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INTRODUCTION TO FINANCEIt would be worthwhile to recall what Henry ford once remarked “Money is an arm ora leg; you either...
FINANCE FUNCTIONSFinance function is a task of providing the funds required by an enterprise on theterms most favourable t...
STEPS INVOLVED IN FINANCIAL PLANNINGThe various steps involved in financial planning are as follows:1.   Establishing obje...
shelter under the plea that the right type of procedures are not available to      support the accomplishment of the goals...
INTRODUCTION TO WORKING CAPITALEmpirical observations show that the financial managers have to spend much of theirtime to ...
•   The need for working capital is directly related to sales growth.Most of the work dealing with working capital managem...
DEFINITIONS OF WORKING CAPITALWorking capital has been in several ways as given below.        Operating capital: - As the ...
NET WORKING CAPITAL CONCEPTNet working capital can be positive or negative. A positive net working capital willarise when ...
OPERATING CYCLE  Operating cycle indicates the length of time between firm’s paying for materials  entering into stock and...
The following figure shows the operating cycle of a trading concern                                                       ...
•   Gross working capital:       It refers to the total current assets of the business. It is also known as       circulat...
•   Ultimately it leads to the reduction in sale, as the firm cannot meet the demand of    the customers.EFFECT OF INADEQU...
Lastly, during slump the demand for working capital, instead of coming down, shootsup. A good amount of working capital is...
 Production capacity     In certain industries the demand is subject to wide fluctuations due to seasonal     variations....
purchases its requirements on credit sells its products/services on cash requires    lesser amount of working capital.   ...
      Other factors       Certain other factors such as operating efficiency, management ability,       irregularities of...
•   Debentures           A debenture is an instrument used by the company acknowledging its debt           to its holder. ...
 Indigenous bankers         Private moneylenders and country bankers used to be the only source of         finance prior ...
CASH MANAGEMENTINTRODUCTIONCash is the most liquid asset and all assets of business are finally converted into cash.Cash i...
 Speculative motive       To take advantage of unexpected opportunities, a firm holds cash for investing       in profit ...
-        Cash budgeting      Cash forecasting           It refers to the prediction of cash requirements and the sources ...
 Management of idle cash           Business firm will face the problem of managing idle cash. At times a           busine...
firm is offering for sale and the components that make the goods. In other words theinventory includes raw materials, work...
operational requirements of the company. The economic order quantity is thatinventory level, which minimizes the total ord...
various working capital policies, such as conservative policy, moderate policy,    and aggressive policy indicate the rela...
The firm to meet liquidity requirements that will last only temporarily creates     temporary working capital. PRINCIPLE ...
DESIGN OF THE STUDYTITILE OF THE STUDY: A study conducted for HGS APPARELSPRIVATE LIMITED on Working Capital Management & ...
OBJECTIVES OF THE STUDY The study was conducted mainly to understand and analyze the issue      of working capital manage...
The study period covered in this case study is for 4 financial years i.e.,from 2000-2001, 2001-2002, 2002-2003, 2003-2004....
 This report is based on the annual reports, which are provided by the   company that cannot be relied upon. The collect...
machines is increased to 450 machines. Earlier there was no washingplant and today there is a washing plant along with the...
 Timely delivery of the product to the overseas buyer without any   delay. Providing discounts to the customers. Retain...
It is a vital tool for providing information about organizationalrelationships.HGS follows top to bottom chart, which is a...
SOURCES OF WORKING CAPITAL TO HGS APPARELSShares: Issues of shares is the most important source for raising thepermanent o...
Companies that grant loans are: Bangalore fashion apparels private  limited and Karnataka financial service limited.   ANA...
Fixed assets are stated at their original cost of acquisition and subsequent  improvement thereto, including taxes, duties...
Research and development expenditure is charged to profit and lossaccount in the year of incurrence. Fixed assets acquired...
CURRENT LIABILITIES AND PROVISIONS CURRENT LIABILITIES      Sundry creditors.      Advance from customers.      Liability...
TABLE - 01    TABLE SHOWING GROSS WORKING CAPITAL CHANGE                     OF HGS APPARELS LIMITED       Particulars    ...
TABLE – 02        TABLE SHOWING NET WORKING CAPITAL CHANGE OF                               HGS APPARELS    Particulars   ...
TABLE SHOWING STATEMENT OF COST OF HGS                           APPARELS PRIVATE LIMITED Sl no   Particulars             ...
28       COST OF SALES                88471759        53560843     67404176       85072833         (25+26+27)     Notes;  ...
creditors     INFERENCE     From the above table, it is evident that the sales of the HGS have     increased over a period...
B          Cost of production per day     199182.64     122124.92     153000.18        233287.30C          Work-in-progres...
Days                         Credit Sales5. Creditors                         Creditors        Holding            = ------...
paying more interest HGS has to reduce its creditors, and it has done thesame in the year 2003-2004.                      ...
In the year 2002-2003 raw material holding days have increased by 4days this is because raw material consumption has incre...
RATIO ANALYSISINTRODUCTIONThe ratio analysis is one of the most important and powerful tools offinancial analysis. It is t...
The use of ratio analysis is not confined to financial manager only. There            are different parties interested in ...
LIQUIDITY RATIOSCURRENT RATIOCurrent ratio may be defined as the relationship between current assetsand current liabilitie...
INFERENCEThe current ratio decreased to 1.16 in the year 2001-2002 , whencompared to the year 2000-2001, and again it is i...
ACID TEST RATIOAcid test ratio may be defined as the relationship between liquid assetsand liquid liabilities. It is also ...
GRAPH – 02GRAPH SHOWING LIQUID RATIO                             54
1.81.61.4                     2000-20011.2                     2001-2002 1                   2002-20030.8                 ...
ABSOLUTE LIQUID RATI0Absolute liquid ratio may be defined as the relationship betweenAbsolute liquid assets and liquid lia...
GRAPH – 03GRAPH SHOWING ABSOLUTE LIQUID RATIO    2.5     2                            2000-2001    1.5                    ...
LONG TERM SOLVENCY RATIODEBT-EQUITY RATIODebt-Equity Ratio, also known as External-Internal Equity ratio iscalculated to m...
GRAPH- 04           GRAPH SHOWING DEBT-EQUITY RATIO           3          2.5                                      2000-200...
The ratio that expresses the relationship between proprietor’s fund andtotal assets is called Proprietory ratio. This rati...
GRAPH - 05       TABLE SHOWING PROPRIETORY RATIO            0.7            0.6            0.5                       2000-2...
The ratio, which establishes the relationship between fixed assets andshareholder’s funds, is called fixed assets to Net w...
GRAPH – 06 GRAPH SHOWING FIXED ASSETS TO NETWORTH RATIO           0.7           0.6           0.5                         ...
The ratio which establishes the relationship between current assets andshareholder’s funds is called ratio of current asse...
GRAPH – 07   GRAPH SHOWING RATIO OF CURRENT ASSETS TO           SHAREHOLDER’S FUND RATIO            0.9            0.8    ...
Capital gearing ratio is a ratio, which expresses relationship betweenfixed interest and dividend bearing securities and e...
GRAPH - 08GRAPH SHOWING CAPITAL GEARING RATIO     1.08     1.06                                    2000-2001     1.04     ...
INVENTORY TURNOVER RATIOInventory turnover ratio is the ratio, which indicates the number of timesthe stock is turned over...
GRAPH – 09   GRAPH SHOWING INVENTORY TURNOVER RATIO           4.5             4           3.5             3               ...
