SCHOOL OF MANAGEMENT

RESEARCH PROJECT
(MBA IVth Semester)
WORKING CAPITAL MANAGEMENT OF
ICICI PRUDENTIAL LIFE INSURANCE
Ths Rese!r"h Pr#$e"t s s%&mtte' (#r the )!rt!* (%*(**me+t #( MBA !t
S"h##* #( M!+!,eme+t-
Pr#$e"t G%'e. S%&mtte' B/.
R%"h S!,!r Ar%+! Bh!tt
(0122PGMB123)
SCHOOL OF MANAGEMENT
BAHRA UNIVERSIT4
2
CERTIFICATE OF COMPLETION

This is to certify that Ms. Aruna Bhatti, a
student of Master of Business Administration, Bahra
University, has worked under my Supervision to complete
his Project Report Workin !apital Manaement "f #!#!#
Prudential $ife #nsurance%
The work done is oriinal and outcome of his
sincere e&orts and 'niversity is satis(ed with the work done
)y him and recommend the same to )e forward for
evaluation%
0




Declaration
I hereby declare that the fnal Project Report Workin !apital
Manaement "f #!#!# Prudential $ife #nsurance submitted in
partial fulfllment of the award for the degree of Master of Business Administration
MBA! to Bahra "ni#ersity$ is one of my original wor% and not submitted to any
other &egree'&iploma$ fellowship or other similar title(
*ame+, Aruna Bhatti
'niv% Roll+, -.//P0MB./1
2ate+,
5
Acknowledgement
With immense gratitude I acknowledge all those, whose guidance & encouragement served
as a platform to stand firmly and complete the project successfully. On such an occasion, I would like to
thank all the people who helped me reach this milestone with relative ease.
I express my sincere thanks to my project guide Miss Ruchi Sagar for her wholehearted
support, inspiring guidance and encouragement throughout the project work.
I express my sincere thanks to my faculty guide, Mr. Karan Gupta for his guidance, moral
support and continuous encouragement throughout the project.
I also thank Faculty of School Of Management (Bahra University) for their guidance,
support and understanding. Finally I thank all my friends for their indirect support in completing this
project.
Aruna Bhatti
6
!"*T3*TS


PART, A
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PART, B
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PART, 2
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PART, 3

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3
I NTRODUCTION
1.1 RELVANCE OF THE TUD!" #
!hane is a lo)al law of nature% The lo)al economy is chanin very fast
and we in #ndia are part of it% #ndian economy has witnessed a vast chane
durin the last decade and present decade% Since independence a wall was
)uilt around economy to protest the #ndian companies% This wall was
continued to e?ist till />>/% The new economic policy which came into force in
the year of />>/ chane of the whole scenario% The days of license and permit
are one% The )lanket of protectisum is no more% The #ndian companies have
already their tails on (re% The forein tiers are already troopin in to #ndian
market and the )attle of royal are already )ean in the (eld of )usiness%
!ompetition already increases its hand )y manifold due to li)erali@ation and
lo)ali@ation of economy% The sloan Ali)erali@e perishB is the )u@@word of the
presents days%
The importance of the workin capital manaement for any kind of )usiness
can )e very well known from the followin in view of the chanin of )usiness%
#n the resent )usiness workin capital manaement covers followin areas%
/% Manaement of !ash %
7
-% #nventory Manaement
6% Manaement of Receiva)les%
9% !ash :low manaement%
OB$ECTIVE OF THE TUD!" #
/%C #dentify the trends for last (ve years%
-%C To know the a)ility of the #!#!# PR'23*T#A$ to meet its current lia)ilities%
6%C To determine the workin capital position of the !ompany%
9%C To know the eDciency with which the orani@ation is utili@in its various assets
in eneratin sale revenue%


