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A

PROJECT REPORT
ON

“ W ORKING C APITAL M ANAGEMENT"

DEVELOPED BY,
MISS. UPADHYE PRIYANKA VINAYAK

FROM
MAHINDRA SONA LTD.

SUBMITTED IN THE FULFILMENT


OF THE
M. B. A. (FINANCE),

TO

UNIVERSITY OF PUNE
(2008- 2009)

P. D. V. V. P. FOUNDATION’S
INSTITUTE OF BUSINESS MANAGEMENT
AND RURAL DEVELOPMENT,
AHEMADNAGAR

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DECLAIRATION:

I hereby declare that, all the information in this project report is


based on my own fact-findings and experienced at “Mahindra Sona
Limited.”

And the result embodies in this project report not been submitted
to any other university or institute for the award of degree or diploma.

IBMRD, AHEMADNAGAR.

Date:
Miss. Upadhye Priyanka V.

Place:

2
ACKNOWLEDGEMENT:

To begin with, I am extremely grateful to the Mahindra Sona


Limited, Nashik for having accepted me as summer trainee and thus
making it possible for we have wonderful work experience.

I most indebted to my guide at ‘Mahindra Sona Limited, Nashik’,


Mr. D. N. Mahale (Personnel Manager) and Mr. Shirish Kale (Finance
Executive) under whose constant supervision and valuable guidance the
project was tethered his cheerful countenance and approachability
delicately enamored productivity of work place.

I also extend my gratitude to whole staff of ‘Mahindra Sona


Limited,’ for giving their valuable support and guidance in completion
of project.

I sincerely thanks to my project guide Prof. Dr. M. P. Sharma


(Faculty, Institute of Business Management and Rural Development,
Ahemadnagar.), for his unfailing and valuable guidance from time to
time.

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OBJECT OF THE PROJECT:

For the partial fulfillment of the MBA course a student is


supposed to undergo training in an organization for 50, days which is
mandatory by PUNE UNIVERSITY. While working with the
organization, one has to undertake a small study on the field of work
and subject allotted by the firm. Based on this study one has to submit a
report to the organization, University and College.
Summer project work exposes the real-time corporate
environment to a student to experience the current .And facilitates
student to experience the scenario .The project helps in giving an insight
in the field of FINANCE. To acquire knowledge and information of
financial aspects of the organization, the topic given by the organization
was “working capital management”.

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OBJECTIVE OF THE PROJECT

 TO CALCULATE THE RATIOS IN RELATION TO WORKING

CAPITAL AND ITS TREND ANALYSIS.

 TO FORECAST THE WORKING CAPITAL REQUIREMENT OF

THE YEAR 2008-2009.

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METHODOLOGY OF THE STUDY

RESEARCH

Research is a careful inquiry or examination to discover new information or


relationships and to expand and verify existing knowledge.

The various sources of information can be broadly classified in two categories namely
primary and secondary.

PRIMARY DATA COLLECTION:


The information and data collected is though\rough formal and informal discussion
with the officers of accounts department.

SECONDARY DATA COLLECTION:


During the training period, data was collected from financial reports. For analyzing
working capital management, certain books were also referred.

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INDEX:

7
CONTENT PAGE
NO.

1. COMPANY PROFILE: 9-17


i. INTRODUCTION
ii. HISTORY
iii. PRODUCTS AND APPLICATIONS
iv. MILEESTONES
v. ORGANIZATIONAL CHART
vi. PLANT LAYOUT

2. PROJECT ON WORKING CAPITAL: 18-33


i. WORKING CAPITAL POLICY
ii. TYPES OF WORKING CAPITAL
iii. NEED FOR WORKING CAPITAL
iv. CHARACTERISTICS OF CURRENT
ASSETS
v. CURRENT ASSETS CYCLE
vi. FACTORS INFLUENCING WORKING
CAPITAL
vii. CURRENT ASSET FINANCING POLICY

3. OPERATING CYCLE AND CASH CYCLE: 34-46


i. OPERATING CYCLE ANALYSIS
ii. DURATION OF LIFE CYCLE
iii. MATCHING OR HEDGING APPROACH
iv. CONSERVATIVE APPROACH
v. AGGRESSIVE APPROACH
vi. RATIO ANALYSIS

4. WORKING CAPITAL FINANCING: 47-52


i. INTRODUCTION
ii. TYPES OF FINANCING WORKING
CAPITAL
iii. SOURCES OF FINANCING WORKING
CAPITAL
iv. REGULATION OF BANK FINANCE
v. OTHER FORMS OF FINANCING

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5. DATA ANALYSIS AND INTERPRETATION: 53-62
i. BALANCE SHEET DATA
ii. BALANCE SHEET OF MSL
iii. CURRENT ASSETS
iv. CURRENT LIABILITIES
v. CHANGES IN WORKING CAPITAL
vi. FINANCIAL REPORT
vii. PROFIT AND LOSS ACCOUNT

6. RATIO ANALYSIS: 63-78


i. CURRENT RATIO
ii. LIQUID RATIO
iii. ABSOLUTE LIQUID RATIO
iv. CURRENT ASSET TURN-OVER RATIO
v. WORKING CAPITAL TURN-OVER
RATIO
vi. INVENTORY TURN-OVER RATIO
vii. GROSS PRIFIT RATIO
viii. NET PROFIT RATIO
ix. DEBTORS TURN-OVER RATIO
x. INVESTMENT IN RECEIVABLES
xi. OPERATING CYCLE
xii. GROSS OPERATING CYCLE
xiii. NET OPERATING CYCLE
xiv. CREDITORS TURN OVER RATIO
xv. DEBT-EQUITY RATIO

7. CONCLUSION 79

8. RECOMMENDATIONS 80

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COMPANY
PROFILE

i. INTRODUCTION
ii. HISTORY
iii. PRODUCTS AND APPLICATIONS
iv. MILESTONES
v. ORGANIZATIONAL CHART
vi. PLANT LAYOUT

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COMPANY PROFILE:
‘Mahindra Sona Limited’ was formed in collaboration with Dana
Corporation of USA, over two decades ago through access to
international technology and has since emerged as a leading
independent manufacturer of Automotive Components which include
Propeller Shafts/ Carden Shafts, UJ Components and automotive
Clutches. Progressively, ‘Mahindra Sona Limited’ has expanded its
product range to meet demands of various Automotive Manufacturers.

The facilities contain more than 9300 sq. meters of manufacturing space
strategically located in western India providing easy accessibility to
various vehicle manufacturers and provide ample scope for future
expansion to almost five times the current size. ‘Mahindra Sona
Limited’ has a strong team of 380 motivated employees, of which, 50
are qualified engineers and professionals.

 HISTORY: The Company has long history, which dates back to the
year 1885 when M/s Turner Hoare and company started its activity in
imports and exports of traditional Indian consumer goods.

In 1968, M/s Turner Hoare and company took over another Company,
M/s East Atlantic Company and realistic market potential entered into
execution of engineering projects like Hydro pneumatic ash handling
system, mechanical cleaning like vibroscreen, traveling water screens
and bagged Import Substitution award twice. In 1977, with equity
participation of Dana Corporation, USA, the company went into
technical collaboration to manufacturer automotive components like

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Propeller Shaft, Axle Shafts, Universal Joint Kits, and Automotive
Clutches.

The Nashik plant commenced production in 1979, following a


technical and financial joint venture between Mahindra and Mahindra
Limited and Dana Corporation, USA, Named Mahindra Spicer limited.

In 1984, Mahindra Spicer Limited merged with its parent company,


Mahindra and Mahindra Limited and became MSL division of the
parent company. In March 1995, Mahindra and Mahindra Limited and
Sona Koyo Steering Systems Pvt. Ltd. formed a new company
‘MAHINDRA SONA LIMITED’ to take over the automotive
components business of MSL division of Mahindra and Mahindra
Limited.

The company is engaged in designing and manufacturing a wide range


of auto- ancillary products such as Propeller Shaft, Axle Shafts,
Universal Joint Kits, Automotive Clutches, Steering Joints, Steering
Column Parts, and Clutches. The company is original equipment
supplier to almost all vehicle manufacturers of India and scatters to the
spare parts market through a wide distribution network. The company
also supplies to vehicle manufacturers.

