A STUDY OF WORKING CAPITAL MANAGEMENT AT DUKES ENGINEERS

OBJECTIVE OF STUDY To know how to manage current assets and current liabilities so that satisfactory level of working capital is maintained. To know how to manage receivable, inventory and cash. To study the different sources of financing working capital. To study the operating cycle of company. To study the liquidity position of company. To look at possible remedial measures if any on the basis of which tied-up funds in working capital could be used effectively and efficiently. To suggest, if possible on the basis of conclusion some modification to meet the situation.

SCOPE OF STUDY The Study of working capital is based on tools like trend Analysis, Ratio Analysis, Working capital leverage, operating cycle. Further the study is based on last 5 years Annual Reports of Dukes Engineers. Even factors like Competitors analysis, industry analysis were not considered while preparing this project. To examine the financial performance in Dukes Engineers. To study the working capital performance in Dukes Engineers. To analyze and appraise the financial performance of Dukes Engineers during the period. To make necessary recommendation on the basic of the findings of the study.

PREPERATION OF PLAN OF ACTION (THREE MONTH DURATION) module 1(one to 7days) title need of study object of study limtation of study review of literature Collect the financial and profit and lose statement analysis the data Collect the Data finalize the analysis part prepare the analysis part finding,suggestion, prepare the final conclusion

module 2(one to &7days) module 3:(30 to 45days)

Module4:(20 to 30days)

REVIEW OF LITERATURE Working capital policy refers to the firm's policies regarding 1) target levels for each category of current operating assets and liabilities, and 2) how current assets will be financed. Generally good working capital policy (i.e. under conditions of certainty) is considered to be one in which holdings of cash, securities, inventories, fixed assets, and accounts payables are minimized. The level of accounts receivables should be used as a means of stimulating sales and other income. Previous literature on working capital management has found a negative association, overall, between level of working capital and operating performance as measured by operating returns and operating margins (Peterson and Rajan, 1997). Under conditions of certainty (i.e. sales, costs, lead times, payment periods, and so on, are known), firms have little reason to hold more working capital than a minimum level. Larger amounts would increase the level of operating assets, increase the need for external funding, resulting in lower return on assets and a lower return on equity, without any increase in profit. However the picture changes when uncertainty (i.e. uncertain growth) is introduced (Brigham and Houston, 2000). Larger amounts of cash, securities, accounts receivables, marketable securities, inventories, and fixed assets will be needed to support increased sales Required levels will be based on expected sales levels and expected order lead times. Additional holdings may be needed to enable the firm to deal with departures from the expected values. Further, firms will also attempt to increase their accounts payable balances as a means of financing increased levels of current operating assets. Firms which are in high growth stages will face the challenge of maintaining the necessary level of operating assets to support subsequent growth, while at the same time attempting to maintain adequate performance indicators.

This study focuses on understanding how IPO companies manage their working capital and other balance sheet items to support subsequent growth. This study supports the existing literature on working capital and contributes to the existing literature by examining a sample of firms (i.e. recent IPO firms) which have a wider range of growth levels than non-IPO firms. Our study examines the impact of working capital management on the operating performance and growth of new public companies. The study also examines these relationships under three categories of growth (i.e. negative growth, moderate growth, and high growth). The study also examines other selected firm characteristics in light of working capital management: firm operating and financial risk, amount of debt, firm size, and industry. An underlying theme of this study is that high growth certainly does not ensure high operating performance. Consistent with prior research (Peterson and Rajan, 1997) this study provides further evidence that good working capital management is positively associated with better operating performance. Higher levels of accounts receivable are associated with higher operating performance, in all three of the growth rate categories. The study also finds that maintaining control over levels of cash, securities, inventory, fixed assets, and accounts payables is associated with higher operating performance. We find that firms which are experiencing very high growth will hold higher levels of cash, securities, inventory, fixed assets, and accounts payable to support the high growth. The study suggests that these firms are sacrificing operating performance (accepting lower operating returns) to support the high growth. This, in turn, increases financial and operating risk for these firms. Perhaps IPO firms should stay more focused on their operating performance, while maintaining more moderate growth levels. In intention to discover the relationship between efficient working capital management and firms profitability(Shin & Soenen, 1998) used net-trade cycle (NTC) as a measure of working capital management. NTC is basically equal to the CCC whereby all three components are expressed as a

percentage of sales. The reason by using NTC because it can be an easy device to estimate for additional financing needs with regard to working capital expressed as a function of the projected sales growth. This relationship is examined using correlation and regression analysis, by industry and working capital intensity. Using a Compustat sample of 58,985 firm years covering the period 1975-1994, in all cases, they found, a strong negative relation between the length of the firm's net-trade cycle and its profitability. In addition, shorter NTC are associated with higher risk-adjusted stock returns. In other word, (Shin & Soenen, 1998) suggest that one possible way the firm to create shareholder value is by reducing firms NTC. The study of (Shin & Soenen, 1998) consistent with later study on the same objective that done by (Deloof, 2003) by using sample of 1009 large Belgian non-financial firms for the period of 19921996. However, (Deloof, 2003) used trade credit policy and inventory policy are measured by number of days accounts receivable, accounts payable and inventories, and the cash conversion cycle as a comprehensive measure of working capital management. He founds a significant negative relation between gross operating income and the number of days accounts receivable, inventories and accounts payable. Thus, he suggests that managers can create value for their shareholders by reducing the number of days accounts receivable and inventories to a reasonable minimum. He also suggests that less profitable firms wait longer to pay their bills. In other study, (Lyroudi & Lazaridis, 2000) use food industry Greek to examined the cash conversion cycle (CCC) as a liquidity indicator of the firms and tries to determine its relationship with the current and the quick ratios, with its component variables, and investigates the implications of the CCC in terms of profitability, indebtness and firm size. The results of their study indicate that there is a significant positive relationship between the cash conversion cycle and the traditional liquidity measures of current and quick ratios. The cash conversion cycle also positively related to the return on assets and

