This document provides an overview of Parag Dairy in Lucknow, India. It discusses how Parag Dairy was established in 1938 as the first cooperative dairy in India. It procures milk from over 32,000 milk producers through 658 cooperative societies. Parag Dairy aims to provide reasonable milk prices to farmers while supplying high quality milk and milk products to urban consumers. It has various programs to support milk producers such as breed improvement, veterinary services, and women's dairy cooperatives.

1. ANALYSIS OF WORKING
CAPITAL OF PARAG MILK INDUSTRY
SUBMITTED BY
AVINASH KUMAR
MBA (2010 – 2012)
PROJECT REPORT SUBMITTED TO SCHOOL OF MANAGEMENT
IN PARTIAL FULFILMENT OF MBA PROGRAMME
GAUTAM BUDDHA UNIVERSITY
GREATER NOIDA
1

2. Dated: 29 July, 2011
TO WHOM IT MAY CONCERN
This is to certify that Mr. AVINASH KUMAR, a student of MBA 2nd sem, Gautam Buddha
University, Greater Noida, undergone as a summer trainee in Finance Division of this
organization 21/05/2011 to 05/07/2011, project on “Analysis of working capital of parag
milk industry”, at Lucknow Producer‟s Co- Operative Milk Union Ltd, Lucknow.
Mr. AVINASH KUMAR has successfully completed the project under my guidance. He is a
sincere and hard working student with pleasant manners.
I wish all success in his future endeavors.
(A.K PANDEY)
Manager (Adm./Per.)
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3. ACKNOWLEDGEMENT
I express my sincere gratitude to my industry guide Mr. Tapesh Yadav, Finance Manager, PARAG
MILK INDUSTRY LIMITED, Lucknow for his able guidance, continuous support and cooperation
throughout 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 the
constant 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 guidance
and invaluable encouragement.
AVINASH
KUMAR
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4. TABLE OF CONTENTS
Acknowledgement
Preface
INTRODUCTION
WORKING CAPITAL MANAGEMENT
WORKING CAPITAL NEED
DEFINITIONS
IMPACT OF WORKING CAPITAL MANAGEMENT ON PROFITTABILIT
PERMAMENT AND TEMPORARY WORKING CAPITAL
FANANCING WORKING CAPITAL
PART-I INDUSTRIAL PROFILE
PARAG DAIRY MARCH TOWARD EXCELLENCE
PART-2
INTRODUCTION OF PROJECT WORKING CAPITAL
FACTORRS DETERMING THE CAPITAL REQUIREMENTS
MANAGEMENT OF WORKING CAPITAL OF PARAG MILK INDUSTRY
ANALYSIS OF WORKING CAPITAL OF PARAG
RATIO ANALYSIS
LIQUIDITY RATIO
CURRENT RATIO
QUICK RATIO
AVERAGE COLLECTION PERIOD
ANALYSIS OF FINANCIAL STATEMEN
CONCLUSION
RECOMMENDATION
REFERENCES
GLOSSARY
4

5. PREFACE
Master in business Administration is a two year full time programme .Pursuing in Gautama Buddha
University Greater Noida.
The study and report is based on finance and comparative data among other organization. It present
some 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 thought
and idea should pour into and research and development to innovate the existing, which should be
beyond competitiors comprehension.
This study enable the user with answer to formulate an effective financial strategy with a broader
prospective to tap areas where it did not feel the earlier ,hence the decision of whether to penetrate
this 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 to
time product to product.
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6. INTRODUCTION
OBJECTIVE
The following objectives would be met by to understand the financial analysis of Parag milk
industry
Analysis of working capital of Parag milk industry‟.
What is need of working capital?
When, where and how working capital need fulfill.
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7. Working Capital Management
A managerial accounting strategy focusing on maintaining efficient levels of both components of
working capital, current assets and current liabilities, in respect to each other. Working capital
management ensures a company has sufficient cash flow in order to meet its short-term debt
obligations 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 of
focus such as inventory management, cash management, accounts receivable and payable
management.
Working Capital Needs
Your working capital is used to pay short-term obligations such as your accounts payable and buying
inventory. If your working capital dips too low, you risk running out of cash. Even very profitable
businesses can run into trouble if they lose the ability to meet their short-term obligations. The
calculator 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.
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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 profitability
The Working capital management is to manage the firm‟s current accounts to achieve a required
balance among profitability and risk. Working capital management is important factor it is a
management of current assets and current liabilities. It is directly affects the profitability of the
firm. 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 and
to analyze the variation in working capital needs and its impact on profitability.
Working capital management is important due to many reasons, current assets normally
accounts for half of the total assets. Excessive level of current assets results in a valuable return
on investment, however firm have shortages of current assets may face difficulties in
maintaining smooth operations. Critical importance of net working capital is proportion of total
financing requirement. Higher working capital results higher profitability.
The main objective of every firm is maximizing profit but companies prevent them from
liquidity 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 working
capital may affect the profitability. Working capital management of the firm affects the
profitability by different variables like average collection period, average payment period and
cash conversion cycle. Working capital and profitability of the firm have opposite relation with
each other.
The profitability of the firm can be enhance by adopted following ways first is increase the
opportunity cost of the float. Second is transaction cost of moving cash should be increase
within and between countries. The profitability of the firm and its value is also effect through
the working capital management because profitability and risk of the firm become low due to
the 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 is
ignored area. The management creates value for the shareholders by increasing inventory level,
account receivable. The firms are capable to attaining competitive advantage by using affective
and efficient utilization of resources.
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9. Working capital is the lifeblood of every firm. If it is managing efficiently it is beneficial for
firm because it has a direct impact on firm‟s profitability but inefficient working. Capital
management negatively impacts the firm‟s profitability. This article provides essential, additional and
different evidence on WCM and its impact on profitability.
Permanent & Temporary Working Capital
There 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 production
process through operating cycle.
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10. Financing Working Capital
The financing of working capital is of utmost important. What portion of current assets should
be 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.
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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 Approach
Liquidity Moderate More Less
Profitability Moderate Less More
Risk Moderate Less More
The risk preferences of the management shall decide the approach to be adopted. The risk-neutral
will adopt the hedging approach, the risk averse the conservative approach and the risk seekers will
adopt the aggressive approach.
Debt Vs Equity
Debt financing involves both short-term debt and long-term debt and equity financing involves
only long-term financing. The financing mix of the working capital depends upon the risk
preferences of the management. Cost of different type of funds, the long-term and short-term, the
return 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. But
the risk involved in debt-financing is also high as the company is liable to pay the fixed interest
periodically. Whereas in equity financing, the risk is comparatively lower than debt financing
because there is no fixed obligation on the part of the company to pay periodically their dividends. If
the company has sufficient profits, they can decide to pay dividends. They may even decide to retain
their earnings to finance future requirements. But the cost of financing through equity would be
higher as they are not allowed as an expense for tax purposes.
Companies adopting hedging approach would optimally use long-term funds to finance fixed
portion of current assets requirement. In manufacturing companies there may be requirement to
always maintain some amount of inventory in raw materials or finished goods to ensure smooth
production and business. This fixed portion of current assets may be financed through either debt or
equity after evaluating the costs of both types of financing. Whereas, other temporary current assets
may 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 of
their current assets through short-term funds or may take risk by financing through accounts or notes
payables. Companies adopting conservative approach will take less risk and finance even their
temporary portion of current assets through long-term sources of finance and especially equity to
lesser the risk. Thus, we can say that the risk preference of the company management decides the
financing mix of working capital.
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12. PART-I
12