The company has been certified for ISO-9001 in 1995 and


QS-9000 in 1999. The company firmly believes that the high standards
of quality can only be achieved through strong systems and the support
of its people.

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‘Mahindra Sona limited’ manufactures the automotive components for
automotive applications like Passenger cars, Multi-utility vehicles,
Sports utility vehicles, Light Commercial vehicles, Medium
Commercial vehicles, and Heavy Commercial vehicles.

MSL Drive Shafts also cater to wide Industrial Applications like Earth
Moving Equipments, Engine Dynamometer Testing and Radiator Fan
Drives for Railways, Steel Rolling Mills, and Printing Machineries etc.

MSL’s other products include Steering Universal Joints for automotive


applications like Passenger cars, Multi-utility vehicles, Sports utility
vehicles, Light Commercial vehicles, Medium Commercial vehicles,
and Heavy Commercial vehicles.
MSL also manufactures Spindle and Sleeves of Steering Column
intermediate Shafts for the following categories;
o Multi-Utility Vehicles/ Sports Utility Vehicles
o Light Commercial Vehicles
o Medium Commercial Vehicles
o Heavy Commercial Vehicles
Recent addition in ‘Mahindra Sona Limited’ product range is Rubber
Coupling for steering applications for Multi-utility vehicles, Sports
Utility vehicles, and Earth Moving Equipments.

The other product line of ‘Mahindra Sona Limited’ is for the


automotive clutches. This includes the world’s largest Diaphragm type
(DST as well as Ring type) and the conventional lever type for
Passenger cars, Multi-utility vehicles, Sports utility vehicles, Light

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Commercial vehicles, Medium Commercial vehicles, and Heavy
Commercial vehicles.

PRODUCTS AND APPLICATIONS:

PRODUCTS:
o Propeller Shafts
o Universal Joints
o Steering Joints
o Clutch

1. PROPRLLER SHAFTS:
• Applications:
o Heavy Duty Vehicles
o Light Commercial Vehicles
o Passenger Cars
o Three Wheelers
o Earth Moving Equipments
o Constructing Machinery
2. AXLES:
• Applications;
o Multi Utility Vehicles
3. CLUTCHES:
• Applications;
o Multi Utility Vehicles
o Passenger Cars

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ESTONES:

1. 1968: Collaboration agreement between


Mahindra group and Dana Corporation, US for manufacturing the
clutches

2. 1976: Formation of a joint venture


company Mahindra Spicer Ltd.

3. 1979: Inauguration of Nashik work.

4. 1984: Merging of Mahindra Spicer Ltd


with Mahindra and Mahindra Ltd, the division of Mahindra and
Mahindra Ltd.

5. 1986: Dana Collaboration ends.

6. 1989: Modernization plan, redesigning


of entire clutch range.

7. 1994: Formation of Mahindra Sona Ltd.


restructure of Mahindra AND MAHINDAR MSL Division as Mahindra
Sona Ltd.

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8. 1995: ISO-9001 certification by TUV-
CERT, Germany.

9. 1999: QS-9000 certification by TUV-


CERT, Germany.

10. 1999: Exports to USA begins.

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BOARD OF
DIRECTORS

Mr. B. S. Patwardhan
Mr. J. V. Prabhu
Management
Managing Director
Representative

Mr. U. D. Phatak
Mr. J. S. Mr. S. R. Kundaje Mr. R. V.
Vice President
Chaudhary General Manager Vadhavkar
(A & F)
Sr. Vice President (Technical Series) General Manager
Company
(Marketing) (Materials)
Secretary

Purchase, SOA,
Product Suppliers, QS
Marketing (OEM Production- engineering, UJ Development,
after Marketing and Clutch Customer
Customers) Universal process, Product Schedule Liaison,
Branch Offices, Joints, Testing, R and D, Material
CAD, QA, Quality Scheduling, OSP
New Business A/C, Finance, Clutch, Tool System, CIP, Schedule, Plant
Opportunities, Costing, MIS Room, Industries Job Ordering,
Customer Maintenance Engineering, Packing, Dispatch,
Satisfaction, Capital Sales
Publicity, Brand and Shop Expenditure, Info Administration,
Management Scheduling systems, HR, RM Stores,
Administration Material
Documentation.

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Finance
Department

Mr. A. D. Kale Mr. R. M.


D. G. M. Sawai
Accounting D. G. M.
and Costing and
Finance MIS

Sales and
Cash and Purchase Purchase and Sales accounts
Exports
Bank Receivables Sales Accounts costing
activities

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BUILT UP AREA INLUSIVE YARDS: 9450 Sq. M.
PLANT LAYOUT

LAND AREA: 45165 Sq. M.


INTRODUCTION:

The topic was provided by the project guide in the organization. The
organization wanted to know how efficiently the working capital management
is working. The various ratios relating to the working capital shows the
efficient management of current asset and current liabilities is done.
YARD

VACANT
STORES

LAND

OBJECTIVE OF PROJECT:
ETP

Main object is to match theoretical aspect with practical experience. The


project forms a vital element in the curriculum of M.B.A. Under M.B.A.
UTILITIES

curriculum, University of Pune each student has to carry out the project in an
CANTEEN

organization and submit the project in the University.


XPORT

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STORA

PLANT
MAIN
During the past decade there has been a burst in each and every business in

GATE
India. Competition has increased considerable within this decade. This has
forced the organization to reduce the cost rather than increasing its market

C
E
F
F
I
price for its product. Cost reduction can be achieved by various method like,
proper inventory management, managing debtors and creditors and other
current assets and liabilities, value engineering etc. To achieve all the things
effective and efficient working of capital is necessary.
N

ROAD
M

C
I

WORKING CAPITAL
POLICY
i. WORKING CAPITAL POLICY
ii. TYPES OF WORKING CAPITAL
iii. NEED FOR WORKING CAPITAL
iv. CHARACTERISTICS OF CURRENT ASSETS
v. CURRENT ASSETS CYCLE
vi. FACTORS INFLUENCING WORKING CAPITAL
vii. CURRENT ASSET FINANCING POLICY
viii. THEORY OF RATIO ANALYSIS

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PROJECT ON WORKING CAPITAL

WORKING CAPITAL POLICY:


Working capital management provides a summarized view of the
position of the current assets and current liabilities and how to manage
them and have an efficient and effective and optimum working capital.
For day to day working of the concern is known as working capital and
to fulfill this need, working capital management is necessary.

This introduces working capital management or short term


financial management which is concerned with decisions relating to
current assets and current liabilities.

The key difference between long term financial management and


working capital management is in terms of the timing of cash. While
long term financial decisions like buying capital equipment or issuing
debentures involve cash flows over an extended period of time( 5 to 15
years or even more), short term financial decisions typically involves
cash flows within a year or within the operating cycle of the firm.

There are two concepts of working capital: gross working capital


and net working capital. Gross working capital is the total of all current
assets. Net working capital is difference between current assets and
current liabilities. Management of working capital refers to the
management of current assets as well as current liabilities. The major
thrust, of course, is on the management of current assets. This is

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understandable because current liabilities arise in the context of current
assets.

Working capital management is a significant facet of financial


management. Its importance stems from two reasons;
An investment in current assets represents a substantial portion of the
total investment.

Investment in current assets and the level of current liabilities


have to be geared quickly to change in sales. To be sure, fixed asset
investment and long term financing are also responsive to variation in
sales. However, this relationship is not as close and direct as it is in the
working capital components.

The importance of working capital management is reflected in


the fact that financial managers spend a great deal of time in managing
current assets and current liabilities. Arranging short term financing,
negotiating favorable credit terms, controlling the movement of cash,
administering accounts receivable, and investing short term surplus
funds consume a great deal of time of financial managers.

TYPES OF WORKING CAPITAL:


There are two types of working capital:
o Fixed working capital
o Variable working capital

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o Fixed working capital :
To carry on business a certain minimum level of working capital is
necessary on a continuous and uninterrupted basis and for all practical
purpose this requirement will have to be met with long term sources.
This requirement is referred to as permanent or fixed working capital.
Variable working capital :
Any amount over and above the permanent level of working capital is
known as temporary, fluctuating or variable working capital. This
portion of the working capital is needed to meet fluctuations in demand
consequent upon changes in production as a result of seasonal changes.

