WORKING CAPITAL MANAGEMENT

CONDUCTED AT

PARLE BISCUITS PRIVATE LIMITED

Final Project Report

Submitted To

Institute Of Management Technology

In partial fulfillment of the requirement for the degree of

MASTER OF BUSINESS ADMINISTRATION

Under Supervision: Submitted By:

*********** ***********

Roll-on: *******

Institute Of Management TechnologyCentre for Distance Learning,

Ghaziabad

August, 2012

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WORKING CAPITAL MANAGEMENT

CONDUCTED AT

PARLE BISCUITS PRIVATE LIMITED

Under Supervision of : ********

Submitted By:

Name : *****

Enrollment No. : **********

Area of Specialization : MBA (Finance)

Title of the Project : “Working Capital Management Conducted At Parle Biscuits Private Limited

Email : **********

Contact No. : ***********

******

2

CERTIFICATE

This is to certify that ********* a student of IMT – CDL Ghaziabad has

completed project work on titled “WORKING CAPITAL MANAGEMENT

CONDUCTED AT PARLE BISCUITS PRIVATE LIMITED” under my

guidance and supervision.

I certify that this is an original work and has not been copied from any source.

Signature of Guide : ____________________________

Name of Project Guide : ____________________________

Date : __________________________

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ACKNOWLEDGEMENT

With Candor and Pleasure I take opportunity to express my sincere thanks and

obligation to my esteemed guide *********** It is because of his able and mature

guidance and co-operation without which it would not have been possible for me

to complete my project.

Finally, I gratefully acknowledge the support, encouragement & patience of my

family, and as always, nothing in my life would be possible without God, Thank

You!

************

Enrollment No: *******

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DECLARATION

I hereby declare that this project work titled “WORKING CAPITAL

MANAGEMENT CONDUCTED AT PARLE BISCUITS PRIVATE

LIMITED” is my original work and no part of it has been submitted for any other

degree purpose or published in any other from till date.

***********

ENROLLMENT NO: **********

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TABLE OF CONTENTS

ACKNOWLEDGMENT

PREFACE

INTRODUCTION* HISTORY OF COMPANY* PRODUCT PROFILE

MANAGERIAL USEFULNESS OF STUDY

CONCEPTS USED IN STUDY

FOCUS OF THE PROBLEMS

OBJECTIVES OF THE PROJECT

SCOPE OF THE WORK

RESEARCH METHODOLOGY * RESEARCH DESIGN

* COLLECTION OF DATA

DATA ANALYSIS

FINDINGS

RECOMMENDATION

LIMITATIONS

CONCLUSIONS

BIBLIOGRAPHY

ANNEXURE

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PREFACE

Practical work experience is the integral part of individual learning. An

individual who is learning managerial concepts has to undergo this practical

experience for being a future executive.

Master of Business Administration is a two-year programme that inserts

management knowledge in an individual to make that individual completely

professional for which practical experience is must.

Parle Biscuits Pvt. Ltd. is the market leader in biscuit industry. Neemrana

plant of PBPL offered me a project on Working Capital Management to

understand the current position through dates provided by them.

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INTRODUCTION

Parle-G or Parle Glucose biscuits, manufactured by Parle Products

Pvt Ltd, are one of the most popular biscuits in India. Parle-G is one of the

oldest brand names as well as the largest selling brand of biscuits in India.

For decades, the product was instantly recognized by its iconic white and

yellow wax paper wrapper with the depiction of a young girl on the front.

Counterfeit companies have attempted to recreate and sell lower quality

products of similar names with virtually identical package design.The

company's slogan is G means Genius. The name, "Parle-G", is derived from

the name of the suburban rail station, Vile Parle which in turn is based on

village Parle in olden days (there is also area called Irle nearby where the

Parle Agro production factory is based).This popular biscuit is primarily

eaten as a tea-time snack.

Parle-G is the largest selling biscuit in the world. It has 70% market share in

India in the glucose biscuit category followed by Britannia, Tiger (17-18%)

and ITC's Sunfeast (8-9%). The brand is estimated to be worth over Rs 2,000

crore (Rs 20 billion), and contributes more than 50 per cent of the company's

turnover (Parle Products is an unlisted company and its executives are not

comfortable disclosing exact numbers). Last fiscal, Parle had sales of Rs

3,500 crore (Rs 35 billion). It also is popular across the world and is starting

to sell in Western Europe and USA.

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AWARDS

Parle products have been shining with the golds and silvers consistently at

the Monde Selection ever since they were first entered in 1971. Monde

Selection is an international institute for assessing the quality of foods and is

currently the oldest and most representative organization in the field of

selecting quality foods worldwide.

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Almost all of our products are market leaders and as recognition of their

quality, have won us 111 gold, 26 silver and 4 bronze Monde Selection

medals since 1971.

HOW PARLE FOUGHT TO MAKE BISCUITS AFFORDABLE TO

ALL

Biscuits were very much a luxury food in INDIA, when Parle began

production in 1939. Apart from Glucose and Monaco biscuits, Parle did offer

a wide variety of brands.

However, during the Second World War, all domestic production was

diverted to assist the Indian Soldiers in India and Far East. Apart from this,

the shortage of wheat in those days, made Parle decide to concentrate on the

more popular brands, so that people could enjoy the price benefits.

Thankfully today, there’s no dearth of ingredients and the demand for more

premium brands is on the rise. That’s why; we now have a wide range of

biscuits mouthwatering confectioneries to offer.

THE QUALITY COMMITMENT

Parle Product Private Limited has 3 manufacturing plants –

1) VILE PARLE in Mumbai (Maharashtra)

2) BHUJ (Gujarat)

3) BANGLORE (Karnataka)

Apart these plants Parle Product Pvt. Ltd. maintain 20 contract base

manufacturing units in all over INDIA. These plants and CMU’s produce

sweets and confectionary products.

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Parle Product Pvt. Ltd. has also a subsidiary company, which is Parle Biscuit

Pvt. Ltd. This subsidiary company produces only biscuits. It also has 2

manufacturing plants –

1) BAHADURGARH in Gurgaon (Haryana)

2) NEEMRANA in Alwar (Rajasthan)

Apart these two plants Parle Biscuit Pvt. Ltd. maintain 11 contract base

manufacturing units on different locations, which produce only biscuits.

All these factories are located at strategic locations, so as to ensure a

constant output & easy distribution. Each factory has state-of-the-art

machinery with automatic printing & packaging facilities.

All Parle products are manufactured under the most hygienic conditions.

Great care is exercised in the selection & quality control of raw materials;

packaging materials & rigid quality standard are ensured at every stage of

the manufacturing process. Every batch of biscuits & confectioneries are

thoroughly checked by expert staff, using the most modern equipment.

THE MARKETING STRENGTH

The extensive distribution network built over the years is a major strength

for Parle Products. Parle biscuits and sweets are available to consumer even

in the most remote places and in the smallest of villages with a population of

just 500.

Parle Has nearly 1500 wholesalers catering to 4,25,000 retail outlets directly

or indirectly. A two hundred strong dedicated field force services these

wholesalers and retailers. Additionally there are 40 depots and C&F agents

supplying goods to the wide distribution network.

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The Parle marketing philosophy emphasizes catering to the masses.

We constantly endeavor at designing products that provide nutrition & fun to

the common man. Most Parle offerings are in the low & midrange price

segments. This is based on our cultivated understanding of the Indian

consumer psyche. The value for money positioning helps generate large

sales volumes for the products.

Parle-G it’s first venture became an instant favorite amongst the masses,

leading the glucose category with a huge market share of 65%. It topped

charts worldwide by becoming the WORLD’S LARGEST BISCUIT

SELLING BRAND as revealed by the US-BASED BAKERY

MANUFACTURES ASSOCIATION in 2002.

THE CUSTOMER CONFIDENCE

The Parle name conjures up fond memories across the length and breadth of

the country. After all, since 1929, the people of India have been growing up

on Parle biscuits & sweets.

Today, the Parle brands have found their way into the hearts and homes of

the people of all over India & abroad. Parle Biscuits & Confectioneries,

continue to spread happiness & joy among people of all ages.

The consumer is the focus of all the activities of Parle. Maximizing value to

consumers and forging enduring customer relationships are the core

endeavors at Parle.