13. INDUSTRIAL PROFILE
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14. Parag Dairy – March Towards Excellence
Lucknow is the capital city of Uttar Pradesh. Total area of district is 2528 square km. 91588 hectare
is cultivated land. Wheat and rice is the main agriculture production of district. 69% of farmers are
small and medium level farmers who have about 1 acre land each. Lucknow Producer‟s Cooperative
Milk Union Ltd. (Parag Dairy Lucknow) was established in 1938. Lucknow Milk Union is the first
Co-operative Diary established in India. Very few people know the fact that the process developed
by Lucknow Milk Union was later used in spirit in Gujrat co-operative milk movement and is now
famous as “Anand Pattern”. Lucknow Milk Union was then chosen as one of the model dairy to
implement 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 defending
then from exploitation of milk vendors and earn supplementary income apart from agriculture. On
the other hand the Milk Union supplies high quality pure Milk & Milk Products at reasonable prices
to urban consumers under the brand name “PARAG”. Presently milk union is procuring milk from
658 functional societies and 32125 milk producer members are getting reasonable price of their milk
production.
The Milk Union has been running “Clean Milk and Breed Conservation Programs” under
UPDASP where milk producers have been educated in producing and supplying milk under clean
and hygienic conditions and provided the producers with semen of pure Indian breed for the
improvement of the present breed of animals. Emergency veterinary treatment service is also
provided by milk union to milk producers/farmers on cost basis. Farmers are purchasing milking
animals Under Mini Dairy Project. Lucknow Milk Union has established women dairy societies in
rural area for assuring the women participation in milk production.
Lucknow Milk Union is establishing Auto Milk Collection Units (AMCU) in societies for
giving transparent payment system for milk given by farmers by the establishment of these machines
farmers are getting full price and actual detail of FAT & SNF of their milk. Presently AMCU are
running successfully in 259 societies. 27 BULK MILK COOLERS are established in various rural
areas of Lucknow for keeping high quality of milk procured in those areas by milk societies
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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 the
Technical Input Program Under district plan in year- 07-08 and year-08-09. Presently, under
Artificial 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 milk
producers of 125 villages at their home by these A.I. centers.
Lucknow Milk Union is providing emergency Veterinary treatment service at the home of
milk producers on their call/information by competent Veterinary doctors. This facility is provided
by the organization under pilot project from so many years.
Lucknow Milk Union has set up of teams for “Quality Check and Health Awareness
Program” for the urban consumers of milk. The teams visit different localities in city, tests their milk
and provides on the spot results to the consumers. The Milk Union also organizes school children‟s
visit to its dairy plant to create awareness on milk processing and other related systems amongst
them. 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 in
pouches, 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 have
already been introduced in various areas of the city. 87 All Time Milk Booths (ATM) are established
for 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 products
through 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 sincere
efforts and he growing confidence of the consumers in PARAG Milk Products.
The organization has a chain of around 2000 agents providing employment to the
unemployed youths. “Door to Door Milk Delivery System” through mini insulated tanker thru
commission agents with attractive commission rates has been started in the city. The requirement for
this 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
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16. Union such as Chhena kheer, Besan Laddoo and Arogya Vardhak Chhachh (Butter Milk), Gulab
Jamun, Rasgulla ,Vaccum packed Paneer have begun tickling the taste buds of the consumers giving
them great pleasure and value for money.
The steady sales progress of the Milk Union is reflected from the fact that from an average
sale of 94,460 lit. of liquid milk per day in the year 2002-03 the sale grew to 1,30,333 lit, per day in
the year 2009-10 and during the year i.e. 2010-11 the sale stands at 124016 lit. per day till 30TH
June-10.The sales turnover of the Milk Union has grown from Rs. 64.07 Crores in the year 2002-03
to Rs. 146.52 Crores in the year 2008-09. The net profit the Milk Union has grown from Rs. 0.84
Crores 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 region
linked to Nepal such as district of Lakhimpur, Behraich, Gonda, Basti, Balrampur, Gorakhpur
including Sitapur, Hardoi, Barabanki, Sultanpur, Raibareli, Faizabad, Shahjahanpur near by districts
of Lucknow obtained under the SMG scheme and after processing this milk, milk and milk related
products, it is being sold in Lucknow, Raibareli, Sultanpur, Barabanki and Sitapur at reasonable
rates to the consumers.
Providing the reasonable rates to the farmers of the above mentioned districts and providing
the consumers the milk and milk related products according to their needs, Lucknow Milk Union is
using 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 present
capacity of plant so a new dairy plant at Chak Gajariya Farm situated at Sultanpur road of
5.00 lakh liter capacities per day is proposed, Including a 30 ton capacity powder plant and
machinery for value added milk products production is also proposed.
The march of Lucknow Milk Union (PARAG DAIRY) towards success and excellence
continues.
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17. Background
The study looks at performance of Pradeshik dairy cooperative federation(PCDF), an apex body of
dairy cooperative societies in largest state of India where approach to gain benefits from mutual
cooperation of villagers could not work while it worked successfully in different part of the country
and brought about revolutionary changes in the life of rural poor. The research paper aims to focus
on function of mutual cooperation approach for developmental initiatives that integrate masses in an
organizational support system. The study has thrust on role of cooperative dairy federation of Uttar
Pradesh (UP) and its contribution in value addition and growth of rural economy. Analysis of
challenges of the sector in my research is embedded in untapped opportunities in dairy sector by
federation of cooperatives in UP. Cooperative movement is considered a milestone in Indian
planning process for increasing people‟s participation in planning and economic well being of larger
segment of the society. In western Indian province of Gujarat, a dairy co-operative movement was
instrumental in checking malpractices adopted by vendors and agents of private dairies. They
exploited farmers during surplus milk production by deciding prices arbitrarily to maximize profit
and compelling farmers to sale their products at minimum cost. The cooperative movement in the
area of dairy development also became instrument of change in import reduction of dairy products
underpinning 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 was
launched in July 1970 to create a flood of milk by helping producers at village level based on Anand
pattern (Singh, K.,et al., 1984) OF appeared as one of the most promising events in the field of rural
development. (UN/FAO, 1981) The program expanded production, processing, marketing and
professional management capabilities in village and metropolitan centres. OF was positioned in a
social 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 were
economically and socially backward in Indian social system of caste based hierarchies. As a result of
these efforts, India surpassed United States to become largest producer of milk in the world with
production volume of 84 million tons in 2001 but annual milk yield per dairy animal was one tenth of
the yield in US and one fifth of the yield of a New Zealand dairy cow. (Planning Commission of
India, 2002; 5)OF along with Anand pattern based on three tier cooperative system in diversified
conditions has significance in context of UP with reference to organisational efforts by PCDF in
replication of the later. PCDF created on April 23, 1962 is an apex cooperative society of the
cooperative milk unions.
Dairy apart from economic activity symbolizes integration of rich and poor in socio political arenas
including electoral politics as a result of moral and religious sanctity accorded to it. It was asserted
by policy makers that promotion of dairy tackled three obstacles of caste, class and power which
frustrated earlier programs of rural development. (Attwood, D.W., et al., 1988; 346) Rural poverty
alleviation programs experienced hurdles of local politics and social exclusion of down trodden
people resulting in poor outcomes. UP apart from being India‟s most populated province happens to
be 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 and
PCDF became one of the instrument to achieve this goal. Planners realized importance of other
spheres for rural development where dairy provided an unconventional method for engaging people.
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18. According to the National Sample Survey Organization (NSSO), in 2004-2005 livestock sector
created regular employment to about 11.44 million persons in principal status and 11.01 million in
subsidiary status, which constitute about 5.50% of the total work force. Out of the 22.44 million in
animal husbandry occupation, 16.84 millions are females. Any progress here would automatically
enhance balanced development of rural economy. Amenities to farmers, better veterinary services
and creation of new dairy processing plants offered prospectus to capture potential markets for milk
distribution and catered to demands of urban masses. Consumption of dairy products becomes
especially relevant for large vegetarian segment of Indian population as an alternative source of
animal protein. (Karmarkar, K.G. et al., 2006). Product demands of vegetarians needed new
interventions offered in the form of increased milk production. Dairy sector gained significance after
successful implementation of Anand model of cooperatives in Gujarat that offered realistic approach
to realize traditional forms of mutual support in modern mechanisms. A comparative achievement of
major milk producing states in the country as evident from figure1 raises questions about more
efficient 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, the
milk 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 to
Punjab where it was 962 gms/day in 2007-2008. Comparison of per capita consumption of milk show
that despite being largest milk producing area it performs poorly in terms of quantity of milk supply
to its citizens. Milk consumed on farm is two third of total production and rest of it go to informal
channel of markets run by private traders. Economy of India is still based on agriculture and
expansion and management of other related occupations are necessary to present better future
perspectives for rural poor. Increase in rural household income translates in to better chance of
respectful life and bridges gaps of inequality. Even after receiving a substantial amount of loans and
18

