Working Capital Management Of Iceberg Foods



WORKING CAPITAL MANAGEMENT OF ICEBERG FOODS

'
TABLE OF CONTENTS

TABLE OF CONTENTS 3
EXECUTIVE SUMMARY 4
Chapter 1: INTRODUCTION 7
1.1 Packaged Drinking Water Industry 8
1.2 Soft Drink Industry 9
1.3 Objective 12
Chapter 2: RESEARCH METHODOLOGY 14
2.1 Limitations 15
2.2 Key Formulas 15
Chapter 3: DATA INTERPRETATION AND ANALYSIS 17
3.1 Cash Flow Statements 17
3.2 Working Capital 19
3.2.1 Constituents of Working Capital 19
3.3 WCM 20
3.3.1 Significance of Working Capital 20
3.3.2 Types of Working Capital 21
3.3.1 Different approaches of working capital 23
3.3.2 Determinants of working capital 23
3.4 Working Capital Level 25
3.4.1 Working capital trend analysis 26
3.7 Current Assets 28
3.7.1 Composition of Current Assets 29
3.8 Current Liabilities 30
3.9 Operating Cycle 31
3.10.1 Role of ratio analysis 34
3.10.2 Limitations of ratio analysis 34
3.11 Classification of Working Capital Ratio 35
3.11.1 Efficiency ratios 35
3.11.2 Liquidity Ratios 38
3.11.3 Other Ratios 40
Chapter 4: CONCLUSION 47
Chapter5: 49
FINDINGS AND RECOMMENDATIONS 49
REFERENCES 52

EXECUTIVE SUMMARY

The project is based on study of Working Capital Management of Iceberg Foods Ltd. For this study, Annual Reports of last five years have been taken into consideration. Since current financial year balance sheet (2011-12) was not prepared during my internship duration so that period has not been covered. Also, balance sheets is always on consolidated basis and does not contain all the minor details, so some information has been retrieved via interviews with different employees of the organization. The information provided by them is assumed to be true because of their experience in their respective fields.
According to me, no work is complete without the basic understanding of the working of organization. Working of organization includes manufacturing of products that company deals in. Therefore, my project comprises flow chart of various processes of the plant (Manufacturing of Bottles, Packaged Drinking Water and Carbonated Soft Drinks). The project also includes corporate philosophy and profile of the company and profile of Soft drink industry in general.
In order to study about the company, Vertical common-sized Balance Sheet and Profit & Loss Account statement of last five years have been prepared. Apart from that, Working Capital trend analysis has been done with the help of charts and graphs and Cash Flow statement of last two years is also been prepared.
Optimum levels of Current assets and Current liabilities have been studied with the help of indices, composition and various graphs and analysis have been done for both.
The strength and weakness of the company has been analyzed with the help of efficiency ratios, liquidity ratios and many other ratios. Every ratio is followed by graph or chart which indicates visual picture about working of organization. Apart from that operating cycle of the company has also been prepared for the last five years which indicates how frequently raw materials are converted into sales.
The project ends with conclusion that is obtained from the study of Working Capital Management of the company. It is further followed by recommendations which include suggestions for the company. These suggestions can be implemented by the company which may result in more profits and better working of the organization. It can also help in improving goodwill of the company and hence, can create a competitive position in the market.





'
Chapter 1: INTRODUCTION

Cash is the lifeline of a company. If this lifeline deteriorates, so does the company's ability to fund operations, reinvest and meet capital requirements and payments. Understanding a company cash flow health is essential in making investment decisions. A good way to judge a company's cash flow is to look at its Working Capital Management (WCM).
Working Capital refers to the cash a business requires for day-to-day operations, or, more specifically, for financing the conversion of raw materials into finished goods, which the company sells for payment. Among the most important items of working capital are levels of inventory, accounts receivable and accounts payable. Analysts look at these items for signs of a company's efficiency and financial strength.
'Working Capital, also called net current assets, the excess of current assets over current liabilities. The efficient management of working capital is important from the point of view of both liquidity and profitability. Poor management of working capital means that funds are unnecessarily tied up in idle assets hence reducing liquidity and also reducing the ability to invest in productive assets such as plant and machinery, so affecting the profitability'.
The better a company manages its working capital, the less the company needs to borrow. Even companies with cash surpluses need to manage working capital to ensure that those surpluses are invested in ways that will generate suitable returns for investors.
WCM may be defined as the management of firm's sources and uses of working capital in order to maximize the wealth of the shareholders. The proper working capital management requires both the medium term planning and the immediate adaptations to changes arising due to fluctuations in operating levels of the firms.
The importance of WCM is reflected in the fact that financial managers spend a great deal of time in managing current assets and current liabilities. These include arranging short term financing, negotiating favorable credit terms, controlling the movement of cash, administering accounts receivables and investing short-term surplus funds.
A firm must maintain a sound working capital position and there must be enough investments. The management of current assets deals with the determination, maintenance, control and monitoring level of all the individual current assets. Current assets have short life span and are swiftly converted into other asset forms. The existence and necessity of current assets is implied for the efficient and optimal use of the fixed assets. Companies need to prepare the operating plans in order to finance the funds to manage their day-to-day operation.

1.1 Packaged Drinking Water Industry

Indian scenario
One cannot think about life without water. We are blessed with adequate natural resources of water but increasing population, alarming rate of global warming and rapid industrialization and lack of adequate and improved management of the water supply systems resulted in the increased rate of water consumption, wastage of water and deteriorating condition of the water supply networks and the result is, scarcity of water. The Water shortage around the world and particularly in the developing countries has opened new doors for bottled water Industry.
PAST
In 1967, Bisleri set up a plant for manufacturing and marketing its mineral water but that time the concept of mineral water was failed. Parle group acquired the Bisleri of Italy for launching soda water but later launched bottled water also. The launch at that time was a big flop as Indian public did not accept it. The market remained dormant for period of another 20 years or so. The market throughout this period was formed only by the premium products that too available through 5 star hotels.
In early 1990's with onset of liberalization policy by the Indian government, coming in of cola majors, sell out of local soft drink brands of Campa, Thumps up, Gold spot etc by pane to coke and other factors led Bisleri to test waters again. Bisleri re-launched its bottled water in 1994. With exposure of media and exposure to international life styles, deteriorating levels of portable water, increases in a number of water borne classes, increases in awareness about health and hygiene led to acceptability of concept of mineral water.
PRESENT
Comparing the growth and status of Indian Bottled Industry with that of Western or Asian market, we are far behind in terms of quantum, infrastructure, professionalism & standards' implementation. The per capita consumption of mineral water in India is a mere 0.5-liter compared to 111 liter in Europe and 45-liter in USA. Also, as per UN study conducted in 122 countries, in connection with water quality, India's number was dismal 120. In comparison to global standards India's bottled water segment is largely unregulated. Safe water is rated with a different yardstick in different countries. In India, the aspect has been overlooked since long. Indian consumers tend to believe that any bottled water is safe water while this may not be true.
This shows that we are not up to the mark but there are positive aspects also. Industry data shows that the Indian bottled water industry is one of the most booming sectors in India.
There are more than 200 bottled water brands in India and among them nearly 80 per cent are local brands. Industry is dominated by the big players like - Parle Bisleri, Coca-Cola, PepsiCo, Parle Agro, Nestle, Mount Everest, Kingfisher, Manikchand and so on.
Sales of bottled water grew from $189 million (USD) in 2003 to $599 million in 2008 -- a growth rate of 216 percent and it is expected that this figure will be doubled in the next five years. This growth rate makes Indian Bottled water market as one the fastest growing in the world. In terms of value, Indian Bottled water segment is estimated currently at Rs 3000crore per annum and expected to double within next 7 years.
FUTURE
High growth rate is expected to continue in future also. The factors that will contribute to high growth rate are sound economy, disposable income of the people, poor public water distribution system and infrastructure and the Indian government hardly cares for what happens to the nation's water resources. However like each industry faces challenges the Indian bottled water industry will also have bottlenecks like poor transportation infrastructure, low entry barriers, difficulties in brand recognition and sometimes threats from the environment protectors and social activist against the use of bottled water. Since huge growth rate is expected many new players will enter in the market which will result in tough competition in this industry

