Working Capital Project Report Dhanalaksmi

1.
1 GENERAL INTRODUCTION
All business organizations prepare financial statements after every financial year. The financial
statements clearly indicate the financial position of the business concern. Published financial statements
may be of considerable interest to shareholders, trade organizations, business analyst and many others.
Each of these groups may be interest in different aspects of the business concern according to their own
purposes.
The basis for financial planning, analysis and decision making is the financial information.
Financial information is needed to predict, compare and evaluate the firm’s earning ability. It is also
required to aid in economic decision making investment and financing decision making. The financial
information of an enterprise is contained in the financial statements or accounting reports.
The financial analysis is the process of analyzing the financial strengths and weaknesses of the
firm by properly establishing the relationships between the items of the balance sheet and profit and loss
account. It is the study of the performance of the unit and therefore is aimed at financial performance of
an individual unit.
This report deals with the financial performance of HDFC Standard Life Insurance Company Ltd.
for the financial year 2008 to 2010.
This report briefly explains the subject matter (financial statements analysis) of the study
conducted. The basis for the financial planning, analysis and decision-making is the financial information.
Financial information is needed to predict, compare and evaluate the firm’s earning ability. It is also
required to aid in economic decision making investment and financing decision making. The financial
information of an enterprise is contained in the financial statements or accounting reports.
The financial analysis is the process of identifying the financial strengths and weaknesses of the
firm by properly establishing relationship between the items of the balance sheet and profit and loss
account. It is the study of the performance of the unit and therefore is aimed at the financial performance
in an individual unit. This is therefore aimed at analyzing the performance, trend and the areas of
strengths and weaknesses of the firm.
International Business School, Bangalore

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The objective of the study was to thoroughly analyze the company’s performance and the
financial position over the years i.e., the direction and the trend in which the company is performing and
the various and their uses.
The balance sheet and the income statement of the company provide some extremely useful
information to the extent that the balance sheet mirrors the financial position on a given date in terms of
the structure of assets, liabilities and owners equity etc. The comparison of the above statements is
therefore an important aid in determining the company’s position and performance over a period of time.
The first task in the analysis is the selection of the information relevant to the decision under
consideration from the total information contained in the financial statements. The second task is to
arrange the information in a way to highlight comparison among different variables from balance sheet
and income statement of different years. The final step is that of drawing inferences and conclusions.
The best tool used for the purpose of finding out trends of an organization’s growth over a period
of time is Ratio Analysis. The variables in the balance sheet provides considerable information which is
eventually helpful for the organization as the trends can be studied and it forms the basis of drawing
important inferences.
Working Capital is the capital required for the day-to-day operations of the business it maybe
regarded as the life blood of business. Its effective position can do much to ensure the success of a
business, while its inefficient management can lead not only to loss of profit but also the ultimate
downfall the study of working capital management is important because of its close relation with the day
to day operations of the business Therefore to keep healthy management of working capital business
needs professionalism and good skill thus the management of working capital varies from industry to
industry.
HDFC Standard Life Insurance Company Ltd. has been taken for the case study to analyze the
financial aspects to working capital for the better understanding of the financial standing of the Company.

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1.
STATEMENT THE OF THE PROBLEM

To study the working capital management and to analyze and evaluate the financial position
HDFC Standard Life Insurance Company Ltd. with special reference to Working Capital Management,
Ratio Analysis, and Fund Flow Analysis
2. OBJECTIVES OF THE STUDY

Primary objective is to analyze the financial position of HDFC Standard Life Insurance Company
Ltd. for the year, 2008-2009 and 2009-2010
• To use working capital management, fund flow analysis, ratio analysis as a tool to identify
the liquidity, solvency, profitability and management efficiency of the company
• To compare the financial position for three years and help in financial control and planning
resources
• To make suggestions out of the findings of the study
3. DATA COLLECTION
The requisite data for the study is collected from the secondary sources of information. The
Secondary data has been obtained from the financial statements of the company in the form of the
Balance Sheet and Profit & Loss accounts. The analysis and interpretation has bee thus derived with the
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help of secondary data available. Though questionnaire was not prepared there was use of primary data in
the case of financing of working capital through paper work and discussions held with the senior financial
manger.
4. PLAN OF ANALYSIS:
The data has been compiled, analyzed and tabulated in various forms. The tabulated financial data
has been further interpreted. These interpretations have been used to form conclusions and suggest
recommendation. Using various financial tools like fund flow statement, ratios and percentages the
analysis was done.
5. RESEARCH METHODOLOGY:
Two Years Balance sheet and Profit & Loss account stated in annual reports were used for
analysis Working Capital & concerned ratios that were used as tools of analysis based upon the
companies financial position, performance was evaluated suggestions were made. Regarding financing of
working capital both the methods were evaluated by extracting information from balance sheet for two
years, then the best alternative was chosen based on which the companies position regarding the financing
of working capital was known.

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About the HDFC Standard Life Insurance Company Ltd.
HDFC Standard Life Insurance Co. Ltd. was incorporated on 14th august 2000. It is a joint venture
between Housing Development Finance Corporation Limited (HDFC Ltd.) India and U.K. based
Standard Life Company
HDFC Standard Life, one of India’s leading private life insurance companies, offers a range of individual
and group insurance solutions. It is a joint venture between Housing Development Finance Corporation

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Limited (HDFC), India’s leading housing finance institution and Standard Life plc, the leading provider
of financial services in the United Kingdom.
HDFC Ltd. holds 72.43% and Standard Life (Mauritius Holding) Ltd. holds 26.00% of equity in the joint
venture, while the rest is held by others.
HDFC Standard Life’s product portfolio comprises solutions, which meet various customer needs such as
Protection, Pension, Savings, Investment and Health. Customers have the added advantage of
customizing the plans, by adding optional benefits called riders, at a nominal price. The company
currently has 32 retail and 4 group products in its portfolio, along with five optional rider benefits
catering to the savings, investment, protection and retirement needs of customers.
HDFC Standard Live continues to have one of the widest reaches among new insurance companies with
568 branches servicing customer needs in over 700 cities and towns. The company has a strong presence
in its existing markets with a base of 2,00,000 Financial Consultants.
HDFC Standard Life Insurance Company Profile
The MD and CEO of HDFC Standard Life Mr. Deepak Satwalekar, has given the company new
directions and has helped the company achieve the status it currently enjoys. HDFC Standard Life brings
to you a whole range of insurance solutions be it group or individual or NAV services for corporations;
they can be easily customized as per specific needs.
HDFC Standard Life Insurance India boasts of covering around 8.7 lakh lives by March'2007. The gross
incomes standing at whopping Rs. 2,856 chores, HDFC Standard Life Insurance Corporation is sure to
become one of the leaders and the first preference for any life insurance customer.
The Banc assurance partners of HDFC Standard Life Insurance Co Ltd are HDFC, HDFC Bank India
Limited, Union Bank of India, Indian Bank, Bank of Baroda, Saraswat Bank and Bajaj Capital.
Areas of Operation:
HDFC Standard Life continues to have one of the widest reaches among new insurance
Companies. The company strengthened its number of offices from 103 to 572 across the country
in less than 3 years. Through these offices, the company today services customer needs in over

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730 cities and towns. HDFCSLIC is head quartered at Mumbai and has established its presence in
The states of:
Andhra Pradesh Assam

Bihar Chatthisgarh
Delhi Goa
Gujarat Haryana
Himachal Pradesh Jharakhand
Karnataka Kerala
Madhya Pradesh Maharashtra
Meghalaya Orissa
Punjab Rajasthan
Tamil Nadu Uttar Pradesh
Uttaranchal West Bengal
Some of the cities in which HDFCSLIC has its branches are:
Ahmedabad, Bangalore,
Chennai, Chandigarh,
Hyderabad, Jaipur,
Jalandar, Jodhpur,
Ludiana, Kanpur,
Kolkata, Lucknow,
Mangalore, Meerut
Mysore, New Delhi,
Noida, Patna,
Pune, Trichur,
Trivandrum, Vishakapatnam, etc
HDFC Ltd.
HDFC was incorporated in 1977 with the primary objective of meeting a social need - that of
Promoting home ownership by providing long-term finance to households for their housing
needs. HDFC was promoted with an initial share capital of Rs. 100 million.
HDFC Founder

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Hasmukhbhai Parekh, Founder and Chairman
Business Objectives
The primary objective of HDFC is to enhance residential housing stock in the country through
the provision of housing finance in a systematic and professional manner, and to promote home
ownership. Another objective is to increase the flow of resources to the housing sector by
integrating the housing finance sector with the overall domestic financial markets.
Subsidiaries and associate Companies
 HDFC Bank
 HDFC Mutual Fund
 HDFC Standard Life Insurance Company
 HDFC Sales
 HDFC General Insurance
 Other Companies Co-Promoted By HDFC
 Financial Information with regard to Subsidiary Companies
HDFC is a unique example of a housing finance company which has demonstrated the viability
of market-oriented housing finance in a developing country. It is viewed as an innovative
institution and a market leader in the housing finance sector in India. The World Bank considers
HDFC a model private sector housing finance company in developing countries and a provider
of technical assistance for new and existing institutions, in India and abroad. HDFC’s executives
have undertaken consultancy assignments related to housing finance and urban development on
behalf of multilateral agencies all over the world.

