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A STUDY ON WORKING CAPITAL MANAGEMENT IN OPT CONSULTANCY SERVICES

CONTENTS
Chapter No Particulars Acknowledgement Certificate Contents List of Tables List of Charts 1. 1.1 1.2 1.3 1.4 1.5 2. 2.1 2.2 2.3 2.4 3. 3.1 3.2 4. 4.1 4.2 4.3 5. 5.1 Working Capital Management Introduction Need of Working Capital Management Gross W.C and Net W.C Types of working capital Determinants of working capital Research Methodology Introduction Types of research methodology Objective of the study Scope and Limitation of the study Introduction to the company Industry Profile Company Profile Data analysis and Interpretation Working capital Analysis Ratio Analysis Trend Analysis Findings & Suggestions Findings 79
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Page No.

9 10 11

14 15 16

17 22

31 36 70

5.2 5.3

Suggestion Conclusion

80 81

LIST OF TABLES

Table. no
4.1 4.2 4.3 4.4 4.5 4.2.1 4.2.2 4.2.3 4.2.4 4.2.5 4.2.6 4.2.7 4.2.8 4.2.9 4.2.10 4.2.11 4.2.12 4.2.13 4.2.14

Name of Tables
Schedule of Changes in Working Capital (2005 06) Schedule of Changes in Working Capital (2006 07) Schedule of Changes in Working Capital (2007 08) Schedule of Changes in Working Capital (2008 09) Schedule of Changes in Working Capital (2009 10) Current Ratio Quick Ratio Absolute Liquid Ratio Inventory Turnover Ratio Debtors Turnover Ratio Creditors Turnover Ratio Fixed Asset Turnover Ratio Cash to Current Asset Ratio Current Asset Turnover Ratio Inventory to Sales Ratio Working Capital Turnover Ratio Inventory to Current Asset Ratio Gross profit Ratio Administrative Expenses Ratio

Page. no
31 32 33 34 35 42 44 46 48 50 52 54 56 58 60 62 64 66 68

LIST OF CHARTS Figure. no 4.3.1 4.3.2 4.3.3 4.3.4 4.3.5 Name of Tables Current Assets Fixed Assets Cash & Bank Balances Inventory Sundry Debtors Page. no 71 72 73 74 75

CHAPTER I

WORKING CAPITAL MANAGEMENT 1.1) Introduction Working capital management


Working capital management is concerned with the problems that arise while attempting to manage the current assets, the current liabilities and the inter relationship that exist between them. The term current assets refers to those assets which in ordinary course of business can be, or, will be, turned in to cash within one year without undergoing a diminution in value and without disrupting the operation of the firm. The major current assets are cash, marketable securities, account receivable and inventory. Current liabilities ware those liabilities which intended at their inception to be paid in ordinary course of business, within a year, out of the current assets or earnings of the concern. The basic current liabilities are account payable, bill payable, bank over-draft, and outstanding expenses. The goal of working capital management is to manage the firms current assets and current liabilities in such way that the satisfactory level of working capital is mentioned. The current assets should be large enough to cover its current liabilities in order to ensure a reasonable margin of the safety.

Definition:According to Guttmann & DougallExcess of current assets over current liabilities

According to Park & GladsonThe excess of current assets of a business (i.e. cash, accounts receivables, inventories) over current items owned to employees and others (such as salaries & wages payable, accounts payable, taxes owned to government).

1.2) Need of working capital management


The need for working capital gross or current assets cannot be over emphasized. As already observed, the objective of financial decision making is to maximize the shareholders wealth. To achieve this, it is necessary to generate sufficient profits. This will naturally depend upon the magnitude of the sales among other things but sales cannot convert into cash. There is a need for working capital in the form of current assets to deal with the problem arising out of lack of immediate realization of cash against goods sold. Therefore
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sufficient working capital is necessary to sustain sales activity. Technically this is refers to operating or cash cycle. If the company has certain amount of cash, it will be required for purchasing the raw material which may be available on credit basis. Then the company has to spend some amount for labor and factory overhead to convert the raw material in work in progress, and ultimately finished goods. These finished goods convert in to sales on credit basis in the form of sundry debtors. Sundry debtors are converted into cash after expiry of credit period. Thus some amount of cash is blocked in raw materials, WIP, finished goods, and sundry debtors and day to day cash requirements. However some part of current assets may be financed by the current liabilities also. The amount required to be invested in this current
assets is always higher than the funds available from current liabilities. This is the precise reason why the needs for working capital arise

1.3) Gross working capital and Net working capital


There are two concepts of working capital management

1. Gross working capital


Gross working capital refers to the firms investment in current assets. Current assets are the assets which can be convert in to cash within a year includes cash, short term securities, debtors, bills receivable and inventory
.

2. Net working capital


Net working capital refers to the difference between current assets and current liabilities. Current liabilities are those claims of outsiders which are expected to mature for payment within an accounting year and include creditors, bills payable and outstanding expenses. Net working capital can be positive or negative Efficient working capital management requires that firms should operate with some amount of net working capital, the exact amount varying from firm to firm and depending, among other things; on the nature of companies. Net working capital is necessary because the cash outflows and inflows do not coincide. The cash outflows resulting from payment of current liabilities are relatively predictable. The cash inflow are however difficult to predict. The more predictable the cash inflows are, the less net working capital will be required. The concept of working capital was, first evolved by Karl Marx. Marx used the term variable capital means outlays for payrolls advanced to workers before the completion of work. He compared this with constant capital which according to him is nothing but dead labor. This variable capital is nothing but wage fund which remains blocked in terms of financial management, in work- in-process along with other operating expenses until it is released through sale of finished goods. Although Marx did not mentioned that workers also gave credit to the firm by accepting periodical payment of wages which funded a portioned of
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W.I.P, the concept of working capital, as we understand today was embedded in his variable capital.

1.4) Types of working capital


The operating cycle creates the need for current assets (working capital). However the need does not come to an end after the cycle is completed to explain this continuing need of current assets a destination should be drawn between permanent and temporary working capital.