the net profit margin but had no linear relationship with the leverage ratios. Conversely, the current and quick ratios had negative relationship with the debt to equity ratio, and a positive one with the times interest earned ratio. Finally, there is no difference between the liquidity ratios of large and small firms. Working capital policy refers to the firm's policies regarding 1) target levels for each category of current operating assets and liabilities, and 2) how current assets will be financed. Generally good working capital policy (i.e. under conditions of certainty) is considered to be one in which holdings of cash, securities, inventories, fixed assets, and accounts payables are minimized. The level of accounts receivables should be used as a means of stimulating sales and other income. Previous literature on working capital management has found a negative association, overall, between level of working capital and operating performance as measured by operating returns and operating margins (Peterson and Rajan, 1997). Under conditions of certainty (i.e. sales, costs, lead times, payment periods, and so on, are known), firms have little reason to hold more working capital than a minimum level. Larger amounts would increase the level of operating assets, increase the need for external funding, resulting in lower return on assets and a lower return on equity, without any increase in profit. However the picture changes when uncertainty (i.e. uncertain growth) is introduced (Brigham and Houston, 2000). Larger amounts of cash, securities, accounts receivables, marketable securities, inventories, and fixed assets will be needed to support increased sales Required levels will be based on expected sales levels and expected order lead times. Additional holdings may be needed to enable the firm to deal with departures from the expected values. Further, firms will also attempt to increase their accounts payable balances as a means of financing increased levels of current operating assets. Firms which are in high growth stages will face the challenge of maintaining the necessary level of operating assets to support subsequent growth, while at the same time attempting to maintain adequate performance indicators.

This study focuses on understanding how IPO companies manage their working capital and other balance sheet items to support subsequent growth. This study supports the existing literature on working capital and contributes to the existing literature by examining a sample of firms (i.e. recent IPO firms) which have a wider range of growth levels than non-IPO firms. Our study examines the impact of working capital management on the operating performance and growth of new public companies. The study also examines these relationships under three categories of growth (i.e. negative growth, moderate growth, and high growth). The study also examines other selected firm characteristics in light of working capital management: firm operating and financial risk, amount of debt, firm size, and industry.

WORKING CAPITAL MANAGENMENT Working Capital Management This report covers analysis of the last decision i.e., Working Capital Management. It is very important for short-term survival, which is must for long-term success. It is concerned with the management of current assets.

WORKING CAPITAL MANAGEMENT WHAT FOR? Management of working capital is an extremely important area of financial management as current assets represent more than half of the total assets of a business. Fixed assets through essential for a business organization, does not by itself produce revenue or income. Fixed assets act with current assets to generate revenue or income. Therefore, working capital is necessary for utilizing the productive capacity of fixed capital. For shortage of working capital, the enterprise would suffer reduction in earnings due to productive capacity remain unutilized. While, excess working capital leads to extra cost for want of productive capacity. Thus, the amount of working capital in every enterprise, whether manufacturing or non-manufacturing, should be neither more or less than what is actually required. Working capital in business is just live blood in human body. Optimum and appropriate movement of blood through the body is extremely necessary to continue life. Like human blood, the proper circulation of funds (working/circulating capital) is utmost necessary to continue business. If the circulation of working capital becomes weak, the businesses can hardly prosper and service. An enterprise should maintain optimum amount of working capital so as to carry on the productive and distributive activities smoothly. While, the determination of optimum level of working capital involves fundamental decisions to an organizations liquidity, which in turn are influenced by a tradeoff between profitability and liquidity.

Thus, goal of working capital management is to manage the firms current assets and liabilities in such a way that satisfactory level of working capital minted.

WORKING CAPITAL MEANING, DEFINITION In accounting Working capital is the difference between the inflow and out flow of funds. It other words it is the net cash inflow. Working capital is defined as excess of current assets over current liabilities and provision. In other word, it is net current assets or net working capital. Working capital can be defined broadly in two different ways i.e. gross working capital and Net working capital. Gross working capital refers to organizations investment in total current assets. Current assets are the assets, which can be, convert in to cash with in an accounting year and include cash, marketable securities, intently etc. it is also known as circulating capital. Net working capital refers to the different between current assets and current liabilities are those claims of outsiders, which are accepted to mature for payment within an accounting year and include creditors, bills payable and outstanding expenses. Symbolically: NWC = CA CL. Where, NWC = Net working Capital CA = Current Assets CL = Current Liabilities Net working capital can also be defined as that portion of firms current assets, which is financed by long-term funds.

NEED FOR WORKING CAPITAL The need for working capital to run the day-to-day business activities cannot over emphasized. We will hardly find a business firm, which doesnt require any amount of working capital. Indeed, firms differ in their requirement of working capital. We known that firm should aimed at maximizing the wealth of its shareholders. In its endeavor to do so, firm should earn sufficient return from its operation. Earning a study amount of profit require successful sales activity. But there is always time gap between the day of sales & its realization from debtors realization from debtors will take time but firm has arrange money for purchase of raw material, to pay for salary, wages and other expenses. Therefore sufficient working capital in needed. The operating cycle can be said to be reason for the need for working capital. OPERATING CYCLE The operating cycle is the length of time required to complete the following stages of the cycle. Operating cycle consists of five Phases: I. II. III. IV. V. Conversion of cash in to Raw materials. Conversation of raw material in to work-in-process. Conversion work in process in to finished goods. Conversion of finished goods in to receivables. Conversion of Receivables in to cash

TYPES OF WORKING CAPITAL There are mainly two types of working capital. a) Permanent Working Capital b) Temporary Working Capital

Permanent Working Capital: The need for current assets arises because of operating cycle. The operating cycle is continuous process and therefore the need for current assets is felt constantly. But the magnitude of current assets needed is not always the same. It increases and decreases over time. However there is always a minimum level of current assets, which are continuously required, by firm to carry or its business operations is called permanent or fixed working capital. This minimum level of working capital is necessary on the regular basis even if the management of working capital is done efficiently in the organization. As this type of working capital is minimum necessary for the business at all points of time, it is financed by the long-term sources.

