Financial Planning and Forecasting

SUMMER PROJECT REPORT ON

“FINANCIAL PLANNING AND FORECASTING”

Submitted in the partial fulfillment of the requirements for the award of the degree of

MASTER OF BUSINESS ADMINISTRATION

AMRITA SCHOOL OF BUSINESS

By

Vignesh S

(BL.BU.P2MBA09059)

Under the guidance of

Industry Guide Faculty Guide

V. Karthikeyan Prof. Usha Nandhini

Manager - Finance PGP Chair

Royal Classic Group Amrita School of Business

Tirupur Bangalore

DECLARATION

I, Vignesh S, a second year MBA student of Amrita School of Business, Amrita Vishwa

Vidyapeetham hereby declare that project titled “Financial Planning and Forecasting” was

done by me under guidance of Dr. Usha Nandhini, (PGP Chair-MBA Program), Amrita

School of Business and Mr. V. Karthikeyan, Manager – Finance, Royal Classic Group

Tirupur during April – June 2010.

I also declare that this project is not submitted by me for award of any degree, diploma,

literature or recognition earlier.

Vignesh S

18th June, 2009

Bangalore

ACKNOWLEDGEMENT

I am grateful to thank Royal Classic Group for giving me this great opportunity to do

my Summer Internship Project with them. I take the privilege to sincerely thank

Mr.R.Sivaraman, Executive Director, Royal Classic Group, in creating the opportunity for a

summer project in the finance department. I would like to thank D. Joshua Chithambaram

Vice President-Finance, my Industry Guide Mr. V. Karthikeyan Manager -Finance, Royal

Classic Group for his guidance and support during the entire course of the project.

I am also thankful to Mr. Kirthivasan, (Industry coordinator for summer internship)

Brand Executive, Royal Classic Group, for making everything possible for me during the

entire course of the project. I am thankful to the Core Finance Team, of the company for their

guidance, support and encouragement to give my best during the Internship Program. I

specially thank all the Managers, Officers and the Staff members with whom I interacted

during the course of my project for their support and cooperation.

I also take great pleasure in thanking my faculty guide, Dr. Usha Nandhini

Chairperson MBA program, Amrita School of Business, Bangalore, for giving me the moral

support and inspiration to perform well and make the Summer Internship Project successful.

I then take the opportunity to thank Ms. Chitra Harshan, Placement Coordinator,

without whose help, I wouldn’t have got such a wonderful corporate exposure at Royal

Classic Group, Tirupur.

I would like to heart fully extend my thanks and gratitude to my family for supporting

and instilling confidence in me in all ways. Above all, I thank the Almighty for His presence

within me and without whose grace the endeavor of mine would not have been successful.

Executive Summary

The internship project on “Financial Planning and Forecasting” has been a very good

experience. Every manufacturing company has to forecast its financial position for better

decision – making. An organization risks can be reduced and the efficiency can be increased

through efficient planning. At the same time company needs to plan about its future

investment to increase the productivity and profitability.

In a manufacturing company, the inventories and debtors occupy large amount which are

major components of current assets. The efficient management of these components would

increase the profitability and flexibility of the firm.

This project is a sincere effort to plan, forecast and analyze the financial position of Royal

Classic Group for the future period. The project is executed in an efficient manner. The

preparation of forecasted financial statements has undergone a various hard-hitting processes

to arrive at the amount of each item of financial statements.

The study on effectiveness of management of debtors was made to suggest some areas of

improvements to the company. For the study of the debtors, I reviewed the credit policy

document of the company, credit assessment methodology that the company follows to find

out the credit worthiness of its customers, the financing method adopted by the company to

finance its debtors, the collection method and then finally classification of debtors according

to the segment to which they belong to.

The financial statements analysis like Ratio analysis, Breakeven Analysis, Operating cycle &

cash cycle and Growth rate has been carried out to know the financial position of the

company in the future period.

The internship is a viaduct between the organization and the institute. This made me to

engage in a project that helped me to learn management of finance practically. And in the

process I could contribute substantially to the organization’s growth.

The experience that I gathered over the period of my internship has certainly provided the

management knowledge which I trust will help me in future.

Contents

Sl. No. Contents Page No.

1. Industry Profile

2. Company Profile

3. Financial Planning and Forecasting –

Introduction

4. Objective

5. Forecasted Financial Statements

6. Assumptions

7. Analysis of Forecasted P&L A/c

8. Analysis of Balance Sheet

9. Debtors Management

10. Ratio Analysis – Forecasted

11. Breakeven Analysis

12. Operating Cycle & Cash Cycle

13. Growth Rate

14. Recommendations

15. Conclusion

16. Bibliography

Industry Profile

Textile Industry – Holistic Approach

A Textile company the purpose of restructuring scheme is defined as “whose

business includes yarn spun on spinning systems, weaving, knitting, processing,

texture made-up, readymade garmenting and composite milling operations in the

organized sector”.

US and European markets dominate the global textile trade, accounting for 64% of

clothing and 39% of the textile market. With the dismantling of quotas, global textile

trade is expected to grow to US$ 670 billion by 2011.

The history of development in World Textile Industry was started in Britain as the

spinning and weaving machines were invented in that country. The World Trade

Organization (WTO) has taken so many steps for uplifting this sector. In the year

1995, WTO had renewed its Multi Fiber Arrangement (MFA) and adopted Agreement

on Textiles and Clothing (ATC), which states that all quotas on textile and clothing

will be removed among WTO member countries. However the level of exports in

textiles from developing countries is increasing even if in the presence of high tariffs

and quantitative restrictions by economically developed countries. Moreover the role

of multifunctional textiles, eco-textiles, e-textiles and customized textiles are

considered as the future of textile industry.

It is worth noting that China, Hong Kong, South Korea and Taiwan have registered

their presence significantly in the world textile market through conscious efforts while

they continued to globalize their textile economy. The Indian textile industry has

witnessed significant growth during the last decade in terms of installed spindleage,

production of yarn (both spun - filament), output of cloth and its per capita availability

as also exports.

The Textile Industry is one of the booming industry, of that Asian Countries plays a

vital role in Global Textile Market. US and European countries dominates global

textile market as they import higher.

Indian Textile Industry

Indian Textile Industry is one of the leading textile industries in the world. Though

was predominantly unorganized industry even a few years back, but the scenario

started changing after the economic liberalization of Indian economy in 1991. The

opening up of economy gave the much-needed thrust to the Indian textile industry,

which has now successfully become one of the largest in the world.

India textile industry largely depends upon the textile manufacturing and export. It

also plays a major role in the economy of the country. India earns about 27% of its

total foreign exchange through textile exports. Further, the textile industry of India

also contributes nearly 14% of the total industrial production of the country. It also

contributes around 3% to the GDP of the country.

Textile Industry in India is the second largest employment generator after agriculture.

It holds significant status in India as it provides one of the most fundamental

necessities of the people. Textile industry was one of the earliest industries to come

into existence in India and it accounts for more than 30% of the total exports. In fact

Indian textile industry is the second largest in the world, next to China.

Textile Industry is unique in the terms that it is an independent industry, from the

basic requirement of raw materials to the final products, with huge value-addition at

every stage of processing. Indian textile industry is constituted of the following

segments: Readymade Garments, Cotton Textiles including Handlooms, Man-made

Textiles, Silk Textiles, Woollen Textiles, Handicrafts, Coir, and Jute.

Current Facts of Indian Textile Industry

India holds position as world’s second highest cotton producer.

