Project on Financial Report on Working Capital

A PROJECT REPORT ON CONTROL ON WORKING CAPITAL

Submitted to the

FACULTY OF MANAGEMENT STUDIES

Manonmaniam Sundaranar University, Tirunelveli

In

Partial fulfillment of the requirements for the award of the degree of

MASTER OF BUSINESS ADMINISTRATION

By

V.KANNAN

REGISTER NO. A10B28162004

DIRECTORATE OF DISTANCE & CONTINUING EDUCATION MANONMANIAM SUNDARANAR UNIVERSITY

TIRUNELVELI -672 012

JUNE -2011

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Mr.M.N.Srikanth., Business Head –SouthHema Engineering Industries LtdHosur – 635 114

CERTIFICATED

This is certify that this project entitled “A PROJECT REPORT ON CONTROL

ON WORKING CAPITAL”, is a bonafide record of the work independently

done by Mr.V.KANNAN, in the department of Business Administration,

Manonmanium Sundaranar University, Tirunelveli, during the academic

year 2010-2011 and has not previously formed the basis for the award of any

degree or similar title and that it represents entirely independent work on the

part of the Master of Business Administration

Place :

Date : Under the supervision and Guidance ofM.N.Srikanth –Business Head

Hema Engineering Industries Ltd, Hosur

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V.Kannan

Register No –A10B28162004

Manonmaniam Sundaranar University

Tirunelveli- 627012

DECLARATION

I hereby declare that this project entitled “A PROJECT REPORT ON

CONTROL ON WORKING CAPITAL”, has been independently carried out by

me as a student of the Directorate of Distance and Continuing Education,

Manonmaniam Sundaranar University, in partial fulfillment of the

requirements for the Professional Degree of Master of Business

Administration under the guidance of Mr.M.N.Srikanth –Business Head –

Hema Engineering Industries Ltd, Hosur -635 114. And has not

previously formed the basis for the award of any degree or similar title and

that it represents entirely independent work.

Place :

Date : Candidate and Signature

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ACKNOWLEDGMENTS

I express my deep sense of gratitude and indebtness to my

institute which has provided me an opportunity to fulfill the most

cherished desire to reach my goal.

I extend my sincere acknowledgement to our faculty guide

for enabling me to face the challenges ahead and for his guidance

during my project.

I would like to express my sense of gratitude to Mr.Srikanth,

Business Head south and Mr.Raman sawney –Director Finance,

Mr.Atul Swaroop –Director Operation for the support provided to

carry on executive training.

I would like to express my sense of gratitude to all the staff

of Alltere Life Varsity for their extended guidance and support

during this course.

Kannan.V

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MSU-Tirunelveli

TABLE OF CONTENTS

SL NO.

CHAPTERS PAGE NO.

1 Introduction 6

2 Company Profile and Key Mile Stone 7

3 Vision 8

4 Management Team 9

5 Products & Market 10

6 Manufacturing Facilities 11

7 Working Capital and Its Concept 13

8 Control on Working Capital and Ratios 14

9 Data Analysis and Interpretation of Data 31

10 Findings 42

11 Research Methodology 43

12 Appendix 47

13 Bibliography 48

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INTRODUCTION

Hema Group was established in the year 1972 in Ludhiana, Punjab (Northern India). The force behind the establishment was the able leadership of Mr. K.K. Jajoo, Bachelor of Engineering.(Mechanical) from prestigious "Birla Institute of Technical Sciences" at Pilani.

The Group specializes in mass production of sheet metal and tubular fabrications, electro plating and painting works. Its core competence has been surface treatment and it is regarded as best in this field and has created a name for itself. With its refined manufacturing processes, up- to - date equipment and highly qualified professionals, the group has created a niche for itself in the kind of operations it is into.

The Group’s competency highlighted in 1983, when it was selected as the major ancillary to M/s Hero Honda Motors Limited, world’s largest two wheeler manufacturer and thus become the OEM (Original Equipment Manufacturer) confirming to the JIS (Japanese Industrial Standard).

Today the group comprises of three independent manufacturing companies with the name and style as mentioned below:

a) M/s Kay Jay Auto Limited.b) M/s Hema Engineering Industries Limited.c) M/s Eurotherm Hema Radiators India Limited.

Step by step the group expanded its geographical reach and diversified its Customer base by tying up with auto major including M/s Yamaha Motors in Northern India and M/s TVS in Southern India.

The group has also, subsequently diversified in the fields of manufacturing And export of oven, panel and bath radiators to European Market.

