13-07-2013, 12:26 PM
ANALYSIS OF WORKING CAPITAL OF PARAG MILK INDUSTRY
CAPITAL OF PARAG.docx (Size: 159.46 KB / Downloads: 29)
OBJECTIVE
The following objectives would be met by to understand the financial analysis of Parag milk industry
• Analysis of working capital of Parag milk industry’.
• What is need of working capital?
• When, where and how working capital need fulfill.
Working Capital Management
A managerial accounting strategy focusing on maintaining efficient levels of both components of working capital, current assets and current liabilities, in respect to each other. Working capital management ensures a company has sufficient cash flow in order to meet its short-term debt obligations and operating expenses.
A few key performance ratios of a working capital management system are the working capital ratio, inventory turnover and the collection ratio. Ratio analysis will lead management to identify areas of focus such as inventory management, cash management, accounts receivable and payable management.
Working Capital Needs
Your working capital is used to pay short-term obligations such as your accounts payable and buying inventory. If your working capital dips too low, you risk running out of cash. Even very profitable businesses can run into trouble if they lose the ability to meet their short-term obligations. The calculator assists you in determining working capital needs for the next year.
Impact of Working Capital Management on profitability
The Working capital management is to manage the firm’s current accounts to achieve a required balance among profitability and risk. Working capital management is important factor it is a management of current assets and current liabilities. It is directly affects the profitability of the firm. The main objective of this article is to determine the impact of account receivables days, inventory days, account payables days and cash conversion cycles on return on total assets and to analyze the variation in working capital needs and its impact on profitability.
Working capital management is important due to many reasons, current assets normally accounts for half of the total assets. Excessive level of current assets results in a valuable return on investment, however firm have shortages of current assets may face difficulties in maintaining smooth operations. Critical importance of net working capital is proportion of total financing requirement. Higher working capital results higher profitability.
The main objective of every firm is maximizing profit but companies prevent them from liquidity also, to avoid this there must be a balance between these two objectives of the firm. Working capital meets the short term financing requirements of any business. Lesser working capital may affect the profitability. Working capital management of the firm affects the profitability by different variables like average collection period, average payment period and cash conversion cycle. Working capital and profitability of the firm have opposite relation with each other.
The profitability of the firm can be enhance by adopted following ways first is increase the opportunity cost of the float. Second is transaction cost of moving cash should be increase within and between countries. The profitability of the firm and its value is also effect through the working capital management because profitability and risk of the firm become low due to the greater increase in investment in current assets.
1. Permanent Working capital
Permanent working capital refers to the minimum amount of all current assets that is required at all times to ensure a minimum level of uninterrupted business operations. Some minimum amount of raw materials, work-in-progress, bank balance, finished goods etc., a business has to carry all the time irrespective of the level of manufacturing or marketing operations. This level of working capital is referred to as core working capital or core current assets. But the level of core current assets is not a constant sum at all the times. For a growing business the permanent working capital will be rising, for a declining business it will be decreasing and for a stable business it will almost remain the same with few variations. So, permanent working capital is perennially needed one though not fixed in volume. This part of the working capital a permanent investment needs to be financed through long-term funds.
2. Temporary Working capital
The temporary or varying working capital varies with the volume of operations. It fluctuates with the scale of operations. This is the additional working capital required from time to time over and above the being permanent or fixed working capital. During seasons, more production/sales take place resulting in larger working capital needs. The reverse is true during off-seasons. As seasons vary, temporary working capital requirement moves up and down. Temporary working capital can be financed through short term funds like current liabilities. When the level of temporary working capital moves up, the business might use short-term funds and when the level for temporary working capital recedes, the business may retire its short-term loans.
Debt Vs Equity
Debt financing involves both short-term debt and long-term debt and equity financing involves only long-term financing. The financing mix of the working capital depends upon the risk preferences of the management. Cost of different type of funds, the long-term and short-term, the return on different type of current assets, risk-bearing ability of the concern, liquidity, levels etc., have to be considered to decide the financing of working capital.
