WORKING CAPITAL

MEANING OF WORKING CAPITAL:Capital required for a business can be classifies under two main categories:

Fixed Capital Working Capital

Every business needs funds for two purposes for its establishments and to carry out day to day operations. Long term funds are required to create production facilities through purchase of fixed assets such as plant and machinery, land and building, furniture etc. Investments in these assets are representing that part of firms capital which is blocked on a permanent or fixed basis and is called fixed capital. Funds are also needed for short term purposes for the purchasing of raw materials, payments 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 firms capital which is required for financing short term or current assets such as cash, marketable securities, debtors and inventories.

CONCEPTS OF WORKING CAPITAL:

There are two concepts of working capital:

Balance Sheet concepts Operating Cycle or circular flow concept

BALANCE SHEET CONCEPT:There are two interpretation of working capital under the balance sheet concept:

Gross Working Capital Net Working Capital

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The term working capital refers to the Gross working capital and represents the amount of funds invested in current assets . Thus, the gross working capital is the capital invested in total current assets of the enterprises. Current assets are those assets which are converted into cash within short periods of normally one accounting year. Example of current assets is:

Constituents of Current Assets:

Cash in hand and Bank balance Bills Receivable Sundry Debtors Short term Loans and Advances Inventories of Stock as: Raw Materials Work in Process Stores and Spaces Finished Goods

Temporary Investments of Surplus Funds Prepaid Expenses Accrued Incomes

The term working capital refers to the net working capital. Net working capital is the excess of current assets over current liabilities or say:

Net Working Capital = Current Assets Current Liabilities.

NET WORKING CAPITAL MAY BE NEGATIVE OR POSITIVE:When the current assets exceed the current liabilities, the working capital is positive and the negative working capital results when 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 of the current assets or the income of the business. Examples of current liabilities are:

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CONSTITUENTS OF CURRENT LIBILITIES:

Bills Payable Sundry Creditors or Account Payable Accrued or Outstanding Expenses Short term Loans, Advances and Deposits Dividends Payable Bank Overdraft Provision for Taxation, If does not amount to appropriation of profits

The gross working capital concept is financial or going concern concept whereas net working capital is an accounting concept of working capital.

OPERATING CYCLE OR CIRCULATING CASH FORMAT:Working Capital refers to that part of firms capital which is required for financing short term or current assets such as cash, marketable securities, debtors and inventories. Funds thus invested in current assets keep revolving fast and being constantly converted into cash and these cash flows out again in exchange for other current assets. Hence it is also known as revolving or circulating capital. The circular flow concept of working capital is based upon this operating or working capital cycle of a firm. The cycle starts with the purchase of raw material and other resources .

And ends with the realization of cash from the sale of finished goods. It involves purchase of raw material and stores, its conversion into stocks of finished goods through work in progress with progressive increment of labor and service cost, conversion of finished stocks into sales, debtors and receivables and ultimately realization of cash and this cycle continuous again from cash to purchase of raw materials and so on. The speed/ time of duration required to complete one cycle determines the requirements of working capital longer the period of cycle, larger is the requirement of working capital.

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Receivable conversion period (RCP)

Cash received form debtors and paid to suppliers of raw materials

Raw material storage conversion period (RMSCP)

Sales of finished goods

Raw materials introduced into process

Finished goods conversion Period (FGCP)

Finished goods produced

Work in process Conversion period (WIPCP)

The gross operating cycle of a firm is equal to the length of the inventories and receivables conversion periods. Thus,

Gross Operating Cycle = RMCP + WIPCP + FGCP + RCPWhere, RMCP = Raw Material Conversion Period WIPCP = Work in- Process Conversion Period FGCP = Finished Goods Conversion Period RCP = Receivables Conversion Period However, a firm may acquire some resources on credit and thus defer payments for certain period. In that case, net operating cycle period can be calculated as below:

Net Operating Cycle Period = Gross Operating Cycle Period Payable Deferral period

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Further, following formula can be used to determine the conversion periods. Raw Material Conversion Period = Average Stock of Raw Material. Raw Material Consumption per day Work in process Conversion Period = Average Stock of Work-in-Progress Total Cost of Production per day Finished Goods Conversion Period = Average Stock of Finished Goods Total Cost of Goods sold per day Receivables Conversion Period = Average Accounts Receivables Net Credit Sales per day Payable Deferral Period = Average Payable Net Credit Purchase per day

CLASSIFICATION OR KIND OF WORKING CAPITAL:Working capital may be classified in two ways: On the basis of concept On the basis of time

On the basis of concept, working capital is classified as;

Gross working capital Net working capital

The classification is important from the point of view of the financial manager. On the basis of time, working capital may be classified as:

Permanent or Fixed working capital Temporary or Variable working capital.

