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50086880 project-on-working-capital
1. A
PROJECT REPORT
ON
“ W ORKING C APITAL M ANAGEMENT"
DEVELOPED BY,
MISS. UPADHYE PRIYANKA VINAYAK
FROM
MAHINDRA SONA LTD.
SUBMITTED IN THE FULFILMENT
OF THE
M. B. A. (FINANCE),
TO
UNIVERSITY OF PUNE
(2008- 2009)
P. D. V. V. P. FOUNDATION’S
INSTITUTE OF BUSINESS MANAGEMENT
AND RURAL DEVELOPMENT,
AHEMADNAGAR
1
2. DECLAIRATION:
I hereby declare that, all the information in this project report is
based on my own fact-findings and experienced at “Mahindra Sona
Limited.”
And the result embodies in this project report not been submitted
to any other university or institute for the award of degree or diploma.
IBMRD, AHEMADNAGAR.
Date:
Miss. Upadhye Priyanka V.
Place:
2
3. ACKNOWLEDGEMENT:
To begin with, I am extremely grateful to the Mahindra Sona
Limited, Nashik for having accepted me as summer trainee and thus
making it possible for we have wonderful work experience.
I most indebted to my guide at ‘Mahindra Sona Limited, Nashik’,
Mr. D. N. Mahale (Personnel Manager) and Mr. Shirish Kale (Finance
Executive) under whose constant supervision and valuable guidance the
project was tethered his cheerful countenance and approachability
delicately enamored productivity of work place.
I also extend my gratitude to whole staff of ‘Mahindra Sona
Limited,’ for giving their valuable support and guidance in completion
of project.
I sincerely thanks to my project guide Prof. Dr. M. P. Sharma
(Faculty, Institute of Business Management and Rural Development,
Ahemadnagar.), for his unfailing and valuable guidance from time to
time.
3
4. OBJECT OF THE PROJECT:
For the partial fulfillment of the MBA course a student is
supposed to undergo training in an organization for 50, days which is
mandatory by PUNE UNIVERSITY. While working with the
organization, one has to undertake a small study on the field of work
and subject allotted by the firm. Based on this study one has to submit a
report to the organization, University and College.
Summer project work exposes the real-time corporate
environment to a student to experience the current .And facilitates
student to experience the scenario .The project helps in giving an insight
in the field of FINANCE. To acquire knowledge and information of
financial aspects of the organization, the topic given by the organization
was “working capital management”.
4
5. OBJECTIVE OF THE PROJECT
TO CALCULATE THE RATIOS IN RELATION TO WORKING
CAPITAL AND ITS TREND ANALYSIS.
TO FORECAST THE WORKING CAPITAL REQUIREMENT OF
THE YEAR 2008-2009.
5
6. METHODOLOGY OF THE STUDY
RESEARCH
Research is a careful inquiry or examination to discover new information or
relationships and to expand and verify existing knowledge.
The various sources of information can be broadly classified in two categories namely
primary and secondary.
PRIMARY DATA COLLECTION:
The information and data collected is thoughrough formal and informal discussion
with the officers of accounts department.
SECONDARY DATA COLLECTION:
During the training period, data was collected from financial reports. For analyzing
working capital management, certain books were also referred.
6
8. CONTENT
PAGE
NO.
9-17
1. COMPANY PROFILE:
i.
ii.
iii.
iv.
v.
vi.
2.
INTRODUCTION
HISTORY
PRODUCTS AND APPLICATIONS
MILEESTONES
ORGANIZATIONAL CHART
PLANT LAYOUT
PROJECT ON WORKING CAPITAL:
i.
WORKING CAPITAL POLICY
ii.
TYPES OF WORKING CAPITAL
iii.
NEED FOR WORKING CAPITAL
iv.
CHARACTERISTICS OF CURRENT
ASSETS
v.
CURRENT ASSETS CYCLE
vi.
FACTORS INFLUENCING WORKING
CAPITAL
vii.
CURRENT ASSET FINANCING POLICY
18-33
3. OPERATING CYCLE AND CASH CYCLE:
i.
OPERATING CYCLE ANALYSIS
ii.
DURATION OF LIFE CYCLE
iii.
MATCHING OR HEDGING APPROACH
iv.
CONSERVATIVE APPROACH
v.
AGGRESSIVE APPROACH
vi.
RATIO ANALYSIS
34-46
4. WORKING CAPITAL FINANCING:
47-52
i.
ii.
iii.
iv.
v.
INTRODUCTION
TYPES OF FINANCING WORKING
CAPITAL
SOURCES OF FINANCING WORKING
CAPITAL
REGULATION OF BANK FINANCE
OTHER FORMS OF FINANCING
8
9. 5. DATA ANALYSIS AND INTERPRETATION:
i.
BALANCE SHEET DATA
ii.
BALANCE SHEET OF MSL
iii.
CURRENT ASSETS
iv.
CURRENT LIABILITIES
v.
CHANGES IN WORKING CAPITAL
vi.
FINANCIAL REPORT
vii.
PROFIT AND LOSS ACCOUNT
53-62
6. RATIO ANALYSIS:
i.
CURRENT RATIO
ii.
LIQUID RATIO
iii.
ABSOLUTE LIQUID RATIO
iv.
CURRENT ASSET TURN-OVER RATIO
v.
WORKING CAPITAL TURN-OVER
RATIO
vi.
INVENTORY TURN-OVER RATIO
vii.
GROSS PRIFIT RATIO
viii.
NET PROFIT RATIO
ix.
DEBTORS TURN-OVER RATIO
x.
INVESTMENT IN RECEIVABLES
xi.
OPERATING CYCLE
xii.
GROSS OPERATING CYCLE
xiii.
NET OPERATING CYCLE
xiv.
CREDITORS TURN OVER RATIO
xv.
DEBT-EQUITY RATIO
63-78
7.
CONCLUSION
79
8.
RECOMMENDATIONS
80
9
11. COMPANY PROFILE:
‘Mahindra Sona Limited’ was formed in collaboration with Dana
Corporation of USA, over two decades ago through access to
international technology and has since emerged as a leading
independent manufacturer of Automotive Components which include
Propeller Shafts/ Carden Shafts, UJ Components and automotive
Clutches. Progressively, ‘Mahindra Sona Limited’ has expanded its
product range to meet demands of various Automotive Manufacturers.
The facilities contain more than 9300 sq. meters of manufacturing space
strategically located in western India providing easy accessibility to
various vehicle manufacturers and provide ample scope for future
expansion to almost five times the current size. ‘Mahindra Sona
Limited’ has a strong team of 380 motivated employees, of which, 50
are qualified engineers and professionals.
HISTORY: The Company has long history, which dates back to the
year 1885 when M/s Turner Hoare and company started its activity in
imports and exports of traditional Indian consumer goods.
In 1968, M/s Turner Hoare and company took over another Company,
M/s East Atlantic Company and realistic market potential entered into
execution of engineering projects like Hydro pneumatic ash handling
system, mechanical cleaning like vibroscreen, traveling water screens
and bagged Import Substitution award twice. In 1977, with equity
participation of Dana Corporation, USA, the company went into
technical collaboration to manufacturer automotive components like
11
12. Propeller Shaft, Axle Shafts, Universal Joint Kits, and Automotive
Clutches.
The Nashik plant commenced production in 1979, following a
technical and financial joint venture between Mahindra and Mahindra
Limited and Dana Corporation, USA, Named Mahindra Spicer limited.
In 1984, Mahindra Spicer Limited merged with its parent company,
Mahindra and Mahindra Limited and became MSL division of the
parent company. In March 1995, Mahindra and Mahindra Limited and
Sona Koyo Steering Systems Pvt. Ltd. formed a new company
‘MAHINDRA SONA LIMITED’ to take over the automotive
components business of MSL division of Mahindra and Mahindra
Limited.
