Analysis of working capital management shriram piston finance

Summer training Project reportOn

ANALYSIS OF WORKING CAPITAL MANAGEMENT

OF

SHRIRAM PISTONS & RINGS LTD

Submitted for the partial fulfillment of the award

OfMaster of Business Administration

DEGREESession 2012-2013

SUBMITTED BY:

Mohd Ahmad AnsariROLL No. 1103270088

.UNDER THE GUIDANCE OF

Internal Guide: Ms Manisha Gupta

Department of ManagementABES ENGINEERING COLLEGE

GHAZIABAD

1

AFFILIATED TOMAHAMAYA TECHNICAL UNIVERSITY, NOIDA

2

C andidates Declaration/Certificate

I hereby declare that the Work which is being presented in this report entitled

“ Analysis of Mutual Funds and Ranking Them ” is an authentic record of my work

carried out under the supervision of Mrs.JAYA PANDEY

The matter embodied in this report has not been submitted by me for the award of any

other degree

Dated MOHD.AHMAD.ANSARI

Department: MBA

This is certifying that the above statements made by the candidate are correct to the best of

my knowledge.

PROF. RAKESH PASSI Mrs. JAYA PANDEY

(Head of Department) Designation: Assistant Professor

Date : ………………….. Department: MBA

Date:……………………

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PREFACE

During Master in Business Administration program, Students comes direct contact with the

real corporate world through the industrial training. A PGDM program provides its students

with an in-depth study of various managerial activities that are performed in any

organization.

A detailed research/analysis of managerial activities conducted in various departments like

finance, marketing, human resources, production department etc. gives the student the

conceptual idea of what they are expected to manage and how to manage and how to obtain

the maximum output through minimum inputs of resources available and how to minimize

the wastage of resources.

As MBA students, I have taken my summer internship training in SHRIRAM PISTONS

AND RINGS LTD.

.

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ACKNOWLEDGEMENT

I feel immense pleasure and privilege to express my sincere thanks to my Project Guide Mr.

SANJAY MAHESHWARI (Finance Manager) for his incessant invaluable and

indispensible guidance throughout. At the same time, I cannot forget the courtesy and timely

help provided by Project Coordinator Mr. SAMEER PUNHANI.

I also express my sincere depth of gratitude to the Finance and Account & Administrative

Department staff members in providing me with all the necessary information in carrying

out my project study. I also extend my thanks to Ms. Divya Agarwal who helped me to

clear the concepts and also made valuable comments and suggestions, while preparing my

project.

Sudheer Kumar MBA-III Sem.

5

EXECUTIVE SUMMERY----------------------------------------------------------------------- 1

INTRODUCTION -------------------------------------------------------------------------------- 2

OBJECTIVE OF STUDY ------------------------------------------------------------------------ 12

COMPANY PROFILE --------------------------------------------------------------------------- 13

RESEARCH METHODOLOGY --------------------------------------------------------------- 18

ANALAYSIS OF WORKING CAPIATL MANAGEMEN -------------------------------- 20

FINANCIAL RATIO ANALYSIS FOR WORKING CAPITAL MANAGEMENT ---- 21

MANAGEMENT OF CURRENT ASSET ----------------------------------------------------- 51

MANAGING THE COMPONENTS OFWORKING CAPITAL --------------------------- 53

DETERMINATION OF OPERATING CYCLE ---------------------------------------------- 61

ANALYSIS OF ASSET PERCENTAGE ------------------------------------------------------- 67

ESTIMATING WORKING CAPITAL --------------------------------------------------------- 73

TREND ANALYSIS FOR WORKING CAPITAL ------------------------------------------- 76

CURRENT ASSET FINANCING --------------------------------------------------------------- 83

FINDING AND SUGGESTIONS --------------------------------------------------------------- 84

LIMITATIONS ------------------------------------------------------------------------------------- 86

REFERENCES -------------------------------------------------------------------------------------- 87

GLOSSARY ----------------------------------------------------------------------------------------- 88

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TABLE OF CONTENT

EXECUTIVE SUMMARY

The management had to depend upon certain relevant information for taking various

strategic decisions. The information is made useful by its analysis and interpretation. My

project is related to “Analysis of Working Capital Management “

It was found that the operating cycle of the company is bit disturbed and is continuously

increasing due to which company is having the decreasing working capital position. By

adopting various calculation and analysis and then making interpretation with the solution of

specific problem I put my efforts in giving appropriate suggestion to the company. To this

context I adopted various methods and techniques like Trend analysis by using statistical

tool, a work towards the optimal level of working capital, estimation of working capital,

analyzing of operating cycle and use of various ratio to put an exact picture of company.

The report also consists of qualitative and quantitative analysis of Working Capital

Management of SHRIRAM PISTONS AND RINGS LIMITED, Ghaziabad .In the course of

study, I found that the organization faces the problem of liquidity.

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INTRODUCTION

Working Capital:

Working capital in simple terms means the amount of funds that a company requires for

financing its day -to- day operations. Working Capital includes the current assets and current

liabilities areas of the balance sheet.

Working Capital Management is concerned with the problems that arise in attempting to

manage the current assets, the current liabilities and the interrelationship that exists between

them. Working Capital Management is the process of planning and controlling the level and

mix of current assets of the firm as well as financing these assets. Analysis of working

capital is of major importance to internal and external analysis because it is closely related to

the current day -to- day operations.

Concept of Working Capital:-

There are two concepts of working capitals: -

1. Gross Working capital: - It means the current assets which represent the proportion of

investment that circulates from one form to another in the ordinary conduct of business.

2. Net Working Capital: - It is the difference between current assets and current liabilities or

alternatively the portion of current assets financed with long-term funds.

Constituents of Current Assets:-

1. Cash in hand and cash at bank.

2. Bill receivables.

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3. Sundry debtors.

4. Short term loans and advances.

5. Inventories.

6. Prepaid Expenses.

7. Accrued Income.

8. Marketable Securities.

Constituents of Current Liabilities:-

1. Accrued and outstanding expenses.

2. Short term loans, advances and deposits.

3. Dividends payable.

4. Bank overdraft.

5. Provision for taxation.

6. Sundry Creditors.

7. Bills payable.

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The gross concept is sometimes preferred to the concept of working capital for the following

reasons:

1. It enables the enterprise to correct amount of working capital at correct time.

2. Every management is more interested in total current assets with which it has to operate

then the source from where it is made available.

3. It take into consideration of the fact every increase in the funds of the enterprise would

increase its working capital. The net working capital concept, However, is also important

for following reasons:

It’s a qualitative concept, which indicates the firm’s ability to meet its operating

expenses and short term liabilities.

It indicates the margin of protection available to the short term creditors.

It is an indicator of the financial soundness of enterprise.

It suggests the need of financing a part of working capital requirement out of the

permanent sources of funds.

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CLASSIFICATION OF WORKING CAPITAL

Working capital may be classified in two ways:

On the basis of concept.

On the basis of time.

On the basis of concept working capital can be classified as gross working capital and net

working capital. On the basis of time, working capital may be classified as:

Permanent or Fixed working capital.

Temporary or variable working capital.

PERMANENT OR FIXED WORKING CAPITAL

Permanent or fixed working capital is minimum amount which is required to ensure

effective utilization of fixed facilities and for maintaining the circulation of current assets.

Every firm has to maintain a minimum level of raw material, work- in-process, finished

goods and cash balance. This minimum level of current assets is called permanent or fixed

working capital as this part of working is permanently blocked in current assets. As the

business grow the requirements of  working capital also increases due to increase in current

assets.

TEMPORARY OR VARIABLE WORKING CAPITAL

Temporary or variable working capital is the amount of working capital which is necessary

to meet the seasonal demands and some special necessities. Variable working capital can

further be categorized as seasonal working capital and special working capital. The capital

necessary to meet the seasonal need of the enterprise is called seasonal working capital.

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Special working capital is that part of working capital which is required to meet special

demands.

Temporary working capital differs from permanent working capital in the sense that is

required for short periods and cannot be permanently employed profitably in the business.

IMPORTANCE OF ADEQUATE WORKING CAPIATAL

SOLVENCEY OF THE BUSINESS: - Adequate working capital helps in maintaining

the solvency of the business by providing uninterrupted of production.

GOODWILL: - Sufficient amount of working capital enables a firm to make prompt

payments and makes and maintain the goodwill.

ESAY LOANS: - Adequate working capital leads to high solvency and credit standing

can arrange loans from banks and other on easy and favorable terms.

CASH DISCOUNT: Adequate working capital also enables a concern to avail cash

discounts on the purchases and hence reduces cost.

REGULAR SUPPLY OF RAW MATERIAL: - Sufficient working capital ensures

regular supply of raw material and continuous production.

REGULAR PAYMENT OF SALARIES, WAGES AND OTHER DAY TO DAY

COMMITMENTS: - It leads to the satisfaction of the employees and raises the morale

of its employees, increases their efficiency, reduces wastage and costs and enhances

production and profits.

