A stuy on interpretation and analysis of ratio analysis and performance evaluation conducted at kmf

Performance evaluation on financial statement

INTRODUCTION
Executive Summary
The world of business today has undergone a complete metamorphosis. This
process was further augmented by various round of GATT agreement that culminated into
WTO a new world order to trade and business. The command economy has yielded place
to market economy with wide ranging implications for Indian business and industry
which have to be globally competitive in terms of technology, costs and quality. To cope
up with these challenges, a new breed of professional managers is needed some of the
traditional theories of management are being challenged today in terms of their relevance
in the fast changing environment, and new management practices and concepts are
evolving. Unfortunately, however, not many text books are available in India, which
thoroughly deals with these changes and which can be gainfully used by the students of
management and practicing managers alike.

The present text on financial management may be seen and appreciated in the
above context. In my long associated with a number of companies, as a consultant or a
director on their boards and audit committees, I have been a witness to the changes that
have taken place in finance function having far reaching implication for corporate
management, in recent years, therefore, financial management has attracted a lot of
attention by the corporate sector, goods professionally managed companies are greatly
concerned about their capital structure, cost of capital working capital management,
project appraisal, corporate governance and so on. They are trying to bring down their
cost of debt to international level not only by using new financial instruments but also by
borrowing abroad. LIBOR linked short term borrowing has become very common in
such companies with all the world really becoming a global village, international
financial management has assumed added significance unprecedented changes have been
taking place in various financial sectors like banking, insurance and capital market
.information technology has not only added new dimensions to the delivery of financial
services, but has also provided a more rigorous analytical framework for decision making.
Hence managers have deal with a many more contemporary issues in finance, economy,
technology, trade and commerce etc., in the modern global village.

1|Page
H R I H E Hassan


Finance
Finance has been aptly described as a lubricant of economic activity, without
which the entire business will grind to a halt, and money has been aptly described by
monetary economist called Geoffrey crowther “finance as the essential invention on
which all the rest is based. With unlimited wants and limited financial resources, the
financier is concerned with what is produced, requirements of funds allocation of funds
selection of developmental priorities, determination of gestation periods, proper
monitoring of accounts to avoid cash flow problems and to ensure the profitability of the
enterprises be it in any sector of economy, public sector, private sector ,industrial,
agricultural, cooperative, banking and allied enterprises.,” the finance manger has to
ensure the rational decision making efforts at the each any every successive stages of pre
investment and post investment. In the absence of proper appraisal system and evaluation
of managerial abilities, there will be misallocation mortality and lopsided growth in
undesired way leading to holocaust of economic wealth.

Meaning
Financial management is that managerial activity which is concerned with the
planning and controlling of the company’s financial resources.

According to soloman, “financial management is concerned with efficient use of an
important economic resource namely, capital funds. This can be possible only when funds
are procured in a manner that the risk, cost, and control consideration are property
balanced in a given situation and there is optimum utilization of funds”.

1.Raising of the required funds at the lower cost
2.Making optimum use of the funds so raised.

So, it is clear that financial management refers to all those managerial activities or efforts
which are concerned with the ascertainment of the finance, short term as well as long
term needed by the company, determination of the sources suitable under the given
circumstances and collection of the funds in time, and control over the utilization of
funds.

2|Page
H R I H E Hassan


Every organization, irrespectively of size of and mission, may be viewed as a financial
entity. Management of an organization, particularly a business firm is confronted with
issues and decisions like the following, which have important financial implications:
 What kind of plant and machinery should the firm buy?
 How should it raise finance?
 What should be its credit policy?
 How much should it invest in inventories?

1.1 Statement of problem:

Analysis and interpretation of financial statement is a regular exercise to review the
performance of the company. It was proposed to conduct a review to study the short term
prospects as well as the long term trends and to arrive at the conclusion on the
performance of the company. Performance review resulting in taking corrective action
optimizes the performance in the subsequent period.

1.2 Objective of the study:

The objective of the study is to evaluate the financial performance of hamul over a period
of past 5years the study shall cover the following areas:
a) The study of balance sheet and loss account
b) To study whether the financial performance is improving or deteriorating
c) To suggest measures and recommend alternative, key factors for decision if
any for the successful performance of the company.

Apart from the above main functions, following subsidiary function are also
performed by the finance manager:
a) Evaluation of the financial performance
b) To negotiate with bankers
c) To keep track of capital market, stock exchange quotation and behaviour
of stock market prices.

Importance of financial management:
3|Page
H R I H E Hassan


The importance of financial management cannot be overemphasized. In every
organization, where funds are involved sound financial management is necessary.

As Collins books has remarked “bad production management and bad sales management
have slain in hundreds, but faculty financial management has slain in thousand”.

Sound financial management is essential in both profit and non profit making
organization. The financial management helps in monitoring the effective deployment of
funds in fixed assets and in working capital assets. The financial management assesses the
finance position of the company through the working out of the return on capital, debt
equity ratio, and cost of capital from each source etc., and comparison of the capital
structure with that of similar companies.

Also it helps in profit planning, capital expenditure, capital expenditure, measuring cost,
given input of funds.

1.3 Scope of the study

Financial management is broadly concerned with the acquisition and use of funds by a
business firm. Its scope may be defined in terms of the following questions:

 What should be the composition of the firm’s assets?
 What should be the mix of the firm’s financing?
 What should the firm analysis, plan and control its financial affairs?

Important decisions:
1 Funds requirement decision
2 Financing decision
3 Investment decision
4 Dividend decision

Meaning of financial statement:
4|Page
H R I H E Hassan


A financial statement is an organized collection of data according to logical and
consistent accounting procedures. It contains summarized information of the firm’s
financial situation to users. Financial statements are prepared for the purpose of
presenting a periodical review or report on the progress by the management and deal with
the,
1. status of investment in the business
2. results achieved during the period under review

According to smith and ashbin, financial statement is, “the end product of financial
accounting in a set of financial statements prepared by the accountant of a business
enterprises, that purports to reveal the financial position of the enterprise, the result of its
recent activities and an analysis of what has been done with the earning”.

The term financial statements generally refer to two basic statements
1. Balance sheet or statement of financial position
2. Profit & loss account or income & expenditure account

Balance sheet is of the most significant financial statement in the organization. It
indicates the financial condition or the state of affairs of a business at a particular point of
time. More specification about resources and obligations of a business entity and about its
owner’s interest in the business at a particular point of time. Profit & loss account is the
“score-board of the firm’s performance during a particular period. It explains that what
has happened to a business because of operations between two balance sheet dates. In
short, it is the accounting report, which summarized the revenues, expenses, and the
difference between them for an accounting period.
The profit and loss account reflects the performance of the firm over a period of time.

Meaning of financial analysis and interpretation:
The financial statements summarize the end result of business activities of enterprises
during an accounting period in monetary terms which are indicators of the two significant
factors viz.
o Profitability and
o Financial soundness

5|Page
H R I H E Hassan


Analysis and interpretation of financial statements, therefore refers to such a treatment of
the information contained in the profit and loss account and balance sheet so as to afford
full diagnosis of the profitability and financial soundness of the business.

A distinction here can be made between the two terms-“analysis” and “interpretation “.
The terms analysis means, methodical classification of the data given in the financial
statements. The figures given in the financial statements will not help one, unless they are
put in a simplified from. The term interpretation means explaining the meaning and
significance of the data so simplified. However both” analysis” and” interpretation” are
complementary to each other. Interpretation requires analysis, while analysis is useless
without interpretation. According to Myers, “financial statement analysis is largely a
study of the relationship among the various financial factors in a business disclosed by a
single set of statement and a study of the trend of these factors as shown in a series of
statement”.

Importance of financial analysis and interpretation:

Financial statements contain a wealth of information, which if properly read, analyzed or
interpreted can provide valuable insights into a firm’s performance and position. Also it is
the starting point for making plan, before using any sophisticated forecasting and
planning procedure. By analyzing these statements, firm can evaluate its past, present,
projected performance etc.

Usually management would be particularly interested in knowing the financial strength of
firm to make their best use and to be able to spot out the financial weakness of the firm to
take suitable corrective action. The future plan of the firm should be laid down in view of
the firm’s financial strength and weakness. In short, through financial analysis and
interpretation it helps effectively the user for decision making process.

