CHAPTER-I

1.1 INTRODUCTION

“Finance” is the life blood and nerve system of any business organization. As the
circulation of blood is necessary in the human body to maintain life. Finance is necessary
in the business organization for smooth running of the business.
Financial management involves managerial activities concerned with the
procurement and utilization of funds for business purpose the finance function does with
procurement of money taking in to consideration of today’s as well as future need and its
effective utilization. Since finance is required to purchase of machinery and raw
materials, to pay salaries and wages also for day-to-day expenses.
Financial management is that managerial activity which is concerned with the
planning and controlling of the firm’s financial resources. It was a branch of economics
till 1890, and as a separate discipline, it is of recent origin. Still, it has no unique body of
knowledge of its own, and draws heavily on economics for its theoretical concepts even
today.
The subject of financial management is of immense interest to both academicians
and practicing managers. It is of great interest to academicians because the subject is still
developing, and there are still certain areas where controversies exist for which no
unanimous solutions have been reached as yet. Practicing managers are interested in this
subject because among the most crucial decisions of the firm are those which relate to
finance, and an understanding of the theory of financial management provides them with
conceptual and analytical insights to make those decisions skillfully.
Working Capital
Working Capital is probably the most often used Financial Management Concept
verbally and misused practically. Literally, no organization can exist with out the
existence of working capital. Independent of nature of an Organization is constitutions
and activity requires working capital.

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 Working Capital management is a significant facet of financial management. Working
Capital refers to the current assets as well as current liabilities. Its importance starts from
two reasons:
Investment in current assets represents a substantial position of the total
investment. Investment in current assets and level of current liabilities has to be geared
quickly to changes in sales.

Working Capital Definitions

“Working Capital refers to a firm’s investment in shorter currents cash short term
securities, accounts receivables and inventory.”
Weston and Beigham

“Working Capital is the excess of the current asset over Current liabilities.”
Guthmanf and Doughall

“Working Capital is the amount of funds necessary to cover of operating the enterprise.”
Shubbin

Every business needs funds for two purposes for its establishment and to carry
out its day-to-day operations. Long-term funds are required to create production facilities
through purchase of fixed assets such as plant and machinery, land, building, furniture,
etc. Investments in these assets represent that part of the firm’s capital, which is blocked
on a permanent or fixed basis and is called fixed capital. Funds are also needed for short-
term purposes for the purchase of raw materials, payment of wages and other day-to-day
expenses, etc. These funds are known as working capital.
In simple words, working capital refers to that part of firm’s capital, which is
required for short-term or current assets such as cash, marketable securities, debtors and
inventories. Funds thus invested in current assets keep revolving fast and are being
constantly converted into cash and this cash flows out again in exchange for other current
assets. Hence, It is also known as revolving or calculating capital or short-term capital.

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1.2 Need for the Study

In order to maintain revenue from operations every firm needed certain amount of
current assets for example cash is in require to pay for expenses or to meet obligation for
service received etc. By a firm identical plan inventories are required to provide the link
between production and sales similarly accounts receivables generate when goods are
sold on credit.Needless to maintain cash, bank, debtors, bills receivables, closing stock
(including raw material work-in progress finished goods) prepayments certain other
deposits and invest which are temporary in nature represents current assets of a firm.
1.3 Scope of the Study

The scope of the study is defined below in term of concepts adopted and period under

focus.First the study management or working capital is confined only to the zuari cement

limited.Secondly, the binary concepts o working capital i.e. gross and net are used in

measuring profitability and liquidity respectively and also to arrive at various objectives

of the study.

1.4 Objectives of the Study

• To study the changes in the networking capital during the study period.

• To study the short-term financial position of the Zuari cement ltd by analyzing

different ratios.

• To analyze the working capital turn of the company

1.5 Limitations of the Study

• The study is can fined to Zuari cement ltd

• The past performance may not be the same is the future

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 CHAPTER-II

CEMENT INDUSTRY PROFILE

Introduction

Cement is key infrastructure industry. It has been decontrolled from price and distribution

on 1st March, 1989 and Delhi censed on 25th July 1991.However, the performance of the

industry and prices of cement are monitored regularly. The constraints faced by the

industry are reviewed in the infrastructure Coordination Committee meetings held in the

Cabinet Secretariat under the Chairmanship of Secretary (Co-ordination).Its performance

is also reviewed by the Cabinet Committee on infrastructure.

Capacity and Production

The cement industry comprises of 130 large cement plants with an installed capacity of

148.28 million tones and more than 365 mini cement plants with an estimated capacity of

11.10 million tons per annum. The Cement Corporation of India, Which is a Central

Public Sector Undertaking, has 10 units. There are 10 large cement plants owned by

various state Governments. The total installed capacity in the country as a whole in

159.38 million tones. Actual cement production in 2004-2005 was 116.3 million tones as

a against a production of 106.90 million tones in 2001-2002 registering a growth rate of

8.48%.

Keeping in view the trend of growth of the industry in previous years, aproduction

target of 126 million tones has been fixed for the year 2005-2006.During the period

April-June 2003, a production (provisional) was 31.30 million tones. The industry has

achieved a growth rate of 4.86% during this period

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Exports

A Part from meeting the entire domestic demand, the industry is also exporting cement

and clinker. The export of cement during 2001-2002 and 2005-2006 was 5.14 million

tones and 6.92 million tones respectively. Export during April-May, 2003 was 1.35

million tones. Major exporters were Gujarat Abuja Cement Ltd. And L&T Ltd.

