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Working capital management is the process of estimation of current assets and current liabilities, within the policy guidelines of an Organization. The policy of working capital is concerned mainly with target levels for each category of assets and methods of financing current assets. The process of estimation and work on working capital in a very large and complex entity like Kaira District Cooperative Milk Producers' Union Limited (KDCMPUL) is a very much critical and big exercise involving each and every work center. At AMUL, I visited the departments like finance and administration; they gave me basic information about them. I calculated all the necessary calculations related to working capital like Cash management, Ratios and Working capital. For calculation of cash management, current assets, inventories, ratios, data collected are from Annual Report of AMUL.
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To find out the efficiency of working capital management in Amul. To have a first hand experience of the functioning of a large co-operative organization. To have a practical experience of the functioning of the Finance Department of a dairy. To study how working capital management practices plays an important role in supporting other activities of an integrated dairy plant.
SPECIFIC OBJECTIVES:
To gain familiarity with the various components of working capital in Amul Plant. To judge the success of the management in carrying on the daily transactions of the company. To gain an in-depth knowledge of the tricks of managing the daily financial activities of DSP. To find out the difference between the theoretical and practical aspect of working capital management. To study and come out with any solution for improvement of working capital management at Amul plant.
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INTRODUCTION :
Failure is never final, and success never ending. Dr Kurien bears out this statement perfectly. He entered the industry when there were only threats. He met failure head-on, and now he clearly is an example of never ending successes! Today, India is 'The Oyster' of the global dairy industry. It offers opportunities galore to entrepreneurs worldwide, who wish to capitalize on one of the world's largest and fastest growing markets for milk and milk products. A bagful of 'pearls' awaits the international dairy processor in India. The Indian dairy industry is rapidly growing, trying to keep pace with the galloping progress around the world. As he expands his overseas operations to India many profitable options await him. He may transfer technology, sign joint ventures or use India as a sourcing center for regional exports. The liberalization of the Indian economy beckons to MNC's and foreign investors alike. Indias dairy sector is expected to triple its production in the next 10 years in view of expanding potential for export to Europe and the West. Moreover with WTO regulations expected to come into force in coming years all the developed countries which are among big exporters today would have to withdraw the support and subsidy to their domestic milk products sector. Also India today is the lowest cost producer of per liter of milk in the world, at 27 cents, compared with the U.S' 63 cents, and Japans $2.8 dollars. Also to take advantage of this lowest cost of milk production and increasing production in the country multinational companies are planning to expand their activities here. Some of these milk producers have already obtained quality standard certificates from the authorities. This will help them in marketing their products in foreign countries in processed form. The urban market for milk products is expected to grow at an accelerated pace of around 33% per annum to around Rs.43,500 crores by year 2005. This growth is going to come from the greater emphasis on the processed foods sector and also by increase in the conversion of milk into milk products. By 2005, the value of Indian dairy produce is expected to be Rs 10,00,000 million. Presently the market is valued at around Rs7,00,000mn
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Background :
India with 134mn cows and 125mn buffaloes has the largest population of cattle in the world. Total cattle population in the country as on October'00 stood at 313mn. More than fifty percent of the buffaloes and twenty percent of the cattle in the world are found in India and most of these are cows and buffaloes. Indian dairy sector contributes the large share in agricultural gross domestic products. Presently there are around 70,000 village dairy cooperatives across the country. The co-operative societies are federated into 170 district milk producers unions, which is turn has 22-state cooperative dairy federation. Milk production gives employment to more than 72mn dairy farmers. In terms of total production, India is the leading producer of milk in the world followed by USA. The milk production in 1999-00 is estimated at 78mn MT as compared to 74.5mn MT in the previous year. This production is expected to increase to 81mn MT by 2000-01. Of this total produce of 78mn cows' milk constitute 36mn MT while rest is from other cattle. While world milk production declined by 2 per cent in the last three years, according to FAO estimates, Indian production has increased by 4 per cent. The milk production in India accounts for more than 13% of the total world output and 57% of total Asia's production. The top five milk producing nations in the world are India, USA, Russia, Germany and France. Although milk production has grown at a fast pace during the last three decades (courtesy: Operation Flood), milk yield per animal is very low. The main reasons for the low yield are
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Table:1
Country
Source: Export prospects for agro-based industries, World Trade Centre, Mumbai.
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Table:2
Country India USA Russia Germany France Pakistan Brazil UK Ukraine Poland New Zealand Netherlands Italy Australia
1997-98 71 71 34 27 24 21 21 14 15 12 11 11 10 9
1998-99 74.5 71 33 27 24 22 27 14 14 12 12 11 10 10
(Million MTs)
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Operation Flood
The transition of the Indian milk industry from a situation of net import to that of surplus has been led by the efforts of National Dairy Development Board's Operation Flood. programme under the aegis of the former Chairman of the board Dr. Kurien. Launched in 1970, Operation Flood has led to the modernization of India's dairy sector and created a strong network for procurement processing and distribution of milk by the co-operative sector. Per capita availability of milk has increased from 132 gm per day in 1950 to over 220 gm per day in 1998. The main thrust of Operation Flood was to organize dairy cooperatives in the milk shed areas of the village, and to link them to the four Metro cities, which are the main markets for milk. The efforts undertaken by NDDB have not only led to enhanced production, improvement in methods of processing and development of a strong marketing network, but have also led to the emergence of dairying as an important source of employment and income generation in the rural areas. It has also led to an improvement in yields, longer lactation periods, shorter calving intervals, etc through the use of modern breeding techniques. Establishment of milk collection centers, and chilling centers has enhanced life of raw milk and enabled minimization of wastage due to spoilage of milk. Operation Flood has been one of the world's largest dairy development programme and looking at the success achieved in India by adopting the co-operative route, a few other countries have also replicated the model of India's White Revolution.
