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PROJECT REPORT ON “ WORKING CAPITAL MANAGEMENT” SWARAJ ENGINES LTD. (SEL) SUBMITTED FOR PARTIAL FULFILLMENT OF THE DEGREE OF MASTERS OF BUSINESS ADMINISTRATION (MBA) AMITOJ SINGH, 1306145
PROJECT REPORT ON
“ WORKING CAPITAL MANAGEMENT”
SWARAJ ENGINES LTD. (SEL)
SUBMITTED FOR PARTIAL FULFILLMENT OF THE DEGREE OF
MASTERS OF BUSINESS ADMINISTRATION (MBA)
AMITOJ SINGH,
1306145
Chandigarh Business School Of Administration,
Landran, Mohali
TABLE OF CONTENTS
Page no.
Preface -------------------------------------------------------3 Acknowledgement -----------------------------------------4 Executive Summary ---------------------------------------5 Introduction to the Study ---------------------------------6 Introduction of the Company ----------------------------8 Introduction to Working Capital Management ------22 Financing Working Capital ------------------------------34 Analysis of Financial Statements of SEL -----------46 Ratio Analysis ----------------------------------------- 50 Analysis of WC of SEL by Ratios ------------------ 51 Recommendations ------------------------------------ 69 Bibliography ------------------------------------------ 71
PREFACE
To start any business, First of all we need finance and the success of that business entirely depends on the proper management of day-to-day finance and the management of this short-term capital or finance of the business is called Working capital Management.
Working Capital is the money used to pay for the everyday trading activities carried out by the business - stationery needs, staff salaries and wages, rent, energy bills, payments for supplies and so on.
I have tried to put my best effort to complete this task on the basis of skill that I have achieved during the last one year study in the institute. I have tried to put my maximum effort to get the accurate statistical data. However I would appreciate if any mistakes are brought to me by the reader.
ACKNOWLEDGEMENT
It is difficult to acknowledge precious a debt as that of learning as it is the only debt that is difficult to repay except through gratitude.It is my profound privilege to express my sincere thanks to Mr Avtar Singh who gave me an opportunity to carry out this project and had been a constant inspiration.I would like to thank him for constant support and guidance through out the tenure of this project without his cooperation it would have been a difficult task to accomplish this project.I am also thankful to my faculty guide Ms. Ruby Sharma, who has provided her valuable time and effort for guiding me for the completion of this report.
Amitoj Singh
EXECUTIVE SUMMARY
The major objective of the study is to understand the working capital of SEL and to suggest measures to overcome the shortfalls if any. Funds needed for short term needs for the purpose like raw materials, payment of wages and other day to day expenses are known as working capital. Decisions relating to working capital (Current assets-Current liabilities) and short term financing are known as working capital management. It involves the relationship between a firm’s short-term assets and its short term liabilities. By definition, working capital management entails short-term definitions, generally relating to the next one year period.
The goal of working capital management is to ensure that the firm is able to continue its operation and that it has sufficient cash flow to satisfy both maturing short term debt and upcoming operational expenses. Working capital is primarily concerned with inventories management, Receivable management, cash management & Payable management.
Introduction
Working Capital:-The life blood of business, as is evident, signified funds required for day-to-day operations of the firm. The management of working capital assumes great importance because shortage of working capital funds is perhaps the biggest possible cause of failure of many business units in recent times. There it is of great importance on the part of management to pay particular attention to the planning and control for working capital. An attempt has been made to make critical study of the various dimensions of the working capital management of SEL.Decisions relating to working capital and short term financing are referred to as working capital management. These involve managing the relationship between a firm's short-term assets and its short-term liabilities. The goal of Working capital management is to ensure that the firm is able to continue its operations and that it has sufficient money flow to satisfy both maturing short term debt and upcoming operational expenses.
Objective of the study:-The following are the main objective which has been undertaken in the present study:1. To determine the amount of working capital requirement and to calculate various ratios relating to working capital.2. To evaluate the financial performance of SEL using financial tools.3. To suggest the steps to be taken to increase the efficiency in management of working capital.
Place of study:-
The project study is carried out at the Finance Department of SEL office situated at Mohali. The study is undertaken as a partof the MBA curriculum for two months in the form of summer internship.
Study design and methodology:-Two types of data are collected, one is primary data and second one is secondary data. The primary data were collected from the Department of finance, SEL. The secondary data were collected from the Annual Report of SEL and SEL website.
Limitations:-There may be limitations to this study because the study duration (summer training) is very short and it’s not possible to observe every aspect of working capital management practices. The data collected were mostly secondary in nature.
1.
Introduction of the Company
BOARD OF DIRECTORS G.P.GUPTA(Chairman)
ANJANIKUMAR CHOUDHARI
Dr. T.N. KAPOOR
D.R.SWAR
S.C.BHARGAVA
HARDEEP SINGH
A.M.SAWHNEY
V.S.PARTHASARATHY
R.R.DESHPANDE
VIJAY VARMA
BISHWAMBHAR MISHRA(Vice Chairman)
G.S.RIHAL(Managing Director)
Senior Vice President – FinanceM.N. KAUSHAL
Company SecretaryM.S. GREWAL
AuditorsM/S DAVINDER S. JAAJ & CO.Chartered Accountants
BankersCANARA BANK
Registered OfficePhase-IV, Industrial AreaS.A.S. Nagar (Mohali)Punjab 160 055
WorksPlot No. 2, Industrial Phase IXS.A.S. Nagar (Mohali)Punjab 160 059
Mahindra
Mahindra embarked on its journey in 1945 by assembling the Willys Jeep in India and is now a US $7.1 billion Indian multinational. It employs over 1,00,000 people across the globe and enjoys a leadership position in utility vehicles, tractors and information technology, with a significant and growing presence in financial services, tourism, infrastructure development, trade and logistics. The Mahindra Group today is an embodiment of global excellence and enjoys a strong corporate brand image.Mahindra is the only Indian company among the top tractor brands in the world. It is today a full-range player with a presence in almost every segment of the automobile industry, from two-wheelers to CVs, UVs, SUVs and sedan. Mahindra recently acquired a majority stake in REVA Electric Car Co Ltd. (now called Mahindra REVA), strengthening its position in the Electric Vehicles domain.The Mahindra Group expanded its IT portfolio when Tech Mahindra acquired the leading global business and information technology services company, Satyam Computer Services. The company is now known as Mahindra Satyam.Mahindra is also one of the few Indian companies to receive an A+ GRI checked rating for its first Sustainability Report for the year 2007-08 and has also received the A+ GRI rating for the year 2008- 09.
Mahindra Group at a Glance:
Automotive
Domestic Operartions
International Operations
Mahindra Renault Private Limited (MRPL)
Mahindra Navistar Automotives Limited (MNAL)
Mahindra Navistar Engines Private Limited (MNEPL)
After-Market Sector
Mahindra Spares Business
Mahindra First Choice
Mahindra First Choice Wheels Ltd. Farm Equipment Sector
Domestic Operations
International Operations
Mahindra Gujarat Tractor
Mahindra Agribusiness
Mahindra Powerol
Mahindra USA
Mahindra Australia
Mahindra China Tractors Financial Services Sector
Mahindra & Mahindra Financial Services Ltd (Mahindra Finance)
Mahindra Insurance Brokers Ltd.
