EXECUTIVE SUMMARY

Working Capital Management is significant in financial management due to the fact that it plays a
vital role in keeping the wheel of the business running. Every business requires capital, without
which it cannot be promoted. It holds exceptional importance in the case of a manufacturing
company. It also covers various concepts like inventory management, cash management, credit
policy etc. This study is undertaken to find out the efficiency and effectiveness of the working
capital management in the company and to provide useful feedbacks.

Apollo Tyres Ltd is one of the largest tyre manufacturing companies across the world. The
company started its production of tyres way back in the year 1977. It holds 2" position in India
and 14th position in the world. The company currently has 9 plants in India, South Africa and
Zimbabwe. Apollo Tyres exports its products to Africa, the Middle East, South America, Asia-
Pacific and Europe.

This project titled 'A STUDY ON WORKING CAPITAL MANAGEMENT AT APOLLO TYRES
LTD' is a deliberate and systematic endeavour to study the working capital management system in
the Indian tyre giant.

Under this study analysis has been done for the last five years from 2003-2004 to 2007-2008.
Various secondary sources like annual report of the company. journals, theoretical texts,
publications in the web, financial inputs from the management staff etc. were utilised to undertake
the study. The study is mostly made from the financial analysis tools like ratio analysis, cash
conversion cycle, schedule of changes in working capital position etc. The limitation of these tools
may reflect in the results of this study also.

The study tries to compare the working capital management in the company and other competitors
in Indian market to know the efficiency and shortcomings of the system. Analysis has been done
by comparing the industrial ratios with the ratios recorded by the company. This project also tries
to study about the components in the current asset to know the level of consistency over the years.

From the study it is found that the overall working capital management system is very efficient
paring few drawbacks. The company showed high consistency in most of the areas of working
capital and also met the industrial average and even surpassed them in some cases. It is found that
the company's performance in some areas is commendable and a few areas require more attention.

It is suggested that the company should reinforce some aspects like cash management to
consolidate its liquidity position. Minor adjustments in the inventory management system are
needed for the more efficient utilisation of the inventory. The company's Debtors management is
found to be highly efficient. This can be understood by seeing the average collection period which
is twice faster than the industrial average.

The company should rectify the shortcomings in its working capital management system with
utmost care to achieve global standards and thereby becoming Benchmark Company in this
particular sector.
 INDUSTRY PROFILE

The origin of tyre industry in India dated back to 1926 when Dunlop Rubber Ltd set up the first
tyre factory in West Bengal. MRF followed the suit in 1946. Since then the Indian tyre industry
has grown rapidly. Transportation industry and tyre industry go hand in hand as the two are inter-
dependent. Transportation industry has experienced 10% growth rate year after year with an
absolute level of 870 billion tonne freight with an extensive road accounts for over 85% of all
freight movement in India.

Tyre industry consumes over 60% of the total rubber production with respect to Indian economy.
But in actuality only just around 52% of the tyre is natural rubber. Remaining 48% consist of
synthetic rubber, carbon, chemicals, etc.

The Indian Tyre Industry produced 736 Iakh units of tyres (11 lakh tonnes) garnering Rs. 19,000
crores in FY 07. MRF Ltd. was the market leader (22% market share) followed closely by Apollo
Tyres Ltd. (21%). The other major players were JK Tyre & Industries Ltd (18%) and Ceat Ltd.
(13%). The industry tonnage production registered a 5 year CAGR of 9.69% between FY 02-07

The tyre industry in India is classified under 4 categories based on the year of commencement of
production namely

1. 1st Generation Companies: which included Dunlop and Firestone.

2. 2nd Generation Companies: which included MRF, CEAT, Good Year and Premier.
3. 3rd Generation Companies: which included Apollo, Vibrant, Modi Rubber and JK Tyres.
4. 4th Generation Companies: which includes the companies started after 1970 and also which are
yet to start production.

RANKING OF TYRE COMPANIES (In India)

RANK COMPANIES
1 MRF TYRES LTD
2 APOLLO TYRES LTD
3 J.K. TYRES LTD
4 CEAT TYRES LTD
5 MODI RUBBERS LTD
6 BIRLA TYRES LTD
7 GOODYEAR INDIA LTD
8 VIKRANT TYRES LTD
MARKET SHARE OF VARIOUS COMPANIES

COMPANY TRUCK CAR

APOLLO 28 10
MRF 16 25
JK 17 18
CEAT 12 14
VIKRANT 11 01
GOODYEAR 05 12
OTHERS 11 20
 COMPANY PROFILE

Corporate Overview

Apollo Tyres Limited (Apollo Tyres) is a tyre manufacturing company, incorporated in 1975. In
1977, the first plant was commissioned at Perambra, Thrissur, Kerala. In 2006, it acquired Dunlop
Tyres International, South Africa and Zimbabwe. It manufactures tyres, tubes and flaps for
commercial and passenger vehicles. Apollo tyres Ltd is the first Indian multinational tyre
corporation. It is India's largest and ranked 17th*in the world. It is the first Indian tyre company to
cross the US$ 1 billion revenue mark in 2006-07. Three decades of manufacturing expertise and
marketing innovation. It is the market leader in heavy commercial and light commercial tyres in
India and fastest growing in passenger vehicle tyres. Apollo tyres itd is the biggest exporter of
passenger vehicle tyres from India.

Vision

"A significant player in the global tyre industry and a brand of choice,
providing customer delight and continuously enhancing stakeholder value"

Values

 C -Care For Customers

 R - Respect For Associates
 E - Excellence Through Teamwork
 A - Always Learn
 T - Trust Mutually
 E - Ethical Practices

Corporate Objectives
  Employee Satisfaction
 Customer Delight
 Revenue Growth
 Operating Margin Improvements

Key Facts

 Apollo Tyres Ltd has been pioneer in the implementation of 'Six Sigma' among all the
tyre companies in India.
 7th fastest growing tyre manufacturing company in the world.
 1st tyre company to obtain ISO 9001 certification for all its operations.
 Apollo Tyres Ltd is in the list of top 15 tyre manufacturing companies in the world in
terms of revenue(14th rank).
 Has about 2400 exclusive dealers.
 The R&D centre is functioning at Baroda plant in Gujarat.
 Tube manufacturing is done at Pune plant, Maharashtra. Tubes for the entire requirement
of all plants are produced here and balance requirement met from outside. Flaps are also
purchased from outside.

