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SUMMER TRAINING REPORT
ON
WORKING CAPITAL MANAGEMENT
LUCKNOW PRODUCERS CO-OPERATIVE MILK UNION LTD.
UNDER THE GUIDANCE OF
COMPANY GUIDE NAME COLLEGE GUIDE NAME
MR. PANKAJ MEHROTRA MR. SANJAY TANDON
(Finance Manager) (HOD- MBA Department)
Submitted in the partial fulfillment for the award of Degree of Master of
Business Administration
BY
MOHD. MOHSIN KHAN
MBA IInd Year (Finance & Marketing)
Roll No. 1116370020
DEPARTMENT OF MANAGEMENT STUDIES
DR. M. C. SAXENA COLLEGE OF ENGINEERING & TECHNOLOGY,
LUCKNOW
(Affiliated to G.B.T.U)
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COMPANY CERTIFICATE
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COLLEGE CERTIFICATE
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ACKNOWLEDGEMENT
I am thankful to management to study the WORKING CAPITAL
MANAGEMENT for granting the permission, corporation and valuable information for
competition of this project.
No words are enough to thankMr. PANKAJ MEHROTRA (Finance Manager),
LUCKNOW PRODUCERS CO-OPERATIVE MILK UNION LTD. who is not
only inspired me to work on this project but also accepted to guide me.
In spite of heavy responsibilities and busy schedules, they always managed time
to provide proper guidance.
Last but not the least, I would like to say that my parents and friends forgiving me
their constant support and encouragement in completion of my project.
Completion of this report was made possible due to enduring help of many people.
I avail this opportunity to express my deep gratitude to them.
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EXECUTIVE SUMMARY
Considering the growing use of project finance, we undertook this project with
an objective of understanding the salient features of project finance. It is a method of
financing very large capital intensive projects, with long gestation period, where the
lenders rely on the assets created for the project as security and the cash flow generated
by the project as source of funds for repaying their dues. As project financing is adopted by a
majority of companies at least once in their lifetime, we decided to study this concept in
detail. Banks as well as non-banking financial companies provide project financing. Banks
enjoy a major market share among the borrowers and the Parag are lagging far behind
and will slowly lose their market share if adequate steps are not taken. Banks are usually
preferred over Parag due to the security aspect and brand name. Also the
documentation process is one such aspect which the borrowers find lengthy and
tiresome in both the banks and Parag. Awareness regarding the nationalized banks
providing project finance is more than the Parag providing the same. Also a borrower
chooses a project finance provider mainly due reference and time frame within which
the loan would be approved. The Parag need to take adequate steps to improve their
position in the minds of the borrowers so as to stay in the market. The Parag should try
to inculcate in the minds of the borrowers that Parag is as safe as any bank and should try and
develop a feeling of security among borrowers with regard to Parag.
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OBJECTIVES OF THE STUDY
The purpose of this project is to diagnose the information contained in financial
statement as to judge the profitability and current financial affairs.
To estimate the working capital requirement of the firm , Just like a doctor
examines his patient by recording his body temperature, blood pressure, etc. before
making any conclusion regarding the illness and before making his conclusion regarding
the illness and before giving the treatment, a financial analyst analysis the financial
statement with various tools and techniques of analysis before commenting upon the
financial affairs (positive and negative) & working capital condition of an enterprise. The
analysis and interpretation of financial statement is essential to bring out the mystery
behind figures in financial statements. The main objectives of the study as related to the
topics are as under:-
To find out the concept of working capital and cash flow analysis. To find and analysis the group wise composition of working capital in
Parag dairy.
To study the different mechanism to maintain proper working capital in paragdairy.
Estimation of working capital. Evaluate working capital requirement in the manufacturing firm. To find various alternatives of working capital To analysis the financial position of Parag dairy.
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CONTENTS OR INDEX
Section-A (Introduction to Company)
Section-B (Introduction to Topic)
Section-C (Research Methodology)
1.Research Methodology2.Data Analysis3.Findings4.Conclusion5.Recommendations/Suggestions6.Limitations7.Bibliography8.Appendix
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SECTIONA
INTRODUCTION TO
COMPANY
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ABOUT LUCKNOW PRODUCERS CO-OPERATIVE
MILK UNION LTD.
The common brand name of the company is PARAG the meaning of PARAG is
the pollen of flower the slogan in the logo is:-
PURE NATURAL & GOOD HEALTH
Parag milk shed is situated in the Lucknow, the capital of Uttar Pradesh since
independence it has formed part of the traditional supply line of agriculture products from the
village to the big cities rich in its milk potential the milk shed has, in the source of last few
decades been thoroughly exploited by small traders and powerful contract or sand well
organized private dairies. Thus, while such intermediaries were retaining large profits the rural
milk producers found the imposition deteriorating day by day.
In 1950, a co-operative milk supply union was organized in Lucknow, which started
collecting milk from village and supplied to Lucknow and local markets. This milk union
continued function for about a decade, in them earn time Lucknow milk scheme was
established by government of India in 1959-60 to ensure cheaper milk to the local pollution of
Lucknow. The scheme started operating through 12 chilling centers in Eastern Uttar Pradesh.
These chilling centers were mainly coated in thither district of Lucknow, Barabanki,
Raebareli, Kanpur, Unnao, Sitapur, etc. The milk was mainly collected through contractors.
10 milk unions were also found almost at the same time, around each chilling center. These
continued functioning in a rather lop-sided manner till 1977.
Gradually all the milk union almost becomes de-functioning and was supplying very
little quantity of milk during the years 1970-77. Obviously contractors had monopoly and
collected major share of milk which was either supplied to Lucknow or to the local population
of the city.
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This programmer was launched in Uttar Pradesh in 1972 and the implementing agency
in the was pradeshik co-operative dairy federation limited which was framed in the year.
The basic idea was to replicate and pattern societies in Uttar Pradesh. In August- September
1972.
Organization of societies in Lucknow district was taken UP Bar out, Mohanlalganj,
Amausi blocks. A spear head team from national dairy development board was posted in
Lucknow, which started functioning from April 1978 with a team of 27 employees drawn
from Lucknow milk 198 milk procurement co-operative societies by the year 1981, when the
operation flood-14programme ended.
Feeder balancing dairy, Lucknow Producers Co-operative Milk Union Ltd. Was set up
under operation flood-1 programmer with the specific purpose of supplying milk of local
markets and other districts.
Dairies and conversion surplus milk into various dairy products. This dairy is situated in
the middle of Lucknow. The dairy was commissioned in April 1978 and processed the liquid
milk procured from the then milk shed comprising Lucknow, Raebareli, Barabanki and
Unnao.
The purpose of establishing feeder balancing dairy, Lucknow cow as to provide remunerative
market for milk produced in the milk shed comprising district of Lucknow, Barabanki,
Raebareli, Kanpur and Sitapur as envisaged under operation flood-1scheme. Thus feeder
balancing dairy was obliged to receive entire surplus milk from the rural areas, through a
network of milk co-op. In 1978-79 the average handing of milk per day at FBD-Lucknow
Producers Co-operative Milk Union Ltd. Was 49,300kg. With peak handing of 1,04,950kg in
the February.
In April 1981 Lucknow Producers Co-operative Milk Union Ltd. Launched
pasteurized whole milk packed in polythene sachet for local consumers. The supply of milk
was gradually extended to other local markets
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As the basic idea of establishing FBD-Lucknow Producers Co-operative Milk Union
Ltd. was to convert surplus milk into various dairy-products, this activity started in
September1978 with manufacture of skimmed milk powder and ghee. The manufacturing of
table butter was started from April1981.
In view of milk production procurement and marketing potential of Lucknow
Producers Co- operative Milk Union Ltd, and expansion programmed has been undertaken
by N.D.D.B. on turn basis. The target set is as under:
Increasing processing capacity from1 lack to 3.5 liters per day. Increasing power plant capacity from 10 tons to 40 tons per day. Increasing the capacity of ghee plant from 1.m.t. to 4.m.t. per day. Increasing the capacity of butter manufacturing up to 16.m.t. per day. The work of expansion has been complete in 1989.