Mahindra Rural Housing Finance Ltd (MRHFL) Infrastructure Development Sector
Mahindra Holidays & Resorts
Mahindra Lifespaces Developers Limited
Mahindra World City
Mahindra Infrastructure Developers
Acres Consulting Engineers Information Technology Sector
Tech Mahindra
Bristlecone
Mahindra 2 Wheelers Mahindra Systech
Forgings
• Mahindra Forgings Limited - India • Mahindra Forgings Europe - Ag
- GSA - Schonoweiss & Co GMBH - JECO - Stokes UK - Falkenroth
Engineering Services
• Mahindra Engineering • Engines Engineering Italy • Mahindra Aerospace
Stampings
Steel
Ferrites
Contract Sourcing
Telematics
Composites
Castings
Gears
• Mahindra Sar Transmissions • Metalcastello Italy
Speciality Businesses
Mumbai Mantra
Mahindra Defence System Mahindra Partners Mahindra Odyssea
Mahindra Intertrade
Mahindra Steel Service Center
Mahindra MiddleEast Electrical Steel Service Centre (MMESSC)
Mahindra Logistics Ltd.
Mahindra Retail
Swaraj
In 1965, when India was entirely dependent on foreign technology and know-how for setting up any industrial venture, the Central Mechanical Research Institute, a national laboratory of Govt. Of India, took the bold step of designing and developing totally Indian know-how for 26.5 HP agricultural tractors. In 1970, Punjab government took up the challenge of setting up Punjab Tractors Limited based on this indigenous design. PTL was established on June 27, 1970 and was promoted by Punjab Govt. through Punjab State Industrial Development Corporation with the support of Government of India and public financial institutions. Being a bold and courageous venture based on indigenous design, research and technology, Swaraj was appropriately chosen as the brand name. Self reliance and building up of Indian engineering capabilities, remains the enduring spirit behind PTL.
The first batch of tractors was rolled out on November 14, 1973. Commercial production started in April 1974. Punjab Tractors Limited established another unit in 1981 at a capital layout of 2.6 crores named Swaraj Combine Division (Now named as Plant 2) to manufacture India's first self propelled Harvester Combine - Swaraj 8100. The division is located in village Chappercheri, Distt. Mohali.
Gradually, the division has increased its product range. In 1985, it brought out diesel forklift trucks in technical collaboration with KOMATSU FORKLIFT COMPANY of Japan. It is also manufacturing electric forklifts.
In 2007, PTL was acquired by Mahindra & Mahindra, one of the world’s largest tractor manufacturers. Mahindra & Mahindra is a leading Indian business conglomerate with group revenues of $ 6.7 billion. Mahindra & Mahindra, Farm Equipment Sector, of which Swaraj brand is now the part, has the distinction of being the only Tractor Company in the world at present to have received two of the world’s top most quality prizes i.e. Japan Quality Medal and Deming prize. We have a tractor portfolio of 9 models with more than 100 variants in the range of 22 HP to 75 HP. We have a strong domestic presence with more than 0.7 million satisfied customers. Swaraj tractors, ruling the rural hinterlands for more than three decades, are synonymous with power, ruggedness & reliability. We have also expanded our presence in the overseas markets including select African and SAARC nations.
Swaraj Division has group of manufacturing units shown below. Swaraj Division- Plant 1 (Production Capacity of 120 tractors /
day) Tractors manufacturing 25 hp to 39 hp range Swaraj Division- Plant 2 • Tractors manufacturing 25 hp to 72 hp
range (Production Capacity of 60 tractors/day) • Combine Harvesters (Both Wheel & Track type for dry & wet land) • Fork lift Trucks (Diesel Engine & stored electrical Energy both type)
Swaraj Engines Limited (Production capacity of 160 engines / day) Diesel Engines manufacturing 25 hp to 55 hp (Collaboration with Kirloskar oil Engines)
Swaraj Foundry Division Production Capacity of 35 ton/day Expansion is going on in order to enhance capacity by 70 ton. Swaraj automotive Limited Manufacturing unit for automotive seats & components
Swaraj Foundry Division: This division supplies automotive castings to other divisions of Swaraj, Swaraj Engines Limited and also to some outside customers. The current production capacity is about 7500 MT
of gray iron castings per annum on a single shift basis. The division is located in village Majri, Distt. Mohali. The foundation stone for expansion of the foundry division was laid on 28th February 2008. This expansion from 10,000 ton per annum to 25,000 ton per annum would bring new business and strengthen its position in the industry. This project of Rs. 32 crores with enhanced technology helped the Foundry Division in making crankcase and cylinder head for engines and transmission housing for the entire group. R&D The emphasis on R&D is validated by a long list of new products it has introduced and established. An R&D complex has been set up in order to meet the increased production target of tractors and the growing need of improving the product line.This complex has the following facilities:
Advanced Research & Development needs for Tractor, harvester combines?and forklifts.
Swaraj centre for HRD training of Management Staff, Supervisory Staff and Workers.
Spare Part Division for Tractors, Harvester combines.
Swaraj Automotives Limited: This company earlier manufacturing scooters had turned sick, which was acquired by the Swaraj Group in 1980. It was turned around with the aid of expertise of Swaraj management and today it is a profit making venture.
Swaraj Engines Limited: PTL in collaboration with KIRLOSKAR OIL ENGINES LTD., floated a new company - Swaraj Engines Ltd. - to manufacture diesel engines in 1987. PTL contributed 38% of the finances for setting up the company, Kirloskar Oil Engines Ltd. Contributed 13% and 49% of the finances came from the public. Swaraj Engines Ltd. was established in Industrial Area, Mohali, Distt.
Mohali.
The Company's principal activity is to manufacture and supply of engines and hi-tech engine components for tractors and other commercial vehicles. The products include internal combustion diesel engines, diesel engine components and spare parts. It supplies engines to Punjab Tractors Ltd and engine components to Swaraj Mazda Ltd.
VISION & MISSION
Mahindra Swaraj:Swaraj Group, part of Mahindra & Mahindra (FES Sector) is a dynamic and growing group, wherein focus is laid on generating
economic prosperity for stakeholders, while growing harmoniously with the community and environment.
Swaraj is one of the leading tractor manufacturers in India and the company is totally indigenous. Nearly 6, 00,000 Swaraj tractors operate in the field providing durable delight to the discerning farming community of India. Swaraj has over 600 dealers across the country.Swaraj Group has achieved ISO 14001:2004 & OHSAS 18001:2007 Certification and TS 16949 certification for Swaraj Automotives Ltd.
Mahindra Farm Equipment Sector (Domestic Operations):
Farm Equipment Sector (FES) is the no. 1 tractor brand in India, since 1983. Brand Mahindra sells a range of tractors that include Bhoomiputra, Shaan, Sarpanch and Arjun Ultra-1, with each (except Shaan) having range of variants based on the horse power (hp) and other attributes. Mahindra tractors are known for high fuel efficiency and reliability. FES sells its 15 HP to 75 HP category tractors in the domestic market.
FES has a large customer base of more than 21, 00,000 customers (including Swaraj). The sector has time and again topped the customer satisfaction chart. FES also has the deepest distribution reach with more than 680 dealers along with widest service network across India. The sector has four manufacturing facilities in India, located in Mumbai and Nagpur in Maharashtra, Rudrapur in Uttaranchal and Jaipur in Rajasthan.
The Farm Equipment Sector is a process driven organisation with a strong focus on quality systems. All FES plants are ISO 14001 (Environment Management System), OHSAS 18001 (Occupational Health and Safety Management System) and ISO/TS 16949 (Quality Management System) certified.
There is a strong commitment on part of the top management to
make the production system even more efficient through proactively following world-class methodologies like QC story and QC tools, Six Sigma, DOE ( Design of Experiments) and TPM ( Total Productive Maintenance).
Mahindra & Mahindra had acquired a majority stake in Punjab Tractors Limited (PTL) in early 2007. PTL is a good strategic fit to the company, as it comes with its strength of efficient design (strong R&D abilities) and the Brand Swaraj, which enjoys a strong customer loyalty for being sturdy and reliable. Benefits of this acquisition include advantages of economies of scale, sourcing benefits and vendor rationalization. Post Mahindra – PTL merger in February 2009, PTL is now a part of Mahindra FES. It is known as Swaraj Division.
