INTRODUCTION TO WORKING CAPITAL

Capital required for day to day working in the business concern, for
purchasing raw material, for meeting day to day expenditure on salaries, wages,
rent, rates, advertisement, etc. is called as working capital.
It represents the portion of the business concern total financial resource, which
is put to variable operative purpose .these are two concept of working capital

 Gross working capital.

 Net working capital.

Gross working capital refers to firm total current assets .It can also
called as circulating capital.

Gross working capital =Total current assets

Net working capital =current assets –current liabilities

Current assets are those assets which have short life span and are
converted into cash in accounting year the major current assets are cash bank
balance, marketable securities, accounts receivable and inventories.

Current liabilities are those liabilities which are intended to be paid in the
ordinary course of business within a year. The basic current liabilities account
payable, bank overdraft, outstanding expenses.
 OBJECTIVES OF THE STUDY

 To study the organizational profile of the Sirpur Paper Mills Limited.

 To analyze the growth of current assets, current liabilities, net working

capital.

 To analyze the financial performance of the company, using the working

capital management.

 To study the various aspects of working capital management like cash,

account receivable and inventories.

 To give conclusion of the study and also offer suitable suggestions for
efficient management of working capital in Sirpur Paper Mills Limited.

2
 RESEARCH METHODOLOGY

PRIMARY DATA:

The required primary data is sourced from discussions with the

executives of the company and departments of the organization i.e., financial
and accounts department.

SECONDARY DATA:

The most of the data from the study is drawn from secondary data source.
The secondary data is collected from company annual reports, financial
statements and other available report, financial statement and other available
records and statement and text book on financial management.

3
 LIMITATIONS OF THE STUDY

The study suffers from the following limitations.

 The study is conducted within a short period.

 The study may not be as detailed, full fledged.

 The study was conducted with the data available and analysis.

 Due to confidential financial records the data is not expose.

SOURCE OF DATA:-

For conducting the study necessary information has been collected from
only secondary sources of mainly published records of the “SIRPUR PAPER
MILL” and collected from the studies and reports.

4
 COMPANY PROFILE

ABOUT THE ORGANISATION:

THE SIRPUR PAPER MILLS LTD., marked the year 1938 for its
establishment, in 1942 under the management of "M/s. Hyderabad Construction
Company limited", it commenced production with a capacity of 14.0 M.T. per
day.

In 1953 M/s. BIRLA BROTHERS were entered with management of

company with the change in the management the expansion programmed of the
mill started in a big way and by 1955 the production increased from 15
tones/day to 50 tones/day A third paper machine of 50 tones/day to 50
tones/day. A third paper machine of 50 tones/day increased to production to 100
tones/day by 1959 paper machine No,4 was installed in the year 1966 with a
capacity of 10.0 M.T per day, Later a Board machine with a production
capacity of 60.0 M.T per day was installed in the year 1974. In 1976 paper
machine No.5 was started with production capacity of 10 M.T per day.

At present the mill produces on an average of 220 TPD paper and board of
7 paper machines. The product is located in SIRPUR K.AGHAZNAGAR
District Adilabad of Andhra Pradesh. Covering approximately 100 acres or more of
area by the plants in the company's land. The approximate company's land in 696

5
acres. Present Installed Capacity 83.550 MT/year of Paper & Board & Operating
95% plant utilization level. The Company's Turnover is Rs.180Crores. To
improve the operational efficiency of the plant to conserve the resources and
contain & control pollution the Company installed BHEL Recovery Boiler, Two,
and FBL Boilers, Full Hedged W.T, Plant and many of the equipments

THE PRODUCTION HAS INCREASED IN THE SECOND PHASES:

 Paper machine no. 2 was commissioned in the year 1953-30 TPD.

 A new paper machine no. 3 with the capacity of 60 MT/D was

commissioned in the year 1959.

 Installed another machine no. 4 of 10 MT/D production capacities in

1966,

 A 60 MT/D, production capacity of board machine was started in the year

1974.

 Another 10 MT/D production capacity paper machine No. 5 was

commenced in the year 1976.

 7th machine of 68 MT/D capacities was installed and commenced on 21

March 2002.

The installed capacity of the mill today is 83,550 MT, in the financial year
2002-03 the company has achieved its highest annual production of 77,974
MT, The total share capital of SPM Ltd is Rs.8,34,55,980 and its present

6
 face value of the share is Rs.10. In the financial year 2000-01 the company has
achieved its maximum net profit of Rs.1621.17 lacks.

THE COMPANIES PRESENT PRINCIPAL BANKERS ARE:

 Central Bank of India.

 State Bank of Hyderabad.

 Bank of Borada.

 Andhra Bank.

THERE ARE 10 DIRECTORS FOR THE COMPANY INCLUDING CHAIRMAN. THEY ARE:

 Ranjan Kumar Poddar, Chairman

 Sundaresan Vice Chairman

 S.K. Khare, Executive Director

 Devasish Poddar, Director

 Sudhir Jalan

 M.S. Rajajee

7
  T.S. Appa Rao

 Laxminiwas Sharma

 P. Vaman Rao

 Utsav Pari

GENERAL:

The paper is made of cellulose fibres. Cellulose is an organics material of

fibrous nature. It occurs in all woody materials mixed with gums, resins and
lignin. Cotton is the present from cellulose. In paper making, cotton is also
used for good quality for paper. But it is costly and not available in plenty
because it is required for textiles also. Therefore major source of paper making
cellulose is obtained from woods, grass, cereals straws and bags. The
percentage of cellulose and hemicelluloses content in different materials are
65%-75%. In India bamboo raw material for paper making. The main source of
fibrous raw materials for SIRPUR PAPER MILLS are bamboo, government
reserve forest spread over 1650 sq km and hardwood from private plantation
through AMC and APFDC.

RAW MATERIAL:

The source of the main raw material Bamboo is from Andhra Pradesh
Government Forest and Hard Wood from social forest. Apart from Bamboo the
raw materials consumed by "S1RPUR PAPER MILLS LTD" are Casuarinas, Bo,
Subabul, Eucalyptus and other local hard wood, Bamboo, imported pulp and

8
waste paper are the major raw materials used. The main constituents present in
the wood in cellulose and micelulloses (fiber composition) which is used for
paper manufacturing Bamboo is obtained from forests spread out in the Northern
and Eastern parts of

Andhra Pradesh in the District of Adilabad, Karimnagar. Khammam and

Warangal. The company continued to lay emphasis on obtaining basic
conventional raw materials and has motivated fanners under the various forestry
schemes. The S.P.M. Ltd receives higher qualities of Bamboo as under the lease
Agreement with Government of Andhra Pradesh.

The 75 tones/hour capacity fluidized Bed combustion (FBC) Boiler enabled

the company to use cheaper, Low Grade Coal with higher ash content thus
reducing the dependency on erratic APSEP Power supply and also reducing energy
cost. There are total 8 coal fired boilers in the mills i.e. Six New Boilers and
two FBC Boilers cinder and fly ash are the waste material that is generated from
FBC Boilers. To improve process economy- efficiency, product quality and new
process developments, the company's research and development activities are
carried out. The company had the financial assistance from financial institutions
like IDBI, ICICI, IFCI and UIT around 10Crores from above mentioned
Institutions, The SIRPUR PAPER MILLS LTD is constantly vigilant to its duty
of maintaining clear environment of mills, site and neighborhood. Full fledged
effluent treatment plant in operation to give clear effluent discharge as per
Government specification, The Sirpur Paper Mills Ltd. is also engaged in
community development activities like Construction of Drinking Water Wells,
Community Halls, and School Buildings etc. It is also engaged in welfare activities
by giving monthly aid to some of the school's, In addition to the monthly aid to the
school the management is conducting free eye camp, Health camp, Organizing

9
Social and Religious Functions. Maintenance of Hospitals and water supply to
some residential wards of SirpurKaghaznagar.

In the year 1986 "The HRD Training Center1' was started training
programmed on worker Development and productivity orientation is being
conducted for the Development of workmen. The company also allows
undergoing in plan training of various students of different disciplines like
Personnel, Finance, Marketing, Engineering, Computer's etc, of various colleges.
The Company has a well established IT facilities and information support is made
having HP 9000 computer system which is operational in 20 applications areas for
better integration of increased service capabilities the company has further
planned to introduce "Real Time1' Technology Enterprise Resource Planning
(ERP), SAP and it is under implementation.

GENERAL PRODUCTION PROCESS OF SPM LTD:

The S.P.M.L is divided into five process departments. They are as follows:

 Pulp Mill

 Stock Preparation

 Paper Machine

 Finishing House

 Power Block

P U LP MILL:

10
 Pulping is essentially the separation of the cellulose fibers in the raw
materials from lignin, a phenol substance that is the bond with the fiber. The
pulping stage being linked to the nature of raw materials utilized as well as
characteristics of the end product is the most critical and employees a variety of
mechanical process varies from 85-95% as a percentage of wood
utilized and such process are mainly used for the manufacture of News Print.
Chemical process generally yield 50-65% of pulp as percentage of wood utilized
and are employed for the manufacture of high strength Kraft or writing and
printing papers.