The work of expanded dairy started functioning on full capacity in 1991-1993 year. The
liquid milk and products are selling in the market in the brand name of PARAG.
The milk product has been marketed by P.C.D.F. Lucknow. The sale of liquid milk has
been carried out Lucknow Producers Co-operative Milk Union Ltd. Lucknow.
In the year 1983 P.C.D.F. Ltd. started working under Operation FloodII (White
revolution) scheme. Mostly unit milk Sahakari Board where connected under Operation
FloodII, having the name Dugdh Utpadak Sahakari Sangh (D.U.S.S.) Ltd. P.C.D.F. Ltd.
Takes royalty of common brand name PARAG and all the important policy taken by
Pradeshik Co-operative Dairy Federation Ltd. Who monitor stop all the D.U.S.S. Ltd. i.e.
Lucknow, Kanpur, Varanasi.
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PARAG provides hygienic, nutritious milk and milk product. In the year 1983 Operation
FloodII scheme was launched; the main objectives of the Operation Flood were following
To collect the milk directly from the producers (villagers through society). To insure the supply of quality milk collected from the villagers which being sold in the
market area of city.
To save the producers, villagers and the customers from the middleman.The milk is collected firstly to the society level then it comes to D.U.S.S. level finely it comes
under the state level i.e. federation.
Lucknow is the capital city of Uttar Pradesh. Total area of district is 2528 square km
91588 hectare is cultivated land. Lucknow producers cooperative milk union ltd. (Parag dairy
Lucknow) was established in 1938. Lucknow milk is the first cooperative dairy established in
India. Very few people know the fact the process developed by Lucknow Milk Union was later
used in spirit in Gujrat co operative milk movement and is now famous as anand pattern .
Lucknow milk union was then chosen as one of the model dairy to implement operation flood
programme started by national dairy development board (NDDB) in 1970.
The aim of Lucknow milk union is to provide reasonable price to farmer thereby
defending them from exploitation of milk vendors and earn supplementary income part from
agriculture. On the other hand the milk union supplies high quality pure milk and milk
products at reasonable prices to urban consumer under the brand name Parag. The milk union
has been running clean milk mend breed conservation programmes
UPDASP where milk producer have been educated in producing and supplying milk
under clean andhygienic condition and provided the producer with semen of pure Indian breed
for the improvement of the present breed of animal. Lucknow milk union is established
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Auto milk collection unit (AMCU) in societies for giving transparent payment system for
milk given by farmer. By the established of this machine farmer are getting full price and actual
detail of fat and snf of their milk. Presently AMCU are running successfully in 259 societies
27 bulk milk coolers are established in various rural area of Lucknow for keeping high quality of
milk procured in those area by milk societies
Lucknow milk union has set up of teams for quality check and health awareness
programme for the urban consumer of milk. The team visit different localities in city, test their
milk and provide on the spot results to the consumer. The milk union also organizes school
childrens visit to its dairy plant to create awareness on milk processing and other related
system amongst them. The milk union has obtained ISO and HACCP certification in year 2007.
For coming months lucknow milk union has committed itself to provide a
minimum of 160000 liters of high qualities Parag milk per day to the urban consumers. Apart
from selling milk in pouches, the milk union is also gearing itself to provide fresh loose milk to
the city consumers. Towards this end, the milk supply vehicles insulated with Japanese eco-
friendly standards have already been introduced in various area of the city. 87 all time milk
booths (ATM) are established for supply of high quality milk to the consumers round the clock.
Lucknow milk union is able to maintain high quality standards in its milk and milk products
through close monitoring of processes in all its stages of production, processing and packaging.
The constant increase in the sales figure of the milk union are a reflection of their sincere
efforts and the growing confidence of the consumers in Parag milk products. The organization
has a chain of around 2000 agent providing employment to the unemployed youths door to door
milk delivery system through mini insulated tanker thru commission agent with attractive
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commission rates has been started in the city. The requirement for this system is to have a mini
insulated tanker for which one has to arrange finance up to Rs. 50000/- himself and rest amount
comes through bank finance.
The new milk products launched by the milk union such as chhena kheer, besan
laddoo, and chhachh, gulabjamun etc. have begin tickling the taste buds of the consumers giving
them great pleasure and value for money.
INDIAN DAIRY INDUSTRY
Worlds largest food factory, in celebration India Dairy.com invites you to worlds
highest milk producers. And all set to find out more about their achievements. Here you can
find about answer to every question about dairy.Be it investors, researchers, entrepreneurs or
the merely curious Indian dairy. It has something for everyone.
Today India is The Oyster of the Global dairy industry. It offers opportunities galore to
entrepreneurs Worldwide, who wish to capitalize on one of the worlds largest and fastest
growing market for milk and milk products. A bagful of pearls awaits the international dairy
processor in India .The Indian dairy industry is rapidly growing, trying to keep pace with the
galloping progress around the world .As he expands his overseas operations to India , many
profitable options awaits him. He may transfer technology, sign joint ventures or use India as a
sourcing center for regional exports. The liberalization of
Indian economy beckons to MNCs and foreign investors alike. India has one of the largest
livestock populations in the world. Fifty percent of the buffaloes and twenty percent of the cattle
in the world are found in India, most of which are milk cows and buffaloes. Dairy development
in India has been acknowledged the world over as one of modern Indias most successful
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developmental programme. Today, India is the largest milk producing country inthe world. Milk
and milk products is rated as one of the most promising sectors which deserves appreciation in a
big way. When the world milk production registered a negative growth of 2 percent, India
performed much better with percent growth. The total milk production is over 72 million tones
and the demand for milk is estimated at around 80 million tones. By 2005, the value of Indian
dairy produce is expected to be Rs. 1,000,000 million. In the last six years foreign investment in
this sector stood at Rs. 3600 million which is about one fourth of the total investmentmade in
this sector. Manufacture of casein and lactose, largely being imported presently, has good scope.
Exports of milk products have been decimalized. The milk surplus states in India are Uttar
Pradesh, Punjab, Haryana, Rajasthan, Gujarat, Maharashtra, Andhra Pradesh, Karnataka and
Tamil Nadu. The manufacturing of milk products is concentrated in these milk surplus States.
Technology Export Potential of Milk and Dairy Sector The production of milk products
i.e. milk products including infant milk food, malted food, condensed milk & cheese stood at
3.07 lakhs tones in 1999-2000. Production of milk-powder including infant milk- food had risen
to 2.25 lakhs tons in 1999-2000, whereas that of malted food is at 65000 tons. The trends in
production of milk products in India are given in Annexure 1.Cheese and condensed milk
production stands at 5000 and 11000 tons respectively. Some plants are coming-up for
producing lactose, casein and improved cheese varieties.
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Livestock Population
India is rich in its livestock wealth. It accounts for nearly 15.8% of the world cattle
population, more thanhalf of the world buffalo population. As per FAO production year book
1998, the population of cattle, buffaloes, sheep and goats in the world and in India is given in
Annexure 2. As per the 1992 livestock census of Ministry of Agriculture, highest cattle
population was reported in Madhya Pradesh(28.68 million nos.) followed by Uttar Pradesh
(25.63 million nos.) Bihar (22.15 million nos.) Maharashtra (17.44 million nos.) and West
Bengal (17.45 million nos.). According to livestock census the highest population of buffaloes
is reported in U.P. (20.08 million nos.) followed by A.P. (9.15 million nos.), M.P. (7.97 million
nos.) and Rajasthan (7.74 million nos).
Production of Milk and Milk Products
The milk production was almost stagnant between 1947 to 1970 with an annual growth
rate of merely one percent Livestock accounts for nearly 15.8% of the world cattle
population, more thanhalf of the world buffalo population. Technology Export
Potential of Milk and Dairy Sector which has since registered a vigorous growth of over
4.5% per annum after the year 1970. The production of milk in India has been increasing
steadily as shown in Annexure 3. The major milk producing states are UP, Punjab,
Rajasthan, M.P, Maharashtra and Gujarat. Number of milk products manufacturing Plants has
come up in these states for Processing of milk.
