Working capital study

CAICO ltd.

1. INTRODUCTION

The Canning Industries Cochin Ltd, was floated at Thrissur in March 1947 with an authorised
capital of Rs. 5 Lakhs .Today CAICO is a well-known popular brand with a diverse product range that
includes Canned fruits and vegetables, Canned and frozen Sea foods, Beverages, Jams, Pickles,
Sauces etc. In the course of its career CAICO has won many laurels for itself including the first Prize
for Canned fruits at the national competition conducted by the food department, Government of India
and the 1982 State Award for outstanding export performance.

CAICO has proudly served the nation these years. It has provided more than 500 jobs and earns
substantial foreign exchange annually. CAICO has always been pledged to the good of the nation and
people everywhere.

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2. PROFILE OF THE ENTERPRISE

The Canning Industries Cochin Ltd is established in March 1947. Mr. O.T.Vareed
had exported the pineapple in various places in India like Mumbai, Chennai etc. Later
these exports began to decline due to long distance and perishability of pineapples. Then
Mr.Vareed along with Mr. M.I.David thought about canning of pineapples. The canning
of products will help the firm to protect the products from damaging. After, initial trails
at "otees orchards and nurseries", the caning industries Cochin Ltd was floated at Thrissur,
in March 1947 with an authorized capital of 5lakhs.

The initial years were hard and the company had to struggle for its working capital. In
1950, the company was given on a five year lease to a well-known Bombay based concern.
This was however, an excellent opportunity to gain practical experience. And at the end of the
lease period, canning industries decided to take on the responsibility of producing and marketing
its own canned products under the brand name "CAICO". Soon the company was able to
establish it brand image in the market and is registered as approved supplier to the Indian Army.
Indian army followed a centralized purchasing system for purchasing the food, which was
given to the soldiers in the border of the country. This would help CAICO to be a good
supplier to the Indian army in the form of canned fruits and vegetables.

By the late 1960, when the company had earned substantial profits and doubled
its capital base, it entered the fisheries filed with a factory at Cochin. A third factory with the
capacity to handle both fruits and sea foods was set up at Mangalore. Since then the
company had grown further, increasing its turnover considerably. Today CAICO is a well-
known and popular brand with a diverse product range that includes canned fruits and
vegetables, canned and frozen sea food, Beverages, jams, Pickles, sauces, etc.

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In the course of its career CAICO has won many laurels for itself including
the first prize for canned Fruits at the national competition conducted by the food Department
Government of India and the 1982 State Award for outstanding export performance in the
processed food industry. CAICO Chief executive Rev. M.I. David has been awarded has
been awarded the Ksheshalkar Memorial Gold Medal for his contribution to the food
preservation industry. In 1981 - 82, the CAICO has won the certificate of the small scale
industries in Kerala.

CAICO has proudly served the nation these years. It has provided more than 500
jobs and earns substantial foreign exchange annually. CAICO has always been pledged to the
good of the nation and people everywhere. At that time, some marketing experts said that, the
canning industries Cochin Ltd. does not sell its products directly but it markets quick sales
under the famous trade mark "CAICO".

COMPANY AT A GLANCE

Name CAICO

Registered Office Caico, The Canning Industries Cochin

Ltd, Valarkavu, Thrissur, Kerala.

E-mail caico@caico.in

Incorporation 25th March 1947

Capital 24 lakhs

EMPLOYEE DETAILS

Office staffs: 12 (4 of them are females)

Workers: 47 (45 of them are females)

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HEAD OFFICE AND BRANCHES

THE CANNING INDUSTRIES COCHIN LTD, has its registered office in

Valarkavu, with in 5Kms radius from Thrissur town. The Head Office has a factory adjacent to
it, which produce canned fruits and vegetable products. The company has two branches,
one at Cochin and another at Mangalore. This branch is engaged in producing frozen marine
products.

