Академический Документы
Профессиональный Документы
Культура Документы
Chapters Pages
1. Introduction
01
2. Company profile (HDFC Bank)
05
3. Various Sources of Working Capital
13
4. HDFC Bank: Policies, Procedures & Products
19
5. Usage of Working Capital
23
6. Business Approach Towards Working Capital
33
7. Indian Market Scenario
45
8. Research Methodology
48
9. Analysis and Interpretation
58
10. Conclusion
62
11. Suggestion
68
12. Bibliography
76
Introduction
Current assets and current liabilities include three accounts which are of special
importance. These accounts represent the areas of the business where managers have
the most direct impact:
A positive change in working capital indicates that the business has either
increased current assets (that is received cash, or other current assets) or has
decreased current liabilities, for example has paid off some short-term creditors.
Decisions relating to working capital and short term financing are referred to
as working capital management. These involve managing the relationship between a
firm's short-term assets and its short-term liabilities. The goal of Working capital
management is to ensure that the firm is able to continue its operations and that it has
sufficient cash flow to satisfy both maturing short-term debt and upcoming
operational expenses.
• One measure of cash flow is provided by the cash conversion cycle - the net
number of days from the outlay of cash for raw material to receiving payment
from the customer. As a management tool, this metric makes explicit the inter-
relatedness of decisions relating to inventories, accounts receivable and
payable, and cash. Because this number effectively corresponds to the time
that the firm's cash is tied up in operations and unavailable for other activities,
management generally aims at a low net count.
Guided by the above criteria, management will use a combination of policies and
techniques for the management of working capital. These policies aim at managing
the current assets (generally cash and cash equivalents, inventories and debtors) and
the short term financing, such that cash flows and returns are acceptable.
• Cash management. Identify the cash balance which allows for the business to
meet day to day expenses, but reduces cash holding costs.
• Debtor’s management. Identify the appropriate credit policy, i.e. credit terms
which will attract customers, such that any impact on cash flows and the cash
conversion cycle will be offset by increased revenue and hence Return on
Capital (or vice versa).
• Short term financing. Identify the appropriate source of financing, given the
cash conversion cycle: the inventory is ideally financed by credit granted by
the supplier; however, it may be necessary to utilize a bank loan (or
overdraft), or to "convert debtors to cash" through "factoring".
Company profile:
HDFC Bank
HDFC Bank, one amongst the firsts of the new generation, tech-savvy
commercial banks of India, was set up in August 1994 after the Reserve Bank of
India allowed setting up of Banks in the private sector. The Bank was promoted by
the Housing Development Finance Corporation Limited, a premier housing finance
company (set up in 1977) of India. Net Profit for the year ended March 31, 2006 was
up 30.8% to Rs 870.8 crores.
Currently (2007), HDFC Bank has 583 branches located in 263 cities of India,
and all branches of the bank are linked on an online real-time basis. The bank offers
many innovative products & services to individuals, corporates, trusts, governments,
partnerships, financial institutions, mutual funds and insurance companies. The bank
also has over 1471 ATMs. In the next few months the number of branches and ATMs
should go up substantially.
Profile
HDFC Bank was the first bank in India to launch an International Debit Card in
association with VISA (VISA Electron) and issues the MasterCard Maestro debit card
as well. The Bank launched its credit card business in late 2001. By September 30,
2005, the bank had a total card base (debit and credit cards) of 5.2 million cards. The
Bank is also one of the leading players in the "merchant acquiring" business with over
50,000 Point-of-sale (POS) terminals for debit / credit cards acceptance at merchant
establishments.
• Treasury
Within this business, the bank has three main product areas - Foreign Exchange and
Derivatives, Local Currency Money Market & Debt Securities, and Equities. With the
liberalisation of the financial markets in India, corporates need more sophisticated
risk management information, advice and product structures. These and fine pricing
on various treasury products are provided through the bank's Treasury team. To
comply with statutory reserve requirements, the bank is required to hold 25% of its
deposits in government securities. The Treasury business is responsible for managing
the returns and market risk on this investment portfolio.
Capital Structure
The authorised capital of HDFC Bank is Rs.450 crore (Rs.4.5 billion). The
paid-up capital is Rs.311.9 crore (Rs.3.1 billion). The HDFC Group holds 22.1% of
the bank's equity and about 19.4% of the equity is held by the ADS Depository (in
respect of the bank's American Depository Shares (ADS) Issue). Roughly 31.3% of
the equity is held by Foreign Institutional Investors (FIIs) and the bank has about
190,000 shareholders. The shares are listed on the The Stock Exchange, Mumbai and
the National Stock Exchange. The bank's American Depository Shares are listed on
the New York Stock Exchange (NYSE) under the symbol "HDB".
Management
Mr. Jagdish kapoor took over as the bank's Chairman in July 2001. Prior to
this, Mr. Capoor was a Deputy Governor of the Reserve Bank of India. The
Managing Director, Mr. Aditya Puri, has been a professional banker for over 25
years, and before joining HDFC Bank in 1994 was heading Citibank's operations in
Malaysia. The Bank's Board of Directors is composed of eminent individuals with a
wealth of experience in public policy, administration, industry and commercial
banking. Senior executives representing HDFC are also on the Board. Senior banking
professionals with substantial experience in India and abroad head various businesses
and functions and report to the Managing Director. Given the professional expertise
of the management team and the overall focus on recruiting and retaining the best
talent in the industry, the bank believes that its people are a significant competitive
strength.
Promoter
Technology
The Bank has made substantial efforts and investments in acquiring the best
technology available internationally, to build the infrastructure for a world class bank.
In terms of software, the Corporate Banking business is supported by Flex cube,
while the Retail Banking business by Finware, both from i-flex Solutions Ltd. The
systems are open, scaleable and web-enabled. The Bank has prioritized its
engagement in technology and the internet as one of its key goals and has already
made significant progress in web-enabling its core businesses. In each of its
businesses, the Bank has succeeded in leveraging its market position, expertise and
technology to create a competitive advantage and build market share.
