CHAPTER-I

INTRODUCTION

As we all know working capital Management is one of the important decision in financing. So it is very necessary to know the working capital & its cycle. Working Capital refers to the cash a business requires for the day to day operations or more specifically for financing the conversions of raw materials into finished goods! which the corporation sells for payment. "n other words #Working Capital$ is the money the business process consumes. %he longer the process takes! the more money is consumed. Working Capital is calculated by deducting current assets from current liabilities. Current Assets are resources! which are in cash or soon be converted into cash. Whereas Current liabilities are commitments! which will soon require cash settlement in the ordinary course of business. Working Capital can also be defined with an approach that encompasses all the processes surrounding accounts payable! accounts receivables and inventory and one begins to understand the potential knock on impacts of a change in working capital practice or policy. When looking in detail at any of these three core areas! it soon becomes clear that Working Capital Management touch all the firm buys! makes and sells. %he diagram below demonstrates how a #total$ approach to working capital covers all the corporation$s activities relating to the vendor! the customer and the products. &ayments & "nvestment s

Collection

&lanning & 'udgeting

&urchase

Sales

SIGNIFICANCE OF THE STUDY

2

Working capital is the life blood and nerve centre of a business. (ust as circulation of blood is essential in the human body for maintaining life! working capital is essential to maintain the smooth running of business. )o business can run successfully without an adequate amount of working capital. *n one hand! inadequacy of working capital pose a danger to the short term liquidity and solvency position of the business and on the other hand e+cess working capital leads to blockage of firm$s funds in current assets! which reduced the profitability of the organi,ation. %hus there is a need to maintain a trade off between the above aspects -i.e. liquidity! solvency and profitability aspects. so that the short term funds of the corporation can be utili,ed in most effective manner. /eeping the above in mind! the present study analy,ed the various aspects of working capital management of 0ood Corporation of "ndia and pin points on weak areas and suggests corrective action to manage the working capital effectively. %he study is useful for the different stakeholders in understanding the working capital position of the corporation. %he study would also help the future researcher for their research in the organi,ation.

CONCEPTUALISATION
3

%he need of working capital is to run the day to day business activities. %here is hardly any firm! which does not require any amount of working capital. 0irms may differ in their requirement of working capital but it is necessary for all firms to maintain the working capital. %he working capital is the lifeblood for any corporation! as a person cannot live without blood! as it is any firm cannot survive without working capital. Working capital is necessary for all type of companies$ whether it is a small corporation or large corporation. 1very corporation maintains the working capital to pay the short term e+penses as creditors! short term loans! daily wage other e+penses. "t is very important to run a business effectively. "t is a part of total investing capital. "t does not give any return opposite of long term investment -fi+ed capital.. 'ut it is helpful in earning profit from the long term capital.

Meaning of working ca i!a"# Working capital is also known as the short term investment of capital. Working capital is that capital which is capture in the business as in the form of cash or cash equivalents to run the rut ion activities of business. Mainly it is known as the difference between the current assets and current liabilities but in other sense it is known as the sum of all current assets. "t is also known as the capital! which is used to operate the business$s routine work. "t is the short term capital investment in the business. %he working capital includes those assets! which are converted into cash within an accounting year and the current liabilities are include in working capital which are payable within an accounting year. %here are two concept of working capital as follows.

%orking ca i!a"

2ross Working Gro$$ %orking CaCapital i!a"# -

)et Working Capital

2ross Working Capital refers to the firm$s investment in the current assets. Current assets are those assets which can be converted into cash within an accounting period -or operating cycle..current assets include the debtors-account receivables .! cash ! short term investment! bills receivables! stock-inventories. !prepaid e+penses and accrued interest.

Ne! %orking Ca i!a"# )et Working Capital refers to the difference between the current assets and current liabilities. Current assets are those assets! which can be converted into cash within an accounting year -or operating cycle.. Current assets include the debtors -account receivables.! cash! short term investment! bills receivables! stock -inventories.! prepaid e+penses and accrued interest. And current liabilities are those claims of outsiders which are e+pected to mature for payment within an accounting year and include creditors -accounts payable.! bills payables! out e+penses -as standing salaries! outstanding rent! outstanding wages.! short term loans and bank overdraft. )et working capital can be positive or negative. A positive net working capital will arise when the current assets e+ceed current liabilities. A negative net working capital occurs when current liabilities are in e+cess of current assets.

%here is two other type of working capital on the %ime basis are as follows

Per&anen! working ca i!a"# -

"t is also called fi+ed working capital. &ermanent working capital is a certain level of working capital on a continuous and uninterrupted basis.

Amount

&ermanent working capital

%ime 'aria("e working ca i!a"# "t is also known as %emporary or 0luctuating working capital. 3ariable working capital is the working capital needed to meet seasonal as well as unforeseen requirements. "t is fluctuating with in accounting year and cannot live fi+ed as shown in the figure.

3ariable working capital Amount

%ime

FOCUS OF THE PRO)LEM

%he study is based on the premise that an efficient and effective management of working capital enhances the profitability of the corporation and utili,es the corporation$s fund in most optimum manner. %hus the present study entitled 4Working

Capital Management at 0ood Corporation of "ndia.5 is focused on evaluating the various components of working capital so that the suitable strategies may be suggested to the corporation for its effective management.

RATIONALE * O)+ECTI'ES OF THE STUDY

%o find out the liquidity position of the corporation. %o analy,e the credit policy of the corporation. %o know the how a firm made the payments. %o know the inventory position of the corporation. %o find out the effectiveness of working capital management. 7

LIMITATIONS OF THE STUDY

%he study is based on secondary data which may incorporate the limitations of the same. %he study is restricted to the period of four years -6778 6779.

CHAPTER-II

RE'IE% OF E,ISTING LITERATURE

:eview of e+isting literature means review or readout the present available information that is collecting before the study by any other person. %he e+isting literature is very important in the study of any topic because the e+isting literature give the basic idea about the study. "t does the work as the secondary data in the preparation of the study report. Without e+isting data it is difficult to start the study because we don$t have any clue about our study so the review of e+isting data is necessary for every researcher. "n the study of working capital management it is very necessary to study the information available of the past studies.

10

+- Fre.- %e$!on finds the some main important function of the financial manager in the aspects of working capital management. 4%ime! working capital management requires much of financial manager$s time. "nvestment! working capital represents a large portion of the total investment in assets. Criticality! working capital management has great significance for all the firms but it is very critical for the small firms. 2rowth! the need for working capital is directly related to the firm$s growth.5 0rom the above study it is clear that the working capital management must have the long time and it is related to the firm$s growth directly and it is a large part of the total investment in the assets. According to the :'"$s report on the study of working capital management! investment in the current assets represents a very significant portion of the total investment in the assets. "n large companies like ';1<! the current assets as a percentage of total assets may be high as! say! =7 percent.

E- %- %a"ker gives the suggestion after his study on working capital management that the financial manager should determine the optimum level of the current assets so that the wealth of shareholders is ma+imi,ed.

S!arr an. /- Mar!in has done study on the topic working capital management and the find that the inventory management is more important in the management of the working capital and they told the motive of inventory holding. 0irst! %ransaction Motive emphasi,es the need to maintain inventories to facilities smooth production and sales operations. Second! &recautionary Motive necessitates holding of inventories to guard against the risk of unpredictable changes in demand and supply forces and other factors. %hird! Speculative motive influences the decision to increase or reduce inventory level to take advantage of price fluctuations.

11

/-'-S&i!0 give his view about working capital management after his study that working capital management is concerned with the problems that arise in attempting to manage the current assets! current liabilities and the inter relationship that e+ists between them. So we have study the all available e+isting literature and it is very helpful in the study of working capital management at 0ood Corporation of "ndia. 'ecause it provides the base for the further study and also help in the analy,ing about the corporation$s financial position.

RESEARCH METHODOLOGY

NATURE OF RESEARCH# %he research is of analytical as well as descriptive in nature! where the problem has been analy,ed with help of financial information available with the corporation. DATA COLLECTION * DATA SOURCE# >ue to the nature of study! study is primarily based on the secondary data. %he secondary data is collected through anne+ure! schedules! other pertinent details

12

from various sources in the corporation and references books. Annual reports and records of the corporation have been used for the purpose of study. TOOLS * TECHNI1UES OF ANALYSIS# "n order to analy,e the problem and to arrive on a fair view #:atio Analysis$! "nterview Methods & different techniques related to inventory management! cash management! receivable management & payable management have been incorporated. Some of them are as follows? 1stimation of components of working capital method &ercentage of sales approach *perating cycle approach

13

CHAPTER-III

INDUSTRY PROFILE
Agric2"!2re In.2$!r3 a! a G"ance#Industry Overview
%he "ndian Agriculture "ndustry is on the brink of a revolution that will moderni,e the entire food chain! as the total food production in "ndia is likely to double in the ne+t ten years. As per recent studies the turnover of the total food market is appro+imately :s.687777 crores -@S A BC.D billion. out of which value added food products comprise :s.97777 crores -@S A 66.6 billion.. %he 2overnment of "ndia has also approved proposals for Eoint ventures! foreign collaborations! industrial licenses and F77G e+port oriented units envisaging an investment of :s.FCF77 crores -@S A D.97 billion. out of which foreign investment is over :s. CF77 crores -@S A F9.6 'illion.. %he agricultural food industry also assumes significance owing to "ndiaHs si,able 14

agrarian economy! which accounts for over I8G of 2>& and employs around B8 per cent of the population. 'oth in terms of foreign investment and number of Eoint ventures J foreign collaborations! the consumer food segment has the top priority. %he other attractive features of the "ndian agro industry that have the capacity to lure foreigners with promising benefits are the deep sea fishing! aqua culture! milk and milk products. 1+cellent e+port prospects! competitive pricing of agricultural products and standards that are internationally comparable has created trade opportunities in the agro industry. %his further has enabled the "ndian Agriculture "ndustry &ortal to serve as a means by which every e+porter and importer of "ndia and abroad! can fulfill their requirements and avail the benefits of agro related buy sell trade leads and other business opportunities. %his "ndian agro industry revolution brings along the opportunities of profitable investment and agriculture industry india.com provides you the '6' platform with agro related trade leads! e+porters & importers directory etc. that help you make your way to profit easy. %o lead yourself to the destination of profit through the "ndian Agriculture "ndustry! know ma+imum about the 1K"M policy! programs & schemes! price policy! seed policy and statistics at the "ndian agro portal and harvest benefits from "ndia! worldHs second largest producer of food and a country with a billion people. 0rom canned! dairy! processed! fro,en food to fisheries! meat! poultry! food grains! alcoholic beverages & soft drinks! the "ndian agro industry has dainty areas to choose for business. STATISTICAL DATA OF AGRICULTURE INDUSTRY#Import and Export of Agriculture Commodities vis-a-vis Total National Imports and Exports during 199 -91 to ! "- #

'a"2e 4R2 ee$ in crore$5 Agric2"!2r e I& or!$ To!a" Na!iona" I& or!$ DIF=7.96 6age Agric2"!2re I& or!$ !o Agric2"!2r To!a" e E7 or!$ Na!iona" I& or!$ 6.=C B7F6.=B To!a" Na!iona" E7 or!$ I686=.69 6age Agric2"!2re E7 or!$ !o To!a" Na!iona" E7 or!$ F9.DC

Year

FCC7 CF

F678.9B

15

FCCF C6 FCC6 CI FCCI CD FCCD C8 FCC8 CB FCCB C= FCC= C9 FCC9 CC FCCC 77 677B 7= 677= 79

FD=9.6= 69=B.68 6I6=.II 8CI=.6F 89C7.F7 BBF6.B7 9=9D.FC FD8BB.D9 FB7BB.=I F67I7.IB CIFF.88

D=987.9D BII=D.86 =IF7F.7F 9CC=7.=7 F66B=9.FD FI9CFC.99 F8DF=B.6C F=9IIF.BC 6F8869.8I 66B==I.D= FDFC9C.B9

I.7C D.8D I.F9 B.B7 D.97 D.=B 8.=7 9.F= =.D8 8.IF B.8B

=9I9.FI C7D7.I7 F689B.88 FI666.=B 67IC=.=D 6DFBF.6C 6D9DI.D8 688F7.BD 68IFI.BB 69C7C.I7 FB68D.6C

DD7DF.9F 8IB99.6B BC=D9.98 96B=I.D7 F7BI8I.I8 FF99F=.I6 FI7F77.BD FIC=8F.== F8C7C8.67 67687C.=B FF8=B6.78

F=.97 FB.9D F9.78 F8.CC FC.F9 67.II FC.F7 F9.68 F8.CF FD.69 FD.7D

$A%O& A'&IC()T(&E *&O+(CT, IN -.IC. /CI +EA),? -0eat With a production reaching ten times in past five years! "ndia is today the second largest w0ea! ro.2cer in the whole world. 3arious studies and researches show that wheat and w0ea! f"o2r play an increasingly important role in the management of "ndia$s food economy. Wheat production is about =7 million tonnes per year in "ndia and counts for appro+imately F6 per cent of world production. 'eing the second largest in population! it is also the second largest in wheat consumption after China! with a huge and growing wheat demand. Pro.2c!ion Area MaEor wheat growing states in "ndia are @ttar &radesh! &unEab! ;aryana! :aEasthan! Madhya &radesh! 2uEarat and 'ihar. All of north is replenished with wheat cultivation. Wheat has a narrow geographic land base of production as compared to rice or pulses. Wheat is a temperate crop requiring low temperatures and most of the country is tropical. 16

&ice
In!ro.2c!ion %hroughout history rice has been one of manHs most important foods. %oday! this unique grain helps sustain two thirds of the worldHs population. Archeological evidence suggests that rice has been feeding mankind for more than 8!777 years. %oday! agriculture is the backbone of "ndia$s economy! providing direct employment to about =7G of working people in the country. "t forms the basis of many premier industries of "ndia! including the te+tile! Eute! and sugar industries. Agriculture contributes about IFG to 2>&L about 68G of "ndiaHs e+ports are agricultural products. Rice Pro.2c!ion Area %he maEor rice growing area in "ndia are West 'engal! @ttar &radesh! Madhya &radesh! *rissa! 'ihar! Andhra &radesh! Assam! %amil )adu! &unEab! Maharashtra! /arnataka! ;aryana! 2uEarat! /erala! (ammu /ashmir! %ripura! Meghalaya! Manipur! :aEasthan! )agaland! Arunanchal &radesh! ;imachal &radesh! Mi,oram! 2oa! &ondicherry! Sikkim! A & ) "sland and > & ) ;aveli.