MANAGEMENT AND ADMINISTRATION

The company is managed by the Board of Directors, Mr. P.D Jose, being the
chairman of the company. Mr. P.T Thomas, Manager of the company is looking after the day
today affairs of the company and also providing and helping hand to the chairman in
formulating and implementing various decision of Board of directors. The company has
production, finance, marketing department and which is headed by the respective departmental
manager.

BOARD OF DIRECTORS

1. Sri. P.D. JOSE, B.A B.L

(CHAIRMAN)

Advocate 4. Sri.
East Fort, Thrissur-5. CHIRIANKANDATH PALU

2. Sri. P.V DAVIS, B.A JOSE

Parappilly House Pipe Line Road

East Fort, Thrissur-5 Mylipadam, Thrissur -20

3. Dr. M.K AELIAS 5. Sri. JIJU EMMATTY

Valiaveedu Emmatty House, College Road,

College Road, Thrissur-1 Thrissur- 20

6. Sri. JOY GEORGE

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Chiriyankandath House, 7. Sri. A.J. PAVOO

Mylipadam House, Thrissur – Anchery House,

20. Mission Quarters, Thrissur -5

BANKERS

CANARA BANK

SOUTH INDIAN BANK

AUDITORS

M/S. ABRAHAM & JOSE

Chartered Accountants

Thrissur

LEGAL ADVISORS

1. Mr. Sivi Jose, B.A., LL.B Parappilly House, East Fort,

Advocate Thrissur

Poothokaran house, East Fort,

Thrissur 3. Mr. Jacob O. Raphel

2. Mr. Regi Davis, B.A., Advocate

LL.B. Latin Church Road, Thrissur
Advocate

MAIN PRODUCTS OF CAICO

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A product is the fundamental feature that determines the firm’s success or

failure. It is medium through which the firm attains consumer’s satisfaction and profit
maximization.

CAICO Ltd occupies a prominent Position catering to the needs of the lower
class and middle class people, who occupy a part of the total population in Kerala.

The product range of the company consist of Jams, pickles, sauces, squashes,
Mango pulp, Mango bar and soft drinks and sea foods.

PRODUCTS OFFERED

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PRODUCT RANGE UNIT PACKING

SQUASH Pineapple 700ml & 500ml

Orange crush 700ml

Mango 700ml

Limejuice cordial 700ml

CRUSH Grape 500ml

Orange 500ml
SAUCES Tomato sauce lKg,500g,200g

Tomato Ketchup 200g

Chilli sauce 200g, 700g

Soya bean sauce 200g, 700g

PICKLES Tender Mango 500g, 300g, 150g

Mango 500g, 300g, I50g ,100g

Lime 500g, 300g, 150g

JAM Pineapple 4kg, lkg,500g,200g,100g

Mixed fruit jam 4kg, lkg,500g,200g,100g

Strawberry 4kg, lkg,500g,200g,100g

SOFT DRINK Pineapple 200ml
CONCENTRATE
Orange 200ml
SOFTDRINKS Mango 300 ml
MANGO BAR 50g, 100g

SEA FOODS

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3. ORGANISATION CHART

Board of Directors

General Manager

Production Finance Sales

Manager Manager Manager

Branch Branch Branch

Manager Manager Manager

Operator cum
Supervisor junior Assistant Sales
Accountant Manager

Technologist Office Staff

Sales Man

Worker Team

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4. FINANCE DEPARTMENT AND FUNCTIONS OF

FINANCE MANAGER

The financial and accounting functions are performed by the finance and accounts departments.
It determines sources, quantity and form of funds together with efficient management of funds.
Some important functions of finance manager are these;

1. Estimation of capital requirements: A finance manager has to make estimation with regards
to capital requirements of the company. This will depend upon expected costs and profits and
future programmes and policies of a concern. Estimations have to be made in an adequate
manner which increases earning capacity of enterprise.

2. Determination of capital composition: Once the estimation have been made, the capital
structure have to be decided. This involves short- term and long- term debt equity analysis.
This will depend upon the proportion of equity capital a company is possessing and additional
funds which have to be raised from outside parties.