1) Permanent working capital


The need for current assets arises, as already observed, because of the cash cycle. To carry on business certain minimum level of working capital is necessary on continues and uninterrupted basis. For all practical purpose, this requirement will have to be met permanent as with other fixed assets. This requirement refers to as permanent or fixed working capital

2) Temporary working capital


Any amount over and above the permanent level of working capital is temporary, fluctuating or variable, working capital. This portion of the required working capital is needed to meet fluctuation in demand consequent upon changes in production and sales as result of seasonal changes

Graph shows that the permanent level is fairly constant; while temporary working capital is fluctuating in the case of an expanding firm the permanent working capital line may not be horizontal. This may be because of changes in demand for permanent current assets might be increasing to support a rising level of activity.

1.5) Determinants of working capital


The amount of working capital is depends upon a following factors

1. Nature of business
Some businesses are such, due to their very nature, that their requirement of fixed capital is more rather than working capital. These businesses sell services and not the commodities and that too on cash basis. As such, no funds are blocked in piling inventories and also no funds are blocked in receivables. E.g. public utility services like railways, infrastructure oriented project etc. their requirement of working capital is less. On the other
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hand, there are some businesses like trading activity, where requirement of fixed capital is less but more money is blocked in inventories and debtors.

2. Length of production cycle


In some business like machine tools industry, the time gap between the acquisition of raw material till the end of final production of finished products itself is quite high. As such amount may be blocked either in raw material or work in progress or finished goods or even in debtors. Naturally the need of working capital is high.

3. Size and growth of business


In very small company the working capital requirement is quite high due to high overhead, higher buying and selling cost etc. as such medium size business positively has edge over the small companies. Once the business grows beyond a certain limit, the working capital requirements may be adversely affected by the increasing size.

4. Business/ Trade cycle


If the company is operating in the time of boom, the working capital requirement may be more as the company may like to buy more raw material, may increase the production and sales to take the benefit of favorable market, due to increase in the sales, there may be more and more amount of funds blocked in stock and debtors etc. similarly in the case of depressions also, working capital may be high as the sales terms of value and quantity may be reducing, there may be unnecessary piling up of stack without getting sold, the receivable may not be recovered in time etc.

5. Terms of purchase and sales


Some time due to competition or custom, it may be necessary for the company to extend more and more credit to customers, as result which more and more amount is locked up in debtors or bills receivables which increase the working capital requirement. On the other hand, in the case of purchase, if the credit is offered by suppliers of goods and services, a part of working capital requirement may be financed by them, but it is necessary to purchase on cash basis, the working capital requirement will be higher.

6. Profitability
The profitability of the business may be vary in each and every individual case, which is in turn its depend on numerous factors, but high profitability will positively reduce the strain on working capital requirement of the company, because the profits to the extent that they earned in cash may be used to meet the working capital requirement of the company.
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CHAPTER II

RESEARCH METHODOLOGY 2.1) Introduction


Research methodology is a way to systematically solve the research problem. It may be understood as a science of studying now research is done systematically. In that various steps, those are generally adopted by a researcher in studying his problem along with the logic behind them. It is important for research to know not only the research method but also know methodology. The procedures by which researcher goes about their work of describing, explaining and predicting phenomenon are called methodology Methods comprise the procedures used for generating, collecting and evaluating data. All this means that it is necessary for the researcher to design his methodology for his problem as the same may differ from problem to problem. Data collection is important step in any project and success of any project will be largely depend upon now much accurate you will be able to collect and how much time, money and effort will be required to collect that necessary data, this is also important step. Data collection plays an important role in research work. Without proper data available for analysis you cannot do the research work accurately.

2.2) Types of data collection


There are two types of data collection methods available. 1. Primary data collection 2. Secondary data collection

1) Primary data
The primary data is that data which is collected fresh or first hand, and for first time which is original in nature. Primary data can collect through personal interview, questionnaire etc. to support the secondary data.

2) Secondary data collection method

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The secondary data are those which have already collected and stored. Secondary data easily get those secondary data from records, journals, annual reports of the company etc. It will save the time, money and efforts to collect the data. Secondary data also made available through trade magazines, balance sheets, books etc. This project is based on primary data collected through personal interview of head of account department, and other concerned staff member of finance department. But primary data collection had limitations such as matter confidential information thus project is based on secondary information collected through five years annual report of the company, supported by various books and internet sides. The data collection was aimed at study of working capital management of the company

Project is based on
1. Annual report of OPT Consultancy services, 2006-07 2. Annual report of OPT Consultancy services, 2007-08 3. Annual report of OPT Consultancy services, 2008-09 4. Annual report of OPT Consultancy services, 2009-10 5. Annual report of OPT Consultancy services, 2010-11

2.3) OBJECTIVES OF THE STUDY


Study of the working capital management is important because unless the working capital is managed effectively, monitored efficiently planed properly and reviewed periodically at regular intervals to remove bottlenecks if any, the company cannot earn profits and increase its turnover. With this primary objective of the study, the following further objectives are framed for a depth analysis. 1. To study the working capital management of OPT Consultancy services., Chennai 2. To study the optimum level of current assets and current liabilities of the company. 3. To study the liquidity position through various working capital related ratios. 4. To study the financial performance using trend analysis tool

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2.4) SCOPE & LIMITATIONS OF THE STUDY


Scope of the study
The scope of the study is identified after and during the study. The study of working capital is based on tools like Trend Analysis, Ratio Analysis, working capital leverage, operating cycle etc. Further the study is based on last 5 years Annual Reports of OPT Consultancy services And even factors like competitors analysis, industry analysis were not considered while preparing this project.

Limitations of the study


Following limitations were encountered while preparing this project:

1) Limited data:This project has completed with annual reports; it just constitutes one part of data collection i.e. secondary. There were limitations for primary data collection because of confidentiality.

2) Limited period:This project is based on five year annual reports. Conclusions and recommendations are based on such limited data. The trend of last five year may or may not reflect the real working capital position of the company
3) Limited

area:-

Also it was difficult to collect the data regarding the competitors and their financial information. Industry figures were also difficult to get.

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CHAPTER III

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3.1 INDUSTRY PROFILE

3.2 COMPANY PROFILE

CHAPTER IV

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DATA ANALYSIS AND INTERPRETAITION

4.1 WORKING CAPITAL ANALYSIS Working capital management is concerned with the problems which arise in attempting to manage the current assets, the current liabilities and the inter relationship that exist between them. The term current assets refers to those assets which in ordinary course of business can be, or, will be, turned in to cash within one year without undergoing a diminution in value and without disrupting the operation of the firm. The major current assets are cash, marketable securities, account receivable and inventory. Current liabilities ware those liabilities which intended at their inception to be paid in ordinary course of business, within a year, out of the current assets or earnings of the concern. The basic current liabilities are account payable, bill payable, bank over-draft, and outstanding expenses. The goal of working capital management is to manage the firm s current assets and current liabilities in such way that the satisfactory level of working capital is mentioned. The current should be large enough to cover its current liabilities in order to ensure a reasonable margin of the safety.

