1.1.

INTRODUCTION OF THE COMPANY

KELTRON Component Complex Ltd (KCCL) was incorporated on 8th October 1974 as an associated company of Kerala State Electronic Development Corporation Limited (KSEDC). It started its operations in the year 1976. KCCLs head quarters situated at Trivandrum. It is public limited company established for the manufacture of aluminum electrolytic capacitors of KSEDC on 28th August 1986. A developing economy requires an increasing volume of investments not only in fixed asset but also in working capital. The requirement of working capital is that portion of total capital of business, which is employed in short term operation. A deeper understanding of the importance of working capital can lead not only material savings in the economical use of capital but can also assert in furthering the ultimate aim of business. Incase of trading concern, the working capital requires depends up on the length of time needed To convert cash into inventories, inventories in to account receivables and account receivables into cash.

For smaller firm working capital management is over more important area and one of the main reasons is that current asset historically represents more than 60% of the total asset of the firm. To avoid liquidity crisis, there must be proper management of working capital.

[1]

KELTRON
Keltron is of the few companies in India which manufactures a wide range of electronic products starting from discrete components to sub assemblies to equipment and systems. This strength combined with the technical manpower resources in research and development, product development, and turnkey project management, has enabled Keltron to emerge as a total solutions provider integrating talent and technology to design workable solutions it suite the specific needs of its customers.

WORKING CAPITAL
The management of working capital plays an important role in maintaining the financial health of the firm during the normal course of the business. The working capital management is a loop ,which starts from cash and marketable securities account , goes through the current accruals account as direct labour and materials are purchased and used to produce inventory, which is in turn sold and generates accounts receivables, which are finally collected to replenish cash. Working capital is the life blood of the organization. It should be optimal, it means if working capital is high, it will be idle and if it is too low, it is very difficult to perform their current operation. It will also affect the goodwill of the firm. Efficient working capital management implies two closely related actions. First the policy may be set regarding the desired levels for each asset component. Second an administrative frame work must be established for managing and controlling these assets within the policy guideline. Working capital management policies of a firm have a great impact on its profitability, liquidity and structural health of the organization.

[2]

WORKING CAPITAL MANAGEMENT OF KCCL

Working capital management of KCCL can be best analyzed by analyzing the component involved in the working capital. Stock of raw material, stores and spares, finished goods, and stock in process have been valued at cost or net realizable value, which ever is low. Major parts of raw material used by KCCL are imported from different countries like Japan, Korea, Taiwan, China etc, where ever is cheap. Another important component is receivables. Major sales are on credit basis, because of stiff competition. Credit period is 75 days and most of the transactions are through banks.

OUT COME OF THE STUDY

Even though there are different studies conducted about the working capital management in KCCL, through this study we can understand more about the current position of the firm and what are the main reasons and how can we improve the current position of the Keltron Component Complex Ltd.

1.2.

OBJECTIVES OF THE STUDY

The study was conducted to cover the following objectives To identify the trend of working capital in KCCL. To forecast the trend of working capital. To find out the long-term solvency position of the organization. To ascertain liquidity position of Keltron by using liquidity ratios. To analyze and evaluate profitability position of the concern by using Profitability Ratios. To analyze schedule of Changes in Working Capital. To analyze the earning capacity of the organization.

[3]

1.3.

PERIOD OF STUDY
The period of study covered by the present study is 5 accounting year (2005-2009)

1.4.

LIMITATIONS OF STUDY
The researcher had to encounter deferent constraint in completing this study. The first and foremost among them was time constraint followed by non availability of data. The later reason has been huddle in resorting to industry comparison of standard and making a comparative evaluation of company study. However care has been taken to collect maximum possible information for the purposes of evaluation of working capital adequacy and financial stability of the company.

1.5.

SCOPE OF THE STUDY

This study is intended to obtain a general view about the working capital management in KELTRON COMPONENT COMPLEX LIMITED, KANNUR. The major component of working capital like inventories, receivable, cash and marketable securities, payables and term loan have give component wise importance to the study. The main attempt is to know the firms ability to fulfill its short term obligation.

1.6.

STATEMENT OF PROBLEM
Every business need fund for two purpose; one for the establishment and the other

to carry out the day to day operation. It needs some amount of working capital to meet daily obligation. The need for working capital arises due to the time gap between the production and realization cash from sales. Management of working capital is concerned with the problem that arises in attempting to manage current asset, current liability and the inter relationship that exist between them. Effective and efficient working capital management of a firm has a great effect on its profitability, liquidity and the structural health of organization

[4]

2.1

INDUSTRY PROFILE
Electronics is the study of properties and behavior of electronics and other carriers of electric charge especially with reference to technological and industrial applications. Electronics play a vital role in the economic and social development of a country, especially the liberalization policy followed by the government, has enabled the development of electronic industries in our country. The electronic Devices Industry leads the Food Chain, Electronic System and the Market Sector within the food chain.

Electronic Devices

Semiconductors

Semiconductors Production Equipment

Materials

In the Chain, Semiconductor follows Electronics. They play an important role in the manufacture of competitive Electronic System. The next two parts of the Chain are again very closely related Semiconductor market. The contribution made by Keltron to a national electronics production is very significant. Year after year Keltrons share to national production is declining. The reason may be due to existence of high wage system and Government policy. The main objective [5]

of Keltron was to set up Electronic Industrial unit all over Kerala. Electronics occupy a key position in modern science and technology. It has a vital role to play in the field of automatic energy education, agricultural and employment generation.

Following are some of the units, which manufacture electrolytic capacitors. Kerala Statate Electronic Development Corporation ltd. Meghalaya Industrial Development Corporation Ltd. Navabharath enterprises, Hyderabad Pieco Electronics And Electronicals Bombay Rescon Manufacturing Pvt.Ltd, Pune Sab Electronics Devices, Sahidabad Webelsen Capacitors Ltd, Culcutta In addition to the above, there are quite a few units manufacturing electrolytic capacitors in small scale. The average capacity of each manufacturer in small scale is in between .5 to 3 million numbers of electrolytic capacitor per annum. According to a recent report on the Indian capacitor industry prepared for Electronic Component Industries Association (ELCINA) by the year 2006 the total demand would be worth Rs.2750. The current indigenous production is estimated to be worth 1200mn. The gap is met by imports. Also the import duty on components including capacitors is expected to be brought down to 0% as per the WTO agreement. As such the market prices are bound to fall further even while the demand increases.

2.1.1.

INDIAN MARKET FOR ELECTRONIC DEVICES

Despite having population over one billion people India has a relatively small electronic market being ranked twenty-sixth worldwide. In terms of production the country is ranked twenty-ninth. [6]

The consumer electronics sector dominates the industry and has benefited from a massive and expanding market. Television sets account for 22% of overall production. Electronic imports have steadily increased in recent years and accounted for 41% of the market in 2001, up from 16% in 1993. In contrast exports account only for 18% of the production.

2.1.2.

WORLD MARKET FOR ELECTRONIC PRODUCTS

Faster, Better and Cheaper is the slogan that drives todays electronic industry.

Consumers are buying goods at a faster rate than the past. Electronic industry now follows the slogan Innovate or Perish. Thus we can see number of novel and modified products in the market today. Electronics development has not been a steady one it is cyclic in nature. There is much fluctuation in demand and supply. But since future belongs to the Electronic Industry as for its providing us compact, simple and innovative products the demand for the electronic devices can be steadied after some time. Keltron is the sole manufacturing unit of capacitors in Kerala. These are some of the units, which manufacture electrolyte capacitors. Meghalaya Industrial Development Corporation Limited Navabharath Enterprises, Hyderabad Pieco Electronics and Electricals Limited, Bombay Rescon manufacturing Private Limited, Pune Sab Electronic Devices, Sahidabad Webel Sen Capacitors limited, Calcutta In addition to the above, there are quite a few units manufacturing electrolytic capacitors in small scale. The average capacity of each manufacturer in small scale is in between 0.5 to 3 million numbers of electrolytic capacitors per annum. As per the information available, all the major units of capacitors are working well. In fact, some of the major units have taken effective steps for their existing units. The small-scale industries are however facing some problems. The major problem they are facing is the non-availability of indigenous good quality raw materials. The organized sector is using 90% to 98% imported raw materials. The leading Asian products of AEC are as follows, Japan [7]

Nippon Chemicon Nichicon Elna Shin EL, Tsushin Kogya Hitachi Condenser Toshin Kobyo

South Korea Korea Elna Samhwa Electronics Samsung Dong Sung Kaimei Electronics Yeong hong Matsushita Taiwan Teapo Anodia etc. The basic technology for manufacturing of Aluminum Electrolytic Capacitors has changed a little since the first high performance Aluminum Electrolytic Capacitors using formed and etching aluminum foils was developed in 1930s. However, over the years, especially with the advent of modern equipment utilizing integrated circuits and with the demand imposed by improved and consistence performance over extended period of time, substantial adoption and process improvement have been made. The leading overseas manufacturers to the following developments are paying maximum attention. Improved materials and their performance Automation Reliability and quality assurance Low ESR Higher temperature capability Miniaturization [8]

Taiwan

For the Indian Aluminum Electrolytic Capacitors industry to improve its profitability of the company, the following is required. Increased the capacities with capacity in excess of indigenous demand stated for exports Further automation of the system resulting in high international standards yields Availability at competitive cost of international standard raw materials preferably from indigenous source All these factors are closely interrelated. Basic technology is to of a fairly high order. The manufacture of ECs in the country is being more or less led by three or four large units which also serve as the repository of basic technology, some acquired through foreign collaboration and some by other means such as through drawing/designs and diffusion of skilled personnel. The small size units squeezed out of the competition arising from both foreign and domestic companies. Faster, better, cheaper is the slogan of the electronic industry

2.1.3.

