MBA Financial Management Project on Working Capital Management

MBA PROJECT AMARAVATHI TEXTILES
FINANCIAL MANAGEMENT
INTRODUCTION
Financial management, as an integral part of over all management is not a

totally independent area. It draws heavily on related disciplines and field of study,
such as Economics, Accounting there disciplines are in related, there are key
references among them.
Financial management refers to its relationship with the closely related
fields, its function, scope and objectives. Financial as academic discipline as
under gone fundamental changes in its scope and coverage. In the early years of
its evolution it was treated synonymously with the rising of funds. In the current
literature pertaining to financial management in addition to procurement of funds
efficient use of resources is universally recognized.
Definition of Financial management:
Ezra Solomon has defined “The Financial Function as the study of the
problems involved in the use and acquisition of funds by a Business”.
Scope of financial management:
The approach to the scope and the functions of financial management is

divided for the purposes of expositions into two broad categories.
WORKING CAPITAL MANAGEMENT AU.CAMPUS..KAKINADA

a) The traditional approach.

b) The modern approach.
Traditional approach:
The traditional to the scope of financial management refers to its subject

matter in academic literature in the stage its evolution as the separate branch of
academic study. The term “Corporation Finance” was used to describe what is
known in the ac academic world as financial management.
Modern approach:
The modern approach views the term Financial Management in the broad
sense and provider a conceptual and analytical framework for financial decision
making.
Objectives of Financial Management:
The objectives of financial management are
1) Profit maximization approach.

2) Wealth maximization approach.

1. Profit maximization approach:
According to this approach actions that increase profits should be

undertaken and those that decrease profits are to be avoided. In specific
operational terms as applicable to Financial Management, the profit maximization
criterion implies that the investment, financing and dividend policy decisions of a
firm should be oriented to the maximization of profits.
2. Wealth maximization:
This is also known as value maximization or net present worth

maximization. In current academic literature value maximization is almost
universally accepted an appropriate operational criterion for Financial
Management decisions as it removes the technical limitation which characterizes
the earlier profit maximization criterion. Its operational features satisfy all the
three requirements of a suitable operational objective of financial courses of
actions namely exactness, quality of the benefits and the time value of money.
The financial statements just provide the financial ingredients of a firm.

One should analyze to identify where the strengths and weakness of the company
are hiding. So the study on ratio analysis have been taken by me in order o know
efficiency and liquidity of a firm.

WORKING CAPITAL
INTRODUCTION
Working capital management involves the relationship between a firm’s

short-term assets and its short-term liabilities. The goal of working capital
management is to ensure that a firm is able to continue its operations and that it
has sufficient ability to satisfy both maturing short-term debt and upcoming
operational expenses. The management of working capital involves managing
inventories, accounts receivable and payable, and cash.
Working capital typically means the firm’s holdings of current, or short-

term, assets such as cash, receivables, inventory and marketable securities. These
items are referred to as circulating assets because of their cyclical nature. In a
retail establishment, cash is initially employed to purchase inventory, which is in
turn sold on credit and results in accounts receivables. Once the receivables are
collected, they become cash-part of which is reinvested in additional inventory
and part going to profit or cash throw-off.
The need for working capital to run the day to day business activities
cannot be overemphasized. We will hardly find a business firm which does not
require any amount of working capital. Indeed, firms differ in their requirements
of the working capital.
There are two concepts of working capital—gross and net.

Gross working capital refers to the firm’s investment in current assets. Current
assets are the assets which can be converted into cash within an accounting year
an include cash, Short-term securities, debtors, bills receivable and stock.
Net working capital refers to the difference between current assets and current
liabilities. Current liabilities are those claims of outsiders which are expected to
mature for payment within an accounting year and include creditors bills payable,
and outstanding expenses.
Working Capital is the capital that allows businesses to operate on a day-
to-day basis. Depending on the nature and the time period for which the working
capital is held in business, it can be classified as:
KINDSOF WORKING CAPITAL:
KINDS OF WORKING CAPITAL
ON THE BASIS OF CONCEPT ON THE BASIS OF TIME
GROSS PERMINANT TEMPORARY

NET WORKING
WORKING WORKING WORKING
CAPITAL
CAPITAL CAPITAL CAPITAL
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PERMANENT (OR) FIXED WORKING CAPITAL:
Permanent Working capital is the minimum amount which is required to

ensure effective capitalization of fixed facilities and for maintaining the
circulation of current assets these are always a minimum level of current assets
which is continuously required by the enterprise to carry out its normal business
operations.
For example every firm has to maintain minimum level of raw materials
work- in –process finished goods & cash balance. This minimum level of current
assets is called permanent or fixed working capital of this part of capital is
permanently blocked in current assets.
TEMPORARY (OR) VARIABLE WORKING CAPITAL:
Temporary Working Capital is the amount of working capital which is

required to meet the seasonal demands and some special emergencies. Variable
Working capital can further classified as reasonable working capital and special
working capital most of the enterprises have to provide additional working capital
to meet the seasonal working capital .special working capital which is required to
meet special exigencies such as marketing research etc.
GROSS WORKING CAPITAL:

It is the amount of funds invested in the various components of current
assets this concept has the following advantages.
• Financial managers are profoundly concerned with current assets.
• This will be provides the current amount of working capital at the right
time.
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• It enables a firm to realize the greatest return on its investment.
• It helps in the fixation of various areas of financial responsibility.
• It enables affirm to plan and control funds and to maximize the return on
investment.
NET WORKING CAPITAL:
In reference to the difference between current liabilities net working capita;

can be positive or negative. A positive net working will arise when current assets
exceeds current liabilities. As negative working capital occurs, where current
liabilities are in excess of current assets.
OPERATING CYCLE
Working capital is required because of the time gap between the sales and
their actual realization in cash. This time gap is technically termed as “operating
cycle” of the business.
In case of a manufacturing company, the operating cycle is the length of

time necessary to complete the following cycle of events...
DEBTORS
CASH FINISHEDGOODS
WORK IN
RAW MATERIAL
PROGRESS
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In case of a “trading firm” the operating cycle will include the length of time
required to convert
i. Cash into Raw Materials.

ii. Raw Materials into Work In Progress.
iii. Work In Progress into Finished Goods.
iv. Finished Goods into Debtors
v. Debtors into Cash
This cycle will be repeated again and again

NEED OF THE STUDY
Every business enterprise needs some amount of working capital. Working

capital is the lifeblood and nerve center of any business concern. The need for
working capital arises due to the time gap between production & realization of
cash from sales.
1). Solvency of the business: Sufficient working capital helps in maintaining

solvency of the business by providing uninterrupted flow of production.
2). Goodwill: Sufficient working capital enables a business concern to make

prompt payments and hence helps in creating and maintaining goodwill.
3). Easy loans: A concern having adequate working capital high solvency and
good credit standing can arrange loans from banks and others on easy and
favorable terms.
4). Cash discount: Adequate working capital also enables a concern to avail
cash discounts on the purchase and reduces cost.
5). Regular supply of raw-materials: Sufficient working capital ensures regular

supply of raw materials and continuous production.

6). Regular payment of salaries, wages & other day to day commitments:
Adequate working capital enables regular payment of salaries, wages and
day to day commitments, which enhances production and profits of the
company.
7). Ability to face crisis: Adequate working capital enables a concern to face
business crisis in emergencies such as depression.
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OBJECTIVES OF THE STUDY
1. The main objective of the study is to analyze how working
capital management is carried out in the organization.
2. To study various components of working capital and their management.
3. To evaluate the liquidity management through some of the related working
capital ratios.
4. To know the efficiency of the company in utilizing its current assets.
5. To study the trends in working capital components.
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RESEARCH & METHODOLOGY
The study has been conducted in the organization to examine Working Capital
Management in order to enquire into the issues like liquidity, and Material
Management. The study has been undertaken in the Accounting & Finance
deportments of the organization.
Primary data :
Primary data is the data which has been collected directly from the people of
the organization it is also called as first hand data.
The primary data is collected by discussions with the functional managers,

officers, staff and other members of the organization.
Secondary data :
Secondary data is those which have been already collected by some agency and
which have been processed.
The secondary data is obtained from annual report and financial statement that
is balance sheet and profit and loss account, annual reports, and from the text books of
financial management.
Here the project is done on secondary data.
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LIMITATIONS OF THE STUDY
1. The study is based on the information available in the latest balance sheets
of the company, these balance sheets suffers a few limitations.
2. The study is based on the working capital analysis only.
3. The study is made only through secondary source of data. Normally
this will not facilitate to undertake a deeper study on the subject taken into
consideration.
4. .The study is limited to a period of five years for analyzing the data.
5. Analysis of information is based on ratios. The study is confined only
to a quantitative analysis; quality aspect of AMARAVATHI TEXTILES
PRIVATE LIMITED doesn’t reflect the study.
6. .This study evaluation is based on sum of the related working capital
ratios.
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PRESENTATION OF THE STUDY
The study is presented in 5 chapters
I Chapter: Need, objectives, research methodology, limitations are

promoted.
II Chapter: company & industry profile is incorporated.
III Chapter: Theoretical frame work related to financial statement analysis

is given
IV Chapter: data analysis & interpretation of AMARAVATHI

TEXTILES PRIVATE Ltd.
V Chapter: Findings, Suggestions, Conclusion of the study are given.
INDUSTRY PROFILE
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Cotton
Cotton is a soft, staple fiber that grows around the seeds of the cotton
plant. It is a natural fiber harvested from the cotton plant. The fiber most often is
spun into yarn or thread and used to make a soft, breathable textile, which is the
most widely used natural-fiber cloth in clothing today.
Processing of Cotton in India
In India the raw cotton, also called as Kapas is processed in a multi-

stage process described as below. The Products of processing are
I. Yarn.
II. Cottonseed Oil.
III. Cottonseed Meal.
I. Production of Yarn
KAPAS TO LINT: Kapas (also known as raw cotton or seed cotton) is unginned
cotton or the white fibrous substance covering the seed that is obtained from the
cotton plant. The first step in the process is, the cotton is vacuumed into tubes that
carry it to a dryer to reduce moisture and improve the fiber quality. Then it runs
through cleaning equipment to remove leaf trash, sticks and other foreign matter.
In ginning a roller gin is used to grab the fiber. The raw fiber, now called lint.
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LINT TO BALE: The lint makes its way through another series of pipes to a
press where it is compressed into bales (lint packaged for market). After baling,
the cotton lint is hauled to either storage yards, textile mills, or shipped to foreign
countries.
NOTE: The cotton seed is delivered to a seed storage area from where it is loaded
into trucks and transported to a cottonseed oil mill.
BALE TO LAP: Here the bales are broken down and a worker feeds the cotton
into a machine called a "breaker" which gets rid of some of the dirt. From here the
cotton goes to a "scutcher". (Operated by a worker also called a scutcher). This
machine cleans the cotton of any remaining dirt and separates the fibers. The
cotton emerges in the form of thin "blanket" called the "lap".
LAP TO CARDING: Carding is the process of pulling the fibers into parallel
alignment to form a thin web. High speed electronic equipment with wire toothed
rollers perform this task. The web of fibers is eventually condensed into a
continuous, untwisted, rope-like strand called a sliver.
SILVER TO ROVING: The silver is then sent to combing machine. Here, the
fibers shorter than half-inch and impurities are removed from the cotton. The
sliver is drawn out to a thinner strand and given a slight twist to improve strength,
then wound on bobbins. These Process is called Roving.
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ROVING TO YARN (SPINNING) : Spinning is the last process in yarn