3. Choice of sources of funds: For additional funds to be procured, a company has many choices
like-
a. Issue of shares and debentures
b. Loans to be taken from banks and financial institutions
c. Public deposits to be drawn like in form of bonds.

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Choice of factor will depend on relative merits and demerits of each source and period of
financing.

4. Investment of funds: The finance manager has to decide to allocate funds into profitable
ventures so that there is safety on investment and regular returns is possible.

5. Disposal of surplus: The net profits decision have to be made by the finance manager. This
can be done in two ways:
a. Dividend declaration - It includes identifying the rate of dividends and other benefits
like bonus.
b. Retained profits - The volume has to be decided which will depend upon expansional,
innovational, diversification plans of the company.

6. Management of cash: Finance manager has to make decisions with regards to cash
management. Cash is required for many purposes like payment of wages and salaries, payment
of electricity and water bills, payment to creditors, meeting current liabilities, maintainance of
enough stock, purchase of raw materials, etc.

7. Financial controls: The finance manager has not only to plan, procure and utilize the funds
but he also has to exercise control over finances. This can be done through many techniques
like ratio analysis, financial forecasting, cost and profit control, etc.

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5. SOURCES OF FUNDS

Being a public limited company, the canning industries Cochin Ltd, has its capital structure.

CAPITAL STUCTURE OF CAICO

SOURCES Rs

Equity Share Capital 24,00,000

Retained Earning 30,00,000

Secure Loan from Canara Bank 38,264

TOTAL 54,38,264

The authorized share capital of the company is Rs.60, 00,000 divided into 2, 00,000
equity share of Rs.30 each with a power to increase or reduce the capital in accordance with
the provisions of the Companies Act, 1956. Issued and subscribed capital is Rs.24, 00, 000
i.e. 80,000 equity share of Rs.30 each.

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6. WORKING CAPITAL

WORKING CAPITAL MANAGEMENT:

Working Capital Management refers to the planning, execution and control of investment in
and financing of working capital. Working capital management is concerned with the problems that
arise in attempting to manage the current assets, the current liabilities and the inter-relationships that
exist between them. The basic ingredients of the theory of working capital management may be said to
include its definition, need, optimum level of current assets, the trade-off between profitability and
risk associated with a firm's level of current assets and current liabilities, financing-mix strategies and
so on.

AIMS OF WORKING CAPITAL MANAGEMENT:

1. The goal of working capital management is to manage the firm’s current assets and current
liabilities in such a way that a satisfactory level of working capital is maintained, to meet the
short-term obligations as and when they arise.

2. A significant objective of working capital management is to ensure short-term liquidity and

to see that profitability is not affected by the way current assets and current liabilities are
managed.

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3. The main theme of working capital management is the interaction between the current
assets and the current liabilities and arrives at the optimum level of both. The optimum
level thus arrived must have provision for contingencies.

4. Trade-off between Profitability and Risk: The level of a firm’s Net working capital has a
bearing on its profitability as well as risk. The term profitability used in this context is
measured by profits after expenses. The term risk is defined as the probability that a firm will
become technically insolvent so that it will not be able to meet its obligations when they
become due for payment. The risk of becoming technically insolvent is measured using Net
Working Capital. The greater the net working capital, the more liquid the firm is and therefore
the less likelihood of it becoming technically insolvent. The relationship between liquidity,
net working capital and risk is such that if either net working capital or liquidity
increases, the firm's risk decreases.

5. Trade-off: If a firm wants to increase its profits, it must also increase its risk. Inversely, if it
decreases risk, its profitability too tends to decrease. The trade-off between these variables is
that regardless of how the firm increases its profitability through the manipulation of working
capital, the consequence is a corresponding increase in risk as measured by the level of Net
working capital.

6. Apart from the profitability – risk – trade-off, another important ingredient of the theory of
working capital management is determining the financing mix. Financing mix refers to the
proportion of current assets that would be financed by current liabilities and by long-term
resources.

PERMANENT & TEMPORARY WORKING CAPITAL

There are 2 kinds of working capital. These are

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i. Permanent Working capital and

ii. Temporary Working capital.