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Present Status
The Five Year Plan, achieving an annual output of over 60 million tones of milk. This
not only places our industry second in the world after the United States, but represents
sustained growth in real availability of milk and milk products for our burgeoning
population. Most important, dairying has become an important secondary source of income
for millions of rural families. Improved genetic material achieved primarily through cross
breeding of cattle and upgrading of the national buffalo herd has played a significant role in
increasing the productivity. Gradual extension of improved husbandry practices; increase in
consumption of balanced concentrates made possible, in part, through innovations in the
field of nutrition; expanded area under fodder; greater access to veterinary care; and advances in
the fight against endemic and epidemic cattle diseases have also contributed to increased
production and productivity. About three quarters of the milk produced is consumed at the
household level. Of the milk supplied to the market, about 9-11 percent is processed in over
275 dairy plants and Dairying has become an important secondary source of millions of rural
families.6 Technology Export Potential of Milk and Dairy Sector 83 milk product factories
operated by cooperative, private dairy processors, and government milk schemes in the
organized sector. Milk channeled through Operation Flood cooperatives is generally processed in
dairy plants located in the rural areas and then transported into cities and towns. Operation
Flood Milk productions account for about 1 0% of total milk production or 40% of the marketed
output. The balance (about 90% of total production) is handled by the private traders and
processors. About 45% of milk production is consumed as fluid milk. About 35% is processed
into butter or ghee; about 7% is processed into Paneer (cottage cheese) and other cheeses, about
4% is converted into milk powder; and the balance is used for other products such as Dahi
(yoghurt) and sweet meats. In recent years, there has been an increasing ice cream production
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as foreign companies have invested in India. Industry Segments are:
1. Cheese:
The organized cheese market including its variants like processed cheese, cheese spreads,
mozzarella, flavoredand spiced cheese, is placed at around Rs 3 bn. processed cheese at
50% of the overall market is Rs. 1.5 bn strong. The next most popular variant is cheese spread
claiming a share of around 30% of the total cheese market. The market is primarily an
urban phenomenon and is known to be growing at around 15%. The market for cheese cubes
slices and tins are growing. The flavored cheese segment has been declining. About 45% of
milk production is consumed as fluid milk. About 35% is processed into butter o r or ghee
is processed into paneer (cottage cheese) and other cheeses, about 4% is converted into milk
powder; and the balance is used for other products such as Dahi (yoghurt) and sweet meats.
Technology Export Potential of Milk and Dairy Sector 7 operator in the branded cheese market
in India with about 60% market share in the branded market. It pioneered the market for
processed, branded cheese. What GCMMF did was to develop the technology to make cheese
from buffalo milk. World over it is made from cow milk. Annexure 4 gives the market size of
cheese in India. Other cheese manufacturers are: Britannia Industries, Dynamic Dairy Industries
(DDI), Hiranandani, ETA and Metro.
2.Ice Cream:
The ice cream market in India is estimated to have reached the level of Rs. 10 bn per
annum, of which the organized sector is about Rs. 6 bn. The unorganized market has been
shrinking. The per capita ice cream consumption in the country is extremely low at 250 ml per
year compared with that of the US, which is about 22 liter. The organized market for ice creams
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of about 60 mn liters has been growing at around 15% per annum. Theice cream industry has,
in a short span of time, undergone a structural transformation. Annexure 5 (a) and 5 (b)
shows the growth of market size of Ice Cream in India and the market structure of this segment
respectively.
3. Chocolates:
The Chocolates market is estimated at 35,000 tons valued at approximately Rs. 8.0 bn.
The chocolate counter market is worth nearly Rs. 2.5 to 3.5 bn and the rest is made up of
chocolate bars. Chocolates in fact make up less than a fourth of the sweet-tooth products
including sugar boiled confectionery mints and chewing gums. Sugar confectionery is by far the
largest segment with a share market growth rates indicate that the cheese market in India is
growing steadily. The organized market for ice creams of about 60 mn liters has been growing
at around 15% per annum. Technology Export Potential of Milk and Dairy Sector exceeding
60%. Annexure 6 (a) and 6 (b) gives the market size are structure of chocolate market in India.
4. Dairy Whiteners:
The organized dairy industry processes an estimated 15% of the total milk output in
India. The industry has maintained a high growth profile, especially in the wake of the
Operation Flood, colloquially also termed as White Revolution, initiated in early 1980s. Today
India produces over 80 mn tones of milk annually. In terms of value, the total milk economy
is estimated at Rs. 1200 bn. The market for dairy whiteners (commercially knows as beverage
milk powders and condensed milk) and creamers are around Rs. 2,750 mn. The growth of
market size of dairy whiteners in the last 10 years is given in Annexure 7 (a) and 7 (b).
Apart from MNCs like Nestle and companies like Britannia, the Indian enterprises have also
made perceptible progress. Names like Amul, Sapan, Vijaya, Mohan, Parag and several others
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have been seen in the marketplace with their whiteners.
Aseptically packed creamer in miniportions is widely used in the west, but has yet to enter the
Indian market. Aseptically packed creamer involves techniques to impart a longer shelf life to
the product. It is packed in small cups ready to be poured into a cup of tea or coffee. Creamer is
fresh milk with increased fat content (up to 12%) and is aseptically packed after
undergoing Ultra Heat Treatment (UHT) at 140oC. Its introduction will affect the existing
whitener market as a natural milk product with a longer shelf life. The organized dairy
industry processes an estimated 15 % of the total milk
output in India. The industry has maintained a high growth profile, especially in the
wake of the Operation Flood, colloquially also termed as White Revolution initiated nearly
1980s.Technology Export Potential of Milk and Dairy Sector The potential for exports;
especially to neighboring countries and the countries in the Middle east, the Gulf and Africa, also
exist and could be exploited.
5. Baby Foods:
Conventionally, foods (solids, semi-solids and liquids) bad ministered to babies of up to
two years of age are classified as baby foods. In some cases, however, baby foods are
continued to be given to children older than of two years depending on socio-economic, health-
related and geosocietal conventions. The concept of packaged baby foods is relatively recent
in India. The traditional homemade foods have dominated this sector until the induction of
packaged foods mostly from multinational companies. Baby foods have assumed special
significance in the recent years because of greater awareness of hygiene and health and
constraints on time of busy mothers. A reliable, heal th y, convenient and ready to-use
baby food is the requirement of the day. India is catching up with the rest of the developed
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world in this area rater fast. A comparison of growth rates over the last 10 years shows that
these have been a steady rise of market size. Annexure 8 (a) and 8 (b) gives the market size
and the market structure of baby foods in India. The packaged food products for babies are
broadly classified into a) cereal-based such as Nestum; b) cereal-based with milk such as
Farex, Cerelax; c) milk-based such as Lactogen, d) ready-to-feed liquids, and e) rusks and
biscuits. Infant milk foods constitute the most significant segment. The potential for exports;
especially to neighboring countries and the countries in the Middle East, the Gulf and
Africa, exist and could be exploited. Technology Export Potential of Milk and Dairy Sector.
6. Biscuits and Bakery Products:
The Indian bakery industry is dominated by the small-scale sector with an estimated
50,000 small and medium-size producers, besides the 15 units in the organized sector. Apart
from the nature of the industry which gravitates to the markets and caters to the local tastes,
the industry is widely dispersed. Thetwo major bakery products, biscuits and bread, account for
82% of all bakery production. The unorganized sector accounts for about two-thirds of the total
biscuits production estimated at 1.3 mn tones. It also accounts for 80% of the total bread
production which is estimated at 1.5 mn tones and around 90% of the other bakery products
estimated at 0.6 mn tones. The last includes pastries, cakes, buns, rusks and others. Annexure
9 (a) and 9 (b) gives the growth of market size of biscuits over the last ten years. Biscuit is
estimated to enjoy around 37% share by volume and 75% by value of the bakery industry. The
organized sector caters to the me di um and p re mi um segm ents , which a re re la ti ve ly less
price-sensitive. The organized sector is unable to compete at the lower price range due to the
excise advantage enjoyed by the informal sector. The organized segment in biscuits has
witnessed a steady growth of about 6%, conforming broadly to the growth rate of GDP. The
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production crossed the one-million tone mark in 1995-96 which has now grown by estimated
30%.