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The NDDB has recently put in place .Perspective 2010. to enable the cooperatives to meet the new challenges of globalization and trade liberalization. Like other major dairying countries of the world, the Indian cooperatives are expected to play a predominant role in the dairy industry in future as well. However, India is in the mean time, attaining its past glory and is once again becoming .DOODH KA SAGAR.. But, what percentage of this SAGAR is handled by the cooperatives - just a little over 7%. Since liberalization of the dairy sector in 1991, a very large number of private sector companies / firms have, despite MMPO, established dairy factories in the country. The share of the total milk processing capacity by private sectors 44% of total installed capacity of 73 MLPD (Million Liters per Day) in the country. Therefore, the total share of the organized sector, both cooperatives as well as
the private sector is barely 12%. What is, therefore, disquieting is that as much as 88% share of the total milk production is commanded by the unorganized sector - which specializes in selling sub-standard, unpasteurized milk more often than not adulterated with harmful chemicals.
Besides, growth in milk production is likely to continue at the present rate of 4.4% in the near future. Who is going to handle this incremental milk? We must bear in mind is both income and price what we must bear in mind both income & price elasticity account for approximately 15% of the total expenditure of food. Demand for milk, at current rate of income growth is estimated to grow at 7% per annum. Interestingly, demand for milk is expected to grow steadily over the next two decades as the low income rural and urban families who have higher expenditure elasticity would also increase their income due to new economic environment. Let us now look at some other economic indicators. According to the World Bank, India is the fourth largest economy in the world going by the purchasing power parity estimates.
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Further, India has been identified as among the first 10 emerging markets in the world. India has the vastest domestic market in the world with over one billion consumers - a majority of whom are vegetarians with drinking of milk as habit. The untapped potential of the dairy sector is immense and opportunity to set up a new dairy venture is great. In the works of Dr. Amrita Patel, Chairperson, NDDB, there is enough place under the scheme for both private and cooperative sectors. Notwithstanding the above potential it is cautioned that, entering dairy sector is not going to be a cakewalk.
Globalization and Liberalization are the Mantras of the new economy today, which is now on the fast track. Industrial production is rapidly moving forward. The dairy industry is no exception. With the World Trade Organization (WTO) coming into effect, from 01 April 2001 and the imports and exports getting liberalized in the global economy, the dairy industry, which includes dairy products, faces both an opportunity for growth as well as a threat for its growth.
There is no doubt that there is tremendous scope for the growth of the dairy industry in the new millennium. The product mix of world dairy trade is likely to shift further towards cheese. This has been developed in the world markets. As the market opens up, consumption trends associated with these markets will have increasing influence on the world trade. Whole milk powder is likely to continue to be a substantial beneficiary and growth substiantially in the middle eastern countries. As standards of living in the importing country rises, exporting countries will increasingly concentrate on whole milk powder and cheese with the assistance of butter and skimmed milk powder.
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There is vast potential for the export of dairy products, the cost of milk production in India being the lowest. The major factor influencing production of bye products is the newer uses that may be developed through R& D support. Milk proteins are being utilized increasingly replacing animal and vegetable proteins in special bakery products and instant foods. Through the application of membrane proven process, milk proteins isolates are being produced. These are being utilized for ice milk mixes and other such applications.
Most of the dairy plants in the Government, Cooperatives and Private Sector produce almost similar dairy products like varieties of milk, butter, ghee, skimmed milk powder and whole milk powder.
There are 7 large-scale cheese manufacturers and 14 manufacturers are producing infant foods and malted milks. There is immense scope for the broadening of the products range and some of the products, which are likely to have considerable demand in the coming decade, have been identified. The cheese market, presently valued at about Rs.80 crore is growing at about 9% annually. There are more than thousand varieties of cheese, which have been listed out of which cheddar; mozzarella, gouda and processed cheeses are being manufactured in India. Pizza is becoming a very popular item in the market. This segment alone commands 5% of the share in the cheese market and other area is fermented milk products. Dahi even though is a Rs.15000 crore market, the share of the organized sector is only around 10%. This product has immense potential for growth.
Varieties of milk shakes are also increasing wherein milk and fruit pulp are mixed in different proportions to produce different beverages. Some of the milk and fruit based beverages which are likely to have demand are a combination of milk with mango, banana, sapota, strawberry, papaya, etc. Some of these beverages can also be produced in dehydrated form and can be an excellent health food. There are varieties in traditional milk based sweets, manufactured in the country. The market size is around Rs.12000 crore. However, there are very few nationally known brands in this category.
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Many of the organized dairies are involved in the manufacture of varieties of milk based sweets: pedha, paneer, shirkhand, etc. These are now restricted to certain areas only but can go national. As the world is getting integrated into one market, quality certification is becoming essential in the market. However, there are very few plants in the country, which have successfully obtained ISO, HACCP certification. There is scope for introducing newer plants adopting newer processes by the dairy industry in the country. Packaging of dairy products is also another very promising area. NRI and overseas investments can take place in manufacturing dairy processing equipment, fruit packaging equipment and equipments for biotechnology related dairy industry.
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Demand profile: Absolutely optimistic. Margins: Quite reasonable, even on packed liquid milk. Flexibility of product mix: Tremendous. With balancing equipment, you can keep on adding to your product line.
Availability of raw material: Abundant. Presently, more than 80 per cent of milk produced is flowing into the unorganized sector, which requires proper channelization.
Technical manpower: Professionally-trained, technical human resource pool, built over last 30 years.
Weaknesses:
Perishability: Pasteurization has overcome this weakness partially. Surely, many new processes will follow to improve milk quality and extend its shelf life.
Lack of control over yield: Theoretically, there is little control over milk yield. However, increased awareness of developments like embryo transplant, artificial insemination and properly managed animal husbandry practices, coupled with higher income to rural milk producers should automatically lead to improvement in milk yields.