1arley
In!ro.2c!ion 'arley is from the lands of the ancient 1gyptians! 2rown in mud from the )ile :iver and held in pottery! was believed to be the first cereal crop by many ancient religions. "n the recent year -FCCC 6777. the estimate of barley production is D!IB7!777 metric tonnes. Pro.2c!ion Area 'arley is a hearty plant! able to withstand many different growing conditions. ;owever! barley is least tolerant of hot! humid conditions! which makes it unsuitable for the subtropical regions. "n "ndia! :aEasthan has the ma+imum growth of (ar"e3 grain besides Madhya &radesh! Andhra &radesh! *rissa! 2uEarat etc.

,ome important fact related to Agriculture Agriculture

Agriculture is the process of producing food! feed! fiber and other desired products by the cultivation of certain plants and the raising of domesticated animals -livestock.. %he practice of agriculture is also known as MfarmingM! while scientists! inventors and others devoted to improving farming methods and implements are also said to be engaged in agriculture. More people in the world are involved in agriculture as their primary economic activity than in any other! yet it only accounts for four percent of the worldHs 2>&. 17

/ood processing
0ood processing is the methods and techniques used to transform raw ingredients into food for human consumption. 0ood processing takes clean! harvested or slaughtered and butchered components and uses them to produce marketable food products. %here are several different ways in which food can be produced. One Off Pro.2c!ion %his method is used when customers make an order for something to be made to their own specifications! for e+ample a wedding cake. %he making of *ne off &roducts could take days depending on how intricate the design is and also the ability of the chef making the product. %oday... )a!c0 Pro.2c!ion %his method is used when the si,e of the market for a product is not clear! and where there is a range within a product line. A certain number of the same goods will be produced to make up a batch or run! for e+ample at 2regg$s 'akery they will bake a certain number of chicken bakes. %his method involves estimating the amount of customers that will want to buy that product. Ma$$ ro.2c!ion %his method is used when there is a mass market for a large number of identical products! for e+ample! chocolate bars! ready meals and canned food. %he product passes from one stage of production to another along a production line. +2$! In Ti&e %his method of production is mainly used in sandwich bars such as Subway! it is when all the components of the product are there and the customer chooses what they want in their product and it is made for them fresh in front of them.

-0olesale and distri2ution

A vast global transportation network is required by the food industry in order to connect its numerous parts. %hese include suppliers! manufacturers! warehousing! retailers and the end consumers. %here are also those companies that! during the food processing process! add vitamins! minerals! and other necessary requirements usually lost during preparation. Wholesale markets for fresh food products have tended to decline in importance in *1C> countries as well as in <atin America and some Asian countries as a result of the growth of supermarkets! which procure directly from farmers or through preferred suppliers! rather than going through markets. %he constant and uninterrupted flow of product from distribution centers to store locations is a critical link in food industry operations. >istribution centers run more efficiently! throughput can be increased! costs can be lowered! and manpower better utili,ed if the proper steps are taken when setting up a material handling system in a warehouse.

18

&etail
With populations around the world concentrating in urban areas! food buying is increasingly removed from all aspects food production. %his is a relatively recent development! taking place mainly over the last 87 years. %he supermarket is a defining retail element of the food industry! where tens of thousands of products are gathered in one location! in continuous! year round supply. 0ood preparation is another area where change in recent decades has been dramatic. %oday! two food industry sectors are in apparent competition for the retail food dollar. %he grocery industry sells fresh and largely raw products for consumers to use as ingredients in home cooking. %he food service industry offers prepared food! either as finished products! or as partially prepared components for final MassemblyM.

/ood Industry Tec0nologies

Sophisticated technologies define modern food production. %hey include many areas. Agricultural machinery! originally led by the tractor! has practically eliminated human labor in many areas of production. 'iotechnology is driving much change! in areas as diverse as agrochemicals! plant breeding and food processing. Many other areas of technology are also involved! to the point where it is hard to find an area that does not have a direct impact on the food industry. Computer technology is also a central force! with computer networks and speciali,ed software providing the support infrastructure to allow global movement of the myriad components involved.

$ar3eting
As consumers grow increasingly removed from food production! the role of product creation! advertising! publicity become the primary vehicles for information about food. With processed food as the dominant category! marketers have almost infinite possibilities in product creation.

$edia 4 $ar3eting
A key tool for 0MC2 marketing managers targeting the supermarket industry includes national titles like The Grocer in the @./.! Checkout in "reland! Progressive Grocer in the @.S. and Private Label Europe for the entire of the 1uropean @nion.

)a2our and Education

@ntil the last F77 years! agriculture was labor intensive. 0arming was a common occupation. 0ood production flowed from millions of farms. 0armers! largely trained from generation to generation! carried on the family business. %hat situation has changed dramatically. "n )orth America! over 87G of the population was farm families only a few decades agoL now! that figure is around F 6G! and some 97G of the population lives in cities. %he food industry as a comple+ whole requires an incredibly wide range of skills. Several hundred occupation types e+ist within the food industry.

19

&esearc0 and +evelopment

:esearch in agricultural and food processing technologies happens in great part in university research environments. &roEects are often funded by companies from the food industry. %here is therefore a direct relationship between the academic and commercial sectors! as far as scientific research.

*rominent /ood Companies

)estlN is the worldHs largest food and beverage company. &epsiCo is the largest @.S. based food and beverage company. @nilever is an Anglo >utch company that owns many of the worldHs consumer product brands in foods and beverages. >u&ont and Monsanto Company are the leading producers of pesticide! seeds! and other farming products. 'oth Archer >aniels Midland and Cargill process grain into animal feed and a diverse group of products. A>M also provides agricultural storage and transportation services! while Cargill operates a finance wing. 'unge is a global soybean e+porter and is also involved in food processing! grain trading! and fertili,er. >ole 0ood Company is the worldHs largest fruit company. Chiquita 'rands "nternational! another @S based fruit company! is the leading distributor of bananas in the @nited States. Sunkist 2rowers! "ncorporated is a @.S. based grower$s cooperative. ('S S.A. is the world$s largest processor and marketer of chicken! beef! and pork. Smithfield 0oods is the worldHs largest pork processor and hog producer. Sysco Corporation! mainly catering to )orth America! is one of the worldHs largest food distributors.

FOOD INDUSTRY AT A GLANCE

Foo. In.2$!r3
%he foo. in.2$!r3 is the comple+! global collective of diverse businesses that together supply much of the food energy consumed by the world population. *nly

20

subsistence farmers! those who survive on what they grow! can be considered outside of the scope of the modern food industry. %he food industry includes?

Reg2"a!ion? local! regional! national and international rules and regulations for food production and sale! including food quality and food safety! and industry lobbying activities E.2ca!ion? academic! vocational! consultancy Re$earc0 an. .e8e"o &en!? food technology Financia" $er8ice$ insurance! credit Man2fac!2ring? agrichemicals! seed! farm machinery and supplies! agricultural construction! etc. Agric2"!2re? raising of crops and livestock! seafood Foo. roce$$ing? preparation of fresh products for market! manufacture of prepared food products Marke!ing? promotion of generic products -e.g. milk board.! new products! public opinion! through advertising! packaging! public relations! etc %0o"e$a"e an. .i$!ri(2!ion? warehousing! transportation! logistics Re!ai"? supermarket chains and independent food stores! direct to consumer! restaurant! food services Con$2&er? 1nd user has one of the highest influences on the food industry through things like preference.

%he "ndian food market is estimated at over @SA F96 billion! and accounts for about two thirds of the total "ndian retail market. 0urther! according to consultancy firm Mc/insey & Co! the retail food sector in "ndia is likely to grow from around @SA =7 billion in 6779 to @SA F87 billion by 6768! accounting for a large chunk of the world food industry! which would grow to @SA D77 billion from @SA F=8 billion by 6768.

E7 or!$
1+ports of agricultural products from "ndia are e+pected to more than double to top @SA 67.B billion in the ne+t five years! according to the commerce ministry.

According to estimates by the Agricultural and &rocessed 0ood &roducts 1+port >evelopment Authority -A&1>A.! the share of "ndiaHs farm product e+ports in the global trade will grow from 6 per cent now to over 8 per cent. 1+ports of fresh and processed vegetables! fruits! livestock and cereals rose F7 per cent to @SA 9.B= billion in 6779 7C.

21

S ice$
>espite a global slowdown! "ndian spice e+ports are growing. "ndia e+ported D=7!867 tonnes of spices valued at @SA FF.B9 billionOan all time highOin 6779 7C. >uring the 677= 79! DDD!687 tonnes valued at @SA FF.7F billion were e+ported. Compared with 677= 79! e+ports had shown an increase of FC per cent in rupee value and si+ per cent in dollar terms.

Foo. Proce$$ing
%he "ndian packaged processed foods industry is estimated at @SA F7.9= billion P @SA FI.78 billion! including biscuits! chocolates! ice cream! confectionery! snacks! cheese and butter. 2rowing at a healthy FD F8 per cent over the past two three years! maEor players in the sector include 'ritannia! )estle! Amul! "%C 0oods! &arle! /ellogg$s! 2la+oSmith/line! Wrigley and 0rito <ay! among others. %he industry received foreign direct investments -0>". totalling @SA FDI.97 million in 677= 79 against @SA 8.=7 million in the previous fiscal. %he cumulative 0>" received by the industry from April 6777 August 677C stood at @SA 9=9.I6 million. ;owever! "ndia$s share in e+ports of processed food in global trade is only F.8 per centL whereas the si,e of the global processed food market is estimated at @SA I.6 trillion and nearly 97 per cent of agricultural products in the developed countries get processed and packaged. "n order to further grow the food processing industry! the government has formulated a 3ision 67F8 action plan under which specific targets have been set. %his includes tripling the si,e of the food processing industry from around @SA =7 billion to about @SA 6F7 billion! raising the level of processing of perishables from B per cent to 67 per cent! increasing value addition from 67 per cent to I8 per cent! and enhancing "ndia$s share in global food trade from F.8 per cent to I per cent. %his would require an investment of @SA 67.B billion.

According to an 1rnst and Qoung -1&Q. presentation! the food processing industry in "ndia will grow I7 D7 per cent as against the present F8 per cent in the ne+t F7 years. &rime Minister >r Manmohan Singh on *ctober B! 677C laid out a blueprint for rapid growth in the country$s food processing sector. %he &rime Minister said that this can be achieved by simplifying the ta+ structure! formulating a )ational 0ood &rocessing

22

&olicy and improving rural infrastructure. Moreover! according to @nion Minister for 0ood &rocessing "ndustries! Subodh /ant Sahai the central government is envisaging an investment of @SA 6F.87 billion in the food processing industry over the ne+t five years! a maEor chunk of which it plans to attract from the private sector and financial institutions.

Snack$ an. Confec!ioner3

%he "ndian market holds enormous growth potential for snack food! which is estimated to be worth @SA I billion! with the branded snack market estimated to be around @SA F.ID billion! growing at F8 67 per cent a year. While the growth rate of the @SA F.8B billion unorganised sector is = 9 per cent.

Hea"!0 Foo.
:ecognising the growth potential of the branded health food sector in "ndia! fast moving consumer goods -0MC2. maEors are foraying into this sector in a big way. As ;industan <ever <td -;@<. is test marketing its health food brand! /issan Ama,e! in three southern states in "ndia! 2odreE ;ershey 0oods & 'everages <td -2;0'<.! a Eoint venture between 2odreE 'everages & 0oods <td and ;ershey Company! is planning to introduce select brands from its international portfolio in the domestic market.

CORPORATION PROFILE
/OO+ CO&*O&ATION O/ IN+IA
A(o2! FCI# -

23

0ood Corporation of "ndia -;indi? . was setup on FDth (anuary FCB8 under 0ood Corporation Act FCBD with authorised capital of almost AB77 million to implement the national policy for price support operations! procurement! storage! preservation! inter state movement and distribution operations. "t operates through 8 ,onal offices and a regional office in >elhi. 1ach year! the 0ood Corporation purchases roughly F8 67 per cent of "ndiaHs wheat output and F6 F8 per cent of its rice output. %he losses suffered by 0C" are reimbursed by the @nion government! to avoid capital erosion! and thus declared as a subsidy in the annual budget. "n 677=! such food subsidies were met by government bonds worth almost A9 billion. %he 0ood Corporation of "ndia was setup under the 0ood Corporation Act FCBD! in order to fulfill following obEectives of the 0ood &olicy?

