Analysis of working capital management shriram piston finance


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Analysis of working capital management shriram piston finance

  1. 1. Summer training Project report On ANALYSIS OF WORKING CAPITAL MANAGEMENT OF SHRIRAM PISTONS & RINGS LTD Submitted for the partial fulfillment of the award Of Master of Business Administration DEGREE Session 2012-2013 SUBMITTED BY: Mohd Ahmad Ansari ROLL No. 1103270088. UNDER THE GUIDANCE OF Internal Guide: Ms Manisha Gupta Department of Management ABES ENGINEERING COLLEGE GHAZIABAD 1
  3. 3. Candidates Declaration/Certificate I hereby declare that the Work which is being presented in this report entitled“Analysis of Mutual Funds and Ranking Them ” is an authentic record of my workcarried out under the supervision of Mrs.JAYA PANDEY The matter embodied in this report has not been submitted by me for the award of anyother degreeDated MOHD.AHMAD.ANSARI Department: MBAThis is certifying that the above statements made by the candidate are correct to the best ofmy knowledge.PROF. RAKESH PASSI Mrs. JAYA PANDEY(Head of Department) Designation: Assistant ProfessorDate : ………………….. Department: MBA Date:…………………… 3
  4. 4. PREFACEDuring Master in Business Administration program, Students comes direct contact with thereal corporate world through the industrial training. A PGDM program provides its studentswith an in-depth study of various managerial activities that are performed in anyorganization.A detailed research/analysis of managerial activities conducted in various departments likefinance, marketing, human resources, production department etc. gives the student theconceptual idea of what they are expected to manage and how to manage and how to obtainthe maximum output through minimum inputs of resources available and how to minimizethe wastage of resources.As MBA students, I have taken my summer internship training in SHRIRAM PISTONSAND RINGS LTD.. 4
  5. 5. ACKNOWLEDGEMENTI feel immense pleasure and privilege to express my sincere thanks to my Project Guide Mr.SANJAY MAHESHWARI (Finance Manager) for his incessant invaluable andindispensible guidance throughout. At the same time, I cannot forget the courtesy and timelyhelp provided by Project Coordinator Mr. SAMEER PUNHANI.I also express my sincere depth of gratitude to the Finance and Account & AdministrativeDepartment staff members in providing me with all the necessary information in carryingout my project study. I also extend my thanks to Ms. Divya Agarwal who helped me toclear the concepts and also made valuable comments and suggestions, while preparing myproject. Sudheer Kumar MBA-III Sem. 5
  6. 6. TABLE OF CONTENT• EXECUTIVE SUMMERY----------------------------------------------------------------------- 1• INTRODUCTION -------------------------------------------------------------------------------- 2• OBJECTIVE OF STUDY ------------------------------------------------------------------------ 12• COMPANY PROFILE --------------------------------------------------------------------------- 13• RESEARCH METHODOLOGY --------------------------------------------------------------- 18• ANALAYSIS OF WORKING CAPIATL MANAGEMEN -------------------------------- 20• FINANCIAL RATIO ANALYSIS FOR WORKING CAPITAL MANAGEMENT ---- 21• MANAGEMENT OF CURRENT ASSET ----------------------------------------------------- 51• MANAGING THE COMPONENTS OFWORKING CAPITAL --------------------------- 53• DETERMINATION OF OPERATING CYCLE ---------------------------------------------- 61• ANALYSIS OF ASSET PERCENTAGE ------------------------------------------------------- 67• ESTIMATING WORKING CAPITAL --------------------------------------------------------- 73• TREND ANALYSIS FOR WORKING CAPITAL ------------------------------------------- 76• CURRENT ASSET FINANCING --------------------------------------------------------------- 83• FINDING AND SUGGESTIONS --------------------------------------------------------------- 84• LIMITATIONS ------------------------------------------------------------------------------------- 86• REFERENCES -------------------------------------------------------------------------------------- 87• GLOSSARY ----------------------------------------------------------------------------------------- 88 6
  7. 7. EXECUTIVE SUMMARYThe management had to depend upon certain relevant information for taking variousstrategic decisions. The information is made useful by its analysis and interpretation. Myproject is related to “Analysis of Working Capital Management “It was found that the operating cycle of the company is bit disturbed and is continuouslyincreasing due to which company is having the decreasing working capital position. Byadopting various calculation and analysis and then making interpretation with the solution ofspecific problem I put my efforts in giving appropriate suggestion to the company. To thiscontext I adopted various methods and techniques like Trend analysis by using statisticaltool, a work towards the optimal level of working capital, estimation of working capital,analyzing of operating cycle and use of various ratio to put an exact picture of company.The report also consists of qualitative and quantitative analysis of Working CapitalManagement of SHRIRAM PISTONS AND RINGS LIMITED, Ghaziabad .In the course ofstudy, I found that the organization faces the problem of liquidity. 7
  8. 8. INTRODUCTIONWorking Capital:Working capital in simple terms means the amount of funds that a company requires forfinancing its day -to- day operations. Working Capital includes the current assets and currentliabilities areas of the balance sheet.Working Capital Management is concerned with the problems that arise in attempting tomanage the current assets, the current liabilities and the interrelationship that exists betweenthem. Working Capital Management is the process of planning and controlling the level andmix of current assets of the firm as well as financing these assets. Analysis of workingcapital is of major importance to internal and external analysis because it is closely related tothe current day -to- day operations.Concept of Working Capital:-There are two concepts of working capitals: -1. Gross Working capital: - It means the current assets which represent the proportion ofinvestment that circulates from one form to another in the ordinary conduct of business.2. Net Working Capital: - It is the difference between current assets and current liabilities oralternatively the portion of current assets financed with long-term funds.Constituents of Current Assets:-1. Cash in hand and cash at bank.2. Bill receivables.3. Sundry debtors. 8
  9. 9. 4. Short term loans and advances.5. Inventories.6. Prepaid Expenses.7. Accrued Income.8. Marketable Securities.Constituents of Current Liabilities:-1. Accrued and outstanding expenses.2. Short term loans, advances and deposits.3. Dividends payable.4. Bank overdraft.5. Provision for taxation.6. Sundry Creditors.7. Bills payable. 9
  10. 10. The gross concept is sometimes preferred to the concept of working capital for the followingreasons:1. It enables the enterprise to correct amount of working capital at correct time.2. Every management is more interested in total current assets with which it has to operate then the source from where it is made available.3. It take into consideration of the fact every increase in the funds of the enterprise would increase its working capital. The net working capital concept, However, is also important for following reasons:• It’s a qualitative concept, which indicates the firm’s ability to meet its operating expenses and short term liabilities.• It indicates the margin of protection available to the short term creditors.• It is an indicator of the financial soundness of enterprise.• It suggests the need of financing a part of working capital requirement out of the permanent sources of funds. 10
  11. 11. CLASSIFICATION OF WORKING CAPITALWorking capital may be classified in two ways:• On the basis of concept.• On the basis of time.On the basis of concept working capital can be classified as gross working capital and networking capital. On the basis of time, working capital may be classified as: • Permanent or Fixed working capital. • Temporary or variable working capital.PERMANENT OR FIXED WORKING CAPITALPermanent or fixed working capital is minimum amount which is required to ensureeffective utilization of fixed facilities and for maintaining the circulation of current assets.Every firm has to maintain a minimum level of raw material, work- in-process, finishedgoods and cash balance. This minimum level of current assets is called permanent or fixedworking capital as this part of working is permanently blocked in current assets. As thebusiness grow the requirements of working capital also increases due to increase in currentassets.TEMPORARY OR VARIABLE WORKING CAPITALTemporary or variable working capital is the amount of working capital which is necessaryto meet the seasonal demands and some special necessities. Variable working capital canfurther be categorized as seasonal working capital and special working capital. The capital 11