Objectives of financial analysis and interpretation:

1. To judge the financial health of the undertaking.
2. To judge the earning performance of the company
6|Page
H R I H E Hassan


3. To gauge/ appraise for investment/ opportunity or potentiality
4. To judge the ability of the company to serve the debt
5. To judge the solvency of the undertaking

Parties demanding financial analysis:

The traditional view is that the financial statements are prepared for the proprietors and
accounting for which just aids the stewardship function. In recent years, this concept of
stewardship accounting has been dramatically changed. A used oriented approach has
instead changed to fit the purposes of the recipient of financial information. Whenever
ownership is separated from administration, is natural for the owner to understand how
money contributed by him is utilised by the administrators. Hence it leads to enquiry by
the owner can be called as the disclosure which is an important part of good corporate
governance.

Financial statement analysis may be done for a variety of purpose, which may range from
a simple analysis of short term liquidity position of the undertaking to comprehensive
assessment of the strength and weaknesses of the undertaking to comprehensive
assessment of the strength and weaknesses of the undertaking in various areas. Also the
nature of analysis will differ depending on the purpose of the analyst.

Important prominent users who go through the report of financial statements for
analysis are:
 Shareholders and prospective investors
 Employees
 Trade creditors
 Banks, financial institutions and lenders
 Managers
 Customers
 Government and regulatory agencies
 Others

Types of financial statement analysis:

7|Page
H R I H E Hassan


Types of financial can be classified into different categories depending upon (1) the
material used and, (2) the modus operandi of analysis

1. On the basis of material used.
According to this basis, financial analysis can be of two types:

a) External analysis: this analysis is done by those who are outsiders for the
business. The term outsiders include investors; credit agencies, government
agencies and other creditors who have no access to the internal records of the
company. These persons mainly depend upon, the published financial
statements. Their analysis serves only a limited purpose.
b) Internal analysis: this analysis is done by persons who have access to the
books of account and other information done by executive and employees or
by officers appointed for this purpose by the government or the court under
power vested in them. The analysis is done depending upon the objective to be
achieved through this analysis.

2. On the basis of “modus operandi”.
According to this, financial analysis can also be of two types:

a) Horizontal analysis: In case of this type of analysis, financial statements
for a number of years are reviewed and analyzed. The current year’s figures
are compared with the standard or base year. The analysis statement usually
contains figures for two or more years and the changes are shown regarding
each item from the base year usually in the from of percentage… such an
analysis given the considerable insight into levels and areas of strength and
weakness. Since this type of analysis is based on the data from year to year
rather than on one date, it is also termed as “dynamic analysis”.

b) Vertical Analysis: In case of this of analysis, a study is made of the
quantitative relationship of the various items in the financial statements on a
particular date, e.g.: the ratios of different items of costs for a particular period
may be calculated with the sales for that period. Such an analysis is useful in
8|Page
H R I H E Hassan


comparing the performance of several companies in the same group or
divisions or departments in the same company. Since this analysis depends on
the data for one period, this is not very conducive to a proper analysis of the
company’s financial position.

Steps in financial statement analysis:

Steps to be taken for financial statement analysis are:
1. Identification of user’s purpose
2. Identification of data source
3. Selecting the techniques to be used for such analysis

The financial statement analysis is purposive and not necessarily comprehensive to
cover all possible uses. Since it is purposive, analysis may be restricted to any
particular portion of the available financial statement taking care to ensure objectivity
and unbiased ness. Also depending upon his purpose, user can choose any of the
techniques or tools for analyzing the financial statement.

1.4 Research methodology:
The study has entirely based on the secondary data. Information is collected form the
profit and loss account and balance sheet of last five years 2004-05 to 20008-09. The data
is analyzed with the help ratio analysis and trend analysis. Apart from this, personal and
informal discussions were held with the executives in the finance and accounts
department and other departments of the corporation. Where as the theoretical concept is
taken from various text book reference on financial management.

1.5 Hypothesis:
“The study has been under taken to see that whether financial performance of the
company is improving or deteriorating”

9|Page
H R I H E Hassan


Sources of data collection:

As the study related to the analysis and interpretation of financial performance, three was
no need for the collection of structure d data. Company’s annual reports for the past 5
years are being referred and direct interviews with various financial senior executives was
carried out for completing the study.
• Primary data
• Secondary data
Primary data: Primary data collected through personal meetings with respondents and
administrating them with a questionnaire. Most of my findings and suggestions are
from the survey and interaction with the employees of the organizations.

Secondary data: secondary data was collected through internet, company literature
and books.

Analysis of data

The analysis is mainly consisted of through study of the financial data available in the
financial statement. The data collected will be subjected to analysis through the following
techniques or tools, like ratio analysis, Trend analysis.The above two analysis are arrived
at on the basis of the profit and loss account and balance sheet of the publish book of
accounts of the corporation.

Objective of the study:
Karnataka milk federation (k.m.f) is a co operative open body in the state of Karnataka
representing dairy farmers Organisation and also implementing dairy development
activities to achieve the following objectives.
1. Providing assured and remunerative market for the milk produced by the
farmer members.
2. Providing quality milk to urban consumers.
3. To build village level institution in cooperative sectors to manage the dairy
activities.

10 | P a g e
H R I H E Hassan


4. To ensure provision of milk production of milk production inputs, processing
facilities and dissemination of know –how
5. To facilities rural development by providing opportunities for self
employment at village level, preventing migration to urban areas, introducing
cash economy and opportunity for steady income.
6. The philosophy of dairy development is to eliminate middlemen and organize
institution to be owned and managed by the milk producers themselves,
employing professionals. Achieve economies of scale to ensure maximum
returns to the milk producers, at the same time providing wholesome milk at
reasonable price to urban consumers. Ultimately the complex network of
cooperative organization should build a bridge between masses of rural
producers and millions of urban consumers and achieve a socio economic
revolution in the hinterlands of the state.

1.6 Limitation of the study

1. Time is a major constraint. The duration of project was limited to few weeks
2. For a detailed study of a subject like organisation climate in a very short span of
time is quite difficult.
3. The research study is confined to only few dimension of organization climate.
4. it based only on secondary data.

2.1 Ratio analysis:

Meaning of financial ratio:

Ratio analysis measures the relationship between two data. For ex: male – female ratio of
the population of a country. Absolute comparison between two figures does not carry
much sense, when spoken in terms of ratio it becomes much more penetrating and
meaningful, so a ratio it defined as the indicated quotient of two mathematical “
expenditure” and as” the relationship between two or more thing”.

11 | P a g e
H R I H E Hassan


Since we are using the term ‘ratio’ in relation to financial statement analysis, it may
properly mean ‘an accounting ratio’ or ‘financial ratio’.

An accounting ratio may be defined as the mathematical expression of the relationship
between two accounting figures. But these figure must be related to each other (these
figure must have a mutual cause and effect relationship) to produce a meaningful and
useful ratio. For ex, the turnover can not be said to be significantly related to the figure of
securities premium.

Thus, an accounting ratio is a mathematical expression of a quantitative relationship
between two items or group of items having mutual cause & effect relationship, taken
from income statement or balance sheet or both, which the analyst may use to make a
qualitative judgment about the various aspect of the financial position and performance of
a concern.

Ratios can be expressed as:

1. Percentage say, gross profit ratio is 20% of sales [calculated by dividing gross
profit (rs. 20000) by sales (100000) and multiplying by 100]
2. Proportion say, current ratio is 2:1 [calculated by dividing current assets
(100000 rs) by current liabilities(rs 50000)]
3. Fraction say, net profit is one tenth of sales [calculated by dividing net profit (rs
10000) by sales (rs 100000)]
4. Times say, capital turnover ratio is 5 times [calculated by dividing net sales (rs
100000)by capital turnover employed (rs 20000)].

Ratio analysis is a process of identifying the financial strength and weakness of the
enterprises by logically establishing relationship between the item of balance sheet or
income statement or both and interpreting the results there of in order to derive
meaningful conclusion.

This is the most important tool available to financial analysis for their work. A financial
ratio shows the relationship in mathematical terms between two interrelated accounting
12 | P a g e
H R I H E Hassan


figures. In financial analysis, a ratio is used an index or yardstick for evaluating the
financial position and performance of a firm. The absolute accounting figure reported in
the financial statements does not provide a meaningful understanding of the performance
and financial position of a firm. For ex: rs.5 cores net profit may look impressive, but the
firm’s performance can be said to good or bad only when the net profit figure is related to
firm’s investment. Ratio helps to summarize the large quantities of financial data and to
make quantitative judgment about the firm’s financial performance.