8

CO%E OF THE TUD!" #
1.& AREA COVERED" #
#t covers the (nancial function of #!#!# PR'23*T#A$
'.& %ERIOD COVERED" #
The study covered 1 years from -..= to -./- to have a
comprehensive picture%
(.& #t helps to understand present position%
METHODOLO)!
A.& REEARCH DEI)N" #
The study was descriptive in nature, in that
an attempt was made to evaluate the performance of the !ompany%
B.& OURCE OF DATA" #
"nly secondary data has )een collected for the
purpose of the study% The secondary data analyst to e?tract of (nancial
9
statement from the company records to a possi)le e?tent for the period of 1
years startin from -..= to -.//,/-%
C.& Rati* ana+ysis is used for data analysis and interpretation
COMPANY PROFILE
ICICI Prudential Life Insurance
#!#!# Prudential $ife #nsurance is a joint venture )etween the #!#!# 0roup and
Prudential plc, of the 'E% #!#!# started o& its operations in />11 with providin
(nance for industrial development, and since then it has diversi(ed into housin
(nance, consumer (nance, mutual funds to )ein a 5irtual 'niversal Bank and its
latest venture $ife #nsurance% #!#!# Prudential $ife #nsurance !ompany $imited was
incorporated on 4uly -., -...% The authori@ed capital of the company is Rs%-6..
Million and the paid up capital is Rs% /1.. Million% The !ompany is a joint venture
of #!#!# F<9GC and prudential plc 'E F-;GC%
The !ompany was ranted !erti(cate of Reistration for carryin out $ife
#nsurance )usiness, )y the #nsurance Reulatory and 2evelopment Authority on
*ovem)er -9, -...% #t commenced commercial operations on 2ecem)er />, -...,
)ecomin one of the (rst few private sector players to enter the li)erali@ed arena%
The !ompany is now operational in Mum)ai, *ew 2elhi, Pune, !hennai, Eolkata,
:
Banalore, !handiarh, Ahmeda)ad, 7ydera)ad, $ucknow, *asik, 4aipur, !ochin,
Meerut, Manalore and $udhiana%
Till March 6/,-..- the !ompany has issued /..,... polices translatin into a
Premium #ncome of around Rs% /,-.. Million and a sum assured of over Rs%/1,...
Million%
The !ompany reconi@es that the drivin force for ainin sustaina)le competitive
advantae in this )usiness is superior customer e?perience and investment )ehind
the )rand% The !ompany aims to achieve this )y strivin to provide world class
service levels throuh constant innovation in products, distri)ution channels and
technoloy )ased delivery% The !ompany has already taken sini(cant steps to
achieve this oal%%
21
,*ns*rs
#!#!# $td was esta)lished in />11 )y the World Bank, the 0overnment of #ndia and
the #ndian #ndustry, to promote industrial development of #ndia )y
providin project and corporate (nance to #ndian industry%
Since inception, #!#!# has rown from a development )ank to a
(nancial conlomerate and has )ecome one of the larest pu)lic
(nancial institutions in #ndia% #!#!# has (nanced all major sectors of
the economy, coverin ;,=9= companies and /;,=1/ projects% #n the
(scal year -...,-../, #!#!# had dis)ursed a total of Rs 6/>%;1 )illion%
#!#!# has now developed a whole rane of activities to )ecome a
'niversal Bank% Some of #!#!#Hs spectrum of activities include+
I !ommercial Bankin , #!#!# Bank, #ndiaHs (rst internet )ank%
I #nformation Technoloy , #!#!# #nfotech, transaction processin,
software development
I #nvestment Bankin , #!#!# Securities, one of the key players in the
#ndian !apital Markets
I Mutual :und , Prudential #!#!# AM!, leadin private sector mutual
fund player in #ndia
I 5enture !apital , #!#!# 5enture, leadin private eJuity investor with
focus on #T and 7ealth!are
I Retail Services , #!#!# P:S, Marketin and 2istri)ution of Retail Asset
Products
I 2istri)ution , #!#!# !apital, 2istri)ution and Servicin of Retail
$ia)ility Products
#!#!# is listed on the #ndian Stock 3?chanes and on the *ew 8ork
Stock 3?chane F*8S3C% "n Septem)er --, />>>, it )ecame the (rst
#ndian company to )e listed on the *8S3 Fsym)ol+ #! and #!%2C% This
has )een followed )y the listin of #!#!# Bank on *8S3 Fsym)ol+ #B*C
on March -=, -...%
22
%ru-entia+ ,+."
Prudential plc was founded in /=9=% Since then it has rown to
)ecome one of the larest providers of a wide rane of savins
products for the individual includin life insurance, pensions,
annuities, unit trusts and personal )ankin% #t has a presence in over
/1 countries, and caters to the (nancial needs of over /. million
customers% #t manaes assets of over 'SK -1> )illion FRupees
//,6>,;.. crores appro?%C as of 2ecem)er 6/, />>>% Prudential plc%
has had its presence in Asia for the past <1 years caterin to over /
million customers across // Asian countries%
Prudential is the larest life insurance company in the 'nited Eindom FSource +
SLPHs 'E $ife :inancial 2iest, />>=C% Asia has always )een an
important reion for Prudential and it has had a presence in Asia for
over <1 years% #n fact PrudentialHs (rst overseas operation was in
#ndia, way )ack in />-6 to esta)lish $ife and 0eneral Branch
aencies%
#!#!# and Prudential came toether in />>6 to provide mutual fund
products in #ndia and today are the larest private sector mutual fund
company in #ndia% The two companies )rin toether two of the
stronest (nancial service )rands in Asia known for their
professionalism, e?cellent Juality of service and lon term
commitment to 8"'%
Management
The #!#!# Prudential $ife #nsurance !ompany $imited Manaement team comprises
reputed people from the (nance industry )oth from #ndia and a)road%
Ms hi/ha har0a, Manain 2irector L !3"
Mr N. . 1annan, 3?ecutive 2irector
20
Mr Bhar2av Das2u,ta, 3?ecutive 2irector
Ms Anita %ai, 35P M !ustomer Service L Technoloy
Mr A3i0 Mithani, !hief Actuary
Mr %uneet Nan-a, !hief #nvestments "Dcer
Mr Binaya/ Dutta, !hief M Sales and distri)ution
Mr. %uneet Nan-a
!hief #nvestment "Dcer
#!#!# Prudential
$ife #nsurance !ompany $imited
%r*-u.ts O4ere- 5y ICICI %ru-entia+ Li6e Insuran.e
3ndowment Plans
#!#!# Pru Save n Protect
#!#!# Pru Assure #nvest
M*ney Ba./ %*+i.y %+an
#!#!# Pru !ash)ak FAnticipated 3ndowment AssuranceC
Retire0ent %+ans
25
#!#!# Pru :orever $ife
#!#!# Pru Reassure
#!#!# Pru :orever$ife F2eferred PensionC
#!#!# Pru $ife$ink pension plan
#!#!# Pru $ifetime
Chi+-ren7s %+an
#!#!# Smart Eid P$an
Ter0 %+an
Protection Plan
#!#!# Pru $ife0uard Sinle Premium
$ife0uard $evel Term Assurance with Return of Premium
#!#!# Pru $ife0uard $evel Term Assurance
THEORETICAL PROSPECTIVE
!apital reJuired for a )usiness can )e classi(ed under two main cateories
/% :i?ed !apital%
-% Workin !apital%
3very )usiness needs funds for two purposes,for its esta)lishment and to
carry out its day,to,day operations% $on term funds are reJuired to create
production facilities throuh purchase of (?ed assets such as plant and machinery,
26
land ,)uildin ,furniture, etc% #nvestments in these assets represents that part of
(rmBs capital which is )locked on a permanent or (?ed )asis and is called (?ed
capital% :unds are also needed for short term purposes for the purchases of raw
materials, payment of waes and other day,to,day e?penses, etc% These funds are
known as workin capital% #n simple words workin capital refers to that part of the
(rmBs capital which is reJuired for (nancin short term or current assets such as
cash, marketa)le securities ,de)tors and inventories% :unds , thus ,invested in
current assets keep revolvin fast and are )ein constantly converted into cash
and this cash Now out aain in e?chane for other current assets% 7ence, it is also
known as revolvin or circulatin capital or short M term capital%
#n the words of Shu)in, OWorkin capital is the amount of funds necessary to cover
the cost of operatin enterprise%P
Accordin to 0enesten)er, O!irculatin capital means current assets of a
company that are chaned in the ordinary course of )usiness from one to another,
as for e?ample , from cash to inventories, inventories to receiva)les, receiva)les to
cash%P
C*n.e,ts *6 8*r/in2 Ca,ita+ "#
There are two concepts of workin capital+
1. Balance Sheet !oncept%
'. "peratin !ycle or !ircular :low !oncept%
91& Ba+an.e heet C*n.e,t"
There are two interpretations of workin capital under the )alance sheet
concept+
FiC 0ross Workin !apital%
FiiC *et Workin !apital%
23
#n the )road sense, the term workin capital refers to the ross workin
capital and represents the amount of funds invested in current assets% Thus
the ross workin capital is the capital invested in the total current assets of
the enterprises% !urrent assets are those assets which in the ordinary course
of )usiness can )e converted into cash within a short period of normally one
accountin year% 3?amples of current assets are+
C*nstituents *6 .urrent Assets
/ !ash in hand and )ank )alances%
- Bills receiva)les%
6 Sundry de)tors Fless provision for )ad de)tsC%
9 Short,term loans and advances%
1 #nventories of stocks, as +
FaC Raw materials%
F)C Work M in M proress%
FcC Stores and spares%
FdC (nished oods%
; Temporary #nvestments of surplus funds%
< Prepaid e?pense%
= Accrued incomes%
#n a narrow sense, the term workin capital refers to the net workin capital%
*et workin capital is the e?cess of current assets over current lia)ilities, or
say+
Net :*r/in2 Ca,ita+ ; Current Assets # Current Lia5i+ities
*et workin capital may )e positive or may )e positive or neative% When the
current assets e?ceeds current lia)ilities the workin capital is positive and the
neative workin capital results when the current lia)ilities are more than the
current assets %!urrent lia)ilities are those lia)ilities which are intended to )e
paid in the ordinary course of )usiness within a short period of normally one
accountin year out of the current assets or the income of the )usiness%
3?amples of current lia)ilities are +
C*nstituents *6 .urrent Assets
/ "utstandin 3?penses%
- Bills Paya)le%
6 Sundry !reditors or Accounts Paya)le
9 Short,term loans and advances%
1 2ividends Paya)les
; Bank "verdraft
27
< Provision for Ta?ation, if it does not amount to
appropriation of pro(t
The ross workin capital concept is (nancial or oin concern concept whereas
net workin capital is an accountin concept% These two concepts of workin
capital are not e?clusive, rather )oth have their own merits% The ross concept is
sometimes preferred to the net concept of Workin !apital for the followin
reasons+
F/C#t ena)les the enterprise to provide correct amount of Workin !apital at
the riht time%
F-C3very manaement is more interested in the total current assets with which
it has to operate than the source from where it is made availa)le%
F6CThe ross concept takes into consideration the fact that every increase in
the funds of the enterprise would increase its Workin !apital%
F9CThe ross concept of Workin !apital is more useful in determinin the rate
of return on investments in Workin !apital%
The net workin capital concept, however, is also important for the followin
reasons+
F/C #t is Jualitative concept which indicates the (rmBs a)ility to meet its
operatin e?penses and short term lia)ilities%
F-C #t indicates the marin of protection availa)le to the short term creditors,
i%e%, the e?cess of current assets over current lia)ilities%
F6C #t is an indicator of the (nancial soundness of an enterprise%
F9C #t suests the need for (nancin a part of the workin capital
reJuirements out of sources of funds%
To conclude, it may )e said that ,)oth , ross and net ,concepts of workin
capital are important aspects of workin capital manaement% The net
concept of workin capital may )e suita)le for proprietory form orainsations
such as sole,trader or partnership (rms% But the ross concept of workin
28
capital is very suita)le to the company form of orani@ation where there is a
divorce )etween ownership, manaement and control%
7owever , it may )e clear that as per the eneral practice, net workin capital
is referred to simply as workin capital%
Classification Or Kinds of Workin Ca!ital
91& %er0anent *r Fi<e- 8*r/in2 .a,ita+"
Permanent or (?ed workin capital is the minimum amount which is
reJuired to ensure e&ective utili@ation of (?ed facilities and for maintainin
the circulation of current assets% There is always a minimum level of current
assets which is continuously reJuired )y the enterprise to carry out its
K+'s #(
;#r<+, "!)t!*
O+ the &!ss #(
"#+"e)t
O+ the &!ss #(
Tme
Gr#ss ;#r<+,
"!)t!*
Net ;#r<+,
"!)t!*
Perm!+e+t
;#r<+, "!)t!*
Tem)#r!r/ #r
V!r!&*e
;#r<+, "!)t!*
Re,%*!r
;#r<+, "!)t!*
Reser=e
;#r<+, "!)t!*
Se!s#+!*
;#r<+, "!)t!*
S)e"!*
;#r<+, "!)t!*
29
normal )usiness operations% :or e?ample, every (rm has to maintain a
minimum level of raw material, work in proress, (nished oods and cash
)alance% This minimum level of current assets is called permanent or (?ed
workin capital as this part of capital as this part of capital is permanently
)locked in current assets %As the )usiness rows, the reJuirements of
permanent workin capital also increases due to the increase in the current
assets %The permanent workin capital can further )e classi(ed as reular
workin capital and reserve workin capital reJuired to ensure circulation of
current assets from cash to inventories, from inventories to receiva)le and
from receiva)les to cash and so on% Reserve workin capital is the e?cess
amount over the reJuirement for reular workin capital which may )e
provided for continencies that may arise at unstated periods such as
strikes, rise in price, depression, etc%
'&. Te0,*rary *r Varia5+e :*r/in2 Ca,ita+"
Temporary or varia)le workin capital is the amount of workin capital
which is reJuired to meet the seasonal demands and some special
e?iencies% 5aria)le workin capital can )e further classi(ed as seasonal
workin capital and special workin capital% Most of the enterprises have to
provide additional workin capital to meet the seasonal and special needs%
The capital reJuired to meet the seasonal needs of the enterprise is called
seasonal workin capital% Special workin capital is that part of workin
capital which is reJuired to meet special e?iencies such as launchin of
e?tensive marketin campains for conductin research ,etc%
Temporary workin capital di&ers from permanent workin capital in
the sense that it is reJuired for short periods and cannot )e permanently
employed ainfully in the )usiness% :iures iven )elow show the di&erence
)etween permanent and temporary workin capital%
I0,*rtan.e *r a-vanta2es *6 a-e=uate 8*r/in2 .a,ita+ "#
2:
Workin capital is the life )lood and nerve centre of a
)usiness% 4ust as circulation of )lood is essential in the human )ody for
maintainin life, workin capital is very essential to maintaiSn the smooth
runnin of a )usiness% *o )usiness can run successfully without an adeJuate
amount of workin capital% The main advantaes of maintainin adeJuate
amount of workin capital are as follows+
F/C*+ven.y *6 the 5usiness + AdeJuate workin capital helps in
maintainin solvency of the )usiness )y providin uninterrupted Now
production%
91& )**-8i+++ SuDcient workin capital ena)les a )usiness concern to
make prompt payments and hence helps in creatin and maintainin
oodwill%
9'& Easy +*ans + A concern havin adeJuate workin capital, hih
solvency and ood credit standin can arrane loans from )anks and
others on easy and favoura)le terms%
9(& Cash -is.*unts " AdeJuate workin capital also ena)les a concern to
avail cash discount on the purchases and hences it reduces costs%
9>& Re2u+ar ,ay0ent *6 sa+aries , 8a2es an- *ther -ay#t*#-ay
.*00it0ents" A company which has ample workin capital can make
reular payment of salaries, waes and other day,to,day commitments
which raises the morale of its employees, increase their eDciency , reduces
wastaes and costs and enhances production and pro(ts%
9?& Re2u+ar u,,+y *6 ra8 0ateria+s" # SuDcient workin capital
ensure reular supply of raw material and continuous production%
9@& E<,+*itati*n *6 Fav*ra5+e 0ar/et .*n-iti*ns" "nly concern with
adeJuate workin capital can e?ploit favora)le market conditions such as
01
purchasin is reJuirements in )ulk when the price are lower and )y holdin
its inventories for hiher prices%
9A& A5i+ity t* 6a.e .risis" AdeJuate workin capital ena)les a concern to
face )usiness crisis in emerencies such as depression )ecause durin
such periods, enerally, there is much pressure on workin capital%
9B& Cui./ an- re2u+ar return *n invest0ent" 3very investor wants a
Juick and reular return on his investment %SuDciency of workin capital
ena)les a concern to pay Juick and reular dividends to its investors as
there may not )e much pressure to plouh )ack pro(ts%
9D& Hi2h 0*ra+e+ AdeJuacy of workin capital creates an environment of
security, con(dence, hih morale and creates overall eDciency in )usiness%
E<.ess *r ina-e=uate 8*r/in2 .a,ita+ "#
3very )usiness concern should have adeJuate
workin capital to run its )usiness operations% #t should have neither redundant
or e?cess workin capital nor inadeJuate or shortae of workin capital% Both
e?cess as well as short workin capital positions are )ad for any )usiness%
7owever, out of the two, it is the inadeJuacy of workin capital which is more
danerous from the point of view of (rm%
Disa-vanta2es *6 re-un-ant *r e<.essive 8*r/in2 .a,ita+ +,
F/C3?cessive workin capital means idle funds which earn no pro(ts for the
)usiness and hence )usiness cannot earn a proper rate or return on its
investments%
F-CWhen there is a redundant workin capital, it may lead to unnecessary
purchasin and accumulation of inventories causin more chances of theft,
waste and losses%
02
F6C3?cessive workin capital implies e?cessive de)tors and defective credit
policy which may cause hiher incidence of )ad de)ts%
F9C#t may result into overall ineDciency in the orani@ation%
F1CWhen there is e?cessive workin capital, relations with )anks and other
(nancial institutions may not )e maintained%
F;C2ue to low rate of return on investment, the value of shares may also fall%
F<CThe redundant workin capital ives rise to speculative transactions%
Disa-vanta2es *r Dan2ers *6 ina-e=uate 8*r/in2 .a,ita+"#
91& A concern which has inadeJuate workin capital cannot pay its short,
term lia)ilities in time% Thus, it will lose its reputation and shall not )e a)le
to et ood credit facilities%
9'& #t cannot )uy its reJuirements in )ulk and cannot avail of discounts,
etc%
9(& #t )ecomes diDcult for the (rm to e?ploit favora)le market conditions
and undertake pro(ta)le projects due to lack of workin capital%
9>& The (rm cannot pay day to day e?penses of its operations and it
creates ineDciencies, increases costs and reduces the pro(ts of the
)usiness%
9?& #t )ecomes impossi)le to utili@e eDciently the (?ed assets due to non
availa)ility of liJuid funds%
00
"#$ The rate of return on investments also falls with the shortae of workin
capital%
Fa.t*rs Deter0inin2 the :*r/in2 Ca,ita+ Re=uire0ents"#
The workin capital reJuirement of a concern depend upon a lare
num)er of factors such as nature and si@e of )usiness, the character of their
operations, the lenth of operatin cycle, the rate of stock turnover and the
state of economic situation% #t is not possi)le to rank them )ecause all such
factors are of di&erent importance and the inNuence of individual factors
chanes for a (rm over time% 7owever the followin are important factors
enerally inNuencin the workin capital reJuirements%
91& Nature Or Chara.ter O6 Business "#
The workin capital reJuirements of a (rm )asically depend upon the
nature of its )usiness% Pu)lic utility undertakins like 3lectricity, Water Supply
and Railways need very limited workin capital )ecause they o&er cash sales
only and supply services, not products and as such no funds are tied up in
inventories and receiva)les% "n the other hand tradin and (nancial (rms
reJuire less investment in (?ed assets )ut have to invest lare amount in
current assets like inventories, receiva)les and cashQ as such they need lare
amount of workin capital% The manufacturin undertakins also reJuire
si@a)le workin capital alonwith (?ed investments% 0enerally speakin it may
)e said that pu)lic utility undertakins reJuire small amount of workin
capital, tradin and (nancial (rms reJuire relatively very lare amount,
whereas manufacturin undertakins reJuire si@a)le workin capital )etween
these two e?tremes%
9'& i3e O6 Business E .a+e *6 O,erati*ns +,
The workin capital reJuirement of a concern are directly inNuenced )y
the si@e of its )usiness which may )e measured in terms of scale of
operations% 0reater the si@e of a )usiness unit, enerally larer will )e the
reJuirements of workin capital% 7owever, in some cases even a smaller
concern may need more workin capital due to hih overheads chares,
05
ineDcient use of availa)le resources and other economic disadvantaes of
small si@e%
9(& %r*-u.ti*n ,*+i.y" #
#n certain industries the demand is su)ject to wide Nuctuations due to
seasonal variations% The reJuirement of workin capital, in such cases, depend
upon the production policy% The production could )e kept either steady )y
accumulatin inventories durin slack periods with a view to meet hih
demand durin the peak season or the production could )e curtailed durin
the slack season and increased durin the peak season% #f the policy is to keep
production steady )y accumulatin inventories it will reJuire hiher workin
capital%
9>& Manu6a.turin2 %r*.ess E Len2th *6 %r*-u.ti*n Cy.+e " #
#n manufacturin )usiness, the reJuirements of workin capital
increase in direct proportion to lenth of manufacturin process% $oner the
process period of manufacture, larer the amount of workin capital
reJuired% The loner the manufacturin time the raw materials and other
supplies have to )e carried for a loner period in the process with
proressive increment of la)our and services cost )efore the (nished
product (nally o)tained%
9?& eas*na+ variati*ns "#
#n the certain industries the raw material is not availa)le throuh the
whole year they have to )uy raw material in )ulk durin the season to ensure
an uninterrupted Now and process them durin the entire yea %A hue amount
is thus )locked in the form of material inventories durin such seasons , which
ives rise to more workin capital reJuirements%
9@& :*r/in2 Ca,ita+ Cy.+e +,
#n a manufacturin concern, the workin capital cycle start with the
purchase of raw material and end with the reali@ation of cash from the sale of
(nished products% This cycle involve purchase of raw material and stores , its
06
conversion into stock of (nished oods throuh work in proress with
proressive increment of la)our and service cost , conversion of (nished stock
into sales , de)tors and receiva)les and ultimately reali@ation of cash and this
cycle continue aain from the cash to purchase of raw material and so on%

