Summer training project report on cash management @ escorts ltd.

SUMMER TRAINING REPORT ON “CASH MANAGEMENT” IN SUBMITTED TO SUBMITTED BY DEPT. OF BUSINESS SHALU VERMA ADMINISTRATION M.B.A –3RD Sem. ROLL NO. 46 CH. DEVI LAL UNIVERSITY,SIRSA

ACKNOWLEDGEMENT At the outset I would like to thank the Management of ESCORTS AGRI MACHINERY GROUP for the wholehearted co-operation and guidance extended by them, which made my summer training project possible. I would like to thank Mr. Bharat Madan (Chief Financial Officer), Mr. S.K Aggarwal (Head Employees Relations), and Mrs. Kiran Chopra ( Chief Secretary & System Manager) for providing me this opportunity to carry out the project. I am very grateful to my project guide Mr.pulak sinha (finance Manager; Finance Department) Escorts Limited (AMG PLANT-1) for his support and suggestions, which led to the completion of this project. I would also like to thank Mr. B.B khanna , Mr. M.M. Halder , Mr. Nitin Aggarwal , Mr. Vijay Nehra , Mr. Rajeev Khandelwal , Mr. Sunil Bhatia, Mr. R.N katyal, Mr.Ajay Wadhawan , Mrs Saroj and Mr. R.K. Kukreja and other staff members for their support and cooperation. 2

STUDENT DECLARATION I, student of “Masters in Business Administration” CH. DEVI LAL UNIVERSITY, SIRSA hereby declare that the dissertation/thesis entitle ‘Study of Cash Management’ of the Escort Agri Machinery Group (AMG) submitted in fulfillment of the training; is my original work and is not submitted for the award for any other degree, fellowship or similar title or prize. SHALU VERMA 3

EXECUTIVE SUMMARY If the development capital is what establishes a business, cash flow is what keeps it going. One of the most common downfalls of business is unexpectedly high running cost. What is important is not just the size of operating costs, but the cash flow-that is when money has to be paid out in relation to the stream of income arriving in. Thus cash flow management is of prime importance. Escorts Ltd. is the holding company of the Escorts Group. Post restructuring, agri - machinery or tractors have become the focus area of operations. Other business i.e. two- wheelers, IT, Telecom, construction equipment, are controlled through subsidiaries and joint venture. Post hive off of its pistons business to a joint venture with a foreign collaborator, Escorts is focusing on its ‘core competence’ of tractors. Escorts have strong hands in house engineering skills, a wide distribution/service network and brand franchise. The project is small attempt to study the cash management in Escorts Agri - Machinery group. Added to this fact that mechanization level in India is currently very low as compared to the world standards. To analyze the performance, published balance sheets of Escorts Limited, CASH FLOW STATEMENTS are been used. This project report is based on financial data up to 2007-08 only. The financial year for escorts is from 01/10/20XX to 31/09/20XX. Escorts is maintaining the following records which is indicative of its professional approach: 4

 Maintaining proper set of accounting records.  Maintaining an accurate cash book with bank statement  Daily cash inflow & cash outflow.  Marking regular forecast of cash requirement based upon planed sales volume.  Ageing of debts/credits with comparisons to previous month 5

TABLE OF CONTENTS  OBJECTIVE OF THE TRAINING  ABOUT TRACTOR INDUSTRY • INTRODUCTION • FUTURE OF TRACTOR INDUSTRY • MARKET SHARE OF THE TRACTOR INDUSTRY • TRACTOR INDUSTRY PERFORMANCE  COMPANY’S PROFILE • ESCORTS SYMBOL • MISSION • QUALITY POLICY • BACKGROUND OF THE BUSINESS • BOARD OF DIRECTORS • OUTLINE OF ESCORTS • SUBSIDERIES • BANKERS  AGRI MACHINERY GROUP • INTRODUCTION • AGRI MACHINERY GROUP CONTRIBUTION 6

• MODERNIZATION OF AGRI- MACHINERY GROUP • PRODUCTS • COMPANY’S FUTURE  CASH MANAGEMENT • INTRODUCTION • CASH FLOW MANAGEMENT • CASH MANAGEMENT SYSTEM • IMPORTANCE OF CASH MANAGEMENT • CASH MANAGEMENT STRATEGIES • CASH OUTFLOW • CASH INFLOW  CASH FLOW STATEMENT • IMPORTANCE • DAILY CASH FLOW REPORT  CASH BUDGET  BANK RECONCILIATION  CASH RATIOS  RECEIVABLES MANAGEMENT  PAYABLE MANAGEMENT  RECOMMENDATIONS  LIMITATIONS 7

 BIBLIOGRAPHY  ANNEXURES OBJECTIVES OF THE TRAINING It is well known fact that we remember 20% of what we hear, we remember 40% of what we see but we remember 75% of what we do. Undergoing M.B.A is the first step to prepare myself as a manager and visualize the ever-dynamic business world and my main objective while taking up the training was to familiarize myself with the working of the finance department of Escort Agri Machinery Group (AMG) To present study in Escort Agri machinery group mainly focus on the following :  Resources of cash inflow of the company.  Cash flow factors which have effect of cash inflow.  Cash flow statement in the company.  Cash flow management in the company 8

ABOUT THE TRACTOR INDUSTRY 9

INTRODUCTION India’s long-term economic prospects, even today, depend to a large extend on the agricultural sector, which contributes a quarter to the gross domestic project and provides livelihood to 2/3 of the population. A gradual and perceptible shift from subsistence farming to enterprise farming is harbinger of modernization of the agriculture economy and this will increase the contribution of the sector to the overall GDP in the time to come. The central government as well as several state governments is giving due priority to agriculture and rural developments. A tractor is a product, which has maximum utility in the agricultural sector. The tractor industry is segmented on the basis of the power of the tractor engine measured in terms of horsepower (HP). The maximum consumption is for 30-40 HP tractors. With the increase in the availability of low cost finance for longer tenures, the sale of the tractors is expected to go up. The new trend observed in this sector is the shift in consumption from majority in the northern states to other parts of the country, too. The soil in the northern states is alluvial in nature and thus 10

requires a low powered tractor for tilling it. However, states located in the western and southern parts of the country where the soil being laterite or black etc. is harder and needs high-powered tractors. Tractor industry in India has passed through various hazes before reaching where it is today. During 1945 to 1960 demand was met entirely through import. There were 37,000 tractors by 1960. Production began in 1861 with five manufactures producing a total of 880 units per year. By 1965 it increased to over 5,000 units per year and by 1970 annual production rose to more than 20,000 units. Six new manufacturing were established during 1971-1980. In 1971 Escorts also started local manufacturing of Ford Tractors in collaboration with Ford, UK. During, 1990 annual production rose to 1, 40,000 units making India an exporter to countries, mainly to Africa. After De-licensing of tractor industry, production exceeded 2, 55,000 units in 1997. The growth of the industry over the last three decades resulted in the entry of several new entrants including all the major multinational companies. The industry now consists of 14 manufactures with an aggregate installed capacity of approximately 4.50 lack tractors. In the tractor industry, following are the key manufacturers:  Mahindra& Mahindra Limited (M&M),  Gujarat Tractors Limited,  Tractors and Farm Equipment Limited,  Hindustan Machine Tools Limited,  Bajaj Tempo Limited 11