Debt financing involves fixed interest rates and allowed as an expense for tax purposes. But the risk involved in debt-financing is also high as the company is liable to pay the fixed interest periodically. Whereas in equity financing, the risk is comparatively lower than debt financing because there is no fixed obligation on the part of the company to pay periodically their dividends. If the company has sufficient profits, they can decide to pay dividends. They may even decide to retain their earnings to finance future requirements. But the cost of financing through equity would be higher as they are not allowed as an expense for tax purposes.
Parag Dairy – March Towards Excellence
Lucknow is the capital city of Uttar Pradesh. Total area of district is 2528 square km. 91588 hectare is cultivated land. Wheat and rice is the main agriculture production of district. 69% of farmers are small and medium level farmers who have about 1 acre land each. Lucknow Producer’s Cooperative Milk Union Ltd. (Parag Dairy Lucknow) was established in 1938. Lucknow Milk Union is the first Co-operative Diary established in India. Very few people know the fact that the process developed by Lucknow Milk Union was later used in spirit in Gujrat co-operative milk movement and is now famous as “Anand Pattern”. Lucknow Milk Union was then chosen as one of the model dairy to implement Operation Flood Programme started by the National Dairy Development Board (NDDB) in 1970. Present handling capacity of plant is 1, 50,000.
The aim of Lucknow Milk Union is to provide reasonable price to farmers thereby defending then from exploitation of milk vendors and earn supplementary income apart from agriculture. On the other hand the Milk Union supplies high quality pure Milk & Milk Products at reasonable prices to urban consumers under the brand name “PARAG”. Presently milk union is procuring milk from 658 functional societies and 32125 milk producer members are getting reasonable price of their milk production.
The Milk Union has been running “Clean Milk and Breed Conservation Programs” under UPDASP where milk producers have been educated in producing and supplying milk under clean and hygienic conditions and provided the producers with semen of pure Indian breed for the improvement of the present breed of animals. Emergency veterinary treatment service is also provided by milk union to milk producers/farmers on cost basis. Farmers are purchasing milking animals Under Mini Dairy Project. Lucknow Milk Union has established women dairy societies in rural area for assuring the women participation in milk production.
Background
The study looks at performance of Pradeshik dairy cooperative federation(PCDF), an apex body of dairy cooperative societies in largest state of India where approach to gain benefits from mutual cooperation of villagers could not work while it worked successfully in different part of the country and brought about revolutionary changes in the life of rural poor. The research paper aims to focus on function of mutual cooperation approach for developmental initiatives that integrate masses in an organizational support system. The study has thrust on role of cooperative dairy federation of Uttar Pradesh (UP) and its contribution in value addition and growth of rural economy. Analysis of challenges of the sector in my research is embedded in untapped opportunities in dairy sector by federation of cooperatives in UP. Cooperative movement is considered a milestone in Indian planning process for increasing people’s participation in planning and economic well being of larger segment of the society. In western Indian province of Gujarat, a dairy co-operative movement was instrumental in checking malpractices adopted by vendors and agents of private dairies. They exploited farmers during surplus milk production by deciding prices arbitrarily to maximize profit and compelling farmers to sale their products at minimum cost. The cooperative movement in the area of dairy development also became instrument of change in import reduction of dairy products underpinning import substitution policy of India, poverty alleviation, creation of jobs in non-agriculture sector and inculcating commercial approach in traditional area of animal husbandry.
Operation Flood (OF) programme is basic part of success story of Indian dairy development. It was launched in July 1970 to create a flood of milk by helping producers at village level based on Anand pattern (Singh, K.,et al., 1984) OF appeared as one of the most promising events in the field of rural development. (UN/FAO, 1981) The program expanded production, processing, marketing and professional management capabilities in village and metropolitan centres. OF was positioned in a social context with developmental objectives and an emphasis on grass root level participation. (Kamath, M.V., 1996, 156) It envisaged objective of organising producers for profits who were economically and socially backward in Indian social system of caste based hierarchies. As a result of these efforts, India surpassed United States to become largest producer of milk in the world with production volume of 84 million tons in 2001 but annual milk yield per dairy animal was one tenth of the yield in US and one fifth of the yield of a New Zealand dairy cow. (Planning Commission of India, 2002; 5)OF along with Anand pattern based on three tier cooperative system in diversified conditions has significance in context of UP with reference to organisational efforts by PCDF in replication of the later. PCDF created on April 23, 1962 is an apex cooperative society of the cooperative milk unions.