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  1. 1. 1
  2. 2. INTRODUCTION TO FINANCEIt would be worthwhile to recall what Henry ford once remarked “Money is an arm ora leg; you either can use it or lose it”. This statement throws light on the significanceof money or finance. A budding concern may need a small amount of money and yetit may be difficult for it to commence business simply because it is not in the positionto get required funds. A firm’s success and survival mainly depends upon its ability togenerate sufficient funds when need arises. Finance holds the key to all the activities.The role of financial manager, that is, the one who is incharge of the finance function,is difficult because he has to play that role and relate it to the role of other managers.DEFINITIONS OF FINANCERay G. Jones and Dean Dudley observe that the word finance comes indirectly fromthe Latin word Finis. Finance is defined as the issuance of the distribution of and thepurchase of liability and equity claim issued for the purpose of generating revenue-producing assets. These claims are commonly referred to as financial claims.According to Paul.G.Hasings. ”Finance” Is the management of the monitory affairs ofthe company. It includes determining what has to be paid for and when, raising themoney on the best terms available, and devoting the available funds to the best uses.Kenneth Midgely and Ronald Burns define financing as “a process of organizing theflow of funds so that a business can carry out its objectives in the most efficientmanner and meet it’s obligations as they fall due”. 2
  3. 3. FINANCE FUNCTIONSFinance function is a task of providing the funds required by an enterprise on theterms most favourable to it in the light of the objectives of the business. This long-held concept has the merit of highlighting the core of the finance function keeping thebusiness the most suitable way and, on the best possible terms, is the central part ofthe finance supplied with enough funds to accomplish its objectives. Getting therequired funds in job.Finance presents itself in a broad spectrum of activities. There are a number of basicfunctions underlying finance. It is an essential, and at the same time a very distinct,segment of the overall managerial function. It is the lifeblood of any business activityand no business function can bedischarged without it. Finance must be used judiciously. It has to be systematicallycontrolled and regulated so that it may contribute to the different functions of businessadministration. If the finance function is properly blended with production, marketing,personnel, accounting and other business functions, the wastage of funds can beavoided.FINANCIAL PLANNINGIn simple words financial planning means deciding well in advance as to how muchfinance is required, when is it required, what are the sources through which finance isavailable and how should it be put to use, so as to obtain organizational objectives.The aim in financial planning should be to match the needs of the companies withthose of investors with a sensible gearing of short term and long-term interestsecurities.Financial planning helps the financial manager to see the financial situations clear ofstress and strains and to develop a deep insight-an essential prerequisite for financialstewardship. The importance of financial planning lies essentially in the fact that itenables the financial manager to develop a diagnostic skill of analyzing complexsituations and arriving at suitable solutions. 3
  4. 4. STEPS INVOLVED IN FINANCIAL PLANNINGThe various steps involved in financial planning are as follows:1. Establishing objectives: Every business enterprise will have to establish its financial objectives. It will have to state how much capital is employed in various factors of production over the long run and how much productivity can be ensured through the employment those factors. It would be necessary for every business enterprise to stipulate both short-run and long run objectives so that it may operate in a dynamic society.2. Policy formulation: financial policies will have to have a thrust on following policies: • Determining the control by the parties who furnish the capital. For example, if debt exceeds in unassuming portions, it would obviously mean dilution of control. • Acting as a guide in the use of debt or equity capital. For example, the business enterprise will have to state clearly its plans about the debt- equity proportions. • Guiding management in the selection of the source of funds. This also means the financial plans should state which source of funds should be drawn upon by a business enterprise in various time phases. 2. Forecasting: forecasting is usually done on the basis of facts; but facts do not become readily available, more particularly when they are addressed to the future. In that case, financial management will have to forecast the future predicting the variability of the factors influencing the type of policies the enterprise intends to formulate. 3. Formulation of procedures: policy for formulation must invariably be backed up by suitable procedures, for financial policies procedures which are broad guidelines which must be capable of being translated into detailed procedures. Very often, there is a gap between financial plans and h results in chaotic conditions in a business enterprise. Financial managers often take 4
  5. 5. shelter under the plea that the right type of procedures are not available to support the accomplishment of the goals and objectives of the firm, where as the chief executives grumble over the short comings inherent in the procedures because they are not able to accomplish the plans by reason of the fact that procedures do not support financial plans.Factors to be considered while estimating financial requirements. • Cost of finance. • Availability of funds. • Repayments. • Interest. • Position of assets. • Control. • Risk. • Seasonality. • Estimating costs of other functions. • Fixed assets requirements. • Expenditure on current assets. • Budgetary appropriations. • Distribution system. • Break-even. • Provision for contingencies. 5
  6. 6. INTRODUCTION TO WORKING CAPITALEmpirical observations show that the financial managers have to spend much of theirtime to the daily internal operations relating to current assets and current liabilities ofthe firms. As the largest portion of the manager’s time is devoted to workingproblems, it is necessary to manage working in the best possible way to get maximumbenefit. The effective management of the business, among other things primarilydepends upon the manner in which the short-term assets and short run sources offinancing are managed. The management or current assets management consists ofinventories, accounts receivable and cash & bank balances as the major components.There is a difference between current assets and fixed assets in terms of theirliquidity. A firm requires many years to recover the initial investments in fixed assetssuch as plant and machinery and land and buildings. On the contrary, investments incurrent assets are turned over many times a year. Investments in current assets such asinventories and book debts are realized during the firm’s working capital cycle, whichis usually less than a year. Working capital is that proportion of a company’s totalcapital, which is employed in short-term operations.Even though, it is one segment of the capital structure of a business, it constitutes aninter-woven part of the total integrated business system. Therefore, neither it can beregarded as an independent entity, nor, can the working capital decisions be taken inisolation. Thus, a study in this field is of major importance to both internal andexternal analysis, for its close relationship with the day-to-day operations of abusiness.There are many aspects of working capital management, which form an importantfunction of a financial manager:- • Working management represents a large portion of the firm’s investment in assets. • Working management has greater significance not only for small firms but also for large firms. 6
  7. 7. • The need for working capital is directly related to sales growth.Most of the work dealing with working capital management in confined to the balancesheet, which is directed towards optimizing the levels of cash and marketablesecurities, receivable and inventories. For the most part, optimization of these currentassets is isolated from the optimization of the other current assets and the overallvaluation of the firm.The decision concerning cash and resources, receivable, investments and currentliabilities is with an objective of maximizing the overall value of the firm. Oncedecisions are reached these areas, the levels of working capital are also reduced.An appropriate level of working capital is to be maintained as the excessive workingcapital interrupts the smooth flow of the business activity and curbs profitability.Also, there are a lot of circumstances where shortage of working capital has proved tobe the major factor for business failure. Operating plans are out of control and thecorporate objectives get blurred. The suppliers and the creditors give the firm anadverse credit rating and tighten up credit terms.The problem of managing working capital has got a separate entity as againstdifferent decision-making issues concerning current assets individually. Workingcapital has to be regarded as one of the conditioning factors in the long run operationsof a firm, which is often inclined to treat it as an issue of short-run analysis anddecision-making.The management of working capital hence involves constant vigilance to ensure thatthe right quantum is available on a continuing basis to support and promote theactivities. Sound financial and statistical techniques, supported by judgment, shouldbe used to predict the quantum of working capital needed at different time periods. 7
  8. 8. DEFINITIONS OF WORKING CAPITALWorking capital has been in several ways as given below. Operating capital: - As the working capital is the capital required to operate the business and is the capital invested in the current assets, it is called as operating capital. Circulating capital: - Interchangingly used word for working is circulatingcapital. Gerestenberg gas suggested this item ‘circulating capital’ as all the assets ofbusiness change from one form to another. CONCEPTS OF WORKING CAPITALConceptually, working capital is either explained as: - Net Working Capital or GrossWorking Capital. These concepts are not exclusive; rather they have equalsignificance from management viewpoint. Gross working capital refers to the firm’sinvestment in current assets. Net working capital refers to the difference betweencurrent assets and current liabilities.GROSS WORKING CAPITAL CONCEPTIt is called as ‘qualitative’ aspect of working capital and focuses attention on twoaspects of current assets management: - 1. Optimum investment in current asset It is conventional rule to maintain the level of current assets twice the level of current liabilities to constitute a margin or buffer for maturing obligation of a business. 2. Financing of current asset Another aspect of gross working capital points to the need of arranging funds to finance current assets. 8