Cross sectional analysis:
It involves the comparison of actual ratios of one firm with those of other similar firms
belonging to the same industry or industry averages at the same point of time.

Time series analysis:
Time series analysis involves the comparison of actual ratios of one period with those of
earlier periods for the same enterprise.

Standards of comparison:

The ratio analysis involves comparison for a useful interpretation of the financial
statements. A single ratio in itself does not indicate favourable or unfavourable conditions
it should be compared with some standard. Standard of comparison may consist of:

1. Ratio calculated from the past financial statements of the same firm
2. Ratio developed using the projected or pro-forma, financial statement of the same
firm.
3. Ratio of some selected firm, especially the most progressive and successful, at the
same point in time and,
4. Ratios of the industry to which the firms belongs

From the above four, the easiest way to evaluate the performance of a firm is to the first
one i.e to compare its current ratio with the past ratio.

13 | P a g e
H R I H E Hassan


Definition and concepts:
1. Analysis and interpretation of financial statement: Refers to such a treatment of the
information contained in the profit and loss account and balance sheet so as to full
diagnosis of the profitability and financial soundness of the business.
2. Financial ratio analysis: This is the most important tool available to financial analyst
for their work. It shows the relationship in mathematical terms between two
interrelated accounting figures.
3. Trend analysis: Trend analysis is for studying financial statements over a period of
time year to year, month to month.
4. Funds flow statement: The funds flow statement, drawing based on the information
contained in the basic financial statement which shows the sources of funds and
application of funds during the period.
5. Profitability ratio: Are calculated to measure the operating efficiency of the
company. It gives some yardsticks to measure profit in relative terms, either with
reference to sales or assets.
6. Gross profit ratio: Is defined as the difference as the difference between net sales and
cost of good sold.
7. Net profit ratio: This ratio shows the earnings left for shareholders as a percentage
of net sales
8. Operating profit ratio: For evaluating the operating performance of the company.
9. Earnings per share (EPS): It is calculated by dividing earnings available to the equity
shears outstanding on the year ending on 31st mar every financial year.
10. Current ration: It indicated the relationship between total current assets and the total
current liabilities in a company net working capital.
11. Return on investment: It is a measure of company earning on investing a unit of
capital whether equity or preference
12. Capital structure ratio: The purpose of this ratio is to identify the source of funds that
is proportion mix of debt and equity.
13. Debt equity ratio: It is determined to ascertain the soundness of long term financial
policies of the company. The ratio indicates the proportion of owner’s stake in the
business compared to long term debt

14 | P a g e
H R I H E Hassan


2.2 Techniques of financial statement analysis :

A financial analyst can adopt the following tools for analysis of the financial statement.
There are also termed as methods of financial analysis. This chapter describes how this
information is analysed, both by parties outside the firm and by the company’s own
management.

All analysis of accounting data involves comparisons. An absolute statement, such as
“company X earned $ 1 million profit, “is by itself not useful. It becomes useful only
when the$ 1million is compared with something else. The comparison may be quite
imprecise and intuitive. For ex: if we know that company X is an industrial giant with
tens of thousands of employees. We know intuitively that $ 1 million profit is a poor
showing, because we have built up in our minds the impression that many companies
should earn much more than that. Or , the comparison may be much more formal, explicit
and precise as is the case when the $ 1 million profit this year is compared with last year’s
profit. In either case, it is the process of comparison that makes the number meaningful.

Business objectives:
Comparison are essentially intended to shed light on how well a company is
achieving its objectives in order to decide the types of comparisons that are useful, we
need first to consider what a business is all about what its objectives are. Let us say, as a
generalization and insofar as it can be measured quantitatively, that the overall objective
of a business is to earn a satisfactory return on the funds invested in it, consistent with
maintaining a sound financial position,”( note that this statement is limited to facts that
can be expressed numerically, however, employee satisfaction, social responsibility,
ethical consideration, and other non measurable objectives are also important and must be
taken in to account whenever possible in appraising the overall success of an enterprise.
This generalized statement of objectives has two aspects: (1) earning a satisfactory return
on investment and (2) maintaining a sound financial position. Each is discussed briefly
below:

Return on investment return on investment (ROI) is broadly defined as net income
divided by investment. The term investment is used in three different senses in financial

15 | P a g e
H R I H E Hassan


analysis, thus giving three different ROI ratios: return on assets, return on owner’s equity
and return on invested capital.

Return on assets (ROA) reflects how much the firm has earned on the investment
of all the financial resources committed to the firm. Thus, the ROA measure is
appropriate if one considers the investment in the firm to include current liabilities, long
term liabilities, and owners’ equity, which are the total sources of funds invested in the
assets. It is a useful measure if one wants to evaluate how well an enterprise has used its
funds, without regard to the relative magnitudes of the sources of those funds (short-term
creditors, long term creditors, bondholders, and share holders).

The ROA ratio often is used by top management to evaluate individual business
units with in a multidivisional firm (e.g the laundry equipment division of a household
appliance firm). The division manager has significant influence over the assets used in the
division but has little control over how those assets are financed, because the division
does not arrange its own loans, issue its own bonds or capital stocks, or in many cases
pay its own bill (current liabilities).

Return on owners, equity (ROE) reflects how much the firm has earned on the
funds invested by the shareholders (either directly or through retained earnings). This
ROE ratio is obviously of interest to present or prospective shareholders, and is also of
concern to management, which is responsible for operating the business in the owners’
best interest. The ratio is not generally of interest to division managers, however, because
they are primarily concerned with the efficient use of assets rather than with the relative
roles of creditors and shear holders, in financing those assets.

The third ratio is return on invested capital (ROIC): invested capital
(Also called permanent capital) is equal to non current liabilities plus shareholders’ equity
and hence represents the funds entrusted to the firm for relatively long periods of time.
ROIC focuses on the use of this permanent capital. It is presumed that the current
liabilities will fluctuate more on less automatically with changes in current assets and that
both vary with the level of current operations.

16 | P a g e
H R I H E Hassan


Invested capital is also equal to working capital plus non current assets. This
equivalency points out that the owners and long term creditors of the firm must in effect
finance the plant and equipment. Other long term assets of the firm and the portion of
current assets that is not financed by current liabilities.

Some firms use ROCI to measure divisional performance, often labelling the ratio
return on capital employed (ROIC) or return on net assets (RONA . this measure is
appropriate for those divisions whose managers have a significant influence on decisions
regarding assets acquisitions, purchasing and production schedules (which determine
inventory levels). Credit policy (account receivables) cash management and on level of
their current liabilities

• Sound financial position: In addition to desiring a satisfactory return, investors
expect their capital to be protected from more than a normal amount of risk. The
return on the shareholders ‘ investment could be increased if incremental investments
in the assets for new projects were financed solely by liabilities, provided the return
on these incremental investments exceeds the interest cost of the added debt. This
“financial leverage” policy, however, would increase the shear holders. Risk of losing
their investment, because interest charges and principal repayments on the liabilities
are fixed obligations and failure to make these payments could throw the company
into bankruptcy. The degree of risk in a situation can be measured in part by the
relative amounts of liabilities and owners’ equity and by the funds available to
discharge the liabilities. This analysis also involves the use of ratios.

• Structure of the analysis: Many ratios have been described in previous chapters.
In this section, these ratios and others are discussed in a sequence intended to
facilitate an understanding of the total business. Thus, we shall assume here that one
first looks at the firm’s performance in the broadest terms and then works down
through various levels of detail in order to identify the significant factors that
accounted for the overall results, if the values of the ratios used in this analysis are
compared with their values for other time periods, this comparison is called a
longitudinal, or trend analysis.

17 | P a g e
H R I H E Hassan


Dozens of ratios can be computed from a single set of financial statements. Each analyst
tends to have a set of favourite ratios, selected from those described below and perhaps
from some we do not describe.

Classification of ratios:
Ratios can be classified into different categories depending on the basis of classification.
The traditional statement to which are determinants of a ratio belong. On the ratio could
be classified as:

18 | P a g e
H R I H E Hassan


Traditional classification:

ratio

Profit & loss a/c ratio Balance sheet ratio Composite ratio

1. Profit and loss a/c ratios: ratios calculated on the basis of the items of the p & l
account only , g/p ratio, n/p ratio, stock turn over ratio, operating ration etc
2. Balance sheet ratios : ratio calculated on the basis of the figure of balance sheet
only , current ratio, debt equity ratio etc
3. Composite ratios: inter statement ratios based on figures of p & l account as well
as the balance sheet ,fixed assets turnover ratio, debtors turnover ratio etc.