Achievements
HDFC Bank has won many awards for its excellent service. Major among them
are "Best Bank in India" by Hong Kong-based Finance Asia magazine in 2005 and
"Company of the Year" Award for Corporate Excellence 2004-05.
• Credit Rating: HDFC Bank has its deposit programmes rated by two rating
agencies - Credit Analysis & Research Limited. (CARE) and Fitch Ratings
India Private Limited. The Bank's Fixed Deposit programme has been rated
'CARE AAA (FD)' [Triple A] by CARE, which represents instruments
considered to be "of the best quality, carrying negligible investment risk".
CARE has also rated the Bank's Certificate of Deposit (CD) programme "PR
1+" which represents "superior capacity for repayment of short term
promissory obligations". Fitch Ratings India Pvt. Ltd. (100% subsidiary of
Fitch Inc.) has assigned the "tAAA (ind)" rating to the Bank's deposit
programme, with the outlook on the rating as "stable". This rating indicates
"highest credit quality" where "protection factors are very high". HDFC Bank
also has its long term unsecured, subordinated (Tier II) Bonds of Rs.4 billion
rated by CARE and Fitch Ratings India Private Limited. CARE has assigned
the rating of "CARE AAA" for the Tier II Bonds while Fitch Ratings India
Pvt. Ltd. has assigned the rating "AAA (ind)" with the outlook on the rating as
"stable". In each of the cases referred to above, the ratings awarded were the
highest assigned by the rating agency for those instruments.
• Corporate Governance Rating: The bank was one of the first four
companies, which subjected itself to a Corporate Governance and Value
Creation (GVC) rating by the rating agency, The Credit Rating Information
Services of India Limited (CRISIL). The rating provides an independent
assessment of an entity's current performance and an expectation on its
"balanced value creation and corporate governance practices" in future. The
bank has been assigned a 'CRISIL GVC Level 1' rating which indicates that
the bank's capability with respect to wealth creation for all its stakeholders
while adopting sound corporate governance practices is the highest.
• Best Domestic Bank in India in The Asset Triple A Country Awards 2005,
2004 and 2003.
• “Company of the Year” Award in The Economic Times Awards for Corporate
Excellence 2004-05.
• Asia money’s Awards for Best Domestic Commercial Bank as well as Best
Cash Management Bank - India in 2005.
• The Asian Banker Excellence in Retail Banking Risk Management Award in
India for 2004.
• Finance Asia “Best Bank - India” in 2005, "Best Domestic Commercial Bank
– India” in 1999, 2000 and 2001 respectively and “Best Local Bank – India”
in 2002 and 2003.
• Business Today “Best Bank in India” in 2003 and 2004.
• “Best Overall Local/Domestic Bank – India” in the Corporate Cash
Management Poll conducted by Asia money magazine.
• Selected by Business World as "one of India's Most Respected Companies" as
part of The Business World Most Respected Company Awards 2004.
• In 2004, Forbes Global named HDFC Bank in its listing of Best under a
Billion, 100 Best Smaller Size Enterprises in Asia/Pacific and Europe.
• In 2004, HDFC Bank won the award for “Operational Excellence in Retail
Financial Services” - India as part of the Asian Banker Awards 2003.
• In 2003, Forbes Global named HDFC Bank in its ranking of “Best under a
Billion, 200 Best Small Companies for 2003”.
• The Financial Express named HDFC Bank the “Best New Private Sector Bank
2003” in the FE-Ernst & Young Best Banks Survey 2003.
• Outlook Money named HDFC Bank the “Best Bank in the Private Sector” for
the year 2003.
• NASSCOM and economictimes.com have named HDFC Bank the ‘Best IT
User in Banking’ at the IT Users Awards 2003.
• Euro money magazine gave HDFC Bank the award for "Best Bank – India” in
1999, “Best Domestic Bank” in India in 2000, and “Best Bank in India” in
2001 and 2002.
• Asia money magazine has named us “Best Commercial Bank in India 2002”
• For its use of information technology, HDFC Bank has been recognized as a
“Computerworld Honors Laureate” and awarded the 21st Century
Achievement Award in 2002 for Finance, Insurance & Real Estate category
by Computerworld, Inc., USA. Its technology initiative has been included as a
case study in their online global archives.
• Business India named HDFC Bank “India’s Best Bank” in 2000.
• In 2000, Forbes Global named HDFC Bank in its list of “The 300 Best Small
Companies” in the world and as one of the “20 for 2001” best small
companies in the world.
Various Sources of Working Capital
Working capital are short term loans meant to increase your cash flow and
they are often used to fund the daily operations of your business. Working capital can
be of two types:
• Secured
• Unsecured
A secured Working Capital Loan is one that is backed by an asset and/or personal
guarantee.
• The asset required can be a house, factory or inventory. They can be fully paid
up assets or assets with existing mortgages or loans.
• How much collateral the bank or financial institution will ask for depends
very much on their assessment of your ability to pay back the loan.
• The bank may also require personal guarantees from the owners and/or
directors. They must be ready and willing to put up their own personal assets
to back the loan e.g. family home, shares and stocks.
Lenders give unsecured loans only to borrowers whom they consider to be low
or no risk. Start-ups are generally viewed as risky and are unlikely to be granted
unsecured loans.
There are many different types of Working Capital Loans. To complicate matters,
different banks use different terms to describe the same type of loan.
• Overdraft / Line-Of-Credit
Overdraft facility is granted for your commercial activities. This facility enables you
to overdraw your account up to an agreed limit for a period up to 12 months. Interest
on the overdraft facility is also competitive. Both Letters of Credit and Deferred
Letters of Credit facilities can be offered at the bank for your imports.
An overdraft allows you to draw funds beyond the available limit
of your bank account.
The maximum amount you can overdraw is your line of credit. The
terms and amount depend on the relationship you have with your
banker and his/her assessment of your credit worthiness.
Overdrafts are flexible and simple to operate. You pay interest
only on the amount you have overdrawn. However, the interest rate
charged is usually 1-2% above the bank's prime rate.
