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Working Capital Management _ Ratio Analysis

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									Hindustan National Ravi Proj KantGlass & Industry ect limited Nawan Virbhadra , Rishikesh On i Wor king Capi tal Man age men t& Rati o Anal ysis

2009

2Project On Working Capital Management & Ratio Analysis

Title Page
Summer Project on Working Capital Management & Ratio Analysis

SUBMITTED To :ACE GLASS CONTAINERS LTD. (FINANCE DEPARTMENT)

S UBMITTED BY:Ravi Kant Nawani INT.B.B.A + M.B.A (O&G) U.P.E.S

Acknowledgement
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At the very outset, I would like to give my heartist thanks , to the Management & staff of Hindustan National Glass & Industries Ltd. Virbhadra , Rishikesh For giving me their co-operation, support and guidance in my project . I am greatly indebted to Shri Rakesh Garg(VicePresident), Mr.Shammi Thasu(Head of Finance& Account) , Mr.S.K.Upadhya , Mr.B.D.Joshi for guiding me and helping me out to complete this dissertation. I would also like to thank to my esteemed Faculty Mr. Vipul Sharma(Finance), Course Co-coordinator Respectively their constant support ,continued and invaluable guidance at each step of this summer internship project . I would like to thank my Parents for what I am today.

Contents
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Executive Summary 7 Research Objectives 8 Research Methodology 10 Hindustan national Glass & 12 Industry Limited (A Review) Requisites for Glass manufacturing 14 Process & their Sources Manufacturing Process Of Glass 15 Glass Container Factories Batch House Hot End Furnace Forming Process Forming Machines Internal Treatment Annealing Cold End Inspection Equipment Secondary Processing 25 Packaging
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Coatings Ancillary Processes- Compressors
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Vision 28 History , HNGIL 29 AGCL 32 Board of Directors 34 Other Member 35 Important Departments & Designation 36 Reporting 39 SWOT Analysis of the company 40 Working Capital Management 44 Concept of Working capital Management Importance Of Working Capital Management Types of W.C.M Components of W.C.M Factor Affecting W.C.M Sources Of W.C.M
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Operating cycle concept s of working capital Ratio Analysis 59 Advantages of Ratio Analysis Limitation Of Ratio analysis General profitability Ratios Overall profitability Ratios Activity Ratios Liquidity Ratios Miscellaneous Interpretation 70 Recommendations 71 Limitations 72 Conclusion 74 Bibliography 76

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Executive Summary

Cash is the lifeline of a company. Understanding a company’s cash flow health is essential to making investment decisions. A good way to judge a company’s cash flow prospects is to look at its Working capital management. Working Capital is also known as operating capital. It represent the day by day operating liquidity available to a business. The goal of Working capital management is to ensure that a firm is able to continue its operations and that it has sufficient ability to satisfy both maturing short-term debt and upcoming operational. Expenses.

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Research Objectives
Objectives Of the study :
This research Project covers the Two most important aspects or features of the functioning of the Finance Accounts Department of the Hindustan national Glass and Industries Ltd.(HNGIL). The first part is both, an analytical as well as an academic study that involves an analysis of the Working Capital and Working Capital Management Policies of the organization-HNGIL. The Main Objectives of this study are :• To understand the working capital management policies of the organization. • To understand the importance of Working Capital Management. • To analyze the liquidity position of the organization. • To analyze the short-term financing policies and patterns, which affect the working capital of the organization.

• To study the factor that affects the Working Capital Management at HNGIL.
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• To find out the Profitability and Operational efficiency of the organization.

Research Methodology
The basic type of research used to prepare this report is;
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Descriptive The major purpose of descriptive research is to give a description of the state of
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affairs, as it exists in the present. The main characteristic of this method is that researcher has no control over the variables. The researcher can only report what has happened or what is happening. What , where , When , How are the researcher and not “Why”. Descriptive Report is that subscription which answers or addresses all these questions. The study mainly based on the secondary data which refers to that form of information that has been already collected and is available.These include some internal sources within the company and externally these sources include books and periodicals, published reports and data of HNGIL and the annual reports of the company. Interaction with the various employees of the accounts department has also been a major source of information. The Data & Financial result of the past ten years have been taken into
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consideration for analysis and calculations.

HINDUSTAN NATIONAL GLASS & INDUSTRIES LIMITED
A REVIEW HINDUSTAN NATIONAL GLASS & INDUSTRIES LIMITED is a capital intensive and refurbishment of furnaces in a cycle of every five years, on an average. Owing to this , the industry is primarily restricted to large
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manufactures in the organized sector accounting for about 85% of the melting capacity. The industry is also sensitive to fright. The glass manufacturing units generally cater to the markets in the radius of 300-500 km. The growth of containers glass industry is derived demand from its user industries. Major end – users, which together accounts for more than 90% of the off take, are manufacturers of carbonated & alcoholic drinks, food processing , pharmaceuticals and cosmetics. While the major user industries like pharmaceuticals and alcoholic drinks were having high growth rates, carbonated drink industry slowed during financial year 2006 due to ongoing pesticide issue. Ace glass containers limited had to concentrate more on pharmaceuticals and alcoholic industries. Alternate forms of packaging like flexible packing laminates and plastic containers in applications like milk packaging,
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intravenous fluids, blister packs for tablets and capsules have been posing threats to the container glass industry. Moreover, aluminum cans and pet bottles are being increasingly used for the purpose of selling bottled soft drinks.