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KINDS OF
WORKING
CAPITAL

ON THE ON THE
BASIS OF BASIS OF
CONCEPT TIME

GROSS FIXED VARIABLE


NET WORKING
WORKING WORKING WORKING
CAPITAL
CAPITAL CAPITAL CAPITAL

SEASONAL
REGULAR RESERVE SPECIAL
WORKING
WORKING WORKING WORKING
CAPITAL CAPITAL CAPITAL
CAPITAL

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 NEED FOR WORKING CAPITAL:
The objective of financial decision making to maximize the
shareholder’s wealth, it is necessary to generate sufficient profit. The
extent to which profits can be earned will naturally depend upon sales.
However, sales can not be easily converted into cash. Therefore, a need
for working capital in the form of current assets to deal with the
problem arising out the lack of immediate realization of cash again good
sold.
Of technically, this is referred to as the operating or cash cycle. This
cycle consists three phases;

PHASE 1-
Conversion of cash into inventory i.e. purchase of raw material,
conversion of raw material, conversion of raw material into work-in-
progress and finished goods.

PHASE 2-
Conversion of inventory in to receivables i.e. allowing customers credit
sales.

PHASE 3-
Conversion of receivables into cash i.e. receivables are collected.

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Working capital policy is divided into seven sections;

 Characteristics of current assets: There are mainly two characteristics


of current assets;
o Short life span and
o Swift transformation into other asset forms.

 Factors influencing working capital requirements: The working


capital needs of a firm are influenced by numerous factors. The
important ones are;
o Nature of business
o Seasonality of operations
o Production policy
o Market conditions
o Condition of supply

 Level of current assets: An important working capital


policy decision is concerned with the level of investment in current
assets. Under the flexible policy (also referred to as a ‘conservative
policy’), the investment in current assets is high. This means that the
firm maintains a huge balance of cash and marketable securities, carries
large amount of inventories, and grants generous terms of credit to
customers which leads to a high level of debtors. Under a restrictive
policy (also referred to as an ‘aggressive policy’), the investment in
current assets is low. This means a firm keeps a small balance of cash
and marketable securities, manages with small amount of inventories,
and offers stiff terms of credit which leads to low level of debtors.

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 Current assets financing policy: The investment in
current assets may be broken into two parts: Permanent Current Assets
and Temporary Current Assets. The former represents what the firm
requires even at the bottom of its
Cycle; the latter reflects the variable component that moves in line with
seasonal fluctuations.

 Profit criterion for current assets: Current assets can be easily


liquidated and the value realized on liquidation would be more or less
equal to the amount invested initially. Put differently, investment in
current assets is reversible. For reversible investments, the criterion for
net profit per period (which here means residual income) is equivalent
to the criterion of net present value.

 Operating cycle analysis: The investment in working capital is


influenced by four keys events in the production and sales cycle of the
firm:
o Purchase of raw materials
o Payment for raw materials
o Sale of finished goods
o Collection if cash for sales

 Cash requirement for working capital: A financial manager is always


interested in figuring out how much cash he/she should be arrange to

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meet the working capital needs of his/her firm. There is a two step
procedure for this:

o Estimate the cash cost of various current assets required by firm.


o Deduct the spontaneous current liabilities from the cash cost of
current assets.

A. CONSTITUENTS OF CURRENT ASSETS:


 Inventories
o Raw materials and components
o Work-in-progress
o Finished goods
o Others
 Trade debtors
 Loans and advances
 Cash and bank balances

B. CONSTITUENTS OF CURRENT LIABILITIES:


 Sundry creditors
 Trade advances
 Borrowings (short-term)
o Commercial banks
o Others
 Provisions

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 CHARACTORISTICS OF CURRENT ASSETS:
While managing working capital, bear in mind two
characteristics of current assets;
i) Short life span
ii) Swift transformation into other asset forms.

Current assets have a short life span. Cash balances may be held idle for
a week or two, accounts receivables may have a lifespan of 30 to 60 days, and
inventories may be held for 2 to 60 days. The lifespan of current assets
depends upon the time required in the activities of procurement, production,
sales and collection and the degree of synchronization among them.
Each current asset is swiftly transformed into other asset forms: cash is
used for acquiring raw materials; raw materials are transformed into finished
goods (this transformation may involve several stages of work in process);
finished goods, generally sold on credit, are converted into accounts receivable
(bank debt); and finally, accounts receivable, on realization, generate cash.
The short lifespan of working capital components and their swift
transformation from one form into another has certain implications;
• Decisions relating to working capital management
are repetitive of frequent.

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• The difference between profit and present value is
insignificant,
• The close interaction among working capital
components implies that efficient management of other
components. For example, if the firm has a large accumulation of
the finished good inventory, it may have to provide more liberal
credit terms or show laxity in credit collection. Another example;
if the firm has a crunch it may have to offer generous discounts.

Finished
Goods

Accounts Work in
Receivable Process

Wages, salaries,
Factory overheads

Raw materials

Cash Suppliers

CURRENT ASSET CYCLE

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FACTORS INFLUENCING WORKING CAPITAL REQUIREMENTS:
The working capital needs of a firm are influenced by numerous
factors. The important ones are;
 Nature of business
 Seasonality of operations
 Production policy
 Market conditions
 Conditions of supply
 Credit Policy
 Inventory Policy
 Abnormal Factors
 Business Cycle
 Growth And Expansion
 Level Of Taxes
 Dividend Policy
 Price Level Changes
 Operating Efficiency

Few of them are given bellow;

a. Nature of business: The working capital requirement of a firm is


closely related to the nature of its business. A service firm, like an
electricity undertaking or a transport corporation, which has a short
operating cycle and which sales prominently on cash basis, has a modest
working capital requirement. On the other hand, a manufacturing
concern likes a machine tools unit, which has a long operating cycle and

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which sales largely on credit have a very substantial working capital
requirement.

b. Seasonality of operations: Firms which have marked seasonality in


their operations usually have highly fluctuating working capital
requirements. To illustrate, consider a firm manufacturing ceiling fans.
The sale of ceiling fan reaches a peak during summer months and drops
sharply during winter period. The working capital requirements of such
a firm are likely to increase considerably in summer months and
decrease significantly during winter period. On the other hand, a firm
manufacturing product like lamps, which have fairly even sales round
the year, tends to have stable working capital

c. Production Policy: A firm marked by pronounced seasonal


fluctuations in its sales may pursue a production policy which may
reduce the sharp variations in working capital requirements. For
example, a manufacturer of ceiling fans may maintain a steady
production throughout the year, rather than intensify the production
activity during the peak business season. Such a production policy may
dampen the fluctuations in working capital requirements.

d. Market Conditions: The degree of competition prevailing in the


market place has an important bearing on working capital needs. When
competition is keen, a larger inventory of finished goods is required to
promptly serve customers who may not be inclined to wait because
other manufacturers are ready to meet their needs. Further, general
credit terms may have to be offered to attract customers in a highly
competitive market. Thus, working capital requirements tend to be high

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because of greater investments in finished goods, inventory and
accounts receivable.
If the market is strong and the competition is weak, a firm can
manage with a smaller inventory of finished goods because customers
can be served with some delay. Further, in such a situation the firm can
insist on cash payment and avoid lock-up of funds in accounts
receivable- it can even ask for advance payment, partial or total.

e. Conditions of Supply: The inventory of raw materials, spares and


stores depends on the conditions of supply. If the supply is prompt and
adequate, the firm can manage with small inventory. However, if the
supply is unpredictable and scant, then the firm, to ensure continuity of
production, would have to acquire stocks as and when they are available
and carry larger inventory, on an average. A similar policy may have to
be followed when the raw material is available seasonally and
production operations are carried out round the year.

CURRENT ASSETS FINANCING POLICY:


After establishing the level of current assets, the firm must determine
how these should be financed. What mix of long term capital and short
term debt should the firm employ to support its current assets?

