CHAPTER - I INTRODUCTION

1.1 INTRODUCTION
Working capital management is concerned with the problems that arise in attempting to manage the current assets, the current liabilities and the interrelationship between them. Capital required for a business can be classified into two main categories. They are: (a) fixed capital (b) working capital. Fixed capital: Capital required for purchase of fixed assets like building, land, plant, machinery, office equipment and furniture is called fixed capital. Working capital: Capital required for purchase of raw materials and for meeting the day-to-day expenditure on salaries, wages, rent, advertising etc is called working capital. Types of working capital: It can be classified into two ways. They are: (a) permanent or fixed working capital (b) temporary or variable working capital. Permanent/Fixed working capital: It is the minimum amount of working capital required to ensure effective utilization of fixed assets and support the normal operation of business. There is always a minimum level of current assets which is continuously required by the enterprise to carryout its normal business operations. Permanent or fixed working capital is minimum amount which is required to ensure effective utilization of fixed facilities and for maintaining the circulation of current assets. Every firm has to maintain a minimum level of raw material, work- in-process, finished goods and cash balance. This minimum level of current assts is called permanent or fixed working capital as this part of working is permanently blocked in current assets. As the business grow the requirements of working capital also increases due to increase in current assets Temporary working capital: It is the amount of working capital which is required by the business over and above the permanent working capital. The amount of such working capital keeps on fluctuating from time to time on the basis of business activities. It is intended to meet seasonal demands and some special exigencies. Temporary or variable working capital is the amount of working capital which is required to meet the seasonal demands and some special exigencies. Variable working capital can further be classified as seasonal working capital and special working capital. The capital required to meet the

seasonal need of the enterprise is called seasonal working capital. Special working capital is that part of working capital which is required to meet special exigencies such as launching of extensive marketing for conducting research, etc., Temporary working capital differs from permanent working capital in the sense that is required for short periods and cannot be permanently employed gainfully in the business. Working capital management ensures a company has sufficient cash flow in order to meet its short-term debt obligations and operating expenses. The two main aspects of working capital management are
1. Ratio analysis and 2. Management of individual concepts of working capital

1.1.2. Ratio Analysis

A tool used by individuals to conduct a quantitative analysis of information in a company's financial statements. There are many ratios that can be calculated from the financial statements pertaining to a company's performance, activity, financing and liquidity. Some common ratios includes
1. Debt-Equity Ratio, 2. Earnings per Share, 3. Asset turnover 4. Working Capital. 5. Working Capital turnover Ratio

6. Debtors Turnover Ratio 7. Debtors Turnover Period 8. Inventory Turnover Ratio 9. Inventory Turnover Period 10. Cash Position Ratio

1.1.3 Concepts Of Working Capital

There are two types of working capital. A. Gross working capital B. Net working capital 1.1.3.1 Gross working capital (GWC): It refers to the company`s investments in current assets. Current assets are the assets which can be converted into cash within an accounting year and include cash, short-term securities, debtors, bills receivable and stock. Assets which can convert in to cash within a short period normally one accounting year. CONSTITUENTS OF CURRENT ASSETS 1. Cash in hand and cash at bank 2. Bills receivables 3. Sundry debtors 4. Short term loans and advances. 5. Inventories of stock as: a) Raw material b) Work in process c) Stores and spares d) Finished goods 6. Temporary investment of surplus funds. 7. Prepaid expenses 8. Accrued incomes. 9. Marketable securities.

CONSTITUENTS OF CURRENT LIABILITIES 1. Accrued or outstanding expenses. 2. Short term loans, advances and deposits. 3. Dividends payable. 4. Bank overdraft. 5. Provision for taxation 6. Bills payable. 1.1.3.2 Net working capital (NWC): It 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. Net working capital can be positive or negative. Positive working capital means that the company is able to pay off its short-term liabilities. Negative working capital means that a company currently is unable to meet its short-term liabilities with its current assets (cash, accounts receivable and inventory). Modern business enterprises produce goods in anticipation of demand. Goods produced are not sold immediately cash for sales is also realized immediately from the time of purchases of raw materials to the time of realizations of cash for sale made and operating cycle is involved. a. Conversion of cash into raw material. b. Conversion of raw material into work in progress. c. Conversion of work in progress into finished goods. d. Conversion of finished goods into sales through debtors. e. Conversion of debtors into cash.

FACTORS DETERMINING THE WORKING CAPITAL REQUIREMENTS 1. Nature Of Business: The requirements of working is very limited in public utility undertakings such as electricity, water supply and railways because they offer cash sale only and supply services not products, and no funds are tied up in inventories and receivables. On the other hand the trading and financial firms requires less investment in fixed assets but have to invest large amt. of working capital along with fixed investments. 2. Size of The Business: Greater the size of the business, greater is the requirement of working capital. 3. Production Policy: If the policy is to keep production steady by accumulating inventories it will require higher working capital. 4. Lenth of Production Cycle: The longer the manufacturing time the raw material and other supplies have to be carried for a longer in the process with progressive increment of labor and service costs before the final product is obtained. So working capital is directly proportional to the length of the manufacturing process. 5. Seasonals Variations: Generally, during the busy season, a firm requires larger working capital than in slack season. 6. Working Capital Cycle: The speed with which the working cycle completes one cycle determines the requirements of working capital. Longer the cycle larger is the requirement of working capital. 7. Rate of Stock Turnover: There is an inverse co-relationship between the question of working capital and the velocity or speed with which the sales are affected. A firm having a high rate of stock turnover will needs lower amt. of working capital as compared to a firm having a low rate of turnover. 8. Credit Policy: A concern that purchases its requirements on credit and sales its product / services on cash requires lesser amt. of working capital and vice-versa.

