[2009]

Live Project
A
Study of Working
Capital Management of
Food Corporation of India
Faculty Guide:
Company Guide:
Dr.Bhunesh Vyas Mr.
R.N.Mittal

Submitted By:
Rajesh Kumar
kumar.rajesh129@gmail.com

08OSB622

Omegan School of Business

 A REPORT
ON

A
Study of Working
Capital Management of
Food Corporation of India

Submitted By:
Rajesh Kumar
kumar.rajesh129@gmail.com

08OSB622
AT

FCI

Date: JUNE – 2009

Omegan School of Business

2
 A REPORT
ON

A
Study of Working
Capital Management of
Food Corporation of India

Submitted By:
Rajesh Kumar
kumar.rajesh129@gmail.com

08OSB622
A report submitted in partial fulfillment of the requirements of

MBA Program

Submitted to the
DR.J.M.OVASDI
Principal
Omegan School of Business
JAIPUR

3
 CERTIFICATE

This is to certify that the project work entitled “A Study of

WorkingCapital Management of FCI.”Is a piece of bonafide work done
by Anshuman, student of Omegan School Of Business, under my
guidance and supervision for the partial fulfillment of the course MBA, at
Omegan School of Business Jaipur.
To the best of my knowledge and belief the thesis embodies the work of
the candidate himself and has been duly completed.

Simultaneously, the thesis fulfills the requirements of the rules and

regulations related to the summer internship of the institute and I am
assured that the project is up- to the standard both in respect to the
contents and language for being referred to the examiner.

Dr.Bhun
esh Vyas
(Faculty
Guide)

4
 DECLARATION

I hereby declare that the project report entitled “A Study of Working

Capital Management of FCI.” Is the produce of my sincere effort. This
Summer Internship Project Report is being submitted by me alone, at
Omegan School of Business Jaipur, for the partial fulfillment of the course
MBA, and the report has not been submitted to any other Educational
institutions or for any other purpose whatsoever.

Rajesh Kumar

(Student of OSB,
Jaipur)

5
 ACKNOWLEDGEMENT

Writing this report happens to be one of the greatest

achievements in this phase of my life. Express my heartiest thanks to those who
provided me tremendous support and making it a useful first hand experience. I
am indebted to those who helped me in one way or the other in heavy indeed. I
take the opportunity to thank all of them. I am thankful to our Principal Dr.
J.M.Ovasdi who gave us the excellent platform of doing something in
management field and I would like to acknowledge my deep sense of gratitude
to Mr.R.N.Mittal for his under guiding help and guidance at all stages.
I am extremely thankful to my faculty guide Dr.Bhunesh Vyas for the sincere
and enthusiastic support without which I would not have been able to write this
report. I extend my gratitude to our soft skills madam Mrs.Nikita Deshpandey
who encourages me for the summer training at FCI her excellent contribution
and guidance in making this report more informative and of a respectable
standard.
I will be failing in my duty if I do not mention here the tremendous cooperation
I received from Mr.K.Donney (Placement officer) and Miss. Vijeta Soni, in
completion of this voluminous work in particular whose patience, support,
encouragement, understanding and love helped to bring this effort to fruition.

RAJESH KUMAR
Jaipur MBA (IIIrd SEM)
Date: - 27 /06 /2009

6
 PREFACE

The underlying aim of the summer training in FCI

is a sincere attempt to analyze its Working Management by making use of
different financial appraisal techniques. The data for the studies were obtained
from the published annual reports of the company.
Among all the problems of financial management, the problems of working
capital management have probably been recognized as the most crucial one. It
is because of the fact that working capital always helps a business concern to
gain vitality and life strength. The objective of this study is to critically
evaluate working capital management as practiced in FCI.

In this study, a sincere attempt has been made to analyze the working of FCI by
making use of different financial appraisal techniques like ratio analysis, trend
analysis, common-size analysis etc. The period of study was 3 year from 2005-
06 to 2007-08. The data for the studies were obtained form the published
annual reports of the company.
An effort has been made to appraise the overall financial performance and
efficiency of management, but the scope and depth of study remained limited
due to the limiting factors of time, and resources. However, it is expected that
the study will provide useful information for better and easier understanding of
the financial results of the company.
This study has been divided into six chapters. The first chapter has been
devoted to the introduction and last to the summary of conclusion and
suggestion. The second chapter deals with the objectives. Third chapter takes
care of introduction to financial analysis. In addition to this fourth chapter deals
with significance of working capital, whereas fifth chapter deals with the
analysis aspects of working capital. The main source of data has been the
annual reports of the company.

7
 CONTENTS

1. Company Profile:-

2. Objective of the Project:-

3. Introduction to Financial analysis:-

4. Significance of the Working Capital:-

5. Analysis of Working Capital:-

6. Conclusion and Suggestions:-

References

Glossary

8
 TABLE OF CONTENTS

Acknowledgments

Preface

Abstract
Chapterisation
1. Introduction

1.1 Overview- FCI................................... 12-24

1.2 Brief History..................................................... 15-18
1.3 Objectives......................................................... 18-20
1.4 Organization Structure .................................... 21-24

2. Objective of the Project

2.1 Research Methodology.................................. 25-28

2.2 Type of Research............................................ 28-29
2.3 Sample of design ........................................... 29-30

3. Introduction to Financial Analysis

3.1 Prelude........................................................ 31-32

3.2 Concept of Financial Statement ................ 32-33
3.3 Types of Financial Statement .................... 33-36
3.4 Parties Interest............................................ 36-37
3.5 Financial Appraisal.................................... 37-40

9
4. Significance of the Working Capital

4.1 Introduction of Working Capital................ 41-42

4.2 Concept of Working Capital....................... 42-45
4.3 Importance of Working Capital analysis .. 45-47
4.4 Operating and cash conversion cycle......... 47-50
4.5 Methods and ratios .................................... 50-56

5. Analysis of Working Capital

5.1 Working capital analysis......................... 57-58

5.2 Working capital trend analysis............... 58-60
5.2 Ratio analysis.......................................... 60-68

6. Conclusion and Recommendations

6.1 Profitability…………………………… 69-71

6.2 Working Capital………………………. 71-72

References

Glossary

10
11
Food Corporation of India (Hindi: भारतीय खाग िनगम) was setup on 14th January 1965 under Food

Corporation Act 1964 with authorised capital of almost $600 million to implement the national

policy for price support operations, procurement, storage, preservation, inter-state movement and

distribution operations.

It operates through 5 zonal offices and 26 regional offices. Each year, the Food Corporation

purchases roughly 15-20 per cent of India's wheat output and 12-15 per cent of its rice output. The

losses suffered by FCI are reimbursed by the Union government, to avoid capital erosion, and thus

declared as a subsidy in the annual budget. In 2007, such food subsidies were met by government

bonds worth almost $8 billion.

