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Final project of parag dairy


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Final project of parag dairy

  2. 2. Dated: 29 July, 2011 TO WHOM IT MAY CONCERNThis is to certify that Mr. AVINASH KUMAR, a student of MBA 2nd sem, Gautam BuddhaUniversity, Greater Noida, undergone as a summer trainee in Finance Division of thisorganization 21/05/2011 to 05/07/2011, project on “Analysis of working capital of paragmilk industry”, at Lucknow Producer‟s Co- Operative Milk Union Ltd, Lucknow.Mr. AVINASH KUMAR has successfully completed the project under my guidance. He is asincere and hard working student with pleasant manners.I wish all success in his future endeavors. (A.K PANDEY) Manager (Adm./Per.) 2
  3. 3. ACKNOWLEDGEMENTI express my sincere gratitude to my industry guide Mr. Tapesh Yadav, Finance Manager, PARAGMILK INDUSTRY LIMITED, Lucknow for his able guidance, continuous support and cooperationthroughout my project, without which the present work would not have been possible.I would also like to thank the entire team of PARAG MILK INDUSTRY LIMITED, Lucknow for theconstant support and help in the successful completion of my project.Also, I am thankful to my faculty guide Dr. Prashant Gupta of my institute, for his continued guidanceand invaluable encouragement. AVINASH KUMAR 3
  5. 5. PREFACEMaster in business Administration is a two year full time programme .Pursuing in Gautama BuddhaUniversity Greater Noida. The study and report is based on finance and comparative data among other organization. It presentsome information regarding working capital of Lucknow Producers Co-op Milk Union Ltd,Lucknow.To keep things in mind that as the ever –changing competitive business environment. New thoughtand idea should pour into and research and development to innovate the existing, which should bebeyond competitiors comprehension.This study enable the user with answer to formulate an effective financial strategy with a broaderprospective to tap areas where it did not feel the earlier ,hence the decision of whether to penetratethis section or not can be found out at the end of the balance sheet analysis.It also gives ideas of the potential of our business in the future and fluctuation in price from time totime product to product. 5
  6. 6. INTRODUCTIONOBJECTIVEThe following objectives would be met by to understand the financial analysis of Parag milkindustry Analysis of working capital of Parag milk industry‟. What is need of working capital? When, where and how working capital need fulfill. 6
  7. 7. Working Capital ManagementA managerial accounting strategy focusing on maintaining efficient levels of both components ofworking capital, current assets and current liabilities, in respect to each other. Working capitalmanagement ensures a company has sufficient cash flow in order to meet its short-term debtobligations and operating expenses.A few key performance ratios of a working capital management system are the working capital ratio,inventory turnover and the collection ratio. Ratio analysis will lead management to identify areas offocus such as inventory management, cash management, accounts receivable and payablemanagement.Working Capital NeedsYour working capital is used to pay short-term obligations such as your accounts payable and buyinginventory. If your working capital dips too low, you risk running out of cash. Even very profitablebusinesses can run into trouble if they lose the ability to meet their short-term obligations. Thecalculator assists you in determining working capital needs for the next year.Definitions Annual growth The percent of growth you expect your business to achieve over the next year. Total current assets This is any cash or asset that can be quickly turned into cash. This includes prepaid expenses, accounts receivable, most securities and your inventory. Total current liabilities This is a liability in the immediate future. This includes wages, taxes, and accounts payable. Current ratio Current Assets divided by current liabilities. Your current ratio helps you determine if you have enough working capital to meet your short-term financial obligations. A general rule of thumb is to have a current ratio of 2.0. Although this will vary by business and industry, a number above two may indicate a poor use of capital. A current ratio under two may indicate an inability to pay current financial obligations with a measure of safety. 7
  8. 8. Working capital Working capital is used by lenders to help gauge the ability for a company to weather difficult financial periods. Working capital is calculated by subtracting current liabilities from current assets. Due to differences in businesses and the fact that working capital is not a ratio but an absolute amount, it is difficult to predict what the ideal amount of working capital would be for your business. To calculate working capital requirements this calculator uses the "Current Ratio" to determine a target amount of working capital.Impact of Working Capital Management on profitabilityThe Working capital management is to manage the firm‟s current accounts to achieve a requiredbalance among profitability and risk. Working capital management is important factor it is amanagement of current assets and current liabilities. It is directly affects the profitability of thefirm. The main objective of this article is to determine the impact of account receivables days,inventory days, account payables days and cash conversion cycles on return on total assets andto analyze the variation in working capital needs and its impact on profitability.Working capital management is important due to many reasons, current assets normallyaccounts for half of the total assets. Excessive level of current assets results in a valuable returnon investment, however firm have shortages of current assets may face difficulties inmaintaining smooth operations. Critical importance of net working capital is proportion of totalfinancing requirement. Higher working capital results higher profitability.The main objective of every firm is maximizing profit but companies prevent them fromliquidity also, to avoid this there must be a balance between these two objectives of the firm.Working capital meets the short term financing requirements of any business. Lesser workingcapital may affect the profitability. Working capital management of the firm affects theprofitability by different variables like average collection period, average payment period andcash conversion cycle. Working capital and profitability of the firm have opposite relation witheach other.The profitability of the firm can be enhance by adopted following ways first is increase theopportunity cost of the float. Second is transaction cost of moving cash should be increasewithin and between countries. The profitability of the firm and its value is also effect throughthe working capital management because profitability and risk of the firm become low due tothe greater increase in investment in current assets.Specific research study on the impact of working capital management on profitability is scanty,especially in Pakistan. This area of study in developing countries and especially in Pakistan isignored area. The management creates value for the shareholders by increasing inventory level,account receivable. The firms are capable to attaining competitive advantage by using affectiveand efficient utilization of resources. 8
  9. 9. Working capital is the lifeblood of every firm. If it is managing efficiently it is beneficial forfirm because it has a direct impact on firm‟s profitability but inefficient working. Capitalmanagement negatively impacts the firm‟s profitability. This article provides essential, additional anddifferent evidence on WCM and its impact on profitability. Permanent & Temporary Working CapitalThere are 2 kinds of working capital. These are i. Permanent Working capital and ii. Temporary Working capital. 1. Permanent Working capital Permanent working capital refers to the minimum amount of all current assets that is required at all times to ensure a minimum level of uninterrupted business operations. Some minimum amount of raw materials, work-in-progress, bank balance, finished goods etc., a business has to carry all the time irrespective of the level of manufacturing or marketing operations. This level of working capital is referred to as core working capital or core current assets. But the level of core current assets is not a constant sum at all the times. For a growing business the permanent working capital will be rising, for a declining business it will be decreasing and for a stable business it will almost remain the same with few variations. So, permanent working capital is perennially needed one though not fixed in volume. This part of the working capital a permanent investment needs to be financed through long-term funds. 2. Temporary Working capital The temporary or varying working capital varies with the volume of operations. It fluctuates with the scale of operations. This is the additional working capital required from time to time over and above the being permanent or fixed working capital. During seasons, more production/sales take place resulting in larger working capital needs. The reverse is true during off-seasons. As seasons vary, temporary working capital requirement moves up and down. Temporary working capital can be financed through short term funds like current liabilities. When the level of temporary working capital moves up, the business might use short-term funds and when the level for temporary working capital recedes, the business may retire its short-term loans.Both permanent and temporary working capitals are necessary to facilitate the sales and productionprocess through operating cycle. 9
