A                     Project Report                           On       A STUDY OF FUND ANALYSIS IN AMTEK                C...
Tilak Maharashtra University, PuneDeemed Under Section 3 of UGC Act 1956 Vide Notification No. F.9-19/85-U3               ...
Certificate of Internal GuideThis is to certify that the project titled ANALYSIS OF FUND ANALYSISIN AMTEK CRANKSHAFT INDIA...
TO WHOMSOVER IT MAY CONCERNThis is to certify that Mr./ Ms_________________________ MBA Student of TilakMaharashtra Univer...
ACKNOWLDGEMENT      I express my sincere thanks to the Management of ‘AMTEK CRANKSHAFTS      INDIA LTD.’ Unit for giving m...
TABLE OF CONTENTSTopics:                                             Page No:CHAPTER 1: Rationale For The Study           ...
CHAPTER 1RATIONALE OF THE STUDY          7
RATIONALE OF THE STUDYGrowth of a successful venture depends on efficient overall management of a business unit. Itis coll...
Any financial control or planning can be effective only with the active participation of theentire managerial group of org...
OBJECTIVES OF THE STUDYThe main objective of the project is to study the accounts of the Amtek Crankshaft (I) Pvt.Ltd. and...
SCOPE OF THE STUDYTill recently, working capital management was neglected in India by both the private andpublic sector co...
12
CHAPTER 3COMPANY PROFILE       13
COMPANY PROFILEHISTORY OF THE COMPANYAmtek is a leading multi-national manufacturer of automotive components and assemblie...
AMTEK TODAY   •   USD 1.24 billion (as of June 2008) global automotive components manufacturer   •   35 manufacturing faci...
•   Commitment to Excellence   •   Openness, Fairness and Trust   •   Team Spirit                             NICHE PRODUC...
worth, Coventry & Bourne (in U.K) & Hennef (Germany), Stanberry, Bay City & Kellogg (inUSA).Assembly: -The Assembling acti...
The fundamental objective of implementing the six-sigma methodology at Amtek isthe implementation of a measurement – based...
Midwest Mfg.    Ring gears /Kellogg (IN)     (Smith Jones)   Flywheel assembly                 Midwest Mfg.    Ring gears ...
CHAPTER 4LITERATURE REVIEW       20
MANAGEMENT OF WORKING CAPITALWorking capital management is an important aspect of financial management. In business,money ...
Definitions favoring this concept are:   1. “Working capital means total of current assets.”                              ...
NEED FOR WORKING CAPITALAlong with the fixed capital almost every business requiring working capital though theextent of w...
CASH   Debtors and bills   receivables                                                              Raw Materials   Finish...
(B) Temporary or variable working capital  Any amount over and above the permanent level of working capital is called temp...
TEMPORARY CURRENT                                                          ASSETS                                         ...
TEMPORARY CURRENT                       ASSETS                                                   SHORT TERM               ...
TIMEFACTORS DETERMINING WORKING CAPITAL EQUIREMENTNATURE OF BUSINESSWorking capital requirements of a firm are basically r...
The manufacturing cycle refers to the time involved in manufacturing of goods. It starts withthe purchase and use of raw m...
DEMAND CONDITIONSMost of the firm experience seasonal and cyclical fluctuations in the demand for theirproducts and servic...
price level. The price rise does not uniformly affect all the commodities. Thus the implication    of price level changes ...
 To level out production cycles by producing to inventory. To carry a reserve in order to prevent stock outs or lost sal...
the profits, which are the goal of business enterprises. Provided however, that we replaceprofits by some measurable objec...
FUNCTIONS OF INVENTORY MANAGEMENT•   Regularizing demand and supply.•   Economizing purchases or production by lot buying ...
Application of ABC AnalysisThis approach helps the material manager to exercise selective control and focus his attentiono...
Sr. No. Type of                    No. of Items       Value        Inventory                                     (in crore...
1. Basis for setting a minimum level of material 2. Lead time 3. Lead time = Difference between placing of order and recei...
1. VIP treatment may be accorded to ‘A’ items in all activities such as processing of purchase   orders, receiving, inspec...
SAFETY STOCK ‘A’ class item stock should be kept less. ‘C’ contrary to ‘A’ class items. ‘B’ class items a moderate policy ...
ECONOMIC ORDER QUANTITY ANALYSISInventory control fundamentally deals with the two basic issues:1.   When to order2.   How...
The relationship of ordering cost and carrying cost as under:        Number and size of order                      Orderin...
inventories, it does not produce foods for sale. Therefore, the aim of cash management is tomaintain adequate control over...
alternative shout-term investment opportunities such as bank deposits, marketable       securities, or inter-corporate len...
high-liquid and low-risk marketable securities. Precautionary balance should, thus, be heldmore in marketable securities a...
(2) A minimum average balance, say, Rs. 5 lakhs over the month.The first alternative is more restrictive as the average am...
(4) A trade discount can be availed of if payment is made within the due date. For example,let us suppose that a firm is e...
SHORT COSTSAnother general factor to be considered in determining cash needs is the cost associated witha shortfall in the...
PROCUREMENT AND MANAGEMENTThese are the costs associated with establishing and operating cash management staff andactiviti...
CASH BUDGET: A CASH MANAGEMENT TOOL of Amtek Crankshaft     (I)Pvt. Ltd.     It has been shown in the preceding sections t...
INFLOWS/CASHRECEIPS                          OUTFLOWS/DISBURSEMENS   •   Cash sales                             •     Acco...
The time horizon of a cash budget may differ from firm to firm. A firm whose business is    affected by seasonal variation...
CHAPTER 5RESEARCH METHODOLOGY        52
RESEARCH METHODOLOGY   Research methodology is a way to systematically solve the research problem. In it step by   step me...
4. Data Collected by Industry Associations: For example, data available with         Publications of Amtek Crankshaft (I) ...
CHAPTER 6DATA ANALYSIS & INTERPRETATION              55
RATIO ANALYSISRatio analysis is a mean of better understanding of financial strength and weakness of anycompany. And hence...
Current ratio:                                                  (ALL AMOUNT IN LAKHS)     YEAR                          20...
Current Ratio                     7                     6     Current ratio                     5                     4   ...
Quick ratio of AMTEK CRANKSHAFT                                                             (ALL AMOUNT IN LAKHS)       YE...
Quick Ratio                  6                  5    Quick ratio                  4                  3                    ...
Absolute liquid assets = cash & bank balance + loans and advances                                                         ...
Absolute Liquidity Ratio                                0.7     Absolute liquidity ratio                                0....
2INVENTORY TURNOVER RATIO:                                                           (ALL AMOUNT IN LAKHS)       YEAR     ...
Inventory turnover ratio                  8   Inventory turnover                  7                  6                  5 ...
DEBTOR TURNOVER RATIO                                                       (ALL AMOUNT IN LAKHS)      YEAR               ...
Debtor turnover ratio                            3.5    debtor turnover ratio                              3              ...
Debtor collection period(in no. of days)                               250    Debtor collection period                    ...
WORKING CAPITAL TURNOVER RATIO                                                          (ALL AMOUNT IN LAKHS)         YEAR...
Working capital ratio           Working capital ratio                               1.4                              1.35 ...
FIXED ASSETS TURNOVER RATIOFixed assets are used in the business for producing goods to be sold. The effective utilization...
Fixed assets turnover ratio                          2.5     Fixed assets ratio                           2               ...
This ratio establishes the relationship between the net profit and net sales.Net profit/ loss ratio = Net profit x 100    ...
Net profit/loss ratio (in %)                           37   Net profit/loss ratio                           36            ...
