Professional Documents
Culture Documents
LANCO INDUSTRIES
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NEED FOR THE STUDY:
Primary Objective:
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To study the working capital management in Lanco Industries.
Secondary Objectives:
.
• To determine the changes in the Working Capital of the Firm over 5 years.
• To determine the short term solvency position.
• To give suggestions to the Company to improve its performance, if any.
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• If proper cash balance is maintained a Company can avail the advantage of cash
discounts by paying cash for the purchase of raw materials in the discount period,
which results in reducing the cost of production.
• Adequate working capital creates a sense of security, confidence and loyalty not
only through out the business itself but also its customers, creditors and business
associates.
• A firm can raise funds from the market, purchase of goods on credit and borrow
short-term funds from banks etc. If investors and borrowers are confident that
they will get their due interest and payment of principle in time.
• Certain contingencies like financial crises due to heavy losses; business
oscillation etc. can be easily overcome, if the company maintains adequate
working capital.
• A continuous supply of raw material, research programs, innovation and technical
developments and expansion programs can successfully be carried out if working
capital is maintained in the business. It will increase the production efficiency,
which in turn increase the efficiency and morale of the employees, lower the cost
and create image in the community.
REVIEW OF LITERATURE:
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CONCEPTS OF WORKING CAPITAL:
Working capital can be defined through its two concepts, namely:
(a) Gross working capital (b) Net working capital.
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TYPES OF WORKING CAPITAL:
Amount of
Working
Capital Temporary
Fixed
Time
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It refers to that part of total working capital that is required
by a business over and above Permanent working capital. It is also called variable
working capital. Since the volume of Temporary working capital keeps on fluctuating
from time to time according to the business activities, it may be financed from Short term
sources.
Amount of
Working
Capital Temporary
Fixed
Time
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• Nature of the business
• Credit policy
• Abnormal factors
• Market conditions
• Conditions of supply
• Business cycle
• Growth and expansion
• Levels of taxes
• Dividend policy
• Price level changes
• Operating efficiency
Credit policy:
The credit policy of the company also determines the
requirements of working capital. A company, which allows liberal credit to its
customers, may have higher sales but consequently will have large amount of funds
tied up in sundry debtors. Similarly, a company which has very efficient debt
collection machinery and offers strict credit terms may require less amount of
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working capital than the one where debt collection system is not so efficient or where
the credit terms are liberal.
Abnormal factors:
Market conditions:
Conditions of supply:
Business cycle: Business fluctuations lead to cyclical and seasonal changes in production
and sales and affect the working capital requirements.
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Growth and expansion:
Levels of taxes:
Dividend policy: Payment of dividend utilizes each while retaining profits acts as a
source of working capital. Thus dividend policies affect working capital.
Price level changes: Inflationary trends in the economy necessitate more working capital
to maintain the same level of activity.
Operating efficiency: Efficient and co-ordinate utilization of capital reduces the amount
of working capital required to be invested.
There are two methods, which are usually followed in determining working capital
requirements. These are:
Operating cycle method: In order to understand what gives rise to difference in the
amount of timing of cash flows, we should know the length of time which is required to
convert cash into final product, the final product into receivables and receivables into
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cash. The length of the operating cycle is a function of the nature of a business. There are
four major components of the operating cycle of a manufacturing company. These are
• The cycle starts with free capital in the form of cash and credit,
followed by investment in materials, manpower and the services.
• Production phase
• Storage of the finished products terminating at the time finished
product is sold.
• Cash or accounts receivable collection period, which results in, and
ends at the point of dis-investment of the free capital originally
committed. New liquid capital then becomes available for productive
reinvestment. When new liquid capital becomes available for
recommitment to productive activity, a new operating cycle begins
There are many aspects of working capital management, which make it an important
function of the financial manager.
Time: Working capital management requires much of the finance managers time.
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Investment: Working capital management has great significance for all firms but it’s
very critical for small firms.
Growth: The need for working capital is directly related to the firm’s growth.
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generated funds because a greater risk is generated with greater disparity. A margin of
safety should, however be provided for short term debt payments.
The various sources for the financing of working capital are as follows:
(e) Working
capital
3. Commercial paper
4. Factoring
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Financial of permanent/ fixed working capital:
1. Shares:
Issue of shares is the most important source for raising the permanent or
long term capital. A company can issue equity or preferences shares to raise the funds.
2. Debentures:
4. Retained earnings:
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Financing of temporary or short term working capital :
1.Trade credit:
2.Bank loans:
a. Over draft
b. Cash credit:
The cash credit facility is similar to the OD facility. Under this credit
facility a borrower is allowed to withdraw funds from the bank up to the
sanctioned credit limit.
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c. Purchase or discounting of bills:
d. Letter of credit:
3.Commercial paper:
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OPERATING CYCLE:
Operating Cycle is the time duration required to convert sales, after the conversion of
resources into inventories, into cash. The operating cycle of a manufacturing company
involves three phases:
They are,
Acquisition of resources such as raw material, labour, power and fuel etc.
Manufacture of the product which includes conversion of raw material into work-
in-progress into finished goods
Sale of the product either for cash or on credit. Credit sales create account
receivable for collection.
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• FGP – Finished Goods Conversion Period
• SDCP= Sundry Debtors Conversion Period
• SCCP= Sundry Creditors Conversion Period
Cash
Debtors
Raw-
Receivables Materials
Finished
Work-in-
Goods process
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DEBTORS MANAGEMENT :
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LAYING DOWN CREDIT POLICY:
The organization specifying applicability of general credit policy i.e., the period
of credit extendable as a thumb rule would fall short of its effort in controlling the
receivables. The credit policy required to be more selective and should bare the growth,
the recoverability, the product strength, the distribution network etc., in its upper most
mind. The variation in credit policy could also be on customer based. As we would
observe there would be two sets of organizations, one looking for a lower margin with
reasonable growth through a conservative credit policy.
The credit policy should not only lay down the period of credit but also a well
thought out procedures for extending credit in order to prevent or minimize the debts
going bad. A systematic evaluation of customers’ credibility, financial.
Strength and their usefulness to the organization in terms of quantum of sales etc.,
would fetch desired results. The credit policy should specify fairly senior personnel could
take the level of management authorized to extend general credit and instead of
decentralizing the power of extending any further dispensation such decisions, few in
number. Depending upon the market conditions the policy could also specify incentives
for early payments like cash discounts, so also interest on delayed payments.
MONITORING RECEIVABLES:
Monitoring the receivables areas important, if not more, as laying down the credit
policy. It has to be constant and continuous in order to bring down the level of
receivables to an optimum level in conformity with the laid down credit policy of the
organization. When we talk about the monitoring of receivables, two ready indicators are
remembered-a. the collection period and b. the age of the book debts.
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a. COLLECTION PERIOD:
The collection period would be in terms of number of days average credit sale.
Such a calculation area wise, marketing personnel wise at frequent intervals would
provide information’s for selective credit control. An application of incentive for faster
collection in certain selective areas also would render possible, the collection faster.
b. AGING OF BOOK DEBTS:
The collection efforts could be intensified on greater analysis of receivables from
the point of view of the number of days it is outstanding. Higher the number of days the
debt is outstanding, the probability of it becoming doubtful of recovery is higher. Earlier
detection of such outstanding from customers would facilitate taking hard decisions of
stoppage of further sales, in order to minimize bad debts. Collection of book debts just as
per credit policy would enable the organization to achieve planned profitability.
INVENTORY MANAGEMENT:
Nature of inventories
• Raw materials: Basic inputs that are converted into finished product through the
manufacturing process. These inventories are purchased and stored for the future
productions.
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• Work in progress: WIP inventories are semi finished products. They represent
products that need more work before they become finished products for sale.
• Finished goods: These inventories completely manufacture products which are
ready for sale. Inventories serve as a link between the production and
consumption of goods.
It is felt that there is the need to study the role of working capital management policies on
profitability of a company. Conventionally, it has been seen that if company desires to
take a greater risk for bigger profits and losses, it reduces the size of its working capital in
relation to its sales. If it is interested in improving its liquidity, it increases the level of its
working capital. However, this policy is likely to result in a reduction of the sales
volume, therefore of profitability. In this paper an effort has been made to make an
empirical study of Indian Consumer Industry for accessing the impact of Working Capital
Policies & practices on profitability during the period 1998-95 to 2004-05. The impact of
working capital policies on profitability has been examined by computing coefficient of
correlation and regression analysis between profitability ration and some key working
capital policy indicator ratios.
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Working Capital Management: A study on British American Tobacco Bangladesh
Company Ltd.
The aim of this study is to analyze the effect of working capital management on firm
profitability. In accordance with this aim, to consider statistically significant relationships
between firm profitability and the components of cash conversion cycle at length at
sample consisting of Istanbul Stock Exchange (ISE) listed manufacturing firms for the
period of 1998-2007 has been analyzed under a multiple regression model. Empirical
findings of the study show that accounts receivable period, Inventory period and leverage
affect firm profitability negatively; while growth (in sales) affects firm profitability
positively.
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The current study contributes to the literature by examining impact of working capital
management on the operating performance and growth of new public companies. The
study also shed light on the relationship of working capital with debt level, firm risk and
industry. Using a sample of initial public offerings (IPO’s), the study finds a significant
positive association between higher levels of accounts receivable and operating
performance. The study further finds the maintaining control (i.e. lower amounts) over
levels of cash and securities, inventory, fixed assets, and accounts payables appears to be
associated with higher operating performance, as well. We find that IPO firms which are
experiencing unusually high growth tend not to perform as well as those with low to
moderate growth. Further firms which are experiencing high growth tend to hold higher
levels of cash and securities, inventory, fixed assets and accounts payables. These
findings tend to suggest that firms are willing to sacrifice performance (accept low or
negative operating returns) to increase their growth levels. The higher level of growth is
also associated with higher operating and financial risk. The findings of this study
suggest that perhaps IPO firms should stay more focused on their operating performance
than on maintaining high growth levels.
Working Capital and Financial Management Practices in the Small Firm sector
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The purpose of this paper is to present the result of a preliminary study
on the working capital and financial management practices of a sample of small firms
located in the north of England. In general, the result of the survey indicated that a
relatively high proportion of small firms in the sample claimed to use quantitative capital
budgeting and working capital techniques and to review various aspects of the
companies’ working capital.
In addition, the firms which claimed to use the more sophisticated
discounted cash flow capital budgeting techniques, or which had been active in respect of
capital working management practices. It is hoped that the issues raised will stimulate
further theoretical and empirical contributions on this neglected and important area of
small business research.
RESEARCH METHODOLOGY:
Research design:
Primary Data:
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The primary data for this project is collected from personal interviews and
discussions with executives and the officials of the Company.
Secondary Data:
The secondary data is collected from the following sources
• Annual Financial Reports of the Company
• Internal Reports of the Company
• Relevant research articles from financial journals.
• Financial newspapers
FUNDFLOW STATEMENTS:
RATIO ANALYSIS:
1. Current Ratio :
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The current ratio establishes the relationship between current assets and current
liabilities. The objective of computing this ratio is to measure the ability of the firm to
meet its short term financial strength/solvency of a firm. If a firm having high degree of
liquidity funds is unnecessarily toed up in current assets. The satisfactory current ratio
2:1. In other words, the objective is to measure the safely margin available for short term
indicators. This ratio is expressed as under.
Current assets
CURRENT RATIO= ----------------------------------
Current liabilities
2. Quick Ratio:
Quick ratio also known as Acid test ratio or liquid ratio is more rigorous test of
liquidity than the current ratio. The term liquidity refers to the ability of a firm to pay its
short term obligations as and when they become due. Generally a quick ratio is of 1:1 is
considered to represent a satisfactory ratio. A company with a high value of quick ratio
can suffer from the shortage of funds it is has slow-playing, doubtful and long-duration
out-standing book debts. On the other hand a company with a low value of quick ratio
may really be prospering and paying its current obligation in time if it has been turning
over its inventories efficiently. This ratio may express as under:
Quick assets
QUICK RATIO= ----------------------------------
Quick liabilities
3. Cash Ratio:
It is suggested that it would be useful, for the management if the liquidity measure
also takes into account reserve borrowing power as the firm’s real debt paying ability
depends not only on cash resources available with it but also on its capacity on its
capacity on borrow from the market at short notice. Absolute liquid assets include cash in
hand and at bank and marketable securities or temporary investment. This ratio may be
expressed as under:
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Absolute liquid assets
ABSOLUTE LIQUID RATIO= ----------------------------------
Current liabilities
4. Net Working Capital Ratio:
The difference between Current Assets and Current Liabilities excluding short
term bank borrowings is called net working capital. It is sometimes used as a measure of
a firm’s liquidity. It is considered that, between two firms, the one having the larger Net
working capital has the greater ability to meet its current obligations. This is no necessary
so; the measure of liquidity is a relationship, rather than the difference between Current
Assets and Current Liabilities.
Net assets turnover can be computed simply dividing sales by total assets.
sales
TOTAL ASSETS TURNOVER RATIO= ----------------------------------
Total assets
6. Fixed Assets Turnover Ratio
This ratio can be calculated for purposes of finding relationships between the
fixed assets and with sales. This ratio is calculated by using the following formulae,
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sales
FIXED ASSETS TURNVOER RATIO= ------------------------
Fixed assets
7. Net Profit Ratio
Net profit ratio establishes a relation ship between net profit and sales, and
indicates the efficiency of the management in controlling expenditure in selling,
administrative and other activities of the firm. This ratio is the overall measure of the
firm’s profitability and is calculated as:
Net profit
NET PROFIT RATIO= ----------------- * 100
Net sales
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OPERATING CYCLE CALCULATIONS:
INDUSTRY PROFILE
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The pig iron plant and LANCO cement plant are two
plants which are presently under the name of M/s LANCO industrial Limited and
LANCO construction Limited.
HIGHLIGHTS
• Donimalai Deposits
• Manufacturing all grades of pig iron with the highest rating quality
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CEMENT DIVISION
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LANCO INDUSTRIES LIMITED is located in
between TIRUPATHI and SRIKALAHASTI with an access of about 30 KMS
from TIRUPATHI and about 10 KMS for SRIKALAHASTI. The reasons for location
of LANCO INDUSTRIES at RACHAGUNNERI village, SRIKALAHASTI Mandal
of chittoor district, Andhra Pradesh are as follows.
• The distance between the harbor and present work spot is less.
• Proximity to marketing.
• Availability of labour.
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COMPANY PROFILE
INTRODUCTION
For a corporation totally itself with a great purpose, it must have courage,
conviction, discipline and endurance qualities which engender organizational growth and
all round success.
ESTABLSHMENT
LOCATION
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LANCO Industries limited is a rural based factory sprawling over many areas of
land with deep resources and congenial soil. It is located in RACHAGUNNERI Village
near TIRUPATHI. Nearly 50% of the consumption of electrical power is supplied by
APSEB, Government of Andhra Pradesh and other 50%of power is maintained by the
company owned DG sets and power plants. Since it is a rural area labor potential is
available an also company is enjoying the subsidies from state Government.
This group company was established in the year 1993 and has executed most
demanding and difficult projects in the field of civil construction engineering on schedule
essaying repute as a world class construction company in a very short time span. The
company is mainly executing prestigious work in the fields of irrigation, pipeline projects
compared several housing complexes roads, irrigation canals, bridges and industrial
complexes at LANCO diverse dimensions of growth is achieved through converging rays
of vision rays of vision creating dimensions.
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KALAHASTI CASTING LIMITED
Establish in 1997 and strategically located in alone proximity to the mini blast
furnace of the pig iron plants it has a clear economics mileage over other castings sites.
The molten metal from the blast cone is directly loosed as basic raw material to produce
graded castings. Cast iron span pipes and iron spun gradually expanded further to meet
the scaring demand of the products. The UPS to the pipe plant will be met through 10
MW capture power plant.
Established in the year of 1993.An ISO-9002 Company, with a state of the art,
integrated manufacturing facility for pig iron through mini blast furnace route
conforming to the latest international technology with initial capacity of 1,00,000 TPA
and subsequently expanded and modernized to 1.75 LTPA. Its quality products of SG-
Grade pig iron are being supplied to foundries in the southern India. The uninterrupted
power requirement for the energy intensive plant is being met through a 2.5 MW co-
generation power plant.
CEMENT DIVISION:
Established in the year of 1996 the basic raw materials is slag produced in the pig
iron manufacturing process to install the cement plant with a capacity of 90,000 TPA.
SPUN PIPE DIVISION
Established in 1997 and strategically located in lose proximity to the mini blast
furnace of the pig iron plant, it has a clear economic mileage over other castings sites.
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The molten metal from the blast furnace is directly used as basic raw material to produce
graded castings , cast iron pipes and ductile iron pipes with a capacity of 90,000 TPA.
Waste heat of flue gas from coke oven will be utilized in waste heat recovery
boiler to produce steam.
Steam produced in the above process will be utilized to run on T.G. Set for
generating power.
Power generated from the power plant will be used for in – house consumption
and balance power will be fed into the APSEDB grid.
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ANALYSIS & INTERPRETATION
INTERPRETATION:
From the above table it could be seen that the working capital of the firm for the year
2007 is 15470.24 whereas for the previous year 2006 the working capital was 8765.23.
while comparing the working capital for the two years ie 2006 & 2007, we find that there
is an increase in the working capital of about 6705.01. This was due to increase in the
inventories, sundry debtors, cash & bank balances, loan and advances, decrease in current
liabilities and provisions of the firm.
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Statement of changes in working capital – 2007-2008(Rs.in.Lacs)
INTERPRETATION:
From the above table it could be seen that the working capital of the firm has shown an
increase in working capital of about 1116.06 for the year 2008 when compared to that of
the previous year 2007. This is due to the increase in the inventories, sundry debtors,
cash & bank balances, loan and advances, decrease in current liabilities and provisions of
the firm.
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Statement of Changes in Working Capital – 2008-2009(Rs.in.Lacs)
INTERPRETATION:
From the above table it could be seen that the working capital of the firm for the year
2009 is 25090.51 whereas for the previous year 2008 the working capital was 16586.3.
While comparing the working capital for the two years ie., 2008 & 2009, we find that
there is an increase in the working capital of about 8504.91 due to increase inventories,
sundry debtors, cash and bank balances and loan and advances and decrease in current
liabilities and provisions.
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Particulars 2009 2010 Increase Decrease
+ -
A. Current Assets:
Inventories 14436.48 11519.19 - 2917.29
Sundry Debtors 11966.16 11845.80 - 120.36
Cash and Bank 3463.66 1516.42 - 1947.24
Loan and Advances 6107.54 5581.47 - 526.07
Total of Current Assets (A) 35973.84 30462.88 - -
B. Current Liabilities
Current liabilities 10108.38 6853.94 3254.44 -
provisions 774.95 1066.74 - 291.79
Total of current liabilities 10883.33 7920.68 - -
Net working capital (A-B) 25090.51 22542.2 - -
Increasing in working capital 2548.31 2548.31 -
Total 25090.51 25090.51 5802.75 5802.75
INTERPRETATION:
From the above table it could be seen that the working capital of the firm has shown an
decrease in working capital of about 2548.31 for the year 2010 when compared to that of
the previous year 2009. This is due to the decrease in inventories, sundry debtors, cash
and bank balances, loan and advances and provisions and increase in current liabilities.
a. Current Ratio
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2009 35973.84 10883.33 3.30
Interpretation:
The above table shows that the current ratio of the firm is in increasing trend every year
ie. 1.91, 2.44, 2.65, 3.30 and 3.84 for 2005-06, 2006-07, 2007-08, 2008-09 and 2009-10
respectively. This shows that the firm has an increasing ability to meet its short term
financial strength.
b. Quick Ratio:
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2008 26616.98 12092.91 14524.07 10030.68 1.44
Interpretation:
The above table shows that the quick ratio of the firm is in increasing trend ie. 0.95, 1.45,
1.44, 1.97 and 2.39 for the year 2005-06, 2006-07, 2007-08, 2008-09 and 2009-10
respectively. This increase in the value of quick ratio shows that the firm can suffer from
shortage of funds where it has slow-playing, doubtful and long-duration out-standing
book debt.
c. CASH RATIO:
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2009 3463.66 10883.33 0.31
Interpretation:
The above table shows that cash ratio of the firm is in fluctuating rate year by year ie.,
0.03 , 0.24, 0.04, 0.31 and 0.19 for the year 2005-06, 2006-07, 2007-08, 2008-09 and
2009-10 respectively. This shows the firms liquidity capacity position on paying the
firms debt.
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2010 22542.50 27759.09 0.81
Interpretation:
The above table shows that the movement of the net working capital ratio of the firm is in
fluctuating trend year by year ie., 0.473 , 0.640, 0.62, 0.88 and 0.81 for the year 2005-06,
2006-07, 2007-08, 2008-09 and 2009-10 respectively. This fluctuating trend in Net
working capital shows that firms ability on paying its financial obligation is not stable
and this is due to the changes in the net working capital of the firm.
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2008 46365.63 26616.98 1.74
2009 64471.61 35973.84 1.79
2010 69057.96 30462.18 2.26
Interpretation:
The above table shows that the total asset turnover of the firm has been increasing
from the year 2006-07 to 2009-2010 from 1.40 to 2.26. This shows that the firm is
successful in increasing its profits and thereby increasing its assets of its business.
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2007 36936.65 24912.53 1.48
Interpretation:
The above table shows that the fixed asset turnover of the firm has been increasing year
by year ie., 1.25 , 1.48, 1.70 and 2.24 for the year 2005-06, 2006-07, 2007-08 and 2008-
09 respectively, wheras for the year 2009-10 the fixed assets turnover decreased with the
turnover of 2.21. This shows that the firm had established a good relationship between its
net profit and sales and has increased its profitability of the business till 2008-09
compared to the decrease in turnover during 2009-10.
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2007 2417.89 36936.65 6.54
Interpretation:
The above table shows that the net profit of the firm has been increasing year by year ie.,
3.84 , 6.54 and 7.32 for the year 2005-06, 2006-07 and 2007-08 respectively, whereas for
the year 2008-09 the net assets of the firm decreased to 4.77 and gradually increased to
11.2 in the year 2009-10. This shows the firms establishment in maintaining good
relationship between its net profit and sales in increasing its profits.
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OPERATING CYCLE CALCULATIONS
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3. Finished goods Conversion Period=Finished goods inventory
-------------------------------------
[cost of goods sold]/360
Finished goods Conversion Period 2006 2007 2008 2009 2010
a.cost of goods sold 276.0 644.45 659.16 607.33 640.58
9
b.cost of goods sold per day 9.20 21.4 21.9 20.2 21.3
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Debtors
4 . Debtors collection period= -------------------------------------
[credit sales]/360
51
creditors
5 . Creditors collection period= -------------------------------------
[credit purchases]/360
52
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ITEMS 2006 2007 2008 2009 2010
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2006 2007 2008 2009 2010
Gross Operating cycle
1.Inventory conversion period
a.Rawmaterial 101 113 108 87 55
b.work in process 93 79 73 72 90
c.finished goods 84 58 55 44 46
Total 278 250 236 203 191
2.Debtors conversion period 79 74 68 66 61
3.Gross operating cycle(1+2) 357 324 304 269 252
4.payment deferral period 94 84 67 69 66
5.Net operating cycle(3-4) 263 240 237 200 186
Fixed Assets
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d. Capital Work in Progress 5604.02 754.45
Total fixed assets 24129.72 24912.53
Investments 6 ---- ----
Current Assets
56
Deferred Tax Liability [Net] 1184.79
---- 2576.95
Fixed Assets
Current Assets
Current Liabilities
57
Fundflow analysis for the year 2008-2009
Fixed Assets
58
Current Assets
Current Liabilities
59
Deferred Tax Liability [Net]
---- 3123.73 3435.754
Fixed Assets
Current Assets
Current Liabilities
60
61