INTRODUCTION

One needs money to make money. Finance is the life blood of business and there
must be a continuous flow of funds in and out of business enterprise. Money makes the
wheels of business run smoothly. Some plans, efficient production system, and excellence
marketing network are all hampered in the absence of an adequate and timely supply of
funds.
In the modern money economy, the role of finance has increased due to large
scale operations, capital intensive technology, intense competition and the growth of the
investment markets. Sound financed management is as important in business as
production and marketing. A business firm requires finance to commence of its
operations, to continue operations and for expansion or growth. Finance is, therefore, an
important operative function of business firms.
It is necessary to estimate accurately the capital requirements of the company.
Correct determination of capital requirements is essential to arrive at the fair
capitalization and to avoid the problems of over capitalization and under capitalization.
Capital includes fixed capital and working capital. The capital invested in fixed or
permanent assets like land buildings plant and machinery, furniture and fixtures etc., is
known as fixed capital or block capital.
The capital invested in current assets such as stock of materials, finished goods,
account receivables and bills receivables, short term securities and cash/bank balance for
meeting day-to-day expenses is known as working capital or current capital.

NEED FOR THE STUDY

Adequate working capital is essential for smooth and efficient working of every
business organization. Lack of sufficient working capital may endanger survival of the
firm at the same time excess working capital or ineffective utilization of working capital
needs to the additional expenditure because of the cost of capital.
Working Capital Management is essential for the following:
A firm wit adequate working capital can meet its liabilities promptly.
Prompt payment helps to raise the credit standing or reputation of the
enterprise.
Adequate of working capital enables the firm to take the advantage of any
favorable business opportunity. Example to purchase raw materials at a
discount or to execute a special order.
Financial soundness of business boosts the morale of employees.
Lack of adequate working capital may result in interruption in operations
and under utilization of plant capacity. A firm with adequate funds can tide
over depression and can maintain financial solvency of business.
Adequate working capital permits timely and regular payment of cash
dividends. This helps to maintain cordial relations with shareholder.
In view of the above it is appropriate to study about the working capital
management. For the study the organization selected is Surabhi hotalsLimited which is
one of the biggest in cement industries; and an ISO 9002 company; the renowned
organization which attained over all excellence; and organization with future and social
outlook; a highly quality conscious and professionally managed organization;
Over and above to all of this, as per Osmania University PGCollege, MBA course
curriculum every student has to undergo practical training for a period of one months and
come out with the project work report in order to observe the particularity of theory
taught. To fulfill this requirement also this study has been undertaken.

OBJECTIVES OF THE STUDY

The primary objective of the study is to examine the working capital policies and
management of working capital in Surabhi hotalsLimited. Following are specific
objectives of the present study.
To analyze & evaluate the working capital management of Surabhi
hotalsLimited
To study the cash management practices in it.
Study the inventory management practices in it.
To examine the liquidity position of the company.
To study the ability of the company in utilizing the working capital in the
business.
To analyze the financial performance of the company and suggest
measures to improve efficiency.

To assess the Liquidity and solvency of Surabhi hotals

Ltd with the help of selected Ratios.

METHODOLOGY OF THE STUDY

There are two sources to collect the required data and information for this
study. They are primary data sources and secondary data sources.
Information relating to the study (data about the companys financial
accounts) has been collected from secondary sources and the required data has
been collected from the primary sources.
The primary data was collected through personal interviews and personal
observations. The basis for secondary data is the discussion with some senior
executives, journals, Annual reports, brochures etc.
The present study is done by taking data for 5 years i.e. from 2007to 2012.
LIMITATIONS OF THE STUDY
1. Non availability of full information of the company and the staff time during the
study, because they are being busy with finalization work of the accounts of the
company.
2. The eight week duration of study also turned to be a limiting factor for an intensive
study.
3. Non availability of documents due to legal aspects.
4. As the study is based on working capital ratios it is only a quantitative analysis and
does not reflect the qualitative aspects of the company

CHAPTERISATION
This study attempts to review the evaluation of financial statements of Surabhi
hotalsLtd., The information of RCL is collected between the years 2007 to 20012. The
entire study is presented in the reports is divided in to 5 Chapters.
1. Chapter I- It reviews the Introduction i.e., a brief about objectives of the study,
framework, methodology and its limitations of the study.
2. Chapter II- It reviews the profile of cement industry, which includes Industry
Analysis, Cement profile, Exports, SWOT Analysis.
3. Chapter III- It reviews the profile of the Surabhi hotalsLimited, which includes
Background, Recent Acquisitions, Board of Directors, and Organization Chart etc.
4. Chapter IV- It deals with Analysis of financial statements of the Surabhi
hotalsLtd which includes Working Capital Management, Cash Management,
Inventory Management, and Bills Receivables Management.
5. Chapter V- It concludes the findings and suggestions of the company.

Working Capital Management

Working capital refers to the part of the capital which is available and used for
carrying on the regular business operations. Thus, the capital required for purchasing raw
materials, payment of direct and indirect expenses, maintaining production investment in
stock and stores, receivable and to be maintained in the form of cash is general known as
working capital. In short, it is the capital with which a business runs.
Working capital=Current Assets-Current Liabilities
Definitions:
The term working capital refers to the amount of capital which is readily
available to an Organization"
In the words of Shubin:- Working Capital is the amount of funds necessary to cover
the cost of operating the enterprise.
According to Genstenberg:-Circulating capital means current assets of a company that
are changed in the ordinary course of business from one to another, as for example, fro m
cash to inventories, inventories to receivable, receivable to cash.
Concept of Working Capital
There are two concept of working capital-(i) Gross Concept (ii) Net Concept.
The gross concept of working capital, viz. (i) The gross working capital = Current
Assets (Marketable Securities, Inventories, and Bills Receivable) Current Liabilities.
(ii) Net concept of working capital = Current Assets-Current Liabilities.
Components of working capital- These are Currents Assets and Current Liabilities.