  9. 9. NET WORKING CAPITAL CONCEPTNet working capital can be positive or negative. A positive net working capital willarise when current assets exceed current liabilities. A negative net working capitalmean excess current liabilities over current assets.net working capital being thedifference between current assets and current liabilities, is ‘qualitative’ concept andhence it: - 1. Indicates the liquidity position of the firm: - A weak liquidity position poses a threat to solvency of the company and makes it unsafe and unsound. 2. Suggests the extent to which working capital needs may be financed by permanent sources of funds:- i.e., it covers the question of judicious mix of long term and short term funds for financing current assets. Thus, it may be emphasized that both gross and net concepts of working capital are equally important for the efficient management of working capital. NEED FOR WORKING CAPITAL FINANCEThe need for working capital finance is over-emphasized. Every business needs someamount of working capital. The need for working capital arises due to the time gapbetween production and realization of cash from sales. There is an operating cycleinvolved in the sales and realization of cash. There are time gaps between purchase ofraw materials & production, production & sales and realization of cash. Thus,working capital is needed for the following purposes. • For the purpose of raw materials, components and spares. • To pay wages and salaries. • To incur day-to-day expenses and overhead costs such as fuel, power and office expenses, etc. • To meet the selling costs as packing, advertising etc. • To provide credit facilities to the customers. • To maintain the inventories of raw materials, work in progress, stores • And spares and finished stock. 9
  10. 10. OPERATING CYCLE Operating cycle indicates the length of time between firm’s paying for materials entering into stock and receiving the cash from sale of finished goods. In other words, the duration of the required time to complete the sequence of events is called operating cycle. The operating cycle may take the following sequence: 1. In a manufacturing concern • Conversion of cash into raw materials. • Conversion of raw materials into work in progress. • Conversion of work in progress into finished goods. • Conversion of finished goods into debtors. • Conversion of debtors and bills receivables into cash. The following figure shows the operating cycle of a manufacturing concern. Cash Raw materialsAccounts receivable Work in progress (or) Work in process Finished goods 2. In a trading concern a) Cash into inventories b) Inventories into debtors and bills receivables c) Debtors and bills receivables into cash 10
  11. 11. The following figure shows the operating cycle of a trading concern Account receivables Cash InventoriesTYPES OF WORKING CAPITALThe working capital is classified in to two types. They are I. Permanent working capital II. Temporary working capital• Permanent working capital: Permanent or fixed working capital is the minimum amount, which is required to ensure effective utilization of fixed facilities and for maintaining the circulation of current assets. This investment if of a permanent type and as the size of the firm expands the requirement of working capital also increases.• Temporary working capital: Temporary working capital is also called as the fluctuating or variable working capital, which varies according to the problem and sales. It is the capital required in addition to the working capital.• Net working capital: It is the difference between current assets and liabilities. It is the excess of current assets over current liabilities. This concept enables a firm to determine the exact amount available at its disposal for operational requirements. 11
  12. 12. • Gross working capital: It refers to the total current assets of the business. It is also known as circulating capital, because the current assets are rotating in their nature.• Negative working capital: When a current liability exceeds current assets, it is called as negative working capital.NEED FOR MAINTENANCE OF ADEQUATE WORKING CAPITALAn adequate or optimum working capital balance refers to the desired working capitalwhere a firm will not have excess or shortage of working capital and indicates bothprofitability and liquidity for the firm. It is necessary to maintain an optimum cashbalance, an optimum level of inventory and an optimum level of debtors andreceivable.DANGERS OF EXCESS WORKING CAPITAL• It results in unnecessary accumulation of inventory in the form of raw material or work in progress or finished goods, leading to a high cost of storage, space, Insurance, increased theft, deterioration in the quality of goods, etc.• Also, it is an indication of defective credit policy and slack collection period.• Excess cash in hand indicates idle cash and even though the liquidity position of the company is good, it lacks profitability.• Excessive working capital makes the management complacent, which degenerates into managerial inefficiency.DANGERS OF INADEQUATE WORKING CAPITAL• The production process will be obstructed if there is shortage of working capital.• Fixed assets are not efficiently utilized if there is lot of working capital funds, which leads to deterioration in profits.• The firm loses its reputation when it is not in a position to honor its short-term obligations. 12
  13. 13. • Ultimately it leads to the reduction in sale, as the firm cannot meet the demand of the customers.EFFECT OF INADEQUATE WORKING CAPITAL ON DECISION MAKING:-1) Stagnates the growth of the firm,2) Threatens the solvency of the firm,3) Creates difficulties in implementing the operating plans,4) Renders the firm unable to avail the attractive credit opportunitiesEFFECTS OF EXCESS WORKING CAPITAL ON DECISION MAKING Impairs firm’s profitability through idle cash and Makes dividend policy liberal, Creates difficulties to cope with the future, on the failure of the estimated speculative profits.IMPORTANCE OF WORKING CAPITALEven though the skills for maintaining the working capital are somewhat unique, thegoals are the same-viz. to make an efficient use of funds for minimizing the risk ofloss to attain profit objectives.Firstly, the adequate of working capital contributes a lot in raising the credit-standingof a corporation in terms of favorable rates of interest on bank loan, better terms ongoods purchased, reduced cost of production on account of the receipt of cashdiscounts, etc.Secondly, a company with sufficient working capital is always in a position to takethe advantage of any favorable opportunity either to purchase raw materials or toexecute a special order or to wait for better market position.In the third place, the ability to meet all reasonable demands for cash withoutinordinate delay is a great psychological factor to improve the all rounds efficiency ofthe business. 13
  14. 14. Lastly, during slump the demand for working capital, instead of coming down, shootsup. A good amount of working capital is locked up in the inventories and book debts.Concerns having ample resources can tide over that period of depression.Thus, working capital is regarded as one of the conditioning factors in the long runoperations of the firm, which is often inclined to treat it as an issue of short runanalysis and decision making.FACTORS INFLUENCING WORKING CAPITAL Nature of business The working capital requirement of a firm basically depends upon the nature of it’s business public utility undertakings like electricity, water supply and railways need very little working capital because they offer cash sales only and supply services, not products and such no funds are tied up in inventories and receivables. The manufacturing undertakings also require sizable working capital along with fixed investments because they have also to build up inventories. Size of business The working capital requirements of a concern are directly influenced by the size of its business, which may be measured in terms of scale of operations. Greater the size of business unit, generally, larger will be the requirements of working capital. However in some cases, even a smaller concern may need more working due to high overhead charges, inefficient use of available resources and other economic disadvantages of small size. 14
  15. 15.  Production capacity In certain industries the demand is subject to wide fluctuations due to seasonal variations. The requirements of working capital in such cases depend on the production policy. Manufacturing process In manufacturing business the requirements of working capital increase in direct proportion to length of manufacturing process. Longer the process period of manufacture, larger is the amount of working capital required. Seasonal variations In certain industries, raw material is not available through out the year. They have to buy raw materials in bulk during the season to ensure an uninterrupted flow and process them during the entire year. A huge amount is, thus, blocked in the form of material inventories during such season, which gives rise to more working capital requirements. Working capital cycle In a manufacture concern, the working capital starts with the purchase of raw materials and ends with the realization of cash from the sale of finished products. The speed with which the working capital completes one cycle determines the requirements of working capital. Longer the period of cycle, larger is the requirement of working capital. Rate of stock turn over There is a high degree of inverse correlation ship between the quantum of working capital and the velocity or speed with which the sales are affected. A firm having as high rate of stock turnover will need lower amount of working capital as compared to a firm having a low rate of turnover. Credit policy The credit policy of a concern in its dealings with debtors and creditors influences considerably the requirements of working capital. A concern that 15