Requisites for Glass Manufacturing Process & their sources
1.Raw Materials:• Broken Glass
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• Sand
Quartz Silica-Comes from Rajasthan Soda Ash – Comes from Kenya  Dolemite– Comes from Paunta Sahib (Himanchal Pradesh)  Limestone- Comes from Paunta Sahib (Himanchal Pradesh)
1.

Fuel And Gases :• RFO (RESIDUAL FURNISHED OIL) • HPS ( HEAVY PETROLEUM STOCK) • FO (FURNISHED OIL) LPG (Liquefied Petroleum Gas) Propane

1.Packing :• Corrugated Bags • Gunny Bags • Plastic Film
1.

Required Temperature:- 1300-15000 c

Manufacturing Process of glass
Glass is common in everyday life, from glass windows to glass containers. The manufacture of
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glass for everyday process may be a complex process. The process of mass production of glass is given below.

Glass Container Factories Modern glass container factory are brodly divided into three parts :- The batch house , the hot end and the cold end. The batch house are concerned with raw material. In hot end are the furnaces , machines that produce containers (forming) and annealing ovens. In cold end there are inspection and packaging equipments.
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Batch House
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The Batch House holds the raw materials for glass, primarily sand , soda ash , feldspar (as we as others).These materials are received (typically by truck or rail transport) and elevated into storage silos. From the silos they are weighed out into a batch of several tones , using common glass batch calculation procedures. The batch is mixed and sent to silos over the furnace.

Hot End
The following table lists common viscosity fix points applicable to large –scale glass production and experimental glass melting in the laboratory.

Log10 (n,Pa.s) 1 3 4 6.6 8.00 10.00 10.5 11.0012.3 12 13.5

Log1o (n,P) 2 4 5 7.6 9.0011.00 11.5 12.0013.3 13 14.5

Description Melting Point Working Point Flow Point Littleton Softening Point Dilatometric Softening Point , Td, depending on load Deformation point Glass Transition Temperature, Tg Annealing Point Strain Point

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Furnace
The Hot end of a glassworks is where the molten glass is formed into containers , beginning when the batch is fed at a slow controlled rate into the furnace. The furnace are natural gas or fuel oil fired and operates at temperatures up to 16750C. The temperatures is limited by the quality of the furnace superstructure material and by the glass composition. Glass furnaces typically operate an energy recovery scheme known as regeneration. The hot exhaust gas flow back over one of two piles of loosely packed bricks, called regenerators. These bricks Scheme known as regeneration. The hot exhaust gas flow back over one of two piles of loosely packed bricks, called regenerators. These bricks become hot and every 20-30 minutes the flow of the combustion system is changed over so that the combustion air, which is mixed with the gas, is drawn through the heated bricks, and combustion exhaust flows through the other pile of bricks. The batch melts inside the furnace which is maintained as a pool of molten glass, perhaps 1200mm deep by 50 to 150 m2 . The molten glass flows from a sub ducted channel known as the
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furnace throat into the refiner and fore hearth channels. These channels, 1200mm wide and 400150 mm deep transport the glass to the glass bottle forming machines. These channels cool the glass very precisely so that the glass at the forming machine is of a uniform and exact temperature.

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Forming Process
There are currently two primary methods of making a glass container the blow and blow method and the press and blow method. In all cases a stream of molten glass at its plastic temperature (10500 C – 12000 C) is cut by a shearing blade to form a cylinder of glass called a gob. Both of the processes start with this gob falling by gravity and guided by trough and chutes into the bank moulds . In the blow and blow process, the glass first is blown from below into the blank moulds to create a parison or pre-container. This parison is the flipped over into a final mould, where a final blow blows the glass out in to the mould to make the final container shape. In the case of press and blow, the parison is formed by a metal plunger which pushes the glass out into the blank mould. The process then continues as before, with the parison being transferred to the mould, and the glass being blown out into the mould.

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Forming Machines

The forming machines hold and move the container. Generally powered by compressed air, the mechanisms are timed to coordinate the movement of all these parts so that containers are made.

The most widely used forming machine arrangement is the individual section machine invented in 1903 by Michael J Owens in Illinois. This machine has a bank of 5-16 identical sections, each of which contains one complete set of mechanisms to make containers. The section are in a row, and the
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gobs feed into each section via a moving chute, called the gob distributor. Section make either one , two , three or four containers simultaneously. In the case of multiple gobs, the shears cut the gobs simultaneously , and they fall into the blank moulds in parallel.

Internal Treatment
After the forming process, some containersparticulary those intended for alcoholic spirits – undergo a treatment to improve the chemical resistance of the inside , called
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internal treatment or dealkalization. This is usually accomplished through the injection of a suffer or fluorine- containing gas mixture into bottles at high temperatures. The gas is typically delivered to the container either in the air used in the forming process or through a nozzle directing a stream of the gas into the mouth of the bottle after forming. The treatment renders the container more resistant to alkali extraction, which can cause increases in product pH, and in some cases container degradation.