  10. 10. Financing Working Capital The financing of working capital is of utmost important. What portion of current assets shouldbe financed by current liabilities? What portion should be financed by long-term resources?Decisions on these questions will determine the financing mix.There are 3 basic approaches to determine an appropriate financing mix. They are a. Hedging or Matching approach. b. Conservative approach. c. Trade-off between the above two. a. Hedging approach: 1. The term hedging can be said to refer to a process of matching maturities of debt with the maturities of financial needs. According to this approach, the maturity of the sources of funds should match the nature of the assets to be financed. For the purpose of analysis, the assets can be broadly classified into two Those assets which are required in a certain amount for a given level of operation and hence do not vary over time 2. Those assets which fluctuate over time. The hedging approach suggests that the long-term funds should be used to finance the fixed portion of current assets requirements. Purely temporary requirements, i.e., the seasonal variations over and above the permanent financing needs should be appropriately financed with short-term funds. b. Conservative approach: This approach suggests that the estimated requirements of total funds should be met from long-term sources; the use of short-term funds should be restricted to only emergency situations or when there is an unexpected outflow of funds. c. Aggressive approach: This approach uses more of short-term funds to finance even the permanent current assets. 10
  11. 11. The following chart gives a summary of the relative costs and benefits of the three different approaches classes: Hedging Conservative Aggressive Factors Approach Approach ApproachLiquidity Moderate More LessProfitability Moderate Less MoreRisk Moderate Less MoreThe risk preferences of the management shall decide the approach to be adopted. The risk-neutralwill adopt the hedging approach, the risk averse the conservative approach and the risk seekers willadopt the aggressive approach.Debt Vs Equity Debt financing involves both short-term debt and long-term debt and equity financing involvesonly long-term financing. The financing mix of the working capital depends upon the riskpreferences of the management. Cost of different type of funds, the long-term and short-term, thereturn on different type of current assets, risk-bearing ability of the concern, liquidity, levels etc.,have to be considered to decide the financing of working capital. Debt financing involves fixed interest rates and allowed as an expense for tax purposes. Butthe risk involved in debt-financing is also high as the company is liable to pay the fixed interestperiodically. Whereas in equity financing, the risk is comparatively lower than debt financingbecause there is no fixed obligation on the part of the company to pay periodically their dividends. Ifthe company has sufficient profits, they can decide to pay dividends. They may even decide to retaintheir earnings to finance future requirements. But the cost of financing through equity would behigher as they are not allowed as an expense for tax purposes. Companies adopting hedging approach would optimally use long-term funds to finance fixedportion of current assets requirement. In manufacturing companies there may be requirement toalways maintain some amount of inventory in raw materials or finished goods to ensure smoothproduction and business. This fixed portion of current assets may be financed through either debt orequity after evaluating the costs of both types of financing. Whereas, other temporary current assetsmay be financed through current liabilities or short-term funds like bank-overdraft, short-term loans,accounts payable etc.Companies adopting aggressive approach may finance even the fixed portion oftheir current assets through short-term funds or may take risk by financing through accounts or notespayables. Companies adopting conservative approach will take less risk and finance even theirtemporary portion of current assets through long-term sources of finance and especially equity tolesser the risk. Thus, we can say that the risk preference of the company management decides thefinancing mix of working capital. 11
  12. 12. PART-I 12
  14. 14. Parag Dairy – March Towards ExcellenceLucknow is the capital city of Uttar Pradesh. Total area of district is 2528 square km. 91588 hectareis cultivated land. Wheat and rice is the main agriculture production of district. 69% of farmers aresmall and medium level farmers who have about 1 acre land each. Lucknow Producer‟s CooperativeMilk Union Ltd. (Parag Dairy Lucknow) was established in 1938. Lucknow Milk Union is the firstCo-operative Diary established in India. Very few people know the fact that the process developedby Lucknow Milk Union was later used in spirit in Gujrat co-operative milk movement and is nowfamous as “Anand Pattern”. Lucknow Milk Union was then chosen as one of the model dairy toimplement Operation Flood Programme started by the National Dairy Development Board (NDDB)in 1970. Present handling capacity of plant is 1, 50,000. The aim of Lucknow Milk Union is to provide reasonable price to farmers thereby defendingthen from exploitation of milk vendors and earn supplementary income apart from agriculture. Onthe other hand the Milk Union supplies high quality pure Milk & Milk Products at reasonable pricesto urban consumers under the brand name “PARAG”. Presently milk union is procuring milk from658 functional societies and 32125 milk producer members are getting reasonable price of their milkproduction. The Milk Union has been running “Clean Milk and Breed Conservation Programs” underUPDASP where milk producers have been educated in producing and supplying milk under cleanand hygienic conditions and provided the producers with semen of pure Indian breed for theimprovement of the present breed of animals. Emergency veterinary treatment service is alsoprovided by milk union to milk producers/farmers on cost basis. Farmers are purchasing milkinganimals Under Mini Dairy Project. Lucknow Milk Union has established women dairy societies inrural area for assuring the women participation in milk production. Lucknow Milk Union is establishing Auto Milk Collection Units (AMCU) in societies forgiving transparent payment system for milk given by farmers by the establishment of these machinesfarmers are getting full price and actual detail of FAT & SNF of their milk. Presently AMCU arerunning successfully in 259 societies. 27 BULK MILK COOLERS are established in various ruralareas of Lucknow for keeping high quality of milk procured in those areas by milk societies 14
  15. 15. Lucknow Milk Union provided Dewormer, Mastitis & tic control kit, khurpaka-muhpaka,Haemorrhagic Septicemia vaccination free of cost to the milk producers of the societies in theTechnical Input Program Under district plan in year- 07-08 and year-08-09. Presently, underArtificial Insemination Program, the milk union is running breeding program for animals (Cow &Buffalo) by establishing 30 centers in various societies. This facility is provided to the milkproducers of 125 villages at their home by these A.I. centers. Lucknow Milk Union is providing emergency Veterinary treatment service at the home ofmilk producers on their call/information by competent Veterinary doctors. This facility is providedby the organization under pilot project from so many years. Lucknow Milk Union has set up of teams for “Quality Check and Health AwarenessProgram” for the urban consumers of milk. The teams visit different localities in city, tests their milkand provides on the spot results to the consumers. The Milk Union also organizes school children‟svisit to its dairy plant to create awareness on milk processing and other related systems amongstthem. The Milk Union has obtained ISO & HACCP certification in year 2007. For coming months, Lucknow Milk Union has committed itself to provide a minimum of 1,60,000 liters of high quality “Parag” milk per day to the urban consumers. Apart from selling milk inpouches, the Milk Union is also gearing itself to provide fresh loose milk to the city consumers.Towards this end, the milk supply vehicles insulated with Japanese eco-friendly standards havealready been introduced in various areas of the city. 87 All Time Milk Booths (ATM) are establishedfor supply of high quality milk to the consumers round the clock. Lucknow Milk Union is able to maintain high quality standards in its Milk and Milk productsthrough close monitoring of processes in all its stages of production, processing and packaging. The constant increase in the sale figures of the Milk Union are a reflection of our sincereefforts and he growing confidence of the consumers in PARAG Milk Products. The organization has a chain of around 2000 agents providing employment to theunemployed youths. “Door to Door Milk Delivery System” through mini insulated tanker thrucommission agents with attractive commission rates has been started in the city. The requirement forthis system is to have a mini insulated tanker for which one has to arrange finances up to Rs.50000/-himself and rest amount comes through bank finance. The new milk products launched by the Milk 15
  16. 16. Union such as Chhena kheer, Besan Laddoo and Arogya Vardhak Chhachh (Butter Milk), GulabJamun, Rasgulla ,Vaccum packed Paneer have begun tickling the taste buds of the consumers givingthem great pleasure and value for money. The steady sales progress of the Milk Union is reflected from the fact that from an averagesale of 94,460 lit. of liquid milk per day in the year 2002-03 the sale grew to 1,30,333 lit, per day inthe year 2009-10 and during the year i.e. 2010-11 the sale stands at 124016 lit. per day till 30THJune-10.The sales turnover of the Milk Union has grown from Rs. 64.07 Crores in the year 2002-03to Rs. 146.52 Crores in the year 2008-09. The net profit the Milk Union has grown from Rs. 0.84Crores in the year 2002-03 to. Rs. 1.00 Crores in the year 2008-09.Presently Lucknow Milk Union is providing reasonable price of milk to the farmers of terrain regionlinked to Nepal such as district of Lakhimpur, Behraich, Gonda, Basti, Balrampur, Gorakhpurincluding Sitapur, Hardoi, Barabanki, Sultanpur, Raibareli, Faizabad, Shahjahanpur near by districtsof Lucknow obtained under the SMG scheme and after processing this milk, milk and milk relatedproducts, it is being sold in Lucknow, Raibareli, Sultanpur, Barabanki and Sitapur at reasonablerates to the consumers. Providing the reasonable rates to the farmers of the above mentioned districts and providingthe consumers the milk and milk related products according to their needs, Lucknow Milk Union isusing more than 122% of its handling capacity of milk.In the coming years Lucknow milk union will not be able to fulfill above mentioned aims by presentcapacity of plant so a new dairy plant at Chak Gajariya Farm situated at Sultanpur road of5.00 lakh liter capacities per day is proposed, Including a 30 ton capacity powder plant andmachinery for value added milk products production is also proposed. The march of Lucknow Milk Union (PARAG DAIRY) towards success and excellencecontinues. 16