The Food Corporation of India was setup under the Food Corporation Act 1964, in order
to fulfill following objectives of the Food Policy :

• Effective price support operations for safeguarding the interests of the

farmers.
• Distribution of foodgrains throughout the country for public distribution
system
• Maintaining satisfactory level of operational and buffer stocks of
foodgrains to ensure National Food Security

In its 45 years of service to the nation, FCI has played a significant role in India 's success
in transforming the crisis management oriented food security into a stable security system.
FCI's Objectives are:

• To provide farmers remunerative prices

12
• To make food grains available at reasonable prices, particularly to vulnerable

section of the society

• To maintain buffer stocks as measure of Food Security

• To intervene in market for price stabilization

13
14
• ORGANIZATIONAL CHART

15
 Food Corporation of India
Headquarters:New Delhi
Quality Control and Scientific Preservation

The Food Corporation of India has an extensive and

scientific stock preservation system. An on-going
programme sees that both prophylactic and curative
treatment is done timely and adequately. Grain in
storage is continuously scientifically graded, fumigated
and aerated by qualified trained and experienced
personnel.

Food Corporation of India's testing laboratories spread

across the country for effective monitoring of quality of
foodgrains providing quality assurance as per PFA
leading improved satisfaction level in producers (farmers)
and customers (consumers).

The preservation of foodgrain starts, the minute it arrives

in the godowns. The bags themselves are kept on
wooden crates/poly pallets to avoid moisture on contact
with the floor. Further till the bags are dispatched/issued,
fumigation to prevent infestation etc. of stocks is done on
an average every 15 days with MALATHION and once in
three months with DELTAMETHRIN etc. on traces of
infestation, curative treatment is done with Al.
PHOSPHIDE.

District Labs 164

F Regional Labs 18
CI Zonal Labs 5
's Central Lab 1
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to
rie
s

16
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17
 QUALITY POLICY

FCI, as the country�s nodal organization for implementing the National Food Policy, is
committed to provide credible, customer focused services, for efficient and effective food
security management in the country. Our focus shall be:

• Professional excellence in Management of food grain and other commodities

• Service quality and stake holder orientation
• Transparency and accountability in transactions
• Optimum utilization of resources
• Continual improvement of systems, processes and resources

QUALITY OBJECTIVES

• Fulfillment of all the targets set as per Govt. of India Food Policy from time to
time.
• Monitoring of Quality in all major transactions, processes leading to improved
customer satisfaction level
• Accountability for efficiency, responsiveness, performance and minimization of all
losses & Wastes
• Need based up gradation of infrastructure and work environment
• Need based enhancement of available knowledge & skills.
• Transparency in decision making, effective communication leading to harmonious
employee relations
• Establishing, maintaining and improving ISO 9001:2000 based Quality
Management Systems covering all areas of activity.

18
DR.BHUNESH VYAS
(Faculty Guide)

19
 OBJECTIVES

CONCEPTUAL :-( Financial Technique: Working Capital Ratios)

To prepare a report after analysis and interpretation of finding

from balance sheet as well as profit and loss account by applying various
mathematical and financial tools and techniques.

FACTUAL :-( Analysis of facts (results) derived from the financial technique

 The present earning capacity or profitability of the FCI

Ltd
 The short-term liquidity and long-term solvency.
 The financial stability of a business.
 To analyze different ratios so to judge the availability and
effective usage of working capital.

20
 RESEARCH METHODOLOGY

• Research Methodology is a systematically solve the research problem. It has

many dimensions and research methods constitute a part of the research
methodology.
• Thus when we talk about research methodology, we do not only talk of the
research methods but also consider the logic behind the methods. We use in
context of our research study, so that research results are capable of being
evaluated either by researcher himself or by others.
• To effectively carry out in research, I would use the following research
process, which consists of series of actions or steps.

Research comprises of the following steps:-

1. Formulating the research Problem.

2. Research design & Sample Design.

3. Analysis of data gathered

4. Data analysis comparison

5. Graphics and interpret

21
 1 FORMULATING THE RESEARCH PROBLEM
This is the first step under which the problem is stated in general way and then
ambiguities i.e. understanding and rephrasing the problem thoroughly and
rephrasing the same into a meaningful terms from an analysis point of view.

The research problem under the present project was to study data of various
funds. For this research process was to be formulated and the execution of
which would result in the desired data.

2. PREPARING THE RESEARCH DESIGN

The function of research design is to provide for the collection of relevant
evidences with minimal expenditure of efforts, time and money.

Research Design

• Type of research

• Sample design

22
 TYPE OF RESEARCH
• The type of research under present is an analytical research. In analytical
research; we use tact's or information already available, and analyze these to
make a critical evaluation of the material. Hence the same would be done.

• In this project I had collected facts, data, and information.

SAMPLE DESIGN
A sample design is a definite plan determined before any data is actually
collected for obtaining a sample. Researcher must select a sample design,
which should be reliable and appropriate for his report.

3. OBSERVATIONAL DESIGN (COLLECTION OF

DATA)
Observational design relates to the condition under which the observations are
to be made. Observational design in respect to research. There are several ways
of collecting the appropriate data, which differ considerably in context of
money, time cost and other resources at the disposal of the researcher.

Data can be obtained from two important sources:

• Primary data

• Secondary Data

23
 Primary data
Primary data are the data that are collected afresh and for the first time. Thus
happens to be in character. Primary data are collected by the following ways:-
a) Observation
b) Interview
c) Schedule
d) Questionnaire

Secondary Data
Secondary data are the data that are already collected and are only
analyzed by different sources these sources are as follows:-

• Corporate magazine

• Manuals of various companies

• Books, journals, newspaper

• Employment exchange

The secondary data would be collected from financial statement,

journal of national repute, books of national and international author as well as
the annual report of the company. In addition to this internet access will make
the study more effective and meaningful.

24
25
 Introduction to financial analysis

FININACIAL ANALYSIS

PRELUDE:-
Financial accounting involves recording transaction and preparing
report and financial statement that can be used by management, owners,
creditor, government agencies and other to understand what is happening in the
business or nonprofit organization. “Accounting” is the process of identifying,
measuring and communicating economic information to permit informed
judgment and decision by users of the information.

CONCEPT OF FINANCIAL STATEMENTS

26
 Financial statement are major means employed by firm to
present their financial situation to stock holders creditors and the public a
financial statement is a collection of data organized accounting to logical and
consistent accounting procedure. Its purpose is to convey an understanding of
some financial aspects of a business firm. The and product of financial
accounting is financial statement consisting of the balance sheet, profit and loss
accounting and statement changes in financial position.

Financial statements are major means employed by a firm to

present their financial situation to stock holders, creditors and the general
public. Accounting reports on the result of operation and the current status of a
business enterprise by a financial statement. The balance sheet and income and
statement. Since the balance sheet and income statement are of limited interest
the annual report of the company are supplemented by a third statement the
change in financial position and by foot notes which explain and amplify the
reported numerical data.

TYPES OF FINANCIAL STATEMENTS

27
(A) The Balance Sheet:-

The balance sheet is called a fundamental accounting

report. It provides information about the financial standing or position of affirm
at given instant. The balance sheet can be visualized, as a snapshot of the
financial status of company is a valid for only one day the reference day. The
position of the firm on a preceding day is bound to be different.

“The balance sheet of a company indicates to

management the financial status of a company as on a given moment. From an
analyst point of view a balance sheet is written representation of the resources
and liabilities of an individual partnership firm an association of a corporation.”