The company is engaged in designing and manufacturing a wide range
of auto- ancillary products such as Propeller Shaft, Axle Shafts,
Universal Joint Kits, Automotive Clutches, Steering Joints, Steering
Column Parts, and Clutches. The company is original equipment
supplier to almost all vehicle manufacturers of India and scatters to the
spare parts market through a wide distribution network. The company
also supplies to vehicle manufacturers.
The company has been certified for ISO-9001 in 1995 and
QS-9000 in 1999. The company firmly believes that the high standards
of quality can only be achieved through strong systems and the support
of its people.
12
13. ‘Mahindra Sona limited’ manufactures the automotive components for
automotive applications like Passenger cars, Multi-utility vehicles,
Sports
utility
vehicles,
Light
Commercial
vehicles,
Medium
Commercial vehicles, and Heavy Commercial vehicles.
MSL Drive Shafts also cater to wide Industrial Applications like Earth
Moving Equipments, Engine Dynamometer Testing and Radiator Fan
Drives for Railways, Steel Rolling Mills, and Printing Machineries etc.
MSL’s other products include Steering Universal Joints for automotive
applications like Passenger cars, Multi-utility vehicles, Sports utility
vehicles, Light Commercial vehicles, Medium Commercial vehicles,
and Heavy Commercial vehicles.
MSL also manufactures Spindle and Sleeves of Steering Column
intermediate Shafts for the following categories;
o Multi-Utility Vehicles/ Sports Utility Vehicles
o Light Commercial Vehicles
o Medium Commercial Vehicles
o Heavy Commercial Vehicles
Recent addition in ‘Mahindra Sona Limited’ product range is Rubber
Coupling for steering applications for Multi-utility vehicles, Sports
Utility vehicles, and Earth Moving Equipments.
The other product line of ‘Mahindra Sona Limited’ is for the
automotive clutches. This includes the world’s largest Diaphragm type
(DST as well as Ring type) and the conventional lever type for
Passenger cars, Multi-utility vehicles, Sports utility vehicles, Light
13
14. Commercial vehicles, Medium Commercial vehicles, and Heavy
Commercial vehicles.
PRODUCTS AND APPLICATIONS:
PRODUCTS:
o Propeller Shafts
o Universal Joints
o Steering Joints
o Clutch
1. PROPRLLER SHAFTS:
• Applications:
o Heavy Duty Vehicles
o Light Commercial Vehicles
o Passenger Cars
o Three Wheelers
o Earth Moving Equipments
o Constructing Machinery
2. AXLES:
• Applications;
o
Multi Utility Vehicles
3. CLUTCHES:
•
Applications;
o
Multi Utility Vehicles
o
Passenger Cars
14
15. ESTONES:
1.
1968: Collaboration agreement between
Mahindra group and Dana Corporation, US for manufacturing the
clutches
2.
1976: Formation of a joint venture
company Mahindra Spicer Ltd.
3.
1979: Inauguration of Nashik work.
4.
1984: Merging of Mahindra Spicer Ltd
with Mahindra and Mahindra Ltd, the division of Mahindra and
Mahindra Ltd.
5.
1986: Dana Collaboration ends.
6.
1989: Modernization plan, redesigning
of entire clutch range.
7.
1994: Formation of Mahindra Sona Ltd.
restructure of Mahindra AND MAHINDAR MSL Division as Mahindra
Sona Ltd.
15
16. 8.
1995: ISO-9001 certification by TUV-
CERT, Germany.
9.
1999: QS-9000 certification by TUV-
CERT, Germany.
10.
1999: Exports to USA begins.
16
17. BOARD OF
DIRECTORS
Mr. B. S. Patwardhan
Management
Representative
Mr. J. V. Prabhu
Managing Director
Mr. J. S.
Chaudhary
Sr. Vice President
(Marketing)
Marketing (OEM
after Marketing
Customers)
Branch Offices,
New Business
Opportunities,
Customer
Satisfaction,
Publicity, Brand
Management
Mr. U. D. Phatak
Vice President
(A & F)
Company
Secretary
A/C, Finance,
Costing, MIS
Mr. S. R. Kundaje
General Manager
(Technical Series)
ProductionUniversal
Joints,
Clutch, Tool
Room,
Maintenance
and Shop
Scheduling
17
Product
engineering, UJ
and Clutch
process, Product
Testing, R and D,
CAD, QA, Quality
System, CIP,
Industries
Engineering,
Capital
Expenditure, Info
systems, HR,
Administration
Mr. R. V.
Vadhavkar
General Manager
(Materials)
Purchase, SOA,
Suppliers, QS
Development,
Customer
Schedule Liaison,
Material
Scheduling, OSP
Schedule, Plant
Job Ordering,
Packing, Dispatch,
Sales
Administration,
RM Stores,
Material
Documentation.
19. Finance
Department
Mr. A. D. Kale
D. G. M.
Accounting
and
Finance
Cash and
Bank
Purchase
Receivables
Mr. R. M.
Sawai
D. G. M.
Costing and
MIS
Purchase and
Sales
Sales and
accounts
costing
activities
Exports
19
Sales
Accounts
20. BUILT UP AREA INLUSIVE YARDS: 9450 Sq. M.
INTRODUCTION:
The topic was provided by the project guide in the organization. The
organization wanted to know how efficiently the working capital management
is working. The various ratios relating to the working capital shows the
ETP
OBJECTIVE OF PROJECT:
VACANT
LAND
STORES
YARD
efficient management of current asset and current liabilities is done.
Main object is to match theoretical aspect with practical experience. The
UTILITIES
project forms a vital element in the curriculum of M.B.A. Under M.B.A.
CANTEEN
curriculum, University of Pune each student has to carry out the project in an
XPORT
organization and submit the project in the University.
20
LAND AREA: 45165 Sq. M.
PLANT LAYOUT
21. MAIN
PLANT
STORA
GATE
During the past decade there has been a burst in each and every business in
India. Competition has increased considerable within this decade. This has
O
F
F
I
C
E
forced the organization to reduce the cost rather than increasing its market
price for its product. Cost reduction can be achieved by various method like,
proper inventory management, managing debtors and creditors and other
current assets and liabilities, value engineering etc. To achieve all the things
ROAD
C
D
I
M
N
effective and efficient working of capital is necessary.
WORKING CAPITAL
POLICY
i. WORKING CAPITAL POLICY
ii. TYPES OF WORKING CAPITAL
iii. NEED FOR WORKING CAPITAL
iv. CHARACTERISTICS OF CURRENT ASSETS
v. CURRENT ASSETS CYCLE
vi. FACTORS INFLUENCING WORKING CAPITAL
vii. CURRENT ASSET FINANCING POLICY
viii. THEORY OF RATIO ANALYSIS
21
22. PROJECT ON WORKING CAPITAL
WORKING CAPITAL POLICY:
Working capital management provides a summarized view of the
position of the current assets and current liabilities and how to manage
them and have an efficient and effective and optimum working capital.
For day to day working of the concern is known as working capital and
to fulfill this need, working capital management is necessary.
This introduces working capital management or short term
financial management which is concerned with decisions relating to
current assets and current liabilities.
The key difference between long term financial management and
working capital management is in terms of the timing of cash. While
long term financial decisions like buying capital equipment or issuing
debentures involve cash flows over an extended period of time( 5 to 15
years or even more), short term financial decisions typically involves
cash flows within a year or within the operating cycle of the firm.
There are two concepts of working capital: gross working capital
and net working capital. Gross working capital is the total of all current
assets. Net working capital is difference between current assets and
current liabilities. Management of working capital refers to the
management of current assets as well as current liabilities. The major
thrust, of course, is on the management of current assets. This is
22
23. understandable because current liabilities arise in the context of current
assets.