EXPLOITATION OF FAVORABLE MARKET CONDITIONS: - If a firm is having

adequate working capital then it can exploit the favorable market conditions such as

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purchasing its requirements in bulk when the prices are lower and holdings its

inventories for higher prices.

ABILITY TO FACE CRISES: - A concern can face the situation during the depression.

QUICK AND REGULAR RETURN ON INVESTMENTS: - Sufficient working capital

enables a concern to pay quick and regular of dividends to its investors and gains

confidence of the investors and can raise more funds in future.

HIGH MORALE: - Adequate working capital brings an environment of securities,

confidence, high morale which results in overall efficiency in a business.

DISADVANTAGES OF EXCESSIVE WORKING CAPITAL

1. Excessive working capital means ideal funds which earn no profit for the firm and

business cannot earn the required rate of return on its investments.

2. Redundant working capital leads to unnecessary purchasing and accumulation

of inventories.

3. Excessive working capital implies excessive debtors and defective credit policy which

causes higher incidence of bad debts.

4. It may reduce the overall efficiency of the business.

5. If a firm is having excessive working capital then the relations with banks and other

financial institution may not be maintained.

6. Due to lower rate of return n investments, the values of shares may also fall.

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7. The redundant working capital gives rise to speculative transactions.

WORKING CAPITAL IS NEEDED FOR THE FOLLOWING PURPOSES: -

For the purpose of raw material, components and spares.

To pay wages and salaries.

To incur day-to-day expenses and overload costs such as office expenses.

To meet the selling costs as packing, advertising, etc.

To provide credit facilities to the customer.

To maintain the inventories of the raw material, work-in-progress, stores and spares and

finished stock.

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FACTORS DETERMINING THE WORKING CAPITAL REQUIRMENTS

1. NATURE OF BUSINESS: - The requirements of working is very limited in public utility

undertakings such as electricity, water supply and railways because they offer cash sale only

and supply services not products, and no funds are tied up in inventories and receivables. On

the other hand the trading and financial firms requires less investment in fixed assets but

have to invest large amt. of working capital along with fixed investments.

2. SIZE OF THE BUSINESS: - Greater the size of the business, greater is the requirement

of working capital.

3. PRODUCTION POLICY: - If the policy is to keep production steady by accumulating

inventories it will require higher working capital.

4. LENGTH OF PRODUCTION CYCLE: - The longer the manufacturing time the raw

material and other supplies have to be carried for a longer in the process with progressive

increment of labor and service costs before the final product is obtained. So working capital

is directly proportional to the length of the manufacturing process.

5. SEASONALS VARIATIONS: - Generally, during the busy season, a firm requires larger

working capital than in slack season.

6. WORKING CAPITAL CYCLE: - The speed with which the working cycle completes one

cycle determines the requirements of working capital. Longer the cycle larger is the

requirement of working capital.

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Fig. - 1

7. RATE OF STOCK TURNOVER: - There is an inverse co-relationship between the

question of working capital and the velocity or speed with which the sales are affected. A

firm having a high rate of stock turnover will needs lower amt. of working capital as

compared to a firm having a low rate of turnover.

8. CREDIT POLICY: - A concern that purchases its requirements on credit and sales its

product / services on cash requires lesser amt. of working capital and vice-versa.

9. BUSINESS CYCLE: - In period of boom, when the business is prosperous, there is need

for larger amt. of working capital due to rise in sales, rise in prices, optimistic expansion of

business, etc. On the contrary in time of depression, the business contracts, sales decline,

difficulties are faced in collection from debtor and the firm may have a large amt. of

working capital.

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CASH

RAW MATERIAL WORK IN PROGRESS

FINISHED GOODS

DEBTORS

10. RATE OF GROWTH OF BUSINESS: - In faster growing concern, we shall require

large amt. of working capital.

11. EARNING CAPACITY AND DIVIDEND POLICY: - Some firms have more earning

capacity than other due to quality of their products, monopoly conditions, etc. Such firms

may generate cash profits from operations and contribute to their working capital. The

dividend policy also affects the requirement of working capital.

12. PRICE LEVEL CHANGES: - Changes in the price level also affect the working capital

requirements. Generally rise in prices leads to increase in working capital.

MANAGEMENT OF WORKING CAPITAL

Management of working capital is concerned with the problem that arises in attempting to

manage the current assets, current liabilities. The basic goal of working capital management

is to manage the current assets and current liabilities of a firm in such a way that a

satisfactory level of working capital is maintained, i.e. it is neither adequate nor excessive as

both the situations are bad for any firm. There should be no shortage of funds and also no

working capital should be ideal.

WORKING CAPITAL MANAGEMENT POLICES of a firm has a great on its probability,

liquidity and structural health of the organization. So working capital management is three

dimensional in nature as:

1. It concerned with the formulation of policies with regard to profitability, liquidity and

risk.

2. It is concerned with the decision about the composition and level of current assets.

3. It is concerned with the decision about the composition and level of current liabilities.

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OBJECTIVE OF STUDY

This project was undertaken to analyze the working capital policies, working capital

management of the company and to reduce down their problems and to find the solutions

with respect to the working capital management of the company.

The objective of the study is to provide the solutions for reducing down the duration of the

operating cycle, to analyze the working capital position of the company and the liquidity

position, finding out the problems that the company is facing in managing the working

capital and showing trend of particular ratios in future and at the same suggesting them to

solve their problems. There are Two types of Objectives in this study:-

1. Primary Objective :- Primary Objectives is to “Analysis of Working Capital

Management “

2. Secondary Objective :- There are few secondary objectives : -

To see whether the company is prepared with enough working capital to face any kind of

contingencies.

To identify the financial strength and weakness of the company

To see how the day-to-day operations of the company takes place.

To compare the performance of working capital for a particular year with previous years.

To assess Liquidity position, Long term solvency, operational efficiency, and overall

profitability of SHRIRAM PISTONS AND RINGS Ltd.

Providing suggestions to solve the problems of the company.

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COMPANY PROFILE

Shriram Pistons and Rings Ltd. is one of the largest and the most sophisticated

manufacturers of Precision Automobile Components i.e. pistons, piston rings, pistons ,pins

and engine valves in India, the products are sold under brand name ‘USHA/SPR’ IN THE

markets.

SPRL manufacturing unit is located at Meerut Road in Ghaziabad (25 km from New Delhi).

SPR employs 6000+ skilled employees, has an annual turnover of approx. US$176 million

and has recently set up a second, most modern new Plant at Pathredi, next to Bhiwadi

Industrial Area (Rajasthan), about 60 kms from Delhi, to expand capacity and to offer the

latest technological products to all customers in India and abroad.

The plant has been recognized as one of the most modern and sophisticated plants in North

India in the field of automobile the production capacity of plant is as under:

Piston : 15.14 million per year

Pin : 13.0 million per year

Rings : 70.5 million per year

Engine valves: 29.5 million per year

“Total Customer Satisfaction Through Quality Management and Continuous

Improvement.”

QUALITY OBJECTIVES:

1. Organization which is sensitive and interactive to the needs of customer.

2. Continuous upgrading of quality and process to meet changing needs of customer.

3. Optimization of return on investment by:

Continuous improvement

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Technology development

Organizational and personnel development

Cost reduction efforts

Effective use of all resources

Harmonious and safe working conditions

4. Work to international norms of quality and management.

The company has successfully practiced the best work ethics and technology

along with the TPM & Kaizen approach and harmony through teamwork.

ACHIEVEMENTS (In Terms Of Quality):

SPR received the ISO- 9001 certificate from RWTUV, Germany in

1994.Technology from the collaborators was supplemented with in-house efforts and

by implementing world-class practices.

The company received QS-9000 certificate from TUV, Germany in the year 1999.

The company received ISO-14001 certificate in the year 2001

SPRL has received the Best Vendor Awards from Maruti Suzuki for 4 consecutive

times, Best Supplier Performance awards from Tata Cummins ltd for3 consecutive

years. And has self-certified status with most of the OEMS.

Excellence Award in Export by government of India.

Excellence Award in Productivity by ACMA.

Excellence Award in Quality by Honda scooters and motors limited, Honda Seil and

ACMA.

Received Diamond Award-Overall Best performance in QCDDM.

Received Silver Trophy-Technology from ACMA in 2009-10.

SPR received the TS-16949 certificate in the year 2003.

The company received the OHSAS-18001 certificates in the year 2003

Best foundry awards from the Institute of Indian Foundry men in the year 2003

Green rating award by CII, UP. Pollution board & World Bank in 2004.

The company received the TPM excellence award in the year 2004

The company received TPM special award in march-2010

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FEATURES OF SPR FACTORY:

Total area covered by the factory is 27 acres.

The factory has manufacturing facilities for pistons, rings, pins and engine valves.

Classification of the premises:

P.T.E – Production Technology and Engineering

C.A.A- Commercial Administration and Accounts.

R &D- Research and Development

Total strength of the company is 5723 nos. consisting of officers, staff, &workers.

The turnover/ sales for the year 2011-12 are Rs.900.0 crores.

The company is exporting to more than 35 countries.

Exports have risen up to Rs.152 crores the year 2010-2011.

Over 10% of the production is exported to sophisticated markets such as Europe,

UK, and Latin America etc.

