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TABLE OF CONTENTS
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(F) Cash Management
PREFACE
To start any business, First of all we need finance and the success of that business entirely
depends on the proper management of day-to-day finance and the management of this
short-term capital or finance of the business is called Working capital Management.
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I have tried to put my best effort to complete this task on the basis of skill that I have
achieved during the last one year study in the institute. I have tried to put my maximum
effort to get the accurate statistical data. However I would appreciate if any mistakes are
brought to me by the reader.
ACKNOWLEDGEMENT
It is difficult to acknowledge precious a debt as that of learning as it is the only debt that
is difficult to repay except through gratitude. It is my profound privilege to express my
sincere thanks to Mr B D Daler,Head HR of ACC Ltd Gagal Barmana ,for giving me an
opportunity to work on the project. who gave me an opportunity to carry out this project
and had been a constant inspiration.
I would like to thank to Mr. Rajiv joshi, Manager HR for their
constant support and guidance through out the tenure of this project without their
cooperation it would have been a difficult task to accomplish this project.
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I am also thankful to my faculty guide Mr.V.Ramana , Rai
Business School, Hyderabad, who has provided their valuable time and effort for guiding
me for the completion of this report.
Sunil Kumar
Date :
STUDENT’S UNDERTAKING
I do hereby declare that this piece of field report entitled “Analysis of gagal cement
Industry & Financial performance of ACC LTD” for partial fulfillment of the
requirements for the award of the degree of “MBA” is a record of original work done by
me under the supervision and guidance of Mr. Rajiv Joshi, HR and Mr. B D Daler Head
HR of ACC LTD,Gagal Barmana Distt. Bilaspur H.P plant .This Field work is my own
and has neither been submitted nor published elsewhere.
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Place: Barmana
Date: Sunil Kumar
EXECUTIVE SUMMERY
The major objective of the study is to understand the working capital of ACC & to
suggest measures to overcome the shortfalls if any.
Funds needed for short term needs for the purpose like raw materials, payment of wages
and other day to day expenses are known as working capital. Decisions relating to
working capital (Current assets-Current liabilities) and short term financing are known as
working capital management. It involves the relationship between a firm’s short-term
assets and its short term liabilities. By definition, working capital management entails
short-term definitions, generally relating to the next one year period.
The goal of working capital management is to ensure that the firm is able to continue its
operation and that it has sufficient cash flow to satisfy both maturing short term debt and
upcoming operational expenses.
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Working capital is primarily concerned with inventories management, Receivable
management, cash management & Payable management.
ACC has been accumulating huge cash surpluses over last several years, which enables
the organization to maintain adequate cash reserves and to generate required amount of
cash.
ACC has set up its marketing office at all major cities in India i.e Bangaluru , Bhopal,
Chandigarh , Coimbatore , Kanpur, Kolkata, Mumbai, Pune , Secunderabad New Delhi
& patna , Gagal (H.P)
This marketing office obtains sales order from Cement users in India as well as globally.
The cement production and dispatch figures for the month of May 2016 are 1.81 & 1.75
million tones respectively. The Sales recorded for the FY 2015 was Rs. 83,861,000,000
INTRODUCTION
Working Capital:-
The life blood of business, as is evident, signified funds required for day-to-day
operations of the firm. The management of working capital assumes great importance
because shortage of working capital funds is perhaps the biggest possible cause of failure
of many business units in recent times. There it is of great importance on the part of
management to pay particular attention to the planning and control for working capital.
An attempt has been made to make critical study of the various dimensions of the
working capital management of ACC.
Decisions relating to working capital and short term financing are referred to as working
capital management. These involve managing the relationship between a firm's short-
term assets and its short-term liabilities. The goal of Working capital management is to
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ensure that the firm is able to continue its operations and that it has sufficient money flow
to satisfy both maturing short-term debt and upcoming operational expenses.
Place of study:-
The project study is carried out at the Finance Department of ACC cements ltd corporate
office Gagal Barmana H.P. The study is undertaken as a part of the MBA curriculum from
03 JUNE 2015 to 03 JULY 2016 in the form of FIELD REPORT.
Scope: - The study has got a wide & fast scope. It tries to find out the players in the
industry & focuses on the upcoming trends. It also tries to show the financial
performance of the major player of the industry i.e.; ACC Ltd.
Limitations:-
There may be limitations to this study because the study duration (summer placement) is
very short and it’s not possible to observe every aspect of working capital management
practices. The data collected were mostly secondary in nature.
Industry Overview:-
The cement industry is one of the vital industries for economic development in a country.
The total utilization of cement in a year is used as an indicator of economic growth.
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Cement is a necessary constituent of infrastructure development and a key raw material
for the construction industry, especially in the government’s infrastructure development
plans in the context of the nation’s socio-
Economic development.
India is the world's second largest producer of cement with total capacity of 219 million
tones (MT) at the end of FY 2009, according to the Cement Manufacture’s Association.
Moreover, the government’s continued thrust on infrastructure will help the key building
material to maintain an annual growth of 9-10 per cent in 2016, according to India’s
largest cement company, ACC.