MARKET TREND IN ALUMINUM ELECTROLYTIC

The primary market for Aluminum Electrolytic Capacitors remains the consumer

CAPACITOR INDUSTRY
himself. Electronics with Asia pacific the largest region, the area benefiting most from the move by Japanese manufacturers to locate consumer electronics production offshore and the strong growth in the indigenous manufacturing base. Flat panel displays, digital cameras and automotives will drive the growth. A number of new markets are emerging as performance improves. Axial leaded aluminum capacitors are now viewed as a mature technology with the number of manufacturers discontinuing production. The medium to longer-term aluminum will faced continued competition from base metal multilayer ceramic, developments in super specialty applications. The reason indigenous production is increased day by day leading to an increased in demand. The gap here is met by imports. Also the import duty is supposed to be brought down as per the WTO agreement. As such the market prices are bound to fall further even while the demand increases. Thus even with complexities Electronic Industry has a bright future ahead!

[9]

2.2 2.2.1.

COMPANY PROFILE HISTORY IN BRIEF

Keltron Components Complex Ltd (KCCL) was incorporated on 8th October

1974 as an associate company of Kerala State Electronics Development Corporation Ltd (KSEDC). A plant for the manufacture of 18 million pieces of Aluminum Electrolytic Capacitor was established in collaboration with M/s NV Sprague eletromag Belgium, which was a subsidiary of Sprague Electric co., USA. The company went in to commercial production in 1978. the expansion of capacitor plant was undertaken in a phased manner to 55 million pieces by 1984-85 and 150 million pieces by 1990-91. the company became a subsidiary of KSEDC increased from 8 million pieces in 1978-79 to 145 million pieces in 1999-2000. .

2.2.2. PRODUCTS
The company started with manufacture of Axial, radial and can type DC capacitors. Subsequently products were added with in house development. At present the company manufactures a wide range of Aluminum Electrolytic DC and AC capacitors as below,

2.2.3.

APPLICATION/ CUSTOMERS
Electrolytic capacitors are widely used in TV sets, VCP, VCR, Radios, Tape

Recorders, Telephone Instruments, Electronic Exchanges, communication equipments, Defense equipments etc. the present customers include major Indian manufactures like,

BEL ITI [10]

C-DOT HCL TATA TELECOM BPL TELECOM ONIDA SHARP INDIA VIDEOCON CROMPTON GREAVES TEXLA ECIL etc

2.2.4.

COMPETITORS
The major competitors in India for electrolytic capacitors are Punssumi India Ltd.,

Uptron, Webelson, Philips, incap; Elnet etcmost of the competitors are not working to capacity. With liberalization of economy, and bringing capacitors under OGL, the company has to compete with international brands like Rubycon, Nichicon, Panasonic, Samsung, Elna etc

2.2.5.

TECHNOLOGY
The company acquired the technology for design development manufacturing and

testing from the collaborators, M/s M.V. Sprague Electromagnet. The manufacturing process which was mainly semi-automatic and manual in nature was upgraded subsequently by the company by sourcing state of the art automatic machinery from Japan during the expansions undertaken. The company could also update the technology by optaining information from suppliers on the latest development taking place in Japan, [11]

Korea and Taiwan on size reduction and high temperature categories of capacitors with its in-house R&D effects. The major raw materials, viz. aluminum etched and formed Foil was initially sourced from various countries. The company had developed and mastered the technology for forming of aluminum foil for low voltage and high voltage use. The company had indigenously Fabricated machinery for forming of 1, 25,000 M2 of low voltage foils and 40,000 M2 of high voltage foil thereby reducing dependence on import of basic raw materials. The company had already developed and demonstrated capability for etching of high voltage aluminum foils under a grant in aid project with aid from Dept. of electronics (DEO) the company is at present engaged in development of technology for etching of low voltage aluminum foils with a 50% cost sharing grant from DOE. The company also engaged in development of electrolytes. Already a few electrolytes had been developed with in-house R&D and development of other electrolytes solution are in progress. The design development and manufacture of the following varies of capacitors were done by the company as part of in-house development. 1. Miniature capacitors of 85 C (2000 Hrs life) 2. Sub miniature capacitor 7mm height 3. Horizontal correction capacitor 4. 5. 6. 7. 105 C (High Temp) capacitors for automotive applications Aluminum electrolytic motor star AC capacitor Snap mount capacitor for SMPS requirement Lug/Screw Terminal type for power supplies

2.2.6.

QUALITY ASSURANCE DEPARTMENT

The need for quality needs no special emphasis. One benefit of quality is increased

productivity results in better profit and builds customer loyalty. Quality control is a staff function concerned with prevention of defects in manufacturing so that, items maybe made right at the first time and not to be performed. There must be inspection and control of incoming raw material to ensure that they meet the specification; there must be planning and controlling of manufacturing process to ensure that suitable methods are being used and that machines and equipments are [12]

performing satisfactorily; there must be in process inspection to ensure that items being fabricated meet specification; there must be final inspection and testing for product performances. The department doing these functions is called quality assurance department. A quality assurance department provides 100% quality assurance for the capacitors produced. The required quality can be attained by regular inspection. The inspection is carried out in three stages: 1. 2. 3. Incoming inspection Patrol inspection Outgoing inspection

2.2.7.

AWARDS AND RECOGNITIONS

National Productivity Award for 1988-89 under large scale electronic components units from National Productivity council, New Delhi. ELCINA Award 1993 for excellence in Research & Development for work done in the field of forming technology. Department of scientific and industrial Research, Ministry of science and Technology, Govt. of India approval for the in-house Research & Development. ISO-9001 certification from KPMG-QR, USA, only Electrolytic capacitor manufacture to have ISO-9001 certification in India. With the experience and knowledge gained over the year the company is confident to upgrade technology in the tune with market requirements in the future also. The present technology of electrolytic capacitors is expected to stay for another ten to fifteen years with marginal variation. The only development taking place in the developed countries is in terms of reference mount technology and in India this technology is expected to be commercialized in another ten to fifteen years only.

Plant and Machinery

The original and machinery for 18 million pieces per annum of capacitors were sourced from M/s NV Sprague Electromag Belgium. Subsequently, for the expansion project the company sourced automatic state of the art machinery from M/s JCC Engineering co., Japan, M/s CKD corporation, Japan and M/s Dons enterprises, Taiwan.

[13]

The company has scheme for breakdown maintenance, preventive maintenance and machinery overhauling. All the critical automatic equipments under inspection maintenance scheme. The engineers and technicians trained in Japan and Taiwan on the machines oversee the repair activities. Technicians are provided on the job training. Sufficient stock of spare parts are sourced and stored from the suppliers. For fabrication of spare parts, Tools Room facility is available. The machines are maintained in good condition and the expected life is extended by proper maintenance.

Human Resources
The total manpower of the Company as on 31.03.2000 is 342. The split up into category-wise is also follows, Executives: 60 Supervisor: 4 Workmen: 251 The range of experience of all the category of employees is from years to years. The company has a Human Resource development program whereby training needs of employees are identified and necessary class room/ on the job training is imparted. Key technical personnel are trained by collaborator of suppliers of machinery oversees on the processing of capacitors and maintenance of machinery.

Customer acceptance and order position

Keltron Electrolytic capacitors are accepted by a wide cross of customers from consumer electronics capacitors is endorsed by the following type approvals obtained by the company: a) b) c) d) ECSO(Electronic Component Standardization Organization) approval CACT approval C-DOT approval DGQA(defense approval

[14]

2.2.8.

