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50086880 project-on-working-capital

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50086880 project-on-working-capital

  1. 1. A PROJECT REPORT ON “ W ORKING C APITAL M ANAGEMENT" DEVELOPED BY, MISS. UPADHYE PRIYANKA VINAYAK FROM MAHINDRA SONA LTD. SUBMITTED IN THE FULFILMENT OF THE M. B. A. (FINANCE), TO UNIVERSITY OF PUNE (2008- 2009) P. D. V. V. P. FOUNDATION’S INSTITUTE OF BUSINESS MANAGEMENT AND RURAL DEVELOPMENT, AHEMADNAGAR 1
  2. 2. DECLAIRATION: I hereby declare that, all the information in this project report is based on my own fact-findings and experienced at “Mahindra Sona Limited.” And the result embodies in this project report not been submitted to any other university or institute for the award of degree or diploma. IBMRD, AHEMADNAGAR. Date: Miss. Upadhye Priyanka V. Place: 2
  3. 3. ACKNOWLEDGEMENT: To begin with, I am extremely grateful to the Mahindra Sona Limited, Nashik for having accepted me as summer trainee and thus making it possible for we have wonderful work experience. I most indebted to my guide at ‘Mahindra Sona Limited, Nashik’, Mr. D. N. Mahale (Personnel Manager) and Mr. Shirish Kale (Finance Executive) under whose constant supervision and valuable guidance the project was tethered his cheerful countenance and approachability delicately enamored productivity of work place. I also extend my gratitude to whole staff of ‘Mahindra Sona Limited,’ for giving their valuable support and guidance in completion of project. I sincerely thanks to my project guide Prof. Dr. M. P. Sharma (Faculty, Institute of Business Management and Rural Development, Ahemadnagar.), for his unfailing and valuable guidance from time to time. 3
  4. 4. OBJECT OF THE PROJECT: For the partial fulfillment of the MBA course a student is supposed to undergo training in an organization for 50, days which is mandatory by PUNE UNIVERSITY. While working with the organization, one has to undertake a small study on the field of work and subject allotted by the firm. Based on this study one has to submit a report to the organization, University and College. Summer project work exposes the real-time corporate environment to a student to experience the current .And facilitates student to experience the scenario .The project helps in giving an insight in the field of FINANCE. To acquire knowledge and information of financial aspects of the organization, the topic given by the organization was “working capital management”. 4
  5. 5. OBJECTIVE OF THE PROJECT  TO CALCULATE THE RATIOS IN RELATION TO WORKING CAPITAL AND ITS TREND ANALYSIS.  TO FORECAST THE WORKING CAPITAL REQUIREMENT OF THE YEAR 2008-2009. 5
  6. 6. METHODOLOGY OF THE STUDY RESEARCH Research is a careful inquiry or examination to discover new information or relationships and to expand and verify existing knowledge. The various sources of information can be broadly classified in two categories namely primary and secondary. PRIMARY DATA COLLECTION: The information and data collected is thoughrough formal and informal discussion with the officers of accounts department. SECONDARY DATA COLLECTION: During the training period, data was collected from financial reports. For analyzing working capital management, certain books were also referred. 6
  7. 7. INDEX: 7
  8. 8. CONTENT PAGE NO. 9-17 1. COMPANY PROFILE: i. ii. iii. iv. v. vi. 2. INTRODUCTION HISTORY PRODUCTS AND APPLICATIONS MILEESTONES ORGANIZATIONAL CHART PLANT LAYOUT PROJECT ON WORKING CAPITAL: i. WORKING CAPITAL POLICY ii. TYPES OF WORKING CAPITAL iii. NEED FOR WORKING CAPITAL iv. CHARACTERISTICS OF CURRENT ASSETS v. CURRENT ASSETS CYCLE vi. FACTORS INFLUENCING WORKING CAPITAL vii. CURRENT ASSET FINANCING POLICY 18-33 3. OPERATING CYCLE AND CASH CYCLE: i. OPERATING CYCLE ANALYSIS ii. DURATION OF LIFE CYCLE iii. MATCHING OR HEDGING APPROACH iv. CONSERVATIVE APPROACH v. AGGRESSIVE APPROACH vi. RATIO ANALYSIS 34-46 4. WORKING CAPITAL FINANCING: 47-52 i. ii. iii. iv. v. INTRODUCTION TYPES OF FINANCING WORKING CAPITAL SOURCES OF FINANCING WORKING CAPITAL REGULATION OF BANK FINANCE OTHER FORMS OF FINANCING 8
  9. 9. 5. DATA ANALYSIS AND INTERPRETATION: i. BALANCE SHEET DATA ii. BALANCE SHEET OF MSL iii. CURRENT ASSETS iv. CURRENT LIABILITIES v. CHANGES IN WORKING CAPITAL vi. FINANCIAL REPORT vii. PROFIT AND LOSS ACCOUNT 53-62 6. RATIO ANALYSIS: i. CURRENT RATIO ii. LIQUID RATIO iii. ABSOLUTE LIQUID RATIO iv. CURRENT ASSET TURN-OVER RATIO v. WORKING CAPITAL TURN-OVER RATIO vi. INVENTORY TURN-OVER RATIO vii. GROSS PRIFIT RATIO viii. NET PROFIT RATIO ix. DEBTORS TURN-OVER RATIO x. INVESTMENT IN RECEIVABLES xi. OPERATING CYCLE xii. GROSS OPERATING CYCLE xiii. NET OPERATING CYCLE xiv. CREDITORS TURN OVER RATIO xv. DEBT-EQUITY RATIO 63-78 7. CONCLUSION 79 8. RECOMMENDATIONS 80 9
  10. 10. COMPANY PROFILE i. ii. iii. iv. v. vi. INTRODUCTION HISTORY PRODUCTS AND APPLICATIONS MILESTONES ORGANIZATIONAL CHART PLANT LAYOUT 10
  11. 11. COMPANY PROFILE: ‘Mahindra Sona Limited’ was formed in collaboration with Dana Corporation of USA, over two decades ago through access to international technology and has since emerged as a leading independent manufacturer of Automotive Components which include Propeller Shafts/ Carden Shafts, UJ Components and automotive Clutches. Progressively, ‘Mahindra Sona Limited’ has expanded its product range to meet demands of various Automotive Manufacturers. The facilities contain more than 9300 sq. meters of manufacturing space strategically located in western India providing easy accessibility to various vehicle manufacturers and provide ample scope for future expansion to almost five times the current size. ‘Mahindra Sona Limited’ has a strong team of 380 motivated employees, of which, 50 are qualified engineers and professionals.  HISTORY: The Company has long history, which dates back to the year 1885 when M/s Turner Hoare and company started its activity in imports and exports of traditional Indian consumer goods. In 1968, M/s Turner Hoare and company took over another Company, M/s East Atlantic Company and realistic market potential entered into execution of engineering projects like Hydro pneumatic ash handling system, mechanical cleaning like vibroscreen, traveling water screens and bagged Import Substitution award twice. In 1977, with equity participation of Dana Corporation, USA, the company went into technical collaboration to manufacturer automotive components like 11
  12. 12. Propeller Shaft, Axle Shafts, Universal Joint Kits, and Automotive Clutches. The Nashik plant commenced production in 1979, following a technical and financial joint venture between Mahindra and Mahindra Limited and Dana Corporation, USA, Named Mahindra Spicer limited. In 1984, Mahindra Spicer Limited merged with its parent company, Mahindra and Mahindra Limited and became MSL division of the parent company. In March 1995, Mahindra and Mahindra Limited and Sona Koyo Steering Systems Pvt. Ltd. formed a new company ‘MAHINDRA SONA LIMITED’ to take over the automotive components business of MSL division of Mahindra and Mahindra Limited. The company is engaged in designing and manufacturing a wide range of auto- ancillary products such as Propeller Shaft, Axle Shafts, Universal Joint Kits, Automotive Clutches, Steering Joints, Steering Column Parts, and Clutches. The company is original equipment supplier to almost all vehicle manufacturers of India and scatters to the spare parts market through a wide distribution network. The company also supplies to vehicle manufacturers. The company has been certified for ISO-9001 in 1995 and QS-9000 in 1999. The company firmly believes that the high standards of quality can only be achieved through strong systems and the support of its people. 12
  13. 13. ‘Mahindra Sona limited’ manufactures the automotive components for automotive applications like Passenger cars, Multi-utility vehicles, Sports utility vehicles, Light Commercial vehicles, Medium Commercial vehicles, and Heavy Commercial vehicles. MSL Drive Shafts also cater to wide Industrial Applications like Earth Moving Equipments, Engine Dynamometer Testing and Radiator Fan Drives for Railways, Steel Rolling Mills, and Printing Machineries etc. MSL’s other products include Steering Universal Joints for automotive applications like Passenger cars, Multi-utility vehicles, Sports utility vehicles, Light Commercial vehicles, Medium Commercial vehicles, and Heavy Commercial vehicles. MSL also manufactures Spindle and Sleeves of Steering Column intermediate Shafts for the following categories; o Multi-Utility Vehicles/ Sports Utility Vehicles o Light Commercial Vehicles o Medium Commercial Vehicles o Heavy Commercial Vehicles Recent addition in ‘Mahindra Sona Limited’ product range is Rubber Coupling for steering applications for Multi-utility vehicles, Sports Utility vehicles, and Earth Moving Equipments. The other product line of ‘Mahindra Sona Limited’ is for the automotive clutches. This includes the world’s largest Diaphragm type (DST as well as Ring type) and the conventional lever type for Passenger cars, Multi-utility vehicles, Sports utility vehicles, Light 13
