A

PROJECT REPORTON

“ W ORKING C APITAL M ANAGEMENT"

DEVELOPED BY,MISS. UPADHYE PRIYANKA VINAYAK

FROMMAHINDRA SONA LTD.

SUBMITTED IN THE FULFILMENTOF THE

M. B. A. (FINANCE),

TO

UNIVERSITY OF PUNE(2008-2009)

P. D. V. V. P. FOUNDATION’SINSTITUTE OF BUSINESS MANAGEMENT

AND RURAL DEVELOPMENT, AHEMADNAGAR

1

DECLAIRATION:

I hereby declare that, all the information in this project report is

based on my own fact-findings and experienced at “Mahindra Sona

Limited.”

And the result embodies in this project report not been submitted

to any other university or institute for the award of degree or diploma.

IBMRD, AHEMADNAGAR.

Date:

Miss. Upadhye Priyanka V.

Place:

2

ACKNOWLEDGEMENT:

To begin with, I am extremely grateful to the Mahindra Sona

Limited, Nashik for having accepted me as summer trainee and thus

making it possible for we have wonderful work experience.

I most indebted to my guide at ‘Mahindra Sona Limited, Nashik’,

Mr. D. N. Mahale (Personnel Manager) and Mr. Shirish Kale (Finance

Executive) under whose constant supervision and valuable guidance the

project was tethered his cheerful countenance and approachability

delicately enamored productivity of work place.

I also extend my gratitude to whole staff of ‘Mahindra Sona

Limited,’ for giving their valuable support and guidance in completion

of project.

I sincerely thanks to my project guide Prof. Dr. M. P. Sharma

(Faculty, Institute of Business Management and Rural Development,

Ahemadnagar.), for his unfailing and valuable guidance from time to

time.

3

OBJECT OF THE PROJECT:

For the partial fulfillment of the MBA course a student is

supposed to undergo training in an organization for 50, days which is

mandatory by PUNE UNIVERSITY. While working with the

organization, one has to undertake a small study on the field of work

and subject allotted by the firm. Based on this study one has to submit a

report to the organization, University and College.

Summer project work exposes the real-time corporate

environment to a student to experience the current .And facilitates

student to experience the scenario .The project helps in giving an insight

in the field of FINANCE. To acquire knowledge and information of

financial aspects of the organization, the topic given by the organization

was “working capital management”.

4

OBJECTIVE OF THE PROJECT

TO CALCULATE THE RATIOS IN RELATION TO WORKING

CAPITAL AND ITS TREND ANALYSIS.

TO FORECAST THE WORKING CAPITAL REQUIREMENT OF

THE YEAR 2008-2009.

5

METHODOLOGY OF THE STUDY

RESEARCH

Research is a careful inquiry or examination to discover new information or relationships and to expand and verify existing knowledge.

The various sources of information can be broadly classified in two categories namely primary and secondary.

PRIMARY DATA COLLECTION:The information and data collected is though\rough formal and informal discussion with the officers of accounts department.

SECONDARY DATA COLLECTION:During the training period, data was collected from financial reports. For analyzing working capital management, certain books were also referred.

6

INDEX:

7

CONTENT PAGE NO.

1. COMPANY PROFILE:i. INTRODUCTIONii. HISTORYiii. PRODUCTS AND APPLICATIONSiv. MILEESTONESv. ORGANIZATIONAL CHARTvi. PLANT LAYOUT

9-17

2. PROJECT ON WORKING CAPITAL:i. WORKING CAPITAL POLICYii. TYPES OF WORKING CAPITALiii. NEED FOR WORKING CAPITALiv. CHARACTERISTICS OF CURRENT

ASSETSv. CURRENT ASSETS CYCLEvi. FACTORS INFLUENCING WORKING

CAPITAL vii. CURRENT ASSET FINANCING POLICY

18-33

3. OPERATING CYCLE AND CASH CYCLE:i. OPERATING CYCLE ANALYSISii. DURATION OF LIFE CYCLEiii. MATCHING OR HEDGING APPROACHiv. CONSERVATIVE APPROACHv. AGGRESSIVE APPROACHvi. RATIO ANALYSIS

34-46

4. WORKING CAPITAL FINANCING:i. INTRODUCTIONii. TYPES OF FINANCING WORKING

CAPITAL iii. SOURCES OF FINANCING WORKING

CAPITALiv. REGULATION OF BANK FINANCEv. OTHER FORMS OF FINANCING

47-52

5. DATA ANALYSIS AND INTERPRETATION:i. BALANCE SHEET DATAii. BALANCE SHEET OF MSLiii. CURRENT ASSETSiv. CURRENT LIABILITIES

53-62

8

v. CHANGES IN WORKING CAPITALvi. FINANCIAL REPORTvii. PROFIT AND LOSS ACCOUNT

6. RATIO ANALYSIS:i. CURRENT RATIOii. LIQUID RATIOiii. ABSOLUTE LIQUID RATIOiv. CURRENT ASSET TURN-OVER RATIOv. WORKING CAPITAL TURN-OVER

RATIOvi. INVENTORY TURN-OVER RATIOvii. GROSS PRIFIT RATIOviii. NET PROFIT RATIOix. DEBTORS TURN-OVER RATIOx. INVESTMENT IN RECEIVABLESxi. OPERATING CYCLExii. GROSS OPERATING CYCLExiii. NET OPERATING CYCLExiv. CREDITORS TURN OVER RATIOxv. DEBT-EQUITY RATIO

63-78

7. CONCLUSION 79

8. RECOMMENDATIONS 80

9

COMPANY PROFILE

i. INTRODUCTIONii. HISTORYiii. PRODUCTS AND APPLICATIONSiv. MILESTONESv. ORGANIZATIONAL CHARTvi. PLANT LAYOUT

10

COMPANY PROFILE:

‘Mahindra Sona Limited’ was formed in collaboration with Dana

Corporation of USA, over two decades ago through access to

international technology and has since emerged as a leading

independent manufacturer of Automotive Components which include

Propeller Shafts/ Carden Shafts, UJ Components and automotive

Clutches. Progressively, ‘Mahindra Sona Limited’ has expanded its

product range to meet demands of various Automotive Manufacturers.

The facilities contain more than 9300 sq. meters of manufacturing space

strategically located in western India providing easy accessibility to

various vehicle manufacturers and provide ample scope for future

expansion to almost five times the current size. ‘Mahindra Sona

Limited’ has a strong team of 380 motivated employees, of which, 50

are qualified engineers and professionals.

HISTORY: The Company has long history, which dates back to the

year 1885 when M/s Turner Hoare and company started its activity in

imports and exports of traditional Indian consumer goods.

In 1968, M/s Turner Hoare and company took over another Company,

M/s East Atlantic Company and realistic market potential entered into

execution of engineering projects like Hydro pneumatic ash handling

system, mechanical cleaning like vibroscreen, traveling water screens

and bagged Import Substitution award twice. In 1977, with equity

participation of Dana Corporation, USA, the company went into

technical collaboration to manufacturer automotive components like

11

Propeller Shaft, Axle Shafts, Universal Joint Kits, and Automotive

Clutches.

The Nashik plant commenced production in 1979, following a

technical and financial joint venture between Mahindra and Mahindra

Limited and Dana Corporation, USA, Named Mahindra Spicer limited.

In 1984, Mahindra Spicer Limited merged with its parent company,

Mahindra and Mahindra Limited and became MSL division of the

parent company. In March 1995, Mahindra and Mahindra Limited and

Sona Koyo Steering Systems Pvt. Ltd. formed a new company

‘MAHINDRA SONA LIMITED’ to take over the automotive

components business of MSL division of Mahindra and Mahindra

Limited.

The company is engaged in designing and manufacturing a wide range

of auto- ancillary products such as Propeller Shaft, Axle Shafts,

Universal Joint Kits, Automotive Clutches, Steering Joints, Steering

Column Parts, and Clutches. The company is original equipment

supplier to almost all vehicle manufacturers of India and scatters to the

spare parts market through a wide distribution network. The company

also supplies to vehicle manufacturers.

