CHAPTER 1

INTRODUCTION

The Lakshmi group is a vertically integrated organisation in the textile industry. One of the two in the world and the only one in India which manufactures the entire range ofextile spinning machinery and textiles. The group has made substantial contributions to the Indian industry technology. Self reliance exports, imports substitution ancillary development and economy besides serving social needs such as public health, education, employment, transfer of technology to third world countries. In agriculture too, the group has gained and encouraged farmers to develop superior varieties of cotton.

1. Working Capital

Financial management deal with the managerial activity which is concerned with the planning and controlling activity of the firms scarce financial resources. Hence these scarce resouces have to be properly alocated to achieve the best of funds available. The subject matter of financial management has been defined in many ways depending upon the study of the subject of that particular period.

The scope of the subject is not so narrow finance function ocupies the area like raising of funds, effective utilization of funds, allocation of funds, taking sound financial decision at the appropriate time, evaluating the new adopting techniques for the growth of assets and for increasing the profitability.

Every business need for working capital to run the day - to day business activities cannot be over emphasised. A business firm which does not require any amount of working capital.

The firms aim at maximising the wealth of share holders. In its endeavour to maximise share holders wealth a firm should earn sufficient return from its operations. Earning a steady amount of profit requires successful sales activities.

2. Research Methodology

The study is based on secondary data which have been collected from the annual reports taken from the Lakshmi mills company ltd.,

Inferences were drawn from secondary data analysis. The analysis was done with the help of different tables, graphs etc. Each data were anlysed accordingly to importance. These data were tabulated accordingly and were analysed and interpreted in the coming paragraph. It was then well supported by corresponding illustration and charts.

3. Objectives of the Study

1.

To understand the relationship between current assets, current liability and working capital.

2.

To have an insight of the working capital position of the Lakshmi mills company ltd.,

3.

The measure financial operations and performance with the help of the working capital of the Lakshmi mills company Ltd.,

4.

To see nature and extent of working capital which is used in the organisation.

5.

To study the importance of working capital to run the day - to -day business activities of the Lakshmi mills company ltd.,

6.

To

indicate

the

relationship

between

profits

from

operations,

distributions of the dividend and raising of new capital or then loans.

4. Scope and Limitations

This report is related to the study of working capital management and covers the following aspects.

1.

History of the company

2.

Theoritical background of the study.

3.

Past 5 year financial performance for the purpose of analysis.

Limitations

There are different constraints while collecting the data from the organisation in completing this tasks.

1.

It is very difficult to collect all the data which are essential, within a short period.

2.

Changes in cash are more important and relavant for financial management than the working capital.

3.

This study is restricted to secondary data.

4.

competitive

nature

of

organisation

prevent

of

revalution

of

all

confidential details.

5.

It is only a rearrangement of data given in financial statements.

5. Profile of the Organisation

The lakshmi mills company ltd., was founded in 1910 as partnership firm in the form of a modest cotton gaining factory by Mr. G.Kuppuswamy Naidu in the city of coimbatore. The company served as a fountain Head of testile industry complex. The Lakshmi mills company ltd., coimbatore, is the most famous composite textile mills in coimbatore having 2.15 Lac spindles, 672 rotors and 386 Automatic Looms. It has celebrated the platinum Jubliee . The management is progressive in bringing about scientific changes.

They have brought professionalism in management, through there was originally Hereditary management. The Lakshmi mills has grown in its stature to be called as The lakshmi group of companies with a lot of diversification of manufacturing units. The company has four plant as follows.

1. Coimbatore Plant : (Papanaickenpalayam)

It is started in 1933 with 11,000 spindles. The weaving department was started in 1950 with 184 looms.

2. Kovilpatti Plant

It is started in Tirunelveli district, commenced production in 1941.

3. Palladam Plant

It is started in 1959 in Kuppusamy Naidu Puram near Palladam.

4. Singanallur Plant

It is started in 1929 as Coimbatore cotton mills and it merged with Lakshmi mills company ltd., in 1979. Weaving is done only in Singanallur and Coimbatore plants.

Board of Directors

SRI. K.R. Appaswamy Naidu

SRI. K. Ethirajulu

SRI. V. Jaganathan

DR. D. Jayavarthanavelu

SRI. J.K.S. Nicholson

JUSTICE G. Ramanujam (Retd.)

SRI. P. Sabanayagam

SRI. S. Narasimhan (Nominee of LIC)

Managing Directors

SRI. K. Sundaram (Chairman)

SRI. S. Pathy (Vice - Chairman)

Company Secratary

SRI. T. Govindharajan.

Auditors

M/S. Subbachar & Srinivasan

M/S. Fraser & Ross

Bankers : Central Bank of INDIA Bank of INDIA State Bank of MYSORE State Bank of SAURASHTRA Corporation Bank Indian Bank

Registered Office: 11OO, Avinashi road, Coimbatore . 641018. Mills at : Singanullur Coimbatore Koivilpatti Palladam

CHAPTER 2

WORKING CAPITAL MANAGEMENT

Working capital means excess of current assets over current liabilities. It is necessary for any organisation to run sucessfully its affairs to provide for adequate working capital. Moreover, the management should also pay due attention in exercising proper control over working capital.

