CHAPTER-1 INTRODUCTION

INTRODUCTION:
Working capital is the cash needed to pay for the day to day operation of the business. Working capital is a financial metric which represents operating liquidity available to a business, organization or other entity, including governmental entity. Along with fixed assets such as plant and equipment, working capital is considered a part of operating capital. Net working capital is calculated as current assets minus current liabilities.. It is a derivation of working capital, that is commonly used in valuation techniques such as DCFs (Discounted cash flows). If current assets are less than current liabilities, an entity has a working capital deficiency, also called a working capital deficit. A company can be endowed with assets and profitability but short of liquidity if its assets cannot readily be converted into cash. Positive working capital is required to ensure that a firm is able to continue its operations and that it has sufficient funds to satisfy both maturing short-term debt and upcoming operational expenses. The management of working capital involves managing inventories, accounts receivable and payable, and cash. Working capital management is a very important component of corporate finance because it directly affects the liquidity and profitability of the company. It involves the decision of the amount and composition of current assets and the financing of these assets. Efficient working capital management involves planning and controlling current assets and current liabilities in a manner that eliminates the risk of inability to meet due short term obligations on the one hand and avoid excessive investment in these assets on the other hand. Working capital means that part of the total assets of the business that change from one form to another form in the ordinary course of business operations. Also known as revolving or circulating capital or short-term financial management it is nothing but the difference between current assets and current liabilities. The word working capital is made of two words- Working & Capital. The word working means day to day operation of the business, whereas the word capital means monetary value of all assets of the business. Working capital is of major importance to internal and external analysis because of its close relationship with the current day-to- day operations of a business.

Every business needs funds for two purposes. Long term funds are required to create production facilities through purchase of fixed assets such as plants, machineries, lands, building, etc. Short term funds are required for the purchase of raw materials, payment of wages, and other day-to-day expenses. Working capital management deals with the management of these short term funds. The constituents of current assets & current liabilities is as followsCURRENT ASSETS 1. INVENTORY a) RAW MATERIAL b)WORK-IN-PROGRESS c) FINISHED GOODS d) OTHERS 2. TRADE CREDITORS 3. LOANS AND ADVANCES 4.CASH AND BANK BALANCE CURRENT LIABILITIES 1. SUNDRY CREDITORS 2. TRADE ADVANCES 3. BORROWINGS (short term) a) COMMERCIAL BANKS b) OTHERS 4. PROVISIONS

WORKING CAPITAL COMPRISES OF THE FOLLOWING:1. Cash and cash equivalents : - This most liquid form of working capital requires constant supervision. A good cash budgeting and forecasting system provides answers to key questions such as: Is the cash level adequate to meet current expenses as they come due? What is the timing relationship between cash inflow and outflow? When would cash need occur? When and how much bank borrowing will be needed to meet any cash shortfalls? When will repayment be expected and will the cash flow cover it? 2. Accounts receivables: - Many businesses extend credit to their customers. If you do, is the amount of accounts receivable reasonable relative to sales? How rapidly are receivables being collected? Which customers are slow to pay and what should be done about them?

3.

Inventory: - Inventory is often as much as 50 percent of a firm's current assets, so naturally it requires continual scrutiny. Is the inventory level reasonable compared with sales and the nature of your business? What's the rate of inventory turnover compared with other companies in your type of business?

4. Accounts payable: - Financing by suppliers is common in small business; it is one of the major sources of funds for entrepreneurs. Is the amount of money owed suppliers reasonable relative to what you purchase? What is your firm's payment policy doing to enhance or detract from your credit rating? 5. Accrued expenses and taxes payable: - These are obligations of your company at any given time and represent a future outflow of cash.

THERE ARE TWO DIFFERENT CONCEPTS OF WORKING CAPITAL:1. Balance sheet or Traditional concept - It shows the position of the firm at certain point of time. It is calculated in the basis of balance sheet prepared at a specific date. In this method there are two types of working capital:a) Gross working capital - It refers to the firms investment in current assets. The sum of the current assets is the working capital of the business. The sum of the current assets is a quantitative aspect of working capital. Which emphasizes more on quantity than its quality, but it fails to reveal the true financial position of the firm because every increase in current liabilities will decrease the gross working capital. b) Net working capital - It is the difference between current assets and current liabilities or the excess of total current assets over total current liabilities. It is also can defined as that part of a firms current assets which is financed with long term funds. It may be either positive or negative. When the current assets exceed the current liability, the working capital is positive and vice versa. 2. Operating cycle concept - The duration or time required to complete the sequence of events right from purchase of raw material for cash to the realization of sales in cash is called the operating cycle or working capital cycle

The investment in working capital is influenced by four key events in the production & sales cycle of the firm: Purchase of raw materials. Payment of raw materials. Sale of finished goods. Collection of cash for sales.
The firm begins with the purchase of raw materials which are paid after a delay which represents the accounts payable period. The raw materials are then converted into finished goods which are then sold. The time lag between the purchase of raw materials and the sale of finished goods is called the inventory period. The time lag between the date of sales & the date of collection of receivables is the accounts receivable period. The time lag between purchase of raw materials & the collection of cash for sales is referred to as operating cycle. The time lag between payment for raw material purchases & the collection of cash for sales is referred to as cash cycle.