ORGANIZATION CHART

Managing Director
FI N PE CAL HRD&AD M MA T E&D MK T

PLG EDP

MFG

QA

E&F R&D

PLG - Planning EDP Electronic Data Processing MFD - Manufacturing PE Plan Engineering FIN - Finance CAL - Calibration QA Quality Assurance R&D Research & Development [15]

E&F Etching & Forming MAT - Materials HRD&ADM Human Resource Development & administration E&D Engineering & Design MKT Marketing

2.3.

PRODUCT PROFILE:

2.3.1. KELTRON COMPONENT COMPLEX LTD.

Aluminum Electrolytic Capacitors, basically consists of anode foil, cathode foil and condenser tissue paper interleaved and rolled to from cylindrical capacitor section. The section is taped and subsequently impregnated into the selected electrolyte based on the working voltage of the capacitor. The impregnated capacitor section is encapsulated in the Aluminum casing with leads taken out from their end sales such as Rubber: Rubber Bakelite cover or molded cover. After ageing and testing, capacitors are provided with printed insulation PVC sleeve. The Aluminum Electrolyte Capacitors is classified into polar and non polar/ bipolar. Based on the working voltage they are grouped into decreasing voltage, medium voltage and increasing voltage range. The polar capacitor has polarity. Positive mark indicates the anode foil and negative mark indicates cathode foil. Anode foil used in Aluminum Electrolyte Capacitor is of high purity about 99.98%. The foil is etched for increasing purity of Aluminum foil. The thickness of foil ranges from 20 microns to110 microns based on the type of foil (anode or cathode) There is no change in the area of anode foil for different type of Keltron products such as Radial, Axial, Can type and AC Motor start. Aluminum Electrolyte Capacitor

[16]

with decreasing voltage will have increasing voltage formed foil. The standard width of 50mm foil will be slit into 3.0mm based on capacitor size. The slit foil is stitched with purity tabs to lead out for external circuit. The capacitor elements and impregnated electrolyte used in the production of Aluminum Electrolyte Capacitors depends on the working voltage and temperature category of the capacitor.

2.3.2.

PRODUCTS
The company started with manufactures of Axial, Radial and Can type Dc

capacitors. Subsequently products were added with in house development. At present the company manufactures a wide range of Aluminum Electrolytic DC and AC capacitors as below Type 1. Radical Capacitors SA2 SM SN SH SZ SB SE 2. Axial Capacitors DB DC DD 3. Can Type capacitors [17] Miniature 85c (2000 hrs) Large axial 85c (2000 hrs) Professional (defense approved) Small Sized + 85c (200 hrs) Reduced size 7mm height Bipolar Horizontal correction Low ESR Professional grade defense approved High temperature, 105c (for automobile Section) Designation

MA MB MD MS MP

PCB mounts high voltage capacitor Snap mounts Double Can motor start AC capacitor Single Can motor start AC capacitor Can type screw terminal

RESEARCH METHODOLOGY 3.1. SOURCES OF DATA

Data required for the analysis is obtained from secondary sources as well as by personal interview. The data with respect to current assets, current liabilities, sales, purchases and other balance sheet item were collected from the published annual reports and records of the company.

3.2.

RESEARCH DESIGN
The research design adopted for the study is descriptive in nature. The study

describes the structure, size and working capital, length of operating cycle and also analyses the efficiency with which working capital has been managed.

3.3.

ANALYSIS OF DATA

The collected information has been properly tabulated and wherever possible graphs have been included. The most commonly used tool for this study is ratio. Objective of the study

1.

To analyze the liquidity position of the KCCL [18]

2. 3. 4. 5.

To identify the turnover ratio of KCCL To analyze structure and growth of working capital. To study the sources and uses of current assets. To give suggestion and recommendation base on the findings for the good working

capital of the firm.

4.1.

WORKING CAPITAL CONCEPTS

Working capital is the lifeblood and nerve centre of a business. Working part

of firms capital which is required to finance short term or current assets. According to account terminology it is the difference between the inflow and out flow of funds. In other words it is the net cash flow. Thus, working capital is the amount of funds necessary to cover the cost of operation of an enterprise.

4.2.

CLASSIFICATION OF WORKING CAPITAL

Working capital may be classified into two ways,

1) ON THE BASIS OF CONCEPT On the basis of concept, there are two types of working capital and Net working capital.

a)

GROSS WORKING CAPITAL Gross working capital is simply called as working capital refers to the firm investment current assets. This concept emphasis the quantitative aspect of working capital (current asset) are the assets which can be converted into cash within an

[19]

accounting year and include cash, short time securities, debtors, bills receivable and stock.

b)

NET WORKING CAPITAL Net working capital refers to the difference between current assets and current liabilities. This concept lays emphasis upon the qualitative aspects of the working capital. Current liabilities are those claims of outsiders, which are expected to mature for payment with outstanding expenses. Net working capital may be positive or negative. A positive net working capital will arise when current assets exceeds current liabilities. A negative working capital occurs when current liabilities are in excess of current assets.

2) ON THE BASIS OF TIME On the basis of time, working capital may be classified as permanent of fixed working capital and temporary or variable working capital. a) PERMANENT OR FIXED WORKING CAPITAL Permanent or fixed working capital is the minimum amount, which is required to ensure effective utilization of fixed facilities and for maintaining the circulation of current assets. There is always a minimum level of current asset which is continuously required by the enterprise to carry out its normal business operations. The permanent working capital further be classified as regular working capital and reserve working capital. Regular working capital required to ensure circulation of current assets from cash to inventories, from inventories to receivables and from receivables to cash and so on. Reserve working capital is the excess amount over the requirement of regular working capital, which may be provided for contingencies that may arise at unstated period, such as strike, rise in prices depression etc. b) TEMPORARY OR VARIABLE WORKING CAPITAL Temporary or variable working capital, which keeps on fluctuating from time to time on the basis of business activities. In other words it represents additional current [20]

asset required for different times during the operating year. Supplier of temporary working capital can expect its return during off-season, when the firm does not require it. Hence, temporary working capital is generally financed from short term sources of finance such as credit. Variable working capital can be further classified as seasonal working capital and special working capital. Most of the enterprises have to provide additional working capital to meet the seasonal and special needs. The capital required to meet the seasonal needs of the enterprise is called seasonal working capital. Special working capital is that part of working capital, which is required to meet special contingencies such as launching of extensive marketing campaigns for conducting research etc.

Permanent and Variable Working Capital: 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, or fixed working capital. Depending upon the changes in production and sales, the need for working capital, over and above permanent working capital will fluctuate. The extra working capital, needed to support the changing production and sales activities is called fluctuating or variable or 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 that will last only temporarily.

Current Assets Level Policy: The financial manager should determine the optimum level of current assets so that the wealth of shareholders is maximized. A firm needs fixed and current assets to support a particular level of output.

[21]

However, to support the same level of output, the firm can have different levels of current assets. The level of current assets can be measured by relating current assets to fixed assets. Dividing the current assets by fixed assets gives CA/FA ratio. Assuming a constant level of fixed assets, a higher CA/FA ratio indicates a conservative current assets policy and a lower CA/FA ratio means an aggressive current assets policy assuming other factors to be constant. A conservative policy implies greater liquidity and lower risk. While aggressive policy indicates higher risk and poor liquidity. The current asset policy of the most firms may fall between these two extreme policies, which are called as average policy.

Current Assets Financing Policy: After establishing the level of current assets, the firm must determine how these should be financed. What mix of long-term capital and short-term capital should the firm employ to support its current assets? Several strategies are available to a firm for financing its capital requirements. Three strategies are listed as below.

Strategy A (Conservative Approach): Long-term financing is used to meet fixed asset requirement as well as peak working capital requirement. When the working capital requirement is less than its peak level, the surplus is invested in liquid assets (cash and marketable securities). A portion of a fluctuating working capital is financed by long-term sources.

Strategy B (Matching or Hedging Approach): Long-term financing is used to meet fixed asset requirements, permanent working capital requirement. The fluctuating working capital requirement is financed by shortterm financing. [22]

Strategy C (Aggressive Approach): Long-term financing is used to meet fixed asset requirement and part of permanent working capital requirement. Short-term financing is used to meet fluctuating working capital requirement & part of permanent working capital.

4.3.

FACTORS

INFLUENCING

WORKING

CAPITAL

REQUIREMENTS a) Nature of Business.