The contents of balance sheet can be divided into three divisions

*Assets: -
Assets are valuable resources owned by a business, which are
acquired at a measurable money cost these are economic resources of a firm
which provide economic benefits to the company.
Liabilities:-
Liabilities are claim of creditors against the enterprises arising
out of past activities that are to be satisfied by the disbursement of utilization of
corporate resources. They are economic obligation of the firm.
*Owner’s equity:-

28
 The owner’s equity is the owner’s current investment in the
assets of company.
The entire system of recording business transaction is based on
accounting equation. The accounting equation is an accounting formula
expressing equivalence of the two expressions of assets and liabilities.
ACCOUNTING EQUATION

ASSETS = LIABILITIES + OWNER’S EQUITY

OR

OWNERS EQUITY = ASSETS - LIBILITIES

OR

LIBILITIES = ASSETS - OWNER’S EQUITY

(B) The Income Statement:-

The balance sheet, as discussed above, is considered a very

significant statement from the view point of bankers, and other lenders,
because it indicates the firm’s financial position and strength, as measured by
its recourses and obligations, however, editors and financial analysis have
recently started paying more attention to the firm’s capacity as a measure of its
financial strength. Its income statement revels the firm’s capacity as a measure
of its financial strength. Its income statement revels the earning potential of the
firm.

29
An income statement is a financial statement summarizing the result of a
company’s income (profit) making activities for a specific time period. It
summarizes revenues and expenses in a manner that discloses whether a
company’s activates in a particular fiscal period have resulted in profit or a
loss. The income statement is a scoreboard of the firm’s performance during a
particular period of time. “The profit and loss account is the condensed and
classified record of the gains losses posing change in the owner’s interest in the
business for a period of time.”
The income statement or the profit and loss account presents the summary of
revenues, expenses and net income (or net loss) of a firm for a period of time.
Thus, it serves as measure of the firm’s profit ability. It’s systematic array of
the data of the revenues, revenues deduction (expenses, revenues, revenue
deductions, expenses, losses, taxes etc.)
Net income and distribution or assignment of the net income to creditors and
property investors of a particular period.

(C)STATEMENT OF CHANGE IN FINANCIAL POSITION

Until 1960, the income statement and the balance sheet
constituted the major financial statement. However, management traditionally
made use of a wide variety of statement and reports in apprising internal
company performance. One popular report for management’s internal use was
called the statement of changes in final position. From such a report,
management could extract valuable information about where working capital
and cash come from and how they were used. If these past events could be
projected in future, management would have a useful tool for budgeting.
Today, the statement of changes of financial position represents third financial
position represents a third financial statement.

PARTIES INTERESTED

30
According to the American institute of certified public accountants, financial
statement reflects, a combination a recorded facts, accounting convention and
personal judgments and the judgments and conventions applied, affect them
materially.

Following are interested in financial statement:-

 Credit, suppliers and others are having business with the company.
 Debenture holders.
 Credit institutions and banks.
 Potential lenders and investors.
 Trade unions and employees.
 Important customers wishing to make a long standing with the company.
 Economist and analyst.
 Members of parliament, the public committee in respect in government
companies.
 Taxation authorities.
 Other departments dealing with the industry in which the company
engaged cooperative.
 The company law board.

31
 FINANCIAL APPRAISAL

A company’s financial statement are intended

to summarize the results of its operation and its ending financial condition. The
information in the statement is studied and related to other information by
external users for several reasons. Current shareholders, for example, are
concerned about there invested income, as well as the company’s overall
profitability and stability. Some potential investors are invested in “solid”
companies that are companies whose financial statement indicate stable
earnings and dividends with little growth in operations. Other prefers
companies whose financial statement indicate rend for rapid growth in a
company’s short run solvency, its ability to pay current obligation as they
become due. Long-term creditors are concerned about the safety of their
interest; income and company’s ability to continue earning cash flow to meet
its financial commitments and these are only few of the users, and uses of
financial statements.

But the numerical data in the financial statement are quit calm. They cannot
speak. Analytical data are not ending in themselves, but they are meant to an
end. Financial appraisal is an attempt to determine the significance, and
meaning of the financial statement data so that forecast may be made of the
prospects for future earnings, ability to pay interest, debt maturities both
current as well as long term profitability of a sound dividend policy. Financial
appraisal involves the assessment of firm’s past, present and anticipated future
financial condition.
Financial appraisal is a scientific evaluation if the profitability and financial
strength of a business concern. In fact financial appraisal and analysis of
financial statement have nearly the same meaning. Financial statement analysis
is used for the purpose of financial appraisal. Financial appraisal is the process
of making a scientific proper, critical and comparative evaluation of the
profitability and financial health of given concern through the application of

32
financial statement analysis. Financial statement analysis is a preliminary step
towards the evaluation of result dawn by the analysis or management
accountant. Appraisal or evaluation of such results is made thereafter. Financial
appraisal begins where financial analysis ends, and financial analysis starts
where the summarization of financial data in the form of profit and loss
account and balance sheet ends, in the words of Kenney and mecmillan,
“financial statement analysis attempts to unveil the meaning and significance of
the items composed in profit and loss account and balance sheet so as to assist
the management in the formation of sound operating financial policies. The
appraisal or analysis of financial statement spotlights the significant facts and
relationship concerning managerial performance, corporate efficiency, financial
strength or weakness and credit worthiness, that would have otherwise been
buries in the maze of details.”

The technique of financial appraisals frequently applied to the study of

accounting data with a view to determining continuity or discontinuity of the
operating policies and investment value of business. Everybody interested in
the affairs of the company is interested in finding answer to the following
searching question:-
A. Does the company earn adequate profit?
B. Does the company process enough funds to meet its obligation as
and when they mature?
C. Is investment in the company safe?

Appraisal of financial statement alone can answer such queries. Its true that
statement analysis merely reveals what has taken place in the past, but past
events given some indication of what may be expected in future unless some
drastic changes take place in business it. Will continue to move in the same
direction in the past.

Roy .A. Faulke is very correct to say “if a train is moving forward at a known
rate of speed, it is reasonable to assume that it will continue to move at

33
approximately the same rate unless some obstacle interrupts its progress
abruptly or the motive power is increased or decreased.” Similarly it is a
reasonable to assume that unless some realistic change take places in the places
in the business, it will continue to move in the same general direction as
indicated by its comparative trends.

NEED OF FINANCIAL APPRAISAL

The need of financial appraisal varies accounting to type of users. For

management is servers as mean s of “self evaluation as it is like a report of its
managerial skill and competence a banker can judge the liquidity position a
creditor can plan buying and selling of hares of concern on the basis of safety
of principal and its capital appearances as wanted by the past record of earning.
A debenture holder of a concern can ascertain whether income is generates
sufficient margin to pay the interest / answers to different question are provided
by financial appraisal. By using this technique an economist can study the
extent of “concentration of economic power” and pitfalls in the financial
policies pursued, while a planner can ascertain if the patter of investment
reveals the company’s position in relation to labor and its welfare, legislation
concerning licensing desirable in the socio economic interested may be based
on statement analysis.