In 1999-2000. Since then, however the industry declined to a level of 1.72 lack tractors in the year 2002-2003, a decline of 33.3% over three years. Despite the step decline in the industry, Escorts consciously decided to aggressively reduce channel inventory further by approximately 3,500 units reduces in the previous year. This has not only impacted their revenue and profit adversely but has also enabled the company to balance the cash flow of company effectively. Tractors form an integral part of farm mechanization and have a crucial role to play in increasing agriculture productivity. In India, 90% of the tractors are financed by banks- credit at concessional rates. Availability of credit therefore is the most crucial factor, impacting tractor demand. Increased use of irrigation facilities, shift towards multi- cropping, consolidation of lands holdings, promotion of cooperatives and higher investment in agriculture also contributes to higher tractor demand. 12

Future of Tractor industry The tractor industry in India has been on a growth trajectory since the second half of 2003-04, after going through a minimum variation for consecutive years. The key factors driving this growth are increasing farm incomes, aggressive financing resulting in easy availability of low- cost credit, sharp inventory correction and strong export growth. The demand in tractor industry is expected to grow mainly due to the agricultural sector, with the expected increase in agricultural production. Also, the shift in trend for demand towards higher HP tractors is expected to continue. This will be further strengthened by the launch of several new models. In the next 2-3 year, demand for tractors is expected to increase significantly in the eastern states, where traditionally, tractor usage has been low. Exports are expected to increase significantly as several Indian players are targeting the “hobby farming” segment in the U.S, which is considerably large. Also, tractors of most Indian manufacturers comply with the emission standards accepted in the U.S. 13

Most exports are likely to be through overseas partnerships or joint ventures. McKinley has also forecasted tractor population requirements of 75 lacs over the next 18 years vs. current population of 26 lacs. The extension of the 150 per cent deduction on R&D expenditure up to march 31, 2009, in the Budget 2008-09 will also benefit the industry in terms of new product development besides increase in the area under irrigation under the Bahrat Nirman Project and the micro irrigation scheme. MARKET SHARE OF TRACTOR INDUSTRY For the year 2007-08 14

ESCORTS 7.26% 13.65% 1.30% 6.63% MAHINDRA & MAHINDRA 8.14% PTL 1.37% TAFE 28.17% 8.82% HMT 1.36% 15.20% SONALIKA 8.00% FML L&T TRACTOR INDUSTRY PERFORMANCE FORD NEW COMPANY 2005-06 2006-07 HOLLAND 2007-08 ESCORT 11138 23200 OTHERS 20950 FARMTRAC 18287 32800 EICHER 26900 TOTAL(ESCORT + 29425 56000 47850 15

FARMTRAC) MAHINDRA & 85028 102500 98700 MAHINDRA 31396 30010 28040 PTL 52400 53400 TAFE 27700 25450 EICHER 7900 6500 4770 HMT 32017 36200 30920 SONALIKA 4464 5050 4820 BTL(FML) 19951 19720 28530 L&T 13214 19400 23250 FORD NEW HOLLAND 8450 7195 4520 TOTAL INDUSTRY 302435 362675 350300 16

COMPANY’S PROFILE ESCORTS SYMBOL The Escorts symbol means more than a seen by eye. It has been prepared with certain objective in mind and is symbol in more than one way. The philosophy behind Escorts and the ‘e’ in the Escorts is “enterprise”. The hexagon is a symbol of productivity. Precision when interposed as a nut. It symbolizes a craft man ship and mending productivity. The sprains 17

super imposed on the hexagon represent the workers and the people of Escorts. This forms the letter ‘E’ the first of Escorts a company even of more changing unveiling the future MISSION For an Enterprise business mission embodies of its endeavor, which acts as a guiding light for continuous development & growth. Mission of ESCORTS is: Engineering Changes through core competency for greater synergy reinforcing bonds with customers & establishing powerful symbiotic 18

relationship with international allies, preparing global market. The company wants to make a lasting difference to its shareholders, its customers, its business associates, its employee and the country as a whole. The company also gives better quality and better technology to customer and treats every customer as “special” to build respect for, and loyalty to, Escorts. QUALITY POLICY We shall strive to continuously improve to meet the ever – rising expectation of our customers at the lower cost. Each one of us must fulfill the need of our customer, both internal and external with the highest degree of commitment thereby creating a quality organization geared to 19

ensure total customer satisfaction and the sustained health and prosperity of our business. Customer Orientation: To fulfill the requirement of our internal and external customer. Process Orientation: To optimize and harmonize interrelated process rather than individual function. Preventive Behavior: To prevent the mistake to happen. BACKGROUND AND BUSINESS The Escorts Group, with Escorts Limited as its flagship company, is among India’s leading corporations operating in the diverse field of agri machinery, construction & material handling equipment, automotive & railway ancillaries information technology and financial services. The 20

group has 15 modern manufacturing facilities & an extensive marketing network spread across the country. The genesis of Escorts goes back to 1944 when two brothers, Mr. H.P. Nanda and Mr. Yudi Nanda, launched a small agency house, Escorts Agents Ltd., in Lahore. The company’s principal activities were trading and representing leading overseas manufacturers for the sale of their products in India. One of its dealerships was for the “Massey Ferguson” brand of tractors. In December 1959, Escorts agents ltd. was converted into a public limited company and was renamed as Escorts Limited (EL). In January 1960, EL decided to set up manufacturing facilities for making tractors in India under the “Escorts” brand name in the 25-40 Horsepower categories. EL promoted Escorts Tractors Limited in 1969 as joint venture with Ford Motor Company of USA for the manufacturing of ‘Ford’ series of tractors. The tractors manufactured were in the 45-50 HP range and ETL became the market leader in this segment with a share of above 50%. Consequent to FMC’s disposal of tractors operations to Ford New Holland, USA, Ford new holland acquired the shares of FMC in ETL. Following an agreement in 1995 to end the joint venture association, EL acquired the entire stake of ford new holland in August 1995, making escorts tractors ltd. a subsidiary of Escorts Ltd. Over the years, Escorts has sured ahead and evolved into one of India’s largest conglomerates. Till 1993-94, all these activities were being carried out in various divisions of EL. EL undertook a major restructuring exercise between 94-98 spinning off the divisions into separate companies. The restructuring exercise-comprised consolidation of the agri- machinery business by merger of ETL with EL and having off various 21

divisions into separate companies. Biwheeler division was spun off to Escorts Yamaha Motors Ltd., construction equipment division to Escorts construction equipment Ltd., telecommunication equipment division to Escorts communication Ltd., EL booked gains of Rs. 2091 million over the four year period 1994-95 to 1997-98 though the sale of these the sale of these divisions. The main products of Escorts group currently comprise of agri- machinery, information technology, health care, financial services, railway components, auto components, construction and material handling equipment. BOARD OF DIRECTORS Managing Director &Chairman Mr. Rajan Nanda Joint Managing Directors Mr. Nikhil Nanda 22

Directors Dr. M.G.K. Menon Dr. S.A. Dave Dr. P.S. Pritam Mr. S.C. Bhargava Sr.Vice President- Law & Company Secretary Mr. G.B. Mathur Exec. Vice President & Group Chief Financial Officer Mr. R.K.Budhiraja OUTLINE ORANISATION – ESCORTS GROUP Chairman & Managing Director – Sh. Rajan Nanda Secretariat Flagship Operating Division 23

