Firoz Complete

DECLARATION

I FIROZ AMBADI hereby declares that this Project Report entitled “A STUDY ON WORKING CAPITAL MANAGEMENT OF THE FACT LTD, ERNAKULAM” is a bonafide record of work done by me in partial fulfillment of the MBA Degree Course of the University of Mahatma Gandhi.

Date:

FIROZ AMBADI

ACKNOWLEDGEMENT

First and foremost, I thank God who helped me in my endeavor My first and foremost acknowledgement is to Shrimathi. CHANDRIKA ,FINANCE OFFICER,F ACT LTD , for giving me an opportunity to do my project work .I also owe my special word of thanks to Mr.PHILIPOS (FACT TRAINING CENTRE) and I also thank Mr.Sabu for his constructive comments and sincere guidance. I express my deep gratitude and indebtedness to the management, staff’s and employees of TCC Ltd for their constant support helped me to complete this project successfully. I wish to extend my sincere gratitude to Ms.Divya (MBA) Regional Management College Malappuram, Academic guide for her immense help and co-operation which she had extended during the course of project. And also I owe my sincere thanks to our Head Of The Department. I have pleasure and privilege in expressing my deep sense gratitude and respect to our beloved Principal Mr. José Joseph (Regional Management College Malappuram), for his helpful guidance, critical suggestions, and inspiring encouragement, timely help and warn concern offered during the course of study. I owe my graceful acknowledgement to my parents, teachers, friends and everyone associated with my project.

CONTENTS Page No 1. INTRODUCTION OF THE STUDY 

Objectives of the study



Scope of the study



Limitations of the study

2. RESEARCH METHODOLOGY 3. COMPANY PROFILE 

About the company



Divisions of company



Products of company



Achievements of the company

4. REVIEW OF LITERATURE 

Concepts of working capital



Determinants of working capital



Determining working capital mix



Analysis of working capital management

5. DATA ANALYSIS AND INTERPRETATION 

Statement of gross working capital



Statement of net working cpiatl



Schedule of changes in working capital



Ratio analysis



Trend analysis



Fund flow analysis

FINDINGS AND SUGGESSION CONCLUSION BIBLIOGRAPHY

INTRODUCTION Here this project study is entitled the analysis and interpretation of management of working capital by the help of various tools used for

financial analysis. So first upon we know about theatrical

aspects of working capital and its management.

Working capital Working capital is the capital required for the day to day working of an enterprise. It is required for the purchase of raw materials and for meeting the day to day expenditure on salaries , wages ,rents , advertising etc.. It is needed for holding some convertible assets (current assets) such as stock , book debts, bills receivables and cash. The firm operates its business through these assets. These assets are convertible in the sense that these change from one form of asset to another. Cash is converted in to raw material, raw material converted in to work in progress, work in progress converted in to finished goods , finished goods in to book debts and bills receivables and then book debts and bills receivable in to cash. Thus the amount goes on circulating or revolving from cash to current assets and current assets to cash. That is why working capital is also called circulating capital or revolving capital. There are two views on the definition of working capital, namely, gross concept and net concept. Gross working capital refers to total current assets. It represents the amount of funds invested in current assets. Net working capital refers to the excess of current asset over current liabilities. In other words, working capital is the difference between current assets and current liabilities. Of the two , the concepts of net working capital is most widely accepted.

Working capital = current asset – current liabilities

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MANAGEMENT OF WORKING CAPITAL Working capital management involves deciding upon the amount and composition of current assets and how to finance these assets. These decisions involve trade-offs between risk and probability. The greater the relative proportion of liquid assets, the less the risk of running out of cash, all other things being equal. However , profitability will also be less, resolution of the trade off between risk and profitability with respect of these decisions depends upon the risk preference of the management. The lower the preference of the liquid asset to total assets, the greater the firms return on total investment. This strategy will result in a low level of working capital. The length of the operating cycle of the firms will be different as such working capital of the firm will also vary . there is no uniformity in the approach in assessing working capital requirements especially with regards to inventories. Different firms will have different inventory policies and different methods of allowing credit period as such different will be there working capital requirements. The problem of working capital requirement can be examined under two heads. Internal financing and external financing. We would be concerned with the internal financing aspects which deal with determining the size of working capital needs in particular business. Situations and seeking to achieve certain long run operating goals. Instead of telling financial executives how much working capital is required in specific situation our purpose is acquired them with tools and skills that may take them more proficient in making quantitative decisions about working capital needs.

2

OBJECTIVES OF THE STUDY  To study and interpret the working capital management of FACT Ltd  To analyses the changes in working capital position of the company.  To study the profitability position of the company.  Suggest measures for improvement with respect to management of debtors, inventory and cash  To identify the areas of inefficiency  To analyses about the suitable proportion of current assets and current liabilities in FACT.  To make suggestions and recommendations on the basis of the study to improve the working capital of the trust.

SCOPE OF THE STUDY Working capital is the single best method of determining the position of the company, or how well that company may be doing. The study was to analyze the working capital management of FACT Ltd Cochin. The study involves the analysis of working capital, liquidity and profitability position, as well as the operational efficiency of the company. For the purpose of the study has been conducted for a period of last five year.

LIMITATIONS OF THE STUDY  This study is limited for a period of five years from 2003-2007  Time is another major constraint in the study, because of not possible to amylase all documents.  Study based on annual report of company.  Tools used for analysis is subject to its inherent limit.  In this short period of time ,the research could not go through all aspects of working capital management 3

RESEARCH METHODOLOGY The methodology used in the study involves the collection of primary data as well as secondary data. Mainly data are collected from the annual report of the company.  Primary data: Direct interview with the concerned officers of the company  Secondary data: Collected from the annual reports and other records of the company. Period of the study A five year period from 2003-2007 has been taken for the study Tools of analysis 1. Ratio analysis 2. Trend analysis 3. Schedule of changes in working capital 4. fund flow analysis

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INDUSTRY PROFILE Economic liberalization and reforms are the two key notes of the govt: political philosophy today which has emplaced almost all sectors of the economy. Even in the care of fertilizer sector , an attempt to introduce liberalization has been made since aug 1992. fertilizer sector has to fall in line with the rest of economy and a total decontrol would there for have to be ultimate goal for this sector. In 1992 with a view to reducing the subsidy all the phosphoric and politick fertilizers were decontrolled. consequently the prices of there fertilizers increased sharply leading to fall in their consumption and destructing in the ratio of fertilizer consumption. The retention pricing scheme (RPS) which was introduced in 1977 got confined urea only. Govt of India is drawing a long term policy for fertilizer industry which is to ensure that is transition to total decontrol is achieved in a shared manner. Govt of India proposes to decontrol the fertilizer completely by 2006. The most necessary requirements of human being is food. The accelerated growth in a nation needs remarkable expansion of food production from time to time. Agriculture must relay upon a primary source for increase in food production. India is the third largest producer and consumer of chemical fertilizers in the worlds and accounts for about 12% of world fertilizer consumption. The country produces several straight nitrogenous fertilizers such as urea, ammonium sulphate, calcium ammonium nitrate etc…as ell as complex fertilizers such as DAP and several NPK complexes. Urea and DAP are the main fertilizers produced in India.

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INTERNATIONAL SCENARIO When there are large areas of unused frontier land in the world it was often more economical for farmers to move on to new unfarmed land than to invest additional money in fertilizers for the land they were than farming, a practice continued in second half of the 20th century in some under developed areas of the world. The use of manure and composts is probably as old as agriculture itself and many other material such as ground bones ,wood ash from burning the fallen trees , dried blood and fish were employed long before the chemistry of soil and crops was understood. The disappearance of frontiers combined with improvements in the technology of fertilizers manufacture and more effective transportation lead to a growing role of fertilizers for producing the needed food and fiber. NATIONAL SCENARIO India is one of the world's largest producers and consumers of fertilizers , both phosphorescent and nitrogenous. The fertilizer industry in the country is also among the fast growing sector in the world. There are around 25 chemical fertilizers used in the country at present. There fall under four broad categories namely nitrogenous, phosphates, potassium and complex fertilizers. 71% of total fertilizer consumption during 1994-95 was of the nitrogenous variety where as the phosphorescent and pottasic fertilizers accounted for 22% and 7% in the same order. While urea , calcium and ammonium phosphate are the major nitrogenous fertilizers, single super phosphate falls under the phosphatic category. Ammonium phosphate is the main complex fertilizer. 6 STATE SCENARIO

Kerala has high degree of land use and cropping intensity. The state's agricultural productivity is decreasing year by year. The production and cultivation of rice is decreasing and the farmers are attached to commercial cropes like rubber and coconut. Due to decrease in the cultivation of rice, the consumption of nitrate and potash has come down. The percentage consumption of fertilizers in different sates in India , the position of kerala is one of the low ranking states. FACT is having market share of 53.4% in Kerala. This is comparatively higher than the other companies in kerala. Due to the entry of competitors in the field of fertilizers FACT has lost its market share 62.2%.