Temporary Working Capital: The amount over and above the permanent level of working capital is temporary, fluctuating or variable working capital. The need for such type of working arises because of fluctuations in production and sales. The additional requirement may be during more active season when the volume of production and sales more goes up necessitating extra blockage of funds temporarily in current assets like Bank Balance, inventory, debtors, etc. The temporary working capital is the additional funds required. Whose volume is different at different points of time and hence it is financed by short-term sources. However when the business is growing, the level of permanent working capital also grows. The working capital graph will be rising one as given in figure below:

DETERMINANTS OF WORKING CAPITAL There are no set formulates to determine the working capital requirements of firms. A large no. of factors each having a different importance, influence working capital needs of firms. However, the factors may vary from organization to organization. Therefore, an analysis or relevant factors should be made in order to determine total investment in working capital. The following is the description of factors, which generally influence the working capital requirement of firms. 1. Nature of Business: Business firm can be dividend in to three categories given below: I. II. III. Service organization or public utilities Trading or financial organization Manufacturing organization

Service organizations dont normally hold any inventory or the level inventory may be very low. Again major sale of such services are on cash basis. Hence they require very less amount of working capital. Trading or financial organization have to maintain sufficient amount of cash and inventory. Hence working capital requirement of such organization are relatively very high. Working capital requirement of manufacturing organization normally falls between the above two extremes. 2. Volume of sales: The higher the sales on credit basis, the higher is the requirement of working capital, as more and more amount is getting blocked in debtors. 3. Manufacturing Cycle:

The manufacturing cycle refers to the time spent by a product right from the stage of purchase of its raw material to the stage of completion of finished goods. Obviously the larger the manufacturing cycle of a company the higher is the volume of working capital needed to finance blockage of money in raw material, work in progress and finished good. 4. Business Cycle: No business can remain study for all the time. It passes through the stages of prosperity and depression. During Prosperity, the volume of sales increases necessitating higher level of inventories and debtors, i.e. more Amount of working capital is required to sustain higher levels of activity during prosperity. Depression has exactly an opposite effect on the level of working capital requirement. 5. Credit Policy: If the organization is following a liberal credit p[policy for its customers, it will result in higher debtors leading to requirement of more working capital. However, if the organization is availing liberal credit term from its suppliers, the need for working capital is reduced. 6. Tax Structure: The entire profit generated may not be available to the organization because of a simplest fact. The organization has to pay its taxes in time. Tax rates vary in different forms of organization and accordingly working capital requirement of different organization will be different. 7. Dividend Payout ratio: If dividend payout ratio is high, the organization may have earned profit but-the profits available only after payment of dividends is available for financing working capital. Hence, higher working capital will be required if Dividend payout ratio is high.

8. Availability of Funds: If the credit worthiness of an organization is good, it may manage the business with less Working Capital. The reason may be that the organization may procure the funds whenever it needs the funds. 9. Change in Technology: Change in technology affect the requirement for working Capital. If the firm decides to go for automation, this would reduce the requirements of Working Capital. If the firm adopts a labor-intensive process, the requirement of working capital will be larger. 10. Size of the Firm: Bigger firms may require lesser working capital as compared to their total sales or assets. Of course the absolute amount of working capital will be higher in bigger firms. The level of Working Capital is determined by a wide variety of factors that are partly internal to the firm and partly external to it. Efficient working capital management requires efficient planning and a constant review of the needs for an appropriate working capital strategy.

WORKING CAPITAL FINANCING A firm must tap the right sources in financing its current assets requirements. Figure given below shows the financing-mix or sources-mix or working capital. A source is said to be spontaneous when its use is automatic or arise in the normal course of business activities. A source is said to be negotiated when its use depends on prior deliberations between the borrower and the lender. (1) Long-term Financing: Long-term working capital should be provided in such a manner that the enterprise might have its uninterrupted use for a long time. It can be conveniently financed by shares, debentures, loans from financial Institution term loans from banks, reserve surplus etc. (2) Short-term financing: The category of funds covers the need of working capital for financing day-to-day business requirements. It includes Bank Credit, Commercial papers, Certificate of deposit, Commercial Bills Market, and Factoring. (3) Spontaneous Financing: It refers to the automatic sources of short-term funds arising in the normal course of business. The major sources of such financing are trade credit (creditors and bill payable) and outstanding expenses. Spontaneous sources of finances are cost free. Therefore a firm would like o finance its curre3nt assets with spontaneous sources as much as possible.

Working capital financing of Dukes The company used both long and short-term sources for financing working capital requirements. The proportion can be shown in following table: Sources A) Equity Share B) Short-term Loan From BOB. Proportion of W.C. Financing (in % 80% 20%

EXCESSIVE OR INADEQUATE WORKING CAPITAL-THE DANGEROUS The firm should maintain a sound working capital position. It should have adequate working capital to run its business operations. Both excessive as well as inadequate working capital positions are dangerous from the firms point of view. Excessive Working capital means idle funds, which earn no profit for the firm paucity of working capital not only impairs firms profitability but also results in production interruptions and inefficiencies. The dangers of excessive Working Capital are as follows: 1) A firm may be tempted to over trade and lose heavily. 2) The situation may lead to unnecessary purchases and accumulation of inventories. This cause more chances of theft, waste, losses, etc. 3) These arise an imbalance between liquidity and profitability. 4) It means funds are idle when funds are idle, no profit is earned when it is so, the rate of return on its investments goes down. 5) The situation leads to greater production, which may not have matching demand. 6) The excess of working capital may lead to carelessness about cost of production. In adequate working capital is also bad and has the following dangers: 1) It stagnates growth. It becomes difficult for the firm to undertake profitable projects for nonavailability of working capital funds. 2) It may fail to pay its dividend because of non-availability of funds.