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  1. 1. A Project Report On A STUDY OF FUND ANALYSIS IN AMTEK CRANKSHAFT (I) LTD. Master of Business Administration (Finance)Submitted in partial fulfillment of the requirements for award of Master of Business Administration, Tilak Maharashtra University, Pune.SUBMITTED BY: GUIDED BY PROF:HITESH MR. C.S. YADAVPRN: (SR. LECTURAR) ANSAL INSTITUTE OF TECHNOLOGY GURGAON
  2. 2. Tilak Maharashtra University, PuneDeemed Under Section 3 of UGC Act 1956 Vide Notification No. F.9-19/85-U3 dated 24th April 1987 By the Government of India. Vidhyapeeth Bhavan, Gultekdi, Pune-411037. CERTIFICATE This is to Certify that the project titled FUND ANALYSIS IN AMTEK CRANKSHAFT INDIA LIMITED is a bonafide work carried our by Mr./ Ms. HITESH a student of Master of Business Administration Semester 3 rd Specialization FINANCE. PRN.07209007779 under Tilak Maharashtra University, in the year 2010. Head of the Department Examiner Examiner Internal External Date: Place: University Seal 2
  3. 3. Certificate of Internal GuideThis is to certify that the project titled ANALYSIS OF FUND ANALYSISIN AMTEK CRANKSHAFT INDIA LIMITED is a bonafide workcarried out by Hitesh a candidate for the award of Master of BusinessAdministration of Tilak Maharashtra University, Pune under myguidance and direction.Date: Mr. C S YADAV (Sr. Lecturer)Place: ANSAL INSTITUTE OF TECHNOLOGY GURGAON 3
  4. 4. TO WHOMSOVER IT MAY CONCERNThis is to certify that Mr./ Ms_________________________ MBA Student of TilakMaharashtra University, Pune has successfully collected the data for the project report foraward of Master Degree of Business Administration.He/She has done the project on “___________________________________________”.Company Name Company SealDesignationSignature 4
  5. 5. ACKNOWLDGEMENT I express my sincere thanks to the Management of ‘AMTEK CRANKSHAFTS INDIA LTD.’ Unit for giving me an opportunity to gain exposure on matter related to Project under the esteem guidance of Mr. OMPARKASH. I hereby take this opportunity to put on records my sincere thanks to Mr. DEVDUTT SHARMA under the light of whose able guidance I could complete this project in an effective and successful manner. I am also thankful to the rest of the staff of the ACIL for their valuable suggestion and cooperation to achieve the task.With sincere thanks HITESH AIT- Gurgaon 5
  6. 6. TABLE OF CONTENTSTopics: Page No:CHAPTER 1: Rationale For The Study 07CHAPTER 2: Objective of the Study 09  Objectives of the Project  Scope of the ProjectCHAPTER 3: Profile of the Company 13CHAPTER 4: Review Literature 20CHAPTER 5: Research Methodology 51  Research Design  Data Collection Methods/Source  Sampling PlanCHAPTER 6: Data Analysis & Interpretations 54CHAPTER 7: Findings and Conclusions 73CHAPTER 8: Limitation of the Study 76Appendices 78Bibliography 81 6
  7. 7. CHAPTER 1RATIONALE OF THE STUDY 7
  8. 8. RATIONALE OF THE STUDYGrowth of a successful venture depends on efficient overall management of a business unit. Itis collective effort of technical marketing and finance personnel.Working capital management is an integral part of finance management. Working capital hasalways been a vital ingredient with growth of the company. Till recently, working capitalmanagement was neglected in India by both the private and public sector companies. Thiswas to some extent a reflection of comparative ease in availability of funds from capitalmarket or commercial and development bands in case of public sector; funds were madeavailable to the government. Further on account of sheltered condition, a view developmentin recent years, situation has completely changed and industrial planning and projectimplementation. With commercial and industrial development in recent years, situation hascompletely changed and need for working capital management is hard felt. No longer is itpossible for even a very big and well-established company to get funds from financialinstitutions, the dependence on which is fast growing without most detailed scrutiny of itsrequests.Apart from that the financial institutions like to exercise control over the functioning of theassisted companies. In a developing country like India where sources are limited, they shouldbe put to best possible use. Exceptional care is needed for managing unit so that organizationcan withstand ups and downs and there should be reasonably adequate resources available forits day-to-day operations. Thus the need of working capital management arises.Working capital, in general practice, refers to the excess of current assets over currentliabilities. Management of working capital therefore is concerned with the problems that arisein attempting to manage the current assets, the current liabilities and the interrelationship thatexist between them. In other words it refers to all aspects of administration of both currentassets and current liabilities. 8
  9. 9. Any financial control or planning can be effective only with the active participation of theentire managerial group of organization. If a new project has to come up the civil mechanicalproject engineers have to do their job well. All are equal partner in achieving goal framed bythe management. CHAPTER 2 OBJECTIVE OF THE STUDY 9
  10. 10. OBJECTIVES OF THE STUDYThe main objective of the project is to study the accounts of the Amtek Crankshaft (I) Pvt.Ltd. and to analyze the FUNDS of the Amtek Crankshaft(I) Pvt. Ltd.. The study includes thestudy of all fixed, running costs etc. and to finally calculate the amount required by thecompany to reach its goal as soon as possible. 10
  11. 11. SCOPE OF THE STUDYTill recently, working capital management was neglected in India by both the private andpublic sector companies. This was to some extent reflection of comparative ease inavailability of funds from capital market or commercial and development bands in case ofpublic sector; funds were made available to the government.Working capital management is an important aspect of financial management. In business,money is required for fixed and working capital. Fixed assets include land and building, plantand machinery, furniture and fittings etc. Fixed assets are required to be retained in businessfor along period and yields return over the life of such assets. Working capital, on the otherhand is required for the efficient and effective use of fixed assets. The main objective ofworking capital management is to determine the optimum amount of working capitalrequired.So we can say that working capital management is the lifeblood of every business. Withoutworking capital management a business cant do its day-to-day operation effectively. This isbecause I choose this project for abstracting conclusion and suggestion. I tried my best to dohard work on that topic and come on the conclusion that without working capital a businesscant do its day-to-day operation effectively. That is why today AMTEK CRANKSHAFT (I)PVT. LTD. is earning good amount of profit because it’s working capital management isgood. So working capital management is the lifeblood of a business. Without it a businesscant do their day-to-day operation efficiently. 11
  12. 12. 12
  13. 13. CHAPTER 3COMPANY PROFILE 13
  14. 14. COMPANY PROFILEHISTORY OF THE COMPANYAmtek is a leading multi-national manufacturer of automotive components and assemblieswith production facilities located strategically across Asia, Europe and USA. The Group’sextensive manufacturing capabilities encompass Iron and Aluminum Casting, Forging,Machining & Assemblies. The Amtek Group was established in the year 1985 with the incorporation of theFlagship Company, Amtek Auto Limited. Over the course of next two decades, the groupgrew rapidly to emerge as a global frontrunner in the automotive industry through a numberof strategic acquisitions across India, Europe and the USA, production segmentrationalization measures. The current turnover of the group exceeds $ 750 million. Amtek Auto Ltd. has established itself amongst the top players in the Indian autoancillary industry and has also grown to become one of the largest manufacturers ofForgings, Castings, Machined Components and Assemblies, which includes PistonConnecting Rod modules and Gear Shifter Forks and Yokes, Flywheel Ring Gears in thecountry. Amtek also holds the distinction of being among the largest manufacturer ofFlywheel Ring Gear Assemblies and Turbocharger Housings in the World. The uptrend inoutsourcing by global OEM majors due to rising cost pressures, the booming domestic Autoindustry, particularly the high – growth diesel engine segment, and Amtek’s aggressiveacquisition and expansion strategy have propelled the Company into a higher growthtrajectory. 14
  15. 15. AMTEK TODAY • USD 1.24 billion (as of June 2008) global automotive components manufacturer • 35 manufacturing facilities across North America, Europe & Asia • Global auto components supplier with proven capabilities in • Forging • Grey & Ductile Iron Casting • Aluminium- Gravity & High Pressure Aluminium Die Casting • Machining and Sub-Assembly • Extensive product portfolio with a range of highly engineered components • Preferred OEM supplier for: • Passenger cars • 2 Wheelers & Motorcycles • Heavy & Light Commercial Vehicles • Agricultural Equipment • Heavy Earth Moving Equipment • Railways • Defense/ Aerospace • Amtek Auto Limited won the best investor of the year award 2008 - UK Trade & InvestmentVISIONWe aspire to be the most preferred and reliable provider of products & services globally, withan unflinching commitment towards technological excellenceCORE VALUE • Customer Focus 15
  16. 16. • Commitment to Excellence • Openness, Fairness and Trust • Team Spirit NICHE PRODUCTSRing gearsCylinder headsFlex platesCylinder blocksCrankshaftConnecting rodsTurbocharging HousingFly wheel- Ring gear & assembliesHub forging and machiningBusiness DivisionsForgings: -Forging is the process of forming hot / cold metal. The Forging divisions of the group areBaddi (H.P). Connecting Rods, Crankshafts, Steering Knuckles, Gears shifter Forks, SectorGears & Shafts, Stub Axles, Front Impact Beams etc are some of the products in the AmtekForging suite.Castings: -Casting is the process of forming from molten metal. The Group has facilities for IronCastings at Bhiwadi (Rajasthan), Baddi (H.P), Coimbatore (Tamil Nadu) & Tipton (UK).Besides Iron Castings, Amtek has facilities for Aluminum Castings at Bourne (U.K) and is inthe process of commissioning another Aluminum Casting facility at Ranjangaon (Mah.).Machining:-Machining is the term used for a set of metal – cutting processes which are performed onForgings and / or Castings to give them the exact shape and size for assembling in thevehicle. The Group has Machining facilities within India at Gurgaon (Haryana), Sanaswadi(Mah), Manesar & Dharuhera (both in Haryana), Baddi (H.P), and across the World at Letch 16