Annealing
As glass cools it shrinks and solidifies. Uneven cooling causes weak glass due to stress. Even cooling is achieved by Annealing. An annealing oven (known in the industry as a Lehr) heats the container to about 5800C then cools it, depending on the glass thickness, over a 20-60 minute period.

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Cold End
The role of the cold end is to inspect the containers for defects, package the containers for shipment and label the containers.

Inspection Equipment

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Glass containers are 100% inspected; every container is inspected. Automatic machines inspect for a variety of faults. Typical faults include small cracks in the glass called checks, foreign inclusions called stones, bubbles in the glass called blisters and excessively thin walls. In addition to rejecting faulty containers, inspection equipment gathers statistical information and relays it to the forming machine operators in the hot end. Computer system collect fault information to the mould that produced the container. This is done by reading the mould number on the container by the mould that made it. Operators carry out a range of checks manually on samples of containers, usually visual and dimensional checks.

Secondary Processing
Sometimes container factories will offer services such as labeling. Several labeling technologies are available. Unique to glass is the Applied Ceramic Labeling process (ACL ). This is screen – printing of the decoration onto the container with vitreous enamel paint, which is then baked on. Bottles have various added services such as: Etching (Absolute
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Raspberry/ Ruby Red) and Applied Ceramic Labeling (Absolute Blue/Pears/Red/Black).

Packaging
Glass containers are packaged in various ways. Popular in Europe are bulk pallets with between 1000 and 4000 containers each. This is out by automatic machines(palletizes) which arrange and stack containers separated by layer sheets. Other possibilities include boxes and even hand sewn sacks. Once packed the new “stock units” are labeled and warehoused.

Coatings
Glass containers typically receive two surface coatings, one at the hot end, just before annealing and at the cold end just after annealing . At the hot end a very thin layer of tin oxide is applied either using a safe organic compound or inorganic stannic chloride. Tin based System are not the only ones used, although the most popular. Titanium Tetrachloride or organo – titanates can also be used. In all cases the coating renders the surface
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of the glass more adhesive to the cold end coating . At the cold end a layer of typically, polythene wax is applied via a water based emulsion. This makes the glass more adhesive to the cold end coating. At the cold end a layer of typically, polythene wax, is applied via a water based emulsion. This makes the glass slippery, protecting it from scratching and stopping and stopping containers from sticking together when they are moved on a conveyor. The resultant invisible combined coating gives a virtually unscratchable surface to the glass. Due to reduction of in – service surface damage the coating often are described as strengtheners, however a more correct definition might be strength retaining coatings.

Ancillary Processes - Compressors
Forming machines are largely powered by compressed air and typical glass works will have several large compressors (totaling 30k-60kcfm) to provide the needed compressed air. Furnaces, compressors and forming machines generate quantities of waste heat which generally is cooled water. Hot glass which is not used in the forming machine is diverted glass (called cullet) is
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generally cooled by water, sometime even processed and crushed in a water and sometime even processed and crushed in a water bath arrangements. Often cooling requirements are shared.

Vision

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History
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Hindustan National Glass & Industries Limited
It was in 1952 that visionary entrepreneur Chandra Kumar Somany laid the foundations for the HNG Group, with the inauguration of Eastern India’s fully automatic glass container manufacturing plant at Rishra,near Kolkata (Calcutta). Hindustan National Glass & Industries Ltd. (HNGIL) is a rare breed in the international glass container community of the 21st century . With a total melting capacity of 2300 tons/day , the company is constantly in search of improvements. In total, 38 highly productive lines are operated, from which pack efficiencies of better than 90% are now standard.

In the organized segment of the domestic glass container industry , AGCL is the second largest glass manufacturer after HNG with a market share of about 25%. It manufacturer about 300 types of glass containers, at an average of 15 lakh pieces per day, for industrial customers. Its major customers include United Breweries,
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Mcdowell & Company, Bacardi Martini India, Nestle, GlaxoSmithKline and Seagram. AGCL uses state-of-the-art technology for glass manufacturing. In Financial Year 2006, the major user industries comprised of Beer & Liquor, Food & Dairy products and beverage & aerated water, with beer & liquor containing to be the dominant end user of industry. Aggregate net sales declined by about 20% in the Financial year 2006 from Financial year 2005 primarily due to decline in the production ( about 60300 MT) an account of shutdown of furnances at Rishikesh and Nasik units for refurbishment and lockout at Pondicherry unit , resulting about 23% fall in the quantity sales during this period. Although the net sales price Realization (ANSPR) during financial year 2006 increased by about 4% , but the container glass industry had an adverse impact in financial year 2006 on account of fall in the carbonated drink sales arising out of pesticide issue. Glass industry is capital intensive, thus requiring refurbishment of future after five years involving shutdown. In the Financial Year 2006, Ace Glass Containers Limited refurbished the second furnance at
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Rishikesh unit at a cost of Rs. 33 Crore and the furnance of the newly acquired Nasik unit at a cost of Rs.2o Crore. Since 28th April 2008 M/ACE Glass Containers, Rishikesh merged with HNGIL and name has been changed from M/ACE to HINDUSTAN NATIONAL GLASS & INDUSTRIES LIMITED.

