A Project Report On RATIO ANALYSIS At Kirloskar pneumatic co.ltd., Pune. In Partial Fulfillments of the Requirement for the award of Master of Business Administration By Chetan v. Phapale Under guidline Ptof.Yuvraj Lahoti The Director, Vishwakarma Institute of Management PUNE, Maharashtra. 2005 - 2007.
Ratio analysis
Jan 18, 2015
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A
Project Report
On
RATIO ANALYSIS
At Kirloskar pneumatic co.ltd.,
Pune.
In Partial Fulfillments of the
Requirement for the award of
Master of Business Administration
By Chetan v. Phapale
Under guidline
Ptof.Yuvraj Lahoti
The Director,
Vishwakarma Institute of Management
PUNE, Maharashtra.
2005 - 2007.
ACKNOWLEDGEMENT
It is a matter of great satisfaction and pleasure to
present this report on Summer Training in KIRLOSKAR
PNUEMATIC CO. LTD.
(KPCL), Pune
411013. I take
this opportunity to owe my thanks to all those involved in
my training.
I thanks to Mrs. VINEETA KAPOOR (MANAGER
HRD) for given me opportunity to work at KPCL, as a
FINANCE TRAINEE.
I am thankful to Mr. R.B. SHALIGRAM and Mr. R.R.
TAVERGIRI for his encouragement and able guidance at
every stage of my training work.
I also express my gratitude towards my project guide
Mr.Y. LAHOTI (sir), who have helped me on every step in
completing the training.
CERTIFICATE
CERTIFICATE
This is certify that Mr.Chetan v. Phapale is a bonafide
student of this Institute studying in M.B.A.
He has completed project report Entitled RATIO
ANALYSIS
in Kirloskar pneumatic co. ltd., Pune. For the
partial fulfillment of the requirement of M.B.A. program for 2005-
2007.
To the best of my knowledge, it is his original work. I wish him
all the best in his future career and success at every step he takes in
his life.
Mr. Yuvraj Lahot
Dr.Shrad joshi
Project guide Director
NUMBER
PARTICULAR
1 Executive summary
2 Company profile
3 Objective
4 Research methodology
5 Ratio analysis Theory Calculaion with graph
6 Working capital
7 Suggestion
8 Conclusion
EXECUTIVE SUMMARY
INTRODUCTION:
Company being established as Kirloskar Pneumatics Company Limited in 1958,
made an entry with manufacture of air compressor and Pneumatic tools and
soon diversified by including air conditioning and transmission equipments.
At Kirloskar Pneumatic up to date manufacturing facilities, including CNC
machines, stringent quality control procedures and systems, research and
development, foundry, screw rotor machines, greal grinding machines,
metallurgical and metrological laboratories, tool room and an integrated computer
system, have all been set up with the sole idea of achieving the highest
standards of quality and performance.
Kirloskar Pneumatic has the distinction of acquiring advance technologies from
world over, adopting them to suit Indian conditions and continuously updating
them to maintain the highest standards of quality and reliability. Kirloskar
Pneumatic is among the first few companies in India, to secure the ISO 9001
certification, in all its operations. It was certified for ISO 9001 quality system by
the Indian quality systems, (IRQS) in February 1993 and re-certified in 1996 and
again in 1999 and in 2003.
Company s products are manufactured under
Survey of renowned inspection
agencies such as Lloyd s, MMD, IRS, NTPL, EIL, PDIL, DGS&D, RITES, and
may more, and are well accepted not only in India but also in the countries of
South East Asia, Africa, Bulf, the Middle East, West Asia, Europe, and the
United States of America
AN OVERVIEW OF COMPANY
Company being established as Kirloskar Pneumatics Company Limited in 1958,
made an entry with manufacture of air compressor and Pneumatic tools and
soon diversified by including air conditioning and transmission equipments.
At Kirloskar Pneumatic up to date manufacturing facilities, including CNC
machines, stringent quality control procedures and systems, research and
development, foundry, screw rotor machines, greal grinding machines,
metallurgical and metrological laboratories, tool room and an integrated computer
system, have all been set up with the sole idea of achieving the highest
standards of quality and performance.