Logistics of procurement: Woes of bad roads and inadequate transportation facility make milk procurement problematic. But with the overall economic improvement in India, these problems would also get solved.
Problematic distribution: Distribution is not perfect. Competition: With so many newcomers entering this industry, competition is becoming tougher day by day. But then competition has to be faced as a ground reality. The market is large enough for many to carve out their niche..
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Opportunities:
Value addition: There is a phenomenal scope for innovations in product development, packaging and presentation. Given below are potential areas of value addition:
o
Steps should be taken to introduce value-added products like shrikhand, ice creams, paneer, khoa, flavored milk, dairy sweets, etc. This will lead to a greater presence and flexibility in the market place along with opportunities in the field of brand building.
Addition of cultured products like yoghurt and cheese lend further strength - both in terms of utilization of resources and presence in the market place.
A lateral view opens up opportunities in milk proteins through casein, caseinates and other dietary proteins, further opening up export opportunities.
Yet another aspect can be the addition of infant foods, geriatric foods and nutritionals.
Export potential: Efforts to exploit export potential are already on. Amul is exporting to Bangladesh, Sri Lanka, Nigeria, and the Middle East. Following the new GATT treaty, opportunities will increase tremendously for the export of agri-products in general and dairy products in particular.
Threats:
Milk vendors, the un-organized sector: Today milk vendors are occupying the pride of place in the industry. Organized dissemination of information about the harm that they are doing to producers and consumers should see a steady decline in their importance.
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The study of this SWOT analysis shows that the strengths and opportunities far outweigh weaknesses and threats. Strengths and opportunities are fundamental and weaknesses and threats are transitory. Any investment idea can do well only when you have three essential ingredients: entrepreneurship (the ability to take risks), innovative approach (in product lines and marketing) and values (of quality/ethics). The Indian dairy industry, following its relicensing, has been attracting a large number of entrepreneurs. Their success in dairying depends on factors such as an efficient yet economical procurement network, hygienic and cost-effective processing facilities and innovativeness in the market place. All that needs to be done is: to innovate, convert products into commercially exploitable ideas. All the time keep reminding yourself: Benjamin Franklin discovered electricity, but it was the man who invented the meter that really made the money!
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These village societies would collect the milk themselves and would decide the prices at which they can sell the milk. The district union was also form to collect the milk from such village co- operative societies and to sell them. It was also resolved that the Government should be asked to buy milk from the union. However, the govt. did not seem to help farmers by any means. It gave the negative response by turning down the demand for the milk. To respond to this action of govt., the farmers of Kaira district went on a milk strike. For 15 whole days not a single drop of milk was sold to the traders. As a result the Bombay milk scheme was severely affected. The milk commissioner of Bombay then visited Anand to assess the situation. Having seemed the condition, he decided to fulfill the farmers demand. Thus their cooperative unions were forced at the village and district level to collect and sell milk on a cooperative basis, without the intervention of Government. Mr. Verghese Kurien showed main interest in establishing union who was supported by Shri Tribhuvandas Patel who lead the farmers in forming the Co- operative unions at the village level. The Kaira district milk producers union was thus established in ANAND and was registered formally on 14th December 1946. Since farmers sold all the milk in Anand through a co-operative union, it was commonly resolved to sell the milk under the brand name AMUL. Initial stage only 250 liters of milk was collected everyday. But with the growing awareness of the benefits of the cooperativeness, the collection of milk increased. Today Amul collect 11 lakhs liters of milk everyday. Since milk was a perishable commodity it becomes difficult to preserve milk flora longer period. Besides when the milk was to be collected from the far places, there was a fear of spoiling of milk. To overcome this problem the union thought out to develop the chilling unit at various junctions, which would collect the milk and could chill it, so as to preserve it for a longer period. Thus, today Amul has more than 150 chilling centers in various villages. Milk is collected from almost 1073 societies. Dr.Rajendra Prasad, the president of India laid the foundation on November 15, 1954. Pandit Jawaharlal Nehru, the prime minister of India declared it open at Amul dairy on November 20, 1955.
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systems, Plough back the profits, by prudent use of men, material and machines, in the rural
sector for the common good and betterment of the member producers and The Union looks after policy formulation, processing and marketing of milk, provision of technical inputs to enhance milk yield of animals, the artificial insemination service, veterinary care, better feeds and the like - all through the village societies.
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Plants :
First plant is at ANAND, which engaged in the manufacturing of milk, butter, ghee, milk powder, flavored milk and buttermilk.
Second plant is at MOGAR, which engaged in manufacturing chocolate, nutramul, Amul Ganthia and Amul lite.
Today, twelve dairies are producing different products under the brand name Amul. Today Amul dairy is no. 1 dairy in Asia and no. 2 in the world, which is matter of proud for Gujarat and whole India.
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AWARDS :
GCMMF bags APEDA AWARD for 11th year in a raw Amul Pro-biotic Ice-cream gets No. 1 Award at World Dairy Summit Ramkrishna Bajaj National Quality Award-2003 Amul- The Taste Of India (GCMMF) receives international Cio 100 Award for Resourcefulness Rajiv Gandhi National Quality Award - 1999
ACHIEVEMENTS :
Asias largest dairy co-operative was created way back in1946 to make the milk producer selfreliant and conduct milk- business with pride. Amul has always been the trend setter in bringing and adapting the most modern technology to door steps to rural farmers.
Amul created history in following areas: a)First self motivated and autonomous farmers organization comprising of more than 5000000 marginal milk producers of Kaira District. b) Created Dairy co-operatives at village level functioning with milk collection centers owned by them. c) Computerized milk collection system with electronic scale and computerized accounting system. d) The first and only organization in world to get ISO 9000 standard for its farmers cooperatives. e) First to produce milk from powder from surplus milk. Amul is the live example of how co-operation amongst the poor marginal farmers can provide means for the socio-economic development of the under privileged marginal farmers.