ACE GLASS CONTAINERS LTD. (AGCL)
It is the pioneer in glass container manufacturing in India. AGCL was formed in 1994 as Owens Bilt Ltd. (OBL), a joint venture between Owens-Illinois inc. (OI), USA and Ballarpur Industries Ltd. (BILT), is currently owned by the C.K.Somany Group. After
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the takeover, OBIL was renamed as Ace Glass Containers Ltd. Since inception , AGCL is engaged in manufacturing plants at Rishikesh (Uttarakhand), Pondicherry and Nasik (Maharashtra) with an aggregate capacity of 366825 TPA. All the three units have ISO 9001:2001 accreditations. Prior to the takeover by the C.K.Somany Group , the company had suffered huge operational losses mainly on account of substantial overheads and tremendous competition from HNG in respect of product pricing. The new management was able to address the overhead issue effectively by adopting various cost cutting measures and leveraging on group’s strong position in the container glass market. In the organized segment of the domestic glass container industry , AGCL is the second largest glass manufacturer after HNG with a market share of about 25%.

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Board Of Directors Chairman

: Mr.C.K.Somany

Mr. C.K.Somany is acknowledged expert in glass technology and is providing policy guidelines for the management and administration for the company. He holds an F.B.I.M (London) Degree and a degree in glass plant instrumentation from Honeywell Brown,Minneapolis,U.S.A. Managing Director : Mr.Sanjay Somany Mr. Sanjay Somany is a commerce graduate and has obtained a Diploma in Diesel
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Engineering and vast knowledge of the glass Manufacturing Technology. At the present he is the Managing Director of the company. Joint Managing Director :Mr.Mukul

Somany
Mr.Mukul Somany is commerce graduate . He is a noted industrialist in the glass manufacturing industry .

Other Members
Mr. J.P.Kasera President Mr.R.R.Soni President Mr.R.L.Khandelia Mr.K.C.Jain Mr. S.Chaudhary Mr.S.Bhende President(Marketing) Mr.V.Sharan President(Marketing) Vice Vice
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Senior Senior President President Vice President

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Mr.A.C.Jain &Ceramics) Mr.N.K.Kabra (Material) Mr.Devdutta Hoare (Exports)

Vice President(Glass Vice President Vice President

Important Departments & Designations

In HNGIL (Virbhadra)
ℜ Stores : ➢ Commercial Senior manager – Mr. Rajeev Gaur ➢ Executive Stores Mr.Ramesh Sharma ➢ Officer store - Mr.Umesh Gupta ℜ Production :
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➢

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DGM Production Mr.D.K.Nawani Managing production - Mr.Ratan Singh Machine Manager Production - Mr.Vikas Jain Assistant Manager Mr.R.P.Dimri, Mr.S.B.Singh, Mr.V.k.Gupta & Mr.A.K.Gaur Executive Mr.B.N.Purohit Officers - Mr.H.S Rawat & Mr.Bals waroop

ℜ Sales : ➢ Commercial Senior Manager Mr.Rajeev Gaur ➢ Assistant Manager Mr.Om Pal Singh ➢ Executive Sales - Mr.Manohar S.Chauhan
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Officer Sales - Mr.B.K.Tyagi & Mr.J.P.Badoni ➢ 4 Clerical Staff & 7 Verifiers
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ℜ Purchase : ➢ Senior Manager Purchase : Mr.V.C.Gupta ➢ Officers - Mr.Sharvan Kumar & Mr. Wariyan Singh ➢ Senior Assitant & 4 Clerical Staff ℜ Finance/ Accounts : ➢ General Manager - Mr. Shammi Thusu ➢ Deputy Manager – Mr.Shiv Singh kandari , Mr.Sanjay Chaurasiya ➢ Assistant Manager – Mr.A.k.Saxena ➢ Officers -Mr.Rakesh Joshi, Mr.Alam Singh Negi ➢ Clerical Assistant – Mr.Ramesh Bisht , Mr.Vinay Saklani, Mr. Manoj Semwal , Mr.Anil Negi. ℜ Personnel Department : ➢ Personnel Manager – Mr.S.K.Upadhyay
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➢

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Officer(Training & placement in charge)Mr.I.S.Bisht,Mr.B.D.Joshi Safety Officer (Sanitation & Gardening in Charge)-Mr.Rajeev Sharma

ℜ ➢

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I.T : Software Engineer – Mr.Rajeshwar Prasad. Hardware Engineer- Mr.Subhash Singh

Reporting Following are the persons along with their designation who will directly report to Mr.Rakesh Garg Who Is The Vice President Of The Unit ;➢

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General Manager (Finance)- Mr.Shammi Thusu Deputy General Manager(Production)Mr.D.K.Nawani
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➢

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Senior Manager Commercial - Mr.Rajeev Gaur Senior Manager Purchase -Mr.V.C.Gupta Senior Manager Glass Mr.B.UmaMahesh Manager Personnel Mr.S.K.Upadhyay Manager Instrument - Mr.Sandeep Khandelwal Manager Electrical - Mr.S.S.Chopra Manager General Maintenance-Mr.Swaroop Kandari Deputy Manager Workshop& DesignMr.Gyandera Garg

Swot Analysis of The Company
For more than 5000 years, civilizations across the globe have discovered the wonder and beauty of glass as a primary packing material. As the primary packing material glass assures the preservation, safe delivery and attractive presentation of vast array of consumer products, supplied to Indian and
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world markets. Whether it is used for drinks, food, cosmetics, perfumes , or pharmaceuticals, glass plays a vital role in supporting domestic trade and commerce. In waste Management Hindustan National Glass & Industries Limited has demonstrated a responsible approach, ever since it took the initiative to launch the collective and recycling of used glass packaging. As a result, today major part of glass container consumption is not sent for disposal in landfills after use, but it is used as an important starting material for producing new glass containers.