Corporate Timeline

 1975 Inception.
 1976 Registered as a company.
 1977 First plant commissioned in Perambra (Cochin, Kerala)
 1991 Second plant commissioned in Linda (Baroda, Gujarat )
 1995 Acquired Premier Tyres in Kalamassery (Cochin, Kerala)
 1996 Exclusive tubes plant commissioned in Ranjangaon (Pune, Maharashtra)
 2000 Exclusive radial capacity established in Limda.
 2000 Established Apollo Tyres Health Care Clinic for HIV-AIDS awareness and
prevention in Sanjay Gandhi Transport Nagar, Delhi.
 2003 Expansion of passenger car radial capacity to 6,600 tyres/day.
 2004 Production of India "s first H-speed rated tubeless passenger car radial tyres.
 2004 Support in setting up India's first Emergency Medical Service in Baroda, Gujarat.
 2005 Apollo Tyres Health Care Clinics in Udaipur in Rajasthan and Kanpur in Uttar
Pradesh.
 2006 Expansion of passenger car radial capacity to 10,000 tyres/day.
 2006 Expansion of passenger car range to include 4x4 and all-terrain tyres.
 2006 Acquired Dunlop Tyres International in South Africa and Zimbabwe.
  2006 Opening of Apollo Tyres Health Care Clinic in Ukkadam, Tamil Nadu.
 2006 Launch of DuraTread, treading rnaterial and solutions.
 2006 Launch of India's first range of ultra-high performance V and W-speed rated tyres.
 2007 Launch of Regal truck and bus radial tyres.
 2007 Launch of DuraTyre, retreaded tyres from Apollo.
 2007 Launch of the Apollo Tennis Initiative and Mission 2018
 2009 Apollo Tyres completes 100 per cent acquisition of Vredestein Banden.

Business Focus
Major Segments:

The Group's principal activities are to manufacture and sell automobiles tyres. Apollo Tyres
product range includes truck and bus tyres; light truck tyres; farm tyres; passenger car tyres, off-
the-road, earthmover and industrial radials. The company has five manufacturing plants in India,
two in Kerala, one in Gujarat, one in Haryana and one in Tamil Nadu. It also has two
manufacturing facilities in South Africa and two in Zimbabwe. The Group exports its products to
South America, Pakistan, South-East Asia, Middle East Countries and Africa.

Products and Services:

 Key product brands of the company include Apollo, Dunlop, India Tyres, Kaizen, Regal
Tyres, Novex, Master Steel, Milestone, Tyfoon, Velocity etc.
 The company has a strong R&D centre at Vadodara that develops and promotes the
evolution of new technologies.
 In FY07, the company launched some new products, including the Acelere Sportz and
Aspire brands.
 In FY07: Apollo Tyres passenger car radial tyre manufacturing capacity increased from
210,000 tyres per month to 300,000 tyres per month.
 The company has a network of over 4,000 dealerships in India, of which over 2,500 are
exclusive outlets. in South Africa, it has over 900 dealerships, of which 190 are Dunlop
Zones.
 Apollo Tyres exports to Africa, the Middle East, South America, Asia-Pacific, and
Europe.

Competitors

SI No. COMPANIES
1 MRF TYRES LTD
2 J.K TYRES LTD
3 CEAT TYRES LTD
 4 MODI RUBBERS LTD
5 BIRLA TYRES LTD
6 GOODYEAR INDIA LTD
7 VIKRANT TYRES LTD

Capital Structure

Period Instrument Authorised Capital Rs. Crs

2007-08 Equity Share 73

2006-07 Equity Share 73
2005-06 Equity Share 48
2004-05 Equity Share 48
2003-04 Equity Share 48

During the year 2007-08, the company has alloted 24.42 millon equity shares of Re. 1 each at a
premium of Rs. 28.30 to promoters on conversion of 2.442 millon warrants. The company's share
capital as on 31st March, 2008 has increased from RS. 464.02 millon to Rs 488.44 millon after the
said allotment. Subsequently, promoters have exercised last tranch of their option for conversion
of 1.558 millon warrants into 15.58 millon shares on18th April, 2008 thereby, increasing share
capitalto Rs.504.02 millon.

The face value of equity shares of the Company has been split from 1 equity share of Rs.10 each
into 10 equity shares of Re. 1 each w.e.f. 27th August 2007, in pursuance of the resolution passed
in the Annual General Meeting held on 26 July 2007.

Ownership Structure

Stake holding Pattern Percentage

Promoters 39_35%
Public 26,38%
F11/ NRI/Foreign Body Corporate 14.76%
Government of Kerala/Travancore/Titanium Products Ltd. 1.98%
Financial In stitutions/Banks/Mutual Funds 17.53%
 Financial Performance

2007-08 2006-07
Sales 4,256.21 3,777.31
Net Profit 219.30 113.42
Dividend 25.20 20.88

Manufacturing Facilities

1. Plants in India

SI.No. LOCATION PRODUCTS & FACILITY

1 APOLLO TYRES LTD, PERAMBRA, BIAS

KERALA
2 APOLLO TYRES LTD, BIAS
KALAMASSERY,KERALA
3 APOLLO TYRES LTD, BARODA, RADIALS & BIAS, R & D
GUJARAT
4 APOLLO TYRES LTD, KUNDLI, RETREADING
HARYANA
5 APOLLO TYRES LTD, CHENNAI, RADIALS
TAMIL NADU

2. Plants in Abroad

SI.No. LOCATION PRODUCTS & FACILITIES

1 APOLLO TYRES LTD, RADIAL CAR
LADYSMITH, SOUTH AFRICA
2 APOLLO TYRES LTD, RADIALS & BIAS
DURBAN, SOUTH AFRICA
3 APOLLO TYRES LTD, RADIALS & BIAS
BULAWAYO, ZIMBABWE
4 APOLLO TYRES LTD, RETREADING
HARARE, ZIMBABWE
Subsidiaries
SL No. Subsidiaries
1. Apollo (Mauritius) Holding Pvt. Ltd.(AMHPL)
2. Apollo (South Africa) Holding Pty. Ltd.(ASHPL)(Subsidiary through AMHPL)
3. Dunlop Tyres International Pty. Ltd. (DTIPL)(Subsidiary through AMHPL)
4. Dunlop Africa Marketing (UK) Ltd. (DAMUK)(Subsidiary through DTIPL)
5. Dunlop Zimbabwe Ltd.(DZL)(Subsidiary through DAMUK)
6. Radun Investment (Pvt.) Ltd.(Subsidiary through DAMUK)
7. AFS Mining (Pvt.) Ltd. (Subsidiary through DZL)
8. Apollo Tyres AG, Switzerland (AT AG)
9. Apollo Tyres Germany(AT GmbH)(Subsidiary through AT AG)
10. Apollo Tyres Kft, Hungary(AT Kft)(Subsidiary through AT AG)
11. Apollo Tyres Pte Ltd, Singapore (AT PL) (Subsidiary through AMHPL)

