Working Capital Management in Kristna Engineering Works - A Case Study of Andhra Pradesh

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1 Working Capital Management in Kristna Engineering Works - A Case Study of Andhra Pradesh Dr.Venkateswararao.Podile 1 and Hema Venkata Siva Sree 2 1 (Professor, MBA Department, Andhra Loyola Institute of Engineering and Technology, Vijayawada, India) 2 (Assistant Professor, MBA Department, Andhra Loyola Institute of Engineering and Technology, Vijayawada, India) Abstract: Kristna Engineering Works is one of the leading manufacturers and exporters from India engaged in the manufacturing of Sugar Mill Rollers, Blank Shells, Mill Spares, Crane Preparatory Devices and spares for sugar and for other allied industries. It is located at Vijayawada of Krishna district in the state of Andhra Pradesh. Kristna Engineering Works was established in the year This company is catering the needs of more than Two hundred and fifty sugar mills located in India and overseas. This Enterprise has an annual turnover of Rupees lakhs. The total current assets of the company are Rupees lakhs and current liabilities are Rupees 931 lakhs. In this paper an attempt is made to examine and analyse working capital Management of Kristna Engineering Works. In this paper structure and composition of working capital in the enterprise for a period of ten years is analysed. ratio, quick ratio, super quick ratio, gross working capital turnover ratio, net working capital turnover ratio, cash turnover ratio, inventory turnover ratio, debtors turnover ratio and average collection period are calculated for the study period. Hypotheses are tested using chi square test. Keywords: Quick Ratio, Working capital, Debtors Turnover, Inventory turnover, Average collection period I. INTRODUCTION Kristna Engineering Works is one of the leading manufacturers and exporters from India engaged in the manufacturing of Sugar Mill Rollers, Blank Shells, Mill Spares, Crane Preparatory Devices and spares for sugar and for other allied industries. It is located at Vijayawada of Krishna district in the state of Andhra Pradesh. Kristna Engineering Works was established in the year This company is catering the needs of more than Two hundred and fifty sugar mills located in India and overseas. This company is an ISO 9001:2008 certified company, certified by Bureau Veritas Quality International (BVQI). It has a man power of 450 including skilled, semi-skilled and supervisory staff working round the clock in three shifts. This Enterprise has an annual turnover of Rupees lakhs. The total current assets of the company are Rupees lakhs and current liabilities are Rupees 931 lakhs. In this paper an attempt is made to examine working capital management in Kristna Engineering Works. II. REVIEW OF LITERATURE Mishra (1975) 1 studied the efficiency of working capital management in six sample public sector units. The study identified that management of various components of working capital in sample units was highly unsatisfactory. Suk, Seung and Rowland (1992) 2 in their research conducted an in-depth survey to analyze the liquidity practices of ninety four sample Japanese companies operating in the United States. Sivarama (1999) 3 in his study on working capital management in the Indian paper industry, found a close association between profitability and working capital efficiency. Reddy (2000) 4 analyzed the working capital management in thirty small scale industries in the Cuddapah district of Andhra Pradesh and found that debtor management policy and the collection mechanism to be very unsystematic and highly inefficient that resulted into excess investment in debtors. Ghosh and Maji (2003) 5 made an empirical study on the relationship between utilization of current assets and operating profitability in the Indian cement and tea industries. Bardia (2004) 6 conducted a study on the issue pertaining to the relationship between working capital management and profitability of Navaratna steel manufacturing public sector enterprise. Prof. B.P.Singh (2012) 7 investigated the relationship between the components of working capital and profitability. He observed that the telecom industry is operating below average so far as working capital is concerned. Pasupathi (2013) 8 conducted a comparative study of WCM performance in commercial vehicles, passenger cars and multi utility vehicles and two and three wheelers sectors of Indian automobile industry. Utkarsh Goel et al. (2015) 9 conducted a study to explore the impact of corporate governance practices on Working capital Management (WCM) in Indian firms. S. Selvanayaki et al. (2015) 10 focused on evaluating the WCM practices adopted by the rice milling firms and analyzed its impact on profitability. Venkateswararao.P, Surya Chandra Rao.D and Hema Venkata Siva Sree.Ch (2017) 11 examined working capital management in PL Plast Pvt Ltd. Venkateswararao.P, and Hema Venkata Siva Sree.Ch (2018) 12 Page 61