Strengths
• HNG is a leading player in the Indian glass containers industry which is largely derived out of its investments for development in process and technology in line with global standards and progressive improvement in facilities. This has enabled the company to adapt to changes in customer taste and preferences.

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42Project On Working Capital Management & Ratio Analysis

• Glass Equipment(India) LTD, a 100% subsidiary of the company is the largest glass machine manufacturer in the country, providing complete engineering & technical support. • HNGIL have 2 furnaces having approximately a capacity of 400 MT/Day , nearly 7 – 8 lakhs bottles per day. • It is one of the biggest plants in the Northern India. • HNG’s customers include companies like McDowell, United Breweries, Smith Kline Beecham, Nestle, Dabour , Pfizer. Zandu , Dr. Morepen, Seagram, Glaxo , IPCA, PepsiCo, Coca-Cola and others.

Weaknesses • The chances for the scope of expansion of the Glass unit are very lass because the locality nearby is very densely populated and hence leading to scarcity of land. Invitations and innovative techniques furthermore requires the sufficient area of land which indirectly affects the progress of the unit.

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43Project On Working Capital Management & Ratio Analysis

• The rate of land is also very high which disturbs the whole budgetary estimate of the company.

Opportunities
In the era of Globalization , it would be challenge for the Indian Packaging industry as the years ahead would witness its integration with global channels , thus to match International standards and quality. It is therefore necessary that the Indian packaging industry upgrades its infrastructures and invests more in research to have holistic approach towards packaging. The Industry has tremendous potential in coming years and would also see exponential growth of more than 12-15% annually.

Threats
The material used in packaging are paper, plastic, glass, metal and others. Among these materials glass accounts for nearly 10-12% of total consumption globally. In India same trend is prevailing. The competition from other materials used for packaging the materials
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44Project On Working Capital Management & Ratio Analysis

specifically plastic and PET bottles is negligible. Change in life style demands more safe and convenient food products. The growing demand for disposable bottles is providing some competition specifically where Indian laws are yet to provide very high weight age to the ecological factor wherein glass scores the highest compared to other packaging medium as because of 100% recyclable and inert nature.

Working Capital Management
Aim Of Working Capital Management (W.C.M) : The aim of the working capital
management is to manage the current assets, the current liabilities and the interrelationship that exists between them.

Meaning Of W.C.M : Decision relating to working
capital and short term financing are referred to as
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45Project On Working Capital Management & Ratio Analysis

working capital management. This involves managing the relationship between a firm’s shortterm assets and its short-term liabilities. The goal of W.C.M 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.

According to Shubin – “Working capital is the amount of funds necessary to cover the cost of operating of the enterprise.”
Working Capital is a measurement of an entity’s current assets, after subtracting its liabilities. Sometimes referred to as operating capital , it is a valuation of the amount of liquidity a business or organization has for running and building of the business. Company with higher amount of working capital are better positioned for success. They have enough liquid assets needed to expand their business operations as desired. Working capital can be expressed as a positive or negative number. When a company has more debts than current assets , it has negative working capital. When current assets outweigh debts, a company has positive working capital.

Significance : The significance is as follows .
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46Project On Working Capital Management & Ratio Analysis

 In a typical manufacturing firm, current assets exceed one - half of total assets. Excessive levels can result in a substandard return on investment(ROI). Current liabilities are the principal source of external financing for small firms. Requires continuous, day-to-day managerial supervision. Working capital management affects the company’s risk, return, and share price.

Concepts of Working Capital
The main concepts of Working capital are as follows-:
A.

Quantitative Concept : This is also
known as “Gross Working Capital Concept” according to this concept working capital is the total of all current assets. The argument given in support of this view is that as all current assets assist in the conduct of business operations, it does not make any difference

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47Project On Working Capital Management & Ratio Analysis

B.

whether they are financed by long term funds or by current or by short term liabilities. Qualitative Concepts : This is also known as “Net Working Capital Concept”. According to this concept the excess of the current assets over current liabilities is known as working capital. If the amount of the current liabilities exceeds the amount of current assets, such a situation knows as deficit of working capital.

Importance Of Working Capital Management
No business can run successfully without an adequate amount of working capital.
i.

Solvency of the Business : Adequate
working capital helps in maintaining solvency of the business by providing uninterrupted flow of production.

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48Project On Working Capital Management & Ratio Analysis

ii.

Goodwill : It Helps in creating and
maintaining goodwill.

iii.