3) Operating inefficiencies creep in when it becomes difficult even to meet day-to-day commitment. 4) Fixed assets arent efficiently utilized for the lack of working capital funds thus the profitability would deteriorate. 5) It may not be able to take advantage of cash discount 6) The firm loses its reputation when it is not in position to honor its short-term obligation. As a result, the firm faces tight credit terms. An enlightened management should, therefore maintain a right amount of Working Capital on continuous basis only them a proper functioning if business operations will be ensured.

ANALYSIS OF WORKING CAPITAL MANAGEMENT

Introduction:

It has already been discussed that working capital acts as lifeblood to an organization. The Dukes Software Solution mainly producing software at lowest possible cost so that they are enables to sale it in profitable manner. As major sale is on credit basis and not on cash mode, working capital is of immense significance for efficiently carried out its day-to-day operation. In the absence of proper and effective management of working capital, it would be difficult to achieve the basic objective of its operational efficiency. For the efficient management of Working Capital, analyses of working capital of company through: Inventory management Receivable management Cash management Ratio analysis

All these are analyzed subsequently in this part.

I.

WORKING CAPITAL ASSEMBLY (Figures in thousands) Particulars 2006-07 YEARS 2007-08 2008-09 2009-10 2010-11

Current Assets 1) Inventories 2) Sundry Debtors 3) Cash & Bank Balance 4) Loans &

339,596 300,586 68,193 192,942 27,872 929,189

350,615 369,429 124,547 224,777 17,358 1,086,726

504,596 321,324 231,670 232,705 37,502 1,327,797

550,852 312,975 244,115 240,548 40,797 1,389,287

692,129 328,621 396,541 245,661 43,582 1,662,952

Advances 5) Other current Assets Total Current Assets (A) Current Liabilities 1) Current Liabilities 2) Provision Total Current Liabilities (B) Net Working Capital (A-B) II. WORKING CAPITAL

408,440 1,025 409,465 627,274

455,039 4413 459,452 519,724

528,285 28,413 556,698 771,099

602,159 30,545 632,704 756583

659,654 36,985 696,639 966313

The amount of gross working capital during last three years is given in following table. (Rs. in thousands) Year 2008-09 2009-10 2010-11 Gross W.C. (Rs.) 929,189 1,086,726 1,327,797 Growth (%) 0.11 16.94 22.18 (Here year 1999-00 taken as 100%)

(Graph-1 Growth in Gross Working Capital)

NET WORKING CAPITAL TO NET ASSETS RATIO Net Working Capital is difference between current assets and current liabilities. This ration measure firms potential reservoir funds relate to net assets. (Rs. in thousands) Year 2008-09 2009-10 2010-11 Net W.C. (Rs.) 627,274 519,724 771,099 Net Assets (Rs.) 11,84,161 11,34,542 11,22,410 Ratio (in times) 0.53 0.46 0.69

(Table-4)

(Graph 2: -Net working capital to Net asset Ratio)

CALCULATION OF OPERATING CYCLE OF COMPANY Operating cycle of a company computed with the help of following formula: O=R+W+F+D-C R= Raw material storage period Average Stock of Raw material = -----------------------------------------------------Average raw material consumption per day Year 2008-09 124833 = -----------1927.60 = Year 2009-10 120933.5 = --------------2349.31 = Year 2010-11 275028 = -----------4044.83 = 68 days. 52 days. 65 days.

W= Work-in-progress period Average Work-in-progress inventory = ----------------------------------------------Average cost of production per day

Year 2008-09 49819 = -----------2305.96 = Year 2009-10 191456 = --------------2807.08 = Year 2010-11 125521 = -----------4658.33 = 27 days. 68 days. 22 days.

F= Finished Stock Storage period Average finished stock inventory = ----------------------------------------------Average cost of goods sold per day Year 2008-09 17823.5 = -----------4316.95 = Year 2009-10 13283 = --------------2294.75 = 6 days. 5 days.

Year 20010-11 12514.5 = -----------3350.13 = 4 days.

D= Debtors collection period Average debtors = ---------------------------------Average credit sales per day

Year 2008-09 287156 = -----------2898.23 = Year 2009-10 335007.5 = --------------3465.99 = Year 2010-11 345376.5 = -----------6150.48 = 56 days. 97 days. 99 days.

C= Creditors payment period Average creditors = ------------------------------------------Average credit purchase per day

Year 2008-09 327468 = -----------1924.33 = Year 2009-10 301568 = --------------2147.15 = Year 2010-11 371553 = -----------3441.96 = 108 days. 140 days. 170 days.

Operating Cycle (Figure in Days) Particulars Inventory Storage period Raw material Work-in-progress Finished Stock Debtor Collection Period Total (A) Creditors Payment Period (B) Operating Cycle Period (A-B) 2008-09 65 22 05 99 191 170 21 YEARS 2009-10 52 68 06 97 223 140 83 2010-11 68 27 04 56 155 108 47

Operating Cycle Period Year 2008-09 2009-10 2010-11 Operating Cycle Period 21 83 47

Operating Cycle of Company

III.

MANAGEMENT OF INVENTORY Inventory constitute major portion of current asset of public Ltd. Companies in India .The

manufacturing companies hold inventories in the form of Raw material, work-in-process and finish good,

There are at least three motives for holding inventories. (1) To facilitate smooth production and sales operation (Transaction motive)

(2) To guard against the risk of unpredictable changes in usage rate and delivery time (Precautionary Motive) (3) To take advantage of price fluctuations. (Speculative Motive)

Inventories represent investment of a firms funds and that is why management of inventory is necessary for the maximization of the value of the firm. The firm should therefore consider (a) Costs (b) Return (c) Risk Factors in establishing its inventory policy.

EVALUATION OF INVENTORY MANAGEMENT PERFORMANCE:

Ratio analysis has been used for making evaluation of Inventory management performance. As the raw material used in the company is pig iron, proper planning and handling is required for the purpose of achieving the right quality of output. The ratios for last three years have been worked out and compared. The various figures are given in the table.

INVENTORY MANAGEMENT IN HIMSON PVT LTD. (Rs. in thousand) ITEM (1) Average Inventory (2) Total Current Assets (3) Cost of Good Sold a) Inventory to Gross Working 0.35 Capital (1/2) b) Inventory Turnover (3/1) c) Inventory Conversion Period (365/b) days 2.31 158 0.30 2.69 136 0.31 3.67 99 2008-09 329550.5 929189 760872 Ratio (%) 2009-10 331822.5 1086729 891349 2010-11 414866 1327797 15207147

IV.

MANAGEMENT OF RECEIVABLE When firm sell goods for cash, payments are received immediately and therefore no receivables

are created. However when a firm sells goods or services on credit, payments are received only at a future date and receivables are created. It is an essential marketing tool in modern business trade. Credit creates receivables, which the firm is expected to collect in near future. A firm grants credit to its customers so that its sales are its customers so that its sales are not lost to competitors. Account receivable constitutes a significant portion of the total current assets of the business after inventories. The receivables arising out of credit has three characteristics. I. II. It involves an element of risk, which should be carefully analyzed. It is based on economic value. To the buyer, the economic value goods or services pass immediately at the time of sale, white the seller expects an equivalent value to be received later on. III. It implies futurity. The customers from whom receivables have to collected in future are called debtors and represents the firms claim or asset.

DEBTORS TURN-OVER RATIO: This is also called Debtors velocity or Receivable Turnover. A firm sells goods on credit and cash basis. When firm extends credit to its customers, book debts are created in firms A/c debtors expected to converted in to cash over short period and thus included in current assets. It is used to measure liquidity of the receivables or to find out period over, which receivables remain uncollected.

Receivable turnover Ratio Total Sales

----------------------Average Debtors

Debt collection period 365 = -----------------------------------Receivable turnover ratio

Receivable Management in Company Year 2008-09 2009-10 2010-11 Sales 1042284 1247759 2214174 Avg. Debtors 287156 335007.5 345376.5 Ratio 3.63 3.72 6.41 Collection Period 100 98 57

V.

MANAGEMENT OF CASH: Cash in the important current assets for the operations of the business. Cash is the basic input

needed to keep the business running on continuos basis, it is also the ultimate output expected to be realized by selling the service or product manufactured by the firm. The firm should keep sufficient cash, neither more or less. Cash shortage will disrupt the firms manufacturing operation while excessive cash will simply remain idle, without contributing anything towards firms profitability. Thus, a major function of the financial managers is to maintain a sound financial position. Cash management involves following four factors: I. II. III. IV. Ascertainment of the minimum cash balance and controlling the levels of cash. Controlling cash in flows Controlling cash outflows Optimum utilization of surplus cash. Cash is required to meet a firms transactions and precautionary needs. A firm needs cash to make payment for acquisition of resources and services for the normal conduct of business. It keeps additional funds to meet any emergency situation. Some firms maintain cash for taking advantages of speculative changes in price of input and output.

EVALUATION OF CASH MANAGEMENT PERFORMANCE:

The following ratios have been used to evaluate different aspects of cash management. (1) (2) (3) Cash to Current Assets Ratio. Cash turnover Ration. Average age of Cash.

The figures of cash and Bank Balance, total current assets and current liabilities for the year 2000-01to 2002-03 are given in the table. Cash Management in Himson Pvt. Ltd. (Rs. In 000s) ITEM (1) Cash & Bank Balance (2) Total Current Assets (3) Total Current Liabilities a) Cash to Current Asset Ratio 7.34 (1/2) b) Cash Turnover Ratio (3/1) c) Average age of cash (365/b) days 5.99 61 11.46 3.65 100 17.45 2.28 160 2008-09 68193 929189 408440 Ratio (%) 2009-10 124547 1086729 455039 2010-11 231670 1327797 528285

VI.

ANALYSIS THROUGH WORKING CAPITAL RATIOS

A study of the causes of changes in uses and sources of Working Capital is necessary to observe that whether working capital is serving the purpose for which it has been created or not. In this technique, for each aspect of analysis certain ratios are computed and then results are compared with standard ratio or industry average. The ratio analysis provides guides and clues especially in sporting trends towards better or poorer performance and in finding out significant deviation for any average or relatively applicable standards.

The following are the important ratios to measure the efficiency of working capital: 1. Ratios relating to liquidity of working capital: Liquidity ratios are used to measure the ability of firm to pay its maturing obligation in time. This ratio helpful for both short-term creditors and internal management of the firm. The following are types of ratios relating to liquidity of working capital.

A.

Current Ratio: -

It is most common measure for measuring liquidity. It is also called Working Capital Ratio. It expresses relationship between current assets & current liabilities.

Current Assets Current Ratio = ---------------------Current Liabilities

(Rs. in 000s) Year Current Assets Current Liabilities Ratio (times) 2008-09 929,189 408,440 2.27:1 2009-10 1,086,726 455,039 2.39:1 2010-11 1,327,797 528,285 2.51:1 The acceptable norms for this ratio is 2:1 considering this it can be said that company has maintained sound ratio over three year

B.

Quick Ratio: -

It is also known as liquid ratio or acid test ration. It is a relation between quick assets and quick liabilities. It is more useful in knowing the liquidity of firm than current ratio. Quick Assets Quick Ratio = ---------------------Current Liabilities

A quick asset means current assets excluding stock and prepaid expenses. (Rs. in 000s) Year Quick Assets Current Liabilities Ratio (times) 2008-09 589,593 408,440 1.44 2009-10 736,111 455,039 1.62 2010-11 823,201 528,285 1.56 The acceptable norm for this ratio is 1:1 but the company as already maintained it above the norms, which indicate sound financial position.