Working capital management is a significant facet of financial
management. Its importance stems from two reasons;
An investment in current assets represents a substantial portion of the
total investment.
Investment in current assets and the level of current liabilities
have to be geared quickly to change in sales. To be sure, fixed asset
investment and long term financing are also responsive to variation in
sales. However, this relationship is not as close and direct as it is in the
working capital components.
The importance of working capital management is reflected in
the fact that financial managers spend a great deal of time in managing
current assets and current liabilities. Arranging short term financing,
negotiating favorable credit terms, controlling the movement of cash,
administering accounts receivable, and investing short term surplus
funds consume a great deal of time of financial managers.
TYPES OF WORKING CAPITAL:
There are two types of working capital:
o Fixed working capital
o Variable working capital
23
24. o Fixed working capital :
To carry on business a certain minimum level of working capital is
necessary on a continuous and uninterrupted basis and for all practical
purpose this requirement will have to be met with long term sources.
This requirement is referred to as permanent or fixed working capital.
Variable working capital :
Any amount over and above the permanent level of working capital is
known as temporary, fluctuating or variable working capital. This
portion of the working capital is needed to meet fluctuations in demand
consequent upon changes in production as a result of seasonal changes.
24
25. KINDS OF
WORKING
CAPITAL
ON THE
BASIS OF
CONCEPT
GROSS
WORKING
CAPITAL
ON THE
BASIS OF
TIME
NET WORKING
CAPITAL
FIXED
WORKING
CAPITAL
REGULAR
WORKING
CAPITAL
RESERVE
WORKING
CAPITAL
25
VARIABLE
WORKING
CAPITAL
SEASONAL
WORKING
CAPITAL
SPECIAL
WORKING
CAPITAL
26. NEED FOR WORKING CAPITAL:
The objective of financial decision making to maximize the
shareholder’s wealth, it is necessary to generate sufficient profit. The
extent to which profits can be earned will naturally depend upon sales.
However, sales can not be easily converted into cash. Therefore, a need
for working capital in the form of current assets to deal with the
problem arising out the lack of immediate realization of cash again good
sold.
Of technically, this is referred to as the operating or cash cycle. This
cycle consists three phases;
PHASE 1Conversion of cash into inventory i.e. purchase of raw material,
conversion of raw material, conversion of raw material into work-inprogress and finished goods.
PHASE 2Conversion of inventory in to receivables i.e. allowing customers credit
sales.
PHASE 3Conversion of receivables into cash i.e. receivables are collected.
26
27. Working capital policy is divided into seven sections;
Characteristics of current assets: There are mainly two characteristics
of current assets;
o Short life span and
o Swift transformation into other asset forms.
Factors influencing working capital requirements: The working
capital needs of a firm are influenced by numerous factors. The
important ones are;
o Nature of business
o Seasonality of operations
o Production policy
o Market conditions
o Condition of supply
Level of current assets: An important working capital
policy decision is concerned with the level of investment in current
assets. Under the flexible policy (also referred to as a ‘conservative
policy’), the investment in current assets is high. This means that the
firm maintains a huge balance of cash and marketable securities, carries
large amount of inventories, and grants generous terms of credit to
customers which leads to a high level of debtors. Under a restrictive
policy (also referred to as an ‘aggressive policy’), the investment in
current assets is low. This means a firm keeps a small balance of cash
and marketable securities, manages with small amount of inventories,
and offers stiff terms of credit which leads to low level of debtors.
27
28. Current assets financing policy: The investment in
current assets may be broken into two parts: Permanent Current Assets
and Temporary Current Assets. The former represents what the firm
requires even at the bottom of its
Cycle; the latter reflects the variable component that moves in line with
seasonal fluctuations.
Profit criterion for current assets: Current assets can be easily
liquidated and the value realized on liquidation would be more or less
equal to the amount invested initially. Put differently, investment in
current assets is reversible. For reversible investments, the criterion for
net profit per period (which here means residual income) is equivalent
to the criterion of net present value.
Operating cycle analysis: The investment in working capital is
influenced by four keys events in the production and sales cycle of the
firm:
o Purchase of raw materials
o Payment for raw materials
o Sale of finished goods
o Collection if cash for sales
Cash requirement for working capital: A financial manager is always
interested in figuring out how much cash he/she should be arrange to
28
29. meet the working capital needs of his/her firm. There is a two step
procedure for this:
o Estimate the cash cost of various current assets required by firm.
o Deduct the spontaneous current liabilities from the cash cost of
current assets.
A. CONSTITUENTS OF CURRENT ASSETS:
Inventories
o Raw materials and components
o Work-in-progress
o Finished goods
o Others
Trade debtors
Loans and advances
Cash and bank balances
B. CONSTITUENTS OF CURRENT LIABILITIES:
Sundry creditors
Trade advances
Borrowings (short-term)
o Commercial banks
o Others
Provisions
29
30. CHARACTORISTICS OF CURRENT ASSETS:
While
managing
working
capital,
bear
in
mind
two
characteristics of current assets;
i)
Short life span
ii)
Swift transformation into other asset forms.
Current assets have a short life span. Cash balances may be held idle for
a week or two, accounts receivables may have a lifespan of 30 to 60 days, and
inventories may be held for 2 to 60 days. The lifespan of current assets
depends upon the time required in the activities of procurement, production,
sales and collection and the degree of synchronization among them.
Each current asset is swiftly transformed into other asset forms: cash is
used for acquiring raw materials; raw materials are transformed into finished
goods (this transformation may involve several stages of work in process);
finished goods, generally sold on credit, are converted into accounts receivable
(bank debt); and finally, accounts receivable, on realization, generate cash.
The short lifespan of working capital components and their swift
transformation from one form into another has certain implications;
•
Decisions relating to working capital management
are repetitive of frequent.
30
31. •
The difference between profit and present value is
insignificant,
•
The close interaction among working capital
components
implies
that
efficient
management
of
other
components. For example, if the firm has a large accumulation of
the finished good inventory, it may have to provide more liberal
credit terms or show laxity in credit collection. Another example;
if the firm has a crunch it may have to offer generous discounts.
Finished
Goods
Accounts
Receivable
Work in
Process
Wages, salaries,
Factory overheads
Raw materials
Cash
Suppliers
CURRENT ASSET CYCLE
31
32. FACTORS INFLUENCING WORKING CAPITAL REQUIREMENTS:
The working capital needs of a firm are influenced by numerous
factors. The important ones are;
Nature of business
Seasonality of operations
Production policy
Market conditions
Conditions of supply
Credit Policy
Inventory Policy
Abnormal Factors
Business Cycle
Growth And Expansion
Level Of Taxes
Dividend Policy
Price Level Changes
Operating Efficiency
Few of them are given bellow;
a. Nature of business: The working capital requirement of a firm is
closely related to the nature of its business. A service firm, like an
electricity undertaking or a transport corporation, which has a short
operating cycle and which sales prominently on cash basis, has a modest
working capital requirement. On the other hand, a manufacturing
concern likes a machine tools unit, which has a long operating cycle and
32
33. which sales largely on credit have a very substantial working capital
requirement.
b. Seasonality of operations: Firms which have marked seasonality in
their operations usually have highly fluctuating working capital
requirements. To illustrate, consider a firm manufacturing ceiling fans.
The sale of ceiling fan reaches a peak during summer months and drops
sharply during winter period. The working capital requirements of such
a firm are likely to increase considerably in summer months and
decrease significantly during winter period. On the other hand, a firm
manufacturing product like lamps, which have fairly even sales round
the year, tends to have stable working capital
c. Production Policy:
A firm marked by pronounced seasonal
fluctuations in its sales may pursue a production policy which may
reduce the sharp variations in working capital requirements. For
example, a manufacturer of ceiling fans may maintain a steady
production throughout the year, rather than intensify the production
activity during the peak business season. Such a production policy may
dampen the fluctuations in working capital requirements.
d. Market Conditions: The degree of competition prevailing in the
market place has an important bearing on working capital needs. When
competition is keen, a larger inventory of finished goods is required to
promptly serve customers who may not be inclined to wait because
other manufacturers are ready to meet their needs. Further, general
credit terms may have to be offered to attract customers in a highly
competitive market. Thus, working capital requirements tend to be high
33
34. because of greater investments in finished goods, inventory and
accounts receivable.