1ffective price support operations for safeguarding the interests of the farmers. >istribution of food grains throughout the country for public distribution system L and Maintaining satisfactory level of operational and buffer stocks of food grains to ensure )ational 0ood Security.

"n its D8 years of service to the nation! 0C" has played a significant role in "ndiaHs success in transforming the crisis management oriented food security into a stable security system. Since its inception in FCB8! having handled various situations of plenty and scarcity! 0C" has successfully met the challenge of managing the comple+ task of providing food security for the nation. A strong food security system which has helped to sustain the high growth rate and maintain regular supply of wheat and rice right through the year. %he efficiency with which 0C" tackled one of the worst droughts of the century not only cemented its role as the premier organi,ation in charge of food security in "ndia! but also brought it accolades from international organi,ations. %oday it can take credit for having contributed a great deal in transforming "ndia from a chronically food deficit country to one that is self sufficient.

Cre.i! S3$!e& for FCI re$cri(e. (3 Go8!- of In.ia

%he ministry of finance may allow regional rural banks -::'s. to Eoin their sponsor banks in financing food procurement e+ercise by 0ood Corporation of "ndia -0C".. <oans to 0C" are classified as food credit. %he move would boost ::'s$ business without taking any additional risk as government typically offers guarantee against food credit. 0or 0C" too! it would be easier making payments against food procurement in far flung areas! where ::'s are mostly active. 24

%he issue has been on the ministry$s platter for quite some time now. According to sources close to the ministry! the final clearance is e+pected anytime. Although! there is no regulatory hurdle on ::'s offering food credit! but such a step has never been tried. 4We are e+pecting the finance minister to make an announcement to this end shortly. %his would help ::'s a great deal by way of a new window for credit deployment!5 said All "ndia :egional :ural 'ank 1mployees Association -A"::'1A. general secretary! >ilip /umar MukherEee. "ncidentally! the request to allow ::'s offer food credit was first made from A"::'1A &latform. 0C" offers handsome returns to its lenders for credit. "t fi+es the rate by taking the average of prime lending rates of the five largest banks. ::'s with unutili,ed funds may use this avenue for assured returns without taking any risk. At present! some 8F banks! including cooperative banks offer food credit. %he government has fi+ed a bank loan limit of :s ID!DC8 crore for 0C" for 677C F7. As on (une I7! 677C! outstanding food credit to 0C" stood at :s 6F!69B crore. 4More than 87 ::'s have unutilised funds. Moreover! many of these banks have e+hausted their agriculture credit limit! making fund deployment more difficult. "n this light! we have requested the ministry to allow the same!5 Mr MukherEee said. %here are 9D ::'s in the country with their F8!677 odd branches spreading across 8CI out of BF6 districts. "ncidentally! it was a long time demand from ::'s to participate in food credit disbursement. Qet! these sets of banks were not in a position to handle such big amounts till recently. )ow! following amalgamation of ::'s! many of them have improved their scale of operation and are equipped to sanction bulk loans.

CORPORATE 'ISION 'i$ion 9:9:

%o aggressively promote >ecentrali,ed &rocurement by State 2overnments with special emphasis in non traditional areas and commodities. %o initiate procurement of non MS& governed commodities on commercial principles.

25

%o ensure adequate buffer for meeting requirements under %&>S & *ther Welfare Schemes. %o dispose of surplus and un storage worthy godowns and introduce concepts of mechani,ed handling in the conventional godowns. %o undertake :&> for conversion of some of the e+isting capacity to bulk and cost effective utili,ation of e+isting bulk capacity. %o optimi,e monthly movement programme with e+isting state of art of computeri,ation within the country at various locations as per corporate policies and priorities. Moderni,ation of Ruality Control equipments and systems for food preservation in order to increase the shelf life of food grain. %o venture in the fields of 0orward %rading and 1+ports of both surplus stocks of food grains in Central &ool and no traditional commodities. %o introduce state of art of financial management in order to reduce the dependency on the present banking system in the country. %o initiate systems for settlement of storage loss and transit loss through insurance coverage and revised inventory mechanism. %o develop efficiency in human resource management both in staffJofficers and workers with changed circumstances in the work approach of &.S.@. s. %o achieve state of art in computeri,ed communication between different officesJ depots throughout the country.

NE% INITIATI'ES

26

;aving been acknowledged a maEor player in food grain management within the Country and abroad! 0C" is now endeavoring for

:esource mobilisation to reduce burden on food subsidy. 'etter financial & %reasury Management. "mproved stock inventory management real time on line system through a recently launched ""S0M -"ntegrated "nformation System for 0ood grains Management. in collaboration with )"C. Creation of &rofit Centers. @p gradation of technology through @niversitiesJManagement "nstitutes. interface with Agriculture

@se of $A$ %will te+ture gunny bags as against H'H %will bags as a proEect to reduce losses in storage and transit. Multimodal transportation system through riverine J container. Micro level "nventory Management through focused weekly movement plans. Sustained corporate communication for improving image perceptions

CORPORATE MISSION
While homemakers are busy making chapati! roti! and pooris! 0ood Corporation of "ndia -0C". stays busy managing "ndiaHs grain supplies. 0C" buys and markets wheat and rice for the "ndian government! purchasing both domestically grown and imported grains! keeping the stockpiles in its own warehouses. %hrough periodic sales! 0C" controls and manages the domestic grain supply! regulating the market prices for those commodities. "t also provides some of its stores of grain to government subsidi,ed food programs! and it builds up buffer stocks to meet any food crisis. *ne of AsiaHs largest companies! 0C" operates under the direction of the "ndian governmentHs 0ood Ministry. "t was founded in FCB8.

27

R@A<"%Q &*<"CQ
0C"! as the country$s nodal organi,ation for implementing the )ational 0ood &olicy! is committed to provide credible! customer focused services! for efficient and effective food security management in the country. *ur focus shall be?

&rofessional e+cellence in Management of food grain and other commodities Service quality and stake holder orientation %ransparency and accountability in transactions *ptimum utili,ation of resources Continual improvement of systems! processes and resources

%&M &*<"CQ
1stablish an e+cellent %otal &roductive Manufacturing system with total involvement of all employees to achieve effective utili,ation of all resources.

Co& e!i!i8e Lan.$ca e for Foo. Cor ora!ion of In.ia

>emand is driven by federal agricultural policy programs! food consumption trends! and the grain and oilseed e+port market. %he profitability of individual companies depends on ma+imi,ing crop yield and minimi,ing disease risk. <arge companies have advantages in highly automated technologies and access to the latest in seed and crop technologies. Small operations can compete effectively by harvesting heirloom! non genetically modified -2M.! or specialty products. %he industry is "a(orin!en$i8e? average annual revenue per employee -operator and hired laborers. is AF77!777.

Top /ood Corporation of India Competitors

Co& anie$ Cargill! "ncorporated "%C <imited <ouis >reyfus SAS Adani 2roup Loca!ion Way,ata! M) /olkata! "ndia &aris! 0rance Ahmedabad! "ndia

28

Organisational !tructure
Headquarters Zonal Offices 5 Regional Offices 23 District Offices 166 Depots 1456 Owned 760 Hired 6 6
!t "o#t 63 $%$ 147 !%$ 3&7 '#t(

CAPITAL STRUCTURE
(As on 31st March 2006)

29

CAPITAL STRUCTURE
(As on 31st March 2006)

Bank Loans (Rs. In Crore) 2002-03 2003-04 2004-05 2005-06 9 79 61 44

Bonds (Rs. In Crore) NIL NIL 4024 8605

30

)! O* 31(03(2007

31

%or+ers
System Depart,ental Direct 'a-,ent !-ste, *o wor+ *o 'a-. /0ree ,e,1er co,,ittee /otal $o2op !ocieties.'ri#ate $ontractors "rand /otal FCI Depots 162 226 13 401 7 4 1224 Strength 22253 34023 13&7 57663 13123000 )ppro4( 13703246

32

!torage $apacit- 56 utilisation7

)s on 01(06(2007

Owned $o#ered Open 5$)'7 12 (4356267 $%$ 22(5 51567 !%$

58n la+0 9/s7 Hired 14(2 5& 67 65(32 5&167 5(115&767 6(&35&367 3(76510067 5(225&367 247(2 56667

!tate "o#t( '#t( 'arties Open 5$)'7 /otal 152(0255567 /otal "rand /otal

33

:oodgrain !toc+s
;uffer !toc+ing *or, < )#aila1ilit(In million tonnes)

34

=le,ents of !u1sid2006-07 (BE)

35

=le,ents of !u1sid2006-07 (RE) E !"!nts =4cess of 9!' o#er $8' !tatutor- < O1ligator- $0arges >a1our < /ransportation costs at 9andies !torage3 interest3 ad,inistrati#e c0arges < guarantee fees paid to !tate )gencies :reig0t $osts Handling $osts !torage $osts 8nterest on :$8 operations 8nterest on outstanding of $redit !ales )d,inistrati#e O#er0eads !0ortages $arr- O#er $0arges paid to !tate )gencies /otal (Rs. Cr) Rs( $r( &544 4&17 670 5&1 3413 1731 1366 1330 23 2 31 331 15 26265 6 32(5 1&(4 2(5 2(2 13(0 6(6 5(2 5(1 (1 3(5 1(3 0(6 100

36

"rowt0 of Operations
200622007 33( ,illion tonnes 2&( ,illion tonnes 31(5 ,illion tonnes 25(2 ,illion tonnes

'rocure,ent 2(6 ,illion tonnes

9o#e,ent 0(7 ,illion tonnes

Distri1ution &(2 ,illion tonnes

1 6521 66

!torage $apacit0(6 ,illion tonnes

37

306

156

6652167

2651467

256 256

15655 67

653667

38

9o#e,ent

30 ,illion ,o#e,ent

tonnes

annual

4 3000 1ags 0andled per ra+e 06 ,o#e,ent 1- Rail &56 ,o#e,ent e42 *ort0 )#erage lead 1500 +,s )#erage annual pa-,ent Rs( 2500 $r freig0t

39

40

41

5'osition as on 31st 9arc0 of eac0 -ear7 #1.0$ %%.3& 30.%1 17.63 $.0#

42

9a?or %0eat 'rocuring !tates

P'n(a)-62*+ ,ar-ana-2$*+ Uttar Pra.!sh-6*+ Ma.h-a Pra.!sh-2* / Ra(asthan-1* (a01. o2 ast thr!! -!ars) 3h!at 4!25c5t Stat!s- 23
,-OT Analysis of /ood Corporation of India
43

S!reng!0 of FCI# 0acilitator for food security o &rovider of price & market assurance to the farmer o 1nsuring steady food grain supplies to 8 <akhs 0air &rice Shops for &ublic >istribution System to cover FDF million Above &overty <ineJ B= million 'elow &overty <ine card holders. o 1nsuring food for all other Welfare Schemes. Management Capability & 1+perience o <arge pool of talent managing world$s largest food grain operation on behalf of 2ovt. of "ndia. 1normity of scale o Countrywide network of offices & strategically located 0ood Storage >epots. o *perates in mandisJpurchase centres located within F7 kms. &ro+imity of farmers. o @ndertakes purchases of I7 to D7 million tonnes annually making it the largest buyer in the world. 1ffective market intervention to stabilise prices State of the art e+pertise on food grain preservation J Warehousing J %ransportation Management o Maintains the health of millions of tones of food grain in storage. Ruality acknowledged by international buyers. o 1+cellent Storage Management. %imely movement of food grains from procuring States to consuming States

%eakne$$ of FCI# 3irtually an e+tended arm of 2ovt. of "ndia "ncreasing age profile of its personnel at all levels. ;eavy dependence on monopolistic govt. agencies. Absence of modern management practices Absence of motivation to bring down the food subsidy bill. <ack of Autonomy as 0C" is not associated in many critical policy decisions affecting its performance. O or!2ni!ie$ for FCI#-

44

After nearly four decades of varied e+perience in food management! 0C" can play a wider role in being a food advisor to the CentralJState 2ovts. %he corporation can also play a more proactive role in the sphere of commercial ventures. %o diversify into nontraditional commodities J activities. T0rea!$ for FCI#-

Widespread negative image perception of 0C"$s role & functions. >espite its gigantic achievements! considered to be overstaffed! inefficient! slow! lacking dynamism! vision & burden on the e+chequer despite the fact that appro+. 98G of its e+penses are statutory & beyond its control & its own administrative overheads restricted to below 6G of 1conomic cost. >espite the criticality of its role particularly on the face of unprecedented natural calamities! periodically its very e+istence is questioned demoralising its workforce.

CORPORATE SETUP

45

%he 2eneral Superintendence! >irections and Management of the affairs and business of the Corporation vests with the 'oard of >irectors 'oard of >irectors as per section =-F. of the 0ood Corporation Act shall be?

Chairman Managing >irector Managing >irector! Central Warehousing Corporation -1+ *fficio. 2overnment :epresentatives ?

%hree >irectors to represent respectively the Ministries of the Central 2overnment dealing with ?

". "". """.