The size of the bread market is estimated at Rs. 13 bn. There are a number of producers
in both sectors,organized and unorganized. From a low priced commodity, bread has The two
major bakery products, biscuits and bread, account for 82% of all bakery production. Biscuit is
estimated to enjoy around 37% share by volume and 75% by value of the bakery industry.
Technology Export Potential of Milk and Dairy Sector graduated intoa branded product with
discriminating prices.
7. Confectionery:
The Indian confectioner y market includes s ugar boiled c on fec ti one ry , hard-
boiled candies, toffees and other sugar based candies. In 2000, sugar boiled confectionery had
penetrated an estimated 15% of the households only, suggesting a large potential for growth.
There are about 5,000 units catering to the local markets. The total volume of the sugar boiled
confectionery market in the organized sector (comprising plain / hard-boiled candies, toffees,
eclairs and gums) is around 125,000 tones. Add to this the unorganized sector and the market
for all types of confectionery is of the order of 250,000 tpa. That translates into 66% market
share of the unorganized sector by volume. In value terms it is less than 50%.
The sectors expansion at a rate of 25% in 1998 had dropped to 17% in 1999 and
registered a negative growth of 2% in 2000. In the long run it is slated to grow at 8 to
10% annually. The growth in the size of the confectionery market is gives as Annexure
10 (a). The total volume of the sugar boiled confectionery market in the organized sector is
around 125,000 tones. Add to this the unorganized sector and the market for all types
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of confectionery i s o f t h e order of 250,000 tpa.
Exports:
Export of certain milk products like milk powder, ghee and butter was canalized until
1993. With the objective of promoting exports of milk products, the Govt. have
dechannelised the export of these milk products with effect from mid 1993. According to the
EXIM Policy for 1997- 2002, the policy for export of these milk products is as under:
Powder milk (skimmed or full Cream) whole and infant milk food, pure milk Ghee and
Butter, except when exported as branded products in consumer packs, not exceeding 5 kg in
weight, will be exempted from the following conditions:
1) Quantitative I ceiling as may be notified by the DGFT from time to time.
2) registration-cum-allocation certifica te i ssued b y ag ricu lt ural an d p ro cess ed Food
Products Export Development Authority (APEDA).
The Director General of Foreign Trade, Ministry of Commerce vide Public Notice No.
48/RE-98/1997-2002 dated 13th October, 1998 has removed the quantitative ceiling for export
of powder milk and ghee and their export is now freely allowed. However, butter,
if exported in packaging exceeding 5 kg in weight, continues to be under the quantitative
ceilings.
Products for exports - Skimmed Milk Powder, Whole Milk Powder, Ghee, Butter,
Cheese, Condensed Milk, Casein etc. are some of the milk products being exported from India.
With the objective of promoting exports of milk products, the Govt. have
dechannelised the export of these milk products with effect from mid 1993.The export
figures of dairy products during the last five years are given in Annexure 11.
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Major Destinations- UAE (43%), Nepal (19%), Bangladesh (12%) Future Markets South East
Asia, Russia and Africa will be the emerging market for Indian dairy products. In the
immediate future, there is prospect of an additional demand of over 3 million tonnes of milk
products in the ASEAN region alone. The EU dairy exports will become limited by GATT
agreements, while Australia-New Zealand does not have adequate production capacity.
Equally significant is the rise of Russia as the worlds biggest dairy importer. Although by
far the biggest milk producer in Europe, the Russian output has declined by more than 25
percent in the past five years. The shortfall in milk production is estimated to be 13 million
tonnes a year. These major deficits in milk availability offer an opportunity for India to
fill this vacuum and to become leading dairy exporting nations.
Potential for value added products Ethnic Indian dairy products like Sweets Shreekhand,
Rusgulla, Khoya and Ready-to-Eat-Kheer, Haluwa, etc. have good de ma nd in the
countries where ethnic Indian population is settled. For promotion of these products, we require
export worthy consumer packing, which also improves the shelf-life of the product. South
East Asia, Russia and Africa will be the emerging market for Indian dairy products.
Technology Export Potential of Milk and Dairy Sector APEDA has initiated following steps
to increase export of dairy products:
Standards have been laid down for export of dairy products APEDA is offering subsidies
for implementation of HACCP and ISO 9000, installation and up gradation of laboratories and
market promotion through sending of samples, printing of catalogue brochures and brand
publicity through advertisement etc. under its plan scheme. Export market development
will depend on ensuring the quality. This will require that exporters ensure quality from the
milk animals to the port and beyond. To build the quality, mechanized dairy f a n n i n g
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requires encouragement with export oriented processing facilities. Manufacturing units
linked by contract with large scale producers, can ensure of quality raw material necessary to
enter and maintain the position in the international market. It is the cow milk which is
recognized in the international market. Since India is producing more ofbuffalos milk, there is
a need for generic promotion of buffalos milk. Many countries in the world do not import milk
products from India since India is reporting many livestock diseases particularly FMD. Efforts
are, therefore, needed to control and eradicate FMD at least in major milk producing States.
Creation of chilling facilities at block level village level and transportation of liquid milk to
processing units in reefer units.
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NATIONAL DAIRY DEVELOPMENT BOARD (NDDB)
The National Dairy Development Board was created to promote, finance and support
to the following:
1- Producer owned and controlled organizations. NDDBs programmes and activities.2- Seek to strengthen farmer to support national policies that are favorable.3- To the growth of such institutions. Fundamental to NDDBs efforts are co- operative
principles and the Anand Pattern Co-operatives of Cooperation.
The National Dairy Development Board (NDDB) was founded to replace exploitation with
empowerment, tradition with modernity, stagnation with growth, transforming dairying into an
instrument for the development of Indias rural people. Milk and Milk Products Order (MMPO)
regulates milk and milk products production in the country. The order requires no permission for
units handling less than 10,000 litres of liquid milk per day or milk solids upto 500 tpa.
Mi lk and Milk Products Order (MMPO) regulates mi lk and mi lk products production in the
country.
A l the milk p r o d u c t s except malted foods are covered in the category
o f i n d u s t r i e s f o r wh i c h f o r e i g n e q u i t y
participation upto 51% is automatically allowed.1 8
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Technology Export Potential of Milk and Dairy Sector All the milk products except malted foods
are covered in the category of industries for which foreign equity participation upto 51% is
automatically allowed. Icecream, which was earlier reserved for manufacturing in the small scale
sector, has now been dereserved. As such, no license is required for setting up of large scale
production facilities for manufacture of ice cream.
Subsequent to dechannelisation exports of some milk based products are freely allowed provided
these units comply with the compulsory inspection requirements of concerned agencies like:
National Dairy Development Board, Export Inspection Council etc. Bureau of Indian standards
has
prescribed the necessary standards for almost all milk based products, which are to be adhered to
by the industry. Regulatory Environment in the Dairy Processing
Sector in India
The Indian processed dairy industry has grown and diversified enormously in the last few years.
To ensure the proper development and growth of this industrial sector, the Government of India
has instituted various laws and regulations. The various regulations that govern the dairy
processing industry can broadly be classified into: Compulsory Legislation
Prevention of Food Adulteration Act, 1954
This Act is the basic statute that is intended to protect the common consumer against the supply
of adulterated food. This specifies different standards for various food articles. The standards are
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in terms of minimum quality levelsTechnology Export Potential of Milk and Dairy Sector 1 9
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Policies in Milk & Milk Products
Intended for ensuring safety in the consumption of these food items and for safeguarding
against harmful impurities and adulteration. The Central Committee for Food
Standards, under the Directorate General of Health Services, Ministry
of Health and Family Welfare, is responsible for
the operation of this Act. The provisions of the Act are mandatory and contravention of the rules
can lead to both fines and imprisonment.
Milk and Milk Product Order (MMPO) 1992
The Milk and Milk Product Order (MMPO), 1992, issued on June 9,
1992 seeks to ensure the supply of liquid milk, an essential commodity,
to consumers by regulating its processing and distribution. Within eight
years of its
operation, the Central/State Registering Authorities have till December 2000 registered 666 units
with a total processing capacity of 65.8 million litres per day (mlpd). Salient Features of the
MMPO Order include the following:
Registrations for units handling up to 75,000 litres of milk per day
are granted by the State Governments
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and units with more than 75,000 litres per day capacity are registered
by the Central Registering Authority.