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Key Milestones ( Manufacturing Facilities):

In a span of 28 years the group witnessed a phenomenal growth from single unit company to Euro 50 million plus industrial group having five Operational plants at various locations in India.

There has been a systematic geographical growth which is quite visible from the table below. The Group has six manufacturing facilities under its three enterprises:

S. No.

Enterprises Unit

Location

1 Hema Engineering Industries Ltd.

I Gurgaon ( Haryana)

Hema Engineering Industries Ltd.

II Housr ( Tamil Nadu)

Hema Engineering Industries Ltd.

III Manesar ( Haryana)

2 Kay Jay Auto Ltd.

I Dharuhera(Haryana)

3 Eurotherm Hema Radiators India Ltd.

I Bawal (Haryana)

The group is poised to reap the benefits of growing opportunities in the country and is poised for quantum leap in its overall performance. Group has already lots of plans quad up and shall be ready for the production in the mid of year 2012.These consist of

S. No.

Particular Location

1Assembly Facility Mysore

2 Manufacturing Facility Haridwar

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3 Manufacturing Facility Nalagarh

4 Manufacturing Facility Hosur

VISISON:-

The vision of the company can be clearly be stated as under “Reach out for the complete customer delight through engineering excellence, effective costing and commitment towards customer.” The group is constantly working towards the betterment of quality and systems. And is easily be judged by number of certifications awarded to us as mentioned above. Keeping the same spirits the group is targeting few more certifications as mentioned below and is working toward to achieve them:

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MANAGEMENT TEAM:-Hema’s strength lies in its management team. The Team is not only professionally equipped but also carries vast experience in the respective fields. The VISION of the company looks handy with proper guidance and ability of its TEAM. As stated above the group was set up under the leadership of Sh. K. K. Jajoo. Being a qualified engineer from BITS, Pilani and first hand entrepreneur, he led from the front and established the group what it is now. He was assisted by professionals Directors and his son Mr. Chandresh Jajoo and other family members. Gradually Mr. Chandresh Jajoo, also a qualified engineer was entrusted with overall responsibility to steer the growth of the group in the capacity of Managing director. Later under the dynamic management of Mr. Chandresh Jajoo, the management of the group was further strengthened when professionals from the industry too joined him to take part in the growth process. Currently the top management consists of following personnel, who are all technically qualified and have rich experience of the industry and function they are handling and managing.Locations of Manufacturing Facilities:Mr. K.K. Jajoo Chairman Mr. Chandresh Jajoo Managing Director Mr. Atul Swaroop Director (Operations)

Mr.Raman Sawney Director ( Finance)

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CHAIRMAN MANAGING DIRECTOR

Products and Market: As stated above, the Group is primarily engaged in the business of design, manufacture and supply of sheet metal and tubular components to automotive industry. It is a reputed tier 1 vendor to M/s Hero Honda, TVS and Yamaha besides supplying to other automotive component manufacturers. The company manufactures and supplies sheet metal and Tubular parts for two wheeler segment of automotive industry. The majority of parts supplied are:

Chassis Parts MSR Component Front and Rear Fork parts Utility part Front and Rear Panel parts Metal box, side support Muffler (silencer) and its parts Brake Shoe parts Shocker / Strut parts Horn parts Spoke & Nipples Head light parts Handle Bar Safety (guards) parts Seat Parts Fendor parts Wheel Supporting Parts Radiator parts(four wheeler)

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Products (Domestic):

Products

The Group is Catering to 50% of Indian Motor Cycle / Scooter Market through two major OEMs i.e. Hero Honda, TVS & Suzuki. Hero Honda Motors Ltd. TVS Motor Company Ltd Electrolux – USA & Italy Gillette Eurotherm – Germany M.I.E. GmbH Fiamm Minda Industries Ltd Yamaha Motors Limited Denso Haryana India Limited Gabriel India Limited

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Munjal Showa Ltd HCL Info systems Ltd Tenneco Ltd.

Manufacturing Facilities:-

The production apparatus in all units are at par with global standards. They include a range of modern gear like the CNC tube bending machines, auto-feed presses, SPM and Seam welding machines among others. Unit I has an automated spoke and nipple manufacturing machines that produce a whopping 149 million pieces per annum…the highest in the country. With fully automated and conveyers painting and powder coating lines, high-tech PLC controlled Tri-Nickel plating plants and Non-Cyanide Alkaline Zinc Plating plants, the group is able to provide durable and corrosion resistant finishes. Further sophistications include an in-house CAD/CAM facility, advanced software like ProE and Delcam, industrial wire cutting machines, a machining centre for tool making and a well-resourced training centre. The basic plant and machinery for engineering the components includes: Press Shop Welding Shop Liquid Paint Shop

