Galla Foods Private Limited

PROJECT REPORT ON

WORKING CAPITAL MANAGEMNET AT GALLA FOODS

BY RAMACHANDRAN.M (M.B.A) SATHYABAMA SCHOOL OF MANAGEMENT STUDIES FINAL SEMESTER PROJECT (BATCH OF 2009)
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INTRODUCTION

Working capital management is concerned with the problems that arise in attempting to manage the current assets, the current liabilities and the interrelation ship that exists between them. The management of current assets is similar to that of fixed assets in the sense that in both cases a firm analyses their effects on its return and risk. The current assets refer to those assets which in the ordinary course of business can be, or will be, converted into cash with in one year. The major current assets are cash, marketable securities, accounts receivable and Inventory. Current liabilities are those liabilities which are intended, at their inception, to be paid in the ordinary course of business, with in a year. The basic current liabilities are accounts payable, bills payable, bank over draft and outstanding expenses. Working capital, it ensures normal and smooth working of a business unit. It is required for the purchase for raw materials and stores, payment of wages and other regular 'expenses like electricity, water charges, taxes etc working capital is necessary when regular manufacturing activities are under taken and normal production activities are conducted. Such capital is required for a short period as it is recovered from the customers when the products are sold to them.

The management of fixed assets and current assets are differs in 3 ways. In managing fixed assets, time is a very important factor, consequently, discounting and

compounding techniques playa significant role in capital budgeting and a minor one in the management of current assets. The large holding of current assets especially cash, strengthens the firms liquidity position (and reduces riskiness), but also reduces that over all profitability. Thus, a risk - return trade off is involved in holding current assets. The level of fixed as well as current assets depends 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 current assets.

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DEFINITION Working capital refers to manage the firm current assets & current liabilities in such a way that a satisfactory level of working capital is maintained. enterprise. Working capital means a sum of current assets only" - Field, Backer & Malott Current assets refers to those assets which to the ordinary course of business can be or will be turned into cash within one year without undergoing a diminution in value and without disrupting the operations of the firm. The major current assets are cash marketable securities accounts receivables and their inception to be paid in the ordinary course of business with in a year out of current assets or earnings of the concern. The basic Current Liabilities are Bills Payables, Bank Overdrafts and Outstanding expenses. The goal of working capital management is to manage the firms current assets and current liabilities in such a way that a satisfactory level of working capital is maintained. Thus the current assets should be large enough to cover its current liabilities in order to ensure a reasonable margin of safety. Each of the current assets must be efficiently in order to maintain the liquidity of the short term be managed efficiently in order to maintain the liquidity of the short term sources of financing must be continuously managed to ensure that they are obtained and used in a best possible way. Therefore interaction between current assets and current liabilities in the main theme of Working Capital Management. Cubing M Y Khan & PK. Jain Working capital is an amount of fun is necessary to cover the cost of operating the

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Galla Foods Private Limited Profits are earned with the help of assets, which are partly fixed, and partly Current Working Capital some times referred to as CIRCULATING CAPITAL.

CONCEPTS GROSS WORKING CAPITAL

The Gross working capital is the firm investment in Current Assets. The Current Assets are the Assets which can be converted into cash with in an accounting year and include cash within an accounting year and include cash, short term securities like Debtors, Bills Receivables and Inventory. Gross Working capital constituted Current Assets i.e., (1) Inventory which are further classified into: (a) Raw Materials (b) Work in progress (c) Finished Goods (2) Accounts Receivables (a) Cash and Bank balance Any business firm needs to provide it with enough of these current assets. So that it an carry on its business operation smoothly. These Assets are essential circulating in nature. That is to say that the business buys Raw Materials with cash Receivable as a result or cash sales. NET WOIRKING CAPITAL:

Net Working Capital refers to the difference between current assets and current liabilities are those claims outsiders which are expected to mature are payment within an accounting year and include creditors Bills payable and outside expenses. Net Working helps the management to look after the permanent sources for its financing working capital under this approach does not increase with increase in short term borrowing. Profits are earned with the help of assets which are partly fixed, and partly working capital some times referred to as CIRCULATING CAPITAL WORKING CAPITAL ========================================================= Working Capital Management

