INTRODUCTION:
Working Capital Management is one of the important components of corporate finance in any organization, be it a manufacturing concern or service concern. It is the process of planning and controlling the level and mix of the current assets of the firm as well as financing these assets. The working capital - cash, accounts receivable, inventories, prepaid expenses, etc. form the day to day operational needs of an organization. Among working capital components, cash is the most important, as it is said to be blood of a corporate body. Without cash the survival of the organization becomes difficult. Cash, accounts receivables and bills receivables are known as liquid assets.
The working capital management's main goal is to maintain adequate liquidity position in the short term and solvency of the organization. Some of the companies in pharmaceutical sectors have 50% of the working capital. The pharmaceutical sector is usually characterized by long working capital cycles. A study has shown that in the year 2004, cipla ltd was having highest working capital of 239 days over the top five pharmaceutical companies in India, lowest being Glaxo Smith line ltd having the working capital of 75days.The raw material storage periods are higher for the companies in pharmaceutical sectors. The average raw material period of pharmaceutical industry is 88 days in the year 2004, where as the average finished goods period of pharmaceutical industry was more in 2003 when compared to last 3yrs. The average is 43 days. In the working capital cycle the last component is outstanding creditors. The average creditors' period of pharmaceutical sector is 48(in 2002). A pharmaceutical company, which produces a few hundred formulations, will find it much more difficult to synchronize its supplies with demand, in view of the sheer number of inputs involved. In this study 5 of the pharmaceutical companies have been included in the Nifty Index.
DEFINITIONS:
Working capital can simply be defined as the deployment of current assets and current liabilities so as to maximize short-term liquidity.
Guthmann and Dougall have defined Working capital as the excess of current assets over liabilities.
Weston and Beigham define working capital as follows- working capital refers to a firm's investments in short term assets, cash, short term securities, accounts receivables and investments.
The term working capital refers to the amount of capital that is readily available to an organization. Thus, working capital is the difference between resources in cash or readily convertible into cash (current assets) and organizational commitments for which cash will soon be required (current liabilities).
Current assets are resources that are in cash or will soon be converted into cash within one financial year.
Current liabilities are commitments that will soon require cash settlement within one financial year.
Thus:
Working Capital Management = Current Assets - Current Liabilities
Current assets - liquid assets, inventory, raw materials, stores, work-in-process, finished goods, prepaid expenses, shot term advances, accrued income and temporary investments.
Current assets have short life span. The life depends upon the time required in the activities of procurements, sales, and collection the degree of synchronization among them.
Current liabilities - bank over draft, creditors and payables, outstanding expenses, short term borrowings, and advances received against sales, taxes and dividends payable, others liabilities maturing within a year.
Working Capital is also known as circulating, fluctuating capital and revolving capital, the magnitude and composition keep on changing continuously in the course of business.
IMPORTANCE
Working capital management is significant fact of financial management. Its importance stems from two reasons:
Investment in current assets represents a substantial portion of total investment.
Investment in current assets and the level of current liabilities have to be geared quickly to change in sales.
The important of working capital management is reflected in the fact that financial managers spend a great deal of time (about 70%) in managing current assets and current liabilities. Arranging short term financing, negotiating favorable credit terms, controlling the movement of case, administering accounts receivable and monitoring the investment in inventories consume a great deal of time of financial managers. Working capital management is management for short-term. Working capital can simply be said to be resource (current assets and current liabilities) available to the firm. These are of critical importance to a firm. Every day companies take in money, write receipts, balance checkbooks, record receivable records, manage inventory etc. Working capital is the money used to make goods and attract sales. The less Working capital used to attract sales, the higher is likely to be the return on investment.
It also plays an important role in maintain the financial health of the firm during the normal course of the firm. Working capital has to do with the short-term accounts of a firm current assets and current liabilities. Net working capital is defined as current assets less current liabilities Working capital management is about the commercial and financial aspects inventory, credit, purchasing, marketing, and royalty and investment policy. Since it is the management of short term assets and liabilities it is necessary to know about assets and liabilities.