IMPORTANCE OF WORKING CAPITAL

The advantages of working capital or adequate working capital may be enumerated as below: -

Cash Discount: If a proper cash balance is maintained, the business can avail the advantage of cash discount by paying cash for the purchase of raw materials and merchandise. It will result in reducing the cost of production. It creates a Feeling of Security and Confidence: The proprietor or officials or management of a concern are quite carefree, if they have proper working capital arrangements because they need not worry for the payment of business expenditure or creditors. Adequate working capital creates a sense of security, confidence and loyalty, not only throughout the business itself, but also among its customers, creditors and business associates.
3. Must for Maintaining Solvency and Continuing Production: In order to maintain the solvency of the business, it is but essential that the sufficient amount t of fund is available to make all the payments in time as and when they are due. Without ample working capital, production will suffer, particularly in the era of cut throat competition, and a business can never flourish in the absence of adequate working capital. 4. Sound Goodwill and Debt Capacity: It is common experience of all prudent businessmen that promptness of payment in business creates goodwill and increases the debt of the capacity of the business. A firm can raise funds from the market, purchase goods on credit and borrow short-term funds from bank, etc. If the investor and borrowers are confident that they will get their due interest and payment of principal in time. Easy Loans from the Banks: An adequate working capital i.e. excess of current assets over current liabilities helps the company to borrow unsecured loans from the bank because the excess provides a good security to the unsecured loans, Banks favour in granting seasonal loans, if business has a good credit standing and trade reputation. 6. Distribution of Dividend:

If company is short of working capital, it cannot distribute the good dividend to its shareholders in spite of sufficient profits. Profits are to be retained in the business to make up the deficiency of working capital. On

the other contrary, if working capital is sufficient, ample dividend can be declared and distributed. It increases the market value of shares.

7.

Exploitation of Good Opportunity: In case of adequacy of capital in a concern, good opportunities can be exploited e.g., company may make off-season purchases resulting in substantial savings or it can fetch big supply orders resulting in good profits.

8.

Meeting Unseen Contingency: Depression shoots the demand of working capital because sock piling of finished goods become necessary. Certain other unseen contingencies e.g., financial crisis due to heavy losses, business oscillations, etc. can easily be overcome, if company maintains adequate working capital.

9.

High Morale: The provision of adequate working capital improves the morale of the executive because they have an environment of certainty, security and confidence, which is a great psychological, factor in improving the overall efficiency of the business and of the person who is at the hell of fairs in the company.

10. Increased Production Efficiency: A continuous supply of raw material, research programme, innovations and technical development and expansion programmes can successfully be carried out if adequate working capital is maintained in the business. It will increase the production efficiency, which will, in turn increases the efficiency and morale of the employees and lower costs and create image among the community.

DISADVANTAGES OF EXCESSIVE WORKING CAPITAL

E v e r y b u s i n e s s c o n c e r n s h o u l d h a v e a d e q u a t e w o r k i n g c a p i t a l t o r u n i t s business operations. It should have neither redundant or excessive working capital nor inadequate nor shortage of working capital. Both excessive as well as short working capital positions are bad for any business.

1. Excessive working capital means idle funds which earn no profits for the business and hence the business cannot earn a proper rate of return on its investments. 2. When there is redundant working capital, it may lead to unnecessary purchasing and accumulation of inventories causing more chances of theft waste and losses. 3. Excessive working capital implies excessive debtors and defective credit Policy which may cause higher incidence of bad debts. 4. It may result into overall inefficiency in the organization. 5. When there is an excessive working capital relation with the banks and other financial institutions may not be maintained. 6. Due to low rate of return on investments the value of shares may also fall

DISADVANTAGES OF INADEQUATE WORKING CAPITAL

1) A concern, which has inadequate working capital, canno t pay its short-term liabilities in time. Thus it will loose its reputation and shall not be able to get good credit facilities. 2) The firm cannot pay day-to-day expenses of inefficiencies, increases costs and reduces the profits of the business. its operations and it creates

3) It becomes impossible to utilize efficiently the fixed assets due to nonavailability of liquid funds. 4 ) T h e r a t e o f r e t u r n o n i n v e s t m e n t s a l s o f a l l s w i t h t h e s h o r t a g e o f w o r k i n g capital.

