A PROJECT REPORT

ON

WORKING CAPITAL
&
RATIO ANALYSIS
OF

UNDERGUDANCE OF
C.A TARUN GUPTA
(DGM ACCOUNTS)

C.A AMIT GUPTA

(MANAGER)

SUBMITTED TO
SINHGAD INSTITUTE OF
MANAGEMENT

BY
KUSHAL JAIN

1
 Sinhgad Technical Education Society’s

Sinhgad Institute of Management

S. No. 44/1, Off Sinhgad Road, Vadgaon (Bk), Pune – 411 041

Ph: 020 -2435 8380/243 8355 Fax: 020-2435 4835 Mob: 9881742711

Email: siomdean@yahoo.com

CERTIFICATE
This is certifying that the major project entitled “WORKING
CAPITAL & RATIO ANALYSIS” is a bona-fide work done
under the guidance of Mr. Tarun Gupta (AGM ACCOUNT)
by Mr. Kushal Jain in the partial fulfillment of requirement
for the award of PGDM of SINHGAD INSTITUTE OF
MANAGEMENT [SIOM].

He has

worked under our guidance and direction. His work is found

to be satisfactory and complete in all respect.

GUIDED BY:
DIRECTOR:
.

2
Dr. Daniel Penkar
prof. A.C. Panda

INDEX

S.N PARTICULAR PAGE

O. NO.

1. ACKNOWLEDGEMENT

2. PREFACE

3. COMPANY PROFILE

4. CEMENT MANUFACTURING
PROCESS
5. PRODUCTS

6. HIGHLIGHT & FEATURES

7. VISION & MISSION

8. WORKING CAPITAL
9. RATIO ANALYSIS

10. CONCLUSION

11. BIBLOGRAPHI

3
4
This project report has been prepared for partial
fulfillment of the course of M.B.A. and being
submitted as a essential part of the course the study
has been done in PRISM CEMENT LTD. SATNA for the
project report 25 May 2010 to 10 July. 2010. the
project report has been written as a study
programme with the aim of applying a real scientific
system of management in the industry .

Preparation of the project report is such a tedious

work which can not done without help and proper
guidance .In accordance with this 1st express my
sincere gratitude to Mr. R. K. Gupta (DGM
ACCOUNT) for providing their proper guidance
through the preparation of this project report.

I also wish to extent my greater thanks to Mr.

Tarun Gupta (AGM ACCOUNT ) prism cement
ltd. without his valuable help the training
programme could not be done properly .

5
Iam also thankful to Mr.Amit Gupta
(Dy.Manager) and Mr. Rahul Tiwari (Sr.
Manager HRD) their patience in providing me
deep knowledge and the right approach to
accomplish the task and helped me knowledge and
understanding of the subject.

Most importantly ,it was the blessing of my parents

and love of my does friends that me motivated
throughout the project work.

KUSHAL
JAIN

6
7
I was highly obliged to be presented with the golden
opportunity of working with PRISM CEMENT. A Company
having huge infrastructure and networking .With the launch
of Champion brand it has added a new weapon to its army .

My project Titled “WORKING CAPITAL & RATIO ANALYSIS

OF PRISM CEMENT” was undertaken for a period of 60
Days.

In the first chapter titled “COMPANY PROFILE” ,I have tried

to give a brief introduction of Prism cement which is the
first company collaborated with F.L. Smith leading company
in cement industry.

Although the project was complied and completed using

limited resources .I would be highly obliged if this proves
beneficial to your.

KUSH
AL JAIN

8
WHO’S WHO

LIST OF BOARD OF DIRECTORS

S.NO. NAME DESIGNATION

1 Mr.Rajesh G. Kapadia Chairman

2 Mr. Rajan B. Raheja Managing director

3 Mr. Manoj Chhabra Managing director

4 Mr. Vijay Aggarwal Managing director

5 Mr. Aziz H. Parpia (upto May 5, 2010)

6 Mr. Satish B. Raheja Director

7 Mr. Akshay R. Raheja Director

8 Mr. Ganesh Kaskar Exeutive Director

9
Prism Cement Limited is an ISO 9001:2000 certified company
promoted by the Rajan Raheja Group. It operates one of the largest
single kiln cement plants in the country at Satna, Madhya Pradesh.
Equipped with state-of-the-art machinery and technical support
from F.L Smidth & Co A.S Denmark, the world leaders in cement
technology, Prism Cement has successfully created a niche for
itself in the Indian cement industry.

The Company is managed by a focused Board comprising of

eminent experts from diverse fields ably supported by a
professional management team. The Management team ensures
high levels of transparency, accountability and equity in all facets
of the company’s operations.

10
Touchstones
The main objective of Prism Cement is to continuously improve
the quality of its products and services in order to meet customer
satisfaction. A Technical Services Cell manned by civil engineers
has been instituted with the objectives of:

• Technical promotion of Prism Cement to Architects / Masons

/ Contractors, the main influencers for cement buying
decisions by individuals.
• To provide on-site services to individual house builders
o Education about correct construction practices and
economic use of cement
o To inspect the house under construction, pin-point
construction errors and suggest corrective actions
o Guidance in casting of RCC roof slabs

GLOBAL SCENARIO :-
Cement is one of the key infrastructure industries .

Price and distribution controls were lifted on the 1st march 1989 and
licensing was dispensed with since 25th July 1991.

However, the performance of the industry and prices of cement are

monitored on a regular basis. The industry is subject to quality control
order issued on 17.02.2003 to ensure quality standards.