Recommendations on Cement Industry

For the development of the cement industry ‘Working Group on Cement Industry Was

Constituted by the planning Commission for the formulation of X five-year plan. The

Working group has projected a growth rate of 10% for the cement industry during the

plan period and has projected creation of additional capacity of 40-62 million tones

mainly through expansion of existing plants. The Working Group has identified

following thrust area for improving demand for cement.

• Further push to housing development programs

• Promotion of concrete Highways and roads; and

• Use of ready-mix concrete in large infrastructure projects

Further, in order to improved global competitiveness of the India Cement

Industry, The Department of Industrial Policy & Promotion Commissioned a study on the

global competitiveness of the Indian Industry through and organization of international

repute, viz. KPMG Consultancy Pvt. Ltd. The report submitted by the organization has

made several recommendations for making the Indian Cement Industry more competitive

in the international market. The recommendations are under consideration.

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Technological Change

Cement Industry has made tremendous strides in technological up-gradation and

assimilation of latest technology. At present ninety three percent of the total capacity in

the industry is based on modern and environment-friendly dru procee technology and

only seven percent of the capacity is based on old wet and semi-dry process technology.

There is tremendous scope for waste heat recovery in cement plants and there by

reduction in emission level. One project for co-generation of power utilizing waster heat

in an Indian cement plant is being implemented with Japanese assistance under Green

Aid plan. The induction of advanced technology has helped in the industry immensely to

conserve energy and fuel and to save materials substantially. India is also producing

different varieties of cement as follows:

• Ordinary Portland Cement (OPC)

• Portland Slag Cement (PSC)

• Portland Pozzadana Cement (PPC)

• Sulphate Resistance Cement (SRC)

• Quick Setting Cement (QSC)

• Rapid Hardening Cement (RHC)

• Low Heat Cement (LHC)

• Masonry Cement

• High Strength Cement

• High Alumina Cement

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Profile of Cement Industry

The Indian Cement industry is the second largest cement producer in the world, with a

installed capacity of 144 million tones. The industry has undergo rapid technological up

gradation an vibrant grown during the last two decades, and some of the plants can be

compared in every respect with the best operating plants in the world. The industry in

highly energy intensive and the energy bill in some of the plants is as high as 60% of

cement manufacturing cost. Although the newer plants are equipped with latest state-of-

the-art equipment, there exists substantial scope for reduction in energy consumption in

many of the older plants adopting various energy conservation measures.

The Indian Cement Industry is mixture of mini and large in capacity cement

plants, ranging in unit capacity per kiln as low as 10tpd to as high asa 7500tpd. Majority

of the production of cement in the country (94%) is by large plants, which are defined as

a plant having a capacity of more than 600tpd. At present there are 124 large rotary kiln

plants in the country.

The ordinary Portland Cement (OPC) enjoys the major share (56%) of the total

cement production in India followed by Portland Pozzolana cement (PPC) and Portland

Slag Cement (PSC). A positive trend towards in the increased use of blended cement can

be seen with the share of blended cement increasing of 43%. There is reginol imbalance

in cement production India due to the limitations posed by raw material and fuel sources.

Most of the cement plants in India are located in proximity to the raw material sources,

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exploiting the natural resources to the full extent. The southern region is the most cement

rich region while other regions have almost same cement production capacity.

The Indian Cement industry is about 90 years old and its main sources of energy

are thermal and electrical energy. The thermal energy id generally obtained from cool,

and the electrical energy is obtained either from grid or captive power plants of the

individual manufacturing units.

Salient Feature of Indian Cement Industry

Indian Cement Industry is the second largest in the world with an installed capacity of

135 MTPS. It accounts for nearly 6% of the world production.

There are 124 large plants and around 365 mini plants. The industry presents a

mixed picture with many new plants that employ state-of-the-art dry process technology

and a few old wet process plants having wet process kilns.

Production from large plants (with capacity above l MTPA) accounts for 85% of

the total production.

The cement industry has achieved significant process in terms of reducing the

overall energy intensity.

Dry process plants that the weighted average thermal energy consumption was

734-kCal/kg clinker, and weighted average electrical energy consumption was 89 kWh

tone of cement. The best energy consumption is 692 kCAl/kg. Clinker and 66k Wh/ton of

cement.

Quantitative Details

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The energy intensity of the all the dry process plants (cost of energy as percentage of total

packed cement) varies from 29 to 61%. This is observed to vary with the vintage of the

plants the technology employed by the plants and they of cement produced.

Specific thermal and electrical energy consumption for the plants ranges between

692-879 Kcal/kg. Of clinker and 66-127 kWh/ton of cement produced (product mix)

respectively. The specific electrical energy also includes the energy consumed in

packing, plant utilities and plant lighting. The reasons for wide range in specific

consumption can be mainly attributed to the differing equipment configuring employed in

different sections of the plants by various by various cement plants. For example, plants

employing ball mills for grinding have reported higher specific electrical energy

consumption as compared to plants having vertical roller mills. In additional, other

factors like the plant capacity, its capacity utilization, vintage, product mix, process

control system, maintenance aspects, raw material characteristics and above all the

management’s attitude and operational practices of plant personnel are also important.