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MISSION AND VISION OF HDFCSLIC
Mission: What we do
Our mission is to build valuable customer relationships by helping customers grow and protect
their assets.
HDFCSLIC aims to be the top new life insurance company in the market. This does not just mean
being the largest or the most productive company in the market. Rather it is a combination of
several things like-
• Customer service of the highest order

• Value for money for customers
• Professionalism in carrying out business
• Innovative products to cater to different needs of different customers
• Use of technology to improve service standards
• Increasing market share
Vision: What we aspire to achieve
Our vision is to help our customers around the world feel confident about their future wealth and
well being.
'To be the most successful and admired life insurance company, which means the most trusted
Company, the easiest to deal with, offer the best value for money, and set the standards in the
Industry'.
'The most obvious choice for all'.
Organizational Goals: HDFCSLIC's main goals are to
a). Develop close relationships with individual households,

b). Transform ideas into viable and creative solutions,
c). Provide consistently high returns to shareholders, and
d). To grow through diversification by leveraging off the existing client base.
Values: Values that the company observes while it works:

• ™ Integrity
• ™ Innovation
• ™ Customer centric
• ™ People Care “One for all and all for one”
• ™ Team work
• ™ Joy and Simplicity
• ™ Thinking holistically: taking a whole view of the person, their needs and how these can be met
• ™ Being flexible: developing innovative products, services and solutions that allow for change
and evolve with peoples’ needs
• ™ Delivering performance: being a better place to grow and protect assets
• ™ Acting with integrity: ensuring each and every one of us does the right thing

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The various products by HDFC Standard Life include:
 INDIVIDUAL PRODUCTS:
Protection Plans
o Term Assurance Plan

o Loan Cover Term
o Assurance Plan
Investment Plans:
o Single Premium Whole Life Plan
Pension Plans:
o Personal Pension Plan

o Unit Linked Pension Plan
o Unit Linked Pension Plus
Savings Plans:
o Endowment Assurance Plan

o Unit Linked Endowment
o Unit Linked Endowment Plus
o Money Back Plan
o Children's Plan
o Unit Linked Youngster
o Unit Linked Youngster Plus
 GROUP PRODUCTS
o Group Term Insurance
o Group Variable Term Insurance
o Group Unit Linked Plan
 OTHER PRODUCTS
o Rural Products
o Social Development Insurance Plan
o Tax Benefit Schemes
The premium payment options available to the customers vary from online payment to direct desk
payments at the HDFC Standard Life Branches, by courier services or in drop boxes provided. You can
also pay by ECS or Automatic Debit System or credit cards or standing instruction mandate. HDFC
Standard Life Insurance Company is a customer oriented corporation and aim at complete customer
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satisfaction.
The lapsation and renewal policy of HDFC Standard Life are clearly defined on the official website.
Online renewal forms are also available. For any change in personal details like the contact details or the
nominee of the policy or policy benefits, online servicing is also available. Even the claim procedure has
been simplified since affect of the loss life is irreparable and is thus fully understandable at HDFC
Standard Life. A completely hassle-free process has been formulated to provide maximum convenience.
Facility of HDFC Standard Life Insurance Company Ltd.
 Protection Plans
 HDFC Term Assurance Plan
 HDFC Premium Guarantee Plan
 HDFC Loan Cover Term Assurance Plan
 HDFC Home Loan Protection Plan
 Children's Plans
 HDFC SLIC Youngster Super II
 HDFC SLIC Youngster Super Premium
 HDFC Children's Plan
 Health Plans
 HDFC Critical Care Plan
 HDFC Surgicare Plan
 Savings & Investment Plans
 HDFC SLIC Crest
 HDFC SLIC ProGrowth Super II
 HDFC SL ProGrowth Maximiser
 HDFC Endowment Assurance Plan
 HDFC SL New Money Back Plan
 HDFC Single Premium Whole of Life Insurance Plan
 HDFC Assurance Plan
 HDFC Savings Assurance Plan
 Retirement Plans
 HDFC Personal Pension Plan
 HDFC Immediate Annuity
 Rural Products
 HDFC GraminBima Kalyan Yojana
 HDFC GraminBima Mitra Yojana

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 HDFC BimaBachat Yojana
 Social Products
 HDFC Development Insurance Plan
Why do I need Protection Plans?
Protection Plans help you shield your family from uncertainties in life due to financial losses in terms of
loss of income that may dawn upon them incase of your untimely demise or critical illness. Securing the
future of one’s family is one of the most important goals of life. Protection Plans go a long way in
ensuring your family’s financial independence in the event of your unfortunate demise or critical illness.
They are all the more important if you are the chief wage earner in your family. No matter how much you
have saved or invested over the years, sudden eventualities, such as death or critical illness, always tend
to affect your family financially apart from the huge emotional loss.
For instance, consider the example of Amit who is a healthy 25 year old guy with a income of Rs.
1,00,000/- per annum. Let's assume his income increases at a rate of 10% per annum, while the inflation
rate is around 4%; this is how his income chart will look like, until he retires at the age of 60 years. At 50
years of age, Amit’s real income would have been around Rs. 10,00,000/- per annum.
However, in case of Amit’s unfortunate demise at an early age of 42 years, the loss of income to his
family would be nearly Rs. 5,00,000/- per annum.
However, with a Protection Plan, a mere sum of Rs. 2,280/- annually (exclusive of service tax &
educational cess) can help Amit provide a financial cushion of up to Rs. 10,00,000/- for his family over a
period of 25 years.
Types of Protection Plans
 HDFC Term Assurance Plan

 HDFC Premium Guarantee Plan
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 HDFC Loan Cover Term Assurance Plan
 HDFC Home Loan Protection Plan
Why do I need Children’s Plans?
Children’s Plans helps you save so that you can fulfill your child’s dreams and aspirations. These plans
go a long way in securing your child’s future by financing the key milestones in their lives even if you are
no longer around to oversee them. As a parent, you wish to provide your child with the very best that life
offers, the best possible education, marriage and life style.
Most of these goals have a price tag attached and unless you plan your finances carefully, you may not be
able to provide the required economic support to your child when you need it the most. For example, with
the high and rising costs of education, if you are not financially prepared, your child may miss an
opportunity of a lifetime.
Today, a 2-year MBA course at a premiere management institute would cost you nearly Rs. 3,00,000/- At
a assumed 6% rate of inflation per annum, 20 years later, you would need almost Rs. 9,07,680/- to finance
your child's MBA degree.
An illustration of how education expenses could rise with passing time due to inflation
Source: HDFC Standard Life Survey 2008. Inflation assumed as 6% p.a.

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So, how can you cope with these costs? Children’s Plans help you save steadily over the long term so that
you can secure your child’s future needs, be it higher education, marriage or anything else. A small sum
invested by you regularly can help you build a decent corpus over a period of time and go a long way in
providing your child a secured financial future along with
Types of Children’s Plans
 Conventional Plans
 HDFC Children’s Plan
 Unit Linked Insurance Plans
 HDFC SL Young Star Super II

 HDFC SL Young Star Super Premium
Why do I need Health Plans?
Health plans give you the financial security to meet health related contingencies. Due to changing
lifestyles, health issues have acquired completely new dimension overtime, becoming more complex in
nature. It becomes imperative then to have a health plan in place, which will ensure that no matter how
critical your illness is, it does not impact your financial independence.
In the race to excel in our professional lives and provide the best for our loved ones, we sometimes
neglect the most important asset that we have – our health. With increasing levels of stress, negligible
physical activity and a deteriorating environment due to rapid urbanization, our vulnerability to diseases
has increased at an alarming rate.

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Source: National Commission on Macroeconomics and Health Report 2005.
Note: Current figures are for the year 2000(Cardiovascular diseases)), 2001 (COPD and Asthma), 2004
(Cancer) and 2005(Diabetes and Mental Health). All figures above are on a per lakh basis.
As can be seen in the above chart, lifestyle diseases are set to spread at disturbing rates. The result –
increased expenditure. In many cases, people need to borrow money or sell assets to cover their medical
expenses. All it takes is a suitable plan to help you overcome the financial woes related to your health by
paying marginal amounts as premiums. For example, if you are 30 years old, then a mere sum of
approximately Rs 3500* annually (exclusive of taxes) can provide you a health insurance plan of Rs 5
lakh over a period of 20 years, and a worry-free future for you and your family.
*Note: The assumption is based on the HDFC Critical Care Plan. The figure is only indicative and the actual premium
may depend upon numerous factors such as age, sum assured, gender, policy term, premium payment frequency and
additional benefits opted for. It also differs from plan to plan and option to option
Types of Health Plans
 HDFC Critical Care Plan

 HDFC Surgi Care Plan

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Why do I need Savings & Investment Plans?
You have always given your family the very best. And there is no reason why they shouldn’t get
the very best in the future too. As a judicious family man, your priority is to secure the well-being of
those who depend on you. Not just for today, but also in the long term. More importantly, you have to
ensure that your family’s future expenses are taken care, even if something unfortunate were to happen to
you.
A big factor that you need to consider while building your wealth is inflation. It has a dual impact on your
hard-earned savings. Inflation not only erodes your current purchasing power but also magnifies your
monetary requirements for the future. Sample this: An 35 Year individual needs to invest Rs. 36,000/- per
year with 8% returns to build a corpus of Rs. 10,00,000/- by the age of 50 Years.
However, Rs. 10,00,000/- after 15 years would be worth roughly around half of what it is today once
adjusted for inflation at the rate of 4%. Therefore, an individual will need to save nearer to Rs 50,000/-
annually to reach your targeted savings at the age of 50 Years, if you consider inflation.
Our Savings & Investment Plans provide you the assurance of lump sum funds for your and your family’s
future expenses. While providing an excellent savings tool for your short term and long term financial
goals, these plans also assure your family a certain sum by way of an insurance cover. With HDFC
Standard Life’s range of Saving & Investment Plans, you can therefore ensure that your family always
remains financially independent, even if you are not around.