19. grants during OF, marketing still remains domain of small traders who maximize profit with corrupt
practices. Small producers after retaining milk for self-consumption sell the product to middlemen
for below market price due to liabilities such as repayment of loans for purchase of animals and for
performing social obligations. The buyer sells to direct consumers and in market for processing and
conversion to bye-products to informal and formal market agencies. Exploitation of farmers occurs
due to lack of marketing facilities for perishable item like milk and compels rural households to sell
their product to middleman on lesser prices in the absence of robust marketing infrastructure.
Relational Overview of Dairy and Organisational Structures
Organizational dimensions, socio-economic and political aspects of a successful plan have theoretical
conceptualizations determining working environment which affect achievements. Organization can
survive with poor performance and dismal outcomes. Continuance of any organizational goal despite
its inability to provide returns can be examined through contextual comparison of similar
organizations. Cooperatives in India were expected to work as an instrument of rural development
because of the assumption of elite idea that rural life embedded in cooperative solidarity and
provisions 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 with
dissimilar outcomes. In the district dairy, milk union‟s administrative complexity exists due to dual
structures. Apart from district unions the offices of district dairy development officer (DDOs) coexist
in different life words. Replication of any successful model without considering local circumstances
as a precondition for positive outcomes can have reverse effect. Entrepreneurship activities of
Gujarat presents different outcomes in UP since commitment of local people to realize
transformation 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 dairy
development in the country (Mascaenhas, 1988) Patterns for distribution of aid, grants and fund
mobilization need further investigations to understand rationale of replication of a model in different
or 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. PART-2
20