OVERVIEW OF THE PERFORMANCE OF THE CEMENT

SECTOR:-

11
 The Indian cement industry not only ranks second in the production
of cement in the world but also produces quality cement, which meets
global standards . However, the industry faces a number of constraints
in terms of high cost of pwer, high railway tariff, high incidence of state
and central levies and duties, lack of private and public investment in
infrastructure project, poor quality coal and inadequate growth of
related infrastructure like sea and rail transport , ports and bulk
terminals .In order to utilize excess capacity available with the cement
industry , the government has identified the following thrust areas for
increasing demand for cement :

(i)Housing development programmers;

(ii) Promotion of concrete highways and roads;

(iii) Use of ready-mix concrete in large infrastructure projects

(iv) construction of roads in rural areas under prism ministers Gram

Sadak Yojana.

INDIAN SCENARIO OF CEMENT INDUSTRY:-

Indian cement industry is modern and uses latest

technology. Only a small segment of industry is using old technology
based on wet and semi –dry process. Efforts are being made to recover
waste heat and success in this area has been significant.

12
13
What is cement and how is it made?

Cement is a soft powdery-type substance. It is made from a

mixture of element found in nature material such a limestone, clay
and/or shale when cement mix with water it can bind sand and gravel
into a hard solid mass called concrete.

14
 Four essential elements are needed to make cement they are
silicon, aluminum, iron, and calcium (which is the main ingredient) can
be obtained from limestone, sand/clay.

For making cement mainly four Raw materials are required:-

1) Limestone
2) Gypsum
3) Laterite / Blue Dust
4) Fly Ash
Limestone is obtained by blasting in mines. In mines there are several
layers of soil, hard rocks, etc. After 5-6 layers company gets limestone
in the form of big rocks. By blasting these big rocks of limestone be get
limestone in smaller form which are easier to transport. Now through
conveyer belt these limestone are moved to plant. These limestone
breaks up into smallest part by grinder. Now this grinded lime stone
transfer to kiln. The temperature of kiln approximately 1400C. in kiln
limestone and other raw materials like Gypsum, Laterite and Fly Ash
were mixed with each other. The high temperature of kiln melts all the
raw materials. After kiln all these materials take a round shape which is
generally known as “Clinker”. Clinker is a semi-finished product of
company. After grinding these clinkers we get final cement which is
used for domestic as well as construction purpose.

Cement product is very fine one kilo (2.2ibs) contains over 300 billion
gram we haven’t actually counted them to see if that is completely
accurate the powder will pass through a slave capable of holding
water.

Applications:-

15
  Suitable for all types of construction like building, roads, bridges,
culverts and cement base products.
 Mass concrete work like dam, machine foundation work.
 Concrete works in environment involving chemicals in soil and
water.
 Sewage and effluent treatment plant.
 All kinds of marine works, like jetty etc.
 Suitable for all construction ensuring higher durability.

Types of Cement:-

Prism cement ltd manufactured two types of cement-

1. PPC
2. OPC
PPC (Portland Pozzolona Cement) with the brand name ‘Champion’ is
general-purpose cement popular for all applications during house
construction by individuals. It is finely ground blend of high quality
clinker and carefully selected high quality Pozzolona material(Fly Ash)
with high fineness an optimum range of chemical composition.

OPC (Ordinary Portland Cement) is made in three grades i.e. 33 Grade,

43 Grade, and 53 Grade cement. Prism Cement’s OPC is in demand for
specialized cement concrete applications like high-rise buildings,
bridges, manufacturing AC sheets, pipes, poles etc.

43 Grade:-

Features:-

 Achieve more than the specified strength as per the relevant IS

code through proper adjustment in the chemical composition.
 High quality limestone deposit result in:

16
 - Higher strength of cement.
- Moderate sulphate resisting properties.
- Lower level of chloride concentration
 Efficient quality control and high level of process parameter
results in reduced free lime, low insoluble residue and loss on
ignition.
Applications:-

Optimally higher strength of cement makes it suitable for:

 All General and semi specialized construction works like plain

and reinforced cement concrete works, brick and stone masonry,
plastering and flooring.
 Manufacturing of concrete pipes, blocks, tiles and poles.
 Suitable for applications like pre-cast, pre stressed and slipform
construction work.
 Also suitable for all types of specialized concrete repair works
like gunniting etc.

Grade 53:-

Features:-

 Higher strength than 43 Grade is achieved through further

improvement in the raw meal chemical composition and also
grinding finer than 43 Grade cement.
 High quality limestone deposit result in
- Higher strength of cement.

17
 - Moderate sulphate resisting properties.
- Lower level of chloride concentration.
 Efficient quality control and high level of process parameter
results in reduced free lime, low insoluble residue and loss on
ignition.
 Optimally higher fineness results in early strength improvement.
 Closed circuit cement grinding system using high efficiency
separator controls the particle size distribution resulting proper
hydration character.
Applications:-

 High strength of cement makes it suitable for:

 Making high grade concrete with proper mix design.
 Early form works removal due to high early strength
development result in quicker construction.
 Optimally higher fineness gives better cohesiveness, improved
workability resulting denser concrete and superior surface finish.
 Economical usage of cement due to high strength through proper
concrete mix design.
 All type of plain and R.C.C., semi and specialized construction
work, like bridges, culverts, slipform work, pre-stressed pipe /
poles etc.
 Also suitable for all types of specialized concrete repair work like
gunniting etc.

18
19
20
 Products

Prism Champion Cement is a finely ground blend of high

quality clinker and carefully selected high quality Pazzolonic
material (Fly Ash) with high fineness and optimum range of
chemical Composition.

Careful selection of Pozzolona is one of the crucial factor

for the superiority of Prism Champion Cement.

The other crucial factors are:

 Optimum dosage of Pozzolona to ensure high level of 28

days strength.
 Balancing the fineness and the reactivity of Pozzolona to
ensure proper hydration character, thus ensuring sustained
strength gain over long period without sacrificing on the
early age strength.
 Low heat of hydration helps in prevention of cracks
ensuring durability of structure.
 Also ensures durability of structure even in adverse
environment condition.