2. Composition of Gross working capital: -

The structure of gross working capital is evaluated by finding out the ratio of each component of current assets with the total current assets. These ratios indicate in which components of current assets, excess funds have been invested to that extent.

Component Inventories Sundry Debtors Cash & Bank Balance Loans & Advances Other Current Assets Total

2008-09 0.37 0.32 0.07 0.22 0.02 100

2009-10 0.32 0.34 0.11 0.21 0.02 100

2010-11 0.38 0.24 0.17 0.17 0.03 100

3. Ratios relating to Circulation or Productivity of Working Capital: This ratio highlighted the efficiency with which working capital is being utilized. It is commonly used to know turnover of working capital and the turnover of its components to indicate the efficiency of working capital management.

A.

Circulation of Gross Working Capital: -

The method is used to examine the effectiveness of gross working capital. It is circulated as: Net Sales Circulation of Gross Working Capital = --------------------------Total Gross W. C.

(Rs. in 000s) Year 2008-09 2009-10 Net Sales 1,042,284 1,247,759 Total Gross W.C. 929,189 1,086,726 Ratio (times) 1.12 1.15

2010-11

2,214,174

1,327,797 (Table 12)

1.67

This ratio tells us the relative efficiency with which the business organization utilizes the shortterm resources to generate output. B. Circulation of Net Working Capital: -

The method used to measure the effectiveness of net working capital is to divide net sales by net working capital. The ratio is computed as follows: Net Sales Circulation of Net Working Capital = -----------Net W.C.

(Rs. in 000s) Year 2008-09 2009-10 2010-11 Sales 1,042,284 1,247,759 2,214,174 Net Working Capital 627,274 519,724 771,099 (Table 13) Ratio (times) 1.66 2.40 2.87

This ratio tells whether three is an improvement in the utilization of net working capital or not.

4. Other Ratio: A. Cash Position Ratio: -

This ratio is variation of quick ratio. It measures the relationship between cash and near cash its on the one had, and immediately maturing obligations on the other. The inventory and debtors are excluded from current assets, to calculate this ratio.

Cash + Marketable Securities Cash Position Raito = ----------------------------------Current Liabilities (Rs. in 000s) Year 2008-09 2009-10 2010-11 Cash 68,193 124,547 231,670 Current Liabilities 408,440 455,039 528,285 (Table 14) Ratio (times) 0.17 0.28 0.44

Generally 0.25:1 ratio is recommended to ensure liquidity.

B.

Return on Fixed Assets : -

This ratio indicates a return on fixed assets. It can be calculated as

Net profit after tax Return on Fixed Assets = ------------------------ 100 Net fixed assets

(Rs. in 000s) Year 2008-09 2009-10 2010-11 Net profit after tax 31,347 59,310 84,152 Net Fixed Assets 5,59,820 4,85,507 4,44,600 (Table 15) Ratio (%) 5.60 12.22 18.92

From the above calculation it is cleared that return on fixed assets increasing year by year, it means that company is able to earn higher return on investment in business than the investment made in the outside deposit.

C.

Current Liabilities to Total Assets Ratio: -

This ratio shows the relationship between current liability and total assets [Net Fixed Assets + Investment + Current Assets]

Current Liabilities Current Liabilities to Total Assets Ratio = ---------------------Total Assets

(Rs. in 000s) Year 2008-09 2009-10 2010-11 Current Liabilities 408,440 455,039 528,285 (Table 16) Total Assets 1,703,885 1,761,816 1,893,509 Ratio (times) 0.24 0.26 0.29

D.

Current Assets to Total Assets Ratio: -

The ratio brings out the percentage of current assets to total net assets of the business. This ratio indicates the extent of liquidity nature of assets required in comparison with total net assets. The formal for ratio is given below. Current Assets Current Assets to Total Assets Ratio = ---------------------Total Assets

(Rs. in 000s) Year 2008-09 2009-10 2010-11 Current Assets 929,189 1,086,726 1,327,797 Total Assets 1,703,885 1,761,816 1,893,509 (Table 17) Ratio (times) 0.55 0.62 0.70

TURNOVER: 2006-07 turnover 2019.63 2007-08 2284.03 2008-09 2624.78 2009-10 3024.78 2010-11 3483.94

FIXED ASSETS: 2006-07 2007-08 2008-09 2009-10 2010-11

Fixed Assets

30,517,531.0

29,339,199.2

27,964,739.6

25,554,623.6

22,944,025.2

OPENING STOCK: 2006-07 Opening 2,791,823.0 stock 2,399,593.2 2,251,977.6 2,247,441.2 2,237,469.6 2007-08 2008-09 2009-10 2010-11

SALES AMOUNT: 2006-07 Sales amount 30,517,531.0 2007-08 29,339,199.2 2008-09 27,964,739.6 2009-10 25,554,623.6 2010-11 22,944,025.2

(A)

Findings: -

Ratio 1) Net W. C. to Net Assets 2) Inventory to Gross W.C. 3) Inventory Turnover 4) Inventory Conversion period (days) 5) Debtors Turnover 6) Debt collection Period (days) 7) Cash to Current Assets. 8) Cash Turnover Ratio 9) Avg. Age of Cash (days) 10) Current ratio 11) Quick Ratio 12) Circulation of Gross Working Capital 13) Circulation of Net

Working Capital Ratios 2008-09 2009-10 2010-11 0.53 0.46 0.69 0.35 0.30 0.31 2.31 2.69 3.67 158 136 99 3.63 100 7.34 5.99 61 2.27 1.44 1.12 1.66 0.17 5.60 0.24 0.55 3.72 98 11.46 3.65 100 2.39 1.62 1.15 2.40 0.28 12.22 0.26 0.62 (Table 18) 6.41 57 17.45 2.28 160 2.51 1.56 1.67 2.87 0.44 18.92 0.29 0.70