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OBJECTIVE OF THE STUDY

The objectives of this project were mainly to study the inventory, cash and receivable at HERO MOTOCORP but there are some more and they are The main purpose of our study is to render a better understanding of the concept Working Capital Management. To understand the planning and management of working capital at MOTOCORP To measure the financial soundness of the company by analyzing various ratios. To suggest ways for better management and control of working capital at the concern. HERO

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NEED &IMPORTANT OF THE STUDY

The need for working capital gross or current assets cannot be over emphasized. As already observed, the objective of financial decision making is to maximize the shareholders wealth. To achieve this, it is necessary to generate sufficient profits can be earned will naturally depend upon the magnitude of the sales among other things but sales cannot convert into cash. There is a need for working capital in the form of current assets to deal with the problem arising out of lack of immediate realization of cash against goods sold. Therefore sufficient working capital is necessary to sustain sales activity. Technically this is refers to operating or cash cycle. If the company has certain amount of cash, it will be required for purchasing the raw material may be available on credit basis. Then the company has to spend some amount for labour and factory overhead to convert the raw material in work in progress, and ultimately finished goods. These finished goods convert in to sales on credit basis in the form of sundry debtors. Sundry debtors are converting into cash after expiry of credit period. Thus some amount of cash is blocked in raw materials, WIP, finished goods, and sundry debtors and day to day cash requirements. However some part of current assets may be financed by the current liabilities also. The amount required to be invested in this current assets is always higher than the funds available from current liabilities. This is the precise reason why the needs for working capital arise.

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SCOPE OF THE STUDY

This project is vital to me in a significant way. It does have some importance for the company too. These are as follows This project will be a learning device for the finance student. Through this project I would study the various methods of the working capital management. The project will be a learning of planning and financing working capital. The project would also be an effective tool for credit policies of the companies. This will show different methods of holding inventory and dealing with cash and receivables. This will show the liquidity position of the company and also how do they maintain a particular liquidity position.

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RESEARCH METHODOLOGY
The following sources have been sought for the prep of this report: Primary sources such as business magazines, current annual reports, book on Financial Management by various authors and internet websites the imp amongst them being : Secondary sources like previous years annual reports, reports on working capital for research, analysis and comparison of the data gathered. While doing this project, the data relating to working capital, cash management, receivables management, inventory management and short term financing was required. This data was gathered through the companys websites, its corporate intranet, HERO MOTOCORP ANNUAL REPORT. A detailed study on the actual working processes of the company is also done through direct interaction with the employees and by timely studying the happenings at the company. Also, various text books on financial management like ICFAIs book, Khan & Jain, Prasanna Chandra and I.M.Pandey were consulted to equip ourselves with the topic.

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LIMITATIONS
Working Capital is the Life-Blood and Controlling Nerve Center of a business The working capital management precisely refers to management of current assets. A firms working capital consists of its investment in current assets, which include short-term assets such as: Cash and bank balance, Inventories, Receivables (including debtors and bills), Marketable securities.

Working capital is commonly defined as the difference between current assets and current liabilities. WORKING CAPITAL = CURRENT ASSETS-CURRENT LIABILITIES THERE ARE TWO MAJOR WORKING CAPITAL Net working capital CONCEPTS OF WORKING CAPITAL:GROSS

Gross working capital: It refers to firm's investment in current assets. Current assets are the assets, which can be converted into cash with in a financial year. The gross working capital points to the need of arranging funds to finance current assets. Net working capital: It refers to the difference between current assets and current liabilities. Net working capital can be positive or negative. A positive net working capital will arise when current assets exceed current liabilities. And vice-versa for negative net working capital. Net working capital is a qualitative concept. It indicates the

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CHAPTER-2 REVIEW OF LITERATURE

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REVIEW OF LITERATURE
Another important aspect of a working capital policy is to maintain and provide sufficient liquidity to the firm. Like the most corporate financial decisions, the decision on how much working capital be maintained involves a trade off- having a large net working capital may reduce the liquidity risk faced by a firm, but it can have a negative effect on the cash flows. Therefore, the net effect on the value of the firm should be used to determine the optimal amount of working capital. Sound working capital involves two fundamental decisions for the firm. They are the determination of: The optimal level of investments in current assets. The appropriate mix of short-term and long-term financing used to support this investment in current assets, a firm should decide whether or not it should use short-term financing. If short-term financing has to be used, the firm must determine its portion in total financing. Short-term financing may be preferred over long-term financing for two reasons: The cost advantage Flexibility But short-term financing is more risky than long-term financing. Following table will summarize our discussion of short-term versus long-term financing.