manufacturing. Spinning draws out the short fibres from the mass of cotton and
twists them together into a long. Spinning machines have a metal spike called a
spindle which the thread winds around.
II. Production of Cotton Seed Oil
Processing of cottonseed in modern mills involves a number of steps. They are as

follows:
• The first step is its entry into the shaker room where, through a number of
screens and air equipment, twigs, leaves and other trash are removed.
• The cleaned seed is then sent to gin stands where the linters are removed
from the seed (delinted). The linters of the highest grade, referred to as
first-cut linters are used in manufacturing non-chemical products, such as
medical supplies, twine, and candle wicks. The second-cut linters removed
in further delinting steps, are incorporated in chemical products, found in
various foods, toiletries, film, and paper.
• The delinted seeds now go to the huller. The huller removes the tough seed
coat with a series of knives and shakers. The knives cut the hulls (tough
outer shell of the seed) to loosen them from the kernels (the inside meat of
the seed, rich in oil) and shakers separate the hulls and kernels.
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• The kernels are now ready for oil extraction. They pass through flaking
rollers made of heavy cast iron, spinning at high speeds. This presses the
meats into thin flakes. These flakes then travel to a cooker where they are
cooked at 170 degrees F to reduce their moisture levels. The prepared meats
are conveyed to the extractor and washed with hexane (organic solvent that
dissolves out the oil) removing up to 98% of the oil.
• Crude cottonseed oil requires further processing before it may be used for
food. The first step in this process is refining. With the scientific use of
heat, sodium hydroxide and a centrifuge (equipment used to separate
substances through spinning action), the dark colored crude oil is
transformed into a transparent, yellow oil. This clear oil may then be
bleached with a special bleaching clay to produce a transparent, amber
colored oil.
The refined cotton seed oil has several advantages other than edible oils. It
contains mere advantage over other edible oils. It contains a large percentage of
Poly Unsaturated Fatty Acids (PUFA) which maintain cholesterol in the blood at
a healthy level.
The quality of cotton oil depends on the weather prevailing during the time
that cotton stands in the fields after coming to maturity. Hence quality of oil
varies from place to place and season to season. The quality of oil is high in dry
seasons and low when the seed is exposed to wet weather in the fields or handled
or stored with high moisture. Further cotton seed cooking oil has a long span of
life due to the presence of vitamin E.
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III. Production of Cottonseed Meal/Cake/Kapaskhalli
• Kapaskhalli (cottonseed extraction/meal) is a byproduct of the cottonseed

industry.
• Cottonseed is a by-product of the cotton plant, which is primarily grown for
its fiber. Although cotton has been grown for its fiber for several thousand
years, the use of cottonseed on a commercial scale is of relatively recent
origin.
• Cottonseed was a raw agricultural product, which was once largely wasted.
Now it is being converted into food for people; feed for livestock; fertilizer
and mulch for plants; fiber for furniture padding; and cellulose for a wide
range of products from explosives to computer chip boards.
The figure showing the products obtained from processing the raw cotton:
Diagram 2.1
Source: The Cotton Corporation of India Ltd.
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Cotton Varieties in India
• Bengal Deshi mainly produced in the states of Punjab, Haryana, Rajasthan.
• Jayadhar mainly produced in the state of Karnataka.
• Bunny (or) Brahma is mainly produced in the states of Maharashtra,

Madhya Pradesh, Andhra Pradesh, Karnataka.
• Suvin is another variety produced in the state of Tamil Nadu.
• H-4 (or) MECH1 is mainly produced in the states of Maharashtra, Madhya

Pradesh, Andhra Pradesh.
Role of Cotton Industry in Indian Economy
Over the years, country has achieved significant quantitative increase

in cotton production. Till 1970s, country used to import massive quantities of
cotton in the range of 8.00 to 9.00 lakh bales per annum. However, after
Government launched special schemes like intensive cotton production
programmes through successive five-year plans, that cotton production received
the necessary impetus through increase in area and sowing of Hybrid varieties
around mid 70s.
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Since then country has become self-sufficient in cotton production
barring few years in the late 90s and early 20s when large quantities of cotton had
to be imported due to lower crop production and increasing cotton requirements
of the domestic textile industry.
Cotton production Areas in India

India is an important grower of cotton on a global scale. It ranks third
in global cotton production after the United States and China; with 9.50 million
hectares grown each year, India accounts for approximately 21% of the world's
total cotton area and 13% of global cotton production. The Cotton producing areas
in India are spread throughout the country. But the major cotton producing states
which account for more than 95% of the area under and output are:
1. Punjab.
2. Haryana.
3. Rajasthan.
4. Maharastra.
5. Gujarat.
6. Madhya Pradesh.
7. Andhra Pradesh.
8. Tamil Nadu.
9. Karnataka.
Of the nine cotton producing States in India, average yields are

highest in Punjab where most of the cotton area is irrigated.
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But the yields of cotton in India are low, with an average yield of 503
kg/ha compared to the world average of 734 kg/ha. The problem is also
compounded by higher production costs and poor quality in terms of varietals
purity and trash content.
However the Cotton plays an important role in the National economy
providing large employment in the farm, marketing and processing sectors.
Cotton textiles along with other textiles also contribute about 1/3rd of the Indian
exports.
Contribution of Cotton industry for Textile Industry

Cotton is the most important raw material for India's Rs. 1,50,000
crores textile industry, which accounts for nearly 20% of the total national
industrial production.
The cotton Industry is the backbone of our textile industry,
accounting for 70% of total fiber consumption in textile sector. It also accounts
for more than 30% of exports, making it India's largest net foreign exchange
industry. India earns foreign exchange to the tune of $10-12 billion annually from
exports of cotton yarn, thread, fabrics, apparel and made-ups.
The cotton Industry provides employment to over 15 million people.
And the area under cotton cultivation in India (9.5 million ha) is the highest in the
world, i.e., 25% of the world area.
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Steps taken by the Cotton Producers in India

Now-a-days the Indian Cotton producers are continuously working to
up-grade the quality and increase the cotton production to cope up with the
increased global demand for cotton textiles and to meet the needs of the 39
million spindles capacity of the domestic textile industry which presently
consumes about 12-14 million bales annually.
In India, cotton yields increased significantly in the 1980’s and
through the first half of 1980’s but since 1996 there is no increase in yield. In the
past, the increase in cost of production of cotton was partially offset by increase in
yield but now with stagnant yield the cost of production is rising. Besides low
yield, Indian cotton also suffers from inconsistent quality in terms of length,
micronaire and strength.
Policy of Government of India towards Cotton Industry

The Cotton production policies in India historically have been
oriented toward promoting and supporting the textile industry.
The Government Of India announces a minimum support price for
each variety of seed cotton (kapas) based on recommendations from the
Commission for Agricultural Costs and Prices. The Government Of India is also
providing subsidies to the production inputs of the cotton in the areas of fertilizer,
power, etc…
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Markets for Indian Cotton
The three major groups in the cotton market are

• Private traders,
• State-level cooperatives,
• The Cotton Corporation of India Limited.
Of these three groups, private traders handle more than 70 percent of

cottonseed and lint, followed by cooperatives and the CCI.
The Cotton Corporation of India Ltd. for the year 2008-09 had
purchased 60.30 lakh quintals of kapas equivalent to 11.77 lakh bales valuing
Rs.1218.70 crores in Andhra Pradesh, Maharashtra, Madhya Pradesh, Orissa and
Karnataka. Beside these the Corporation had also carried out commercial
operations and purchased 2.71 lakh bales valuing Rs.285.82 crores in the year
2008-09 as compared to around 1.00 lakh bales valuing Rs.108.81 crores during
the previous year (i.e. for the year 2006-07).
Exports of Cotton
The main market for Indian cotton export is China. The other
markets also include Taiwan, Thailand and Turkey. In July 2001, the union
government removed all curbs on cotton exports. As a result of these, now the
exporters are not required to obtain any certificate from the Textile Commissioner
on the registration, allocation, quality and quantity of export.
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India exported around 25 per cent cotton during 2008-09 and it is

estimated nearly 62 per cent exported to China.
During the year 2008-09 the prices of Indian cotton in early part of
the season being lower than the international prices, had been attractive to foreign
buyers and there was good demand for Indian cotton, especially S-6, H-4 and
Bunny, which had resulted in sustained cotton exports, which are estimated at
55.00 lakh bales
The Cotton Advisory Board estimated an 18-20 percent increase in
cotton exports to 65 lakh bales for Oct 2009- Sep 2010, as against its Aug 2009
estimate of 58 lakh bales.
Imports of Cotton
Despite good domestic crops, India is importing cotton because of

quality problems or low world prices particularly for processing into exportable
products like yarns and fabrics.
India imported just 721,000 bales of cotton in 2004-05. The imports
rose to 1,217,000 lakh bales in 2005-06, 4,700,000 lakh bales in 2006-07 and the
anticipated imports for the year 2007-08 are 550,000 lakh bales.
For the year 2007-08 the cotton imports into the country had once
again remained limited mainly to Extra Long staple cottons, like as previous year,
which were in short supply at around 6 lakh bales inclusive of import of around 2
lakh bales of long staple varieties contracted by mills during April-May 2009.
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Role of Cotton seed oil in Indian Economy
The global production of cottonseed oil in the recent years has been
at around 4-4.5 million tons. Around 2 lakh tons are traded globally every year.
The major seed producers, viz., China, India, United States, Pakistan
are the major producers of oil. United States (60000 tons) is the major exporter of
cottonseed oil, while Canada is the major importer.
Cottonseed is a traditional oilseed of India. In India the average
production of cotton oil is around 4 lakh tons a year. It is estimated that, if
scientific processing is carried out the oil production can be increased by another
4 lakh tons.
In India, the oil recovery from cottonseed is around 11%. Gujarat is
the major consumer of cottonseed oil in the country. It is also used for the
manufacture of vanaspati. The price of cottonseed oil is generally dependent on
the price behavior of other domestically produced oils, more particularly
groundnut oil.
India used to import around 30000 tons of crude cottonseed oil,
before palm and soyoil became the only imports of the country. Currently, the
country does not import cottonseed oil.
Role of cottonseed meal in Indian Economy

India produces around 2 million tons of cottonseed meal a year.
However, in India mainly undecorticated meal is largely produced. Several
associations are promoting the production of decorticated cake in India and the
production of this is expected to increase in the country.
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India used to be a major exporter of cottonseed extraction around two
decades ago. However, the demand for other oil meals like soymeal, has lowered
the cottonseed demand globally. In addition, the low availability of decorticated
meal in India has also been a major reason for the fall in exports.
The major importers of Indian cottonseed meal (undecorticated) used
to be Thailand. India in 2003-04 exported only 50 tons of decorticated cottonseed
meal. In 2004-05, too there have been no significant exports. India does not
import cottonseed meal.
The Organizations dealing with the promotion of Cotton Industry in India

The organizations that try to promote the quantity and quality of Cotton in India
are
I. The Cotton corporation of India Ltd.,
II. Cotton Advisory Board.,
III. Cotton Association of India.
IV. Central Institute of Cotton Research.
I. The Cotton Corporation of India Limited

