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A
Project Report
On
A STUDY OF FUND ANALYSIS IN AMTEK
CRANKSHAFT (I) LTD.
Master of Business Administration (Finance)
Submitted in partial fulfillment of the requirements for
award of Master of Business Administration,
Tilak Maharashtra University, Pune.
SUBMITTED BY: GUIDED BY PROF:
HITESH MR. C.S. YADAV
PRN: (SR. LECTURAR)
ANSAL INSTITUTE OF TECHNOLOGY
GURGAON
Tilak Maharashtra University, Pune
Deemed Under Section 3 of UGC Act 1956 Vide Notification No. F.9-19/85-U3 dated 24th April 1987 By the Government of India.
Vidhyapeeth Bhavan, Gultekdi, Pune-411037.
CERTIFICATE
This is to Certify that the project titled FUND ANALYSIS IN AMTEK
CRANKSHAFT INDIA LIMITED is a bonafide work carried our by Mr./ Ms.
HITESH a student of Master of Business Administration Semester 3rd Specialization
FINANCE. PRN.07209007779 under Tilak Maharashtra University, in the year
2010.
Head of the Department Examiner Examiner
Internal External
Date:
Place: University Seal
2
Certificate of Internal Guide
This is to certify that the project titled ANALYSIS OF FUND ANALYSIS
IN AMTEK CRANKSHAFT INDIA LIMITED is a bonafide work
carried out by Hitesh a candidate for the award of Master of Business
Administration of Tilak Maharashtra University, Pune under my
guidance and direction.
Date: Mr. C S YADAV
(Sr. Lecturer)
Place: ANSAL INSTITUTE OF
TECHNOLOGY
GURGAON
3
TO WHOMSOVER IT MAY CONCERN
This is to certify that Mr./ Ms_________________________ MBA Student of Tilak
Maharashtra University, Pune has successfully collected the data for the project report for
award of Master Degree of Business Administration.
He/She has done the project on “___________________________________________”.
Company Name Company Seal
Designation
Signature
4
ACKNOWLDGEMENTACKNOWLDGEMENT
I express my sincere thanks to the Management of ‘AMTEK CRANKSHAFTS
INDIA LTD.’ Unit for giving me an opportunity to gain exposure on matter
related to Project under the esteem guidance of Mr. OMPARKASH.
I hereby take this opportunity to put on records my sincere thanks to Mr. DEVDUTT
SHARMA under the light of whose able guidance I could complete this project in an
effective and successful manner.
I am also thankful to the rest of the staff of the ACIL for their valuable suggestion and
cooperation to achieve the task.
With sincere thanks
HITESH
AIT- Gurgaon
5
TABLE OF CONTENTS
Topics: Page No: CHAPTER 1: Rationale For The Study 07
CHAPTER 2: Objective of the Study 09
Objectives of the Project
Scope of the Project
CHAPTER 3: Profile of the Company 13
CHAPTER 4: Review Literature 20
CHAPTER 5: Research Methodology 51
Research Design
Data Collection Methods/Source
Sampling Plan
CHAPTER 6: Data Analysis & Interpretations 54
CHAPTER 7: Findings and Conclusions 73
CHAPTER 8: Limitation of the Study 76
Appendices 78
Bibliography 81
6
CHAPTER 1
RATIONALE OF THE STUDY
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RATIONALE OF THE STUDY
Growth of a successful venture depends on efficient overall management of a business unit. It
is collective effort of technical marketing and finance personnel.
Working capital management is an integral part of finance management. Working capital has
always been a vital ingredient with growth of the company. Till recently, working capital
management was neglected in India by both the private and public sector companies. This
was to some extent a reflection of comparative ease in availability of funds from capital
market or commercial and development bands in case of public sector; funds were made
available to the government. Further on account of sheltered condition, a view development
in recent years, situation has completely changed and industrial planning and project
implementation. With commercial and industrial development in recent years, situation has
completely changed and need for working capital management is hard felt. No longer is it
possible for even a very big and well-established company to get funds from financial
institutions, the dependence on which is fast growing without most detailed scrutiny of its
requests.
Apart from that the financial institutions like to exercise control over the functioning of the
assisted companies. In a developing country like India where sources are limited, they should
be put to best possible use. Exceptional care is needed for managing unit so that organization
can withstand ups and downs and there should be reasonably adequate resources available for
its day-to-day operations. Thus the need of working capital management arises.
Working capital, in general practice, refers to the excess of current assets over current
liabilities. Management of working capital therefore is concerned with the problems that arise
in attempting to manage the current assets, the current liabilities and the interrelationship that
exist between them. In other words it refers to all aspects of administration of both current
assets and current liabilities.
8
Any financial control or planning can be effective only with the active participation of the
entire managerial group of organization. If a new project has to come up the civil mechanical
project engineers have to do their job well. All are equal partner in achieving goal framed by
the management.
CHAPTER 2
OBJECTIVE OF THE STUDY
9
OBJECTIVES OF THE STUDY The main objective of the project is to study the accounts of the Amtek Crankshaft (I) Pvt.
Ltd. and to analyze the FUNDS of the Amtek Crankshaft(I) Pvt. Ltd.. The study includes the
study of all fixed, running costs etc. and to finally calculate the amount required by the
company to reach its goal as soon as possible.
10
SCOPE OF THE STUDYTill recently, working capital management was neglected in India by both the private and
public sector companies. This was to some extent reflection of comparative ease in
availability of funds from capital market or commercial and development bands in case of
public sector; funds were made available to the government.
Working capital management is an important aspect of financial management. In business,
money is required for fixed and working capital. Fixed assets include land and building, plant
and machinery, furniture and fittings etc. Fixed assets are required to be retained in business
for along period and yields return over the life of such assets. Working capital, on the other
hand is required for the efficient and effective use of fixed assets. The main objective of
working capital management is to determine the optimum amount of working capital
required.
So we can say that working capital management is the lifeblood of every business. Without
working capital management a business can't do its day-to-day operation effectively. This is
because I choose this project for abstracting conclusion and suggestion. I tried my best to do
hard work on that topic and come on the conclusion that without working capital a business
can't do its day-to-day operation effectively. That is why today AMTEK CRANKSHAFT (I)
PVT. LTD. is earning good amount of profit because it’s working capital management is
good. So working capital management is the lifeblood of a business. Without it a business
can't do their day-to-day operation efficiently.
11
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CHAPTER 3
COMPANY PROFILE
13
COMPANY PROFILE
HISTORY OF THE COMPANY
Amtek is a leading multi-national manufacturer of automotive components and assemblies
with production facilities located strategically across Asia, Europe and USA. The Group’s
extensive manufacturing capabilities encompass Iron and Aluminum Casting, Forging,
Machining & Assemblies.
The Amtek Group was established in the year 1985 with the incorporation of the
Flagship Company, Amtek Auto Limited. Over the course of next two decades, the group
grew rapidly to emerge as a global frontrunner in the automotive industry through a number
of strategic acquisitions across India, Europe and the USA, production segment
rationalization measures. The current turnover of the group exceeds $ 750 million.
Amtek Auto Ltd. has established itself amongst the top players in the Indian auto
ancillary industry and has also grown to become one of the largest manufacturers of
Forgings, Castings, Machined Components and Assemblies, which includes Piston
Connecting Rod modules and Gear Shifter Forks and Yokes, Flywheel Ring Gears in the
country. Amtek also holds the distinction of being among the largest manufacturer of
Flywheel Ring Gear Assemblies and Turbocharger Housings in the World. The uptrend in
outsourcing by global OEM majors due to rising cost pressures, the booming domestic Auto
industry, particularly the high – growth diesel engine segment, and Amtek’s aggressive
acquisition and expansion strategy have propelled the Company into a higher growth
trajectory.
14
AMTEK TODAY
USD 1.24 billion (as of June 2008) global automotive components manufacturer
35 manufacturing facilities across North America, Europe & Asia
Global auto components supplier with proven capabilities in
Forging
Grey & Ductile Iron Casting
Aluminium- Gravity & High Pressure Aluminium Die Casting
Machining and Sub-Assembly
Extensive product portfolio with a range of highly engineered components
Preferred OEM supplier for:
Passenger cars
2 Wheelers & Motorcycles
Heavy & Light Commercial Vehicles
Agricultural Equipment
Heavy Earth Moving Equipment
Railways
Defense/ Aerospace
Amtek Auto Limited won the best investor of the year award 2008 - UK Trade &
Investment
VISION
We aspire to be the most preferred and reliable provider of products & services globally, with
an unflinching commitment towards technological excellence
CORE VALUE
• Customer Focus
• Commitment to Excellence
• Openness, Fairness and Trust
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• Team Spirit
NICHE PRODUCTS
Ring gears
Cylinder heads
Flex plates
Cylinder blocks
Crankshaft
Connecting rods
Turbocharging Housing
Fly wheel- Ring gear & assemblies
Hub forging and machining
Business Divisions
Forgings: -Forging is the process of forming hot / cold metal. The Forging divisions of the group are
Baddi (H.P). Connecting Rods, Crankshafts, Steering Knuckles, Gears shifter Forks, Sector
Gears & Shafts, Stub Axles, Front Impact Beams etc are some of the products in the Amtek
Forging suite.