If the market is strong and the competition is weak, a firm can
manage with a smaller inventory of finished goods because customers
can be served with some delay. Further, in such a situation the firm can
insist on cash payment and avoid lock-up of funds in accounts
receivable- it can even ask for advance payment, partial or total.
e. Conditions of Supply: The inventory of raw materials, spares and
stores depends on the conditions of supply. If the supply is prompt and
adequate, the firm can manage with small inventory. However, if the
supply is unpredictable and scant, then the firm, to ensure continuity of
production, would have to acquire stocks as and when they are available
and carry larger inventory, on an average. A similar policy may have to
be followed when the raw material is available seasonally and
production operations are carried out round the year.
CURRENT ASSETS FINANCING POLICY:
After establishing the level of current assets, the firm must determine
how these should be financed. What mix of long term capital and short
term debt should the firm employ to support its current assets?
For the sake of simplicity, assets are divided into two classes, viz. fixed
assets and current assets. Fixed assets are assumed to grow at a
constant rate which reflects the secular growth in sales. Current assets,
too, are expected to display the same long-term rate of growth; however,
they exhibit substantial variations around the trend line, thanks to
seasonal (or even cyclical) patterns in sales and/or purchases.
34
35. The investment in current assets may be broken into two parts:
Permanent Current Assets and Temporary Current Assets. The former
represents what the firm requires even at the bottom of its sales cycle;
the latter reflects the variable component that moves in line with
seasonal fluctuations.
Several strategies are available to a firm for financing its capital
requirements. These strategies are illustrated by lines A, B and C in
following diagram.
STRATAGY A: Long-term financing is used to meet fixed asset as
well as peak working capital requirements. When the working capital
requirements are less than its peak level, the surplus is invested in liquid
assets (cash and marketable securities).
STRATEGY B: Long-term financing is used to meet fixed asset
requirements, permanent working capital requirements, and a portion of
fluctuating working capital requirements. During seasonal upswings,
short-term financing is used; during seasonal downswings, surplus is
invested in liquid assets.
STRATEGY C: Long-term financing is used to meet fixed asset
requirements and permanent working capital requirements. Short-term
financing is used meet fluctuating working capital requirements.
35
37. Time
CAPITAL REQUIREMENTS AND THEIR FINANCING
OPERATING
CYCLE
AND
CASH CYCLE
OPERATING CYCLE ANALYSIS
ii. DURATION OF LIFE CYCLE
37
iii. MATCHING OR HEDGING APPROACH
iv. CONSERVATIVE APPROACH
v. AGGRESSIVE APPROACH
i.
38. OPERATING CYCLE AND CASH CYCLE:
The investment in working capital is influenced by four keys events in
the production and sales cycle of the firm:
• Purchase of raw materials
• Payment for raw materials
• Sale of finished goods
• Collection if cash for sales
The firm begins with the purchase of raw materials which are
paid for after a delay which represents the accounts payable period. The
firms convert the raw material into finished goods and then sell the
same. The time lag between the purchase of raw materials and the sell
of finished goods is the inventory period. Customers pay their bills
sometimes after the sales. The period that elapses between the date of
38
39. sale and the date of collection of receivables is the accounts receivable
period (debtor’s period).
The time that elapses between the purchase of raw materials and
the collection of cash for sales is referred to as the operating cycle,
whereas the time length between the payments for raw material
purchases and the collection of cash for sales is referred to as the cash
cycle. The operating cycle is the sum of inventory period and the
accounts receivable period, whereas the cash cycle is equal to the
operating cycle less the accounts receivable period.
From the financial statement of the firm, we can estimate the
inventory period, the accounts receivable period, and the accounts
payable period.
Order placed
Stock arrives
Inventory
Period
Accounts Receivable
Period
Accounts Payable
Period
Firm Receives
invoice
Cash Paid For
Materials
Operating Cycle
Cash Cycle
OPERATING AND CASH CYCLE
39
Cash
Received
40. OPERATING CYCLE ANALYSIS:
The Concept of Operating Cycle:
The net working capital is the difference between current assets
and current liabilities. A firm acquires current assets to convert them
into cash so that the current liabilities can be satisfied. On the other
hand, fixed assets such as land and building, plant and machinery etc.
are acquired with long term objective. The amount of capital invested in
fixed assets is recovered after a long period of time. On the other hand,
amount blocked in current assets is expected to recover as early as
possible. The concept of operating cycle is based on this aspect.
Operating cycle:
The concept of operating cycle implies the time period that is
required from the time cash is put on the business along with other
inputs to the time it is recovered from the amount of sales made by the
firm. A firm puts cash on as an input and the inputs like raw materials
are purchased with the cash. The raw materials are converted into
finished product and for this additional cash may be required. The
finished product is converted into sale and if the sale is made for cash,
the operating cycle is complete as cash is recovered back. On the other
hand, if sales are on credit, sales are converted into debtors and debtors
are converted into cash.
The length of operating cycle depends upon several factors.
These factors are as follows;
40
41. (i) Length of the manufacturing process: If the manufacturing
process is quite lengthy, the operating cycle will be prolonged. On the
other hand, if the manufacturing process is of shorter duration, the
length of the operating cycle will also be of a shorter duration. For
example, in case of hotels and restaurants, the manufacturing process is
relatively short which reduces the duration of the operating cycle. In
case of heavy engineering industries, since the manufacturing process
itself is very lengthy, the operating cycle also becomes very long.
(ii) Holding period of inventories: On an average for how long firm
holds inventory is also one of the factors affecting operating cycle. If the
firm holds inventory of raw material for a longer duration due to safety
precautions, operating cycle is prolonged. Firms following hand to
mouth policies regarding inventories of raw materials will have a
shorter operating cycle. Similarly in case of work-in-process, if the time
duration is long before being converted into finished product, operating
cycle will be of longer period. In case of finished goods inventory also,
the same principle exists. If finished goods are quickly converted into
sales, operating cycle will be shorter. But if finished goods inventory is
not converted into sales quickly and liberal credit is extended to the
customers, operating cycle becomes lengthy.
The operating cycle of a firm begins with the acquisition of raw material
and ends with the collection of receivables. It may be divided into four
stages.
o Raw material and stores storage stage
o Work in progress stage
o Finished goods inventory stage
41
42. o Debtor’s collection stage
DURATION OF LIFE CYCLE:
The duration of life cycle is equal to the sum of duration of each of
these stages less the credit period allowed by the suppliers of the firm.
O=R+W+F+D-C
Where O = duration of operating cycle
R = raw material and stores storage period
W= work - in - progress period
F = finished goods storage period
D = debtors collection period
C = creditors payment
The components of operating cycle may be calculated as follows;
Average stock of Raw material
R = --------------------------------------------------------------------------Average raw material and stores consumption per day
Average work-in-progress inventory
W = --------------------------------------------------------------------------Average cost of production per day
Average finished goods inventory
F = ----------------------------------------------------------------------------Average cost of goods sold per day
42
43. Average book debts
D = ----------------------------------------------------------------------------Average credit sales per day
Average trade creditors
C = ----------------------------------------------------------------------------Average credit purchase per day
MATCHING APPROACH OR HEDGING APPROACH:
In matching approach or hedging approach for financing in which the
expected life of assets is matched with the sources of funds rose to
finance assets. The more explanation of the exact matching approach is
the purpose of financing is to make payments of assets, the financing
should be relinquished when the asset is expected to be relinquished,
and long term finance for the short term is expensive or costly because
funds will not be utilized for full period.