Acreage under cotton reduced about 1% during 2008-09.

The productivity of cotton which was growing up over the years has

decreased in 2008-09.

Substantial increase of Minimum Support Prices (MSPs).

Cotton exports couldn't pick up owing to disparity in domestic and

international cotton prices.

Imports of cotton were limited to shortage in supply of Extra Long staple

cottons.

Tamil Nadu

Tirupur known by various names such as knits city, Cotton city is famously called

the Textile city of India. Tirupur has the largest and fastest growing urban

agglomerations in Tamil Nadu. The knitwear industry which is the soul of Tirupur has

created millions of jobs for all class of people. There are nearly about 3000 sewing

units, 450 knitting units, hundreds of dyeing units and other ancillary units which are

un-countable. The annual for-ex business for the past year 2008 stands at Rs.

8,000cr. Due to the climate and availability of raw material and work force Tirupur

has had made a large contribution to the export of knitwear garments. It is called the

Knits Capital of India as it caters to famous brands retailers from all over the world.

Nearly every international knitwear brand in the world has a strong production share

from Tirupur. It has a wide range of factories which export all types of Knits fabrics

and supply garments for Kids, Ladies, Men's garments - both underwear and tops.

The city is known for its hosiery exports and provides employment for about 300,000

people. Tirupur Exporters Association – popularly known as TEA - was established

in the year 1990. This is an Association exclusively for exporters of cotton knitwear

who has production facilities in Tirupur. From the modest beginning TEA has grown

into a strong body of knitwear exporters. Today, TEA has a membership of 672 Life

members and 155 Associate Members. The members of the Association, from the

beginning, have resolved to develop their organization focusing on:

1. Multilateral growth of knitwear industry and exports

2. Development of infrastructural needs for Tirupur.

3. Implementation of schemes for the benefit of the society and public.

4. Promotion of constructive co-operation with workers with fair division of

rewards.

5. General up-liftment of quality of life in Tirupur.

For foreign buyer TEA:

1. Offers conferencing and secretarial services.

2. Helps in locating suitable suppliers.

3. Helps in resolving disputes.

Company Profile

The Royal Classic Group was founded by three brothers:

Mr.R.Gopalakrishnan

Chairman,

A first Generation Entrepreneur,

29 Years of Experience in the industry.

Mr.R.Shanmugam

Managing Director,

A Diploma Holder in Electrical Engineering

27 Years of rich experience in the industry

In-Charge of export marketing, Innovation of new projects and banking

Mr.R.Sivaram

Executive Director,

A Diploma Holder Civil Engineering,

21years of experience in the industry

In-Charge of all domestic activities & IT System Administration

Vision:

Most Preferred global men’s wear fashion brand in the mid-premium segment.

Classic Polo aims to be and remain the leading retailer of world-class men’s wear in

India and become a compulsory part of men’s wardrobe solution by 2011.

Mission:

To grow horizontally and vertically in all formats (MBO, EBO, Chain Stores) through

continuous innovation by offering unparallel value to create customer delight.

The Royal Classic Group (RCG) began in 1991 as an exporter and gradually grew

into an Rs.425cr textile giant with brands under it wings through its 100% vertical

integration state-of-the-art in-house production. In February 2001, the company

launches its maiden T-Shirt brand Classic Polo, making its foray into the domestic

market. Within a short time, this brand figured among the top casual T-Shirt brands

in India. RCG acquired Smash, another T-Shirt brand, in September 2004 and

launched its exclusive premium men’s intimate wear under the brand name smash in

April 2005.

Classic Polo was awarded as the brand for the year 2005-06 for men’s casual.

Although, Classic Polo is primarily a T-Shirt brand, the range also offers a complete

lifestyle/wardrobe like exclusive T-Shirts, Shirts, Trousers, Denims, Sweaters,

Jackets, Loungewear etc.,

Royal Classic Group has production capacity of 15000 T-Shirts, 4000 Shirts and

4000 Trousers per day with consistent quality 0.01% defective percentage. Hand

picked cotton is used for production. RCG jointly has covered about 5000 acres of

wet land on contract farming. By providing the best seeds and timely manure, RCG

is getting an average productivity of 10Quintals/hectare, which is much higher from

conventional Cotton Farming.

Infrastructure

Innovations in manufacturing programs of garment occur in our production facilities

very often. Our specialization reflects in the quality of the goods delivered, as the

workers, executives and machinery are trained and tuned for that purpose.

Cotton farming

Ginning and Pressing

Spinning

Yarn

Knitting

Dyeing and finishing

Garmenting

Captive Power Plant

Cotton Farming:-

RCG has jointly covered about 5000 acres of wet land on contract farming. By

providing the best seeds and timely manure, RCG is getting an average productivity

of 10 Quintals/Hectare which is much higher from conventional cotton farming

RCG is ensuring about minimum guaranteed price for the farmers and hence apart

from its finest quality produce harvested, RCG enjoys a corporate social

responsibility by enlightening about 2000 families involved in cotton /farming.

Constant workshops and seminars are conducted at fields to educate and safe

transportation methods. The present area is planned to go up to 70000 acres in next

3 years.

Modern Ginning and pressing:-

From kappa’s cotton, this unit segregates the cotton seeds and good quality cotton

(lint) and this operation is done with least number of workers and totally under a

pneumatic drive system ensuring least human contacts. Ginning has capacity of 200

bales per day with an average weight of 170 Kgs/bale and as the cultivation

improves can reach up to 400 bales per day.

Spinning:-

The ginned cotton is covered into spun yarn in this unit with the following state-of-

the-art machineries.

Yarn:-

The company deals in 100% cotton yarn, 100% polyester yarn, all types blended

yarns, 100% gassed mercerized yarn, twisted yarn, various mélange yarn, etc… Our

spacious stock yard stores every type of yarn for supply to the regional factories,

apart from our own knitwear factories.

Advanced yarn testing facility is an added advantage. Yarn can be tested both at the

source point of the spinning mill and locally, which ensures best quality of yarn.

Knitting:-

Knitting dept has an array of latest computer controlled knitting machines from

reputed international brands. The in-house facility, which includes a knitting design

studio, is one of the best in the knitting industry. There are 46 circular knitting

machines that can knit jacquards, interlocks, ribs, and jerseys, in any pattern or

structure as needed. The capacity is 10 tons per day. There are 9 flat knitting

machines and that knit jacquards, plain, strips, and self designs with a capacity of

8500 pieces per day. Our circular machinery includes: (All Brand new MAYER and

CIE machines)

Dyeing and finishing:-

Our modern soft flow dyeing plant with Effluent Treatment Plant (ETP) has a

processing capacity of 10 tons per day. The soft flow dyeing plant has 7 vessels

imported from Taiwan. Supported by computerized color prediction, measurement

and matching systems from Data Color International, USA (Spectra Flash SF 600)

the plant can deliver evenly color fabrics, streaks free.

Dyed Fabrics are processed through balloon paddler from stretch plus, Switzerland

to remove the moisture neat and to give the fabric a better feeling and finish. Fabrics

are further processed through relax imported from Calator Ruckh, Germany.

Garmenting:-

The completely integrated facilities is topped by our garmenting division with skilled

pattern masters, cutting masters, tailors, and supporting workmen who are well

trained. The product specialization gives an excellent finish to the garment s they

make.