Castings: - Casting is the process of forming from molten metal. The Group has facilities for Iron
Castings at Bhiwadi (Rajasthan), Baddi (H.P), Coimbatore (Tamil Nadu) & Tipton (UK).
Besides Iron Castings, Amtek has facilities for Aluminum Castings at Bourne (U.K) and is in
the process of commissioning another Aluminum Casting facility at Ranjangaon (Mah.).
Machining:- Machining is the term used for a set of metal – cutting processes which are performed on
Forgings and / or Castings to give them the exact shape and size for assembling in the
vehicle. The Group has Machining facilities within India at Gurgaon (Haryana), Sanaswadi
(Mah), Manesar & Dharuhera (both in Haryana), Baddi (H.P), and across the World at Letch
worth, Coventry & Bourne (in U.K) & Hennef (Germany), Stanberry, Bay City & Kellogg (in
USA).
16
Assembly: -The Assembling activities are carried at Letch worth, Coventry, Gurgaon, Dharuhera, &
Hennef (Germany). The products include Bridge Fork Assemblies, Strut Assemblies, Wheel
Corner Modules, Axle Assemblies, Turbochargers, Piston Cylinder Modules, Spindle
Assemblies, and Fuel Delivery Systems.
KEY CUSTOMERS
Amtek supplies products to a diverse customer base comprising some of the largest automotive OEMs, such as Maruti, Ford, Renault, Tata Motors, John Deere, Land Rover, Bajaj Auto, HMSI, Dana Italia, International Tractors Ltd., Cummins India, General Motors, Hyundai, Eicher, CNH Global, BMW, Jaguar, Renault, Volks Wagon, Suzuki Power Train, JCB, GE Transportation, Hero Honda, Escorts, TVS, ILGIN, Hyundai, AVTEC (Hindustan Motors), Polaris, Magna, Diesel Locomotive Works - Northern Railways, Borg – Warner, Garret, Holset, Yamaha, TAFE etc.
QUALITY: -
The company has TS16949: 2002 and ISO 14001 accreditations for majority of its manufacturing facilities. Besides this, the company is in the process of implementing Lean and Six Sigma worldwide.
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The fundamental objective of implementing the six-sigma methodology at Amtek is
the implementation of a measurement – based strategy that focuses on process
improvement & variation reduction through the application of six sigma projects. MANUFACTURING LOCATIONS
Location Company Type India Sohna Amtek Auto Machining Gurgaon Amtek Auto Machining Dharuhera Unit 1 Amtek Auto Machining
Dharuhera Unit 2 Amtek Auto
Machining/Forging (Under Implementation)
Sanaswadi Amtek Auto Machining (Under Implementation)
Nalagarh Amtek Auto Machining Manesar Amtek Auto Machining
Ranjangaon Amtek Auto
Aluminium Casting (Under implementation)
Manesar Amtek Siccardi India Machining
Gurgaon Amtek Auto Forging Bhopal Amtek Auto Forging
Chakan Ahmednagar Forgings Forging / Machining
Kuruli Ahmednagar Forgings Forging
Ahmednagar Ahmednagar Forgings Forging / Machining
Gurgaon Benda Amtek Ring gears / Flywheel assembly
Europe Letchworth (UK) GWK Amtek Machining Coventry GWK Amtek Machining
Hennef (Germany) - I - II
Zelter Machining Zelter Machining
Witham (UK) Amtek Investments UK Limited
HPDC Aluminium Casting
USA
Bay City (MI) Amtek Gears (Amtek Inv US)
Ring gears / Flywheel assembly
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Kellogg (IN) Midwest Mfg. (Smith Jones)
Ring gears / Flywheel assembly
Stanberry (MO) Midwest Mfg. (Smith Jones)
Ring gears / Flywheel
AMTEK MAJOR CUSTOMERS PROFILE
19
CHAPTER 4
LITERATURE REVIEW
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MANAGEMENT OF WORKING CAPITAL
Working capital management is an important aspect of financial management. In business,
money is required for fixed and working capital. Fixed assets include building, plant and
machinery, furniture and fitting etc. Fixed assets are required to be retained in the consumer
for a long period and yield returns over the life of such assets. Working capital, on the other
hand is required for the efficient and effective use of fixed assets. The main objective of
working capital management is to determine the optimum amount of working capital
required.
The various topics discussed in management of working capital are:
I. Definition of working capital
II. Types of working capital
III. Need for working capital
IV. Financing of working capital
V. Factors determining working capital
DEFINITION OF WORKING CAPITALThere are two concept of working capital:
1. Gross working capital
2. Net working capital
(I) Gross Working Capital Concept:
According to this concept working capital means gross working capital, which is the total
of all the current assets of the business.
Gross Working Capital = Total Current Assets
21
Definitions favoring this concept are:
1. “Working capital means total of current assets.”
---Mead, Mallott and Field
2. “Any acquisitions of funds which increase the current assets increase working capital,
for they are one and the same.”
---Bonneville and Dewey
(II) Net Working Capital concept:
According to this concept, working capital means net working capital, which is the
excess of current assets over current liabilities.
Net working capital = current assets - current liabilities
Definitions favoring this concept are:
1. “It has ordinarily been defined as the excess of current assets over current liabilities.”
2. “The most common definition of net working capital is the differences of firm’s
current assets and current liabilities.”
As discussed net working capital is the excess of current assets over current liabilities. If
current assets are equal to current liabilities, net working capital will be zero and if current
liabilities are more than current assets, net working capital will be negative.
Current assets mean those assets which are converted into cash within a short period of time
not exceeding one year, e.g. cash, bank balance, debtors, bills, receivable, stock, accrued
income etc.
Current liabilities means those liabilities which have to be paid within a short period of time
in no case exceeding one year, e.g. creditors, bills payable, outstanding expenses, short term
loans etc.
22
NEED FOR WORKING CAPITALAlong with the fixed capital almost every business requiring working capital though the
extent of working capital requirement differs in different businesses. Working capital is
needed for purchasing raw materials. The raw material is then converted into finished goods
by incurring some additional costs on it. Now goods are sold. Sales do not convert into cash
instantly because there is invariably some credit sales. Thus, there exists a time lag between
sales of goods and receipt of cash. During this period, expenses are to be incurred for
continuing the business operations. For this purpose working capital is needed which shall be
involved from the purchase of raw materials to the realization of cash. The time period,
which is required to convert raw materials to the realization of cash? The time period, which
is required to convert raw materials into finished goods and then into cash is known as
operating cycle or cash cycle. The time need for working capital can also be explained with
the help of operating cycle. Operating cycle of a manufacturing concern involves five phases:
Conversion of cash into raw material
Conversion of raw material into work in progress
Conversion of work in progress into finished goods
Conversion of finished goods into debtors by credit sales
Conversion of finished goods into cash by realizing cash from them.
Operating CycleThus the operating cycle starts from cash, finishes at cash and then again restarts from cash.
Net for working capitals depends upon period of operating cycle. Greater the period more
will be the need for working capital. Period of operating cycle in a manufacturing concern is
greater than period of operating cycle in a trading concern because in training units cash is
directly converted into finished goods.
Because of the time involved in an operating cycle there is a need of working capital in the
form of current assets. Firms have to keep adequate stock of raw materials to avoid risk of
non-availability of raw materials. Similarly, concerns must have adequate stock of finished
goods to meet the demand in market on continuous basis and to avoid being out of stock..
In addition to all these, concerns have to necessarily keep cash to pay the manufacturing
expenses etc. and to meet the contingencies.
23
Permanent and temporary working capitalWorking capital in a business is needed because of operating cycle. But the need for working
capital does not come to an end after the cycle is completed. Since the operating cycle is a
continuous process there remains a need for continuous supply of working capital. However,
the amount of working capita required is not constant throughout the year but keeps
fluctuating. On the basis of this concept, working capital is classified into two types.