  16. 16. purchases its requirements on credit sells its products/services on cash requires lesser amount of working capital. Business cycle Business cycle refers to alternate expansion and contraction in general business actively. In a period of boom i.e., when the business is prosperous, there is a need for larger amount of working capital due to increase in sales, rise in prices, optimistic expansion of business, etc. on the contrary, in the times of depression i.e., when there is a down swing of the cycle, the business contracts, sales decline, difficulties are faced in collections from debtors and firms may have a large amount of working capital lying idle. Rate of growth of business The working capital requirements of a concern increase with the growth and expansion of its business activities. Earning capacity and dividend policy Some firms have more earning capacity than others due to quality of their products, monopoly conditions, etc. such firms with high earning capacity may generate high cash profits from operations and contribute to their working capital. The dividend policy of a concern also influences the requirement of its working capital. Price level changes Changes in the price level also affect the working capital requirements. Generally, the rising prices will require the firm to maintain larger amount of working capital, as more funds will be required to maintain the same current assets. The effect of rising prices will be different for different firms. Some firms may be affected much while some may not be affected at all by the rise in prices. 16
  17. 17.  Other factors Certain other factors such as operating efficiency, management ability, irregularities of supply, import policy, asset structure, importance of labour, banking facilities, etc., also influence the requirements of working capital.SOURCES OF WORKING CAPITALThe various of working capital for the financing of working capital are as follows: Sources of working capital Permanent or fixed Temporary or variable1) Shares 1) Commercial banks2) Debentures 2) Indigenous bank3) Public deposits 3) Trade credits4) Ploughing back of profits 4) Installment credit5) Loans from financial institutions 5) Accounts receivables FINANCING OF PERMANENT, FIXED OR LONG TERM WORKING CAPITALPermanent working capital should be financed in such a manner that the enterprisemay have its uninterrupted use for a sufficiently long period. There are five importantsources of permanent or long-term working capital:• Shares Issue of shares is the most important source for raising the permanent or long capital. A company can issue various types shares as equity shares, preference shares. 17
  18. 18. • Debentures A debenture is an instrument used by the company acknowledging its debt to its holder. It is also an important method of raising long term or permanent working capital.• Public deposits Public deposits are the fixed deposits accepted by a business enterprise directly from the public. This source of raising short term and medium term finance was very popular in the absence of banking facilities.• Ploughing back of profits Ploughing of profits means the re-investment by a concern of its surplus earnings in its business. It is an internal source of finance and a most suitable for an established firm for its expansion, modernization and replacement, etc.• Loans for financial institutions Financial institutions such as commercial banks, Life Insurance Corporation, industrial finance corporation, industrial bank of India, etc, also provide short term and long-term loans. FINANCING OF TEMPORARY, VARIABLE OR SHORT- TERM WORKING CAPITALThe main sources of short-term working capital are as follows: Commercial banks Commercial banks are the most important source of short-term capital. The major portion of working capital loans is provided by commercial banks. They provide a wide variety of loans tailored to meet the specific requirements of a concern. The different forms in which the banks normally provide loans and advances are loans, cash credits, overdrafts, purchasing and discounting of bills. 18
  19. 19.  Indigenous bankers Private moneylenders and country bankers used to be the only source of finance prior to the establishment of commercial banks. They used to change very high rates of interest and exploit the customers to the largest extent possible. Installment credit This is another method by which the assets are purchased and the possession of goods is taken immediately but the payment is made in installments over a predetermined period of time. Trade credits As present day commerce is built upon credit, the rate credit arrangement of a concern with its suppliers is an important source of short-term finance. The main advantages of this source are: it is very convenient method of finance; it is flexible and it may be possible to obtain favorable terms. Advances Some business houses get advances from their customers and agents against orders and this source is a short-term source of finance for them. Accounts receivables Accounts receivable is a permanent investment in the business. As old receivables are collected and new receivables are created, it is the major component of the current assets. 19
  20. 20. CASH MANAGEMENTINTRODUCTIONCash is the most liquid asset and all assets of business are finally converted into cash.Cash is considered as the lifeblood of the business. It is essential for a business tocarry out all its transactions. Cash of a business includes cheques, currencies and bankdrafts. The cash determines the credit worthiness, solvency and liquidity position of abusiness with the business. Cash management assumes more importance than othercurrent assets because cash is the most significant and least productive asset of abusiness.Management of cash is important not only because it is the most liquid asset but alsobecause all the liabilities of the business are to be met in cash. Though cash forms thesmallest part in the total assets of the company it requires a lot of time for itsmanagement.MOTIVES FOR HOLDING CASHA business may hold cash with the following motives: Transaction motive It requires a firm to hold cash to conduct day-to-day operations of business. The firm needs cash to make payments for purchases, wages and operating expenses and other inevitable payments. Precautionary motive The firms to meet emergencies i.e., the unforeseen events of the business also maintain cash. A business firm will have to fan a number of risks because it has an environment of its own. The environment consists of many uncontrollable factors like government legislation, natural calamities, unpredictable consumer behaviour etc, to face all these risks, the firm needs to hold cash in a business. 20
  21. 21.  Speculative motive To take advantage of unexpected opportunities, a firm holds cash for investing in profit making opportunities. Such a motive is purely speculative in nature. Security motive A firm should maintain cash reserves for future requirements if a firm is not in a position to obtain finance from any other source, then it can utilize the cash reserves. Compensatory motive It is a motive to have cash to compensate against loss arising in business.OBJECTIVES OF CASH MANAGEMENT To meet the payment schedule The main objective of cash management is to make the payments to the various types of expenditure. Every business will have payment schedule and hence it has to generate cash inflows to meet the cash outflows. To maintain minimum cash reserves Another important objective of cash management is to maintain optimum cash balance. To meet the expenses a firm need not maintain huge reserves of cash. Huge reserves will mean idle cash, which is not productive. On the other hand if there is no cash reserve, a firm finds it difficult to meet the expenses. Hence, minimum cash reserves are to be maintained.STRATEGEIES OF CASH MANAGEMENTFollowing are the various strategies for cash management. Cash planning Cash planning is necessary to project the surplus or deficit of cash. It also helps to maintain the cash balance for the planned period. It is a technique to plan and control the use of cash. Cash planning may be done on daily, weekly or monthly basis. The period and frequency of cash planning generally depends upon the size of the firm. Cash planning requires the use of two techniques namely - Cash forecasting and 21
  22. 22. - Cash budgeting  Cash forecasting It refers to the prediction of cash requirements and the sources of cash generation. Cash forecasts are required to prepare cash budgets. It may be done on a short-term basis or a long-term basis. The most commonly used methods for cash forecasting are: 1) The receipts and disbursement method 2) Net adjusted income method  Cash budgeting Cash budget is the most significant device for planning and controlling the receipts and payments. It is a summary statement of the firms expected cash inflows and outflows over a projected time period. The time horizon of a cash budget may differ from firm to firm. Daily, weekly or monthly. Cash budget should be prepared for determining the cash requirements.  Management of cash inflows Once the cash budget has been prepared the financial manager should that their does not exit a significant deviation between projected cash inflows and actual cash flows. The two objectives of managing cash flows are: - Accelerating cash inflows and - De-accelerating cash outflows Optimum cash balance Cash management involves the maintenance of optimum cash balance. Optimum cash balance is desired amount of cash to be held by the firm. If a firm has an optimum cash balance it will not suffer with the ideal cash or with shortage of cash. Cash by itself cannot generate until it is invested. Having excess cash will mean an opportunity cost to the business. If a firm runs short of cash it cannot fulfill the basic objectives of meeting the payment schedules hence optimum cash balance is necessary. 22