Escorts Limited Faridabad Agri Machinery Engineering International Business Corporate Center Faridabad Escorts Research Institute of Farm Center, Faridabad Mechanization, Bangalore Personnel Finance Project Escorts Heart Research Escorts Medical Institute, New Delhi Center, Faridabad Administration and Law Export and Security Communication Associates Companies Subsidiary Companies Escorts Employees Welfare Trust Faridabad OUTLINE ORANISATION – ESCORTS LIMITED Chairman & Managing Director – Sh. Rajan Nanda Secretriat Corporate Office Registered Office Corporate Center, Faridabad New Delhi 24

Personnel Finance Project Law Administration Export and and Security Communication Agri Machinery Automotive Ancillaries Marketing Division and Railway Equipment Division Farmtrac Division Escorts Tractor Division Corporate Office Functional Units Corporate Office Functional Units (Line Duties) (Production & Operation) (Line Duties) Production & Operation) SUBSIDERIES Escorts Asset Management Ltd. Escorts Automotive Ltd. Escorts Class Ltd. Escorts Construction Equipment Ltd. 25

Escorts Heart Institute and Research Centre Ltd Escorts Hospital and Research Centre Ltd. Escorts Securities Ltd. Escorts Telecommunication Ltd. Esconet Services ltd. Cellnext Solutions Pvt. Ltd. I Serv India Solutions Pvt. Ltd. Escosoft Technologies Ltd. Escosoft Technologies (USA) Ltd. Escosoft Technologies (UK) Pvt. Ltd. Escosoft Singapore Pvt. Ltd. E-Soft (Mauritius) Holdings Ltd. Escotel Mobile Communication Ltd. Escotel Telecommunication Ltd. Escorts Agrimachiner BANKERS IDBI BANK. ABN AMRO BANK N.V. BANK OF BARODA. CITIBANK, N.A. 26

DEUTSCHE BANK AG. HONGKONG & SHANGHAI BANKING CORPORATION LIMITED. HDFC BANK LIMITED. PUNJAB NATIONAL BANK. STATE BANK OF INDIA. STATE BANK OF TRAVANCORE. AGRI 27

MACHINERY GROUP INTRODUCTION Having pioneered farm mechanization in the country, Escorts has played a pivotal role in the agricultural growth of India for over five decades. One of the leading tractor manufacturers of the country, Escorts produces tractors in the 27-75 HP range and has already sold over 6 lakh tractors. Escorts AGRI MACHINERY GROUP (AMG) was set up in 1960 and they rolled out their batch of tractors in 1965 under the brand 28

name of Escorts. Today its tractors are marketed under three brand names, viz. Escort, Powertrac and Farmtrac. Escorts Brand of tractors is symbolic of reliability and enjoys the confidence of the farming community for the last 40 years. Powertrac Brand of tractors is the most fuel-efficient tractor in their respective categories that offer excellent value for money and have helped the farmer improve their quality of life. Farmtrac Brand is the most powerful premium range of tractors that give maximum productivity to the farmers. Spanning these three brands, the company has a full range of tractors to cater to the domestic as well as overseas markets. The company is developing state-of-the-art highly fuel efficient engines with the assistance of AVL of Australia and have also entered into a Joint venture with CARRARO SPA of Italy for the manufacturing of transmission and axles. To sustain the present momentum and to realize the future goals, Escorts has invested Rs. 60 crore towards strengthening new product. Development programs and enhancement of R&D capabilities. Additionally, Rs.400 crore has been invested towards modernization of its manufacturing facilities bringing them to international standards. The company has one of the most comprehensive distribution networks comprising of over 500 dealership / outlets and 30 area offices spread across the country. It has a manufacturing capacity of 75000 tractors per annum. Escorts Agri Machinery Group is looking at forward and backward integration through genetic engineering. 29

In line to their vision for becoming a major player in sub 100 HP segment by 2011 in the global markets, they have increased their reach from a major regional player to major global markets, which stretch from North America to Australia covering all the continents. Despite the strict competition by other major tractor manufactures they have been able to gain constant volumes in the global market. Their target for this year is to export 25% volumes of their total production volumes. To consolidate its presence in the overseas markets, the company has ventures in the USA and Europe (Poland). It has recently acquired a majority stake in Long Agribusiness LLC, a tractor distributing company in USA and Poland Escort Spolka Z.O.O., Poland. Besides the USA and Poland, Escorts has strong presence in Turkey, Australia, Bangladesh, Sri Lanka, Nepal, Kenya, Tanzania and South Africa etc. though its dealers network in these countries. Escorts have very ambitious plans to expand the network in other potential countries in the coming year. By the end of next year, the company hopes to be largest exporter of tractors in the Indian tractor industry. AGRI MACHINERY GROUP CONTRIBUTION 30

AMG contribution is Almost Half of the Total Revenues of Escort Group. AMG 23% Auto Ancilliary Parts 56% Railway 12% Equipments 9% Construction MODERNIZATION OF AGRI MACHINERY GROUP Escorts Agri Machinery Group (AMG) has invested over US $7.5 million in state of the Art & Research and Development Center. 31

Virtual prototypes of components and aggregate assemblies are made and assembled on computer workstations using 3D technology. Their performance is checked on computers using simulation techniques thus saving a lot of time for the end-user as well as lowering development costs. The R&D center uses advanced 3D modeling, analysis and simulation software for engines, transmission and vehicles. Physical prototypes are then extensively tested for performance, durability and reliability. Facilities include a high –technology engine laboratory featuring fully computerized test-beds with on line control, data collection, and analysis. PRODUCTS 32

Escorts Farmtrac E-325 Josh F T –30 E-335 F T –35 E-335P F T –45 E-430 F T –45Live PT E-430XL F T –50DB E-435 F T –50 E-440(6+2 & 8+2)PT F T –60 E-440(6+2 & 8+2)XL F T –60DB E-450 F T –60Deluxe E-450(8+2)PT F T –60Live PT E-450(8+2)XL F T –70 33

COMPANY’S FUTURE The growing domestic demand for food gains and agri products promises a very good future for company’s business. With exemption of excise duty on tractors and growing importance of agriculture sector in the growth of Indian economy India can become a major exporter of agri products and increased demand both domestic and export will call for increased yields. Tractors population today is concentrated in 10% of villages and even today 70% of the villages do not have tractor .Crisil infa has estimated an annual demand 3.0 lacks to 3.20 lakhs of tractors by 2007-08 vs. 2.4 lakhs in 2006-07. All these show great potential for growth in the industry and thus in the company 34

CASH MANAGEMENT 35

INTRODUCTION Cash is the important current asset for the operation of the business. Cash is a medium of exchange to purchase the goods and services and to discharge the liabilities. Cash is the basic input needed to keep the business running on a continuous basis; it is also the ultimate output expected to be realized by selling the service or product manufactured by the firm. The firm should keep sufficient cash, neither more nor less. Cash shortage will disrupt the firm’s manufacturing operations while excessive cash will simply remain idle, without contributing anything towards the firm’s profitability. Thus a major function of the financial manager is to maintain a sound cash position. Cash is the money which a firm can disburse immediately without any restriction. The term cash includes coins, currency and cheques held by the firm, and balances in its bank accounts. Sometimes near cash terms, such as marketable securities or bank time deposits, are also included in cash. The basic characteristic of near cash asset is that they can readily be converted into cash. Generally, when a firm has excess 36

cash, it invests it in marketable securities. This kind of investment contributes some profit to the firm. CASH FLOW MANAGEMENT Cash flow management is a process of monitoring, analyzing, and adjusting one’s business cash flows. The most important aspect of cash flow management is avoiding extended cash shortages, caused by having too great a gap between cash inflows and outflows. Therefore, one needs to perform a cash flow analysis on a regular basis, and use cash flow forecasting so that one can take the steps necessary to head off cash flow problems. Cash management involves the efficient collection, disbursement and temporary investment of cash. The treasurer department of a company is usually responsible for the firm’s cash management system. A cash budget, instrumental in the process, tell us how much cash we likely to have it, and for how long. In cash flow management I studied many statements like as follows: 37