(A) Permanent working capital
The need for working capital or current assets fluctuates from time to time. However, to carry
on day-to-day operations of the business without any obstacles, a certain minimum level of
raw materials, work in progress, finished goods and cash must be maintained on a continuous
basis. The amount needed to regular working capital. The amount involved as permanent
working capital has to be from long term sources of finance e.g., debentures long-term loans
etc.
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Debtors and bills receivables
Finished goods Work- in - Progress
CASH
Raw Materials
(B) Temporary or variable working capital
Any amount over and above the permanent level of working capital is called temporary,
fluctuation or variable working capital. Due to seasonal changes, level of business activities
working activities is higher than normal during some months of year and therefore additional
working capital will be requiring along with the permanent working capital. It is so because
during peak season, demand rise and more due to excessive sales. Additional working capital
thus needed is known as temporary capital because once the season is over; the additional
demand will be no more. Need for temporary working capital should be met from short term
sources of finance e.g., short term loans etc. that can be refunded when it is not required.
FINANCING OF WORKING CAPITALAfter determining the requirement of working capital, the next important task before the
financial manager is to select the appropriate sources of working capital. There are mainly
two sources include equity shares, preference shares, debentures, retained earnings,
depreciation and long term financial institutions. A short-term source includes short-term
loans, trade creditors, commercial paper, factoring and public deposits etc. there are basically
three approaches to determine an appropriate financing mix of various sources. These are as
follows:
1. MATCHING APPROACH OR HEDGING APPROACH
According to this approach, a firm should adopt a financial plan, which involves the matching
of expected life of the sources of funds raised to financial assets. Matching approach suggests
that long-term funds should be used to finance the permanent portion of current assets
requirements in a manner similar to the financing of fixed assets. The temporary requirements
on the other hand should be financed with short-term funds. The firm fixed assets are
permanent. Current assets are financed with long term funds and as the level of these assets
increases, the long term financing level also increase.
25
2. CONSERVATIVE APPROACH
Conservative approach suggests that the firm should depend more on long-term funds for its
needs. Under a conservative plan its permanent current assets and a past of temporary current
assets with long-term sources of finance. Thus, during the periods when the firm has no
temporary current assets, it preserves liquidity by investing surplus funds into marketable
securities. Since conservative plan relies heavily on long term financing.
26
LONG TERM FINANCING
SHORT TERM FINANCING
TEMPORARY CURRENT ASSETS
AMOUNT
TIME
PERMANENT CURRENT ASSETS
FIXED ASSETS
3. AGGRESSIVE APPROACH
In contrast to conservative approach, however the firm may be aggressive in financing its
assets. A firm is said to follow an aggressive policy, when it uses more short-term funds. The
firm finances a part of its permanent current assets with short term financing. This makes the
firm more risky. The diagram of aggressive financing approach is given below.
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AMOUNT
TEMPORARY CURRENT ASSETS SHORT TERM
FINANCING
LONG TERM FINANCINGPERMANENT CURRENT ASSETS
FIXED ASSETS
TIME
TEMPORARY CURRENT ASSETS
PERMANENT CURRENT ASSETS
FIXED ASSETS
AMOUNT
SHORT TERM FINANCING
LONG TERM FINANCING
TIME
FACTORS DETERMINING WORKING CAPITAL EQUIREMENTNATURE OF BUSINESS
Working capital requirements of a firm are basically relayed to nature of business. For,
instance public utilities have a very limited need for working capital and have to largely
invent in fixed assets. Their working capital requirements are minimal because they have
cash sales only and supply services and not products. On the other extreme, trading and
financial firms have a very less investment infixed assets and a large investment in working
capital. This so they have to maintain a sufficient amount of cash, inventories and book debts.
Working capital requirements of a manufacturing firm. However these would vary from
industry falls between these two extremes, that is, public utility and firms. However these
would vary from industry to industry depending on their asset structure.
SIZE OF BUSINESS
The size of business also has an important influence on its working capital requirements. Size
measure the scale of operations obliviously, larger the size greater would be the need of
working capital. On the other hand, smaller firms would require lesser amount of working
capital.
LENGTH OF MANUFACTURING CYCLE
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The manufacturing cycle refers to the time involved in manufacturing of goods. It starts with
the purchase and use of raw materials and complete with the production of the finished
goods. Thus, the larger the time span of the manufacturing cycle, larger will be the working
capital requirements of the firms and vice-versa.
BUSINESS CYCLE
Most firms experience cyclical fluctuations in demand for their products and services. These
fluctuations affect the working capital requirements, particularly the temporary working
capital requirement. During the upswing in the business activity, the sales will increase.
Correspondingly, the firm’s investment in inventories and book debts will also increase.
Additional funds may be required to invest in fixed assets and the resultant increase in
working capital to meet the increased demand. On the other hand, during downswing, sale
will fall and cons equations influence the size of working capital mainly through the effect on
inventories.
PRODUCTION POLICY
In the case of seasonal demand for certain products, the production may either be confined
only to the periods when goods are purchased or production may be carried on steadily
throughout the year. During the slack season it will have to maintain its labor force physical
facilities without adequate production and sale. During peak period the firm will have to
operate at its full capacity to meet the demand, which be will very inconvenient and
expensive. On the other hand the steadily production policy will result in accumulation of
inventories during the off seasons periods requiring an increasing amount of working capital
and the firm will be exposed to greater inventory costs and risk.
CREDIT POLICY OF THE FIRM
The credit policy of the firm has bearing on the magnitude of working capital by determining
the level of book debts. Larger credit sales will result in higher book debts and more working
capital. Credit terms extended by an enterprise is affecting by the prevailing trade practices as
well as changing economic conditions. Under the situation of acute competition, there would
be a pressure to grant generous credit terms. The firm should evaluate the credit standing of
new customers and periodic review of new customers. Similarly, collection of debts should
monitor properly for timely payment by them. This will avoid problem of having excess
working capital.
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DEMAND CONDITIONS
Most of the firm experience seasonal and cyclical fluctuations in the demand for their
products and services. These variations affect the working capital of the business. Seasonal
variations not only affect the working capital, but also create production problems. During
period of peak demand, increasing production may be expensive for the firm. Similarly it will
be more expensive during slack periods when the firm has to sustain its working capital force
and physical facilities without adequate production and sales. The increasing level of
inventories during the slack season will require increasing funds to be tied up in the working
capital for the same month. Therefore, financial arrangements for seasonal working capital
requirements must be made in advance. However the financial plans should be flexible
enough to take care of some abrupt seasonal variation.
PROFIT MARGINS AND PROFIT APPORTION
A high profit margin would generate more internal funds thereby contributing to the working
capital pool. The net profit is the source of working capital to the extent it has been earned in
cash. But, in practice the net cash inflows from operations cannot be considered as cash
available for use at the end of cash cycle. Even as the company’s operations are in progress,
cash is used for augmented stock, book debts and fixed assets. It is important to see that cash
has been used for rightful purpose.
The availability of internal funds for working capital requirements is determined not merely
by the profit margin but also on the manner of appropriating profits. The availability of such
funds for the working capital depends on the profit appropriations for taxation, dividend and
depreciation and reserves. Higher the amount of the dividends, less will be the contribution
towards working capital funds, an increase in tax liability will lead to an increase in working
capital requirements and vice versa. However tax liability can be reduced through proper tax
planning. Depreciation as allowed under income tax rules helps to save tax.
PRICE LEVEL CHANGES
Changes in the price level also influence the requirements of working capital. Rising prices
would necessitate the need of more funds for maintaining the existing level of activity. Thus
more working capital will be required. However the firm can revise the process with rising
30
price level. The price rise does not uniformly affect all the commodities. Thus the implication
of price level changes will vary from company to company.
OPERATING EFFICIENCY
The operating efficiency of the firm related to the optimum utilization of the resources at the
minimum costs. Efficiency of operations accelerates the pace of the cash cycle and improves
the working capital turnover. Better utilization of resources improves profitability and, thus,
helps in releasing the pressure on working capital.
INVENTORY MANAGEMENT
WHAT IS INVENTORY
An inventory is an idle resource of any kind provided that such resource has economic
value.
Materials are procured (buy or manufacture) to meet internal demand/customer demands.
When such materials are received and accounted for they are inventories of that
establishment.
WHY TO HAVE INVENTORIES
The importance of inventory lies in the urgency of requirements. If men and machines in a
factory could wait and so could customers, materials would not lies in wait for them and no
inventories would be carried. Since such condition does not exist, it has become necessary to
keep material stock on hand.