  17. 17. worth, Coventry & Bourne (in U.K) & Hennef (Germany), Stanberry, Bay City & Kellogg (inUSA).Assembly: -The Assembling activities are carried at Letch worth, Coventry, Gurgaon, Dharuhera, &Hennef (Germany). The products include Bridge Fork Assemblies, Strut Assemblies, WheelCorner Modules, Axle Assemblies, Turbochargers, Piston Cylinder Modules, SpindleAssemblies, and Fuel Delivery Systems.KEY CUSTOMERSAmtek supplies products to a diverse customer base comprising some of the largestautomotive OEMs, such as Maruti, Ford, Renault, Tata Motors, John Deere, Land Rover,Bajaj Auto, HMSI, Dana Italia, International Tractors Ltd., Cummins India, General Motors,Hyundai, Eicher, CNH Global, BMW, Jaguar, Renault, Volks Wagon, Suzuki Power Train,JCB, GE Transportation, Hero Honda, Escorts, TVS, ILGIN, Hyundai, AVTEC (HindustanMotors), Polaris, Magna, Diesel Locomotive Works - Northern Railways, Borg – Warner,Garret, Holset, Yamaha, TAFE etc.QUALITY: -The company has TS16949: 2002 and ISO 14001 accreditations for majority of itsmanufacturing facilities. Besides this, the company is in the process of implementing Leanand Six Sigma worldwide. 17
  18. 18. The fundamental objective of implementing the six-sigma methodology at Amtek isthe implementation of a measurement – based strategy that focuses on processimprovement & variation reduction through the application of six sigma projects. MANUFACTURING LOCATIONSLocation Company TypeIndiaSohna Amtek Auto MachiningGurgaon Amtek Auto MachiningDharuhera Unit 1 Amtek Auto Machining Machining/Forging (UnderDharuhera Unit 2 Amtek Auto Implementation) Machining (UnderSanaswadi Amtek Auto Implementation)Nalagarh Amtek Auto MachiningManesar Amtek Auto Machining Aluminium Casting (UnderRanjangaon Amtek Auto implementation) Amtek SiccardiManesar India MachiningGurgaon Amtek Auto ForgingBhopal Amtek Auto Forging AhmednagarChakan Forgings Forging / Machining AhmednagarKuruli Forgings Forging AhmednagarAhmednagar Forgings Forging / Machining Ring gears /Gurgaon Benda Amtek Flywheel assemblyEuropeLetchworth (UK) GWK Amtek MachiningCoventry GWK Amtek MachiningHennef (Germany) - I Zelter Machining- II Zelter Machining Amtek Investments HPDC AluminiumWitham (UK) UK Limited CastingUSA Amtek Gears Ring gears /Bay City (MI) (Amtek Inv US) Flywheel assembly 18
  19. 19. Midwest Mfg. Ring gears /Kellogg (IN) (Smith Jones) Flywheel assembly Midwest Mfg. Ring gears /Stanberry (MO) (Smith Jones) FlywheelAMTEK MAJOR CUSTOMERS PROFILE 19
  20. 20. CHAPTER 4LITERATURE REVIEW 20
  21. 21. MANAGEMENT OF WORKING CAPITALWorking capital management is an important aspect of financial management. In business,money is required for fixed and working capital. Fixed assets include building, plant andmachinery, furniture and fitting etc. Fixed assets are required to be retained in the consumerfor a long period and yield returns over the life of such assets. Working capital, on the otherhand is required for the efficient and effective use of fixed assets. The main objective ofworking capital management is to determine the optimum amount of working capitalrequired.The various topics discussed in management of working capital are: I. Definition of working capital II. Types of working capital III. Need for working capital IV. Financing of working capital V. Factors determining working capitalDEFINITION OF WORKING CAPITALThere are two concept of working capital: 1. Gross working capital 2. Net working capital(I) Gross Working Capital Concept: According to this concept working capital means gross working capital, which is the total of all the current assets of the business.Gross Working Capital = Total Current Assets 21
  22. 22. Definitions favoring this concept are: 1. “Working capital means total of current assets.” ---Mead, Mallott and Field 2. “Any acquisitions of funds which increase the current assets increase working capital, for they are one and the same.” ---Bonneville and Dewey(II) Net Working Capital concept: According to this concept, working capital means net working capital, which is the excess of current assets over current liabilities. Net working capital = current assets - current liabilitiesDefinitions favoring this concept are: 1. “It has ordinarily been defined as the excess of current assets over current liabilities.” 2. “The most common definition of net working capital is the differences of firm’s current assets and current liabilities.”As discussed net working capital is the excess of current assets over current liabilities. Ifcurrent assets are equal to current liabilities, net working capital will be zero and if currentliabilities are more than current assets, net working capital will be negative.Current assets mean those assets which are converted into cash within a short period of timenot exceeding one year, e.g. cash, bank balance, debtors, bills, receivable, stock, accruedincome etc.Current liabilities means those liabilities which have to be paid within a short period of timein no case exceeding one year, e.g. creditors, bills payable, outstanding expenses, short termloans etc. 22
  23. 23. NEED FOR WORKING CAPITALAlong with the fixed capital almost every business requiring working capital though theextent of working capital requirement differs in different businesses. Working capital isneeded for purchasing raw materials. The raw material is then converted into finished goodsby incurring some additional costs on it. Now goods are sold. Sales do not convert into cashinstantly because there is invariably some credit sales. Thus, there exists a time lag betweensales of goods and receipt of cash. During this period, expenses are to be incurred forcontinuing the business operations. For this purpose working capital is needed which shall beinvolved from the purchase of raw materials to the realization of cash. The time period,which is required to convert raw materials to the realization of cash? The time period, whichis required to convert raw materials into finished goods and then into cash is known asoperating cycle or cash cycle. The time need for working capital can also be explained withthe help of operating cycle. Operating cycle of a manufacturing concern involves five phases: • Conversion of cash into raw material • Conversion of raw material into work in progress • Conversion of work in progress into finished goods • Conversion of finished goods into debtors by credit sales • Conversion of finished goods into cash by realizing cash from them.Operating CycleThus the operating cycle starts from cash, finishes at cash and then again restarts from cash.Net for working capitals depends upon period of operating cycle. Greater the period morewill be the need for working capital. Period of operating cycle in a manufacturing concern isgreater than period of operating cycle in a trading concern because in training units cash isdirectly converted into finished goods.Because of the time involved in an operating cycle there is a need of working capital in theform of current assets. Firms have to keep adequate stock of raw materials to avoid risk ofnon-availability of raw materials. Similarly, concerns must have adequate stock of finishedgoods to meet the demand in market on continuous basis and to avoid being out of stock..In addition to all these, concerns have to necessarily keep cash to pay the manufacturingexpenses etc. and to meet the contingencies. 23
  24. 24. CASH Debtors and bills receivables Raw Materials Finished goods Work- in - ProgressPermanent and temporary working capitalWorking capital in a business is needed because of operating cycle. But the need for workingcapital does not come to an end after the cycle is completed. Since the operating cycle is acontinuous process there remains a need for continuous supply of working capital. However,the amount of working capita required is not constant throughout the year but keepsfluctuating. On the basis of this concept, working capital is classified into two types.(A) Permanent working capitalThe need for working capital or current assets fluctuates from time to time. However, to carryon day-to-day operations of the business without any obstacles, a certain minimum level ofraw materials, work in progress, finished goods and cash must be maintained on a continuousbasis. The amount needed to regular working capital. The amount involved as permanentworking capital has to be from long term sources of finance e.g., debentures long-term loansetc. 24
  25. 25. (B) Temporary or variable working capital Any amount over and above the permanent level of working capital is called temporary, fluctuation or variable working capital. Due to seasonal changes, level of business activities working activities is higher than normal during some months of year and therefore additional working capital will be requiring along with the permanent working capital. It is so because during peak season, demand rise and more due to excessive sales. Additional working capital thus needed is known as temporary capital because once the season is over; the additional demand will be no more. Need for temporary working capital should be met from short term sources of finance e.g., short term loans etc. that can be refunded when it is not required. FINANCING OF WORKING CAPITAL After determining the requirement of working capital, the next important task before the financial manager is to select the appropriate sources of working capital. There are mainly two sources include equity shares, preference shares, debentures, retained earnings, depreciation and long term financial institutions. A short-term source includes short-term loans, trade creditors, commercial paper, factoring and public deposits etc. there are basically three approaches to determine an appropriate financing mix of various sources. These are as follows:1. MATCHING APPROACH OR HEDGING APPROACH According to this approach, a firm should adopt a financial plan, which involves the matching of expected life of the sources of funds raised to financial assets. Matching approach suggests that long-term funds should be used to finance the permanent portion of current assets requirements in a manner similar to the financing of fixed assets. The temporary requirements on the other hand should be financed with short-term funds. The firm fixed assets are permanent. Current assets are financed with long term funds and as the level of these assets increases, the long term financing level also increase. 25