In January 2016, rating agency Fitch predicted that the country will add about 50 million
tone cement capacity in 2016, taking the total to around 300 million tones.
Government Initiatives
Increased infrastructure spending has been a key focus area. In the Union Budget
2015-16, US$ 37.4 billion has been provided for infrastructure development.
The government has also increased budgetary allocation for roads by 13 per cent
to US$ 4.3 billion.
Future Trends:-
The cement industry is expected to grow steadily in 2015-2016 and increase
capacity by another 50 million tons in spite of the recession and decrease in
demand from the housing sector.
The industry experts project the sector to grow by 9 to 10% for the current
financial year provided India's GDP grows at 7%.
India ranks second in cement production after China.
The major Indian cement companies are Associated Cement Company Ltd
(ACC), Grasim Industries Ltd, Ambuja Cements Ltd, J.K Cement Ltd and Madras
Cement Ltd.
The major players have all made investments to increase the production capacity
in the past few months, heralding a positive outlook for the industry.
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The housing sector accounts for 50% of the demand for cement and this trend is
expected to continue in the near future.
PORTER’S FIVE FORCE MODEL:- It is useful for analyzing the industry overall and
determining the level of competition among different existing players .It can be
understood under different topics .Along with the industry we will try to point out the
conditions for ACC too.
i) THREAT OF NEW ENTRANTS:-
ACC has threat from new entrants like TATA; Reliance etc can enter into this industry.
But there are certain barriers to their entry. These are:-
Quality of finished goods i.e. cement is very important for ACC ltd.
iii) BARGAINING POWER OF BUYER:- ACC ltd plays the role of buyer. It has
following bargaining powers:
There are only few buyers of raw material of cement.
ACC has major stake in cement industry i.e. 11% of the world.
iv) THREAT OF SUBSTITUTES:- It has threat from its competitors like Ambuja
cements, Birla cements, Binani cements ,Grasim etc.
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SWOT ANALYSIS
Strengths: -
1. The industry is likely to maintain its growth momentum and continue growing at
about 9 – 10% in the foreseeable future.
2. Government initiative in the infrastructure sector such as the commencement of the
second phase of the National Highway Development project, freight carriers, rural
roads and development of the housing sector (Bharat Nirman Yojana) are likely to
be the main drivers of growth.
3. In the coming few years the demand for the cement will increase which will be
booming news for cement manufactures. As capacity utilization is over 90% now.
4. Huge potential for export.
Weakness: -
1. Cement Industry is highly fragmented & regionalized.
2. Low – value commodity makes transportation over long distances un-
economical.
3. High capital cost and investment cost for each and every project.
4. The complex Excise Duty structure based on the category of buyer and end use
of the cement has caused at lot of confusion in the industry.
5. The recent ban on export of cement clinker would increase the availability of
cement in the domestic market, which in turn would put pressure on cement
prices.
Opportunities: Demand–supply gap
1. Substantially low per capita cement consumption as compared to developing
countries (1/3 rd of world average) Per capita cement consumption in India is
82 kgs against a global average of 255 kgs and Asian average of 200 kgs.
2. Despite slightly lower economic growth, the construction and infrastructure
sector is expected to record healthy growth, which augurs well for cement
industry.
3. Additional capacity of 20 million tons per annum will be required to match the
demand.
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Threats: -
1. The recent moves by the Central Government in making the import of the
cement total duty free, is a cause of worry for the Indian cement industry.
3. Almost all the major players in the industry have announced substantial
increase in the capacity and the possibility of over supply situation cannot be
ruled out.
5. Scarcity of good quality Coal is some other factors which are cause of concern
for the industry.
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Competitor analysis (Overall industry):-
ACC, with an installed capacity of 22.63 MTPA, enjoys an 11% market share in India,
which with its total installed capacity of 207 MTPA, India is the second largest cement
producing country in the world. ACC’s nation-wide presence and brand image ensures a
competitive edge and helps it to withstand regional fluctuations in prices and also to
adapt its distribution to market place needs. Its key competitors are as follows:-
ACC Ltd is the market leader with the capacity of 22.63 MTPA .The top ten
companies are given below with the details:-
Name ACC Limited
Production 17,902
Installed Capacity 18,640
Net Profit (Quarter ended Sep 30, 2015) 41,550.89 lakhs
Name Gujarat Ambuja Cements Limited
Production 15,094
Installed Capacity 14,860
Net Profit (Quarter ended on Sep 30, 2015) 31,848 lakhs
Name Ultratech
Production 13,707
Installed Capacity 17,000
Net Profit (in 2014-15) 97,700 lakhs
Name Grasim
Production 14,649
Installed Capacity 14,115
Net Profit (in 2014-15) 1,64,800 lakhs
Name India Cements
Production 8,434
Installed Capacity 8,810
Net Profit (in 2014-15) 43,218 lakhs
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Name JK Cement Ltd
Production 6,174
Installed Capacity 6,680
Net Profit (in 2014-15) 14,234.40 lakhs
Name Jaypee Group
Production 6,316
Installed Capacity 6,531
Name Century Cement
Production 6,636
Installed Capacity 6,300
Name Madras Cement
Production 4,550
Installed Capacity 5,457
Net Profit (in 2014-15) 49,081 lakhs
Name Birla Corp.