Our efforts are driven towards maximizing customers’ satisfaction and this is

in synergy with our quality pledge. “Parle Products Limited will strive to

provide consistently nutritious & quality food products to meet consumers’

satisfaction by using quality materials and by adopting appropriate

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processes. To facilitate the above we will strive to continuously train our

employee and to provide them an open and participative environment. “

EMERGING TRENDS OF THE BRAND

Since its inception in the 30’s Parle biscuits have prided itself in offering

quality products that are affordable to the common man. The marketing mix

has evolved with the times…

THE PRODUCT

Parle biscuits have a range of variants in its product portfolio. The popular

brands Parle-G, Krackjack, Monaco and its variants (zeera, onion and

methi) are available in packets of various convenient sizes. New products

like Hide & Seek are a foray into the premium segment.

THE PRICING STRATEGY

This biscuit major has not bothered to raise the price of its flagship brand

“Parle-G” for the past 6-8 years and has always tried to provide its offerings

at nearly 33% discount as compared to other competitive brands.

THE PROMOTION POLICY

The consumer is the focus of all activities at Parle. Maximizing value to

consumers and forging enduring customer relationships are the core

endeavors at Parle. Parle-G ‘My Dream Comes True Contest’ was one of

its biggest promotional ventures (2.5 crores) which gave contestants a

chance to fulfill their dreams. Discounts, gift offer schemes are other popular

promotional offerings.

THE PLACE

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A well-entrenched distribution system (the company covers 12-15 lacks

outlets across the country) with 40 depots at strategic points all over the

country. From the depots, the biscuits are sold to wholesalers and further to

retailers.

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PARLE BISCUITS PRIVATE LIMITED (NEEMRANA)

Parle Biscuit Pvt. Ltd. is a subsidiary of Parle Product Pvt. Ltd.

The manufacturing at Neemrana unit started in 1982 for Parle-G with a

single plant. It is planted in near about 16 acres of land.

Including General Manager 78 employees of Managerial and Officer class

are working in this plant. Production is going on in this plant 24 hours in

three shifts. Number of permanent workers of thrice shifts is 680 and around

400 workers are there on contract basis.

In 1990’s Krackjack production began followed by Monaco and Nimkin.

Average Production capacity of Neemrana unit per month is-

1) Parle-G 3500 Metric Tonnes

2) Krackjack 1600 Metric Tonnes

3) Monaco 800

MetricTonnes

The plant works in coordination with the Mumbai office, Neemrana

(Rajasthan).

DEPARTMENTS IN PLANT

FINANCE

HR & PERSONNEL

QUALITY ASSURANCE

PRODUCTION & PRINTING

EXCISE & DESPATCH

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ENGINEERING

I.T.

PURCHASE

STORE

The organization follows a flat structure with less hierarchal levels. The

heads of the different departments report to the General Manager through

direct communication. The working atmosphere is not stressful with

enough work-flexibility given to staff and managers.

The plant also has auditorium and viewing gallery, which is used during

the visit of school children. A retail shop at the Plant provides Parle

Products at M.R.P. rates.

Parle-G Making Process

MIXING:

This is a process where all ingredients are put together in right proportion for

dough formation. These ingredients are then fed into Mixers where mixing is

done and dough is prepared for molding .Major ingredients are flour, fat,

sugar and others as per the product one would like to have.

MOULDING:

In this section we laminate the dough into sheet which then passes down to

gauge rollers and sheet thickness achieved for cutting. Here we have a cutter

or a molder as per the variety where one gets the shape and sizes of biscuits.

BAKING:

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This is the area where we pass these mounded wet biscuit into baking oven.

The oven temperature is 230°C. The biscuits are baked on desired

temperature. The oven which are use very effective.

COOLING:

These baked biscuits are then passed on to cooling conveyors for natural

cooling prior to packing .The temperatures are brought down to room

temperatures.

PACKING:

These biscuit are then stacked and fed into packing machine for packing.

Different packing material are available for packing of these biscuit in

different packs .slug packs, pouch pack or family packs etc. These packs are

then put into secondary packaging like cartons to be transported to retailers.

EQUIPMENT USED FOR AUTOMATED BISCUIT

MANUFACTURING

Mixers Laminators Gauge Rolls or Pre Sheeters Molder / Cutter Baking

Oven Cooling Conveyor Packing

Machines Material Handling Equipments Biscuit / Sugar Grinder Milk/Oil

Sprays Salt / Cashew

Sprinklers

INGREDIENTS USED

Flour , Fat , Sugar , Salt , Ammonium bicarbonate , Milk , Butter , Flavors ,

Emulsifiers , Invert syrups, Dough Improvers and many additives

CREDIT POLICY OF PARLE BISCUITS PVT. LTD.

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Before coming to the credit policy it’s necessary to be aware with the goods

distribution policy of Parle Biscuits Pvt. Ltd.

For fulfilling the demand of it’s customer’s timely Parle Biscuits Pvt. Ltd.

maintains 40 DEPOTS in all over INDIA. Finished goods are transferred

from production plants to these depots. According to their transportation

facilities customers of Parle Biscuits Pvt. Ltd. ask their demand of different

products to depots.

Then it’s the responsibility of these depots to fulfill the demand of customers

of Parle Biscuits Pvt. Ltd.

Parle Biscuits Pvt. Ltd. doesn’t has credit policy it deals in cash. For the

collection of it’s payment PBPL deals with 5 banks which are as follows:

1) UTI

2) STANDARD CHARTERED

3) HDFC

4) BANK OF PUNJAB

5) CORPORATION BANK

After collecting the amount of sold goods it is deposited by the depots in any

of these bank.

Parle Biscuits Pvt. Ltd. divided its customers in 4 categories-

1) Cheque Parties – Cheque parties are those who send their blank

cheques to Depots before receiving the finished goods. Depots fill the

selling amount of the consignment in those cheques and then these

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cheques are deposited by the depots in the account of PBPL in any of

these 5 banks.

2) Demand Draft Parties – In such cities where anyone of these 5 banks

isn’t there customers of those come in this category. Before receiving

the finished goods customers send the draft of the consignment

amount to production plants directly. Then consignment is sent to

those customers by concerned depot.

3) Credit Parties – Those parties to whom maximum 4 days credit

facility is provided are called credit parties. After 4 days these parties

send cheque of consignment amount to depot. And then procedure just

like first category is followed by depot.

4) Credit Demand Draft Parties - These are those parties to whom 4

days credit facility is provided but they also don’t have facility of any

of those 5 banks in their city. After 4 days just like the second

category these parties send the draft of consignment amount directly

to production plant.

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Product Profile

Over the years, Parle has grown to become a multi-million US Dollar

company. Many of the Parle products, biscuits or confectionaries, are market

leaders in their category and have won acclaim at the Monde Selection, since

1971.

Today, Parle enjoys a 40% share of the total biscuits market and a 15% share

of the total confectionary market in India.

The Parle biscuits brands are:

1) Hide & Seek

2) Choc Cream

3) Elaichi Cream

4) Orange Cream

5) Pineapple Cream

6) Marie Choice

7) Cheesling

8) Jeffs

9) Monaco

10) Nimkin

11) Sixer

12) Glucose

13) Krackjack

14) Parle-G

The Parle toffees brands are:

1) Funtoosh

2) Mango Bite

3) Orange Candy

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4) Poppins

5) Roll-A-Cola

6) Tangy Candy

7) Boo

8) Pippermint

9) Rose Mint

10) M Choco

11) Melody

12) Dairy Toffee

13) Lux Toffee

14) Mayfair Toffee

15) Kismi

16) Mahakismi

17) Smoothies

18) Cafechino

19) Chox Bar

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INTRODUCTION OF TOPIC

WORKING CAPITAL AT A GLANCE

INTRODUCTION

TYPES

FEATURES

DETERMINANTS

COMPONENTS

WORKING CAPITAL CYCLE

INTRODUCTION

A successful sales program is necessary for earning profits by any business

enterprise. Sales don’t convert into cash instantly. There is a time lag

between the sale of goods and receipt of cash. Therefore, there is a need for

working capital in the form of current assets to deal with the problem arising

out of the lack of immediate realization of cash against goods sold.

Therefore sufficient working capital is necessary to sustain sales activity.

FEATURES

1) Working capital is regarded as the excess of current assets over

current liabilities.

2) Working capital indicates circular flow of funds in the day-to-day

activities of business. That’s why it is also called circulating capital.

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3) Working capital represents the minimum amount of investment in raw

materials, work-in progress, finished goods, stores and spares,

accounts receivables and cash balance.

TYPES

Working capital can be classified either on the basis of concept or on the

basis of periodicity of its requirement.

1) ON THE BASIS OF CONCEPT

On the basis of concept working capital is of 2 types.

A) Gross working capital - Gross working capital is represented by the

total Current assets.

Gross working capital = Total current assets

B) Net working capital - Net working capital is the excess of current

assets over current liabilities.