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The consideration of the level investment in current assets should avoid two danger points excessive and inadequate investment in current assets. Investment in current assets should be just adequate, not more or less, to the need of the business firms. 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 be threatened for the solvency of the firms because of its inability to meet its current obligation. It should be realized that the working capital need of the firms 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 imbalance

SCHEDULE OF CHANGES IN WORKING CAPITAL TABLE 4.1


PARTICULARS ASSETS: CURRENT ASSETS 2005 AMOUNT Rs. 2006 AMOUNT Rs. INCREASE AMOUNT Rs. DECREASE AMOUNT Rs.

Inventory (ERP Software Licences) Sundry Debtors Cash & Bank Balance Loans and Advances Prepaid Expenses Accrued Income
TOTAL CURRENT ASSETS LESS: CURRENT LIABILITIES

250940.647 2763427.255 83610.810 1551164.710 5649.150 79277.450 6992535.422

5825092.799 1590439.776 58403.077 27974575.056 13732.400 2925.000 35465168.108

3315686.752 ----------26423410.350 8083.250 -----29747180.35

----1172987.479 25207.733

----------76352.450

1274547.662

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Sundry Creditors
TOTAL CURRENT LIABILITIES NET WORKING CAPITAL NET INCREASE IN WORKING CAPITAL

6453315.833 6453315.833 539219.589 30819341.21 31358560.79

4106607.313 4106607.313 31358560.79 -----31358560.79

2346708.520

----------1274547.662 30819341.21 32093888.87

2346708.520 32093888.87 -----32093888.87

TOTAL

Thus there is an increase in Net Working Capital compared to the last year. OPT Consultancy services Financial Position was Increase in the year (2006).
Source: Annual Report OPT Consultancy servicesChennai From 2006-2010

SCHEDULE OF CHANGES IN WORKING CAPITAL TABLE 4.2


PARTICULARS ASSETS: CURRENT ASSETS 2006 AMOUNT Rs. 2007 AMOUNT Rs. INCREASE AMOUNT Rs. DECREASE AMOUNT Rs.

Inventory Sundry Debtors Cash & Bank Balance Loans and Advances Prepaid Expenses Accrued Income
TOTAL CURRENT ASSETS LESS: CURRENT LIABILITIES

5825092.799 1590439.776 58403.077 27974575.056 13732.400 2925.000 35465168.108

5429251.165 3093057.061 605026.901 2128152.721 17021.883 396425.127


11668934.86

-----1502617.285 546623.824 -----3289.483 393500.127


2446030.719

395841.634 ---------25846422.34 ----------26242263.97

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Sundry Creditors
TOTAL CURRENT LIABILITIES NET WORKING CAPITAL NET DECREASE IN WORKING CAPITAL

4106607.313

15182116.746

----------2446030.719 34871742.68 37317773.4

11075509.43 11075509.43 37317773.4 -----37317773.4

4106607.313 15182116.746 31358560.79 -----3513181.88 34871742.68

TOTAL

31358560.79 31358560.79

Thus there is a decrease in Net Working Capital in the year 2006 when compared with the previous year of OPT Consultancy servicesSo the Companys financial position has to be increased.

Source: Annual Report OPT Consultancy servicesChennai From 2005-2009

SCHEDULE OF CHANGES IN WORKING CAPITAL TABLE 4.3


2007 AMOUNT Rs. 2008 AMOUNT Rs. INCREASE AMOUNT Rs. DECREASE AMOUNT Rs.

PARTICULARS ASSETS: CURRENT ASSETS

Inventory Sundry Debtors Cash & Bank Balance Loans and Advances Prepaid Expenses Accrued Income
TOTAL CURRENT ASSETS LESS: CURRENT LIABILITIES

5429251.165 3093057.061 605026.901 2128152.721 17021.883 396425.127 11668934.86

3880115.603 2311550.508 593151.324 10179277.86 32054.500 292198.000 17288347.79

---------------8051125.137 15032.617

1549135.562 781506.553 11875.577 ----------104227.127

80661577.54

2446744.819

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Sundry Creditors
TOTAL CURRENT LIABILITIES NET WORKING CAPITAL NET INCREASE IN WORKING CAPITAL

15182116.746 15182116.746 3513181.88 11204931.74

9596597.936 9596597.936 7691749.854 ------

5585518.85 5585518.85 136516766 ------

----------2446744.819 112049317.6

TOTAL

7691749.854

7691749.854

13651676.6

13651676.6

Thus there is an increase in Net Working Capital Compared with the last year, OPT Consultancy services financial position was increased in the year (2007)

Source: Annual Report OPT Consultancy servicesChennai From 2005-2009 SCHEDULE OF CHANGES IN WORKING CAPITAL TABLE 4.4
2008 AMOUNT Rs. 2009 AMOUNT Rs. INCREASE AMOUNT Rs. DECREASE AMOUNT Rs.

PARTICULARS ASSETS: CURRENT ASSETS

Inventory Sundry Debtors Cash & Bank Balance Loans and Advances Advance Tax Prepaid Expenses Accrued Income
TOTAL CURRENT ASSETS

3880115.603 2311550.508 593151.324 10179277.86 -----32054.500 292198.000 17288347.79

9150310.374 4431187.152 371374.749 9251176.824 311019.826 23164.140 226382.200


23764615.27

5270194.771 2119636.644 ----------311019.826 ----------8066157.754

1549135.562 781506.553 11875.577 ------

8890.360 65815.800 2446744.819

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LESS: CURRENT LIABILITIES

Sundry Creditors
TOTAL CURRENT LIABILITIES NET WORKING CAPITAL NET INCREASE IN WORKING CAPITAL

9596597.936 9596597.936 7691749.854


8419850.856

7653014.565 7653014.565
1611100.71

943583.371
1943583.371 9644434.612

----------1224583.761 8419850.856

------

------

TOTAL

16111600.71

16111600.71

9644434.612

9644434.612

Thus there is an increase in Net Working Capital Compared with the last year OPT Consultancy servicesfinancial position was increased from in this year.
Source: Annual Report OPT Consultancy services, Chennai From 2005-2009 STATEMENT OF CHANGES IN WORKING CAPITAL TABLE 4.5
2009 AMOUNT Rs. 2010 AMOUNT Rs. INCREASE AMOUNT Rs. DECREASE AMOUNT Rs.