The Cotton Corporation of India Ltd. was established on 31st July
1970 as a Government Company registered under the Companies Act 1956. In
the initial period of setting up, as an Agency in Public Sector, Corporation was
charged with the responsibility of equitable distribution of cotton among the
different constituents of the industry and to serve as a vehicle for the canalisation
of imports of cotton.
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With the changing cotton scenario, the role and functions of the
Corporation were also reviewed and revised from time to time. As per the Policy
directives from the Ministry of Textiles, Government of India in 1985, the
Corporation is nominated as the Nodal Agency of Government of India, for
undertaking Price Support Operations, whenever the prices of kapas (seed cotton)
touch the support level.
The Cotton Corporation of India Ltd. Operations cover all the cotton
growing states in the country comprising of:
• Punjab, Haryana and Rajasthan in Northern Zone.
• Gujarat, Maharashtra and Madhya Pradesh in Central Zone.
• Andhra Pradesh, Karnataka & Tamil Nadu in Southern Zone.
II. Cotton Advisory Board

The Cotton Advisory Board is a representative body of Government/
Growers/ Industries/ Traders. It advises the Government generally on matters
pertaining to production, consumption and marketing of cotton, and also provides
a forum for liaison among the cotton textile mill industry, the cotton growers, the
cotton trade and the Government. It functions under the Chairmanship of Textile
Commissioner with Deputy Textile Commissioner as a Member Secretary.
III. The Cotton Association of India

The Cotton Association of India also called as the East India Cotton
Association (EICA) was declared as the statutory body by the Bombay Cotton
Contract Act on 28th December, 1922. Its purpose is to
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• Provide and maintain suitable buildings or rooms or a Cotton

Exchange in the city of Bombay or elsewhere in India.
• Provide forms of contracts and regulate the marketing, etc. of
the contracts.
• Fix and adopt standards or classifications of cotton.
• Adjust by arbitration or otherwise controversies between
persons engaged in the cotton trade.
• Acquire, preserve or disseminate useful information connected with the
cotton interests.
IV. Central Institute of Cotton Research
With a view to develop a Centre of excellence for carrying out long
term research on fundamental problems limiting cotton production the Indian
Council of Agricultural Research has established the Central Institute for Cotton
Research at Nagpur in April, 1976. CICR was simultaneously established at
Coimbatore to cater to the needs of southern cotton zone. CICR was established at
Sirsa in the year 1985, to cater to the needs of northern irrigated cotton zone. All
the three research farms are well equipped with tractors and other farm
implements and efforts are underway to initiate further developmental work in all
the farms.
The Vision of the CICR is to improve production and quality of
Indian Cotton with reduced cost to make cotton production cost effective and
competitive in the national and global market. The Mission of CICR is to develop
economically viable and eco-friendly production and protection technologies for
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enhancing quality cotton production by 2-3% every year on a sustainable basis for
the next twelve years (till 2020).
The Current Scenario of Cotton Industry (2008-09)

The cotton production in the country has been increasing
continuously since last three years and the same has further gone up by around
11% during cotton season 2008-09 at a record level of 270 lakh bales as against
244 lakh bales during 2007-08. Gujarat has turned into a largest cotton producing
State with a record production-level of 93 lakh bales constituting around 34% of
the country’s total production.
The area under cotton cultivation during 2008-09 has also gone up by
around 6% at 91.58 lakh hectares as against 86.77 lakh hectares during 2007-08.
With wide usage of hybrid seeds throughout the country as well as
changed mindset of cotton farmers for adoption of better and improved farm
practices, the average productivity of cotton has crossed 503 kgs per hectare as
against 478 kgs during the previous year. The prices of Indian cotton in early part
of the season being lower than the international prices, had been attractive to
foreign buyers and there was good demand for Indian cotton.
Due to expectation of bumper crop, the mill demand in the beginning
of the season was subdued which put pressure on the cotton prices right from the
beginning of the season and has resulted into fall in cotton prices between October
2008 & January 2009. Cotton prices reached its peak level by end-March 2009
and there was some correction in cotton prices in April and May 2009. However,
on the whole, cotton prices remained better by almost Rs.3000 per quintal in
almost all varieties as compared to previous year.
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Future of Cotton Industry in India
Considering the continual capital investments in the textile industry, the

Govt. of India may extend the Technology Upgradation Fund Scheme (TUFS) by
the end of the 11th Five Year Plan (till 2012-2013), in order to support the
industry. Indian textile industry is massively investing to meet the targeted output
of $85bn by the end of 2011, aiming exports of $50bn. There is huge development
foreseen in Indian textile exports from the $17bn attained in 2006-07 to $50bn by
2010-11. The estimation for the exports in the current financial year is about
$19bn. There is substantial potential in Indian exports of technical textiles and
home-textiles, as most European companies want to set up facilities near-by the
emerging markets, such as China and India.
The global demand for apparel and woven textiles is likely to grow by 25
percent by year 2011 to over 35mn tons, and Asia will be responsible for 85
percent output of this growth. The woven products output will also rise in Central
and Southern American countries, however, at a reasonable speed. On the other
hand, in major developed countries, the output of woven products will remain
stable. Weaving process is conducted to make fabrics for a broad range of
clothing assortment, including shirts, jeans, sportswear, skirts, dresses, protective
clothing etc., and also used in non-apparel uses like technical, automotive,
medical etc…
It is been forecasted that the woven textile and apparel markets will sustain
their growth from current till 2011.
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The imports of apparel and textiles will rise from developed economies like
the USA and the western countries of Europe and Japan, along with some newly
emerged economies, such as South Korea and Taiwan. Certainly, import growth
has been witnessed vertical rise in the previous year.
Apparel is the most preferred and important of all the other applications.
Woven fabrics are widely used in apparel assortments, including innerwear,
outerwear, nightwear and underwear, as well as in specialized apparels like
protective clothing and sportswear. Home textile also contributes considerably in
woven fabric in products assortments like curtains, furnishing fabrics, carpets,
table cloths etc.
Special kind of woven fabrics are utilized in medical as well as industrial

applications. The medical applications include adhesives, dressing bandages,
plasters etc.
Where as, industrial applications includes;
• Geotextile - interior upholstery, trim, airbags and seat belts and lyre fabrics.
• Sailcloth - tent and fabrics used architectures, transportation and tarpaulins.
And many more applications…
The Indian Industry foresees huge demand for industrial woven products for
medical and automotive applications. Demand for woven fabrics is anticipated to
be rise vertically in the sector of home textiles.
32

Non woven sector has great future in terms of global demand, thus major facilities
of cotton yarn are currently concentrating just on home textiles. It is mandatory,
that the peak management of the cotton yarn manufacturers analyze the future
prospect and growing graph of demand for non woven products.
Conclusion
Anticipating massive growth in medical and automobile sectors, these sectors

assures substantial demand for non woven facilities in India. Albeit, home textiles
also will lure higher demand, there are specific demands for home textile facilities
also.
The 7th Five Year Plan has huge consideration on agricultural growth that
also includes cotton textileindustry, resulting a prosperous future forecast for the
textile industry in india. Indian cotton yarn manufacturers should rush forward for
joint ventures and integrated plans for establishing processing and weaving
facilities in home textiles and technical textiles in order to meet export target of
$50bn, and a total textile production of $85bn by 2009-2010.
Future Challenges for the Indian Cotton Industry

The challenges that are going to face by the cotton producers in India
for the season 2009-10 are:
• Rupee appreciation
The increase in the value of the rupee gives only smaller import
orders to the cotton producers.
33

• Cheaper Imports
The appreciated rupee value makes the cotton imports cheaper when
compared to past. So this aspect is also required to consider by the cotton
producers.
• Low quality
The Quality of cotton is also far from satisfactory considering the
presence of a large number of contaminants. So the cotton producers are also
required to take care in this aspect.
34

COMPANY PROFIL4
AMARAVATHI TEXTILES PRIVATE LIMITED.
AMARAVATHI TEXTILES Group with its diverse interests in core areas is

surging ahead with drive and determination. with all the companies superbly
integrated in one single campus, the group harnesses an entrepreneurial spirit, state-
of-art technology and financial strengths to emerge as an industrial force to
reckon with.
AMARAVATHI TEXTILES GROUP is driven by a passion be the best in al

the areas it operates. Backed by a high density of advanced technology and
sophisticated manufacturing facilities, it’s only natural that the group is leaf fogging
for an outstanding future. The total group turnover is around 300 crores per annum.
ABOUT THE COMPANY
• The founder of AMARAVATHI TEXTILES who has drawn its future planned
growth. A Man whose spirit of Dynamism has helped the group to achieve
manifold growth. Thanks to his pioneering vision, the group’s operation grew
and market extended. Today AMARAVATHI TEXTILES is a multi-activity
group with a Rs.300crores turnover, comprising 6 divisions with diverse
interest in……..
• COTTON
• SPINNING
• TEXTILE
35

A TRADITION OF ENTERPRISE
Sri Kandimalla Srinivasa Rao left in pursuit of a dream. With just two bags
of grain, he ventured to cultivate 100 acres of land. And with the tell- tale sprite
gleaming in his eyes. His value – oriented strategy and adventurous sprit bore fruit
consistently. His farmland grew and from a model farmer he evolved into a dynamitic
entrepreneur. He proved that success starts with a proactive attitude. A vigorous
confidence that one can effectively integrate ideas with enterprise. Sadineni’s first trip
to RUSSIA gave him the power of conviction to stride boldly into the industrial
environment. And valiantly into the future.
THE BIRTH OF A DREAM
Sri Kandimalla Srinivasa Rao set up a cotton ginning mill in 1984. The
operations grew rapidly to lay solid foundations for giant surging ahead in diverse
environments. To the group, the future is rich in possibilities. A future where the best
of minds and men will work. And will have the most resources to draw upon. It’s
vision of the future where change will be embraced as the very basis of opportunity
and endeavor.
The managing Director of AMARAVATHI TEXTILES (P) LTD. Relentless

pursuit of perfection is the hallmark of this young and dynamic B.Tech Textiles
Graduate.
36

His rich and professionals experience in the spinning line enabled
AMARAVATHI Textile’s Spinning Division to scale new heights. His enterprising
zeal and cautious planning have been the pivotal points in driving the group towards
trailblazing progress. Mr. Kandimalla Srinivasa Rao is committed to labour welfare
and his visionary leadership has earned him a wealth of respect among the employees
of AMARAVATHI. Astute professionals by habit, he is forever aiming higher. He is
widely acknowledged as the man who has fostered a ‘can do’ culture which starts at
top and filters down to every employee at AMARAVATHI TEXTILES. He is
powered by just one belief……..
“Success is a matter of excellence, and not chance”.
Social service has always been a matter of prime concern to him. Which is why he
perennially strives to provide the best education and undertake multi-pronged
schemes towards the betterment of the community. While nurturing a corporate
culture that encourages individual growth, he is committed to a vision that
encompasses everybody’s enlistment.
COTTON DIVISION
The COTTON GINNING & PRESSING UNIT was started in 1984. The
Division maintains 54 Gins and 1 Hydraulic press with an annualized turnover of
Rs.40crores. The company firmly believes that unmatched capabilities plus an in-
depth knowledge of various cotton growing areas alone can put it on the path to
speedy growth. This Division also processes India ’s best long staple cotton DCH-32
at Dharwad Branch, Karnataka.
37