Net working capital = Current assets – Current liabilities

2) ON THE BASIS OF REQUIREMENT

On the basis of requirement working capital is also of 2 types.

A) Permanent working capital - It is that amount of investment which

should always be there in the fixes or minimum current assets like

inventory, accounts receivables or cash balance etc. to carry out

business smoothly. Such an amount cant be reduced if the firms wants

to carry on business operations without interruption.

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B) Variable working capital - The excess the amount of working capital

over permanent working capital is known as variable working capital.

It may also be subdivided into two parts.

C) Seasonal working capital - Such capital is required to meet out the

seasonal demands of busy periods occurring at stated intervals.

D) Special working capital - Such capital is required to meet out the

extra-ordinary needs for contingencies. Events like strike, fire,

unexpected competition, rising price tendencies, or initiating a big

advertisement campaign require such capital.

DETERMINANTS

1) Nature of business – The effect of the general nature of the business

on working capital requirements can’t be exaggerated. Rail, roads and

other public utility services have large fixes investment so they have

the lower requirements of current assets. Industrial and manufacturing

enterprises, on the other hand, generally require a large amount of

working capital.

2) Production policies – if the production is evenly spread over the

entire year, working capital requirements are greater, because the

inventories will be unnecessarily accumulated during of season

period. But if the production schedule favours a varying production

plan as per the seasonal requirements, working capital is required to a

greater extent during a specified season only. The production policies

are affected by so many factors availability of raw materials, labour,

stocking facility etc & therefore, whatever the productions policies

are, the firm has to arrange its working capital requirements

accordingly.

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3) Proportion of the cost of raw materials to total cost - In those

industries where cost of proportion is a large proportion of total cost

of the goods produced, requirements of working capital will be

comparatively large.

4) Length of period of manufacturing – The time which elapses

between the commencement and end of the manufacturing process has

an important bearing upon the requirements of working capital. The

manufacturing cycle may be shorter for certain concerns & longer for

others- it depends on the type of the product to be manufactured, work

to be done through machine labour & hand labour, degree of

rationalization of manufacturing procedures through times, motion &

fatigue studies etc.

5) Terms of purchase - If suppliers allow continuous credit, payment

can be postponed for some time and can be made out of the sale

proceeds of the goods produced. In such a case, the requirements of

working capital will be reduced.

6) Dynamic Attitudes – As a company grows, it is logical to expect the

large amount of working capital will be required.

7) Business cycles – Requirement of working capital also varies with the

business. When the price level is up due to boom conditions, the

inflationary conditions create demand for more working capital.

During depression also a heavy amount of working capital is needed

due to the inventories being locked unsold and book debts

uncollected.

8) Requirement of cash - The working capital requirements of a

company are also influenced by the amount of cash required by it for

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various purposes. The greater the requirement of cash, the higher will

be the working capital needs of the company.

9) Dividend policy of concern – If the management follows a

conservative dividend policy the needs of working capital can be met

with the retained earnings. The relationship between dividend policy

and working capital is well established and mostly companies declare

dividend after a careful study of their cash requirements.

10) Other Factors - Other factors, which affect the requirement of

working capital, are lack of co-operation in production and

distribution policies, transport and communication facilities, the fiscal

and tariff policies of the government etc.

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COMPONENTS

Main components of working capital are as follows:

1) Cash – Cash is the most liquid and important component of working

capital. Holding cash involves cash in the sense that the present worth

of cash held for a year is less than the value of cash on today. During

inflationary situations as exist today the cost of holding includes the

deterioration in the value of the cash due to inflation. Cash, therefore,

results in enhanced liquidity, but lower profitability. Despite in the

cost involved it is pertinent to hold cash because it facilitates the

attainment of some important motives.

2) Marketable Securities – Though marketable securities provides a

such lower yield that the firm’s operation assets. They serve two

useful functions. Firstly, they act as a substitute for cash, and

secondly, are used as temporary investment. Where these securities

are held in lieu of the cash balance, they act as a substitute for

transactional or precautionary balances. Normally, these aren’t used as

speculative balances, but only as a guard against the possible shortage

of bank credit.

Marketable securities (as temporary investment) may be held for one of the

following reasons:

Seasonal or cyclical operations

To meet known financial requirements. Construction of an

additional plant.

Immediately after the sale of long-term securities.

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3) Account Receivable - Though accounts receivable are a vital

investment of any business organization, little analytical work as been

done to determine credit policies. Maintaining account receivable has

its cost implications in that the firm’s monetary resources are tied up.

This is of greater significance in the inflationary economy, because of

the depreciation in the value of money. Basically, this is a two-step

account. When goods are shipped, inventories are reduced and

accounts receivable is created. When payment is made, this account is

reduced and the cash level increases. Accounts receivables are,

therefore a function of the volume of credit sales and the average

length of time between sales and collections.

4) Inventory – Inventories represent a substantial amount of a firm’s

current assets. Management of inventories should be efficiently

carried out so that this investment doesn’t become too large, as it

would result in blocked capital which could put to productive use

elsewhere. On the other hand, having too small an inventory could

result in loss of sale or loss of customer goodwill. An optimum level

of inventory should therefore be maintained.

WORKING CAPITAL CYCLE

Working capital cycle indicates the length of time between a firm’s paying

for materials entering into stock and receiving the cash from sale of finished

goods. In a manufacturing firm, the duration of time required to complete

the sequence of events is called operating cycle.

In case of a manufacturing company, the operating cycle is the length of

time necessary to complete the following cycle of events: -

1) Conversion of cash into raw materials

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2) Conversion of raw materials into work-in-progress

3) Conversion of work-in-progress into finished goods

4) Conversion of finished goods into accounts receivable

5) Conversion of accounts receivable into cash

The above operating cycle is repeated again & again over the period

depending upon the nature of the business & type of product etc. the

duration of the operating cycle for the purpose of estimating working capital

is equal to the sum of duration allowed by the suppliers.

Working capital cycle can be expressed as:

R+W+F+D-C

Where R=Raw Material Storage Period =

Avg. Stock of Raw Material

Avg. Cost of Production per day

W=Work in Progress Holding Period =

Avg. Work in Progress Inventory

Avg. Cost of Production per day

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F=Finished Goods Storage Period =

Avg. Stock of Finished Goods

Avg. Cost of Goods Sold per day

D=Debtors Collection Period = Avg. Book Debts

Avg. Credit Sales per day

C=Credit Period Availed = Avg. Trade Creditors

Avg. Credit Purchases per day

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Classification of Ratio:

CLASSIFICATION OF RATIO

BASED ON FINANCIAL BASED ON FUNCTION BASED ON USER

STATEMENT

1] BALANCE SHEET 1] LIQUIDITY RATIO 1] RATIOS FOR

RATIO 2] LEVERAGE RATIO SHORT TERM

2] REVENUE 3] ACTIVITY RATIO CREDITORS

STATEMENT 4] PROFITABILITY 2] RATIO FOR

RATIO RATIO SHAREHOLDER

3] COMPOSITE 5] COVERAGE 3] RATIOS FOR

RATIO RATIO MANAGEMENT

4] RATIO FOR

LONG TERM

CREDITORS

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Based on Financial Statement

Accounting ratios express the relationship between figures taken from

financial statements. Figures may be taken from Balance Sheet, P& P A/C,

or both. One-way of classification of ratios is based upon the sources from

which are taken.

1] Balance sheet ratio:

If the ratios are based on the figures of balance sheet, they are called Balance

Sheet Ratios. E.g. Ratio of current assets to current liabilities or Debt to

equity ratio. While calculating these ratios, there is no need to refer to the

Revenue statement. These ratios study the relationship between the assets &

the liabilities, of the concern. These ratios help to judge the liquidity,

solvency & capital structure of the concern. Balance sheet ratios are Current

ratio, Liquid ratio, and Proprietary ratio, Capital gearing ratio, Debt equity

ratio, and Stock working capital ratio.

2] Revenue ratio:

Ratio based on the figures from the revenue statement is called revenue

statement ratios. These ratios study the relationship between the profitability

& the sales of the concern. Revenue ratios are Gross profit ratio, Operating

ratio, Expense ratio, Net profit ratio, Net operating profit ratio, Stock

turnover ratio.

3] Composite ratio:

These ratios indicate the relationship between two items, of which one is

found in the balance sheet & other in revenue statement.

There are two types of composite ratios-

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a) Some composite ratios study the relationship between the profits &

the investments of the concern. E.g. return on capital employed, return

on proprietors fund, return on equity capital etc.

b) Other composite ratios e.g. debtors turnover ratios, creditors turnover

ratios, dividend payout ratios, & debt service ratios

Based on Function:

Accounting ratios can also be classified according to their functions in to

liquidity ratios, leverage ratios, activity ratios, profitability ratios & turnover

ratios.