SPR has been investing 30% of its retained earnings in quality up gradation and

modernization.

Collaborations

On our path to great quality, we walk hand-in-hand with global technology leaders, who

share our commitment to product quality and performance.

We have unique distinction of having 4 collaborations with World leaders in their respective

fields. We have Technical Collaborations with Kolbenschmidt AG of Germany for Pistons,

Riken Corporation of Japan for Piston Rings and Fuji Oozx of Japan for Engine Valves. We

also have a technical collaboration with Honda Foundry of Japan for the manufacture of

Pistons for engines produced by Honda and its joint ventures in India.

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KOLBENSCHMIDT AG, founded in 1910, is part of the Rhinemetal Group, Germany. It is

one of the world's largest manufacturers of pistons. They have production facilities around

the world producing Pistons with diameter range upto 620 mm. Their products are exported

to over 120 countries around the world.

HONDA Foundry, Japan, founded in 1963 is a wholly owned subsidiary of Honda Motors,

Japan. It has a fully automatic Piston casting plant and they also manufactures Intake

Manifolds, Cylinder Heads and intricate aluminum castings.

Riken Corporation, established in 1927, is the undisputed world leader in steel Piston Rings.

It also holds more than 50% market share of overall Piston Ring market within Japan. Piston

Rings are produced within diameter range of 20 mm to 3100 mm.

Besides Piston Rings, they also manufacture Cam Shafts, Knuckles, Valve Seats, Piston

Inserts, Pre-combustion Chambers, Rocker Arms, Tappets etc.

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Fuji Oozx is the largest Engine Valve manufacturer in Japan. They have multiple production

facilities including fully automatic state-of-the-art plant.

They have joint ventures in Thailand, South Korea, Taiwan and the Peoples' Republic of

China.

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RESEARCH METHODOLOGY

Methodology:

A. Type of Study:

The study carried out here is basically analytical in nature. This type of study relies on

data which is already available.

B. Type of Data used:

The methodology involved for data collection was mainly through secondary data

and was obtained from the company’s financial statements and the company’s website.

The Balance Sheets and the Profit & Loss Accounts for the last 3 years was the

source based on which forecasting was done which was from the company’s archives. Extreme

care was taken in collecting the data from the financial statements and only

relevant data was taken for the analysis based on.

C. Sources of Data:

The source of data has been company’s Balance Sheet and Profit and Loss Accounts

over a period of past 3 years.

D. Tools used for Data Collection:

The data has been collected mainly from the company’s Balance Sheet and Profit &

Loss Account for the past 3 years. Interview schedule was taken to understand how the

Finance Department is working and what are the various policies followed in the

Organization.

E. Tools and techniques used for analysis:

Various tools and techniques have been used to fulfill the aforesaid objectives. A

thorough study of the organization has been along with in depth study of the

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functioning of Finance and Accounts Department of SRPL. Further for the analysis

of Working Capital Management, study of working Capital cycle / Operating cycle

has been made along with Operating cycle of SPRL. Thereafter analysis of working capital

has been done by taking into consideration past 3 years Current Assets and current

Liabilities. After this component wise analysis has been done, to have in depth view of working

capital requirements and its trend. To find out the efficiency of Working Capital

management, Ratio analysis tool has been used for the evaluation of inventory, Cash

Management and Receivables Management at SRPL. Trend Projection of Working

Capital Requirements has also been done to assess the future requirements of

Working Capital. 

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ANALYSIS OF WORKING CAPITAL MANAGEMENT

Methods adopted for Working Capital analysis:

The broad range of project management and financial advisory services include:

Working Capital policy

Financial Ratio analysis for Working Capital Management

Managing the components of Working Capital of SHRIRAM PISTONS AND

RINGS LTD.

Determination of operating cycle of SHRIRAM PISTONS AND RINGS LTD.

Statement of change in Working Capital

Estimating Working Capital needs, Permanent & Variable Capital

Trend Analysis of Working Capital Management

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FINANCIAL RATIO ANALYSIS FOR WORKING CAPITAL

MANAGEMENT

Return on Working Capital:

Return on Working Capital (ROWC) =     PBIT / Working Capital * 100

Table2: Return on Working Capital

Return on Working Capital For Shriram Pistons

2009-10 793.58/1393.58*100 56.94%

2010-11 649.91/1133.27*100 57.34%

2011-12 1221.48/1560.83*100 78.25%

Figure 3: Return on working capital

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Note: Current Liabilities = Working Capital borrowings from Banks + Current Liabilities

+ Proposed Dividend + Provision for Tax.

Current Assets = Inventories + Debtors + Cash & Bank balance + Current

Investments + Advance Income Tax + Advance recoverable in Cash.

Analysis:

There has been a decline in ROWC between the two years – it reduces 20% during 2009-10.

This situation arises because of increase in current liabilities in past years as company is

having proposal of lots of investment due to which company is financing its project and

there is less tendency of free cash flow.

LIQUIDITY RATIOS:

Snapshot of Liquidity Ratios:

Table 3: Liquidity ratios

Basic Ratios 2009-10 2010-11 2011-12

Current ratio 2.60 2.17 2.43

Acid test ratio 1.66 1.28 1.57

Cash ratio 0.05 0.01 0.30

Current Ratio:

The current ratio is also known as the working capital ratio and is normally presented as a

real ratio.

Table4: Current Ratio

2009-10 Current Asset : Current Liability 2.60:1

2010-11 Current Asset : Current Liability 2.17:1

2011-12 Current Asset : Current Liability 2.43:1

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Figure 4: Current Ratio

Analysis:

The current ratio is the measure of whether a company has enough short-term assets to cover

its short-term debt and is index of strength of working capital. Anything below 1 indicates

negative W/C (working capital). While anything over 2 means that the company is not

investing excess assets. A ratio of greater than one means that the firm has more current

assets then current claims. Current ratio of the company has increased from 2.17 in Year

2010-11 to 2.43 in Year 2009-10. Current Ratio of the company depicts that for every Re.1

worth of current liability there are assets worth Rs.2.43. The company has sufficient

liquidity as the ratio is increasing. This year there is an increase in ratio due to almost double

inventory level in current year in comparison with previous year.

Suggestions:

Firstly the company should try to increase their inventory levels as money gets blocked.

In order to increase current ratio current assets should be increased. If we look into the

detailed schedule of current assets then we can find out that major portion of current

assets is due to debtors and inventories.

Company should make market survey and should decide first that what should be the

optimum amount of finished goods so that major portion of it can be sold off in the

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market. This will help in reducing the locking of funds or working capital in the finished

goods.

Acid Test Ratio:

Table 5: Acid Test Ratio for Shriram Pistons

Acid Test Ratio For Shriram Pistons

2009-10 Current Assets - Stocks: Current Liabilities 2258.21-814.19/867.00 1.66

2010-11 Current Assets - Stocks: Current Liabilities 2099.75-857.25/965.73 1.28

2011-12 Current Assets - Stocks: Current Liabilities 2650.04-929.57/1089.21 1.57

Figure 5: Acid Test Ratio for Shriram Pistons

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Analysis:

Acid test ratio is a more rigorous test of liquidity than the current ratio and when used in

conjunction with it, gives a better picture of the firm s ability to meet its short-term debts out

of short-term assets. This ratio is used to determine risk that is not detected by the Working

Capital ratio. A quick or liquid ratio of 1:1 is considered as satisfactory as the firm can

easily or readily meets all of its current liabilities. Here Shriram Pistons have its last year

ratings of which is constant from last three years, which indicates company is not having

satisfactory financial position and not able to pay its current liabilities and should be looked

at with extreme care and also implies that current assets are highly dependent on inventory.

Comparison between Current Ratio & Acid Test Ratio:

Table 6: Comparison between current ratio and acid test ratio

Comparison Current Acid Test

2009-10 2.10 1.66

2010-11 1.72 1.28

2011-12 1.91 1.57

SHRIRAM PISTONS AND RINGS liquidity position had worsened when looked at its

current ratio. The acid test ratio has fallen from 2010 to 2011. Current assets might not be

that liquid since most of them are debtors. The fact that the differences between the current

and acid test ratio is around .4, which is large, tells us that the SHRIRAM PISTONS stocks

are large. This is a huge level of stock holding. Additionally, the acid test ratio has decreased

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over the three-year period, meaning that SHRIRAM PISTONS has a weak liquidity position

than it had before. Normally that is not a good thing.

Cash Ratio:

Table 7: Cash ratio for SHRIRAM PISTONS

Cash Ratio For Shriram Pistons

2009-10 Cash: Current

Liabilities

46.32/867.00 0.05:1

2010-11 Cash: Current

Liabilities

17.59/965.73 0.01:1

2011-12 Cash: Current

Liabilities

334.66/1089.21 0.30:1

Figure 6: Cash Ratio for Shriram Pistons

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Analysis:

As cash is being the most liquid asset, quoted investment has been taken as marketable

securities. In our case the company is showing an increasing trend but still it is not a

favorable cash ratio. From the above calculation it is clear that company’s cash ratio had

remained very low. It is the notable point for the company as its current liabilities are much

higher than the cash in hand. It can create problems in the future payments of current

liabilities. Major portion of company’s current assets goes to inventory and debtors, which

only increase the carrying cost. Company need to reduce these assets to their optimum level.