Regular Supply of raw materials: It
ensures regular supply of raw materials and continuous production.

iv.Regular payment of salaries, wages and other day to day commitments. v.Exploitation of favorable market conditions. vi. Ability to face crisis : Adequate working
capital enables a concern to face business crisis in emergencies such as depression.
vii.

Quick and regular return on investments : Sufficiency of working capital

enables a concern to pay quick and regular dividend to its investors as there may not be much pressure to plough back profits. This gains the confidence of its investor and creates a favorable markets to raise additional funds in future. viii.Build high morale : Adequacy of working capital creates an environment of security , confidence , high morale and creates overall efficiency in a business.

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49Project On Working Capital Management & Ratio Analysis

Types of working Capital
Working Capital can be classified on the following two basis:

i. On the basis of concepts. ii.On the basis of necessities. On The Basis of Concepts: On the basis of
concepts, working capital can be of two types.
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50Project On Working Capital Management & Ratio Analysis



Gross Working Capital : Gross working
capital is the capital, which is invested , in the total current assets of the company. Thus

Gross working capital = Total current Assets


Net Working Capital : NetWorking capital
means excess of current assets over current assets over current liabilities. Current assets are resources , which are in cash or will soon be converted into cash in “ordinary course of business.”

Net Working Capital = Current assets – Current Liabilities On The Basis Of Necessities : Working
capital can be divided into two categories.


Permanent Working Capital : It also
refers to the hard core working capital. It is that minimum level of investment in the current assets that is carried by the business at all times to carry out minimum level of its activities. Temporary Working Capital: It refers to that part of total working capital which is
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

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51Project On Working Capital Management & Ratio Analysis

required by a business over and above permanent working capital. It is also called variable working capital. The volume of temporary working capital keeps on fluctuating from time to time according to the business activities it may be financed from short term sources

Components of Working Capital Management
There are two components of Working Capital :

Current Assets ℜ Current Liabilities
ℜ

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52Project On Working Capital Management & Ratio Analysis

Current Assets : Current Assets are those
which can be converted into cash in the normal course of business within a short-period of say one year.

Cash in hand and bank balance.  Bills receivables. Sundry Debtors ( less provision for bad debts).  Short term loans and advances. Inventories of stocks , as : Raw material, Work-in-progress, stores and spares, finished goods. Temporary investments of surplus funds. Prepaid expenses. Accrued Incomes. ℜ Current Liabilities : Current Liabilities


are those liabilities which are intended to be paid in the ordinary course of business within a short period of time normally one accounting year out of the current assets or the income of the business.

 Bills payable.

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53Project On Working Capital Management & Ratio Analysis

Sundry debtors or account payable. Accrued or outstanding expenses. Short-term loans advances and deposits. Dividend Payable. Provision For taxation, if it does not amount to appropriation of profits.

Factor Affecting Working Capital
1.

Nature Of Business : The working capital
requirements of a firm basically depend upon the nature of firm. Such as generally public utility undertaking require small amount of

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54Project On Working Capital Management & Ratio Analysis

2.

3.

4.

working capital, trading and financial firms require relatively very large amount. Size Of Business : As per Size of the business the requirements of working capital change. Manufacturing Process : As the length of this process the requirement of working capital would be flexible. Rate of Stock Turnover : As per the manufacturing cycle and holding period of inventory and economic order quantity the requirement of working capital varies for different companies.

5.

Earning Capacity and Dividend policy:
The Company- paying to its shareholders must have more cash with them. Price level Changes : Fluctuation in market and changes in economy is also very important factor , as if company is dealing with that product where frequent change in technology or change in prices of components require manufacturing the product. Availability of credit : The company getting the providing more credit to its dealers , suppliers and customers need more

6.

7.

working capital.
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55Project On Working Capital Management & Ratio Analysis

8.

Production Policy: The production could be kept either steady by accumulating inventories during slack periods with a view to meet high demand during the peak season or the production could be curtailed during the slack season and increased during the peak season.

Sources Of Working Capital
1) Long Term Sources 2)Short Term Sources Long Term Sources 1.Owned sources: (i) Issue of shares : Arrangement of
working capital through issue of share does not create a fixed obligation on
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56Project On Working Capital Management & Ratio Analysis

income of the business. Thus it is preferable to arrange the permanent working capital through issue of shares. (ii) Retained earnings : A firm can meet its working capital requirement by reinvesting the profits earned by it. Reinvestment of the earned profit is a regular and costless source of fund. (iii)Reserves: Like retained earnings, the use of reserves for financing the working capital requirement is also costless source of finance.
1.

It mainly includes the issue of debentures or long term loans.

Borrowed

Sources

:

Short- Term Sources : a) Internal sources : It mainly includes
depreciation provision , outstanding liabilities and provision for taxation.

b)External Sources :
i) Trade Credit. ii) Bank Credit. iii)Public Deposits.
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57Project On Working Capital Management & Ratio Analysis

iv)Advance from Customers.

Operating Cycle concept of working capital

Operating cycle concept of working capital is gaining importance in recent years. It is also known as working capital cycle. The operating cycle refers to the average time elapses between the acquisition of raw material and the final cash realization. In case of manufacturing company, the operating cycle is the length of time necessary to complete the following events : • Conversion of cash into raw materials.