1.2 Soft Drink Industry

PAST

1970's and early 80's ' The entry and exit of Coke
India has proved to be perhaps the toughest battle ground for the Cola giants. Coca-Cola was the 1st international soft drinks brand to enter India in early 1970's. Indian market was dominated by domestic brands, with Limca being the largest selling brand. Cola was the largest selling flavor with market share of 40%, Lemon drinks 31% and orange drinks only 19%.
Up till 1977, Coca-cola was the leading soft drink brand in India. But due to norms set by the Foreign Exchange Regulation Act (FERA), Coca-Cola left India and did not return till 1993.
In 1980, Parle, another major Indian player launched ThumsUp, the drink which till date is most popular soft-drink in India. Pure Drinks strongly objected to ThumsUp being called a 'soft' drink as it felt its taste is too strong. For over a decade, Parle led the Indian soft-drinks market, with its market share reaching a peak of 70% in1990.
Late 80's and early 90's' Pepsi's struggle to enter India
Pepsi saw the exit of Coke as a God send opportunity to capture then estimated 900 crore market of India. India was then a highly regulated market with International trade constituting only 6% of GDP in 1985. Foreign trade was subject to import tariffs, export tariffs and quantitative restrictions. Foreign direct investment (FDI) was restricted by barriers like upper limit equity participation, restrictions on technology transfer, export obligations and government approvals. Any foreign investment had a lot of political sensitivity to it. By the time PepsiCo began its negotiations, the upper cap for equity holding in Indian companies was 40%. PepsiCo realized it'll have to be creative to enter the Indian markets.
Attempt 1: In May 1985, PepsiCo joined hands with the RPG group to form Agro Product Export Limited. It planned to import Cola concentrate and sell soft-drinks under the Pepsi label and in return offered to export Juice Concentrate from Punjab. The government rejected the proposal due to its using a foreign name and importing the concentrate.
Attempt 2: Pepsi decided to play the Punjab Card by promising to invest $15 million in Punjab, establish an Agro Research centre (costing Rs 1.55 crores), a potato and grain based processing unit (costing Rs 8 crores) and a fruit and vegetable processing unit (costing Rs 5 crores). Benefits and proposal included better market for rice, wheat and fruits in Punjab, creation of 25000 jobs in Punjab and 25000 more in other areas. In 1988, government agreed. PepsiCo entered as Lehar Pepsi and by 1991, it was clear that most of its promises were just on paper.
Re-entry of Coca-Cola in 1993
On the 26th of October 1993, Coca-Cola re-entered the Indian market having acquired some of the leading Indian soft drink brands from Parle, namely Thums-Up, Maaza, Limca, Goldspot & Citra. These brands joined Coke's portfolio of international brands i.e. Coca-Cola, Sprite, Fanta, Schweppes as Coca-Cola India took control of the top soft drink brands in India from the very beginning. From 1993 to 2003, company invested US $ 1 billion in India.
PRESENT
The 60-bn-rupee soft drink industry is growing now at around 5% annually. In India, Coke and Pepsi have a combined market share of around 95% directly or through franchisees. The rest is divided among local players. Industry watchers say, fake products also account for a good share of the balance.
There are about 120 soft drink producing units (60% being owned by Indian bottlers) in the country, employing about 164,000 people. There are two distinct segments of the market, cola and non-cola drinks. The cola segment claims a share of 62%, while the non-cola segment includes soda, clear lime, cloudy lime and drinks with orange and mango flavors.
The industry contributes estimated Rs 15 bn to the exchequer and exports goods worth Rs 2 bn. Soft and aerated drinks were considered products for the middle class and the affluent. That segregation or thesis is no more valid. Soft and aerated drinks are consumed by all except those who cannot afford to buy any drink. An NCAER (National Council of Applied Economic Research) study says that 91% of soft drink sales are made to the middle class - lower, middle and upper middle segments.
The soft drink industry has been urging the government to categorize aerated waters (soft drinks) equitably with other consumer products of mass consumption and remove the special excise duty.
The industry estimates that the beverage market should grow at twice the rate of GDP growth. The Indian market for the products should have, therefore, grown by at least 12%. However, it has been growing at a rate of about 5%. In contrast, the Chinese market expanded by more than double the Indian rate, while the Russian market expanded at about four times the rate of growth of the Indian market.
About 85% of the soft drinks are currently sold in returnable bottles. There was a floating stock of about 1000 mn bottles valued at Rs 6 bn. If the industry were to abide by the new guidelines, it would have to invest in new bottles, resulting in a cost outgo of Rs 5 bn. Neither Coke nor Pepsi is in a position to invest such a large amount. Of the total market, PET bottle segment is approximately 12%.

FUTURE
Amidst various allegations and controversies, the soft drinks industry in India, supported by its booming economy, strengthening middle class and low per capita consumption, is growing at a cruising pace. The focus has shifted from carbonated drinks to Fruit drinks, with both the companies launching Lemon drinks in 2011-12. In the next few years, the fruit juice category is likely to carry the growth flag forward as consumers become more health conscious. The companies are likely to take more steps to deal with environment sustainability. But the Cola wars are here to stay. Many new players will enter in the market which will result in tough competition in the soft industry.

1.3 Objective

1) To study the 'Working Capital Management' of 'Iceberg Foods Ltd (IFL)' and exploring its potential in the company.
2) To prepare cash flow statement and analyze it.
3) To study the optimum level of Current Assets and Current Liabilities of the company.
4) To study Working Capital components such as receivables accounts, cash management, inventory position etc.
5) To study the liquidity position through various Working Capital related ratios.
6) To study operating cycle of Iceberg Foods Ltd (IFL).
7) To provide recommendations to the company to improve its Working Capital Management.