0ood 0inance Co operationL and

Si+ other >irectors -out of which four-D. are non official >irectors. *'(1C%"31S *0 0C" %o provide farmers remunerative prices %o make food grains available at reasonable prices! particularly to vulnerable section of the society %o maintain buffer stocks as measure of 0ood Security %o intervene in market for price stabili,ation

SIGNIFICANT ACCOUNTING POLICIES OF FOOD CORPORATION OF INDIA

46

;-

PURCHASES AND IMPORTS

-A. &urchases of indigenous food grains represent the payment made at the &rocurementJ &urchase prices reduced by the amount of income from quality cuts wherever applicable and include the procurement charges incurred on direct purchases and paid to the State 2overnments and other agencies for the purchases made from them. "n respect of imported food grains! purchases are accounted for on the basis of the payment made for the quantities shown in the bills of lading together with the e+penses incurred on ocean freight! port clearance charges and marine insurance. Stocks on high seas! in ship awaiting berthing and in ship holds are also valued in the same manner e+cept that the port clearance charges and cost of gunnies -both not accrued. are not added the in . Such purchases are taken in the account for vessels sailed up to IF st March. "f there is more than one bill of lading of different financial years for the same vessels! the bills of lading bearing dates on or before IF st March are to be accounted for as purchases of the relevant financial year. -'. "n case of import of food grains! the dispatch money earned at the unloading port Accounted for on the basis of provisional time sheets where the final time sheets are not available and for the loading pot! it is accounted for only on receipt of final time sheets. ;owever! in the case of e+port of food grains the dispatch money earned at the loading port is accounted for on the basis of provisional time sheets. 9SALES a. Sales affected on behalf of the 2overnment of "ndia are reflected at the issue prices fi+ed by the 2overnment. %he difference between the economic cost and the sales reali,ation is claimed as subsidy. b. Sales of sugar are reflected at the net value after deducting sub wholesalersJretailers margin and transportation charges. c. Sales are accounted for on actual delivery of stocks.

<-

)AN/ TRANSACTIONS

47

%he accounting of cash and bank transactions including "nter office remittances is made as per the books maintained by the Corporation. %he differences in the banking transaction between the figures of the Corporation and those appearing in the bank accounts are reflected in the bank reconciliation statement. =INCOME>E,PENSES RELATING TO PRE'ISOUS YEARS "tems of incomeJe+penses for each claimJbill pertaining to the previous years above :s.68777J which arise in the current period as a result of errors or omissions are accounted for under the head 4AdEustment relating to previous years. 4 %he chargesJ credits arising on the outcome of a contingency which at the time o f occurrence could not be estimated accurately do not constitute an error but a change in estimate. Such an item is not treated as prior item. ?PRO'ISION OF LIA)ILTIES

-A. &rovision for accrued e+penses @& to IFst March! irrespective of amount of each billJclaim is made in the accounts. -'. All undisputed ta+es! levies i.e. Central Sales ta+! purchase ta+! Market fee! *ctroi! 1ntry ta+! )irashrit ta+! 1+cise J Custom duty etc. which are legally payable and paid within the stipulated period are accounted for on accrual basis. -C. &roperty ta+es and other leviesJ service charges etc. *n the godowns belonging to the Corporation charged by the local authorityJ administration and which are legally payable shall be accounted for on accrual basis. ->. "nterest due on loans or borrowings or advances from public 0inancial "nstitutionsJ Scheduled 'anks up to IF st March and paid on or before finali,ation of Accounts or by the specified date for filing of :eturn of "ncome whichever is earlier! is accounted for on accrual basis. -1. Where the arbitration award is against the Corporation and the Corporation has not challenged the award within the period of I months from the date of pronouncement of award or the appeal to set aside the award has been reEectedJdismissed by the court! liabilities are provided for on accrual basis. -0. &repaid e+penses @p to :s.F7!777J in each case are charged to revenue. -2. Contingent liabilities -claims against the Corporation not acknowledged as debts. are disclosed in each case! above :s.68!777J -;. <iabilities other than those relating to CentralJState 2overnments which have not been claimed within a period of three years are generally written back. ;owever! this limitation is not applicable to CentralJState 2overnment liabilities which are valid for I7 years and also to the claimsJ counter claims of state J2overnment J Agencies! where there are continuing transactions and where Accounts are pending reconciliationJclaims are pending acceptance. 48

-".

%he accounting of e+penditure towards reimbursement of ;ill %ransport subsidy and :oad %ransport charges is made upon receipt of claims as per prescribed procedure! from concerned state 2overnments. -(. &ayment under 3oluntary :etirement Scheme e+cepting one fifth of the amount so paid! are treated as >eferred :evenue 1+penditure and equally claimed as e+penditure in succeeding four years. -/. <iability for un responded debitJe+cess credit given by the 'ank as well as claim on the 'ank for e+cess debitJun responded credit alongwith interest accrued thereon is retained for F6 years. %hereafter the net amount alongwith interest is written backJcharged off as current year$s incomeJe+penditure! however! in case of nit liability the same alongwith interest thereon! or reflected under contingent liability. @ DERI'ATI'E TRANSACTIONS %he reali,ed gain or loss in respect of commodity hedging contracts and interest rate swap transactions! entered into by the Corporation to manage the commodity price risk and interest rate risk respectively! the settlement period of which has e+pired during the year! are recogni,ed in the &rofit and <oss Account. ;owever in respect of contracts the settlement period of which e+tend beyond the 'alance sheet date! are treated as off 'alances Sheet transactions. 2ain or losses arising there from are recogni,ed! as and when settlement takes place! in accordance with the terms of the contracts. A FI,ED ASSETS a. 0i+ed assets are accounted for on historical costs less depreciation -e+cept freehold land at cost. on written down value basis. %he rates and methods of depreciation are being adopted as prescribed in the "ncome %a+ Act! FCBF and :ules framed there under as amended from time to time b. >epreciation claimed lessJmore in earlier year-s. is not charged offJreversed in the current year. c. <and-s. allotted to the Corporation free of cost by the StateJCentral 2overnment are valued at )otional Cost of :e.FJ -for each plot of land..

RE'ENUE RECOGNITION %he following items of income and e+penses are accounted for on cash basis

49

4A5 Inco&e -F. Claims against CentralJState 2overnments and their agenciesJ'anks which are prima facie under dispute. :efunds including rebateJinterest thereon! due on account of ta+es and levies. Claims on duty drawback on e+ports. Claims on :ailways for freight on missing wagons! disputed demurrages and compensation for shortagesJ damages. "nterest on advances to the State 2overnmentsJAgenciesJStaff and on delayed reali,ation of sales. Claims on shipping agents for short <anding in weight in bulk cargo as well as in bagged cargo where number of bags are found correct having no slack and torn bags noticed at the time of discharge of vessel and for disputed demurrages. &enalties and compensation for breach of contracts.

-6.

-I. -D.

-8.

-B.

-=.

4)5 E7 en$e$ F. All disputed ta+esJlevies i.e. C1)%:A<JState Sales ta+! &urchase ta+! 3alue Added %a+! Market fee! *ctroi! 1ntry ta+! )irashrit ta+! 1+ciseJCustom duty etc. ;owever! the same should be shown as contingent liability provided the amountJclaim in each case e+ceeds :s.68!777J Sales ta+ paid over and above the actual collection and disputed is shown as deposit recoverable and is charged in the year of settlement after the assessment is over. &enal interest other than that accepted by the Corporation. Claims against the Corporation including salaries and wages which are prima facie under dispute. &rorata pension payments to the 2overnment of "ndia! 2ratuity and 1ncashment of leave. &ayment to the families of deceased employees under the 0C" 2roup "nsurance Scheme! FC97. &rovident 0und Contribution in respect of Contractor$s labour.

6. I. D. 8. B.

PHYSICAL 'ERIFICATION -A. %he physical verification of stocks -including non issueable! below ".S.S and damaged. of foodgrains! sugar and other commodities is required to be 50

made at the end of year on the basis of peripheral count and weighment is conducted in all depots including CWCJSWC godowns. &rovision for shortages assessed on peripheral count! if any! is considered at ;eadquarters. -'. %he physical verification of stocks is conducted by F77G weighment is conducted in respect of baby stacks -baby stacks are defined where the number of bags is less than 67G of the total number of bags received right from the creation of the stack. e+cepting for those baby stacks where the stocks are covered by tender sales or subEect to litigation. -C. Where the stocks are held in silosJbins and in transit at portJ:ailway siding! the book balances are adopted. %he variations! if any! are adEusted when the silosJbins are emptied and J or the stocks received at godowns. Stocks under fumigation at the year end are also taken at the book balances. ->. Where the stocks are loaned toJheld by other parties! these are adopted as per book balances. ;: -A. 'ALUATION OF CLOSING STOC/-

%he closing stock of issueable foodgrains! by products and sugar are valued at weighted average acquisition cost. "n cases where the stocks comprise of both indigenous and imported varieties of a particular commodity! the stocks are valued at common weighted average acquisition rateJcost. -'. %he stocks of foodgrains! by productsJsugar declared as non issueable! below ".S.S after due segregation and analysis by Ruality Control >ivision and as approved by Competent Authority! are valued at estimated reali,able value. -C. %he stocks of other commodities i.e. gunnies and stores & spares etc. are valued at average acquisition cost. ;; IN'ESTMENT %he investments in 2ovt. of "ndia 'onds are valued at cost.

FINANCIAL FEATURES AT A GLANCE Average 'ank 'orrowing during 677= 79 :s. 6=I6= Crores -Consortium of B8 'anks as on IF.I.79. 51

Commercial 'orrowing -'onds.

:s. 9B78 Crores

:ate of "nterest on 'ank 'orrowing w.e.f. F7.F8 G p.a. -Monthly Compounding. 7F.7I.6779 :ate of "nterest on 'onds =.IFGp.a.-Annually &ayable.

ED2i!3 Re"ea$e. for P"an Sc0e&e$ an. %orking Ca i!a" 4a$ on <;-:<-:B5

:s. Cr. Qear @pto 6776 7I 677I 7D 677D 78 6778 7B 677B 7= 677= 79 0irst Ruarter Second Ruarter %hird Ruarter 0ourth Ruarter %otal Working Construction Capital 2odowns FD9D.77 988.FF )il )il )il )il . )il )il )il )il )il . Authorised Capital . 6I.CB 8.9= 67.=9 =.87 . )il )il I.F9 7.96 D.77 . . of ""S0M &roEect )il F8.87 IC.FD F8.77 )il . )il )il FD.DC F7.8F 68.77 BD.BD . . *ther Schemes FI.9C )il )il )il )il . )il )il )il )il )il FI.9C . . %otal 6I8I.77 IC.DB D8.7F I8.=9 =.87 . )il )il F=.B= FF.II 6C.77 687C.=8 . I877.77

%otal paid up Capital FD9D.77 CF=.66

Econo&ic Co$! of Foo. grain$ of FCI Crop Qear Wise 1conomic Cost -&rovisional. -:s.Jqtl.. :ice -2rade A. F=FB :ice -Common. FBBD

Qear :abi 6779 /harif 677=

Wheat F8F8

52

Acco2n!ing Year-%i$e o ening S!ock a.E2$!e. weig0!e. Econo&ic Co$! -:s.Jqtl.. Qear 677F 76 6776 7I 677I 7D 677D 78 6778 7B 677B 7=-&rov. 677= 79-:1. 6779 7C-'1. Status Audited Audited Audited Audited @n audited &rov. 1stimates :ev. 1stimates Wheat 986.CD 99D.77 CF9.BC F7FC.7F F7DF.98 F6FD.IC FID9.BC :ice F7C=.CB FFB8.7I F6IB.7C FI7I.8C FIIC.BC FDFF.B7 F8=F.IB FBC9.C7

'udget 1stimates FD89.9I

Foo. S2($i.3 Re"ea$e. !o FCI an. Inc2rre. (3 FCI 4R$- Cr-5 0ood subsidy released to 0C" Against Qear %otal FB6=D.7 7 66B=I.= 6 6ID=D.7 D 6I697.7 7 1arlier years 677F 76 6776 7I 677I 7D 677D 78 . . 0or Qear FB6=D.77 66B=I.=6 0ood Subsidy "ncurred by 0C" the Subsidy "ncurred Status Accounts Audited Audited Audited Audited of

during the year F9778.77 68I66.77 6F89=.77 67==I.77

D8D8.9B F9C69.F9 D7C7.IC FCF9C.BF

53

6778 7B 677B 7= 677= 79 6779 7C -@pto I7J7DJ79.

FC9=F.7 7 67=9B.6 F 6==8C.B 9

D=I.I6

FCIC=.B9

6FIDD.77 6D989.77 IF9F=.77

@n Audited &rov.1stimate s :ev.1stimate s .

FDFF.79 FCI=8.FI 86F9.=8 668D7.CI

8D77.7D .

8D77.7D

54

CHAPTER-I'

THEORETICAL FRAME%OR/ OF %OR/ING CAPITAL MANAGEMENT

%orking Ca i!a" C3c"e
Working capital is vital to a business. %hey have to have funds available to pay their day to day bills! wages and so on. %he working capital is made up of the current assets net of the current liabilities. "t is very important to a corporation to manage its working capital carefully. %his is particularly true where there is a substantial time lag between making the product and receiving the money for it. "n this situation the corporation has paid out all the costs associated with making the product -labor! raw materials and so on. but not yet got any money for it. %hey must therefore ensure they have enough cash to do this. 55

%he way working capital moves around the business is modeled by the working capital cycle. %his shows the cash coming into the business! what happens to it while the business has it and then where it goes. A simple working capital cycle may look something like?