  26. 26. TEMPORARY CURRENT ASSETS SHORT TERMAMOUNT FINANCING PERMANENT LONG TERM CURRENT FINANCING FIXED ASSETS TIME2. CONSERVATIVE APPROACH Conservative approach suggests that the firm should depend more on long-term funds for its needs. Under a conservative plan its permanent current assets and a past of temporary current assets with long-term sources of finance. Thus, during the periods when the firm has no temporary current assets, it preserves liquidity by investing surplus funds into marketable securities. Since conservative plan relies heavily on long term financing. 26
  27. 27. TEMPORARY CURRENT ASSETS SHORT TERM FINANCINGUNT LONG TERM PERMANENT CURRENT ASSETS FINANCING FIXED ASSETS TIME 3. AGGRESSIVE APPROACH In contrast to conservative approach, however the firm may be aggressive in financing its assets. A firm is said to follow an aggressive policy, when it uses more short-term funds. The firm finances a part of its permanent current assets with short term financing. This makes the firm more risky. The diagram of aggressive financing approach is given below. TEMPORARY CURRENT ASSETS SHORT TERM FINANCING AMOUNT PERMANENT CURRENT ASSETS LONG TERM FINANCING FIXED ASSETS 27
  28. 28. TIMEFACTORS DETERMINING WORKING CAPITAL EQUIREMENTNATURE OF BUSINESSWorking capital requirements of a firm are basically relayed to nature of business. For,instance public utilities have a very limited need for working capital and have to largelyinvent in fixed assets. Their working capital requirements are minimal because they havecash sales only and supply services and not products. On the other extreme, trading andfinancial firms have a very less investment infixed assets and a large investment in workingcapital. This so they have to maintain a sufficient amount of cash, inventories and book debts.Working capital requirements of a manufacturing firm. However these would vary fromindustry falls between these two extremes, that is, public utility and firms. However thesewould vary from industry to industry depending on their asset structure.SIZE OF BUSINESSThe size of business also has an important influence on its working capital requirements. Sizemeasure the scale of operations obliviously, larger the size greater would be the need ofworking capital. On the other hand, smaller firms would require lesser amount of workingcapital.LENGTH OF MANUFACTURING CYCLE 28
  29. 29. The manufacturing cycle refers to the time involved in manufacturing of goods. It starts withthe purchase and use of raw materials and complete with the production of the finishedgoods. Thus, the larger the time span of the manufacturing cycle, larger will be the workingcapital requirements of the firms and vice-versa.BUSINESS CYCLEMost firms experience cyclical fluctuations in demand for their products and services. Thesefluctuations affect the working capital requirements, particularly the temporary workingcapital requirement. During the upswing in the business activity, the sales will increase.Correspondingly, the firm’s investment in inventories and book debts will also increase.Additional funds may be required to invest in fixed assets and the resultant increase inworking capital to meet the increased demand. On the other hand, during downswing, salewill fall and cons equations influence the size of working capital mainly through the effect oninventories.PRODUCTION POLICYIn the case of seasonal demand for certain products, the production may either be confinedonly to the periods when goods are purchased or production may be carried on steadilythroughout the year. During the slack season it will have to maintain its labor force physicalfacilities without adequate production and sale. During peak period the firm will have tooperate at its full capacity to meet the demand, which be will very inconvenient andexpensive. On the other hand the steadily production policy will result in accumulation ofinventories during the off seasons periods requiring an increasing amount of working capitaland the firm will be exposed to greater inventory costs and risk.CREDIT POLICY OF THE FIRMThe credit policy of the firm has bearing on the magnitude of working capital by determiningthe level of book debts. Larger credit sales will result in higher book debts and more workingcapital. Credit terms extended by an enterprise is affecting by the prevailing trade practices aswell as changing economic conditions. Under the situation of acute competition, there wouldbe a pressure to grant generous credit terms. The firm should evaluate the credit standing ofnew customers and periodic review of new customers. Similarly, collection of debts shouldmonitor properly for timely payment by them. This will avoid problem of having excessworking capital. 29
  30. 30. DEMAND CONDITIONSMost of the firm experience seasonal and cyclical fluctuations in the demand for theirproducts and services. These variations affect the working capital of the business. Seasonalvariations not only affect the working capital, but also create production problems. Duringperiod of peak demand, increasing production may be expensive for the firm. Similarly it willbe more expensive during slack periods when the firm has to sustain its working capital forceand physical facilities without adequate production and sales. The increasing level ofinventories during the slack season will require increasing funds to be tied up in the workingcapital for the same month. Therefore, financial arrangements for seasonal working capitalrequirements must be made in advance. However the financial plans should be flexibleenough to take care of some abrupt seasonal variation.PROFIT MARGINS AND PROFIT APPORTIONA high profit margin would generate more internal funds thereby contributing to the workingcapital pool. The net profit is the source of working capital to the extent it has been earned incash. But, in practice the net cash inflows from operations cannot be considered as cashavailable for use at the end of cash cycle. Even as the company’s operations are in progress,cash is used for augmented stock, book debts and fixed assets. It is important to see that cashhas been used for rightful purpose.The availability of internal funds for working capital requirements is determined not merelyby the profit margin but also on the manner of appropriating profits. The availability of suchfunds for the working capital depends on the profit appropriations for taxation, dividend anddepreciation and reserves. Higher the amount of the dividends, less will be the contributiontowards working capital funds, an increase in tax liability will lead to an increase in workingcapital requirements and vice versa. However tax liability can be reduced through proper taxplanning. Depreciation as allowed under income tax rules helps to save tax.PRICE LEVEL CHANGESChanges in the price level also influence the requirements of working capital. Rising priceswould necessitate the need of more funds for maintaining the existing level of activity. Thusmore working capital will be required. However the firm can revise the process with rising 30
  31. 31. price level. The price rise does not uniformly affect all the commodities. Thus the implication of price level changes will vary from company to company. OPERATING EFFICIENCY The operating efficiency of the firm related to the optimum utilization of the resources at the minimum costs. Efficiency of operations accelerates the pace of the cash cycle and improves the working capital turnover. Better utilization of resources improves profitability and, thus, helps in releasing the pressure on working capital. INVENTORY MANAGEMENT WHAT IS INVENTORY• An inventory is an idle resource of any kind provided that such resource has economic value.• Materials are procured (buy or manufacture) to meet internal demand/customer demands. When such materials are received and accounted for they are inventories of that establishment. WHY TO HAVE INVENTORIES The importance of inventory lies in the urgency of requirements. If men and machines in a factory could wait and so could customers, materials would not lies in wait for them and no inventories would be carried. Since such condition does not exist, it has become necessary to keep material stock on hand. There are four reasons for carrying inventories: To gain economies in purchasing by buying quantities beyond current requirement To maintain service stocks while replacement stock are in transit. 31
  32. 32.  To level out production cycles by producing to inventory. To carry a reserve in order to prevent stock outs or lost sales. TO GAIN ECONOMIES There is a cost in placement of every purchases order say Rs.15.00 (approx) for any material and it may, therefore be more efficient to order beyond the immediate needs of the company. For example, if one order is placed for a bulk quantity of material instead of more orders, the purchaser saves ordering cost. The purchases may also get substantial discount from the seller by ordering bulk quantity. Further, the purchaser may saves in shipping and transportation costs in transporting the bulk quantity. Purchasing in bulk quantity from the foreign suppliers is normally resorted to because of difficulties in obtaining import license and other formalities. TO MAINTAIN SERVICE STOCKS To supply against an order may not reach the purchaser in time due to time lag between shipment and delivery. A manufacturer cannot afford to exhaust his materials in hand and then await the new arrival. In order to cushing the transit delay, he maintains the service stock so that his production schedule need not come to a grinding halt. TO PREVENT STOCK OUTS OR LOST SALES Stock outs means to exhaust the stock of any item to no level, could mean losses of thousands of rupees per day and in extreme cases if could cause shut down of the entire operation. In selling finished foods, the failure to have the product available for the customers may result in the loss of the sale, the loss of the customer. A businessman holds inventory because the alternatives are more costly or loss profitable. Inventory is used wherever it assures higher profitability than such alternatives as additional equipment to meet peak demands, higher labor costs, the costs associated with shortages and inability to meet customer demands, lower productivity due to delays caused by lack of raw or in process materials. Most of the discussions and examples that follow are concerned with business organization, they also apply to government and military operations if “profit” is given and their interpretation. The “goal” of government and military operations is often quite different from 32