For the sake of simplicity, assets are divided into two classes, viz. fixed
assets and current assets. Fixed assets are assumed to grow at a
constant rate which reflects the secular growth in sales. Current assets,
too, are expected to display the same long-term rate of growth; however,
they exhibit substantial variations around the trend line, thanks to
seasonal (or even cyclical) patterns in sales and/or purchases.

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The investment in current assets may be broken into two parts:
Permanent Current Assets and Temporary Current Assets. The former
represents what the firm requires even at the bottom of its sales cycle;
the latter reflects the variable component that moves in line with
seasonal fluctuations.
Several strategies are available to a firm for financing its capital
requirements. These strategies are illustrated by lines A, B and C in
following diagram.

STRATAGY A: Long-term financing is used to meet fixed asset as


well as peak working capital requirements. When the working capital
requirements are less than its peak level, the surplus is invested in liquid
assets (cash and marketable securities).

STRATEGY B: Long-term financing is used to meet fixed asset


requirements, permanent working capital requirements, and a portion of
fluctuating working capital requirements. During seasonal upswings,
short-term financing is used; during seasonal downswings, surplus is
invested in liquid assets.

STRATEGY C: Long-term financing is used to meet fixed asset


requirements and permanent working capital requirements. Short-term
financing is used meet fluctuating working capital requirements.

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Fluctuating Current
Fluctuating Current
Asset fluctuating
Asset Requirements
requirement
A

C
Requirements
Capital

Permanent Current
Asset Requirements

Fixed Asset
Requirement

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Time
CAPITAL REQUIREMENTS AND THEIR FINANCING

OPERATING
CYCLE
AND
CASH CYCLE
i. OPERATING CYCLE ANALYSIS
ii. DURATION OF LIFE CYCLE
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iii. MATCHING OR HEDGING APPROACH
iv. CONSERVATIVE APPROACH
v. AGGRESSIVE APPROACH
OPERATING CYCLE AND CASH CYCLE:
The investment in working capital is influenced by four keys events in
the production and sales cycle of the firm:
• Purchase of raw materials
• Payment for raw materials
• Sale of finished goods
• Collection if cash for sales

The firm begins with the purchase of raw materials which are
paid for after a delay which represents the accounts payable period. The
firms convert the raw material into finished goods and then sell the
same. The time lag between the purchase of raw materials and the sell
of finished goods is the inventory period. Customers pay their bills
sometimes after the sales. The period that elapses between the date of

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sale and the date of collection of receivables is the accounts receivable
period (debtor’s period).

The time that elapses between the purchase of raw materials and
the collection of cash for sales is referred to as the operating cycle,
whereas the time length between the payments for raw material
purchases and the collection of cash for sales is referred to as the cash
cycle. The operating cycle is the sum of inventory period and the
accounts receivable period, whereas the cash cycle is equal to the
operating cycle less the accounts receivable period.

From the financial statement of the firm, we can estimate the


inventory period, the accounts receivable period, and the accounts
payable period.

Stock arrives Cash


Order placed Received
Inventory Accounts Receivable
Period Period

Accounts Payable
Period
Firm Receives Cash Paid For
invoice Materials

Operating Cycle

Cash Cycle

OPERATING AND CASH CYCLE

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OPERATING CYCLE ANALYSIS:

The Concept of Operating Cycle:


The net working capital is the difference between current assets
and current liabilities. A firm acquires current assets to convert them
into cash so that the current liabilities can be satisfied. On the other
hand, fixed assets such as land and building, plant and machinery etc.
are acquired with long term objective. The amount of capital invested in
fixed assets is recovered after a long period of time. On the other hand,
amount blocked in current assets is expected to recover as early as
possible. The concept of operating cycle is based on this aspect.

Operating cycle:
The concept of operating cycle implies the time period that is
required from the time cash is put on the business along with other
inputs to the time it is recovered from the amount of sales made by the
firm. A firm puts cash on as an input and the inputs like raw materials
are purchased with the cash. The raw materials are converted into
finished product and for this additional cash may be required. The
finished product is converted into sale and if the sale is made for cash,
the operating cycle is complete as cash is recovered back. On the other
hand, if sales are on credit, sales are converted into debtors and debtors
are converted into cash.

The length of operating cycle depends upon several factors.


These factors are as follows;

40
(i) Length of the manufacturing process: If the manufacturing
process is quite lengthy, the operating cycle will be prolonged. On the
other hand, if the manufacturing process is of shorter duration, the
length of the operating cycle will also be of a shorter duration. For
example, in case of hotels and restaurants, the manufacturing process is
relatively short which reduces the duration of the operating cycle. In
case of heavy engineering industries, since the manufacturing process
itself is very lengthy, the operating cycle also becomes very long.

(ii) Holding period of inventories: On an average for how long firm


holds inventory is also one of the factors affecting operating cycle. If the
firm holds inventory of raw material for a longer duration due to safety
precautions, operating cycle is prolonged. Firms following hand to
mouth policies regarding inventories of raw materials will have a
shorter operating cycle. Similarly in case of work-in-process, if the time
duration is long before being converted into finished product, operating
cycle will be of longer period. In case of finished goods inventory also,
the same principle exists. If finished goods are quickly converted into
sales, operating cycle will be shorter. But if finished goods inventory is
not converted into sales quickly and liberal credit is extended to the
customers, operating cycle becomes lengthy.
The operating cycle of a firm begins with the acquisition of raw material
and ends with the collection of receivables. It may be divided into four
stages.

o Raw material and stores storage stage


o Work in progress stage
o Finished goods inventory stage

41
o Debtor’s collection stage

DURATION OF LIFE CYCLE:


The duration of life cycle is equal to the sum of duration of each of
these stages less the credit period allowed by the suppliers of the firm.

O=R+W+F+D-C

Where O = duration of operating cycle


R = raw material and stores storage period
W= work - in - progress period
F = finished goods storage period
D = debtors collection period
C = creditors payment
The components of operating cycle may be calculated as follows;
Average stock of Raw material
R = ---------------------------------------------------------------------------
Average raw material and stores consumption per day

Average work-in-progress inventory


W = ---------------------------------------------------------------------------
Average cost of production per day

Average finished goods inventory


F = -----------------------------------------------------------------------------
Average cost of goods sold per day

42
Average book debts
D = -----------------------------------------------------------------------------
Average credit sales per day

Average trade creditors


C = -----------------------------------------------------------------------------
Average credit purchase per day

MATCHING APPROACH OR HEDGING APPROACH:


In matching approach or hedging approach for financing in which the
expected life of assets is matched with the sources of funds rose to
finance assets. The more explanation of the exact matching approach is
the purpose of financing is to make payments of assets, the financing
should be relinquished when the asset is expected to be relinquished,
and long term finance for the short term is expensive or costly because
funds will not be utilized for full period.
Similarly financing long term assets with a short term financing will
have to be made on a continuing basis. In this way, when a company
follows matching approach, long term financing will be used to finance
fixed assets and permanent current assets. Short term financing is used
to finance temporary current assets.

CONSERVATIVE APPROACH:
The financing policy of a company is conservative when it depends
more on long term funds for financing needs.
In this approach, company finances permanent assets with long term
financing. In this way company has no temporary assets, company

43
stores liquidity by investing surplus funds into marketable securities.
This plan mainly depends upon long term financing and so less risky.

AGGRESSIVE APPROACH:
While financing assets, company may select aggressive approach when
a company uses more short term financing than warranted by matching
approach. In this policy, company finances a part of its permanent
current assets are also financed by short term finance. The relatively
more used of short term financing makes this aggressive approach more
risky.

 RATIO ANALYSIS:
A ratio is simple arithmetical expression of the relationship of one
number to another. It may be defined as the indicated quotient of the
two mathematical expressions.
A ratio is defined as, “The indicated quotient of two
mathematical expressions.” And as, “The relationship between two or
more things.” Ratio analysis is powerful tool of financial analysis.
Ratio analysis is a technique of analysis and interpretation of
financial statements. It is a process of establishing and interpreting
various ratios for helping in making certain decisions.

CLASSIFICATION OF RATIOS (ACCORDING TO TEST):


Various ratios have been classified as bellow;
a) LIQUIDITY RATIO: These are the ratios which measure short
term solvency for financial position of a firm.