'etween each stage of this working capital cycle there is a time delay. 0or some businesses this will be very long where it takes them a long time to make and sell the product. %hey will need a substantial amount of working capital to survive. *thers though may receive their cash very quickly after paying out for raw materials etc. -&erhaps even before theyHve paid their bills. %hey will need less working capital. 0or all businesses though they need to plan how much cash they are going to have.

Proce$$ f"ow of FCa$0 "anning * )2.ge!ingG

"nput information received from all units firm for the first week & tentative for the 6nd! Ird! Dth week for raw material! sales! manufacturing e+p. 1tc. on the basis of debtors & inventory aging reports etc.

&lan firmed up after discussion and modified with reference to inflows & outflows on unit basis.

56

Monitored & reviewed on daily basis including follow up collection Jfunds in transit.

&lan met

No

Carried to ne+t month

Yes

Month closed
1+planation of above? Cash is the lifeblood of every business organi,ation. 1very organi,ation needs to have adequate flow of cash to meet its all requirement whether short term or long term. "n any organi,ations before starting any business activity proper planning of cash inflow & outflow is required to be made. So! on the basis of receivable period cash inflow is planned for the beginning of each month and accordingly outflow that is to be made is also planned as to when payment is to be made.

P2r o$e of re aring ca$0 f"ow

Cash flow is concerned with the movement of money in and out of a business. More importantly! it is concerned with the time at which the movement of the money takes place. Qou might even say the concept of cash flow is more in line with reality. "t is being identified in which unit the outflow is greater than the inflow! & where there is discrepancy between the 'udgeted & Actual inflow & outflow. "n this format on daily basis cash inflow & outflow is entered under respective heads. %his is done in all the units of 0ood Corporation of "ndia then at the end of the day cash balance remaining with all banks are also added & it is found whether the cash balance reduced between two consecutive days are equivalent to the net of cash flow or notS "f not! then any discrepancy is there & that is tried to found out. "t also helps in finding out the item wise e+penditure of the firm & help in knowing the 57

surplusJdeficit generated in each unit & also helps in finding out the reason for difference between the inflow & outflow of various units.

%orking Ca i!a" Manage&en!

Components of Working Capital? :eceivable Management "nventory Management &ayable Management Cash Management

Recei8a("e$ Manage&en!
%he term receivable is defined as 4debt owed to the firm by customers arising from sale of goods in the ordinary course of business5. %he credit sales are generally made on open account in the sense that there are no formal obligations through a financial instrument. ;owever e+tension of credit involves risk and cost. Management

58

should weigh the benefits as well as the cost to determine the goal of receivable management. %he benefits from receivables are the increased sales and profits anticipated because of a more liberal policy. When firms e+tend their trade credit! i.e. invest in receivablesL they intend to increase the sales level. %he motive of liberal credit policy can be either growth oriented or sales retention. %he e+tension of credit has a maEor impact on sales! costs and profitability. *ther things being equal! a relatively liberal policy and therefore higher investment in receivables will produce larger sales. ;owever cost will be higher with the liberal policies than with more stringent measures. %herefore accounts receivables management should aim at a trade off between profit -benefits. and risk -cost..

%he cost associated with the e+tension of credit and accounts receivables are? F. Collection cost 6. "nterest cost I. >elinquency cost and D. >efault cost.

F. Collection cost? %hese are the administrative costs incurred in collecting the receivables from the customers to whom credit sales have been made. 6. "nterest cost? %he increased level of accounts receivables is investments in assets. %hey have to be financed by increasing credit limits with banks which involves payment of more interest. ;ence the interest cost increases! which is therefore a part of the cost of e+tending credit or receivables. I. >elinquency cost? Arises out of the failure of the customers to meet their obligations when payment on credit sales becomes due after the e+piry of the period of credit. 'locking up of funds for an e+tended period and cost associated 59

with steps that have to be initiated to collect the over dues are components of such type of costs. D. >efault cost? When firms are unable to recover the over dues because of the inability of the customer! the debts are treated as bad debts to be written of as they cannot be reali,ed! such costs are known as default costs.

Recei8a("e Manage&en! in Foo. Cor ora!ion of In.ia

%hese sales are made against invoice. :eceivable management is beyond credit control. "n 0ood Corporation of "ndia Sales ledger debtors$ day collection is prepared to calculate on a consistent basis throughout the corporation and for each unit! the number of day$s sales represented by customer debts. >epartment involved in receivable management F. Accounts & 0inance department 6. Sales & marketing department Credit terms followed

60

All sales made are credit sales. F. "t has different payment terms with different customers and it is mutually agreed which is shown on the &* -purchase order. made with each customer. 6. "n general credit offer to most of the customers is for I7 D8 days! and to few customers it is B7 days. I. Advance payment is received in case of foreign customer & the customer who are one time purchaser or whose credit worthiness is not checked. Credit policy? "n credit policy as credit standards & credit analysis is done. 'ut in 0ood Corporation of "ndia there is no written credit policy as such. )o credit analysis is done before selling goods to them. )o documents are being filled by the customer & their financial performance is also not Eudged. Sometime they Eust refer to their balance sheet. )o information is collected either internally or e+ternally. Collection policy? %here is distinct credit collection policy in 0ood Corporation of "ndia because no credit sales are allowed in 0C" and that is 0C" not having any uniform collection policy. "nventory management "nventories are stock of the product! a corporation is manufacturing for sale. "nventories can e+ist in the form of raw material! work in progress! finished goods! components and supplies! whereas motive for holding inventories can be transaction motive! precautionary motive and speculative motive. 'ut many companies can$t operate under this model. %hose that sell time sensitive items have to have materials! if not finished products! on hand to satisfy the e+pectations of the customer who needs an order right away. )ow a days many large manufacturers operate on a Eust in time -("%. basis whereby all the components to be assembled on a particular day! arrive at the factory early that morning! no earlier no later. %his helps to minimi,e manufacturing costs as ("% stocks take up little space! minimi,e stock holding and virtually eliminate the risk of obsolete or damaged stock! 61

because ("% manufacturers hold stock for a very short time! they are able to conserve substantial cash. "nventory Management P *bEective %he basic obEective of inventory management is twofold. 0irst is the avoidance of over or under investment in inventories and second is to provide the right quantity of material to the production department at right time. %he key issue for a business is to identify the fast and slow stock movers with the obEective of establishing optimum stock levels for each category and! thereby! minimi,e the cash tied up in stocks. 0actors to be considered when determining optimum stock levels are? %he proEected sales of each product. Availability of raw materials! components etc. >elivery time by the suppliers Can one remove slow movers from one$s product range without compromising best sellersS "nventory Management %echniques An inventory management technique includes the following? 1ffective and efficient purchasing! storage and issuing procedures. Settings of various levels like ma+imum! minimum! recorder level etc. 0i+ation of economic order quantity. 1stablishment of inventory budgets. @se of perpetual inventory system. Min ma+ plan. *rder cycling system. A'C analysis. 31> analysis. KQT analysis. @se of inventory ratios.

62

Aging schedule of inventories.

"nventory Management in 0ood Corporation of "ndia. "n 0ood Corporation of "ndia inventory management is done as various types of inventory are required to be kept & valuation of inventory is done.

%ypes of "nventory F. :AW MA%1:"A< '*& -'rought out part.? continued production. >evelopment material? "t is the inventory that is being developed for new order until the sample is being finali,ed. /ey material? "t is the raw material of keys &lastic material? the keys. (ob Work -Ird party :M.? "t is the inventory that is being used by third party for producing our goods. %his stock is in a way the stock of 0ood Corporation of "ndia only. 6. Work in progress? "t is the inventory of semi finished goods. /ey section? "t includes following? /ey blank? "t is the inventory of plain key material. "t is the inventory of plastic material that is used for covering "t is the inventory of main raw material. "t is kept for

63

/ey bitted? "t is the inventory of key that is being cut as per the requirement of locks of different vehicles. /ey molded? "t is the inventory of key that is being molded to suit the requirement of vehicle.

I. :eEection? "t is the inventory of item that has been out of use. %he material that can be used from reEected inventory is taken out & rest is the scrap

%echnique of "nventory Management used 1ffective and efficient purchasing! storage and issuing procedures are being followed. *n the basis of schedules received from the customer forecasting of material requirement for the full lead period is done. Proce.2re of 2rc0a$eH $!ock * i$$2e are a$ fo""ow$# Proce$$ f"ow of 2rc0a$eH $!ock * i$$2e

Schedule is recei ed !rom customers i.e. Centr"l #o t. or St"te #o t.

*ill o! m"teri"l is (re("red $%& (m"teri"l re'uirement (l"nnin)) is done

64

, "il"-ilit+ o! stoc. is chec.ed &roduction schedule is chec.ed

,ccordin)l+ /rder is (l"ced 0ith su((liers1 endors

$"teri"l recei ed is stored (one d"+ in entor+ is m"int"ined)

When supply is received then check is done at the gate of the wherehouse & it is checked whether the material is supplied as per the invoice. "f satisfied then M:: -material received receipt. is issued at the gate. Material is then sent to the receiving department! there the quantity of material is checked to know whether it is as per the order or notS After checking it is then passed on to the quality store for the quality check i.e. whether the quality is as per the order requirement or notS %hen the material is finally stored in the store from where it is issued to the production department through the issue slip. Material is issued using 0"0* -first in first out. method! where the material that comes first is issued first for the production. %hey use the practice in which material is kept in racks in such a way that material coming first will be used first.

$"teri"l is issued !or (roduction usin) 2I2/ method

("% method? "n 0ood Corporation of "ndia ("% system of inventory management is used. "t is the method in which inventory is ordered only when demand comes. As in 0ood Corporation of "ndia the production schedule is followed. When & how much quantity of purchase & sale is to be made is know beforehand. %hat$s why no e+cess inventory is maintained.

65

'in card system? "n case of this technique! each item of inventory is kept in bin. %he bin contains such quantity of inventory! which is sufficient to meet the consumption requirements till the ne+t date order is placed. A card for each bin is maintained in which total inventory received in quantity! inventory used! purpose of issue is mentioned. 1ach time new inventory is received it is entered in the card. Aging schedule of inventories? "nventory aging is done where on the basis of period of stock holding inventory is divided into four categories? I7 B7days B7 C7 days C7 F67 days F67 above ? )on Moving ? 0ast Moving Slow Moving

Continued "nventory aging is done to know the status of inventory. Analysis is done so as to control & reduce the slow moving inventory. )on moving inventory are removed either by selling it as scrap or by making some modification in it through Eob work and then using it again! if possible. Which type of inventory is higher in different monthsS :emedial action can be taken against the inventory. With the help of chart comparison becomes easy.

&ayable Management Creditors are a vital part of effective cash a management and should be managed carefully to enhance the cash position. &urchasing initiates cash outflows and an over ,ealous purchasing function can create liquidity problems. "ronically! some companies looking to take working capital off the balance sheet nurture slow! inefficient or even obstructive AJ& processes. "t$s one case where negligence can improve financial performance. 'ut squee,ing the vendors is a shortsighted policy. A better strategy is to shrink the vendor base radically! then use one$s clout to negotiate longer terms with the vendors. 3endor rationali,ation is a process that can pay off in a big way. Apart from the question that who should authori,e purchasing in the corporation should it be 66

tightly managed or spread among a number of -Eunior. peopleS %he following comes under good payable management. F. &urchase quantities should be geared to demand forecasts 6. *rder quantities should be used which takes account of stock holding and purchasing costs. I. %he cost to the corporation of carrying stock should be clearly defined. D. A corporation should have alternative sources of supply. "t should get quotes from maEor suppliers and shop around for the best discounts! credit terms! and reduce dependence on a single supplier.

&ayable Management in 0ood Corporation of "ndia "n 0ood Corporation of "ndia it is being ensured that timely payment is made to the supplierJvendors. %he payment schedule is so designed that it will be made when the payment is received from the debtorsJcustomers & they have tried to delay the payment as much as they can so that the e+cess cash balance is not required from the bank& their WC>< -working capital draw down limit. is not used. &ayment terms? F. &ayment terms with the various vendors is decided on the basis of their &* i.e. purchase order. %he unit to be purchased cost of each unit! period of credit! when & how payment is to be made. 1verything is stated in the &*. 6. &ayment is made to the vendors twice in a month in all the units of 0ood Corporation of "ndia. 0irst installment is made in between 9 th F7th & second installment is made in between 68thP6Cth. I. &ayment is made to the vendors through :%2S! )10% only if all the required bank detail -like "0SC code! 'ank name! its branch! aJc no.. of the respective vendor is available! if not then the payment is made through aJc payee cheque.

67

Methodology of payment "n 0ood Corporation of "ndia the complete data base of the vendors is made in which each & every information & bank detail of the suppliers is available. F. 0or making the payment every time it become due! the suppliers$ liability is checked on the basis of their credit period and amount that is due for the respective period is found out and it is being tallied with the ledger of that supplier. 6. "f the amount in ledger doesn$t tally with the ledger of supplier then balance confirmation is asked from the respective supplier to know the due amount. I. %hen the amount due is recorded in the database & it is checked that through which medium payment is to be made. "f amount is more than 4one lack5 then payment is made through :%2S otherwise through )10%! and if bank detail is not available or the supplier whose bank is not registered with :'" then in that case payment is made through account payee cheque. D. 0ood Corporation of "ndia has recently started the service of outsourcing cheque payment from ;S'C bank! whereby! now only the details of supplier & the amount to be paid will be sent to the bank & bank will make the cheque & payment on its behalf this will save the time & efforts of the employees & the process will also get fastened.