  14. 14. Commercial vehicles, Medium Commercial vehicles, and Heavy Commercial vehicles. PRODUCTS AND APPLICATIONS: PRODUCTS: o Propeller Shafts o Universal Joints o Steering Joints o Clutch 1. PROPRLLER SHAFTS: • Applications: o Heavy Duty Vehicles o Light Commercial Vehicles o Passenger Cars o Three Wheelers o Earth Moving Equipments o Constructing Machinery 2. AXLES: • Applications; o Multi Utility Vehicles 3. CLUTCHES: • Applications; o Multi Utility Vehicles o Passenger Cars 14
  15. 15. ESTONES: 1. 1968: Collaboration agreement between Mahindra group and Dana Corporation, US for manufacturing the clutches 2. 1976: Formation of a joint venture company Mahindra Spicer Ltd. 3. 1979: Inauguration of Nashik work. 4. 1984: Merging of Mahindra Spicer Ltd with Mahindra and Mahindra Ltd, the division of Mahindra and Mahindra Ltd. 5. 1986: Dana Collaboration ends. 6. 1989: Modernization plan, redesigning of entire clutch range. 7. 1994: Formation of Mahindra Sona Ltd. restructure of Mahindra AND MAHINDAR MSL Division as Mahindra Sona Ltd. 15
  16. 16. 8. 1995: ISO-9001 certification by TUV- CERT, Germany. 9. 1999: QS-9000 certification by TUV- CERT, Germany. 10. 1999: Exports to USA begins. 16
  17. 17. BOARD OF DIRECTORS Mr. B. S. Patwardhan Management Representative Mr. J. V. Prabhu Managing Director Mr. J. S. Chaudhary Sr. Vice President (Marketing) Marketing (OEM after Marketing Customers) Branch Offices, New Business Opportunities, Customer Satisfaction, Publicity, Brand Management Mr. U. D. Phatak Vice President (A & F) Company Secretary A/C, Finance, Costing, MIS Mr. S. R. Kundaje General Manager (Technical Series) ProductionUniversal Joints, Clutch, Tool Room, Maintenance and Shop Scheduling 17 Product engineering, UJ and Clutch process, Product Testing, R and D, CAD, QA, Quality System, CIP, Industries Engineering, Capital Expenditure, Info systems, HR, Administration Mr. R. V. Vadhavkar General Manager (Materials) Purchase, SOA, Suppliers, QS Development, Customer Schedule Liaison, Material Scheduling, OSP Schedule, Plant Job Ordering, Packing, Dispatch, Sales Administration, RM Stores, Material Documentation.
  18. 18. 18
  19. 19. Finance Department Mr. A. D. Kale D. G. M. Accounting and Finance Cash and Bank Purchase Receivables Mr. R. M. Sawai D. G. M. Costing and MIS Purchase and Sales Sales and accounts costing activities Exports 19 Sales Accounts
  20. 20. BUILT UP AREA INLUSIVE YARDS: 9450 Sq. M. INTRODUCTION: The topic was provided by the project guide in the organization. The organization wanted to know how efficiently the working capital management is working. The various ratios relating to the working capital shows the ETP OBJECTIVE OF PROJECT: VACANT LAND STORES YARD efficient management of current asset and current liabilities is done. Main object is to match theoretical aspect with practical experience. The UTILITIES project forms a vital element in the curriculum of M.B.A. Under M.B.A. CANTEEN curriculum, University of Pune each student has to carry out the project in an XPORT organization and submit the project in the University. 20 LAND AREA: 45165 Sq. M. PLANT LAYOUT
  21. 21. MAIN PLANT STORA GATE During the past decade there has been a burst in each and every business in India. Competition has increased considerable within this decade. This has O F F I C E forced the organization to reduce the cost rather than increasing its market price for its product. Cost reduction can be achieved by various method like, proper inventory management, managing debtors and creditors and other current assets and liabilities, value engineering etc. To achieve all the things ROAD C D I M N effective and efficient working of capital is necessary. WORKING CAPITAL POLICY i. WORKING CAPITAL POLICY ii. TYPES OF WORKING CAPITAL iii. NEED FOR WORKING CAPITAL iv. CHARACTERISTICS OF CURRENT ASSETS v. CURRENT ASSETS CYCLE vi. FACTORS INFLUENCING WORKING CAPITAL vii. CURRENT ASSET FINANCING POLICY viii. THEORY OF RATIO ANALYSIS 21
  22. 22. PROJECT ON WORKING CAPITAL WORKING CAPITAL POLICY: Working capital management provides a summarized view of the position of the current assets and current liabilities and how to manage them and have an efficient and effective and optimum working capital. For day to day working of the concern is known as working capital and to fulfill this need, working capital management is necessary. This introduces working capital management or short term financial management which is concerned with decisions relating to current assets and current liabilities. The key difference between long term financial management and working capital management is in terms of the timing of cash. While long term financial decisions like buying capital equipment or issuing debentures involve cash flows over an extended period of time( 5 to 15 years or even more), short term financial decisions typically involves cash flows within a year or within the operating cycle of the firm. There are two concepts of working capital: gross working capital and net working capital. Gross working capital is the total of all current assets. Net working capital is difference between current assets and current liabilities. Management of working capital refers to the management of current assets as well as current liabilities. The major thrust, of course, is on the management of current assets. This is 22
  23. 23. understandable because current liabilities arise in the context of current assets. Working capital management is a significant facet of financial management. Its importance stems from two reasons; An investment in current assets represents a substantial portion of the total investment. Investment in current assets and the level of current liabilities have to be geared quickly to change in sales. To be sure, fixed asset investment and long term financing are also responsive to variation in sales. However, this relationship is not as close and direct as it is in the working capital components. The importance of working capital management is reflected in the fact that financial managers spend a great deal of time in managing current assets and current liabilities. Arranging short term financing, negotiating favorable credit terms, controlling the movement of cash, administering accounts receivable, and investing short term surplus funds consume a great deal of time of financial managers. TYPES OF WORKING CAPITAL: There are two types of working capital: o Fixed working capital o Variable working capital 23
  24. 24. o Fixed working capital : To carry on business a certain minimum level of working capital is necessary on a continuous and uninterrupted basis and for all practical purpose this requirement will have to be met with long term sources. This requirement is referred to as permanent or fixed working capital. Variable working capital : Any amount over and above the permanent level of working capital is known as temporary, fluctuating or variable working capital. This portion of the working capital is needed to meet fluctuations in demand consequent upon changes in production as a result of seasonal changes. 24
  25. 25. KINDS OF WORKING CAPITAL ON THE BASIS OF CONCEPT GROSS WORKING CAPITAL ON THE BASIS OF TIME NET WORKING CAPITAL FIXED WORKING CAPITAL REGULAR WORKING CAPITAL RESERVE WORKING CAPITAL 25 VARIABLE WORKING CAPITAL SEASONAL WORKING CAPITAL SPECIAL WORKING CAPITAL
  26. 26.  NEED FOR WORKING CAPITAL: The objective of financial decision making to maximize the shareholder’s wealth, it is necessary to generate sufficient profit. The extent to which profits can be earned will naturally depend upon sales. However, sales can not be easily converted into cash. Therefore, a need for working capital in the form of current assets to deal with the problem arising out the lack of immediate realization of cash again good sold. Of technically, this is referred to as the operating or cash cycle. This cycle consists three phases; PHASE 1Conversion of cash into inventory i.e. purchase of raw material, conversion of raw material, conversion of raw material into work-inprogress and finished goods. PHASE 2Conversion of inventory in to receivables i.e. allowing customers credit sales. PHASE 3Conversion of receivables into cash i.e. receivables are collected. 26
  27. 27. Working capital policy is divided into seven sections;  Characteristics of current assets: There are mainly two characteristics of current assets; o Short life span and o Swift transformation into other asset forms.  Factors influencing working capital requirements: The working capital needs of a firm are influenced by numerous factors. The important ones are; o Nature of business o Seasonality of operations o Production policy o Market conditions o Condition of supply  Level of current assets: An important working capital policy decision is concerned with the level of investment in current assets. Under the flexible policy (also referred to as a ‘conservative policy’), the investment in current assets is high. This means that the firm maintains a huge balance of cash and marketable securities, carries large amount of inventories, and grants generous terms of credit to customers which leads to a high level of debtors. Under a restrictive policy (also referred to as an ‘aggressive policy’), the investment in current assets is low. This means a firm keeps a small balance of cash and marketable securities, manages with small amount of inventories, and offers stiff terms of credit which leads to low level of debtors. 27