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1. PERMANENT WORKING CAPITAL

Permanent working capital refers to the minimum amount of all current assets that is required
at all times to ensure a minimum level of uninterrupted business operations. Some minimum
amount of raw materials, work-in-progress, bank balance, finished goods etc., a business has to
carry all the time irrespective of the level of manufacturing or marketing operations. This level
of working capital is referred to as core working capital or core current assets. But the level of
core current assets is not a constant sum at all the times. For a growing business the permanent
working capital will be rising, for a declining business it will be decreasing and for a stable
business it will almost remain the same with few variations. So, permanent working capital is
perennially needed one though not fixed in volume. This part of the working capital being a
permanent investment needs to be financed through long-term funds.

2. TEMPORARY WORKING CAPITAL

The temporary or varying working capital varies with the volume of operations. It fluctuates
with the scale of operations. This is the additional working capital required from time to time
over and above the permanent or fixed working capital. During seasons, more production/sales
take place resulting in larger working capital needs. The reverse is true during off-seasons. As
seasons vary, temporary working capital requirement moves up and down. Temporary working
capital can be financed through short term funds like current liabilities. When the level of
temporary working capital moves up, the business might use short-term funds and when the
level for temporary working capital recedes, the business may retire its short-term loans.

Both permanent and temporary working capitals are necessary to facilitate the sales and production
process through operating cycle.

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DETERMINANTS OF WORKING CAPITAL

The level of working capital is influenced by many factors. They are:

1. NATURE OF BUSINESS

This is one of the main factors. Usually in trading businesses the working capital needs are
higher as most of their investment is concentrated in stock or inventory. Manufacturing
businesses also need a good amount of working capital to meet their production requirements.
Whereas, those companies that sell services and not goods, on a cash basis require least
working capital because there is no requirement on their part to maintain heavy inventories.

2. SIZE OF BUSINESS

Size of business is another influencing factor. As size increases, the working capital
requirement is also more and vice versa.

3. CREDIT TERMS / CREDIT POLICY

Credit terms greatly influence working capital needs. If terms are:

i. buy on credit and sell by cash, working capital is lower

ii. buy on credit and sell on credit, working capital is medium
iii. buy on cash and sell on cash, working capital is medium
iv. buy on cash and sell on credit, working capital is higher.

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Prevailing trade practices and changing economic condition do generally exert greater
influence on the credit policy of concern.

a. A liberal credit policy if adopted more trade debtors would result and when the same is
tightened, size of debtors gets slim.

b. Credit periods also influence the size and composition of working capital. When
longer credit period is allowed to debtors as against the one extended to the firm by its
creditors, more working capital is needed and vice versa.

c. Collection policy is another influencing factor. A stringent collection policy might not
only deter away some credit customers, but also force the existing customers to be
prompt in settling dues resulting in lower level of working capital. The opposite holds
well with a liberal collection policy.

d. Collection procedure also influences the working capital needs. A decentralized

collection of dues from customers and centralized payments to suppliers shall reduce
the size of working capital. Centralized collections and centralized payments would
lead to moderate level of working capital. But with centralized collections and
decentralized payments, the working capital need would be the highest.

8. SEASONALITY

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a. Seasonality of Production

Agriculture and food processing and preservation industries have a seasonal

production. During seasons, when production activities are in their peak, working
capital need is high.

b. Seasonality in supply of raw materials

This also affects the size of working capital. Industries that use raw materials which are
available during seasons only, have to buy and stock those raw materials. They cannot
afford to buy these items in a phased way, since either supplies would get reduced or
prices would be higher. Also, from the point of view of quality of raw materials, it pays
to buy in bulk during the seasons. Hence the high level of working capital needed when
season exists for raw materials.

c. Seasonality of demand for finished goods

In case of products like umbrella, rain-coats and other seasonal items, the demand is
high during peak seasons. But the production of these items has to be continuous
throughout the year to meet the high demand during peak seasons. Thus, working
capital requirement would be higher.