There are four reasons for carrying inventories:
To gain economies in purchasing by buying quantities beyond current requirement
To maintain service stocks while replacement stock are in transit.
31
To level out production cycles by producing to inventory.
To carry a reserve in order to prevent stock outs or lost sales.
TO GAIN ECONOMIES
There is a cost in placement of every purchases order say Rs.15.00 (approx) for any material
and it may, therefore be more efficient to order beyond the immediate needs of the company.
For example, if one order is placed for a bulk quantity of material instead of more orders, the
purchaser saves ordering cost. The purchases may also get substantial discount from the seller
by ordering bulk quantity. Further, the purchaser may saves in shipping and transportation
costs in transporting the bulk quantity. Purchasing in bulk quantity from the foreign suppliers
is normally resorted to because of difficulties in obtaining import license and other
formalities.
TO MAINTAIN SERVICE STOCKS
To supply against an order may not reach the purchaser in time due to time lag between
shipment and delivery. A manufacturer cannot afford to exhaust his materials in hand and
then await the new arrival. In order to cushing the transit delay, he maintains the service stock
so that his production schedule need not come to a grinding halt.
TO PREVENT STOCK OUTS OR LOST SALES
Stock outs means to exhaust the stock of any item to no level, could mean losses of thousands
of rupees per day and in extreme cases if could cause shut down of the entire operation. In
selling finished foods, the failure to have the product available for the customers may result
in the loss of the sale, the loss of the customer.
A businessman holds inventory because the alternatives are more costly or loss profitable.
Inventory is used wherever it assures higher profitability than such alternatives as additional
equipment to meet peak demands, higher labor costs, the costs associated with shortages and
inability to meet customer demands, lower productivity due to delays caused by lack of raw
or in process materials.
Most of the discussions and examples that follow are concerned with business organization,
they also apply to government and military operations if “profit” is given and their
interpretation. The “goal” of government and military operations is often quite different from
32
the profits, which are the goal of business enterprises. Provided however, that we replace
profits by some measurable objective which these organizations attempt to achieve or some
pare meter which they intend to optimize, many of the arguments we have presented
concerning inventory will still apply.
The businessman will hold stacks of goods for one or more of these reasons
1. Transaction motive.
2. Precautionary motive.
3. Speculative motive.
In its simplest form, the transaction motive assumes that a given volume of sales requires a
minimum amount of cash balances or inventories. The form cannot maintain a given volume
of sales with smaller inventories or cash balances and drives no benefits from having greater
once.
IMPORTANCE OF INVENTORYInventory constitutes the large stock component of current assets in any organizations. Poor
management of inventories therefore may result in business failures. A production function
depends to a large extent upon inventory management.
Inventory is a usable resource, which is physical and tangible such as materials.
Inventory could be raw material, work in progress (wip), finished good or the spare parts and
other indirect materials.
Effectiveness of the material production function depends to a large extent upon inventory
management.
33
FUNCTIONS OF INVENTORY MANAGEMENT Regularizing demand and supply.
Economizing purchases or production by lot buying or batch production.
Allowing organizations to cope with perishable materials.
METHODS OF CONTROLLING INVENTORY
ABC ANALYSIS
ABC analysis is a basic analytical management tool, which enables top management to place
the efforts where the results will be greatest. This technique popularly known as “Always
Better Control” has universal applications in many areas of human endeavor. The technique
tries to analyze the distribution of characteristic by money value of importance in order to
determine priority. Remembering this simple 20/80 law, popularly known as Pareto’s Law of
“CAUSE AND EFFECT”, can successfully solve quite a number of management problems.
The law states, “Only 20% of the activity causes 80% of effect.”
Example1. 20% of the machines are responsible for 80% of the total down time.
2. 20% of the end product generally account for 80% of total revenue.
3. 20% of the clerks make 80% of the clerical errors.
4. 20% of the employees create 80% of the problems.
5. 20% of the customers are responsible for 80% of the bad debts.
6. 20% of the total items in the stock account for 80% of the total expenditure on the
materials.
This 20/80 ratio is very useful concept in business where it can be used to solve some
production control, inventory control and similar other management problems. The exact
percentage may fluctuate on either side but the principle stays. So, the golden rule is to keep
on this 20% and you will cover 80% of the effect.
This concept when applied to stock items is called “ABC Analysis.”
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Application of ABC AnalysisThis approach helps the material manager to exercise selective control and focus his attention
only on a few items when he confronted with lacs of stores items. Any sound stock control
system should ensure that every item gets right amount of attention at the right time. ABC
analysis makes it possible with considerably less effort by its selective approach.
Degree of Control
‘A’ class items form a substantial part of total consumption in rupees and so it must draw out
attention. Up-to-date and accurate records should be maintained for these items. The
inventory should be kept at a minimum by putting blanket orders covering annual
requirement and then arranging frequent deliveries from vendors.
‘B’ class items should have normal or moderate control made possible by good records and
regular attention.
‘C’ class items have required little or no control.
For analysis purpose at Amtek Crankshaft the MAIS system support is taken for extracting
reports. Through above system the value-wise report of closing stock can be taken. The
closing stock report is classified three classes representing items above 10, 00,000 item
between 50,000 to 10, 00,000 and less than 50,000. The items classified in the Group are
analyzed by the Manager (CMM) and concerned engineer to determine whether the items are
of regular nature and should be classified either as “B” or “C”. There are 31000 thousand
item are available in the stock and value is 40 crores. The current status of stock remains
available in MAIS stream.
Sr. No. Type ofInventory
No. of Items Value (in crores)
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1. “A” 22,000 17
2. “B” 10,000 12
3. “C” 18,000 11
At Amtek Crankshaft (I) Pvt. Ltd. following method of inventory control are
followed
Maximum Level
It is calculated by considering these elements
1. Normal consumption or 1 year consumption
2. Scheduled activities
3. Suddenly / unexpected requirement of material
4. Reviews
Minimum Level
1. Basis for setting a minimum level of material
2. Lead time
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3. Lead time = Difference between placing of order and receipt material.
4. Reorder Level time consumption
5. Re-order level depends on the Minimum level and lead-time.
Re-Order LevelBasis for setting reorder level
Lead-time
Lead-time is of 2 types:
Administrative lead-time
Supplier lead-time
Supplier may be local, East, West, North, South region of India
Supplier may be from outside of India
ORDERING PROCEDURE
At Amtek Crankshaft (I) Pvt. Ltd. “A” classes items includes the spares part used in
the Reactor, Turbine or generator, which relates to mainly related to operation. These items
are less in numbers but have very high value. ‘A’ class items require careful and accurate
determination of order quantities and order points based on exact requirements. They should
be subjected to frequent reviews to reduce possibility of overstocking. The time-to-time
analysis is done if any material is surplus it can be sent to other units where these are
required.
A reasonably good analysis for order quantities and other words points is required for ‘B’
items but the stock may be reviewed less frequently or only when major changes occur.
No such computation is required for C items.
These items should be brought in bulk, may be for full year.
1. VIP treatment may be accorded to ‘A’ items in all activities such as processing of purchase
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orders, receiving, inspection, movement on the shop floor, etc with an object to reduce
lead-time and average inventory.
2. No such treatment is necessary for ‘B’ items. Normal plants procedures should take care of
inward and outward flow of these items.
3. No priority is assigned to ‘C’ items.
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SAFETY STOCK ‘A’ class item stock should be kept less.
‘C’ contrary to ‘A’ class items.
‘B’ class items a moderate policy is required.
The following can be safety stock for 3 categories of items:
‘A’ items
merit a
tightly
controlled inventory system with constant attention by the purchase manager and stores
management.
‘B’ items require a formalized inventory system with periodic attention by purchase and
stores management.
‘C’ items use a simpler system designed to cause the least trouble for the purchase and stores
department.
ECONOMIC ORDER QUANTITY ANALYSISInventory control fundamentally deals with the two basic issues:
1. When to order
2. How much to order
The problem of ‘when to order’ is decided by prescribing the reorder level of each of the
“A” class items ½ month stock
“B” class items 1 month stock
“C” class items 2 month stock
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inventory item. The other incidental issue is ‘how much to order’ i.e., that should be the
size of each order. The issue of ‘how much to order’ is decided on the basis of “Economic
Order Quantity (EOQ).”
EOQ prescribes the size of the order and at which the ordering cost and the inventory
carrying cost will be minimize.
The ordering cost consist of cost of paper for placing an order like use of paper, typing,
posting, filing, etc. the cost of staff involve in this work, the costs incidental to order like
follow-up, receiving, inspection etc. Ordering cost is more or less fixed and ascertained on
per order basis. If the annual requirement is met by placing more order of small quantity
instead of single large order, the number of order placed during the year will increase
resulting into higher total ordering cost.
