A Project report

On

Working Capital Management

For

Unit CPM (Songadh Fort)

By

Sagar R. Ratnani
From Date : 11/6/2012 to 23/7/2012 Enrollment No. 117500592119 Batch 2011-2013 Under the Guidance of Company Guide : Nimesh Joshi College Guide : Esha Pandya Submitted to : Gujarat Technological University Through

S. R. Luthra Institute Of Management, Surat

PREFACE
The project report on JK Paper Ltd. has been prepared as per the topic Working Capital Management of JK Paper Ltd.

Understanding of both practical and theoretical knowledge is essential in this competitive world. Training is an important aspect of the study. The basic aim of training in the management field is to know how to apply management theories in practice. Practice makes man perfect; therefore practical study is very important for management students.

Practical training helps in comprehending the theory of subject taught in classroom. This is more applicable in case of management education. My training at JK Paper Ltd. has such effect to acquire the practical knowledge of Finance Management and others.

Thus, it is our moral and obligatory duty to take part of our studies with great enthusiasm and seriousness and give them due importance.

Last but not the least I received all required information and co-operation from the Accounts Department and HR Department. I hope that this report will meet the educational requirement.

Sagar R. Ratnani

ACKNOWLEDGEMENT
Success is not merely a question of luck of genius it depends on hard work, sustained toil and most important of all his guidance. I am greatly thankful to JK Paper Ltd. for giving me an opportunity to work on this project at their company. I wish to express my sincere thanks top M.s Esha Pandya, Lecturer of S.R.Luthra Institute of Management who guide me to undertake this project report under JK Paper Ltd. I wish to convey my heart full gratitude to Mr. Surendra Behani (GM, Accounts) of JK Paper Ltd. for his valuable guidance and co-operation me during the course of this project; I also thank the all the officers of Accounts Department of the JK Paper Ltd. Last but not the least I would like to thank sincerely to Mr. Nimesh Joshi (Asst. Executive-HRD & TPM) for his assistance during my training period.

( Sagar R. Ratnani )

RESEARCH METHODOLOGY
The term research refers to the systematic method consisting of enunciating the problem, formulating the hypothesis collecting data, analyzing the facts and reaching the certain conclusions either in the form of solution towards the concern problem or in certain generalization for some theoretical formulation. Research methodology is a way to solve systematically the research problem. It may be understood as a science of studying how research is done scientifically.
Time period of the study :

The present study was undertaken during six weeks from 11th June 23rd July.
Research Design :

Descriptive research procedure is used for describing the recent situations in the organization and analytical research to analyze the result by using research tools. Descriptive Research : Descriptive research, also known as statistical research, describes data and characteristics about the population and phenomenon being studied. Although the data description is factual, accurate and systematic, the research cannot describe what caused a situation. Therefore descriptive research cannot be used to create a casual relationship, where one variable affects another. In other words, descriptive research can be said to have a low requirement for internal validity.
Data Source & Collection Method :

I. II.

Primary data Secondary data

Primary data :

To collect the primary data I have collected the information by informal discussion held with various department heads. Information pertaining to receivables, cash, inventory, and creditors were collected from the respective departments in the units. Secondary data : Secondary data are those which have already been collected by someone else and which have already been passed through the statistical process. The Secondary data consist of reality available companies already complied statistical statements. Secondary data consist of not only published records and reports but also unpublished records.
Purpose :

The purpose of this paper is to properly analysis of the working capital management of JK Paper Ltd., Songadh over the period 2008-2012
OBJECTIVE OF THE STUDY :

The management of Working Capital is very important. It involves the study of day to day affairs of the company. The motive behind the study to develop the understanding about working capital management in the running business organization and to help the company in developing the efficient working capital management. Therefore, it helps in future planning and control decision. To analyze the working capital management. To determine the gross operating and net operating cycle of the unit. To know the future need of working capital in the running organization. To render recommendations for the effective management of working capital.

 SCOPE OF THE STUDY :

The study is conducted at JK Paper Ltd., Songadh for 6 weeks duration. The study of working capital management is purely based on secondary data and all the information is available within the company itself in the form of records. To get proper understanding of concepts, I have done the study of balance sheet, profit/ loss A/cs, cash accounts. I have also conducted the interview with employees of accounts department. So scope of the study limited up to the availability of official records and information provided by the employees. The study is supposed to be related to the period of last four years. Analysis through working capital ratios. Analysis through schedule change in working capital. Analysis through gross operating cycle and net operating cycle. Analysis through various components of working capital. a. Receivable Management b. Inventory Management c. Cash Management
Limitation of Study :

Generally the company does not allow the finance project to have any study or research work. Therefore getting a project work in the company itself was very difficult. The time span of the project was very short 6 weeks, which was a major constraint, so study and analysis on this topic within limited period was not sufficient.