  33. 33. the profits, which are the goal of business enterprises. Provided however, that we replaceprofits by some measurable objective which these organizations attempt to achieve or somepare meter which they intend to optimize, many of the arguments we have presentedconcerning inventory will still apply.The businessman will hold stacks of goods for one or more of these reasons 1. Transaction motive. 2. Precautionary motive. 3. Speculative motive.In its simplest form, the transaction motive assumes that a given volume of sales requires aminimum amount of cash balances or inventories. The form cannot maintain a given volumeof sales with smaller inventories or cash balances and drives no benefits from having greateronce.IMPORTANCE OF INVENTORYInventory constitutes the large stock component of current assets in any organizations. Poormanagement of inventories therefore may result in business failures. A production functiondepends to a large extent upon inventory management.Inventory is a usable resource, which is physical and tangible such as materials.Inventory could be raw material, work in progress (wip), finished good or the spare parts andother indirect materials.Effectiveness of the material production function depends to a large extent upon inventorymanagement. 33
  34. 34. FUNCTIONS OF INVENTORY MANAGEMENT• Regularizing demand and supply.• Economizing purchases or production by lot buying or batch production.• Allowing organizations to cope with perishable materials. METHODS OF CONTROLLING INVENTORY ABC ANALYSIS ABC analysis is a basic analytical management tool, which enables top management to place the efforts where the results will be greatest. This technique popularly known as “Always Better Control” has universal applications in many areas of human endeavor. The technique tries to analyze the distribution of characteristic by money value of importance in order to determine priority. Remembering this simple 20/80 law, popularly known as Pareto’s Law of “CAUSE AND EFFECT”, can successfully solve quite a number of management problems. The law states, “Only 20% of the activity causes 80% of effect.” Example 1. 20% of the machines are responsible for 80% of the total down time. 2. 20% of the end product generally account for 80% of total revenue. 3. 20% of the clerks make 80% of the clerical errors. 4. 20% of the employees create 80% of the problems. 5. 20% of the customers are responsible for 80% of the bad debts. 6. 20% of the total items in the stock account for 80% of the total expenditure on the materials. This 20/80 ratio is very useful concept in business where it can be used to solve some production control, inventory control and similar other management problems. The exact percentage may fluctuate on either side but the principle stays. So, the golden rule is to keep on this 20% and you will cover 80% of the effect. This concept when applied to stock items is called “ABC Analysis.” 34
  35. 35. Application of ABC AnalysisThis approach helps the material manager to exercise selective control and focus his attentiononly on a few items when he confronted with lacs of stores items. Any sound stock controlsystem should ensure that every item gets right amount of attention at the right time. ABCanalysis makes it possible with considerably less effort by its selective approach.Degree of Control‘A’ class items form a substantial part of total consumption in rupees and so it must draw outattention. Up-to-date and accurate records should be maintained for these items. Theinventory should be kept at a minimum by putting blanket orders covering annualrequirement and then arranging frequent deliveries from vendors.‘B’ class items should have normal or moderate control made possible by good records andregular attention.‘C’ class items have required little or no control.For analysis purpose at Amtek Crankshaft the MAIS system support is taken for extractingreports. Through above system the value-wise report of closing stock can be taken. Theclosing stock report is classified three classes representing items above 10, 00,000 itembetween 50,000 to 10, 00,000 and less than 50,000. The items classified in the Group areanalyzed by the Manager (CMM) and concerned engineer to determine whether the items areof regular nature and should be classified either as “B” or “C”. There are 31000 thousanditem are available in the stock and value is 40 crores. The current status of stock remainsavailable in MAIS stream. 35
  36. 36. Sr. No. Type of No. of Items Value Inventory (in crores)1. “A” 22,000 172. “B” 10,000 123. “C” 18,000 11At Amtek Crankshaft (I) Pvt. Ltd. following method of inventory control arefollowedMaximum LevelIt is calculated by considering these elements1. Normal consumption or 1 year consumption2. Scheduled activities3. Suddenly / unexpected requirement of material4. ReviewsMinimum Level 36
  37. 37. 1. Basis for setting a minimum level of material 2. Lead time 3. Lead time = Difference between placing of order and receipt material. 4. Reorder Level time consumption 5. Re-order level depends on the Minimum level and lead-time. Re-Order Level Basis for setting reorder level Lead-time Lead-time is of 2 types: Administrative lead-time Supplier lead-time Supplier may be local, East, West, North, South region of India Supplier may be from outside of India ORDERING PROCEDURE At Amtek Crankshaft (I) Pvt. Ltd. “A” classes items includes the spares part used in the Reactor, Turbine or generator, which relates to mainly related to operation. These items are less in numbers but have very high value. ‘A’ class items require careful and accurate determination of order quantities and order points based on exact requirements. They should be subjected to frequent reviews to reduce possibility of overstocking. The time-to-time analysis is done if any material is surplus it can be sent to other units where these are required. A reasonably good analysis for order quantities and other words points is required for ‘B’ items but the stock may be reviewed less frequently or only when major changes occur. No such computation is required for C items. These items should be brought in bulk, may be for full year. 37
  38. 38. 1. VIP treatment may be accorded to ‘A’ items in all activities such as processing of purchase orders, receiving, inspection, movement on the shop floor, etc with an object to reduce lead-time and average inventory.2. No such treatment is necessary for ‘B’ items. Normal plants procedures should take care of inward and outward flow of these items.3. No priority is assigned to ‘C’ items. 38
  39. 39. SAFETY STOCK ‘A’ class item stock should be kept less. ‘C’ contrary to ‘A’ class items. ‘B’ class items a moderate policy is required.The following can be safety stock for 3 categories of items:“A” class items ½ month stock“B” class items 1 month stock“C” class items 2 month stock‘A’ items merit a tightly controlled inventory system with constant attention by the purchasemanager and stores management.‘B’ items require a formalized inventory system with periodic attention by purchase andstores management.‘C’ items use a simpler system designed to cause the least trouble for the purchase and storesdepartment. 39
  40. 40. ECONOMIC ORDER QUANTITY ANALYSISInventory control fundamentally deals with the two basic issues:1. When to order2. How much to orderThe problem of ‘when to order’ is decided by prescribing the reorder level of each of theinventory item. The other incidental issue is ‘how much to order’ i.e., that should be thesize of each order. The issue of ‘how much to order’ is decided on the basis of “EconomicOrder Quantity (EOQ).”EOQ prescribes the size of the order and at which the ordering cost and the inventorycarrying cost will be minimize.The ordering cost consist of cost of paper for placing an order like use of paper, typing,posting, filing, etc. the cost of staff involve in this work, the costs incidental to order likefollow-up, receiving, inspection etc. Ordering cost is more or less fixed and ascertained onper order basis. If the annual requirement is met by placing more order of small quantityinstead of single large order, the number of order placed during the year will increaseresulting into higher total ordering cost.The other side of the scene is the inventory carrying costs. When the inventories arestored, it involve following costs:1. Interest cost due to locking up of funds.2. Cost of storage space cost of insurance and taxes.As all these costs are directly related with the certain percentage of materials stored; e.g. saycarrying cost is 15% of the value of the material stored. The ordering cost and the carryingcost is mutually exclusive. If the annual requirement is met by placing a single order, theordering cost will be less due to single order. But as the single order will be for a hugequantity (i.e. for the entire annual requirements), the average stockholding would be veryhigh into greater carrying cost. 40
  41. 41. The relationship of ordering cost and carrying cost as under: Number and size of order Ordering cost Carrying cost1. Few orders, each order of large size Low High2. More orders each order of small size High LowCASH MANAGEMENTCash is the important current asset for the operations of the business. Cash is the basic inputneeded to keep the business running on a continuous basis; it is also the ultimate outputexpected to be realized by selling the service or product manufactured by the firm. The firmshould keep sufficient cash, neither more nor les. Cash shortage will disrupt the firm’smanufacturing operating while excessive cash will simply remain idle, without contributinganything towards the firm’s profitability. Thus, a major function of the financial manager isto maintain a sound cash position.Cash is the money, which a firm can disburse immediately without any restriction. The termcash includes coins. Currency and cheques held by the firm, and balances in its bankaccounts. Sometimes near cash items, such as marketable securities or bank times depositsare also included in cash. The basic characteristic of near cash assets is that they can readilybe converted into cash. Generally, when a firm has excess cash, it invests it in marketablesecurities. This kind of investment contributes come profit to the firm.FACTS OF CASH MANAGEMENTCash management is concerned with the managing of; (1) cash flows into and out of the firm,(2) cash flow within the firm, and (3) cash balances held by the firm at a point of time byfinancing deficit or investing surplus cash. It can be represented by a cash management cycleas shown following. Sales generated cash, which has to be disbursed out. The surplus cashhas to be invested while deficit has to be borrowed. Cash management seeks to accomplishthis cycle at a minimum cost. At the same time, it also seek o achieve liquidity and control.Cash management assumes more importance than other current assets because cash is themost significant and the least productive asset then a firm holds. It is significant because it isused to pay the firm’s obligations. However, cash is unproductive. Unlike fixed assets or 41