The working capital requirement of a firm is closely related to the nature of its business. A service firm, like an electricity undertaking or a transport corporation, which has a short operating cycle and which sells predominantly on cash basis, has a modest working capital requirement. On the other hand, a manufacturing concern like a machine tools unit, which has a long operating cycle and which sells largely on credit, has a very substantial working capital requirement.

b) Seasonality of operations. Firms, which have marked seasonality in their operations usually, have highly fluctuating working capital requirements. To illustrate, consider a firm manufacturing ceiling fans. The sale of ceiling fans reaches a peak during the summer months and drops sharply during the winter period. The working capital need of such a firm is likely to increase considerably in summer months and decrease significantly during the winter [23]

period. On the other hand, a firm manufacturing a product like lamps, which have fairly even sales round the year, tends to have stable working capital needs. c) Production policy. A firm marked by pronounced seasonal fluctuation in its sales may pursue a production policy, which may reduce the sharp variations in working capital requirements. For example, a manufacturer of ceiling fans may maintain a steady production throughout the year rather than intensify the production activity during the peak business season. Such a production policy may dampen the fluctuations in working capital requirements.

d) Market Conditions.
The degree of competition prevailing in the market place has an important bearing on working capital needs. When competition is keen, a larger inventory of finished goods is required to promptly serve customers who may not be inclined to wait because other manufacturers are ready to meet their needs. Further, generous credit terms may have to be offered to attract customers in a highly competitive market. Thus, working capital needs tend to be high because of greater investment in finished goods inventory and accounts receivable. If the market is strong and competition weak, a firm can manage with a smaller inventory of finished goods because customers can be served with some delay. Further, in such a situation the firm can insist on cash payment and avoid lock-up of funds in accounts receivable-it can even ask for advance payment, partial or total.

e) Conditions of Supply.
The inventory of raw materials, spares, and stores depends on the conditions of supply. If the supply is prompt and adequate, the firm can manage with small inventory. However, if the supply is unpredictable and scant then the firm, to ensure continuity of production, would have to acquire stocks as and when they are available and carry larger [24]

inventory on an average. A similar policy may have to be followed when the raw material is available only seasonally and production operations are carried out round the year.

4.4.

MANAGEMENT OF WORKING CAPITAL

Working capital is the lifeblood of business enterprise. It has assumed great

significant in the recent past. It has now been established that a small economy in working capital utilization magnifies the profitability of an enterprise considerably. The firm has therefore to optimize the use of the limited available resources at their disposal through their efficient and effective management of working capital. Liquidity and profitability is the two dimension of an enterprise. An efficient and effective management of working capital enables an enterprise to maximize the profitability and maintain adequate liquidity in the business. The manner of management of working capital determined to a large extent of success and failure of an enterprise. Many a time, in the event of failure of an enterprise the storage of working capital is given out as its main reason. But in the ultimate evolution, it may be the mismanagement of working capital. It is therefore necessary to maintain an optimum level of working capital so as to ensure profitability and to maintain adequate liquidity in the business. Working capital management means the problem of decision making regarding investment in current assets within objective of maintaining the liquidity of funds of the firm to meet its current obligation. The major areas in working capital management are: Problem of deciding the optimal level of investment in the current assets 1. Problem of deciding the optimal mix of current and fixed assets 2. Location of sources of short term financing [25]

3. The importance of working capital management is reflected in the fact that financial Managers spend a lot of time in managing current assets and current liabilities. Arranging short term financing negotiating favorable credit terms, controlling the movement of cash administrating accounts receivables, and monitoring the investment in inventories consume a great deal of time of financial managers.

4.5.

SIGNIFICANCE OF WORKING CAPITAL MANAGEMENT IN

The importance of managing working capital is magnified when it refers to firms

DEVELOPING ECONOMIES
in developing economies. These firms have many problems, such as being small in size and lack of resources. The list of problems is long and includes low level of product and process technology, small product market, lack of access to capital, lack of physical infrastructure and proper institutional frame work. Because of their small size, firms in developing satisfy the demand they may have the product and this makes inventory management more relevant. Both human and financial resources of the firms in developing economies are very limited. The problem of managing working capital investments and short-term debt may be increased by such lack of managerial knowledge. Financially, firm in developing countries lack the opportunity of getting benefit of financial markets as the firms are small in size and have less opportunity to go public to benefit from financial markets. Banks will resistant to provide long-term loans to such firms. So because of these reasons working capital management is even more important in developing countries than developed countries. It is through the working capital related activities that they are trying to capitalize in order to create value for the firms. [26]

Need for Working Capital

The need for working capital is to run the day to day business cannot be over emphasized. The need for working capital arises due to the time gap between production and realization of cash from sales. Thus working capital is a) For the purchase of raw materials, components and spares. b) To pay wages and salaries. c) To meet the day to day expenses and overhead costs like power, office expenses etc. d) To meet various selling costs as packing, advertising etc. e) To provide credit facilities to the customers. f) To maintain the inventories of raw material, work-in-progress, stores and finished stocks.

Sufficient working capital is necessary to sustain sales activity; this is referred to Operating or Cash Cycle. The continuing flow from cash to suppliers, to inventories to accounts receivables, and back into cash is called operating cycle. In other words, the term cash cycle refers to the length of time necessary to complete the following cycles of event: Conversion of cash into inventory. Conversion of inventory into receivables. Conversion of receivables into cash.

[27]

4.6. CASH OR OPERATING CYCLE

The operating cycle is said to be the heat of working capital. The operating cycle can be explained as the continuing flow of cash to suppliers, to inventory, to accounts receivables and back to cash. It is the time duration required to convert resources into inventories and sales into cash.

[28]

Phase 3

RECEIVABLES

CASH

Phase 2

Phase 1

INVENTORY

A firms operating cycle typically consists of their primary activities purchasing resources, manufacturing the products, and sales of the product. These activities create fund flaw that are both unsynchronized because cash disbursements usually take place before cash receipts. They are uncertain because future sales and costs, which generate the respective receipts and disbursements, cannot be forecasted with complete accuracy. If the firm is to maintain liquidity and needs to function properly, it has to invest fund in various short term assets during the cycle. It has to maintain a cash balance to pay bills they becomes due. In addition, the company invests in inventories to fill customers order properly and finally, the company invests accounts receivables to extend credit to its customers. Thus a firm should make adequate investments in inventories and debtors for smooth and uninterrupted production.

[29]

Manufacturing companys three phases of operating cycle: The operating cycle of a manufacturing company involves three phases Acquisition of resources. Manufacture of the product. Sale of the product. These phases affect cash flows, which most of the time, are neither synchronized not certain. They are not synchronized because cash outflows usually occur before cash inflows. Cash inflows are not certain because sales and collections, which give rise to cash inflows, are difficult to forecast accurately. The firms gross operating cycle (GOC) can be determined as inventory conversion period (ICP) plus debtors conversion period (DCP). A) GOC = ICP + DCP. Here GOC = Gross Operating Cycle. ICP = Inventory Conversion Period. DCP = Debtors Conversion Period. B) ICP = RMCP + WIPCP + FGCP. Here ICP = Inventory Conversion Period. RMCP = Raw Material Conversion Period. WIPCP = Work-in-Process Conversion Period. FGCP = Finished Goods Conversion Period. C) NOC = GOC PDP. Here GOC = Gross Operating Cycle. PDP = Payables Deferral Period. If the depreciation and profit is excluded from expenses in the computation of operating cycle, the net operating cycle will be called as Cash Conversion Cycle (CCC). Pictorial representation of GOC, NOC, ICP, PDP, FGCP, RMCP, WIPCP & DCP can be viewed in the below mentioned diagram.

[30]

Length of Operating Cycle The component of working capital such as inventories and debtors enables a firm to compute the length of the operating cycle. The length of the operating cycle includes the sum of inventory conversion period. The inventory conversion period is the total time needed to producing and selling the products. It comprises of raw materials conversion period, work in progress conversion period is the time required in collecting the outstanding amount from the customers

[31]

4.7. 1.

ELEMENTS OF WORKING CAPITAL CASH MANAGEMENT

Cash is the business enterprise may be compared to the blood of the human body,

blood gives life and strength to the human body, and cash imparts life and strength. Profits and solvency to the business organizations.

Motives for holding cash:

The firms need for cash may be attributed to the following needs. Transaction motives, precautionary motive and speculative motive. Some people are of the view that a business requires cash only for the first two motives while others feel that speculative motive also remains. These motives are discussed as follows. Transaction Motives Precautionary Motives Speculative Motives Compensation Motives

Transaction Motives:A firm needs cash for making transactions in the day for day operations. The cash is needed to make purchases, pay expenses, taxes, dividend etc. The cash need arises due to the fact that there is no complete synchronization between cash receipts and payments.

Precautionary Motives:A firm is required to keep cash for meeting various contingencies. Through cash inflows and cash outflows are anticipated but there may be variations in these estimates.

[32]

Speculative Motives:The speculative motives relate to holding for cash for investing its profitable opportunities as and when they arise. Such opportunities do not come in a regular manner.

Compensation Motives:Every business concern enjoys certain services from its bankers fees of charge. So, it is usually required to deep certain minimum.