The Certificate also specifies the milkshed area, which, under the order is defined as a
geographical area demarcated by the Registering Authority for the collection of milk by the
registered unit.
Maintenance of specified hygienic conditions in the premises where milk and milk products are
handled, processed, manufactured or stored.2 0
Technology Export Potential of Milk and Dairy Sector The collection, transportation and
processing of milk normally centres around the operations of a processing plant. The region from
which the marketable surplus of milk production finds its way to a processing plant is called a
milkshed. The concept of milkshed areas is pivotal to the MMPO. For an
orderly development of the dairy industry, a proper assignment/allocation
of milkshed is critical. Standards on Weights and Measures
(Packaged Commodities) Rules, 1977
These Rules lay down certain obligatory conditions for all commodities that are packed form, with
respect to declarations on quantities contained. These Rules are operated by the Directorate of
Weights and Measures, under the Ministry of Food and Civil Supplies.
a) Voluntary Standards
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There are two organizations that deal with voluntary standardization and certification
systems in the food sector. The Bureau of Indian Standards looks after standardization of processe
foods and standardization of raw agricultural produce is under the purview of the Directorate of
Marketing and Inspection.
b) Bureau of Indian Standards (BIS)
The activities of BIS are twofold, the formulation of
Indian standards in the processed foods sector and the implementation of standards through
promotion and through voluntary and third party certification systems. BIS has on record, standard
for most of
processed foods. In general, these standards cover rawTechnology Export Potential of Milk and
Dairy Sector
2 1
materials permitted and their quality parameters, hygienic conditions under which products are
manufactured and packaging and labelling requirements. Manufacturers complying with standards
laid down by the BIS can obtain and ISI mark that can be exhibited on product packages. BIS
has identified certain items like food colours/additives, vanaspati, containers for packing, milk
powder and condensed milk, for compulsory certification.
c) Directorate of Marketing and Inspection (DMI)
The DMI enforces the Agricultural Products (Grading and Marketing) Act, 1937. Under this
A G d S d d ib d f i l l d lli d di i h k
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Agmark
Standards. Grading under the provisions of this Act is voluntary.
Manufacturers who comply with standard the laid down by DMI
are allowed to use Agmark labels on their products.
Other Government Regulations:
1) Industrial Licence:
No licence is required for setting up a Dairy Project in
India. Only a Memorandum has to be submitted to the Secretariat
for Industrial Approvals (SIA) and an acknowledgment is to be
obtained. However Certificate of Registration is required under
the Milk and Milk Products Control Order (MMPO) 1992.
2) Foreign Investment:
Foreign Investment in dairying requires prior
approval from the Secretariat of Industrial Approvals,
Ministry of Industry, as dairying has not been included2 2
Technology Export Potential of Milk and Dairy Sector in the list of High Priority Industries.
Automatic approval will be given upto 51% Foreign Investment
in High Priority Industries. In case of other Industries, proposals
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without enforcing the
old limit of 40% applicable under Foreign Exchange
Regulations Act at its discretion.
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COMPANY PROFILE
Lucknow Pradeshik Co-operative Dairy Federation came into being on 23rd
March
1938 via registration number 257 , the capital invested was only Rs. 100/- and liters of liquid milk
Today 2 lakh liters of milk are handled in the co-operative production unit and turnover has
touched Rs. 50 crore marks. Parag Dairy is one of the India's reputed manufactures and exporters
of Milk and Milk Products like skimmed milk powder, full cream milk powder, ghee, butter,
paneer & curd etc.
All our products are processed under hygienic conditions, so that it is safe for our clients to
consume. As the whole process is mechanized, it keep the products safe from the germs and
contaminations spreading by hands.
In Brief:
Established : 1938
Registered : 23rd
March 1938
First dairy Inspector : Mr. N.K. Bhargava
Board of Directors : Mr. Gopal Lal Pandya
: Mr. Nirmal Chandra Chaturvedi
: Mr. Tej Shankar
: Mr. Pushkar Nath Bhatt
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Initial Capital Investment : Rs. 100/-
Present Capital : State Government90%
:Co-operative10%
Location : Initial Charbagh
Area of Distribution : Initially Bakshi Ka Talab ,
: Tivariganj ,Gosaiganj.
Presently : The entire District
In spite of the several setback and hurdle, the Lucknow Pradeshik Co-operative Dairy has steadily
progressed and retains its position firmly in the present market and given strength to the operation
flood II.
Human population : 953 million (70 million dairy farmer)
Milk production :74.3 tones (203.5 million lpd)
Average Annual Growth rate (1995-2000): 5.6%
Per capita milk availability : 224 g/days or 78kg/year
Milk animals : 57 million cows ; 39 million buffalos
Milk yield per breed able bovine in-milk :1250 kg
Cattle feed production (organized sector) : 1.5 million tones
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Turnover of of veterinary pharmaceuticals : Rs. 550 crores
Dairy plants throughout : 20 mlpd
Throughout as percentage of total milk output : 10
Value of output of milk group (2007-2008)* : Rs. 50,051 crores
Value output of dairy industry** : Rs. 105,500 crores
*based on producers price **based on retail price
BRIEF HISTORY OF PARAG
The history of co-operative dairy industry in U.P. dates back to 1917, when the Katra
Co-operative Milk Society, Allahabad was established. LPMU was established in 1938 as
the first step towards organized dairy development programme all over India.
At the time of independence four milk supply schemes were operating in Lucknow, Allahabad,
Varanasi, and Kanpur cities. The Agra co-operative dairy came into existence in second five year
plans while dairies at Bareilly, Gorakhpur and Mathura were adopted later on.
The Apex institute of dairy co-operative was registered under the name PCDF(Pradeshik Co-
operative Dairy Federation) in the year 1962 during the fourth five- year plan. Aligarh and
Merrut were also proposed to be included in the scheme. The Government of U.P. also entrusted
PCDF with the responsibility of implementing the operation flood. It was to establish co-
operative structure in some of the best milk sheds located in ten states in U.P. being one of them.
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ORGANIZATION STRUCTURE
LPCUL has ten divisions. Every division has a manager who is responsible to
General Manager. G.M. of every division is responsible to managing director.
The division heads of each division is responsible for the performance and of their
respective division shall be responsible for the performance and of their respective division not
only at head office but also in the units/unions in the field. These officers shall not merely insure
achievement of the targets fixed and implementation of systems for their functional areas but
promptly attend to the problems of the units/unions.
The divisional heads discharge their duties within policy frames laid down by the Managing
Director and subject of his control & supervision only important performance and control
reports, matters, questions involving exceptions to approved policy, systems development and
other important matters need to be put up before Managing Director.
Bill before approval and implementation; be routed through the Management Service
Division (MSD), which will check the plan to see whether they are in conformity with
other plans and system contradiction occurs.
The divisional heads see the terms made by them and their officers and purposively designate link
officers for each officer in their division. All letters to the NDDB shall before dispatch, be send to
the MSD, which will take speedy clearance at the appropriate level. A copy of all such letters shal
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Economy vs. QualityCheck Your Self:
Laboratory results show that pouch milk from some local packers is g e
n e r a l l y l o w i n f a t a n d m o s t l y d e f i c i
e n t i n S N F . E v e n t h e l o o s e m i l k h o m e d e l i v e r e d t o i n c a n s
i s i n v a r i a b l y l e s s i n q u a n t i t y ( d y e t o f r o t h i n e s s ) a s w e l l a s
S N F . Y o u m a y n o t k n o w t h e amount of SNF in the milk you
consume unless it is tested. Parag Dairy c a n h e l p y o u . C o n t a c t u s t o g e t y o u r m i l k t
e s t e d f r e e o f c o s t a t y o u r doorstep! Results wil l make you exclaim in disbelief
. . . . !!! Then you will pay only for fat and SNF (the vital factor) and not for water.