The higher the profit margin, the lower is likely to be the level of working capital tied up in creating and selling titles. The secret to good working capital management is simple- use someone else's money every chance you get and don't let anyone else use yours. To do that, the following strategies might be employed within reasons. A company wouldn't want to stretch out its payables for so long a period that it's forced out of business.
Turn receivables as quickly as possible. Make it easy for customers to pay. Lockboxes, prepaid envelopes, discounts, etc. may be utilized.
Turn inventories as quickly as possible. Inventories may be a big investment for a firm and they earn no interest.
Just-in-time inventory methods and some other strategies are used to hold down firms investments in inventories.
FACTORS INFLUENCING WORKING CAPITAL REQUIREMENT:
Some important factors influencing the working capital requirements of a firm are:
Nature of business: The nature of business carried out by an organization determines its working capital requirement. In a trading concern, a major part of resources are deployed in current assets, particularly stock-in-trade-in a transport organization, major part of funds would be locked up in fixed assets like motor vehicles. A service organization needs lesser working capital than trading or financial organization.
Seasonality of operation: Seasonality factor creates production or even storage problem. Agriculture based production concern have to purchase their raw materials only during the season when they are available. But manufacturing operation has to be conducted during the whole year resulting in working capital blockage during off-season.
Market conditions: The degree of competition prevailing in the market place has an important bearing on working capital needs. When competition is keen, a larger inventory of finished goods is required to serve customers who may not be inclined to wait because other manufactures are ready to meet their needs. Also, generous credit terms may have to be offered to attract customers in a highly competitive market.
Condition of supply: No contingency plan is required in case of easy and stable credit policy. But, in case of supply uncertainties lead-time may be longer necessitating larger basic inventory, higher carrying costs and working capital needs for the purpose.
Operating efficiency: The operating efficiency of a firm relates to optimum utilization of resources at minimum costs. Operating efficiency improves the use of working capital and accelerates the pace of cash conversion cycle. Better utilization of resources improves profitability and helps in releasing the pressure on working capital.
Credit policy: Credit policy of the business includes to whom, when and to what extent credit may be allowed. amount of money locked up in accounts receivable has its impact on working
Availability of credit: Credit worthiness is a precondition for assured accessibility to credit. Accessibilities in banks depend on the flow of credit .i.e, the level of working capital.
Growth and diversification of business: Growth and diversification of business calls for larger value of working capital. The need for increased working capital does not follow the growth of business operations, but precedes it. Working capital needs is in fact assessed in advance in reference to the business plan.
ESTIMATION OF WORKING CAPITAL:
There are three methods for estimating the working capital requirement of a firm.
Percentage of sales method: It is a tradition and simple method of determining the level of working capital and its components: In this method, working capital is determined on the basis of past experience. If, over the years, the relationship between sales and working capital is found to be stable, then this relationship may be taken as a base for determining working capital for future. This method is easy to understand and useful for projecting relatively short-term changes in working capital. However, this method cannot be recommended for universal application because the assumption of linear relationship between sales and working capital may not hold well in all cases.
Regression analysis method: It is a useful statistical technique applied for forecasting working capital requirements. It helps in making working capital requirement projections after establishing the average relationship between sales and working capital and its various components in the past years. The method of least squares is used in regard.
OPERATING CYCLE
Operating cycle is the time duration required to convert sales, after the conversion of resource into inventories, into cash. the operating cycle of a manufacturing company involves three phases:
Acquisition of resources such as raw material, labor, power, fuel, etc.
Manufacturing of the product which includes conversion of raw materials into work-in-progress into finished goods.
Sale of the products either for cash or on credit .credit sales creates accounts receivable for collection.
These three phases affect cash flows, which most of the time, are neither synchronized nor certain. They are not synchronized because cash outflows usually occur before cash inflows. Cash inflows are not certain because sales and collections that give rise to cash inflows are difficult to forecast accurately. cash outflows, on the other hand, are relatively certain .the firm is therefore required to invest in current assets for a smooth, uninterrupted functioning. It needs to maintain liquidity to purchase raw materials and pay expenses such as wages and salaries, other manufacturing, administrative and selling expense and taxes as there is hardly a matching between cash inflow and outflows.