1. Classification of Working Capital

Working capital may be classified in two ways.

1.1

On the basis of concept

1.2

On the basis of time

1.1 On the basis of concept

There are two concepts of working capital

1. Gross working capital

The gross working capital is the capital invested in total current assets of the enterprise. Current assets are those assets which in the ordinary course of business can be converted into cash within a short period of normally one accounting year.

2. Net working capital

Net working capital is the excess of current assets over current liabilities.

i.e Net working capital = current assets - current liabilities.

Net working capital may be positive or negative. When the current assets exceed the current liabilities of the working capital is positive. Liabilities exceeds the current assets the working capital is negative.

1.2 On the basis of time

1. 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 are always a minimum level of current assets which is continuously required by the enrerprise to carry out its normal business operations. Regular working capital required to ensure circulation of current assets from cash

to inventories, from the inventories to receivable and from receivable to cash and so on.

Reserve working capital is the excess amount over the requirement for the regular working capital which may be provided for contigenies that may arise at unstated periods such as strikes, rise in prices, depreciation etc.

2. Temproary or variable working capital.

Temporary or variable working capital can be further classified as seasonal working capital and special working capital. Most of the enterprise have provide additional working capital to meet the seasonal needs. The capital required to meet the seasonal needs of the enterprises is called seasonal working capital special working capital is that part of working capital which is required to meet special exigencies such as launching of extensive marketing campaigns for conducting research etc.

2. Objects of working capital.

Main objectives of the working capital.

1.

For the purchase of raw materials, components and spares.

2.

To pay wages and Salaries.

3.

To incur day to day expenses and over head cost such as fuel, power and office expenses, etc.,

4.

To meet the selling cost as packing, advertising, etc.,

5.

To provide credit facilities to the customers.

6.

To maintain the inventors of raw materials, work-in-process stores and spares and finished goods.

3. Componants of working capital

A. Current assets

Current assets sometime also called liquid assets are those resources of a firm which are either held in the form of cash or are expected to be converted into cash within the accounting period or the operating cycle of the business.

Current assets include cash marketable securities book debts (accounts receivable) and stock of raw material work-in-process and finished goods.

i ) Cash

Cash is the most liquid current assets. It is the current purchasing power in the hands of a firm and can be used for the purposes of acquiring some resources or paying some obligations cash includes actual money in hand and cash deposits in bank account.

ii) Marketable securitites

Its are the temporary or short-term investments in shares debentures, bonds and other securities. These securities are readily marketable and can be converted into cash within the accounting period. A firm usually invests in marketable securities when it has temporary surplus cash.

iii) Book debts or account receivable

Book debts are the amounts due from debtors (customers) to whom goods or services have been sold on credit. These amounts are generally readiable into cash within the accounting period. All book debts may not be realised by the firm. Debts which will never be collected are called bed debts.

iv) Bills receivable

It represent the promises made in writing by debtors to pay definite sums of money after some specified period of time. Bills are written by the firm and become effective when accepted by debtors.

v) Stock or inventory

Stock include raw materials, work-in-progress and finished goods in case of manufacturing firms. Raw materials and work-in-progress inventories are needed for smooth production. Stock of finished goods is kept for serving customers on a continuing basis. A merchandise as it has no manufacturing activity.

vi) Prepaid expenses and accrued incomes

Prepaid expenses and accrued incomes are also included in current assets prepaid expenses are the expenses of future period paid in advance. Example of prepaid expenses are prepaid insurance, prepaid rent or taxes paid in advance. They are current assets because their benefits which the firms has earned, but they have not been received in cash yet. They include items such as accrued dividend, accrued commission or accrued interest.

vii)

Loans

&

advances

Loan and advances are also included in current assets in India. They include dues from employees or associates, advances for current suppliers and advances against acquisition of capital assets expect for the advancement for current supplies, it is not proper to include loan & advances in current assets.

B) Current liabilities :

Current liabilities are debts payable within an accounting current assets are converted into cash to pay current liabilities. Some time new current liabilities may be incurred to liquidate the existing current liabilities. The typical example of current liabilities are creditors, bills payable, bank over draft, tax payable, outstanding expenses and income received in advance.

i ) Sundry Creditors :

It represent the current liablities towards suppliers from whom the firm has purchased raw materials on credit. This liability is also known as accounts payable and is shown in the balance sheet till the payment has been made to the creditors.

ii) Bills Payable :

Bills payable are the premised made in writing by the firm to make payment of a specified sum to creditor at some specific date. Bills are written by creditors over the firm and become bill payable once they are accepted by the firm. Bills payable have a life of less than a year, therefore, they are shown as current liabilities in the balance sheet.

iii) bank borrowing :

Bank borrowing forms a substantial part of current liabilities of large number of companies in India commercial banks advance short term credit to firms for financing their current assets.

iv) Provisions :

Provisions are other types of current liabilities. They include provisions for taxes or provision for dividend. Every business has to pay on its income. Usually it takes some time to finalises the amount of which the tax authorities. Therefore, the amount of tax is estimated and shown as provision for taxes or tax liability in the balance sheet.