GENERAL HEALTH OF THE INDUSTRY It is feared that several fertilizer units will be closed down in the process of switch over from the present administrated pricing mechanism to a market based industry. this would mean substantial loss of domestic fertilizer production and corresponding incurred in import of raw material to meat the demand. Even under the present circumstances health of industry is not good several units have become loss making according to expenditure reform committee recommendation of instead of unit wise retention price there will be a GroupWise lump sum concession per ton of urea based on feed stock which will harm some units and benefit others and there will be wide spread sickness in the urea industry

Implication for future India has become third largest country with a total capacity of 11.07 million tones of p205 in the year 2000-2001. further capacity addition for N now been started for the time being due to very narrow demand supply gap at present and costly feed stock. However there will be some addition to the phosphatic capacity. Domestic production of nitrogen fertilizers was 11.004

million tones in 200-01 where as production of phosphate fertilizer was 4.703 million tones. Which are marginal higher compared to last year production. All India capacity utilization has gradually improved over the years and was maintained at almost cent per cent level for N. however during 2000-01 vestrichous were imposed on capacity utilization of urea at 92%. The increase in production of total N is observed due to increase in production of DAP during 2000-01 was 10% higher compared to previous year. The capacity utilization for P205 fertilizers was cent per cent

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COMPANY PROFILE

The history of fact is a stage of initiative , enterprise , innovation and adventure in industrial development in India. The story of fact begin the time of second world war. During those days entire India had face a shortage in the supply of food items. The condition was so severe that even our traditional ways of cultivation and farming was not so sufficient to meet the requirements. Every one was search of a long term solution for solving the problem. Finally they came to the conclusion that chemical fertilizer will be an answer tom the problem. It was at this time sir, C.P Ramaswami Iyer took the initiative to put up the fertilizer plant for the production of chemical fertilizer. He worked all the ways for the building up of a chemical fertilizer in kerala. This can be considered an first stage of development of a fertilizer plant called Fertilizers And Chemicals Travencore Ltd. FACT became a public sector enterprise on 1960 and 1962 FACT was came under control of central Govt: The third stage of expansion of FACT was completed in 1965 with setting up of a new ammonium sulphate plant. FACT engineering and Design Organization (FEDO) was set up on 24th July 1965 to meet the merging need for indigenous capabilities in vital areas of Engineering , Design and consultancy for establishing large modern fertilizer plants, FEDO has since the diversified in to chemicals , petrochemicals , hydrometallurgy , pharmaceutical and other areas. FEDO offers services from project identification and evaluation stage to plant design , procurement , projects management , site supervision and commissioning of new plants as well as revamping and modernization of old plants. FACT Engineering Works(FEW) was established on 13th April 1966 as unit to fabricate and install equipments for fertilizer plant. Over the years FEW few developed capabilities in the 9

fabrication of pressure vessels and heat exchangers. FEW has also undertaken lying of cross country piping and fabrication and installation of large heddle projects. The cochin division of FACT , the 2nd production unit was set up at Ambalamedu and the first phase was commissioned in 1973. The 2nd face of FACT cochin division was commissioned in 19769. as diversified plans from the traditional field of fertilizers and chemicals 50000 TPA Caprolactum plant at udyogamandal was commissioned in 1990. FACT was set up 1990 TPD Ammonia plant at Udyogamandal at s cost of 638 crores following an order of high court of kerala in Feb 1994 on public interest Litigation ,to decommission the existing imported Ammonia storage and handling facility at Willington Island (cochin port). The Ammonia plant was commissioned in 1998. the companies main business is manufacture and marketing of fertilizers , caprolactum and engineering consultancy and fabrication of equipments. From the year 1983-84 FACT had overcome the break even point forever and started making a profit balance on its profit and loss account. This trend was continued in several years. Till 199798 FACT maintain the good run. But after that because of the effect of globalization and several other reasons the trend was reversed. The profit story of FACT became and old story and the negative trend continued for a long period. It was such a difficult period for FACT , sop that most of the experts predicted its death of giant industry. As expected at he time of selling up FACT it had began a revolution in the field of agriculture and chemical fertilizers. It had made the chemical fertilizers familiar to the Indian farmers. Started an a large fertilizer plant in the country , FACT had fulfill and fulfilling the whole needs and 10

expectation of past , present and future generations respectively. The different kinds of activities that had been initiated and done by FACT had made it living legend in the minds o people.

DIVISIONS OF FACT The udyogamanadal division of FACT can be called an birth place of FACT and the mother of entire fertilizer industry in India. It was at udyogamandal division the first commercial production of FACT was taken place on 1947. At the beginning there was an ammonium sulphate plant having a capacity to produce 10000 tons of N. Over the years the division grew phenomenally because of the multistage expansion programs involving the rationalization and modernization of production process

aided

this

and

technologies

successfully

experimented

and

implemented at FACT by their on technologists, in the corse of their experiences and expertise were enriched. The current annual production capacity of udyogamandal division is 76050 tons of N and 29700 tons of P2O apart from the manufacturing of ammonia ,sulphuric acid,sulphur dioxide, phosphoric acid, synthetic , co2 etc. are also produced in udyogamandal division. The 900 TPD ammonia complex set up at udyogamandal division was the latest addition to that division. The division has been conferred iso 14001 certification for environmental management system.

COCHIN DIVISION The success of FACT inculcating and building at fertilizer awareness as well as in creating an atmosphere of self reliance in agriculture production leads to more intensive efforts in maximizing indigenous 11

know –how in the country. The cochin division of FACT formed in 1969 in Ambalamedu, near cochin rerefinaries was a part of the well planned overall efforts by the govt to give the greatest scope to the indigenous technology in setting up large fixed fertilizer plant. FACT cochin division is totally designed and engineered by their own technologies from (FEDO) keeping foreign assistance to the minimum. It commences commercial product in 1973.This division compraises a number of large capacity plants applying sophisticated process technologies tom produce ammonia, sulphuric acid ,phosphoric acid, urea and Factom fos 20:20 complex fertilizer and de ammonium phosphate. Besides related off sites ,peripheral services and township the facility was insist of two plants, one a 600TPD ammonia plant in single stream and the other a 1000 TPD urea plant in two stream. The NAPHTA and Fnd oil requires for the new venture were to be supplied but cochin refineries ,situated close to the Ambalamedu division. Over 3.30 lakhs ton of urea and 4.80 lacks tons of complex fertilizers are manufacturing here annually but today the urea plant ,because of some technical reasons is shutdown. This division has been conferred ISO 14001 certification for environment management system and ISO 9002 for quality management system.

PETROCHEMICAL DIVISION The petrochemical division of FACT was a result of a major diversification process initiated by fact. They diversified in to petrochemicals in 1990 with the production of camprolactum. This versatile the petrochemical is the raw material used in the manufacture of Nylon-6, which finds executive application in textile and engineering products. FACTs caprolactum , by earning high quality has been acknowledged as amongst the first in the world. The unit has the capacity of producing 50000 tons per anum of caprolactum 2.25 lack ton of Soda Ash. A separate plant had been set up at udyogamandal division for the processing of ammonium sulphate which is coming out of the caprolactum plant as co-product. This division has obtained

ISO 9002 certification for quality and ISO 14001 for environment management system.