The operating cycle of a firm begins with the acquisition of raw materials and ends with the collection of receivables. There are four aspects of the operating cycle:
Raw material stages
Work-in-process stage
Finished goods stage
Accounts receivable stage.
There is one aspect of operating cycle that provides resource accounts payable stage (the period for which credit is provided by supplier).the duration or length of operating cycle is the sum of:
Raw materials conversion period
Work-in-process conversion period
Finished goods conversion period.
Debtors' conversion period.
The total of these four components is called the Gross operating cycle.
Net operating cycle is calculated by deducting the payable deferral period from the gross operating cycle. The payable deferral period is the length of time the firm is able to defer payments on various resource purchases.
Thus, operating cycle = (RM+WIP+FG+Drs) - Crs
Where,
RM = Average stock of raw material
Average raw materials consumed per day
WIP = Average work-in-process inventory
Average WIP value of raw materials committed per day
FG = Average finished goods inventory
Average cost of goods sold per day
Debtors= Average account receivable
Average sales per day
Creditors= Average accounts payable
Average credit purchases per day
STRATEGIES IN WORKING CAPITAL MANAGEMENT
Depending on the risk exposure of business, different strategies are evolved to manage working capital:
Conservative Working capital strategy: This strategy suggests carrying high levels of current assets in relation to sales. Surplus current assets absorb sudden variations in sales, production plans and procurement time without disrupting production plans. Higher liquidity levels also reduce the risk of insolvency. But, lower risk translates into lower return. Large investments in current assets lead to higher interest and carrying costs and encouragement for inefficiency.
But, conservative policy will enable the firm to absorb day-to-day business risks. It assures continuous. Under this strategy, long-term sources of finance cover more than the total requirement for working capital.
Aggressive Working capital strategy: Here, current assets are maintained just to meet the current liabilities. There is no cushion for the variations in working capital needs. The core working capital is financed by long-term sources of capital. Seasonal variations are met through short-term loans and public deposits. This strategy minimizes the investments in net working capital and ultimately lowers its financing costs.
Hedging Approach/Matching Approaching: Under this approach, fixed working capital is financed from long-term sources and variable working capital is financed form short-term sources of finance.
COMPONENTS:
There are 3 major components in working capital management. They are
Cash management
Inventory management
Credit management
CASH MANAGEMENT
Cash, the most liquid assets, is of vital importance to the daily operations of the business firms. Crucial for the solvency of the business, it is referred to as the "life-blood of a business firm."
Cash is the basic input needed to keep the business running on a continuous basis; it is also the ultimate output expected to be realized by selling the service or product manufactured by the firm. Cash shortage will disrupt the firm's manufacturing operations while excess of cash will simply remain idle, without contributing anything towards the firm's profitability. Thus, a major function of the financial manager is to maintain a sound cash position.
OBJECTIVES OF CASH MANAGEMENT
The basic objectives of cash management are two-fold;
To meet the cash disbursement needs(payment schedule); and
To minimize funds committed to cash balances.
INVENTORY MANAGEMENT
Inventories constitute the most significant part of the current assets of a large majority of companies in India. On an average, inventories constitute almost 60% of current in Indian public limited companies. Thus a huge amount of funds is required to maintain these inventories. Therefore, it is imperative to manage inventories effectively off Inventory is an essential requirement for success of the enterprise.
NATURE OF INVENTORIES
Inventories are stock of the product a company is manufacturing for sale and components that make up the product. The various forms in which inventories exist in a manufacturing company are:
Raw material: the basic input that is converted into finished product through manufacturing process. It includes direct material used in the manufacturing of a product and it also includes the components, fuel, etc. used in manufacture.
Work-in-progress: semi-manufactured products. It includes partly finished goods and material, sub-assemblies etched between manufacturing stage. Stocks of work-in-progress are in the process of production.
Finished goods: completely manufactured products that are ready for sale or distribution.
OBJECTIVES OF INVENTORY MANAGEMENT
In the context of inventory management, the firm is faced with the problem of meeting two conflicting needs.
To maintain large size of inventory for efficient and smooth production and sales operations.