68

CASH MANAGEMENT Cash is an important part of any business organi,ationL therefore it should be manage properly so as to ensure smooth functioning of the organi,ation. "t is the maintaining of liquidity of a firm to minimi,e the risk of insolvencyS -An insolvent corporation is one where it is unable to meet its maturing liabilities on time because it has inadequate liquidity to meet its debt obligation.. Cash Management is also about the proper balancing of keeping cash without letting it idling around. &rofit is not equating to cash flow. A highly profitable corporation might collapse if without adequate cash flow due to the tying up of corporation$s funds with the accounts receivable and worsen by the needs to make regular payments like wages! rent & utilities! ta+es MotivesJ:easons of ;olding Cash %hree -I. motives advocated by 'ritish economist! (ohn Maynard /eynes namely for? F. %ransaction motive 6. &recautionary motive and I. Speculative motive

Cash Management in 0ood Corporation of "ndia? Cash is the lifeblood of every business organi,ation. 1very organi,ation needs to have adequate flow of cash to meet its entire requirement! whether short

69

term or long term. "n any manufacturing organi,ations before starting any business activity proper planning of cash inflow & outflow is required to be made. So! on the basis of receivable period cash inflow is planned for the beginning of each month and accordingly outflow that is to be made is also planned! as to when payment is to be made. *n daily basis unit wise cash flow is prepared as discussed above & the position is monitored. "t is being identified in which unit the outflow is greater than the inflow! & where there is discrepancy between the 'udgeted & Actual inflow & outflow. &ayment is received on 6nd! 9th! F9th 66nd of each month! accordingly payment is made on 6nd! 9th! & 66nd of each month. :eceivable & payable of the organi,ation are so managed that the cash limit available with the 'anks are minimally used. 0ood Corporation of "ndia has maintained the accounts with many banks but maEor ones are S'" 'A)/! ">'" 'A)/ and AK"S 'A)/. 'ank provides the facility of WC>< -working capital draw down limit..it is the limit available with the bank for meeting the short term cash requirement of the firm. >ifferent bank charges differed rate of interest for the service. As WC>< is the ,ero balance schemes where firm can use the credit limit of the bank up to certain e+tent as agreed upon by them. WC>< -working capital draw down limit. is of two types? S0or!-!er& "oan5 - "t is the short term loan facility that the firm can avail with the bank it is having F8 days roll over period i.e. after using for F8 days this facility gets rolled for ne+t F8 days. CC 4Ca$0 Cre.i!5 "i&i!# -"t is the facility similar to credit card facility available with the bank. %he organi,ation can avail up to certain e+tent the credit facility of bank. "n case of standard chartered bank it is 877 Crores. %o know the position of WC>< used with the banks daily bank statements are checked of all the three banks! this is done because there is always difference between the our bank book & books maintain by bank! so to get an accurate picture of cash bank statements are checked. "t is identified on daily basis that whether the firm is having 70

fund with bank or it is using bank$s fund i.e. 'ank$s CC limit. %his is done to know the cash position of firm at the end of each day so that decision could be taken on time regarding Sweep to other unit or regarding investing the surplus fund. Chart is prepared to show the WC>< utili,ation position. "n the ne+t page WC>< Average chart is shown in which average utili,ation of the WC>< is shown.

2000.00

1%00.00

1000.00

!eries1

%00.00

0.00 1 2 3 & % 6 7 # $ 10 11 12 13 1& 1% 16 17 1# 1$ 20 21 22 23 2& 2% 26 27 2# 2$ 30 31

As per this chart WC>< utili,ation increases on F6 th PF9th of every month as payment is being made to supplier$s between these days in ma+imum number of units of 0ood Corporation of "ndia. %he utili,ation is minimum on 9 th & 66nd of every month as payment is received on these days from customer. "n the ne+t chart WC>< utili,ation position from MA:$79 to (@)1$79 is given. Comparison is made and it is found that although WC>< utili,ation has not smoothen in the (@)1 month but as compared to other months the fluctuations in utili,ation is less.

71

3C4L Ut5 5sat5on- Mar6 0# - 7'n!6 0#

3000

2500

2000

1500

9ar20& )pr20& 9a-20& @un20&

A"o'nt

1000

500

0 1 2 3 4 5 6 7 & 10 11 12 13 14 15 16 17 1& 1 4a-s 20 21 22 23 24 25 26 27 2& 2 30 31

STATEMENT SHO%S %OR/ING CAPITAL POSITION OF FOOD CORPORATION OF INDIA A$ on <;$! Marc0 9::A

STATEMENT OF %OR/ING CAPITAL

Statement of Working Capital as on IF March 677= Par!ic2"ar$ A&o2n! R$- 4in Cr-5 C2rren! A$$e!$# -F. Cash FB.=D -6. >ebtors and receivables 679DI.6= -I. Stock F8FI8.9F -D. Advances to suppliers & employees =8.C= -8. Short term investment BIF.C7 %otal of current assets -A. IB=7I.BC C2rren! Lia(i"i!3# -F. Creditors I=DF.7C -6. &rovisions for 0'% I.9= -I. Advances from customers FD6.F8 -D. Short term loan F66D.6C %otal of current liability -'. 8FFF.D 72

Ne! working ca i!a" 4A-)5

IF8C6.6C

%OR/ING CAPITAL PERFORMANCE USING RATIO ANALYSIS :A%"* A)A<QS"S is the process of determining and presenting the relationship of items and group of items! in the statements. According to 'atty (.!5 :atio can assist management in its basic functions of forecasting! planning! coordination! control and communication.5 :atio analysis is based on premise that a single accounting figure itself may not communicate any meaningful information but when e+pressed as a relative to some other figure! it may definitely give some significant information. :atios are used as a yardstick for evaluating the financial condition and position of the firm. "t is helpful to know about the liquidity! solvency! capital structure and profitability of an organi,ation.

:atio analysis involves comparison for a useful interpretation of the financial statements. Single ratio in itself does not indicate favorable or unfavorable condition. %herefore in this report it is compared with? &ast ratios! i.e. ratios calculated from the past financial statements of the same corporation. Since liquidity ratios and Activity ratios helps to measure the firm$s ability to meet current obligations and firms efficiency in utili,ing its assets respectively. %hese two have been used. 0inancial ratio analysis calculates and compares various ratios of amounts and balances taken from the financial statements. 73

T0e &ain 2r o$e$ of working ca i!a" ra!io ana"3$i$ are#

%o indicate working capital Management &erformance %o assist in identifying areas requiring closer Management.

T0e fo""owing ra!io$ are of in!ere$! !o !0o$e &anaging working ca i!a" # -

F. Working capital ratio 6. Cash ratio I. Ruick ratio D. Working capital ratio 8. >ebtor turnover ratio B. Creditor turnover ratio =. "nventory turnover ratio

74

C2rren! Ra!io Current :atio U Current AssetsJCurrent <iability Current Assets divided by Current <iabilities. %he working capital ratio -or current ratio. attempts to measure the level of liquidity! that is! the level of safety provided by the e+cess of current assets over current liabilities.

Qear ending

Current Assets -in Cr.

Current <iability -in Cr. Current :atio

6778 677B 677= 6779 -&roviso.

I9C6F.CF DBI79.B6 IB=7I.B9 D7777.77

ICB6.7B ICBF.IC 8FFF.IC B777.77

C.96 FF.BC =.F9 B.BB

0rom the above table it can be interpreted that 0ood Corporation of "ndia$s liquidity position is not constant. As a conventional rule a current ratio of 6 to F or more is considered satisfactory because in a worse situation! even if the value of current assets becomes half! the firm will be able to meet its obligation. Current ratio refers a margin of safety for creditors therefore higher the current ratio! the greater the margin of safety.

75

%he closer look reveals that 0ood Corporation of "ndia current assets is nearly 9.9I times of its liability it shows a good position of working capital but it is not fair enough because corporation going to block there capital. 12ick Ra!io Ruick :atio U -Currents Assets P "nventory.JCurrent <iability Ruick ratio establishes a relationship between quick or liquid assets and current liabilities. An asset is liquid if it can be converted into cash immediately or reasonably soon without a loss of value. "nventories are considered to be less liquid therefore for calculating quick ratio they are deducted from current assets.

Qear ending 6778 677B 677= 6779 -&roviso.

Current Assets -in Cr.. I9C6F.CF DBI79.B6 IB=7I.B9 D7777.77

"nventory -in Current <iability -in Ruick :atio Cr.. Cr.. FI6I9.99 F6=IC.I= F8FI8.9F FB777 ICB6.7B ICBF.IC 8FFF.IC B777.77 B.D9 9.D= D.6F D.77

Ruick :atio in the current year has reduced to D.77 -&robable on the basis of provisional data.! which is still satisfactory. Ruick :atio is more penetrating test of liquidity than current ratio! yet it should be used cautiously as all debtors may not be liquid and cash may be immediately needed to pay operating e+penses. Ca$0 Ra!io Cash & 'ank V Short term securitiesJcurrent liability Although receivables! debtors and bills receivables are generally more liquid than inventories! yet there may be doubts regarding their reali,ation into cash

76

immediately or in time. ;ence! it is necessary that the absolute liquid ratio should also be calculated together with current ratio and acid test ratio so as to e+clude even receivables from the current assets and find out the absolute liquid assets

Qear ending 6778 677B 677= 6779

Cash & bank V Current <iability -in short term securities Cr.. FF9C.F9 DF6.7C BD9.BD C77.77 ICB6.7B ICBF.IC 8FFF.IC B777.77

Cash :atio 7.I7 7.F7 7.FI 7.F8

%he acceptable form for this ratio is 7.87 and the quick ratio of this year is 7.F= which is not good but we can say it is also not satisfactory.

%OR/ING CAPITAL TURNO'ER RATIO Working Capital %urnover :atio U SalesJ)et Working Capital Working capital of a firm is directly related to sales. Current assets like debtors! receivables! cash! and stock etc. all changes with all change in sales. Working capital turnover ratio indicates the velocity of utili,ation of net working capital. %his ratio indicates the number of times the working capital is turned over in the course of the year. %his ratio measures the efficiency with which the working capital is being used by a firm.

Qear ending

Sales -Cr..

)et WC -in Cr..

WC %urnover ratio

6778 677B

6DIIC.=D 66C=B.CI

IDC8C.98 D6ID=.6I

7.BC 7.8D

77

677= 6779 -&rovisional.

F987D.CI 67777.77

IF8C6.6C ID777.77

7.89 7.89

A higher ratio indicates the efficient utili,ation of working capital and low ratio otherwise. "n case of 0ood Corporation of "ndia Working Capital ratio indicate inefficient utili,ation of working capital. DE)TOR TURNO'ER RATIO >ebtors %urnover :atioU SalesJ>ebtors Average Collection &eriodUIB7J>ebtor %urnover :atio %his ratio indicates the speed with which >ebtorsJAccounts receivables are being collected. "t shows how quickly debtors or receivables are being converted into cash. A turnover ratio of = shows that debtors are converted into cash = times in a year. A collection period of DC shows that debtors on an average are collected in DC days the higher the turnover ratio and lower the average collection period the better the trade credit management. <onger collection &eriod shows that payment of debtors is delayed. "n case of 0ood Corporation of "ndia collection period is long because almost sales are on credit and customers goodwill is good.

Qear ending 6778 677B 677= 6779 -&rovisio.

>ebtors -in Cr.. 6DDFD.66 II7B=.D9 679DI.6= 6D777.77

Sales -in Cr.. 6DIIC.=D 66C=B.CI F987D.CI 67777.77

>ebtor %urnover ratio F.7F F.87 F.FF F.67

Average Collection I8B 6D7 I6D I77

A turnover ratio of F.67 shows that debtors are converted into cash F.67 times in a year. A collection period of I78 shows that debtors on an average are collected in I78 days the lower the turnover ratio and higher the average collection period the

78

worse the trade credit management. <onger collection &eriod shows that payment of debtors is delayed. "n case of 0ood Corporation of "ndia collection period is long because almost sales are on credit based upon central or state government discretion and these customers goodwill is good.

CREDITORS TURNO'ER RATIO Creditors %urnover :atio U &urchasesJCreditors Average &ayment &eriod U )o. of working daysJCreditor turnover ratio %his ratio indicates the speed at which creditors are to be paid. A turnover ratio of FF.D9 shows that creditors are to be paid FF.D9 times in a year. Creditors payment period shows that on average creditors are to be paid after I6 days. <ower creditor turnover ratio and the higher creditors payment period shows receiving liberal credits from the creditors and vice versa.