Some Unique Features of the Dairy:
T h i s i s t h e f i r s t v e r t i c a l d a i r y o f A s i a w i t h i t s v a r i o u s s e c t i o n s l o c a t e d i n t h e b a s e m e
t a n d t h r e e f l o o r s o f t h e b u i l d i n g . A l l p r o c e s s i n g o p e r a t i o n s a r e c o n t r o l l e d f r o m a
c e n t r a l i z e d c o n t r o l r o o m through computers. Thus, it is also the most modern and automated
dairy in North India, where quality of milk proceeded and packed is second to one.
State-of-the-art vertical liquid milk plant of 4 lakh liters per day(LLPD) capacity,
extendable up to 6 LLPD. It is the most modern and computerized dairy in North India.A
rapidly growing distribution network.
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Designed to handle and pack liquid milk in poly packs, untouched b y h a n d , t o c a t e r t o t h e d
e m a n d o f t h e N a t i o n a l C a p i t a l r e g i o n , efficiently and hygienically
PARAG MILK:
After having won the hearts of thousands people and becoming youth No.1 m i l k i n U . P . ,
P a r a g i s n o w g e t t i n g c l o s e r t o b e c o m i n g a w e l l
k n o w n brand in the National Capital Region. With the aim of becoming a bests e l l e r h e
r e a s w e l l . W i t h a n a f f o r d a b l e p r i c e , i n c o m p a r a b l e
p u r i t y a n d hygiene. So that your famil y have more milk and thereby, become
more healthy.In view of specific individual needs, preferences and requirements ,various
types of milk with different special qualities have been developed so as to meet the
requirements of all sections of the consumers
PRODUCT LINE OF PARAG
Dairy products are manufactured under the name PARAG
They had a considerable market share in U.P. and other regions in north and east. There has been
an increase in the market completion due to the coming up of many private dairies that has
introduced their own brand of milk product.
AMUL products still have to face a stiff competition in Lucknow with PARAG products due
to the efficient distribution network of the marketing division of LMU is liquid milk. Other
milk products are:
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1. MILK
2. BUTTER
3. GHEE
4. PANEER
5. FLAVORED MILK
6. SKIMMED MILK
POWDER
7. MILK CAKE
8. ICE-CREAM
9. MATTHA
10. CURD
COLLECTION AND DISTRIBUTION OF MILK
This report present detailed information about the Lucknow Milk Union (PARAG), its evolution
and organization structure.
Dairy work happens through various procedures. Basic of the dairy work is like this structure
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Milk Collection Mechanism
Milk Distribution Mechanism
Parag is the brand name of products of Lucknow Producers Co-operative milk
union. It is a big co-operative unit based on values of understanding and co-operation
profit for milk producers and providing quality products to consumers at a cheaper price
.PARAG does maximum utilization of milk to increase milk efficiency in reasonable
costs of production and hence overall costs.
Work ofPARAG may be divided into 3 subunits:
a) Marketing
b) Administration and production c) Industry Unit Administration co-ordinates various
functions, looks after salaries and wages and various human resources problems of production.
The industry unit is engaged in the function of producing various industrial products like milk,
butter etc.
Whereas the marketing is engaged in distribution and proper sale of these products like milk,
butter etc.
Whereas the marketing is engaged in distribution and proper sale of these products.
PUBLIC RELATION means the effort made by industries, unions, corporation, occupation,
government, or other organizations to establish productive relationship report and partnership
It is popularly defined as on the other basis of acceptance of well organized efforts by
society for welfare and development of entire community.
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Section - B
Introduction to the Topic
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WorkingCapital Management
Concept of Working Capital Management
- Current assets
- Current Liabilities
- Circulating Capital
Structure of Working Capital
Circulation of Working Capital
Classification of Working Capital
Importance of Working Capital Management
Meaning of Working Capital Management
Significance of Working Capital Management
Difference between Working Capital Management and the Fixed AssetsManagement
Theory of Working Capital Management
Factors influencing Working Capital Requirements
Principles of Working Capital Management
The Operating Cycle
Duration of Operating Cycle
Determinants of Working Capital
Forecasting of Working Capital
Control of Working Capital
Adequacy of Working Capital
Sources of Working Capital
Structure of Working Capital
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The uses of funds of a concern can be divided into two parts namelylong-term funds and
short-term funds. The longterm investment may be termed as fixed investment. A major par
of the long-term funds is invested in the fixed assets. These fixed assets are retained in the
business to earn profits during the life of the fixed assets. To run the business operation
shortterm assets are also required.
Concept of Working Capital Management
There are two concepts of working capital viz.
quantitative and qualitative. Some people also define the two concepts as gross
concept and net concept. According to quantitative concept, the amount of working
capital refers to
total of current assets. What we call current assets? Smith1 called
circulating capital. Current assets are considered to be gross working capital in this
concept.
The qualitative concept gives an idea regarding source of financing capital
According to qualitative concept the amount of working capital refers to excess o
current assets over current liabilities.2 L.J. Guthmann defined working capital as
the portion of a firms current assets which are financed from longterm funds.3
The excess of current assets over current liabilities is termed as Net working
capital. In this concept Net working capital represents the amount of current assets
which would remain if all current liabilities were paid. Both the concepts of working
capital have their own points of importance. If the objectives is to measure the size
and extent to which current assets are being used, Gross concept is useful; whereas
in evaluating the liquidity position of an undertaking Net concept
becomes pertinent and preferable.
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liabilities for learning the meaning of working capital, which is explained below:
Current assetsIt i s rightly observed that Current assets have a short life span
These type of assets are engaged in current operation of a business and normally used for short
term operations of the firm during an accounting period i.e. within twelve months. The two
important characteristics of such assets are, (i) short life span, and (ii) swift transformation into
other form of assets. Cash balance may be held idle for a week or two, account receivable may
have a life span of 30 to
60 days, and inventories may be held for 30 to 100 days.4
Fitzgerald defined current assets as, cash and other assets which are expected to
be converted in to cash in the ordinary course of business within one year or within such
longer period as constitutes the normal operating cycle of a business.5
Current liabilities The firm creates a Current Liability towards creditors (sellers
from whom it has purchased raw materials on credit. This liability is also known as accounts
payable and shown in the balance sheet till the payment has been made to the creditors.
The claims or obligations which are normally expected to mature for payment within an
accounting cycle are known as current liabilities. These can be defined as those liabilitie
where liquidation is reasonably expected to require the use of existing resources properly
classifiable as current assets, or the creation of other current assets, or the creation of othe
current liabilities.6
Circulating capital Working capital is also known as
Circulating capital or current capital. The use of the term circulating
capital instead of working capital indicates that its flow is circular in nature.
Structure of Working Capital
The different elements or components of current assets and current liabilities constitute
the structure of working capital which can be illustrated in the shape of a chart as
f ll
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Structure of Current Assets and Current Liabilities
Current Liabilities Current AssetsBank Overdraft Cash and Bank Balance
Creditors Inventories: Raw-Materials
Work-in-progress
Finished GoodsOutstanding Expenses Spare Parts
Bills Payable Accounts Receivables
Short-term Loans Bills Receivables
Proposed Dividends Accrued Income
Provision for Taxation, etc. Prepaid Expenses
Short-term Investments
Circulation of WorkingCapital
At one given time both the current assets and current liabilities exist in the business.
The current assets and current liabilities are flowing round in a business like an electric
current. However, The working capital plays the same role in the business as the role of
heart in human body. Working capital funds are generated and these funds are circulated in
the business. As and when this circulation stops, the business becomes lifeless. It is because of
this reason that he working capital is known as the circulating capital as it circulates in the
business just like blood in the human body.7
Figure No.1 depicting Working Capital Cycle makes it clear that theamount of cash isobtained mainly from issue of shares, borrowing and operations. Cash funds are used to
purchase fixed assets, raw materials and used to pay to creditors. The raw materials are
processed; processed; wages and overhead expenses are paid which in result good
for sale.
produce finished
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The sale of goods may be for cash or credit. In the former case, cash is directly
received while in later case cash is collected from debtors. Funds
are also generated from operation and sale of fixed
assets. A portionof profit is used for payment of interest, tax and dividends whileremaining is retained in the business. This cycle continues throughout the life of the
business firm.