Research, Design & Development

 Global R&D centre in Limda [Baroda]

 Dedicated FEA [Finite Element Analysis] cell
 Tie-ups with premier institutes in India [IIT Mumbal and IIT Kharagpur] and leading
international universities in Germany [Leipzig and Leibniz]
 Panel of international tyre technologists working on compounding and tyre design.
 Partners in the best raw material sources from across the world —Lanxess, Bekaert,
Degussa to name a few—have development agreements with each
 Rigorous testing of UHF & 4x4 passenger vehicle tyres in world-class testing facilities.

Key Partnerships

 Apollo tyres relationship with the automakers have both expanded as well as improved
over the year. It added General Motors India to the list of customers.

 All the major automakers in India now actively look at Apollo Tyres Ltd. as a
partner in their journeys. The last financial year has been a watershed year in
ATL's march towards being a significant global player.

 Apollo Tyres strategic acquisition of Dunlop South Africa made it the first Indian tyre
company to have a transnational footprint.

 A very important milestone was the initiation of direct exports by Apollo tyres to its
International customers across Europe.

Distribution Network
  Aiming to make the most of ongoing growth in the promising world tyre market, Apollo
Tyres is expanding its operations by fortifying local production capacity. product line ups
and depth into the market.

 With over 120 sales & service stock points, 5 zonal offices, 18 state offices and 11
redistribution centres, Apollo Tyres is poised to penetrate its presence to the farthest
corners of the country.

 A 4,032 strong dealership network along with 2138 Apollo Tyre Worlds, 194 Apollo
Radial Worlds and 61 Apollo Pragati Kendras, ensures that Apollo Tyres is never very far
from its consumers.
 The over 3000 exclusive Apollo Tyre World and Apollo Tyre Radial outlets have initiated
a quick response mechanism by enabling prompt product delivery and after sales service
to customers throughout the country.

SWOT Analysis

Strengths
 Apollo Tyres has continued to maintain its lead in the market within the dominant
segment of truck and bus tyres within the Indian tyre industry.
 The Company has established a state-of-the-art plant in Baroda.
 Quick response to changes in market conditions and product profiles has resulted in
superior product innovation and technical expertise.
 The Company's marketing initiatives have resulted in a strong brand recall, even in the
price sensitive tyre market. Aiding these efforts is an extensive distribution network.
 The sourcing of raw materials to a global presence through the acquisition of
Dunlop Tyres International (Pty) Ltd in South Africa.
 Economies of transportation cost are a constant benefit to the company on account of
proximity to the natural rubber growing belt.
 With a move into the international arena, Apollo Tyres can also follow and maintain
global quality standards and international process and system certifications.

Weakness
 Apollo Tyres has no presence in the two and three wheeler segments.
 The capital intensive nature of the business in this segment also has its drawback.

Opportunities
 The national thrust in road infrastructure and construction of expressways and national
highways presents a range of opportunities for the tyre industry.
 Creation of road infrastructure has given, and will increasingly give, a tremendous fillip
to surface transportation in the coming years.
 The tyre industry will continue to play an important role in this dynamic and
evolving situation.
  Apollo's leadership position in the commercial vehicle segment will enable the company
to leverage new and related business opportunities.
 The company have already started leveraging these opportunities to its benefit with
its new product segments like Truck/Bus Radial (TBR), Off-The- Road (OTR) tyres,
retreading and allied automotive services.
 Growth within India also supports the Company's aim to be a leader in the global
industry and partake in overseas markets like Europe.

Threats
 There is a need to prepare for imports from neighbouring countries at competitive prices,
which have been rising in the recent past.
 The ever present challenge of raw material price volatility

ORGANISATION PROFILE
Apollo Tyres Ltd., Perambra, Thrissur

Organisational Details

Name : APOLLO TYRES LTD

Place : Perambra, Thrissur District (50km north of Kochi, Kerala)
Year of Inception : 1976
Land Area : 97 acres
Building Area : 69500 Sq. Mt
Head Office : New Delhi
Registered Office : Kochi, Kerala
Present Capacity : 309 MT per day
Product Range : TRUCK, LCV, REAR TRACTORS, FARM RADIALS, PASSENGER &
ADV TYRES
Number of Staffs : 2790

Employee Pattern

Management Staffs - 270

Permanent Staffs - 1819
Workmen Trainees - 248
Contract Workmen - 453
Total - 2790

Milestones of Apollo tyres, Perambra.

  1972 - Company licence was obtained by Mr. Mathew T. Marattakalam,
Jacob Thomas and Associates
 1974 - Company was taken over by Dr. Raunaq Singh and his associates
 1975 - April 13th ,foundation stone of Perambra plant was laid
 1976 - Apollo tyres was registered with registered office at Kochi
 1977 - Plant was commissioned with 49 tons per day capacity
 1982 - Started manufacturing of passenger car radial tyres
 2005 - The plant completed 30 years on April 13th

Highlights
 Single largest truck tyre plant in India
 Fastest growing plant in Apollo family
 Known as the mother plant
 Continuous expansion
 Total employee involvement

DESIGN OF THE STUDY

Objectives of the study:

Primary Objectives
 To analyse the firm's working capital management and to gauge its effect on cash flow
and value

Secondary Objectives
 Ascertain the liquidity of Apollo Tyres Ltd
 Ascertain the efficiency of Apollo Tyres Ltd
 Ascertain the creditworthiness of Apollo Tyres Ltd
 Ascertain the profitability of Apollo Tyres Ltd

Scope of the study

This study assess the working capital investments, evaluates working capital investments
and working capital components of Apollo Tyres Ltd.

Methodology

This research assesses the overall working capital management of the company taking into
account the financial data for the accounting period of last 5 years. Ratio analysis, Cash
Conversion Cycle, Schedule of Changes in working capital is used for this purpose.