Production 5,150
Installed Capacity 5,113
Net Profit (in 2014-15) 9,061 lakhs
ACC (ACC Limited) is India's foremost manufacturer of cement and concrete. ACC's
operations are spread throughout the country with 14 modern cement factories, 19 Ready
mix concrete plants, 19 sales offices, and several zonal offices. It has a workforce of
about 9000 persons and a countrywide distribution network of over 9,000 dealers. ACC's
research and development facility has a unique track record of innovative research,
product development and specialized consultancy services. Since its inception in 1936,
the company has been a trendsetter and important benchmark for the cement industry in
respect of its production, marketing and personnel management processes. Its
commitment to environment-friendliness, its high ethical standards in business dealings
and its on-going efforts in community welfare programs have won it acclaim as a
responsible corporate citizen. In the 70 years of its existence, ACC has been a pioneer in
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the manufacture of cement and concrete and a trendsetter in many areas of cement and
concrete technology including improvements in raw material utilization, process
improvement, energy conservation and development of high performance concretes.
ACC’s brand name is synonymous with cement and enjoys a high level of equity in the
Indian market. It is the only cement company that figures in the list of Consumer Super
Brands of India.
The company's various businesses are supported by a powerful, in-house research and
technology backup facility - the only one of its kind in the Indian cement industry. This
ensures not just consistency in product quality but also continuous improvements in
products, processes, and application areas.
ACC has rich experience in mining, being the largest user of limestone, and it is also one
of the principal users of coal. As the largest cement producer in India, it is one of the
biggest customers of the Indian Railways, and the foremost user of the road transport
network services for inward and outward movement of materials and products.
ACC has also extended its services overseas to the Middle East, Africa, and South
America, where it has provided technical and managerial consultancy to a variety of
consumers, and also helps in the operation and maintenance of cement plants abroad.
ACC was formed in 1936 when ten existing cement companies came together under one
umbrella in a historic merger – the country’s first notable merger at a time when the term
mergers and acquisitions was not even coined. The history of ACC spans a wide canvas
beginning with the lonely struggle of its pioneer F E Din Shaw and other Indian
entrepreneurs like him who founded the Indian cement industry. Their efforts to face
competition for survival in a small but aggressive market mingled with the stirring of a
country’s nationalist pride that touched all walks of life – including trade, commerce and
business.
The first success came in a move towards cooperation in the country’s young cement
industry and culminated in the historic merger of ten companies to form a cement giant.
These companies belonged to four prominent business groups – Tatas, Khataus, Killick
Nixon and F E Din Shaw groups. ACC was formally established on August 1, 1936.
Sadly, F E Din Shaw, the man recognized as the founder of ACC, died in January 1936.
Just months before his dream could be realized.
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The ACC Board comprises of 13 persons. These include executive, non-executive, and
nominee directors. This group is responsible for determining the objectives and broad
policies of the Company - consistent with the primary objective of enhancing long-term
shareholder value.
The Board meets once a month. Two other small groups of directors - comprising
Shareholders'/Investors' Grievance Committee and Audit Committee of the Board of
Directors - also meet once a month on matters pertaining to the finance and share
disciplines. During the last decade, there has been a streamlining of the senior
management structure that is more responsive to the needs of the Company's prime
business. A Managing Committee - comprising, in addition to the Managing Director and
the two executive directors, the presidents representing multifarious disciplines: finance,
production, marketing, research and consultancy, engineering and human resources –
meets once a week.
A Strategic Alliance:
The house of Tata was intimately associated with the heritage and history of ACC, right
from its formation in 1936 up to 2000. The Tata group sold all 14.45% of its
shareholdings in ACC in three stages to subsidiary companies of Gujarat Ambuja
Cements Ltd. (GACL), who are now the largest single shareholder in ACC.
This enabled ACC to enter into a strategic alliance with GACL; a company reputed for its
brand image and cost leadership in the cement industry.
Holcim – A New Partnership:
A new association was formed between ACC and The Holcim group of Switzerland in
2005. In January 2005, Holcim announced its plans to enter into long – term alliances
with Ambuja Group by acquiring a majority stake in Ambuja Cements India Ltd. (ACIL),
which at the time held 13.8% of total equity shares in ACC. Holcim simultaneously
announced its bid to make an open offer to ACC shareholders, through Holdcem Cement
Pvt. Ltd. and ACIL, to acquire a majority shareholding in ACC. An open offer was made
by Holdcem Cement Pvt. Ltd. along with ACIL, following which the shareholding of
ACIL increased to 34.69% of Equity share capital of ACC. Consequently, ACIL has filed
declarations indicating their shareholding and declaring itself as a promoter of ACC.
Holcim is the world leader in cement as well as
being large supplier of concrete, aggregates and certain construction related services.
Holcim is also a respected name in information technology and research and
development. The group has its headquarters in Switzerland with worldwide operations
spread across more than 70 countries.