The company has been certified for ISO-9001 in 1995 and

QS-9000 in 1999. The company firmly believes that the high standards

of quality can only be achieved through strong systems and the support

of its people.

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‘Mahindra Sona limited’ manufactures the automotive components for

automotive applications like Passenger cars, Multi-utility vehicles,

Sports utility vehicles, Light Commercial vehicles, Medium

Commercial vehicles, and Heavy Commercial vehicles.

MSL Drive Shafts also cater to wide Industrial Applications like Earth

Moving Equipments, Engine Dynamometer Testing and Radiator Fan

Drives for Railways, Steel Rolling Mills, and Printing Machineries etc.

MSL’s other products include Steering Universal Joints for automotive

applications like Passenger cars, Multi-utility vehicles, Sports utility

vehicles, Light Commercial vehicles, Medium Commercial vehicles,

and Heavy Commercial vehicles.

MSL also manufactures Spindle and Sleeves of Steering Column

intermediate Shafts for the following categories;

o Multi-Utility Vehicles/ Sports Utility Vehicles

o Light Commercial Vehicles

o Medium Commercial Vehicles

o Heavy Commercial Vehicles

Recent addition in ‘Mahindra Sona Limited’ product range is Rubber

Coupling for steering applications for Multi-utility vehicles, Sports

Utility vehicles, and Earth Moving Equipments.

The other product line of ‘Mahindra Sona Limited’ is for the

automotive clutches. This includes the world’s largest Diaphragm type

(DST as well as Ring type) and the conventional lever type for

Passenger cars, Multi-utility vehicles, Sports utility vehicles, Light

13

Commercial vehicles, Medium Commercial vehicles, and Heavy

Commercial vehicles.

PRODUCTS AND APPLICATIONS:

PRODUCTS:

o Propeller Shafts

o Universal Joints

o Steering Joints

o Clutch

1. PROPRLLER SHAFTS:

Applications:

o Heavy Duty Vehicles

o Light Commercial Vehicles

o Passenger Cars

o Three Wheelers

o Earth Moving Equipments

o Constructing Machinery

2. AXLES:

Applications;

o Multi Utility Vehicles

3. CLUTCHES:

Applications;

o Multi Utility Vehicles

o Passenger Cars

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MILESTONES:

1. 1968: Collaboration agreement between Mahindra group and Dana

Corporation, US for manufacturing the clutches

2. 1976: Formation of a joint venture company Mahindra Spicer Ltd.

3. 1979: Inauguration of Nashik work.

4. 1984: Merging of Mahindra Spicer Ltd with Mahindra and Mahindra

Ltd, the division of Mahindra and Mahindra Ltd.

5. 1986: Dana Collaboration ends.

6. 1989: Modernization plan, redesigning of entire clutch range.

7. 1994: Formation of Mahindra Sona Ltd. restructure of Mahindra AND

MAHINDAR MSL Division as Mahindra Sona Ltd.

8. 1995: ISO-9001 certification by TUV-CERT, Germany.

9. 1999: QS-9000 certification by TUV-CERT, Germany.

15

10. 1999: Exports to USA begins.

16

BOARD OF DIRECTORS

Mr. J. V. PrabhuManaging Director

Mr. B. S. PatwardhanManagement

Representative

Mr. J. S. Chaudhary

Sr. Vice President(Marketing)

Mr. U. D. PhatakVice President

(A & F)Company Secretary

Mr. S. R. KundajeGeneral Manager(Technical Series)

Mr. R. V. Vadhavkar

General Manager(Materials)

Marketing (OEM after Marketing

Customers)Branch Offices, New Business Opportunities,

Customer Satisfaction,

Publicity, Brand Management

A/C, Finance, Costing, MIS

Production- Universal

Joints, Clutch, Tool

Room, Maintenance

and Shop Scheduling

Product engineering, UJ

and Clutch process, Product Testing, R and D, CAD, QA, Quality

System, CIP, Industries

Engineering, Capital

Expenditure, Info systems, HR,

Administration

Purchase, SOA, Suppliers, QS Development,

Customer Schedule Liaison,

Material Scheduling, OSP Schedule, Plant Job Ordering,

Packing, Dispatch, Sales

Administration, RM Stores,

Material Documentation.

17

18

Finance Department

Mr. A. D. KaleD. G. M.

Accounting and

Finance

Mr. R. M. Sawai

D. G. M.Costing and

MIS

Cash and Bank

Purchase Receivables

Purchase and Sales Exports Sales

Accounts

Sales and accounts costing

activities

INTRODUCTION:

The topic was provided by the project guide in the organization. The

organization wanted to know how efficiently the working capital management

is working. The various ratios relating to the working capital shows the

efficient management of current asset and current liabilities is done.

OBJECTIVE OF PROJECT:

19

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PLANT LAYOUT

Main object is to match theoretical aspect with practical experience. The

project forms a vital element in the curriculum of M.B.A. Under M.B.A.

curriculum, University of Pune each student has to carry out the project in an

organization and submit the project in the University.

During the past decade there has been a burst in each and every business in

India. Competition has increased considerable within this decade. This has

forced the organization to reduce the cost rather than increasing its market

price for its product. Cost reduction can be achieved by various method like,

proper inventory management, managing debtors and creditors and other

current assets and liabilities, value engineering etc. To achieve all the things

effective and efficient working of capital is necessary.

20

WORKING CAPITAL POLICY

i. WORKING CAPITAL POLICYii. TYPES OF WORKING CAPITALiii. NEED FOR WORKING CAPITALiv. CHARACTERISTICS OF CURRENT ASSETSv. CURRENT ASSETS CYCLEvi. FACTORS INFLUENCING WORKING CAPITALvii. CURRENT ASSET FINANCING POLICYviii. THEORY OF RATIO ANALYSIS

PROJECT ON WORKING CAPITAL

WORKING CAPITAL POLICY:

Working capital management provides a summarized view of the

position of the current assets and current liabilities and how to manage

them and have an efficient and effective and optimum working capital.

For day to day working of the concern is known as working capital and

to fulfill this need, working capital management is necessary.

This introduces working capital management or short term

financial management which is concerned with decisions relating to

current assets and current liabilities.

The key difference between long term financial management and

working capital management is in terms of the timing of cash. While

long term financial decisions like buying capital equipment or issuing

debentures involve cash flows over an extended period of time( 5 to 15

years or even more), short term financial decisions typically involves

cash flows within a year or within the operating cycle of the firm.

There are two concepts of working capital: gross working capital

and net working capital. Gross working capital is the total of all current

assets. Net working capital is difference between current assets and

current liabilities. Management of working capital refers to the

management of current assets as well as current liabilities. The major

thrust, of course, is on the management of current assets. This is

21

understandable because current liabilities arise in the context of current

assets.

Working capital management is a significant facet of financial

management. Its importance stems from two reasons;

An investment in current assets represents a substantial portion of the

total 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 also responsive to variation in

sales. However, this relationship is not as close and direct as it is in the

working capital components.

The importance of working capital management is reflected 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 accounts receivable, and investing short term surplus

funds consume a great deal of time of financial managers.

TYPES OF WORKING CAPITAL:

There are two types of working capital:

o Fixed working capital

o Variable working capital

22

o Fixed working capital :

To carry on business a certain minimum level of working capital is

necessary on a continuous and uninterrupted basis and for all practical

purpose this requirement will have to be met with long term sources.

This requirement is referred to as permanent or fixed working capital.

o Variable working capital :

Any amount over and above the permanent level of working capital is

known as temporary, fluctuating or variable working capital. This

portion of the working capital is needed to meet fluctuations in demand

consequent upon changes in production as a result of seasonal changes.