To maintain a minimum investment in inventories to maximize profitability's.
CREDIT MANAGEMENT
Credit is a means, by which customers can obtain immediate benefits of goods and services, upon the promise of payment at a facilitate sales. Business firms often provide credit to customers to facilitate sales. Since a credit sale increases the resources of customers by postponing payment it is appealing to them. Credit extended by a business firm usually ranges between 15-60 days. When goods are sold on credit sales are converted into accounts receivables. In every firm, receivables form an important part of the balance sheet.
OBJECTIVES OF CREDIT MANAGEMENT
To obtain optimum volume of sales.
To control the cost of credit and keep it at minimum
To maintain an optimum level of investment in debtors.
OBJECTIVES OF WORKING CAPITAL
The objective of working capital management is to maintain the optimum balance of each of the working capital components. This includes making sure that funds are held as cash in bank deposits for as long as and in the largest amounts possible, thereby maximizing the interest earned. However, such cash may more appropriately be "invested" in other assets or in reducing other liabilities.
The basic objective of working capital management is as follows:
By optimizing the investment in current assets and by reducing the level of current liabilities, the company can reduce the locking up of funds in working capital thereby; it can improve on capital employed in the business.
The next important objective of working capital management is that the company should always be supported by the current assets available with the firm. But, maintaining excess funds in working capital means locking of funds without return.
The firm should manage its current assets in a ways that the marginal return on investment on these assets is not less than the cost of capital employed to finance the current assets.
CONCEPTS OF WORKING CAPITAL
There are two concepts of working capital-Gross working capital and Net working capital
Gross working capital is the total of all current assets.
Net working capital is the difference between the current assets and current liabilities .working capital financed out of long-term source of funds is Net working capital.
Management of working capital refers to the management of current assets as well as the management of current liabilities.
KINDS OF WORKING CAPITAL
Considering time as a basis for classification, there are two kinds of working capital:
Permanent working capital represents the assets required on a continuing basis over the entire year.
The operating cycle is a continuous process and therefore the need for current assets is felt constantly. But the magnitude of current assets needed is not always the same. It increases and decreases overtime. But, there is always minimum level of current assets that is continuously required by the firm to carry on its business. This minimum level of current assets is referred to as permanent or fixed working capital.
Temporary working capital represents additional assets required at different times the operation of the year. Core current assets are those required by a firm to ensure the continuity of operation, which represents the minimum levels of various items of current assets viz., stock of raw materials, stock of work-in-progress, stock of finished goods, debtors balances, cash and bank, etc. the minimum level of current assets will be financed by the long-term sources and any fluctuation over the minimum level of current assets will be financed by the short-term financing.
It can be seen in the figures give below that the permanent working capital is stable over time, while temporary working capital is fluctuating-sometimes increasing and sometimes decreasing. However, the permanent working capital line need not be horizontal if the firm's requirement for permanent capital is increasing capital or decreasing over a period.
REVIEW OF LITERATURE:
COMPANY PROFILE:
TRIDENT PHARMACEUTICALS PVT LTD is a conglomerate of twenty years old company. It is equipped with latest machines and equipment complying with GMP norms. This company has manufacturing unit specialize in certain molecules to maintain the high stringent quality standards.
The company aimed to be one of the fastest growing and leading companies in our domain by providing unmatched products, incomparable services at the most competitive prices to our valued customers. The company is committed towards the highest quality standards, understanding the customers' need, changing market scenario and delivering products accordingly. Our wide distribution of suppliers and distributors, excellent professional services and promote delivery procedures has helped them to achieve maximum degree of customer satisfaction.
This company is dealing with different varieties of products. The product list of this company is as follows:
Tablets
Liquids
Suspensions
Capsules
Injectables
Dry powder injectables
Protein powder
SCOPE OF THE STUDY
The project report on working capital management covers of data, analysis of the data and suggestions.
For the purpose of project data or information for the financial years 2002, 2003, 2004, and 2005……..2007 is considered. Inventory statements are prepared on the financial of Trident Pharma.
OBJECTIVES OF THE STUDY
To understand the method of Working Capital Management in Trident Pharmaceuticals Pvt Ltd.