The raw materials like bamboo and hardwood are simultaneously assed to
chipper house in the ratio of 85% and 15% through conveyor. It is cut into pieces
of size between 3mm to 45mm than it is allowed to pass through vibrating screens
and piece of size above 45mm is rejected to Re-chippers from the chipper
house the chips are passed to digester house and the cooking material passes to
blow tank and then to knitters. In Knitters cooked chips are stored and
redirected to digester house and then come to the washing screens.

STOCK PREPARATION :

After Screening and cleaning to remove unwanted matter, followed by

bleaching (if it undesired to produce bleached varieties) the pulp is subjected to
treatment in heaters and refiners for disintegration into individual fibers. The
'Stock' a term used to describe the dilute suspension of fibers in water utilized
to produce a sheet of paper, in prepared by blending different grades of pulp and
mixture of additives to secure the desired properties of the end product.

THE PAPER MACHINE:

11
 At the 'Wet end' of the paper machine, the head box controls the flow of
stock, which is passed over a fine wire mesh (referred to as the 'wire') to form
the sheet of web of paper, while the water is simultaneously drained. The paper
web is then compressed against a felt to squeeze out the remaining water and
passed through a series of steam heated drying cylinders (the 'dry end’) to
complete the extraction of water, followed by calendaring to achieve surface
finish.

FINISHING:

This is the term which refers to preparation of the paper reel for
marketing and covers a series of operations such as slitting and rewinding of
large reels into smaller ones, sheet cutting and packing. Power Block the
Primary function of the power block is supplying - water -to various
departments supplying power and steam produced to various departments and
treatment of waste water. There are 13 Boilers and 4 Turbines, the other
subsidiary departs.

Chemical ------------- Electrical

Central Laboratory -------------- Mechanical

Civil Department -------------- Soda Recovery

POWER BLOCK:

The function of power block are supplying of water, power and steam
produced to various departments and treatment of wastewater. The company has

12
got its own power generation plant generating 32MW of power, and gets
3500KVA power from A.P.

TRANSCO; there are 13 boilers and 4 turbines.

The four turbo generators installed in the mills are:

TA2, TA3 (Metro Politah Vackers, England)

TA4, TA5 (M/s. Jyoliii Tnveni turbines 1 .id, Ranjilnrc)

TA1 (BHEL makes double extraction turbines)

THE CAPACITIES OF EACH TURBO GENERATORS ARE:

TA1 - 9.5 MW
TA2 - 7.5 MW
TA3 - 7.5 MW
TA4 - 2.5 MW
TA5 - 5.0MW

The administrative section consists of various departments, which performs

general management functions. They are:

 Personnel Department.
 Finance Department.
 Marketing/Sales Department.
 Systems Department.

WELFARE ACTIVITIES:

13
 The following are the names of the school to which S.P.M. Management is
giving monthly aid.

 Bala Bharathi High School.

 Balvidya Mandir High School.

 Anwar Urdu Upper Primary School.

 Iqbal Urdu School.

 Tamil Manran Primary School.

 The company has contributed Rs.18 Lacks to unable the Kaghaznagar

Municipal authorities to take up road repairs, roads, formations and

drainages etc.

ORGANISATION STRUCTURE

The “SIRPUR PAPER MILLS LTD" Commenced in the year 1938. It is

located in the remote corner of Andhra Pradesh. The Mill is located at "Sirpur-
Kaghaznagar" District Adilabad; The SPM Ltd is a joint stock company
Registered under companies Act. The registered office is located at 5-9-2/1/1
first floor opposite: New MLA Quarters Gate, Adarshanagar, and Hyderabad-
500463. The Sales Office and corporate office of SPM Ltd is in New Delhi. The
Control of SIRPUR PAPER MILLS LIMITED rests with the Board of Directors
representing Slate Government and other Share Holders. The Board of directors
does formulate the policies enumerating to translate. The board of directors docs
the approval of the annual budget and future Financial outlay.

For convenience the organization structure is

divided into two sections as
follows:

14
  Technical Section

 Administrative Section

A brief outline of the Organization structure of S.P.M. Ltd is presented in

the figure.

INTRODUCTION TO P APER I N D U S T R Y

A country civilization mostly depends upon its paper consumption. First

we have to know as briefly about the introduction and establishment of paper in
the world, its entrance in INDIA, Again it is essential to know about the
development and progress of paper industry in our country as well as in our state.

The world paper is adopted from the water plant called "PAPYRUS"
which is used to grow around "NILE RIVFR". F.GYPT. the Egypt citizens used
papyrus plant as paper after cutting and drying. It since 3000BC it was sad
that "T. JAMEUM CHAINE" had prepared paper at a tank of mulberry tree in 105
A.D.

In 7 51 AD the "ARABS" imported the knowledge of paper making" is

spread to "EUROPE" and central countries of the world. It has highly

15
popularized by the "BOWDDACK" especially by the "DOKSOMONK" through
out the world.

The first paper mi ll the world was started in 1336 AD in GERMANY.

Later paper mills were started in 1586 AD in SWITZERLAND and
HOLLAND and later it spread all over the world.

Firstly in 1789 AD chlorine was used for bleaching of pulp. In 1799

AD "ROBERT INCHOLES" the French scientist designed the first paper machine
in the world. Later "LAGER DIBBT" and "BRIMAN DONKIM" designed
present paper machine with their continuous efforts.

PAPER INDUSTRY IN INDIA (CAPITAL)

HISTORY:

Unlike iron & steel, textile & sugar industry the paper making industry
did not exist in ancient India. For writing purpose “BOJPARTRO” (Bank of
Trees) and ‘TALLAPATRA” (Leaves of Palm) were used.

In newsprint segment there are at present 39 mills (4 in the central public

sector, 2 in the state public sector and 33 in private sector) with an installed
capacity of about 0.836 million TPM at present.

16
 The per capita consumption of paper in India is currently 6 Kgs, against a
world average 45 Kgs with an expected growth rate of 6.7% PA over the next
five years (fig.1)

PER CAPITA CONSUMPTION OF PAPER

Series-1

INDUSTRY DEMAND:

The demand of paper influenced by various macro-economic factors like

national economic growth, industrial production, promotional expenditure,
population growth and the government allocation for the educational sector.
Paper consumption in India is expected to reach 9.0 MT by the years 2010 and
13 MT by 2015 (fig.2)

Paper Consumption in India

17
 FRAME WORK OF WORKING CAPITAL MANAGEMENT

Working capital refers to the investment by a company in short-term assets

such as cash, marketable securities, accounts receivables and inventories. A study
of working capital is of major importance to internal and external analysis
because of its close relationship with the current day to day operations of
business.

Business needs funds for the purpose of its establishment and to carry out its
day-to-day operations. Long-term funds are required to create production

18
facilities through purchase fixed assets such as plant & machinery, land &
buildings, furniture etc. investment in these assets represents the part of firm's
capital, which is blocked on a permanent or fixed and is called fixed capital,
Funds are also needed for short-term purpose for the purchase of raw materials,
payments of wages and other day-to-day expenses etc., these funds are known as
working capital.

Working capital is one of the most important requirements of any business

concern. Working capital can be compared with the -blood of human beings. As
human cannot survive without blood, in the same way on business cannot survive
without working capital.

Working capital management deals with maintaining the levels of

working capital to optimum, because if a concern has inadequate opportunities if
the working capital is more than required the concern will loose money in form
of interest on the block funds. Therefore working capital management plays a
very vital role in profitability of a company.

DEFINITION AND MEANING:

Working capital is defined as excess of current assets over current

liabilities. Management of working capital includes management of all current-
assets and current liabilities. The interaction between current assets and current
liabilities is the main theme of the theory of working capital management.

Working capital is commonly used for the capital required for day to day working
in a business concern, such as purchasing raw material for meeting day to day
expenditure on salaries, wages, rent rates, advertising etc.

19
 Working capital management may be said to include in its definitions, needs,
optimum level of current assets, the trade off between profitability and risk
associations with a firm's level of current assets and liabilities financing mix
strategies and so on.

Current Working capital measures how much in assets a company has

available to build its business. The number can be positive or negative,
depending on how much debt the company is carrying. In general, companies
that have a lot of working capital will be more successful since they can expand
and improve their operations. Companies with negative working capital may
lack the necessary for also called net current assets or current capital.

Cash is the lifeline of a company. If this lifeline deteriorates, so does the

company's ability to fund operations, reinvest and meet capital requirements
and payments. Understanding a company's health is essential to making
investment decisions. A good way to judge a company's cash flow prospects is
to look at its Working Capital Management (WCM).

NEED FOR WORKING CAPITAL:

The basic objective of financial management is to minimize the

shareholder wealth. This is possible only when company earns sufficient profits.
The amount of such profits largely depends upon the magnitude of sales.
However sales convert into cash instantaneously. There is always time gap
between sale for goods and their actual realization working capital required in
order to sustain the sales activities in this period.

In case adequate working capital is not available for this period the company
will not be in a position to purchase raw material, pay wages and other expenses

20
required for, manufacturing the goods. Therefore sufficient amount of working
capital is to be maintained at nay point time.