The entire production wing is housed under one roof with scientific work systems and

quality control systems,

Captive Power Plant:-

Presently they have installed 4 windmills of total 3.0 MW capacities which are

currently taking care of the entire requirements of the group. The company is

planning to add couple of more machines to take care of the future needs.

Solar Panel

The new solar heating Plant has been deployed at our dyeing division as the

replacement of exiting Fire Wood with the capacity of 10000 Liters per Day at 90D

and 20000 liters at 80. It has replaced the usage of 10 tons of Firewood/Day. In turn

we are saving almost 1000 trees a day.

Deployment of STP (sewage treatment Plant)

With the help of STP, RCG is purifying 1 Lac Liter of sewage water every day and it

is used for agriculture purposes.

Objective:

The main objective of the study is to understand the financial position of the

company, refers to the development of long-term strategic financial plans that

guide the preparation of short-term operating plans and budgets, which focus

on analyzing the pro forma statements and preparing the cash budget.

Financial Planning and Forecasting

Financial Planning and Forecasting is the estimation of value of a variable or set of

variables at some future point. A Forecasting exercise is usually carried out in order

to provide an aid to decision – making and planning in the future. Business

Forecasting is an estimate or prediction of future developments in business such as

Sales, Expenditures and profits. Given the wide swings in economic activity and the

drastic effects these fluctuations can have on profit margins, business forecasting

has emerged as one of the most important aspects of corporate planning.

Forecasting has become an invaluable tool for business to anticipate economic

trends and prepare themselves either to benefit from or to counteract them. Good

business forecasts can help business owners and managers adapt to a changing

economy.

Financial planning and forecasting represents a blueprint of what a firm proposes to

do in the future. So, naturally planning over such horizon tends to be fairly in

aggregative terms. While there are considerable variations in the scope, degree of

formality and level of sophistication in financial planning across firms, we need to

focus on common elements which include Economic assumptions, Sales forecast,

Pro forma statements, Asset requirements and the mode of financing the

investments.

In general usage, a financial plan can be a budget, a plan for spending and saving

future income. This plan allocates future income to various types of expenses, such

as rent or utilities, and also reserves some income for short-term and long-term

savings. A financial plan can also be an investment plan, which allocates savings to

various assets or projects expected to produce future income, such as a new

business or product line, shares in an existing business, or real estate.

Financial forecast or financial plan can also refer to an annual projection of income

and expenses for a company, division or department. A financial plan can also be an

estimation of cash needs and a decision on how to raise the cash, such as through

borrowing or issuing additional shares in a company.

While a financial plan refers to estimating future income, expenses and assets, a

financing plan or finance plan usually refers to the means by which cash will be

acquired to cover future expenses, for instance through earning, borrowing or using

saved cash.

Corporations use forecasting to do financial planning, which includes an assessment

of their future financial needs. Forecasting is also used by outsiders to value

companies and their securities. This is the aggregative perspective of the whole firm,

rather than looking at individual projects. Growth is a key theme behind financial

forecasting, so growth should not be the underlying goal of corporation – creating

shareholder value is enabled through corporate growth.

The benefits of financial planning for the organization are

Identifies advance actions to be taken in various areas.

Seeks to develop number of options in various areas that can be

exercised under different conditions.

Facilitates a systematic exploration of interaction between investment

and financing decisions.

Clarifies the links between present and future decisions.

Forecasts what is likely to happen in future and hence helps in avoiding

surprises.

Ensures that the strategic plan of the firm is financially viable.

Provides benchmarks against which future performance may be

measured.

There are three commonly used methods for preparing the pro forma financial

statements. They are:

1. Percent of Sales Method

2. Budgeted Expense Method.

3. Variation Method.

4. Combination Method.

Percent of Sales Method

The percent of sales method for preparing pro forma financial statement are fairly

simple. Basically this method assumes that the future relationship between various

elements of costs to sales will be similar to their historical relationship. When using

this method, a decision has to be taken about which historical cost ratios to be used.

Budgeted Expense Method

The percent of sales method, though simple, is too rigid and mechanistic. For

deriving the pro forma financial statements, we assume that all elements of costs

and expenses bore a strictly proportional relationship to sales. The budgeted

expense method, on the other hand calls for estimating the value of each item on the

basis of expected developments in the future period for which the pro forma financial

statements are prepared. This method requires greater effort on the part of

management because it calls for defining likely developments.

Variation Method

Variation method on the other hand, calls for estimating the items on the basis of

percentage increase or decrease of comparing with the same item of base year. It is

quite flexible throughout the future period. This method is not like budgeted method,

the value estimating for an item under this method is entirely dependent on the

historical data.

Combination Method

It appears that a combination of above explained three methods works best. For

certain items, which have a fairly stable relationship with sales, the percent of sales

method is quite adequate. For other items, where future is likely to be very different

from the past, the budgeted expense method or variation method is eminently

suitable. A combination method of this kind is neither overly simplistic as the percent

of sales method nor unduly onerous as the budgeted expense method or variation

method.

Assumptions

The method used for this study is combination method which eminently works best

for an organization.

The assumptions made for forecasting are as follows:

1. The sales are expected to increase by 20% every year.

2. All expenses are estimated under percentage of sales method.

3. Tax is estimated on the basis of profit.

4. Proposed Dividend to be increased by Rs. 5,000,000 every year.

5. Dividend tax is payable on the basis of proposed dividend.

6. Secured and unsecured loans to be decreased by 5% every year.

7. Tax liability on percentage of sales method.

8. Fixed assets are expected to increase by 2% every year.

9. Work-in-progress of capital is expected to decrease by 10% every year.

10. Investments are expected to increase by 5%.

11. Current assets like inventories and sundry debtors are expected to increase

by 2% every year.

12. Cash and it equivalents on the basis of percentage of sales method.

13. Loans and advances are estimated to increase by 5% every year.

14. Current liabilities are expected to increase by 5% every year.

15. Provisions are expected to increase by 10% every year.

Analysis of Profit & Loss Account

Income

Sales

The firm has sales as Exports as well as Domestic. The total sales include 59.8% of Export

sales, 39.7% of Domestic sales and 0.4% of second sales. The sales are forecasted to

increase by 20%p.a in the coming three years taking 2008-09 as base year.

This shows that company is more Export oriented than the Domestic Sales.

Expenditure

Raw Materials Consumed

Raw materials on which company spend most of its working capital consists of 39.3% of

Total Sales Value. This shows that there is a heavy expenditure on raw materials. It is

forecasted to increase by 20% in the coming three years.

The company should try to optimize the expense on raw material, as in the inflationary

economy capital blocked with raw material will lose its value in the subsequent year which

can be utilized in other profitable investments.

Cost of Human Resources

The cost of Human Resources for the firm is 11.1% of the Total Sales Value which is quite

satisfactory. This is expected to increase by 20% which means that company is expected to

give an increment in wages as well as recruit more employees.

Other Manufacturing Expenses

Other Manufacturing Expenses include Electricity Charges, Processing Charges,

Consumables and Repair & Maintenance which constitutes 20.1% of Total Sales Value. It is

expected to increase by 20% in coming three years. The other manufacturing expenses of

the company are quite high which is needed to be controlled.

Administrative Overheads

This includes Rent, Repairs and Maintenance, Insurance Charges, Legal and Consultancy

Fees and Audit Fees. Administrative Overheads constitutes about 5.5% which is quite

satisfactory. It is also expected to increase by 20% in the coming three years.