  17. 17. BackgroundThe study looks at performance of Pradeshik dairy cooperative federation(PCDF), an apex body ofdairy cooperative societies in largest state of India where approach to gain benefits from mutualcooperation of villagers could not work while it worked successfully in different part of the countryand brought about revolutionary changes in the life of rural poor. The research paper aims to focuson function of mutual cooperation approach for developmental initiatives that integrate masses in anorganizational support system. The study has thrust on role of cooperative dairy federation of UttarPradesh (UP) and its contribution in value addition and growth of rural economy. Analysis ofchallenges of the sector in my research is embedded in untapped opportunities in dairy sector byfederation of cooperatives in UP. Cooperative movement is considered a milestone in Indianplanning process for increasing people‟s participation in planning and economic well being of largersegment of the society. In western Indian province of Gujarat, a dairy co-operative movement wasinstrumental in checking malpractices adopted by vendors and agents of private dairies. Theyexploited farmers during surplus milk production by deciding prices arbitrarily to maximize profitand compelling farmers to sale their products at minimum cost. The cooperative movement in thearea of dairy development also became instrument of change in import reduction of dairy productsunderpinning import substitution policy of India, poverty alleviation, creation of jobs in non-agriculture sector and inculcating commercial approach in traditional area of animal husbandry.Operation Flood (OF) programme is basic part of success story of Indian dairy development. It waslaunched in July 1970 to create a flood of milk by helping producers at village level based on Anandpattern (Singh, K.,et al., 1984) OF appeared as one of the most promising events in the field of ruraldevelopment. (UN/FAO, 1981) The program expanded production, processing, marketing andprofessional management capabilities in village and metropolitan centres. OF was positioned in asocial context with developmental objectives and an emphasis on grass root level participation.(Kamath, M.V., 1996, 156) It envisaged objective of organising producers for profits who wereeconomically and socially backward in Indian social system of caste based hierarchies. As a result ofthese efforts, India surpassed United States to become largest producer of milk in the world withproduction volume of 84 million tons in 2001 but annual milk yield per dairy animal was one tenth ofthe yield in US and one fifth of the yield of a New Zealand dairy cow. (Planning Commission ofIndia, 2002; 5)OF along with Anand pattern based on three tier cooperative system in diversifiedconditions has significance in context of UP with reference to organisational efforts by PCDF inreplication of the later. PCDF created on April 23, 1962 is an apex cooperative society of thecooperative milk unions.Dairy apart from economic activity symbolizes integration of rich and poor in socio political arenasincluding electoral politics as a result of moral and religious sanctity accorded to it. It was assertedby policy makers that promotion of dairy tackled three obstacles of caste, class and power whichfrustrated earlier programs of rural development. (Attwood, D.W., et al., 1988; 346) Rural povertyalleviation programs experienced hurdles of local politics and social exclusion of down troddenpeople resulting in poor outcomes. UP apart from being India‟s most populated province happens tobe world‟s largest sub national entity. Poverty being intertwined phenomenon of large population,emphasis of government schemes remained on eradication of poverty through allied activities andPCDF became one of the instrument to achieve this goal. Planners realized importance of otherspheres for rural development where dairy provided an unconventional method for engaging people. 17
  18. 18. According to the National Sample Survey Organization (NSSO), in 2004-2005 livestock sectorcreated regular employment to about 11.44 million persons in principal status and 11.01 million insubsidiary status, which constitute about 5.50% of the total work force. Out of the 22.44 million inanimal husbandry occupation, 16.84 millions are females. Any progress here would automaticallyenhance balanced development of rural economy. Amenities to farmers, better veterinary servicesand creation of new dairy processing plants offered prospectus to capture potential markets for milkdistribution and catered to demands of urban masses. Consumption of dairy products becomesespecially relevant for large vegetarian segment of Indian population as an alternative source ofanimal protein. (Karmarkar, K.G. et al., 2006). Product demands of vegetarians needed newinterventions offered in the form of increased milk production. Dairy sector gained significance aftersuccessful implementation of Anand model of cooperatives in Gujarat that offered realistic approachto realize traditional forms of mutual support in modern mechanisms. A comparative achievement ofmajor milk producing states in the country as evident from figure1 raises questions about moreefficient system in less milk producing Gujarat Province compared to UP. Figure 1: Pie chart showing share of UP in milk production in India Milk Production in Major Provinces in Percentage 8 Andhra Pradesh 18.2 7.44 Gujrat Punjab 9.43 Rajasthan 9.16 Uttar Pradesh (Source: Department of Animal Husbandry, Dairying and Fisheries, Government of India, Year 2007-2008)Share of UP in total milk population of India was about 16% in 2001 and milk production is 18%while in another north Indian state of Punjab despite the having 2% of the population of country, themilk production was as high as 9%. As per Ministry of Agriculture, Government of India (GOI),(Figure 1) the per capita availability of milk was 273 gms/day in Uttar Pradesh in comparison toPunjab where it was 962 gms/day in 2007-2008. Comparison of per capita consumption of milk showthat despite being largest milk producing area it performs poorly in terms of quantity of milk supplyto its citizens. Milk consumed on farm is two third of total production and rest of it go to informalchannel of markets run by private traders. Economy of India is still based on agriculture andexpansion and management of other related occupations are necessary to present better futureperspectives for rural poor. Increase in rural household income translates in to better chance ofrespectful life and bridges gaps of inequality. Even after receiving a substantial amount of loans and 18
  19. 19. grants during OF, marketing still remains domain of small traders who maximize profit with corruptpractices. Small producers after retaining milk for self-consumption sell the product to middlemenfor below market price due to liabilities such as repayment of loans for purchase of animals and forperforming social obligations. The buyer sells to direct consumers and in market for processing andconversion to bye-products to informal and formal market agencies. Exploitation of farmers occursdue to lack of marketing facilities for perishable item like milk and compels rural households to selltheir product to middleman on lesser prices in the absence of robust marketing infrastructure.Relational Overview of Dairy and Organisational StructuresOrganizational dimensions, socio-economic and political aspects of a successful plan have theoreticalconceptualizations determining working environment which affect achievements. Organization cansurvive with poor performance and dismal outcomes. Continuance of any organizational goal despiteits inability to provide returns can be examined through contextual comparison of similarorganizations. Cooperatives in India were expected to work as an instrument of rural developmentbecause of the assumption of elite idea that rural life embedded in cooperative solidarity andprovisions of institutional framework mobilizes shared aims for nation building. (Baviskar, A., 1988)Cooperative institution‟s success generates formal and informal cooperation among villagers.Reforms in one administrative entity of same or different geographical area work differently withdissimilar outcomes. In the district dairy, milk union‟s administrative complexity exists due to dualstructures. Apart from district unions the offices of district dairy development officer (DDOs) coexistin different life words. Replication of any successful model without considering local circumstancesas a precondition for positive outcomes can have reverse effect. Entrepreneurship activities ofGujarat presents different outcomes in UP since commitment of local people to realizetransformation depend upon many variables present in traditional system or unseen external forces.Adopted strategy was practiced for providing aid to invest in creating infrastructure for dairydevelopment in the country (Mascaenhas, 1988) Patterns for distribution of aid, grants and fundmobilization need further investigations to understand rationale of replication of a model in differentor similar working conditions. Milk related activities change with time, distance and context. Raw milk produced on farm Milk consume on farm Milk sold to trader Formal Sector Informal Sector Liquid milk Liquid milk Milk products Milk products 19
  20. 20. PART-2 20