MARKETING DIVISION FACT has been the pace seller in the fertilizer marketing. Through innovative farmers education and fertilizer promotion programs FACT created awareness about scientific cultivation and fertilizer are among the farmers. This was achieved with the aid of various programs over the part of 60 years. During the part from its very inception , FACT had realized the taste of fertilizer manufacturers involves much more than fertilizer production and marketing. The understood that the magical transformation in agriculture production brought by fertilizer use had to be brought home to the farmers through a variety of ways , which are understandable to them , to show them the role of chemical fertilizer in agriculture. FACT had also realized that given the Indian farming condition and the tradition approach of the farmers , it was an uphill task and nothing short of creating a new wave of awareness of fertilizer will do the trick. And this was exactly what FACT marketing activities set out to achieve. Today the marketing division of FACT has well organized distribution in south India for the sales of fertilizers and other inputs. The FACT agro service centers located in major markets serve the farmers with supply of fertilizer and know how. The most significant aspect of FACT is marketing and promotional programmers in within focus on the rural development. Many ueque and novel methods of promotion had been developed by FACT realize the goal. The concept of fertilizer festival is the most original and renowned among them. Village adoption is another original practice introduced in the country for the first time by FACT to demonstrate the fertilizer use. FACT agriculture study centers –Krishi Vidyan Kendram is another novel program to impact agriculture education to farmer. This scheme is selected pockets , will train farmers in modern scientific methods of cultivation. FACT is also

offering a series of other free agronomy services to the farming community like free soil testing , farmers club and demonstration. To ensure timely supply of fertilizers to farmers FACT maintain a chain of go down with a lot of storage capacity . FACT fertilizer also made available through the retail network of the co-operative marketing federation and the agro industries corporation of the southern states. In kerala FACT maintains the largest dealer network and also maintain the major market of FACT. Today kerala , Tamil nadu , Karnataka and andrapradesh are the major markets of FACT. The division continues its farmers education programs like demonstration , village adoption, farmers training and seminars.

FACT ENGINEERING AND DESIGHN ORGANISATION (FEDO) As a fast growing organization fact was continuously facing with challenges arising out of problem of technology , rawmaterial,process marketing and personnel. FACT constructive response to these challenges was to meet them with innovation , invention ,improvisation and managerial acts . the most significant act among them was the setting up of a separate organization for the design and engineering of chemical fertilizer plant are for involving new process for producing various chemicals vital for industry. As a result of that FACT engineering and development organization was established on 1965 FEDO is India's on of the project engineering organization as a wide spectrum of industries like petrochemicals , refining , pharmaceuticals , hydro metallurgy

etc.. and petroleum storage ,

environmental engineering , off site facilities etc… It undertakes project execution on consultancy basis , design and engineer handmade procurement and construction with practiced care , hard core professionals , advanced computer system , technology tie-ups with globally reputed technology license

and a provoking track record have made FEDO the first choice for engineering and turn key projects for India blue chips and western Asian countries.

FACT ENGINEERING WORKS (FEW) FEW was established on 1996. FEW is get another division of FACT which is established to turn in to reality the dream that the FACT revolution had give wise to. It was originally conceived on fabricating unit for large scale fertilizer plant. And on the years roll by FEW had attained new dimensions and on today FEW is one of the leading fabricators in India , equipped with modern facilities and an excellent team of professionals. Over the years it developed capabilities in the manufacture of chare pressure vessels , heat exchanger , columns , tower etc.. required for the fertilizers , petrochemical and petroleum industries. FEW had received ISO 9002 certification in 1998.

RESEARCH AND DEVELOPMENT Research and development plays a vital role in giving the company and its products the cutting edge in the competitive market. FACTs well equipped research and development department has advanced facilities equipped with pilot plants , modern equipments and accessories. A team of highly motivated research scientists backs it. Various process has been developed and patented by FACT research and development division of which several have been commercialized successfully. Field trials on slow release fertilizers developed by the division have been successful. Production of bio-fertilizers has commenced with an installed capacity of 150 tons per annum.

PRODUCT PROFILE FACT manufactures straight fertilizers , complex fertilizers , fertilizer mixtures and chemicals. a) STRAIGHT FERTILIZERS

1) Ammonium Sulphate Ammonium sulphate is a nitrogenous fertilizer containing 20.6% nitrogen , entirely in ammoniac form. It has excellent physical properties-non hygroscopic , crystalline and free following. It is deal an a straight nitrogenous fertilizer and also an iron ingredients in fertilizer mixtures. It is the most widely proffered nitrogenous fertilizer for dressing on all crops. Another unique advantages is that it contains 24% sulphare , an important secondary nutrient. 2) Urea FACT urea with its 46% nitrogen is the highest concentrated nitrogenous fertilizer. It is marketed in the form of pills an has got good physical prosperities. It is the cheapest source of "N". There is a great saving in overhead like transport , storage , handling and application charges due to its concentrated nutrient contents. FACT urea is deal for foliar application also , the nutrient content is extremely low. b) COMLEX FERTILIZERS 1) FACTOM FOS 20:20:0:15 (Ammonium Phosphate Sulphate) Factom fos 20:20:0:15 is a chemical blend of 40 parts of 20%"N" and p2o5. The entire N is in ammonial form and P

is

completely water soluble. In addition FACTOM FOS contains 15 % sulphar , a secondary plant nutrient which is now attaining great importance is the cultural scene. FACTOM FOS 20:20:0:15 with the granular formant non hygroscopic and fire flowing nature , has excellent physical properties. It is ideal for application on all soils and crops. FACTOM FOS 20:20:0:15 can also be used for foliar application. 2) Diammonium Phosphate

FACT Di –Ammonium (DAP) is also an NP complex fertilizer with 18 % N and 46% P2O5. It is a concentrated fertilizer. As the entire "N" is in ammonial form and phospherom fully in water soluble form , it is suitable for all soils crops. The high "P" content of the fertilizer make its ideal and suitable for application to crops like pulses , ground nut and other legumes. c) FERTILIZER MIXTURES 1) NPK Mixtures FACT prepares a very large scale all the standared mixtures for different cropes for Kerala an stipulated by the dept of agriculture. In adition FACT prepares special tailor made fertilizer mixtures of any required grade plantation cropes like coffee , tea , rubber etc… 2) Rose Mix FACT rose mix is a special tonic for roses. This fertilizer blend besides N , P and K contains the secondary and trace elements in the required form and correct quantity for roses. Rose mix is marketed in 500gms packets and available at prominent fertilizer shops. 3) Vegetable Mixture FACT vegetable mixture is also a special blend exclusively prepared for use on vegetables. FACT vegetable mixture is available in 1 kg packet. 4) Garden Mixture FACT garden mixture is also a fertilizer blend specially prepared for garden , pot flowers and foliage types. It is sold in 1 kg packet. d) CHEMICALS 1) An Hydro Ammonia Ammonia is one of the basic products in the manufacturer of fertilizers. FACT produces Ammonia of over

99.96% purity , used mainly for manufacture of ammonium phosphate. Besides it also finds are mainly for rubber and explosive industry and refineries. It is also used in the pharmaceutical industry. 2) Sulphuric Acid FACT has one of the largest plants in Asia for producing Sulphuric Acid. Sulphuric Acid manufactured in FACT plants has purity of 98%. 3) Caprolactum Caprolactum is the raw material for Nylon-6 the product quality of FACT Caprolactum is among the best available in the world. 4) Nitric Acid and Soda Ash Small quantities of Nitric Acid and Soda Ash are obtained from the caprolactum plants as by products.