21. INTRODUCTION OF PROJECT
Project is related to conduct financial analysis performance of Parag milk industry and analysis of
working capital of parag industry. I
WORKING CAPITAL
Working Capital Meaning: - Capital required for a business can be classified under two main
categories 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 of
fixed assets such as p&m, land, building, furniture, etc. Investments in these assets represent that part
of firm‟s capital which is blocked on permanent or fixed basis and is called fixed capital. Funds are
also needed for short-term purposes for the purchase of raw material, payment of wages and other
day – to- day expenses etc.
These funds are known as working capital. In simple words, working capital refers to that part
of 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 revolving
fast and are being constantly converted in to cash and this cash flows out again in exchange for other
current 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 main
categories via,
1) Fixed Capital
2) Working Capital
21

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 of
fixed assets such as p&m, land, building, furniture, etc. Investments in these assets represent that part
of firm‟s capital which is blocked on permanent or fixed basis and is called fixed capital. Funds are
also needed for short-term purposes for the purchase of raw material, payment of wages and other
day – to- day expenses etc.
These funds are known as working capital. In simple words, working capital refers to that part
of 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 revolving
fast and are being constantly converted in to cash and this cash flows out again in exchange for other
current 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. 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 transactions
DISADVANTAGES OF INADEQUATE WORKING CAPITAL
Every business needs some amounts of working capital. The need for working capital arises due to
the time gap between production and realization of cash from sales. There is an operating cycle
involved in sales and realization of cash. There are time gaps in purchase of raw material and
production; 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. 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 under
varying circumstances such as a new concern requires a lot of funds to meet its initial
requirements such as promotion and formation etc. These expenses are called preliminary
expenses and are capitalized. The amount needed for working capital depends upon the size of
the company and ambitions of its promoters. Greater the size of the business unit, generally larger
will be the requirements of the working capital.
The requirement of the working capital goes on increasing with the growth and expensing of the
business till it gains maturity. At maturity the amount of working capital required is called
normal working capital.
There are others factors also influence the need of working capital in a business.
FACTORS DETERMINING THE WORKING CAPITAL
REQUIREMENTS
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. 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.
DEBTORS
CASH FINISHED GOODS
RAW 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. 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 CAPITAL
Management of working capital is concerned with the problem that arises in attempting to
manage the current assets, current liabilities. The basic goal of working capital management
is to manage the current assets and current liabilities of a firm in such a way that a
26

27. satisfactory level of working capital is maintained, i.e. it is neither adequate nor excessive as
both the situations are bad for any firm. There should be no shortage of funds and also no
working capital should be ideal. WORKING CAPITAL MANAGEMENT POLICES of a
firm has a great on its probability, liquidity and structural health of the organization. So
working capital management is three dimensional in nature as
1. 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. WORKING CAPITAL OF PARAG MILK INDUSTRY
Parag 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 is
increasesed.
In winter season milk production rate is high (November, December,January, February) .The
demand of milk and all milk product is less in the market. The firm in this season have lots of milk
but demand of milk in market is less so then in this season Parag Milk industry‟s liquid milk is
converted into the Powder milk and Butter.
Firm make stocks of powder milk and butter and maintain own suppliers (raw materials) and timely
pays money to own suppliers. Parag Milk Industry finishes the transaction to own suppliers in 10
days 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 this
condition firm maintains its own suppliers .The winter seasons suppliers provides large amount of
milk (raw material) to industry. In this seasons fund is very less in the Parag industry. They take
loans from banks and other financial institution forthe powder milk and butter stocks . They submit
security 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 milk
product demand is very high in the market and requirement of milk in the market day by day
increases ,milk is limited. In this period Parag industry converts powder milk and butter in to the
liquid milk and fulfill market demand. In summer season Parag industry cash transaction is about 45
to 60 lakhs per day. Sale in summer season increases in comparison to other seasons. In winter
season Parag industry cash transaction is about 35 to 50 lakhs per day. Parag industry takes loans in
winter and pays it of in summers
This process of maintaining cash is known as process of maintaining industrial working capital.
28