International Operations:
The international operations of the Farm Equipment Sector are spread across six continents and in around 25 countries. FES has state-of-the-art manufacturing plants in India and China with a combined capacity to produce more than 1, 70, 000 tractors a year. Besides, these plants there are assembly plants USA and Australia. FES has more than 1000 dealers world-wide. Currently, the tractors for international market range between 25 to 85 HP.
Mahindra USA (MUSA):
Mahindra USA (MUSA) is a wholly owned subsidiary of Mahindra & Mahindra. Over the years, Mahindra USA has reinforced its position in the 'Compact' and 'Utility' segment of tractors. It has a network of hundreds of leading tractor dealers throughout the country to provide customers based at US a complete product support with a quality after sales service. The company has three
assembly plants in USA - Houston (Texas), Calhoun (Georgia) and Redbluff (California).
In an independent survey conducted by The North American Equipment Dealers Association (NAEDA) in 2008, MUSA has topped the list in terms of Overall Satisfaction among tractor manufacturers. NAEDA, which is the apex dealer association, conducted this survey amongst 1309 dealers of various equipment in 12 specific product categories, including tractors and sought dealer feedback on 36 different attributes of manufacturer – dealer interaction, including Overall Satisfaction Mahindra Australia
Mahindra Australia, based in Brisbane offers a complete range of 2WD and 4WD compact tractors (20-30 HP range) and utility tractor models (45-80 HP range) along with attachments like loaders, back-hoes and mowers. These attachments can also be put to multiple usages with excellent reliability and ease.
Mahindra China Tractor Company Ltd. (MCTCL)
Mahindra China Tractor Company Ltd. (MCTCL), a joint venture between the Jiangling Motors Company Group and Mahindra & Mahindra FES, started operations in July 2005. It is increasingly becoming a centre for Mahindra & Mahindra to further expand the product range and to develop more tractors for China and other overseas markets.
JV with Jiangsu Yueda Yancheng Tractor Manufacturing Co.
In 2008, Mahindra acquired the majority stake in 3rd largest tractor company in China, with forming a Joint Venture (JV) with Jiangsu Yueda Yancheng Tractor Manufacturing Co. Ltd. (Yancheng Tractor), a leading Chinese tractor manufacturer. Mahindra is to hold 51 per cent in the JV. This is the second tractor venture of Mahindra in China. Yancheng Tractor’s Huanghai Jinma brand is the no. 3 tractor brand in China (in terms of tractor volumes in 2007). FES has footprints in many countries in the world. Some of the major markets are in Africa (Major countries: Nigeria, Mali, Chaad, Gambia, Angola, Sudan, Ghana, Morocco), Latin America (Chile, Brazil), South Asian countries (Srilanka, Bangladesh, Nepal), Middle East (Iran, Syria etc) and East Europe (Serbia and Macedonia; FES has entered the Turkey market in 2008).
An Introduction To Working Capital Management
“A measure of both a company's efficiency and its short-term financial health is called Working Capital”
Concept of working capital:-
The word working capital is made of two words 1.Working and 2. CapitalThe word working means day to day operation of the business, whereas the word capital means monetary value of all assets of the business.Working capital : -Working capital may be regarded as the life blood of business. Working capital is of major importance to internal and external analysis because of its close relationship with the current day-to-day operations of a business. Every business needs funds for two purposes.
Long term funds are required to create production facilities through purchase of fixed assets such as plants, machineries, lands, buildings & etc
Short term funds are required for the purchase of raw materials, payment of wages, and other day-to-day expenses.
It is other wise known as revolving or circulating capitalIt is nothing but the difference between current assets and current liabilities. i.e.Working Capital = Current Asset – Current Liability.Businesses use capital for construction, renovation, furniture, software, equipment, or machinery. It is also commonly used to purchase inventory, or to make payroll. Capital is also used often by businesses to put a down payment down on a piece of commercial real estate. Working capital is essential for any business to succeed. It is becoming increasingly important to have access tomore working capital when we need it.
Concept of working capitalGross Working Capital = Total of Current AssetNet Working Capital = Excess of Current Asset over CurrentLiability.
Current Assets Current LiabilitiesCash in hand / at bank Bill Payable Bills Receivable Sundry CreditorsSundry Debtors Outstanding Expenses Short term loans Accrued Expenses Investors/ stock Bank OverdraftTemporary investmentPrepaid expensesAccrued incomes
Working capital in terms of five components:
1. Cash and equivalents: - A good cash budgeting and forecasting system provides answers to key questions such as: Is the cash level adequate to meet current expenses as they come due? What is the timing relationship between cash inflow and outflow? When will peak cash needs occur? When and how much bank borrowing will be needed to meet any cash shortfalls?
2. Accounts receivable: - Many businesses extend credit to their customers. If we do, is the amount of accounts receivable reasonable relative to sales? How rapidly are
receivables being collected? Which customers are slow to pay and what should be done about them?
3. Inventory: - Inventory is often as much as 50 percent of a firm's current assets, so naturally it requires continual scrutiny. Is the inventory level reasonable compared with sales and the nature ofour business? What's the rate of inventory turnover compared with other companies in our type of business?
4. Accounts payable: - Financing by suppliers is common in smallbusiness; it is one of the major sources of funds for entrepreneurs. Is the amount of money owed suppliers reasonable relative to what wepurchase? What is our firm's payment policy doing to enhance or detract from our credit rating?
5. Accrued expenses and taxes payable: - These are obligations of our company at any given time and represent a future outflow of cash.
Two different concepts of working capital are:-Balance sheet or Traditional conceptOperating cycle concept.
Balance sheet or Traditional concept:- It shows the position of the firm at certain point of time. It is calculated in the basis of balance sheet prepared at a specific date. In this method there are two type of working capital:-Gross working capitalNet working capital
Gross working capital:- It refers to the firm’s investment in current assets. The sum of the current assets is the working capital of the business. The sum of the current assets is a quantitative aspect of working capital. Which emphasizes more on quantity than its quality, but it fails to reveal the true financial position of the firm because every increase in current liabilities will decrease the gross working capital.
Net working capital:- It is the difference between current assets and current liabilities or the excess of total current assets over total current liabilities.
Working capital= current assets - current liabilities.Net working capital: - It is also can defined as that part of a firm’s current assets which is financed with long term funds. It may be either positive or negative.Operating cycle concept: - The duration or time required to complete the sequence of events right from purchase of raw material for cash to the realization of sales in cash is called the operating cycle or working capital cycle.
TYPES OF WORKING CAPITAL
SIGNIFICANCE OF WORKING CAPTAL
Importance of Working Capital Ratios:Ratio analysis can be used by financial executives to check upon the efficiency with which working capital is being used in the enterprise. The following are the important ratios to measure the efficiency of working capital. The following, easily calculated, ratios are important measures of working capital utilization:
Note:- Once ratios have been established for our business, it is important to track them over time and to compare them with ratios for other comparable businesses or industry sectors.
The working capital needs of a business are influenced by numerous factors. The important ones are discussed in brief as given below:
Nature of Enterprise:-The nature and the working capital requirements of an enterprise are interlinked. While a manufacturing industry has a long cycle of operation of the working capital, the same would be short in an enterprise involved in providing services. The amount required also varies as per the nature; an enterprise involved in production would require more working capital than a service sector enterprise.
Manufacturing/Production Policy:-Each enterprise in the manufacturing sector has its own production policy, some follow the policy of uniform production even if the demand varies from time to time, and others may follow the principle of 'demand-based production' in which production is based on the demand during that particular phase of time. Accordingly, the working capital requirements vary for both of them.
