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PROJECT REPORT ON

WORKING CAPITAL
A Summer Training Project Submitted in partial fulfillment of the requirements for the Award of degree of Bachelor of Business Administration 2008-2011

INDEX
Sr. No. 1. 2. 3. 4. 5. Contents Objectives of the Study Company Profile Working Capital Management Working Capital Ratio Analysis Working Capital Management 6. 7. 8. Components Working Capital Finance Conclusion Bibliography 75 79 80 Page No. 6 7 30 36 65

OBJECTIVES OF THE STUDY

Study of the working capital management is important because unless the working capital is managed effectively, monitored efficiently planed properly and reviewed periodically at regular intervals to remove bottlenecks if any the company cannot earn profits and increase its turnover. With this primary objective of the study, the following further objectives are framed for a depth analysis. 1. To study the working capital management of Alcon Rail Nirman Ltd. 2. To study the optimum level of current assets and current liabilities of the company. 3. To study the liquidity position through various working capital related ratios. 4. To study the working capital components such as receivables accounts, cash management, Inventory position 5. To study the way and means of working capital finance of the company. 6. To study the cash cycle of the company. 6

CHAPTER I COMPANY PROFILE

Products / Services :
ALUMINUM CONDUCTOR XLPE INSULATED , PVC INSULATED ARMOURED AND UNAROMOURED CABLE. COPPER CONDUCTOR XLPE INSULATED, PVC INSULATED ARMOURED AND UNARMOURED CBALE. COPPER FLEXIBLE CABLE. COPPER FLAT CABLE Company Profile : We are manufacture of LT power and control cable and flexible cable Establishment Year: 1959 Firm Type: Partnership Nature of Business: Manufacturer Level to Expand: State

Products & services


>> Other products and services

Twine, cordage, ropes and cables


Twine, man-made fibre Cords, natural fibre Cords, man-made fibre Cords, silk and cotton waste Cords, paper Cords, braided Cords, impregnated Cords, endless Cords, plastic or latex coated

Cables, cords and ropes, plaited bands and stranded wire slings, metal
Cables, stainless steel wire

Cables, galvanised steel wire Cables, iron and steel, mixed cables Cables, mixed, metal-textile fibres Cables, multi-wire, 4 to 16 strands, non-ferrous metals Cables, metal, covered Cables, metal, braided

Power line cable and wire fittings


Terminals, power line cable and wire Connectors, power line cable and wire Clamps, power line cable and wire Cable clips and wiring clips, electric Cable cleats and saddles, electric Brackets, power line cable and wire Cable glands Cable glands for hazardous areas Junction boxes Junction boxes, watertight Junction boxes, earth-cable, fused Power line vibration dampers and spacer dampers Cable tensioners and cable laying equipment, electric Cable support systems Cable suspenders, electric Cable racks, electric Cable trays, electric Cable thimbles and sockets, electric Cable end sleeves, electric Cable joint accessories, underground distribution

Electric wires and cables, insulated


Wire, mineral fibre covered, electric Wire, ceramic covered, electric Wire, textile covered, electric

Wires and cables for telecommunications and electronics


Cables, coaxial Cables, coaxial, microwave Cables, miniature, electric

Local area network (LAN) equipment NES


Local area network (LAN) systems, complete Local networks, optical fibre cable Local networks, coaxial cable

Computer cable assemblies and connectors


Computer data cable assemblies, pre-assembled Computer serial cable assemblies Computer parallel cable assemblies Computer keyboard and mouse extension cable assemblies

Contact Information :
Web-site: Visit Website Contact Person: B.K.SAGGI Designation: PARTNER Phones (Office) : 1762329943 Phones (Resi.) : 329943 Mobile: 9316603066 Fax: 1762232687 Address: 27-A, FOCAL POINT, RAJPURA RAJPUA - 140401 (Punjab) India

CHAPTER II WORKING CAPITAL MANAGEMENT

Introduction Need of working capital Gross W.C. and Net W.C. Types of working capital Determinants of working capital

Introduction
Working capital management is concerned with the problems arise in attempting to manage the current assets, the current liabilities and the inter relationship that exist between them. The term current assets refers to those assets which in ordinary course of business can be, or, will be, turned in to cash within one year without undergoing a diminution in value and without disrupting the operation of the firm. The major current assets are cash, marketable securities, account receivable and inventory. Current liabilities ware those liabilities which intended at their inception to be paid in ordinary course of business, within a year, out of the current assets or earnings of the concern. The basic current liabilities are account payable, bill payable, bank overdraft, and outstanding expenses. The goal of working capital management is to manage the firms current assets and current liabilities in such way that the satisfactory level of working capital is mentioned. The current asset should be large enough to cover its current liabilities in order to ensure a reasonable margin of the safety.

Need of working capital management


The need for working capital gross or current assets cannot be over emphasized. As already observed, the objective of financial decision making is to maximize the shareholders wealth. To achieve this, it is necessary to generate sufficient profits can be earned will naturally depend upon the magnitude of the sales among other things but sales cannot convert into cash. There is a need for working capital in the form of current assets to deal with the problem arising out of lack of immediate realization of cash against goods sold. Therefore sufficient working capital is necessary to sustain sales activity. Technically this is refers to operating or cash cycle. If the company has certain amount of cash, it will be required for purchasing the raw material may be available on credit basis. Then the company has to spend some amount for labour and factory overhead to convert the raw material in work in progress, and ultimately finished goods. These finished goods convert in to sales on credit basis in the form of sundry debtors. Sundry debtors are converting into cash after expiry of credit period.

Thus some amount of cash is blocked in raw materials, WIP, finished goods, and sundry debtors and day to day cash requirements. However some part of current assets may be financed by the current liabilities also. The amount required to be invested in this current assets is always higher than the funds available from current liabilities. This is the precise reason why the needs for working capital arise.