29. ANALYSIS OF WORKIG CAPITAL OF PARAG AND RATIO
WORKING CAPITAL ANALYSIS
As we know working capital is the life blood and the centre of a business. Adequate amount of
working capital is very much essential for the smooth running of the business. And the most
important part is the efficient management of working capital in right time. The liquidity position of
the firm is totally effected by the management of working capital. So, a study of changes in the uses
and sources of working capital is necessary to evaluate the efficiency with which the working capital
is 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. 5. Receivables turnover.
6. Payable turnover ratio.
7. Working capital turnover ratio.
8. Working capital leverage
9. Ratio of current liabilities to tangible net worth.
2. FUND FLOW ANALYSIS
Fund flow analysis is a technical device designated to the study the source from which
additional funds were derived and the use to which these sources were put. The fund flow
analysis 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 BUDGET
A budget is a financial and / or quantitative expression of business plans and polices to be
pursued in the future period time. Working capital budget as a part of the total budge ting
process of a business is prepared estimating future long term and short term working capital
needs and sources to finance them, and then comparing the budgeted figures with actual
performance for calculating the variances, if any, so that corrective actions may be taken in
future. 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. working capital budget involves the preparing of separate budget for each element of working
capital, 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. 2. QUICK RATIO
3. ABSOLUTE LIQUID RATIO
1. CURRENT RATIO
Current Ratio, also known as working capital ratio is a measure of general liquidity and its
most 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 LIABILITES
The two components of this ratio are:
1) CURRENT ASSETS
2) CURRENT LIABILITES
Current assets include cash, marketable securities, bill receivables, sundry debtors,
inventories and work-in-progresses. Current liabilities include outstanding expenses, bill
payable, dividend payable etc.
A relatively high current ratio is an indication that the firm is liquid and has the ability to
pay its current obligations in time. On the hand a low current ratio represents that the
liquidity position of the firm is not good and the firm shall not be able to pay its current
liabilities in time. A ratio equal or near to the rule of thumb of 2:1 i.e. current assets double
the current liabilities is considered to be satisfactory.
32

33. CALCULATION OF CURRENT RATIO
(Rupees in crore)
e.g.
Year 2006 2007 2008
Current Assets 81.29 83.12 13,6.57
Current Liabilities 27.42 20.58 33.48
Current 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. 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 2010
Quick Assets 44.14 47.43 61.55
Current Liabilities 27.42 20.58 33.48
Quick 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. 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 2010
Absolute Liquid Assets 4.69 1.79 5.06
Current Liabilities 27.42 20.58 33.48
Absolute 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. 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 Ratio
The current ratio and quick ratio give misleading results if current assets include high amount
of debtors due to slow credit collections and moreover if the assets include high amount of
slow moving inventories. As both the ratios ignore the movement of current assets, it is
important 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. 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 2010
Cost of Goods sold 110.6 103.2 96.8
Average Stock 73.59 36.42 55.35
Inventory 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 2010
Days 365 365 365
Inventory Turnover Ratio 1.5 2.8 1.8
Inventory Conversion Period 243 days 130 days 202 days
37

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 Period
DEBTORS 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. e.g.
Year 2005 2009 2010
Sales 166.0 151.5 169.5
Average Debtors 17.33 18.19 22.50
Debtor 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 Ratio
Year 2005 2009 20010
Days 365 365 365
Debtor Turnover Ratio 9.6 8.3 7.5
Average Collection Period 38 days 44 days 49 days
39

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 2010
Sales 166.0 151.5 169.5
Networking Capital 53.87 62.52 103.09
40

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 2007-2008
Inventories 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 2007-2008
Cash 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. 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. 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 2009-2010
Net 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. RESEARCH METHODOLOGY
The methodology, I have adopted for my study is the various tools, which basically analyze critically
financial 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 ANALYSIS
The above parameters are used for critical analysis of financial position. With the evaluation of each
component, the financial position from different angles is tried to be presented in well and systematic
manner. By critical analysis with the help of different tools, it becomes clear how the financial
manager handles the finance matters in profitable manner in the critical challenging atmosphere, the
recommendation are made which would suggest the organization in formulation of a healthy and
strong position financially with proper management system.
I sincerely hope, through the evaluation of various percentage, ratios and comparative analysis, the
organization would be able to conquer its in efficiencies and makes the desired changes.
ANALYSIS OF FINANCIAL STATEMENTS
FINANCIAL STATEMENTS:
Financial statement is a collection of data organized according to logical and consistent accounting
procedure to convey an under-standing of some financial aspects of a business firm. It may show
44