44
b) LONG TERM SOLVANCY AND LIQUIDITY RATIO: Long
term solvency ratios convey the firm’s ability to meet the
interest costs and repayment schedules of its long term
obligations. E.g. Debt-equity ratio and Interest coverage ratio.
c) ACTIVITY RATIO: These are calculated to measure the
efficiency with which the resources of a firm have been
employed.
d) PROFITABILITY RATIOS: These ratios measure the results
of business operations or overall performance and effectiveness
of a firm.

 LIQUIDITY RATIO:
Liquidity refers to the ability of a concern to meet its current obligations
as and when it becomes due. These should be convertible into cash for
paying obligations of short term nature. If current assets can pay off
current liabilities, then liquidity position will be satisfactory. On the
other hand, if current liabilities may not be easily met out of current
assets then liquidity position will be bad. To measure liquidity of a firm,
the following ratios can be calculated;
i. Current Ratio
ii. Quick or Acid Test or Liquid Ratio
iii. Absolute Liquid Ratio or Cash Position ratio

A. CURRENT RATIO:
Current ratio may be defined as the relationship between current assets
and current liabilities. This ratio is also known as the Working Capital

45
Ratio, which is a measure of general liquidity and is most widely used
to make the analysis of short term financial position or liquidity of a
firm.

Current Assets
Current Ratio = --------------------------------------
Current liabilities

OR

Current Assets: Current Liabilities

B. LIQUID RATIO:
Liquid ratio or quick or acid test ratio may be defined as the relationship
between liquid assets and current or liquid liabilities. An asset is said to
be liquid if it can be converted into cash within a short period without
loss of value. In that sense, cash in hand and cash at bank are the most
liquid assets.
Liquid Assets
Liquid Ratio = --------------------------------
Liquid Liabilities

C. ABSOLUTE LIQUID RATIO:


The ratio should be calculated together with current ratio and acid test
ratio so as to exclude even receivables from the current assets and find
out the absolute liquid assets.

46
Absolute Liquid Assets
Absolute Liquid Ratio = -----------------------------------
Current Liabilities
D. CURRENT ASSET TURNOVER RATIO:
Funds are invested in various assets in business to make sales and earn
profit. The efficiency with which assets are managed directly affects the
volume of sales. The better the management of assets, the larger is the
amount of sales or profits. Activity ratios measure the efficiency or
effectiveness with which a firm manages its resources or assets. These
ratios are called as “Turn-over ratios” because they indicate speed with
which assets are converted into sales.

Current Assets Sales


Turnover Ratio = ----------------------
Current Assets

E. WORKING CAPITAL TURNOVER RATIO:


Working capital turnover ratio indicates the velocity of the utilization of
net working capital. This ratio indicates the number of times the
working capital is turned over in the course of a year.
A higher ratio indicates efficient utilization of working capital and a low
ratio indicates otherwise.

Working Capital Cost of Sales


Turnover Ratio = ---------------------------------

47
Average Working Capital

F. INVENTORY TURNOVER RATIO:


This is also known as Stock Velocity. It indicates whether inventory has
been efficiently used or not. The purpose is to see whether only required
minimum funds have been locked up in inventory. The ratio indicates
number of times the stock has been turned over during the period and
evaluates the efficiency with which a firm is able to manage its
inventory.

Inventory Sales
Turnover Ratio = ----------------------
Inventory

G. GROSS PROFIT RATIO:


Gross profit ratio measures the relationship of gross profit and net sales
and is usually represented as a percentage.

Gross Profit
Gross Profit Ratio = ---------------------- Î100
Net Sales

H. NET PROFIT RATIO:

48
Net profit ratio establishes a relationship between net profit (after taxes)
and sales, and indicates the efficiency of the management in
manufacturing, selling, administrative and other activities of the firm.

Net Profit after Tax


Net Profit Ratio = -------------------------- Î 100
Net Sales

I. DEBTORS TURNOVER RATIO:


Debtor’s velocity indicates the velocity of debt collection of firm. In
simple words, it indicates the number of times average debtors
(Receivables) are turned over during the year.

Net Credit Sales


Debtors Turnover Ratio = -------------------------------
Average Trade Debtors

= No. of Times

J. CREDITORS TURNOVER RATIO:


A firm has to make credit purchases and incur short term liabilities. A
supplier of goods, i.e., creditor, is naturally interested in finding out how
much time the firm is likely to take in repaying its trade creditors.

Net Purchases
Creditors Turnover Ratio = -------------------------------

49
Average Trade Creditors

K. DEBT-EQUITY RATIO:
Debt-equity ratio, also known as “External- Internal Equity Ratio” is
calculated to measure the relative claims of outsiders and the owners (i.
e. shareholders) against the firm’s asset. The ratio indicates the
relationship between the outsider’s funds and the shareholders funds.

Outsider’s funds
Debt-Equity Ratio = ---------------------------
Shareholders funds

50
WORKING capital
financing
i. INTRODUCTION
ii. TYPES OF FINANCING WORKING CAPITAL
iii. SOURCES OF FINANCING WORKING CAPITAL
iv. REGULATION OF BANK FINANCE
v. OTHER FORMS OF FINANCING

51
WORKING CAPITAL FINANCING:

INTRODUCTION:
The investment in raw materials, stock-in-progress, finished goods, and
receivables (the principal constituents of current assets) often varies a great
deal during the course of the year. Hence, the financial manager generally
spends a good chunk of his time in finding money to finance current assets.

 TYPES OF FINANCING WORKING CAPITAL:


The firm must find out the sources of finds to finance its working capital.
There are three different financial policies which are as follows;

• Long Term Financing: The sources of long term


financing
Are;
o Shares (Equity shares and preference shares)
o Debentures
o Retained earnings and
o Long term loan from financial institution

• Short Term Financing: The sources of short-term financing are short


term credit, which the firm arranges. These sources include.
o Short term bank credit or loans
o Commercial papers
o Factoring receivable and
o Public deposit

52
• Spontaneous Financing: Spontaneous financing refers to the automatic
sources of short term funds.
E.g. Trade credit and outstanding expenses. The main features of these
sources are that they are cost free.
Normally permanent working capital is financed by long term sources where
as temporary working capital is financed by short term sources.
While taking the decision of financing working capital requirement, certain
factors are to be taken into consideration;
i. cost of financing
ii. flexibility

o Cost of Financing: The interest rates increased with the time.


Longer the maturity of debit greater the interest rate. The decision of the
company is guided by risk-return trade off.

o Flexibility: Short term funds are more flexible. Short term funds can
be easily refunded as compared to long term funds, because long term
funds can not be refunded before its maturity period. Financing for the
domestic order is majority met by letter of credit. In case of any shortage
company uses the surplus into various activities such as;
a) short term investments
b) Inter corporate deposit – In case any sister factory is in need of
funds, the surplus fund is used as given to the sister concern.
c) Paying for Overdrafts

Typically, current assets are supported by a combination of long-term and


short-term sources of finance. Long-term sources of finance primarily support
fixed assets and secondarily provide the margin money for working capital.
Short-term sources of finance, more or less exclusively support the current
assets.

53
 CASH FLOW STATEMENT:
Cash flow statements indicate movement of cash only. The preparation
of cash flow statement is important to understand the paradoxical
situation in which the firm finds difficulty in honoring its short period
business
Indicated by the funds flow statement (working capital basis).

 FUNDS FLOW STATEMENT:


The funds flow statement reveals the sources from which the funds are
made available and how they are utilized or applied. Difference between
cash flow and funds flow statement is given bellow;

54
 DIFFERENCE BETWEEN FUNDS FLOW AND CASH
FLOW STATEMENT:

FUND FLOW STATEMENT CASH FLOW STATEMENT


The term fund refers to working The term cash refers to only cash
capital and it shows changes in and it shows change in cash
working capital. position of the business.
This analysis is more useful in long This is more useful in short term
term planning. planning.
This considers changes in all current This indicates simply cash receipt
assets and current liabilities. and cash payments and does not
take into consideration other current
assets.

