Cash Management analysis of Petroleum Sector

ABSTRACT ............................................................................................................................................... 1

CHAPTER 1 .............................................................................................................................................. 2

INTRODUCTION ...................................................................................................................................... 2

IMPORTANCE OF CASH MANAGEMENT .................................................................................................................. 2 MAJOR ELEMENTS OF CASH MANAGEMENT ............................................................................................................. 3 PURPOSE OF CASH MANAGEMENT ..................................................................................................................... 3 TECHNIQUES USE BY CASH MANAGER: ................................................................................................................. 4 DOES MNC CASH MANAGEMENT DIFFER SIGNIFICANTLY FROM THE LOCAL? ........................................................................ 4 CASH MANAGEMENT IN MNC; ................................................................................................................................ 5 PETROLEUM SECTOR IN PAKISTAN .............................................................................................................................. 5 JUSTIFICATION OF THE STUDY: ........................................................................................................................... 5 OBJECTIVES OF THE STUDY: ............................................................................................................................. 6 LIMITATION OF THE STUDY: .............................................................................................................................. 6 METHODOLOGY OF THE STUDY: ......................................................................................................................... 6 SIGNIFICANCE AND BACKGROUND: ...................................................................................................................... 6 INDUSTRY PROFILE: ....................................................................................................................................... 7 SHELL PROFILE: ................................................................................................................................................... 8 PSO PROFILE: ................................................................................................................................................... 8

CHAPTER 2 .............................................................................................................................................. 9

LITERATURE REVIEW: .............................................................................................................................. 9

CASH MANAGEMENTS: .................................................................................................................................. 9 CASH FLOW AND CASH MANAGEMENTS: .................................................................................................................. 10 CASH RATIOS AND CASH MANAGEMENTS: ................................................................................................................. 11 MNC’S AND CASH MANAGEMENT: ........................................................................................................................ 12 LOCAL FIRMS AND CASH MANAGEMENT: .................................................................................................................. 12 CASH MANAGEMENT AND PETROLEUM SECTORS: ......................................................................................................... 13

CHAPTER 3 ............................................................................................................................................ 15

COMPARATIVE ANALYSIS OF CURRENT CASH MANAGEMENTS STRATEGIES OF SHELL PAKISTAN LIMITED AND PSO: .............................................................................................................................................. 15

OPERATING RATIOS AND CASH CONVERSION CYCLE: ................................................................................................ 15 PANEL DATA ANALYSIS OF RATIOS: .......................................................................................................................... 15 INVENTORY TURNOVER: ....................................................................................................................................... 15 ACCOUNTS RECEIVABLE TURNOVER: ......................................................................................................................... 16 ACCOUNTS PAYABLE TURNOVER: ............................................................................................................................ 17 DAYS IN INVENTORY: ........................................................................................................................................... 18 DAYS REQUIRED COLLECTING ACCOUNT RECEIVABLE: ...................................................................................................... 19 DAYS TO PAY TO ACCOUNT PAYABLE: ........................................................................................................................ 19 CASH CONVERSION CYCLE: ................................................................................................................................... 20 CASH CONVERSION CYCLE BY QUARTERS: ........................................................................................................... 22 COMPARATIVE CASH FLOWS STATEMENT ANALYSIS OF SHELL PAKISTAN LIMITED AND PSO: .................................................... 25 OPERATING CASH FLOW COMPARISON: .................................................................................................................... 26 INVESTING CASH FLOW COMPARISON: ...................................................................................................................... 27 FINANCING CASH FLOW COMPARISON: ..................................................................................................................... 27 CASH AND CASH FLOWS RATIOS: ...................................................................................................................... 28 PANEL DATA ANALYSIS OF CASH AND CFO RATIOS: ...................................................................................................... 28 WORKING CAPITAL AND LIQUIDITY RATIOS ANALYSIS: .............................................................................................. 33 PANEL DATA ANALYSIS OF RATIOS: .......................................................................................................................... 33 VERTICAL ANALYSIS OF SHELL PAKISTAN LIMITED: .................................................................................................. 36 CASH EFFECTIVENESS MEASURE RATIOS: .............................................................................................................. 41 PANEL DATA ANALYSIS OF RATIOS: .......................................................................................................................... 41

CHAPTER 4 ............................................................................................................................................ 47

ISSUES / FINDINGS: ............................................................................................................................... 47

PAKISTAN STATE OIL LTD: .............................................................................................................................. 47 SHELL PAKISTAN LTD: .................................................................................................................................. 47

CHAPTER 5 ............................................................................................................................................ 49

PROJECTED SOLUTIONS FOR PSO: .................................................................................................................... 49 WORKING CAPITAL COMPOSITIONS OF PSO: .............................................................................................................. 49 CASH CONVERSION CYCLE OF PSO ........................................................................................................................... 51 CASH FLOWS OF PSO: ....................................................................................................................................... 52 PROJECTED SOLUTIONS FOR SHELL: ................................................................................................................... 53 VERTICAL ANALYSIS: ........................................................................................................................................... 53 WORKING CAPITAL AND LIQUIDITY RATIOS: ................................................................................................................ 55 CASH FLOWS OF SHELL: ....................................................................................................................................... 56

CHAPTER 6 ............................................................................................................................................ 57

RECOMMENDATIONS: .......................................................................................................................... 57

MONITOR THE CASH POSITION ON CONTINUOUS BASIS: .............................................................................................. 57 CONTROLLING BALANCES ON DEPOSIT: ................................................................................................................ 57 MOVING FUNDS AS NECESSARY: ....................................................................................................................... 57 MANAGING SHORT-TERM (WORKING CAPITAL) BORROWING AND INVESTING: ...................................................................... 57 FORECAST FUTURE SHORTAGES AND SURPLUSES ....................................................................................................... 57 HOW IS SURPLUS CASH INVESTED? ..................................................................................................................... 57 HOW ARE CASH SHORTAGES MANAGED? .............................................................................................................. 58 SHORT-TERM FINANCING ALTERNATIVES INCLUDE: ..................................................................................................... 58 MANAGING BANKING RELATIONSHIPS: ................................................................................................................. 59 ANALYZING, DESIGNING AND IMPLEMENTING CASH MANAGEMENT SYSTEMS AND PROCEDURES: .................................................... 59 CONCLUSION: ..................................................................................................................................... 60 REFERENCES: ............................................................................................................................................ 62 APPENDIX: .............................................................................................................................................. 64

[Cash Management Comparative Analysis] [2011]

ABSTRACT

This paper examines the comparative study of cash management analysis of a Local and MNC in petroleum industry of Pakistan. Cash management is one of the fastest growing tools use in the firms especially in financial sectors and MNCs. The objectives and issues of international cash management are similar to domestic cash management. The techniques and methods for managing the cash in effective are looks similar but the implementation of these techniques can be differ. For this purpose study is limited to two major companies of Pakistan i.e. PSO & Shell. For the effectively analysis the paper examine the published Annual Report of recent five years and uses the important tool such as Ratio Analysis, Cash Flows Analysis and Horizontal as well as Vertical analysis. On basis of the past financial trend of both companies the study also analysis on the projected financial statements through which analysis is made whether these companies have adequate liquid cash resources to meet the future obligation. In the last the paper recommends some strategies that these organizations should adopt to identify shortages and surpluses in time to either borrow funds to cover the shortfall or invest excess funds.

Key Words: Cash Management, International Cash Management, Domestic Cash Management, Cash to Cash Cycle Analysis, Cash Flow Statements and Ratios analysis, Vertical analysis, Working Capital Analysis, Projected Cash Budget Analysis

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CHAPTER 1INTRODUCTIONCash is all about money. Money in the form of bills or coins and currency is so called cash. Cash is something that serves for the Payment for goods or services in currency or by cheque. Cash is both a fundamental resource and the means by which the entity acquires other resources. To manage cash is to manage the entity's ability to purchase assets, service debt, pay employees, and control operations. Thus, effective cash management directly correlates with the entity's ability to realize its mission, goals, and objectives. Therefore Cash management is one of the fastest growing tools use in the firms especially in financial sectors and MNCs.The optimization of cash flows and investment of excess cash can be refers as Cash management. Cash flow is the movement of cash into or out of a business, project, or financial product. Therefore, cash management can also be defined as managing cash inflow, concentration of cash and disbursement of cash and it’s seems to deal with forecasting future cash needs by analyzing current cash portfolios and possibilities to generate surplus cash. Cash management is a broad area having to do with the collection, concentration, and disbursement of cash including measuring the level of liquidity, managing the cash balance, and short-term investments. “To collect, maintain, and disburse funds in a way that minimizes the risk of misuse, maximizes profitable cash flow, and supports the entity's operations and mission.” In organization all the inflow and outflow can be measured through the cash flow statements. Therefore all operating decision and events eventually affect financial position of the firms thus resulted in cash inflow and outflow of the firms. The cash inflow and outflow is unrealistic which mean not stable all the times, and thus it never matches. Therefore it needs to be handling effectively through skilful cash managements. Cash is to a business is what blood is to a living body. The availability of cash in time is one of the heartiest desires for successful operation and capitalizes on opportunity. The cash treasury of the firms’ play important role in this regards. The instability of cash will not much issue for MNC’s because of vast cash resources and creditworthiness. Due to high creditability of MNC’s, the cash may be generated through public offering and advances. The local firms however are in high risk in cash issues. The cash managements of these firms operated in totally different ways due to its operation size. The rules of thumbs for two types of firms are however the same that cash in hand should be appropriate, not too much and too little. Importance of Cash Management

Cash management relates to taking the adequate actions to maintain significant levels of cash to meet operational and capital requirements and to get the maximum consists of taking the necessary actions to maintain adequate levels of cash to meet operational and capital requirements and to obtain the maximum capitalization on the idle cash that organization invested. The betterment of the overall financial management requires a very effective cash management that increases the recurring revenues and improving the control on cash flows. The effective cash management requires strong Bank Relation, analysis on cash flow statement, estimating collection receipts, forecasting disbursement, preparing the effective budget as well as effectively investing the idle cash. The other important terms which are described later also relates on effective cash management.

Working capital management also plays an important role in the cash departments. Working capital management relates to manage the short term resources and significantly capitalize the 2 | P a g e


assets of an organization in a significant ways that help an organization to meet its short term obligation. Therefore Cash is one the significant element in working capital management.Cash is most liquid assets among the all so for the liquidity concern organization should keep a fare amount to pay its short term obligation. According to Walter “Organization must keep its cash and expected cash flow less than its ordinary expenditure requirements because this shows the opportunity cost for the organization as well as guarantee of useless cash held by an firm. In organization cash to cash analysis helps in managing the cash flow cycle i.e. accounts payable to inventory to accounts receivable. Cash to cash analysis is another important factor that describe how effectively an organization managing its capital which is also called the cash conversion cycle which shows the how many number of days company took to pays its payable and collect from receivable. For reducing these no of days lead the organizations operation and financial betterment.

Major elements of cash management

These are the major elements that are using in petroleum sector in Pakistan in local companies as well the multinational companies.Deposits: Receiving funds and depositing receipts into the bank account as quickly as possible, while collecting adequate information to correctly identify the source of the payment.Concentration: Moving funds to a central location from which they are more efficiently managed for investing and disbursing. Disbursement: The payment of funds through cheques or electronically to vendors, employees, investors, and others.Information gathering, analysis and control:

Reporting funds information, including: current cash position, forecasted shortages and surpluses, cost-benefit of proposed changes in cash management operations or outsourced services, interest rate or foreign currency risk exposure, and many other monetary circumstances which affect corporate resources.Purpose of Cash Management

Cash management is the proper use of an entity’s cash resources. Cash management refers to keep an organization execution for the better use of cash resources such as to collect receivable in timely and make timely payments to creditors McKinsey 2009).The function of cash management usually referred as to eliminate the idle cash resources because these idle resources represent the opportunity cost for the organization. These funds can be invested to some profitable securities to gain some profit. It’s also related to maintain their accounts receivable to because it’s better to have funds in hand rather than in accounts receivable. The cash that is recovered from receivable can be invested in some profitable securities or through which the important payments can be made.

Kim et al. (1998) underline the perception of tradeoff model between the costs of holding cash that derives a low return and estimated costs of generating funds if new investment opportunities

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available or the planned expenditure arises to internal cash flows. The expected cost in this regard shows the probability of shortfall of cash as well as arising more cash if shortfall arises.The holding of cash shows the positive relation to cash flow volatility that increases the probability of shortfall of cash and the cost of outside financing.

Techniques Use by Cash Manager:

The manger used certain techniques to know the effectiveness of its cash reserves. According to the Albert Mickie, 2009, these techniques vary by business needs and operating policies. However some of them are similar in many organizations which are enlisted below:

Proper Cash collection and disbursement system be adopted in the firms.

Centralized cash control systems enhance proper use of cash.

Optimal Cash balance, not too much that hurt profitability and too low that disturb liquidity.

Manage working capital and short-term liquidity.

Monitoring Inventory and cost of keeping its. Keep it at optimal level to minimize cost.

Effective forecast futures cash surplus and deficiencies.

Proper collection and payments of accounts.

Create line of Credit for futures cash needs.

Generating sufficient income by enhancing revenues through generating demand and controlling cost.

Does MNC Cash Management differ significantly from the local?

Cash management is becoming as important phase in every organization whether its local or an MNC. The objectives and issues of international cash management are similar to domestic cash management. The techniques and methods for managing the cash in effective are looks similar but the implementation theses techniques can be differ. However MNC have to face the additional challenges such as managing of foreign exchange, cross-border funds movement and the volatility of global financial environment as well as Social and cultural values. There can also be differences exist in Local and MNC for the tax rules, payment procedure, rules and regulations on transfer of funds and data exchange but the basic cash management objectives remain constant globally. By the development of technology software such as Enterprise resource planning (ERP), software program such as SAP, Oracle and PeopleSoft geared up the centralization of cash management relatively easy.

The local firms and MNC both hold cash balances for the profitable investments and also maintain cash reserves for tradeoff predications Opler et al. (1999). There is strong correlation between internal cash flows and dividend payout. Firms maintain cash reverse to open their

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options for spending and reducing the business risk, in contrast Ozkan and Ozkan (2004) suggest there is negative relation between holding cash and managerial ownership. Cash management in MNC;

According to Buckley and Korn cash management is equity index tracking. Cash management is very difficult for MNC because laws affect the cash transfers across the border of different countries as well as the fluctuations of exchange rate also affect the value of cash transfers among different countries. These international firms should have the knowledge of advantages and disadvantages of investing cash in foreign markets which help them to make effective decision regarding managing of cash which eventually can maximize the value of these firms.

Petroleum Sector in PakistanThis paper will focus the petroleum sector of Pakistan. Attock Oil, Burmah Oil, Pakistan Oil Fields Ltd (POI) and Pakistan Petroleum Limited (PPL) are these organizations which were form after the independence of Pakistan. Further this paper will analysis of two major oil companies of Pakistan i.e. Pakistan State Oil (PSO) and Shell Pakistan and makes the comparative analysis of cash management of both companies.PSO is the market leader in Pakistan energy sector after having market share of 82.3% in the black oil market and 59.4% share in white oil market. Other than importing products, various refineries in Pakistan including Attock Refinery Limited, Pakistan Refinery Limited, BOSICOR, NRL and PARCO cater to our product needs including that of LPG, motor gasoline, kerosene, jet fuels, high speed diesel and furnace oil.

Shell Pakistan has the second largest oil company and represent in exploration of both onshore and offshore in refining with also having 26% share in white oil with a vibrant portfolio and fast growing retail network. Shell Brand is now the most preferred brand amongst motorists across Pakistan.

Justification of the Study:

Cash management involves the well-organized collection and payment of the cash. Too mange proper collection and disbursements of the firm, cash manger needs to analyze the cash to cash cycle. Therefore, in order to make optimal cash inflows and outflows, managing cash cycle plays an important role (Paul D. Hutchison, M. Theodore Farris II, and Susan B. Anders, 2007). The surplus and deficiencies required for the business also require examining. This will do with the help of cash flows statements analysis where cash manger get clear pictures how much cash are require for which activities (Wilna Styne Bruwer and Willie Hamman, 2008). As Cash is a part of working capital of the firms, therefore optimal selection of working capital compositions and optimal cash in hands has counter effects on each others. These two also measure liquidity of the firms. The optimal cash in hands therefore is major consideration as it effect working capital requirement and maintain liquidity of the firms (Goodhart, 2009). The Cash management includes managing of short-term marketable securities, because in today world money comprises

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actual cash in hand or bank or other thing that use as mode of cash. (Singhvi, 1970). So cash management is all about how many cash is coming in the business and how much cash is going out of business, cash flows within the company concern or any mode of cash that the companies hold at any point and in any condition. Management of cash has the fundamental significance for the overall actions of a company concern to survive in the industry or for running the business smoothly. In this article an effort is made to make in detail study of petroleum sector how they perform and how they manage his cash. The results are help to others people to bring the new ideas in business about management cash.

Objectives of the Study:

These are the objectives of our study: To evaluate the performance of cash management of petroleum sector by analyzing cash tools

such as cash cycle and cash flows statements and ratios. To examine that, the capacity of financial requirement is reliant to the capacity of generating

daily cash requirement of companies. To evaluate the short term solvency and liquidity of petroleum sector, how the selected

companies utilize his cash resources and aptitude of financial management of petroleum sector

To investigate the long term cash surplus and deficiencies of the companies.

Limitation of the Study:

The study is restricted to 5 years (2005_06 to 2010-11) performance of the companies. The information used in this study has been taken from published annual reports only. As the requirement and necessity some data are grouped and sub grouped. For making a clear cut opinion, ratio analysis techniques of financial management has been used.

Methodology of the Study:

The data of petroleum sector for the time (2005_06 to 2010-11) used in this study has been taken from resulting sources as secondary data e.g. Published annual reports of the companies and access the different tolls that the companies use to analyze the financial position were taken from secondary. All the work has been done as per the prerequisite of the study. For evaluating the act and position of cash in this study the method of ratio examination has been used.Significance and Background:

In the previous study, researchers focus on specific cash management issues such as managing cash to cash cycle (Heikki Hirvensalo, 2008), working capital and liquidity management (Zhao Zhi-gang, 2006), Managing Cash flows statements and related ratios (Thomas L. Zeller & Brian B. Stanko, 1994), Investments alternatives to idle cash; a derivative for investing cash flows (H. Christopher Peterson, 1992), cash budget and forecast future cash surplus and deficiencies (SAP, 2001) and many others. The previous studied focused on general research related to particulars industry or sectors. The general research generally did not take any empirical findings. Therefore, such studied was too much limited.

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However, this study tries to carry research by considering and removing above limitation. Therefore, this study take research on an industry by choosing firms for finding specific firms empirical result in order to reach particulars result and decision. This study also tries to explore all cash management’s issues by focusing all relevant tools as mentioned above. These issues will explore with the help of some empirical findings in order to make a sense of decision and conclusion.

For this study, petroleum sector are chosen because there are crisis of petroleum all over the globe. The prices and demands too much fluctuate from time to time. Therefore, managing cash surplus and deficiencies are difficult task for the cash managements. The cash needs are varied to local and MNC. The issues relate to such needs might be vary that this study tries to find out.

Industry Profile:

The Petroleum sector of Pakistan is an important sector due to high demands of their products in Pakistan. This sector is divided into different line of business such as:

Refinery Exploration Marketing

There are large numbers of companies do its operations in these lines of business. These companies are lead by OGRA, the state authority of Pakistan. The major sales of these products are to transportation industry such as air buses, local and public buses transports companies.

In Marketing Petroleum sectors, the following companies with respected marketing shares are operating in Pakistan:

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Market S hares As on Dec ember, 2010

45%

22%

7%

6%

20%

P S O S hell Total P akis tan C altex Others


Shell Profile:The second largest oil company in the country, Shell Pakistan has successfully positioned itself as the preferred oil and Gas Company in Pakistan, leading the field in its commitment to customer service, quality of products, safety and environmental protection.

Shell Pakistan is divided into 8 functional areas i.e. Retail, Lubricants, Aviation, Operations, Finance, Corporate, Human Resource and Commercial Fuels. It has played a leading role in abridging the growing energy demand gap in Pakistan. We are represented in all aspects of the upstream and downstream oil business in Pakistan in exploration both onshore and offshore, in refining, as well as a 26% share holding in the white oil pipeline.

PSO Profile:PSO is the market leader in Pakistan’s energy sector. The company has the largest network of retail outlets to serve the automotive sector and is the major fuel supplier to aviation, railways, power projects, armed forces and agriculture sector. PSO also provides Jet Fuel to Refueling Facilities at 9 airports in Pakistan and ship fuel at 3 ports. The company takes pride in continuing the tradition of excellence and is fully committed to meet the energy needs of today and rising challenges of tomorrow.

Pakistan State Oil, the largest oil marketing company in the country, is currently engaged in storage, distribution and marketing of various POL products. The company’s current market share of 82.3% in the black oil market and 59.4% share in the white oil market, alone speak volumes about its success.

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CHAPTER 2Literature Review:Cash Managements:

Cash Management or treasury management is the most effective tools used today. The success of cash managements is lead the firms toward milestone victory as it not only manage its resources effectively via cost reduction and profit maximization but also saving for the future growth as well. The history of treasury managements was as old as the business firms and other management tools. The term cash management could be defined as the mean of optimal used of cash flows that lead to savings for the purpose of reinvesting such cash. Cash management is the technique used for the managing of cash flows into and out of the firm, by financing deficit or investing surplus cash. Cash Management is also used to effectively managed cash flows within the firm and cash balances held by the firm at a point in time.

The one of the essential components of working capital management and more probably the vital function of cash management is Liquidity Management. The firms usually MNCs are commonly have access to numerous lines of credit and overdraft facilities in various currencies. Therefore, they should maintained adequate liquidity without extensive cash balances. Liquidity is important for the overall MNC; but it cannot be properly measured by liquidity ratios alone. Potential access to funds is more relevant than cash on hand (Cennage Learning, 2009). Therefore, adequate cash reserves are necessary in order to be effective in term of liquidity.

The cash management has to tackle with some issues such as receivable and payment of cash, futures cash needs, cash to cash cycle conversion, relationship with creditors etc. (Douglas Jaffe, 1978). Cash to Cash Cycle is a unique financial performance metric that indicates how well an entity is managing its capital. The definition of C2C, or cash conversion cycle, is “the length of time a company’s cash is tied up in working capital before that money is finally returned when customers pay for the products sold or services rendered” (Neil C. Churchill and John W. Mullins, “How Fast Can Your Company Afford To Grow?,” Harvard Business Review, May 2001). The collection of receivables, control payments to trade creditors and efficiently manage cash services that are especially appealing in times of prohibited credit, are tools of Cash management system that helped companies pick up the pace of its growth by effectively managing above tools (McKinsey, 2009). The cash management also deals with cash to cash cycle that leads the firms to ensure its operations stability. Important aspect which is unique to cash management is time dimension associated with the movement of cash (Mrs. Jyoti Goel, & Mr. Avnish Mehra, 2009).

The heart of cash management is to generate surplus cash resources that help the firm to remain optimal as compared to its rival by meeting its cash needs in all aspect of its operations when needed. On these grounds, theory predicts that cash holdings may have both direct and indirect effects on competitive outcomes. Holdings cash can be viewed as a preemptive tool that may have an effect on rivals’ entrance or competence growth decisions (Benoit, 1984). Firms try to maintain an optimum level of cash that maximizes that firm’s value (Deloof, 2003; Howorth and Westhead, 2003; and Afza and Nazir, 2007). Holding optimal cash level have also affect on the performance of the firms. Mikkelson and Partch(2002) show that the operating performance of

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US firms with high cash levels is comparable to or even greater than the performance of firms with normal levels of cash matched by size and industry.

Some put a light on negative consequences of cash holdings by argued that entrenched managers use them in ways that destroy value; see Harford (1999), Dittmar and Mahrt-Smith (2006), and Harford, Mansi, and Maxwell (2006). In contrast, other studies highlighted that cash funds bring advantage to shareholders by allowing firms to take proficient advantage of their development scenario; see Opler, Pinkowitz, Stulz, and Williamson (1999), Mikkelson and Partch (2003), and Haushalter, Klasa, and Maxwell (2006). Whatever the focused of previous researchers, the only facts that resulted from above discussion is that no firms can growth too large without having strong cash management skill as it lead the firms toward milestone victory by enabling them cost effectiveness and profit maximization. This will definitely result cash surplus that can be use for the purpose of future growth as most MNC can proved this facts.

Cash management’s decision also involved to decide its functional system structures. Cash management is concerned with the managing of: Cash flows into and out of the firm, Cash flows within the firm and Cash balances held by a firm at a point of time. Such decision can be taken at any level of the firms depending on the management’s decision structures. The cash managements system may also be centralized (such as Brazil) and non-centralized (such as USA) depending upon the accounting procedures follows in particular countries (T. Abed, 1998). Such decision can also depend upon the size of the firms. The effective techniques for the firms may be that MNC can be followed decentralized system and local firms can be followed centralized ones. The cash structures also considerable factor for the cash managements.

The different tools used by different firms help cash managements effective. These includes managing cash flow activities such as operating activities, investing activities and financing activities, using cash related ratios for effective decision making and cash forecasted budget analysis etc. The cash flow statements analysis and cash related ratios helped firms related to cash management’s decision (Steven E. Springer, 1988). These will discuss below:

Cash Flow and Cash Managements: Cash flow is the most viable source of information for managers, and its interpretation is one of the most important objectives of the management team to acquire the desire efficiency (Faurescu Florentina-Simona, 2009). The company cash flow is the tool used by the financial analysts specially when they carried out cash management performance. The cash flow help the analyst to understand the firm’s ability of paying contractual obligations, maintain current dividend policy and current capital expenditures without taking external financing (Pamela P. Drake and J. Gray Ferguson, 2008). Recent studies on cash flow that argued that cash flow analysis is the effective tools for managing cash are those by Hanna & Lindamood, 1993; Chang, 1994; Davis & Carr, 1992; Davis & Weber, 1990; Godwin, 1994; Godwin & Koonce, 1992; Lown & Ju, 1992; Porter & Garman, 1993; Scannell, 1990 . Four essential practices such as: budgeting cash flow analysis, analysis of cash flow statement, compare budget and actual cash flow statement, and developing a balance sheet to estimate net worth are optimal techniques to be use for cash management as indentified by Davis and Weber (1990).

The purpose to maintain some level of cash leads toward three motives: the transactions motive, the precautionary motive and the speculative motive (Baumol, 1952 and Pigou, 1970). Adequate

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controlled over the cash position as indicates by cash flow statements, helped to remain the firm adequately liquid and used surplus cash in a lucrative way is the most important perspective of cash management (Kennedy Munyua Waweru, 2011). The effectiveness of firms’ growth lies in the facts of cash management efficiency especially that related to working capital management and operating cash flow activities (Larsson och Hammarlund 2005, s.16). The way in which firms has managed their working capital i.e. operating activities put a strong impact on their prosperity (Garcia-Teruel and Martinez-Solano, 2007; Lazaridis and Tryfonidis, 2006; Shin and Soenem, 1998).

The cash management issues lies today lead the financial management to become more active and proficient as compare to past. The cash managements become more focuses after the financial crisis of 2008. The others cash decision take by the firms related to financing and investing activities. The decision of a firm either to invest or to borrow from creditors based on uneven cash in-flow (Ameha Tefera Tessema, 2011). The analyst then has to considered financial activities that directly affected the firms’ cash flow and its cash position. Therefore, the main issue arises in this way is to match and improvement of cash flow (Metka Duhovnik, 2011).

Therefore, such decision should be taken that balanced the firms needs of credit (financing activities) and positive cash flow balances at the end i.e. cash flow accurately matched (Kocherlakota, 1988 & 1990). The relationship between cash flow and investment considerable factors as well for the analysts who managed the cash of the firms and take other decisions (Fazzari, Hubbard and Petersen, 1988). Some others studied also argued the managements of cash flows and investing activities (Hoshi, Kashyap and Scharfstein, 1991) and Cummins, Hassett and Oliner (1997).

Cash Ratios and Cash Managements: Cash related ratios are also effective tools that used by the cash management of the firms to understand cash position and future cash needs of the firms. Cash ratio analysis can help cash managements in making decision related to cash and predicting firm’s future performance. It can also give early warning about the slowdown of firm’s financial condition arises due to cash deficiency (Olson, 1980). The cash flow ratios and its studied got familiarities in 1966 when H.W. Beaver started working on these ratios. Cash needs and debt ratios are significantly important as functions of both help to determine the failure rates of the firms (Diamond, 2006).

Educators also, have been noted for their negligence towards the use of cash flow ratios, preferring instead to rely on other forms of financial analysis, possibly, the traditional current ratios (Bodie et al, 2004). This was lead toward bankruptcy of many firms as it didn’t tell the cash position and needs of cash for the firms. Therefore, these evidences stressed the significance used of cash flow and related ratios in forecasting either the non-bankruptcy or bankruptcy of the companies (Mulford & Comiskey, 2005).

Different cash ratios have its’ own important. For the production firms, cash conversion cycle is much important as it helps the firms to manage its cash availability on time and to be remains effective in term of liquidity. The others related to cash are cash flow related ratios such as OCF ratios, CFFF ratios and many other. However only few can be used by many firms that helped a

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lot and that are significantly important (John R. Mills, Jeanne H. Yamamura, Thomas L. Zeller & B. Stanko Brian 1994).

MNC’s and Cash Management:MNCs are any organizations that operate its businesses in more than one country. A company that having production and distribution facilities in more than one country (Alan C. Shapiro, 1998). The phenomenon of MNCs has been attributed to a combination of two main factors: the jagged ecological allotment of aspect endowments and bazaar breakdown (Dunning, 1988). The MNCs is the firms whose equity holder portions owned by foreign partners thus involved in decision making process and foreign investments decision and profits arises thereon (Lawrence J. Gitman, 2009).

MNC that has strong management specially treasury skill that able it to be remain effective in term of internationalized in its operations. The strong financial holding of such MNC is the most important aspects that make them stronger and able MNC putting away local firms from its market share. The acquisition between local and MNC is only due to poor cash resources hold b due to poor performance especially due to poor treasury management that led it toward financial crisis and bankruptcy. MNCs are good means of transferring capital through cross borders for taking advantage of growth in that particular economy (Aliber, 1970).

There is dark-side as well for managing cash management of MNCs. The scope of cash management become more complex from global perspective as cross-border transfer of cash become restricted because of different foreign law existing in different countries (Madura, International Financial Management, 2007). It is also because of different issues affecting directly to cash holdings of MNCs such as domestic tax laws, foreign exchange risk, government law for protection of domestic institutions, economic and political situation of particular country and such others factors. The cash flow statements of certain MNC reveal above facts.

MNCs financial skill should be strong enough that tackled to meet the challenges of cash inequalities. This inequalities and cash balances only handle through effective cash management skill. Matching cash flow is one of the competent and difficult tasks in the organizations especially in the MNCs where cash flow in and out fast due to operating in global environment that might be uncertain. Due to increase in global competition, it is important for the firms to have control on their operations through centralized managements that are responsible for their decision especially financial as they mostly involve in bankruptcy of the firms (Barlett & Ghoshal, 1988, 1989; Geringer & Hebert, 1989; Martinez & Jarillo, 1989; Sohn, 1994; Vernon, Wells, & Rangan, 1996).

Local Firms and Cash Management: Any firms which are operated at small level and which are employed 10-250 workers are called local firms. The small firms are significantly important as it played vital role in the development of any country (David Logan & David Deakins, 2001). The firms which are usually operated at small level and usually be run by entrepreneurs are so called local firm (Prodi Commission, 1999). The firms which usually operated at domestic level so called local firms gained popularity in the 1980s and 1990s ((David Logan & David Deakins, 2001). Therefore, any firms which are

12 | P a g e


run at restricted boundary of the country and employed few workers and ran at few management structures are so called local or domestic firms.

Smaller firms are at high risk as far as liquidity is concerned as compared to larger firms due to low creditability that generated less external financing for local firms (Walker and Pretty, 1978). Therefore, cash management need to be more important for local firms. Walker et al also indicated that there is strong rapport among cash management practices and firms performance for the local firms such as cash cycle and profitability. Thus cash management’s skill of this type of firms need to be strong enough to yield optimal results such as increasing stock prices and shareholders values (Poutziouris, 1998). No, doubt the skill of local and larger firms is different due to using different pattern and techniques of financial managements (Graplowsky, 1984).

The issues relate to cash managements is that local firms faced external financing problems due to low creditability. Therefore, they faced liquidity problems due to shortage of cash (Wilson et al, 1996). The local firms therefore, are at high risk in term of liquidity, creditability, profitability and optimal capital structure. About 70% banks and creditors insufficiently support smaller business as revealed by the England Banks report 1997.

Despite of the above facts, many local firms still performed outstanding due to holding surplus cash reserves that was achieved via cost destruction, profit maximization, correct allocation of cash among financing, investing and operating activates, used and correct interpretation of cash related ratios and optimal use of cash to develop forecasted cash budget. All these techniques helped a lot to local firms to gain milestone victory and become internationalized in its operations via faster growth.

Cash Management and Petroleum Sectors: The cash management’s skill for the petroleum sectors need to be very advanced due to high instability in its prices that might affected the company’s profitability hence affected company cash positions. This increase in prices is usually due to highly demand of such products. The managements need to be strong proficient especially in the economy where prevailing energy crisis such as Pakistan.

Oil companies either operated within country’s jurisdiction or at different jurisdiction faced issues related to treasury management. These issues include how to minimize the cash outflow and maximize cash inflows of the firms (Deloitte UK Ltd Report, 2011). The issues related to anomaly of cash need to be handle carefully in order to avoid uncertain loses. The forecasted cash budget by looking futures prices help the firms a lot in this regards (Sloan, 1996). If cash managements skill is not proficient enough than the result is negatives cash flows that not only hurt the stock prices and shareholder values but also disturbed quality earnings of the firms. In this way net financing affected as revealed by Mayer (1990), approximately 75% of all net financing occurs through the use of cash reserves, as opposed to debt, convertibles and equity.

Due to purchasing concerned, one of the important considerable for the cash managements is cash to cash cycle (Pedro Ortín-Ángel & Diego Prior, 2004). By using Cash conversion cycle and supporting ratios, the result would indicated the fact that these ratios provide not only

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valuable information about working capital quality management, cash-generating ability of operations and short-term liquidity risk of a firm (Backer and Gosman, 1980; Stickney, 1993; Saccurato, 1994) but also about the operating efficiency level (Holstrom, 1994).

However the others ratios are equally important as they have their own significant (Frank R, Urbancic, 2005). These will help the firms in determining the correct pictures of financial position especially for those that need to analyze the data all the time due to uneven cash situation such as petroleum and energy sectors (Albrecht, 2003). Hence, Petroleum sectors need to be analyzed its financial position via using all financial and cash techniques as its external and internal factors are very uncertain (Wells 2005).

Hence, concluding above discussion, it is said that Business firm's income is not constant, or fixed from period to period because of this the firm’s cash inflow or out flow is uneven. The decision of a firm either to invest or to borrow from creditors based on totally current and future cash need by looking the firms cash reserves. The cash management has to play vital role in this regard. They should make decision by taking all consideration and by having a look on all important aspects by using all necessary tools. These includes liquidity and profitability concerns by using working capital and profitability ratios, earning quality perspective by using earning quality ratios, shareholder values consideration by using ratios that shows firm ability to pay dividend, ability to meet fixed charges as it is shown by cash to fixed charges ratios and effective result oriented where cash treasury is involved (Frank R, Urbancic & Maxwell Samuel Amuzu, 2010). No doubt, cash is the life blood of the business; therefore, cash management needs to be proficient and skillful. If cash managements of the company are strong enough, than no doubts that company is flourish and growth in the world by days and nights.

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CHAPTER 3

Comparative Analysis of current Cash Managements Strategies of Shell Pakistan Limited and PSO:The cash managements used certain tools to know their abilities regarding how beautifully they handle cash treasury of the firms. The most important is cash operating cycle and cash flows statements analysis as it’s tell them how quickly they complete its cycle in order to remain effective in its operations and how much the variation in actual cash flows with what was estimated. The cash and cash flows ratios are also important mechanism used by the cash managements to know the worth of cash treasury. The others may be used in order to know the positive and negatives consequences of operating cycle and current cash position. It includes liquidity, expenses coverage abilities and quality earning and shareholders values concerns. Let discuss each one by one:

Operating Ratios and Cash Conversion Cycle: Panel Data Analysis of Ratios:Inventory Turnover: The higher inventory turnover means that it converts into cash faster. It was due to high sale because of high demand and also production capacity constraints that tend low ending inventory at stores. This shows effective inventory management as far as cost and profitability are concerned.

Shell:

Items Year 2006 Year 2007 Year 2008 Year 2009 Year 2010Cost of

Goods Sold107,301,071 108,664,932 124,694,471 143,097,916 185,403,153

Avg. Inventory

8,168,633 9,141,546 13,191,596 15,600,644 12,727,689

Inventory Turnover

13.3 11.9 9.5 9.2 14.6

It has continuously decreased up to 2009 from 2006 than increased in 2010. It was due to continuously increased of average inventory balance and higher growth of such inventory as compared to costs of goods sold as from FY 2006 to FY 2009 inventory growth almost 91% whereas CGS growth was only 33.36% . The average inventory balance then down in 2010 caused lower inventory turnover. The manger should maintain such policy that made the inventory conversion into cash by quick time that is beneficial to the firm as shown in 2010 in above table.

PSO:

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Items Year 2006 Year 2007 Year 2008 Year 2009 Year 2010Cost of

Goods Sold281,042,813 337,446,896 465,254,907 609,685,478 713,591,707

Avg. Inventory

28,293,663 28,991,805 46,082,914 51,643,117 49,761,442

Inventory Turnover

9.93 11.64 10.10 11.81 14.34

In PSO it was random behavior over the 5 years i.e. 2006 to 2010. It 1st increased in 2007 from 2006 than down in 2008 than increased as well up to 2010. It was low in 2008 because of higher average inventory growth as compared to cost of goods sold as inventory growth almost 59% whereas CGS growth was only 37.87% in that year. However than result were opposite mean inventory turnover increased in preceding FY i.e. 2009 and 2010 that resulted quick conversion of inventory in cash. It was due to CGS growth faster than average inventory as it growth almost 54% from FY 2008 whereas average inventory growth was only -34.68% and 43.87% in FY 2009 and FY 2010 respectively as shown by the value in above table. Therefore, PSO had comparative inventory management as compared to shell Pakistan Limited.

Accounts Receivable Turnover: A high turnover ratio is generally a good thing since it means that customers are paying their bills on time. If the turnover ratio is too high as compared to the industry, it may mean that the company is too restrictive in its credit and collection policies and not extending credit to enough customers.

Shell:Items Year 2006 Year 2007 Year 2008 Year 2009 Year 2010

Credit Sales 35,178,756 28,761,359 30,765,832 28,080,018 13,827,164

Avg. A/R 5,562,628 4,907,696 4,742,246 3,072,077 1,626,286A/R

Turnover6.3 5.9 6.5 9.1 12.1

It has random behavior in the recent 5 years. It first decline in 2007 from 2006 than continuously improved up to 2010. It had higher value in 2010 because of higher negative growth rate of average receivable i.e. -47.06% as compared to credit sales which was only -29.65% from previous FY as shown by values in above table. It was lower value in 2007 due to higher negative growth rate of credit sales i.e. -18.24% as compared to average accounts receivable which was -11.77% from previous FY. The 2010 value shows strict credit policy, this might hurt company profits that it might gain through credit sales. Therefore, company should make lenient policies that equally enhance its revenue as well with collection of accounts.

PSO:Items Year 2006 Year 2007 Year 2008 Year 2009 Year 2010

Credit Sales 44,737,506 69,941,265 123,819,633 183,808,677 185,689,488

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Avg. A/R 5,857,934 12,657,917 23,752,347 57,207,279 99,005,452

A/R Turnover

7.6 5.5 5.2 3.2 1.9

It has random behavior in the recent 5 years. It first increased in 2007 from 2006 than continuously decreased up to 2010. It had higher value in 2007 because of higher positive growth rate of credit sales i.e. more than 134% as compared to average accounts receivable in same year which was 116% as shown by values in above table. It was than down in last 3 years i.e. 2008 to 2010 due to higher growth rate of accounts receivable as compared to credit sales. The accounts receivable turnover should not be too much low as it hurt trade cycle of the company. Therefore, PSO accounts receivable management seems poor with respect to trade cycle and good with respect to profitability.

Accounts Payable Turnover: The higher accounts payable turnover means that it paid quickly. The higher accounts payable turnover was either due to higher accounts payable or lower credit purchase. The higher accounts payable let positive trade cycle.

Shell:

Items Year 2006 Year 2007 Year 2008 Year 2009 Year 2010Credit

Purchase107,301,071 108,664,932 124,694,471 143,097,916 185,403,153

Avg. A/P 20,396,273 23,850,866 28,395,504 32,454,004 35,907,546A/P

Turnover8.99 9.12 7.57 8.96 9.30

It has also random behavior in the recent 5 years. It increased in 2007 from 2006 than down in 2008 and then increased as well up to 2010. It was due to high and low credit purchase arises by low and high demand of the firms. It was lower value in 2009 due to higher payable growth rate i.e. 14.29% from 2008 and higher in 2010 due to lower payable growth rates i.e. 10.46% from 2009 and purchase growth rate however stable in that particulars years. The 2010 value mean creditors paid in less time. Since, it was a good sign for the firms as it avoid liquidity problems. The manger should maintain good relationship with the suppliers in order to get sufficient time of payments so that firm remains effective in term of liquidity.

PSO:

Items Year 2006 Year 2007 Year 2008 Year 2009 Year 2010Credit

Purchase281,042,813 337,446,896 465,254,907 609,685,478 713,591,707

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Avg. A/P 18,407,201 39,122,739 61,249,320 95,595,634 133,079,709

A/P Turnover

15 9 8 6 5

On the other hand, in PSO this ratio was continuously down up to 2010 which mean that creditors paid slowly. It was due to continuously and faster growth of accounts payable i.e. almost more than 100% in every year with respect to previous FY. The purchase growth rate was stable in those years. The PSO credit management was poor than Shell in the past years than needs to be improved in order to get competitive edge over creditors and maintained good relationship with suppliers.

Days in Inventory:The lower days in inventory mean that inventory takes less time to convert into cash and it is due to higher inventory turnover. Higher inventory turnover, on the other hand is resulted by lower inventory at stores.

Shell:

Items Year 2006 Year 2007 Year 2008 Year 2009 Year 2010Days in a Periods

365 365 365 365 365

Inv. Turnover

13.3 11.9 9.5 9.2 14.6

Days in Inventory

27 31 39 40 25

The 2010 shows lower days in inventory as compared to past years because of higher inventory turnover, that was a good sign for the firm. This shows effective inventory management of the firm as it enhances revenue and save inventory costs. The shell should keep such policy that result faster conversion of inventory into cash in order to remain effective inventory managements.

PSO:


365 365 365 365 365

Inv. Turnover

9.93 11.64 10.10 11.81 14.34

Days in Inventory

36.75 31.36 36.15 30.92 25.45

The inventory management of PSO as compared to shell also seems good as it had close value over the 5 years. It also had lower days in inventory in 2010 because of lower average inventory in 2010.

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Days Required Collecting Account Receivable:

The higher accounts receivable turnover caused lower days to collect account receivables which means that receivable quickly convert into cash. This was due to lowest accounts receivables due to strict credit policies that hurt revenues that company might gain through more credit sales.

Shell:


365 365 365 365 365

A/R Turnover

6.3 5.9 6.5 9.1 12.1

Days in A/R 58 62 56 40 30The value of this ratio improved in recent year i.e. 2010. It was due to higher accounts receivable turnover that lead fastest collection of money from customers. On the other hand, it also showed strict credit policy of the firms. Therefore, such policy needs to be adopted that are not either too much restrict or obstructive.

PSO: Items Year 2006 Year 2007 Year 2008 Year 2009 Year 2010

Days in a Periods

365 365 365 365 365

A/R Turnover

7.6 5.5 5.2 3.2 1.9

Days in A/R

48 66 70 114 195

The value of this ratio continuously increased up to 2010. It was due to low accounts receivable resulted by higher accounts receivable balance. The higher value mean customers paid slowly. Too much higher value hurt trade cycle as in case of PSO. Therefore, accounts receivable management seems poor as compared to shell with respect to managing cash cycle.

Days to pay to Account Payable:The higher accounts payable turnover resulted lower day to pay to accounts payable that means those payables paid quickly. This shows positive sign for the firm as it maintain good relationship with suppliers and avoid liquidity problem for the firm.

Shell:


365 365 365 365 365

A/P Turnover

8.99 9.12 7.57 8.96 9.30

Days in A/P 40.61 40.01 48.25 40.74 39.25

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This ratio shows higher value in 2008 and lower value in 2010. It was due to higher and lower accounts payable balance respectively in particular years. The lower value of 2010 means, payable paid in lesser time as compared to past. This shows good accounts payable management of shell Pakistan limited.

PSO:


365 365 365 365 365

A/P Turnover

15 9 8 6 5

Days in A/P 24 42 48 57 68

In case of PSO, the value of this ratio continuously increase which mean PSO paid payable late. It increased due to increased in accounts payable. The accounts payable management of PSO with respect to cash cycle seems poor as compared to shell. This need to be improved in order to be maintains good relationship with suppliers.

Cash Conversion Cycle: Cash conversion cycle have 3 components i.e. collection periods, days to sell inventory and days to pay account payable. The value shows that each trade activities from purchase to sell and collection of money and payback to creditors.

Shell:

Items Year 2006 Year 2007 Year 2008 Year 2009 Year 2010

Days in Inv. 27 31 39 40 25

Days in A/R 58 62 56 40 30

Days in A/P 40.61 40.01 48.25 40.74 39.25

CCC 44.54 52.97 46.63 38.99 28.74

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The cash conversion cycle was having random behavior in last 5 years i.e. 2006 to 2010. It was high in 2007 due to high days in inventory and collection periods as compared to days to pay accounts payable and low in 2010 due to vice versa. The value of 2010 shown little bit positive sign for the firms as it means that firms collect money quickly and paid creditors with few span of time. However, in all these years’ firms need to be maintained some cash in hand as there was a time lapse between collection of moneys and payments to creditors. The graph shown below also represents the same facts.

The graph also tells us the higher value in 2007 and lower value in 2010. The 2010 value means that shell collect money almost 16 days after shell payments to creditors. It means shell creditors give them 16 days less than their collections days. Therefore, to have effective cash cycle the collection periods should enhance by quick conversion of inventory into cash to clear their creditors. The collection of accounts receivable periods may enhance without disturbing the sales and revenues. The net effect of cycle no doubts enhance operation of the firms as cash is available for earlier used and also for the purpose of avoiding liquidity problems by having sufficient cash to be in hand.

PSO:

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Days in Inv. 36.75 31.36 36.15 30.92 25.45

Days in A/R 48 66 70 114 195

Days in A/P 24 42 48 57 68

CCC 61 55 58 87 152

The cash conversion cycle values, in case of PSO were continuously increased in last 5 years i.e. 2006 to 2010. It was very high in 2010 due to high days in inventory and collection periods as compared to days to pay accounts payable. The cash conversion cycle of PSO therefore, showed negative trends as compared to shell that needs to be improved by improving accounts receivable and payable management skill. The graph below shows such trend.

The graph shows 152 value of 2010 which mean that there was 152 days gap between payments. This shows poor trade cycle as compared to shell that needs to improve by improving accounts receivable collection periods. Furthermore, the relationship with suppliers need to enhance in order to get maximum payments time. This will definitely enhance operations of the firms.

Cash Conversion Cycle by Quarters:

Now let examine the cash conversion cycle by quarters in order to have clear pictures of cash needs by examining time required to cash inflows and outflows.

Shell: PSO22 | P a g e


Year 2008

19 2228

45

0

10

20

30

40

50

60

70

1st 2nd 3rd 4th

Quaters

Days

DS-inv DSR

DSP conversion cycle

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Year 2009

49

75

107118

0

20

40

60

80

100

120

140

160

180

200

1st 2nd 3rd 4th

QuatersD

ays

DS-inv DSR


Year 2010

128 136150 156

0

50

100

150

200

250

1st 2nd 3rd 4th

Quaters

Da

ys

DS-inv DSR


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According to above tables and graph, the cash managements of the Shell continuously improved as it’s effectively completing its operating cycle on time. On the other hand PSO cash cycle goes down due to poor performance of accounts receivable as customer’s payments stand outstanding for larger periods of time due to poor credit policies. According to quarters data, the shell need sufficient cash in hands in the in the 1st and 4th quarters i.e. during January to march and then to September to December where due to largest credit sales and account receivables, collection periods was little bit slow. The credit duration provided by the creditors is lower than the firm amounts collection durations which means that firm should have cash reserves in its treasury in order to avoid disputes with the suppliers. On the other hand, PSO needs cash reserves in last 2 quarters i.e.3rd (January to March) and 4th (May to June). It might be due to previous quarter’s customers outstanding. Therefore, cash management of PSO should be proficient by improving its accounts managements that effectively managed the operating activities in a skilful manner by arranging payments of creditors through quick collection of money.

Comparative Cash Flows Statement Analysis of Shell Pakistan Limited and PSO:

Shell:

Items Year 2006Year 2007

Year 2008 Year 2009 Year 2010

Operating Cash Flow 902,579 108,329 992,843 3,933,575 2,238,505

Investing Cash Flow -681,224 -1,333,710 -718,970 -1,125,496 -1,558,310

Financing Cash Flow -1,355,780 -1,447,262 1,481,508 -607,878 -4,538,230

Net Cash Flow -1,134,425 -2,672,643 1,755,381 2,200,201 -3,858,035

PSO:


Operating Cash Flow 1633774 3691454 4050125 -4828554 4957702

Investing Cash Flow -173687 -707953 -172926 -2889 87504

Financing Cash Flow -4104443 -1565507 -9649840 511790 -1944209

Net Cash Flow -2644356 1417994 -5772641 -4319653 3100997

Shell:

-5,000,000-4,000,000-3,000,000-2,000,000-1,000,000

01,000,0002,000,0003,000,0004,000,000

2006 2007 2008 2009 2010

CFO

CF-INV

CF-FIN

NET CF

PSO:

Operating Cash Flow Comparison: The above table and graph shows the positive values of operating cash flows over the 5 years i.e. from 2006 to 2010 for Shell and PSO except PSO have negative cash flows in 2009. The positive trend of operating cash flows was due to less cash outflows as compared to inflows. It means that firms effectively managed its operating activities. According to cash flow statements (as shown in appendix), the tax liabilities and working capital change were the major elements of operating cash flows for shell as it tend the net operating cash flows to change to larger extent. The values

-10000000

-8000000-6000000

-4000000-2000000

02000000

40000006000000

2006 2007 2008 2009 2010

CFOCF-INVCF-FINNET CF

of such components of shell were mainly caused the lower value of operating cash flows usually in 2010. The negative working capital resulted by higher current liabilities as compared to currents assets (as shown by balance sheet annexed in appendix) caused such decrease. Higher tax paid also caused such decreased. In order to be effective in term of operating profits and with respect to operations of the firms, the expenditures should be minimized and liabilities and assets should be kept at level where firm are able to avoid liquidity problem with equally analyzed the cash needs as well.

On the hand, the finance cost and working capital were also major items of operating cash flows in last 5 years that lead higher increased and decrease in its. In addition to this operating cost was also major elements that lead major change in cash flows trends. It should be kept at minimum level in order to have efficient operating cash flows trends.

Investing Cash Flow Comparison: The above table and graph shows the negative values of investing cash flows over the 5 years i.e. from 2006 to 2010 for both firms except PSO have positive investing cash flows. It is due to less cash inflows as compared to outflows. According to cash flow statements of shell (as shown in appendix), the fixed capital expenditures were the major elements of investing cash flows as it tend the investing cash flows to change to larger extent. The values of such components were mainly caused the negative value of net investing cash flows. It looked that company made higher expenses in fixed assets to enhance its revenue and for the purpose of future growth (as shown by financial statements annexed in appendix). However, due to minimizing such expenses and short term investments PSO cash flows from investing activities become positive in 2010. The investing activities however, need to improve in order to get strong cash flows statements to attract investors. This will do through more and more investments in others companies specially it required by shell that has negative investing cash flow.

Financing Cash Flow Comparison: The above table and graph also shows the negative values of financing cash flows over the 5 years i.e. from 2006 to 2010 for both firms. It is due to more cash outflows as compared to inflows. According to cash flow statements of Shell (as shown in appendix), the dividend paid and proceeds of long-term liabilities were the major elements of financing cash flows as it tend the financing cash flows to change to larger extent. The values of such components were mainly caused the negative value of net financing cash flows (as shown by cash flows annexed in appendix). This was a positive sign for the firms as it avoids agency issues and solvency problems. The financing activities however, need to improve in order to get strong cash flows statements to attract investors. This will do through more and more retained earnings by avoiding agency problems.

In case of PSO, the dividends and proceeds of short term finance resulted negative cash flows from financing activities. It was highly negatives trend in 2008 because of high cash payments to creditors and shareholders. This was little bit improve in the later because of taking short term financing and paid less dividends (as shown by cash flows in the appendix).

Now let examine what are the positive and negatives outcomes of cash management’s strategies of shell Pakistan limited and PSO. First of all, we examine true cash and cash flows ratios that will help to analyze the other areas as well.

Cash and Cash flows ratios:

These ratios help the cash managements of the firm to know the worth of cash treasury of the firms. It helped them to know how efficiently they managed its cash and how useful cash reserves they have. Let analyzed the important aspects for this purpose below:

Panel Data Analysis of Cash and CFO Ratios:

• Cash to Sales: This ratio shows the relationship of sales and cash i.e. what percentages of sales are merged in cash. It also represents whatever cash company holds is generated by the certain percentage of sales. This might represents the cash earned from other sources as well.

Company Year 2006 Year 2007 Year 2008 Year 2009 Year 2010Shell 0.84% 0.71% 0.62% 0.56% 0.53%

PSO 0.39% 0.42% 0.55% 0.69% 0.62%

Shell: According the table, the value decline from 2006 to 2007 which might means that firms’ cash value represents less percentage of sales and cash generation from others sources represent more of it. But it might be due to low cash in hands in upcoming years such as in 2007 cash in hand growth rate was -17% that might invest in somewhere (as shown by financial statements in appendix). The 2008 value however increases due to positive growth rate i.e. 7.11% in that year. The same was true for the FY 2009 and FY 2010 respectively as growth was -0.32% and 20% respectively. Therefore, to make cash treasury more strong such investing opportunities needs to use more and more in the effective ways. The firm also needs to generate as much as cash revenues as possible in order to avoid the cost of bad debts. PSO: The same trend was observed in PSO as well. The reason behind it was also same. However, percentage growth rate was different as it was highly grown in 2008 i.e. 98% and higher negative growth in 2010 which was -38%. This needs to improve in order to have strong cash position as shell was.

• Cash to Total Assets: This represents what proportion the assets represented by the cash. This help the managements to determine either they have sufficient cash in hands to meet its business requirements. This also shows that either firm used its cash in some profitable ways such as capital expenditures; long-term investments; purchased marketable securities etc. and/or keeps its cash idle that hurts its profits.

Shell: This value falls from 2006 to 2010 due to favorable growth in assets i.e. 14.39% up to

2010 especially long-term investments growth rate was 10% up to 2010 as compared to cash which was fallen down due to capital and investing expenditures. It means that firm invested its cash in some long-term investment that help the firm to enhance its profitability (as shown by financial statements in appendix). PSO: The trend of this ratio in case of PSO also the same as it also falls from 2006 to 2010. But in that case assets were mainly growth due to current assets rather than non-current or fixed


PSO 1.70% 1.84% 2.40% 3.07% 3.02%

assets as fixed assets negatively growth i.e. -9% in 2010 and non-current assets were -40% growths. This shows poor management as compared to shell as far as capital expansion and cash positions were concerned.

• Cash to Total Debts: This shows the solvency of the firm. It represents what percentage of long term debts paid Noff with the help of cash if maturities of such debts arise. This helps the firm to keep sufficient cash in hand in order to avoid solvency problem by meeting finance cost in time.


PSO 3.16% 3.48% 4.57% 5.75% 6.27%

Shell: This ratio goes down from 2006 to 2010 due to growth rate in long term liabilities was more as compared to cash reserves as liabilities in 2010 growth was 20.54% where as cash growth was 20.17% (as shown by financial statements in appendix). Therefore, cash reserves need to improve by controlling expenses and generating revenues from all available sources. PSO: This ratio shows random behavior as 1st decreased in 2007, than rose in 2008 and then fallen down as well up to 2010. This was due to random behaviors of both cash and liabilities. The higher liabilities growth as compared to cash leads lower of this value in 2009 and 2010 as compared to 2008. The value of cash growth rate was 21.23% and liabilities were 30.45% in 2010 as compared to past.

• CFO to Sales: This ratio shows the percentage of sales is represented by operating cash flows. This help the managements to determine how much expenditures it make in its operations and how effectively its handle such expenses in order to lower its cost of operating activities to get maximum operating profits. It also shows accruals of the firm.


PSO 0.75% 1.55% 1.42% 1.28% 1.12%

Shell: This value decreased from 2006 to 2007, than increased up to 2009 and down against in 2010. The lower value in 2010 was due to higher revenue growth rate i.e. 26.62 % as compared to operating cash flow which was fall down by 43%. This ratio needs to improve by controlling operating expenses. PSO: The behavior of this ratio in case of PSO was opposite as compared to shell i.e. it 1st increased and then down. The down behaviors were due to high operating cost which was then controlled in 2010 to get high value in these particular years.

• CFO to Total Assets: This ratio shows how effectively assets are utilized to get operating cash revenues. If this ratio is high it means that assets are effectively utilized to get operating profits.


PSO 3.25% 6.77% 6.23% 5.71% 5.44%

Shell: This ratio has random behavior as first it decrease in 2007 from previous year, than it increase up to 2009 and then fall down again in 2010. This random behavior was due to accruals shown by the firms that caused operating cash flow low and high (as shown by financial

statements in appendix). It means that assets utilization has no problem as it continuously generating more and more revenue. It was sure positive sign for the firm that needs to be maintained. PSO: The trend of this ratio seem same but value was lower due to lower assets value which mean that company paid less capital expenditures compared to past as OCF shown -8.76% growth rate in 2010 of such expenditures. This reveal poor management with respect to competitors as far as business growth is concerned.

• CFO to Current Debts: This ratio shows how much actual cash generating by the firm from its operation in order to pay its current liabilities.


PSO 6.17% 13.01% 12.02% 10.86% 11.47%

Shell: This ratio decreasing from 2006 to 2007 than increasing from 2007 to 2009 but down in 2010 as well due to largest accrual shown in 2010 (as shown by financial statements in appendix). However in all these years firm was insufficient cash generated from its operations to pay off its current obligations as certain percentage of current obligations can be disposed off with such cash generations. This ratio needs to enhance in order to avoid liquidity problems in upcoming periods. PSO: The results were opposite in PSO in 2010 due to improvements of cash flows from operations. This was good sign for the firm that it improved its liquidity.

• CFO to Total Debts: This ratio shows how much actual cash generating by the firm from its operation in order to pay its current liabilities.


PSO 6.04% 12.77% 11.83% 10.71% 11.30%

Shell: This ratio also decreasing from 2006 to 2007 than increasing from 2007 to 2009 but down in 2010 as well due to largest accrual shown in 2010 (as shown by financial statements in appendix). However in all these years firm was insufficient cash generated from its operations to pay off its total obligations as certain percentage of total obligations can be disposed off with such cash generations. This ratio needs to enhance in order to avoid solvency problems. PSO: The results were opposite in PSO in 2010 due to improvements of cash flows from operations. It was also improved due to lower long term liabilities. This was good sign for the firm that it improved its solvency.

• CFO to Interest expenses: This ratio shows how many time interests are paid off with the help of operating cash flows. This helps to determine either firm’s sufficiently generating cash from its operations to pay its finance costs.

Company Year 2006 Year 2007 Year 2008 Year 2009 Year 2010Shell 7.01 0.75 4.69 4.77 3.90

PSO 9.15 15.62 15.31 8.09 9.67

Shell: This ratio was high in 2006 and low in 2007 which mean that firm paid interest liabilities too large extent in 2006. On the other, hand it unable to pay its obligations in 2007 due to high finance costs and lower operating revenue as compared to past year. However, this was later

improved in upcoming periods i.e. 2008 to 2010 due to lower of debts portion that lower finance costs that also lower the operating expenses. PSO: This ratio shows better result as compared to shell because of lower portion of long term liabilities as compared to shell. Also, OCF in recent years was positive as compared to shell.

• CFO to Dividend: This ratio shows how much cash are generating from operations to return it to stockholders.

Company Year 2006 Year 2007 Year 2008 Year 2009 Year 2010Shell 0.70 0.08 1.01 7.23 1.14

PSO 2.05 4.34 3.82 3.52 2.10

Shell: This ratio was high in 2009 which mean that firm able to pay higher dividend in this particular year. It gone down in 2010 that mean that expenses gone up that need to be controlled in order to avoid agency problem. PSO: The better OCF in recent years also result this ratio better than shell. This shows better management with respect to shareholders value concern.

• CFO to Operating Income: This ratio represents percentage of accruals shows by the income statements. If it high it mean higher accruals are shown in the income statements. This helps the analyzers to determine actual cash positions of the firms in order to make its more effective.


PSO 19.19% 39.42% 35.91% 32.29% 27.83%

Shell: This ratio was down in 2010 which mean either accruals gone down or firm earned less operating profits. According to financial statements (as shown in appendix), the operating revenue gone down due to certain operating costs that need to be at minimum level in order to be remain effective in term of profitability as firm was in 2009. PSO: On the other hand, PSO ratio was low in 2010 because of high operating profits and positive OCF. This is good things in term of profitability.

Cash flow to fixed charges:

This ratio shows how much operating cash are available to pay per Rs. Fixed expenses or obligations bored by the firm. The higher this ratio means that the more time fixed expenses are paid by the operating cash flow generation.

Shell:

Ratios Year 2006 Year 2007 Year 2008 Year 2009 Year 2010

Operating Cash Flows

2581820 2259708 3033014 5656154 4514858

Fixed Charges 70290 59985 -2467765 63955 2567906

Cash Flow to Fixed Charges

36.73 37.67 -1.23 88.44 1.76

It was low in 2008 and 2010 which means that less cash as compared to other years were available for redemption of fixed expenses due to high operating costs that need to improve as it was in the 2009 in order to effectively meeting the fixed nature expenditures.

PSO:

Ratios Year 2006 Year 2007 Year 2008 Year 2009 Year 2010Operating

Cash Flows1633774 3691454 4050125 -4828554 4957702

Fixed Charges 216000 3210474 -5335878 3472487 -1427452

Cash Flow to Fixed Charges

30.34 2.84 -2.34 -0.05 -7.69

As compared to shell, it was also low in 2008 and 2010 which means that less cash as compared to other years were available for redemption of fixed expenses due to high direct costs that need to improve as it was in the 2006 in order to effectively meeting the fixed nature expenditures.

• Earning Quality: The degree to which earnings are attributed to aspects of the company's business as opposed to external forces. If a company has a change in earnings derived from a decrease in production costs or an increase in sales, they are said to have a high quality of earnings. If a company's earnings are attributed to outside sources such as inflation and high tax, this is seen as low quality of earnings. This ratio is more focused by the investors against income.

Company Year 2006 Year 2007 Year 2008 Year 2009 Year 2010

Shell 1.3667 4.1073 0.8528 2.0581 1.6764

PSO 1.4110 4.6695 2.1113 12.7387 1.1372

Shell: This ratio was high in 2007 and low in 2008. It was due to high finance and tax costs burden bored by the firm. However, it increased in 2009 due to less such burden and then down as well in 2010. The value down in 2010 which mean that firms abilities to generate actual cash incomes gone down due to operating expenses (as shown by financial statements in appendix).. Such expenses should be controlled by the firm in order to enhance its earning quality for the purpose of attracting its investors.

PSO: It is lower than shall in all financial years. It was low because of poor managements that are unable to find the optimal debts ratios in order to lower the tax and finance costs.

Working Capital and Liquidity Ratios Analysis:

Panel Data Analysis of Ratios:

Working capital: the different between current assets and liabilities. It help to measure the liquidity of the firms. Shell:

RatiosYear2006

Year2007

Year2008

Year2009

Year2010

Current Assets

20,316,721 20,041,859 30,220,209 21,363,250 25,489,760

Current Liabilities

17,902,377 19,612,115 23,307,811 25,169,302 30,407,710

Working capital

2,414,344 429,744 6,912,398 -3,806,052 -4,917,950

The working capital ratios are increasing last 3 years except recent 2 years i.e. 2009 and 2010. The assets are increasing and liabilities too from 2006 to 2010. The liabilities especially accounts payable are growing faster face than assets as accounts payable represents 47.76% and 51.79% in 2009 and 2010 which results negative working capital in 2009 and 2010 (as shown financial statements in appendix). This will cause liquidity problems for the managements if cash shortages arise at maturities time. Therefore, the managements should look such ratios and analyzed the needs of hours to have sufficient liquid assets and cash treasury to pay current obligations. It is because that fixed assets that represents only 36.52% and 33.79% in 2009 and 2010 respectively were using to generate revenue used to pay such obligations hurt the revenue and profits as there is tradeoff between profitability and liquidity. The balanced between profitability and liquidity is the real task of working capital and more probably cash manger. This can be done by having effective working capital and cash treasury management skills by concerning and looking other aspects as well.

PSO:

RatiosYear2006

Year2007

Year2008

Year2009

Year2010

Current Assets

198,349,442 238,769,755 272,113,917 340,416,947 350,015,514

Current Liabilities

109,300,121 128,824,186 152,718,579 184,652,593 186,324,488

Working capital

89,049,321 109,945,569 119,395,338 155,764,354 163,691,026

The working capital of PSO shows better position as compared to Shell Pakistan which mean that PSO have sufficient assets to pay its current obligations. It didn’t needs to dispose of its fixed assets for this purpose. This also represents strong net worth of PSO. The assets are increasing due to higher increased in accounts receivable and inventory as accounts receivable represented 52.48% and 52.10% and inventory represented 26.60% and 29.10% in 2009 and 2010 respectively (as shown by financial statements values in appendix). This shows less liquid assets hold by the firm. However, it can improve its liquidity by improving its inventory and accounts management by keeping efficiency of its net worth.

Current Ratio: This ratio measured the liquidity of the firms. This ratio should be greater than 1 in order to avoid liquidity problem. The 1 are called standard ratio which mean that firm has 1 dollar to pay 1 dollar of its liability. Shell:

RatiosYear2006

Year2007

Year2008

Year2009

Year2010

Current Assets

20,316,721 20,041,859 30,220,209 21,363,250 25,489,760

Current Liabilities

17,902,377 19,612,115 23,307,811 25,169,302 30,407,710

Current Ratio

1.13 1.02 1.30 0.85 0.84

The current ratios are greater than standard ratio 1 from 2006 to 2008. In 2009 and 2010 it is lower than 1 which means that firms have insufficient current assets to pay its current obligations as current assets represented 63.48% and 66.21% in 2009 and 2010 respectively as compared to current liabilities that represented 74.79% and 78.99% in 2009 and 2010 respectively. This will create liquidity concerns if account payables make its policy strict. So cash managements should look this issue in order to avoid liquidity problems for the firm. If it pay its current obligations through the sale of long-term assets, than no doubt it avoid liquidity problem but on the other it lose profitability as there is tradeoff between profitability and liquidity. Therefore, having strong cash treasury is necessary in this regards. PSO:

RatiosYear2006

Year2007

Year2008

Year2009

Year2010

Current Assets

198,349,442 238,769,755 272,113,917 340,416,947 350,015,514

Current Liabilities

109,300,121 128,824,186 152,718,579 184,652,593 186,324,488

Current Ratio 1.81 1.85 1.78 1.84 1.88

The liquidity position of PSO as compared to shell was strong enough in all years. It was due to sufficient current assets were available to pay current liabilities. As we see in the values that current assets were almost 10% more of current liabilities which we also observe by looking values of such current assets which were 90.40% and 95.61% of total assets as compared to liabilities which were 84.75% and 84.09% in 2009 and 2010 respectively.

Acid Test Ratio: It is more stringent measure of liquidity as it includes more liquid assets other than accounts receivable, prepayments and inventory. Shell:

RatiosYear2006

Year2007

Year2008

Year2009

Year2010

Current Assets

20,316,721 20,041,859 30,220,209 21,363,250 25,489,760

Current Liabilities

17,902,377 19,612,115 23,307,811 25,169,302 30,407,710

Acid Test Ratio

0.35 0.28 0.25 0.08 0.10

It was continuously decreased up to 2010 due to increased in current liabilities and decreased in liquid assets as it represented only 21% and 29.22% out of 63.48% and 66.21% in 2009 and 2010 respectively . The shell has less liquidity in 2010 as compared to past, although it had more liquid assets in that year. It was due to highly increased in liabilities as compared to those assets.

PSO:

RatiosYear2006

Year2007

Year2008

Year2009

Year2010

Current Assets 198,349,442 238,769,755 272,113,917 340,416,947 350,015,514

Current Liabilities

109,300,121 128,824,186 152,718,579 184,652,593 186,324,488

Acid Test Ratio 0.78 0.80 0.81 0.78 0.59

The acid ratio of PSO was not only better than shell but also larger than standard ratio i.e. 0.50 because of sufficient proportion of liquid assets such as it were 25% and 30% in 2009 and 2010.

Cash Ratio: It includes more liquid assets of the firms that will liquidate with in no time in order to meet the company liability. This will include cash and marketable securities. Such ratio needs to be closest to standard ratio 0.050.

Shell:

RatiosYear2006

Year2007

Year2008

Year2009

Year2010

Cash and Cash Equivalents

981,197 814,530 872,414 869,623 1,045,025

Current Liabilities

17,902,377 19,612,115 23,307,811 25,169,302 30,407,710

Cash Ratio 0.055 0.042 0.037 0.035 0.034

It will high in 2006 and then gone down up to 2010 as it represents liquidity problem for the firms if something wrong done with the firms. It means that firm has insufficient cash in hand to pay of its obligations as it represented 2.58% and 2.71% in 2009 and 2010 respectively. The other sources might be used to pay such liabilities. This will be great concern for the management in the near futures; otherwise it is not tackle on time, it creates liquidity problems for the firm.

PSO:

RatiosYear2006

Year2007

Year2008

Year2009

Year2010

Cash and Cash Equivalents 3530323 4565072 7081700 10771094 11862710

Current Liabilities

109,300,121 128,824,186 152,718,579 184,652,593 186,324,488

Cash Ratio 0.04 0.13 0.21 0.27 0.08

The cash ratio of PSO also better due to high cash in hands in term of amounts despite the facts that the proportion of cash in hands gone down in 2009 and 2010 as it represented 1.88% in 2009 and 0.88% in 2010.

Vertical Analysis of Shell Pakistan Limited:

Now, look on the vertical trend of working capital i.e. current assets and current. Vertical Analysis expresses financial statements as percentages. The percentages are assigned 100% to Total Assets on Balance Sheet and 100% to Total revenue in Income Statement.

The vertical analysis helped us understand what proportion current assets represent total assets and what proportion current liabilities represent total liabilities and shareholders’ equities. It also helps us understand the liquidity managements of the firm which is the major concern of the cash mangers. The table below shows the trend analysis of working capital of both companies.

Shell:

Account Title Annual Annual Annual Year Annual Annual

Year 2006 Year 2007 2008 Year 2009 Year 2010Cash and Cash

Equivalents3.48% 2.79% 2.20% 2.58% 2.71%

Trade Deposits and Short term

Prepayments0.74% 0.65% 0.90% 1.10% 1.35%

Accounts Receivable

18.59% 15.68% 12.37% 3.68% 5.23%

Inventory 35.53% 28.33% 45.65% 38.90% 32.11%

Other Receivables 13.78% 21.19% 15.33% 17.39% 25.16%

Current Assets 72.12% 68.61% 76.19% 63.48% 66.21%Accounts Payable 42.38% 40.78% 41.56% 47.46% 51.79%

Short Term Borrowings

17.85% 25.80% 14.72% 25.12% 25.94%

Short Term Portion of LT Debt

0.09% 0.11% 0.14% 0.12% 0.04%

Accrued Markup 0.27% 0.47% 0.56% 0.71% 0.31%

Taxation 2.95% 0.00% 1.95% 1.50% 0.99%

Current Liabilities 63.55% 67.14% 58.76% 74.79% 78.99%

Vertical Analysis of working Capital for PSO:

Account Title 2006 2007 2008 2009 2010Cash and Cash Equivalents 2.71% 2.04% 2.37% 1.88% 0.88%

Deposits and Short term Securities 1.84% 2.12% 0.32% 0.36% 0.18%

Accounts Receivable 16.70% 18.20% 26.67% 52.48% 58.10%

Inventory 40.32% 39.73% 49.15% 26.60% 29.03%

Other Current Assets 21.15% 21.57% 12.65% 9.08% 7.42%Current Assets 82.71% 83.64% 91.16% 90.40% 95.61%

Accounts Payable 52.47% 55.44% 63.78% 71.78% 77.15%

Short Term Borrowings 10.90% 12.13% 8.65% 12.16% 6.44%

Short Term Portion of LT Debt 0.00% 0.00% 0.00% 0.00% 0.00%

Other Current Liabilities 1.28% 1.10% 0.74% 0.81% 0.50%Total Current Liabilities 67.06% 68.76% 73.74% 84.75% 84.09%

Shell: PSO:

Breakdown of Current Assets

0.00%

20.00%

40.00%

60.00%

80.00%

100.00%

2006 2007 2008 2009 2010

Periods

% o

f To

tal A

sset

s

Cash and Cash Equivalents Trade Deposits and Short term P repaymentsAccounts Receivable Invento ry Other Recievables

Breakdown of Current Liabilities

0.00%10.00%20.00%30.00%40.00%50.00%60.00%70.00%80.00%90.00%

2006

2007

2008

2009

2010

Periods

% o

f Tot

al

Accounts Payable Short Term Borrowings Short Term Portion of LT Debt Taxation

2006 2007 2008 2009 2010

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%

80.00%

90.00%

100.00%

% o

f T

ota

l A

ss

ets

Periods


Cash and Cash Equivalents Deposits and Shortterm SecuritiesOther Current Assets Inventory Accounts Receivable


0.00%10.00%20.00%30.00%40.00%50.00%60.00%70.00%80.00%90.00%

2006

2007

2008

2009

2010

Periods

% o

f Tot

al

Accounts Payable Short Term Borrowings Short Term Portion of LT Debt Taxation

2006 2007 2008 2009 2010

0.00%

2.00%

4.00%

6.00%

8.00%

% to

Tot

al

Inve

stm

ent

Periods

Investement Breakdown

Trade Deposits and Short term Investment Longterm Investments

2006 2007 2008 2009 2010

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

% to

Tot

al

Inve

stm

ent

Periods

Investement Breakdown

Deposits and Shortterm Securities Longterm Investments

The above table and graph shows the composition of current assets and liabilities for the both companies. According to above table, the both companies has invested more in current assets rather than fixed assets which mean that both companies depend upon more on liquid assets to carry its routine businesses. In case of Shell, among these assets inventory has largest proportion than other assets. This will create costs for the firms and caused profits to down. The other assets which are more liquid in nature such as cash and short terms investments has low proportion which mean that company are not good as far as liquidity is concerned. The liquidity problem also arises due to falling current assets. Therefore, it can be improved by investing more in much

liquid assets such as short term investments. On the other hand, when we see the current liabilities it is larger than the current assets which also represents liquidity problem which was a sign of poor working capital and cash managements. The accounts payable are larger enough which need to be control in order to avoid such problem but it also save interest cost. Therefore, good relationship with suppliers plays a vital role in this regard.

The above graph of PSO which shows the composition of current assets and liabilities represents the same facts as stated above. But PSO did not face liquidity problems as it has enough short term assets to meet its short term obligations. However, the liquidity needs to improve by investing more in more liquid assets such as short term investments.

Cash Effectiveness measure Ratios:

Panel Data Analysis of Ratios: Cash Flow Adequacy Ratio (CFAR)/ Cash Coverage Ratio:

This ratio is often used to determine cash richness of company as it also reflecting true picture of the company. This tells us whether the cash generated by the company from its operations is sufficient to fund its future capital needs that are required either for the replacement of fixed assets or for expansion or for growth in the operations or even further diversification. The ratio higher than 0 i.e. positive mean that company have cash to finance its fixed assets and to purchase further assets for expansion.

Shell:


Cash Flow Adequacy(CFAR)

1.33 0.83 0.69 3.13 3.18

It will decrease over 3 years i.e. up to 2008 and then increase up to 2010. It was due to increased in capital nature expenditures. This shows positive sign as far as business expansions are concerned. This should be maintained in order to maintain cash treasury effectiveness.

PSO:

Ratios Year 2006 Year 2007 Year 2008 Year 2009 Year 2010Cash Flow Adequacy(CFAR)

3.9369 -9.5491 1.2644 0.0111 0.8149

This ratio was lower than in almost in every years as compared to PSO because of lower cash reserves that need for the business expansion.

Cash Reinvestment Ratio/ Plowback:

The cash reinvestment ratio is useful for determining the amount of cash flow that a company is routinely plowing back into the business. The higher the ratio means that higher investment made in routine business from inside. The low debt utilized by the firms is due to high plowback of the firm.

Shell:


41 | P a g e

Cash Reinvestment

Ratio0.5 -0.8 1.2 -4.6 -0.6

The behavior is random in last 5 years. It is high in 2009 which mean firms utilized more it internal financing and it decrease in 2010 which mean that firm utilized external financing as well for its operations.

PSO:


Cash Reinvestment

Ratio0.296 0.120 0.708 2.252 1.387

This ratio shows better result than shell because PSO depends less on external financing as compared to Shell which utilized more external financing.

Effects of Cash Managements Short term Decision/Policies on business cash generation of Both Companies:

Now let examine the impacts of short term decision and policies adopted by the both companies. This will help determine to strong the cash treasury in shortest periods of time.

Gross Profit Margin (GPM): It measure the percentage of Gross Profit Company is able to earn out of bearing direct cost (CGS). It shows either firm sufficiently generating revenue or effectively handling cost to have optimal cash for other activities as well.

FirmYear 2006

Year 2007Year 2008

Year 2009

Year 2010

Shell 8.49% 5.55% 10.83% 8.27% 6.14%

PSO 5.77% 3.51% 6.06% 0.49% 3.93%

According to above table the shell are generating more cash after paid its direct cost. It might show that shell is effectively handling its cost of productions as compared to PSO. Therefore, PSO should enhance such profit by controlling such cost.

Operating Profit Margin (OPM): It measures the operating revenue the firm is able to generate after paid operation cost. It shows either firm effectively manages its operating activities.

Firm Year 2006 Year 2007 Year 2008 Year 2009 Year 2010

Shell 4% 1% 6% 3% 2%

PSO 3.78% 2.27% 4.53% -1.04% 2.86%

42 | P a g e

The above table shows that in the past year shell were effectively managed its operating costs and activities but then it’s unable to handle it effectively that should be monitor in order to have high revenue as PSO in 2010. It shows effective operating management of PSO.

Net Profits Margin (NPM): It is the income that company generated from it business and that are available for the distribution to the shareholders.

Firm Year 2006 Year 2007 Year 2008 Year 2009 Year 2010Shell 3% 1% 4% 2% 1%

PSO 2.51% 1.33% 2.83% -1.15% 1.21%

It shows that in the past, shell are better generating more revenue but in 2010 due to inadequately management expenses, such revenue gone down that need to control in order to have effective revenue for the distribution to shareholders for avoiding agency problem and for the growth as well. The PSO however need consistent in income level in order to remain effective.

Benchmark Analysis:

Now Let Compare both companies cash managements with the industry averages in order to know whether these companies performed better or not.

Current Ratio:

Firms Year 2006 Year 2007 Year 2008 Year 2009 Year 2010

Industry 1.22 1.11 1.06 1.05 1.02

Shell 1.13 1.02 1.30 0.85 0.84

PSO 1.23 1.22 1.24 1.07 1.14

The shell lies close to industry averages in all year. However, up to 2008 it has high such ratio because of better holding optimal current assets. It can be improved by enhancing current asset composition. The PSO, on the other hand, lies close to industry averages because of sufficient current assets in the company. It should maintain such ratio by maintaining effective assets composition.

Acid Test Ratio:


Industry 1.03 2.03 3.03 4.03 5.03

Shell 0.35 0.28 0.25 0.08 0.10

PSO 0.32 0.33 0.40 0.65 0.70

43 | P a g e

The acid ratio of an industry is too large due to larger numbers of assets and investments made in this sector. The shell is too poor especially in 2010 due to inadequate liquid assets and PSO acid test ratio looking better as compared to industry averages due to holding sufficient liquid assets. It however require by both companies to improve such ratio by investing in liquid assets.

Receivable Turnover Ratio:


Industry 7.71 10.00 10.00 5.30 6.00

Shell 6.32 5.86 6.49 9.14 12.15

PSO 7.64 5.53 5.21 3.21 1.88

The shell lies close to industry averages even better in 2009 and 2010 due to effective accounts receivable management. The shell need to keep such accounts receivable by ensuring that its receivable collected during the years without hurting its revenue that might be due to too much strict policy. The PSO’ accounts receivable management start decline after 2008. Therefore, the PSO should revise its accounts receivable management policy in order to get optimal accounts receivable level in order to get the pace of an industry. Days to Collect Accounts Receivable:


Industry 47.34 36.50 36.50 68.87 60.83

Shell 58 62 56 40 30

PSO 48 66 70 114 195

The shell lies close to industry averages even better in 2009 and 2010 due to effective accounts receivable management. The shell collects money from maximum customers during the years and avoid bad debts cost. It need to keep such accounts receivable by ensuring that it did not hurt its revenue that might be caused by strict policy credit policy. The PSO’ accounts receivable management start decline after 2008. Therefore, the PSO should revise its accounts receivable management policy in order to minimize collection periods and also to avoid bad debts cost and get pace industry as well. This will do by quick conversion of accounts receivable into cash. Inventory Turnover Ratio:


Industry 11.00 10.00 11.00 7.00 8.00

Shell 13.30 11.89 9.45 9.17 14.57

PSO 9.93 11.64 10.10 11.81 14.34

44 | P a g e

The shell and PSO lies close to industry averages even better in 2009 and 2010 due to effective inventory management. The both companies need to keep such inventory level that quickly converts into cash in order to avoid inventory storage cost. Days in Inventory:


Industry 86 88 81 89 82

Shell 27 31 39 40 25

PSO 37 31 36 31 25

The shell and PSO lies close to industry averages even better in 2009 and 2010 due to effective inventory management. The both companies need to keep such inventory level that quickly converts into cash in order to avoid inventory storage cost and enhance profitability and cash conversion cycle. Gross Margin:


Industry 13.00% 10.00% 11.00% 9.00% 7.00%

Shell 8.49% 5.55% 10.83% 8.27% 6.14%

PSO 5.77% 3.51% 6.06% 0.49% 3.93%

The shell are lies close to an industry averages due to low direct cost (CGS). Therefore, in better performance and maintain the pace of an industry such cost should be keep low. On the other hand, PSO need to improve its profitability to get closer to an industry averages. It will do with the help of enhancing revenues and minimizing cost of goods sold.

Net Margin:


Industry 10.00% 8.70% 10.00% 6.20% 5.00%

Shell 2.65% 0.61% 3.67% 1.64% 0.82%

PSO 2.51% 1.33% 2.83% -1.15% 1.21%

The shell are lies far away to an industry averages due to high operation and indirect cost. Therefore, in better performance and get the pace of an industry such expenses should be

45 | P a g e

minimized. On the other hand, PSO also need to improve its profitability to get closer to an industry averages. It will do with the help of enhancing revenues and minimizing expenses.

46 | P a g e

CHAPTER 4ISSUES / FINDINGS:

Pakistan state oil Ltd:

• High cash conversion cycle

There is high cash conversion cycle at Pakistan state oil Ltd as it was 152 days in 2010 due to

• Too much account receivables as represented 58% in 2010.

• Lower level of accounts payables as represented only 77% as compared to an industry which was more than that.

• Inadequate current assets composition due to

• Inadequate cash balances as it represented only 0.88% in 2010.

• Minor level of short term investment as 0.18% in 2010.

• Too much Account receivables as 58% in 2010.

• Inadequate cash flows as negative cash trend at the end .

• Profitability issue as very low net profit in 2010 i.e. 1.21%.

• Liquidity Problem due to illiquid assets.

• High level of direct cost (CGS) as represented by GPM which was only 3.93% in 2010.

• Lack of capital Expenditure as it gone down 546802 thousands from 678172 thousands.

• Minor level of long term investment as it represented only 1% in 2010.

Shell Pakistan Ltd:

• Inadequate current assets composition due to• Inadequate cash balances as it represented only 2.71% in 2010.• Minor level of short term investment as it was null in 2010.

• Inadequate cash flows.• Profitability issue as in 2010 there was very low profit i.e. 0.82%.

• Liquidity Problem due to inadequate cash in hands and marketable securities.

47 | P a g e

• Minor level of inventory to meet uncertain demand as it was 30% in hand where as demand growing at the rate of 25%. The inventory should be double of demand as half consider as cushion.

• High level of operating cost as it was 5% in 2010 where as industry average was only 3-3.5%.

48 | P a g e

2011 2013 2015

0.00%20.00%40.00%60.00%80.00%

100.00%

% o

f T

ota

l

As

se

ts

Periods


Accounts Receivable

Inventory

Other Current Assets

Deposits and ShorttermSecurities

Cash and Cash Equivalents


0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

2011

2012

2013

2014

2015

Periods

% o

f T

ota

l

Other Current Liabilities

Short Term Portion of LTDebt

Short Term Borrowings

Accounts Payable

Investment Trend

0.00%

2.00%

4.00%

6.00%8.00%

10.00%

12.00%

14.00%

2011 2012 2013 2014 2015

Year

%

Longterm Investments Deposits and Shortterm Securities

CHAPTER 5Projected Solutions for PSO:

Working Capital Compositions of PSO:Here are provided solutions on above issues by examining past trends of growth in particulars items such as revenues, cost etc.

Account Title

Annual

Period

2011

Annual

Period

2012

Annual

Period

2013

Annual

Period

2014

Annual

Period

2015

Cash and Cash Equivalents 1.70% 1.84% 2.40% 3.07% 3.02%Deposits and Short-term Securities 0.58% 5.12% 8.53% 11.22% 0.80%

Accounts Receivable 39.12% 34.89% 30.81% 26.83% 24.36%Inventory 34.78% 34.89% 30.81% 35.78% 38.97%

Other Current Assets 19.56% 19.63% 19.81% 20.12% 21.92%Current Assets 95.74% 96.36% 92.36% 97.02% 89.07%Accounts Payable 47.82% 47.97% 47.54% 46.96% 43.84%

Short Term Borrowings 3.69% 3.66% 3.73% 5.32% 3.31%Short Term Portion of LT Debt 0.00% 0.00% 0.00% 0.00% 0.00%


49 | P a g e

According to the above table and graphs, if PSO invest its cash reserves portion in some profitable markets securities so that its current assets composition become adequate and shows better result and net worth of the firms as compared to the past. It will also enhance cash reserves further that become against invested for further futures growth. On the other hand if the firm quite strict its credit policies, it’s also avoid bad debts of the firms that also make cash in hands effective. As in the past, investments just represented 1.9% and bad debts almost more than 30% that will improve by investing more in marketable securities and by strict the credit policy. However, it didn’t mean to create liquidity problems by disturbing sale and cash in hand. For this purpose current liabilities also keep at optimal level that is beneficial for the firm.

50 | P a g e

Cash conversion cycle of PSO

208

131

88

6167

0.00

50.00

100.00

150.00

200.00

250.00

2011 2012 2013 2014 2015

Days sale in Inventory Days to Pay to A/P Days to Collect A/R Net Trade Cycle

The cash conversion cycle can be effective by improving accounts receivable of the firm. It should be done without disturbing sales and revenues rather collection process should enhance. If the firm makes such policy that its collection periods keep at industry averages than cash cycle improves. As we see that the actual cash cycle was triple of industry averages as in 2010 it was 152 days. By taking above steps, cash cycle will come closer to an industry averages. The cash cycle also improve by taking more times from the creditors via good relationship with them. If firm take such steps than no doubts, it enhances its cash cycle in the same trends as shown above.

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CASH FLOW TREND

-30000000

-20000000

-10000000

0

10000000

20000000

30000000

40000000

2011 2012 2013 2014 2015

YEARS

AM

OU

NT

S

CFO Cf-inv CF-fin

Cash Flows of PSO:

In order to have better cash flows composition and better cash treasury, the PSO should enhance its all cash flows activities. The cash flows from operations should be enhancing by taking such steps that keep expenses at industry averages. For this purpose, the unnecessary direct costs should be controlled which was increased to 96% in 2010. Whereas, industry averages was only 93%. For the improvements of investing activities, short term investments should be made that will enhance futures profitability as well. The investing portion was only 1% in the past whereas it should be at least 5% in the futures. The financing activities also are improved by taking optimal level of external financing so that the cost of debts should be minimized. For this purpose tax shield should be calculated.

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Projected Solutions for Shell:Vertical Analysis:

Account TitleAnnualPeriod2011

AnnualPeriod2012

AnnualPeriod2013

AnnualPeriod2014

AnnualPeriod2015

Cash and Cash Equivalents 34.13% 28.52% 29.01% 30.13% 32.09%Deposits and Short-term Securities 1.35% 1.19% 7.55% 7.64% 7.46%

Accounts Receivable 10.66% 9.97% 10.16% 9.96% 9.78%Inventory 21.33% 24.93% 19.04% 17.44% 14.68%

Other Current Assets 12.00% 14.45% 11.43% 11.21% 11.01%Current Assets 79.47% 79.06% 77.19% 76.38% 75.02%Accounts Payable 39.99% 37.39% 36.80% 36.56% 41.58%

Short Term Borrowings 25.18% 28.66% 27.00% 27.30% 20.88%Short Term Portion of LT Debt 0.00% 0.92% 0.90% 0.75% 0.97%


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According to the above table and graphs, the shell should invest its cash reserves portion in some profitable markets securities so that its current assets composition become adequate and shows better result especially positive working capital and net worth of the firms as compared to the past years. In the past, investment almost null, that need to be kept at least 4-5%. The profits arises from such sources also enhances the cash reserves. It will definitely help for further futures growth as well. On the other hand the inventory and account receivables also keep at optimal level in order to have positive working capital that equally enhances liquidity and profitability as well.

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Working Capital and Liquidity Ratios:

Account Title

AnnualPeriod2011

AnnualPeriod2012

AnnualPeriod2013

AnnualPeriod2014

AnnualPeriod2015

Current Assets 58,885,615 73,290,708 80,792,915 92,918,076 102,214,958

Current Liabilities

52,234,907 66,706,651 73,042,790 84,659,738 93,092,329

Working Capital

6,650,708 6,584,057 7,750,125 8,258,338 9,122,629

Account Title

AnnualPeriod2011

AnnualPeriod2012

AnnualPeriod2013

AnnualPeriod2014

AnnualPeriod2015

Current Assets 58,885,615 73,290,708 80,792,915 92,918,076 102,214,958

Current Liabilities

52,234,907 66,706,651 73,042,790 84,659,738 93,092,329

Current Ratio 1.13 1.10 1.11 1.10 1.10

Acid Test Ratio

0.65 0.55 0.67 0.69 0.72

Cash Ratio 0.50 0.41 0.52 0.54 0.58

If above current assets compositions that shows in the table and graph will adopt and get by the shell than liquidity problems can be solved. It will do by having optimal level of all items lies in current asset and current liabilities. It specially improve buy having investing portion which was null in 2010. Now, up to 2015, it shows more than 5%. The cash reserves also get enhance due to profitability arises from such sources as well. The working capital than become positive and current ratio, acid test ratio and cash ratio becomes favorable as compared to previous years. The ratio not only increases by having above composition but also lies above standard ratio which means that firm have sufficient assets to pay its current obligations.

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CASH FLOW TREND

-8000000

-6000000

-4000000

-2000000

0

2000000

4000000

6000000

8000000

10000000

12000000

2011 2012 2013 2014 2015YEARS

AM

OU

NT

S

CFO CF-Investment CF Finance

Cash Flows of Shell:

The cash flows of firm will needs to improve by controlling unnecessary expenses specially operating expenses that lead net income down even below 1%. If this expenses keep low than cash flows from operation become favorable due to better net income that now go up i.e. 3% up to 2015 that resulted positive trend at the end. The investing and financing activities also become optimal by having short-term investments that was null up to 2010 and now it higher than 5% and optimal debts obligation by calculating tax shield. Such decision enhances profitability by lowering cost.

56 | P a g e

CHAPTER 6Recommendations:Monitor the cash position on continuous basis:

On a continuous basis, the cash manager should typically spend the first part of the day in developing the cash position. This exercise will identify shortages and surpluses in time to either borrow funds to cover the shortfall or invest excess funds. The cash manager should first confirm the prior day’s closing balance, typically using online or Internet bank reporting. Forecasted and scheduled disbursements, receipts, loan repayments, and maturing investment proceeds are then added and subtracted to calculate the day’s cash flow. The cash manager should also typically administer the credit facility borrowing on a day-to-day basis. This continuous reconciliation process also provides an effective method of immediately revealing unauthorized or fraudulent transactions.

Controlling balances on deposit:

The cash manager should maintain bank balances at a level adequate to avoid overdrafts. Short-term borrowing may be necessary to meet the required balances. Excess funds must typically invest, short-or long-term, until they are required to cover capital or operating expenditures.

Moving funds as necessary:

The cash manager should efficiently control several different bank accounts, perhaps in different states or even foreign countries. The transfer of monies from one account to another is often a continuous exercise to prevent cash shortages in the accounts and to promptly invest surpluses.

Managing short-term (working capital) borrowing and investing:

Whether a company is an overall investor or borrower, the unsynchronized timing of operating cash flows requires the cash manager to be both a borrower and an investor. On any given day, the cash manager should borrow to meet short term cash requirements or invest surplus cash for a healthy growth.

Forecast future shortages and surpluses

To determine the amount and various maturities of the investment portfolio, the cash manager must predict future cash flows. Investing for a shorter period than necessary usually results in lost earnings; and investing for too long may cause premature security sales at a loss if funds are needed before maturity. Forecasting also allows the cash manager to plan for an adequate level of short-term credit facilities.How is surplus cash invested?

Surplus cash can arise from many sources: the sale of stock, loan proceeds, seasonal sales peaks, growth of earnings and simply the acceleration of the cash flow cycle. If the company has outstanding debt, especially a short-term working capital credit facility, the manager may elect to pay down the liability. If, however, the cash surplus is temporary, the cash manager may want to invest in short-term, money market instruments. There are three areas that need to be defined in any investment strategy and should be clearly spelled out in all investment policies: (1) Risk tolerance (protection of principal), (2) Liquidity (3) Return. 57 | P a g e

These factors are listed in order of priority. The preservation of principal is a serious consideration in the selection of an investment. Although there is some degree of risk in all investments, that risk is identifiable and may be controlled. The capable manager will choose investments that offer both income and the safety of principal. Cash management’s primary objective in holding short-term investments is to maintain adequate liquidity: assurance that investments can be easily sold prior to maturity to cover unexpected cash shortfalls. The investment strategy for short-term holdings is to maintain an adequate liquidity reserve (“cushion”) while increasing interest income/return and net income ultimately and to make happy to the stakeholders as well.

How are cash shortages managed?

Unused borrowing capacity is a liquidity management tool. As the old adage says, the best time to borrow money is when you don’t need it. Defining the amount of a short-term line of credit requires not only reliable cash forecast, but also a thorough understanding of seasonal revenue fluctuations, timing of major capital expenditures, the intra-period timing of receipts and disbursements and an appropriate contingency factor to deal with the unexpected. The objectives in establishing borrowing levels are to:• Ensure adequate funds to meet short-term cash requirements• Minimize the cost of funds• Avoid an excessive debt burden or a potential default• Develop alternative sources of short-term borrowing to maximize flexibility and the responsiveness to sudden market shifts and opportunitiesThere are numerous arrangements and methods for managing temporary cash shortfalls. Each company has to determine the best method available to them to obtain short-term financing, based on its overall financial health and strategic financial planning. The cost of short-term borrowing is determined by the lender’s perceived credit risk that is established by reviewing the borrower’s current earnings, leverage, future growth potential and the type of collateral.

Short-term financing alternatives include:

• Line of Credit is an agreement between the lender and the borrower that allows the borrower to access funds up to a maximum amount.• Commercial Paper (CP) is debt that is issued directly by the company or through its dealers. It is an unsecured promissory note for a specific period of time and is generally issued at a discount. The cost of credit via commercial paper issuance depends on the credit worthiness of the company. Companies issue CP to obtain cheaper, more flexible or more available financing than is offered through financial institutions.• Asset-Based Borrowing is a form of secured lending based on pledging corporate assets as collateral. The most common form of asset based borrowing is the pledging of accounts receivable, but also may involve collateralizing inventory, real estate (mortgage) or other tangible property.• Factoring is the sale of a title to accounts receivable to a third party (factor) at a discounted rate.• Trade Credit cannot be overlooked as a means of short-term borrowing. Some vendors offer substantial trade discounts for early payment. Delaying payment for the full payment terms, however, can be a source of short-term cash. Economically, however, missing trade discounts

58 | P a g e

tends to be the most expensive method of short-term borrowing. Late payments create significant vendor relationship problems and will ultimately impair the company’s access to credit

Managing banking relationships:

The cash manager should maintain a mutually beneficial relationship with the company's bankers. If the cash manager develops an open and straightforward relationship, the banker can develop a good understanding of the company’s operations and can bring relevant banking products and services to the attention of the cash manager.Analyzing, designing and implementing cash management systems and procedures:

Through the day-to-day tasks involved in their job, cash managers must know system requirements to carry out cash management efficiently. Cash managers have a professional responsibility to keep up-to-date on developments in cash management products and practices by attending conferences, reading journals, and other networking and continuous learning activities. While growing professionally, the cash manager acquires and updates the skills and knowledge necessary to implement the cash management systems and procedures best suited to the company objectives.

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CONCLUSION:

The Pakistan and even overall petroleum sectors in the world face uncertainty due to high demand and cost of their products. The few firms however, running its operation successfully in this sector. It basically includes MNC such as shell of Pakistan. The local firm however gets advantage of being local and liberation. The local firm is get advantage over the tax and risk and return certainty as we see in case of Pakistan state oil. Both companies get maximum share in their major line of business. The issues are faced by the both local and MNC’s firm that might be different in natures as we see in our study as well. The local and MNC have their own needs of operations. The cash needs are also vary. However, they can compare in term of its treasury management performance as it do in this study. No doubts, cash are the life blood of the company. The better it utilized the better company performance in all areas. By concluding our discussion, we can say that better the performance of treasury and cash management of the firm, the better the performance of the firm overall. The optimal level of cash composition plays an important role in putting the company in a better position in the industry and to get maximum market shares in the globe. In order to have better cash flows composition and better cash treasury, the PSO should enhance its all cash flows activities. The cash flows from operations should be enhancing by taking such steps that keep expenses at industry averages. For this purpose, the unnecessary direct costs should be controlled which was increased to 96% in 2010. Whereas, industry averages was only 93%. For the improvements of investing activities, short term investments should be made that will enhance futures profitability as well. The investing portion was only 1% in the past whereas it should be at least 5% in the futures. The financing activities also are improved by taking optimal level of external financing so that the cost of debts should be minimized. For this purpose tax shield should be calculated.

Whereas in Shell the cash flows of firm will needs to improve by controlling unnecessary expenses specially operating expenses that lead net income down even below 1%. If this expenses keep low than cash flows from operation become favorable due to better net income that now go up i.e. 3% up to 2015 that resulted positive trend at the end. The investing and financing activities also become optimal by having short-term investments that was null up to 2010 and now it higher than 5% and optimal debts obligation by calculating tax shield. Such decision enhances profitability by lowering cost. Both companies has invested more in current assets rather than fixed assets which mean that both companies depend upon more on liquid assets to carry its routine businesses. In case of Shell, among these assets inventory has largest proportion than other assets. This will create costs for the firms and caused profits to down. The other assets which are more liquid in nature such as cash and short terms investments has low proportion which mean that company are not good as far as liquidity is concerned. The liquidity problem also arises due to falling current assets. Therefore, it can be improved by investing more in much liquid assets such as short term investments. On the other hand, when we see the current liabilities it is larger than the current assets which also represents liquidity problem which was a sign of poor working capital and cash managements. The accounts payable are larger enough which need to be control in order to avoid such problem but it also save interest cost. Therefore, good relationship with suppliers plays a vital role in this regard.

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PSO’s composition of current assets and liabilities represents the same facts as stated above. But PSO did not face liquidity problems as it has enough short term assets to meet its short term obligations. However, the liquidity needs to improve by investing more in more liquid assets such as short term investments and lower down the accounts receivables and should maintain adequate level of cash.

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References:

Adam, Peter S & William A. Harrison, co-editors (2001). Essentials of Cash Management.

Maxwell Samuel Amuzu, (2010). Cash Flow Ratio as a Measure of Performance of Listed Companies in Emerging Economies.

Paul D. Hutchison, M. Theodore Farris II, and Susan B. Anders, (2007). Cash-to-Cash Analysis and Management.

Jacob J. Bierley Jr., (2009). Cash-to-Cash Cycle

Ned Herman, (2009). Effective Cash Management.

Cash Management from a Purchasing Perspective, Louise Nilsson & Jacob Person, 207

Frank R, Urbancic, (2006). The Power of Cash Flow Ratios. Pedro Ortín-Ángel & Diego Prio (2004). Accounting Turnover Ratios And Cash

Conversion Cycle Saccurato F (1994) The study of working capital. Business Credit. 96, 1, 36-37.

Richards VD and Laughlin EJ (1980) A Cash Conversion Cycle Approach to Liquidity Analysis. Financial Management. 9, 1, 32-38.

Maness TS (1994). The Cash-Flow Timeline and the Credit Manager. Business Credit. July/August, 10-12.

Gombola MJ, Haskins ME, Ketz JE and Williams DD (1987) Cash Flow in Bankruptcy Prediction. Financial Management. Winter, 55-65.

Gallinger GW (1997). The current and quick ratios: do they stand up to scrutiny? Business Credit. 99, 3, 22-25.

Dechow PM (1994). Accounting earnings and cash flows as measures of firm performance. The role of accounting accruals. Journal of Accounting and Economics. 18, 3-42.

Citron D, Robbie K. and Wright M (1997). Loan Covenants and Relationship Banking in MBOs. Accounting and Business Research. 27, 4, 277-294.

Charitou A (1997). The role of cash flows accruals in explaining security returns: evidence for the UK. The European Accounting Review. 6, 4, 629-652.

S. Baccarin, (2002). Optimal Impulse Control for Cash Management with Quadratic Holding-Penalty Costs. Decisions in Economics and Finance, 25, 19-32.

Raheman A, Nasr M, (2007). Working capital management and profitability – case of Pakistani firms. International Review of Business Research Papers, 3: 279-300.

Besley S, Meyer RL, (1987). An empirical investigation of factors affecting the cash conversion cycle. Paper Presented at the Annual Meeting of the Financial Management Association, Las Vegas, Nevada.

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Falope OI, Ajilore OT, 2009. Working capital management and corporate profitability: evidence from panel data analysis of selected quoted companies in Nigeria. Research Journal of Business Management, 3: 73-84.