Galla Foods Private Limited

Proprietors Fund Cash

Cash from Debtors

Creditors

Debtors

NEED FOR WORKING CAPITAL: Business firms aim at maximizing the wealth of shareholders. In its endeavor to maximize share holders wealth a firm should earn sufficient return from its operation earning a steady amount of profits required successfully sales activity. The firm has to invest enough funds in current assets for the success of sales activity current assets are needed because sales dont convert into cash instantaneously there is always an operating cycle involved in the conversion of sales into cash. Level of working capital is necessary on a continuous and uninterrupted basis. This requirement is referred to as permanent of fixed working capital. Any amount over the above the permanent level of working capital is temporary, fluctuating or variable working capital. This is portion of the required working capital is needed to meet fluctuating in demand consequent upon changes in production and sales as a result of seasonal changes.

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Temporar y

Permanent

Time

The above figure shows permanent level is fairly constant, white temporary working capital is fluctuating some times increasing and some times decreasing in accordance with seasonal demands, in the case an expanding firm the permanent working capital may not be a horizontal. This is because the demand for permanent current assets might be increasing or decreasing supports a rising level of activity in that the line should be a rising one. It is very clear that the basic objective of financial management is to maximize share holders wealth. It is possible only when the company earns sufficient profits. The amount of such profit largely depends upon the magnitude of sales. However, sales do not convert into cash instantaneously. There is always a time gap between the sale of goods and receipt of cash. Working capital is required for this period in order to sustain the sales activity. In case adequate working capital is not available for this period, the company will not be in a position to sustain the sales since it may not be in a position to purchase raw materials, pay wages and other expenses required for manufacturing the goods to be sold. Technically, this is referred to as the operating or cash cycle.

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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 involves 3 phases. Acquisition of resources: as raw materials, labour, power and fuel etc. Manufacture of the product: Sale of the product: either for which includes conversion of raw material into work-in-progress into finished goods. cash or on credit. Credit sales create account receivable for collection. The firm is 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 as there is hardly a matching between cash inflows and outflows. Cash is also held to meet any future exigencies stocks of raw material and work-in-process are kept to ensure smooth production and to guard against nonavailability of raw-materials and other components. The firm holds stock of finished goods to meet the demands 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. Thus, a firm makes adequate investment in inventories, and debtors, for smooth, uninterrupted production and sale. Accounts Receivables such

Cash

Finished Goods

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Galla Foods Private Limited

OPERATING CYCLE
Conversion of cash into raw materials Conversion of raw-material into work-in-progress Conversion of work-in-process into finished goods. Conversion of finished goods into accounts receivable and Conversion of accounts receivable into cash.

PERMANENT WORKING CAPITAL It is a certain minimum level of working capital on a continuous and uninterrupted basis. It is also called as fixed working capital. The operating cycle is a continuous process and therefore, 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 the firm to carry on its business operations. This minimum level of current assets is referred to as permanent working capital. It is permanent in the same way as the firm's fixed assets are depending upon the changes in production and sales. The need for working capital, over and above permanent working capital, will fluctuate. TEMPORARY WORKING CAPITAL It is the working capital needed to meet seasonal as well as unforeseen requirements. It is also called fluctuating (or) variable working capital. The extra working capital, needed to support the changing production and sales activities is called temporary working capital. Both kinds of working capital - permanent and temporary are necessary to facilitate production and sale through the operating cycle, but temporary working capital is created by the firm to meet liquidity requirements. The following figure illustrates difference between permanent and temporary working capital.