Selling and Distribution Overheads

The Selling and Distribution overheads include Advertisement Charges, Salary for sales

executives, Carriage Outwards, Commission, Discount and Incentives. These expenses

constitute 7.5% of Total Sales Value. Out of the total selling and distribution expenses, the

expense on commission discount and carriage is quite high which should be minimized and

the same amount can be used for Advertisement to promote brands of the company.

Finance Charges

Finance charges which mainly includes interest on loans from Banking and Non-Banking

Corporations. It constitutes 11.2% of Total Sales Value which is quite high, which shows

that, company has high value of debt in comparison to its equity.

Dividend

The trend for the dividend shows that it is increasing by Rs50 Lakhs Every Year which

means company is able to attract its investor by announcing dividend timely. This also

shows that the company has a reasonable operating profit. This is good indication for the

company.

Analysis of Balance Sheet

Sources of Funds

Share Capital

A share is the unit into which the capital of the company is divided. The promoters take

futuristic look and decide on the maximum capital i.e. Authorized Capital which is about

Rs7.5Cr for the firm. The amount actually paid by the shareholders is called paid-up-capital

of the company which is Rs5 Cr for the firm. The company has issued 2062650 Equity

shares and 2937350 Preference shares.

Reserves and Surplus

The Net Profit is increasing by 20% for the forecasted three years out of which the retained

amount after paying dividend is carried to Balance sheet under Reserves and Surplus head.

In ultimate analysis reserves belong to shareholders. Therefore, the total amount due to the

shareholders constitutes the capital and reserves. The presence of sizeable reserves in a

balance sheet is an advantage as it adds to the financial strength of the company.

Secured Loans

Secured Loans represent borrowings by the company against charging of its specific assets.

It is expected to decrease by 5% in coming three years. This shows the firm is expected to

utilize its Reserves and Surplus for its operations and its dependence on secured loans has

decreased.

Unsecured Loans

These include borrowings of the company without creation of any charge on its assets. It is

expected to decrease by 5% in coming three years. This shows that the firm is expected to

finance its short term needs by utilizing own funds for its operations.

Deferred Tax Liability

According to the data, the company seems to postpone a huge amount of taxes to the future

years and the company is utilizing the same amount as a source of fund for itself. As the Net

Profit is increasing by 20% every year it is also expected to increase by 20% in the future

years.

Current Liabilities and Provisions

Current Liabilities include short-term liabilities of the company and the provisions. The short-

term liabilities include sundry creditors for Trade, Expenses, and Capital Goods. It is

expected to increase by 5% as the operations of the company are growing but at the same

time company is able to pay its liabilities on time. The company is making the provisions

appropriate to the taxing policy of the company.

Application of Funds

Fixed Assets

As the company is expanding its business, the fixed assets like Land and Buildings, plant

and machinery of the company is expected to increase by 2%. The company has their own

power plant which includes four windmills. The company has separate production plants for

yarn, knitting, compacting, stitching and packaging. They have their own logistics for

domestic distribution.

Investment

The company is investing its surplus amount from retained earnings in shares of Corporation

Bank and South Indian Bank Ltd. The company has 200 Equity shares of Corporation Bank

and 360 Equity shares of South Indian Bank Ltd. The company has also invested in Tirupur

Infrastructure Bonds and Win Win Enterprises Pvt Ltd.

The company is expected to increase its investment by 5% p.a. for the coming three years.

Current Assets

Inventories

Inventories constitute more than 50% of the total current assets. As the Textile Industries

has longer production cycles the firm needs to maintain inventories but the management of

inventories should be efficiently carried out so that this investment does not become too

large as it result in blocked capital which could be put to productive use elsewhere. This is of

greatest significance in the inflationary economy because of the depreciation in the value of

money. The inventories of the company are expected to increase by 2% p.a. which is

satisfactory with respect to sales.

Sundry Debtors

Investment in receivables involves both benefits and costs. The extension of trade credit has

a major impact on sales, cost and profitability. Liberal policy leads to larger debtors at the

same time increase in sales. So the company needs to have a standard credit policy to

maintain a balance between receivables and sales. The sundry debtors are expected to

increase by 2% which is quite satisfactory with respect to sales which are increasing by

20%.

Cash and Bank Balances

According to the data, the cash and bank balances has increased by 20%, which is a good

indication in aspect of liquidity of the company. This is a good sign for the creditors as it

means company is able to meet its current obligations.

Loans and Advances

According to the data, the cash and bank has increased by 20%, which means company’s

liquidity position is good enough and it is able to give loans and advances to its subsidiary

company for carrying its operations.

DEBTORS MANAGEMENT

Royal Classic Group has a large proportion of the sales in cash and a small amount

of sales on credit. Although there is credit sales the credit policies are very

aggressive in nature and the company follows restrictive measures. The sales of the

firm are both domestic sales and international sales. The total debtors are classified

into 4 main segments:

Exporters

MBO-Distributors

Urban Retail Division

Others

There are 132 debtors for the financial year ending 31st march 2010, which includes

both MBO & EBO. There are 26 debtors with an outstanding amount of Rs 4.047cr

for classic fashion division (MBO Distributors). The total debtors are classified into 4

main regions:

East

North

South

West

Analysis:

East: East region has second highest sales which amount to Rs 6.777 cr but at the

same time debtors turnover is low i.e. 2.91 times in a year with a collection period of

125.4 days which is just twice of the credit period given by the firm. There is a need

of some aggressive policy at the same time maintaining high sales.

North: Here the firm has started the business recently, so it is too early to know the

exact debtors turnover and the firm will have flexible policy. The firm should aim at a

trade-off between profit (benefit) and risk (cost).

South: This is the region with highest sales, debtors turnover is also very good i.e.10

times in a year with the collection period of 36.4 days which is less than the credit

period given by the company.

West: This region also has high debtor’s turnover of 7.57 times in year, with

collection period of 48 days which is less than the credit period given by the firm. The

company should go for flexible credit policy aiming at higher sale.

Credit Policy

Discounting (or) Receivable purchase: The customers to whom the goods are

sold on credit, many of those receivables are discounted with the banks. In other

words the banks agree to purchase the company receivables and later on the due

date the company collects the amounts from the debtors and pay them to the bank.

This facilitates the company with the earlier realization of funds and no default risk.

Partly Credit policies: Under some circumstances the company also sells goods on

credit to its cash customers. It is purely a business call and this happens rarely .It

happens in the case of second sale. Under the following circumstances the goods

are offered on credit:

To clear period ending stocks which require the customer some period to sell

To sell old goods which are 180 days or more older

Sometimes in case an old customer is in some temporary financial trouble, then the

relation with customer forces to sell goods on credit.

Ratio Analysis

Ratio analysis is a widely-used tool of financial analysis. It is the process of the determining

of the items and group of items in the statements. It can be used to compare the risk and

return relationships of firm of different sizes. Ratio can assists management in its basics

function of forecasting, planning, coordination, control and communication.

Benefits of ratio analysis:-

Helpful in analysis of financial statements.

Helpful in comparative study.

Helpful in locating the weak spots.

Helpful in forecasting.

Estimate about the trend of the business.

Fixation of ideal standards.

Effective control.

Study of financial soundness.

Types of ratios

Ratios can be classified into four broad groups.