( W#r<+, C!)t!* >O)er!t+, C/"*e #( ! M!+%(!"t%r+, C#+"er+)
The speed with which the workin capital completes one cycle determines the
reJuirements of workin capital, loner the cycle larer is the reJuirements of
workin capital%
The ross operatin cycle of a (rm is eJual to the lenth of the inventories
and receiva)les conversion periods% Thus
)r*ss O,eratin2 Cy.+e ; RMC% F :I%C% FF)C% F RC%
Where
RM!P R Raw Material !onversion Period
De&t#rs
(Re"e=!&*e
s)
R!;
M!ter!*s
C!sh
F+she'
G##'s
W#r< ?I+@
Pr#,ress
03
W#P!P R Work #n Process !onversion Period
:0!P R :inished 0oods !onversion Period
R!P R Receiva)les !onversion Period
7owever a (rm may acJuire some resources on credit and thus de&er
payments for certain period% #n that case, net operatin cycle period can )e
calculated as follows+
:urther followin formulas can )e used to determine the conversion periods +
Averae Stock "f Raw Materials
F/C Raw Material !onversion Period R SSSSSSSSSSSSSSSSSSSSSSSSSSSSS
Raw Material !onsumption Per day%
Averae Stock "f Work #n Proress
F/CWork #n Proress !onversion PeriodR SSSSSSSSSSSSSSSSSSSSSSSSSSSS
Total !ost "f Production Per 2ay
Averae Stock "f :inished 0oods
F9C :inished 0oods !onversion Period R SSSSSSSSSSSSSSSSSSSSSSSSSSSSS
Total !ost "f Sales Per 2ay
Averae Accounts Receiva)les
F-CReceiva)les !onversion Period R SSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSS

*et !redit Sales Per 2ay
07
N%t O!%ratin C&cl% P%riod'(ross O!%ratin C&cl% P%riod)Pa&a*l% +%f%ral
P%riod
Averae Paya)les
F1C Paya)les 2eferral Period R SSSSSSSSSSSSSSSSSSSSSSSSSS
*et !redit Purchases Per 2ay
Fa.t*r Deter0inin2 8*r/in2 .a,ita+ Re=uire0ents
1 *ature or !haracter of Business%
' Si@e of Business T Scale "f "perations%
( Production Policy%
> Manufacturin Process T$enth "f Production !ycle%
? Seasonal 5ariations%
@ Workin !apital !ycle%
A Rate "f Stock Turnover%
B !redit Policy%
D Business !ycle%
1G Rate of 0rowth of Business%
11 3arnin !apacity and 2ividend Policy%
1' Price $evel !hanes
1( "ther :actors
9A& Rate O6 t*./ Turn*ver" #
There is a hih deree of inverse co,relationship )etween the Juantum
of workin capital and the velocity or speed with which the sales are a&ected%
A (rm havin a hih rate of stock turnover will need lower amount of workin
capital as compared to a (rm havin a low rate of turnover% :or e?ample, in
case of precious stone dealers, the turnover is very slow% They have to
maintain a lare variety of stocks and the movement of stocks is very slow%
Thus, the workin capital reJuirements of such a dealer shall )e hiher than
that of a provision store%
08
9B& Cre-it %*+i.y" ,
The credit policy of a concern in its dealins with de)tors and creditors
inNuence considera)ly the reJuirements of workin capital% A concern that
purchases its reJuirements on credit and sells its products T services on cash
reJuire lesser amount of workin capital% "n the other hand a concern )uyin
its reJuirements for cash and allowin credit to its customers, shall need
larer amount of workin capital as hue amount of funds are )ound to )e
tied up in de)tors or )ills receiva)les%
9D& Business .y.+e" ,
Business cycle refers to alternate e?pansion and contraction in eneral
)usiness activity% #n a period of )oom i%e% when the )usiness is prosperous,
there is a need of larer amount of workin capital due to increase in sales,
rise in sales , rise in prices , optimistic e?pansion of )usiness , etc% "n the
contrary in the times of depression i%e% when there is a down swin of the
cycle , the )usiness contracts, sales decline, diDculties are faced in collections
from de)tors and (rms may have a lare amount of workin capital lyin idle%
91G& Rate *6 )r*8th *6 Business +,
The workin capital reJuirements of a concern increase with the
rowth and e?pansion of its activities% Althouh, it is diDcult to determine the
relationship )etween the rowth in the volume of )usiness and the rowth in
the workin capital of a )usiness, yet it may )e concluded that for normal rate
of e?pansion in the volume of )usiness, we may have retained pro(ts to
provide for more workin capital )ut in fast rowin concerns, we shall reJuire
larer amount of workin capital%
911& Earnin2 Ca,a.ity an- Divi-en- %*+i.y" ,
Some (rms have more earnin capacity than others due to Juality of
their products, monopoly conditions, etc% Such (rms with hih earnin
capacity may enerate cash pro(ts from operations and contri)ute to their
workin capital% The dividend policy of a concern also inNuences the
reJuirements of its workin capital% A (rm that maintains a steady hih rate of
09
cash dividend irrespective of its eneration of pro(ts needs more workin
capital than the (rm that retains larer part of its pro(ts and does not pay so
hih rate of cash dividend%
91'& %ri.e Leve+ .han2es "#
!hanes in the price level also a&ect the workin capital reJuirements%
0enerally, the risin prices will reJuire the (rm to maintain larer amount of
workin capital as more funds will )e reJuired to maintain the same current
assets% The a&ect of risin prices may )e di&erent for di&erent (rms% Some
(rms may )e a&ected much while others may not )e a&ected at all )y the rise
in prices%
91(& Other Fa.t*rs "#
!ertain other factors such as operatin eDciency , manaement a)ility
, irreularities of supply, import policy, asset structure, importance of la)our,
)ankin facilities, etc% also inNuences the reJuirements of workin capital%
Finan.in2 *6 :*r/in2 Ca,ita+
The workin capital reJuirements of a concern can )e classi(ed as follow+,
Permanent or :i?ed workin capital reJuirements%
Temporary or 5aria)le workin capital reJuirements%
#n any concern, a part of workin capital investment are as permanent
investments in (?ed assets% This is so )ecause there is always a minimum
level of current assets which is continuously reJuired )y the enterprises to
carry out its day to day )usiness operations and this minimum cannot )e
e?pected to reduce at any time % This minimum level of current asset ive rise
to permanent or (?ed workin capital as this part of workin capital is
permanently )locked in current assets%
Similarly, some amount of workin capital may )e reJuired to meet the
seasonal demands and some special e?iencies such as rise in prices, strikes
0:
etc% This proportion of workin capital ive rise to temporary or varia)le
workin capital which cannot )e permanently employed ainfully in )usiness%
The fxed proportion of working capital should be generally fnanced
from the fxed capital resources while the temporary working capital
requirements of a concern may be met from the short term sources
of capital.
The various sources for the (nancin of workin capital are as follows+
*ur.es *6 8*r/in2 Ca,ita+
F*re.ast E Esti0ate *6 :*r/in2 Ca,ita+ Re=uire0ents"#
So,rc%s of Workin Ca!ital
Perm!+e+t #r FAe' Tem)#r!r/ #r V!r!&*e
Sh!res
De&e+t%res
P%&*" De)#sts
P*#%,h+, &!"< #( )r#(ts-
L#!+ (r#m (+!+"!*
+stt%t#+-
C#mmer"!* B!+<s-
I+',e+#%s B!+<ers-
Tr!'e Cre't#rs
I+st!**me+t Cre't
A'=!+"es
A""#%+ts Re"e=!&*es-
A""r%e' EA)e+ses
C#mmer"!*
P!)ers-
51
OWorkin !apital is the life )lood and controllin nerve centre of a
)usiness%P *o )usiness can )e successfully run without an adeJuate amount
of workin capital% To avoid the shortae of workin capital at once, an
estimate of workin capital reJuirements should )e made in advance so that
arranements can made to procure adeJuate workin capital% But estimate of
workin capital% But estimation of reJuirements is not an easy task and
orani@ation, the followin factors have to )e taken into consideration while
makin an estimate of workin capital reJuirements%
Fa.t*rs Re=uirin2 C*nsi-erati*n :hi+e Esti0atin2
:*r/in2 Ca,ita+"
/ Total !osts incurred on materials ,waes and overheads%
- The lenth of time for which raw materials are to remain
in stores )efore they are issed for production%
6 The lenth of production cycle or work Min,process, i%e%,
the time taken for conversion of raw materials into
(nished oods%
9 The lenth of sales cycle durin which (nished oods are
to )e kept waitin to sales%
1 The averae period of credit allowed to customers%
; The amount of cash reJuired to pay day to day e?penses
of the )usiness%
< The averae amount of cash reJuired to make advance
payments%
= The averae credit period e?pected to )e allowed )y
suppliers%
> Time la in the payment of waes and other e?penses%
52
:*r/in2 Ca,ita+ Mana2e0ent
9Cash , Re.eiva5+es H Invent*ry Mana2e0ent&
MANA)EMENT OF CAH
!ash is one of the current assets of a )usiness% #t is needed at all times to
keep the )usiness oin% A )usiness concern should always keep suDcient
cash for meetin its o)liations% Any shortae of cash will hamper the
operations of a concern and any e?cess of it will )e unproductive % !ash is
most unproductive of all the assets% While (?ed assets like machinery, plant
,etc% and current assets such as inventory will help the )usiness in increasin
its earnin capacity, cash in hand will not add anythin to the concern% #t is in
this conte?t that cash manaement has assumed much importance%
Cash Mana2e0ent "
The cash manaement has assumed importance )ecause it is the most
Sini(cant of all the current assets% !ash manaement deals with the
followin+,
F/C!ash inNows and outNows%
F-C!ash Nows within the (rm
F6C!ash )alance help )y the (rm at a point of time%
!ash manaement needs strateies to deal with various facets of cash %
:ollowin are some of its facets+,
91& Cash %+annin2 "#
!ash plannin is a techniJue to plan and control the use of cash% A
projected cash Now statement may )e prepared , )ased on present )usiness
operations and anticipated future activities% The cash inNows from various
sources may )e anticipated and cash outNows will determine the possi)le
uses of cash%
9'& Cash F*re.ast an- Bu-2etin2 ",
A cash )udet is most important device for the control of receipt and
payments of cash % A cash )udet is an estimate of cash receipts and
dis)ursements durin a future period of time% #t is analysis of Now of cash in
50
a )usiness over a future , short or lon period of time% #t is a forecast of
e?pected cash intake and outlay%
Both short and lon term forecasts may )e made with the help of followin
methods+
9'& Re.ei,t an- Dis5urse0ents Meth*- "
#n this method the receipts and payments of cash are estimated%
The cash receipts may )e from cash sales, collections from de)tors ,sale of
(?ed assets, receipts of dividend or other incomes of all the itemsQ it is
diDcult to forecast sales%
Re.eiva5+es Mana2e0ent
Meanin2 *6 Re.eiva5+es I,
Receiva)les represents amounts owed to the (rm as a result of sales
of oods or services in the ordinary course of )usiness% Theses are claims of
the (rm aainst its customers and form part of its current assets%
Receiva)les are also known as accounts receiva)les , trade receiva)les ,
customer receiva)les or )ook de)ts% The receiva)les are carried for the
customers% The period of credit and e?tent of receiva)les depends upon the
credit policy followed )y the (rm% The purpose of maintainin or investin in
receiva)les is to meet competition , and to increase the sales and pro(ts%
C*sts *6 Maintainin2 Re.eiva5+es
The allowin of credit to customers means ivin of funds for the
customerBs use% The concern incurs the followin costs on maintainin
receiva)les%
"-$ C*st *6 Jnan.in2 re.eiva5+es +,
When oods and services are provided on credit concernBs capital is
allowed to )e used )y the customers% The receiva)les are (nanced from the
funds supplied )y shareholders for lon term (nancin and throuh retained
55
earnins % The concern incurs some cost for collectin funds which (nance
receiva)les%
".$ C*st *6 C*++e.ti*n +,
A proper collection of receiva)les is essential for receiva)les
manaement% The customers who do not pay the money durin a stipulated
credit period are sent reminders for early payments % Some persons may
have to )e sent for collectin these amounts% #n some cases leal recourse
may have to )e taken for collectin receiva)les% All these costs are known as
collection costs which a concern is enerally reJuired to incur%
"/$ Ba- De5ts +,
Some customers may fail to pay the amounts due towards them% The
amounts which the customers fail to pay are known as )ad de)ts% Thouh a
concern may )e a)le to reduce )ad de)ts throuh eDcient collection
machinery )ut one cannot altoether rule out this cost%
FACTOR INFLUENCIN) THE IKE OF RECEIVABLE
Besides sales, a num)er of other factors also inNuence the si@e of
receiva)les% The followin factors directly and indirectly a&ect the si@e of
receiva)les%
Fa.t*rs inLuen.in2 the si3e *6 re.eiva5+es
/
Si@e of !redit Sales%
-
!redit Policies%
6
Terms of Trade%
9
3?pansion Plans%
1
Relation with Pro(ts%
56
;
!redit !ollection%
<
7a)its of !ustomers%
91& i3e *6 Cre-it a+es ",
The volume of credit sales is the (rst factor which increases or
decreases the si@e of receiva)les% #f a concern sells only on cash )asis, as
then there will )e no receiva)les% The hiher the part of credit sales out of
total sales , (ures of receiva)les will also )e more or vice versa%
9'& Cre-it %*+i.ies",
A (rm with conservative credit policy will have a low si@e of receiva)les
while a (rm with li)eral credit policy will )e increasin this (ure% The viour
with which the concern collects the receiva)les also a&ects its receiva)les% #f
collections are prompt then even if credit is li)erally e?tended the si@e of
receiva)les will remain under control% #n case receiva)les remain
outstandin for a loner period, there is always a possi)ility of )ad de)ts%
9(& Ter0s *6 Tra-e",
The si@e of receiva)les also depends upon the term of trade% The
period of credit allowed and rates of discount iven are linked with
receiva)les% #f credit period allowed is more then receiva)les will also )e
more% Sometimes trade policies of competitors have to )e followed otherwise
it )ecomes diDcult to e?pand the sales% The terms once followed cannot )e
chaned without adversely a&ectin sales opportunities%
9>& E<,ansi*n %+ans",
When a concern wants to e?pand its activities, it will have to enter
new markets% To attract customers, it will ive incentives in the form of credit
facilities% The periods of credit can )e reduced when the (rm is a)le to et
permanent customers% #n the early staes of e?pansion more credit )ecomes
essential and si@e of receiva)les will )e more%
9?& Re+ati*n 8ith ,r*Jts",
53
The credit policies is followed with a view to increase sales% When
sales increase )eyond a certain level the additional costs incurred are less
than the increase in revenues% #t will )e )ene(cial to increase sales )eyond a
point )ecause it will )rin more pro(ts% The increase in pro(ts will )e
followed )y an increase in the si@e of receiva)les or vice M versa%
9@& Cre-it C*++e.ti*n E4*rts",
The collection of credit should )e streamlined% The customers should
)e sent periodical reminders if they fail to pay in time% "n the other hand , if
adeJuate attention is not paid towards credit collection then the concern can
land itself in a serious (nancial pro)lem% An eDcient credit collection
machinery will reduce the si@e of receiva)les% #f these e&orts are slower then
outstandin amounts will )e more%
9A& Ha5its *6 .ust*0ers",
The payin ha)its of customers also have a )earin on the si@e of
receiva)les% The customers may )e in the delayin payments even thouh
they are (nancially sound% The concern should remain in touch with such
customers and should make them reali@e the urency needs%
MEANIN) AND OB$ECTIVE OF RECEIVABLE MANA)EMENT