v) Expenses payable :

Expenses payable (o/s expenses) are also current liabilities. The firm may owe payments to its employees and others at the end of accounting period for the service received in the current year. These payments are payable within a very short period. Examples of o/s expenses are wages payable rent payable or commission payable.

vi) Income received in advance:

It is yet another example of current liability. A firm can sometimes receive income for goods or services to be supplied in future. As goods or services have to be provided within the accounting period, such receipts are shown as current liabilities in the Balance sheet.

vii) Installments of long term loans: Installments of long term loans are payable periodically. That portion of the long-term loan which is payable in the current year will form part of current

liabilities. A form may also raise deposits form public for financing its current assets. These may be therefore classified under current liabilities. It may be noted that public deposits may be raised for a duration of one year through three years.

4. Factors determining the working capital requirements:

1) Nature or character of Business

Working capital also depends upon the nature of the business. The public utility concerns like railways, electricity, etc., have very little need for working capital since most of their transactions are on cash basis and moreover they do not require large inventories.

2) Size of Business / Scale of operations:-

Greater the size of a business unit generally longer will be the requirements of working capital. Smaller concern may need more working capital due to high O/H charges, inefficient use of available resources and other economic disadvantages.

3) Production Policy

The production could be kept either steady by accumulating inventories during slack periods with a view to meet high demand during the peak season. If the policy is to keep production steady by accumulating inventories it will require higher W.C.

4) The Length of Production Cycle:-

The longer the manufacturing time the raw materials and other supplies have to be carried for a longer period in the process with progressive increment of labour and service costs before the furnished product is finally obtained.

5) Sales Growth:-

The working capital needs of the firm increase as it sales grow. It is difficult to precisely determine the relationship between volume of sales and working capital needs. In practice, current assets will have to be employed before growth takes place. It is, therefore, necessary to make advance planning of working capital for a growing firm on a continuous basis.

6) Price Level Changes:-

The increasing shifts in price Level make functions of financial manager difficult. He should anticipate the effect of price level changes of working capital requirements of the firm. Generally raising price levels will require a firm amount of working capital. Same levels of current assets will need increased investment when prices are increasing.

7) Availability of Credit:-

The working capital requirements of a firm also affected by credit terms granted by its creditors. A firm will need less working capital if liberal credit terms are available to it. Similarly the availability of credit from banks also influences the working capital needs of the firm.

5. Need for working capital:-

The Need for working capital to run the day-to-day business activities cannot be over emphasied. We will hardly find a business firm which does not require any amount of working capital.

We know that firms aim at maximising the wealth of shareholders in its endeavour to maximise shareholders wealth a firm should earn sufficient return from its operations. Earning a steady amount of profit requires successful sales activity.

5.1 Operating cycle:-

Operating cycle is the time duration required to convert sales after the conversion of resources into inventories, into cash. The operating cycle of a manufacturing company involve three phases:-

i.

Acquisition Of Resources such as raw materials, labour, power & fuel, etc.,

ii.

Manufacturer Of The Product which includes conversion of raw materials into the work-in-process into finished goods.

Sales Of The Product either for cash or on credit. Credit sale creates book debts for collection.

Operating Cycle a Manufacturing Firm.

Payment RMCP + WIPCP + FGCP ICP Payables GOC

Credit Sale

Collection

RCP NOC

RMCP WIPCP FGCP ICP RCP NOC GOC

Raw material conversion period. Work in progress conversion period.

Finished goods conversion period. Inventory conversion period. Receivables conversion period. Net Operating cycle. Gross operating cycle.

The length of the operating cycle of a manufacturing firm is the sum of

(1) (2)

Inventory conversion period, and Book debts conversion period.

The inventory conversion period is the total time needed for producing and selling the product. Typically it includes,

(a)

Raw material conversion period

(b)

Work-in-progress

( C)

Finished goods conversion period.

The book debts conversion period is the time required to collect outstanding amount from customers. The total of inventory conversion period and book debts conversion period is sometimes referred to as gross operating cycle.

5.2 Permanent and variable working capital.

The need for current assets arises because of the operating cycle. The operating cycle is a continuous process and therefore the need for current assets is felt constantly. However, there is always a minimum level of current assets which is continuously required by the firm to carry on its business operations. The minimum level of current assets is referred to as permanent or fixed working capital.

Permanent and Variable Working Capital Amount of Working Capital in Rs.

Temporary (or) variable

Permanent

Time

Depending upon 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 working capital.

5.3

Adequacy of working capital

The dangers of excessive working capital are as follows:

i.

It results in unecessary accumulation of inventories. Thus changes of inventory mishanding waste, theft and losses increase.

ii.

It is an indication of defective credit policy and slack collection period. Consequently higher incidence of bad debts results, which adversely affects profits.

iii.

Excessive working capital makes management complacent which degenerates into managerial inefficiency.

iv.

Excessive working capital makes management complement which teads to overall inefficiency in the organisation.

Inadequate working capital is also bad and has the following dangers.

i.