Gross working capital and Net working capital


There are two concepts of working capital management 1. Gross working capital Gross working capital refers to the firm s investment in current assets. Current assets are the assets which can be convert in to cash within year includes cash, short term securities, debtors, bills receivable and inventory. 2. Net working capital Net working capital refers to the difference between current assets and current liabilities. Current liabilities are those claims of outsiders which are expected to mature for payment within an accounting year and include creditors, bills payable and outstanding expenses. Net working capital can be positive or negative. Efficient working capital management requires that firms should operate with some amount of net working capital, the exact amount varying from firm to firm and depending, among other things; on the nature of industries.net working capital is necessary because the cash outflows and inflows do not coincide. The cash outflows resulting from payment of current liabilities are relatively predictable. The cash inflow are however difficult to predict. The more predictable the cash inflows are, the less net working capital will be required.

Type of working capital


The operating cycle creates the need for current assets (working capital). However the need does not come to an end after the cycle is completed to explain this continuing need of current assets a destination should be drawn between permanent and temporary working capital. 1) Permanent working capital The need for current assets arises, as already observed, because of the cash cycle. To carry on business certain minimum level of working capital is necessary on continues and uninterrupted basis. For all practical purpose, this requirement will have to be met permanent as with other fixed assets. This requirement refers to as permanent or fixed working capital. 2) Temporary working capital Any amount over and above the permanent level of working capital is temporary, fluctuating or variable, working capital. This portion of the required working capital is needed to meet fluctuation in demand consequent upon changes in production and sales as result of seasonal changes

Determinants of working capital


The amount of working capital depends upon the following factors:1. Nature of business Some businesses are such, due to their very nature, that their requirement of fixed capital is more rather than working capital. These businesses sell services and not the commodities and that too on cash basis. As such, no founds are blocked in piling inventories and also no funds are blocked in receivables. E.g. public utility services like railways, infrastructure oriented project etc. there requirement of working capital is less. On the other hand, there are some businesses like trading activity, where requirement of fixed capital is less but more money is blocked in inventories and debtors. 2. Length of production cycle In some business like machine tools industry, the time gap between the acquisition of raw material till the end of final production of finished products itself is quite high. As suchamount may be blocked either in raw material or work in progress or finished goods or even in debtors. Naturally there need of working capital is high. 3. Size and growth of business In very small company the working capital requirement is quit high due to high overhead, higher buying and selling cost etc. as such medium size business positively has edge over the small companies. But if the business start growing after certain limit, the working capital requirements may adversely affect by the increasing size. 4. Business/ Trade cycle

If the company is the operating in the time of boom, the working capital requirement may be more as the company may like to buy more raw material, may increase the production and sales to take the benefit of favourable market, due to increase in the sales, there may more and more amount of funds blocked in stock and debtors etc. similarly in the case of depressions also, working capital may be high as the sales terms of value and quantity may be reducing, there may be unnecessary piling up of stack without getting sold, the receivable may not be recovered in time etc. 5. Terms of purchase and sales Some time due to competition or custom, it may be necessary for the company to extend more and more credit to customers, as result which more and more amount is locked up in debtors or bills receivables which increase the working capital requirement. On the other hand, in the case of purchase, if the credit is offered by suppliers of goods and services, a part of working capital requirement may be financed by them, but it is necessary to purchase on cash basis, the working capital requirement will be higher. 6. Profitability The profitability of the business may be vary in each and every individual case, which is in turn its depend on numerous factors, but high profitability will positively reduce the strain on working capital requirement of the company, because the profits to the extent that they earned in cash may be used to meet the working capital requirement of the company. 7. Operating efficiency

If the business is carried on more efficiently, it can operate in profits which may reduce the strain on working capital; it may ensure proper utilization of existing resources by eliminating the waste and improved coordination etc.

Statement of Working Capital


As per financial records of Alcon Rail Nirman Ltd up to 31st March 2009.

Particulars (A) Current Assets Inventories Sundry Debtors Cash & Bank Balance Other C.A. Loan &

2005-06 Rs.

2006-07 Rs.

2007-08 Rs.

2008-09 Rs.

194799131 243587499 76113686

427052993 407657437 504777909

895384581 341241874 256301747

837351802 482447680 294468615

80003943 54583090

151038089 88478801 1579005229 346003954 62270017 408273971 1170731258

330596825 107711253 1931236280 397798913 77884176 475683089 1455553191

366076803 80783339 2061128239 319271072 51215931 370487003 1690641236

advances Total 649087349 (B) Current Liabilities Liabilities 78816022 Provisions 30004352 Total 108820374 Working 540266975 Capital

CHAPTER III WORKING CAPITAL


RATIO ANALYSIS
Introduction Role of Ratio Analysis Limitations of Ratio Analysis Classification of Ratio Analysis Quarterly Trends

Introduction

Ratio analysis is the powerful tool of financial statements analysis. A ratio is define as the indicated quotient of two mathematical expressions and as the relationship between two or more things. The absolute figures reported in the financial statement do not provide meaningful understanding of the performance and financial position of the firm. Ratio helps to summaries large quantities of financial

Role of ratio analysis

Ratio analysis helps to appraise the firms in the term of their profitability and efficiency of performance, either individually or in relation to other firms in same industry. Ratio analysis is one of the best possible techniques available to management to impart the basic functions like planning and control. As future is closely related to the immediately past, ratio calculated on the basis historical financial data may be of good assistance to predict the future. E.g. On the basis of inventory turnover ratio or debtors turnover ratio in the past, the level of inventory and debtors can be easily ascertained for any given amount of sales. Similarly, the ratio analysis may be able to locate the point out the various areas which need the management attention in order to improve the situation. E.g. Current ratio which shows a constant decline trend may be indicate the need for further introduction of long term finance in order to increase the liquidity position. As the ratio analysis is concerned with all the aspect of the firms financial analysis liquidity, solvency, activity, profitability and overall performance, it enables the interested persons to know the financial and operational characteristics of an organization and take suitable decisions.