23

KINDS OF WORKING CAPITAL

ON THE BASIS OF CONCEPT

ON THEBASIS OF

TIME

GROSS WORKINGCAPITAL

NET WORKING CAPITAL

FIXED WORKING CAPITAL

VARIABLE WORKING CAPITAL

REGULAR WORKING CAPITAL

RESERVE WORKING CAPITAL

SEASONAL WORKING

CAPITAL

SPECIAL WORKING CAPITAL

24

NEED FOR WORKING CAPITAL:

The objective of financial decision making to maximize the

shareholder’s wealth, it is necessary to generate sufficient profit. The

extent to which profits can be earned will naturally depend upon sales.

However, sales can not be easily converted into cash. Therefore, a need

for working capital in the form of current assets to deal with the

problem arising out the lack of immediate realization of cash again good

sold.

Of technically, this is referred to as the operating or cash cycle. This

cycle consists three phases;

PHASE 1-

Conversion of cash into inventory i.e. purchase of raw material,

conversion of raw material, conversion of raw material into work-in-

progress and finished goods.

PHASE 2-

Conversion of inventory in to receivables i.e. allowing customers credit

sales.

PHASE 3-

Conversion of receivables into cash i.e. receivables are collected.

25

Working capital policy is divided into seven sections;

Characteristics of current assets: There are mainly two characteristics

of current assets;

o Short life span and

o Swift transformation into other asset forms.

Factors influencing working capital requirements: The working

capital needs of a firm are influenced by numerous factors. The

important ones are;

o Nature of business

o Seasonality of operations

o Production policy

o Market conditions

o Condition of supply

Level of current assets: An important working capital policy decision

is concerned with the level of investment in current assets. Under the

flexible policy (also referred to as a ‘conservative policy’), the

investment in current assets is high. This means that the firm maintains

a huge balance of cash and marketable securities, carries large amount

of inventories, and grants generous terms of credit to customers which

leads to a high level of debtors. Under a restrictive policy (also referred

to as an ‘aggressive policy’), the investment in current assets is low.

This means a firm keeps a small balance of cash and marketable

securities, manages with small amount of inventories, and offers stiff

terms of credit which leads to low level of debtors.

26

Current assets financing policy: The investment in current assets may

be broken into two parts: Permanent Current Assets and Temporary

Current Assets. The former represents what the firm requires even at the

bottom of its

Cycle; the latter reflects the variable component that moves in line with

seasonal fluctuations.

Profit criterion for current assets: Current assets can be easily

liquidated and the value realized on liquidation would be more or less

equal to the amount invested initially. Put differently, investment in

current assets is reversible. For reversible investments, the criterion for

net profit per period (which here means residual income) is equivalent

to the criterion of net present value.

Operating cycle analysis: The investment in working capital is

influenced by four keys events in the production and sales cycle of the

firm:

o Purchase of raw materials

o Payment for raw materials

o Sale of finished goods

o Collection if cash for sales

Cash requirement for working capital: A financial manager is always

interested in figuring out how much cash he/she should be arrange to

27

meet the working capital needs of his/her firm. There is a two step

procedure for this:

o Estimate the cash cost of various current assets required by firm.

o Deduct the spontaneous current liabilities from the cash cost of

current assets.

A. CONSTITUENTS OF CURRENT ASSETS:

Inventories

o Raw materials and components

o Work-in-progress

o Finished goods

o Others

Trade debtors

Loans and advances

Cash and bank balances

B. CONSTITUENTS OF CURRENT LIABILITIES:

Sundry creditors

Trade advances

Borrowings (short-term)

o Commercial banks

o Others

Provisions

28

CHARACTORISTICS OF CURRENT ASSETS:

While managing working capital, bear in mind two

characteristics of current assets;

i) Short life span

ii) Swift transformation into other asset forms.

Current assets have a short life span. Cash balances may be held idle for

a week or two, accounts receivables may have a lifespan of 30 to 60 days, and

inventories may be held for 2 to 60 days. The lifespan of current assets depends

upon the time required in the activities of procurement, production, sales and

collection and the degree of synchronization among them.

Each current asset is swiftly transformed into other asset forms: cash is

used for acquiring raw materials; raw materials are transformed into finished

goods (this transformation may involve several stages of work in process);

finished goods, generally sold on credit, are converted into accounts receivable

(bank debt); and finally, accounts receivable, on realization, generate cash.

The short lifespan of working capital components and their swift

transformation from one form into another has certain implications;

Decisions relating to working capital management are repetitive of

frequent.

The difference between profit and present value is insignificant,

29

Finished Goods

Accounts Receivable

Work in Process

Wages, salaries, Factory overheads

Cash Suppliers

Raw materials

The close interaction among working capital components implies

that efficient management of other components. For example, if

the firm has a large accumulation of the finished good inventory, it

may have to provide more liberal credit terms or show laxity in

credit collection. Another example; if the firm has a crunch it may

have to offer generous discounts.

CURRENT ASSET CYCLE

30

FACTORS INFLUENCING WORKING CAPITAL REQUIREMENTS:

The working capital needs of a firm are influenced by numerous

factors. The important ones are;

Nature of business

Seasonality of operations

Production policy

Market conditions

Conditions of supply

Credit Policy

Inventory Policy

Abnormal Factors

Business Cycle

Growth And Expansion

Level Of Taxes

Dividend Policy

Price Level Changes

Operating Efficiency

Few of them are given bellow;

a. Nature of business: The working capital requirement of a firm is

closely related to the nature of its business. A service firm, like an

electricity undertaking or a transport corporation, which has a short

operating cycle and which sales prominently on cash basis, has a modest

working capital requirement. On the other hand, a manufacturing

concern likes a machine tools unit, which has a long operating cycle and

which sales largely on credit have a very substantial working capital

requirement.

31

b. Seasonality of operations: Firms which have marked seasonality in

their operations usually have highly fluctuating working capital

requirements. To illustrate, consider a firm manufacturing ceiling fans.

The sale of ceiling fan reaches a peak during summer months and drops

sharply during winter period. The working capital requirements of such

a firm are likely to increase considerably in summer months and

decrease significantly during winter period. On the other hand, a firm

manufacturing product like lamps, which have fairly even sales round

the year, tends to have stable working capital

c. Production Policy: A firm marked by pronounced seasonal

fluctuations in its sales may pursue a production policy which may

reduce the sharp variations in working capital requirements. For

example, a manufacturer of ceiling fans may maintain a steady

production throughout the year, rather than intensify the production

activity during the peak business season. Such a production policy may

dampen the fluctuations in working capital requirements.

d. Market Conditions: The degree of competition prevailing in the

market place has an important bearing on working capital needs. When

competition is keen, a larger inventory of finished goods is required to

promptly serve customers who may not be inclined to wait because

other manufacturers are ready to meet their needs. Further, general

credit terms may have to be offered to attract customers in a highly

competitive market. Thus, working capital requirements tend to be high

because of greater investments in finished goods, inventory and

accounts receivable.

If the market is strong and the competition is weak, a firm can

manage with a smaller inventory of finished goods because customers

32

can be served with some delay. Further, in such a situation the firm can

insist on cash payment and avoid lock-up of funds in accounts

receivable- it can even ask for advance payment, partial or total.

e. Conditions of Supply: The inventory of raw materials, spares and

stores depends on the conditions of supply. If the supply is prompt and

adequate, the firm can manage with small inventory. However, if the

supply is unpredictable and scant, then the firm, to ensure continuity of

production, would have to acquire stocks as and when they are available

and carry larger inventory, on an average. A similar policy may have to

be followed when the raw material is available seasonally and

production operations are carried out round the year.

CURRENT ASSETS FINANCING POLICY:

After establishing the level of current assets, the firm must determine

how these should be financed. What mix of long term capital and short

term debt should the firm employ to support its current assets?

For the sake of simplicity, assets are divided into two classes, viz. fixed

assets and current assets. Fixed assets are assumed to grow at a

constant rate which reflects the secular growth in sales. Current assets,

too, are expected to display the same long-term rate of growth; however,

they exhibit substantial variations around the trend line, thanks to

seasonal (or even cyclical) patterns in sales and/or purchases.