  12. 12. necessary to meet the seasonal need of the enterprise is called seasonal working capital.Special working capital is that part of working capital which is required to meet specialdemands.Temporary working capital differs from permanent working capital in the sense that isrequired for short periods and cannot be permanently employed profitably in the business.IMPORTANCE OF ADEQUATE WORKING CAPIATAL• SOLVENCEY OF THE BUSINESS: - Adequate working capital helps in maintaining the solvency of the business by providing uninterrupted of production.• GOODWILL: - Sufficient amount of working capital enables a firm to make prompt payments and makes and maintain the goodwill.• ESAY LOANS: - Adequate working capital leads to high solvency and credit standing can arrange loans from banks and other on easy and favorable terms.• CASH DISCOUNT: Adequate working capital also enables a concern to avail cash discounts on the purchases and hence reduces cost.• REGULAR SUPPLY OF RAW MATERIAL: - Sufficient working capital ensures regular supply of raw material and continuous production.• REGULAR PAYMENT OF SALARIES, WAGES AND OTHER DAY TO DAY COMMITMENTS: - It leads to the satisfaction of the employees and raises the morale of its employees, increases their efficiency, reduces wastage and costs and enhances production and profits. 12
  13. 13. • EXPLOITATION OF FAVORABLE MARKET CONDITIONS: - If a firm is having adequate working capital then it can exploit the favorable market conditions such as purchasing its requirements in bulk when the prices are lower and holdings its inventories for higher prices.• ABILITY TO FACE CRISES: - A concern can face the situation during the depression.• QUICK AND REGULAR RETURN ON INVESTMENTS: - Sufficient working capital enables a concern to pay quick and regular of dividends to its investors and gains confidence of the investors and can raise more funds in future.• HIGH MORALE: - Adequate working capital brings an environment of securities, confidence, high morale which results in overall efficiency in a business.DISADVANTAGES OF EXCESSIVE WORKING CAPITAL1. Excessive working capital means ideal funds which earn no profit for the firm and business cannot earn the required rate of return on its investments.2. Redundant working capital leads to unnecessary purchasing and accumulation of inventories.3. Excessive working capital implies excessive debtors and defective credit policy which causes higher incidence of bad debts.4. It may reduce the overall efficiency of the business.5. If a firm is having excessive working capital then the relations with banks and other financial institution may not be maintained. 13
  14. 14. 6. Due to lower rate of return n investments, the values of shares may also fall.7. The redundant working capital gives rise to speculative transactions.WORKING CAPITAL IS NEEDED FOR THE FOLLOWING PURPOSES: -• For the purpose of raw material, components and spares.• To pay wages and salaries.• To incur day-to-day expenses and overload costs such as office expenses.• To meet the selling costs as packing, advertising, etc.• To provide credit facilities to the customer.• To maintain the inventories of the raw material, work-in-progress, stores and spares and finished stock. 14
  15. 15. FACTORS DETERMINING THE WORKING CAPITAL REQUIRMENTS1. NATURE OF BUSINESS: - The requirements of working is very limited in public utilityundertakings such as electricity, water supply and railways because they offer cash sale onlyand supply services not products, and no funds are tied up in inventories and receivables. Onthe other hand the trading and financial firms requires less investment in fixed assets buthave to invest large amt. of working capital along with fixed investments.2. SIZE OF THE BUSINESS: - Greater the size of the business, greater is the requirementof working capital.3. PRODUCTION POLICY: - If the policy is to keep production steady by accumulatinginventories it will require higher working capital.4. LENGTH OF PRODUCTION CYCLE: - The longer the manufacturing time the rawmaterial and other supplies have to be carried for a longer in the process with progressiveincrement of labor and service costs before the final product is obtained. So working capitalis directly proportional to the length of the manufacturing process.5. SEASONALS VARIATIONS: - Generally, during the busy season, a firm requires largerworking capital than in slack season.6. WORKING CAPITAL CYCLE: - The speed with which the working cycle completes onecycle determines the requirements of working capital. Longer the cycle larger is therequirement of working capital. 15
  16. 16. DEBTORS FINISHED GOODS CASH RAW MATERIAL WORK IN PROGRESS Fig. - 17. RATE OF STOCK TURNOVER: - There is an inverse co-relationship between thequestion of working capital and the velocity or speed with which the sales are affected. Afirm having a high rate of stock turnover will needs lower amt. of working capital ascompared to a firm having a low rate of turnover.8. CREDIT POLICY: - A concern that purchases its requirements on credit and sales itsproduct / services on cash requires lesser amt. of working capital and vice-versa.9. BUSINESS CYCLE: - In period of boom, when the business is prosperous, there is needfor larger amt. of working capital due to rise in sales, rise in prices, optimistic expansion ofbusiness, etc. On the contrary in time of depression, the business contracts, sales decline, 16
  17. 17. difficulties are faced in collection from debtor and the firm may have a large amt. ofworking capital.10. RATE OF GROWTH OF BUSINESS: - In faster growing concern, we shall requirelarge amt. of working capital.11. EARNING CAPACITY AND DIVIDEND POLICY: - Some firms have more earningcapacity than other due to quality of their products, monopoly conditions, etc. Such firmsmay generate cash profits from operations and contribute to their working capital. Thedividend policy also affects the requirement of working capital.12. PRICE LEVEL CHANGES: - Changes in the price level also affect the working capitalrequirements. Generally rise in prices leads to increase in working capital. MANAGEMENT OF WORKING CAPITALManagement of working capital is concerned with the problem that arises in attempting tomanage the current assets, current liabilities. The basic goal of working capital managementis to manage the current assets and current liabilities of a firm in such a way that asatisfactory level of working capital is maintained, i.e. it is neither adequate nor excessive asboth the situations are bad for any firm. There should be no shortage of funds and also noworking capital should be ideal.WORKING CAPITAL MANAGEMENT POLICES of a firm has a great on its probability,liquidity and structural health of the organization. So working capital management is threedimensional in nature as:1. It concerned with the formulation of policies with regard to profitability, liquidity and risk. 17
  18. 18. 2. It is concerned with the decision about the composition and level of current assets.3. It is concerned with the decision about the composition and level of current liabilities. OBJECTIVE OF STUDYThis project was undertaken to analyze the working capital policies, working capitalmanagement of the company and to reduce down their problems and to find the solutionswith respect to the working capital management of the company.The objective of the study is to provide the solutions for reducing down the duration of theoperating cycle, to analyze the working capital position of the company and the liquidityposition, finding out the problems that the company is facing in managing the workingcapital and showing trend of particular ratios in future and at the same suggesting them tosolve their problems. There are Two types of Objectives in this study:-1. Primary Objective :- Primary Objectives is to “Analysis of Working Capital Management “2. Secondary Objective :- There are few secondary objectives : -• To see whether the company is prepared with enough working capital to face any kind of contingencies.• To identify the financial strength and weakness of the company• To see how the day-to-day operations of the company takes place.• To compare the performance of working capital for a particular year with previous years.• To assess Liquidity position, Long term solvency, operational efficiency, and overall profitability of SHRIRAM PISTONS AND RINGS Ltd. 18
