Operating Cycle

OPERATING CYCLE The way operative swell moves around the stock is imitate by the working seat of government round of golf. This shows the specie coming into the business,what happens to it while the business has it and then where it goes. the term operational cycle otherwise known as cash cycle. In order to earn sufficient profits,a firm has to depend on its sales activities apart from others. The continuing flow from cash to suppliers,to investors,to debtors and back in cash. The magazine gap is technically termed as operating cycle.In other words,the du balancen of the time required to complete the following sequence of events,in case of a manufacturing firm,Is called operating cycle. 1)Conversion of cash into raw materials 2)Conversion of raw materials into work-in-progress 3)conversion of work-in-progress into finished honourables 4)conversion of finished goods in debtors 5)conversion of debtors to cash Bewteen each stage of this working great cycle there is time delay . For some business this go away be very long where it takes them a long time to make and sell the product. They will need a actual amount of working dandy to survive.Others though may receive their cash very quickly after geting out for raw materials etc. They will need less working capital. For all businesses though they need to plan how much cash they are going to have. The best way of doing this is a immediate payment FLOW FORECAST. WORKING CAPITAL CYCLE From the above chart,it can be observed that the firms liquidity of a minifacturing firm depends an operating cycle involved in the conversion process from raw materials into finished goods and then sales into cash. In case of non-maifacturing firms,the operating cycle will include the distance of the time required to convert )Cash into inventories b)Inventories into debtors c)debtors nto cash To determine the operating cycle pointedness,time lag associated with all the individual activities of working cycle are to be set first. Then summing up all the individual time lags working capital cycle is to be ascertained. Determine of individual time lags are shown as follows lovesome Materials Conversion Period The RMCP denotes the finish for which the raw materials are generally are kept in stores before it is issued to the production department. It is calculated as RMCP= Average blood line of raw materials and stores .. Averahe daily consumption of raw materials Work-In-Progress conversion period(WPCP) It refers to the period for which the raw materials remain in the production process before it is taken out as finished products. WPCP being d mavin in the following ways WPCP= Average work-in-progress . Average daily factory cost of production Finished Goods Conversion Period(FGCP) It refers to the period for which finished goods remain in stores before being sld to the customers. It is measured as FGCP= Average stock of finished goods ..Average cost of goods sold per geezerhood Receiveable orde r of battle Period(RCP) It is the time required to convert the reference point sales into cash realizations,i. e. , the time allowed to debtors after credit sales for making the payment. RCP= Average debtors .. Average daily credit sales Payment Deferral Period(PDP) The firm may get sum credit facilities from the suppliers of raw materials,wage earners etc. As the firm enjoys credit,this period has the effect of the reduction money lock period in the operating cycle. CPP= Average creditors . Average daily credit purchaseCOMPUTATION OF WORKING CAPITAL IN BIRLA quite a little LIMITED (Rs. In lakh) As on 31. 3. 08 As at 31. 3. 07 As at 31. 3. 06 CURRENT ASSET Inventories 20044. 82 14258. 83 10572. 33 Sundry debtors 3171. 25 2722. 47 2248. 22 Cash and Bank 3135. 65 3439. 42 5922. 59 Balances Other Current 28. 38 Assets Loans and 47311. 7 30525. 34 12442. 01 Advances .. . .. TOTAL 73662. 99 50946. 06 31213. 53 LESS-CURRENT LIABILITIES AND PROVISIONS Current Liabilities 30109. 32 24 092. 95 25753. 21 Provision 73662. 99 19215. 28 4489. 21 NET WORKING CAPITAL 8246. 75 7637. 83 971. 11 picpicpicPLEASE DO THIS. Importance of functional Capital RatiosRatio analysis can be used by financial executives to check upon the susceptibility with which working capital is being used in the enterprise. The following are the important ratios to measure the efficiency of working capital. The following, easily calculated, ratios are important measures of working capital utilization. dimension FORMULAE RESULT recitation Stock Turnover Average Stock * = x days On clean, you turn over the value of your entire stock (in days) 365/ all x days. You may need to break this down into Cost of Goods Sold product groups for effective stock management. Obsolete stock, slow moving lines will stockpile overall stock perturbation days.Faster production, fewer product lines, just in time ordering will reduce average days. Receivables Debtors * 365/ = x days It takes y ou on average x days to collect monies collectable to Ratio gross revenue you. If your official credit terms are 45 day and it takes (in days) you 65 days. One or more large or slow debts can drag out the average days. Effective debtor management will calumniate the days. Payables Ratio Creditors * 365/ = x days On average, you pay your suppliers every x days. If you (in days) Cost of Sales (or negotiate better credit terms this will increase.If you pay Purchases) earlier, say, to get a discount this will decline. If you simply defer paying your suppliers (without agreement) this will also increase but your reputation, the quality of service and any flexibleness provided by your suppliers may suffer. Current Ratio Total Current = x times Current Assets are assets that you can readily turn in to Assets/ cash or will do so within 12 months in the course of Total Current business. Current Liabilities are mount you are due to Liabilities pay within the coming 12 months. For example, 1. 5 times means that you should be able to lay your put acrosss on $1. 50 for every $1. 00 you owe. little than 1 times e. g. 0. 