Kirloskar Pneumatic has the distinction of acquiring advance technologies from
world over, adopting them to suit Indian conditions and continuously updating
them to maintain the highest standards of quality and reliability. Kirloskar
Pneumatic is among the first few companies in India, to secure the ISO 9001
certification, in all its operations. It was certified for ISO 9001 quality system by
the Indian quality systems, (IRQS) in February 1993 and re-certified in 1996 and
again in 1999 and in 2003.
Company s products are manufactured under
Survey of renowned inspection
agencies such as Lioyd s, MMD, IRS, NTPL, EIL, PDIL, DGS&D, RITES, and
may more, and are well accepted not only in India but also in the countries of
South East Asia, Africa, Bulf, the Middle East, West Asia, Europe, and the
United States of America.
Kirloskar Pneumatic Company Limited started with the manufacturing of Air -
Compressors and Pneumatic Tools, Immediately thereafter, the company
expanded its activities in the field of Air
Conditioning and Refrigeration
machinery. Further diversification in the manufacture of Hydraulic Power
Transmission Equipment followed.
Kirloskar Pneumatic is held in high esteem for Process System Engineering and
Turnkey Project expertise. The result of its success in this area is reflected in
Company s association with virtually every project and industry in the country.
At Kirloskar Pneumatic, up-to-date manufacturing facilities, including CNC
Machines, Stringent Quality Control Procedures and Systems, Research and
Development, Foundry, Heat Treatment Facilities, Screw Rotor Machines, Gear
Grinding Machines, Metallurgical & Metrogical Laboratories, Tool Room and an
Integrated Computer System, have all been set up with the sole idea of achieving
the highest standards of quality and performance.
Kirloskar Pneumatic is among the first few companies in India. It was certified for
ISO 9001 Quality Systems by the Indian Quality Systems (IRQS) in February
1993, and re-certified in 1996, 1999 and most recently in 2003.
Company s products are manufactured under the survey of renowned inspection
agencies such as, Lloyd s, MMD, IRS, NTPC, EIL, PDIL, DGS&D, RITES and
many more, and are well accepted not only in India but also in the countries of
South East Asia, Africa, Gulf, the Middle East, West, West Asia, Europe and
United States of America.
COMPANY PROFILE
1. History :
Kirloskar Pneumatic Company Limited was incorporated by late. Shri
Shantanurao, l.Kirloskar in the year 1958.
We are a 600 Million US Dollars engineering conglomerate driving critical
industries. We are century old pioneers in our areas of specialization like power,
construction and mining, agriculture, industry and transport, oil and gas and
environment protection with a range of world-class industrial products and
turnkey services.
We are made up of 8 major group companies, each led by the best engineering
and managerial talent in India. In addition to engineering, we have interests in
civic utility systems and in Information Technology and communication.
Our multi-unit, multi-product, multi-location conglomerate is built on the plinths of
Experience, Expertise, Quality, Innovation and Values in the business. Our best
play is successful work and creation of a new industrial order where we can
provide tailor made solutions to the customers.
At Kirloskar, listening to the customer and his needs is a tradition as old as the
group itself. For it is they who drive us further, make us reach higher, and
engineer better solutions. In the customer's often unspoken wish for better
implements lies the seed for a new invention, a path-breaking industrial conc
We are the Kirloskar Group of Companies.
Business for us is the best service, customer care and a lifelong relationship.
Where are we headed?
We believe in synergy and its limitless power of unifying. It is not limited to our
group. It extends to the realms of customer/collaborator relations, investor
interactions and into market trends analyses and technological advances. It is the
only way we ensure that when an endeavor is made by several different
elements, the result is of a far higher quality than what could have been achieved
by each element acting alone. Our policies and practices help in treating the
customer as the most important part of our family. We do work for profit but our
profits are guided by the motives which suit best the customer needs.
How do we plan to reach there?