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AMUL IN ABROAD :
After having established its presence in China, Mauritius and Hong Kong, Gujarat Cooperative Milk Marketing Federation (GCMMF), Indias largest milk cooperative, is waiting to flood the Japanese market. Then, GCMMF is also looking at Sri Lanka as one of its next export destinations. Amul products are already available on shelves across several countries, including the US, China, Australia, West Asian countries and Africa.
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RESEARCH METHODOLOGY :
It is a science of studying how research is done scientifically. It is a way to systematically solve research problem by logically adopting various steps. Methodology helps to understand not only the products of scientific inquiry but the process itself. It aims to describe and analyze methods, throw light on their limitations and resources, clarify their presuppositions and consequences, relating their potentialities to twilight zone at the frontiers of knowledge.
Benefits :
Advancement of wealth of human knowledge It provides tool to look at things in life objectively. It develops a critical and scientific attitude , disciplined thinking to observe objectively It enriches practitioner and his practices, provides opportunity to study the subject in depth, unable us to make intelligent decisions. Doing research is the best wayto learn to read and think critically.
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LITERATURE REVIEW
Haitham Nobanee (p. 13) has said that one of the comprehensive measures of working capital management efficiency is the cash conversion cycle that conceders all financial flows associated with inventory, receivable and payables. The traditional link between the cash conversion cycle and firm's profitability and market value is that reducing the cash conversion cycle by reducing the time that cash are tied up in working capital improves firms profitability and market value. This could happen by shortening the inventory conversion period via processing and selling goods to customers more quickly, by shortening the receivable collection period by speeding up collections, or by lengthening the payable deferral period via slowing down payments to suppliers.
According to Juan Garca-Teruel and Martnez-Solano (p.13,14), Working capital management is important in the case of Large, small and medium-sized companies when Most of these companies assets are in the form of current assets. Also, current liabilities are one of their main sources of external finance. According to previous studies focus on large firms (Shin and Soenen, 1998; Deloof, 2003), the analyses carried out confirm the important role of working capital management in value generation in small and medium-sized firms. We find a significant negative relation between an SMEs profitability and the number of days accounts receivable and days of inventory which we do not observe in large-sized company.
Shin and Soenen (1998) show a strong negative relation between the length of the cash conversion cycle and corporate profitability of listed American firms covering the period 19751994. Maryam AlHajjar and Haitham Nobanee (p.10)suggested that there is a significant negative relationship between cash conversion cycle and operating income to sales and operating cash flow to sales.
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LIMITATIONS :
The study is based on the information received and analysis done during the training period only. The study is based on the available data of last 4 years. The study is fully based on secondary data.
HYPOTHESES TESTING:
Since the objective of this study is to examine the relationship between profitability and working capital management, the study makes a set of testable hypothesis (the Null Hypotheses H0 versus the Alternative ones H1 ).
Working capital management and Profitability of AMUL. H1: There is no Significant relationship between efficient Working capital management and Profitability of AMUL.
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CALCULATION :
1) Inventory Turnover Ratio :
Debtors Turnover Year Sales Debtors Debtors Turnover Ratio (times) 2005-06 7130.26 9.85 36.56 2006-07 6388.23 12.78 28.17 2007-08 8863.31 12.09 29.77
Table:4
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Table:5
Rs. In Lacs
2005-06
70206.23
2006-07
81631.69
2007-08
107187.29
2008-09
137212.35
10101.05
7850.76
15208.55
11201.9
6.95
10.4
7.05
12.25
100
0
Capital Employed
Rs. In Lacs
Year PAT
2005-06
323.74 15634.38
2006-07
411.50 13655.2 8
2007-08
451.51 21972.10
2008-09
575.53 18625.70
Capital Employed
2.07%
3.01%
2.05%
3.08%
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Table:7
Year
Inventory Turnover
83.37 77.37 68.99 85.22 78.74034981 7.16882375 8.12
Debtor Turnover
36.56 28.17 29.77 13.04 26.8848622 (-)3.208009607 9.23
Table:8
Particular
Correl, Between Inventory turnover and ROC
Correl, Between Debtor turnover and ROC Correl, Between Working Capital turnover and ROC
(-)0.75 0.97
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t = 0.69
Here,
Degree of freedom = n-2 = 4-2 = 2 Table Value =4.303 The value of t is less than the table value, so, null hypothesis will be accepted.
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t = 1.6
Here,
Degree of freedom = n-2 = 4-2 = 2 Table Value = 4.303 The value of t is less than the table value, so, null hypothesis will be accepted.
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(3)
t = 5.69
Here,
Degree of freedom = n-2 = 4-2 = 2 Table Value = 4.303 The value of t is less than the table value, so, null hypothesis will be rejected.
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CONCLUSION :
Here, we can observe that the co-relation between ROC and Inventory Turnover is significant. If we analyze the significant co-relation between ROC and Inventory Turnover than we can conclude that there will be a positive impact of increase of inventory turnover period on profitability. So if inventory turnover period increases (1) then ROC increases (0.69). But more increase in inventory turnover also block our cash in inventory and increase in ROC is also comparatively less. Also we observed that the co-relation between ROC and Accounts Receivables is significant. If we analyze the significant co-relation between ROC and Accounts Receivable than we can conclude that there will be a positive impact of increase of average collection period on profitability. So if average collection period increase (1) then ROC increase (1.6). So we cant increase sales by giving more credit, some time it converts in to bed debts also. In the t test for Working Capital and ROC, it can be observed that there is no significant corelation between them. If we analyze the relation between ROC and Working Capital Turnover than we can conclude that increase in the working capital turnover will have negative impact on profitability.