To study the management of various Components of Working Capital in Trident Pharmaceuticals Pvt Ltd.
To Analyze the Financial Performance of the Company by analyzing its Working Capital Management.
To suggest if possible ways of improving Working Capital Management in Trident Pharmaceuticals Pvt Ltd.
METHODOLOGY OF THE STUDY
The Methodology used for present study is to Primary data and Secondary data.
The primary data was collected through
Formal or informal discussion with the key people in the finance department, warehouse, production department and sales & marketing department.
Formal or informal discussion with the key people in the top management.
Onsite observations.
The Secondary data was collected through
Company Annual Reports (2008-09, 2007-08, 20006-07, 2005-06, 2004-05).
Business news papers (economic times, business standards, business lines, financial express).
Business magazines (business world, business India, business today).
Business/finance journals (Harvard business review, MIT Sloan management review, California management review, Finance India).
Text books.
CUSTOMERS OF TRIDENT PHARMACEUTICALS:
Trident Pharmaceuticals pvt. Ltd. Has large number of customers. They have customers in many states. They have customers like DURGA ENTERPRISES, RANJITH MARKETING, KRISHNA MEDICAL AGENCIES, SN PHARMA, SIVA ENTERPRISES, SRI LAKSHMI VENKATESHWARA DISTRIBUTORS, ALPHA MEDICOSE, BIOCARE, JAYANTH DISTRIBUTORS, KODAKKAT PHARMA, MALTESH AGENCIES, MALNAD PHARMA, NEW APEX, SAIRA PHARMA, SNEBA PHARMA, SHREE PRATAP DISTRIBUTORS, UNITED SALES ENTERPRISES, ETC.
BUSINESS AREAS:
This company is dealing their business in almost many states. The states in which the company is dealing their business are Andhra Pradesh, Karnataka, Madhya Pradesh, Kerala, Maharashtra, Tamil Nadu, Orissa, Gujarat, Bihar and Jharkhand. The company is doing their business with the annual turnover of 2.5 crores.
CURRENT OPERATIONS:
Today Trident Pharmaceuticals Pvt. Ltd. is a leading manufacturer of Pharmaceutical Formulations since 1989. We have observed continuous growth with profit increase, every year, under the efficient and direct supervision of the professional and experts. Over the years the expanded scope of Self-Reliance perused by TRIDENT PHARMA enabled it to blossom into a multi product and multi-disciplinary Organization, developing expertise in multiple Technologies catering to the exacting requirements of various clienteles in Professionals, Real-time and Strategic Sector.
TRIDENT PHARMA is organized into Strategic Business units specializing in Strategic Electronics, Communications, Control and Automations, Special Components and Products for Defence, Instruments, Security and Access Control and Information Technology and Telecom. Over the years, ECIL has setup extensive infrastructure for design, Development, Manufacturing and quality assurance which includes Computer aided design and manufacturing, MIS, Antina spinning facility, Antina test range, Quality control, calculation Laboratories and all that is required to enable the company to perform.
INFRASTRUCTURE:
TRIDENT PHARMACEUTICALS has an extensive infrastructure for Design, Manufacture, Testing and quality and Reliability Assurance. Its vast nation-wide network of marketing and service centers is the hallmark of its customer relations.
The company has widened its operations through development of infrastructure to present operating level in an area of 50000 sq mts of floor space and 300 acres of land having manufacturing facilities as:
Multi-layer PCB manufacturing Facility
Mechanical Fabrication facility(meeting seismic facility)
Antenna Test Range
Environment Test Facility
Standard and Calibration Laboratory
Wide variety of Computing environment
Surface Mounted Components Assembling Facility.
Over the years, TRIDENT PHARMA dedicated its efforts for development, production and promising sale of electronic components, products and systems with emphasis on total solutions in the sectors of Information Technology, Automation and Control, Communications and Strategic Electronics.
TRIDENT PHARMA has introduced advanced technologies and equipment through in-house and collaborative development efforts by the Research and Development wings at Hyderabad, India.