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Appendix:

Financial Statements of Shell (Amounts in Thousands):Balance Sheet:

DescriptionAnnualPeriod2006

AnnualPeriod2007

AnnualPeriod2008

AnnualPeriod2009

AnnualPeriod2010

Cash and Cash Equivalents 981,197 814,530 872,414 869,623 1,045,025Short Term Marketable Securities 0 0 0 0 0

Accounts Receivable 5,235,840 4,579,552 4,904,940 1,239,213 2,013,358Inventory 10,008,751 8,274,340 18,108,851 13,092,437 12,362,940

Trade Deposits and Short term Prepay-ments

209,138 182,959 254,893 310,333 381,571

Other Receivables 3,881,795 6,190,478 6,079,111 5,851,644 9,686,866Total Current Assets 20,316,721 20,041,859 30,220,209 21,363,250 25,489,760

Fixed Assets 10,827,536 12,268,128 13,194,614 11,786,795 11,839,506Accumulated Depreciation -5,099,461 -5,688,135 -6,367,766 -4,762,008 -5,336,733

Net Fixed Assets 5,728,075 6,579,993 6,826,848 7,024,787 6,502,773Long-term Investments 1,877,001 2,015,535 2,134,783 2,312,806 2,547,853

Other Long-term Deposits 250,085 293,573 483,019 328,519 284,068Deferred tax 0 280,967 0 2,334,798 1,993,350

Intangibles and Other Assets 0 0 0 289,573 1,679,707Total Non Current Assets 7,855,161 9,170,068 9,444,650 12,290,483 13,007,751

Total Assets 28,171,882 29,211,927 39,664,859 33,653,733 38,497,511

Accounts Payable 11,938,370 11,912,496 16,483,008 15,970,996 19,936,550Accrued Markup 77,035 131,580 157,268 200,038 86,350

Short Term Borrowings 5,029,860 7,535,836 5,838,339 8,453,001 9,986,438Short Term Portion of LT Debt 26,480 32,203 56,742 38,808 15,550

Taxation 830,632 0 772,454 506,459 382,822Total Current Liabilities 17,902,377 19,612,115 23,307,811 25,169,302 30,407,710

Deferred Taxation 50,059 0 51,574 0 0Liabilities Subject to Finance Lease 7,019 547 2,216 1,790 2,662

Asset Retirement Obligations 98,320 138,494 2,691,620 212,038 187,104Total Non Current Liabilities 155,398 139,041 2,745,410 213,828 189,766

Total Liabilities 18,057,775 19,751,156 26,053,221 25,383,130 30,597,476Common Equity 438,323 547,904 547,904 684,880 684,880

Un-appropriate Profit 7,442,758 6,679,841 10,830,708 5,489,673 5,119,105Retained Earnings/Reserves 2,233,026 2,233,026 2,233,026 2,096,050 2,096,050

Treasury Stock 0 0 0 0 0Total Shareholder Equity 10,114,107 9,460,771 13,611,638 8,270,603 7,900,035Total Liabilities & Equity 28,171,882 29,211,927 39,664,859 33,653,733 38,497,511

Income Statement:

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Cash Flow Statement:

Descriptions Year 2006 Year 2007 Year 2008 Year 2009 Year 2010

65 | P a g e


AnnualPeriod2007

AnnualPeriod2008

AnnualPeriod2009

AnnualPeriod2010

Net Sales 117,262,519 115,045,434 139,844,689 156,000,098 197,530,911

Other Operating Revenues 161,564 215,322 306,453 492,001 527,448

Total Revenues 117,424,083 115,260,756 140,151,142 156,492,099 198,058,359

Cost of Goods Sold -107,301,071 -108,664,932 -124,694,471 -143,097,916 -185,403,153

Other Operating Expenses -328,314 -377,978 -1,915,601 -1,284,990 -738,589

Total Direct Expenses -107,629,385 -109,042,910 -126,610,072 -144,382,906 -186,141,742

Selling, General & Adminis-trative

-4,797,195 -5,083,262 -5,059,711 -7,222,558 -8,203,863

Operating Income 4,997,503 1,134,584 8,481,359 4,886,635 3,712,754

Finance cost -398,009 -878,098 -970,267 -1,401,211 -1,264,677

Foreign Exchange (Loss) Gain

0 0 0 0 0

Associated Company (Loss) Gain

0 122,250 212,248 424,585 596,008

Other Non-Operating (Loss) Gain

0 0 0 0 0

Income Tax Expense -1,491,025 327,923 -2,586,246 -1,347,061 -1,428,503

Reserve Charges 0 0 0 0 0

Income Before Extra Ord. Items

3,108,469 706,659 5,137,094 2,562,948 1,615,582

Extra Ordinary Items (Loss) Gain

0 0 0 0 0

Tax Effects of Extraordinary Items

0 0 0 0 0

Minority Interests 0 0 0 0 0

Net Income 3,108,469 706,659 5,137,094 2,562,948 1,615,582

Cash Flow From Operating Activities

4,599,494 378,736 7,723,340 3,910,009 3,044,085

Net Income before tax 667,805 588,674 679,632 749,717 988,971

Depreciation and Amortization

0 5,623 5,141 32,913 7,717

Accrued expense in repaired of car

171,026 290,191 719,826 213,718 173,712

Provision for Doubtful trade debts/others

26,601 0 62,141 282,487 98,922

Bad Debts Written off/ others written off

-13,116 0 -131,638 -161,595 -112,222

Reversal of Provision for Doubtful debts/

Liabilities-23,253 15,505 -70,230 11,814 4,052

Profits on Disposal of PPE

-10,722 -5,708 -21,765 -30,380 -52,471

Markup Short term deposits

0 -122,250 -212,248 -424,585 -596,008

Shares from AOP 266,057 784,321 873,744 1,243,998 1,065,444

Markup Short term Finance running

0 0 0 5,959 4,726

Finance Charges Liabilities

5,683,892 1,935,092 9,627,943 5,834,055 4,626,928

Profit before working capital changes

-3,102,072 324,616 -6,594,929 -177,901 -112,070

Change in working capital

2,581,820 2,259,708 3,033,014 5,656,154 4,514,858

Cash Flow from Operations

-235,819 -729,776 -848,056 -1,612,944 -1,179,132

Markup Short term Loan Paid

-1,336,848 -1,055,695 -1,261,536 -363,543 -1,210,692

Taxes Paid -54,761 -42,939 36,198 20,624 19,098

Long term Loan (net) -62,201 -549 -90,724 62,482 15,876

Long term deposits and prepayments (net)

10,388 5,807 21,162 74,215 50,380

Markup received on Short term deposits

0 -328,227 102,785 96,587 28,117

66 | P a g e

Long term Debtors (net) 902,579 108,329 992,843 3,933,575 2,238,505

Net Cash Flow From Operating Activities

4,599,494 378,736 7,723,340 3,910,009 3,044,085

Cash Flow From Investing Activities

-724,924 -1,383,390 -933,830 -1,324,547 -2,019,278

Fixed Capital Expenditures

43,700 21,080 121,860 69,074 100,007

Proceeds from Sales of PPE

0 28,600 93,000 129,977 360,961

Dividend Received -681,224 -1,333,710 -718,970 -1,125,496 -1,558,310

Net Cash Used in Investing Activities

-724,924 -1,383,390 -933,830 -1,324,547 -2,019,278

Cash Flow From Financing Activities

-1,285,490 -1,387,277 -986,257 -543,923 -1,970,324

Dividends Paid to Shareholders

-70,290 -59,985 -32,235 -63,955 -67,906

Repayments of Liabilities under Finance

Lease0 0 2,500,000 0 -2,500,000

Proceeds from Long term Loan

-1,355,780 -1,447,262 1,481,508 -607,878 -4,538,230

Net Cash Provided (Used) from Financing

-1,134,425 -2,672,643 1,755,381 2,200,201 -3,858,035

Increase (Decrease) to Cash

-1,285,490 -1,387,277 -986,257 -543,923 -1,970,324

Beginning Cash Balance -2,914,238 -4,048,663 -6,721,306 -7,283,579 -5,083,378

Ending Cash Balance -4,048,663 -6,721,306 -4,965,925 -5,083,378 -8,941,413

Financial Statements of PSO (Amounts in Thousands):

Balance Sheet:


AnnualPeriod2007

AnnualPeriod2008

AnnualPeriod2009

AnnualPeriod2010

Cash and Cash Equivalents 1898894 1522276 3018640 2883118 1778056Deposits and Short-term Securi-

ties1287893 1583913 401433 551803 367378

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Accounts Receivable 11715868 13599966 33904728 80509830 117501074Inventory 28293663 29689946 62475881 40810352 58712531

Other Current Assets 14838357 16117172 16078010 13934421 15014109Total Current Assets 58034675 62513273 115878692 138689524 193373148

Deferred tax 408296 401037 407337 5033273 0Fixed Assets 14675012 16244045 16774554 17391358 17751613

Accumulated Depreciation -7156056 -8231728 -9314005 -10404333 -11376380Net Fixed Assets 7518956 8012317 7460549 6987025 6375233

Long-term Investments 3278970 2990591 2701097 2153514 2019270Long-term Loans & Advances 772808 693885 556843 489435 443840Intangibles and Other Assets 154819 126212 105502 68872 36250Total Non Current Assets 12133849 12224042 11231328 14732119 8874593

Total Assets 70168524 74737315 127110020 153421643 202247741Taxes Payable 1695250 69398 726703 0 0

Accounts Payable 36814402 41431075 81067565 110123702 156035716Short Term Borrowings 7648919 9064781 10997908 18654526 13021015

Short Term Portion of LT Debt 0 0 0 0 0Other Current Liabilities 898007 820473 944044 1244892 1018725

Total Current Liabilities 47056578 51385727 93736220 130023120 170075456

Long-term Debt / Borrowings 743994 768308 834598 854718 948476Other Long-term Liabilities 1554893 1644063 1574148 1673020 1887751

Total Non Current Liabilities 2298887 2412371 2408746 2527738 2836227Total Liabilities 49355465 53798098 96144966 132550858 172911683Common Equity 1715190 1715190 1715190 1715190 1715190

Additional Paid in Capital 0 0 0 0 0Retained Earnings 19097869 19224027 29249864 19155595 27620868

Total Shareholder Equity 20813059 20939217 30965054 20870785 29336058Total Liabilities & Equity 70168524 74737315 127110020 153421643 202247741

Income Statement:

Annual Annual Annual Annual AnnualPeriod Period Period Period Period

Description 2,006 2,007 2,008 2,009 2,010Gross sales 404,170,698 423,760,576 734,695,916 787,053,029 997,081,363Net Sales 298,250,039 349,706,326 495,278,533 612,695,589 742,757,951

Other Operating Rev-enues

1,393,641 1,703,170 1,710,387 1,451,666 1,479,054

Total Revenues 299,643,680 351,409,496 496,988,920 614,147,255 744,237,005Cost of Goods Sold -281,042,813 -337,446,896 -465,254,907 -609,685,478 -713,591,707Other Operating Ex-

penses-3,909,120 -2,264,813 -4,857,681 -5,702,375 -4,230,756

Total Direct Expenses -284,951,933 -339,711,709 -470,112,588 -615,387,853 -717,822,463Selling, General & Ad-

ministrative-3,428,222 -3,748,001 -4,425,340 -5,112,746 -5,181,129

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Operating Income 11,263,525 7,949,786 22,450,992 -6,353,344 21,233,413

Finance cost -884,153 -1,158,112 -1,367,898 -6,232,056 -9,882,010Foreign Exchange

(Loss) Gain0 0 0 0 0

Associated Company (Loss) Gain

1,038,939 330,306 294,318 451,850 516,401

Other Non-Operating (Loss) Gain

0 0 0 776,686 6,095,348

Income Tax Expense -3,893,610 -2,432,182 -7,323,617 4,658,329 -8,913,556Reserve Charges 0 0 0 0 0

Income Before Extra Ord. Items

7,524,701 4,689,798 14,053,795 -6,698,535 9,049,596

Extra Ordinary Items (Loss) Gain

0 0 0 -387,965 -70,751

Tax Effects of Extraor-dinary Items

0 0 0 -6,188 985

Minority Interests 0 0 0 0 0Net Income 7,524,701 4,689,798 14,053,795 -7,092,688 8,979,830

Cash Flow Statement:

Descriptions Year 2006 Year 2007 Year 2008 Year 2009 Year 2010

Net Income before tax 11418311 7121980 21377412 -11356864 17963152

Depreciation and Amortization

1068906 1140065 1166826 1194313 1182389

doubtful trade debts 1045600 150748 158680 477345 241969

store and spear 192730 10737 1467 2385 0

store and spear parts 500 7000 8000 0 0

disputed demand for custom duty

215492 0 37604 0 0

petroleum development claim

9486 0 0

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short term receivable 28051 17614 0 0

duty claim receivable 24223 5748 0 0 0

property, plant and equipment written off

0 0 0 18380

claim and other receivable written off

52176 15787 0 0 0

capital stores written off 8518 0 0 6629 0

liabilities written back -305450 -184793 -113129 -31026 0

reversal of provision for impairment

-8393 -78638 0 -17934 0

retirement and other benefits

415655 376891 541034 585470 693496

(Increase) Decrease Defer Taxes

0 0 0 0 0

(Gain) Loss on Sale of Assets

-10553 -26092 -31244 -16798 -2990

(Increase) Decrease Current Assets

0 0 0 0 0

share of profit of associate

-1038939 -330306 -294318 -451850 -516401

dividend income -10331 -13200 -60906 -65821 -59990

Increase (Decrease) Current Liabilities

0 0 0 0 0

finance cost 884153 1158112 1367898 6232056 9882010

profit before working capital changes

13952598 9391576 24176938 -3442095 29402015

change in working capital

-7398823 -287878 -11697883 3280023 -18423427

Cash Flow from Operations

6553775 9103698 12479055 -162072 10978588

decrease in long term loans advances and

receivables71528 74511 149747 71965 87891

increase in long term deposits and prepayments

30501 8749 -13185 -4557 -42296

inc in long term deposits 0 0 0 20120 93758

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tax paid -3826184 -4050775 -6672612 -1403937 -3217236

finance cost -827346 -1146882 -1281931 -2825871 -2464238

payments against provision

-184050 -10126 0 -37604 0

retirement benefits -184450 -287721 -610949 -486598 -478765

Net cash flow generated from(used) operating

activities1633774 3691454 4050125 -4828554 4957702

Purchases of property, plant and equipments

-751350 -1596166 -593314 -678172 -546802

purchase of intangible assets

0 -13301 -26979 -15985 -12130

Proceeds from Sales of Assets

261863 30740 57189 20167 5567

dividend received 291143 870774 390178 671101 640869

Sale of Investments 0 0 0 0 0

proceed from liquidation of subsidies

24657 0 0 0 0

Cash Provided (Used) from Investments

-173687 -707953 -172926 -2889 87504

Proceeds from short term finance

216000 3210474 -5335878 3472487 -1427452

PROCEED FROM LONG TERM

FONANCE68824 24313 66290 0 0

Dividends Paid to Shareholders

-4389267 -4800295 -4380252 -2960697 -516757

Cash Provided (Used) from Financing

-4104443 -1565507 -9649840 511790 -1944209

Increase (Decrease) to Cash

-2644356 1417994 -5772641 -4319653 3100997

Beginning Cash Balance 1019784 1898894 1522276 3018640 2883118

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Ending Cash Balance 2917668 1522276 3018640 2883118 1778056

NOTE:

For more details regarding financial statements and Ratios analysis please take a look on excel sheets/files provided in write able C.D along with final Report.

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Date post:	08-Jul-2015
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Cash Management analysis of Petroleum Sector

Economy & Finance