19 | P a g e
H R I H E Hassan


FUNCTION CLASSIFICATION RATIO

Ratio

Profitability ratio Activity ratio Financial ratio

Liquidity ratio Leverage ratio
(Short term) (Long term)

Functional classifications:

a. Profitability ratios: profitability of the organisation reflects the final result of business
operation, and it will have no future if it fails to make sufficient profits. Therefore, the
financial manager should continuously evaluate the efficiency of the company,
besides management of the company, creditor want to get interest and repayment of
principal regularly. Owners want to get a reasonable rate of return in their
investments. This is possible only when the company earns enough profits. Generally
two major types of profitability ratios are calculated.

a. Profitability in relation to sales:

G/P ratio= gross profit x 100
Sales/turnover
N/P ratio= net profit x 100
Sales

b. Profitability in relation to investment:

20 | P a g e
H R I H E Hassan


ROI = Earning before interest and taxes x100
Total assets
Return on equity = Profit after taxes x100
Net worth
Earning per share = Profit after tax
No. of paid up equity shares

b. Activity ratios: This ratio is also called as turnover ratio, asset management ratio.
It measures how efficiently the assets are employed by the firm. There ratios are
based on the relationship between the level of activity, represented by sales or cost of
goods sold, and levels of various assets. A proper balance between sales and assets
generally reflects that assets managed well. Several activity ratios can be calculated to
judge the effectiveness of assets utilization. The important turnover ratios are:

a) Inventory turnover ratio = Cost of goods sold
Average inventory
b) Debtors turnover ratio= Credit sales
Average debtors
c) Total assets turnover ratio= Net sales
Total assets
d) Working capital turn over ratio= Net sales
Working capital

This ratio indicates whether or not working capital has been effectively utilized in making
sales.

c. Financial ratios: Financial ratios indicate about the financial position of the
company. The company is deemed to be financially sound if it is in a position to carry
on its business smoothly and meet all its obligations both long terms as well as shortly
term without strain. Thus, its financial position to be judged from two angles. Short
term as well as long terms.
A. Current ratio= Current assets
Current liability
B. Acid test ratio = Quick assets
21 | P a g e
H R I H E Hassan


Current liabilities
This quick ratio is a fairly stringent measure of liquidity. It is based on those current
assets which are highly liquid. Inventories are excluded from the numerator of this
ratio because, those are deemed to be the least liquid component of current assets.

d. Leverage ratios: Leverage ratio help in assessing the risk arising from the use of
debt capital. The important leverage ratio is.
1. Debt equity ratio= Long term debt
Equity capital
2. Proprietary ratio= Share holder funds
Total tangible assets

Advantages of ratio analysis are:
1. Simplifies the financial statements.
2. Facilitates inter firm comparison
3. Makes intra firm comparison possible
4. Helps in planning
5. Useful tool to test the health of the company quickly

Overall
Assessment of
performance

Financial position Fund flow
& profitability statement
Financial
statement

Deployment of Ratio analysis
fund by the and trend analysis
HCMPSU

Use of the above financial ratio to:

22 | P a g e
H R I H E Hassan


1. Share holders: Are interested in short run performance of the company, so they
can embark upon dividend per share ratio. Some others may be interested in holding
the shares in the long term. So they have to go in for more details. They should judge
long term solvency position ROE and EPS.
2. Analyst advisors: They advise the present and potential investors about their
buy/sell and lending decision. They generally review all the financial characteristics.
They also make inter firm comparisons.
3. Tax authorities: They judge the reliability of the financial information presented
by a enterprises. By using various ratios and applying the logic of inter relationship;
they try to assess the comparability of information.
4. Credit rating agencies: Presently in India the credit rating agencies rank the
companies in terms of a specific loan or deposit. They also use financial ratio along
with the process of wage negotiation.
5. Employees and trade union: They use mainly profitability ratio and agencies
rations, in the process of wage negotiation.
6. Auditors; Like tax authorities, auditors use ratio as part of comparability test on
the financial data provided for audit.
7. Distress analysts: Ratio is useful tools for industrial units.

Limitation of financial ratios:

1. Comparative study required: Ratios are useful in judging the efficiency of
the business only when they are compared with past results of the business or with
the results of a similar business.
2. Ratios alone are not adequate: Ratios are only indicators, they cannot be
taken as financial regarding good or bad financial position of the business.
3. Window dressing: The term window dressing means manipulation of
accounts in a way so as to conceal vital facts and present the financial statements
in a way to show a better position than what is actually is, on account of such a
situation, presence of particular ratio may not be a definite indicator of good or
bad management.

23 | P a g e
H R I H E Hassan


4. No fixed standards: No fixed standards can be laid down for ideal ratio. For
eg., current ratio is generally considered to be ideal if current assets are twice the
current liabilities. However, in the case of those concerns which have adequate
arrangements with their banks for providing funds when they require, it may be
perfectly ideal if current assets are equal to or slightly more than current liabilities.
5. Limitation of financial statement: Ratios are based only on the
information which has been recorded in the financial statements. As financial
statement suffer from a number of limitations, the ratios derived there from,
therefore are also subject to those limitations.
6. Diversified product lines: Many businesses operate a large number of
divisions in quite different industries. In such cases ratio calculated on the basis of
aggregate data cannot be used for inter-firm comparisons.

2.3 Cost volume profit (CVP) analysis:
Profit is the important measure of firm’s performance. An analysis of the effects of
various factors on profit is an essential step in the financial planning & decision making.
The analytical technique used to study the behaviour of profit in response to the changes
in volume, costs and price is called the cost volume profit (CVP) analysis. It is a device
used to determine the usefulness of the profit analysis helps to determine the minimum
sales volume to avoid losses and the sales volume at which the profit goal of the firm will
be achieve. As an ultimate objective, it helps management in seeking the most profitable
combination of coats and volume. A dynamic implications of its short run decision about
fixed costs, variable costs volume and selling price for its short run decisions about fixed
costs, variable costs, volume and selling price for its profit plans on a continuous basis.

The CVP analysis is on immense utility to management as it provides as insight into
effects and interrelationship of factors which influence profits of the firm. If it with the
help of the CVP analysis that the finance executive is enabled to present facts and figures
in accurate report and intelligible charts to management for action.

24 | P a g e
H R I H E Hassan


An overview of the organization:

m/s Hassan Co-operative Milk Producers Societies Union Ltd B.M.ROAD, Industrial
Estate, Hassan.

India is called “the country of villages” where it covers nearly 70%of its total area. In this
relation we can say that Indian economy is based on rural activities and their
development. Therefore we have to give prime importance to the rural activities.

K.M.F. has successfully helped the dairy development in India. This development would
such of 80% of India population comparing hard working but poor farmers. India also has
the largest population of milk animal in world, yet the milk yield products per animal are
less. Most of the farmers have one milk animal; they sell the milk through local milk
contractors or middlemen. These traders have always exploited the poor and uneducated
milk producers. It was in the late forties, when integrated approach for dairy development
based on farmers owned milk cooperative was 1st adopted at Anand. The system includes
milk procurement production, and marketing through farmer cooperatives.

The system of collective ownership, operation and control of milk trade by farmers came
to be known as ANAND PATTERN’. Anand pattern has given them an opportunity to
have access to the modern technology. Developments of the mid cities are founded. The
premier institution NDDB and IDC for application of the Anand pattern through out the
country. The whole project under which replication was envisaged, is named ’operation
flood’. The success of Anand pattern depends as establishing a strong co operative
infrastructure at the grass root level, making economically viable could further strengthen
this.

Dairy industry offers employment opportunity to the people so as to help the farmers to
get fair price for milk. The farmers are provided with medical facilities to their cattle.
Milk is becoming an alternative life line in our rural economy. With the advent of white
revolution that is “SKHEERA KRANTHI” in the same pattern of that of Denmark and
Holland.

25 | P a g e
H R I H E Hassan


Export of dairy products plays an important role in our foreign trade. It increases the
foreign exchange and national income of our country and also economic development of
our country.

Meaning of dairy
Dairy means a place where the milk and other milk related products like ghee, curds,
Etc.., are produced or packed for the sale earlier people were raring animals. Because the
population is less and place, situation and facilities are well suited to maintain the
animals. So the cooperative societies are come to market and established a dairy to
manufacture a milk product to help farmers and consumers to have milk available
everywhere and at any time.