Goals of Cash Management

To satisfy day-to-day business requirement. To provide for scheduled major payments. To face unexpected cash drains. To size potential opportunities for profitable long-term investments. To meet requirements of bank relationship. To build re survivor for net cash inflows till the availability of better uses of funds To minimize the operation costs of cash management.

by conscious planning.

Importance of Cash Management

Cash management is one of the areas of working capital management. In fact, cash management is the most important areas of working capital management. This has contributed to the Importance of cash management. A. B. cash. C. for it. Cash management is also important because cash constitutes the smallest portion of the total current assets; even then, considerable time of management is devoted Cash management assumes more importance than other current assets Management of cash is also important because to as difficult to predict

because cash is the most significant and the least productive assets that the firm holds. cash inflows accurately and that is no perfect coincidence between inflows and outflows of

[33]

Objective of Cash Management

Keeping these two views liquidity and profitability, the following objectives can be identified of cash management.

a. b.
a.

To made cash payments. To maintain minimum cash reserve. To made cash payments.
A very objective of holding cash is to meet the various types of expenditure to be incurred in business operations. Several types of expenditure have to be met at different points of time and the firm should be prepared to make such cash payments.

b.

To maintain minimum cash reserve.

Another important objective of cash management is to maintain

minimum cash reserve. This means, in the process statements from forecast of expected cash flows and cash outflows for a given person. The forecast may be based on the present operation or the anticipated future operations.

Advantages of Cash Management:

The availability of cash may be a matter of life of death. A sufficiency if cash can deep an unsuccessful firm going despite losses. Conversely, an insufficiency of cash can bring failure in the face of actual or prospective earnings.

I. II. III. recession. IV. V.

Cash may be set to be like the blood stream on living body for its very much the It helps to avoid uncertainty in the future It gives an inventory of the financial reserves, which are available in the event of a It yields a plan as an integral part of the procedure. It views problem in a dynamic context over a period of time.

life-blood of business. It must be kept circulating.

[34]

Disadvantages of Cash Management

I. II. It may offer a solution of compensation, which is not justified on the basis of a concrete It considers economic recession as the main sources of uncertainty but ignores notion, particularly which the business economy operates in an uncertain world. technological developments shifts in consumer preference political changes etc.

2.

INVENTORY MANAGEMENT

Management of inventory
The literally meaning if the world inventory is stock of goods. To the finance manager inventory connects the value of raw materials, consumable, spares, work-in-progress, finished goods and scrap in which a companys funds have been invested. He considered control over inventory.

Nature of inventory
To understand the exact meaning of the word inventory use may study it from the usage side of from the side of point of entry in the operations. Inventory includes the following things. i. ii. iii. iv. v. Raw materials. Work-in-progress. Consumables. Finished goods. Spares.

[35]

Raw materials:Raw materials form a major input into the organization. They are required to carry out production activities uninterruptedly. The quantity of raw materials required will be determined by the rate of consumption and the time required for replenishing the supplies.

Work-in-progress:The work-in-progress is that stage of stock, which is in between raw materials and finished goods. The raw materials enter the process of manufacture but they are yet to attain final shape of finished goods.

Consumables:These are the materials that are needed to smoother the process of production. These materials do not directly enter production but they act as catalysts, etc. Consumables may be classified according to their consumption and criticality.

Finished goods:These are the goods, which are ready for the consumers. The stock of finished goods provides a buffer between production and market.

Spares:Spares also form a part of inventory. The consumption pattern of raw materials, consumables, finished goods are different from that of spares.

[36]

4.7.1. BENEFITS OF HOLDING INVENTORY

The benefits of holding inventory arises from the following reasons

Large purchases of raw materials or finished goods may be made to take advantage of the discounts offered a bulk purchases. Bulk purchases; naturally result in holding of inventories. Large orders may be placed for goods to cut down the ordering costs, the costs of

checking, handling and payments involved in small orders large orders, naturally result in holding large inventories. Holding of sufficient inventories of raw materials or finished goods becomes necessary

in times of scarcity to prevent stoppage of production or business Vital spares and tools are required to be kept in stock so as to avoid spells of production

break down due to non-availability of important spares parts or tools. Holding goods in the process of production is a technological necessity. It depends

mainly on the length of manufacturing process.

[37]

4.7.2. FACTORS INFLUENCING INVENTORY REQUIREMENT Inventory represents the most prominent component of assets in a business enterprise. For manufacturing firm, it is necessary to have inventory of raw materials, goods-in-progress and inventory of finished goods. The factors influencing inventory requirements are:-

1)

NATURE OF BUSINESS ACTIVITIES:For a firm engaged in manufacturing activity sufficiently large amount offends will be

required to carry inventories. Similarly, trading companies in their bid to ensure smooth trading activity has to employ large funds in holding stocks.

2) INVENTORY TURNOVER:Within the same line of business inventory requirement vary markedly in different firms depending essentially on inventory turnover. Inventory turnover in firms reveals how many times the inventory turns during a given period of time. 3) METHODS OF INVENTORY VALUATION:Methods that a firm follows in valuating inventories have also its affect on the level of investment in inventory. Two important methods of inventory valuation are First-In-First-Out (FIFO) and Last-In-First-Out (LIFO). 4) NATURE OF ARRANGEMENTS WITH SUPPLIERS OF GOODS:If arrangement made either the supplier of the materials is such that they will supply materials on order but will demand the payment only on the scale of the finished goods, he firm need to keep large amount of inventories. 5) SPECIAL CIRCUMSTANCES:-

Finally, the financial manager should study critically the circumstances under which the firm will operate and which have their direct bearing on inventory level. It would be suitable to discuss the impact of these situations on the level of different kinds of inventories separately.

[38]

4.7.3. TOOLS AND TECHNIQUES OF INVENTORY MANAGEMENT The following are the important tools and technique of inventory management.
i. ii. iii. iv. v. vi. Determination of stock levels Determination of safety stock Selecting a proper system of ordering for inventory Determination of economic order quantity A.B.C Analysis VED Analysis

Determination of stock levels:Carrying of too much and too little of inventories is detrimental to the firm. Various stock levels are discussed as such a. b. c. d. e. Minimum level Re-ordering level Maximum level Danger level Average stock level

Determination of safety stock:Safety stock is a buffer to meet some unanticipated increase in usage. The usage of inventory cannot be perfectly forecasted. It fluctuates over a period of time.

Selecting a proper system of ordering for inventory:The basic problem of inventory is to decide the re-order point. This point indicates an order should be placed. The re-order print is determined with the help of these things. a. b. c. Average rate. Duration of time. Economic order quantity

ECONOMIC ORDER QUANTITY:[39]

Economic order quantity is the size of the lot to be purchased which is economically viable. This is the quantity of material, which can be purchased at minimum costs.

A.B.C ANALYSIS:Under A.B.C Analysis, the materials are divided into three categories viz, A, B, C, past experience has shown that almost 10% of the items contribute to 70% of value of consumption and this category is called A category. About 20% of the items contribute about 20% of value of consumption and this is known as category B materials, category C covers about 70% of items of materials, which contribute 10% of value of consumption.

VED ANALYSIS:The VED Analysis is used generally for spare parts. The requirements and urgency of spare parts as different from that of materials. Spare parts are classified as Vital(V), Essential(E), and desirable(D). Vital (V) means items that, when not available, a production is help up. These are also Essential (E) means non-available items, which dislocate production work. Desirable (D) means items that are necessary, but do not cause any immediate loss of

called insurance items.

production.

4.7.4. OBJECTIVES OF INVENTORY MANAGEMENT

The basic objectives of inventory management are To avoid over and under investment in inventories To produce the right quality and right quantity of goods at the right time AND at a

reasonable price.

These can be grouped as

[40]

Availability of materials: - All type of materials should be available at all times so

that production should not suffer.

Best service to customer: - By producing finished quality goods to the satisfaction of

customers & maintaining the delivery periods.

Wastage minimization: - To minimize wastage at all levels. Promotion of manufacturing efficiency: - By providing the right kind of

materials & by improving the morale of the workers.

Optimum investment: - These will be no unnecessary hold of money, if optimum

levels of inventories are held. Capital can be efficiently used.

Purchase economy: - It offers several advantages & economies in purchasing because

of bulk purchase & favourable market conditions.

danger.

Optimum level of inventories: - This saves lots money & avoids the out stock

Production level control: - proper inventory control helps in increasing &

maintaining the buffer stock of raw materials to meet any eventually.

[41]

5.

RATIO ANALYSIS OF KCCL 5.1 SHORT TERM FINANCIAL POSITION.

)a

CURRENT RATIO:
Current ratio establishes relationship between current assets and current liabilities. The ratio is also known as working capital ratio.