Classification of WorkingCapital
The quantitative concept of Working Capital is known as gross working capita
while that under qualitative concept is known as net working capital.
Working capital can be classified in various ways. The important classifications are as
i b l
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Conceptual classification There are two concept of working capital
viz., quantitative and qualitative. The
quantitative concept takes into account as the current assets while the qualitative concept takes
into account the excess of current assets over current liabilities. Deficit of working capital exist
where the amount of current liabilities exceeds the amount of current assets. The above
can be summarised as follows:
I. Gross Working Capital = Total Current AssetsII. Net Working Capital = Excess of Current Assets over Current Liabilities
III. Working Capital Deficit = Excess of CurrentLiabilities over Current Assets.
Classification on the basis of financial reports The information of working
capital can be collected from Balance Sheet or Profit and Loss Account; as such the working
capital may be classified as follows:
(i) Cash Working CapitalThis is calculated from the
information contained in profit and loss account. This concept of working capital has
assumed a great significance in recent years as it shows the adequacy of cash flow in
business. It is based on
OperatingCycle Concepts which is explained later in this chapter.
(ii) Balance Sheet Working Capital The data for Balance Shee
Working Capital is collected from the balance sheet. On this basis the Working Capital can also
be divided in three more types, viz., gross Working Capital, net Working
Capital and Working Capital deficit.
Classification on the Basis of Variability Gross
Working Capital can be divided in two categories viz., (i
permanent or fixed working capital, and (ii) Temporary, Seasonal or variable working
capital. Such type of classification is very important for hedging decisions.
(i) Temporary Working Capital Temporary Working Capital is also
called as fluctuating or seasonal workingcapital. This represents additiona
investment needed during prosperity and favourable seasons. It increases with
the growth of the business. Temporary working capital is the
additional assets required to meet the variations in sales above the permanent level.8
This can be calculated as follows:
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Temporary Working Capital = Total Current Assetspermanent CurrentAssets
(ii) Permanent Working CapitalIt is a part of total current assets which is
not changed due to variation in sales. There is always a minimum
level of cash, inventories, and accounts receivables which is always maintained in the business
even if sales are reduced to a minimum. Amount of such
investment is called as permanent working capital. Permanent Working Capital is the
amount of working capital that persists over time regardless of fluctuations in sales.9 This i
also called as regular working capital.
Importance of Working Capital Management
For smooth running an enterprise, adequate amount of working capital is very
essential. Efficiency in this area can help, to utilize fixed assets gainfully, to assure the
firms long- term success and to achieve the overall goal of maximization of the
shareholders, fund. Shortage or bad management of cash may result in loss of cash
discount and loss of reputation due to non-payment of obligation
on due dates. Insufficient inventories may be the main
cause of production held up and it may compel the enterprises to purchase raw
materials at unfavourable rates.
Like-wise facility of credit sale is also very essential for sales promotions. It is
rightly observed that many a times business failure takes place due to lack o
working capital.10
Adequate working capital provides a cushion for bad days, as
a concern can pass its period of depression without much difficulty.
O Donnel et al. correctly explained the significance of adequate working
capital and mentioned that to avoid
interruption in the production schedule and maintain sales, a concern requires
funds to finance inventories and receivables.
The adequacy of cash and current assets together with their efficient handling
virtually determines the survival or demise of a concern.11 An enterprise
h ld i t i d t ki it l f it th f ti i B th
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excessive working capital and inadequate working capital will impair the
profitability and general health of a concern.
The danger of excessive working capital are as follows:
Heavy investment in fixed assets A concern may invest heavily in
its fixed assets which is not justified by actual sales. This may create situation of over
capitalisation.
Reckless purchase of materials- Inventory is purchased recklessly which
results in dormant slow moving and obsolete inventory. At the same time it may
increase the cost due to mishandling, waste, theft, etc.
Speculative tendencies - Speculative tendencies may increase
and if profit is increased dividend distribution will also increase. This will hamper the
image of a concern in future when speculative loss may start.
Liberal credit - Due to liberal credit, size of accounts
receivables will also increase. Liberal credit facility can increase bad debts and wrong
practices will start, regarding delay in payments.
Carelessness - Excessive working capital will lead to carelessness about
costs which will adversely affect the
profitability.
Paucity of working capital is also bad and has the following dangers:
1. Implementation of operating plans becomes difficult and a concern may not achieve its
profit target.
2. It is difficult to pay dividend due to lack offunds.
3. Bargaining capacity is reduced in credit purchases and cash discount could not be
availed.
4. An enterprise looses its reputation when it becomes difficult even to meet day-to- day
commitments.
5. Operating inefficiencies may creep in when a concern cannot meet it financia
promises.
6. Stagnates growth as the funds are not available for new projects.
7. A concern will have to borrow funds at an exorbitant rate of interest in case of need.
8. Sometimes, a concern may be bound to sale its product at a very reduced rates to
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collect funds which may harm its image.
Meaning of Working Capital Management
The management of current assets, current liabilities and inter-relationship between them
is termed as working capital management. Working capital management is concerned with
problems that arise in attempting to manage the current assets, the current liabilities and the
inter-relationship that exist between them.12 In practice, There is usually a distinction
made between the investment decisions concerning current assets and the financing of working
capital.13
From the above, the following two aspects of working capital management emerges:
(1) To determine the magnitude of current assets or
level of working capital and
(2) To determine the mode of financing or hedgingdecisions.
Significance of Working Capital Management
Funds are needed in every business for carrying on day- to-day operations. Working
capital funds are regarded as the life blood of a business firm. A firm can exist and survive
without making profit but cannot survive without working capital funds. If a firm is no
earning profit it may be termed as
sick, but, not having working capital may cause its
bankruptcy working capital in order to survive. The alternatives are no
pleasant. Bankruptcy is one alternative. Being acquired on unfavourable term as another
Thus, each firm must decide how to balance the amount of working capital it holds, agains
the risk of failure.14
Working capital has acquired a great significance and sound position in the recen
past for the twin objects of profitability and liquidity. In period of rising capital costs and
f d h ki i l i f h i i i i
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It is rightly observed that, Constant management review is required to maintain
appropriate levels in the various working capital accounts.15
Mainly the success of a concern depends upon propermanagement ofworking capital so working capital
management has been looked upon as the driving seat of financial manaser.16
It consumes a great deal of time to increase profitability as well as to maintain proper
liquidity at minimum risk. There are many aspects of working capital management which make it
an important function of the finance manager. In fact we need to know when to look for
working capital funds, how to use them and how measure, plan and control them.A study
of working capital management is very important foe interna
and external experts. Sales expansion, dividend declaration, plants expansion, new produc
line, increase in salaries and wages, rising price level, etc., put added strain on working
capital maintenance. Failure of any enterprise is undoubtedly due to poor
management and absence of management skill.
Importance of working capital management stems from two reasons, viz.,(i) A substantia
portion of total investment is invested in current assets, and (ii) level of current assets and
current liabilities will change quickly with the variation in sales. Though fixed asset
investment and long-term borrowing will also response to the changes in sales, but its response
will be weak.
Difference between the Working Capital Management and the Fixed Asset
Management
In fact management of working capital is similar to that of fixed assets
management in the sense that in both cases a firm analyses their effects
on its profitability and risk. However, fixed assets
management and working capital management differ in
three important ways. Firstly, in managing fixed assets time is very
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a significant role in capital budgeting and a minor one in the working capita
management. Secondly, large holdings of current assets specially cash, strengthen
a firms liquidity position (and reduce risks), but they also reduce overal
profitability. Thirdly, the level of fixed as well as current assets depends upon the
expected sales, but it is only current assets, which can be adjusted with sales fluctuations
in the short-run.
Theory of Working Capital Management
The interaction between current assets and current
liabilities is, therefore, the main theme of the theory of working capital management.
Working capital management is concerned with the
problem that arises in attempting to manage the current assets, the current liabilities
and the inter- relationship that exist between them. The goal of working capita
management is to manage a firms current assets and current liabilities in such a way
that a satisfactory level of working capital is maintained.