  42. 42. inventories, it does not produce foods for sale. Therefore, the aim of cash management is tomaintain adequate control over cash position to keep the firm sufficiently liquid and to useexcess cash in some profitable way.MANAGEMENT CYCLECash management is also important because it is difficult to predict cash flows accurately,particularly the inflows, and there is no perfect coincidence between the inflows and outflowsof cash. During some periods cash outflows will excess cash inflows, because payments fortaxes, dividends, or seasonal inventory build up. At other times, cash inflow will be morethan cash payments because there may be large cash sales and debtors may be realized inlarge sums promptly. Further, cash management is significant because cash constitutes thesmallest portion of the total current assets, yet management’s considerable time is devoted inmanaging it. In recent past, a number of innovations have been done in cash managementtechniques. An obvious aim of the firm these days is to manage its cash affairs in such a wayas to keep cash balance at a minimum level and to invest the surplus cash in profitableinvestment opportunities.In order to resolve the uncertainty about cash flows prediction and lack of synchronizationbetween cash receipts and payments, the firm should develop appropriate strategies for cashmanagement. The firm should evolve strategies regarding the following four facets of cashmanagement:  Cash planning: Cash inflows and outflows should be planned to project cash surplus or deficit 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 outflow should be decelerated.  Optimum cash level: The firm should decide about the appropriate level of cash balances. The cost of excess cash and danger of cash deficiency should be matched to determent the optimum level of cash balances.  Investing surplus cash: The surplus cash balances should be properly invested to earn he firm should decide about the division of such cash balance between 42
  43. 43. alternative shout-term investment opportunities such as bank deposits, marketable securities, or inter-corporate lending.MOTIVES FOR HOLDING CASHThe firm’s need to hold cash may be attributed to the following three motives:  The transactions motive  The precautionary motive  The speculative motive  The compensation motiveTRANSACTION MOTIVEThe transactions motive requires a firm to hold cash to conduct its business in the ordinarycourse. The firm needs cash primarily to make payments for purchases, wages and salaries,other operating expenses, taxes, dividends etc. the need to hold cash would not arise if therewere perfect synchronization between cash receipts and cash payments, i.e. enough cash isreceived when the payment has to be made. But cash receipts and payments are not perfectlysynchronized. For those periods, when cash payments exceed cash receipts, the firm shouldmaintain some acash balance to be able to make required payments. For transactionspurpose, a firm may invest its cash in marketable securities. Usually, the firm will purchasesecurities whose maturity corresponds with some anticipated payments, such as dividends, ortax in the future. Notice that the transactions motive mainly refers to holding cash to meetanticipated payments whose timing is not perfectly matched with cash receipts.PRECAUTIONARY MOTIVEThe precautionary motive is the need to hold cash to meet contingencies in the future. Itprovides a cushion pt buffer to withstand some unexpected emergency. The precautionaryamount of cash depends upon the predictability of cash flows. It cash flows can be predictedwith accuracy, less cash will be maintained for an emergency. The amount of precautionarycash is also influenced by the firm’s ability to borrow at shout notice when the need arises.Stronger the ability of the firm to borrow at short notice, less the need for precautionarybalance. The precautionary balance may be kept in cash and marketable securities. Theamount of cash set aside for precautionary reasons is not expected to earn anything.Therefore, the firm should attempt to earn some profit on it. Such funds should be invested in 43
  44. 44. high-liquid and low-risk marketable securities. Precautionary balance should, thus, be heldmore in marketable securities and relatively less in cash.SPECULATIVE MOTIVEThe speculative motive relates to the holding of cash for investing in profit-makingopportunities as and when they arise. The opportunity to make profit may arise when it isexpected that interest rated will rise and security prices will fall. Securities can be purchasedwhen the interest rate is expected to fall. The firm will benefit by the subsequent fall ininterest rates and increase in security prices. The firm may also speculate on materials’ prices.If it expected that material’s price will fall, the firm can postpone materials’ purchasing andmake purchased in future when price actually falls. Some firms may hold cash forspeculations. Thus, the primary motives to hold cash and marketable securities are: thetransactions and the precautionary motives.COMPENSATION MOTIVEYet another motive to hold cash balances is to compensate banks for providing certainservices and loans.Banks provide a variety of services to business firms, such as clearance of cheque, supply ofcredit information, transfer of funds, etc. while for some of the services banks charge acommission or free, for others they seek indirect compensation. Usually clients are requiredto maintain a minimum balance of cash at the bank. Since this balance cannot be utilized bythe firms for transaction purpose, the banks themselves can use the amount to earn a return.To be compensated for their services indirectly in this form, they require the client to alwayskeep a bank balance sufficient to earn a return equal to the cost of services. Such balances arecompensating balances.Compensating balances are also required by some loan agreements between a bank and itscustomers. During periods when the supply of credit is restricted and interest rates are rising,banks require a borrower to maintain a minimum balance in his account as a conditionprecedent to the grant of loan. This is presumably to “compensate” the bank for a rise in theinterest rate during the period when the loan will be pending.The compensating cash balances can either of two forms:(1) An absolute minimum. Say, Rs. 5 lakhs, below which the actual bank balance will never fall. 44
  45. 45. (2) A minimum average balance, say, Rs. 5 lakhs over the month.The first alternative is more restrictive as the average amount of cash held during the monthmust be above Rs. 5 lakhs by the amount of transaction balance. From the firm’s viewpointthis is obviously dead money.Under the second alternative, the balance could fall to zero one day provided it was Rs. 10lakhs some other day with average working to Rs. 5 lakhs.Of the four primary motives of holding cash balances, the two most important are thetransactions motive and the compensation motive. Business firms normally do not speculateand need not have speculative balances. The requirement of precautionary balances can bemet out of short-term borrowings.OBJECTIVES OF CASH MANAGEMENTThe basic objectives of cash management are two fold: 1. To meet the cash disbursement needs (payment schedule) 2. To minimize funds committed to cash balances.These are, conflicting and mutually contradictory and the task of cash management is toreconcile them.MEETING THE PAYMENT SCHEDULEIn the normal curse of business firms have to make payments of cash and a continuous andregular basis to suppliers of goods, employees and so on. At the same item, there is a constantinflow of cash through collections from debtors. Cash is therefore aptly described as the “oilto lubricate the ever-turning wheels of business: without it the process grinds to a stop.” Abasic objective of management is to meet the payments schedule, i.e. to have sufficient cashto meet the cash disbursement needs of a firm. The importance of sufficient cash to meet thepayment schedule can hardly be over-emphasized. The advantages of adequate cash are: (1) It prevents insolvency or bankruptcy arising out of the inability of a firm to meet itsobligations;(2) The relationships with the bank is not strained;(3) It helps in fostering good relations with trade creditors and suppliers of raw materials, asprompt payment may help their own cash management; 45
  46. 46. (4) A trade discount can be availed of if payment is made within the due date. For example,let us suppose that a firm is entitled to a 2% discount for a payment made within ten dayswhen the entire payment is to make within 30 days. Since the net amount is due in 30 days,failure to take the discount means paying an extra 2% for every 20 days period over a year,there would be 18 such periods (360 days/20 days).MINIMISING FUNDS COMMITTED TO CASH BALANCESThe second Objective of cash management is to minimize cash balances. In minimizing thecash balances two conflicting aspects have to be reconciled. A high level of cash balanceswill, as shown above, ensure reconciled. A high level of cash balances will, as shown above,ensure prompt payment together with all the advantages. But it also implies that large fundswill remain idle, as cash is a non-earning asset and the firm has to forego profits. A level ofcash balances, on the other hand, may mean failure to meet the payment schedule. The aim ofcash management should be to have an optimal amount of cash balances.Keeping in view these conflicting aspects of cash management, we propose to discuss theplanning determination of the need for cash balances. There are two aspects involved in cashplanning.First, an examination of those factors, which have a bearing on, the firm’s required cashbalances.Second, a review of the approaches to reach optimum cash balance.FACTORS DETERMINING CASH NEEDSThe factors that determine the required cash balances are:SYNCHRONIZATION OF CASH FLOWSThe need for maintaining cash balances arises from the non-synchronization of the inflowsand outflows of cash: if the receipts and payments of cash perfectly. Coincide or balance eachother, there would be no need for cash balances. The first consideration in determining thecash needs, therefore, the extent of non-synchronization of cash receipts and disbursements.For this purpose, the inflows and outflows have to be forecast over a period of time,depending upon the planning horizon, which is typically a one-year period with each of the12 months being a sub-period. The techniques adopted are a cash budget. The preparation ofa cash budget is discussed in the next section of this chapter. A properly prepared budget willpinpoint the months when the firm will have excess or a shortage of cash. 46