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Kinds of Working Capital

On the basis of concept

On the basis of time

Gross Working Capital

Net Working Capital

Permanent or Fixed Working Capital

Temporary or Variable Working Capital

Reserve Working Capital

Regular Working Capital

Seasonal Working Capital

Special Working Capital

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1. PERMANENT OR FIXED WORKING CAPITAL:Permanent or fixed working capital is the minimum amount which is required to ensure effective utilization of fixed facilities and for maintaining the circulation of current assets. There is always a minimum level of current assets which is continuously required by the enterprises to carry out its normal business operations.

2. TEMPRORAY 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.Varibles working capital can be further classified as second working capital and special working capital. The capital required to meet the seasonal needs of the enterprises is called the seasonal working capital.

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.

IMPORATNCE OR ADVANTAGE OF ADEQUATE WORKING CAPITAL:Working capital is the life blood and nerve centre of a business . just a circulation of a blood is essential in the human body for maintaining life, working capital is very essential to maintain the smooth running of a business. No business can run successfully without an adequate amount of working capital. The main advantages of maintaining adequate amount of working capital are as follows:

Solvency of the Business Goodwill Easy Loans Cash discounts Regular supply of Raw Materials Regular payments of salaries, wages & other day to day commitments. Exploitation of favorable market conditions Ability of crisis Quick and regular return on investments [8]

THE NEED OR OBJECTS OF WORKING CAPITAL:The need for working capital cannot be emphasized. Every business needs some amount of working capital. The need of working capital arises due to the time gap between production and realization of cash from sales. There is an operating cycle involved in the sales and realization of cash. There are time gaps in purchase of raw materials and production, production and sales, And sales, and realization of cash, thus , working capital is needed for the following purposes: For the purchase of raw materials , components and spaces To pay wages and salaries To incur day to day expenses and overhead costs such as fuel, power and office expenses etc. To meet the selling costs as packing, advertising etc. To provide credit facilities to the customers. To maintain the inventories of raw materials, work in- progress, stores and spares and finished stock.

FACTORS DETERMING THE WORKING CAPITAL REQUIRMENT:The working capital requirements of a concern depend upon a large number of factors such as nature and size of the business, the characteristics of their operations, the length of production cycle , the rate of stock turnover and the state of economic situation. However the following are the important factors generally influencing the working capital requirements.

NATURE OR CHARACTERSTICS OF A BUSINESS:

The nature and the working capital

requirement of enterprises are interlinked. While a manufacturing industry has a long cycle of operation of the working capital, the same would be short in an enterprises involve in providing services. The amount required also varies as per the nature, an enterprises involved in production would required more working capital then a service sector enterprise.

MANAFACTURE PRODUCTION POLICY: Each enterprises in the manufacturing sector has its own production policy, some follow the policy of uniform production even if the demand varies from time to time and other may follow the principles of demand based production in which production is based on the demand during the particular phase of time. Accordingly the working capital requirements vary for both of them.

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OPERATIONS: The requirement of working capital fluctuates for seasonal business. The working capital needs of such business may increase considerably during the busy season and decrease during the dull season.

MARKET CONDITION: If there is a high competition in the chosen project category then one shall need to offer sops like credit, immediate delivery of goods etc for which the working capital requirement will be high. Otherwise if there is no competition or less competition in the market then the working capital requirements will be low.

AVABILITY OF RAW MATERIAL: If raw material is readily available then one need not maintain a large stock of the same thereby reducing the working capital investment in the raw material stock . On other hand if raw material is not readily available then a large inventory stocks need to be maintained, there by calling for substantial investment in the same.

GROWTH AND EXAPNSION: Growth and Expansions in the volume of business result in enhancement of the working capital requirements. As business growth and expands it needs a larger amount of the working capital. Normally the needs for increased working capital funds processed growth in business activities.