ADEQUACY OF WORKING CAPITAL:

A firm must have -adequate working capital is as much as needed by the firm.
It should neither be excessive nor in adequate. Both the situation is harmful to the
concern. Excessive working capital is the firm as ideal funds which earns no profits for
the firm inadequate working capital means the firm does not have funds to perform
operations which means ultimately results in production interruptions and lowering
down of the profitability.

It will be interesting to understand the relationship between working capital,

risk return in manufacturing concern it is generally accepted that higher levels of
working capital decrees the risk and have the potential of increasing the
profitability also.

ASSUMPTION:

There is a direct relationship risk and profitability, higher the risk higher the
profitability, while lower the risk lower the profitability. Current assets are less
profitable than fixed assets... Short-term funds are less expensive than long-term
funds. On account of above principles, an increasing in the ratio of current assets to
total assets will be result in the decline of the profitability of the firm, This is
because investment in current assets as started above is less profitable than in the
fixed assets, However an increase in the ratio would decrease the risk of the firm
becoming technically insolvent. On the other hand a decrease in the ratio of

21
current assets to total assets would increase the profitability of the firm because
investment in fixed assets is more profitable then investment in current assets.
However this increases the risk of becoming insolvent on account of its possible
inability in meeting its commitments in time due to shortage of funds.

CONCEPT OF WORKING CAPITAL:

There are two concepts of working capital. They are:

 Gross Working Capital

 Net working Capita

GROSS WORKING CAPITAL:

It is the total of all the current assets, which include inventories, sundry
debtors, and cash in hand, and bank, advances, investments, short term deposits etc.,

NET WORKING CAPITAL:

It is the excess of current assets over current liabilities; this is as a
matter of fact the most commonly accepted definition. In other words it can
also be defined as difference between current assets and current assets and
current liabilities.
It is that portion of a firm's current assets, which is financed with long-
term funds.
TYPE OF WORKING CAPITAL:
The working capital may also be classified into permanent and temporary
working capital .permanent working capital refers to the minimum amount of
investment in all current assets which is requires all the time to carry out

22
 minimum level of business activities . It represent the current assets are called
as core current assets .the amount of permanent working capital remains in the
business in one form or another form of assets .the suppliers of such working
capital are not paid during the life of the firm i.e. the assets concerned are
financed by funds raised from long term sources . Permanent working capital of
the firm increase with the volume of business as illustrated in figure 1

Amount of
working
capital Permanent

FIG1:
It represent that permanent capital is fixed over a period of time while
temporary working capital is fluctuating Permanent.

Amount of Permanent
working
capital

fig2

23
 It represents that: permanent working capital increasing over a period of
time which increases the level of business activity. And temporary working
capital is fluctuating.

The amount of working capital that fluctuates from time to time on the
basis of business activity is called temporary working capital.

It represents additional current assets required at different times during

the accounting year. Temporary working capital requirement are met by fund
raising from short term sources of finance. Suppliers are paid generally during
off range season.

Working capital management is aimed to manage the firm’s current

assets and current liabilities. So that a satisfactory level of working capital is
maintained. If a firm is unable of maintain adequate working capital .The firm
may become insolvent and even be forced into bankruptcy.

A firm must have adequate working capital it should not be excessive

working capital results in idle funds, which yield no profits for the business.
Inadequate working capital results into insufficient of funds for running the
operations of the business smoothly. Sometimes it result into production
interruption and there by reduces the profitability of the business. Working
capital management is concerned with all decision and acts the influence the
size and effectiveness of working capital efficient. Working capital management
requires that the firm should operate with some amount of working capital. The
size of net working capital varies from firm to firm and depend upon the nature
of Business. The use of net working capital is to measure a firm’s liquidity

24
requirement cash flow and cash flow out of business does concede. Cash out
flow results forms payment of current liabilities are predictable, whereas cash
inflow are difficult to predict, the more the accuracy of prediction of cash
inflow the lower will be the net working capital requirement.

Working capital is required for a business because of the time gap between the
sales and their actual realization in cash. The time gap is technically called an
operating cycle of the Business fig -3 illustrates the operating cycle of a firm
working capital management involves management of different components of
working capital such as account receivable and i9nventories for determining the
size and method of financing.

Cash Raw material

Work in
progress
Account
receivable

Finished
goods
Sales

OPERATING CYCLE FIG3

A brief description of various issues involved in the management of each of

the component of working capital is here below. Adequate cash balance have to

25
maintained so that no fund are blocked in idle cash which involves costs in
terms if interest. Adequate cash is required to meet business obligation as and
when they raise. Cash requirement also arise to meet unforced contingencies
such as stake, increase in the price of raw material, and fall in the collocation of
the account receivable. The grater is the possibilities of contingencies. The
greater amount of fund required to maintain by the firm.

Adequate cash is also required to take the advantages of unexpected

Business opportunities. The management of cash is aimed to meet the obligation
as per the payment schedule and to minimize the amount of idle cash balance.
Inventories include raw material, work in progress and finished good
inventories. The maintenance of these levels of inventories depend upon the
nature of business.

Adequate inventories protect the firm from the losses on account of

shortage or delay in production price variations and defer ratio of stock.
Accounts receivable constitute a significant portion of the hotel current assets of
a business. Accounts receivable are the results of goods or credit intended
increase the scale volume and thereby increase in the profits of the business.
Management of accounts receivable is aimed to ensure liquidity. Higher level of
accounts receivable to be bad debt and inverse the collection cost.

Working capital can be divided into categories on the basis of time.

 Permanent working capital / fixed working capital

 Temporary working capital / variable working capita

PERMANENT WORKING CAPITAL:

26
 This refers to that minimum amount of investment in all current assets,
which is required at all times to carry out minimum levels of business activities.
Permanents working capital represent the current assets required on a continuing
basis over the entire year. Amount of permanent working capital remains in the
business in one form or other. This is particulars important form the point of
view of financing. The suppliers of such working capital should not expect its return
during the lifetime of the firm.

TEMPORARY WORKING CAPITAL:

The amount of such working capital keeps on fluctuating from time to time on
the basis of business activities. Working capital represents additional current
assets required at different times during the operating year.

ESTIMATION OF WORKING CAPITAL:

Since working capital is excess of current assets over current liabilities,

the forecast for working capital requirements can be made only after estimating
the amount of different constituent's working capital.
I. Inventories

 Stock of raw materials

 Work - in – process
 Finished goods
II. Sundry debtors
III. Cash and bank balances

27
IV. Sundry creditors
V. Outstanding expenses

I.INVENTORIES:

The terms inventories include stock of raw materials, work - in - process

and finished goods. The estimation of each of them will be made as follows:

 STOCK OF RAW MATERIALS: The average amount of raw materials to be

kept in stock will depends upon the quantity of raw material required for
production during a particular period and the average time taken in obtaining a
fresh delivery.

 WORK- IN-PROCESS: The cost of work - in - process includes raw materials,

wages and overheads. In determining the amount of work in process, the time
period for which the good will be in the course of production process, is
most important.

 FINISHED GOODS: The finished goods are kept in warehouse and according to the

orders of the customers, goods will be delivered.

II.SUNDRY DEBTORS: Debtors are those persons who will be purchase goods on
credit basis. The sundry' debtors will-be calculated on the basis of credit sales.

III.CASH AND BANK BALANCES: The amount of money to be kept as cash in hand or
cash at bank can be estimated on the basis of past experience.

IV.SUNDRY CREDITORS: The lag in payment to suppliers of raw materials, goods,

etc., and likely credit purchase to be made during the period will be help in
estimating the amount of creditors.

28
V.OUTSTANDING EXPENSES: The time lag in payment of wages and other expenses
will be help in estimation of outstanding expenses.

29
SOURCES OF WORKING CAPITAL

There are mainly two types of sources of working capital, they are
as follows:

PERMANENT OR FIXED OR LONG-TERM WOKI N G CAPITAL:

 SHARES: Issue of shares is the most important share for raising the
permanent or long-term capital. A company can issue various types of shares,
preference share and deferred share.

 DEBENTURES: A debenture is an instrument issued by the company

acknowledging its debts to its holder it is also an important method of raising
long term permanent working capital

 PUBLIC DEPOSITS: Public deposits are the fixed deposits accepted by a

business enterprise directly popular in the absence of banking facilities.

 LOANS FROM FINANCIAL INSTITUTION : Financial Institutions such as

commercial Banks, industrial finance corporations of India, state financial
corporations.

TEMPORARY OR VARIABLE FOR SHORT -TERM WORKING CAPITAL :

 TRADE CREDIT : Trade credit refers to the credit extended by the

suppliers of goods in the normal coerce of business. As present day
commerce is built upon credit, the trade credit arrangement of a firm with
its suppliers is an important source of short-term finance.

 I NDIGENOUS BUSINESS: Private money-lenders and other is country

banks used to be the only sources of finance prior to the

30
 establishment of commercial banks. They used to change very
higher rates of interest and exploited the customers to the largest
extent possible.