TECHNOLOGICAL ADVANCES AND CONVERGENCE:
Rapid Technological Advances with increase sharing of Technologies across various business areas characterize the current information era. TRIDENT PHARMA place and affective key role in most of these Applications in an effective way for connecting and inter operating of various sub-systems or systems based on multiple Technologies.
TRIDENT PHARMA is one of the few companies that offer multiple technology-based total solutions oriented products across all areas of Electronic Business. Today, these customers Centric Company is Vigorously perusing its mission of becoming a 'Valued National Asset' by focusing its efforts on the nuclear, Defense and other sectors of National importance.
ANAYLSIS OF VARIOUS RATIOS
CURRENT RATIO
Rs.In lakhs
YEAR
CURRENT ASSETS(RS)
CURRENT LIABILITIES(RS)
2004-05
10652181.50
3122076.43
2005-06
12362576.27
5334403.73
2006-07
9200895.55
4026935.73
2007-08
7057282.60
4173095.58
2008-09
10230000.00
4643000.00
INTERPRETATION:
The current ratio reflects the short-term solvency of the company. The ideal current ratio for a firm is said to be 2:1. i.e., the assets of the company should be twice its liabilities.
In the table, it can see that the current ratio of Trident pharma is fluctuating. In 2004-05, the current ratio is more than the ideal ratio (1.33), after that it maintained the ideal ratio.
However, the company has been in a very comfortable position because of large amounts of advances received from its customers. Thus, even if the company does not have cash ratios as per the generally accepted norms, it is in a very good position.
QUICK RATIO
YEAR
QUICK ASSETS(RS)
CURRENT LIABILITIES(RS)
2004-05
5354320.54
3122076.43
2005-06
7397512.56
5334403.73
2006-07
3894821.97
4026935.73
2007-08
4086911.65
4173095.58
2008-09
4691000.00
4643000.00
INTERPRETATION:
Quick current assets are those current assets that are convertible into cash rather early. As stock is not realizable early, it is not considered in computing quick assets. Quick ratio is a more precise measure of liquidity rather than current ratio. It shows the ability of the enterprise to pay its obligations without relying on the sale and collection of inventories. A quick ratio of 1:1 is considered ideal.
WORKING CAPITAL RATIO
YEAR
CURRENT ASSETS
CURRENT LIABILITIES
2004-05
10652181.50
3122076.43
2005-06
12362576.27
5334403.73
2006-07
9200895.55
4026935.73
2007-08
7057282.60
4173095.58
2008-09
10230000.00
4643000.00
INTERPRETATION:
Working capital is the difference between the current assets and current liabilities of a company. The table above shows the working capital of Trident pharma over the last five years. According to the fluctuations in current assets and current liabilities, the working capital also fluctuates.
Working capital is the highest at 7530105.07lakhs in 2004-05. Working capital has decreased in next 3 years. The reason for this is the rise in current assets position along with a steep fall in the current liabilities position in this year.
CURRENT ASSETS TURNOVER RATIO
YEAR
SALES(Rs)
CURRENT ASSETS(Rs)
2004-05
29219246.59
10652181.50
2005-06
24072051.30
12362576.27
2006-07
25615124.76
9200895.55
2007-08
22749799.51
7057282.60
2008-09
25186000.00
10230000.00
INTERPRETATION:
The ratio of sales to current assets measures the turnover of current assets. This ratio is a measure of the efficiency of the use of current assets. It shows the sales generates for investment of one rupee in current assets.
The current assets turnover ratio in Trident pharma, was high in the year 2007-08. It was low in the previous 3 years. This shows the lack of efficiency in utilization of current assets. Due decrease in the sales of the company.
WORKING CAPITAL TURNOVER:
YEAR
SALES(Rs)
NET WORKING CAPITAL(Rs)
WCT=sales/NWC
2004-05
29219246.59
7530105.07
3.88
2005-06
24072051.30
7028172.54
3.425
2006-07
25615124.76
5173959.82
4.950
2007-08
22749799.51
2884187.02
7.887
2008-09
25186000.00
5587000.00
4.507
INTERPRETATION:
Working capital turnover ratio is also called as net assets turnover ratio. This ratio implies the amount of sales generated for Re.1/- of capital employed in net assets. It shows how efficiently the working capital has been utilized. Higher the ratio, more efficient the working capital management.