9. Business Cycle: In period of boom, when the business is prosperous, there is need for larger amt. of working capital due to rise in sales, rise in prices, optimistic expansion of business, etc. On the contrary in time of depression, the business contracts, sales decline, difficulties are faced in collection from debtor and the firm may have a large amt. of working capital. 10. Rate of Growth of Business: In faster growing concern, we shall require large amt. of working capital. 11. Earning Capacity and Dividend Policy: Some firms have more earning capacity than other due to quality of their products, monopoly conditions, etc. Such firms may generate cash profits from operations and contribute to their working capital. The dividend policy also affects the requirement of working capital. A firm maintaining a steady high rate of cash dividend irrespective of its profits needs working capital than the firm that retains larger part of its profits and does not pay so high rate of cash dividend. 12. Price Level Changes: Changes in the price level also affect the working capital requirements. Generally rise in prices leads to increase in working capital.

MANAGEMENT OF WORKING CAPITAL Management of working capital is concerned with the problem that arises in attempting to manage the current assets, current liabilities. The basic goal of working capital management is to manage the current assets and current liabilities of a firm in such a way that a satisfactory level of working capital is maintained, i.e. it is neither adequate nor excessive as both the situations are bad for any firm. There should be no shortage of funds and also no working capital should be ideal. Working Capital Management Polices of a firm has a great on its probability, liquidity and structural health of the organization. So working capital management is three dimensional in nature as 1. It concerned with the formulation of policies with regard to profitability, liquidity and risk. 2. It is concerned with the decision about the composition and level of current assets. 3. It is concerned with the decision about the composition and level of current liabilities.

IMPORTANCE OR ADVANTAGE OF ADEQUATE WORKING CAPITAL 1. Solvency Of The Business: Adequate working capital helps in maintaining the solvency of the business by providing uninterrupted of production.
2. Goodwill: Sufficient amount of working capital enables a firm to make prompt

payments and makes and maintain the goodwill.

3. Easy loans: Adequate working capital leads to high solvency and credit standing can

arrange loans from banks and other on easy and favorable terms.
4. Cash Discounts: Adequate working capital also enables a concern to avail cash

discounts on the purchases and hence reduces cost.

5. Regular Supply of Raw Material: Sufficient working capital ensures regular supply of

raw material and continuous production.

6. Regular Payment of Salaries, Wages And Other Day TO Day Commitments: It leads

to the satisfaction of the employees and raises the morale of its employees, increases their efficiency, reduces wastage and costs and enhances production and profits.

7. Ability to Face Crises: A concern can face the situation during the depression. 8. Quick And Regular Return On Investments: Sufficient working capital enables a

concern to pay quick and regular of dividends to its investors and gains confidence of the investors and can raise more funds in future. 9. High Morale: Adequate working capital brings an environment of securities, confidence, high morale which results in overall efficiency in a business. EXCESS OR INADEQUATE WORKING CAPITAL Every business concern should have adequate amount of working capital to run its business operations. It should have neither redundant or excess working capital nor inadequate nor shortages of working capital. Both excess as well as short working capital positions are bad for any business. However, it is the inadequate working capital which is more dangerous from the point of view of the firm. DISADVANTAGES OF REDUNDANT OR EXCESSIVE WORKING CAPITAL 1. Excessive working capital means ideal funds which earn no profit for the firm and business cannot earn the required rate of return on its investments. 2. Redundant working capital leads to unnecessary purchasing and accumulation of inventories. 3. Excessive working capital implies excessive debtors and defective credit policy which causes higher incidence of bad debts. 4. It may reduce the overall efficiency of the business. 5. If a firm is having excessive working capital then the relations with banks and other financial institution may not be maintained. 6. Due to lower rate of return n investments, the values of shares may also fall. 7. The redundant working capital gives rise to speculative transactions.

Working capital is commonly understood as the fund needed to meet the day-to-day expenses of an enterprise. For a finance manager it is the fund locked up in current assets and, therefore, he looks for liquidity support in net working capital (NWC), which is
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equivalent to the excess of current assets over current liabilities. A banker also looks at the size of NWC as the long-term stake of the business in funding the current assets. But for a production manager, liquidity is synonymous to uninterrupted supply of material inputs to the production lines. Similarly for a marketing manager, if there is no production, his marketing outlets dry up despite demand in the market. While the finance manager discourages overstocking of inventory, the production manager and the marketing manager dread of being out of stock. In this conflict the goal of the organization often takes a back seat.