Besides, various external parameters like quality of coal, raw materials and power supply

have their own repercussions. A large number of plants have put in vertical roller mills

for raw meal section. The ball mills are still operating in the clinker grinding and coal

milling sections in some plants. Some of the newer plants have installed roller press and

vertical roller mills in the clinker grinding section as well

Comparison of energy performance of Indian cement industry with other

countries reveals that there exits scope for improving the energy performance of the

Indian Cement Industry. The best repaired (as per CMA data) energy performance figures

in the world re 65 kW/h/ton of cement and 650 kCal/kg of clinker whereas the best in

9
India is 69 kWh/ton of cement and 665 kCal/kg clinker.This clearly bring out fact that

although we have some of the best plants in the world in terms of energy performance,

there are many plants where there exists scope for reducing energy consumption.

CHAPTER-3

ZUARY CEMENT LTD

The Company

The Zuari cement was started in 1994 to operate the cement plant of Texaco ltd., under a

working arrangement. Subsequently Texmaco’s cement business was taken over by the

company in 1995. Today Zuari Cement’s manufacturing facility at yerraguntla in Andhra

Pradesh is one of the largest in South India.

In the year 2000 Zuari enters in to a joint venture with the italcementi group the

second largest cement produce in Europe and Zuari Ltd. Lived off of a separate company.

The Zuari Cement is strategically located at Yerraguntla. The plant location

existence of 6km from Yerraguntla. It is connected to the railway station on by a railway

track of 7km length and is having an exchange plant inside the factory. Plant is connected

to the nearest highway by 0.2km land private road.

Promoter of the company

This investment was initially made through a 50:50 joint venture with the KK Birla group

in Zuari Cement Ltd., but subsequently in May 2006. Italicement group acquired the full

central of the company.

Now Company is under joint venture having rated capacity of 17 Lakhs per

annum company for that diversified that production of the cement making EPC along

with OPC.

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Financial support

The required finances for the cement co., are provided by several financial institutions

like S.B.I BNP Paribas, Andhra Bank, Standard Charted Bank.

Technology adopted

The technology adopted in the plant is an open pre-blending stockpiles system for

limestone and clinker. This is a special feature compared to the conventional system of

storage which has its own weakness on the case of the failure of cranes.

Expansion of capacity

The expansion of clinker capacity at Yerraguntla by way of new line with a capacity of

5500 tons per day and new grinding unit at Chennai with a capacity of 0.8 million have

been finalized with an estimate capital outlay of MINR 6760. Major permits and

clearness requires for the projects have been obtained and the supply contract for main

equipment for Yerraguntla new line are finalized with M/s F.L.Smith Limited. M/s

Clauduis Peter Technologies, M/s Maag Gear AG and M/s Honeywell Automation India

Limited. For Chennai grinding unit main equipment are finalized with M/s

Walchandnagar Industries limited, including contracts for erection and commissioning.

On implementation of these projects the total capacity of the company will increase to 5

million tons.

Quality customer service

In an effort to reach out to customers better, Zuari cement had setup a technical cell

named Zuari home partner. This cell gives guidance in the field of building.

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 Technology, architecture, housing finance and economical usage of the high

quality cement.

Technology experts provide the assistance according to individual requirements.

So that customers get the best value for the investment they have made.

Development activities

The plant in Yerraguntla had adopted four near by villages as part of its program of

corporate social responsibility towards the local community. These villages are

Thumallapalli, Yalasapalli, Koduru and Peddanapadu, part of the Kadapa district of

Andhra Pradesh State. In particular, the planet intends to contribute to the improvement

of living standards of the people in the surrounding villages. The strategy focuses on

three basis areas: health and hygiene, education and sustainable livelihoods.

Italcementi group

Italcemanti Group, with a production capacity of approximately 70 million tons of

cement annually, is the fifth largest cement producer in the world with leadership in the

Mediterranean area. Italcementi, one of the 10 largest Italian industries companies is

included in S&P/MIB Index of Italian Stock Exchange.

The core business cement (over 65% of sales) is conbined with the production of

ready mixed concrete and aggregates, Italcementi Group, with 2006 annual sales

amounting to 5,854 million Euro and a net income of 651 million Euro, combines the

expertise, knows how and cultures of 19 countries. With over 22,850 employees, the

Group boasts, as at 31

12
 December 2006, an industrial network of 62 cement plants, 15 grinding centres, 3

terminials, 152 aggregate quarries and 588 concrete, batching units Italcement group in

India Italcement group made its debut in India in January 2001, through the partial

acquisition of the 2.1 MnT Yerragunta Cement plant, located in the southern part of

Andhra Pradesh State. The plant supplies material to south India that accounts for one

fourth of the entire population of the country. The plant is strategically located to cater to

the major markets of Banglore and Chennai.

In January 2002, Zuari cement took over another company, Sri Vishnu Cement

Limited (SVCL) whose 1.3 MnT plant is situated at Sitapuram, Andhra Pradesh State,

near the capital, Hyderabad, 3rd highest consumption center of the South.Until now,

Italcement group has invested around 200 million euro in India, the Group actually

counts on 3.4 MnT production capacity, with net sales of about 116 million euro in 2006.

Board of Directors

DIRECTORS Saroj Kumar Poddar, Chairman

Rodolfo Danielle (Alternate Mrs.

Regina Bouille)

Yves Rene Nanto (Alternate Giorgio

Bodo) Goran L.Seifert (Alternate

Philippe Marchat ) Maurizio

Caneppele, Managing Director V.