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Types of Savings & Investment Plans
Type Conventional Plans Unit Linked Insurance Plans

Regular Premium • HDFC SL New Money Back Plan • HDFC SL ProGrowth
• HDFC Assurance Plan# Super II
• HDFC Savings Assurance Plan^
• HDFC Endowment Assurance Plan
Single Premium/ • HDFC Single Premium Whole of Life • HDFCSL Pro Growth
Investment Insurance Plan Maximiser
Limited Premium • HDFC SL Crest
Payment
#HDFC Assurance Plan is available for sale through our Bancassurance Partners (HDFC Ltd., HDFC
Bank, Saraswat Bank and Indian Bank)
^HDFC Savings Assurance Plan is available for sale through HDFC Bank
Why do I need Retirement Plans?
Retirement Plans provide you with financial security so that when your professional income starts
to ebb, you can still live with pride without compromising on your living standards. By providing you a
tool to accumulate and invest your savings, these plans give you a lump sum on retirement, which is then
used to get regular income through an annuity plan. Given the high cost of living and rising inflation,
employer pensions alone are not sufficient. Pension planning has therefore become critical today.
India’s average life expectancy is slated to increase to over 75 years by 2050 from the present level of
close to 65 years. Life spans have been increasing due to better health and sanitation conditions in the
country. However, the average number of years of employment has not been rising commensurately. The
result is an increase in the number of post-retirement years. Accordingly, it has become necessary to
ensure regular income for life after retirement, so that you can live with pride and enjoy your twilight
years.
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Priorities at different stages of life:-
However, skyrocketing costs can throw even a well-laid plan off balance. With costs rising every day,
you can just imagine how high they will be when you are ready to hang up your boots. So, what should
you do to counter this? It’s time to plan your retirement and that too sooner than later.
The above illustration shows how with each passing year your annual savings requirement would
increase. For instance, if you are 30 years old and plan to retire at 60, then, with a current annual
expenditure of Rs. 3,00,000/- , you would need a corpus in excess of Rs. 2,00,00,000/- to maintain your
living standards, assuming you live till 85 years and the inflation rate is 4%. To build this retirement
corpus, you need to invest Rs 3,60,000/- per annum in a retirement plan that offers 8% returns per annum.
In case you delay planning your retirement by 5 years then the investment amount would increase to Rs
6,90,000/- per annum.

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WORKING CAPITAL MANAGEMENT
Introduction:
Working capital is the lifeblood of every business. Its effective provision ensures success and
inefficient provision reduces the profit and results in downfall of the company. Mismanagement of
business failure. A study of working capital is of major importance to internal and external analysis
because of its close relationship with day-do-day operations of a business.
Definition:
In accounting concept working capital is nothing but, “The difference between inflow and outflow
of cash. It is also known as the difference between current assets and current liabilities. Current assets
consists of cash/bank balance, short from investments, receivables, stocks advance payments etc., current
liabilities include creditors, bills payables, bank overdraft, short term loans etc.,”
GROSS WORKING CAPITAL

W
O
R NET WORKING CAPITAL
K
I
N
NEGATIVE WORKING CAPITAL
G
C
RESERVE WORKING CAPITAL
A
P
I
T PERMANENT WORKING CAPITAL
A
L
TEMPERARY WORKING CAPITAL 21
1. Gross working capital:
It is the amount of funds invested in the various components of current assets.
2. Net working capital:

It is the difference between current assets and the current liabilities. The concept of net working
capital enables a firm to determine the exact amount available at its disposal for operational requirements.
It reflects the company’s liquidity position.
3. Negative working capital:

When current liabilities exceed current assets negative working capital emerges. Such a situation
occurs when a firm is nearing a crisis of some magnitude.
4. Reserve working capital:

It refers to the short term financial arrangement made by the business units to meet uncertainties.
Business firms are always exposed to risks, which may be controllable or uncontrollable. In the event of
happenings of such events, reserve working capital strengthens the capacity of the company to face the
challengers.
5. Permanent working capital:

It means the minimum amount of investment in all current assets which is regarded at all times to
carry on minimum level of business activities. The operating cycle is a continuous process and therefore,
the need for current assets. But, the magnitude of current assets increases and decreases over time. There
is always a minimum level of current assets required at all times by the firm to carry on its business
operations. The minimum level of current assets is known as permanent working capital or fixed working
capital.
6. Temporary working capital:

This is also called the fluctuating or variable working capital. The amount of temporary working
capital keeps on changing depending upon the changes in production and sales. For example extra
inventory of finished goods will have to be maintained to support the peak periods of sale and investment

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in receivable may also increase during such period. On the other hand investment in raw materials, work-
in-progress and finished goods will decrease. If the market is black. The extra working capital required
to support the changing production and sales activities is known as temporary working capital.
The figure above shows that the permanent level is fairly constant while temporary working
capital is fluctuating sometimes increasing and sometimes decreasing in accordance with seasonable
demands. In the case of an expanding firm the permanent working capital line may not be horizontal this
is because the demand for permanent current assets might be increasing or decreasing to support a rising
level of activity.
Both finds working capital are necessary to facilitate the sales process through the operation cycle.
Temporary working capital is created to meet liquidity requirements that are purely transient nature.
Need for working capital:

The basic objective of financial management is maximizing wealth of shareholders. This can be
achieved when a firm earns sufficient returns from its operations. The amount of such earnings largely
depends upon the magnitude of sales. There is always a time gap between sales of goods and the final
realization of cash. Current assets are required during time gap in order to sustain the sales activity.
Adequate working capital is required during this period for the purchase of raw material, payment of
images or other expenses required for the manufacturing of goods to be sold. Working capital is also
required to run the business smoothly.
Operating cycle:
The duration of the time required to complete the following cycle of events in a case of
manufacturing firm is called as operating cycle. The operating cycle consists of the following events.
1. Conversion of cash into raw material

2. Conversion of raw material into work-in-progress
3. Conversion of work-in-progress into finished goods
4. Conversion of finished goods into debtors and bills receivable through sales
5. Conversion of debtors and bills receivable into cash

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This cycle will be repeated again and again. This can be shown in the following chart.
RAW MATERIAL
CASH WORK-IN-PROGRESS
ACCOUNT RECIEVABLES FINISHED GOODS
OPERATING CYCLE
Determinants of working capital:
A large number of number of factors influence working capital needs of a firm. The basic
objectives of working capital management are to manage the firm’s current assets and current assets and
current liabilities in such a way that a satisfactory level of working capital is maintained.
The following factors determine the amount of working capital.

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1. Nature of business:
The composition of current assets is a function of the size of a business and industry to which it
belongs. Small companies have smaller proportion of cash, receivables and inventory than large
corporations. This difference becomes more marked i.e., large corporations. A public utility concern, for
example, mostly employees fixed assets in its operations, while a merchandising department depends
generally on inventory and receivables. Need for working capital is thus determined by the nature of an
enterprise.
2. Size of business:
The size of business is also an important impact on its working capital needs. Size may be,
measured in terms of scale of operations. A firm with large scale of operation will need more working
capital than a small firm.
3. Length of the Manufacturing Process:

Larger the manufacturing process, the higher will be the requirement of working capital and vise
versa. This is because of the fact that highly capital-intensive industries require a large amount of
working capital to run their sophisticated and long production process. On the same principle of trading
concern requires a much lower working capital than a manufacturing concern.
4. Production policy:
The production policies by the management have a significant effect on the requirement on
working capital of the business. The production schedule has a great influence on the level of inventories.
The decision automation etc., will also have an effect on the working capital requirements.
5. Volume of sales:
This is the most important factor effecting the size and components of working capital. A firm
maintains current assets because they are needed to support the operational activities which resulting
sales. The volume of sales and size of the working capital are directly related to each other. As the
volume of sales increases there is an increase in the investment of working capital.
6. Terms of purchases and sales:

A Firm, which allows liberal credit to its customers, may enjoy higher sales but will need more
working capital as compared as compared to a firm enforcing strict credit terms. The working capital
requirements are also effected by the credit facilities enjoyed by the firm.

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7. Business cycle:
Business expands during the period of prosperity and declines during the period of depression;
consequently, more working capital is required during the period of prosperity and less during the period
of depression.
8. Growth and expansion:

If a business firm has ambitious plan for expansion, it requires more working capital, to fulfill
such requirements. Growth and expansion in business is more essential to exploit the available business
opportunity and to increase the existing market share.
9. Fluctuations in the supply of raw materials:

Certain companies have to obtain and maintain large reserve of raw materials due to their irregular
sales and intermittent supply. This is particularly true in case of companies requiring special kind of raw
materials available only from one or two sources. In such a case a large quantity of raw materials is to be
kept in store to avoid an possibility of the production process coming to a dead halt. Thus, the working
capital requirements in case of such industries would be large.
10. Price level changes:

The increasing shifts in price levels make the functions of financial managers difficult. He should
anticipate the effect of price level changes on working capital requirements of the firm. Generally, rising
price levels will require a firm to maintain higher amounts of working capital. The same levels of current
assets will need increased investment when prices are increasing.
11. Operating efficiency:

The operating efficiency of the firm relates to the optimum utilization of resources at a minimum
cost. The firm will be effectively contributing to its working capital if it’s efficient in controlling the
operating costs. The use of working capital is improved and pace of cash cycle is accelerated with
operating efficiency.
12. Profit margin:

Firms differ in their capacity to generate profit from business operations. Some firms enjoy a
dominant position, due to quality product or good marketing management or monopoly power in the

26
market and earn a high profit margin. Some other firms may have to operate in an environment of intense
competition and may earn low margin of profits.
13. Profit appropriations:

Even if the net profits are earned in cash at the end of the period, whole of it is not available for
working capital purposes. The contribution towards working capital would be effected by the way in
which profits are appropriated. The availability of cash generated from operations thus depends upon
taxation, dividend and retention policy and depreciation policy.
14. Credit Policy:

A, company which follows a liberal credit policy to its customers, may have higher sales but will need
higher working capital as compared to a company which has an efficient debt collection machinery and
observing strict terms. A company enjoying liberal credit facilities from its suppliers will need lower
amount of working capital as compared to a company, which does not enjoy such credit facilities.
PRINCIPLES OF WORKING CAPITAL MANAGEMENT:

Principle of risk variation:
Risk here refers to the inability of a firm to maintain sufficient current assets to pay for its
obligations, if working capital is varied relative to ales; the amount of risk that a firm assumes is also
varied and the opportunity for gain or loss is increased.
As the level of working capital relative to sales decreases the degree of risk increases. When the
degree of risk increases the opportunity for gain or loss also increases. Thus if the level of working
capital goes up the amount of risk goes down and the opportunity for gain or loss is likewise adversely
affected. Depending upon this attitude, the management changes the size of working capital.
Principle of cost of capital:

27
This principle emphasizes the different sources of finance, for each source has a different cost of
capital. It should be remembered that the cost of capital moves inversely with risk. Thus additional
capital results in the decline in the cost of capital.
Principle of equity position:

Accounting to this principle the amount of working capital invested in each corporate should be
adequately justified by a firm’s equity position. Every rupee invested in the working capital should be
contributed to the net worth of the firm.
Principle of maturity of payments:

A company should make every effort to relate maturity of payments be it flow of internally
generated funds. There should be the least disparity between the maturities of a firm’s short-term debt
instruments and its flow of internally generated funds because a greater risk is generated with greater
disparity. A margin of safety however should be provided for short-term debt payments.
Sources of working capital:

There are two approaches for sources of finance:
a. Hedging approach
b. Conservative approach
A. Heading approach:
The term hedging approach is often used in the sense of risk reducing investment strategy
involving transactions of simultaneous but opposite nature so that the effect of one is likely to counter
balance the effects of the other. With reference to an appropriate financing mix, the term hedging can be
said to refer to a process of matching maturity of financial needs. This approach to financing decision to
determine an appropriate financing mix is, therefore also called as maturity approach.
According to this approach the maturity of the source of funds should match the nature of the assets to be
financed for the purpose of analysis, the assets can be broadly classified into two classes.
1. Those that are required in a certain amount for a given level of operation and hence do not vary
over time.
2. Thos that fluctuates over time.

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When the firm follows marching approach, long term financing will be used to finance permanent
working capital. Temporary working capital should be financed out of short-term funds. The rationale
underlying marching approach is treat the maturity of sources of funds should match the nature of assets
to be financed.
Estimated total funds for company X for the year Y
Total Funds required Permanent

Months Seasonal Requirements
(Rs) Requirements
1 2 3 4
January 9500 7900 1600
February 9000 7900 11000
March 8500 7900 600
April 8000 7900 100
May 7900 7900 0
June 8150 7900 250
July 9000 7900 1100
August 9350 7900 1450
September 9500 7900 1600
October 10000 7900 2100
November 9000 7900 1100
December 8500 7900 600
According to the hedging approach the permanent portion of funds should be financed with long-
term funds and the seasonal portion with short-term funds. With the approach, the short term financing
requirements (current assets) would be just equal to the short term financing (current liabilities). There
would therefore be on net working capital.
B. Conservative approach:
This approach suggests that the estimated requirements of funds should be met from long term
sources, the use of short term funds should be restricted to only emergency situations or when there is an

29
unexpected outflow of funds. In the case of Hypothetical Company “X” in the total requirements,
including the entire rupees 10,000 needed in October, will be financed by long term services. The short-
term funds will be used to meet contingencies. The amount given represent the extent to which short term
financial needs are being financed by long term funds, that is the net working capital.
Estimated total funds for company X for the year Y
Permanent
Months Total Funds require (Rs) Seasonal Requirements
Requirements
1 2 3 4
January 9500 7900 1600
February 9000 7900 1100
March 8500 7900 600
April 8000 7900 100
May 7900 7900 0
June 8150 7900 250
July 9000 7900 1100
August 9350 7900 1450
September 9500 7900 1600
October 10000 7900 2100
November 9000 7900 1100
December 8500 7900 600
Other sources of working capital:
1. Loans from financial institutions

2. Floating of debentures
3. Accepting public deposits
4. Rising of funds by internal financing
5. Issue of shares
1. Loans from financial institutions:

The option is ruled out because banks do not finance always for working capital requirement.
This facility may not be available to all companies.

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2. Floating of debentures:
Probability of sources is less because still Indian capital market could not get popularity. The
company not associated with reputed groups fails to attract investors. However issue of convertible
bonds is gaining momentum.
3. Accepting public deposits:

The success is directly related to the image of the company problem of low profitability in many
companies is very common.
4. Issue of shares:
It can be considered but the companies have to command respect of investors how profit margin
and lack of knowledge of the company makes this sources not an attractive one.
5. Raising of funds by internal financing:

It is a problem for many companies because the prices of end products are controlled and do not
permit the companies to pay reasonable dividend and retain profit for additional working capital
requirement.
However feasible solution lies in increasing the profitability through cost control, reduction,
managing cash operating cycle and rationalizing inventory or stock etc.,
MANAGEMENT OF CASH, INVENTORY AND RECEIVABLES
Cash management:
What is cash?
Cash is the most liquid asset that a business owns. It includes money and such instruments as
cheques, money orders and bank drafts. Cash in the business enterprise may be compared to the blood in
the human body. In broad sense it includes ‘rear cash’ items such as time deposits with banks,
marketable securities etc., and such securities / deposits can be immediately sold or converted into cash if
necessary. The term cash management includes both cash and rear cash assets.
Motives of holding cash:

1. Transaction motive:

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A firm enters into a variety of business transactions in both in flows and outflows of cash. At time
the cash outflows may exceed the cash inflows. In order to meet the business obligations in such
situations, it is necessary to maintain adequate cash balance. The firms with the motive of meeting
routine business payments keep this cash balance.
2. Precautionary motive:
A firm’s cash balance to meet unexpected contingencies such as floods, strikes, presentment of
bills for payment earlier than the expected date, unexpected showing down of collection of accounts
receivables, sharp increase in price of raw materials etc., the more is the possibility of such contingencies;
the more is the amount of cash kept by this firm.
3. Speculative motive:
A firm also keeps cash balance to take advantage of unexpected opportunities typically outside the
normal cause of the business. Such move is therefore of purely a speculative nature. For example a firm
may like to take a payment of immediate cash or delay purchase of materials in the anticipation of
declining prices. Similarly, it may like to keep some cash balance to make profit by buying securities in
times when prices fall on account of tight money conditioned.
Compensation motive:
Banks provide certain services to their clients free of charge. They therefore, usually require
clients to keep minimum cash balance with them, which helps to earn interest and thus compensate them
for free services provided.
Business firms normally do not enter into speculative activities and therefore out of four motives
of holding cash balance the two most important motives are the cash transactions and compensation
motive.
How to have effective cash management?

Big corporations with sizable funds generally display a highly independent management of cash
assets. In these firms a responsible fiscal officer is charged with responsibility of managing working cash

32
balance in relation to the needs for the payment of obligations. To search for the optimum cash probably
overstates the company’s capabilities.
A proper cash management necessitates the development and application of some practical
administrative procedures to accelerate the inflow of cash and to improve the utilization of excess funds.
This practical administrative procedure includes:
1. Planning of cash requirements

2. Effective control of cash flow
3. Production utilization of exceeds funds
Objectives of cash management:

A highly liquid, vital asset is cash. It is needed to meet every type of expenditure. Hence it should be
sufficiently made available. If a firm falls to provide funds to meet the obligations, it will be clear
indication of technical insolvency of firm. If the cash position of the firm is strong, it can command
business operations. Cash discounts can be obtained on purchases. Obligations can be met immediately.
Cost of capital will be minimized. However, it cannot also hold cash in an idle way. It should be made
productive. Keeping these two views, viz., liquidity and profitability, the following objectives of cash
management can be identified.
i. To make cash payments

j. ii. To maintain minimum cash reserve
To make cash payments:

The very objective of holding cash is to meet the various types of expenditure to be incurred in
business operations. Several types of expenditures have to be met at different points of time and the firm
should be prepared to make such cash payments. The firm should remain liquid to meet the obligations.
Otherwise the business suffers.
It is observed that “cash is an oil to lubricate the every turning wheels of business, without it the process
of grinds to stop”. Thus one of the basic objectives of cash management is to maintain the images of the
organization by making a prompt payment to creditors and to avail cash discounts facilities.

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To maintain minimum cash reserve:
Another important objective of cash management is to maintain reserve. This means in the
process of meeting obligations on time, the firm should not maintain unnecessarily heavy cash reserves.
It cannot keep cash idle. Excess cash balance should be productive. Maintaining minimum cash reserve
is made possible by synchronizing cash inflows and outflows through cash budgeting. Cash collection
should be expedited and cash outflows should be controlled to conserve cash resources. Thus as far as
possible the firm should maintain minimum cash reserve to attain the objective of profitability.
Importance of cash management:
• Cash management assumes more important than other current assets because cash is the most
significant and the least productive asset that the firm holds. It is significant because it is used to
pay firm’s obligations. However, cash is unproductive and as such, the aim of cash management
is to maintain adequate cash position to keep the firm sufficiently liquid to use excess cash in
some profitable way.
• Management of cash is also important because it is difficult to predict cash flows accurately and
that there is not perfect coincidence between inflows and outflows of cash. Thus, during some
periods, cash outflows exceed cash inflows, because payments for taxes, dividends, excise duty,
seasonal inventory build up etc., are met through it. At other times cash inflows will be more than
cash payments, because there may be large cash sales and debtors may be realized in large sums
promptly.
• Cash management is also important cash constitutes the smallest portion of the total current assets;
even then, considered time management is devoted for it.
Strategies of cash management:
1. Cash planning:
Cash inflows and outflows should be planned to project cash surplus or deficit for each period of
planning. Cash budget should be prepared for this purpose.
2. Managing cash flows:

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The inflow and outflow of cash should be property managed. The inflow of cash should be
accelerated, while the outflow of cash should be decelerated as far as possible.
3. Optimum cash level:

The firm should decide on the appropriate level of cash balances. The cost of excess cash and the
danger of cash deficiency should be matched to determine the optimum level of cash balances.
4. Investing idle cash:

The idle cash or precautionary cash balances should be properly invested to earn profits. The firm
should decide on the division of such balances into bank deposits and marketable securities.
Functions of cash management:
1. To forecast cash inflow and outflow.