• Bank Guarantees
The bank can undertake to guarantee facilities obtained from other creditors suppliers
on behalf of its prospective customers.
• Business Loans
Many traditional lending institutions offer small business loans. These business loans
are based on an amortization table from which a borrower is paying a portion of the
principle as well as interest. In addition, most traditional bank loans require a set
payment to be made each month.
• Debtor Finance
Debtor Finance is a facility that improves your cash flow for immediate business
growth. It is a non-disclosed facility, which is designed to afford cash flow
acceleration against the security of your debtor's book.
Debtor Finance is suited to your business:
If you are in manufacturing, distribution or selected services industry
If you sell to other companies, trading concerns or institutions but not to
individual members of public
If your annual sales are in excess of approximately R12 million (this is
flexible)
If all aspects of administration are soundly managed, especially your debtor's
book
Key features and benefits
Provides funding of between 70% and 80% of your debtor's book
Improves your cash flow for immediate business growth
Allows you to negotiate discounts from suppliers for the early settlement of
accounts
Key balance sheet ratios are improved, as your debtors become a real asset
As part of the service, we will rate your debtors
Minimum contract is typically for 12 months
The administration and collection of debts is done by your company.
• Flexi – Business Loans
This is ideal for the established business owner who wishes to undertake growth
projects. To apply, the business must have been operating for longer than 2 years,
have an annual turnover of up to 40 million, and be able to produce sound financials.
Key features and benefits
Repayments term from 12 to 60 months
Loans up to a maximum of R200 000
Competitive interest rates
Redraw up to the original capital amount without the hassle of having to
formally apply with financial documentation
Easy cash flow planning with the agreed minimum installment payable
Easy and immediate access to any prepaid amounts
Lending in the Business name, rather than personal, is tax efficient.
Working capital Loans offered by Government
Target Segment:
1. Traders
2. Stockist
3. Distributor
4. Retailer
Located at all the centers where the bank has its own branches.
Incase all of above criteria are affirmative, then the documents (As listed below)
need to be collected and send to the Relationship Manager at the regional credit hub.
1. Audited Financials – P/L accounts & balance sheet (along with IT Returns &
sales tax returns for the last 3 years), with schedules to accounts, auditors
report and tax auditors report.
2. Provisional Financials – P/L accounts and Balance Sheet for the current year
3. Copy of the sanction letter of existing bankers
4. Bank Statement of the existing business banker
5. 3 Months stocks and receivables statement as submitted to existing bankers.
6. Any Pat repayment track records (Loan Statements) of the establishments
&/or its promoters
7. Projected financials for the next 3 to 5 years (if it is a term loan case).
1. Fund Based:
• Term Loan (TL):- Term loan is an advance allowed for a fixed period of time
i.e. for 3 years for meeting capital expenditure, requirements i.e. expansion,
renovation etc, against security of immovable properties e.g. Residential and
commercial properties etc. The two types of term loan are:-
1. Vanilla term loan : term loan allowed to meet capital expenditure
requirements (as above).
2. Merchant term loan (METL): Merchants are allowed a term loan facility of
up to 9 times of there card receivable provided collateral in the form of
residential or commercial properties is provided to banks.
• Invoice Discounting: Bills which are payable after a particular period of time
are discounted by the bank by paying the face value of the bill less discount to
the seller of goods and acquires all the rights under the bill.
2. Non Fund Based:-
• Bank Guarantee (BG): Guarantee given by the bank to the third person
on behalf of the customer who pay a certain sum of money on the
customer failing to fulfill his obligations legal/contractual, as the case
maybe. These are of two types
1. Performance Guarantee
2. Financial Guarantee
Usage of Working Capital
Businesses need working capital for various modes of operations and it can be
utilized in form of many credit facilities provided by Banks i.e.
• Financing of purchases
1. Domestic
- Discounting of your Supplier bills to finance your purchase of raw
materials
- Opening Letters of Credit to stand guarantee of payment covering
purchase of your local supplies.
2. Imports
- Opening Import L/Cs favoring your overseas sellers to provide
guarantee of payment covering these import purchases.
- Arranging overseas buyer’s credit through our network. The rate
quoted is usually a spread over LIBOR.
• Financing of sales
Domestic
- Overdraft / loans against receivables
- Discounting Sales bills to finance your receivables
Exports
- Post shipment credit against export orders executed by you.
- Discounting export bills sent by you.
- Advance against bills sent on collection.
- Extending advance against bills sent on collection.
- Negotiating export bills with or without recourse – to finance your
funding requirements after shipment.
Some banks also offer solutions for projects that may put a strain on your
working capital. BDC, for example, can provide long-term financing for increased
inventory or other fixed assets, market development or e-commerce initiatives, just to
name a few. In addition, BDC can arrange repayment schedules to help you keep as
much working capital available as possible.
Line of credit
Overdraft protection
Bridge financing
Factoring
Cash flows in a cycle into, around and out of a business. It is the business's
life blood and every manager's primary task is to help keep it flowing and to use the
cash flow to generate profits. If a business is operating profitably, then it should, in
theory, generate cash surpluses. If it doesn't generate surpluses, the business will
eventually run out of cash and expire.
The faster a business expands the more cash it will need for working capital
and investment. The cheapest and best sources of cash exist as working capital right
within business. Good management of working capital will generate cash will help
improve profits and reduce risks. Bear in mind that the cost of providing credit to
customers and holding stocks can represent a substantial proportion of a firm's total
profits.
There are two elements in the business cycle that absorb cash - Inventory
(stocks and work-in-progress) and Receivables (debtors owing you money). The
main sources of cash are Payables (your creditors) and Equity and Loans.
If you have insufficient working capital and try to increase sales, you can easily
over-stretch the financial resources of the business. This is called overtrading. Early
warning signs include:
Inventory Management
The key is to know how quickly your overall stock is moving or, put another
way, how long each item of stock sit on shelves before being sold. Obviously,
average stock-holding periods will be influenced by the nature of the business. For
example, a fresh vegetable shop might turn over its entire stock every few days while
a motor factor would be much slower as it may carry a wide range of rarely-used
spare parts in case somebody needs them.