PARTICULARS ASSETS: CURRENT ASSETS

Inventory Sundry Debtors Cash & Bank Balance Loans and Advances Advance Tax Prepaid Expenses Accrued Income

9150310.374 4431187.152 371374.749 9251176.824 311019.826 23164.140 226382.200

4708448.732 3066217.179 925406.415 9270117.814 589869.330 143768.858 169833.300

----------554031.666 18940.99 278849.504 120604.718 ------

4441861.642

1364969.973 --------------------565489

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TOTAL CURRENT ASSETS LESS: CURRENT LIABILITIES

2376461.527

1887366.163

972426.878

5863380.515

Sundry Creditors
TOTAL CURRENT LIABILITIES NET WORKING CAPITAL NET DECREASE IN WORKING CAPITAL

765301.4565 765301.4565
1611100.71

8550106.668 8550106.668 10323554.96 57880457 16111600.71

----------972426.878 57880457 6760472.628

8970921.103 897092.103 6760472.618

-----16111600.71

-----6760472.628

TOTAL

Thus there is a Decrease in Net Working Capital in the year 2009 when compared with the previous year of OPT Consultancy servicesSo the companys financial position has to be increased.

Source: Annual Report OPT Consultancy servicesChennai From 2005-2009

RATIO ANALYSIS
4.2 MEANING OF RATIO: A ratio is a mathematical relationship between two items expressed in a quantitative form. Ratio can be defined as Relationship expressed kin quantitative terms between figures which have cause and effect relationship which are connected with each other in some manner or the other.

DEFINITION OF RATIO: According to Accountants Hand Book by Wixon, Kell and Bedford, a Ratio Is an expression of the quantitative relationship between two numbers.

LIQUIDITY RATIOS:

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It measures the ability of a company to meet its current obligations, and indicate the short term financial stability of the company. The parties interested in the liquid ratio would be employees, bankers and short-term creditors.

CURRENT RARIO: Current Ratio may be defined as the ratio of Current Assets to Current Liabilities. It is also known as Working Capital Ratio 2:1 ratio. Current Ratio shows the relationship between total current assets and total current liabilities expressed as a formula.

Current Assets CURRENT RATIO = Current Liabilities QUICK RATIO: A measure of companys liquidity and ability to meet its obligations, Quick ratio, often referred to as acid-test ratio, is obtained by subtracting inventories from current assets and then dividing by current liabilities. Quick ratio is viewed as a sign of companys financial strength or weakness (higher number means stronger, lower number means weaker). Liquid/Quick assets QUICK RATIO = Current Liabilities

ABSOLUTE LIQUIDITY RATIO: This is also known as super Quick Ratio (or) Cash Ratio. This ratio considers only absolute liquidity available with the firm. Absolute Liquid assets include cash in hand, cash at bank marketable securities. A standard of 0.5: 1 absolute liquidity ratio is considered an acceptable norm. It is calculated as follows:
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Cash & Bank Balances ABSOLUTE LIQUIDITY RATIO = Current Liabilities INVENTORY TURNOVER RATIO: Inventory Turnover Ratio also known as stock turnover ratio in the traditional language; usually establishes relationship between the cost of goods sold during a given period and the average amount of Inventory outstanding during that period. Inventory Turnover Ratio can be calculated by of the following formula:

Net Sales INVENTORY TURNOVER RATIO = Average Inventory DEBTORS TURNOVER RATIO: Receivables (or) Debtors normally include both debtors and Bill Receivable and represent the uncollected portion of Credit sales receivables constitute an important component of Current Assets and therefore the quality of receivables to a great extent determines the liquidity of a firm. This Ratio can be calculated as follows: Credit Sales DEBTORS TURNOVER RATIO = Debtor CREDITORS TURNOVER RATIO: This Ratio is similar to receivable turnover ratio. It compares the Accounts Payable with the total credit purchases. It signifies the credit period enjoyed by the firm in paying creditors. Accounts payable include both sundry creditors and bills payable. It is calculated as follows: Net Purchase
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CREDITORS TURNOVER RATIO = Average creditors

FIXED ASSET TURNOVER RATIO: This ratio indicates the extent to which the investment in fixed assets contributes towards sales. If compared with a previous period, it indicates whether the investment in fixed assets has been judicious or not, the Ratio is calculated as follows:

Sales FIXED ASSET TURNOVER RATIO = Net Fixed Assets WORKING CAPITAL TURNOVER RATIO: 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. Net Sales WORKING CAPITAL TURNOVER RATIO= Net Working Capital CASH TO CURRENT ASSET RATIO: The cash asset ratio is similar to the current ratio, except that the current ratio includes current assets such as inventories in the numerator. Some analysts believe that including current assets makes it difficult to convert them into usable funds for debt obligations. The cash asset ratio is a much more accurate measure of a firm's liquidity Cash CASH TO CURRENT ASSET RATIO=
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Current Assets CURRENT ASSET TURNOVER RATIO: The ratio is calculated to ascertain the efficiency of use of current assets of the concerns. With an increase in sales, current assets are expected to increase. However, an increase in the ratio shows that current assets turned over faster resulting in higher sales for a given investment in current assets. Higher ratio is generally an index of better efficiency and profitability of the concern. This ratio gives a general impression about the adequacy of working capital in reaction to sales. Sales CURRENT ASSET TURNOVER RATIO= Current Assets

INVENTORY TO SALES RATIO: Inventory to Sales Ratio indicates the manner in which a firms inventory in turning. The inventory to sales ratio indicates the efficiency with which inventory turnover into sales. Inventory INVENTORY TO SALES RATIO= Sales INVENTORY TO CURRETN ASSETS RATIO: It indicates the amount of inventory in Current Assets. Any increase amount of inventory indicates the lower liquidity as compared to the other Current Assets.