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Chaibasa Cement Works
Chaibasa 0.87
2
Chanda Cement Works
Chanda 1.00
3
Damodar Cement Works
Damodhar 0.53
4
Gagal Cement Works 4.40
Gagal
5 (Gagal I and II)
Jamul Cement Works
Jamul 1.58
6
Kymore Cement Works
Kymore 2.20
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Lakheri Cement Works
Lakheri 1.50
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Madukkarai Cement Works
Madukkarai 0.96
9
Sindri Cement Works
Sindri 0.91
10
Wadi Cement Works
Wadi 2.59
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Wadi Cement Works
New Wadi Plant 2.60
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Tikaria Cement Grinding and Packing
Tikaria Plant 2.31
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Vision:
“To be one of the most respected companies in India; recognized for challenging
conventions and delivering on our promises”
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Mission of ACC
Maintain our leadership of the Indian cement industry through the
Leadership continuous modernization and expansion of our manufacturing facilities
and activities, and through the establishment of a wide and efficient
marketing network.
Achieve a fair and reasonable return on capital by promoting productivity
Profitability throughout the company.
Ensure a steady growth of business by strengthening our position in the
Growth cement sector.
Maintain the high quality of our products and services and ensure their
Quality
supply at fair prices.
Equity Promote and maintain fair industrial relations and an environment for the
effective involvement, welfare and development of staff at all levels.
Promote research and development efforts in the areas of product
Pioneering development and energy, and fuel conservation, and to innovate and
optimize productivity.
Fulfill our obligations to society, specifically in the areas of integrated
Responsibility rural development and in safeguarding the environment and natural
ecological balance.
YEAR Achievements
ACC Sindri uses waste material - calcium carbonate sludge -from fertilizer factory at
1955
Sindri to make cement
1956 Bulk Cement Depot established at Okhla, Delhi
Blast furnace slag, (a waste by-product from steel) from TISCO used at ACC Chaibasa to
1961
manufacture Portland Slag Cement.
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ACC inducts use of pollution control equipment and high efficiency sophisticated
1966 electrostatic precipitators for its cement plants and captive power plants decades before it
becomes mandatory to do so.
1978 Introduction of the energy efficient pre-calcinations technology for the first time in India.
1982 Commissioning of the first 1 MTPA plant in the country at Wadi, Karnataka.
ACC develops a new binder, working at sub-zero temperature, which is successfully used in
1987
the Indian expedition to Antarctica.
1992 Incorporation of Bulk Cement Corporation of India, a JV with the Government of India.
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Awards & Accolades
IMC Ramkrishna Bajaj National Quality Award - – Gagal wins Commendation Certificate and
New Wadi Plant wins Special Award for Performance Excellence in the Manufacturing Sector,
2007.
National Award for outstanding performance in promoting rural and agricultural development
– by ASSOCHAM
Sword of Honour - by British Safety Council, United Kingdom for excellence in safety
performance.
Indira Priyadarshini Vrikshamitra Award --- by The Ministry of Environment and Forests for
"extraordinary work" carried out in the area of afforestation.
FICCI Award --- for innovative measures for control of pollution, waste management &
conservation of mineral resources in mines and plant.
Subh Karan Sarawagi Environment Award - by The Federation of Indian Mineral Industries for
environment protection measures.
Drona Trophy - By Indian Bureau Of Mines for extra ordinary efforts in protection of
Environment and mineral conservation in the large mechanized mines sector.
Indo German Greentech Environment Excellence Award
Golden Peacock Environment Management Special Award - for outstanding efforts in
Environment Management in the large manufacturing sector.
Indira Gandhi Memorial National Award - for excellent performance in prevention of pollution
and ecological development
Excellence in Management of Health, Safety and Environment : Certificate of Merit by Indian
Chemical Manufacturers Association
Vishwakarma Rashtriya Puraskar trophy for outstanding performance in safety and mine
working
Good Corporate Citizen Award - by PHD Chamber of Commerce and Industry
Jamnalal Bajaj Uchit Vyavahar Puraskar - Certificate of Merit by Council for Fair Business
Practices
Greentech Safety Gold and Silver Awards - for outstanding performance in Safety management
systems by Greentech Foundation
FIMI National Award - for valuable contribution in Mining activities from the Federation of
Indian Mineral Industry under the Ministry of Coal.
Rajya Sthariya Paryavaran Puraskar - for outstanding work in Environmental Protection and
Environment Performance by the Madhya Pradesh Pollution. Control Board.
National Award for Fly Ash Utilization - by Ministry of Power, Ministry of Environment &
Forests and Dept of Science & Technology, Govt of India - for manufacture of Portland
Pozzolana Cement.
Good Corporate Citizen Award - by Bombay Chamber of Commerce and Industry for working
towards an environmentally sustainable industry while pursuing the objective of creation of a
better society.
National Award for Excellence in Water Management - by the Confederation of Indian Industry
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(CII)
ACC was the first recipient of ASSOCHAM’s first ever National Award for
outstanding performance in promoting rural and agricultural development
activities in 1976.
Decades later, PHD Chamber of Commerce and Industry selected ACC as winner of
its Good Corporate Citizen Award for the year 2002.
Over the years, there have been many awards and felicitations for achievements in Rural
and community development, Safety, Health, Tree plantation, A forestation, Clean
Mining, Environment Awareness and Protection.