HDFC Bank provides various facilities to its customers and thus the products
undertaken by the customers or facilities provided to its customers are of great use to
the customer.
Business approach towards Working Capital
Small businesses often use working capital to pay short-term obligations such
as inventory or advertising but it can also be utilized for long-term projects such as
renovations or expansion. These are elements in the business cycle that can quickly
absorb cash. If working capital dips too low, a business risks running out of cash.
Even very profitable businesses can run into trouble if they lose the ability to meet
their short-term obligations. Business financing or small business loans can be used
as a fast cash option to cushion the periods when the flow is not ideal or readily
available.
Cash flow is the businesses life blood and every owner’s primary task is to
help keep it flowing and to use the cash to generate profits. If a business is operating
profitably, then it should, in theory, generate a cash surplus. If it does not generate a
surplus, the business could eventually run out of cash and expire. The faster a
business expands the more cash it will need for working capital. Proper management
of working capital will generate cash and will help improve profits and reduce risk.
Operating cash flow is generated through revenues, or the cash in, and through
expenditures, or the cash out. But the speed at which sales are converted to cash and
the speed at which your own suppliers are paid, has an important influence on the
health of your operation. So it makes sense to be able to predict how much cash you'll
have on-hand in the future.
Start with a balance sheet
If you're starting a new business, you'll be investing your own money (equity)
and incurring some liabilities (purchasing inventory and or machinery on credit or
borrowing money from a lender). At that point in time, the company's total assets (or
value of goods or infrastructure you've purchased) will be equal to the money you've
invested (the equity) and the money you have borrowed.
The formula looks like this: Total Assets = Liabilities + Equity
The balance sheet however, does not show when you will have to make payments on
purchased equipment or taxes payable such as GST. Those taxes come due in the
future, so it's a good idea to plan or budget for them ahead of time.
For cash inflows, you need to make sure you account for all possible sources
of income including tax refunds, grants, sales of assets as well as sales of goods and
services. Your cash outflows include operating expenses such as salaries and rent,
debt and tax payments as well as the cost of the goods sold. At the end of every
period, you should have a closing cash balance which then becomes the opening cash
balance for the next period.
The budget should be realistic enough so that you can see whether you need
more working capital financing. It should be detailed enough to indicate those periods
where revenues may be lower than expenditures. Finally, it should prompt you to
create an action plan for dealing with cash flow surpluses as well as cash crunches.
For instance, you can identify periods where your sales are low and plan to bridge the
gap by increasing your line of credit in advance. For a projected large order where
you need to suddenly increase your inventory without getting paid right away, you
may want to arrange for long-term working capital financing. You may also notice
that you are paying suppliers in less time than it takes to get paid by your customers.
If that's the case, you might want to negotiate better terms with those suppliers. And if
it's taking longer to get paid by your customers, it may be time to build some early-
payment inducements into your operation.
If you have a good credit rating, nothing prevents you from taking out a
personal (term) loan from your chartered bank or credit union, and subsequently
injecting this amount into your business. The interests on loans of this kind are also
tax deductible.
Your suppliers can also be a source of funding. You could ask them to extend
your payment terms and raise your credit limit. A combination of these two factors
will enhance your potential to undertake more than one project at a time.
One way to analyze your financial health and identify where you can improve it is
by looking closely at your financial ratios. Ratios are used to make comparisons
between different aspects of a company's performance or within a particular industry
or region. They reveal very basic information such as whether you've accumulated
too much debt, are stockpiling too much inventory or not collecting receivables fast
enough.
Ideally, you should review your ratios on a monthly basis in order to keep abreast
of changing trends in your company. The most common example of the importance of
financial ratios is when a lender determines the stability and health of your business
by looking at your balance sheet. The balance sheet provides a portrait of what your
company owns or is owed (assets) and what you owe (liabilities). Bankers will often
make financial ratios a part of your loan agreement. For instance, you may have to
keep your equity above a certain percentage of your debt, or your current assets above
a certain percentage of your current liabilities. Although you'll find different terms are
available for different ratios, these are the basic 4 categories:
• Liquidity ratios
These ratios measure the amount of liquidity (cash and easily converted assets)
that you have to cover your debts and they give a broad overview of your financial
health.
Current ratio
This ratio, also called the working capital ratio measures your company's
ability to generate cash to meet your short-term financial commitments. The current
ratio is calculated by dividing your current assets such as cash, inventory, and
receivables by your current liabilities such as line of credit balance, payables, and
current portion of long term debts.
Quick Ratio
These ratio measures your ability to access cash quickly to support immediate
demands. Also known as the acid test, the quick ratio divides current assets
(excluding inventory) by current liabilities (excluding current portion of long term
debts). A ratio of 1.0 or greater is generally acceptable, but depends on your industry.
A comparatively low ratio can mean that your company might have difficulty
meeting your obligations and may not be able to take advantage of opportunities that
require quick cash. Paying off your liabilities can improve this ratio; you may want to
delay purchases or consider long-term borrowing to repay short-term debt. You may
also want to review your credit policies with clients and possibly adjust them to
improve the time it takes to collect receivables.
A higher ratio may mean that your capital is being underutilized. In this case, you
could invest your capital in projects that drive more growth, such as innovation,
product or service development, R&D or reaching international markets.
• Efficiency ratios
Often measured over a 3 to 5 year period, these ratios give additional insight into
areas of your business such as collections, cash flow and operational results.
Inventory turnover looks at how long it takes for inventory to be sold and replaced
during the year. It is calculated by dividing total purchases by average inventory in a
given period. For most inventory-reliant companies, this can be a make or break
factor for success. After all, the longer the inventory sits on your shelves, the more it
costs. Assessing your inventory turnover is important because gross profit is earned
each time inventory is turned over. This ratio can enable you to see where you can
improve your buying practices and inventory management. For example, you could
analyze your purchasing patterns as well as your clients to determine ways to
minimize the amount of inventory on-hand. You might want to turn some of the
obsolete inventory into cash by selling it off at a discount to specific clients. This
ratio can also help you see if your levels are too low and you're missing out on sales
opportunities.