Qear ending Creditors -in Cr.. 6778 677B 677= 6779 6=D9.DC 6B=B.7B I=DF.79 D777.77

&urchases -in Cr.. IBCI6.D7 IDB=C.8D I8BDC.86 D7777.77

Creditors Average &ayment %urnover ratio &eriod FI.DI F6.C8 C.86 F7.77 6= 69 I9 IB

<ower credit payment period shows receiving liberal credit from the creditors. 0ood Corporation of "ndia debtors turnover ratio is on an average F.67 times and creditors turnover ratio is FF.D9 times it shows a not a very good sign for 0ood Corporation of "ndia. 'ecause there is a time gap between receives of payment and payment pays and because of this time gap a 0ood Corporation of "ndia can invest the money for short term. IN'ENTORY TURNO'ER RATIO

79

"nventory turnover ratio U Cost of 2oods SoldJAverage "nventory "nventory Conversion &eriod U >ays in a yearJinventory %urnover :atio "nventory %urnover :atio indicates the speed at which inventory convert into finished sales. @sually! a high inventory turnoverJ Stock velocity indicates efficient management of inventory because more frequently the stocks are sold! the lesser amount of money is required to finance the inventory. A low in inventory turnover ratio indicates an inefficient management of inventory. A low inventory turnover implies over investment in inventories! dull business! poor quality of goods! stock accumulation of obsolete and slow moving goods and low profits as compared to total investments.

Qear ending

C*2S -"n Cr..

"nventory -in Cr.. F6C6C.8D F6C9=.BD FICIB.I8 F8777.77

"nventory %urnover :atio I.FB I.78 6.=D 6.BB

"nventory Conversion &eriod FFD FF9 FIF FI8

6778 677B 677= 6779

D79=F.FB ICBC7.76 I9F=7.6F D7777.77

A too high turnover of inventory may not necessarily imply higher profits. %he profits may be low due to e+cessive cost incurred in replacing stocks in small lots! stock out problems selling inventory at lower price. "n 0ood Corporation of "ndia "nventory position is satisfactory. "nventory turnover 6.C7 shows it takes F6I days to convert.

80

Percen!age of Sa"e$ Me!0o.

%he &ercentage of Sales Method is a 0inancial 0orecasting approach which is based on the premise that most 'alance Sheet and "ncome Statement Accounts vary with sales. %herefore! the key driver of this method is the Sales 0orecast and based upon this! &ro 0orma 0inancial Statements -i.e.! forecasted. can be constructed and the firms needs for e+ternal financing can be identified. %he calculations illustrated on this page will refer to the 'alance Sheet and "ncome Statement which follow. %he forecasted Sales growth rate in this e+ample is 68G

Percen!age-of-$a"e$ &e!0o. (2$ine$$ * &one3 .efini!ion

1. 2eneral? Method of estimating cash requirements by e+pressing revenues and e+penses as percentages of sales! and using these percentages to construct a pro forma income statement.

81

2. Advertising? Advertising e+pense budgeting method based on allocating a fi+ed percentage -say 8 percent. of the anticipated sales revenue to advertising. "t is based on the erroneous assumption that Msales cause advertisingM whereas the reality is Eust the opposite -advertising causes sales.. See also adaptive control method! affordable method! competitive parity method! and obEectives and task method. F. A widely used method of establishing an advertising budget based on a percentage of past! current! or future sales or profits. 0or e+ample! a product producing F8G of sales would receive F8G of the advertising budget. 6. &roEecting financial statements on the basis that many of the variables will remain at a fi+ed percentage of sales. 0or e+ample! if sales are e+pected to increase F7G during the ne+t year! the firm will have an additional F7G in inventories! receivables! and accounts payable.

&rocedure used to set advertising budgets! based on a predetermined percentage of past sales or a forecast of future sales. %his method of budget allocation is popular with advertisers because of its simplicity and its ability to relate advertising e+penditures directly to sales. Management usually determines the budgetHs percentage figure! which is based on the industry average or the companyHs historical or previous yearHs advertising spending. 0or e+ample! a firm e+pecting to do :upees87 million worth of business ne+t year and choosing to allocate 8G of their sales to the advertising budget! would propose a :upees6.8 million advertising budget. A similar decision may be based on market share! with :upees6 million being allocated for every share point a brand holds. Many advertisers! however! shun this method because it is based on the theory that advertising results from sales! while the converse is true! that is! that sales result from advertising. "n other words! advertisers feel that advertising communicates to prospective buyers the features and benefits of a product that are necessary to generate sales. "n addition! the method does not recogni,e that as conditions change! advertising e+penditures should change with them. 0inally! using this method may erroneously lead to e+cessive spending for large established brands and inadequate budgeting for products that may profit from additional advertising! such as new or repositioned brands.

)a"ance S0ee! 4R2 ee$ in Crore$5 A$$e!$ 9::A Lia(i"i!ie$ Owner$I ED2i!3
C2rren! A$$e!$ Cash Accounts :eceivable "nventory Total Current Assets Fi7e. A$$e!$ Net /ixed Assests 677 D77 B77 F677 977

an.9::A

Inco&e S!a!e&en! 4R2 ee$ in Crore$5 9::A

Sales Cost of 2oods Sold Taxa2le Income %a+es Net Income >ividends Addition to :etained 1arnings F677 C77 I77 C7 6F7 =7 FD7

C2rren! Lia(i"i!ie$ Accounts &ayable D77 )otes &ayable D77 Total Current )ia2ilities 977 Long-Ter& Lia(i"i!ie$ <ong %erm >ebt 877 %otal <ong %erm <iabilities 877 Owner$I ED2i!3 Common Stock -:upeesFI77 &ar. :etained 1arnings D77

82

Total Assets

6777

Total Owners6 E7uity =77 Total )ia28 and Owners6 6777 E7uity

Percen!age$ of Sa"e$
%he first step is to e+press the 'alance Sheet and "ncome Statement accounts which vary directly with Sales as percentages of Sales. %his is done by dividing the balance for these accounts for the current year -677=. by sales revenue for the current year. %he 'alance Sheet accounts which generally vary closely with Sales are Cash! Accounts :eceivable! "nventory! and Accounts &ayable. 0i+ed Assets are also often tied closely to Sales! unless there is e+cess capacity. -%he issue of e+cess capacity will be addressed in 1+ternal 0inancing )eeded section.. 0or this e+ample! we will assume that 0i+ed Assets are currently at full capacity and! thus! will vary directly will sales. :etained 1arnings on the 'alance Sheet represent the cumulative total of the firmHs earnings which have been reinvested in the firm. %hus! the change in this account is linked to SalesL however! the link comes from relationship between Sales growth and 1arnings %he )otes &ayable! <ong %erm >ebt! and Common Stock accounts do not vary automatically with Sales. %he changes in these accounts depend upon how the firm chooses to raise the funds needed to support the forecasted growth in Sales. *n the "ncome Statement! Costs are e+pressed as a percentage of Sales. Since we are assuming that all costs remain at a fi+ed percentage of Sales! )et "ncome can be e+pressed as a percentage of Sales. %his indicates the &rofit Margin. %a+es are e+pressed as a percentage of %a+able "ncome -to determine the ta+ rate.. >ividends and Addition to :etained 1arnings are e+pressed as a percentage of )et "ncome to determine the &ayout and :etention :atios respectively.

Percen!age of Sa"e$ Ca"c2"a!ion$ %he e+amples in this bo+ illustrate the calculations which were used to determine the percentages provided in the following 'alance Sheet and "ncome Statement. Ca$0 CashJSales U :upees677J:upeesF677 U .FBB= U FB.B=G In8en!or3 "nventoryJSales U :upeesB77J:upeesF677 U .8 U 87G Acco2n!$ -Accounts &ayable.JSales U :upeesD77J:upeesF677 U .IIII U Pa3a("e II.IIG Co$!$ CostsJSales U :upeesC77J:upeesF677 U .=8 U =8G Ta7e$ %a+esJ-%a+able "ncome. U :upeesC7J:upeesI77 U .I U I7G Ne! Inco&e -)et "ncome.JSales U :upees6F7J:upeesF677 U .F=8 U F=.8G

83

Di8i.en.$

>ividendsJ-)et "ncome. U :upees=7J:upees6F7 U .IIII U II.IIG

)a"ance S0ee! 4R2 ee$ in Crore$5 A$$e!$ 9::A 6 Lia(i"i!ie$ an. 9::A Owner$I ED2i!3
C2rren! A$$e!$ Cash Accounts :eceivable "nventory Total Current Assets Fi7e. A$$e!$ Net /ixed Assests C2rren! Lia(i"i!ie$ 677 FB.B=G Accounts &ayable D77 II.IIG )otes &ayable B77 87.77G Total Current )ia2ilities F677 Long-Ter& Lia(i"i!ie$ <ong %erm >ebt %otal <ong %erm <iabilities 977 BB.B=G Owner$I ED2i!3 Common Stock -:upeesF &ar. :etained 1arnings Total Owners6 E7uity 6777 Total )ia28 and Owners6 E7uity

Inco&e S!a!e&en! 4R2 ee$ in Crore$5 9::A 6

Sales Cost of 2oods Sold Taxa2le Income %a+es Net Income >ividends Addition to :etained 1arnings F677 C77 =8G I77 68G C7 I7GW 6F7 F=.8G =7 II.IIGW FD7 BB.B=GW

D77 II.IIG D77 )JA 977

877 877 I77 D77 =77 6777

)JA

)JA )JAW

Total Assets

Par!ia" Pro-For&a
%he ne+t step is to construct the &artial &ro forma 0inancial Statements. 0irst! determine the forecasted Sales level. %his is done my multiplying Sales for the current year -677=. by one plus the forecasted growth rate in Sales. SFU S7 -F V g. U :upees F677-F V .68. U :upees F877 Where

SF U the forecasted Sales level! S7 U the current Sales level! and g U the forecasted growth rate in Sales.

*nce the forecasts Sales level has been determined! the 'alance Sheet and "ncome Statement accounts which vary directly with Sales can be determined by multiplying the percentages by the Sales forecast. %he accounts which do not vary directly with Sales are simply transferred to the &artial &ro 0orma 0inancial Statements at their current levels. :etained 1arnings on the 'alance Sheet are the one item whose amount is determined using a slightly different procedure. %he &artial &ro 0orma balance for :etained 1arnings equals :etained 1arnings in the current year plus the forecasted Addition to :etained 1arnings from the &artial &ro 0orma "ncome Statement. %he

84

balances for summary accounts! such as %otal Current Assets and %otal Current <iabilities! are determined by summing their constituent accounts.

Par!ia" Pro-For&a Ca"c2"a!ion$ %he e+amples in this bo+ illustrate the calculations which were used to derive the following &artial &ro 0orma 'alance Sheet and "ncome Statement. Ca$0 -CashG.-Sales 0orecast. U -FB.B=G.-:upees F877. U :upees 687 In8en!or3 -"nventoryG.-Sales 0orecast. U 87G-:upees F877. U :upees =87 Co$!$ -CostsG.-Sales 0orecast. U =8G-:upees F877. U :upees F677 A..i!ion !o -Addition to :etained 1arningsG.-)et "ncome 0orecast. U BB.B=G Re!aine. -:upees 6B6.8. U :upees F=8 Earning$ Re!aine. :etained 1arnings V Addition to :etained 1arnings 0orecast U Earning$ :upees D77 V :upees F=8 4)a"ance S0ee!5

A$$e!$

)a"ance S0ee! 4R2 ee$ in Crore$5 9::A 9::B Lia(i"i!ie$ an. Owner$I ED2i!3
677 D77 B77 F677 C2rren! Lia(i"i!ie$ 687 Accounts &ayable 877 )otes &ayable =87 Total Current )ia2ilities F877 Long-Ter& Lia(i"i!ie$ <ong %erm >ebt %otal <ong %erm <iabilities F777 Owner$I ED2i!3 Common Stock -:upeesF &ar. :etained 1arnings Total Owners6 E7uity 6877Total )ia28 and Owners6 E7uity

9::A
D77 D77 977 877 877 I77 D77 =77 6777

9::B
877 D77 C77

Inco&e S!a!e&en! 4R2 ee$ in Crore$5 9::A 9::B

F677 C77 I77 C7 6F7 =7 FD7 F877 FF68 I=8 FF6.8 6B6.8 9=.8 F=8

C2rren! A$$e!$ Cash Accounts :eceivable "nventory Total Current Assets Fi7e. A$$e!$ Net /ixed Assests

Sales Cost of 2oods Sold Taxa2le Income %a+es Net Income >ividends 877 Addition to :etained 877 1arnings 868 8=8 9=8 66=8

977

Total Assets

6777

E7!erna" Financing Nee.e. 4EFN5

%he 1+ternal 0inancing )eeded -10). can be determined from the &artial &ro 0orma 'alance Sheet. "t is simply equal to the difference between &artial &ro 0orma %otal Assets and &artial &ro 0orma %otal <iabilities and *wnersH 1quity. 10) U :upees 6877 P :upees 66=8 U :upees 668 Please note that the External Financing Needed section explores the calculation of EFN hen there is excess capacit!. 85

Pro-For&a Financia" S!a!e&en!$

%he final step is to determine how the 10) is to be raised. 0irms can choose to raise the 10) by borrowing on short term basis -)otes &ayable.! borrowing on a long term basis -<ong %erm >ebt.! issuing equity -Common Stock.! or some combination of the above. %he chosen method is called the P"2g. "n this e+ample we shall assume that the 10) is to be raised through long term borrowing. %hus the plug is <ong %erm >ebt. %o determine the &ro 0orma 0inancial Statements simply increase <ong %erm >ebt by the 10) of :upees668 determined in the previous step.
)a"ance S0ee! 4R2 ee$ in Crore$5 9::A 9::B Lia(i"i!ie$ an. 9::A 9::B Owner$I ED2i!3
677 D77 B77 F677 C2rren! Lia(i"i!ie$ 687 Accounts &ayable 877 )otes &ayable =87 Total Current )ia2ilities F877 Long-Ter& Lia(i"i!ie$ <ong %erm >ebt %otal <ong %erm <iabilities F777 Owner$I ED2i!3 Common Stock -:upeesF &ar. :etained 1arnings Total Owners6 E7uity 6877Total )ia28 and Owners6 E7uity D77 D77 977 877 =68 I77 D77 =77 6777 877 D77 C77