Average Inventory INVENTOTY TO CURRENT ASSETS RATIO=

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Current Assets DEBT UTILIZATION RATIOS The debt utilization ratio measures the proportion of debt and low efficiently management used the debt capital. The higher the ratio, the greater the amount other peoples money being used in an attempt to generate profits DEBT RATIO: The Debt Ratio measures the proportion of total assets financed by the times creditor. The lighter the ratio the greater the amount other peoples money being used in an attempt to generate profits, the ratio is calculated as follows, Total Liability DEBT RATIO= Total Assets PROFITABILITY RATIOS:

These measures the overall effectiveness in terms of returns generated, with profits being related to sales and adequacy of such profits as to sales or investment. The profitability ratios are important to internal management, to bankers, to investors, and to the owners.

GROSS PROFIT RATIO: Gross Profit Ratio expresses the relationship of gross profit of sales to net sales in terms of percentage, representing the percentage of gross profit earned on sales. Gross Profit GROSS PROFIT RATIO= Net Sales *100

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ADMINISTRATIVE EXPENSES RATIO: This Ratio is also known as supporting ratios operating ratio. They indicate the efficiency with which business as a whole functions. It is better for the concern to known how it is able to save or waste over expenditure in respect of different items of expenses. Therefore each aspect of cost of sales & operation expenses are analyzed.

Administrative Expenses Ratio ADMINISTRATIVEEXPENSESRATIO= Net Sales *100

CURRENT RATIO: Current Asset CURRENT RATIO = Current Liabilities TABLE 4.2.1

YEAR

CURRENT ASSETS Rs

CURRENT LIABILTIES Rs

RATIO

2005-06 2006-07 2007-08 2008-09 2009-10

35465.16 11668.93 17288.34 23764.61 18873.66

4106.607 15182.11 9596.59 7653.01 8550.106

8.63 0.77 1.8 3.11 2.21

Source: Annual Reports OPT Consultancy services, Chennai from 2005-010

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INTERPRETATION:

The Current Ratio measures the ability of the firm to meet its Current Liabilities. The standard norms of Current Ratio are 2:1. From the above table it can be inferred that the Current Ratio of OPT Consultancy servicesShows higher in the year 2005-06 (i.e.) 8.63%.But from 2006-07 to 2009-10 there has been continuously decreased (i.e.) 2.21.When compare to previous years.

CURRENT RATIO:

FIGURE 4.2.1

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CURRENT RATIOS
9 8 7 6 8.63

RATIOS

5 4 3 2 1 0 2005-06 2006-07 2007-08 2008-09 2009-10 0.77 1.8 3.11 2.21 RATIOS

YEARS

QUICK RATIO: Liquidity Assets Quick Ratio = Current Liabilities Where as (Quick Assets = Current Assets - (Stock + Prepaid Expenses)
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TABLE 4.2.2

YEARS QUICK ASSETS CURRENT LIABILTIES RATIOS Rs 2005-06 2006-07 2007-08 2008-09 2009-10 296263430 6222661.813 13376177.687 14591140.756 14021444.04 Rs 4106607.313 1518211.675 9596597.936 7653014.565 8550106.668 7.21 0.41 1.4 1.91 1.67

Source: Annual Reports OPT Consultancy services Chennai from 2005-10

INTERPRETATION:

The Quick Ratio (or) Liquidity ratio gives a measure of Liquidity the expected industry standard is 1:1. From the above table it can be inferred that the Quick Ratio of OPT
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Consultancy servicesincrease in trend from the year 2007-08 to 2009-10(i.e.) 1.40 to1.67.Has a safe Liquidity position with the ratio of quick assets to current liabilities in the period from the year 2007-08 to 2009-10 (i.e.) 1.40 to 1.67.When we compared to standard ratio 1:1 the quick ratios are higher. So the company has good liquidity ratio for all year.

QUICK RATIO

FIGURE 4.2.2

QUICK RATIOS
8 7 6 5 7.22

RATIOS

4 3 2 1 0 2005-06 2007-08 2006-07 2008-09 2009-10 0.41 1.91 1.4 1.67 RATIOS

YEARS

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ABSOLUTE LIQUIDITY RATIO: Cash & Bank Balances Absolute Liquidity Ratio = Current Liability TABLE 4.2.3

YEARS

CASH & BANK BALANCE CURRENT LIABILITIES Rs Rs RATIOS

2005-06 2006-07 2007-08 2008-09 2009-10

58403.077 605026.901 593151.324 371374.749 925406.415

55107605.94 15182116.746 9596597.936 7653014.565 8550106.668

0.001 0.04 0.03 0.01 0.05

Source: Annual Reports OPT Consultancy services Chennai from 2005-10

INTERPRETATION:

From the above table it can be inferred that the OPT Consultancy serviceshas a high Absolute Liquidity Ratio in the year 2007 (i.e.) 0.04 When compare to 2006 and the ratio decrease from 2007-08 to 2008-09 (i.e.) 0.01 finally the ratio has increased in the year 2009 -10 (i.e.) 0.05.The ideal cash position is .05:1. So the companys cash position ratio is not satisfactory.
32

ABSOLUTE LIQUIDITY RATIO

FIGURE 4.2.3

ABSOLUTE LIQUIDITY RATIOS


0.05 0.045 0.04 0.035 0.03 0.03 0.04 0.05

RATIOS

0.025 0.02 0.015 0.01 0.005 0 0.001 2005-06 2006-07 2007-08 2008-09 2009-10 0.01 RATIOS

YEARS

33

INVENTORY TURNOVER RATIO:

Net Sales Inventory Turnover Ratio = Average Inventory TABLE 4.2.4 YEAR NET SALES Rs AVERAGE INVENTORY Rs RATIO

200506 200607 200708 200809 200910

39377253.95 1 57364832.07 5 63273345.62 5 77237254.71 3 89967678.58 3

5825092.799 5429251.165 3880115.603 9150310.374 4708448.732

6.76 10.57 16.31 8.44 19.11

Source: Annual Reports OPT Consultancy services Chennai from 2005-10

INTERPRETATION:

34

From the above table it can be inferred that the companys Inventory increase in year 2005-06 to 2009-10 (i.e.) 6.76 to 19.11.has been increased in the year 2010 (i.e.) 19.11.when compared to previous years

INVENTORY TURN OVER RATIO:

FIGURE 4.2.4

INVENTORY TURNOVER RATIO


20 18 16 14 12

19.11 16.31

RATIOS

10.57 8.44 6.76 RATIOS

10 8 6 4 2 0 2005-06 2006-07 2007-08

2008-09

2009-10

YEARS

35

DEBTORS TURNOVER RATIO: Credit Sales Debtors Turnover Ratio = Debtors TABLE 4.2.5 YEAR CREDIT SALES Rs 200506 200607 200708 200809 200910 39377253.95 57364832.08 63273345.63 77237254.71 89967678.53 DEBTORS Rs 1590439.77 6 3093057.06 1 2311550.50 8 4431187.15 2 3066217.17 9 24.76 18.55 27.37 17.43 29.34 RATIO

Source: Annual Reports OPT Consultancy services Chennai from 2005-10

36

INTERPRETATION:

From the above table it can be inferred that the Debtors Turnover Ratio of OPT Consultancy servicesincrease in the year 2005-06 to 2009-10 (i.e.) 24.76 to 29.34.shows high in the year 2010 (i.e.) 29.34.When compare to previous years.

DEBTORS TURN OVER RATIO:

FIGURE 4.2.5

37

DEBTORS TURN OVER RATIO


30 25 20 24.76 29.34 27.37

18.55

17.43

RATIOS

15 RATIO 10 5 0 2005-06 2006-07 2007-08 2008-09 2009-10

YEARS

CREDITORS TURNOVER RATIO: Net Purchase Creditors Turnover Ratio = Average Creditors

TABLE 4.2.6
38

YEAR 200506 200607 200708 200809 200910

NET PURCHASE AVERAGE CREDITORS Rs Rs RATIO 34098754.434 55053121.762 56214265.402 75714393.653 77310587.362 4106607.313 15182116.746 9596597.936 7653014.565 8550106.668 8.30 3.63 5.86 9.89 9.04

Source: Annual Reports OPT Consultancy services Chennai from 2005-10

INTERPRETATION:

From the above table it can be inferred that the OPT Consultancy servicescompanys creditors turnover ratio in year 2005-06 to 2007-08 (i.e.) 8.30 to 5.86 .has been decreased by 29% in the year 2008 and the ratio finally increases in the year 2010 (i.e.) 9.04 when compared to the previous years.

CREDITORS TURNOVER RATIO:

FIGURE 4.2.6

39

CREDITORS TURNOVER RATIO


10 9 8 7 6 5.86 8.3 9.89 9.04

RATIOS

5 4 3 2 1 0 2005-06 2006-07 2007-08 2008-09 2009-10 3.63 RATIO

YEARS

FIXED ASSET TURNOVER RATIO: Sales Fixed Assets Turnover Ratio = Net Fixed Assets TABLE4.2.7
40

YEAR

SALES Rs

NET FIXED ASSETS RATIO Rs 740010.6 986728.6 1700745.121 1621368.217 1664269.636 53.21 58.14 37.2 47.63 54.05

200506 200607 200708 200809 200910

39377253.9 5 57364832.0 8 63273345.6 3 77237254.7 1 89967678.5 3

Source: Annual Reports OPT Consultancy services Chennai from 2005-10

INTERPRETATION:

From the above table it can be inferred that the Fixed Asset Turnover Ratio of OPT Consultancy services has increased by 58.14% in the year 2007, and the ratio finally decreases in the year 2010 (i.e.) 54.05 when compare to previous years.

FIXED ASSET TURNOVER RATIO:

FIGURE 4.2.7
41

FIXED ASSET TURNOVER RATIO


60 53.21 50 40 37.2 47.63 58.14 54.05

RATIOS 30
RATIO 20 10 0 2005-06 2006-07 2007-08 2008-09 2009-10

YEARS

CASH TO CURRENT ASSET RATIO: Cash Cash to Current Asset Ratio=


42

Current Assets TABLE 4.2.8

YEAR

CASH CURRENT ASSET RATIO Rs Rs

200506 200607 200708 200809 200910

58403.077 605026.901 593151.324 371374.749 925406.415

35465168.1 11668934.86 17288347.79 23764615.27 18873661.63

1.65 0.05 0.03 0.02 0.05

Source: Annual Reports OPT Consultancy services Chennai from 2005-10

INTERPRETATION:

From the above table it can be inferred that the Ratio increase in the year 2005-06 to 2009-10 (i.e.) 1.65 to 0.05.The Cash to Current Asset Ratio shows higher in the year 200506 (i.e.) 1.65.But from 2006-07 to 2009-10 there has been continuously decreased (i.e.) 0.05 when compared to previous year.

43

CASH TO CURRENT ASSET RATIO:

FIGURE4.2.8

CASH TO CURRENT ASSET RATIO


1.8 1.6 1.4 1.2

1.65

RATIOS

1 0.8 0.6 0.4 0.2 0 0.05 2005-06 2006-07 0.03 2007-08 0.02 0.05 RATIO

2008-09 2009-10

YEARS

CURRENT ASSET TURNOVER RATIO:

Sales

44

Current Asset Turnover Ratio = Current Assets

TABLE 4.2.9

YEAR

SALES Rs

CURRENT ASSETS RATIO Rs 335465168.1 11668934.86 17288347.79 23764615.27 18873661.63 1.11 4.92 3.66 3.25 4.77

200506 200607 200708 200809 200910

39377253.9 5 57364832.0 8 63273345.6 3 772237254. 7 89967678.5 8

Source: Annual Reports OPT Consultancy services Chennai from 2005-10

INTERPRETATION:

From the above table it can be inferred that the Current Asset Turnover Ratio of OPT Consultancy servicesin year 2005-06 to 2009-10 (i.e.) 1.11 to 4.77.has been increased which shows the satisfactory level of current asset correspondence to the sales in the subsequent years and the ratio finally increases in the year 2010 (i.e.) 4.77 when compared to the previous years

CURRENT ASSET TURNOVER RATIO:


45

FIGURE 4.2.9

CURRENT ASSET TURNOVER RATIO


5 4.5 4 3.5 3 3.66 3.25 4.92

4.77

RATIOS 2.5
2 1.5 1 0.5 0 2005-06 2006-07 2007-08 2008-09 2009-10 1.11 RATIO

YEARS

INVENTORY TO SALES RATIO: Inventory Inventory to Sales Ratio=


46

Sales TABLE 4.2.10

YEAR

INVENTORY Rs

SALES Rs 39377253.9 5 57364832.0 8 63273345.6 3 77237254.7 1 89967678.5 8 RATIO 0.15 0.09 0.06 0.11 0.05

200506 200607 200708 200809 200910

5825092.799 5429251.165 3880115.603 9150310.374 4708448.732

Source: Annual Reports OPT Consultancy services Chennai from 2005-10

INTERPRETATION:

From the above table it can be inferred that the Inventory to Sales Ratio of OPT Consultancy servicesHas been increased in the year 2008 (i.e.) 0.11.When compared to previous years. But I the year2009, the ratio have been fall down to 0.05.