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Powder Coating Shop Strut & Shocks Mfg.Shop

Spoke & Nipple Mfg. Shop Auto Zinc Plating Shop

Nickel Coating Shop Silencer Shop Apart from these machine shops all the plants are equipped with the primary utilities like Tool & Design Room DG Sets Effluent Treatment Plant Sewerage Treatment Plant

Capital required for a business can be classified under two main categories via,

1) Fixed Capital

2) Working Capital

Every business needs funds for two purposes for its establishment and to carry out

its day- to-day operations. Long terms funds are required to create production facilities

through purchase of fixed assets such as p&m, land, building, furniture, etc. Investments

in these assets represent that part of firm’s capital which is blocked on permanent or fixed

basis and is called fixed capital. Funds are also needed for short-term purposes for the

purchase of raw material, payment of wages and other day – today expenses etc.

These funds are known as working capital. In simple words, working capital

refers to that part of the firm’s capital which is required for financing short- term or

current assets such as cash, marketable securities, debtors & inventories. Funds, thus,

invested in current assts keep revolving fast and are being constantly converted in to cash

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and this cash flows out again in exchange for other current assets. Hence, it is also known

as revolving or circulating capital or short term capital.

CONCEPT OF WORKING CAPITAL

There are two concepts of working capital:

1. Gross working capital

2. Net working capital

The gross working capital is the capital invested in the total current assets of the

enterprises current assets are those

Assets which can convert in to cash within a short period normally one accounting

year.

CONSTITUENTS OF CURRENT ASSETS

1) Cash in hand and cash at bank

2) Bills receivables

3) Sundry debtors

4) Short term loans and advances.

5) Inventories of stock as:

a. Raw material

b. Work in process

c. Stores and spares

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d. Finished goods

6. Temporary investment of surplus funds.

7. Prepaid expenses

8. Accrued incomes.

9. Marketable securities.

In a narrow sense, the term working capital refers to the net working. Net

working capital is the excess of current assets over current liability, or, say:

NET WORKING CAPITAL = CURRENT ASSETS – CURRENT

LIABILITIES.

Net working capital can be positive or negative. When the current assets

exceeds the current liabilities are more than the current assets. Current liabilities

are those liabilities, which are intended to be paid in the ordinary course of

business within a short period of normally one accounting year out of the

current assts or the income business.

CONSTITUENTS OF CURRENT LIABILITIES

1. Accrued or outstanding expenses.

2. Short term loans, advances and deposits.

3. Dividends payable.

4. Bank overdraft.

5. Provision for taxation , if it does not amt. to app. Of profit.

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6. Bills payable.

7. Sundry creditors.

The gross working capital concept is financial or going concern concept whereas net

working capital is an accounting concept of working capital. Both the concepts have their

own merits.

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

following reasons:

1. It enables the enterprise to provide 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.

4. This concept is also useful in determining the rate of return on

investments in working capital. The net working capital concept,

however, is also important for following reasons:

It is qualitative concept, which indicates the firm’s ability to meet to 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 enterprises.

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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 to ways:

o On the basis of concept.

o 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 assts 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 required

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

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

required 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

exigencies such as launching of extensive marketing for conducting research, etc.

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

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

IMPORTANCE OR ADVANTAGE OF ADEQUATE WORKING CAPITAL

SOLVENCY 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.

Easy loans: Adequate working capital leads to high solvency and credit

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

Cash Discounts: 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 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.

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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.

EXCESS OR INADEQUATE WORKING CAPITAL

Every business concern should have adequate amount of working capital to run its

business operations. It should have neither redundant or excess working capital nor

inadequate nor shortages of working capital. Both excess as well as short working

capital positions are bad for any business. However, it is the inadequate working

capital which is more dangerous from the point of view of the firm.

DISADVANTAGES OF REDUNDANT OR 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

DISADVANTAGES OF INADEQUATE WORKING CAPITAL

Every business needs some amounts of working capital. The need for working capital

arises due to the time gap between production and realization of cash from sales. There is

an operating cycle involved in sales and realization of cash. There are time gaps in

purchase of raw material and production; production and sales; and realization of cash.

Thus 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.

For studying the need of working capital in a business, one has to study the business

under varying circumstances such as a new concern requires a lot of funds to meet its

initial requirements such as promotion and formation etc. These expenses are called

preliminary expenses and are capitalized. The amount needed for working capital

depends upon the size of the company and ambitions of its promoters. Greater the

size of the business unit, generally larger will be the requirements of the working

capital.

