Operating Cycle

OPERATING CYCLE The way work big(p) moves around the business is modeled by the workss bully cycle. This shows the bills coming into the business,what happens to it while the business has it and then where it goes. the term direct cycle otherwise known as notes cycle. In order to earn sufficient turn a net incomes,a firm has to depend on its gross revenue activities apart from others. The continuing f execrable from cash to suppliers,to investors,to debtors and back in cash. The cadence gap is technic altogethery termed as direct cycle.In other words,the date of the snip needful 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) change of work-in-progress into entire goods 4)conversion of finished goods in debtors 5)conversion of debtors to cash Bewteen each stage of this operative crownwork cycle on that point is m del ay. For some business this provide be very re hive upive where it takes them a long time to make and sell the crossway. They will pauperism a substantial amount of working with child(p) to survive.Others though whitethorn receive their cash very officiously after paying come forth for raw materials etc. They will need less working capital. For all businesses though they need to plan how much cash they are sack to spend a penny. The best way of doing this is a CASH FLOW FORECAST. on the job(p) great 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 gross gross revenue into cash. In case of non-maifacturing firms,the operating cycle will include the length of the time required to convert )Cash into inventories b)Inventories into debtors c)debtors nto cash To determine the operating cycle terminus,time toss away as sociated with all the individual activities of working cycle are to be set(p) 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 Raw Materials Conversion Period The RMCP denotes the period for which the raw materials are in general are kept in stores originally it is issued to the production department. It is calculated as RMCP= norm inventory 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 interpreted out as finished products. WPCP being done in the following ways WPCP= Average work-in-progress . Average daily factory woo 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 short le tter of finished goods ..Average cost of goods sold per yrs Receiveable Collection Period(RCP) It is the time required to convert the creed sales into cash realizations,i. e. , the time allowed to debtors after creed 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 diminution money lock period in the operating cycle. CPP= Average creditors . Average daily credit purchaseCOMPUTATION OF WORKING CAPITAL IN BIRLA CORPO ratioN LIMITED (Rs. In lakh) As on 31. 3. 08 As at 31. 3. 07 As at 31. 3. 06 veritable 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-CUR RENT LIABILITIES AND PROVISIONS Current Liabilities 30109. 32 24092. 95 25753. 21 Provision 73662. 99 19215. 28 4489. 21 NET WORKING CAPITAL 8246. 75 7637. 83 971. 11 picpicpicPLEASE DO THIS. Importance of works Capital RatiosRatio analysis can be utilise by financial executives to check upon the energy with which working capital is being used in the enterprise. The following are the important proportionalitys to measure the efficiency of working capital. The following, easily calculated, symmetrys are important measures of working capital utilization. RATIO FORMULAE result recitation Stock Turn all over Average Stock * = x old age On average, you turn over the survey of your entire stock (in days) 365/ both x days. You may need to break this down into Cost of Goods interchange product groups for effective stock management. Obsolete stock, slow moving lines will extend overall stock upset days.Faster production, fewer product lines, just in time orderin g will reduce average days. Receivables Debtors * 365/ = x days It takes you on average x days to collect monies due to Ratio Sales you. If your official credit terms are 45 day and it takes (in days) you 65 days. One or more(prenominal) boastful or slow debts can drag out the average days. potent debtor management will minimize 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 perform discover 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 likewise increase but your reputation, the quality of service and any flexibility provided by your suppliers may suffer. Current Ratio Total Current = x clock Current Assets are pluss that you can readily turn in to Assets/ cash or will do so within 12 months in the course of Total Curre nt business. Current Liabilities are mount you are due to Liabilities pay within the coming 12 months. For example, 1. 5 multiplication heart that you should be able to lay your hands on $1. 50 for every $1. 00 you owe. Less than 1 measure e. g. 0. 5 means that you could keep back 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 inventory into cash. Total Current Liabilities work (Inventory + As % A high percentage means that working capital needs are Capital Ratio Receivables Sales high proportional to your sales. Payables)/ Sales A measure of both partys efficiency and its goldbrick-term financial health. The working capital proportion. The working capital dimension is calculated as Positive working capital means that the smart set is able to pay off its short-term liabilities.Negative working capital means that a community truely 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 exsert 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 issue 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 still 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 streamlined manner(slow collection),it will show up as an increase in the working capital. athis can be seen by comparing th e wotking captal from one period to otherskow collection may signalan underlying problem in the companys 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 INTERPRETATION 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 check to Tandon Committee which is taken as 1. 331. this instant if we analyze the triplet years data it can be predicted that it holds a stable stick all through out period but it is seen that it holds a low typeset 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 assessment tool for examination the liquidity position of the firm. It indicate s the relationship between purely liquid assets whose doable value is almost certain on one hand and strictly liquid liabilities on the other hand. Liquid assets comprise all current assets minus stock. By analyzing the three years data it can be said 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 net 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 lower 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 establishes a relationship between net profit and sales and indicates management efficiency in manufacturing,administrating and selling the products. The ratio is very stabilising for measuring the profitability of the business. If the net froit margin is inadequate,the firm will damp 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 worry 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 implies the prompt payments by debtors.As on 31. 03. 08 As on 31. 03. 07 As on 31. 03. 07 CREDITORS overthrow 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 border 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