47

INVENTORY TO SALES RATIO:

FIGURE 4.2.10

INVENTORY TO SALES RATIO


0.16 0.14 0.12 0.1 0.09 0.11

0.15

RATIOS

0.08 0.06 0.04 0.02 0 0.06 0.05

RATIO

2005-06 2006-07 2007-08 2008-09 2009-10

YEARS

WORKING CAPITAL TURNOVER RATIO:


48

Net Working Capital WORKING CAPITAL TURNOVER RATIO = Current Liabilities

TABLE 4.2.11

YEAR

NET WORKING CAPITAL CURRENT LIABILITIES RATIO Rs Rs 4106607.313 15182116.75 9596597.936 7653014.565 8550106.668 7.63 0.23 0.8 2.1 1.2

200506 200607 200708 200809 200910

31358560.79 3513181.88 7691749.854 16111600.71 10323554.96

Source: Annual Reports OPT Consultancy services Chennai from 2005-10

INTERPRETATION:

From the above table it can be inferred that the Working Capital Turnover Ratio of OPT Consultancy servicesThe Working Capital Turnover Ratio shows higher in the year 2006 i.e. 7.63% But from 2007 to 2010 there has been continuously decreased (i.e.) when compared to previous years.

49

WORKING CAPITAL TURNOVER RATIOS

FIGURE 4.2.15

WORKING CAPITAL TURNOVER RATIO


8 7 6 5 7.63

RATIOS

4 3 2 1 0 0.23 2005-06 2006-07 2007-08 2008-09 2009-10 0.8 2.1 1.2 RATIOS

YEARS

50

INVENTORY TO CURRE NT ASSET RATIO:

Average Inventory Inventory to Current Asset Ratio = Current Assets TABLE 4.2.12

YEAR 200506 200607 200708 200809 200910

AVERAGE INVENTORY CURRENT ASSET Rs Rs RATIO

5825092.799 5429251.165 38801156.503 9150310.374 4708448.732

35465168.1 11668934.86 17288347.79 2376415.27 18873661.63

0.16 0.47 0.22 0.39 0.25

51

Source: Annual Reports OPT Consultancy services Chennai from 2005-10

INTERPRETATION:

From the above table it can be inferred that the companys Inventory to Current Asset Ratio in the year 2005-06 to 2009-10 (i.e.) 0.16 to 0.25.has increased by 0.25% in the year 2010 when compare to previous year.

INVENTORY TO CURRENT ASSET RATIO

FIGURE 4.2.12

52

INVENTORY TO CURRENT ASSET RATIO


0.5 0.45 0.4 0.35 0.3 0.39 0.47

RATIOS 0.25
0.2 0.15 0.1 0.05 0 0.16

0.22

0.25 RATIO

2005-06 2006-07 2007-08 2008-09 2009-10

YEARS

GROSS PROFIT RATIO: Gross Profit Gross Profit Ratio= Net Sales
53

* 100

Where as (Gross Profit = Net Sales- Cost of Goods Sold) Cost of Goods Sold = (Opening Stock+ Purchase Less Returns-Current Liabilities) Net Sales = (Sales- Sales Return). TABLE 4.2. 13

YEAR

GROSS PROFIT CURRENT ASSET RATIO Rs Rs

200506 200607 200708 200809 200910

3753475.257 4171996.853 5509944.653 6793055.831 8215229.528

39377253.951 57364832.075 63273345.625 77237254.713 89967678.583

9.53 7.27 8.71 8.80 9.13

Source: Annual Reports OPT Consultancy services Chennai from 2005-10

INTERPRETATION:

From the above table it can be inferred that the companys Gross Profit Ratio increase in year 2005-06 (i.e.) 9.53. But from 2005-06 to 2009-10 there has been slowdown to some extent, when comparing to the previous years.

GROSS PROFIT RATIO

FIGURE 4.2.13

54

GROSS PROFIT RATIO


10 9 8 7 6 7.27 9.53 8.71 8.8

9.13

RATIOS

5 4 3 2 1 0 2005-06 2006-07 2007-08 2008-09 2009-10 RATIO

YEARS

ADMINISTRATIVE EXPENSES RATIO: Administrative Expenses Administrative Expenses Ratio= Net Sales
55

*100

TABLE 4.2.14

YEAR 200506 200607 200708 200809 200910

ADMINISTRATIVE EXPENSES RATIO Rs

NET SALES Rs 39377253.951 57364832.075 63273345.62 5 77237254.71 3 89967678.58 3

RATIO

6660618.145 9805865.796 11598635.776 13919612.840 14236372.803

16.91 17.09 18.33 18.02 15.82

Source: Annual Reports OPT Consultancy services Chennai from 2005-10

INTERPRETATION:

From the above table it can be inferred that the companys Administrative Expenses Ratio in year 2005-06 to 2009-10 (i.e.) 16.91 to 15.82.has been increased in the year 2006 (i.e.) 16.91. In the year 2010 the Administrative Expenses Ratio has been decreased (i.e.) 15.82.When compared to previous years

ADMINISTRATIVE EXPENSES RATIO


56

FIGURE 4.2.14

ADMINISTRATIVE EXPENSES RATIO


18.5 18 17.5 17 16.91 17.09

18.33 18.02

RATIOS

16.5 16 15.5 15 14.5 2005-06 2006-07 2007-08 2008-09 2009-10 15.82 RATIO

YEARS

TREND ANALYSIS
57

4.3 MEANING TREND ANALYSIS: Trend analysis is one of the important tools of analyzing the financial data. It computes the percentage changes for different variables over a long period and then makes a comparative study of them. The trend percentage helps the analyst to study the changes that have occurred darning the period. Such an analysis indicates the progress by showing ups and downs in its activities FINANCIAL TREND ANALYSIS is the process of analyzing financial statements of a company for any continuing relationship. Generally, an analysis is made to find out what direction a concern is going, how rapidly, and whether there are enough resources to complete proposed projects. An aspect of technical analysis that tries to predict the future movement of a stock based on past data. Trend analysis is based on the idea that what has happened in the past gives traders an idea of what will happen in the future. There are three main types of trends: short-, intermediate- and long-term.

CURRENT ASSET:
58

TABLE 4.3.1 CURRENT ASSET (Y) 35465168.1 11668934.86 17288347.79 23764615.27 18873661.63

YEAR 200506 200607 200708 200809 200910

X -2 -1 0 1 2

XY -70930336.2 -11668934.86 0 23764615.27 37747323.26

X2 4 1 0 1 4

Y=a+bx 17194678.994 19303412.247 21412145.52 25629611.91 29847078.32

Y=107060727.7 Y = a + bX

XY=2108733 2.53 Where a = Y ; n

X=0

X2=1 0 b = XY X2

Current assets value for 2010 11 will be about Rs.34, 06, 45,447 CURRENT ASSET: FIGURE 4.3.1

FIXED ASSET:
59

TABLE 4.3.2 FIXED ASSET (Y)

YEAR

XY

X2

Y=a+bx

740010.600 2005-06 986728.600 2006-07 1700745.121 2007-08 1621368.217 2008-09 1664269.636 2009-10 Y=6713122.174 Y = a + bX

-2 -1 0 1 2 X=0

-1480021.2 -986728.6 0 1621368.217 3328539.272 XY=2483157.689 ;

4 1 0 1 4 X2=10 b = XY X2

845992.897 1094308.666 1342624.435 1590940.204 1839255.973

Where a = Y n

Fixed assets value for 2010 11 will be about Rs. 2, 08, 75,71.738 FIXED ASSET FIGURE 4.3.2

CASH & BANK BALANCE:


60

TABLE 4.3.3

YEAR 200506 200607 200708 200809 200910

CASH & BANK 58403.077 605026.901 593151.324 371374.749 925406.415

X -2 -1 0 1 2

XY -116806.154 -605026.901 0 371374.749 1850812.83

X2 4 1 0 1 4

Y=a+bx 210601.589 360637.041 510672.493 660707.945 810743.397

Y=2553362.466 X=0 XY=1500354.524 X2=10 Y = a + bX Where a = Y n ; b = XY X2

Cash Requirement for 2010 11 will be about Rs. 96, 07,788.49 CASH & BANK BALANCES FIGURE 4.3.3

INVENTORY
61

TABLE 4.3.4 YEARS 2005-06 2006-07 2007-08 2008-09 2009-10 INVENTORY 5825092.799 5429251.165 3880115.603 9150310.374 4708448.732 X -2 -1 0 1 2 XY -11650185.6 -5429251.165 0 9150310.374 9416897.464 X2 4 5649866.627 1 5798643.734 0 5947420.841 1 6096197.948 4 Y=a+bx 3879602.726

Y=28993218.67 X=0 XY=1487771.073 X2=10 Y = a + bX Where a = Y n ; b = XY X2

Stock level for 2010 11 will be about Rs. 6, 24, 49,75.056 INVENTORY FIGURE 4.3.4

SUNDRY DEBTORS
62

TABLE 4.3.5

YEARS SUNDRY DEBTORS (Y) 2005-06 2006-07 2007-08 2008-09 2009-10 1590439.776 3093057.061 2311550.508 4431187.152 3066217.179 Y=11732451.68 Y = a + bX

XY

X2

YC= a + b x

-2 -1 0 1 2

-3180879.552 -3093057.061 0 4431187.152 6132434.358

4 1 0 1 4

1488553.358 1917521.847 2346490.336 2775458.825 3204427.314

X=0 XY=4289684.897 X2=10 ; b = XY X2

Where a = Y n

Sundry Debtors for 2010 11 will be about Rs. 3, 63, 33,95.805 SUNDRY DEBTORS FIGURE 4.3.5

63

CHAPTER V

FINDINGS:
In the year of 2005-06, 2006-2007 and 2007-2008 shows increase in

64

Working Capital. This indicates that the company has ability of payment of short-term Liability. The fixed assets ratio indicates that the working capital of this company is funded by long-term funds which indicate efficient funds management.
The Short term Liquidity and long- term Liquidity position of the

concern were studied to evaluate the Working Capital of the concern. During the study period 2005 - 2006 to 2009-2010 the current ratio of the concern varied from 8.63 to 2.21.But 2007-08 to 2008-09 is varied from 0.77 to 1.80. This was much less than the prescribed of 2:1. The inference is that the Current Liability may not be easily met out of Current Asset by the Company.

The Quick ratio of the concern during the period 2005-06 to 2009-10

the study is varied from 7.22 to 1.67.Which was much greater than the prescribed standard of 1:1.So the company Liquidity level is satisfactory.
In Trend analysis the Cash &Bank Balance have been increased from

2005-05 to 2008-09.So it shows the Cash position of the company is good.

SUGGESTION:

65

The company is a profit seeking one; it has to commit all of its resources to achieve its goal. To achieve this, profitability, liquidity and solvency position a crucial elements to be monitored carefully, thereby the trade off can be reached

This companys ability to meet its current obligations is satisfactory though it does not meet the conventional norm. This company maintains current liabilities more than the amount of current assets which has to be viewed seriously and improvement of this ratio is required to achieve the optimum level. Stock Turnover Ratio should be maintained at the constant level.

The Cash & Bank Balances of the company is good.

Using trend analysis it can be suggested that the fixed assets curve

shows steady upward direction much than the current assets curve, which enable us to understand the companys funds are dumped in fixed asset, it is not a favorable condition to the company

CONCLUTION:

66

The present study reveals that the liquidity position of this company is comparatively good as it approaches the standard norms throughout the period of study. On the whole, it can be concluded that the companys overall risk evaluation process is not at desired level and the author has made the realistic recommendation for the improvement in operational and managerial efficiency of the company as to maintain and increase further by effective utilization and control of all the assets.

BIBILIOGRAPHY
67

Management accounting

S.N.MAHESHWARY

Financial management

I.M.PANDEY

Research methodology

C.R.KOTHARI

Management accounting

R.S.N.PILLAI & BAGAVATHI

Web site:

www.google.com

www.finance.org

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