Inventory to net working capital ratio can determine if you have too much of your
working capital invested in inventory. It is calculated by dividing inventory by total
current assets. In general, the lower the ratio, the better. Improving this ratio will
allow you to invest more working capital in growth-driven projects such as export
development, R&D or marketing.
Evaluating inventory ratios depends a great deal on your industry and the quality
of your inventory. Ask yourself: are your goods seasonal (ski equipment), perishable
(food), or prone to becoming obsolete (fashion)? Depending on the answer, these
ratios will vary a great deal. Still, regardless of the industry, inventory ratios can you
help you improve your business efficiency.
Average collection period looks at the average number of days customers take to
pay for your products or services. It is calculated by dividing receivables by total
sales and multiplying by 365. To improve how quickly you collect payments, you
may want to establish clearer credit policies and a set of collection procedures. For
example, to encourage your clients to pay on time, you can give them incentives or
discounts. You should also compare your policies to those of your industry to ensure
you remain competitive.
• Profitability ratios
These ratios are used not only to evaluate the financial viability of your business,
but are essential in comparing your business to others in your industry. You can also
look for trends in your company by comparing the ratios over a certain number of
years.
Net profit margin measures how much a company earns (usually after taxes)
relative to its sales. In general, a company with a higher profit margin than its
competitor is more efficient, flexible and able to take on new opportunities.
Operating profit margin also known as coverage ratio measures earnings before
interest and taxes. The results can be very different from the net profit margin due to
the impact of interest and tax expenses. By analyzing this margin, you can better
assess your ability to expand your business through additional debt or other
investments.
Return on assets (ROA) ratio tells how well management is utilizing all the
company's resources (assets). It is calculated by dividing net profit (before taxes) by
total assets. The number will vary widely across different industries. Capital-
intensive industries such as railways will yield a low return on assets, since they need
expensive assets to do business. Service based operations such as consulting firms
will have a high ROA: they require minimal hard assets to operate.
Return on equity (ROE) measures how well the business is doing in relation to the
investment made by its shareholders. It tells the shareholders how much the company
is earning for each of their invested dollars and is calculated by dividing the equity in
the company by net profits (usually before tax).
• Leverage ratios
These ratios provide an indication of the long-term solvency of a company and to
which extent you are using long-term debt to support your business. Debt-to-equity
and debt-to-asset ratios are used by bankers to see how your assets are financed, for
example, by creditors or through your own investments. In general, a bank will
consider a lower ratio to be a good indicator of your ability to repay your debts or
take on additional debt to support new opportunities.
• Accessing and calculating ratios
To calculate your ratios, you can use a variety of online tools such as BDC's ratio
calculators, although your financial advisor, accountant, and banker may already have
the most currently used ratios on hand.
.
• Interpreting your ratios
Ratios will vary from industry to industry, and over time, interpreting them
requires knowledge of your business, your industry, and the reasons for fluctuations.
In this light, BDC Consulting offers sound advice, which can help you interpret and
improve your financial performance. To help you understand why ratios can easily
vary from one industry to another, see the examples below. A current ratio measures
your ability to pay your debts over the next 12 months; a ratio of 1.0 or greater is
generally acceptable.
• A clothing story will have goods that quickly lose value because of changing
fashion trends. However, these goods are easily liquidated and have high
turnover. As a result, small amounts of money continuously come in and go
out, and in a worst-case scenario, liquidation is relatively simple. This
company could easily function with a current ratio close to 1.0
• An airplane manufacturer, on the other hand, has high-value,
non-perishable assets such as work-in-progress inventory as well as extended
receivable terms. Businesses with these characteristics need carefully planned
payment terms with customers; the current ratio should be much higher to
allow for coverage of short-term liabilities.
` Of the 30 stocks in the Sensex, seven stocks have negative working capital
and ROCEs in the range of 20-80%. The total market capitalization of these
companies has moved up by 94% as against the entire Sensex, which moved up by
67% over the last one year.
Negative is positive
HLL, Nestle and Godrej Consumers Products Ltd have ROCE in excess of
40%. The same goes for two-wheeler companies like Bajaj Auto, TVS and Hero
Honda, which have given high returns on their investment. The success of this high
return is associated with the way these companies have managed their working capital
management cycles.
These are the companies that first sell their goods and later on pay their raw material
suppliers. This is possible only when the companies are huge in size and account for
the bulk of turnover for their suppliers. In such a situation, they are always in a
position to arm-twist the suppliers by taking more credit.
HLL, which had a net negative working capital of Rs 183.3 crore in FY05, has
been able to maintain its creditor days at 64 as compared to receivable days at 16. The
company has generated a ROCE at 44.1%. On the other hand, Godrej Consumer
Products (GCPL) is another company with negative working capital of Rs 45.48 crore
and creditor days at 53, compared to average debtors of six days only. The company
has earned an ROCE at almost 158%.
The strong distribution and dominant position in the FMCG industry has made
these companies to bargain with the debtors and creditors to expand the payment
cycle in favor of the company. The FMCG companies have been able to keep their
creditors almost equal to debtors and inventory, which have resulted in a lot of cash
generation for these companies, which is again invested in the business. These
companies also make investment in short-term papers and call money, which allows
them to earn good returns.
Research can be best defined as “the systematic and objective analysis and
recording of controlled observations that may lead to the development of
generalization, principles or theories, resulting in predictions and possibly ultimate
control of events”.
Research method that is usually adapted for projects are of two types:
Secondary data is data which has been collected by individuals or agencies for
purposes other than those of our particular research study. For example, if a
government department has conducted a survey of, say, family food expenditures,
then a food manufacturer might use this data in the organization’s evaluations of the
total potential market for a new product. Similarly, statistics prepared by a ministry
on agricultural production will prove useful to a whole host of people and
organizations, including those marketing agricultural supplies.