34
35
 SIGNIFICANCE OF WORKIG CAPITAL

Introduction:-

The management of current assets is similar to that of

fixed assets in the sense that in both case that a firm analyses their effects on its
return and risk. The management of fixed and current assets, however, differs
in three important ways: first, in managing fixed assets, time is a very
important factor; consequently, discounting and compounding techniques play
a significant role in capital budgeting and a minor one in the management of
current assets. Second, the large holding of current assets, especially cash,
strenghthens the firm’s liquidity position (and reduces riskiness), but also
reduces the overall profitability. Thus a risk-return trade off is involved in
holding current assets. Third, levels of fixed as well as current assets depend
upon expected sales, but it is only current assets which can be adjusted with
sales fluctuations in the short run. Thus, the firm has a greater degree of
flexibility in managing currents.

36
 CONCEPTS OF WORKING CAPITAL

Gross working capital:-

Gross working capital refers to the firm’s

investment in current assets are the assets which can be converted into cash
within an accounting year and include cash , short-term securities, debtors,
(accounts receivable or book debts) bills receivable and stock (inventory).

Net Working Capital:-

It’s refers to the difference between current assets
and current liabilities. Current liabilities are those claims of outsiders
which are expected to mature for payments within an accounting year and
include creditors (account payable) , bills payable ,and outstanding expenses
. Net Working Capital can be positive or negative. A positive net working
capital will arise when current assets exceed current liabilities .a negative
net working capital occurs when current liabilities are in excess of current
assets.

 PERMANENT WORKING CAPITAL:-

We know that the need of current assets arises

because of the operating cycle. The operating cycle is a continuous process
and, there for, the need for current assets is felt constantly. But the
magnitude of current assets needed is not always the same; it increases and
decreases over time. However there is always a minimum level of current
assets which is continuously required by a firm to carry on its business
operations. Permanent or fixed, working capital is the minimum level of
current assets. it is permanent in the same way as the firm’s fixed assets are.

37
Depending upon the changes in production and sales, the need for working
capital, over and above permanent working capital, will fluctuate. For
example extra inventory of finished goods will have to be minted to support
the peak period of sale, and investment in debtors (receivable) may also
increase during such periods. On the other hand, investment in raw material,
work in process and finished goods will fall if the market is slack.

Temporary or
Amount of
Fluctuating
working
capital (Rs)

Time

 VARIABLE OR FLUCTUATING WORKING CAPITAL:-

Variable or fluctuating working capital the extra

working capital needed to support the changing production and sales

38
 activities of the firm. Both kinds of working capital –permanent or
fluctuating (temporary)-are necessary-to facilitate production and sales
through the operating cycle. But the firm to meet liquidity requirements that
will last only temporary working capital. In figure illustrates differences
between permanent and temporary working capital. It is shown that
permanent working capital is stable over time, while temporary working
capital is fluctuating – some times increasing and sometimes decreasing.
However, the permanent working capital need not be horizontal if the firm’s
requirement for permanent capital is increasing (or decreasing) over a period

Temporary or
Fluctuating
Amount of Permanent
working
capital (Rs)

Time

FOCUSING ON MANAGEMENT OF CURRENT ASSETS

The gross working capital concept focuses attention on two aspects of current
assets management:
1. How to optimize investment in current assets?

39
 2. How should current assets be financed?
The consideration of the level of investment in current assets should
avoid two danger points- excessive or inadequate investment in current assets.
Investment in current assets should be just adequate to the needs of the
business firm. Excessive investment in current assets should be avoided
because it impairs the firm’s profitability, as idle investment earns nothing. On
the other hand, inadequate amount of working capital can threaten solvency of
the firms because of its inability to meet its current obligations. It should be
released that the working capital needs of the firm may be fluctuating with
changing business activity. This may cause excess or shortage of working
capital frequently. The management should be prompt to initiate an action and
correct imbalances.
Another aspect of the gross working capital point to the need of
arranging funds to finance current assets. Whenever a need for working capital
funds arises due to the increasing level of business activity or for any other
reason. Financing arrangement should be made quickly. Similarly, if suddenly,
some surplus funds arise they should not be allowed to remain idle, but should
be invested in short- term securities. Thus, the financial manager should have
knowledge of the sources of working capital funds as well as investment
avenues where idle funds may be temporarily invested.

FOCUSING ON LIQUIDITY MANAGEMENT

Net working capital is a qualitative concept. it

indicates the liquidity position of the firm and suggests the extent to which
working capital needs may be financed by permanent sources of funds. Current
assets should be sufficiently in excess of current liabilities to constitute a
margin or buffer for maturing obligations within the ordinary operating cycle
of a business. In order to protect their interests, short term creditors always like
a company to maintain current assets at a higher level than current liabilities. It
is a conventional rule to maintain the level of current assets twice the level of
current liabilities. However, the quality of current assets should be considered

40
in determining the level of current assets vis – a – vis current liabilities. A weak
liquidity position poses a threat to the solvency of the company and makes it
unsafe and unsound. A negative working capital means a negative liquidity,
and may prove to be harmful for the company’s reputation excessive liquidity
is also bad. it may be due to mismanagement of current assets. There for,
prompt and timely action should be taken by management to improve and
correct the imbalances in the liquidity position of the firm.
Networking capital concept also covers the equation of judicious mix of long
term and short term funds for financing current assets. For every firm, there is a
minimum amount of net working capital which is permanent. Therefore, a
portion of the working capital should be financed with the permanent sources
of funds such as equity share capital, debentures, long term debt, performance
share capital or retained earnings. Management must, therefore, decide the
extent to which current assets should be financed with equity capital and/or
borrowed capital.
In summary, it may be emphasized that both gross and net concepts of working
capital are equally important for the efficient management of working capital.
There is no precise way to determine the exact amount of gross or net working
capital for any firm. The data and problems of each company should be
analyzed to determine the amount of working capital. There is no specific rule
as to how current assets should be financed. It is not feasible in practice to
finance current assets by short – term sources only. Keeping in view the
constraints of the individual company, a judicious mix of long and short term
finances should be invested in current assets. Since current assets involve cost
of funds, they should be put to productive use.

OPERATING AND CASH CONVERSION CYCLE

The need for working capital to run the day-to-day business activities cannot be
overemphasized. We will hardily find a business firm which does not require any
amount of working capital. Indeed, firms differ in their requirement of the working
capital.

41
We know that a firm should aim at maximizing the wealth of its shareholders. In its
Endeavour to do so, a firm should earn sufficient return from its operations. Earning
a steady amount of profit requires successful sells activities. The firm has to invest
enough funds in current assets for generating sales. Currents assets are needed
because sales do not convert into cash instantaneously. There is always an operating
cycle involved in the conversion of sales into case.