 DEFERRED INCOMES: Deferred incomes are incomes received

advances before supplying goods or services. They represent funds
received by a firm for which it has to supply goods or services in future.

 COMMERCIAL PAPER: Commercial paper represents unsecured

promissory notes issued by firms to raise short-terms funds. It is an
important money market instrument in advanced countries like U.S.A. In
India, the reserve bank of India introduced commercial paper in the
Indian Money Market on the recommendations of the working capital
upon money market (Vague - Committee)

DETERMINANTS OF WORKING CAPITAL:

Some of the important determinants of working capital are given below:

 NATURE OF WORKING CAPITAL: The working capital requirements of

enterprises are basically related to conduct of the business. Public
utility undertaking need very limited working capital as they offer
cash sales only and supply services but not product and as such no
funds are tied up in inventories and receivables, but at the same time
trading firms require large amounts in current assets like inventories,
receivable, cash etc. and has to invest less amount in fixed assets.

 SIZE OF BUSINESS: 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, larger will be the requirements of working capital.

31
 TERMS OF SALES AND PURCHASE: Credit terms granted by the concern
to its customers as well as credit terms granted by its suppliers also
affected the working capital.

 MANUFACTURING CYCLE: The length of manufacturing cycle

influences the quantum of working capital needed. Manufacturing
process always involves a time or lag between the time when raw
materials are fed into production line and finished products are
finally turned out by it.

 RAPIDITY OF TURNOVER: If the inventory turnover is high, the working

capital requirements will be low, with a better inventory control, a
firm is able to reduce its working capital requirement, firms should
determine, the minimum level stock, which it will be have to
maintain throughout the period of its operation.

 SEASONAL VARIATION: The inventory of raw materials, spares and

stores depends on the conditions of supply. If the supply is
prompt and adequate the firm can manage with small inventory.
However if the supply is unpredictable and scant then the firm, to
ensure continuity of production, would have to acquire stocks and
when they are available larger inventory should be carried.

 DIVIDEND POLICY: Dividend policy has a dominant influence on the

working capital position of an enterprise. If the management follows

a conservative dividend policy, consequently drains off large
amounts from the pool of working capital.

 SEASONALITY OF OPERATING: Firms, which have marked seasonality in

their operations usually, have higher fluctuating working capital
requirement. On the other side firms which manufacture products,

32
 which have sales round the year, tend to have stable working capital
needs.

 CREDIT POLICY: The credit policy of a concern in its dealings with

debtors and creditors influence considerably the requirements of

working capital. A concern that purchases it requirements on credit
and sells its product/services on cash requires lesser amount of
working capital.

 BUSINESS: 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.

 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 fund will be requirement to maintain the same current assets.

 OPERATING CYCLE: Working capital is required because of the time gap

between the sales and their actual realization of cash. This time gap
is technically termed as "Operating Cycle" of the business. In the case
of manufacturing company, the operating cycle is the length of time
necessary to complete the following cycle of events:

 Conversion of cash into raw materials

 Conversion of raw material into working in process

 Conversion of work in process into finished goods

 Conversion of finished goods into accounts receivable

33
 Conversion of accounts receivables into cash

The cycle will be repeated again and again. In case of a "trading firm' the
operating cycle will include the length of time required.

TO CONVERT:

 Conversion of inventories.

 Inventories into accounts receivables.

 Accounts receivable into cash.

 In case of financing firms the operating cycle includes the length of the
time taken for conversion of cash into debtors and debtors into cash.

OBJECTIVE OF CASH MANAGEMENT:

There are two basic objectives of cash management.

 To minimize the mount locked up as cash balances

 To meet the cash disbursement needs as per the payment schedule.

ADVANTAGES OF SIMPLE CASH FUNDS:

 Maintain a good bank relation.

 Maintain of goodwill.

 Exploration of business opportunities.

 Encourage new investment.

 Helps to overcome abnormal financial situations.

CASH MANAGEMENT – BASIC PROBLEM:

34
Cash management involves the following four .basic problems

 Controlling level of cash.

 Controlling inflows of cash.

 Controlling outflows of cash.

 Optimum investment of surplus.

35
 MANAGEMENT OF INVENTORY

Management of inventories means an optimum investment in

inventories, it should neither be too low to effect the production adversely nor
too high to block the funds. Unnecessary investment in inventories is
unprofitable for business.

Inventories are one of the major elements, which help the firm in
obtaining the desired level of sales. Inventories mean the stock of the product
of a company and components of the products, which include raw materials,
work - in - process and finished goods.

TECHNIQUES OF INVENTORY CONTROL:

The following are the techniques to control the size of the inventory

 Always Better Control.

 High Medium and Low.

 Vital Essential and Desirable.

 Scarce Difficult and Easy to Obtain.

 Fast-moving Slow-moving and Non-moving.

 Economic Order Quantity.

 Max –Min System.

 Two Bin System.

 Materials Requirements planning.

 Just - in – time.

36
OBJECTIVES . O F INVENTORY:

 Avoid both overstocking and under stocking of stock.

 Continuous availability of raw material.

 Purchase raw material at a reasonable price.

 Avoid wastage and damages.

BASIC PROBLEM OF INVENTORY MANAGEMENT:

Maintaining a minimum investment in inventories to minimize the

direct and indirect case associated with holding inventories to maximize the
profitability.

37
 RATIOS ANALYSIS

A ratio analysis is a widely – used tool of financial analysis. It

defined as the systematic use of ratio to interpret the financial statement so
that the strength and weakness of the firm as well as historical performance
and the current financial conduction can be determined .The term ratio
refers to the numerical or quantitative relationship between the two
items /variables .this relation can be expressed as:

 Percentages say net profits are 25%of sales.

 Fraction net profit is one – fourth of sales.

 Proportion of number (1:4)

IMPORTANCE AND LIMITATION OF RATIO ANALYSIS: As a tool of financial

management, ratios are of crucial significance. The importance of ratio
analysis lies in the fact that it present facts on a comparative basis and
enables the drawing of inferences regarding the performance of a firm
.ratio analysis is relevant in assessing the performance of a firm.

RESPECT OF FOLLOWING ASPECTS

 Liquidity position.

 Long term solvency.

 Operating efficiency.

 Overall profitability.

 Inter firm comparisons.

38
  Trend analysis.

LIMITATIONS:

Ratio analysis is widely used tool of financial analysis. Yet, it

suffers from various limitations .the operational imprecation of this is that
while using ratios, the conclusion should not be taken on their face value
.some of the limitations which characterized ratio analysis are:

 Difficulty in comparison.

 Impact of inflation.

 Conceptual diversity.

RATIOS CAN BE CLASSIFIED INTO FOUR BROAD GROUPS:

 Liquidity ratio.

 Leverage ratio.

 Activity ratio.

 Profitability ratio.

LIQUIDITY RATIO

The importance of adequate liquidity in this sense of the ability of a

firm to meet current short term obligation when they become due for the
payment can hardly be overstressed in fact, liquidity is a prerequisite for
the every of the firm. The short term creditors of the firm are interested in

39
the fund of the firm, but the liquidity implies, from the viewpoint of
utilization of the fund of the firm, that fund are idle or they earn very little.
A proper balance between the two contradictory requirements, that is,
liquidity and profitability, is required for efficient financial management.
The liquidity ratios measure the ability of the firm to meet its short term
obligation and reflect the short term financial strength /solvency of a firm.
The ratio which indicates the liquidity of the firm

 Current ratio

 Quick ratio /acid ratio

CURRENT RATIO:

These ratio shows a firms ability to cover its current liabilities with
its current assets, generally 2:1 ratio is considered ideal ratio for a concern,
i.e. current assets twice of current liabilities.

QUICK RATIO /ACID RATIO:

These ratios show a firm ability to meet its current liabilities with its
most liquid assets. Generally 1:1 is considered ideal ratio, because it is
wise to keep the liquid assert at least equal to the liquid assets at all times.

LEVERAGE RATIO

The second category of the financial ratios is leverage ratio or

capital structure ratio. The long term creditors would judge the soundness
of the firm on the basis of long term financial strength measure in terms of
its ability to pay the interest regularly as well as repay the installment of

40
the principal on the due date or in one lump sum at the one time of the
maturity.

The long term solvency of the firm can be examined by using

leverage or capital structure ratio. The leverage or capital structure ratios
may be defined as financial ratios which throw light on long term solvency
of a firm as reflect in ability to measure the long term creditors with regard
to:

Periodic payment of interest during the period of loan.

Repayment of principal amount on maturity.

 Debt - Equity ratio.

 Preparatory ratio.

 Fixed assets ratio.

 Total debt ratio.

 Coverage ratio.

 Interest coverage ratio.

DEBT EQUITY RATIO:

This ratio shows the relative probation of outsiders fund and shares
holders funds invested in the company. The ratio measures the relative
claims of outsiders against the firms assets. The idle debt equity ratio is
2:1, that means long term liabilities of the Business should ideally be 2
time of shareholders funds.