Limitations of ratio analysis

1. The basic limitation of ratio analysis is that it may be difficult to find a basis for making the comparison 2. Normally, the ratios are calculated on the basis of historical financial statements. An organization for the purpose of decision making may need the hint regarding the future happiness rather than those in the past. The external

analyst has to depend upon the past which may not necessary to reflect financial position and performance in future. 3. The technique of ratio analysis may prove inadequate in some situation if there is differs in opinion regarding the interpretation of certain ratio. 4. As the ratio calculates on the basis of financial statements, the basic limitation which is applicable to the financial statement is equally applicable. In case of technique of ratio analysis also i.e. only facts which can be expressed in financial terms are considered by the ratio analysis. 5. The technique of ratio analysis has certain limitations of use in the sense that it only highlights the strong or problem areas, it does not provide any solution to rectify the problem areas 37

The following ratio may be calculated for the purpose of analyzing the working capital of ALCON: 1. Liquidity Ratio 2. Leverage Ratio 3. Turnover Ratio 4. Profitability Ratio

1.Liquidity Ratio
Liquidity ratios measure the short term solvency, i.e., the firms ability to pay its current dues and also indicate the efficiency with which working capital is being used. Commercial banks and short-term creditors may be basically interested in the ratios under this group. They comprise of following ratios:

Current Ratio

This ratio measures the solvency of the company in the short term. Current assets are those assets which can be converted into cash within a year. Current liabilities and provisions are those liabilities that are payable within a year. The ratio is mainly used to give an idea of the company's ability to pay back its short-term liabilities with its short-term assets. The higher the current ratio, the more capable the company is of paying its obligations. However, a very high ratio indicates idleness of funds, poor investment policies of the management and poor inventory control. A ratio under 1 suggests that the company would be unable to pay off its obligations if they came due at that point. A lower ratio indicates lack of liquidity and shortage of working capital. A current ratio of 2:1 indicates a highly solvent position. A current ratio of 1.33:1 is considered by banks as the minimum acceptable level for providing working capital finance. Current Assets Current Ratio= Current Liability

Year 2005-06 2006-07 2007-08 2008-09

Current Assets 649087349 1579005229 1931236280 2061128239

Current Liability 108820374 408273971 475683089 370487003

Ratio(CA/CL) 5.96 3.86 4.05 5.56

Interpretation
As we know that ideal current ratio for any firm is 2:1. If we see the current ratio of the company for last three years it has increased from 2006 to 2008. The current ratio of company is more than the ideal ratio. This depicts that companys liquidity position is sound. Its current assets are more than its current liabilities.

Quick Ratio
Quick ratio is used as a measure of the companys ability to meet its current obligations. Cash is the most liquid asset. Debtors, bills receivables and marketable

securities are relatively liquid and included in quick assets. Inventories are considered to be less liquid, hence not a quick asset. A quick ratio of 1:1 is considered standard and ideal, since for every rupee of current liabilities, there is a rupee of quick assets. A decline in the liquid ratio indicates overtrading, which, if serious, may land the company in difficulties.

Current Assets - Inventories Quick Ratio = Current Liability


Year 2005-06 2006-07 2007-08 2008-09 Liquid Assets 454288218 1151952236 1035851699 1223776437 Current Liability 108820374 408273971 475683089 370487003 Ratio(CA/CL) 4.17 2.82 2.17 3.30

Interpretation
A quick ratio is an indication that the firm is liquid and has the ability to meet its current liabilities in time. The ideal quick ratio is 1:1. Companys quick ratio is more than ideal ratio. This shows company has no liquidity problem.

Leverage Ratio

Leverage refers to the use of debt finance. While debt finance is a cheaper source of finance but it is riskier also. These ratios help in assessing the risk arising from the use of debt capital. A leverage ratio reveals the firms ability to meet its obligations in long run. The short term creditor, like bankers and raw material suppliers, are more concern with the firms current debt paying ability. On the other hand, long term creditors, like debenture holders, financial institutions etc. are more concern with the firms long term financial strength. In fact, a firm should have a strong short as well as long term financial position.

Debt Ratio
The firm may be interested in knowing the proportion of the interest-bearing debt in the capital structure. It may, therefore, compute debt ratio by

Total Debt Debt Ratio = Capital Employed


Year 2005-06 2006-07 2007-08 2008-09 Debt 414635193 540857896 761455005 822617264 Capital Employed 591103847 1238879545 1625514244 1862460512 Ratio(D/CE) 0.70 0.43 0.46 0.44

Interpretation
The debt ratio of 0.43 means that lenders have financed 43% of ALCONs net assets (capital employed). It obviously means that owners have provided the remaining finances i.e. 57%. For consecutive years also, the lenders have financed less than 50% highlighting that the firm has a strong financial position. It has very less chances of going bankrupt.

Debt Equity Ratio


The debt-equity ratio is worked out to ascertain soundness of the long term financial policies of the firm. This ratio expresses a relationship between debt (external equities) and the equity (internal equities). Debt means long-term loans, i.e., debentures, public deposits, loans (long term) from financial institutions. Equity means shareholders funds, i.e., preference share capital, equity share capital, reserves less losses and fictitious assets like preliminary expenses. It indicates the extent to which the firm depends upon outsiders for its existence. A high debt-equity ratio may indicate that the financial stake of the creditors is more than that of the

owners. A very high debt-equity ratio may make the proposition of investment in the organization a risky one. While a low ratio indicates safer financial position, a very low ratio may mean that the borrowing capacity of the organization is being underutilized. Debt Debt Equity Ratio = Net worth (Equity)

Year 2005-06 2006-07 2007-08 2008-09

Debt 414635193 540857896 761455005 822617264

Net Worth 176468654 695616233 858068314 1029553358

Ratio(D/NW) 2.34 0.77 0.88 0.79

Interpretation
This relationship describes the lenders contribution for each rupee of the owners contribution. It is clear that the lenders contribution is 0.77, 0.88, 0.79 times of owners contribution. The company is conservative in financing its growth with debt but this is beneficial as there is less chances of it going bankrupt.