  23. 23.  Management of idle cash Business firm will face the problem of managing idle cash. At times a business will have more cash inflows and shortage of cash. It is necessary for the firm to generate something out of the idle cash and keep ready the same cash at that time when it runs to shortage of cash. The best option to manage the idle cash is to invest it on marketable securities i.e., it can invest on the securities like shares and debentures of other companies. While investing on the securities of other it has to consider the following three factors:1) Safety2) Marketability3) MaturityRECEIVABLES MANAGEMENTINTRODUCTIONReceivables management is a permanent investment in the business. As oldreceivables are collected and new receivables are created, it is a major credit of thecurrent assets. This emerges because of the existence of credit sales. It shows theamount receivable from the purchases. This is called by different names such as billsreceivables, accounts receivable, trade debtors, sundry debtors, trade receivables etc.Receivables derive benefits to the firm and also involve cost to the firm. If the benefitis more the cost is also more and hence the risk increases. On the other hand, if thebenefits are less the cost and risk is also less. Receivable management tries to trade ofbetween benefits and cost arising from receivables. INVENTORY MANAGEMENTINTRODUCTIONThe important component of working capital is inventory. Inventory refers to thestock of goods yet to be sold by a business firm. It is denied as the stock of goods a 23
  24. 24. firm is offering for sale and the components that make the goods. In other words theinventory includes raw materials, work in progress and finished goods.OBJECTIVES OF INVENTORY MANAGEMENT To provide continuous supply of raw materials for production To reduce the wastage and to avoid loss of breakage and deterioration To meet the demand for goods of ultimate consumers on time To provide right material at time and at right places To avoid excess and inadequate storing of materialsMOTIVES FOR HOLDING INVENTORYGenerally inventories are held by three motives The transaction motive, which emphasizes the need to maintain inventories to facilitate smooth production and sales operation. The precautionary motive which necessitates holding of inventories to guard against the risk of unpredictable changes in demand and supply process and other factory. The speculative motive which influences the decision to increase or reduce inventory levels to take advantages of price fluctuations.INVENTORY MANAGEMENT TECHNIQUESIn managing inventories, the firm’s objective should be in consance with the wealthmaximization principle. To achieve this, the firm should determine the optimum levelof inventory. Efficiently controlled inventories make the firm flexible. To manageinventories efficiently, the understanding economic order quantity and reorder pointcan answer the questions.ECONOMIC ORDER QUANTITYOne of the major inventory management problems to be resolved is how muchinventory should be added when inventory replenished. Economic order quantity isthat quantity of material, which is most economical in buying taking into account the 24
  25. 25. operational requirements of the company. The economic order quantity is thatinventory level, which minimizes the total ordering cost and carrying cost.PRINCIPLES OF WORKING CAPITAL MANAGEMENTThe objectives of working capital management are to manage the firm’s current assetsand current liabilities in such a way that a satisfactory level of working capital ismaintained. The following general principles help us to maintain a sound workingcapital: • Principle of risk variation • Principle of cost of capital • Principle of Equity position • Principle of maturity of payment  PRINCIPLE OF RISK VARIATION Risk here refers to the capability of a firm to meet its obligations as and when they become due for payment. Larger investment in current assets with less dependency on short-term borrowing increases liquidity, like for example: conversion of resources into inventories, into cash, here cash outflows occur before cash inflow. But then the cash inflows are not certain because sales and collections, which give rise to cash inflows, are difficult to forecast accurately. Cash outflows on the other hand are relatively certain. The firm is therefore, required to invest in current assets for a smooth, uninterrupted functioning. It needs to maintain liquidity to purchase raw materials and pay expenses such as wages and salaries, other manufacturing administrative and selling expenses as there is hardly a matching between cash inflows and outflows. On the other hand investment in current assets with greater dependence on short-term borrowings increases risks, reduces liquidity and increases profitability. For example: Acquiring resources on credit, temporarily postpones payment of certain expenses. Thus, the time interval between cash collections from sale of products and cash payments for resources acquired by the firm reduces liquidity and increases profitability. In other words there is a definite inverse relationship between the degree of risk and profitability. The 25
  26. 26. various working capital policies, such as conservative policy, moderate policy, and aggressive policy indicate the relationship between current assets and sales. A conservative management prefers to minimize risk by maintaining a higher level of current assets for working capital while a moderate or aggressive management assumes comparatively greater risk by reducing working capital. However, the goal of the management should be to establish a suitable trade off between profitability and risk. PRINCIPLE OF COST OF CAPITAL / PERMANENT AND VARIABLE CAPITAL Cost of capital varies with the source of finance and the degree of risk involved. Generally, it is, higher the risk, lower is the cost and lower the risk higher is the cost. A sound working capital management should always try to achieve a proper balance between these two. The magnitude of current assets needed is not always the same; it keeps fluctuating (increases and decreases) over time. However there is always a minimum level of current assets, which is continuously required by the firm to carry on its business operations. This minimum level of current assets is referred to as permanent, or fixed, working capital. Depending upon the changes in production a sales, the need for working capital over and above permanent working capital will fluctuate. For example: extra inventory of finished goods will have to be maintained to support the peak periods of and investment maintained to support the peak period of sale, and investment in receivables may also increase during such periods. On the other hand, investment in raw material, work in progress and finished goods will fall if the market is slack The extra working capital, needed to support the changing production and sales activities is called fluctuating, variable or temporary working capital. 26
  27. 27. The firm to meet liquidity requirements that will last only temporarily creates temporary working capital. PRINCIPLE OF EQUITY POSITION This principle is concerned with planning how much to earmark for CA from the total investment. According to this principle, the amount of working capital invested in each component should be adequately justified by a firm’s equity position. Every rupee invested in the current assets should contribute to the net worth of the firm. Excessive working capital needs idle funs, which earn no profits for the firm. Paucity of working capital not only impairs the firm’s profitability but also results in production interruptions and inefficiencies. PRINCIPLE OF MATURITY OF PAYMENT This principle is concerned with planning the source of finance for working capital. A firm should make every effort to relate maturities of payment (sundry creditors) to this flow of internally generated funds. Maturity pattern of various current obligations is an important factor in risk assumptions and risk assessments. Generally, shorter the maturity schedule of current liabilities in relation to expected cash inflow, greater the liability to meet its obligations in time. In the words of Louis Brand, “we need to know when to look for working capital funds, how to use them and how to measure, plan and control them”. To achieve the above-mentioned objectives of working capital management, the financial manager has to perform the following basic functions: a) Estimating the working capital requirements. b) Analysis and control of working capital. c) Financing of working capital needs. 27
  28. 28. DESIGN OF THE STUDYTITILE OF THE STUDY: A study conducted for HGS APPARELSPRIVATE LIMITED on Working Capital Management & Ratio analysis.STATEMENT OF PROBLEMWorking capital is an important requirement for any business, withoutwhich no business can survive. Every activity of the business is related tothe availability of the working capital. That is, arranging short-termfinancing, negotiating favorable credit terms, controlling the movementof cash, administering the account receivable and monitoring theinvestment in inventories. All this consumes a great deal of time offinance managers. Also the obstacles inhabiting the effective workingcapital management throws open challenges to the finance managers inmanaging working capital.Initially American companies were the core customers through which thegarment business of HGS APPARELS PRIVATE LIMITED was carriedon, but in the year 2000, economy of America came down, and arecession in the garment industry there, reduced the buying power ofAmerican customers, thereby reducing the demand for garments. Due towhich the sales of HGS APPARELS came down which affected theprofitability of the company directly.As profitability effects the working capital management of a firm, itcreated an opportunity to prepare a case study at HGS APPARELS. 28
  29. 29. OBJECTIVES OF THE STUDY The study was conducted mainly to understand and analyze the issue of working capital management, being practically employed in HGS APPARELS PRIVATE LIMITED. To understand the practical difficulties faced by managing the working capital. To analyze the various external and internal factors effecting working capital management in HGS APPARELS PRIVATE LIMITED. To understand and learn the various policies framed by HGS APPARELS PRIVATE LIMITED for effective management of working capital.DATA AND METHODOLOGYMainly data is obtained from the annual reports of the company. Furtherdata is collected through interviews with the key personnel and concernedof the company. Sampling techniques are not applicable to the study as itpertains to the study of a single company. Media of collecting the data isthe office of this company’s chartered accountant, K.V.Gopalakrishnayya in Bangalore.SCOPE OF STUDYThe study of working capital management is limited to the specificcompany, HGS APPARALS PRIVATE LIMITED.REFERENCE PERIOD 29