  47. 47. SHORT COSTSAnother general factor to be considered in determining cash needs is the cost associated witha shortfall in the firm’s cash needs. The cash forecast presented in the cash budget wouldreveal periods of cash shortages. In addition, there may be some unexpected shortfalls. Everyshortage of cash—whether expected or unexpected—involves a cost “depending upon theseverity, duration and frequency of the shortfall and how the shortage is covered. Expensesincurred as a result of shortfall are caked short costs”. Included in the short costs are:Transaction costsThis is usually the brokerage incurred in relation to the sale of some short-term near cashassets such as marketable securities.Borrowing costsAssociated with borrowing to cover the shortage. These include items such as interest onloan, commitment charges and other expenses relating to the loan.Loss on trade discountA substantial loss because of a temporary shortage of cash.Cost associated With deterioration of the firm’s credit rating, which is neglected in higher bankcharges on loans, stoppage of supply, demands for cash payment, refusal to sell, loss offirm’s image and the attendant decline in sales and profits.Penalty rates By banks to meet a shortfall in compensating balances.EXCESS CASH BALANCE COSTSAnother consideration in determining cash needs is the cost associated with maintainingexcess/idle cash. The cost of having excessively large cash balances is known as excess cashbalance cost. If large funds are idle, the implication is that the firm has missed opportunitiesto invest those funds and has thereby lost interest, which it would otherwise have earned.This loss of interest is primary the excess cost. 47
  48. 48. PROCUREMENT AND MANAGEMENTThese are the costs associated with establishing and operating cash management staff andactivities. They are generally fixed and are mainly accounted for by salary, storage, handlingof securities, etc.UNCERTAINTY AND CASH MANAGEMENTFinally, the impact of uncertainty on cash management strategy is also relevant, as cash flowscannot be predicted with complete accuracy. The first requirement is a precautionary cushionto cope with irregularities in cash flows, unexpected delays I collections and disbursements,defaults and unexpected cash needs.The impact of uncertainty on cash management can, however, be mitigated through:(1) Improved forecasting of tax payments, capital expenditure, dividends, etc.(2) Increased ability to borrow through overdraft facility.DETERMINIG CASH NEED - CASH BUDGETAfter the examination of the pertinent considerations and cost that determine cash needs, thenext question deals with determination of a firm cash needs.There are two approaches to derive an optimal cash balance, namely, i. Minimizing cost model ii. Cash budget 48
  49. 49. CASH BUDGET: A CASH MANAGEMENT TOOL of Amtek Crankshaft (I)Pvt. Ltd. It has been shown in the preceding sections that a firm is will-advised to hold adequate cash balances but should avoid excessive balance. The firm has, therefore, to assess its need for cash properly. The cash budget is probably the most important tool in cash management. It is a device to help a firm to plan and control the use of cash. It is a statement showing the estimated cash, income (cash inflow) and cash expenditure (cash outflow) over the firm’s planning horizon. In other words, the net cash position (surplus or deficiency) of a firm as it moves from one budgeting sub-period to another is highlighted by the cash budget. The purposes of cash budget are:a. To co-ordinate the timings of cash needs. It identifies the periods when there might either be a shortage of cash or an abnormally large cash requirement.b. It pinpoints the period when there is likely to be excess cash.c. It enables a firm which has sufficient cash to take advantage of cash discounts onits accounts payable, to pay obligations when due, to formulate dividend policy, to plan financing of capital expansion and to help unify the production schedule during the year so that the firm can smooth out costly seasonal fluctuations.d. Finally, it helps to arrange needs funds on the most favorable terms and prevents the accumulation of excess funds. With adequate time to stuffy his firm’s needs, the manager can select the best alternative. In Contrast, a firm, which does not budget its cash requirements, may suddenly find itself short of funds. With pressing needs and little time to explore alternative avenues of financing, the management is forces to accept the best terms offered in a difficult situation. “These terms will mot be a s favorable, since the lack of planning indicated to the lender that there is an organizational deficiency. The firms, therefore, represents a higher risk”. 49
  50. 50. INFLOWS/CASHRECEIPS OUTFLOWS/DISBURSEMENS • Cash sales • Accounts payable/payable payments • Collection of accounts • Purchase of raw materials ts3. • receivable • Wages and salary (payroll) • Disposal of fixed assets • Factory expenses • Administrative and selling expenses • Maintenance expenses • Purchases of fixed assetsCASH PLANNINGCash flows are inseparable parts of the business operations of firms. A firm needs cash toinvest in inventory, receivable and foxed assets and to make payments for operating expensesin order to maintain growth in sales and earnings. It is possible that firm may be makingadequate profits, but may suffer from the shortage of cash as its growing needs may beconsuming cash vary fast.The cash poor position of the firm can be corrected if its cash needs are planned in advance.At times, a firm can have excess cash with its cash inflows exceed cash outflows. Suchexcess cash may remain idle. Again, such excess cash flows can be anticipated any properlyinvested if cash planning is resorted to. Cash planning is a technique to plan and control theuse of cash. It helps to anticipate the future cash flows and needs of the firm’s profitabilityand cash deficits, which can cause the firm’s failure.CASH FORECASTING AND BUDGETINGCash budget is the most significant device to plan for and control cash receipts and payments.A cash budget is a summary statement of the firm’s expected cash inflows and outflows overa projected time period. It gives information on the timing and magnitude of expected cashflows and cash balances over the Projected period. This information helps the financialmanger to determine the future cash needs of the firm, plan for the financing of these needsand exercise control over the cash and liquidity of the firm. 50
  51. 51. The time horizon of a cash budget may differ from firm to firm. A firm whose business is affected by seasonal variations may prepare monthly cash budgets. Daily or weekly cash budgets should by prepare for determining cash requirement if cash flows show extreme fluctuations. Cash budget for a longer intervals may be prepared if cash flows are relatively stable. Cash forecasts are needed to prepare cash budgets. Cash forecasts may be done on short or long-term basis. Generally, forecasts covering periods of one year or less are considered short-term; those extending beyond one year are considered short-term; those extending beyond one year are considered long-term. SHORT-TERM CASH FORECASTING It is comparatively easy to make short-term cash forecasts. The important functions of carefully developed short-term cash forecasts are:  To determine operating cash requirements.  To anticipate short-term financing  To manage investment of surplus cash LONG-TERM CASH FORECASTING Long-term cash forecasts are prepared to five an idea of the company’s financial requirements in the distant future. They are not as detailed as the short-term forecasts are. Once a company has developed long-term cash forecast, it can be used to evaluate the impact of, say, new product developed or plant acquisition on the firm’s financial condition three, five, or more years in the future. The major uses of the long-term cash forecasts are:• It indicates as company’s future financial needs, especially for its working capital requirements.• It helps to evaluate proposed capital projects. It pinpoints the cash required to finance these projects as well as the cash to be generated by the company to support them.• It helps to improve corporate planning. Long- term cash forecasts compel each division to plan for future and to formulate projects carefully. 51
  52. 52. CHAPTER 5RESEARCH METHODOLOGY 52
  53. 53. RESEARCH METHODOLOGY Research methodology is a way to systematically solve the research problem. In it step by step methods are followed to solve a particular problem it refers to search for knowledge Methodology includes the overall research procedures, which are followed in the research study. This includes Research design, the sampling procedures, and the data collection method and analysis procedures. To broad methodologies can be used to answer any research question-experimental research and non-experimental research. The major difference between the two methodologies lies in the control of extraneous variables by the intervention of the investigator in the experimental research. RESEARCH DESIGN A research design is defined, as the specification of methods and procedures for acquiring the Information needed. It is a plant or organizing framework for doing the study and collecting the data. Designing a research plan requires decisions all the data sources, research approaches, Research instruments, sampling plan and contact methods. Research design is mainly of following types: - 1. Exploratory research. 2. Descriptive studies 3. Casual studiesSECONDARY DATA Sources of Secondary Data Following are the main sources of secondary data: 1. Official Publications: Publications of Amtek Crankshaft (I) Pvt. Ltd. or the by the Publications of Amtek Crankshaft (I) Pvt. Ltd.. 2. Publications Relating to Trade: Publications of the trade associations, stock exchange, trade union etc. 3. Journal/ Newspapers etc.: Some newspapers/ Journals collect and publish their own data, e.g. Indian Journal of economics, economist, Economic Times. 53
  54. 54. 4. Data Collected by Industry Associations: For example, data available with Publications of Amtek Crankshaft (I) Pvt. Ltd. by promotional schemes. 5. Unpublished Data: Data may be obtained from several companies, organizations, working in the same areas. For example, data on Publications of Amtek Crankshaft (I) Pvt. Ltd. by magazines. Data Collection Method The following methods of data collection are generally used: (i) Observation Method (ii) Case Study MethodI have used case study method in the project. 54
  55. 55. CHAPTER 6DATA ANALYSIS & INTERPRETATION 55