If concern which has inadequate working capital cannot pays its shortterm liabilities its time.

ii.

It cannot by its requirements in bulk and take advantages of cash discounts.

iii.

Leads to inefficiencies increase in costs and reduction in profit.

iv.

iv)Leads to decrease in return on investment.

v.

Fixed assets are not efficiently utilised for the {labour}* of working capital funds.

6.

Estimating working capital needs

A number of methods in addition to the operating cycle concept, may be used to determine working capital needs in practice. We shall illustrate have three approaches which have been successfully applied in practice.

1. Current assets holding period

To ensure estimate working capital requirements on the basis of average holding period of current assets and relating them to costs based on the companys experience in the previous hear.

2. Ratio of sales

To estimate working capital requirements as a ratio of sales on the assumption that current assets change with sales.

3. Ratio of fixed investment

To estimate working capital requirements as a percentage of fixed investment.

7. Financing current assets.

Three types of financing may be distinguished.

1.

Long-term,

2.

Short-term and

3.

Spontaneous financing

The important sources of long-term financing are shares, debentures, preference shares, retained earnings and long-term debt from financial institutions short-term financing refers to those sources of short-term credit that the firm must average in advance. These sources include short-term bank loans, commercial

papers, factoring receivables and public deposits. Spontaneous financing refers to the automatic sources of short-term funds arising in the normal course of a business.

Depending on the mix of short-term and long-term financing, the approach followed by a company may be referred to us.

A. Matching approach

B. Conservative approach

C. Aggressive approach.

A. Matching approach

The firm can adopt a financial plan which matches the expected use of assets with the expected life of the source of funds raised to finance assets. Thus, a tenyear loan may be raised to finance a plant with an expected life of ten years. Stock of goods to be sold in thirty days may be financed with a thirty-day bank loan and so on.

When the firm follows matching approach (also known as hedging approach) long-term financing will be used to finance fixed assets and permanent current assets and short-term financing to finance temporary or variable current assets.

Temporary C.A Assets

C E

Permanent C.A Fixed assets Time

Short term financing A C E

Long term financing B D F in conservative approach in aggressive approach in matching approach

B. Conservative approach

A firm in practice may adopt a conservative approach in financing its current and fixed assets. The financing policy of the firm is said to be conservative when it depends more on long-term funds for financing needs under a conservative plan, the firm finances its permanent assets and also a part of temporary current assets with long-term financing. In the period when the firm has no need for temporary current assets, the idle long-term funds can be invested in the tradable securities to conserve liquidity. The conservative plan relies hearly on long-term financing and therefore, the firm has less risk of facing the problem of shortage of funds.

C. Aggressive approach

A firm may be aggressive in financing its assets. An aggressive policy is said to be followed by the firm when it uses more short-term financing than warranted by the matching plan. Under an aggressive policy, the firm finances a part of its permanent current assets with short-term financing some extremely aggressive firms may even finance a part of their fixed assets with short-term financing.

CHAPTER 3

ANALYSIS OF WORKING CAPITAL

Size of working capital

The basic objective of financial management is to maximise shareholders wealth. This is possible only when the company earns sufficient profit. The amouht of such profits longly depends upon the magnitude of sales. However sales do not converet into cash instaneously. There is always a time gap between the sales of goods and receipts of cash working capital is required for the period in order to sustain the sales activily.

Table : 3.1 Size of working capital (Rs. in lakhs) Year 1993-94 1994-95 1995-96 1996-97 1997-98 Current assets 6513 9000 10835 8054 8475 Current liabilities 3148 2051 3569 2523 2456 Working capital 3365 6949 7266 5531 6019

Interpretation : The above table shows the working capital position of Lakshmi mills company for the last five years. The working capital was positive position due to the increase in loans & advances, sundry debtors. From this table, we can see that during the 1995-96 working capital was increased, beceuse of the company utilised those money for inventory, advances and sundry debtors.

During the 1996-97 the working capital was decreased because during these years companys inventory, advances and sundry debtors were decreased.

Table: 3.2 Composition of working capital Year % inventory to C.A % of debtors % of cash & bank balance % of loan & advances to Sales

to C.A 1993-94 1994-95 1995-96 1996-97 1997-98 Average 45 55 57 43 42 48 16 14 14 15 15 15

to C.A 20 18 15 22 22 19

C.A 19 13 14 20 21 18 15494 20125 20866 19834 21078

Interpretation : From this table, shows that composites of working capital during 1993 to 98. It shows that the stock have decreased from 45% to 42% (nearly) and cash & bank balances have increased from 20% to 22% (nearly) of the total current assets. Also sales was increased properly. Thus the cash & bank balances position of the company would be rather comfortable.

