Project Report - Working Capital Management WORKING CAPITAL - Meaning of Working Capital Capital req ire!

for a " #ine## can "e cla##ifie! n!er t$o main categorie# %ia& '( +( )i*e! Capital Working Capital

,%er- " #ine## nee!# f n!# for t$o p rpo#e# for it# e#ta"li#.ment an! to carr- o t it# !a-- to-!a- operation#/ Long term# f n!# are req ire! to create pro! ction facilitie# t.ro g. p rc.a#e of fi*e! a##et# # c. a# p0m& lan!& " il!ing& f rnit re& etc/ In%e#tment# in t.e#e a##et# repre#ent t.at part of firm1# capital $.ic. i# "locke! on permanent or fi*e! "a#i# an! i# calle! fi*e! capital/ ) n!# are al#o nee!e! for #.ort-term p rpo#e# for t.e p rc.a#e of ra$ material& pa-ment of $age# an! ot.er !a- 2 to- !a- e*pen#e# etc/ T.e#e f n!# are kno$n a# $orking capital/ In #imple $or!#& $orking capital refer# to t.at part of t.e firm1# capital $.ic. i# req ire! for financing #.ort- term or c rrent a##et# # c. a# ca#.& marketa"le #ec ritie#& !e"tor# 0 in%entorie#/ ) n!#& t. #& in%e#te! in c rrent a##t# keep re%ol%ing fa#t an! are "eing con#tantl- con%erte! in to ca#. an! t.i# ca#. flo$# o t again in e*c.ange for ot.er c rrent a##et#/ 3ence& it i# al#o kno$n a# re%ol%ing or circ lating capital or #.ort term capital/ CONC,PT O) WORKING CAPITAL T.ere are t$o concept# of $orking capital4 '/ +/ Gro## $orking capital Net $orking capital

T.e gro## $orking capital i# t.e capital in%e#te! in t.e total c rrent a##et# of t.e enterpri#e# c rrent a##et# are t.o#e A##et# $.ic. can con%ert in to ca#. $it.in a #.ort perio! normall- one acco nting -ear/ CON5TIT6,NT5 O) C6RR,NT A55,T5 '( +( 8( Ca#. in .an! an! ca#. at "ank 7ill# recei%a"le# 5 n!r- !e"tor#

9( :( a/ "/ c/ !/

5.ort term loan# an! a!%ance#/ In%entorie# of #tock a#4 Ra$ material Work in proce## 5tore# an! #pare# )ini#.e! goo!#

;/ Temporar- in%e#tment of # rpl # f n!#/ </ Prepai! e*pen#e# =/ Accr e! income#/ >/ Marketa"le #ec ritie#/

In a narro$ #en#e& t.e term $orking capital refer# to t.e net $orking/ Net $orking capital i# t.e e*ce## of c rrent a##et# o%er c rrent lia"ilit-& or& #a-4 N,T WORKING CAPITAL ? C6RR,NT A55,T5 2 C6RR,NT LIA7ILITI,5/ Net $orking capital can "e po#iti%e or negati%e/ W.en t.e c rrent a##et# e*cee!# t.e c rrent lia"ilitie# are more t.an t.e c rrent a##et#/ C rrent lia"ilitie# are t.o#e lia"ilitie#& $.ic. are inten!e! to "e pai! in t.e or!inar- co r#e of " #ine## $it.in a #.ort perio! of normall- one acco nting -ear o t of t.e c rrent a##t# or t.e income " #ine##/ CON5TIT6,NT5 O) C6RR,NT LIA7ILITI,5 '/ +/ 8/ 9/ :/ Accr e! or o t#tan!ing e*pen#e#/ 5.ort term loan#& a!%ance# an! !epo#it#/ @i%i!en!# pa-a"le/ 7ank o%er!raft/ Pro%i#ion for ta*ation & if it !oe# not amt/ to app/ Of profit/

;/ </

7ill# pa-a"le/ 5 n!r- cre!itor#/

T.e gro## $orking capital concept i# financial or going concern concept $.erea# net $orking capital i# an acco nting concept of $orking capital/ 7ot. t.e concept# .a%e t.eir o$n merit#/ T.e gro## concept i# #ometime# preferre! to t.e concept of $orking capital for t.e follo$ing rea#on#4 '/ It ena"le# t.e enterpri#e to pro%i!e correct amo nt of $orking capital at correct time/

+/ ,%er- management i# more intere#te! in total c rrent a##et# $it. $.ic. it .a# to operate t.en t.e #o rce from $.ere it i# ma!e a%aila"le/ 8/ It take into con#i!eration of t.e fact e%er- increa#e in t.e f n!# of t.e enterpri#e $o l! increa#e it# $orking capital/ 9/ T.i# concept i# al#o #ef l in !etermining t.e rate of ret rn on in%e#tment# in $orking capital/ T.e net $orking capital concept& .o$e%er& i# al#o important for follo$ing rea#on#4 A It i# q alitati%e concept& $.ic. in!icate# t.e firm1# a"ilit- to meet to it# operating e*pen#e# an! #.ort-term lia"ilitie#/ A A IT in!icate# t.e margin of protection a%aila"le to t.e #.ort term cre!itor#/ It i# an in!icator of t.e financial #o n!ne## of enterpri#e#/

A It # gge#t# t.e nee! of financing a part of $orking capital req irement o t of t.e permanent #o rce# of f n!#/

CLA55I)ICATION O) WORKING CAPITAL Working capital ma- "e cla##ifie! in to $a-#4 o o On t.e "a#i# of concept/ On t.e "a#i# of time/

On t.e "a#i# of concept $orking capital can "e cla##ifie! a# gro## $orking capital an! net $orking capital/ On t.e "a#i# of time& $orking capital ma- "e cla##ifie! a#4 B Permanent or fi*e! $orking capital/

Temporar- or %aria"le $orking capital

P,RMAN,NT OR )IC,@ WORKING CAPITAL Permanent or fi*e! $orking capital i# minim m amo nt $.ic. i# req ire! to en# re effecti%e tiliDation of fi*e! facilitie# an! for maintaining t.e circ lation of c rrent a##et#/ ,%er- firm .a# to maintain a minim m le%el of ra$ material& $ork- in-proce##& fini#.e! goo!# an! ca#. "alance/ T.i# minim m le%el of c rrent a##t# i# calle! permanent or fi*e! $orking capital a# t.i# part of $orking i# permanentl- "locke! in c rrent a##et#/ A# t.e " #ine## gro$ t.e req irement# of $orking capital al#o increa#e# ! e to increa#e in c rrent a##et#/ T,MPORARE OR FARIA7L, WORKING CAPITAL Temporar- or %aria"le $orking capital i# t.e amo nt of $orking capital $.ic. i# req ire! to meet t.e #ea#onal !eman!# an! #ome #pecial e*igencie#/ Faria"le $orking capital can f rt.er "e cla##ifie! a# #ea#onal $orking capital an! #pecial $orking capital/ T.e capital req ire! to meet t.e #ea#onal nee! of t.e enterpri#e i# calle! #ea#onal $orking capital/ 5pecial $orking capital i# t.at part of $orking capital $.ic. i# req ire! to meet #pecial e*igencie# # c. a# la nc.ing of e*ten#i%e marketing for con! cting re#earc.& etc/ Temporar- $orking capital !iffer# from permanent $orking capital in t.e #en#e t.at i# req ire! for #.ort perio!# an! cannot "e permanentl- emplo-e! gainf ll- in t.e " #ine##/ IMPORTANC, OR A@FANTAG, O) A@,G6AT, WORKING CAPITAL B 5OLF,NCE O) T3, 765IN,554 A!eq ate $orking capital .elp# in maintaining t.e #ol%enc- of t.e " #ine## "- pro%i!ing ninterr pte! of pro! ction/ B Goo!$ill4 5 fficient amo nt of $orking capital ena"le# a firm to make prompt pa-ment# an! make# an! maintain t.e goo!$ill/ B ,a#- loan#4 A!eq ate $orking capital lea!# to .ig. #ol%enc- an! cre!it #tan!ing can arrange loan# from "ank# an! ot.er on ea#- an! fa%ora"le term#/ B Ca#. @i#co nt#4 A!eq ate $orking capital al#o ena"le# a concern to a%ail ca#. !i#co nt# on t.e p rc.a#e# an! .ence re! ce# co#t/ B Reg lar 5 ppl- of Ra$ Material4 5 fficient $orking capital en# re# reg lar # ppl- of ra$ material an! contin o # pro! ction/ B Reg lar Pa-ment Of 5alarie#& Wage# An! Ot.er @a- TO @a- Commitment#4 It lea!# to t.e #ati#faction of t.e emplo-ee# an! rai#e# t.e morale of it# emplo-ee#& increa#e# t.eir efficienc-& re! ce# $a#tage an! co#t# an! en.ance# pro! ction an! profit#/ B ,*ploitation Of )a%ora"le Market Con!ition#4 If a firm i# .a%ing a!eq ate $orking capital t.en it can e*ploit t.e fa%ora"le market con!ition# # c. a# p rc.a#ing it# req irement# in " lk $.en t.e price# are lo$er an! .ol!ing# it# in%entorie# for .ig.er price#/

A"ilit- To )ace Cri#e#4 A concern can face t.e #it ation ! ring t.e !epre##ion/

B G ick An! Reg lar Ret rn On In%e#tment#4 5 fficient $orking capital ena"le# a concern to pa- q ick an! reg lar of !i%i!en!# to it# in%e#tor# an! gain# confi!ence of t.e in%e#tor# an! can rai#e more f n!# in f t re/ B 3ig. Morale4 A!eq ate $orking capital "ring# an en%ironment of #ec ritie#& confi!ence& .ig. morale $.ic. re# lt# in o%erall efficienc- in a " #ine##/ ,CC,55 OR INA@,G6AT, WORKING CAPITAL ,%er- " #ine## concern #.o l! .a%e a!eq ate amo nt of $orking capital to r n it# " #ine## operation#/ It #.o l! .a%e neit.er re! n!ant or e*ce## $orking capital nor ina!eq ate nor #.ortage# of $orking capital/ 7ot. e*ce## a# $ell a# #.ort $orking capital po#ition# are "a! for an- " #ine##/ 3o$e%er& it i# t.e ina!eq ate $orking capital $.ic. i# more !angero # from t.e point of %ie$ of t.e firm/ @I5A@FANTAG,5 O) R,@6N@ANT OR ,CC,55IF, WORKING CAPITAL '/ ,*ce##i%e $orking capital mean# i!eal f n!# $.ic. earn no profit for t.e firm an! " #ine## cannot earn t.e req ire! rate of ret rn on it# in%e#tment#/ +/ Re! n!ant $orking capital lea!# to nnece##ar- p rc.a#ing an! acc m lation of in%entorie#/ 8/ ,*ce##i%e $orking capital implie# e*ce##i%e !e"tor# an! !efecti%e cre!it polic- $.ic. ca #e# .ig.er inci!ence of "a! !e"t#/ 9/ It ma- re! ce t.e o%erall efficienc- of t.e " #ine##/

:/ If a firm i# .a%ing e*ce##i%e $orking capital t.en t.e relation# $it. "ank# an! ot.er financial in#tit tion ma- not "e maintaine!/ ;/ </ @ e to lo$er rate of ret rn n in%e#tment#& t.e %al e# of #.are# ma- al#o fall/ T.e re! n!ant $orking capital gi%e# ri#e to #pec lati%e tran#action#

@I5A@FANTAG,5 O) INA@,G6AT, WORKING CAPITAL ,%er- " #ine## nee!# #ome amo nt# of $orking capital/ T.e nee! for $orking capital ari#e# ! e to t.e time gap "et$een pro! ction an! realiDation of ca#. from #ale#/ T.ere i# an operating c-cle in%ol%e! in #ale# an! realiDation of ca#./ T.ere are time gap# in p rc.a#e of ra$ material an! pro! ctionH pro! ction an! #ale#H an! realiDation of ca#./ T. # $orking capital i# nee!e! for t.e follo$ing p rpo#e#4

A A A A A

)or t.e p rpo#e of ra$ material& component# an! #pare#/ To pa- $age# an! #alarie# To inc r !a--to-!a- e*pen#e# an! o%erloa! co#t# # c. a# office e*pen#e#/ To meet t.e #elling co#t# a# packing& a!%erti#ing& etc/ To pro%i!e cre!it facilitie# to t.e c #tomer/

A To maintain t.e in%entorie# of t.e ra$ material& $ork-in-progre##& #tore# an! #pare# an! fini#.e! #tock/ )or #t !-ing t.e nee! of $orking capital in a " #ine##& one .a# to #t !- t.e " #ine## n!er %ar-ing circ m#tance# # c. a# a ne$ concern req ire# a lot of f n!# to meet it# initial req irement# # c. a# promotion an! formation etc/ T.e#e e*pen#e# are calle! preliminare*pen#e# an! are capitaliDe!/ T.e amo nt nee!e! for $orking capital !epen!# pon t.e #iDe of t.e compan- an! am"ition# of it# promoter#/ Greater t.e #iDe of t.e " #ine## nit& generalllarger $ill "e t.e req irement# of t.e $orking capital/ T.e req irement of t.e $orking capital goe# on increa#ing $it. t.e gro$t. an! e*pen#ing of t.e " #ine## till it gain# mat rit-/ At mat rit- t.e amo nt of $orking capital req ire! i# calle! normal $orking capital/ T.ere are ot.er# factor# al#o infl ence t.e nee! of $orking capital in a " #ine##/ )ACTOR5 @,T,RMINING T3, WORKING CAPITAL R,G6IR,M,NT5 '/ NAT6R, O) 765IN,554 T.e req irement# of $orking i# %er- limite! in p "lic tilitn!ertaking# # c. a# electricit-& $ater # ppl- an! rail$a-# "eca #e t.e- offer ca#. #ale onlan! # ppl- #er%ice# not pro! ct#& an! no f n!# are tie! p in in%entorie# an! recei%a"le#/ On t.e ot.er .an! t.e tra!ing an! financial firm# req ire# le## in%e#tment in fi*e! a##et# " t .a%e to in%e#t large amt/ of $orking capital along $it. fi*e! in%e#tment#/ +/ 5II, O) T3, 765IN,554 Greater t.e #iDe of t.e " #ine##& greater i# t.e req irement of $orking capital/ 8/ PRO@6CTION POLICE4 If t.e polic- i# to keep pro! ction #tea!- "- acc m lating in%entorie# it $ill req ire .ig.er $orking capital/ 9/ L,NT3 O) PR@6CTION CECL,4 T.e longer t.e man fact ring time t.e ra$ material an! ot.er # pplie# .a%e to "e carrie! for a longer in t.e proce## $it. progre##i%e increment of la"or an! #er%ice co#t# "efore t.e final pro! ct i# o"taine!/ 5o $orking capital i# !irectlproportional to t.e lengt. of t.e man fact ring proce##/

:/ 5,A5ONAL5 FARIATION54 Generall-& ! ring t.e " #- #ea#on& a firm req ire# larger $orking capital t.an in #lack #ea#on/ ;/ WORKING CAPITAL CECL,4 T.e #pee! $it. $.ic. t.e $orking c-cle complete# one c-cle !etermine# t.e req irement# of $orking capital/ Longer t.e c-cle larger i# t.e req irement of $orking capital/

@,7TOR5 CA53 )INI53,@ GOO@5

RAW MAT,RIAL

WORK IN PROGR,55

</ RAT, O) 5TOCK T6RNOF,R4 T.ere i# an in%er#e co-relation#.ip "et$een t.e q e#tion of $orking capital an! t.e %elocit- or #pee! $it. $.ic. t.e #ale# are affecte!/ A firm .a%ing a .ig. rate of #tock t rno%er $ ill nee!# lo$er amt/ of $orking capital a# compare! to a firm .a%ing a lo$ rate of t rno%er/ =/ CR,@IT POLICE4 A concern t.at p rc.a#e# it# req irement# on cre!it an! #ale# it# pro! ct J #er%ice# on ca#. req ire# le##er amt/ of $orking capital an! %ice-%er#a/ >/ 765IN,55 CECL,4 In perio! of "oom& $.en t.e " #ine## i# pro#pero #& t.ere i# nee! for larger amt/ of $orking capital ! e to ri#e in #ale#& ri#e in price#& optimi#tic e*pan#ion of " #ine##& etc/ On t.e contrar- in time of !epre##ion& t.e " #ine## contract#& #ale# !ecline& !iffic ltie# are face! in collection from !e"tor an! t.e firm ma- .a%e a large amt/ of $orking capital/ 'K/ RAT, O) GROWT3 O) 765IN,554 In fa#ter gro$ing concern& $e #.all req ire large amt/ of $orking capital/ ''/ ,ARNING CAPACITE AN@ @IFI@,N@ POLICE4 5ome firm# .a%e more earning capacitt.an ot.er ! e to q alit- of t.eir pro! ct#& monopol- con!ition#& etc/ 5 c. firm# ma- generate ca#. profit# from operation# an! contri" te to t.eir $orking capital/ T.e !i%i!en! polic- al#o affect# t.e req irement of $orking capital/ A firm maintaining a #tea!- .ig. rate of ca#. !i%i!en! irre#pecti%e of it# profit# nee!# $orking capital t.an t.e firm t.at retain# larger part of it# profit# an! !oe# not pa- #o .ig. rate of ca#. !i%i!en!/ '+/ PRIC, L,F,L C3ANG,54 C.ange# in t.e price le%el al#o affect t.e $orking capital req irement#/ Generall- ri#e in price# lea!# to increa#e in $orking capital/ Ot.er# )ACTOR54 T.e#e are4

L L L L L L L

Operating efficienc-/ Management a"ilit-/ Irreg laritie# of # ppl-/ Import polic-/ A##et #tr ct re/ Importance of la"or/ 7anking facilitie#& etc/

MANAG,M,NT O) WORKING CAPITAL Management of $orking capital i# concerne! $it. t.e pro"lem t.at ari#e# in attempting to manage t.e c rrent a##et#& c rrent lia"ilitie#/ T.e "a#ic goal of $orking capital management i# to manage t.e c rrent a##et# an! c rrent lia"ilitie# of a firm in # c. a $a- t.at a #ati#factorle%el of $orking capital i# maintaine!& i/e/ it i# neit.er a!eq ate nor e*ce##i%e a# "ot. t.e #it ation# are "a! for an- firm/ T.ere #.o l! "e no #.ortage of f n!# an! al#o no $orking capital #.o l! "e i!eal/ WORKING CAPITAL MANAG,M,NT POLIC,5 of a firm .a# a great on it# pro"a"ilit-& liq i!it- an! #tr ct ral .ealt. of t.e organiDation/ 5o $orking capital management i# t.ree !imen#ional in nat re a# '/ +/ 8/ It concerne! $it. t.e form lation of policie# $it. regar! to profita"ilit-& liq i!it- an! ri#k/ It i# concerne! $it. t.e !eci#ion a"o t t.e compo#ition an! le%el of c rrent a##et#/ It i# concerne! $it. t.e !eci#ion a"o t t.e compo#ition an! le%el of c rrent lia"ilitie#/

WORKING CAPITAL ANALE5I5 A# $e kno$ $orking capital i# t.e life "loo! an! t.e centre of a " #ine##/ A!eq ate amo nt of $orking capital i# %er- m c. e##ential for t.e #moot. r nning of t.e " #ine##/ An! t.e mo#t important part i# t.e efficient management of $orking capital in rig.t time/ T.e liq i!itpo#ition of t.e firm i# totall- effecte! "- t.e management of $orking capital/ 5o& a #t !- of c.ange# in t.e #e# an! #o rce# of $orking capital i# nece##ar- to e%al ate t.e efficienc$it. $.ic. t.e $orking capital i# emplo-e! in a " #ine##/ T.i# in%ol%e# t.e nee! of $orking capital anal-#i#/

T.e anal-#i# of $orking capital can "e con! cte! t.ro g. a n m"er of !e%ice#& # c. a#4 '/ +/ 8/ Ratio anal-#i#/ ) n! flo$ anal-#i#/ 7 !geting/

'/

RATIO ANALE5I5

A ratio i# a #imple arit.metical e*pre##ion one n m"er to anot.er/ T.e tec.niq e of ratio anal-#i# can "e emplo-e! for mea# ring #.ort-term liq i!it- or $orking capital po#ition of a firm/ T.e follo$ing ratio# can "e calc late! for t.e#e p rpo#e#4 '/ C rrent ratio/ +/ G ick ratio 8/ A"#ol te liq i! ratio 9/ In%entor- t rno%er/ :/ Recei%a"le# t rno%er/ ;/ Pa-a"le t rno%er ratio/ </ Working capital t rno%er ratio/ =/ Working capital le%erage >/ Ratio of c rrent lia"ilitie# to tangi"le net $ort./

+/

)6N@ )LOW ANALE5I5

) n! flo$ anal-#i# i# a tec.nical !e%ice !e#ignate! to t.e #t !- t.e #o rce from $.ic. a!!itional f n!# $ere !eri%e! an! t.e #e to $.ic. t.e#e #o rce# $ere p t/ T.e f n! flo$ anal-#i# con#i#t# of4

a/ "/

Preparing #c.e! le of c.ange# of $orking capital 5tatement of #o rce# an! application of f n!#/

It i# an effecti%e management tool to #t !- t.e c.ange# in financial po#ition M$orking capital( " #ine## enterpri#e "et$een "eginning an! en!ing of t.e financial !ate#/

8/

WORKING CAPITAL 76@G,T

A " !get i# a financial an! J or q antitati%e e*pre##ion of " #ine## plan# an! police# to "e p r# e! in t.e f t re perio! time/ Working capital " !get a# a part of t.e total " !ge ting proce## of a " #ine## i# prepare! e#timating f t re long term an! #.ort term $orking capital nee!# an! #o rce# to finance t.em& an! t.en comparing t.e " !gete! fig re# $it. act al performance for calc lating t.e %ariance#& if an-& #o t.at correcti%e action# ma- "e taken in f t re/ 3e o"jecti%e $orking capital " !get i# to en# re a%aila"ilit- of f n!# a# an! nee!e!& an! to en# re effecti%e tiliDation of t.e#e re#o rce#/ T.e # cce##f l implementation of $orking capital " !get in%ol%e# t.e preparing of #eparate " !get for eac. element of $orking capital& # c. a#& ca#.& in%entorie# an! recei%a"le# etc/

ANALE5I5 O) 53ORT 2 T,RM )INANCIAL PO5ITION OR T,5T O) LIG6I@ITE T.e #.ort 2term cre!itor# of a compan- # c. a# # pplier# of goo!# of cre!it an! commercial "ank# #.ort-term loan# are primaril- intere#te! to kno$ t.e a"ilit- of a firm to meet it# o"ligation# in time/ T.e #.ort term o"ligation# of a firm can "e met in time onl- $.en it i# .a%ing # fficient liq i! a##et#/ 5o to $it. t.e confi!ence of in%e#tor#& cre!itor#& t.e #moot. f nctioning of t.e firm an! t.e efficient #e of fi*e! a##et# t.e liq i! po#ition of t.e firm m #t "e #trong/ 7 t a %er- .ig. !egree of liq i!it- of t.e firm "eing tie! 2 p in c rrent a##et#/ T.erefore& it i# important proper "alance in regar! to t.e liq i!it- of t.e firm/ T$o t-pe# of ratio# can "e calc late! for mea# ring #.ort-term financial po#ition or #.ort-term #ol%encpo#ition of t.e firm/ '/ +/ Liq i!it- ratio#/ C rrent a##et# mo%ement# Nratio#/

A( LIG6I@ITE RATIO5 Liq i!it- refer# to t.e a"ilit- of a firm to meet it# c rrent o"ligation# a# an! $.en t.e#e "ecome ! e/ T.e #.ort-term o"ligation# are met "- realiDing amo nt# from c rrent& floating or

circ lating a##t#/ T.e c rrent a##et# #.o l! eit.er "e liq i! or near a"o t liq i!it-/ T.e#e #.o l! "e con%erti"le in ca#. for pa-ing o"ligation# of #.ort-term nat re/ T.e # fficienc- or in# fficienc- of c rrent a##et# #.o l! "e a##e##e! "- comparing t.em $it. #.ort-term lia"ilitie#/ If c rrent a##et# can pa- off t.e c rrent lia"ilitie# t.en t.e liq i!it- po#ition i# #ati#factor-/ On t.e ot.er .an!& if t.e c rrent lia"ilitie# cannot "e met o t of t.e c rrent a##et# t.en t.e liq i!it- po#ition i# "a!/ To mea# re t.e liq i!it- of a firm& t.e follo$ing ratio# can "e calc late!4 '/ +/ 8/ C6RR,NT RATIO G6ICK RATIO A75OL6T, LIG6I@ RATIO

'/ C6RR,NT RATIO C rrent Ratio& al#o kno$n a# $orking capital ratio i# a mea# re of general liq i!it- an! it# mo#t $i!el- #e! to make t.e anal-#i# of #.ort-term financial po#ition or liq i!it- of a firm/ It i# !efine! a# t.e relation "et$een c rrent a##et# an! c rrent lia"ilitie#/ T. #& C6RR,NT RATIO ? C6RR,NT A55,T5 C6RR,NT LIA7ILIT,5 T.e t$o component# of t.i# ratio are4 '( +( C6RR,NT A55,T5 C6RR,NT LIA7ILIT,5

C rrent a##et# incl !e ca#.& marketa"le #ec ritie#& "ill recei%a"le#& # n!r- !e"tor#& in%entorie# an! $ork-in-progre##e#/ C rrent lia"ilitie# incl !e o t#tan!ing e*pen#e#& "ill pa-a"le& !i%i!en! pa-a"le etc/ A relati%el- .ig. c rrent ratio i# an in!ication t.at t.e firm i# liq i! an! .a# t.e a"ilit- to pa- it# c rrent o"ligation# in time/ On t.e .an! a lo$ c rrent ratio repre#ent# t.at t.e liq i!it- po#ition of t.e firm i# not goo! an! t.e firm #.all not "e a"le to pa- it# c rrent lia"ilitie# in time/ A ratio eq al or near to t.e r le of t. m" of +4' i/e/ c rrent a##et# !o "le t.e c rrent lia"ilitie# i# con#i!ere! to "e #ati#factor-/

CALC6LATION O) C6RR,NT RATIO

MR pee# in crore( e/g/ Eear C rrent A##et# C rrent Lia"ilitie# C rrent Ratio Interpretation4A# $e kno$ t.at i!eal c rrent ratio for an- firm i# +4'/ If $e #ee t.e c rrent ratio of t.e compan- for la#t t.ree -ear# it .a# increa#e! from +KK; to +KK=/ T.e c rrent ratio of compani# more t.an t.e i!eal ratio/ T.i# !epict# t.at compan-1# liq i!it- po#ition i# #o n!/ It# c rrent a##et# are more t.an it# c rrent lia"ilitie#/ +/ G6ICK RATIO G ick ratio i# a more rigoro # te#t of liq i!it- t.an c rrent ratio/ G ick ratio ma- "e !efine! a# t.e relation#.ip "et$een q ickJliq i! a##et# an! c rrent or liq i! lia"ilitie#/ An a##et i# #ai! to "e liq i! if it can "e con%erte! into ca#. $it. a #.ort perio! $it.o t lo## of %al e/ It mea# re# t.e firm#1 capacit- to pa- off c rrent o"ligation# imme!iatel-/ G6ICK RATIO ? G6ICK A55,T5 C6RR,NT LIA7ILIT,5 W.ere G ick A##et# are4 '( +( 8( Marketa"le 5ec ritie# Ca#. in .an! an! Ca#. at "ank/ @e"tor#/ +KK; ='/+> +</9+ +/>;4' 9/K84' +KK< +KK= =8/'+ '8&;/:< +K/:= 88/9= 9/K=4'

A .ig. ratio i# an in!ication t.at t.e firm i# liq i! an! .a# t.e a"ilit- to meet it# c rrent lia"ilitie# in time an! on t.e ot.er .an! a lo$ q ick ratio repre#ent# t.at t.e firm#1 liq i!itpo#ition i# not goo!/ A# a r le of t. m" ratio of '4' i# con#i!ere! #ati#factor-/ It i# generall- t.o g.t t.at if q ick a##et# are eq al to t.e c rrent lia"ilitie# t.en t.e concern ma- "e a"le to meet it# #.ort-term o"ligation#/ 3o$e%er& a firm .a%ing .ig. q ick ratio ma- not .a%e a #ati#factor- liq i!itpo#ition if it .a# #lo$ pa-ing !e"tor#/ On t.e ot.er .an!& a firm .a%ing a lo$ liq i!it- po#ition if it .a# fa#t mo%ing in%entorie#/

CALC6LATION O) G6ICK RATIO e/g/ Eear G ick A##et# C rrent Lia"ilitie# G ick Ratio Interpretation 4 A q ick ratio i# an in!ication t.at t.e firm i# liq i! an! .a# t.e a"ilit- to meet it# c rrent lia"ilitie# in time/ T.e i!eal q ick ratio i# '4'/ Compan-1# q ick ratio i# more t.an i!eal ratio/ T.i# #.o$# compan- .a# no liq i!it- pro"lem/ 8/ A75OL6T, LIG6I@ RATIO Alt.o g. recei%a"le#& !e"tor# an! "ill# recei%a"le are generall- more liq i! t.an in%entorie#& -et t.ere ma- "e !o "t# regar!ing t.eir realiDation into ca#. imme!iatel- or in time/ 5o a"#ol te liq i! ratio #.o l! "e calc late! toget.er $it. c rrent ratio an! aci! te#t ratio #o a# to e*cl !e e%en recei%a"le# from t.e c rrent a##et# an! fin! o t t.e a"#ol te liq i! a##et#/ A"#ol te Liq i! A##et# incl !e# 4 A75OL6T, LIG6I@ RATIO ? A75OL6T, LIG6I@ A55,T5 C6RR,NT LIA7ILIT,5 A75OL6T, LIG6I@ A55,T5 ? CA53 0 7ANK 7ALANC,5/ e/g/ Eear A"#ol te Liq i! A##et# C rrent Lia"ilitie# A"#ol te Liq i! Ratio Interpretation 4 T.e#e ratio #.o$# t.at compan- carrie# a #mall amo nt of ca#./ 7 t t.ere i# not.ing to "e $orrie! a"o t t.e lack of ca#. "eca #e compan- .a# re#er%e& "orro$ing po$er 0 long term in%e#tment/ In In!ia& firm# .a%e cre!it limit# #anctione! from "ank# an! can ea#il- !ra$ ca#./ 7( C6RR,NT A55,T5 MOF,M,NT RATIO5 MR pee# in Crore( +KK; 9/;> +</9+ /'< 4 ' /K> 4 ' +KK< '/<> +K/:= /': 4 ' +KK= :/K; 88/9= MR pee# in Crore( +KK; 99/'9 +</9+ '/; 4 ' +/8 4 ' +KK< 9</98 +K/:= '/= 4 ' +KK= ;'/:: 88/9=

) n!# are in%e#te! in %ario # a##et# in " #ine## to make #ale# an! earn profit#/ T.e efficienc- $it. $.ic. a##et# are manage! !irectl- affect# t.e %ol me of #ale#/ T.e "etter t.e management of a##et#& large i# t.e amo nt of #ale# an! profit#/ C rrent a##et# mo%ement ratio# mea# re t.e efficienc- $it. $.ic. a firm manage# it# re#o rce#/ T.e#e ratio# are calle! t rno%er ratio# "eca #e t.e- in!icate t.e #pee! $it. $.ic. a##et# are con%erte! or t rne! o%er into #ale#/ @epen!ing pon t.e p rpo#e& a n m"er of t rno%er ratio# can "e calc late!/ T.e#e are 4 '/ +/ 8/ 9/ In%entor- T rno%er Ratio @e"tor# T rno%er Ratio Cre!itor# T rno%er Ratio Working Capital T rno%er Ratio

T.e c rrent ratio an! q ick ratio gi%e mi#lea!ing re# lt# if c rrent a##et# incl !e .ig. amo nt of !e"tor# ! e to #lo$ cre!it collection# an! moreo%er if t.e a##et# incl !e .ig. amo nt of #lo$ mo%ing in%entorie#/ A# "ot. t.e ratio# ignore t.e mo%ement of c rrent a##et#& it i# important to calc late t.e t rno%er ratio/ '/ INF,NTORE T6RNOF,R OR 5TOCK T6RNOF,R RATIO 4

,%er- firm .a# to maintain a certain amo nt of in%entor- of fini#.e! goo!# #o a# to meet t.e req irement# of t.e " #ine##/ 7 t t.e le%el of in%entor- #.o l! neit.er "e too .ig. nor too lo$/ 7eca #e it i# .armf l to .ol! more in%entor- a# #ome amo nt of capital i# "locke! in it an! #ome co#t i# in%ol%e! in it/ It $ill t.erefore "e a!%i#a"le to !i#po#e t.e in%entor- a# #oon a# po##i"le/ INF,NTORE T6RNOF,R RATIO ? CO5T O) GOO@ 5OL@

A%erage in%entorIn%entor- t rno%er ratio mea# re# t.e #pee! $it. $.ic. t.e #tock i# con%erte! into #ale#/ 6# all- a .ig. in%entor- ratio in!icate# an efficient management of in%entor- "eca #e more freq entl- t.e #tock# are #ol! H t.e le##er amo nt of mone- i# req ire! to finance t.e in%entor-/ W.ere a# lo$ in%entor- t rno%er ratio in!icate# t.e inefficient management of in%entor-/ A lo$ in%entor- t rno%er implie# o%er in%e#tment in in%entorie#& ! ll " #ine##& poor q alit- of goo!#& #tock acc m lation# an! #lo$ mo%ing goo!# an! lo$ profit# a# compare! to total in%e#tment/ AF,RAG, 5TOCK ? OP,NING 5TOCK O CLO5ING 5TOCK + MR pee# in Crore(

Eear Co#t of Goo!# #ol! A%erage 5tock In%entor- T rno%er Ratio Interpretation 4

+KK; ''K/; <8/:> '/: time# +/= time#

+KK< 'K8/+ 8;/9+

+KK= >;/= ::/8: '/<: time#

T.e#e ratio #.o$# .o$ rapi!l- t.e in%entor- i# t rning into recei%a"le t.ro g. #ale#/ In +KK< t.e compan- .a# .ig. in%entor- t rno%er ratio " t in +KK= it .a# re! ce! to '/<: time#/ T.i# #.o$# t.at t.e compan-1# in%entor- management tec.niq e i# le## efficient a# compare to la#t -ear/ +/ INF,NTORE CONF,R5ION P,RIO@4

INF,NTORE CONF,R5ION P,RIO@ ? 8;: MN,T WORKING @AE5( in%entor- t rno%er ratio e/g/ Eear @a-# In%entor- T rno%er Ratio In%entor- Con%er#ion Perio! Interpretation 4 In%entor- con%er#ion perio! #.o$# t.at .o$ man- !a-# in%entorie# take# to con%ert from ra$ material to fini#.e! goo!#/ In t.e compan- in%entor- con%er#ion perio! i# !ecrea#ing/ T.i# #.o$# t.e efficienc- of management to con%ert t.e in%entor- into ca#./ 8/ @,7TOR5 T6RNOF,R RATIO 4 +KK; 8;: '/: +98 !a-# '8K !a-# +KK< 8;: +/= +K+ !a-# +KK= 8;: '/=

A concern ma- #ell it# goo!# on ca#. a# $ell a# on cre!it to increa#e it# #ale# an! a li"eral cre!it polic- ma- re# lt in t-ing p # "#tantial f n!# of a firm in t.e form of tra!e !e"tor#/ Tra!e !e"tor# are e*pecte! to "e con%erte! into ca#. $it.in a #.ort perio! an! are incl !e! in c rrent a##et#/ 5o liq i!it- po#ition of a concern al#o !epen!# pon t.e q alit- of tra!e !e"tor#/ T$o t-pe# of ratio can "e calc late! to e%al ate t.e q alit- of !e"tor#/ a( "( @e"tor# T rno%er Ratio A%erage Collection Perio!

@,7TOR5 T6RNOF,R RATIO ? TOTAL 5AL,5 MCR,@IT(

AF,RAG, @,7TOR5 @e"tor1# %elocit- in!icate# t.e n m"er of time# t.e !e"tor# are t rne! o%er ! ring a -ear/ Generall- .ig.er t.e %al e of !e"tor1# t rno%er ratio t.e more efficient i# t.e management of !e"tor#J#ale# or more liq i! are t.e !e"tor#/ W.erea# a lo$ !e"tor# t rno%er ratio in!icate# poor management of !e"tor#J#ale# an! le## liq i! !e"tor#/ T.i# ratio #.o l! "e compare! $it. ratio# of ot.er firm# !oing t.e #ame " #ine## an! a tren! ma- "e fo n! to make a "etter interpretation of t.e ratio/ AF,RAG, @,7TOR5? OP,NING @,7TOROCLO5ING @,7TOR +

e/g/ Eear 5ale# A%erage @e"tor# @e"tor T rno%er Ratio Interpretation 4 T.i# ratio in!icate# t.e #pee! $it. $.ic. !e"tor# are "eing con%erte! or t rno%er into #ale#/ T.e .ig.er t.e %al e# or t rno%er into #ale#/ T.e .ig.er t.e %al e# of !e"tor# t rno%er& t.e more efficient i# t.e management of cre!it/ 7 t in t.e compan- t.e !e"tor t rno%er ratio i# !ecrea#ing -ear to -ear/ T.i# #.o$# t.at compan- i# not tiliDing it# !e"tor# efficienc-/ No$ t.eir cre!it polic- "ecome li"eral a# compare to pre%io # -ear/ 9/ AF,RAG, COLL,CTION P,RIO@ 4 No/ of Working @a-# @e"tor# T rno%er Ratio T.e a%erage collection perio! ratio repre#ent# t.e a%erage n m"er of !a-# for $.ic. a firm .a# to $ait "efore it# recei%a"le# are con%erte! into ca#./ It mea# re# t.e q alit- of !e"tor#/ Generall-& #.orter t.e a%erage collection perio! t.e "etter i# t.e q alit- of !e"tor# a# a #.ort collection perio! implie# q ick pa-ment "- !e"tor# an! %ice-%er#a/ A%erage Collection Perio! ? 8;: MNet Working @a-#( @e"tor# T rno%er Ratio +KK; ';; '</88 >/; time# =/8 time# +KK< ':'/: '=/'> </: time# +KK= ';>/: ++/:

A%erage Collection Perio! ?

Eear @a-# @e"tor T rno%er Ratio A%erage Collection Perio! Interpretation 4

+KK; 8;: >/; 8= !a-# 99 !a-#

+KK< 8;: =/8 9> !a-#

+KK= 8;: </:

T.e a%erage collection perio! mea# re# t.e q alit- of !e"tor# an! it .elp# in anal-Ding t.e efficienc- of collection effort#/ It al#o .elp# to anal-#i# t.e cre!it polic- a!opte! "compan-/ In t.e firm a%erage collection perio! increa#ing -ear to -ear/ It #.o$# t.at t.e firm .a# Li"eral Cre!it polic-/ T.e#e c.ange# in polic- are ! e to competitor1# cre!it polic-/ :/ Working capital t rno%er ratio 4

Working capital t rno%er ratio in!icate# t.e %elocit- of tiliDation of net $orking capital/ T.i# ratio in!icate# t.e n m"er of time# t.e $orking capital i# t rne! o%er in t.e co r#e of t.e -ear/ T.i# ratio mea# re# t.e efficienc- $it. $.ic. t.e $orking capital i# #e! "- t.e firm/ A .ig.er ratio in!icate# efficient tiliDation of $orking capital an! a lo$ ratio in!icate# ot.er$i#e/ 7 t a %er- .ig. $orking capital t rno%er i# not a goo! #it ation for an- firm/ Working Capital T rno%er Ratio ? Co#t of 5ale# Net Working Capital

Working Capital T rno%er

5ale# Net$orking Capital

e/g/ Eear 5ale# Net$orking Capital Working Capital T rno%er Interpretation 4 T.i# ratio in!icate# lo$ m c. net $orking capital req ire# for #ale#/ In +KK=& t.e reciprocal of t.i# ratio M'J'/;9 ? /;K>( #.o$# t.at for #ale# of R#/ ' t.e compan- req ire# ;K pai#a a# $orking capital/ T. # t.i# ratio i# .elpf l to foreca#t t.e $orking capital req irement +KK; ';; :8/=< 8/K= +KK< ':'/: ;+/:+ +/9 +KK= ';>/: 'K8/K> '/;9

on t.e "a#i# of #ale/ INF,NTORI,5 MR#/ in Crore#( Eear In%entorie# Interpretation 4 In%entorie# i# a major part of c rrent a##et#/ If an- compan- $ant# to manage it# $orking capital efficienc-& it .a# to manage it# in%entorie# efficientl-/ T.e grap. #.o$# t.at in%entor- in +KK:-+KK; i# 9:P& in +KK;-+KK< i# 98P an! in +KK<-+KK= i# :9P of t.eir c rrent a##et#/ T.e compan- #.o l! tr- to re! ce t.e in%entor- pto 'KP or +KP of c rrent a##et#/ CA53 7NAK 7ALANC, 4 MR#/ in Crore#( Eear Ca#. 7ank 7alance Interpretation 4 Ca#. i# "a#ic inp t or component of $orking capital/ Ca#. i# nee!e! to keep t.e " #ine## r nning on a contin o # "a#i#/ 5o t.e organiDation #.o l! .a%e # fficient ca#. to meet %ario # req irement#/ T.e a"o%e grap. i# in!icate t.at in +KK; t.e ca#. i# 9/;> crore# " t in +KK< it .a# !ecrea#e to '/<>/ T.e re# lt of t.at it !i#t r" t.e firm# man fact ring operation#/ In +KK=& it i# increa#e! pto appro*/ :/'P ca#. "alance/ 5o in +KK=& t.e compan- .a# no pro"lem for meeting it# req irement a# compare to +KK</ @,7TOR5 4 MR#/ in Crore#( Eear @e"tor# Interpretation 4 @e"tor# con#tit te a # "#tantial portion of total c rrent a##et#/ In In!ia it con#tit te one t.ir! of c rrent a##et#/ T.e a"o%e grap. i# !epict t.at t.ere i# increa#e in !e"tor#/ It repre#ent# an e*ten#ion of cre!it to c #tomer#/ T.e rea#on for increa#ing cre!it i# competition an! compan- li"eral cre!it polic-/ +KK:-+KK; +KK;-+KK< +KK<-+KK= '</88 '>/K: +:/>9 +KK:-+KK; +KK;-+KK< +KK<-+KK= 9/;> '/<> :/K: +KK:-+KK; +KK;-+KK< +KK<-+KK= 8</': 8:/;> <:/K'

C6RR,NT A55,T5 4 MR#/ in Crore#( Eear C rrent A##et# Interpretation 4 T.i# grap. #.o$# t.at t.ere i# ;9P increa#e in c rrent a##et# in +KK=/ T.i# increa#e i# ari#e "eca #e t.ere i# appro*/ :KP increa#e in in%entorie#/ Increa#e in c rrent a##et# #.o$# t.e liq i!it- #o n!ne## of compan-/ +KK:-+KK; +KK;-+KK< +KK<-+KK= ='/+> =8/': '8;/:<

C6RR,NT LIA7ILITE 4 MR#/ in Crore#( Eear C rrent Lia"ilitInterpretation 4 C rrent lia"ilitie# #.o$# compan- #.ort term !e"t# pa- to o t#i!er#/ In +KK= t.e c rrent lia"ilitie# of t.e compan- increa#e!/ 7 t #till increa#e in c rrent a##et# are more t.an it# c rrent lia"ilitie#/ +KK:-+KK; +KK;-+KK< +KK<-+KK= +</9+ +K/:= 88/9=

N,T WOKRING CAPITAL 4 MR#/ in Crore#( Eear Net Working Capital Interpretation 4 Working capital i# req ire! to finance !a- to !a- operation# of a firm/ T.ere #.o l! "e an optim m le%el of $orking capital/ It #.o l! not "e too le## or not too e*ce##/ In t.e compan+KK:-+KK; +KK;-+KK< +KK<-+KK= :8/=< ;+/:8 'K8/K>

t.ere i# increa#e in $orking capital/ T.e increa#e in $orking capital ari#e# "eca #e t.e compan- .a# e*pan!e! it# " #ine##/

R,5,ARC3 M,T3O@OLOGE T.e met.o!olog-& I .a%e a!opte! for m- #t !- i# t.e %ario # tool#& $.ic. "a#icall- anal-De criticall- financial po#ition of to t.e organiDation4

I/ II/ III/ IF/ F/ FI/

COMMON-5II, PJL AJC COMMON-5II, 7ALANC, 53,,T COMPARTIF, PJL AJC COMPARTIF, 7ALANC, 53,,T TR,N@ ANALE5I5 RATIO ANALE5I5

T.e a"o%e parameter# are #e! for critical anal-#i# of financial po#ition/ Wit. t.e e%al ation of eac. component& t.e financial po#ition from !ifferent angle# i# trie! to "e pre#ente! in $ell an! #-#tematic manner/ 7- critical anal-#i# $it. t.e .elp of !ifferent tool#& it "ecome# clear .o$ t.e financial manager .an!le# t.e finance matter# in profita"le manner in t.e critical c.allenging atmo#p.ere& t.e recommen!ation are ma!e $.ic. $o l! # gge#t t.e organiDation in form lation of a .ealt.- an! #trong po#ition financiall- $it. proper management #-#tem/ I #incerel- .ope& t.ro g. t.e e%al ation of %ario # percentage& ratio# an! comparati%e anal-#i#& t.e organiDation $o l! "e a"le to conq er it# in efficiencie# an! make# t.e !e#ire! c.ange#/

ANALE5I5 O) )INANCIAL 5TAT,M,NT5

)INANCIAL 5TAT,M,NT54 )inancial #tatement i# a collection of !ata organiDe! accor!ing to logical an! con#i#tent

acco nting proce! re to con%e- an n!er-#tan!ing of #ome financial a#pect# of a " #ine## firm/ It ma- #.o$ po#ition at a moment in time& a# in t.e ca#e of "alance #.eet or ma- re%eal a #erie# of acti%itie# o%er a gi%en perio! of time& a# in t.e ca#e of an income #tatement/ T. #& t.e term Nfinancial #tatement#1 generall- refer# to t.e t$o #tatement# M'( T.e po#ition #tatement or 7alance #.eet/ M+( T.e income #tatement or t.e profit an! lo## Acco nt/ O7Q,CTIF,5 O) )INANCIAL 5TAT,M,NT54 Accor!ing to acco nting Principal 7oar! of America MAP7( #tate# T.e follo$ing o"jecti%e# of financial #tatement#4 '/ To pro%i!e relia"le financial information a"o t economic re#o rce# an! o"ligation of a " #ine## firm/ +/ To pro%i!e ot.er nee!e! information a"o t c.arge# in # c. economic re#o rce# an! o"ligation/ 8/ To pro%i!e relia"le information a"o t c.ange in net re#o rce# Mreco r#e# le## o"ligation#( mi##ing o t of " #ine## acti%itie#/ 9/ To pro%i!e financial information t.at a##et# in e#timating t.e learning potential of t.e " #ine##/ LIMITATION5 O) )INANCIAL 5TAT,M,NT54 T.o g. financial #tatement# are rele%ant an! #ef l for a concern& #till t.e- !o not pre#ent a final pict re a final pict re of a concern/ T.e tilit- of t.e#e #tatement# i# !epen!ent pon a n m"er of factor#/ T.e anal-#i# an! interpretation of t.e#e #tatement# m #t "e !one caref llot.er$i#e mi#lea!ing concl #ion ma- "e !ra$n/ )inancial #tatement# # ffer from t.e follo$ing limitation#4 '/ )inancial #tatement# !o not gi%en a final pict re of t.e concern/ T.e !ata gi%en in t.e#e #tatement# i# onl- appro*imate/ T.e act al %al e can onl- "e !etermine! $.en t.e " #ine## i# #ol! or liq i!ate!/ +/ )inancial #tatement# .a%e "een prepare! for !ifferent acco nting perio!#& generall- one -ear& ! ring t.e life of a concern/ T.e co#t# an! income# are apportione! to !ifferent perio!# $it. a %ie$ to !etermine profit# etc/ T.e allocation of e*pen#e# an! income !epen!# pon t.e per#onal j !gment of t.e acco ntant/ T.e e*i#tence of contingent a##et# an! lia"ilitie# al#o make t.e #tatement# impreci#e/ 5o financial #tatement are at t.e mo#t interim report# rat.er t.an t.e final pict re of t.e firm/

8/ T.e financial #tatement# are e*pre##e! in monetar- %al e& #o t.e- appear to gi%e final an! acc rate po#ition/ T.e %al e of fi*e! a##et# in t.e "alance #.eet neit.er repre#ent t.e %al e for $.ic. fi*e! a##et# can "e #ol! nor t.e amo nt $.ic. $ill "e req ire! to replace t.e#e a##et#/ T.e "alance #.eet i# prepare! on t.e pre# mption of a going concern/ T.e concern i# e*pecte! to contin e in f t re/ 5o fi*e! a##et# are #.o$n at co#t le## acc m late! !eprecation/ Moreo%er& t.ere are certain a##et# in t.e "alance #.eet $.ic. $ill realiDe not.ing at t.e time of liq i!ation " t t.e- are #.o$n in t.e "alance #.eet#/ 9/ T.e financial #tatement# are prepare! on t.e "a#i# of .i#torical co#t# Or original co#t#/ T.e %al e of a##et# !ecrea#e# $it. t.e pa##age of time c rrent price c.ange# are not taken into acco nt/ T.e #tatement are not prepare! $it. t.e keeping in %ie$ t.e economic con!ition#/ t.e "alance #.eet lo#e# t.e #ignificance of "eing an in!e* of c rrent economic# realitie#/ 5imilarl-& t.e profita"ilit- #.o$n "- t.e income #tatement# ma- "e repre#ent t.e earning capacit- of t.e concern/ :/ T.ere are certain factor# $.ic. .a%e a "earing on t.e financial po#ition an! operating re# lt of t.e " #ine## " t t.e- !o not "ecome a part of t.e#e #tatement# "eca #e t.e- cannot "e mea# re! in monetar- term#/ T.e "a#ic limitation of t.e tra!itional financial #tatement# compri#ing t.e "alance #.eet& profit 0 lo## AJc i# t.at t.e- !o not gi%e all t.e information regar!ing t.e financial operation of t.e firm/ Ne%ert.ele##& t.e- pro%i!e #ome e*tremel- #ef l information to t.e e*tent t.e "alance #.eet mirror# t.e financial po#ition on a partic lar !ata in line# of t.e #tr ct re of a##et#& lia"ilitie# etc/ an! t.e profit 0 lo## AJc #.o$# t.e re# lt of operation ! ring a certain perio! in term# re%en e o"taine! an! co#t inc rre! ! ring t.e -ear/ T. #& t.e financial po#ition an! operation of t.e firm/

)INANCIAL 5TAT,M,NT ANALE5I5 It i# t.e proce## of i!entif-ing t.e financial #trengt. an! $eakne## of a firm from t.e a%aila"le acco nting !ata an! financial #tatement#/ T.e anal-#i# i# !one CALC6LATION5 O) RATIO5 Ratio# are relation#.ip e*pre##e! in mat.ematical term# "et$een fig re#& $.ic. are connecte! $it. eac. ot.er in #ome manner/

CLA55I)ICATION O) RATIO5 Ratio# can "e cla##ifie! in to !ifferent categorie# !epen!ing pon t.e "a#i# of cla##ification T.e tra!itional cla##ification .a# "een on t.e "a#i# of t.e financial #tatement to $.ic. t.e !etermination of ratio# "elong#/

T.e#e are4A A A Profit 0 Lo## acco nt ratio# 7alance 5.eet ratio# Compo#ite ratio#