• Definitions
The researcher has to be careful, when making use of secondary data, of the
definitions used by those responsible for its preparation. Suppose, for example,
researchers are interested in rural communities and their average family size. If
published statistics are consulted then a check must be done on how terms such as
"family size" have been defined. They may refer only to the nucleus family or include
the extended family. Even apparently simple terms such as 'farm size' need careful
handling. Such figures may refer to any one of the following: the land an individual
owns the land an individual owns plus any additional land he/she rents, the land an
individual owns minus any land he/she rents out, all of his land or only that part of it
which he actually cultivates. It should be noted that definitions may change over time
and where this is not recognized erroneous conclusions may be drawn. Geographical
areas may have their boundaries redefined, units of measurement and grades may
change and imported goods can be reclassified from time to time for purposes of
levying customs and excise duties.
• Measurement Error
• Source Bias
• Reliability
The reliability of published statistics may vary over time. It is not uncommon, for
example, for the systems of collecting data to have changed over time but without any
indication of this to the reader of published statistics. Geographical or administrative
boundaries may be changed by government, or the basis for stratifying a sample may
have altered. Other aspects of research methodology that affect the reliability of
secondary data is the sample size, response rate, questionnaire design and modes of
analysis.
• Time Scale
Most censuses take place at 10 year intervals, so data from this and other
published sources may be out-of-date at the time the researcher wants to make use of
the statistics.
The time period during which secondary data was first compiled may have a
substantial effect upon the nature of the data. For instance, the significant increase in
the price obtained for Ugandan coffee in the mid-90's could be interpreted as
evidence of the effectiveness of the rehabilitation programme that set out to restore
coffee estates which had fallen into a state of disrepair.
1. Internal Sources
2. External Sources
1. Internal Sources:
Sales data: All organizations collect information in the course of their everyday
operations. Orders are received and delivered, costs are recorded, sales personnel
submit visit reports, invoices are sent out, and returned goods are recorded and so on.
Much of this information is of potential use in marketing research but a surprising
amount of it is actually used. Organizations frequently overlook this valuable
resource by not beginning their search of secondary sources with an internal audit of
sales invoices, orders, inquiries about products not stocked, returns from customers
and sales force customer calling sheets. For example, consider how much information
can be obtained from sales orders and invoices:
• Sales by territory
• Sales by customer type
• Prices and discounts
• Average size of order by customer, customer type, geographical area
• Average sales by sales person and
• Sales by pack size and pack type, etc.
Financial data: An organization has a great deal of data within its files on the cost of
producing, storing, transporting and marketing each of its products and product lines.
Such data has many uses in marketing research including allowing measurement of
the efficiency of marketing operations. It can also be used to estimate the costs
attached to new products under consideration, of particular utilization (in production,
storage and transportation) at which an organization’s unit costs begin to fall.
Transport data: Companies that keep good records relating to their transport
operations are well placed to establish which are the most profitable routes, and loads,
as well as the most cost effective routing patterns. Good data on transport operations
enables the enterprise to perform trade-off analysis and thereby establish whether it
makes economic sense to own or hire vehicles, or the point at which a balance of the
two gives the best financial outcome.
Storage data: The rate of stock turn, stock handling costs, assessing the efficiency of
certain marketing operations and the efficiency of the marketing system as a whole.
More sophisticated accounting systems assign costs to the cubic space occupied by
individual products and the time period over which the product occupies the space.
These systems can be further refined so that the profitability per unit, and rate of sale,
are added. In this way, the direct product profitability can be calculated.
2. External Sources
The marketing researcher who seriously seeks after useful secondary data is more
often surprised by its abundance than by its scarcity. Too often, the researcher has
secretly (sometimes subconsciously) concluded from the outset that his/her topic of
study is so unique or specialized that a research of secondary sources is futile.
Consequently, only a specified search is made with no real expectation of sources.
Cursory researches become a self-fulfilling prophecy. Dillon et. al3 give the following
advice: "You should never begin a half-hearted search with the assumption that what
is being sought is so unique that no one else has ever bothered to collect it and
publish it. On the contrary, assume there are scrolling secondary data that should help
providing definition and scope for the primary research effort."
The same authors support their advice by citing the large numbers of
organizations that provide marketing information including national and local
government agencies, quasi-government agencies, trade associations, universities,
research institutes, financial institutions, specialist suppliers of secondary marketing
data and professional marketing research enterprises. Dillon et al further advise that
searches of printed sources of secondary data begin with referral texts such as
directories, indexes, handbooks and guides. These sorts of publications rarely provide
the data in which the researcher is interested but serve in helping him/her locate
potentially useful data sources.
Trade associations differ widely in the extent of their data collection and
information dissemination activities. However, it is worth checking with them to
determine what they do publish. At the very least one would normally expect that
they would produce a trade directory and, perhaps, a yearbook.
Published market research reports and other publications are available from a
wide range of organizations which charge for their information. Typically, marketing
people are interested in media statistics and consumer information which has been
obtained from large scale consumer or farmer panels. The commercial organization
funds the collection of the data, which is wide ranging in its content, and hopes to
make its money from selling this data to interested parties.
Bank economic reviews, university research reports, journals and articles are
all useful sources to contact. International agencies such as World Bank, IMF, IFAD,
UNDP, ITC, FAO and ILO produce a plethora of secondary data which can prove
extremely useful to the marketing researcher.
Before making use of secondary data there is need to evaluate both the data
itself and its source. Particular attention should be paid to definitions used,
measurement error, source bias, reliability and the time span of the secondary data.
Where possible, multiple data sources should be used so that one source can be cross-
checked for consistency with another.
It will almost certainly become the case, in all parts of the world, that
electronic information sources will eventually supersede traditional printed sources.
With the advent of Internet and CD-ROM, searches of secondary sources are
becoming more efficient and more effective. Computer-based information systems
give access to four different types of database bibliographic, numeric, directories and
full-text.
Analysis and Interpretation
The study analyses the role of public deposit as a source of working capital in
Indian corporate sector. This source emerged in India in 1930s. In 1950s, there
became a downfall in the use of it. In 1970s it again came into prominence. Use of
public deposit may frustrate the Government's policy of channeling the flow of funds
to industrial sector according to planned priorities. Moreover, it is said that the
unwary depositors may come into the trap of unscrupulous depositee- companies, by
lending their hard-earned money as public deposit. But from the standpoint of
depositee companies, public deposit can be said to be a viable source of finance in
many respects.