Avg. of Ratio 0.56 0.32 2.89 131 4.59 85 12.08 11.92 107 2.39 1.54 1.31 2.31 0.30 12.25 0.26 0.62

Working Capital 14) Cash Position 15) Return on fixed Assets 16) Current liabilities to Total Assets 17) Current Assets to Total Assets

The following are the findings of the analysis: -

(a) Gross working capital: -

Gross working capitals of company i.e. current asset are increasing over a period of study. It was 0.11% in 2009-10 and increased to 22.18 in 2010-11 so there is increased of 22.07% (b) Operating cycle: The period for conversion of material in to finished & finished good in to sales &sales in cash for a period of study is respectively 21.83 and 47 days on average there is 50 days required to collect money and again repeat cycle. (1) Net working capital to Net asset Ratio: The average ratio is 0.56 for period under study. It means there is a reserve of Rs.56 on an average from net asset of Rs.100

(2) Inventory to Gross Working Capital Ratio: This ratio is decreasing as compared to year 2008-09 from 0.35 to 0.31 in 2010-11. It shows that firm has improved its inventory management. (3) Inventory Turnover: This ratio has been increased over the three years from 2.31 in 2008-09 to 3.67 in 2010-11. So it can be said that company has take steps to increase the inventory-turn over ratio. (4) Inventory Conversion Period: It refers to the period when manufacturing unit takes to clear a lot of stock. There has been a continuous decreasing in conversion period. This will help in reducing accumulation of inventories. (5) Debtors Turnover Ratio: -

This ratio shows the period of which receivable remain uncollective. The ratio is doubled in 2009-10 as compared to 2010-11. So serious steps should be taken to reduce the collection period though sales increase. (6) Debt Collection Period: It is the time period required by company to recollect its payment. Company has made speedy collection in 2011 as compared 2009-10 by collecting in nearly half period i.e. 57 days compared to 100 days in 2009-10. Average collection period over 3 years is 85 days (7) Cash to Current Asset Ratio: This ratio indicates the extent to which the current assets are represented by cash&bank balance. There is an increase in the ratio over the three years. It was increased by 10% in 2010-11 compared to 2009-10.This increase will lower the profitability of the company.

(8)Cash Turnover: It indicates no. of times cash is flowed out for payment to creditors. The ratio is continuously decreasing indicating there is ideal cash balance. (9) Average age of cash: It indicates the period for which the cash remains unused. There is continuous increased in period. It means there is lack of cash management. (10) Current Ratio: It is a quick measure of the firms liquidity, which remained between 2.27 to 2.51 throughout the period understudy. It is over the acceptable norm i.e.2:1 so company has sufficient liquidity to meet short-term obligation. (11) Quick Ratio: -

This ratio is above the standard norm of 1:1 throughout study period so it can be said that it has satisfactory liquidity position. (12) Circulation of Gross Working Capital: The ratio shows upward trend over the three-year period. It means there is lower investment in current asset as compared to sales. Some say that there is an improvement in working capital utilization. (13) Circulation of Net Working Capital: The ratio shows an increasing trend over 3 years, which means there is an improvement in utilization of Net Working Capital during the period.

(B)

SUGGESTIONS: From the analysis of working capital ratios, I have some suggestion for company, which might

help them in improving management of working capital: The Gross working capital is increasing over three years but the major proportion of current assets comprise of inventories in each year. The company should try to reduce investment in inventory. The company should give more importance to inventory management and try to reduce inventory to gross working capital ratio. This will help in reducing inventory costs.

 There is an increase in debt collection period over three years and at present (2010-11) it is near by two months which as per the textile industry norm but this is possible due to increase in debtors turn over ratio. So the company should try to increase this ratio as much as possible. The company should additional funds in business rather than investing in fixed deposit because company able to earn higher rate of return on investment in fixed assets as compare to fixed deposit.

BIBLIOGRAPHY

Working Capital Management P. Mohanrao Deep & & Alok K. Pramanik Deep Working Capital Management Hrishikes Bhattacharya PrenticeHall Financial Management I. M. Pandy Vikash Publication Financial Management Khan & Jain Tata McGrawhill Financial Management T. J. Rana & B. S. Shah Naresh Jain Management Accounting Bhagwati & Pillai Himalaya Annual Reports of Company

CONSOLIDATED STATEMENT OF ASSETS & LIABILITIES, AS RESTATED (RUPEES IN CRORES)

PARTICULAR A .FIXED ASSETS Gross Block Less: Depreciation Net Block Add: Capital Work in Progress/ Capital Advances

As on MARCH 11

As on MARCH 10

As on MARCH 09

As on MARCH 08

As on MARCH 07

589.05 289.05 300.00

532.85 260.54 272.31

376.61 198.10 178.51

288.08 148.17 139.91

288.08 121.40 150.62

36.93

5.07

0.84

1.68

1.91

B,GOODWILL C.CUURENT ASSETS,LOANS AND ADVANCE Inventories Sundry Debtors Cash and bank Loans and advance

TOTAL ASSETS D.LIABILITIES AND PROVISIONS Secured loan Un secured loan Current liabilities including finance lease obligation provisions

E.DEFEREED TAX LIABILITUY (NET) F.NET WORTH REPRESENTED BY Share capital Advance share capital Capital reserve Share premium account Statutory reserve Foreign currency translation

profit &loss account balance brought forward

from profit &loss account Adjustment on consolidation 336.93 277.38 179.35 141.59 152.53