  21. 21. INTRODUCTION OF PROJECTProject is related to conduct financial analysis performance of Parag milk industry and analysis ofworking capital of parag industry. I WORKING CAPITALWorking Capital Meaning: - Capital required for a business can be classified under two maincategories via, 1) Fixed Capital 2) Working Capital Every business needs funds for two purposes for its establishment and to carry out its day- to-day operations. Long terms funds are required to create production facilities through purchase offixed assets such as p&m, land, building, furniture, etc. Investments in these assets represent that partof firm‟s capital which is blocked on permanent or fixed basis and is called fixed capital. Funds arealso needed for short-term purposes for the purchase of raw material, payment of wages and otherday – to- day expenses etc. These funds are known as working capital. In simple words, working capital refers to that partof the firm‟s capital which is required for financing short- term or current assets such as cash,marketable securities, debtors & inventories. Funds, thus, invested in current assts keep revolvingfast and are being constantly converted in to cash and this cash flows out again in exchange for othercurrent assets. Hence, it is also known as revolving or circulating capital or short term capital.Working Capital Meaning: - Capital required for a business can be classified under two maincategories via, 1) Fixed Capital 2) Working Capital 21
  22. 22. Every business needs funds for two purposes for its establishment and to carry out its day- to-day operations. Long terms funds are required to create production facilities through purchase offixed assets such as p&m, land, building, furniture, etc. Investments in these assets represent that partof firm‟s capital which is blocked on permanent or fixed basis and is called fixed capital. Funds arealso needed for short-term purposes for the purchase of raw material, payment of wages and otherday – to- day expenses etc. These funds are known as working capital. In simple words, working capital refers to that partof the firm‟s capital which is required for financing short- term or current assets such as cash,marketable securities, debtors & inventories. Funds, thus, invested in current assts keep revolvingfast and are being constantly converted in to cash and this cash flows out again in exchange for othercurrent assets. Hence, it is also known as revolving or circulating capital or short term capital.  Exploitation Of Favorable Market Conditions: If a firm is having adequate working capital then it can exploit the favorable market conditions such as purchasing its requirements in bulk when the prices are lower and holdings its inventories for higher prices.  Ability to Face Crises: A concern can face the situation during the depression.  Quick And Regular Return On Investments: Sufficient working capital enables a concern to pay quick and regular of dividends to its investors and gains confidence of the investors and can raise more funds in future.  High Morale: Adequate working capital brings an environment of securities, confidence, high morale which results in overall efficiency in a business. EXCESS OR INADEQUATE WORKING CAPITAL Every business concern should have adequate amount of working capital to run its business operations. It should have neither redundant or excess working capital nor inadequate nor shortages of working capital. Both excess as well as short working capital positions are bad for any business. However, it is the inadequate working capital which is more dangerous from the point of view of the firm. 22
  23. 23. DISADVANTAGES OF REDUNDANT OR EXCESSIVE WORKING CAPITAL 1. Excessive working capital means ideal funds which earn no profit for the firm and business cannot earn the required rate of return on its investments. 2. Redundant working capital leads to unnecessary purchasing and accumulation of inventories. 3. Excessive working capital implies excessive debtors and defective credit policy which causes higher incidence of bad debts. 4. It may reduce the overall efficiency of the business. 5. If a firm is having excessive working capital then the relations with banks and other financial institution may not be maintained. 6. Due to lower rate of return n investments, the values of shares may also fall. 7. The redundant working capital gives rise to speculative transactionsDISADVANTAGES OF INADEQUATE WORKING CAPITALEvery business needs some amounts of working capital. The need for working capital arises due tothe time gap between production and realization of cash from sales. There is an operating cycleinvolved in sales and realization of cash. There are time gaps in purchase of raw material andproduction; production and sales; and realization of cash.Thus working capital is needed for the following purposes: For the purpose of raw material, components and spares. To pay wages and salaries To incur day-to-day expenses and overload costs such as office expenses. To meet the selling costs as packing, advertising, etc. 23
  24. 24. To provide credit facilities to the customer. To maintain the inventories of the raw material, work-in-progress, stores and spares and finished stock.For studying the need of working capital in a business, one has to study the business undervarying circumstances such as a new concern requires a lot of funds to meet its initialrequirements such as promotion and formation etc. These expenses are called preliminaryexpenses and are capitalized. The amount needed for working capital depends upon the size ofthe company and ambitions of its promoters. Greater the size of the business unit, generally largerwill be the requirements of the working capital.The requirement of the working capital goes on increasing with the growth and expensing of thebusiness till it gains maturity. At maturity the amount of working capital required is callednormal working capital.There are others factors also influence the need of working capital in a business.FACTORS DETERMINING THE WORKING CAPITALREQUIREMENTS 1. NATURE OF BUSINESS: The requirements of working is very limited in public utility undertakings such as electricity, water supply and railways because they offer cash sale only and supply services not products, and no funds are tied up in inventories and receivables. On the other hand the trading and financial firms requires less investment in fixed assets but have to invest large amt. of working capital along with fixed investments. 2. SIZE OF THE BUSINESS: Greater the size of the business, greater is the requirement of working capital. 3. PRODUCTION POLICY: If the policy is to keep production steady by accumulating inventories it will require higher working capital. 24
  25. 25. 4. LENTH OF PRDUCTION CYCLE: The longer the manufacturing time the raw material and other supplies have to be carried for a longer in the process with progressive increment of labor and service costs before the final product is obtained. So working capital is directly proportional to the length of the manufacturing process. 5. SEASONALS VARIATIONS: Generally, during the busy season, a firm requires larger working capital than in slack season. 6. WORKING CAPITAL CYCLE: The speed with which the working cycle completes one cycle determines the requirements of working capital. Longer the cycle larger is the requirement of working capital. DEBTORSCASH FINISHED GOODSRAW MATERIAL WORK IN PROGRESS 7. RATE OF STOCK TURNOVER: There is an inverse co-relationship between the question of working capital and the velocity or speed with which the sales are affected. A firm having a high rate of stock turnover will needs lower amt. of working capital as compared to a firm having a low rate of turnover. 8. CREDIT POLICY: A concern that purchases its requirements on credit and sales its product / services on cash requires lesser amt. of working capital and vice-versa. 9. BUSINESS CYCLE: In period of boom, when the business is prosperous, there is need for larger amt. of working capital due to rise in sales, rise in prices, optimistic expansion of business, etc. On the contrary in time of depression, the business contracts, sales 25
  26. 26. decline, difficulties are faced in collection from debtor and the firm may have a large amt. of working capital.10. RATE OF GROWTH OF BUSINESS: In faster growing concern, we shall require large amt. of working capital.11. EARNING CAPACITY AND DIVIDEND POLICY: Some firms have more earning capacity than other due to quality of their products, monopoly conditions, etc. Such firms may generate cash profits from operations and contribute to their working capital. The dividend policy also affects the requirement of working capital. A firm maintaining a steady high rate of cash dividend irrespective of its profits needs working capital than the firm that retains larger part of its profits and does not pay so high rate of cash dividend.12. PRICE LEVEL CHANGES: Changes in the price level also affect the working capital requirements. Generally rise in prices leads to increase in working capital.Others FACTORS: These are: Operating efficiency. Management ability. Irregularities of supply. Import policy. Asset structure. Importance of labor. Banking facilities, etc.MANAGEMENT OF WORKING CAPITALManagement of working capital is concerned with the problem that arises in attempting tomanage the current assets, current liabilities. The basic goal of working capital managementis to manage the current assets and current liabilities of a firm in such a way that a 26
  27. 27. satisfactory level of working capital is maintained, i.e. it is neither adequate nor excessive asboth the situations are bad for any firm. There should be no shortage of funds and also noworking capital should be ideal. WORKING CAPITAL MANAGEMENT POLICES of afirm has a great on its probability, liquidity and structural health of the organization. Soworking capital management is three dimensional in nature as1. It concerned with the formulation of policies with regard to profitability, liquidity and risk.2. It is concerned with the decision about the composition and level of current assets.3. It is concerned with the decision about the composition and level of current liabilities. 27