The division is poised to excel and is confidently geared to post an impressive

growth rate. This Division has stayed big thinking big and keeping an eye on the
details that sustain quality.
SPINNING DIVISION
The AMARAVATHI TEXTILES SPINNING MILLS DIVISION has been a
trend setter ever since it’s commissioning. Established in 1991, the plant started
commercial production of World class yarn to the requirement of global markets as
well as indigenous markets. Conceived in a sprawling area in the midst of rich cotton
fields of GUNTUR District, the division is on its way to dizzy heights on the cotton
horizon. We are having a capacity of 60,000 spindles. The impressive performance
reflects AMARAVATHI TEXTILESS commitment to continue machine
modernization. The division through a concerted Endeavour assures exemplary
quality by undertaking rigid quality control measures which start right at the at the
stage of procuring raw material ingredients down to the last level. It is the dedicated
quality consciousness that as paved the way for a phenomenal demand for
AMARAVATHI TEXTILES products.
All this translates into utmost customer satisfaction. The unit is enviably well-
entrenched as a leading player for the highly competitive export markets ever since
1996. AMARAVATHI TEXTILES magnificent obsession with exports has won for
it important international markets. In fact, over 70% of the produce was exported
major European countries.
38

In recognition of its excellent quality conforming to the highest international

standards, the products of Amaravathi have won widespread appreciation and repeat
orders. By exporting world class cotton yarn globally, the mill is leap fogging for the
further growth. The thrust on higher capacity utilization, uncompromising
productivity standards, quality management, astute focus on niche markets, prompt
delivery schedules combined with competitive pricing have resulted in higher sales
and profits.
AMARAVATHI VALUES:
v Promptness in execution.
v Transparency in Business
v Integrity in Negotiation
v Innovation that fuels growth
ENVIRONMENTAL PROTECTION AND SAFETY – A TOP PRIORITY
Amaravathi is committed to the conservation of the environment. Our

manufacturing facilities comply with stringent environmental norms and are equipped
for effluent treatment. The Amaravathi Dyeing Plant uses reverse osmosis with a
multi effect vaporator to qualify as a zero discharge unit.
COUNT RANGE : We are running from 50 to 100 counts in single well as

double (TFO) yarns. We are running compact yarn with 12000 spindles (suessen).
We will achieve 25000 spindles compact yarn shortly.
39

TEXTILE DIVISION
The Division was started in 2005. The Units equipped with modern imported
machinery. Presently we are running with 48 Brand New Looms. We have sucker
wrapping and sizing. Total plant planned for 98 Looms. In phased manner we are
expanding the Looms capacity.
STATEMENT OF ACCOUNTING POLICIES GENERAL:
The Financial Statements are prepared on historical cost convention and in

accordance with generally accepted accounting practices.
FIXED ASSETS:
Fixed assets are stated at historical cost less accumulated depreciation.
INVESTMENTS:
Long term Investment is stated at cost and income thereon accounted for on
accrual. Provision towards decline in the value of Long Term Investments is made
only when such decline id other than temporary.
DEPRECIATION:
Depreciation is a written off in accordance with the provisions of schedule XIV

of the companies Act 1956 as follows:
· Under straights –Line Method in respect of the assets of Spinning, Power

and Textile Divisions.
· Under written down valve method on the assets of all other divisions of
the company.
40

INVENTORIES:
Valuation of inventories is made as follows
· Raw-Material and Finished goods at cost or net realizable valve

whichever is lower.
· Work-in-Progress at cost inclusive of direct production overheads.
· Stores and spares at cost.
· Electronic power at net releasable valve
Excise Duty liability on finished goods is accounted for as and when goods are
cleared from factory and there is no liability on closing stock of finished goods at the
year end.
SALES:
Sales are inclusive of Excise Duty.
TAXES ON INCOME:
Current taxes are determined as per the provisions of income Tax Act 1961 in
respect of taxable income for the year ended 31st march, 2003.
Differed tax liability is recognized, subject to the consideration of prudence on

timing differences, being the difference between taxable income and accounting that
originate in one period and are capable of reversal in one or more subsequent
periods...
SEGMENT REPORTING:
41

The accounting policies adopted for segment reporting are in line with the
accounting policies of the company with the following additional policies for
segment reporting.
Inter-segment Revenue has been accounted for based on the market related
prices.
Revenue and Expenses other than interest have been identified to

segments on the basis of their relationship to the operating activities of the segment.
Revenue and expense which related to the enterprise as a whole and are not allocable
to segments on a reasonable basis have been included under “Unallocated” head.
RETIREMENT BENEFITS:
The Company makes regular monthly contribution to provident fund which are
deposited with the Government and Group term Insurance is routed through L.I.C,
and are charged against the revenue. The company has taken Group Gradually (Cash
Accumulation) scheme with Life Insurance Corporation of India . The premium on
policy and the difference between the amounts of gratuity paid on retirement and
recovered from the Life Insurance Corporation of India debited to profit and Loss
Account. Leave encashment is accounted as and when the employees claimed and
paid.
PROPOSED DIVIDEND:
Provision is made in the account for the dividend payable (including of all
tax thereon) by the company as recommended by the Board of Directors, Pending
approval of the shareholders at the annual General Meeting.
IMPAIRMENT OF ASSETS:
42

At the date of each balance sheet the company evaluates internally, indications
of the impairment if any, to carrying amount of its fixed and other assets. No
impairment loss has been recognized.
CONTIGENT LIABILITIES:
Contingent Liabilities are not recognized in the accounts, but are disclosed
after a careful evaluation of the concerned facts and legal issues involved.
Amaravathi Product: YARN
Commercial performance
Table 2.2: (in rupees)
Year Sales Turnover Domestic Sales
2003-04 28,34,20,669 28,34,20,669
2004-05 34,46,12,983 34,46,12,983
2005-06 44,48,54,723 44,48,54,723
2006-07 52,60,60,377 52,60,60,377
2007-08 68,97,53,568 68,97,53,568
BOARD OF DIRECTORS
§ K.Srinivasa Rao. Director

43

§ K.Bhaskar Director
§ K.Geetha Director
GENERAL MANAGER.
Shri P.Ramesh, D.T.T., B.A.,
ACCOUNTS MANAGER.
Shri N.Veeraiah, B.Com. A.C.A.
BANKERS
State Bank of India , Guntur
State Bank of Mysore , Guntur .
State Bank of Hyderabad , Guntur .
REGISTERED OFFICE
33-263, Kandimalla Road ,
Pandaripuram,
Chilakaluripet-522616
FACTORY
Martur-522301,
Martur Mandal,
Prakasam District, Andhra Pradesh.
44

45

46

WORKING CAPITAL MANAGEMENT – AN OVERVIEW
Working capital may be regarded as the most important factor of a business;

its effective provision and utilization can do much to ensure the success of a
business.
While the efficient management may not only lead to loss of projects but also
to the ultimate shown fall of what other wise would be considered as promising
concern. A study on working capital is of major importance, because of its close
relationship with current day today operations of a business.
The term working capital stands for that form of capital which is required for
the financially of working or current need of the company. It is usually invested in
raw material work in progress finished goods accounts receivable and saleable
securities.
Management of working capital usually involves planning and controlling

current assets, namely cash and marketable securities, assets receivable and
inventories and also administration of current liabilities.
Working capital or current assets management is one of the most important

aspect of the over all financial management. It is concerned with the problem that
arises in attempting to manage the current assets.
47

The current liabilities and the inter relationships that exists between them.
Current assets are the assets, which can be converted into cash with in an
accounting year and includes cash short-term securities, debtors, bill receivable
and inventories.
Current liabilities are those claims of outside, which are expected to mature
for payment with in an accounting year and include creditor’s bill payable and
outstanding expenses.
The goal of working capital management is to manage the firms current
assets and current liabilities in such a way enough to cover its current liabilities in
order to ensure that they are obtained and used in the best possible way.
48

MEANING OF WORKING CAPITAL
Capital required for a business can be classified under two main categories.
1. Fixed capital
2. Working capital
Working capital is the amounts of funds necessary to cover the cost of

operating of enterprises.
Every business needs funds for two purposes for its establishment sand to
carry out its day-to-day operations. Long-term funds are required to create
production facilities through purchases of fixed assets such as plant, machinery,
land, building, and furniture etc. Investment in these assets represented that part of
firm’s capital, which is blinked on permanent or fixed basis and is called fixed
capital. Funda are also needed for short-term purpose for the purchase of raw
material, payment of wages and other day-to-day expenses. These funds are
known as working capital funds thus invested current assets keep revolving fast
and are being constantly converted into cash and these cash flows ot again in
exchange for other current assets. Hence it is also known as revolving or
circulating capital short-term capital. Circulating capital means current assets of a
company that are changed in the ordinary course of bs8iness from to another.
Role of working capital management in public sector concern

The salient features of working capital management in public sector
undertakings are presented below;
49

• There is often no provision for working capital margin, when the project
cost is estimated. Hence long –term funds are not made available for
working capital margin. This means that public sector undertakings are
required to raise all the financing required for current assets from short-
term sources.
• Most of the public sector undertakings are capital-intensive industries like
steel, heavy engineering, oil refining etc. Hence the ratio of current assets
to fixed assets in public sector undertaking, in general is rather low.
• Apparently public sector undertakings do not have much difficulty in
obtaining can now obtain short term financing from all nationalized banks,
which are generally quite accommodations. Since the risk involved in
lending is minimized, commercial banks seem to be quite liberal in
extending credit to the public sector concerns.
• Management of inventories in public sector undertakings rather tax. This is
evident from the high inventory to sales ratios found foremost of the public
sector concerns.
PRINCIPLES & CONCEPTS OF WORKING CAPITAL

The need for working capital varies with the changes in the volume of business
due to
• Changes in the level of sales /operating expenses
• Managerial policy changes
• Changes in managerial new technologies
50

“WORKING CAPITAL” may be regarded as the life blood of a business its

effective provision can do much to ensure the success of business, while its in
efficient management can lead only to loss of profits but also to the ultimate
downfall of what otherwise might be considered as a promising concern, A study
of working Capital is of major importance to internal and external analysis
because of its close relationship with the current day to day operations of a
business working capital is the leading cause of that position of the assets of a
business which are used in or related to current operations and represented at any
one time by the “Operating Cycle” of such items as against receivables ,
inventories of raw materials , stores., work in progress & finished goods,
merchandize, notes or bills receivables and cash. The assets of this type are
relatively temporary in nature.
The definition of working capital is qualitative in character. Working

capital represents the total of all current assets In other words it is “gross working
capital”. It is also known as CIRCULATING CAPITAL or CURRENT
CAPITAL, of current assets are rotating in their nature. Working capital is
essentially circulating capital that includes cash, inventory and receivables
circulating in nature. In an accounting working capital is the difference between
current assets and current liabilities. This is also termed as “net working capital”.
Concepts o f net working capital enables a firm to determine how much amount is
left for operational requirements.
51