PREPARATORY RATIO:

41
 A company is Said to be highly geared if the major share of the total
capital is in the form of fixed interest bearing securities (i.e. Debentures
and preference share capital)or this ratio is more than 1.if it is less than one
it is said to low geared. If it exactly 1it is evenly geared.

FIXED ASSETS RATIO:

This ratio indicates whether the firm has raised adequate long term funds
to meet its fixed asset requirements. This ratio gives an idea as to what part
of the capital employed has been used in purchasing the fixed assets for the
concern. The ideal ratio is 0.67 or less than 1.

TOTAL DEBT RATIO:

Total debt ratio = long term liabilities + current liabilities /share

holders firms.

This ratio shows the relationship between external equity (long term
liabilities +current liabilities) and external equity (share holders funds)

INTEREST COVERAGE RATIO:

This Ratio shows how many times the interest charges or covered by
PBIT out of which they will be paid. In others words, the ratio ascertain
whether the company is capable of meeting interest on the loan and
debentures easily out of profit or not. The PBIT should be ideally 6or7
times of the fixed interest charge.

ACTIVITY RATIO

42
 Activity ratios are concerned with the measuring the efficiency in
the asset management. These ratios are also called efficiency ratios or asset
utilization ratio. The efficiency with which the asset are used would be
reflected in the speed and the rapidly with which assets are converted into
sales. Greater is the rate of turnover or conversion, the more efficient is the
utilization/management, other things being equal. For this reason, such
ratios are also designated as turnover ratios. Turnover is the primary mode
for measuring the extent of efficient employment of assets by relating the
assets to sales .an activity ratio may ,therefore, be defined as test of the
relationship between sales (more appropriately with cost of sales) and the
various assets of a firm. Depending upon the various type of assets, there
are various types of activity ratios.

INVENTORY (OR STOCK) TURNOVER RATIO:

This ratio establishes the relationship between costs of goods sold

and average stock and reflects the speed of turning over the stock into
sales. The inventory \ stock turnover measures how quickly inventory is
sold. Promptness of sales indicates better performance of the business. It is
a test of efficient inventory management. Higher inventory turnover ratio
is always beneficial to the concern. A high ratio implies good inventory
management. Lower inventory turnover ratio shows that the stock is
blocked and not immediately sold.

DEBTORS TURN OVER RATIO:

This ratio shows how quickly debtors & bills receivable are
converted into cash. In others words debtors’ turnover ratio is a test of
liquidity of the debtors of a firm.

43
 The higher the debtor turnover ratio and shorter the average
collection period, the better the liquidity of debtors as short collection
period and high debtors turnover ratio imply prompt payment on the part
of debtors. On the other hand low debtor turnover ratio and long collection
period is preferred.

CREDITOR’S TURNOVER RATIO:

This ratio explains the velocity with which creditors are paid. In
other words this ratio shows the average credit period enjoyed by the firm
from the creditors. A high ratio indicates that creditors are not paid in time
while a low ratio gives an idea that business is not talking full advantage of
credit period given by creditors. The average payment period indicates the
speed with which payments for credit purchases are made to creditor.

WORKING CAPITAL TURNS OVER RATIO :

This ratio shows the number of times the working capital results in
sales. This ratio reflects the efficiency in the utilization of working capital.
The higher the ratio the lower is the investment in working capital.
However a very high ratio shows overtrading and lower ratio shows under
trading.

FIXED ASSETS TURN OVER RATIO:

This ratio shows how well the fixed assets are being used in
business. The higher is the ratio the better is the performance. On the other
hand a low ratio indicates that the fixed assets are not being effectively
used.

INVENTORY TO NET WORKING CAPITAL:

44
 Inventory is an important port of the current assets. If inventory is
less than the working capital his percentage will decrease. If inventory is
more than the networking capital percentage will increase generally low
ratios will show sound working capital ratio should not exceed 100
percent.

THE CURRENT ASSETS TURNOVER RATIO:

Current asset turnover ratio is use to find out the current assets and
also find out the sales.

PROFITABILITY RATIO

Apart from the creditors, both short term and long terms, also interested
in the financial soundness of a firm are the owners and management or the
company itself. The management of the firm is naturally eager to measure
its operating efficiency. Simply, the owners invest their fund in the
expectation of reasonable return. The operating efficiency of the firm and
its ability to ensure adequate returns to its shareholders depends ultimately
on the profit earned by it. The profitability of the form can be measured by
its profitability ratios. In other words, the profitability ratios are designed
to provide answers to the questions such as

 Is the profit earned by the firm adequate?

 What rate of return does it represent?

 What is the rate of profit for various divisions and segments

of the firm?

 What is the earning per share?

45
  What was the amount paid in dividend?

GROSS PROFIT RATIO:

Increase in gross profit ratio will mean Profit ability ratio related
tom sales these ratios are based on the premise that a firm should earn
sufficient profit on each rupee of sale. If adequate profits are not earned on
sales, there will be difficulty in meeting the operating expenses and no
return will be available to the owner. These ratios consist of Profit margin
and expenses ratio

Profit margin. The profit margin measures the relationship between

profit and sales. As the profit may be gross or net there are two type of
profit margin.

 Gross profit margin.

 Net profit margin.

RETURN ON ASSETS (ROA):

Here, the profitability ratio is measured in terms of relationship

between net profit and net assets. The ROA may also be called profit to
asset ratio there are various possible approaches to define net profit and
assets.

46
 BALANCE SHEET FOR THE LAST FIVE YEARS

PARTICULARS 2003-04 2004-05 2005-06 2006-07 2007-08

LIABLITIES
CAPITAL 834.56 834.56 834.56 1101.38 1500.55
RESERVES SURPLUS 15465.1 16048.5 16865.2 19391.5 22263
SECURD LOAN 5548.86 6367.67 6311.34 12262.4 22157.7
UNSECURED LOAN 187.77 678.87 2680 1697.13 2561.99
SUNDRY CREDTORS 3208.74 2667.28 4015.67 4639.62 6638.21
ACCEPTANCE 100.73 156.19 94.69 3.71 34.3
DIVIDENTS 12.4 14.59 18.64 297.72 26.19
INTREST ACCURED 40.83 26.99 17.36 15.15 8.39
PROVISIONS 388.07 616.2 662.03 376.45 1198.41
OTHER LIABLITIES 921.36 822.06 1210.59 1764.09 2873.36
DIFFERED TAX 2480.94 2501.42 2512.33 2478.09 2143.19
LIABLITIES
TOTAL 29189.3 30734.4 35222.5 44027.3 61405.3

ASSETS

FIXED ASSETS 20014.6 20647.2 22972.1 32557 49194.5

INVESTMENTS 475 254.16 2006.51 1729.39 336.67
CURRENT ASSETS
INVENTORY 1794.27 2284.39 2682.88 2547.78 2882.49
SUNDRY DEBTORS 3132.67 3275.01 2286.55 2429.95 1612.94
LOANS & 3260.59 3572.27 4183.13 3991.68 5524.01
ADVANCES

47
CASH & BANK 446.96 685.54 881.93 631.08 1701.37
BALANCE
MIS EXP 65.2 15.77 209.37 140.4 153.31
TOTAL 29189.3 30734.4 35222.5 44027.3 61405.3

29124.1 30718.6 35013.1 43886.9 61252

NET WORKING CAPITAL OF S.P.M LTD FOR 2003-04 TO 2007-08

PARTICULARS 2003-04 2004 -05 2005-06 2006-07 2007-08

CURRENT ASSETS
INVENTORIES 1794.27 2284.39 2682.88 2547.78 2882.49
SUNDRY DEBTOR 3132.67 3275.01 2286.55 2429.95 1612.94
LOANS ADVANCES 3260.59 3572.27 4183.13 3991.68 5524.01
CASH &BANK 446.96 685.54 881.93 631.08 1701.37
BALANCE
TOTAL(A) 8634.49 9817.21 10034.49 9600.49 11720.8
1

CURRENT
LIABLITIES
CREDITORS 3208.74 2667.28 4015.67 4639.62 6638.21
ACCEPTANCE 100.73 156.19 94.69 3.71 34.30
DIVIDENTS 12.40 14.59 18.64 297.72 26.19
INTREST ACCURED 40.83 26.99 17.36 15.15 8.39
PROVISIONS 388.07 616.20 662.03 376.45 1198.41
OTHER LIABLITIES 921.36 822.06 1210.59 1764.09 2873.36
TOTAL(B) 4672.13 4303.31 6018.98 7096.74 10778.8
6
Net working capital(A- 3962.36 5513.9 4015.51 2503.75 941.95
B)

The Net working capital of the company is 3962.36lakhs in 2003-

04, 5513.9lakhs in 2004-05; 4015.51lakhs in 2005-06, 2503.75 lakhs
in2006-07,941.95 lakhs in 2007-08.The net working capital requirement of

48
the company during the five years period indicate slight (or) abnormal
fluctuation. From the above table it is observe that the Net working capital
requirement of the company has decreased in the year 2007-08 from which
shows net decreased of 3020.41 when compared to 2003-04.

STATEMENT OF CHANGES IN WORKING CAPITAL

The primary source of the statement is to explain the net changes in the net
working capital. In this statement all current assets and current liabilities
are individually listed. Against each account the figures pertaining to the
account at the beginning at the end of the account period is shown.