Current Ratio= Current assets/Current liabilities

This ratio is widely used to analyze short term financial position of the firm. A higher ratio indicates the firms ability to pay its current obligation in time and lower ratio represents the liability position of the firm is not good. The accepted norm for current ratio is 2:1 i.e., the firm having current asset.

YEAR 2004-05 2005-06 2006-07 2007-08 2008-09

Current Assets 2306.08 2180.34 1970.60 2203.96 2142.58

Current Liability 978.67 1069.59 1160.61 1130.02 781.69

Ratio 2.36 2.04 1.70 1.95 2.74

[42]

INTERPRETATION
Relatively high current ratio is an indication that the firm is liquid and has the ability to pay its current obligation in time as and when they become due. Here the position of current ratio of KCCL is the range of 1.70 to 2.74 times over current liabilities. At the outset current ratio of the firm is with in the range of manageable limit.

[43]

CURRENT RATIO 3

2.5

Ratio

1.5

0.5

0 2004-05 2005-06 2006-07 2007-08 2008-09 Year

)b

QUICK RATIO
[44]

Its expresses the relationship between quick asset and quick liability. This is also known as acid test ratio.

Quick Ratio=Quick Asset/Current liability

Quick ratio is to measure the liquidity position of the firm. It measures the firms capacity to pay off its current obligation immediately. A quick ratio of 1:1 is considered to be satisfactory

YEAR 2004-05 2005-06 2006-07 2007-08 2008-09

CURRENT ASSETS 824.64 775.81 681.87 832.17 1107.60

CURRENT LIABILITY 978.67 1069.59 1160.61 1130.02 781.68

RATIO .84 .73 .59 .74 1.42

INTERPRETATION High quick ratio is an indication that the firm is liquid and has the ability to meet its current or liquid liabilities in time. The quick ratio of KCCL is with in the range of 0.59 to 1.42 this shows that the quick ratio of KCCL not sufficient to meets its liabilities. The firms liquidity position has to be increased.

[45]

QUICK RATIO

1.6

1.4

1.2

1 RATIO

0.8

0.6

0.4

0.2

0 2004-05 2005-06 2006-07 2007-08 YEAR 2008-09

5.2

CURRENT ASSET MOVEMENTS/ACTIVITY RATIO

[46]

a)

INVENTORY TURN OVER RATIO:

Inventory turnover ratio indicates the efficiency of the firm producing selling its

product. It is calculated by dividing the sales by inventory; and Days of Inventory Holdings (DIH) are calculated by dividing the number of days in a year (say 360) by inventory turnover.

Inventory Turnover Ratio=Cost of goods sold/Average inventory

The higher the ratio better is the performance of the company and vice versa. Year 2004-05 2005-06 2006-07 2007-08 2008-09 Cost of goods sold 2858.91 2770.49 2632.09 2565.28 2437.02 Average Inventory 1481.44 1404.53 1288.73 1371.79 1536.39 Ratio 1.93 1.97 2.04 1.87 1.59

INTERPRETATION
[47]

Inventory turn over ratio indicates the velocity of conversion of stock into sales. Here the ratios range from 1.59 to 2.04. A high ratio indicates efficient management of inventory because the stocks are sold frequently. A lower ratio indicate that the firm is having over investment in investment, dull business, poor quality of goods, stock accumulations, accumulation of obsolete and slow moving goods and low profit as compared to total investment. Here the firm maintains a good and well build inventory turn over ratio.

[48]

INVENTORY TURN OVER RATIO 2.5

1.5 Ratio 1 0.5 0 2004-05 2005-06 2006-07 2007-08 2008-09 Year

b)

AVERAGE INVENTORY HOLDING PERIOD

[49]

The ratio indicates average time taken for clearing stock. This period is calculated by dividing the number of days by inventory turnover ratio.

Inventory Holding Period= (360/Inventory Turn over ratio)

Year 2004-05 2005-06 2006-07 2007-08 2008-09

No. of days 360 360 360 360 360

Inventory Turnover Ratio 1.93 1.97 2.04 1.87 1.59

Period 187 183 176 193 226

INTERPRETATION
The ratio shows that the inventories are converted into cash during the year. The company should convert this stock an average of 200 days.

[50]

AVERAGE INVENTORY HOLDING PERIOD

250

200

150 Period 100 50 0 2004-05 2005-06 2006-07 Year 2007-08 2008-09

c)

DEBTORS TURN OVER RATIO:

[51]

Debtors turn over ratio indicates the velocity of debt collection of firm. In simple words it indicates the number of time the average debtors are turned over during a year. Debtors Turnover ratio=Net credit sales/Average debtors

Year
2004-05 2005-06 2006-07 2007-08 2008-09

Sales
2455.23 2455.20 2044.34 2159.42 3089.85

Debtors
714.24 649.92 599.20 552.03 981.88

Ratio
3.44 3.78 3.41 3.91 3.15

INTERPRETATION
Generally the higher value of debtors turn over ratio indicates the firm is more efficient in managing the debtors. But here the firm is lacking behind in this field of managing the debtors.

[52]

DEBTORS TURN OVER RATIO 4.5 4 3.5 3 2.5 Ratio 2 1.5 1 0.5 0 2004-05 2005-06 2006-07 Year 2007-08 2008-09

d)

AVERAGE COLLECTION PERIOD

[53]

The average collection period represents the average number of days for which a firm has to wait before its receivables are converted into cash.

Average collection period=Number of working days/Debtors turnover ratio

Year

No. of days

Debtors Turnover ratio

Average collection period

105 95 106 92 114

2004-05 2005-06 2006-07 2007-08 2008-09

360 360 360 360 360

3.44 3.78 3.41 3.91 3.15

INTERPRETATION
From the table we can understand that the average collection period of the firm is varying from 2005 to 2009. During the year 2004 it had the collection period around 105 days but during the year 2008 it shrink down to 92 days. During the year 2009 it increases around 114. The firm has to take a perfect concentration on this part.

[54]

AVERAGE COLLECTION PERIOD

120

100

80

Period

60

40

20

0 2004-05 2005-06 2006-07 2007-08 2008-09 Year

e)

CREDITORS TURNOVER RATIO

[55]

A supplier of goods is naturally interested in finding out how much time the firm is likely to take in repaying its trade creditors.

Creditors Turnover Ratio=Credit Purchase / Average Account Payable

Year

Credit Purchase

Average Account Payable

Ratio

2004-05 2005-06 2006-07 2007-08 2008-09

1121.62 1309.02 1207.27 1318.97 1619.54

668.06 717.07 778.60 725.99 821.83

1.68 1.83 1.55 1.82 1.97

INTERPRETATION
This Ratio shows that the credit worthiness is going to be affected adversely. The firm has to take proper actions in controlling the creditors turnover ratio. The firms credit turnover ratio is very low which an unsatisfactory condition is.

[56]

CREDITORS TURNOVER RATIO 2.5

1.5 Ratio 1 0.5 0 2004-05 2005-06 2006-07 2007-08 2008-09 Year

[57]

f)

AVERAGE PAYMENT PERIOD

It is the average number of day taken by a firm to pay its creditors. Generally lower

the ratio, the better is the liquidity position of the firm.

Average Payment Period = No. of working days / Creditors turnover ratio

Year 2004-05 2005-06 2006-07 2007-08 2008-09

No. of days 360 360 360 360 360

Creditors Turnover Average Payment Period Ratio 1.68 1.83 1.55 1.82 1.97 214 197 232 198 183

INTERPRETATION From the analysis conducted it is found that the company takes about 200 days for its repayment of cash to its creditors. This firm should take initiative in paying back the amount by any other mean or should control in purchasing the raw materials and other machineries in credit.

[58]

AVERAGE PAYMENT PERIOD 250

200

150 Period 100 50 0 2004-05 2005-06 2006-07 2007-08 2008-09 Year

g)

FIXED ASSET TURNOVER RATIO

[59]

This ratio indicates whether there are adequate invests. An increase in this ratio is a good indicator of financial performance and vice versa.

Fixed Asset Turnover Ratio=Net Sales/Fixed Assets

Year 2004-05 2005-06 2006-07 2007-08 2008-09

Net Sales 2455.23 2455.20 2044.34 2159.42 3089.85

Fixed Asset 298.31 276.13 247.96 281.05 366.02

Ratio 8.23 8.89 8.24 7.68 8.44

INTERPRETATION In the study it is found that the company is trying to improve its fixed asset turnover ratio. In the year 2005 the ratio shows 8.23 lakhs. It was increasing in the next year to 8.89. In the year 2009 it grew down to 8.44. Though it has an increasing trend the company must take necessary steps in improving the fixed assets turnover ratio.

