Capital required Ior a business can be classiIied under two main categories via,

1) Fixed Capital
2) Working Capital
Every business needs Iunds Ior two purposes Ior its establishment and to carry out its
day- to-day operations. Long terms Iunds are required to create production Iacilities through
purchase oI Iixed assets such as p&m, land, building, Iurniture, etc. Investments in these
assets represent that part oI Iirm`s capital which is blocked on permanent or Iixed basis and is
called Iixed capital. Funds are also needed Ior short-term purposes Ior the purchase oI raw
material, payment oI wages and other day to- day expenses etc.
These Iunds are known as working capital. In simple words, working capital reIers to
that part oI the Iirm`s capital which is required Ior Iinancing short- term or current assets such
as cash, marketable securities, debtors & inventories. Funds, thus, invested in current assts
keep revolving Iast and are being constantly converted in to cash and this cash Ilows out
again in exchange Ior other current assets. Hence, it is also known as revolving or circulating
capital or short term capital.
CONCEPT OF WORKNG CAPTAL
There are two concepts oI working capital:
1. Gross working capital
2. Net working capital
The gross working capital is the capital invested in the total current assets oI the
enterprises current assets are those
Assets which can convert in to cash within a short period normally one accounting year.
CON8TTUENT8 OF CURRENT A88ET8
1) Cash in hand and cash at bank
2) Bills receivables
3) Sundry debtors
4) Short term loans and advances.
) Inventories oI stock as:
a. Raw material
b. Work in process
c. Stores and spares
d. Finished goods
6. Temporary investment oI surplus Iunds.
7. Prepaid expenses
8. Accrued incomes.
9. Marketable securities.

In a narrow sense, the term working capital reIers to the net working. Net working
capital is the excess oI current assets over current liability, or, say:
NET WORKING CAPITAL CURRENT ASSETS CURRENT LIABILITIES.
Net working capital can be positive or negative. When the current assets exceeds the
current liabilities are more than the current assets. Current liabilities are those
liabilities, which are intended to be paid in the ordinary course oI business within a
short period oI normally one accounting year out oI the current assts or the income
business.
CON8TTUENT8 OF CURRENT LABLTE8
1. Accrued or outstanding expenses.
2. Short term loans, advances and deposits.
3. Dividends payable.
4. Bank overdraIt.
. Provision Ior taxation , iI it does not amt. to app. OI proIit.
6. Bills payable.
7. Sundry creditors.
The gross working capital concept is Iinancial or going concern concept whereas net working
capital is an accounting concept oI working capital. Both the concepts have their own merits.
The gross concept is sometimes preIerred to the concept oI working capital Ior the Iollowing
reasons:
1. It enables the enterprise to provide correct amount oI working capital at
correct time.
2. Every management is more interested in total current assets with which
it has to operate then the source Irom where it is made available.
3. It take into consideration oI the Iact every increase in the Iunds oI the
enterprise would increase its working capital.
4. This concept is also useIul in determining the rate oI return on
investments in working capital. The net working capital concept,
however, is also important Ior Iollowing reasons:
O It is qualitative concept, which indicates the Iirm`s ability to meet to its
operating expenses and short-term liabilities.
O IT indicates the margin oI protection available to the short term creditors.
O It is an indicator oI the Iinancial soundness oI enterprises.
O It suggests the need oI Iinancing a part oI working capital requirement out
oI the permanent sources oI Iunds.