The other side of the scene is the inventory carrying costs. When the inventories are
stored, it involve following costs:
1. Interest cost due to locking up of funds.
2. Cost of storage space cost of insurance and taxes.
As all these costs are directly related with the certain percentage of materials stored; e.g. say
carrying cost is 15% of the value of the material stored. The ordering cost and the carrying
cost is mutually exclusive. If the annual requirement is met by placing a single order, the
ordering cost will be less due to single order. But as the single order will be for a huge
quantity (i.e. for the entire annual requirements), the average stockholding would be very
high into greater carrying cost.
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The relationship of ordering cost and carrying cost as under:
Number and size of order Ordering cost Carrying cost
1. Few orders, each order of large size Low High
2. More orders each order of small size High Low
CASH MANAGEMENTCash is the important current asset for the operations of the business. Cash is the basic input
needed to keep the business running on a continuous basis; it is also the ultimate output
expected to be realized by selling the service or product manufactured by the firm. The firm
should keep sufficient cash, neither more nor les. Cash shortage will disrupt the firm’s
manufacturing operating while excessive cash will simply remain idle, without contributing
anything towards the firm’s profitability. Thus, a major function of the financial manager is
to maintain a sound cash position.
Cash is the money, which a firm can disburse immediately without any restriction. The term
cash includes coins. Currency and cheques held by the firm, and balances in its bank
accounts. Sometimes near cash items, such as marketable securities or bank times deposits
are also included in cash. The basic characteristic of near cash assets is that they can readily
be converted into cash. Generally, when a firm has excess cash, it invests it in marketable
securities. This kind of investment contributes come profit to the firm.
FACTS OF CASH MANAGEMENTCash management is concerned with the managing of; (1) cash flows into and out of the firm,
(2) cash flow within the firm, and (3) cash balances held by the firm at a point of time by
financing deficit or investing surplus cash. It can be represented by a cash management cycle
as shown following. Sales generated cash, which has to be disbursed out. The surplus cash
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has to be invested while deficit has to be borrowed. Cash management seeks to accomplish
this cycle at a minimum cost. At the same time, it also seek o achieve liquidity and control.
Cash management assumes more importance than other current assets because cash is the
most significant and the least productive asset then a firm holds. It is significant because it is
used to pay the firm’s obligations. However, cash is unproductive. Unlike fixed assets or
inventories, it does not produce foods for sale. Therefore, the aim of cash management is to
maintain adequate control over cash position to keep the firm sufficiently liquid and to use
excess cash in some profitable way.
MANAGEMENT CYCLECash management is also important because it is difficult to predict cash flows accurately,
particularly the inflows, and there is no perfect coincidence between the inflows and outflows
of cash. During some periods cash outflows will excess cash inflows, because payments for
taxes, dividends, or seasonal inventory build up. At other times, cash inflow will be more
than cash payments because there may be large cash sales and debtors may be realized in
large sums promptly. Further, cash management is significant because cash constitutes the
smallest portion of the total current assets, yet management’s considerable time is devoted in
managing it. In recent past, a number of innovations have been done in cash management
techniques. An obvious aim of the firm these days is to manage its cash affairs in such a way
as to keep cash balance at a minimum level and to invest the surplus cash in profitable
investment opportunities.
In order to resolve the uncertainty about cash flows prediction and lack of synchronization
between cash receipts and payments, the firm should develop appropriate strategies for cash
management. The firm should evolve strategies regarding the following four facets of cash
management:
Cash planning: Cash inflows and outflows should be planned to project cash surplus
or deficit for each period of the planning period. Cash budget should be prepared for
this purpose.
Managing the cash flows: The flow of cash should be properly managed. The cash
inflows should be accelerated while, as far as possible, the cash outflow should be
decelerated.
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Optimum cash level: The firm should decide about the appropriate level of cash
balances. The cost of excess cash and danger of cash deficiency should be matched to
determent the optimum level of cash balances.
Investing surplus cash: The surplus cash balances should be properly invested to
earn he firm should decide about the division of such cash balance between
alternative shout-term investment opportunities such as bank deposits, marketable
securities, or inter-corporate lending.
MOTIVES FOR HOLDING CASHThe firm’s need to hold cash may be attributed to the following three motives:
The transactions motive
The precautionary motive
The speculative motive
The compensation motive
TRANSACTION MOTIVE
The transactions motive requires a firm to hold cash to conduct its business in the ordinary
course. The firm needs cash primarily to make payments for purchases, wages and salaries,
other operating expenses, taxes, dividends etc. the need to hold cash would not arise if there
were perfect synchronization between cash receipts and cash payments, i.e. enough cash is
received when the payment has to be made. But cash receipts and payments are not perfectly
synchronized. For those periods, when cash payments exceed cash receipts, the firm should
maintain some a\cash balance to be able to make required payments. For transactions
purpose, a firm may invest its cash in marketable securities. Usually, the firm will purchase
securities whose maturity corresponds with some anticipated payments, such as dividends, or
tax in the future. Notice that the transactions motive mainly refers to holding cash to meet
anticipated payments whose timing is not perfectly matched with cash receipts.
PRECAUTIONARY MOTIVE
The precautionary motive is the need to hold cash to meet contingencies in the future. It
provides a cushion pt buffer to withstand some unexpected emergency. The precautionary
amount of cash depends upon the predictability of cash flows. It cash flows can be predicted
with accuracy, less cash will be maintained for an emergency. The amount of precautionary
cash is also influenced by the firm’s ability to borrow at shout notice when the need arises.
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Stronger the ability of the firm to borrow at short notice, less the need for precautionary
balance. The precautionary balance may be kept in cash and marketable securities. The
amount of cash set aside for precautionary reasons is not expected to earn anything.
Therefore, the firm should attempt to earn some profit on it. Such funds should be invested in
high-liquid and low-risk marketable securities. Precautionary balance should, thus, be held
more in marketable securities and relatively less in cash.
SPECULATIVE MOTIVE
The speculative motive relates to the holding of cash for investing in profit-making
opportunities as and when they arise. The opportunity to make profit may arise when it is
expected that interest rated will rise and security prices will fall. Securities can be purchased
when the interest rate is expected to fall. The firm will benefit by the subsequent fall in
interest rates and increase in security prices. The firm may also speculate on materials’ prices.
If it expected that material’s price will fall, the firm can postpone materials’ purchasing and
make purchased in future when price actually falls. Some firms may hold cash for
speculations. Thus, the primary motives to hold cash and marketable securities are: the
transactions and the precautionary motives.
COMPENSATION MOTIVE
Yet another motive to hold cash balances is to compensate banks for providing certain
services and loans.
Banks provide a variety of services to business firms, such as clearance of cheque, supply of
credit information, transfer of funds, etc. while for some of the services banks charge a
commission or free, for others they seek indirect compensation. Usually clients are required
to maintain a minimum balance of cash at the bank. Since this balance cannot be utilized by
the firms for transaction purpose, the banks themselves can use the amount to earn a return.
To be compensated for their services indirectly in this form, they require the client to always
keep a bank balance sufficient to earn a return equal to the cost of services. Such balances are
compensating balances.
Compensating balances are also required by some loan agreements between a bank and its
customers. During periods when the supply of credit is restricted and interest rates are rising,
banks require a borrower to maintain a minimum balance in his account as a condition
precedent to the grant of loan. This is presumably to “compensate” the bank for a rise in the
interest rate during the period when the loan will be pending.
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The compensating cash balances can either of two forms:
(1) An absolute minimum. Say, Rs. 5 lakhs, below which the actual bank balance will never
fall.
(2) A minimum average balance, say, Rs. 5 lakhs over the month.
The first alternative is more restrictive as the average amount of cash held during the month
must be above Rs. 5 lakhs by the amount of transaction balance. From the firm’s viewpoint
this is obviously dead money.
Under the second alternative, the balance could fall to zero one day provided it was Rs. 10
lakhs some other day with average working to Rs. 5 lakhs.
Of the four primary motives of holding cash balances, the two most important are the
transactions motive and the compensation motive. Business firms normally do not speculate
and need not have speculative balances. The requirement of precautionary balances can be
met out of short-term borrowings.
OBJECTIVES OF CASH MANAGEMENTThe basic objectives of cash management are two fold:
1. To meet the cash disbursement needs (payment schedule)
2. To minimize funds committed to cash balances.
These are, conflicting and mutually contradictory and the task of cash management is to
reconcile them.