[60]

Fixed Asset Turnover Ratio

10 9 8 7 6 Ratio 5 4 3 2 1 0 2004-05 2005-06 2006-07 2007-08 2008-09 Year

h) WORKING CAPITAL TURNOVER RATIO

[61]

Working Capital Turnover Ratio = Sales / Net Working Capital

Year

Sales

Net Working Capital

Ratio

2004-05 2005-06 2006-07 2007-08 2008-09

2455.23 2455.20 2044.34 2159.42 3089.85

1327.41 1110.75 809.99 1073.94 1360.89

1.85 2.21 2.25 2.01 2.27

INTERPRETATION In the working capital turnover ratio of the firm is very low; the number of times the working capital turnover in course of year is very low. The firm should work hard in increasing the asset of the company and also decreasing the ability of the firm. Thus it can bring some improvement in the working capital turnover ratio.

[62]

WORKING CAPITAL TURNOVER RATIO 2.5

1.5 Ratio 1 0.5 0 2004-05 2005-06 2006-07 Year 2007-08 2008-09

5.3.

LONG TERM FINANCIAL POSITION

[63]

a) DEBT EQUITY RATIO This ratio indicates the relationship between the external equities or the outsiders fund and the internal equities or the shareholders fund. It is calculated to measure the relative claims of outsider and the owner against the firm asset. Debt equity ratio establishes the relationship between borrowed capital and equity capital. It provides a clear view regarding the liability of the industry to outsiders. Shareholders fund include equity share capital, capital reserve, revenue reserve and surplus like reserve for contingencies sinking funds.

Debt Equity Ratio = Outsiders Fund / Shareholders Fund

Year 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009

Outsiders Fund 2302.51 2054.22 1982.04 2108.16 2217.75

Shareholders Fund 264.73 575.73 575.73 805.75 812.73

Ratio 8.70 3.57 3.44 2.62 2.73

INTERPRETATION

[64]

The ratio gives an idea about the cushion available to outsiders on the liquidation of the firm. But the study tells that the outsiders fund have dominated on the owners fund. However the owner wants to do with the maximum of outsiders fund in order to take lesser risk of their investment and to increase their earnings.

[65]

DEBT EQUITY RATIO

10 9 8 7 6 Ratio 5 4 3 2 1 0
2004-05 2005-06 2006-07 2007-08 2008-09

Year

b) PROPRIETARY RATIO

[66]

This ratio establishes the relationship between share holders fund to total asset of the firm. The ratio of proprietors fund to total funds is an important ratio for determining long term solvency of a firm. The components of this ratio are shareholders fund or proprietors fund to total assets.

Proprietary Ratio = Shareholders Fund / Total Assets

Year 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009

Shareholders Fund 264.73 575.73 575.73 805.75 812.73

Total Assets 2911.77 2746.57 2514.96 2779.33 3342.51

Ratio .09 .21 .23 .29 .24

INTERPRETATION As equity ratio represents the relationship of owners fund to total asset, higher the ratio of the share of the shareholders in the total capital of the company, better is the long term solvency position of the company. The ratio indicates the extent to which the asset of the company can be lost without affecting the interest of the creditors of the company.

[67]

PROPRIETARY RATIO 0.35

0.3

0.25

0.2 Ratio 0.15 0.1 0.05 0

2004-05 2005-06 2006-07 2007-08 2008-2009

Year

[68]

5.4.
.A

PROFITABILITY RATIO
GENERAL PROFITABILITY

a) GROSS PROFIT RATIO

Gross profit ratio measures the relationship of gross profit to net sales and is usually represented as a percentage. Thus it is calculated by dividing the gross profit by sales.

Gross Profit ratio = Gross profit / Net sales * 100

Year
2004-2005 2005-2006 2006-2007 2007-2008 2008-2009

Gross Profit
-403.68 -315.29 -249.59 -60.24 -53.42

Net Sales
2455.23 2455.20 2044.34 2159.42 2864.85

Ratio
-16.44 -12.84 -12.21 -2.79 -1.86

INTERPRETATION
The ratio reflects how efficient the firm is in producing its product. The study shows that the firm is inefficient in producing its products. During the year 2005, it had a slight improvement in the GP ratio, but the continuing year till 2009 it is again going to negatives. So the company should take proper care in producing its product in the most effective manner.

[69]

GROSS PROFIT RATIO 0 2004-05 -2 -4 -6 -8 -10 -12 -14 -16 -18 Year 2005-06 2006-07 2007-08 2008-09

Ratio

b)

NET PROFIT RATIO

[70]

The ratio explains per rupees profit generation capacity if sales. If the cost of sales is lower than the net profit will be higher and we divide it with the sales, the result is the sales efficiency. If lower the net profit per rupee of sales lower will be the sales efficiency. The concern must try for achieving greater sales efficiency for maximizing the return on investment. This ratio is very useful to the proprietors and prospective investors because it reveals the overall profitability of the concern. Net profit ratio establishes the relationship between net profit (after tax) and sales, and indicates the efficiency of the management in manufacturing, selling, administrative and the other activities of the firm. The ratio is the overall measure of the firms profitability.

Net Profit ratio = Net profit / Net sales * 100

YEAR 2004-05 2005-06 2006-07 2007-08 2008-09

NET PROFIT -706.13 -1014.95 -1263.40 -1314.78 -1519.17

NET SALES 2455.23 2455.20 2044.34 2159.42 2864.85

RATIO -28.76 -41.34 -61.80 -60.89 -53.02

INTERPRETATION When all the expenses including the office expenses are included the net profit ratio comes down to negatives. So the firm has to take proper concentration in the production of the products and thus make procedures for increasing the profit ratio, without which the firm can complete in the market.

[71]

NET PROFIT RATIO

0 2004-05 -10 2005-06 2006-07 2007-08 2008-09

-20

-30 Ratio -40 -50 -60 -70 Year

c)

OPERATING RATIO
[72]

Operating ratio establishes the relationship between the cost of goods sold and other operating expenses on the one hand and the sales of the other hand. It excludes income and expenses which it can also which can also include be calculated by the formula.

Operating ratio = 100 Net profit ratio

NET YEAR 2004-05 2005-06 2006-07 2007-08 2008-09 100 100 100 100 100 RATIO -28.76 -41.34 -61.80 -60.89 -53.02

PROFIT OPERATING RATIO 128.76 141.34 161.80 160.89 153.02

INTERPRETATION
Here the study shows the firm having a silent higher operating ratio which is unfavorable. Normally 75 to 85 percentages may be considered to be a good ratio in case of manufacturing undertaking. So the firm should try to reduce the operating profit ratio as early possible.

[73]

OPERATING RATIO 180 160 140 120 100 80 60 40 20 0 2004-05 2005-06 2006-07 Year 2007-08 2008-09

.B

OVERALL PROFITABILITY
[74]

Ratio

a) RETURN ON INVESTMENT
Return on shareholders investments, popularly known as ROI or return on shareholders/proprietors fund is the relationship between net profit (after interest and tax) and the proprietors fund.

Return on Shareholders Investment = Net profit / Shareholders fund

YEAR 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009

NET PROFIT -706.13 -1014.95 -1263.40 -1314.78 -1519.17

SHAREHOLDERS FUND 264.73 575.73 575.73 805.75 812.73

RATIO -2.67 -1.76 -2.19 -1.63 -1.87

INTERPRETATION The overall efficiency of the firm is very weak. Its lying in negatives. As the primary objectives of business is to maximize its earnings, this ratio indicates the extent to which this primary objective of business is achieved as this ratio reveals how well the resource of the firm are being used, the higher the ratio better are the results.

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RETURN ON INVESTMENT 0 2004-05 -0.5 2005-06 2006-07 2007-08 2008-09

-1 Ratio

-1.5

-2

-2.5

-3 Year

5.5.

OPERATING CYCLE
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The firm requires many years to recover the initial investment in fixed assets. On the contrary the investment made in current assets is turned over many times in a year.

Operating Cycle = Inventory conversion period (icp) + debtors collection period (dcp) Creditors payment period (cpp)

YEAR 2004-05 2005-06 2006-07 2007-08 2008-09

ICP(DAYS) 182 196 185 187 216

DCP(DAYS) 105 95 106 92 104

CPP(DAYS) 214 197 232 198 224

OC(DAYS) 73 94 59 81 96

INTERPRETATION
The operating cycle shows that the time interval over which no additional spontaneous working capital financing is required to carry out the firms activities. It represents the net time interval between the collection of each receipt and sales of a product.