Similarly financing long term assets with a short term financing will
have to be made on a continuing basis. In this way, when a company
follows matching approach, long term financing will be used to finance
fixed assets and permanent current assets. Short term financing is used
to finance temporary current assets.
CONSERVATIVE APPROACH:
The financing policy of a company is conservative when it depends
more on long term funds for financing needs.
In this approach, company finances permanent assets with long term
financing. In this way company has no temporary assets, company
43
44. stores liquidity by investing surplus funds into marketable securities.
This plan mainly depends upon long term financing and so less risky.
AGGRESSIVE APPROACH:
While financing assets, company may select aggressive approach when
a company uses more short term financing than warranted by matching
approach. In this policy, company finances a part of its permanent
current assets are also financed by short term finance. The relatively
more used of short term financing makes this aggressive approach more
risky.
RATIO ANALYSIS:
A ratio is simple arithmetical expression of the relationship of one
number to another. It may be defined as the indicated quotient of the
two mathematical expressions.
A ratio is defined as, “The indicated quotient of two
mathematical expressions.” And as, “The relationship between two or
more things.” Ratio analysis is powerful tool of financial analysis.
Ratio analysis is a technique of analysis and interpretation of
financial statements. It is a process of establishing and interpreting
various ratios for helping in making certain decisions.
CLASSIFICATION OF RATIOS (ACCORDING TO TEST):
Various ratios have been classified as bellow;
a)
LIQUIDITY RATIO: These are the ratios which measure short
term solvency for financial position of a firm.
44
45. b)
LONG TERM SOLVANCY AND LIQUIDITY RATIO: Long
term solvency ratios convey the firm’s ability to meet the
interest costs and repayment schedules of its long term
obligations. E.g. Debt-equity ratio and Interest coverage ratio.
c)
ACTIVITY RATIO: These are calculated to measure the
efficiency with which the resources of a firm have been
employed.
d)
PROFITABILITY RATIOS: These ratios measure the results
of business operations or overall performance and effectiveness
of a firm.
LIQUIDITY RATIO:
Liquidity refers to the ability of a concern to meet its current obligations
as and when it becomes due. These should be convertible into cash for
paying obligations of short term nature. If current assets can pay off
current liabilities, then liquidity position will be satisfactory. On the
other hand, if current liabilities may not be easily met out of current
assets then liquidity position will be bad. To measure liquidity of a firm,
the following ratios can be calculated;
i. Current Ratio
ii. Quick or Acid Test or Liquid Ratio
iii. Absolute Liquid Ratio or Cash Position ratio
A. CURRENT RATIO:
Current ratio may be defined as the relationship between current assets
and current liabilities. This ratio is also known as the Working Capital
45
46. Ratio, which is a measure of general liquidity and is most widely used
to make the analysis of short term financial position or liquidity of a
firm.
Current Assets
Current Ratio = -------------------------------------Current liabilities
OR
Current Assets: Current Liabilities
B. LIQUID RATIO:
Liquid ratio or quick or acid test ratio may be defined as the relationship
between liquid assets and current or liquid liabilities. An asset is said to
be liquid if it can be converted into cash within a short period without
loss of value. In that sense, cash in hand and cash at bank are the most
liquid assets.
Liquid Assets
Liquid Ratio = -------------------------------Liquid Liabilities
C. ABSOLUTE LIQUID RATIO:
The ratio should be calculated together with current ratio and acid test
ratio so as to exclude even receivables from the current assets and find
out the absolute liquid assets.
46
47. Absolute Liquid Assets
Absolute Liquid Ratio = ----------------------------------Current Liabilities
D.
CURRENT ASSET TURNOVER RATIO:
Funds are invested in various assets in business to make sales and earn
profit. The efficiency with which assets are managed directly affects the
volume of sales. The better the management of assets, the larger is the
amount of sales or profits. Activity ratios measure the efficiency or
effectiveness with which a firm manages its resources or assets. These
ratios are called as “Turn-over ratios” because they indicate speed with
which assets are converted into sales.
Current Assets
Sales
Turnover Ratio = ---------------------Current Assets
E. WORKING CAPITAL TURNOVER RATIO:
Working capital turnover ratio indicates the velocity of the utilization of
net working capital. This ratio indicates the number of times the
working capital is turned over in the course of a year.
A higher ratio indicates efficient utilization of working capital and a low
ratio indicates otherwise.
Working Capital
Cost of Sales
Turnover Ratio = --------------------------------47
48. Average Working Capital
F. INVENTORY TURNOVER RATIO:
This is also known as Stock Velocity. It indicates whether inventory has
been efficiently used or not. The purpose is to see whether only required
minimum funds have been locked up in inventory. The ratio indicates
number of times the stock has been turned over during the period and
evaluates the efficiency with which a firm is able to manage its
inventory.
Inventory
Sales
Turnover Ratio = ---------------------Inventory
G. GROSS PROFIT RATIO:
Gross profit ratio measures the relationship of gross profit and net sales
and is usually represented as a percentage.
Gross Profit
Gross Profit Ratio = ---------------------- Î
100
Net Sales
H. NET PROFIT RATIO:
48
49. Net profit ratio establishes a relationship between net profit (after taxes)
and sales, and indicates the efficiency of the management in
manufacturing, selling, administrative and other activities of the firm.
Net Profit after Tax
Net Profit Ratio = -------------------------- Î 100
Net Sales
I. DEBTORS TURNOVER RATIO:
Debtor’s velocity indicates the velocity of debt collection of firm. In
simple words, it indicates the number of times average debtors
(Receivables) are turned over during the year.
Net Credit Sales
Debtors Turnover Ratio = ------------------------------Average Trade Debtors
= No. of Times
J. CREDITORS TURNOVER RATIO:
A firm has to make credit purchases and incur short term liabilities. A
supplier of goods, i.e., creditor, is naturally interested in finding out how
much time the firm is likely to take in repaying its trade creditors.
Net Purchases
Creditors Turnover Ratio = ------------------------------49
50. Average Trade Creditors
K. DEBT-EQUITY RATIO:
Debt-equity ratio, also known as “External- Internal Equity Ratio” is
calculated to measure the relative claims of outsiders and the owners (i.
e. shareholders) against the firm’s asset. The ratio indicates the
relationship between the outsider’s funds and the shareholders funds.
Outsider’s funds
Debt-Equity Ratio = --------------------------Shareholders funds
50
52. WORKING CAPITAL FINANCING:
INTRODUCTION:
The investment in raw materials, stock-in-progress, finished goods, and
receivables (the principal constituents of current assets) often varies a great
deal during the course of the year. Hence, the financial manager generally
spends a good chunk of his time in finding money to finance current assets.
TYPES OF FINANCING WORKING CAPITAL:
The firm must find out the sources of finds to finance its working capital.
There are three different financial policies which are as follows;
•
Long Term Financing: The sources of long term
financing
Are;
o Shares (Equity shares and preference shares)
o Debentures
o Retained earnings and
o Long term loan from financial institution
•
Short Term Financing: The sources of short-term financing are short
term credit, which the firm arranges. These sources include.
o Short term bank credit or loans
o Commercial papers
o Factoring receivable and
o Public deposit
52
53. •
Spontaneous Financing: Spontaneous financing refers to the automatic
sources of short term funds.
E.g. Trade credit and outstanding expenses.
The main features of these
sources are that they are cost free.
Normally permanent working capital is financed by long term sources where
as temporary working capital is financed by short term sources.
While taking the decision of financing working capital requirement, certain
factors are to be taken into consideration;
i.
cost of financing
ii. flexibility
Cost of Financing: The interest rates increased with the time.
o
Longer the maturity of debit greater the interest rate. The decision of the
company is guided by risk-return trade off.