2 examined working capital management in Sri Rama Chandra Paper Boards Ltd. Venkateswararao.P, and HemaVenkata Siva Sree.Ch (2018) 13 examined working capital management in Sri Nagavalli solvent oils Pvt. Ltd. Venkateswararao.P (2018) 14 examined the working capital management in Cuddapah Spinning Mills Ltd. It was found that there was no study on working capital management in a company engaged in the manufacturing of Sugar Mill Rollers, Blank Shells, Mill Spares, Crane Preparatory Devices and spares for sugar and for other allied industries. Hence, this study is taken up. Objectives The general objective of the study is to examine the working capital management in Kristna Engineering Works. The specific objectives include the following. 1. To examine the structure and composition of working capital in Kristna Engineering Works during the period of study. 2. To analyse the liquidity position of Small Enterprise during the period of study. 3. To find the gross working capital turnover and networking capital turnover in the company. 4. To examine the efficiency in cash, debtors and inventory management in the Small Enterprise under study. 5. To offer suggestions for effective working capital management if required. Hypotheses H 01 : ratio in Kristna Engineering Works is uniform during the period of study. H 02 : Quick ratio in Kristna Engineering Works is uniform during the period of study. H 03 : Super quick ratio in Kristna Engineering Works is uniform during the period of study. H 04 : Gross working capital turnover ratio in Kristna Engineering Works is uniform during the period of study. H 05 : Net working capital turnover ratio in Kristna Engineering Works is uniform during the period of study. H 06 : Cash turnover ratio in Kristna Engineering Works is uniform during the period of study. H 07 : Inventory turnover ratio in Kristna Engineering Works is uniform during the period of study. H 08 : Debtors turnover ratio in Kristna Engineering Works is uniform during the period of study. H 09 : Average collection period in Kristna Engineering Works is uniform during the period of study. III. METHODOLOGY The present study is mainly based on secondary data. The data is taken from the financial statements including balance sheet, trading account and profit and loss account of Kristna Engineering Works. The period of study is ten years covering the financial years from to The data gathered is analysed through the technique of percentages and certain appropriate ratios relating to working capital management. The ratios covered includes current ratio, quick ratio, super quick ratio, gross working capital turnover ratio, net working capital turnover ratio, cash turnover ratio, inventory turnover ratio, debtors turnover ratio and average collection period. Chi square test is used for testing the hypotheses formed. Structure and composition of working capital Working capital structure of Kristna Engineering Works is presented in table1. It is observed that Inventory was per cent of total current assets during It is the lowest percentage during the period of study. Its percentage was highest at during It is observed that inventory occupied highest percentage of current assets during the year Debtors as a percentage of total current assets varied in between during 2010 and during Of all current assets debtors occupied highest percentage during the period of study except 2010.It is also observed that cash and bank balance as a percentage of current assets varied between 0.31 during 2014 and 8.14 during Loans and advances as a percentage of current assets varied between 4.54 during 2007 and during Other current assets as a percentage of total current assets varied between 3.68 during 2014 and during Sundry Creditors occupied highest per