Origin of the organization:
The KMF, Hassan Co-operative Milk Producers’ Societies Union Limited is situated 2
kilometer away from Hassan city in industrial area. It was formally a subsidiary unit of
Karnataka dairy development corporation. After organizing required members of the milk
societies, plant was commissioned during May 1982. The kudige dairy which was the 1st
dairy established in Karnataka had come under the jurisdiction of Hassan Milk Limited in
the year 1987. The organization consists of 3 districts Hassan, Chikmagalore and Coorg
consisting of 18 taluks.

Growth and development of the organization:
Hassan milk co-operative is one of the oldest unions in the state of Karnataka. The sphere
head team was positioned here in the 1975 and the union was registered in the year 1977.
This union has under its preview the district of Hassan, Chickmagalore and Coorg.

Under the international development agency programme a total investment of Rs 17.4
millions was made to set up a milk processing facility of 60000 LPD at Hassan.
A dairy of 20000 LPD was set up at kudige in 1986 by the government of Karnataka
which was handed over to the KMF in the same year.

26 | P a g e
H R I H E Hassan


Under the operation flood II programme, no expansion in the dairy sequent was proposed.
However a chilling of 20000 LPD was to be established and in this union since no firm
proposed chilling centre, work did not commence.
The consumption of milk in Hassan dairy per day is only about 96000 liters. The
remaining milk will be sent to other dairy and product dairies for sales and conversion
respectively.

Now the hassan milk union has following facilities.
Sl. No Dairy Processing capacity
1 (i) Hassan 120000 LPD
(ii) Kudige 50000 LPD
2 Chilling centre Chilling capacity
(i) Holenarasipura, Hassan 20000 LPD
(ii) Birur, Chikkamangalure 20000 LPD
(iii) Channarayapatna, Hassan. 100000 LPD

Present status and future plans of the organisation:
As on the end of March 2010, the network of 1197 dairy co-operative societies (dcs) have
been organized spread in 13 taluks of three districts. The societies from three districts
constituted “Hassan Milk Union”.

The dairy industry in the state is running under 3 their systems:-

Karnataka milk federation –state level body
District milk union -district level body
Dairy co operative societies- village level body
The union is affiliated to Karnataka milk federation I,e KMF a state level body.
Chilling centres are at Holenarasipur, Channarayapatna and Birur and dairy is situated in
Hassan and Kudige.
The HCMPSL is doing liquid milk sales in 3 districts of Hassan, coorg and chikmanglore.
There are 35 distribution routes selling around 56000 liters per day in Hassan district and
there are 6 milk distribution routes under kudige dairy selling 40000 liters per day. There
are 252 authorised milk agents for selling, spread over three districts and 19 milk parlors
in these three districts.

27 | P a g e
H R I H E Hassan


Hassan Chickmagalore coorg Total
Milk parlors 8 4 7 19
Day counters 5 5 7 17
Debtors 6 7 5 18

Future plans of the organization:
Over the years the union had been taking many steps to meet the changing consumer
needs, availability of milk variants and milk production to meet the needs of the
consumers. Priority areas for the development of liquid milk market in the union areas are
identified and necessary action plans have been drawn for implementation during the year
2008-09. the key strategies planned for 2008-09 is given below:-

1. Increase the availability of nandini milk in the market
2. Consumer awareness programme
3. Motivating channel members
4. Constituting effective replacement /leakage policy
5. System of consumer/retailers grievance redress
6. Stealing team concept for market visit
7. Constituting a core group consisting quality, plan and marketing staff for solving
day to day problems
8. Sales promotion activities

Origin of dairying in India:
Around 1500 to 2000 b.c the Aryans were first to domesticate cattle. Use them for
tilling their land and obtain milk to be consumed as food. Again it were Aryans who
priced the milk of a cow more than its meat, forbade its slaughter, created legends
about it and even worshipped it. Hindus even to this day consider cow as sacred.
Besides it were only the east which domesticated buffalo as much animal and
succeeded so well that today, more than half the total production of milk in India is
obtained from buffalo. Now India is one of the richest milk producing country in the
world. In 1999 it produced milk up to 770 00000 tons and this milk valued up to
75000 crores and 13% of total production in the world is produced by India itself.

28 | P a g e
H R I H E Hassan


HASSAN CO-OPERATIVE MILK PRODUCER’S SOCIETIES
UNION LTD

The Union was registered on 30th March 1977 with the operational jurisdiction
extended to 3 Districts namely Hassan, Kodagu & Chikkamagalur.

The Dairy was setup under the Operation Flood II & III and has a processing capacity
of 1.2 Lakh Litres of milk per day. The Union also has a Dairy at Kudige with a capacity
of 50,000 litres per day which is the first Dairy in Karnataka State started during January
1955.

The Union has three Chilling Centres at Birur, Holenarasipur and channarayapatna
with chilling capacity of 20000 liters per day at Birur and Holenarasipura and 100000
liters per day at Channarayapatna. The Union also produces Ghee, Peda, Curds, Khova
and Butter Milk.

Hassan Dairy was established under the World Bank aid with an initial handling
capacity of 60,000 KGPD and was being managed by Karnataka dairy development
corporation.

29 | P a g e
H R I H E Hassan


In the year 1987 with an idea of bringing all milk allied activities such as milk
procurement, milk processing and milk marketing the Hassan dairy and the Kudige dairy
(the first commission dairy plant) were handed over to Hassan Co operative Milk
Producers Societies Union. The integrated system of monitoring the milk procurement,
processing and marketing activities by milk producers themselves was established.

MISSION STATEMENT

Hassan milk union aims to render the best services at normal cost to its members
to increase milk production and produce good quality milk by paying remunerative price
through out the year, there by improving their economic and social condition while
ensuring high quality milk and milk products to the delighted level of the consumers at
competitive price.

VISION STATEMENT

The union thrives hard to adopt the modern and eco friendly technologies to
produce milk and milk products of international standards to make our presence
prominent in the global market.

AIMS AND OBJECTIVES

Hassan co operative milk producers societies union is completely an autonomous
body consisting of representatives from milk producers as policy makers

• To produce continuous and remunerative market for the surplus milk in the rural
areas.
• To supply quality milk to customers in the urban areas at a competitive price.
• To provide the technical inputs necessary to produce good quality milk and to
facilitate increase in milk yield.
• To provide self employment to rural folk and to make them economically self
sustainable by which the migration of rural folk to urban areas is minimized.
• To prevent the role of the middle men in the milk business and to increase their
returns.

30 | P a g e
H R I H E Hassan


• To establish a bridge between rural and urban folk and to play a vital role in
changing he social and economic status of the rural folk.

Role Of Dairy Co-Operative Society

The dairy co operatives are organized in rural areas for the milk producers keeping
in view the domestic principles and values. These societies educate, guide, support the
milk producers in dairy development activities.

Functioning Of Dairy Co Operatives

The dairy co operative function all through the year in two shifts, this will provide
continuous market for the surplus milk produced and the payment for the milk supplied
will be distributed to the producers on the predetermined day.

Input activities include:

• Veterinary services like regular vaccination
• Artificial insemination services
• Supply of balanced cattle feed and fodder slips
• Training facilities

Growth Of The Union

The milk union which was established in the year 1977 with 100 functional dairy
co operatives collecting 10,300 Kgs of milk per day is procuring on an average 386462
Kgs per day from 1122 co operatives as on date with the increase in milk production the
Hassan dairy with the initial capacity of 60,000 KGPD was expanded to 120000 KGPD
during 1996.The union has also established three chilling centers with a chilling capacity
of 20,000 KPD and 100000 KPD.

2.3 Organization Structure

31 | P a g e
H R I H E Hassan


BOARD OF DIRECTORS - CHAIRMAN

MANAGING
DIRECTOR
(C.E.O.)

ADMINISTRATI
PERSONEL ON MANAG E
ASSISTANCE PRODUC TION MENT INFOR
FINANCE PROCURE
DEPARTMENT (Dairy Plant) MARKE TING PURCHASE MATION
MENT & INPUT
Sr. Staff SYSTEM

A- B- C-2 E-27 F-2
1
D-69 G-3
15 3 5 5 H-3

Personnel Department
It plays a crucial role in an organization which is always referred as the strength of
the organization.

Recruitment
Suitable candidate is selected through the notice in the news paper then the
candidate undergoes job training.

Training
The existing as well as freshers undergo training.

32 | P a g e
H R I H E Hassan


For ex: Animal health/artificial insemination officers are put along the existing
employees (senior doctors) and they undergo a normal period of 15 days training.