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OTHER SNAPSHOT OF WORKING CAPITAL MANAGEMENT

RATIO S

Table 8: Working capital management ratios

Shriram Pistons For the three years

Asset Usage 2009-10 2010-11 2011-12

Fixed Asset Turnover 0.99 times 0.91 times 1.03 times

Current Asset Turnover 2.67 times 3.04 times 2.92 times

Capital Employed Turnover 2.53 times 2.45 times 2.42Times

Working Capital Turnover 4.33times 5.65 times 4.95times

Efficiency

Working capital to Gross Sale 0.23 times 0.17 times 0.20 times

Working Capital to Cost of Sale 0.28 times 0.28 times 0.25 times

Stock/Debtors/Creditors

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Debtors’ Turnover 5.17 times 6.35 times 6.90 times

Average Collection Period 69.61 days 56.69 days 52.17 days

Credits’ Turnover 3.33 times 2.65 times 3.36 times

Credit Payment Period 108.10days 135.84days 107.14 days

Inventory Turnover 6.09 times 6.37 times 6.63 times

Inventory Holding 59.11 days 56.16 days 54.29 days

Conversion Period (In Days) 59.11 days 56.51 days 54.29 days

Ratio to analyze WC Structure

Current Asset to Total Assets Ratio 0.38 times 0.33 times 0.38 times

Cash to Current Asset Ratio 0.020 times 0.008 times 0.12 times

Inventory to Current Asset Ratio 0.36 times 0.40 times 0.35 times

Current Liabilities to Total

Liabilities

0.48 times 0.43 times 0.49 times

Finished goods to Inventory Ratio 0.400 times 0.403 times 0.340 times

Raw Material to Inventory Ratio 1.69 times 1.62 times 1.81 times

Loan & Advances to CA ratio 0.10 times 0.10 times 1.00 times

Working Capital Management I: Asset Usage

Current Asset Turnover:

Current Asset Turnover =        Turnover        

Current Assets

35

36

Table 9: Current asset turnover for Shriram Pistons

Current Asset Turnover For Shriram Pistons

2009-10 6038/2260.58 = 2.67times

2010-11 6400/2099.75 = 3.04 times

2011-12 7739/2650.04 = 2.92 times

Figure 7: Current Asset Turnover

Analysis:

High current assets turnover ratio is more judicious and shows efficiency of management

and proper utilization of the assets. The graph shows the company has managed to higher

the ratio during the previous year however this year due to non-proportionate change in

current assets and turnover the ratio declines to 2.92. Due to more inventories this ratio falls.

37

Working Capital Turnover: This ratio signifies how effectively working capital is

being used in terms of the turnover.

Working Capital Turnover =        Sales        

Working Capital

Table 10: Working capital turnover for Shriram Pistons

Working Capital Turnover For Shriram Pistons

2009-10 6038/1393.58 4.33 times

2010-11 6400/1133.27 5.65 times

2011-12 7739/1560.83 4.95 times

Figure 8: Working Capital Turnover for Shriram Pistons

38

Analysis:

What this ratio tries to highlight is how effectively working capital is being used in terms of

the turnover it can help to generate: no ideal values here but the higher the better, surely.

The declining working capital turnover ratio in SHRIRAM PISTONS indicates that working

capital is not being utilized properly over the period of time. Management may think of

increasing the sales in the market or it is going for certain expansion plans.

Working Capital Management II: Efficiency

Working Capital to Gross Sale:

Working Capital to Gross Sale =Working Capital

Gross Sale

Table 11: Working capital to gross sale for Shriram Pistons

Working Capital to Gross Sale for the Shriram Pistons

2009-10 1393.58/6038 0.23

2010-11 1133.27/6400 0.17

2011-12 1560.83/7739 0.20

Figure 9: Working Capital to Gross Sale for the Shriram Pistons

39

Analysis:

The Company was showing decline in the year 2011 but now as the ratio increased to 0.17

from 0.20 there is a matter of concern but here also SHRIRAM PISTONS is far better than

the industry’s average. In previous year company’s working capital was very low but now

they are trying to improve it for liquidity purposes.

Working Capital to Cost of Sale:

Table 12: Working capital to cost of sale for Shriram Pistons

40

Working Capital to Cost of Sale =Working Capital

Cost of Sale

S

Figure 10: Working Capital to Cost of Sale for the Shriram Pistons

Analysis:

The Company was showing decline in the year 2011 but now as the ratio increased to 0.25

from 0.20 there is a matter of concern but here also SHRIRAM PISTONS is far better than

the industry’s average. In previous year company’s working capital was very low but now

they are trying to improve it for liquidity purposes.

Working Capital Management III: Stock/Debtors/Creditors

41

Working Capital to Cost of Sale for the Shriram Pistons

2009-10 1393.58/4960 0.28

2010-11 1133.27/5462 0.20

2011-12 1560.83/6168 0.25

Debtor’s Turnover:

Debtor’s Turnover =        Sales        

Debtors

Table 13: Debtor’s turnover ratio for Shriram Pistons

Figure 11: Debtor’s Turnover Ratio for the Shriram Pistons

Analysis:

Firstly, the ratio seems to have change by going from 5.17 to 6.35 times in the two years;

and it means that, on average, the company’s debtors are taking fewer days to pay their

42

Debtor’s Turnover Ratio for the Shriram Pistons

2009-10 6038/1167.56 5.17 times

2010-11 6400/1007.38 6.35 times

2011-12 7739/1120.41 6.90 times

accounts. Soundness of this ratio is more dependent on the business policy and the terms

with the clients. On the other side turnover is increasing over the years, which implies higher

the turnover, shorter the time between sales and collecting cash. It shows the company’s

debt-collecting machinery has improved through years.

Average Collection Period:

Avg. Collection Period =        360        

Debtor Turnover

Table 14: Average collection period for Shriram Pistons

Average Collection Period for the Shriram Pistons

2009-10 360 / 5.17 69.61days

2010-11 360 /  6.35 56.69 days

2011-12 360 / 6.90 52.17 days

Figure 12: Average Collection Period for the Shriram Pistons

43

Analysis:

The average collection period measures the quality of debtors since it indicates the speed of

their collection. The shorter the average collection period, the better the quality of debtors,

as a short collection period implies the prompt payment by debtors. The trend of SHRIRAM

PISTON is showing that the company was a success in decreasing the average collection

period, which represent sound collection policy of the company. Previous year it was 56.69

being debtors were less but now it is on the previous trend.

Creditor’s Turnover:

Creditor’s Turnover =        Purchases        

Creditors

Table 15: Creditor’s turnover ratio for Shriram Pistons

44

Figure 13: Creditor’s Turnover Ratio for the Shriram Pistons

Analysis:

In 2010 creditors turnover ratio increased from 2.65 to 3.36 times that shows company was

having improved credit paying ability through proper working capital management while in

2011 the ratio decreased which implies terms of credit allowed by the suppliers are liberal

and creditors are not paid promptly. This shows company keeps its obligation for long time.

Credit Payment Period:

45

Creditor’s Turnover Ratio for the Shriram Pistons

2009-10 1378/413.69 3.33

2010-11 1390.10/523.95 2.65

2011-12 1685/500.83 3.36

Credit Payment Period =        360        

Payable turnover ratio

Table 16: Credit payment period for Shriram Pistons

Credit Payment Period for the Shriram Pistons

2009-10 360 / 3.33 108.10 days

2010-11 360 / 2.65 135.84 days

2011-12 360 / 3.36 107.14 days

Figure 14: Credit Payment Period for the Shriram Pistons

Analysis:

46

Since in 2010 and 2010 the average payment period of the company was less compared to

2011 i.e. 135.84 days which implies that 2011 company was less prompt in making payment

to suppliers compared to other years. As again it improved its criteria and kept fewer

obligations in the year 2010. The same shows that reduction in the payment period is

responsible for the creditworthiness of the company.

Inventory Turnover Ratio:

Inventory Turnover =     Cost of Goods Sold

Closing Stock

Table 17: Inventory turnover ratio for Shriram Pistons

Inventory Turnover Ratio for the Shriram Pistons

2009-10 4960/814.19 6.09

2010-11 5462/857.25 6.37

2011-12 6168/929.57 6.63

Figure 15: Inventory Turnover Ratio for the Shriram Pistons

47

Analysis:

It measures approximately the number of times an entity is able to acquire the inventories

and convert them into sales. The Shriram Pistons shows higher turnover ratio which is good

for the company while a low turnover is usually a bad sign because products tend to

deteriorate as they sit in a warehouse, but several aspects of inventory holding policy have to

be balanced like lead time, seasonal fluctuations in orders, alternative use of warehouse

space.