'
Chapter 2: RESEARCH METHODOLOGY

It is a way to systematically solve a research problem. These are generally adopted by a researcher in studying his problem along with the logic behind them. It is important for research to know not only the research method but also know methodology. 'The procedures by which researcher go about their work of describing, explaining and predicting phenomenon are called methodology.' Methods comprise the procedures used for generating, collecting and evaluating data. Therefore, it is necessary for the researcher to design his methodology for his problem. Data collection is an important step in any project and success of any project will be largely depend upon now much accurate you will be able to collect and how much time, money and effort will be required to collect that necessary data.
For the purpose of project, two types of data collection techniques are used, Primary and Secondary.
1. Primary Data: Primary data is a data which is original in nature and is collected first hand. It is collected with the help of interviews and questions from different persons. It is basically used to support secondary data and to know about various facts which are not present in theory.
2. Secondary Data: Secondary data is a data which is already collected and stored. It is in the form of Annual Reports, Books, Journals, Articles and Internet.
Basic methodology is comparative analysis of Iceberg Foods Ltd. over the last five years through vertical common sized balance sheets, profit and loss account, cash flow statements, various ratios, trends, comparisons, charts, graphs and tables. Apart from that, flow charts are used whenever they are required.
Project is based on

' Annual Report of IFL 2006-07
' Annual Report of IFL 2007-08
' Annual Report of IFL 2008-09
' Annual Report of IFL 2009-10
' Annual Report of IFL 2010-11

'
2.1 Limitations
In spite of my continued efforts to make the project as accurate and wide in scope as possible, certain limitations are evident while implementing the project. These limitations cannot be removed and have to be accepted as permanent constraints in implementing the project. Some limitations, which have been identified, by me are:
1) The analysis is based purely on the basis on collected data.
2) One does not have access to each and every detail of company, so data collected may be limited.
3) Industry Benchmark Report and competitors ratios were not available during my project so comparative analysis has been done. The comparative analysis includes analysis of the ratios of the last five years. It might not tell the true picture of Working Capital of the company because I am not referring to Industry Benchmark Report.
4) Generalizations and calculated assumptions had to be made in some areas while analyzing the financial statements, ratios etc. due to non-availability of complete information.
5) The segment wise and product wise study of the various product segments and units of the company have been excluded from the scope of the project due to factual data and time constraints.
2.2 Key Formulas

Serial No. Term Formula
1. Net sales Sales ' Excise Duty
2. Operating Fixed Assets Gross Block ' Depreciation
3. Operating Profit EBIT (Earnings before Interest and Taxes)
4. Total Operating Assets Operating Fixed Assets + Current Assets

5. Gross Profit Sales ' Opening Stock of Finished Goods ' Cost of Production + Closing Stock of Finished Goods
6. Total Outside Liabilities Secured Loans + Unsecured Loans + Sundry Creditors

7. Net worth Share Capital + Reserve & Surplus
8. Average Finished Goods Inventory (Opening Stock + Closing Stock) / 2

9. Cost of Goods Sold (COGS) Raw Material Consumed + (Direct + Personnel + Administrative + Selling) Expenses

'

Chapter 3: DATA INTERPRETATION AND ANALYSIS

3.1 Cash Flow Statements

In financial accounting, a cash flow statement, also known as statement of cash flows or funds flow statement, is a financial statement that shows how changes in balance sheet accounts and income affect cash and cash equivalents, and breaks the analysis down to operating, investing, and financing activities. Essentially, the cash flow statement is concerned with the flow of cash in and cash out of the business. The statement captures both the current operating results and the accompanying changes in the balance sheet. As an analytical tool, the statement of cash flows is useful in determining the short-term viability of a company, particularly its ability to pay bills.
Due to limited time duration, I have prepared cash flow statements for the last two financial years, that is, 2010-11 and 2009-10. The cash flow statements of the last two years are:
Data Interpretation:
Table 3.1
Particulars/ Years 2009-10 2010-11
A Cash Flow From Operating Activities

Adjustments for: Net Profit before tax & extraordinary items 7,333,411.42
18,736,848.12

Depreciation 6,951,461.32 9,176,658.45
Capital Loss on Transfer (17,428.50) 44,201.00
(Profit) or loss on Investments - -
(Profit) or loss on Foreign Exchange
Interest paid - -
Interest paid 8,109,810.00 8,869,074.00
Operating Profit before Working Capital Changes 22,377,254.24
36,826,781.57

Adjustments for: Prior Period Income (20,638.17) -
(Increase)/Decrease in stock 1,945,267.00 (16,461,016.27)
(Increase)/Decrease in Debtor (23,900,915.78) (5,080,901.06)
(Increase)/Decrease in Loans & Advances (9,798,372.37) (1,102,216.16)

Increase/(Decrease) in Current Liabilities 17,670,356.29 17,873,410.00

Cash generated From Operations
8,272,951.21
32,056,058.08

Income Tax Paid
1,485,000.00
4,510,000.00

Net Cash Flow From Operating Activities 6,787,951.21
27,546,058.08

B Cash Flow From Investing Activities

Purchase of Fixed Assets (18,350,763.00) (52,508,615.00)
Sale of Fixed Assets (180,000.00) 120,041.00
Purchase of Investments - -
Sale of Investments - -
Interest Received - -
Dividend Received - -
Net Cash Flow From Investing Activities (18,170,763.00)
(52,388,574.00)

C Cash Flow From Financing Activities
Proceeds From Issue of Share Capital 5,000,000.00 5,080,000.00
Proceeds From Long term Borrowing 18,829,579.71 31,412,490.28
Interest Paid During the Year (8,109,810.00) (8,869,074.00)
Net Cash Flow From Financing Activities 15,719,769.71
27,623,416.28

Net Increase/(decrease) in Cash & Cash Equivalents (A+B+C) 4,336,957.92 2,780,900.36
Cash & Cash Equivalents at the Beginning of periods 2,050,833.88 6,387,791.60
Cash & Cash Equivalents at the End of periods 6,387,791.80 9,168,691.96

Analysis:
The above table indicates the cash flow statements of the financial year 2009-10 and 2010-11. Net profit before tax is increasing as compared to previous year which states that company's position is improving. There is huge investment in Fixed Assets in 2010-11 and depreciation has also increased. This is good for the company because depreciation in a way is profit for the company and increase in fixed assets states that company is expanding and these fixed assets will generate more profits in future. Operating Profit before Working Capital changes is also increasing by a large number which states that company's position is good in term of operating profit. However, there is increase in stock from last year which is not good for the company. But stock is short term in nature as company introduced two new flavors which dint work in market and hence increased stocks. In all, net cash flow from operating activities indicates efficient working of the organization. Company is planning for expansion by introducing more machinery and by acquisition, so investing activity is increasing in 2010-11 from the year 2009-10. For this, company used its long term funds for short term requirements. It can also be seen that all the investments of the company is done internally and company is not investing elsewhere. For expansion, company has increased its share capital and also has long term borrowings which are good for the company. In short, the company's performance is above average as resulted from the cash flow statements.
3.2 Working Capital

The word working capital is made of two words: Working and Capital. The word working means day to day operation of the business, whereas the word capital means monetary value of all assets of the business.