Corporate office:
Overseeing the company’s rang of business; the Corporate Office is the central head
quarters of all business and human resource function located in Mumbai.
ACC Subsidiaries:
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HIGHILIGHTS OF FINANCIAL PERFORMANCE of ACC LTD
Rs. Crore
Particulars *2012 2013 2014 2015 2016
“Working capital means the part of the total assets of the business that change from one
form to another form in the ordinary course of business operations.”
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Concept of working capital:-
The word working capital is made of two words 1.Working and 2. 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 : -
Working capital may be regarded as the life blood of 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, buildings & etc
* Short term funds are required for the purchase of raw materials, payment of wages, and
other day-to-day expenses.
. It is other wise known as revolving or circulating capital
It is nothing but the difference between current assets and current liabilities. i.e.
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Investors/ stock Accrued expenses
Temporary investment
Prepaid expenses Bank Over draft
Accrued incomes
1. Cash and 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 will peak cash
needs 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?
5.Accrued expenses and taxes payable: - These are obligations of our company at any
given time and represent a future outflow of cash.
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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 type of working capital:-
Gross working capital
Net working capital
Gross working capital:- It refers to the firm’s 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.
Net working capital:- It is the difference between current assets and current liabilities or the
excess of total current assets over total current liabilities.
Net working capital: - It is also can defined as that part of a firm’s 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.
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.
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TYPES OF
WORKING
CAPITAL
REGULAR TEMPORARY
GROSS WORKING NET WORKING
WORKING WORKING
CAPITAL CAPITAL
CAPITAL CAPITAL
SEASONAL
WORKING
CAPITAL
SPECIFIC
WORKING
CAPITAL
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PAYMENT TO
SUPPLIERS
SIGNIFICAN--CE OF
WORKING CAPITAL
INCREASE IN FIX
ASSETS
Ratio analysis can be used by financial executives to check upon the efficiency with
which working capital is being used in the enterprise. The following are the important
ratios to measure the efficiency of working capital. The following, easily calculated,
ratios are important measures of working capital utilization.
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The following, easily calculated, ratios are important measures of working capital
utilization.
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Payables)/
Ratio
Sales
Note:- Once ratios have been established for our business, it is important to track them
over time and to compare them with ratios for other comparable businesses or industry
sectors.
The working capital needs of a business are influenced by numerous factors. The
important ones are discussed in brief as given below:
Working Capital Cycle :-In manufacturing concern, working capital cycle starts
with the purchase of raw materials and ends with realization of cash from the sale
of finished goods. The cycle involves the purchase of raw materials and ends with
the realization of cash from the sale of finished products. The cycle involves
purchase of raw materials and stores, its conversion in to stock of finished goods
through work in progress with progressive increment of labor and service cost,
conversion of finished stick in to sales and receivables and ultimately realization
of cash and this cycle continuous again from cash to purchase of raw materials
and so on.
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competition or less competition in the market then the working capital
requirements will be low.
Credit Policy:-The credit policy is concerned in its dealings with debtors and
creditors influence considerably the requirements of the working capital. A
concern that purchases its requirements on credit and sells its products/services on
cash requires lesser amount of working capital. On the other hand a concern
buying its requirements for cash and allowing credit to its customers, shall need
larger amount of funds are bound to be tied up in debtors or bills receivables.
Availability of Raw Material:-If raw material is readily available then one need
not maintain a large stock of the same, thereby reducing the working capital
investment in raw material stock. On the other hand, if raw material is not readily
available then a large inventory/stock needs to be maintained, thereby calling for
substantial investment in the same.
Earning Capacity and Dividend policy:-Some firms have more earning capacity
than others due to the quality of their products, monopoly conditions etc. Such
firms with high earning capacity may generate cash profits from operations and
contribute to their capital. The dividend policy of a concern also influences the
requirements of the working capital. A firm that maintains steady high rate of cash
dividend irrespective of its generation of profits needs more capital than the firm
retains larger part of its profits and does not pay high rate of cash dividend.
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in advance for proper control and management. The factors discussed above
influence the quantum of working capital in the business. The assessment of
working capital requirement is made keeping these factors in view. Each
constituent of working capital retains its form for a certain period and that holding
period is determined by the factors discussed above. So for correct assessment of
the working capital requirement, the duration at various stages of the working
capital cycle is estimated. Thereafter, proper value is assigned to the respective
current assets, depending on its level of completion.
The importance of working capital management is effected in the fact that financial
manages spend a great deal of time in managing current assets and current liabilities.
Arranging short term financing, negotiating favorable credit terms, controlling the
movement of cash, administering the accounts receivable, and monitoring the inventories
consume a great deal of time of financial managers.
The problem of working capital management is one of the “best” utilization of a scarce
resource.