Inventory Holding Period:

Inventory Holding Period =        360        

Inventory Turnover

Table 18: Inventory holding period

48

Inventory Holding Period for the Shriram Pistons

2009-10 360 / 6.09 59.11 days

2010-11 360 / 6.41 56.16 days

2011-12 360 / 6.63 54.29 days

Figure 16: Inventory Holding Period for the Shriram Pistons

Analysis:

49

Here, the company shows a decreasing trend in which there inventory holding ratio falls

down, which is good for the company as it avoids the unnecessary locking up of working

capital in the inventory and it shows efficiency of the management.

Working Capital Management IV: Ratio to analyze W/C Structure

Current Asset to Total Assets Ratio:

Table 19: Current asset to total asset ratio for Shriram Pistons

Current Asset to Total Asset Ratio for the Shriram Pistons

2009-10 2260.58/5946.26 0.38

2010-11 2099.75/6266.87 0.33

2011-12 2650.04/6843.25 0.38

50

Figure 17: Current Asset to Total Asset Ratio for the Shriram Pistons

Analysis:

If we analyze the structural health of working capital for SHRIRAM PISTONS, the

proportion of current assets to total assets has been showing almost constant trend

continuously over the years, which shows that the company is having certain problems with

its current asset management. But as this picture is showing less declining so it’s very clear

that this can be due to some investment for long-term return.

Cash to Current Asset Ratio:

Cash to Current

Asset=

     Cash     

Current asset

51

Cash to Current Asset Ratio for the Shriram Pistons

2009-10 46.32/2260.58 0.020

2010-11 17.59/2099.75 0.008

2011-12 334.66/2650.04 0.120

Table 20: Cash to current asset ratio

Figure18: Cash to Current Asset Ratio for the Shriram Pistons

Analysis:

The company shows an increasing trend in 2010 & again it decrease in 2011 but as this

recovered again the increasing trend of cash in the current assets was observed. However in

the year 2011 it decreased drastically. We can say that it will effect liquidity position of the

firm but on the other hand it is observed that they do not keep any ideal cash with them,

which is a positive sign for the company.

52

Inventory to Current Asset Ratio:

Inventory to Current Asset = Inventory     

Current asset 

Table 21: Inventory to current asset ratio for Shriram Pistons

Inventory to Current Asset Ratio for the Shriram Pistons

2009-10 814.19/2260.58 0.36

2010-11 857.25/2099.75 0.40

2011-12 929.57/2650.04 0.35

Figure: 19 Inventory to current asset ratio

Analysis:

53

Here, the company shows an unfavorable trend of increase in the proportion of the inventory

to current assets in 2010-11, which represents that the company is locking up the working

capital unnecessarily in the inventory. Fortunately, the ratio rises in the year 2010 which is a

good sign.

Current Liabilities to Total Liabilities:

Current Liabilities to Total Liabilities =Current Liabilities

Total Liabilities 

Table 22: Current liabilities to total liabilities ratio for Shriram Pistons

Current Liabilities to Total Liabilities Ratio for the Shriram Pistons

2009-10 867.00/1075.57 0.80

2010-11 965.73/1215.29 0.79

2011-12 1089.21/1382.14 0.78

Figure 20: Current liabilities to Total liabilities

54

Analysis:

The company shows a decreasing trend in the proportion of the current liabilities in the total

liabilities, this means company is taking fewer loans to meet its liability and project

investments are there, hence this shows a less burden on the management of SHRIRAM

PISTON. This ratio is not the only means of reviewing a company's debt structure.

Loan & Advances to Current Asset Ratio:

Loan & Advances to Current Asset =Loan & Advances

Current Asset

Table 23: Loan & Advances to Current assets ratio for Shriram Pistons

55

Loan & Advances to Current Asset Ratio for the Shriram Pistons

2009-10 229.93/2260.58 0.10

2010-11 217.53/2099.75 0.10

2011-12 265.40/2650.04 1.00

Figure 22: Loan & Advances to Current Asset

Analysis:

The increase in this ratio in the year 2010 shows the efficiency of the management. However

this much increases in the ratio is not suggestible.

INTERPRETATION (RATIO ANALYSIS):

56

The utilization rate of net working capital as depicted by working capital turnover ratio

is fluctuating during the period. It shows that working capital has not been effectively

used over the period of years except in the year 2010.

As shown by current assets turnover ratio, the utilization of current assets in terms of

sales has shown an increasing trend which shows that current assets has been effectively

used to achieve sales.

Again if we look at the efficiency with which individual elements of working capital

have been utilized, the picture of inventory turnover is bright.

As we look at the extent of liquidity of working capital, we notice that the ratio shows a

decreasing trend. This indicates, problem on the liquidity front.

MANAGEMENT OF CURRENT ASSETS

57

Alternative Current Asset Investment policies

Three alternative policies are there regarding the total amount of current assets. Essentially,

these policies differ with regard to the amount of current assets carried to support any given

level of sales, hence in the turnover of those assets. The line with the steepest slope

represents a relaxed current asset investment (also known as “fat cat”) Policy, where

relatively large amounts of cash, marketable securities, and inventories are carried, and

where sales are stimulated by the use of a credit policy that provides liberal financing to

customers and a corresponding high level of receivables. Conversely, with the restricted

current asset investment (also known as “lean and mean”) policy, the holdings of cash,

securities, inventories and receivables are minimized. Under the restricted, current assets are

turned over more frequently, so each dollar of current assets is forced to “work harder”. The

moderate current asset investment policy is between the two extremes.

Under the conditions of certainty, all firms would hold only minimal levels of current assets.

Any larger amounts would increase the need for external funding without a corresponding

increase in profits, while any smaller holdings would involve late payments to suppliers

along with lost sales due to inventory shortages and an overly restrictive credit policy.

When uncertainty is introduced the firm requires some minimum amount of cash and

inventories. A restricted lean and mean current asset investment policy often provides the

highest expected return on this investment, but it entails the greatest risk, while the reverse is

true under a relaxed policy.

Alternative Current Assets Investment Policies:

58

Figure 23: Alternate current assets investment policies

Current Assets

50

SHRIRAM PISTONS

40 Relaxed

30 Moderate

20

Restricted

10

0 50 100 150 Sales

Table showing Alternative Current Assets Investment Policies:

Table 24: Table showing alternative current assets investment policies

Policy Current asset to support

Sales of INR 100/-

Turnover of

Current Assets

Relaxed 30 3.3

Modified 23 4.3

Restricted 16 6.3

SHRIRAM

PISTONS

32.57 3.07

Note: - The Sales/current assets relationship is shown here as being linear, but the

relationship is often curvilinear

MANAGING THE COMPONENTS OF WORKING CAPITAL OF

SHRIRAM PISTONS

59

Four main components:

Cash

Marketable securities/Account Payables

Inventory

Accounts Receivables

Cash Management in SHRIRAM PISTONS:

Cash management system adopted by Finance Department in SHRIRAM PISTONS is very

reliable and transparent. As cash is a very important activity for a good operation of

company here in SHRIRAM PISTONS cash is monitored every day and intimated to

Finance Department. The daily cash report includes all the details of cash inflows and

outflows. Monthly cash budgets are maintained for the estimated of monthly cash inflows

and outflows. Finally the annual cash budget is made by the Finance Department in the

corporate head office.

The corporate office allocates different amount of each to different manufacturing units as

per their requirement. Corporate office acts as a linkage between the manufacturing unit and

creditors. Corporate office has determined the credit facility for every units of the company

and this keeps on changing from year to year depending up on company’s position

transactions, profitability and inventory position.

The corporate office provides cash to manufacturing units but there most function is

controlled in unit itself. All the need related to inventory are met through corporate office as

well as individual efforts of unit.

Fund Allocation:

60

Here the initial allocation for manufacturing units is done by corporate office and all

supplementary requirements are to look upon by Commercial department.

Fund Utilization:

Company operates an annual ‘Cash Budget’ and a rolling ‘Cash Plan’ drawn up every

month. Although specific forecasting technique is used, funds are deployed to different

departments as per their requirements. Daily reports on cash transaction are prepared by

Procurement department to keep a track of all payments made in the days work. Every

month cash transaction report is sent to Finance department in the corporate office showing

all the transaction of cash, (inflow and outflows) actual utilization of cash and allocation of

fund is compared. If the utilization of cash is more than the allocation of fund, then the plant

has to justify its more utilization.

To meet the requirement of cash, company approach to bank and present the required

detailed by the bank. SHRIRAM PISTONS kept less cash in hand, to meet the entire cash

requirement it depends on financing process.

Evaluation of cash management performances:

To assess the cash management performance this phase is divided as follows:

a) Size of Cash

b) Liquidity and Adequacy of cash:

This is depicted by the current ratio and acid test ratio, as calculated in part ratio analysis for

working capital management and respective position is shown in graph.

c) Control of cash

One of the major objectives of cash management from the stand point of increasing return

on investment is to economize on the cash holding without impairing the overall liquidity

requirements of the firms. This is possible by effecting tighter controls over cash flows. The

following ratios have been applied to assess the efficiency of cash control:

Cash to Current Assets ratio

Cash turnover ratio

Cash to current liabilities ratio

Table 25: Table showing different cash ratios

61

SHRIRAM PISTONS For the year ended Mn/Rs.