  28. 28. Current assets financing policy: The investment in  current assets may be broken into two parts: Permanent Current Assets and Temporary Current Assets. The former represents what the firm requires even at the bottom of its Cycle; the latter reflects the variable component that moves in line with seasonal fluctuations.  Profit criterion for current assets: Current assets can be easily liquidated and the value realized on liquidation would be more or less equal to the amount invested initially. Put differently, investment in current assets is reversible. For reversible investments, the criterion for net profit per period (which here means residual income) is equivalent to the criterion of net present value.  Operating cycle analysis: The investment in working capital is influenced by four keys events in the production and sales cycle of the firm: o Purchase of raw materials o Payment for raw materials o Sale of finished goods o Collection if cash for sales  Cash requirement for working capital: A financial manager is always interested in figuring out how much cash he/she should be arrange to 28
  29. 29. meet the working capital needs of his/her firm. There is a two step procedure for this: o Estimate the cash cost of various current assets required by firm. o Deduct the spontaneous current liabilities from the cash cost of current assets. A. CONSTITUENTS OF CURRENT ASSETS:  Inventories o Raw materials and components o Work-in-progress o Finished goods o Others  Trade debtors  Loans and advances  Cash and bank balances B. CONSTITUENTS OF CURRENT LIABILITIES:  Sundry creditors  Trade advances  Borrowings (short-term) o Commercial banks o Others  Provisions 29
  30. 30. CHARACTORISTICS OF CURRENT ASSETS:  While managing working capital, bear in mind two characteristics of current assets; i) Short life span ii) Swift transformation into other asset forms. Current assets have a short life span. Cash balances may be held idle for a week or two, accounts receivables may have a lifespan of 30 to 60 days, and inventories may be held for 2 to 60 days. The lifespan of current assets depends upon the time required in the activities of procurement, production, sales and collection and the degree of synchronization among them. Each current asset is swiftly transformed into other asset forms: cash is used for acquiring raw materials; raw materials are transformed into finished goods (this transformation may involve several stages of work in process); finished goods, generally sold on credit, are converted into accounts receivable (bank debt); and finally, accounts receivable, on realization, generate cash. The short lifespan of working capital components and their swift transformation from one form into another has certain implications; • Decisions relating to working capital management are repetitive of frequent. 30
  31. 31. • The difference between profit and present value is insignificant, • The close interaction among working capital components implies that efficient management of other components. For example, if the firm has a large accumulation of the finished good inventory, it may have to provide more liberal credit terms or show laxity in credit collection. Another example; if the firm has a crunch it may have to offer generous discounts. Finished Goods Accounts Receivable Work in Process Wages, salaries, Factory overheads Raw materials Cash Suppliers CURRENT ASSET CYCLE 31
  32. 32. FACTORS INFLUENCING WORKING CAPITAL REQUIREMENTS: The working capital needs of a firm are influenced by numerous factors. The important ones are;  Nature of business  Seasonality of operations  Production policy  Market conditions  Conditions of supply  Credit Policy  Inventory Policy  Abnormal Factors  Business Cycle  Growth And Expansion  Level Of Taxes  Dividend Policy  Price Level Changes  Operating Efficiency Few of them are given bellow; a. Nature of business: The working capital requirement of a firm is closely related to the nature of its business. A service firm, like an electricity undertaking or a transport corporation, which has a short operating cycle and which sales prominently on cash basis, has a modest working capital requirement. On the other hand, a manufacturing concern likes a machine tools unit, which has a long operating cycle and 32
  33. 33. which sales largely on credit have a very substantial working capital requirement. b. Seasonality of operations: Firms which have marked seasonality in their operations usually have highly fluctuating working capital requirements. To illustrate, consider a firm manufacturing ceiling fans. The sale of ceiling fan reaches a peak during summer months and drops sharply during winter period. The working capital requirements of such a firm are likely to increase considerably in summer months and decrease significantly during winter period. On the other hand, a firm manufacturing product like lamps, which have fairly even sales round the year, tends to have stable working capital c. Production Policy: A firm marked by pronounced seasonal fluctuations in its sales may pursue a production policy which may reduce the sharp variations in working capital requirements. For example, a manufacturer of ceiling fans may maintain a steady production throughout the year, rather than intensify the production activity during the peak business season. Such a production policy may dampen the fluctuations in working capital requirements. d. Market Conditions: The degree of competition prevailing in the market place has an important bearing on working capital needs. When competition is keen, a larger inventory of finished goods is required to promptly serve customers who may not be inclined to wait because other manufacturers are ready to meet their needs. Further, general credit terms may have to be offered to attract customers in a highly competitive market. Thus, working capital requirements tend to be high 33
  34. 34. because of greater investments in finished goods, inventory and accounts receivable. If the market is strong and the competition is weak, a firm can manage with a smaller inventory of finished goods because customers can be served with some delay. Further, in such a situation the firm can insist on cash payment and avoid lock-up of funds in accounts receivable- it can even ask for advance payment, partial or total. e. Conditions of Supply: The inventory of raw materials, spares and stores depends on the conditions of supply. If the supply is prompt and adequate, the firm can manage with small inventory. However, if the supply is unpredictable and scant, then the firm, to ensure continuity of production, would have to acquire stocks as and when they are available and carry larger inventory, on an average. A similar policy may have to be followed when the raw material is available seasonally and production operations are carried out round the year. CURRENT ASSETS FINANCING POLICY: After establishing the level of current assets, the firm must determine how these should be financed. What mix of long term capital and short term debt should the firm employ to support its current assets? For the sake of simplicity, assets are divided into two classes, viz. fixed assets and current assets. Fixed assets are assumed to grow at a constant rate which reflects the secular growth in sales. Current assets, too, are expected to display the same long-term rate of growth; however, they exhibit substantial variations around the trend line, thanks to seasonal (or even cyclical) patterns in sales and/or purchases. 34
  35. 35. The investment in current assets may be broken into two parts: Permanent Current Assets and Temporary Current Assets. The former represents what the firm requires even at the bottom of its sales cycle; the latter reflects the variable component that moves in line with seasonal fluctuations. Several strategies are available to a firm for financing its capital requirements. These strategies are illustrated by lines A, B and C in following diagram. STRATAGY A: Long-term financing is used to meet fixed asset as well as peak working capital requirements. When the working capital requirements are less than its peak level, the surplus is invested in liquid assets (cash and marketable securities). STRATEGY B: Long-term financing is used to meet fixed asset requirements, permanent working capital requirements, and a portion of fluctuating working capital requirements. During seasonal upswings, short-term financing is used; during seasonal downswings, surplus is invested in liquid assets. STRATEGY C: Long-term financing is used to meet fixed asset requirements and permanent working capital requirements. Short-term financing is used meet fluctuating working capital requirements. 35
  36. 36. Fluctuating Current Fluctuating Current Asset fluctuating Asset Requirements requirement A B Capital Requirements C Permanent Current Asset Requirements Fixed Asset Requirement 36
  37. 37. Time CAPITAL REQUIREMENTS AND THEIR FINANCING OPERATING CYCLE AND CASH CYCLE OPERATING CYCLE ANALYSIS ii. DURATION OF LIFE CYCLE 37 iii. MATCHING OR HEDGING APPROACH iv. CONSERVATIVE APPROACH v. AGGRESSIVE APPROACH i.