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Maintaining a policy of short term financing for short term or temporary assets needs (Box 1) and long- term financing for long term or permanent assets needs (Box 3) would comprise a set of moderate risk profitability strategies. But what one gains by following alternative strategies (like by box 2 or box 4) needs to weighed against what you give up.

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CLASSIFICATION OF WORKING CAPITAL

Working capital can be classified as follows: On the basis of time On the basis of concept

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TYPES OF WORKING CAPITAL NEEDS

Another important aspect of working capital management is to analyze the total working capital needs of the firm in order to find out the permanent and temporary working capital. Working capital is required because of existence of operating cycle. The lengthier the operating cycle, greater would be the need for working capital. The operating cycle is a continuous process and therefore, the working capital is needed constantly and regularly. However, the magnitude and quantum of working capital required will not be same all the times, rather it will fluctuate. The need for current assets tends to shift over time. Some of these changes reflect permanent changes in the firm as is the case when the inventory and receivables increases as the firm grows and the sales become higher and higher. Other changes are seasonal, as is the case with increased inventory required for a particular festival season. Still others are random reflecting the uncertainty associated with growth in sales due to firm's specific or general economic factors.

The working capital needs can be bifurcated as: Permanent working capital Temporary working capital

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Permanent working capital:

There is always a minimum level of working capital, which is continuously required by a firm in order to maintain its activities. Every firm must have a minimum of cash, stock and other current assets, this minimum level of current assets, which must be maintained by any firm all the times, is known as permanent working capital for that firm. This amount of working capital is constantly and regularly required in the same way as fixed assets are required. So, it may also be called fixed working capital.

Temporary working capital:

Any amount over and above the permanent level of working capital is temporary, fluctuating or variable working capital. The position of the required working capital is needed to meet fluctuations in demand consequent upon changes in production and sales as a result of seasonal changes. The permanent level is constant while the temporary working capital is fluctuating increasing and decreasing in accordance with seasonal demands as shown in the figure. In the case of an expanding firm, the permanent working capital line may not be horizontal. This is because the demand for permanent current assets might

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FINANCING OF WORKING CAPITAL

There are two types of working capital requirements as discussed above. They are: Permanent or Fixed Working Capital requirements Temporary or Variable Working Capital requirements

Therefore, to finance either of these two working capital requirements, we have long-term as well as short-term sources.

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FACTORS DETERMINING WORKING CAPITAL REQUIREMENTS

There are many factors that determine working capital needs of an enterprise. Some of these factors are explained below: Nature or Character 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 sells predominantly on cash basis, has a modest working capital requirement. Oh the other hand, a manufacturing concern like a machine tools unit, which has a long operating cycle and which sells largely on credit, has a very substantial working capital requirement. HERO MOTOCORP carry on activities related to computer systems. Though they are primarily an assembling firm they also have manufacturing facilities in Chennai and Pondicherry. This requires them to keep a very sizeable amount in working capital. Size of Business/Scale of Operations. HERO MOTOCORP is the leader in its segment in both consumer as well as commercial market share. They have increased their share in the consumer segment notably in the last four years. This they have achieved through retail expansion. The scale of operations and the size it

Rate of Growth of Business.

The rate of growth of sales indicates a need for increase in the working capital requirements of the firm. As the firm is projected to increase their sales by 80% from what it was in 2006, it is required to guard them against the increasing requirements of the net current asset by way of efficient working capital management. The sales and projected sales level determine the investment in inventories and receivables.

Price Level Changes.

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Changes in the price level also affect the working capital requirements. It was the reduced margins in the price of the raw materials that had prompted them to go for bulk purchases thus making on additions to their net current assets. They might have gone for this large-scale procurement for availing discounts and anticipating a rise in prices, which would have meant that more funds are required to maintain the same current assets. The upper portion of the diagram above shows in a simplified form the chain of events in a manufacturing firm. Each of the boxes in the upper part of the diagram can be seen as a tank through which funds flow. These tanks, which are concerned with day-to-day activities, have funds constantly flowing into and out of them. The chain starts with the firm buying raw materials on credit. In due course this stock will be used in production, work will be carried out on the stock, and it will become part of the firms work-in-progress. Work will continue on the WIP until it eventually emerges as the finished product. As production progresses, labor costs and overheads need have to be met. Of course at some stage trade creditors will need to be paid. When the finished goods are sold on credit, debtors are increased. They will eventually pay, so that cash will be injected into the firm.