 Low heat of hydration helps in prevention of cracks

21
Prism Cement manufactures and markets Portland Pozzollana Cement (PPC)
with the brand name ‘Champion’ and the full range of Ordinary Portland
Cement (OPC) of 33, 43 and 53 Grades.

‘Champion’ Prism’s largest selling product is a general-purpose cement

popular for all applications during house construction by individuals. Prism
Cement’s OPC is in demand for specialised cement concrete applications like
high-rise buildings, bridges, manufacturing AC sheets, pipes, poles etc.

22
Highlights & Features

Highlights of Plant Design Features:-

 The plant presently capable of producing 6800MT clinker per day

is all set to be increased to 15800MT per day with the expansion
work by September 2010.
 The capacity will further be increased to 24800MT per day once
the work on Andhra Pradesh Plant is commissioned by the year
2011.

Some special Design Features of our Plant:-

 The entire cement manufacturing process at all Prism Cement

Plant represents the latest relevant state-of-the-art technology.
 Our all Plant equipments are supplied by M/s F.L. Smidth & Co.,
Denmark and its subsidiaries, Ventomatic; Krupp Industries Ltd.,
ABB Seimens and Cromption Greaves.
 Computerized mining activities using three dimensional imaging
for optimum blending of raw material.
 The Vertical Roller Press mill for efficient grinding of raw meal.
 Six Stage low pressure drop pre-heater for lower power
consumption.

23
 Online computerized quality control by x-ray spectrometer to
ensure raw meal control and consistency from raw meal to final
product cement.
 Fuzzy logic control for kiln and cement mill to ensure
instantaneous corrective response through computer based
control system.
 A combination of Roller Press and Boll Mill for improved fresh
grinding of cement.
 Quality grinding through closed circuit grinding system.
 Pollution control system e.g. ESP and Bag filters for all Plant
Building to meet stringent pollution control requirement.
 All Electronic Packers each capable of packing accurately 120MT
of finished cement per hour.
 Automatic Truck Loader each capable of loading 15MT of cement
in 10 minutes.
 Wagon loader each capable of loading one full rake in 5 hours.
 Total self reliance in power requirement through DG Sets.

24
25
Company Vision and Mission
Vision :-

To be acknowledged as a leading player in the

industry
with the highest level of integrity

Mission :-

• State of the art cement plants

• Transparent dealings with all stakeholders
• Committed to the principles of good corporate
governance

26
27
WORKING CAPITAL - Meaning of Working

Capital

Capital required for a business can be classified under two

main categories via,

1) Fixed Capital

2) Working Capital

Every business needs funds for two purposes for its

establishment and to carry out its day- to-day operations.
Long terms funds are required to create production
facilities through purchase of fixed assets such as p&m,
land, building, furniture, etc. Investments in these assets
represent that part of firm’s capital which is blocked on
permanent or fixed basis and is called fixed capital. Funds
are also needed for short-term purposes for the purchase
of raw material, payment of wages and other day – to- day
expenses etc.

These funds are known as working capital. In

simple words, working capital refers to that part of the
firm’s capital which is required for financing short- term or
current assets such as cash, marketable securities, debtors
& inventories. Funds, thus, invested in current assts keep
revolving fast and are being constantly converted in to
cash and this cash flows out again in exchange for other
current assets. Hence, it is also known as revolving or
circulating capital or short term capital.

28
CONCEPT OF WORKING CAPITAL

There are two concepts of working capital:

1. Gross working capital

2. Net working capital

The gross working capital is the capital invested in the

total current assets of the enterprises current assets are
those

Assets which can convert in to cash within a short

period normally one accounting year.

CONSTITUENTS OF CURRENT ASSETS

1) Cash in hand and cash at bank

2) Bills receivables

3) Sundry debtors

4) Short term loans and advances.

5) Inventories of stock as:

a. Raw material

b. Work in process

29
 c. Stores and spares

d. Finished goods

6. Temporary investment of surplus funds.

7. Prepaid expenses

8. Accrued incomes.

9. Marketable securities.

In a narrow sense, the term working capital refers

to the net working. Net working capital is the
excess of current assets over current liability, or,
say:

WORKING CAPITAL = CURRENT ASSETS – CURRENT

LIABILITIES.

Net working capital can be positive or negative.

When the current assets exceeds the current
liabilities are more than the current assets. Current
liabilities are those liabilities, which are intended to
be paid in the ordinary course of business within a
short period of normally one accounting year out of
the current assts or the income business.

30
CONSTITUENTS OF CURRENT LIABILITIES

1. Accrued or outstanding expenses.

2. Short term loans, advances and deposits.

3. Dividends payable.

4. Bank overdraft.

5. Provision for taxation , if it does not amt. to

app. Of profit.

6. Bills payable.

7. Sundry creditors.

The gross working capital concept is financial or going

concern concept whereas net working capital is an
accounting concept of working capital. Both the concepts
have their own merits.

The gross concept is sometimes preferred to the concept of

working capital for the following reasons:

1. It enables the enterprise to provide correct

amount of working capital at correct time.

2. Every management is more interested in

total current assets with which it has to

31
 operate then the source from where it is
made available.

3. It take into consideration of the fact every

increase in the funds of the enterprise would
increase its working capital.

4. This concept is also useful in determining

the rate of return on investments in working
capital. The net working capital concept,
however, is also important for following
reasons:

• It is qualitative concept, which indicates the

firm’s ability to meet to its operating expenses
and short-term liabilities.

• IT indicates the margin of protection

available to the short term creditors.

• It is an indicator of the financial soundness

of enterprises.

• It suggests the need of financing

a part of working capital

requirement out of the permanent sources of

funds

32
CLASSIFICATION OF WORKING CAPITAL

Working capital may be classified in to ways:

o On the basis of concept.

o On the basis of time.