Raghunathan

EXECUTIVES Director – Marketing : Krishna

Srinivatava Sr. Vice President –

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 works : L. Srivastava Chief Finance

Officer : Gabreil Morin

COMPANY SECRETARY L.R. Neelakanta

BANKERS State Bank of India,BNP Paribas

Andhra Bank

CHAPTER -4

CONCEPT OF BACKGROUND
According to Genestenberg, “ Circulating capital means current assets of a company that

are changed in the ordinary course of business from to another, as for example, from cash

to inventories, inventories to receivables, receivables into cash.

CLASSIFICATION OR KINDS OF WORKING CAPITAL

Concept Time

Gross Permanent Temporary

Net
Working Working Working
Working
Capital Capital Capital
Capital

(a) On the basis of concept.

(b) On the basis of time.

Gross Working Capital

The gross working capital refers to the firms' investment in the total current assets of the

enterprise. The current assets are those assets with in the ordinary course of business can

converted into cash with in the short period of normally one accounting year.

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Net Working Capital

The net working capital can be defined into two ways the most common definition of

working capital is difference between current assets and current liabilities.

Net working capital can also be defined as that portion of firm's current assets.

Which are financed with long-term funds?

On the basis of concept, working capital is classified as gross working capital and net

working capital as discussed earlier. This classification is important from the point of

view of the financial manager. On the basis of time, working capital may be classified as:

1. Permanent or fixed working capital.

2. Temporary or variable working capital.

1. Permanent or fixed working capital.

Permanent or fixed working capital is the minimum amount which is required to ensure

effective utilization of fixed facilities and for maintaining the circulation of current

assets. There is always a minimum level of current assets which is continuously required

by the enterprise to carry out its normal business operations. For example, every firm has

to maintain a minimum level of raw materials, work-in-process, finished goods and cash

balance. This minimum level of current assets is called permanent or fixed working

capital.

2. Temporary or variable working capital.

Temporary or variable working capital is the amount of working capital which is required

to meet the seasonal demands and some special exigencies. Most of the enterprises have

to provide additional working capital to meet the seasonal and special needs. The capital

required to meet the seasonal needs of the enterprise is called seasonal working capital.

15
Special working capital is that part of working capital which is required to meet special

exigencies such as launching of extensive marketing campaigns for conducting research,

etc.

Importance or Advantages of Adequate Working Capital

Working capital is the life of blood and nerve canter of a business. Just as circulation of

blood is essential in the human body for maintaining life, working capital is very

essential to maintain the smooth running of a business. No business can run successfully

without an adequate amount of working capital. The main advantages of maintaining

adequate amount of working capital are as follows:

1. Solvency of the business. Adequate working capital helps in maintaining

solvency of the business by providing uninterrupted flow of production.

2. Good will. Sufficient working capital enables a business concern to make

prompt payments and hence helps in creating and maintaining goodwill.

3. Easy loans. A concern having adequate working capital, high solvency and

good credit standing can arrange loans from banks and others on easy and

favorable terms.

4. Cash discounts. Adequate working capital also enables a concern to avail

cash discounts on the purchase and hence it reduces costs.

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

supply of raw materials and continuous production.

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 6. Regular payment of salaries, wages and other day-to-day commitments.

A company which has ample working capital can make regular payment of

salaries, wages and other day-to-day commitments which raises the morale of

its employees, increases their efficiency, reduces wastages and costs and

enhances production and profits.

7. Exploitation of favorable market conditions. Only concerns with adequate

working capital can exploit favorable market conditions such as purchasing its

requirement in bulk when the prices are lower and by holding its inventories

for higher prices.

8. Ability to face crisis. Adequate working capital enables a concern to face

business crisis in emergencies such as depression because during such

periods, generally, there is much pressure on working capital.

9. Quick and regular return on investments. Every Investor wants a quick and

regular return on his investments. Sufficiency of working capital enables a

concern to pay quick and regular dividends to its investors as there may not be

much pressure to plough back profits. This gains the confidence of its

investors and creates a favorable market to raise additional funds in the future.

10. High morale. Adequacy of working capital creates an environment of

security, confidence, high morale and creates overall efficiency in a business.

Excess or Inadequate Working Captial

Every business concern should have adequate working capital to run its business

operations. It should have neither redundant or excess working capital nor inadequate nor

shortage of working capital. Both excess as well as short working capital positions are

17
bad for any business. However, out of the two, it is the inadequacy of working capital

which is more dangerous from the point of view of the firm.

Disadvantages of Redundant or Excessive Working Capital

1. Excessive Working Capital means idle funds which earn no profits for the

business and hence the business cannot earn a proper rate of return on its

investments.

2. When there is a redundant working capital, it may lead to unnecessary

purchasing and accumulation of inventories causing more chances of theft,

waste and losses.

3. Excessive working capital implies excessive debtors and defective credit

policy which may cause higher incidence of bad debts.

4. It may result into overall inefficiency in the organization.

5. When there is excessive working capital, relations with banks and other

financial institutions may not be maintained.

6. Due to low rate of return on investments, the value of shares may also fall.

7. The redundant working capital gives rise to speculative transactions.

Disadvantages or Dangers of Inadequate Working Capital

1. A concern which has inadequate working capital cannot pay its short-term

liabilities in time. Thus, it will lose its reputation and shall not be able to get

good credit facilities.

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 2. It cannot buy its requirements in bulk and cannot avail of discounts, etc.

3. It becomes difficult for the firm to exploit favorable market conditions and

undertake profitable projects due to lack of working capital.

4. The firm cannot pay day-to-day expenses of its operations and it creates

inefficiencies, increases costs and reduces the profits of the business.