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58Project On Working Capital Management & Ratio Analysis

• Conversion progress. • Conversion goods. • Conversion receivable. • Conversion

of raw materials into work-inof work-in-progress into finished of finished goods into accounts of accounts receivable into cash.

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59Project On Working Capital Management & Ratio Analysis

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60Project On Working Capital Management & Ratio Analysis

RATIO ANALYSIS
A Ratio is an arithmetical expression of relationship between two related and interdependent items. It expresses a magnitude by which one quantity is a multiple or a part of another similar quantity. When the concept of ratio is explained with references to the items shown in the financial statement, then it is called “Accounting ratio”. According to J.Betty, “The term accounting ratio is used to describe significant relationship which exist between figures shown in a balance Sheet , in a profit and loss account , in a budgetary control system or in any part of the accounting organization”. Meaning Of Ratio Analysis While the profit and loss(P&L) account of a company essentially contains revenue items, appropriation and provisions, the balance-sheet lists out the assets and liabilities. While it is useful to understand the absolute quantum of each asset, liability and revenue item in isolation, far greater understanding of the
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61Project On Working Capital Management & Ratio Analysis

company can be archived by a “relationship” study. The Relationship study referred has two faces. 1.The relationship of item to another for the current or Pervious years, but in respect of the same company. 2.The relationship of these parameters with industry figure of competitors or of firm of similar size and operations. The first set enables one enables to understand the performance of the company in isolation, while the second gives an insight as to where the company stands vis-à-vis the industry. The Liquidity ratios give a clear indication of the extent to which a company liquid. Liquidity and Profitability are two separate yardsticks to gauge a company’s performance. The current ratio gives an indication of the number of times by which the current assets multiply the current liabilities. In the healthy industry, the current ratio should be upwards of 1.75 . A figure of less than 1.25 would indicate that the company’s working capital management has to be pretty rigid to keep the liquidity afloat.
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62Project On Working Capital Management & Ratio Analysis

The quick and acid test ratio is a modification of the current ratio in that only the “Quick” assets are considered in the numerator, and inventory, which is the slowest of the current assets , is ignored. Liquidity is the level of profitability. The Debt ratio can ascertain the extent of reliance of external financing. The Debt-Equity ratio gives the proportion of debt to equity. In capital intensive industries, this ratio can be as high as four –that is , debt can be up to four times the equity portion. Normally , a debt equity ratio of two is considered acceptable. The Time Interest ratio is a matter to the reassurance to the lenders that their interest dues are protected. By comparing the various ratios with those of the previous year or years, the areas where the company has improved can be identified; as also the spheres where finances display a fall in the performance. This will act as a good planning tool.

Advantages of Ratio Analysis

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63Project On Working Capital Management & Ratio Analysis

Ratio analysis is an important technique of financial analysis. It is an accounting tool which presents complicated accounting variables in simple, concise and understandable form. The following are the main advantages of ratio analysis.
1)

Useful in Simplifying accounting figures: Accounting ratios simplify summarize and systemize the accounting figures so that they may be understood properly and conveniently. Useful in Financial position Analysis: Accounting Ratios provide the knowledge of the financial position of the concern, on one hand , is useful in taking decision by the firm itself and on the other hand provides necessary information to banks, financial institution and investors required for making investment decision. Helpful in Financial Forecasting and Planning : If accounting ratios of several years are available, then a trend is established. This trend helps in setting up future financial plans and forecasting.
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2)

3)

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64Project On Working Capital Management & Ratio Analysis

4)

Useful in locating the weak spots of the business: The weak spots in the working of business can easily be located with the help of accounting ratios. These weakness may be in liquidity, profitability or in any other area of working operation. Useful in Assessing operational efficiency : Accounting ratio are useful in assessing the efficiency, profitability and performance of the firm. Useful in Control : Ratio analysis helps in making effective control of the business. After calculation of ratio variances, can be found by comparing them with standard or ideal level of these ratios and necessary corrective actions may be taken for resolving these variances.

5)

6)

Limitation of Ratio Analysis 1) It is significant only when the ratios are compares with relevant ratios of other firms or of previous period. 2)It far not is used as a technique in itself . 3)It is only a means.
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65Project On Working Capital Management & Ratio Analysis

4)It may give false result. 5)It is not useful when different company follow different accounting policy. 6)Frequently price level changes affect ratio analysis. So it is necessary to adjust past years figure in the line of price level changes. 7) On the basis of ratio analysis it is very difficult to forecast future on the basis of past data. 8) There is no standard ratio against which the actual ratio is measurable.