Factors Influencing Working Capital Requirement
Numerous factors can influence the size and need of working capital in a
concern. So no set rule or formula can be framed. It is rightly observed that, There is
no precise way to determine the exact amount of gross or net working capital for every
enterprise. The data and problem of each company should be analysed to
determine the amount of working capital.
Briefly, the optimum level of current assets depends upon following
determinants.Nature of business--Trading and industrial concerns require more funds for working
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capital. Concerns engaged in public utility services need less working capital. For example, if a
concern is engaged in electric supply, it will need less current assets, firstly due to cash nature
of the transactions and secondly due to sale of services. However, it will invest more in fixed
assets.In addition to it, the investment varies concern to
concern, depending upon the size of business, the nature of the product, and the production
technique.
Conditions of supply-- If the supply of inventory is prompt and adequate, les
funds will be needed. But, if the supply is seasonal or unpredictable, more funds will be
invested in inventory. Investment in working capital will fluctuate in case of seasonal nature
of supply of raw materials, spare parts and stores.
Production policy-- In case of seasonal fluctuations in sales, production will fluctuate
accordingly and ultimately requirement of working capital will also fluctuate. However, sale
department may follow a policy of off-season discount, so that sales and
production can be distributed smoothly
throughout the year and sharp, variations in working capital requirement are avoided.
Seasonal Operations-- It is not always possible to shift the burden of production and sale
to slack period. For example, in case of sugar mill more working capital will be needed at the time
of crop and manufacturing.
Credit Availability-- If credit facility is available from banks and suppliers on
favourable terms and conditions, less working capital will be needed. If such facilities are
not available more working capital will be needed to avoid risk.
Credit policy of enterprises-- In some enterprises most of the sale isat cash and even it is received in advance while, in other sales is at credit and payments are
received only after a month or two. In former case less working capital is needed than the later
The credit terms depend largely on norms of industry but enterprise some flexibility and
discretion. In order to ensure that unnecessary funds are not tied up in book debts, the enterprise
should follow a rationalized credit policy based on the credit standing of the customers and
other relevant factors.
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Growth and expansion-- The need of working capital is increasing with the growth and
expansion of an enterprise. It is difficult to precisely determine
the relationship between volume of sales and the working capital needs
The critical fact, however, is that the need for increased working capital funds does not follow
growth in business activities but precedes it. It is clear that advance planning is essential for
a growing concern.
Price level changeWith the increase in price level more
and more working capital will be needed for the same
magnitude of current assets. The effect of rising prices will be different for different enterprises.
Circulation of working capital Less working capital will be needed with theincrease in circulation of working capital and vice-versa. Circulation means time required
to complete one cycle i.e. from cash to material, from material to work-in-progress, form
work-in-progress to finished goods, from finished goods to accounts receivable and from
accounts receivable to cash.
Volume of sale-- This is directly indicated with working capital requirement, with the
increase in sales more working capital is needed for finished goods and debtors, its vice versa is
also true.
Liquidity and profitability-- There is a negative
relationship between liquidity and profitability. When working capital in relation to sales is
increased it will reduce risk and
profitability on one side and will increase liquidity on the other
side.
Management ability Proper co-ordination in production and
distribution of goods may reduce the
requirement of working capital, as minimum funds will be invested in absolute inventory
non-recoverable debts, etc.
External Environment With development of financial institutions, means o
communication, transport facility, etc., needs of working capital is reduced because it can be
available as and when needed.
Principles of Working Capital Management
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The following are the principles of working capital management:
Principles of the risk variation Risk here refers to the inability of firm to maintain
sufficient current assets to pay its obligations. If working capital is varied relative to sales, the
amount of risk that a firm assumes is also varied and the opportunity for gain or loss isincreased. In other words, there is a definite relationship between the degree of risk and the rate o
return. As a firm assumes more risk, the opportunity for gain or loss increases. As the level o
working capital relative to sales decreases, the degree of risk increases. When the degree
of risk increases, the opportunity for gain and loss also increases. Thus, if the level of working
capital goes up, amount of risk goes down, and vice-versa, the opportunity for gain is like-wise
adversely affected.
Principle of equity position 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 the working capital should
contribute to the net worth of the firm.
Principle of cost of capital This principle emphasizes that different sources of finance
have different cost of capital. It should be remembered that the cost of capital moves inversely
with risk. Thus, additional risk capital results in decline in the cost of capital.
Principle of maturity of payment A company should make every effort to relate
maturity of payments to its flow of internally generated funds. There should be the leas
disparity between the maturities of a firms short-term debt instruments and its flow of internally
generated funds, because a greater risk is generated with greater disparity. A margin of safety
should, however, be provided for any short-term debt
payment.
Operating Cycle
The duration of time required to complete the following sequence of events, in case of
manufacturing firm, is called the operating cycle:
1. Conversion of cash into raw materials.
2. Conversion of raw materials into work-in- progress.
3. Conversion of work in process into finished goods.
4 Conversion of finished goods into debtors and bills receivables through sales
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5. Conversion of debtors and bills receivables into cash.
The length of cycle will depend on the nature of business. Non manufacturing
concerns, service concerns and financial concerns will not have raw material and work-
in-process so their cycle will be shorter. Financial Concerns have a shortest operatingcycle.
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Operating Cycle of Manufacturing Concerns
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Duration of the Operating Cycle
The duration of the operating cycle is equal to the sum of the duration of each of
these stages less the credit period allowed by the suppliers of the firm. In symbols,
O = R + W + F + DC Where,
O = duration of operating cycle. R = raw material storage period.
W= work-in-process period.
F= finished goods storage period. D=debtors collection period, and C = creditors
payment period.
The components of the operating cycle may be calculated
as follows:
Average stock of raw materials and storesR=
Average raw material and stores consumption per day
W=Average work-in-process inventory
Average cost of production per day
Average finished goods inventory
F= Average cost of goods sold per day per day
D=Average book debts
Average credit sales per day
C=
Average trade creditors Average credit purchase
per day
Determinants of Working Capital
There are no set rules or formulas to determine the working capital
requirement of a firm. A number of factors influence the need and quantum of the
working capital of a firm. These are discussed below:
Nature of industry The composition of an asset is related to the size of abusiness and the industry to which it belongs. Small companies have smaller proportion
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working capital is thus determined by the nature of an enterprise.
Demand of creditors Creditors are interested in the security of loans. They
want their advances to be sufficiently covered. They want the amount of security in assets
which are greater than liabilities.
Cash requirements Cash is one of the current assets which are
essential for the successful operations of the
production cycle. Cash should be adequate and properly utilized. A minimumlevel of
cash is always needed to keep the operations going.
General nature of business The general nature of a business is an
important determinant of the level of the working capital. Working capital
requirements depends upon the general nature and its activity on work. They are relatively
low in public utility concerns in which inventories and
receivables are rapidly converted into cash. Manufacturing organisations, however,
face problems of slow turn-over of inventories and receivables, and invest large
amount in working capital.
Time- The level of working capital depends upon the time required to
manufacture goods. If the time is longer, the amount of working capital required is
greater and vice-versa. Moreover, the amount of working capital depends upon
inventory turnover and the unit cost of goods that are sold. The greater this cost, the larger is
the amount of working capital.
Volume of sales This is the most important factor affecting the size and
component of working capital. A firm maintains current assets because they are needed
to support the operational activities which results in sales. The volume of sales and the
size of the working capital are directly related to each other. As the volume of sales
increases, there is an increase in the investment of working capital in the cost of
operations, in inventories and in receivables.
Terms of purchases and sales If the credit terms of purchases are more
favourable and those of sales less liberal, less cash will be invested in inventory. With
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time for payment to creditors or suppliers.
Inventory turnover If the inventory turnover is high, the working capital
requirements will be low. With good and efficient inventory control, a firm is able to
reduce its working capital requirements.
Receivables turnover It is necessary to have effective control over receivables.
Prompt collection of receivables and good facilities for setting payables result into low
working capital requirements.
Business cycle Business expands during periods of prosperity and decline
during a period of depression.
Consequently, more working capital is required during periods of prosperity and less
during the periods of depression.
Variation in sales
A seasonal business requires the maximum amount of
working capital for a relatively