Cash flow Statement Cash Budget CASH MANAGEMENT SYSTEM With timely information reporting a firm can generate significant income by properly managing collections, disbursement cash balance and cash equivalents investment, Collection Disbursement Cash 38

Cash Equivalents Control Through Information Report IMPORTANCE OF CASH MANAGEMENT Cash management assumes more important than other current assets because cash is the most significant and the least productive asset that a firm holds. It is significant because it is used to pay the firms obligations. However cash is unproductive. Unlike fixed assets or inventories, it does not produce goods for sale. Therefore, the aim of cash management is to maintain adequate control over cash position to keep the firm sufficiently liquid and to excess cash in some profitable way. Cash management is also important because it is difficult to predict cash flow accurately, particularly the inflows and there is no perfect coincidence between the inflows or outflows of cash. During some periods, cash outflows will exceed cash inflows, because payments for taxes, dividends, or seasonal inventory build up. At other times, cash inflows will be more than cash payments because there will be large cash sales and debtors may be realized in large sums promptly. 39

Cash management is significant because cash constitutes the smallest portion of the total current assets, yet management’s considerable time is devoted in managing it. CASH MANAGEMENT STRATEGIES The firm should develop appropriate strategies for cash management. The firm should evolve strategies regarding the following four facets of cash management: Cash planning cash inflow and outflow should be planned to project cash surplus or deficit for each period for each period of the planning period. Cash budget should be prepared for this purpose. Managing the cash flows the flow of cash should be properly managed. The cash inflows should be accelerated while, as far as possible, the cash outflows should be decelerated. Optimum cash level the firms should decide about the appropriate level of cash balances. The cost of excess cash and danger of cash 40

deficiency should be matched to determine the optimum level of cash balances. Investing surplus cash the surplus cash balances should be properly invested to earn profits. The firm should decide about the division of such cash balance between short-term investment opportunities such as bank deposits, marketable securities, or inter- corporate lending. CASH OUTFLOW For cash management, the control of cash outflows, which is directly related to organizational arrangements for budget execution, can pose more difficulties than the control of cash inflows. However, issues related to cash management should not be confused with issues related to the distribution of responsibilities for accounting control and administration of the payment system. The major purpose of controlling cash outflows is to ensure that there will be enough cash until the date payments are due and to minimize the costs of transactions, while keeping cash outflows compatible with cash inflows and fiscal constraints. The first condition for ensuring that cash outflows fit fiscal constraints is good budget preparation and budget implementation covering both cash and obligations. However, during budget implementation, cash outflows must also be regulated through cash plans to smooth cash outflows. 41

CASH INFLOW It is necessary to minimize the interval between the time when cash is received and the time it is available for carrying out expenditure programs. Collected revenues need to be processed promptly and made available for use. When tax collection is done by the tax administration offices (or by Treasury offices) the administrative organization of these offices may have to be reviewed and their equipment modernized. Commercial banks by virtue of the banking sector infrastructure are often able to collect revenues more efficiently than tax offices, which should therefore focus instead on tracking taxpayers. When revenues are collected by commercial banks, arrangements must be defined to foster competition and ensure prompt transfer of collected revenues to government accounts. Systems of bank remuneration through float, which consists of authorizing the banks to keep the revenues collected for a few days, present inconveniences. Stringent rules to ensure prompt transfers must be established. Moreover, bank remuneration through fees 42

is more transparent and promotes competitive bidding. An appropriate system of penalties for taxpayers is also an important element in avoiding delays in revenue collection. CASH FLOW STATEMENT Meaning: IT IS a summary of firm’s cash receipts and cash payments during period of time. The purpose of cash flow statement is to report a firm’s cash inflow and outflows, during a period of time, segregated in to three categories: operating, investing and financing activities. The statement of cash flow explains changes in cash and cash equivalent such as treasure bill and the activities that increase and decrease cash. The cash flow statement may be presented using either a “direct method” (Which is encouraged by financial accounting standards board) or an “Indirect Method” (which is likely to be the method followed by good majority of firms). The only difference between the direct and indirect method of presentation concern the reporting of operating activities; the investing and financing activities section would 43

be identical under either method. Under the direct method, operating cash flow reported directly by major classes of operating cash receipts (from customers) and payment (to suppliers and employees). A separate indirect reconciliation of Net income to net cash flow from operating activities must be provided. The reconciliation starts with reported net income and adjusts this figure for non-cash income statement items and related changes in balance sheet items to determine cash provides by operating activities. Cash flow statement has three activities like as follow: Operating Activities:- Shows impact of transactions not defined as investigation or financing activities. These cash flows are generally the cash effects or transaction that enter into the determination of net income. Thus, we see items that not all statement users might think of as ‘operating’ flows-items such as dividends and interest received, as well as interest paid. Investing Activities:- Shows impact of buying and selling fixed assets or equity securities of other entities. Financing Activities:- Shows impact of all cash transactions with shareholders and the borrowing and repaying transactions with lenders. 44

IMPORTANCE  The effects of cash and non-cash investing and financing transaction.  A manager can assess the reason for differences between net income and net cash flow from operating activities.  It is also helpful for a company to generate future net cash inflows from operations to pay debts, interest and dividends.  It gives indication to a company’s need for external financing.  A cash flow statement is straightforward and easy to Understand.  It gives a strong indication of how viable the company will be over time. 45

 The extent of success or failure of cash planning can be known by comparing the actual cash statement with the budgeted cash flow statement and remedial measures can be taken.  It discloses the volume and the speed at which cash flows in different segments of the business DAILY CASH FLOW REPORT The Daily Cash Flow report is prepared with an objective to keep incessant check on the cash flows of the firm, which includes both inflow and outflow cash. The cash flows are planned to project cash surplus or deficit for each period i.e daily, monthly, quarterly, semi-annual & annual basis. The framework of report highlights all the effects, which lead to cash surplus or deficit. It is a measure, which calculates the details of daily transaction in terms of sale and purchase, which further includes the means through which they take place. At Escorts-AMG, the daily cash flow report is designed in a format suiting their requirements .The sales of tractors is their primary goal which includes exports as well. The bills are presented for desired collection from various channels i.e dealers, stockiest, distributors through which the tractors are supplied in the market. Besides tractors 46

they also deal in engines, backend, implements which are included in the category of other receipts. The receipts are other than collections as they aren’t generated through sales. Next come the payments, which are made in discharge of financial obligation towards various suppliers, bank payments, excise duty, salary & wages etc. Through the various collections, receipts and payment, we are now in a position to derive the surplus or deficit which is the result of above transactions. The surplus balance shows that the collections & receipts are more than payments and vice-a-versa in case of deficit. Though surplus is an indicator of sound financial position and deficits the other way round, but excess surplus is also not considered healthy which has reasons to it like inventory pile up and so on. The last component of the cash flow report is the outstanding debtors, which is calculated by subtracting billing & collection from opening o/s of debtors in domestic, export and other categories. This way the day to day cash transactions are maintained through the cash flow report which leads to proper functioning of an organization’s resources both men & material. COMPONENTS The annual cash flow statement at Escort- AMG is prepared for the fiscal period commencing from 01/10/20XX to 31/09/20XX. They are also maintaining the daily cash flow report with a purpose of keeping constant 47

check on the daily flow of cash i.e cash inflow and cash outflow, for different products categories, their parts and other miscellaneous. The main products at ESCORTS – AMG are “ TRACTORS “ which are available in three major categories: Farmtrac Powertrac Escorts These products are sold into the market through intermediaries like dealers, stockists and distributors , these parties charge a commission for the services provided by them. Among these parties dealers are given priority over the stockists & distributors for the delivering the product to the end customer and the commission also varies in the same manner. The following are the transactions that take place in the daily cash flow report under the following main heads:  Particulars,  Year to date i.e the very first day of the financial year till the previuos months end (in which the daily report is being made),  The previous month,  Plan for the ongoing month,  The particular day for which the report is being made, 48