2. Plant the cash requirement.
3. Determine the safe level of cash.
4. Monitor the safety level of cash.
5. Locate funds needed.
6. Regulate cash inflow.
7. Determine the criteria for investment of excess cash.
8. Regulate cash outflow.
9. Avail banking facilities and maintain good relationship with bankers.
Problems of cash management

1. Impact of inflation on cash flow:
Inflation is growth in value terms and therefore it provides of rapid inflation a firm should expect
to find itself in a very unfavorable cash flow position, like that of the firm which is growing very fast. In
the words of W.C.F. Hautrey” in advances terms it comes dangerously close to compounding a felony”.
Timing of cash flow:

Period to another the figure indicates the variation during the different firms with identical cash
balances at the beginning and at the end of the year, but with vastly different patterns of cash flow. Most

35
amounts are to be dimensional, which means an annuity multiplied by a price. Cash flow amounts passes
the perverse third dimension of time and indeed, it is the time dimension which is at the root of the
various problems created by accounting concepts, therefore it the long term profit are aimed at but in
short term the cash flow is much more important.
2. Environment:
There are environmental constraints that create cash flow problems for a firm. Such problem may
be created by the very nature of its operations, such a location or season ability of the market place.
Every firm should, therefore, examine its own position in respect of its environment that will affect its
short-term flow.
3. Managerial decisions:
A cash flow does not flow of its own accord. It is direct consequence of management decisions.
The management procedures employed for maximizing the use of cash through the control of payable and
related payments are:
• Timings payments to vendors so that bills are paid only as they fall due.
• Establishing procedure that will prevent or minimize the loss of discounts.
• Centralizing payable and disbursement procedures.
• Reducing “compensating balance” a “deposit with banks”.
• Improving control over inter-company transfers
• Utilizing manpower more effectively.
• Strategic tax planning.
This need not be if management uses strategic tax planning to minimize its tax expenditure.
Currently, a management employs the following the techniques to reduce its tax payment.
1. It uses acerbated depreciation method or adopts guidelines and depreciation rate.

2. It uses investment credit to fall advantage by strategic acquisition and disposition of
property, plant and equipment.
3. It reduces research and developments, costs and similar expenses in the years in which
they are incurred instead of capitalizing them and amortizes such costs over a number of
years.
4. It adopts changes in accounting procedures particularly those initiated by the internal
reserve service or exploits changes in reporting periods.

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Cash forecasting:
Cash forecasts are required to prepare cash budgets. Cash forecasting may be done on short term
or long-term basis. Generally, forecast covering period of one year or less are considered short term,
those beyond one year considered long term.
Types of cash forecast
Short – term Long – term

forecast forecast
Short term forecast:

It covers a period of one year or less. The important uses of short term cash forecast are:
• It helps in determining cash requirements.

• It helps in anticipating short term financing.
• It helps in managing money market investments.
Long-term cash forecasting:

Long-term cash forecasts are prepared to give an idea of the company’s financial requirements.
Once a company has developed a long term cash forecast, it can be used to evaluate the impact of new
product developments or plant acquisition on the firms financial position; three, five or more years in
future.
The Major uses of long-term cash forecasts are:
1. It indicates a company’s future financial needs, especially for its working capital
requirements.
2. It helps in evaluating proposed capital projects. It pinpoints the cash required to finance
these projects as the cash to be generated by the company to support them.

37
3. It helps in improving corporate planning. Long-term cash forecasts compel each division
to plan for future and to formulate projects carefully. Long-term cash forecasts may be
two, three or five years.
How to manage debts?

a. Establish a credit policy:
The company should consider whether it is appropriate to offer credit at all and if so how much, to
whom and under what circumstances.
b. Assess customers’ credit worthiness:

From their banker or other sources before allowing trade credit.
c. Establish effective administration of debtors:
• That not goods are dispatched until it has been vouched that the present order will take the
customer above his predetermined credit limit.
• That invoices for supplied on credit go off the customers as soon as possible after the goods are
dispatched and this encourages the customers to initiate payments sooner rather than later.
• That existing debtors are systematically reviewed and that slow payers are sent reminders
d. Establish a policy on bad debts:

The company should decide what is policy on writing off bad debts should be. This policy should
be planned except in unusual circumstances. It is important that writing off a bad debt only occurs when
all steps mentioned in the policy have been followed. Such writing off should be done at a senior level
management.
e. Consider offering discount for prompt payment:

It is possible to enter into agreement with a factoring company. In such cases, payment is
received from factoring company immediately after sale.
RATIO ANALYSIS AND CLASSIFICATION OF RATIOS

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Ratio Analysis:
Ratio analysis is a powerful tool of financial analysis. In such an analysis the ratios are used as
yardstick for evaluating the financial condition and performance of the firm. Analysis and interpretation
of various accounting ratios give a skilled and experienced analyst a better understanding of the financial
condition and performance of the firm than what he could have obtained only through a perusal of
financial statements.
Meaning of ratios:
The relationship between two accounting figures, expressed mathematically is known as a ratio
(financial ratio). The term ratio refers to the numerical or quantitative relationship between two figures.
A ratio is the relationship between two figures, and obtained by dividing the former by the later. Radios
are designed to show how one number is related to another. Ratios are relative form of financial
statements to measure the firms’ liquidity, profitability and solvency.
Significance of ratio analysis:

Following are the significance of ratio analysis
A. Managerial uses of ratio analysis:

1. Helps in decision-making:
Financial statements are prepared primarily for decision-making. But the information provided in
financial statements is not and in itself and no meaningful conclusion can be drawn from these statements
alone. Ratio analysis helps in making decisions from the information provided in these financial
statements.
2. Helps in financial forecasting and planning:

Ratio analysis is of much help in financial forecasting and planning. Planning is looking ahead
and the ratios calculated for a number of years work as a guide for the future. Meaningful conclusions
can be drawn for future from these ratios. Thus, ratio analysis helps in forecasting and planning.
3. Helps in communicating:

39
The financial strength and weakness of a firm are communicated in a more easy and
understandable manner by the use of ratios. The information contained in the financial statements is
conveyed in a meaningful manner to the one for whom it is meant. Thus, ratios help in communication
and enhance the value of the financial statements.
4. Helps in co-ordination:
Radios even help in co-ordination, which is of utmost importance in effective business
management. Better communication of efficiency and weakness of an enterprise results in better
coordination in enterprise.
5. Helps in control:
Ratio analysis even helps in making effective control of the business. Standard ratio can be based
upon preformed financial statements and variances and deviations, if any, can be found by comparing the
actual with the standards so as to take a corrective action at the right time. The weakness or otherwise, if
any, come to the knowledge of the management which helps in effective control of the business.
6. Other uses:
These are so many other uses of the ratio analysis. It is an essential part of the budgetary control
and standard costing. Ratios are of immense importance in the analysis and interpretation of financial
statements as they bring the strength or weakness of a firm.
B. Utility to share holders / investors:

An investor in the company will like to assess the financial position of the concern where he is
going to invest. His first interest will be the security of the investment and then a return in the form of
dividend or interest. For the first purpose he will try to assess the value of fixed assets and the loan raised
against them. The investor will feel satisfied only if the concern has sufficient amount of assets. Long-
term solvency ratios, on the other hand, will be useful to determine profitability position. Ratio analysis
will be useful to the investor in making up his mind whether present financial position of the concern
warrants further investment or not.
C. Utility to creditors:
The creditors or suppliers extend short-term credit to concern. They are interested to know
whether financial position of the concern warrants their payments at a specified time or not. The concern

40
pays short-term creditors out of its current assets. If the current assets are quite sufficient to meet current
liabilities then the creditors will not hesitate in extending credit facilities. Current and acid test ratios will
be an idea about the current financial position of the concern.
D. Utility to employees:
The employees are also interested in the financial position of the concern especially profitability.
Their wage increases and amount of fringe benefits are related to the volume of profits earned by the
concern. The employees make use of information available in financial statements. Various profitability
ratios relating to gross profit, operating profit, net profit, etc enable employees to put forward their
viewpoint for the increase of wages of other benefits.
E. Utility to government:
Government is interested to know the overall strength of the industry. Various financial
statements published by industrial units are used to calculate ratios for determining short-term, long term
and overall financial position of the concerns. Profitability indexes can also be prepared with the help of
ratios. Government may base its future policies on the basis of industrial information available from
various units. The ratios may be used as indicators of overall financial strength of public as well as
private sector. In the absence of the reliable economic information, governmental plans and policies may
not prove successful.
F. Tax audit requirements:

The finance act, 1984, interested section 44 AB in the Income Tax Act. Under this section every
assess engaged in any business having turnover or gross receipts exceeding Rs. 40 lacks is required to get
the accounts audited by a chartered accountant and submits the tax audit report before the due date for
filing the return of income under section 139(1). In case of a professional, a similar report is required if
the gross receipts exceed Rs. 10 lacks. Clause 32 of the Income Tax Act requires that the following
accounting ratios should be given:
• Gross profit / turnover

• Net profit / turnover
• Stock-in-trade / turnover
• Material consumed / finished goods produced.