Orientation programme
Under KMF, CTI (Central training institute), Bangalore, which is a full fledge
training institute. And some of the other trainings institutes for which the employees
of HAMUL are sent for training are as below:
1. SRDTC(Southern regional demonstration and training center) for both
technical and non technical training.
2. Mansinh institute of training, Mahsana, Gujrat, only for technical training.
3. Vaikunt Mehta institute, Pune. For management development programmes.
4. Institute of rural management, Anand.
5. Regional institute of co operative management, Pune.
6. CII- Confederation of Indian industries, institute for quality- for food
industrial platforms are created.

Employee promotion
Higher cadre employee benefits are meant for the management or administrative
level authority only. The employee promotion is dependent on his capability and
seniority basis is the mandatory method followed. To decide on this, the employee
education, obedience, carrying of the job and attendance are taken into consideration.

Record maintenance
All the day to day information from the date of joining is updated in the records.

Leave
Casual leave of 15 days per year and for new entrants 1 day per month for one
year is followed. And for other employees earned leave of 30 days per year, once in 2
years there also exists surrender of leave or the encashment of the leave. If they
accumulate 240 days it is encashed but exceeding 240 days is not entitled for
encashment.
If any accident takes place during the working hours the special leave is given:

33 | P a g e
H R I H E Hassan


• Special leave: the rabies leave is given for the infected dog bite. And also the
blood donation leave for 1 day is given.
• Maternity leave: on condition, with payment.
• Extra-ordinary leave: depending on the service or any major health issues.

Allowance
The allowance in terms of fuel and commuter charges for those who are
dependent on public transport per month is fixed.

Uniform
Uniform is to be worn when on the job and two pairs are given each year.

Transfer:
The transfer authority is in the hands of Managing Director. If the transfer is on
the request, employee is not entitled for cash benefits but if it is not on request, he is
entitled for cash benefits.

Retirement
The retirement age is 58 years. But on physical incapability or mental instability
there is a consideration. And the 3 months prior notice is a must before leaving the job
anytime before the retirement.

Retirement benefits:

A salary of 15 days per year of completed years of service. 2.5 lakh ceiling is
applicable and all the gratuity announcements are according to government
notifications. Provident fund is as per the government norms. 12.5% toward provident
fund contribution fer all the employees.

Production Department:

Every morning by 9.30am, the scheduled is drawn depending on the consolidation
of all the information from different units. Entire milk has to dispatched before the
34 | P a g e
H R I H E Hassan


next raw milk comes in. All the availability options should be weighed and instant
decisions have to be taken. Presently the day to procurement on an average comes up
to 2,50,000 litres per day. All the indents are moved there by 11am and this has to be
intimated to the packing division.

Packing material purchase is based on the integrated business plan. The rolls have
to be weighed and bought out because by the end of the month the statement have to
be prepared if the loss is 2% over and above the loss is recovered from the suppliers.
If the loss is >1% and <2% that loss is recovered from the packing contractor.

For each and every product the organization has fixed some standard.
For 500ml it is 45-55 micron.
For 1000ml it is 55-65 micron.
This comes in pre-printed rolls but the date of packing, batch number and machine
number is printed on the time of packing.
After the packing being done, it is handed over to the finished goods section then
dispatch starts. The longest route is Hassan to Kudremukh(180km) through an
insulated vehicle. The document from the last point has to be bought back. No credit
services. Day to day payments are being made. Only for milk pourers it is 7 days and
sometime it even goes up to 15 days. The statement is being made deducting the
commission and the next day’s indent also has to be collected.

In case of any eventualities other than natural calamities, it is accepted. Suppose
any negligence, accidents penalty is fixed.

Marketing Department:
Marketing should be considered as the central business function in this
competitive world as it establishes, develops, and commercializes long term customer
relationships and helps in meeting organizational goals.
KMF has adopted pricing mainly on four categories namely:
• Double Toned Milk – Rs 14/100ml
• Toned Milk – Rs 16/1000ml
• Standardized (homogenized) Milk – Rs 18/1000ml

35 | P a g e
H R I H E Hassan


• Full Cream Milk – Rs 20/1000ml

Stores:
The storage place for almost all necessary goods which come into the factory
premises:
But here the store is the place where all these are there:
1. Packing materials
2. Stationery
3. Spares
4. Oil and lubricants
5. Sugar
6. Testing chemicals
7. Cleaning acids
8. Uniforms and Shoes
9. Cans for societies
10. Ledgers

The activity takes place in stores:

Requisition letter: First the manager of concerned department depending upon the
need for the goods sends a requisition letter to the manager dairy and then once
approved the same reaches the stores in charge, the purchase section places an order.

Purchase order: But for the goods regular nature depending upon the stock level ,
the stores in charge takes up the responsibility to place order and have the materials
ready when ever required. Here in the co operative sector as per the transparency act
if the goods and where the capital expenditure is involved, the enquire letters are sent
the suppliers and who ever quotes the least and also with quality gets the order.
And the same purchase order copy goes to
1. the supplier
2. the store in charge
3. Accounts section
4. concerned user section

36 | P a g e
H R I H E Hassan


Purchase order also includes
1. Mode of payment after and before supply
2. Terms and conditions(taxes)
3. Delivery period
4. Mode of dispatch

Invoice:
Against the purchase order the concerned supplier gives the invoice. Once the
invoice is received the cross checking of materials as per the specifications purchase
order is done. The concerned department communicated about the goods and the
concerned person gives a user section remark on the quality of the product. Hence the
goods received note is sent to concerned user section.

MIS
The main activity of the MIS department in the organization is to act as the
information source for all the levels of management for the decision making in different
situation. Hence to say the integration of information from all the departments for the
decision making for all the three levels which exist in the organization:
1. Top level
2. Middle level
3. Lower level

The information from the procurement and input wing, production department, marketing
department and the data like the artificial insemination being done and the follow up,
folder sales, target set being done. All these data is given to the MIS department and the
integration on monthly basis is taken up and the report as sent to the managing director
and same place before the monthly meetings held of all the milk unions.

FINANCE DEPARTMENT
Source of finance to start KMF and its units is from World bank channels through
agreement between NDDB under Tripartite agreement between NDDB, KMF and
Government of Karnataka.

37 | P a g e
H R I H E Hassan


Now, source of funds are share capital and realization from sale proceeds of milk
and milk products. As on 31.03.2010 the paid up capital was 765.32 lakhs and 218.03
lakhs loan was taken for operating.

CHANNELS OF DISTRIBUTION
The network of distribution of milk was founded to be very systematic and has
made distinct role in the successful marketing of milk.
The processed and pasteurized milk is first packed and stored and then distributed
to the target customers.
Processing and manufacturing

Storage

Dealers or Retailers

Consumer

Power

The KPTCL supplies the power upto 325 kilo watts per month. In case of shortage in
supply diesel generator is used.

VEHICLE
The union owns 5 milk tankers. In addition to this, it has one car, and one jeep.

38 | P a g e
H R I H E Hassan


PRODUCTS/ SERVICES
Milk is marketed under Nandini brand name in different types. The pricing adopted is
mainly on four categories namely:
• Double Toned Milk – Rs 14 /1000ml
• Toned Milk – Rs 16 /1000ml
• Standardized (homogenized) Milk – Rs 18 /1000ml
• Full Cream Milk – Rs 20 /1000ml

Apart from this, milk is marketed in 3 variants-
• Nandini Goodlife with 3.5% fat and 8.5% SNF
• Nandini Smart with 1.5% fat and 9% SNF
• Nandini Goodlife Slim with 0.5% fat and 9% SNF

The major products are Nandini Ghee, Butter, Curd, Skim Milk Powder, Badam
Powder, Paneer, Peda, Mysore Pak, Burfi, Jamoons, Khova, Flavoured Milk, Ice
Cream, Cheese, Nandini Bite, Nandini Basan Ladoo, Nandini Set Curds.

39 | P a g e
H R I H E Hassan

cultures, filled into 200gm and 400gm
cups and allowed to set into curds.
Imported bacterial cultures constitute
curd forming bacteria of high genetic
abilities and release antimicrobial
substances into curd imparting disease
resistance to consumers( probiotic
characteristic). The curd apart from
therapeutic in nature has very high shelf-
life and can be kept for 15 days in
refrigerator without curds becoming sour.

NANDINI SET CURD is competitively
priced at Rs.7 per 200gm cup and at
Rs.13 per 400gm cup.