 Month to date (from the beginning of the current month till the day for which report is being made). SALES – This includes the number of tractors sold in the domestic boundaries as well as overseas. BILLING – It is the process of sending accounts to customers for goods or services. The document used is called an invoice, the invoice may be attached to the goods or forwarded separately. The average sale value of each tractor is calculated as a follows : Total sales of tractors Number of tractors sold COLLECTION – The collections is recovered from all those parties to whom the products is being sold. The parties involved are : Tractors ( Direct ) – This includes the sale made through dealers to the end customer, for which a predetermined amount is given as commission to the opposite party. If the dealer fails to make the sale till the due date than he has to pay interest on it thereon. Tractors ( Stockists ) – This includes the sale made through stockists, who doesn’t sell the product by themselves but sells them through dealers. The credit period allowed to stockists by the company is less in 49

comparison than that of dealers, which yields to faster generation of income . Tractors ( Channel financing ) – This system is adopted to improve the working capital of the company by avoiding inventory pile up and earning speedy collections. Furthermore, Channel Financing is an innovative option for extending working capital finance to dealers who have business relationships with large companies. Channel Financing is the mechanism through which a Bank / Financial Institution meets the various Channel Financing could cover : - Discounting of trade bills drawn by a company & accepted by its dealers/ distributors/ channel partners. Providing overdraft facility to the dealers/ distributors who have business dealings with large corporate. OTHER RECEIPTS : An acknowledgment (usually tangible) that payment has been made. The below mentioned are the transactions included in it : Bill discounting : it is a major activity with some of the smaller banks. Under this type of lending, bank takes the bill drawn by borrower or his (borrower’s) customer and pay him immediately deducting some amount as discount / commission. The bank then present the bill to the 50

borrower’s customer on the due date of the bill and collect the total amount. If the bill is delayed, the borrower or his customer pays the bank a predetermined interest depending upon the terms of the transaction. The following entries could be passed in the co.’s books: Sales bill discounting : Following entries are passed during the sales Made by the company: Party a/c dr. .......... To sales a/c ........... (Being sale made on credit) Bank a/c dr. .......... Bank charges a/c dr. ……. To party a/c …….. ( being payment recived) Purchase bill discounting : Following entries are passed in the books purchases made by the company :- 51

Purchase a/c dr. …… To party a/c …… ( being purchases made) Party a/c dr. …… To bill discounting supplier a/c …… ( being paid to party through bank ) Bill discounting supplier a/c dr. ……. To bank a/c …… ( being payment made to bank) Letter of credit : The LC can also be the source of payment for a transaction, meaning that redeeming the letter of credit will pay an exporter. Letters of credit are used primarily in international trade transactions of significant value, for deals between a supplier in one country and a customer in another. The parties to a letter of credit are usually a beneficiary who is to receive the money, the issuing bank of whom the applicant is a client, and the advising bank of whom the beneficiary is a client. Almost all letters of credit are irrevocable, i.e., cannot be amended or canceled without prior agreement of the 52

beneficiary, the issuing bank and the confirming bank. In this 100 % payment is not given to the supplier by the bank due to loss in transition , rejection & shortage . in if loss doesn’t occur than 100 % is given to the supplier on the due date. Packing credit : when we receive an export order from countries , than we can avail loan from bank at nominal interest as packing credit loan. It provides the exporters with working capital between the time of the receipt of order and the time of shipment to arrange for production or procurement of goods. Pre-shipment finance is of particular importance to small scale manufacturers and exporters who do not possess sufficient financial resources to meet the expenditure involved in the production of goods for export. Pre shipment finance is normally provided by the commercial banks. As in the case of many other advances the bank takes into consideration a number of factors before making the necessary other advances to exporters viz., (1) honesty, integrity and capital of the borrower, (2) exporter’s experience in the line, (3) security offered, (4) the margin of interest (5) the bank’s experience about the exporter to ensure that his name does not appear on the caution list of the Reserve Bank. Pre- shipment : when the company receives order Post shipment : when assignment is dispatched from the company. The following entries to be passed in the books for packing credit loan : 53

Party a/c dr. …… To export a/c …… ( being export order received) Bank a/c dr. …… Bank charges a/c dr. ……. To packing credit loan …… ( being loan granted by bank ) Bank a/c dr. …… To party a/c ……. ( being payment made to bank) Pcl a/c dr. …… To bank a/c …… ( being payment of loan made to bank) Credit note : This note is presented to the other party for the payment to be made by the opposite party. Whereas debit note is given to the company by the other party in case of payment is to be made by the company. 54

PAYMENTS : It is the transfer of wealth from one party (such as a person or company) to another. A payment is usually made in exchange for the provision of goods, services or both, or to fulfill a legal obligation. The payments at Escorts – AMG includes – Direct (hundis, LC ), bank payment , excise duty which is lieved on the parts of the tractors, ladt ( local area development tax), sales tax , salary and wages, vrs, spare parts, implements, electricity, overhead, finance charges, capex is the capital expenditure made to purchase the fixed assets or adding value to the existing fixed asset, credit note, corporate loan, loan rapyments, interest, wcdl payment, packing credit & bill discounting. OUTSTANDING : Outstanding debtors are calculated by the following formula – Closing O/S = Opening O/S + Billing - Collection In this, values are calculated for debtors outstanding in different point of time in domestic and overseas sales of tractors & its part. 55

CASH BUDGET MEANING A forecast of estimated cash receipts and disbursements for a specified period of time. A cash budget is arrived at through a projection of future cash receipts and cash disbursements of the firm over interval of time, it reveals the timing and amount of expected cash inflows and outflows over the period. With this, the firm will be able to determine its future cash needs, and exercise control over the cash and liquidity of the firm. Though the cash budget may be prepared almost any interval of time, its monthly projection are most common. In short, we can say that cash budget is a forecast of a firms future cash flows arising from collection and disbursement, usually on a monthly basis.. The key to the accuracy of most cash budgets is the sales forecast. This forecast can be either internal or external analysis, in internal 56

approach, sales representatives are asked to project sales for the forthcoming period, We can then consolidate these sales estimates for the product line. The estimates for the various product lines are then combined in to an overall sales estimate for the firm. The basic problem with an internal approach is that it can be too myopic, often significant trends in the economy and in the industry are overlooked. Many companies use an external analysis as well, in external approach economic analysts make forecast of the economy and of industry sales for several years to come. They may use regression analysis to estimate the association between industry sales and the economy in general. After these basic predictions of business conditions and the industry are made. The next step is to estimate the market share by individual products, price that are likely to prevail and the expected reception of new product. By this way we can prepare an external forecast. For Effective Cash Budget  A firm may be able to delay its capital expenditure or its payment for purchase,  Purpose of cash budget should be to determine the timing and magnitude of prospecting financing needs so that the most appropriate method of financing can be arranged,  A decision to obtain long term financing should be based on long- range funds requirement. 57