PRICE LEVEL CHANGES : Generally raising price level require a higher investment in the working capital. With increasing prices, the same levels of current assets needs enhanced investments.

MANAFACTURING CYCLE: The manufacturing cycle starts with the purchase of raw material and is completed with the production of finished goods. If the manufacturing cycle involves a longer period the need for working capital would be more. At time business needs to estimate the requirement of working capital in advance for proper control and management. The factors discussed above influence the quantum of working capital in the business. The assessment of the working capital requirement is made keeping this factor in view. Each constituents of the working capital retains it form for a certain period and that holding period is determined by the factors discussed above. So for correct assessment of the working capital requirement the duration at various stages of the working capital cycle is estimated. Thereafter proper value is assigned to the respective current assets, depending on its level of completion. The basis for assigning value to each component is given below:

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COMPONENTS OF WORKING CAPITAL Stock of Raw Material Stock of Work -in- Process Stock of finished Goods Debtors Cah

BASIS OF VALUATION Purchase of Raw Material At cost of Market value which is lower Cost of Production Cost of Sales or Sales Value Working Expenses

Each constituent of the working capital is valued on the basis of valuation Enumerated above for the holding period estimated. The total of all such valuation becomes the total estimated working capital requirement. The assessment of the working capital should be accurate even in the case of small and micro enterprises where business operation is not very large. We know that working capital has a very close relationship with day-to-day operations of a business. Negligence in proper assessment of the working capital, therefore, can affect the day-to-day operations severely. It may lead to cash crisis and ultimately to liquidation. An inaccurate assessment of the working capital may cause either underassessment or over-assessment of the working capital and both of them are dangerous.

PRINCIPLES OF WORKING CAPITAL MANAGEMENT POLICY:The following are the general principles of a sound working capital management policy:

PRINCIPLES OF WORKING CAPITAL MANAGEMNT POLICY

PRINCIPLES OF RISK VARIATIONS

PRINCIPLES OF COST OF CAPITAL

PRINCIPLES OF EQUITY PRINCIPLES

PRINCIPLES OF MATURITY OF PAYMENTS

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1. PRINCIPLE OF RISK VARAITAION (CURRENT ASSETS POLICY):Risk here refers to the inability of a firm to meet its obligations as and when they become due for payment. Larger investment in current Assets with less dependence on short term borrowings, increase liquidity, reduces risk and thereby decreases the opportunity for gain or loss. On the other hand less investments in current assets with greater dependence on short term borrowings, reduces liquidity and increase profitability. In other words there is a definite inverse relationship between the degree of risk and profitability. In other words, there is a definite inverse relationship between the risk and

profitability. A conservative management prefers to minimize risk by maintaining a higher level of current assets or working capital while a liberal management assumes greater risk by reducing working capital. However, the goal of management should be to establish a suitable trade off between profitability and risk.

2. PRINCIPLES OF COST OF CAPITAL: The various source of raising working capitalfinance have different cost of capital and the degree of risk involved. Generally, higher and risk however the risk lower is the cost and lower the risk higher is the cost. A sound working capital management should always try to achieve a proper balance between these two.

3.PRINCIPLE OF EQUITY POSITION: The principle is concerned with planning the totalinvestments in current assets. According to this principle, the amount of working capital invested in each component should be adequately justified by a firms equity position. Every rupee invested in current assets should contribute to the net worth of the firm. The level of current assets may be measured with the help of two ratios:

1. Current assets as a percentage of total assets and 2. Current assets as a percentage of total sales

While deciding about the composition of current assets, the financial manager may consider the relevant industrial averages.

4. PRINCIPLES OF MATURITY OF PAYMENT: The principle is concerned withplanning the source of finance for working capital. According to the principles, a firm should make every effort to relate maturities of payment to its flow of internally generated funds. Maturity pattern of various current obligations is an important factor in risk assumptions and risk assessments.

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Generally shorter the maturity schedule of current liabilities in relation to expected cash inflows, the greater the inability to meet its obligations in time.