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REVIEWOF LITERATURE

CONCEPTUAL BACK GROUND OF WORKING CAPITAL INTRODUCTION In practice a firm has to empty short term assets and short term sources of finance for management of such assets , described as working capital management , is one of the most important aspects of the overall financial management. It is one of the important decision making area of financial management of an enterprise. It requires understanding of (1) How to raise and allocate financial recourses (2) How to create short term investment and financial decision to the overall objectives of the firm. (3) How to relate short term financial decisions to certain long term financial decisions NEED FOR WORKING CAPITAL The need for working capital to run the day to day business activities cannot be over emphasized. We will hardly find a business firm which does not require any amount of working capital , indeed , firms differ in their requirements of the working capital. We know firms aim at maximizing the wealth of share holders. In its endeavor to maximize share holders wealth , a firm should earn sufficient return from its operations. Earning a study amount of profit requires successful sales activity. The firm has to invest enough fund in current assets for the success of the sales activity current assets are needed because sales do not convert in to cash instantaneously. There is always an operating cycle involved in the conversation of sales in to cash. 19

OPERATING CYCLE The operating cycle of manufacturing company involve three phases. 1) Acquisition of recourses such as raw material , labor , power and fuel. 2) Manufacture of the product which includes conversion of raw material in to work in progress and finished goods. 3) Sales of the product either for cash or on credit. Credit sales create book debts for collection. Concept of working capital 1.Gross working capital refers to firm’s investment in current assets. Current assets are the assets which can be converted in to cash with in a accounting year and include cash, short term securities, debtors, bills receivable and stocks. 2.Net working capital refers to the difference between current assets and current liabilities. Current liabilities are those claims of outsiders which are expected to mature for payment with in an accounting year accounting year and include creditors, bills payable and outstanding expenses. Net working capital can be negative or positive. A positive networking capital will arise when current assets exceeds current liabilities. A negative net working capital occurs when current liabilities are in excess of current assets.

20

A firm is required to invest in current assets for a smooth, uninterrupted production and sales. How much a firm will invest in current assets will depend on its operating cycle. The two concepts of working capital-gross and net are not exclusive; rather they have equal significance from the management point of view. The gross working capital concept focuses attention on two aspects of current assets management: a) how to optimize investment in current assets? (b) How should current assets be financed? The consideration of the level of investment in current assets should avoid two danger points- excessive and inadequate investment in current assets. Investment in current assets should be just adequate, not more or less, to the needs of the business firm. Excessive investment in current assets should avoid because it impairs the firm’s profitability, as idle investment earn nothing. On the other hand, inadequate amount of capital can threaten solvency of the firm because of its inability to meet its current obligations. Another aspect of gross working capital points to the need of arranging funds to finance current assets. Whenever a need for working capital funds arises due to the increasing level of business activity or for any other reason, financing arrangement should be made quickly. Similarly, if suddenly, some surplus funds arise they should not be allowed to remain idle, but should be invested in short- term securities. Net working capital is a qualitative aspect. It indicates the liquidity position of the firm and suggests the extent to which working capital needs may be financed by permanent source of funds. Current assets should be sufficiently in excess of current liabilities to constitute a margin or buffer for 21

maturing obligations within the ordinary operating cycle of a business. A weak liquidity position poses a threat to the solvency of the company and makes it unsafe and unsound. A negative working capital means a negative liquidity, and may prove to be harmful for the company’s reputation. Excessive liquidity is also bad. Net working capital concept also covers the question of judicious mix of long-term and short-term funds for financing current assets. For every firm, there is a minimum amount of net working capital which is permanent. Therefore, a portion of the working capital should be financed with the permanent sources of funds such as equity share capital, debenture, long-term debt, preference share capital or retained earnings. Management must, therefore, decide the extent to which current assets should be financed with equity capital and/ or borrowed capital. In summary, it may be emphasized that both gross and net concepts of working capital are equally important for the efficient management of working capital. There is no precise way to determine the exact amount of gross or net working capital for any firm. TYPES OF WORKING CAPITAL The classification of working capital in to two components in current assets is short and long terms are as follows. 1)Permanent working capital Permanent working capital is the minimum mount of current assets which is needed to conduct the business even during the dullest season of the year. The amount varies from year to year , depending upon growth of the company and the stage of the business cycle in which it operates. It is the amount of funds which required to produce the goods and services which are

required on a continuing basic over the entire year. It is maintained as the medium to carry on operations at any time. 2) Variable working capital It represents the additional assets which are required of different times during the operating year additional inventory , extra cash etc. Seasonal working capital is the additional of current assets cash receivables , inventory which are required the most active business season for the year. It is temporarily invested in purchase. 3) Gross working capital Working capital some times defined as " the current assets ofv thec firm notably cash and marketable securities , amount receivables and inventory". This is also known as gross working capital. It refers to funds invested in current assets. The gross working capital is going concern concept. This concept is helpful to provide current amount off working capital t the right time so that the firm is able to realize the greatest return on investment. 4) Net working capital It refers to both current assets and current liabilities. Net working capital is defined as current assets minus current liabilities. The concept of net working capital enable a firm to determine how much amount is left for operational requirements. 5) Balance sheet working capital It is one which calculated from the items appearing in the balance sheet. Gross working capital is represented by the excess of current assets over current liabilities are examples of balance sheet working capital. 6) Cash working capital It is one which calculated from the item appearing in the profit and loss account it shows the real flow of money or values at a particular time and it is conceded to be the most realistic approach in

working capital management. It is basis of the operation cycle concept which has assumed great importance in financial management in recent years. The reason is that the cash working capital indicates the adequacy of cash flow , which is an essential pre requisite of a business. 7) Negative working capital Negative working capital emerges when current liabilities exceed current assets such a situation is not absolutely theoretical and occurs when a firm is nearing a crisis of some magnitude.

DETERMINANTS OF WORKING CAPITAL There are no set of rules or formulae to determine the working capital requirements of firms. A large number of factors, each having a different importance, influence working capital needs of firms. Following are the factors which generally influence the working capital requirements of firms. 1) Nature of business Working capital requirements of a firm are basically influenced by the nature of its business. Trading and financial firms have a very small investment in fixed assets, but require a large sum of money to be invested in working capital. Manufacturing undertakings also have to invest substantially in working capital and a nominal amount in fixed assets. In contrast, public utilities have a very limited need for working capital and have to invest abundantly in fixed assets. Their working capital requirements are nominal because they may have only cash sales and supply services, not products. 2) Size of business/scale of operations The working capital requirements of a concern are directly influenced by the size of its business which may be measured in terms of scale of operations. Greater the size of a business unit, generally larger will be the requirements of working capital. 3) Production policy

In certain industries, the demand is subject to wide fluctuations due to seasonal variations. The requirements of working capital, in such cases depend upon the production policy. The production could be kept either steady by accumulating inventories during slack periods with a view to meet high demand during peak season or the production could be curtailed during the slack season and increased during the peak season. If the policy is to keep production steady by accumulating inventories it will require higher working capital. 4) Manufacturing process/length of production cycle In manufacturing business, the requirements of working capital increase in direct proportion to length of manufacturing process. Longer the process period of manufacture, larger is the amount of working capital required. 5) Sales and demand conditions The working capital needs of a firm are related to its sales. It is difficult to precisely determine the relationship between volume of sales and working capital needs. A growing firm may need to invest funds in fixed assets in order to sustain its growing production and sales. This will, in turn, increase investment in current assets to support enlarged scale of operations. It should be realized that a growing firm needs funds continuously. It used external as well as internal sources to meet increasing needs of funds. Sales depend on demand conditions. Most firms experience seasonal and cyclical fluctuations in demand for their products and services. These business variations affect the working capital requirements, specially the temporary working capital requirement of the firm. 6) Credit policy The credit policy of the firm affects the working capital by influencing the level of debtors. A concern that purchases its requirements on credit and sells its products/services on cash requires lesser amount of working capital. On the other hand a concern buying its requirements for

cash and allowing credit to its customers, shall need larger amount of working capital as very huge amount of funds are bound to be tied up in debtors or bills receivables. 7) Availability of credit The working capital requirements of a firm are also affected by credit terms granted by its creditors. A firm will need less working capital if liberal credit terms are available to it. Similarly , the availability of credit from banks also influences the working capital needs of the firm. A firm, which can get credit terms easily on favorable conditions, will operate with less working capital than a firm without such a facility. 8) Business cycles Business cycle refers to alternate expansion and contraction in general business activity. In a period of boom i.e., when the business is prosperous, there is a need for larger amount of working capital due to increase in sales, rise in prices, optimistic expansion of business, etc. on the contrary in the times of depression i.e., when there is a down swing of the cycle, the business contracts, sales decline, difficulties are faced in collections from debtors and firms may have a large amount of working capital lying idle. 9) Operating efficiency The operating efficiency of the firm relates to the optimum utilization of resources at minimum costs. The firm will be effectively contributing in keeping the working capital investment at a lower level if it is efficient in controlling operating costs and utilizing current assets. The use of working capital is improved and pace of cash conversion cycle is accelerated with operating efficiency. Better utilization of resources improves profitability and thus, helps in releasing the pressure of working capital. 10) Price level changes Changes in the price level also affect the working capital requirements. Generally, the rising prices will require the firm to maintain