 On the basis of cash budget the manager should be able to plan to invest excess funds in cash equivalents. BANK RECONCILIATION Bank reconciliation involves comparing the company’s record of transactions and balances to the bank’s record of transactions and balances. The company should go through every transaction in their account and make sure the company and the bank agree on the transaction. It’s important to go through the process of bank reconciliation. If the company doesn’t, than it is taking few risks. Without bank reconciliation, the company may not have a clear idea of how much cash is available in their accounts. They might bounce Cheques and incur overdraft charges. Without bank reconciliation, the company also expose yourself to risk. People may be stealing from the company’s account. If they never look through each transaction, they’ll never know about it. If they don’t notify the bank quickly enough, they may be out of luck. The same goes for bank mistakes. With regular bank reconciliation the company can find problems quickly and make them go away. 58

Bank reconciliation can be done manually, in excel & there’s electronic bank reconciliation as well. Though the manual way for handling company’s large bank accounts is not appropiate, it is helpful when there are less transactions. But still it important for any manager to learn it as it is the basic form of doing it. For reconciling the company’s record of transaction with the bank balances , there are three essential requirements :  Bank book  Bank statement  Bank reconciliation statement of preceding month Than the above transactions needs to be tally & unmatched have to be reconciled accordingly. Below is an example of how is it done manually:- 59

BANK RECOCILIATION STATEMENT AS ON 31.05.09 A/C NO 000381400000156 GL CODE DESCRIPTION Bal as per bank book AS ON 31.05.09 Opening bal 83382.91 DR. LESS: MAY2009 BALANCE 2726955 CR. -2643572 CR. ADD : Amount cr. By us but not dr. by bank 3634103 DR. 3634103 LESS : Amount dr. by us but not cr. by bank 3722549 CR. 3722549 ADD : Amount cr. By bank but not dr. by us 2832114 DR. 2832114 LESS : Amount dr. by bank but not cr. By us 41989.68 41989.68 Balance as per bank statement 58106.87 60

DETAILS OF CHEQUE ISSUED BUT NOT PRESENTED FOR PAYMENT S.NO VCH. DT. VCH. NO. CHQ.NO. CHQ.AMT. 7770 22/5/2009 86410 pcl loan LIQ. 3565791.98 7771 22/5/2009 86400 SA/SP/34 941 7774 31/5/2009 86301 B/C&INTT ON 59369.98 7766 12/5/2009 85683 BANK CHARGE 4000 2/4/2009 BANK CHARGE 4000 3634102.96 DETAILS OF AMOUNT DEPOSITED BUT NOT CREDITED BY BANK S.NO VCH. DT. VCH. NO. CHQ.NO. CHQ.AMT. 7754 22/5/2009 155 Sa/35 3704227.2 7749 1/5/2009 371 33796(bank ch.) 7667 7752 11/5/2009 372 33913(bank ch.) 5466 7755 22/5/2009 156 sa/sp/34 2927.15 7757 26/5/2009 157 tanj/37 2261.15 3722548.5 DETAILS OF AMT. CREDITED BY BANK S.NO VCH. DT. VCH. NO. CHQ.NO. CHQ.AMT. 19/5/2009 1390022 2832113.94 2832113.94 DETAILS OF AMOUNT DEBITED BY BANK S.NO VCH. DT. VCH. NO. DESCRIPTION CHQ.AMT. 1/5/2009 1210003 2206 4/5/2009 1240001 5515 4/5/2009 1240011 607.15 5/5/2009 1250005 2206 5/5/2009 1250001 2758 8/5/2009 1280029 607.15 9/5/2009 1290007 2206 11/5/2009 1180001 1103 12/5/2009 132000 1103 14/5/2009 1340024 607.15 19/5/2009 1320001 1103 19/5/2009 1390022 607.15 22/5/2009 560001 20753.93 26/5/2009 1460014 607.15 41989.68 CASH RATIOS 61

MEANING Cash ratios are also important tool of cash control. There are various ratios which explain the efficiency of cash management or vice- versa. They are the acids test ratio, cash ratio, receivables turnover ratio, inventory turnover ratio, cash turnover ratio etc. These are calculated as – LIQUIDITY RATIOS – Liquidity ratio measures the ability of the firm to meet its current obligations. It is necessary to strike a proper balance between high liquidity and lack of liquidity. A high degree of liquidity means that a firm’s fund will be unnecessarily tied up in current assets. Whereas lack of liquidity, implies failure of a company to meet its obligations due to lack of sufficient liquidity. The ratios, which are used for the analysis of Escorts liquidity position in this report, are:  Current Ratio  Quick Ratio CURRENT RATIO Current ratio is calculated by dividing current assets by current liabilities: 62

Current ratio = Current Assets Current Liabilities 2006-07 2007-08 Current Ratio 1.12 1.16 From the above table it can be interpreted that Escorts liquidity position is not constant. As a conventional rule a current ratio of 2:1 or more is considered satisfactory because in a worse situation, even if the value of current assets become half, the firm will be able to meet its obligations. Current ratio refers to a margin of safety for creditors therefore higher the current ratio, the greater the margin of safety. QUICK RATIO Quick ratio establishes a relationship between quick or liquid assets and current liabilities. An asset is liquid if it can be converted into cash immediately or reasonably soon without a loss of value. Inventories are considered to be less liquid therefore calculating quick ratio they are deducted from current assets. Quick Ratio = Current Assets – inventory 63

Current liabilities 2006-07 2007-08 Quick Ratio 0.90 0.99 Escorts quick ratio in the current year has decreased in comparison to previous year, yet it can be considered to be satisfactory, as it is 1:1 times of current liabilities. Although quick ratio is more penetrating test of liquidity than current ratio. Yet it should be used cautiously, as all debtors may not be liquid and cash may be immediately needed to pay operating expenses. The value of quick ratio is decreasing every year. The satisfactory level of the quick ratio is 1:1. This shows the worse situation of the company. The current liabilities are more than the quick assets. ACTIVITY RATIOS – Activity Ratios are used to evaluate the efficiency with which the firm manages and utilizes its assets. The ratios are called Turnover Ratios as they indicate the speed with which the firm manages and utilizes its assets. Activity ratios, which are used to analyze Escorts effectiveness in Asset utilization, are 64

 Inventory Turnover Ratio  Fixed Assets Turnover Ratio  Working Capital Turnover Ratio  Debtors Turnover Ratio  Creditors Turnover Ratio INVENTORY TURNOVER RATIO It indicates the efficiency of the firm in producing and selling its product. It is calculated by dividing sales by avg. inventory. In a manufacturing company inventory of finished goods is used to calculate inventory turnover. Inventory Turnover = Cost of goods sold Avg. Inventory 2006-07 2007-08 Inventory turnover 14.42 15.10 If the company is comfortably meeting the customer needs with 9.73 days inventory of finished goods, all India basis. It is a good achievement for the Escorts Limited. 65