Liquidity Ratios

Leverage ratios

Profitability Ratios

Activity Ratios

Liquidity Ratios

They indicate the firm’s ability to meet its current obligation out of current resources and

reflect the short - term financial strengths/solvency of a firm. Liquidity implies from the

viewpoint of utilization of the funds of the firm that funds are idle or they earn very little. The

proper balance between the two contradictory requirements that is liquidity and profitability is

required for efficient financial management. The ratios which indicate the liquidity of the

firms are

Current Ratio

Quick Ratio/ Acid test Ratio

Current Ratio

The current ratio of the firm measures its short – term solvency that is its availability to meet

short – term obligations. As a measure of short – term or current term financial liquidity, it

indicates the rupees of current assets available for each rupee of current liabilities obligation

payable. The higher the current ratio the larger is the amount of rupees available per rupee

of current liability, the more is the firm’s ability to meet current obligations and greater is the

safety of funds of short – term creditors. Thus, current ratio is a measure of margin of safety

to the creditors.

Year Total Current

Assets

Total Current

Liabilities

Current

Ratio

2010-11 1616102521 1254990145 1.29

2011-12 1669271632 1217053762 1.37

2012-13 1726349950 1181591804 1.46

The industrial standard norms for current ratio are 1.33:1. The expected current ratio for

the year 2010-11 is 1.29, for 2011-12 is 1.37, for 2012-13 is 1.46. The company is

expected to meet the standard norms from the financial year 2011-12 onwards. It shows

that the liquidity position of the company is expected to improve in the coming years. In

the year 2010-11 it is expected to have Rs.1.29 for each rupee of current liabilities. It is

expected to increase 1.37 and 1.46 for every rupee of current liabilities in the year 2010-

11 and 2011-12 respectively.

1.20

1.25

1.30

1.35

1.40

1.45

1.50

2010-11 2011-12 2012-13

1.29

1.37

1.46

Current Ratio

Quick Ratio

The quick ratio is a measure of firm’s ability to convert its current assets quickly into cash in

order to meet its current liabilities. It refers to the amount which is readily available with the

company to meet its current liabilities. The quick ratio is the ratio between quick current

assets and current liabilities. The quick current assets do not include stock and prepaid

expenses. But, now a day’s majority of the companies assume that prepaid expenses are

also quick assets by considering it is recoverable.

Year Total Quick

Assets

Total Current

Liabilities Quick Ratio

2010-11 762888147 1254990145 0.61

2011-12 798826193 1217053762 0.66

2012-13 838320485 1181591804 0.71

The industrial standard norms for quick ratio are 1:1. The expected quick ratio for the year

2010-10, 2011-12 and 2012-13 is 0.61, 0.66 and 0.71 respectively. Of these, the quick ratio

is expected to increase by 0.05 every year. It is expected that in the financial year 2012-13

(0.71) is satisfactory. It means most of the current assets are blocked with unsalable

inventories. This needs to be managed aggressively.

0.54

0.56

0.58

0.60

0.62

0.64

0.66

0.68

0.70

0.72

2010-11 2011-12 2012-13

0.61

0.66

0.71

Quick Ratio

Leverage Ratios

Leverage Ratios measures the financial strength of the company. The long – term solvency

of a firm can be examined by using leverage ratios. The leverage ratio may be defined as

financial ratios which throw light on the long – term solvency of a firm as reflected in its

ability to assure the long – term lenders with regard to periodic payment of interest during

the period of the loan and repayment of principal on maturity or in predetermined

installments at due dates. These ratios are based on relationship between borrowed funds

and owners capital. These ratios computed from balance sheet. The ratios which indicate

the leverage position of the firm are

Debt – Equity Ratio

Debt – Assets Ratio

Debt – Equity Ratio

The relationship between borrowed funds and owner’s capital is a measure of the long –

term financial solvency of a firm. This ratio reflects the relative claims of creditors and

shareholders against the assets of the firm. Alternatively, this ratio indicates the relative

proportions of debt and equity in financing the assets of a firm.

Year Total Debt Equity Debt - Equity

Ratio

2010-11 1183019942 860746887 1.37

2011-12 1171920382 943142093 1.24

2012-13 1141029961 1040846391 1.10

The industry standard norms for debt – equity ratio are less than 1.65. The firm is expected

to have 1.37, 1.24 and 1.10 for the year 2010-11, 2011-12 and 2012-13 respectively. It

shows that the firm is expected to utilize its own funds more for investments. This also

shows that the firm is quite confident about the returns on its investment and it is also going

to attract creditors as they have less risk.

Debt – Assets Ratio

Debt – assets ratio is the relationship between creditors’ funds and total assets of the

company. Here, the outside liabilities are related to the total capitalization of the firm and not

merely to the shareholder equity. This ratio indicates the total assets financed by outsiders of

the company.

Year Total Debt Total Assets Debt - Assets Ratio

2010-11 2082161858 3151042611 0.66

2011-12 1978053765 3203129538 0.62

2012-13 1879151077 3258926145 0.58

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

2010-11 2011-12 2012-13

1.371.24

1.10

Debt-Equity Ratio

The industry standard norms for debt – assets ratio are 0.50-1.00. It is expected to have

debt – assets ratio of 0.66, 0.62 and 0.58 for the 2010-11, 2011-12 and 2012-13

respectively. This shows that the company is expected to utilize its own funds for future

investments. The firm is taking its own risk by being confident about the returns on its

investment. This also shows that the company is trying to reduce its borrowings to finance

the assets.

0.52

0.54

0.56

0.58

0.60

0.62

0.64

0.66

0.68

2010-11 2011-12 2012-13

0.66

0.62

0.58

Debt-Assets Ratio

Turnover Ratios

Turnover ratios determine how quickly certain current assets are converted into cash. It

measured in times. The three relevant turnover ratios are

Debtors Turnover

Creditors Turnover

Inventory Turnover

Fixed Assets Turnover

Debtors Turnover Ratio

The debtor’s turnover ratio supplements the information regarding the liquidity of one item of

current assets of the firm. The ratio measures hoe rapidly receivables are collected. A high

ratio is an indicative of shorter time – lag between credit sales and cash collection. A low

ratio shows that debts are not being collected rapidly.

Year Net Sales Avg Debtors

Debtors

Turnover

2010-11 3514686561 403526275 8.71

2011-12 4217623874 411596800 10.25

2012-13 5061148649 419828736 12.06

0.00

2.00

4.00

6.00

8.00

10.00

12.00

14.00

2010-11 2011-12 2012-13

8.7110.25

12.06

Debtors Turnover Ratio

The industry standard norms for debtors turnover ratio is 6times. The expected debtor

turnover ratio for the year 2010-11, 2011-12 and 2012-13 is 8.71, 10.25 and 12.06

respectively. It is expected to increase every year rapidly. It shows that the company is quite

prompt over its collection and the credit policy of the firm quite aggressive.

Creditors Turnover Ratio

The creditor’s turnover ratio is an important tool of analysis as a firm can reduce its

requirement of current assets by relying on supplier’s credit. The extent to which trade

creditors are willing to wait for payment can be approximated by creditor’s turnover ratio. A

low turnover ratio reflects liberal credit terms granted by suppliers, while a high ratio shows

that accounts are settled rapidly.

Year

Net Credit

Purchase Avg Creditors

Creditors

Turnover

2010-11 2392973673 371676164.7 6.44

2011-12 2868576684 390259972.9 7.35

2012-13 3439240462 409772971.6 8.39

The industrial standard norms for creditors turnover ratio is 6 times. The expected creditor’s

turnover ratio for the year 2010-11, 2011-12 and 2012-13 are 6.44, 7.35 and 8.39

respectively. It is expected to increase by every year rapidly. It shows that the company is

quite prompt over its payments and policy adopted by the company seems to be aggressive.