Improvement in working capital Improvement in cash position


does not mean improvement in cash results in improvement in working
position. capital.
This is a test of effective use of This is the test of effective control
working capital by the management of flow of cash by the management
in a particular period of time. in a particular period of time.
This explains in brief the changes This explains the movement of cash
occurred in the items in two balance and all those dealings which affects
sheets. the cash position of the concern.

55
INVENTORY MANAGEMENT:

INTRODUCTION:
There are three types of inventories: raw materials, work in progress,
and finished goods.
a. Raw materials are materials and components that are inputs in
making the final product.
b. Work-in-process also called stock-in-process refers to goods in
the intermediate stages of production.
c. Finished goods consist of final products that are ready for sale.

While manufacturing firms generally hold all the three types of


inventories, distribution firms hold mostly finished goods.

Inventories represent the second largest asset category for


manufacturing companies, next only to plant and equipment. The
proportion of inventories to total assets generally varies between 15 and
30 percent. Given substantial investment in inventories, the importance
of inventory management can not be emphasized.
o

REGULATION OF BANK FINANCE:


The regulation of bank finance by central bank of India to our company is
CMA data (Current Monitoring Analysis) bank before giving finance to the
company sees and analyze the earning capacity of the company. The money
that the bank will be giving where the company is going to invest and for what
purpose. Whether the money is put into the manufacture process or not bank
needs to know the financial condition of a firm and its credit worthiness.

56
DATA ANALYSIS
AND
INTERPRETATION
i. BALANCE SHEET OF MSL
ii. CURRENT ASSETS
iii. CURRENT LIABILITIES
iv. CHANGES IN WORKING CAPITAL
v. FINANCIAL REPORT

57
DATA ANALYSIS AND INTERPRETATION:

BALANCE SHEET OF MAHINDRA SONA LTD.


Schedule 2003-2004` 2004-2005 2005-2006 2006-2007
Sources of funds :-
Share Capital I 39600000 39600000 39600000 39600000
Reserve & Surplus II 130763392.2 189700080.3 265042678.5 363683646

Loan Funds:-
Secured Loan III 68886274.5 81342342.9 96630797.7 67521776.4
Unsecured Loan IV 15262110 15262110 15262110 15262110

Deferred tax liability(Net) V 3394386

Total 257906162.7 325904533.2 416535586.2 486067532.4

Application of funds :-
Fixed Asset
Gross Block VI 235246054.5 276634041.3 326875086 342719935.2
Less: Depreciation/ Amortization VII 147383485.2 167001049.8 182503653.3 197105247
Net Block VIII 87862569.3 109632991.5 144371432.7 145614688.2
Capital WIP & Capital advance IX 9909356.4 17384400 234702 1606675.5

Investment 1021410 1021410


Deferred tax Asset(Net) X 1257219 7207127.1 12316295.7

Current Asset loans & advances


Inventories XI 96845011.2 152829979.2 116907812.1 122664522.6
Sundry debtors XII 222813224.1 324030586.5 320144611.5 360091789.2
Cash & Bank balance XIII 35200474.2 10243058.4 50582646 73017614.7
Loans & Advances XIV 23957856.9 41913249.3 38010249 34831211.4

Less:-
Current liabilities XV 175436987.4 254001050.1 185920966.8 184014939.6
Provisions XVI 43245342 77385900.6 76023437.4 81081735.3

Net current asset XVII 160134237 197629922.7 263700914.4 325508463

Total 257906162.7 325904533.2 416535586.2 486067532.4

Net Current Asset 378816566.4 529016873.4 526666728.6 591626547.9

Working capital leverage 1.111135256 1.271572286 1.073679094

58
CURRENT ASSET
2003-2004 2004-2005 2005-2006 2006-2007
Investment (At cost, Unless otherwise specified)
Unquoted:- 1021410 1021410
Shares (Non-trade & fully
paid up )

Inventories
Stores & Spares 2799252.9 3824108.1 2588202 2404312.2
Tools 7104163.5 8571260.7 10014266.7 9406374.3
Raw Material 18819824.4 27509949 29815432.2 33502496.4
WIP 56680064.1 89319083.4 66041937 64072076.4
FG 11441706.3 23605578 8447974.2 13279263.3
Total 96845011.2 152829979.2 116907812.1 122664522.6

Sundry debtors
Outstanding over six months
Considered Good 656801.1 2990799 2532024 2043717.3
Considered doubtful 724526.1 724526.1 724526.1 724526.1

Other debt consider good 222156423 321039787.5 317612587.5 358048071.9

Less:-
Provision for doubtful debts 724526.1 724526.1 724526.1 724526.1

Total 222813224.1 324030586.5 320144611.5 360091789.2

Loans & Advances


Advances recoverable in cash or
in kind
or for value to be received 22631033.7 37345631.4 32713847.1 27823066.2
consider good

Balance with customs port trust 1326823.2 4567617.9 2142961.2 2523188.7

59
Excise, etc

VAT recoverable 3087153.9 3811758.3

Fringe benefit tax ( Net of 606911.4


provision)

Income tax ( Net of provision) 66286.8 66286.8

Total 23957856.9 41913249.3 38010249 34831211.4

Cash & Bank balance


Cheque on hand 1821519 1261197.9

Balance with schedule bank in 32573086.2 9490284.9 48390798.6 15967837.8


current A/c.

In fixed deposit 697680 607680 45119057.4

Cash on hand 1665

Remittance on transit 11598525

As margin money 805869 55093.5 322969.5 330529.5

Total 35200474.2 10243058.4 50582646 73017614.7

Net Current Asset 378816566.4 529016873.4 526666728.6 591626547.9

60
Year CA
378816206.
2004 4
529016873.
2005 4
526600441.
2006 8
590726547.
2007 9

Change in CA

7
6
5
4
Current Assets

3
2
1
0

2004 2005 2006 2007


Year

INTERPRETATION:
The CA has Shown an increasing trend in the year 2005-2006 as compared to
2004-2005.whereas in the year 2006-2007 there has been a negligible decrease
in CA.

61
CURRENT LIABILITIES
2003-2004 2004-2005 2005-2006 2006-2007
Acceptances 8309551.5 3502710.9

sundry creditors[note20 ii]


i]total outstanding dues of
small scale industries undertakings 47729880 32807356.2 18638133.3 23411069.1

ii]total outstanding dues of creditors


other than small scale industrial
undertaking 106150972.5 202512098.7 145110034.8 135508625.1
Total 153880852.5 235319454.9 163748168.1 158919694.2
advances from customers 7059273.3 8093942.1 8353999.8 7266978

VAT payable 5227652.7 6718377.6

Other liabilities 5673644.1 6832030.5 8231236.2 10780084.8

Interest accrued but not due on


lone 513666 252911.7 359910 329805

Total 175436987.4 254001050.1 185920966.8 184014939.6

Provisions
2003-2004 2004-2005 2005-2006 2006-2007
Provision for warranties [note 7] 4714534.8 4569586.2 4242493.8 3882312

Provision for income tax [net of


payment] 8228560.5 22597056.9 14907864.6 14643873

Provision for fringe benefit tax 57600

Provision for wealth tax 27000 29700 37800

Provision for encashable leave on


separation 4616100 6066900

Provision for gratuity 3322271.7 12780000

Provision for employee benefit 18396864 16225530.3

Proposed dividend 19800000 27720000 33660000 39600000

Tax on proposed dividend 2536875 3622657.5 4720815 6730020

62
TOTAL 43245342 77385900.6 76023437.4 81081735.3
Net Current Liabilities 218682329.4 331386950.7 261944404.2 265096674.9

63
Year CL
218682329.
2004 4
331386950.
2005 7
261944404.
2006 2
265096674.
2007 9

3.5 Changes in CL
3

2.5
2
Current Liabilities
1.5
1

0.5
0
2004 2005 2006 2007

Year

INTERPRETATION:
The Current Liabilities has Shown an increasing trend in the year 2005-2006
as compared to 2004-2005.whereas in the year 2006-2007 there has been a
negligible increase in Current Liabilities.