On the basis of concept working capital can be

classified as gross working capital and net working
capital. On the basis of time, working capital may
be classified as:

 Permanent or fixed working capital.

 Temporary or variable working capital

PERMANENT OR FIXED WORKING CAPITAL

Permanent or fixed working capital is minimum amount

which is required to ensure effective utilization of fixed
facilities and for maintaining the circulation of current
assets. Every firm has to maintain a minimum level of raw
material, work- in-process, finished goods and cash
balance. This minimum level of current assts is called

33
 permanent or fixed working capital as this part of working
is permanently blocked in current assets. As the business
grow the requirements of working capital also increases
due to increase in current assets.

TEMPORARY OR VARIABLE WORKING CAPITAL

Temporary or variable working capital is the amount of

working capital which is required to meet the seasonal
demands and some special exigencies. Variable working
capital can further be classified as seasonal working capital
and special working capital. The capital required to meet
the seasonal need of the enterprise is called seasonal
working capital. Special working capital is that part of
working capital which is required to meet special
exigencies such as launching of extensive marketing for
conducting research, etc.

Temporary working capital differs from permanent working

capital in the sense that is required for short periods and
cannot be permanently employed gainfully in the business.

IMPORTANCE OR ADVANTAGE OF ADEQUATE WORKING

CAPITAL

 SOLVENCY OF THE BUSINESS: Adequate

working capital helps in maintaining the solvency of
the business by providing uninterrupted of
production.

34
 Goodwill: Sufficient amount of working capital
enables a firm to make prompt payments and makes
and maintain the goodwill.

 Easy loans: Adequate working capital leads to

high solvency and credit standing can arrange loans
from banks and other on easy and favorable terms.

 Cash Discounts: Adequate working capital also

enables a concern to avail cash discounts on the
purchases and hence reduces cost.

 Regular Supply of Raw Material: Sufficient

working capital ensures regular supply of raw
material and continuous production.

 Regular Payment Of Salaries, Wages And

Other Day TO Day Commitments: It leads to

the satisfaction of the employees and raises the
morale of its employees, increases their efficiency,
reduces wastage and costs and enhances production
and profits.

 Exploitation Of Favorable

Market Conditions: If a firm is having adequate

working capital then it can exploit the favorable
market conditions such as purchasing its
requirements in bulk when the prices are lower and
holdings its inventories for higher prices.

35
 Ability To Face Crises: A concern can face the
situation during the depression.

 Quick And Regular Return On

Investments: Sufficient working capital enables a

concern to pay quick and regular of dividends to its
investors and gains confidence of the investors and
can raise more funds in future.

 High Morale: Adequate working capital brings an

environment of securities, confidence, high morale
which results in overall efficiency in a business.

EXCESS OR INADEQUATE WORKING

CAPITAL

Every business concern should have adequate amount

of working capital to run its business operations. It
should have neither redundant or excess working capital
nor inadequate nor shortages of working capital. Both
excess as well as short working capital positions are bad
for any business. However, it is the inadequate working
capital which is more dangerous from the point of view
of the firm.

DISADVANTAGES OF REDUNDANT OR EXCESSIVE

WORKING CAPITAL

36
1. Excessive working capital means ideal
funds which earn no profit for the firm and
business cannot earn the required rate of
return on its investments.

2. Redundant working capital leads to

unnecessary purchasing and accumulation
of inventories.

3. Excessive working capital implies

excessive debtors and defective credit
policy which causes higher incidence of
bad debts.

4. It may reduce the overall efficiency of the

business.

5. If a firm is having excessive working

capital then the relations with banks and
other financial institution may not be
maintained.

6. Due to lower rate of return n investments,

the values of shares may also fall.

7. The redundant working capital gives rise

to speculative transactions

37
DISADVANTAGES OF INADEQUATE WORKING

CAPITAL

Every business needs some amounts of working capital.

The need for working capital arises due to the time gap
between production and realization of cash from sales.
There is an operating cycle involved in sales and realization
of cash. There are time gaps in purchase of raw material
and production; production and sales; and realization of
cash.

Thus working capital is needed for the following purposes:

• For the purpose of raw material, components and

spares.

• To pay wages and salaries

• To incur day-to-day expenses and overload costs

such as office expenses.

• To meet the selling costs as packing, advertising,

etc.

• To provide credit facilities to the customer.

38
• To maintain the inventories of the raw material,
work-in-progress, stores and spares and finished
stock.

For studying the need of working capital in a business,

one has to study the business under varying
circumstances such as a new concern requires a lot of
funds to meet its initial requirements such as promotion
and formation etc. These expenses are called
preliminary expenses and are capitalized. The amount
needed for working capital depends upon the size of the
company and ambitions of its promoters. Greater the
size of the business unit, generally larger will be the
requirements of the working capital.

The requirement of the working capital goes on

increasing with the growth and expensing of the
business till it gains maturity. At maturity the amount of
working capital required is called normal working
capital.

There are others factors also influence the need of

working capital in a business.

39
FACTORS DETERMINING THE WORKING CAPITAL

REQUIREMENTS

1. NATURE OF BUSINESS: The

requirements of working is very limited in public
utility undertakings such as electricity, water
supply and railways because they offer cash sale
only and supply services not products, and no
funds are tied up in inventories and receivables.
On the other hand the trading and financial firms
requires less investment in fixed assets but have
to invest large amt. of working capital along with
fixed investments.

2. SIZE OF THE BUSINESS: Greater the

size of the business, greater is the requirement of
working capital.

3. PRODUCTION POLICY: If the policy is to

keep production steady by accumulating
inventories it will require higher working capital.

40
 4. LENTH OF PRDUCTION CYCLE: The
longer the manufacturing time the raw material
and other supplies have to be carried for a longer
in the process with progressive increment of labor
and service costs before the final product is
obtained. So working capital is directly
proportional to the length of the manufacturing
process.

