and skyscrapers. Ferrous metals are also found in shipping containers, pipework,
automobiles, railways and a range of both commercial and domestic tools. The high
carbon content of ferrous metals means that they are vulnerable to rust when exposed
to moisture, and therefore generally unsuitable for applications such as water pipes.
Wrought iron is an exception to this as its purity means it resists rust, while alloying
elements can also be used, such as chromium in stainless steel, to prevent rusting.

Since most ferrous metals are magnetic, they are often used in electrical and motor
applications, as well as in other less obvious places. Ferrous metals have been in use
for thousands of years and have a huge range of different applications, from the
largest structures to the smallest nuts and bolts. Ferrous metals can include a wide
range of different alloying elements, including chromium, nickel, manganese,
molybdenum, and vanadium, manganese. These alloying elements give ferrous
materials different properties that allow them to be used in a variety of engincering
and other applications including tools, pipelines, containers, cutlery and larger
fabrications like skyscrapers.

Examples and uses

Due to the different properties of ferrous materials, they have a variety of

applications that differ depending on the metal being used:

Non-Alloy Steels

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Also known as carbon steels, non-alloy steels use carbon as the alloying element.
These steels do include other elements, such as manganese, silicon, sulphur, and
phosphorus, but the content of these elements is so low that they do not impact the
material properties. Non-alloy steels are | classified as having either a low, medium
or high carbon content, and each has different characteristics and treatment methods:

1.Low Carbon steel

Low carbon steels, als0 called mild steels, contain just 0.05-0.25% carbon. Low cost
and malleable, these steels are widely used for items such as nuts and bolts or
forgings. The surface hardness of these steels can be increased by carburising

2. Medium Carbon Steel

Medium carbon steels contain 0.25-0.6% of carbon. This higher carbon content
provides an increase in strength and hardness over low carbon steels. However, these
steels have reduced ductility compared to low carbon steels. Increased levels of
carbon and manganese in medium carbon steels mean that they can be tempered and
quenched. These steels are widely used for making components for the automotive
industry, such as gears, axles and shafts, but are also suitable for use on railway
applications.

3. High Carbon Steel

High carbon steels contain 0.6-1% carbon and are the strongest of the non-alloyed
steels. This strength makes them ideal for applications requiring resistance to
mechanical wear, while they are also good at maintaining their shape. On the
negative side, these steels are inferior to lower carbon steels when it comes to weld
ability, ductility and impact toughness. High carbon steel is used for springs, blades,
rail steels, wire rope, wear resistant plates, tools and more.

3.2.3 GOVERNMENT POLICIES RELATED TO METAL

INDUSTRIES

The Government of India has introduced several policy initiatives to give a boost to
the metals sector:

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  Foreign equity holding allowed up to l100 per cent through automatic route
for all non fuel, non-atomic minerals except diamond and precious stones.
 Thirteen minerals that were reserved for the public sector have been opened
out for private sector investment. These include iron ore, manganese ore,
chrome ore, sulphur, gold, diamond, copper, lead, zinc, molybdenum,
tungsten, nickel and platinum.
 Customs duty on primary and secondary metals has been reduced from 15
per cent to 10 per cent.

STEEL:

 The National Steel Policy (NSP) 2005 lays emphasis on improving

productivity, efficiency, cost, quality and product mix for accelerating
growth in the domestic production and consumption of steel.
 Import duties on various steel products have been reduced from 15 per cent
to l0 per cent. Customs duty on alloy and stainless steel has been reduced to
five per cent.
 Duty on nickel reduced from five per cent to two per cent to help domestic
stainless steel manufacturers tackle increase in global prices for raw
materials.
COPPER:

“ Copper and copper products can be imported at zero duty from Sri Lanka
under the Free Trade Agreement (FTA) with that country.

 “Duties on copper and copper products have been progressively

reduced -for example, customs duty has been reduced from 35 per cent
in 2001 to 10 per cent in 2006.

3.2.4 PROFILE OF KEY PLAYERS IN METAL SECTOR

1. Tata Iron and Steel Company Limited (TISCO)

Established in Jamshedpur (India) in 1907, the Company took shape from the vision of
founder Jamsetji N Tata and is today one of the world’s most geographicaly-diversified

26
steel producers with operations and commercial presence across the world. Tata Steel
group is spread across five continents with an employee base of over 65,000.

Focusing on Innovation, Technology, Sustainability & People, the Company strives to

be the global steel industry benchmark for value creation and corporate citizenship and
become the most admired brand in metals and minerals space. Currently, Tata Steel’s
consolidated India crude steel production capacity stands at 19.6 MnTPA with
manufacturing facilities in Jamshedpur in Jharkhand, Kalinganagar and Dhenkanal in
Odisha, Sahibabad in Uttar Pradesh and Khopoli in Maharashtra. In addition, the
Company has several downstream product extensions with manufacturing facilities for
Wires, Tubes, Bearings, Agriculture Equipment and Industrial By-products. It also has
a Ferro-alloys and Minerals division and a heavy-duty engineering and fabrication unit,
Tata Growth Shop. In India, Tata Steel operates an end-to-end value chain that extends
from mining to finished steel goods, catering to an array of market segments such as
automotive, construction, general engineering etc.

2. Stecl Authority of India Limited (SAIL)

Stecl Authority of India Ltd (SAIL) is one of India’s largest steclmakers and among
the top Government owned companies conferred with the prestigious ‘Maharatna’
status. SAIL owns and operates 5 integrated steel plants at Bhilai, Bokaro, Burnpur,
Durgapur and Rourkela, 3 special steel plants at Durgapur, Salem and Bhadravati and
ferro-alloy manufacturing unit at Chandrapur. The Central Marketing Organization
(CMO) of SAIL has one of the largest steel marketing set ups with a pan-India
distribution network of 37 Branch Sales offices, 10 customer contact offices and 49
warehouses & yards supplemented by an extensive distributor/dealer network.

SAIL is also the second largest producer of iron ore in India and meets 100% of its
requirement from its captive mines. SAIL offers the widest array of steel products
amongst all Indian manufacturers, including products in mild, special and alloy steel
categories in around 50 products, 500 grades and 5000 dimensions. SAIL has recently
augmented its saleable steel production capacity to around 21 million tonnes per annum.
Hon’ble Prime Minister of India, Shri Narendra Modi has dedicated SAIL’s modernized

27
and expanded units in Rourkela Steel Plant (RSP), IISCO Steel Plant (ISP) and Bhilai
Steel Plant (BSP) to the nation. Post expansion, SAIL is also adding a number of new
products to its basket, which will cater to the needs of India’s growing infrastructure
and manufacturing sector. SAIL’s strategic growth plan, besides targeting higher
production, also addresses the need for cost competitiveness by eliminating
technological obsolescence, adopting state-of-the art technologies, achieving energy
savings, enriching product mix, reducing pollution, developing mines and collieries,
introducing customer-centric processes and developing matching infrastructure
facilities.

SAIL is continually partnering with the Government of India in their major flagship
programmes like Make in India. It has been supplying steel for India’s prestigious
national infrastructure projects and strengthening defence indigenization, India’s foray
into space research, railways, power and all major sectors of economy. SAIL’s steel,
owing to its quality, strength, variety, value and performance finds wide application
across different important segments. SAIL’s products, namely SAIL TMT and SAIL
JYOTI Galvanized products are widely used by the common man throughout the
country. SAIL is the first to launch the NPB -750 sections in the country, which are
valued by architects in builders for their strength and cost efficiency. The tagline of the
company -There’s a little bit of SAIL in everybody’s life -symbolizes the fact that in
the last five decades it has grown from strength to strength and the SAIL brand has
become well entrenched in peoples’ minds. The company’s business philosophy
encompasses a triple bottom line approach covering the economic, environmental and
social dimensions, reflecting SAIL’s commitment to build natural, human and social
capital and contribute its might in adding strength to India’s development and progress.

3. Essar Steel

Essar steel fully integrated flat carbon steel manufacturer -from iron ore to ready-to
market products -with a current capacity of 10 million tonnes per annum (MTPA). Their
products find wide acceptance in highly discerning consumer sectors such as
automotive, white goods, construction, engineering and shipbuilding. Essar steel Essar
Steel is one of India’s largest exporters of flat products, exporting to the highly

28
demanding US and European markets, and to the growing markets of South East Asia
and the Middle East. A number of major client companies have approved their steel for
their use. Including Caterpillar, Hyundai, Swaraj Mazda, the Konkan Railway, and
Maruti Suzuki. Essar Steel has acquired extensive quality accreditation and one of the
highest productivity and lowest manpower costs among steel plants internationally.

4. Jindal Steel & Power Limited

Jindal Steel & Power Ltd (JSPL) is a steel manufacturer and power producer, which
produces steel products, sponge iron, pellets and castings, and plans, implements,
develops and operates power plants. Its steel product portfolio includes TMT bars, long
track rails and heads hardened rails, parallel flange beams and column, angles and
channels, plates, coils, wire rods, and cast round and billets. The company generates
power using thermal, hydro and renewable sources. JSPL also provides aviation,
machinery and real estate development services. It has operations across Asia, Africa
and Middle East. The company has steel plants in Odisha, Chhattisgarh and Jharkhand,
and power generation facilities in India. JSPL is headquartered in New Delhi, India.

5. Hindustan Copper Limited (HCL)

A public sector undertaking, incorporated on 9th November 1967, is under the

administrative control of the Ministry of Mines, Government of India . It has the
distinction of being the nation’s only vertically integrated copper producing company
as it manufactures copper right from the stage of mining to beneticiation, smelting.
Refining and casting of refined copper metal into downstream saleable products.

The Company has the facilities for production & marketing of copper concentrate,
copper cathodes, copper wire bar, continuous cast copper rod and by-products, such as
anode slime (containing gold, silver, etc.), copper sulphate and sulphuric acid.
Presently, company is focusing on mining & beneficiation operation and is primarily
selling copper concentrate as the main product. In the concluded financial year 2020 21,
the Company has carned a net profit (PAT) of Rs 109.98 crore against a sales turnover
of Rs 1760.84 crore (excluding GST) HCL’s mines and plants are spread across five

29
operating Units, one each the States of Rajasthan, Madhya Pradesh, Jharkhand,
Maharashtra and Gujarat.

6. Hindalco Industries Limited

Hindalco Industries Ltd (Hindalco), a subsidiary of Aditya Birla Management Corp Pvt
Ltd, is manufacturer of aluminum and copper. Its products include aluminum in the
form of billets, ingots, and wire rods, alumina and value-added products such as rolled
products, extrusions, and foils. Its aluminium unit in India carries out operations such
as bauxite mining, alumina refining, captive power generation, coal mining, and
aluminium smelting. The company’s copper facility, Birla Copper comprise of copper
smelter, a fertilizer plant, downstream facilities, and a captive jetty. Hindalco’s copper
unit manufactures and sales continuous cast copper rods, copper cathodes, precious
metals, sulfuric acid, di-ammonium phosphate (DAP), silver, gold, and other precious
metals. Hindalco’s products cater to automotive, construction, and chemicals industry.
The company operates across Asia, Europe, North America, and South America.
Hindalco is headquartered in Mumbai, Maharashtra, India.

7. National Aluminium Company Limited (NALCO)

National Aluminium Company Limited, abbreviated as NALCO, (incorporated in

1981) is a government company having integrated and diversified operations in mining,
metal and power under the ownership of the Ministry of Mines and Government of
India. Presently, the government of India holds a 51.5% equity in NALCO, It is one of
the largest integrated bauxite-alumina-aluminium-power complex in the country,
encompassing bauxite mining, alumina refining, aluminium smelting and casting,
power generation, rail and port operations.

The company Is the lowest-cost producer of metallurgical grade alumina in the world
and lowest-cost producer of bauxite in the world as per a Wood McKenzie report. With
sustained quality products, the company’s export earnings accounted for about 42% of
the sales turnover in the year 2018-19 and the company is rated as third highest net
export earning CPSE as per a Public Enterprise Survey report.

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To face the challenges f an ever-evolving market and position the company in a
sustainable growth path, a new corporate plan has been developed with well-defined
three-year action plan, seven-year strategy and fifteen years vision of being a premier
and integrated company in the aluminium value chain with strategic presence in mining
both domestic and global, metals and energy sectors. The corporate plan has chalked
out a roadmap for multifold growth in revenue and profit by 2032.

As a responsive corporate, the company is harnessing renewable energy aligning to the

ambitious programmes of the Indian government. The company has already
commissioned 198 MW wind power plants and further 50 MW wind power plants are
in pipeline, making it the highest producer of renewable energy among PSUs.

8. Sterlite Industries India Limited

Sesa Sterlite earlier Sterlite Industries (India) Ltd (SIIL) was incorporated on September
8, 1975 as Rainbow Industries Ltd. It was later renamed to Sterlite Industries (India)
Ltd. In 1986. SIIL 0s India’s leading vertically integrated non ferrous metallurgical
company. The merger of Sesa Goa, Sterlite and Vedanta Aluminium created Sesa
Sterlite,

Sterlite Industries (India) Ltd is the largest non-ferrous metals and mining company and
is one of the fastest growing private sector companies. SIIL is a leading producer of
copper in India. SIIL pioneered the manufacturing of Continuous Cast Copper Rods /n
India, and established India’s largest Copper Smelting and Refining Plant for
production of world class refined copper.

SIIL is the principal subsidiary of Vedanta Resources plc, a diversified and integrated
FTSE 100 metals and mining company, Vedanta Resources principal operations are
located throughout India, with further operations in Zambia and Australia. The major
metals produced are aluminium, copper, zinc and lead. Vedanta has also recently
acquired Sesa Goa Limited, India’s largest producer exporter of Iron ore.

Sterlite’s principal operating companies comprise Hindustan Zinc Limited (HZL) for
its fully integrated zinc and lead operations; Sterlite Industries India Limited (Sterlite)
and Copper Mines of Tasmania Pty Limited (CMT) for its copper operations in

31
India/Australia; and Bharat Aluminium Company (BALCO), for its aluminium and
alumina operations and Sterlite Energy for its commercial power generation business.
Sterlite has continually demonstrated its ability to deliver major value creating projects,
offering unparalleled growth at lowest costs and generating superior financial returns
for its shareholders. At the same time, it ensures that its expansion projects meet Ejgh
conservative financial norms and do not place an unwarranted burden on its balance
sheet and financial resources.

Sterlite develops and manages a diverse portfolio of mining and metals businesses to
provide attractive returns to its shareholders whilst carrying out its activities in a socially
and environmentally responsible manner and creating value for the communities where
it operates. As one of the largest metals and mining groups in India, Sterlite remains
continually committed to managing its business in a socially responsible manner. The
management of environment, employees, health and safety and community issues, in
respect

9. Hindustan Zinc Limited

Hindustan Zinc Company History Hindustan Zinc Ltd a Vedanta Group company is the
market leader in zinc lead and sulphuric acid business. The company is India’s only and
the world’s largest integrated producer of Zinc-Lead. They are also one of the leading
Silver producers in the world. They are one of the lowest cost producers in the world
and are well placed to serve the growing demand ofAsian countries. The company’s
core business comprises of mining and smelting of zinc and lead along with captive
power generation. The company is headquartered in Udaipur Rajasthan in India. The
company’s current metal production capacity is 1064000 tonnes per annum (879000
tonnes of zinc and 185000 tonnes of lead) With reserves and resources of 404.4 million
tonnes their exploration programme is integral to their growth and future expansions.
The company also owns 474 MW of coal based thermal captive power plants in
Rajasthan to support their metallurgical operations. Additionally it has green power
capacity of 324 MW including 274 MW of wind power 16 MW of solar power and 35
MW of waste heat power. Hindustan Zinc Ltd was incorporated from the erstwhile
Metal Corporation of India on January 10 1966 as a Public Sector Undertaking. In April

32
2002 Sterlite Opportunities and Ventures Ltd (SOVL) made an open offer for
acquisition of shares of the company; consequent to the disinvestment of Government
of ndia’s stake of 26% including management control to SOVL and acquired additional
20% of shares from public pursuant to the SEBI Regulations 1997. In August 2003
SOVL acquired additional shares to the extent of 18.92% of the paid up capital from
GOIl in exercise of ‘call option’ clause in the share holder’s agreement between GOl
and SOVL. With the above additional acquisition soVL’s stake in the company has
gone up to 64.92%. Thus GOl’s stake in the company now student at 29.54%.Later on
SOVL was mergcd with Sterlite Industries India Ltd in April 201| which in turn merged
with Sesa Goa Ltd to form Sesa Sterlite Limited in August 2013. Sesa Sterlite was
renamed to Vedanta Limited in April 2015. Hindustan Zinc is now a direct subsidiary
of Vedanta Limited

10. ISPAT INDUSTRIES LTD (IIL)

IIL has set up one of the largest integrated steel plants in the private sector in India at
Dolvi in Raigad District, Maharashtra with a capacity to manufacture 3 million tonnes
per annum of hot rolled steel coils (HRC). The Dolvi complex also boasts of an ultra
modern blast furnace (setup by a group company Ispat Metallics India Ltd.) capable of
producing 2.0 million tonnes per annum of Hot Metal/ Pig Iron, a 2.0 million tonnes
capacity Sinter Plant (newly commissioned) and a DRI plant with a capacity of 1.6
million tonnes per annum. The complex boast of an ultra-modern

Captive jetty which meets the plants ‘requirement with regard to import of various raw
material. In the coming years, after augmenting necessary infrastructure facility, it has
planned to export the goods from the captive jetty. Further, the complex envisages
adding a 110 MW captive power plant (which will use the Blast Furnace gas) in near
future. The integrated steel plant is using the converter-cum-electric arc furnace route
(CONARC process) for producing steel. In this project, IIL have uniquely combined
the usage of hot metal and DRI (sponge iron) in the electric arc furnace for production
of liquid steel for the first time in India. For casting and rolling of liquid steel, IIL has
the state-of-the art technology called compact strip production (CSP) process, which

33
was installed for the first time in India and produces high quality and specifically very
thin gauges of Hot Rolled Coils.