larger amount of working capital as more funds will be required to maintain the same current assets. However, companies which can immediately revise their product prices with rising prices levels will not face a severe working capital problem. The effect of rising prices may be different for different companies. 11) Earning capacity and dividend policy Some firms have more earning capacity than others due to quality of their products, monopoly conditions; etc. Such firms with high earning capacity may generate cash operations and contribute to their working capital. The dividend policy of a concern also influences the requirements of its working capital. A firm that maintains a steady high rate of cash dividend irrespective of its generation of profits needs more working capital than the firm that retains larger part of its profits and does not pay so high rate of cash dividend. 12) Other factors Certain other factors such as operating efficiency, management ability, irregularities of supply, import policy, asset structure, importance of labour, banking facilities, etc., also influence the requirements of working capital. FACTORS AFFECTING THE WORKING CAPITAL REQUIRMENTS The working capital requirements of a concern depend upon a large number of factors such as nature and size of business , the character of their operation etc. It is not possible to rank them because all such factors are of great importance and individual factors changes a firm overtime. However , the important factors generally influencing the working capital requirements are: 1) Nature of business 2) Size of business 3) Production policy 4) Manufacturing process 5) Seasonal variations

6) Credit policy 7) Business cycle 8) Rate of growth of business 9) Earning capacity and dividend policy 10) Price level change 11) Working capital cycle

28

DATA ANALYSIS AND INTERPRETATION

TABLE NO.1 STATEMENT SHOWING GROSS WORKING CAPITAL Particulars

2003-2004

2004-2005

2005-2006

2006-2007

2007-2008

Inventories

19686.01

22889.15

25996.71

34615.62

31844.48

Sundry debtors

22815.45

9997.38

14817.40

19233.92

7585.22

Cash and bank balances

2465.98

2277.77

3462.62

7781.95

6746.39

42.29

36.93

11.59

730.39

501.98

2998.79

5600.99

9969.59

9668.21

11068.34

48008.52

40802.22

54257.91

72030.09

57746.41

Other current asset Loans and advances Total current assets

Source: Annual report of FACT

29

TABLE NO.2 STATEMENT SHOWING NET WORKING CAPITAL (Rs. Lakhs) Particulars 2003-2004 2004-2005 2005-2006 2006-2007

2007-2008

Inventories

19686.01

22889.15

25996.71

34615.62

31844.48

Sundry debtors

22815.45

9997.38

14817.40

19233.92

7585.22

Cash and bank balances

2465.98

2277.77

3462.62

7781.95

6746.39

42.29

36.93

11.59

730.39

501.98

2998.79

5600.99

9969.59

9668.21

11068.34

48008.52

40802.22

54257.91

72030.09

57746.41

Other current asse Loans and advances Total current assets

CURRENT LIABILITIES Liabilities

34177.19

27513.19

37086.51

39098.07

25414.43

Provisions

1425.24

1640.16

1939.89

2282.53

3596.65

Total current liabilities

35602.43

29153.35

39026.40

41380.60

29011.08

Net working capital

12406.09

11648.87

15231.51

30649.49

28735.33

Source: Annual report of FACT

30

TABLE NO. 3 STATEMENT OF CHANGES IN WORKING CAPITAL (Rs. Lakhs) 2004-2005 2003-2004 Particulars Increase Current assets 19686.01 22889.15 3203.14 1.Inventories 22815.45 9997.38 2. Sundry Debtors 2465.98 2277.77 3. Cash&Bank 42.29 36.93 4.other asset 5600.99 2602.2 5.loans and 2998.79 advances 48008.52 40802.22 Total Current liabilities 6664 1.liabilities 34177.19 27513.19 2. provisions 1425.24 1640.16 Total 35602.43 29153.35 Working capital 12406.09 11648.87 757.21 Decrease in working -757.21 capital 11648.87 13226.55 Total 11648.87

31

Decrease

12818.07 188.21 5.36

214.91

13226.55

TABLE NO. 4 STATEMENT OF CHANGES IN WORKING CAPITAL

Particulars Current assets 1.Inventories 2. Sundry Debtors 3. Cash&Bank 4.other asset 5.loans and advances Total Current liabilities 1.liabilities 2. provisions Total Working capital Increase in working capital Total

2004-2005

(Rs. Lakhs) 2005-2006

22889.15 9997.38 2277.77 36.93 5600.99

25996.71 14817.40 3462.62 11.59 9969.59

40802.22

54257.91

27513.19 1640.16 29153.35 11648.87 3582.64

37086.51 1939.89 39026.40 15231.51

15231.51

15231.51

Increase

Decrease

3107.56 4820.02 1184.85 25.34 4368.6

9573.32 299.73

3582.64

32

13481.03

13481.03

TABLE NO. 6 STATEMENT OF CHANGES IN WORKING CAPITAL

Particulars Current assets 1.Inventories 2. Sundry Debtors 3. Cash&Bank 4.other asset 5.loans and advances Total Current liabilities 1.liabilities 2. provisions Total Working capital Increase in working capital Total

(Rs. Lakhs) 2006-2007 2005-2006 25996.71 14817.40 3462.62 11.59 9969.59

34615.62 19233.92 7781.95 730.39 9668.21

54257.91

72030.09

37086.51 1939.89 39026.40 15231.51 15418

39098.07 2282.53 41380.60 30649.49

30649.49

30649.49

Increase

Decrease

8618.91 4416.52 4319.33 718.8 301.38

2011.56 342.64

15418

33

18073.55

18073.55

TABLE NO. 7 STATEMENT OF CHANGES IN WORKING CAPITAL Particulars Current assets 1.Inventories 2. Sundry Debtors 3. Cash&Bank 4.other asset 5.loans and advances Total Current liabilities 1.liabilities 2. provisions Total Working capital Decrease in working capital Total

(Rs. Lakhs) 2007-2008 2006-2007 34615.62 19233.92 7781.95 730.39 9668.21

31844.48 7585.22 6746.39 501.98 11068.34

72030.09

57746.41

39098.07 2282.53 41380.60 30649.49 -1914.16

25414.43 3596.65 29011.08 28735.33

28735.33

28735.33

Increase

Decrease 2771.14 11648.7 1035.56 228.41

1400.13

13683.64 1314.12

1914.16

34

16997.93

16997.93

TREND ANALYSIS Time series or trend analysis of ratios indicates the direction of change. This kind of analysis is particularly applicable to the items of profit and loss account. Trend percentage is also referred to trend ratio. The financial performance for a series of years may be analyzed to determine the trend of the data contained therein. This method of analysis is adopted to determine, the direction, upward or down ward. The method of calculating trend percentage includes the calculation of percentage relationship, each item bears to the same item in the base year. Each item of the base year is taken as 100and on that basis the percentage for each of the item of each of the year is calculated. There are different steps for calculating trend percentage. 1) Selection of the base year, which may be earliest, latest on any intervening period. 2) Assignment of a weight of 100 to each amount of the base year is next step. 3) Mention each item amount of every other year as a percentage of its base year amount by applying the formula. Trend percentage thus shows not only the magnitude but also the direction upward or down ward during various years and hence is quite useful in horizontal analysis. It is advisable that trends of sales and net income may be studied in the light of two factors: the rate of expansion or secular trend in the growth of the business and the general price level.

35

1. Trend analysis of current assets TABLE NO.8 STATEMENT SHOWING TREND ANALYSIS OF CURRENTASSETS Year

Current assets (Rs. Lakhs)

Trend percentage

2003

48009

100

2004

40802

85

2005

54150

113

2006

72030

150

2007

57746

120

36

GRAPH SHOWING TREND OF CURRENT ASSETS

trend percentage 160 140 120 trend percentage

100 80 60 40 20 0

2003

2004

2005 year

Interpretation:

2006

2007

From the graph it is clear that the direction of changes of current assets is fluctuating. During the year 2003, the current assets decreased from 100to 85, which further started growing during the years 2005 and 2006.