Definition:-

According to Guthmann & Dougall-

'Excess of current assets over current liabilities'

According to Park & Gladson-

'The excess of current assets of a business (i.e. cash, accounts receivables, inventories) over current items owned to employees and others (such as salaries & wages payable, accounts payable, taxes owned to government)'.
3.2.1 Constituents of Working Capital

1) Current Assets ( CA )
2) Current Liabilities ( CL )

1) Current Assets (CA): Those assets which in ordinary course of business can be, or, will be, turned in to cash within one year without undergoing a diminution in value and without disrupting the operation of the firm. The major current assets are:
a) Cash in hand / bank,
b) Marketable securities,
c) Sundry Debtors
d) Loans and advances, and
e) Inventory

2) Current Liabilities (CL): Those liabilities which intended at their inception to be paid in ordinary course of business, within a year, out of the current assets or earnings of the concern. The basic current liabilities are:

a) Sundry Creditors,
b) Bills payable,
c) Bank over-draft and
d) Outstanding expenses
3.3 WCM

Working Capital Management (WCM) is concerned with the problems that arise in attempting to manage the current assets, current liabilities and inter-relationship that exist between them. The goal of working capital management is to ensure that the firm is able to continue its operations and that it has sufficient cash flow to satisfy both maturing short-term debt and upcoming operational expenses. The current assets should be large enough to cover its current liabilities in order to ensure a reasonable margin for the efficient working of the company.

3.3.1 Significance of Working Capital

Figure 3.1


3.3.2 Types of Working Capital

Figure 3.2


On the Basis of Business concept, there are two types of Working Capital:
1) Gross working capital ( Gross W.C )
2) Net working capital ( Net W.C )

1) Gross working capital: It refers to the firm's investment in current assets.
2) Net working capital: It refers to the difference between current assets and current liabilities. Net working capital can be positive or negative

Efficient working capital management requires that firms should operate with some amount of net working capital; the exact amount varies from firm to firm and depends upon nature of industries. Net working capital is necessary because the cash outflows and inflows do not coincide.

The cash outflows resulting from payment of current liabilities are relatively predictable. The cash inflow are however difficult to predict. The more predictable the cash inflows are, the less will be the net working capital required.

The concept of working capital was, first evolved by Karl Marx. Marx used the term 'variable capital' means outlays for payrolls advanced to workers before the completion of work. He compared this with 'constant capital', which according to him is nothing but 'dead labor'. This 'variable capital' is nothing but wage fund which remains blocked in terms of financial management, in work-in-process along with other operating expenses until it is released through sale of finished goods. Although Marx did not mentioned that workers also gave credit to the firm by accepting periodical payment of wages which funded a portion of W.I.P, the concept of working capital, as we understand today, was embedded in his 'variable capital'.

On the Basis of Time, there are two types of Working Capital:

1) Permanent Working Capital
2) Temporary Working Capital

1) Permanent Working Capital: The need for current assets arises because of the cash cycle. To carry on business, certain minimum level of working capital is required on continuous and uninterrupted basis. For all practical purposes, this requirement will have to be met permanently as with other fixed assets. This requirement refers to as permanent or fixed working capital.

2) Temporary Working Capital: Any amount over and above the permanent level of working capital is temporary, fluctuating or variable working capital. This portion of the required working capital is needed to meet fluctuation in demand consequent upon changes in production and sales as a result of seasonal changes and specific changes.

Figure 3.3


Above graph shows that the permanent level is fairly constant; while temporary working capital is fluctuating. Generally, permanent working capital is not horizontal due to expansion of the firm. This is because a permanent current asset increases to support rising level of activities.

3.3.1 Different approaches of working capital

1) Industry norm approach
2) Economic modeling approach
3) Strategic choice approach

1) Industry Norm Approach ' This approach is based on the premise that every company is guided by the industry practice. For instance, if majority of firms have been granting 3 months credit to a customer than others will have to follow the majority due to fear of losing customers.

2) Economic Modeling Approach ' This approach is used to estimate optimum inventory, which is decided with the help of EOQ Model.

3) Strategic Choice Approach ' This approach recognizes the variations in business practice and advocates use of strategy in taking working capital decisions. The purpose behind this approach is to prepare the unit to face challenges of competition and take a strategic position in the market place. Generally, firm is independent in choosing its own course of action which is not guided by the rules of industry.

Presently, the company is following Strategic Choice Approach. But soon the company will switch to industry norm approach as the company will have strong market position in the near future.

3.3.2 Determinants of working capital

The amount of working capital required depends upon a number of factors.

1) Nature of business
Some businesses are such, due to their very nature, that their requirement of fixed capital is more rather than working capital. These businesses sell services and not commodities and that too on cash basis. As such, no funds are blocked in inventories and also no funds are blocked in receivables. E.g. public utility services like railways, infrastructure oriented project etc. On the other hand, there are some businesses like trading activity, where requirement of fixed capital is less and more money is blocked in inventories and debtors.

2) Length of production cycle
In some business like machine tools industry, the time gap between the acquisitions of raw materials to final production of finished products is quite high. Due to this, amount may be blocked either in raw materials or work-in progress or finished goods or even in debtors. Naturally, the need of working capital is high there.

3) Size and growth of business
In a small company, working capital requirement is quite high due to high overhead cost, higher buying and selling cost etc. Medium size businesses have edge over the small companies. But if the business starts growing after certain limit, the working capital requirements may adversely change with the increasing size.

4) Business/ Trade cycle
If the company is operating in the time of boom, the working capital requirement may be more as the company may like to buy more raw materials, may increase the production and sales to take the benefit of favorable market. Due to increase in the sales, more and more amount of funds may be blocked in stocks, debtors etc. Similarly, in the case of depressions also, working capital may be high as the sales terms of value and quantity may reduce, there may be unnecessary storage of finished goods, receivables may not be recovered in time etc.

5) Terms of purchase and sales
At times due to competition or custom, it may be necessary for the company to extend more and more credit to customers, as a result of which, more and more amount is locked up in debtors or bills receivables, which increase the working capital requirement. On the other hand, in case of purchases, if the credit is offered by suppliers of goods and services, a part of working capital requirement may be financed by them, but if it is necessary to purchase on cash basis, then working capital requirement will be higher.

6) Profitability
The profitability of the business depends on numerous factors, but high profitability will positively reduce the strain on working capital requirement of the company, because profits earned in cash may be used to meet the working capital requirement of the company.

7) Operating efficiency
If the business is carried on efficiently, it can operate in profits, which may reduce the strain on working capital. It may ensure proper utilization of existing resources by eliminating the waste and improved coordination etc.

3.4 Working Capital Level

The consideration of investment in current assets should avoid two danger points: excessive and inadequate investment. Investment in current assets should be just adequate, not more or less, to the need of the business firms. Excessive investment in current assets should be avoided because it impairs the firm's profitability, as idle investment earns nothing. On the other hand, inadequate amount of working capital can threaten solvency of the firm because of its inability to meet its current obligation. It should be realized that the working capital need of the firms may be fluctuating with changing business activity. This may cause excess or shortage of working capital frequently. The management should be prompt to initiate an action and correct imbalance.