CLA88FCATON OF WORKNG CAPTAL
Working capital may be classiIied in to ways:
4 On the basis oI concept.
4 On the basis oI time.
On the basis oI concept working capital can be classiIied as gross working capital
and net working capital. On the basis oI time, working capital may be classiIied as:
Permanent or Iixed working capital.
Temporary or variable working capital
PERMANENT OR FXED WORKNG CAPTAL
Permanent or Iixed working capital is minimum amount which is required to ensure eIIective
utilization oI Iixed Iacilities and Ior maintaining the circulation oI current assets. Every Iirm
has to maintain a minimum level oI raw material, work- in-process, Iinished goods and cash
balance. This minimum level oI current assts is called permanent or Iixed working capital as
this part oI working is permanently blocked in current assets. As the business grow the
requirements oI working capital also increases due to increase in current assets.
TEMPORARY OR VARABLE WORKNG CAPTAL
Temporary or variable working capital is the amount oI working capital which is required to
meet the seasonal demands and some special exigencies. Variable working capital can Iurther
be classiIied as seasonal working capital and special working capital. The capital required to
meet the seasonal need oI the enterprise is called seasonal working capital. Special working
capital is that part oI working capital which is required to meet special exigencies such as
launching oI extensive marketing Ior conducting research, etc.
Temporary working capital diIIers Irom permanent working capital in the sense that is
required Ior short periods and cannot be permanently employed gainIully in the business.
MPORTANCE OR ADVANTAGE OF ADEOUATE WORKNG CAPTAL
8OLVENCY OF THE BU8NE88: Adequate working capital helps in
maintaining the solvency oI the business by providing uninterrupted oI production.
Goodwill: SuIIicient amount oI working capital enables a Iirm to make prompt
payments and makes and maintain the goodwill.
Easy loans: Adequate working capital leads to high solvency and credit standing
can arrange loans Irom banks and other on easy and Iavorable terms.
Cash Discounts: Adequate working capital also enables a concern to avail cash
discounts on the purchases and hence reduces cost.
Regular 8upply of Raw Material: SuIIicient working capital ensures
regular supply oI raw material and continuous production.
Regular Payment Of 8alaries, Wages And Other Day TO Day
Commitments: It leads to the satisIaction oI the employees and raises the morale
oI its employees, increases their eIIiciency, reduces wastage and costs and enhances
production and proIits.
Exploitation Of Favorable Market Conditions: II a Iirm is having
adequate working capital then it can exploit the Iavorable market conditions such as
purchasing its requirements in bulk when the prices are lower and holdings its
inventories Ior higher prices.
Ability To Face Crises: A concern can Iace the situation during the
depression.
Ouick And Regular Return On nvestments: SuIIicient working
capital enables a concern to pay quick and regular oI dividends to its investors and
gains conIidence oI the investors and can raise more Iunds in Iuture.
High Morale: Adequate working capital brings an environment oI securities,
conIidence, high morale which results in overall eIIiciency in a business.
EXCE88 OR NADEOUATE WORKNG CAPTAL
Every business concern should have adequate amount oI working capital to run its
business operations. It should have neither redundant or excess working capital nor
inadequate nor shortages oI working capital. Both excess as well as short working capital
positions are bad Ior any business. However, it is the inadequate working capital which is
more dangerous Irom the point oI view oI the Iirm.
D8ADVANTAGE8 OF REDUNDANT OR EXCE88VE WORKNG
CAPTAL
1. Excessive working capital means ideal Iunds which earn no proIit Ior
the Iirm and business cannot earn the required rate oI return on its
investments.
2. Redundant working capital leads to unnecessary purchasing and
accumulation oI inventories.
3. Excessive working capital implies excessive debtors and deIective
credit policy which causes higher incidence oI bad debts.
4. It may reduce the overall eIIiciency oI the business.
. II a Iirm is having excessive working capital then the relations with
banks and other Iinancial institution may not be maintained.
6. Due to lower rate oI return n investments, the values oI shares may
also Iall.
7. The redundant working capital gives rise to speculative transactions
D8ADVANTAGE8 OF NADEOUATE WORKNG CAPTAL
Every business needs some amounts oI working capital. The need Ior working capital arises
due to the time gap between production and realization oI cash Irom sales. There is an
operating cycle involved in sales and realization oI cash. There are time gaps in purchase oI
raw material and production; production and sales; and realization oI cash.
Thus working capital is needed Ior the Iollowing purposes:
O For the purpose oI raw material, components and spares.
O To pay wages and salaries
O To incur day-to-day expenses and overload costs such as oIIice expenses.
O To meet the selling costs as packing, advertising, etc.
O To provide credit Iacilities to the customer.
O To maintain the inventories oI the raw material, work-in-progress, stores and spares
and Iinished stock.
For studying the need oI working capital in a business, one has to study the business
under varying circumstances such as a new concern requires a lot oI Iunds to meet its
initial requirements such as promotion and Iormation etc. These expenses are called
preliminary expenses and are capitalized. The amount needed Ior working capital depends
upon the size oI the company and ambitions oI its promoters. Greater the size oI the
business unit, generally larger will be the requirements oI the working capital.
The requirement oI the working capital goes on increasing with the growth and expensing
oI the business till it gains maturity. At maturity the amount oI working capital required is
called normal working capital.
There are others Iactors also inIluence the need oI working capital in a business.
FACTOR8 DETERMNNG THE WORKNG CAPTAL
REOUREMENT8
1. NATURE OF BU8NE88: The requirements oI working is very
limited in public utility undertakings such as electricity, water supply and railways
because they oIIer cash sale only and supply services not products, and no Iunds
are tied up in inventories and receivables. On the other hand the trading and
Iinancial Iirms requires less investment in Iixed assets but have to invest large
amt. oI working capital along with Iixed investments.
2. 8ZE OF THE BU8NE88: Greater the size oI the business,
greater is the requirement oI working capital.
3. PRODUCTON POLCY: II the policy is to keep production
steady by accumulating inventories it will require higher working capital.
4. LENTH OF PRDUCTON CYCLE: The longer the
manuIacturing time the raw material and other supplies have to be carried Ior a
longer in the process with progressive increment oI labor and service costs beIore
the Iinal product is obtained. So working capital is directly proportional to the
length oI the manuIacturing process.
. 8EA8ONAL8 VARATON8: Generally, during the busy
season, a Iirm requires larger working capital than in slack season.
6. WORKNG CAPTAL CYCLE: The speed with which the
working cycle completes one cycle determines the requirements oI working
capital. Longer the cycle larger is the requirement oI working capital.