Receiva)les manaement is the process of makin decisions relatin
to investment in trade de)tors% !ertain investment in receiva)les is
necessary to increase the sales and the pro(ts of a (rm% But at the same
time investment in this asset involves cost consideration also% :urther is
always a risk of )ad de)ts too% Thus , the o)jective of receiva)les
manaement is to take a sound decision as reards investment in de)tors%
DIMENION OF RECEIVABLE MANA)EMENT
Receiva)les manaement involves the careful consideration of the
followin aspects+
57
F/C:ormin of !redit Policy%
F-C3?ecutin the !redit Policy
F6C:ormulatin and e?ecutin collection policy%
INVENTOR! MANA)EMENT
INTRODUCTION "#
3very enterprise needs inventory for smooth runnin of its activities% #t
serve as a link )etween production and distri)ution processes% There is
,enerally, a time la )etween the reconition of a need and its ful(llment %
The reater the time M la , the hiher the reJuirements for inventory % The
unforeseen Nuctuations in demand and supply of oods also necessitate the
need for inventory% #t also provides a cushion for future price Nuctuations%
The investment in inventories constitutes the most sini(cant part of current
assets T workin capital in most of the undertakins% Thus , it is very
essential to have proper control and manaement of inventories% The
purpose of inventory manaement is to ensure availa)ility of materials in
suDcient Juantity as and when reJuired and also to minimi@e investment in
inventories%
MEANIN) AND NATURE OF INVENTORIE",
#n a manufacturin concern, inventory may include raw materials, work
in process and stores, stock of (nished oods%
58