  28. 28. WORKING CAPITAL OF PARAG MILK INDUSTRYParag Milk Industry works in three seasons, all season have four months:-1) Lean season - (May, June, July, August) In this season milk production rate decreases.2) Mean season - (March , April, September, October ) In this season milk production rate is normal.3) Plus season – (November, December, January, and February) In this season milk production rate isincreasesed.In winter season milk production rate is high (November, December,January, February) .Thedemand of milk and all milk product is less in the market. The firm in this season have lots of milkbut demand of milk in market is less so then in this season Parag Milk industry‟s liquid milk isconverted into the Powder milk and Butter.Firm make stocks of powder milk and butter and maintain own suppliers (raw materials) and timelypays money to own suppliers. Parag Milk Industry finishes the transaction to own suppliers in 10days as like (1-10days,10-20days and 20 -30 days).In winter season Milk demand in market is down. Earning of Parag industry falls down but in thiscondition firm maintains its own suppliers .The winter seasons suppliers provides large amount ofmilk (raw material) to industry. In this seasons fund is very less in the Parag industry. They takeloans from banks and other financial institution forthe powder milk and butter stocks . They submitsecurity to banks in terms of powder milk then bank funds the Parag industry.In summer seasons suppliers provides milk in very low quantity but in this seasons milk and milkproduct demand is very high in the market and requirement of milk in the market day by dayincreases ,milk is limited. In this period Parag industry converts powder milk and butter in to theliquid milk and fulfill market demand. In summer season Parag industry cash transaction is about 45to 60 lakhs per day. Sale in summer season increases in comparison to other seasons. In winterseason Parag industry cash transaction is about 35 to 50 lakhs per day. Parag industry takes loans inwinter and pays it of in summersThis process of maintaining cash is known as process of maintaining industrial working capital. 28
  29. 29. ANALYSIS OF WORKIG CAPITAL OF PARAG AND RATIOWORKING CAPITAL ANALYSISAs we know working capital is the life blood and the centre of a business. Adequate amount ofworking capital is very much essential for the smooth running of the business. And the mostimportant part is the efficient management of working capital in right time. The liquidity position ofthe firm is totally effected by the management of working capital. So, a study of changes in the usesand sources of working capital is necessary to evaluate the efficiency with which the working capitalis employed in a business. This involves the need of working capital analysis. The analysis of working capital can be conducted through a number of devices, such as: 1. Ratio analysis. 2. Fund flow analysis. 3. Budgeting. 1. RATIO ANALYSIS A ratio is a simple arithmetical expression one number to another. The technique of ratio analysis can be employed for measuring short-term liquidity or working capital position of a firm. The following ratios can be calculated for these purposes: 1. Current ratio. 2. Quick ratio 3. Absolute liquid ratio 4. Inventory turnover. 29
  30. 30. 5. Receivables turnover.6. Payable turnover ratio.7. Working capital turnover ratio.8. Working capital leverage9. Ratio of current liabilities to tangible net worth.2. FUND FLOW ANALYSISFund flow analysis is a technical device designated to the study the source from whichadditional funds were derived and the use to which these sources were put. The fund flowanalysis consists of: a. Preparing schedule of changes of working capital b. Statement of sources and application of funds.It is an effective management tool to study the changes in financial position (working capital)business enterprise between beginning and ending of the financial dates.3. WORKING CAPITAL BUDGETA budget is a financial and / or quantitative expression of business plans and polices to bepursued in the future period time. Working capital budget as a part of the total budge tingprocess of a business is prepared estimating future long term and short term working capitalneeds and sources to finance them, and then comparing the budgeted figures with actualperformance for calculating the variances, if any, so that corrective actions may be taken infuture. He objective working capital budget is to ensure availability of funds as and needed,and to ensure effective utilization of these resources. The successful implementation of 30
  31. 31. working capital budget involves the preparing of separate budget for each element of workingcapital, such as, cash, inventories and receivables etc.ANALYSIS OF SHORT – TERM FINANCIAL POSITION OR TEST OF LIQUIDITY The short –term creditors of a company such as suppliers of goods of credit and commercial banks short-term loans are primarily interested to know the ability of a firm to meet its obligations in time. The short term obligations of a firm can be met in time only when it is having sufficient liquid assets. So to with the confidence of investors, creditors, the smooth functioning of the firm and the efficient use of fixed assets the liquid position of the firm must be strong. But a very high degree of liquidity of the firm being tied – up in current assets. Therefore, it is important proper balance in regard to the liquidity of the firm. Two types of ratios can be calculated for measuring short-term financial position or short-term solvency position of the firm. 1. Liquidity ratios. 2. Current assets movements „ratios. A) LIQUIDITY RATIOS Liquidity refers to the ability of a firm to meet its current obligations as and when these become due. The short-term obligations are met by realizing amounts from current, floating or circulating assts. The current assets should either be liquid or near about liquidity. These should be convertible in cash for paying obligations of short-term nature. The sufficiency or insufficiency of current assets should be assessed by comparing them with short-term liabilities. If current assets can pay off the current liabilities then the liquidity position is satisfactory. On the other hand, if the current liabilities cannot be met out of the current assets then the liquidity position is bad. To measure the liquidity of a firm, the following ratios can be calculated: 1. CURRENT RATIO 31
  32. 32. 2. QUICK RATIO3. ABSOLUTE LIQUID RATIO 1. CURRENT RATIOCurrent Ratio, also known as working capital ratio is a measure of general liquidity and itsmost widely used to make the analysis of short-term financial position or liquidity of a firm.It is defined as the relation between current assets and current liabilities. Thus,CURRENT RATIO = CURRENT ASSETS CURRENT LIABILITESThe two components of this ratio are: 1) CURRENT ASSETS 2) CURRENT LIABILITESCurrent assets include cash, marketable securities, bill receivables, sundry debtors,inventories and work-in-progresses. Current liabilities include outstanding expenses, billpayable, dividend payable etc.A relatively high current ratio is an indication that the firm is liquid and has the ability topay its current obligations in time. On the hand a low current ratio represents that theliquidity position of the firm is not good and the firm shall not be able to pay its currentliabilities in time. A ratio equal or near to the rule of thumb of 2:1 i.e. current assets doublethe current liabilities is considered to be satisfactory. 32
  33. 33. CALCULATION OF CURRENT RATIO (Rupees in crore) e.g.Year 2006 2007 2008Current Assets 81.29 83.12 13,6.57Current Liabilities 27.42 20.58 33.48Current Ratio 2.96:1 4.03:1 4.08:1 Interpretation:- As we know that ideal current ratio for any firm is 2:1. If we see the current ratio of the company for last three years it has increased from 2006 to 2008. The current ratio of company is more than the ideal ratio. This depicts that company‟s liquidity position is sound. Its current assets are more than its current liabilities. 2. QUICK RATIO Quick ratio is a more rigorous test of liquidity than current ratio. Quick ratio may be defined as the relationship between quick/liquid assets and current or liquid liabilities. An asset is said to be liquid if it can be converted into cash with a short period without loss of value. It measures the firms‟ capacity to pay off current obligations immediately. QUICK RATIO = QUICK ASSETS CURRENT LIABILITES Where Quick Assets are: 33
  34. 34. 1) Marketable Securities 2) Cash in hand and Cash at bank. 3) Debtors. A high ratio is an indication that the firm is liquid and has the ability to meet its current liabilities in time and on the other hand a low quick ratio represents that the firms‟ liquidity position is not good. As a rule of thumb ratio of 1:1 is considered satisfactory. It is generally thought that if quick assets are equal to the current liabilities then the concern may be able to meet its short-term obligations. However, a firm having high quick ratio may not have a satisfactory liquidity position if it has slow paying debtors. On the other hand, a firm having a low liquidity position if it has fast moving inventories. CALCULATION OF QUICK RATIO e.g. (Rupees in Crore)Year 2005 2009 2010Quick Assets 44.14 47.43 61.55Current Liabilities 27.42 20.58 33.48Quick Ratio 1.6 : 1 2.3 : 1 1.8 : 1 Interpretation : A quick ratio is an indication that the firm is liquid and has the ability to meet its current liabilities in time. The ideal quick ratio is 1:1. Company‟s quick ratio is more than ideal ratio. This shows company has no liquidity problem. 3. ABSOLUTE LIQUID RATIO 34
  35. 35. Although receivables, debtors and bills receivable are generally more liquid than inventories, yet there may be doubts regarding their realization into cash immediately or in time. So absolute liquid ratio should be calculated together with current ratio and acid test ratio so as to exclude even receivables from the current assets and find out the absolute liquid assets. Absolute Liquid Assets includes : ABSOLUTE LIQUID RATIO = ABSOLUTE LIQUID ASSETS CURRENT LIABILITES ABSOLUTE LIQUID ASSETS = CASH & BANK BALANCES. e.g. (Rupees in Crore)Year 2005 2009 2010Absolute Liquid Assets 4.69 1.79 5.06Current Liabilities 27.42 20.58 33.48Absolute Liquid Ratio .17 : 1 .09 : 1 .15 : 1 Interpretation : These ratio shows that company carries a small amount of cash. But there is nothing to be worried about the lack of cash because company has reserve, borrowing power & long term investment. In India, firms have credit limits sanctioned from banks and can easily draw cash. B) CURRENT ASSETS MOVEMENT RATIOS Funds are invested in various assets in business to make sales and earn profits. The efficiency with which assets are managed directly affects the volume of sales. The better the management of assets, large is the amount of sales and profits. Current assets movement ratios measure the efficiency with which a firm manages its resources. These ratios are called turnover ratios because they indicate the speed with which assets are converted or 35