Working Capital Cycle :-In manufacturing concern, working capital cycle starts with the purchase of raw materials and ends with realization of cash from the sale of finished goods. The cycle involves the purchase of raw materials and ends with the realization of cash from the sale of finished products. The cycle involves purchase of raw materials and stores, its conversion in to stock of finished goods through work in progress with progressive increment
of labor and service cost, conversion of finished stick in to sales and receivables and ultimately realization of cash and this cycle continuous again from cash to purchase of raw materials and so on.
Operations:-The requirement of working capital fluctuates for seasonal business. The working capital needs of such businesses may increase considerably during the busy season and decrease during the slack season. Ice creams and cold drinks have a great demand during summers, while in winters the sales are negligible.
Market Condition:-If there is high competition in the chosen product category, then one shall need to offer sops like credit, immediate delivery of goods etc. for which the working capital requirement will be high. Otherwise, if there is no competition or less competition in the market then the working capital requirements will be low.
Credit Policy:-The credit policy is concerned in its dealings with debtors and creditors influence considerably the requirements of the working capital. A concern that purchases its requirements on credit and sells its products/services on cash requires lesser amount of working capital. On the other hand a concern buying its requirements for cash and allowing credit to its customers, shall need larger amount of funds are bound to be tied up in debtors or bills receivables.
Business Cycle:-Business Cycle refers to alternate expansion andcontraction in general business activities. In a period of born i.e. when the business is prosperous there is a need for larger amount of working capital due to increase in sales, rise in prices, optimistic expansion of business etc. On the country at he time of depression i.e. when there is a down swing of the cycle, business contracts, sales decline, difficulties are
faced in collections from debtors and firms may have a large amount of working capital lying ideal
Availability of Raw Material:-If raw material is readily available then one need not maintain a large stock of the same, thereby reducing the working capital investment in raw material stock. On the other hand, if raw material is not readily available then a large inventory/stock needs to be maintained, thereby calling for substantial investment in the same.
Growth and Expansion:-Growth and expansion in the volume ofbusiness results in enhancement of the working capital requirement. As business grows and expands, it needs a larger amount of working capital. Normally, the need for increased working capital funds precedes growth in business activities.
Earning Capacity and Dividend policy:-Some firms have more earning capacity than others due to the quality of their products, monopoly conditions etc. Such firms with high earning capacity may generate cash profits from operations and contribute to their capital. The dividend policy of a concern also influences the requirements of the working capital.
Price Level Changes:-Generally, rising price level requires a higher investment in the working capital. With increasing prices, the same level of current assets needs enhanced investment.
Manufacturing Cycle:-The manufacturing cycle starts with the purchase of raw material and is completed with the production of finished goods. If the manufacturing cycle involves a longer period, the need for working capital would be more.
Other Factors:-Certain other factors such as operating efficiency,management ability, irregularities a supply, import policy, asset structure, importance of labor, banking facilities etc. also influences the requirement of working capital.
Component of Working Capital Basis of Valuation:- Stock of raw material purchase cost of raw materials Stock of work in process at cost or market value, whichever is lower Stock of finished goods Cost of production Debtors Cost of sales or sales value Cash Working expenses
WORKING CAPITAL MANAGEMENT
Working Capital Management refers to management of current assets and current liabilities. The major thrust of course is on the management of current assets .This is understandable because current liabilities arise in the context of current assets. Working Capital Management is a significant fact of financial management. Its importance stems from two reasons:-Investment in current assets represents a substantial portion oftotal investment.Investment in current assets and the level of current liabilities have to be geared quickly to change in sales. To be sure, fixed asset investment and long term financing are
responsive to variation in sales. However, this relationship is not as close and direct as it is in the case of working capital components.
The importance of working capital management is effected in the fact that financial managers spend a great deal of time in managing current assets and current liabilities. Arranging short term financing, negotiating favorable credit terms, controlling the movement of cash, administering the accounts receivable, and monitoring the inventories consume a great deal of time of financial managers.The problem of working capital management is one of the “best” utilization of a scarce resource. Thus the job of efficient working capital management is a formidable one, since it depends upon several variables such as character of the business, the lengths ofthe merchandising cycle, rapidity of turnover, scale of operations, volume and terms of purchase & sales and seasonal and other variations.
CONSEQUENCES OF UNDER ASSESSMENT OF WORKING CAPITAL:
o Growth may be stunted. It may become difficult for the enterprise toundertake profitable projects due to non-availability of working capital.
o Implementation of operating plans may become difficult and consequently the profit goals may not be achieved.
o Cash crisis may emerge due to paucity of working funds.
o Optimum capacity utilization of fixed assets may not be achieved due to non availability of the working capital.
o The business may fail to honor its commitment in time, thereby adversely affecting its credibility. This situation may lead to business closure.
o The business may be compelled to buy raw materials on credit and sell finished goods on cash. In the process it may end up with increasing cost of purchases and reducing selling prices by offering discounts. Both these situations would affect profitability adversely.
o Non-availability of stocks due to non-availability of funds may result in production stoppage.
CONSEQUENCES OF OVER ASSESSMENT OF WORKING CAPITAL:
o Excess of working capital may result in unnecessary accumulation of inventories.
o It may lead to offer too liberal credit terms to buyers and very poorrecovery system and cash management.
o It may make management complacent leading to its inefficiency.
o Over-investment in working capital makes capital less productive and may reduce return on investment. Working capital is very essential for success of a business and, therefore, needs efficient management and control. Each of the components of the working capital needs proper management to optimize profit.
Financing Working CapitalWorking capital or current assets are those assets, which unlike fixed assets change their forms rapidly. Due to this nature, they need to be financed through short-term funds. Short-term funds are also called current liabilities. The following are the major sources of raising short-term funds:
I. Supplier’s CreditAt times, business gets raw material on credit from the suppliers. The cost of raw material is paid after some time, i.e. upon completion of the credit period. Thus, without having an outflow of cash the business is in a position to use raw material and continue the activities. The credit given by the suppliers of raw materials is for a short period and is considered current liabilities. These funds should be used for creating current assets like stock of raw material, work in process, finished goods, etc.
ii. Bank Loan for Working Capital
This is a major source for raising short-term funds. Banks extend loans to businesses to help them create necessary current assets so as to achieve the required business level. The loans are available for creating the following current Assets:Stock of Raw MaterialsStock of Work in ProcessStock of Finished GoodsDebtorsBanks give short-term loans against these assets, keeping some security margin. The advances given by banks against current assets are short-term in nature and banks have the right to ask for immediate repayment if they consider doing so. Thus bank loans for creation of current assets are also current liabilities.
iii. Promoter’s FundIt is advisable to finance a portion of current assets from the promoter’s funds. They are long-term funds and, therefore do not require immediate repayment. These funds increase the liquidity of the business.
Management of Inventory
Inventories constitute the most significant part of current assets of a large majority of companies in India. On an average, inventories are approximately 60 % of current assets in public limited companies in India. Because of the large size of inventories maintained by firms, a considerable amount of funds is required to be committed to them. It is, therefore very necessary to manage inventories efficiently and effectively in order to avoid unnecessary investments. A firm neglecting a firm the management of inventories will be jeopardizing its long run profitability and may fail ultimately. The purpose of inventory management is to ensure availability of materials in sufficient quantity as and when
required and also to minimize investment in inventories at considerable degrees, without any adverse effect on production and sales, by using simple inventory planning and control techniques.
Need to hold inventories:- Transaction motive emphasizes the need to maintain inventoriesto facilitate smooth production and sales operation. Precautionary motive necessities holding of inventories to guard against the risk of unpredictable changes in demand and supply forces and other factors.
Speculative motive influences the decision to increases or reduceinventory levels to take advantage of price fluctuations and also for saving in re-ordering costs and quantity discounts etc.