41
Advantages of ratio analysis:
• Simplifies financial statements

• Facilitates inter-firm comparison
• Makes inter-firm comparison possible
• Helps in planning
Limitations of ratio analysis:

The ratio analysis is one of the most powerful tools of financial management. Though ratios are
simple to calculate and easy to understand, they suffer from some serious limitations.
1. Limited use of a single ratio:

A single ratio, usually, does not convey much of a sense. To make a better interpretation a
number of ratios have to be calculated which is likely to continue the analyst than help him in making any
meaningful conclusions.
2. No fixed standards:
No fixed standards can be laid down for ideal ratios. There are not well-accepted standards or
rules of thumb for all ratios, which can be accepted as norms. It renders interpretation of the ratios
difficult.
3. Inherent limitation of accounting:

Like financial statements, ratios also suffer from the inherent weakness of accounting records such
as their historical nature. Ratios of the past are not necessarily true indicators of the future.
4. Change of accounting procedure:

Change in accounting procedure by a firm often makes ratio analysis misleading, example, a
change in the valuation of methods of inventories, from FIFO to LIFO increases the cost of sales and
reduces considerably the value of closing stocks which makes stock turnover ratio to be lucrative and an
unfavorable gross profit ratio.
5. Window dressing:

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Financial statements can easily be window dressed to present a better picture of its financial and
profitability position to outsiders. Hence, one has to be very careful in making a decision from ratios
calculated from such financial statements. But it may be very difficult for an outsider to know about the
window dressing made by a firm.
6. Personal bias:
Ratios are only means of financial analysis and not an end in itself. Ratios have to be interpreted
and different people may interpret the same ratio in different ways.
7. Incomparable:
Not only industries differ in their nature but also the forms of the similar business viable differ in
their size and accounting procedures, etc., It makes comparison of ratios difficult and misleading.
Moreover, comparisons are made difficult due to differences in definitions of various financial terms used
in the ratio analysis.
8. Absolute figure distractive:

Ratios devoid of absolute figures may prove decorative, as ratio analysis is primarily a
quantitative analysis and not a qualitative analysis.
9. Price level changes:

While making ratio analysis, no consideration is made to changes in price levels and this makes
the interpretation of ratio invalid. If the price level changes are considered for ratio analysis, then it may
lead to misleading results.
10. Ratios are a composite of many figures:

Ratios are a composite of many different figures. Some over a time period, others are at an instant
of time while still others are only averages.

43
FUNCTIONAL CLASSIFICATION OF THE RATIOS
1. Liquidity ratios or short-term solvency ratios:

44
Liquidity refers to the ability of a firm to meet its obligations in the short run, certain the financial
condition of a firm. Liquidity ratios are calculated by establishing relationships between current assets
and current liabilities. To measure the liquidity of a firm, the following ratios can be calculated.
A. Current ratio:
Current ratio may be defined as the relationship between current assets and current liabilities.
This ratio, also know as working capital ratio. This ratio is most widely used to make the analysis of a
short-term financial position or liquidity of a firm. It is calculated by dividing the total of current assets
by current liabilities. Thus,
Current Assets
Current ratio =
Current liabilities
Components of current ratio:

Current assets:
1. Cash in hand
2. Cash at bank
3. Debtors
4. Bill receivable
5. Prepaid expenses
6. Money at calls and short notice
7. Stock
8. Sundry supplies
9. Other amounts receivable with in a year
Current liabilities:
1. Creditors
2. Bill payable
3. Bank overdraft
4. Expenses outstanding
5. Interest due or payable
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6. Reserve for unbilled expenses
7. Installment payable on long-term loans
8. Any other amount which is payable in short period (one year)
Significance of current ratio:
1. Current ratio indicates the firm’s ability to pay its current liabilities i.e., day-to-day financial
obligations.
2. It shows short-term financial strength and solvency of a firm.
3. It is a test of a credit strength and solvency of a firm.
4. It indicates the strength of the working capital.
5. It indicates the capacity to carry on work effective operations.
6. It discloses the over-trading or under-capitalization.
7. It shows the tendency of over investment in inventory.
8. Higher the ratio i.e., more than 2:1 indicates inadequate working capital.
9. Lower ratio i.e., less than 2:1 indicates inadequate working capital.
10. It discloses the quantity of working capital position.
Ideal Ratio:
A ratio equal or near to the thumb of 2:1 i.e., current assets double the current liabilities is
considered to be satisfactory
B. Quick ratio:
Quick ratio is also known as liquid ratio or acid test ratio or near money ratio. It is the ratio
between quick or liquid assets and quick liabilities. The term quick asset refers to current assets, which
can be converted into cash immediately or at a short notice without diminution of value. Liquid assets
comprise all current assets minus stock and prepaid expenses. Liquid assets liabilities comprise all
current liabilities minus bank overdraft The quick ratio can be calculated by dividing the total of the
quick assets by total current liabilities. Thus,
Quick or liquid assets

Quick ratio =
Liquid or current liabilities

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Sometimes bank overdraft is not included in current liabilities while calculating quick or acid test ratio,
on the argument that bank overdraft is generally a permanent way of financing and is not subject to be
called on demand. In such cases, the quick ratio is found by dividing the total quick assets by quick
liabilities (i.e., current liabilities – bank overdraft).
Significance of quick ratio:
1. It is the true test of business solvency.

2. Higher ratio i.e., more than 1:1 indicates financial difficulty.
3. Lower ratio i.e., less than 1:1 indicates financial difficulty.
4. This is an important ratio of financial institutions.
5. It is a stringent test of liquidity.
6. It gives better picture of firm’s ability to meet its short-term debts out of short-term assets.
7. If the current ratio is more than 2:1 but liquid ratio is less than 1:1 it indicates excessive
inventory.
8. It is more of qualitative nature of test.
Ideal Ratio:
An acid test ratio of 1:1 is considered satisfactory as a firm can easily meet current claims. It is the
true test of the firm’s solvency. It gives a better picture of firm’s ability to pay its short-term debts out of
short-term assets. It is more of a qualitative nature of test.
C. Absolute liquidity ratio or cash position ratio:

It is a variation of quick ratio. When liquidity is highly restricted in terms of cash and cash
equivalents, this ratio should be calculated. Liquidity ratio measures the relationship between cash and
near cash items on the one hand, and immediately maturing obligations on the other. The inventory and
the debtors are excluded from current assets, to calculate this ratio.
Cash + Marketable securities

Cash position ratio =
Current Liabilities
Generally, 0.75:1 ratio is recommended to ensure liquidity. This test is more rigorous measure of
a firm’s liquidity position. If the ratio is 1:1, then the firm has enough cash on hand to meet all current
liabilities. This type of ratio is not widely used in practice

47
D. Inventories to working capital ratio:
It represents the relationship between inventory or stocks and working capital of the firm.
Inventory or stock refers to closing stock of raw materials, work-in-progress (i.e., semi-finished good)
and finished goods. Working capital is the excess of current assets over current liabilities. It is usually
expressed as a percentage. It is expressed as:
Inventory
Inventory to working capital ratio = x 100
Working capital
The ratio indicates the portion of working capital tied up in inventories or stocks and thereby
throws some light on the liquidity of a concern. It also indicates whether there is overstocking or under
stocking. As per the standard or ideal inventory to working capital ratio, the inventories should not
absorb more than 75% of working capital.
Ideal Ratio:
As per the standard, in the inventory to working capital ratio, the inventories should not absorb
more than 75 percentage of working capital.
3. Activity ratios or turnover ratio:

It is also refers to as assets management ratios measures the efficiency or effectiveness with which
a firm manages its resources or assets. The ratios are called turnover ratios because they indicate the
speed with which assets are converted or turned over into sales. These ratios are calculated by
establishing relationship between sales and assets. The various turnover ratios are as follows:
A. Inventory turnover ratio:

This is also known as stock velocity. This ratio is calculated to consider the adequacy of the
quantum of capital and its justification for investing in inventory. A firm must have reasonable stock in

48
comparison to sales. It is the ratio of cost of sales and average inventory. This ratio helps the financial
manager to evaluate inventory policy. This ratio reveals the number of times finished stock is turned over
during a given accounting period. This ratio is used for measuring the profitability. The various ways in
which stock turnover ratios may be calculated are as follows:
Cost of goods sold

Stock turnover ratio =
Average stock
Cost of goods sold may be calculated as under:

Cost of goods sold = Opening stock + purchases + Direct
Expenses – closing stock
This ratio indicates whether investment is inventory is within proper limit or not. The quantum of stock
should be sufficient to meet the demands of the business but it should not be too large to indicate
unnecessary lock-up of capital in stock and danger of stock-items obsolete and getting it wasted by
passing of time. The inventory turnover ratio measures how quickly inventory is sold. It is a test of
efficient inventory management. To judge whether the ratio of the firm is satisfactory or not, it should be
compared over time on the basis of trend analysis
Cost of Goods Sold Includes = Opening Stock + Purchases + Manufacturing expenses-Closing stock
Average Stock =Opening stock + Closing stock/2
B. Debt collection period ratio:

It indicates the numbers of time on the average the receivable are turnover in the each year. The
higher the value of ratio, the more is the efficient management of debtors. It measures the accounts
receivable (trade debtors and bill receivables) in terms of number of days of credit sales during a
particular period. It is calculated as follows:
Average debtors
Debt collection period= x 365