  38. 38. OPERATING CYCLE AND CASH CYCLE: The investment in working capital is influenced by four keys events in the production and sales cycle of the firm: • Purchase of raw materials • Payment for raw materials • Sale of finished goods • Collection if cash for sales The firm begins with the purchase of raw materials which are paid for after a delay which represents the accounts payable period. The firms convert the raw material into finished goods and then sell the same. The time lag between the purchase of raw materials and the sell of finished goods is the inventory period. Customers pay their bills sometimes after the sales. The period that elapses between the date of 38
  39. 39. sale and the date of collection of receivables is the accounts receivable period (debtor’s period). The time that elapses between the purchase of raw materials and the collection of cash for sales is referred to as the operating cycle, whereas the time length between the payments for raw material purchases and the collection of cash for sales is referred to as the cash cycle. The operating cycle is the sum of inventory period and the accounts receivable period, whereas the cash cycle is equal to the operating cycle less the accounts receivable period. From the financial statement of the firm, we can estimate the inventory period, the accounts receivable period, and the accounts payable period. Order placed Stock arrives Inventory Period Accounts Receivable Period Accounts Payable Period Firm Receives invoice Cash Paid For Materials Operating Cycle Cash Cycle OPERATING AND CASH CYCLE 39 Cash Received
  40. 40. OPERATING CYCLE ANALYSIS: The Concept of Operating Cycle: The net working capital is the difference between current assets and current liabilities. A firm acquires current assets to convert them into cash so that the current liabilities can be satisfied. On the other hand, fixed assets such as land and building, plant and machinery etc. are acquired with long term objective. The amount of capital invested in fixed assets is recovered after a long period of time. On the other hand, amount blocked in current assets is expected to recover as early as possible. The concept of operating cycle is based on this aspect. Operating cycle: The concept of operating cycle implies the time period that is required from the time cash is put on the business along with other inputs to the time it is recovered from the amount of sales made by the firm. A firm puts cash on as an input and the inputs like raw materials are purchased with the cash. The raw materials are converted into finished product and for this additional cash may be required. The finished product is converted into sale and if the sale is made for cash, the operating cycle is complete as cash is recovered back. On the other hand, if sales are on credit, sales are converted into debtors and debtors are converted into cash. The length of operating cycle depends upon several factors. These factors are as follows; 40
  41. 41. (i) Length of the manufacturing process: If the manufacturing process is quite lengthy, the operating cycle will be prolonged. On the other hand, if the manufacturing process is of shorter duration, the length of the operating cycle will also be of a shorter duration. For example, in case of hotels and restaurants, the manufacturing process is relatively short which reduces the duration of the operating cycle. In case of heavy engineering industries, since the manufacturing process itself is very lengthy, the operating cycle also becomes very long. (ii) Holding period of inventories: On an average for how long firm holds inventory is also one of the factors affecting operating cycle. If the firm holds inventory of raw material for a longer duration due to safety precautions, operating cycle is prolonged. Firms following hand to mouth policies regarding inventories of raw materials will have a shorter operating cycle. Similarly in case of work-in-process, if the time duration is long before being converted into finished product, operating cycle will be of longer period. In case of finished goods inventory also, the same principle exists. If finished goods are quickly converted into sales, operating cycle will be shorter. But if finished goods inventory is not converted into sales quickly and liberal credit is extended to the customers, operating cycle becomes lengthy. The operating cycle of a firm begins with the acquisition of raw material and ends with the collection of receivables. It may be divided into four stages. o Raw material and stores storage stage o Work in progress stage o Finished goods inventory stage 41
  42. 42. o Debtor’s collection stage DURATION OF LIFE CYCLE: The duration of life cycle is equal to the sum of duration of each of these stages less the credit period allowed by the suppliers of the firm. O=R+W+F+D-C Where O = duration of operating cycle R = raw material and stores storage period W= work - in - progress period F = finished goods storage period D = debtors collection period C = creditors payment The components of operating cycle may be calculated as follows; Average stock of Raw material R = --------------------------------------------------------------------------Average raw material and stores consumption per day Average work-in-progress inventory W = --------------------------------------------------------------------------Average cost of production per day Average finished goods inventory F = ----------------------------------------------------------------------------Average cost of goods sold per day 42
  43. 43. Average book debts D = ----------------------------------------------------------------------------Average credit sales per day Average trade creditors C = ----------------------------------------------------------------------------Average credit purchase per day MATCHING APPROACH OR HEDGING APPROACH: In matching approach or hedging approach for financing in which the expected life of assets is matched with the sources of funds rose to finance assets. The more explanation of the exact matching approach is the purpose of financing is to make payments of assets, the financing should be relinquished when the asset is expected to be relinquished, and long term finance for the short term is expensive or costly because funds will not be utilized for full period. Similarly financing long term assets with a short term financing will have to be made on a continuing basis. In this way, when a company follows matching approach, long term financing will be used to finance fixed assets and permanent current assets. Short term financing is used to finance temporary current assets. CONSERVATIVE APPROACH: The financing policy of a company is conservative when it depends more on long term funds for financing needs. In this approach, company finances permanent assets with long term financing. In this way company has no temporary assets, company 43