9. TRADE CYCLE

Trade cycle refers to the periodic turns in business opportunities from extremely peak levels,
via a slackening to extremely tough levels and from there, via a recovery phase to peak levels,
thus completing a business cycle. There are 4 phases of trade cycle.

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a. Boom Period – more business, more production, more working capital.

b. Depression period – less business, less production, less working capital.
c. Recession period – slackening business, stock pile-up, more working capital.
d. Recovery period – recouping business, stock speedily converts to sales, less working
capital.

10. INFLATION

Under inflationary conditions generally working capital increases, since with rising prices
demand reduces resulting in stock pile-up and consequent increase in working capital.

11. PRODUCTION CYCLE

The time lapse between feeding of raw material into the machine and obtaining the finished
goods out from the machine is what is described as the length of manufacturing process. It is
otherwise known as conversion time. Longer this time period, higher is the volume and value
of work-in-progress and hence higher the requirement of working capital and vice versa.

12. SYSTEM OF PRODUCTION PROCESS

If capital intensive, high-technology automated system is adopted for production, more

investment in fixed assets and less investment in current assets are involved. Also, the
conversion time is likely to be lower, resulting in further drop in the level of working capital.
On the other hand, if labor intensive technology is adopted, less investment in fixed assets and
more investment in current assets which would lead to higher requirement of working capital.

13. GROWTH AND EXPANSION PLANS

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Growth and expansion industries need more working capital than those that are static.

Apart from the above factors, dividend policy, depreciation policy, price level changes, operating
efficiency and government regulations also influence the level and the size of working capital.

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OPERATING CYCLE

Working capital is also known as revolving capital and a circular path of

conversion/reconversion takes place. This revolution of cycle is called as the operating cycle. Let us
consider an example to better understand operating cycle. A person starts a business with an initial
investment. With credit extended by expense creditors, he starts production process. Goods of varying
levels of finish results, and thus called as work-in-progress. Once complete processing is done, it is
called as finished goods. Until these goods are sold, they remain in stock. Sales may be for cash and/or
credit basis. The business person needs to wait a little to realize cash from credit customers. The
realized cash is used to pay creditors. But he needs to maintain cash balance for day-to-day operations
as well as for meeting sudden spurt in payment obligations accompanied by sluggish cash collections
from debtors. Thus a revolution or cycle from cash to raw materials to Work-in-Progress, to finished
goods, to debtors, and back to cash takes place. This revolution is called as operating cycle.

Thus, we can say that the term operating cycle, otherwise called as cash cycle refers to the length of
time necessary to complete the following cycle of events:

1. Conversion of cash into inventory

2. Conversion of inventory into debtors
3. Conversion of debtors into cash

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Stage 1: Cash to Inventory – In this stage, cash first gets converted into raw materials, then work-in-
progress and then finished goods in a typical manufacturing concern. As regards non-manufacturing
concerns, when the goods are purchased, cash gets converted into inventory.

Stage 2: Inventory to Debtors – The inventory thus produced or purchased, gets converted into
debtors or receivables upon credit sales.

Stage 3: The debtors or accounts receivables get in turn converted back into cash when they make
payment.

LENGTH OF OPERATING CYCLE

When raw materials remain in store pending issue for production for a less duration, when raw
materials gets converted into WIP in a short duration, when finished goods remain in warehouse
pending for sales for a short duration only, and when cash realizations out of sales are made quickly
and finally when payment to creditors is made slowly, the operating cycle would be smaller and
consequently the working capital will also be reasonable. Thus shorter duration of operating cycle
indicates an efficient working capital management.

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7. ESTIMATION OF WORKING CAPITAL

The most appropriate method of calculating the working capital needs of a firm is the concept
of operating cycle. However, a number of other methods may be used to determine working
capital needs in practice.

 Current assets holding period: To estimate working capital requirements on the basis of
average holding period of current assets and relating them to costs based o the
company’s experience in previous years

 Ratio of sales: To estimate working capital as a ratio of sales on the assumption that
current assets change with sales.