The requirement of the working capital goes on increasing with the growth and

expensing of the business till it gains maturity. At maturity the amount of working

capital required is called normal working capital.

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There are others factors also influence the need of working capital in a business.

FACTORS DETERMINING THE WORKING CAPITAL REQUIREMENTS

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 PRDUCTION 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.

DEBTORS

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CASH FINISHED GOODS

RAW MATERIAL WORK IN PROGRESS

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 wuill 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.

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. A firm maintaining a steady high rate of cash

dividend irrespective of its profits needs working capital than the firm that

retains larger part of its profits and does not pay so high rate of cash dividend.

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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.

Others FACTORS: These are:

Operating efficiency.

Management ability.

Irregularities of supply.

Import policy.

Asset structure.

Importance of labor.

Banking facilities, etc.

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.

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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.

WORKING CAPITAL ANALYSIS

As we know working capital is the life blood and the centre of a business.

Adequate amount of working capital is very much essential for the smooth

running of the business. And the most important part is the efficient management

of working capital in right time. The liquidity position of the firm is totally

effected by the management of working capital. So, a study of changes in the uses

and sources of working capital is necessary to evaluate the efficiency with which

the working capital is employed in a business. This involves the need of working

capital analysis.

The analysis of working capital can be conducted through a number of devices,

such as:

1. Ratio analysis.

2. Fund flow analysis.

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3. Budgeting.

1. RATIO ANALYSIS

A ratio is a simple arithmetical expression one number to another. The technique

of ratio analysis can be employed for measuring short-term liquidity or working

capital position of a firm. The following ratios can be calculated for these

purposes:

1. Current ratio.

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2. Quick ratio

3. Absolute liquid ratio

4. Inventory turnover.

5. Receivables turnover.

6. Payable turnover ratio.

7. Working capital turnover ratio.

8. Working capital leverage

9. Ratio of current liabilities to tangible net worth.

2. FUND FLOW ANALYSIS

Fund flow analysis is a technical device designated to the study the source from

which additional funds were derived and the use to which these sources were put.

The fund flow analysis consists of:

a. Preparing schedule of changes of working capital

b. Statement of sources and application of funds.

It is an effective management tool to study the changes in financial position

(working capital) business enterprise between beginning and ending of the

financial dates.

3. WORKING CAPITAL BUDGET

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A budget is a financial and / or quantitative expression of business plans and

polices to be pursued in the future period time. Working capital budget as a part

of the total budge ting process of a business is prepared estimating future long

term and short term working capital needs and sources to finance them, and then

comparing the budgeted figures with actual performance for calculating the

variances, if any, so that corrective actions may be taken in future. He objective

working capital budget is to ensure availability of funds as and needed, and to

ensure effective utilization of these resources. The successful implementation of

working capital budget involves the preparing of separate budget for each element

of working capital, such as, cash, inventories and receivables etc.

ANALYSIS OF SHORT – TERM FINANCIAL POSITION OR TEST OF

LIQUIDITY

The short –term creditors of a company such as suppliers of goods of credit and

commercial banks short-term loans are primarily interested to know the ability

of a firm to meet its obligations in time. The short term obligations of a firm can

be met in time only when it is having sufficient liquid assets. So to with the

confidence of investors, creditors, the smooth functioning of the firm and the

efficient use of fixed assets the liquid position of the firm must be strong. But a

very high degree of liquidity of the firm being tied – up in current assets.

Therefore, it is important proper balance in regard to the liquidity of the firm.

Two types of ratios can be calculated for measuring short-term financial

position or short-term solvency position of the firm.

1. Liquidity ratios.

2. Current assets movements ‘ratios.

A) LIQUIDITY RATIOS

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Liquidity refers to the ability of a firm to meet its current obligations as and

when these become due. The short-term obligations are met by realizing

amounts from current, floating or circulating assts. The current assets should

either be liquid or near about liquidity. These should be convertible in cash for

paying obligations of short-term nature. The sufficiency or insufficiency of

current assets should be assessed by comparing them with short-term liabilities.

If current assets can pay off the current liabilities then the liquidity position is

satisfactory. On the other hand, if the current liabilities cannot be met out of the

current assets then the liquidity position is bad. To measure the liquidity of a

firm, the following ratios can be calculated:

1. CURRENT RATIO

2. QUICK RATIO

3. ABSOLUTE LIQUID RATIO

1. CURRENT RATIO

Current Ratio, also known as working capital ratio is a measure of general

liquidity and its most widely used to make the analysis of short-term financial

position or liquidity of a firm. It is defined as the relation between current assets

and current liabilities. Thus,

CURRENT RATIO = CURRENT ASSETS

CURRENT LIABILITES

The two components of this ratio are:

1) CURRENT ASSETS

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2) CURRENT LIABILITES

Current assets include cash, marketable securities, bill receivables, sundry

debtors, inventories and work-in-progresses. Current liabilities include

outstanding expenses, bill payable, dividend payable etc.