There is a difference between current and fixed assets in terms of their

liquidity. A firm requires many years to recover the initial investment in fixed
assets such as plant and machinery or land and building. On the contrary,
investment in current assets such as inventories and debtors [account
receivable] is realized during the firm’s operating cycle that is usually less than
a year.
What is an operating cycle?
Operating cycle is the time duration required to convert sales, after the
conversion of resources into inventories, into cash. The operating cycle of a
manufacturing company involve three phases:
• Acquisition of resources such as raw material, labor, power and
fuel etc.
• Manufacture of the product which includes conversion of raw
material into work-in-progress into finished goods.
• Sales of the products either for cash or on credit. Credit sales
create account receivable for collection.
These phases affect cash flows, which most of the time, are neither
synchronized because cash outflows usually occur before cash inflows. Cash
inflows are not certain because sales and collections which give rise to cash
inflows are difficult to forecast accurately. Cash outflows, on the other hand,
are relatively certain. The firm is, therefore, required to invest in current assets
for a smooth, uninterrupted functioning. It needs to maintain liquidity to
purchase raw materials and pay expenses such as wages and salaries, other
manufacturing, administrative and selling expenses and taxes are there is
hardly a matching between cash inflows and outflow. Cash is also held to meet
to any future exigencies. Stocks of raw material and work –in- process are kept
to ensure smooth production and to guard against non-availability of raw
materials of other components. The firms hold stock of finished goods to meet
the demand of customers on continuous basis and sudden demand from some
customers. Debtors (Accounts Receivable) are created because goods are sold
on credit for marketing and competitive reasons.

42
 Purchase Payment Credit Sale Collection

RMCP+WIPCP+FGCP

Inventory convention period Receivable conversion price

Gross operation cycle

Payable Net operating cycle

Operating Cycle of a manufacturing firm

Thus, a firm makes adequate investment in inventories, and debtors, for

smooth, uninterrupted production and sale.
How is the length of operating cycle determined?
The length operating cycle of a manufacturing firm is the sum of (i) inventory
conversion period (ICP) and (ii) debtors (Receivable) conversion period (DCP).
The inventory conversion period is the total time needed for producing and
selling the product. Typically, it includes: (a) raw material conversion period
(rmcp) ,(b)work-in-process conversion period (WIPCP), and (c) finished goods
conversion period (FGCP). The debtors’ conversion period is the time required
to collect the outstanding amount from the customers. The total of inventory
conversion period and debtors conversion period is referred to as gross
operating cycle (GOC).
In practice, a firm may acquire resources ( such as raw material) on credit and
temporarily postpone payment of certain expenses. Payables, which the firm
can defer, are spontaneous sources of capital to finance investment in current
assets,. The creditors (Payables) deferral period (CDP) is the length of time the
firm is able to defer payments on various resource purchases. The difference
between (gross) operating cycle and payables deferral period is net operating
cycle (NOC). if depreciation is excluded from expenses in the computation of
operating cycle, the net operating cycle also represents the cash conversion
cycle(CCC).it is net time interval between cash collections sale of the product
and cash payments fore resources acquired by the firm. It also represents the
time interval over which additional funds, called working capital, should be

43
obtained in order to carry out firm’s operations. The firm has to negotiate
working capital from sources such as commercial banks. The negotiated
sources of working capital financing are called non-spontaneous sources. If net
operating cycle of a firm increases, it means further need for negotiated
working capital.
Let us illustrate the computation of the length of operating cycle. Consider the
statement of cost of sales for a firm given in below-
Statement of Cost of Sales
( Rs in lakh)

ITEM ACTUAL 20X1 PROJECTED 20X2

1 Purchase of raw material X1 X.

2 Opening raw material inventory X2 ..
3 Closeing raw material inventory X3 ..
4 Raw material consumed (1+2-3) X4 X.
5 Direct labour X5 X.
6 Depriciation X.. X.
7 Other mfg. expences X… X.
8 Total cost (4+5+6+7) .. X.
9 Opening work-in-process inventory X.. X.
1
0 Closing work-in-process inventory … X.
1
1 Cost of production (8+9-10) .. X.
1
2 Opening finished goods inventory .. X.
1
3 Closing finished goods inventory .. X.
1
4 Cost of goods sold (11+12-13) .. X.
1
5 Selling administrtive and gen expences .. X.
1
6 cost of sales (14+15) .. X.

The firm's data for sales and debtors and creditors are given below

Sales and Debtors

(Rs in lakh)
ITEM ACTUAL 20X1 PROJECTED 20X2

44
 Sales (Credit) X Y
Opening balance of debtors X. Y.
Closing balance of debtors .. ..
opening balance of creditors .. ..
closing balance of creditors X. ..

Gross operating cycle (GOC)

The firm’s gross operating cycle (GOC) can be

determined as inventory conversion period (ICP) plus debtors conversion
period (DCP).Thus, GOC is given as follows:
Inventory Debtors
Gross operating = +
Conversion period Conversion period
GOC = ICP + DCP
…….. (1)
Inventory conversion period

What determines the inventory conversion

period? The inventory conversion (ICP) is the sum of raw material conversion
period (RMCP), work-in-process conversion period (WIPCP) and finished
goods conversion period (FGCP):

ICP = RMCP +WIPCP +FGCP

……(2)

• Raw material conversion period (RMCP):- The raw material

conversion period (RMCP) is the average time period taken to convert
material in to work-in-process. RMCP depends pm: (a) raw material
consumption per day, and (b) raw material inventory. Raw material
consumption per day is given by the number of days in the year (say, 360).
The raw material conversion period is obtained when raw material
inventory is divided by raw material consumption per day. Similar

45
calculations can be made for other inventories, debtors and creditors. The
following formula can be used:

Raw material
Raw material Inventory
Conversion =
Period [ Rawmaterial
consumption]/360

RMC RMC*360
RMCP = RMI ÷ = ……(3)
360 RMC

• Work-in-process conversion period (WIPCP):- Work-in-process

conversion period (WIPCP) is the average time taken to complete the
semi-finished or work-in-process. It is given by the following formula:

Work-in-process
Work-in-process Inventory
Conversion =
Period [Cost of production]/360

COP WIPI *360

WIPCP = WIPI ÷ = ……..(4)
360 COP

• Finished goods conversion period (FGCP):-

46
 Finished goods conversion period
(FGCP) is the average time taken to sell the finished goods. FGCP can be
calculated as follows:

Finished goods
Finished goods Inventory
Conversion =
Period [Cost of goods sold]/360

CGI FGI*360
FGCP = FGI ÷ = ……..(5)
360 CGS

Debtors (receivable) conversion period (DCP)

Debtors conversion period (DCP) is the average
time taken to convert debtors into cash. DCP represent the average collection
period. It is calculated as follows:

Debtors Debtor Debtors*360

Conversion = = …(6)
Period (DCP) Creditor sales/360 Creditor sales

Creditors (payables) deferral period (CDP)

Creditors (payables) deferral period (CDP) is the
average time taken by the firm in paying its suppliers (creditors). CDP is given
as follows:

Creditors Creditors Credit*360

Deferral = = …(7)
Period Credit purchases/360 Credit purchases

47
Cash Conversion or Net Operating Cycle
Net operating cycle (NOC) is the difference
between gross operating cycle and payables deferral period.