Activity or Turnover Ratio


Funds of creditors and owners are invested in various assets to generate sales and profits. The better the management of assets, the larger the amount of sales. Activity ratios are employed to evaluate the efficiency with which the firm manages and utilises its assets. These ratios are also called turnover ratios because they indicate the speed with which the assets are being converted or turned over into sales. Higher turnover ratio means, better use of resources, which in turn means better profitability ratio. The following are the important activity (turnover) ratios:

Inventory Turnover Ratio


The inventory turnover shows how rapidly the inventory is turning into receivables through sales. Generally, a high inventory turnover is indicative of good inventory management. A low inventory turnover implies a slow-moving or obsolete inventory. However, a relatively high inventory turnover should be carefully analysed. A high inventory turnover may be due to a very low level of inventory, which results in frequent stock-outs. The turnover will also be high if the firm replenishes its inventory in too many small lot sizes. Net Sales Inventory Turnover ratio = Average Inventory

Year
2005-06 2006-07 2007-08 2008-09

Net Sales
901324171 1881201406 2480267871 2814977170

Average Inventory 162817698 310926062 661218787 866368191.5

Ratio(NS/Avg. Inv) 5.53 6.05 3.75 3.24

Interpretation
The inventory turnover shows how rapidly the inventory is turning into receivable through sales. A high ratio indicates good inventory management. ALCON has turned its inventory of finished goods into sales 6.05 times a year which has then fallen to 3.75 times and then to 3.24. Though it is not low for a construction company but it should pay more attention to maintain the stability of this ratio.

Debtor Turnover Ratio


It measures whether the amount of resources tied up in debtors is reasonable and whether the company has been efficient in converting debtors into cash. The higher the ratio, the better the position. Net sales Debtor turnover ratio = Sundry Debtor

Year 2005-06 2006-07 2007-08 2008-09

Net Sales 901324171 1881201406 2480267871 2814977170

Sundry Debtor 243587499 407657437 341241874 482447680

Ratio(NS/SD) 3.7 4.61 7.26 5.83

Interpretation
Generally, the higher the value of debtors turnover, the more efficient is the management of credit. The ratio for the firm has from 4.61 to 7.26 and then fallen to 5.83. It depicts that the firm has not been following an efficient credit policy.

Average Collection Period


The average collection period ratio represents the average number of days for which a firm has to wait before its receivables are converted into cash. It measures the quality of debtors. Generally, shorter the average collection period the better is the quality of debtors as a short collection period implies quick payment by debtors and vice-versa. 360 Average Collection Period = Debtor turnover Ratio

Year
2005-06 2006-07 2007-08 2008-09

No. of days
360 360 360 360

Debtors Turnover Ratio(360/DTR) Ratio 3.7 4.61 7.26 5.83


97days 78 days 50 days 62 days

Interpretation
The Average collection period measures the quality of debtors since it indicates the speed of their collection. Though it has fallen from 78 days to 62 days, it still implies a very liberal and inefficient credit and collection performance.

Working Capital Turnover Ratio


The working capital turnover ratio measures the efficiency with which the working capital is being used by a firm. A high ratio indicates efficient utilization of working capital and a low ratio indicates otherwise. But a very high working capital turnover ratio may also mean lack of sufficient working capital which is not a good situation. Net Sales Working Capital Turnover Ratio = Working Capital

Year 2005-06 2006-07 2007-08 2008-09

Net Sales 901324171 1881201406 2480267871 2814977170

Working Capital 540266975 1170731258 1455553191 1690641236

Ratio(NS/WC) 1.66 1.60 1.70 1.66

Interpretation
In alcon, the management needs to utilize the working capital in a better manner so that it can increase the income.

Fixed Asset Turnover Ratio


The fixed-asset turnover ratio measures a company's ability to generate net sales from fixed asset investments - specifically property, plant and equipment (PP&E) - net of depreciation. A higher fixed-asset turnover ratio shows that the company has been more effective in using the investment in fixed assets to generate revenues. Net Sales Fixed Assets Turnover Ratio = Fixed Assets

Year 2005-06 2006-07 2007-08 2008-09

Net Sales 901324171 1881201406 2480267871 2814977170

Fixed Assets 55759485 68148287 166961053 168819276

Ratio(NS/FA) 16.16 27.6 14.6 16.67

Interpretation

A high ratio indicates a high degree of efficiency in fixed assets utilization. The company has been effective in using the investment in fixed assets to generate revenues.

Current Assets Turnover Ratio


It measures the efficiency with which the current asset employed. A high ratio indicates a high degree of efficiency in current asset utilization and vice-versa. But again too high ratio indicates overtrading on the basis of these ratios. Net Sales Current Asset Turnover Ratio = Current Assets

Year 2005-06 2006-07 2007-08 2008-09

Net Sales 901324171 1881201406 2480267871 2814977170

Current Assets 649087349 1579005229 1931236280 2061128239

Ratio(NS/CA) 1.38 1.19 1.28 1.36

Interpretation
Alcon turns over its fixed assets faster than current assets.

Total Asset Turnover Ratio


This ratio indicates the number of times total assets are being turned over in a year. The higher the ratio indicates overtrading of total assets, while a relatively lower ratio indicates idle capacity. Net Sales Total Assets Turnover Ratio = Total Assets

Year 2005-06 2006-07 2007-08 2008-09

Net Sales 901324171 1881201406 2480267871 2814977170

Total Assets 704846834 1647153516 2101197333 2232947515

Ratio(NS/CA) 1.27 1.14 1.18 1.26

Interpretation
The total assets turnover has been slowly increasing implying that ALCON generates a sale of Rs. 1.26 for one rupee investment in fixed and current assets together.

Profitability Ratio
The purpose of study and analysis of profitability ratios are to help assessing the adequacy of profit earned by the company and also to discover whether profitability is increasing or declining. The profitability ratio shows the combined effects of liquidity, asset management and debt management on operating results. Profitability ratio are measured with reference to sale, capital employed, total asset employed, shareholders fund etc.