  19. 19. • Providing suggestions to solve the problems of the company. COMPANY PROFILEShriram Pistons and Rings Ltd. is one of the largest and the most sophisticatedmanufacturers of Precision Automobile Components i.e. pistons, piston rings, pistons ,pinsand engine valves in India, the products are sold under brand name ‘USHA/SPR’ IN THEmarkets.SPRL manufacturing unit is located at Meerut Road in Ghaziabad (25 km from New Delhi).SPR employs 6000+ skilled employees, has an annual turnover of approx. US$176 millionand has recently set up a second, most modern new Plant at Pathredi, next to BhiwadiIndustrial Area (Rajasthan), about 60 kms from Delhi, to expand capacity and to offer thelatest technological products to all customers in India and abroad.The plant has been recognized as one of the most modern and sophisticated plants in NorthIndia in the field of automobile the production capacity of plant is as under:Piston : 15.14 million per yearPin : 13.0 million per yearRings : 70.5 million per yearEngine valves: 29.5 million per year “Total Customer Satisfaction Through Quality Management and Continuous Improvement.” QUALITY OBJECTIVES: 1. Organization which is sensitive and interactive to the needs of customer. 2. Continuous upgrading of quality and process to meet changing needs of customer. 19
  20. 20. 3. Optimization of return on investment by: • Continuous improvement • Technology development • Organizational and personnel development • Cost reduction efforts • Effective use of all resources • Harmonious and safe working conditions 4. Work to international norms of quality and management. • The company has successfully practiced the best work ethics and technology along with the TPM & Kaizen approach and harmony through teamwork.ACHIEVEMENTS (In Terms Of Quality):• SPR received the ISO- 9001 certificate from RWTUV, Germany in 1994.Technology from the collaborators was supplemented with in-house efforts and by implementing world-class practices.• The company received QS-9000 certificate from TUV, Germany in the year 1999.• The company received ISO-14001 certificate in the year 2001• SPRL has received the Best Vendor Awards from Maruti Suzuki for 4 consecutive times, Best Supplier Performance awards from Tata Cummins ltd for3 consecutive years. And has self-certified status with most of the OEMS.• Excellence Award in Export by government of India. 20
  21. 21. • Excellence Award in Productivity by ACMA. • Excellence Award in Quality by Honda scooters and motors limited, Honda Seil and ACMA. • Received Diamond Award-Overall Best performance in QCDDM. • Received Silver Trophy-Technology from ACMA in 2009-10. • SPR received the TS-16949 certificate in the year 2003. • The company received the OHSAS-18001 certificates in the year 2003 • Best foundry awards from the Institute of Indian Foundry men in the year 2003 • Green rating award by CII, UP. Pollution board & World Bank in 2004. • The company received the TPM excellence award in the year 2004 • The company received TPM special award in march-2010FEATURES OF SPR FACTORY:  Total area covered by the factory is 27 acres.  The factory has manufacturing facilities for pistons, rings, pins and engine valves.  Classification of the premises:  P.T.E – Production Technology and Engineering  C.A.A- Commercial Administration and Accounts.  R &D- Research and Development  Total strength of the company is 5723 nos. consisting of officers, staff, &workers.  The turnover/ sales for the year 2011-12 are Rs.900.0 crores. 21
  22. 22.  The company is exporting to more than 35 countries.  Exports have risen up to Rs.152 crores the year 2010-2011.  Over 10% of the production is exported to sophisticated markets such as Europe, UK, and Latin America etc.  SPR has been investing 30% of its retained earnings in quality up gradation and modernization. CollaborationsOn our path to great quality, we walk hand-in-hand with global technology leaders, whoshare our commitment to product quality and performance.We have unique distinction of having 4 collaborations with World leaders in their respectivefields. We have Technical Collaborations with Kolbenschmidt AG of Germany for Pistons,Riken Corporation of Japan for Piston Rings and Fuji Oozx of Japan for Engine Valves. Wealso have a technical collaboration with Honda Foundry of Japan for the manufacture ofPistons for engines produced by Honda and its joint ventures in India.KOLBENSCHMIDT AG, founded in 1910, is part of the Rhinemetal Group, Germany. It isone of the worlds largest manufacturers of pistons. They have production facilities around 22
  23. 23. the world producing Pistons with diameter range upto 620 mm. Their products are exportedto over 120 countries around the world.HONDA Foundry, Japan, founded in 1963 is a wholly owned subsidiary of Honda Motors,Japan. It has a fully automatic Piston casting plant and they also manufactures IntakeManifolds, Cylinder Heads and intricate aluminum castings.Riken Corporation, established in 1927, is the undisputed world leader in steel Piston Rings.It also holds more than 50% market share of overall Piston Ring market within Japan. PistonRings are produced within diameter range of 20 mm to 3100 mm.Besides Piston Rings, they also manufacture Cam Shafts, Knuckles, Valve Seats, PistonInserts, Pre-combustion Chambers, Rocker Arms, Tappets etc.Fuji Oozx is the largest Engine Valve manufacturer in Japan. They have multiple productionfacilities including fully automatic state-of-the-art plant. 23
  24. 24. They have joint ventures in Thailand, South Korea, Taiwan and the Peoples Republic ofChina. 24
  25. 25. RESEARCH METHODOLOGYMethodology: A. Type of Study: The study carried out here is basically analytical in nature. This type of study relies on data which is already available. B. Type of Data used: The methodology involved for data collection was mainly through secondary data and was obtained from the company’s financial statements and the company’s website. The Balance Sheets and the Profit & Loss Accounts for the last 3 years was the source based on which forecasting was done which was from the company’s archives. Extreme care was taken in collecting the data from the financial statements and only relevant data was taken for the analysis based on. C. Sources of Data: The source of data has been company’s Balance Sheet and Profit and Loss Accounts over a period of past 3 years. D. Tools used for Data Collection: The data has been collected mainly from the company’s Balance Sheet and Profit & Loss Account for the past 3 years. Interview schedule was taken to understand how the Finance Department is working and what are the various policies followed in the Organization. E. Tools and techniques used for analysis: Various tools and techniques have been used to fulfill the aforesaid objectives. A thorough study of the organization has been along with in depth study of the functioning of Finance and Accounts Department of SRPL. Further for the analysis 25
  26. 26. of Working Capital Management, study of working Capital cycle / Operating cyclehas been made along with Operating cycle of SPRL. Thereafter analysis of working capitalhas been done by taking into consideration past 3 years Current Assets and currentLiabilities. After this component wise analysis has been done, to have in depth view of workingcapital requirements and its trend. To find out the efficiency of Working Capitalmanagement, Ratio analysis tool has been used for the evaluation of inventory, CashManagement and Receivables Management at SRPL. Trend Projection of WorkingCapital Requirements has also been done to assess the future requirements ofWorking Capital. 26
  27. 27. ANALYSIS OF WORKING CAPITAL MANAGEMENTMethods adopted for Working Capital analysis:The broad range of project management and financial advisory services include: • Working Capital policy • Financial Ratio analysis for Working Capital Management • Managing the components of Working Capital of SHRIRAM PISTONS AND RINGS LTD. • Determination of operating cycle of SHRIRAM PISTONS AND RINGS LTD. • Statement of change in Working Capital • Estimating Working Capital needs, Permanent & Variable Capital • Trend Analysis of Working Capital Management 27