  44. 44. stores liquidity by investing surplus funds into marketable securities. This plan mainly depends upon long term financing and so less risky. AGGRESSIVE APPROACH: While financing assets, company may select aggressive approach when a company uses more short term financing than warranted by matching approach. In this policy, company finances a part of its permanent current assets are also financed by short term finance. The relatively more used of short term financing makes this aggressive approach more risky.  RATIO ANALYSIS: A ratio is simple arithmetical expression of the relationship of one number to another. It may be defined as the indicated quotient of the two mathematical expressions. A ratio is defined as, “The indicated quotient of two mathematical expressions.” And as, “The relationship between two or more things.” Ratio analysis is powerful tool of financial analysis. Ratio analysis is a technique of analysis and interpretation of financial statements. It is a process of establishing and interpreting various ratios for helping in making certain decisions. CLASSIFICATION OF RATIOS (ACCORDING TO TEST): Various ratios have been classified as bellow; a) LIQUIDITY RATIO: These are the ratios which measure short term solvency for financial position of a firm. 44
  45. 45. b) LONG TERM SOLVANCY AND LIQUIDITY RATIO: Long term solvency ratios convey the firm’s ability to meet the interest costs and repayment schedules of its long term obligations. E.g. Debt-equity ratio and Interest coverage ratio. c) ACTIVITY RATIO: These are calculated to measure the efficiency with which the resources of a firm have been employed. d) PROFITABILITY RATIOS: These ratios measure the results of business operations or overall performance and effectiveness of a firm.  LIQUIDITY RATIO: Liquidity refers to the ability of a concern to meet its current obligations as and when it becomes due. These should be convertible into cash for paying obligations of short term nature. If current assets can pay off current liabilities, then liquidity position will be satisfactory. On the other hand, if current liabilities may not be easily met out of current assets then liquidity position will be bad. To measure liquidity of a firm, the following ratios can be calculated; i. Current Ratio ii. Quick or Acid Test or Liquid Ratio iii. Absolute Liquid Ratio or Cash Position ratio A. CURRENT RATIO: Current ratio may be defined as the relationship between current assets and current liabilities. This ratio is also known as the Working Capital 45
  46. 46. Ratio, which is a measure of general liquidity and is most widely used to make the analysis of short term financial position or liquidity of a firm. Current Assets Current Ratio = -------------------------------------Current liabilities OR Current Assets: Current Liabilities B. LIQUID RATIO: Liquid ratio or quick or acid test ratio may be defined as the relationship between liquid assets and current or liquid liabilities. An asset is said to be liquid if it can be converted into cash within a short period without loss of value. In that sense, cash in hand and cash at bank are the most liquid assets. Liquid Assets Liquid Ratio = -------------------------------Liquid Liabilities C. ABSOLUTE LIQUID RATIO: The ratio should be calculated together with current ratio and acid test ratio so as to exclude even receivables from the current assets and find out the absolute liquid assets. 46
  47. 47. Absolute Liquid Assets Absolute Liquid Ratio = ----------------------------------Current Liabilities D. CURRENT ASSET TURNOVER RATIO: Funds are invested in various assets in business to make sales and earn profit. The efficiency with which assets are managed directly affects the volume of sales. The better the management of assets, the larger is the amount of sales or profits. Activity ratios measure the efficiency or effectiveness with which a firm manages its resources or assets. These ratios are called as “Turn-over ratios” because they indicate speed with which assets are converted into sales. Current Assets Sales Turnover Ratio = ---------------------Current Assets E. WORKING CAPITAL TURNOVER RATIO: Working capital turnover ratio indicates the velocity of the utilization of net working capital. This ratio indicates the number of times the working capital is turned over in the course of a year. A higher ratio indicates efficient utilization of working capital and a low ratio indicates otherwise. Working Capital Cost of Sales Turnover Ratio = --------------------------------47
  48. 48. Average Working Capital F. INVENTORY TURNOVER RATIO: This is also known as Stock Velocity. It indicates whether inventory has been efficiently used or not. The purpose is to see whether only required minimum funds have been locked up in inventory. The ratio indicates number of times the stock has been turned over during the period and evaluates the efficiency with which a firm is able to manage its inventory. Inventory Sales Turnover Ratio = ---------------------Inventory G. GROSS PROFIT RATIO: Gross profit ratio measures the relationship of gross profit and net sales and is usually represented as a percentage. Gross Profit Gross Profit Ratio = ---------------------- Î 100 Net Sales H. NET PROFIT RATIO: 48
  49. 49. Net profit ratio establishes a relationship between net profit (after taxes) and sales, and indicates the efficiency of the management in manufacturing, selling, administrative and other activities of the firm. Net Profit after Tax Net Profit Ratio = -------------------------- Î 100 Net Sales I. DEBTORS TURNOVER RATIO: Debtor’s velocity indicates the velocity of debt collection of firm. In simple words, it indicates the number of times average debtors (Receivables) are turned over during the year. Net Credit Sales Debtors Turnover Ratio = ------------------------------Average Trade Debtors = No. of Times J. CREDITORS TURNOVER RATIO: A firm has to make credit purchases and incur short term liabilities. A supplier of goods, i.e., creditor, is naturally interested in finding out how much time the firm is likely to take in repaying its trade creditors. Net Purchases Creditors Turnover Ratio = ------------------------------49
  50. 50. Average Trade Creditors K. DEBT-EQUITY RATIO: Debt-equity ratio, also known as “External- Internal Equity Ratio” is calculated to measure the relative claims of outsiders and the owners (i. e. shareholders) against the firm’s asset. The ratio indicates the relationship between the outsider’s funds and the shareholders funds. Outsider’s funds Debt-Equity Ratio = --------------------------Shareholders funds 50
  51. 51. WORKING capital financing i. ii. iii. iv. v. INTRODUCTION TYPES OF FINANCING WORKING CAPITAL SOURCES OF FINANCING WORKING CAPITAL REGULATION OF BANK FINANCE OTHER FORMS OF FINANCING 51
  52. 52. WORKING CAPITAL FINANCING: INTRODUCTION: The investment in raw materials, stock-in-progress, finished goods, and receivables (the principal constituents of current assets) often varies a great deal during the course of the year. Hence, the financial manager generally spends a good chunk of his time in finding money to finance current assets. TYPES OF FINANCING WORKING CAPITAL:  The firm must find out the sources of finds to finance its working capital. There are three different financial policies which are as follows; • Long Term Financing: The sources of long term financing Are; o Shares (Equity shares and preference shares) o Debentures o Retained earnings and o Long term loan from financial institution • Short Term Financing: The sources of short-term financing are short term credit, which the firm arranges. These sources include. o Short term bank credit or loans o Commercial papers o Factoring receivable and o Public deposit 52