64
TRENDS:- WORKING CAPITAL CHANGE
YEAR CHANGES IN YEAR CURRENT ASSET YEAR CURRNNT
WORKING LIABILITIES
CAPITAL
2003-2004 160134237 2003-2004 378816566.4 2003-2004 218682329.4
2004-2005 197629922.7 2004-2005 529016873.4 2004-2005 331386950.7
2005-2006 264722324.4 2005-2006 526666728.6 2005-2006 261944404.2
2006-2007 326529873 2006-2007 591626547.9 2006-2007 265096674.9

YEAR CHANGES IN YEAR CURRENT ASSET YEAR CURRENT


WORKING LIABILITIES
CAPITAL
2003-2004 160.13 2003-2004 378.81 2003-2004 218.68
2004-2005 197.62 2004-2005 529.01 2004-2005 331.39
2005-2006 264.72 2005-2006 526.67 2005-2006 261.95
2006-2007 326.52 2006-2007 591.63 2006-2007 265.11

65
Year CA CL Working
Capital
2004 378816206.4 218682329.4 160133877
2005 529016873.4 331386950.7 197629922.7
2006 526600441.8 261944404.2 264656037.6
2007 590726547.9 265096674.9 325629873

Changes in Working Capital


7
6
5
al
Capit 4
ing 3
Work
2
1

0
2004 2005 2006 2007

Year

INTERPRETATION:
The Working Capital has Shown an increasing trend in the year 2005-2006 as
compared to 2004-2005.whereas in the year 2006-2007 there has been a
negligible decrease in Working Capital.

66
Financial Report
year ended year ended year ended year ended
31st 31st 31st 31st
march2004 march2005 march2006 march2007
Income 934.03 1427.9 1430.92 1715.15
Profit before
depreciation 132.38 197.87 209.64 265.03
Less:-
Depreciation 21.71 22.67 17.54 19.05
Profit before tax 110.67 175.2 192.1 245.98
Less:-
Provision for tax
Current year 43 80 70 82.5
Earlier year 1.34 6.61 1.52
Deferred tax (Net) 5.88 5.17 2.06 3.47
Profit after tax for
current year 72.21 100.37 126.65 165.43
Profit for earlier
year brought
forward 45.7 85.2 139.69 210.4
Profit available for
appropriation 118.01 185.57 266.04 375.83
Propose Dividend 22 30.8 37.4 44
Income tax on
Dividend 2.82 4.03 5.52 7.47

67
RATIO ANALYSIS
i.CURRENT RATIO
ii. LIQUID RATIO
iii. ABSOLUTE LIQUID RATIO
iv. CURRENT ASSET TURN-OVER RATIO
v. WORKING CAPITAL TURN-OVER RATIO
vi. INVENTORY TURN-OVER RATIO
vii. GROSS PRIFIT RATIO
viii. NET PROFIT RATIO
ix. DEBTORS TURN-OVER RATIO
x. INVESTMENT IN RECEIVABLES
xi. OPERATING CYCLE
xii. ROSS OPERATING CYCLE
xiii. NET OPERATING CYCLE
xiv. CREDITORS TURN OVER RATIO
xv. DEBT-EQUITY RATIO

68
A. CURRENT RATIO:

YEAR CURRENT ASSET CURRNNT


LIABILITIES
2003-2004 378816566.4 218682329.4
2004-2005 529016873.4 331386950.7
2005-2006 526666 728.6 261944404.2
2006-2007 591626547.9 265096674.9

YEAR CURRENT RATIO


2003-2004 1.732268755
2004-2005 1.596372073
2005-2006 2.010604999
2006-2007 2.231738848

CURRENT RATIO
2.5
2

1.5
RATIO

0.5
0
2003-2004 2004-2005 2005-2006 2006-2007
YEAR

INTERPRETATION:
The Current Ratio of a company shows slight decrease from the
year 2004-2005. But later on it goes on increasing from 2006-2007.

69
B. LIQUID RATIO:

YEAR CURRENT ASSET INVENTORIES LIQUID ASSET LIQUID LIABILITIES


2003-2004 378816566.4 96845011.2 281971555.2 218682329.4
2004-2005 529016873.4 152829979.2 376186894.2 331386950.7
2005-2006 526666728.6 116907812.1 409758916.5 261944404.2
2006-2007 591626547.9 122664522.6 468962025.3 265096674.9

YEAR LIQUID RATIO


2003-2004 1.289411705
2004-2005 1.13518922
2005-2006 1.56429727
2006-2007 1.769022661

LIQUID RATIO
2

O
TI 1.5
A
1
R

0.5

2003-2004 2004-2005 2005-2006 2006-2007


YEAR

INTERPRETATION:
The Liquid Ratio of a company shows slight decrease from the
year 2004-2005. But later on it goes on increasing from 2006-2007.

70
C. ABSOLUTE LIQUID RATIO:

YEAR CASH & BANK SHORT TERM TOTAL LIQUID LIABILITIES


BALANCE INVESTMENT
2003-2004 35200474.2 35200474.2 218682329.4
2004-2005 10243058.4 10243058.4 331386950.7
2005-2006 50582646 1021410 51604056 261944404.2
2006-2007 73017614.7 1021410 74039024.7 265096674.9

YEAR ABSOLUTE LIQUID


RATIO
2003-2004 0.160966249
2004-2005 0.030909661
2005-2006 0.19700385
2006-2007 0.279290658

ABSOLUTE LIQUID RATIO


0.3
0.25
O
TI
A 0.2
R
0.15
0.1
0.05
0

2003-2004 2004-2005 2005-2006 2006-2007


YEAR

INTERPRETATION:
The Absolute Liquid Ratio of a company shows a deep decrease
in the year 2004-2005. But later on it goes on increasing from 2006-
2007.

71
D. CURRENT ASSETS TURNOVER RATIO:

YEAR SALES CURRENT


ASSET
2003-2004 816839262 378816566.4
124689527
2004-2005 6 529016873.4
125135185
2005-2006 6 526666728.6
150921324
2006-2007 9 591626547.9

YEAR CURRENT ASSET TURNOVER


RATIO
2003-2004 2.156292344
2004-2005 2.357004737
2005-2006 2.375984257
2006-2007 2.550955927

CURRENT ASSET TURNOVER RATIO


2.6
O 2.5
TI 2.4
A 2.3
R
2.2
2.1
2

1.9
2003-2004 2004-2005 2005-2006 2006-2007
YEAR

INTERPRETATION:

72
The Current Asset Turnover Ratio of a company shows deep
increase from the year 2003-2004. Then it shows slight increase. But
later on it goes on increasing from 2006-2007.

E. WORKING CAPITAL TURNOVER RATIO:

YEAR SALES WORKING CAPITAL


2003-2004 816839262 160134237
2004-2005 1246895276 197629922.7
2005-2006 1251351856 264722324.4
2006-2007 1509213249 326529873

YEAR WORKING CAPITAL TURN


OVER RATIO
2003-2004 5.100965773
2004-2005 6.309243354
2005-2006 4.727035616
2006-2007 4.621976039

WORKING CAPITAL TURN OVER RATIO


7
6
5
RATIO

4
3
2
1
0

2003-2004 2004-2005 2005-2006 2006-2007


YEAR

INTERPRETATION:

73
The Working Capital Turnover Ratio of a company shows deep
increase from the year 2003-2004. And it again decreases till the year
2005-2006. In the year 2006-2007, it remains almost same.

F. INVENTORY TURNOVER RATIO:

YEAR SALES INVENTORIES


2003-2004 816839262 96845011.2
2004-2005 1246895276 152829979.2
2005-2006 1251351856 116907812.1
2006-2007 1509213249 122664522.6

INVENTORY TURN
YEAR OVER RATIO
2003-2004 8.434500155
2004-2005 8.15870867
2005-2006 10.70374882
2006-2007 12.30358393

INVENTORY TURN OVER RATIO


14
12

10
8
RATIO

6
4

2
0

2003-2004 2004-2005 2005-2006 2006-2007


YEAR

74
INTERPRETATION:
The Inventory Turnover Ratio of a company shows slight
decrease from the year 2004-2005. But later on it goes on increasing till
the year 2006-2007.