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Net credit sales
The purpose of this ratio is to measure the liquidity of the receivables or to find out the period over which
receivable remain uncollected.
Ideal Ratio:
The shorter the collection period the better is the quality of debtors as a short collection period
implies quick payment by debtors. Similarly a higher collection period implies an inefficient collection
performance, which in turn adversely affects the liquidity or short term paying capacity of a firm out of its
current liabilities.
Analysis and Interpretation:

Debtors’ turnover ratio indicates the number of times the debtors are turn over during a year.
Higher debtors velocity shows good management while low debtors velocity shows inefficient
management of debtors/sales and less liquid are the debtors. But a precaution is needed while interpreting
a very high debtors turnover ratio because a very high ratio may imply a firms inability due to lack of
resources to sell on credit.
C. Debt payment period ratio:

This is also known as accounts payable or creditor’s velocity. A business firm usually purchases
on credit goods, raw materials and services from other firms. The amount of total payables of a business
concern depends upon the purchases policy of the concern, the quantity of purchases and suppliers’ credit
policy. Longer the period of outstanding payable is, lesser is the problem of working capital of the firm.
But when the firm does not pay off its creditors within time, it may have adverse effect on the business.
Creditor’s turnover indicates the number of times the payable rotate in a year. It signifies the
credit period enjoyed by the firm paying creditors. Accounts payable include sundry creditors and bills
payable.
Payables turnover shows the relationship between net purchases for the whole year and total
payable (average or outstanding at the end of the year).

50
Accounts creditors
Debt payment ratio = x 365
Net credit purchase
Net purchase = all credit purchases – purchase returns

Ideal Ratio:
A higher ratio shows that the creditors are not paid in time. A lower ratio shows that the business is not
taking the full advantage of credit period allowed by the creditors.
Analysis & Interpretation:

A higher payment period implies that greater credit period is enjoyed by the firm and
consequently larger the benefit reaped by the credit suppliers. A higher ratio may also imply lesser
discount facilities availed or higher prices paid for the goods purchased on credit.
From the above table, one can ascertain that the company is moderately using its used its credit
facilities provided to it by its creditors.
D. Cash turnover ratio:

It’s calculated as
Net annual sales

Cash turnover ratio =
Cash
Cash for the purpose means cash in hand, cash at bank, and readily realized marketable securities.
Turnover refers to the total annual sales (cash sales credit sales) effected during the year however, sales
means net annual sales i.e., total sales – sales returns.

51
This ratio indicates the extent to which cash resources are efficiently utilized by the enterprise. It
also helps in determining the liquidity of the concern.

This ratio measures the velocity of sales turnover with a minimum cash balance. From the above
information it is clear that the company has achieved favorable sales figure in the year 2002-03 as well as
in the preceding years.
E. Working capital turnover ratio:

This ratio is a measure of the efficiency of the employment of the working capital. It indicates
over trading and under trading and is harmful for the smooth conduct of business. This ratio finds out the
relation between cost of sales and working capital. It helps in determining the liquidity of a firm in as
much as it gives the rate at which inventories are converted to sales and then to cash.
Net sales
Working capital turnover ratio =
Net working capital
(Net working capital = current assets – current liabilities)
A higher sale in comparison to working capital means overtrading and lower sales in comparison
to working capital means under trading. A higher working capital turnover ratio shows that there is low
investment in working capital and there is more profit.

Higher sales in comparison to working capital mean over trading &lower sales in comparison to
working capital means under trading. A higher working capital turnover ratio shows that there is low
investment in working capital &there is more profit.
F. Fixed assets turnover ratio:

52
It is also known as sales to fixed asset ratio. This ratio measures the efficiency and profit earning
capacity of the firm. Higher the ratio, greater is the intensive utilization of fixed assets. Lower ratio
means under-utilization of fixed assets.
Net sales
Fixed asset turnover ratio =
Net fixed assets
(Net fixed assets = value of assets – depreciation)
G. Total assets turnover ratio:

This is the ratio between sales and total assets and it shows whether or not the total assets have
been properly utilized and measures the effective use of capital. The higher the ratio, the greater will be
the return but too high a ratio means over trading.
Net sales
Total assets turnover ratio =
Total assets
4. Profitability ratio:
It measures the overall performance of business – profit margin ratios and rate of return ratios.
Profit margin ratios show the relationship between profit and sale. Rate of return ratios reflect the
relationship between profit and investments. The various profitability ratios are as follows.
A. Gross profit ratio:

The gross profit ratio is also known as gross margin ratio, trading margin ratio etc., it is expressed
as a “Per Cent Ratio”. The difference between net sales and cost of goods sold is known as gross profit.
Gross profit is highly significant. The earning capacity of the business can be ascertained by taking the
margin between cost of goods sold and sales. It is very useful as a test of profitability and management
efficiency. It is generally contented that the margin of gross profit should be sufficient enough to recover
all operating expenses and other expenses and also leave adequate amount as net profit in relation to sales
and owners’ equity. Thus, in a trading business, gross profit is net sales minus trading cost of sales.

53
Gross profit
Gross profit ratio = x 100
Net sales
OR
Sales – cost of goods sold

Gross profit ratio = x 100
Net sales
Gross profit ratio shows the gap between revenue and trading costs. Maintenance of steady gross
profit ratio is important. An analysis of gross profit margin should be carried out in the light of
information relating to purchasing, increasing or reducing the sales price of goods sold by mark up and
mark downs, credit and collections and merchandising policies.
A higher ratio may be the result of one or all of the following:
1. Increase in the selling price of goods sold without any corresponding increase in the cost of goods
sold.
2. Decrease in the cost of goods sold without corresponding decrease in selling price.
3. Both selling price and cost of goods sold may have changed, the combined effect being increase in
gross margin.
4. Out of sales-mixes, product having higher gross profit margin, should have been sold in larger
quantity.
5. Under-valuation of opening stock or over-valuation of closing stock.
6. On the other hand, if the gross profit ratio is very low, it may be an indicator of lower and poor
profitability.
A lower ratio may be the result of the following factors:
1. Decrease in the selling price of goods sold, without corresponding decrease in cost of goods sold.
2. Increase in cost of goods sold without any increase in selling price.
3. Unfavorable purchasing policies.
4. Over-valuation of opening stock or under-valuation of closing stock.
5. Inability of management to improve sales volume.
6. Higher ratio is better. A ratio of 25% to 30% may be considered good.
54
B. Net profit ratio:
It establishes the relationship between net profit (after tax) and sales and indicates the efficiency
of the management in manufacturing, selling, administrative and other activities of the firm. This ratio is
used to measure the overall profitability and it is calculated as:
Net profit
Net profit ratio = x 100
Net sales
This ratio indicates the firm’s capacity to face adverse economic conditions such as price
competition, low demand, etc., Higher the ratio, the better is the profitability.

The company ratio of the company for all the three financial years is on a healthier side as it is
showing favorable trend of growth to the outsiders about the percentage net profit after tax on its net sales
this ratio reveals the true picture of company’s financial position.
C. Operating ratio:
This ratio establishes the relationship between total operating expenses and sales. Total operating
expenses include cost of goods, administrative expenses, financial expenses and selling expenses. Cost of
goods sold is also known as direct operating expenses. Operating ratio is generally expressed in
percentages.
Cost of goods sold + operating expenses

Operating ratio = x 100
Net sales

55
Cost of goods sold = operating stock + purchase – closing stock
Operating expenses = administrative expenses + financial expenses
+ Selling expenses
D. Return on capital employed ratio:
This is also known as return on investment or rate of return. The prime objective of making
investments in any business is to obtain satisfactory return on capital invested. It indicates the percentage
of return on the capital employed in the business and it can be used to show the efficiency of the business
as a whole.
Operating profit
Return on capital employed = x 100
Capital employed
The term capital employed refers to long-term funds supplied by the creditors and
owners of the firm. It can be computed in two ways. First, it is equal to non-current
liabilities (long-term liabilities) plus owners’ equity. Alternatively, it is equivalent to
net working capital plus fixed assets. Thus, the capital employed basis provides a
test of profitability related to the sources of long-term funds. A comparison of this
ratio with similar firms, with the industry average and over time would provide
sufficient insight into how efficiently the long-term funds of owners and creditors
are being used. The higher the ratio, the more efficient use of the capital
employed.

The operating ratio is showing a favorable trend and is considered to be a good ratio as the
company is a manufacturing undertaking. This shows that the company has enough funds from its margin

56
to cover interest, income tax, dividends and reserves. This reveals the operating efficiency of the
company.
E. Return on owner’s fund ratio:
This ratio establishes the profitability from the shareholders point of view.
Net profit
Return on owner’s fund = x 100
Shareholders fund
The term net profit as used here means net income after payment of interest and tax including net
non-operating income (i.e. non-operating income minus non-operating expenses). It is the final income
that is available for distribution as dividends to shareholders. Shareholders’ funds include both
preference and equity share capital and all reserves and surplus belonging to shareholders.
For the purpose of the study, only those ratios’ concerning working capital and fund flows has
been considered and analysis and interpretation has been done in the next chapters.

57
58
FUND FLOW STATEMENT
Techniques of analysis & interpretation of financial statements:

The following method is generally used for the purpose of analysis and interpretation of financial
statements:
1. Comparative Statement
2. Common Size Statements
3. Trend Analysis
4. Ratio Analysis
5. Cash flow statements
6. Fund flow statements
Fund Flow Statement

The fund flow statement is a statement, which shows the movement of funds and is a report of the
financial operations of the business undertaking.
The fund flow statement shows how the attitude of a business organization is financed or how the
available financial resources have been used during the particular period of time. It indicates in a
summarized form the various means through which the funds were collected during a particular period
and the ways in which these funds were employed.
Fund flow statement is a widely used tool in the hands of financial executives for analyzing the
financial performance of a concern.
The fund flow statement is made up of three words, i.e., funds, flow and statement.