1] Liquidity ratios:

It shows the relationship between the current assets & current liabilities of

the concern e.g. liquid ratios & current ratios.

2] Leverage ratios:

It shows the relationship between proprietors funds & debts used in

financing the assets of the concern e.g. capital gearing ratios, debt equity

ratios, & Proprietary ratios.

3] Activity ratios:

It shows relationship between the sales & the assets. It is also known as

Turnover ratios & productivity ratios e.g. stock turnover ratios, debtors’

turnover ratios.

4] Profitability ratios:

a) It shows the relationship between profits & sales e.g. operating ratios,

gross profit ratios, operating net profit ratios, expenses ratios

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b) It shows the relationship between profit & investment e.g. return on

investment, return on equity capital.

5] Coverage ratios:

It shows the relationship between the profit on the one hand & the claims of

the outsiders to be paid out of such profit e.g. dividend payout ratios & debt

service ratios.

Based on User:

1] Ratios for short-term creditors:

Current ratios, liquid ratios, stock working capital ratios

2] Ratios for the shareholders:

Return on proprietors fund, return on equity capital

3] Ratios for management:

Return on capital employed, turnover ratios, operating ratios, expenses ratios

4] Ratios for long-term creditors:

Debt equity ratios, return on capital employed, proprietor ratios.

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Liquidity Ratio: -

Liquidity refers to the ability of a firm to meet its short-term (usually up to 1

year) obligations. The ratios, which indicate the liquidity of a company, are

Current ratio, Quick/Acid-Test ratio, and Cash ratio. These ratios are

discussed below

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Current Ratio

Meaning:

This ratio compares the current assets with the current liabilities. It is also

known as ‘working capital ratio’ or ‘solvency ratio’. It is expressed in the

form of pure ratio.

E.g. 2:1

Formula:

Current assets Current ratio =

Current liabilities

The current assets of a firm represents those assets which can be, in the

ordinary course of business, converted into cash within a short period time,

normally not exceeding one year. The current liabilities defined as liabilities

which are short term maturing obligations to be met, as originally

contemplated, with in a year.

Current ratio (CR) is the ratio of total current assets (CA) to total current

liabilities (CL). Current assets include cash and bank balances; inventory of

raw materials, semi-finished and finished goods; marketable securities;

debtors (net of provision for bad and doubtful debts); bills receivable; and

prepaid expenses. Current liabilities consist of trade creditors, bills payable,

bank credit, and provision for taxation, dividends payable and outstanding

expenses. This ratio measures the liquidity of the current assets and the

ability of a company to meet its short-term debt obligation.

CR measures the ability of the company to meet its CL, i.e., CA gets

converted into cash in the operating cycle of the firm and provides the funds

37

needed to pay for CL. The higher the current ratio, the greater the short-term

solvency. This compares assets, which will become liquid within

approximately twelve months with liabilities, which will be due for payment

in the same period and is intended to indicate whether there are sufficient

short-term assets to meet the short- term liabilities. Recommended current

ratio is 2: 1. Any ratio below indicates that the entity may face liquidity

problem but also Ratio over 2: 1 as above indicates over trading, that is the

entity is under utilizing its current assets.

Liquid Ratio:

Meaning:

Liquid ratio is also known as acid test ratio or quick ratio. Liquid ratio

compares the quick assets with the quick liabilities. It is expressed in the

form of pure ratio. E.g. 1:1.

The term quick assets refer to current assets, which can be converted into,

cash immediately or at a short notice without diminution of value.

Formula:

Quick assetsLiquid ratio =

Quick liabilities

Quick Ratio (QR) is the ratio between quick current assets (QA) and CL. QA

refers to those current assets that can be converted into cash immediately

without any value strength. QA includes cash and bank balances, short-term

marketable securities, and sundry debtors. Inventory and prepaid expenses

are excluded since these cannot be turned into cash as and when required.

38

QR indicates the extent to which a company can pay its current liabilities

without relying on the sale of inventory. This is a fairly stringent measure of

liquidity because it is based on those current assets, which are highly liquid.

Inventories are excluded from the numerator of this ratio because they are

deemed the least liquid component of current assets. Generally, a quick ratio

of 1:1 is considered good. One drawback of the quick ratio is that it ignores

the timing of receipts and payments.

Cash Ratio:

Meaning:

This is also called as super quick ratio. This ratio considers only the absolute

liquidity available with the firm.

Formula:

Cash + Bank + Marketable securities

Cash ratio =

Total current liabilities

Since cash and bank balances and short term marketable securities are the

most liquid assets of a firm, financial analysts look at the cash ratio. If the

super liquid assets are too much in relation to the current liabilities then it

may affect the profitability of the firm.

Investment/ Shareholder

39

EARNING PER SHARE:-

Meaning:

Earnings per Share are calculated to find out overall profitability of the

organization. Earnings per Share represent earning of the company whether

or not dividends are declared. If there is only one class of shares, the earning

per share are determined by dividing net profit by the number of equity

shares.

EPS measures the profits available to the equity shareholders on each share

held.

Formula:

Net Profit after TaxEarnings per share =

Number of equity share

The higher EPS will attract more investors to acquire shares in the company

as it indicates that the business is more profitable enough to pay the

40

dividends in time. But remember not all profit earned is going to be

distributed as dividends the company also retains some profits for the

business

Dividend Per Share:-

Meaning:

DPS shows how much is paid as dividend to the shareholders on each share

held.

Formula:

Dividend Paid to Ordinary ShareholdersDividend per Share =

Number of Ordinary Shares

Dividend Payout Ratio:-

Meaning:

Dividend Pay-out Ratio shows the relationship between the dividends paid

to equity shareholders out of the profit available to the equity shareholders.

Formula:

Dividend per shareDividend Payout ratio = *100

Earning per share

D/P ratio shows the percentage share of net profits after taxes and after

preference dividend has been paid to the preference equity holders.

41

Gearing

CAPITAL GEARING RATIO:-

Meaning:

Gearing means the process of increasing the equity shareholders return

through the use of debt. Equity shareholders earn more when the rate of the

return on total capital is more than the rate of interest on debts. This is also

known as leverage or trading on equity. The Capital-gearing ratio shows the

relationship between two types of capital viz: - equity capital & preference

capital & long term borrowings. It is expressed as a pure ratio.

Formula:

Preference capital+ secured loanCapital gearing ratio =

Equity capital & reserve & surplus

42

Capital gearing ratio indicates the proportion of debt & equity in the

financing of assets of a concern.

Profitability

These ratios help measure the profitability of a firm. A firm, which generates

a substantial amount of profits per rupee of sales, can comfortably meet its

operating expenses and provide more returns to its shareholders. The

relationship between profit and sales is measured by profitability ratios.

There are two types of profitability ratios: Gross Profit Margin and Net

Profit Margin.

43

GROSS PROFIT RATIO:-

Meaning:

This ratio measures the relationship between gross profit and sales. It is

defined as the excess of the net sales over cost of goods sold or excess of

revenue over cost. This ratio shows the profit that remains after the

manufacturing costs have been met. It measures the efficiency of production

as well as pricing. This ratio helps to judge how efficient the concern is I

managing its production, purchase, selling & inventory, how good its control

is over the direct cost, how productive the concern , how much amount is

left to meet other expenses & earn net profit.

Gross profitGross profit ratio = * 10 Net Sales

Net Profit Ratio:-

Meaning:

Net Profit ratio indicates the relationship between the net profit & the sales

it is usually expressed in the form of a percentage.

Formula:

NPAT Net profit ratio = * 100 Net sales

This ratio shows the net earnings (to be distributed to both equity and

preference shareholders) as a percentage of net sales. It measures the overall

efficiency of production, administration, selling, financing, pricing and tax

44

management. Jointly considered, the gross and net profit margin ratios

provide an understanding of the cost and profit structure of a firm.

Return on Capital Employed:-

Meaning:

The profitability of the firm can also be analyzed from the point of view of

the total funds employed in the firm. The term fund employed or the capital

employed refers to the total long-term source of funds. It means that the

capital employed comprises of shareholder funds plus long-term debts.

Alternatively it can also be defined as fixed assets plus net working capital.

Capital employed refers to the long-term funds invested by the creditors and

the owners of a firm. It is the sum of long-term liabilities and owner's equity.

ROCE indicates the efficiency with which the long-term funds of a firm are

utilized.