Statement of changes in working capital in 1994-95 (Rs. in Lakhs) Particulars Current assets : 1. Cash 2. Cash at bank 3. Raw materials 4. Stock in process 5. Other inventories 6. Sundry Debtors 7. Loans & Advances Total Current liabilities 1. Sundry creditors 2. Unclaimed dividend 3. Provisions 4. Other liabilities Total Increase in working capital Total 3888 1393 3 751 1001 3148 344 3 467 12377 2051 3584 3888 1049 284 236 4 1309 965 246 1700 1039 1250 6513 7 1626 2067 354 2527 1237 1182 9000 3 317 1102 108 827 198 68 1994 1995 Increase Decrease

Statement of changes in working capital in 1995-96 (Rs. in Lakhs) Particulars Current assets : 1. Cash 2. Cash at bank 3. Raw materials 4. Stock in process 5. Other inventories 6. Sundry Debtors 7. Loans & Advances Total Current liabilities 1. Sundry creditors 2. Unclaimed dividend 3. Provisions 4. Other liabilities Total Increase in working capital Total 2574 344 3 467 1237 2051 2106 5 376 1082 3569 317 2574 91 155 1762 2 7 1626 2067 354 2527 1237 1182 9000 5 1669 3814 374 2036 1493 1444 10835 43 1747 20 256 262 2 491 1995 1996 Increase Decrease

Statement of changes in working capital in 1996-97 (Rs. in Lakhs) Particulars Current assets : 1. Cash 2. Cash at bank 3. Raw materials 4. Stock in process 5. Other inventories 6. Sundry Debtors 7. Loans & Advances Total Current liabilities 1. Sundry creditors 2. Unclaimed dividend 3. Provisions 4. Other liabilities Total Decrease in working capital Total 2106 5 376 1082 3569 1410 5 430 678 2523 1735 3047 3047 696 404 54 5 1669 3814 374 2036 1493 1444 10835 4 1808 1316 366 1806 1237 1517 8054 139 73 1 2498 8 230 256 1996 1997 Increase Decrease

Statement of changes in working capital in 1997-98 (Rs. in Lakhs) Particulars Current assets : 1. Cash 2. Cash at bank 3. Raw materials 4. Stock in process 5. Other inventories 6. Sundry Debtors 7. Loans & Advances Total Current liabilities 1. Sundry creditors 2. Unclaimed dividend 3. Provisions 4. Other liabilities Total Increase in working capital Total 711 1410 5 430 678 2523 1280 5 426 745 2456 488 711 130 4 67 4 1808 1316 366 1806 1237 1517 8054 5 1869 1160 378 2071 1283 1709 8475 1 61 12 265 46 192 156 1997 1998 Increase Decrease

CHAPTER 4 WORKING CAPITAL RATIOS 1. Current Ratio The current ratio is calculated by dividing cueernt assets by curreent liabilities Current ratio = Current assets/ Current liabilities Table: 4.1 Current ratio (Rs. in lakhs) Year 1993-94 1994-95 1995-96 1996-97 1997-98 Current assets 6513 9000 10835 8054 8475 Current liabilities 3148 2051 3569 2523 2456 Ratio 2.07 4.39 3.04 3.19 3.45 Average : 3.23

Interpretation From this table, we can see the last five year current ratio level. The Lakshmi mills company ltd., current ratio is normal level. The company should maintain the normal level otherwise the company may fail in the long run.

One company keeps current ratio 1:1 companys short term financial position good. Here, The Lakshmi mills company ltd keep the ratio more than one in the last year.

2. Working capital turnover ratio :

This ratio indicate whether or not working capital has been effectively utilised in making sales. In case a company has achived a higher volumes of sales with relatively small amount of working capital it is an indication of the operating efficiency of the company

Working Capital Turnover ratio = Net sales/ working capital Table: 4.2 Working capital turnover ratio (Rs. in lakhs)

Year 1993-94 1994-95 1995-96 1996-97 1997-98

Net sales 15494 20125 20866 19834 21078

Working capital 3365 6949 7266 5531 6019

Ratio 4.60 2.90 2.87 3.59 3.50

Interpretation : From this analysis it is clear that the company utilised its working capital properly in working capital. In 1993-94 working capital turnover ratio was good. In 1994-95 and 1995-96 working capital turnover ratio was low level working capital commonly, we can say that the last two years working capital position of The Lakshmi mills company ltd., is good.

3 Inventory Turnover Ratio : Inventory turnover ratio points the effieciency of the firm in maintaining and utilising the inventory. The higher the inventory turn over the larger the amount of profit,the smaller the amount of capital tied up in inventory and the more current the merchandise stock. Inventory turn over ratio = Cost of goods sold/ Average inventory Table: 4.3 Inventory turn over ratio (Rs. in lakhs) Year 1993-94 1994-95 1995-96 1996-97 1997-98 Cost of goods sold 16826 16331 13123 16707 16910 Average inventory 2911 4949 6224 3488 3609 Ratio 5.78 3.30 2.11 4.79 4.69

Interpretation : The ratio gives the number of times the inventory is replace during a given period. Higher the ratio better the performance of the company for it has managed to operate with a relatively small average loading up of funds. The conclude The Lakshmi mills company Ltd., Kept inventory at an average of 2 times for the last 5 years which is a satisfactory level.