General Profitability Ratios


Gross Profit Ratio = Gross profit* 1oo
Net Sales



Net Profit Ratio

= Net profit* 100
Net Sales



Net Operating Profit Ratio= Net operating
profit*100
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66Project On Working Capital Management & Ratio Analysis

Net sales



Operating Ratio=Cost of goods sold +Operating
expenses*100 Net sales

Overall Profitability Ratios
➢

Share Holders Investment = Net profit(after interest & tax)*100 Shareholders’ funds

Return on equity shareholders funds=Net profit after interest & tax-preference dividend*100 Equity shareholders funds
➢

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67Project On Working Capital Management & Ratio Analysis

Return on equity capital = Net profit after interest & taxPreference dividend Paid up equity capital
➢

Activity Ratios
➢

Stock Turnover Ratio = Cost of goods sold Average stock Debtors Turnover Ratio = Net Credit sales Average debtors/ Receivables Average Collection period= Average
debtors/Receivables*365 Net Credit sales
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➢

➢

68Project On Working Capital Management & Ratio Analysis

➢

Creditor Turnover ratio = Net credit purchases Average creditors/payable ➢ Average Payment period = Average creditors / Payable*365 Net credit purchases ➢ Working Capital Turnover ratio= Sales or cost of goods sold Working Capital ➢ Total Assets turnover ratio = Net sales or cost of goods sold Total Assets
➢

Fixed Assets turnover ratio =

Net sales Fixed assets

➢

Current Asset turnover ratio = Cost of goods or sales Current Assets

Liquidity Ratios


Current Ratio = Liabilities

Current Assets Current

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69Project On Working Capital Management & Ratio Analysis



Liquid Or quick or Acid test Ratio = Assets t Assets

Liquid Curren



Absolute Liquid Ratio = Assets Liabilities

Absolute Liquid Liquid

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70Project On Working Capital Management & Ratio Analysis

Miscellaneous



Net Profit or Paid capital = * 100 capital

Net profit Paid up –



Solvency Ratio = Liabilities

Total Assets Total outside



Debt –Equity Ratio = Funds

Outside Funds Shareholders’

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71Project On Working Capital Management & Ratio Analysis

Interpretation

HNGIL shows a decrease in ratio from
1998 to 2007 which indicates a good inventory position for HNGIL.
Year
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Ratio
o.45 0.52 0.41 0.48 0.47 0.45 0.53 0.51 0.47 0.49

Recommendations
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72Project On Working Capital Management & Ratio Analysis

The policy employed by the company with regard to its working capital should clearly defined and documented. An adequate organization installed as meta-management can have impact across all functions and processes. Responsibilities and processes have to be defined, whereby working capital objectives have to be integrated into the company’s incentive system. For monitoring the financial flows, it is advisable to set adequate working capital targets periodically on the company’s wide basis and to institutionalized control and reporting mechanism. Many companies consider working capital as very important. It has been seen that size of company can also be related to working capital of the company. The main objectives of every business is maintaining liquidity. A high level of trading activity characterizes liquidity. It is safer to invest in liquid assets than illiquid ones because it is easier for you to get money out of the investment.

Limitations
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73Project On Working Capital Management & Ratio Analysis

The Glass industry is a capital intensive industry. The industry requires a huge infusion of capital investment for upgrading and rebuilding of its Furnaces and machines. To keep pace with the latest technological development for up gradation of technology, a constant review is also required since this industry is very elastic in terms of cost and any upward revision in cost has a big toll on its profitability. Major investment are in fixed capital or working capital. It is not an easy task to gather such a huge capital for setting up a glass industry. Relatively the process of setting of Glass Industry is very time consuming as it requires huge technical set up taking much longer period of gestation before the final production. Moreover, the glass industry has a wide spectrum of customers with a wide range of requirement of bottles in size and shapes. This requires maintaining a high level a high level of inventory of bottles as well as the limit of credit period is also very wide. All these factors affect the working capital requirement of an industry. In terms of usage there are many uses that glass can be put to. Glass can serve as containers to many things, such as medicines, liquors, cosmetics etc. The Float glasses are used by
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74Project On Working Capital Management & Ratio Analysis

realtors for use in housing and other commercial uses. However it is not possible for a single glass manufacturing company to produce such a wide range of glass. As the nature of industry changes the entire spectrum changes requiring a complete new set up for each type of product. Glass has a peculiar industry where the customer are majority big industry, who require the product as packaging material for themselves especially like Liquor, Soft drink industry and pharmaceuticals.

Conclusion
The company seems to be plagued with high inventory and poor liquidity position which is rendering the company its position where the
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75Project On Working Capital Management & Ratio Analysis

company has to resort borrowing from financial institution adding to interest cost of production. The company has also has a very low turnover ratio indicating that inventory holding is very high as can be seen from the aging of the inventory. The Companies will concentrate on optimizing the individual process chains as well as on the subject of reporting and incentive system. The main task is to develop an enterprise – wide concept in view with working capital management. The key components of this approach are as follows:




Performance : Releasing liquidity, reducing the amount of capital tied up by the way of shortening the time span during which working capital is required. Process Optimizing : Standardization and automation of processes covering all functions, minimizing media gaps, measuring the through efficiency of the procedure , measuring the production in performance figure.



Creation of awareness : Creation of awareness for the relevance of working capital in the corresponding alternative action.
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76Project On Working Capital Management & Ratio Analysis



Implementation of the Guidelines : Documentation of the working capital management in the form of specific instruction of action.

Corporate short term cash management is a difficult task. In a few hours each morning , cash managers must review overnight transaction , asses the corporate cash position, and make determinations on whether to invest or borrow, with whom and for whom and for what terms.

Bibliography
www.hngindia.com 2. www.google.co.in 3.Financial Management 4. www.yahoo.com
1.

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