Formula:

NPATReturn on capital employed = *100

Capital employed

Financial

These ratios determine how quickly certain current assets can be converted

into cash. They are also called efficiency ratios or asset utilization ratios as

they measure the efficiency of a firm in managing assets. These ratios are

based on the relationship between the level of activity represented by sales

or cost of goods sold and levels of investment in various assets. The

important turnover ratios are debtors turnover ratio, average collection

45

period, inventory/stock turnover ratio, fixed assets turnover ratio, and total

assets turnover ratio. These are described below:

DEBTORS TURNOVER RATIO (DTO)

Meaning:

DTO is calculated by dividing the net credit sales by average debtors

outstanding during the year. It measures the liquidity of a firm's debts.

Net credit sales are the gross credit sales minus returns, if any, from

customers. Average debtors are the average of debtors at the beginning

and at the end of the year. This ratio shows how rapidly debts are

collected. The higher the DTO, the better it is for the organization.

Formula:

Credit salesDebtors turnover ratio =

Average debtors

46

Inventory or Stock Turnover Ratio (ITR)

Meaning:

ITR refers to the number of times the inventory is sold and replaced during

the accounting period.

Formula:

Cost of Goods Sold Stock Turnover Ratio =

Average stock

ITR reflects the efficiency of inventory management. The higher the ratio,

the more efficient is the management of inventories, and vice versa.

However, a high inventory turnover may also result from a low level of

inventory, which may lead to frequent stock outs and loss of sales and

customer goodwill. For calculating ITR, the average of inventories at the

beginning and the end of the year is taken. In general, averages may be used

when a flow figure (in this case, cost of goods sold) is related to a stock

figure (inventories).

Fixed Assets Turnover (FAT)

The FAT ratio measures the net sales per rupee of investment in fixed assets.

Formula:

Net SalesFixed assets turnover =

Net Fixed Assets

This ratio measures the efficiency with which fixed assets are employed. A

high ratio indicates a high degree of efficiency in asset utilization while a

47

low ratio reflects an inefficient use of assets. However, this ratio should be

used with caution because when the fixed assets of a firm are old and

substantially depreciated, the fixed assets turnover ratio tends to be high

(because the denominator of the ratio is very low).

Proprietors Ratio:

Meaning:

Proprietary ratio is a test of financial & credit strength of the business. It

relates shareholders fund to total assets. This ratio determines the long term

or ultimate solvency of the company.

In other words, Proprietary ratio determines as to what extent the owner’s

interest & expectations are fulfilled from the total investment made in the

business operation.

Proprietary ratio compares the proprietor fund with total liabilities. It is

usually expressed in the form of percentage. Total assets also know it as net

worth.

Formula:

Proprietary fundProprietary ratio = OR

Total fund Shareholders fund

Proprietary ratio =

Fixed assets + current liabilities

48

Stock Working Capital Ratio:

Meaning:

This ratio shows the relationship between the closing stock & the working

capital. It helps to judge the quantum of inventories in relation to the

working capital of the business. The purpose of this ratio is to show the

extent to which working capital is blocked in inventories. The ratio

highlights the predominance of stocks in the current financial position of the

company. It is expressed as a percentage.

Formula:

StockStock working capital ratio = Working Capital

Stock working capital ratio is a liquidity ratio. It indicates the composition &

quality of the working capital. This ratio also helps to study the solvency of

a concern. It is a qualitative test of solvency. It shows the extent of funds

blocked in stock. If investment in stock is higher it means that the amount of

liquid assets is lower.

Debt Equity Ratio:

Meaning:

This ratio compares the long-term debts with shareholders fund. The

relationship between borrowed funds & owners capital is a popular measure

of the long term financial solvency of a firm. This relationship is shown by

debt equity ratio. Alternatively, this ratio indicates the relative proportion of

debt & equity in financing the assets of the firm. It is usually expressed as a

pure ratio. E.g. 2:1

49

Formula:

Total long-term debt

Debt equity ratio = Total shareholders fund

Debt equity ratio is also called as leverage ratio. Leverage means the process

of the increasing the equity shareholders return through the use of debt.

Leverage is also known as ‘gearing’ or ‘trading on equity’. Debt equity ratio

shows the margin of safety for long-term creditors & the balance between

debt & equity.

Return on Proprietor Fund:

Meaning:

Return on proprietors fund is also known as ‘return on proprietor’s equity’ or

‘return on shareholders’ investment’ or ‘investment ratio’. This ratio

indicates the relationship between net profits earned & total proprietor’s

funds. Return on proprietors fund is a profitability ratio, which the

relationship between profit & investment by the proprietors in the concern.

Its purpose is to measure the rate of return on the total fund made available

by the owners. This ratio helps to judge how efficient the concern is in

managing the owner’s fund at disposal. This ratio is of practical importance

to prospective investors & shareholders.

50

Formula:

NPATReturn on proprietors fund = * 100

Proprietor’s fund

Creditors Turnover Ratio:

It is same as debtors turnover ratio. It shows the speed at which payments

are made to the supplier for purchase made from them. It is a relation

between net credit purchase and average creditors

Net credit purchase

Credit turnover ratio =

Average creditors

Months in a year

Average age of accounts payable =

Credit turnover ratio

Both the ratios indicate promptness in payment of creditor purchases. Higher

creditors turnover ratio or a lower credit period enjoyed signifies that the

creditors are being paid promptly. It enhances credit worthiness of the

company. A very low ratio indicates that the company is not taking full

benefit of the credit period allowed by the creditors.

Importance 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 presents facts on a

comparative basis & enables the drawing of interference regarding the

performance of a firm. Ratio analysis is relevant in assessing the

performance of a firm in respect of the following aspects:

51

1] Liquidity position

2] Long-term solvency

3] Operating efficiency

4] Overall profitability

5] Inter firm comparison

6] Trend analysis.

1] Liquidity position: -

With the help of Ratio analysis conclusion can be drawn regarding the

liquidity position of a firm. The liquidity position of a firm would be

satisfactory if it is able to meet its current obligation when they become due.

A firm can be said to have the ability to meet its short-term liabilities if it has

sufficient liquid funds to pay the interest on its short maturing debt usually

within a year as well as to repay the principal. This ability is reflected in the

liquidity ratio of a firm. The liquidity ratio is particularly useful in credit

analysis by bank & other suppliers of short term loans.

2] Long-term solvency: -

Ratio analysis is equally useful for assessing the long-term financial viability

of a firm. This respect of the financial position of a borrower is of concern to

the long-term creditors, security analyst & the present & potential owners of

a business. The long-term solvency is measured by the leverage/ capital

structure & profitability ratio Ratio analysis s that focus on earning power &

operating efficiency.

Ratio analysis reveals the strength & weaknesses of a firm in this respect.

The leverage ratios, for instance, will indicate whether a firm has a

52

reasonable proportion of various sources of finance or if it is heavily loaded

with debt in which case its solvency is exposed to serious strain. Similarly

the various profitability ratios would reveal whether or not the firm is able to

offer adequate return to its owners consistent with the risk involved.

3] Operating efficiency:

Yet another dimension of the useful of the ratio analysis, relevant from the

viewpoint of management, is that it throws light on the degree of efficiency

in management & utilization of its assets. The various activity ratios

measure this kind of operational efficiency. In fact, the solvency of a firm is,

in the ultimate analysis, dependent upon the sales revenues generated by the

use of its assets- total as well as its components.

4] Overall profitability:

Unlike the outsides parties, which are interested in one aspect of the

financial position of a firm, the management is constantly concerned about

overall profitability of the enterprise. That is, they are concerned about the

ability of the firm to meets its short term as well as long term obligations to

its creditors, to ensure a reasonable return to its owners & secure optimum

utilization of the assets of the firm. This is possible if an integrated view is

taken & all the ratios are considered together.

5] Inter firm comparison:

Ratio analysis not only throws light on the financial position of firm but also

serves as a stepping-stone to remedial measures. This is made possible due

to inter firm comparison & comparison with the industry averages. A single

figure of a particular ratio is meaningless unless it is related to some

53

standard or norm. One of the popular techniques is to compare the ratios of a

firm with the industry average. It should be reasonably expected that the

performance of a firm should be in broad conformity with that of the

industry to which it belongs. An inter firm comparison would demonstrate

the firms position vice-versa its competitors. If the results are at variance

either with the industry average or with those of the competitors, the firm

can seek to identify the probable reasons & in light, take remedial measures.

6] Trend analysis:

Finally, ratio analysis enables a firm to take the time dimension into account.