Flexibility: Short term funds are more flexible. Short term funds can
o
be easily refunded as compared to long term funds, because long term
funds can not be refunded before its maturity period. Financing for the
domestic order is majority met by letter of credit. In case of any shortage
company uses the surplus into various activities such as;
a)
short term investments
b)
Inter corporate deposit – In case any sister factory is in need of
funds, the surplus fund is used as given to the sister concern.
c)
Paying for Overdrafts
Typically, current assets are supported by a combination of long-term and
short-term sources of finance. Long-term sources of finance primarily support
fixed assets and secondarily provide the margin money for working capital.
Short-term sources of finance, more or less exclusively support the current
assets.
53
54. CASH FLOW STATEMENT:
Cash flow statements indicate movement of cash only. The preparation
of cash flow statement is important to understand the paradoxical
situation in which the firm finds difficulty in honoring its short period
business
Indicated by the funds flow statement (working capital basis).
FUNDS FLOW STATEMENT:
The funds flow statement reveals the sources from which the funds are
made available and how they are utilized or applied. Difference between
cash flow and funds flow statement is given bellow;
54
55.
DIFFERENCE BETWEEN FUNDS FLOW AND CASH
FLOW STATEMENT:
FUND FLOW STATEMENT
The term fund refers to working
CASH FLOW STATEMENT
The term cash refers to only cash
capital and it shows changes in
and it shows change in cash
working capital.
This analysis is more useful in long
position of the business.
This is more useful in short term
term planning.
This considers changes in all current
planning.
This indicates simply cash receipt
assets and current liabilities.
and cash payments and does not
take into consideration other current
assets.
Improvement in working capital
Improvement in cash position
does not mean improvement in cash
results in improvement in working
position.
This is a test of effective use of
capital.
This is the test of effective control
working capital by the management
of flow of cash by the management
in a particular period of time.
This explains in brief the changes
in a particular period of time.
This explains the movement of cash
occurred in the items in two balance
and all those dealings which affects
sheets.
the cash position of the concern.
55
56. INVENTORY MANAGEMENT:
INTRODUCTION:
There are three types of inventories: raw materials, work in progress,
and finished goods.
a.
Raw materials are materials and components that are inputs in
making the final product.
b.
Work-in-process also called stock-in-process refers to goods in
the intermediate stages of production.
c.
Finished goods consist of final products that are ready for sale.
While manufacturing firms generally hold all the three types of
inventories, distribution firms hold mostly finished goods.
Inventories represent the second largest asset category for
manufacturing companies, next only to plant and equipment. The
proportion of inventories to total assets generally varies between 15 and
30 percent. Given substantial investment in inventories, the importance
of inventory management can not be emphasized.
o
REGULATION OF BANK FINANCE:
The regulation of bank finance by central bank of India to our company is
CMA data (Current Monitoring Analysis) bank before giving finance to the
company sees and analyze the earning capacity of the company. The money
that the bank will be giving where the company is going to invest and for what
purpose. Whether the money is put into the manufacture process or not bank
needs to know the financial condition of a firm and its credit worthiness.
56
58. DATA ANALYSIS AND INTERPRETATION:
BALANCE SHEET OF MAHINDRA SONA LTD.
Schedule
2003-2004`
2004-2005
2005-2006
2006-2007
Sources of funds :Share Capital
Reserve & Surplus
I
II
39600000
130763392.2
39600000
189700080.3
39600000
265042678.5
39600000
363683646
Loan Funds:Secured Loan
Unsecured Loan
III
IV
68886274.5
15262110
81342342.9
15262110
96630797.7
15262110
67521776.4
15262110
Deferred tax liability(Net)
V
3394386
257906162.7
325904533.2
416535586.2
486067532.4
235246054.5
147383485.2
87862569.3
9909356.4
276634041.3
167001049.8
109632991.5
17384400
326875086
182503653.3
144371432.7
234702
342719935.2
197105247
145614688.2
1606675.5
1257219
1021410
7207127.1
1021410
12316295.7
Total
Application of funds :Fixed Asset
Gross Block
Less: Depreciation/ Amortization
Net Block
Capital WIP & Capital advance
VI
VII
VIII
IX
Investment
Deferred tax Asset(Net)
X
Current Asset loans & advances
Inventories
Sundry debtors
Cash & Bank balance
Loans & Advances
XI
XII
XIII
XIV
96845011.2
222813224.1
35200474.2
23957856.9
152829979.2
324030586.5
10243058.4
41913249.3
116907812.1
320144611.5
50582646
38010249
122664522.6
360091789.2
73017614.7
34831211.4
Less:Current liabilities
Provisions
XV
XVI
175436987.4
43245342
254001050.1
77385900.6
185920966.8
76023437.4
184014939.6
81081735.3
Net current asset
XVII
160134237
197629922.7
263700914.4
325508463
Total
257906162.7
325904533.2
416535586.2
486067532.4
Net Current Asset
378816566.4
529016873.4
526666728.6
591626547.9
1.111135256
1.271572286
1.073679094
Working capital leverage
58
59. CURRENT ASSET
2003-2004
2004-2005
2005-2006
2006-2007
1021410
1021410
Investment (At cost, Unless otherwise specified)
Unquoted:Shares (Non-trade & fully
paid up )
Inventories
Stores & Spares
2799252.9
3824108.1
2588202
2404312.2
Tools
7104163.5
8571260.7
10014266.7
9406374.3
Raw Material
18819824.4
27509949
29815432.2
33502496.4
WIP
56680064.1
89319083.4
66041937
64072076.4
FG
11441706.3
23605578
8447974.2
13279263.3
Total
96845011.2
152829979.2
116907812.1
122664522.6
Considered Good
656801.1
2990799
2532024
2043717.3
Considered doubtful
724526.1
724526.1
724526.1
724526.1
Other debt consider good
222156423
321039787.5
317612587.5
358048071.9
Provision for doubtful debts
724526.1
724526.1
724526.1
724526.1
Total
222813224.1
324030586.5
320144611.5
360091789.2
22631033.7
37345631.4
32713847.1
27823066.2
1326823.2
4567617.9
2142961.2
2523188.7
Sundry debtors
Outstanding over six months
Less:-
Loans & Advances
Advances recoverable in cash or
in kind
or for value to be received
consider good
Balance with customs port trust
59
60. Excise, etc
VAT recoverable
3087153.9
Fringe benefit tax ( Net of
provision)
606911.4
Income tax ( Net of provision)
Total
3811758.3
66286.8
23957856.9
41913249.3
66286.8
38010249
34831211.4
Cash & Bank balance
Cheque on hand
1821519
Balance with schedule bank in
current A/c.