  36. 36. turned over into sales. Depending upon the purpose, a number of turnover ratios can be calculated. These are : 1. Inventory Turnover Ratio 2. Debtors Turnover Ratio 3. Creditors Turnover Ratio 4. Working Capital Turnover RatioThe current ratio and quick ratio give misleading results if current assets include high amountof debtors due to slow credit collections and moreover if the assets include high amount ofslow moving inventories. As both the ratios ignore the movement of current assets, it isimportant to calculate the turnover ratio.1. INVENTORY TURNOVER OR STOCK TURNOVER RATIO : Every firm has to maintain a certain amount of inventory of finished goods so as to meet the requirements of the business. But the level of inventory should neither be too high nor too low. Because it is harmful to hold more inventory as some amount of capital is blocked in it and some cost is involved in it. It will therefore be advisable to dispose the inventory as soon as possible. INVENTORY TURNOVER RATIO = COST OF GOOD SOLD AVERAGE INVENTORY Inventory turnover ratio measures the speed with which the stock is converted into sales. Usually a high inventory ratio indicates an efficient management of inventory because more frequently the stocks are sold; the lesser amount of money is required to finance the inventory. Where as low inventory turnover ratio indicates the inefficient management of inventory. A low inventory turnover implies over investment in 36
  37. 37. inventories, dull business, poor quality of goods, stock accumulations and slow moving goods and low profits as compared to total investment. AVERAGE STOCK = OPENING STOCK + CLOSING STOCK 2 (Rupees in Crore)Year 2005 2009 2010Cost of Goods sold 110.6 103.2 96.8Average Stock 73.59 36.42 55.35Inventory Turnover Ratio 1.5 times 2.8 times 1.75 times Interpretation : This ratio shows how rapidly the inventory is turning into receivable through sales. In 2007 the company has high inventory turnover ratio but in 2008 it has reduced to 1.75 times. This shows that the company‟s inventory management technique is less efficient as compare to last year. 2. INVENTORY CONVERSION PERIOD: INVENTORY CONVERSION PERIOD = 365 (net working days) INVENTORY TURNOVER RATIO e.g.Year 2005 2009 2010Days 365 365 365Inventory Turnover Ratio 1.5 2.8 1.8Inventory Conversion Period 243 days 130 days 202 days 37
  38. 38. Interpretation : Inventory conversion period shows that how many days inventories takes to convert from raw material to finished goods. In the company inventory conversion period is decreasing. This shows the efficiency of management to convert the inventory into cash.3. DEBTORS TURNOVER RATIO: A concern may sell its goods on cash as well as on credit to increase its sales and a liberal credit policy may result in tying up substantial funds of a firm in the form of trade debtors. Trade debtors are expected to be converted into cash within a short period and are included in current assets. So liquidity position of a concern also depends upon the quality of trade debtors. Two types of ratio can be calculated to evaluate the quality of debtors. a) Debtors Turnover Ratio b) Average Collection PeriodDEBTORS TURNOVER RATIO = TOTAL SALES (CREDIT) AVERAGE DEBTORS Debtor‟s velocity indicates the number of times the debtors are turned over during a year. Generally higher the value of debtor‟s turnover ratio the more efficient is the management of debtors/sales or more liquid are the debtors. Whereas a low debtors turnover ratio indicates poor management of debtors/sales and less liquid debtors. This ratio should be compared with ratios of other firms doing the same business and a trend may be found to make a better interpretation of the ratio.AVERAGE DEBTORS= OPENING DEBTOR+CLOSING DEBTOR 2 38
  39. 39. e.g.Year 2005 2009 2010Sales 166.0 151.5 169.5Average Debtors 17.33 18.19 22.50Debtor Turnover Ratio 9.6 times 8.3 times 7.5 times Interpretation : This ratio indicates the speed with which debtors are being converted or turnover into sales. The higher the values or turnover into sales. The higher the values of debtors turnover, the more efficient is the management of credit. But in the company the debtor turnover ratio is decreasing year to year. This shows that company is not utilizing its debtors efficiency. Now their credit policy becomes liberal as compare to previous year.4. AVERAGE COLLECTION PERIOD: Average Collection Period = No. of Working Days Debtors Turnover Ratio The average collection period ratio represents the average number of days for which a firm has to wait before its receivables are converted into cash. It measures the quality of debtors. Generally, shorter the average collection period the better is the quality of debtors as a short collection period implies quick payment by debtors and vice-versa. Average Collection Period = 365 (Net Working Days) Debtors Turnover RatioYear 2005 2009 20010Days 365 365 365Debtor Turnover Ratio 9.6 8.3 7.5Average Collection Period 38 days 44 days 49 days 39
  40. 40. Interpretation : The average collection period measures the quality of debtors and it helps in analyzing the efficiency of collection efforts. It also helps to analysis the credit policy adopted by company. In the firm average collection period increasing year to year. It shows that the firm has Liberal Credit policy. These changes in policy are due to competitor‟s credit policy.5. WORKING CAPITAL TURNOVER RATIO : Working capital turnover ratio indicates the velocity of utilization of net working capital. This ratio indicates the number of times the working capital is turned over in the course of the year. This ratio measures the efficiency with which the working capital is used by the firm. A higher ratio indicates efficient utilization of working capital and a low ratio indicates otherwise. But a very high working capital turnover is not a good situation for any firm. Working Capital Turnover Ratio = Cost of Sales Net Working Capital Working Capital Turnover = Sales Networking Capital e.g.Year 2005 2009 2010Sales 166.0 151.5 169.5Networking Capital 53.87 62.52 103.09 40
  41. 41. Working Capital Turnover 3.08 2.4 1.64 Interpretation : This ratio indicates low much net working capital requires for sales. In 2008, the reciprocal of this ratio (1/1.64 = .609) shows that for sales of Rs. 1 the company requires 60 paisa as working capital. Thus this ratio is helpful to forecast the working capital requirement on the basis of sale.INVENTORIES (Rs. in Crores)Year 2005-2006 2006-2007 2007-2008Inventories 37.15 35.69 75.01 Interpretation : Inventories is a major part of current assets. If any company wants to manage its working capital efficiency, it has to manage its inventories efficiently. The graph shows that inventory in 2005-2006 is 45%, in 2006-2007 is 43% and in 2007-2008 is 54% of their current assets. The company should try to reduce the inventory upto 10% or 20% of current assets.CASH BNAK BALANCE : (Rs. in Crores)Year 2005-2006 2006-2007 2007-2008Cash Bank Balance 4.69 1.79 5.05 Interpretation : Cash is basic input or component of working capital. Cash is needed to keep the business running on a continuous basis. So the organization should have sufficient cash to 41
  42. 42. meet various requirements. The above graph is indicate that in 2006 the cash is 4.69 crores but in 2007 it has decrease to 1.79. The result of that it disturb the firms manufacturing operations. In 2008, it is increased upto approx. 5.1% cash balance. So in 2008, the company has no problem for meeting its requirement as compare to 2007.DEBTORS : Interpretation : Debtors constitute a substantial portion of total current assets. In India it constitute one third of current assets. The above graph is depict that there is increase in debtors. It represents an extension of credit to customers. The reason for increasing credit is competition and company liberal credit policy.CURRENT ASSETS : (Rs. in Crores) Year 2004-2005 2009-2010 Current Assets 81.29 83.15 Interpretation : This graph shows that there is 64% increase in current assets in 2008. This increase is arise because there is approx. 50% increase in inventories. Increase in current assets shows the liquidity soundness of company.CURRENT LIABILITY : (Rs. in Crores)Year 2004- 2005 2009-2010 42
  43. 43. Current Liability 27.42 20.58 Interpretation : Current liabilities shows company short term debts pay to outsiders. In 2008 the current liabilities of the company increased. But still increase in current assets are more than its current liabilities.NET WOKRING CAPITAL : (Rs. in Crores)Year 2004-2005 2009-2010Net Working Capital 53.87 62.53 Interpretation : Working capital is required to finance day to day operations of a firm. There should be an optimum level of working capital. It should not be too less or not too excess. In the company there is increase in working capital. The increase in working capital arises because the company has expanded its business. 43
  44. 44. RESEARCH METHODOLOGYThe methodology, I have adopted for my study is the various tools, which basically analyze criticallyfinancial position of to the organization: I. COMMON-SIZE P/L A/C II. COMMON-SIZE BALANCE SHEET III. COMPARTIVE P/L A/C IV. COMPARTIVE BALANCE SHEET V. TREND ANALYSIS VI. RATIO ANALYSISThe above parameters are used for critical analysis of financial position. With the evaluation of eachcomponent, the financial position from different angles is tried to be presented in well and systematicmanner. By critical analysis with the help of different tools, it becomes clear how the financialmanager handles the finance matters in profitable manner in the critical challenging atmosphere, therecommendation are made which would suggest the organization in formulation of a healthy andstrong position financially with proper management system.I sincerely hope, through the evaluation of various percentage, ratios and comparative analysis, theorganization would be able to conquer its in efficiencies and makes the desired changes.ANALYSIS OF FINANCIAL STATEMENTSFINANCIAL STATEMENTS:Financial statement is a collection of data organized according to logical and consistent accountingprocedure to convey an under-standing of some financial aspects of a business firm. It may show 44