LIST OF CURRENT ASSETS & CURRENT LIABILITIES

Current Assets: Current Liabilities
Cash in hand Bills payable
Cash in bank Sundry creditors
Bills receivables Accrued expenses
Sundry debtor’s Short-term loans
Stock Dividends payable
Prepaid expenses Bank over draft
Accrued income provision for taxation
Short-term investment
OBJECTIVES OF WORKING CAPITAL

The need for working capital cannot be over emphasized. Every business
needs some amount of working capital. The need for working capital arises due to
the time gap between production and realization of cash from sales
• For the purchase of materials, components & spares
• To pay wages & salaries
• To increase day to day expenses & overheads cost such as fuel, power &
office expenses etc
• To meet the selling cost as packing, advertising etc
• To provide credit facilities to the customer
To maintain the inventors of raw material, work-in –progress, stores, spaces
& finishes stock. There are two important objectives of a working capital i.e.
profitability and liquidity which are conflicting to each other.
52

PROFITABILITY:
It refers to the rate of return on investment with reference to current asset

levels and their use. For higher profitability d, the enterprise should invest less in
current assets and vice-versa. Because funds will not be locked up but are utilized
to the maximum extent. But this may result I n liquidity and stock outs on account
of deficiency of working capital funds. Therefore, the planning and control of
working capital aims at trading of between profitability and liquidity. This is th e
major dimension in the working capital management in practice.
ADVANTAGES OF ADEQUATE WORKING CAPITAL:

Working capital is the lifeblood and nerve center of business. Just as circulation
of blood is essential in the human body for maintaining life, working capital is
very essential without an adequate amount of working capital. The main
advantage of maintaining adequate amount of working capital is as follows:
• Solvency of the business
• Good will
• Easy loans
• Cash discounts
• Regular supply of raw materials
• Regular payment of salaries, wages and other day to day commitments
• Exploitation of favorable market conditions
• Ability to face crisis
• Quick and regular return on investments
• High morale
53

INADEQUATE WORKING CAPITAL:
Every business concern should have adequate working capital to run its
business operations. It should have neither redundant excess working capital nor
inadequate / shortage of working capital.
DISADVANTAGES OF EXCESSIVE WORKING CAPITAL:
• Excessive working capital means idle funds which earn no profits for the
business and hence the business cannot earn a proper rate of return on its
investments
• Where there is a redundant working capital, it may lead to unnecessary
purchasing and accumulations of inventories causing more chances of
theft , waste and losses.
• Excessive working capital implies excessive debtors and defective credit
policy, which may cause higher incidence of bad debts
• It may result into overall inefficiencies in the organization.
• When there is an excessive working capital relations with banks and other
financial institutions may not be maintained
• Due to low rate of return on investment, the value of shares may also fall
• The redundant working capital gives rise to speculative transactions
DISADVANTAGES OF SHORTAGE WORKING CAPITAL:

• A Concern, which has inadequate working capital, cannot pay its short-term
liabilities in time. Thus, it will lose its representation and shall not be able
to get good credit facilities
• It cannot buy its requirements in bulk cannot avail of discounts etc
54

• It becomes difficult for the firm to exploit favorable market conditions &
undertake projects due to lack of working capital.
• The firm cannot pay day today expenses of its operations and it creates
inefficiencies, increase cost& reduces the profits of the business
• It becomes impossible to utilize efficiency the fixed assets due to non-
availability of liquid funds.
• The rate of return on investments also falls with shortage of working capital
FACTORS DETERMINING WORKING CAPITAL REQUIREMENTS:
1 Nature or character of business

2 Size of Business/sale of operations
3 Production policy
4 Manufacturing process/length of the production cycle
5 Seasonal variations
6 Working capital cycle
7 Stock turnover ratio
8 Credit policy
9 Business cycle
10 Rate of growth of business
11 Earning capacity and dividend policy
12 Price level changes
13 Other factors
WORKING CAPITAL CYCLE:

55

Debtors (Receivables)
FINISHED GOODS
CASH
Work in progress
Raw material
OPERATING CYCLE:
The duration of time required to complete the following sequence of events

cash of manufacturing firm is called the operating cycle
• Conversation of cash into work process

• Conversation of raw material into work in process
• Conversation work in process onto finished goods into debtors & bill
receivable through sales
• Conversation of debtors & bill receivables into cash
56

TYPES OF WORKING CAPITAL:
1.Gross working capital:

It is the amount of funds invested in the various components of currents assets.
This concept has the following advantages.
• Financial managers are profoundly concerned with current assets.

• This will be provides the current amount of working capital at the right time
• It enables a firm to realize the greatest return on its investment
• It helps in the fixation of various areas of financial responsibility
• It enables affirm to plan and control funds and to maximize the return on
investment.
2.Net working capital:

In reference to the difference between current liabilities net working capital
can be positive or negative. A positive net working will arise when current assets
exceeds current liabilities. As negative working capital occurs where current
liabilities are in excess of current assets.
INFLUENCING FACTORS OF WORKING CAPITAL REQUIREMENTS:
The working capital needs of firm are influenced by numerous factors. The
important ones are
57

• Nature of business
• Seasonality of operations
• Production policy
• Market conditions
• Conditions of supply
NATURE OF BUSINESS:
The working capital requirements of firms are closely related to the nature of its
business. A services 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.
SEASONALITY OF OPERATIONS:
Firms, which have marked seasonality in their operations usually, have
highly fluctuating working capital requirements. For example, 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.
PRODUCTION POLICY:
A Firm marked by pronounced seasonal fluctuation in its sales may have a
production policy which may reduce the sharp variations in working capital
requirements.
58

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 all required to promptly serving customers who may not be
inclined to wait because other manufacturing are ready to meet their needs.
SOURCES OF WORKING CAPITAL

A large scale manufacturing company may procure funds from various
sources to meet its working capital from time to time. Sources of working capital
may be classified under 2 heads.
a) Sources of long term or Regular working capital
b) Sources of short term or Seasonal working capital
Sources of working capital
Long term working capital Short-term working capital
Internal External
59

Long-term working capital:

• Issue of share
• Issue of debentures
• Profits
• Sale of fixed assets
• Security from employees and from customers
• Term loan
Short-Term working capital:
1. Internal sources:
• Deprecation fund
• Provision of taxation
• Accrued expenses
2.External sources:
• Normal trade credit
• Credit papers
• Bank credit
• Customer credit
• Public deposits
• Loans from managing directors
• Government assistance
60

KEY AREAS OF WORKING CAPITAL MANAGEMENT

The following are the key areas of working capital management.
1. Cash management
2. Receivable management
3. Inventory management
1.CASH MANAGEMENT:
Cash management is one of the key areas of working capital. The term cash
with reference to cash management is uses in two senses. In a narrow sense it is
used broadly to cover currency and generally accepted equivalence of cash such
as cheques, drafts and demand deposits in banks
Motives for holding cash:
Keynes has identified five motives for cash holding those are:
1. Transaction motive:
Need for cash to meet payments arising in the ordinary course of action. These
payments include such things as purchase, labor taxes and dividends etc.
2. Precautionary motive:
This precautionary balance maintenance will act as a casher of buffer to meet it
unforeseen and unexpected contingencies. More predictable cash flow of
business, the less will also influence this balance.
3. Speculative motive:
This is holding of cash management will ensure is resolving uncertainly both cash
flow and cash out flow
61

4. Investment motive:
a) For meeting operational requirements
b) For providing liquidity reserve against
• Routine net out flows of cash
• Schedule of major outlays
• Exploitation of possible particulars for advantages long term investment
• Unexpected drains of cash
c) Maintenance of bank relationship
d) Building of an investment image and other such intangibles.
e) Constructing a reservoir for net cash inflow, pending an opportunity
for a better use of funds.

5. Compensation motive:
Banks provide a variety of services to business firms, such as clearance of
cheque, supply of credit information, transfer of funds etc. While for some of the
services, a bank charges a commission/ fee for other they seek indirect
compensation. Such balances are called compensation balance.
For effective cash management the following points are to be kept in mind
• Planning of cash requirements
• Effective control of cash flow
• Productive utilization of excess funds.
OBJECTIVES OF CASH MANAGEMENT:

• Meeting the payments schedule
• Minimizing funds committed to cash balances
62

2) RECEIVABLES MANAGEMENT:
Receivables are assets, which are created as a result of the sale of goods or
services in the ordinary courses of business. These are known as “ accounts
receivables, trade receivables or customer receivables”.
The receivables represent an important component of the current assets of a
firm. Every business needs to have a proper control management of receivables.
Meaning: Receivables represents amount owed to the firm as a result of sale of
goods or services on the ordinary course of business. The purpose of maintaining
or investing in receivables is to meet competition and to the sales and profits.
Characteristics of maintaining receivables:
• Expansion of sales
• Increased profit
• Financing receivables
• Administrative expenses
• Cost of collection
• Bad debts
Factors influencing the receivables management:
• Size of credit sales
• Credit policies
• Terms of trade
• Expansion plans
• Relations with profits
• Credit collection efforts
• Habits of customers
63

3) INVENTORY MANAGEMENT:
Every business needs inventory for smooth running of its activities .It
serves as link between production & distribution process. The unforeseen
fluctuations in demand & supply of goods also necessitate the need for inventory.
It is also provides a cushion for future price fluctuation. The purposes of ensure
availability of materials in sufficient quantity as and when require & also to
minimize inventories.
Meaning & nature of inventory management: Inventory is one of the major

current asserts. The literary meaning of work inventory is stock of goods or list of
goods. Various authors understand the inventory differently. Inventory includes
the following things.
• Raw material
• Work in process
• Consumables
• Finished goods
• Spares
OBJECTIVES OF INVENTORY MANAGEMENT:

The main objective of the availability of materials is for the efficient &
uninterrupted production.
• Minimize investment I in inventory to maximize profitability
• To minimize carrying costs & order cost of inventory
• To facilitate purchasing economy
• To have an efficient stores organizations
64

• Optimum consumption of materials so that materials cost of a finished

goods is kept at minimum
• To maintain sufficient finished goods inventory for smooth sales operation
& efficient customer services.
• To minimize obsolescence in stores
• To avoid excessive & inadequate stocks
• To contribute profitability
• To dispose surplus items & scrap at appropriate time
• To provide a check against losses of materials through pilferage & theft.
TOOLS AND TECHNIQUES OF INVENTORY MANAGEMENT
Effective inventory management requires an effective control system for

inventories. A proper inventory control not only helps in solving the acute
problems of liquidity but also increase profits and causes substantial reduction in
the working capital of the concern. The following are the important tools and
techniques of inventory management and control.
• Determining of stock levels
• Determining of safety stocks
• Selecting a proper system of ordering for inventory
• Determination of economic order quantity
• ABC analysis
65

• VED analysis
• Inventory turnover ratios
• Aging schedule of inventories
• Classification and codification of inventories
• Preparation of inventory reports
ADVANTAGES OF HOLDING INVENTORY

• Quick services
• Discounts
• Reduction in order cost
• Efficient production runs
• Protection against shortages
66

TABLE:4.1 STATEMENTS OF CHANGES IN WORKING CAPITAL FOR

THE YEAR 2003-2004 to 2004-2005: Rs In Lakhs
Particulars 2003-2004 2004-2005 Changes in Working Capital