  30. 30. The study period covered in this case study is for 4 financial years i.e.,from 2000-2001, 2001-2002, 2002-2003, 2003-2004.DEFINITIONS OF CONCEPTSSome of the concepts used in different senses from time to time in theliterature of financial management are discussed below in order to makethe study clear and meaningful.WORKING CAPITALIt is the fund, which is used to finance its day to day activities ofbusiness, and it has to be employed in short term operations. There aretwo concepts of working capital-gross concept and net concept.WORKING CAPITAL MANAGEMENTIt means administration of current assets and current liabilities.Objects in managing working capital –profitability and liquidityPROFITABILITYIt is the ability of the firm to meet the claims of suppliers of short-termcapital for building up of current assets and also means short-term debtrepaying capacity of enterprise, in a limited sense.OPERATING CYCLEIt is a period involved from the time cash is invested in inventory till thetime cash is recovered from sales of goods.LIMITATIONS OF STUDY 30
  31. 31.  This report is based on the annual reports, which are provided by the company that cannot be relied upon. The collection of data for analysis is restricted to HGS APPARELS PRIVATE LIMITED only and Time was major limiting factor to the study. PROFILE OF HGS APPARELS PRIVATE LIMITED ORIGIN AND DEVELOPMENTIn the achievement of the strategic objectives of a self-reliant anddynamic economy, the government considers a substantial expansion inexport earnings to be of great importance. In order to achieve nationalobjectives, the government has adopted new and scientific approach to itsexport policy. Depending upon the tax paid by the company governmentcalculates and provides certain incentives to all the Indian exporters. HGSAPPARELS is one among such exporters. HGS APPARELS is a privatelimited company, which is involved in manufacturing and exporting offinished garments.Pradeep.H.Hingorani established this company on 12th February 1990.At the initial stages his father H.B.Hingorani and uncle G.B.Hingoraniwere the promoters of liberty brand of garments in Mumbai, but therebusiness did not reach a higher level due to which they had to start aseparate export business in Mumbai. By 1985 Pradeep took over theexport business. He was then forced to shift the business to Bangaloredue to labour unrest. After this Pradeep strived hard and has gainedsuccess in bringing his export business to a top most level which wascommenced in most critical circumstances. HGS APPARELS has itsoffice in THAVAREKERE and its manufacturing unit, located in BTMLayout. HGS APPARELS was first started with a rental premises buttoday it has its own premises where in which machine capacity of 100 31
  32. 32. machines is increased to 450 machines. Earlier there was no washingplant and today there is a washing plant along with the latest technologyproduction plant.In the factory there are about 1100 laborers working with subject to aregular bonus and other benefits. It is very tough to start a company fromthe scratch in spite of facing hurdles, but still Pradeep Hingoranimanaged to do so with a success and as a result HGS APPARELS is oneof the major exporters to companies such as: GAP in US DECABHLON in FRANCE MATALON in UK etc.COMPETITIONAs there are various exporters of garments in Bangalore, HGSAPPARELS has to go through a cutthroat competition and make sure thatit overcomes this competition with ease. Some of the major competitorsof HGS APPARELS are: ZENITH EXPORTS MNS EXPORT ORIVATE LIMIITED LT KARLE EXPORTS LIMITED SAI LAKSHMI INDUSTRIES etc.In order to overcome this competition the company has adopted thefollowing techniques: Charging reasonable price as per the range of the product. Maintaining the quality of the product and making sure that it is as per the demand of the customers. 32
  33. 33.  Timely delivery of the product to the overseas buyer without any delay. Providing discounts to the customers. Retaining the customersRANGE OF PRODUCTS Shirts Blouses ShortsORGANISATION STRUCTUREOrganization structure is basic framework with in which the manager’sdecision-making behaviour takes place. The structure gives an establishedpattern of relationship among the various components of an organization. 33
  34. 34. It is a vital tool for providing information about organizationalrelationships.HGS follows top to bottom chart, which is as follows ORGANIZTION CHART Mr. Pradeep H. Hingorani (Managing Director) Mr. Chandrashekhar Mr. Mahesh V Sukhij (Production Mgr) (Chief Executive Officer) Cutting Department Batch Department Mr. Gabrial Mr. L Rughuraj Mr.Patil Washing Department (Purchase Mgr) (General Mgr) (Marktg Mgr) Finishing Department Marketing Dept. Q C Department Fabric Dept. Trims & Exercise Dept.Accounts Dept. Shipping Dept. Personnel Dept. Maintenance Dept.MARKETING ACTIVITIESThe major market for HGS APPARELS prevails in foreign as it is exportoriented. It exports to various countries as discussed earlier.This company does not have any subsidiary at present. Initially it had asubsidiary in USA called NEXT APPARELS CORPORATE but now itdoes not exist. There are local resources in India through whom thecompany gets to know about the wants and desires of foreign buyers. 34
  35. 35. SOURCES OF WORKING CAPITAL TO HGS APPARELSShares: Issues of shares is the most important source for raising thepermanent or long-term capital. HGS APPARELS has 15000 equityshares of RS 100, each which are fully paid up.Loans: Financial institutions such as commercial banks, life insuranceCorporation, industrial finance corporation of India, state financialcorporation etc provides long term, short term, and medium term loans tothe companies. 1. Secured loans: HGS APPARELS gets secured loans by borrowing money from banks. It also allocates 18% non-convertible debentures to KSFC. Borrowings from banks are generally secured by the following; Hypothecation of stocks, sundry debtors and machineries. Personal guarantee of all the directors. Mortgage of title deeds in respect of land and building belonging to an associate firm. 2. Unsecured loans: HGS APPARELS gets unsecured loans from the directors of the company, from shareholders and from Bangalore fashion apparels private limited. Directors who grant unsecured loans are as follows: GB HINGORANI HB HINGORANI KG HINGORANI PH HINGORANI RS SUKHIJA LEELA.S.SUKHIJA is the shareholder who grants unsecured Loans to HGS APPARELS PVT LTD. 35
  36. 36. Companies that grant loans are: Bangalore fashion apparels private limited and Karnataka financial service limited. ANALYSIS OF WORKING CAPITAL MANAGEMENT AND RATIOS OF HGS APPARELS PRIVATE LIMITED Working capital is looked as a driving seat of finance manager in HGS APPARELS PRIVATE LIMITED. As it involves manufacturing activity it requires efficient amount of working capital to meet its day-to-day needs. The long-term working capital needs are for building, plant, furniture, etc., and the short-term needs are cash, inventories, securities, etc. The balances sheet shows the financial position of a company at a given point of time. It provides a snapshot and is regarded as a static picture. The income statement or the profit and loss statement reflects the performance of a company over a period of time. The significant accounting policies followed by HGS APPARELS PRIVATE LIMITED are as follows; SIGNIFICANT ACCOUNTING POLICIES Basis of preparing financial statements The financial statements of HGS APPARELS PRIVATE LIMITED are prepared under the historical cost convention on an accrual basis. Fixed assets 36
  37. 37. Fixed assets are stated at their original cost of acquisition and subsequent improvement thereto, including taxes, duties, freight and other incidental expenses related to acquisition, construction and installation of asset(s) concerned. Depreciation Depreciation on fixed assets is provided at rates prescribed on written down value basis in schedule XIV of the companies’ act of 1956 on a prorata basis from the date of acquisition of the asset. Inventories Inventories are valued at lower of cost or net realizable value. Cost is determined on first in first out basis and includes an appropriate portion of production and factory related overheads Long-term investments Long-term investments are accounted at cost, and no provision has been made for dimunition in the value of the same. Foreign exchange transactions Foreign exchange transactions are dealt with in accordance with the accounting standards on accounting for effects of changes in foreign exchange rates (AS11) issued by institute of chartered accountant of India. Gratuity Provision of gratuity is made on an estimated basis as per the provision of the payment of gratuity act 1972. Research and development 37
  38. 38. Research and development expenditure is charged to profit and lossaccount in the year of incurrence. Fixed assets acquired for the purpose ofresearch and developments are capitalized.Share capitalOut of the equity shares issued, 15000 shares of Rs.100 each wereallotted as fully paid up.[The current assets and current liabilities of HGS APPARELS PRIVATELIMITED are given below.CURRENT ASSETS INVENTORIES Raw materials and packing materials. Work in progress. Finished goods. Finished goods in transit. Packing material. Scrap. SUNDRY DEBTORS (unsecured considered good) Debts outstanding for a period exceeding 6 months Others CASH AND BALANCES Current account with scheduled banks. Current account with deutsche bank. Margin deposit account. Cash in hand. LOANS AND ADVANCES (unsecured considered good) Advances receivable in cash or kind. Deposits. 38
  39. 39. CURRENT LIABILITIES AND PROVISIONS CURRENT LIABILITIES Sundry creditors. Advance from customers. Liability for expenses. Interest accrued but not due on debentures. PROVISIONS For taxation (net of Advance income tax). For gratuity. For leave encashment.By studying the working capital in HGS APPARELS LIMITED, one canknow the factors influencing the growth prospects of the company.Let us understand gross and net working capital changes of HGSAPPARELS LIMMITED over the years. 39
  40. 40. TABLE - 01 TABLE SHOWING GROSS WORKING CAPITAL CHANGE OF HGS APPARELS LIMITED Particulars 2000-2001 2001-2002 2002-2003 2003-2004Current AssetsInventories 18450170 22444998 17500270 29520878Sundry Debtors 5239150 11818945 4174430 5947413Cash &Balance 2863563 1034108 1952882 2011974Loans advances 9264595 10509307 9301065 8741638Gross Working Capital 35817478 45807358 32928647 46221903INFERENCEThe gross working capital has fluctuated with the growth of the businessover a series of years. There is an increase in the current assets of thecompany. 40