5. It becomes impossible to utilize efficiency the fixed assets due to non-

availability of liquid funds.

6. The rate of return on investments also falls with the shortage of working

capital.

The Need or Objects of Working Capital

The needs for working capital cannot be over emphasized. Every business needs some

amount of working capital. The needs for working capital arises due to the time gap

between productions and realization of cash from sales. There is an operating cycle

involved in the sales and realization of cash. There are time gaps in purchase of raw

materials and production; production and sales; and sales and realization of cash. Thus

working capital is needed for the following purpose:

1. For the purchase of raw materials, components and spares.

2. To pay wages and salaries.

3. To incur day- to-day expenses and overhead costs such as fuel, power and

office expenses, etc.

4. To meet the selling costs as packing, advertising, etc.

5. To provide credit facilities to the customers.

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 6. To maintain the inventories of raw material, work-in-progress, stores and

spares and finished stock.

Factors Determining The Working Captial Requirements

The working capital requirements of a concern depend upon a large number of factors

such as

1. Nature or Character of Business. The working capital requirements of a firm

basically depend upon the nature of its business. Public utility undertakings like

Electricity, Water Supply and Railways need very limited working capital because

they offer cash sales only and supply services, not products, and as such no funds are

tied up in inventories and receivables. On the other hand trading and financial firms

require less investments in fixed assets but have to invest large amounts in current

assets like inventories, receivables and cash; as such they need large amount of

working capital.

2. Size of Business/Scale of Operations. The working capital requirements of a

concern are directly influenced by the size of its business which may be measured in

terms of scale of operations. Greater the size of a business unit, generally larger will

be the requirements of working capital. However, in some cases even a smaller

20
 concern may need more working capital due to high overhead charges, inefficient use

of available resources and other economic disadvantages of small size.

3. Production Policy. In certain industries the demand is subject to wide fluctuations

due to seasonal variations. The requirements of working capital, in such cases,

depend upon the production policy. The production could be kept either steady by

accumulating inventories during slack periods with a view to meet high demand

during the peak season or the production could be curtailed during the slack season

and increased during the peak season. If the policy is to keep production steady by

accumulating inventories it will require higher working capital.

4. Manufacturing Process/Length of Production Cycle. In manufacturing business,

the requirements of working capital increase in direct proportion to length of

manufacturing process. Longer the process period of manufacture, larger is the

amount of working capital required. The longer the manufacturing time, the raw

materials and other supplies have to be carried for a longer period in the process with

progressive increment of labour and service costs before the finished product is

finally obtained.

5. Seasonal Variations. In certain industries raw materials is not available throughout

the year. They have to buy raw materials in bulk during the season to ensure an

uninterrupted flow and process them during the entire year. A huge amount is, thus,

blocked in the form of material inventories during such season, which gives rise to

more working capital requirements. Generally, during the busy season, a firm requires

larger working capital than in the slack season.

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6. Working Capital Cycle. In a manufacturing concern, the working capital cycle

starts with the purchase of raw material and ends with the realization of cash from the

sale of finished products. The cycle involves purchase of raw materials and stores, its

conversion into stocks of finished goods through work-in-progress with progressive

increment of labour and services costs, conversion of finished stock into sales,

debtors and receivables and ultimately realization of cash and this cycle continues

again from cash to purchase of raw material and so on

The speed with which the working capital completes one cycle determines the

requirements of working capital-longer the period of the cycle larger are the requirement

of working capital.

Principles Of Working Capital Management/Policy

The following are the general principal of a sound working capital management policy:

1. Principle of Risk Variation. Risk here refers to the inability of a firm to meet

its obligations as and when they become due for payment. Larger investment

in current assets with less dependence on short-term borrowings increases

liquidity, reduces dependence on short-term borrowing increases liquidity,

reduces risk and thereby decreases the opportunity for gain or loss. On the

other hand less investment in current assets with greater dependence on short-

term borrowing increases risk, reduces liquidity and increases profitability. In

other words, there is a definite inverse relationship between the degree of risk

and profitability. A conservative management prefers to minimize risk by

22
 maintaining a higher level of current assets or working capital while a liberal

management should be establish a suitable trade off between profitability and

risk. The various working capital policies indicating the relationship between

current assets and sales are depicted below:

2. Principle of Cost of Capital. The various sources of raising working capital

finance have different cost of capital and the degree of risk involved.

Generally, higher the risk lower is the cost and lower the risk higher is the

cost. A sound working capital management should always try to achieve a

proper balance between these two.

3. Principle of Equity Position. This principle is concerned with planning the

total investment in current assets. According to this principle, the amount of

working capital invested in each component should be adequately justified by

a firm’s equity position. Every rupee invested in the current assets should

contribute to the net worth of the firm. The level of current assets may be

measured with the help of two ratios: (i) current assets as a percentage of total

assets and current assets as a percentage of total sales. While deciding about

the composition of current assets, the financial manager consider the relevant

industrial averages.

4. Principle of Maturity of payment. This principle is concerned with planning

the sources of finance foe working capital. According to this principle, a firm

23
 Should make every effort to relate maturities of payment to its flow of

internally generated funds. Maturity pattern of various current obligations is

an important factor in risk assumptions and risk assessments. Generally,

shorter the maturity schedule of current liabilities in relation to expected cash

inflows, the greater the inability to meet its obligations in time.