  53. 53. • Spontaneous Financing: Spontaneous financing refers to the automatic sources of short term funds. E.g. Trade credit and outstanding expenses. The main features of these sources are that they are cost free. Normally permanent working capital is financed by long term sources where as temporary working capital is financed by short term sources. While taking the decision of financing working capital requirement, certain factors are to be taken into consideration; i. cost of financing ii. flexibility Cost of Financing: The interest rates increased with the time. o Longer the maturity of debit greater the interest rate. The decision of the company is guided by risk-return trade off. Flexibility: Short term funds are more flexible. Short term funds can o be easily refunded as compared to long term funds, because long term funds can not be refunded before its maturity period. Financing for the domestic order is majority met by letter of credit. In case of any shortage company uses the surplus into various activities such as; a) short term investments b) Inter corporate deposit – In case any sister factory is in need of funds, the surplus fund is used as given to the sister concern. c) Paying for Overdrafts Typically, current assets are supported by a combination of long-term and short-term sources of finance. Long-term sources of finance primarily support fixed assets and secondarily provide the margin money for working capital. Short-term sources of finance, more or less exclusively support the current assets. 53
  54. 54.  CASH FLOW STATEMENT: Cash flow statements indicate movement of cash only. The preparation of cash flow statement is important to understand the paradoxical situation in which the firm finds difficulty in honoring its short period business Indicated by the funds flow statement (working capital basis).  FUNDS FLOW STATEMENT: The funds flow statement reveals the sources from which the funds are made available and how they are utilized or applied. Difference between cash flow and funds flow statement is given bellow; 54
  55. 55.  DIFFERENCE BETWEEN FUNDS FLOW AND CASH FLOW STATEMENT: FUND FLOW STATEMENT The term fund refers to working CASH FLOW STATEMENT The term cash refers to only cash capital and it shows changes in and it shows change in cash working capital. This analysis is more useful in long position of the business. This is more useful in short term term planning. This considers changes in all current planning. This indicates simply cash receipt assets and current liabilities. and cash payments and does not take into consideration other current assets. Improvement in working capital Improvement in cash position does not mean improvement in cash results in improvement in working position. This is a test of effective use of capital. This is the test of effective control working capital by the management of flow of cash by the management in a particular period of time. This explains in brief the changes in a particular period of time. This explains the movement of cash occurred in the items in two balance and all those dealings which affects sheets. the cash position of the concern. 55
  56. 56. INVENTORY MANAGEMENT: INTRODUCTION: There are three types of inventories: raw materials, work in progress, and finished goods. a. Raw materials are materials and components that are inputs in making the final product. b. Work-in-process also called stock-in-process refers to goods in the intermediate stages of production. c. Finished goods consist of final products that are ready for sale. While manufacturing firms generally hold all the three types of inventories, distribution firms hold mostly finished goods. Inventories represent the second largest asset category for manufacturing companies, next only to plant and equipment. The proportion of inventories to total assets generally varies between 15 and 30 percent. Given substantial investment in inventories, the importance of inventory management can not be emphasized. o REGULATION OF BANK FINANCE: The regulation of bank finance by central bank of India to our company is CMA data (Current Monitoring Analysis) bank before giving finance to the company sees and analyze the earning capacity of the company. The money that the bank will be giving where the company is going to invest and for what purpose. Whether the money is put into the manufacture process or not bank needs to know the financial condition of a firm and its credit worthiness. 56
  57. 57. DATA ANALYSIS AND INTERPRETATION i. BALANCE SHEET OF MSL ii. CURRENT ASSETS iii. CURRENT LIABILITIES iv. CHANGES IN WORKING CAPITAL v. FINANCIAL REPORT 57
  58. 58. DATA ANALYSIS AND INTERPRETATION: BALANCE SHEET OF MAHINDRA SONA LTD. Schedule 2003-2004` 2004-2005 2005-2006 2006-2007 Sources of funds :Share Capital Reserve & Surplus I II 39600000 130763392.2 39600000 189700080.3 39600000 265042678.5 39600000 363683646 Loan Funds:Secured Loan Unsecured Loan III IV 68886274.5 15262110 81342342.9 15262110 96630797.7 15262110 67521776.4 15262110 Deferred tax liability(Net) V 3394386 257906162.7 325904533.2 416535586.2 486067532.4 235246054.5 147383485.2 87862569.3 9909356.4 276634041.3 167001049.8 109632991.5 17384400 326875086 182503653.3 144371432.7 234702 342719935.2 197105247 145614688.2 1606675.5 1257219 1021410 7207127.1 1021410 12316295.7 Total Application of funds :Fixed Asset Gross Block Less: Depreciation/ Amortization Net Block Capital WIP & Capital advance VI VII VIII IX Investment Deferred tax Asset(Net) X Current Asset loans & advances Inventories Sundry debtors Cash & Bank balance Loans & Advances XI XII XIII XIV 96845011.2 222813224.1 35200474.2 23957856.9 152829979.2 324030586.5 10243058.4 41913249.3 116907812.1 320144611.5 50582646 38010249 122664522.6 360091789.2 73017614.7 34831211.4 Less:Current liabilities Provisions XV XVI 175436987.4 43245342 254001050.1 77385900.6 185920966.8 76023437.4 184014939.6 81081735.3 Net current asset XVII 160134237 197629922.7 263700914.4 325508463 Total 257906162.7 325904533.2 416535586.2 486067532.4 Net Current Asset 378816566.4 529016873.4 526666728.6 591626547.9 1.111135256 1.271572286 1.073679094 Working capital leverage 58
  59. 59. CURRENT ASSET 2003-2004 2004-2005 2005-2006 2006-2007 1021410 1021410 Investment (At cost, Unless otherwise specified) Unquoted:Shares (Non-trade & fully paid up ) Inventories Stores & Spares 2799252.9 3824108.1 2588202 2404312.2 Tools 7104163.5 8571260.7 10014266.7 9406374.3 Raw Material 18819824.4 27509949 29815432.2 33502496.4 WIP 56680064.1 89319083.4 66041937 64072076.4 FG 11441706.3 23605578 8447974.2 13279263.3 Total 96845011.2 152829979.2 116907812.1 122664522.6 Considered Good 656801.1 2990799 2532024 2043717.3 Considered doubtful 724526.1 724526.1 724526.1 724526.1 Other debt consider good 222156423 321039787.5 317612587.5 358048071.9 Provision for doubtful debts 724526.1 724526.1 724526.1 724526.1 Total 222813224.1 324030586.5 320144611.5 360091789.2 22631033.7 37345631.4 32713847.1 27823066.2 1326823.2 4567617.9 2142961.2 2523188.7 Sundry debtors Outstanding over six months Less:- Loans & Advances Advances recoverable in cash or in kind or for value to be received consider good Balance with customs port trust 59
  60. 60. Excise, etc VAT recoverable 3087153.9 Fringe benefit tax ( Net of provision) 606911.4 Income tax ( Net of provision) Total 3811758.3 66286.8 23957856.9 41913249.3 66286.8 38010249 34831211.4 Cash & Bank balance Cheque on hand 1821519 Balance with schedule bank in current A/c. 1261197.9 32573086.2 9490284.9 15967837.8 697680 In fixed deposit 48390798.6 607680 45119057.4 Cash on hand 1665 Remittance on transit 11598525 As margin money 805869 55093.5 322969.5 330529.5 Total 35200474.2 10243058.4 50582646 73017614.7 Net Current Asset 378816566.4 529016873.4 526666728.6 591626547.9 60