0.00

2.00

4.00

6.00

8.00

10.00

2010-11 2011-12 2012-13

6.447.35

8.39

Creditors Turnover Ratio

Inventory Turnover Ratio

Inventory turnover ratio indicates how fast inventory is sold. A high ratio is good from the

viewpoint of liquidity and vice versa. A low ratio would signify that inventory does not sell fast

and stays on the shelf or in the warehouse for a long time.

Year Net Sales Closing Stock

Inventory Turnover

Ratio

2010-11 3514686561 847655111 4.15

2011-12 4217623874 864608214 4.88

2012-13 5061148649 881900378 5.74

The industry standard norms for inventory turnover ratio are 6 times. The expected inventory

turnover ratios for 2010-11, 2011-12 and 2012-13 are 4.15, 4.88, and 5.74 respectively. This

shows that the inventories will stored in shelf and sales will not happen fast. As it increasing

rapidly it may be able to turnover the inventories more in the upcoming years.

4.15

4.88

5.74

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

2010-11 2011-12 2012-13

Inventory Turnover Ratio

Fixed Assets Turnover Ratio

Fixed assets turnover ratio indicates the efficiency with which firm uses its fixed assets to

generate sales. It is the relationship between costs of goods sold and fixed assets. The

higher the turnover ratio, the more efficient is the management and utilization of the assets

while lower turnover ratios are indicative of underutilization of available resources and

presence of idle capacity.

Year Net Sales Net Fixed Assets

Fixed Assets Turnover

Ratio

2010-11 3514686561 1956741440 1.80

2011-12 4217623874 1995876269 2.11

2012-13 5061148649 2035793794 2.49

The fixed assets turnover ratios are expected to increase rapidly in the upcoming years. It

shows that the firm is trying to utilize maximum of available resources as the value of fixed

assets are also increasing.

0.00

0.50

1.00

1.50

2.00

2.50

2010-11 2011-12 2012-13

1.80

2.11

2.49

Fixed Assets Turnover Ratio

Return on Assets

The return on assets measures the profitability of the total funds or investments of a

firm. It is relationship between Profit after Tax before Interest and Average Total

Assets.

Year PBIT Total Assets

Return on

Assets

2010-11 535977572 3151042611 0.17

2011-12 643173086 3203129538 0.20

2012-13 771807703 3258926145 0.24

The industry standard norms for return on assets are 14%. It is expected return on

assets for the year 2010-11, 2011-12 and 2012-13 are 17%, 20% and 24%

respectively. It shows that the company is expected to get good returns on assets. It

also shows that the operating efficiency is good.

0.00

0.05

0.10

0.15

0.20

0.25

2010-11 2011-12 2012-13

0.17

0.20

0.24

Return on Assets

Return on Capital Employed

The return on capital employed provides a test of profitability related to sources of

long – term funds. It also provides sufficient insight into how efficiently the long –

term funds of owners and lenders are being used. The higher the ratio, the more

efficient is the use of capital employed.

Year PBIT

Total Capital

Employed

Return on Capital

Employed

2010-11 535977572 2718308097 0.20

2011-12 643173086 2748758299 0.23

2012-13 771807703 2781836344 0.28

The industry standard norms for Return on capital employed are 14%. The expected

return on capital employed for the year 2010-11, 2011-12 and 2012-13 are 20%, 23%

and 28% respectively. It shows that the firm will able to use its capital fund efficiently

on its operations.

0.00

0.05

0.10

0.15

0.20

0.25

0.30

2010-11 2011-12 2012-13

0.20

0.23

0.28

Return Capital Employed

Return on Investment

The purpose of this ratio is to ascertain how much percentage of income is generated by the

use of capital. It measures the overall effectiveness of management in generating profits with

its available assets.

Year PBIT

Net Fixed Assets& Working

Capital

Return on

investment

2010-11 535977572 3046143391 0.18

2011-12 643173086 3107691963 0.21

2012-13 771807703 3171952635 0.24

The industry standard norms for return in investment are 14%. The expected return

on investment for the year 2010-11, 2011-12 and 2012-13 are 0.18, 0.21 and 0.24

respectively. It shows that the firm earns good returns on their investment and it is

expected to increase rapidly.

0.00

0.05

0.10

0.15

0.20

0.25

2010-11 2011-12 2012-13

0.18

0.21

0.24

Return on Investment

Ratio Analysis Breakeven

The break even analysis of ratios is calculated by considering the industrial standard

norms for Ratios. This is an analysis which helps the management to know current

financial position of the company. This is used to find the appropriate amount of

financial items needed to satisfy the Industrial standard norms for ratios.

Current Ratio

Year Total Current

Assets Total Current

Liabilities Current

Ratio Std

Norms BE Current

Assets BE Current Liabilities

2010-11 1616102521 1254990145 1.29

1.33

1669136892 1215114677

2011-12 1669271632 1217053762 1.37 1618681503 1255091452

2012-13 1726349950 1181591804 1.46 1571517099 1298007481

The industry standard norms for current ratio are 1.33:1. The expected value of

break even current assets is high and break even current liabilities are low in the

year 2010-11. This shows that the current ratio for the year 2010-11 is not up to the

mark, it is back by 0.04. So, the company has to adopt some necessary policies to

increase the current assets or to reduce the current liabilities.

The firm can take decisions to reduce the current liabilities rather than increasing the

current assets because for increasing the current assets either the company has to

reduce their investments on fixed assets or to convert inventories into debtors or

cash. The conversion of inventories to debtors or cash depends on sales, which

depends on market position. So, the firm can have a control on current assets like

Sundry Creditors.

As the firm is expected to have the current ratio better in comparison with industry

standard norms for the year 2011-12 and 2012-13 it shows that the routine is

expected to increase by 0.04 and 0.13 for the year 2011-12 and 2012-13

respectively.

Quick Ratio

Year Total Quick

Assets Total Current

Liabilities Quick Ratio

Std Norms

BE Quick Assets

BE Current Liabilities

2010-11 762888147 1254990145 0.61

0.8 - 1

1003992116 953610184

2011-12 798826193 1217053762 0.66 973643009 998532741

2012-13 838320485 1181591804 0.71 945273443 1047900606

The industry standard norms for quick ratio is 0.8 – 1. The expected break even

quick assets are high and break current liabilities are low. The data shows that the

firm is not expected to meet its industry standard norms till the year 2012-13. It is

back by 0.19, 0.14 and 0.09 for the year 2010-11, 2011-12 and 2012-13 respectively.

The firm has to adopt necessary policies to make the quick ratio as a standard one

as it represents the ready cash available to its liabilities.

The current ratio is expected to meet its standards by the year 2011-12 whereas in

case of quick assets it is not so. It shows that the majority of its current assets are

held by inventories. So the firm has to convert its inventories to either cash or sundry

debtors. At the same time the firm has to reduce its current liabilities like sundry

creditors to meet its standard norms.

As per the above breakeven analysis, there are two different breakeven current

liabilities figure which has very high difference. This is because of value of current

assets and quick assets in which inventories hold larger amount.