A$$e!$

Inco&e S!a!e&en! 4R2 ee$ in Crore$5 9::A 9::B

F677 C77 I77 C7 6F7 =7 FD7 F877 FF68 I=8 FF6.8 6B6.8 9=.8 F=8

C2rren! A$$e!$ Cash Accounts :eceivable "nventory Total Current Assets Fi7e. A$$e!$ Net /ixed Assests

Sales Cost of 2oods Sold Taxa2le Income %a+es Net Income >ividends 877 Addition to :etained =68 1arnings I77 8=8 9=8 6877

977

Total Assets

6777

ACCOUNTING TURNO'ER RATIOS AND CASH CON'ERSION CYCLE

0inancial statements! and especially accounting ratios! are usually used to evaluate actual managerial performance and predict the consequences of their decisions -firm value or financial distress.. 0or a better understanding of the empirical results! and to improve the correct evaluation of managerial decisions! it is necessary to establish a link between accounting ratios and concrete managerial decisions. %his paper analyses the relationship established between accounting turnover ratios and the period of time spent concluding and operational process. "n order to achieve this purpose! not only a set of possible averages of real conversion periods are defined! but also the conditions that guarantee that accounting turnover ratios offer a good approach to them are established. "n general! the conditions which enable to approach accounting turnover ratios on good terms are difficult to accept in firms operating in growing or declining markets! with seasonal demand or with long

86

operating cycles. *n the other hand! some possible alternatives which! without needing more information! can help to measure real conversion periods of time in a more accurate way are also proposed and illustrated. %his work starts by focusing on the turnover ratios and with their inverse interpreted as an appro+imation of the average days spent in an operational process . %hese time variables integrate the global working capital time variable cash conversion cycle -net time interval between actual cash e+penditures on purchase of productive resources and the ultimate recovery of cash receipts from product sales.? Section F Section 6 Section I -V. -V. -. -U. :eceivables conversion period "nventory conversion period &ayment deferral period Cash conversion cycle

%he main obEective here is to clarify the assumptions which must be posed to be able to deduce the amount of days spent completing an operational process from turnover ratios. "nitially! in Section F! different weighted averages of days that a group of units -commodities! sales or purchases! all three magnitudes which can be e+pressed not only in physical but also in monetary terms. have been in a concrete process until it has been completed are defined. After this! in Section 6! these averages of days are related to the usually employed accountant based turnover ratios. %his relationship will allow us to evaluate the degree of reliability of the implicit assumptions made by the analyst who uses accounting information and turnover ratios in order to quantify the cash conversion cycle period. %o support the discussion terms! and with the aim of offering the most correct possible solution we can find! an empirical application is presented as an illustration of the problems detected in the theoretical level -Section I.. %his work concludes with presenting a synthesis of the main conclusions we have obtained. %his work has analy,ed the problems of evaluating the Cash Conversion Cycle through accounting information. %o do so! different averages of days that a unit has been in a process have been defined. Afterwards! these definitions have been compared with the accounting approaches habitually used by analysts. *ne of the main contributions of this part of the work lies in showing the assumptions which are being carried out when the accounting approaches are interpreted as theoretical average periods which some units have been in the operating process. %he type of assumptions made seems to be more difficult to be fulfilled in the following situations? F. "n non steady state firms -firms which are growing or declining.. 6. 0irms devoted to activities which require maintaining long operating cycles. I. 0irms which! due to influential e+ternal factors! have non stable working capital requirements. "t is interesting to highlight that the accounting information allows us to establish some limits between which some of the averages of defined days will vary!

87

and that these limits will allow us to formulate a clearer interpretation of the accounting ratios. Subsequently! a practical application of the proposed ratios has been carried out! with special emphasis on the problems of quantification. More specifically! the width of the intervals between which some of the theoretical average periods could vary is shown. %he possibility of grouping the years considered in the average in order to gain precision in the calculation of the average periods analysed has also been proposed. %his proposal has drawbacks! mainly! when the evolution of the Cash Conversion Cycle in a concrete company for a long period of time is analysed! since the comparisons are not carried out from year to year. "n other words! a very precise quantification of the theoretical cash conversion cycle can be obtained! but the price to be paid is that the average period which must be considered contains periods of time which corresponds to two years or more. 0or this reason! this procedure is not very useful if we are interested in analysing the changes in the Cash Conversion Cycle with special focus on the very near short term periods of time. )evertheless! we believe that our proposal presents some interesting features which can be used by the analyst if increasing the reliability of the analysis is considered as a fundamental goal. So! then! if on a yearly basis the working capital management of two firms is being benchmarked! the differences between the periods derived from the accounting turnover ratios have to be taken note of with more interest if the interval of possible values presents little differences rather than if these differences are big. "n other words! as a tool in short term financial analysis! the interval could e+ercise as an indicator of degree of accuracy when we are quantifying the Cash Conversion Cycle using only e+ternal accounting information. When the analyst has financial statements corresponding to several periods! this problem can be considerably reduced because he can reduce the interval of ma+imum and minimum values and! comparatively! he can also verify the impact of improvement or deterioration in the management of working capital magnitudes. %o conclude! our work has been directed towards providing additional tools for financial statements analysis in order to obtain a more accurate diagnosis or working capital management. )evertheless! there are still some unsolved questions which need more attention in the future. Among them! a possible future e+tension could be how to make sure that conversion days measured by the same rules are being added? the receivables conversion period takes sales prices while the inventory conversion period is measured using operating costs rules.

O era!ing C3c"e Fra&ework

O era!ing C3c"e Working capital is also known as revolving capital and a circular path of conversionJreconversion takes place. %his revolution of cycle is called as the operating cycle. <et us consider an e+ample to better understand operating cycle. A person starts a business with an initial investment. With credit e+tended by e+pense creditors! he starts production process. 2oods of varying levels of finish results! and thus called as work in progress. *nce complete processing is done! it is called as finished goods. @ntil these goods are sold! they remain in stock. Sales may be for 88

cash andJor credit basis. %he business person needs to wait a little to reali,e cash from credit customers. %he reali,ed cash is used to pay creditors. 'ut he needs to maintain cash balance for day to day operations as well as for meeting sudden spurt in payment obligations accompanied by sluggish cash collections from debtors. %hus a revolution or cycle from cash to raw materials to Work in &rogress! to finished goods! to debtors! and back to cash takes place. %his revolution is called as operating cycle. %hus! we can say that the term operating cycle! otherwise called as cash cycle refers to the length of time necessary to complete the following cycle of events? F. Conversion of cash into inventory 6. Conversion of inventory into debtors I. Conversion of debtors into cash

S!age ;# Cash to "nventory P "n this stage! cash first gets converted into raw materials! then work in progress and then finished goods in a typical manufacturing concern. As regards non manufacturing concerns! when the goods are purchased! cash gets converted into "nventory. S!age 9# "nventory to >ebtors P %he inventory thus produced or purchased! gets converted into debtors or receivables upon credit sales. S!age <# %he debtors or accounts receivables get in turn converted back into cash when they make payment. Leng!0 of o era!ing c3c"e# When raw materials remain in store pending issue for production for a less duration! when raw materials gets converted into W"& in a short duration! when finished goods remain in warehouse pending for sales for a short duration only! and when cash reali,ations out of sales are made quickly and finally when payment to creditors is made slowly! the operating cycle would be smaller and consequently the working capital will also be reasonable. %hus shorter duration of operating cycle indicates an efficient working capital management. For E7a& "e# Co& 2!a!ion of "eng!0 of o era!ing c3c"e# &eriod covered Average credit period allowed by creditors F year of IB8 days FB days

89

Average total of debtors outstanding

AD97!777

%otal consumption of raw materials per AD!D77!777 annum %otal production cost per annum AF7!777!777 %otal cost of sales AF7!877!777 Sales during the year 3alue of stock maintained? :aw materials Work in progress 0inished goods stock Calculate the operating cycle. So"2!ion# Age of :aw materials Age of W"& U AI67!777 + IB8 U AD!D77!777 6= days AFB!777!777 AI67!777 AI87!777 A6B7!777

U AI87!777 + IB8 U AF7!777!777 U A6B7!777 + IB8 U AF7!877!777 U AD97!777 + IB8 U AFB!777!777

FI days

Age of finished goods Age of debtors

C days

FF days B7 days FB days DD days

<ess? Age of creditors -given. <ength of *perating cycle

Computation of Working capital need through *perating cycle %he length of operating cycle can be used to estimate total working capital required. 0irst! we have to calculate the number of operating cycles in the period under study! normally a year. %herefore! number of operating cycles U )umber of days in a year <ength of operating cycle in days "n the above e+ample! the number of cycles per annum would be IB8 J DD U 9.I times. Amount of working capital U %otal *perating cost )o. of *perating cycles

90

"f the operating cost per annum is AF7!877!777! the amount of working capital would thus come to AF7!877!777 X 9.I U AF!6B8!7B7 per operating cycle. ;ence the significance of operating cycle concept in the efficient management of working capital.

Re"e8anc3 of Percen!age of Sa"e$ A Foo. Cor ora!ion of In.ia

roac0 * O era!ing C3c"e A

roac0 in

0ood Corporation of "ndia still not adopted these methodologies but in forthcoming years they will have to adopt these terminologies not in theoretical sense but in they have to put themselves in practical manner also. %his is the main reason that " have put myself to e+plain these methodologies with the help of an e+ample. "n 0ood Corporation of "ndia everything is controlled by Central 2overnment! buffer stock! targets of the forthcoming years for purchase of food grains! minimum support price for food grains! shortage ratios! purchase price and sales prices of food grains that are the main reason for not adopting these methodologies in practical manner mainly not practicable for 0C"! where everything is controlled by Ministry of Agriculture! Central 2overnment.

91

CHAPTER-'

FINDINGS
%he study of working capital primarily aimed at pinpointing the strengths and weaknesses of a business undertaking by regrouping and analy,ing the systems and procedures involved in preparing financial statements and procedures involved in. "t is useful for management for its internal affairs and to outside parties who are directly or indirectly related with the affairs of the corporation. %hese are crucial reports! which reflect the financial soundness of a business enterprise through well arranged data. *n the basis of the study of financial accounting system of 0ood Corporation of "ndia following are the main findings? F. %he working capital management of corporation is good. Corporation pays its creditors on time and well manages the current assets.

92

6. %here is a time gap between debtors and creditors. And it$s a good health sign for a corporation. 'ecause a corporation can invest for short term & earn return. I. 0irm made its payment through )10% -national electronic fund transfer. & :%2S -real time gross settlement.. And by this a firm can made payment quickly and there is no need of paper work. D. As corporation uses ("% policy for inventory. %hat$s why there is very less chances for obsolescence of inventory.

SUGGESTIONS
*n the basis of the study of procedures of 0ood Corporation of "ndia following are the suggestions? F. %hey should list their Corporation in stock 1+change to generate funds so that they can e+pand their business and earn more revenue. 6. Corporation is working on *ffline. %hat$s why corporation should adopt other software like *racle etc. I. %here should have uniform policy in every unit like in making provisions! valuation of inventory etc. D. "f firm has ("% policy then why there is non moving stock e+ists in the firm. A firm should keep check on it.

CONCLUSIONS
93

0ood Corporation of "ndia is a growing enterprise. "ts sales are increasingly gradually. >epending upon which its working capital requirement s also increased. %he management of working capital in 0ood Corporation of "ndia is quite satisfactory. %his is shown by different ratios and other calculations. :atio like net working capital! Current :atio! quick :atio shows that liquidity position of the corporation is good which means corporation can easily pay to its short term liabilities as and when it become due. And if one can get money to move faster around the cycle -e.g. collect money due from debtors more quickly. or reduce the amount of money tied up -e.g. reduce inventory levels relative to sales.! the business will generate more cash or it will need to borrow less money to fund working capital. As a consequence! one can reduce the cost of bank interest or generate additional free money available to support additional sales growth or investment. Similarly! if one can negotiate improved terms with supplier e.g. get longer credit or an increased credit limitL one can effectively create free finance to help fund future sales.

)I)LIOGRAPHY

)OO/S# F. /han M.Q. and (ain &./ -677F.! Financial "anage#ent! %ata Mc2raw ;ill. 6. /othari C.:. -6778.! 4$esearch "ethodolog!%"ethods & Techni'ues 5! )ew Age "nternational &vt. <td. &ublishers! )ew >elhi. I. &andey ".M. -677I.! Financial "anage#ent! %ata Mc2raw ;ill. D. Shapiro Alan C. -677I. 4"ultinational Financial "anage#ent 5 (ohn Wiley & Sons -AS"A. &vt. <td. REPORT# 'ulletin and Annual :eport? 7=.. 0ood Corporation of "ndia. -0rom 677D 6778 to 677B

94

Annual :eport of 0C" for the financial year 677= 79 is under submission to 0ood Ministry! so unavailable. %E)SITES# F. www.economictimes.com 6. www.financiale+press.org I. www.sldl.com D. www.tubenet.org 8. www.fciweb.nic.in 6. http?JJwww.agriculture industry india.com

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