 The organizations do not disclose all the data which is an obstacle for the detail study. Due to the busy schedule, some of the staff members were not in a position to spare time for guiding the topic or giving any information. As the organization policies were very strict regarding using actual figures due to which approximately values were used for analysis. Hence the result also reveals approximate values. Maximum secondary data is used.

Here I have done the analysis on the basis of secondary data, which includes : Balance Sheet of company Profit / Loss of JK Paper Ltd.

LITERATURE REVIEW
1. The research done by Herrfeldt B., How to understand Working Capital Management describe that Cash is king so say the money managers who share the responsibility of running this countrys businesses. And with banks demanding more from there prospective borrowers, greater emphasis has been placed on those accountable for so-called working capital management. Working capital management refers to the management of current or short term assets and short term liabilities. In essence, the purpose of that function is to make certain that the company has enough assets to operate its business. 2. The research done by, Samiloglu F. and Demirgunes K., Effect of Working Capital Management on firm Profitability : Evidence of Turkey (2010) describe that the effect of working capital management on firm profitability. In accordance with this aim, to consider statistical significance relationship between firm profitability and the component of cash conversion cycle at length a sample consisting of Istanbul Stock Exchange (ISE) listed manufacture firms for the period of 1998-2007 has been analyzed under multiple regression models. Empirical findings the study show that accounts receivable period, inventory period and leverage affect firms profitability negatively; while growth (in sales) affects on firm profitability positively. 3. Michael J Peel, Nicholas Wilson (2009), very little research has been conducted on the capital budgeting and working capital practices of small firms. The result of survey indicates that a relatively high proportion of small firm in the sample claimed to use quantitative capital budgeting and working capital technique and to review various aspect of the companies working capital. In addition, the firms which claim to usequantitative capital budgeting and working capital technique and to review various aspects of their companies working capital. In addition, the firms which claim to use more sophisticated discounted cash flows capital budgeting techniques, or which had been active in terms of reducing stock level

4. The research done by Hardcastle J., Working Capital Management, (2007) describe that the working capital sometimes called gross working capital, simply refers to the firms total current assets (the short term ones), cash, marketable securities, account receivables and inventory. While long term finance analysis primarily concern strategic planning, working capital management deal with day-to-day operations. By making sure that the production line do not stop due to lack of raw material, that inventories do not build up because production continue unchanged when sales dip that customer pay on time and that have enough cash is on hand to make payments when they are due. Obviously good working capital management, no firm can be efficient and profitable. 5. The research done by Thachappilly G., Working Capital Management manages Flow of Fund, (2010) describe that the Working Capital is the cash needed to carry on operation during the cash conversion cycle, i.e. the days for paying for raw material to collecting cash from customers. Raw material and operating supplies must be brought and stores to ensure uninterrupted production. Wages, salaries, utility charges and other incidents must be paid for converting the material into finished goods. Customers must be allowed a credit period that is standard in the business. Only at the end of cycle does cash flow in again. 6. The research done by, Gass D., How to improve Working Capital Management (2009) Cash is the lifeblood of the business is an often repeated maxim amongst financial manager. Working capital management refers to the management of current or short-term assets and short-term liabilities. Component of short-term assets include inventories, loans and advance, debtors, investmentand cash & bank balances. Short-term liabilities include creditors, trade advances, borrowing and provisions. The major emphasis is, however, on short-term assets, since short-term liabilities arise in the context of short-term assets. It is important that companies minimize risk by prudent working capital management.

WORKING CAPITAL MANAGEMENT

Meaning And Nature of Working Capital Management The management of working capital is concerned with two problems that arising in attempting to manage the current assets, current liabilities and the inter relationship that asserts between them. The basic goal is working capital management is to manage current assets and current liabilities of the firm in such way that a satisfactory of optimum level of working capital is maintained i.e. it is neither inadequate nor excessive. This is so because both inadequate as well as excessive working capital position is bad for business. A business which is fully equipped with all types of fixed assets required is bound to collapse without (i) Adequate supply of raw material processing, (ii) Cash to pay for wages, power and other costs, (iii) Creating a stock of finished goods to feed the market demand regularly and (iv) The ability to grant credit to its customers. All these require working capital. Working capital is thus like the lifeblood of business. Working capital cycle involves conversions and rotation of various component of the working capital. Initial cash is converted into raw material. Subsequently, with the usage of fixed assets resulting in value addition, the raw material get converted into working in progress and then into finished goods. When sold on credit, the finished goods assume the form of debtor who give the business cash on due date. Thus the cash assume its original form again at the

end of one such working capital cycle but in the course it passes through various other forms of current assets too. This is how various components of current assets keep on changing their forms due to value addition. As a result they rotate and business operation continues. Thus the working capital cycle involves rotation of various constitute of working capital. Sources of Additional Working Capital Source of additional working capital include the following Existing cash reserves Profits ( When you secure it as cash ) Payables ( Credit from Supplier ) New equity or loans from shareholders Bank overdrafts or lines of credit Long term loans

Classification of Working Capital Working capital can be classified in two ways. 1. On the basis of concept 2. On the basis of time

A. On the basis of concept working capital can be classified

Gross Working Capital Net working capital.

B. On the basis of time working capital may be classified

Permanent or fixed working capital Temporary or variable working capital

 Types of Working Capital

There are mainly two types of working capital. a) Permanent Working Capital b) Temporary Working Capital a) Permanent Working Capital:The need for current assets arises because of operating cycle. The operating cycle is continuous process and therefore the need for current assets is felt constantly. But the magnitude of current assets needed is not always the same. It increases and decreases over time. However there is always a minimum level of current assets, which are continuously required, by firm to carry or its business operations is called permanent or fixed working capital. This minimum level of working capital is necessary on the regular basis even if the management of working capital is done efficiently in the organization. As this type of working capital is minimum necessary for the business at all points of time, it is financed by the long-term sources. b) Temporary Working Capital:The amount over and above the permanent level of working capital is temporary, fluctuating or variable working capital. The need for such type of working arises because of fluctuations in production and sales. The additional requirement may be during more active season when the volume of production and sales more goes up necessitating extra blockage of funds temporarily in current assets like Bank Balance, inventory, debtors, etc. The temporary working capital is the additional funds required. Whose volume is different at different points of time and hence it is financed by short-term sources.

Working Capital Analysis

Working Capital Assembly :
YEAR Particular 2011-12 Current Assets 1) Inventories 2) Sundry Debtors 3) Cash & Bank Balances 4) Loans & Advances 5) Others Current Assets TOTAL CURRENT ASSETS (A) Less : Current Liabilities 1) Current liabilities & Provisions TOTAL CURRENT LIABILITIES (B) NET WORKING CAPITAL (A-B) 164.19 144.16 147.69 177.67 -127.53 107.87 30.89 171.78 -126.89 104.49 7.87 160.98 -117.11 107.15 34.22 162.24 -2010-11 2009-10 2008-09

633.71

438.07

400.23

420.72

526.36 107.35

204.47 204.47

184.31 184.31

152.95 152.95

107.35

233.60

215.92

267.77

 Operating Cycle Analysis

Operating cycle refers to the time period which starts from raw material purchases and ends with realization of receivable. So it is total time gap between raw material purchases to total debtors collection. This is also known as working capital cycle. Operating cycle is therefore expressed in terms of months or weeks or days. The highest the operating cycle period, higher the working capital requirement. It comprises raw material conversion period, WIP conversion period, FG conversion period and debtors conversion period and creditors period. The basic reasons for calculating operating cycle is to find out the means for reducing the duration of operating cycle because if duration of operating cycle will be less than the working capital requirement will be less. OC = R + W + F + D C Where, R = Raw material conversion period F = Finished goods conversion period C = Creditors payment period W = Work in process period D = Debtors collection period

 RAW MATERIAL CONVERSION PERIOD (RMCP)

360
Rs. In Lac (0.1 Million) 2009-2010 2008-2009

Particular Raw Material Stock Raw Material Consumed during the year

2011-12

2010-11

8195.60 72140.11

4803.42 33427.13

5334.87 28,678.95

3174.20 28,143.37

RMCP

41 Days

52 Days

67 Days

41 Days

Raw material conversion period

80 70 60
DAYS

67
52 41 41

50 40 30 20 10 0

2008-09

2009-10
YEARS

2010-11

2011-12

Interpretation :The raw material conversion period is the average time period taken to convert material in to work - in process. Smaller the raw material conversion period higher the efficiency of production. Here, we can see that year 2011-12 the raw material conversion period is 41 days which is high as compare to previous year. It is high because both the level of consumption and inventory level has been increase, so it is not good for the company.

Work in Process Conversion Period (WIPCP)

360
Particular Stock In Process Cost of Production WIPCP 2011-12 14.51 1298.80 4 Days 2010-11 8.90 1097.15 3 Days 2009-2010 8.35 988.45 3 Days 2008-2009 11.13 938.45 4 Days

Interpretation:It indicate the work in process inventory (can say semi finished good) converted into finished goods. Its also contain the production cost holding by it. Here, we can say that for the year 2011-12 due to low work in process inventory. Work in process conversion period is low even though the cost of production is too high compare to others.

Work process conversion period

5 4
DAYS

4 3 3

3 2 1 0 2008-09

2009-10
YEARS

2010-11

2011-12

Finished Goods Conversion Period

360
Particular Finished Goods Inventory Cost of Goods Sold FGCP 2011-12 24.43 2010-11 34.89 2009-2010 26.54 2008-2009 32.71

1294.81

1099.32

994.63

927.88

11 Days

8 Days

16 Days

13 Days

Finised goods conversion period

20 16 15
DAYS

13 11 8

10 5 0 2008-09 2009-10 YEARS

2010-11

2011-12

Interpretation :It indicates the finished goods inventory converted in to sold or distributed to the end user. Its also containing the production cost holding by it. If finished goods conversion period is lower, the efficiency of company is higher. In case of this company for the year 2011-12 finished goods conversion period is 11 days which is lower than the previous year 2010-11, it indicates good efficiency of the company.

 Debtors Conversion Period

360
Particular Debtors Credit Sales DCP 2011-12 144.16 1328.26 39 Days 2010-11 104.87 1230.72 31Days 2009-2010 104.49 1299.57 29 Days 2008-2009 107.15 1268.34 30 Days

Debtors conversion period

45 40 35 30 25 20 15 10 5 0

39 30 29

31
DAYS

2008-09

2009-10

2010-11

2011-12

Interpretation :This conversion period measures the quality of debtors. A short collection period implies without delay in payment by debtors. It reduces the chances of bad debts. Similarly, a longer collection period implies too liberal and inefficient credit collection performance. It is difficult to provide a standard collection period of debtors. Here, we can say that for the year 2011-12, debtors conversion period is low as compare to previous years. So companies management is efficient in collection on cash and they have not more provision for bad debts.

 Creditors Conversion Period

360
Particular Creditors Purchase CCP 2011-12 574.7 1318.03 161 Days 2010-11 133.00 1107.55 43 Days 2009-10 115.71 874.47 48 days 2008-09 100.13 941.68 38 days

Creditors conversion period

200 150
DAYS

161

100 50 0 2008-09 2009-10

YEARS

38

48

43

2010-11

2011-12

Interpretation :Creditors conversion period an indication of a companys credit worth in the eyes of its supplies and creditors, since it shows how long they are willing to wait for payment. Within reason, the higher the number the better, because all companies want to converse cash. A company that is especially slow to pay its bills may be a company having trouble generating cash or one trying to finance its operations with its suppliers funds. Here, we can say that for the year 2011-12, Creditor conversion period is high as compare to previous year. Companys credit worth is increase so company can able to manage cash for the payment of their suppliers.

Gross Operating Cycle

YEAR RMCP WIPCP FGCP DCP GOC

2011-2012 2010-2011 2009-2010 2008-2009

41 52 67 41

4 3 3 4

11 8 10 13

39 31 29 30

95 Days 94 Days 109 days 88 days

Gross operating cycle

120 100 80
DAYS

109 88 94 95

60 40

20
0 2008-09 2009-10
YEARS

2010-11

2011-12

Interpretation :Gross operating cycle is total inventory conversion period and debtors conversion period. As we can see in the year 2011-12 gross operating cycle periods is 95 days which is high in the above data because gross operating cycle as well as payable deferral period is high in year 2011-12.

Net Operating Cycle

YEAR 2011-2012 2010-2011 2009-2010 2008-2009 GOC 95 94 109 88 CCP 161 43 48 38 NOC 256 Days 137 Days 61 days 50 days

Net operating cycle

300 250 200 150 100 50 0
256 137 50 61

DAYS

2008-09

2009-10
YEARS

2010-11

2011-12

Interpretation :Net operating cycle also represents the cash conversion cycle. It is net time interval product and cash payment for resources acquired by the firm. It also represents the time interval over which additional funds, called working capital, should be obtained in order to carry out the firms operations. The firm has to negotiate working capital from sources such as commercial banks. If net operating cycle of a firm increase, it means further need for negotiable working capital. As we can see in the year 2011-12Net Operating Cycle period is 256 days which is highest in the above taken data because gross operating cycle as well as payable deferral period is high in 2011-12 compare to previous year. Here, initially net operating cycle of a firm increase as compare to previous year, so which gives bad indication.

Ratios Analysis
YEAR CURRENT ASSETS CURRENT LIABILITIAS CURRENT RATIO

ANALYSIS THROUGH WORKING CAPITAL RATIOS : A study of the causes of changes in uses and sources of Working Capital is necessary to observe that whether working capital is serving the purpose for which it has been created or not. In this technique, for each aspect of analysis certain ratios are computed and then results are compared with standard ratio or industry average. The ratio analysis provides guides and clues especially in sporting trends towards better or poorer performance and in finding out significant deviation for any average or relatively applicable standards. The following are the important ratios to measure the efficiency of working capital: A. Current Ratio: It is most common measure for measuring liquidity. It is also called Working Capital Ratio. It expresses relationship between current assets & current liabilities. High current ratio indicates firm is liquid and has the ability to pay its current obligation in time and when they become due. A ratios equal or near to the rule of thumb of 2:1 i.e. current assets double the current liabilities is considered to be satisfactory.

2011-12 2010-11 2009-10 2008-09

919.16 938.07 400.23 420.72

526.36 326.18 184.31 152.95

1.746 2.876 2.171 2.751

Current ratio
3.5 3 2.5
DAYS

2.751 2.171

2.876 1.746

2 1.5 1 0.5 0 2008-09 2009-10

YEARS

2010-11

2011-12

Interpretation:Higher the current ratio, the larger is the amount of rupees available per rupee of current liabilities, the more is the firms ability to meet current obligation and greater is safety of fund of short term creditors. From the above calculation we can say that current ratio of 2011-12 is 1.746 : 1 which is comparatively lower than the previous year. It indicates the company is quite not satisfactory with their current affair as compare to previous years.

B.Net Working Capital Ratio Net Working Capital is difference between current assets and current liabilities. This ration measure firms potential reservoir funds relate to net assets.

Year 2011-12 2010-11 2009-10 2008-09

Net W.C. 161.69 265.97 215.92 267.77

Net Assets 535.24 232.47 142.37 150.20

Ratio (in times) 0.30 1.14 1.52 1.78

Net working capital ratio

2 1.5
DAYS

1.78 1.52 1.14

1 0.5 0 2008-09 2009-10

YEARS

0.3

2010-11

2011-12

Interpretation :The difference current assets and current liabilities excluding short term bank borrowing is called net working capital or net current assets. Net current assets are sometimes used as a measure of a firms liquidity. It is considered that the firm

having the large networking capital has the greatest ability to meet its current obligation. As shown in the calculation net working capital of 2011-12 is low as compares to previous year because firm had used its cash & bank balance to meet its current obligation. Here we can say that as compare to previous net working capital is low which is good for the company. C. Liquid Ratios This ratio is also known as quick ratios or acid test ratios. It is more rigorous test of liquidity than the current ratios. It is based on those current assets which are highly liquid. Inventory and prepaid expenses are excluded because they are deemed to be least liquid component of current assets. A high quick ratios indicate that the firm is liquid and has the ability to meet its current assets in time and on the other hand low ratios represent liquidity position is not good.

YEAR 2011-12 2010-11 2009-10 2008-09

LIQUID ASSETS 494.49 284.07 273.34 303.61

CURRENT LIABILITIES 555.28 332.88 184.31 152.95

LIQUID RATIOS 0.891 0.853 1.483 1.985

Interpretation :Usually high liquid ratios an indication that the firm is liquid and has the ability to meet its current or liquid liabilities in time and on the other hand a low liquidity ratio represents that the firm's liquidity position is not good. According to rule of thumb, it should be 1:1. The liquid ratios present an uneven change over the past four year. It was 1.985 in 200809 and increased to 1.483 in 2009-10 and then to 0.853 in 2010-11.

The decrement in ratios is not satisfactory, however the ratios 0.891 in 2011-12 is more than the rule of thumb but the ratios of four year is quite more than the rule of thumb. Quick ratio
2.5 2
DAYS

1.985 1.483 0.853 0.891

1.5 1 0.5 0

2008-09

2009-10
YEARS

2010-11

2011-12

D. Working Capital Turnover Ratios Working capital turnover ratios indicates the velocity of the utilization of the net working capital. This ratio measures the efficiency with which the working capital is being used by the firm.

YEAR 2011-12 2010-11 2009-10 2008-09

SALES 1558.90 1437.35 1299.57 1268.34

NET WORKING CAPITAL 161.69 265.97 215.92 267.77

WCTR 9.641 5.466 6.019 4.737

Working capital turnover ratio

12 10
parcanteg

9.641 6.019 4.737

8 6 4

5.466

2
0 2008-09 2009-10
YEARS

2010-11

2011-12

Interpretation :Working capital turnover ratio measures the firms efficiency that how a firm manages and utilize its working capital as we can see from the above calculation of year 2011-12 has a higher working capital turnover ratio which is higher than the previous year 2010-11. So we can say that in 2011-12 working capital efficiency is more than the previous year 2010-11. The ratio of the company is satisfactory.

E. Stock Turnover Ratios This ratios tell the story by which stock is converted into sales. A high stock turnover ratios reveals the liquidity of the inventory i.e., how many times on an average, inventory is turned over or sold during the year.

YEAR

SALES

AVERAGE INVENTORY 32.73 29.66 122.00 178.90

STOCK TURNOVER RATIO 47.63 48.46 10.65 7.09

2011-12 2010-11 2009-10 2008-09

1558.90 1437.35 1299.57 1268.34

Stock turnover ratio

60 50 40
parcanteg 48.46 47.63

30 20 10
7.09 10.65

0
2008-09 2009-10
YEARS

2010-11

2011-12

Interpretation :Stock turnover ratio measures how quickly inventory is sold. It is a test of efficient inventory management. To judge whether the ratio of a firm is satisfactory or not, higher ratio shows efficient use of inventory. As we can see from the graph that in the year 2010-11 ratio is 48.46 : 1 which is higher than all previous years, so we can say that inventory is converted into finished goods highest in this year which indicate the highest efficient use of the inventory.

F. Debtors Turnover Ratios

YEAR

SALES

AVERAGE DEBTORS 144.16 107.87 105.82 164.40

DEBTOR TURNOVER RATIO 10.81 13.32 8.60 5.40

2011-12 2010-11 2009-10 2008-09

1558.90
1437.35 909.70 887.84

DEBTOR TURNOVER RATIO

14 12 Percentage 10 8 6 4 2 0 2011-12 2010-11 Year 2009-10 2008-09 5.4 10.81 8.6 13.32

Interpretation:The analysis of the debtors turnover ratio supplements the information regarding the liquidity of one item of current asset of the firm. The ratio measure how rapidly debts are collected. A higher ratio is indicator of shorter time lag between credit sales and cash sales. From the above calculation and chart we can interpret that in the year 2010-11 debtors turnover ratio is highest among all years that is about 13.32:1. This is lower than 2011-12 year. So we can say that company has faced problem in collecting the money in the 2011-12 year. So this ratio is not good for the converting credit sales into cash sales for the company as compare to 2010-11 year.

Inventory Management
Inventory constitute major portion of current asset of public Ltd. Companies in India .The manufacturing companies hold inventories in the form of Raw material, work-in-process and finished goods.
There are at least three motives for holding inventories :

(1) To facilitate smooth production and sales operation (Transaction motive) (2) To guard against the risk of unpredictable changes in usage rate and delivery time (Precautionary Motive) (3) To take advantage of price fluctuations. (Speculative Motive) Inventories represent investment of a firms funds and that is why management of inventory is necessary for the maximization of the value of the firm. The firm should therefore consider (a) Costs (b) Return (c) Risk

EVALUATION OF INVENTORY MANAGEMENT PERFORMANCE: -

Ratio analysis has been used for making evaluation of Inventory management performance. As the raw material used in the company is pig iron, proper planning and handling is required for the purpose of achieving the right quality of output.

The ratios for last four years have been worked out and compared. The various figures are given in the table.

INVENTORY MANAGEMENT
ITEM (1) Average Inventory (2) Total Current Assets (3) Cost of Goods Sold 2011-12 32.73 919.16 2010-11 29.66 938.07 2009-10 122.00 400.23 2008-09 178.90 420.72

1294.81

1099.32

994.63

927.88

Ratio (%) a) Inventory to Gross Working Capital (1/2) b) Inventory Turnover (3/1) c) Inventory Conversion Period (365/b) days 9 Days 10 Days 45 Days 61 Days 39.56 37.06 8.15 5.97 0.04 0.03 0.30 0.43

Inventory Conversion Period

70 60 50 40 30 20 10 0 61 45

Days

10

2008-09

2009-10 Year

2010-11

2011-12

Inventory Conversion Period

Interpretation :Inventory conversion period means, time taken to convert raw material into finished goods to goods sold. It indicates how effectively and efficiently an inventory is controlled. Lesser the inventory conversion period more efficient and effective use of inventory. From the above Calculation and Chart we can conclude that in the year 2011-12 inventory conversion period is 9 days which is less than the rest of year and this is lowest among the rest of the year. Therefore we can say that currently company is efficient and effective use of inventory.

RECEIVABLE MANAGEMENT When firm sell goods for cash, payments are received immediately and therefore no receivables are created. However when a firm sells goods or services on credit, payments are received only at a future date and receivables are created. It is an essential marketing tool in modern business trade. Credit creates receivables, which the firm is expected to collect in near future. A firm grants credit to its customers so that its sales are its customers so that its sales are not lost to competitors. Account receivable constitutes a significant portion of the total current assets of the business after inventories. The receivables arising out of credit has three characteristics. It involves an element of risk, which should be carefully analyzed. It is based on economic value. To the buyer, the economic value goods or services pass immediately at the time of sale, white the seller expects an equivalent value to be received later on. It implies futurity. The customers from whom receivables have to collected in future are called debtors and represents the firms claim or asset.

DEBTORS COLLECTION PERIOD : -

Indicates the average time taken to collect debts. In other words, a reducing period of time is an indicator of increasing efficiency. Debtor Collection Period = (Average Debtors / Credit Sales) * 365 ( = No. of days) Credit Sales are all sales made on credit (i.e. excluding cash sales) . A firm sells goods on credit and cash basis. When firm extends credit to its customers, book debts are created in firms A/c debtors expected to convert in to cash over short period and thus included in current assets. It is used to measure liquidity of the receivables or to find out period over, which receivables remain uncollected.

360

Receivable Management
Year Sales Debtors Collection Period 2011-12 2010-11 2009-10 2008-09 1558.90 1437.35 1299.57 1268.34 144.16 107.87 104.49 107.15 33 Days 27 Days 29 days 30 days

Collection Period
40 30 Days 20 10 0 2008-09 2009-10 Year Collection Period 2010-11 2011-12 30 29 33 27

Interpretation :The collection period represents the average number of days for which a firm has to wait before its debtors are converted into cash. A short collection period implies without delay in payment by debtors. It reduces the chances of bad debts. Similarly, a longer collection period implies too liberal and inefficient credit collection performance. It is difficult to provide a standard collection period of

debtors. If it is longer than those terms, than this indicates some insufficiency in the procedures for collection debts. From the above calculation and chart we can interpret that in the 2011-12year the debtors collection period is highest among as compare to rest of the years. So companies management is inefficient in collection on cash within their decided well specified period and company has insufficient control over receivable management.

CASH MANAGEMENT
Cash in the important current assets for the operations of the business. Cash is the basic input needed to keep the business running on continues basis, it is also the ultimate output expected to be realized by selling the service or product manufactured by the firm. The firm should keep sufficient cash, neither more or less. Cash shortage will disrupt the firms manufacturing operation while excessive cash will simply remain idle, without contributing anything towards firms profitability. Thus, a major function of the financial managers is to maintain a sound financial position. Cash management involves following four factors: Ascertainment of the minimum cash balance and controlling the levels of cash. II. Controlling cash in flows III. Controlling cash outflows IV. Optimum utilization of surplus cash. Cash is required to meet a firms transactions and precautionary needs. A firm needs cash to make payment for acquisition of resources and services for the normal conduct of business. It keeps additional funds to meet any emergency situation. Some firms maintain cash for taking advantages of speculative changes in price of input and output. I.

EVALUATION OF CASH MANAGEMENT PERFORMANCE: -

The following ratios have been used to evaluate different aspects of cash management. (1) Cash to Current Assets Ratio. (2) Cash turnover Ratio.

CASH MANAGEMENT
ITEM (1) Cash & Bank Balance (2) Total Current Assets (3) Cash balance ratio 2011-12 147.69 2010-11 30.90 2009-10 793.81 2008-09 3422.17

702.70

453.83

400.23

420.72

814.5

738.01

313.37

145.5

a) Cash to Current Asset Ratio (1/2) b) Cash Turnover in (365/3) days

1.98

8.13

0.86

1.25

46 days

65 days

60 days

112 days

Cash Turnover Ratio

120 100 80 Days 60 60 40 20 0 2008-09 2009-10 Year Cash Turnover Ratio 2010-11 2011-12 65 46 112

Interpretation :In current assets cash is the most significant and the least productive asset that a firm holds. It is significant because it is used to pay the firms obligation. From the above calculation and chart we can conclude that in the 2011-12cash turnover is 46 days this is lowest as compare to rest of the year. The company has to extend its creditors credit policy period so they can able to payable the bills.

FINDINGS
From the study I come to know there is net decrease in working capital. It was observed that sources and application are managed in J K Paper Ltd.

WORKING CAPITAL OPERATING CYCLE

Year Raw material conversion period Work in Progress Conversion Period Finished Goods Conversion Period Gross Operating cycle Net Operating Cycle 2011-12 41 days 4 days 11 days 95 days 256 days 2010-11 52 days 3 days 8 days 94 days 137 days 2010-11 67 days 3 days 10 days 109 days 61 days 2009-09 41 days 4 days 13 days 88 days 50 days

RATIO ANALYSIS
YEAR 2011-12 Current ratio Net working capital ratio Liquidity ratio Working capital turnover ratio Stock turnover ratio Debtors turnover ratio 1.75:1 0.30:1 0.89:1 9.64:1 47.63:1 10.81:1 2010-11 2.88:1 1.14:1 0.85:1 5.47:1 48.46:1 13.32:1 2009-10 2.17 :1 1.52 : 1 1.48 : 1 6.02 : 1 10.6 : 1 8.60 : 1 2008-09 2.75 : 1 1.78 : 1 1.99 : 1 4.74 : 1 7.09 : 1 5.40 : 1

 INVENTORY MANAGEMENT
YEAR 2011-12 Inventory Conversion Period 9 days 2010-11 10 days 2009-10 45 days 2008-09 70 days

RECEIVABLE MANAGEMENT
YEAR 2011-12 Debtors collection period 33 days 2010-11 27 days 2009-10 29 days 2008-09 30 days

CASH MANAGEMENT
YEAR 2011-12 Cash collection period 46 days 2010-11 65 days 2009-10 46 days 2008-09 65 days

From the working capital management, I have found that it is very difficult task to manage working capital in such big organization.
o Inventory conversion period shows a downward trend for year 2011-12 because

the average inventory holding period has been decrease and also the cost of goods increase.
o From the data available we can see that there is very big fluctuation in net

working capital and for that JK Paper Ltd., have to improve the method of maintaining working capital.
o JK Paper Ltd., strongly follows the credit policy and so that they are able to

recover their receivable which is good sign.

o Liquidity position of a company can be ensured by current ratio, it can be said

that if the ratio is 2 : 1 then the companys liquidity position is sound.

o In case of JK Paper Ltd., while analysis of data from last four financial years, it

arrived that the company have more than double current assets compare to current liabilities.
o Net operating cycle period is increased in the financial year 2011-12. So here

company not properly maintaining of raw material conversion period, while debtors conversion period and finished goods conversion period is maintain properly. After the analysis I have come to the conclusion that the current assets should be managed efficiently.

SUGGESTION
After understanding and applying the Working Capital Management theory, my suggestion are as below :o In case of JK Paper Ltd., they need to change their credit policy because in this case we can see that the average creditors credit period (Bills Payable) is 48 days which they need to negotiate with over creditors to increase the credit period. o So that they can increase working capital and get in smooth running of the business. o It is possible because JK Paper Ltd., is the company who is producing Board Paper and also has second biggest paper plant in over India. o We can say they have the Monopoly in Board Paper and also they are the market leader in case of paper plant. o So either they can increase the period of creditors credit period or decrease the debtors credit period, they can shorten collection period. o The Gross working capital is increasing over the years 2011-10 but the major proportion of current assets comprise of inventories. The company should try to reduce investment in inventory.

CONCLUSION
Here, raw material conversion is increase which should be decreased. Where finished goods conversion is decrease which is good sign. Here, company should increase its credit period by this they can able to pay the

bills to their creditors properly.

From the above data we can say that there is decrease in net working capital

which company has to improve.

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BIBLIOGRAPHY