5. SEASONALS VARIATIONS: Generally,

during the busy season, a firm requires larger
working capital than in slack season.

6. WORKING CAPITAL CYCLE: The

speed with which the working cycle completes one
cycle determines the requirements of working
capital. Longer the cycle larger is the requirement
of working capital.

DEBTORS

CASH FINISHED GOODS

RAW MATERIAL WORK IN PROGRESS

41
7. RATE OF STOCK TURNOVER:
There is an inverse co-relationship between the
question of working capital and the velocity or
speed with which the sales are affected. A firm
having a high rate of stock turnover wuill needs
lower amt. of working capital as compared to a
firm having a low rate of turnover.

8. CREDIT POLICY: A concern that

purchases its requirements on credit and sales its
product / services on cash requires lesser amt. of
working capital and vice-versa.

9. BUSINESS CYCLE: In period of boom,

when the business is prosperous, there is need for
larger amt. of working capital due to rise in sales,
rise in prices, optimistic expansion of business,
etc. On the contrary in time of depression, the
business contracts, sales decline, difficulties are
faced in collection from debtor and the firm may
have a large amt. of working capital.

10. RATE OF GROWTH OF

BUSINESS: In faster growing concern, we shall

require large amt. of working capital.

11. EARNING CAPACITY AND

DIVIDEND POLICY: Some firms have more

earning capacity than other due to quality of their

42
 products, monopoly conditions, etc. Such firms
may generate cash profits from operations and
contribute to their working capital. The dividend
policy also affects the requirement of working
capital. A firm maintaining a steady high rate of
cash dividend irrespective of its profits needs
working capital than the firm that retains larger
part of its profits and does not pay so high rate of
cash dividend.

12. PRICE LEVEL CHANGES: Changes in

the price level also affect the working capital
requirements. Generally rise in prices leads to
increase in working capital.

OTHER FACTORS: These are:

 Operating efficiency.

 Management ability.

 Irregularities of supply.

 Import policy.

 Asset structure.

 Importance of labor.

 Banking facilities, etc.

43
MANAGEMENT OF WORKING CAPITAL

Management of working capital is concerned with the

problem that arises in attempting to manage the
current assets, current liabilities. The basic goal of
working capital management is to manage the
current assets and current liabilities of a firm in such
a way that a satisfactory level of working capital is
maintained, i.e. it is neither adequate nor excessive
as both the situations are bad for any firm. There
should be no shortage of funds and also no working
capital should be ideal. WORKING CAPITAL
MANAGEMENT POLICES of a firm has a great on its
probability, liquidity and structural health of the
organization. So working capital management is
three dimensional in nature as

1. It concerned with the formulation of policies

with regard to profitability, liquidity and risk.

2. It is concerned with the decision about the

composition and level of current assets.

3. It is concerned with the decision about the

composition and level of current liabilities.

44
WORKING CAPITAL ANALYSIS

As we know working capital is the life blood and the

centre of a business. Adequate amount of working
capital is very much essential for the smooth running
of the business. And the most important part is the
efficient management of working capital in right
time. The liquidity position of the firm is totally
effected by the management of working capital. So, a
study of changes in the uses and sources of working
capital is necessary to evaluate the efficiency with
which the working capital is employed in a business.
This involves the need of working capital analysis.

The analysis of working capital can be conducted

through a number of devices, such as:

1. Ratio analysis.

2. Fund flow analysis.

3. Budgeting.

1. RATIO ANALYSIS

45
A ratio is a simple arithmetical expression one
number to another. The technique of ratio analysis
can be employed for measuring short-term liquidity
or working capital position of a firm. The following
ratios can be calculated for these purposes:

1. Current ratio.

2. Quick ratio

3. Absolute liquid ratio

4. Inventory turnover.

5. Receivables turnover.

6. Payable turnover ratio.

7. Working capital turnover ratio.

8. Working capital leverage

9. Ratio of current liabilities to tangible net worth.

2. FUND FLOW ANALYSIS

Fund flow analysis is a technical device designated to

the study the source from which additional funds
were derived and the use to which these sources
were put. The fund flow analysis consists of:

a. Preparing schedule of changes of working

capital

46
 b. Statement of sources and application of
funds.

It is an effective management tool to study the

changes in financial position (working capital)
business enterprise between beginning and ending of
the financial dates.

3. WORKING CAPITAL BUDGET

A budget is a financial and / or quantitative

expression of business plans and polices to be
pursued in the future period time. Working capital
budget as a part of the total budge ting process of a
business is prepared estimating future long term and
short term working capital needs and sources to
finance them, and then comparing the budgeted
figures with actual performance for calculating the
variances, if any, so that corrective actions may be
taken in future. He objective working capital budget
is to ensure availability of funds as and needed, and
to ensure effective utilization of these resources. The
successful implementation of working capital budget
involves the preparing of separate budget for each
element of working capital, such as, cash, inventories
and receivables etc.

47
 Ratio Analysis

Introduction:-

48
 The financial position of an organization is contained
in its profit and loss account and balance sheet. The figure contained in
these statements are absolute. The profit and loss account presents
the summery of items relating to the revenue and expenses of a firm
during a particular period of time. A balance sheet reports the firm’s
assets and liabilities at a point of time. They do not show the nature of
transactions entered into during the period to finance the firm’s
operations. Financial statements are prepared primarily for decision-
making. They play an important role in setting the framework of
managerial decisions. But the information provided in the financial
statements are not an end in itself as no meaningful conclusion can be
drawn from these statements alone. However, the information
provided in the financial statements are of immense use in making
decisions through analysis and interpretations of financial statements.

There are various methods of financial statement

analysis of these, Ratio Analysis is the most widely used method. It is
the process of establishing and interpreting quantitative relationship
between figures and groups of figures. With the help of ratios, the
financial statements can be analyzed more clearly and decisions can
be made more logically.