Efficiency of cash control 2009-10 2010-11 2011-12

Cash to Current Asset Ratio 46.32/2258

=0.020

17.59/2099

=0.008

334.66/2650.0

4

=0.12 times

Cash to Current liability Ratio 46.32/867.0

0

=0.05 times

17.59/965.7

3

=0.01 times

334.66/1089.2

1

=0.30 times

Average: 0.049

Average: 0.12

Summary:

It can be inferred from the above table that cash to current assets ratio is increasing which

shows improving position of liquidity but it again starting decline from 2011, which

ultimately affect the operational efficiency of the firm. Cash to current liability ratio shows

the cash balance maintained by company at a certain point of time for meeting its current

liabilities. The cash to current liability ratio is nearly on decreasing trend shows the

efficiency of operations, but this year it increases which is not a good sign.

Payable Management in SHRIRAM PISTONS:

Mostly the creditor comprises of the bank that is financing the working capital needs and the

suppliers to whom payments are to be given. This is basically done as per terms and

condition with the respective parties. The company is not able to make proper payment to its

creditors as year on year company’s creditors are increasing.

Evaluation of Payables Management:

The evaluation for payable management is done with the help of ratios:

Creditor’s turnover ratio

Average Payment Period

62

Table 26: Table showing payables management

SHRIRAM PISTONS For the year ended Mn/Rs.

Payable Management 2009-10 2010-11 2011-12

Creditor’s ratio 3.33 times 2.65 times 3.36 times

Average Payment period 108.10 days  135.84days  107.14 days

Average: 117.02 days

Summary:

The analysis shows that the minimum average creditor period is 107 days and maximum is

135 days. By analysis reveals the increasing and decreasing trend in average payment

period, which shows company is provided with liberal and strict credit payment period over

the year and according to the market situation.

Inventory Management:

Here the inventory is categorized in to:

(1) A B C analysis

(2) X Y Z analysis

1) ABC Analysis: - Items which constitutes to 70% of total consumption (of stores and

spares) value when arranged in descending order of consumption value will be termed as

‘A’ class items. Next 20% of total consumption value will be termed as ‘B’ class items and

the rest 10% as the ‘C’ class items.

2) XYZ Analysis: - Items which constitute top 70% of total stock of stores and spares

holding value when arranged in descending order of stock holding will be termed a ‘X’ class

items next 20% of total stock holding value is ‘Y’ class items and the rest 10% as the ‘Z’

class.

Higher than necessary stock levels tie up cash and cost more in insurance, accommodation

costs and interest charges.

Four basic levels will need to be established for each line/category of stock. There are the:

63

a) Maximum level – achieved at the point a new order of stock is physically received;

b) Minimum level – the level at point just prior to delivery of a new order (sometimes

called buffer stocks – those held for short term emergencies);

c) Reorder level – point at which a new order should be placed so that stocks will not fall

below the minimum level before delivery is received; and the

d) Reorder quantity or economic order quantity – the quantity of stock, which must be

reordered to replenish the amount held at the point delivery, arrives up to the maximum

level.

Once these controls are implemented an efficient system of recording receipts and issues is

vital to exercise full control of inventories.

Inventory Management at SHRIRAM PISTONS:

Inventory is stock of a company, which is manufacturing the components that make up the

products, for sale. In managing inventories the objective of the company is to determine and

maintain optimum level of inventory investment. The optimum level of inventory lies

between two danger points of excess and inadequate inventories.

Inventory is monitored differently for raw material, work in progress, finished goods and

spares. Monthly inventory report is sent to the finance department in the corporate office.

Obviously the inventory report is prepared at plant level. Procurement Department gives the

date of closing stock of raw materials, finished goods as well as the work in progress.

Inventory Turnover Ratio:

Table 27: table showing Inventory turnover ratio

SHRIRAM PISTONS For the year ended Mn/Rs.

2009-10 2010-11 2011-12

Inventory Turnover 6.09 times 6.37 times 6.63 times 

Average: 6.36

Summary:

64

Inventory turnover ratio establishes a relationship between the total sales during a period and

average inventory hold to meet that quantum at 6.63 times in 2010 and on average it is 6.36

times, that signifies the average moving of inventory. In other words, the stock held during

2010 is for 59.11 days as comparison of average at 56.52 days.

Receivable Management:

At a plant level mostly the finished goods are sold on credit to increase upon the market

share and retain the customers but the major portion of debtors are dealt by Marketing

Unit of the Commercial Department and the Finance Department. It is consideration as

an essential marketing tool.

Control of the debtors’ element (the amount owed the business in the short term) involves a

fundamental trade-off between the cost of providing credit to customers (which includes

financing bad debts and administration), and the additional net revenue that can be earned by

doing so. The former can be kept to a minimum with effective credit control policies, which

will require:

Setting and enforcing credit terms;

Vetting customers prior to allowing them credit;

Setting and reviewing individual credit limits;

Efficient invoicing and statement generation;

Prompt query resolution;

Continuous review of debtors position (generating ‘aged debtors’ report);

Effective chasing and collection procedures; and

Limits beyond which legal action will be pursued.

Before allowing credit to a new customer trade and bank references should be sought.

Accounts can be asked for and analyzed and a report including any county court judgments

Against the business and a credit score asked for from a credit rating business. Salesmen’s

views can also be canvassed and the premises of the potential customer visited.

65

The extent to which all means are called upon will depend on the amount of the credit

sought, the period, past experiences with this customer or trade sector, and the importance of

the business that is involved. But this is not a one-off requirement. One classic fraud is to

start off with small amounts of credit, with invoices being settled promptly, eventually

building up to a huge order and a disappearing customer.

Credit checking, even for established customers, should therefore feature in regular

procedures.

When the creditworthiness of a new customer is established, positive credit control calls for

the setting of a credit limit, any settlement discounts, the credit period, and credit charges (if

any).

The Late Payment of Commercial Debts (Interest) Act now allows small businesses to

charge large interest on late payment of business debts by companies and public sector

organizations. Nevertheless, it is wise to inform customers this right will be exercised.

Collection is a vital element of credit control and must include standard, polite and well-

constructed reminder letters and effective telephone or e-mail follow up. Use of collection

agencies should be considered, as could factoring – in its most comprehensive form a loan

facility based on outstanding invoices plus a sales ledger and debtors control service.

Efficient control of debtors will assist cash flow, and help keep overdraft or other loan

requirements down, and hence reduce interest costs.

Debtors represent future cash – or they should do if proper credit control policies are

pursued. Likewise stock will eventually become cash, but in the meantime represents

working capital tied up in the business. Keeping levels to the minimum required for efficient

operations will keep costs down. This means controlling buying, handling, and storing,

issuing, and recording stock.

Inherent in any system of inventory control is the concept of appropriate stock levels –

normally expressed in physical units sometimes in monetary terms.

The objective of establishing control levels is to ensure that excessive stocks are never

carried (and working capital thereby sacrificed) but that they never fall below the level at

which they can be replenished before they run out.

66

Receivables Management in SHRIRAM PISTONS:

Corporate office and the commercial department in coordination do the management of

receivables. The management of receivable is dealt on major part by corporate office and

minor part by commercial department of the company.

SHRIRAM PISTONS in matter of granting a credit period to customers tightens their policy

and reduce credit period to 107 days to its debtors. Total Debtors amounted to Rs. 1167.56

by the end of 2010, which further decreased to Rs. 1007.38 in 2011.

67

DETERMINATION OF OPERATING CYCLE OF SHRIRAM

PISTONS:

The determination of length of the operating cycle of a manufacturing firm is the sum of:

The broad range of project management and financial advisory services include:

inventory conversion period (ICP), &

debtors conversion period (DCP)

A) Inventory conversion period:

It is the total time needed for producing and selling the product. Typically, it includes:

a) raw material conversion period (RMCP)

b) work-in-process conversion period (WIPCP), and

c) Finished goods conversion period (FGCP).

Inventory Conversion period = RMPC + WIPCP + FGCP

The raw material conversion period is depends on:

1) raw material consumption per day, &

2) raw material inventory

Raw Material Consumption per day = Total Raw Material Consumption/Number of

days in the year

Raw Material Conversion period = Raw Material Inventory/Raw Material

Consumption per day

Similar calculations can be made for other inventories, debtors and creditors.

B) Debtors’ conversion period:

It is the time required to collect the outstanding amount from the customers. The total of

inventory conversion period and debtors’ conversion period is referred to as gross operating

cycle (GOC).

68

Gross Operating Cycle = ICP + DCP

C) Payable Deferral period:

This is very common to get gross operating cycle but in practice, a firm may acquire

resources (such as raw materials) on credit and temporarily postpone payment of certain

expenses. Payables, which the firm can defer, are spontaneous sources of capital to finance

investment in current assets. The payables deferral period (PDP) is the length of time the

firm is able to defer payments on various resource purchases.

Net Operating Cycle = Gross Operating Cycle – Payable Deferral period

If depreciation is excluded from expenses in the computation of operating cycle, the net

operating cycle also represents the cash conversion cycle. It is net time interval between

cash collections from sale of the product and cash payments for resources acquired by the

firm. It also represents the time interval over which additional funds, called working capital,

should be obtained in order to carry out the firm’s operations.