STATEMENT OF CHANGES IN WORKING CAPITAL

FOR THE YEAR 2003-04 TO 2004-05.
(Rs in lakhs)
PARTICULARS 2003-04 2004-05 Increase Decrease
CURRENTS
ASSETS
Inventories 1724.38 1794.27 69.89 -
Sundry debtors 2280.17 3132.67 852.5 -
Cash in bank 263.48 446.96 783.48 -
Loan & advances 3501.40 3260.59 - 240.81
Miscellaneous 119.35 60.20 - 54.15
exp
Total (A): 7888.78 8699.69 - -
CURRENT
LIABILITIES
Current liabilities 4226.53 4284.06 - 657.53
Provisions 292.70 388.07 - 95.37
Total (B): 4519.23 4672.13 - -

49
WORKING 3369.55 4027.56 - -
CAPITAL (A-B)
Increase in 658.01 - - 658.01
working capital
Total: 4027.56 4027.56 1705.87 1705.87

STATEMENT OF CHANGES IN WORKING CAPITAL

FOR THE YEAR 2004-05 TO 2005-06.
(Rs in lakhs)

PARTICULARS 2004-05 2005-06 Increase Decrease

CURRENTS
ASSETS
Inventories 1794.27 2287.29 493.02 -

Sundry debtors 3132.67 3302.44 169.80 -

Cash in bank 446.96 679.81 232.82 -

Loan & advances 3260.59 3524.24 263.65 -

Miscellaneous exp 65.20 14.27 - 50.96

Total (A): 8699.69 9808.05 - -

CURRENT
LIABILITIES
Current liabilities 4284.06 3683.08 600.98 -

Provisions 388.07 616.20 - 228.13

Total (B): 4672.13 4299.28 - -

WORKING 4027.56 5508.77 - -

CAPITAL (A-B)

50
Increase in 1481.21 - - 1481.21
working capital
Total: 5508.77 5508.77 1760.27 1760.27

STATEMENT OF CHANGES IN WORKING CAPITAL

FOR THE YEAR 2005-06 TO 2006-07.

(Rs in lakhs)
PARTICULARS 2005-06 2006-07 Increase Decrease

CURRENTS
ASSETS
Inventories 2287.29 2682.88 395.60 -

Sundry debtors 3302.44 2286.55 - 1015.80

Cash in bank 679.81 881.93 202.10 -

Loan & advances 3524.24 4183.13 658.90 -

Miscellaneous exp 14.27 209.37 195.10 -

Total (A): 9808.05 10243.86 - -

CURRENT
LIABILITIES
Current liabilities 3683.08 5356.95 - 1673.90

Provisions 616.20 662.03 - 45.83

Total (B): 4299.28 6018.98 - -

WORKING 5508.77 4224.88 - -

CAPITAL (A-B)
51
Increase in - 1283.89 1283.89 -
working capital
Total: 5508.77 5508.77 2735.53 2735.53

STATEMENT OF CHANGES IN WORKING CAPITAL

FOR THE YEAR 2006-07 TO 2007-08.

(Rs in lakhs)

PARTICULARS 2006-07 2007-08 Increase Decrease

CURRENTS
ASSETS
Inventories 2682.88 2379.81 - 303.07

Sundry debtors 2286.55 2429.95 143.40 -

Cash in bank 881.93 631.08 - 250.90

Loan & advances 4183.13 3991.68 - 191.50

Miscellaneous exp 209.37 140.40 - 68.97

Total (A): 10243.86 9572.92 - -

CURRENT
LIABILITIES
Current liabilities 5356.95 6720.29 - 1363.40

Provisions 662.03 376.45 285.70 -

Total (B): 6018.98 7096.74 - -

52
 WORKING 4224.88 2476.18 - -
CAPITAL (A-B)
Increase in - 1748.70 1748.70 -
working capital
Total: 4224.88 4224.88 2177.80 2177.80

COMPARATIVE BALANCE SHEET

(2003-2004)

Particulars As on As on Increase Increase

31-3-03 31-3-04 (or) (or)
Decrease Decrease
ASSETS
A. Current assets
Inventories 1724.38 1794.27 69.89 4.053
Sundry debtors 2280.17 3132.67 852.50 37.39
Cash & bank 263.48 446.97 783.48 297.35
Loans & advances 3501.40 3260.59 (240.81) (6.87)
Investment 465.00 475.00 10.00 2.15

Total (A): 8334.43 9109.49 875.06 10.63

B. Fixed assets
Net block 20228.93 19771.58 (457.37) (2.26)
Capital work in 189.85 243.04 53.19 28.01
progress and advance
Total (B): 20418.78 20014.62 (404.16) (1.98)

C. Miscellaneous exp
Preliminary exp 119.35 65.20 (54.15) (45.37)

53
Total (C): 119.35 65.20 (54.15) (45.37)

Total (A+B+C): 28772.58 29189.31 416.73 1.45

LIABILITIES
A. Current liabilities
& provisions:
liabilities 4226.53 4284.06 657.53 1.36
provisions 292.70 388.07 95.37 32.50
differed tax 2224.00 2480.94 256.94 11.55
liabilities

Total (A): 6743.23 7153.07 409.84 6.08

B. Shareholders
funds& loans:
Share capital 834.56 834.56 - -
Reserves & 14941.27 15465.05 523.78 3.51
surplus
secured loans 5990.04 5548.86 (441.18) (7.37)
unsecured loans 263.46 187.77 (75.69) (28.72)

Total (B): 22029.30 22036.30 (6.91) (32.58)

54
Total (A+B): 28772.53 29189.37 416.75 1.45

COMPARATIVE BALANCE SHEET

(2004-2005)
Increase Increase
As on As on
Particulars (or) (or)
31-3-04 31-3-05
Decrease Decrease
ASSETS
A. Current assets
Inventories 1794.27 2287.29 493.02 27.48
Sundry debtors 3132.67 3302.44 169.80 5.42
Cash & bank 446.96 679.81 232.82 52.09
Loans & 3260.59 3524.24 263.65 8.09
advances
Investment 475.00 576.19 101.19 21.30

Total (A): 9109.49 10369.97 1260.48 13.84

B. Fixed assets
Net block 19771.58 20293.96 522.38 2.64
Capital work in 243.04 343.80 100.76 41.40
progress and advance

Total (B): 20014.62 20637.76 623.14 3.12

55
C. Miscellaneous
exp
Preliminary exp 65.20 14.27 (50.93) (78.10)

Total (C): 65.20 14.27 (50.93) (78.10)

Total (A+B+C): 29189.31 31022 1832.69 6.28

LIABILITIES
A. Current
liabilities
& provisions:
liabilities 4284.06 3683.08 (600.98) 14.03
provisions 3880.7 616.20 228.13 57.78
differed tax 2480.94 2512.33 31.39 1.26
liabilities

Total (A): 7153.07 6811.60 341.46 4.78

B. Shareholders
funds& loans:
Share capital 834.56 834.56 - -
Reserves & 15464.05 16329.29 864.24 5.59
surplus
secured loans
unsecured loans 5548.86 6367.67 818.80 14.75
187.77 678.87 491.00 261.49

56
Total (B): 22036.30 24210.40 2174.04 9.87

Total (A+B): 29189.37 31022 2515.50 8.61

COMPARATIVE BALANCE SHEET

(2005-2006)

Increase
As on As on Increase (or)
Particulars (or)
31-3-05 31-3-06 Decrease
Decrease
ASSETS
A. Current assets
Inventories 2287.29 2682.88 395.6 17.29
Sundry debtors 3302.44 2286.55 (1015.80) 30.76
Cash & bank 679.81 881.93 202.1 29.70
Loans & 3524.24 4183.13 658.90 18.70
advances
Investment 576.19 2006.51 1430.32 248.20

Total (A): 10369.97 12041 2686.90 25.90

B. Fixed assets
Net block 20293.96 21690.39 1396.43 6.90
Capital work in 343.80 1281.69 937.90 273
progress and advance
Total (B): 20637.76 22972.10 2334.40 11.31
C. Miscellaneous
exp
Preliminary exp 14.27 209.37 195.10 1367.20

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Total (C): 14.27 209.37 195.10 1367.20
Total (A+B+C): 31022 35222.5 4200.5 13.54

LIABILITIES

A. Current liabilities
& provisions:
liabilities 3683.00 5356.95 1673.90 45.45
provisions 616.20 662.03 45.83 7.40
differed tax
liabilities 2512.33 2512.33 - -

Total (A): 6811.60 8531.30 1719.70 25.25

B. Shareholders
funds& loans:
Share capital
Reserves & 834.56 834.56 - -
surplus
secured loans 16329.29 16865.24 535.95 3.28
unsecured loans
6367.67 6311.34 (56.33) (0.88)
678.87 2680.00 2001.13 294.80

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Total (B): 24210.39 26691.20 2537.08 10.48

Total (A+B): 31022 35223 4201 13.55

COMPARATIVE BALANCE SHEET

(2006-2007)