Table 3.4 Size of Working Capital
Particulars/Years 2006-07 2007-08 2008-09 2009-10 2010-11

( I ) Current Assets
1) Inventories 11029765.27 12617448.82 17777335.68 15832068.42 32293084.69
2) Sundry Debtors 4316211.88 11257426.62 21167556.84 45068472.64 50149373.68
3) Cash &Bank Balance 3322051.56 2667417.87 2050833.88 6387791.60 9168692.39
4) Loans & Advances 5820574.31 7812641.08 31953827.68 41752200.05 42854416.21
Total of ( I )* 24488603.02 34354934.39 72949554.08 109040532.71 134465566.97

( II ) Current Liabilities
1) Current Liabilities 12169756.73 17906462.06 26078120.8 42185531.45 53469158.89
2) Provisions & Expenses Payable & Other Liabilities 3924686.38 4468593.19 9063457.25 10626402.89 17216186.32
Total of ( II ) 16094443.11 22375055.25 35141578.05 52811934.34 70685345.21
( A ' B )* 8394159.91 11979879.14 37807976.03 56228598.37 63780221.76

*Total of ( I ) = Gross Working Capital
*( A ' B ) = Net Working Capital ( Net W.C )

3.4.1 Working capital trend analysis

In working capital analysis, the direction of changes over a period of time is of crucial importance. Working capital is one of the important fields of management. It is therefore very essential for an analyst to make a study about the trend and direction of working capital over a period of time. Such analysis enables us to study the upward and downward trend in current assets and current liabilities and its effect on the working capital position.

In the words of S.P. Gupta 'The term trend is very commonly used in day-to-day conversion. Trend, also called secular or long term need is the basic tendency of population, sales, income, current assets, and current liabilities to grow or decline over a period of time'.

According to R.C.Galeziem 'The trend is defined as smooth irreversible movement in the series. It can be increasing or decreasing.'

Emphasizing the importance of working capital trends, Man Mohan and Goyal have pointed out that 'Analysis of working capital trends provide us base to judge whether the practice and privilege policy of the management with regard to working capital is good enough or not.

Data Interpretation:
Table 3.4.1: Gross Working Capital Size

Years 2006-07 2007-08 2008-09 2009-10 2010-11
Total of ( I )* 24488603.02 34354934.39 72949554.08 109040532.71 134465566.97
Indices 100 140.29 297.89 445.27 549.09
*( I ) = Gross Working Capital ( Gross W. C )

Chart 3.4

Analysis:
Gross Working Capital (Gross W.C) of the company is increasing continuously over the periods taken for analysis, that is, from the financial year 2006-07 to financial year 2010-11. Taking year 2006-07 as the base year, it can be observed that the growth of company is respectable and company is constantly trying to improve its standard. The maximum increase was 112.34% in the year 2008-09. This was mainly due to increase in loans and advances and also due to introduction of RC Cola in Indian Market.
Data Interpretation:
Table 3.5: Net Working Capital Size
Years 2006-07 2007-08 2008-09 2009-10 2010-11
( A ' B )* 8394159.91 11979879.14 37807976.03 56228598.37 63780221.76
Indices 100 142.72 450.41 669.85 759.82
*( A ' B ) = Net Working Capital ( Net W.C )

Chart 3.5

Analysis:
Net Working Capital of the company is also increasing continuously over the periods taken for analysis, that is, from the financial year 2006-07 to financial year 2010-11. Taking year 2006-07 as the base year, it can be observed that the growth of company is respectable and company is constantly trying to improve its standard. The maximum increase was 215.59% in the year 2008-09. This was mainly due to introduction of RC Cola in Indian Market and also due to increase of current assets by 112% whereas current liabilities by 57% only. So much increase in current assets indicates that company used its long term funds to meet short term requirements. This increasing positive net working capital indicates that company has sufficient money in order to maintain or expand its operations. Increasing Net W.C is a positive signal for the company in the long run but company should take care of its expenditure from long term funds for short term requirements.

3.6 Current Assets

Current assets are liquid assets which can be converted into cash within one year. The size of current assets of Iceberg Foods Ltd. of last five years is:

Data Interpretation:
Table 3.6: Current Assets Size
Particulars/Years 2006-07 2007-08 2008-09 2009-10 2010-11
1) Inventories 11029765.27 12617448.82 17777335.68 15832068.42 32293084.69
2) Sundry Debtors 4316211.88 11257426.62 21167556.84 45068472.64 50149373.68
3) Cash &Bank Balance 3322051.56 2667417.87 2050833.88 6387791.60 9168692.39
4) Loans & Advances 5820574.31 7812641.08 31953827.68 41752200.05 42854416.21
Total of C.A* 24488603.02 34354934.39 72949554.08 109040532.71 134465566.97
Indices 100 140.29 297.89 445.27 549.09
*C.A = Current Assets

Chart 3.6

Analysis:
The above graph indicates that current asset size is increasing over the last 5 years when financial year 2006-07 is taken as the base year. Increasing current assets is good for company as it will help the company in fulfilling its short term requirements efficiently but company should not invest excessively in current assets as it hampers the profitability of the firm. The actual reason of increase in current assets is indicated with the help of composition of current assets.

3.6.1 Composition of Current Assets
Analysis of current assets components enable one to examine in which components the working capital fund has been locked. For instance, a large tie up of funds in inventories affects the profitability of the business or if the major portion of current assets is made up of cash alone, the profitability will decrease because cash is non earning assets.
Data Interpretation:
Table 3.7

CURRENT ASSETS
Particulars / Years 2006-07 2007-08 2008-09 2009-10 2010-11
1) Inventory 45.04% 36.73% 24.37% 14.52% 24.02%
2) Sundry Debtors 17.63% 32.77% 29.02% 41.33% 37.29%
3) Cash & Bank Balance 13.56% 7.76% 2.81% 5.86% 6.82%
4) Loans & Advances 23.77% 22.74% 43.80% 38.29% 31.87%
100% 100% 100% 100% 100%

Chart 3.7

Analysis:
The above graph indicates that out of inventory, sundry debtors, cash & bank balance and loan & advances, cash & bank balance has the least percentage. This is good for the company as cash is a non earning asset. In the initial years (2006-07 and 2007-08), the company had comparatively more cash in hand because of lack of technical knowledge. But with time and after launch of RC Cola, company is trying to maintain its cash & bank balance to be as low as possible. Blockage of funds in inventories was high in year 2006-07 due to poor maintenance strategies but now company has established its distribution network and is continuously working towards it, so blockage of funds is decreasing. In year 2010-11, company launched two new variants of RC Cola, due to which inventory slightly increased in that particular year. Sundry Debtors does not have a fixed pattern but the graph indicates a positive signal for the company over the last 5 years. Sundry Debtors was low in year 2006-07, 2008-09 and 2010-11 because of launch of Kingfisher packaged drinking water, RC Cola and more new flavors of RC respectively. But Sundry debtors should not be unnecessarily high as it indicates inefficient collection management. The loans and advances were high in year 2008-09 because company ordered new machinery for which it had to pay in advance. After that year, company is continuously up-grading its machinery for which they have to pay advance payment. In short, it can be said that whenever company is introducing any new product or flavor, it should concentrate more on its sundry debtors. Also, whenever any new flavor is introduced, company should do proper production planning so that unnecessarily funds are not blocked in inventories.
3.8 Current Liabilities