For the Kirloskar Group, engineering excellence is not an end, but a journey. An
array of business solutions stand testimony to the fact, that good business
values, pillared by expertise can work wonders. Solutions, which are crafted from
a solid base of developing and manufacturing, generate reliable products and
superior service. Through which, continual measurement of customer satisfaction
is offered. It's a commitment rather than a ritual.
From our early agricultural implements to our hi-tech engineering products, we've
been always weaving our corporate goals into our clients' expectations by
providing expertise and delivering technology that they can benefit from and rely
on us at globally competitive prices.
Today, we are in the process of concentrating our collective energies on core
industry sectors to give us a sustainable competitive edge in terms of both quality
and price.
The Kirloskar Group's customer base currently ranges from heavy industries like
power generation, steel and chemicals to the mechanic in his workshop and the
farmer in the fields. Across this wide spectrum of clients, many of whom are
overseas, the one thing that remains consistent is that they all matter to us and
call us for more of our service, products and better solutions.
The Kirloskar story unfolds It has now been more than a century since the Kirloskar story started. We started
with an aim of becoming the pioneers in fields in which our country needed
innovation. In the 100 years and more that we have been in existence as a family
and as an organisation, we've been seminal to Indian agricultural and industrial
development. We gave India its first iron plough, pump and engine; inventions
that were born from the need of the hour and went on to become signs of the
time. That is why our group history can in many ways be considered a history of
the economic and industrial revolution in India.
The Kirloskar story
Landmarks in the Kirloskar Saga
The Kirloskar Story
It has now been more than a century since the Kirloskar story started. We started
with an aim of becoming the pioneers in fields in which our country needed
innovation. In the 100 years and more that we have been in existence as a family
and as an organisation, we've been seminal to Indian agricultural and industrial
development. We gave India its first iron plough, pump and engine; inventions
that were deviced from the need of the hour and went on to become signs of the
time. Which is why our group history can in many ways can be considered a
history of the economic and industrial revolution in India.
The founder and the first factory village
The Kirloskar story starts with Laxmanrao Kirloskar, the founder. A man who
believed that an understanding of one's environment and reality was essential to
the manufacture of path-breaking industrial implements. From this steadfast
belief was born the iron plough, the first Kirloskar product. Originally intended as
an essential aid to agriculture, the plough soon became an icon of reform and
revolution.
A highlight of the early history of the group is Kirloskarvadi, India's first industrial
township. A model factory-village created by Laxmanrao and his band of
dedicated workers.
In January 1910, when the Kirloskar were being ousted from Belgaum to make
room for a new suburb, they found themselves in dire need of a place to live and
work. Sensing this need, the Raja of the princely state of Aundh, who admired
and respected Laxmanrao Kirloskar, offered the latter all the land he needed in
Aundh state.
Two months later, Laxmanrao Kirloskar set foot on 32 acres of barren land
strewn with cacti and infested with cobras. Driven by his faith in human ability,
Laxmanrao banded together 25 workers and their families and succeeded in
transforming the barren expanse into his dream village. Ramuanna, Laxmanrao's
brother, planned and administered the township, Shamburao Jambhekar doubled
as engineer and all-round healing man, K.K.Kulkarni, an unsuccessful student,
became a manager, treasurer and odd jobs man, Mangeshrao Rege was the
clerk and chief accountant, Anantrao Phalnikar, a school drop-out flowered into
an imaginative engineer. Such was our founder's faith in the human being that,
Tukaram Ramoshi and Pirya Mang, both convicted dacoits, became the trusted
guards of Kirloskarvadi!
The first Kirloskar Group Company
Kirloskar Brothers Limited (KBL) - the first Kirloskar venture at Kirloskarvadi was
to become the base for all of the Kirloskar Group's subsequent enterprises. It
began as the only Indian company with its own standard products - the fodder
cutter and the iron plough, which competed with the British products.
KBL also manufactured groundnut shellers, sugarcane crushers and pumps,
which were to usher in a new economic order in the Indian industry. To power
these machines, diesel engines, coal gas generators and electric motors were
developed at Kirloskarvadi.