A) Inventory conversion period:

a) Raw Material Conversion Period:

Years 2009-10 2010-11 2011-12

Raw material consumed

Avg. Raw material inventory 1378.63

701.22

1378.63/701.22

1390.10

722.75

1390.10/722.75

1685

893.41

1685/893.41

69

=1.96 times =1.92 times =1.88 times

RCMP 360/1.96

=183.67 days

360/1.92

=187.5 days

360/1.88

=191.48 days

b) Work-In-Progress Conversion Period:

Years 2009-10 2010-11 2011-12

Cost of Production

Avg.Work in progress

2061.73

152.55

2061.73/152.55

=13.51 times

2310.03

119.93

2310.03/119.93

=19.26 times

1248.82

148.35

1248.82/148.35

=8.41 times

WIPCP 360/13.51

=42.80 days

360/19.26

=18.69 days

360/8.41

=26.64 days

c) Finished Goods Conversion Period:

70

Years 2009-10 2010-11 2011-12

Sales

Closing stock

6038

325.66

6038/325.66

=18.54 times

6400

346.22

6400/346.22

=18.48 times

7739

321.33

7739/321.33

=24.08 times

FGCP 360/18.54

=19.41 days

360/18.48

=19.48 days

360/24.08

=14.95 days

B) Debtors Conversion:

C)

Payables Conversion:

71

Years 2009-10 2010-11 2011-12

Sales

Closing debtors

6038

1170.14

6038/1170.14

=5.16 times

6400

1007.38

6400/1007.38

=6.35 times

7739

1120.41

7739/1120.41

=6.90 times

DCP 360/5.16

=69.76 days

360/6.35

=56.69 days

360/6.90

=52.17 days

Years 2009-10 2010-11 2011-12

Purchases

Closing creditors

1378.63

413.69

1378.63/413.69

=3.33 times

1390.10

523.95

1390.10/1007.38

=2.65 times

1685

500.88

1685/500.88

=3.36 times

PCP 360/3.33

=108.10 days

360/2.65

=135.8 days

360/3.36

=107.14 days

Operating Cycle:

Gross Operating Cycle (GOC):

Years 2009-10 2010-11 2011-12

RCMP+WIPCP+FGCP+DCP 299.48 days 282.36 days 301.40 days

Net Operating Cycle (NOC):

Years 2009-10 2010-11 2011-12

GOC-PCP

299.48-108.10

=191.38 days

282.36-135.80

=146.56 days

301.40-

107.14

=194.26 days

Analysis:

The operating cycle of the firm is disturbed, as it is continuously increasing which is not

good for the company.

The company policy had a significant change for the year with regard to inventory as it

had increased continuously but this policy has a cost to the company in the presence of a

significant decrease in payables deferral period, will have to negotiate higher working

capital funds.

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Company has tighten its steps towards the credit policy which signifies that in the

current year company is proving itself more efficient but other side it as well shows a

decline in the market share of the company.

The company had reduced down its payables deferral period significantly which

strengthens its creditworthiness in the market and helps the company in getting the loans

on liberal terms. This represents the efficiency of the management.

One can have a vastly different working capital outlay while performing the same activity.

Having a large amount invested in stocks and debtors does not necessarily mean large

profits, but it can mean a drop in the prime calculation that every businessman is interested

in the return on investment. The object of working capital management is to trim down on

stocks and debtors and get the cash coming faster within the comfort zone of the business. In

the normal periods of business activity, cash that had completed the working capital cycle

would be reinvested in stock and the whole process would begin again.

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Analysis of Asset Percentage:

Table 28: Table showing analysis of asset percentage

SHRIRAM PISTONS Years

Particulars 2009-10 2010-11 2011-12

Current asset 2258 2099 2650.04

Total asset 5946.26 6266.87 6843.25

Percentage of current assets over

fixed assets

37.02% 29.99% 35.49%

Current ratios 2.60 2.17 2.43

Figure 24: Percentage of Current Asset to Fixed Asset

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Analysis: From the above calculation it can be analyzed that company is following an

adequate policy of working capital from last 2 years. When we give a thought to the current

ratio of last three years we can very easily depict that its current ratio is more than the

standard one i.e. of 2:1. This type of approach also gives the adverse impact on the liquidity

of the company.

Analysis of Change in Working Capital:

Table 29: Table showing analysis of working capital

SHRIRAM PISTONS For the year ended Mn/Rs.

Particulars 2009-10 2010-11 2011-12

Current asset 2258 2099 2650.04

Current Liabilities 1052.03 1199.28 1351.91

Net Working Capital 1205.97 899.72 1298.13

Figure 25: Net working Capital

Analysis:75

As we can see from the above table and graph that company’s Net Working Capital has

been showing variation in its trend as from last two years working capital is showing

positive trend in increasing order.

The above situation shows that company management is efficient in management of

working capital.

Making the comparison of current assets and current liabilities in 2010 & 2011 current

liabilities are less than current assets which leads the working capital in positive range

which is good for the company.

Analysis of Current Assets:

Table 30: Table showing analysis of current assets

SHRIRAM PISTONS For the year ended Mn/Rs.

Particulars 2009-10 2010-11 2011-12

Debtors 1167.56 1007.38 1120.38

Inventory 814.19 857.25 929.57

Cash & Bank balance 46.32 17.59 334.66

Loans & Advances 229.93 217.53 265.40

Total 2258 2099.75 2650.01

Analysis:

Composition of all parts seems to be distributing but almost each component is showing

increasing trend which has both kind of influence for the financial performance of the

company so company need to manage these components very carefully.

Inventory is showing an increasing trend that is the signal of danger for company’s

profitability and these are not giving any return by locking up working capital.

Suggestions:

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First and foremost suggestion for the company is that, it should look into the idle funds,

which are engaged in inventory. Company should withdraw money from this locked up

working capital and invest it in some other assets.

Analysis of Current Liabilities:

Table 26: Table showing analysis of current liabilities

Particulars 2009-10 2010-11 2011-12

Sundry Creditors 413.69 523.95 500.83

Advances from customers 14.76 10.27 16.12

Other provisions 208.57 249.56 292.93

Other Current liabilities 415.01 415.50 542.03

Total 1052.03 1199.28 1351.91

Analysis:

As we can see from the graph and table that major portion of current liabilities are with

sundry creditors and every year it keeps on increasing.

As the company obligations are increased so company need to put certain measure to

control current liabilities.

By looking the three years position of company in current assets and current liabilities it

can be seen that current liabilities are increasing over current assets so within the time

company need to manage its liability portion and need to make safer decisions.

Suggestions:

77

Due to the huge amount of current liabilities company has to lock up its funds in current

assets. Therefore, it should reduce its current liabilities by paying them off so that

regular cash outflow of cash get restricted and outflow gets converted into inflow to

increase in profitability of the firm.

One suggestion that could be made to the company is that, it should pay off its creditors

by withdrawing some cash from its debtors, which is idle at this point of time and some

amount from its inventory.

STATEMENT OF CHANGE IN WORKING CAPITAL

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Table 33: Table showing statement of change in working capital

SHRIRAM PISTONS Years

Particulars 2009-10 2010-11 2011-12

Total Current assets (A) 2258 2099 2650.04

Total Current Liabilities (B) 1052.03 1199.28 1351.91

Working Capital Shortfall (A-B) 1205.97 899.72 1298.13

Analysis:

A statement of changes in working capital helps us in locating where these changes took

place. Since working capital is measured by subtracting current liabilities from current

assets. Any increase in current asset and any decrease in current liabilities show an increase

in working capital similarly, a decrease in current assets and an increase in current liabilities

represent a decrease in working capital.

This table shows the changes in net working capital of SHRIRAM PISTONS. A wise

financial policy of a firm requires that long-term funds be used to finance Fixed Assets and

short term funds are used to finance Current Assets. The statement of changes in working

capital shows that there was a tremendous continuous increase in current liabilities. It is

clear that our debtors are increasing in the previous year so it implies that company is losing

the interest on the working capital locked into it. There is a decrease in working capital

mainly because of the locking of working capital funds in inventories and receivables and

due to the increase in the liabilities.

ESTIMATING WORKING CAPITAL NEEDS

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The most appropriate method of calculating the working capital needs of a firm is the

concept of operating cycle. However, a number of other methods may be used to determine

working capital needs in practice. We shall illustrate here three approaches, which have

been successfully applied in practice:

Current assets holding period: To estimate working capital requirements on the basis

of average holding period of current assets and relating them to costs based on the

company’s experience in the previous years. This method is essentially based on the

operating cycle concept.

Ratio of sales: To estimate working capital requirements as a ratio of sales on the

assumption that current assets change with sales.

Ratio of fixed investment: To estimate working capital requirements as a percentage of

fixed investment.

Estimating Optimal Need of Working Capital

a) Raw material consumed per month:

= 1685/12 =140.40 Mn/Rs.