  41. 41. TABLE – 02 TABLE SHOWING NET WORKING CAPITAL CHANGE OF HGS APPARELS Particulars 2000-2001 2001-2002 2002-2003 2003-2004 Gross Working Capital 35817478 45807358 32928647 46221903 Current Liabilities 10004325 21128392 11339964 25537988 Net Working Capital 25813153 24678966 21588683 20683915 INFERENCE The net working capital table indicates that excess current asset is available at the disposal of the company for the operational requirements. OPERATING CYCLE OF HGS APPARELS Operating cycle is one of the important determinants of working capital requirements. In most of the companies, cash inflows and cash outflows are not synchronized. Therefore, HGS holds the stock of finished goods, to meet the demand of the customers and also make an adequate investment in inventories and cash balance for a smooth and uninterrupted production and sales, while book debts are created since the goods are sold on credit basis for marketing sand competitive reasons. The operating cycle of HGS can be divided into two broad phases, which are as follows: Inventory conversion period: - It is requirement of time to produce and sell the product and includes conversion period of raw material, work-in- progress and finished goods. Book debts conversion period: - It is the time required to collect sales receipt from customers. TABLE - 03 41
  42. 42. TABLE SHOWING STATEMENT OF COST OF HGS APPARELS PRIVATE LIMITED Sl no Particulars 2000-2001 2001-2002 2002-2003 2003-2004 01 Opening stock 8175307 7481660 8907507 33832308 02 Purchase of raw materials 43303740 24383562 30274949 65882129Closing raw material inventory 03 7481660 8907507 5350148 10373012 04 Raw material consumed 43997387 22957715 33832308 60859265 (1+2-3) 05 Exgratia 139625 49369 5658 ------------- 06 Freight inwards 239433 309140 387719 731840 07 PRIME COST 44376445 23316224 34225686 61591105 (4+5+6) 08 Factory Overheads 12453261 7553167 8941795 8451148 09 Depreciation on Buildings 69952.17 91593.97 112154 131686 10 Depreciation on Machinery 3153437.82 3707471.55 4280630 5034385 11 Depreciation on Electrical 439861.53 474952.98 510224 538760 12 (7+8+9+10+11) 60492958 35143410 48070489 75747084 13 Opening work in progress 63599110 5577575 5054229 6535267 14 Closing work in progress 5577575 5054229 6535267 7057849 15 WORKS COST 61275294 35666756 46589451 75224502 (12+13+14) 16 Office Overheads 9714821 6683649 7154488 7926537 17 Depreciation on Computer 690939.81 888069.77 1006348 1077315 18 Depreciation on Office 127467.44 163329.35 184063 203059 equipments 19 Depreciation on 36553.61 49102.85 58403 65295 motorcycle 20 Depreciation on Motorcar 35639.83 540532.51 676995 778128 21 Depreciation on Furniture 500193.94 584159.53 643786 700437 & Fittings COST OF PRODUCTION 72701667 44575599 56313534 85975273 22 (15+16+17+18+19+20+21) 23 Opening stock of finished 4694511 5057710 8205812 5047149 goods 24 Closing stock of finished 5057710 8205812 5047149 11137287 goods 25 COST OF GOODS SOLD 72338468 41427497 59472197 79885135 (22+23-24) 26 Selling Overheads 4414936 4038567 5771556 3566365 27 Labour Charges 11718355 8094779 2160423 1621333 42
  43. 43. 28 COST OF SALES 88471759 53560843 67404176 85072833 (25+26+27) Notes; Factory overheads include; wages, production incentives, EL encashment, repairs and maintenance of machinery and electrical, power and electricity, repairs and maintenance of dg set, fabric and processing charges, repairs and maintenance building. Office overheads include; audit fees, bonus, conveyance, council charges, entertainment, ESI contribution, gratuity, PF contribution, insurance, membership and subscription, printing and stationery, professional fees, rates and taxes, rent, salaries, staff welfare, water charges, courier charges. Selling overheads include; claims on export sales, commission, traveling expenses, vehicle maintenance, freight outwards, sales promotion, service charges, donations, bad debts written off. TABLE - 04 TABLE SHOWING SALES AND DEBTORS OF HGS APPARELS Particulars 2000-2001 2001-2002 2002-2003 2003-2004 Sales 82298796 48397521 62649553 90124131 Opening 16929055 5239150 11818945 4174430 debtors Closing 5239150 11818945 4174430 5947413 debtors Opening 11912242 4776658 1287919 7452623 creditors Closing 4776658 12827919 7452623 20032834 43
  44. 44. creditors INFERENCE From the above table, it is evident that the sales of the HGS have increased over a period of time and this increases the size and components of working capital. There is also an increase in the debtors, which is apparent from the table, which implies that the company is running short of cash or there is inadequate cash in the hands of the company. To understand the operating cycle concept better and to analyze how exactly it affects working capital, let us study the table showing the operating cycle calculations. TABLE - 05 TABLE SHOWING OPERATING CYCLE CALCULATION OF HGS APPARELS PRIVATE LIMITEDSL NO PARTICULARS 2000-2001 2001-2002 2002-2003 2003-200401 Raw material consumption periodA Raw material consumption 43997387 22957715 33832308 60859265B Raw material consumption 120540.78 62897.84 92691.25 166737.71 per dayC Raw material inventory 7481660 8907507 5350148 10373012D 62 Days 142 Days 58 Days 62 Days02 Work-in-progress conversion periodA Cost of production 72701667 44575599 55845068 85149868 44
  45. 45. B Cost of production per day 199182.64 122124.92 153000.18 233287.30C Work-in-progress 5577575 5054229 6535267 7057849 inventoryD Work-in-progress holding 28 Days 41 Days 43 Days 30 Days days03 Finished goods conversion periodA Cost of goods sold 72338468 41427497 59003731 79059730B Cost of goods sold per day 198187.58 113499.99 161654.05 216602C Finished goods inventory 5057710 8205812 5047149 11137287D Finished goods inventory 26 Days 72 Days 31 Days 51 Days holding days04 Collection periodA Credit sales 82298796 48397521 62649553 90124131B Sales per day 225476.15 132595.94 171642.61 246915.42C Book debts 5239150 11818945 4174430 5947413D Book debts outstanding 23 Days 89 Days 24 Days 24 Days days05 Payment deferral periodA Credit purchases 44491045 25501189 32984848 69718267B Purchases per day 121893.27 69866.27 90369.44 191008.95C Creditors 4776658 12827919 7452623 20032834D Credit holding days 39 Days 184 Days 82 Days 105 Days Formulae used to get the proper data in the above table are as follows: 1. Raw material Raw material inventory Inventory = ------------------------------------- * 365 Holding days Raw material consumption 2. Work-in-progress work-in-progress inventory Inventory = --------------------------------------- * 365 Holding days Cost of production 3. Finished Goods Finished Goods inventory Inventory = -------------------------------------- * 365 Holding days Cost of goods sold 4. Book debts Book Debts Outstanding = -------------------------------------- * 365 45
  46. 46. Days Credit Sales5. Creditors Creditors Holding = --------------------------------------- * 365 Days Credit PurchasesANALYSIS OF OPERATING CYCLE CALCULATIONSFrom the table number 30 the raw material inventory level in the year2000-2002 to 8907507 when compared to 2000-2001 which stood as7481660, indicating that the company has good production and does nothave any uncertainty in supply of raw materials, but in the year2003-2004 raw material inventory has increased to 10373012 whencompared to year 2002-2003 which fallen down to 5350148 whencompared to it’s previous year which is satisfactory.There has been an increase in the level of work in progress inventory andhence it is a satisfactory level, also HGS has maintained an increasinglevel of finished goods inventory to meet the demand of the customers.In the case of collection period the book debts have increased by 2.25times more than in the year 2000-2001, and by 1.42 times in the year2002-2003. This indicates that HGS has been extending its creditfacilities to the customers in order to avoid competition.The company’s creditors are increased to 20032834 in 2003-2004 andpayment deferral period as accordingly increased in order to deceleratethe cash outflows. In the view of the company’s financial position in 46
  47. 47. paying more interest HGS has to reduce its creditors, and it has done thesame in the year 2003-2004. TABLE – 06 TABLE SHOWING SUMMARY OF OPERATING CYCLE CALCULATION OF HGS APPARELS NO PARTICULARS 2000-2001 2001-2002 2002-2003 2003-2004 01 Inventory conversion period A Raw material 62 Days 142 Days 58 Days 62 Days B Work-in-progress 28 Days 41 Days 43 Days 30 Days C Finished goods 26 Days 72 Days 31 Days 51 Days 02 Receivable conversion 23 Days 89 Days 24 Days 24 Days period 03 Gross Operating Cycle 139 Days 344 Days 156 Days 167 Days (1+2) 04 Payment Deferral period 39 Days 184 Days 82 Days 105 Days 05 Net Operating Cycle 100 Days 160 Days 74 Days 62 Days (3-4)INFERENCEAccording to the above table the operating cycle takes 62 days to convertraw materials into cash. The net operating cycle has increased from100-160 days in the year 2001-2002 and has decreased to 72 days in theyear 2002-2003. The following reasons can be highlighted about thesefluctuations. 47
  48. 48. In the year 2002-2003 raw material holding days have increased by 4days this is because raw material consumption has increased to 60859265and at the same time the level of raw material inventory has increased to10373012.One reason would be the policy of company, to reduce the inventoryholding to bring the cost down, but there is an increase in the work inprogress holding days when compared to that of the year 2000-2001, dueto fluctuations of demand for the company’s product in the market.Collection period is reduced so as to increase the cash inflows, where asthe payment deferral period is increased to 105 days in the year2003-2004 when compared to 39 days in the year 2000-2001, and 82 daysin 2002-2003. This indicates that the company has to take necessary stepsto control disbursements for maximum availability of cash. 48
  49. 49. RATIO ANALYSISINTRODUCTIONThe ratio analysis is one of the most important and powerful tools offinancial analysis. It is the process of establishing and interpreting variousratios. It is with the help of ratios that the ratios that the financialstatement can be analyzed more clearly and decisions made from suchanalysis.CONCEPT OF RATIOA ratio is a simple arithmetical expression of the relationship of onenumber to another. It may be defined as the indicated quotient of twomathematical expressions. According to Accountant’s handbook byWixonkell and Bedford, a ratio “is an expression of the quantitativerelationship between two numbers”.RATIO ANALYSISRatio analysis is the technique of calculation of number of accountingratios from the data found in the financial statements, the comparison ofthe accounting ratios with those of the previous years or with those ofother concerns engaged in similar line of activities or with those ofstandard ratios and the interpretation of the comparison.CLASSIFICATION OF ACCOUNTING RATIOS 49