  28. 28. FINANCIAL RATIO ANALYSIS FOR WORKING CAPITAL MANAGEMENT• Return on Working Capital: Return on Working Capital (ROWC) = PBIT / Working Capital * 100 Table2: Return on Working Capital Return on Working Capital For Shriram Pistons 2009-10 793.58/1393.58*100 56.94% 2010-11 649.91/1133.27*100 57.34% 2011-12 1221.48/1560.83*100 78.25% Figure 3: Return on working capital 100.00% 80.00% Return on Working capital(Mn/Rs.) 60.00% 2009-2010 2010-2011 40.00% 2011-2012 20.00% 0.00% YearNote: Current Liabilities = Working Capital borrowings from Banks + Current Liabilities + Proposed Dividend + Provision for Tax. 28
  29. 29. Current Assets = Inventories + Debtors + Cash & Bank balance + Current Investments + Advance Income Tax + Advance recoverable in Cash.Analysis:There has been a decline in ROWC between the two years – it reduces 20% during 2009-10.This situation arises because of increase in current liabilities in past years as company ishaving proposal of lots of investment due to which company is financing its project andthere is less tendency of free cash flow. LIQUIDITY RATIOS: Snapshot of Liquidity Ratios: Table 3: Liquidity ratios Basic Ratios 2009-10 2010-11 2011-12 Current ratio 2.60 2.17 2.43 Acid test ratio 1.66 1.28 1.57 Cash ratio 0.05 0.01 0.30• Current Ratio:The current ratio is also known as the working capital ratio and is normally presented as areal ratio. Table4: Current Ratio 2009-10 Current Asset : Current Liability 2.60:1 2010-11 Current Asset : Current Liability 2.17:1 2011-12 Current Asset : Current Liability 2.43:1 29
  30. 30. Figure 4: Current Ratio 2.6 2.5 2.4 2.3 2009-2010 current ratio 2.2 2010-2011 2.1 2011-2012 2 1.9 YearAnalysis:The current ratio is the measure of whether a company has enough short-term assets to coverits short-term debt and is index of strength of working capital. Anything below 1 indicatesnegative W/C (working capital). While anything over 2 means that the company is notinvesting excess assets. A ratio of greater than one means that the firm has more currentassets then current claims. Current ratio of the company has increased from 2.17 in Year2010-11 to 2.43 in Year 2009-10. Current Ratio of the company depicts that for every Re.1worth of current liability there are assets worth Rs.2.43. The company has sufficientliquidity as the ratio is increasing. This year there is an increase in ratio due to almost doubleinventory level in current year in comparison with previous year.Suggestions:• Firstly the company should try to increase their inventory levels as money gets blocked. 30
  31. 31. • In order to increase current ratio current assets should be increased. If we look into the detailed schedule of current assets then we can find out that major portion of current assets is due to debtors and inventories.• Company should make market survey and should decide first that what should be the optimum amount of finished goods so that major portion of it can be sold off in the market. This will help in reducing the locking of funds or working capital in the finished goods.• Acid Test Ratio: Table 5: Acid Test Ratio for Shriram Pistons Acid Test Ratio For Shriram Pistons 2009-10 Current Assets - Stocks: Current Liabilities 2258.21-814.19/867.00 1.66 2010-11 Current Assets - Stocks: Current Liabilities 2099.75-857.25/965.73 1.28 2011-12 Current Assets - Stocks: Current Liabilities 2650.04-929.57/1089.21 1.57 Figure 5: Acid Test Ratio for Shriram Pistons 31
  32. 32. 1.8 1.6 1.4 acid test ratio 1.2 2009-2010 1 2010-2011 0.8 2011-2012 0.6 0.4 0.2 0 yearAnalysis:Acid test ratio is a more rigorous test of liquidity than the current ratio and when used inconjunction with it, gives a better picture of the firm s ability to meet its short-term debts outof short-term assets. This ratio is used to determine risk that is not detected by the WorkingCapital ratio. A quick or liquid ratio of 1:1 is considered as satisfactory as the firm caneasily or readily meets all of its current liabilities. Here Shriram Pistons have its last yearratings of which is constant from last three years, which indicates company is not havingsatisfactory financial position and not able to pay its current liabilities and should be lookedat with extreme care and also implies that current assets are highly dependent on inventory.Comparison between Current Ratio & Acid Test Ratio: Table 6: Comparison between current ratio and acid test ratio 32
  33. 33. Comparison Current Acid Test 2009-10 2.10 1.66 2010-11 1.72 1.28 2011-12 1.91 1.57SHRIRAM PISTONS AND RINGS liquidity position had worsened when looked at itscurrent ratio. The acid test ratio has fallen from 2010 to 2011. Current assets might not bethat liquid since most of them are debtors. The fact that the differences between the currentand acid test ratio is around .4, which is large, tells us that the SHRIRAM PISTONS stocksare large. This is a huge level of stock holding. Additionally, the acid test ratio has decreasedover the three-year period, meaning that SHRIRAM PISTONS has a weak liquidity positionthan it had before. Normally that is not a good thing.• Cash Ratio: Table 7: Cash ratio for SHRIRAM PISTONS Cash Ratio For Shriram Pistons 2009-10 Cash: Current 46.32/867.00 0.05:1 Liabilities 2010-11 Cash: Current 17.59/965.73 0.01:1 Liabilities 2011-12 Cash: Current 334.66/1089.21 0.30:1 Liabilities 33
  34. 34. Figure 6: Cash Ratio for Shriram Pistons 0.3 0.25 0.2 2009-2010 Cash ratio(times) 0.15 2010-2011 0.1 2011-2012 0.05 0 yearAnalysis:As cash is being the most liquid asset, quoted investment has been taken as marketablesecurities. In our case the company is showing an increasing trend but still it is not afavorable cash ratio. From the above calculation it is clear that company’s cash ratio hadremained very low. It is the notable point for the company as its current liabilities are muchhigher than the cash in hand. It can create problems in the future payments of currentliabilities. Major portion of company’s current assets goes to inventory and debtors, whichonly increase the carrying cost. Company need to reduce these assets to their optimum level. 34
  35. 35. OTHER SNAPSHOT OF WORKING CAPITAL MANAGEMENTRATIOS Table 8: Working capital management ratios Shriram Pistons For the three years Asset Usage 2009-10 2010-11 2011-12 Fixed Asset Turnover 0.99 times 0.91 times 1.03 times Current Asset Turnover 2.67 times 3.04 times 2.92 times Capital Employed Turnover 2.53 times 2.45 times 2.42Times Working Capital Turnover 4.33times 5.65 times 4.95times Efficiency 35
  36. 36. Working capital to Gross Sale 0.23 times 0.17 times 0.20 times Working Capital to Cost of Sale 0.28 times 0.28 times 0.25 times Stock/Debtors/Creditors Debtors’ Turnover 5.17 times 6.35 times 6.90 times Average Collection Period 69.61 days 56.69 days 52.17 days Credits’ Turnover 3.33 times 2.65 times 3.36 times Credit Payment Period 108.10days 135.84days 107.14 days Inventory Turnover 6.09 times 6.37 times 6.63 times Inventory Holding 59.11 days 56.16 days 54.29 days Conversion Period (In Days) 59.11 days 56.51 days 54.29 days Ratio to analyze WC Structure Current Asset to Total Assets Ratio 0.38 times 0.33 times 0.38 times Cash to Current Asset Ratio 0.020 times 0.008 times 0.12 times Inventory to Current Asset Ratio 0.36 times 0.40 times 0.35 times Current Liabilities to Total 0.48 times 0.43 times 0.49 times Liabilities Finished goods to Inventory Ratio 0.400 times 0.403 times 0.340 times Raw Material to Inventory Ratio 1.69 times 1.62 times 1.81 times Loan & Advances to CA ratio 0.10 times 0.10 times 1.00 timesWorking Capital Management I: Asset Usage• Current Asset Turnover: Turnover Current Asset Turnover = Current Assets 36
  37. 37. Table 9: Current asset turnover for Shriram Pistons Current Asset Turnover For Shriram Pistons 2009-10 6038/2260.58 = 2.67times 2010-11 6400/2099.75 = 3.04 times 2011-12 7739/2650.04 = 2.92 times Figure 7: Current Asset Turnover 3.1 3 2.9 current asset 2.8 turnover 2009-2010 ratio(times) 2.7 2010-2012 2.6 2011-2012 2.5 2.4 YearAnalysis: 37
  38. 38. High current assets turnover ratio is more judicious and shows efficiency of managementand proper utilization of the assets. The graph shows the company has managed to higherthe ratio during the previous year however this year due to non-proportionate change incurrent assets and turnover the ratio declines to 2.92. Due to more inventories this ratio falls.• Working Capital Turnover: This ratio signifies how effectively working capital is being used in terms of the turnover. Sales Working Capital Turnover = Working Capital Table 10: Working capital turnover for Shriram Pistons Working Capital Turnover For Shriram Pistons 2009-10 6038/1393.58 4.33 times 2010-11 6400/1133.27 5.65 times 2011-12 7739/1560.83 4.95 times Figure 8: Working Capital Turnover for Shriram Pistons 38