1261197.9
32573086.2
9490284.9
15967837.8
697680
In fixed deposit
48390798.6
607680
45119057.4
Cash on hand
1665
Remittance on transit
11598525
As margin money
805869
55093.5
322969.5
330529.5
Total
35200474.2
10243058.4
50582646
73017614.7
Net Current Asset
378816566.4
529016873.4
526666728.6
591626547.9
60
65. TRENDS:- WORKING CAPITAL CHANGE
YEAR
2003-2004
2004-2005
2005-2006
2006-2007
YEAR
2003-2004
2004-2005
2005-2006
2006-2007
CHANGES IN
WORKING
CAPITAL
160134237
197629922.7
264722324.4
326529873
YEAR
CURRENT ASSET
YEAR
CURRNNT
LIABILITIES
2003-2004
2004-2005
2005-2006
2006-2007
378816566.4
529016873.4
526666728.6
591626547.9
2003-2004
2004-2005
2005-2006
2006-2007
218682329.4
331386950.7
261944404.2
265096674.9
CHANGES IN
WORKING
CAPITAL
160.13
197.62
264.72
326.52
YEAR
CURRENT ASSET
YEAR
CURRENT
LIABILITIES
2003-2004
2004-2005
2005-2006
2006-2007
378.81
529.01
526.67
591.63
2003-2004
2004-2005
2005-2006
2006-2007
218.68
331.39
261.95
265.11
65
67. Financial Report
Income
Profit before
depreciation
Less:Depreciation
Profit before tax
Less:Provision for tax
Current year
Earlier year
Deferred tax (Net)
Profit after tax for
current year
Profit for earlier
year brought
forward
Profit available for
appropriation
Propose Dividend
Income tax on
Dividend
year ended
31st
march2004
934.03
year ended
31st
march2005
1427.9
year ended
31st
march2006
1430.92
year ended
31st
march2007
1715.15
132.38
197.87
209.64
265.03
21.71
110.67
22.67
175.2
17.54
192.1
19.05
245.98
43
1.34
5.88
80
5.17
70
6.61
2.06
82.5
1.52
3.47
72.21
100.37
126.65
165.43
45.7
85.2
139.69
210.4
118.01
22
185.57
30.8
266.04
37.4
375.83
44
2.82
4.03
5.52
7.47
67
68. RATIO ANALYSIS
i.CURRENT RATIO
ii.
LIQUID RATIO
iii. ABSOLUTE LIQUID RATIO
iv. CURRENT ASSET TURN-OVER RATIO
v. WORKING CAPITAL TURN-OVER RATIO
vi. INVENTORY TURN-OVER RATIO
vii. GROSS PRIFIT RATIO
viii. NET PROFIT RATIO
ix. DEBTORS TURN-OVER RATIO
x. INVESTMENT IN RECEIVABLES
xi. OPERATING CYCLE
xii. ROSS OPERATING CYCLE
xiii. NET OPERATING CYCLE
xiv. CREDITORS TURN OVER RATIO
xv. DEBT-EQUITY RATIO
68
69. A. CURRENT RATIO:
YEAR
CURRENT ASSET
2003-2004
2004-2005
2005-2006
2006-2007
378816566.4
529016873.4
526666 728.6
591626547.9
YEAR
2003-2004
2004-2005
2005-2006
2006-2007
CURRNNT
LIABILITIES
218682329.4
331386950.7
261944404.2
265096674.9
CURRENT RATIO
1.732268755
1.596372073
2.010604999
2.231738848
CURRENT RATIO
2.5
2
1.5
RATIO
1
0.5
0
2003-2004
2004-2005
2005-2006
YEAR
2006-2007
INTERPRETATION:
The Current Ratio of a company shows slight decrease from the
year 2004-2005. But later on it goes on increasing from 2006-2007.
69
70. B. LIQUID RATIO:
YEAR
2003-2004
2004-2005
2005-2006
2006-2007
CURRENT ASSET
378816566.4
529016873.4
526666728.6
591626547.9
YEAR
2003-2004
2004-2005
2005-2006
2006-2007
INVENTORIES
96845011.2
152829979.2
116907812.1
122664522.6
LIQUID ASSET
281971555.2
376186894.2
409758916.5
468962025.3
LIQUID LIABILITIES
218682329.4
331386950.7
261944404.2
265096674.9
LIQUID RATIO
1.289411705
1.13518922
1.56429727
1.769022661
LIQUID RATIO
2
1.5
1
0.5
0
2003-2004
2004-2005
2005-2006
2006-2007
YEAR
INTERPRETATION:
The Liquid Ratio of a company shows slight decrease from the
year 2004-2005. But later on it goes on increasing from 2006-2007.
70
R
A
TI
O
71. C. ABSOLUTE LIQUID RATIO:
YEAR
2003-2004
2004-2005
2005-2006
2006-2007
CASH & BANK
BALANCE
35200474.2
10243058.4
50582646
73017614.7
YEAR
SHORT TERM
INVESTMENT
TOTAL
35200474.2
10243058.4
51604056
74039024.7
1021410
1021410
LIQUID LIABILITIES
218682329.4
331386950.7
261944404.2
265096674.9
ABSOLUTE LIQUID
RATIO
0.160966249
0.030909661
0.19700385
0.279290658
2003-2004
2004-2005
2005-2006
2006-2007
ABSOLUTE LIQUID RATIO
0.3
0.25
0.2
0.15
0.1
0.05
0
2003-2004
2004-2005
2005-2006
2006-2007
YEAR
INTERPRETATION:
The Absolute Liquid Ratio of a company shows a deep decrease
in the year 2004-2005. But later on it goes on increasing from 20062007.
71
R
A
TI
O
72. D. CURRENT ASSETS TURNOVER RATIO:
YEAR
SALES
2003-2004
816839262
124689527
6
125135185
6
150921324
9
2004-2005
2005-2006
2006-2007
YEAR
2003-2004
2004-2005
2005-2006
2006-2007
CURRENT
ASSET
378816566.4
529016873.4
526666728.6
591626547.9
CURRENT ASSET TURNOVER
RATIO
2.156292344
2.357004737
2.375984257
2.550955927
CURRENT ASSET TURNOVER RATIO
2.6
2.5
2.4
2.3
2.2
2.1
2
1.9
2003-2004
2004-2005
2005-2006
YEAR
INTERPRETATION:
72
2006-2007
R
A
TI
O
73. The Current Asset Turnover Ratio of a company shows deep
increase from the year 2003-2004. Then it shows slight increase. But
later on it goes on increasing from 2006-2007.
E. WORKING CAPITAL TURNOVER RATIO:
YEAR
2003-2004
2004-2005
2005-2006
2006-2007
YEAR
2003-2004
2004-2005
2005-2006
2006-2007
SALES
816839262
1246895276
1251351856
1509213249
WORKING CAPITAL
160134237
197629922.7
264722324.4
326529873
WORKING CAPITAL TURN
OVER RATIO
5.100965773
6.309243354
4.727035616
4.621976039
WORKING CAPITAL TURN OVER RATIO
7
6
5
RATIO
4
3
2
1
0
2003-2004
2004-2005
2005-2006
YEAR
INTERPRETATION:
73
2006-2007
74. The Working Capital Turnover Ratio of a company shows deep
increase from the year 2003-2004. And it again decreases till the year
2005-2006. In the year 2006-2007, it remains almost same.
F.
INVENTORY TURNOVER RATIO:
YEAR
2003-2004
2004-2005
2005-2006
2006-2007
YEAR
2003-2004
2004-2005
2005-2006
2006-2007
SALES
816839262
1246895276
1251351856
1509213249
INVENTORIES
96845011.2
152829979.2
116907812.1
122664522.6
INVENTORY TURN
OVER RATIO
8.434500155
8.15870867
10.70374882
12.30358393
INVENTORY TURN OVER RATIO
14
12
10
8
RATIO
6
4
2
0
2003-2004
2004-2005
2005-2006
YEAR
74
2006-2007
75. INTERPRETATION:
The Inventory Turnover Ratio of a company shows slight
decrease from the year 2004-2005. But later on it goes on increasing till
the year 2006-2007.
G. GROSS PROFIT RATIO:
YEAR
2003-2004
2004-2005
2005-2006
2006-2007
GROSS PROFIT
75819582.9
119463178.5
136404734.4
186955091.1
YEAR
GROSS PROFIT
RATIO
10.25413947
10.46257402
11.87262526
13.50021467
2003-2004
2004-2005
2005-2006
2006-2007
SALES(NET)
739404639
1141814417
1148901203
1384830506
GROSS PROFIT RATIO
16
14
12
10
8
RATIO
6
4
2
0
2003-2004
2004-2005
2005-2006
YEAR
75
2006-2007
76. INTERPRETATION:
The Gross Profit Ratio of a company shows slight increase from
the year 2004-2005. But later on it goes on increasing from 2006-2007.