Net Profit Margin


A measure of how well a company controls its costs. It is calculated by dividing a company's profit by its revenues and expressing the result as a percentage. The higher the net profit margin is, the better the company is thought to control costs. Investors use the net profit margin to compare companies in the same industry and well as between industries to determine what are the most profitable. Net Profit Net profit Ratio = Net Sales
Year 2005-06 2006-07 2007-08 2008-09 Net Profit 36092058 94415570 142160782 104392055 Net Sales 901324171 1881201406 2480267871 2814977170 Ratio(NPx100/NS) 4% 5% 5.73% 3.7%

Interpretation
The firm is having a low net margin and is further declining which might be difficult for the firm to survive in adverse economic condition and also in the face of falling selling price, rising cost of production or declining demand.

Return on Equity
This ratio is an important yardstick of performance for equity shareholders since it indicates the return on the funds employed by them. The factor which motivates shareholders to invest in a company is the expectation of an adequate rate of return on their funds and periodically, they want to assess the rate of return in order to decide whether to continue with their investment. Net Profit Return on Equity = Net Worth

Year 2005-06 2006-07 2007-08 2008-09

Net Profit 36092058 94415570 142160782 104392055

Net Worth 176468654 695616233 858068314 1029553358

Ratio(NPx100/NW ) 20.45% 13.5% 16.56% 10.13%

Interpretation
The ratio reveals that the shareholders funds are being utilized efficiently though last year the return was not satisfactory.

Return on Capital Employed


It is used in finance as a measure of the returns that a company is realising from its capital employed. It is commonly used as a measure for comparing the performance between businesses and for assessing whether a business generates enough returns to pay for its cost of capital. ROCE measures the profitability of the capital employed in the business. A high ROCE indicates a better and profitable use of long-term funds of owners and creditors. As such, a high ROCE will always be preferred. Net Profit Return on Capital Employed = Capital employed

Year 2005-06 2006-07 2007-08 2008-09

Net Profit 36092058 94415570 142160782 104392055

Capital Employed 591103847 1238879545 1625514244 1862460512

Ratio(NPx100/CE) 6.10% 7.62% 8.74% 5.60

Interpretation
The ROCE is on the lower side depicting that the company has a low earning power.

QUARTERLY TRENDS FROM 2006-2010


2006-07

QUARTER 1
(Apr-Jun

QUARTER 2
(Jul-Sep

QUARTER 3
(Oct-Dec

QUARTER 4
(Jan-Mar

2006)
Rs. 19.374 cr. 17.089 cr. 0.7 cr. 0.15 cr. 1.435 cr. 0.443 cr. 0.992 cr. 4.946 cr. 2

2006)
Rs. 37.233 cr. 32.727 cr. 1.008 cr. 0.15 cr. 3.348 cr. 1.302 cr. 2.046 cr. 4.946 cr. 4.14

2006)
Rs. 49.035 cr. 41.988 cr. 1.113 cr. 0.1 cr. 5.834 cr. 2.1 cr. 3.734 cr. 8.772 cr. 4.26

2006)
Rs. 82.481 cr. 76.47 cr. 1.827 cr. 0.2 cr. 3.984 cr. 0.309 cr. 3.675 cr. 10.498 cr. 3.5

Income Expenditure Interest Depreciation Profit before


Tax Tax Net Profit Equity Capital EPS

CUMMULATIVE (2006-07) (Rs.) Income Expenditure Interest Depreciation Profit before Tax Tax Net Profit Equity Capital EPS 188.12 cr. 168.27 cr. 4.648 cr. 0.6 cr. 14.6 cr. 4.154 cr. 10.447 cr. 10.498 cr. 9.95

ANNUAL (2006-07) (Rs.) 188.12 cr. 168.98 cr. 3.9 cr. 0.62 cr. 14.6 cr. 5.16 cr. 9.44 cr. 10.52 cr. 8.97

*EPS in the Annual Report was 15.31 which should have been 8.97

2007-08
QUARTER 1 (Apr-Jun QUARTER 2 (Jul-Sept QUARTER 3 (Oct-Dec QUARTER 4 (Jan-Mar

2007)
(Rs.) Income Expenditure Interest Depreciation Profit before Tax Tax Net Profit Equity Capital EPS 48.134 cr. 42.571 cr. 0.978 cr. 0.2 cr. 4.384 cr. 1.49 cr. 2.894 cr. 10.498 cr. 2.76

2007)
(Rs.) 43.867 cr. 38.332 cr. 1.158 cr. 0.1 cr. 4.277 cr. 1.368 cr. 2.909 cr. 10.521 cr. 2.76

2007)
(Rs.) 93.865 cr. 83.131 cr. 1.572 cr. 0.15 cr. 9.013 cr. 2.796 cr. 6.216 cr. 10.521 cr. 5.91

2007)
(Rs.) 48.791 cr. 45.023 cr. 0.793 cr. 0.15 cr. 2.825 cr. 0.7 cr. 2.125 cr. 10.727 cr. 3.5

CUMMULATIVE (2007-08) (Rs.)

ANNUAL (2007-08) (Rs.)

Income Expenditure Interest Depreciation Profit before Tax Tax Net Profit Equity Capital EPS

234.65 cr. 209.05 cr. 4.05 cr. 0.6 cr. 20.95 cr. 6.35 cr. 14.6 cr. 10.73 cr. 13.6

248.02 cr. 222.82 cr. 3.16 cr. 0.88 cr. 21.16 cr. 6.95 cr. 14.21 cr. 10.73 cr. 13.25

2008-09

QUARTER 1 (Apr-Jun 2008)

QUARTER 2 (Jul-Sept 2008)

QUARTER 3 (Oct-Dec 2008)

QUARTER 4 (Jan-Mar 2009)

(Rs.) Income Expenditure Interest Depreciation Profit before Tax Tax Net Profit Equity Capital EPS 59.486 cr. 51.54 cr. 1.827 cr. 0.23 cr. 5.889 cr. 1.79 cr. 4.099 cr. 10.72 cr. 3.82