A relatively high current ratio is an indication that the firm is liquid and has the

ability to pay its current obligations in time. On the hand a low current ratio

represents that the liquidity position of the firm is not good and the firm shall

not be able to pay its current liabilities in time. A ratio equal or near to the rule

of thumb of 2:1 i.e. current assets double the current liabilities is considered to

be satisfactory.

CALCULATION OF CURRENT RATIO

(Rupees in crore)

e.g.

Year 2009 2010 2011

Current Assets 81.29 83.12 136.57

Current Liabilities 27.42 20.58 33.48

Current Ratio 2.96:1 4.03:1 4.08:1

Interpretation:-

As we know that ideal current ratio for any firm is 2:1. If we see the current

ratio of the company for last three years it has increased from 2006 to 2008. The

current ratio of company is more than the ideal ratio. This depicts that

company’s liquidity position is sound. Its current assets are more than its current

liabilities.

2. QUICK RATIO

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Quick ratio is a more rigorous test of liquidity than current ratio. Quick ratio

may be defined as the relationship between quick/liquid assets and current or

liquid liabilities. An asset is said to be liquid if it can be converted into cash

with a short period without loss of value. It measures the firms’ capacity to pay

off current obligations immediately.

QUICK RATIO = QUICK ASSETS

CURRENT LIABILITES

Where Quick Assets are:

1) Marketable Securities

2) Cash in hand and Cash at bank.

3) Debtors.

A high ratio is an indication that the firm is liquid and has the ability to meet its

current liabilities in time and on the other hand a low quick ratio represents that

the firms’ liquidity position is not good.

As a rule of thumb ratio of 1:1 is considered satisfactory. It is generally thought

that if quick assets are equal to the current liabilities then the concern may be

able to meet its short-term obligations. However, a firm having high quick ratio

may not have a satisfactory liquidity position if it has slow paying debtors. On

the other hand, a firm having a low liquidity position if it has fast moving

inventories.

CALCULATION OF QUICK RATIO

e.g. (Rupees in Crore)

Year 2009 2010 2011

Quick Assets 44.14 47.43 61.55

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Quick Ratio 1.6 : 1 2.3 : 1 1.8 : 1

Interpretation :

A quick ratio is an indication that the firm is liquid and has the ability to

meet its current liabilities in time. The ideal quick ratio is 1:1. Company’s

quick ratio is more than ideal ratio. This shows company has no liquidity

problem.

3. ABSOLUTE LIQUID RATIO

Although receivables, debtors and bills receivable are generally more liquid

than inventories, yet there may be doubts regarding their realization into cash

immediately or in time. So absolute liquid ratio should be calculated together

with current ratio and acid test ratio so as to exclude even receivables from the

current assets and find out the absolute liquid assets. Absolute Liquid Assets

includes :

ABSOLUTE LIQUID RATIO = ABSOLUTE LIQUID ASSETS

CURRENT LIABILITES

ABSOLUTE LIQUID ASSETS = CASH & BANK BALANCES.

e.g. (Rupees in Crore)

Year 2009 2010 2011

Absolute Liquid Assets 4.69 1.79 5.06


Absolute Liquid Ratio .17 : 1 .09 : 1 .15 : 1

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Interpretation:

These ratio shows that company carries a small amount of cash. But there is

nothing to be worried about the lack of cash because company has reserve,

borrowing power & long term investment. In India, firms have credit limits

sanctioned from banks and can easily draw cash.

B) CURRENT ASSETS MOVEMENT RATIOS

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

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

volume of sales. The better the management of assets, large is the amount of

sales and profits. Current assets movement ratios measure the efficiency with

which a firm manages its resources. These ratios are called turnover ratios

because they indicate the speed with which assets are converted or turned over

into sales. Depending upon the purpose, a number of turnover ratios can be

calculated. These are :

1. Inventory Turnover Ratio

2. Debtors Turnover Ratio

3. Creditors Turnover Ratio

4. Working Capital Turnover Ratio

The current ratio and quick ratio give misleading results if current assets include

high amount of debtors due to slow credit collections and moreover if the assets

include high amount of slow moving inventories. As both the ratios ignore the

movement of current assets, it is important to calculate the turnover ratio.