Shelf life : 15 days in refrigerator
without curds becoming sour.

40 | P a g e
H R I H E Hassan


ACTIVITIES OF HASSAN MILK UNION

1. Organization of dairy co operative societies: As at the end of March 2010, 1197
societies have been registered. Out of functional societies, 330 women societies
are functioning.
2. Membership Enrolment: As on 31st March 2010 173396 members have been
enrolled of which 71046 are small farmer48866 are marginal farmers, 22199 are
agriculture labourers and 31285 are other big farmers.
3. Milk procurement activities: The present average milk procurement from 1122
milk societies is 386462 Kgs/day.

ACHIEVEMENTS
• Hassan milk union is procuring milk from all the 13 taluks of three districts and
selling quality milk in all the taluks and small towns.
• The union and all the dairy co operatives are being managed by the democratically
elected boards from among the milk producers.
• The technical input to dairy co operatives and the dairy plants are managed by
well trained, committed professionals and technical team.
• 91% of the milk co operative societies are operating under profit
• The union has successfully implemented the animal induction program for SC ST
and OBC since 1996 with the financial assistance from central and state
governments and rendered direct loans to the beneficiaries at lower interest rates.
• 112 women dairy co operatives have been organized since 1997 under support
training and education program(STEP)
• The union has implemented mini dairy scheme since 1996 and has facilitated
loans to OBC beneficiaries.
• The union has set up Artificial insemination facilities for dairy co operatives.

41 | P a g e
H R I H E Hassan


• The union has rendered emergency veterinary services round the clock.
• The union has implemented foot and mouth disease control program(FMDCP)
• Fertility camps are being conducted once in three months by inviting experts in
the field.
• The union supplies quality fodder slips and seeds through the year and facilitates
the availability of green fodder.
• The union is insuring the life of milk producers and dairy co operative staff with
the co ordination from Life insurance corporation and National insurance
company since 1997-1998 under “samajika suraksha yojana”.
• The union has launched the “YESHASHVINI” program to the milk producers
wherein the milk producers are provided with the best available medical facility at
free of cost.
• Smokeless chula have been provided to the milk producers with an intention of
improving the health of rural women folk.
• Under “Bhatath Darshan Program” 265 progressive milk producers have been sent
on educational tour.
• The union has successfully implemented the Total energy management program
and Total quality management program (quality excellence from cow to
consumer) since 2001 respectively.
• Quality awareness programs are being conducted regularly for school children,
house wives and consumers.
• The union has got ISO 9001:2000 certification from TUV India, Mumbai.
• The union has got Energy Conservation Award.

42 | P a g e
H R I H E Hassan


2.6 SWOT analysis

Strengths
• Procurement and Input( P&I) network
• Goodwill
• ISO 9001:2000 certified
• Second largest producer
• Vast market

Weaknesses
• WTO standards
• Advertisement execution in its early
• Early stages of automation and computerization

Opportunities
• Enter rural market
• Neutraceuticals
• Exports

Threats
• Entry of big players
• WTO standards
• Government policies

43 | P a g e
H R I H E Hassan


DATA ANALYSIS AND INTERPRETATION

“Ratios are tools in the hands of an expert; these are not even kitchen knife, in the hands
of a layman”

Financial statement reveals the financial performance of the firm, its management
efficiency and the future prospects of growth. Each type of statement gives a peculiar
understanding of the firm’s performance. The balance sheet gives the firms financial
position at a point of time. The profit and loss statement reveals the profitability of the
firm over a period of time. Finally, higher the retained earnings/ reserve and surplus
higher is firms investment and higher its growth. The users of financial statement view
the statements differently according to their requirements. The creditors would like to
know whether they should give short term or long term loan to the firm. Even among the
creditors short term creditors are interested to know the interested in earnings generating
capacity, valued adding capacity and operating efficiency of the firm. The shareholders
are interested to know the long term growth prospects of the firm, the management is
interested to know its operational efficiency and weakness so that it is able to pay all
creditors in time and generates surplus for its shareholders investments.
Ratio analysis is one such analysis where all requirements of the end users of
financial statements are met. According to the dictionary the word ratio is the indicated
quotient of two mathematical expressions and as the relationship between two or more
things. The information/ figures revealed by the financial statements do not help the user
to understand the exact performance and financial position of the firm. when these
absolute figures are related to other relevant information then it makes sense for example
the firm may show impressive sales revenue like Rs. 10 crores, but when compared with
its investments say in this case if it Rs.11 crores the exact financial position of the firm
may be understood. We can say that the firm did not do well because inspite of huge sales
44 | P a g e
H R I H E Hassan


its investments were also large hence profits are negative. Thus financially ratio can be
figure of two accounting data expressed mathematically. Ratios help to express large
financial data in brief and analyze the qualitative as well as quantitative position of the
firm. for all ratios we have standard benchmarks, which helps the analysts in judging the
financial position of the firm qualitatively. For ex: say current ratio standard is 2:1 but a
company has a current ratio of 1:2, we can say that the company has a serious problem
with its liabilities and should take care of it.

The accounting ratios very sincerely judge the financial health of a firm. The various
advantages of ratios are:
1. Measurement of profitability
2. Measurement of operational efficiency
3. Measurement of solvency
4. Comparative analysis of performance
5. Helps in budgeting and forecasting
6. Simplified and concise presentation of firms performance
7. Measuring managerial effectiveness

The technique of ratio analysis is thus a part of financial statement analysis of any
business.

RATIO BENCHMARK:

As ratios are relationship or comparison we must know that standard or the benchmark
against which we are going to evaluate the financial performance of the company. If
suppose we determine the current ratio i.e, current assets to current liabilities, then we
must know the benchmark by which we will judge it. A ratio analysis is meaningless if
we do not have standards set before us.

Bench mark is a yardstick against which actual ratio is to be compared in order to make a
qualitative judgment about the various aspects of the financial position and performance
of an enterprise. Benchmark may be:

45 | P a g e
H R I H E Hassan


A part ratio of the same enterprise- A ratio could be compared with the past ratio of the
same enterprise. This type of comparisons is known as intra firms comparison as is done
under the time series analysis.

Ratios of similar firms – A ratio could be compared with the ratio of similar firms
belonging to the same industry at the same point of time. These types of comparison are
known as inter firm comparison as is done under cross sectional analysis.

Industry average – A ratio could be compared with the industry average at the same
point of time. This type of comparison is known as pattern comparison as in done under
cross sectional analysis.

Rule of thumb-Rule of thumb have evolved over a period of time. A ratio could be
compared with rule of thumb. However these rules of thumb should be used cautiously.

 Competitor’s ratio: Every company must have the ratios of its
competitors. This helps the company to evaluate its competitive edge in
the market.
 Industry ratios: The industry to which the company belongs has its own
standards regarding to different inputs and outputs. Hence, the industry
ratios help the company to evaluate its industry competitiveness.
 Past ratios: The past ratios of the company help it to evaluate its
performance over a period of time and judge whether it has improved or
not.
 Forecasted ratios: Many a time the company sets future plans for itself
where it forecasted for the future the company can understand how it
has performed, whether it lived up to its expectations or not, if not then
what were the reasons.

Profitability ratios:
A business is run primarily for profit. So its performance has been measured in
terms of profit. Profitability ratios give some yardsticks to measures profit in relative
terms, either with reference to sales or assets or capital employed.

46 | P a g e
H R I H E Hassan


Profitability in relation to sales or income:
A company should be able to produce adequate profit on each rupee of sales. If
sales do no generate sufficient profit, it would be very difficult for the firm to cover
operating expenses and interest charges and as a result, it will fail to earn any profits for
owners.

Measures of profit:

 Gross profit- Sales minus cost of goods sold
 Net profit (PAT)- Result of impact of all factors on earning
 Operating profit- Earnings before interest and taxes(EBIT)

1. GROSS PROFIT RATIO: This ratio indicates the average spread between the
cost of goods sold and sales or income. A high gross profit margin ratio is a sign
of good management. A gross profit margin ratio may increase due to any of the
following factors.
o Higher sales price cost of goods sold remaining constant
o Lower the cost of goods sold, sales prices remaining constant
o A combination of variations in sales price and cost, the margin widening
o An increase in the proportionate volume of higher margin item

Gross profit ratio= Gross profitx100
Net sales

The analysis of these factors will reveal to the management how a depressed gross profit
margin can be removed.