Increase Decrease
CURRENT ASSETS
Inventory 6,59,75,061 14,66,66,238 8,06,91,177 ---------
Sundry debtors 1,46,15,361 42,57,736 --------- 1,03,57,625
Cash on hand 24,17,745 7,02,984 --------- 17,14,761
Other current assets 28,155 9,721, --------- 18,434
Loans & Advances 2,98,71,968 2,84,49,035 -------- 14,22,933
Total Current Assets
11,29,08,290 18,00,85,714
(A)
Current liabilities
Sundry creditors 2,21,20,270 3,37,28,550 --------- 1,16,08,280
Advance received
--------- 1,19,99,737 --------- 1,19,99,737
against sales
Interest accured but
3,781 --------- 3,781 ---------
not due
Provisions
Provision for
1,08,00,000 1,24,50,000 --------- 16,50,000
taxation
Provision for gratuity 19,80,610 21,66,085 --------- 1,85,475
Provision for earned
leave en 1,90,000 1,90,273 273
cashment
Total Current
3,50,94,661 6,05,34,645
liabilities (B)
Networking Capital
(A-B) [7,78,13,629] [11,95,51,069]
Increase / Decrease 4,17,37,440 [4,17,37,440]
11,95,51,069 11,95,51,069 8,06,94,958 8,06,94,958
67

INTERPRETATION
1. It was observed that the above working capital calculations for the year
2003-2004 we can notice that the working capital is increased by
53.63% compared to the previous financial year
2. There is overall increase of 59.49% in total current assets during the

year 2003-2004 when compared to the previous financial years.
3. The inventory is increase to 122.31%
4. But there are decrease in sundry debtors, cash, other current assets, loans
and advances by 70.87%, 70.92%, 65.47, and 4.76.
5. There is overall increase of 72.49% in total current liabilities during the

year 2003-2004 when compared to the previous financial year.
6. This is due of the increase of sundry creditors, advance received against

sales, tax, gratuity and provision earned by 52.48%, 100%, 15.28%,
9.36% above 0.14% respectively, but there is a decrease in interest by
100%
68


THE YEAR 2004-2005 to 2005-2006:
In Rupees
Particulars 2004-2005 2005-2006 CHANGES IN WORKING

CAPITAL
Increase Decrease
CURRENT ASSETS
Inventory 14,66,66,238 15,46,04,872 79,38,634 ---------
Sundry debtors 42,57,736 2,42,23,172 1,99,65,436 ---------
Cash on hand 7,02,984 18,65,440 11,62,456 ---------
Other current assets 9,721, 18,906 9,185 ---------
Loans & Advances 2,84,49,035 4,08,46,737 1,23,97,702 ---------
Total Current Assets
18,00,85,714 22,15,59,127
(A)
Current liabilities
Sundry creditors 3,37,28,550 3,65,53,421 --------- 28,24,871
Advance received
1,19,99,737 7,99,037 1,12,00,700 ---------
against sales
Provisions
Provision for
1,24,50,000 2,32,56,000 --------- 1,08,06,000
taxation
Provision for
21,66,085 23,80,031 --------- 2,13,946
gratuity
1,90,273 2,06,763 --------- 16,490
leave encashment
Total Current
6,05,34,645 6,31,95,252
liabilities (B)
Networking Capital
[11,95,51,069] [15,83,63,875]
(A-B)
Increase / Decrease 3,88,12,806 [3,88,12,806]
15,83,63,875 15,83,63,875 5,26,74,003 5,26,74,113
69

INTERPRETATION
It was observed that the above working capital calculations for the year 2004-2005
we can notice that the working capital is increased by 32.46% compared to the
previous financial year
1. There is overall increase of 23.03% in total current assets during the year 2004-
2005 when compared to the previous financial years.
2. This is due of the increase inventory, sundry debtors, cash, other current assets,
loans and advances with 5.41%, 468.92%, 165.36%, 94, 49% and 43.58%
respectively.
3. There is overall increase of 4.40% in total current liabilities during the year
2004-2005 when compared to the previous financial year.
4. This is due of the increase in sundry creditors, tax, gratuity and provision earned
by 8.38%, 86.80%, 9.88%, 49.28%, 100%, and 8.67% respectively.
5. But there is a decrease of advance received against sales by 93.34%.
70


THE YEAR 2005-2006 to 2006-2007: In
Rupees

CAPITAL
Increase Decrease
CURRENT ASSETS
Inventory 15,46,04,872 17,65,51,218 2,19,46,346 ---------
Sundry debtors 2,42,23,172 2,71,64,018 29,40,846 ---------
Cash on hand 18,65,440 13,63,596 --------- 5,01,844
Other current assets 18,906 3,48,414 3,29,508 ---------
Loans & Advances 4,08,46,737 7,74,01,413 3,65,54,676 ---------
TotalCurrentAssets (A) 22,15,59,127 28,28,28,659
Current liabilities
Sundry creditors 3,65,53,421 4,47,70,381 --------- 82,16,960
Advancereceived against
7,99,037 17,07,769 --------- 9,08,732
sales
Provisions
Provision for taxation 2,32,56,000 3,23,31,000 --------- 90,75,000
2,06,763 2,04,443 2,320 ---------
leave encashment
TotalCurrentliabilities(B) 6,31,95,252 8,15,74,913
NetworkingCapital(A-B) [15,83,63,875] [20,12,53,746]
Increase / Decrease [4,28,89,871] [4,28,89,871]
20,12,53,746 20,12,53,746 6,17,73,696 6,17,73,696
INTERPRETATION:
71

1) It was observed that the above working capital calculations for the year
2005-2006 we can notice that the working capital is increased by -11.73%
compared to the previous financial year
2) There is overall increase of 27.65% in total current assets during the year
2005-2006 when compared to the previous financial years.
3) This is due of the increase inventory, sundry debtors, other current assets,
loans and advances with 14.20%, 12.14%, 1742.88%, and 89.49%
respectively. But there is a decrease in cash by 26.90% respectively.
4) There is overall increase of 29.08% in total current liabilities during the
5) This is due of the increase of sundry creditors; advance received against
sales, tax, gratuity by 22.48%, 113.73 %, 39.02 %, 7.62 % respectively.
6) There is decrease in provision earned by 1.12 %.
72

TABLE:4. 4 STATEMENTS OF CHANGES IN WORKING CAPITAL FOR

THE YEAR 2006-2007 to 2007-
2008:
In Rupees

CAPITAL
Increase Decrease
CURRENT ASSETS
Inventory 17,65,51,218 22,91,60,365 5,26,09,147 ---------
Sundry debtors 2,71,64,018 4,19,93,041 1,48,29,023 ---------
Cash on hand 13,63,596 4,00,95,172 3,87,31,576 ---------
Other current assets 3,48,414 5,47,621 1,99,207 ---------
Loans & Advances 7,74,01,413 14,08,42,555 6,34,41,142 ---------
TotalCurrentAssets (A) 28,28,28,659 45,26,38,754
CURRENT LIABILITIES
Sundry creditors 4,47,70,381 4,34,30,156 13,40,225 ---------
Advancereceived
17,07,769 14,54,844 2,52,925 ---------
against sales
Provisions
Provision for taxation 3,23,31,000 5,15,25,000 --------- 1,91,94,000
2,04,443 2,84,246 --------- 79,803
leave encashment
Total Current liabilities
(B) 8,15,74,913 9,97,01,429
Networking Capital (A-

[20,12,53,746] [35,29,37,325]
B)
Increase / Decrease [15,16,83,579] [15,16,83,579]
35,29,37,325 35,29,37,325 17,14,03,245 17,14,03,245
73

INTERPRETATION
1) It was observed that the above working capital calculations for the year
2007-2008 we can notice that the working capital is increased by 75.37%
compared to the previous financial year.
2) There is overall increase of 60.04% in total current assets during the year
3) This is due of the increase inventory, sundry debtors, and cashes in
hand, other current assets, loans &advance by 29.80%, 54.59%,
2840.40%, 57.18%and 81.96%.
4) There is overall increase of 22.22% in total current liabilities during the
5) .This is due of the increase in tax, gratuity and provision earned by 59.37
%,17.41 %, 39.03% respectively. .
6) But decrease of sundry creditors, advance received against sales by 2.99%,
14.81.
74

TABLE:4. 5 STATEMENTS OF CHANGES IN WORKING CAPITAL FOR

THE YEAR 2008-2009
In Rupees
Particulars 2007-2008 2008-2009 Changes in working capital

Increase Decrease
CURRENT ASSETS
Inventory 22,91,60,365 26,90,46,994 3,98,86,629 ---------
Sundry debtors 4,19,93,041 7,28,27,064 3,08,34,023 ---------
Cash on hand 4,00,95,172 5,20,02,856 1,19,07,684 ---------
Other current assets 5,47,621 15,42,861 9,95,240 ---------
Loans & Advances 14,08,42,555 25,78,53,360 11,70,10,805 ---------
TotalCurrentAssets
45,26,38,754 65,32,73,135
(A)
Current liabilities
Sundry creditors 4,34,30,156 6,82,59,442 --------- 2,48,29,286
Advance received
against sales 14,54,844 35,41,107 --------- 20,86,263
Provisions
Provision for taxation 5,15,25,000 9,58,25,000 --------- 4,43,00,000
leave en 2,84,246 4,39,501 --------- 1,55,255
cashment
Total Current
liabilities (B) 9,97,01,429 17,20,56,115
75

INTERPRETATION:
1. It was observed that the above working capital calculations for the year
2008-2009 we can notice that the working capital is increased by
36.35% compared to the previous financial year
2. There is overall increase of 44.33% in total current assets during the year
3. This is due of the increase inventory, sundry debtors, and cashes in hand,
other current assets, loans &advance by 17.41%, 73.43%, 29.70%,
181.74%and 83.08%.
4. There is overall increase of 72.57% in total current liabilities during the

5. This is due of the increase in sundry creditors, advance received against

sales, tax, gratuity and provision earned by 57.17%, 143.40%, 85.98%,
32.72%, and 54.62% respectively. .
76

RATIO’S
1. CURRENT RATIO:
It may be defined as the relationship between current assets and current

liabilities. This ratio is known as working capital ratio. It is a measure of general
liquidity and is most widely used to make the analysis of a short-term financial
position or liquidity of a firm. It is calculated by dividing the total of current
assets by total of the current liabilities. Thus,
Current assets include:
Cash at Bank, Cash in hand, Debtors, Bills Receivable, Stock, repaid

Expenses, and Short Term investments etc.
Current liabilities include:
Creditors, Bills payable, out standing expenses, Short-term loan, Bank over
draft etc.
Current Assets
(A)Current Ratio = ________________
Current Liabilities
77

TABLE 4.6
Year Current Assets Current Liabilities Current ratio
2004-05
18,00,85,714 6,05,34,645 2.97:1
2005-06
22,15,59,127 6,31,95,252 3.50:1
2006-07
28,28,28,659 8,15,74,913 3.47:1
2007-08
45,26,38,754 9,97,01,429 4.54:1
2008-09
65,32,73,135 17,20,56,115 3.80:1
Graph 4.6 Current Ratio
5
4.54
4 3.8
3.5 3.47
3 2.97
Ratios
2
1
0
2004-05 2005-06 2006-07 2007-08 2008-09
Years
78