Each of the areas- Stock (raw materials, WIP, and finished goods), trade debtors, cash (positive or negative) and trade creditors can be viewed as tanks into and from which funds flow. Working capital is clearly not the only aspect of a business that affects the amount of cash. The business will have to make payments to government for taxation. Fixed assets will be purchased and sold Lessors of fixed assets will be paid their rent

Shareholders (existing or new) may provide new funds in the form of cash Some shares may be redeemed for cash Dividends may be paid Long-term loan creditors (existing or new) may provide loan finance, loans will need to be repaid from time-to-time, and

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CHAPTER-3
INDUSTRY &COMPANY PROFILE

25

INDUSTRY PROFILE

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CHAPTER-4
DATA

ANALYSIS&INTERPR ETATION

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NET WORKING CAPITAL

CURRENT ASSETS STORES AND SPARE PARTS STOCK-IN-TRADE SUNDRY DEBTORS INTREST ACCRUED AND INVESTMENTS CASH AND BANK LOANS AND ADVANCES TOTAL(A)

2007-2008 505.44 1827.54 631.63 0.20 455.41 3055.73 6475.95

2008-2009 557.67 2047.31 543.48 0.20 465.04 2452.78 6066.28

2009-2010 612.19 2868.28 635.98 0.00 1590.60 4330.43 10037.48

2010-2011 623.76 2453.99 434.83 0.29 3234.14 3628.28 10375.29

2011-2012 716.18 3237.58 428.03 0.00 4141.54 9553.19 18076.52

CURRENT LIABILITIES SUNDRY CREDITORS SUBSIDIARY COMPANIES INTEREST ACCRUED BUT NOT DUE ADVANCE RECEIVED FROM THE CUSTOMER UNCLAIMED MATURED DEPOSITS(DUE) INTEREST ACCRUED ON UNPAID DIVIDENDS AND UNCLAIMED MATURED DIVIDENDS(DUE) UNPAID DIVIDENDS APPLICATION MONEY PENDING REFUND UNPAID MATURED DIVIDENDS

2006-2007 3145.99 102.61 47.11 198.28 0.00 0.03

2007-2008 3243.42 115.74 231.05 226.03 0.02 0.08

2008-2009 3842.78 1358.12 506.68 297.37 0.01 0.07

2009-2010 4086.65 1514.30 676.66 334.99 0.00 0.00

2010-2011 4721.07 1711.07 679.31 293.84 0.00 0.00

23.37 0.01 0.00

29.33 5.65 0.00

33.08 0.24 0.00

39.44 0.14 0.73

41.26 0.61 0.54

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UNPAID MATURED DEPOSITS UNPAID MATURED DEBENTURES INTEREST ACCRUED ON UNPAID DIVIDENDS AND MATURED DIVIDENDS PROVISION FOR RETIRING GRATUITIES PROVISION FOR EMPLOYEE BENEFITS PROVISION FOR TAXATION PROVISION FOR FRINGE BENEFITS PROPOSED DIVIDEND TOTAL(B)

2.59 1.76 1.45

1.73 1.79 0.42

1.03 0.14 0.34

0.00 0.00 0.18

0.00 0.00 0.13

49.31 470.19 448.68 18.37 943.91 5453.66

0.00 848.54 854.74 19.12 1278.40 6768.78

0.00 1143.08 493.59 19.12 1278.40 8974.05

0.00 1127.50 507.13 2.12 709.77 8999.61

0.00 1601.75 791.29 3.88 1151.06 10995.81

NET WORKING CAPITAL

1022.29

(702.5)

1063.43

1375.68

7080.71

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PERCENTAGE CHANGE IN NET WORKING CAPITAL

CURRENT ASSETS STORES AND SPARE PARTS STOCK-IN-TRADE SUNDRY DEBTORS CASH AND BANK LOANS AND ADVANCES TOTAL(A)

2007-2008 14.18 5.51 17.10 57.91 147.46 242.16

2008-2009 10.33 12.03 -13.96 2.11 -19.73 -9.22

2009-2010 9.78 40.10 17.02 242.04 76.55 385.49

2010-2011 1.89 -14.44 -31.63 103.33 -16.21 42.98

2011-2012 14.81 31.93 -1.56 28.06 163.30 236.54

CURRENT LIABILITIES SUNDRY CREDITORS SUBSIDIARY COMPANIES INTEREST ACCRUED BUT NOT DUE ADVANCE RECEIVED FROM THE CUSTOMER PROVISION FOR RETIRING GRATUITIES PROVISION FOR EMPLOYEE BENEFITS PROVISION FOR TAXATION