Debt – Equity Ratio

Year Total Debt Equity Debt - Equity

Ratio Std

Norms BE Debt BE Equity

2010-11 1183019942 860746887 1.37

< 1.65

1420232364 716981783

2011-12 1171920382 943142093 1.24 1556184454 710254777

2012-13 1141029961 1040846391 1.10 1717396545 691533310

The industry standard for debt – equity ratio is less than 1.65. The expected

breakeven debt is high and break even equity is low. The data shows that the firm is

expected to have good ratio between debt and equity which is back by 0.28, 0.41

and 0.55 for the year 2010-11, 2011-12 and 2012-13 respectively.

From the data two observations can be made, (i) Firm is expected to utilize its own

funds for its investments or (ii) Firm is expected to reduce its investments.

If the firm is expected to utilize its funds for investments, it is quite confident about its

returns on its investment and it also attracts the creditors as they have less risk.

If the firm is expected to reduce its investments either the firm has got enough

investments or the firm may not be confident about their returns on investments.

Debt – Assets Ratio

Year Total Debt Total Assets Debt - Assets

Ratio Std

Norms BE Debt BE Assets

2010-11 2082161858 3151042611 0.66

0.5 - 1

1575521305 4164323716

2011-12 1978053765 3203129538 0.62 1601564769 3956107530

2012-13 1879151077 3258926145 0.58 1629463073 3758302153

The industry standard norms for debt to assets ratio is 0.5 – 1. The expected

breakeven debt is low and breakeven asset is high which shows that the firm

satisfies the standard norms in upcoming years. The firm is expected to have good

ratio between debt – assets which is back by 0.34, 0.38 and 0.42 for the year 2010-

10, 2011-12 and 2012-2013 respectively when compared with maximum value.

It also shows that the firm is expected to utilize its own funds for financing its own

assets as the debt decreases correspondingly assets increases.

As per the above breakeven analysis, there are two different breakeven debt values

with slight difference. From this analysis it is better to consider the breakeven debt of

debt to assets figure because the firm goes for borrowings to finance its assets and

not maintain the standard for debt to equity ratio. Anyway it also satisfies the

standards of debt – equity too.

Inventory Turnover Ratio

Year Net Sales Closing Stock Inventory

Turnover Ratio Std

Norms BE Sales

BE Closing Stock

2010-11 3514686561 847655111 4.15

6

5085930669 585781094

2011-12 4217623874 864608214 4.88 5187649282 702937312

2012-13 5061148649 881900378 5.74 5291402268 843524775

The industry standard norms for inventory turnover ratio are 6 times. The expected

breakeven sales are high and breakeven closing stock is low. The data shows that

the firm does not meet its standards till the year 2012-13. It is back by 1.85, 1.12 and

0.26 for the year 2010-11, 2011-12 and 2012-13 respectively. The firm has to adopt

necessary policies to increase the sales or to decrease its inventories. There is also

possibility that the firm may adopt conservative policy on its raw materials like cotton

as the price of cotton fiber is increasing.

At the same time, the firm has to increase its sales by adopting better marketing

policies and promotion strategies or to reduce the inventories by having a control its

production and raw materials.

Debtors Turnover Ratio

Year Net Sales Avg Debtors Debtors

Turnover Std Norms BE Sales BE Debtors

2010-11 3514686561 403526275 8.71

6

2421157648 585781094

2011-12 4217623874 411596800 10.25 2469580801 702937312

2012-13 5061148649 419828736 12.06 2518972417 843524775

The industry standard norms for debtors turnover ratio is 6 times. The expected

breakeven sales are low and breakeven debtors are high. The data shows that the

company has very good debtor’s turnover which shows that the firm is able to collect

its receivables from its debtors, which is up by 2.71, 4.25 and 6.06 for the year 2010-

11, 2011-12 and 2012-13 respectively.

As per the above breakeven analysis, there are two different breakeven sales figure

with very high differences. From this analysis it is better to consider the debtors

turnover ratio because it is impossible to increase the sales by 200% approximately

as per the inventory turnover data. This shows that the firm holds very huge amount

of inventory which can also be derived from quick ratio. So the firm has to take

necessary steps to control its inventory.

Creditors Turnover Ratio

Year Net Credit Purchase

Avg Creditors

Creditors Turnover

Std Norms

BE Purchase BE Creditors

2010-11 2392973673 371676165 6.44

6

2230056988 398828945

2011-12 2868576684 390259973 7.35 2341559838 478096114

2012-13 3439240462 409772972 8.39 2458637829 573206744

The industry standard norms for creditors turnover ratio is 6 times. The expected

breakeven purchase is low and breakeven creditors are high. The data shows that

the company is expected to have good creditor’s turnover ratio which means that

they are payables are compensated on fine time interval. It is up by 0.44, 1.35 and

2.39 for the year 2010-11, 2011-12 and 2012-13 respectively. This policy attracts the

creditors to have business with this company.

Return on Assets

Year PBIT Total Assets Return on

Assets Std

Norms BE PBIT BE Assets

2010-11 535977572 3151042611 0.17

0.14

441145966 3828411226

2011-12 643173086 3203129538 0.20 448438135 4594093471

2012-13 771807703 3258926145 0.24 456249660 5512912165

The industry standard norms for return on assets are 0.14 (14%). The expected

breakeven PBIT is low and breakeven Assets are high. The data shows that the

company meets its standard norms in upcoming years and it is also expected to

have better returns when compared standard norms. It is up by 0.03, 0.06 and 0.10

for the year 2010-11, 2011-12 and 2012-13 respectively. This shows that the assets

are used efficiently and the operating efficiency is also good.

Return on Capital Employed

Year PBIT Total Capital

Employed Return on Capital

Employed Std

Norms BE PBIT

BE Capital Employed

2010-11 535977572 2718308097 0.20

0.14

380563134 3828411226

2011-12 643173086 2748758299 0.23 384826162 4594093471

2012-13 771807703 2781836344 0.28 389457088 5512912165

The industry standard norms for Return on Capital Employed (ROCE) are 14%. The

expected breakeven PBIT is low and breakeven Capital Employed is high. The data

indicates that the firm meets its standards in upcoming years. It is up by 0.06, 0.09

and 0.14 for the year 2010-11, 2011-12, 2012-13 respectively. It indicates that the

firm has enhanced returns when compared with standard norms.

As per the above breakeven analysis, there are two different breakeven PBIT

figures. From these it is better to consider the breakeven PBIT from Return on

Assets (ROA) because Capital employed does not include Current Liabilities. So the

firm expects return on the basis of total assets employed for the business as it is the

efficient one.

Operating Cycle & Cash Cycle

Operating cycle and cash cycle are two important components of working capital

management. Together they determine the efficiency of a firm regarding working

capital management.

Operating cycle refers to the delay between the buying of raw materials and the

receipt of cash from sales proceeds. In other words, operating cycle refers to the

number of days taken for the conversion of cash to inventory through the conversion

of accounts receivable to cash. It indicates towards the time period for which cash is

engaged in inventory and accounts receivable. If an operating cycle is long, then

there is lower accessibility to cash for satisfying liabilities for the short term.

Operating cycle takes into consideration the following elements: accounts payable,

cash, accounts receivable, and inventory replacement.

The following formula is used for calculating operating cycle:

Operating cycle = age of inventory + collection period

Cash cycle is also termed as net operating cycle, asset conversion cycle, working

capital cycle or cash conversion cycle. Cash cycle is implemented in the financial

assessment of a commercial enterprise. The more the figure is increased, the higher

is the period for which the cash of a commercial entity is engaged in commercial

activities and is inaccessible for other functions, for instance investments. The cash

cycle is interpreted as the number of days between the payment for inputs and

getting cash by sales of commodities manufactured from that input.