1. INVENTORY TURNOVER OR STOCK TURNOVER

RATIO :

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Every firm has to maintain a certain amount of inventory of finished goods

so as to meet the requirements of the business. But the level of inventory

should neither be too high nor too low. Because it is harmful to hold more

inventory as some amount of capital is blocked in it and some cost is

involved in it. It will therefore be advisable to dispose the inventory as

soon as possible.

INVENTORY TURNOVER RATIO = COST OF GOOD SOLD

AVERAGE INVENTORY

Inventory turnover ratio measures the speed with which the stock is

converted into sales. Usually a high inventory ratio indicates an efficient

management of inventory because more frequently the stocks are sold ; the

lesser amount of money is required to finance the inventory. Where as low

inventory turnover ratio indicates the inefficient management of inventory.

A low inventory turnover implies over investment in inventories, dull

business, poor quality of goods, stock accumulations and slow moving

goods and low profits as compared to total investment.

AVERAGE STOCK = OPENING STOCK + CLOSING STOCK

2

(Rupees in Crore)

Year 2009 2010 2011

Cost of Goods sold 110.6 103.2 96.8

Average Stock 73.59 36.42 55.35

Inventory Turnover Ratio 1.5 times 2.8 times 1.75 times

Interpretation :

These ratio shows how rapidly the inventory is turning into receivable

through sales. In 2010 the company has high inventory turnover ratio but in

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2011 it has reduced to 1.75 times. This shows that the company’s inventory

management technique is less efficient as compare to last year.

2. INVENTORY CONVERSION PERIOD:

INVENTORY CONVERSION PERIOD = 365 (net working days)

INVENTORY TURNOVER RATIO

e.g.

Year 2009 2010 2011

Days 365 365 365

Inventory Turnover Ratio 1.5 2.8 1.8

Inventory Conversion Period 243 days 130 days 202 days

Interpretation:

Inventory conversion period shows that how many days’ inventories take to

convert from raw material to finished goods. In the company inventory

conversion period is decreasing. This shows the efficiency of management to

convert the inventory into cash.

3. DEBTORS TURNOVER RATIO:

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A concern may sell its goods on cash as well as on credit to increase its

sales and a liberal credit policy may result in tying up substantial funds of a firm

in the form of trade debtors. Trade debtors are expected to be converted into

cash within a short period and are included in current assets. So liquidity

position of a concern also depends upon the quality of trade debtors. Two types

of ratio can be calculated to evaluate the quality of debtors.

a) Debtors Turnover Ratio

b) Average Collection Period

DEBTORS TURNOVER RATIO = TOTAL SALES (CREDIT)

AVERAGE DEBTORS

Debtor’s velocity indicates the number of times the debtors are turned

over during a year. Generally higher the value of debtor’s turnover ratio the

more efficient is the management of debtors/sales or more liquid are the debtors.

Whereas a low debtors turnover ratio indicates poor management of

debtors/sales and less liquid debtors. This ratio should be compared with ratios

of other firms doing the same business and a trend may be found to make a

better interpretation of the ratio.

AVERAGE DEBTORS= OPENING DEBTOR+CLOSING DEBTOR

2

Year 2009 2010 2011

Sales 166.0 151.5 169.5

Average Debtors 17.33 18.19 22.50

Debtor Turnover Ratio 9.6 times 8.3 times 7.5 times

Interpretation :

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This ratio indicates the speed with which debtors are being converted or

turnover into sales. The higher the values or turnover into sales. The higher the

values of debtors turnover, the more efficient is the management of credit. But

in the company the debtor turnover ratio is decreasing year to year. This shows

that company is not utilizing its debtors efficiency. Now their credit policy

become liberal as compare to previous year.

4. AVERAGE COLLECTION PERIOD :

Average Collection Period = No. of Working Days

Debtors Turnover Ratio

The average collection period ratio represents the average number of days

for which a firm has to wait before its receivables are converted into cash. It

measures the quality of debtors. Generally, shorter the average collection period

the better is the quality of debtors as a short collection period implies quick

payment by debtors and vice-versa.

Average Collection Period = 365 (Net Working Days)

Debtors Turnover Ratio

Year 2009 2010 2011

Days 365 365 365

Debtor Turnover Ratio 9.6 8.3 7.5

Average Collection Period 38 days 44 days 49 days

Interpretation :

The average collection period measures the quality of debtors and it

helps in analyzing the efficiency of collection efforts. It also helps to analysis

the credit policy adopted by company. In the firm average collection period

increasing year to year. It shows that the firm has Liberal Credit policy. These

changes in policy are due to competitor’s credit policy.