2007-2008 24.15 64.52 93.95 7.14 5987.65 0.00 79.44

2008-2009 3.10 12.80 390.45 14.00 0.00 63.34 90.50

2009-2010 18.48 1073.42 119.29 31.56 0.00 34.71 -42.25

2010-2011 6.35 11.50 33.55 12.65 0.00 0.014 2.74

2011-2012 15.52 12.99 0.39 -12.28 0.00 42.06 56.03

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PROVISION FOR FRINGE BENEFITS PROPOSED DIVIDEND TOTAL(B) PERCENTAGE CHANGE OF NET WORKING CAPITAL (A-B)

675.11 31.19 6959.78 -6717.62

4.08 26.19 638.04 -647.26

0.00 7.33 1232.01 -846.52

-88.91 -44.48 -50.61 93.59

83.01 62.17 264.96 -28.42

FINANCIAL RATIOS:
1. WORKING CAPITAL TURNOVER RATIO

It is a ratio that reflects the amount of working capital needed to maintain a given level of sales. A high ratio indicates the firm is in a good liquidity position and vice-versa.

FORMULA =

NET SALES NET WORKING CAPITAL

PARTICULARS NET SALES NET WORKING CAPITAL WORKING CAPITAL TUNRNOVER RATIO

2007-2008 17551.09 1022.29 17.17

2008-2009 19693.28 (702.5) -28.03

2009-2010 24315.77 1063.43 22.87

2010-2011 25021.98 1375.68 18.19

2011-2012 29396.35 7080.71 4.15

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INTERPRETATION: The net working capital of HERO MOTOCORP Ltd. has been fluctuating over the years. A sharp decrease in the working capital in the year 2007-2008, where the working capital was negative was mainly because of a decrease in current assets. As compared to the year 2009-2010 where the working capital ratio was 18.19, the ratio this year has fallen down to 4.15. The reason for decrease can be accredited to the increase in the current assets such as inventory, cash & bank balances and loans and advances that has increased tremendously this year. There has been an increase in the sales and the production capacity this year. The raw materials consumption has also increased by 13.64%. CURRENT RATIO

The current ratio is used to evaluate a companys overall short term liquidity position. It tells us whether a company is in a position to meet its obligations.

FORMULA = CURRENT ASSETS CURRENT LIABILITIES PARTICULARS CURRENT ASSETS CURRENT LIABILITIES 2007-2008 6475.95 5453.66 2008-2009 6066.28 6768.78 2009-2010 10037.48 8974.05 2010-2011 10375.29 8999.61 2011-2012 18076.52 10995.81

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CURRENT RATIO

1.19

0.9

1.12

1.15

1.64

INTERPRETATION: The ideal current ratio is considered to be 2:1. The current ratio has been increasing steadily over the years. As compared to the previous year in 2009-2010 the ratio has increased to 1.64 in the year 2010-2011. The reason for increase might be continuous investments in the current assets over the years.

QUICK RATIO
Quick ratio / Liquid ratio is an indicator of a companys short term solvency or liquidity position. It is the relationship between liquid assets and liabilities. An asset is said to be liquid if it can be converted into cash within a short period without loss of value. FORMULA = CURRENT ASSETS INVENTORY CURRENT LIABILITIES

PARTICULARS CURRENT ASSETS INVENTORY CURRENT ASSETSINVENTORY CURRENT LIABILTY QUICK RATIO

2007-2008 2008-2009 2009-2010 2010-2011 2011-2012 6475.95 6066.28 10037.48 10375.29 18076.52 1827.54 2047.31 2868.28 2453.99 3237.58 4648.41 5453.66 0.85 4018.97 6768.78 0.59 7169.2 8957.05 0.8 7921.3 8999.61 0.88 14838.94 10995.81 1.34

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INTERPRETATION:

The ideal standard in case of quick ratio is 1:1. And if it is more it is considered to be better. The idea behind this is that for every rupee of current liabilities, there should be at least one rupee of liquid asset. Quick ratio is thus a rigorous test of liquidity and gives a better picture of short term financial position of the firm. As shown in the graph above, we can see that after a steep fall in the quick ratio from the year 2006-2007 to 2007-2008 there has been a steady increase in the quick ratio and for the year 2010-2011 the ratio is 1.34 which signifies that the liquidity position of the firm has improved and this is because of increase in the cash that is lying with the firm.

DEBTORS TURNOVER RATIO Debtors Turnover Ratio or Receivables Turnover Ratio indicates the relationship between net sales and average debtors. It shows the rate at which cash is generated by the turnover of debtors.