The investment in current assets may be broken into two parts:

Permanent Current Assets and Temporary Current Assets. The former

represents what the firm requires even at the bottom of its sales cycle;

33

the latter reflects the variable component that moves in line with

seasonal fluctuations.

Several strategies are available to a firm for financing its capital

requirements. These strategies are illustrated by lines A, B and C in

following diagram.

STRATAGY A: Long-term financing is used to meet fixed asset as

well as peak working capital requirements. When the working capital

requirements are less than its peak level, the surplus is invested in liquid

assets (cash and marketable securities).

STRATEGY B: Long-term financing is used to meet fixed asset

requirements, permanent working capital requirements, and a portion of

fluctuating working capital requirements. During seasonal upswings,

short-term financing is used; during seasonal downswings, surplus is

invested in liquid assets.

STRATEGY C: Long-term financing is used to meet fixed asset

requirements and permanent working capital requirements. Short-term

financing is used meet fluctuating working capital requirements.

34

Fluctuating Current Asset fluctuating requirement

A

B

C

Fixed Asset Requirement

CAPITAL REQUIREMENTS AND THEIR FINANCING

35

Time

Fluctuating CurrentAsset Requirements

Permanent CurrentAsset Requirements

Cap

ital

Req

uire

men

ts

36

OPERATING CYCLE

AND CASH CYCLEi. OPERATING CYCLE ANALYSISii. DURATION OF LIFE CYCLEiii. MATCHING OR HEDGING APPROACHiv. CONSERVATIVE APPROACHv. AGGRESSIVE APPROACH

OPERATING CYCLE AND CASH CYCLE:

The investment in working capital is influenced by four keys events in

the production and sales cycle of the firm:

Purchase of raw materials

Payment for raw materials

Sale of finished goods

Collection if cash for sales

The firm begins with the purchase of raw materials which are

paid for after a delay which represents the accounts payable period. The

firms convert the raw material into finished goods and then sell the

same. The time lag between the purchase of raw materials and the sell

of finished goods is the inventory period. Customers pay their bills

sometimes after the sales. The period that elapses between the date of

sale and the date of collection of receivables is the accounts receivable

period (debtor’s period).

The time that elapses between the purchase of raw materials and

the collection of cash for sales is referred to as the operating cycle,

37

whereas the time length between the payments for raw material

purchases and the collection of cash for sales is referred to as the cash

cycle. The operating cycle is the sum of inventory period and the

accounts receivable period, whereas the cash cycle is equal to the

operating cycle less the accounts receivable period.

From the financial statement of the firm, we can estimate the

inventory period, the accounts receivable period, and the accounts

payable period.

38

Stock arrives

Inventory Period

Accounts Receivable Period

Cash Cycle

OPERATING AND CASH CYCLE

Cash ReceivedOrder placed

Accounts Payable Period

Firm Receives invoice

Cash Paid For Materials

Operating Cycle

OPERATING CYCLE ANALYSIS:

The Concept of Operating Cycle:

The net working capital is the difference between current assets

and current liabilities. A firm acquires current assets to convert them

into cash so that the current liabilities can be satisfied. On the other

hand, fixed assets such as land and building, plant and machinery etc.

are acquired with long term objective. The amount of capital invested in

fixed assets is recovered after a long period of time. On the other hand,

amount blocked in current assets is expected to recover as early as

possible. The concept of operating cycle is based on this aspect.

Operating cycle:

The concept of operating cycle implies the time period that is

required from the time cash is put on the business along with other

inputs to the time it is recovered from the amount of sales made by the

firm. A firm puts cash on as an input and the inputs like raw materials

are purchased with the cash. The raw materials are converted into

finished product and for this additional cash may be required. The

finished product is converted into sale and if the sale is made for cash,

the operating cycle is complete as cash is recovered back. On the other

hand, if sales are on credit, sales are converted into debtors and debtors

are converted into cash.

The length of operating cycle depends upon several factors.

These factors are as follows;

(i) Length of the manufacturing process: If the manufacturing

process is quite lengthy, the operating cycle will be prolonged. On the

other hand, if the manufacturing process is of shorter duration, the

39

length of the operating cycle will also be of a shorter duration. For

example, in case of hotels and restaurants, the manufacturing process is

relatively short which reduces the duration of the operating cycle. In

case of heavy engineering industries, since the manufacturing process

itself is very lengthy, the operating cycle also becomes very long.

(ii) Holding period of inventories: On an average for how long firm

holds inventory is also one of the factors affecting operating cycle. If the

firm holds inventory of raw material for a longer duration due to safety

precautions, operating cycle is prolonged. Firms following hand to

mouth policies regarding inventories of raw materials will have a

shorter operating cycle. Similarly in case of work-in-process, if the time

duration is long before being converted into finished product, operating

cycle will be of longer period. In case of finished goods inventory also,

the same principle exists. If finished goods are quickly converted into

sales, operating cycle will be shorter. But if finished goods inventory is

not converted into sales quickly and liberal credit is extended to the

customers, operating cycle becomes lengthy.

The operating cycle of a firm begins with the acquisition of raw material

and ends with the collection of receivables. It may be divided into four

stages.

o Raw material and stores storage stage

o Work in progress stage

o Finished goods inventory stage

o Debtor’s collection stage

40

DURATION OF LIFE CYCLE:

The duration of life cycle is equal to the sum of duration of each of

these stages less the credit period allowed by the suppliers of the firm.

O = R + W + F + D - C

Where O = duration of operating cycle

R = raw material and stores storage period

W= work - in - progress period

F = finished goods storage period

D = debtors collection period

C = creditors payment

The components of operating cycle may be calculated as follows;

Average stock of Raw material

R = ---------------------------------------------------------------------------

Average raw material and stores consumption per day

Average work-in-progress inventory

W = ---------------------------------------------------------------------------

Average cost of production per day

Average finished goods inventory

F = -----------------------------------------------------------------------------

Average cost of goods sold per day

Average book debts

D = -----------------------------------------------------------------------------

Average credit sales per day

41

Average trade creditors

C = -----------------------------------------------------------------------------

Average credit purchase per day

MATCHING APPROACH OR HEDGING APPROACH:

In matching approach or hedging approach for financing in which the

expected life of assets is matched with the sources of funds rose to

finance assets. The more explanation of the exact matching approach is

the purpose of financing is to make payments of assets, the financing

should be relinquished when the asset is expected to be relinquished,

and long term finance for the short term is expensive or costly because

funds will not be utilized for full period.

Similarly financing long term assets with a short term financing will

have to be made on a continuing basis. In this way, when a company

follows matching approach, long term financing will be used to finance

fixed assets and permanent current assets. Short term financing is used

to finance temporary current assets.

CONSERVATIVE APPROACH:

The financing policy of a company is conservative when it depends

more on long term funds for financing needs.

In this approach, company finances permanent assets with long term

financing. In this way company has no temporary assets, company

stores liquidity by investing surplus funds into marketable securities.

This plan mainly depends upon long term financing and so less risky.

42

AGGRESSIVE APPROACH:

While financing assets, company may select aggressive approach when

a company uses more short term financing than warranted by matching

approach. In this policy, company finances a part of its permanent

current assets are also financed by short term finance. The relatively

more used of short term financing makes this aggressive approach more

risky.

RATIO ANALYSIS:

A ratio is simple arithmetical expression of the relationship of one

number to another. It may be defined as the indicated quotient of the

two mathematical expressions.

A ratio is defined as, “The indicated quotient of two

mathematical expressions.” And as, “The relationship between two or

more things.” Ratio analysis is powerful tool of financial analysis.

Ratio analysis is a technique of analysis and interpretation of

financial statements. It is a process of establishing and interpreting

various ratios for helping in making certain decisions.