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OPERATING CYCLE
120

100

80

Days

60

40

20

0 2004-05 2005-06 2006-07 Year 2007-08 2008-09

5.6. WORKING CAPITAL OF KCCL

WORKING CAPITAL = CURRENT ASSETS CURRENT LIABILITIES [78]

CURRENT YEAR 2004-05 2005-06 2006-07 2007-08 2008-09 ASSETS (Rs in lakhs) 2306.08 2180.34 1970.60 2203.96 2142.58

CURRENT LIABILITIES (Rs in lakhs) 978.67 1069.59 1160.61 1130.02 781.69

WORKING CAPITAL(Rs in lakhs) 1327.41 1110.76 809.99 1073.94 1360.89

INTERPRETATION
Current assets of KCCL consist of inventories, debtors, and cash and bank balance. Working capital gap can be analyzed by measuring net assets. Net assets referred to current assets minus current liabilities. On an average for the past four years, there is a decrease in working capital margin of KCCL. But in the year 2007 onwards there is an increase in working capital of KCCL.

STATEMENT SHOWING CHANGES IN WORKING CAPITAL (2004-2005)

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PARTICULARS

2004

2005

INCREASE

DECREASE

CURRENT ASSETS a) Inventories b) Sundry debtors c) Cash and bank TOTAL CURRENT LIABILITIES a) Current liability b) Provision TOTAL NET WORKING CAPITAL Decrease in working Capital 1553.30 1553.30 384.27 384.27 837.86 252.83 1090.69 1553.30 679.48 299.19 978.67 1327.41 225.89 225.89 158.38 46.36 1536.39 981.88 125.72 2643.99 1481.44 714.24 110.40 2306.08 54.95 267.64 15.32

INTERPRETATION
The study reveals that the inventories, sundry debtors, cash and bank balance, provision has decreased. [80]

Current liabilities have increased. The net working capital of the firm has decreased in the year 2005.

STATEMENT SHOWING CHANGES IN WORKING CAPITAL (2005-2006)

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PARTICULARS

2005

2006

INCREASE

DECREASE

CURRENT ASSETS a) Inventories b) Sundry debtors c) Cash and bank TOTAL CURRENT LIABILITIES a) Current liability b) Provision TOTAL NET WOEKING CAPITAL Decrease in Working Capital 1327.41 1327.41 232.15 232.15 679.48 299.19 978.67 1327.41 729.44 340.15 1096.59 1110.45 216.66 216.66 49.96 40.96 1481.44 714.24 110.40 2306.08 1404.53 649.92 125.89 2180.34 15.49 76.91 64.32

INTERPRETATION
In the year 2006, there is a steep decrease in inventories, sundry debtors. Whereas cash and bank balance has increased by 15.49 lakhs. [82]

Total current liabilities and provision have decreased. Net working capital has reduced in this year.

STATEMENT SHOWING CHANGES IN WORKING CAPITAL (2006-2007)

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PARTICULARS

2006

2007

INCREASE

DECREASE

CURRENT ASSETS a) Inventories b) Sundry debtors c) Cash and bank TOTAL CURRENT LIABILITIES a) Current liability b) Provision TOTAL NET WORKING CAPITAL Decrease in Working Capital 1110.75 1110.75 300.76 300.76 729.44 340.15 1069.59 1110.75 729.54 369.07 1060.61 809.76 300.76 300.76 0.1 28.92 1404.53 649.92 125.89 2180.34 1288.73 599.20 82.67 1970.60 115.80 50.72 43.22

INTERPRETATION
In the year 2007 almost all current assets and current liabilities has decreased. Net working capital has reduced in this year. [84]

STATEMENT SHOWING CHANGES IN WORKING CAPITAL (2007-2008)

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PARTICULARS

2007

2008

INCREASE

DECREASE

CURRENT ASSETS a) Inventories b) Sundry debtors c) Cash and bank TOTAL CURRENT LIABILITIES a) Current liability b) provision TOTAL NET WORKING CAPITAL Increase in Working Capital 1073.94 1073.94 334.34 334.34 1288.73 599.20 82.67 1970.60 1371.79 552.03 280.14 2203.96 83.06 47.17 197.47

791.54 369.07 1160.61 809.99 263.95

737.73 392.29 1130.02 1073.94

53.81 23.22

263.95

INTERPRETATION
The study reveals that the inventory, cash and bank balance, current liabilities has increased. The sundry debtors, provision has decreased. Net working has increased in this year. [86]

STATEMENT SHOWING CHANGES IN WORKING CAPITAL (2008-2009)

PARTICULARS 2008 2009 INCREASE DECREASE

CURRENT ASSETS a) Inventories b) Sundry Debtors 1371.79 552.03 1476.39 296.88 [87] 124.60 255.15

c) Cash and bank TOTAL CURRENT LIABILITIES a) current liability b) Provision TOTAL NET WORKING CAPITAL Increase in Working Capital

280.14 2203.96

369.31 2142.58

89.17

737.73 392.29 1130.02 1073.94 286.95 1360.89

528.86 252.83 781.69 1360.89

208.87 139.46

286.95 1360.89 562.10 562.10

INTERPRETATION
The study reveals that the inventories, sundry debtors, cash and bank balance, provision has decreased. Current liabilities have increased. The net working capital of the firm has increased in the year 2009.

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6.1.

FINDINGS

From the liquidity analysis it is found that the company is having a satisfactory level of working capital. The liquidity position i.e.; the ability to meet its short term liability is satisfactory. But the firm has to take proper attention in improving its standard ratio. Current ratio is high. So the company is able to pay its current obligation in time and when they become due.

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 Quick Ratio shows increasing trend. It becomes high in the last year. So the organization is able to meet current & liquid liabilities in time. The inventory turnover ratio and average inventory holding period has to be shortened down. Debtors turnover ratio has been good but the firm failed to maintain its ratio according to the needs. It has to provide procedure for the collection of debts. Creditors turnover ratio is unsatisfactory. More concentration has to be made on the payment of the creditors. Otherwise it will affect the credit worthiness of the firm. The debt equity ratio shows that the firm has dominants of outsiders fund over the shareholders capital. Inventory holding period also shows the stock velocity of conversion of stock into sales. In this organization the inventory holding period is high. It shows the negative trend.

Generally the higher value of debtors turnover ratio indicates the firm is more efficient in managing the debtors. But in this organization shows a decreasing trend in debtors turnover ratio. This organization is lacking to managing the debtors. Average collection period is increase during the year 2007. In the year 2008 it decreases to 97. But the last year it again increased to 114.

The creditors turnover ratio is very low. Low creditors turnover ratio is unsatisfactory to the concern. The company takes more time to repayment of the cash. It forces to control the purchase of raw material. [90]

 The fixed asset turnover ratio is very poor in this organization. But the company is trying to improve the ratio. Debt equity ratio is showing a decreasing trend. The company is accepting maximum outsiders fund to reduce risk for their investment.

The gross profit ratio of the company is unsatisfactory level. The company is trying to increase the gross profit ratio. Normally the operating ratio is 75 to 85. But in this company it is more than 100. It will affect negatively.

Return on investment is lying in negative. It shows the overall efficiency of the firm is very weak. Operating cycle shows that the company needs additional working capital for carry out the activities of the firm.

6.2.

SUGGESTIONS

The management has to take proper action in reducing the payment period and thus reduce the creditors of the firm. The firm should develop strategies in boosting up of sales in order to cover the cost involved in the production. The company facing heavy interest burden. By discharging major portion of its secured and unsecured loans, the company can reduce its financial charge.

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 The company is manufacturing only capacitors. For a manufacture turnover the company can diverse by its product. The firm should introduce any scientific method of sales promotion techniques in order to improve the sales. The debtors turnover ratio is very high. So the company must try to reduce the credit period. Otherwise it will affect negatively.

The company reduces the repayment of cash. Otherwise company cannot purchase the raw materials. It will affect the production and profit.

6.3.

CONCLUSION

This project work has been carryout to know the working capital management of KCCL by using ratio analysis. With the help of this ratio findings suggestion has been given. The basic financial balance sheet and profit and loss account of the company help in finding out the various transactions that was conducted in the firm. The study reveals that the long term solvency position of the company also not good and it is not having that much capacity to pay back its long term debt. So the company is forced to raise funds from non spontaneous sources, as the operating cycle of the

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company is very lengthy. So the company should take steps to improve its liquidity position.

BIBLIOGRAPHY
TEXT BOOKS:

C.R.Kothari, Research Methodology; Method and Techniques, (2nd edition; NewDelhi: New Age International Publishers, 2004) Hrishikes Bhattacharya, (2007).Working Capital Management- Strategies and Techniques, New Delhi: Prentice-Hall of India Pvt. Ltd. [93]

 M.Y. Khan and P.K.Jain, Financial Management: text, Problems and Cases, (5 th edition; New Delhi: Tata McGraw-Hill Publishing Company Ltd., 2008)

I.M.Pandey, Financial Management, (2nd edition; New Delhi: Vikas Publishing House Pvt. Ltd., 2002)

WEBSITES:
http://www.keltroncomp.com

http://en.wikipedia.org/wiki/Electrolytic capacitor

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