T**+s an- Te.hni=ues *6 Invent*ry Mana2e0ent "#
3&ective #nventory Manaement reJuires an e&ective control system
for inventories% A proper inventory control not only helps in solvin the acute
pro)lem of liJuidity )ut also increase pro(ts and causes su)stantial
reduction in the workin capital of the concern% The followin are the
important tools and techniJues of inventory manaement and control+,
Te.hni=ues *6 Invent*ry Mana2e0ent
S!ar%s
Finis0%d
(oods
Cons,1
)a*l%s
Work 2
in)
Pror%ss
Ra3
Mat%rial
In4%n)
tor&
59
1. 2etermination of Stock levels%
'. 2etermination of Safety Stocks%
(. Selectin a proper system of orderin for inventory%
>. 2etermination of 3conomic orderin Uuantity%
?. AB! Analysis%
@. 532 Analysis%
A. #nventory Turnover Ratios%
B. Ain Schedule of #nventories%
D. !lassi(cation and codi(cation of inventories%
1G. Preparation of #nventory Reports%
11. $ead Time%
1'. Perpetual #nventory System%
1(. 4#T !ontrol System%
The ana+ysis *6 8*r/in2 .a,ita+ .an 5e .*n-u.te- thr*u2h a n*.
*6 -evi.es, su.h as"#
9A& Rati* Ana+ysis.
9A&The 6*++*8in2 Rati*s 0ay 5e .a+.u+ate- 6*r this ,ur,*se +,
F/C !urrent Ratio%
F-C Acid Test Ratio%
F6C A)solute $iJuid Ratio%
F9C #nventory Turnover Ratio%
F1C Receiva)les Turnover Ratio%
F;C Paya)le Turnover Ratio%
F<C Workin !apital Turnover Ratio%
F=C Ratio of current lia)ilities to tani)le net worth %
2-) CURRENT RATIO" #
#t indicates the (rmBs commitment to meet its short,term lia)ilities% An
ideal current ratio is -+/% #f the ratio is more the capital is unnecessary
5:
locked in current assets% #t ive the solvency position of the (rm% #f the ratio
is less than - it show the daner sinal to the manaement%
0-) CUIC1 RATIO" #
Uuick ratio may )e de(ned as the relationship )etween Juick assets
and current lia)ilities% An asset is said to )e liJuidTJuick if it can )e
converted in cash within a short period of time without loss of value% #n that
sense, cash,in,hand and cash,at,)ank are the most Juick assets% The ideal
ratio is /+/%
5-) U%ER CUIC1 RATIO" #
#t includes cash,in,hand and cash,at,)ank and marketa)le securities%
The accepta)le norm of this ratio is 1.G or/+ -%The ratio is the most
viorous measure of the (rm liJuidity positions% 7owever it is not widely
used in practice.
>.& :OR1IN) CA%ITAL TURNOVER RATIO"#
This ratio indicates the velocity of the utili@ation of net workin capital%
This ratio indicates the num)er of times the workin capital is turned over
in the course of a year%
#n the other words we can say this ratio indicate whether the workin
capital has )een e&ectively utili@ed in makin sales with small amount of
workin capital the company hiher volume of sales indicates the
operational eDciency of the company%
?.& DEBTOER TURNOVER RATIO+ ,
2e)tor constitute an important portion of current assets% Therefore the
Juality of de)tors determines the liJuidity of the (rm% 7iher turnover
61
indicates the liJuidity position of the (rm% #t also indicates the eneration of
)ad de)ts%
;%C DEBTOR COLLECTION %ERIOD" #
The ratio indicates the de)t have )een collected in time it ive the
averae collection period% #t is helpful to (nd out the )orrowers in collectin
the money in the reasona)le time% #f the collection period increase it will
result in reater )lockae of funds in de)tors% #n eneral the amount of
receiva)le should not e?ceed 6 to 9 month credit sales
A.& CREDITOR TURNOVER RATIO" #
#t is similar to 2e)tors turnover ratio, it indicates speed in which in
which payment credit purchase% #t also ives information a)out how the
credit limit is properly utili@ed%
B.& TOC1 TURNOVER RATIO" #
#t indicates whether the investment in inventory is eDciently or not% #t
is also helpful to control the inventory with in the limit% #nventory indicates
raw material, work in proress and (nished oods% #t sini(es the liJuidity
of the inventory% 7ih turnover indicates )rick sales% #t also measures to
discover the possi)le trou)le in the (rm of over stockin or over valuation%
As per eneral uideline+ ,
Raw material - to 9 month consumption should not e?ceed%
Work,in,proress /1 to 6. days cost of should not e?ceed%
:inished oods - to 6 month sales%
LIMITATION OF RATIO ANAL!I" ,
Thouh ratios are simple to
calculate and easy to understand, they must )e use very carefully if due care
62
is not taken they miht confuse rather than clarify the situations% Ratios never
provide a de(nite answer to (nancial pro)lems% There is always a Juestion of
judment as to what sini(cance should )e iven to the (ures% So that one
must rely upon oneBs own ood sense in makin ratio analysis and an analysis
must use this techniJue keepin in mind the followin shortcomins of this
techniJue%
1.& LIMITED UE OF A IN)LE RATIO" #
Ratio can )e useful only when
they are computed in suDcient larer num)er% A sinle ratio would not )e a)le
to convey anythin% At the same time if too many ratios are calculated, they
likely confuse instead of revealin any meaninful conclusion%
'.& LAC1 OF ADECUATE TANDARAD" #
There are no well accepted
standards or rules of thum) for all ratios which can )e accepted as norms% #t
renders interpretation of the ratios diDcult%
(.& LA: OF CUALITATIVE ANAL!I OF THE %ROBLEM" #
Rati
o Analysis ives only a ood )asis for Juantitative analysis of (nancial
pro)lems% But it su&ers from Jualitative aspects%
>.& EFFECT OF INHERENT LIMITATION OF ACCOUNTIN)" #
Becaus
e ratios are computed from historical accountin records they press their
eliminationBs and weakness as accountin records process% Ratios of the past
are not necessarily true indicators of the future%
?.& ARITHMETICAL :INDO: DREIN)" #
60
The term window
dressin means manipulation of accounts in a way as to conceal vital fact and
present (nancial statements in a way to show a )etter position than what is
actually,
"n account of such situation presence of particular ratio may not )e a de(nite
indicator of ood or )ad manaement%