CLASSIFICATION OF RATIOS (ACCORDING TO TEST):

Various ratios have been classified as bellow;

a) LIQUIDITY RATIO: These are the ratios which measure short

term solvency for financial position of a firm.

b) LONG TERM SOLVANCY AND LIQUIDITY RATIO: Long

term solvency ratios convey the firm’s ability to meet the

interest costs and repayment schedules of its long term

obligations. E.g. Debt-equity ratio and Interest coverage ratio.

43

c) ACTIVITY RATIO: These are calculated to measure the

efficiency with which the resources of a firm have been

employed.

d) PROFITABILITY RATIOS: These ratios measure the results

of business operations or overall performance and effectiveness

of a firm.

LIQUIDITY RATIO:

Liquidity refers to the ability of a concern to meet its current obligations

as and when it becomes due. These should be convertible into cash for

paying obligations of short term nature. 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 liquidity of a firm,

the following ratios can be calculated;

i. Current Ratio

ii. Quick or Acid Test or Liquid Ratio

iii. Absolute Liquid Ratio or Cash Position ratio

A. CURRENT RATIO:

Current ratio may be defined as the relationship between current assets

and current liabilities. This ratio is also known as the Working Capital

Ratio, which is a measure of general liquidity and is most widely used

to make the analysis of short term financial position or liquidity of a

firm.

44

Current Assets

Current Ratio = --------------------------------------

Current liabilities

OR

Current Assets: Current Liabilities

B. LIQUID RATIO:

Liquid ratio or quick or acid test ratio may be defined as the relationship

between liquid assets and current or liquid liabilities. An asset is said to

be liquid if it can be converted into cash within a short period without

loss of value. In that sense, cash in hand and cash at bank are the most

liquid assets.

Liquid Assets

Liquid Ratio = --------------------------------

Liquid Liabilities

C. ABSOLUTE LIQUID RATIO:

The ratio should 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 Assets

Absolute Liquid Ratio = -----------------------------------

Current Liabilities

45

D. CURRENT ASSET TURNOVER RATIO:

Funds are invested in various assets in business to make sales and earn

profit. The efficiency with which assets are managed directly affects the

volume of sales. The better the management of assets, the larger is the

amount of sales or profits. Activity ratios measure the efficiency or

effectiveness with which a firm manages its resources or assets. These

ratios are called as “Turn-over ratios” because they indicate speed with

which assets are converted into sales.

Current Assets SalesTurnover Ratio = ----------------------

Current Assets

E. WORKING CAPITAL TURNOVER RATIO:

Working capital turnover ratio indicates the velocity of the utilization of

net working capital. This ratio indicates the number of times the

working capital is turned over in the course of a year.

A higher ratio indicates efficient utilization of working capital and a low

ratio indicates otherwise.

Working Capital Cost of SalesTurnover Ratio = ---------------------------------

Average Working Capital

46

F. INVENTORY TURNOVER RATIO:

This is also known as Stock Velocity. It indicates whether inventory has

been efficiently used or not. The purpose is to see whether only required

minimum funds have been locked up in inventory. The ratio indicates

number of times the stock has been turned over during the period and

evaluates the efficiency with which a firm is able to manage its

inventory.

Inventory SalesTurnover Ratio = ----------------------

Inventory

G. GROSS PROFIT RATIO:

Gross profit ratio measures the relationship of gross profit and net sales

and is usually represented as a percentage.

Gross Profit

Gross Profit Ratio = ---------------------- Î 100

Net Sales

H. NET PROFIT RATIO:

Net profit ratio establishes a relationship between net profit (after taxes)

and sales, and indicates the efficiency of the management in

manufacturing, selling, administrative and other activities of the firm.

47

Net Profit after Tax

Net Profit Ratio = -------------------------- Î 100

Net Sales

I. DEBTORS TURNOVER RATIO:

Debtor’s velocity indicates the velocity of debt collection of firm. In

simple words, it indicates the number of times average debtors

(Receivables) are turned over during the year.

Net Credit Sales

Debtors Turnover Ratio = -------------------------------

Average Trade Debtors

= No. of Times

J. CREDITORS TURNOVER RATIO:

A firm has to make credit purchases and incur short term liabilities. A

supplier of goods, i.e., creditor, is naturally interested in finding out how

much time the firm is likely to take in repaying its trade creditors.

Net Purchases

Creditors Turnover Ratio = -------------------------------

Average Trade Creditors

K. DEBT-EQUITY RATIO:

48

Debt-equity ratio, also known as “External- Internal Equity Ratio” is

calculated to measure the relative claims of outsiders and the owners (i.

e. shareholders) against the firm’s asset. The ratio indicates the

relationship between the outsider’s funds and the shareholders funds.

Outsider’s funds

Debt-Equity Ratio = ---------------------------

Shareholders funds

49

50

WORKING capital financing

i. INTRODUCTIONii. TYPES OF FINANCING WORKING CAPITALiii. SOURCES OF FINANCING WORKING CAPITALiv. REGULATION OF BANK FINANCEv. OTHER FORMS OF FINANCING

WORKING CAPITAL FINANCING:

INTRODUCTION:

The investment in raw materials, stock-in-progress, finished goods, and

receivables (the principal constituents of current assets) often varies a great

deal during the course of the year. Hence, the financial manager generally

spends a good chunk of his time in finding money to finance current assets.

TYPES OF FINANCING WORKING CAPITAL:

The firm must find out the sources of finds to finance its working capital.

There are three different financial policies which are as follows;

Long Term Financing: The sources of long term financing

Are;

o Shares (Equity shares and preference shares)

o Debentures

o Retained earnings and

o Long term loan from financial institution

Short Term Financing: The sources of short-term financing are short

term credit, which the firm arranges. These sources include.

o Short term bank credit or loans

o Commercial papers

o Factoring receivable and

o Public deposit

Spontaneous Financing: Spontaneous financing refers to the automatic

sources of short term funds.

51

E.g. Trade credit and outstanding expenses. The main features of these

sources are that they are cost free.

Normally permanent working capital is financed by long term sources where

as temporary working capital is financed by short term sources.

While taking the decision of financing working capital requirement, certain

factors are to be taken into consideration;

i. cost of financing

ii. flexibility

o Cost of Financing: The interest rates increased with the time. Longer the

maturity of debit greater the interest rate. The decision of the company is

guided by risk-return trade off.

o Flexibility: Short term funds are more flexible. Short term funds can be

easily refunded as compared to long term funds, because long term funds

can not be refunded before its maturity period. Financing for the domestic

order is majority met by letter of credit. In case of any shortage company

uses the surplus into various activities such as;

a) short term investments

b) Inter corporate deposit – In case any sister factory is in need of

funds, the surplus fund is used as given to the sister concern.

c) Paying for Overdrafts

Typically, current assets are supported by a combination of long-term and

short-term sources of finance. Long-term sources of finance primarily support

fixed assets and secondarily provide the margin money for working capital.

Short-term sources of finance, more or less exclusively support the current

assets.

52

CASH FLOW STATEMENT:

Cash flow statements indicate movement of cash only. The preparation

of cash flow statement is important to understand the paradoxical

situation in which the firm finds difficulty in honoring its short period

business

Indicated by the funds flow statement (working capital basis).

FUNDS FLOW STATEMENT:

The funds flow statement reveals the sources from which the funds are

made available and how they are utilized or applied. Difference between

cash flow and funds flow statement is given bellow;

53

DIFFERENCE BETWEEN FUNDS FLOW AND CASH FLOW

STATEMENT:

FUND FLOW STATEMENT CASH FLOW STATEMENT

The term fund refers to working

capital and it shows changes in

working capital.

The term cash refers to only cash

and it shows change in cash

position of the business.

This analysis is more useful in long

term planning.

This is more useful in short term

planning.

This considers changes in all current

assets and current liabilities.

This indicates simply cash receipt

and cash payments and does not

take into consideration other

current assets.