Formulation of research problem

The research problem in this project is to study the investment of the firm in the working capital,
whether they are reasonable, in other words, is the firm over or underinvested in working capital.
Period of study

The period covered for the completion of the project is 8 weeks.

Source of data

1. Primary Data:
It has been obtained through interviews with the officials of the company.
2. Secondary Data:
Secondary data which is used in this study are:
 Annual Report.
 Publish documents.
 Various Journals.
 Websites.

Research design

Research design used for the study was descriptive analysis type and it involves observation of
ideas from the standard texts and journals, websites and other related materials to get a hold on the
theories.

Tools of data analysis

The tools used for the study are Ratio analysis, Cash Conversion Cycle, and Schedule of changes
in working capital.

Limitations of the study

The study is based on secondary data drawn from the secondary sources connected to the topic. So
errors are possible. And the study only covers the accounting period of last five years and current
year was excluded on account of non availability of data. So the current position of the firm was
not taken into consideration.
 WORKING CAPITAL MANAGEMENT

Introduction

In a perfect world, there would be no necessity for current assets and liabilities because there
would be no uncertainty, no transaction costs, information search costs, scheduling costs, or
production and technology constraints. The unit cost of production would not vary with the
quantity produced. Borrowing and lending rates shall be same. Capital, labour, and product market
shall be perfectly competitive and would reflect all available information, thus in such an
environment, there would be no advantage for investing in short term assets.

However the world we live is not perfect. It is characterized by considerable amount of

uncertainty regarding the demand, market price, quality and availability of own products and those
of suppliers. There are transaction costs for purchasing or selling goods or securities. Information
is costly to obtain and is not equally distributed. There are spreads between the borrowings and
lending rates for investments and financings of equal risks. Similarly each organization is faced
with its own limits on the production capacity and technology. It can employ there are fixed as
well as variable costs associated with production goods. In other words, the markets in which real
firm operated are not perfectly competitive.

These real world circumstances introduce problems which require the necessity of maintaining
working capital. For example, and organisation may be faced with an uncertainty regarding the
availability of sufficient quantity of crucial imputes in future at reasonable price. This may
necessitate holding of inventory, current assets. Similarly an organisation maybe faced with and
uncertainty regarding the level of its future cash flows and insufficient amount of cash incur
substantial costs. This may necessitate the holding of reserve of short marketable securities, again
short term capital assets. In corporate financial management. the term working capital
management (net) represents the excess of current assets over current liabilities

Working Capital

In simple words working capital is the excess of current Assets over current liabilities. Working
capital has ordinarily been defined as the excess of current assets over current liabilities. Working
capital is the heart of the business. If it is weak business cannot proper and survives. It is therefore
said the fate of large scale investment in fixed assets is often determined by a relatively small
amount of current assets. As the working capital is important to the company is important to keep
adequate working capital with the company. Cash is the lifeline of company. If this lifeline
deteriorates so the company's ability to fund operation, reinvest do meet capital requirements and
payment. Understanding Company's cash flow health is essential to making investment decision.
A good way to judge a company's cash flow prospects is to look at its working capital
management, The company must have adequate working capital as much as needed by the
company. It should neither be excessive or nor inadequate. Excessive working capital cuisses for
idle funds laying with the firm without earning any profit, where as inadequate working capital
shows the company doesn't have sufficient funds for financing its daily needs working capital
management involves study of the relationship between firm's current assets and current liabilities.
The goal of working capital management is to ensure that a firm is able to continue its operation.
And that is has sufficient ability to satisfy both maturing short term debt and upcoming
operational expenses. The better a company managers its working capital, the less the company
needs to borrow. Even companies with cash surpluses need to manage working capital to ensure
that those surpluses are invested in ways that will generate suitable returns for investors.

The primary objective of working capital management is to ensure that sufficient cash is
available to:

 Meet day to day cash flow needs.

 Pay wages and salaries when they fall due
 Pay creditors to ensure continued supplies of goods and services.
 Pay government taxation and provider of capital — dividends
  Ensure the long term survival of the business entity

Need for working capital

The prime objective of the company is to obtain maximum profit through the business. The
amount of profit largely depends upon the magnitude of sales. However the sales does not convert
into cash instantaneously. There is always a time gap between sales of goods and receipt of cash.
The time gap between the sales and their actual realisation in cash is technically termed as
operating cycle. Additional capital requirement to have uninterrupted business operations, and the
amount will be locked up in the current assests. Regula availability of adequate working capital is
Inevitable for sustained business operations. If the proper fund is not provided for the purpose, the
business operations will be effected and hence this part of finance is to be managed well.

Working Capital Cycle

Each component of working capital (namely inventory, receivables and payables) has two
dimensions Time and Money. When they come to managing working capital, Time is Money. If
you can get money to move faster around the cycle (collect monies due from debtors more
quickly) or reduce the amount of money tied up (i.e., reduce inventory level relative to sales). The
business will generate more cash or it will need to borrow less money to fund working capital. As
a consequence, you could reduce the cost of bank interest or you will have additional free money
available to support addition sales growth or investment. Similarly, if you can negotiate improved
terms with suppliers e.g get longer credit or an increased credit limits, you festively create freed
finance to help fund future sales.

A persual of operationalcycle reveals that the cash invested in operations are recycled back in to
cash. However it takes time to reconvert the cash. Cash flows in cycle into around and out of a
business in the business's lifeblood and every manager's primary task task to help keep it flowing
and to use the cash flow to generate profits. The shorter the period of operating cycle, the larger
will be the turnover of the funds invested in various purposes.

Determinants of working capital

Working capital requirements of a concern depends on a number of factors, each of which should
be considered carefully for determining the proper amount of working capital. It may be however
be added that these factors affect differently to the different units and these keeps varying from
time to time. In general, the determinants of working capital which re common to all
organization's can be summarized as under:
Nature of business

Need for working capital is highly depends on what type of business, the firm in. there are trading
firms, which needs to invest a lot in stocks, ills receivables, liquid cash etc. public utilities like
railways, electricity, etc., need much less inventories and cash. Manufacturing concerns stands in
between these two extends. Working capital requirement for manufacturing concerns depends on
various factor like the products, technologies, marketing policies.