Meaning of Ratio:-

A ratio is a simple arithmetic expression of the

relationship of one number to another. In other words, it is only a
comparison of the numerator with the denominator. Ratios are
designed to show how one number is related to another.

Ratio makes the relating information comparable.

A single figure by itself has no meaning, but when expressed in terms

49
of a related figure. It yields significant inferences. Thus, ratios are
relative figures reflecting the relationship between variables.

Definition:-

1. “A ratio is an expression of the quantitative relationship between

two numbers.”
-
Wixon and Bedfort

2. ”Ratio analysis of financial statement is a study of relationship

among various financial factors in a business, as disclosed by a
single set of statements and study of the trend of these factors
as shown in series of statements”

-Myers

Modes of expression:-

There are various modes of expression of ratios, which are as follows:

i. Rate- It is the ratio between two numerical facts over a period of

time. For example, stock turnover is 4 times in a year.
ii. Proportion or pure ratio- It is calculated by simple division of
one number by another. For example, current assets are
Rs.20000 and current liabilities are Rs.10000, we can say that
current assets to current liabilities are 2:1.
iii. Percentage- It is special type of rate expressing the relationship
in hundred. It is calculated by multiplying the quotient by 100.
For example, gross profit is Rs.25000 and net sales are
Rs.100000 we can say that gross profit is 25%.

Steps in Ratio Analysis:-

Following are the steps involved in the ratio analysis:

50
 i. Selection of relevant data from the financial statements
depending upon the objective of the analysis.
ii. Calculation of appropriate ratios from the above data.
iii. Comparison of the calculated ratios with the ratios of the same
firm or the ratio of some other firms or the comparison with
ratios of the industry to which the firm belongs.
iv. Analysis and interpretation of the ratios.

Objectives and significance of Ratio Analysis:-

The importance of the ratio analysis can be summarized in the

following points:

 Helps in decision-making
 Helps in financial forecasting and planning
 Evaluation of efficiency
 Helps in co-ordination
 Helps in control
 Intra-firm comparison
 Measures financial solvency
 Utility to employees
 Utility to Government

Limitations of Ratio Analysis:-

These are following:

 Lack of proper standards

 Changes in accounting procedure
 Limited use of single ratio
 Personal Bias

51
 Limitations of accounting records
 Qualitative factors are ignored
 Window dressing
 Change in policies

52
 Types of ratios
Financial classification of Ratios

53
CLASSIFICATION OF RATIO

Ratio may be classified into the four categories as follows:

A. Liquidity Ratio

a. Current Ratio

b. Quick Ratio or Acid Test Ratio

B. Leverage or Capital Structure Ratio

a. Debt Equity Ratio

b. Debt to Total Fund Ratio

c. Proprietary Ratio

d. Fixed Assets to Proprietor’s Fund Ratio

e. Capital Gearing Ratio

f. Interest Coverage Ratio

C. Activity Ratio or Turnover Ratio

a. Stock Turnover Ratio

b. Debtors or Receivables Turnover Ratio

c. Average Collection Period

d. Creditors or Payables Turnover Ratio

e. Average Payment Period

f. Fixed Assets Turnover Ratio

g. Working Capital Turnover Ratio

D. Profitability Ratio or Income Ratio

54
(A) Profitability Ratio based on Sales :

a. Gross Profit Ratio

b. Net Profit Ratio

c. Operating Ratio

d. Expenses Ratio

(B) Profitability Ratio Based on Investment :

I. Return on Capital Employed

II. Return on Shareholder’s Funds :

a. Return on Total Shareholder’s Funds

b. Return on Equity Shareholder’s Funds

c. Earning Per Share

d. Dividend Per Share

e. Dividend Payout Ratio

f. Earning and Dividend Yield

g. Price Earning Ratio

Ratios are also classified differently on different bases. The mostly

used one is the financial classification under which the ratios are
broadly divided into the following five classes:-

55
 • Liquidity Ratios concerned with the short term solvency of the
concern or its ability to meet financial obligation on their due
dates.
• Activity Ratios concerning efficiency of management of various
assets by the concern.
• Leverage Ratios concerning stake of the owners in the business
in relation to outside borrowing or long term solvency.
• Coverage Ratios concerned with the ability of the company to
meet fixed commitments such as interest on term loans and
divided on preference shares.
• Profitability Ratios concerned with the profitability of the
concern.

Liquidity Ratios:-

• Current Ratio:- It is calculated by dividing the total of current

assets by total current liabilities. Thus,
Current Ratio= Current Assets

Current Liability

Current assets include cash and those assets which can be easily
converted into cash within a short period of time, generally one
year. Inventories, debtors, bills receivable, marketable securities,
prepaid expenses etc. are include in current assets. Current
liabilities are those obligations which are payable within a short
period of time, generally one year. It includes outstanding expenses,
creditors, bill payable, bank overdraft, short term advances etc.

• Quick /Acid Test /Liquid Ratio /Near Money Ratio:-

Quick Ratio= Quick or Liquid Assets

56
 Current Liabilities

It establishes a relationship between liquid assets and current

liabilities. An asset is liquid, if it can be converted into cash
immediately without a loss of value. Cash is the most liquid assets.

Liquid Assets=Current Assets - (Stock and Prepaid

expenses)

Liquid Liabilities=Current Liabilities – Bank Overdraft

• Absolute Liquidity Ratio / Super Quick Ratio:-

Absolute Liquidity Ratio = Cash + Bank + Short Term
Securities

Current Liabilities

The ideal absolute liquidity ratio is taken as 1: 2 or 0.5:1

• Cash Ratio:-
Cash Ratio = Cash + Bank

Current Liabilities

Activity Ratios:-

• Debtor’s velocity:-
Average balance of debtors

Debtor’s velocity = x
365

Credit sale during the year

It is expressed in number of days;

57
(Or)

Average balance of debtors

Debtor’s velocity= x 12*

Credit sale during the year

(*52 if result require in number of weeks)

The ratio obtained should be compared with that of other similar

units. If the ratio of the company being studied is greater (say, 10
weeks as against 6 weeks for the industry), it indicates that the
company is allowing longer than the usual credit period. This may
be justified in the case of new companied or existing companies
entering into new ventures because initially they may have to
extend longer credits to capture the market. In other cases, the
position needs a deeper study; it is possible that many unrealizable
and long pending items are include in debtors. The companies
connection machineries may need gearing up. The chances of larger
bad debts are imminent.