  39. 39. 6 5 4 working 2009-2010 capital 3 turnover 2010-2011 2 2011-2012 1 0 yearAnalysis:What this ratio tries to highlight is how effectively working capital is being used in terms ofthe turnover it can help to generate: no ideal values here but the higher the better, surely.The declining working capital turnover ratio in SHRIRAM PISTONS indicates that workingcapital is not being utilized properly over the period of time. Management may think ofincreasing the sales in the market or it is going for certain expansion plans.Working Capital Management II: Efficiency• Working Capital to Gross Sale: Working Capital Working Capital to Gross Sale = Gross Sale Table 11: Working capital to gross sale for Shriram Pistons Working Capital to Gross Sale for the Shriram Pistons 2009-10 1393.58/6038 0.23 2010-11 1133.27/6400 0.17 2011-12 1560.83/7739 0.20 39
  40. 40. Figure 9: Working Capital to Gross Sale for the Shriram Pistons 0.25 0.2 working 0.15 2009-2010 capital to 0.1 2010-2011 gross sales 2011-2012 0.05 0 yearAnalysis:The Company was showing decline in the year 2011 but now as the ratio increased to 0.17from 0.20 there is a matter of concern but here also SHRIRAM PISTONS is far better thanthe industry’s average. In previous year company’s working capital was very low but nowthey are trying to improve it for liquidity purposes.• Working Capital to Cost of Sale: Working Capital Working Capital to Cost of Sale = Cost of Sale 40
  41. 41. Table 12: Working capital to cost of sale for Shriram Pistons Working Capital to Cost of Sale for the Shriram Pistons2009-10 1393.58/4960 0.282010-11 1133.27/5462 0.202011-12 1560.83/6168 0.25 S Figure 10: Working Capital to Cost of Sale for the Shriram Pistons 0.8 working capital to cost of sale 0.7 0.6 0.5 2011-2012 0.4 2010-2011 0.3 2009-2010 0.2 0.1 0 year 41
  42. 42. Analysis:The Company was showing decline in the year 2011 but now as the ratio increased to 0.25from 0.20 there is a matter of concern but here also SHRIRAM PISTONS is far better thanthe industry’s average. In previous year company’s working capital was very low but nowthey are trying to improve it for liquidity purposes.Working Capital Management III: Stock/Debtors/Creditors• Debtor’s Turnover: Sales Debtor’s Turnover = Debtors Table 13: Debtor’s turnover ratio for Shriram Pistons Debtor’s Turnover Ratio for the Shriram Pistons 2009-10 6038/1167.56 5.17 times 2010-11 6400/1007.38 6.35 times 2011-12 7739/1120.41 6.90 times Figure 11: Debtor’s Turnover Ratio for the Shriram Pistons 42
  43. 43. 8 6 deb tors turnover ratio 4 2011-2012 2 0 2009-2010 yearAnalysis:Firstly, the ratio seems to have change by going from 5.17 to 6.35 times in the two years;and it means that, on average, the company’s debtors are taking fewer days to pay theiraccounts. Soundness of this ratio is more dependent on the business policy and the termswith the clients. On the other side turnover is increasing over the years, which implies higherthe turnover, shorter the time between sales and collecting cash. It shows the company’sdebt-collecting machinery has improved through years.• Average Collection Period: 360 Avg. Collection Period = Debtor Turnover Table 14: Average collection period for Shriram Pistons Average Collection Period for the Shriram Pistons 2009-10 360 / 5.17 69.61days 2010-11 360 / 6.35 56.69 days 2011-12 360 / 6.90 52.17 days 43
  44. 44. Figure 12: Average Collection Period for the Shriram Pistons 70 60 50 average 40 2009-2010 collection 30 2010-2011 period 20 2011-2012 10 0 yearAnalysis:The average collection period measures the quality of debtors since it indicates the speed oftheir collection. The shorter the average collection period, the better the quality of debtors,as a short collection period implies the prompt payment by debtors. The trend of SHRIRAMPISTON is showing that the company was a success in decreasing the average collection 44
  45. 45. period, which represent sound collection policy of the company. Previous year it was 56.69being debtors were less but now it is on the previous trend.• Creditor’s Turnover: Purchases Creditor’s Turnover = Creditors Table 15: Creditor’s turnover ratio for Shriram Pistons Creditor’s Turnover Ratio for the Shriram Pistons 2009-10 1378/413.69 3.33 2010-11 1390.10/523.95 2.65 2011-12 1685/500.83 3.36 Figure 13: Creditor’s Turnover Ratio for the Shriram Pistons 45
  46. 46. 4 creditors 3 2009-2010 turnover 2 2010-2011 ratio 1 2011-2012 0 yearAnalysis:In 2010 creditors turnover ratio increased from 2.65 to 3.36 times that shows company washaving improved credit paying ability through proper working capital management while in2011 the ratio decreased which implies terms of credit allowed by the suppliers are liberaland creditors are not paid promptly. This shows company keeps its obligation for long time.• Credit Payment Period: 360 Credit Payment Period = Payable turnover ratio Table 16: Credit payment period for Shriram Pistons Credit Payment Period for the Shriram Pistons 2009-10 360 / 3.33 108.10 days 46
  47. 47. 2010-11 360 / 2.65 135.84 days 2011-12 360 / 3.36 107.14 days Figure 14: Credit Payment Period for the Shriram Pistons 160 credit payment period(days) 140 120 100 2009-2010 80 2010-2011 60 2011-2012 40 20 0 yearAnalysis:Since in 2010 and 2010 the average payment period of the company was less compared to2011 i.e. 135.84 days which implies that 2011 company was less prompt in making paymentto suppliers compared to other years. As again it improved its criteria and kept fewerobligations in the year 2010. The same shows that reduction in the payment period isresponsible for the creditworthiness of the company.• Inventory Turnover Ratio: Inventory Turnover = Cost of Goods Sold 47
  48. 48. Closing Stock Table 17: Inventory turnover ratio for Shriram Pistons Inventory Turnover Ratio for the Shriram Pistons2009-10 4960/814.19 6.092010-11 5462/857.25 6.372011-12 6168/929.57 6.63 Figure 15: Inventory Turnover Ratio for the Shriram Pistons 6.7 6.6 6.5 6.4 inventory 6.3 2009-2010 turnover ratio 6.2 2010-2011 6.1 2011-2012 6 5.9 5.8 year 48
  49. 49. Analysis:It measures approximately the number of times an entity is able to acquire the inventoriesand convert them into sales. The Shriram Pistons shows higher turnover ratio which is goodfor the company while a low turnover is usually a bad sign because products tend todeteriorate as they sit in a warehouse, but several aspects of inventory holding policy have tobe balanced like lead time, seasonal fluctuations in orders, alternative use of warehousespace.• Inventory Holding Period: 360 Inventory Holding Period = Inventory Turnover Table 18: Inventory holding period Inventory Holding Period for the Shriram Pistons 2009-10 360 / 6.09 59.11 days 2010-11 360 / 6.41 56.16 days 2011-12 360 / 6.63 54.29 days Figure 16: Inventory Holding Period for the Shriram Pistons 49
  50. 50. 60 59 inventory holding(days) 58 57 2009-2010 56 2010-2011 55 2011-2012 54 53 52 51 yearAnalysis:Here, the company shows a decreasing trend in which there inventory holding ratio fallsdown, which is good for the company as it avoids the unnecessary locking up of workingcapital in the inventory and it shows efficiency of the management.Working Capital Management IV: Ratio to analyze W/C Structure• Current Asset to Total Assets Ratio: Table 19: Current asset to total asset ratio for Shriram Pistons Current Asset to Total Asset Ratio for the Shriram Pistons 50
  51. 51. 2009-10 2260.58/5946.26 0.382010-11 2099.75/6266.87 0.332011-12 2650.04/6843.25 0.38 51
  52. 52. Figure 17: Current Asset to Total Asset Ratio for the Shriram Pistons 0.38 0.37 0.36 current 0.35 asset 2009-2010 0.34 /total 2010-2011 0.33 asset 0.32 2011-2012 0.31 0.3 yearAnalysis:If we analyze the structural health of working capital for SHRIRAM PISTONS, theproportion of current assets to total assets has been showing almost constant trendcontinuously over the years, which shows that the company is having certain problems withits current asset management. But as this picture is showing less declining so it’s very clearthat this can be due to some investment for long-term return.• Cash to Current Asset Ratio: Cash to Current Cash = Asset Current asset 52
  53. 53. Table 20: Cash to current asset ratio Cash to Current Asset Ratio for the Shriram Pistons2009-10 46.32/2260.58 0.0202010-11 17.59/2099.75 0.0082011-12 334.66/2650.04 0.120 Figure18: Cash to Current Asset Ratio for the Shriram Pistons 0.12 0.1 0.08 cash to 2009-2010 current 0.06 asset 2010-2011 0.04 2011-2012 0.02 0 yearAnalysis:The company shows an increasing trend in 2010 & again it decrease in 2011 but as thisrecovered again the increasing trend of cash in the current assets was observed. However inthe year 2011 it decreased drastically. We can say that it will effect liquidity position of thefirm but on the other hand it is observed that they do not keep any ideal cash with them,which is a positive sign for the company.• Inventory to Current Asset Ratio: 53