37

2. Trend analysis of current liabilities TABLE NO.9 STATEMENT SHOWING TREND ANALYSIS OF CURRENT LIABILITIES Year

Current liabilities(Rs. Lakhs)

Trend percentage

2003

35602.43

100

2004

29153.35

82

2005

39026.4

90

2006

41380.6

116

2007

29011.08

82

38

GRAPH SHOWING TREND OF CURRENT LIABILITIES

trend percentage

percentage

120 100 80 60 40 20 0

2003 2004 2005 2006 2007 year

Interpretation: From the graph it is clear that the current liabilities have fluctuated during the last five years, which had decreased from 116to 82 during the last year 2006-07. 39

3. Trend analysis of sundry debtors TABLE NO.10 STATEMENT SHOWING TREND ANALYSIS OF SUNDRY DEBTORS

Year

Sundry debtors (Rs. Lakhs)

Trend percentage

2003

22815.45

100

2004

9997.38

44

2005

14817.40

65

2006

19233.92

85

2007

7585.22

45

40

GRAPH SHOWING TREND OF SUNDRY DEBTORS

percentage

trend percentage 100 90 80 70 60 50 40 30 20 10 0

2003 2004 2005 2006 2007 year

Interpretation:

As per the graph, the direction of change of sundry debtors is fluctuating. The first 2 years shows a decreasing trend, and it goes on increasing in the next two years and the last year it is decreased.

41

1. Trend analysis of sundry creditors TABLE NO.11 STATEMENT SHOWING TREND ANALYSIS OF CREDITORS Year

Creditors (Rs. Lakhs)

Trend percentage

2003

13773.89

100

2004

14345.03

104

2005

19625.15

142

2006

18316.66

132

2007

6887.24

51

42

GRAPH SHOWING TREND OF SUNDRY CREDITORS

trend percentage

percentage

160 140 120 100 80 60 40 20 0

2003 2004 2005 2006 2007 year

Interpretation:

As per the graph, the creditors shows a growing trend in years, 2003, 2004 and 2005. But during the last year of study, i.e., 2006-07, it decreased to51.

43

CURRENT RATIO Current ratio in a business concern indicates the availability of current assets to meet its current liabilities. Higher the ratio better is the coverage. Traditionally it is also called 2:1 ratio, i.e. 2 is the standard for current assets for each unit of current liabilities. But this is only a conservative outlook about the coverage of current liabilities.

Current ratio =

Current Assets Current Liability

TABLE NO.1 STATEMENT SHOWING CURRENT RATIO

Year

Current Assets

Current liabilities

Cash to Current Assets ratio

2003

48009

35602.43

1.35

2004

40802

29153.35

1.4

2005

54150

39026.4

1.39

2006

72030

41380.6

1.74

2007

57746

29011.08

1.99

TOTAL

Source: Annual report of FACT

44

GRAPH SHOWING CURRENT RATIO

current ratio 12 10

ratios

8 6 4 2 0 2003 2004 2005 2006 2007

year

Interpretation

As a conventional rule, a current ratio of 2 to 1 or more is considered satisfactory. But the current ratio of the company over the 5 years is not meeting the ideal ratio. But in the last year the ratio is just 2:1. so we can conclude that working capital position of the company is improving stage.

45

QUICK RATIO This ratio is similar to current ratio except that it exclude inventory from the numerator of the ratio. All current assets have different degrees of risk and liquidity, among them, inventory is generally the least liquid asset as it needs more time for conversion than other components of current assets or it would have no value at all at the time of real crisis. The quick ratio, therefore, emphasis the relationship of liquid assets (i.e. current assets less inventory) to current liabilities. The term liquid assets refers to current assets, which can be converted into cash immediately or at a short notice. It is compared as follows.

Quick Ratio =

Quick Assets Current Liabilities

TABLE NO.2 STATEMENT SHOWING CURRENT RATIO

Year

Liquid assets

Current liabilities

Quick ratio

2003

28322.5

35602.43

.8

2004

17913.07

29153.35

.61

2005

28261.2

39026.4

.72

2006

37414.47

41380.6

.9

2007

25901.93

29011.08

.89

Total

Ssource: Annual report of FACT

46 GRAPH SHOWING QUICK RATIO

ratios

Quick ratio 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0

2003 2004 2005 2006 2007 year

Interpretation:

The quick ratio of the company is showing a satisfactory current financial condition. During the last three years, the company maintaining and improving the liquidity position. In 2004 ,company has a low liquidity but after 2004 company improve illiquidity position.

47

DEBT EQUITY RATIO Several debt ratios may used to analyze the long term solvency of the firm. The firm may be interested in knowing the proportion of the interest bearing debt in the capital structure. Total debt include short and long term borrowings from financial institutions, debenture/bonds, deferred payment arrangements for buying capital equipments, and bank borrowings, public deposits and any other interest bearing loan. The relationship describing the lender’s contribution for each rupee of the owner’s contribution is called Debt-Equity Ratio. Debt Equity Ratio = Outsiders Fund Shareholders Fund TABLE NO.3 STATEMENT SHOWING DEBT EQUITY RATIO

Year

Outsiders fund

Shareholders fund

Debt equity ratio

2003

113015.27

35660.14

3.16

2004

115890.74

35580.88

3.25

2005

68074.52

64806.53

1.05

2006

92863.47

64802.36

1.43

2007

75857.73

64798.36

1.17

Source: Annual report of FACT

48

GRAPH SHOWING DEBT EQUITY RATIO

debt equity ratio 3.5 3 2.5 2 ratio 1.5 1 0.5 0 2003

2004

2005

2006

2007

year

Interpretation: The debt equity ratio of the co shows a fluctuating trend. During the year 2003-the ratio was 3.16, which increased to 3.25 during 2004. while in the following years showed an decreasing trend in the debt equity ratio, such as

1.05 in 2005, 1.43 in 2006 and 1.17 in 2007. And this decrease in the ratio means company not concentrated in using long term debt .

49

ABSOLUTE LIQUIDITY RATIO Absolute liquidity is represented by cash and near cash items. Hence, in the computation of this ratio, only absolute liquid assets are compared with current liabilities. These assets normally included cash, bank, and marketable securities. It is to be observed that receivable are excluded from the list of liquid assets. Absolute ratio =

cash + bank+ marketable securities Current liability

TABLE NO.4 STATEMENT SHOWING ABSOLUTE LIQUIDITY RATIO

Year

Liquid assets

Current liability

2003

28322.5

35602.43

2004

17913.07

29153.35

2005

28261.2

39126.40

2006

37414.47

41380.60

2007

25901.93

29011.08

Source: Annual report of FACT

Absolute ratio 0.79 0.6 0.72 0.9 0.89

50 GRAPH SHOWING ABSOLUTE LIQUIDITY RATIO

Absolute liquid ratio 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0 2003

2004

2005 year

Interpretation:

2006

West 2007

ratio

The absolute liquid ratio of the company is satisfactory and it is showing a fluctuating trend. In last two years absolute liquid ratio is increased .

51

TOTAL ASSETS TO DEBT RATIO: The ratio of Total Assets to Debt ratio establishes a relationship between total assets and the total long term debts. The two components of this ratios, i.e., total assets and debt are computed as follows: (a) Total assets : Total assets include fixed as well as current assets. However, it does not include fictitious assets like preliminary expenses, underwriting commission, etc. and debt balance of Profit and Loss account (b) Long term Debts : Long term debt refers to debt that will mature after one year. It includes debenture, bonds, loans from financial institutions. Formula: Total asset to debts ratio = Total asset Long term debt TABLE NO.5 STATEMENT SHOWING TOTAL ASSET TO DEBTS RATIO

Year

Debt

2003

113015.27

2004

115890.74

2005

68074.52

2006

92863.47

2007

75857.73

Total asset

Absolute ratio

148675.41

1.3

151471.62

1.3

132881.05

1.95

127016.34

1.36

140656.09

1.85

Source: Annual report of FACT

52

GRAPH SHOWING TOTAL ASSET TO DEBT RATIO

total asset to debt ratio

1.3

1.3

2003

2004

1.95

ratio

1.85 1.36

West 2005

2006

2007

year

Interpretation: Total asset to debt ratio is usually expressed as pure ratio 2:1. It helps to measure the safety margin available to the providers of long term debts. Here the ratio is less than 2:1, this indicates a risky financial

position as it means that business depends heavily on outside loans from its existence.