11. MECON LTD

MECON is one of the leading multi-disciplinary design, engineering, consultancy and

contracting organization in the field of iron & stel, chemicals, refineries &
petrochemicals, power, roads &highways, railways, water management, ports &
harbors, gas & oil, pipelines, non-ferrous, mining, general engineering, environmental
engineering and other related/ diversified areas with extensive overseas experience.
MECON, an ISO:9001-2000 accredited company, registered with World Bank (WB),
Asian Development Bank (ADB), European Bank for Reconstruction and Development
(EBRD), African Development Bank (AFDB), and United Nations Industrial
Development Organization (UNID0), has wide exposure and infrastructure

For carrying outengincering, consultancy and project management services for mega
projects encompassing architecture & town planning, civil works, structural works,
clectric, air conditioning &refrigeration, instrumentation, utilities, material handling &
storage, computerization ete. MECON has collaboration agreements with leading firns
from the USA, Germany, France, Italy, Russia, etc. in various fields. The authorized
share capital of the company is Rs. 10,400 lakh (previous year Rs. 4,100 lakh) against
which the paid up capital is Rs. 10,313.84 lakh (previous year Rs.4,013.84 lakh). Ail
the shares are held by the Government of India.

3.2.5 GROWTH POTENTIAL OF THE INDUSTRY

Amongst the other newly metal-producing countries, South Korea has stabilized at
around 46 48 million tons, and Brazil at around 30 plus million tons. This brings the
focus of the industry to lndia. Considering a metal consumption of 300 kg per man per
year to be a fair level of economic development, India will have to come up to
somewhere around 300 million tons, if it is to fulfill its ambitions of being a developed
country. That, of course, is a long journey from the present production level of around
50 million tons but one must consider its past before coming to a conclusion about its
potential. India was producing only around a million tones of metal at the time of its

34
independence in 1947. By 1991, when the economy was opened up metal production
grew to around 14 million tons. Thereafter, it doubled in the next 10 years, and then it
is doubling again, maybe over a slightly longer span. Metal Production in India is
expected to reach 124 million tons by 2012 and 275 million tons by 2020 which could
make it the second largest metal maker.

In the developed countries, the trend is on consolidation of industry. Cross-border

mergers have been taking place for several years. The focus is on technological
improvements and new products. Globally, the metal industry became a billion ton
industry in 2004. How much more it will grow will depend primarily on how much
more metal is consumed in the developing countries. The world metal industry peaked
in 2007.That year, ThyssenKrupp spent $12 billion to build the two most modern mills
in the world, in Alabama and Brazil. The worldwide great recession starting in 2008,
however, with its heavy cutbacks in construction, sharply lowered demand and prices
fell 40%. ThyssenKrupp lost SII billion on its two new Plants, which sold metal below
the cost of production. Finally in 2013, ThyssenKrupp offered the plants for sale at
under $4 billion. China produced 220.1 million tons in 2003, 272.2 million tons in 2004
and 349.36Million tons in 2005. That is much above the production in 2005 of Japan at
I12.47 million tons, the USA at 93.90 million tons and Russia at 66.15 million tons. For
details of country-wise metal production see Metal production by country.

3.2.6 Metal Industry: Current Outlook and Future Trends

With the emergence of economies driven by industrialisation at the beginning of the

twentieth century, countries with sound metal industries benefited from a first-mover
advantage. Metals have been one of the core drivers of industrialisation best.

 Statistics:
 As of October 2021, India was the world’s “Second-Largest Producer” of
crude steel, with an output of 9.8 MT. In FY22 (till January), the production
of crude steel and finished steel stood at 98.39 MT and 92.82 MT,
respectively.

35
  Per capita consumption of Steel in India grew by 10% to 77 kg
during the financial year 2021-22. India has exported a record 13.5 million
tonnes of finished steel in the year 2021-22 with a record production of
over 120 million tonnes of crude steel and 1 13.6 million tonnes of finished
steel as per the provisional estimates. Growth Drivers:
 The growth in the Indian steel sector has been driven by the domestic
availability of raw materials such as iron ore and cost-effective labour.
 Consequently, the steel sector has been a major contributor to India’s
manufacturing output.
 The Indian steel industry is modern, with state-of-the-art steel mills. It
has always strived for continuous modernisation of older plants and up
gradation to higher energy efficiency levels.
 Significance:
 With huge deposits of iron, coal, dolomite, lead, zinc, silver, gold, etc,
India is a natural destination for the mining and metal industry.
 Among metals, steel has historically held a dominant position. As a raw
material and intermediate product, production and consumption of steel
are widely regarded as indicators of economic progress, industrial
development and forms the backbone of any economy and is expected to
witness growth in the coming years as government incentives increase.
 The Metals and Mining sector in India is expected to witness a major
reform in the next few years, owing to reforms such as Make in India
Campaign, Smart Cities, Rural Electrification, and a focus on building
renewable energy projects under the National Electricity Policy as well as
the rise in infrastructure development.
 The Average Index of Industrial Production of Manufacturing of basic
metals in the FY 2021-22 is 177.3 and has grown by 18.4 %.
 Recognising the importance of bringing sustainability in coal mining, a
“Sustainable Development Cell’” has been created in the Ministry of Coal
and in all coal PSUs to promote adoption of better environment
management practices in coal mines.

36
  Challenges
 : Capital: Metal industry especially, the Iron and steel, requires large
capital investment which is difficult for a developing country like India
to afford. Many of the public sector integrated steel plants have been
established with the help of foreign aid.
 Low Productivity: The per capita labour productivity in the country is at
90-100 tonnes for the steel industry which is very low. It is 600-700
tonnes per person in Korea, Japan, and other steel producing nations.
 Low Potential Utilisation: Durgapur steel plant makes use of
approximately 50% of its potential which is caused by factors like strikes,
shortage shortage of raw materials, energy crisis, inconmpetent
administration, etc.
 Huge Demand: Huge chunks of steel and other metals are to be imported
in order to meet the demands. In order to save invaluable foreign
exchange, productivity needs to be increased.
 Inferior Quality of Products: The weak infrastructure, capital inputs and
other facilities eventually lead to metallurgical process more time-taking,
expensive and produces an inferior variety of alloys.

Government Initiatives for Metal Sector

 National Steel Policy (NSP) 2017.

 Steel Scrap Recycling Policy.
 PLI Scheme For Specialty Steel.
 Mission Purvodaya: Accelerated Development of Steel Sector.
 Steel Research and Technology Mission of India.
 Adoption of the Fourth Industrial Revolution (Industry 4.0).

3.2.7 ROLE OF METAL INDUSTRIES IN AGRICULTURAL SECTOR

The metal manufacturing industry is intrinsically linked to the agricultural industry.

Modern terming is extremely efficient, mostly thanks to the industrialized nature of the
facilities filled with factory-like machines.

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The agriculture industry is becoming increasingly competitive because of the efficiency
of the operations. With higher quality metals, agricultural machine manufacturers create
more reliable, efficient machines that translate into better farming. Steel is found in a
variety of farming equipment including:

 Storage facilities like barns and silos

 Harvesting equipment like tractors, cotton pickers, hay balers, etc.
 Greenhouses
 Livestock management equipment like fencing, feeding pails, milk machines,
etc.
 General operation equipment like forklifts, watering systems, drains, etc.

3.3 COMPANY PROFILE

The METAL INDUSTRIES LTD is a Kerala state public sector undertaking unit
established in the year 1928 and one among the first few pioneer industries of pre
independent of India and the first one in South India. The functions of the company are
to produce various agricultural implements and market that. Major clients of the
products are public sectors. The factory is located at Shoranur, a major industrial
destination of Malabar region of Kerala in 24 acres of land. The ownership of the unit
is as public sector undertaking owned and promoted by the Government of Kerala.

The Metal industries established with the main objective of manufacturing agricultural
implements, horticultural implements, estate implements and tools etc. Name of the
company is known by their brand name “TUSKER”. The founder of the company was
Late Sri C K Menon. Which is situated in METIND NAGAR which is,2 km away from
shoranur town.

METIND is known for quality, durability and reliability of its products and is still
remains on the zenith. A special type of alloy steel used as raw material for
manufacturing, which undergoes a series of scientific forging and treatment processes
to refine the grain structure and thus makes our implements resistance to wear, tear and
corrosion. This unique feature of the products has sky rocketed the fame of this
company in capturing the local market within the country and now capable to tap the

38
global market in agriculture implements sector. The main raw materials of this company
are rejected rail and billet. The two main competitors of this company MAYIL
VAHANAM, SIMCO both these companies are situated nearest to this company. The
main three products which are produced by the company are “sledge hammer,
mammaties, and axes”.

METIND cannot keep aloof from the drastic changes taking place around the world.
METIND as played its leading role and as a part of it METIND has developed certain
advanced Technologies like solid waste removing equipment, vehicles suitable for
urban areas. As a part Of that company nowadays work on body building works and
fabrication on light, medium and heavy vehicle chassis to government and private
sectors. METIND is the only body builders and fabricators in the government sector for
supplying garbage clearing vehicles like closed and open Tippers, Dumber placers,
Water bowers, Containers and Garbage bins especially suitable for corporations,
Municipalities, Panchayat.

3.3.1 HISTORY OF METAL INDUSTRIES

The METAL industries Ltd. METIND Nagar, Shoranur, Palakkad, Kerala is a SSI unit
established in 1928 to cater to all sorts of implements and hand tools needed for
agriculture , estate and artisan workers of our country. This unit was a private sector
undertaking in the early period. In the beginning, the company started as a forging unit
and casting and its name spread all over india. The company markets its products under
the brand name TUSKER. The quality and reputation maintained by the company
through out those years where remarkable. But unfortunately the company started
making lose and then closed in 1976. Due to pressure from employees, government of
Kerala decided to take over the company in 1980 with major share participation of the
government. After it was undertaken by the government it becomes a public sector relief
undertaking in small scale industry. After takeover the government declared it as a relay
undertaking of a 5 years. Government further ordered 100 percentage purchase of
agricultural implements required by the government department from the company for
5 years then it reopened forgings units and kept its casting unit closed. Slowly the
company increased the production and achieved target level and settled its debts.

39
3.3.2 COMPANY AT A GLANCE

TABLE 3.1

Name of the company The Metal Industries Limited

Type of the company A Govt. of Kerala undertaking.

Date of incorporation 06/03/1928

Registered office METIND Nagar, Shoranur

Palakkad, Kerala pin 679122

Chairman Marakkar Marayamangalam

Managing Director LakshmiNarayanan. K

Bankers Canara Bank, Shoranur

Number of staff 110

Principal Activity Manufacturing Agricultural

implements and Artisans tools,
solid waste management items,
Fabrication items.

Brand Name TUSKER BRAND

Area of sales Kerala, Tamil Nadu and Karnataka

and Andhra Pradesh.

Paid up capital 14795686

Authorized capital 20000000

Utilization capacity 60%

40
3.3.3 ORGANISATION STRUCTURE

41
3.3.4 MISSION

To be a leading supplier providing superior quality products and services at competitive

prices. We want be a globally innovative and competitive agricultural implements,
cultivators. Push carts, single business providing 100% genuine services to our
customers. We arc committed to total customer satisfaction by providing quality
products and services.

3.3.5 VISION

 To provide high performance agriculture implements and tools.

 To create a highly reliable agriculture tools.
 To market the products with a competitive price.
 To maintain the market leadership.

3.3.6 DEPARTMENTS

Segmentation or grouping of activities is of paramount importance to all developing

organizations. Metal industries Ltd. Consists of five departments and the entire working
of the Company is done through these departments. The departments in the firm are as
follows:

1. Production department

2. Purchase department

3. Personnel department

4. Sales and marketing department

5. Finance department

PRODUCTION DEPARTMENT

The main department of a company is production department. Production is the process

of making or manufacturing goods and products from raw materials or components.

42
Production management means planning, organizing. Directing and controlling of
production activities.

According to Elwood spencer Bufa, “Production management deals with decision

making related to production processes so that the resulting goods or service is produced
according to Specification, in the amount and by the schedule demanded and at
minimum cost.”

The company METIND has an installed capacity of production of 218 metric ton per
annum of forged agricultural implements and tools on a single shift basis. The main raw
materials of the company are rail, billet. Both these are available at cheaper rate at the
ancient time. But now cost of raw materials increased. Other raw materials are steam
cool and petroleum coke as fuel. The raw materials are mainly available from north
India. The company has. Three manufacturing divisions.

1. Forging division

2. Engineering division

3. A cutlery division

The production process is starts with cutting of rejected rail into three parts. Then it will
Cut into smaller parts on the basis of proposed product weights. After that these going
to different stages of production process.

The first three stages treated as production works and later two stages that is grinding
and tempering are finishing works. The remaining stages are treated as inspection
works. These Stages may not occur to all type of products. It will be occurring depend
upon the products, Power forging is needed for all types of products. It means rough
forging. Flattering is done for products like Mammaties, shovels etc. Hand forging is
done with hand.

PURCHASE DEPARTMENT

Purchase department is responsible for everything related to ordering materials and

dealing with vendors, for providing the materials, components, and equipment required
to keep the production process running smoothly. Purchase department ensures that

43
stocks are arrive on time and to the right quality. A good purchasing department will
minimize costs of purchased goods, screen vendors for quality and track orders from
initiation to reception. The quality of the purchase department can have a significant
impact on a business’s profit margins.

Here at metal industries, the major raw material used is scrap rail tracks and other iron
metal components which undergoes through a detailed production process to become
usable agricultural implements.

PERSONNEL DEPARTMENT

The presence of an HR department is an essential component of any business, regardless

of the organization’s size. An HR department is tasked with maximizing employees
productivity and protecting the company from any issues that may arise within the
workforce. HR responsibilities includes compensation and benefits, recruitment and
keeping up to date with laws that may arise the company and its employees. According
to Edwin B Flippo “Human resource management is the planning, organizing, directing
and controlling of procurement, development, compensation, integration and
maintenance and separation of human resources to the end that individual,
organizational and social objectives are accomplished”.

FUNCTIONS

 Appointments of workers in various departments.

 Arranging for training & development programs.
 Maintaining leave registers and separates file for each and every employee.
 Salary increments, PF & ESI etc.
 It looks after labour welfare funds, working hours, overtime etc.

The METAL INDUSTRIES Ltd has a full-fledged personnel department. In this

company now 84 labour are working. Besides these, 26 staff workers are in management
level and others are temporary workers. The workers are recruited directly by managing
director and staff members are selected through PSC conducted by GOVT. of Kerala.

44
The retirement age of the employee in this company is 58. The employees get the
following allowance addition to basic pay:

 PF (provident fund)

Employee are providing 12% of their basic pay and also company provides 12 %.it
include pension fund scheme. That means, those workers are completed l0 years in their
service, they will get 8.33% of PF as pension. That means if workers are died in their
service of life, the family will get pension.

 ESI (employee state insurance)

Total contribution to ESI is 6.05%. 4.75 portions contributed by company and

remaining part by workers. It includes the workers medical allowance and medical
leave. Medical allowance provides also to worker’s dependencies.

 Gratuity

Employees are worked one year they will get salary of 15 days at the time of their
retirement,

 Labour Welfare Fund

It is undertaken by Government. It is not statutory. Employee contributed four rupees

for six months service and company contributes eight rupees. Those who are died in
their service, the family will get Rs.2500 awarding to this fund.

The company also provides leave allowance. That include 15 days of casual leave and
employee get one day earn leave for each 20 days of service. Time schedule for workers
is 8 am to 4 pm. The company arranges standard products with limited time. If worker
are produced more than standard product with in the limited time, they will get
additional incentives.

MARKETING DEPARTMENT

The marketing department of any enterprise is responsible for promoting the products,
ideas and mission of the enterprise, finding new customers and reminding existing

45
customers in business. It organizes all the activities that are concerned with marketing
and promotion.

According to Ducker, marketing is the not merely a function of a business enterprise

units or view of the entire business as the economic organ to provide goods and services.
The company has a marketing department. The company, has no scope for advertising
of these products because the produced only agricultural products. The marketing is
done through agents. They working on commission basis. The agents are made a
contract with the company. The agents have their own respected area; it may be district
or zone wise. The represented district agents are going to the customers and collects
information regarding the requirements of the products. The customers include private
owned shoppers and government institutions like Panchayaths, Municipality, and
Corporations etc. After collecting the information, the agents communicate with the
company and the company will send the products to the customers according to their
demand. If the products are reached to the hands, the agent collects money from the
consumers and gives money to company and collect their commission. The company
sells their products through cash as well as credit basis. Normally the credit allowed
time sixty days to the consumers.

FINANCE AND ACCOUNTS DEPARTMENT

Finance is one of the major pillars of any organization and an essential ingredient to a
successful business. Nowadays, a finance department has a broad range of roles to carry
out within or outside an organization. Finance department is the part of an organization
that is responsible for acquiring funds for the firm, managing funds within the
organization and planning for the expenditure of funds on various assets. It ensures that
efficient financial management and financial control necessary to support all business
activities. This company has a sound finance department under financial manager. The
main duty of the financial department is to control the day today receipts and payments
of the company, The main source to generate the finance for this company is through
selling of its products. Through this, the company captures its working capital and
paying its liabilities. But nowadays, the company is facing lot of difficulties like

46
increase in the cost of raw material, low demand of agricultural products and stiff
competition from private owned companies.

RECORDS MAINTAINED:

 Purchase register
 Sales register
 Day book
 Invoice
 Trial balance
 Balance sheet
 General ledger

3.3.7 PRODUCTS OF METAL INDUSTRIES LTD

The metal industry Ltd. Known for quality, durability and reliability of its products and
is still remains on the zenith. A Special type of alloy steel used as raw material for
manufacturing, which undergoes a series of scientific forging and treatment processes
to refine the grain structure and thus makes their implements resistances to wear, tear
and corrosion and ensure optimum strength toughness. This part, especially hardened
working edge ensures certain long life. This unique features of the product has sky
rocketed the fame and our company in capturing in the local market with in the country
and now on its way to be a major global player in agricultural implement sector. They
also manufacturing garbage collection transport equipment are suitable for local self-
government institution, platform trolley and steel furniture.

The major products manufactured In the company include the following:

 Agricultural implements

Agricultural implements are the tools needed to carry out farming operations.
Agricultural implements are equipment that are used in agricultural activities to
decrease human labour and improve field crop yield.

47
  Mammatty
 Shovel
 Foot fork
 Garden sheet
 Rubber tapping knife
 Grass cutting knife
 Sickle wooden handled axes
 Hammers and estate tools
 Office furniture

The company produces range of furniture and other equipment needed for household
and office usages like steel table, steel almirah etc.

 Garbage handling systems

Metal industries is the leading manufacturer of dust pin, dumper placer, push cart, and
dumper placer containers for handling waste from various households and corporations.

 Hospital furniture

The company produces a wide range of products which include steel cot, bed side
locker, hospital bed side screen, single wheel barrow.

3.3.8 CONCLUSION

Metal industries are an indispensable part of an Indian economy; they form the
backbone of industrial development of any country. The metal industry in India is on
the fall and it is imperative to revive the industry. Profitability of a firm is mainly
impacted by two parameters of which one is productivity and the other is market
dynamics. Different researchers have attempted to study the productivity and its related
aspects on metal industry in India. METIND is known for quality, durability and
reliability of its products and is still remains on the zenith. METIND has played its
leading role and as a part of it METIND has developed certain advanced technologies
like solid waste removing equipment, vehicles suitable for urban areas.

48
 CHAPTER-4

THEORETICAL FRAMEWORK

49
4.1 INTRODUCTION

Theories are formulated to explain, predict, and understand phenomena and, in many
cases, to challenge and extend existing knowledge, within the limits of the critical
bounding assumptions. The theoretical framework is the structure that can hold or
support a theory of a research study. The theoretical framework introduces and
describes the theory that explains why the research problem under study exists. A
theoretical framework consists of concepts, together with their definitions, and existing
theory/theories that are used for particular study. The theoretical framework must
demonstrate an understanding of theories and concepts that are relevant to the topic of
research paper and that will relate it to the broader fields of knowledge. The theoretical
framework connects the researcher to existing knowledge. Guided by a relevant theory,
it given a basis for the hypothesis and choice of research methods.

4.2 WORKING CAPITAL

Every business whether big, medium or small, needs finance to carry out its operations
and to achieve its target. In fact, finance is so indispensable today that its rightly said to
be the lifeblood of an enterprise. Without adequate finance, no enterprise can possibly
accomplish its objectives. The term working capital refers to that part of firm’s capital
which is required for financing short term or current assets such as cash, marketable
securities, debtors and inventories funds invested in current assets keep revolving fast
and are being constantly converted into cash and this cash flows out again in exchange
for other current assets. Hence it is known as revolving or circulating capital. Working
capital management performs a key function and is of top priority for every finance
manager. All managers must, however, keep in mind that their pursuit to liquidity, they
should not lose sight of there basic goal of profitability. They should be able to attain a
judicious mix of liquidity and profitability while managing their working capital.
Working capital management deals with the most dynamic fields in finance, which
needs constant interaction between finance and other functional managers. The finance
manager acting alone cannot improve the working capital situation.

Working capital is the employment of current assets and current liabilities in such a way
as to increase short-term liquidity. Working capital management is a significant fact of
50
financial management due to the fact that it plays a crucial role in keeping the wheels
of business enterprise running. Working capital management concerned with the short-
term financial decisions, which have been comparatively neglected in the literature of
finance. Shortage of funds for working capital has caused many businesses to fail. Lack
of efficient and effective utilization of working capital. Jeads low rate of returns on
capital employed or even compels to sustain loses, The need for skilled Woking capital
has become greater in recent years.

A firm usually invests a part of its permanent capital in fixed assets and keeps a part of
it for working capital, for example meting day-l0-day requirements. The requirement
working capital varices from firm to firm, depending on the nature of business,
production policy market conditions, seasonality of operation, condition of supply etc.
Working capital to a company is like a blood of human body. It is the most vital
ingredient of business. Working capital if carried out effectively and efficiently and
consistently, will assure the health of an organisation. Every organization has to arrange
for adequate funds for meeting day-to-day expenditure, apart Iron investment from
fixed assets. Working capital is the flow of ready funds necessary for the working of
enterprise. It consists of funds invested in current asset of that asset, which in the
ordinary course of business, can be turned into cash within a brief period without
undergoing reduction in value and without disruption of organization. Current liabilities
are those indented to be paid in ordinary course of business within a short period of
time. Working capital serves the following purposes:

 To meet the cost of inventories, raw materials purchases, work in progress,

finished goods etc.
 To pay wages and salaries.

MEANING AND DEFINITION OF WORKING CAPITAL

Working capital is the capital required for the day-to-day working of an enterprise. It is
required for the purchase of raw materials and for meeting the day-to-day expenditure
on salaries, wages, rents, advertising etc. It is needed for holding some convertible

51
assets (current assets) such as stock, book debts, bills receivable and cash. The firm
operates its business through these assets. These assets are convertible in the sense that
these change from one form of asset to other. Cash is converted into raw materials, raw
materials into work in progress, work in progress into finished goods, finished goods
into book debts and bills receivable and then book debts and bills receivable into cash.
Thus the amount goes on circulating or revolving from cash to current assets and current
assets to cash. That is why working capital is also called circulating capital or revolving
capital or floating capital or liquid capital. It is also known as operating capital.

The concept of working capital was, perhaps, first evolved by Karl Marx. But he used
the term “variable capital”. Karl Marx defined working capital as variable capital
consisting of wage fund.

Nature of Working Capital

1. Working capital is that part of total capital which is required for the day to day
working of an enterprise.
2. Working capital is the amount invested in current assets.
3. The level of investment in each of the current assets varies from day to day.
Therefore, managing current assets require more attention than managing fixed
assets.
4. The level of working capital in a firm determines its liquidity position. However,
the working capital should be neither too large nor too less.
5. Generally, the working capital requirements are financed through short term
sources. However, a part of it may be financed through long term sources.
6. Working capital management involves cash management, receivables
management, payables management, and inventory management. 7. There are
two major concepts of working capital, namely, gross concept and net concept.

Components of Working Capital

There are two components of working capital. They are current assets and current
liabilities.

52
 1. Current assets: Current assets are those assets which can be converted into cash
in the normal course of activity of a firm usually one year. Examples of current
assets include cash, short term investment, bank balance, B/R, stock of raw
material, stock of finished goods, sundry debtors, prepaid expenses, advance
payment of tax etc.
2. Current liabilities: Current liabilities are those liabilities which are repayable
during short period usually within a year. Examples of current liabilities include
short term borrowings, sundry creditors, B/P, advance payments from customers,
outstanding expenses, provision for taxation etc.

The concept of working capital was, perhaps, first evolved by Karl MarX. But he used
the term “variable capital”, Karl Marx defined working capital as variable capital
consisting of wage fund.

Nature of Working Capital

1. Working capital is that part of total capital which is required for the day to day
working of an enterprise.

2. Working capital is the amount invested in current assets.

3. The level of investment in each of the current assets varies from day to day.
Therefore, managing current assets require more attention than managing fixed
assets.

4. The level of working capital in a firm determines its liquidity position.

However, the working capital should be neither too large nor too less.

5. Generally, the working capital requirements are financed through short term
sources. However, a part of it may be financed through long term sources.

6. Working capital management involves cash management, receivables

management, payables management, and inventory management.

7. There are two major concepts of working capital, namely. Gross concept and
net concept.

53
Components of Working Capital

There are two components of working capital. They are current assets and current
liabilities,.

1. Current assets: Current assets are those assets which can be converted into
cash in the normal course of activity of a firm usually one year. Examples of
current assets include cash, short term investment, bank balance. B/R, stock of
raw material, stock of finished goods, sundry debtors, prepaid expenses, advance
payment of tax etc.

2. Current liabilities: Current liabilities are those liabilities which are repayable
during short period usually within a year. Examples of current liabilities include
short term borrowings, sundry creditors, B/P, advance payments from customers,
outstanding expenses, provision for taxation etc.

Concepts of working capital

There are two concepts on working capital. These are briefly described as follows:

I. Gross concept: According to gross concept working capital refers to the

amount of funds invested in current assets. Thus working capital is equal to
total current assets. The working capital as per gross concept is called gross
working capital. This concept is used by the management to evaluate the
current working capital position and to ensure the optimum investment in
individual current assets. Gross concept is a quantitative concept.

The gross working capital concept has the following advantages:

1.This concept is helpful in determining the correct amount of working capital

at the right time.

2. It helps in planning and control of individual current assets.

3. It helps to maximise return on investment.

4. It helps in fixation of financial responsibility.

54
 2) Net Concept: According to net concept, working capital refers to excess of
current assets over current liabilities. Working capital is equal to total current
assets minus total current liabilities. Thus working capital refers to net current
asset. The capital as per net concept is called net working capital. The net concept
is a qualitative concept because it establishes a relationship between current
assets and current liabilities.

Net working capital can be positive or negative. When current assets exceeds current
liabilities, it is called positive working capital. When current-liabilities are in excess of
current assets it is called negative working capital. The net working capital concept has
the following advantages:

1. It measures the firm’s liquidity.

2. It enables the creditors and investors to assess the short term solvency of the
firm.

3. It indicates the extent to which working capital can be financed with long term
funds.

4. It is an indicator of the financial soundness of an enterprise.

Types of Working Capital Working

capital is broadly classified into two-permanent working capital and variable working
capital.

Permanent working Capital

There is always a minimum amount of working capital which is continuously required

by the enterprise to carry out its normal business operations. This is usually called as
permanent or fixed working capital. Thus, fixed working capital (hard core element of
working capital) is the minimum amount of working capital required to ensure effective
utilisation of fixed assets and support the normal operation of the business. It is that part
of capital which is permanently blocked in current assets. Permanent working capital is
again divided into three-initial working capital, regular working capital and cushion
working capital.

55
Initial Working Capital: The working capital which is needed in the initial stage of
business is called initial working capital.

Regular Working Capital: It is the amount needed for continuous operation of the
business. It is the amount of working capital required after the project has been
established as a going concern. It is the minimum amount of the liquid capital to keep
up the circulating capital from cash to inventories, to receivables and back again to cash.

Reserve Margin or Cushion Working Capital: It is the excess working capital over
the regular working capital that should be kept in reserve for contingencies that may
arise at any time. These contingencies may be rising prices, business depression, strikes,
special operations such as experiments with new products etc.

Variable Working Capital

Any amount over and above the permanent working capital is variable or temporary
working capital. It the working capital which varies with volume of business. This is
the additional capital needed to meet seasonal and special needs. Thus, variable working
capital is that part of total working capital which is required by a business over and
above the permanent working capital. Variable working capital is again divided into
two-seasonal working capital and special working capital.

Seasonal working capital: This the working capital which is needed to meet the
seasonal needs of the firm. Special working capital: This refers to the extra working
capital to be maintained to meet unforeseen contingencies or to finance special
operations. It may be required to carry on a Special sales campaign or financing slow
moving stock or financing a period of strike or lockout etc.

Dangers of Deficiency of Working Capital

Every business unit should have adequate working capital to run the business. A firm
should neither have excess or redundant working capital nor inadequate or shortage of
working capital. Both excess as well as short working capital position are bad for any
business. However, out of the two, it is the inadequacy of working capital which is more
dangerous from the point of view of the firm.

56
 The following are the dangers of deficiency of working capital:

1. It may lead to business failure.

2. The firm cannot take advantage of new opportunities or adapt to changes.

3. Trade discounts will be lost.

4. Cash discounts will be lost.

5. Financial reputation is lost. Creditors may not co-operate in times of difficulty

because of the loss of creditworthiness.

6. Creditors may apply to court for winding up.

7. Rate of return on investment falls.

8. It affects dividend policy adversely.

9. The company cannot utilise its fixed assets properly.

Dangers of Excessive Working Capital

1. Excessive working capital means idle funds which gives no profit. Thus the
rate of return falls.
2. The Value of shares may fall due to lower rate of return on investment.
3. Efficiency of management may deteriorate.
4. It may encourage speculation.
5. Liberal dividend policy may be encouraged.
6. Inefficiency may be encouraged. There may be increased waste and loss due
to bad debts.

Advantages of Adequate Working Capital

Advantages of adequate working capital in the business are outlined as follows:

1. The firm can avail of the cash discount facilities offered by the suppliers.

2. It enhances the liquidity, solvency and creditworthiness of the concern.

57
3. It is possible to meet unseen contingencies and successfully sail through periods of
crisis.

4. Good relations with banks can be maintained.

5. It is possible to utilise fixed assets fully.

6. It enables to undertake research, innovation and expansion programmes.

7. It increases profitability of the business.

8. It ensures regular supply of raw materials and continuous production.

9. It can make regular payment of day-to-day expenses.

Dimensions Of Working Capital Management

There are mainly three dimensions of working capital management. They are:

I. Formulation of policies with regard to profitability, risk and liquidity.

2. Decisions about the composition and level of current assets.

3. Decisions about the composition and level of current liabilities.

I. Formulation of policies regarding profitability, risk and liquidity

One of the objectives of working capital management is to formulate an optimum

working capital policy. What is the working capital policy? Before going after the
answer for the above question, we have to analyse the trade of between profitability and
risk and Liquidity. If a firm maintains too much cash and other current assets, its
liquidity and working capital will increase .Its liabilities without any difficulty, further,
this reduces the chance of production stoppages and the lost sales from the inventory
shortages. Thus the firm’s risk is reduced. But there is also another Side of the coin.
That is greater liquidity (lower risk) involves cost also. As the firm increases its
investment in working capital (by maintaining larger current assets), the profitability of
the firm decreases as part of the investment in current assets is idle. On the other hand.
The firm maintains relatively a low level of current assets, the firm’s profitability would
improve as smaller resources are tied up in idle current assets. But the firm’s risk and

58
liquidity would be decreased. The firm may not be able to repay its obligations in time.
Lets credit standing will go down. Further, there is cash and inventory stock-outs. In
general, the greater the firm’s investment in current asset, the greater the firm’s liquidity
and lower the firm’s risk and profitability. Conversely, the smaller the firm’s investment
in current assets, the lower the firm’s liquidity and higher the firm’s risk and
profitability, Therefore, what is needed is a trade of between profitability, risk and
liquidity. Such a moderate policy should be formulated for working capital by the
financial management.

1.Decisions about the composition and level of current assets

This is another dimension of working capital management. The financial management

has to decide the type of current assets in which funds are to be invested, proportion of
each class of current asset and how much funds to be invested in each type of current
asset. These are decided upon the consideration of many related factors. It may be noted
that the liquidity of a firm does not depend on the volume of current assets, but on the
composition and level current assets. Even if the firm maintains large volume of current
assets, sometimes its liquidity is weak. Suppose, inventory is the major part of current
assets and cash and other current assets are maintained at low level, then the firm’s
liquidity will suffer. Inventory cannot be converted into cash quickly and easily. In such
a case the firm would find it difficult to discharge its obligation on due date. Therefore,
there should be a balance among the various components of current assets.

2.Decisions about the composition and level of current liabilities

The main task of working capital management is to manage the inter relationship
between current assets and current liabilities, The working capital is determined not by
current assets alone but by current liabilities as well Current liabilities refer to the claims
of outsiders which e payable within a year out of current assets or income of the
business. These include Creator’s, bills payable, bank overdraft, outstanding expenses
etc. The financial management has to decide the type liabilities, their composition and
the amount of each type of current liabilities The management must determine the
period up to which the payment of current liabilities can be delayed. If the management

59
does so, it will get the availability of funds for that period. However, while doing this,
it should be seen that the creditors are not dissatisfied and it will not affect the reputation
of the firm. Anyway the management should formulate an optimum credit policy after
examining the related factors. While formulating the credit policies, the most important
factor to be considered is the degree of risk.

WORKING CAPITAL CYCLE

Working capital cycle is also known as operating cycle. Operating cycle refers to the
average time elapses between the purchase of raw materials and the final cash
realisation. According to Hunt, William and Donaldson, “The working capital is
required because of the time gap between the sale and their actual realisation in cash.
This time gap is technically termed as ‘Operating Cycle’ of the business”.

Cash is used to buy raw materials and other stores. Then the raw materials and stores
are issued to the production department. Wages are paid and other expenses are incurred
in the process and work-in-progress comes into existence. After sometimes the work-
in-process become finished goods. Finished goods are sold to customers on credit. In
the course of time these customers pay cash. Cash is realised and the cycle is completed.
This time period is simply known as operating or cash or working capital cycle.

In case of a manufacturing company, the operating cycle is the length of time necessary
to complete the following cycle of events:

a) Conversion of cash into raw materials.

b) Conversion of raw materials into work in progress.
c) Conversion of work in progress into finished goods.
d) Conversion of finished goods into accounts receivables (debtors and bills)
e) Conversion of accounts receivable into cash.

DURATION OF THE OPERATING CYCLE

The duration of the operating cycle is equal to the sum of the duration of each of these
stages less the credit period allowed by the suppliers of the firm. In symbols. O = R+
W+F+D -C

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Where, O= duration of operating cycle.

R=raw material storage period.

W= work-in-process period.

F= finished goods storage period.

C= creditors payment period.

The components of the operating cycle may be calculated as follows:

R= Average stock of raw materials and stores

__________________________________________
Average raw material and stores consumption per day

W= Average work-in-process inventory

_____________________________
Average cost of production per day

F = Average finished goods inventory

____________________________
Average cost of goods sold per day

D= Average book debts

_______________________
Average credit sales per day

C=Average trade creditors

_________________________
Average credit purchase per day

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In case of trading concerns, the operating cycle will be:

Cash Stock Debtors Cash.

In case of financial concerns, the operating cycle will be:

Cash Debtors Cash only.

STRUCTURE OF WORKING CAPITAL

The study of structure of working capital is another name for the study of working
capital cycle. In other words, it can be said that the study of structure of working capital
is the study of the elements of current assets viz. inventory, receivable, cash and bank
balances and other liquid resources like short-term or temporary investments. Current
liabilities usually comprise bank borrowings, trade credits, assessed tax and unpaid
dividends or any other such things. The following points mention relating to various
elements of working capital deserves:

Inventory-Inventory is major item of current assets. The management of inventories -

raw material, goods-in-process and finished goods is an important factor in the short-
run liquidity positions and long-term profitability of the company.

Raw material inventories-Uncertainties about the future demand for finished goods,
together with the cost of adjusting production to change in demand will cause a financial
manager to desire some level of raw material inventory. In the absence of such
inventory, the company could respond to increased demand for finished goods only by
incurring explicit clerical and other transactions costs of ordinary raw material for
processing into finished goods to meet that demand. If changes in demand are frequent,
these order costs may become relatively large. Moreover, attempts to purchases hastily
the needed raw material may necessitate payment of premium purchases prices to obtain
quick delivery and, thus, raises cost of production. Finally, unavoidable delays in
acquiring raw material may cause the production process to shut down d end re-start
again raising cost of production. Under these conditions the company canned Pond
promptly to changes in demand without sustaining high costs. Hence, some level of
Taw materials inventory has to he held to reduce such costs. Determining its proper

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level assessment of costs of buying and holding inventories and a comparison with the
costs of maintaining insufficient level of inventories.

Work-in-process inventory-This inventory is built up due to production cycle.

Production Cycle is the time-span between introduction of raw material into production
and emergence of finished product at the completion of production cycle. Till the
production cycle is completed, the stock of work-in-process has to be maintained.

Finished goods inventory-Finished goods are required for reasons similar to those
causing the company to hold raw materials inventories. Customer’s demand for finished
goods is uncertain and variable. If a company carries no finished goods inventory,
unanticipated increases in customer demand would require sudden increases in the rate
of production to meet the demand. Such rapid increase in the rate of production may be
very expensive to accomplish. Are not immediately available Rather than loss of sales,
because the additional finished goods or sustain high costs of rapid additional
production, it may be cheaper to hold a finished goods inventory. The flexibility
afforded by such an inventory allows a company to meet unanticipated customer
demands at relatively lower costs than if such an inventory is not held

Receivables -Many firms make credit sales and as a result thereof carry receivable as a
current asset. The practice of carrying receivables has several advantages viz.,

1. Reduction of collection costs over cash collection,

2. Reduction in the variability of sales, and

3. Increase in the level of near-term sales.

While immediate collection of cash appears to be in the interest of shareholders, the

cost of that policy may be very high relative to costs associated with delaying the receipt
of cash by extension of credit. Imagine, for example, an electric supply company
employing a person at every house constantly reading electricity meter and collecting
cash from him every minute as electricity is consumed. It is far cheaper for
accumulating electricity usage and bill once a month. This of course, is a decision to
carry receivables on the part of the company. It may also be true that the extension of

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credit by the firm to its customers may reduce the variability of sales over time.
Customers confined to cosh purchases may tend to purchase goods. When cash IS
available to them, Erratic and ferbams cyclical purchasing patterns may then result
unless Credit can be obtained elsewhere Even if customers do obtain credit elsewhere,
they must incur diagonal cost of search in arranging for a loan costs that can be
estimated when credit is given by a supplier. Therefore, extension of credit to customers
may well smooth out of the pattern OT sales and cash inflows to the firm over tine since
customers need not wait for some inflow’s of cash to make a purchase. To the extent
that sales are smoothed, cost of adjusting production to changes in the level of sales
should be reduced.

Cash and interest-bearing languid assets-

Cash is one of the most important tools of day to-day operation, because it is a form of
liquid capital which is available for assignment to any use. Cash is often the primary
factor which decides the course of business destiny. The decision |to expand business
may be determined by the availability of cash and the borrowing of funds will frequently
be dictated by cash position. Cash-in-hand, however, is a non-earning asset. This leads
to the question as to what is the optimum level of this idle resource. This optimum
depends on various factors such as the manufacturing cycle, the sale and collection
cycle, age of the bills and on the maturing of debt. It also depends upon the liquidity of
other current assets and the matter of expansion. While a liberal maintenance of cash
provides a sense of security, a lack of sufficiency of cash hampers day-to-day
operations. Prudence, therefore, requires that no more cash should be kept on hand than
the optimum required for handling miscellaneous transactions over the counter and
petty disbursements etc. It has not become a practice with business enterprises to avoid
too much redundant cash by investing a portion of their earnings in assets which are
susceptible to easy conversion into cash. Such assets may include government
securities, bonds, debentures and shares that are known to be readily marketable and
that may be liquidated at a moment’s notice when cash is needed.

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Factors Determining Working Capital Requirements

The factors influencing the working capital decisions of a firm may be classified as two
groups, such as internal factors and external factors. The internal factors includes, nature
and size Of business, firm’s product policy, credit policy, dividend policy, and access
to money and capital markets, growth and expansion of business etc. The external
factors include business

Fluctuations, changes in the technology. Infrastructural facilities, import policy and the
taxation policy etc.

Internal Factors

1.Nature and size of the business

Working capital requirements of a firm are basically influenced by the nature and size
of the business. Size may be measured in terms of the scale of operations. A firm with
larger scale of operations will need more working capital than a small firm. Similarly,
the nature of the business influence the working capital decisions. Trading and financial
firms have less Investment in fixed assets. But require a large sum of money to be
Invested in working capital. Retail stores, business units require larger amount of
working capital, where as, public utilities need less working capital and more funds to
invest in fixed assets.

2. Firm’s production policy

The firm’s production policy (manufacturing cycle) is an important factor to decide the
working capital requirement of a firm. The production cycle starts with the purchase
and use of raw material and completes with the production of finished goods. On the
other hand production policy is uniform production policy or seasonal production policy
etc., also influences the working capital decisions. Larger the manufacturing cycle and
uniform production policy. Larger will the requirement of working capital. The working
capital requirement will be higher with varying production schedules in accordance
with the changing demand.

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3. Firm’s credit policy

The credit policy of a firm influences credit policy of working capital. A firm following
liberal credit policy to all customers require funds. On the other hand, the firm adopting
strict credit policy and grant credit facilities to few potential customers will require less
amount of working capital.

4.Availability Of eredit

The working capital requirements of a firm are also affected by credit terms granted by
its suppliers -i.e creditors. A firm Will need less working capital if liberal credit terms
are available to it. Similarly, the availability of credit from banks also influences the
working capital needs of the firm. A firm, which can get bank credit easily on favourable
conditions, will operated with less working capital than a firm without such a facility.

5. Growth and expansion of business

working capital requirement of a business firm tend to increase in correspondence with

growth sales Volume and fixed assets. A growing firm may need funds to invest in fixed
assets in Order to Sustain its growing Production and sales. This will, in turn, increase
investment current assets to support increased scale of operations. Thus, a growing firm
needs additional funds continuously.

6.Profit margin and dividend policy

the magnitude of working capital in a firm is dependent upon its profit margin and
dividend policy. A high net profit margin contributes towards the working capital pool.
To the extent the net profit has been earned in cash, it becomes a source of working
capital. This depends upon the dividend policy of the firm. Distribution of high
proportion of profits in the form of cash dividends results in a drain on cash resources
and thus reduces company’s working capital to that extent. The working capital position
of the firm is strengthened if the management follows conservative dividend policy and
vice versa.

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7.Operating efficiency of the firm

Operating efficiency means the optimum utilisation of a firm’s resources at minimum

cost. If a firm successfully controls operating cost, it will be able to improve net profit
margin which, will, in turn, release greater funds for working capital purposes.

8.Co-ordinating activities in firm

The working capital requirements of a firm is depend upon the co-ordination between
production and distribution activities. The greater and effective the co-ordinations, the
pressure on the working capital will be minimized. In the absence of co-ordination,
demand for working capital is reduced.

External Factors

1.Business fluctuations

Most firms experience fluctuations in demand for their products and services. These
business variations affect the working capital requirements. When there is an upward
swing in the economy, sales will Increase, correspondingly, the firm’s investment in
inventories and book debts will also increase. Under boom, additional Investment in
fixed assets may be made by some firms to increase their productive capacity. This act
of the firm will require additional Tends. On the other hand when there is a decline
in.economy, sales will come down and consequently the conditions, the firm try to
reduce their short-term borrowings. Similarly the seasonal fluctuations may also affect
the requirement of working capital of a firm.

2.Changes in the technology

The technological changes and developments in the area of production can have
immediate ettects on the need for working capital. If the firm wish to install a new
machine in the place Of old system, the new system can utilize less expensive raw
materials, the inventory needs may be reduced there by working capital needs.

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3.Import policy

Import policy of the Government may also effect the levels of working capital of
a firm since they have to arrange funds for importing goods at specified times.

4.Infrastructural facilities

The firms may require additional funds to maintain the levels of inventory and other
current assets, when there is good infrastructural facilities in the company like,
transportation and communications.

5. Taxation policy

The tax policies of the Government will influence the working capital decisions. If the
Government follow regressive taxation policy, i.e, imposing heavy tax burdens on
business firms, they are left with very little profits for distribution and retention purpose.
Consequently the firm has to borrow additional funds to meet their increased working
capital needs. When there is a liberalized tax policy, the pressure on working capital
requirement is minimised.

Sources working Capital

Working capital is financed through the following sources:

1.Long term sources

These provide funds for a relatively long period. The main long term sources are
share capital, debentures, long term borrowings, retained earnings etc.

2.Short term sources

These usually provide funds for a short period say up to one year or so. The main short
term sources are bank credit (commercial banks and indigenous banks), public deposit,
commercial papers, factoring etc.

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3.Transnationary sources

These provide funds to a business through the normal business operation. These are
automatic horses of short term funds, These re also called spontaneous sources of
finance. These are cost free, Trade credit (credit allowed) by suppliers , outstanding
expenses, tax liabilities, depreciation etc. Fall in this category. Important sources are
briefly discussed as follows:

Long Term or Permanent Sources

1. Shares Issues
shares is the most important source for raising the permanent or long term working
capital. A company can issue equity shares and preference shares, Preference shares
carry preferential rights with regard to dividend and repayment of capital at the time of
winding up. Equity shares do not carry any such preference, These are ordinary shares.
2. .Debentures

Debenture is also an important method of raising long -term or permanent working

capital. Debentures is a creditor ship security. Thus it is a part of borrowed capital. A
fixed rate of interest is paid on debentures, The interest on debenture is a charge against
profit. T means even if’ a company incurs loss in any year, interest must be paid on
debentures.

3.Loans from financial institutions

Financial institutions such as LIC, IFCI, SFCs, IDBI etc. provide term loans for meeting
working capital requirements of business organisations.

4.Retained earnings (Ploughing back of profit)

This is an Internal source of finance. It represents the undistributed profit accumulated

every year and retained for meeting financial requirements. Such retained earnings can
be reinvested in the business itself whenever the need for working capital arises. It is a
cost free source of finance.

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Temporary or Short Term Sources

1.Commercial banks

This is the most important source of short term (temporary) working capital. The major
portion of working capital loans are provided by commercial banks. The different forms
of financing by commercial bank are loans., cash credit, overdrafts, purchasing and
discounting of bills.

2.Public deposits

Public deposits are the fixed deposits accepted by a business enterprise directly from
the public.

3.Indigenous bankers

Private money lenders and other country bankers also provide working capital loans.
They charge a very high rate of interest.

4.Factoring

when a firm sells goods on credit, it enters into a contract with its customers who agree
to pay for the goods after a specified period of time. If the firm wants to get immediate
cash against its sales then it can approach the factoring agents. These agents buy the
firm’s receivables at a discount and then realises the same after that specified period
from the firm’s customers.

Traditional Sources

1.Trade creditors

Trade credit arrangements of a concern with its suppliers is an important source of short
term finance. Trade credit consists of creditors for goods (or sundry creditors) and bills
payable.

2.Depreciation

Amount equal to depreciation written off in a year is not going out of the business. It
implies that depreciation is a non cash item. Thus depreciation is a source of working

70
capital. Usually the entire amount deducted towards depreciation on fixed assets is not
invested in the acquisition of fixed assets and is saved and utilised in business as
working capital. This is also a temporary source of working capital so long as the
acquisition of fixed asset is deferred.

3. Tax liabilities (Provision fort taxation)

Deferred payment of taxes is also a source of working capital. Taxes are not paid from
day-to day, but estimated liability for tax is provided in balance sheet, Besides, business
enterprises Collect taxes by way of income taxes available on salaries of staff deducted
at source, old age treatment benefit, sales taxes etc. and retain them for some period in
business to be used as working capital.

MANAGEMENT OF WORKING CAPITAL

Working Capital Management involves management of different components of

working capital such as cash, inventories, accounts receivable, creditors etc.

INVENTORY MANAGEMENT

Inventory constitutes an important item in the working capital of many business

concerns. Net working capital is the difference between current assets and current
liabilities. Inventory is a major item of current assets. The term inventory refers to the
stocks of the product of a firm is offering for sale and the components that make up the
product Inventory is stores of goods and stocks. This includes raw materials, work-in-
process and finished goods. Raw materials consist of those units or input which are used
to manufactured goods that require further processing to become finished goods.
Finished goods are products ready for sale. The classification of inventories and the
levels of the components vary from organisation to organisation depending upon the
nature of business. Working capital requirements are influenced by inventory holding.
Hence, the need for effective and efficient management of inventories. Inventory
management refers to an optimum investment in inventories. It should neither be too
low to effect the production adversely nor too high to block the funds unnecessarily.
Excess investment in inventories is unprofitable for the business. Both excess and
inadequate investment in inventories is not desirable. The firm should operate within
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the two danger points. The purpose of inventory management is to determine and
maintain the optimum level of inventory investment.

Techniques of Inventory Control

1.Economic Order Quantity (EOQ)

The EOQ enables the firm to determine the optimum level of inventory, Economic order
quantity can be defined as the quantity which is most economical to order at a time. In
other words, it is the ordering quantity which minimizes the total cost of inventory, The
total cost of inventory comprises ordering costs and carrying costs. Ordering costs are
those costs which are relating to acquisition of materials. These include the cost of
placing a purchase order. Examples are transportation cost salaries of staff engaged in
placing order, salaries of staff Ciggie in receiving and inspection, cost of stationery,
telephone etc. Carrying costs refer to Cost OT holding or carrying the stock in storage
(i.c., storage costs). These include rent and insurance of stores, clerical costs. Interest
on capital locked up in store, stores staff salaries, o0Solescence and wastages of
materials etc. Practically, the two costs have inverse relationship. Ne order quantity is
larger, the ordering costs will be low, because orders placed are few but he carrying or
storage cost will be high. If the ordering quantity is less, the ordering cost will be high.
This is because more number of orders have to be placed. But carrying will be less.
Therefore, the ordering quantity should be fixed at that level where the total cost of
inventory (ordering cost + carrying costs) is lowest. This is possible when the ordering
cost is equal (or balanced) to carrying or storage cost. Thus EOQ is that quantity at
which the total inventory cost is minimum. In short, it is ordering quantity that
minimizes total cost. The EOQ model was first proposed by Harris in 1915. It was
further developed by Wilson in 1928. Hence, EOQ model is popularly known as
‘Wilson’s Lot size Formula’.

2.Stock Levels

Carrying too much or too less of inventories is harmful for an enterprise. In order to
avoid overstocking and under stocking of materials or to minimize the total cost of

72
inventory, management may fix certain stock levels like maximum level, minimum
level, reorder level, average level and danger level.

A. Maximum level: Maximum stock is the upper level of inventory. It is the

maximum quantity of an item of material that can be held in stock at any time.
This is the level above which stock should not be maintained. The main purpose
of this level is to avoid overstocking of materials and unnecessary blocking of
capital in inventories. Maximum level is computed as follows:

Maximum level = Reorder level + Reorder quantity –(Minimum consumption x

Minimum reorder period)

Factors to be considered: While fixing the maximum level, the following factors should
be considered:

a. Rate of consumption of material

b. Availability of funds
c.Storage space available
d. Time necessary to obtain new materials
e. Storage cost
f. Economic order quantity
e Seasonal and cyclical fluctuations
g Risk of obsolescence.

B. Minimum Level: Minimum stock level is the minimum quantity of stock that
should be held at all times,. It is that level below which stock should not normally
be allowed to fall. The main purpose of this level is to ensure that production is
not stopped due to non-availability of materials. Minimum stock level is
computed by the following formula:

Minimum level = Reorder level –(Normal consumption x Normal reorder period)

Factors to be considered: In fixing the minimum level, the following factors should
be considered:

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 (a)Nature of item of material

(b)Average rate of consumption of material

(c) Production requirement

(d) Reorder level € Reorder quantity.

C. Reorder level (Ordering Level): This is the level at which order is placed
for further Supply of materials. When the stock of material reaches this level, the
storekeeper should initiate action for the purchase of material. Reorder level is
fixed somewhere between minimum level and maximum level. It must be fixed
in such a way that the stock representing the difference between reorder level
and minimum level should be sufficient to meet demands of production till new
materials arrive. Reorder level is computed as follows:

Reorder level = Maximum consumption x Maximum reorder period

Or

Minimum level + Average consumption x Average reorder period.

Factors to be considered: While determining reorder level, the factors to be taken into
consideration are

(a) Rate of consumption

(b)Reorder period

(c)Variation in reorder period or

(d)Minimum level

(e)Economic order quantity.

D. Average stock level: This is the average stock held by a concern. It is

calculated by the following formula:

Average stock level = Minimum level + ½ % Reorder quantity

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 E. Danger level: This is the level of stock below which the stock should never
be allowed to fall. If the stock level falls below the minimum level is called the
danger level. When stock reaches danger level, urgent and emergency action
should be taken to replenish the stock so that production is not stopped. Danger
level is rightly described as danger warning level. Danger level is calculated by
the following formula:

Danger level = Average consumption x Maximum reorder period for emergency

purchases.

F. Reorder period: In connection with stock levels, the term reorder period
refers to the time required to obtain new materials. It is the time gap required
between placing an order and the actual receipt of the materials. In short, it is the
time lag in procurement of materials. Sometimes reorder period is called lead
time or delivery period.

3. ABC Analysis for Inventory Control

ABC analysis is a method of material control according to value. The basic principle is
that high value items are more closely controlled than the low value items. The materials
are

Grouped according to the value and frequency of replenishment during a Period

‘A’ Class items: Small percentage of the total items but having higher values.

‘B’ Class items: More percentage of the total items but having medium values.

‘C’ Class items: High percentage of the total items but having low values.

4.VED ANALYSIS

This technique of material control is applicable to spare parts, oils, lubricants and such
like. Spare parts are classified into Vital, Essential and Desirable. Vital spares are those
which are very critical for production. If these are out of stock, it will lead to immediate
production stoppage and heavy production loss. Essential spares are those which are
very important. Without these, production can be done only for few hours or a day. If

75
they are out of stock for a long period, production will stop. Desirable spares are those
which are required for production, but factory can manage without for some time, say,
a week or even more because they have some substitutes. While exercising control,
greater attention should be paid on vital spares.

5.JIT (Just In Time) Inventory Technique

JIT is a modern technique of inventory control. It was developed in Japan by Taichi

ohno. It was first used by the Japanese Motor company, Toyota. The system aims at
minimising inventories of raw material and work-in-progress. It also aims at eliminating
waste from every aspect of manufacturing and its related activities. Shigeo Shingo, one
of the architects of JIT System, identified areas in which there are wastes. The areas
are: (a) over production, (b) waiting time, (c) transport, (d) processing. € inventory, ()
quality, and (g) motion.

The term JIT refers to producing only what Is needed, when it is needed, in just the
quantity needed. According to CIMA Terminology, “JIT is a technique for the
organization of workflows, to allow rapid, high quality, flexible production whilst
minimizing manufacturing waste and stock level”. It is a highly integrated production,
sales and distribution system leading to continuous flow to produce the kinds of units
needed at the time needed and in quantities needed.

CASH MANAGEMENT

Cash management is one of the key areas of working capital management. Cash is the
most liquid current assets. Cash is the common denominator to which all current assets
can be reduced because the other major liquid assets, i.e. receivable and inventory get
eventually convened into cash, This underlings the importance of cash management.
The tern "cash" with reference to management of cash is used in two ways. In a narrow
sense cash refers to coins, Currency. cheque, drafts and deposits in banks. The broader
view of cash includes near cash asset such as marketable securities and time deposits in
banks. The reason why these near cash asset are included in cash is that they can readily
be converted into cash. Usually, excess cash is invested in marketable securities as it
contributes to profitability

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Cash is one of the most important components of current assets. Every firm should have
adequate cash, neither more nor less. Inadequate cash will lead to production
interruptions, while excessive cash remains idle and will impair profitability. Hence,
the need for cash management. Thus, the aim of cash management is to maintain
adequate cash balances at one hand and to use excess cash in some profitable way on
the other hand.

Motives For Holding Cash

1.Transactions motive

This motive refers to the holding of cash, to meet routine cash requirements in the
ordinary course of business. A firm enters into a number of transactions which requires
cash payment. For example, purchase of materials, payment of wages, salaries, taxes,
interest etc. Similarly, a firm receives cash from cash sales, collections from debtors,
return on investments etc. But cash inflows and cash outflows do not perfectly
synchronize. Sometimes, cash receipts are more than payments while at other times
payments exceed receipts. The firm must have to maintain sufficient cash balance if the
payments are more than receipts. Thus, the transactions refers to the holding of cash to
meet expected obligations whose timing is not perfectly matched with cash receipts.
Though, a large portion of cash held for transactions motive is in the form of cash, a
part of it may be invested in marketable securities whose maturity conform to the timing
of expected payments such as dividends, taxes etc.

1. Precautionary motive

Apart from the non-synchronization of expected cash receipts and payments in the
ordinary course of business, a firm may be failed to pay cash for unexpected
contingencies. For example, strikes, sudden increase in cost of raw materials etc.
Cash held to meet these unforeseen situations is known as precautionary cash
balance and it provides a caution against them. The amount of cash balance under
precautionary motive is influenced by two factors i.e. predictability of cash flows
and the availability of short term credit. The more unpredictable, the greater the need
for such cash balances and vice versa. If the firm can borrow at short-notice, it will

77
 need a relatively small balance to meet contingencies and vice versa. Usually
precautionary cash balances are invested in marketable securities so that they
contribute something to profitability.

2. Speculative motive

Sometimes firms would like to hold cash in order to exploit, the profitable
opportunities as and when they arise. This motive is called as speculative motive.
For example, if the firm expects that the material prices will fall, it can delay the
purchases and make purchases in future when price actually declines. Similarly, with
the hope of buying securities when the interest rate is expected to decline, the firm
will hold cash. By and large, firms rarely hold cash for speculative purposes.

3.Compensation motive This motive to hold cash balances is to compensate banks

and other financial institutes for providing certain services and loans. Banks provide
a variety of services to business firms like clearance of cheques, drafts, transfer of
funds etc. Banks charge a commission or fee for their services to the customers as
indirect compensation. Customers are required to maintain a minimum cash balance
at the bank. This balance cannot be used for transaction purposes. Banks can utilise
the balances to earn a return to compensate their cost of services to the customers.
Such balances are compensating balances. These balances are also required by some
loan agreements between a bank and its customers. Banks require a chest to maintain
a minimum cash balance in his account to compensate the bank when the supply of
credit is restricted and interest rates are rising. Thus cash is required to fulfil the
above motives. Out of the four motives of holding cash balances, transaction motive
and compensation motives are very important. Business firms usually do not
speculate and need not have speculative balances. The requirement of precautionary
balances can be met out of short-term borrowings

MANAGEMENT OF RECEIVABLES

Receivables means the book debts or debtors and these arise, if the goods are sold on
credit. Debtors form about 30% of current assets in India. Debt involves an element of
risk and bad debts also. Hence, it calls for careful analysis and proper management. The

78
goal of receivables management is to maximize the value of the firm by achieving a
trade off between risk and profitability. For this purpose. A finance manager has:

 To obtain optimum (non-maximum) value of sales

 To control the cost of receivables, cost of collection, administrative expenses,
bad debts and opportunity cost of funds blocked in the receivables.
 To maintain the debtors at minimum according to the credit policy offered to
customers.
 To offer cash discounts suitably depending on the cost of receivables, bank rate
of interest and opportunity cost of funds blocked in the receivables.

Factors Affecting the Size of Receivables

1.Level of sales

Generally in the same industry, a firm having a large volume of sales will be having a
larger level of receivables as compared to a firm with a small volume of sales. Sales
level can also be used for forecasting change in accounts receivable. For example, if a
firm predicts that there will be an increase of 20% in its credit sales for the next period,
it can be expected that there will also be a 20% increase in the level of receivables.

2.Credit policies

The term credit policy refers to those decision variables that influence the amount of
trade credit, i.e., the investment in receivables. These variables include the quantity of
trade accounts to be accepted, the length of the credit period to be extended, the cash
discount to be given and any special terms to be offered depending upon particular
circumstances of the firm and the customer.

3.Terms of trade

The size of the receivables is also affected by terms of trade (or credit terms) offered by
the firm. The two important components of the credit terms are Credit period and Cash
discount.

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Credit Policy

A firm should establish receivables policies after carefully considering both benefits
and costs of different policies. These policies relate to :

o Credit standards
o Credit terms
o Collection procedures

A.Credit standards

The term credit standards represent the basic criteria for extension of credit to
customers. The levels of sales and receivables are likely to be high if the credit standards
are relatively loose, as compared to a situation when they are relatively tight. The firm’s
credit standards are generally determined by the five “C’s”. Character, Capacity,
Capital, Collateral and Conditions of customer.

B.Credit terms

It refers to the terms under which a firm sells goods on credit to its customers. As stated
carrier, the two components of the credit terms are (a) Credit Period and (b) Cash
Discount. Credit period -Extending the credit period stimulates sales but increases the
cost on account of more tying up of funds in receivables. Cash discount -The effect of
allowing cash discount can also be analysed on the same pattern as that of the credit
period. Attractive cash discount terms reduce the average collection period resulting in
reduced investment in accounts receivable.

C.Collection procedures

A stringent collection procedure is expensive for the firm because of high out-of-pocket
costs and loss of goodwill of the firm among its customers. However., it minimizes the
loss on account of bad debts as well as increases savings in terms of lower capital costs
on account of reduction in the size of receivables. A balance has therefore to be stuck
between the costs and benefits of different collection procedures or policies.

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WORKING CAPITAL ANALYSIS

Working Capital represents the company’s ability to cover its short-term obligations
with its current assets, including cash and other liquid assets. Working capital is the life
blood and nerve centre of a business. Just as circulation of blood is essential in the
human body for maintaining life, working capital is very essential to maintain the
smooth running of a business.

LIQODITY RATIOS (SHORT TERM SOLVENCY RATIOS)

The term liquidity refers to the firm’s ability to pay its current liabilities out of its current
assets. Liquidity ratios are used to measure the liquidity position or short-term financial
position of a Tm. These ratios are used to assess the short-term debt paying ability of a
firm. These ratios are highly useful to creditors and commercial banks that provide short
term credit. Following are the ratios which can help to assess the ability of a firm to
meet its current liabilities.

1. Current ratio

2. Acid test ratio/ quick ratio/ Liquidity ratio

3. Absolute liquid ratio

1. CURRENT RATIO

Current ratio is one of the oldest of all financial ratios. It was first used in 1891. Even
today, it is the most common ratio for analyzing liquidity or short-term financial
position. Current ratio is defined as the ratio of current assets to current liabilities. It
shows the relationship between total current assets and total current liabilities. The
objective of computing this ratio is to measure the ability of a firm to pay off its
obligations in time. Current ratio is also called working capital ratio or banker’s ratio.
It is calculated as follows:

Current Ratio = Current Assets / Current Liabilities

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The two basic components of current ratio are current assets and current liabilities.
Current assets mean cash or those assets which can be converted into cash within a year.
Current liabilities are those liabilities which are to be repaid within a year. Current
Assets include Cash in hand, Cash at bank, Marketable or short-term securities, Bills
Receivable, Sundry debtors, Stock or inventories, Work in progress and Prepaid
expenses. Current liabilities include Sundry creditors, Bills payable, Outstanding
expenses and bank overdraft etc.

Generally a current ratio of 2: I is considered satisfactory or ideal. This means that

current assets shall be at least twice the current liabilities. This further means that after
paying off the current liabilities, there should be sufficient margin of working capital.

2.Liquid Ratio or Quick Ratio

Liquid ratio is the ratio of liquid assets (or quick assets) to current liabilities. It
establishes the relationship between quick assets and current liabilities. Lt is the
measure of the instant debt paying ability of the business enterprise, It is also called acid
test ratio. It is canceled so because the ratio is calculated to eliminate all possible liquid
elements from current assets. It is also called near money ratio, it is computed as
follows:

Liquid Ratio Liquid Assets /Current Liabilities

The two basic components of quick ratio are quick assets and current liabilities. Quick
or liquid assets are those assets which are quickly convertible into cash without loss of
value. Quick asset include all current assets except inventories and prepaid expenses.
Stock cannot be included in quick assets because it takes long time to convert them into
cash. Similarly, no cash will be realised from prepaid expenses.

A quick ratio of l:l is considered as satisfactory or ideal. It means that the liquid assets
are |just equal to quick/current liabilities. If the quick ratio is I:l or more than 1:1, the
financial position of the firm is said to be good. If the ratio is less than 1:1 the financial
position is said to be unsound. This means that the firm not be able to pay off its current
liabilities when they become due.

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3.Absolute Liquid Ratio or Cash Ratio

Absolute Liquid Ratio is calculated by dividing Absolute Liquid assets by current

Liabilities. Absolute Liquid Assets include cash in hand and at bank and marketable
securities or temporary investments. The acceptable norm for this ratio is 50% or 0.5 :1
or 1 :2.

Absolute Liquid Ratio = Absolute Liquid Assets / Current Liabilities

ACTIVITY RATIOS

Activity ratios show how effectively a firm uses its available resources or assets. These
ratios indicate efficiency in asset management. These ratios are also known as efficiency
ratios or performance ratios or assets utilization ratios. These ratios indicate the cash
elasticity of current assets. In other words, these ratios indicate the speed with which
the resources are turned over or converted into cash. That is why these ratios are called
turnover ratios. Higher turnover ratio means better use of resources. This further means
higher profitability. Turnover ratios are always expressed in number of times. These
ratios indicate the efficiency of management in the use of resources, both short term and
long term. The overall performance of a company is evaluated on the basis of its ability
to make sales using minimum resources. Turnover ratios reflect the speed at which
assets are utilized in effecting sales. A higher turnover ratio means efficient use of funds
by management in generating more sales. The important turnover ratios are:

1. Inventory turnover ratio

2. Debtors turnover ratio

3. Creditors turnover ratio

4. Or Total assets turnover ratio

5. Fixed assets turnover ratio

6. Working capital turnover ratio

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1. INVENTORY TURNOVER RATIO (Stock Turnover Ratio)

Inventory or stock turnover ratio shows the relationship between cost of goods sold and
average inventory or stock. It is also called merchandise turnover ratio. It indicates the
number of times the stock is turned over or converted into sales. This ratio indicates the
efficiency in turning over inventory and can be compared with the experience of other
companies in the same industry. It also provides some indication as to the adequacy of
a company’s inventory for the volume of business being handled. If a company has an
inventory turnover rate that is above the industry average, it means that a better balance
is being maintained between inventory and cost of goods sold. As a result, there will be
less risk for the business of being caught with top heavy inventory in the event of a
decline in the price of raw materials or finished goods. Stock turnover ratio is computed
by the following formula:

Stock Turnover Ratio = Cost of Goods Sold / Average Stock

Components of Stock Turnover Ratio: Cost of goods sold and average stock are
the components of stock turnover ratio.

Cost of goods sold= Opening stock + Purchases + Direct expenses (including wages)
Closing stock

Or

Cost of goods sold = Sales-Gross profit

Average stock = Opening stock + Closing stock

_________________________
2
Stock velocity: Generally stock or inventory turnover ratio is expressed in times. It can
also be expressed in days or months. Then it is called stock velocity or stock turnover
period.

Stock velocity = No. of Days or Months in a year

__________________________
Stock Turnover Ratio (in times)

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2.Debtors Turnover Ratio

A concern may sell goods on cash as well as on credit. Credit is one of the important
elements of sales promotion, The volume of sales can be increased by following a liberal
credit policy. The effect of a liberal credit policy may result in tying up substantial funds
of a firm in the form of trade debtors (or receivables). Trade debtors are expected to be
converted into cash within a short period of time and are included in current assets.
Hence, the liquidity position of concern to pay its short term obligations in time depends
upon the quality of its trade debtor

Debtors turnover ratio explains the relationship between net credit sales and average
debtors including bills receivable. This ratio shows how quickly debtors are realised or
converted into cash. Indicates how efficiently the firm collects cash from debtors.
Debtors turnover ratio is also known as receivables turnover ratio

Debtors Turnover Ratio = Net Credit Sales

__________________
Debtors Including B/R
Components of Debtors Turnover Ratio: There are two components of this ratio. They
are net credit sales, and average debtors. Net credit sales means gross credit sales minus
sales returns. Debtors arise in respect of credit sales. Therefore, only the credit sales
will be taken and not total sales. If credit sale is not given, total sale nay be taken.

Net credit sales = Gross credit sales- sales returns

Gross credit sales = Total sales sales returns- Cash sales

The second component namely debtors include bills receivable. The total of debtors and
bills receivable is known as account receivables or simply receivables.

Average Debtors = Opening Debtors + Closing

_______________________
2

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Debtors Average B/R = Opening B/R + Closing B/R
______________________
2
Average Collection Period: Average collection period means the number of days or
months tor which debtors and B/R remain outstanding, In short, it refers to debtors
turnover ratio Expressed in days or months. It is also known as debtors velocity or
average age of debtors.

Average Collection Period = 360 (or 12)

___________________
Debtors Turnover Ratio

3.Creditors Turnover Ratio

Creditors turnover ratio shows the relationship between net credit purchase and average
creditors including bills payable. This ratio indicates the number of times the creditors
are paid. This ratio is similar to the debtor’s turnover ratio. It compares creditors with
the total credit purchases. It signifies the credit period enjoyed by the firm in paying
creditors. Accounts payable include both sundry creditors and bills payable.

Creditors Turnover Ratio = Net Credit Purchase

___________________
Creditors including B/P
The components of creditors turnover ratio are net credit purchase and average
creditors.

Net Credit Purchase =Total Credit Purchase -Purchase Returns

Average Creditors = Opening Creditors + Closing Creditors

_______________________________
2

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Average Bills Payable = Opening B/P + Closing B/P
_______________________
2
Average Payment Period: This ratio. Is related with and dependent upon creditors
turnover ratio. Average payment period means the credit period enjoyed by the firm in
paying creditors. In short it, means creditors turnover ratio expressed in days or months.
It is also known as creditors velocity or average age of creditors. Average

Payment Period = 360 (or 12)

___________________
Creditors turnover ratio

The average payment period ratio represents the number of days by the firm to pay its
creditors. A high creditor’s turnover ratio or a lower credit period ratio signifies that the
creditors are being paid promptly. This situation enhances the credit worthiness of the
company. However a very favourable ratio to this effect also shows that the business is
not taking the full advantage of credit facilities allowed by the creditors

3.5 Working Capital Turnover Ratio

Current assets will change with change in sales. This means working capital is related
with sales. The relation between sales and working capital is called working capital
turnover ratio. This ratio shows how many times the working capital is turned over to
produce sales. Working capital turnover ratio indicates whether working capital is
effectively utilized in making sales. It measures the efficiency in working capital
management. The standard or ideal working capital turnover ratio is 7 or & times.
Generally higher the ratio the better is the utilization of working capital. This means a
lower investment in working capital has generated more volume of sales. But a very
high ratio indicates over trading. This means there is inadequacy of working capital to
support the increasing volume of sales. A low ratio indicates under trading. i.e., working
capital is not effectively utilized in generating sales.

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Working Capital Turnover Ratio = Net Sales
_____________
Working Capital

4.Fixed Asset Turnover Ratio

A business enterprise purchases fixed assets for carrying out the business. Without
fixed assets, it cannot make sales and profits. Thus, sales depend on how fixed assets
are utilized in business.

For knowing whether fixed assets are effectively utilized or not, fixed assets turnover
ratio is used. Fixed asset turnover ratio establishes the relationship between net sales
and fixed assets. Measures the efficiency with which a firm is utilizing its fixed assets
in generating sales. Higher ratio indicates better utilization of fixed assets. A low ratio
indicates under utilization of fixed assets in generating sales.

Fixed Assets Turnover Ratio = Net Sales

______________
Net Fixed Assets
PROFITABILITY RATIOS

The ultimate aim of any business enterprise is to earn maximum profit. A firm should
earn profits to survive grow over a long period of time. To the management, profit is
the measure of efficiency and control. To the owners, it is a measure of worth of their
investment. To the creditors, it is the margin of safety. The management of the company
is very much interested in the profitability of the company. Besides management,
creditors and owners also are interested in the profitability of the company. The term
profitability refers to the ability of a firm to earn income. The profitability of a firm can
be easily measured by its profitability ratios

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1.Gross Profit Ratio

This is the ratio of gross profit sales expressed as a percentage. It is also known as gross
margin. The main objective of computing this ratio is to determine the efficiency in
trading or production activity. Another objective is determining the selling price. The
standard or ideal gross profit ratio is 20% to 25%. It is calculated as follows:

Gross Profit Ratio = Gross Profit

_________
Net Sales
The basic components for the solution of gross profit ratio are gross profit and net sales.
Net sales mean those sales minus sales returns. Gross profit would be the difference
between net sales and cost of goods sold. Cost of goods sold in the case of a trading
concern would be equal to opening stock plus purchases, minus closing stock plus all
direct expenses relating to purchases. In the case of manufacturing concern, it would be
equal to the sum of the cost of raw materials, wages, direct expenses and all
manufacturing expenses. In other words, generally the excluded from charged to profit
and loss account or operating expenses are excluded from the solution of cost of goods
sold.

2.Operating Ratio

pirating ratio expresses the relationship between operating cost and sales. It indicates
the overall efficiency in operating the business. Operating ratio shows the operational
efficiency Or the business. Lower operating ratio shows higher operating profit and vice
versa. An operating ratio ranging between 75% and 80% is generally considered as
standard for manufacturing concerns. This ratio is considered to be a yardstick of
operating efficiency but it should be used cautiously because it may be affected by a
number of uncontrollable factors beyond the control of the firm. Moreover, in some
firms, non-operating expenses from a substantial part of the total expenses and in such
cases operating ratio may give misleading results.

The formula for computing operating ratio is as follows :

Operating ratio = (Cost of goods Sold + Operating expenses) / Net Sales *100
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The two basic components for the solution of operating ratio are operating cost (cost of
goods sold plus operating expenses) and net sales. Operating expenses normally include
(a) administrative and office expenses and (b) selling and distribution expenses.
Financial charges such as interest, provision for taxation etc. are generally excluded
from operating expenses.

3.Operating Profit Ratio

The operating profit of a business is the profit after meeting all operating expenses
incurred in the regular course of operations. It is a measure of operating efficiency of a
business. Operating profit ratio explains the relationship between operating profit and
net sales. It is calculated as follows:

Operating profit ratio =Operating Profit / Net Sales * 100

4.Net Profit Ratio

Net profit ratio is the ratio of net profit earned by a business and its net sales. It measures
overall profitability. The objective of calculating net profit ratio is to measure the
overall profitability. The ideal N/P ratio is 5% to 10%. However, in order to understand
the real ability of the management to earn profit, this ratio should be used along with
working capital turnover ratio. It is calculated as follows:

N/P Ratio Net Profit/ Net Sales * 100

The two basic components of the net profit ratio are thc net profit and sales. The net
profits are obtained after deducting income-tax and, generally, non-operating expenses
and incomes are excluded from the net profits for calculating this ratio. Thus, incomes
such as interest on Investments outside the business, profit on sales of fixed assets and
losses on sales of fixed assets, etc are excluded.

Net profit ratio can be calculated in two ways. One is to take Profit Before Tax (PBT).
The other is to take Profit After Tax (PAT), These are shown as follows:

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NP Ratio = PBT/ Net Sales *100

or

N/P Ratio = PAT/ Net Sales *100

4.2.1 SCHEDULE OF CHANGES IN WORKING CAPITAL

Working capital means the excess of current assets over current liabilities. A statement
of changes in working capital is prepared by recording changes in current assets and
current liabilities during the accounting period. Working capital during this period is
bound to change due to an increase or decrease in the current assets and current
liabilities. Statement of changes in working capital is prepared to show the changes in
the working capital between the two balance sheet dates. This statement is prepared
with the help of current assets and current liabilities derived from the two balance sheets
as:-

 Working capital = Current assets Current liabilities.

 An increase in current assets increases the working capital
 The decrease in current assets decreases the working capital
 An increase in current liabilities decreases the working capital
 A decrease in current liabilities increases working capital

The total increase and the total decrease are compared and the difference shows the net
increase or net decrease in working capital. It is worth nothing that schedule of changes
in working capital is prepared only from current assets and current liabilities. The Net
increase in working capital represents the application of funds and the Net decrease
in working capital represents the source of fund.

Steps to Follow to Prepare a Statement of Changes in Working Capital

First, draw the pro forms. Then. Identify and enter all current assets under the heading
of Current assets. In turn, center the current assets for the base year and current year in
the respective columns. Now, ascertain the difference in the current assets between the

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two periods. Enter the difference in the increase or decrease column, depending on the
situation. In turn, Identify current liabilities and enter them under the heading of current
liabilities. Then, enter the amount of current liabilities for the base year and current year
in the respective columns. The next step is to determine the difference in the current
liabilities between the two periods. Enter the difference in the increase or decrease
column, depending on the situation. Add up the Current assets and current liabilities for
the previous year and current year. Denote the total Current assets by A and current
liabilities by B. Calculate working capital for both the current period and base period
by subtracting current liabilities (B) from current assets (A). As the next step, compare
the difference between the amount of working capital for the current and the base year.
If the working capital of the current year is greater than the working capital of the
previous year, enter the difference in working capital in the previous year. In the
relevant column, enter the increase in working capital against the amount written. If the
working capital of the current year is less than the working capital of the previous year,
enter the difference in working capital in the current year. In the relevant column, enter
the decrease in working capital against the amount written. Finally, add up both of the
columns for the previous and current year.

4.2.2 TREND ANALYSIS

Trend simply means general tendency. Analysis of these general tendencies is called
trend analysis. In the context of financial analysis, trend analysis means analyzing
general tendencies In each item of the financial statements on the basis of the data of
the base year. In short, comparing the past data over a period of time with a base year
is called trend analysis. Under this technique, information for a number of years is taken
up and one year (usually the first year) is taken as the base year. Each item of the base
year is taken as 100 and on that basis the percentages for other years are calculated.
Trend analysis helps in understanding the direction in which the organization is moving.
The trend percentages are generally computed for major items in the statement.

Objectives of Trend Analysis

Objectives of trend analysis are as follows :

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I. To find the trend or direction of movement over a period of time.

2.To make a comprehensive and comparative study of financial statements.

3. To have a better understanding of financial and profitability position.

Methods of Trend Analysis

Trend analysis may be done in any of the following three ways:

1. Trend percentages,

2. Trend ratios

3. Graphic method

Of the three methods, trend ratio is the most widely used method.

Steps in the Computation of Trend Ratios

The following steps are involved in the computation of trend ratios:

1. Select a base year. Generally, the first year is taken as base year,

2. Take the figures of base year as 100

3. Calculate trend percentages in relation to base year. Each year’s figure is

divided by the base year’s figure. If the amount of the same item in the other
statement is more than that in the base statement, the trend percentage would be
more than 100% and if the amount is less than the base amount, the trend
percentage would be less than 100%.

Advantages of Trend Analysis

Advantages of trend analysis are as follows :

I. It is a simple technique.

2. It is an easy method to indicate the future trends.

3. It reduces the chances of errors because it is possible to compare the

percentage with absolute figures.

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 4. Information can be presented in summary form. Limitations of Trend Analysis

Limitations of trend analysis are as follows :

I. The trend ratio of a single item has no significance unless it is compared with the
trend ratio of related figures.

2. If the accounting principals and practices are not uniform throughout the period of
analysis, comparison of trend ratios may be unscientific.

3. There may be no normal base year.

4.3 CONCLUSION

Good management of working capital shall ensure that a business has the cash and
resources available to have successful and healthy business operations and meet its
current liabilities, without which a company shall always be under the risk of having a
working capital deficit thereby hampering its business operations. In the short term this
can damage the profitability of the business, and affect its operations. In the long term,
poor working capital management can compromise a company’s eligibility for business
loans and damage its ability to attract potential investors. In recent times, there have
been greater bankruptcies on account of working capital deficits and unnamed cash
flows such that companies have not been able to repay their debt obligations. The right
systems and policies in place to manage business operations as well as the right mix of
financial products and facilities from banks and financial institutions to ensure cost
effective liquidity shall enable companies to manage such risks of working capital
deficits and maintain a healthy business cycle.

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 CHAPTER-5

DATA ANALYSIS AND INTERPRETATION

95
5.1 INTRODUCTION

Data analysis is defined as a process of cleaning, transforming, and modelling data to

discover Useful information for business decision making. The purpose of Data
Analysis is to extract useful information from data and taking the decision based upon
the data analysis. The Data Analysis Process is nothing but gathering information by
using a proper application or tool Which allows to explore the data and find a pattern in
it. Based on that information and data, We can make decisions, or get ultimate
conclusions. Data interpretation is the process of reviewing data through some
predefined processes which will help assign some meaning to the data and arrive at a
relevant conclusion. It involves taking the result of data analysis. It is usually the first
step taken towards data interpretation. It is evident that the interpretation of data is very
important, and as such needs to be done properly. Therefore, researchers have Identified
some data interpretation methods to aid this process. Different financial tools are used
for analysing the working management of METAL INDUSTRIES LTD such as ratio
analysis, trend analysis and schedule of changes in working capital.

5.2 DATA ANALYSIS AND INTERPRETATION

Analysis, refers to dividing a whole into its separate components for individual
examination. Data analysis, is a process for obtaining raw data, and subsequently
converting it into information useful for decision-making by users. Data, is collected
and analyzed to answer questions, test hypotheses, or disprove theories. Data simply
means row facts and figures, or the collected information related to the subject. The
success of research depends on the collection of data. After the collection of data, the
researcher has to undertake the risk of its organization, classification and presentation
of the organized data. Data analysis involves analysis of the presented data using
statistical method. Analysis of data reveals different characteristics of the data; they can
be used for arriving at various conclusion and interpretation. After analyzing the data
the researcher should have to explain the findings on the basis of some theory. It is
known as interpretation. In this study data are collected from the secondary sources such
as organization published documents, website, and secondary data etc. Tools for data
analysis

96
1. Ratio analysis

2. Schedule of changes in working capital

3. Trend analysis

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1. LIQUIDITY RATIOS

5.1 CURRENT RATIO

Current ratio is defined as the ratio of current assets to current liabilities. Generally a
current ratio of 2: I is considered satisfactory or ideal.

Current Ratio = Current Assets / Current Liabilities

Table 5.2 Quick Ratio

year Quick Assets Current Liabilities Quick Ratio

2017-2018 58772.73 25851.45 2.27
2018-2019 54954.13 30431.01 1.8
2019-2020 35476.58 90876.32 0.39
2020-2021 32270.04 96424.37 0.33
2021-2022 35704.42 111679.62 0.32
(Source: Annual report of METAL INDUSTRIES LTD)

Figure 5.1 Current Ratio

Generally current ratio of 2:1 is considered ideal for a concern, it means current assets
should be at least twice than the current liabilities. From the above table and graph it is
clear that the company’s liquidity position is not satisfactory. The highest ratio was 2.27
and lowest was 0.32. From the above table we can infer that the current ratio is showing
a decreasing trend.

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5.2 QUICK RATIO

Quid ratio is the ratio of liquid assets (or quick assets) to current liabilities. It establishes
the relationship between quick assets and current liabilities.

Liquid Ratio = Liquid Assets / Current Liabilities

Table 5.2 Quick Ratio

year Quick Assets Current liabilities Quick Ratio

2017-2018 52084.42 25851.45 2.01
2018-2019 46594.32 30431.0I 1.53
2019-2020 25487.06 90876.32 0.28
2020-2021 23379.26 96424.37 0.24
2021-2022 24850.02 11679.62 0.22
(Source: Annual reports of METAL INDUSTRIES LTD)

Figure 5.2 Quick Ratio

A quick ratio of 1:1 is considered as satisfactory or ideal. If the quick ratio is 1:l or more
than 1:1, the financial position of the fim said to be good. It indicates that quick assets
are sufficient to pay off the short term obligations. If the ratio is less than 1:1 the
financial position is said to be unsound. During the year 2017-18 the quick ratio was
2.01, in the year 2018-19 it decreases to 1.53. There was a subsequent decreases in the
year 2019-20, 2020-21 and 2021-22. Hence it shows that the liquidity position of the
company is inadequate.

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5.3 ABSOLUTE LIQUID RATIO

Absolute Liquid Ratio is calculated by dividing Absolute Liquid assets by current

Liabilities. Absolute Liquid Asses include cash in hand and at bank and marketable
securities or temporary investments.

Absolute Liquid Ratio = Absolute Liquid Assets / Current Liabilities

Table 5.3 Absolute Liquid Ratio

year Absolute Liquid Current Liabilities Absolute Liquid

Assets Ratio
2017-2018 25080.65 25851.45 0.97
2018-2019 17840.67 30431.02 0.59
2019-2020 2947.28 90876.32 0.03
2020-2021 7031.85 96424.37 0.07
2021-2022 7102.73 111679.62 0.06
(Source: Annual reports of METAL INDUSTRIES LTD)

Figure 5.3 Absolute Liquid Ratio

The standard norm of absolute liquid ratio is 50% that is 0.5:1. It indicates the adequacy
of the S0% worth absolute liquid assets to pay the 100% worth current liabilities in time.
During the year 2017-18 the absolute liquid ratio was 0.97. But after that it shows a
decreasing trend over the coming years. It indicates that the company’s day to day
management of cash is in a poor light, hence it is not satisfactory.

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5.4 ACTIVITY RATIOS

Inventory or stock turnover ratio shows the relationship between cost of goods sold and
average inventory or stock.

Stock Turnover Ratio = Cost of Goods Sold / Average Stock Table

5.4 Inventory Turnover Ratio

year Cost of Goods Average Stock Turnover Ratio

Sold Stock Table

2017-2018 27856.46 6691.96 4.16

2018-2019 29598.13 7524.06 3.93

2019-2020 24565.03 9174.66 2.68

2020-2021 26871.15 9440.15 2.85

2021-2022 21990.47 9872.58 2.23

(Source: Annual reports of METAL INDUSTRIES LTD)

Figure 5.4 Inventory Turnover Ratio

A high turnover ratio indicates that inventory is sold fast. It is an indication of good
inventory management. On the other hand, a low turnover ratio indicates that
inventories are lying in stock for a long time or that stock does not sell quickly. It reflects
over investment in inventories, accumulation of huge stock, dull business etc. Generally
a ratio of 8 times is considered satisfactory. In the year 2017-18 the ratio is 4.16. but
after that it shows a decreasing trend over the coming years.

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5.5 INVENTORY CONVERSION PERIOD

The inventory conversion period is the tine required to obtain materials for a product,
manufacture it, and sell it, This period is essentially the time period during which a
company must invest cash while it converts materials into a sale.

Stock velocity = No, of Days or Months in a year

____________________________
Stock Turnover Ratio (in times)
Table S.5 Inventory Conversion Period

year No of days in a year Inventory Turnover Inventory

ratio Conversion
Period
2017-2018 365 4.16 88
2018-2019 365 3.93 93
2019-2020 365 2.68 136
2020-2021 365 2.85 128
2021-2022 365 2.23 164
(Source: Annual reports of METAL INDUSTRIES LTD)

Figure 5.5 Inventory Conversion Period

Inventory conversion period the total time period required converting the entire
inventory into sales. In the year 20201-22 the conversion period were l64 which is
higher period by comparing with all other years. It indicates that inventories are lying
in stock for a long time. In the year 2017-18 inventory conversion period were 88, it is
an indication of good inventory management.

102
5.6 DEBTORS TURNOVER RATIO

Debtors turnover ratio explains the relationship between net credit sales and average
debtors including bills receivable.

Debtors Turnover Ratio = Net Credit Sales

______________
Debtors Including B/R
Table 5.6 Debtors Turnover Ratio

year Net Credit Sales Average Debtors Debtors Turnover

Ratio
2017-2018 41120.20 22961.56 1.79
2018-2019 34783.42 25300.89 1.37
2019-2020 27223.78 22255.89 1.22
2020-2021 27068.32 16124.85 1.68
2021-2022 24402.50 14150.59 1.72
(Source: Annual reports of METAL INDUSTRIES LTD)

Figure 5.6 Debtors Turnover Ratio

It shows how quickly debtors are converted into cash. For debtors turnover ratio,
standard is not fixed. A higher debtors turnover ratio shows the efficiency in collection
from debtors. The highest debtors turnover ratio is 1.79, in the period 2017-18. A lower
turnover ratio indicates inefficiency of management in collecting debtors. The lower
turnover ratio is 1.22 in the year 2019-20.

103
5.7 AVERAGE DEBT COLLECTION PERIOD

Average collection period means the number of days or months for which debtors and
B/R remain outstanding.

Average Collection Period = 365 / Debtors Turnover Ratio

Table 5.7 Average Debt Collection Period

year No of days in a year Debtors Turnover Average Collection

Ratio Period
2017-2018 365 1.79 204
2018-2019 365 1.37 266
2019-2020 365 1.22 299
2020-2021 365 1.68 217
2021-2022 365 1.72 212
(Source: Annual reports of METAL INDUSTRIES LTD)

Figure 5.7 Average Debt Collection Period

Debt collection period changing over the years. In general, a lower average collection
period is more favourable than a high average collection period. In 2017-18 the average
collection period were 204, it is the lower average collection period. During the year
2018-19 and 2019 20 it was increased as 266 and 299. But after 2019-20 it shows a
decreasing trend.

104
5.8 CREDITORS TURNOVER RATIO

Creditors turnover ratio shows the relationship between net credit purchase and average
creditors including bills payable.

Creditors Turnover Ratio = Net Credit Purchase

_________________
Creditors including B/P
Table 5.8 Creditors Turnover Ratio

year Net Credit Average Creditors Creditors Turnover

Purchase Ratio
2017-2018 22249.74 16414.79 1.36
2018-2019 19943.44 19112.85 1.04
2019-2020 14589.01 20364.12 0.41
2020-2021 14374.09 16067.63 0.89
2021-2022 13940.26 11931.72 1.16
(Source: Annual reports of METAL INDUSTRIES LTD)

Figure 5.8 Creditors Turnover Ratio

The creditors turnover ratio indicates the number of times the creditors are paid in a
year. It is clear that creditors turnover ratio changing over the years. It was I.36 times
in the year 2017 18. There was a subsequent decrease in the year 2018-19 and 2019-20
to 1.04 times and 0.71 times respectively, it means payments to creditors are delayed.
It increased to 0.89 times and 1.16 times in the year 2020-21 and 2021-22.

105
5.9 AVERAGE PAYMENT PERIOD

Average Payment period means the credit period enjoyed by the firm in paying
creditors. In Short, it means creditors turnover ratio expressed in days or months.

Average Payment Period = 360 (or 12)

__________________
Creditors turnover ratio
Table 5.9 Average Payment Period
year No of days in a year Creditors Turnover Average Payment
period
Ratio
2017-2018 365 1.36 268
2018-2019 365 1.04 350
2019-2020 365 0.41 514
2020-2021 365 0.89 410
2021-2022 365 1.16 315
(Source: Annual reports of METAL INDUSTRIES LTD)
Figure 5.9 Average Payment Period

It represents the average number of days taken by the firm to pay the creditors and other
bills payable. Lower credit period means early payment to creditors. Longer credit
period means payments to creditors are delayed. In the year 20 19-20 the average
payment period were 514 which is higher period by comparing with all other years. In
the year 2017-18 average payment period were 268. It indicates that the company has
taken the steps to prompt payment to the creditors.

106
5.10 CURRENT ASSSET TURNOVER RATIO

The current assets turnover ratio indicates how many times the current assets are turned
over in the form of sales within a specific period of time

Current Asset Turnover Ratio= Net Sales

__________
Average Current Assets
Table 5.10 Current Asset Turnover Ratio

year Net Sales Average current Current Turnover

Assets Ratio
2017-2018 41120.20 59146.79 0.70

2018-2019 34783.42 56863.43 0.61

2019-2020 27223.78 45215.35 0.60

2020-2021 27068.32 33892.64 0.80

2021-2022 24402.50 33987.23 0.72

(Source: Annual reports of METAL INDUSTRIES LTD)

Figure 5.10 Current asset turnover ratio

The current assets turnover ratio indicates how many times the current assets are turned
over in the form of sales within a specific period of time. It was 0.7 times in the year
2017-18. There was subsequent decrease in the year 2018-19 and 2019-20 to 0.61 times
and 0.6 times. But it increases in the year 2020-21 to 0.8.

107
5.11WORKING CAPITAL TURNOVER RATIO

The relation between sales and working capital is called working capital turnover ratio.
This ratio shows how many times the working capital is turned over to produce sales.

Working Capital Turnover Ratio = Net Sales

____________
Working Capital
Table 5.11 Working Capital Turnover Ratio

year Net Sales Net Working Working Capital

Capital Turnover Ratio
2017-2018 41120.20 32921.27 1.25
2018-2019 34783.42 24523.12 1.42
2019-2020 27223.78 -55399.74 -0.49
2020-2021 27068.32 -64154.34 -0.42
2021-2022 24402.50 -75975.20 -0.32
(Source: Annual reports of METAL INDUSTRIES LTD)

Figure 5.11 Working Capital Turnover ratio

Working capital turnover ratio indicates whether working capital is effectively utilized
in making sales. The working capital ratio is fluctuating year to year that was high in
the year 2018-19, 1.42 times. There was a subsequent decrease in the years 2019-
20,2020-21 and 2021 22 to -0.49, -0.42 and -0.32 times respectively. Which indicates
that management is not efficiently using the working capital in generating sales.

108
5.12 FIXED ASSET TURNOVER RATIO

Fixed asset turnover ratio establishes the relationship between net sales and fixed assets.
It measures the efficiency with which a firm is utilising its fixed assets in generating
sales

. Fixed Assets Turnover Ratio = Net Sales

_________
Net fixed Asset
Table 5.12 Fixed Asset Turnover Ratio

year Net Sales Average fixed Fixed Assets

Assets Turnover Ratio
2017-2018 41120.20 39316.22 1.05
2018-2019 34783.42 36660.10 0.95
2019-2020 27223.78 35391.95 0.76
2020-2021 27068.32 35030.01 0.77
2021-2022 24402.50 34061.9 0.72
(Source: Annual reports of METAL INDUSTRIES LTD)

Figure 5.12 Fixed asset turnover ratio

This ratio indicates how efficiently the fixed assets are used. 2017-18 data shows a
highest fixed asset turnover ratio of 1.05, a higher ratio indicates better utilization of
fixed assets. In 2021-22 the fixed asset turnover ratio were 0.72, it is the lowest turnover
ratio. A low ratio indicates under utilization of fixed assets in generating sales.

109
3. FROFITABILITY RATIOS

5.13 GROSS PROFIT RATIO

Gross Profit Margin Ratio, sometimes also referred to as gross margin, is a type of
profitability ratio, It helps to measure how much profit a company makes from the sale
of goods and services alert deducting the direct costs,

Gross Profit Ratio= Gross Profit

___________
Net sales
Table 5.13 Gross profit Ratio

year Gross profit Net Sales Gross profit Ratio

2017-2018 -7892.44 41120.20 -19

2018-2019 -1062.22 34783.42 -3.05
2019-2020 -791.29 27223.78 -2.9
2020-2021 -112.64 27068.32 -0.4
2021- 2022 -2412.12 24402.50 -9.9
(Source: Annual reports of METAL INDUSTRIES LTD)

Figure 5.13 Gross Profit Ratio

110
The ideal gross profit ratio is 20% to 25%. It indicates the efficiency of production or
trading operations. This ratio measures the margin of profit available on sales. From the
above table we can identify that the company’s gross profit is negative. A high gross
profit ratio is a sign of efficient production or purchase management. On the other hand.
A low gross profit IS a danger signal

111
5.14 NET PROFIT RATIO

Net profit ratio is the ratio of net profit earned by a business and its net sales. It measures
overall profitability.

NIP Ratio = PAT/ Net Sales *100

Table 5.14 Net Profit Ratio

year Net profit after tax Net Sales Net profit Ratio
2017-2018 -20011.35 41120.20 -48.67
2018-2019 -20519.99 34783.42 -58.99
2019-2020 -25899.40 27223.78 -95.14
2020-2021 -23435.62 27068.32 -86.58
2021-2022 -24259.64 24402.50 -99.41
(Source: Annual reports of METAL INDUSTRIES LTD)

Figure 5.13 Net Profit Ratio

It indicates efficiency as well as profitability of a business. It determines the returns to

the owners. It also indicates how much of sales is left after meeting all expenses. From
the above table we can identify that the net profit is negative. It indicates that the
production costs are more than the total revenue for a specific period. Higher the ratio,
better is the profitability. This means higher returns to shareholders.

112
5.14 RETURN ON TOTAL ASSET RATIO

The Return on total assets ratio indicates how well a company’s investments generate
value, making it an important measure of productivity for a business.

Return on Total Asset Ratio = Net income

____________
Average Total Asset
Table 5.15 Return On Total Asset Ratio

year Net Income Average Total Return on Total

Assets Asset Ratio
2017-2018 -20011.35 99189.77 -20.17
2018-2019 -20519.99 94255.71 -21.77
2019-2020 -25899.40 81346.52 -31.84
2020-2021 -23435.62 69663.66 -33.64
2021-2022 -24259.64 68790.16 -35.27
(Source: Annual reports of METAL INDUSTRIES LTD)

Figure 5.15 Return on Total Asset Ratio

The return on total assets ratio indicates how well a company’s investments generate
value, making it an important measure of productivity for a business. Higher the ratio,
the better it is for the concern. This ratio shows whether the assets of the concern are
utilized properly or not. From the above table we can see that the return on total asset
ratio in a negative trend. It indicates that the company’s assets are not utilized properly.

113
Table 5.16

SCHEDULE OF CHANGES IN WORKING CAPITAL FOR THE YEAR

2017-2018

Particulars 2017 2018 Increase in Decrease in

working working
capital capital
(A) Current
Assets:
Inventories 6695.61 6688.31 7.3
Trade 21219.19 24703.93 3484.74
receivables
Cash and cash 30144.38 25080.65 5063.73
equivalents
Short-term 1448.79 2114.33 665.54
loans and
advances
Other Current 12.89 185.50 172.61
Assets
Total(A) 59520.86 58772.72
(B)Current
liabilities
Short term 4867.23 5591.29 724.06
borrowings
Trade payables 15789.76 17039.81 1350.05
Other Current 3337.60 3217.96 119.64
liabilities
Short-term 2.39 2.39
provisions
Total(B) 23996.98 25851.45

114
 Working 35523.88 32921.27
capital (A-B)
Decrease in 2602.61 2602.61
working
capital
35523.88 35523.88 7045.14 7045.14

In the above table, it is seen that during the year 2017-18 there was a net decrease in
working capital of Rs. 2602.61. It indicates an inadequate working capital in METAL
INDUSTRIESLTD. This is because of Increase current assets such as trade receivables
by Rs 3474.84, short term loans and advances by Rs 665.54, other current assets by Rs
172.61. And decrease in inventories by Rs 7.3. Cash & cash equivalents by Rs 5063.73.
.Increase in current liabilities Such as other current liabilities etc.

115
Table 5.17

SCHEDULE OF CHANGES IN WORKING CAPITAL FOR THE YEAR

2018- 2019

Particulars 2018 2019 Increase in Decrease in

working working
capital capital
(B) Current
Assets:
Inventories 6688.31 8359.81 1671.5
Trade 24703.93 25897.87 1193.94
receivables
Cash and cash 25080.65 17840.67 7239.98
equivalents
Short-term 2114.33 2666.07 551.74
loans and
advances
Other Current 185.50 189.71 4.21
Assets
Total(A) 58772.72. 54954.13
(B)Current
liabilities
Short term 5591.29 5938.30 347.01
borrowings
Trade payables 17039.81 21185.80 4145.99
Other Current 3217.96 3304.33 86.37
liabilities
Short-term 2.39 2.39
provisions
Total(B) 25851.45 30430.82

116
 Working 32921.27 24523.31
capital (A-B)
Decrease in 8397.96 8397.96
working
capital
32921.27 32921.27 11819.35 11819.35

The schedule shows that there is a decrease in the working capital in the year 2018-
2019 by decrease in cash and cash equivalents and increase in short term borrowings,
trade payables and other current liabilities. It means that the company is not able to use
its resources in a better way. There is an decrease of Rs. 8397.96 in the working capital
for the year 2018-2019

117
Table 5.18

SCHEDULE OF CHANGES IN WORKING CAPITAL FOR THE YEAR

2019-2020

Particulars 2019 2020 Increase in Decrease in

working working
capital capital
(A)Current
Assets:
Inventories 8359.81 9989.52 1629.71
Trade 25897.87 18613.91 7283.96
receivables
Cash and cash 17840.67 2947.28 14893.39
equivalents
Short-term 2666.07 3327.22 661.15
loans and
advances
Other Current 189.71 598.65 408.94
Assets
Total(A) 54954.13 35476.58
(B)Current
liabilities
Short term 5938.30 2278.98 3659.32
borrowings
Trade payables 21185.80 19542.35 1643.45
Other Current 56513.01 69052.60 12539.59
liabilities
Short-term 2.39 2.39
provisions
Total(B) 83639.69 90876.32

118
 Working 28685.56 -55399.74
capital (A-B)
Decrease in 26714.18 26714.18
working
capital
28685.56 28685.56 34716.94 34716.94
The schedule of changes in working capital for the year 2019-2020 shows an decrease
in the working capital. The increase in current liabilities exceeds the increase in current
assets in the year 2019 and 2020 and the working capital decreased. The change in
working capital amounts to Rs. 26714.18. Negative changes in working capital is when
the company’s current liabilities are more than its current assets.

119
Table 5.19

SCHEDULE OF CHANGES IN WORKING CAPITAL FOR THE YEAR

2020-2021

Particulars 2020 2021 Increase in Decrease in

working working
capital capital
(A)Current
Assets:
Inventories 9989.52 8890.78 1098.74
Trade 18613.91 13635.79 4978.12
receivables
Cash and cash 2947.28 7031.84 4084.57
equivalents
Short-term 3357.52 2104.45 1253.07
loans and
advances
Other Current 607.02 607.17 0.15
Assets
Total(A) 35515.25 32270.04
(B)Current
liabilities
Short term 2278.98 2110.89 168.09
borrowings
Trade payables 19542.35 12592.90 6449.45
Other Current 69091.27 81720.58 12629.31
liabilities
Short-term 2.39 - 2.39
provisions
Total(B) 90914.99 96424.37

120
 Working -55399.74 -64154.33
capital (A-B)
Decrease in 8754.59 8754.59
working
capital
-55399.74 -55399.74 19959.24 29959.24

The schedule of changes in working capital for the year 2020-2021 shows an decrease
in the working capital. From the above table we can see that the company have negative
working capital. Negative working capital is when the company’s current liabilities are
more than its current assets. In the year 2020 and 2021 current liabilities are more than
the current assets. It Means that the company is not able to use its resources in a better
way. There is a decrease of Rs. 8754.59 in the working capital for the year 2020-2021.

121
Table 5.20

SCHEDULE OF CHANGES IN WORKING CAPITAL FOR THE YEAR

2021-2022

Particulars 2021 2022 Increase in Decrease in

working working
capital capital
(A)Current
Assets:
Inventories 8890.78 10854.39 1963.61
Trade 13635.79 14665.38 1029.59
receivables
Cash and cash 703.85 7102.90 70.88
equivalents
Short-term 2104.45 2454.90 350.45
loans and
advances
Other Current 607.17 627.01 19.84
Assets
Total(A) 32270.04 35704.41
(B)Current
liabilities
Short term 2110.89 4447.82 2336.93
borrowings
Trade payables 12592.90 11270.53 1322.37
Other Current 81720.58 95961.26 14240.68
liabilities
Short-term - -
provisions
Total(B) 96424.37 111679.61

122
 Working -64154.33 -75975.2
capital (A-B)
Decrease in 11820.87 11820.87
working
capital
-64154.33 -64154.33 16577.61 16577.61

The schedule of changes in working capital for the year 2021-2022 shows an decrease
in the working capital. From the above we can see that in the year 2021 and 2022 the
company have negative working capital i.e. -64154.33 and -75975.2. This means that
there is inadequacy of working capital to support the increasing volume of sales. There
is a decrease of Rs. 8754.59 in the working capital for the year 2020-2021

123
TREND ANALYSIS OF WORKING CAPITAL 2017-2022

Table 5.20 Tread Analysis of Working Capital 2017-2022

Particulars Total Total Working Changes in Percentage

current current capital working of charge
Assets liabilities capital
2017-2018 58772.72 25851.45 32921.27

Percentage 100 100 100

2018-2019 54954.13 30430.82 24523.31 -8397.96 -25.50

Percentage 93.50 117.71 74.49

2019-2020 35476.58 90876.32 -555399.74 -26714.18 -81.15

Percentage 60.36 351.53 168.28

2020-2021 32270.04 9642.37 -64154.33 -8754.59 -26.59

Percentage 54.91 372.99 194.87

2021-2022 35704.41 111678.61 -75975.2 -11820.87 -35.90

Percentage 60.74 432.01 230.78

124
Figure 5.18 Trend Analysis Of Working Capital

The trend is moving in a negative manner. Trend began with -8397.96 and it is again
decreased to -26714.18 in 2019-2020 and then it shows a increasing trend. It is increased
to -8754.59 in 2020-2021 and finally fallen to -11820.87 in the last year. This indicates
lower productivity of the firm and poor operational efficiency.

5.3 CONCLUSION

The working capital Analysis is the process of identifying the financial strengths and
weaknesses of the firm by properly establishing relationship between the items of the
balance sheet changes in working capital and the profit and loss account. Different
financial tools used for analysis in this study are ratio analysis and trend analysis and
schedule of changes in working capital. It is clear from the financial analysis of METAL
INDUSTRIES LTD that the working capital trend of the firm is showing a negative
impact in five years. This indicates that lower productivity of the firm and poor
operational efficiency.

125
 CHAPTER 6

FINDINGS, SUGGESTIONS AND CONCLUSIONS

126
6.1 INTRODUTION

This chapter provides the summary of the findings from chapter five, and also it gives
the conclusions and recommendations of the study based on the objectives of the study.
The main Objective of this study is to evaluate the efficiency in the management of the
working capital O ne company. The findings are understood through the application of
the tools like ratio analysis, changes in working capital, comparative balance sheet and
trend analysis. And it also Includes the suggestion for the improvement of the working
capital position of the company. And finally, the conclusion of the study

6.2 FINDINGS

1. The working capital position of the company is negative nature. There is excess of
current liabilities over current assets during the period of study. Which indicates that
the firm has insufficient current assets to meet current liabilities.

2. As current ratio is showing an decreasing trend year on year, which implies that
current liabilities are more compared to current assets. In the year 2021-2022 current
ratio has decreased to 0.32, as the result company may face liquidity problems in future.

3. Quick ratio of the company shows an decreasing trend. In the three years 2019-20.
2020-21 and 2021-22 the quick ratio was below the standard.

4. Absolute liquid ratio is below the standard norm in the last 3 years, which means that
company is facing cash shortage.

5. Inventory turnover ratio depicts the decreasing trend, which indicates inventories are
lying in stock for a long time or that stock does not sell quickly.

6. Inventory holding period fluctuating over the years. Company has been taking more
days to convert inventory into sales.

7. Debtors turnover ratio is very high in the year 2017-2018. In the year 2018-19 it has
decreased by 1.37 times. In the last year 2021-22 it has again increased by 1.72 times
as compared to 2020-21.

127
8. Debt collection period shows poor credit collection performance which was gone up
to 299 days in the year 2019-2020.

9. Creditors turnover ratio was decrease from 2017-18 to 2019-20. It was shows higher
during 2017-18 that is 1.36 times.

10. The creditors payment period shows that the company has taken long time from
creditors which was gone up to 514 days in the F.Y 2019-2020.

11.The current asset turnover ratio of the company shows the relationship between net
sales and current assets. It quietly improved in 2020-2021.

12. Working capital turnover ratio shows the company is utilizing working capital
effectively in the first two years then after it is shown that inefficient utilization of
working capital.

I3. Fixed asset turnover shows the relationship between fixed assets and net sales. It
shows an decreasing trend.

14. The gross profit ratio of the company is negative nature. It is danger signal to the
company.

15. It is found that the net profit ratio of the company is negative nature. It indicates that
the production costs are more than the total revenue for a specific period.

16. The schedule of changes in working capital in five years shows an decreasing trend.
It indicates that the company is not able to use its resources in a better way.

17. The working capital trend of the firm is showing a negative impact in five years.
This indicates that lower productivity of the firm and poor operational efficiency.

6.3 SUGGESTIONS

Keeping in view of detailed analysis for the last 5 years of study and findings, the
following suggestions shall be helpful in increasing the efficiency in working capital
management. 1.Metal Industries Ltd should maintain large amount of working capital
to meet the day to day operations.

2. Company should try to increase volume based sales so as to stand in the competition.
128
3. The liquidity ratios are almost below to the standard requirement. So the working
capital management of the company is not satisfactory. Therefore or improve in
liquidity ratios are necessary.

4. Company has to control on their current liabilities because current liabilities increased
every year.

5. To gain good profits company has to improve the sales through inventory
management.

6. Company should try to reduce inventory cycle to ensure that on time delivery.

7. The company should take precautionary measures for investing and collecting funds
from receivables and to reduce the bad debts.

8.The Company has take long time to make payments to the creditors. This is not good
Sign tor the company. Because it will decrease the goodwill of the company in market
and also decrease the credibility of the company. It has maintained it further to survive
in the market.

9.The management of the company should concentrate the profitability ratios, that is
negatively sloped and to control the operating expenses.

10. The company should try and maintain an optimum level of working capital in order
to improve the workings of the company.

6.4 CONCLUSION

The study on working capital management conducted in METAL INDUSTRIES LTD,

Shoranur to analyse the financial position of the company. The company’s financial
position is analysed by using the secondary data of annual reports from 2017-18 to
2021-22. The working capital position of the company is negative nature. There is
excess of current liabilities over current assets during the period of study. Which
indicates that the firm has insufficient current assets to meet current liabilities. The
working capital position of the company is not satisfactory to meet current obligation.
The purpose of working capital is very essential to smooth running of the business. In
the future period the working capital position will be satisfactory if the company speed

129
up its collection policy and efficient utilization of funds. METAL INDUSTRIES LTD
is fielding to maintain working capital in the firm and government needs to give certain
money to METAL INDUSTRIES as working capital for the next years. No other way
to maximize the working capital from the finding of study. It could be concluded that
the working capital position of the company is not satisfactory. If the company
concentrates more on the cash management and inventory management it is quite
confident that the working capital of the company could be made highly satisfactory.
There by improving the overall efficiency of the organization.

130
BIBLIOGRAPHY

131
 BIBLIOOGRAPHY

BOOKS

I. Agarwal N.P (1982), “Analysis of Financial Statements”, National Publishing House,

New Delhi

2. Bhatt V. V. (1972), Working Capital Finance: Criteria of Appraisal, “Economic and

Political Weekly”, Vol.7 No. 17, pp.842-845.

3. Kothari, C.R. (2004). Research methodology: Methods and techniques (2nd revised
Edition). New Delhi: New Age International (P) Limited, Publishers.

4. Kulkarni P. V (1999), “Financial Management”, Himalaya Publishing House,

Mumbai.

5. Vyuptakesh (2005), *Fundamentals of Financial Management”, Pearson Education.,

New Delhi.

WEBSITES

1. https://themetalindustries.in

2. www.connectmodern.com

3. www.investopedia.com

4. www.monevcontrol.com

5. Www.seribd.com/.../working-capital-management.

COMPANY DOCUMENTS

1. Magazines of the company prepared annually.

2. The Metal industries Ltd. Shoranur Annual report

132
APPENDIX

133
THE METAL INDUSTRIES LIMITED, SHORANUR

BALANCE SHEET FOR THE YEAR 2018-2022

PARTICULARS 2018 2019 2020 2021 2022

EQUITY AND
LIABILITIES
SHAREHOLDER
S FUNDS
Share capital 15180.3 15180.32 15180.32 15180.32 15180.32
2
Reserve and (76270.5 (96790.58 (122689.98 (130945.28 (155204.92
surplus ) ) ) ) )
Total 61090.2 (81610.27 (107509.67 (130945.28 (155204.92
shareholders’s fund 7 ) ) ) )
SHARE
APPLICATION
MONEY
PENDING
ALLOTMENT
Government of 4600.00 4600.00 4600.00 4600.00 4600.00
Kerala
NON-CURRENT
LIABILITIES
Fixed assets:-
Tangible assets 37738.8 35554.62 35229.28 34830.74 33293.11
5
Intangible assets 26.92 21.54 17.23 15.28 13.55
Capital working in 0.00 0.00 1517.00 0.00 0.00
progress

134
Total fixed assets 37738.8 35533.08 35229.28 34830.74 33293.11
5
Non current
investments
Deferred tax assets 428.22 428.22 428.22 428.22 428.22
Long term loans 298.53 309.19 312.79 312.79 312.79
and advances
Total Non- 38492.5 36292.03 35970.29 35571.75 34034.12
Current Assets 2
CURRENT
ASSETS:-
Current 0.00 0.00 0.00 0.00 0.00
investments
Inventories 6688.31 8359.81 9989.52 8890.78 10854.39
Trade receivables 24703.9 25897.87 18613.91 13635.79 14665.38
3
Cash and cash 25080.6 17840.67 2947.28 7031.85 7102.73
equivalents 5
Short-term loans 2114.33 2666.07 3327.23 2104.45 2454.90
and advances
Other Current 185.50 189.71 598.65 607.17 627.01
Assets
Total current 58772.7 54954.13 35476.58 32270.04 35704.42
Assets 3
TOTAL ASSETS 97265.2 91246.16 71446.87 67841.78 69738.53
5

135
STATEMENT OF PROFIT AND LOSS ACCOUNT FOR THE YEAR
2018-2022

PARTICULARS 2018 2019 2020 2021 ,2022

REVENUE
REVENUE
FROM
OPERATIONS
Sales of products 35748.90 30660.35 25356.32 26983.79 24402.59
Other operating 5371.29 4123.07 1867.46 84.52 0.00
revenue
TOTAL 41120.20 34783.42 27223.78 27068.32 24402.59
REVENUE
FROM
OPERATIONS
Other income 649.67 743.83 1860.70 84.52 139.93
TOTAL 41769.87 35527.25 29084.48 27068.32 24542.53
REVENUE
EXPENSES
Cost of materials 5482.49 3480.69 1659.86 4491.12 5608.67
consumed
Purchase of stock 17514.07 15655.63 11610.61 10130.38 8898.96
in trade
Change in -862.43 -515.76 -653.22 -701.89 -2571.06
inventories of
finished goods,
work in progress
and stock in trade

136
Employee benefit 14089.81 14635.52 17211.90 13391.90 14005.91
expenses
Finance cost 10659.79 11121.48 14746.97 13233.13 14708.75
Depreciation and 3486.22 2364.59 1878.12 1727.11 1551.25
amortization
expenses
Other expenses 11411.27 9305.08 8529.64 7455.18 6599.69
TOTAL 61781.22 56047.24 54983.88 51130.71 48802.17
EXPENSES
Profit before -20011.35 -20519.99 -25899.40 -23435.62 -24259.63
exceptional and
extra ordinary
items and tax
Exceptional items
Profit before extra -20011.35 -20519.9 -25899.40 -23435.62 -24259.63
ordinary items
and tax
Exceptional items
Profit before tax -20011.35 -20519.9 -25899.40 -23435.62 -24259.63
Tax expenses:-
Current
Relating to earlier
year (Net)
Deferred (Net)
MAT credit
entitlement
Profit for the -20011.35 -20519.9 -25899.40 -23435.62 -24259.63
year

137
138