Thus the job of efficient working capital management is a formidable one, since it
depends upon several variables such as character of the business, the lengths of the
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merchandising cycle, rapidity of turnover, scale of operations, volume and terms of
purchase & sales and seasonal and other variations.
o Growth may be stunted. It may become difficult for the enterprise to undertake
profitable projects due to non-availability of working capital.
o Optimum capacity utilization of fixed assets may not be achieved due to non
availability of the working capital.
o The business may fail to honor its commitment in time, thereby adversely
affecting its credibility. This situation may lead to business closure.
o The business may be compelled to buy raw materials on credit and sell finished
goods on cash. In the process it may end up with increasing cost of purchases and
reducing selling prices by offering discounts. Both these situations would affect
profitability adversely.
o It may lead to offer too liberal credit terms to buyers and very poor recovery
system and cash management.
o Over-investment in working capital makes capital less productive and may reduce
return on investment. Working capital is very essential for success of a business
and, therefore, needs efficient management and control. Each of the components
of the working capital needs proper management to optimize profit.
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Financing Working Capital
Working capital or current assets are those assets, which unlike fixed assets change their
forms rapidly. Due to this nature, they need to be financed through short-term funds.
Short-term funds are also called current liabilities. The following are the major sources of
raising short-term funds:
I. Supplier’s Credit
At times, business gets raw material on credit from the suppliers. The cost of raw material
is paid after some time, i.e. upon completion of the credit period. Thus, without having an
outflow of cash the business is in a position to use raw material and continue the
activities. The credit given by the suppliers of raw materials is for a short period and is
considered current liabilities. These funds should be used for creating current assets like
stock of raw material, work in process, finished goods, etc.
Management of Inventory
Inventories constitute the most significant part of current assets of a large majority of
companies in India. On an average, inventories are approximately 60 % of current assets
in public limited companies in India.
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The purpose of inventory management is to ensure availability of materials in sufficient
quantity as and when required and also to minimize investment in inventories at
considerable degrees, without any adverse effect on production and sales, by using simple
inventory planning and control techniques.
The main objectives of inventory management are operational and financial. The
operational mean that means that the materials and spares should be available in
sufficient quantity so that work is not disrupted for want of inventory. The financial
objective means that investments in inventories should not remain ideal and minimum
working capital should be locked in it. The following are the objectives of inventory
management:-
Management of cash
Cash is the important current asset for the operation of the business. Cash is the basic
input needed to keep the business running in the continuous basis, it is also the ultimate
output expected to be realized by selling or product manufactured by the firm.
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The firm should keep sufficient cash neither more nor less. Cash shortage will disrupt the
firm’s manufacturing operations while excessive cash will simply remain ideal without
contributing anything towards the firm’s profitability. Thus a major function of the
financial manager is to maintain a sound cash position.
Cash is the money, which a firm can disburse immediately without any restriction. The
term cash includes coins, currency and cheques held by the firm and balances in its bank
account. Sometimes near cash items such as marketing securities or bank term deposits
are also included in cash. Generally when a firm has excess cash, it invests it is
marketable securities. This kind of investment contributes some profit to the firm.
Management of Receivables
A sound managerial control requires proper management of liquid assets and inventory.
These assets are a part of working capital of the business. An efficient use of financial
resources is necessary to avoid financial distress. Receivables result from credit sales.
A concern is required to allow credit sales in order to expand its sales volume. It is not
always possible to sell goods on cash basis only. Sometimes other concern in that line
might have established a practice of selling goods on credit basis. Under these
circumstances, it is not possible to avoid credit sales without adversely affecting sales.
The increase in sales is also essential to increases profitability. After a certain level of
sales the increase in sales will not proportionately increase production costs. The increase
in sales will bring in more profits. Thus, receivables constitute a significant portion of
current assets of a firm. But for investment in receivables, a firm has to insure certain
costs. Further, there is a risk of bad debts also. It is therefore, very necessary to have a
proper control and management of receivables.
Cash flows in a cycle into, around and out of a business. It is the business's life blood and
every manager's primary task is to help keep it flowing and to use the cash flow to
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generate profits. If a business is operating profitably, then it should, in theory, generate
cash surpluses. If it doesn't generate surpluses, the business will eventually run out of
cash and expire. The faster a business expands the more cash it will need for working
capital and investment. The cheapest and best sources of cash exist as working capital
right within business. Good management of working capital will generate cash will help
improve profits and reduce risks. Bear in mind that the cost of providing credit to
customers and holding stocks can represent a substantial proportion of a firm's total
profits.
Each component of working capital (namely inventory, receivables and payables) has two
dimensions ........TIME ......... and MONEY. When it comes to managing working capital
- TIME IS MONEY. If we can get money to move faster around the cycle (e.g. collect
monies due from debtors more quickly) or reduce the amount of money tied up (e.g.
reduce inventory levels relative to sales), the business will generate more cash or it will
need to borrow less money to fund working capital. As a consequence, we could reduce
the cost of bank interest or we'll have additional free money available to support
additional sales growth or investment. Similarly, if we can negotiate improved terms with
suppliers e.g. get longer credit or an increased credit limit; we effectively create free
finance to help fund future sales.
If we....... Then......
Collect receivables (debtors) faster We release cash from
the cycle
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Get better credit (in terms of duration We increase our cash
or amount) from suppliers resources
It can be tempting to pay cash, if available, for fixed assets e.g. computers, plant, vehicles
etc. If we do pay cash, remember that this is now longer available for working capital.