CONSEQUENCES OF UNDER ASSESMENT OF WORKING CAPITAL: Growth may be stunted. It may become difficult for the enterprises to undertake profitable projects due to non availability of working capital. Implementations of operating plans may brome difficult and consequently the profit goals may not be achieved. Cash crisis may emerge due to paucity of working funds. Optimum capacity utilization of fixed assets may not be achieved due to non availability of the working capital. The business may fail to honour its commitment in time thereby adversely affecting its creditability. This situation may lead to business closure. The business may be compelled to by raw materials on credit and sell finished goods on cash. In the process it may end up with increasing cost of purchase and reducing selling price by offering discounts . both the situation would affect profitable adversely. Now avaibility of stocks due to non availability of funds may result in production stoppage. While underassessment of working capital has disastrous implications on business overassesments of working capital also has its own dangerous.

CONSEQUENCES OF OUR OWN ASSESMNET OF WORKING CAPITAL:

Excess of working capital may result in un necessary accumulation of inventories. It may lead to offer too liberal credit terms to buyers and very poor recovery system & cash management. It may make management complacent leading to its inefficiency. Over investment in working capital makes capital less productive and may reduce return on investment. Working Capital is very essential for success of business & therefore needs efficient management and control. Each of the components of working capital needs proper management to optimize profit.

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INVENTORY MANAGEMNT: Inventory includes all type of stocks. For effective workingcapital management, inventory needs to be managed effectively. The level of inventory should be such that the total cost of ordering and holding inventory is the least. Simultaneously stock out costs should be minimized. Business therefore should fix the minimum safety stock level reorder level of ordering quantity so that the inventory costs is reduced and outs management become efficient.

RECEIVABLE MANAGEMENT: Given a choice, every business would prefer selling itsproduce on cash basis. However, due to factors like trade policies , prevailing market conditions etc. Business are compelled to sells their goods on credit. In certain circumstances a business may deliberately extend credit as a strategy of increasing sales. Extending credit means creating current assets in the form of debtors or account receivables. Investment in the type of current assets needs proper and effective management as, it gives rise to costs such as : Cost of carrying receivables Cost of bad debts losses

Thus the objective of any management policy pertaining to accounts receivables would be to ensure the benefits arising due to the receivables are more then the costs incurred for the receivables and the gap between benefit and costs increased resulting in increase profits. An effective control of receivables Help a great deal in properly managing it. Each business should therefore try to find out coverage credit extends to its clients using the below given formula:

Average Credit = (Extend in days)

Total amount of receivable Average credit sale per day

Each business should project expected sales and expected investments in receivable based on various factor, which influence the working capital requirement. From this it would be possible to find out the average credit days using the above given formula. A business should continuously try to monitor the credit days and see that the average. Credit offer to clients is not crossing the budgeted period otherwise the requirement of investment in the working capital would increase and as a result, activities may get squeezed. This may lead to cash crisis.

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CASH BUDGET: Cash budget basically incorporates estimates of future inflow and outflows ofcash cover a projected short period of time which may usually be a year, a half or a quarter year . effective cash management is facilated if the cash budget is further broken down into months, weeks or even a daily basis. There are two components of cash budget are:

1. Cash inflows 2. Cash outflows

The main source for thses flows are given here under:

1. Cash Sales 2. Cash received from debtors 3. Cash received from Loans, deposits etc. 4. Cash receipts other revenue income 5. Cash received from sale of investment or assets.

CASH OUTFLOWS:

1. Cash Purchase2. Cash payments to Creditors 3. Cash payment for other revenue expenditure 4. Cash payment for assets creation 5. Cash payments for withdrawals, taxes. 6. Repayments of Loan etc.

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Table No. 1

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Chart No.1PROPORTION OF EACH CURRENT ASSET IN GROSS WORKING CAPITAL

Advances 1% Investments 0% Others 7% Inventory 9% Debtors 14%

Cash 69%

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5.1 CALCULATION OF WORKING CAPITALNet working capital refers to the difference between current assets and current liabilities. Net working capital is a qualitative concept. 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. Net working capital can be negative or positive. A negative working capital means a negative liquidity and may be harmful for the companys reputation. Net working capital = Current asset Current liability Current asset includes inventories, sundry debtors, cash and bank balance and loans and advances. Current liability includes sundry creditors unclaimed dividend, advances, security deposit and dividend not paid.