In Trident pharma, the working capital turnover ratio was 3.88times in 2004-05. But, it has increased to 7.88 times in 2007-08. This shows that the company is managing it's current assets and current liabilities.
ANALYSIS OF RATIOS RELATING TO CASH
CASH RATIO
YEAR
ABSOLUTE LIQUID ASSETS
CURRENT LIABILITIES
2004-05
110895.28
3122076.43
2005-06
122825.00
5334403.73
2006-07
116957.25
4026935.73
2007-08
197358.31
4173095.58
2008-09
260000.00
4643000.00
INTERPRETATION:
Cash ratio or Absolute liquidity ratio is calculated along with the current ratios to known the liquidity of an organization. Here, the ratio between absolute liquid ratios (i.e., cash, bank balances and marketable securities) and current liabilities is calculated. Since cash is the most liquid assets, its ratio to current liabilities may be calculated to have an idea about the liquidity of an organization. The acceptable norms for cash ratio is 1:2.
In the case of Trident pharma, it can be seen that the cash ratio is also fluctuating from one year to another. But they are not maintaining the ideal ratio. The cash ratio of that company is very low. It will be good for the company if they maintain enough cash reserves.
SECURED LOANS
The secured loans taken by TRIDENT PHARMA over the past five years. During 1996-97, 1999-00, it use to take the secured loans, but then after it stop taking working capital demand loans. From then onwards the working capital demand loans have gone down from Rs: 5502.6lakhs in 1999-00 to nil next years. From than onwards the secured loans have reduced up to nil.
However, estimations of cash credit requirement are not done beforehand through cash budgets. Many times, the forecasts of the company do not come true due to a number of reasons. Cash budgets may change according to government policies. At such times, it is difficult to predict the future requirements of cash by the company. The cash credit is taken as and when the requirement arises according to the arrangement the company has with the consortium of banks. But, in the past few years, the secured loans have reduced. The reasons for this are:
Increase in advances received from customers has been utilized to meet the cash requirement of the cash.
The debtors realized have generated cash for the company's
INVENTORY CONTROL SYSTEM IN TRIDENT PHARMA
Most of the inventory ordering is done under Just-In-Time system. The company has an idea of the projects that are going to come its way and so it keeps the suppliers ready by telling them beforehand of the order they are likely to place with them. Once the company is sure of a particular order, the supplier is informed who in turn deliver the required materials. Due to this, the company does not have to wait very long to receive the raw material required to start production. The inventory -holding period comes down as also the lead-time for the material. Thus, the company follows a sort of perpetual inventory system stocking method.
The company receives about 10% to 20 % of the total project amount from its customers as advances.70% of the balance amount is realized after the goods have been dispatched to the customers. The balance amount (if any) is received after the installation work (wherever required) has been completed.
ANALYSIS OF RATIOS RELATING TO INVENTORY
INVENTORY TURNOVER RATIO
YEAR
COST OF GOODS SOLD
AVERAGE OF INVENTORY
2004-05
28705569.99
5270860.96
2005-06
23737567.76
4965063.71
2006-07
24670920.26
5306073.58
2007-08
22299734.12
2970370.95
2008-09
24669000.00
5539000.00
The inventory turnover ratio measures how fast the inventory is moving through the firm and generating sales. It reflects the efficiency of inventory management. The higher the ratio, more efficient the management of inventories. However, too high or too low a ratio needs to be investigated as it may mean that the stock levels maintained in the company are either too high or too low.
In the case of Trident pharma, the inventory turnover ratio decreased in the succeeding two years comparing to 2004-05 .This shows that inventory management is poor. The ratios are low, and the company has to improve their inventories.
INVENTORY HOLDING PERIOD
YEAR
AVERAGE INVENTORY
COST OF GOODS SOLD
2004-05
5270860.96
28705569.99
2005-06
4965063.71
23737567.76
2006-07
5306073.58
24670920.26
2007-08
2970370.95
22299734.12
2008-09
5539000.00
24669000.00
INTERPRETATION:
The inventory-holding period shows the number of days required by the company to convert the inventory into salable finished goods. A lower holding period shows that the company has the capacity to convert its inventories into finished goods very quickly.