  50. 50. The use of ratio analysis is not confined to financial manager only. There are different parties interested in the ratio analysis for knowing the financial position of a firm for different purposes. In view of various users of ratio which can be calculated from the information given in the financial statement. Ratios Traditional classification Functional classification Significance ratios 1. Balance sheet ratios 1. Primary ratios 1. Liquidity ratios 2. Revenue statement ratios 2. Secondary ratios 2. Leverage ratios 3. Mixed ratios 3. Activity ratios 4. Probability ratios CLASSIFICATION ACCORDING TO TESTS Liquidity ratios Long-term solvency ratios Activity ratios Probability ratios 1. Debt equity ratio 1. Stock turn over ratio 1. Gross profit ratio1. Current ratio 2. Debtors turnover ratio 2. Proprietory ratio 2. Net profit ratio2. Acid test ratio 3. Debt-collection 3. Capital gearing 3. Operating profit3. Absolute liquid period ratio ratio ratio 4. Creditors turnover 4. Fixed assets to net 4. Return on capital worth ratio employed 5. Current assets to net 5. Debt-payment period 5. Return on total worth 6. Fixed assets turnover resources ratio 6. Return on equity 7. Total assets turnover ratio 8. Working capital turnover ratio 9. proprietory fund 50 turnover ratio
  51. 51. LIQUIDITY RATIOSCURRENT RATIOCurrent ratio may be defined as the relationship between current assetsand current liabilities. This ratio is also known as working capital ratio. Itis calculated by dividing the total current assets by total current liabilities. Current Assets Current ratio = ------------------------- Current Liabilities Current assets include cash in hand, cash at bank, bills receivable, sundry debtors, inventory, prepaid expenses, outstanding incomes temporary investments and advances. Current liabilities include bills payable, sundry creditors, bank overdraft, unclaimed dividend, outstanding expenses, provision for taxation and proposed dividend etc. TABLE – 01 TABLE SHOWING CURRENT RATIO Year Current Assets Current Liabilities Current Ratio 2000-2001 25813153 10004325 2.58 2001-2002 24678965 21128392 1.16 2002-2003 21588683 11339964 1.90 2003-2004 20683915 25537988 0.80 51
  52. 52. INFERENCEThe current ratio decreased to 1.16 in the year 2001-2002 , whencompared to the year 2000-2001, and again it is increased to 1.90 in2002-2003, later it is again fallen down to 0.80. This shows thatthere is no improvement in the short-term solvency of the companyfor the year 2003-2004. GRAPH – 01 GRAPH SHOWING CURRENT RATIO 3 2.5 2 2000-2001 2001-2002 1.5 2002-2003 2003-2004 1 0.5 0 Current Ratio 52
  53. 53. ACID TEST RATIOAcid test ratio may be defined as the relationship between liquid assetsand liquid liabilities. It is also known as liquid ratio or quick ratio. Liquidassets include all current assets except inventory and prepaid expenses.Liquid liabilities include all current liabilities except bank overdraft. Liquid Assets Acid test ratio = ---------------------------- Liquid liabilities TABLE – 02 SHOWING THE LIQUID RATIO Year Liquid assets Liquid liabilities Liquid ratio 2000-2001 17367308 10004325 1.73 2001-2002 23362359 21128392 1.10 2002-2003 15428377 11339964 1.36 2003-2004 16701025 25537988 0.65INFERENCEThe liquid ratio is decreased to 1.10 in the year 2001-2002 whencompared to the previous year 2000-2001, and again it is increased to1.36 in the year 2002-2003. This further confirms that there arefluctuations in the short-term liquidity of the company. 53
  54. 54. GRAPH – 02GRAPH SHOWING LIQUID RATIO 54
  55. 55. 1.81.61.4 2000-20011.2 2001-2002 1 2002-20030.8 2003-20040.60.40.2 0 Liquid ratio 55
  56. 56. ABSOLUTE LIQUID RATI0Absolute liquid ratio may be defined as the relationship betweenAbsolute liquid assets and liquid liabilities. Absolute liquid assets includecash in hand, cash at bank and marketable securities.The absolute liquid ratio can be calculated by dividing absolute liquidassets by liquid liabilities. Thus, Absolute liquid assets Absolute Liquid Ratio = --------------------------------- Liquid liabilities TABLE – 03 SHOWING ABSOLUTE LIQUID RATIO Year Liquid Assets Liquid Liabilities Absolute Liquid Ratio 2000-2001 22720507 10004325 2.27 2001-2002 23493785 21128392 1.11 2002-2003 18659035 11339964 1.64 2003-2004 18302726 25537988 0.71INFERENCEThe absolute liquid ratio is increased to 1.64 when compared to 1.11 inthe year 2001-2002, but again it shows a fall in the year 2003-2004 whichstands at 0.71 56
  57. 57. GRAPH – 03GRAPH SHOWING ABSOLUTE LIQUID RATIO 2.5 2 2000-2001 1.5 2001-2002 2002-2003 1 2003-2004 0.5 0 Absolute Liquid Ratio 57
  58. 58. LONG TERM SOLVENCY RATIODEBT-EQUITY RATIODebt-Equity Ratio, also known as External-Internal Equity ratio iscalculated to measure the relative claims of outsiders and owners againstthe firm’s assets. The Debt-Equity ratio can be calculated by dividing thetotal Debts by equity. Thus, Total debts Debt-Equity ratio = ---------------------- Equity A total debt equals all long term debts plus current liabilities andprovisions and equity includes share capital, reserves and surplus minuscapital losses TABLE – 04 TABLE SHOWING DEBT-EQUITY RATIO Year Total debt Equity Debt-Equity Ratio 2000-2001 62072358 28620421 2.16 2001-2002 74357442 28416205 2.61 2002-2003 55024148 28057713 1.96 2003-2004 70288556 30391887 2.31INFERENCEDebt equity ratio has increased to 2.61 in 2002-2003 when compared to2000-2001 and again it is increased to 2.31 in the year 2002-2003 thoughit was decreased to 1.96 in the year 2001-2002. 7This shows that there isimprovement in the long-term solvency position of the company. 58
  59. 59. GRAPH- 04 GRAPH SHOWING DEBT-EQUITY RATIO 3 2.5 2000-2001 2 2001-2002 1.5 2002-2003 2003-2004 1 0.5 0 Debt-Equity RatioPROPRIETORY RATIO 59
  60. 60. The ratio that expresses the relationship between proprietor’s fund andtotal assets is called Proprietory ratio. This ratio can be calculated asunder. Equity Proprietory Ratio = ---------------------- Total Asset TABLE – 05 TABLE SHOWING PROPRIETORY RATIO Year Equity Total Assets Proprietory Ratio 2000-2001 28620421 52068033 0.54 2001-2002 28416205 53229050 0.53 2002-2003 28057713 43684184 0.64 2003-2004 30391887 44750568 0.67INFERENCEThis ratio is decreased in the year 2001-2002 to 0.53 when compared to2000-2001 and further increased to 0.67 in the year 2003-2004 whencompared to 2000-2001. this shows that there is an increase in the long-term solvency of the business. 60
  61. 61. GRAPH - 05 TABLE SHOWING PROPRIETORY RATIO 0.7 0.6 0.5 2000-2001 2001-2002 0.4 2002-2003 0.3 2003-2004 0.2 0.1 0 Proprietory RatioFIXED ASSETS TO NETWORTH RATIO 61
  62. 62. The ratio, which establishes the relationship between fixed assets andshareholder’s funds, is called fixed assets to Net worth ratio. This ratiocan be calculated as follows Fixed Assets (After depreciation) Fixed assets to Net worth Ratio = ------------------------------------- Shareholder’s funds TABLE – 06 TABLE SHOWING FIXED ASSETS TO NETWORTH RATIO Year Fixed Asset Net worth Fixed assets to Net worth Ratio 2000-2001 6335879 28620421 0.22 2001-2002 6079307 28416205 0.21 2002-2003 5378748 28057713 0.19 2003-2004 7775901 30391887 0.25INFERENCEThe ratio of fixed assets to net worth ratio is found to be fluctuating in theyear 2001-2002 and 2002-2003. But it is slightly increased in the year2003-2004 to 0.25. 62
  63. 63. GRAPH – 06 GRAPH SHOWING FIXED ASSETS TO NETWORTH RATIO 0.7 0.6 0.5 2000-2001 2001-2002 0.4 2002-2003 0.3 2003-2004 0.2 0.1 0 Proprietory RatioRATIO OF CURRENT ASSETS TO SHARREHOLDER’S FUND 63
  64. 64. The ratio which establishes the relationship between current assets andshareholder’s funds is called ratio of current assets to shareholder’s fundratio. The ratio can be calculated as follows. Current Assets Current assets to Net worth ratio = -------------------------- Shareholder’s funds TABLE – 07 TABLE SHOWING RATIO OF CURRENT ASSETS TO SHAREHOLDER’S FUND RATIO Year Current Assets Net worth Current Assets to Net worth Ratio 2000-2001 25813153 28620421 0.90 2001-2002 24678965 28416205 0.86 2002-2003 21588683 28057713 0.76 2003-2004 20683915 30391887 0.68INFERENCEThe above table shows that the current assets to net worth ratio in theyear 2001-2002 has come down to 0.86 when compared to the year2000-2001 and the current asset ratio is on a declining trend in subsequentyears. 64
  65. 65. GRAPH – 07 GRAPH SHOWING RATIO OF CURRENT ASSETS TO SHAREHOLDER’S FUND RATIO 0.9 0.8 0.7 2000-2001 0.6 0.5 2001-2002 0.4 2002-2003 0.3 2003-2004 0.2 0.1 0 Current Assets to Net worth RatioCAPITAL GEARING RATIO 65
  66. 66. Capital gearing ratio is a ratio, which expresses relationship betweenfixed interest and dividend bearing securities and equity share capital.This ratio is calculated as follows. Fixed interest and dividend bearing Securities Capital Gearing Ratio = -------------------------------------------- Equity share capital TABLE – 08 TABLE SHOWING CAPITAL GEARING RATIO Fixed interest and Year dividend bearing Equity share capital Capital gearing securities ratio 2000-2001 1627673 1500000 1.08 2001-2002 1528950 1500000 1.01 2002-2003 1548490 1500000 1.03 2003-2004 1621805 1500000 1.08INFERENCECapital gearing ratio is constant in the year 2000-2001 and 2003-2004 butit has decreased in 2001-2002 and , to 1.01 and 1.03 respectively. 66
  67. 67. GRAPH - 08GRAPH SHOWING CAPITAL GEARING RATIO 1.08 1.06 2000-2001 1.04 2001-2002 1.02 2002-2003 2003-2004 1 0.98 0.96 Capital gearing ratio ACTIVITY RATIOS 67
  68. 68. INVENTORY TURNOVER RATIOInventory turnover ratio is the ratio, which indicates the number of timesthe stock is turned over i.e., sold during the year. In other words, it is theratio between the cost of goods sold and closing stock. This ratio can becalculated as follows. Sales Stock Turnover Ratio = ---------------- Inventory TABLE – 09 TABLE SHOWING INVENTORY TURNOVER RATIO Year Sales Inventory Stock turnover Ratio 2000-2001 82298796 18450170 4.46 2001-2002 483975 21 22444998 2.15 2002-2003 62649553 17500270 3.57 2003-2004 90124231 29520878 3.05INFERENCEInventory turn over ratio has decreased to 2.15 in the year 2001-2002when compared to 2000-2001 and again increased in the year 2002-2003to 3.57 but in the year 2003-2004 it shows a fall that is 3.05. 68
  69. 69. GRAPH – 09 GRAPH SHOWING INVENTORY TURNOVER RATIO 4.5 4 3.5 3 2000-2001 2.5 2001-2002 2 2002-2003 1.5 2003-2004 1 0.5 0 Stock turnover RatioDEBTORS TURNOVER RATIO 69

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