45. position at a moment in time, as in the case of balance sheet or may reveal a series of activities over a
given 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) states
The following objectives of financial statements: -
1. To provide reliable financial information about economic resources and obligation of a business
firm.
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) missing
out 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 final
picture a final picture of a concern. The utility of these statements is dependent upon a number of
factors. The analysis and interpretation of these statements must be done carefully otherwise
misleading 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 statements
is 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 view
to determine profits etc. The allocation of expenses and income depends upon the personal judgment
of the accountant. The existence of contingent assets and liabilities also make the statements
imprecise. So financial statement are at the most interim reports rather than the final picture of the
firm.
3. The financial statements are expressed in monetary value, so they appear to give final and accurate
position. The value of fixed assets in the balance sheet neither represent the value for which fixed
assets can be sold nor the amount which will be required to replace these assets. The balance sheet is
45

46. prepared on the presumption of a going concern. The concern is expected to continue in future. So
fixed assets are shown at cost less accumulated deprecation. Moreover, there are certain assets in the
balance sheet which will realize nothing at the time of liquidation but they are shown in the balance
sheets.
4. The financial statements are prepared on the basis of historical costs Or original costs. The value
of assets decreases with the passage of time current price changes are not taken into account. The
statement are not prepared with the keeping in view the economic conditions. the balance sheet loses
the significance of being an index of current economics realities. Similarly, the profitability shown
by 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 the
business but they do not become a part of these statements because they cannot be measured in
monetary terms. The basic limitation of the traditional financial statements comprising the balance
sheet, profit & loss A/c is that they do not give all the information regarding the financial operation
of the firm. Nevertheless, they provide some extremely useful information to the extent the balance
sheet mirrors the financial position on a particular data in lines of the structure of assets, liabilities
etc. and the profit & loss A/c shows the result of operation during a certain period in terms revenue
obtained and cost incurred during the year. Thus, the financial position and operation of the firm.
FINANCIAL STATEMENT ANALYSIS
It is the process of identifying the financial strength and weakness of a firm from the available
accounting data and financial statements.
46

47. CLASSIFICATION OF RATIOS
Ratios can be classified in to different categories depending upon the basis of classification
The traditional classification has been on the basis of the financial statement to which the
determination of ratios belongs.
These are:-
1. Profit & Loss account ratios
2. Balance Sheet ratios
3. Composite ratios
47

48. CONCLUSIONS
48

49. CONCLUSIONS
In 2007 there is increase in current assets by 24% than 2006and there is increase
in current liability by 17%, because of greater increase in current assets than in current
liabilities, 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 ratio
p r e s e n t s protection to long term lenders and shows sufficient working capital in the
firm.
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 working
capital position is better than that of previous year.
49

50. SUGGESTION
AND
RECOMMANDATION
50

51. SUGGESTION AND RECOMMANDATION
The management of Working Capital is equal important as the management of long- term financial
investment. The goal of working capital management is to ensure that the firm is able to continue its
operations and that it has sufficient cash flow to satisfy both maturing short term debt and upcoming
operational expenses.
The various possible steps that Parag Milk industry takes to improve its Working Capital
management are as follows-
Availing more credit from its suppliers.
Prompt collection it debtors.
51

52. LIMITATIONS
52

53. LIMITATIONS
Based 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. ACRONYMS
54

55. ACRONYMS
BMC Bulk Milk Cooler
BO Butter Oil
ECA Essential Commodities Act
EEC European Economic Community
FAO Food And Agriculture Organization
FAOSTAT Food and Agriculture Organization Corporate Statistical Database
GATT General Agreement on Tariffs and Trade
GCMMF Gujrat Cooperative Milk Marketing Federation Limited
GDP Gross Domestic Product
GOI Government of India
GOUP Government of Uttar Pradesh
ICA International Cooperative Alliance
IGA Income Generating Activity
IRMA Institute of Rural Management
LLPD Lac Litre Per Day
MC Milk Commissioner
MCO Milk Commissioner Office
NABARD National Bank of Agricultrue and Rural Development
NCDFI National Cooperative Dairy Federation of India
NDDB National Dairy Development Board
NPC Nominal Protection Coefficients
NSSO National Sample Survey Organization
OF Operation Flood
PCDF Pradeshik Cooperative Dairy Federation
55

56. SHG Self Help Group
SMP Skimmed Milk Powder
UP Uttar Pradesh
UPDASP Uttar Pradesh Deivesified Agriculture support Project
US United States
VMPCS Village Milk Prinmary Cooperative Socities
Glossary
56

57. Glossary
Accounting period -- the period of time over which profits are calculated. Normal
accounting periods are months, quarters, and years (fiscal or calendar).
Accounts payable -- amounts owed by the company for the goods or services it has
purchased from outside suppliers.
Accounts receivable -- amounts owed to the company by its customers.
Accrual basis, system, or method -- an accounting system that records revenues and
expenses at the time the transaction occurs, not at the time cash changes hands. If
you buy a coat and charge it, the store records or accrues the sale when you walk out
with the coat, not when you pay your bill. Cash basis accounting is used by
individuals. Accrual basis accounting is used by most businesses.
Accrued expenses, accruals -- An expense which has been incurred but not yet
paid for. Salaries are a good example. Employees earn or accrue salaries each hour
57