Objective of Inventory Management:-The main objectives of inventory management are operational and financial. The operational mean that means that the materials and spares should be available in sufficient quantity so that work is not disrupted for want of inventory. The financial objective means that investments in inventories should not remain ideal and minimum working capital should be locked in it. The following are theobjectives of inventory management:- To ensure continuous supply of materials, spares and finished goods. To avoid both over-stocking of inventory. To maintain investments in inventories at the optimum level as required by the operational and sale activities. To keep material cost under control so that they contribute in reducing cost of production and overall purchases.
To eliminate duplication in ordering or replenishing stocks. This is possible with the help of centralizing purchases.
To minimize losses through deterioration, pilferage, wastages anddamages. To design proper organization for inventory control so that management. Clear cut account ability should be fixed at various levels of the organization.
To ensure perpetual inventory control so that materials shown in stock ledgers should be actually lying in the stores.
To ensure right quality of goods at reasonable prices.
To facilitate furnishing of data for short-term and long term planning and control of inventory
Management of cash
Cash is the important current asset for the operation of the business. Cash is the basic input needed to keep the business running in the continuous basis, it is also the ultimate output expected to be realized by selling or product manufactured by the firm.The firm should keep sufficient cash neither more nor less. Cash shortage will disrupt the firm’s manufacturing operations while excessive cash will simply remain ideal 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 account. Sometimes near cash items such as marketing securities or bank term deposits are also included in cash. Generally when a firm has excess cash, it invests it is marketable securities. This kind of investment contributes some profit to the firm.
Management of Receivables
A sound managerial control requires proper management of liquid assets and inventory. These assets are a part of working capital of the business. An efficient use of financial resources is necessary to avoid financial distress. Receivables result from credit sales.A concern is required to allow credit sales in order to expand its sales volume. It is not always possible to sell goods on cash basis only. Sometimes other concern in that line might have established a practice of selling goods on credit basis. Under these circumstances, it is not possible to avoid credit sales without adversely affecting sales.
The increase in sales is also essential to increases profitability. After a certain level of sales the increase in sales will not proportionately increase production costs. The increase in sales will bring in more profits. Thus, receivables constitute a significant portion of current assets of a firm. But for investment in receivables, a firm has to insure certain costs. Further, there is a risk of bad debts also. It is therefore, very necessary to have a proper control and management of receivables.
Needs to hold cash:
Receivables management is the process of making decisions relating to investment in trade debtors. Certain investments in receivables are necessary to increase the sales and the profits of a firm. But at the same time investment in this asset involves cost consideration also. Further, there is always a risk of bad debts too. Thus, the objective of receivable management is to takea sound decision as regards investments in debtors. In the words of Bolton, S.E., the need of receivables management is “to promote sales and profits until that point is reached where the return of investment in further funding of receivables is less than the cost of funds raised to finance that additional credit.”
Working Capital Cycle
Cash flows in a cycle into, around and out of a business. It is the business's life blood and every manager's primary task is to help keep it flowing and to use the cash flow to generate profits. If a business is operating profitably, then it should, in theory, generate cash surpluses. If it doesn't generate surpluses, the business will eventually run out of cash and expire. The faster a business expands the more cash it will need for working capital and investment. The cheapest and bestsources of cash exist as working capital right within business. Good management of working capital will generate cash will help improve profits and reduce risks.There are two elements in the business cycle that absorb cash - Inventory (stocks and work-in-progress) and Receivables(debtors owing our money). The main sources of cash are Payables (our creditors) and Equity and Loans.
Each component of working capital (namely inventory, receivables and payables) has two dimensions ........TIME ......... and MONEY. When it comes to managing working capital - TIME IS MONEY. If we can get money to move faster around the cycle (e.g. collect monies due from debtors more quickly) or reduce the amount of money tied up (e.g. reduce inventory levels relative to sales), the business will generate more cash or it will need to borrow less money to fund working capital. As a consequence, we could reduce the cost of bank interest or we'll have additional free money available to support additional sales growth or investment. Similarly, if we can negotiate improved terms with suppliers e.g. get longer credit or an increased credit limit; we effectively create free finance to help fund future sales.
It can be tempting to pay cash, if available, for fixed assets e.g. computers, plant, vehicles etc. If we do pay cash, remember that this is now longer available for working capital. Therefore, if cash is tight, we should consider other ways of financing capital investment - loans, equity, leasing etc. Similarly, if we pay dividends or increase drawings, these are cash outflows and, like water flowing downs a plug hole, they remove liquidity from the business.
Sources of Additional Working Capital:-Existing cash reservesProfits (when we secure it as cash!)Payables (credit from suppliers)New equity or loans from shareholdersBank overdrafts or lines of creditLong-term loans
If we have insufficient working capital and we try to increase sales, we can easily over-stretch the financial resources of the business. This is called overtrading.Early warning signs include: Pressure on existing cash Exceptional cash generating activities e.g. offering high discounts for early cash payment Bank overdraft exceeds authorized limit Seeking greater overdrafts or lines of credit Part-paying suppliers or other creditors Paying bills in cash to secure additional supplies Management pre-occupation with surviving rather than managingFrequent short-term emergency requests to the bank (to help pay wages, pending receipt of a cheque).
Handling Receivables (Debtors)
Cash flow can be significantly enhanced if the amounts owing to a business are collected faster. Every business needs to know.... who owes them money.... how much is owed.... how long it is owing.... for what it is owed.
If we don't manage debtors, they will begin to manage our business as we will gradually lose control due to reduced cash flow and, of course, we could experience an increased incidence of bad debt.
The following measures will help manage our debtors:
1. Have the right mental attitude to the control of credit and make sure that it gets the priority it deserves.2. Establish clear credit practices as a matter of company policy.3. Make sure that these practices are clearly understood by staff, suppliers and customers.4. Be professional when accepting new accounts, and especially larger ones.5. Check out each customer thoroughly before we offer credit. Use credit agencies, bank references, industry sources etc.6. Establish credit limits for each customer... and stick to them.7. Continuously review these limits when we suspect tough times are coming or if operating in a volatile sector.8. Keep very close to our larger customers.9. Invoice promptly and clearly.10.Consider charging penalties on overdue accounts.11.Consider accepting credit /debit cards as a payment option.12. Monitor our debtor balances and ageing schedules, and don't let any debts get too large or too old.Recognize that the longer someone owes we, the greater the chance we will never get paid. If the average age of our debtors is getting longer, or is already very long, we may need to look for the following possible defects: weak credit judgment poor collection procedures lax enforcement of credit terms slow issue of invoices or statements
errors in invoices or statements Customer dissatisfaction.Debtors due over 90 days (unless within agreed credit terms) should generally demand immediate attention.
The act of collecting money is one which most people dislike for many reasons and therefore put on the long finger because they convince themselves there is something more urgent or important that demands their attention now. There is nothing more important than getting paid for our product or service. A customer who does not pay is not a customer.
Managing Payables (Creditors)Creditors are a vital part of effective cash management and should be managed carefully to enhance the cash position. Purchasing initiates cash outflows and an over-zealous purchasing function can create liquidity problems. Consider the following:
Who authorizes purchasing in our company - is it tightly managed orspread among a number of (junior) people? Are purchase quantities geared to demand forecasts? Do we use order quantities which take account of stock-holding andpurchasing costs? Do we know the cost to the company of carrying stock? Do we have alternative sources of supply? If not, get quotes from major suppliers and shop around for the best discounts, credit terms, and reduce dependence on a single supplier.
How many of our suppliers have a returns policy? Are we in a position to pass on cost increases quickly through priceincreases to our customers? If a supplier of goods or services lets we down can we charge back the cost of the delay? Can we arrange (with confidence!) to have delivery of supplies staggered or on a just-in-time basis?There is an old adage in business that if we can buy well then we can sell well. Management of our creditors and suppliers is just as important as the management of our debtors. It is important to look after our creditors – slow payment by we may create ill-feeling and can signal that our company is inefficient (or in trouble!).Remember, a good supplier is someone who will work with us to enhance the future viability and profitability of our company.