G. GROSS PROFIT RATIO:

YEAR GROSS PROFIT SALES(NET)


2003-2004 75819582.9 739404639
2004-2005 119463178.5 1141814417
2005-2006 136404734.4 1148901203
2006-2007 186955091.1 1384830506

YEAR GROSS PROFIT


RATIO
2003-2004 10.25413947
2004-2005 10.46257402
2005-2006 11.87262526
2006-2007 13.50021467

GROSS PROFIT RATIO


16
14
12
10
RATIO
8
6
4
2
0

2003-2004 2004-2005 2005-2006 2006-2007


YEAR

75
INTERPRETATION:
The Gross Profit Ratio of a company shows slight increase from
the year 2004-2005. But later on it goes on increasing from 2006-2007.

H. NET PROFIT RATIO:

YEAR NET PROFIT SALES(NET)


2003-2004 65000436.3 739404639
2004-2005 90330083.1 1141814417
2005-2006 113988485.7 1148901203
2006-2007 148887169.2 1384830506

YEAR NET PROFIT


RATIO
2003-2004 8.790915403
2004-2005 7.911100245
2005-2006 9.921522009
2006-2007 10.75129184

NET PROFIT RATIO


12

10
8
RATIO
6

2003-2004 2004-2005 2005-2006 2006-2007


YEAR

76
INTERPRETATION:
The Net Profit Ratio of a company shows slight decrease from
the year 2004-2005. But later on it goes on increasing till 2006-2007.
YEAR SALES(NET) CLOSING
DEBTORS
2003-2004 739404639 222813224.1
2004-2005 1141814417 324030586.5
2005-2006 1148901203 320144611.5
2006-2007 1384830506 360091789.2

YEAR DEBTORS TURNOVER RATIO


2003-2004 3.318495309
2004-2005 3.523785914
2005-2006 3.588694488
2006-2007 3.845770849

I. DEBTORS TURNOVER RATIO:

DEBTORS TURNOVER RATIO


4

3.8
RATIO
3.6

3.4

3.2
3

2003-2004 2004-2005 2005-2006 2006-2007


YEAR

INTERPRETATION:
77
The Debtors Turnover Ratio of a company goes on increasing till
2006-2007.

J. INVESTMENT IN RECEIVABLES:

INVESTMENT IN RECEIVABLES
2003-04 2004-05 2005-06 2006-07
PARTICULERS 97 DAYS 91 DAYS 89 DAYS 83 DAYS
COLLECTION COLLECTION COLLECTION COLLECTION
PERIOD PERIOD PERIOD PERIOD
SALES (NET) 739404639 1141814417 1148901203 1384830506
LESS:-
FIEXED COST (20%) 147880927.8 147880927.8 147880927.8 147880927.8
VARIABLE COST (60%) 443642783.4 685088650.2 689340721.8 830898303.6
RETURN ON
INVESTMENT 44826406.24 59218930.94 58213067.82 63467715.79
BAD DEBTS (1%) 7394046.39 11418144.17 11489012.03 13848305.06
NET BENEFIT 95660475.17 238207763.9 241977473.5 328735253.8

INVESTMENT IN RECEIVABLES
350
300
250
NETMILLION
BENEFITRS.) 200
(AMOUNT IN
150
100
50
0
2003-2004 2004-2005 2005-2006 2006-2007
YEAR

78
INTERPRETATION:
The Investment in Receivables of a company shows deep
increase from the year 2004-2005. And then it shows very slight
increase. But later on it goes on increasing till 2006-2007.

OPERATING CYCLE
2004 2005 2006 2007
1) RAW MATERIAL
CONVERSION PERIOD
A) Raw material consumption 460469385 742734765 654570475 782073011
B) Raw material consumption per
day 1438966 2321046 2045532 2443978
C) Raw material Inventory 18819824 27509949 29815432 33502496
D) Raw material holding day's 13 11 14 13

2) WIP CONVERSION PERIOD


126194749
A) Cost of production 720265120 1111670321 1078538405 1
B) Cost of production per day 2073703 3473969 3370432 3943585
C) WIP Inventory 56680064 89319083 66041937 64072076
D) Work in progress inventory
holding day's 25 24 20 17

3) FINISHED GOOD
CONVERSION PERIOD
121115467
A) Cost of good's sold 675026762 1045956816 1020944442 8
B) Cost of good's sold per day 2109458 3268615 3190451 3784858
C) Finished good's inventory 11441706 23605578 8447974 13279263
D) FG inventory holding day's 5 7 3 4

4) COLLECTION DAY'S
138483050
A) Credit sales 739404639 1141814417 1148901203 6
B) Sales per day 2310639 3568170 3590316 4327595
C) Debtors 222813224 324030586 320144611 360091789
D) Debtor outstanding day's 97 91 89 83
GROSS OPERATING CYCLE 140 133 126 117
5) CREDITORS DEFERRAL
PERIOD
A) Credit purchase 464389295 751424889 656875958 785760075
B) Purchase per day 1451216 2348202 2052737 2455500
C) Creditors 153880852 235319454 163748168 158919694
D) Creditors outstanding day's 106 100 80 65
NET OERATING CYCLE / CCC 34 33 46 52

79
K. GROSS OPERATING CYCLE:

YEAR GROSS OPERATING CYCLE


2003-2004 140
2004-2005 133
2005-2006 126
2006-2007 117

GROSS OPERATING CYCLE


S 145
Y 140
A
135
D
F 130
O 125
O.
N 120
115
110
105
2003-2004 2004-2005 2005-2006 2006-2007
YEAR

80
INTERPRETATION:
The gross operating cycle is going down every year.

I. NET OPERATING CYCLE:

YEAR NET OPERATING


CYCLE (CCC)
2003-2004 34
2004-2005 33
2005-2006 46
2006-2007 52

NET OPERATING CYCLE (CCC)

60
50
40
NO. OF DAYS
30
20
10
0
2003-2004 2004-2005 2005-2006 2006-2007
YEAR

81
INTERPRETATION:
The Net Operating Cycle has increased from the year 2004-05 to 2007-08.

M. CREDITORS TURNOVER RATIO:

YEAR CREDIT PURCHASE CREDITORS


2003-2004 464389252 153880852
2004-2005 751424889 235319454
2005-2006 656875958 163748168
2006-2007 785760075 158919694

YEAR CREDITORS TURNOVER


RATIO
2003-2004 3.017849498
2004-2005 3.193211935
2005-2006 4.011501112
2006-2007 4.94438452

CREDITORS TURNOVER RATIO


6
5
4
RATIO
3
2
1
0
2003-2004 2004-2005 2005-2006 2006-2007
YEAR

82
INTERPRETATION:
The Creditors Turnover Ratio of a company shows slight
increase from the year 2004-2005. But later on it goes on increasing till
2006-2007.

N. DEBT-EQUITY RATIO:

YEAR DEBT(LONG TERM) EQUITY


2003-2004 84148348 170363392
2004-2005 96604452 229300080
2005-2006 111892907 304642678
2006-2007 82783886 403283646

YEAR DEBT-EQUITY RATIO


2003-2004 0.493934448
2004-2005 0.421301432
2005-2006 0.367292291
2006-2007 0.205274592

DEBT-EQUITY RATIO
0.6
O 0.5
TI 0.4
A
R 0.3
0.2
0.1
0

2003-2004 2004-2005 2005-2006 2006-2007


YEAR

INTERPRETATION:

83
The Debt-equity Ratio of a company shows decrease from the
year 2004-2005 till 2006-2007.

 CONCLUSION:

1. From the current ratio and quick ratio, it can be


concluded that, the liquidity of the company has increased. The
quick ratio has increased because of control of inventory and
increase in cash balance.
2. Inventory turn over ratio is increasing which
reflects that the inventory is fast moving.
3. Payables deferral period has reduced from 106 days
to 65 days, this shows that the company is paying its creditors faster.
4. Company has more investments in current assets
which mean higher liquidity with lower risk, so the policy followed
by the company is conservative.

84
 RECOMMENDATIONS:

1. The company should review its credit


policy for debtors. The debtor’s collection period has reduced
but it should reduce further. This will reduce the working
capital requirement of the company.
2. The company should invest in short term
investments as working capital is continuous.
3. As a working capital is showing an
increasing trend, it should not increase further as it affects the
profitability due to blockage of funds.

85