58. they work. The salaries continue to accrue until payday when the accrued expense of
the salaries is eliminated.
Aging -- a process where accounts receivable are sorted out by age (typically
current, 30 to 60 days old, 60 to 120 days old, and so on.) Aging permits collection
efforts to focus on accounts that are long overdue.
Amortize -- To charge a regular portion of an expenditure over a fixed period of
time. For example if something cost $100 and is to be amortized over ten years, the
financial reports will show an expense of $10 per year for ten years. If the cost were
not amortized, the entire $100 would show up on the financial report as an expense
in 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 now
worth $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 property
such as a building, or an object such as a stock certificate, or it may be a right, such
as the right to use a patented process.
Current Assets are those assets that can be expected to turn into cash within a year or
less. Current assets include cash, marketable securities, accounts receivable, and
inventory.
Fixed Assets cannot be quickly turned into cash without interfering with business
operations. 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 not
physical 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 account
receivable becomes a bad debt when it is recognized that it won't 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 adding
to a reserve is also an expense.
Balance sheet -- a statement of the financial position of a company at a single
specific time (often at the close of business on the last day of the month, quarter, or
year.) The balance sheet normally lists all assets on the left side or top while
liabilities and capital are listed on the right side or bottom. The total of all numbers
on the left side or top must equal or balance the total of all numbers on the right side
58

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 bond
shows amount of the debt, due date, and interest rate.
Book value -- total assets minus total liabilities. (See also net worth.) Book value
also means the value of an asset as recorded on the company's books or financial
reports. 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 the
amount of expense. Breakeven point is often expressed as the number of units that
must be sold to produce revenues exactly equal to expenses. Sales above the
breakeven point produce a profit; below produces a loss.
Capital -- money invested in a business by its owners. (See equity.) On the bottom
or right side of a balance sheet. Capital also refers to buildings, machinery, and other
fixed assets in a business. A capital investment is an investment in a fixed asset with
a long-term use.
Capitalize -- to capitalize means to record an expenditure on the balance sheet as an
asset, to be amortized over the future. The opposite is to expense. For example,
research expenditures can be capitalized or expensed. If expensed, they are charged
against income when the expenditure occurs. If capitalized, the expenditure is
charged against income over a period of time usually related to the life of the
products 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, which
usually differs from profits shown.
Chart of accounts -- a listing of all the accounts or categories into which business
transactions 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 company's financial reports, but
which might become due. If a company is being sued, it has a contingent liability
that 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 an
accounting period. Each unit sold has a cost of sales or cost of the goods sold. In
businesses with a great many items flowing through, the cost of sales or cost of
goods sold is often computed by this formula: Cost of Sales = Beginning Inventory +
Purchases During the Period - Ending Inventory.
59

60. Credit -- an accounting entry on the right or bottom of a balance sheet. Usually an
increase in liabilities or capital, or a reduction in assets. The opposite of credit is
debit. Each credit in a balance sheet has a balancing debit. Credit has other usages, as
in "You have to pay cash, your credit is no good." Or "we will credit your account
with the refund."
Debit -- an accounting entry on the left or top of a balance sheet. Usually an increase
in 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 for
goods or services that will be provided later. For example, when a magazine
subscription is paid in advance, the magazine publisher is liable to provide
magazines for the life of the subscription. The amount in deferred income is reduced
as the magazines are delivered.
Depreciation -- an expense that is supposed to reflect the loss in value of a fixed
asset. For example, if a machine will completely wear out after ten year's use, the
cost of the machine is charged as an expense over the ten-year life rather than all at
once, when the machine is purchased. Straight line depreciation charges the same
amount to expense each year. Accelerated depreciation charges more to expense in
early years, less in later years. Depreciation is an accounting expense. In real life, the
fixed asset may grow in value or it may become worthless long before the
depreciation period ends.
Discounted cash flow -- A system for evaluating investment opportunities that
discounts 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 a
return 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 company's 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 items
produce 80% of the action -- 20% of the product line produces 80% of the sales, 20
percent of the customers generate 80% of the complaints, and so on. In evaluating
any business situation, look for the small group which produces the major portion of
the transactions you are concerned with. This rule is not exactly accurate, but it
reflects a general truth, nothing is evenly distributed.
Equity – the owners' share of a business.
60

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 balance
sheet when it occurs. However, an expenditure will not necessarily show up on the
income statement or affect profits at the time the expenditure is made. All
expenditures eventually show up as expenses, which do affect the income statement
and 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 accounting
period. An expense results in the reduction of an asset. All expenditures are not
expenses. For example, a company buys a truck. It trades one asset - cash - to acquire
another asset. An expenditure has occurred but no expense is recorded. Only as the
truck is depreciated will an expense be recorded. The concept of expense as different
from an expenditure is one reason financial reports do not show numbers that
represent spendable cash. The distinction between an expenditure and an expense is
important in understanding how accounting works and what financial reports mean.
(To expense is a verb. It means to charge an expenditure against income when the
expenditure 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 any
salaries unaffected by ups and downs in sales.
Goodwill -- in accounting, the difference between what a company pays when it
buys the assets of another company and the book value of those assets. Sometimes,
real goodwill is involved - a company's 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 be
converted into goods, work in process, and finished goods ready for sale.
Inventory obsolescence -- inventory no longer salable. Perhaps there is too much on
hand, perhaps it is out of fashion. The true value of the inventory is seldom exactly
what is shown on the balance sheet. Often, there is unrecognized obsolescence.
Inventory shrinkage -- a reduction in the amount of inventory that is not easily
explainable. The most common cause of shrinkage is probably theft.
61