59
'FUND' according to the fund flow statement means:
Cash
Money
Marketable securities
Working capital
However the concept of fund as working capital is the most popular one and considered
appropriate. The study of sources and uses of funds is beneficial to management and organization at large
since it reveals the soundness and solvency of the organization.
The term FLOW means movement and includes both 'inflow' and 'outflow'. The term 'flow of
funds' means transfer of economic values from one asset of equity to another.
The fund flow statement is a method by which we study changes in the financial position of a
business enterprise and financial statements ending date. It is a Statement showing sources and uses of
funds for a given period of time.
A fund flow statement is an essential tool for the financial analysis and is of primary importance
to the financial management. The basic purpose of a fund flow statement is to reveal the changes in the
working capital on the two balance sheet dates. It reveals how the expansion and development activity of
an enterprise is financed also tells the financial needs of the enterprise.
Working Capital = Current Assets - Current Liabilities

Working Capital = Total Current Assets - Total Current Liabilities
Important of fund flow

The fund flow statement analysis the causes of changes in the firm’s working capital
position. It is more informative and comprehensive in indicating the change in the firm’s financial
positions.
Current Assets:

60
It refers o cash and other assets or resources commonly identified as those, which are reasonably
expected to be realized in cash or sold or consumed during the normal operating period of the company.
Current Liabilities:
It refers to all obligations which are likely to mature within one year in the normal course of
business operations and which are cleared off by creating current liabilities or out of the current assets.
Components of Current Assets and Current Liabilities
Current assets Current Liabilities

Cash Balance Accounts payable / Bills payable
Bank Balance Sundry creditors
Inventory/Stock of goods Bank overdraft
Temporary Investments Outstanding expenses
Pre-paid expenses Unclaimed dividend
outstanding incomes Provision for taxation
Accounts receivable Proposed dividend
Bill receivable Short-term loan
Sundry Debtors Any provision against current assets
Non-Current Assets / Liabilities:

It refers to all those assets and liabilities other than current assets and current
Liabilities.
Components of Non current assets and Non-current Liabilities
Non-Current Liabilities Non-Current assets

Share Capital Fixed Assets
Long term loans Fictitious Assets like goodwill Patents Rights, Trade Marks
Debentures Long term Investments
Share premium A/c. Profit and Loss A/c. (Debit balance)
Forfeited shares A/c. Discount on issue of shares and
Debentures
Profit and Loss A/c (Credit balance) Deferred expenditures like preliminary Expenses, advertising
expenses
Appropriation of profits
61
Provisions like provision for
tax,
Provision for deprecations
Capital reserve
• It helps in analysis of financial operations The financial statements reveal the net effect of various
transactions on the operational and financial position of a concern. The Balance Sheet gives a
static time. But it does not disclose the cause for changes in the assets and liabilities between two
different points. The fund flow statement explains the causes for such changes and also effects of
such changes on the liquidity position of the company.
• It helps in the formation of a realistic dividend policy. Sometimes a firm has sufficient profits
available for distribution as dividend but yet it may not be advisable to distribute dividend for lack
of liquid or cash reserves. In such cases, fund flow statement helps to formulate a realistic
dividend policy.
• It helps in proper allocation of funds. The resources of a concern are always limited and it wants
to make the best use of these resources. A projected fund flow statement constructed for the future
helps in making managerial decisions.
• It helps in taking corrective action if there is any imbalance between the sources and uses of the
funds.
Preparation of Fund Flow Statement:
• The financial information required for preparing the fund flow statement is obtained from the
balance sheet of two periods and other required information from the books of accounts of the
organization. In the process of fund flow statement these statements are prepared,
• It helps in analysis of financial operations The financial statements reveal the net effect of various
transactions on the operational and financial position of a concern. The Balance Sheet gives a
static time. But it does not disclose the cause for changes in the assets and liabilities between two
different points. The fund flow statement explains the causes for such changes and also effects of
such changes on the liquidity position of the company.
• It helps in the formation of a realistic dividend policy. Sometimes a firm has sufficient profits
available for distribution as dividend but yet it may not be advisable to distribute dividend for lack
62
of liquid or cash reserves. In such cases, fund flow statement helps to formulate a realistic
dividend policy.
• It helps in proper allocation of funds. The resources of a concern are always limited and it wants
to make the best use of these resources. A projected fund flow statement constructed for the future
helps in making managerial decisions.
• It helps in taking corrective action if there is any imbalance between the sources and uses of the
funds.
Preparation of Fund Flow Statement:

The financial information required for preparing the fund flow statement is obtained from the
balance sheet of two periods and other required information from the books of accounts of the
organization. In the process of fund flow statement these statements are prepared,
1. Statement of changes in working capital,

2. Statement which indicate funds from operation (for determining funds generated every year
through the business activity)
3. Sources and application of funds.
Statement of Changes in Working Capital:

Statement of changes in the working capital is prepared in order to ascertain the increase or
decrease in working capital between two accounting periods. This statement is prepared with the help of
current assets and current liabilities. The net difference between current assets and current liabilities
indicate either increase or decrease in the working capital. The decrease will appear as a source and the
increase as an application.
Funds from Operation:

The funds from operation form the main source of funds of any organization. The funds from
operation will not be equal to profits as shown by profits and loss account. The net profit as per the profit
and loss account is the balance arrived at after deducting from revenues, a number of expenses which do
not represent current outflow of funds such as depreciation, loss on sale of assets etc. to arrive at precisely
the funds from operation an adjusted profit and loss account or a statement of funds from operation is
prepared.
Statement of Sources and Application of Funds:

63
After the preparation of statement of changes in the working capital the statement of sources and
application of funds is prepared. The statement of sources and application of funds saves as a bridge
between successive balance sheets. It ties-up the balance sheet and profit and loss account together by
using information taken from both statements. This statement contains two main groups of items. One is
the mean by which resources are acquired and the other their deployment.
Cash flow statement for the year ended March 31, 2009
Table
Current Year Previous Year
CASH FLOW FROM OPERATING ACTIVITIES Rs ‘000 Rs ‘000
Amounts received from Policyholders 54,747,190 47,554,360

Amounts paid to Policyholders (5,248,135) (4,224,779)
Amounts received / (paid) to Reinsures (550,719) (415,081)
Amounts paid as Commission (4,156,520) (3,377,762)
Payments to Employees and Suppliers (16,025,349) (8,621,462)
Deposit with Reserve Bank of India (2,627) —
Taxes Paid (219,808) (8,758)
Others 765,819 (214,763)
Net Cash from Operating Activities 29,309,851 30,691,755
CASH FLOW FROM INVESTING ACTIVITIES

Purchase of Fixed Assets (578,182) (663,248)
Sale of Fixed Assets 319 368
Investments (Net) (38,958,793) (36,020,822)
Income from Investments 4,592,227 2,711,629
Net Cash Flow from Investing Activities (34,944,429) (33,972,073)
CASH FLOW FROM FINANCING ACTIVITIES
Issue of Shares during the year 5,250,000 4,697,391
Share application money received pending — (287,391)
allotment
5,250,000 4,410,000
Net Cash Flow from Financing Activities
Net Increase in Cash and Cash Equivalents (384,578) 1,129,682

64
Cash and Cash Equivalents as at the beginning 4,493,238 3,363,556
of the year
CASH AND CASH EQUIVALENTS AT THE END 4,108,660 4,493,238

OF THE YEAR

65
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The company has also diverted its funds appropriately in proper channels like purchase of various
fixed assets, which in turn increases the overall productivity of the organization.
The company has paid sufficient amount of dividends to its share holders and has also transferred
reasonable amount of cash to its reserves & surplus account. To meet its capital expenditures the
company has also raised own funds.

67

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STATEMENT THE OF THE PROBLEM

2. OBJECTIVES OF THE STUDY

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HDFC Standard Life Insurance Company Profile

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Andhra Pradesh Assam

Some of the cities in which HDFCSLIC has its branches are:

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Subsidiaries and associate Companies

 HDFC Mutual Fund

 HDFC Standard Life Insurance Company

 HDFC General Insurance

 Other Companies Co-Promoted By HDFC

 Financial Information with regard to Subsidiary Companies

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• Customer service of the highest order

Vision: What we aspire to achieve

Organizational Goals: HDFCSLIC's main goals are to

a). Develop close relationships with individual households,

Values: Values that the company observes while it works:

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o Term Assurance Plan

o Single Premium Whole Life Plan

o Personal Pension Plan

o Endowment Assurance Plan

Facility of HDFC Standard Life Insurance Company Ltd.

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Why do I need Protection Plans?

 HDFC Term Assurance Plan

Why do I need Children’s Plans?

Source: HDFC Standard Life Survey 2008. Inflation assumed as 6% p.a.

Types of Children’s Plans

 HDFC Children’s Plan

 Unit Linked Insurance Plans

 HDFC SL Young Star Super II

Why do I need Health Plans?

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Types of Health Plans

 HDFC Critical Care Plan

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Type Conventional Plans Unit Linked Insurance Plans

Why do I need Retirement Plans?

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GROSS WORKING CAPITAL

2. Net working capital:

3. Negative working capital:

4. Reserve working capital:

5. Permanent working capital:

6. Temporary working capital:

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Need for working capital:

1. Conversion of cash into raw material

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ACCOUNT RECIEVABLES FINISHED GOODS

The following factors determine the amount of working capital.

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3. Length of the Manufacturing Process:

6. Terms of purchases and sales: