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A stuy on interpretation and analysis of ratio analysis and performance evaluation conducted at kmf
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A stuy on interpretation and analysis of ratio analysis and performance evaluation conducted at kmf

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A stuy on interpretation and analysis of ratio analysis and performance evaluation conducted at kmf

A stuy on interpretation and analysis of ratio analysis and performance evaluation conducted at kmf

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  • Full Name Full Name Comment goes here.
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  • m planning on doing same topic in kmf...i also need to do literatue review on dis....so hemanth can u guide me regarding dat
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  • Hello, Please contact us through www.projectsformba.blogspot.com/p/feedback.html so that one of our team mate will get back to you at the earliest. Thank you!
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  • hey this is helpful.. could u email this to me @Lshankar83@gmail.com
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  • Pls mail this ppt to agipkumara79@yahoo.com ,Thanks
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  • Hi Hemanth, it would be of great help if u can mail me this report... My mail id is m110017ms@nitc.ac.in
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A stuy on interpretation and analysis of ratio analysis and performance evaluation conducted at kmf A stuy on interpretation and analysis of ratio analysis and performance evaluation conducted at kmf Document Transcript

  • Performance evaluation on financial statement INTRODUCTION Executive Summary The world of business today has undergone a complete metamorphosis. This process was further augmented by various round of GATT agreement that culminated into WTO a new world order to trade and business. The command economy has yielded place to market economy with wide ranging implications for Indian business and industry which have to be globally competitive in terms of technology, costs and quality. To cope up with these challenges, a new breed of professional managers is needed some of the traditional theories of management are being challenged today in terms of their relevance in the fast changing environment, and new management practices and concepts are evolving. Unfortunately, however, not many text books are available in India, which thoroughly deals with these changes and which can be gainfully used by the students of management and practicing managers alike. The present text on financial management may be seen and appreciated in the above context. In my long associated with a number of companies, as a consultant or a director on their boards and audit committees, I have been a witness to the changes that have taken place in finance function having far reaching implication for corporate management, in recent years, therefore, financial management has attracted a lot of attention by the corporate sector, goods professionally managed companies are greatly concerned about their capital structure, cost of capital working capital management, project appraisal, corporate governance and so on. They are trying to bring down their cost of debt to international level not only by using new financial instruments but also by borrowing abroad. LIBOR linked short term borrowing has become very common in such companies with all the world really becoming a global village, international financial management has assumed added significance unprecedented changes have been taking place in various financial sectors like banking, insurance and capital market .information technology has not only added new dimensions to the delivery of financial services, but has also provided a more rigorous analytical framework for decision making. Hence managers have deal with a many more contemporary issues in finance, economy, technology, trade and commerce etc., in the modern global village. 1|Page H R I H E Hassan
  • Performance evaluation on financial statement Finance Finance has been aptly described as a lubricant of economic activity, without which the entire business will grind to a halt, and money has been aptly described by monetary economist called Geoffrey crowther “finance as the essential invention on which all the rest is based. With unlimited wants and limited financial resources, the financier is concerned with what is produced, requirements of funds allocation of funds selection of developmental priorities, determination of gestation periods, proper monitoring of accounts to avoid cash flow problems and to ensure the profitability of the enterprises be it in any sector of economy, public sector, private sector ,industrial, agricultural, cooperative, banking and allied enterprises.,” the finance manger has to ensure the rational decision making efforts at the each any every successive stages of pre investment and post investment. In the absence of proper appraisal system and evaluation of managerial abilities, there will be misallocation mortality and lopsided growth in undesired way leading to holocaust of economic wealth. Meaning Financial management is that managerial activity which is concerned with the planning and controlling of the company’s financial resources. According to soloman, “financial management is concerned with efficient use of an important economic resource namely, capital funds. This can be possible only when funds are procured in a manner that the risk, cost, and control consideration are property balanced in a given situation and there is optimum utilization of funds”. 1.Raising of the required funds at the lower cost 2.Making optimum use of the funds so raised. So, it is clear that financial management refers to all those managerial activities or efforts which are concerned with the ascertainment of the finance, short term as well as long term needed by the company, determination of the sources suitable under the given circumstances and collection of the funds in time, and control over the utilization of funds. 2|Page H R I H E Hassan
  • Performance evaluation on financial statement Every organization, irrespectively of size of and mission, may be viewed as a financial entity. Management of an organization, particularly a business firm is confronted with issues and decisions like the following, which have important financial implications:  What kind of plant and machinery should the firm buy?  How should it raise finance?  What should be its credit policy?  How much should it invest in inventories? 1.1 Statement of problem: Analysis and interpretation of financial statement is a regular exercise to review the performance of the company. It was proposed to conduct a review to study the short term prospects as well as the long term trends and to arrive at the conclusion on the performance of the company. Performance review resulting in taking corrective action optimizes the performance in the subsequent period. 1.2 Objective of the study: The objective of the study is to evaluate the financial performance of hamul over a period of past 5years the study shall cover the following areas: a) The study of balance sheet and loss account b) To study whether the financial performance is improving or deteriorating c) To suggest measures and recommend alternative, key factors for decision if any for the successful performance of the company. Apart from the above main functions, following subsidiary function are also performed by the finance manager: a) Evaluation of the financial performance b) To negotiate with bankers c) To keep track of capital market, stock exchange quotation and behaviour of stock market prices. Importance of financial management: 3|Page H R I H E Hassan
  • Performance evaluation on financial statement The importance of financial management cannot be overemphasized. In every organization, where funds are involved sound financial management is necessary. As Collins books has remarked “bad production management and bad sales management have slain in hundreds, but faculty financial management has slain in thousand”. Sound financial management is essential in both profit and non profit making organization. The financial management helps in monitoring the effective deployment of funds in fixed assets and in working capital assets. The financial management assesses the finance position of the company through the working out of the return on capital, debt equity ratio, and cost of capital from each source etc., and comparison of the capital structure with that of similar companies. Also it helps in profit planning, capital expenditure, capital expenditure, measuring cost, given input of funds. 1.3 Scope of the study Financial management is broadly concerned with the acquisition and use of funds by a business firm. Its scope may be defined in terms of the following questions:  What should be the composition of the firm’s assets?  What should be the mix of the firm’s financing?  What should the firm analysis, plan and control its financial affairs? Important decisions: 1 Funds requirement decision 2 Financing decision 3 Investment decision 4 Dividend decision Meaning of financial statement: 4|Page H R I H E Hassan
  • Performance evaluation on financial statement A financial statement is an organized collection of data according to logical and consistent accounting procedures. It contains summarized information of the firm’s financial situation to users. Financial statements are prepared for the purpose of presenting a periodical review or report on the progress by the management and deal with the, 1. status of investment in the business 2. results achieved during the period under review According to smith and ashbin, financial statement is, “the end product of financial accounting in a set of financial statements prepared by the accountant of a business enterprises, that purports to reveal the financial position of the enterprise, the result of its recent activities and an analysis of what has been done with the earning”. The term financial statements generally refer to two basic statements 1. Balance sheet or statement of financial position 2. Profit & loss account or income & expenditure account Balance sheet is of the most significant financial statement in the organization. It indicates the financial condition or the state of affairs of a business at a particular point of time. More specification about resources and obligations of a business entity and about its owner’s interest in the business at a particular point of time. Profit & loss account is the “score-board of the firm’s performance during a particular period. It explains that what has happened to a business because of operations between two balance sheet dates. In short, it is the accounting report, which summarized the revenues, expenses, and the difference between them for an accounting period. The profit and loss account reflects the performance of the firm over a period of time. Meaning of financial analysis and interpretation: The financial statements summarize the end result of business activities of enterprises during an accounting period in monetary terms which are indicators of the two significant factors viz. o Profitability and o Financial soundness 5|Page H R I H E Hassan
  • Performance evaluation on financial statement Analysis and interpretation of financial statements, therefore refers to such a treatment of the information contained in the profit and loss account and balance sheet so as to afford full diagnosis of the profitability and financial soundness of the business. A distinction here can be made between the two terms-“analysis” and “interpretation “. The terms analysis means, methodical classification of the data given in the financial statements. The figures given in the financial statements will not help one, unless they are put in a simplified from. The term interpretation means explaining the meaning and significance of the data so simplified. However both” analysis” and” interpretation” are complementary to each other. Interpretation requires analysis, while analysis is useless without interpretation. According to Myers, “financial statement analysis is largely a study of the relationship among the various financial factors in a business disclosed by a single set of statement and a study of the trend of these factors as shown in a series of statement”. Importance of financial analysis and interpretation: Financial statements contain a wealth of information, which if properly read, analyzed or interpreted can provide valuable insights into a firm’s performance and position. Also it is the starting point for making plan, before using any sophisticated forecasting and planning procedure. By analyzing these statements, firm can evaluate its past, present, projected performance etc. Usually management would be particularly interested in knowing the financial strength of firm to make their best use and to be able to spot out the financial weakness of the firm to take suitable corrective action. The future plan of the firm should be laid down in view of the firm’s financial strength and weakness. In short, through financial analysis and interpretation it helps effectively the user for decision making process. Objectives of financial analysis and interpretation: 1. To judge the financial health of the undertaking. 2. To judge the earning performance of the company 6|Page H R I H E Hassan
  • Performance evaluation on financial statement 3. To gauge/ appraise for investment/ opportunity or potentiality 4. To judge the ability of the company to serve the debt 5. To judge the solvency of the undertaking Parties demanding financial analysis: The traditional view is that the financial statements are prepared for the proprietors and accounting for which just aids the stewardship function. In recent years, this concept of stewardship accounting has been dramatically changed. A used oriented approach has instead changed to fit the purposes of the recipient of financial information. Whenever ownership is separated from administration, is natural for the owner to understand how money contributed by him is utilised by the administrators. Hence it leads to enquiry by the owner can be called as the disclosure which is an important part of good corporate governance. Financial statement analysis may be done for a variety of purpose, which may range from a simple analysis of short term liquidity position of the undertaking to comprehensive assessment of the strength and weaknesses of the undertaking to comprehensive assessment of the strength and weaknesses of the undertaking in various areas. Also the nature of analysis will differ depending on the purpose of the analyst. Important prominent users who go through the report of financial statements for analysis are:  Shareholders and prospective investors  Employees  Trade creditors  Banks, financial institutions and lenders  Managers  Customers  Government and regulatory agencies  Others Types of financial statement analysis: 7|Page H R I H E Hassan
  • Performance evaluation on financial statement Types of financial can be classified into different categories depending upon (1) the material used and, (2) the modus operandi of analysis 1. On the basis of material used. According to this basis, financial analysis can be of two types: a) External analysis: this analysis is done by those who are outsiders for the business. The term outsiders include investors; credit agencies, government agencies and other creditors who have no access to the internal records of the company. These persons mainly depend upon, the published financial statements. Their analysis serves only a limited purpose. b) Internal analysis: this analysis is done by persons who have access to the books of account and other information done by executive and employees or by officers appointed for this purpose by the government or the court under power vested in them. The analysis is done depending upon the objective to be achieved through this analysis. 2. On the basis of “modus operandi”. According to this, financial analysis can also be of two types: a) Horizontal analysis: In case of this type of analysis, financial statements for a number of years are reviewed and analyzed. The current year’s figures are compared with the standard or base year. The analysis statement usually contains figures for two or more years and the changes are shown regarding each item from the base year usually in the from of percentage… such an analysis given the considerable insight into levels and areas of strength and weakness. Since this type of analysis is based on the data from year to year rather than on one date, it is also termed as “dynamic analysis”. b) Vertical Analysis: In case of this of analysis, a study is made of the quantitative relationship of the various items in the financial statements on a particular date, e.g.: the ratios of different items of costs for a particular period may be calculated with the sales for that period. Such an analysis is useful in 8|Page H R I H E Hassan
  • Performance evaluation on financial statement comparing the performance of several companies in the same group or divisions or departments in the same company. Since this analysis depends on the data for one period, this is not very conducive to a proper analysis of the company’s financial position. Steps in financial statement analysis: Steps to be taken for financial statement analysis are: 1. Identification of user’s purpose 2. Identification of data source 3. Selecting the techniques to be used for such analysis The financial statement analysis is purposive and not necessarily comprehensive to cover all possible uses. Since it is purposive, analysis may be restricted to any particular portion of the available financial statement taking care to ensure objectivity and unbiased ness. Also depending upon his purpose, user can choose any of the techniques or tools for analyzing the financial statement. 1.4 Research methodology: The study has entirely based on the secondary data. Information is collected form the profit and loss account and balance sheet of last five years 2004-05 to 20008-09. The data is analyzed with the help ratio analysis and trend analysis. Apart from this, personal and informal discussions were held with the executives in the finance and accounts department and other departments of the corporation. Where as the theoretical concept is taken from various text book reference on financial management. 1.5 Hypothesis: “The study has been under taken to see that whether financial performance of the company is improving or deteriorating” 9|Page H R I H E Hassan
  • Performance evaluation on financial statement Sources of data collection: As the study related to the analysis and interpretation of financial performance, three was no need for the collection of structure d data. Company’s annual reports for the past 5 years are being referred and direct interviews with various financial senior executives was carried out for completing the study. • Primary data • Secondary data Primary data: Primary data collected through personal meetings with respondents and administrating them with a questionnaire. Most of my findings and suggestions are from the survey and interaction with the employees of the organizations. Secondary data: secondary data was collected through internet, company literature and books. Analysis of data The analysis is mainly consisted of through study of the financial data available in the financial statement. The data collected will be subjected to analysis through the following techniques or tools, like ratio analysis, Trend analysis.The above two analysis are arrived at on the basis of the profit and loss account and balance sheet of the publish book of accounts of the corporation. Objective of the study: Karnataka milk federation (k.m.f) is a co operative open body in the state of Karnataka representing dairy farmers Organisation and also implementing dairy development activities to achieve the following objectives. 1. Providing assured and remunerative market for the milk produced by the farmer members. 2. Providing quality milk to urban consumers. 3. To build village level institution in cooperative sectors to manage the dairy activities. 10 | P a g e H R I H E Hassan
  • Performance evaluation on financial statement 4. To ensure provision of milk production of milk production inputs, processing facilities and dissemination of know –how 5. To facilities rural development by providing opportunities for self employment at village level, preventing migration to urban areas, introducing cash economy and opportunity for steady income. 6. The philosophy of dairy development is to eliminate middlemen and organize institution to be owned and managed by the milk producers themselves, employing professionals. Achieve economies of scale to ensure maximum returns to the milk producers, at the same time providing wholesome milk at reasonable price to urban consumers. Ultimately the complex network of cooperative organization should build a bridge between masses of rural producers and millions of urban consumers and achieve a socio economic revolution in the hinterlands of the state. 1.6 Limitation of the study 1. Time is a major constraint. The duration of project was limited to few weeks 2. For a detailed study of a subject like organisation climate in a very short span of time is quite difficult. 3. The research study is confined to only few dimension of organization climate. 4. it based only on secondary data. 2.1 Ratio analysis: Meaning of financial ratio: Ratio analysis measures the relationship between two data. For ex: male – female ratio of the population of a country. Absolute comparison between two figures does not carry much sense, when spoken in terms of ratio it becomes much more penetrating and meaningful, so a ratio it defined as the indicated quotient of two mathematical “ expenditure” and as” the relationship between two or more thing”. 11 | P a g e H R I H E Hassan
  • Performance evaluation on financial statement Since we are using the term ‘ratio’ in relation to financial statement analysis, it may properly mean ‘an accounting ratio’ or ‘financial ratio’. An accounting ratio may be defined as the mathematical expression of the relationship between two accounting figures. But these figure must be related to each other (these figure must have a mutual cause and effect relationship) to produce a meaningful and useful ratio. For ex, the turnover can not be said to be significantly related to the figure of securities premium. Thus, an accounting ratio is a mathematical expression of a quantitative relationship between two items or group of items having mutual cause & effect relationship, taken from income statement or balance sheet or both, which the analyst may use to make a qualitative judgment about the various aspect of the financial position and performance of a concern. Ratios can be expressed as: 1. Percentage say, gross profit ratio is 20% of sales [calculated by dividing gross profit (rs. 20000) by sales (100000) and multiplying by 100] 2. Proportion say, current ratio is 2:1 [calculated by dividing current assets (100000 rs) by current liabilities(rs 50000)] 3. Fraction say, net profit is one tenth of sales [calculated by dividing net profit (rs 10000) by sales (rs 100000)] 4. Times say, capital turnover ratio is 5 times [calculated by dividing net sales (rs 100000)by capital turnover employed (rs 20000)]. Ratio analysis is a process of identifying the financial strength and weakness of the enterprises by logically establishing relationship between the item of balance sheet or income statement or both and interpreting the results there of in order to derive meaningful conclusion. This is the most important tool available to financial analysis for their work. A financial ratio shows the relationship in mathematical terms between two interrelated accounting 12 | P a g e H R I H E Hassan
  • Performance evaluation on financial statement figures. In financial analysis, a ratio is used an index or yardstick for evaluating the financial position and performance of a firm. The absolute accounting figure reported in the financial statements does not provide a meaningful understanding of the performance and financial position of a firm. For ex: rs.5 cores net profit may look impressive, but the firm’s performance can be said to good or bad only when the net profit figure is related to firm’s investment. Ratio helps to summarize the large quantities of financial data and to make quantitative judgment about the firm’s financial performance. Cross sectional analysis: It involves the comparison of actual ratios of one firm with those of other similar firms belonging to the same industry or industry averages at the same point of time. Time series analysis: Time series analysis involves the comparison of actual ratios of one period with those of earlier periods for the same enterprise. Standards of comparison: The ratio analysis involves comparison for a useful interpretation of the financial statements. A single ratio in itself does not indicate favourable or unfavourable conditions it should be compared with some standard. Standard of comparison may consist of: 1. Ratio calculated from the past financial statements of the same firm 2. Ratio developed using the projected or pro-forma, financial statement of the same firm. 3. Ratio of some selected firm, especially the most progressive and successful, at the same point in time and, 4. Ratios of the industry to which the firms belongs From the above four, the easiest way to evaluate the performance of a firm is to the first one i.e to compare its current ratio with the past ratio. 13 | P a g e H R I H E Hassan
  • Performance evaluation on financial statement Definition and concepts: 1. Analysis and interpretation of financial statement: Refers to such a treatment of the information contained in the profit and loss account and balance sheet so as to full diagnosis of the profitability and financial soundness of the business. 2. Financial ratio analysis: This is the most important tool available to financial analyst for their work. It shows the relationship in mathematical terms between two interrelated accounting figures. 3. Trend analysis: Trend analysis is for studying financial statements over a period of time year to year, month to month. 4. Funds flow statement: The funds flow statement, drawing based on the information contained in the basic financial statement which shows the sources of funds and application of funds during the period. 5. Profitability ratio: Are calculated to measure the operating efficiency of the company. It gives some yardsticks to measure profit in relative terms, either with reference to sales or assets. 6. Gross profit ratio: Is defined as the difference as the difference between net sales and cost of good sold. 7. Net profit ratio: This ratio shows the earnings left for shareholders as a percentage of net sales 8. Operating profit ratio: For evaluating the operating performance of the company. 9. Earnings per share (EPS): It is calculated by dividing earnings available to the equity shears outstanding on the year ending on 31st mar every financial year. 10. Current ration: It indicated the relationship between total current assets and the total current liabilities in a company net working capital. 11. Return on investment: It is a measure of company earning on investing a unit of capital whether equity or preference 12. Capital structure ratio: The purpose of this ratio is to identify the source of funds that is proportion mix of debt and equity. 13. Debt equity ratio: It is determined to ascertain the soundness of long term financial policies of the company. The ratio indicates the proportion of owner’s stake in the business compared to long term debt 14 | P a g e H R I H E Hassan
  • Performance evaluation on financial statement 2.2 Techniques of financial statement analysis : A financial analyst can adopt the following tools for analysis of the financial statement. There are also termed as methods of financial analysis. This chapter describes how this information is analysed, both by parties outside the firm and by the company’s own management. All analysis of accounting data involves comparisons. An absolute statement, such as “company X earned $ 1 million profit, “is by itself not useful. It becomes useful only when the$ 1million is compared with something else. The comparison may be quite imprecise and intuitive. For ex: if we know that company X is an industrial giant with tens of thousands of employees. We know intuitively that $ 1 million profit is a poor showing, because we have built up in our minds the impression that many companies should earn much more than that. Or , the comparison may be much more formal, explicit and precise as is the case when the $ 1 million profit this year is compared with last year’s profit. In either case, it is the process of comparison that makes the number meaningful. Business objectives: Comparison are essentially intended to shed light on how well a company is achieving its objectives in order to decide the types of comparisons that are useful, we need first to consider what a business is all about what its objectives are. Let us say, as a generalization and insofar as it can be measured quantitatively, that the overall objective of a business is to earn a satisfactory return on the funds invested in it, consistent with maintaining a sound financial position,”( note that this statement is limited to facts that can be expressed numerically, however, employee satisfaction, social responsibility, ethical consideration, and other non measurable objectives are also important and must be taken in to account whenever possible in appraising the overall success of an enterprise. This generalized statement of objectives has two aspects: (1) earning a satisfactory return on investment and (2) maintaining a sound financial position. Each is discussed briefly below: Return on investment return on investment (ROI) is broadly defined as net income divided by investment. The term investment is used in three different senses in financial 15 | P a g e H R I H E Hassan
  • Performance evaluation on financial statement analysis, thus giving three different ROI ratios: return on assets, return on owner’s equity and return on invested capital. Return on assets (ROA) reflects how much the firm has earned on the investment of all the financial resources committed to the firm. Thus, the ROA measure is appropriate if one considers the investment in the firm to include current liabilities, long term liabilities, and owners’ equity, which are the total sources of funds invested in the assets. It is a useful measure if one wants to evaluate how well an enterprise has used its funds, without regard to the relative magnitudes of the sources of those funds (short-term creditors, long term creditors, bondholders, and share holders). The ROA ratio often is used by top management to evaluate individual business units with in a multidivisional firm (e.g the laundry equipment division of a household appliance firm). The division manager has significant influence over the assets used in the division but has little control over how those assets are financed, because the division does not arrange its own loans, issue its own bonds or capital stocks, or in many cases pay its own bill (current liabilities). Return on owners, equity (ROE) reflects how much the firm has earned on the funds invested by the shareholders (either directly or through retained earnings). This ROE ratio is obviously of interest to present or prospective shareholders, and is also of concern to management, which is responsible for operating the business in the owners’ best interest. The ratio is not generally of interest to division managers, however, because they are primarily concerned with the efficient use of assets rather than with the relative roles of creditors and shear holders, in financing those assets. The third ratio is return on invested capital (ROIC): invested capital (Also called permanent capital) is equal to non current liabilities plus shareholders’ equity and hence represents the funds entrusted to the firm for relatively long periods of time. ROIC focuses on the use of this permanent capital. It is presumed that the current liabilities will fluctuate more on less automatically with changes in current assets and that both vary with the level of current operations. 16 | P a g e H R I H E Hassan
  • Performance evaluation on financial statement Invested capital is also equal to working capital plus non current assets. This equivalency points out that the owners and long term creditors of the firm must in effect finance the plant and equipment. Other long term assets of the firm and the portion of current assets that is not financed by current liabilities. Some firms use ROCI to measure divisional performance, often labelling the ratio return on capital employed (ROIC) or return on net assets (RONA . this measure is appropriate for those divisions whose managers have a significant influence on decisions regarding assets acquisitions, purchasing and production schedules (which determine inventory levels). Credit policy (account receivables) cash management and on level of their current liabilities • Sound financial position: In addition to desiring a satisfactory return, investors expect their capital to be protected from more than a normal amount of risk. The return on the shareholders ‘ investment could be increased if incremental investments in the assets for new projects were financed solely by liabilities, provided the return on these incremental investments exceeds the interest cost of the added debt. This “financial leverage” policy, however, would increase the shear holders. Risk of losing their investment, because interest charges and principal repayments on the liabilities are fixed obligations and failure to make these payments could throw the company into bankruptcy. The degree of risk in a situation can be measured in part by the relative amounts of liabilities and owners’ equity and by the funds available to discharge the liabilities. This analysis also involves the use of ratios. • Structure of the analysis: Many ratios have been described in previous chapters. In this section, these ratios and others are discussed in a sequence intended to facilitate an understanding of the total business. Thus, we shall assume here that one first looks at the firm’s performance in the broadest terms and then works down through various levels of detail in order to identify the significant factors that accounted for the overall results, if the values of the ratios used in this analysis are compared with their values for other time periods, this comparison is called a longitudinal, or trend analysis. 17 | P a g e H R I H E Hassan
  • Performance evaluation on financial statement Dozens of ratios can be computed from a single set of financial statements. Each analyst tends to have a set of favourite ratios, selected from those described below and perhaps from some we do not describe. Classification of ratios: Ratios can be classified into different categories depending on the basis of classification. The traditional statement to which are determinants of a ratio belong. On the ratio could be classified as: 18 | P a g e H R I H E Hassan
  • Performance evaluation on financial statement Traditional classification: ratio Profit & loss a/c ratio Balance sheet ratio Composite ratio 1. Profit and loss a/c ratios: ratios calculated on the basis of the items of the p & l account only , g/p ratio, n/p ratio, stock turn over ratio, operating ration etc 2. Balance sheet ratios : ratio calculated on the basis of the figure of balance sheet only , current ratio, debt equity ratio etc 3. Composite ratios: inter statement ratios based on figures of p & l account as well as the balance sheet ,fixed assets turnover ratio, debtors turnover ratio etc. 19 | P a g e H R I H E Hassan
  • Performance evaluation on financial statement FUNCTION CLASSIFICATION RATIO Ratio Profitability ratio Activity ratio Financial ratio Liquidity ratio Leverage ratio (Short term) (Long term) Functional classifications: a. Profitability ratios: profitability of the organisation reflects the final result of business operation, and it will have no future if it fails to make sufficient profits. Therefore, the financial manager should continuously evaluate the efficiency of the company, besides management of the company, creditor want to get interest and repayment of principal regularly. Owners want to get a reasonable rate of return in their investments. This is possible only when the company earns enough profits. Generally two major types of profitability ratios are calculated. a. Profitability in relation to sales: G/P ratio= gross profit x 100 Sales/turnover N/P ratio= net profit x 100 Sales b. Profitability in relation to investment: 20 | P a g e H R I H E Hassan
  • Performance evaluation on financial statement ROI = Earning before interest and taxes x100 Total assets Return on equity = Profit after taxes x100 Net worth Earning per share = Profit after tax No. of paid up equity shares b. Activity ratios: This ratio is also called as turnover ratio, asset management ratio. It measures how efficiently the assets are employed by the firm. There ratios are based on the relationship between the level of activity, represented by sales or cost of goods sold, and levels of various assets. A proper balance between sales and assets generally reflects that assets managed well. Several activity ratios can be calculated to judge the effectiveness of assets utilization. The important turnover ratios are: a) Inventory turnover ratio = Cost of goods sold Average inventory b) Debtors turnover ratio= Credit sales Average debtors c) Total assets turnover ratio= Net sales Total assets d) Working capital turn over ratio= Net sales Working capital This ratio indicates whether or not working capital has been effectively utilized in making sales. c. Financial ratios: Financial ratios indicate about the financial position of the company. The company is deemed to be financially sound if it is in a position to carry on its business smoothly and meet all its obligations both long terms as well as shortly term without strain. Thus, its financial position to be judged from two angles. Short term as well as long terms. A. Current ratio= Current assets Current liability B. Acid test ratio = Quick assets 21 | P a g e H R I H E Hassan
  • Performance evaluation on financial statement Current liabilities This quick ratio is a fairly stringent measure of liquidity. It is based on those current assets which are highly liquid. Inventories are excluded from the numerator of this ratio because, those are deemed to be the least liquid component of current assets. d. Leverage ratios: Leverage ratio help in assessing the risk arising from the use of debt capital. The important leverage ratio is. 1. Debt equity ratio= Long term debt Equity capital 2. Proprietary ratio= Share holder funds Total tangible assets Advantages of ratio analysis are: 1. Simplifies the financial statements. 2. Facilitates inter firm comparison 3. Makes intra firm comparison possible 4. Helps in planning 5. Useful tool to test the health of the company quickly Overall Assessment of performance Financial position Fund flow & profitability statement Financial statement Deployment of Ratio analysis fund by the and trend analysis HCMPSU Use of the above financial ratio to: 22 | P a g e H R I H E Hassan
  • Performance evaluation on financial statement 1. Share holders: Are interested in short run performance of the company, so they can embark upon dividend per share ratio. Some others may be interested in holding the shares in the long term. So they have to go in for more details. They should judge long term solvency position ROE and EPS. 2. Analyst advisors: They advise the present and potential investors about their buy/sell and lending decision. They generally review all the financial characteristics. They also make inter firm comparisons. 3. Tax authorities: They judge the reliability of the financial information presented by a enterprises. By using various ratios and applying the logic of inter relationship; they try to assess the comparability of information. 4. Credit rating agencies: Presently in India the credit rating agencies rank the companies in terms of a specific loan or deposit. They also use financial ratio along with the process of wage negotiation. 5. Employees and trade union: They use mainly profitability ratio and agencies rations, in the process of wage negotiation. 6. Auditors; Like tax authorities, auditors use ratio as part of comparability test on the financial data provided for audit. 7. Distress analysts: Ratio is useful tools for industrial units. Limitation of financial ratios: 1. Comparative study required: Ratios are useful in judging the efficiency of the business only when they are compared with past results of the business or with the results of a similar business. 2. Ratios alone are not adequate: Ratios are only indicators, they cannot be taken as financial regarding good or bad financial position of the business. 3. Window dressing: The term window dressing means manipulation of accounts in a way so as to conceal vital facts and present the financial statements in a way to show a better position than what is actually is, on account of such a situation, presence of particular ratio may not be a definite indicator of good or bad management. 23 | P a g e H R I H E Hassan
  • Performance evaluation on financial statement 4. No fixed standards: No fixed standards can be laid down for ideal ratio. For eg., current ratio is generally considered to be ideal if current assets are twice the current liabilities. However, in the case of those concerns which have adequate arrangements with their banks for providing funds when they require, it may be perfectly ideal if current assets are equal to or slightly more than current liabilities. 5. Limitation of financial statement: Ratios are based only on the information which has been recorded in the financial statements. As financial statement suffer from a number of limitations, the ratios derived there from, therefore are also subject to those limitations. 6. Diversified product lines: Many businesses operate a large number of divisions in quite different industries. In such cases ratio calculated on the basis of aggregate data cannot be used for inter-firm comparisons. 2.3 Cost volume profit (CVP) analysis: Profit is the important measure of firm’s performance. An analysis of the effects of various factors on profit is an essential step in the financial planning & decision making. The analytical technique used to study the behaviour of profit in response to the changes in volume, costs and price is called the cost volume profit (CVP) analysis. It is a device used to determine the usefulness of the profit analysis helps to determine the minimum sales volume to avoid losses and the sales volume at which the profit goal of the firm will be achieve. As an ultimate objective, it helps management in seeking the most profitable combination of coats and volume. A dynamic implications of its short run decision about fixed costs, variable costs volume and selling price for its short run decisions about fixed costs, variable costs, volume and selling price for its profit plans on a continuous basis. The CVP analysis is on immense utility to management as it provides as insight into effects and interrelationship of factors which influence profits of the firm. If it with the help of the CVP analysis that the finance executive is enabled to present facts and figures in accurate report and intelligible charts to management for action. 24 | P a g e H R I H E Hassan
  • Performance evaluation on financial statement An overview of the organization: m/s Hassan Co-operative Milk Producers Societies Union Ltd B.M.ROAD, Industrial Estate, Hassan. India is called “the country of villages” where it covers nearly 70%of its total area. In this relation we can say that Indian economy is based on rural activities and their development. Therefore we have to give prime importance to the rural activities. K.M.F. has successfully helped the dairy development in India. This development would such of 80% of India population comparing hard working but poor farmers. India also has the largest population of milk animal in world, yet the milk yield products per animal are less. Most of the farmers have one milk animal; they sell the milk through local milk contractors or middlemen. These traders have always exploited the poor and uneducated milk producers. It was in the late forties, when integrated approach for dairy development based on farmers owned milk cooperative was 1st adopted at Anand. The system includes milk procurement production, and marketing through farmer cooperatives. The system of collective ownership, operation and control of milk trade by farmers came to be known as ANAND PATTERN’. Anand pattern has given them an opportunity to have access to the modern technology. Developments of the mid cities are founded. The premier institution NDDB and IDC for application of the Anand pattern through out the country. The whole project under which replication was envisaged, is named ’operation flood’. The success of Anand pattern depends as establishing a strong co operative infrastructure at the grass root level, making economically viable could further strengthen this. Dairy industry offers employment opportunity to the people so as to help the farmers to get fair price for milk. The farmers are provided with medical facilities to their cattle. Milk is becoming an alternative life line in our rural economy. With the advent of white revolution that is “SKHEERA KRANTHI” in the same pattern of that of Denmark and Holland. 25 | P a g e H R I H E Hassan
  • Performance evaluation on financial statement Export of dairy products plays an important role in our foreign trade. It increases the foreign exchange and national income of our country and also economic development of our country. Meaning of dairy Dairy means a place where the milk and other milk related products like ghee, curds, Etc.., are produced or packed for the sale earlier people were raring animals. Because the population is less and place, situation and facilities are well suited to maintain the animals. So the cooperative societies are come to market and established a dairy to manufacture a milk product to help farmers and consumers to have milk available everywhere and at any time. Origin of the organization: The KMF, Hassan Co-operative Milk Producers’ Societies Union Limited is situated 2 kilometer away from Hassan city in industrial area. It was formally a subsidiary unit of Karnataka dairy development corporation. After organizing required members of the milk societies, plant was commissioned during May 1982. The kudige dairy which was the 1st dairy established in Karnataka had come under the jurisdiction of Hassan Milk Limited in the year 1987. The organization consists of 3 districts Hassan, Chikmagalore and Coorg consisting of 18 taluks. Growth and development of the organization: Hassan milk co-operative is one of the oldest unions in the state of Karnataka. The sphere head team was positioned here in the 1975 and the union was registered in the year 1977. This union has under its preview the district of Hassan, Chickmagalore and Coorg. Under the international development agency programme a total investment of Rs 17.4 millions was made to set up a milk processing facility of 60000 LPD at Hassan. A dairy of 20000 LPD was set up at kudige in 1986 by the government of Karnataka which was handed over to the KMF in the same year. 26 | P a g e H R I H E Hassan
  • Performance evaluation on financial statement Under the operation flood II programme, no expansion in the dairy sequent was proposed. However a chilling of 20000 LPD was to be established and in this union since no firm proposed chilling centre, work did not commence. The consumption of milk in Hassan dairy per day is only about 96000 liters. The remaining milk will be sent to other dairy and product dairies for sales and conversion respectively. Now the hassan milk union has following facilities. Sl. No Dairy Processing capacity 1 (i) Hassan 120000 LPD (ii) Kudige 50000 LPD 2 Chilling centre Chilling capacity (i) Holenarasipura, Hassan 20000 LPD (ii) Birur, Chikkamangalure 20000 LPD (iii) Channarayapatna, Hassan. 100000 LPD Present status and future plans of the organisation: As on the end of March 2010, the network of 1197 dairy co-operative societies (dcs) have been organized spread in 13 taluks of three districts. The societies from three districts constituted “Hassan Milk Union”. The dairy industry in the state is running under 3 their systems:- Karnataka milk federation –state level body District milk union -district level body Dairy co operative societies- village level body The union is affiliated to Karnataka milk federation I,e KMF a state level body. Chilling centres are at Holenarasipur, Channarayapatna and Birur and dairy is situated in Hassan and Kudige. The HCMPSL is doing liquid milk sales in 3 districts of Hassan, coorg and chikmanglore. There are 35 distribution routes selling around 56000 liters per day in Hassan district and there are 6 milk distribution routes under kudige dairy selling 40000 liters per day. There are 252 authorised milk agents for selling, spread over three districts and 19 milk parlors in these three districts. 27 | P a g e H R I H E Hassan
  • Performance evaluation on financial statement Hassan Chickmagalore coorg Total Milk parlors 8 4 7 19 Day counters 5 5 7 17 Debtors 6 7 5 18 Future plans of the organization: Over the years the union had been taking many steps to meet the changing consumer needs, availability of milk variants and milk production to meet the needs of the consumers. Priority areas for the development of liquid milk market in the union areas are identified and necessary action plans have been drawn for implementation during the year 2008-09. the key strategies planned for 2008-09 is given below:- 1. Increase the availability of nandini milk in the market 2. Consumer awareness programme 3. Motivating channel members 4. Constituting effective replacement /leakage policy 5. System of consumer/retailers grievance redress 6. Stealing team concept for market visit 7. Constituting a core group consisting quality, plan and marketing staff for solving day to day problems 8. Sales promotion activities Origin of dairying in India: Around 1500 to 2000 b.c the Aryans were first to domesticate cattle. Use them for tilling their land and obtain milk to be consumed as food. Again it were Aryans who priced the milk of a cow more than its meat, forbade its slaughter, created legends about it and even worshipped it. Hindus even to this day consider cow as sacred. Besides it were only the east which domesticated buffalo as much animal and succeeded so well that today, more than half the total production of milk in India is obtained from buffalo. Now India is one of the richest milk producing country in the world. In 1999 it produced milk up to 770 00000 tons and this milk valued up to 75000 crores and 13% of total production in the world is produced by India itself. 28 | P a g e H R I H E Hassan
  • Performance evaluation on financial statement HASSAN CO-OPERATIVE MILK PRODUCER’S SOCIETIES UNION LTD The Union was registered on 30th March 1977 with the operational jurisdiction extended to 3 Districts namely Hassan, Kodagu & Chikkamagalur. The Dairy was setup under the Operation Flood II & III and has a processing capacity of 1.2 Lakh Litres of milk per day. The Union also has a Dairy at Kudige with a capacity of 50,000 litres per day which is the first Dairy in Karnataka State started during January 1955. The Union has three Chilling Centres at Birur, Holenarasipur and channarayapatna with chilling capacity of 20000 liters per day at Birur and Holenarasipura and 100000 liters per day at Channarayapatna. The Union also produces Ghee, Peda, Curds, Khova and Butter Milk. Hassan Dairy was established under the World Bank aid with an initial handling capacity of 60,000 KGPD and was being managed by Karnataka dairy development corporation. 29 | P a g e H R I H E Hassan
  • Performance evaluation on financial statement In the year 1987 with an idea of bringing all milk allied activities such as milk procurement, milk processing and milk marketing the Hassan dairy and the Kudige dairy (the first commission dairy plant) were handed over to Hassan Co operative Milk Producers Societies Union. The integrated system of monitoring the milk procurement, processing and marketing activities by milk producers themselves was established. MISSION STATEMENT Hassan milk union aims to render the best services at normal cost to its members to increase milk production and produce good quality milk by paying remunerative price through out the year, there by improving their economic and social condition while ensuring high quality milk and milk products to the delighted level of the consumers at competitive price. VISION STATEMENT The union thrives hard to adopt the modern and eco friendly technologies to produce milk and milk products of international standards to make our presence prominent in the global market. AIMS AND OBJECTIVES Hassan co operative milk producers societies union is completely an autonomous body consisting of representatives from milk producers as policy makers • To produce continuous and remunerative market for the surplus milk in the rural areas. • To supply quality milk to customers in the urban areas at a competitive price. • To provide the technical inputs necessary to produce good quality milk and to facilitate increase in milk yield. • To provide self employment to rural folk and to make them economically self sustainable by which the migration of rural folk to urban areas is minimized. • To prevent the role of the middle men in the milk business and to increase their returns. 30 | P a g e H R I H E Hassan
  • Performance evaluation on financial statement • To establish a bridge between rural and urban folk and to play a vital role in changing he social and economic status of the rural folk. Role Of Dairy Co-Operative Society The dairy co operatives are organized in rural areas for the milk producers keeping in view the domestic principles and values. These societies educate, guide, support the milk producers in dairy development activities. Functioning Of Dairy Co Operatives The dairy co operative function all through the year in two shifts, this will provide continuous market for the surplus milk produced and the payment for the milk supplied will be distributed to the producers on the predetermined day. Input activities include: • Veterinary services like regular vaccination • Artificial insemination services • Supply of balanced cattle feed and fodder slips • Training facilities Growth Of The Union The milk union which was established in the year 1977 with 100 functional dairy co operatives collecting 10,300 Kgs of milk per day is procuring on an average 386462 Kgs per day from 1122 co operatives as on date with the increase in milk production the Hassan dairy with the initial capacity of 60,000 KGPD was expanded to 120000 KGPD during 1996.The union has also established three chilling centers with a chilling capacity of 20,000 KPD and 100000 KPD. 2.3 Organization Structure 31 | P a g e H R I H E Hassan
  • Performance evaluation on financial statement BOARD OF DIRECTORS - CHAIRMAN MANAGING DIRECTOR (C.E.O.) ADMINISTRATI PERSONEL ON MANAG E ASSISTANCE PRODUC TION MENT INFOR FINANCE PROCURE DEPARTMENT (Dairy Plant) MARKE TING PURCHASE MATION MENT & INPUT Sr. Staff SYSTEM A- B- C-2 E-27 F-2 1 D-69 G-3 15 3 5 5 H-3 Personnel Department It plays a crucial role in an organization which is always referred as the strength of the organization. Recruitment Suitable candidate is selected through the notice in the news paper then the candidate undergoes job training. Training The existing as well as freshers undergo training. 32 | P a g e H R I H E Hassan
  • Performance evaluation on financial statement For ex: Animal health/artificial insemination officers are put along the existing employees (senior doctors) and they undergo a normal period of 15 days training. Orientation programme Under KMF, CTI (Central training institute), Bangalore, which is a full fledge training institute. And some of the other trainings institutes for which the employees of HAMUL are sent for training are as below: 1. SRDTC(Southern regional demonstration and training center) for both technical and non technical training. 2. Mansinh institute of training, Mahsana, Gujrat, only for technical training. 3. Vaikunt Mehta institute, Pune. For management development programmes. 4. Institute of rural management, Anand. 5. Regional institute of co operative management, Pune. 6. CII- Confederation of Indian industries, institute for quality- for food industrial platforms are created. Employee promotion Higher cadre employee benefits are meant for the management or administrative level authority only. The employee promotion is dependent on his capability and seniority basis is the mandatory method followed. To decide on this, the employee education, obedience, carrying of the job and attendance are taken into consideration. Record maintenance All the day to day information from the date of joining is updated in the records. Leave Casual leave of 15 days per year and for new entrants 1 day per month for one year is followed. And for other employees earned leave of 30 days per year, once in 2 years there also exists surrender of leave or the encashment of the leave. If they accumulate 240 days it is encashed but exceeding 240 days is not entitled for encashment. If any accident takes place during the working hours the special leave is given: 33 | P a g e H R I H E Hassan
  • Performance evaluation on financial statement • Special leave: the rabies leave is given for the infected dog bite. And also the blood donation leave for 1 day is given. • Maternity leave: on condition, with payment. • Extra-ordinary leave: depending on the service or any major health issues. Allowance The allowance in terms of fuel and commuter charges for those who are dependent on public transport per month is fixed. Uniform Uniform is to be worn when on the job and two pairs are given each year. Transfer: The transfer authority is in the hands of Managing Director. If the transfer is on the request, employee is not entitled for cash benefits but if it is not on request, he is entitled for cash benefits. Retirement The retirement age is 58 years. But on physical incapability or mental instability there is a consideration. And the 3 months prior notice is a must before leaving the job anytime before the retirement. Retirement benefits: A salary of 15 days per year of completed years of service. 2.5 lakh ceiling is applicable and all the gratuity announcements are according to government notifications. Provident fund is as per the government norms. 12.5% toward provident fund contribution fer all the employees. Production Department: Every morning by 9.30am, the scheduled is drawn depending on the consolidation of all the information from different units. Entire milk has to dispatched before the 34 | P a g e H R I H E Hassan
  • Performance evaluation on financial statement next raw milk comes in. All the availability options should be weighed and instant decisions have to be taken. Presently the day to procurement on an average comes up to 2,50,000 litres per day. All the indents are moved there by 11am and this has to be intimated to the packing division. Packing material purchase is based on the integrated business plan. The rolls have to be weighed and bought out because by the end of the month the statement have to be prepared if the loss is 2% over and above the loss is recovered from the suppliers. If the loss is >1% and <2% that loss is recovered from the packing contractor. For each and every product the organization has fixed some standard. For 500ml it is 45-55 micron. For 1000ml it is 55-65 micron. This comes in pre-printed rolls but the date of packing, batch number and machine number is printed on the time of packing. After the packing being done, it is handed over to the finished goods section then dispatch starts. The longest route is Hassan to Kudremukh(180km) through an insulated vehicle. The document from the last point has to be bought back. No credit services. Day to day payments are being made. Only for milk pourers it is 7 days and sometime it even goes up to 15 days. The statement is being made deducting the commission and the next day’s indent also has to be collected. In case of any eventualities other than natural calamities, it is accepted. Suppose any negligence, accidents penalty is fixed. Marketing Department: Marketing should be considered as the central business function in this competitive world as it establishes, develops, and commercializes long term customer relationships and helps in meeting organizational goals. KMF has adopted pricing mainly on four categories namely: • Double Toned Milk – Rs 14/100ml • Toned Milk – Rs 16/1000ml • Standardized (homogenized) Milk – Rs 18/1000ml 35 | P a g e H R I H E Hassan
  • Performance evaluation on financial statement • Full Cream Milk – Rs 20/1000ml Stores: The storage place for almost all necessary goods which come into the factory premises: But here the store is the place where all these are there: 1. Packing materials 2. Stationery 3. Spares 4. Oil and lubricants 5. Sugar 6. Testing chemicals 7. Cleaning acids 8. Uniforms and Shoes 9. Cans for societies 10. Ledgers The activity takes place in stores: Requisition letter: First the manager of concerned department depending upon the need for the goods sends a requisition letter to the manager dairy and then once approved the same reaches the stores in charge, the purchase section places an order. Purchase order: But for the goods regular nature depending upon the stock level , the stores in charge takes up the responsibility to place order and have the materials ready when ever required. Here in the co operative sector as per the transparency act if the goods and where the capital expenditure is involved, the enquire letters are sent the suppliers and who ever quotes the least and also with quality gets the order. And the same purchase order copy goes to 1. the supplier 2. the store in charge 3. Accounts section 4. concerned user section 36 | P a g e H R I H E Hassan
  • Performance evaluation on financial statement Purchase order also includes 1. Mode of payment after and before supply 2. Terms and conditions(taxes) 3. Delivery period 4. Mode of dispatch Invoice: Against the purchase order the concerned supplier gives the invoice. Once the invoice is received the cross checking of materials as per the specifications purchase order is done. The concerned department communicated about the goods and the concerned person gives a user section remark on the quality of the product. Hence the goods received note is sent to concerned user section. MIS The main activity of the MIS department in the organization is to act as the information source for all the levels of management for the decision making in different situation. Hence to say the integration of information from all the departments for the decision making for all the three levels which exist in the organization: 1. Top level 2. Middle level 3. Lower level The information from the procurement and input wing, production department, marketing department and the data like the artificial insemination being done and the follow up, folder sales, target set being done. All these data is given to the MIS department and the integration on monthly basis is taken up and the report as sent to the managing director and same place before the monthly meetings held of all the milk unions. FINANCE DEPARTMENT Source of finance to start KMF and its units is from World bank channels through agreement between NDDB under Tripartite agreement between NDDB, KMF and Government of Karnataka. 37 | P a g e H R I H E Hassan
  • Performance evaluation on financial statement Now, source of funds are share capital and realization from sale proceeds of milk and milk products. As on 31.03.2010 the paid up capital was 765.32 lakhs and 218.03 lakhs loan was taken for operating. CHANNELS OF DISTRIBUTION The network of distribution of milk was founded to be very systematic and has made distinct role in the successful marketing of milk. The processed and pasteurized milk is first packed and stored and then distributed to the target customers. Processing and manufacturing Storage Dealers or Retailers Consumer Power The KPTCL supplies the power upto 325 kilo watts per month. In case of shortage in supply diesel generator is used. VEHICLE The union owns 5 milk tankers. In addition to this, it has one car, and one jeep. 38 | P a g e H R I H E Hassan
  • Performance evaluation on financial statement PRODUCTS/ SERVICES Milk is marketed under Nandini brand name in different types. The pricing adopted is mainly on four categories namely: • Double Toned Milk – Rs 14 /1000ml • Toned Milk – Rs 16 /1000ml • Standardized (homogenized) Milk – Rs 18 /1000ml • Full Cream Milk – Rs 20 /1000ml Apart from this, milk is marketed in 3 variants- • Nandini Goodlife with 3.5% fat and 8.5% SNF • Nandini Smart with 1.5% fat and 9% SNF • Nandini Goodlife Slim with 0.5% fat and 9% SNF The major products are Nandini Ghee, Butter, Curd, Skim Milk Powder, Badam Powder, Paneer, Peda, Mysore Pak, Burfi, Jamoons, Khova, Flavoured Milk, Ice Cream, Cheese, Nandini Bite, Nandini Basan Ladoo, Nandini Set Curds. 39 | P a g e H R I H E Hassan
  • Performance evaluation on financial statement cultures, filled into 200gm and 400gm cups and allowed to set into curds. Imported bacterial cultures constitute curd forming bacteria of high genetic abilities and release antimicrobial substances into curd imparting disease resistance to consumers( probiotic characteristic). The curd apart from therapeutic in nature has very high shelf- life and can be kept for 15 days in refrigerator without curds becoming sour. NANDINI SET CURD is competitively priced at Rs.7 per 200gm cup and at Rs.13 per 400gm cup. Shelf life : 15 days in refrigerator without curds becoming sour. 40 | P a g e H R I H E Hassan
  • Performance evaluation on financial statement ACTIVITIES OF HASSAN MILK UNION 1. Organization of dairy co operative societies: As at the end of March 2010, 1197 societies have been registered. Out of functional societies, 330 women societies are functioning. 2. Membership Enrolment: As on 31st March 2010 173396 members have been enrolled of which 71046 are small farmer48866 are marginal farmers, 22199 are agriculture labourers and 31285 are other big farmers. 3. Milk procurement activities: The present average milk procurement from 1122 milk societies is 386462 Kgs/day. ACHIEVEMENTS • Hassan milk union is procuring milk from all the 13 taluks of three districts and selling quality milk in all the taluks and small towns. • The union and all the dairy co operatives are being managed by the democratically elected boards from among the milk producers. • The technical input to dairy co operatives and the dairy plants are managed by well trained, committed professionals and technical team. • 91% of the milk co operative societies are operating under profit • The union has successfully implemented the animal induction program for SC ST and OBC since 1996 with the financial assistance from central and state governments and rendered direct loans to the beneficiaries at lower interest rates. • 112 women dairy co operatives have been organized since 1997 under support training and education program(STEP) • The union has implemented mini dairy scheme since 1996 and has facilitated loans to OBC beneficiaries. • The union has set up Artificial insemination facilities for dairy co operatives. 41 | P a g e H R I H E Hassan
  • Performance evaluation on financial statement • The union has rendered emergency veterinary services round the clock. • The union has implemented foot and mouth disease control program(FMDCP) • Fertility camps are being conducted once in three months by inviting experts in the field. • The union supplies quality fodder slips and seeds through the year and facilitates the availability of green fodder. • The union is insuring the life of milk producers and dairy co operative staff with the co ordination from Life insurance corporation and National insurance company since 1997-1998 under “samajika suraksha yojana”. • The union has launched the “YESHASHVINI” program to the milk producers wherein the milk producers are provided with the best available medical facility at free of cost. • Smokeless chula have been provided to the milk producers with an intention of improving the health of rural women folk. • Under “Bhatath Darshan Program” 265 progressive milk producers have been sent on educational tour. • The union has successfully implemented the Total energy management program and Total quality management program (quality excellence from cow to consumer) since 2001 respectively. • Quality awareness programs are being conducted regularly for school children, house wives and consumers. • The union has got ISO 9001:2000 certification from TUV India, Mumbai. • The union has got Energy Conservation Award. 42 | P a g e H R I H E Hassan
  • Performance evaluation on financial statement 2.6 SWOT analysis Strengths • Procurement and Input( P&I) network • Goodwill • ISO 9001:2000 certified • Second largest producer • Vast market Weaknesses • WTO standards • Advertisement execution in its early • Early stages of automation and computerization Opportunities • Enter rural market • Neutraceuticals • Exports Threats • Entry of big players • WTO standards • Government policies 43 | P a g e H R I H E Hassan
  • Performance evaluation on financial statement DATA ANALYSIS AND INTERPRETATION “Ratios are tools in the hands of an expert; these are not even kitchen knife, in the hands of a layman” Financial statement reveals the financial performance of the firm, its management efficiency and the future prospects of growth. Each type of statement gives a peculiar understanding of the firm’s performance. The balance sheet gives the firms financial position at a point of time. The profit and loss statement reveals the profitability of the firm over a period of time. Finally, higher the retained earnings/ reserve and surplus higher is firms investment and higher its growth. The users of financial statement view the statements differently according to their requirements. The creditors would like to know whether they should give short term or long term loan to the firm. Even among the creditors short term creditors are interested to know the interested in earnings generating capacity, valued adding capacity and operating efficiency of the firm. The shareholders are interested to know the long term growth prospects of the firm, the management is interested to know its operational efficiency and weakness so that it is able to pay all creditors in time and generates surplus for its shareholders investments. Ratio analysis is one such analysis where all requirements of the end users of financial statements are met. According to the dictionary the word ratio is the indicated quotient of two mathematical expressions and as the relationship between two or more things. The information/ figures revealed by the financial statements do not help the user to understand the exact performance and financial position of the firm. when these absolute figures are related to other relevant information then it makes sense for example the firm may show impressive sales revenue like Rs. 10 crores, but when compared with its investments say in this case if it Rs.11 crores the exact financial position of the firm may be understood. We can say that the firm did not do well because inspite of huge sales 44 | P a g e H R I H E Hassan
  • Performance evaluation on financial statement its investments were also large hence profits are negative. Thus financially ratio can be figure of two accounting data expressed mathematically. Ratios help to express large financial data in brief and analyze the qualitative as well as quantitative position of the firm. for all ratios we have standard benchmarks, which helps the analysts in judging the financial position of the firm qualitatively. For ex: say current ratio standard is 2:1 but a company has a current ratio of 1:2, we can say that the company has a serious problem with its liabilities and should take care of it. The accounting ratios very sincerely judge the financial health of a firm. The various advantages of ratios are: 1. Measurement of profitability 2. Measurement of operational efficiency 3. Measurement of solvency 4. Comparative analysis of performance 5. Helps in budgeting and forecasting 6. Simplified and concise presentation of firms performance 7. Measuring managerial effectiveness The technique of ratio analysis is thus a part of financial statement analysis of any business. RATIO BENCHMARK: As ratios are relationship or comparison we must know that standard or the benchmark against which we are going to evaluate the financial performance of the company. If suppose we determine the current ratio i.e, current assets to current liabilities, then we must know the benchmark by which we will judge it. A ratio analysis is meaningless if we do not have standards set before us. Bench mark is a yardstick against which actual ratio is to be compared in order to make a qualitative judgment about the various aspects of the financial position and performance of an enterprise. Benchmark may be: 45 | P a g e H R I H E Hassan
  • Performance evaluation on financial statement A part ratio of the same enterprise- A ratio could be compared with the past ratio of the same enterprise. This type of comparisons is known as intra firms comparison as is done under the time series analysis. Ratios of similar firms – A ratio could be compared with the ratio of similar firms belonging to the same industry at the same point of time. These types of comparison are known as inter firm comparison as is done under cross sectional analysis. Industry average – A ratio could be compared with the industry average at the same point of time. This type of comparison is known as pattern comparison as in done under cross sectional analysis. Rule of thumb-Rule of thumb have evolved over a period of time. A ratio could be compared with rule of thumb. However these rules of thumb should be used cautiously.  Competitor’s ratio: Every company must have the ratios of its competitors. This helps the company to evaluate its competitive edge in the market.  Industry ratios: The industry to which the company belongs has its own standards regarding to different inputs and outputs. Hence, the industry ratios help the company to evaluate its industry competitiveness.  Past ratios: The past ratios of the company help it to evaluate its performance over a period of time and judge whether it has improved or not.  Forecasted ratios: Many a time the company sets future plans for itself where it forecasted for the future the company can understand how it has performed, whether it lived up to its expectations or not, if not then what were the reasons. Profitability ratios: A business is run primarily for profit. So its performance has been measured in terms of profit. Profitability ratios give some yardsticks to measures profit in relative terms, either with reference to sales or assets or capital employed. 46 | P a g e H R I H E Hassan
  • Performance evaluation on financial statement Profitability in relation to sales or income: A company should be able to produce adequate profit on each rupee of sales. If sales do no generate sufficient profit, it would be very difficult for the firm to cover operating expenses and interest charges and as a result, it will fail to earn any profits for owners. Measures of profit:  Gross profit- Sales minus cost of goods sold  Net profit (PAT)- Result of impact of all factors on earning  Operating profit- Earnings before interest and taxes(EBIT) 1. GROSS PROFIT RATIO: This ratio indicates the average spread between the cost of goods sold and sales or income. A high gross profit margin ratio is a sign of good management. A gross profit margin ratio may increase due to any of the following factors. o Higher sales price cost of goods sold remaining constant o Lower the cost of goods sold, sales prices remaining constant o A combination of variations in sales price and cost, the margin widening o An increase in the proportionate volume of higher margin item Gross profit ratio= Gross profitx100 Net sales The analysis of these factors will reveal to the management how a depressed gross profit margin can be removed. A low gross profit margin may reflect higher cost of goods sold due to the firm’s inability to purchase at favourable terms, in efficient utilization of plant and machinery, or over investment in plant and machinery, resulting in highest cost of production. This ratio will 47 | P a g e H R I H E Hassan
  • Performance evaluation on financial statement also be low due to fall in prices in the market or market reduction in selling price by the firm in an attempt to obtain large sales volume, the cost of goods sold remaining unchanged. The financial manager must be able to detect the courses of falling gross margin and initiative action to improve situation, there is no norm for judging this ratio; therefore, the evaluation of business on its basis is a matter of judgment, however the gross profit should be adequate to cover operating expenses and to provide for fixed charges, dividends and building up of reserves. 2. OPERATING PROFIT RATIO: The profit after tax figure excludes interest on borrowing. Interest is tax deductible, and therefore, a firm which pays more interest pay less taxes. Tax saved on account to payment of interest is called interest tax shield. thus the conventional measure of net profit margin PAT to sales ratio is affected by the firm’s financing policy. for a true comparison of the operating performance of the firms, we must ignore the effect of financial leverage viz, the measure of profit should ignore interest and its tax effect. Operating profit ratio= Operating profitx100 Net sales This ratio indicates:  High gross profit  Lower operating expenses  A combination of foreside two factors An enterprise should have a satisfactory ratio. To judge wether the ratio is satisfactory or not, it should be compared with its own past ratios or with the ratio of similar enterprises in the same industry or with the industry average. 3. NET PROFIT RATIO: This ratio indicates net margin earned on sale of rs.100, this ratio helped in determined the efficiency with which affairs of the business are being managed. An increase in the ratio over the previous period indicates improvement in the operational efficiency of the business provided the gross profit ratio is constant. It indicates that the management’s efficiency in manufacturing area, administrating and selling the products 48 | P a g e H R I H E Hassan
  • Performance evaluation on financial statement Net profit ratio=Net profit before tax x 100 Net sales = Net profit after tax x 100 Net sales The ratio also indicates the firm’s capacity to withstand adverse economic condition. A firm with a high net profit ratio would be in a advantageous position to survive in the face of falling sales price, rising cost of production or declining demand for the product. An investor has to judge the adequacy or otherwise of this ratio by taking into account the cost of capital, the return in the industry as a whole and market conditions such as boom or depression period. No norms can be laid down. However constant increase in the above ratio year after year is a definite indication of improving condition of the business. 49 | P a g e H R I H E Hassan
  • Performance evaluation on financial statement Balance sheets of last four years: Manufacturing 2005-06 2006-07 2007-08 2008-09 trading a/c expenses Opening stock 12597167.78 7406110.12 8144870.02 15513894.52 Purchase 843563064.77 1006054769.1 1390732359.4 1881083739.94 3 8 Procurement 91186368.47 75105886.33 48857786.64 63748393.97 transportation Processing and MFG 70877371.98 62323083.34 67853148.53 93105497.83 exp. Salary and other exp. 56104373.15 80045206.15 83615473.84 79882272.98 Gross profit 61320005.85 67970324.20 80738849.42 83764841.53 Total 1135648352.0 1298905379.2 1679942487.9 2217098640.77 0 7 3 Income Sales 908316775.93 1283640880.4 1631928945.2 2172149561.29 5 1 Inter unit transfers 219925465.95 7119628.80 32499648.20 13083842.85 Closing stock 7406110.12 8144870.02 15513894.52 31865236.63 Total 1135648352.0 1298905379.2 1679942487.9 2217098640.77 0 7 3 Profit and loss a/c 0.00 0.00 0.00 0.00 Expenses Salary and other benefits 14026093.29 20011301.54 20903868.46 19970568.24 ADMN exposits 4515705.08 10633245.82 6454634.78 8684100.33 Rent, rates and taxes 865123.75 1072489.00 538021.00 1090622.00 Selling and distribution exp. 27452306.84 18975868.95 21624081.19 25069314.58 P and I service 6714679.10 8107154.59 7165843.08 7790809.63 Interest and bank charges 885542.15 1084687.84 1469887.44 1558036.25 VEHICLE MAINTENANCE 3893831.57 3977121.21 3208737.97 2779036.59 Depreciation 4691989.36 4077504.63 5678540.39 13330438.95 Provision For Bad & Doubtful Debts 0.00 0.00 1181671.53 0.00 Provision for taxation 3503352.00 7564329.00 6587850.00 5414158.00 Net profit to b/s 6154677.20 6139523.35 20264268.38 11699086.86 Total 72703300.34 81643225.93 95077404.22 97386171.43 50 | P a g e H R I H E Hassan
  • Performance evaluation on financial statement Income Gross profit from mfg 61320005.85 67970324.20 80738849.42 83764841.53 and trading a/c Other income 9828715.04 10213382.49 10732450.30 11586460.93 Interest on loan advance 1554579.45 3459519.24 3606104.50 2034868.97 Total 72703300.34 81643225.93 95077404.22 97386171.43 0.00 0.00 0.00 0.00 Liabilities 2005-06 2006-07 2007-08 2008-09 Share capital 30359000.00 37001000.00 42273000.00 60814000.00 Share suspense 245269.93 439931.33 870182.51 1654456.01 DEP and other funds 67674649.95 73751700.98 107274621.80 156268990.15 Profit and loss a/c 10591092.50 6139523.35 20264268.38 11699086.86 Loans 6081719.00 24783663.00 23979297.00 25225155.98 Grants and subsidiaries 30863943.03 32092314.86 7753935.23 6479027.59 Current liability 79951172.94 82178514.71 191194156.82 175479156.43 Provisions 7443106.94 11970012.54 19854317.14 18054340.07 Bank balance over 0.00 0.00 0.00 0.00 drawn Total 233209954.29 268356660.77 413463778.88 455674213.09 Assets Cash on hand 542434.15 2105813.25 783063.90 881835.65 Cash at bank 6777465.53 13674831.73 47494052.04 46344999.70 Investment 34276761.86 47729846.33 59626895.33 41820936.33 Fixed assets 115051216.14 118494561.14 152729790.68 210331884.63 Current assets 47408041.71 56038783.73 103534763.35 89158355.64 Loans, advances and deposits -579.06 44359.94 31601.49 15801.96 Sundry debtors 10679810.55 10473705.39 21952659.63 22231916.27 Audit objections 3813655.68 3734352.67 3734352.67 3734352.67 STOCK ON HAND 14661147.73 16060406.59 23576599.79 41154130.24 Total 233209954.29 268356660.77 413463778.88 455674213.09 0.00 0.00 0.00 0.00 GROSS MARGIN RATIO= Gross margin x100 Turnover Gross margin= (Income minus material cost) OPERATING PROFIT RATIO= Operating profit X 100 51 | P a g e H R I H E Hassan
  • Performance evaluation on financial statement Turnover NETPROFIT RATIO = Net profit x 100 Turnover Profitability in relation to the capital employed: The profitability of the company should also be evaluated in terms of the firms investment in assets and in terms of capital contributed by creditors and owners. If the company is unable to earn a satisfactory return on investment, its survival is threatened.  Return on investment: The term investment may refer to total asset which employed in the net asset is known as capital employed. The return on capital invested in a concept that measures the profit which a firm earns on investing a unit of capital. These ratios express all the efficiencies or in efficiencies of a business collectively and thus, is a dependable measure for judging its over all efficiency or in efficiency. Analysis and interpretation: 1. Expenses ratio: Expenses ratio also calculated to explain the increase or decline in profitability ratio. A higher operating ratio is unfavourable since it will leave a small amount of operating income to meet interest; dividend etc.., to get a comprehensive idea of the behaviour of operating expenses, variations in the ratio over a number of years should be studied. Certain expenses are 52 | P a g e H R I H E Hassan
  • Performance evaluation on financial statement within the managerial discretion, therefore it should be seen whether changes in expenses is due to changes in the management policy or external factors. The operating expenses ratio indicates the average aggregative variations in expenses, where some of the expenses may be increasing while others may be falling. Thus, to know the behaviour of specific expenses items, the ratio of each individual operating expense to sales/ turnover should be calculated. These ratios when compared from year to year for the company will throw light upon the managerial policies and programmes. For example: The increase in selling expenses without a sufficient increase in sales, can uncontrollable sales promotion expenditure, inefficiency of marketing department etc., Following are the major operating expenses ratio for HCMPS. 1. Material & cost/ turnover ratio 2. Variable cost/ turnover ratio 3. Fixed cost/ turnover ratio Liquidity ratio: The term ‘liquidity’ and short term solvency are used synonymously. Liquidity means ability of the business to pay short term liabilities or ability to realize value in money, the most liquid of asset in ability to pay off short term liabilities affects its creditability as well as its credit rating continuous default on the part of the business leads to commercial bankruptcy. Eventually such commercial bankruptcy may lead to its sickness and dissolution. Shot term lenders and creditors of a business are very much interested to know its state of liquidity because of their financial stake. Excess liquidity, would reflect lower profitability, deterioration in managerial efficiency, increased speculation and unjustified expansion. Too little liquidity than may lead to frustration of business objection, reduced ratio of return, business opportunity missed and weakness of morale. The most common ratio which indicates the extent of liquidity is as under. 53 | P a g e H R I H E Hassan
  • Performance evaluation on financial statement Current assets include cash and those assets which can be converted into cash with in a year, all obligations making within a year are included in current liabilities. The current ratio is a measure of the company’s short term solvency. It indicates the ability of current assets than one means that the firm has more current claims against them. Higher the ratio better is the coverage. Traditionally, it is also called 2:1 ratio i.e., ‘2’ is the standard for current assets for each unit of current liabilities. But this is only a conservative outlook about the coverage of current liabilities. Generally the level of current ratio varies from industry depending on the special industry characteristics. Also a firm differs from the industry ratio because of policy. Higher current ratio indicates inadequate employment of funds while a poor current ratio is a danger signal to the management. Table of current ratio: Current ratio=Current assets Current liability ITEMS 2005-06 2006-07 2007-08 2008-09 Current assets 80068320.61 98397900.63 197372740.20 199787039.46 Current liability 87394279.88 94148527.25 211048473.96 193533496.50 Total 0.91:1 0.49:1 0.93:1 1.03:1 54 | P a g e H R I H E Hassan
  • Performance evaluation on financial statement Analysis of current ratio: Current ratio is one of the tools to project the short term solvency of the company. It shows the short term liquidity of the organization. With out having a strong or sound short term liquidity, it is very difficult to mange day to day financial operations of the organisation for the financial industry the standard ratio is 2:1 in this case the ratio is very much below the standard which was non liquidity of funds. The above figures indicate that, short liquidity or financial position working capital position of the organization is very weak. But the investment showed in the financial statements. If we consider the short term investment as current assets, then current ration will be more than the industrial standard, hence actual short term liquidity position of the organization is good. Quick ratio/ liquidity ratio: The current ratio does not measure accurately the liquidity or the short term solvency of a concern. That is, the current ratio is not a sufficient index of the liquidity of a concern. This is because of current assets include items such as stocks and prepaid expenses, which are not easily realizable. Quick ratio is ratio which expresses the relationship between quick or liquid assets and currents liabilities. Short term creditors are primarily interested in liquidity or short term solvency of the enterprise since their claims are to be met in the short run. Liquidity or short term 55 | P a g e H R I H E Hassan
  • Performance evaluation on financial statement solvency means the ability of the enterprise to meet short term obligations as and when they become due. Inability to pay off short term liabilities affects the credibility of the enterprise. Continuous default on part of the liabilities affects the credibility of the enterprise. Continuous default on part of the enterprise leads to commercial bankruptcy which may lead to its sickness and dissolution. Quick ratio= (Current assets-stock) Current liability Items 2005-06 2006-07 2007-08 2008-09 Quick assets 65407173.61 82337494.22 173796141.03 158632909.48 curent liability 87394279.88 94148527.25 211048473.96 193533496.50 Quick ratio 0.74:1 0.87:1 0.82:1 0.81:1 Interpretation of quick ratio: 56 | P a g e H R I H E Hassan
  • Performance evaluation on financial statement As observed from the above figures, there is a marginal variation in the quick ratio of the organization. The ideal quick ratio is 1:1 quick ratio of the organization is marginally lower than the ideal ratio. The above figures are excluding short term investments which may be considered as liquid assets. If they are included in quick assets, liquid ratio of the organization is higher is higher than the ideal ratio. It indicates a strong short term liquidity position of the organization and also indicates lesser contribution of inventories among total current assets which cannot be realized quickly. In turn it shows a strong inventory turn over and better and working capital management of the organization. Capital structure ratio (leverage ratio): Capital structure of a business consists of long term funds, which are not repayable in the short run, and short term funds, which are re-payable in the short run and short term funds, which are re payable in the short run. The short term creditors with the company current debt paying ability. On the other hand, long term creditors like debenture holders, financial institution etc., are more concerned with the company’s long term financial strength. This ratio indicates mix of funds provided by owners and lenders. In other words leverage ratio may be calculated from the balance sheet items to determine the proportion of debt in total financing. 1. Debt equity ratio: It is determined to ascertain the soundness of the long term financial policies of company. The ratio indicates the proportion of owner’s stake in the business. Excessive liabilities tend to cause insolvency. The ratio indicates the extent to which the company depends upon outsiders for its existence. The ratio provides a margin of safety to the creditos, it tells the owners the extent to which they can gain the benefits or maintain control with a limited investment. Debt equity ratio=Long term debts Shareholders funds Table of capital structure ratio: 57 | P a g e H R I H E Hassan
  • Performance evaluation on financial statement Items 2005-06 2006-07 2007-08 2008-09 DEBTS 80.04 64.32 247.84 239.79 equity 306.05 374.41 431.44 624.69 Debt 0.26:1 0.17:1 0.57:1 0.38:1 equity ratio Analysis of debt equity ratio: In the given case the ratio is 0.26:1, 0.17:1, 0.57:1 and 0.38:1 for the financial year , 2005-06, 2006-07 2007-08 and 2008-09 respectively. Any discrepancies in debt: equity ratio will have drastic financial effect on the company’s financial performance. Portion of debt in the capital structure goes on decreasing from 2006-07 0.17:1 in 2005-06 and to 0.26:1 in 2006-07 but it has been increased to 0.57 in 2007-08 and marginally decreased to 0.38 in 2008-09. Increase in debt indicates weak financial structure of the concern. But industry’s standard of the concern is sound. Debt portion of the organization is less than two times the equity; the logical conclusion is that the financial structure of the concern is sound. Debt portion of the organization is less than two times as observed in the above figures; hence the capital structure of the organization is sound. Solvency ratio: 58 | P a g e H R I H E Hassan
  • Performance evaluation on financial statement The solvency ratio is a measure of the solvency of a concern. It means the ability of a concern to meet its total liabilities out of its total assets. Solvency ratio table: ITEMS 2005-06 2006-07 2007-08 2008-09 Total assets 162459257.85 174533344.87 256264554.03 299490240.27 Total liabilities 87394279.88 94148527.25 211048473.96 193533496.50 Solvency ratio 1.85:1 1.85:1 1.21:1 1.54:1 Interpretation Of Solvency Ratio 59 | P a g e H R I H E Hassan
  • Performance evaluation on financial statement Higher the solvency ratio of a concern, the stronger is its financial position, and lower the solvency ratio, the weaker is its financial position. Solvency ratio from 2005-06 is in increasing trend 1.85 in 2005-06 and 1.85in 2006-07. it has been decreased to 1.21 in 2007-08 and to 1.54 2008-09. Though the ratio has been decreased during 2007-08 and 2008-09, in the five financial years the total assets are higher than the total liabilities. Hence the organization has the stronger long term liquidity position. Performance/activity/ efficiency ratios: Activity ratios or performance ratios refers to ratios which measure the level of activities, the performance or the operating efficiency of an enterprise. In other words, they are the ratio which indicates the efficiency utilization of the several of the various assets by a concern. 1) Inventory turnover ratio,/ stock turnover ratio: Inventory turn over ratio is the ratio which indicates the number of times the stock is turned over during a year. The stock turn over ratio is, generally, expressed as a rate as so many times in a year. It is expressed as follows: Stock turnover ratio=Cost of goods sold Average stock The standard stock turn over ratio is 8 times a year. As such, a stock turnover of 8 times or more than 8 times indicates that more sale are affected the business is expanding, and as such, there is effective inventory management of the organization. 2) Debtors Turn Over Ratio/ Debtors Velocity 60 | P a g e H R I H E Hassan
  • Performance evaluation on financial statement Receivables or debtors constitute an important item of current assets. That means, the quality of debtors determines the liquidity of the firm to a grate extent, to judge the quality of the debtors, the receivables turnover ratio, debtors turnover ratio or debtors velocity is used. Debtors’ turnover ratio is the ratio which indicates the relationship between debtors and sales. It is the ratio which indicates the number of times the debts are collected in a year. Debtors turnover ratio= Net annual credit sales Average debtors Debtors’ turnover ratio: ITEMS 2007-08 2008-09 Net annual credit sales 16644.29 21852.33 Average debtors 219.52 222.31 Debtors turn over 75.82 98.29 ratio(in time Times Times Debtors velocity(in 3 days 4.78 days days) Interpretation of debtor’s turnover ratio: 61 | P a g e H R I H E Hassan
  • Performance evaluation on financial statement If the actual period of credit allowed is more than the normal period of credit or the ideal period of credit. 30 days, the indication is that credit collection is not efficient. On the other hand if the actual period of credit allowed in less than the normal period of creditors the ideal period of credit, the indication is that the credit collection is efficient. As observed from the above figures the debtor’s collection period or credit allowed period is only 3 days in 2007-08 and 4.78 days in 2008-09 credit allowed by the organization has increased from 3 days to 4.78 days, indicating debt collection efficiency of the organisation has marginally decreased in 2008-09 as against previous month. But from the point of industrial standards organization has been collecting debt from the customers effectively; it shows working capital management is good in terms of the industry standards. 3) Capital turnover ratio: In this ratio establishes a relationship between net sales and capital employed. Non trading assets do not form part of capital employed some accountants feel that the figure of capital employed should be fairly representative of the capital investment throughout the accounting period and therefore, they prefer to make use of the concept of ‘average capital employed’ which can be obtained by dividing the aggregate of capital employed at the beginning and at the end of the accounting period Capital turnover ratio= Net sales Capital employed Item 2005-06 2006-07 2007-08 2008-09 Net sales 1128242241.88 1290760509.25 1664428593.41 2185233404.14 Capital 36685988.93 62224594.33 67122479.51 314693611.98 employed Capital turn 30.75 20.74 24.71 6.94 over ratio 62 | P a g e H R I H E Hassan
  • Performance evaluation on financial statement Interpretation: It indicates the firm’s ability to generate sales per rupee of capital employed. In general higher the ratio, the more efficient the management and utilisation of capital employed. A too high ratio may indicates the situation of over trading if current ratio is lower than that required reasonably and vice versa. Thus an enterprise should have neither a very high nor a very low ratio; it should have a satisfactory ratio. 4) Fixed assets turnover ratio: This ratio establishes a relationship b/w net sales and fixed assets. An advance for purchase of a fixed asset is not an operating fixed asset. Some accountants feel that the figure of net fixed assets should be fairly representative of the investment in net fixed assets through out the accounting period and therefore, they prefer to make use of the concept of average net fixed assets which can be obtained by dividing the aggregate of the net fixed assets. Fixed assets turnover ratio= Net sales Net fixed assets Item 2005-06 2006-07 2007-08 2008-09 63 | P a g e H R I H E Hassan
  • Performance evaluation on financial statement Net sale 1128242241.88 1290760509.25 1664428593.41 2185233404.14 Net fixed 115051216.14 118494561.14 152729790.68 210331884.63 assets Fixed assets 98.0 10.89 10.89 10.38 Turn over ratio Interpretation: It indicates the firm’s ability to generate sales per rupee of investment in fixed assets. In general, higher the ratio, the more efficient the management and utilisation of fixed assets, and vice versa. It may be noted that there is no direct relationship between sales and fixed assets since the sales are influenced by other factors as well (quality of product, delivery terms, credit terms, after sales service, advertisement and publicity etc) 5) Current assets turnover ratio: This ratio establishes a relationship b/w net sales and current assets the provision for doubtful debts /bills is deducted from the total amount of trade debtors/ bills receivable in order to ascertain the realisable value of trade debtors/bills receivable. Non realizable portion of marketable securities is also excluded from the total value of marketable securities in order to concertina the realizable value of marketable securities. unless 64 | P a g e H R I H E Hassan
  • Performance evaluation on financial statement otherwise stated, it is assumed that debtors and marketable securities are realizable at their given book value. Current assets turnover ratio= net sales Current assets Item 2005-06 2006-07 2007-08 2008-09 Net sales 1128242241.88 1290760509.25 1664428593.41 2185233404.14 Current Assets 80068320.61 98397900.63 197372740.20 199787039.46 Current assets turn over ratio 14.09 13.11 8.43 10.93 Interpretation: It indicates the firm’s ability to generate sales per rupee of investment in current assets. In general, higher the ratio, the more efficient the management and utilisation of current assets, and vice versa, it may be noted that there is no direct relationship between sales and current assets. Project appraisal systems in organization future vision in HAMUL 65 | P a g e H R I H E Hassan
  • Performance evaluation on financial statement Future plans the union had been taking many steps to meet the changing consumer needs, availability of milk availability of milk variants and milk products to; meet the needs of the consumers. Priority areas for the development of liquid milk market in the union areas are identified and necessary action plans have been drawn for implementation during the year 2008-09. The key strategies planned for 2008-09 are given below:- 1) Increase in the availability of nandini milk in the market:  By expanding the retail market in the union area  Introducing of lassie/ flavoured  Introducing of one liter sachet standardized homogenized milk 2) Consumer education/ awareness campaign: To be organized as movement One of the major problems faced by the unions is that the consumer awareness about the quality attributes of good milk, types of milk and various benefits, derived from the particular type of milk, consumer legal rights, PFA standards etc., is very low hence increasing consumer awareness through education programme is the need of the hour. The union with financial assistance from KMF&NDDB will take up consumer awareness programmes. There is a need for systematic approach towards consumer awareness programme. 3) Motivating the channel members: A system to motivate and educate the channel members has been proposed for increasing the milk sales. A systematic awareness campaign would be organized and all the nandini retailers will be contacted. This is planned by meeting them regularly and inviting suggestions/ feed back from them on regular basis. Rewarding the best performing channel retailers and his delivery boy for prompt services planned. 4) Effective replacement/ leakage policy: Though there are no foolproof methods to solve this problem, sincere efforts have to be made which should be impartial and by and large should be acceptable to all the channel members. it is very true that the monetary suffered by the retailers in managing a leaky packet is quite high as compared to the margins they get from selling a packet of milk. It is also very difficult to avoid leakage since the distribution is to be made through bad roads and other inconvenient circumstances. However, a systematic approach should be 66 | P a g e H R I H E Hassan
  • Performance evaluation on financial statement applied to the leakage problem at the union to ensure that the milk pouches delivered at the dairy dock for loading are not leaky and sound packed. This could be possible by implementing strict quality parameters at the packing operation. 5) System of consumers/ retailers grievance redresses: Since the market forces are driven by the consumers, the milk union would initiate focusing towards consumer needs. In this direction, the customers of nandini to feel the privilege by the kind of service provided to them. Focus or customers’ orientation could be established over a period of time. 6) Team concept: In order to achieve highest sales target and to service the cannel members, it has been decided to constitute two teams, one at Hassan and another at kudige comprising of 3 to4 members consisting of quality packing processing and accounts groups. The team will have clear cut role and description to visit the markets and service the channel members. The team member while visiting the marketing would absorbed the dairy happenings in the market, visit consumer point and identify such institutions/ hotels which require nandini milk. The team will conduct the following activity:  Visit the market along with marketing staff for market development and to increase sales.  Organize door to door campaign 7) Constituting the core group: A core team constituting of officers from plant, implement the strategies for implementation. This team would sit every day for 15 minutes in manager dairy chamber for thrashing out problems faced by the marketing staff. Problems noticed and action taken is to be recorded every day. Managing director to get the record once in a week and conduct review meeting once in a month. 8) Sales promoting activities  Group insurance scheme to retailers  Loose milk sales to hotels / retailers  Advertisement and radio programmes will be continued during this year. FINDINGS 67 | P a g e H R I H E Hassan
  • Performance evaluation on financial statement  By calculating the ratios we can see the position or performance of the company.  Company going in the profit way every year for good performance and good management.  Used new technology and good accounting management helps to the success.  Induct, retain and develop excellent employees and get their total involvement in achieving company goals.  Provide opportunity for personal development and advancement to all with requisites integrity ability and ambition.  Deal in good faith with all employees.  Encourage development of participative and support leadership.  Be fair and firm in dealing with grievances and discipline. SUGGESTIONS To reduce operating cost by infuses professional and modern management techniques/ system in working style of the corporation. • To provide necessary management development training to staff to upgrade the working skills. 68 | P a g e H R I H E Hassan
  • Performance evaluation on financial statement CONCLUSION Ratio Analysis helps to know the financial position of the company . and it also helps to know the profit and loss of the company. It helps them to overcome from the loss. The solvency ratio is a measure of the solvency of a concern. It means the ability of a concern to meet its total liabilities out of its total assets. Ratio Analysis helps the Financial statement to reflect how far the corporation is able to achieve its objectives. And it also helps to know the past and present financial performance of the company. BIBLIOGRAPHY 69 | P a g e H R I H E Hassan
  • Performance evaluation on financial statement Book: I.M Pandey, Financial Management, Ninth Edition, Indian Institute of Management , Ahmedabad. Prathiyogitha Darpan, compitative success . Company Annual report 2006 to 2009 Website: Google.com 70 | P a g e H R I H E Hassan