Gross Creditors
Net operating = Operating = deferral
Cycle Cycle period

NOC = GOC - CDP

…… (8)

Net operating cycle is also referred to as cash conversion cycle. Some people
argue that depreciation and profit should be excluded in the computation of
cash conversion cycle since the firm’s concern is with cash flow associated
with conversion at contrary view is that a firm has to ultimately recover total
costs should include depreciation, and even the profits. Also, in using the
above-mentioned formulae, average figures for the period may be used.
For example, Table shows detained calculations of the components of a
firm’s operating cycle. Table provides the summary of calculations.
During 20X1 the daily raw material consumption was Rs 12.1 lakh and the
company held an ending raw material inventory of Rs827 lakh. If we assume
that this is the average inventory held by the company, the raw material
consumption the projected raw material conversion period is 60 days. This has
happened because both consumption (Rs 16.5 lakh per day) and level of
inventory (Rs 986 lakh) have increased, but the consumption rate has
increased) by 36.4 percent). Thus, the raw material conversion period has
declined by 8 days. Raw materials are the result of daily raw material
consumption and total raw material consumption and total raw material
consumption and total raw material consumption during a period given the
company’s production targets. Thus, raw material inventory is controlled
through control over purchases and production. We can similarly interpret
other calculations in table below

48
 Table:-Operating Cycle Calculation (Hypothetical Example)

( Rs. In lakh)
Actual Projected
Item 19X1 19X2
1 Raw Materials Conversion Period
(a) Raw material consumption 4,349 5,932
(b) Raw material consumption per day 12.1 16.5
(c) raw material inventory 827 986
68
(d) Raw material inventory holding days d 60d
2 Work-in-process Conversion Period
(a)cost of production* 5,212 7,051
(b)cost of production per day 14.5 19.6
(c)work-in-process inventory 325 498
(d) Work-in-process inventory holding
days 22d 25d
3 Finished Goods Conversion Period
(a) Cost of goods sold* 5,003 6,582
(b) Cost of goods sold per day 13.9 18.3
(c) Finished goods inventory 526 995
(d)Finished goods inventory holding 38
days d 54d
4 Collection period
(a) Credit sales (at cost)** 6,087 8,006
(b) sales per day 16.9 22.2
(c) debtor 735 1,040
43
(d) debtors outstanding days d 47d
5 Creditors Deferral Period
(a) Credit purchases 4,653 6,091
(b) purchase per day 12.9 16.9
(c) creditors 454 642
35
(d) Creditors outstanding day d 38d
*Depreciation is including.
**All sales are assumed on credit.

49
 Table :-Summery of Operating Cycle Calculations
(Number of Days)

Actual Projected
GROSS OPERATING CYCLE
1 Inventory Conversion Period
(i) Raw material 68 60
(ii) Work- in- process 22 25
(iii) Finished goods 38 128 54 139
2 Debtors Conversion Period 43 47
3 Gross operating cycle (1 + 2) 171 186
4 Payment Deferral period 35 38
NET OPERAING CYCLE (3-4) 136 148

We note a significant change in the company’s policy for 20X2 with regard
to finished goods inventory. It is expected to increase to 54 days holding from
38 days in the previous year. One reason could be a conscious policy decision
to avoid stock out situations and carry more finished goods inventory to expand
sales. But this policy has a cost; the company, in the absence of a significant
increase in payables (creditors) deferral period, will have to negotiate higher
working capital funds, In the case of the firm in our example, its net operating
cycle is expected to increase from 136 days to 148 days How does a company
manage its inventories, debtors and suppliers’ credit? How can it reduce its
operating cycle?
The operating cycle concept as shown in Figure relates to a manufacturing
firm. Non-manufacturing firms such as wholesalers and retailers will not have
the manufacturing phase. They will acquire stock of finished goods and convert
them into debtors (receivable) and debtors into cash. Further, service and
financial enterprises will not have inventory of goods (cash will be their
inventory). Their operating cycles will be the shortest. They need to acquire
cash, then lend (create debtors) and again convert lending into cash.

50
ANALYSIS OF WORKING CAPITAL

51
 Analysis of working capital is an essential part of financial
management. If there is an adequate amount of working capital and it is utilized
in the right manner, it is a great achievement for the business. The excess of
working capital causes financial stringency and brings the business to a
standstill.

Realizing the impotence of working capital in financial management the

analysis of working capital becomes an essential phenomenon. It facilitates the
adequacy and management of working capital. The management of working
capital provides a careful inquiry into its components so as to control the
working capital and to conserve it properly. It helps in determining the
optimum level of working capital in the firm. The process of measurement and
analysis of working capital is performed on the basis of financial statements of
the business enterprise for past few years.

In the present study the analysis of working capital of FCI ltd. Has been made
by two techniques vis., trend analysis and ratio analysis.

WORKING CAPITAL TREND ANALYSIS

52
 The working capital trend analysis represents a
picture of variation in current assets, current liabilities and working capital over
a period of time. Such an analysis enables us to study upward and downward
trend in current liabilities and its effect on the working capital position. The
trend analysis is a tool of financial appraisal where the changes in the factors
are compared with the base year assuming the base year as 100.
In the present study a statement – showing trend of working capital as well as
its structure has been made. It is it scientific and important study because each
component of working capital has got the relationship of causes and effects.
Following table below shows the structure and trend of working capital of FCI
ltd.during the period under review.

STRUCTURE AND TREND OF WORKING CAPITAL OF FCI

2005 TO2008
PERTICULAR 2005-2006 2006-2007 2007-2008
CURRENT ASSETS
CASH 322389.24 855819.51 836439.2
BANK 18632795.88 35936348.16 27218462.16
LOAN AND ADVANCES 71220809.88 84836477.65 77115112.92
DEBTORS 300805197.7 311027760.6 356580000.4
STOCK 377580243.7 427327384.8 465048573.5
TOTAL (A) 768561436.4 859983790.7 926798588.2
CURRENT LIABILITIES
CURRENT LIABILITIES
526439722 512950750.7 442009648.8
AND PROVISIONS
TOTAL (B) 526439722 512950750.7 442009648.8
NET WORKING CAPITAL
242121714.4 347033040 484788939.4
(A-B)

Inference
• Current Assets increase to 20.59% in the year of 2007-2008 as

53
Compare to in the year 2005-2006.

• Current Liabilities in the year 2007-2008 got decreased by 16.04%

As compared to the year 2005-2006.

• In the year 2006-2007 the growth in working capital was 43.33%

As compare to the year 2005-2006 similarly working capital in the year 2007-
2008 has grown to 100.03% as compared to the working capital in the year
2005-2006

The analysis shows the effective and efficient management of working

capital by the FCI.

RATIO ANALYSIS OF WORKING CAPITAL

Trend analysis shows the trend of current assets,

current liabilities and working capital only. It do not interpret the contribution
of each item of working capital in the trend, whereas, it can be done easily by
ratio analysis. The ratio analysis of working capital can be used by
management as a means of checking upon the efficiency in working capital
management of the company. Following ratio haven used to analysis and
interpret working capital of FCI ltd.

 Current ratio
 Quick ratio
 Absolute ratio
 Stock or inventory ratio
 Working capital turnover ratio

CURRENTRATIO

54
Current ratio is one of the important ratios used in testing liquidity of a
concern. this is a good measure of the ability of company to maintain solvency
over a short run. This is computed by dividing the total current assets by the
total current liabilities and is expressed as:

The current assets of a firm represent those assets, which

can be in the ordinary course of business, converted into cash within one
accounting year. The current liabilities are defines as obligation maturing
within a short period (usually one accounting year). Excess of current assets
over current liabilities is known as working capital and since these two (current
assets and current liabilities) are used in current ratio therefore, this ratio is also
known as working capital ratio.