cent of current liabilities during the period of study except 2009 and They varied between during 2013 and during Short-term borrowings were nil during the period of study. Short-term provisions by the Business organisation were made during the years 2007,2008,2010,2013 and Short-term provisions as a percentage of current liabilities were 1.14 during 2010 and during Other current liabilities vary between during 2007 and during It is observed that Net Working Capital in the company varied between Rs Lakhs during 2013 to Rs Lakhs during It was maintained at high levels during 2015 and Table1: Working Capital structure of Kristna Engineering Works during to (Figures in Lakhs) Particulars Assets Cash & Bank balances Page 62

3 % of TCA Debtors % of TCA Loans & Advances % of TCA Other Assets % of TCA Inventory % of TCA Total Assets (TCA) Sundry Creditors % of TCL Other current liabilities % of TCL Short term borrowings % of TCL Short term provisions % of TCL Total (TCL) NWC Ratio The current ratio in the company was maintained at above normal level in the company. It has varied between 1.34 during 2013 and 4.18 during 2010 was shown in the table. It is found in the significance test that current ratio is uniform during the period of study. Table2: Ratio (Figures in Lakhs) Assets ratio Calculated value of χ2for current ratio = Calculated value is less than Critical Value i.e., 2.056< Hence H 01 is accepted. Quick Ratio The quick ratio of the company as shown in the table has varied between 0.80 during 2013 to 2.78 during It is found in the significance test that quick ratio is uniform during the period of study. Table-3: Quick Ratio (Figures in Lakhs) Liquid Assets Quick ratio Calculated value of χ2for Quick ratio = Calculated value is less than Critical Value i.e., 1.358<16.919,Hence, H 02 is accepted. Page 63

4 Super Quick Ratio The super quick ratio of the company as shown in the table has varied between during 2013 and 0.28 during It is found in the significance test that super quick ratio is not uniform during the period of study. Table4: Super Quick Ratio (Figures in Lakhs) Cash Super Quick ratio Calculated value of χ2 for Super Quick ratio = Calculated value is less than Critical Value i.e., 0.878<16.919, Hence, H 03 is accepted. Gross Working Capital Turnover Ratio The gross working capital turnover ratio of the company as shown in the table has varied between 1.07 during 2016 and 2.18 during It is found in the significance test that net working capital turnover ratio is uniform during the period of study. Table5: Gross Working Capital turnover Ratio (Figures in Lakhs) Gross working capital Ratio Calculated value of χ2 for Gross Working Capital turnover ratio = Calculated value is less than Critical Value i.e., 0.705<16.919, Hence, H 04 is accepted. Net Working Capital Turnover Ratio The net working capital turnover ratio of the company as shown in the table has varied between 1.52 during 2016 and 6.51 during It is found in the significance test that net working capital turnover ratio is uniform during the period of study. Table6: Net Working Capital Turnover Ratio (Figures In lakhs) Net Working Capital Ratio Calculated value of χ2 for Net Working capital turnover ratio = Calculated value is less than Critical Value i.e., 6.138<16.919, Hence, H 05 is accepted. Cash Turnover Ratio The cash turnover ratio of the company as shown in the table has varied between during 2016 and during It is found in the significance test that cash turnover ratio is not uniform during the period of study. Table7: Cash Turnover (Figures In lakhs) Average Cash Balance Ratio Calculated value of χ2 for Cash turnover ratio = Calculated value is greater than Critical Value i.e >16.919, Hence, H 06 is rejected. Page 64