Increase Increase
As on As on
Particulars (or) (or)
31-3-06 31-3-07
Decrease Decrease
ASSETS
A. Current assets
Inventories 2682.88 2379.81 (303.07) 11.30
Sundry debtors 2286.55 2429.95 143.40 6.27
Cash & bank 881.93 631.08 (250.90) (28.40)
Loans & advances
Investment 4183.13 3991.68 (191.50) (4.6)
2006.51 1729.39 (277.12) (13.80)

Total (A): 12041 11161.90 (879.10) (7.3)

B. Fixed assets
Net block 21690.39 20239.69 (1450.77) (6.70)
Capital work in 1281.69 12317.29 11035.60 861.10
progress and advance

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Total (B): 22972.08 32556.98 9585.70 41.7

C. Miscellaneous
exp
Preliminary exp 209.37 140.40 (68.97) (32.90)

Total (C): 209.37 140.40 (68.97) (32.90)

Total (A+B+C): 35222.50 43860.10 8637.60 24.52

LIABILITIES

A. Current liabilities
& provisions:
liabilities 5356.95 6720.29 1363.40 25.50
provisions 662.03 376.45 (285.60) 43.10
differed tax 2512.33 2478.09 (34.24) (1.36)
liabilities

Total (A): 8531.30 9574.80 1043.5 12.23

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B. Shareholders
funds& loans:
Share capital 834.56 1101.38 266.82 31.97
Reserves & 16865.24 19391.52 2526.30 14.90
surplus 6311.34 12262.40 5931.06 94.30
secured loans 2680.00 1697.13 (982.90) 36.70
unsecured
loans
Total (B): 26691.20 34452.40 7761.20 29.07

Total (A+B): 35223 44027.20 8804.20 24.99

COMPARATIVE BALANCE SHEET

(2007-2008)

Particulars As on As on Increase Increase

31-3-07 31-3-08 (or) (or)
Decrease Decrease
ASSETS
A. Current assets
Inventories 2379.81 2882.49 502.68 21.12
Sundry debtors 2429.95 1612.94 (817.01) (33.62)
Cash & bank
Loans & advances 631.08 1701.37 1070.29 169.59
Investment
3991.68 5524.01 1532.33 38.38

1729.39 336.67 (1392.72) (80.50)

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Total (A): 11161.90 12057.48 895.58 8.02

B. Fixed assets
Net block 20239.69 22037.86 1798.17 8.88
Capital work in 12317.29 27156.61 14839.30 120.47
progress and advance

Total (B): 32557.80 49194.47 16636.70 51.09

C. Miscellaneous
exp
Preliminary exp 140.40 153.31 12.91 9.19

Total (C): 140.40 153.31 12.91 9.19

Total (A+B+C): 43860.10 61405.30 17545.20 40.00

LIABILITIES

A. Current liabilities
& provisions:
liabilities 6720.29 9580.45 2860.16 42.60
provisions 376.45 1198.41 821.96 218.30
differed tax 2478.09 2143.19 (334.90) 13.51
liabilities

Total (A): 9574.80 12922.05 3347.25 34.95

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B. Shareholders
funds& loans:
Share capital 1101.38 1500.55 399.17 36.24
Reserves & 19391.52 22263.02 2871.50 14.80
surplus
secured loans 12262.40 22157.65 9895.30 80.70
unsecured loans 1697.13 2561.99 864.90 50.96
Total (B): 34452.40 48483.20 14030.80 40.73

Total (A+B): 44027.20 61405.30 17378 39.47

CALCULATION OF RATIO ANALYSIS

LIQUIDITY RATIO
CURRENT RATIO:

Current assets
Current ratio = -----------------------
Current liabilities

CURRENT
YEARS CURRENT ASSETS CURRENT RATIO
LIABILITIES

2003-04 8634.49 4672.13 1.85

2004-05 9817.21 4303.31 2.28
2005-06 10034.49 6018.98 1.67
2006-07 9600.49 7096.74 1.35
2007-08 1172.81 1077.86 1.09

63
 2003-04 2004-05 2005-2006 2006-07
2007-08

INTERPRETATION:

The ideal ratio is 2:1.The firms current Ratio is highest in 2004-

2005 i.e. 2.28 and lowest in 2007-2008 i.e. 1.09, It ability to meet current
liability is good and has greater Short-term solvency.

QUICK RATIO:

Quick Assets.
Quick Ratio = -------------------------
Current Liabilities.

Years Quick assets Current Quick Ratio

liabilities

2003-04 6840.22 4672.13 1.46

2004-05 7532.82 4303.31 1.75
2005-06 7351.61 6018.98 1.22
2006-07 7052.71 7096.74 0.99
2007-08 8838.32 10778.86 0.82

64
 2003-04 2004-05 2005-2006 2006-07
2007-08

INTERPRETATION:

The ideal ratio is 1:1. The firm’s Quick ratio is highest in 2003-2004
i.e. 1.75 and lowest in 2007-2008 i.e. 0.82.Quick Ratio exclude inventories
as they are deemed to be less liquid component as such firms liquidity
position is good.

LEVERAGE RATIO
DEBIT-EQUITY RATIO:

Long Term Liabilities

Debt-Equity Ratio = ----------------------------
Shareholders Funds

SHARE HOLDERS DEBT-EQUITY

LONG TERM DEBT
YEARS EQUITY RATIO

2003-04 5736.63 16299.61 0.35

2004-05 7046.54 16883.10 0.42

2005-06 8991.34 17699.80 0.51
2006-07 13959.53 20492.90 0.68
2006-07 24719.64 23763.57 1.04

65
 2003-04 2004-05 2005-2006 2006-07
2007-08

INTERPRETATION:

The ideal ratio is 2:1; the firm’s debt-equity ratio is highest in 2007-
2008 i.e., 1.04 and lowest in 2003-2004 i.e., 0.35. Lower is considered
safer. Lower the degree of equity higher the degree of protection enjoyed
by creditors.
PROPRIETARY RATIO:

Prop Fund or Net Worth

Proprietary Ratio = -----------------------------------
Total Assets

PROPRIETARY
YEAR NET WORTH TOTAL ASSETS
RATIO

2003-04 16299.61 29124.11 0.56

2004-05 16883.10 30718.60 0.55
2005-06 17699.80 35013.08 0.51
2006-07 20492.90 43886.86 0.47
2007-08 23763.57 61251.95 0.39

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 2003-04 2004-05 2005-2006 2006-07
2007-08

INTERPRETATION:

The ideal ratio is 0.5. 0.5 is the satisfactory proprietary ratio. The
firm’s proprietary ratio is highest in 2003-2004 i.e., 0.56 and lowest in
2007-2008 i.e. 0.39. Higher is safer.

FIXED ASSETS RATIO:

Fixed Asset Ratio

Fixed Assets Ratio = -------------------------
Capital employed

FIXED
YEAR FIXED ASSETS CAPITAL EMPLOYED ASSET
RATIO

2003-04 20014.62 21971.04 0.91

2004-05 20647.23 23913.87 0.86
2005-06 22972.08 26481.77 0.87
2006-07 32556.98 34312.03 0.95
2007-08 49194.47 49329.9 0.99

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 2003-04 2004-05 2005-2006 2006-07
2007-08

INTERPRETATION:

The ideal ratio is (0.67 or less than 1). The firm’s fixed assets ratio
is highest in 2007-2008 i.e., 0.99 and lowest in 2004-2005 i.e., 0.86. This
ratio indicates whether the firm has raised adequate long-term funds to
meet its fixed assets requirement.
TOTAL DEBT RATIO:

Long term liabilities + current liabilities

Total Debt Ratio = ------------------------------------------------------
Shareholders Funds

YEARS L T LIAB+C L SHARE HOLDERS FUND TOTAL DEBT

RATIO

2003-04 12889.7 16299.61 0.790798

13851.27 16883.10 0.820422
2004-05

2005-06 17522.65 17699.80 0.989991

2006-07 23534.36 20492.90 1.148415

2007-08 37641.69 23763.57 1.584008

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 2003-04 2004-05 2005-2006 2006-07
2007-08

INTERPRETATION:

The firms total debt ratio is highest in 2007-2008 i.e. 1.58 and
lowest in 2003-2004 i.e., 0.79. This ratio shows the relationship between
external equity (Long term liabilities + current liabilities) and external
equity.

INTEREST COVERAGE RATIO:

PBIT
Interest Coverage Ratio = -----------------------
Interest

INT.COVER-
YEARS PBIT INTEREST
AGE RATIO

2003-04 -254.81 45.192 -5.64

2004-05 2151.04 159.9 13.45

2005-06 1801.95 212.93 8.46
2006-07 1964.66 365.34 5.38
2007-08 1747.37 214.98 8.13

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 2003-04 2004-05 2005-2006 2006-07
2007-08

INTERPRETATIONS:

The PBIT should be ideally 6 to 7 time’s fixed interest charges.

Interest coverage ratio is highest in 2004-2005 i.e., 13.45 and lowest in
2003- 2004 i.e., -5.64. Highest is considered it can easily meet its interest
burden even PBIT suffer a decline.