Production policies

Production policy of the organization effects the working capital requirements very much,
Seasonal industries. which produces only in specific season requires more working capital. Some
industries which produces round the year but sale mainly done in some special seasons are also
need to keep more working capital.

Size of business

Size of business is another factor to determines the need for working capital

Length of operating cycle

Operating cycle of the firm also influence the working capital longer the orating cycle, the higher
will be the working capital requirement of the organization.

Credit policy

Companies; follows liberal credit policy needs to keep more working capital with them. Efficiency
of debt collecting machinery is also relevant in this matter. Credit availability form suppliers also
effects the company's working capital requirements. A company doesn't enjoy a liberal credit from
its suppliers will have to keep more working capital

Business fluctuation

Cyclical changes in the economy also influence the level of working capital. During boom period,
the tendency of management is to pile up inventories of raw materials and finished goods to avail
the advantage of rising prices. This creates demand for more capital. Similarly, during
depression when the prices and demand for manufactured goods. Constantly reduce the
industrial and trading activities show a downward termed. Hence the demand for working capital
is low.

Current Asset Policies

The quantum of working capital of a company is significantly determined by its current assets
policies. A company with conservative assets policy may operate with relatively high level of
working capital than its sales volume. A company pursuing an aggressive amount assets policy
operates with a relatively lower level of working capital.

Fluctuations of supply and seasonal variations

Some companies need to keep large amount of working capital due to their irregular sales and
intermittent supply. Similarly companies using bulky materials also maintain large reserves
of raw material inventories, this increase the need for
working capital. Some companies manufacture and sell goods only during certain seasons.
Working capital requirements of such industries will be higher during certain season of such
industries period.

Other factors

Effective co ordination between production and distribution can reduce the need for working
capital. Development in transportation and communication means helps to reduce the working
capital requirement.

Working Capital Concepts

There are two thoughts that currently accepted about working capital. They are Gross working
capital concept & Net working capital concept.

Gross working capital concept

This thought says that total investment in current assets is the working capital of the company.
This concept does not consider current liabilities at all. Reasons given for this concept:
1) When we consider fixed capital as the amount invested in fixed assets. Then the amount
invested in current assets should be considered as working capital.
2) Current asset whatever may be the sources of acquisition, are used in activities
related to day to day operations and their forms keep on changing. Therefore they should be
considered as working capital.

Net working capital

It is narrow concept of working capital and according to this, current assets minus current
liabilities form working capital. The excess of current assets over current liabilities is called as
working capital. This concept lays emphasis on qualitative aspect which indicates the liquidity
position of the concern/enterprise. The reason for the net working capital method are:
1) The material thing in the long fun is the surplus of current assets over current liability
2) Financial health can easily be judged by with this concept particularly from the view point of
creditors and investors.
3) Excess of current assets over current liabilities represents the amount which is not liable to be
returned
4) Inter-company comparison of financial position may be correctly done particularly when both
the companies have the same amount of current assets.

If the current assets are higher than current liability it is considered as the financial position of the
company is sound. If both current assets and liabilities are equal, the comapny has resorted to
short term funds for financing the working capital and long term sources of funds have been used
to finance the acquisition of fixed assets. It does not indicate the financial soundness for the
company. If the current assets are lesser than current liabilities then there is negative wortking
capital which indicates financial crisis.

Net working capital concept is more reasonable than the gross working capital concepts. The
balance sheet of the company includes group of liabilities such as bank overdraft, creditors, bills
payables, outstanding expenses etc, if it is not deduct from current assets the concern may
consider itself quite secured: while the reality is may be that the concern has very little working
capital or has no working capital. Therefore it is reasonable to define working capital as the excess
of current assets over current liabilities.

Kinds of working capital

Working capital can be put in two categories:

1) fixed or permanent working capital
2) fluctuating or temporary working capital

Fixed or permanent working capital

The volume of investment in current assets an change over a period of time But always there is
minimum level of current assets that must be kept in order to carry on the business. This is the
irreducible minimum amount needed for maintaining the operating cycle. It is the investment in
current assets. This is permanently locked up in the business and therefore known as permanent
working capital.

Variable/temporary working capital

It is the volume of working capital which is needed over and above the fixed working capital in
order to meet the unforced market changes and contingencies. In other words any amount over and
about the permanent level of working capital is variable or fluctuating working capital. This type
of working capital is generally financed from shorter source of finance such as bank credit
because this because amount is not permanently required and is usually paid back during off
season or after the contingency.

Sources of working capital

The company can choose to finance its current assets by

1. Long term sources
2. Short term sources
3. A combination of the two

Long term sources

Long term sources of permanent working capital include equity and preference shares, retained
earnings, debentures and other long term debts from public deposits and financial institution.
The long term working capital needs should meet through long term means of financing.
Financing through long term means provides stability, reduces risk or payment and increases
liquidity of the business concern. Various types of long term sources of working capital are
summarized as follow

Issue of shares

It is the primary and most important sources of regular or permanent working capital. Issuing
equity shares as it does not create and burden on the income of the concern. Nor the concern is
obliged to refund capital should preferably raise permanent working capital.

Retained earnings

Retain earning accumulated profits are a permanent sources of regular working capital. It is
regular and cheapest. It creates not charge on future profits of the enterprises.

Issue of debentures

It creates a fixed charge on future earnings of the company and the company is obliged to pay
interest. Management should make wise choice in procuring funds by issue of debentures.

Long term debt

Company can raise fund from accepting public deposits, debts from financial institution like
banks, corporations etc. the cost is higher than the other financial tools.
Other sources consist of the sale of idle fixed assets, securities received from employees and
customers are examples of other sources of finance_
Short term sources of temporary working capital
Temporary working capital is required to meet the day to day business expenditures. The variable
working capital would finance from short term sources of funds and only for the period needed.
It has the benefits of low cost and establishes closer relationships with banker.

Some sources of temporary working capital:

Commercial bank
A commercial bank constitutes a significant source for short term or temporary working capital.
This will be in the form of short term loans, cash credit, and overdraft and though discounting the
bills of exchanges.

Public deposits
Most of the companies in recent years depend on these sources to meet their short term working
capital requirements ranging from six month to three years.

Various credits
Trade credit, business credit papers and customer credit are other sources of short term working
capital. Credit from suppliers, advances from customers, bills of exchanges, promissory notes,
etc helps to raise temporary working capital

Reserves and other funds

Various funds of the company like depreciation fund. Provision for tax and other provisions kept
with the company can be used as temporary working capital.
The company should meet its working capital needs through both long term and short term funds.
It will be appropriate to meet at least 2/3 of the permanent working capital equipments form long
term sources, whereas the variables working capital should be financed from short term sources,
The working capital financing mix should be designed in such a way that the overall cost of
working capital is the lowest, and the funds are available on time and for the period they are really
required.

Sources of Additional Working Capital

Sources of additional working capital include the following:

1. Existing cash reserves
2. Profits(when you secure it as cash)
3. Payables(credit from suppliers)
4. New equity or loans from shareholder
5. Bank overdrafts line of credit
6. Long term loans
If the firm have insufficient working capital and try to increase sales, it can easily over stretch the
financial resources of the business. This is called overtrading. Early warning signs include

1. Pressure on existing cash

2. Exceptional cash generating activities. Offering high discounts for clear cash payment
3. Bank overdraft exceeds authorized limit
4. Seeking greater overdrafts or lines of credit
5. Partly paying suppliers or other creditor
6. Management pre occupying with surviving rather than managing,

Adequate Working Capital

As stated about keeping working capital is the mantas towards the success of financial
management. The term adequate working capital refers to the amount of working capital to be
kept with the organisation to met its dialy operations. Large investments in fixed assets is not
sufficient to run a business successfully. But adequate working capital is equally important.
Without workinga capital fixed assets are like a gun, which cannot shoot, as there are no
cartridges.
It is said that "Inadequate working capital is a disastrous: where as redundant working capital is a
criminal waste." it is clear that the company can't invest all its funds in current assets to increase
working capital and the same time it requires to keep sufficient funds with it. So a proper leverage
between both ends is needed to assure proper running of the business. It needs to keep adequate
working capital with it, neither less nor more than needed.

(a) Advantages of adequate working capital

Adequate working capital provides certain benefits to the company they are:

Increase in debt capacity and goodwill

Adequate working capital represents the financial soundness of the company. If one company is
financially sound it would be able to pay its creditors timely and properly. It will increase
company's goodwill. It crests confidence among investors and creditors. Thus a firm with
adequate working capital can raise requisite funds from market, borrow short term credit form
banks, and purchases inventories of raw material etc., for the smooth operations of its business.

Increase in production inefficiency

With adequate working capital the firm can smoothly carryout research and development
actives and thus adds to its production efficiency.

Exploitation of favourable opportunities

In the presence of adequate working capital, a company can avail the benefits of favourable
opportunities. Adequate working capital will help the company to have bulk purchases, seasonal
storage of raw material etc.. which would reduce the cost of production, thus adds to its profit.

Meeting contingencies adverse changes

A company can easily face certain business and economic crises a company having adequate
working capital can successfully meet contingencies such as business
oscillations, financial crisis arising from heavy losses etc.,

Available cash discount

Maintenance of adequate working capital enables a company to avail the advantage of cash
discount by making cash payment for to the suppliers of raw materials and merchandise.
Obviously it will reduce the cost of production and increase the profit of the company.

Solvency and efficiency fixed assets.

It helps to maintain the solvency of the company. So that payments could be made in time as and
when they fall due. Likewise, adequate working capital also increases the efficiency for fixed
assets insofar as their proper maintenance depends upon the availability of funds.

Attractive dividend to shareholders

It enables the company to offer attractive dividend to the shareholders so that sense of security and
confidence will increase among them. It also increases the market
values of its shares.

(b) Dangers of Inadequate Working Capital

Having inadequate working capital les to so many of dangers as it doesn't fulfi• its purpose. Some
are given below:

Loss of goodwill and creditworthiness

As the firm fails to operate on its current liabilities it loses its goodwill and creditworthiness
among its creditors. Consequently, the firm finds it difficult to produce the requisite funds for its
business operations on easy terms, which ultimately results in reduced profitability as well as
production interruption.

Firm can't make use of favourable opportunities

The firm fails to undertake the profitable projects, which not only prevent the firm from availing
the benefits of favourable opportunities but also stagnate it's growth.

Adverse effects of credit opportunities

The firm also fails to avail the attractive credit opportunities but also stagnate its growth

Operational inefficiencies
It leads the company to operating inefficiencies, as day to day commitments cannot be met.

Effects on financial capacity

Inadequacy of working capital also weakness the shock absorbing capacity of the firm because it
cannot meet the contingencies arising from business oscillations, financial losses, due to shortage
of working capital.

Non achievement of profit target

The firm cannot implement operational plans due to unavailability of fund which will lead to non
achievement of profit margin.

Dangers of redundant working capital

As the inadequate working capital is dangerous to the firm, redundant working capital also brings
hazardous condition in to the company. Let us discuss the dangers of redundant working capital to
the company.

Low rate of return on capital

Excessive or redundant working capital implies the presence of idle funds that earn no profit to the
firm. So it cannot earn a proper rate of return on its total investments, whereas profits are
distributed on its total investment, whereas profits are distributed on the whole of its capital.

Decline in capital and efficiency

Since the rate of return on capital is low the company tempts to make some adjustments to inflate
profit to increase the dividend. Sometimes this unearned dividend paid out of the company's
capital to keep up the show of prosperity by window dressing of accounts. Certain provision, such
as provision for depreciatiom, repairs and renewals are into made. This leads to decline in
operating efficiency of the firm.

Loss of goodwill and confidence

Lower rate of return leads to lower dividend available to share holder. This leads to down fall in
market value of the company's share and markets the shareholder lose their confident in company.

Evils of over capitalization

Excessive working capital is often responsible for giving birth to the situation of
overcapitalization in the company with all its evils. Over capitalizations is not only disastrous to
the smooth survival of the company but also interests of those associated with the company.

Destruction of turnover ratio

It destructs the control over turnover ratio which is commonly used in the conduct of an efficient
business.
It is evident from the foregoing discussion that a company must have adequate working capital
pursuant to its requirements. It should neither be excessive not inadequate. Both situations are
dangerous. While inadequate working capital adversely affects the business operations and
profitability, excessive working capital remains idle and earns no profits for the company. So
company must assure its working capital is adequate for its operations.

Blueprint for a good working capital management policy

General Action

Set the planning standards for stock days, debtor days and creditor days. Having set planning
standards and keep to them. Impress on staff that these targets are just important operating budgets
and standards cost, Instil an understanding amongst the staff that working capital management
produces profits.

Action on Stocks

Keep stock levels as low as possible, consistent with not running out of stock and not ordering
stock in uneconomically small quantities. "Just In Time" stock management is fine, as long as it is
"Just In Time" and never fails to deliver on time. Consider keeping stock in supplier's warehouses
drawing on its as needed and saving warehousing cost,

Action on Debtors /customers

Assess all significant new customers for their ability to pay. Take references, examine accounts
and ask around, Try not to take on new customers who would be poor payers. Re assess all
significant customers periodically. Stop supplying existing customers who are poor payers, you
may lose sales, but you are after quality of business rather than quantity of business. Sometimes
poor paying customers suddenly (and magically!!) find cash to settle invoices if their supplies are
being cut off. If customers can't pay/won't pay let your competitor have them and give the
competitor a few more problems.
Consider factoring sales invoices the extra cost may be worth it in terms of quick payment of sales
revenue, less debtor administration and more time to carry out your business (rather than spend
time chasing debts).

Consider offering discounts for prompt settlement of invoices, but only if the discounts are lower
than the costs of borrowing the money owed from other sources.

Action on creditors

Do not pay invoices too early take advantage of credit offered by suppliers, it's free!! Only pay
early if the supplier is offering a discount. Even then, consider this to be an investment.
Establish a register of creditors to ensure that creditors are paid on the correct date not earlier and
not later.

THE CONCEPT OF ZERO WORKING CAPITAL

In today's world of intense global competition, working capital management is receiving

increasing attention from managers striving for peak efficiency the goal of many leading
companies today, is zero working capital. Proponent of the zero working capital concept claims
that a movement toward this goal not only generates cash but also speeds up production and helps
business make more timely deliveries and operate more efficiently. The concept has its own
definition of working capital: inventories+receivables- payables. The rational here is (I) that
inventories and receivables are the keys to making sales, but (II) that inventories can be financed
by suppliers through account payables.
Companies use about 20% of working capital for each sales. So, on average, working capital is
turned over five times per year. Reducing working capital and thus increasing turnover has two
major financial benefits. First, money freed up by reducing inventories or receivables, by
increasing payables, results in a onetime contribution to cash flow. Second, a movement toward
zero working capital permanently raises a company's earnings.

The most important factor in moving toward zero working capital is increased speed. If the
production process is fast enough, companies can produce items as they are ordered rather than
having to forecast demand and build up large inventories that are managed by bureaucracies. The
best companies delivery requirements. This system is known as demand flow or demand based
management. And it builds on the just in time method of inventory control.
Clearly it is not possible for most firms to achieve zero working capital and infinitely efficient
production. Still, a focus on minimizing receivables and inventories while maximizing payables
will help a firm lower its investment in working capital and achieve financial and production
economies.

Estimation of Working Capital

As discussed above a number of factors are responsible for determining the amount of working
capital required by affirm let us know discuss the various methods/ technique used in assessment
of firm's working capital requirements. These methods are.

Estimation of components of working capital method

This method is based on the basic definition of working capitalizes, excess of current assets over
the current liabilities, in other worked the amount of different constituent of the working capital
such as debtors, cash inventories capital, creditors etc are estimated separately and the total
amount of working capital requirement is worked out accordingly.

Percent sales method

This is the most simple and widely used method in combination with other scientific methods,
According to this method a ratio is determined for estimating the future working capital
requirement this is the generally based on the past experience of management as the ratio varies
from industry to industry. For example if the past experience shows that the amount of working
capital has been 20% of sales and projected amount of sales for the next year is Rs. 10 Lakhs. The
required amount of working capital shall be Rs. 2 Lakhs.

As seen from above the above method is merely an estimation based on past experience. Their
fore a lot depends on the efficiency of decision maker, which may not be correct in all
circumstances. Moreover the basic assumptions regarding linear relationship between sales and
the working capital may not hold well in all the cases. Therefore this method is not dependable
and not universally acceptable. At best, this method gives a rough idea about the working capital.

Operating Cycle Approach

The need of working capital arises mainly because of them gap capital between the production of
goods and their actual realization after sales. This gap is technically referred as the "operating
cycle" or the "cash cycle" of the business. If it were possible to complete the entire job
instantaneously, there would be no need for current asset (working capital). But since it is not
possible, every business organization is forced to have current asset and hence operating cycle. It
may be divided into four stages.

1. Raw materials and stores storage space.

2. Work in process stage.
3. Finished goods inventory stage.
4. Debtor's collection stage.

Operating Cycle and Cash Cycle

There is an invisible time lag between the sale of goods and receipt of cash. There is, therefore, a
need for working capital. In other words, sufficient working capital is necessary to sustain sales
activity, The operating cycle concept penetrates to the heart of working capital management in a
more dynamic form. The time that elapses to convert raw materials into cash is known as
operating cycle. In other words the time that elapses between the purchase of raw materials and
the collection of cash for sale is referred to as the operating cycle.

The operating cycle involves the following procedure:

a) Conversion cash into raw materials
b) Conversion of raw materials into work-in-process
c) Conversion of work-in-process into finished goods
d) Conversion of finished goods into sales(Debtors and Cash)
e) Conversion of debtors into cash.
Operating Cycle

PERIOD AAI ARP

2007-2008 46.57 15.39
2006-2007 45.89 18.29
2005-2006 49.22 20.16
2004-2005 43.41 19.02
2003-2004 40.63 15.36

The time that elapsed to convert raw materials into cash is known as operating cycle.

Operating Cycle (OC) = AAI + ARP

During the year 2005-2006, the operating cycle period increased by a great extend to 69.38 days
from the previous year's figure 62.43 days. But now the Operating Cycle period has decreased in
the last two years which is a good sign for the company. This means that the time elapsed to
convert raw materials into cash becoming lesser.

Both the Average Age of Inventory and the Average Collection period should be reduced to
improve the operating cycle period.
 Cash Conversion Cycle
In days

PERIOD AAI ARP

2007-2008 46.57 15.39
2006-2007 45.89 18.29
2005-2006 49.22 20.16
2004-2005 43.41 19.02
2003-2004 40.63 15.36

Cash Conversion Cycle (CCC) is the time length between the payment for suppliers of raw
materials and collection of cash for sales.