@.& %AT I NOT INDICATOR OF FUTURE" #
#t is not always possi)le to
make future estimates on the )asis of the past, as it always does not come
true%
A.& EFFECT TO %ERONAL ABILIT! AID BAI TO THE ANAL!T" #
Ratios are only mean of (nancial analysis and not an end in
itself% Ratios have to )e interpreted and di&erent people may interpret the
same ratio in di&erent ways%

B.& BAC1)ROUND I OVERLOO1ED" #
When inter,(rm comparisons
are made on the )asis of ratio analysis and di&er su)stantial in si@e, ae and
nature of the product% Ratio analysis can not ive satisfactory results, as these
factors are not considered here%
D.& NO ALLO:ANCE FOR CHAN)E IN %RICE LEVEL" #

While makin comparisons of ratios, no allowance for chane in price is made%
A chane in the price level can seriously a&ect the validity of comparison of
ratio computed for di&erent time periods%
1G.& DIFFERENCE IN DEFINATION" #
!omparisons are also made
diDcult, due to di&erence in de(nitions of various (nancial (rms% The terms
65
like ross pro(t, net pro(t, operatin pro(t etc% have no precise de(nition and
well,accepted procedure for their computation.
1G.& LIMITED UE" #
Ratio Analysis is not a su)stitute for several
4udments rather are a hopeful tool to aid in applyin judment to otherwise
comple? situations% So conclusions drawn with the help of ratios shared
veri(ed with other techniJues too%
11.& NO FIMED TANDARD" #
*o (?ed standards can )e laid down
for ideal ratios, for e?ample current ratio is enerally considered to )e ideal if
current assets are twice the current lia)ilities% 7owever, in case of those
conclusions, which have adeJuate arranements, it may )e perfectly ideal if
the current assets are eJual to current lia)ilities%
1'.& RATION NO UBTITUTE" #
While makin ratio analysis, it
is merely a tool of (nancial statements% 7ence, ratios )ecome useless if
separated from the statement from which they are computed%
TANDARD OF COM%ARIION" #
The ratio analysis involves
comparison for a useful interpretation of the (nancial statement% A sinle ratio
does not indicate favora)le or unfavora)le condition% #t should )e compared its
standard% Standard of comparison may consist of+ ,
/%C Ratios calculated from the past (nancial statement of same (rm%
-%C Ratio developed usin the !ompanyed performa (nancial statement of
same (rm%
6%C Ratios of some selected (rm especially a most proressive and successful
one at the point of time%
9%C Ratios of the industries to which the (rm )elons%
66

+ATA ANALYSIS AN+ INTERPRATION
2- TOTAL REVENUE.@ .5 NET SALES
4EARS Rs- + m**#+s
0119 5B9:5-50
011: 6B573-67
0121 6B92:-26
0122 3B851-01
0120 7B117-21
/5 C6RRENT ASSETS7 ) 85 LI96I+ ASSETS7 )

:5 C6RRENT
LIA;ILITIES7 )
#5 AVERA(E INVENTORY7 )
YEARS Rs + m**#+s
0119 756-:7
011: 889-23
0121 957-62
0122 2133-10
0120 2267-99
<5 +E;TORS7 =5 NET WORKIN( CAPITAL7 )

4EARS Rs + m**#+s
0119 5B982-:7
011: 6B063-72
0121 6B888-17
0122 3B706-25
0120 3B:5:-20
4EARS Rs + m**#+s
0119 796-18
011: 851-6
0121 25:0-82
0122 2509-26
0120 2513-69
4EARS Rs + m**#+s
0119 2B5:8-17
011: 2B672-22
0121 0B015-:8
0122 0B500-90
0120 00:1-51
4EARS Rs + m**#+s
0119 607-17
011: 317-793
0121 37:-25
0122 76:-803
0122 819-07
4EARS Rs + m**#+s
0119 870-2
011: 790-:7
0121 2578-37
0122 2078-9
0120 2265-99
4EARS Rs + m**#+s
0119 738-0:
011: 822-63
0121 :37-37
0122 2B035-13
0120 2B053-91
63

+ata int%r!r%tation and ratio anal&sis7 )
III5 T6RNOVER RATIOS7 )
"-$ WORKIN( CAPITAL T6RNOVER RATIO7)
The a)ove ta)le indicates that the workin capital turnover is
showin workin capital to sales% #n the year -./- there is a increase in workin
capital turnover, more over there is a steep decline in workin capital turnover%
9(& +E;TORS T6RNOVER RATIO7)