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b) Work in progress:

Raw material per month + (Cost of Production /2)

= ---------------------------------------------------------

12

140.40 + (1248.82/ 2)

= ----------------------------- = 140.40 + 624.41= 764.81 Mn/Rs.

c) Finished Goods:

321.33

Total cost per month = --------------- = 26.77 Mn/Rs.

12

d) Total Inventory Needs:

= 140.40 + 764.81 + 26.77 = 931.98 Mn/Rs.

e) Debtors:

7739

Sales per month = ----------------- = 644.91 Mn/Rs.

12

f) Operating Cash:

624.41

Total cost per month = ------------------ =52.03 Mn/Rs.

12

Therefore, Total Working Capital Required

= 931.98 + 644.91 + 52.03

= 1628.92 Mn/Rs.

The first method gives details of the working capital items. This approach is subject to error

if markets are seasonal.

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A number of factors will govern the choice of methods of estimating working capital.

Factors such as seasonal variations in operations, accuracy of sales forecasts, investment

cost and variability in sales price would generally be considered. The production cycle and

credit and collection policy of the firm would have an impact on working capital

requirements. Therefore, they should be given due weightage in projecting working capital

requirements.

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TREND ANALYSIS FOR WORKING CAPITAL MANAGEMENT

Trend analysis is comparative analysis of company’s ratios over time. It tries to predict the

future movement based on past data. Trend analysis is based on idea what is happened in

past and given the idea what would happen in past. In trend analysis, industry ratios are

compared over time, typically years. Year-to-year comparisons can highlight trends and

point up the need for action. Trend analysis works best with five years of ratios.

"With the past, we can see trajectories into the future - both catastrophic and creative

projections."

The Trend Analysis module allows plotting aggregated response data over time. This is

especially valuable on the basis of five-year data and a result of long survey.

The following data points can be measured (Y-Axis)

1. Mean and Mean Percentile

2. Standard Deviation and Variance

3. Ratio

The "Time Factor" (X-Axis) can have the following granularity

1. Daily

2. Weekly

3. Monthly

4. Quarterly (Jan-Mar, Apr-Jun, Jul-Sept, Oct-Dec)

5. Yearly

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Projection of Ratios through Trend Analysis

Figure 26: Current Ratio Trend

Figure 27: Cash Ratio Trend

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Figure 28: Total Asset Turnover Trend

Figure 29: Current Asset Turnover Trend

85

Figure 30: Working Capital Turnover Trend

Figure 31: Debtor Turnover Trend

86

Figure 32: Creditor Turnover Trend

Figure 33: Inventory Turnover Trend

87

Analysis on the basis of Trend:

Trend of current ratio put a picture of company that company is not having short term

fund in hand to meet short term debt hence it put a threat in meeting current obligations.

Cash Ratio trend shows that company is having high amount of cash for paying current

liability which can influence the financial position of company in upcoming period.

Total asset turnover implies the asset base of company and this projection is in favour of

the company that shows efficacy of company in handling asset.

Current asset turnover trend of company is decreasing which shows inefficiency in

handing assets.

Working capital is decreasing over the period that can lead company to face liquidity

crunch & shows inefficiency in use of working capital. It needs to analyze the root cause

of the same to take required corrective action.

Debtor’s turnover trend is showing an increase in future that signifies that there is

shorter time period in sales and collecting cash.

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As the Creditor’s turnover ratio trend is decreasing which shows that payments of

company are prompt and do not keep its obligation for long time.

Inventory is showing good position in hand of company but still company need to keep a

check over it as inventory is influenced by seasonal fluctuations and market conditions.

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CURRENT ASSET FINANCING

Process of working capital financing:

1) Predictions are made based on sales.

2) Company has Credit Monitoring Arrangement (CMA) with banks. Accordingly

Forms are prepared and sent to consortium of banks for approval.

a. Form I contains information about Current Assets, this Form I should be sent

one week before beginning of Quarter.

b. Form II contains details about operations; this Form II should be sent six

weeks from entering the Quarter.

3) Accordingly margins are decided. The company itself should meet margin amount.

E.g. Inventory – 25%, Receivables – 35%. Normally margins are 25-35%.

4) Advances are received.

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FINDING & SUGGESTIONS

Findings:

The study conducted on working capital management of SHRIRAM PISTONS AND

RINGS LTD shows the evaluation of management performance in this context. Major

findings and suggestions thereon are narrated as under:

1. As current ratio is showing an increasing trend year on year, which implies that

current asset, are more compared to current liabilities.

2. High current assets turnover ratio is more judicious and shows efficiency of

management and proper utilization of the assets.

3. SHRIRAM PISTONS AND RINGS LTD has not a sufficient amount of working

capital during the past two years. As company is showing decreasing trend of

working capital, which shows that company, kept its obligation for long time and less

cash in hand to pay off its obligations.

4. Current ratio (2.43:1) and quick ratio (1.57:1) of the year 2011-12 are little bit more

than that of the ideal figures i.e. ideal current ratio is 2:1 while quick ratio is 1:1.

5. Inventory turnover ratio depicts the increasing trend which indicates the faster sale of

inventory which is good for the company.

6. Debtors Turnover ratio reveals an increasing trend during the period of study and

average collection period came down from 69 to 52 days which shows that company

is having specific policy for debtors’ management.

7. The operating cycle of the firm is disturbed, as it is continuously increasing which is

not good for the company.

8. The optimum need for working capital on an average basis company roughly will

require more than 1628.92 Mn/Rs. as its working capital.

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Suggestions: Keeping in view of detailed analysis for the 3 years of study and findings

mentioned in above paragraphs, the following suggestions shall be helpful in increasing the

efficiency in working capital management.

1. In case of inventory management ABC analysis, FSN technique, VED technique

should be adopted to increase the efficiency of inventory management. Further a

inventory monitoring system should be introduced to avoid holding of excess

inventory.

2. It is suggested to maintain a favorable current and quick ratios which shows a lesser

than ideal figures. It can be done either through increasing current assets or

decreasing liabilities.

3. With the help of proper inventory management systems, like demand-based

management, etc. the company can reduce the need for working capital and

inventories can be financed through accounts payable.

4. The company should try and maintain an optimum level of working capital in order

to improve upon the workings of the company.

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LIMITATIONS

1. Availability of the financial data was very limited which is not disclosed due to

sensitive nature for the company.

2. The main component of working capital is cost of capital, which is not described in

the project because of confidential nature.

3. External environment influence was not considered while doing the theoretical

standard rather than the industrial standard because of unavailability of any such

specific standard.

4. The scope of the study was limited to SHRIRAM PISTONS AND RINGS LTD

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REFERENCES

Annual reports of Shriram Pistons and Rings Ltd.

Khan M.Y, Financial Management.

Financial accounting, Weygandt, Keiso, kimmel .

Fundamental of financial management D. chandra Bose

Financial management, Paresh Shah

Financial Management , Khan & Jain - 2011 Edition

[email protected]

www.google.com

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GLOSSARY

ABC Analysis: An approach of inventory management, which classifies inventories

according to their monetary values. Inventory items are thus categorized as (i) A- items:

high value items for which careful management is needed; (ii) B-items: moderate value

items for which rules of thumb such as past inventory turnover are adequate

management techniques, and (iii) C-items: low value items which can be maintained at a

flat minimum amount.

Accrued Liability: - Also known as outstanding liabilities or expenses. For example,

accrued wages, accrued rent, accrued taxes and accrued interest and so on. They

typically represent obligations for certain services for which payments are yet to be

made and are indirect sources of financing.

Ageing Schedule: It is a tabular classification of receivables which showing the length

of time which the account has been outstanding.

An Aggressive Policy: It resorts to short-term liabilities to finance temporary and also

part or the entire permanent current assets requirement.

Average Collection Period: Accounts receivables / (annual credit sales/360).A ratio

that express how rapidly the firm is collecting its credit accounts.

Balanced Policy: This policy is that balances the trade-off between risk and profitability

in a manner consistent with its attitude towards bearing risk.

Bills Payable: Bills Payable is a current liability and arises when the bills written by

creditors are accepted by the firm.

Capital Cost: The cost of the use of additional capital to support credit sales, which

alternatively could be profitably employed elsewhere is, therefore a part of the cost of

extending credit or receivables and are called capital costs.

Carrying Costs: These costs arise due to the storing of inventory and expenses made in

raising funds to finance the acquisition of inventory.

Cash Budget: It is statement of the expected cash flows for a firm over a specified

period of time.

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Cash Cycle: This is length of the time between the purchase of raw materials and

collection of receivables in the sale of the final product.

Cash Discount: A percent reduction in sales or purchase price allowed for early

payment of invoices. It is an incentive for credit customers to pay invoices in a timely

fashion.

Collection Cost: These costs are administrative costs or legal costs incurred in

collecting the receivables from the customers to whom credit sales have been made.

Conservative Policy: A conservative policy ignores the distinction between temporary

and permanent current assets, by financing almost all assets investments with long term

capital.

Consumer Credit: Credit granted to an individual is referred to as consumer credit.

Credit Period: It is total length of time period over which credit is extended to a

customer to pay bill.

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