DEBTOR8
CA8H FN8HED GOOD8

RAW MATERAL WORK N PROGRE88

7. RATE OF 8TOCK TURNOVER: There is an inverse co-relationship
between the question oI working capital and the velocity or speed with which the
sales are aIIected. A Iirm having a high rate oI stock turnover wuill needs lower
amt. oI working capital as compared to a Iirm having a low rate oI turnover.
8. CREDT POLCY: A concern that purchases its requirements on credit and
sales its product / services on cash requires lesser amt. oI working capital and
vice-versa.
9. BU8NE88 CYCLE: In period oI boom, when the business is prosperous,
there is need Ior larger amt. oI working capital due to rise in sales, rise in prices,
optimistic expansion oI business, etc. On the contrary in time oI depression, the
business contracts, sales decline, diIIiculties are Iaced in collection Irom debtor
and the Iirm may have a large amt. oI working capital.
10. RATE OF GROWTH OF BU8NE88: In Iaster growing concern, we shall
require large amt. oI working capital.
11. EARNNG CAPACTY AND DVDEND POLCY: Some Iirms have
more earning capacity than other due to quality oI their products, monopoly
conditions, etc. Such Iirms may generate cash proIits Irom operations and
contribute to their working capital. The dividend policy also aIIects the
requirement oI working capital. A Iirm maintaining a steady high rate oI cash
dividend irrespective oI its proIits needs working capital than the Iirm that retains
larger part oI its proIits and does not pay so high rate oI cash dividend.
12. PRCE LEVEL CHANGE8: Changes in the price level also aIIect the
working capital requirements. Generally rise in prices leads to increase in working
capital.
Others FACTOR8: These are:
Operating eIIiciency.
Management ability.
Irregularities oI supply.
Import policy.
Asset structure.
Importance oI labor.
Banking Iacilities, etc.

MANAGEMENT OF WORKNG CAPTAL
Management oI working capital is concerned with the problem that arises in
attempting to manage the current assets, current liabilities. The basic goal oI working
capital management is to manage the current assets and current liabilities oI a Iirm in
such a way that a satisIactory level oI working capital is maintained, i.e. it is neither
adequate nor excessive as both the situations are bad Ior any Iirm. There should be no
shortage oI Iunds and also no working capital should be ideal. WORKING CAPITAL
MANAGEMENT POLICES oI a Iirm has a great on its probability, liquidity and
structural health oI the organization. So working capital management is three
dimensional in nature as
1. It concerned with the Iormulation oI policies with regard to
proIitability, liquidity and risk.
2. It is concerned with the decision about the composition and level oI
current assets.
3. It is concerned with the decision about the composition and level oI
current liabilities.

WORKNG CAPTAL ANALY88
As we know working capital is the liIe blood and the centre oI a business. Adequate
amount oI working capital is very much essential Ior the smooth running oI the
business. And the most important part is the eIIicient management oI working capital
in right time. The liquidity position oI the Iirm is totally eIIected by the management
oI working capital. So, a study oI changes in the uses and sources oI working capital
is necessary to evaluate the eIIiciency with which the working capital is employed in
a business. This involves the need oI working capital analysis.
The analysis oI working capital can be conducted through a number oI devices, such
as:
1. Ratio analysis.
2. Fund Ilow analysis.
3. Budgeting.