FIXED ASSETS TURNOVER RATIO A firm’s ability to produce a large volume of sales for a given amount of net assets is the most important aspect of its operating performance. Unutilized or underutilized assets increase the firm’s need for costly financing as well as expenses for maintenance and upkeep. Fixed assets turnover is calculated by dividing net sale by net fixed assets. Fixed Assets Turnover = Sales Fixed Assets 2006-07 2007-08 F.A.T 2.29 2.35 Escorts fixed asset turnover have increased in 2003-04. The fixed asset turnover of 2.78 implies that it is producing Rs.2.78 of sales for one rupee of capital employed. The higher the ratio, more it is satisfactory… It should be interpreted very cautiously because the denominator of the ratio includes fixed asset net of depreciation. Thus old assets with lower book value may create a misleading impression of high turnover without any improvement in sales 66

DEBTORS TURNOVER RATIO Debtor’s turnover indicates the number of times debtors’ turnover each year. Higher the value of Debtors turnover, the more efficient is the management of credit. The liquidity position of the firm depends on the quality of the debtors to a great extent. Debtors Turnover = Credit Sales Avg. Debtors 2006-07 2007-08 Debtors Turnover 4.44 4.29 Escorts debtors turnover is quite lower. The debtor’s turnover ratio is high at 2003-04 . The ratio is decreasing. Also the debt collection period has its own importance. The debt collection period of Escorts was 76 days in 2003-04 but it has increased to 95 days . This does not show the satisfactory level. The shorter the collection period, the better the quality of debtors, since a short collection period implies prompt payment by debtors. A too low collection period is also not necessarily favorable as it may indicate a very restrictive collection and credit policy. Because of the fear 67

of bad debt loses the firm may be selling to those only whose financial conditions are sound and who are very prompt in making the payments. CREDITOR TURNOVER RATIO Creditors Turnover = Total Purchases Creditors 2006-07 2007-08 Creditors Turnover 3.55 3.45 Though the days are very high and apparently appears to substitute right collection, this extended credit has its own drawback like:  High interest inbuilt in cost system.  Sub-quality creditors may be accepted.  Quality of material may be accepted. The payment period of Escorts Limited is 90 days in 2007-08, which is more reasonable than previous years. This helps to make good quality product and also better relationship with suppliers. 68

WORKING CAPITAL TURNOVER RATIO Working capital turnover ratio has its own significance in the business organizations. It shows the efficiency of the firm. How much sale that the company get with the utilization of the limited working capital. Working Capital Turnover = Net Sales Net Working Capital 2006-07 2007-08 Working.Cap.Turn. 113.45 28.30 In the case of working capital turnover ratio Escorts is significantly going very downward. This is a very dangerous point of the firm. The company should try to improve it earlier. It shows that the company requires more money to generate sales. RECEIVABLE MANAGEMENT 69

The term receivable is defined as “debt owed to the firm by customers arising from sales of goods in the ordinary course of business”. The sale of goods on credit is an essential part of modern day business. The credit sales are generally made on open account in the sense that there are no formal obligations through a financial instrument. However extension of credit involves risks and cost. Management should weigh the benefits as well as the cost to determine the goal of receivable management. The benefits from receivables are the increased sales and profits anticipated because of more liberal policy. When firm extend trade credit, i.e. invest in receivables, they intend on increase the sales level. The motive of liberal credit policy can be either growth oriented or sales retention. The extension of credit has a major impact on sales, costs and profitability. Other things being equal, a relatively liberal policy and therefore higher investments in receivables will produce larger sales. However the cost will be higher with liberal policies then with more stringent measures. Therefore account receivable management should aim at a trade- of between profit and risk. The costs associated with the extension of credit and account receivables are  collection cost  capital cost  delinquency cost  default cost DECISION AREAS 70

CREDIT POLICIES The credit policy of a firm provides the framework to determine whether or not to extend credit to a customer and also how much credit to extend. It has two broad dimensions, the first is credit standard and second is the credit analysis. Credit standards represent the basic criteria for the extension of credit to customers. The trade- off with reference to credit standards covers collection costs, average collection period, level of bad debts losses and level of sales. With a relaxed credit standard the collection costs, bad debts expenses and sales goes up and in reverse case vice-versa happens. The second aspect of credit policy is credit analysis. It begins with obtaining credit information of the customers and ends up with the analysis of the obtained credit information. Information can be collected either internally or externally. Internal source of credit information is derived from the records of the firm. The analysis of credit information should cover both qualitative as well as quantitative aspects. The quantitative aspect is based on the available financial statements whereas qualitative aspects cover the quality of management. CREDIT TERMS The second decision area in accounts receivable management is the credit terms. After the credit standard have been establish and the credit worthiness of the customers is assessed, the management of a firm must determine the terms and conditions on which trade credit will be made available. Credit terms have three components : credit period, cash discount and cash discount period. Credit period is the duration of time 71

for which trade credit is extended whereas cash discount is the amount by which the over the due amount will be reduced thus benefiting the customer. The credit terms like the credit standard affect the profitability as well as the cost of the firm therefore a firm should determine the credit terms on the basis of cost-benefit trade-off. COLLECTION POLICIES The collection policies refer to the procedures followed to collect account receivable when after expiry of the credit period they become due. This policy covers two aspects : first is the degree of effort to collect the over due and second is the type of collection efforts. Escort Limited has a zero debt credit policy. However it is giving the following facilities to its dealers to promote the sales, as liberal credit policy has a direct impact on sales. CHANNEL FINANCE FACILITIES The company arranges these facilities with various bankers for the company dealers to support their cash needs. The goods are sold on credit against hundis. Hundis can be drawn for 50 or 75 or 90 days subject to qualifying criteria of bank. CREDIT FACILITIES 72

Escort provides thirty days interest free credit to the dealers. For this in respect of all hundis the company bears 30 days interest and the remaining cost of interest, delayed payment charges are borne by the dealers. PENALTY ON BOUNCING OF HUNDIES / CHEQUES Bouncing of hundis/ cheques drawn in favor of the company is viewed very strongly and usually following actions are taken.  Tractor supplies are suspended and restored only after all dues are cleared.  All charges debited by the bank such as collection charges, penal interest are debited to the dealer.  The bank extending channel financing policy have clearly stated that if a dealer has two or more bouncing he will be black listed and his limit will be withdrawn with immediate effect. Company also makes sales to such dealers only against letter of credit or demand draft. CASH DISCOUNT ON EARLY PAYMENT Cash discount of 1% is payable on tractors dispatched against funds available in the form of letter of credit or demand draft. Interest is charged/ paid at 12% per annum on outstanding/ credit balance early payment incentive. PAYABLE MANAGEMENT 73

Creditors are a vital part of effective cash management and should be managed carefully to enhance the cash position. Purchasing initiates cash outflows and an over-zealous purchasing function can create liquidity problems. A better strategy is to shrink the vendor base radically, then use one’s clout to negotiable longer terms with the vendors. Vendor rationalization is a process that can pay off in a big way. Apart from the question that who should authorize purchasing in the company – should it be tightly managed or spea among a number of (junior) people? The following comes under good payable management.  Purchase quantities should be geared to demand forecasts.  Order quantities should be used which takes account of stock holding and purchasing costs.  The cost to the company of carrying stock should be clearly defined.  A Company should have alternative sources of supply. It should get quotes from Major suppliers and shop around for the best discounts, credit terms and reduce dependence on a single supplier. 74