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In phase 1, cash gets converted into inventory. This would include purchase of raw materials, conversion of raw materials into work-in-progress, finished goods and terminate in the transfer
of goods to stock at the end of the manufacturing process. In the case of trading organization,
this phase would be shorter as there would be no manufacturing activity and cash will be converted into inventory directly. The phase will, of course, be totally absent in case of service organizations. In phase 2 of the cycle, the inventory is converted into receivables as credit sales are made to customers. Firms which do not sell on credit will obviously not have phase 2 of the operating cycle. The last phase, phase 3, represents the stage when receivables are collected. This phase completes the operating cycle. Thus, the firm has moved from cash to inventory, to receivables and to cash again.
Figure:1 38
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TYPES OF WORKING CAPITAL ON THE BASIS OF TIME : (1) FIXED/PERMANENT WORKING CAPITAL :
To carry on business, a certain level of working capital is necessary on a continuous and uninterrupted basis, for all practical purpose, the requirement has to be met as with other fixed assets. Permanent working capital represents the minimum level of raw materials, work-inprogress, finished goods, stores, accounts receivables and cash which are in circulation to ensure continuity of production. Permanent working capital is again divided into two parts: regular working capital and reserve working capital. The portion of fixed working capital which is utilized to carry out the cyclical operation of current assets in the form of conversion of liquid cash into raw materials, raw materials into finished goods, finished goods into debtors and debtors into liquid cash in a continuous manner is known as regular working capital. On the other hand, the portion of fixed working capital, which is preserved for meeting uncertain and emergent working needs (like sudden price hike, abnormal scarcity in times of war, natural calamity, etc) is known as reserve working capital.
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Generally the importance of variable working capital is more acute in business concern having seasonal market demands. Variable or temporary working capital may be further sub- divided into (a) seasonal working capital and (b) special working capital.
The additional working capital required by a concern to carry out its operating activities in busy seasons of high market demands is known as seasonal working capital. Businesses which mostly have seasonal demands of their products like ice- cream, cold drinks, wool and likely products manufacturing concern may need huge amount of seasonal working capital. In other business concerns too the market may rise to the peak in some particular time period. So in all types of business a portion of working capital may be preserved for meeting seasonal needs. On the other hand, the portion of working capital that is needed by a concern to meet the extraordinary requirements of special situations is known as special working capital. This is called special working capital because it is needed in special situations and not in normal circumstances.
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Figure:2
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PRODUCTION CYCLE:
Another factor which has a bearing on the quantum of working capital is the production cycle. The term production or manufacturing cycle refers to the time involved in the manufacture of goods. It covers the time-span between the procurement of raw materials and the completion of the manufacturing process leading to the production of finished goods. To sustain such activities the need of working capital is obvious.
BUSINESS CYCLE:
The working capital requirements are also determined by the nature of the business cycle. The variations in business conditions may be in two directions: (i) upward phase when boom conditions prevail, and (ii) downward phase when economic activity is marked by a decline. During the upswing of the business activity the need of working capital is more as opposed to the downward phase of the business.
PRODUCTION POLICY:
The requirement of working capital also depends on the production policy of the firm. In manufacturing concerns having mostly seasonal demand for the product the production policy is a significant determinant of working capital.
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DIVIDEND POLICY:
The payment of dividend consumes cash resources and, thereby, affects working capital to that extent. Conversely, if the firm does not pay dividend but retains the profits, working capital will increase.
DEPRECIATION POLICY:
Depreciation policy also exerts an influence on the quantum of working capital. Depreciation charges do not involve any cash outflow. The effect of depreciation policy on working capital is, therefore indirect.
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CURRENT ASSETS:
The list of current assets comprises inventories (including raw materials, work-in-progress and finished goods and spares), sundry debtors including receivables, readily realizable securities and tax reserve certificates, short-term investments, accrued incomes, prepaid expenses (not in the nature of deferred charge), cash at bank, and cash in hand. In Durgapur Steel Plant current assets are: Inventories (stores & spares, raw materials, semi-finished products) Sundry debtors Cash & bank balances Interest receivable/accrued Loans & advances etc.
CURRENT LIABILITIES:
The list of liabilities includes trade creditors, accounts payable, outstanding or accrued expenses, bank overdraft, outstanding liabilities, short-term loans and borrowings and certain obligations including different provisions, i.e., provision for taxation, proposed dividend etc. In Durgapur Steel Plant current liabilities are: Sundry creditors Advances from customers Security deposit Other liabilities etc.
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WHILE
ESTIMATING
The length of time for which raw materials remain in stores before they are issued to production. The length of the production cycle or work-in-progress, i.e., the time taken for conversion of raw materials into finished goods. The length of the Sales Cycle during which finished goods are to be kept waiting for sales. The average period of credit allowed to customers. The amount of cash required to pay day-to-day expenses of the business. The amount of cash required for advance payments if any. The average period of credit to be allowed by suppliers. Time-lag in the payment of wages and other overheads.
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PARTICULARS
CURRENT ASSETS :
STOCK :
Trading Stock Stores (A)Total Stock 7989.62 1681.64 9671.26 6952.79 2125.11 9077.90 13476.86 2261.02 15737.88 16334.50 3106.47 19440.97
19061.84
19957.30
29100.96
29000.59
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Chart:1
Interpretation :
The investment in current assets should be just adequate to the needs of the business firm. In Amul, investment in current assets changes with the level of business activities. we can observe from above data that the investment in current assets is increasing as the turnover of Amul is increasing. We can see in above table that total debtors decrease than the year 2007 2008 i.e. Rs. 9946.80 lacs to Rs. 7380.01 lacs, which is good for the company. Total bank account decreases year by year, company has to maintain it. And cash on hand increases year by year i.e. Rs. 0.62 lacs to Rs. 0.71 lacs and from Rs. 0.71 lacs to Rs. 1.00 Lacs . So company can easily pay miscellaneous expanses and it is helpful to pay immediate small expenses. notable increase in current assets in year 2007 2008. There was a
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Table:10
Rs. In Lacs
PARTICULARS
(A) TOTAL CURRENT ASSETS Less: Current Liabilities Deposits Due to Societies Outstanding Against Expenses Outstanding Against Purchases Sundry Creditors Provision (B) TOTAL CURRENT LIABILITIES NET WORKING CAPITAL (A-B)
2005-06
18990.94
2006-07
19957.30
2007-08
29100.96
2008-09
29000.59
50
6000.00
4000.00 2000.00 0.00 NET WORKING CAPITAL (A-B) 2005-06 10030.15 2006-07 7850.76 2007-08 15208.55 2008-09 11201.91
Interpretation : Efficient working capital management requires that the firm should operate their daily expenses or short term obligation with the amount of N.W.C. The data of last four years show the margin by which current assets cover the short term obligation. There was a notable increase in Net Working Capital in the year 2007-08 i.e. 7357.79 lacs than the year 2006-07. But after the year of 2007-08,in the year 2008-09, with increase in current liabilities and with decrease in current assets, Net Working Capital decrease.