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Table No. 2

Calculation of working capitalCurrent Assets(Rs. In Lakhs)

Year

Current Liabilities(Rs. In Lakhs)

Net Working Capital(Rs. In Lakhs)

2007 2008 2009 2010 2011 Average

5283.97 5929.05 6656.07 8209.80 9681.06 7151.99

4799.65 4991.09 5245.37 6437.63 7190.49 5732.85

484.32 937.96 1410.70 1772.17 2490.57 1419.14

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Chart No.2Net Working Capital3000 2500

2000

1500

Net Working Capital

1000

500

0 2007 2008 2009 2010 2011

INFERENCE

The working capital indicated the liquidity position of the firm. A negative liquidity may cause harm to the companys reputation.

The net working capital of the company is showing a positive trend over the period from 2007 to 2011. In the year 2010 2011, the company had a net working capital of 2490.57 (in lakhs). The average working capital of the firm from 2007 to 2011 is 1419.14 lakhs.

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5.2 RATIO ANALYSIS

Ratio analysis is widely used tool for financial analysis. It is defined as the systematic use of ratio to interpret the financial statements so that the strengths and weakness of a firm as well as its historical performance and current financial condition can be determined. The term ratio refers to the numerical or quantitative relationship between two items. LIQUIDITY RATIOS Liquidity ratio measures the ability of the firm to meet its obligations. WORKING CAPITAL RATIO (CURRENT RATIO) Current ratio is defined as the relationship between current assets and current liabilities. It is a measure of general liquidity & is most widely used to make the analysis of short term financial position of a firm. Current ratio is the ratio of current assets to current liabilities. A relatively higher ratio is an indication that the firm is liquid and has the ability to pay its current obligations on time. On the other hand a low current ratio indicates that the liquidity position of the firm is not good and shall not be able to pay its current liabilities in time. It is also called working capital ratio. The current ratio is a measure of the firms short-term solvency.

It indicates the availability of current assets in rupees for every one rupee of current liability. In a sound business current ratio of 2:1 considered as ideal one.

Working capital ratio = Current assets/ Current liabilities

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Table No.3

Current ratiosYear Current Assets(Rs. In Lakhs)

Current Liabilities(Rs. In Lakhs)

Current Ratio(Times)

2007 2008 2009 2010 2011 Average

5283.97 5929.05 6656.07 8209.80 9681.06 7151.99

4799.65 4991.09 5245.37 6437.63 7190.49 5732.85

1.10 1.19 1.27 1.28 1.35 1.24

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Chart No.3Current Ratio1.60 1.40 1.20 1.00 0.80 0.60 0.40 0.20 0.00 2007 2008 2009 2010 2011

Current Ratio

INFERENCEThe above table no.3 deals with current ratio. The standard current ratio for a firm is 2:1. Though this company records a fluctuating trend in its current ratio, the ratios are near to the ideal level. The company has not achieved the standard ratio of 2:1 in any of the years but the firm was able to maintain its current ratio above 1 for the past five years. The company has also shown a positive trend in maintaining the current ratio. The average current ratio is 1.24. The ratio is highest in the year 2010 - 2011 (1.35) and lowest in the year 2006 - 2007 (1.10).

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5.3ACID TEST RATIO (QUICK RATIO)Quick ratio or liquid ratio is a more rigorous test of liquidity than the current ratio. The term liquidity refers to the ability of the firm to pay short term obligations as and when they become due. Quick ratio may be defined as ration of quick assets to quick liabilities. Liquid assets include all the current assets excluding inventories & prepaid expenses. Liquid liabilities mean all liabilities excluding bank overdraft. Inventories & prepaid expenses are not termed as liquid assets because they cannot be converted into cash immediately without a loss of value. An acid test ratio of 1:1 is considered satisfactory.