Therefore, if cash is tight, we should consider other ways of financing capital investment
- loans, equity, leasing etc. Similarly, if we pay dividends or increase drawings, these are
cash outflows and, like water flowing downs a plug hole, they remove liquidity from the
business.
More businesses fail for lack of cash than for want of profit.
If we have insufficient working capital and we try to increase sales, we can easily over-
stretch the financial resources of the business. This is called overtrading. Early warning
signs include:
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Handling Receivables (Debtors)
Cash flow can be significantly enhanced if the amounts owing to a business are collected
faster. Every business needs to know.... who owes them money.... how much is owed....
how long it is owing.... for what it is owed.
If we don't manage debtors, they will begin to manage our business as we will
gradually lose control due to reduced cash flow and, of course, we could experience an
increased incidence of bad debt.
1. Have the right mental attitude to the control of credit and make sure that it gets
the priority it deserves.
2. Establish clear credit practices as a matter of company policy.
3. Make sure that these practices are clearly understood by staff, suppliers and
customers.
4. Be professional when accepting new accounts, and especially larger ones.
5. Check out each customer thoroughly before we offer credit. Use credit agencies,
bank references, industry sources etc.
6. Establish credit limits for each customer... and stick to them.
7. Continuously review these limits when we suspect tough times are coming or if
operating in a volatile sector.
8. Keep very close to our larger customers.
9. Invoice promptly and clearly.
10. Consider charging penalties on overdue accounts.
11. Consider accepting credit /debit cards as a payment option.
12. Monitor our debtor balances and ageing schedules, and don't let any debts get too
large or too old.
Recognize that the longer someone owes we, the greater the chance we will never get
paid. If the average age of our debtors is getting longer, or is already very long, we may
need to look for the following possible defects:
Debtors due over 90 days (unless within agreed credit terms) should generally demand
immediate attention.
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Profits only come from paid sales.
The act of collecting money is one which most people dislike for many reasons and
therefore put on the long finger because they convince themselves there is something
more urgent or important that demands their attention now. There is nothing more
important than getting paid for our product or service. A customer who does not pay
is not a customer.
Creditors are a vital part of effective cash management and should be managed carefully
to enhance the cash position.
Purchasing initiates cash outflows and an over-zealous purchasing function can create
liquidity problems. Consider the following:
There is an old adage in business that if we can buy well then we can sell well.
Management of our creditors and suppliers is just as important as the management of our
debtors. It is important to look after our creditors - slow payment by we may create ill-
feeling and can signal that our company is inefficient (or in trouble!).
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Remember, a good supplier is someone who will work with us to enhance the future
viability and profitability of our company.
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off or adjusted)
TOTAL ASSETS (Net) 100 100 100 100 100
Interpretation:-
Trend Analysis (Horizontal):- Trend percentage analysis moves in one direction either
progression or regression (upward or downward).This method involves the calculation of
percentage relationship that each statements bear to the same item in the base year
.Mostly the earliest period is taken as the base year.
Advantages:-
It indicates the increase in an accounted item along with the magnitude of changes
in percentages which is more effective then absolute data.
It facilitates an efficient comparative study of the financial performance of a firm
over a period of time.
Limitations:-
Any one trend by itself is not very analytical & informative.
During the inflationary periods the data becomes incomparable, unless the
absolute rupee data is adjusted.
There is always the danger of selecting the base year which may not be
representative, normal & typical.
The calculated percentages having no logical relationship with one another.
Precautions to be taken:-
Consistency in the principles & practices followed by the organization throughout
the calculated period.
The base year should be normal.
Trend percentages should be calculated only for the items which are having
logical relationship with each other.
Figures of the current year should be adjusted according to the changes in price
levels.
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2013* 2014 2015 2016
APP. OF FUNDS:-
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( Rs.in Crore)
Particulars Dec’14 Dec’15 Increase ( + ) Decrease (- )
Current Assets
Inventories 778.98 793.27 (14.29)
Sund. Debtors 203.70 310.17 (106.47)
Cash & Bank Bal 746.38 984.24 (237.86)
Loan & Advances 554.42 651.28 (96.86)
Other CA 10.99 20.67 (9.68)
Total ( A ) 2294.47 2759.63
Current Liabilities
C.L. 2060.34 1801.79 258.55
Provisions 1091.88 963.93 127.95
Total ( B ) 3152.22 2765.72
(851.66)
( A-B ) (857.75) (6.09) (465.16) (465.16)
Changes in (851.66)
working capital
Total (857.75) (857.75) (465.16) (465.16)
Similarly the calculation of WC for the year 2012 to 2016 as given below:-
(Rs.in Crore)
2012 2013 2014 2015 2016
(A)Current assets 1,421 1,921 2,203 2,760 2,294
(B)Current 1,335 1,672 2,221 2,766 3,152
Liabilities
Working capital 86 249 (18) (6) (858)
Interpretation:-While looking into the changes, we will look into the various
components of working capital & analyze the changes in that.