Current liabilities mean the liabilities which have to be paid within one year. It includes Sundry Creditors which means suppliers whose payment is due and not paid yet, thus creditors are known as current liabilities. Current liabilities also includes advance from customers, short term loan and provision as tax provision. The size of current assets of Iceberg Foods Ltd. of last five years is:
Data Interpretation:
Table 3.8: Current Liabilities Size
Particulars/Years 2006-07 2007-08 2008-09 2009-10 2010-11
1) Current Liabilities 12169756.73 17906462.06 26078120.8 42185531.45 53469158.89
2) Provisions & Expenses Payable & Other Liabilities 3924686.38 4468593.19 9063457.25 10626402.89 17216186.32
Total of C.L* 16094443.11 22375055.25 35141578.05 52811934.34 70685345.21
Indices 100 139.02 218.35 328.14 439.19
*C.L = Current Liabilities

Chart 3.8

Analysis:
The above graph indicates that current liabilities have been increasing with respect to base year 2006-07. It shows that company is able to get good credit from the market because of the established goodwill over the years. The company can further improve its credit scenario by searching various options for credit in the market.
3.9 Operating Cycle
The need of working capital arrived because of time gap between production of goods and their actual realization after sale. This time gap is called 'Operating Cycle' or 'Working Capital Cycle'. It is the length of time between the company's outlay on raw materials, wages and other expenses and inflow of cash from sales of goods. It is an important concept in management of cash and management of working capital. Quicker the operating cycle, less amount of investment in working capital is needed, hence, it improves profitability. The duration of the operating cycle depends on nature of industries and efficiency in working capital management.
Figure 3.9


Data Interpretation:
Table 3.9: Operating Cycle of Iceberg Foods Ltd.
OPERATING CYCLE ( No of Days )
Years 2006-07 2007-08 2008-09 2009-10 2010-11
ADD:
1) Raw Material Holding Period 43 27 17 14 20
2) Finished Goods Holding Period 11 18 17 13 16
3) Receivable Collection Period 30 26 37 47 46
Gross Operating Cycle 84 71 71 74 82
LESS:
4) Creditors Payment Period 19 56 48 70 68
Net Operating Cycle 65 15 23 4 14

Chart 3.9

Analysis:
The above graph indicates that there is no pattern of net operating cycle during the period into consideration. In financial year 2006-07, the operating cycle was highest, that is, 65 days. In this year, company started its actual manufacturing business so market goodwill was not there. As a result, creditor's payment period was low and receivable collection period was high. From that year onwards company is trying to maintain its operating cycle to a low level. In financial year 2009-10, company had operating cycle of only 4 days with creditor payment period of 70 days. But in this particular year, company faced lack of funds (due to launch of RC Cola in previous year) and was unable to pay to its creditors on time. Hence, operating cycle was 4 days. In short, company should take good care of its creditors during expansion else it may affect the goodwill of the company in long run.
Chart 3.10: Operating Cycle Components

The above graph indicates that raw material holding period is decreasing except in year 2010-11, which indicates good production strategy of the company. In year 2010-11, there was increase in raw material holding period by 6 days. In this year, company tried to increase its production capacity but the sales were not up to the mark resulting in increase in raw materials holding period. The finished good holding period varies from 11 to 18 days which is acceptance as beverage industry is a seasonal industry. Receivable collection period should ideally decrease overtime but it is not that bad for company as from year 2008-09, company is continuously upgrading itself and increasing its customer base by a large number. Creditors payment period has a lot of variation which indicates that company need to focus properly on its creditors as creditors are equally important as debtors.

3.10 Ratio analysis
Ratio analysis is the powerful tool of financial statement analysis. A ratio is defined as 'the indicated quotient of two mathematical expressions'. The absolute figures reported in the financial statement do not provide meaningful understanding of the performance and financial position of the firm. Ratio helps to summaries large quantities of financial data and to make qualitative judgment of the firm's financial performance.

3.10.1 Role of ratio analysis

Ratio analysis helps to appraise the firms in terms of their profitability and efficiency, either individually or in relation to other firms in same industry. Ratio analysis is one of the best possible techniques available to management to impart the basic functions like planning and control. As future is closely related to immediate past, ratio calculated on the basis of historical financial data may be of good assistance to predict the future. For instance, on the basis of inventory turnover ratio or debtor's turnover ratio in the past, the level of inventory and debtors can be easily ascertained for any given amount of sales. Similarly, the ratio analysis may be able to locate various areas which need management attention in order to improve the situation. For instance, if Current ratio shows a continuous decline, it indicates the need for further introduction of long term finance in order to improve the liquidity position. As the ratio analysis is concerned with all aspect of the firm's financial analysis: liquidity, solvency, activity, profitability and overall performance, it enables interested persons to know the financial and operational characteristics of an organization and take suitable decisions.

3.10.2 Limitations of ratio analysis

1. The basic limitation of ratio analysis is that it may be difficult to find a basis for making the comparison.
2. Normally, the ratios are calculated on the basis of historical financial statements. An organization for the purpose of decision making may need future data rather than those of the past. The external analyst has to depend upon the past which may not necessarily reflect the financial position and performance in future.
3. The technique of ratio analysis may prove inadequate in some situations if there is difference in opinion regarding the interpretation of a certain ratio.
4. As the ratios are calculated on the basis of financial statements, the basic limitations which are applicable to the financial statements are equally applicable.
5. The technique of ratio analysis has certain limitations as it only highlights the strong or problem areas but does not provide any solution to rectify the problem areas.

3.11 Classification of Working Capital Ratio

Working capital ratio means ratios which are related with the working capital management e.g. current assets, current liabilities, liquidity, profitability and risk turnoff etc. These ratios are classified as follows:

i) Efficiency Ratios
ii) Liquidity Ratios
iii) Other Ratios

i) Efficiency Ratio
Funds are invested in various assets in business to make sales and earn profits. The efficiency with which assets are managed directly affects the volume of sales. The better the management of assets, larger is the amount of sales and profits. It measures the efficiency with which a firm manages its resources. These ratios are called turnover ratios because they indicate the speed with which assets are converted or turned over into sales. To measure efficiency, we have following ratios:
1) Working capital turnover ratio
2) Inventory turnover ratio
3) Receivable turnover ratio
4) Current assets turnover ratio

ii) Liquidity ratio
Liquidity refers to the ability of a firm to meet its current obligations as and when these become due. The short-term obligations are met by realizing amounts from current, floating or circulating assets. The current assets should either be liquid or near about liquidity. These should be convertible in cash for paying obligations of short-term nature. The sufficiency or insufficiency of current assets should be assessed by comparing them with short-term liabilities. If current assets can pay off the current liabilities then the liquidity position is satisfactory. On the other hand, if the current liabilities cannot be met out of the current assets then the liquidity position is bad. To measure the liquidity of a firm, following ratios can be calculated:
1. Current ratio
2. Quick ratio
3. Absolute liquid ratio
3.11.1 Efficiency ratios

1) Working capital turnover ratio

Working Capital turnover ratio = Gross Sales
Net Working Capital

Chart 3.9

Analysis:
The above graph indicates that the company is efficiently using its working capital as the ratios are on higher side. But in year 2006-07 and 2007-08, the ratios were very high which is also not good for organization. This ratio is helpful to forecast the working capital requirement on the basis of sale. For instance, in year 2010-11, reciprocal of ratio (1/ 5.91 = 0.17) shows that for sales of Rs. 1, the company requires 17 paisa as working capital.
2) Inventory turnover ratio