The most important argument in favor of its use is that it is cheaper than bank
borrowings and many other sources of finances. Now, government has imposed some
regulation and as a result the interest of innocent investors has been protected to an
extent and the flow of public deposit has also been restrained in the interest of
planned economy. It is thus expected that the investors will now accept the offer for
public deposit more freely and the firms, due to its cost advantage, will utilize this
source up to at least the permissible limit. But what we see is that the share of public
deposit to total borrowings is, on an average, only 6% in public limited companies,
and this is as meagre as 0.08% in government companies. Share of public deposit to
current assets is also only 7% in public limited companies and 0.08% in government
companies. The individual results as to the use of public deposit are, however, widely
scattered, and this is substantiated by the high co-efficient of variation (108%) of the
scores. Nevertheless, it is evident from the combined results that the role of public
deposit as a source of working capital is not significant in the decade of eighty,
though in 1970s its role had been better to some extent. Long-term borrowings like
debenture, institutional loan and government loan have also a contribution to working
capital financing, since, a part of current assets is usually covered by long-term funds.
The corporate practices as to these of different types of long-term sources reveal that
the position of debenture in corporate finance is almost equal to that of institutional
loan. In RBI sample, both hold individually 14% of total borrowings. In case of ten
selected public limited companies their individual scores are 7% and in case of
government companies their scores are only 0.1% - 0.3%. Government loan, on the
other hand, occupies as much as 66% share of total borrowings in government
companies, though its position in public limited companies is really insignificant.
The customers of HDFC Bank utilizes the Working Capital provided by the
bank and bank charges interest rates at such facilities that are payable on monthly
basis by the customers. The interest is charged on the Limit or the credit facility used
by the customer.
The limit is set up by the bank on the basis of current operations and working
of the business and thus the interest is charged only on the amount of limit or credit
that is used and not on the total limit setup by the bank. For e.g. The limit setup by the
bank is 10 Lacs at 10.5% and the credit facility utilized by the customer in a month is
just 2 lacs then interest rate for 1 month is calculated as 2, 00,000 X 10.5/100 X 1/12
Conclusion
2. Accounts receivable.
Many businesses extend credit to their customers. If you do, is the amount of
accounts receivable reasonable relative to sales? How rapidly are receivables being
collected? Which customers are slow to pay and what should be done about them?
3. Inventory.
Inventory is often as much as 50 percent of a firm’s current assets, so
naturally it requires continual scrutiny. Is the inventory level reasonable compared
with sales and the nature of your business? What’s the rate of inventory turnover
compared with other companies in your type of business?
4. Accounts payable.
Financing by suppliers is common in small business; it is one of the major
sources of funds for entrepreneurs. Is the amount of money owed suppliers reasonable
relative to what you purchase? What is your firm’s payment policy doing to enhance
or detract from your credit rating?
• Nature of business
• Size of business
• Production policy
• Manufacturing process
• Seasonal variations
• Working capital cycle
• Rate of stock turn over
• Credit policy
• Business cycles
• Rate of growth of business
• Price level changes
• Earning capacity & dividend policy
• Other factors.
Stock Turnover (in days) Average Stock * 365/ Cost of Goods Sold = x days
On average, you turn over the value of your entire stock every x days. You may need
to break this down into product groups for effective stock management.
Obsolete stock, slow moving lines will extend overall stock turnover days. Faster
production, fewer product lines, just in time ordering will reduce average days.
Receivables Ratio (in days) Debtors * 365/ Sales = x days It take you on average x
days to collect monies due to you. If you’re official credit terms are 45 day and it
takes you 65 days... why? One or more large or slow debts can drag out the average
days. Effective debtor management will minimize the days.
Payables Ratio (in days) Creditors * 365/ Cost of Sales (or Purchases) = x days
On average, you pay your suppliers every x days. If you negotiate better credit
terms this will increase. If you pay earlier, say, to get a discount this will decline. If
you simply defer paying your suppliers (without agreement) this will also increase -
but your reputation, the quality of service and any flexibility provided by your
suppliers may suffer.
Cash flows in a cycle into, around and out of a business. It is the business's
life blood and every manager's primary task is to help keep it flowing and to use the
cashflow to generate profits. If a business is operating profitably, then it should, in
theory, generate cash surpluses. If it doesn't generate surpluses, the business will
eventually run out of cash and expire. The faster a business expands the more cash it
will need for working capital and investment. The cheapest and best sources of cash
exist as working capital right within business. Good management of working capital
will generate cash will help improve profits and reduce risks. Bear in mind that the
cost of providing credit to customers and holding stocks can represent a substantial
proportion of a firm's total profits.
There are two elements in the business cycle that absorb cash - Inventory
(stocks and work-in-progress) and Receivables (debtors owing you money). The main
sources of cash are Payables (your creditors) and Equity and Loans.
When it comes to managing working capital, the first piece of advice “don't be
reactive. Be proactive." Entrepreneurs experiencing rapid growth are often confronted
with the challenge of not having enough cash on hand to operate their businesses. "Be
sure you're ready for growth and that you don't find yourself in the red without cash
resources. It's a question of planning ahead. You don't want it to become a crisis
before you go to your bank,”
A good example would be to ensure that you are eliminating work processes
that add no value to the product or service and simplifying those processes that do.
Lean manufacturing, for example, targets a number of sources of waste, including
overproduction, defects, delivery delays, unnecessary inventory and the movement of
goods, people or information. Ultimately, if you can find ways to run your company
more efficiently, you can also make more profits and increase cash flow.
Keeping a vigilant eye on your sales cycle is another way to help manage your
working capital. "You need to know if your sales cycle is similar from year-to-year
and identify its highs and lows. If you know that you will be facing financial
difficulties during certain periods, you may need to adjust your working capital
accordingly,” "You need to know your main expenditures during a low season, and
then try and keep your expenses down during that period." Fixed expenditures for
most businesses include labor and equipment. "There are certain areas of your
business where you'll always need an influx of cash."