• Creditors velocity:-
Average Creditors

Creditors velocity= x 365

[or 52 or 12]

Credit Purchases

When the opening balance of creditors and the figure of credit

purchases are not available, the ratio can be computed as follows:

Creditors

Creditors velocity= x 365 [or

52 or 12]

58
 Purchases

A high ratio as compared to that obtaining in the industry (e.g., 12

weeks as compared to 8 weeks for the industry) may mean that;

 The company is unable to pay its debts and is therefore taking

longer than usual time to pay its creditors; or
 The company is enjoying good reputation in the market and
therefore the supplier are extending more credit; or
 The company may be a near monopoly consumer and the
supplier is agreeable to the credit terms dedicated by the
company.
Reversely, a lower ratio would mean any of the following:

 The company has a comfortable financial position and its paying

off the creditors promptly; or
 The creditors may offer discount on early payments to avail of
which the company is paying early. The company may do so
provided the cost of borrowing is less than the discount offered;
or
 The company does not enjoy good reputation in the market and
its creditors have restricted credits; or
 The supplier may be monopolists dictating terms to the
company.
The real reason should be found by going into the facts of
individual cases. This ratio should be studied along with debtors
velocity and current ratio to judge the real situation.

• Inventory velocity:-
Cost of good sold

Inventory Turnover=
or

59
 Average Inventory

Net Sales

Inventory Turnover =

Average Inventory

Cost of good sold= net Sales – Gross Profit

Or

Opening Stock + Purchases + Direct Expenses – Closing Stock

Opening Stock + Closing Stock

Average Inventory=

The ratio is usually expressed as number of times the stock has

turned over. Inventory management forms the crucial part of
working capital management. As a major portion of the bank
advance is for the holding of inventory, a study of the adequacy of
abundance of the stock held by the company in relation to its
production needs requires to be made carefully by the bank.

A higher ratio may mean (higher turnover or loss holding periods):

 The stocks are moving well and there is efficient inventory

management; or
 The stocks are purchased in small quantities. This may be
harmful if sufficient quantities are not available for
production needs; secondly, buying in small quantities may
increase the cost.

60
Contrarily, a lower ratio (i.e., lower turnover of longer holding period
may be an index of (1) Accumulation of large stocks not commensurate
with production requirements, (2) A reflection of inefficient inventory
management or over-valuation of stocks for balance sheet purposes; or
stagnation in sales, if stocks comprise mostly finished goods.

• Working Capital Turnover:-

Net Sales

Working Capital Turnover =

Net Working Capital

The use of this ratio is two fold. First, it can be used to measure the
efficiency of the use of working capital in the unit. Secondly, it can
be used as a base for measuring the requirements of working
capital for an expected increase in sales.

• Current Assets Turnover Ratio:-

Net Sales

Current Assets Turnover Ratio =

Current Assets

The ratio is calculated to ascertain the efficiency of use of current

assets of the concerns. With an increase in sales, current assets are
expected to increase. However, an increase in the ratio shows that
current assets turned over faster resulting in higher sales for a
given investments in current assets. Higher ratio is generally an
index of better efficiency and profitability of the concern. This ratio
gives a general impression about the adequacy of working capital in
reaction to sales.

• Fixed Assets Turnover Ratio:-

Net Sales

61
 Fixed Assets Turnover Ratio =

Fixed Assets

The ratio shows the efficiency of the concern in using its fixed assets.
Higher ratio indicate higher efficiency because every rupee invested in
fixed assets generates higher sales. A lower ratio may indicate
efficiency of assets. It may also be indicative of under utilizations or
non-utilization of certain assets. Thus with the help of this ratio, it is
possible to identify such underlined or unutilized assets and arrange for
their disposal.

Leverage Ratio:-

• Debt-Equity Ratio:-
Long term Liabilities

Debt-Equity Ratio =

Equity (or networth)

This is a measure of owner’s stake in the business. The proprietors

may desire more of funds to be from borrowings because it carries
two main advantages. First, their stake in the venture is reduced
and correspondingly their risk also. Secondly, interest on borrowing
is allowed as expenditure in computing taxable profits but not
dividend shares. The tax is computed on the profits before any
dividend is declared. But considerable contribution from the
proprietors is necessary from the creditors point of view to sustain
the interest of the proprietors in the venture and also as a margin of
safety of the creditors. Besides, excessive liabilities tend to cause
insolvency.

Generally a ratio 2: 1 (i.e., 2 units of debt for 1 unit of equity)

is considered normal, but in certain cases relaxations are allowed.

62
 • Total-Indebtedness Ratio:-
Long term Liabilities +
Current Liabilities

Total-Indebted Ratio = Equity

This ratio should be watched for a period of 3 to 5 years to see its

trend, if declining or decreasing. A declining trend in the ratio is a
welcome sign as it shows that the company is augmenting its own
sources of funds by plaguing back profit or by reducing its dependence
on outside borrowing by repaying them. On the other hand, an
increasing trend in the ratio should be carefully looked into by the
banker. Similar to the debt-equity ratio, there is no standard single
ratio of total indebtedness that can be applied to all industries. But a
ratio of 4:1 is considered normal. This ratio supplements the
information supplied by the debt-equity ratio. A company may have
declining debt-equity ratio but total outside liabilities may not decrease
because of increased borrowing on short term. This will be revealed by
the present ratio.