Estimated Working Capital Requirement:

“Working capital is the life-blood and controlling nerve centre of business.” No

business can be successfully run without an adequate amount of working capital. To

avoid the shortage of working capital at once, an estimate of working capital

requirements should be made in advance so that arrangements can be made to procure

adequate working capital. But estimation of working capital requirements is not an easy

task and a large number of factors have to be considered before starting this exercise.

Components of Current Assets:

(i) Cash (in hand, in bank, and in transit)

(ii) Investments (short-term only, and not long-term)

(iii) Inventories (raw materials and consumable stores and spares,

work-in-process, and finished goods)

(iv) Sundry Debtors (also known Bills Receivable and Accounts

Receivable)

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 (v) Loans and advances (granted by the Company)

Components of Current Liabilities

(i) Sundry Creditors (also known as Bills Payable and Accounts

Payable)

(ii) Trade Advances (given to the company for supply of goods)

(iii) Short-term Borrowings from Banks and Others

(iv) Provisions (for taxes, bad debts, exchange rate fluctuations, etc.)

Better business sense, however, calls for keeping the currents assets at the

minimal level, whereby minimum sources of funds, (both current and non-current

Liabilities), may be required to finance them, and thereby, the “inventory carrying

Costs”, and the “interests outgo” may as well be kept at the minimal level

Why Working Capital Management

Effective management and control of the various components of working capital has been

rated as one of the most important and vital functions of financial management in any of

the industrial and business units, based on varied parameters, discussed hereunder:

A. Flexibility

Working capital Management is highly flexible in nature, so much so that it can very

easily be adapted to suit even extreme conditions, like rising and falling demands in peak

and off seasons, buoyant and sluggish economic and market conditions, etc. Further, if

some inappropriate policy or procedure is detected at a later stage, remedial and right

steps can be adopted henceforth, any time. This, however, is not the position in the case

of project management.

25
 B. Level of investments in various components of current assets

Investments in current assets constitute a very substantial percentage (Usually more

than 50%) of the total investments in most of the Indian companies and firms.

C. Criticality

The under mentioned fact itself can bring home the extent of crucially and Criticality

of Working Capital Management.

One of the components of the Working Capital can make such a dramatic difference,

the importance of meticulous management of all the components of the Working Capital

(viz. Current Assets, Current Liabilities and even a portion of the deferred liabilities) can

very well be imagined and appreciated.

D. Quantum of efforts and time

Empirical study and observations have revealed that a major portion of the time of the

Finance Managers, in most of the companies, is devoted (and rightly so) towards the

management of the various components of the working capital, with a view to

maximizing their profitability, and the prospects and prosperity therewith.

Ratio Analysis

Ratio analysis is defined as the systematic use of ratio to interpret the financial statements

so that the strengths weakness of a firm as well as its historical performance and current

financial condition can be determined.

A single ratio itself does not indicate favorable or unfavorable condition. It should

be compared with some standard. Standards of comparison may consist of

1. Ratios calculated from the past financial statements of the same firm.

26
 2. Ratios developed using the projected or Performa financial statement of the same

firm.

3. Ratios of some selected firms, especially the most progressive and successful. At

the same point of time.

4. Ratios of the industry to which the firm belongs.

Stages for Ratio Analysis:

The following procedure is generally followed, while analyzing the financial statements

through ratio-analysis

A) Arrangement of data

B) Classification of ratios

C) Interpretation of Calculated ratios

D) Projections through ratios

Advantage or Importance of Ratio Analysis:

1. The Ability of corporation to meet its current obligations i.e., liquidity position.

2. Ratio analysis provides data for inter firm comparison. Ratios highlights the

factors associated with successful & unsuccessful firms corporations.

27
 3. The efficiency of .the corporation is. utilizing its various assets in generating

sales revenue.

4. The extent to which the firms has used its ling-term solvency for borrowing funds.

5. The overall operating efficiency & performance of the corporation.

Limitations to Ratio Analysis:

1. Standards for Comparison:

Ratios of a company have meaning only when they are compared with some standards

and it is always a challenging job to find and adequate standard.

2. Company difference:

Situation of two companies are never same: Similarly the factors influencing the

performance of a company in one year may change in another year. Thus, the comparison

of the ratios of two companies becomes difficult and meaningless when they are

operating in different situations.

3. Price level change:

The inter presentation and comparison of ratios are also rendered invalid by the changing

value of money. A change in the price level can seriously affect the validity of

comparisons of ratios computed for different time periods.

4. Standards for Comparison:

Ratios of a company have meaning only when they are compared with some standards

and it is always a challenging job to find and adequate standard.

28
5. Different definitions of variables:

Comparisons are also made difficult due to difference in definitions. The terms like gross

profit. Operating profit.net profit etc. has not got precise definitions and there is a

conferrable diversity in practice as to how they should be measured.

6. Changing Situations:

A balance sheet may fait to reflect the average or typical situation as it is prepared as of

one moment of time. It ignores short-term fluctuations in assets and equities that may

occur with in the period covered by the two balance sheet dates.

7. Differences in accounting methods:

Various differences are found among the accounting methods used by different

companies. Which variously affect the comparability of financial statements. Methods

of recording and valuing assets. Write-offs. Costs. Expenses etc differ from

company to company.

Types of Ratios:

Ratios can be grouped into various classes according to financial activity or function to

be evaluated. The parties interested in financial analysis are short & long term creditor.