We can see that the inventory holding period of Trident pharma in 2004-05 was 67days and it has increased to 78 days in 2006-07. But in 2007-08 it has reduced to 49 days. Again in 2008-09 it increased to 81 days. This shows that the company's production capacity is not stable.
ANALYSIS OF RATIOS RELATED TO RECEIVABLES
DEBTORS
TURNOVER RATIO
Rs.In lakhs
YEAR
SALES
DEBTORS
DTR=SALES/DEBTORS
2004-05
29219246.59
4436456.71
6.586
2005-06
24072051.30
3022456.82
7.964
2006-07
25615124.76
3177111.62
8.062
2007-08
22749799.51
3584399.57
6.346
2008-09
25186000.00
3533000.00
7.128
INTERPRETATION:
This ratio establishes the relationship between net credit sales and averages trade debtors. The objective of computing this ratio is to determine the efficiency with which the trade debtors are managed. It indicates the speed with which the debtors turn over on an average each year. In general, high ratio indicate the shorter collection period implying prompt payments from debtors and a low ratio indicates a longer collection period, which means a longer collection period.
In the case of Trident pharma the ratio increased in 2005-06 and 2006-07 when compared to 2004-05. This shows an improved efficiency on the part of Trident pharma in collecting its outstanding debts. But in 2007-08 the ratio has been decreased. Again in 2008-09 it showed improvement.
AVERAGE COLLECTION PERIOD
Rs.In lakhs
YEAR
DEBTORS
SALES
DEBTORS/SALES*365
2004-05
4436456.71
29219246.59
55.419
2005-06
3022456.82
24072051.30
45.828
2006-07
3177111.62
25615124.76
45.271
2007-08
3584399.57
22749799.51
57.504
2008-09
3533000.00
25186000.00
51.200
INTERPRETATION:
The average collection period represents the number of day's worth of credit sales locked in debtors. The shorter the average collection period, the better the quality of debtors, since a shorter collection period is also calculated as:
365
Debtors' turnover
It can be seen that Trident pharma's average collection period decreased in successive two years compared to 2004-05. But in 2007-08 it has increased.
CONCLUSIONS
The current ratio of the company is good. They are maintaining the required ideal ratio.
The analysis of Quick ratio taken shows that Trident pharma is not dependent on its inventories for its liquidity.
The working capital ratio has been reduced in next two years when compared to 2004-05. They should improve their working capital ratio.
The current assets in 2004-05 and 2005-06 were low. But it increased in 2007-08. But again in 2008-09 it has reduced. They showed improvement in 2007-08. They should show that same improvement rather than coming down.
The Working capital turnover ratio shows that working capital utilization has improved greatly in Trident pharma.
The company places orders for inventory only when it receives the order for a particular products, this greatly decreased its costs of maintaining inventory levels.
The company has to improve its inventory management in the future. It is not stable. It is either increasing or decreasing.
Better inventory management leads to better management of current assets in the company.
SUGGESTIONS
1. The liquidity position of Trident pharma is very good but it has to strive hard &improve it further to meet its growing needs.
2. The sales of the company should further improve the manufacturing of the goods very high.
3. The company should improve its inventory management in the future. As Better inventory management leads to better management of current assets in the company.
4. The company has improved its inventory management in the past five years. Better inventory management leads to better management of current assets in the company.
5. The Working capital turnover ratio shows that working capital utilization has improved greatly in Trident pharma.
6. The Company places orders for inventory only when it receives the order for particular products, this greatly decreased its costs of maintaining inventory level.
In conclusion, it can be said that working capital position of Trident pharma should be improved slowly.
The analysis of Quick ratio taken shows that Trident pharma is not dependent on its inventories for its liquidity. This is a good sign as dependence on stocks for liquidity can be harmful for any company.
The Working capital turnover ratio shows that working capital utilization has improved greatly. I suggested them to maintain the same.