H. NET PROFIT RATIO:
YEAR
2003-2004
2004-2005
2005-2006
2006-2007
YEAR
2003-2004
2004-2005
2005-2006
2006-2007
NET PROFIT
65000436.3
90330083.1
113988485.7
148887169.2
SALES(NET)
739404639
1141814417
1148901203
1384830506
NET PROFIT
RATIO
8.790915403
7.911100245
9.921522009
10.75129184
NET PROFIT RATIO
12
10
8
RATIO
6
4
2
0
2003-2004
2004-2005
2005-2006
YEAR
76
2006-2007
77. INTERPRETATION:
The Net Profit Ratio of a company shows slight decrease from
the year 2004-2005. But later on it goes on increasing till 2006-2007.
YEAR
SALES(NET)
CLOSING
DEBTORS
222813224.1
324030586.5
320144611.5
360091789.2
2003-2004
2004-2005
2005-2006
2006-2007
739404639
1141814417
1148901203
1384830506
YEAR
2003-2004
2004-2005
2005-2006
2006-2007
DEBTORS TURNOVER RATIO
3.318495309
3.523785914
3.588694488
3.845770849
I. DEBTORS TURNOVER RATIO:
DEBTORS TURNOVER RATIO
4
3.8
RATIO
3.6
3.4
3.2
3
2003-2004
2004-2005
2005-2006
YEAR
INTERPRETATION:
77
2006-2007
78. The Debtors Turnover Ratio of a company goes on increasing till
2006-2007.
J. INVESTMENT IN RECEIVABLES:
INVESTMENT IN RECEIVABLES
PARTICULERS
SALES (NET)
LESS:FIEXED COST (20%)
VARIABLE COST (60%)
RETURN ON
INVESTMENT
BAD DEBTS (1%)
NET BENEFIT
2003-04
97 DAYS
COLLECTION
PERIOD
739404639
2004-05
91 DAYS
COLLECTION
PERIOD
1141814417
2005-06
89 DAYS
COLLECTION
PERIOD
1148901203
2006-07
83 DAYS
COLLECTION
PERIOD
1384830506
147880927.8
443642783.4
147880927.8
685088650.2
147880927.8
689340721.8
147880927.8
830898303.6
44826406.24
7394046.39
95660475.17
59218930.94
11418144.17
238207763.9
58213067.82
11489012.03
241977473.5
63467715.79
13848305.06
328735253.8
INVESTMENT IN RECEIVABLES
350
300
250
200
150
100
50
0
BENEFIT (AMOUNT IN
NETMILLION RS.)
2003-2004
2004-2005
2005-2006
YEAR
78
2006-2007
79. INTERPRETATION:
The Investment in Receivables of a company shows deep
increase from the year 2004-2005. And then it shows very slight
increase. But later on it goes on increasing till 2006-2007.
OPERATING CYCLE
2004
2005
2006
2007
460469385
742734765
654570475
782073011
1438966
18819824
13
2321046
27509949
11
2045532
29815432
14
2443978
33502496
13
720265120
2073703
56680064
1111670321
3473969
89319083
1078538405
3370432
66041937
126194749
1
3943585
64072076
25
24
20
17
675026762
2109458
11441706
5
1045956816
3268615
23605578
7
1020944442
3190451
8447974
3
121115467
8
3784858
13279263
4
A) Credit sales
B) Sales per day
C) Debtors
D) Debtor outstanding day's
GROSS OPERATING CYCLE
5) CREDITORS DEFERRAL
PERIOD
A) Credit purchase
B) Purchase per day
C) Creditors
D) Creditors outstanding day's
739404639
2310639
222813224
97
140
1141814417
3568170
324030586
91
133
1148901203
3590316
320144611
89
126
138483050
6
4327595
360091789
83
117
464389295
1451216
153880852
106
751424889
2348202
235319454
100
656875958
2052737
163748168
80
785760075
2455500
158919694
65
NET OERATING CYCLE / CCC
34
33
46
52
1) RAW MATERIAL
CONVERSION PERIOD
A) Raw material consumption
B) Raw material consumption per
day
C) Raw material Inventory
D) Raw material holding day's
2) WIP CONVERSION PERIOD
A) Cost of production
B) Cost of production per day
C) WIP Inventory
D) Work in progress inventory
holding day's
3) FINISHED GOOD
CONVERSION PERIOD
A) Cost of good's sold
B) Cost of good's sold per day
C) Finished good's inventory
D) FG inventory holding day's
4) COLLECTION DAY'S
79
80. K. GROSS OPERATING CYCLE:
YEAR
2003-2004
2004-2005
2005-2006
2006-2007
GROSS OPERATING CYCLE
140
133
126
117
GROSS OPERATING CYCLE
145
140
135
130
125
120
115
110
105
2003-2004
2004-2005
YEAR
80
2005-2006
2006-2007
N
O.
O
F
D
A
Y
S
81. INTERPRETATION:
The gross operating cycle is going down every year.
I. NET OPERATING CYCLE:
YEAR
2003-2004
2004-2005
2005-2006
2006-2007
NET OPERATING
CYCLE (CCC)
34
33
46
52
NET OPERATING CYCLE (CCC)
60
50
40
NO. OF DAYS
30
20
10
0
2003-2004
2004-2005
2005-2006
YEAR
81
2006-2007
82. INTERPRETATION:
The Net Operating Cycle has increased from the year 2004-05 to 2007-08.
M. CREDITORS TURNOVER RATIO:
YEAR
2003-2004
2004-2005
2005-2006
2006-2007
YEAR
2003-2004
2004-2005
2005-2006
2006-2007
CREDIT PURCHASE
464389252
751424889
656875958
785760075
CREDITORS
153880852
235319454
163748168
158919694
CREDITORS TURNOVER
RATIO
3.017849498
3.193211935
4.011501112
4.94438452
CREDITORS TURNOVER RATIO
6
5
4
RATIO
3
2
1
0
2003-2004
2004-2005
2005-2006
YEAR
82
2006-2007
83. INTERPRETATION:
The Creditors Turnover Ratio of a company shows slight
increase from the year 2004-2005. But later on it goes on increasing till
2006-2007.
N. DEBT-EQUITY RATIO:
YEAR
2003-2004
2004-2005
2005-2006
2006-2007
DEBT(LONG TERM)
84148348
96604452
111892907
82783886
YEAR
2003-2004
2004-2005
2005-2006
2006-2007
EQUITY
170363392
229300080
304642678
403283646
DEBT-EQUITY RATIO
0.493934448
0.421301432
0.367292291
0.205274592
DEBT-EQUITY RATIO
0.6
0.5
0.4
0.3
0.2
0.1
0
2003-2004
2004-2005
2005-2006
YEAR
INTERPRETATION:
83
2006-2007
R
A
TI
O
84. The Debt-equity Ratio of a company shows decrease from the
year 2004-2005 till 2006-2007.
CONCLUSION:
1.
From the current ratio and quick ratio, it can be
concluded that, the liquidity of the company has increased. The
quick ratio has increased because of control of inventory and
increase in cash balance.
2.
Inventory turn over ratio is increasing which
reflects that the inventory is fast moving.
3.
Payables deferral period has reduced from 106 days
to 65 days, this shows that the company is paying its creditors faster.
4.
Company has more investments in current assets
which mean higher liquidity with lower risk, so the policy followed
by the company is conservative.
84
85. RECOMMENDATIONS:
1.
The company should review its credit
policy for debtors. The debtor’s collection period has reduced
but it should reduce further. This will reduce the working
capital requirement of the company.
2.
The company should invest in short term
investments as working capital is continuous.
3.
As a working capital is showing an
increasing trend, it should not increase further as it affects the
profitability due to blockage of funds.
85