CCC = AAI + ARP - APP

As the operating cycle period increased by a great extend to 69.38 days from the previous year's
figure of 62.43 days during the year 2005-2006, likewise the CCC increased from 16.35 days to
27.26 days during that year. But now the Operating Cycle period as well as CCC has shown a
decreasing trend in last two years which is a good sign for the company.

Both the Average Age of Inventory and the Average Collection Period should be reduced to
improve the CCC period. Average Collection Period should be minimised by implementing
attractive credit policy that allows prompt payment by the debtors.
 Also the Accounts Payable Period should be maximized by utilising the credit period allowed by
creditors to the maximum extend.

Statement of Working Capital

Particulars 2003-2004 2004-2005 2005-2006

Current Assets
Inventories 262.66 330.12 419.42
Sundry Debtors 120.41 156.52 175.14
Cash and bank bal. 106.35 110.43 231.36
Other Current Assets 0.05 0.02 0.21
Loans and Advanves 157.89 146.46 184.39
Total 647.36 743.55 1,010.53
Current liabilities
Current liabilities 310.59 380.14 388.63
Provisions 28.32 28.83 52.05
Total 338.91 408.97 440.67
Working capital(A-B) 308.45 334.58 569.86
 COMPONENTS OF TOTAL CURRENT ASSETS

Interpretation:
 Important facts can be drawn about the company's current assets from the above figure:

 The current assets consist of 42-44% of inventory in almost all years under study.
 There has been a steep decrease in the debtors to 14% during the year 2007-08, which
was otherwise hovering around 18-20% in the past years.
 Cash and Bank balances showed hig fluctuations during the years, lowest being 15% and
the highest being 24%
 Other current assets are less than 1% in almost all the years.
 There has been a steady decrease in the loans and advanves which was 24% in the 2003-
2004 now down to 16%

INDUSTRIAL AVERAGE OF SOME IMPORTANT RATIOS*

Ratios 2003-04 2004-05 2005-06 2007-08 5 Years

Average
Current 1.91 1.86 1.68 1.59 1.61 1.73
Ratio
Quick 1.25 1.19 1.03 0.93 0.86 1.05
Ratio
Collection 47.47 46.19 43.73 38.05 36.17 42.32
Period
Holding 41.89 40.69 39.77 39.14 46.05 41.51
Period
Turnover 6.54 8.75 8.03 9.89 9.70 8.58
Ratio
* source: zen money

* The ratios of 4 major players namely MRF Tyres, Apollo Tyres, Ceat and J.K Tyres are taken for
calculating the industrial average. These companies altogether holds around 74% share of Indian
Market.
 CURRENT RATIO

YEAR CURRENT ASSETS CURRENT L

2003-2004 647.36 338
2004-2005 743.55 408
2005-2006 1010.51 440
2006-2007 1034.63 597
2007-2008 1125.80 658
The ratio measures the solvency of the company in the short - term. Curremt assets are those
assets which can be converted into cash within a year. Current liabilities and provisions are those
liabilities that are payable within a year.

A current ratio 2:1 indicates a highly solvent position. A current ratio of 1.33:1 is considered by
the bank as the minimum acceptable level for providing working capital finance. The constituents
of the current assets are as important as the current assets themselves for evaluations of a
companys solvency position. A high current ratio may be due to the piling up of inventory,
inefficiency in the collection of debtors, high balances in cash and bank accounts without proper
investment etc.

Interpretation:

The current ratio in the year 2005-2006 is more than 2:1 wjich may not be favourable due to
various reasons like,
1) there may be slow moving stocks or
2) cash lying idle bacause of insufficient investment.
Even though the Company is now maintaining a healthy current ratio average it is showing a
decreasing trend except for the year 2005-2006. This indicates that there has been deterioration in
the liquidity position of the firm.

Industry Comparision:

Apollo tyres maintain a healthy current ratio when compared to the industrial average ratio which
is 1.91, 1.86, 1.59, 1.61 for the respective years. Some years it is almost the same and in one year
the ratio is better than the industrial average ratio.
 QUICK
RATIO

YEAR QUICK ASSETS QUICK LIAB

2003-2004 384.70 338.91
2004-2005 413.43 408.97
2005-2006 591.10 440.67
2006-2007 582.68 597.58
2007-2008 612.51 658.91
This ratio is used as the measure of the company's ability to meet its current obligation since bank
overdraft is secured by the inventories, the other current assets must be sufficient to meet other
current liabilities.

A quick ratio 1:1 indicatws a highly solvent position. The ratio serves as supplement to the current
ratio in analysing liquidity.

Interpretation:

The Quick ratio in the year 2005-2006 is 1.34:1 which ia very higer than the standard quick ratio
which is 1:1. Even though the company is now maintaining a healthy quick ratio average. It is
showing a decreasing trend except for the year 2005-2006. The company must take necessary
steps to step up the ratio to 1:1 which indicates highly solvent position. The quick ratio of the
company in the last year 2007-2008 is 0.93:1, this indicates that the concern may be able to meet
its short-term obligations.

Industry Comparision :

The quick ratio of the company, when compared to industrial average ratio which is 1.25, 1.19,
1.03, 0.93, 0.86 for the respective years, shows that in the last three years the company have
surpassed the industrial average ratio. This is a higly commendable performance.
 ABSOLUTE LIQUIDITY RATIO

YEAR CASH CURRENT LIABILITIES RATIO

2003-2004 106.35 338.91 0.31
2004-2005 110.43 408.97 0.27
2005-2006 231.36 440.67 0.53
2006-2007 172.00 597.58 0.29
2007-2008 265.85 658.91 0.40
This is the ratio of absolute liquidity assets to quick liabilities. However, for calculation purposes,
it is taken as ratio of absolute liquid assets to current liabilities. Absolute liquid assets include cash
in hand, cash at bank and short-term or temporary investments.

The

acceptable norm for this ratio is 50% or 0.5:1 or 1:2 i.e. Re 1 worth absolute liquid assets are
considered adequate to pay Rs. 2 worth current liabilities.

Interpretation:

The absolute liquidity ratio in the year 2005-2006 is very healthy. 053:1 which is higher than the
standard. But the years 2003-04, 2004-05, 2006-2007 ahows a very poor ratios of 0.31, 0.27, 0.29
respectively. The absolute liquidity ratio of 2007-2008 shows an increasing trend in the absolute
liquidity ratio which is a good sign. The company should improve its absolute liquidity ratio.