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PARTICULARS
Raw Material Consumption Raw Material Consumption per day Raw Material Inventory Raw Material Inventory holding days
2005-06
10872.93 30.20 154.85 5
2006-07
11718.00 32.55 207.39 6
2007-08
15725.31 43.68 266.58 6
2008-09
20332.86 56.48 415.92 7
Chart:3
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Chart:4
Interpretation :
It can be seen that the raw-material conversion period has increase from 5 days and 6 days in 2005 06 to 7 days in 2008 2009 owing to both increase in consumption as well as increase in inventory level. During the year 2006 2007 raw material consumption per day was Rs.32.55 lacs and Amul held on ending raw material inventory of Rs. 207.39 lacs. In the year 2008 2009 raw material consumption per day was Rs. 56.48 lacs and raw material inventory was of Rs. 415.92 lacs with the constant increase in the raw material inventory holding days.
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PARTICULARS
2005-06
65777.15 182.71 2091.82 11
2006-07
2007-08 2008-09
131681.48 365.78 3330.96 9
Cost of Production Cost of Production per day work-in-process Inventory work-in-process Inventory holding days
Chart:5
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Chart:6
Interpretation :
From the above table we can see that the cost of production increases year by year but the work in process inventory also increases year by year which indicates efficiency of the production of Amul. The holding days of the Work-In-Process inventory remained same in year 2006 07 and 2007 08 but the inventory increased in 2007 08, and the holding days of the Work-In-Process inventory in year 2008 09 is 9 and it decreased by 1 day in previous year which is 2008-09. This shows that there is increase in inventory with constant decrease in work-in-process inventory holding days.
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PARTICULARS
Cost of Goods Sold Cost of Goods Sold per day Finished Goods Inventory Finished Goods Inventory holding days
2005-06
44920.78 125.00 5741.55 46
2006-07
53348.99 158.00 4700.25 30
2007-08
71441.49 198.00 10207.16 52
2008-09
91427.30 254.00 12587.62 50
Chart:7
150.00
100.00 50.00 0.00 2005-06 125.00 2006-07 158.00 2007-08 198.00 2008-09 254.00
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Chart:8
30
20 10 0 Finished Goods Inventory holding days 2005-06 46 2006-07 30 2007-08 52 2008-09 50
Interpretation : It can be seen that the cost of goods sold is increasing year by year with increase in the milk procurement at Amul plant. Finished goods inventory also increasing year by year, this result shows that company is producing more than the previous year. The holding period of the finished goods inventory is increased by 10 days from 2006 07 to 2007 -08 but after a year in 2008-09, it decreases by 2 days, which shows that the days of holding finished goods has become less than year 2007-08 though cost of goods sold increases in the last year.
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PARTICULARS
Credit Sales Credit Sales per day Debtors Debtors outstanding days
2005-06
70206.23 195.02 7130.26 36
2006-07
81631.69 226.75 6388.23 28
2007-08
107187.29 297.74 8863.31 30
2008-09
137212.35 381.14 4969.62 13
Chart:9
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Chart:10
10
5 0 Debtors outstanding days 2005-06 36 2006-07 28 2007-08 30 2008-09 13
Interpretation : During the year 2006 07 the rate of credit sales of Amul was Rs. 81631.69 lacs and per day credit sales was Rs. 226.75 lacs and it increases year by year as mentioned into table. In table and from the chart we can also see that the collection period for year 2006 -07 was 28 days which increases in year 2007 08 by 2 days. But after that we observed a tremendous decrease in collection period. The collection period declines to 13 days which from 30 days of previous year. Here, we can interpret that Amul has used better policy for nearby 50% decrease in debtors outstanding days though there is a constant increase in credit sales per day.
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Rs. In Lacs
PARTICULARS
Credit Purchase Credit Purchase per day Creditors Creditors outstanding days
2005-06
46502.01 129.17 4384.16 34
2006-07
52312.16 145.31 4787.89 33
2007-08
77965.56 216.57 6180.96 29
2008-09
94248.94 261.90 5223.19 20
Chart:11
100.00
50.00 0.00 Credit Purchase per day
2005-06 129.17
2006-07 145.31
2007-08 216.57
2008-09 261.90
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Chart:12
20
15 10 5 0 Creditors outstanding days 2005-06 34 2006-07 33 2007-08 29 2008-09 20
Interpretation : From the table and chart, we can see that Amul increases it credit purchase year by year. Here, the thing which can attract us is that, in the year 2006-07 and 2007-08, creditors get increased but after that, in the previous year which was 2008-09, creditors get decreased. With that decrease, the payment deferral period also decreases in the last year by 9 days though credit purchase per day is growing gradually with the pace of time. Amul has been efficient in payment of dues against purchase and expenses and slowly but firmly it is going to make the payment deferral period less.