5 Inventory Turnover Ratio The inventory turnover ratio of the company as shown in the table has varied between 3.20 during 2016 to 6.81 during It is found in the significance test that Inventory turnover ratio is uniform during the period of study. Table8: Inventory Turnover Ratio (Figures In lakhs) Average Inventory Ratio Calculated value of χ2 for Inventory turnover ratio = Calculated value is less than Critical Value i.e <16.919, Hence, H 07 is accepted. Debtors Turnover Ratio The debtor s turnover ratio of the company as shown in the table has varied between 2.29 during 2016 to 5.36 during It is found in the significance test that Debtors turnover ratio is uniform during the period of study. Table9: Debtors Turnover Ratio (Figures In lakhs) Average debtors Ratio Calculated value of χ2 for Debtors turnover ratio = Calculated value is less than Critical Value i.e., 2.450<16.919, Hence, H 08 is accepted. Average Collection Period The average collection period as shown in the table has varied between 68 days during 2011 to 159 days during It is found in the significance test that Average collection period is not uniform during the period of study. Table10: Average Collection Period (Figures In lakhs) Days in a year Debtors Turnover Ratio Average Collection Period Calculated value of χ2 for Average collection period = Calculated value is greater than Critical Value i.e >16.919, Hence, H 09 is rejected. IV. CONCLUSION The above analysis depicts that debtors occupied first place followed by inventory as a percentage of current assets in Kristna Engineering Works during the period of study. The Business organisation has credit worthiness because there is a significant increase in creditors. Short term borrowings during the period of study are nil. ratio of the company is high which indicates that the company is more likely to meet its current liabilities. But, high current ratio indicates high liquidity but profitability is affected to some extent. Debtors turnover ratio was comparatively less in last four years of the study which reflects in high Average collection period. Cash turnover ratio and average collection periods are not uniform during the period of study and showed wide fluctuations. Collection of debts and cash utilization was poorly done in the company during the period of study. ratio, Quick ratio, super quick ratio, Gross working turnover ratio, net working capital turnover ratio, Inventory turnover and debtor turnover ratios are uniform during the period of study. To conclude, though working capital management is satisfactory, there is further scope for improvement in working capital management. Page 65

6 V. REFERENCES [1] Mishra, R.K., Problems of Working Capital with Reference to Selected Public Undertakings in India, Somaiya Publication, Bombay, [2] Suk, H., Seung, H. and Rewland, Working Capital Practices of Japanese Firms in the US, Financial Practice and Education, Spring Summer, Vol.2, No.1, 1992,pp [3] Sivarama PR, Working Capital Management in Indian Paper Industry, Unpublished Thesis, Nagarjuna University, Nagarjuna Nagar, Guntur, [4] Reddy, S.H., Working Capital Management in Small Scale Industries A Case Study of Cuddapah District, Doctoral Dissertation, Sri Venkateswara Univeristy, Tirupati,2000. [5] Ghosh SK and Maji SG, Utlization of Assets and Operating Profitability: An Empirical Study on Cement and Tea Industries in India, Indian Journal of Accounting, IAA,2003, pp [6] Bardia SC, Liquidity Management: A Case Study of Steel Authority of Indian Ltd., The Management Accountant, ICWAI, June, 2004, pp [7] Prof. B.P. Singh, Working Capital Management and Profitability in the IT and Telecom Industry in India, Indian Journal of Finance, Vol.6.No.3,2004, pp [8] Pasupathi Working Capital Management of Indian Automobile Industry, Finance India, vol-xxvi, No.1, 2004, pp [9] Utkarsh Goel et al., Impact of Corporate Governance Practices on Working Capital Management Efficiency: A structural Equation Modelling Approach, Indian Journal of Finance, Vol: 9, No-1,2015, pp [10] S. Selvanayaki et al., Working Capital Management in modern rice milling firms at kangayam Tamilnadu, Indian Journal of Finance, vol:9, No:2, 2015, pp [11] VenkateswaraRao.P, Surya Chandrarao.D and Hema Venkata Siva Sree.Ch, Working capital Management in P.L.Plast Pvt Ltd, IOSR Journal of Business Management, Vol.19,Issue No.4,2017, pp [12] VenkateswaraRao.P, and Hema Venkata Siva Sree.Ch, Working capital Management in Sri Rama Chandra Paper Boards Ltd, International Journal of Research in Management, Economics and Commerce,Vol.8, Issue.2,2018, pp [13] VenkateswaraRao.P, and Hema Venkata Siva Sree.Ch, Working capital Management in Sri Nagavalli solvent oils Pvt. Ltd, IOSR Journal of Business Management, Vol.20, Issue.2,2018, pp [14] VenkateswaraRao.P, Working capital Management in Cuddapah Spinning Mills Ltd- A case study in Andhra Pradesh, International Journal of Research in Engineering, IT and Social Sciences,Vol.8, Issue.3,2018, pp Page 66