INTERPRETATION:
1. In the above table current ratio of Amaravathi textiles pvt ltd is

fluctuating under the period of study from one year to another.
2. In the year 2004-05 Amaravathi textiles pvt ltd has current ratio is
2.97:1, In the year 2005-06 the current ratio increased to 3.50:1, In
the year 2006-07 the current ratio decreased to 3.47:1, In the year
2007-08 the current ratio increased to 4.54:1, In the year 2008-09 the
current ratio increased to 3.80:1.
3. The company has maximum CR of 4.54 in the year of 2007-08.Due

to the higher increase in CA corresponding to the increase in CL. The
more than proportionate increase in CA & slighter increase in CL
caused to the maximum CR for the year 2008-09.The minimum
value of CR is 2.97 in the year of 2004-05.
4. The current ratio of Amaravathi textiles pvt ltd has been more
satisfactory & above the idle ratio of 2:1 for entire period of the
study is 2004-05 to 2008-09.
5. In the year 2007-08the current ratio has to reach the maximum level.
It has more liquid more than the required.
79

(2)Quick Ratio:
It is also known as acid test or liquid ratio is more rigorous test of liquidity
than the current ratio. Quick ratio may be defined as the relationship between the
quick/ liquid assets and current/ liquid liabilities. An asset is said to be liquid if it
can converted into cash within a short period without loss of value. Inventories
cannot be termed to be liquid assets because they can’t be converted in to cash
immediately. A Quick Ratio 1:1 usually considering idle Ratio.
Quick assets= Current assets - Inventories
Quick assets include:
Cash at Bank, Cash in hand, Debtors, Bills Receivable, Prepaid Expenses,

and Short Term investments etc.
Creditors, Bills payable, out standing expenses, Short-term loan,

Bank over draft etc.
Quick assets
Quick ratio = ______________________

Current liabilities
80

TABLE 4.7
Year Quick Assets Current Liabilities ratio

2004-05 3,34,19,476 6,05,34,645 0.55:1
2005-06 6,69,54,256 6,31,95,252 1.06:1
2006-07 10,62,77,441 8,15,74,913 1.30:1
2007-08 22,34,78,389 9,97,01,429 2.24:1
2008-09 38,42,26,141 17,20,56,115 2.23:1
Graph 4.7
Quick Ratio
2.5
2.24 2.23
2
1.5
Ratios 1.3
1 1.06
0.5 0.55
0
2004-05 2005-06 2006-07 2007-08 2008-09
Years
81

INTERPRETATION:
1. In the above table Quick ratio of Amaravathi Textiles pvt ltd is

2. In the year 2004-05 Amaravathi Textiles pvt ltd has Quick ratio is
0.55:1, In the year 2005-06 the Quick ratio increased to 1.06:1, In the
year 2006-07 the Quick ratio increased to 1.30:1, In the year 2007-08
the Quick ratio increased to 2.24:1, In the year 2008-09 the Quick
ratio decreased to 2.23:1.
3. It was observed that the maximum Quick ratio of 2.24 in the year of
2007-08.There is a increased in the quick assets .So that the ratio is
increased in this year .The minimum value of Quick ratio is 0.55 in
the year of 2004-05. There is a decreased in the quick assets .So that
the ratio is decreased in this year
4. The Quick ratio of Amaravathi textiles pvt ltd has been more
satisfactory & above the idle ratio of 1:1 for entire period of the
study is 2004-05 to 2008-09
5. Amaravathi textiles pvt ltd is more than the required .So Amaravathi
textiles pvt ltd to pay off its current obligations.
6. The over all trend of the quick ratio increasing pattern .And the
percentage change in 3.07 between the period 2004-5and 2008-9
82

(3) CASH RATIO:
Cash is the most liquid asset; a financial analyst may examine cash ratio
and its equivalent to current liabilities. Trade investment and marketable
securities are equivalent of cash.
Super Quick assets
Cash and marketable securities and account receivables.
Creditors, Bills payable, out standing expenses, Short-term loan, Bank over
draft etc.
Cash +marketable securities
Cash ratio = ____________________________________
Current liabilities
83

TABLE 4.8
Year Cash+marketable Current liabilities ratio

securities
2004-05
7,02,984 6,05,34,645 0.011:1
2005-06
18,65,440 6,31,95,252 0.030:1
2006-07
13,63,596 8,15,74,913 0.021:1
2007-08
4,00,95,172 9,97,01,429 0.400:1
2008-09
5,20,02,856 17,20,56,115 0.302:1
84

Graph 4.8
Cash Ratio
0.5
0.4 0.4
0.3 0.302
Ratios
0.2
0.1
0 0.011 0.03 0.021
2004-05 2005-06 2006-07 2007-08 2008-09
Years
INTERPRETATION:
1) In the above table cash ratio of Amaravathi textiles pvt ltd is

2) In the year 2004-05 Amaravathi textiles pvt ltd has cash ratio is 0.011,
In the year 2005-06 the cash ratio increased to 0.030,In the year 2006-
07 the cash ratio decreased to 0.021, In the year 2007-08 the cash ratio
increased to 0.4, In the year 2008-09 the cash ratio is 0.302.
3) It was observed that the company has maximum cash ratio of 0.400 in
the year of 2007-08.There is a decreased in the current liabilities .So
that the ratio is increased in this year .The minimum value of cash ratio
is 0.011 in the year of 2004-05. There is a increased in the current
liabilities .So that the ratio is decreased in this year
85

4) It was observed that the cash ratio of Amaravathi textiles pvt ltd has
been UN satisfactory & above the idle ratio of 0.5:1 for entire period of
the study is 2003-04 to 2008-09.
5) The over all trend of the quick ratio is increasing pattern & percentage
change in 35.36 between the period 2004-05and 2008-09.
86

(4) TURNOVER RATIOS
Another way of examining the liquidity is to determine how quickly certain

current assets are converted into cash. The ratios to measure these are referred to
as turn over ratio.
Relevant turnover ratios are….
1. Inventory turnover ratio
2. Debtors turnover ratio.
3. Working capital turnover ratio.
4. Current assets turnover ratio.
1. INVENTORY TURNOVER RATIO:
This ratio, also known as stock turnover ratio establishes the relationship
between cost of goods sold during a given period and the average amount of
inventory held during that period. It indicates the number of times inventory is placed
during the year or how quickly the goods are sold. It is a test of efficient inventory us
management. Higher the ratio, the better it is because it shows that finished stock is
rapidly turned-over. On the other head, a low stock turnover ratio is not desirable
because it reveals the accumulation of obsolete stock, or the carrying too much stock.
This ratio is calculated as follows;
87

Stock turnover ratio= cost of goods sold/ average stock
Cost of goods sold = opening stock+ purchase+ manufacturing expenses- closing

stock
Average stock= opening stock + closing stock /2
(Or)
Sales
Inventory turnover ratio = -------------
Inventory
88

The below table showing the calculation of inventory turnover ratio:
TABLE 4.9
Year Sales Inventory Ratio

2004-05 1.93
28,34,20,669 14,66,66,238
2005-06 2.23
34,46,12,983 15,46,04,872
2006-07 2.52
44,48,54,723 17,65,51,218
2007-08 2.30
52,60,60,377 22,91,60,365
2008-09 2.56
68,97,53,568 26,90,46,994
Graph 4.9
Inventory Turnover Ratio
3
2.5 2.52 2.56
2.23 2.3
2 1.93
Ratios 1.5
1
0.5
0
2004-05 2005-06 2006-07 2007-08 2008-09
Years
89

INTERPRETATION:
1) In the above table inventory or stock turn over ratio of Amaravathi textiles
pvt ltd is fluctuating under the period of study from one year to another &
the above table shows relationship between Sales and closing inventory.
2) The inventory or stock turn over ratio of the Amaravathi textiles pvt ltd in
the year 2004-2005as1.93 it has been increased to 2.23 in the year 2005-
06 & further increased 2.52 in the year2006-07It had decreased to 2.30 in
the year2007-08 At present the inventory or stock turn over ratio of the
company was 2.56 in the year 2008-09.
3) It was observed that the inventory or stock turn over ratio of the
Amaravathi textiles pvt ltd is maximum (2.56) the reason for increase in
sales and decrease in cl.stock in the year 2008-09.
4) It was observed that the inventory or stock turn over ratio of the Amaravathi
textiles pvt ltd is minimum (1.93) the reason for decrease in sales and
increase in cl.stock in the year 2004-05.
5) The over all trend of the inventory or stock turn over ratio is increasing
pattern & percentage change in 0.32 between the period 2004-05and 2008-
09.
90

(5)INVENTORY HOLDING PERIOD: -
12 months or 365 days
Inventory holding period = ---------------------------
Inventory turnover ratio
Table 4.10
Year 12 months / 365 days Inventory turnoverRatio (days)

ratio
2004-2005 365 days 1.93 189

2005-2006 365 days 2.23 163
2006-2007 365 days 2.52 144
2007-2008 2.30
365 days 158
2008-2009 365 days 2.56 142
91

Graph 4.10
Inventory Turnover Ratio
3
2.5 2.52 2.56
2.23 2.3
2 1.93
Ratios 1.5
1
0.5
0
2004-05 2005-06 2006-07 2007-08 2008-09
Years
INTERPRETATION
1. Inventory holding period of Amaravathi Textiles private Limited is

fluctuating.
2. It has maximum of 189days in the year 2004-2005while it was minimum

of 142days in the year 2008-2009.
3. Inventory turnover ratio is influence to the inventory holding period.

Inventory turnover ratio has been fluctuating from the year 2004-2005to
2008-2009.
92

(6)DEBTORS TURNOVER RATIO
It indicates the efficiency of receivables management & shows how quickly

trade credit is collected. When a firm sells goods on credit, book debts are created.
Debtors are expected to be converted into cash over a short period. To a great extent,
the amount and quickly of debtors determine the liquidity position of the firm.
Debtor’s turnover or receivables turnover is calculated by dividing credit sales by
average debtors. This ratio indicates the number of times, on an average the debtors.
This ratio indicates the number of times, on an average the debtors or receivables
turnover each year. Generally, the higher the value of debtor’s turnover, the more
efficiency is the management of assets. Sometimes, data relating to credit sales,
opening balance and closing balance of debtors may not be available. Then debtor’s
turnover can be calculated by dividing total sales by closing balance of debtors.
Debtors turnover ratio= credit sales/ average debtors
(Or)
Debtors turnover ratio= total sales/ closing debtors
The below table showing calculation of debtor’s turnover ratio:

93

TABLE 4.11
Year Sales Closing Debtor’s Ratio
2004-2005 66.57
28,34,20,669 42,57,736
2005-2006 14.23
34,46,12,983 2,42,23,172
2006-2007 16.38
44,48,54,723 2,71,64,018
2007-2008 12.53
52,60,60,377 4,19,93,041
2008-2009 9.47
68,97,53,568 7,28,27,064
Graph 4.11
Debtors Turnover Ratio
70 66.57
60
50
40
Ratios
30
20
14.23 16.38
10 12.53 9.47
0
2004-05 2005-06 2006-07 2007-08 2008-09
Years
INTERPRETATION:
94