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CHAPTER-2

11

OVERVIEW OF THE PROFILE

2.1 COMPANY PROFILE MIL Industries Limited formerly known as (Madras Industrial Linings Limited) is a leading company in India engaged in the manufacture of corrosion resistant and abrasion resistant linings for Chemical, Fertilizer and other Process Industries, both in India and abroad.

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MIL's well-equipped R&D Division is continuously making available to its clientele new / improved Rubber Compound formulations and Plastic Lining materials to cater to increasingly arduous operating conditions. It has three divisions of production. They are: Rubber lining division The Company set up its Rubberling Division in 1969, in technical collaboration with Societe Chemique de Gerland of France, for the manufacture of corrosion resistant and abrasion resistant Rubberlinings and other Rubber Lined products for industrial applications and has been a major player since then. Plastic division MIL diversified into the field of Plastic Lining in 1989, as an extension of their technical expertise and capabilities in corrosion resistant field and has been a key player since then. Engineering division MIL's present range of services and products include the Design, Supply of: Chemical Plants, Electrolytic (Mercury) cells Caustic Soda Chlorine Plants, Brine purification for which we had technical collaboration with KREBS SWISS, ZURICH. Engineering and

MILAIRCLEN - Air Pollution Control Systems by Wet Scrubbing for which we had technical collaboration with Environmental Elements Corporation, USA. Solvent Recovery System based on Carbon Adsorption Technology for which we had technical collaboration with AMEG (U.K) Ltd.

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Working with Rafflenbeul Ingenieure, Germany for Molecular Sieve Adsorption Technology, Heat Recovery Systems and VOC Emission Control for Paper and other allied industries. Working with Membrane Technology & Research Inc., USA for Vapour Sep Membrane System to recover volatile organic compounds. Waste Water Treatment Systems with KISSLER Gmbh, (GERMANY). 1.2.1 Associate Companies of MIL Milgerlan Engineering and Consultants Pvt. Ltd. Chemical Consultants and Engineers Pvt. Ltd. Krebs Engineering Pvt. Ltd. Conpipe MIL Ltd. MIL Trading Pvt. Ltd. 1.2.2 Core Sector Industries For over three and a half decades, MIL has been catering the requirements of following core sector industries :

Phosphatic Fertilizers Chloroalkaly (Caustic Chlorine) VCM /PVC Heavy Chemicals Bulk Drugs Pulp & Paper Mining & Metallurgical Mineral Processing Steel Plants Power and Desalination Plants 2.2 INDUSTRY PROFILE

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The Company set up its Rubberling Division in 1969, in technical collaboration with Societe Chemique de Gerland of France, for the manufacture of corrosion resistant and abrasion resistant Rubberlinings and other Rubber Lined products for industrial applications and has been a major player since then. MIL's manufacturing operations are backed by R&D Centre, recognized by Ministry of Science & Technology, Govt. of India. MILGERLAN Product Range Corrosion Resistant Rubber lining - For process equipment vessels, storage tanks, ducts, columns and other specialized items. Abrasion Resistant Rubber lining - For chutes, hoppers, launders, bins, ball mills, cyclones, ducts etc. Rubber Lined Pipes and Fittings - For both corrosive and / or abrasive services Fabrication and Rubber lining of Process Equipment / Vessels - As per client's requirement Special Lining and Gaskets - In Hypalon, Neoprene, Butyl, Nitrile, EPDM and Natural Rubber Pre-vulcanized Natural and Synthetic Rubber Sheets - For chemical and abrasion resistance Flexible Cell Covers and Foils - For high amperage electrolytic mercury cells Water Proof Membranes - Flexible membranes of Butyl, EPDM and Butyl / EPDM for Lining of canals, dam beds and structures, effluent pits, evaporation ponds, roofings, etc.

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Expansion Joints - Bellow type made out of natural synthetic rubber with fabric and metal reinforcements suitable for high pressure, vacuum, varying temperature and corrosive service. Ebonite Products - Tubular liquid distribution and distance pieces resistant to chemicals and temperature Special Rubber Hoses - With fabric and wire reinforcements for chemical resistance Special Rubber Putty and Special Adhesives - For all types of repairs at client's factory

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Type

s of Rubber Lining POLYMER Natural Rubber SHORE HARDNESS 40A - 70A / 60D 85D TYPE Soft/Semi-hard/Hard Ebonite/ Soft-Hard-Soft (Triflex

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type). Synthetic Rubber Butyl Chloroprene Hypalon EPDM Nitrile 50A - 60A 45A - 65A 45A - 65A 50A - 70A 55A - 65A Soft Soft Soft Soft Soft

Vulcanization Techniques MIL employs two of the largest autoclaves in the country for vulcanizing factory-lined equipment. The Cold Bond Technique pioneered by MIL in India has been accepted as the most suited for site lining of large storage tanks, particularly under tropical conditions. Pressure Vulcanization Hot Water Vulcanization Exhaust Steam Vulcanization Manufacturing Infrastructure - Rubber Lining Division MILs existing manufacturing infrastructure is not only well laid out, but also can cater to future growth requirements. MILs factory is situated in a plot of approximately ten acres. The factory has a built up area of 3,150 sq.m. including production base, utility buildings, stores and office. The plant has a transformer of 425 KVA. Besides this, it has also its own Diesel Generators of 560 KVA for providing uninterrupted power supply. The

manufacturing facilities include the following Plant & Machinery:

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S.No 1 2 3 4 5 6 7 8 9 10

MACHINERY DESCRIPTION Mixing Mills 3 nos (1 x 65 HP & 2 x 125 HP) Roll Calender 1 no. (650 mm dia x 1750 mm long , 65 HP) Turbine Type Agitator (1 no.) & Double Arm Mixers (2 nos) Autoclaves 3.5 M Dia x 12 M Long 1 no. and 5 M Dia x 8 M long 1 no. EOT Crane 1 no., Capacity : 7.5 Tonnes Mobile Crane 1 no. Boilers 2 nos., Capacity : 4000 LBS / Hr. Air Compressors 7 nos. Grit Blasting Chambers 3 nos, Size:15 M x 6 M x 6.5 M Ht DG Sets 180 KVA 1 no. & 380 KVA 1no.

Major Achievements in Rubber Lining

More than 100 proven rubber compound recipes / formulations. Rubberlined around one million sq. m. both at Factory and Sites. Pioneer in Cold Bond Lining and lined over 500,000 sq. m. by Single largest order executed using Cold Bond Lining Technique

Cold Bond Technique.

- 7 Storage Tanks and 12 Process Equipment adding to 31,000 sq.m. - 4 Tanks of size 34 M Dia x 14 M Ht. for M/s National Chemical and Fertilizer Company (SAFCO), Jubail, Saudi Arabia. Application completed in record 4 months.

Rubberlined 10,000 sq. m. for Industries Chemiques du

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Senegal (ICS) through Krebs - Speichim, France.

Rubberlined

10,000

sq.m.

for

Indo-Jordan

Chemicals

Company, Eshidiya, Jordan.

Rubberlined over 75,000 sq. m. for Oswal Chemicals &

Fertilizers Ltd, Paradeep (now IFFCO)

The Company MIL Industries Limited is a leading company in India engaged in the manufacture of corrosion resistant and abrasion resistant linings for Chemical, Fertilizer and other Process Industries, both in India and abroad. With up-to-date technical know-how from Ohji Rubber and Chemical Co., Japan and India's largest and modern Rubber lining facility, MIL enjoys leadership position in the Rubber Lining field with a market share of around 50%. It has pioneered in India, the Cold Bond Rubber Lining Technique for large capacity storage tanks in situ. MIL also manufactures an extensive range of Plastic lined Pipes & Fittings, PTFE Expansion Joints, PTFE lined Dip Pipes, Spargers, Thermowells, Plain / Corrugated PTFE Hoses and so on. They have the latest technology from M/s. Fluorocarbon Company Ltd., UK and the processing facilities and technical capabilities are at par with the best available anywhere in the International market. In addition, MIL also supplies Air Pollution Control Systems for dust and fumes removal and Solvent Recovery Systems based on Carbon Adsorption Technology. MIL's well-equipped R&D Division is continuously making available to its clientele new / improved Rubber Compound formulations and Plastic Lining materials to cater to increasingly arduous operating conditions. Associate Companies Milgerlan Engineering and Consultants Pvt. Ltd. Chemical Consultants and Engineers Pvt. Ltd.
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Krebs Engineering Pvt. Ltd. MIL Trading Pvt. Ltd.

For over three and a half decades, MIL has been catering the requirements of following core sector industries :

Phosphatic Fertilizers Chloroalkaly (Caustic Chlorine) VCM /PVC Heavy Chemicals Bulk Drugs Pulp & Paper Mining & Metallurgical Mineral Processing Steel Plants Power and Desalination Plants Ports

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CHAPTER-3 DESIGN OF THE STUDY

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3.1 OBJECTIVES OF THE STUDY

3.1.1 Primary objective: 1. To ascertain the effectiveness of the working capital management in the MIL INDUSTRIES LTD.

3.1.2 Secondary objective: 1. To identify the amount of gross and net working capital of MIL. 2. To estimate the working capital requirement of the company by analyzing the past records of the company. 3. To study the changes in net working capital of MIL.

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3.2 SCOPE OF THE STUDY

1. The definition of working capital is fairly simple; it is the difference between an organizations current assets and its current liabilities.

2. Of more importance is its function which is primarily to support the day-to-day financial operations of an organization, including the purchase of stock, the payment of salaries, wages and other business expenses, and the financing of credit sales.

3. As the cycle indicates, working capital comprises a number of different items and its management is difficult since these are often linked. Hence altering one item may impact adversely upon other areas of the business.

4. For example, a reduction in the level of stock will see a fall in storage costs and reduce the danger of goods becoming obsolete. It will also reduce the level of resources that an organization has tied up in stock.

5. However, such an action may damage an organizations relationship with its customers as they are forced to wait for new stock to be delivered, or worse still may result in lost sales as customers go elsewhere

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3.3 NEED OF THE STUDY:

Every business needs funds for two purposes for its establishment and to carry out its day- to-day operations. Long terms funds are required to create production facilities through purchase of fixed assets such as p&m, land, building, furniture, etc. Investments in these assets represent that part of firms capital which is blocked on permanent or fixed basis and is called fixed capital. Funds are also needed for shortterm purposes for the purchase of raw material, payment of wages and other day to- day expenses etc.

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3.4 LIMITATIONS OF THE STUDY 1. The study is based on secondary sources of information being provided by MIL. 2. The study covers a period of 5 years from 2004 to 2009 and it does not cover all the ratios. 3. The study does not touch all the units of MIL. 4. The nature of financial performance is historical past cannot be present basis for future estimation, forecasting, budgeting and planning.
5. Since financial matters are sensitive in nature and they could not be acquired easily.

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3.5 REVIEW OF LITERATURE Chris Conolly & Smith (2005)1 studied working capital is the money used to make goods and attract sales. The less Working Capital used to attract sales, the higher is likely to be the return on investment. J.D.Agarwal (2004)2 analyzed about the commercial and financial aspects of Inventory, credit, purchasing, marketing, and royalty and investment policy. Jonathon Hardcastle (2006)3 analyzed the term working capital originated with the old Yankee peddler, who would load up his wagon with goods and then go off on his route to peddle his wares. The merchandise was called working capital because it was what he actually sold, or "turned over", to produce his profits. The wagon and horse were his fixed assets. He generally owned the horse and wagon, so they were financed with "equity" capital, but he borrowed the funds to buy the merchandise. These borrowings were called working capital loans. David Gass (2006)4 finds the measures to improve working capital management. The essence of effective working capital management is proper cash flow forecasting. This should take into account the impact of unforeseen events, market cycles, loss of a prime customer, and actions by competitors Effective dispute management procedures in relation to customers will go along way in freeing up cash otherwise locked in due to disputes. It will also improve customer service and free up time for legitimate activities like sales, order entry, and cash collection. Overall, efficiency will increase due to reduced operating costs. Collaborating with your customers instead of being focused only on your own operations will also yield good results. If feasible, helping them to plan their

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inventory requirements efficiently to match your production with their consumption will help reduce inventory levels. Patrick Buchman and Udo Jung (2002)5 estimated the importance of working capital management as a lever for freeing up cash from inventory, accounts receivable, and accounts payable. By effectively managing these components, companies can sharply reduce their dependence on outside funding and can use the released cash for further investments or acquisitions. This will not only lead to more financial flexibility, but also create value and have a strong impact on a companys enterprise value by reducing capital employed and thus increasing asset productivity. Navneeth Mehta (2009)6 the most important areas in the day to day management of the firm, is the management of working capital. Working capital management is the functional area of finance that covers all the current accounts of the firm. It is concerned with management of the level of individual current assets as well as the management of total working capital. Working capital management involves the relationship between a firms 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. T.S.Reddy & Y.Hari Prasad Reddy (2000)7 stated funds flow statement is generally prepared and interpreted on the basis of net working capital. Sanchez (1992)8 surveys over 8,000 firms and found that on average 25 percent of receivables are delinquent at any given time. He also found that less than one percent of delinquent receivables is ever written off as a loss. As a result, he views collections not so much as enforcement of payment but more as "the process of completing the sale." He argues that internal processes are critical to accounts receivable management.

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Smith and Belt (1989)9 report that most of the respondents of the Fortune 1000 companies that were surveyed used more than one method of determining to whom to grant credit and monitor customers' payment behaviors. Beranek and Sherr (1991)10 find that 58 percent of the respondents to their survey establish credit limits for over 90 percent of their customers Ricci (1999)11 surveys 200 randomly-selected credit managers on the topics of pre-sale issues, post-sale issues, and reporting issues. Although Ricci finds that several methods were being used to identify creditworthy customers, using multiple methods did not have an impact on the level of past due accounts. Furthermore, no relationship existed between the amount of money spent on information and the percentage of sales turning into bad debts. Gilbert and Reichert (1995)12 finds that about 60 percent of firms use the percentage-ofsales model or an internally developed model to forecast receivables. As one might expect, those firms that employed more methods to forecast and monitor receivables had a lower level of past due accounts. Barth, Cram, and Nelson (2001)13 investigate the role of accruals in predicting future cash flows and show that each accrual component reflects different information relating to future cash flows. Hill and Sartoris (1992)14 note that from 1970 to 1990, receivables in typical manufacturing corporations constituted almost 17 percent of total assets. Based on annual survey data, CFO Magazine (Myers, 2006) notes overall improvements in the related working capital variables such as accounts receivable and accounts payable over the last several years. Thus, given the gains that have been made in working capital management in the last 15 years, one might expect a smaller proportion today. Bhattacharya Hrishikes (2002)15 Working capital is commonly understood as the fund needed to meet the day-to-day expenses of an enterprise. For a finance manager it is the fund locked up in current assets and, therefore, he looks for liquidity support in net
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working capital (NWC), which is equivalent to the excess of current assets over current liabilities. A banker also looks at the size of NWC as the long-term stake of the business in funding the current assets.

3.6 RESEARCH METHODOLOGY 3.6.1 RESEARCH DESIGN 1. The project report was done using analytical research design. 2. Data collected from all the available sources had been tabulated, analyzed, interpreted and supported with relevant charts, ratios, tables, graphs, etc., where ever necessary and suggestions arising there of has also been listed in the project. 3. The project report was done using analytical research design. 4. Data collected from all the available sources had been tabulated, analyzed, interpreted and supported with relevant charts, ratios, tables, graphs, etc., where ever necessary and suggestions arising there of has also been listed in the project. 3.6.2 Sources of Data Sources of data can be classified into two types, they are : 1. Primary data a) Data observed or collected directly from first-hand experience is called primary data. b) Primary data is not applicable in this study. 2. Secondary data.
a) Published data and the data collected in the past or other parties is called

secondary data. b) Secondary data from published annual reports for 5 years.

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3.2 DATA COLLECTION

1. Data collection is a term used to describe a process of preparing and collecting data

2. The purpose of data collection is to obtain information to keep on record, to make decisions about important issues 3.2.1 Secondary data Secondary data is data collected by someone other than the user. Examples Records, documents, published materials and policy statements. 3.2.2 Collection of data The data for the analysis are collected and gathered from the printed annual reports of MIL INDUSTRIES LTD and it is a qualitative data. 3.6.3. TOOLS USED IN THIS STUDY Some common ratios include: 1. Debt-equity ratio 2. Earnings per share
3. Asset turnover ratio

4. Working capital
5. Working capital turnover ratio

6. Debtors turnover ratio

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7. Debtors turnover period 8. Inventory turnover ratio 9. Inventory turnover period 10. Cash position ratio 3.6.1 Debt-Equity Ratio The debt-to-equity ratio (D/E) is a financial ratio indicating the relative proportion of shareholders' equity and debt used to finance a company's assets. = (Long term debt / Shareholders fund) 3.6.2 Earnings per Share The portion of a company's profit allocated to each outstanding share of common stock. Earnings per share serve as an indicator of a company's profitability. = (Profit after Tax & Dividend / No of Equity Shares) 3.6.3 Fixed Asset Turnover Ratio The amount of sales generated for every dollar's worth of assets. It is calculated by dividing sales in dollars by assets in dollars. = (Net Sales / Fixed Assets)*100 3.6.4 Working Capital A measure of both a company's efficiency and its short-term financial health. The working capital ratio is calculated as = (Current Assets Current Liabilities) 3.6.5 Working Capital Turnover Ratio

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A measurement comparing the depletion of working capital to the generation of sales over a given period. This provides some useful information as to how effectively a company is using its working capital to generate sales. = (Net Sales / Working Capital)*100

3.6.6 Debtors Turnover Ratio In simple words it indicates the number of times average debtors (receivable) are turned over during a year. [Debtors Turnover Ratio = Total Sales / Debtors] 3.6.7 Debtors Turnover Period The average collection period ratio represents the average number of days for which a firm has to wait before its debtors are converted into cash. [(Trade Debtors No. of Working Days) / Net Credit Sales] 3.6.8 Inventory Turnover Ratio Inventory turn over ratio indicates the number of time the stock has been turned over during the period and evaluates the efficiency with which a firm is able to manage its inventory. This ratio indicates whether investment in stock is within proper limit or not. [Inventory Turnover Ratio = Cost of goods sold / Average inventory at cost] 3.6.9 Inventory Turnover Period The general objective is to increase the stock velocity as much as possible or in effect decrease the days or months for which items remains in stock. The ratio can be expressed in terms of Days or Months.

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[Inventory turnover period = Days or months in a year / Inventory turnover ratio]

3.6.10 Cash position Ratio This ratio measures liquidity in terms of cash and near cash items and short term current liabilities. [Cash position ratio = (Cash & Bank Balances + Marketable Securities) / Current Liabilities]

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CHAPTER 4 DATA ANALYSIS & INTERPRETATION

35

DATA ANALYSIS & INTERPRETATION

The study on Working Capital Management of the MIL INDUSTRIES LTD, so we need to analyze the financial soundness of the industry. The only tool used in this study was Ratio Analysis for the analysis of data. It can be classified into three categories they are :i. Profitability ratios ii. Turnover ratios iii. Solvency ratios. But the following ratios only calculated in this study. They are: 1. Debt-equity ratio 2. Earnings per share 3. Asset turnover ratio 4. Working capital 5. Working capital turnover ratio 6. Debtors turnover ratio 7. Debtors turnover period 8. Inventory turnover ratio 9. Inventory turnover period 10. Cash position ratio

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

(Total Long term Debt / Shareholders Fund) (28109344 / 173050161) (24692034 / 159378150) (21307922 / 161438176) (37847232 / 162718937) (46617192 / 165729114)

Debt Equity Ratio 0.16 0.15 0.13 0.23 0.28

Table No 4.1.Debt Equity Ratio

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Chart No 4.1: Debt Equity Ratio

D b E u R tio e t q ity a 0 .3 0 5 .2 0 .2 0 5 .1 0 .1 0 5 .0 0 2 0 -0 04 5 2 0 -0 05 6 2 0 -0 06 7 2 0 -0 07 8 2 0 -0 08 9 0 6 .1 0 3 .2 0 8 .2

0 5 .1

0 3 .1

D b E u R tio e t q ity a

Inference: The above table indicates that the company is not having ideal debt equity ratio (1:1). They have more of share capital and less of debt; hence they are not in a position to give good returns to the share holders. But in 2008 & 2009 the debt has slowly increased.