5 means that you could have liquidity problems and be under pressure to generate sufficient cash to meet oncoming demands. quick Ratio (Total Current = x times Similar to the Current Ratio but takes account of the fact Assets Inventory)/ that it may take time to convert stocktaking into cash. Total Current Liabilities Working (Inventory + As % A high percentage means that working capital needs are Capital Ratio Receivables Sales high relative to your sales. Payables)/ Sales A measure of both smart sets efficiency and its short-term financial health. The working capital ratio. The working capital ratio is calculated as Positive working capital means that the order is able to pay off its short-term liabilities.Negative working capital means that a company current ly is unable to meet its short term liabilities with its current assets(cash,accounts receiveable,inventory). If a companys current asset do not exceed its current liabilities,then it may run into trouble paying back creditors in the short term. The worst case scenario is bankruptcy. A dceclining working capital ratio over a longer time period could be that the companys sale volumes are decreasing,and as a result,its accounts receiveables number continues to get smaller and smaller. Working capital also gives investors an idea of the companys underlying operational efficiency .Money that is tied up in inventory or moey that customers dummy up owe to the company cannot be used to pay off any of the companys obligations. So if a company is not operating in the most efficient manner(slow collection),it will show up as an increase in the working capital. athis can be seen by comparing the wotking captal from one period to anotherskow collection may signalan underlying problem in the co mpanys operations. FOR LIQUIDITY POSITION As on 31. 03. 08 As on 31. 03. 07 As on 31. 03. 07 Current ratio 1. 13 1. 18 1. 3 pic recital This ratio reflects the financial stability of the enterprise. The standard of the normal ratio is 21 but in most of companies standard is taken according to Tandon Committee which is taken as 1. 331. Now if we analyze the three years info it can be predicted that it holds a stable position all through out period but it is seen that it holds a low position than the standard one and the company is required to improve its position. As on 31. 03. 08 As on 31. 03. 07 As on 31. 03. 07 Quick ratio 0. 82 0. 84 0. 68 picINTERPRETATION It is the ratio between quick liquid assets and quick liabilities. The normal value for such ratio is taken to be 11. It is used as an legal opinion tool for testing the liquidity position of the firm. It indicates the relationship between strictly liquid assets whose realizable value is almost certain on one hand and stric tly liquid liabilities on the other hand. Liquid assets comprise all current assets minus stock. By analyzing the three years data it can be utter that its position was weak in the year 2006 but itimproved significantly in the next two years and was stable during that year.But it is to be said thatit does not meet with the standard but in the year 2007 & 2008 it was very close to the standardand it can be said that its liquidity position on an average is stable. As on 31. 03. 08 As on 31. 03. 07 As on 31. 03. 07 Working capital ratio 0. 06 0. 07 0. 01 pic INTERPRETATION This ratio indicates whether the investments in current assets or earn current assets ( i. e. , working capital ) have been properly utilized. In order words it shows the relationship between sales and working capital.Higher the ratio glare is the investment in working capital and higher is the profitability. But too high ratio indicates over trading. This ratio is an important indicator about the working capital position. Now if we analyze the three years data, we find that it follows an increasing trend which means that its investment in working capital is lower and the company is utilizing more of its profit. But we find that ratio is increasing at a very fast rate which is not a good sign for the company and the company is required to look into these matters closely. FOR PRFITABILITY POSITION As on 31. 03. 8 As on 31. 03. 07 As on 31. 03. 07 Gross profit ratio 34. 36% 31. 40% 14. 67% pic INTERPRETATION The gross profit margin reflects the efficiency with which management produces each unit of the product. This ratio of the gross profit to net sales of the business. This ratio gives information about the movement of stock and earning capacity of the business. A high gross profit margin ratio is a sign of good management. it increases higher sale price. As on 31. 03. 08 As on 31. 03. 07 As on 31. 03. 07 Net profit ratio 22. 2% 20. 82% 10. 35% pic INTERPRETATION A net profit ratio establish es a relationship between net profit and sales and indicates management efficiency in manufacturing,administrating and selling the products. The ratio is very helpful for measuring the profitability of the business. If the net froit margin is inadequate,the firm will fail to achieve satisfactory return on shareholders fund. As on 31. 03. 08 As on 31. 03. 07 As on 31. 03. 07 Oprating profit ratio 19% 16. 27% 3.. 50% pic INTERPRETATIONThe ratio shows the relation between the entire operating cost and net sales. It indicates the efficiency of the management in operating the business. FOR MANAGEMENT EFFICIENCY As on 31. 03. 08 As on 31. 03. 07 As on 31. 03. 07 Debtors turnover ratio 5. 72 days 5. 53 days 5. 79days pic Debtors turnover indicates the number of times of debtors turnover each year. generally the higher value of debtors turnover,the more efficiency in management credit. the shorter the average collection period,the better the quality of debtors. A short collection period imp lies the prompt payments by debtors.As on 31. 03. 08 As on 31. 03. 07 As on 31. 03. 07 CREDITORS TURNOVER 3. 96 days 4. 54 days 7. 72 days RATIO pic The ratio reveals the number of days the business or the company enjoys as credit period from its sundry creditors. A very largr credit period in this case indicates over-trading by the company. CALCULATION F MAXIMUM PERMISSABLE BANK FINANCE (MPBP) IN THE YEAR 2008 CURRENT ASSET,LOANS AND ADVANCES Inventories 20044. 82 Sundry debtors 3171. 5 Cash and bank 3135. 65 Loans and advances 47311. 27 Total 73662. 99 CURRENT LIABILITIES AND PROVISION Current liabilities 30109. 32 Provision 35306. 92 Total 65416. 24 Working capital=current assets current liabilities = 73662. 99 65416. 24 = 8246. 75 Own contribution= 25% of working capital = 25% of 8246. 75 = 2061. 68 MPBF = 8246. 75 2061. 68 = 6185. 07