1) In the above table Debtors Turnover ratio of Amaravathi textiles pvt ltd is
fluctuating under the period of study from one year to another & the above
table shows relationship between Sales and closing debtors.
2) The debtors turn over ratio of the Amaravathi textiles pvt ltd in the year
2004-05 66.57 it has been decreased to 14.23 in the year 2005-06 And
further increased 16.38 in the year2006-07It had decreased to 12.53 in the
year2007-08 At present the debtors turn over ratio of the company was 9.47
in the year 2008-09.
3) The debtors turn over ratio of the Amaravathi textiles pvt ltd is maximum
(66.57) the reason for decrease in debtors and increase in sales in the year
2004-05.
4) The debtors turn over ratio of the Amaravathi textiles pvt ltd is minimum
(9.47) the reason for increase sales and increase in debtors in the year 2008-
09.
5) The over all trend of the debtors turn over ratio is decreasing pattern. And
percentage change in 6.02 between the period 2004-05and 2008-2009.
(7) DEBTORS COLLECTION PERIOD:
12 months or 365 days
95

Debt collection period = ---------------------------
Debtor’s turnover ratio
Table - 4.12
Year 12 months / Debtor’s Ratio
365 days turnover ratio (days)

2004-2005 365 days 66.57 5.48
2005-2006 365 days 14.23 25.65
2006-2007 365 days 16.38 22.28
2007-2008 365 days 12.53 29.13
2008-2009 365 days 9.47 38.54
96

Graph 4.12
Debtors Collection Period Ratio
50
40 38.54
30 29.13
Ratios 25.65
20 22.28
10
5.48
0
2004-05 2005-06 2006-07 2007-08 2008-09
Years
INTERPRETATION:
1. Debt collection period of Amaravathi textiles private Limited is fluctuating.
2. It has maximum of 38.54 days in the year 2008-2009while it was minimum of

5.48 in the year 2004-2005.
3. Debtor’s turnover ratio is influence to the Debt collection period. Debtor’s

turnover ratio has been fluctuating from the year 2004-2005to 2008-2009.
97

WORKING CAPITAL TURNOVER RATIO
This is the ratio used to the relation between the working capital and net sales.
This ratio calculated by dividing the working capital with the net sales. This shows
the how much working capital is in organization at how many times to the net sales.
This ratio is calculated as under
Net sales
Working capital turnover ratio = -------------------
Net working capital
The below table showing the calculation of working capital turnover ratio:
Table - 4.13
98

Year Net Sales Net working CapitalRatio
2004-2005 28,34,20,669 11,95,51,069 2.37
2005-2006 34,46,12,983 15,83,63,875 2.18
2006-2007 44,48,54,723 20,12,53,746 2.21
2007-2008 52,60,60,377 35,29,37,325 1.49
2008-2009 68,97,53,568 48,12,17,020 1.43
Graph 4.13
Net Working Capital Turnover Ratio
2.5 2.37
2.18 2.21
2
1.5 1.49 1.43
Ratios
1
0.5
0
2004-05 2005-06 2006-07 2007-08 2008-09
Years
INTERPRETATION:
1) In the above table Working capital Turnover ratio of Amaravathi

textiles pvt ltd is fluctuating under the period of study from one year to
another & the above table shows relationship between Sales and
working capital.
2) The working capital turns over ratio of the Amaravathi textiles pvt ltd
in the year 2004-05 is2.37 it has decreasedto 2.10 in the year 2005-06
99

And further increased 2.21 in the year2006-07It had decreased to 1.49
in the year2007-08 At present the working capital turn over ratio of the
company was 1.43 in the year 2008-09.
100

3) It was observed that the working capital turn over ratio of the
Amaravathi textiles pvt ltd is maximum (2.37) the reason for decrease
in working capital and increase in sales in the year 2004-05.
4) It was observed that the working capital turn over ratio of the
Amaravathi textiles pvt ltd is minimum (1.43) the reason for increase in
working capital and decrease in net sales in the year 2008-09.
5) The over all trend of the working capital turn over ratio is decreasing
pattern .And percentage change in 0.65 between the period 2004-05and
2008-09.
101

(8)FIXED ASSETS TURN OVER RATIO:
The fixed assets turnover ratio indicates the extent to which the investments
on fixed assets contribute to sales. This ratio will explain about the amount of net
sales that are arises by utilizing fixed assets. Generally a high fixed assets
turnover ratio indicates efficient utilization of fixed assets in generation of sales.
Sales
Fixed assets turnover ratio = -----------------------
Net fixed assets
TABLE – 4.14
Year Net Sales Fixed assets Ratio

2004-2005 28,34,20,669 15,38,42,230 1.84
2005-2006 34,46,12,983 15,51,02,769 2.21
2006-2007 44,48,54,723 25,41,59,811 1.75
2007-2008 52,60,60,377 54,85,61,649 0.95
2008-2009 68,97,53,568 78,75,33,337 0.88
102

Graph 4.14
Fixed Assets Turnover Ratio
2.5
2.21
2
1.84 1.75
1.5
Ratios
1 0.95 0.88
0.5
0
2004-05 2005-06 2006-07 2007-08 2008-09
Years
INTERPRETATION:
1) In the above table fixed Turnover ratio of Amaravathi textiles pvt ltd
is fluctuating under the period of study from one year to another &
the above table shows relationship between Sales and fixed assets.
2) The fixed assets turn over ratio of the Amaravathi textiles pvt ltd in
the year 2004-05 was 1.84 it has been increased to 2.21 in the year
2005-06. And further decreased 1.75 in the year2006-07.It had
decreased to 0.95 in the year2 007-08. At present the fixed assets turn
over ratio of the company was 0.88 in the year 2008-09.
103

3) It was observed that the fixed assets turn over ratio of the Amaravathi
textiles pvt ltd is maximum (2.21) the reason for decrease in fixed
assets and increase in sales in the year 2004-05.
4) It was observed that the fixed assets turn over ratio of the Amaravathi
textiles pvt ltd is minimum (0.88) the reason for increase in fixed
assets and decrease in sales in the year 2008-09.
5) The over all trend of the fixed assets turn over ratio is decreasing
pattern. percentage change in 1.51 between the period 2004-05and
2008-09.
104

FINDINGS
1. Amaravathi Textiles Private Limited has been maintaining favorable

working capital from the last 5 years (2004-2005 to 2008-2009).
2. By observing the working capital statement of 2004-2005 it is noticed

that the working capital is increased by 53.63% compared to the
previous financial year.

that working capital is increased by 32.46% compared to the previous
year.

year.

year.

year.
105

7. Debtor’s turnover ratio is fluctuating from the year 2004-2005 to 2008-

2009. The company debt collection period is also fluctuating. Debt
collection period is influenced by the debtor’s turnover ratio.
8. The inventory turnover ratio is also fluctuating through out all the years.
The inventory holding period also fluctuating.
9. The fixed assets turnover ratio is also fluctuating.
10. The current ratio of Amaravathi Textiles Private Limited is having better
standards.
11. Quick ratio of Amaravathi Textiles Private Limited is also having good
standards.
12. The performance of net working capital is increasing every year.
106

SUGGESTIONS
1. The debtor’s turnover ratio is fluctuating throughout all the years. Though it is
fluctuating it is showing positive or improvement as a result it is good. So the
company is suggested to maintain the same in future. As well as the debtors
collection period.
2. It is suggested that maintain the inventories very effectively. .
3. It is suggested that improve fixed assets .
4. Company does not maintaining the current idle ratio Company try to improve
its current assets...
5. Company needs to improve its quick ratio .
6. It is suggested that the company needs to maintain enough investment in

current assets in order to ensure the proper liquidity for the company.
107

BIBLIOGRAPHY
S.No Book Name Authors Publication name

Name
Financial Vikas Publishing
1 I.M Pandey
Management House Pvt.Ltd.,
Financial M.Y Khan Tata me Grwhil
2.
Management P.K.Jain Publishing Company
Financial Prasanna Tata me Grw hil
3.
Management Chandra Publishing Company
R.S.N
Management
4 Pilali S.Chand & Co
Accounting
Bhavathi
ANNUAL REPORTS OF AMARAVATHI TEXTILES PRIVATE LIMITED
108

MBA Financial Management Project on Working Capital Management

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MBA PROJECT AMARAVATHI TEXTILES

Financial management, as an integral part of over all management is not a

Definition of Financial management:

Scope of financial management:

The approach to the scope and the functions of financial management is

WORKING CAPITAL MANAGEMENT AU.CAMPUS..KAKINADA

a) The traditional approach.

The traditional to the scope of financial management refers to its subject

Objectives of Financial Management:

The objectives of financial management are

1) Profit maximization approach.

WORKING CAPITAL MANAGEMENT AU.CAMPUS..KAKINADA

1. Profit maximization approach:

According to this approach actions that increase profits should be

This is also known as value maximization or net present worth

The financial statements just provide the financial ingredients of a firm.

WORKING CAPITAL MANAGEMENT AU.CAMPUS..KAKINADA

Working capital management involves the relationship between a firm’s

Working capital typically means the firm’s holdings of current, or short-

There are two concepts of working capital—gross and net.

WORKING CAPITAL MANAGEMENT AU.CAMPUS..KAKINADA

KINDSOF WORKING CAPITAL:

KINDS OF WORKING CAPITAL

ON THE BASIS OF CONCEPT ON THE BASIS OF TIME

GROSS PERMINANT TEMPORARY

WORKING CAPITAL MANAGEMENT AU.CAMPUS..KAKINADA

Permanent Working capital is the minimum amount which is required to

TEMPORARY (OR) VARIABLE WORKING CAPITAL:

Temporary Working Capital is the amount of working capital which is

GROSS WORKING CAPITAL:

WORKING CAPITAL MANAGEMENT AU.CAMPUS..KAKINADA

NET WORKING CAPITAL:

In reference to the difference between current liabilities net working capita;

In case of a manufacturing company, the operating cycle is the length of

WORKING CAPITAL MANAGEMENT AU.CAMPUS..KAKINADA

i. Cash into Raw Materials.

WORKING CAPITAL MANAGEMENT AU.CAMPUS..KAKINADA

NEED OF THE STUDY

Every business enterprise needs some amount of working capital. Working

1). Solvency of the business: Sufficient working capital helps in maintaining

2). Goodwill: Sufficient working capital enables a business concern to make

5). Regular supply of raw-materials: Sufficient working capital ensures regular

WORKING CAPITAL MANAGEMENT AU.CAMPUS..KAKINADA

WORKING CAPITAL MANAGEMENT AU.CAMPUS..KAKINADA

1. The main objective of the study is to analyze how working

capital management is carried out in the organization.

2. To study various components of working capital and their management.

3. To evaluate the liquidity management through some of the related working

4. To know the efficiency of the company in utilizing its current assets.

5. To study the trends in working capital components.

WORKING CAPITAL MANAGEMENT AU.CAMPUS..KAKINADA

RESEARCH & METHODOLOGY

The primary data is collected by discussions with the functional managers,

Here the project is done on secondary data.

WORKING CAPITAL MANAGEMENT AU.CAMPUS..KAKINADA

LIMITATIONS OF THE STUDY

of the company, these balance sheets suffers a few limitations.

2. The study is based on the working capital analysis only.

3. The study is made only through secondary source of data. Normally

5. Analysis of information is based on ratios. The study is confined only

to a quantitative analysis; quality aspect of AMARAVATHI TEXTILES

PRIVATE LIMITED doesn’t reflect the study.