1. RATO ANALY88
A ratio is a simple arithmetical expression one number to another. The technique oI
ratio analysis can be employed Ior measuring short-term liquidity or working capital
position oI a Iirm. The Iollowing ratios can be calculated Ior these purposes:
1. Current ratio.
2. Quick ratio
3. Absolute liquid ratio
4. Inventory turnover.
. Receivables turnover.
6. Payable turnover ratio.
7. Working capital turnover ratio.
8. Working capital leverage
9. Ratio oI current liabilities to tangible net worth.

2. FUND FLOW ANALY88
Fund Ilow analysis is a technical device designated to the study the source Irom which
additional Iunds were derived and the use to which these sources were put. The Iund
Ilow analysis consists oI:

a. Preparing schedule oI changes oI working capital
b. Statement oI sources and application oI Iunds.
It is an eIIective management tool to study the changes in Iinancial position (working
capital) business enterprise between beginning and ending oI the Iinancial dates.

3. WORKNG CAPTAL BUDGET
A budget is a Iinancial and / or quantitative expression oI business plans and polices
to be pursued in the Iuture period time. Working capital budget as a part oI the total
budge ting process oI a business is prepared estimating Iuture long term and short
term working capital needs and sources to Iinance them, and then comparing the
budgeted Iigures with actual perIormance Ior calculating the variances, iI any, so that
corrective actions may be taken in Iuture. He objective working capital budget is to
ensure availability oI Iunds as and needed, and to ensure eIIective utilization oI these
resources. The successIul implementation oI working capital budget involves the
preparing oI separate budget Ior each element oI working capital, such as, cash,
inventories and receivables etc.

ANALY88 OF 8HORT - TERM FNANCAL PO8TON OR TE8T
OF LOUDTY
The short term creditors oI a company such as suppliers oI goods oI credit and
commercial banks short-term loans are primarily interested to know the ability oI a
Iirm to meet its obligations in time. The short term obligations oI a Iirm can be met
in time only when it is having suIIicient liquid assets. So to with the conIidence oI
investors, creditors, the smooth Iunctioning oI the Iirm and the eIIicient use oI Iixed
assets the liquid position oI the Iirm must be strong. But a very high degree oI
liquidity oI the Iirm being tied up in current assets. ThereIore, it is important
proper balance in regard to the liquidity oI the Iirm. Two types oI ratios can be
calculated Ior measuring short-term Iinancial position or short-term solvency
position oI the Iirm.
1. Liquidity ratios.
2. Current assets movements ratios.

A) LOUDTY RATO8
Liquidity reIers to the ability oI a Iirm to meet its current obligations as and when
these become due. The short-term obligations are met by realizing amounts Irom
current, Iloating or circulating assts. The current assets should either be liquid or
near about liquidity. These should be convertible in cash Ior paying obligations oI
short-term nature. The suIIiciency or insuIIiciency oI current assets should be
assessed by comparing them with short-term liabilities. II current assets can pay oII
the current liabilities then the liquidity position is satisIactory. On the other hand, iI
the current liabilities cannot be met out oI the current assets then the liquidity
position is bad. To measure the liquidity oI a Iirm, the Iollowing ratios can be
calculated:
1. CURRENT RATIO
2. QUICK RATIO
3. ABSOLUTE LIQUID RATIO

1. CURRENT RATO
Current Ratio, also known as working capital ratio is a measure oI general liquidity
and its most widely used to make the analysis oI short-term Iinancial position or
liquidity oI a Iirm. It is deIined as the relation between current assets and current
liabilities. Thus,
CURRENT RATIO CURRENT ASSETS
CURRENT LIABILITES
The two components oI this ratio are:
1) CURRENT ASSETS
2) CURRENT LIABILITES
Current assets include cash, marketable securities, bill receivables, sundry debtors,
inventories and work-in-progresses. Current liabilities include outstanding expenses,
bill payable, dividend payable etc.
A relatively high current ratio is an indication that the Iirm is liquid and has the
ability to pay its current obligations in time. On the hand a low current ratio
represents that the liquidity position oI the Iirm is not good and the Iirm shall not be
able to pay its current liabilities in time. A ratio equal or near to the rule oI thumb oI
2:1 i.e. current assets double the current liabilities is considered to be satisIactory.