In other words, whether the financial position of a firm is improving or

deteriorating over the years. This is made possible by the use of trend

analysis. The significance of the trend analysis of ratio lies in the fact that

the analysts can know the direction of movement, that is, whether the

movement is favorable or unfavorable. For example, the ratio may be low as

compared to the norm but the trend may be upward. On the other hand,

though the present level may be satisfactory but the trend may be a declining

one.

54

OPERATING CYCLE OF MANUFACTURING BUSINESS

REALIZATION Accounts SALES Receivables

Cash FinishedGoods

PURCHASES PRODUCTIONPROCESS PRODUCTION

Raw Materials Work-in-Process PROCESS

55

METHOD OF ASSESMENT OF WORKING CAPITAL

Operating cycle No. of days

Raw material = 916.53 = 7.9

114.84

Stock in Process = 10.12 = .088

114.84

Finished goods = 1054.1 = 9.13

115.36

Debt collection period = 4.22

(Calculating in ratios) _____________

Total length of Operating Cycle = 21.34 Days

SALES per month 67829.07 = 5652.422 Rs.

12

Total EXPENSES 60450.77 = 5037.66 Rs.

Per month 12

56

WORKING CAPITAL REQUIRED =

Total Length of Operating Cycle X Monthly Expenses

30

= 21.34X 5037.66

30

= 3583.45Rs.

Working Notes:

1. Raw Material – (Mentioned in P&L Account)

Opening Stock + Purchases – Closing Stock

2010-11:

Annual Consumption = 36047.27Rs

1 Month’s Consumption = 36047.27/12 = 3003.94Rs

2011-12:

Annual Consumption = 38058.07Rs

1 Month’s Consumption = 38058.07/12 = 3171.50 Rs.

2. Stock In Process --

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Raw Material + Power + Labour + Repairs

+ Other Manufacturing Expenses + Depreciation

+ Opening Stock – Closing Stock

2010-11:

Cost of Production = 40125.5 Rs.

1Month’s Stock In Process = 40125.5/12 = 3343.81Rs.

2011-12

Cost of Production = 41315.08 Rs.

1Month’S Stock In Process = 41315.08/12 = 3442.92 Rs.

3. Finished Goods --

Cost of Production + Opening Stock - Closing Stock

2010-11:

Cost of Goods Sold = 40275.31Rs.

1 Month’s Finished Goods = 40275.31/12 = 3356.27Rs.

2011-12:

Cost of Goods Sold = 41529.54Rs.

1 Month’s Finished Goods = 41529.54/12 = 3460.85Rs.

58

THEORTICAL ASPECTS OF WORKING

CAPITAL MANAGEMENT

NATURE OF WORKING CAPITAL MANAGEMENT

Working capital management is three dimensional in nature-

1) It is concerned with the formulation of policies with regard to

profitability, liquidity and risk.

2) It is concerned with the decisions about the composition and level of

current assets.

3) It is concerned with the decisions about the composition and level of

current liabilities.

DIMENSIONS OF WORKING CAPITAL

59

Composition of Level of Current Assets

Policies regarding to Profitability Liquidity and Risk

Composition of Levelof Current Liabilities

GOAL OF WORKING CAPITAL MANAGEMENT

Working capital management is concerned with the problems that

arise in attempting to manage the current assets, the current liabilities and

the interrelationship that exists between them.

The term current assets refer to those assets which is the ordinary

course of business can be converted into cash within one year. Major current

assets are cash, marketable securities, accounts receivable and inventory.

Current liabilities are those liabilities, which are intended, at their

inception, to be paid in the ordinary course of business within a year, out of

the current assets or earnings of the concern. Current liabilities are accounts

payable, bills payable, bank overdraft, and outstanding expenses.

Working capital is that portion of firm’s assets which is financed by long-

term funds.

Interaction between current assets and current liabilities is the main theme

of the theory of working capital management.

Goal of working capital management is to manage the firm’s current

assets and liabilities in such a way so that a satisfactory level of working

capital is maintained.

The second important segment of working capital management is deciding

the optimum level of investment in various current assets. There are three

important current assets cash, accounts receivables and inventory

60

INVENTORY MANMAGEMENT IN PARLE BISCUITS PVT. LTD.

For inventory management in Neemrana plant of PBPL certain things are

considered which are completely practical-

As market generally fluctuates so if there is any perception of the

increment in the price level of any commodity in future then that

particular commodity is stored.

All the materials of the mixture, which is used in making biscuits, can

be stored maximum only for 3 days. Because store of plant is

designed like this that more than 3 days storage can’t be maintained in

it.

Minimum levels of inventories are maintained in plant in wake of

lead-time, govt. policies, and one-day safety stock for transportation

problem.

Re-order levels of inventories are maintained in the plant in wake of

per day consumption level of inventories and lead-time in days.

61

The position of inventory at the end of last two years is as follows-

NAME OF THE COMMODITY YEAR AMOUNT

(In Rs/-)

Stores and spares 2010-11 82, 91,000

2011-12 57, 29,000

Raw Materials 2010-11 10, 21,52,000

2011-12 8,11,54,000

Packing Material 2010-11 5,82,08,000

2011-12 7,08,06,000

Finished Goods 2010-11 11,61,33,000

2011-2012 9,46,87,000

62

CASH MANAGEMENT IN PARLE BISCUITS PVT. LTD.

Cash management in Parle Biscuits Pvt. Ltd. is as follows-

Average daily collection of the Parle Biscuits Pvt. Ltd. is 2 crores.

Salaries and Wages are distributed in Parle Biscuits Pvt. Ltd on

monthly basis. 50,00,000-75,00,000 salaries and wages are

distributed in one month. Like this all other daily transactions are

completed by daily collection.

In case of strike or any contingency supply of demand is completed

by another plant of Parle Biscuits Pvt. Ltd. and by 11 CMU’S.

Supply doesn’t disturb.

Authority for getting the benefit of any opportunity is given to

Mumbai office of Parle Biscuits Pvt. Ltd. That decides the policy

regarding to any market opportunity.

Parle Biscuits Pvt. Ltd. doesn’t have any credit policy. It deals in

cash. That’s why it doesn’t has any cash problem.

Distribution channel of Parle Biscuits Pvt. Ltd. is very short only

depots are there as a middleman between plant & open market. That’s

why there isn’t any necessity of more cash.

Biscuits come in FMCG product. So circulation of cash is smooth &

fast.

Production cycle is short. That’s why Parle Biscuits Pvt. Ltd has less

demand of cash.

63

FINANCING OF WORKING CAPITAL

INTRODUCTION

A firm has to decide how it is to be financed. The need for financing arises

mainly because the investment in Working Capital/Current Assets that is raw

materials, work/stock-in-progress, finished goods and receivables typically

fluctuates during the year.

The main sources of Working Capital financing are Trade Credit, Bank

Credit, RBI framework/regulation of bank credit/finance/advances,

Factoring, Commercial Papers and Internal Sources.

TRADE CREDIT

Trade Credit refers to the credit extended by the supplier of goods and

services in the normal course of transaction/business/sale of the firm.

According to trade practices, cash is not paid immediately for purchases but

after an agreed period of time. Thus, deferral of payment (trade credit)

represents a source of finance for credit purchases.

BANK CREDIT

Bank Credit is the primary institutional source of Working Capital finance in

India. In fact, it represents the most important source for financing of

Current Assets.

Working Capital finance is provided by banks in five ways:

1) Cash Credits/Overdrafts

2) Loans

3) Purchase/Discount Bills

64

4) Letter of Credit

5) Working Capital term loans

RESERVE BANK OF INDIA FRAMEWORK FOR /REGULATION

OF BANK CREDIT

In order to secure alignment of Bank Credit with planning priorities and

measures to direct Bank Credit to priority sectors and enforce a measure of

financial discipline among industrial borrowers.

However, the basic character of Bank financing of Industry, namely over

borrowing and domination of cash credit system did not materially alter.

COMMERCIAL PAPERS

Commercial Paper is a short-term unsecured negotiable instrument,

consisting of usance promissory notes with a fixed maturity. It is issued on a

discount on face value basis but it can also be issued in interest bearing

form. A Commercial Paper when issued by a company directly to the

investor is called a Direct Paper. The companies announce current rates of

Commercial Papers of various maturities, and investors can select those

maturities, which closely approximate their holding period. When

Commercial Papers are issued by security dealers/dealers on behalf of their

corporate customers, they are called Dealer Paper. They buy at a price less

than the commission and sell at the highest possible level.