  45. 45. position at a moment in time, as in the case of balance sheet or may reveal a series of activities over agiven period of time, as in the case of an income statement. Thus, the term „financial statements‟generally refers to the two statements(1) The position statement or Balance sheet.(2) The income statement or the profit and loss Account.OBJECTIVES OF FINANCIAL STATEMENTS:According to accounting Principal Board of America (APB) statesThe following objectives of financial statements: -1. To provide reliable financial information about economic resources and obligation of a businessfirm.2. To provide other needed information about charges in such economic resources and obligation.3. To provide reliable information about change in net resources (recourses less obligations) missingout of business activities.4. To provide financial information that assets in estimating the learning potential of the business.LIMITATIONS OF FINANCIAL STATEMENTS:Though financial statements are relevant and useful for a concern, still they do not present a finalpicture a final picture of a concern. The utility of these statements is dependent upon a number offactors. The analysis and interpretation of these statements must be done carefully otherwisemisleading conclusion may be drawn.Financial statements suffer from the following limitations: -1. Financial statements do not given a final picture of the concern. The data given in these statementsis only approximate. The actual value can only be determined when the business is sold or liquidated.2. Financial statements have been prepared for different accounting periods, generally one year,during the life of a concern. The costs and incomes are apportioned to different periods with a viewto determine profits etc. The allocation of expenses and income depends upon the personal judgmentof the accountant. The existence of contingent assets and liabilities also make the statementsimprecise. So financial statement are at the most interim reports rather than the final picture of thefirm.3. The financial statements are expressed in monetary value, so they appear to give final and accurateposition. The value of fixed assets in the balance sheet neither represent the value for which fixedassets can be sold nor the amount which will be required to replace these assets. The balance sheet is 45
  46. 46. prepared on the presumption of a going concern. The concern is expected to continue in future. Sofixed assets are shown at cost less accumulated deprecation. Moreover, there are certain assets in thebalance sheet which will realize nothing at the time of liquidation but they are shown in the balancesheets.4. The financial statements are prepared on the basis of historical costs Or original costs. The valueof assets decreases with the passage of time current price changes are not taken into account. Thestatement are not prepared with the keeping in view the economic conditions. the balance sheet losesthe significance of being an index of current economics realities. Similarly, the profitability shownby the income statements may be represent the earning capacity of the concern.5. There are certain factors which have a bearing on the financial position and operating result of thebusiness but they do not become a part of these statements because they cannot be measured inmonetary terms. The basic limitation of the traditional financial statements comprising the balancesheet, profit & loss A/c is that they do not give all the information regarding the financial operationof the firm. Nevertheless, they provide some extremely useful information to the extent the balancesheet mirrors the financial position on a particular data in lines of the structure of assets, liabilitiesetc. and the profit & loss A/c shows the result of operation during a certain period in terms revenueobtained and cost incurred during the year. Thus, the financial position and operation of the firm.FINANCIAL STATEMENT ANALYSISIt is the process of identifying the financial strength and weakness of a firm from the availableaccounting data and financial statements. 46
  47. 47. CLASSIFICATION OF RATIOSRatios can be classified in to different categories depending upon the basis of classificationThe traditional classification has been on the basis of the financial statement to which thedetermination of ratios belongs.These are:- 1. Profit & Loss account ratios 2. Balance Sheet ratios 3. Composite ratios 47
  48. 48. CONCLUSIONS 48
  49. 49. CONCLUSIONSIn 2007 there is increase in current assets by 24% than 2006and there is increasein current liability by 17%, because of greater increase in current assets than in currentliabilities, the position of Working capital has improved.The % of Fixed Assets has come down in 2007 from 2006.As per current ratio firm is able to pay its current liability.Q u i c k r a t i o p r e s e n t s a b e t t e r t e s t o f s h o r t t e r m f i n a n c i a l position,which shows better working capital position of firm.Debt equity ratio and debt to total fund ratiop r e s e n t s protection to long term lenders and shows sufficient working capital in thefirm.G.P. and N.P. have increased from previous year.Cash flow statement indicates outflow of cash in comparison to past year.D u e t o b e t t e r l o n g t e r m a n d s h o r t t e r m f i n a n c i a l c o n d i t i o n firm‟s workingcapital position is better than that of previous year. 49
  51. 51. SUGGESTION AND RECOMMANDATIONThe management of Working Capital is equal important as the management of long- term financialinvestment. The goal of working capital management is to ensure that the firm is able to continue itsoperations and that it has sufficient cash flow to satisfy both maturing short term debt and upcomingoperational expenses.The various possible steps that Parag Milk industry takes to improve its Working Capitalmanagement are as follows- Availing more credit from its suppliers. Prompt collection it debtors. 51
  52. 52. LIMITATIONS 52
  53. 53. LIMITATIONSBased on financial statements these statements suffer from certain limitations.Affected by window dressing.Company provides only secondary data, so certain type of bias is in study.Unsuitable for forecasting 53
  54. 54. ACRONYMS 54
  55. 55. ACRONYMSBMC Bulk Milk CoolerBO Butter OilECA Essential Commodities ActEEC European Economic CommunityFAO Food And Agriculture OrganizationFAOSTAT Food and Agriculture Organization Corporate Statistical DatabaseGATT General Agreement on Tariffs and TradeGCMMF Gujrat Cooperative Milk Marketing Federation LimitedGDP Gross Domestic ProductGOI Government of IndiaGOUP Government of Uttar PradeshICA International Cooperative AllianceIGA Income Generating ActivityIRMA Institute of Rural ManagementLLPD Lac Litre Per DayMC Milk CommissionerMCO Milk Commissioner OfficeNABARD National Bank of Agricultrue and Rural DevelopmentNCDFI National Cooperative Dairy Federation of IndiaNDDB National Dairy Development BoardNPC Nominal Protection CoefficientsNSSO National Sample Survey OrganizationOF Operation FloodPCDF Pradeshik Cooperative Dairy Federation 55
  56. 56. SHG Self Help GroupSMP Skimmed Milk PowderUP Uttar PradeshUPDASP Uttar Pradesh Deivesified Agriculture support ProjectUS United StatesVMPCS Village Milk Prinmary Cooperative Socities Glossary 56
  57. 57. GlossaryAccounting period -- the period of time over which profits are calculated. Normalaccounting periods are months, quarters, and years (fiscal or calendar).Accounts payable -- amounts owed by the company for the goods or services it haspurchased from outside suppliers.Accounts receivable -- amounts owed to the company by its customers.Accrual basis, system, or method -- an accounting system that records revenues andexpenses at the time the transaction occurs, not at the time cash changes hands. Ifyou buy a coat and charge it, the store records or accrues the sale when you walk outwith the coat, not when you pay your bill. Cash basis accounting is used byindividuals. Accrual basis accounting is used by most businesses.Accrued expenses, accruals -- An expense which has been incurred but not yetpaid for. Salaries are a good example. Employees earn or accrue salaries each hour 57
  58. 58. they work. The salaries continue to accrue until payday when the accrued expense ofthe salaries is eliminated.Aging -- a process where accounts receivable are sorted out by age (typicallycurrent, 30 to 60 days old, 60 to 120 days old, and so on.) Aging permits collectionefforts to focus on accounts that are long overdue.Amortize -- To charge a regular portion of an expenditure over a fixed period oftime. For example if something cost $100 and is to be amortized over ten years, thefinancial reports will show an expense of $10 per year for ten years. If the cost werenot amortized, the entire $100 would show up on the financial report as an expensein the year the expenditure was made. (See entries on Expenditure and Expense.)Appreciation -- An increase in value. If a machine cost $1,000 last year and is nowworth $1,200, it has appreciated in value by $200. (The opposite of depreciation.)Assets -- things of value owned by a business. An asset may be a physical propertysuch as a building, or an object such as a stock certificate, or it may be a right, suchas the right to use a patented process.Current Assets are those assets that can be expected to turn into cash within a year orless. Current assets include cash, marketable securities, accounts receivable, andinventory.Fixed Assets cannot be quickly turned into cash without interfering with businessoperations. Fixed assets include land, buildings, machinery, equipment, furniture,and long-term investments.Intangible Assets are items such as patents, copyrights, trademarks, licenses,franchises, and other kinds of rights or things of value to a company, which are notphysical objects. These assets may be the most important ones a company owns.Often they do not appear on financial reports.Audit -- a careful review of financial records to verify their accuracy.Bad debts -- amounts owed to a company that are not going to be paid. An accountreceivable becomes a bad debt when it is recognized that it wont be paid.Sometimes, bad debts are written off when recognized. This is an expense.Sometimes, a reserve is set up to provide for possible bad debts. Creating or addingto a reserve is also an expense.Balance sheet -- a statement of the financial position of a company at a singlespecific time (often at the close of business on the last day of the month, quarter, oryear.) The balance sheet normally lists all assets on the left side or top whileliabilities and capital are listed on the right side or bottom. The total of all numberson the left side or top must equal or balance the total of all numbers on the right side 58