"Getting paid is not a sure bet today even though you may have outstanding
payments from clients,". "You want to ensure that your customers have a good credit
history and that they will respect your payment terms. Otherwise you may find
yourself without cash when you need it,” It’s recommended that entrepreneurs clearly
communicate their credit policy up front. "It's basically a set of rules to help you get
paid as quickly as possible. Your clients need to know the maximum amount of credit
you will grant them, payment terms (30, 45, 60 or 90 days) and deposit requirements.
"Ask yourself: how much can I afford to lend my customers without draining my
working capital?"
"Be sure that your suppliers are giving you the best possible deal and don't be
afraid to negotiate,” It's important to shop around to get quotes from several suppliers.
"Even if you're unable to get a better price, you can at least negotiate better payment
terms so you're not draining your cash flow." It is also recommended that making
payments to suppliers on time. "If you respect their terms, you're more likely to get
their cooperation if you need to renegotiate payments when things are tougher.
It's also a good idea to assess your inventory turnover to determine which
items are selling and which may be using up your working capital. "If you've got too
much tied up in inventory, then you may be vulnerable. Be sure that, you can liquefy
your inventory for cash when you need it." A rule of thumb is that once you see a
trend or pattern in client orders, you can begin to stock inventory according to your
needs. Does this just before you sell the inventory, so that the money you've invested
comes back into the business as quickly as possible?
Experts always contend that taking on long-term debt for working capital also
pays off. "You can't grow your business and increase your profits if you're not
investing in your company,” "For instance, if you have a list of clients, you can only
change them into real accounts receivables if you can afford the inventory to sell to
them,". "It's basic business know-how." Entrepreneurs can also recuperate the costs of
loans, for example, through increased revenues. Thus, HDFC Bank can provide long-
term financing for increased inventory or other fixed assets, market development or e-
business initiatives, just to name a few. In addition, HDFC Bank can arrange
repayment schedules to help entrepreneurs keep as much working capital available as
possible.
• Refinance your fixed assets
Another option for small and medium sized businesses is to make personal
investments in order to increase working capital. "You'll first need to do a cost and
benefits analysis to see what return you will get on your investment,” "This is a viable
strategy if you see that the pay-off in your business outweighs personal losses.
Your level of working capital is intimately related to the flow of cash into and
out of your business. Simply stated, you need enough working capital to setup the
business, pay operating costs, and continue to operate until payment arrives 30, 60 or
maybe even 90 days later.
But if you've used a lot of that working capital to pay for fixed assets, you
may come up against a crash crunch that prevents you from paying suppliers, buying
materials and even paying yourself a salary. It's a good idea then, to maintain a level
of working capital that allows you to make it through those crunch times and continue
to operate the business.
In growth situations where you have to suddenly increase inventory that will
be sold on credit, you may need to increase your working capital. Shareholders and
other investors can sometimes provide this cash injection and HDFC Bank can also
provide long-term financing for working capital.
Large asset purchases such as equipment and real estate should be financed
long-term which allows you to spread the payments over the average life of the
assets. Yes, you'll be paying interest but, you'll still have a big portion of your capital
on-hand for business operations.
And it's always a good idea to make a cash flow budget. Your bookkeeper,
accountant, accounting software and even spreadsheets downloadable from the
Internet can help you anticipate inflows and outflows of money over a period of time.
Budgeting allows you to see when a cash crunch is likely to occur.
There are many risks involved in running a business, and serious challenges
should be expected at some time in the future. You need to consider a number of
scenarios such as "What if that big order suddenly comes in?", "What if that big order
is cancelled?" or "What if that important client under owes me money?" This kind of
risk analysis can become part of your cash-flow budgeting process. For instance, if
you're using a spreadsheet to enter cash inflows, simply reflect that situation by
adding or deleting. The repercussions in the weeks and months to come should be
immediately visible, so that you can consider what you would do if that occurred.
You can reduce the risk of cash-crunch due to this type of situation, by
planning ahead and having a more diversified client base. If you're not dependent on
one large order or client, your livelihood doesn't hinge on the health of someone else's
business. Finding new clients will increase revenue, improve your cash flow situation
and make you less susceptible to marketplace adversity.
• Collect quickly
To guard against late payments, bill as early as possible and make those
invoices as clear and as detailed as possible. It may also be worth changing other
billing practices such as invoice frequency: instead of waiting until the end of the
month, generate an invoice as soon as the goods or services are delivered. Make sure
those invoices are addressed to the right person in the right department.
For those big orders, you may want to consider progressive invoicing while
you manufacture the goods or deliver the service. For example you can ask for a
deposit with the order and then a percentage of the payment at various agreed upon
milestones.
Keep track of your receivables. It's easy to lose track and then neglect to
follow up on an overdue account. Experience shows that the longer you remain out of
contact with a customer, the less likely you are to recover the full amount owed, so if
you can't take care of it yourself, hire someone to do it for you.
Make sure you're getting the best possible deal from your suppliers. You can
do this by shopping around and getting quotes from other suppliers. They may not be
able to give a better price, but may be able to offer better payment terms making it
easier on your cash flow situation. Analyze inventory turnover to determine which
items are selling and which are duds that are soaking up your working capital. Try to
keep inventory levels lean so that your working capital isn't tied-up unproductively
and unprofitably.
Bibliography
1. www.wikipedia.com
2. www.investopedia.com
3. www.businessfinance.com
4. www.finance.cch.com
5. A guide to capital cost estimating By Mr. A.M.Gerrard
6. Working Capital Management & Control: Principles & Practice By Mr. Satish
B. Mathur
7. www.planware.com/Finance
8. The ICFAI Journals (Finance)
9. www.fxcmttr.com
10. Entreprenuerial Profit & Loss By Murray, RothBards
11. www.searchindia.com/finance
12. www.financeguide.com/working_capital
13. www.articles.com/finance/working_capital
14. www.google.com
15. www.yahoo.com/search