MEETING THE PAYMENT SCHEDULE
In the normal curse of business firms have to make payments of cash and a continuous and
regular basis to suppliers of goods, employees and so on. At the same item, there is a constant
inflow of cash through collections from debtors. Cash is therefore aptly described as the “oil
to lubricate the ever-turning wheels of business: without it the process grinds to a stop.” A
basic objective of management is to meet the payments schedule, i.e. to have sufficient cash
to meet the cash disbursement needs of a firm. The importance of sufficient cash to meet the
payment schedule can hardly be over-emphasized. The advantages of adequate cash are:
(1) It prevents insolvency or bankruptcy arising out of the inability of a firm to meet its
obligations;
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(2) The relationships with the bank is not strained;
(3) It helps in fostering good relations with trade creditors and suppliers of raw materials, as
prompt payment may help their own cash management;
(4) A trade discount can be availed of if payment is made within the due date. For example,
let us suppose that a firm is entitled to a 2% discount for a payment made within ten days
when the entire payment is to make within 30 days. Since the net amount is due in 30 days,
failure to take the discount means paying an extra 2% for every 20 days period over a year,
there would be 18 such periods (360 days/20 days).
MINIMISING FUNDS COMMITTED TO CASH BALANCES
The second Objective of cash management is to minimize cash balances. In minimizing the
cash balances two conflicting aspects have to be reconciled. A high level of cash balances
will, as shown above, ensure reconciled. A high level of cash balances will, as shown above,
ensure prompt payment together with all the advantages. But it also implies that large funds
will remain idle, as cash is a non-earning asset and the firm has to forego profits. A level of
cash balances, on the other hand, may mean failure to meet the payment schedule. The aim of
cash management should be to have an optimal amount of cash balances.
Keeping in view these conflicting aspects of cash management, we propose to discuss the
planning\ determination of the need for cash balances. There are two aspects involved in cash
planning.
First, an examination of those factors, which have a bearing on, the firm’s required cash
balances.
Second, a review of the approaches to reach optimum cash balance.
FACTORS DETERMINING CASH NEEDSThe factors that determine the required cash balances are:
SYNCHRONIZATION OF CASH FLOWS
The need for maintaining cash balances arises from the non-synchronization of the inflows
and outflows of cash: if the receipts and payments of cash perfectly. Coincide or balance each
other, there would be no need for cash balances. The first consideration in determining the
cash needs, therefore, the extent of non-synchronization of cash receipts and disbursements.
For this purpose, the inflows and outflows have to be forecast over a period of time,
depending upon the planning horizon, which is typically a one-year period with each of the
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12 months being a sub-period. The techniques adopted are a cash budget. The preparation of
a cash budget is discussed in the next section of this chapter. A properly prepared budget will
pinpoint the months when the firm will have excess or a shortage of cash.
SHORT COSTS
Another general factor to be considered in determining cash needs is the cost associated with
a shortfall in the firm’s cash needs. The cash forecast presented in the cash budget would
reveal periods of cash shortages. In addition, there may be some unexpected shortfalls. Every
shortage of cash—whether expected or unexpected—involves a cost “depending upon the
severity, duration and frequency of the shortfall and how the shortage is covered. Expenses
incurred as a result of shortfall are caked short costs”. Included in the short costs are:
Transaction costs
This is usually the brokerage incurred in relation to the sale of some short-term near cash
assets such as marketable securities.
Borrowing costs
Associated with borrowing to cover the shortage. These include items such as interest on
loan, commitment charges and other expenses relating to the loan.
Loss on trade discount
A substantial loss because of a temporary shortage of cash.
Cost associated
With deterioration of the firm’s credit rating, which is neglected in higher bank
charges on loans, stoppage of supply, demands for cash payment, refusal to sell, loss of
firm’s image and the attendant decline in sales and profits.
Penalty rates
By banks to meet a shortfall in compensating balances.
EXCESS CASH BALANCE COSTS
Another consideration in determining cash needs is the cost associated with maintaining
excess/idle cash. The cost of having excessively large cash balances is known as excess cash
balance cost. If large funds are idle, the implication is that the firm has missed opportunities
47
to invest those funds and has thereby lost interest, which it would otherwise have earned.
This loss of interest is primary the excess cost.
PROCUREMENT AND MANAGEMENTThese are the costs associated with establishing and operating cash management staff and
activities. They are generally fixed and are mainly accounted for by salary, storage, handling
of securities, etc.
UNCERTAINTY AND CASH MANAGEMENTFinally, the impact of uncertainty on cash management strategy is also relevant, as cash flows
cannot be predicted with complete accuracy. The first requirement is a precautionary cushion
to cope with irregularities in cash flows, unexpected delays I collections and disbursements,
defaults and unexpected cash needs.
The impact of uncertainty on cash management can, however, be mitigated through:
(1) Improved forecasting of tax payments, capital expenditure, dividends, etc.
(2) Increased ability to borrow through overdraft facility.
DETERMINIG CASH NEED - CASH BUDGETAfter the examination of the pertinent considerations and cost that determine cash needs, the
next question deals with determination of a firm cash needs.
There are two approaches to derive an optimal cash balance, namely,
i. Minimizing cost model
ii. Cash budget
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CASH BUDGET: A CASH MANAGEMENT TOOL of Amtek Crankshaft
(I)Pvt. Ltd.
It has been shown in the preceding sections that a firm is will-advised to hold adequate cash
balances but should avoid excessive balance. The firm has, therefore, to assess its need for
cash properly. The cash budget is probably the most important tool in cash management. It is
a device to help a firm to plan and control the use of cash. It is a statement showing the
estimated cash, income (cash inflow) and cash expenditure (cash outflow) over the firm’s
planning horizon. In other words, the net cash position (surplus or deficiency) of a firm as it
moves from one budgeting sub-period to another is highlighted by the cash budget.
The purposes of cash budget are:
a. To co-ordinate the timings of cash needs. It identifies the periods when there
might either be a shortage of cash or an abnormally large cash requirement.
b. It pinpoints the period when there is likely to be excess cash.
c. It enables a firm which has sufficient cash to take advantage of cash discounts onits
accounts payable, to pay obligations when due, to formulate dividend policy, to plan
financing of capital expansion and to help unify the production schedule during the year
so that the firm can smooth out costly seasonal fluctuations.
d. Finally, it helps to arrange needs funds on the most favorable terms and prevents the
accumulation of excess funds. With adequate time to stuffy his firm’s needs, the manager
can select the best alternative. In Contrast, a firm, which does not budget its cash
requirements, may suddenly find itself short of funds. With pressing needs and little time
to explore alternative avenues of financing, the management is forces to accept the best
terms offered in a difficult situation. “These terms will mot be a s favorable, since the
lack of planning indicated to the lender that there is an organizational deficiency. The
firms, therefore, represents a higher risk”.
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INFLOWS/CASHRECEIPS OUTFLOWS/DISBURSEMENS
Cash sales
Collection of accounts
receivable
Disposal of fixed assets
Accounts payable/payable payments
Purchase of raw materials ts3.
Wages and salary (payroll)
Factory expenses
Administrative and selling expenses
Maintenance expenses
Purchases of fixed assets
CASH PLANNINGCash flows are inseparable parts of the business operations of firms. A firm needs cash to
invest in inventory, receivable and foxed assets and to make payments for operating expenses
in order to maintain growth in sales and earnings. It is possible that firm may be making
adequate profits, but may suffer from the shortage of cash as its growing needs may be
consuming cash vary fast.
The cash poor position of the firm can be corrected if its cash needs are planned in advance.
At times, a firm can have excess cash with its cash inflows exceed cash outflows. Such
excess cash may remain idle. Again, such excess cash flows can be anticipated any properly
invested if cash planning is resorted to. Cash planning is a technique to plan and control the
use of cash. It helps to anticipate the future cash flows and needs of the firm’s profitability
and cash deficits, which can cause the firm’s failure.
CASH FORECASTING AND BUDGETINGCash budget is the most significant device to plan for and control cash receipts and payments.
A cash budget is a summary statement of the firm’s expected cash inflows and outflows over
a projected time period. It gives information on the timing and magnitude of expected cash
flows and cash balances over the Projected period. This information helps the financial
manger to determine the future cash needs of the firm, plan for the financing of these needs
and exercise control over the cash and liquidity of the firm.
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The time horizon of a cash budget may differ from firm to firm. A firm whose business is
affected by seasonal variations may prepare monthly cash budgets. Daily or weekly cash
budgets should by prepare for determining cash requirement if cash flows show extreme
fluctuations. Cash budget for a longer intervals may be prepared if cash flows are relatively
stable.