  61. 61. Year CA 378816206. 4 529016873. 4 526600441. 8 590726547. 9 2004 2005 2006 2007 Change in CA 7 6 5 4 Current Assets 3 2 1 0 2004 2005 Year 2006 2007 INTERPRETATION: The CA has Shown an increasing trend in the year 2005-2006 as compared to 2004-2005.whereas in the year 2006-2007 there has been a negligible decrease in CA. 61
  62. 62. CURRENT LIABILITIES 2004-2005 3502710.9 2005-2006 2006-2007 Acceptances 2003-2004 8309551.5 sundry creditors[note20 ii] i]total outstanding dues of small scale industries undertakings 47729880 32807356.2 18638133.3 23411069.1 ii]total outstanding dues of creditors other than small scale industrial undertaking Total advances from customers 106150972.5 153880852.5 7059273.3 202512098.7 235319454.9 8093942.1 145110034.8 163748168.1 8353999.8 135508625.1 158919694.2 7266978 5227652.7 6718377.6 VAT payable Other liabilities 5673644.1 6832030.5 8231236.2 10780084.8 Interest accrued but not due on lone 513666 252911.7 359910 329805 Total 175436987.4 254001050.1 185920966.8 184014939.6 Provision for warranties [note 7] 2003-2004 4714534.8 2004-2005 4569586.2 2005-2006 4242493.8 2006-2007 3882312 Provision for income tax [net of payment] 8228560.5 22597056.9 14907864.6 14643873 Provisions Provision for fringe benefit tax 57600 Provision for wealth tax 27000 29700 Provision for encashable leave on separation 4616100 6066900 Provision for gratuity 3322271.7 12780000 Provision for employee benefit 37800 18396864 16225530.3 Proposed dividend 19800000 27720000 33660000 39600000 Tax on proposed dividend 2536875 3622657.5 4720815 6730020 62
  63. 63. TOTAL Net Current Liabilities 43245342 218682329.4 77385900.6 331386950.7 63 76023437.4 261944404.2 81081735.3 265096674.9
  64. 64. Year 2004 2005 2006 2007 CL 218682329. 4 331386950. 7 261944404. 2 265096674. 9 3.5 Changes in CL 3 2.5 2 1.5 Current Liabilities 1 0.5 0 2004 2005 2006 2007 Year INTERPRETATION: The Current Liabilities has Shown an increasing trend in the year 2005-2006 as compared to 2004-2005.whereas in the year 2006-2007 there has been a negligible increase in Current Liabilities. 64
  65. 65. TRENDS:- WORKING CAPITAL CHANGE YEAR 2003-2004 2004-2005 2005-2006 2006-2007 YEAR 2003-2004 2004-2005 2005-2006 2006-2007 CHANGES IN WORKING CAPITAL 160134237 197629922.7 264722324.4 326529873 YEAR CURRENT ASSET YEAR CURRNNT LIABILITIES 2003-2004 2004-2005 2005-2006 2006-2007 378816566.4 529016873.4 526666728.6 591626547.9 2003-2004 2004-2005 2005-2006 2006-2007 218682329.4 331386950.7 261944404.2 265096674.9 CHANGES IN WORKING CAPITAL 160.13 197.62 264.72 326.52 YEAR CURRENT ASSET YEAR CURRENT LIABILITIES 2003-2004 2004-2005 2005-2006 2006-2007 378.81 529.01 526.67 591.63 2003-2004 2004-2005 2005-2006 2006-2007 218.68 331.39 261.95 265.11 65
  66. 66. Year CA CL 2004 2005 2006 2007 378816206.4 529016873.4 526600441.8 590726547.9 218682329.4 331386950.7 261944404.2 265096674.9 Working Capital 160133877 197629922.7 264656037.6 325629873 Changes in Working Capital 7 6 5 4 3 2 Work ing Capit al 1 0 2004 2005 2006 2007 Year INTERPRETATION: The Working Capital has Shown an increasing trend in the year 2005-2006 as compared to 2004-2005.whereas in the year 2006-2007 there has been a negligible decrease in Working Capital. 66
  67. 67. Financial Report Income Profit before depreciation Less:Depreciation Profit before tax Less:Provision for tax Current year Earlier year Deferred tax (Net) Profit after tax for current year Profit for earlier year brought forward Profit available for appropriation Propose Dividend Income tax on Dividend year ended 31st march2004 934.03 year ended 31st march2005 1427.9 year ended 31st march2006 1430.92 year ended 31st march2007 1715.15 132.38 197.87 209.64 265.03 21.71 110.67 22.67 175.2 17.54 192.1 19.05 245.98 43 1.34 5.88 80 5.17 70 6.61 2.06 82.5 1.52 3.47 72.21 100.37 126.65 165.43 45.7 85.2 139.69 210.4 118.01 22 185.57 30.8 266.04 37.4 375.83 44 2.82 4.03 5.52 7.47 67
  68. 68. RATIO ANALYSIS i.CURRENT RATIO ii. LIQUID RATIO iii. ABSOLUTE LIQUID RATIO iv. CURRENT ASSET TURN-OVER RATIO v. WORKING CAPITAL TURN-OVER RATIO vi. INVENTORY TURN-OVER RATIO vii. GROSS PRIFIT RATIO viii. NET PROFIT RATIO ix. DEBTORS TURN-OVER RATIO x. INVESTMENT IN RECEIVABLES xi. OPERATING CYCLE xii. ROSS OPERATING CYCLE xiii. NET OPERATING CYCLE xiv. CREDITORS TURN OVER RATIO xv. DEBT-EQUITY RATIO 68
  69. 69. A. CURRENT RATIO: YEAR CURRENT ASSET 2003-2004 2004-2005 2005-2006 2006-2007 378816566.4 529016873.4 526666 728.6 591626547.9 YEAR 2003-2004 2004-2005 2005-2006 2006-2007 CURRNNT LIABILITIES 218682329.4 331386950.7 261944404.2 265096674.9 CURRENT RATIO 1.732268755 1.596372073 2.010604999 2.231738848 CURRENT RATIO 2.5 2 1.5 RATIO 1 0.5 0 2003-2004 2004-2005 2005-2006 YEAR 2006-2007 INTERPRETATION: The Current Ratio of a company shows slight decrease from the year 2004-2005. But later on it goes on increasing from 2006-2007. 69
  70. 70. B. LIQUID RATIO: YEAR 2003-2004 2004-2005 2005-2006 2006-2007 CURRENT ASSET 378816566.4 529016873.4 526666728.6 591626547.9 YEAR 2003-2004 2004-2005 2005-2006 2006-2007 INVENTORIES 96845011.2 152829979.2 116907812.1 122664522.6 LIQUID ASSET 281971555.2 376186894.2 409758916.5 468962025.3 LIQUID LIABILITIES 218682329.4 331386950.7 261944404.2 265096674.9 LIQUID RATIO 1.289411705 1.13518922 1.56429727 1.769022661 LIQUID RATIO 2 1.5 1 0.5 0 2003-2004 2004-2005 2005-2006 2006-2007 YEAR INTERPRETATION: The Liquid Ratio of a company shows slight decrease from the year 2004-2005. But later on it goes on increasing from 2006-2007. 70 R A TI O
  71. 71. C. ABSOLUTE LIQUID RATIO: YEAR 2003-2004 2004-2005 2005-2006 2006-2007 CASH & BANK BALANCE 35200474.2 10243058.4 50582646 73017614.7 YEAR SHORT TERM INVESTMENT TOTAL 35200474.2 10243058.4 51604056 74039024.7 1021410 1021410 LIQUID LIABILITIES 218682329.4 331386950.7 261944404.2 265096674.9 ABSOLUTE LIQUID RATIO 0.160966249 0.030909661 0.19700385 0.279290658 2003-2004 2004-2005 2005-2006 2006-2007 ABSOLUTE LIQUID RATIO 0.3 0.25 0.2 0.15 0.1 0.05 0 2003-2004 2004-2005 2005-2006 2006-2007 YEAR INTERPRETATION: The Absolute Liquid Ratio of a company shows a deep decrease in the year 2004-2005. But later on it goes on increasing from 20062007. 71 R A TI O
  72. 72. D. CURRENT ASSETS TURNOVER RATIO: YEAR SALES 2003-2004 816839262 124689527 6 125135185 6 150921324 9 2004-2005 2005-2006 2006-2007 YEAR 2003-2004 2004-2005 2005-2006 2006-2007 CURRENT ASSET 378816566.4 529016873.4 526666728.6 591626547.9 CURRENT ASSET TURNOVER RATIO 2.156292344 2.357004737 2.375984257 2.550955927 CURRENT ASSET TURNOVER RATIO 2.6 2.5 2.4 2.3 2.2 2.1 2 1.9 2003-2004 2004-2005 2005-2006 YEAR INTERPRETATION: 72 2006-2007 R A TI O
  73. 73. The Current Asset Turnover Ratio of a company shows deep increase from the year 2003-2004. Then it shows slight increase. But later on it goes on increasing from 2006-2007. E. WORKING CAPITAL TURNOVER RATIO: YEAR 2003-2004 2004-2005 2005-2006 2006-2007 YEAR 2003-2004 2004-2005 2005-2006 2006-2007 SALES 816839262 1246895276 1251351856 1509213249 WORKING CAPITAL 160134237 197629922.7 264722324.4 326529873 WORKING CAPITAL TURN OVER RATIO 5.100965773 6.309243354 4.727035616 4.621976039 WORKING CAPITAL TURN OVER RATIO 7 6 5 RATIO 4 3 2 1 0 2003-2004 2004-2005 2005-2006 YEAR INTERPRETATION: 73 2006-2007