  59. 59. or bottom. A balance sheet balances according to this equation: Assets = Liabilities +Capital.Bond -- a written record of a debt payable more than a year in the future. The bondshows amount of the debt, due date, and interest rate.Book value -- total assets minus total liabilities. (See also net worth.) Book valuealso means the value of an asset as recorded on the companys books or financialreports. Book value is often different than true value. It may be more or less.Breakeven point -- the amount of revenue from sales which exactly equals theamount of expense. Breakeven point is often expressed as the number of units thatmust be sold to produce revenues exactly equal to expenses. Sales above thebreakeven point produce a profit; below produces a loss.Capital -- money invested in a business by its owners. (See equity.) On the bottomor right side of a balance sheet. Capital also refers to buildings, machinery, and otherfixed assets in a business. A capital investment is an investment in a fixed asset witha long-term use.Capitalize -- to capitalize means to record an expenditure on the balance sheet as anasset, to be amortized over the future. The opposite is to expense. For example,research expenditures can be capitalized or expensed. If expensed, they are chargedagainst income when the expenditure occurs. If capitalized, the expenditure ischarged against income over a period of time usually related to the life of theproducts or services created by the research.Cash -- money available to spend now. Usually in a checking account.Cash flow -- the amount of actual cash generated by business operations, whichusually differs from profits shown.Chart of accounts -- a listing of all the accounts or categories into which businesstransactions will be classified and recorded. Each account usually has a number.Transactions are coded by this number for manipulation on computers.Contingent liabilities -- liabilities not recorded on a companys financial reports, butwhich might become due. If a company is being sued, it has a contingent liabilitythat will become a real liability if the company loses the suit.Cost of sales, cost of goods sold -- the expense or cost of all items sold during anaccounting period. Each unit sold has a cost of sales or cost of the goods sold. Inbusinesses with a great many items flowing through, the cost of sales or cost ofgoods sold is often computed by this formula: Cost of Sales = Beginning Inventory +Purchases During the Period - Ending Inventory. 59
  60. 60. Credit -- an accounting entry on the right or bottom of a balance sheet. Usually anincrease in liabilities or capital, or a reduction in assets. The opposite of credit isdebit. Each credit in a balance sheet has a balancing debit. Credit has other usages, asin "You have to pay cash, your credit is no good." Or "we will credit your accountwith the refund."Debit -- an accounting entry on the left or top of a balance sheet. Usually an increasein assets or a reduction in liabilities. Every debit has a balancing credit.Deferred charges -- see prepaid expenses.Deferred income -- a liability that arises when a company is paid in advance forgoods or services that will be provided later. For example, when a magazinesubscription is paid in advance, the magazine publisher is liable to providemagazines for the life of the subscription. The amount in deferred income is reducedas the magazines are delivered.Depreciation -- an expense that is supposed to reflect the loss in value of a fixedasset. For example, if a machine will completely wear out after ten years use, thecost of the machine is charged as an expense over the ten-year life rather than all atonce, when the machine is purchased. Straight line depreciation charges the sameamount to expense each year. Accelerated depreciation charges more to expense inearly years, less in later years. Depreciation is an accounting expense. In real life, thefixed asset may grow in value or it may become worthless long before thedepreciation period ends.Discounted cash flow -- A system for evaluating investment opportunities thatdiscounts or reduces the value of future cash flow. (See present value.)Dividend -- a portion of the after-tax profits paid out to the owners of a business as areturn on their investment.Double entry -- a system of accounting in which every transaction is recorded twice-- as a debit and as a credit.Earnings per share -- a companys net profit after taxes for an accounting period,divided by the average number of shares of stock outstanding during the period.80 - 20 rule -- a general rule of thumb in business that says that 20% of the itemsproduce 80% of the action -- 20% of the product line produces 80% of the sales, 20percent of the customers generate 80% of the complaints, and so on. In evaluatingany business situation, look for the small group which produces the major portion ofthe transactions you are concerned with. This rule is not exactly accurate, but itreflects a general truth, nothing is evenly distributed.Equity – the owners share of a business. 60
  61. 61. Expenditure -- an expenditure occurs when something is acquired for a business --an asset is purchased, salaries are paid, and so on. An expenditure affects the balancesheet when it occurs. However, an expenditure will not necessarily show up on theincome statement or affect profits at the time the expenditure is made. Allexpenditures eventually show up as expenses, which do affect the income statementand profits. While most expenditures involve the exchange of cash for something,expenses need not involve cash. (See expense below.)Expense -- an expenditure which is chargeable against revenue during an accountingperiod. An expense results in the reduction of an asset. All expenditures are notexpenses. For example, a company buys a truck. It trades one asset - cash - to acquireanother asset. An expenditure has occurred but no expense is recorded. Only as thetruck is depreciated will an expense be recorded. The concept of expense as differentfrom an expenditure is one reason financial reports do not show numbers thatrepresent spendable cash. The distinction between an expenditure and an expense isimportant in understanding how accounting works and what financial reports mean.(To expense is a verb. It means to charge an expenditure against income when theexpenditure occurs. The opposite is to capitalize.)Fiscal year -- an accounting year than begins on a date other than January 1.Fixed asset -- see asset.Fixed cost -- a cost that does not change as sales volume changes (in the short run.)Fixed costs normally include such items as rent, depreciation, interest, and anysalaries unaffected by ups and downs in sales.Goodwill -- in accounting, the difference between what a company pays when itbuys the assets of another company and the book value of those assets. Sometimes,real goodwill is involved - a companys good reputation, the loyalty of its customers,and so on. Sometimes, goodwill is an overpayment.Income -- see profit.Interest -- a charge made for the use of money.Inventory -- the supply or stock of goods and products that a company has for sale.A manufacturer may have three kinds of inventory: raw materials waiting to beconverted into goods, work in process, and finished goods ready for sale.Inventory obsolescence -- inventory no longer salable. Perhaps there is too much onhand, perhaps it is out of fashion. The true value of the inventory is seldom exactlywhat is shown on the balance sheet. Often, there is unrecognized obsolescence.Inventory shrinkage -- a reduction in the amount of inventory that is not easilyexplainable. The most common cause of shrinkage is probably theft. 61
  62. 62. Inventory turnover -- a ratio that indicates the amount of inventory a company usesto support a given level of sales. The formula is: Inventory Turnover = Cost of SalesAverage Inventory. Different businesses have different general turnover levels. Theratio is significant in comparison with the ratio for previous periods or the ratio forsimilar businesses.Invested capital -- the total of a companys long-term debt and equity.Journal -- a chronological record of business transactions.Ledger -- a record of business transactions kept by type or account. Journal entriesare usually transferred to ledgers.Liabilities -- amounts owed by a company to others. Current liabilities are thoseamounts due within one year or less and usually include accounts payable, accruals,loans due to be paid within a year, taxes due within a year, and so on. Long-termliabilities normally include the amounts of mortgages, bonds, and long-term loansthat are due more than a year in the future.Liquid -- having lots of cash or assets easily converted to cash.Marginal cost, marginal revenue -- marginal cost is the additional cost incurred byadding one more item. Marginal revenue is the revenue from selling one more item.Economic theory says that maximum profit comes at a point where marginal revenueexactly equals marginal cost.Net worth -- total assets minus total liabilities. Net worth is seldom the true value ofa company.Opportunity cost -- a useful concept in evaluating alternate opportunities. If youchoose alternative A, you cannot choose B, C, or D. What is the cost or loss of profitof not choosing B, C, or D? This cost or loss of profit is the opportunity cost ofalternative A. In personal life you may buy a car instead of taking a Europeanvacation. The opportunity cost of buying the car is the loss of the enjoyment of thevacation.Overhead -- a cost that does not vary with the level of production or sales, andusually a cost not directly involved with production or sales. The chief executivessalary and rent are typically overhead.Post -- to enter a business transaction into a journal or ledger or other financialrecord.Prepaid expenses, deferred charges -- assets already paid for, that are being usedup or will expire. Insurance paid for in advance is a common example. The insurance 62