62. Inventory turnover -- a ratio that indicates the amount of inventory a company uses
to support a given level of sales. The formula is: Inventory Turnover = Cost of Sales
Average Inventory. Different businesses have different general turnover levels. The
ratio is significant in comparison with the ratio for previous periods or the ratio for
similar businesses.
Invested capital -- the total of a company's long-term debt and equity.
Journal -- a chronological record of business transactions.
Ledger -- a record of business transactions kept by type or account. Journal entries
are usually transferred to ledgers.
Liabilities -- amounts owed by a company to others. Current liabilities are those
amounts 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-term
liabilities normally include the amounts of mortgages, bonds, and long-term loans
that 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 by
adding 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 revenue
exactly equals marginal cost.
Net worth -- total assets minus total liabilities. Net worth is seldom the true value of
a company.
Opportunity cost -- a useful concept in evaluating alternate opportunities. If you
choose alternative A, you cannot choose B, C, or D. What is the cost or loss of profit
of not choosing B, C, or D? This cost or loss of profit is the opportunity cost of
alternative A. In personal life you may buy a car instead of taking a European
vacation. The opportunity cost of buying the car is the loss of the enjoyment of the
vacation.
Overhead -- a cost that does not vary with the level of production or sales, and
usually a cost not directly involved with production or sales. The chief executive's
salary and rent are typically overhead.
Post -- to enter a business transaction into a journal or ledger or other financial
record.
Prepaid expenses, deferred charges -- assets already paid for, that are being used
up or will expire. Insurance paid for in advance is a common example. The insurance
62

63. protection is an asset. It is paid for in advance, it lasts for a period of time, and
expires on a fixed date.
Present value -- a concept that compares the value of money available in the future
with the value of money in hand today. For example, $78.35 invested today in a 5%
savings account will grow to $100 in five years. Thus the present value of $100
received in five years is $78.35. The concept of present value is used to analyze
investment opportunities that have a future payoff.
Price-earnings (p/e) ratio -- the market price of a share of stock divided by the
earnings (profit) per share. P/e ratios can vary from sky high to dismally low, but
often do not reflect the true value of a company.
Profit -- the amount left over when expenses are subtracted revenues. Gross profit is
the profit left when cost of sales is subtracted from sales, before any operating
expenses are subtracted. Operating profit is the profit from the primary operations of
a business and is sales minus cost of sales minus operating expenses. Net profit
before taxes is operating profit minus non-operating expenses and plus non-operating
income. Net profit after taxes is the bottom line, after everything has been subtracted.
Also called income, net income, earnings. Not the same as cash flow and does not
represent spendable dollars.
Retained earnings -- profits not distributed to shareholders as dividends, the
accumulation of a company's profits less any dividends paid out. Retained earnings
are not spendable cash.
Return on investment (ROI) -- a measure of the effectiveness and efficiency with
which managers use the resources available to them, expressed as a percentage.
Return on equity is usually net profit after taxes divided by the shareholders' equity.
Return on invested capital is usually net profit after taxes plus interest paid on long-
term debt divided by the equity plus the long-term debt. Return on assets used is
usually the operating profit divided by the assets used to produce the profit.
Typically used to evaluate divisions or subsidiaries. ROI is very useful but can only
be used to compare consistent entities -- similar companies in the same industry or
the same company over a period of time. Different companies and different
industries have different ROIs.
Revenue -- the amounts received by or due a company for goods or services it
provides to customers. Receipts are cash revenues. Revenues can also be represented
by accounts receivable.
Risk -- the possibility of loss; inherent in all business activities. High risk requires
high return. All business decisions must consider the amount of risk involved.
63

64. Sales -- amounts received or due for goods or services sold to customers. Gross sales
are total sales before any returns or adjustments. Net sales are after accounting for
returns and adjustments.
Stock -- a certificate (or electronic or other record) that indicates ownership of a
portion of a corporation; a share of stock. Preferred stock promises its owner a
dividend that is usually fixed in amount or percent. Preferred shareholders get paid
first out of any profits. They have preference. Common stock has no preference and
no fixed rate of return. Treasury stock was originally issued to shareholders but has
been subsequently acquired by the corporation . Authorized by unissued stock is
stock which official corporate action has authorized but has not sold or issued.
(Stock also means the stock of goods, the stock on hand, the inventory of a
company.)
Sunk costs -- money already spent and gone, which will not be recovered no matter
what course of action is taken. Bad decisions are made when managers attempt to
recoup sunk costs.
Trial balance -- at the close of an accounting period, the transactions posted in the
ledger are added up. A test or trial balance sheet is prepared with assets on one side
and liabilities and capital on the other. The two sides should balance. If they don't,
the accountants must search through the transactions to find out why. They keep
making trial balances until the balance sheet balances.
Variable cost - A cost that changes as sales or production change. If a business is
producing nothing and selling nothing, the variable cost should be zero. However,
there will probably be fixed costs.
Working capital - Current assets minus current liabilities. In most businesses the
major components of working capital are cash, accounts receivable, and inventory
minus accounts payable. As a business grows it will have larger accounts receivable
and more inventory. Thus the need for working capital will increase.
Write-down -- the partial reduction in the value of an asset, recognizing
obsolescence or other losses in value.
Write-off -- the total reduction in the value of an asset, recognizing that it no longer
has any value. Write-downs and write-offs are non-cash expenses that affect profits.
64

65. REFERENCES
Fundamentals of financial management (JAMES C.VAN HORNE,JONH
M.WACHWICZ)
Financial accounting (R.NARAYANASWAMY)
www.fnbnews.com
www.google.com
www.Financialexpress.com
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