Improvement in working capital

does not mean improvement in cash

position.

Improvement in cash position

results in improvement in working

capital.

This is a test of effective use of

working capital by the management

in a particular period of time.

This is the test of effective control

of flow of cash by the management

in a particular period of time.

This explains in brief the changes

occurred in the items in two balance

sheets.

This explains the movement of cash

and all those dealings which affects

the cash position of the concern.

54

INVENTORY MANAGEMENT:

INTRODUCTION:

There are three types of inventories: raw materials, work in progress,

and finished goods.

a. Raw materials are materials and components that are inputs in

making the final product.

b. Work-in-process also called stock-in-process refers to goods in

the intermediate stages of production.

c. Finished goods consist of final products that are ready for sale.

While manufacturing firms generally hold all the three types of

inventories, distribution firms hold mostly finished goods.

Inventories represent the second largest asset category for

manufacturing companies, next only to plant and equipment. The

proportion of inventories to total assets generally varies between 15 and

30 percent. Given substantial investment in inventories, the importance

of inventory management can not be emphasized.

o

REGULATION OF BANK FINANCE:

The regulation of bank finance by central bank of India to our company is

CMA data (Current Monitoring Analysis) bank before giving finance to the

company sees and analyze the earning capacity of the company. The money

that the bank will be giving where the company is going to invest and for what

purpose. Whether the money is put into the manufacture process or not bank

needs to know the financial condition of a firm and its credit worthiness.

55

56

DATA ANALYSIS AND

INTERPRETATIONi. BALANCE SHEET OF MSLii. CURRENT ASSETSiii. CURRENT LIABILITIESiv. CHANGES IN WORKING CAPITALv.FINANCIAL REPORT

DATA ANALYSIS AND INTERPRETATION:

BALANCE SHEET OF MAHINDRA SONA LTD.Schedule 2003-2004` 2004-2005 2005-2006 2006-2007

Sources of funds :-Share Capital I 39600000 39600000 39600000 39600000Reserve & Surplus II 130763392.2 189700080.3 265042678.5 363683646

Loan Funds:-Secured Loan III 68886274.5 81342342.9 96630797.7 67521776.4Unsecured Loan IV 15262110 15262110 15262110 15262110

Deferred tax liability(Net) V 3394386

Total 257906162.7 325904533.2 416535586.2 486067532.4

Application of funds :-Fixed AssetGross Block VI 235246054.5 276634041.3 326875086 342719935.2Less: Depreciation/ Amortization VII 147383485.2 167001049.8 182503653.3 197105247Net Block VIII 87862569.3 109632991.5 144371432.7 145614688.2Capital WIP & Capital advance IX 9909356.4 17384400 234702 1606675.5

Investment 1021410 1021410Deferred tax Asset(Net) X 1257219 7207127.1 12316295.7

Current Asset loans & advancesInventories XI 96845011.2 152829979.2 116907812.1 122664522.6Sundry debtors XII 222813224.1 324030586.5 320144611.5 360091789.2Cash & Bank balance XIII 35200474.2 10243058.4 50582646 73017614.7Loans & Advances XIV 23957856.9 41913249.3 38010249 34831211.4

Less:-Current liabilities XV 175436987.4 254001050.1 185920966.8 184014939.6Provisions XVI 43245342 77385900.6 76023437.4 81081735.3

Net current asset XVII 160134237 197629922.7 263700914.4 325508463

Total 257906162.7 325904533.2 416535586.2 486067532.4

Net Current Asset 378816566.4 529016873.4 526666728.6 591626547.9

Working capital leverage 1.111135256 1.271572286 1.073679094

57

CURRENT ASSET2003-2004 2004-2005 2005-2006 2006-2007

Investment (At cost, Unless otherwise specified)

Unquoted:- 1021410 1021410

Shares (Non-trade & fullypaid up )

Inventories

Stores & Spares 2799252.9 3824108.1 2588202 2404312.2

Tools 7104163.5 8571260.7 10014266.7 9406374.3

Raw Material 18819824.4 27509949 29815432.2 33502496.4

WIP 56680064.1 89319083.4 66041937 64072076.4

FG 11441706.3 23605578 8447974.2 13279263.3

Total 96845011.2 152829979.2 116907812.1 122664522.6

Sundry debtors

Outstanding over six months

Considered Good 656801.1 2990799 2532024 2043717.3

Considered doubtful 724526.1 724526.1 724526.1 724526.1

Other debt consider good 222156423 321039787.5 317612587.5 358048071.9

Less:-

Provision for doubtful debts 724526.1 724526.1 724526.1 724526.1

Total 222813224.1 324030586.5 320144611.5 360091789.2

Loans & Advances

Advances recoverable in cash or in kindor for value to be received consider good

22631033.7 37345631.4 32713847.1 27823066.2

Balance with customs port trust Excise, etc

1326823.2 4567617.9 2142961.2 2523188.7

58

VAT recoverable 3087153.9 3811758.3

Fringe benefit tax ( Net of provision)

606911.4

Income tax ( Net of provision) 66286.8 66286.8

Total 23957856.9 41913249.3 38010249 34831211.4

Cash & Bank balance

Cheque on hand 1821519 1261197.9

Balance with schedule bank in current A/c.

32573086.2 9490284.9 48390798.6 15967837.8

In fixed deposit 697680 607680 45119057.4

Cash on hand 1665

Remittance on transit 11598525

As margin money 805869 55093.5 322969.5 330529.5

Total 35200474.2 10243058.4 50582646 73017614.7

Net Current Asset 378816566.4 529016873.4 526666728.6 591626547.9

59

Year CA2004 378816206.42005 529016873.42006 526600441.82007 590726547.9

INTERPRETATION:

The CA has Shown an increasing trend in the year 2005-2006 as compared to

2004-2005.whereas in the year 2006-2007 there has been a negligible decrease

in CA.

Change in CA

01

2

3

4

5

6

7

2004 2005 2006 2007Year

Current Assets

60

CURRENT LIABILITIES2003-2004 2004-2005 2005-2006 2006-2007

Acceptances 8309551.5 3502710.9

sundry creditors[note20 ii]i]total outstanding dues ofsmall scale industries undertakings 47729880 32807356.2 18638133.3 23411069.1

ii]total outstanding dues of creditorsother than small scale industrial undertaking 106150972.5 202512098.7 145110034.8 135508625.1Total 153880852.5 235319454.9 163748168.1 158919694.2advances from customers 7059273.3 8093942.1 8353999.8 7266978

VAT payable 5227652.7 6718377.6

Other liabilities 5673644.1 6832030.5 8231236.2 10780084.8

Interest accrued but not due on lone 513666 252911.7 359910 329805

Total 175436987.4 254001050.1 185920966.8 184014939.6

Provisions2003-2004 2004-2005 2005-2006 2006-2007

Provision for warranties [note 7] 4714534.8 4569586.2 4242493.8 3882312

Provision for income tax [net of payment] 8228560.5 22597056.9 14907864.6 14643873

Provision for fringe benefit tax 57600

Provision for wealth tax 27000 29700 37800

Provision for encashable leave on separation 4616100 6066900

Provision for gratuity 3322271.7 12780000

Provision for employee benefit 18396864 16225530.3

Proposed dividend 19800000 27720000 33660000 39600000

Tax on proposed dividend 2536875 3622657.5 4720815 6730020

TOTAL 43245342 77385900.6 76023437.4 81081735.3Net Current Liabilities 218682329.4 331386950.7 261944404.2 265096674.9

61

Year CL2004 218682329.42005 331386950.72006 261944404.22007 265096674.9

INTERPRETATION:

The Current Liabilities has Shown an increasing trend in the year 2005-2006

as compared to 2004-2005.whereas in the year 2006-2007 there has been a

negligible increase in Current Liabilities.