 Ratio of fixed investment: To estimate working capital requirements as a percentage of

fixed investment.

Items Amount
Raw materials:
Opening stock 26,07,952
Purchases 68,77,731
Closing stock 33,91,405

60,94,278
Direct expenses: 66,16,862
Finished goods:
Opening stock 8,93,711
Closing stock 10,60,755

16,70,44

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Operating expenses: 51,96,863

Debtors: 13,23,667
Creditors: 7,85,697
Sales: 1,02,51,235

CALCULATING OPERATING CYCLE

(Values are taken from the above table and attached annual report)

R = Average stock of raw materials and stores /Average raw materials and stores consumption per day

= (2999678.5 /6094278)*360 = 177 days

F = Average finished stock inventory / Average cost of goods sold per day

= (977233/12544096)*360 = 28 days

D = Average debtors / Average Credit Sales per day

= (13,23,667/1,02,51,235)*360 = 47 days

C = Average trade Creditors / Average Credit Purchases per day

= (785697/6877731)*360 =41 days

OPERATING CYCLE PERIOD= R+F+D-C = 177 +28 +47 -41

= 211 days

Number of operating cycles in an year = 360/211 =1.7

AMOUNT OF WORKING CAPITAL REQUIRED = TOTAL OPERATION COST /NO: OF

OPERATING CYCLES = 51,96,863/1.7

= Rs 30,39,101.17

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Since this is a food industry, the raw materials may not be available throughout the year.
Different products are made at different time of the year and hence the raw materials are bought at
some time and products are sold at a different period of time. So, the operating cycle or realisation
period is quite lengthy. CAICO keeps apart enough money for the working capital requirements.

8. FINDINGS AND SUGGESTIONS

 Most of customers had recognized that the price charged is reasonable.

 Variety of flavour of CAICO products is frequently available in market.
 Taste is given priority than price while going of purchasing materials.
 The raw material of CAICO depends of season.
 The modern equipment is necessary for increasing the overall productivity of the
concern.
 Though investment in different fields is not that easy, the concern can of course
compensate the short coming of the current line of business. Thus the loss of rising due to
non-utilization of plant facilities at OFF season can be managed to an extent.

 Use of more powerful and modern equipment can reduce wastage of materials in
transportation of material form one machine to another. It will reduce the production time
and efforts. This will increase the overall productivity of the concern.

 They are buying the fruits and vegetables and converting them into pulps by
themselves. This is a tedious task and it makes the operating cycle longer. If they are

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buying pulp directly from vendors and could preserve them for the whole year, it reduces
the cost of production and reduces the operating cycle.

 Setting up units in places where raw materials are available in plenty and converting
them into pulps there it can reduce the cost of production to a great extent.

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9. CONCLUSION

As per the modern management concept production is one of the most pillars in the
process of building an affective and successful business organization with continuous
growth. The study was done to study the working of CAICO Ltd. The study helped us to
understand the CAICO products and it gives a good knowledge about how company
operates.

In this era of globalization and liberalization the key word to be kept in mind is "The best
and only best will survive". Giving good quality products will help, but only to as extend. The
firm must also communicate regarding their products and Services. This is where we feel
CAICO lack competence. The quality of products is excellent, but whether competitors go for
extensive advertisement giving importance to various media, CAICO says back. So if the
company wants to attract their customers, it should develop better advertisement strategies.
Also they are buying the fruits and vegetables and converting them into pulps by themselves.
This is a tedious task and it makes the operating cycle longer. If they are buying pulp directly
from vendors and could preserve them for the whole year, it reduces the cost of production and
reduces the operating cycle.

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10. BIBLIOGRAPHY

 I.M PANDEY, Financial management, New Delhi: Vikas publishing house pvt ltd,
tenth edition

 Annual report of CAICO ltd 2010.

 http://www.caico.in/index.html

 http://www.tutorsonnet.com/homework_help/working_capital_management/operating_
cycle_assignment_help_online_tutoring.htm

 http://www.ehow.com/how_7443861_calculate-operating-cycle.html

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11. APPENDICES

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