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PARTICULARS
(A) GROSS OPERATING CYCLE
1.Raw Material Conversion Period 2. W.I.P. Conversion Period 3. Finished Goods Conversion Period 4. Collection Period Gross Operating Cycle (1+2+3+4) 5. Payment Deferral Period (B) NET OPERATING CYCLE [G.O.C-(5)]
2005-06
2006-07
2007-08
2008-09
5 11 46 36 98 34 64
6 10 30 28 74 33 41
6 10 52 30 98 29 69
7 9 50 13 79 20 59
Chart:13
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Chart:14
40 30 20 10 0
(B) NET OPERATING CYCLE [G.O.C-(5)] 2005-06 64 2006-07 41 2007-08 69 2008-09 59
Interpretation : From the above chart we can have comparison of the period of the operating cycle in different years. After an observation of above, we can conclude that the operating cycle of Amul shows very high fluctuations. In 2006 -07 it was 41 days and 2007 08 it increased up to 69 days and further in 2008 09 it reduced to 59 days. This proves the operating efficiency of Amul which it applied in last year. Amul should try to improve the finished goods conversion period and each of its account payable. This will result into reduction of operating days and hence the requirements of working capital will be relatively less.
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PARTICULARS
1. INVENTORY Raw Material Work-in-process Finished Goods Stores 2. DEBTORS 3. PREPAID EXPENSES 4. CASH & BANK 5. DEFERRED REVENUE EXPENSES TOTAL CURRENT ASSETS
2005-06
9669.86 154.85 2091.82 5741.55 1681.64 7130.26 552.26 1395.69 70.90 18818.97
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Chart:15
25000.00
Rs. in Lacs 20000.00 15000.00 10000.00 5000.00 0.00 TOTAL CURRENT ASSETS 2005-06 18818.97 2006-07 19694.58 2007-08 28795.27 2008-09 27551.11
Interpretation : From the above information, we can say that there is a big part of inventory out of the total current assets. For Year 2005-06: % from the Total Current Assets:
38%
51%
Chart:16
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38%
51%
Chart:17
Chart:18
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Chart Title
4% 18% 71% 7% 0% 1. INVENTORY 2. DEBTORS 3. PREPAID EXPENSES 4. CASH & BANK
Chart:19
The above table and charts mentioned the distribution of working capital in the Amul from 2006 07 to 2008 09 which are including current assets: inventory, debtors, prepaid expenses and advances, cash and bank balance etc the company has a big part of inventory out of total current Asset. The above table mentioned that the company has a big part of inventory out of total current Asset. The percentage of inventory to current asset is 51% to 71% year by year. It constantly increases year to year. Inventory has higher contribution and deferred revenue expenses have lower contribution and cash and bank balance decrease gradually which is not good for the organization.
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Table:19
NET WORKING CAPITAL TURNOVER Rs. In Lacs PARTICULARS 2005-06 2006-07 2007-08 2008-09
70206.23 10030.15 7.00 81631.69 107187.29 137212.35 7850.76 15208.55 11201.91 10.40 7.05 12.25
NWC Turnover
14.00
12.00 10.00 8.00
6.00
4.00 2.00 0.00 N.W.C. Turnover (Sales/NWC) 2005-06 7.00 2006-07 10.40 2007-08 7.05 2008-09 12.25
Chart:20
Interpretation : The company may also like to relate its Net Working Capital or net current assets gap to sales. In the year 2005 06 Working capital was 7 times means the Working Capital changes with sales 7. In 2007 08 it decreases with sales 7.05 times, it means that there was a change of 3.35 which shows organizations excellence. But in year 2008 09 further it increases 12.25 times, it means there is a change of 5.20. So, it is not good for Amul and Anul has to maintain stable rate of working capital in the firm.
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PARTICULARS
Sales Current Assets Current Assets Turnover (Sales/C.A.)
2005-06
70206.23 18990.94
3.70
4.09
3.68
4.73
4.00
3.50 3.00 2.50 2.00 1.50 1.00 0.50 0.00 Current Assets Turnover (Sales/C.A.) 2005-06 3.70 2006-07 4.09 2007-08 3.68 2008-09 4.73
Interpretation :
Chart:21
Current asset turnover shows organizations efficiency of utilizing its current assets. From above table we can observe that, Amul turns its current assets about 3.70 times in 2005 06 and 4.09 times in 2006 07 and 3.68 times in 2007 -08. From the above chart and table, we can see fluctuations in the current assets turnover in Amul. In the last year it decreases from the previous year, it shows that Amuls efficiency had decreased in the year 2008-09 compared to year 2007-08.
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PARTICULARS
Current Assets Current Liabilities Current Ratio
Chart:22
2005-06
18990.94 8960.79 2.12
Current Ratio
2.50
2.00
1.50
1.00
0.50
2005-06
2006-07
2007-08
2008-09
2.12
1.65
2.09
1.63
Interpretation : The above analysis shows that use of long term sources of funds in financing W.C. need has little variation in Amul dairy over the period under study. It indicates that Amul is following conservative financing policy resulting in higher profitability. In year 2005 06 the ratio is 2.12 in year 2006 07 it is 1.65 and in the year of 2007-08, it is 2.09 which is higher than its previous year. In year 2008 09, it decreases at 1.63, so it is not good for organization and Amul should try to improve it.
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PARTICULAR
Total Current Assets Total Current Liabilities Net Working Capital Profitability (NP/sales)x100
Chart:23
2005-06
18990.94 8960.79 10030.15 0.46
Profitability
0.60 0.50 0.40 0.30 0.20 0.10 0.00 Profitability(NP/Sales) x 100
2005-06
0.46
2006-07
0.50
2007-08
0.42
2008-09
0.42
Interpretation : From above table we can compare four years N.W.C. We can also say about Amuls net liability against current assets. In year 2006 07 total current asset was Rs. 19957.30 lacs and in 2007 08, it was Rs. 29100.96 lacs and in 2008 09 Rs. 29000.59 lacs. The organization has good financing policy because current liabilities are less than current assets. There is a small difference in profitability year to year. Organization is doing well. The working capital policy of any firm can be determined from two things, current asset to sales ratio and secondly uses of long term sources to financing W.C. needs.