FINANCING OF WORKING CAPITAL
Permanent working capital should be financed in such a manner that the enterprise may have its uninterrupted use for a sufficiently long period. Important sources are:
1. Shares: Issue of shares is the most important source for raising the long term capital. Raising of permanent capital through the issue of shares has certain advantages like there is no fixed burden on the resources of the company and, moreover, no charge is created on the assets of the company.
2. Debentures: A debenture is an instrument issued by the company acknowledging its debt to its holder. Debentures carry a fixed rate of interest which is a legal charge against revenue of the company. The debentures are generally given floating charge on the assets of the company.
3. Public deposits:
Public deposits are the fixed deposits accepted by a business enterprise directly from the public. This source of raising finance became popular because of the imperfect development of banking system in the country. This mode of financing has a large number of advantages such as very simple and convenient source of finance, taxation benefits, trading on equity, and inexpensive source of finance.
4. Retained Earnings:
It refers to reinvestment by a concern of its surplus earnings in its business. It is an internal source of finance and it often referred to as self financing or ploughing back of profits. It is most suitable for an established firm for its expansion, modernization, replacement, etc. But excessive resort to ploughing back of profits may lead to monopolies, misuse of funds, over capitalization,.
5 . Loans from Financial institutions:
Financial institutions such as Commercial Banks, Life Insurance Corporation, State Financial Corporation of India, Industrial Development Bank of India, etc. also provide short term, medium term and long term loans.
ANALYSIS of financial statements of SEL :-
Balance Sheet of SEL:
Balance Sheet of Swaraj Engines
------------------- in Rs. Cr. -------------------
Mar '14 Mar '13 Mar '12 Mar '11 Mar '10
12 mths 12 mths 12 mths 12 mths 12 mths
Sources Of Funds
Total Share Capital 12.42 12.42 12.42 12.42 12.42
Equity Share Capital 12.42 12.42 12.42 12.42 12.42
Share Application Money 0.00 0.00 0.00 0.00 0.00
Preference Share Capital 0.00 0.00 0.00 0.00 0.00
Reserves 197.46 181.31 173.86 139.80 110.32
Revaluation Reserves 0.00 0.00 0.00 0.00 0.00
Networth 209.88 193.73 186.28 152.22 122.74
Secured Loans 0.00 0.00 0.00 0.00 0.00
Unsecured Loans 0.00 0.00 0.00 0.00 0.00
Total Debt 0.00 0.00 0.00 0.00 0.00
Total Liabilities 209.88 193.73 186.28 152.22 122.74
Mar '14 Mar '13 Mar '12 Mar '11 Mar '10
12 mths 12 mths 12 mths 12 mths 12 mths
Application Of Funds
Gross Block 152.38 141.03 96.04 77.63 71.93
Less: Accum. Depreciation 68.32 60.31 54.24 53.68 49.22
Net Block 84.06 80.72 41.80 23.95 22.71
Capital Work in Progress 1.73 2.46 13.46 2.47 0.95
Investments 72.19 74.15 81.12 57.79 57.72
Inventories 46.41 39.35 33.44 35.12 19.91
Sundry Debtors 7.85 9.25 11.91 8.06 4.05
Cash and Bank Balance 109.53 80.72 3.28 9.93 3.04
Total Current Assets 163.79 129.32 48.63 53.11 27.00
Loans and Advances 12.34 14.27 12.62 9.76 6.98
Fixed Deposits 0.00 0.00 66.41 66.27 53.34
Total CA, Loans & Advances 176.13 143.59 127.66 129.14 87.32
Current Liabilities 69.96 56.36 56.42 44.45 32.27
Provisions 54.28 50.82 21.35 16.67 13.71
Total CL & Provisions 124.24 107.18 77.77 61.12 45.98
Net Current Assets 51.89 36.41 49.89 68.02 41.34
Total Assets 209.87 193.74 186.27 152.23 122.72
PProfit & Loss account of Swaraj Engines
------------------- in Rs. Cr. -------------------
Mar '14
Mar '13 Mar '12 Mar '11 Mar '10
12 mths
12 mths 12 mths 12 mths 12 mths
Income
Sales Turnover 608.28 479.03 495.61 398.08 306.44
Excise Duty 0.00 0.00 47.03 37.45 24.00
Net Sales 608.28 479.03 448.58 360.63 282.44
Other Income 16.33 15.32 12.24 8.15 10.01
Stock Adjustments 3.43 2.65 -1.78 4.71 2.61
Total Income 628.04 497.00 459.04 373.49 295.06
Expenditure
Raw Materials 477.45 374.64 346.06 278.01 212.91
Power & Fuel Cost 5.02 3.78 3.32 2.50 2.34
Employee Cost 27.69 22.13 19.41 16.96 14.36
Other Manufacturing Expenses 0.00 0.00 2.90 1.88 1.67
Selling and Admin Expenses 0.00 0.00 3.98 4.34 3.34
Miscellaneous Expenses 10.90 9.65 1.75 0.94 0.87
Preoperative Exp Capitalised 0.00 0.00 0.00 0.00 0.00
Total Expenses 521.06 410.20 377.42 304.63 235.49
Mar '14 Mar '13 Mar '12 Mar '11 Mar '10
12 mths 12 mths 12 mths 12 mths 12 mths
Operating Profit 90.65 71.48 69.38 60.71 49.56
PBDIT 106.98 86.80 81.62 68.86 59.57
Interest 0.04 0.15 0.08 0.04 0.03
PBDT 106.94 86.65 81.54 68.82 59.54
Depreciation 9.12 7.16 4.26 4.46 4.84
Other Written Off 0.00 0.00 0.00 0.00 0.00
Profit Before Tax 97.82 79.49 77.28 64.36 54.70
Extra-ordinary items 0.00 0.00 0.00 0.00 0.00
PBT (Post Extra-ord Items) 97.82 79.49 77.28 64.36 54.70
Tax 30.81 24.10 24.45 20.44 17.36
Reported Net Profit 67.00 55.40 52.82 43.91 37.35
To comment upon the working capital management in SEL, the technique of Ratio Analysis is adopted after
closely analyzing the financial statements of the company.
The term "accounting ratios" is used to describe significant relationship between figures shown on a balance sheet, in a profit and loss account, in a budgetary control system or in any other part of accounting organization. Accounting ratios thus shows the relationship between accounting data.
Ratios simply means one number expressed in terms of another. A ratio is a statistical yardstick by means of which relationship between two or various figures can be compared or measured.
It may be expressed in the form of co-efficient, percentage, proportion, or rate.
Advantages of Ratios Analysis :
Ratio analysis is an important and age-old technique of financial analysis. The following are some of the advantages / Benefits of ratio analysis:
1. Simplifies financial statements: It simplifies the comprehension of financial statements. Ratios tell the whole story of changes in the financial condition of the business
2. Facilitates inter-firm comparison: It provides data for inter-firm comparison. Ratios highlight the factors associated with with successful and unsuccessful firm. They also reveal strong firms and weak firms, overvalued and undervalued firms.
3. Helps in planning: It helps in planning and forecasting. Ratios can assist management, in its basic functions of forecasting. Planning, co-ordination, control and communications.
4. Makes inter-firm comparison possible: Ratios analysis also makes possible comparison of the performance of different divisions of the firm. The ratios are helpful in deciding about their
efficiency or otherwise in the past and likely performance in the future.
5. Help in investment decisions: It helps in investment decisions in the case of investors and lending decisions in the case of bankers etc.
Limitations of Ratios Analysis :
The ratios analysis is one of the most powerful tools of financial management. Though ratios are simple to calculate and easy to understand, they suffer from serious limitations.