4. Raw material turnover ratio : It is computed so as to analysis the speed with which the raw materials are being consumed by the firms. A high raw material turnover ratio is an indication of fast moving on items. Raw material consumed Raw material turnover ratio = --------------------------------------------Average stock of raw materials Month in the year Average consumption period = ----------------------------------------Raw material turnover ratio

Table: 4.4 Raw material turnover ratio (Rs. in lakhs) Year 1993-94 1994-95 1995-96 1996-97 1997-98 Raw material consumed 8158 10684 11261 9806 9895 Average stock of raw materials 965 2067 3814 1316 1160 Ratio 8.45 5.17 2.95 7.45 8.53 Average consumption period 43 days 70 days 123 days 48 days 42 days

Interpretation : The ratio gives the number of times the raw materials is replaced during a given period. Higher the ratio better the performance of the company for it has manged to operate with a relatively small average loading up of funds commonly. The Lakshmi mills company ltd., kept satisfactory raw material turnover.

5 Finished goods turnover ratio : Finished goods turnover ratio is the number of times the finished goods have been turned into sales during a period and the time taken for such process.

Cost of production Finished goods turnover ratio = -----------------------------------Average finished goods 365 days = -----------------------------------------Finished goods turnover ratio

Average period for sales

Table: 4.5 Finished goods turn over ratio (Rs. in lakhs) Year 1993-94 1994-95 1995-96 1996-97 1997-98 Cost of production 17219 16681 13055 16452 17225 Average of finished goods 1286 1657 1798 1637 1667 Ratio 13.4 10 7.3 10 10.3 Average sales period 27 days 37 days 50 days 37 days 35 days

Interpretation : Here the replacement of finished goods during the year 1993-94 was high. In the consequent year it declined replacement of finished goods at an average of 37 days during the last 5 year. It is a satisfactory level.

6. Net profit ratio : This ratio of net profit to sales essentially expenses the cost price effectiveness of the operation. A high net profit would ensure adequate return to the owners as well as enable the firm to withstand advances economic conditions when selling price is declining cost of production is raising demand for product is falling. Net profit = ----------------- x 100 Sales Table: 4.6 Net profit ratio (Rs. in lakhs) Year 1993-94 1994-95 1995-96 1996-97 1997-98 Net profit 270.65 372.34 113.99 125.83 424.61 Sales 15494 20125 20866 19834 21078 Ratio 1.75% 1.85% 0.55% 0.63% 2.01%

Net profit ratio

Interpretation : The company earn low profit in the year 1995-96. The next year 1996-97 sales Rs.1032 lakhs decreased but profit is sufficient level compared with 199596. 1997-98 profit and sales in sufficient level.

7. Earning per share : If we adopt minimising earnings per share as the financial objective of the firm, this will also not ensure the minimisation of the owner of economic welfare. If the market value is not function of EPS, than maxiamtion of the latter will not necessary result in the highest possible price for the companys share.

Earning per share

Profit after Tax = ------------------------------No. of equity shares Table: 4.7 Earning per share (Rs. in lakhs)

Year 1993-94 1994-95 1995-96 1996-97 1997-98

Profit after Tax 27065000 37234000 11399000 12583000 42461000

No. of equity shares 463700 695550 695550 695550 695550

EPS 58.37 53.53 16.39 18.09 61.05

Interpretation : EPS was decreasing 1993-94 to 1995-96 respectively. The last two years companys EPS was increasing respectively . 1997-98 EPS was sufficient level and profit was increased to 4,24,61,000

8. Profit margin ratio : It is arrived at after dividing profits by sales. If we divide the gross profit by sales the ratio is called the gross profit margin. But when operating profit is divided by sales the ratio is known as profit margin.

Profit margin ratio

EBIT = ----------- x 100 Sales Table 4.8

Profit margin ratio ` Year 1993-94 1994-95 1995-96 1996-97 1997-98 EBIT 950 1220 1351 1485 1720 Sales 15494 20125 20866 19834 21078 (Rs. in lakhs) Profit margin ratio 6.13% 6.06% 6.48% 7.49% 8.16%

Interpretation : From the above analysis we can see that the profit was increasing the every year and earning before interest and tax also increasing in the sales turnover and it affects the operations of the firm.

9. Return on share holders fund : Common share holders are entitled to the residual profit. The rate of common dividend is not fixed the earnings may be distributed to them or retained in the profit. Return on share holders fund indicates how well the firm used the resources of owners.

Return on share holders fund

EBIT = ---------------------------Share holders fund Table : 4.9

Return on share holders fund (Rs. in lakhs) Year 199394 199495 199596 199697 199798 EBIT 950 Share holders fund 2423 Return on share holders fund 0.39

1220

2680

0.46

1351

2616

0.52

1485

2619

0.57

1720

2921

0.59

Interpretation : From the analysis we can say that the company maintained a good return to the share holders fund. It creates the good name for the company between the share holders. So the company earn more profit in coming years to turn the share holders fund.