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INVENTORY ANALYSIS
By analyzing the 5 years data we can see that the value of inventories is increasing over a
no of year. It indicates that the company is growing rapidly in cement sector. A company
uses inventory when they have demand in market. From other point of view we can say
that the liquidity of firm is blocked in inventories but it is important to keep stocks due to
uncertainty of availability of raw material in time.
SUNDRY DEBTORS ANALYSIS
Debtors will arise only when credit sales are made. The above graph depicts that there is
continuous rise in the debtors of ACC Ltd in the successive years other than 2009.. It
represents an extension of credit to customers. The reason for increasing credit is
competition and company liberal credit policy.
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Significant increase in Cash & bank balance, which shows the financial strengths
of the company. Though there is a slight fall in the FY 2009 . Cash is basic input
or component of working capital. Cash is needed to keep the business running on
a continuous basis. So the organization should have sufficient cash to meet
various requirements.
After analyzing the table, we can say that the pattern of loans & advance is not
static in nature. It shows upwards & downwards movement as the requirements
influence it.
After analyzing the bar-chart, we can say that the amount of current liabilities is
increasing significantly over years .An increase current liabilities indicates that
company is using its credit facilities to the maximum extent for operating
purpose.
From the above table we can see that provision shows an increasing trend and the
huge amount is being kept in these provisions. This is kept to pay the taxes,
interest & other facilities or benefits to the employee. It is just kept for meeting
future short-term liabilities.
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RATIO ANALYSIS
(A) Overview:-
Financial ratios are measures of the relative health, or sometimes the relative sickness of
a business. A physician, when evaluating a person’s health, will measure the heart rate,
blood-pressure and temperature; whereas, a financial analyst will take readings on a
company’s growth, cost control, turnover, profitability and risk. Like the physician, the
financial analyst will then compare these readings with generally accepted guidelines.
Ratio analysis is an effective tool to assist the analyst in answering some basic questions,
such as:-
1. How well is the company doing?
2. What are its strengths and weaknesses?
3. What are the relative risks to the company?
Although an analysis of financial ratios will help identify a company’s strengths
and weaknesses, it has its limitations and will not necessarily provide the solutions or
cures for the problems it identifies.
Solvency Ratio
Debt-equity ratio. 0.50 0.25 0.07 0.10 0.09
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Interpretation: - As we know that ideal current ratio for any firm is 2:1.The
current ratio of company is less than the ideal ratio. This depicts that company’s
liquidity position is not sound. Its current assets are less than its current liabilities.
Generally a QR of 1:1 is considered to represent satisfactory current financial
position. The trend of quick ratio is uneven & the ratio is around 0.5:1 over a
period of time. A quick ratio is an indication that the firm is liquid and has the less
confidence to meet its current liabilities in time. This shows company has
liquidity problem.
Debt-equity ratio shows relationship between borrowed funds and owners’ capital
is a popular measure of the long term financial solvency of the firm. For ACC it
was the highest around 0.5:1 in 2005.After that it shows fluctuation.
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It shows increasing trend which is favorable for the company. As it indicates how
rapidly the inventory is turning into receivable through sales. A high ratio is good
from the view point of liquidity. A low ratio would signify that inventory does not
sell fast.
A high ratio is indicative of shorter time lag between credit sales and cash
collection. The higher the value of debtors’ turnover the more efficient is the
management of debtors or more liquid the debtors are. A low ratio shows that
debts are not being collected rapidly. As the graph reveals that the debts are
collected in time & the process is improving consistently. This shows that
company is utilizing its debtor’s efficiently as compare to previous year.
This ratio indicates high net working capital requires for sales. This company
having negative working capital because, they have more current liabilities over
current assets. It shows that the short term loans are not sufficient and more
money are invested in the purchase of fixed assets. Thus this ratio is helpful to
forecast the working capital requirement on the basis of sale.
Investment
Valuation Ratio
Face value 10.00 10.00 10.00 10.00 10.00
Dividend per Share 8.00 15.00 20.00 20.00 23.00
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As it shows the dividend per share ratio is increasing over years. It means that
the investors have faith in the company.
G/P margin ratio shows the profit relative to sales. A high ratio of gross profits
to sales is a sign of good management as it implies that the cost of production of
the firm is relatively low. For ACC it is uneven but it was good in FY’13 &
FY’16.
The net profit margin is indicative of management ability to operate the business
with sufficient success not only to recover from revenues, but also to leave a
reasonable margin to the owners. A high net profit margin would ensure
adequate return to the owners as well as enable a firm to face adverse economic
conditions. It is significant & satisfactory for the company.
Suggestion:-
It is suggested that the company has to increase its current assets to meet its
short-term obligations.
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Company has to improve debtors’ collection period continuously so that
effective receivable management will possible.
While forecasting cash flow, the management should take into account the
impact of unforeseen events, market cycles and actions by competitors. The
effect of unforeseen demands of working capital should be factored in.
Collaborating with the customers & suppliers instead of being focused only on
own operations will also yield good results. If feasible, helping them to plan
their inventory requirements efficiently to match their production with their
consumption will help reduce inventory levels.
Bibliography
www.google.com
INVESTOPEDIA.com
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www.Moneycontrol.com
www.cmaindia.org
www.acclimited.com
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