A low gross profit margin may reflect higher cost of goods sold due to the firm’s inability
to purchase at favourable terms, in efficient utilization of plant and machinery, or over
investment in plant and machinery, resulting in highest cost of production. This ratio will

47 | P a g e
H R I H E Hassan


also be low due to fall in prices in the market or market reduction in selling price by the
firm in an attempt to obtain large sales volume, the cost of goods sold remaining
unchanged. The financial manager must be able to detect the courses of falling gross
margin and initiative action to improve situation, there is no norm for judging this ratio;
therefore, the evaluation of business on its basis is a matter of judgment, however the
gross profit should be adequate to cover operating expenses and to provide for fixed
charges, dividends and building up of reserves.

2. OPERATING PROFIT RATIO: The profit after tax figure excludes interest on
borrowing. Interest is tax deductible, and therefore, a firm which pays more
interest pay less taxes. Tax saved on account to payment of interest is called
interest tax shield. thus the conventional measure of net profit margin PAT to
sales ratio is affected by the firm’s financing policy. for a true comparison of the
operating performance of the firms, we must ignore the effect of financial
leverage viz, the measure of profit should ignore interest and its tax effect.

Operating profit ratio= Operating profitx100
Net sales

This ratio indicates:
 High gross profit
 Lower operating expenses
 A combination of foreside two factors
An enterprise should have a satisfactory ratio. To judge wether the ratio is satisfactory or
not, it should be compared with its own past ratios or with the ratio of similar enterprises
in the same industry or with the industry average.

3. NET PROFIT RATIO: This ratio indicates net margin earned on sale of rs.100,
this ratio helped in determined the efficiency with which affairs of the business
are being managed. An increase in the ratio over the previous period indicates
improvement in the operational efficiency of the business provided the gross
profit ratio is constant. It indicates that the management’s efficiency in
manufacturing area, administrating and selling the products

48 | P a g e
H R I H E Hassan


Net profit ratio=Net profit before tax x 100
Net sales

= Net profit after tax x 100
Net sales

The ratio also indicates the firm’s capacity to withstand adverse economic condition.
A firm with a high net profit ratio would be in a advantageous position to survive in
the face of falling sales price, rising cost of production or declining demand for the
product. An investor has to judge the adequacy or otherwise of this ratio by taking
into account the cost of capital, the return in the industry as a whole and market
conditions such as boom or depression period. No norms can be laid down. However
constant increase in the above ratio year after year is a definite indication of
improving condition of the business.

49 | P a g e
H R I H E Hassan


Balance sheets of last four years:

Manufacturing 2005-06 2006-07 2007-08 2008-09
trading a/c expenses
Opening stock 12597167.78 7406110.12 8144870.02 15513894.52
Purchase 843563064.77 1006054769.1 1390732359.4 1881083739.94
3 8
Procurement 91186368.47 75105886.33 48857786.64 63748393.97
transportation
Processing and MFG 70877371.98 62323083.34 67853148.53 93105497.83
exp.
Salary and other exp. 56104373.15 80045206.15 83615473.84 79882272.98
Gross profit 61320005.85 67970324.20 80738849.42 83764841.53
Total 1135648352.0 1298905379.2 1679942487.9 2217098640.77
0 7 3
Income
Sales 908316775.93 1283640880.4 1631928945.2 2172149561.29
5 1
Inter unit transfers 219925465.95 7119628.80 32499648.20 13083842.85
Closing stock 7406110.12 8144870.02 15513894.52 31865236.63
Total 1135648352.0 1298905379.2 1679942487.9 2217098640.77
0 7 3
Profit and loss a/c 0.00 0.00 0.00 0.00
Expenses
Salary and other benefits 14026093.29 20011301.54 20903868.46 19970568.24
ADMN exposits 4515705.08 10633245.82 6454634.78 8684100.33
Rent, rates and taxes 865123.75 1072489.00 538021.00 1090622.00
Selling and distribution exp. 27452306.84 18975868.95 21624081.19 25069314.58
P and I service 6714679.10 8107154.59 7165843.08 7790809.63
Interest and bank charges 885542.15 1084687.84 1469887.44 1558036.25
VEHICLE MAINTENANCE 3893831.57 3977121.21 3208737.97 2779036.59
Depreciation 4691989.36 4077504.63 5678540.39 13330438.95
Provision For Bad & Doubtful Debts 0.00 0.00 1181671.53 0.00
Provision for taxation 3503352.00 7564329.00 6587850.00 5414158.00
Net profit to b/s 6154677.20 6139523.35 20264268.38 11699086.86
Total 72703300.34 81643225.93 95077404.22 97386171.43

50 | P a g e
H R I H E Hassan


Income
Gross profit from mfg 61320005.85 67970324.20 80738849.42 83764841.53
and trading a/c
Other income 9828715.04 10213382.49 10732450.30 11586460.93
Interest on loan advance 1554579.45 3459519.24 3606104.50 2034868.97
Total 72703300.34 81643225.93 95077404.22 97386171.43
0.00 0.00 0.00 0.00

Liabilities 2005-06 2006-07 2007-08 2008-09
Share capital 30359000.00 37001000.00 42273000.00 60814000.00
Share suspense 245269.93 439931.33 870182.51 1654456.01
DEP and other funds 67674649.95 73751700.98 107274621.80 156268990.15
Profit and loss a/c 10591092.50 6139523.35 20264268.38 11699086.86
Loans 6081719.00 24783663.00 23979297.00 25225155.98
Grants and subsidiaries 30863943.03 32092314.86 7753935.23 6479027.59
Current liability 79951172.94 82178514.71 191194156.82 175479156.43
Provisions 7443106.94 11970012.54 19854317.14 18054340.07
Bank balance over 0.00 0.00 0.00 0.00
drawn
Total 233209954.29 268356660.77 413463778.88 455674213.09
Assets
Cash on hand 542434.15 2105813.25 783063.90 881835.65
Cash at bank 6777465.53 13674831.73 47494052.04 46344999.70
Investment 34276761.86 47729846.33 59626895.33 41820936.33
Fixed assets 115051216.14 118494561.14 152729790.68 210331884.63
Current assets 47408041.71 56038783.73 103534763.35 89158355.64
Loans, advances and deposits -579.06 44359.94 31601.49 15801.96
Sundry debtors 10679810.55 10473705.39 21952659.63 22231916.27
Audit objections 3813655.68 3734352.67 3734352.67 3734352.67
STOCK ON HAND 14661147.73 16060406.59 23576599.79 41154130.24
Total 233209954.29 268356660.77 413463778.88 455674213.09
0.00 0.00 0.00 0.00
GROSS MARGIN RATIO= Gross margin x100
Turnover

Gross margin= (Income minus material cost)

OPERATING PROFIT RATIO= Operating profit X 100
51 | P a g e
H R I H E Hassan


Turnover

NETPROFIT RATIO = Net profit x 100
Turnover

Profitability in relation to the capital employed:

The profitability of the company should also be evaluated in terms of the firms
investment in assets and in terms of capital contributed by creditors and owners. If the
company is unable to earn a satisfactory return on investment, its survival is threatened.

 Return on investment:
The term investment may refer to total asset which employed in the net asset is known
as capital employed.

The return on capital invested in a concept that measures the profit which a firm earns
on investing a unit of capital. These ratios express all the efficiencies or in efficiencies
of a business collectively and thus, is a dependable measure for judging its over all
efficiency or in efficiency.

Analysis and interpretation:

1. Expenses ratio: Expenses ratio also calculated to explain the increase or
decline in profitability ratio. A higher operating ratio is unfavourable since it
will leave a small amount of operating income to meet interest; dividend etc..,
to get a comprehensive idea of the behaviour of operating expenses, variations
in the ratio over a number of years should be studied. Certain expenses are

52 | P a g e
H R I H E Hassan

A stuy on interpretation and analysis of ratio analysis and performance evaluation conducted at kmf

A stuy on interpretation and analysis of ratio analysis and performance evaluation conducted at kmf

Recommended

Recommended

More Related Content

What's hot

What's hot (20)

Viewers also liked

Viewers also liked (20)

Similar to A stuy on interpretation and analysis of ratio analysis and performance evaluation conducted at kmf

Similar to A stuy on interpretation and analysis of ratio analysis and performance evaluation conducted at kmf (20)

More from Projects Kart

More from Projects Kart (20)

Recently uploaded

Recently uploaded (20)

A stuy on interpretation and analysis of ratio analysis and performance evaluation conducted at kmf