With the help of this ratio the analyst can review the extent to which the
company can covert such liabilities with current assets. The current ratio gives
the analyst a general picture of the adequacy of the working capital of a
company and ability of the company to meet its day-to-day payment obligation.
“it likewise measures the margin of safety provided for paying current debts in
the event of a reduction in the values of current assets.”

The current ratio is very useful as a measure of short terms debt prying ability
but it is tricky to interpret this ratio. Experts are of the view that the value of
current assets should be at least double the amount if current liabilities.

Walker and Bough have the same view when they ay “a good current ratio may
mean a good umbrella for creditors against the rainy days.”But to the
management it reflects bad financial planning or presence of idle assets or over
capitalization”

IDLE CURRENT RATIO: 2:1

55
If this ratio is higher than standards than it is assumed
 Very good short –term liquidity/solvency.

 Excess stocks, bad debts and idle cash.

 Under trading

If this ratio is lower than standards than it is assumed

 Unsatisfactory short-term liquidity.

 Shortage of stocks, less credit sales, shortage of cash.

 Over trading

CURRENT RATIO OF FCI DURING 2005 TO 2008

CURRENT CURRENT
YEAR CURRENT RATIO
ASSETS LIABILITIES
(A) (B) (C) (B)/(C)
2005-2006 768561436.4 526439722 1.46
2006-2007 859983790.7 512950750.7 1.68
2007-2008 926798588.2 442009648.8 2.01

INFERENCE:-
This table reveals that current ratio has increased that is
making improvements in its short term solvency. It is because of increase in
current assets as compared to current liabilities. Still this is lower than standard
current assets ratio that shows a little bit unsatisfactory liquidity position of the
company.
The Current Ratio for the year 2007-2008 has taken the Value of 2.01:1, which
is very satisfactory and as per the standard required (2:1).The current ratio of
2.01:1 indicates, that for every Rs 1 of current liability the company Rs 2 of
current assets, which indicates more liquidity and hence more amount of
working capital.

QUICK RATIO

56
 The solvency of a company is batter indicated by quick
Rato.the fundamental this Ratio is to enable the financial management of a
company to ascertain that would happen
If current creditors press for immediate payment and either not
Possible to push up the sales of closing or it id sold, a heavy loss is likely to be
suffered. This problem arises because closing stock is two steps away from the
cash and their price more or less uncertain according to market demand.

The term quick assets include all current assets except inventories and prepaid
expenses. It shows the relationship of quick assets and current liabilities. The
Ratio is calculated as following:

An indicator of a company's short-term liquidity. The quick ratio measures a

company's ability to meet its short-term obligations with its most liquid assets.
The higher the quick ratio, the better the position of the company.
Also known as the "acid-test ratio" or the "quick assets ratio".

QUICK RATIO OF FCI. DURING 2005 TO 2008

QUICK CURRENT
YEAR ASSETS LIABILITIES QUICK RATIO
(A) (B) (C) (B)/(C)
2005-2006 390981192.7 526439722 0.74
2006-2007 432656405.9 512950750.7 0.84
2007-2008 461750014.7 442009648.8 1.04

IDLE QUICK RATIO 1:1

57
INFERENCE:-

Although it is less idle ratio still it has increasing trend that

shows dairy’s improving condition of short term solvency of FCI.
Quick ratio for the year 2007-08 is above the ideal standard. It is 1.04:1, which
indicates that for every Re1 of current liability the company has Rs 1.04 of
current assets, hence the company is in sound position in terms of working
capital position.

ABSOLUTE LIQUDITY RATIO

The absolute liquid ratio between absolute liquid
assets and current liabilities is calculated by dividing the liquid assets and
current liabilities. Expressed in formula, the ratio is:

Cash + Marketable Securities= Absolute Liquidity Ratio

Current Liabilities

The term liquid assets include cash bank balance and marketable securities, if
current liabilities are to pay at once, only balance of Cash and marketable
securities will be utilized. Therefore, to measure the absolute liquidity of a
business, this ratio is calculated.

IDLE RATIO: 0.5: 1

58
The idea behind the norm id that if all creditors for demand for payment, at
least 50% of their claim should be satisfied at once.
The table shown on the next page reflects the absolute liquidity ratio FCI Ltd.

ABSOLUTE LIQUIDITY RATIO OF FCI DURING 2005 TO 2008

ABSOLUTE CURRENT ABSOLUTE
YEAR
LIQUID ASSETS LIABILITIES RATIO
(A) (B) (C) (B)/(C)
2005-2006 18955185.12 526439722 0.04
2006-2007 36792167.67 512950750.7 0.07
2007-2008 28054901.36 442009648.8 0.06

INFERENCE

This ratio is very below from idle ratio. It is making insecure

creditors claim but it is getting increasing trend. It is needed to maintain this
trend.
Ratios for all the above mentioned years right from 2005 up to 2008 are close
to the standard. For year 2007-08, the ratio is well above the standard, which
indicates the healthy picture of the company in terms of availability of working
capital (quick assets) in order to meet current liabilities.

INVENTORY TURNOVER RATIO

Every firm has to maintain a certain level of inventory of finished good so as to

be able to meet the requirements of the business. But the level of inventory
should neither to be high not to be low. It to high inventory means higher
carrying cost and higher risk of stocks becoming obsolete whereas to low
inventory may mean the loss of business opportunities. it is very essential to
keep sufficient stock in business .

59
 it is express in number of time . Stock turnover ratio or inventory turn over
ratio indicates the no. of times the stock has been turned over during the period
and evaluates the efficiency with which a firm a able to manage its inventory.
This ratio indicates whether investment in stock is with in proper limit or not.

HIGHER RATIO INDICATES:-

 Stock is sold out fast.

 Same volume of sales from less stock or more sales from
Same stock
 Too high ratio shows stock outs or over trading.
 Less working capital requirement.

LOWER RATIO REVEALS:-

 Stock a sold out at a slow speed.

 Same volume of sale for more stock or less sale from same stock.
 More working capital requirement.
 Too low ratio show obsolete stock or under trading.

Formula of stock turn over ratio:-

The ration is calculated by dividing the cost of goods sold by the amount of
average stock at cost.

Inventory turnover Ratio =

Inventory turn over ratio measures the velocity of

conversion of stock in to sales. Usually a high inventory turnover / stock
velocity indicates efficient management of inventory because more frequently

60
the stock are sold, the lesser amount of money is required to finance the
inventory. Low inventory turn over ration indicate inefficient management of
inventory. in low inventory turn over implies over investment in inventories,
the business, poor quality of goods, stock accumulation, accumulation of
absolute and slow moving good and low profit as compared to total investment
the inventory turn over ratio is also an index profitability where a high ratio
signifies more profit ‘a low ratio signifies low profit some time a high
inventories.

INVENTORY TURNOVER RATIO OF FCI LIMITED.

DURING 2005TO 2008
YEAR COST OF AVERAGE INVENTORY INVENTORY
GOOD SOLD INVENTORY TURNOVER(TIMES) TURNOVER(DAYS)
(A) (B) (C) (D) = (B)/(C) (E)= 365/D
2005-2006 2955076031 377580243.7 7.83 46.64
2006-2007 3501014350 427327384.8 8.19 44.55
2007-2008 3995104641 465048573.5 8.59 42.49

INFERENCE:-

As compared to year 2005-2006, in the year 2006-

07, the inventory turnover increased to 8.19 times. Similarly, in the year 2007-
08 it increased to 8.59 times, which indicates that the times taken in converting
raw material into finished product and finally selling it got reduced
considerably and hence indicates quick release of working capital

WORKING CAPITAL TURNOVER

A measurement comparing the depletion of working capital to the generation of
sales over a given period. This provides some useful information as to how
effectively a company is using its working capital to generate sales.

61
A company uses working capital (current assets - current liabilities) to fund
operations and purchase inventory. These operations and inventory are then
converted into sales revenue for the company. The working capital turnover
ratio is used to analyze the relationship between the money used to fund
operations and the sales generated from these operations. In a general sense, the
higher the working capital turnover, the better because it means that the
company is generating a lot of sales compared to the money it uses to fund the
sales.

WORKING CAPITAL RATIO OF FCILTD. DURING 2005 TO

2008
NET WORKING CURRENT
YEAR SALES CAPITAL RATIO
(A) (B) (C) (B)/(C)
2005-2006 3207510314 242121714.4 13.24
2006-2007 3747805031 347033040 10.8
2007-2008 4266143965 484788939.4 8.8

INFERENCE:
In spite of an increase in Net Working Capital, the Working
capital turnover ratio of FCI got reduced to 10.8 times in the year 2006- 2007,
as compared to the year 2005-07. Similarly, in the year 2007-08, the working
capital turnover ratio further reduced to 8.8 times as compared to 13.24 times
in the year 2005-06. The reduction in working capital turnover ratio is on
account of massive growth in net working capital as compared to a slight
growth in the sales of the company.

62
63
 CONCLUSION AND RECOMMENDATION

Financial analysis is analysis of financial statements

of and enterprise. Financial statement reorganized collection of data according
to logical and constituent accounting procedures. How ever financial
statements in their traditional from giving historical data and information are of
little us to these who use them to draw certain conclusion.

Financial appraisal is scientific evaluation of

profitability and financial strength of any business concern. Financial appraisal
techniques include ration analysis common size analysis trend analysis, fund
flow analysis etc. these techniques may be applied in the financial appraisal of
any entity and FCI Ltd.. Is no exception to it.

64
 PROFITABILITY

The measurement of profitability is a tool of overall measurement of efficiency

an overall study profitability of FCI has been Dade in relation to sales
operating assets capital employed and its net worth.
By analysis the working result i.e. Profit and loss account of FCI. It was found
that the net profit before interest and tax of the FCI is showing increasing
trends. This is very good for FCI. The increase in the profits is nearly 24%
more then previous year the reason is good sales growth between years. For
this following suggestion should be considered.
• Proper cost control is required and cost control technique should be
adopted for it.
• Operating expenses, admn. Expenses should be specially considered to be
reduced.
• Inventory is the biggest items of balance sheet that must have demanded
a large amount of maintaining cost. So efficient inventory management
should be done. Inventory should be reduced extent that would help to
recover blocking money in inventory.
• The service staff should be given proper training and better environment
for work.
• Proper advertisement and sales promotion is required.

65
• Dairy has to pay large fix interest charged. Hence long term borrowing
should be reduced so that the earning are satisfactorily earmarked with
them.

Working capital

• In the year 2006-2007 the growth in working capital was 43.33%As

compare to the year 2005-2006 similarly working capital in the year
2007-2008 has grown to 100.03% as compared to the working capital in
the year 2005-2006. The management should follow the same trend in
near future too so to have considerable appreciation in working
capital every year.

• The Current Ratio for the year 2007-2008 has taken the Value of 2.01:1,
which is very satisfactory and as per the standard required (2:1).The
current ratio of 2.01:1 indicates, that for every Rs 1 of current liability the
company Rs 2 of current assets, which indicates more liquidity and
hence more amount of working capital. The company need to further
enhance the value of ratio.

• Quick ratio for the year 2008-09 is above the ideal standard (1:1). It is
1.04:1, which indicates that for every Re1 of current liability the
company has Rs 1.04 of current assets, hence the company is in sound
position in terms of working capital position. It would be better for the

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 company if in near future it could further enhance the value of the
ratio

• Absolute quick ratio for the years right from 2005 up to 2008 are close to
the standard. For year 2007-08, the ratio is well above the standard
(0.5:1), which indicates the healthy picture of the company in terms of
availability of working capital (quick assets) in order to meet current
liabilities. The same position should be sustained in near future too.

• As compared to year 2005-2006, in the year 2006-07, the inventory

turnover increased to 8.19 times. Similarly, in the year 2007-08 it
increased to 8.59 times, which indicates that the times taken in
converting raw material into finished product and finally selling it got
reduced considerably and hence indicates quick release of working
capital. In near future it would be more profitable for the company, if
the value of ratio gets increased to 11- 14%.

• In spite of an increase in Net Working Capital, the Working capital

turnover ratio of FCI got reduced to 10.8 times in the year 2006- 2007, as
compared to the year 2005-07. Similarly, in the year 2007-08, the
working capital turnover ratio further reduced to 8.8 times as compared
to 13.24 times in the year 2005-06. The reduction in working capital
turnover ratio is on account of massive growth in net working capital as
compared to a slight growth in the sales of the company. The value of

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 ratio could be better in near future , if the growth in sales matches
with the growth in net working capital.

REFRENCES

 I.M.Pandey, (1978), financial management, Ninth addition, UBS

Publication New Delhi.
 Van Horn,(2002),Financial Management and Policy,12th edition,
Publisher Dorling Kindersley India ltd.
 Horne Wwachonicz, J.R.Bhaduri (2005), Fundamentals and Financial
management, 12th edition, Pearson publisher.
 MY Khan, P.K.Jain (1981), Financial Management,5th edition, Publisher
Mc graw hill companies.

 Financial statement for the year ended 2007-08 as obtained from FCI
 Annual-Report 2006-07 of FCI
 Study module on financial management

 Financial dailies.
 Economic Times
 Business Standard

 Business Magazines
 Business India

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  Business World

 Internet Portals:
 www.fciweb.nic.in
 www.wikipedia.com
GLOSSARY

HACCP: HACCP stands for Hazard Analysis and Critical Control Points.

HACCP is an industry-wide effort approved by the scientific community as

well as regulatory and industry practitioners. This effort is designed to focus

specifically on food safety, including food safety in retail establishments.

HACCP, or the Hazard Analysis Critical Control Point system, is a process

control system that identifies where hazards might occur in the food production

process and puts into place stringent actions to take to prevent the hazards from

occurring. By strictly monitoring and controlling each step of the process, there

is less chance for hazards to occur. HACCP is important because it prioritizes

and controls potential hazards in food production. By controlling major food

risks, such as microbiological, chemical and physical contaminants, the

industry can better assure consumers that its products are as safe as good

science and technology allows. By reducing food borne hazards, public health

protection is strengthened.

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