Changes in CL

0.5

11.5

2.5

33.5

0

2

2004 2005 2006 2007

Year

Current Liabilities

62

TRENDS:- WORKING CAPITAL CHANGEYEAR CHANGES IN

WORKING CAPITAL

YEAR CURRENT ASSET YEAR CURRNNT LIABILITIES

2003-2004 160134237 2003-2004 378816566.4 2003-2004 218682329.42004-2005 197629922.7 2004-2005 529016873.4 2004-2005 331386950.72005-2006 264722324.4 2005-2006 526666728.6 2005-2006 261944404.22006-2007 326529873 2006-2007 591626547.9 2006-2007 265096674.9

YEAR CHANGES IN WORKING CAPITAL

YEAR CURRENT ASSET YEAR CURRENT LIABILITIES

2003-2004 160.13 2003-2004 378.81 2003-2004 218.682004-2005 197.62 2004-2005 529.01 2004-2005 331.392005-2006 264.72 2005-2006 526.67 2005-2006 261.952006-2007 326.52 2006-2007 591.63 2006-2007 265.11

63

Year CA CL Working Capital

2004 378816206.4 218682329.4 1601338772005 529016873.4 331386950.7 197629922.72006 526600441.8 261944404.2 264656037.62007 590726547.9 265096674.9 325629873

INTERPRETATION:

The Working Capital has Shown an increasing trend in the year 2005-2006 as

compared to 2004-2005.whereas in the year 2006-2007 there has been a

negligible decrease in Working Capital.

Changes in Working Capital

Year

0

1234567

2004 2005 2006 2007

Working Capital

64

Financial Reportyear ended 31st march2004

year ended 31st march2005

year ended 31st march2006

year ended 31st march2007

Income 934.03 1427.9 1430.92 1715.15Profit before depreciation 132.38 197.87 209.64 265.03Less:-Depreciation 21.71 22.67 17.54 19.05Profit before tax 110.67 175.2 192.1 245.98Less:-Provision for taxCurrent year 43 80 70 82.5Earlier year 1.34 6.61 1.52Deferred tax (Net) 5.88 5.17 2.06 3.47Profit after tax for current year 72.21 100.37 126.65 165.43Profit for earlier year brought forward 45.7 85.2 139.69 210.4Profit available for appropriation 118.01 185.57 266.04 375.83Propose Dividend 22 30.8 37.4 44Income tax on Dividend 2.82 4.03 5.52 7.47

65

66

RATIO ANALYSISi.CURRENT RATIOii. LIQUID RATIOiii. ABSOLUTE LIQUID RATIOiv. CURRENT ASSET TURN-OVER RATIOv. WORKING CAPITAL TURN-OVER RATIOvi. INVENTORY TURN-OVER RATIOvii. GROSS PRIFIT RATIOviii. NET PROFIT RATIOix. DEBTORS TURN-OVER RATIOx. INVESTMENT IN RECEIVABLESxi. OPERATING CYCLExii. ROSS OPERATING CYCLExiii. NET OPERATING CYCLExiv. CREDITORS TURN OVER RATIOxv. DEBT-EQUITY RATIO

A. CURRENT RATIO:

YEAR CURRENT ASSET CURRNNT LIABILITIES

2003-2004 378816566.4 218682329.42004-2005 529016873.4 331386950.72005-2006 526666 728.6 261944404.22006-2007 591626547.9 265096674.9

YEAR CURRENT RATIO2003-2004 1.7322687552004-2005 1.5963720732005-2006 2.0106049992006-2007 2.231738848

INTERPRETATION:

The Current Ratio of a company shows slight decrease from the

year 2004-2005. But later on it goes on increasing from 2006-2007.

CURRENT RATIO

0

0.5

1

1.5

2

2.5

2003-2004 2004-2005 2005-2006 2006-2007YEAR

RATIO

67

B. LIQUID RATIO:

YEAR CURRENT ASSET INVENTORIES LIQUID ASSET LIQUID LIABILITIES2003-2004 378816566.4 96845011.2 281971555.2 218682329.42004-2005 529016873.4 152829979.2 376186894.2 331386950.72005-2006 526666728.6 116907812.1 409758916.5 261944404.22006-2007 591626547.9 122664522.6 468962025.3 265096674.9

INTERPRETATION:

The Liquid Ratio of a company shows slight decrease from the

year 2004-2005. But later on it goes on increasing from 2006-2007.

YEAR LIQUID RATIO2003-2004 1.2894117052004-2005 1.135189222005-2006 1.564297272006-2007 1.769022661

LIQUID RATIO

0

0.5

1

1.5

2

2003-2004 2004-2005 2005-2006 2006-2007

YEAR

RATIO

68

C. ABSOLUTE LIQUID RATIO:

YEAR CASH & BANK BALANCE

SHORT TERM INVESTMENT

TOTAL LIQUID LIABILITIES

2003-2004 35200474.2 35200474.2 218682329.42004-2005 10243058.4 10243058.4 331386950.72005-2006 50582646 1021410 51604056 261944404.22006-2007 73017614.7 1021410 74039024.7 265096674.9

INTERPRETATION:

The Absolute Liquid Ratio of a company shows a deep decrease

in the year 2004-2005. But later on it goes on increasing from 2006-

2007.

YEAR ABSOLUTE LIQUID RATIO

2003-2004 0.1609662492004-2005 0.0309096612005-2006 0.197003852006-2007 0.279290658

ABSOLUTE LIQUID RATIO

0

0.05

0.1

0.15

0.2

0.25

0.3

2003-2004 2004-2005 2005-2006 2006-2007

YEAR

RATIO

69

D. CURRENT ASSETS TURNOVER RATIO:

YEAR SALES CURRENT ASSET

2003-2004 816839262 378816566.42004-2005 1246895276 529016873.42005-2006 1251351856 526666728.62006-2007 1509213249 591626547.9

INTERPRETATION:

The Current Asset Turnover Ratio of a company shows deep

increase from the year 2003-2004. Then it shows slight increase. But

later on it goes on increasing from 2006-2007.

YEAR CURRENT ASSET TURNOVER RATIO

2003-2004 2.1562923442004-2005 2.3570047372005-2006 2.3759842572006-2007 2.550955927

70

CURRENT ASSET TURNOVER RATIO

1.92

2.12.2

2.32.42.52.6

2003-2004 2004-2005 2005-2006 2006-2007YEAR

RATIO

E. WORKING CAPITAL TURNOVER RATIO:

INTERPRETATION:

The Working Capital Turnover Ratio of a company shows deep

increase from the year 2003-2004. And it again decreases till the year

2005-2006. In the year 2006-2007, it remains almost same.

YEAR SALES WORKING CAPITAL2003-2004 816839262 1601342372004-2005 1246895276 197629922.72005-2006 1251351856 264722324.42006-2007 1509213249 326529873

YEAR WORKING CAPITAL TURN OVER RATIO

2003-2004 5.1009657732004-2005 6.3092433542005-2006 4.7270356162006-2007 4.621976039

WORKING CAPITAL TURN OVER RATIO

0

1

2

3

4

5

6

7

2003-2004 2004-2005 2005-2006 2006-2007

YEAR

RATIO

71

F. INVENTORY TURNOVER RATIO:

YEARINVENTORY TURN OVER RATIO

2003-2004 8.4345001552004-2005 8.158708672005-2006 10.703748822006-2007 12.30358393

INTERPRETATION:

The Inventory Turnover Ratio of a company shows slight

decrease from the year 2004-2005. But later on it goes on increasing till

the year 2006-2007.

YEAR SALES INVENTORIES2003-2004 816839262 96845011.22004-2005 1246895276 152829979.22005-2006 1251351856 116907812.12006-2007 1509213249 122664522.6

72

INVENTORY TURN OVER RATIO

0

2

4

6

8

10

12

14

2003-2004 2004-2005 2005-2006 2006-2007

YEAR

RATIO

G. GROSS PROFIT RATIO:

YEAR GROSS PROFIT SALES(NET)2003-2004 75819582.9 7394046392004-2005 119463178.5 11418144172005-2006 136404734.4 11489012032006-2007 186955091.1 1384830506

YEAR GROSS PROFIT RATIO

2003-2004 10.254139472004-2005 10.462574022005-2006 11.872625262006-2007 13.50021467

INTERPRETATION:

The Gross Profit Ratio of a company shows slight increase from

the year 2004-2005. But later on it goes on increasing from 2006-2007.