  54. 54. Inventory Inventory to Current Asset = Current asset Table 21: Inventory to current asset ratio for Shriram Pistons Inventory to Current Asset Ratio for the Shriram Pistons 2009-10 814.19/2260.58 0.36 2010-11 857.25/2099.75 0.40 2011-12 929.57/2650.04 0.35 Figure: 19 Inventory to current asset ratio 2009-2010 0.4 2010-2011 inventory to 0.38 current asset 0.36 2011-2012 ratio 2011-2012 0.34 0.32 2009-2010 yearAnalysis:Here, the company shows an unfavorable trend of increase in the proportion of the inventoryto current assets in 2010-11, which represents that the company is locking up the working 54
  55. 55. capital unnecessarily in the inventory. Fortunately, the ratio rises in the year 2010 which is agood sign.• Current Liabilities to Total Liabilities: Current Liabilities Current Liabilities to Total Liabilities = Total Liabilities Table 22: Current liabilities to total liabilities ratio for Shriram Pistons Current Liabilities to Total Liabilities Ratio for the Shriram Pistons 2009-10 867.00/1075.57 0.80 2010-11 965.73/1215.29 0.79 2011-12 1089.21/1382.14 0.78 Figure 20: Current liabilities to Total liabilities 55
  56. 56. 0.8 0.795 current 0.79 liabilities / 2009-2010 total 0.785 liabilities 2010-2011 0.78 2011-2012 0.775 0.77 yearAnalysis:The company shows a decreasing trend in the proportion of the current liabilities in the totalliabilities, this means company is taking fewer loans to meet its liability and projectinvestments are there, hence this shows a less burden on the management of SHRIRAMPISTON. This ratio is not the only means of reviewing a companys debt structure.• Loan & Advances to Current Asset Ratio: Loan & Advances Loan & Advances to Current Asset = Current Asset Table 23: Loan & Advances to Current assets ratio for Shriram Pistons 56
  57. 57. Loan & Advances to Current Asset Ratio for the Shriram Pistons 2009-10 229.93/2260.58 0.10 2010-11 217.53/2099.75 0.10 2011-12 265.40/2650.04 1.00 Figure 22: Loan & Advances to Current Asset 1 0.8 loan and 0.6 advances / 2009-2010 CA 0.4 2010-2011 2011-2012 0.2 0 yearAnalysis:The increase in this ratio in the year 2010 shows the efficiency of the management. Howeverthis much increases in the ratio is not suggestible.INTERPRETATION (RATIO ANALYSIS): 57
  58. 58. • The utilization rate of net working capital as depicted by working capital turnover ratio is fluctuating during the period. It shows that working capital has not been effectively used over the period of years except in the year 2010.• As shown by current assets turnover ratio, the utilization of current assets in terms of sales has shown an increasing trend which shows that current assets has been effectively used to achieve sales.• Again if we look at the efficiency with which individual elements of working capital have been utilized, the picture of inventory turnover is bright.• As we look at the extent of liquidity of working capital, we notice that the ratio shows a decreasing trend. This indicates, problem on the liquidity front.MANAGEMENT OF CURRENT ASSETS 58
  59. 59. Alternative Current Asset Investment policiesThree alternative policies are there regarding the total amount of current assets. Essentially,these policies differ with regard to the amount of current assets carried to support any givenlevel of sales, hence in the turnover of those assets. The line with the steepest sloperepresents a relaxed current asset investment (also known as “fat cat”) Policy, whererelatively large amounts of cash, marketable securities, and inventories are carried, andwhere sales are stimulated by the use of a credit policy that provides liberal financing tocustomers and a corresponding high level of receivables. Conversely, with the restrictedcurrent asset investment (also known as “lean and mean”) policy, the holdings of cash,securities, inventories and receivables are minimized. Under the restricted, current assets areturned over more frequently, so each dollar of current assets is forced to “work harder”. Themoderate current asset investment policy is between the two extremes.Under the conditions of certainty, all firms would hold only minimal levels of current assets.Any larger amounts would increase the need for external funding without a correspondingincrease in profits, while any smaller holdings would involve late payments to suppliersalong with lost sales due to inventory shortages and an overly restrictive credit policy.When uncertainty is introduced the firm requires some minimum amount of cash andinventories. A restricted lean and mean current asset investment policy often provides thehighest expected return on this investment, but it entails the greatest risk, while the reverse istrue under a relaxed policy. Alternative Current Assets Investment Policies: 59
  60. 60. Figure 23: Alternate current assets investment policiesCurrent Assets 50 SHRIRAM PISTONS 40 Relaxed 30 Moderate 20 Restricted 10 0 50 100 150 Sales Table showing Alternative Current Assets Investment Policies: Table 24: Table showing alternative current assets investment policies Policy Current asset to support Turnover of Sales of INR 100/- Current Assets Relaxed 30 3.3 Modified 23 4.3 Restricted 16 6.3 SHRIRAM 32.57 3.07 PISTONS Note: - The Sales/current assets relationship is shown here as being linear, but the relationship is often curvilinearMANAGING THE COMPONENTS OF WORKING CAPITAL OFSHRIRAM PISTONSFour main components: 60
  61. 61. • Cash• Marketable securities/Account Payables• Inventory• Accounts ReceivablesCash Management in SHRIRAM PISTONS:Cash management system adopted by Finance Department in SHRIRAM PISTONS is veryreliable and transparent. As cash is a very important activity for a good operation ofcompany here in SHRIRAM PISTONS cash is monitored every day and intimated toFinance Department. The daily cash report includes all the details of cash inflows andoutflows. Monthly cash budgets are maintained for the estimated of monthly cash inflowsand outflows. Finally the annual cash budget is made by the Finance Department in thecorporate head office.The corporate office allocates different amount of each to different manufacturing units asper their requirement. Corporate office acts as a linkage between the manufacturing unit andcreditors. Corporate office has determined the credit facility for every units of the companyand this keeps on changing from year to year depending up on company’s positiontransactions, profitability and inventory position.The corporate office provides cash to manufacturing units but there most function iscontrolled in unit itself. All the need related to inventory are met through corporate office aswell as individual efforts of unit.Fund Allocation:Here the initial allocation for manufacturing units is done by corporate office and allsupplementary requirements are to look upon by Commercial department.Fund Utilization: 61
  62. 62. Company operates an annual ‘Cash Budget’ and a rolling ‘Cash Plan’ drawn up everymonth. Although specific forecasting technique is used, funds are deployed to differentdepartments as per their requirements. Daily reports on cash transaction are prepared byProcurement department to keep a track of all payments made in the days work. Everymonth cash transaction report is sent to Finance department in the corporate office showingall the transaction of cash, (inflow and outflows) actual utilization of cash and allocation offund is compared. If the utilization of cash is more than the allocation of fund, then the planthas to justify its more utilization.To meet the requirement of cash, company approach to bank and present the requireddetailed by the bank. SHRIRAM PISTONS kept less cash in hand, to meet the entire cashrequirement it depends on financing process.Evaluation of cash management performances:To assess the cash management performance this phase is divided as follows:a) Size of Cashb) Liquidity and Adequacy of cash:This is depicted by the current ratio and acid test ratio, as calculated in part ratio analysis forworking capital management and respective position is shown in graph.c) Control of cashOne of the major objectives of cash management from the stand point of increasing returnon investment is to economize on the cash holding without impairing the overall liquidityrequirements of the firms. This is possible by effecting tighter controls over cash flows. Thefollowing ratios have been applied to assess the efficiency of cash control:• Cash to Current Assets ratio• Cash turnover ratio• Cash to current liabilities ratio Table 25: Table showing different cash ratios SHRIRAM PISTONS For the year ended Mn/Rs. Efficiency of cash control 2009-10 2010-11 2011-12 62