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

( Profit after Tax & Dividend / No of Equity Shares) (-37373595 / 4900000) (-29254500 / 4900000) (9274797 / 4900000) (10614691 / 4900000) (13674923 / 4900000)

Earnings per Share -7.62 -5.97 1.89 2.16 2.79

Table no 4.2: Earnings per share

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Chart No 4.2. Earnings per Share

Ea rnings pe Sha r re
4 2 0 -2 -4 -6 -8 -10 Y ear -7.62 -5.97 2004-05 2005-06 2006-07 2007-08 2008-09 Earnings per Share 1.89 2.16 2.79

Inference: It can be inferred from the above table that there was negative EPS in the first two years due to the loss in the sale of fixed asset. But now the company is slowly regaining by increasing the EPS to the share holders. It means the market price of equity share is less.

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Table No 4. 3. Fixed Asset Turnover Ratio

Year 2004-05 2005-06 2006-07 2007-08 2008-09 (Net Sales / Fixed Assets (119180248 / 140065473) (143806978 / 134885716) (160736857 / 134668543) (155584195 / 161591628) (165186080 / 163879812) Fixed Asset Turnover Ratio 0.85 1.06 1.19 0.96 1.01

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Chart No 4. 3. Fixed Asset Turnover Ratio

F e A tt r o e ix d sse u n v r
1 .2 1 0 .8 0 .6 0 .4 0 .2 0 1 6 .0 0 5 .8 1 9 .1 0 6 .9 1 1 .0

Asse tu ov r t rn e
20 05 -0 6 20 06 -0 7 20 07 -0 8 20 08 -0 9

20 04 -0 5

Ya er

Inference: It is cleared from the above table that the fixed asset turnover ratio is slowly increases year by year which that the fixed assets are utilized properly helps to increase the sales.

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Table No 4.4. Working Capital

Year 2004-05 2005-06 2006-07 2007-08 2008-09 (Current Assets Current Liabilities) (76527666 - 28003064) (80345960 - 26020409) (97451407 - 29518129) (90163841 - 33062449) (96289436 - 28850828) Working Capital 48524602 54325551 67933278 57101392 67438608

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Chart No 4.4. Working Capital

W ing Ca it l ork p a
8000 0000 7000 0000 6000 0000 5000 0000 4000 0000 3000 0000 2000 0000 1000 0000 0 2 0 -0 2 0 -0 2 0 -0 2 0 -0 2 0 -0 04 5 05 6 06 7 07 8 08 9 Y ear Workin Cap g ital 4540 8262 5355 4251 6937 7328 5119 7032 6480 7368

Inference: It is observed from the above table that the working capital has been increasing steadily year after year which is not a good indication. Unless control is vested towards the working capital the company cannot expect increase their profit.

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Table No 4.5. Working Capital Turnover Ratio

Year 2004-05 2005-06 2006-07 2007-08 2008-09 (Net Sales / Working Capital) (119180248 / 48524602) (143806978 / 54325551) (160736857 / 67933278) (155584195 / 51101392) (165186080 / 67438608) Working Capital turnover Ratio 2.45 2.64 2.36 3.04 2.45

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Chart No 4.5. Working Capital Turnover Ratio

Working Capital Turnover Ratio

4 3 2 1 0 2004- 2005- 2006- 2007- 200805 06 07 08 09 Working Capital Turnov Ratio er

Working Capital 2.456 2.647 2.366 3.044 2.449 Turnov Ratio er

Inference: It is clear from the above table that the working capital is reducing which indicates there is high investment in working capital and there is less profit.

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Table No 4.6. Debtors Turnover Ratio

Year 2004-05 2005-06 2006-07 2007-08 2008-09 Net Credit Sales / Average Accounts Receivables (123204540 / 34402590.5) (149624713 / 38178612.5) (167671656 / 41020082.5) (162293012 / 41617516) (170044153 / 40261791) Debtors turnover ratio 3.58 3.92 4.08 3.89 4.22

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Chart No 4.6. Debtors turnover Ratio

Debtors turnover ratio 4.4 4.2 4 Times 3.8 3.6 3.4 3.2 2004-05 2005-06 2006-07 2007-08 2008-09 Year 3.58 3.92 4.08 3.89 Debtors turnover ratio

4.22

Inference: It is cleared from the above table the debtors turnover ratio shows an increasing trend. It means the management of debtors is more efficient.