10. Working capital leverage The working capital leverage of the last five year for a 25% reduction in current assets. Current assets = ---------------------------------------------------Total assets - 25 % of Current assets Table : 4.10 Working capital leverage (Rs in Lakhs) Year 1993-94 1994-95 1995-96 1996-97 1997-98 Fixed Assets 2247 2665 3157 3033 2817 Current Assets 6513 9000 10835 8054 8475 Non - current Assets 237 296 423 693 902 Total assets 8997 11961 14416 11780 12194 Ratio 0.88 0.93 0.93 0.82 0.84

Working capital leverage

Interpretation : Looking at the working capital leverage of the last five year. 1995 and 1996 year working capital leverage is the highest level in the last five year position. We can say that the sensitivity of earnings for changes in the level of current assets of 1998 is for greater than that of 1997.

CHAPTER 5

FINDINGS

1.

Here the financial position means only the working captial position of finance. The Lakshmi mills have a satisfactory financial position indicates the ability of the company to pay off the current liabilities within a short span of time.

2.

Current ratio is another indicater of short term financial position of a concern. If one company keeps 1:1 companys short term financial position is good. Here the Lakshmi mills company ltd., keeps the ratio more than one all the five years. This is an satisfactory position of Lakshmi mills company ltd.,

3.

The Lakshmi mills company ltd., an average of 15% of its current assets in the form of debtors.

4.

The current assets most of the parts is covered by the inventory. The stock holding of the Lakshmi mills company ltd., is high through put the five years more than 24% of the current assets were kept in the form of stock. From the analysing stock shows increasing in the year 1995 and then decresing in the year 1996 & 1997. The inventory turnover ratio shows an upward and also downward trend.

5.

The Lakshmi mills company ltd., is maintaining a good working capital position through out the last two years out of 4 years. During the year 1993-94 companys working capital turnover ratio was very high (4.60) and

during the year 1993-94 company utilised its working capital properly and during that year company sales was 15494 lakhs with a working capital of 3365 lakhs.

6.

The working capital helped in the lakshmi mills company ltd in the way of Inventory, sundry debtors, cash & bank balance and sundry creditors.

Assessment of working capital Estimate for the year ending (Rs. in Lakhs) Particulars 1. Gross sales 2. Cost of sales i) Raw materials ii) Salaries & wages iii) Power & fuel iv) Store consumed v) Repairs vi) Processing charges vii) Other expenditure viii)Depreciation Sub Total Add : Opening stock in process 11261 2205 1955 633 420 73 206 491 17244 221 17465 Less : Closing stock in progress Cost of Production Add : Opening stock of finished goods 246 17219 1089 18308 Less : Closing stock of finished goods Total Cost of Sales 1482 16826 10684 2123 1737 640 654 294 210 447 16789 246 17035 354 16681 1482 18163 1832 16331 8159 2023 1262 493 353 236 140 409 13075 354 13429 374 13055 1832 14887 1764 13123 9806 2637 2026 633 485 45 308 504 16444 374 16818 366 16452 1764 18216 1509 16707 9895 2633 2507 722 534 83 364 499 17237 366 17603 378 17225 1509 18734 1824 16910 1994 15494 1995 20125 1996 20866 1997 19834 1998 21078

Particulars 3. Selling & administration expenses Total Operating profit less: Interest Graduity Modernisation & Special repairs Net profit for the year before taxation Less : 1. Bonus relating to previous year 2. Expenses relating to earlier year 3. Taxation

1994 897 17723 1457

1995 1189 17520 1378

1996 958 14081 1381

1997 915 17622 1554

1998 1049 17959 1790

579 477 31 370

778 127 31 442

1237 31 113

1119 69 366

948 71 771

100 270

70 372

113

201 16 23 126

240 107 424

As per balance sheet as at (Rs. In lakhs) Particulars Liabilities Current liabilities 1. Sundry creditors 2. Sales tax ( Net) 3. Unclaimed dividend 4. provisions 5. Other Liabilities Total Current Liabilities Term liabilities : 1. Debenture 2. Loans from financial institutions 3. Loan from banks 4. Unclaimed loan Total Term Liabilities 298 588 2243 296 3425 1198 1161 4179 692 7230 1198 834 5763 435 8230 1198 295 4785 360 6638 1073 5289 454 6816 1393 4 3 751 997 3148 344 28 3 467 1209 2051 2106 28 5 376 1054 3569 1410 [38] 5 430 716 2523 1280 14 5 426 731 2456 1994 1995 1996 1997 1998

Particulars Net worth 1. Ordinary share capital 2. Capital reserve 3. General reserve 4. Other reserve Total Net Worth Total Liabilities Assets : Current Assets : 1. Cash 2. Cash at bank 3. Raw materials 4. Stock in process 5. Other inventories 6. Sundry debtors 7. Deposit with ltd company

1994

1995

1996

1997

1998

464 47 1175 738 2424 8997

696 47 1400 537 2680 11961

696 47 1415 459 2617 14416

696 9 1430 484 2619 11780

696 9 1462 755 2922 12194

4 1309 965 246 1700 1039 20

7 1626 2067 354 2527 1237 20

5 1669 3814 374 2036 1493 20

4 1808 1316 366 1806 1237 20

5 1869 1160 378 2071 1283 20

Particulars 8. Other deposits 9. Advance tax 10. Income receivable 11. Other current assets Total Current Assets Fixed assets Gross Block Less : Depreciation Net Block Non Current Assets: 1. Capital work in process 2. Investment 3. Miscellaneous Expenditure a) Modernisation special repairs b) Differed Revenue Expenses Total Assets Net working capital