1. Limitations of financial statements: Ratios are based only on the information which has been recorded in the financial statements. Financial statements themselves are subject to several limitations. Thus ratios derived, there from, are also subject to those limitations. For example, non-financial changes though important for the business are not relevant by the financial statements. Financial statements are affected to a very great extent by accounting conventions and concepts. Personal judgment plays a great part in determining the figures for financial statements.
2. Comparative study required: Ratios are useful in judging the efficiency of the business only when they are compared with past results of the business. However, such a comparison only provide glimpse of the past performance and forecasts for future may not prove correct since several other factors like market conditions, management policies, etc. may affect the future operations.
3. Ratios alone are not adequate: Ratios are only indicators, they cannot be taken as final regarding good or bad financial position of the business. Other things have also to be seen.
4. Problems of price level changes: A change in price level can affect the validity of ratios calculated for different time periods. In such a case the ratio analysis may not clearly indicate the trends
5. Lack of adequate standard: No fixed standard can be laid down for ideal ratios. There are no well accepted standards or
rule of thumb for all ratios which can be accepted as norm. It renders interpretation of the ratios difficult.
6. Limited use of single ratios: A single ratio, usually, does not convey much of a sense. To make a better interpretation, a number of ratios have to be calculated which is likely to confuse the analyst than help him in making any good decision.
7. Personal bias: Ratios are only means of financial analysis and not an end in itself. Ratios have to interpreted and different people may interpret the same ratio in different way.
8. Incomparable: Not only industries differ in their nature, but also the firms of the similar business widely differ in their size and accounting procedures etc. It makes comparison of ratios difficult and misleading.
A financial ratio (or accounting ratio) is a relative magnitude of two selected numerical values taken from an enterprise's financial statements. Often used in accounting, there are many standard ratios used to try to evaluate the overall financial condition of a corporation or other organization. Financial ratios may be used by managers within a firm, by current and potential shareholders (owners) of a firm, and by a firm's creditors. Security analysts use financial ratios to compare the strengths and weaknesses in various companies. If shares in a company are traded in a financial market, the market price of the shares is used in certain financial ratios.
Financial ratio analysis groups the ratios into categories which tell us about different facets of a company's finances and operations. An overview of some of the categories of ratios is given below.
Leverage Ratios which show the extent that debt is used in a company's capital structure.
Liquidity Ratios which give a picture of a company's short term financial situation or solvency.
Operational Ratios which use turnover measures to show how efficient a company is in its operations and use of assets.
Profitability Ratios which use margin analysis and show the return on sales and capital employed.
Solvency Ratios which give a picture of a company's ability to generate cash flow and pay it financial obligations.
The following ratios have been calculated for the analysis of Working Capital of SEL:
Current Ratio:
The current ratio is an indicator of a firm’s short term solvency. A firm, to survive on a continuing basis, should maintain sufficient liquidity. As a rule of thumb, 2:1 is considered to be an ideal current ratio. The idea of having double the current assets as to current liabilities is to provide a cushion against possible losses and to ensure a smooth day to day functioning of the firm. There is, however, nothing very sacrosanct about the 2:1 ratio. What is more important is the quality of current assets, how fast and to what extent can they be converted into cash.
5 Yearly Trend of Current Ratio of SEL (In Cr.)
Year Current Assets Current Liabilities
Current Ratio
2010 87.34 45.98 1.902011 129.13 61.12 2.112012 127.67 77.77 1.642013 143.58 107.18 1.342014 176.13 124.24 1.42
A relatively high current ratio is an indication that the firm is liquid and has the ability to pay its current obligations in time and when they become due. On the other hand, a low current ratio represents that the liquidity position of the firm is not good and the firm shall not be able to pay its current liabilities in time. The above table indicates that there are also fluctuations in the current ratio of SEL.
In FY 2010 it was 1.90:1 times then increases to 2.11:1 times in FY 2011 and then further decreases to 1.42:1 times in FY 2014. The reason of increment in the current ratio because decrease in current liabilities and increase in current assets in the FY 2011.
2010 2011 2012 2013 20140
20
40
60
80
100
120
140
160
180
200
Current AssetsCurrent Liabilities
Liquid ratio:
Liquid ratio is also termed as "Liquidity Ratio", "Acid Test Ratio" or "Quick Ratio". It is the ratio of liquid assets to current liabilities. The true liquidity refers to the ability of a firm to pay its short term obligations as and when they become due.Liquid Assets are current assets minus inventories (stock) and prepaid expenses.
Liquid Ratio = Liquid Assets / Current LiabilitiesLiquid Assets=Current Assets-Inventories-Prepaid ExpensesYear Liquid assets Current
LiabilitiesLiquid Ratio
2010 67.43 45.98 1.452011 94.01 61.12 1.522012 94.23 77.77 1.202013 104.23 107.18 0.972014 129.72 124.24 1.04
The quick ratio/acid test ratio is very useful in measuring the liquidity position of a firm. It measures the firm's capacity to pay off current obligations immediately and is more rigorous test of liquidity than the current ratio. It is used as a complementary ratio to the current ratio. Liquid ratio is more rigorous test of liquidity than the current ratio because it eliminates inventories and prepaid expenses as a part of current assets. Usually a high liquid ratios an indication that the firm is liquid and has the ability to meet its current or liquid liabilities in time and on the other hand a low liquidity ratio represents that the firm's liquidity position is not good. As a convention, generally, a quick ratio of "one to one" (1:1) is considered to be satisfactory.
The Quick Ratio in FY 2010 is 1.45:1 which then increases to 1.52:1 in the FY 2011 and then again decreases to 1.04:1 in 2014.Ratio of 1:1 is considered satisfactory ratio and it is equal to or higher than 1:1 in
almost all the five years which shows that the company is in a good condition to pay off its liabilities.
2010 2011 2012 2013 20140
20
40
60
80
100
120
140
Liquid AssetsCurrent Liabilities
Debtors/Receivables Turnover Ratio:
Debtor’s turnover ratio indicates the velocity of debt collection of firm.
In simple words, it indicates the number of times the average debtors
are turned over during a year.
Debtors Turnover Ratio = Net Credit Sales Accounts Recievable/Debtors
5 Yearly Trend of Debtor Turnover Ratio of SEL: (Amount in Cr.)
Year Net Credit Sales
Debtors D.T.R
2010 - 4.05 60.922011 - 8.06 59.572012 - 11.91 44.932013 - 9.25 45.272014 - 7.85 71.15
Accounts receivable turnover ratio or debtors turnover ratio indicates the number of times the debtors are turned over a year. The higher the value of debtors turnover the more efficient is the management of debtors or more liquid the debtors are. Similarly, low debtors turnover ratio implies inefficient management of debtors or less liquid debtors. It is the reliable measure of the time of cash flow from credit sales. There is no rule of thumb which may be used as a norm to interpret the ratio as it may be different from firm to firm.
As said above the higher the DTR the better it is, DTR has increased in FY 2014 and is more than satisfactory in last 5 years. In FY 2014 the debtors reduced to 7.85 crores so there was a sudden jump in the DTR i.e. to 71.15 times.
2010 2011 2012 2013 20140
2
4
6
8
10
12
14
SalesDebtors
Working capital turnover RatioThe amount of working capital is sometimes used as a measure of a firm’s liquidity. Working capital turnover analysis is used to measure the efficiency with which the firms are using their working capital. For this purpose, working capital turnover ratio, which indicates the velocity of the utilization of net working capital, is worked out. A higher ratio indicates efficient utilization of working capital. In the following lines a comparative statement of working capital turnover ratio of SEL is produced.Net Working Capital of SEL (In Crores) Year Current Assets Current
LiabilitiesNet Working Capital
2010 87.34 45.98 41.362011 129.13 61.12 68.01
2012 127.67 77.77 49.92013 143.58 107.18 36.42014 176.13 124.24 51.89
2010 2011 2012 2013 20140
10
20
30
40
50
60
70
80
Net Working Capital
Net Working Capital
Working Capital turnover ratio of SEL
(Amount in Crores) (Amount in lacs)Year Sales Net W.C W.C Turnover
Ratio2010 306.44 41.36 7.40
2011 398.08 68.01 5.852012 495.61 49.9 9.932013 479.03 36.4 13.162014 608.28 51.89 11.72
The working capital turnover ratio measure the efficiency with which the working capital is being used by a firm. A high ratio indicates efficient utilization of working capital and a low ratio indicates otherwise. But a very high working capital turnover ratio may also mean lack of sufficient working capital which is not a good situation.