The a)ove ta)le shows that de)t turnover ratio
is hoverin around ;%-,9 times of net sales
N%t Sal%s>A4%ra% Workin
Ca!ital
Years
Net
sales
Working
Capital
Working
Capital
Turnover
2008 3,871.96 671.05 5.7
2009 4,245.61 722.5 5.87
2010 4777.06 1045.03 4.5
2011 5,624.13 1156.415 4.8
2012 5,939.12 1143.42 5.16
Years
Total
sales
Average
debtors
debtors
turnover
2008 3,871.96 657.29 5.89
2009 4,245.61 684.37 6.2
2010 4,777.06 834.00 5.73
2011 5,624.13 1104.80 5.09
2012 5939.12 1244.42 4.78
Total Sal%s > A4%ra% Acco,nt
R%c%i4a*l%
67
which is considered ood )ut it must not )e very hih as this shows (rms ina)ility
to sell on credit )asis%
"/$AVERA(E COLLECTION PERIO+ 7
Averae collection period of de)tors is increasin year )y year from -..>,/.
due to increase in amount of de)tors durin the period%
C6RRENT ASSETS T6RNOVER RATIO
N,1*%r of 3orkin da&s>
+%*tors T,rno4%r Ratio
Years
Debtor
Turnover
No. of
Working
days
Average
collection
period
(in days)
2008 5.89 360 61
2009 6.2 360 58
2010 5.73 360 62.8
2011 5.09 360 70
2012 4.78 360 75
N%t Sal%s > C,rr%nt Ass%ts
Years
Total
sales
Current
Assets CATR
2008 3,871.96 1397.06 2.87
2009 4,245.61 1461.11 2.77
2010 4,777.06 2203.97 2.90
2011 5,624.13 2322.82 2.16
2012 5,939.12 2290.30 2.42
68
The a)ove ta)le shows that current assets turnover ratio is satisfactory% Althouh it
is Nuctuatin a )it )ut as sales are twice to current assets the situation is o%k%
":$ INVENTORY T6RNOVER RIATIO7)

The a)ove ta)le indicates that the inventory turnover ratio is sta)le around =,
> which is considered as ood indicatin that stocks are )ein turned into
(nished oods freJuently% #t is also a sin of eDcient manaement% 7owever
inventory level should not )e very low as it can lead to idealness of assets
resultin in ineDciency%
"#$ INVENTORY CONVERTION PERIO+7)
N%t Sal%s > A4%ra% In4%ntor&
Y%ars
Total
sal%s
A4
in4%ntor&
In4%ntor&
t,rno4%r
ratio
0119 5982-:7 607-17 :-1:
011: 6063-72 317-79 9-59
0121 6888-17 37:-25 9-5:
0122 3706-25 76:-85 9-77
0120 3:5:-20 819-07 9-5:
+a&s in a Y%ar > In4%ntor& T,rno4%r Ratio
69

The a)ove ta)le indicates that with decreasin in the inventory ratio the
conversion of inventory is increasin it is due to hih stock of inventory
"<$ NET PROFIT RATIO7)
N%t Profit>N%t Sal%s ? -@@
Years
Days
in
year
nventory
Turnover
ratio
nventory
conversion period
(n days)
2008 365 9.09 40.1540154
2009 365 8.38 43.55608592
2010 365 8.39 43.50417163
2011 365 8.66 42.147806
2012 365 8.39 43.50417163
Years
Net
!rofit "ales
N.!.
Ratio
2008 524.77 3,871.96 13.55
2009 626.63 4,245.61 14.75
2010 815.47 4,777.06 17
2011 1,057.45 5,624.13 18.8
2012 944.83 5,939.12 15.9
6:
The a)ove ta)le indicates that the net pro(t has increased in
almost all the years and a sharp sure in net pro(t took place durin -./.,//
due to decrease in operatin e?penses and company also e?perienced
increase in its sales, non operatin income also contri)uted towards net
pro(t%
Altoether it was due to orani@ations a)ility to decrease its
operatin e?penses that led to increase in its net pro(ts%
IV5 SHORT TERM FINANCIAL POSITION OR TEST OF LI96I+ITY7 )
"-$ C6RRENT RATIO7)
C,rr%nt Ass%ts > C,rr%nt Lia*iliti%s
The a)ove ta)le indicates that the current ratio of the !ompany is ood as per
the standard -+/% it is evident from current ratio that the orani@ation can pay
its current lia)ilities eDciently% #t is not very hih which shows that de)tors are
under control%
Years
Current
Assets
Current
#iabilities
Current
Ratio
2008 1,397.06 634.96 2.2!1
2009 1461.11 778.15 1.88!1
2010 2203.97 836.41 2.63!1
2011 2,322.82 1,055.02 2.2!1
2012 2290.30 1,146.88 1.99!1
31
".$ 96ICK > ACI+ TEST > LI96I+ RATIO7)
LiA,id Ass%ts > C,rr%nt Lia*iliti%s
The a)ove ta)le indicates that the Juick ratio is hoverin around /,/%;; which
is considered to ) satisfactory also the orani@ations de)t turnover ratio is
ood hence its ood )ut it must )e seen that money docent remain locked in
de)tors as it ives a false impression of healthy liJuid assets5
Years
#i$uid
Assets
Current
#iabilities
#i$uid
Ratio
2008 684.07 634.96 1.07!1
2009 730.4 778.15 0.94!1
2010 1392.71 836.41 1.66!1
2011 1328.14 1,055.02 1.26!1
2012 1305.48 1,146.88 1.14!1
32
"c%edule &f C%anges n Working Capital

!articulars '()) '()'
*ffect on Working
Capital
ncrease Decrease
Current Assets
"nventories 702.03 714.5 12.47
#e$tors 1253.05 1235.8 17.25
Cas% & 'ank 'alan(e 75.09 69.68 5.41
)oans & *+van(es 292.65 270.32 22.33
Total Current Assets '+''.,' ''-(.+
Current #iabilities
Cre+itors 821.62 725.45 96.17
,t%er Current )ia$ilities 100.56 85.07 15.49
-rovisions 132.84 336.34 203.5
Total current #iabilities 1055.02 1146.88
Net .orking (apital 1267.8 1143.42
Net #e(rease in .orking (apital 124.38 124.38
Total )'./., )'./.,

30
:#*2#*0S A*2 !"*!'$S#"*S+,
/% 0ross sales increased )y 1%<G from Rs1,;-9%/6 million in -./.,// to Rs%
1,>6>%/- million in -.//,/-%
-% Total Revenue increasedFnetC rew )y 1%<G from Rs%11;-%. million in -./.,
// to Rs% 1=<<%> million in -.//,/-
6% !urrent ratio is satisfactory so that company is a)le its short term lia)ility
comforta)ly%
9% The overall workin capital condition of the concern is satisfactory%
)"**+),I-.
2- Nee' #( re'%"+, !=, "#**e"t#+ )er#'-
0- Net )r#(t t# s!*es m!r,+ s #( &t "#+"er+ s# +ee' #( )!/+, !tte+t#+ s here-
35
LIMITATION OF TUD!" #
/%C 2ue to time constrain the limited data only considered for the analysis and
interpretation%
-%C We can apply only limited tools for analysis and interpretation%
6%C :or the analysis and interpretation only (ve years data are availa)le% "n
the )asis of these data we are una)le to come to conclusion%
The analysis and interpretation is only on the )asis of information furnished )y
manaement% #f the information was window dressin the entire result may o
wron


36
R+/R+.0+)
M!+!,eme+t A""#%+t+, &/ R-K Sh!rm!B Sh!sh K- G%)t!-
F+!+"!* M!+!,eme+t &/ I-M- P!+'!/
A'=!+"e A""#%+t+, &/ R-L- G%)t!
;;;-"")r%*(e-"#m C#m)!+/ re)#rts !+' !++%!* !""#%+ts-
;;;-;<)e'!-"#m
;;;-+=est#)e'!-"#m
33