73

GROSS PROFIT RATIO

0

2

4

6

8

10

12

14

16

2003-2004 2004-2005 2005-2006 2006-2007

YEAR

RATIO

H. NET PROFIT RATIO:

YEAR NET PROFIT SALES(NET)2003-2004 65000436.3 7394046392004-2005 90330083.1 11418144172005-2006 113988485.7 11489012032006-2007 148887169.2 1384830506

YEAR NET PROFIT RATIO

2003-2004 8.7909154032004-2005 7.9111002452005-2006 9.9215220092006-2007 10.75129184

INTERPRETATION:

The Net Profit Ratio of a company shows slight decrease from

the year 2004-2005. But later on it goes on increasing till 2006-2007.

74

NET PROFIT RATIO

0

2

4

6

8

10

12

2003-2004 2004-2005 2005-2006 2006-2007

YEAR

RATIO

I. DEBTORS TURNOVER RATIO:

INTERPRETATION:

The Debtors Turnover Ratio of a company goes on increasing till

2006-2007.

YEAR SALES(NET) CLOSING DEBTORS

2003-2004 739404639 222813224.12004-2005 1141814417 324030586.52005-2006 1148901203 320144611.52006-2007 1384830506 360091789.2

YEAR DEBTORS TURNOVER RATIO2003-2004 3.3184953092004-2005 3.5237859142005-2006 3.5886944882006-2007 3.845770849

75

DEBTORS TURNOVER RATIO

3

3.2

3.4

3.6

3.8

4

2003-2004 2004-2005 2005-2006 2006-2007

YEAR

RATIO

J. INVESTMENT IN RECEIVABLES:

INVESTMENT IN RECEIVABLES2003-04 2004-05 2005-06 2006-07

PARTICULERS 97 DAYS 91 DAYS 89 DAYS 83 DAYSCOLLECTION PERIOD

COLLECTION PERIOD

COLLECTION PERIOD

COLLECTION PERIOD

SALES (NET) 739404639 1141814417 1148901203 1384830506LESS:-FIEXED COST (20%) 147880927.8 147880927.8 147880927.8 147880927.8VARIABLE COST (60%) 443642783.4 685088650.2 689340721.8 830898303.6RETURN ON INVESTMENT 44826406.24 59218930.94 58213067.82 63467715.79BAD DEBTS (1%) 7394046.39 11418144.17 11489012.03 13848305.06

NET BENEFIT 95660475.17 238207763.9 241977473.5 328735253.8

INTERPRETATION:

The Investment in Receivables of a company shows deep

increase from the year 2004-2005. And then it shows very slight

increase. But later on it goes on increasing till 2006-2007.

76

INVESTMENT IN RECEIVABLES

050

100150200250300350

2003-2004 2004-2005 2005-2006 2006-2007YEAR

NET BENEFIT (AMOUNT IN

MILLION RS.)

OPERATING CYCLE2004 2005 2006 2007

1) RAW MATERIAL CONVERSION PERIODA) Raw material consumption 460469385 742734765 654570475 782073011B) Raw material consumption per day 1438966 2321046 2045532 2443978C) Raw material Inventory 18819824 27509949 29815432 33502496D) Raw material holding day's 13 11 14 13

2) WIP CONVERSION PERIODA) Cost of production 720265120 1111670321 1078538405 1261947491B) Cost of production per day 2073703 3473969 3370432 3943585C) WIP Inventory 56680064 89319083 66041937 64072076D) Work in progress inventory holding day's 25 24 20 17

3) FINISHED GOOD CONVERSION PERIODA) Cost of good's sold 675026762 1045956816 1020944442 1211154678B) Cost of good's sold per day 2109458 3268615 3190451 3784858C) Finished good's inventory 11441706 23605578 8447974 13279263D) FG inventory holding day's 5 7 3 4

4) COLLECTION DAY'SA) Credit sales 739404639 1141814417 1148901203 1384830506B) Sales per day 2310639 3568170 3590316 4327595C) Debtors 222813224 324030586 320144611 360091789D) Debtor outstanding day's 97 91 89 83GROSS OPERATING CYCLE 140 133 126 1175) CREDITORS DEFERRAL PERIODA) Credit purchase 464389295 751424889 656875958 785760075B) Purchase per day 1451216 2348202 2052737 2455500C) Creditors 153880852 235319454 163748168 158919694D) Creditors outstanding day's 106 100 80 65

NET OERATING CYCLE / CCC 34 33 46 52

77

K. GROSS OPERATING CYCLE:

YEAR GROSS OPERATING CYCLE2003-2004 1402004-2005 1332005-2006 1262006-2007 117

INTERPRETATION:

The gross operating cycle is going down every year.

78

GROSS OPERATING CYCLE

105

110

115

120

125

130

135

140

145

2003-2004 2004-2005 2005-2006 2006-2007

YEAR

NO. OF DAYS

I. NET OPERATING CYCLE:

YEAR NET OPERATING CYCLE (CCC)

2003-2004 342004-2005 332005-2006 462006-2007 52

INTERPRETATION:

The Net Operating Cycle has increased from the year 2004-05 to 2007-08.

79

NET OPERATING CYCLE (CCC)

0

10

20

30

40

50

60

2003-2004 2004-2005 2005-2006 2006-2007YEAR

NO. OF DAYS

M. CREDITORS TURNOVER RATIO:

YEAR CREDIT PURCHASE CREDITORS2003-2004 464389252 1538808522004-2005 751424889 2353194542005-2006 656875958 1637481682006-2007 785760075 158919694

YEAR CREDITORS TURNOVER RATIO

2003-2004 3.0178494982004-2005 3.1932119352005-2006 4.0115011122006-2007 4.94438452

INTERPRETATION:

The Creditors Turnover Ratio of a company shows slight

increase from the year 2004-2005. But later on it goes on increasing till

2006-2007.

80

CREDITORS TURNOVER RATIO

0

1

2

3

4

5

6

2003-2004 2004-2005 2005-2006 2006-2007YEAR

RATIO

N. DEBT-EQUITY RATIO:

YEAR DEBT(LONG TERM) EQUITY2003-2004 84148348 1703633922004-2005 96604452 2293000802005-2006 111892907 3046426782006-2007 82783886 403283646

INTERPRETATION:

The Debt-equity Ratio of a company shows decrease from the

year 2004-2005 till 2006-2007.

YEAR DEBT-EQUITY RATIO2003-2004 0.4939344482004-2005 0.4213014322005-2006 0.3672922912006-2007 0.205274592

81

DEBT-EQUITY RATIO

0

0.1

0.2

0.3

0.4

0.5

0.6

2003-2004 2004-2005 2005-2006 2006-2007

YEAR

RATIO

CONCLUSION:

1. From the current ratio and quick ratio, it can be concluded that, the

liquidity of the company has increased. The quick ratio has increased

because of control of inventory and increase in cash balance.

2. Inventory turn over ratio is increasing which reflects that the

inventory is fast moving.

3. Payables deferral period has reduced from 106 days to 65 days, this

shows that the company is paying its creditors faster.

4. Company has more investments in current assets which mean higher

liquidity with lower risk, so the policy followed by the company is

conservative.

82

RECOMMENDATIONS:

1. The company should review its credit policy for debtors. The

debtor’s collection period has reduced but it should reduce

further. This will reduce the working capital requirement of

the company.

2. The company should invest in short term

investments as working capital is continuous.

3. As a working capital is showing an

increasing trend, it should not increase further as it affects the

profitability due to blockage of funds.

83