  63. 63. Cash to Current Asset Ratio 46.32/2258 17.59/2099 334.66/2650.04 =0.020 =0.008 =0.12 times Cash to Current liability Ratio 46.32/867.00 17.59/965.73 334.66/1089.21 =0.05 times =0.01 times =0.30 timesAverage: 0.049Average: 0.12Summary:It can be inferred from the above table that cash to current assets ratio is increasing whichshows improving position of liquidity but it again starting decline from 2011, whichultimately affect the operational efficiency of the firm. Cash to current liability ratio showsthe cash balance maintained by company at a certain point of time for meeting its currentliabilities. The cash to current liability ratio is nearly on decreasing trend shows theefficiency of operations, but this year it increases which is not a good sign.• Payable Management in SHRIRAM PISTONS:Mostly the creditor comprises of the bank that is financing the working capital needs and thesuppliers to whom payments are to be given. This is basically done as per terms andcondition with the respective parties. The company is not able to make proper payment to itscreditors as year on year company’s creditors are increasing.Evaluation of Payables Management:The evaluation for payable management is done with the help of ratios:• Creditor’s turnover ratio• Average Payment Period Table 26: Table showing payables management SHRIRAM PISTONS For the year ended Mn/Rs. 63
  64. 64. Payable Management 2009-10 2010-11 2011-12 Creditor’s ratio 3.33 times 2.65 times 3.36 times Average Payment period 108.10 days 135.84days 107.14 daysAverage: 117.02 daysSummary:The analysis shows that the minimum average creditor period is 107 days and maximum is135 days. By analysis reveals the increasing and decreasing trend in average paymentperiod, which shows company is provided with liberal and strict credit payment period overthe year and according to the market situation.• Inventory Management:Here the inventory is categorized in to: (1) A B C analysis (2) X Y Z analysis1) ABC Analysis: - Items which constitutes to 70% of total consumption (of stores andspares) value when arranged in descending order of consumption value will be termed as‘A’ class items. Next 20% of total consumption value will be termed as ‘B’ class items andthe rest 10% as the ‘C’ class items.2) XYZ Analysis: - Items which constitute top 70% of total stock of stores and sparesholding value when arranged in descending order of stock holding will be termed a ‘X’ classitems next 20% of total stock holding value is ‘Y’ class items and the rest 10% as the ‘Z’class.Higher than necessary stock levels tie up cash and cost more in insurance, accommodationcosts and interest charges.Four basic levels will need to be established for each line/category of stock. There are the: a) Maximum level – achieved at the point a new order of stock is physically received; b) Minimum level – the level at point just prior to delivery of a new order (sometimes called buffer stocks – those held for short term emergencies); c) Reorder level – point at which a new order should be placed so that stocks will not fall below the minimum level before delivery is received; and the 64
  65. 65. d) Reorder quantity or economic order quantity – the quantity of stock, which must be reordered to replenish the amount held at the point delivery, arrives up to the maximum level.Once these controls are implemented an efficient system of recording receipts and issues isvital to exercise full control of inventories.Inventory Management at SHRIRAM PISTONS:Inventory is stock of a company, which is manufacturing the components that make up theproducts, for sale. In managing inventories the objective of the company is to determine andmaintain optimum level of inventory investment. The optimum level of inventory liesbetween two danger points of excess and inadequate inventories.Inventory is monitored differently for raw material, work in progress, finished goods andspares. Monthly inventory report is sent to the finance department in the corporate office.Obviously the inventory report is prepared at plant level. Procurement Department gives thedate of closing stock of raw materials, finished goods as well as the work in progress.Inventory Turnover Ratio: Table 27: table showing Inventory turnover ratio SHRIRAM PISTONS For the year ended Mn/Rs. 2009-10 2010-11 2011-12 Inventory Turnover 6.09 times 6.37 times 6.63 timesAverage: 6.36Summary:Inventory turnover ratio establishes a relationship between the total sales during a period andaverage inventory hold to meet that quantum at 6.63 times in 2010 and on average it is 6.36times, that signifies the average moving of inventory. In other words, the stock held during2010 is for 59.11 days as comparison of average at 56.52 days.• Receivable Management: 65
  66. 66. At a plant level mostly the finished goods are sold on credit to increase upon the market share and retain the customers but the major portion of debtors are dealt by Marketing Unit of the Commercial Department and the Finance Department. It is consideration as an essential marketing tool.Control of the debtors’ element (the amount owed the business in the short term) involves afundamental trade-off between the cost of providing credit to customers (which includesfinancing bad debts and administration), and the additional net revenue that can be earned bydoing so. The former can be kept to a minimum with effective credit control policies, whichwill require:• Setting and enforcing credit terms;• Vetting customers prior to allowing them credit;• Setting and reviewing individual credit limits;• Efficient invoicing and statement generation;• Prompt query resolution;• Continuous review of debtors position (generating ‘aged debtors’ report);• Effective chasing and collection procedures; and• Limits beyond which legal action will be pursued.Before allowing credit to a new customer trade and bank references should be sought.Accounts can be asked for and analyzed and a report including any county court judgmentsAgainst the business and a credit score asked for from a credit rating business. Salesmen’sviews can also be canvassed and the premises of the potential customer visited.The extent to which all means are called upon will depend on the amount of the creditsought, the period, past experiences with this customer or trade sector, and the importance ofthe business that is involved. But this is not a one-off requirement. One classic fraud is tostart off with small amounts of credit, with invoices being settled promptly, eventuallybuilding up to a huge order and a disappearing customer. 66
  67. 67. Credit checking, even for established customers, should therefore feature in regularprocedures.When the creditworthiness of a new customer is established, positive credit control calls forthe setting of a credit limit, any settlement discounts, the credit period, and credit charges (ifany).The Late Payment of Commercial Debts (Interest) Act now allows small businesses tocharge large interest on late payment of business debts by companies and public sectororganizations. Nevertheless, it is wise to inform customers this right will be exercised.Collection is a vital element of credit control and must include standard, polite and well-constructed reminder letters and effective telephone or e-mail follow up. Use of collectionagencies should be considered, as could factoring – in its most comprehensive form a loanfacility based on outstanding invoices plus a sales ledger and debtors control service.Efficient control of debtors will assist cash flow, and help keep overdraft or other loanrequirements down, and hence reduce interest costs.Debtors represent future cash – or they should do if proper credit control policies arepursued. Likewise stock will eventually become cash, but in the meantime representsworking capital tied up in the business. Keeping levels to the minimum required for efficientoperations will keep costs down. This means controlling buying, handling, and storing,issuing, and recording stock.Inherent in any system of inventory control is the concept of appropriate stock levels –normally expressed in physical units sometimes in monetary terms.The objective of establishing control levels is to ensure that excessive stocks are nevercarried (and working capital thereby sacrificed) but that they never fall below the level atwhich they can be replenished before they run out.Receivables Management in SHRIRAM PISTONS:Corporate office and the commercial department in coordination do the management ofreceivables. The management of receivable is dealt on major part by corporate office andminor part by commercial department of the company. 67