The fundamental formula that is applied for the calculation of cash conversion cycle

is as follows:

Cash cycle = (Average Stockholding Period) + (Average Receivables Processing

Period) - (Average Payables Processing Period).

Year Inventory

Period Receivable

Period Payable Period

Operating Cycle

Cash Cycle

2010-11 88.03 41.91 56.69 129.94 73.24

2011-12 74.82 35.62 49.66 110.44 60.79

2012-13 63.60 30.28 43.49 93.88 50.39

Analysis: A short cash cycle reflects sound management of working capital. On the

other hand, a long cash cycle denotes that capital is occupied when the commercial

entity is expecting its clients to make payments. As per the standard norm it should

be less than 120 days for a textile industry. The forecasted data shows that the

efficiency of accessibility of cash for other instances is good as it is low when

compared with standard norms.

0.00

20.00

40.00

60.00

80.00

100.00

120.00

140.00

2010-11 2011-12 2012-13

129.94

110.44

93.88

73.24

60.7950.39

Operating Cycle

Cash Cycle

Growth Rates

Firms generally state corporate goals in terms of growth rates. Growth is often the

central theme of corporate planning. It is year – over – year change expressed in

percentage. The emphasis on maximizing shareholder value as the principal goal of

the firm, the exertion of planners with growth seems like riddling.

While firms are interested in growth, they may be reluctant to raise external equity.

There are two growth rates to overcome this reluctance in the context of long – term

financial planning. They are,

1. Internal Growth Rate.

2. Sustainable Growth Rate.

Internal Growth Rate

The internal growth rate is the maximum growth rate that can be achieved with no

external financing. This is the growth rate that can be sustained with retained

earnings, which represent internal financing.

The formula used to calculate internal growth rate is

Year Return on

Assets Plough back

Ratio Internal Growth Rate

2010-11 0.17 0.83 16%

2011-12 0.20 0.81 19%

2012-13 0.24 0.80 23%

The data shows the internal growth rate for the forecasted year. It seems that the

firm will have fine internal growth rate in the upcoming years. The firm is expected to

have 16%, 19% and 23% for the year 2010-11, 2011-12 and 2012-13 respectively

with no external financing requirements.

Sustainable Growth Rate

The sustainable growth rate is the maximum growth rates that can a firm can

achieve without resorting to external equity finance. This is the growth rate that can

be sustained with the help of retained earnings matched with debt financing, in line

with debt – equity policy of the firm.

This is an important growth rate because firms are reluctant to raise external equity

finance for the following reasons:

1. The dilution of control, consequent to the external equity issue, may not be

acceptable to the existing controlling interest.

2. There may be a significant degree of under pricing when external equity is

raised.

3. The cost of issue tends to be high.

0%

5%

10%

15%

20%

25%

2010-11 2011-12 2012-13

16%

19%

23%

Internal Growth Rate

The formula used to calculate sustainable growth rate is

Year Return on

Equity Plough back

Ratio Sustainable growth

rate

2010-11 0.11 0.83 9.7%

2011-12 0.12 0.81 10.5%

2012-13 0.13 0.80 11.5%

The data shows the sustainable growth rate of the firm for forecasted year. It seems

that the firm will have fine sustainable growth rate in the upcoming years. The firm is

expected to have 9.7%, 10.5% and 11.5% for the year 2010-11, 2011-12 and 2012-

13 respectively without resorting to external equity requirements.

8.5%

9.0%

9.5%

10.0%

10.5%

11.0%

11.5%

2010-11 2011-12 2012-13

9.7%

10.5%

11.5%

Sustainable Growth Rate

Recommendations

Conversion of open credit customers to bank financed customers: The

Company has a policy of discounting or receivable purchase with the bank,

which can be converted to discounting without recourse or receivable

purchase backed by Insurance scheme. In case of non- payment of such

bills, the sufferer will be the factor (bank) or insurance company, firm will bear

almost no risk.

Credit sales to retailers: The Company should use other parameters also to

determine the credit scoring of a debtor. The parameters often used for credit

rating are customer’s profile, its market share, technology standards, capital

investment, credit history and ability to pay debts on time.

Securitization from open credit customers: Though the company tries to

finance all its customers through bank, it becomes necessary under some

circumstances for the company to sell its goods to customers who are not

under the bank finance scheme. Thus converting such customers under the

financing scheme may not also be possible. So, the company can make

provisions for circumstances for the securitization of such customers.

Collection of post dated cheque may also be a good instrument.

The indirect expenses for the company are high which as a result leads to low

net profit margin (4.06%) for the company. It may be due to inefficiency of the

marketing department and production department leading uncontrolled

promotional and other expenses on processing the fabrics and materials,

inefficient utilization of resources which should be controlled.

As per the data, majority of the current assets are blocked with slow moving

inventories because of which company is facing liquidity problem which is

expected to have 4.15, 4.88, and 5.74 for the upcoming years where the

standard norm is 6. The quick ratio is not up to the mark because of the value

of inventory. The firm has to control its capacity on over production or the firm

has to adopt proper promotional strategies to move the goods. So, the firm

should work towards the efficient management of inventories.

The debt – equity ratio is good from the creditors point of view but not from

the company’s point of view. The firm is expected to have 1.37, 1.24 and 1.10

for the upcoming years because it is expected to use the available reserves

and surplus for further investments. The company should go for long term

loans to broaden their investment as well as tax shield on its profit.

As fixed assets turnover ratio is less than the standard it shows that the

company’s operating efficiency is not up to the mark. As, the textile industry is

facing the economic problem like exchange rate against US dollar for export

trade and the cost major raw material i.e. cotton has been increasing rapidly,

they have restricted their usage of fixed assets like plant and machinery. The

company should try to improve its operating performance by efficient use of

fixed assets for the future.

Though the company tries to finance all its customers through bank, it

becomes necessary under circumstances for the company to sell its goods to

customers who are not under the bank finance scheme. Thus converting such

customers under the bank financing scheme may not also be possible. So,

the company can make provisions for circumstances under which such sale

will take place and review it regularly.

Conclusion

The project is executed by considering the financial 2009 – 10 as a base year

because the whole economy was experiencing recession in the previous years. The

company is expected to have good financial position in future as it is expected to

have good turnovers of sales, debtors, creditors and its assets. The firm is also

expected to have ratios between debt, equity and its assets which show the firm

uses its own funds for further investments which are a raising flag for its investors.

As, the firm is facing the difficulty on indirect expenses and its inventories however,

the above mentioned are some of the recommendations that could improve the

financial position of the company if implemented.

Note: The recommendations are brought to the notice of the company after the

effective study on economic conditions and proper analysis of financial statements

during the period of my study. I would like to thank the company, Royal Classic

Group for giving me this great opportunity of doing this project. I would then like to

give a great thanks to my mentor Mr. D.Joshua Chithambaram (Vice President

Finance) & Mr. V. Karthikeyan (Manager-Finance) for their continuous and

unending support during my project study. Finally, I would also like to thank all other

senior managers and officials who were able to spend their valuable time with me in

discussion of the subject area of my project and others for providing me the financial

data any other requirements for my study and successful completion of my project,

and thus contributed a great value to my project.

Bibliography

Financial Management – Prasanna Chandra

Management Accounting – M.Y. Khan and P.K. Jain

Advanced Accountancy – S.M. Shukla

Financial Statements – Royal Classic Group

www.wikipedia.org

www.rcg.in

www.mapsofindia.com