Inventory Turnover Ratio = Cost of Goods Sold
Average Finished Goods Inventory

Where,
Average Finished Goods Inventory = (Opening Stock + Closing Stock) / 2
Cost of Goods Sold (COGS) = Raw Material Consumed + (Direct + Personnel
+ Administrative + Selling) Expenses

Analysis:
The above graph indicates that the company is improving in terms of inventory turnover ratio. Over the last 5 years into consideration, the ratio has increased from 8.99 to 14.79, that is, 64.52% increment. Therefore, it can be said that the company is selling its stock frequently; thereby need less amount to finance its inventory. The ratio is lowest in the financial year 2006-07 because in this year company launched Kingfisher water and soda and overstocking were a part of market penetration policy. After that, company has streamlined its distribution network. The company can further improve inventory turnover ratio if the company will plan for its production and distribution simultaneously.
3) Receivable Turnover Ratio

Receivable Turnover Ratio = Gross Sales
Average account receivables
Where,
Average account receivables = (Opening stock + Closing stock) / 2
Chart 3.11

Analysis:

The above graph indicates that initially the ratio was increasing but in year 2008-09, it declined by 28.79%. The ratio declined because of launch of RC Cola in Indian market. So, lower ratio was part of market penetration strategy. In year 2009-10, it further declined by 21.07% and in year 2010-11, it was increased by only 1.15%. This shows that company is concentrating more on sales and less on debtors. Company should take actions towards this direction because many a times, extended credit period eat up the profit element by high interest and monitoring costs which results in negative profits.

4) Current Asset Turnover Ratio

Current Asset Turnover Ratio = Net Sales
Current Assets

Chart 3.12

Analysis:
The above graph indicates that the current asset turnover ratio of the company varies between 2.2 to 2.9 over the last five years. This means that current assets are able to convert themselves into sales consistently. The ratio was lowest in year 2009-10, that is, 2.2. It was because of high cash balance (361% increase compared to previous year). Cash is a non 'earning asset and does not help in increasing sales volume due to which the ratio declined. Company should keep track of its cash balance with respect to sales as excess cash sometimes lead to less profit.
3.11.2 Liquidity Ratios
1) Current Ratio

Current Ratio = Current Assets
Current Liabilities

Chart 3.13

Analysis:
The above graph indicates that the current ratio is increasing over the years except a decrease of 7.77% in year 2010-11. In the starting years of manufacturing (2006-07 and 2007-08), the ratio was 1.5:1 which states that the position was not according to ideal standard of 2:1. But in year 2008-09, the company achieved the ratio of 2.08:1, very near to industry standard. This shows that the company has funds for payment of current liabilities in the form of current assets. Company should continuously work to maintain this ratio in future also.

2) Quick Ratio

Quick Ratio = Current Assets - Inventory
Current Liabilities

Chart 3.14

Analysis:
The above graph indicates that there is no fixed pattern of quick ratio over the last 5 years into study. In no particular year, the ratio is ideal, which states that company is not considering this ratio for its working. In the year 2008-09, the ratio increased to 1.57 from 0.97, because of increase in loans and advances by 309%. In this year, company purchased new machinery due to launch of RC Cola due to which company had to pay in advance. The ratio further increased in 2009-10 because of increase of sundry debtors by 113% and loans & advances by 30.66%. Although basic reason behind increase of quick ratio is up gradation of machinery yet continuous high ratio is not good for the organization.

3) Absolute Liquid Ratio

Absolute Liquid Ratio = Absolute Liquid Assets
Current Liabilities
Where,
Absolute Liquid Assets = Cash in hand + Balance held with bank


Chart 3.15

Analysis:
The above graph indicates that ratio was 0.12 in three financial years which is a good symbol for the company. In year 2008-09, the ratio was 0.06 because company utilized its cash in launch of RC Cola, whereas in year 2006-07, the ratio was 0.21 because of excess of cash in hand which shows that company followed conservative approach in that particular year. In future also, company should maintain its ratio as 0.12.
3.11.3 Other Ratios

1) Fixed Asset Turnover Ratio

Fixed Asset Turnover Ratio = Net Sales
Operating Fixed Assets
Where,

Net sales = Sales ' Excise Duty
Operating Fixed Assets = Gross Block ' Depreciation


Chart 3.16

Analysis:
The above graph indicates that there is an increasing trend in the ratio of Iceberg Foods Ltd. There is slight decrease of 6.53% in the financial year 2010-11 as compared to 2009-10 and it was due to expansion of business activities by introduction of more products. Although Iceberg is a manufacturing company and its fixed asset turnover should be around 5 yet the trend indicates that the company can attain this figure, if the company will keep track of all its customers.
2) Return on Investment ( ROI )

Return on Investment = Operating Profit
Sales Total Operating Assets
= Operating Profit ?? 100
Total Operating Assets
Where,

Operating Profit = EBIT (Earnings before Interest and Taxes)
Total Operating Assets = Operating Fixed Assets + Current Assets

Chart 3.17
Analysis:
The above graph indicates that there is no fixed pattern of ROI of the company over the last 5 years considered for study. However, ROI is equal to or more than 12 % in all financial years except in the financial year 2008-09. This indicates the performance of the company was average or below average in this particular year. Low ROI was due to introduction of R.C Cola in the Indian market. Huge capital was invested by the company in this year for launch of RC but profit earned was less which resulted in poor performance. After 2008-09, company's ROI is increasing by 20 ' 25 % which indicates that RC Cola is earning profits now and company will have more ROI in years 2011-12 and 2010-11.
3) Gross Profit Ratio

Gross Profit Ratio = Gross Profit
Net sales
Where,
Gross Profit = Sales ' Opening Stock of Finished Goods ' Cost of Production + Closing Stock of Finished Goods
Chart 3.18

Analysis:
The above graph indicates that the gross profit ratio is increasing over the last 5 years considered for study. The performance of company was bad during year 2006-07. It was because of conversion of the plant from Cold Storage to manufacturing unit. Continuous increase in ratio is due to continuous up gradation of machinery. In short, it can be said that gross profit ratio is decent over the last 5 years and should result in constant ratio in coming years.
4) Equity ' Total Debt Ratio
Equity ' Total Debt Ratio = Net Worth Total Outside Liabilities
Where,
Total Outside Liabilities = Secured Loans + Unsecured Loans + Sundry Creditors
Net worth = Share Capital + Reserve & Surplus
Chart 3.19

Analysis:
The above indicates that in the initial years of business, the company relied more on debt because of less availability of reserve & surplus but now the company is maintaining a balance between equity and debt. In the financial year 2008-09, the ratio increased by 24% compare to previous year because in this year company introduced RC Cola so utilized money more from reserve & surplus. In short, equity ' debt ratio of the company is improving over the period in study.
5) Equity ' Short term Debt Ratio

Equity ' Short term Debt Ratio = Net Worth
Current Liabilities
Chart 3.20

Analysis:
The above graph indicates that the ratio is declining above the period of 5 years except in the financial year 2008-09, where the ratio has increased from 1.49 to 1.62, that is, 9 % increase from previous year. This year, increment of Net worth of the company was 40% whereas increment of current liabilities was only 29%, due to which the ratio increased. In this year, capital was raised because company needed money for the launch of RC Cola. Over the period of 5 years, company is progressing and can reach ideal ratio of 1 if it will concentrate more on its debtors.
6) Number of days of inventory holding

Days of Inventory Holding = Average Finished Goods Inventory ?? 365
Cost of Goods Sold

Where,
Average Finished Goods Inventory = (Opening Stock + Closing Stock) / 2
Cost of Goods Sold (COGS) = Raw Material Consumed + (Direct + Personnel
+ Administrative + Selling) Expenses
Chart 3.21

Analysis:

The above graph indicates the company is improving in terms of days of inventory holding. Over the last five years, the number of days has been reduced from 41 to 25, that is, 39% decrement. In the financial year 2006-07, the number of days was highest. It was because company launched Kingfisher Water and Soda in this year and overstocking was a part of market penetration policy. Decreasing ratio indicates that the company has streamlined its distribution network. The company can further improve number of days of inventory holding if the company plans for its production and distribution simultaneously.