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5. WORKING CAPITAL TURNOVER RATIO :

Working capital turnover ratio indicates the velocity of utilization of net

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

capital is turned over in the course of the year. This ratio measures the

efficiency with which the working capital is used by the firm. A higher

ratio indicates efficient utilization of working capital and a low ratio

indicates otherwise. But a very high working capital turnover is not a

good situation for any firm.

Working Capital Turnover Ratio = Cost of Sales

Net Working Capital

Working Capital Turnover = Sales

Networking Capital

e.g.

Year 2009 2010 2011

Sales 166.0 151.5 169.5

Networking Capital 53.87 62.52 103.09

Working Capital Turnover 3.08 2.4 1.64

Interpretation :

This ratio indicates low much net working capital requires for sales.

In 2008, the reciprocal of this ratio (1/1.64 = .609) shows that for sales of Rs. 1

the company requires 60 paisa as working capital. Thus this ratio is helpful to

forecast the working capital requirement on the basis of sale.

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INVENTORIES

(Rs. in Crores)

Year 2008-2009 2009-2010 2010-2011

Inventories 37.15 35.69 75.01

Interpretation :

An inventory is a major part of current assets. If any company wants to

manage its working capital efficiency, it has to manage its inventories

efficiently. The graph shows that inventory in 2005-2006 is 45%, in 2006-2007

is 43% and in 2007-2008 is 54% of their current assets. The company should try

to reduce the inventory upto 10% or 20% of current assets.

CASH BNAK BALANCE :

(Rs. in Crores)

Year 2008-2009 2009-2010 2010-2011

Cash Bank Balance 4.69 1.79 5.05

Interpretation:

Cash is basic input or component of working capital. Cash is needed to

keep the business running on a continuous basis. So the organization should

have sufficient cash to meet various requirements. The above graph is indicate

that in 2006 the cash is 4.69 crores but in 2007 it has decrease to 1.79. The

result of that it disturb the firms manufacturing operations. In 2008, it is

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increased upto approx. 5.1% cash balance. So in 2008, the company has no

problem for meeting its requirement as compare to 2007.

DEBTORS :

(Rs. in Crores)

Year 2008-2009 2009-2010 2010-2011

Debtors 17.33 19.05 25.94

Interpretation:

Debtors constitute a substantial portion of total current assets. In India it

constitute one third of current assets. The above graph is depict that there is

increase in debtors. It represents an extension of credit to customers. The reason

for increasing credit is competition and company liberal credit policy.

CURRENT ASSETS :

(Rs. in Crores)

Year 2008-2009 2009-2010 2010-2011

Current Assets 81.29 83.15 136.57

Interpretation :

This graph shows that there is 64% increase in current assets in 2008. This

increase is arise because there is approx. 50% increase in inventories. Increase

in current assets shows the liquidity soundness of company.

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CURRENT LIABILITY :

(Rs. in Crores)

Year 2008-2009 2009-2010 2010-2011

Current Liability 27.42 20.58 33.48

Interpretation :

Current liabilities shows company short term debts pay to outsiders. In

2008 the current liabilities of the company increased. But still increase in

current assets is more than its current liabilities.

NET WOKRING CAPITAL:

(Rs. in Crores)

Year 2008-2009 2009-2010 2010-2011

Net Working Capital 53.87 62.53 103.09

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Interpretation :

Working capital is required to finance day to day operations of a firm.

There should be an optimum level of working capital. It should not be too less

or not too excess. In the company there is increase in working capital. The

increase in working capital arises because the company has expanded its

business.

Finding :

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The Interpretation given in the each analysis shows that the company is having strong

control on its working capital even during the period of global economic crisis. A

continuation of the same is needed in future. Even though the net working capital shows

at high trend it is has to be addressed by continuous follow up on new project

developments

RESEARCH METHODOLOGY

The methodology, I have adopted for my study is the various tools, which basically

analyze critically financial position of to the organization:

i. COMMON-SIZE P/L A/Cii. COMMON-SIZE BALANCE SHEET

iii. COMPARTIVE P/L A/Civ. COMPARTIVE BALANCE SHEETv. TREND ANALYSIS

vi. RATIO ANALYSIS

The above parameters are used for critical analysis of financial position. With the evaluation of each component, the financial position from different angles is tried to be

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presented in well and systematic manner. By critical analysis with the help of different tools, it becomes clear how the financial manager handles the finance matters in profitable manner in the critical challenging atmosphere, the recommendation are made which would suggest the organization in formulation of a healthy and strong position financially with proper management system.