Quick Ratio = Quick asset / Current liability

Quick Assets=Current Assets-Stock

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Table No.4Quick RatiosCurrent Stock Quick Current Quick Assets Asset Liabilities Ratio(Rs. In Lakhs) (Rs. In Lakhs) (Rs. In Lakhs) (Rs. In Lakhs) (Times)

Year

2007 2008 2009 2010 2011

5283.97 5929.05 6656.07 8209.80 9681.06

729.74 504.07 904.41 416.99 266.97

4554.23 5424.98 5751.66 7792.81 9414.09

4799.65 4991.09 5245.37 6437.63 7190.49

0.95 1.09 1.10 1.21 1.31

Average

7151.99

564.44

6587.55

5732.85

1.13

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Chart No.4Quick Ratio1.4

1.2

1

0.8 Quick Ratio 0.6

0.4

0.2

0 2007 2008 2009 2010 2011

INFERENCE

For Quick ratio, 1:1 is considered as satisfactoryFrom the table depicting the Quick ratio of the firm shows that, the trend of ratio is increasing year by year. The average quick ratio is 0.48.The firm has not achieved the industry standard of 1:1 in of the years. From the figure we can see that in 2004-2005 it is 0.42 but in 2006-2007 it is reduced by In 2006-2007 quick ratio is 0.51 indicating companys liquidity position is not satisfactory. If this condition is continued company should face serious liquidity crisis.

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5.4 CASH RATIOSince Cash is the most liquid form of asset, so examination of cash ratio and its equivalent to current liabilities is very important. Analysis of cash with current liability shows that whether the company has the ability to pay its current liability on due date.

Cash Ratio = (Cash + Marketable Securities)/ Current liability.

Table No.5Cash RatiosYear2007 2008 2009 2010 2011 Average

Cash(Rs. In Lakhs)

Current Liabilities(Rs. In Lakhs)

Cash Ratio(Times)

3669.85 4285.79 4604.89 5380.91 6852.26 4958.74[31]

4799.65 4991.09 5245.37 6437.63 7190.49 5732.846

0.76 0.86 0.88 0.84 0.95 0.86

Chart No.5Cash Ratio1 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0 2007 2008 2009 2010 2011 Cash Ratio

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5.5 TURNOVER RATIO OR EFFICIENCY RATIOTurnover ratios are employed to evaluate the efficiency with which the firm manages and utilizes its assets. Their ratio indicates the speed with which assets are converted in to sales. Activity ratio involves a relationship between sales and assets.

5.6

DEBTORS TURNOVER RATIOIt is also called receivables turnover ratio. It also measures the liquidity of

the company. The purpose of this ratio is to discuss the credit collection period and policy of the firm. It indicates the number of time debtors turnover each year. Higher the ratio lowers the average debtors to the lower credit sales.

Debtors turnover ratio = Sales/Debtors Average collection period = 360/Debtors turnover ratio

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Table No.6Debtors turnover RatiosSales(Rs. In Lakhs)

Year2007 2008 2009 2010 2011 Average

Debtors(Rs. In Lakhs)

Debtors Average Turnover collection Ratio period(Times) 10.00 11.77 12.23 9.84 7.02 10.17(Days)

4790.41 6453.04 8005.48 18149.54 13744.88 10228.67

478.93 548.40 654.72 1844.57 1957.01 1096.726

36.49 31.02 29.85 37.10 51.97 37.29

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Chart No.6Debtors Turnover Ratio14

12

10

8 Debtors Turnover Ratio 6

4

2

0 2007 2008 2009 2010 2011

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Chart No.7Avg collection period60

50

40

30

Avg collection period

20

10

0 2007 2008 2009 2010 2011

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Fixed Asset Turnover RatioFixed asset turnover ratio is the ratio of Sales to Fixed assets. It indicates how well the business is using its fixed assets to generate sales. A higher fixed asset turnover ratio shows that the company has been more effective in using the investment in fixed asset to generate revenues.

Fixed Asset Turnover Ratio = Sales/Fixed Assets

Table No.7Fixed Asset Turnover Ratio Sales(Rs. In Lakhs)

Year2007 2008 2009 2010 2011 Average

Fixed Assets(Rs. In Lakhs)

Fixed Asset Turnover Ratio(Times)

4790.41 6453.04 8005.48 18149.54 13744.88 10228.67[37]

878.05 777.79 668.78 695.74 752.63 754.60

5.46 8.30 11.97 26.09 18.26 13.56

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Chart No.8Fixed Asset Turnover Ratio30 25 20 15 10 5 0 2007 2008 2009 2010 2011

Fixed Asset Turnover Ratio

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a)

Inventory Turnover Ratio

It is also called stock turnover ratio. This ratio indicates the number of times inventory or stock replaced during the year. It measures the relationship between good sold and inventory level. It indicates whether investment in inventory is efficiently used or not. A right inventory turnover indicates of good inventory management.