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Temporary Working Capital

Amount of working capital

Permanent Working capital

Time

The diagram explains that the permanent working capital is fairly constant while temporary working capital is fluctuating increasing and decreasing in accordance with seasonal demands. In the case of expanding on growing firm, the permanent working capital line may not be horizontal. This is because the demand for permanent current assets might be increasing (or decreasing) to support a rising level of activity. In that case the line would be a rising one as shown in the diagram. Temporary Working Capital

Amount of working capital

Permanent working capital

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Time

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INDUSTRY PROFILE

Absence of a market strategy, inadequate export infrastructure and unstable supply base are giving Indian mango growers a run for their money, more Soils, Nutrition, and Fertilizer in the international markets where the Indian king of fruits is still to take its place. While India produces over 11m metric tones of mangoes annually around 63% of world produce, its export share is just 0.11%. However, APEDA has identified UK, Germany, the Holland, France, Italy and Belgium for mango exports and plans aggressive marketing strategies there. APEDA is making all efforts to make available latest packaging and processing technology for our produce. EU duty slices local mango pulp exports EU, the main market for India, has imposed a 3.8% import duty on Indian pulp this year, already making Indian pulp mango prices less competitive than Latin American pulp. The EU preferential treatment to Latin American pulp, along with the high fresh fruit prices appear to be affecting negatively Indias traditional pulp export market in the EU, CIS, Africa and in West Asia. Getting high on mango Mango champagne concocted by Indias Agricultural and Processed Food Products Export Development Authority, launched a mango promotion campaign in London with a mango dinner. At the launch party at Bombay Brasserie in Central London, there was an overkill of the mango magic as guests were treated to an assortment of mango products-from mango lassi to pickles, chutneys and an all mango desert, not forgetting the mango champagne, which as a connoisseur remarked, was neither mango nor champagne. Half-a-dozen commercial varieties of mango, including alphonso, banganpalli, dushehari, langra and chausa are being promoted as Indias royal heritage. A brochure explaining the variety of uses to which mango can be put ======================================================= == Working Capital Management

Galla Foods Private Limited consumed as a table fruit, as desert, or often between meals and processed for preparing pulps, juices, nectars, spuashes and jams is being handed our to traders and potential mango consumers. They are being told that it is Indias kind fruit and India is the largest producer of mangoes. Bihar government to provide litchi farmers with mobile Bihar is giving its litchi farmers facilities to store, process and transport the succulent fruit with the hope of doubling exports to over 200 tonnes this summer. The state government will provide the farmers with mobile refrigerator vans and cold storage facilities, said APEDA officials. Each van has a five-tonne capacity. Litchi is cultivated in about 60,000 hectares in the country and Bihar contributes 74% of the total produce, mainly from Muzaffarpur district. According to the National Horticulture Board, countrys total litci production in 98-99 was 428.900m tones. Due to the absence of adequate cold storage facilities and refrigerated transport, hardly 1% of litchi farmers in Bihar export their produce. A team of experts from Kolkata suggested setting up precooling and sulphur treatment facilities in existing cold storage plants to prevent waste. It also recommended opening some new cold storage facilities. The centre is to provide concessions on export and excise duties to litchi products from the export zone. The Bihar government has also sanctioned the provision of 67 acres for a litchi research centre near Muzaffarpur under the litchi export zone programme. The centre would develop and grow new strains of high yield litchi seeds for supply to farmers at subsidized rates. Along with grand production of grapes, pomegranates are also increasing in production in Nasik District. In Ratnagiri also, cashew and mangoes are having abundant yields. Foreign countries are exporting about 70-80% of processed food, while in India it is only about 2%. In the favor of the same, NABARD officials just now have taken a primary survey whose report is supposed to come out within a months period. The average production, requirement of food processing units, required economic policies etc points are covered in the survey. Agricultural officers, the farmers engaged in the ======================================================= == Working Capital Management

Galla Foods Private Limited development of Wine Park, bank representative etc persons are being visited in the survey. A workshop will also be held if there is such need. Climate conditions of the state are very much suitable for cultivation of Lemon & Ginger in large scale and processing technology is available. Technical manpower in the field of Lemon & Ginger cultivation and processing are available in the State. There shall be single window clearance whenever necessary for speedy implementation of the project. Logistic support shall be provided by the State Government whenever necessary.