  74. 74. The Working Capital Turnover Ratio of a company shows deep increase from the year 2003-2004. And it again decreases till the year 2005-2006. In the year 2006-2007, it remains almost same. F. INVENTORY TURNOVER RATIO: YEAR 2003-2004 2004-2005 2005-2006 2006-2007 YEAR 2003-2004 2004-2005 2005-2006 2006-2007 SALES 816839262 1246895276 1251351856 1509213249 INVENTORIES 96845011.2 152829979.2 116907812.1 122664522.6 INVENTORY TURN OVER RATIO 8.434500155 8.15870867 10.70374882 12.30358393 INVENTORY TURN OVER RATIO 14 12 10 8 RATIO 6 4 2 0 2003-2004 2004-2005 2005-2006 YEAR 74 2006-2007
  75. 75. INTERPRETATION: The Inventory Turnover Ratio of a company shows slight decrease from the year 2004-2005. But later on it goes on increasing till the year 2006-2007. G. GROSS PROFIT RATIO: YEAR 2003-2004 2004-2005 2005-2006 2006-2007 GROSS PROFIT 75819582.9 119463178.5 136404734.4 186955091.1 YEAR GROSS PROFIT RATIO 10.25413947 10.46257402 11.87262526 13.50021467 2003-2004 2004-2005 2005-2006 2006-2007 SALES(NET) 739404639 1141814417 1148901203 1384830506 GROSS PROFIT RATIO 16 14 12 10 8 RATIO 6 4 2 0 2003-2004 2004-2005 2005-2006 YEAR 75 2006-2007
  76. 76. INTERPRETATION: The Gross Profit Ratio of a company shows slight increase from the year 2004-2005. But later on it goes on increasing from 2006-2007. H. NET PROFIT RATIO: YEAR 2003-2004 2004-2005 2005-2006 2006-2007 YEAR 2003-2004 2004-2005 2005-2006 2006-2007 NET PROFIT 65000436.3 90330083.1 113988485.7 148887169.2 SALES(NET) 739404639 1141814417 1148901203 1384830506 NET PROFIT RATIO 8.790915403 7.911100245 9.921522009 10.75129184 NET PROFIT RATIO 12 10 8 RATIO 6 4 2 0 2003-2004 2004-2005 2005-2006 YEAR 76 2006-2007
  77. 77. INTERPRETATION: The Net Profit Ratio of a company shows slight decrease from the year 2004-2005. But later on it goes on increasing till 2006-2007. YEAR SALES(NET) CLOSING DEBTORS 222813224.1 324030586.5 320144611.5 360091789.2 2003-2004 2004-2005 2005-2006 2006-2007 739404639 1141814417 1148901203 1384830506 YEAR 2003-2004 2004-2005 2005-2006 2006-2007 DEBTORS TURNOVER RATIO 3.318495309 3.523785914 3.588694488 3.845770849 I. DEBTORS TURNOVER RATIO: DEBTORS TURNOVER RATIO 4 3.8 RATIO 3.6 3.4 3.2 3 2003-2004 2004-2005 2005-2006 YEAR INTERPRETATION: 77 2006-2007
  78. 78. The Debtors Turnover Ratio of a company goes on increasing till 2006-2007. J. INVESTMENT IN RECEIVABLES: INVESTMENT IN RECEIVABLES PARTICULERS SALES (NET) LESS:FIEXED COST (20%) VARIABLE COST (60%) RETURN ON INVESTMENT BAD DEBTS (1%) NET BENEFIT 2003-04 97 DAYS COLLECTION PERIOD 739404639 2004-05 91 DAYS COLLECTION PERIOD 1141814417 2005-06 89 DAYS COLLECTION PERIOD 1148901203 2006-07 83 DAYS COLLECTION PERIOD 1384830506 147880927.8 443642783.4 147880927.8 685088650.2 147880927.8 689340721.8 147880927.8 830898303.6 44826406.24 7394046.39 95660475.17 59218930.94 11418144.17 238207763.9 58213067.82 11489012.03 241977473.5 63467715.79 13848305.06 328735253.8 INVESTMENT IN RECEIVABLES 350 300 250 200 150 100 50 0 BENEFIT (AMOUNT IN NETMILLION RS.) 2003-2004 2004-2005 2005-2006 YEAR 78 2006-2007
  79. 79. INTERPRETATION: The Investment in Receivables of a company shows deep increase from the year 2004-2005. And then it shows very slight increase. But later on it goes on increasing till 2006-2007. OPERATING CYCLE 2004 2005 2006 2007 460469385 742734765 654570475 782073011 1438966 18819824 13 2321046 27509949 11 2045532 29815432 14 2443978 33502496 13 720265120 2073703 56680064 1111670321 3473969 89319083 1078538405 3370432 66041937 126194749 1 3943585 64072076 25 24 20 17 675026762 2109458 11441706 5 1045956816 3268615 23605578 7 1020944442 3190451 8447974 3 121115467 8 3784858 13279263 4 A) Credit sales B) Sales per day C) Debtors D) Debtor outstanding day's GROSS OPERATING CYCLE 5) CREDITORS DEFERRAL PERIOD A) Credit purchase B) Purchase per day C) Creditors D) Creditors outstanding day's 739404639 2310639 222813224 97 140 1141814417 3568170 324030586 91 133 1148901203 3590316 320144611 89 126 138483050 6 4327595 360091789 83 117 464389295 1451216 153880852 106 751424889 2348202 235319454 100 656875958 2052737 163748168 80 785760075 2455500 158919694 65 NET OERATING CYCLE / CCC 34 33 46 52 1) RAW MATERIAL CONVERSION PERIOD A) Raw material consumption B) Raw material consumption per day C) Raw material Inventory D) Raw material holding day's 2) WIP CONVERSION PERIOD A) Cost of production B) Cost of production per day C) WIP Inventory D) Work in progress inventory holding day's 3) FINISHED GOOD CONVERSION PERIOD A) Cost of good's sold B) Cost of good's sold per day C) Finished good's inventory D) FG inventory holding day's 4) COLLECTION DAY'S 79
  80. 80. K. GROSS OPERATING CYCLE: YEAR 2003-2004 2004-2005 2005-2006 2006-2007 GROSS OPERATING CYCLE 140 133 126 117 GROSS OPERATING CYCLE 145 140 135 130 125 120 115 110 105 2003-2004 2004-2005 YEAR 80 2005-2006 2006-2007 N O. O F D A Y S
  81. 81. INTERPRETATION: The gross operating cycle is going down every year. I. NET OPERATING CYCLE: YEAR 2003-2004 2004-2005 2005-2006 2006-2007 NET OPERATING CYCLE (CCC) 34 33 46 52 NET OPERATING CYCLE (CCC) 60 50 40 NO. OF DAYS 30 20 10 0 2003-2004 2004-2005 2005-2006 YEAR 81 2006-2007
  82. 82. INTERPRETATION: The Net Operating Cycle has increased from the year 2004-05 to 2007-08. M. CREDITORS TURNOVER RATIO: YEAR 2003-2004 2004-2005 2005-2006 2006-2007 YEAR 2003-2004 2004-2005 2005-2006 2006-2007 CREDIT PURCHASE 464389252 751424889 656875958 785760075 CREDITORS 153880852 235319454 163748168 158919694 CREDITORS TURNOVER RATIO 3.017849498 3.193211935 4.011501112 4.94438452 CREDITORS TURNOVER RATIO 6 5 4 RATIO 3 2 1 0 2003-2004 2004-2005 2005-2006 YEAR 82 2006-2007
  83. 83. INTERPRETATION: The Creditors Turnover Ratio of a company shows slight increase from the year 2004-2005. But later on it goes on increasing till 2006-2007. N. DEBT-EQUITY RATIO: YEAR 2003-2004 2004-2005 2005-2006 2006-2007 DEBT(LONG TERM) 84148348 96604452 111892907 82783886 YEAR 2003-2004 2004-2005 2005-2006 2006-2007 EQUITY 170363392 229300080 304642678 403283646 DEBT-EQUITY RATIO 0.493934448 0.421301432 0.367292291 0.205274592 DEBT-EQUITY RATIO 0.6 0.5 0.4 0.3 0.2 0.1 0 2003-2004 2004-2005 2005-2006 YEAR INTERPRETATION: 83 2006-2007 R A TI O
  84. 84. The Debt-equity Ratio of a company shows decrease from the year 2004-2005 till 2006-2007.  CONCLUSION: 1. From the current ratio and quick ratio, it can be concluded that, the liquidity of the company has increased. The quick ratio has increased because of control of inventory and increase in cash balance. 2. Inventory turn over ratio is increasing which reflects that the inventory is fast moving. 3. Payables deferral period has reduced from 106 days to 65 days, this shows that the company is paying its creditors faster. 4. Company has more investments in current assets which mean higher liquidity with lower risk, so the policy followed by the company is conservative. 84
  85. 85.  RECOMMENDATIONS: 1. The company should review its credit policy for debtors. The debtor’s collection period has reduced but it should reduce further. This will reduce the working capital requirement of the company. 2. The company should invest in short term investments as working capital is continuous. 3. As a working capital is showing an increasing trend, it should not increase further as it affects the profitability due to blockage of funds. 85

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