I sincerely hope, through the evaluation of various percentage, ratios and comparative analysis, the organization would be able to conquer its in efficiencies and makes the desired changes.

ANALYSIS OF FINANCIAL STATEMENTS

FINANCIAL STATEMENTS:

Financial statement is a collection of data organized according to logical and consistent accounting procedure to convey an under-standing of some financial aspects of a business firm. It may show position at a moment in time, as in the case of balance sheet or may reveal a series of activities over a given period of time, as in the case of an income statement. Thus, the term ‘financial statements’ generally refers to the two statements

(1) The position statement or Balance sheet.

(2) The income statement or the profit and loss Account.

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OBJECTIVES OF FINANCIAL STATEMENTS:

According to accounting Principal Board of America (APB) states

The following objectives of financial statements: -

1. To provide reliable financial information about economic resources and obligation of a business firm.

2. To provide other needed information about charges in such economic resources and obligation.

3. To provide reliable information about change in net resources (recourses less obligations) missing out of business activities.

4. To provide financial information that assets in estimating the learning potential of the business.

LIMITATIONS OF FINANCIAL STATEMENTS:

Though financial statements are relevant and useful for a concern, still they do not present a final picture a final picture of a concern. The utility of these statements is dependent upon a number of factors. The analysis and interpretation of these statements must be done carefully otherwise misleading conclusion may be drawn.

Financial statements suffer from the following limitations: -

1. Financial statements do not given a final picture of the concern. The data given in these statements is only approximate. The actual value can only be determined when the business is sold or liquidated.

2. Financial statements have been prepared for different accounting periods, generally one year, during the life of a concern. The costs and incomes are apportioned to different periods with a view to determine profits etc. The allocation of expenses and income depends upon the personal judgment of the accountant. The existence of contingent assets and liabilities also make the statements imprecise. So financial statement are at the most interim reports rather than the final picture of the firm.

3. The financial statements are expressed in monetary value, so they appear to give final and accurate position. The value of fixed assets in the balance sheet neither represent the value for which fixed assets can be sold nor the amount which will be required to replace these assets. The balance sheet is prepared on the presumption of a going concern. The

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concern is expected to continue in future. So fixed assets are shown at cost less accumulated deprecation. Moreover, there are certain assets in the balance sheet which will realize nothing at the time of liquidation but they are shown in the balance sheets.

4. The financial statements are prepared on the basis of historical costs Or original costs. The value of assets decreases with the passage of time current price changes are not taken into account. The statement are not prepared with the keeping in view the economic conditions. the balance sheet loses the significance of being an index of current economics realities. Similarly, the profitability shown by the income statements may be representing the earning capacity of the concern.

5. There are certain factors which have a bearing on the financial position and operating result of the business but they do not become a part of these statements because they cannot be measured in monetary terms. The basic limitation of the traditional financial statements comprising the balance sheet, profit & loss A/c is that they do not give all the information regarding the financial operation of the firm. Nevertheless, they provide some extremely useful information to the extent the balance sheet mirrors the financial position on a particular data in lines of the structure of assets, liabilities etc. and the profit & loss A/c shows the result of operation during a certain period in terms revenue obtained and cost incurred during the year. Thus, the financial position and operation of the firm.

FINANCIAL STATEMENT ANALYSIS

It is the process of identifying the financial strength and weakness of a firm from the available accounting data and financial statements. The analysis is done

CALCULATIONS OF RATIOS

Ratios are relationship expressed in mathematical terms between figures, which are

connected with each other in some manner.

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CLASSIFICATION OF RATIOS

Ratios can be classified in to different categories depending upon the basis of

classification

The traditional classification has been on the basis of the financial statement to which the

determination of ratios belongs.

These are:-

Profit & Loss account ratios

Balance Sheet ratios

Composite ratios

Appendix

Working capital - Refer about the status of Current Asset and Current Liability

Ratios - Indicates about various components strength weakness on financial point of view.

Balance sheet - Considered for the calculation of Ratios

Profit and Loss Account – Considered for Inventory on Hand

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Bibliography:

The following books were referred in preparation of the project reports

1. Towards Better Working Capital Management by Gopalakrishna murthy.G

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2. Financial Ratio Analysis: A Handy Guidebook by Charles K Vandyck

3. Financial Management by S.N.Maheswari

4. Advanced Accounting by R.L Guptha

5. Dictionary of Financial Formula and Ratios by Linda M. Magoon

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Project on Financial Report on Working Capital

Documents

manonmaniam

fund flow

hema engineering

variable working

net working

ensure effective

special working

gross working