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Table No 4.7. Debtors Turnover Period

Year 2004-05 2005-06 2006-07 2007-08 2008-09 No of Days in a year / Debtors turnover ratio (365 / 3.58) (365 / 3.92) (365 / 4.08) (365 / 3.89) (365 / 4.22) Debtors turnover period 102 93 89 94 86

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Chart No 4.7. Debtors Turnover Period

Debtors turnover period (Days) 105 100 95 90 85 80 75 200405 200506 200607 Year 200708 200809 102 93 89 93.83 86.42 Debtors turnover period (Days) Days

Inference: It is inferred from the above table, the debtors turnover period shows a decreasing trend. It means the management is very effective in collecting the payments from debtors.

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Table No 4.8. Inventory Turnover Ratio

Year 2004-05 2005-06 2006-07 2007-08 2008-09 Cost of goods sold / Average Inventory (71801932 / 22049129.5) (97481215 / 22458443.5) (104892974 / 22226896.5) (99963448 / 22645050) (111497607 / 23806358) Inventory turnover ratio 3.256 4.34 4.72 4.41 4.68

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Chart no 4.8. Inventory Turnover Ratio

Inventory turnover ratio 5 4.5 4 3.5 3 2.5 2 1.5 1 0.5 0 4.72

4.34 3.256

4.41

4.68

Times

Inventory turnover ratio

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

Inference: It is observed from the above table the inventory turnover ratio is gradually increasing. It indicates the company has efficient inventory management and efficiency of business operation.

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Table No 4.9. Inventory Turnover Period

Year 2004-05 2005-06 2006-07 2007-08 2008-09 No of days in a year / Inventory turnover ratio (365 / 3.256) (365 / 4.34) (365 / 4.72) (365 / 4.41) (365 / 4.68) Inventory turnover period(Days) 112 84 77 83 78

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Chart No 4.9. Inventory Turnover Period

Inventory turnover period (days) 120 100 80 Days 60 40 20 0 200405 200506 200607 Year 200708 200809 112 84 77 82.68 78 Inventory turnover period (days)

Inference: It is observed from the above table the inventory turnover period has keep on decreasing. It indicates the company has effective storage of inventory in terms of days or months.

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Table No 4.10. Cash Position Ratio

Year 2004-05 2005-06 2006-07 2007-08 2008-09 (Cash & Bank balances + Marketable Securities ) / Current Liabilities (7501398+28050) / 28003064 (6050583+51000) / 26020409 (12171290+129000) / 29518129 (9076679+78000) / 33062449 (9857868+78000) / 28850828 Cash position ratio 0.27 0.23 0.42 0.28 0.34

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Chart No. 4.10 Cash Position Ratio

Cash position ratio 0.45 0.4 0.35 0.3 0.25 0.2 0.15 0.1 0.05 0 0.42 0.34 0.27 0.23 0.27 Cash position ratio

Times

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

Inference: It is cleared from the above table the cash position ratio of the company is not met the ideal ratio i.e. 0.75. Hence the company is not in the position to meet the liquidity of current liabilities.

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CHAPTER 5 FINDINGS & SUGGESTIONS

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5.1 FINDINGS
1. From the debt equity ratio the company is not in the position to give good returns to the

share holders and their earnings per share also very less.
2. The fixed assets utilization in the company is fluctuating in all the years. Hence they are

not in the position to generate more revenues. 3. The level of working capital has been increasing year by year, which is not a good indication.
4. From the working capital turnover ratio the companys investments highly locked in

working capital.
5. The management of debtors is more efficient both in debtors turnover ratio and debtors

collection period. 6. The company has effective management both in the inventory turnover ratio and inventory turnover period. 7. The company is not in the position to meet the liquidity of its current liabilities.

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5.2 SUGGESTIONS
1. The company should have more of debts and less of equities and the company should

maintain the ideal debt-equity ratio i.e., (2:1).

2. The company should utilize the fixed assets effectively to generate more revenues and to

maximize the profit in the forthcoming years. 3. The level of working capital should be reduced to maximize the earnings of the company and the company has to take measures to control the level of working capital.
4. The company has to take necessary steps before making the investments in working

capital. 5. The company has to maintain the efficient management controls both in sundry debtors and inventory management. 6. The company has to take necessary steps to meet the liquidity of current liabilities.

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CHAPTER-6 CONCLUSION & BIBLIOGRAPHY

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6.1 CONCLUSION
Analysis of working capital brings out certain important measures in it. It also revealed that the company does not have efficient management control in financial aspects. So the company has to take some measures mentioned in the suggestions to achieve higher profits and also to satisfy the share holders of the company.

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6.2 BIBLIOGRAPHY: Books

1. Agarwal.J.D Working Capital Management IIF Publications. 2. Bhalla.V.K Working Capital Management: Text & Cases Tata McGraw Hill

Publications.
3. Ramachandran.R & Srinivasan.R Financial Management Sriram Publications, Tiruchi.

4. Sudarsana Reddy Financial Management Himalaya publications.

Websites
1. www.studyfinance.com 2. www.investopedia.com

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