Example of current assets are----

Example of Current Liabilities----

i)

Cash at Bank

ii)

Cash in Hand

iii)

Stock(RawMaterial,Work-inProgress and Stock)

iv)

Bills receivables

v)

Short-term loans and advances

vi)

Prepaid Expenses

vii)

Accrued incomes

viii)

Money Receivable with in

12months.

i)

Bills Payable

ii)

Creditors

iii)

Bank Overdraft

iv)

Short term borrowings

v)

Dividend payable

vi)

Provident fund dues

vii)

Outstanding expenses.

viii)

Another payment which is due

with in one year.

Sources of working capital- Sources of working capital are Long term and Short
term.
Long Term Sources
Issue of share either equity or preference shares.
Loans (Debenture, bond and others)
Public Deposits.
Ploughing Back of Profits.
Short Term Sources
Trade credit.
Credit Document / Paper.
Taxation Provision.
7

 Depreciation.
Accrued Expenses.
Bank Credit/Cash Credit/Advances.
Govt. Subsidies / Assistance.
Security of employees.
Loans from directors.
Objectives of working capital:
1. To ensure optimum investment in current assets.
2. To strike the balance between liquidity and profitability.
3. To ensure adequate flow of funds for current operations.
4. To spend up the flow of funds or to minimize the stagnation of

funds.

Importance of working capital:

Working capital may be regarded as the lifeblood of a business. Its effective
provision can do much to ensure the success of a business, while its inefficient
management can lead not only to loss of profit but also to the ultimate down for of
business. A study of working capital is of major importance to internal and external
analyze because of its close relationship with the current day-to-day operations of a
business.
An adequate working capital protects a business from the adverse effects of
shrinkage in the value of current assets. It ensures to a greater extent the maintenance of a
companys credit standing and provides for search emergencies as strikes, floods etc., it
helps to pay all the current obligations promptly and to take advantage of cash discounts.
It permits the carrying of inventories at a level that would enable a business to serve
satisfactorily the needs of its customer. It enables a company to extend favorable credit
terms to customer and also helps to withstand periods of depression smoothly.
When working capital is inadequate, a company may have to borrow funds at
exorbitant rates of interest and also may not be able to pay its dividends because of the
non availability of funds. Such firms run the risk of inventory.

Then the question of the optimum amount of working capital for a firm cresses. A
firm should have neither too high amount, of working capital nor too low. It is the job of
the financial manager to estimate the requirement of working capital carefully and
determinant the optimum level of investment in working capital.
Types of Working Capital:
a. Net Working Capital
b. Gross working capital
c. Permanent working capital
d. Variable working capital.
a)

Net Working Capital:

The net working capital is the between current assets and current liabilities. The

concept of net working capital, as the excess of current assets over current liabilities,
highlights the character of the courses from which the funds have been obtained to
support that portion of current asserts in excess of current liabilities.
This part of working capital may be provides by way of share capital, from
internal sources such as reserves are the from external sources in the form of long term
borrowings., The concept of net working capital enables a firm to determine how much
amount is left for operational requirements.41
b)

Gross Working Capital:

Gross working capital is the amount of funds in the various components of current

assets. In other works, funds needed would total upto the constituent components mainly
stack of raw materials, work-in-progress, finished goods, accounts receivables and
minimal cash and bank balance constituting working capital.
Gross working capital provides the current amount of working capital at the right
time. It enables a firm to realize the greatest return on its investment and also enable a
firm to plan and control funds and to maximize the return on investment. Excessive
investment in current assets is to be carefully avoided, as otherwise profits would be
impaired.

c)

Permanent working capital:

This is the minimum amount of current assets which needed to conduct a business

even during the dullest season of the year. It is the amount of funds required to produce
the goods and services which are necessary to a satisfy demand at a particular point.
d)

Variable working capital:

It represents the additional assets which are required at different times during the

operating year. It is temporarily invested in current assets.

Tools and Techniques of Working Capital Analysis:
1. Schedule of Working Capital Changes.
2. Ratio Analysis
3. Fund Statement.
1) Schedule of Working Capital Changes:-The working capital do to change due to
various transaction. The working position at the beginning of a period is changed all to a
different position at the end of that period.
A statement of working capital is prepared to depict. The changes in working
capital, working capital represents the excess of Current Assets over Current Liabilities.
All current assets and current liabilities are the component of working capital. It is
necessary to measure the increase or decrease.
2) Ratio Analysis:-Ratio Analysis is an important tool for analyzing financial statement.
The data given in financials statements either Balance Sheet or Profit & Loss Account.
Ratios are relative form of financial data and very useful tool to check upon the
efficiency of a firm. Ratio analysis is based on different ratios which are calculated from
the accounting data contained in the financial statements.
What is Ratio?
1 The ratio refers to the numerical relationship between two variables.
2 The relationship between two figures can be established on the basis of some
logical methods, which is called ratio.
3 Ratio is an assessment of one number in relation to the other.
Mode of Expression
10

This is quantitative relationship may be expressed in either of the following

ways--i)

Rate

ii)

Proportion

iii)

Percentage

Importance or Objectives of Ratio Analysis

The importance or objective of Ratio analysis are----i)

Aid to measure General Efficiency.

ii)

Aid in comparison of financial data.

iii)

Financial forecasting.

iv)

Aid in planning.

v)

Facilitate decision making.

vi)

To test profitability.

vii)

To test solvency positions.

viii)

Aid in Intra firm comparison

ix)

Taking investment decision.

x)

Effective tool for management

xi)

Act as a good communication.

xii)

To achieve desired co-ordination.

Limitations of Ratio-Analysis
The limitations of ratio analysis are
1.) A single ratio in itself is not important, or has limited value because trend is more
significant in the analysis.
2.) A simple ratio would not be able to convey anything.
3.) Lack of proper standard.
4.) Difference in definitions.
5.) Effect of personal opinion.
6.) Ratios may make the comparative study complicated and misleading an account
of changes in price level.
11

7.) Ratio analysis is one of the many techniques of analysis and interpretation.
8.) Ratios become meaning less if detached from the details from which they are
derived.
9.) Ratio analysis is not a substitute for sound judgment.
10) Ratios are computed on the basis of past data, past is not an indicator of future.
Interested Parties
Ratio analysis of firms financial statement is of interest to a number of
parties, mainly management, creditors, shareholders, and investor etc. Parties interested
and application of different ratios in short, are given below:
Parties Interested
1. Management

Application of Ratio
(i) Operating Ratio

To use

(ii) Return on capital employed

(iii) Stock Turnover

Profitability

(iv) Debtors Turnover

(v) Solvency Ratio
2. Creditors Money Lenders (i) Current Ratio
Investor

(ii) Solvency Ratio

Liquidity

(iii) Creditors Turnover

or

(iv) Fixed Assets Ratio

Solvency

(v) Assets Cover

(vi) Interest Cover or Debts Service Ratio
3. Share Holders, Creditors, (i) Return on Shareholders fund
Employee Government

(ii) Capital Gearing Ratio

(iii) Dividend Cover Ratio
(iv) Yield Rate Ratio
(v) Proprietary Ratio
(vi) Dividend Rate Ratio
(vii) Assets Cover of Share

Accounting Ratios
12

Capital Structure

There are several ratios can be computed in a firm for various purpose. In view of
the requirements of the various users of ratios, we may classify them into the following
five important categories:
Accounting Ratios
Profitability Earning Ratio
Ratios
Grass Profit Dividend Ratio

Activity Ratio

Liquidity

Leverage

Stock Turnover

Ratios
Current Ratio

Ratio
Leverage

Ratio
Net
Profit Earning Per Share

Working Capital Liquidity Ratio

Ratio
Expenses

PriceEarning Ratio

Turnover
Fixed Assets

Cash

Ratio
Operating

Pay-Out Ratio

Turnover
Capital Turnover

Ratio
Stock Ratio

Profit Ratio
Return
on Earning
capital

Ratio

Power

Position

Debtors

Ratio

Velocity

Employed
Ratio
Creditors Ratio
Proprietary
Ratio
Debt
Ratio

TYPES OF RATIOS

13

Equity

Ratio can be grouped into various classes according to financial activity or

function to be evaluated. The parties interested in financial analysis are short term & long
term creditors, owners & management. Short-term creditors main interest is in the
liquidity position or the short-term solvency of the firm. Long-term creditors on the other
hand are more interested in evaluating every aspect of the firms performance.
43
They have to protect the interest of all parties and see that the firm grows
profitability. In view of the requirement of various users of ratios, the ratios classified
into four important categories.
A. Liquidity ratios
B. Leverage ratios
C. Activity ratios/turnover ratios
D. Profitability ratios.
(A) Liquidity Ratios :These ratios, if favorable indicate the firms ability to fulfill its short-term
obligations (usually those which are for payment within a year at the most) on
time without leopard day to day operations. They are based on the relationship
between current assets & current liabilities. Needless to say, it is important for the
fir, to maintain proper liquidity.
(1) Current Ratio :This ratio, measured as current assets /current liabilities. The idea behind this
is that current liabilities should be no difficulty in carrying on the usual
operations. However, it is not advisable to have very high ratios, as it would imply
poor investment policies or excessive stock. Similarly, the same should not be
maintained very low, which imply a shortage of working capital.
Current Assets
Current ratio = -----------------------Current Liabilities
(2) Quick ratio :Quick ratio stock may be the governing factor in the current ratio and
this may could the liquidity position. In order to obviate this and test the short14

term liquidity in its true form, the quick ratio is worked out. Inventories & prepaid
expenses are excluded from the current assets, as they are the least liquids. The
standard norm accepted for this ratio is 1:1, since in that the cash yield would be
sufficient to discharge liability. It is calculated as
Quick Assets
Quick ratio = -------------------Current Liabilities
(3) Cash Ratio:Cash being the most liquid of all assets may be used to work out the cash ratio.
In preparing this ratio, short-term marketable securities are also added to cash
since they are readily convertible to cash.
Cash + Short-Term Marketable Securities
Cash ratio = -------------------------------------------------Current Liabilities
(4) Interval Measure:
This ratio rectifies the static element present in the 1 st & 2nd ratios and projects a
dynamic analysis by an examination of cash inflows and outflows are as well as the
size of liquid assets balances at a given point of time. The average daily flow of
operational cash expenses can be calculated by dividing the total expenses (i.e.,
manufacturing, selling, administration etc.,) by 365 days. It is calculated as
Quick Assets
Interval Measure =

-------------------

Average daily flow of operational expenses.

(5)

Net Working Capital Ratio:

15

This again indicates the firms capacity to meet current obligations and is
calculated as:
Net Working Capital
NWCR = --------------------------------Net Assets
Where net working capital = current ratio current liabilities.
(B) Leverage Ratio :Financial leverage centers on debt. Although it is a cheaper source of finance, it
needs to been exercised with caution in view of the risk associated with it i.e., the
capacity of the company to generate enough profits to repay the debts with interest. While
analyzing financial leverage, the two types of ratios structural & coverage are used.
While the former establish a relationship between debt equity & debt assets, the latter
shoes the relationship between debt servicing commitments and the sources for
measuring these burdens.
(1) Total Debt Ratio :
Several debt ratios may be used to analyze the long-term solvency of a firm. The
firm may be interested in knowing the proportion of the interest bearing debt in a capital
structure. It may therefore, computed debt ratio by dividing total debt (T.D.) by the
capital employed (C.E) or total net assets (N.A.). Total debts include short & long term
borrowings, from financial institutions, debentures/ bonds & bank borrowings. Public
Deposits, Capital employed will include total debt & net worth (N.W.)
Total Debt
Total Debt Ratio = ----------------Capital Employed.
(2) Debt Equity Ratio :-

16

This is measured to assess the soundness of long-term financial policies. It is

calculated as
Total Debt
Debt Equity Ratio = ---------------------Net Worth
In general, the lower ratio, the more protection enjoyed by the creditors and viceversa.
(3) Interest Coverage Ratio :
Earnings Before Interest & Tax
Interest Coverage Ratio = --------------------------------------------Interest
A high ratio means that the firm can easily meet its interest burden even if
earnings before interest & tax falls a low ratio may adversely affect the credit worthiness
of the company if earnings before interest & tax fall.

(4) Proprietary Ratio :

One interesting of shoot of the debt equity ratio is the proprietors ratio. It
enables the proprietors to know what share is in the business on a certain date. It is
calculated as
Share holders funds
Proprietary ratio = -------------------------Total tangible assets

It is normally expressed as a percentage. If the ratio is low, it would, means that

the company is unstable since any loss incurred would be borne by outsides to a large
extent.
(C) Turnover Ratios / Activity Ratios:-

17

Funds in on organization may be more actively employed or less actively

employed or sometimes even remain idle. The activity or circulation of funds has a direct
bearing on the profitability of the investment. Turnover ratios are a measure of the
activity of the employed.
(1) Total Assets Ratio:
It measures how efficiently assets are being employed over all. Therefore,
Net Sales
Total Assets Turnover =--------------Total Sales
(2) Fixed Assets Turnover Ratio:
This measures how efficiently the fixed assets are employed. The higher the
ratio, the more efficient they are being used vice-versa.
Net Sales
Fixed assets turnover ratio = ---------------Net Fixed Assets
(3) Inventory Turnover Ratio:
This reflects the efficiency with which inventory was managed. The higher the
ratio, the more efficient inventory management is. However, the management should be
cautioned in that low of stock, which may result in loss of sale and customer goodwill,
may cause a high inventory turnover. It is calculated as
Net Sales
Inventory Turnover Ratio = -------------------Average Inventory
(4) Days of Inventory Holding:

18

This tells us how long stock is kept before issued. It is calculated as

Average inventory
-----------------------------Sales* 365
(5) Average Collection Period:
This indicates how much time is given to creditors to pay their debts. The shorter
the average collection period the higher the receivables turnover & vice-versa. A short
collection period is always favorable. It is calculated as
365
---------------------Debtors Turnover Ratio
(D) Profitability Ratios:Profitability is the overall measures of efficiency since its reflects the final result
of business operations. The profitability ratios are divided into two gropes,
Profit Margin Ratio, shows the relationship between profit & sales
Rate of Return ratio, helps us to understand the relationship between profit &
investment
(1) Gross Profit Margin Ratio:
The first profitability ratio in relation to sales is the gross profit ratio. It is
calculated by dividing the gross profit by sales. The gross profit ratio reflects the
efficiency with which management produces each unit of product. This ratio indicates the
average spread between the cost of goods sold & the sales revenue. A high gross profit
ratio is a sign of good management.
19

A gross profit ratio may increase due to any of the following factors. (1) Higher
sales prices, cost of goods sold remaining constant, (2) Lower cost of goods sold, sales
prices remaining constant, (3) Increase in the proportionate volume of higher margin
items.
A low gross profit ratio due to the higher cost of goods sold and also due to a fall
in prices in the market.
The gross profit ratio is calculated as follows
Gross Profit
Gross Profit ratio =------------------Net Sales * 100
Where Gross Profit = Sales Cost Of Goods Sold
(2) Net Profit Margin Ratio:Net Profit is derived at when operating expenses, interest and taxes are
subtracted from the gross profit. The gross profit margin ratio is measured by dividing
profit after tax by sales.
Profit After Tax
Net Profit Margin = ---------------------------Sales

20

The ratio establishes a relationship between net profit & sales and indicates
managements efficiency in manufacturing administrating & selling the products. This
ratio is the overall measures of the firms ability to turn each rupee sales into net profit. If
the net profit margin is inadequate, the firm will fail to achieve satisfactory return on
owners equity.
This ratio also indicates the firms capacity to with stand adverse economic
conditions.
(3)Return On Equity: This ratio, measures the profitability of equity funds invested in
firms and shoes the shareholders hoe efficiently their investments have been utilized. It is
calculated as
Profit after Tax
Return on Equity=-------------------Net Worth

(4) Return On Total Assets:

The profitability ratio is measured in terms of the relationship between net profits
and assets
Earnings Before Interest & Tax
Return on Total Assets = ----------------------------------------Total Assets

21

CLASSIFICATION OF RATIOS
Accounting ratios are classified in various ways. The following are the important
basis on which ratios can be classified:
1. Classification by sources/statement
2. Classification by users
3. Classification by functions
4. Classification by importance
5. Classification by purpose
1. Classification by sources/ statements
The classification based upon the statements is known as classification by
sources. According to this angle ratios are classified as under
a. Balance Sheet
b. Profit & loss Account
c. Combined Ratios
If the ratios deals with the relationship between two items of the balance sheet.
Then it is known as balance sheet ratios. For Example, Current ratios, Debt-equity ratio
etc.,
If the ratio deals with the relationship between two items of the same profit & loss
account, then it is known as profit & loss account ratios. For Example, Gross profit ratio,
net profit ratio etc.,
If the ratio deals with relationship of an items of balance sheet and profit & loss
account of the same accounting period then it is known as combined ratio. For example,
Stock turnover ratio etc.

2. Classification by users
22

If the classification is based upon the parties who are interested in making use of
these ratios. Then it is known as classification by users
a. Shareholders Ratio. Example, Return on shareholders etc.,
b. Creditors Ratio. Example, Current ratio etc.,
c. Management Ratio. Example, Operating ratio etc.,
3. Classification by functions
If the classification is made according to the functions i.e. from the point of view
of the financial management needs, then it is known as classification by functions.
Example, Stock Turnover Ratio.
4. Classification by importance
Classification by importance can be basis of importance ratio mast be classified as
a. Primary Ratios and
b. Secondary Ratios.
5. Classification by purpose
Accounting ratios are computed for different purposes .Based upon the purpose the
ratio can be classified example, profitability ratios activity ratios etc.
3) Fund Flow Statement:- Fund statement is a statement showing various items changing
working capital. It shows inflows and outflows of funds. Fund flow statement can be
prepared at any time. The object of its preparation is to show changes and factors for
these changes between two balance sheet dates.
The usefulness of fund statement is wide. Various uses of this statement have been
described.
23

As it serves as a handy tool in financial analysis, making Financial planning, preparation

of budget. Fund flow statement shows the items of sources of fund and its uses in various
items.
The sources of fund statement are-Issue of New share, Issue of debentures,
Creation of long term liability, sales of fixed assets and profit from operations and the
uses of fund as loss from operation, discharge of liability, Redemption of debentures,
Redemption of preference shows and purchase of fixed assets.
Estimates of Working Capital: The following factors should be considered at the time
of estimating size/quantum of working capital Nature of Business Firm.
Sales volume and turnover of working capital.
Liquidity of Current Assets.
Debtors position.
Seasonal variations in the business.
Manufacturing cycle and Time lag between production and sale.
Terms of purchases and sales or credit policy.
Cash position.
Inventory position.
Technique of Forecasting Working Capital
These are can
1. Operating cycle method
2. Forecasting of Current Assets and Current Liabilities method.
3. Cash Forecasting method- Cash Forecasting.
4. Projected Balance Sheet Method.
5. Profit and Loss Adjustment method.

Determination of Working Capital: The factors which usually influence working

capital needs in manufacturing undertaking cover:
24

The nature of and size of business.

1. Manufacturing process, technology and facilities.
2. Competitive forces.
3. Speed of operating cycle.
4. Growth and expansion activities.
5. Credit terms.
6. Dividend policy.
7. Production policy.
8. Attitude towards profits.
9. Inventory procedures, depreciation policy, business cycle management
attitude etc.,
10. Infrastructure: The abysmal economic and physical infrastructure in India
also effects to working capital needs adversely prolonging the operating
cycle.
Working capital management is an integral part of overall corporate management.
The effective management of working capital like other areas of management requires a
clear statement of goals to be pursued and responsibility to be allocated. Cash
management and short-term loans along with the level of debtors are the responsibility of
financial executives. Inventory and credit control are managed in other departments
these division of responsibilities makes a coordinated approach to working capital
management.

25

Profitability and liquidity are the twin objectives of working capital management.
Profitability and liquidity frequently conflict with each other. Attempts to produce
maximum profitability and out of various elements of working capital do create severe
liquidity problems. At the same time, over concentration on liquidity does dilute profits.
Management of working capital establish the best possible credit off between the
profitability of net current assets employed and the ability to pay current liabilities as
there fall due,
Ratios Relating To Working Capital
To evaluate the financial condition and the purpose of a firm the financial analyst
needs certain yardsticks frequently used are a ratio relating two pieces of financial data to
each other. Different types of ratios relating to working capital management are,
1. Current Ratio:
This is the most widely used ratio. It is ratio of current assets to current liabilities.
Generally current assets should be 2 times of current liabilities.
Current Assets
Current ratio= --------------------------Current liabilities
2. Quick Ratio:
This is the ratio of assets. Liquid assets are those, which are readily converted into
cash and will include cash balances, bills receivables, sundry debtors and short-term
investments, inventory and prepaid expenses are not in liquid assets.
Quick Assets
Quick Ratio=

----------------------Current Liabilities

26

3. Working Capital Turnover Ratio:

This ratio shows the number of items working capital is turnover in a state period.
The higher the investment in working capital and the greater are the profits. A low
working capital ratio indicates the working capital is not efficient utilized.
Cost of sales
Working capital turnover ratio=-----------------------Net working capital
Working capital management includes:
1. Cash management
2. Receivable management
3. Inventory management.
1. Cash Management
The utility of current assets is measured by current assets turnover ratio, obtained
by dividing the figure of sales by the amount of current assets. A high ratio indicates
greater circulation of current assets, frequent repetition of operating cycle and there fore
more liquidity in current assets.
A better utilization of current assets is in timely linked with the inventory
position. If the proportion of inventory is excessively large unwanted by the quantum of
sales, the turnover of current will be low. The normally hypothesis is that if the
proportion of inventory to current assets declines, there may be better turnover of
inventories and better utilization of current assets.
But, if the quantum of the sales goes inadequate as not warranted by the
investments in current assets and inventory, the declining trend of current turnover and
inventory turn over ratio.
In such cases the efficiency of current assets declaims continuously not due to the
excessive inventories as is the usual case but, due to inadequate sales, may be due
shortage of various inputs.

27

Cash is the most liquidity assets that a business owns which includes money and
search instruments as checks, money order etc., cash is an obvious and inescapable
input into companys operations.
And as search it has to be available sufficient does according to needs on
continuing basis. Cash needs to hold in an enterprise for meeting anticipated obligations
that may not match with cash receipts.
Liquidity is the lifeblood of companies and insufficient availability of cash is the
only factor, which may force it out of business. Cash flows into a company by direct cash
sales and the collection of debt from customers, and also but less regularly, from the sale
of assets. Cash flows out in direct purchase and payments to creditors, in payment of
wages and other costs, in the purchase of capital equipments, in the payment of taxes and
a interest on borrowed money, and in dividends to share holders.
One of the essentials of good management is the fact at any organization is able to
need its obligation as and they arise by judicious direction of the flow of cash into and
out the business.
Cash management constitutes a key area of working capital management. The
twin objectives of cash management can be stated as that of being able to meet payment
schedule and yet keeping minimum funds as cash balance.

Sufficient cash can keep a function unsuccessful firm going despite losses.
Conversely, an in sufficiency of cash can bring failure in the face of actual or prospective
earnings.
An efficient cash management through a relevant and timely cash budgets may
enable a firm to obtain optimum working capital and ease the strains of cash shortage, a
facilitating temporary investment of cash and providing funds for normal growth.

28

2. Bills Receivable Management

Receivables are assets which are created as a result of the sales of goods are
services the ordinary course of business. A firm there fore carries receivable for its
customers for some period, which depends upon the requirements of the customers at one
end and the credit sanctioning capacity of the firm at the others.
Receivables constitute a major component of working capital. By using accounts
receivable financing to obtain business loans, companies are often able to provide them
with more operating cash then they obtain through other methods of short term
borrowings.
This may be the most important among the many reasons are the fact that as
increasing use is made of receivables financing ; and its significance is heightened by the
increases in pressure on working capital in the modern economy. Accounts receivable
financing is the method by which business loans are obtained by the assignment of
opening accounts receivables. It involves an arrangement under which financial
institutions advance funds which are secured by the pledge of accounts receivables with
resources to borrows and with out notice to the account debtors.
Management of receivables furnished additional operating cash, and there is no
needed for diluting the equity and control of owners. The accounts receivables financing
arrangement provides a business firm with an established sources of funds which may be
used for long as well as short term purposes, and which does not obligate it to pay for
money when it is not needed.
Therefore, its serves as a limited loan to finance and rapid and successful growth
of undertaking and provides continuous sources of operating cash.

29

3. Inventory Management
The meaning of the word Inventory is stock of goods. Inventories mean
tangible property held for sales in the ordinary course of business is in the process for
such sales. Managing working capital is synonymous with controlling inventories. Good
inventory ultimately results in the maximization of the owners wealth.
Types of inventory:
1.

Raw material:
Inventories of raw material and suppliers are needed for sustaining production.
The objectives of inventory management intuits raw materials phase can be said

to be that materials, having the required quality and made available as and when needed
ensuring at the time that is the investment in or funds tied up in inventory is kept the
minimum possible level.
2.

Work-in-progress:
The process of manufacturer will give risk to semi-finished products in the form

of work-in-progress, components etc., in the work-in-processing economic batch

quantities and avoiding undue accumulation of intermediates stocks.
3.

Finished goods:
In this phase inventory management is concerned with the maintained of adequate

inventories at the required outlets to meet the market needs promptly and yet avoid build
up of imbalances such as excess stocks in certain outlets and shortages in the other areas.
Objectives of inventory management:
i.

To have stocks available as and when they are required

ii.

To ensure and adequate supply of materials, minimize stock outs and

shortages and avoid costly interruption in operations.

iii.

To keep down investment in inventories, inventory carrying cost and

obsolescence losses to the minimum.

iv.

To keep all the expenditure with in the budget authorization.

v.

To contribute to profitability.
30

COMPOSITION OF CURRENT ASSETS (Rs. In Millions)

Current Assets
2007-08
2008-09 2009-10 2010-11 2011-12
Inventories
6.44
105.25
126.31 120.74 206.75
Sundry Debtors
2.32
42.94
43.61
49.85
60.26
Cash and Bank Balance
5.07
41.89
114.31 106.39 490.33
Other current assets
NIL
0.16
0.056
0.39
1.81
Loans and advances
768.79
418.00
398.84 534.78 546.05
TOTAL C.A
782.62
608.24
683.12 812.15 1305.2
Source: Compiled from the annual reports.
COMPOSITION OF CURRENT LIABILITIES (Rs. In Millions)
Current Liabilities
2007-08
2008-09
2009-10
2010-11
Goods
--------Expenses
--4.50
----Due to SSI undertaking
0.27
0.73
2.60
1.00
Other industry
--------Unclaimed dividend
5.01
7.05
----Other liabilities
--------Bank Overdraft
--------Interest accrued but not paid
Advance received from
Customers
Provision
TOTAL C.L :

Average
113.09
39.79
151.59
0.48
533.29
838.26

2011-12
----0.12
---------

---

5.50

---

0.75

---

84.83
0.8
90.91

40.91
5.52
64.21

51.69
6.29
60.5

46.69
8.63
57.08

33.86
9.72
43.71

Table-I Net Working Capital Growth= Currents Assets- Current Liabilities

31

Size and growth of Net working capital in Rain Industry Limited during 2007-2012(in millions)
Current
Current
Current
Assets (Rs.
Year
Assets base Liabilities (Rs.
In
year growth In Millions)
Millions)
2007-08
782.63
100.00
90.91
2008-09
608.26
77.74
642.12
2009-10
683.14
87.28
603.59
2010-11
812.17
103.77
570.84
2011-12
1305.22
166.77
437.14
Source: Compiled from the annual reportChart-1

Current
Liabilities
base year
growth
100
706.32
663.94
627.91
474.24

Net
Net Working
working
Capital base
capital (Rs.
year growth
In Millions)
691.72
100
-33.86
-4.89
79.55
11.49
241.33
34.88
868.08
125.49

Interpretation- The amount of current assets which was Rs.782.63 millions in 2007-08
it is decreased to Rs. 608.26 millions in 2008-09, and the next year increased to Rs.
683.14 millions in 2009-10, and it is continuously increased from 2011-12 onwards. Now
the current assets will be Rs.1305.22 millions.
The current liabilities are in 2007-08 Rs. 90.91 millions and it is increased to Rs. 642.12
millions, and continuously decreasing from 2009-10 onwards. The net working capital
ratio in 2007-08 is 8.61 and it is decreased to 0.94 and it will be increased from 2009-10
onwards. Now the net working capital ratio is in good position. Company is also in good
position.

Current Assets
32

Table-II Current Ratio = ------------------------Current Liabilities

Current Ratio during 2007-12 (Rs. In Millions)
Year

Current Assets

Current Liabilities

2007-08
782.63
2008-09
608.26
2009-10
683.14
2010-11
812.17
2011-12
1305.22
Source: Compiled from the annual report.

90.91
642.12
603.59
570.84
437.14

Current Ratio
8.61
0.94
1.13
1.42
2.98

Chart-II

INTERPRETATION
The above table shows that the details of current ratio. It was observed from the
table that current ratio was fluctuating. The current ratio works out to 8.6 times in
2007-08. It is decreased to 0.94 in 2008-09, after that a steady increase in current ratio
from 2009-10 onwards and finally it increased to 2.98 times in 2011-12.
Now the company situation is very good position. Because the current assets will be
continuously increased from 2009-10 onwards.
Table-III
Quick Assets
Quick Ratio = -----------------------Current Liabilities
33

Quick Ratio during 2011-12 (Rs. In Millions)

Year

Quick Assets

Current Liabilities

2007-08
776.19
2008-09
503.01
2009-10
556.83
2010-11
691.43
2011-12
1098.49
Source: Compiled from the annual report.

90.91
642.12
603.59
570.84
437.14

Quick Ratio
8.53
0.78
0.92
1.21
2.51

Chart-III

INTERPRETATION:
The above table shows that the details of quick ratio. It was observed from the
table that quick ratio was fluctuating. The quick ratio works out to 8.53 times in
2007-08. It is decreased to 0.78 in 2008-09, after that a steady increase in current ratio
from 2009-10 onwards and finally it increased to 2.51 times in 2011-12.
Now the company situation is very good position. Because the quick assets will
be continuously increased from 2004.05 onwards.
Cost of Sales
Table-IV Working Capital Turnover Ratio = --------------------------------Net Working Capital
Working Capital Turnover Ratio during 2002-2007

34

(Rs. In Millions)

Year

Cost Of Sales

Net Working Capital

Ratio

2007-08
2008-09
2009-10
2010-11
2011-12

2714.10
1205.30
2463.45
3044.26
3617.16

691.72
-33.86
79.55
241.33
868.08

3.92
-35.59
30.96
12.61
4.16

Chart-IV

INTERPRETATION:The above table shows that the details of working capital turnover
ratio. It was observed from the table that working capital turnover ratio was fluctuating.
The working capital turnover ratio in 2002-03 is 3.92 and it is decreased to -35.59,
because the net working capital in 2003-04 period is very low compare with the previous
year.
The cost of sales will be continuously increased from 2004-05 onwards, in the
same way the NWC is also continuously increased from the same year. But the ratio
is continuously decreased from 2004-05 onwards.
When cost of sales compare with the NWC, the NWC is less than cost of sales.
Because of this reason the graph shows very decreasing ratios.
Now the company situation is very good position. Because the cost of sales of the
company is continuously increased from 2004.05 onwards.
Net Sales
Table-V Debtors Turnover Ratio= ------------------Average Receivables

35

Debtors Turnover Ratio during 2002-2007(Rs. In Millions)

Year
2007-08
2008-09
2009-10
2010-11
2011-12
Chart-V

Net Sales
2058.45
958.44
2444.51
3203.10
4954.76

Average Receivables
1.16
21.47
21.80
24.92
30.13

Ratio
1774.52
44.64
112.13
128.53
164.44

INTERPRETATION:-The above table shows that the details of Debtors turnover ratio.
It was observed from the table that Debtors turnover ratio was fluctuating. The debtors
turnover ratio in 2007-08 is 1774.52 and it is decreased to 44.64, because the net sales are
decreased in 2008-09.
The net sales are continuously increased from 2009-10 onwards, in the same way
the Average Receivables is also continuously increased from the same year.
But the ratio is continuously increased from 2010-11 onwards. When receivables
are comparing with the net sales, the receivables are less than the net sales.
Now the company situation is very good position. Because the net sales of the
company is continuously increased from 2011-12 onwards.
Table-VI

Year
2007-08
2008-09

Net Sales to
Current Assets
2.63
1.57

Inventory turnover ratio

Total C.A as % of Proportion of Inventory
total Assets
77.81
21.30
36

to CA
0.82
17.30

Inventory turnover
ratio
319.63
9.11

2009-10
3.57
22.13
2010-11
3.94
26.50
2011-12
3.79
35.78
Source: Compiled from the annual report.

18.48
14.86
15.84

19.35
26.53
23.36

Chart-VI

Interpretation:-Inventory turnover ratio indicates how many times the inventory

was converted into sales. Normally 8 times conversion of inventory into sales is ideal.
The table shows that the inventory turnover ratio was fluctuating, the inventory
turnover ratio was 319.63 times in 2007-08 and in 2008-09 it decreased to 9.11, It can be
observed from table that the inventory turn over ratio has increasing in 2010 and 2011.
But in the last year the ratio is decreased to 23.36.
(In Millions)
Particulars
Sales
(-)Excise Duty

2007-08
2426.42
405.78

2008-2009
1161.31
202.86

2009-10
2960.28
515.76

2010-11
3803.14
600.04

2011-12
5633.65
678.89

Net Sales
EBIT
Net Profit
Gross Profit

2020.64
492.03
492.03
501.22

958.44
-335.40
-350.03
-36.53

2444.51
-85.55
-193.78
180.36

3203.10
219.63
4.52
460.28

4954.76
1250.15
1004.98
1557.97

37

Compiled from Annual reports

Gross Profit
1. Gross Profit Ratio:- --------------------*100
Net Sales

Table- VII
Years
2007-08
2008-09
2009-10
2010-11
2011-12
Chart-VII

Gross Profit
501.22
-36.53
180.36
460.28
1557.97

Net Sales
2020.64
958.44
2444.51
3203.10
4954.76

38

Ratio
24.80
-3.81
7.37
14.36
31.44

INTERPRETATION:-Gross profit ratio in 2002-03 is 24.80 and it is decreased to -3.81

and the next year increased 7.37 and the next year onwards it is continuously increases to
14.36 to 31.44.
Profit After Tax
2.
Net Profit Ratio= ----------------------- * 100
Sales

Table-VIII
Years
2007-08
2008-09
2009-10
2010-11

(In Millions)
Profit After Tax
492.03
-350.03
-193.78
4.52

Sales
2020.64
958.44
2444.51
3203.10
39

Ratio
24.35
-36.52
-7.92
0.14

2011-12

1004.98

4954.76

20.28

Chart- VIII

INTERPRETATION:-Net profit ratio in 2007-08 is 24.35 and it is decreased to -36.52

and the next year high decrease in the net profit ratio i.e., -7.92 and the next year onwards
it was continuously increases from 0.14 to 20.28.
Now the company position is in good in the market.
Profit Before Tax
3.

Return on Total Resources Ratio= ----------------------------- *100

Total Assets

Table- IX
Years
2007-08
2008-09
2009-10
2010-11
2011-12

Profit Before Tax

492.03
-335.40
-85.55
219.63
1250.15

Total Assets
776.63
2854.69
3087.28
3064.40
3647.82

40

Ratio
63.65
-11.74
-2.77
7.16
34.27

Chart-IX

INTERPRETATION:-Return on total assets ratio in 2007-08 is 63.65 and it is

decreased to -11.74 and the next year high decrease in total assets ratio i.e., -2.77 and the
next year onwards it was continuously increases from 7.16 to 34.27.
Now the company position is in good in the market.

Findings
Current ratio 2:1 is standard/ideal ratio - The current ratio of the FY 2007-08 is 8.61: 1
which is more than ideal ratio. In the FY.2008-09, 2009-10, & 2011-12 current ratio is
less than the standard, due to current liabilities are increased.
From FY.2011-12 the current ratio is improving due to current liabilities are decreased
and in the same way the current assets are increased. It is observed that the above ratio is
showing growth of company from FY.2011-12.
41

It shows there is a good improvement of the working capital of the company from
2008-09 In present scenario, there is a good growth for cement industry, in future the
company can maintained working capital position adequately.

42

Conclusions:
We can conclude from the above Working Capital Rations that Priya Cements when
compared other companies is in a better liquidity position. The company has enough
funds to meet its current liabilities. But at the same time, the company has a huge amount
of cash blocked in Sundry Debtors. This calls for a change in the companys policies as
these debts could turn into bad debts which in turn would take away the competitive
advantage from Priya Cements due to sudden cash crunch. Thus the company must try to
improve its Average Collection period and increase average payment period to improve
its working capital management efficiency.
The following observation has been made about the performance of the company.

The market share of Priya Cements is 6.9% in the Urea Fertilizer Industry.

The company has opted for CDR package. Due to this, the shareholdings of
Banks and Financial institutions have increased from 15.06% to 22.01%. This has
laid greater control in their hands.

A large chunk of public shareholders consists of Farmers and Dealers situated in

the Godavari Basin.

The company has not declared any dividend for the fast few years.

43

Suggestions
1. The company can improve its cash balance position by exerting proper control on
cash inflows and outflows by preparing cash budget.
2. The investment in debtors is mounting up every year. Efforts should be expected
the collection. The investment in debtors shall justify the additional sales
generated. Therefore it is suggested to take all necessary steps to reduce the
maintaining debtors year by year.
3. The inventory composite showed be reduced to the minimum extent especially on
slow moving item like stores. The company showed adopt scientific inventory
management.
4. The firm may use marketable securities in the place of fixed deposits, because
they are the most liquid assets after cash
5. Surabhi hotalsLimited is presently following a concentration banking methods of
collection from debtors. As lock box system is an advanced procedure of cash
collection from debtor. The company is advised to follow this procedure which is
more advantageous for the firm.
6. Working capital turnover ratio is gradually decreasing. High ratio is good to the
organization try to maintain high ratio.

44

BIBLIOGRAPHY

Bibliography
1. Fundamentals of Financial Management

_ James C.Van Horne

2. Financial Management

_.M.Pandey

3. Financial Management

_ Prasanna Chandra

4. Financial Management

_ Khan and Jain

5. Annual Report

_ Jocil Ltd.,

Web Sites:
www.priyacements.com
www.workingcapital.co.in
www.nse.co.in

45