Owners & management. Short-term creditor’s main interest is in the liquidity positions or

the short-term solvency of the firm. Long-term creditors on the other hand are more

interested in the long term solvency and profitability of the firm. Management is

interested in evaluating every aspect of the firm’s performance. They have to protect the

29
interest of all parties and see that the firm grows profitability. In view of the requirement

of the various users of ratios, the ratios are classified into four important categories. .

A. Liquidity ratios

B. Leverage ratios

C. Activity ratios / Turn over ratio

D. Profitability ratio.

In that working capital related ratios are

• Working capital turnover ratio

• Debtors turnover ratio

• Creditors turnover ratio

• Finished goods turnover ratio

• Inventory turnover ratio

• Current ratio

• Quick ratio

• Debt ratio

• Debt equity ratio

• Net working capital ratio

• Cash ratio

30
 CHAPTER-5
Research Methodologies

SOURCES OF DATA

Secondary data

Secondary data is collected from the annual reports of zuari cement limited during for the

last five years. And various other reports like company’s magazines journals published

books and journals and web sites.

Tools for data collection:

Secondary Data:
• An company annual reports
• Reference books
• Journals
• Websites

31
 CHAPTER- 6
6.1 Data analysis and interpretation
Table 6.11

Statement of Working Capital of 31-3-2004 & 31-12-2005 (Rs.in lakhs)

increase or decrease in
Particulars 31-3-2004 31-3-2005
working capital
increase Decrease
Current assets
Inventories 3036 2693 - 343
Sundry debtors 3134 1838 - 1696
Cash & bank 4164 1371 - 2793
Loans & advances 3744 1983 - 1763
Total current assets 14478 7885 - -
Current liabilities
Liabilities 3448 3557 - 109
Provisions 35 36 - 1

32
Total current liabilities 3483 3593 - -
NET Working capital 10996 4291 - -
DECREASE IN Working
capital 6485 6485

10996 10996 6485 6485

Inference: From the above table in the year 2005 the total assets are decreased by

Rs.6595and the total liabilities are increased by Rs.110. Hence the working capital

decreased by Rs.6485

Table 6.12

Statement of Working Capital of 31-3-2005 & 31-12-2006 (Rs.in lakhs)

increase or decrease in
PARTICULORS 31-3-2005 31-3-2006 working capital
INCREASE DECREASE
Current assets
Inventories 2693 2281 - 412
Sundry debtors 1838 3109 1271 -
Cash & bank 1371 1716 345 -
Loans & advances 1983 1771 - 212
Total current assets 7885 8877
Current liabilities
Liabilities 3557 3827 - 270
Provisions 36 50 - 14
Total current liabilities
3593 3877 - -

NET Working capital

4292 5000 - -

33
 Increase in working capital 708 708

5000 5000 1616 1616

Inference: This statement shows that working capital is increased when compare to

the year 2005 of rs.708. The total debtors and cash and bank balances are increased

respectively rs.1271, rs.345

Table 6.13

Statement of Working Capital of 31-3-2006 & 31-12-2007(Rs.in lakhs)

CHANGES IN WC
PARTICULORS 31-3-2006 31-3-2007
INCREASE DECREASE
Current assets

Inventories
2281 2503 222 -
Sundry debtors 3109 2467 - 642
Cash & bank 1716 1290 - 426
Loans & advances
1771 1960 135 -
Total current assets 8877 8767 - -
Current liabilities

Liabilities 3827 3381 446 -

Provisions
50 127 - 77
Total current liabilities
3877 3509 - -

NET Working capital 5000 4658 - -

34
DECREASE IN W.C - 342 342 -

5000 5000 1145 1145

Inference: This table shows that working capital is again decreased by Rs342 when

compare to the year 2006 the cash and bank balances and sundry debtors are decreased

respectively by rs.642.rs.426.

Table 6.14

Statement of Working Capital of 31-3-2007 & 31-3-2008 (Rs.in lakhs)

INCREASE OR DECREASE IN
PARTICULORS 31-3-2007 31-3-2008 WORKING CAPITAL
INCREASE DECREASE
Current assets

Inventories 2503 3114 611 -

Sundry debtors 2467 943 - 1524
Cash & bank 1290 1383 93 -
Loans & advances
1906 5284 3378 -
Total current assets 8166 10724 - -
Current liabilities

Liabilities
3381 3758 - 377
Provisions 127 163 - 36
Total current liabilities
3508 3921 - -

NET Working capital 4658 6802 - -

INCREASE IN W.C
2145 - - 2145

6803 6803 4082 4082

35
Inference: This table shows that the working capital is increased byrs.2145 when
compare to the year 2007. And the loans and advances are increased by rs.3378.

Table 6.15
Statement of Working Capital of 31-3-2008 & 31-3-2009 (in lakhs)Rs.
INCREASE OR DECREASE IN
PARTICULORS 31-3-2008 31-3-2009 WORKING CAPITAL
INCREASE DECREASE
Current assets

Inventories 3115 2889 - 226

Sundry debtors 943 886 - 57
Cash & bank 1383 1576 193 -
Loans & advances 5284 3095 - 2189
Total current assets 10724 8446 - -
Current liabilities
Liabilities 3758 5062 - 1304
Provisions 163 326 - 163
Total current liabilities
3921 5388 - -

NET Working capital 6803 3058 - -

DECREASE IN W.C
- 3745 3745 -

6803 6803 3938 3938

36
Inference: In this above statement the total assets are decreased by Rs.2278 and current

liabilities are increased by Rs.1467. Hence the working capital is decreased by Rs.3745.