ACTIVITY RATIO
INVENTORY TURNOVER RATIO:

Net sales
Inventory Turnover Ratio = ------------------
Closing Stock

INV.TURNOVER
YEARS NET SALES CLOSING STOCK
RATIO
2003-04 20405.30 321.97 63.38
2004-05 21657.22 302.55 71.58
2005-06 22025.48 487.93 45.14
2006-07 23331.99 439.47 53.09

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 2007-08 24186.10 394.8 61.26

2003-04 2004-05 2005-2006 2006-07

2007-08

INTERPRETATION:

The ideal ratio is (Higher or 8 times). The ratio is highest in 2005-

2006 i.e., 71.58 & lowest in 2006-2007 i.e., 45.14. The high inventory
turnover indicates efficient management of inventory.

DEBTORS TURNOVER RATIO:

Net annual credits

Debtors Turnover Ratio = -----------------------------
Trade Debtors

DR.TURNOVER
YEARS CREDIT SALES TRADE DEBTORS
RATIO
2003-04 20405.30 3132.67 6.51
2004-05 21657.22 4868.78 4.45
2005-06 22025.48 3937.91 5.59
2006-07 23331.99 3573.30 6.53
2007-08 24186.10 2827.92 8.55

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 2003-04 2004-05 2005-2006 2006-07 2007-
08

INTERPRETATION:

The ratio is highest in 2007-2008 i.e., 8.55 & lowest in 2004-2005

i.e. 4.45. Highest ratio shows the efficient management of credit.

CREDITOR TURNOVER RATIO:

Net Purchases
Creditor Turnover Ratio = --------------------------------
Avg.Creditor Period

CR.TURNOVER
YEARS NET PUR A CR+BP
RATIO
2003-04 4731.57 26993.47 0.18
2004-05 6016.93 23902.44 0.25
2005-06 6429.29 3298.96 1.95
2006-07 6320.05 4249.13 1.49
2007-08 7132.68 5468.79 1.30

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 2003-04 2004-05 2005-2006 2006-07 2007-
08

INTERPRETATION:

The ideal ratio is (lower is the best). This ratio is highest in 2005-
2006 i.e., 1.95. The lowest in 2003-2004 i.e., 0.18. This ratio explains
velocity with which creditors are paid. High ratio indicates that creditors
are not paid in times.

WORKING CAPITAL TURNOVER RATIO:

Net sales
Working Capital Turnover Ratio = ----------------------------
Net Working Capital

NETWORKING WR.CAP.TURNOVER
YEARS NET SALES
CAPITAL RATIO
2003-04 20405.3 3962.36 5.15
2004-05 21657.22 5513.9 3.93
2005-06 22025.48 4015.51 5.48
2006-07 23331.99 2503.75 9.32
2007-08 24186.1 941.95 25.67

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 2003-04 2004-05 2005-2006 2006-07 2007-
08

INTERPRETATION:

The higher is the best. The working capital turnover ratio is highest
in 2007-2008 i.e., 25.67 and lowest in 2004-2005 i.e., 3.93. The higher is
safer.

FIXED ASSETS TURNOVER RATIO:

Sales
Fixed Assets Turnover Ratio = -------------------
Fixed Assets

FIXED ASSET
YEAR SALES FIXED ASSETS
TURNOVER RATIO

2003-04 23190.14 20014.62 1.16

2004-05 21662.43 20647.23 1.05

2005-06 22024.17 22972.08 0.96

2006-07 23331.99 32556.98 0.72
2007-08 24126.1 49194.47 0.49

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 2003-04 2004-05 2005-2006 2006-07
2007-08

INTERPRETATION:

Fixed assets turnover ratio is highest in 2003-2004 i.e., 1.16 and

lowest in 2007-2008 i.e., 0.49. The higher the ratio the higher ratio is the
better is the performance on the other hand a low ratio indicates that the
fixed assets are not being effectively used.

INVENTORY TO NET WORKING CAPITAL:

Closing inventories
Inventory to Net Working Capital = ------------------------------
Net Working

INV.TO NET
NET WORKING
YEAR CLOSING INVENTORIES WORKING
CAPITAL
CAPITAL

2003-04 1794.27 3962.36 0.45

2004-05 2284.39 5513.9 0.41
2005-06 2682.88 4015.51 0.67

2006-07 2547.78 2503.75 1.02

75
 2007-08 2882.49 941.95 3.06

2003-04 2004-05 2005-2006 2006-07 2007-

08

INTERPRETATION:

Inventory to net working capital is highest in the year 2007-2008

i.e., 3.06 & lowest in the year 2004-2005 i.e., 0.41. This analysis indicates
that the ratio is always less than 1, which is a healthy sign as to
management of inventory in terms of working capital.
CURRENT ASSETS TURNOVER RATIO:

Current Asset
Current Assets Turnover Ratio = ----------------------
Sales

YEAR CURRENT ASSETS SALES C.A.T RATIO

2003-04 8634.49 23190.14 0.37

2004-05 9817.21 21662.43 0.45

2005-06 10034.49 22024.17 0.46
2006-07 9600.49 23331.99 0.41
2007-08 11720.81 24126.1 0.48

76
 2003-04 2004-05 2005-2006 2006-07
2007-08

INTERPRETATION:

The current assets turnover ratio is shows in times. This ratio is

highest in the year 2007-2008 i.e., 0.48 & lowest in 2003-2004 i.e., 0.37.
This ratio is use to find out the current assets and also find out sales.

PROFITABILITY RATIO
NET PROFIT RATIO:

Earnings After Interest And Taxes (EAT)

Net Profit Ratio = --------------------------------------------------------- X 100
Sales

YEAR EAT SALES N.P RATIO

2003-04 1246.66 23190.14 5.38

2004-05 1792.00 21662.43 8.27
2005-06 1409.94 22024.17 6.40
2006-07 1459.33 23331.99 6.25

77
 2007-08 1332.39 24126.10 5.52

2003-04 2004-05 2005-2006 2006-07

2007-08

INTERPRETATION:

This ratio is shows that the higher is the better. This ratio highest in
2004-2005 i.e., 8.27 and lowest in 2003-2004 i.e., 5.38. There is a high
net profit in 2007-2008 which means there is efficiency of production,
administration, selling financing, pricing and tax management.
RETURN ON ASSETS:

Net Profit After Interest And Tax

Return on Assets = -------------------------------------------------- X100
Total Assets
NET PROFIT AFTER RETURN ON
YEAR TOTAL ASSETS
INTEREST AND TAX ASSETS

2003-04 1246.66 29189.31 4.27

2004-05 1792.00 30734.37 5.83

2005-06 1409.94 35222.45 4.00

2006-07 1459.33 44027.26 3.31

2007-08 1332.39 61405.26 2.17

78
 2003-04 2004-05 2005-2006 2006-07
2007-08

INTERPRETATION:

This ratio is shows that the higher is the better. This ratio highest in
2004-2005 i.e., 5.83 & lowest in 2007-2008 i.e., 2.17. Here the
profitability ratio is measured in terms of relationship between net profit
and net assets.

CONCLUSION

 The net working capital requirements of the company indicate slight

(or) abnormal fluctuations. The net working capital decreased in the

year 2007-2008 by 3020.42,when compared to 2003-2004.

 Statement of change in working capital shows increasing trend for

the years 2003-2008, which is a good sign.

 In Comparative balance sheet the current asset shows increasing

trend and the current liability shows decreasing trend. But in 2007-
2008 there is a slight change.

79
 The current assets are higher than current liabilities. The company
has better liquidity position.

 Debt-equity ratio is low which means greater degree of protection

enjoyed by the creditors.

 The fixed assets turnover ratio is high and there is greater efficiency
in assets management and utilization.

 Working capital turnover ratios are high. It is due to the effective

management of working capital.

SUGGESTIONS

 The following suggestion based on the analysis of balance sheet,

working capital offered from ensuring effective management of

working capital.

 Working capital requirements of the company are to be estimated

well before the commencement of final year, so that performance is
evaluated and corrective steps can be initiated.

 S.P.M.Ltd has focused the attention to reduce the investment in

loans and advances and sundry debtors. In the area surplus are pure
spare have been identified in various projects.

80
 The optimum level of various components of current assets is to be
determined so that a high level or low level of particular component
can be observed.

 The company has to adopt the inventory control technology such as

ABC analysis and ordering level.

 The company must prepare the cash budget in advance for the next
account period.

 The over all company performance is extremely well and over all
working capital is also satisfactory.

BIBILOGRAPHY

 Prasanna Chandra : FINANCIAL MANAGEMENT

 Khan & Jain: FINANCIAL MANAGEMENT

 Van Horne Wachowicz: FUNDAMENTALS OF FINANCIAL

MANAGEMENT

 I.M. Panday : FINANCIAL MANAGEMENT

81
 Van Horne Wachowicz: FUNDAMENTALS OF FINANCIAL
MANAGEMENT

 Neveu Raymond.r: FUNDAMENTAL OF MANAGERIAL OF

FINANCE

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“www.accounts@sirpurpaper.com

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