Inventory turnover ratio = Cost of goods sold / Average inventory Cost of Goods Sold = Opening stock + Purchases + Direct expenses Closing stock

Average Inventory = (Opening stock + Closing stock)/2

Inventory holding period = 365/Inventory turnover ratio

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Table No.8Average InventoryYear2007 2008 2009 2010 2011 Average

Sales(Rs. In Lakhs)

Opening Stock(Rs. In Lakhs)

Closing Stock729.74 504.07 904.41 416.99 266.97 564.44

Average Stock668.515 616.905 704.24 660.7 341.98 598.47

(Rs. In Lakhs) (Rs. In Lakhs)

4790.41 6453.04 8005.48 18149.5 13744.9 10228.7

607.29 729.74 504.07 904.41 416.99 632.50

Table No.9Cost of goods soldYear Direct Opening Closing Cost of Purchases Expenses Stock Stock goods sold(Rs. In Lakhs) 2007 2008 2009 2010 2011 Average 4209.99 5294.23 6631.56 17324.70 12202.15 9132.53 (Rs. In Lakhs) 265.15 335.26 453.43 457.12 570.85 416.36[41]

(Rs. In Lakhs) 607.29 729.74 504.07 904.41 416.99 632.50

(Rs. In Lakhs) 729.74 504.07 904.41 416.99 266.97 564.44

(Rs. In Lakhs) 4352.69 5855.16 6684.65 18269.24 12923.02 9616.95

Table No.10Inventory Turnover ratioInventor Cost of y goods Average Turnover Inventory holding sold stock Ratio period(Rs. In Lakhs) (Rs. In Lakhs) (Rs. In Lakhs) (In Days)

Year

2007 2008 2009

4352.69 5855.16 6684.65

668.515 616.905 704.24 660.7 341.98 598.47

6.51 9.49 9.49 27.65 37.79 18.19

56.06 38.46 38.45 13.20 9.66 31.17

2010 18269.24 2011 12923.02 Average 9616.95

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Chart No.9Inventory Turnover Ratio40 35 30 25 20 15 10 5 0 2007 2008 2009 2010 2011 Inventory Turnover Ratio

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Chart No.10Inventory holding period60

50

40

30

Inventory holding period

20

10

0 2007 2008 2009 2010 2011

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Table No.11Working Capital Turnover RatioWorking capital(Rs. In Lakhs)

Year

Sales(Rs. In Lakhs)

Working Capital TurnoverRatio(In Times)

2007 2008 2009 2010 2011 Average

4790.41 6453.04 8005.48 18149.54 13744.88 10228.67

484.32 937.96 1410.7 1772.17 2490.57 1419.14

9.89 6.88 5.67 10.24 5.52 7.64

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Chart No.11Working Capital Turnover Ratio12

10

8

6

Working Capital Turnover Ratio

4

2

0 2007 2008 2009 2010 2011

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5.7 . PROFITABILITY RATIOSProfitability reflects the final result of business operations. There are two types of profitability ratios- profit margin ratios and rate of return ratios. Profit margin ratios show the relationship between profit and sales. Popular profit margin ratios are gross profit margin and net profit margin ratio. Rate of return ratio reflects the relationship between profit and investment. The important rates of return measures are: rate of return on total assets and rate in equity.

5.8.1NET PROFIT RATIO

This ratio shows the earnings left for shareholders as a percentage of net sales i.e., profit per rupee of sales. It measures the overall efficiency, production, administration, selling, financing and pricing and tax management.

Net profit ratio

= (Net profit / Sales) x 100

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Table No.12Net Profit RatioYear Sales Net Profit Net Profit Ratio(%)

(Rs. In Lakhs) (Rs. In Lakhs)

2007 2008 2009 2010 2011 Average

4790.41 6453.04 8005.48 18149.54 13744.88 10228.67

31.81 342.77 485.16 543.22 730.42 426.68

0.66 5.31 6.06 2.99 5.31 4.07

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Chart No.12Net Profit Ratio7 6 5 4 3 2 1 0 2007 2008 2009 2010 2011 Net Profit Ratio

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