Cash forecasts are needed to prepare cash budgets. Cash forecasts may be done on short or
long-term basis. Generally, forecasts covering periods of one year or less are considered
short-term; those extending beyond one year are considered short-term; those extending
beyond one year are considered long-term.
SHORT-TERM CASH FORECASTINGIt is comparatively easy to make short-term cash forecasts. The important functions of
carefully developed short-term cash forecasts are:
To determine operating cash requirements.
To anticipate short-term financing
To manage investment of surplus cash
LONG-TERM CASH FORECASTINGLong-term cash forecasts are prepared to five an idea of the company’s financial
requirements in the distant future. They are not as detailed as the short-term forecasts are.
Once a company has developed long-term cash forecast, it can be used to evaluate the impact
of, say, new product developed or plant acquisition on the firm’s financial condition three,
five, or more years in the future. The major uses of the long-term cash forecasts are:
It indicates as company’s future financial needs, especially for its working capital
requirements.
It helps to evaluate proposed capital projects. It pinpoints the cash required to finance these
projects as well as the cash to be generated by the company to support them.
It helps to improve corporate planning. Long- term cash forecasts compel each division to
plan for future and to formulate projects carefully.
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CHAPTER 5
RESEARCH METHODOLOGY
52
RESEARCH METHODOLOGY
Research methodology is a way to systematically solve the research problem. In it step by
step methods are followed to solve a particular problem it refers to search for knowledge
Methodology includes the overall research procedures, which are followed in the research
study. This includes Research design, the sampling procedures, and the data collection
method and analysis procedures. To broad methodologies can be used to answer any research
question-experimental research and non-experimental research. The major difference between
the two methodologies lies in the control of extraneous variables by the intervention of the
investigator in the experimental research.
RESEARCH DESIGN
A research design is defined, as the specification of methods and procedures for
acquiring the Information needed. It is a plant or organizing framework for doing the study
and collecting the data. Designing a research plan requires decisions all the data sources,
research approaches, Research instruments, sampling plan and contact methods.
Research design is mainly of following types: -
1. Exploratory research.
2. Descriptive studies
3. Casual studies
SECONDARY DATA
Sources of Secondary Data
Following are the main sources of secondary data:
1. Official Publications: Publications of Amtek Crankshaft (I) Pvt. Ltd. or the by the
Publications of Amtek Crankshaft (I) Pvt. Ltd..
2. Publications Relating to Trade: Publications of the trade associations, stock exchange,
trade union etc.
3. Journal/ Newspapers etc.: Some newspapers/ Journals collect and publish their own
data, e.g. Indian Journal of economics, economist, Economic Times.
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4. Data Collected by Industry Associations: For example, data available with
Publications of Amtek Crankshaft (I) Pvt. Ltd. by promotional schemes.
5. Unpublished Data: Data may be obtained from several companies, organizations,
working in the same areas. For example, data on Publications of Amtek Crankshaft (I)
Pvt. Ltd. by magazines.
Data Collection Method
The following methods of data collection are generally used:
(i) Observation Method
(ii) Case Study Method
I have used case study method in the project.
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CHAPTER 6
DATA ANALYSIS & INTERPRETATION
55
RATIO ANALYSISRatio analysis is a mean of better understanding of financial strength and weakness of any
company. And hence my study is based on the data related to last four years i.e. from 2002 to
2005 and the financial
Analyses are made on the basis of these ratios.
LIQUIDITY RATIOLiquidity refers to the ability of concern to meet its current obligations as and when these
become due. The short term obligations are met by realizing amount assets should either be
liquid or near liquidity. These should be converted into cash for paying obligations of short-
term liabilities, if current assets can pay off current liabilities, then liquidity position will be
satisfactory. On the other hand, if current liabilities may not be easily met out of current
assets then liquidity position will be bad. To measure the liquidity of a firm, the following
ratio can be calculated:
Current ratio
Quick or acid test or liquid ratio
Absolute liquidity ratio
CURRENT RATIO
This ratio explains the relationship between current assets and current liabilities of business.
The formula for calculating the ratio is:
Current ratio= Current Assets
Current liabilities
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Current ratio:
(ALL AMOUNT IN
LAKHS)
YEAR
2007-08
2006-07
CURRENT ASSETS 12558.4 14250.08
CURRENT LIABILITIES 3525.46 2251.42
CURRENT RATIO 3.56
6.33
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INTERPRETATION
As above diagram and ratio states that the last year current ratio of Amtek Crankshaft is more
than 2:1. In the year 2006-07 it is very high hence it shows idleness of funds. But in the year
2007-08 short term financial position of the enterprise is very sound because its current assets
are more than twice of current liabilities.
QUICK RATIO
Quick ratio indicates whether the firm is in a position to pay its current liabilities with in a
month or immediately. As such the quick ratio calculated by calculated by dividing liquid
assets by current liabilities.
Quick ratio= Quick assets
Current liabilities
Quick assets = current assets - inventories
Liquid assets mean those assets, which will yield cash vary shortly. An ideal quick ratio is
said to be 1:1. If it is more, it is considered to be better. The idea is that for every rupee of
current liabilities, there should be at-least one rupee of liquid assets.
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Quick ratio of AMTEK CRANKSHAFT
(ALL AMOUNT IN LAKHS)
YEAR
2007-08
2006-07
QUICK ASSETS
9316.73
11593.4
CURRENT LIABILITIES
3525.46
2251.42
QUICK RATIO 2.64
5.15
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INTERPRETATION
As above diagram and calculation shows that quick ratio is more than 1:1.
So it is satisfactory. It means that current assets are more than current liabilities, the short
term financial position is very good.
ABSOLUTE LIQUIDITY RATIO
Although receivable, debtors and bills receivable are generally more liquid than inventories,
yet there may be doubts regarding their realization into cash immediately or in time. Hence,
some authorities are of the opinion that the absolute liquid ratio should also be calculated
together with current ratio and acid test ratio so as to exclude even receivables from the
current assets and find out the absolute liquid assets.
Absolute liquid ratio = absolute liquid assets
Current liabilities
Absolute liquids assets include cash & bank, short-term securities. The acceptable norm for
this ratio is liquid assets are considered adequate to pay Rs.2 worth current liabilities in time
as all the creditors and then cash may also be realized from debtor and inventories.
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Absolute liquid assets = cash & bank balance + loans and advances
YEAR
2007-08
2006-07
ABSOLUTE LIQUID ASSETS
1469.35
1332.09
CURRENT LIABILITIES
3525.46
2251.42
ABSOLUTE LIQUID RATIO
0.42
0.592
(ALL AMOUNT IN LAKHS)
61
INTERPRETATION
As above calculation and diagram shows that absolute liquidity ratio of 2007-08 is less than
0.5:1. So it shows that there is inadequacy of cash and short-term securities. But in 2006-07 it
is more than 0.5:1, which is satisfactory.
ACTIVITY RATIOThis ratio measures how many times the average stock is sold during the year. Promptness of
sale indicates the better performance of the business. Higher turnover ratio is always
beneficial to the concern. Lower inventory turnover ratio shows that the stock is blocked and
not immediately sold. It is always advisable to keep the required quantity of stock. In the
other words these ratios measure the efficiency and rapidity of the resources of the company,
like stock, debtors, fixed assets, working capital etc. These ratios are generally calculated on
the basis of sales or cost of sales. Some of the important activity ratio are as follow: -
1. Inventory Turnover Ratio: This ratio indicates the relationship between the cost of
goods sold during the tear and average stock kept during that year.
Inventory turnover ratio = cost of goods sold
Average stock or inventory
Average stock or inventory = stock of previous year + stock of current year
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2
INVENTORY TURNOVER RATIO:
(ALL AMOUNT IN
LAKHS)
YEAR
2007-08
2006-07
COST OF GOODS SOLD
11563 16271
AVERAGE INVENTORY 2949.175
2324.51
INVENTORY TURNOVER RATIO 3.92
6.99
63
INTERPRETATION
As above calculation and diagram shows the inventory turnover ratio of Caryaire Equipment
is not satisfactory in 2007-08 as compared to 2006-07. It means funds are blocked in
inventory, which create problem of cash inflow. So, management should take some important
decision regarding inventory management.
DEBTORS TURNOVER RATIO Debtors turnover ratio = Net credit sales
Average debtors
Where net credit sales in case = sales of respective year
Average debtor = opening debtors + closing debtors
2
This ratio indicates the speed with which the amount is collected from debtors. The higher the
ratio, the better it is, since it indicates that amount from debtors is being collected more
quickly. A lower debtors turnover ratio will indicate the inefficient credit sales policy of the
management. It means that credit sales have been made to customers who do not deserve
much credit.
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DEBTOR TURNOVER RATIO
(ALL AMOUNT IN LAKHS)
YEAR
2007-08
2006-07
NET CREDIT SALES
16546.74 37226.62
AVERAGE DEBTOR 8877.89 11330.39
DEBTOR TURNOVER RATIO 1.86 3.28
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DEBTOR COLLECTION PERIOD
Debtor collection period = 365
Debtor turnover ratio
This ratio shows the time in which the customer is paying for credit sale. Increase in this ratio
indicates the excessive blockage of funds with debtors, which increase the chances of bad
debts. On the other hand, if there is decrease in debt collection period, it indicates prompt
payment by debtors, which reduces the chances of bad debts.
Debtor collection period (in number of days)
YEAR
2007-08
2006-07
DEBTOR COLLECTION PERIOD
196
111
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INTERPRETATION
As the calculation and diagram shows that debtor collection period of current year is more
than that of the previous year, which is not satisfactory which indicates deferred payment by
debtors and hence increases the chances of bad debts. But if you consider the collection
period of current year i.e.; 2007-08 it is satisfactory.
WORKING CAPITAL TURNOVER RATIO
Working capital turnover ratio = cost of goods sold
Working capital
Where working capital = current assets – current liabilities
This ratio reveals how efficiently working capital has been utilized in producing sales. A high
working capital turnover ratio shows efficient use of working capital and quick turnover of
current assets like stock and debtors.
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WORKING CAPITAL TURNOVER RATIO
(ALL AMOUNT IN LAKHS)
YEAR
2007-08
2006-07
COGS
11563 16271
WORKING CAPITAL
9032.95
11998.65
WORKING CAPITAL TURNOVER
RATIO
1.28
1.36
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INTERPRETATION
This ratio indicates the weak position of organization as compared to previous year. So, this
ratio indicates the under utilization of working capital.
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FIXED ASSETS TURNOVER RATIOFixed assets are used in the business for producing goods to be sold. The effective utilization
of fixed assets will result in increased production and reduced cost. It also ensures whether
investment in the assets have been judicious or not. Higher ratio indicates better performance.
Fixed assets turnover ratio = net sales
Fixed assets (net block)
(ALL AMOUNT IN LAKHS)
YEAR
2007-08
2006-07
NET SALE
16546.74
37226.62
FIXED ASSETS
15442.22
16702.55
FIXED ASSETS TURNOVER RATIO 1.07
2.22
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INTERPRETATION
This ratio reveals how efficiently the fixed assets are being utilized. Compared with the
previous year there is a decrease in the ratio, which shows that assets have not been used
efficiently as they had been used in the previous year.
NET PROFIT/LOSS RATIO
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This ratio establishes the relationship between the net profit and net sales.
Net profit/ loss ratio = Net profit x 100
Net sales
Where net profit = gross profit
+ Operating and non operating income
(-) Operating and non-operating expenses.
(ALL AMOUNT IN
LAKHS)
YEAR
2007-08
2006-07
NET PROFIT
5977.23
12288.56
NET SALES
16546.74
37226.62
NET PROFIT/LOSS RATIO (IN %)
36 %
33 %
72
INTERPRETATION
Above diagram and calculation shows that earning a good amount of profit.
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\
CHAPTER 7
FINDING AND CONCLUSION
74
FINDING & CONCLUSIONS
FINDINGOn the basis of my detailed discussion and observation with the head of department of Amtek
Crankshaft (I) Pvt. Ltd., I am providing the following suggestion and recommendation to
improve the following ratio:
Gross profit, net profit, net worth ratio is very low in 2007, which require the due
attention of the management. Possible reasons should be identified, thoroughly investigate
and remedial measures should be taken to improve the situation if the same require action.
The operating cost ratio is very high in the year 2007 as compared to 2006; it is because of
increasing in the operational cost of the corporation for the generation of electricity. The
management of the corporation should take necessary step to reduce its operating costs.
The working capital, fixed asset, and total capital turnover ratio are more than 1. So the
corporation should make certain policy to utilize the capital employed, its working capital
and fixed assets to its ability.
The current ratio is much higher than 2:1 in both the year, which shows that the fund in
corporation is ideal, it is not effectively utilized. The management of the corporation
should make the policy to invest the funds in other profitable opportunities.
Cash, bank balance, loans & advances should be used properly so as to meet current
liabilities.
Management of credit sales policy should be done efficiently so as to decrease debtor
collection period.
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CONCLUSIONS
Sales are decreasing during the year 2006-07. Hence profitability has declined over
this time period
Due to increase in the time period for the realization of debtors, cash and bank
balance has decreased.
Stock turn over ratio is decreasing; it shows that capital is blocked into the inventory.
Fixed asset turnover ratio has decreased this year, which shows that assets have not
been used efficiently as they had been used in the previous year.
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CHAPTER 8
LIMITATION OF THE PRODUCT
77
LIMITATIONS OF RESEARCH
In spite of best efforts of the investigator the study was subjected to following
limitations:
1. Some officers were too busy to give a sincere response to investigators and hence their
response may not relate to real picture.
2. Manager sometime denied disclosing some important financial matters, which can be
helpful in this study.
3. Some information related to the study, which had been collected from the company was
rounded off because of some influence.
4. At some place approximate figures had been taken as per instruction of company officers.
5. The time period given to me for the completion of the project was short in such a short
span of time it is difficult to complete any project in detail.
6. Some information in Amtek synthetic (I) Pvt. Ltd. was highly confidential due to which
some calculations are not made.
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CHAPTER 9
APPENDICES
79
PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED ON MARCH 31,2007
(Rs. in Lakhs) For the year For the Year 2007-2008 2006-2007INCOME Sales: 16546.73 37226.62 16546.73 Other Income 5033.49 176.83TOTAL INCOME 21580.22 37403.45 EXPENDITURE Generation, Administration & Other Expenses 14714.12 23856.27 Extra Ordinary Item Written off - Delayed Payment Charges Waiver - Interest On Bonds 23.9 39.59 23.9 39.59 Depreciation 864.98 1219.03TOTAL EXPENDITURE 15603 25114.9 PROFIT FOR THE YEAR 5977.22 12288.55 Prior Period Adjustments (Net) 222.86 1100.37PROFIT BEFORE TAX 5754.36 11188.18 Provision for Taxation - - -
PROFIT AFTER TAX 5754.36 11188.18 Balance brought forward from previous year - -PROFIT FOR APPROPRIATIONS 5754.36 11188.18 APPROPRRIATIONS: Proposed dividend for the Year - - Tax on Proposed Dividend - - Bond Redemption Reserve - - Balance carried to Balance Sheet - - TOTAL 5754.36 11188.18
BALANCE SHEET AS ON MARCH 31,2007 (Rs. In Lakhs) As at As at 31st March 2008 31st March 2007
80
I.SOURCES OF FUNDS 1.shareholder's funds a) Share Capital - b) Subscription from Govt. of India towards - Share Capital pending allotment - c) Reserves & Surplus 5754.36 11188.18
2.Loan Funds a) Secured Loans - -b) Unsecured Loans - -
-
3.Inter Unit Balance 41081.01 20762.42
TOTAL 46835.38 31950.6
II.APPLICATION OF FUNDS 1.Fixed Assets a) Gross Block 90151.96 90165.88 Less: Depreciation 74709.74 73463.34
Net Block 15442.21 16702.54b) Capital Work in Progress 22359.5 3248.7
37801.72 19951.24
2. Investments 0.71021 0.71021
3. Current Assets, Loans & Advances a) Inventories 3241.67 2656.68b) Sundry Debtors 7664.45 10091.33c) Cash & Bank Balances 267.29 248.6d) Other Current Assets 182.91 169.96e) Loans & Advances 1202.06 1083.49
12558.4 14250.08
Less: Current Liabilities & Provisions a) Liabilities 3525.46 2251.42 b) Provisions - -
3525.46 2251.42 Net Current Assets 9032.94 11998.65
4. Miscellaneous Expenditure (to the - - Extent not written off or adjusted)
TOTAL 46835.38 31950.6
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BIBLIOGRAPHY
FINANCIAL MANAGEMENT
“Pandey I.M.”
COMPREHENSIVE ACCOUNTING
“Siddiqui S.A.”
ANNUAL REPORT OF AMTEK CRANKSHAFT
AMTEK CRANKSHAFT PVT. LTD. WEB SITE
www.wikipedia.org
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