7) Debt ' Service Coverage Ratio ( DSCR )

DSCR = Profit after tax + Depreciation + Interest
Interest + Repayment Obligation * [ 1/ ( 1 ' Tax Rate ) ]
Where,
Repayment Obligation = Term Loans

Analysis:

The above graph indicates that the there is no fixed pattern for DSCR ratio over the last five years. Only in the financial year 2010-11, the ratio has been increased from 0.46 to 0.76, that is, by 65.21%. Rest in all the years, the ratio is either decreasing or increasing marginally. The ratio is less than standard ratio for term loans, that is, 1.5, which is a negative signal for the company. In future, company can face problems in receiving term loans from banking institutions. Also company can face problems in meeting its long-term working capital obligations.

Chapter 4: CONCLUSION

Working Capital Management (WCM) is an important tool for the management of short term funds in an organization. At Iceberg Foods Ltd., it can be seen that they are following a moderate policy towards WCM. Since beverage industry is a seasonal industry, so working capital requirement is more during summers than winters.
The company's turnover has been increased by four times, that is, from 10 crores to 40 crores over the period of five years. Also, profit is increasing every year by a very large number which is proved from the fact that profit has increased by 2038.26% in the year 2010-11 as compared to year 2006-07.
Current Assets of the company are increasing every year which is a good symbol for the company and current liabilities are also increasing which indicates that company is able to get credit from the market and hence, creating goodwill in the market.
Operating cycle was very high in the initial years taken for study. But subsequently, it has been decreasing which states that company is working towards unnecessary blockage of funds in inventories.
The different ratios calculated depict the detail analysis of the company. The efficiency ratios state that the company is average in terms of efficiency or maintenance of its assets. Liquidity ratios state that the company's liquidity position is good and will improve further in future. Other ratios state that the company is above average in its performance.
In short, it can be concluded that the performance of the company is above average during the period considered for study and have great scope of improvement in future.

'

Chapter5:
FINDINGS AND RECOMMENDATIONS

1) Company should categorize its customers (both institutional and retail) on the basis of the business they provide. This will help the company in concentrating their efforts towards customers which provide greater business to them.

2) It has been observed that the company does not consider creditors and debtors while evaluating their investment proposals (be it expanding business or launch of new products), which leads to improper evaluation of the proposals. Working capital should be duly considered as it will lead to a proper evaluation and thus acceptance of correct decisions.

3) Iceberg Foods Ltd. is growing at a fast pace but it was found that the company does not refer its performance with the Industry Benchmark report. So, it is recommended that company should start the analysis of ratios with the Industry ratios. It will help the company in knowing its position in the market and also in improving profitability.

4) From the Receivable Turnover ratio, it has been observed that huge amount is blocked in Sundry Debtors. This leads to reduced liquidity for the company and increased risk of default in payments. Also, many a times, extended credit period eat up the profit element by high interest and monitoring costs which results in negative profits. The company can reduce these to an amount equal to the industrial norms.

5) An Efficient cash mechanism should also be put in place, as there is surplus cash available. Permanent surplus cash can be withdrawn from the business and temporary surplus cash can be invested in marketable securities.

6) Inventory period of 'concentrate' is 90 days and lead time is 60 days. So, this inventory period can be reduced by 15 days in the off season. This will be helpful to the company because concentrate is the most costly raw material so funds released from inventory can be used for other purposes.

7) DSCR Ratio of the company is poor which may make it difficult for the company to raise finance for itself. Efforts should be made in this direction.

8) Company can improve number of days of inventory holding if the company plans for its production and distribution simultaneously. Although, company is working in this direction yet scope of improvement is there.

9) Company can search for various sources of finance wherein it can obtain loans at a cost lesser than that of what it has to pay for enhancing its credit period towards its creditors.

10) Till now, Company does not maintain cash flow statements but cash flow statements give the true picture of inflow and outflow of cash. It also helps in cash management for the company which is inevitable in recent times considering that the recent financial turmoil occurred due to lack of liquidity in the market. In future, company should maintain cash flow statements.

11) On the basis on personal visits at the plant during my internship tenure, it has been observed that there is mishandling of raw materials and finished goods. Inefficient management at every minor stage is also detrimental for a big organization like this. So, top management and respective department heads should conduct training sessions for all the employees so that there is minimal wastage.

12) Company is expanding its business every year with the help of acquisitions and investment in latest technology. Also, it has to compete with big names in the industry. So in future, Six Sigma can be applied by the company for it manufacturing processes or overall working. This will clearly indicate the weak areas of the company and company could easily work towards their improvement and could compete with other players of the industry.

REFERENCES

[1] http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1000770
[2] http://gbr.sagepub.com/cgi/content/short/8/2/267
[3] http://www.rolandberger.com/company/press/releases/519 press_archive2009_sc_content/Study_on_working_capital_management.html
[4] http://papers.ssrn.com/sol3/papers.cfm?abstract_id=621103

[5] http://www.bizresearchpapers.com/Kesseven.pdf

[6] http://www.citefin.com/1570-working-capital.html
[7] http://www.bizmove.com/finance/m3b3.htm
BIBLIOGRAPHY

[1] Working Capital Management: Strategies and Techniques, By Hrishikes Bhattacharya
[2] Financial Management: Theories, Concepts and Problems , By R.P Rustagi
[3] Financial Accounting for Management, By Ambrish Gupta
[4] Working Capital Management and Control: Principles and Practice, By Satish B. Mathur

Source: Essay UK - http://ntechno.pro/free-essays/finance/working-capital-management-iceberg-foods.php


Not what you're looking for?

Search:


About this resource

This Finance essay was submitted to us by a student in order to help you with your studies.


Rating:

Rating  
No ratings yet!

  • Order a custom essay
  • Download this page
  • Print this page
  • Search again

Word count:

This page has approximately words.


Share:


Cite:

If you use part of this page in your own work, you need to provide a citation, as follows:

Essay UK, Working Capital Management Of Iceberg Foods. Available from: <http://ntechno.pro/free-essays/finance/working-capital-management-iceberg-foods.php> [20-10-17].


More information:

If you are the original author of this content and no longer wish to have it published on our website then please click on the link below to request removal:


Essay and dissertation help

badges