FORMULA = AVERAGE DEBTORS NET SALES AVERAGE DEBTORS= (OPENING DEBTORS + CLOSING DEBTORS) / 2

PARTICULARS AVERAGE DEBTORS

2007-2008 585.515

2008-2009 587.55

2009-2010 589.73

2010-2011 535.4

2011-2012 431.43

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NET SALES DEBTORS TURNOVER RATIO

17551.09 29.98

19693.28 33.52

24315.77 41.23

25021.98 46.73

29396.35 68.13

INTERPRETATION: Debtors turnover ratio indicates the speed with which the amount is being collected from the debtors. The higher the ratio the better it is, since it indicates the amount from the debtors is being collected more quickly. The more quickly the debtors pay, the less risk from bad debts, and so lower is the expenses of collection and increase in the liquidity of the firm. By comparing the debtors turnover ratio of the current year with the previous year, it may be assessed whether the sales policy of the management is efficient or not. As shown in the graph above, there has been an increase in the ratio from 2006-2007 to 2010-201 1from 29.98 to 68.13 which shows that the sales management of the firm is quite efficient.

DEBT COLLECTION PERIOD Days Sales Outstanding is a short term (operating) Activity ratio which tells us about the debtors holding time. The more the holding period the more risky it becomes for the company. A high debt collection period indicates that the company is taking time to collect cash from its debtors. The cash is not being collected on time which is not a good sign for the company, it is a red flag. FORMULA = 365/ DEBTORS TURNOVER RATIO PARTICULARS DEBTORS TURNOVER RATIO NO. OF DAYS DEBT COLLECTION 2007-2008 2008-2009 29.98 365 12
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2009-2010 33.52 365 11 41.23 365 9

2010-2011 46.73 365 8

2011-2012 68.13 365 5

PERIOD

INTERPRETATION:

Debt collection period means the average number of days that the debtors take to get converted to cash. In other words, credit sales are locked up in debtors for the number of days. As we can see here, the debt collection period has come down from 12 days to 5 days which means that the debtors get converted to cash in 5 days. An increase in the ratio indicates excessive blockage of funds with the debtors which increases the chances of bad debts. In this case as we can see that there is a decrease in the average collection period which indicates prompt payment by debtors which reduces the chances of bad debts. Therefore, from the above data it can be concluded that the company is in a better position and is improving as compared to its previous years. 1. STOCK TURNOVER RATIO The Inventory Turnover Ratio measures the efficiency of the firms inventory management. A higher ratio indicates that inventory does not remain in warehouses or on the shelves but rather turns over rapidly from the time of acquisition to sales. A lower inventory turnover ratio means accumulation of inventories, over investment in inventory or unsalable goods. FORMULA = COST OF GOODS SOLD AVERAGE STOCK AVERAGE STOCK= (OPENING STOCK+CLOSING STOCK)/2

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PARTICULARS COST OF GOODS SOLD AVERAGE STOCK STOCK TURNOVER RATIO

2006-2007 10174.97 1779.82 5.72

2007-2008 11155.5 1937.43 5.76

2008-2009 14928.65 2457.8 6.07

2009-2010 15730.67 2661.14 5.91

2010-2011 17471.83 2845.78 6.13

INTERPRETATION:
This ratio indicates the relationship between the cost of goods sold during the year and average stock kept during that year. The ratio indicates whether the stock has been efficiently used or not. It shows the speed with which the stock is turned into sales during the year. The graph above shows that after an increase in the ratio from the year 2007-2008 to 2008-2009 (5.76-6.07) there in the year 2009-2010(5.91) after which again a rise in the ratio in the year 2010-2011(6.13). A high ratio is indicative that the stock is selling quickly.

PAYABLES TURNOVER RATIO

FORMULA- NET CREDIT PURCHASE AVERAGE CREDITORS

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AVERAGE CREDITORS= (OPENING CREDITORS+CLOSING CREDITORS)/2

PARTICULARS NET CREDIT PURCHASE AVERAGE CREDITORS PAYABLES TURNOVER RATIO 2007-2008 2008-2009 2009-2010 2010-2011 2011-2012 2263.01 2353.8 6241.61 5215.42 6853.95 2840.01 3194.7 3543.1 3964.72 4383.86 0.79 0.73 1.76 1.31 1.56

INTERPRETATION: The ratio indicates the speed with which the amount is being paid to the creditors. A higher ratio is better since it would indicate that the creditors are being paid more quickly and this increases the credit worthiness of the firm. Here, the graph above shows a steep fall in the ratio from the year 2008-2009(1.76) to 20092010(1.31) and then again a rise to the year 2010-2011(1.56). The reason for the fall can be attributed to a decrease in the net credit purchases in the year 2009-2010. Other than the investment in current assets, the firm also has to be concerned with short-term to long-term debt as this plays a very important role in determining the amount of risk undertaken by the firm. That is , the firm not only has to be concerned about current assets but also the sources through which they are financed. A firm before financing in either of the two, has to take into consideration various aspects. While short term might seem the ideal way to finance your assets than the long term due to shorter maturity period and also less of costs are involved, there