RECOMMENDATIONS 75

LOANS AND ADVANCES Special efforts should be made to analyze loans & advances, which are between 35% to 56% of current assets. This can be classified between production / operation relation related and non-production / operation related. No production related cases might be financed from other sources like debenture etc. and treated separately. INVENTORY Inventory should be reviewed constantly to identify show / dead / obsolete item and then disposed . Optimum level should be revised periodically, keeping in view, distance of suppliers, production lead time of supplier, transport problem if any and reliability of suppliers. This will help to avoid obsolesce and dead inventory. DEBTORS A study may be conducted if required by experts to pinpoint reason behind Escorts high correction period of 95 days in 2007-08 against 50 days of Mahindra & Mahindra. It is due to quality of products, quality of customer, the segment of customers marketing effort, distribution pattern or other reasons. CREDITORS 76

Though high payout days may be appartenly beneficial for the company. It has it very heavy long term cost like high interest cost, bad credit ratings and shyness of good quality / standard suppliers. RATIOS The company should try to improve its current situation. The ratios, which are taken in this research to evaluate the company’s position, are Current ratio, Quick ratio and Activity ratio. These ratios show the actual position of the company. The Quick ratio is declining since 2001-02 till now. There is a drastic declining in the working capital turnover ratio. This ratio goes to –ve position in current year compared to previous. The Debts collection period is 359 days for Exporters. This shows the poor collection policy. The current ratio is 1.12 in 2006-07, which is not upto the ideal ratio. This shows that the current assets are equal to the current liabilities. Not satisfactory. OTHERS –  More attention must be given to market forecasts can be made and the surplus of inventory is reduced to minimum  Company should not follow the competitors only. New products should be produced for the farmers having low income and small holdings.  Proper market survey should be carried out. The company should explore the export market to study the present and prospective demand. 77

 Proper inventory plans should be made in order to reduce the carrying cost.  New market strategies should be devised from time to time. This is because, even if the tractor is of good quality, the competitors may produce the same product with additional features and at lower prices.  Marketing network should be enhanced. Company should also produce more tractors of higher H.P. But new developments should be made continuously in order to survive in this competitive world. 78

LIMITATIONS 79

Although every effort has been in to collect the relevant information through the sources available, still some relevant information could not be gathered. Busy Schedule of Concerned Executives: The concerned executives were having very busy schedule because of which they were reluctant to give appointment. Time: The time duration could not provide ample opportunity to study every detail of working capital management of the company. Unawareness: Executives were unaware of many terms related to working capital study while asking to them. Confidential Information: As the company on account of confidential report has not disclosed some figures. Moreover, in some cases separate accounts of division are not separately maintained thereby, leading to restrictions in study. 80

BIBLIOGRAPHY BOOKS Financial Management- S.K Gupta Management Accountancy-D k Gole Cost and Management Accountancy, S.N.Maheshwari Financial Management And Policy, James C.Van Horne WORLD WIDE WEB www.escortsagri.com www.economictimes.com www.planware.com www.icraindia.com Other than Web M.I.S of the company Annual Reports 81

ANNEXURES 82

PROFIT AND LOSS ACCOUNT 1SToct 2007- 30th September 2008 1st oct 2006 – 30th sept 2007 Operating income 2,012.00 2,092.04 Material consumed 1,470.66 1,540.01 Manufacturing expenses 47.68 50.79 Personnel expenses 202.63 204.02 Selling expenses 114.57 118.63 Adminstrative expenses 69.12 57.45 Expenses capitalised - - Cost of sales 1,904.66 1,970.90 Operating profit 107.34 121.14 Other recurring income 0.04 20.85 Adjusted PBDIT 107.38 141.99 Financial expenses 55.93 89.78 Depreciation 42.87 44.97 Other write offs - 3.32 Adjusted PBT 8.58 3.92 Tax charges 47.13 -10.89 Adjusted PAT -38.55 14.81 Non recurring items 17.56 -21.25 Other non cash adjustments 32.86 - Reported net profit 11.87 -6.44 Earnigs before appropriation -133.59 -145.46 Equity dividend - - Preference dividend - - Dividend tax - - Retained earnings -133.59 -145.46 BALANCE SHEET AS ON….. 83

1ST OCT 2007- 30th SEPT 2008 1st OCT 2006 – 30TH SEPT 2007 Equity share capital 90.71 83.69 Share application money - - Preference share capital - - Reserves & surplus 645.49 563.38 Secured loans 422.63 414.04 Unsecured loans 14.44 31.10 Total 1,173.27 1,092.21 Gross block 1,415.93 1,436.96 Less : revaluation reserve 466.46 471.90 Less : accumulated depreciation 593.41 583.24 Net block 356.06 381.82 Capital work-in-progress 14.43 13.40 Investments 425.79 425.13 Current assets, loans & advances 1,131.98 1,325.61 Less : current liabilities & provisions 776.14 1,069.68 Total net current assets 355.84 255.93 Miscellaneous expenses not written 11.00 15.93 Total 1,163.12 1,092.21 Book value of unquoted investments 494.53 493.87 Market value of quoted investments 1.98 3.31 Contingent liabilities 168.40 318.74 Number of equity sharesoutstanding 907.09 836.94 (Lacs) CASH FLOW STATEMENT 84

PARTICULAR MARCH MARCH (2008) (2007) CASH FLOW FROM OPERATING ACTIVITIES N.P BEFORE TAX 26.14 -17.33 Adjustment for: provision for doubtful debts , obsolescence inventory & 16.36 1.89 advances Gain on sale of long term investment -1.22 Gain on sale of asset -4.8 -0.13 Depreciation 42.87 44..97 Assets w/off 11.64 8.08 Interest expense 62.2 72.22 Dividend income 0.04 -0.02 Interest income 12.93 -20.82 Operating profit before change in w.capital 141.52 87.64 Adjustment for: Trade & receivable -65.36 -168.61 Money in escrow account 20.09 Inventory -43.68 13.79 Trade payable 58.02 67.05 Misc.expenditure -3.21 -7.5 Op.profit after change in w.capital -34.14 -95.27 Cash generated from operating activities 107.38 -7.63 Less-Direct taxes/refunds -6.25 -17.85 NET CASH FLOW FROM OPERATING ACTIVITIES 101.13 -25.48 CASH FLOW FROM INVESTING ACTIVITIES Purchase of fixed assets -7.5 0.86 Proceeds from sale of fixed. Assets 14.26 -30.95 Loss on sale of investment -30.64 Movement in loan & advances -3.9 -16.27 Sale of investment -0.66 32.33 Short term deposits with schedule banks 8.58 -2.31 Interest received 3.21 20.7 Dividend received -0.04 0.02 NET CASH FLOW FROM INVESTING ACTIVITIES 16.69 4.38 CASH FLOW FROM FINANCING ACTIVITIES Proceeds from share capital & securities premium 40.32 114.44 Proceeds/repayment from long- term borrowings 234.09 80.6 Less:repayment of long term borrowing -41.68 -0.54 Proceed/repayment from short-term borrowing -46.83 -146.82 Interest paid -66.27 -77.4 85

NET CASH USED IN FINANCING ACTIVITIES -114.46 -23.72 Net increase / decrease in cash & cash equivalents (30.03 -44.82 OPENING CASH BALANCE 60.83 105.65 CLOSING CASH BALANCE 30.8 60.83 86

Summer training project report on cash management @ escorts ltd.

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Summer training project report on cash management @ escorts ltd. Document Transcript