CALCULATON OF CURRENT RATO
(Rupees in crore)
e.g.
Year 2006 2007 2008
Current Assets 81.29 83.12 13,6.7
Current Liabilities 27.42 20.8 33.48
Current Ratio 2.96:1 4.03:1 4.08:1
Interpretation:-
As we know that ideal current ratio Ior any Iirm is 2:1. II we see the current ratio oI
the company Ior last three years it has increased Irom 2006 to 2008. The current
ratio oI company is more than the ideal ratio. This depicts that company`s liquidity
position is sound. Its current assets are more than its current liabilities.
2. OUCK RATO
Quick ratio is a more rigorous test oI liquidity than current ratio. Quick ratio may be
deIined as the relationship between quick/liquid assets and current or liquid
liabilities. An asset is said to be liquid iI it can be converted into cash with a short
period without loss oI value. It measures the Iirms` capacity to pay oII current
obligations immediately.
QUICK RATIO QUICK ASSETS
CURRENT LIABILITES
Where Quick Assets are:
1) Marketable Securities
2) Cash in hand and Cash at bank.
3) Debtors.
A high ratio is an indication that the Iirm is liquid and has the ability to meet its
current liabilities in time and on the other hand a low quick ratio represents that the
Iirms` liquidity position is not good.
As a rule oI thumb ratio oI 1:1 is considered satisIactory. It is generally thought that
iI quick assets are equal to the current liabilities then the concern may be able to
meet its short-term obligations. However, a Iirm having high quick ratio may not
have a satisIactory liquidity position iI it has slow paying debtors. On the other
hand, a Iirm having a low liquidity position iI it has Iast moving inventories.
CALCULATON OF OUCK RATO
e.g. (Rupees in Crore)
ear 2006 2007 2008
Quick Assets 44.14 47.43 61.
Current Liabilities 27.42 20.8 33.48
Quick Ratio 1.6 : 1 2.3 : 1 1.8 : 1
Interpretation :
A quick ratio is an indication that the Iirm is liquid and has the ability to meet
its current liabilities in time. The ideal quick ratio is 1:1. Company`s quick ratio is
more than ideal ratio. This shows company has no liquidity problem.
3. AB8OLUTE LOUD RATO
Although receivables, debtors and bills receivable are generally more liquid than
inventories, yet there may be doubts regarding their realization into cash
immediately or in time. So absolute liquid ratio should be calculated together with
current ratio and acid test ratio so as to exclude even receivables Irom the current
assets and Iind out the absolute liquid assets. Absolute Liquid Assets includes :
ABSOLUTE LIQUID RATIO ABSOLUTE LIQUID ASSETS
CURRENT LIABILITES
ABSOLUTE LIQUID ASSETS CASH & BANK BALANCES.
e.g. (Rupees in Crore)
ear 2006 2007 2008
Absolute Liquid Assets 4.69 1.79 .06
Current Liabilities 27.42 20.8 33.48
Absolute Liquid Ratio .17 : 1 .09 : 1 .1 : 1
Interpretation :
These ratio shows that company carries a small amount oI cash. But there is
nothing to be worried about the lack oI cash because company has reserve,
borrowing power & long term investment. In India, Iirms have credit limits
sanctioned Irom banks and can easily draw cash.
B_ CURRENT A88ET8 MOVEMENT RATO8
Funds are invested in various assets in business to make sales and earn proIits.
The eIIiciency with which assets are managed directly aIIects the volume oI sales.
The better the management oI assets, large is the amount oI sales and proIits.
Current assets movement ratios measure the eIIiciency with which a Iirm manages
its resources. These ratios are called turnover ratios because they indicate the speed
with which assets are converted or turned over into sales. Depending upon the
purpose, a number oI turnover ratios can be calculated. These are :
1. Inventory Turnover Ratio
2. Debtors Turnover Ratio
3. Creditors Turnover Ratio
4. Working Capital Turnover Ratio
The current ratio and quick ratio give misleading results iI current assets include high
amount oI debtors due to slow credit collections and moreover iI the assets include
high amount oI slow moving inventories. As both the ratios ignore the movement oI
current assets, it is important to calculate the turnover ratio.
INVENTOR TURNOVER OR STOCK TURNOVER
RATIO :
Every Iirm has to maintain a certain amount oI inventory oI Iinished goods so
as to meet the requirements oI the business. But the level oI inventory should
neither be too high nor too low. Because it is harmIul to hold more inventory
as some amount oI capital is blocked in it and some cost is involved in it. It
will thereIore be advisable to dispose the inventory as soon as possible.
INVENTORY TURNOVER RATIO COST OF GOOD SOLD
AVERAGE INVENTORY
Inventory turnover ratio measures the speed with which the stock is converted
into sales. Usually a high inventory ratio indicates an eIIicient management oI
inventory because more Irequently the stocks are sold ; the lesser amount oI
money is required to Iinance the inventory. Where as low inventory turnover
ratio indicates the ineIIicient management oI inventory. A low inventory
turnover implies over investment in inventories, dull business, poor quality oI
goods, stock accumulations and slow moving goods and low proIits as
compared to total investment.
AVERAGE STOCK OPENING STOCK CLOSING STOCK
2
(Rupees in Crore)
ear 2006 2007 2008
Cost oI Goods sold 110.6 103.2 96.8
Average Stock 73.9 36.42 .3
Inventory Turnover Ratio 1. times 2.8 times 1.7 times
Interpretation :
These ratio shows how rapidly the inventory is turning into receivable through
sales. In 2007 the company has high inventory turnover ratio but in 2008 it has
reduced to 1.7 times. This shows that the company`s inventory management
technique is less eIIicient as compare to last year.
2 INVENTOR CONVERSION PERIOD:
INVENTORY CONVERSION PERIOD 36 (net working days)
INVENTORY TURNOVER RATIO
e.g.
ear 2006 2007 2008
Days 36 36 36
Inventory Turnover Ratio 1. 2.8 1.8
Inventory Conversion Period 243 days 130 days 202 days
Interpretation :
Inventory conversion period shows that how many days inventories takes to
convert Irom raw material to Iinished goods. In the company inventory conversion
period is decreasing. This shows the eIIiciency oI management to convert the
inventory into cash.
DEBTORS TURNOVER RATIO :
A concern may sell its goods on cash as well as on credit to increase its sales
and a liberal credit policy may result in tying up substantial Iunds oI a Iirm in the
Iorm oI trade debtors. Trade debtors are expected to be converted into cash within a
short period and are included in current assets. So liquidity position oI a concern
also depends upon the quality oI trade debtors. Two types oI ratio can be calculated
to evaluate the quality oI debtors.
a) Debtors Turnover Ratio
b) Average Collection Period
DEBTORS TURNOVER RATIO TOTAL SALES (CREDIT)
AVERAGE DEBTORS
Debtor`s velocity indicates the number oI times the debtors are turned over
during a year. Generally higher the value oI debtor`s turnover ratio the more
eIIicient is the management oI debtors/sales or more liquid are the debtors. Whereas
a low debtors turnover ratio indicates poor management oI debtors/sales and less
liquid debtors. This ratio should be compared with ratios oI other Iirms doing the
same business and a trend may be Iound to make a better interpretation oI the ratio.
AVERAGE DEBTORS OPENING DEBTORCLOSING DEBTOR
2