484.56

622.22

667.49

1.03

1.03

6341.18 5380.00 1135.42 1184.90 14041.50

4814.00 5823.98 966.35 1152.08 12756.41

1983.18 3740.06 211.31 818.87 6753.42

788.19 1339.93 247.68 488.67 2864.47

796.32 1075.46 5.85 354.02 2231.65

14,862.99

13,656.41

7,600.26

3007.09

2385.21

437.24 4,648.06 4,473.35

805.18 3,978.83 4,071.75

812.99 1,481.50 1,685.80

479.44 213.27 947.60

438.67 198.18 617.73

584.86 10,143.51

483.27 9,339.03

278.00 4,258.30

302.87 1,983.18

207.88 1,462.46

9.31

11.41

16.29

16.24

24.40

4,710.17 646.35 43.66

4,305.97 630.82 50.47

3,325.67 607.01 1.36

1,047.67 293.88 1.36

898.34 293.88 14.44 1.36

2,023.65 0.57 16.35

1,946.53 0.57 3.29

1,748.83 -

121.05 -

121.05 -

1,1787.11 2,184.30 1,067.92 631.38

482.05

(112.80) (204.71) 4,710.17 4,305.97 (92.51) 3,325.67 1,047.67

898.34

Profit & Loss account of Dukes Engineers

------------------- in Rs. Cr. ------------------Mar '11 12 mths Mar '10 12 mths 32,174.10 2,856.40 29,317.70 662.00 200.90 30,180.60 22,636.30 216.60 545.60 1,061.60 1,032.17 201.73 0.00 25,694.00 Mar '10 12 mths 3,824.60 4,486.60 33.50 4,453.10 825.00 0.00 3,628.10 Mar '09 12 mths 23,381.50 2,652.10 20,729.40 491.70 -356.60 20,864.50 15,983.20 193.60 471.10 716.10 817.66 236.84 -22.30 18,396.20 Mar '09 12 mths 1,976.60 2,468.30 51.00 2,417.30 706.50 0.00 1,710.80 Mar '08 12 mths 21,200.40 3,133.60 18,066.80 494.00 336.30 18,897.10 13,958.30 147.30 356.20 523.30 521.48 287.62 -19.80 15,774.40 Mar '08 12 mths 2,628.70 3,122.70 59.60 3,063.10 568.20 0.00 2,494.90 Mar '07 12 mths 17,358.40 2,552.00 14,806.40 338.10 -200.70 14,943.80 10,863.00 97.40 288.40 392.40 483.26 239.44 -14.30 12,349.60 Mar '07 12 mths 2,256.10 2,594.20 37.60 2,556.60 271.40 0.00 2,285.20

Income Sales Turnover Excise Duty Net Sales Other Income Stock Adjustments Total Income Expenditure Raw Materials Power & Fuel Cost Employee Cost Other Manufacturing Expenses Selling and Admin Expenses Miscellaneous Expenses Preoperative Exp Capitalised Total Expenses

40,865.50 4,304.00 36,561.50 784.60 73.20 37,419.30 28,880.00 210.20 703.60 1,949.40 1,153.87 289.73 -25.70 33,161.10 Mar '11 12 mths 3,473.60 4,258.20 24.40 4,233.80 1,013.50 0.00 3,220.30

Operating Profit PBDIT Interest PBDT Depreciation Other Written Off Profit Before Tax

Extra-ordinary items PBT (Post Extra-ord Items) Tax Reported Net Profit Total Value Addition Preference Dividend Equity Dividend Corporate Dividend Tax Per share data (annualised) Shares in issue (lakhs) Earning Per Share (Rs) Equity Dividend (%) Book Value (Rs)

18.90 3,239.20 820.20 2,288.60 4,281.10 0.00 216.70 35.10 2,889.10 79.21 150.00 479.99

51.10 3,679.20 1,094.90 2,497.60 3,057.70 0.00 173.30 28.80 2,889.10 86.45 120.00 409.65

37.90 1,748.70 457.10 1,218.70 2,413.00 0.00 101.10 17.20 2,889.10 42.18 70.00 323.45

76.60 2,571.50 763.30 1,730.80 1,816.10 0.00 144.50 24.80 2,889.10 59.91 100.00 291.28

33.40 2,318.60 705.30 1,562.00 1,486.60 0.00 130.00 21.90 2,889.10 54.07 90.00 237.23

CASH FLOW STATEMENT Mar ' 11 Profit before tax Mar ' 10 Mar ' 09

in crore Mar ' 08 Mar ' 07

3,108.80 3,592.50 1,675.80 2,503.00 2,279.80 951.40 -2,436.80 4,783.30 3,061.50 55.10 -536.20 132.30 430.00 21.20 1,608.50 1,840.80 1,098.80 98.20 1,939.00 324.00

Net cashflow-operating activity 3,050.30 2,887.40 1,193.30 1,830.40 2,028.00 Net cash used in investing activity Netcash used in fin. activity 73.40 -713.40

Net inc/dec in cash and equivlnt 2,410.30 Cash and equivalnt begin of year Cash and equivalnt end of year 98.20 2,508.50

1,939.00 330.50 1,422.80 1,401.60 1,422.80

FUND FLOW STATEMENT

in crore

Mar '11 12 mths Net Profit Before Tax Net Cash From Operating Activities Net Cash (used in)/from Investing Activities Net Cash (used in)/from Financing Activities Net (decrease)/increase In Cash and Cash Equivalents Opening Cash & Cash Equivalents 3108.80 3050.30 73.40 -713.40 2410.30 98.20

Mar '10 12 mths 3592.50 2887.40 -4783.30 55.10 -1840.80 1939.00

Mar '09 12 mths 1675.80 1193.30 951.40 -536.20 1608.50 330.50

Mar '08 12 mths 2503.00 1830.40 -3061.50 132.30 -1098.80 1422.80

Mar '07 12 mths 2279.80 2028.00 -2436.80 430.00 21.20 1401.60

Closing Cash & Cash Equivalents

2508.50

98.20

1939.00

324.00

1422.80