  56. 56. RATIO ANALYSISRatio analysis is a mean of better understanding of financial strength and weakness of anycompany. And hence my study is based on the data related to last four years i.e. from 2002 to2005 and the financialAnalyses are made on the basis of these ratios.LIQUIDITY RATIOLiquidity refers to the ability of concern to meet its current obligations as and when thesebecome due. The short term obligations are met by realizing amount assets should either beliquid or near liquidity. These should be converted into cash for paying obligations of short-term liabilities, if current assets can pay off current liabilities, then liquidity position will besatisfactory. On the other hand, if current liabilities may not be easily met out of currentassets then liquidity position will be bad. To measure the liquidity of a firm, the followingratio can be calculated: Current ratio Quick or acid test or liquid ratio Absolute liquidity ratioCURRENT RATIOThis ratio explains the relationship between current assets and current liabilities of business.The formula for calculating the ratio is: Current ratio= Current Assets Current liabilities 56
  57. 57. Current ratio: (ALL AMOUNT IN LAKHS) YEAR 2007-08 2006-07 CURRENT ASSETS 12558.4 14250.08 CURRENT LIABILITIES 3525.46 2251.42 CURRENT RATIO 3.56 6.33 Current assets/Current liabilities 15000 10000 C.A/C.L Current assets Current liabilities 5000 0 2007-08 2008-09 Year 57
  58. 58. Current Ratio 7 6 Current ratio 5 4 3 Current ratio 2 1 0 2006-2007 2007-08 YearINTERPRETATIONAs above diagram and ratio states that the last year current ratio of Amtek Crankshaft is morethan 2:1. In the year 2006-07 it is very high hence it shows idleness of funds. But in the year2007-08 short term financial position of the enterprise is very sound because its current assetsare more than twice of current liabilities.QUICK RATIOQuick ratio indicates whether the firm is in a position to pay its current liabilities with in amonth or immediately. As such the quick ratio calculated by calculated by dividing liquidassets by current liabilities.Quick ratio= Quick assets Current liabilitiesQuick assets = current assets - inventoriesLiquid assets mean those assets, which will yield cash vary shortly. An ideal quick ratio issaid to be 1:1. If it is more, it is considered to be better. The idea is that for every rupee ofcurrent liabilities, there should be at-least one rupee of liquid assets. 58
  59. 59. Quick ratio of AMTEK CRANKSHAFT (ALL AMOUNT IN LAKHS) YEAR 2007-08 2006-07 QUICK ASSETS 9316.73 11593.4CURRENT LIABILITIES 3525.46 2251.42 QUICK RATIO 2.64 5.15 Liquid assets/Current liabilities 14000 L.assets/C.liabilities 12000 10000 Quick assets 8000 6000 Current liabilities 4000 2000 0 2006-07 2007-08 Year 59
  60. 60. Quick Ratio 6 5 Quick ratio 4 3 Quick ratio 2 1 0 2006-07 2007-08 YearINTERPRETATIONAs above diagram and calculation shows that quick ratio is more than 1:1.So it is satisfactory. It means that current assets are more than current liabilities, the shortterm financial position is very good.ABSOLUTE LIQUIDITY RATIOAlthough receivable, debtors and bills receivable are generally more liquid than inventories,yet there may be doubts regarding their realization into cash immediately or in time. Hence,some authorities are of the opinion that the absolute liquid ratio should also be calculatedtogether with current ratio and acid test ratio so as to exclude even receivables from thecurrent assets and find out the absolute liquid assets.Absolute liquid ratio = absolute liquid assets Current liabilitiesAbsolute liquids assets include cash & bank, short-term securities. The acceptable norm forthis ratio is liquid assets are considered adequate to pay Rs.2 worth current liabilities in timeas all the creditors and then cash may also be realized from debtor and inventories. 60
  61. 61. Absolute liquid assets = cash & bank balance + loans and advances (ALL AMOUNT IN LAKHS) YEAR 2007-08 2006-07ABSOLUTE LIQUID ASSETS 1469.35 1332.09CURRENT LIABILITIES 3525.46 2251.42ABSOLUTE LIQUID RATIO 0.42 0.592 Absolute liquid assets/Current liabilities 4000 A.L.assets/C.liabilities 3000 Absolute liquid assets 2000 Current 1000 liabilities 0 2006-07 2007-08 Year 61
  62. 62. Absolute Liquidity Ratio 0.7 Absolute liquidity ratio 0.6 0.5 0.4 Absolute liquidity 0.3 ratio 0.2 0.1 0 2006-07 2007-08 YearINTERPRETATIONAs above calculation and diagram shows that absolute liquidity ratio of 2007-08 is less than0.5:1. So it shows that there is inadequacy of cash and short-term securities. But in 2006-07 itis more than 0.5:1, which is satisfactory.ACTIVITY RATIOThis ratio measures how many times the average stock is sold during the year. Promptness ofsale indicates the better performance of the business. Higher turnover ratio is alwaysbeneficial to the concern. Lower inventory turnover ratio shows that the stock is blocked andnot immediately sold. It is always advisable to keep the required quantity of stock. In theother words these ratios measure the efficiency and rapidity of the resources of the company,like stock, debtors, fixed assets, working capital etc. These ratios are generally calculated onthe basis of sales or cost of sales. Some of the important activity ratio are as follow: -1. Inventory Turnover Ratio: This ratio indicates the relationship between the cost ofgoods sold during the tear and average stock kept during that year.Inventory turnover ratio = cost of goods sold Average stock or inventoryAverage stock or inventory = stock of previous year + stock of current year 62
  63. 63. 2INVENTORY TURNOVER RATIO: (ALL AMOUNT IN LAKHS) YEAR 2007-08 2006-07COST OF GOODS SOLD 11563 16271AVERAGE INVENTORY 2949.175 2324.51INVENTORY TURNOVER RATIO 3.92 6.99 COGS/Avg. inventory 20000 COGS/Avg. inventory 15000 COST OF GOODS SOLD 10000 AVERAGE 5000 INVENTORY 0 2006-07 2007-08 Year 63
  64. 64. Inventory turnover ratio 8 Inventory turnover 7 6 5 Inventory ratio 4 3 turnover 2 ratio 1 0 2006-07 2007-08 YearINTERPRETATIONAs above calculation and diagram shows the inventory turnover ratio of Caryaire Equipmentis not satisfactory in 2007-08 as compared to 2006-07. It means funds are blocked ininventory, which create problem of cash inflow. So, management should take some importantdecision regarding inventory management.DEBTORS TURNOVER RATIO Debtors turnover ratio = Net credit sales Average debtorsWhere net credit sales in case = sales of respective yearAverage debtor = opening debtors + closing debtors 2This ratio indicates the speed with which the amount is collected from debtors. The higher theratio, the better it is, since it indicates that amount from debtors is being collected morequickly. A lower debtors turnover ratio will indicate the inefficient credit sales policy of themanagement. It means that credit sales have been made to customers who do not deservemuch credit. 64
  65. 65. DEBTOR TURNOVER RATIO (ALL AMOUNT IN LAKHS) YEAR 2007-08 2006-07NET CREDIT SALES 16546.74 37226.62AVERAGE DEBTOR 8877.89 11330.39DEBTOR TURNOVER RATIO 1.86 3.28 Net credit sales/avg.debtor Debtor turnover ratio 40000 30000 Net credit sales 20000 Average 10000 debtors 0 2006-07 2007-08 Year 65
  66. 66. Debtor turnover ratio 3.5 debtor turnover ratio 3 2.5 2 Debtor 1.5 turnover ratio 1 0.5 0 2006-07 2007-08 YearDEBTOR COLLECTION PERIODDebtor collection period = 365 Debtor turnover ratioThis ratio shows the time in which the customer is paying for credit sale. Increase in this ratioindicates the excessive blockage of funds with debtors, which increase the chances of baddebts. On the other hand, if there is decrease in debt collection period, it indicates promptpayment by debtors, which reduces the chances of bad debts.Debtor collection period (in number of days) YEAR 2007-08 2006-07DEBTOR COLLECTION PERIOD 196 111 66
  67. 67. Debtor collection period(in no. of days) 250 Debtor collection period 200 150 Debtor collection period (in no. of 100 days) 50 0 2006-07 2007-08 YearINTERPRETATIONAs the calculation and diagram shows that debtor collection period of current year is morethan that of the previous year, which is not satisfactory which indicates deferred payment bydebtors and hence increases the chances of bad debts. But if you consider the collectionperiod of current year i.e.; 2007-08 it is satisfactory.WORKING CAPITAL TURNOVER RATIO Working capital turnover ratio = cost of goods sold Working capital Where working capital = current assets – current liabilitiesThis ratio reveals how efficiently working capital has been utilized in producing sales. A highworking capital turnover ratio shows efficient use of working capital and quick turnover ofcurrent assets like stock and debtors. 67
  68. 68. WORKING CAPITAL TURNOVER RATIO (ALL AMOUNT IN LAKHS) YEAR 2007-08 2006-07 COGS 11563 16271 WORKING CAPITAL 9032.95 11998.65WORKING CAPITAL TURNOVER 1.28 1.36RATIO COGS/Working capital 20000 COGS/Working capital 15000 COGS 10000 Working capital 5000 0 2006-07 2007-08 Year 68
  69. 69. Working capital ratio Working capital ratio 1.4 1.35 Working capital 1.3 ratio 1.25 1.2 2006-07 2007-08 YearINTERPRETATIONThis ratio indicates the weak position of organization as compared to previous year. So, thisratio indicates the under utilization of working capital. 69
  70. 70. FIXED ASSETS TURNOVER RATIOFixed assets are used in the business for producing goods to be sold. The effective utilizationof fixed assets will result in increased production and reduced cost. It also ensures whetherinvestment in the assets have been judicious or not. Higher ratio indicates better performance.Fixed assets turnover ratio = net sales Fixed assets (net block) (ALL AMOUNT IN LAKHS) YEAR 2007-08 2006-07 NET SALE 16546.74 37226.62 FIXED ASSETS 15442.22 16702.55FIXED ASSETS TURNOVER RATIO 1.07 2.22 Net sale/Fixed asset Net sale/Fixed asset 40000 30000 Net sale 20000 Fixed asset 10000 0 2006-07 2007-08 Year 70
  71. 71. Fixed assets turnover ratio 2.5 Fixed assets ratio 2 1.5 Fixed assets 1 ratio 0.5 0 2006-07 2007-08 YearINTERPRETATIONThis ratio reveals how efficiently the fixed assets are being utilized. Compared with theprevious year there is a decrease in the ratio, which shows that assets have not been usedefficiently as they had been used in the previous year.NET PROFIT/LOSS RATIO 71
  72. 72. This ratio establishes the relationship between the net profit and net sales.Net profit/ loss ratio = Net profit x 100 Net sales P & L/Net sales 40000 P & L/Net sales 30000 Net profit 20000 Net sales 10000 0 2006-07 2007-08 YearWhere net profit = gross profit + Operating and non operating income (-) Operating and non-operating expenses. (ALL AMOUNT IN LAKHS) YEAR 2007-08 2006-07 NET PROFIT 5977.23 12288.56 NET SALES 16546.74 37226.62NET PROFIT/LOSS RATIO (IN %) 36 % 33 % 72
  73. 73. Net profit/loss ratio (in %) 37 Net profit/loss ratio 36 35 Net profit/loss 34 ratio (in %) 33 32 31 2007-08 2008-09 YearINTERPRETATIONAbove diagram and calculation shows that earning a good amount of profit. 73

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