e.g.
ear 2006 2007 2008
Sales 166.0 11. 169.
Average Debtors 17.33 18.19 22.0
Debtor Turnover Ratio 9.6 times 8.3 times 7. times
Interpretation :
This ratio indicates the speed with which debtors are being converted or
turnover into sales. The higher the values or turnover into sales. The higher the
values oI debtors turnover, the more eIIicient is the management oI credit. But in
the company the debtor turnover ratio is decreasing year to year. This shows that
company is not utilizing its debtors eIIiciency. Now their credit policy become
liberal as compare to previous year.
4 AVERAGE COLLECTION PERIOD :
Average Collection Period No. oI Working Days
Debtors Turnover Ratio
The average collection period ratio represents the average number oI days Ior
which a Iirm has to wait beIore its receivables are converted into cash. It measures
the quality oI debtors. Generally, shorter the average collection period the better is
the quality oI debtors as a short collection period implies quick payment by debtors
and vice-versa.
Average Collection Period 36 (Net Working Days)
Debtors Turnover Ratio
ear 2006 2007 2008
Days 36 36 36
Debtor Turnover Ratio 9.6 8.3 7.
Average Collection Period 38 days 44 days 49 days
Interpretation :
The average collection period measures the quality oI debtors and it
helps in analyzing the eIIiciency oI collection eIIorts. It also helps to analysis the
credit policy adopted by company. In the Iirm average collection period increasing
year to year. It shows that the Iirm has Liberal Credit policy. These changes in
policy are due to competitor`s credit policy.
. WORKING CAPITAL TURNOVER RATIO :
Working capital turnover ratio indicates the velocity oI utilization oI net
working capital. This ratio indicates the number oI times the working capital
is turned over in the course oI the year. This ratio measures the eIIiciency
with which the working capital is used by the Iirm. A higher ratio indicates
eIIicient utilization oI working capital and a low ratio indicates otherwise.
But a very high working capital turnover is not a good situation Ior any Iirm.
Working Capital Turnover Ratio Cost oI Sales
Net Working Capital

Working Capital Turnover Sales
Networking Capital

e.g.
ear 2006 2007 2008
Sales 166.0 11. 169.
Networking Capital 3.87 62.2 103.09
Working Capital Turnover 3.08 2.4 1.64
Interpretation :
This ratio indicates low much net working capital requires Ior sales. In
2008, the reciprocal oI this ratio (1/1.64 .609) shows that Ior sales oI Rs. 1 the
company requires 60 paisa as working capital. Thus this ratio is helpIul to Iorecast
the working capital requirement on the basis oI sale.
INVENTORIES
(Rs in Crores)
ear 2005-2006 2006-2007 2007-2008
Inventories 37.1 3.69 7.01
Interpretation :
Inventories is a major part oI current assets. II any company wants to manage
its working capital eIIiciency, it has to manage its inventories eIIiciently. The graph
shows that inventory in 200-2006 is 4, in 2006-2007 is 43 and in 2007-2008
is 4 oI their current assets. The company should try to reduce the inventory upto
10 or 20 oI current assets.
CASH BNAK BALANCE :
(Rs in Crores)
ear 2005-2006 2006-2007 2007-2008
Cash Bank Balance 4.69 1.79 .0
Interpretation :
Cash is basic input or component oI working capital. Cash is needed to keep the
business running on a continuous basis. So the organization should have suIIicient
cash to meet various requirements. The above graph is indicate that in 2006 the cash
is 4.69 crores but in 2007 it has decrease to 1.79. The result oI that it disturb the
Iirms manuIacturing operations. In 2008, it is increased upto approx. .1 cash
balance. So in 2008, the company has no problem Ior meeting its requirement as
compare to 2007.
DEBTORS :
(Rs in Crores)
ear 2005-2006 2006-2007 2007-2008
Debtors 17.33 19.0 2.94
Interpretation :
Debtors constitute a substantial portion oI total current assets. In India it
constitute one third oI current assets. The above graph is depict that there is increase
in debtors. It represents an extension oI credit to customers. The reason Ior
increasing credit is competition and company liberal credit policy.

CURRENT ASSETS :
(Rs in Crores)
ear 2005-2006 2006-2007 2007-2008
Current Assets 81.29 83.1 136.7
Interpretation :
This graph shows that there is 64 increase in current assets in 2008. This
increase is arise because there is approx. 0 increase in inventories. Increase in
current assets shows the liquidity soundness oI company.

CURRENT LIABILIT :
(Rs in Crores)
ear 2005-2006 2006-2007 2007-2008
Current Liability 27.42 20.8 33.48
Interpretation :
Current liabilities shows company short term debts pay to outsiders. In 2008 the
current liabilities oI the company increased. But still increase in current assets are
more than its current liabilities.

NET WOKRING CAPITAL :
(Rs in Crores)
ear 2005-2006 2006-2007 2007-2008
Net Working Capital 3.87 62.3 103.09
Interpretation :
Working capital is required to Iinance day to day operations oI a Iirm. There
should be an optimum level oI working capital. It should not be too less or not too
excess. In the company there is increase in working capital. The increase in working
capital arises because the company has expanded its business.

RESEARCH METHODOLOG
The methodology, I have adopted Ior my study is the various tools, which basically analyze
critically Iinancial position oI to the organization:

I COMMON-SIZE P/L A/C
II COMMON-SIZE BALANCE SHEET
III COMPARTIVE P/L A/C
IV COMPARTIVE BALANCE SHEET
V TREND ANALSIS
VI. RATIO ANALSIS

The above parameters are used Ior critical analysis oI Iinancial position. With the
evaluation oI each component, the Iinancial position Irom diIIerent angles is tried
to be presented in well and systematic manner. By critical analysis with the help oI
diIIerent tools, it becomes clear how the Iinancial manager handles the Iinance
matters in proIitable manner in the critical challenging atmosphere, the
recommendation are made which would suggest the organization in Iormulation oI
a healthy and strong position Iinancially with proper management system.
I sincerely hope, through the evaluation of various percentage, ratios and
comparative analysis, the organization would be able to conquer its in
efficiencies and makes the desired changes

ANALYSIS OF FINANCIAL STATEMENTS

FINANCIAL STATEMENTS:
Financial statement is a collection oI data organized according to logical and
consistent accounting procedure to convey an under-standing oI some Iinancial
aspects oI a business Iirm. It may show position at a moment in time, as in the case
oI balance sheet or may reveal a series oI activities over a given period oI time, as
in the case oI an income statement. Thus, the term Iinancial statements` generally
reIers to the two statements
(1) The position statement or Balance sheet.
(2) The income statement or the proIit and loss Account.
OBJECTIVES OF FINANCIAL STATEMENTS:
According to accounting Principal Board oI America (APB) states
The Iollowing objectives oI Iinancial statements: -
1. To provide reliable Iinancial inIormation about economic resources and
obligation oI a business Iirm.
2. To provide other needed inIormation about charges in such economic resources
and obligation.
3. To provide reliable inIormation about change in net resources (recourses less
obligations) missing out oI business activities.
4. To provide Iinancial inIormation that assets in estimating the learning potential
oI the business.
LIMITATIONS OF FINANCIAL STATEMENTS:
Though Iinancial statements are relevant and useIul Ior a concern, still they do not
present a Iinal picture a Iinal picture oI a concern. The utility oI these statements is
dependent upon a number oI Iactors. The analysis and interpretation oI these
statements must be done careIully otherwise misleading conclusion may be drawn.
Financial statements suIIer Irom the Iollowing limitations: -
1. Financial statements do not given a Iinal picture oI the concern. The data given
in these statements is only approximate. The actual value can only be determined
when the business is sold or liquidated.
2. Financial statements have been prepared Ior diIIerent accounting periods,
generally one year, during the liIe oI a concern. The costs and incomes are
apportioned to diIIerent periods with a view to determine proIits etc. The allocation
oI expenses and income depends upon the personal judgment oI the accountant.
The existence oI contingent assets and liabilities also make the statements
imprecise. So Iinancial statement are at the most interim reports rather than the
Iinal picture oI the Iirm.
3. The Iinancial statements are expressed in monetary value, so they appear to give
Iinal and accurate position. The value oI Iixed assets in the balance sheet neither
represent the value Ior which Iixed assets can be sold nor the amount which will be
required to replace these assets. The balance sheet is prepared on the presumption
oI a going concern. The concern is expected to continue in Iuture. So Iixed assets
are shown at cost less accumulated deprecation. Moreover, there are certain assets
in the balance sheet which will realize nothing at the time oI liquidation but they
are shown in the balance sheets.
4. The Iinancial statements are prepared on the basis oI historical costs Or original
costs. The value oI assets decreases with the passage oI time current price changes
are not taken into account. The statement are not prepared with the keeping in view
the economic conditions. the balance sheet loses the signiIicance oI being an index
oI current economics realities. Similarly, the proIitability shown by the income
statements may be represent the earning capacity oI the concern.
. There are certain Iactors which have a bearing on the Iinancial position and
operating result oI the business but they do not become a part oI these statements
because they cannot be measured in monetary terms. The basic limitation oI the
traditional Iinancial statements comprising the balance sheet, proIit & loss A/c is
that they do not give all the inIormation regarding the Iinancial operation oI the
Iirm. Nevertheless, they provide some extremely useIul inIormation to the extent
the balance sheet mirrors the Iinancial position on a particular data in lines oI the
structure oI assets, liabilities etc. and the proIit & loss A/c shows the result oI
operation during a certain period in terms revenue obtained and cost incurred
during the year. Thus, the Iinancial position and operation oI the Iirm.

FINANCIAL STATEMENT ANALSIS
It is the process oI identiIying the Iinancial strength and weakness oI a Iirm Irom the
available accounting data and Iinancial statements. The analysis is done
CALCULATIONS OF RATIOS
Ratios are relationship expressed in mathematical terms between Iigures, which are
connected with each other in some manner.

CLASSIFICATION OF RATIOS
Ratios can be classiIied in to diIIerent categories depending upon the basis oI
classiIication
The traditional classiIication has been on the basis oI the Iinancial statement to which the
determination oI ratios belongs.

These are:-
O Profit & Loss account ratios
O Balance Sheet ratios
O Composite ratios