(Rs.) 87.764 cr. 80.105 cr. 2.178 cr. 0.27 cr. 5.212 cr. 2.027 cr. 3.185 cr. 11.22 cr. 2.84

(Rs.) 72.59 cr. 65.754 cr. 2.295 cr. 0.25 cr. 4.292 cr. 1.327 cr. 2.965 cr. 11.22 cr. 2.64

(Rs.) 61.654 cr. 57.211 cr. 2.336 cr. 0.2 cr. 1.907 cr. 0.629 cr. 1.278 cr. 11.22 cr. 1.13

CUMMULATIVE (2008-09) (Crores) Income Expenditure 281.5 254.61

ANNUAL (2008-09) (Crores) 281.5 255.91

Interest Depreciation Profit before Tax Tax Net Profit Equity Capital EPS

8.63 0.95 17.3 5.77 11.52 11.22 10.27

8.14 1.4 16.05 5.61 10.44 11.22 9.3

2009-10
QUARTER 1 (Apr-Jun 2009) (Rs.) QUARTER 2 (Jul-Sept 2009) (Rs.) QUARTER 3 (Oct-Dec 2009) (Rs.) QUARTER 4 (Jan-Mar 2010) (Rs.)

Income Expenditure Interest Depreciation Profit before Tax Tax Net Profit Equity Capital EPS

36.018 cr. 30.918 cr. 2.199 cr. 0.359 cr. 2.542 cr. 0.864 cr. 1.678 cr. 11.22 cr. 1.49

26.022 cr. 23.553 cr. 1.806 cr. 0.375 cr. 0.289 cr. 0.011 cr. 0.278 cr. 12.24 cr. 0.23

37.642 cr. 34.587 cr. 0.36 cr. 2.172 cr. 0.522 cr. 0.265 cr. 0.257 cr. 12.24 cr. 0.2

60.799 cr. 53.392 cr. 1.467 cr. 0.407 cr. 5.533 cr. 1.881 cr. 3.652 cr. 12.24 cr. 2.98

*EPS in the 3rd quarter was found 0.02 in the report which must be 0.2 CUMMULATIV E (2009-10) (Rs.) Income Expenditure Interest Depreciation Profit before Tax Tax Net Profit Equity Capital EPS 160.48 cr. 142.45 cr. 5.83 cr. 3.31 cr. 8.88 cr. 3.02 cr. 5.86 cr. 12.24 cr. 4.8

CHAPTER IV

WORKING CAPITAL MANAGEMENT COMPONENTS


Receivables Management Cash Management Inventory Management

Working Capital management Components RECEIVABLES MANAGEMENT


Receivables or debtors are the one of the most important parts of the current assets which is created if the company sells the finished goods to the customer but not receive the cash for the same immediately. Trade credit arises when firm sells its products and services on credit and does not receive cash immediately. It is essential marketing tool, acting as bridge for the movement of goods through production and distribution stages to customers. Trade credit creates receivables or book debts which the firm is expected to collect in the near future. The receivables include three characteristics 1) It involve element of risk which should be carefully analysis. 2) It is based on economic value. To the buyer, the economic value in goods or services passes immediately at the time of sale, while seller expects an equivalent value to be received later on 3) It implies futurity. The cash payment for goods or serves received by the buyer will be made by him in a future period.

Objective of receivable management


The sales of goods on credit basis are an essential part of the modern competitive economic system. The credit sales are generally made up on account in the sense that there are formal acknowledgements of debt obligation through a financial instrument. As a marketing tool, they are intended to promote sales and there by profit. However extension of credit involves risk and cost, management should weigh the benefit as well as cost to determine the goal of receivable management. Thus the objective of receivable management is to promote sales and profit until that point is reached where the return on investment in further funding of receivables is less .than the cost of funds raised to finance that additional credit.

Size of receivables

Year Sundry Debtor

2005-06 243587499

2006-07 407657437

2007-08 341241874

2008-09 482447680

Average collection period


The average collection period measures the quality of debtors since it indicate the speed of their collection. The shorter the average collection period, the better the quality of the debtors since a short collection period implies the prompt payment by debtors. The average collection period should be compared against the firms credit terms and policy judges its credit and collection efficiency. The collection period ratio thus helps an analyst in two respects. 1. In determining the collectability of debtors and thus, the efficiency of collection efforts. 2. In ascertaining the firms comparative strength and advantages related to its credit policy and performance. The debtors turnover ratio can be transformed in to the number of days of holding of debtors.
Average Collection Period Year Average Collection Period 2005-06 97 2006-07 78 2007-08 50 2008-09 62

OBSERVATION
Alcon as such do not have a credit policy. As the company undertakes government projects so there is no worry about not getting the cash for the bills receivables. Though the average collection period has fallen over the years, still the company needs to follow a credit policy for timely recovery of the cash for the bills receivables.

CASH MANAGEMENT
Cash is common purchasing power or medium of exchange. As such, it forms the most important component of working capital. The term cash with reference to cash management is used in two senses, in narrow sense it is used broadly to cover cash and generally accepted equivalent of cash such as cheques, draft and demand deposits in banks. The broader view of cash also induce hear- cash assets, such as marketable sense as marketable securities and time deposits in banks. The main characteristics of this deposits that they can be really sold and convert in to cash in short term. They also provide short term investment outlet for excess and are also useful for meeting planned outflow of funds. We employ the term cash management in the broader sense. Irrespective of the form in which it is held, a distinguishing feature of cash as assets is that it was no earning power. Company have to always maintain the cash balance to fulfil the dally requirement of expenses. There are three primary motive for maintain the cash as follows

Motive of holding cash


There are three motives for holding cash as follow 1. Transaction motive 2. Precautionary motive 3. Speculative motive

Transaction motive
Cash balance is necessary to meet day-to-day transaction for carrying on with the operation of firms. Ordinarily, these transactions include payment for material, wages, expenses, dividends, taxation etc. there is a regular inflow of cash from operating sources. But since they do not perfectly synchronize, a minimum cash balance is necessary to uphold the operations for the firm if cash payments exceed receipts. Always a major part of transaction balances is held in cash, a part may be held in the form of marketable securities whose maturity conforms to the timing of anticipated payments of certain items, such as taxation, dividend etc.