COMPANY PROFILE
Galla Foods Private Limited belongs to an innovative, and successful AmaraRaja Group Companies, is now progressing in establishing a 100% Export Oriented World class food processing Unit near RangamPet, Puthalapattu mandal, Chittoor dt, AP. The Company is aiming to establish one of the best food processing industries in India on par with the International Standards. India is one of the largest producers of Tropical fruits in the world and has established the image in the international market. Due to its own advantages in climatic conditions, India can produce wide variety of fruits and vegetables. Unfortunately, the processing technologies and storage facilities, available are still primitive and enough importance has not been accorded for this industry, which has tremendous growth potential. Only recently, both the central and state governments have realized the importance and taken steps through wide variety of measures for the growth of the industry. Andhra Pradesh, where the plant is coming up, is known for variety of quality fruits particularly for Mango, Papaya, Guava, etc., With the support of Govt. bodies, many small-scale industries (overall capacity of upto 1000M.Tons of fruit pulp by canning process) have been established since 1970 by leading formers and fruit traders for processing the tropical fruits. In the early 1970s India started exporting this tropical fruit products to Gulf countries. However, could not ======================================================= == Working Capital Management

Galla Foods Private Limited able to meet advanced international market requirements to enter into Europe and American countries due to inferior product quality. Even the response in the GULF countries has not seen the potential growth year by year due to quality related issues. From the year 1995, Indian manufacturers realized on the technological gap in meeting the international standards when compared with competitive producers of same products from North America, Peru, Brazil & Egypt. Necessary steps were then initiated in establishing the new technologies called Aseptic Fruit Pulp to compete in international markets. Nevertheless, today there are many small scale industries producing low quality fruit pulps (canned pulp) and struggling to approach advanced international markets. Though, the successful organizations like Foods & Inns, Clean foodsetc could establish Aseptic process with latest technologies at that point of time, the plants have not been designed completely to meet international standards. Ever since, the AmaraRaja Group is committed to bring innovative/advanced technologies/concepts/manufacturing practices to India and produce premium quality products in any area where ever we have been. This has been well demonstrated in our earlier projects and group will continue to maintain its commitment in all the projects all the time. As part of Groups business diversification, GFPL is being established with latest technological developments in Fruit processing. GFPL is confident that, this new approach will bring revolutionary changes in present Industry practices and translates the benefits to Formers, Industry and Nation.

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NEED
In order to maintain flows of revenue from operations every firm need certain amount of current assets. For example cash is required to pay expenses or to meet obligations for service received etc., by a firm on the identical plan inventories are required to provide the line between production and sales. Similarly accounts receivables generate when goods are sold on credit. Need less to maintain cash, bank, debtors, bills receivables, closing stock including raw materials, working progress, finished goods repayment and certain other deposits and investments which are temporary in nature represents current assets of a firm. OBJECTIVES PRIMARY OBJECTIVE To study the working capital management in galla foods pvt ltd in puthalapattu SECONDARY OBJECTIVE To know the current assets position over the past years To find out the liquidity position of the company through working capital. To study the operating efficiency of the company

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RESEARCH METHODOLOGY

Exploratory research design has been adopted in the present study. Exploratory research design largely interprets the already available information; it makes use of secondary data and lays emphasis on analysis and interpretation of the existing and available information SOURCES OF DATA Primary Data Primary data regarding the unit was collected from the consultant departments like Finance Departments. Secondary Data Secondary data regarding the unit was collected from the records and documents of the company. Information about GFPL was obtained from newspapers, booklets, websites related to the topic.

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SCOPE The present study is confined to only Galla Foods Private Limited. The time study considered for performing the study is three years i.e., from 2005-2008 various components of working capital i.e. cash, receivables, inventory management has been analyzing taking into consideration the information both the post and present with respect to the performance of the company.

LIMITATIONS The study on working capital has the following limitations. The research is restricted to Chittoor town only. The analysis is carried out on the basis of the figures present in the internal records only. The study is based on only the data given by the Finance Department which has its own limitations. Detailed analysis could not be carried for the project work because of limited time span.

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