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Table:23
Rs. In Lacs
PARTICULARS
(A) CURRENT ASSETS 1. Stock 2. Debtors 3. Cash & Bank 4. Prepaid Expenses Total Current Assets (B) CURRENT LIABILITIES 1. Deposits 2. Due to Societies 3. O/S Against Expenses 4. O/S Against Purchases 5. Sundry Creditors 6. Provisions Total Current Liabilities DECREASE IN NET WORKING CAPITAL
2008-09
19440.97 4969.62 2053.41 960.91 27424.91
9788.68
7494.95
14797.80
9626.23
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Chart:24
0.00
DECREASE IN NET WORKING CAPITAL
2005-06 9788.68
2006-07 7494.95
2007-08 14797.80
2008-09 9626.23
Interpretation :
Schedule of change in working capital reflect that between two balance sheets what type of changes occur in current assets and current liabilities. In the year 200506, Net Working Capital is 10015.30 which increases in the year 2007-08, but it decreases in the year 2008-09 which is our previous year. Here, the need of Working Capital increases day by day because Amul is on Expansion path.
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PARTICULARS
Raw Material(Days) W.I.P.(Days) Finished Goods(Days) [A] Inventory Conversion Period [B] Debtors Conversion Period Total (A+B) [C] Payment Deferral Period CASH CONVERSION CYCLE(Days)
2005-06
5 11 46 62 36 98 34 64
2005-06 64
2006-07 41
2007-08 69
2008-09 59
Interpretation :
Cash conversion cycle is the time duration in which an organization is able to convert its resources into cash. It is actually the total time period required to first convert resources into inventory, inventory into finished goods then goods into sales and then sales into cash. From above table we can observe that the cash conversion cycle was 64 days in 200506, 41 days in 2006 07 and 69 days in 2007 -08 and 59 days in 2008-09. 10 days decrease in last year which means more cash required to carry on operations in Amul.
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FINDINGS
After completion of my project there is no doubt that Amul is a very good co-operative organization in India which truly works for farmers who are attached with the union and who are the members of the union. Union is also linked with social services and its departments are working well for the union to reach toward the top position. From working capital and operating cycle, the following conclusions can be drawn. The working capital of requirement of Amul is financed through raising the cash credit loans and short term loans. Amul is following conservative policy to finance its current assets. A large operating cycle is observed due to high work-in-process conversion period, high finished goods conversion period and lower payment deferral period. The organization has not arranged proper Current Asset, so it increases not due to only one element, but it increases due to increase in inventory and due to increase in cash and bank. Amuls Gross Working Capital is made up of three current assets which are 1) Stock, 2) Advances & Debtors, 3) Cash and Bank balance. Investment in current assets is increasing with increase of business activities. There is a significant increase in investment in the year 2007-08. The margin by which current assets cover short term obligations i.e. current liabilities are more in year 2008-09 and while it was relatively less in 2007-08. There is significant change in the Work In Process Conversion Period (WIPCP), Finished Goods Conversion Period (FGCP). The WIPCP decreases by 1 day and FGCP decreases by 2 days in 2008-09. So, it shows efficiency improvement of Amul.
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RECOMMENDATIONS
Amul is following conservative policy to finance its current assets. The firm should increase the investment in current assets to improve its cfedit standing.
Amul should try to reduce raw materials and finished goods period by reducing inventory level.
Amul should control the inventory level. It should increase Current Asset and decrease Current Liabilities, because the quick ratio is taking the too much time.
Amul has big consumer market in overall country as well as abroad, so increase in product mix will give more privileges to Amul.
Transportation of milk should be accurate so that wastage of milk can be avoided. Amul should increase the procurement of milk by increasing thr number of village societies.
Amul should concentrate more on inventory or we can say that stock, because in Current Assets, inventorys demand has higher position.
Amul should increase its sales by different sales promotion schemes. The local milk producers should be motivated to increase the daily production as most of the producers are the marginal farmers. At the same time price for the retailer and price for milk producer should be maintained at an affordable price.
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CONCLUSION
Concluding my report, firstly, I would like to say that it was a great pleasure of taking the industrial internship at the Amul. My report is on working capital management and hence concentrating on financial perspective. Amul is really the great organization which distributes all its profit among its members, those who supply milk to Amul. It would perhaps be the first organization in India to run successfully on the co-operative basis. Amul is a highly successful co-operative sector in the world since last 60 years. Amul has built its own personality that portrays its true image. But since there are certain avenues, if they are taken carefully than they lead the organization to higher standards. Amul has competitive established system. The four hands of Amul are working successfully with co-operation. The people of Amul are very co-operative and enthusiastic. Amul is famous for itz Anand Pattern for itz co-operative organization in the world. If we do SWOT Analysis of Amul, through it, Amul can know that it must be aware of their threats, weakness and they should have to concentrate on it and Try to more use of their strength and opportunity. The calculations presented by me in the report are true to the best of my knowledge and wish that it would help Amul a lot.
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BIBLIOGRAPHY
BOOKS :
Pandey I M, financial management, 9th revised edition, Vikas Publishing House Pvt. Ltd., 2005. New Delhi. Chandra Prasanna, Financial Management, theory and practice, 7th edition Tata McGraw hill publishing co. ltd New Delhi. Kothari, C.R., Research Methodology, Vikas Publishing House Pvt. Ltd., New Delhi, 1985.
ANNUAL REPORTS:
Annual report of AMUL 2005-06 Annual report of AMUL 2006-07 Annual report of AMUL 2007-08 Annual report of AMUL 2008-09
WEBSITES:
www.amul.com www.scribd.com www.iimahd.ernet.in
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