Precautionary Motive

Cash flows are somewhat unpredictable, with the degree of predictability varying among firms and industries. Unexpected cash needs at short notice may also be the result of following: 1. Uncontrollable circumstances such as strike and natural calamities. 2. Unexpected delay in collection of trade dues. 3. Cancellation of some order for goods due unsatisfactory quality. 4. Increase in cost of raw material, rise in wages, etc. The higher the predictability of firms cash flows, the lower will be the necessity of holding this balance and vice versa. The need for holding the precautionary cash balance is also influenced by the firms capacity to have short term borrowed funds and also to convert short term marketable securities into cash.

Speculative motive:
Speculative cash balances may be defined as cash balances that are held to enable the firm to take advantages of any bargain purchases that might arise. While the precautionary motive is defensive in nature, the speculative motive is aggressive in approach.

However, as with precautionary balances, firms today are more likely to rely on reserve borrowing power and on marketable securities portfolios than on actual cash holdings for speculative purposes.

Advantages of cash management


Cash does not enter in to the profit and loss account of an enterprise, hence cash is neither profit nor losses but without cash, profit remains meaningless for an enterprise owner. 1. A sufficient of cash can keep an unsuccessful firm going despite losses 2. An efficient cash management through a relevant and timely cash budget may enable a firm to obtain optimum working capital and ease the strains of cash shortage, fascinating temporary investment of cash and providing funds normal

growth. 3. Cash management involves balance sheet changes and other cash flow that do not appear in the profit and loss account such as capital expenditure.

OBSERVATION
Alcon has a relatively small amount of cash in hand which is usually employed in administrative expenses and payment to employees. The company carries out the various construction projects by borrowing 100% cash from various banks. The cash to be borrowed is entirely based on the project and varies from project to project.

CASH CYCLE
One of the distinguishing features of the fund employed as working capital is that constantly changes its form to drive business wheel. It is also known as circulating capital which means current assets of the company, which are changed in ordinary course of business from one form to another, as for example, from cash to inventories, inventories to receivables and receivables to cash. Basically cash management strategies are essentially related to the cash cycle together with the cash turnover. The cash cycle refers to the process by which cash is used to purchase the raw material from which are produced goods, which are then send to the customer, who later pay bills. TENDER NOTICES CASH RAW MATERIALS (for construction) DEBTORS FINISHED CONSTRUCTION Work in Progress The cash cycle for the construction company is entirely different from manufacturing companies. The various stages in the cycle are described below: 71

TENDER NOTICES
Alcon looks out for the various tender notices published out by the government in national newspapers. The company, upon evaluating its eligibility criteria according to the tender, files the tender with a competitive bid. The company which fulfils the eligibility criteria, has a good credential and has the lowest bid gets the tender for completion of the project.

CASH
Upon successfully getting a project in its hand, the company lifts cash by borrowing from various banks. The cash to be borrowed is entirely based on the project and varies from project to project.

RAW MATERIALS
The company purchases the materials required for the construction and completion of the project. The amounts of the material along with its specification/designation are provided in the tender. Complying with those, materials are bought, stocked and put to use.

WORK in PROGRESS
This is the stage where construction is in progress. The government pays to the company progressively in parts after a certain amount of work is completed.

FINISHED CONSTRUCTION
Finally, the construction project is finished and in case any material is left out, it is kept in stock for future use.

DEBTORS
Debtors mainly here are the government bodies like Railways, etc. that are yet to pay the remaining cash for the completion of the project.

72

INVENTORY MANAGEMENT
Inventories constitute the most significant part of current assets of a large majority of companies in India. On an average, inventories are approximately 60 % of current assets in public limited companies in India. Because of the large size of inventories maintained by firms maintained by firms, a considerable amount of funds is required to be committed to them. It is, therefore very necessary to manage inventories efficiently and effectively in order to avoid unnecessary investments. A firm neglecting a firm the management of inventories will be jeopardizing its long run profitability and may fail ultimately. The purpose of inventory management is to ensure availability of materials in sufficient quantity as and when required and also to minimize investment in inventories at considerable degrees, without any adverse effect on production and sales, by using simple inventory planning and control techniques.

Needs to hold inventories:There are three general motives for holding inventories: Transaction motive emphasizes the need to maintain inventories to facilitate smooth production and sales operation. Precautionary motive necessities holding of inventories to guard against the risk of unpredictable changes in demand and supply forces and other factors. Speculative motive influences the decision to increases or reduce inventory levels to take advantage of price fluctuations and also for saving in reordering costs and quantity discounts etc.

Objective of Inventory Management:The main objectives of inventory management are operational and financial. The operational mean that means that the materials and spares should be available in sufficient quantity so that work is not disrupted for want of inventory. The financial objective means

that investments in inventories should not remain ideal and minimum working capital should be locked in it.

The following are the objectives of inventory management:


To ensure continuous supply of materials, spares and finished goods. To avoid both over-stocking of inventory. To maintain investments in inventories at the optimum level as required by the operational and sale activities. To keep material cost under control so that they contribute in reducing cost of production and overall purchases. To eliminate duplication in ordering or replenishing stocks. This is possible with the help of centralizing purchases. To ensure perpetual inventory control so that materials shown in stock ledgers should be actually lying in the stores. To ensure right quality of goods at reasonable prices. To facilitate furnishing of data for short-term and long term planning and control of inventory

OBSERVATION
Alcon does not hold much inventory. It follows the Just-in-Time Systems, where in the materials required are bought and put to use. The construction company, after getting a project in its hand, buys and stocks the materials which will be needed for construction. The tender itself describes the amount and the specification/designation of the materials which are to be needed for the construction, so accordingly the materials are purchased. Alcon also follows a First-in-First-out (FIFO) method wherein the materials purchased first are put to use first.