53

PROPRIETARY RATIO: The objective of computing the proprietary ratio is to establish the relationship between proprietor’s funds and total assets. Proprietor’s funds means share capital plus reserves and surplus, both of capital and revenue nature. Loss if any should be deducted. Funds payable to others should not be added. This ratio shows the extent to which the shareholders own the business. The different between this ratio as % and 100 represent the ratio of total liabilities to total assets. It is worked out as follows: Proprietary ratio =

Share holders fund Total asset

TABLE NO.6 STATEMENT SHOWING PROPRITORY RATIO

Year

Equity

2003

35660.14

2004

35580.88

2005

64806.53

2006

64802.36

2007

64798.36

Total asset

Absolute ratio

148675.41

0.23

151471.62

0.23

132881.05

0.48

127016.34

0.5

140656.09

0.46

Source: Annual report of FACT

54

GRAPH SHOWING PROPRITORY RATIO propritory ratio

0.5 0.45 0.4 0.35 0.3 ratio 0.25 0.2 0.15 0.1 0.05 0 2003

2004

2005

2006 year

2007

Interpretation: The propritory ratio of the co shows a improving trend. During the year 2003 and 2004 the ratio is 0.23: 1

but in the last three years which

increased to 0.48:1 ,0.50: 1 and 0.46:1 respectively.While in the following years showed a increasing trend in the propritory ratio.

55

FIXED ASSET RATIO Fixed asset ratio indicates the extend to which the total of fixed assets is financed by long term funds of the firm. Generally the total of long term funds or the ratio should be 100%. But in case the fixed assets exceed the total of long term funds, it implies that the firm has financed apart of its fixed assets out of the current funds or working capital which is not a good financial policy. And if the total long term funds are more than total fixed assets, it means that working capital requirements are met out of the long term funds of the firm.

Fixed assets ratio =

Net fixed assets Long term funds

TABLE NO.7 STATEMENT SHOWING FIXED ASSET RATIO

Year

Net fixed assets

Long term funds

66959.97

2003

0.49

92863.47

43327.6

2007

0.75

68074.52

46030.77

2006

0.49

115890.74

51340.65

2005

0.59

113015.27

57391.96

2004

Fixed Asset ratio

0.57

75857.73

Source: Annual report of FACT

56

GRAPHS SHOWING FIXED ASSET RATIO

Fixed asset ratio year 2007

2006

2005

2004

2003 ratio 0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

Interpretation The fixed asset ratio is high in the year 2005, but in 2007 it is increasing trnd. The ratio decreased to 0.49 during 2006, which increased to 0.57 during

2007. This shows that the ratio is vary from year to year as increasing and decreasing trend simultaneously.

57

GENERAL PROFITABILITY RATIO 1. GROSS PROFIT RATIO 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 and the sales revenue. Gross profit ratio =

Gross profit Net sales

* 100

TABLE NO.8 STATEMENT SHOWING GROSS PROFIT RATIO Year

Gross profit

Sales

Gross profit ratio

2003

-6832

76751

-8.9

2004

-2035

98055

-2

2005

-1371

101917

-1.34

2006

-1158

105501

-1.09

2007

-9316-

56297

-16.5

Source: Annual report of FACT

58

GRAPH SHOWING GROSS PROFIT RATIO

0 -5 ratio

-10 -15 -20

2003

gross profit ratio

2004

2005

2006

2007

year

Interpretation: The gross profit ratio in recent five years is decreasing trend such as.-8.9, -2 , -1.34, -1.09 ,-16.5 . the ratio decreased to -16.5 in the year 2007. in 2007 gross profit ratio of the company has big changes. Because it is varry

from -1.09 to -16.5 . totally gross profit ratio of the company is not satisfactory in recent years , especially in 2007.

59

NET PROFIT RATIO This ratio explains per rupee profit generating capacity of sales. If the cost of sales is lower, then the net profit will be higher than we divide it with the net sales, the result is the sales efficiency. Lower is the net profit per rupee of sales, lower will be the sales efficiency. The concern must try for achieving greater sales efficiency for maximizing the return on investment. This ratio is very useful to the proprietors and prospective investors because it reveals the overall profitability of the concerns. This can be calculated as Net profit ratio =

Net profit after tax * 100 Net sales

TABLE NO.9 STATEMENT SHOWING NET PROFIT RATIO Year

Net profit

Sales

Net profit ratio

2003

-16722

76751

-21.78

2004

-16796

98055

-17.12

2005

23566

101917

23.12

2006

-12473

105501

-11.8

2007

897

56297

1.6

Source: Annual report of FACT

60

GRAPH SHOWING NET PROFIT RATIO

net profit ratio

25 20 15 ratio

10 5 0 -5 -10 -15 -20 -25 2003

2004

2005 year

Interpretation:

2006

2007

From the study, it is clear that the company is not making profits during the years, i.e., 2003 and 2004. The ratios for the 2 years are negative. While the company is making profits during 2005. The net profit ratio during the years 2003, and 2004 are-21.78 and -17.12 but in 2005 it is varry to 23.12 as net profit .In 2007 it is positively varry from 2006 as -11.8 to 1.6 and this gives the idea of improved efficiency of the company.

61

OPERATING RATIO The operating ratio is yardstick of operating efficiency. The operating ratio indicates the average aggregative variations in expenses, where some of the expenses may be increasing while others may be falling. These ratios when compared from year to year for the firm will throw light on managerial policies and programmes. Operating ratio =

Operating cost Net sales

* 100

TABLE NO.10 STATEMENT SHOWING OPERATING PROFIT RATIO Year

Operating cost

Sales

Operating profit ratio

2003

111451.3

76751

145.2

2004

134491.63

98055

137.15

2005

152431.05

101917

149.5

2006

161762.88

105501

153.3

2007

108933.17

56297

193.5

Source: Annual report of FACT

62

GRAPH SHOWING OPERATING PROFIT RATIO

operating profit ratio

250

200

150 ratio

100

50

0 2003

2004

2005

year

2006

2007

Interpretation: The operating profit ratio of the company is improved during the recent five years : 145, 137,149,153,193 respectively. So it depics that operating efficiency of the company is improved especially in 2006 to 2007

,because in 2006 the ratio is 153 it is hugely changes to 193 in 2007 ,it is satisfactory level of operating ratio.

63

CHANGES IN FINANCIAL POSITION FOR THE YEAR ENDED 31ST MARCH 2004 2003-2004

SOURSES OF FUNDS Funds generated from operations Profit after tax Depreciation Long term loan Short tem loan

0 6458 0 7726 0 1418

APPLICATION OF FUNDS Loss for the year Capital expenditure (net) Repayment of long term loans Repayment of short term loans Reduction in liability towards the government Of India loan on account of conversion in to capital Reduction in liability towards the government of India loan on account of write off Reduction in liability towards interest due on the govt ogf Indian loan written off Miscellaneous expenditure not written off(net) Increase/decrease(-) in working capital

16722 344 720 515 0 0 0 2512 -6629 14184

64

CHANGES IN FINANCIAL POSITION FOR THE YEAR ENDED 31ST MARCH 2005 2004-2005

SOURSES OF FUNDS Funds generated from operations Profit after tax Depreciation Long term loan Short tem loan

0 6127 0 4494 0 10621

APPLICATION OF FUNDS Loss for the year Capital expenditure (net) Repayment of long term loans Repayment of short term loans Reduction in liability towards the government Of India loan on account of conversion in to capital Reduction in liability towards the government of India loan on account of write off Reduction in liability towards interest due on the govt ogf Indian loan written off Miscellaneous expenditure not written off(net) Increase/decrease(-) in working capital

16796 -92 0 40 0 0 0 -496 -5627 10621

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CHANGES IN FINANCIAL POSITION FOR THE YEAR ENDED 31ST MARCH 2006 2005-2006

SOURSES OF FUNDS Funds generated from operations Profit after tax Depreciation Long term loan Short tem loan

23566 6271 29230 4000 5121 68188

APPLICATION OF FUNDS Loss for the year Capital expenditure (net) Repayment of long term loans Repayment of short term loans Reduction in liability towards the government Of India loan on account of conversion in to capital Reduction in liability towards the government of India loan on account of write off Reduction in liability towards interest due on the govt ogf Indian loan written off Miscellaneous expenditure not written off(net) Increase/decrease(-) in working capital