  68. 68. SHRIRAM PISTONS in matter of granting a credit period to customers tightens their policyand reduce credit period to 107 days to its debtors. Total Debtors amounted to Rs. 1167.56by the end of 2010, which further decreased to Rs. 1007.38 in 2011. 68
  69. 69. DETERMINATION OF OPERATING CYCLE OF SHRIRAM PISTONS:The determination of length of the operating cycle of a manufacturing firm is the sum of:The broad range of project management and financial advisory services include:• inventory conversion period (ICP), &• debtors conversion period (DCP)A) Inventory conversion period:It is the total time needed for producing and selling the product. Typically, it includes: a) raw material conversion period (RMCP) b) work-in-process conversion period (WIPCP), and c) Finished goods conversion period (FGCP).Inventory Conversion period = RMPC + WIPCP + FGCPThe raw material conversion period is depends on: 1) raw material consumption per day, & 2) raw material inventory Raw Material Consumption per day = Total Raw Material Consumption/Number of days in the year Raw Material Conversion period = Raw Material Inventory/Raw Material Consumption per daySimilar calculations can be made for other inventories, debtors and creditors.B) Debtors’ conversion period:It is the time required to collect the outstanding amount from the customers. The total ofinventory conversion period and debtors’ conversion period is referred to as gross operatingcycle (GOC). 69
  70. 70. Gross Operating Cycle = ICP + DCPC) Payable Deferral period:This is very common to get gross operating cycle but in practice, a firm may acquireresources (such as raw materials) on credit and temporarily postpone payment of certainexpenses. Payables, which the firm can defer, are spontaneous sources of capital to financeinvestment in current assets. The payables deferral period (PDP) is the length of time thefirm is able to defer payments on various resource purchases. Net Operating Cycle = Gross Operating Cycle – Payable Deferral periodIf depreciation is excluded from expenses in the computation of operating cycle, the netoperating cycle also represents the cash conversion cycle. It is net time interval betweencash collections from sale of the product and cash payments for resources acquired by thefirm. It also represents the time interval over which additional funds, called working capital,should be obtained in order to carry out the firm’s operations.A) Inventory conversion period:a) Raw Material Conversion Period: 70
  71. 71. Years 2009-10 2010-11 2011-12Raw material consumedAvg. Raw material inventory 1378.63 1390.10 1685 701.22 722.75 893.41 1378.63/701.22 1390.10/722.75 1685/893.41 =1.96 times =1.92 times =1.88 timesRCMP 360/1.96 360/1.92 360/1.88 =183.67 days =187.5 days =191.48 daysb) Work-In-Progress Conversion Period: Years 2009-10 2010-11 2011-12Cost of Production 2061.73 2310.03 1248.82Avg.Work in progress 152.55 119.93 148.35 2061.73/152.55 2310.03/119.93 1248.82/148.35 =13.51 times =19.26 times =8.41 timesWIPCP 360/13.51 360/19.26 360/8.41 =42.80 days =18.69 days =26.64 daysc) Finished Goods Conversion Period: 71
  72. 72. Years 2009-10 2010-11 2011-12Sales 6038 6400 7739Closing stock 325.66 346.22 321.33 6038/325.66 6400/346.22 7739/321.33 =18.54 times =18.48 times =24.08 timesFGCP 360/18.54 360/18.48 360/24.08 =19.41 days =19.48 days =14.95 daysB) Debtors Conversion: 72
  73. 73. Years 2009-10 2010-11 2011-12Sales 6038 6400 7739Closing debtors 1170.14 1007.38 1120.41 6038/1170.14 6400/1007.38 7739/1120.41 =5.16 times =6.35 times =6.90 timesDCP 360/5.16 360/6.35 360/6.90 =69.76 days =56.69 days =52.17 daysC)Payables Conversion: 73
  74. 74. Years 2009-10 2010-11 2011-12Purchases 1378.63 1390.10 1685Closing creditors 413.69 523.95 500.88 1378.63/413.69 1390.10/1007.38 1685/500.88 =3.33 times =2.65 times =3.36 timesPCP 360/3.33 360/2.65 360/3.36 =108.10 days =135.8 days =107.14 daysOperating Cycle:Gross Operating Cycle (GOC): Years 2009-10 2010-11 2011-12RCMP+WIPCP+FGCP+DCP 299.48 days 282.36 days 301.40 days 74
  75. 75. Net Operating Cycle (NOC): Years 2009-10 2010-11 2011-12 282.36-135.80 301.40- 299.48-108.10 107.14GOC-PCP =191.38 days =146.56 days =194.26 daysAnalysis:The operating cycle of the firm is disturbed, as it is continuously increasing which is notgood for the company.• The company policy had a significant change for the year with regard to inventory as it had increased continuously but this policy has a cost to the company in the presence of a significant decrease in payables deferral period, will have to negotiate higher working capital funds.• Company has tighten its steps towards the credit policy which signifies that in the current year company is proving itself more efficient but other side it as well shows a decline in the market share of the company.• The company had reduced down its payables deferral period significantly which strengthens its creditworthiness in the market and helps the company in getting the loans on liberal terms. This represents the efficiency of the management.One can have a vastly different working capital outlay while performing the same activity.Having a large amount invested in stocks and debtors does not necessarily mean largeprofits, but it can mean a drop in the prime calculation that every businessman is interested 75
  76. 76. in the return on investment. The object of working capital management is to trim down onstocks and debtors and get the cash coming faster within the comfort zone of the business. Inthe normal periods of business activity, cash that had completed the working capital cyclewould be reinvested in stock and the whole process would begin again. 76
  77. 77. Analysis of Asset Percentage: Table 28: Table showing analysis of asset percentage SHRIRAM PISTONS YearsParticulars 2009-10 2010-11 2011-12Current asset 2258 2099 2650.04Total asset 5946.26 6266.87 6843.25Percentage of current assets over fixed 37.02% 29.99% 35.49%assetsCurrent ratios 2.60 2.17 2.43 Figure 24: Percentage of Current Asset to Fixed Asset 40.00% 35.00% percentag 30.00% e of 25.00% 2009-2010 current 20.00% asset to 15.00% 2010-2011 fixed asset 10.00% 2011-2012 5.00% 0.00% year 77
  78. 78. Analysis: From the above calculation it can be analyzed that company is following anadequate policy of working capital from last 2 years. When we give a thought to the currentratio of last three years we can very easily depict that its current ratio is more than thestandard one i.e. of 2:1. This type of approach also gives the adverse impact on the liquidityof the company.Analysis of Change in Working Capital: Table 29: Table showing analysis of working capital SHRIRAM PISTONS For the year ended Mn/Rs. Particulars 2009-10 2010-11 2011-12 Current asset 2258 2099 2650.04 Current Liabilities 1052.03 1199.28 1351.91 Net Working Capital 1205.97 899.72 1298.13 Figure 25: Net working Capital 100% 1298.13 90% 80% 70% 60% 899.72 2011-2012 50% 2010-2011 40% 2009-2010 1205.97 30% 20% 10% 0%Analysis: 78
  79. 79. • As we can see from the above table and graph that company’s Net Working Capital has been showing variation in its trend as from last two years working capital is showing positive trend in increasing order.• The above situation shows that company management is efficient in management of working capital.• Making the comparison of current assets and current liabilities in 2010 & 2011 current liabilities are less than current assets which leads the working capital in positive range which is good for the company.Analysis of Current Assets: Table 30: Table showing analysis of current assets SHRIRAM PISTONS For the year ended Mn/Rs. Particulars 2009-10 2010-11 2011-12 Debtors 1167.56 1007.38 1120.38 Inventory 814.19 857.25 929.57 Cash & Bank balance 46.32 17.59 334.66 Loans & Advances 229.93 217.53 265.40 Total 2258 2099.75 2650.01Analysis:• Composition of all parts seems to be distributing but almost each component is showing increasing trend which has both kind of influence for the financial performance of the company so company need to manage these components very carefully.• Inventory is showing an increasing trend that is the signal of danger for company’s profitability and these are not giving any return by locking up working capital.Suggestions: 79