The Working Capital Ratio in FY 2010 was 7.40 times then it decreased to 5.85 times which is not a good sign, it shows that the working Capital is not being utilized efficiently. In FY 2014 the WC Turnover Ratio increased to 11.72 times which shows improved WC turnover Ratio.
Working capital Turnover Ratio:
2010 2011 2012 2013 20140
2
4
6
8
10
12
14
Working Capital Turnover Ratio
Working Capital Turnover Ratio
Inventory Turnover Analysis:
Every firm has to maintain a certain level of inventory of finished products so as to be able to meet the requirements of the business and ensure an uninterrupted production. This analysis is done by calculating inventory turnover ratio. Inventory turnover ratio which is calculated by dividing sales by average inventory indicates the number of times the stock has been turned over during the year. It also evaluates the efficiency with which a firm is able to manage its inventory. A lower inventory turnover is an indicator of higher efficiency in managing the inventory.
Inventory Turnover of SEL in 5 years
Particulars 2010 2011 2012 2013 2014
Sales (in crores)
306.44 398.08 495.61 479.03 608.28
Average Inventory (in Crores)
19.91 35.12 33.44 39.45 46.41
Inventory Turnover Ratio
15.40 12.37 16.17 12.17 13.11
Equity Ratio: This ratio throws light on the general financial strength of the company. It is also regarded as a test of the soundness of the capital structure. Higher the ratio or the share of shareholders in the total capital of the company, better is the long-term solvency position of the company. A low equity ratio will include greater risk to the creditors.
Equity Ratio = Shareholders Fund *100 ______________________________________________ Total Assets (Fixed assets+Current assets+Investments)
(Rs. In Crores)
Year Shareholder’s
Fund
Total Assets Equity Ratio
2010 - - -
2011 152.22 212.01 71.80
2012 186.28 263.37 70.73
2013 193.73 300.91 64.39
2014 209.88 334.11 62.82
The equity ratio is a financial ratio indicating the relative proportion of equity used to finance a company's assets. Higher the Equity Ratio, better it is. High ratio means that the creditors hav a low risk of their money with the company. In the case of SEL the Equity ratio is satisfactory.
2011 2012 2013 20140
50
100
150
200
250
300
350
400
Shareholder's FundTotal assets
2011 2012 2013 201458
60
62
64
66
68
70
72
74
Equity Ratio
Equity Ratio
Solvency Ratio:
The solvency ratio measures the size of a company's after-tax income, excluding non-cash depreciation expenses, as compared to the firm's total debt obligations. It provides a measurement of how likely a company will be to continue meeting its debt obligations.
Solvency Ratio=100-Equity Ratio
Year Solvency Ratio
2010 - -
2011 100-71.80 28.20%
2012 100-70.73 29.27%
2013 100-64.39 35.61%
2014 100-62.82 37.18%
Acceptable solvency ratios will vary from industry to industry, but as a general rule of thumb, a solvency ratio of greater than 20% is considered financially healthy. Generally speaking, the lower a company's solvency ratio, the greater the probability that the company will default on its debt obligations.
So in this case the solvency ratio is satisfactory.
CONCLUSIONS
On the basis of financial performance of Swaraj Engines Limited made
in the previous chapters, following conclusions are drawn:
General Profile: The plant of SEL is ideally located in the Mohali
Focal Point Estate near Chandigarh, the capital of Punjab, on a
campus of 17 hectares. The working environment of the company is
very healthy. The visitors feel happy after the campus.
Indigenous Technology: SEL is the only tractor manufacturing
company based on purely indigenous technology. Swaraj was
appropriately chosen as the brand name as self-reliance and building
up of Indian Engineering capabilities remain the guiding spirit of SEL.
Financial structure: SEL is a low debt company signifying its
dependence mainly on its internal accruals for its financial
requirements. SEL continues to strengthen its financial position by
channelising these internal accruals to fund its expansion
programmes.
Cash Rich Company: SEL is a cash rich company as it sells its
product (tractors) on cash or advance payments. As a result, there are
almost nil outstanding on its sales.
Working results: SEL has registered a handsome and constant
growth in its profits because of a brisk demand for Swaraj Tractors.
None of the other three players has shown such a steady growth.
SEL has recorded the lowest current ratio. However, with this lowest
current ratio, SEL still enjoys minimum payment period and highest
velocity of creditors and debtors.
Marketing Performance: SEL is ranked at number three as far as its
marketing performance is concerned, SEL has recorded the highest
growth in 35 HP segment. While its competitors are meeting
competition by stepping into the higher HP segment, SEL has decided
to expand capacities in all segments.
Social Performance: SEL’s contribution towards industry and
research and technology has received national recognition. However,
it has not sponsored any programme or established any educational
or medical institution for the general public or its employees. No
housing facility is provided to the employees. Though SEL has not
done much for the welfare of the general public, but still the farmers
have a craze for Swaraj tractors mainly due to its promising quality
and reasonable price. SEL has become a rich bonanza for its
investors, as it pays the highest amount of dividend to its
shareholders.
SEL is far ahead of its competitors as regards on capital-employed
returns on equity capital. This fact removes illusions of the general
public about the preference of public sector companies. Excellent
financial performance exhibited by SEL is the result of an efficient and
responsible management that establishes the fact that performance of
a company depends on the caliber of its managers and not on the
nature of sector to which belongs.
RECOMMENDATIONS
1. SEL should increase its capacity utilization. It should work at full
capacity to minimize its cost of production. With this increase in
capacity utilization, the total cost will spread over more units
thereby decreasing the per unit cost.
2. SEL should increase the credit facilities provided to its consumers.
Earlier, it was selling its main product i.e. tractor either against
advance payments or cash payments. In the wake of neck-to-neck
competition due to emergence of new players in the industry, it has
changed this policy to maintain and improve its market share. It
should extend more credit facilities to attract more and more
buyers.
3. SEL must move into higher HP segment to capture more market.
SEL’s highest share is in the 35 HP segment (Approximately 19%)
Its contribution to higher HP segment is almost negligible, because
of which it cannot export its tractors to Africa and Middle East,
where there is demand for 70 HP tractors. It is therefore, suggested
that in order to be competitive in the international market also, SEL
should reset to manufacturing after cutting out many of the frills in
its lower HP tractors.
4. SEL should make efforts to capture emerging markets in South.
Swaraj Tractors are no doubt, very popular with the farmers of the
Northern market (Punjab, Haryana and U.P.) but with the
plateauing of sales in these markets, there is strong need for
zeroing in on the central and southern markets.
5. SEL should undertake such activities that can add value to Society.
SEL, as a good corporate citizen, should sponsor programmes
related to environment protection, rural enlistment and welfare or
general public. It should spend a crunch of its profits on the social
activities that will further improve its image in the society.
BIBLIOGRAPHY
1) Khan & Jain, Financial Management
2) Annual Reports of Swaraj Engines Limited
3) Internet Websites
4) Shashi K Gupta & Sharma R.K. “Financial Management”.
5) Jain & Narang “Financial Management”
6) Pandey I.M. “Financial Management”
Websites: www.swarajenterprise.com www.mahindra.com www.google.co.in www.moneycontrol.com