• Proprietary Ratio:-
Total Assets

Proprietary Ratio = x 100

Total Tangible Assets

This ratio indicates the general financial strength of the concern. It is a

test of the soundness of the financial structure of the concern. The
ratio is of great significance to creditors since it enables them to find
out the proportion of shareholders funds in the total investment in the

63
business. In case of companies which depend entirely on owned funds
and have no outside liabilities, the ratio will be 100%. A high ratio is
welcome to the creditors because it secures their position by providing
a high margin of safety. A ratio above 50% is generally considered safe
for creditors.

Coverage Ratio:-

• Interest Coverage Ratio:-

EBIT

Interest Coverage Ratio =

Interest

Since, EBIT calculated after depreciation, it can be added back to arrive

at the total funds available for payment of interest. The formula can be
modified as follows:-

EBIT + Depreciation

Interest Coverage Ratio =

Interest

Higher the ratio better is the coverage. The firm may not fail on its
commitments to pay interest even if profits fail substantially.

• Preference Dividend Coverage Ratio:-

PA
T

Preference Dividend Coverage Ratio =

Preference Dividend (1
+ Dividend Rate of Tax)

64
Profitability Ratio:-

• Gross Profit Ratio:-

Gross Profit

Gross Profit Ratio =

x 100

Net Sales

Gross Profit = Net Sales - Cost of good sold

Cost of good sold = Opening Stock + purchases + Direct Expenses –

Closing Stock

Net Sales = Total Sales – Sales Return

A comparison with the standard ratio for the industry will reveal a
picture of the profitability of the concern. Also the ratio may be worked
out for a few years and compared to verify if a steady ratio is
maintained.

• Net profit Ratio:-

Net Profit After Tax

Net profit Ratio =

x 100 (or)

Net Sales

Net Operating Profit

65
 =
x 100

Net Sales

The net profit is calculated after deducting income tax.

• Return on Investments:-
This ratio measures the profits of the concern as percentage
of the total investment made. However, both the important terms
involved, viz., profit and investment, have been interpreted in various
ways and hence the formula used for this ratio varies widely. We shall
adopt the formula

Operating Profits

Return on Investments =
x 100

Total Tangible
Assets

For the purpose of this ratio, the operating profit is calculated by

adding back to net profit: (1) interest paid on the long term borrowings
and debentures; (2) Abnormal and non-recurring losses; (3) Intangible
assets written off. Similarly, from the net profit abnormal and non-
recurring gains are deducted. The idea is to get profit generated out of
total investments made.

The ratio of return on investments is an important ratio in computing

the profitability of the concern. It computes the profitability as against
profits. A company may maintain the profits at absolute value every
year but its efficiency lies in maintaining the same percentage of
profits as compared to the total investment made. When one wants to
analyze an increase or decrease in the rate of return, it can be done by
further analysis of the ratio. Profit is decided by the rapidity with which

66
sales are made (turnover) and the margin of the profit on sales.
Therefore, the ratio can be calculated also as:

Profits
Sales

Return on Investments = x 100 x

Sales
Total Assets

(Margin)
(Turnover)

Profit can be increased by increasing the margin or increasing the

turnover. A further analysis of the different components that enter into
the above will pinpoint the factors that contributed to the increase or
decrease in profits.

Return on investment is also known as Return on Capital Employed.

Capital Employed is used to mean the total investment in the unit, i.e.,
total assets.

• Return on Proprietors funds:-

Net Profit

Return on Proprietors funds = x 100

Net Worth

This ratio serves the requirements of the shareholders specially to

know the return on their investments in the business.

• Earnings / Share:-
Profit After Tax and
Preference Dividend

Earning Per Share =

67
 No. of
equity shares

The numerator indicates the funds available for distribution as dividend

to equity shareholders. As the name indicates the ratio indicates the
earning made by the company per equity share. A comparison with the
ratio for similar companies will indicate whether the company is using
its capital effectively or not.

• Dividend / Share:-
Dividend paid to
equity shareholders

Dividend Per Share =

No. of
equity shares

Not all the earning available for distribution are declared as dividend of
the company. This ratio indicates the actual amount declared as
dividend by the company.

• Dividend Payout Ratio:-

Dividend Per Share

Dividend Payout Ratio =

Earning Per Share

This ratio indicates the actual dividend paid to the shareholders. It

throws light on the dividend policies of the company.

• Price Earning Ratio:-

Market Price Per Share

Price Earning Ratio =

Earning Per Share

68
 Net Income –
Preference Dividend

Earning Per Share =

No. of equity
shares

A higher price earning ratio as compared to that of other companies

shows higher confidence the company enjoys with the public. This ratio
is also used by the investors to know whether the shares of the
company are undervalued or overvalued. Based on this fact they would
decide to purchase the shares at the particular price or not. For
instance, suppose the market price of the shares of the company A is
Rs.80 when it earnings per share is Rs.10. (The price earnings ratio of
the company is 8.) the price earning ratio of the other companies is 9.
based on the general price earnings ratio, the market price of the
shares of company A should be (Rs.10x9) Rs.90. the shares of
company A are undervalued since they are quoted at Rs.80.

• Dividend Yield Ratio:-

Dividend Per Share

Dividend Yield Ratio =

Market Price of Share

Yield is the actual return for the shareholders on the investment. The
dividend is declared on the face value of shares. Thus 20% dividend
declared on a share of the face value of Rs.10 would fetch Rs.2 as
dividend but, if the shareholders has acquired the share from the
market for Rs.40, actual yield will be

= x 100 = 5%

69
 40

• Earning Yield Ratio:-

Earning Per Share

Earning Yield Ratio =

Market Price of Share

This ratio measures the yield earned by the company per share.

70