0 224 0 0 29230 32710 4869 -2429 3584 68188

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CHANGES IN FINANCIAL POSITION FOR THE YEAR ENDED 31ST MARCH 2007

2006-2007 SOURSES OF FUNDS Funds generated from operations Profit after tax Depreciation Long term loan Short tem loan

0 6401 0 3000 18935 28336

APPLICATION OF FUNDS Loss for the year Capital expenditure (net) Repayment of long term loans Repayment of short term loans Reduction in liability towards the government Of India loan on account of conversion in to capital Reduction in liability towards the government of India loan on account of write off Reduction in liability towards interest due on the govt of Indian loan written off Miscellaneous expenditure not written off(net) Increase/decrease(-) in working capital

12473 982 0 0 0 0 -151 15032 28336

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CHANGES IN FINANCIAL POSITION FOR THE YEAR ENDED 31ST MARCH 2008 2007-2008

SOURSES OF FUNDS Funds generated from operations Profit after tax Depreciation Long term loan Short tem loan

0 2993 0 1500 -6965 20000 17528

APPLICATION OF FUNDS Loss for the year Capital expenditure (net) Repayment of long term loans Repayment of short term loans Reduction in liability towards the government Of India loan on account of conversion in to capital Reduction in liability towards the government of India loan on account of write off Reduction in liability towards interest due on the govt ogf Indian loan written off Miscellaneous expenditure not written off(net) Increase/decrease(-) in working capital

19103 295 ------0 0 0 -5 -1865

17528

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FINDINGS  The working capital position of the company is on fluctuating trend in last five years. But in 2005 to 2007 it is changed positively and shows increasing trend as compare with 2003 and 2004. Totally net working capital shows increasing and decreasing trend.

 Company shows positive working capital for the last five years of the study due to increase in current asset and decrease in current liabilities. It depicts that working capital position of the company is in satisfactory level to maintain the day to day operations.  In 2006 net current asset has a major increase compare with 2005, but it has major decrease in 2007.These two major changes is closely affect the working capital position especially in 2007.  But , on the basis of current ratio of the firm it is on increasing trend but not in satisfactory level as compare with the ideal ratio of 2:1  On the basis of trend analysis of current asset it is on fluctuating trend and it will closely affect the working capital position and also affect the day to day operations.  The trend percentages of current liability is on increasing trend fromm 2004 to 2006 but on 2007 it is decreased and it positively affect for the maintaining of good working capital position.  Short term solvency position of the company is satisfied on the basis of its increasing trend. But on the basis of apt ratio it is not satisfied except last two years.  Generally company use outsiders fund on the basis of the debt equity ratio. but in last three years company try to maintain the balancing of debt and equity by reducing using more fund from owners and reducing fund from outsiders for balancing a good long-term solvency position.  The quick ratio of the company is satisfied in last two years on the basis of the ideal ratio of 1:1



The gross profit margin of the company is in decreasing trend and we can know that company has gross loss in last five years. It is not enough sufficient to cover the operating and other non operating expenses.

 Net profit of the company is on fluctuating trend. It represents the inefficiency of the operation. But in the last year company has increasing trend in their profitability.

 Profitability in operation is increasing trend in last five years on the basis of operating profit ratio. It is the result of effective operation management of the company

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SUGGESTION  The company shows decreasing trend in working capital for the last year, so it should maintain adequate current asset to meet its day to day operations.

 The company should try to decrease the current liabilities for a better working capital position.  Company must consider creditors and outsiders by maintaining a good position in short term and long term solvency  The company should adopt inventory control techniques and take a good inventory decisions for the positive affects for a better working capital position.  Greater emphasis should be given tom minimize the cost . so cost control technique is applied. It can be positively affect the profitability of the company.  Company try to maintain a good solvency position for good strength of the working capital position.  The company must take effective measures to reduce the operating expenses  The company can improve the earning power and increase the net prodfit margin by reducing operating expenses and increasing the sales volume.  The company’s liquidity position is also not satisfactory, so it should try to maintain better liquidity position.  The company’s net profit ratio is not satisfactory and there exist wide gap between gross profit ratio and net profit ratio because of increasing operating cost. Therefore steps must be taken to reduce all operating expenses.

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CONCLUSION The study was conducted for a period of 5 years from 2003 to 2007. secondary data was obtained from the published annual report of the company. Ratio analysis , trend analysis , schedule of changes in working

capital , fund flow analysis done to evaluate the " WORKING CAPITAL MANGEMENT OF FACT Ltd". The analysis of five years reveals that the various factors affects the overall performance and their positive and negative involvement in financial and non financial aspects of the company. Totally we can conclude that financial position of the company is on improving stage and company take necessary decisions for the improvement of profitability , solvency ,leverage and all other financial strength of the company as compare with previous years.

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BIBLIOGRAPHY 1. I M Pandey, Financial Management, vikas publishing house pvt ltd.

2. M Y Khan & P K Jain, Financial Management, Tata McGraw-Hill publishing Company Limited. 1. Annual Reports of TCC, for five years from 2002-2003 to 20062007. 2. www.tcckerala.com. 3. A.Vinod, Financial Management, Calicut University central cooperative stores limited. No. 4347 4. Dr.S.N.Maheswari – Management Accounting & Financial control

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160 140 120 100 80 60

East

40 20 0 2003

2004

2005

2006 2007

FINDINGS  Current ratio of the company shows a fluctuating trend. An ideal current ratio is 2:1. Average current ratio for the last five years is 0.67, Showing that the liquidity position is not satisfactory.

 Companies’ quick ratio for the last five years is 0.48. The standard norm fixed for quick ratio is 1:1. This again shows that the company’s liquidity position is not satisfactory. This is unfavorable to creditors.  The average absolute liquid ratio is 0.05. The acceptable ratio is 1:2. This shows that company’s financial position is not satisfactory.  During the years, 2003-2004 and 2004-2005, the company had satisfactory gross profit ratios, indicating increasing sales.  Net profit ratio shows a down ward trend. It has declined over the 5 years and has not increased as fast as the gross margin. This implies that the operating expenses relative to sales have been increasing.  The operating profit ratio also shows a declining trend, the reason can be the increasing operating cost.  The average inventory turn over ratio is 6.14. A high inventory turn over ratio is indicative of good inventory management.  The average debtors turn over ratio is 8.28 times. Debtors turn over ratio is satisfactory. It shows the effectiveness of the company’s credit policy. The average debt collection period is 44 days.  The company shows negative working capital for the last 5 years of the study, due to the increase in current liabilities and decrease in current assets.

SUGGESTION ♦ The company shows negative working capital for the last five years, so it should maintain adequate current asset to meet its day to day operations.

♦ The company should take necessary measures to check the increasing current liabilities. ♦ The company’s liquidity position is also not satisfactory, so it should try to maintain better liquidity position. ♦ The company’s net profit ratio is not satisfactory and there exist wide gap between gross profit ratio and net profit ratio because of increasing operating cost. Therefore steps must be taken to reduce all operating expenses. ♦ The cash management should be done more carefully as it holds only a small portion of current assent.

CONCLUSION In this study an attempt is made to analyze the working capital position of the company. The study shows that the overall performance of the company is not satisfactory. The analysis and interpretation of various data relating to working capital management helped to reach a conclusion that the efficiency of working capital is not sufficient, since the working capital amounts show negative balance. It also reveals that the company is not having a satisfactory liquidity and profitability position. The overall success of any company depends upon its working capital position. So it should be handled properly because it shows the efficiency and financial strength of the company. Therefore the company should enforce strict and possible measures in every sphere of its activity to bring the company back to sufficient working capital position and improve its financial performance for better prospects in the coming days. There should be a better short term fund management.

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BIBLIOGRAPHY 3. I M Pandey, Financial Management, vikas publishing house pvt ltd. 4. M Y Khan & P K Jain, Financial Management, Tata McGraw-Hill publishing Company Limited. 5. Annual Reports of TCC, for five years from 2002-2003 to 20062007. 6. www.tcckerala.com. 7. A.Vinod, Financial Management, Calicut University central cooperative stores limited. No. 4347 8. Dr.S.N.Maheswari – Management Accounting & Financial control

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