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is an inherent risk in short term financing due to fluctuating interest rates and due to the reason that the firm might be unable to ready the amount in a shorter span of time. Under secured loan cash credit, along with non fund based facilities, foreign currency term loan from banks are secured by way of hypothecation of stock-in-trade, book debts as first charge and by way of second chanrge on all the immovable and movable assets of the parent company. Term loan in Indian rupees from a bank is subject to a prior charge in favour of companys bankers on book debts and stock in trade for working capital facilities. Here HERO MOTOCORP has a major portion of their financing done through short term financing than long term financing. The preference of short term financing to long term as such is not the part of any policy employed by the firm but it was due to the reason that the interest rates in short term were more investor friendly and the cost involved in them were also low. At present, we can see that the firm is moving more towards long term financing as the interest terms in the long term has reduced compared to the short term.

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CHAPTER-5
SUGGESTIONS, FINDINGS& CONCLUSIONS

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FINDINGS
The management of working capital plays a vital role in running of a successful business. So, things should go with a proper understanding for managing cash, receivables and inventory. HERO MOTOCORP is managing its working capital in a good manner, but still there is some scope for improvement in its management. This can help the company in raising its profit level by making less investment in accounts receivables and stocks etc. This will ultimately improve the efficiency of its operations. Following are few recommendations given to the company in achieving its desired objectives: The business runs successfully with adequate amount of the working capital but the company should see to it that the cash should not be tied up in excessive amount of working capital. Though the present collection system is near perfect, the company as due to the increasing sales should adopt more effective measures so as to counter the threat of bad debts. The over purchasing function should be avoided as it could lead to liquidity problems. The investment of cash in marketable securities should be increased, as it is very profitable for the company. Holding of excessive and insufficient stock must be avoided as it creates a burden on the cash resources of a business and results in lost sales, delays for customers, etc respectively.

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SUGGESTIONS
The working capital position of the company is sound and the various sources through which it is funded are optimal. The company has used its dividend policy, purchasing, financing and investment decisions to good effect can be seen from the inferences made earlier in the project. The debts doubtful have been doubled over the years but their percentage on the debts has almost become half. This implies a sales and collection policy that get along with the receivables management of the firm. The returns have been affected by a marked growth in working capital and though a 29.75% in 2006 return on investment is good, but it got reduced as compared to 39.01% return in 2012 The various ratios calculated are an indicator as to the fact that the profitability of the firm and sales are on a rise and also the deletion of the inefficiencies in the working capital management. The firm has not compromised on profitability despite the high liquidity is commendable. HERO MOTOCORP has reached a position where the default costs are as low as negligible and where they can readily factor their accounts receivables for availing finance is noteworthy.

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CONCLUSION
HERO MOTOCORP has been analyzed in terms of financial aspects especially working capital and financial ratios. A comparison has been made with JSW and SAIL to see the position of HERO MOTOCORP Ltd. in the industry. Working capital management is a very crucial part of any organization. It needs to maintain its working capital efficiently for its day to day operations to take place. An organization needs proper liquidity to meet its obligations on time. Ratio analysis is also a very important part of a business. It is a platform to judge a company based on liquidity, profitability etc. It is very crucial for banks, investors, creditors etc. It also makes comparisons easier. HERO MOTOCORP has been able to maintain a good liquidity position throughout. It has been able to pay back its liabilities on time and also has been able to give dividends on time to its shareholders. It has also maintained a good level of EPS. The inventory turnover has been maintained efficiently which we can see from the high inventory turnover ratio.

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BIBLIOGRAPHY

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BIBLIOGRAPHY
BOOK NAME Management Accounting The Analysis And Use Of Financial Statements AUTHOR NAME M Y Khan & P K Jain (2010). Gerald I. White, Ashwinpaul C. Sondhi & Dov Fried (2011). EDITION - Fifth Edition.
- THIRD EDITION.

Financial management REFFERANCES (WEBSITES)

PRASANNA CHANDRA

5TH EDITION

http://www.HERO MOTOCORP.com/about-us/company-profile.asp

http://www.ey.com/Publication/vwLUAssets/Global__Report_2010-2011/$FILE/Global%20%20Report %202010-2011%20FULL%20REPORT.pdf zenithresearch.org.in/images/stories/pdf/2012/Jan/ZIJMR/13 SURESH VADDE _paper.pdf http://www.zacks.com/stock/news/49743/-industry-outlook-%96-march-2011

Research and Markets: Analyzing the Indian Industry 2012 Edition is Completed with An Analysis of the Major Players in the Indian Sector | Japan Metal Bulletin

Top Indian Companies Performance | News From Business, Finance, Share Market Real Estate

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