65

FACTORING

Factoring provides resources to finance receivables as well as facilitates the

collection of receivables. Although such services constitute a critical

segment of the financial services scenario in the developed countries, they

appeared in the Indian financial scene only in the early nineties as a result of

RBI initiatives. There are two bank-sponsored organizations, which provide

such services:

1) SBI Factors and Commercial Services Ltd.

2) Canarabank Factors Ltd.

The first private sector factoring company, Foremost Factors Ltd,

started operations since the beginning of 1997.

INTERNAL SOURCES

This is also another major source for financing of Working Capital. Internal

Sources include profits, reserves etc.

FINANCING OF WORKING CAPITAL IN PARLE BISCUITS PVT.

LTD.

In Parle Biscuits Pvt. Ltd financing of Working Capital is done through only

internal sources. Profits and reserves of Parle Biscuits Pvt. Ltd. are enough

to fulfill the demand of it’s Working Capital.

Parle Biscuits Pvt. Ltd. doesn’t use any other source apart internal for

financing it’s Working Capital.

66

MANAGERIAL USEFULNESS OF STUDY

Today in the business line every man want to know about his company

financial condition. A working capital is a part of finance. The working

capital are calculated by the current assets and current liabilities which are

related to annual report of the company. With the help of working capital

management we can calculated the liquidity position of the company. If the

current assets are more than the current liabilities thus we can say that the

liquidity position of the company is satisfactory, the usefulness of study is

included the signification of the working capital. Working capital

management is manage the operating process in the organization &

company.

All the businessmen want to know how much they have gained or lost

during the year; how much capital is invested in the business at the end (if

the year; how much amount, they are liable to pay and to whom they owe it;

how much is owed to them and by whom etc. In order to attain such

information, it is essential to keep a complete and systematic record of each

and every business transaction entered into during the year.

By keeping a complete and systematic record of every business dealing the

businessman can know how much the amount of purchases is; how much is

the amount of sales; what are his total expenses and what is the amount of

profit earned or loss incurred during the year. Furthermore, he can ascertain

the financial position of his business, such as, how much capital it has at the

end for the year and how that capital stands invested in various assets; how

much amount he has to take and from whom and how much amount he is

liable to pay and to whom. Besides, the properly maintained accounts are

helpful in the assessment of Income-tax and Sales

67

CONCEPT USED IN STUDY

In this project I used working the ratio which are used for calculating for the

financial conditions of Parle Biscuit Pvt. Ltd. I have used the ratio which are

networking capital ratio, current ratio, average collection ratio and quick

ratio. These ratio are very useful to understand the topic because we can

calculate the working capital by the help of these ratio. I have used these

ratio by the declaration of financial manager of Parle Biscuit Pvt. Ltd. These

ratio are shows the liquidity position in the financial competition. Ratio help

to summaries the large quantities of financial data and to make qualitative

judgment about the firm’s financial performance. The project is developed

keeping in mind the security of working capital of the company. That is

possible with the help of ratio analysis.

Focus of the Problem

The main purpose of study the account process is to find the main reason or

decision which can improve the business of the company. The main purpose

or focus of the problem is to know that which product should be used in the

company and why and how can it be effective for the company?

The main focus of the problem is to find out output of the economical

business. Since a special reference has been made towards Parle Biscuits

Pvt. Ltd. business has also become equally important and unless we know

the methodology adopted by Parle Biscuits Pvt. Ltd. our study will not give

the true picture. In nutshell, the focus of our study is find the amount

consolidation of the entire group.

Our study is focused on to know about the amount consolidation of the

entire group and the international financial market.

68

The study is also focused on satisfaction of the customer, job satisfaction

level of the employees and the effectives handling of accounts with

computer & related software.

69

OBJECTIVE OF PROJECT

Right from the beginning and also in present scenario, Confectionary has

carved for itself a strong place in the international market with around half

of the global primary demand of confectionary products. Now-a-days

confectionary products are also a means to economic power. Most of the

nations including developing countries like INDIA have placed adequate

emphasis on self-reliance technology in confectionary industry.

1. Primary : To find out the operating and day to day

financial functions which reflects how the company operates its

operating cycle and manage financial flow in day to day business

activity.

2. Secondary :

1. To know the functioning of the finance deppt.

Of Parle Biscuits Pvt. Ltd.

2. To analyze the liquidity position of the

organization

3. To examine profitability position of the

management.

4. To prepare report on study thus conducted.

70

RESEARCH METHODOLOGY

Research Design

The research design involves taking the decision on type of data sources

from which the data is to collected and the contact methods. The research

design selected by me was descriptive cum analytical as this the best suited

to analyze the fact which already exist and choose the best one for welfare of

the employees.

METHODS OF DATA COLLECTION

To deal with real life problems it is often found that data at hand are

inadequate and hence it becomes necessary to collect data appropriate.

As the project is on working capital information include was collected from

the finance dept. for this purpose data collection was done through

secondary data.

1) Secondary Data

Secondary data consists of information that already exists somewhere and

was collected for another purpose which may not be the same.

Secondary Data used here

- Various files of accounts

- Magazine and Books

- Performa’s and Websites

- Annual financial reports of parle

I have used secondary data in the completion of this summer training report.

71

Tool and Techniques:-

1. Ratio analysis

2. Fund flow statement .

3. Operating cycle method

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DATA ANALYSIS

ANALYSIS OF WORKING CAPITAL MANAGEMENT

In this chapter an analysis over the Working Capital of Parle Biscuits Pvt.

Ltd. has been done. But before going further let us have a look on the current

position of Working Capital.

The Working Capital of the last two years is as follows –

(Amount in ‘00s Rs/-)

YEAR SALES INVESTMENTS WORKINGCAPITAL

% OFWORKINGCAPITAL TOSALES

2010-11 5282907 939194 299640 5.67

2011-12 5505061 1175683 288828 5.24

In year 2010-11 Working Capital of Parle Biscuits Pvt. Ltd. was

299640 Rs/- while in the same period the sales was noticed 5282907 Rs/-

then % of Working Capital to sale was 5.67 but in the next year 2011-12

sales was 550506 Rs/- and Working Capital was 288828 Rs/-. So in year

2011-12 % of Working Capital to sales was 5.24.

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CALCULATION OF WORKING CAPITAL

Amount in ‘00s

2010-11

2011-12

74

RATIO ANALYSIS

It is a powerful tool of financial analysis. A ratio is defined as “the indicated

quotient of two mathematical expressions” and as “the relationship between

two or more things”. Ratio helps to summaries the large quantities of

financial data and to make qualitative judgment about the firm’s financial

performance. The point to note is that a ratio indicates a quantitative

relationship, which can be turn, used to make a qualitative judgment.

Here are some of the calculated ratios of the financial year of Parle Biscuits

Pvt. Ltd.

All the ratios are calculated in ‘00s Rs/- figures.

1) Net Working Capital Ratio

Net Working Capital

Capital Employed 2010-11

2011-12

Net Working Capital 299640 288828

Net Assets or Capital employed 1403616

1716615

Ratio .21: 1

.17: 1

The difference between Current Assets and Current Liabilities excluding

short-term borrowings is called Net Working Capital or Net Current Assets.

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The position of Net Working Capital in the year 2010-11 is better as

compared with the year 2011-12. The important thing to say is that this

organization has healthy Current Assets.

2) Current Ratio:-

Current Assets

Current Liabilities

2010-11 2011-12

Current Assets 596878 646067

Current Liabilities 297238 357239

Ratio 2 : 1 1.80: 1

Current Assets include cash and those assets, which can be converted

into cash within a year. All obligations maturing within a year are included

in current liabilities.

As a conventional rule a current ratio 2: 1 or more is considered

satisfactory. The current ratio doesn’t represent margin of safety i.e. a

“cushion” of protection for creditors.

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2010-11

2011-12

77

3) Average Collection Ratio

Debtors*360

Sales 2010-11

2011-12

Debtors*360 172716*360 188725*360

Sales 5282907

5505061

Days 11.77

12.34

The average collection period shows the efficiency of debtors. It tells

the PBL doesn’t has credit policy & if is given then in rare case.

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2010-11

2011-12

79

4) Quick Ratio or Acid Test

Current Assets - Inventories

Current Liabilities 2010-11

2011-12

Current Assets – Inventories 596878-270934 646067-

289272

Current Liabilities 297238 357239

Ratio 1.09 : 1 .99 : 1

Generally a quick ratio of 1:1 is considered to represent a satisfactory

position. But it can’t be said tat a company having quick ratio of less than

1:1 isn’t financially sound, Because it depends upon the nature of debtors. If

the debtors are slow paying the quick ratio of more than 1:1 can become

harmful. But if debtors are liquid like in this organization than even less than

1:1 can work out to be satisfactory.