CHAPTER V WORKING CAPITAL FINANCE


Introduction Bank Finance for Working Capital Form of Bank Credit Security required in Bank Finance

Introduction
Funds available for period of one year or less is called short term finance. In India short term finance is used as working capital finance. Two most significant short term sources of finance for working capital are trade credit and bank borrowing. Trade credit ratio of current assets is about 40%, it is indicated by Reserve Bank of India data that trade credit has grown faster than the growth in sales. Bank borrowing is the next source of working capital finance. The relative importance of this varies from time to time depending on the prevailing environment. In India the primary source of working capital financing are trade credit and short term bank credit. After determine the level of working capital, a firm has to consider how it will finance.

Bank Finance for Working Capital


Banks are the main institutional sources of working capital finance in India. Bank credit is the most important source of financing working capital requirements. A bank considers a firms sales and production plans and the desirable levels of current assets in determining its working capital requirements. The amount approved by the bank for the firms working capital is called credit limit. Credit limit is the maximum funds which a firm can obtain from the banking system. In the case of firms with seasonal businesses, banks may fix separate limits for the peak level credit requirement and normal, non-peak level credit requirement indicating the periods during which the separate limits will be utilised by the borrower. In practice, banks do not lend 100% of the credit limit; they deduct margin money. Margin requirement is based on the principle of conservatism and is meant to ensure security. If the margin requirement is 30%, bank will lend only upto 70% of the value of the asset.

Form of bank credit


Bank provides working capital finance in the following ways

Overdraft
Under the overdraft facility, the borrower is allowed to withdraw funds in excess of the balance in his current account upto a certain limit during a stipulated period. Though overdrawn amount is repayable on demand, they generally continue for a long period by annual renewals of the limits. It is a very flexible arrangement from the borrowers point of view since he can withdraw and repay funds whenever he desires within the overall stipulations. Interest is charged on daily balances-on the amount actually withdrawn-subject to some minimum charges. The borrower operates the account through cheques.

Cash credit
Under the cash credit facility, a borrower is allowed to withdraw funds from the bank upto the sanctioned credit limit. He is not required to borrow the entire sanctioned credit once, rather, he can draw periodically to the extent of his requirements and repay by depositing surplus funds in his cash credit account. There is no commitment charge; therefore, interest is payable on the amount actually utilised by the borrower. Cash credit limits are sanctioned against the security of current assets. Though funds borrowed are repayable on demand, banks usually do not recall such advances unless they are compelled by adverse circumstances.

Bills purchased / discounted


This form of assistance is comparatively of recent origin. This facility enables the company to get the immediate payment against the credit bills / invoice raised by the company. The banks hold the bills as a security till the payment is made by the customer. The entire amount of bill is not paid to the company. The company gets

only the present worth of amount of bill from of discount charges. On maturity, bank collects the full amount of bill from the customer.

Letter of credit
Suppliers, particularly the foreign suppliers, insist that the buyer should ensure that his bank will make the payment if he fails to honour its obligation. This is ensured through a letter of credit (L/C) arrangement. A bank opens an L/C in favour of a customer to facilitate his purchase of goods. If the customer does not pay to the supplier within the credit period, the bank makes the payment under the L/C arrangement. This arrangement passes the risk of the supplier to the bank. Bank charges the customer for opening the L/C. It will extend such facility to financially sound customers.

Security Required in Bank Finance


Banks generally do not provide working capital finance without adequate security. The following are the modes of security which a bank may require.

Hypothecation
Under this, the borrower is provided with working capital finance by the bank against the security of movable property, generally inventories. The borrower does not transfer the property to the bank; he remains in the possession of property made available as security for the debt. Banks generally grant credit hypothecation only to first class customers with highest integrity.

Pledge
Under this arrangement, the borrower is required to transfer the physical possession of the property offered as a security to the bank to obtain credit. The bank can retain possession of the goods pledged unless payment of the principal, interest and any

other expenses is made. In case of default, the bank may either (a) sue the borrower for the amount due, or (b) sue for the sale of goods pledged, or (c) after giving due notice, sell the goods.

Lien
Lien means right of the lender to retain property belonging to the borrower until he repays credit. It can be either a particular lien or general lien. Particular lien is a right to retain property until the claim associated with the property is fully paid. General lien, on the other hand, is applicable till all dues of the lender are paid. Banks usually enjoy general lien.

OBSERVATION
Alcon, being a construction company, looks out for various tender notices opened out by the government. Upon successfully getting a project in its hand, the firm borrows cash from various banks including State Bank of India, State Bank of Patiala, Yes Bank, HDFC, AXIS Bank. The banks provide working capital finance to the firm through one of the methods described above. The companys borrowings are entirely based on the projects in hand and usually the amount of cash to be spent on the completion of the project is 100% borrowed.

CONCLUSION

Working capital management is important aspect of financial management. The study of working capital management of Alcon Rail Nirman (Engineers) Ltd. has revealed that the company shows no liquidity problem. The study has been conducted on working capital ratio analysis, working capital leverage, working capital components which helped the company to manage its working capital efficiently and effectively. 1. Working capital of the company was increasing and showing positive working capital per year. It shows good liquidity position. 2. Positive working capital indicates that company has the ability of payments of short terms liabilities. 3. The study of receivables management of the company shows that they do not have a credit policy and hence have a high average collection period. 4. The study of cash management reveals that the company carries out the various construction projects by borrowing 100% cash from various banks and varies from project to project. 5. The study of inventory management reveals that the company follows Just-in-Time Systems and FIFO method. Over all company has good liquidity position and sufficient funds to repayment of liabilities. Company has accepted conservative financial policy and thus maintaining more current assets balance.

BIBLIOGRAPHY
Books Referred
1. I. M. Pandey - Financial Management - Vikas Publishing House Pvt. Ltd. Ninth Edition 2006 2. M.Y. Khan and P.K. Jain, Financial management Vikas Publishing house Ltd.

Annual Reports of ALCON


2005-06 2006-07 2 007-08 2008-09

Website Referred
www.Alcon.net www.wikipedia.org www.investopedia.com www.google.com

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