1994 161 214 66 789 6513 6423 4176 2247 9 133

1995 164 329 40 629 9000 7095 4430 2665 36 199

1996 218 305 89 812 10835 8038 4881 3157 30 171

1997 223 54 192 1028 8054 8366 5333 3033 58 211

1998 235 32 82 1340 8475 8584 5767 2817 211

91 4 8997 3365

61 11961 6949

222 14416 7266

314 110 11780 5531

602 89 12194 6019

CONTENTS Chapter No. SUB-TITLE LIST OF TABLE LIST OF FIGURES ACKNOWLEDGEMENT I II III IV V VI INTRODUCTION WORKING CAPITAL MANAGEMENT ANALYSIS OF WORKING CAPITAL WORKING CAPITAL RATIOS FINDINGS SUGGESTIONS APPENDIX BIBLIOGRAPHY Title

SUB TITLES CHAPTER I Introduction No. 1. 2. 3. 4. 5. Working capital Research methodology Objectives of the study Scope and limitations of study Profile of the organisation Particulars

CHAPTER II Working capital management No. 1. 2. 3. 4. 5. 6. 7. Particulars Classification of working capital Objectives of working capital Components of working capital Factors determining the working capital requirements Needs for working capital Estimating working capital needs Financing current assets

CHAPTER 6

SUGGESTIONS

1.

The lakshmi mills company ltd is having a satisfactory working capital pssition. So the company can pay its current liabilities within a short period.

2.

The company can maintain the current ratio in the same level (1:3) for the coming years.

3.

Even though

the company is having a good size of working capital,it can

increase the current assets to achieve a exellent working capital.

4.

The inventory turnover ratio shows an upward and also downward trend. So the company can try to get finished goods turnover within a 35 days.

5.

Generally, the last four years (1995 to 1998) Working Capital position is good. The company should continue this Working capital position.

BIBLIOGRAPHY

1.

Financial Management

- I. M. Pandey.

2.

Principles of Management Accounting

- S. N. Maheshwari.

3.

Financial Management

- S. P. Jain & Narang

4.

Financial Management

- Sharma

5.

Financial Management

- P.V.Kulkarni

6.

Management Accounting

- R.K.Sharma & Gupta

LIST OF FIGURES No. 4.1 4.2 4.3 4.4 4.5 4.6 4.7 4.8 4.9 4.10 Current ratio Working capital turnover ratio Inventory turnover ratio Rawmaterial turnover ratio Finished goods turnover ratio Net profit ratio Earning per share Profit margin ratio Return on share holders fund Working capital leverage Particulars

LIST OF TABLES No. 3.1 3.2 4.1 4.2 4.3 4.4 4.5 4.6 4.7 4.8 4.9 4.10 Particulars Size of the Working Capital Composition of Working Capital Current ratio Working capital turnover ratio Inventory turnover ratio Rawmaterial turnover ratio Finished goods turnover ratio Net profit ratio Earning per share Profit margin ratio Return on share holders fund Working capital leverage

KSR Institute of Management KSR COLLEGE OF ARTS & SCIENCE

(Affiliated to University of Madras)

CERTIFICATE

This is to certify that the project report is entitled A DETAIL STUDY ON WORKING CAPITAL MANAGEMENT IN LAKSHMI MILLS COMPANY LTD., COIMBATORE is a bonafide record of work done by MB70677 during the academic year 1998 - 99.

A.RAJENDRAN, Reg. No.

Faculty Guide

Director

Submitted for Viva-voce Examination held on ..........................

Internal Examiner Examiner

External

ACKNOWLEDGEMENT

My overwhelming and delightful thanks to our winsome Correspondent Dr. Lion K.S.RANGASAMY, MJF for providing me an opportunity to undergo Masters Degree in Business Administration in this college.

I take this opportunity to thank Prof. A.Y.NARASIMHAM, B.Sc., B.E., MBA (USA), for having permitted me to undertake this project work.

I express my sincere gratitude to my project guide Mr.D.S.SELVAKUMAR, M.Com., M.Ed., M.Phil., for his valuable guidance and assistance throughout my endeavour.

I am deeply indebted to Mr. V. PRABAKARAN, Account Department in Lakshmi Mills Company Limited, Coimbatore for his whole hearted co-operation and support which played a vital role in a successful completion of this project work.

A. Rajendran

DECLARATION

I, A. RAJENDRAN, Register No. MB 70677 declare that the project report on A DETAIL STUDY ON WORKING CAPITAL MANAGEMENT IN LAKSHMI MILLS COMPANY LTD., COIMBATORE , is the result of the original work done by me and to the best of my knowledge. A similar work has not been submitted earlier to the University of Madras or any other institution for the fulfilment of the

requirements of a course of study. This project is submitted on partial fulfilment of the requirement of all award of the Degree of MASTER OF BUSINESS

ADMINISTRATION (M.B.A) of UniversZity of Madras

Place : Date :

Signature

(A. RAJENDRAN)