As debtors of this organization aren’t slow paying so that quick ratio is

satisfactory.

The above made calculation of various ratios has told us about the various

aspects of Working Capital of Parle Biscuits Pvt. Ltd. The system is well

under control an effective but still in some areas a little more concentration

to be needed.

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2010-11

2011-12

81

5) Gross Profit Margin

Gross Profit Margin = gross profit*100/sales

2010-11 2011-12

Gross profit 829287 846824

Sales 5282907 5505061

Ratio 15.70 15.38

Profit Margin of the firm has decreased from 15.70% to 15.38% which

means that margin of profit on sales has decreased.

6) Net Profit Margin

Net Profit Margin= PAT*100/Sales

2010-11 2011-12

PAT 262056 347142

Sales 5282907 5505061

Ratio 4.96 6.31

Profit Margin of the firm has increased from 4.96% to 6.31% which means

that margin of profit on sales has increased.

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7) Asset Turnover Ratio

Net Asset turnover ratio= sales/net assets

2010-11 2011-12

Sales 5282907 5505061

Net Assets 1403616 1716615

Ratio 3.76 3.21

NATR has decreased from 3.76 to3.21 which means Parle is producing 3.76

times of sales for one rupee of capital employed in net assets in 2010-1\10 to

decreased a 3.21 times of sales for one rupee of capital employed in net

assets in 2011-12.

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FUND FLOW ANALYSIS

The statement of change in financial position, prepared to determine only the

sources and uses of working capital between dates of the two Balance Sheets

is known as the Fund Flow Statement. Working Capital is defined as the

difference between Current Assets and Current Liabilities. Working

determines the liquidity of the firm.

The Working Capital flow or fund arises when the net effect of transaction is

to increase or decrease the amount of Working Capital. Normally, a firm will

have some transactions that will change Net Working Capital and some that

ill cause no change in Net Working Capital. The transaction will cause Net

Change of Working Capital only when one of the accounts affected is a

current account (Current Liability) and account is non-current account

(Long-term Assets or Long term Liability).

The concepts of Working Capital may be summarized as follows:

The Net Working Capital increases or decreases when a transaction

involves a current account and a non-current asset account.

The Net Working Capital remains unaffected when a transaction

involves only Current accounts.

The Net Working Capital remains unaffected when a transaction

involves only non current accounts.

Now let us examine the Working Capital flow of Parle Biscuits Pvt.

Ltd. through the statement of change in Working Capital.

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SCHEDULE OF CHANGE IN WORKING CAPITAL

Particulars 2010-11 2011-12 Effect on Working

capital

Increase Decrease

Current

Assets

Inventories 270934 289272 18338

Debtors 172716 188725 16009

Cash 153228 168070 14842

Accured Income 816122 868345 52223

Total 1413000 1514412

Current Liabilities

C/L (Cr.) 297238 357239 60001

Provisions 1111814 1151815 40001

Total 1409052 1509054

W.C (A-B) 3948 5358 101412 100002

Pos. Inc. in W.C 1410

The project is developed keeping in mind the security of Working

Capital of the company. Means that no one can enter in the confidential data

of the company and without permission the senior officer one can’t enter in

the main programme whether he is Manager, Employee or the Guest.

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FINDINGS

It is very difficult to make the project or the analysis in such a way that can

solve all the problems according to the requirements. In this project it is

being tried to give more and more facilities but in a short period of training

time, as much as possible has been done.

In year 2010-11 Working Capital of Parle Biscuits Pvt. Ltd. was

299640 Rs/- while in the same period the sales was noticed 5282907

Rs/- then % of Working Capital to sale was 5.67 but in the next year

2011-12 sales was 550506 Rs/- and Working Capital was 288828

Rs/-. So in year 2011-12 % of Working Capital to sales was 5.24.

The Position of Net Working Capital in the year 2010-11 is better as

compared with the year 2011-12. The important thing to say is that

this organization has healthy current assets.

As a Conventional rule a current ratio 2:1 or more is considered

satisfactory the current ratio don’t represent margin of safety i.e. a

“cushion” of protection for creditors.

The average Collection period shows the efficiency of the debtors, it

tells that Parle Biscuit Pvt. Ltd doesn’t has credit policy and if is given

then in rare cases.

.

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RECOMMENDATIONS

Total Current assets need to be increased.

Total Liabilities of outsiders should be decreased.

Overall Management should be improved.

Expenditure should be decreased.

Organization has healthy current assets but it needs to improve its

liquidity power.

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LIMITATIONS OF THE STUDY

The major limitations of my study are as under.

Limited Time : Although the staff of Parle Company Pvt. Ltd. was

very efficient and highly co-operative and devoted enough of their

valuable time to us. But because of time constant. We were not able to

devote as much time with their employees.

Secrecy: Some of the information was kept confidential and was not

disclosed to any person who so ever.

Lack of Comparative Data : Due to non availability of other

industries in the same line we were not able to compare the data of

one organization with other one. Inspire of these difficulties we still

put our best efforts to try to do the full justice subject matter and in

completion of the report.

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CONCLUSIONS

“Success is achieved by those who try where there is

nothing to loose by trying a great deal to gain if

successful, by all means try.”

W.Clement Stone

The study has its own importance in its own way. With the help of this study

one can know about the struggle and success of Parle Biscuits Pvt. Ltd.

Efforts, which is due to its efficient management.

The study will definitely increase the morale of each employee and by

studying this managers come to know that what effective measures can be

taken to maintain the effective use of working capital in the organization and

thus to achieve goals of the organizations.

89

BIBLIOGRAPHY

Text Books

D.C.Sharma & K.G.Gupta Management Accounting

M.Y.Khan & P.K.Jain Financial Management

Annual Reports

1) Parle Biscuits Pvt. Ltd. annual report 2010-11

2) Parle Biscuits Pvt. Ltd. annual report 2011-12

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ANNEXURE

Profit and Loss Account

Particulars 2010-11

(in ‘00s)

2011-12

(in ‘00s)

Sales 5282907 5505061

Less: Cost of Goods Sold

Opening Stock 137107 136933

Add: Raw Material Consumed 3067148 3268256

Packing Material Consumed 723740 666587

Payment to an Provisions for employees 171429 126067

Store and Spare Parts Consumed 43975 40306

Power and Fuel 120505 142037

Conversion Charges 257928 305061

Rates and Taxes 68721 78051

Less: Closing Stocks 136933 105061

Gross Profit 829287 846824

Less : Operating Expenses

Selling and Distribution expenses

Repair and Maintenance 44499 40507

Advertisement and Sales/ Marketing Expenses 187875 250507

Communication Expenses 2103 2209

Cash Discount 20440 25061

Traveling and Convince Expenses 6312 7051

General and Administrative Expenses

Rent 4636 2051

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Printing and Stationary 2276 2051

Insurance 3531 3033

Legal and Professional 3642 4050

Financial Expenses

Depreciation 103900 95061

Miscellaneous 5488 6057

Operating Profit 327846 396336

Add : Not Operating Income

Income from Investment 87622 146251

Other Incomes 10606 21872

Less : Non Operating Expenses

Net income before Tax 426074 564459

Less : Tax@38.5% 164038 217317

Net Income 262036 347142

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Common Size Statement

Profit and loss Account

Particulars 2010-11 2011-12

Sales 100 100

Less Cost of Good Sold 84.3 84.62

Gross Profit 15.7 15.38

Less : Operating Expenses

Selling and Distribution Expenses 7.15 6.14

General and Administration Expenses .27 .20

Financial Expenses 1.97 1.72

Misc. Expenses .10 .11

Total Operating Expenses 9.5 8.18

Operating Profit 6.21 7.2

Total Income 1.86 3.05

Less : Other Expenses

Income Before Tax 8.07 10.25

Less : Provision for Tax 3.11 3.95

Income after Tax 4.96 6.3

Balance Sheet

Particulars 2010-11 2011-12

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Liabilities

Share Capital 4950 4950

Reserves and Surplus 1494788 1759852

Secured Loans

Unsecured Loans

Current Liabilities and Provisions

a) Current Liabilities(Creditors) 297238 357239

b) Provisions 1111814 1151815

Contingent Liabilities

Total 2908790 3273856

Particulars 2010-11 2011-12

Assets

Fixed Assets 556596 583761

Investment 939194 1175683

Current Assets, Loans and Advances

a) Current assets

Stock 270934 289272

Debtors 172716 188725

Cash 153228 168070

b) Loans and Advances 816122 868345

Misc. Expenditure

Profit and Loss A/c(Dr. Balance)

Total 2908790 3273856

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