Table 6.16
Working Capital Changes

Year Increase/Decrease in

working capita(Rs.in lakhs)l

2004-05 6705

2005-06 708

2006-07 -342

2007-08 2145

2008-09 -1298

37
 Changes in working capital
8000 6705
6000

4000
2145
2000 708
0
-342
-2000 -1298
2004-05 2005-06 2006-07 2007-08 2008-09

years

INFERENCE: The data in the above table shows that there is a mixed trend changes in

working capital. That is both positive and negative changes. However, there is an

increase and decrease in changes of working capital, but the working capital trend shows

a positive trend.

6.2 Data Analysis for Ratios

Current Ratio

Current ratio may be defined as the relationship between current assets and current

liabilities. This ratio also known as working capital ratio current assets include cash and

these assets which can be converted in to cash with in a one year such as cash & bank,

marketable securities, debtors, inventories, prepaid expenses include the represent the

payments that will be made in future obligation like creditors, bills payable etc.

Generally current ratio is a measure of firms short-term solvency 2:1 is considered

to be ideal for the concern. It indicates the availability of current assets in rupees for

every on rupee of current liabilities worth of two rupee Current assets.

38
 Current assets

Current ratio = -------------------------------

Current liabilities

Table 6.21

CURRENT CURRENT
YEAR RATIO
ASSETS LIABILITIES
2004-2005 7885 3593 2.19
2005-2006 8879 3877 2.29
2006-2007 8167 3509 2.33
2007-2008 10726 3823 2.81
2008-2009 9427 5388 1.75

current ratio
2.81
3 2.29 2.33
2.19
1.75
2
ratio

2004-2005 2005-2006 2006-2007 2007-2008 2008-2009

years

39
 INFERENCE:

From the above table the current ratio is satisfactory because as conversional rule

current ratio is 2:1.except31-3-2009 in all years cash ratio is above 2:1but in that year

only it has 1.6:1 ratio.

Quick Ratio

This is the ratio of quick assets to current liabilities. It shows a firms ability to meet

current liabilities. The assets is liquid if it can be converted in to cash immediately like

cash or band & short investments & bills receivable. Generally 1:1 ratio is considered

ideal ratio for a concern because it is wise to keep the liquid assets at least equal to the

liquid liabilities at all times.

QUICK RATIO = QUICK ASSETS / CURRENT LIABILITIES

Table 6.22

Year Quick Assets Current liabilities Ratio

2004-2005 5192 3593 1.45

2005-2006 6597 3877 1.70

40
2006-2007 5664 3509 1.61

2007-2008 7611 3823 1.99

2008-2009 6538 5388 1.21

.

Quick ratio

2.5
1.99
2 1.7 1.61
1.45
1.5 1.21
ratio

1
0.5
0

2004-2005 2005-2006 2006-2007 2007-2008 2008-2009

years

41
Inference: From the above table the quick assets ratio position is satisfactory. Normally

the quick assets ratio is 1:1.in all above years it is more than 1:1 (1.4, 1.7, 1.6, 1.9,1.03).

Working Capital Turn Over Ratio

This ratio measures the relationship between working capital and sales. The ratio shows

the number of times the working capital results. In sales working capital as usual is the

excess of current assets over the current liabilities.

Working capital turn over ratio = sales/net working capital

Comment: Higher the ratio creates the greater the profit. A low working capital turn

over indicates that working capital is not efficiently utilized.

Table 6.23

NET WORKING
YEAR SALES RATIO
CAPITAL
2004-2005 31590 4292 7.4

2005-2006 35851 5002 7.2

2006-2007 39889 4658 8.6

42
 2007-2008 47306 6803 7.0

2008-2009 50309 4058 12.3

Working capital turnover ratio

15 12.3

10 8.6
7.4 7.2 7
Ratio

0
2004-2005 2005-2006 2006-2007 2007-2008 2008-2009

Years

INFERENCE: From the above table we can analyze that in the year 2007-2008 it will

be decreased to 7.0 and in the year 2008-2009 it will be higher that 12.3 remaining all

years it will be increasing in position.

43
 CHAPTER- 7
Findings, Conclusion & Recommendations
Findings

• The current ratio in 2004-05 is 2.19 gradually it is increase year by year, in 2008-

09 it is decreased by 1.75 compare to previous year (2.81).

• Quick ratio position is satisfactory because in all 5 years it is more than the

standard ratio1:1

• The working capital turnover ratio in 2004-05 is 7.4 it is gradually increasing

upto2008-09 i.e, 12.3.

Recommendations

• The working capital ratio shows excess value. so, the excess amount can be

invested in marketable securities.

• Quick ratio position is satisfactory so to maintain the same level in future also.

• Working capital turnover ratio is gradually increases. It is suggested to maintain

the future

Conclusion

44
The study described the working capital of the company . It having more than the

standard value of current ratio and quick ratio.hence the liquidity position of the company

is good. The turnover position of the company is all so good.

Finally the overall working capital position is good

BIBLIOGRAPHY

Pandey .I.M., Fincial management, 9th edition,

Vikas Publishing (Pvt) Ltd., New Delhi.

M.Y.Khan & P.K. Jain Financial management text, problems & cases,

4th edition TATA MC grawhill Publishing comp. Ltd.,

New Delhi.

Prassanna Chandra Investment Analysis & Portfolio Management

TATA MC Grawhill Publishing comp. Ltd.,

New Delhi.

Srivastava. R.M. Financial Management and Policy,

3rd edition, Himalaya Publishing House.

45
46