In a display of great versatility, KBL then shifted its focus to fluid handling and
control. As India's largest manufacturer of pumps and valves, and also the
group's flagship company, KBL lends its strength and expertise to every new
venture of the Kirloskar Group.
Playing a part in the War
The intensified boycott of the British goods and the approaching World War
threatened to stop imports of machine tools into India. The Kirloskar, with
characteristic foresight began making machine tools. This paradigm shift of sorts,
from farm implements to machine tools, created a new company - The Mysore
Kirloskar Limited. This company, situated in Harihar, benefited greatly from the
patronage of yet another Raja - the Maharaja of Mysore. In the first month of
production, Mysore Kirloskar sold all of manufactured seven lathes.
The new generation -Innovation, creation, tradition
From colonialism to independence
An important change, for the country, and for one of its premier industrial houses,
the Kirloskar Group. The altered political climate of the 1940s heralded the end of
the princely patronage for enterprise.The policy shifts and changes in authority
were the order of the day. This marked a turning point for the group.
Shantanurao Kirloskar, the eldest son of the founder travelled to Pune to initiate
a new aspect of the group's activities - diesel engines. His experience of trying to
secure the land for his factory in Pune was quite different from his father's in
Kirloskarvadi. There was no benevolent ruler here to bestow acres gratis.
Shantanurao had to face the tangle of red tape and public resistance to
acquisition of land for industrial purposes.
Finally, after arguing that factories have a longer life than human beings
Shantanurao Kirloskar won a place for Kirloskar Oil Engines Ltd. (KOEL), twelve
months after signing an agreement of collaboration with Associated British Oil
Engines Export Ltd. of UK.
This collaboration, incidentally, was the first of its kind between an Indian and a
foreign company, and signified a bridging of the technological gap between east
and west.
The KOEL factory was incorporated in 1946, and soon after that gave India her
first vertical high-speed engine. Brijlal Sarda, who reported its satisfactory
running for over 4 decades, bought this first engine!
To electric motors and pneumatics
The making of the electrical motor. This was the second of Laxmanrao Kirloskar's
long cherished dreams, the first being the making of an engine. This task was
brought to completion by Ravi Kirloskar, his youngest son, in 1946. Way back
then, the authorities whom Ravi Kirloskar had approached for land were
astonished by the request for 25 acres. Today, Kirloskar Electric Company
Limited (KECL) has four plants occupying several times that acreage.
KECL's logo in the 40's
The setting up of KECL and other Kirloskar companies saw a major role being
played by Nanasaheb Gurjar, a lawyer who made industry his sole area of
operation. Though the development of air compressors was an established
activity at Kirloskarvadi, a full-fledged plant to manufacture the same was set up
at Pune in 1958, under the eventual management of Shreekant Kirloskar,
Shantanurao's youngest son. In collaboration with Broom and Wade of England,
Kirloskar Pneumatic Company Limited began the manufacture of air
compressors and pneumatic tools.
Today, its turnkey expertise is sought in almost every major industrial project in
India. Collaboration with Twin Disc Inc. of the USA has taken the company into
torque invertors, marine gearboxes and rail traction transmissions.
A new direction - services
The phenomenal success of the Kirloskar name prompted entrepreneurs and
businessmen of the time to approach the group for guidance and expertise. This
gave birth to the concept of formalised engineering consultancy and a new
company - Kirloskar Consultants Limited (KCL) in 1963. Marking an extension of
the group's repertoire from manufacturing to services, KCL, in its 25 years of
operation, has contributed to critical areas such as defence, irrigation, roads and
environment.
This paradigm shift saw the setting up of yet another service company - Pune
Industrial Hotels Limited in 1964, the Kirloskar Group's first foray into hospitality.
This company set up Hotel Blue Diamond in Pune and began to manage Hotel
Pearl in Kolhapur. The Baker's Basket confectionery chain and the Hotel and
Catering Consultancy Services (HOCON) were also set up.
The dawn of a new millennium
To meet the changing demands of a global business environment and emerging
economic trends, the Kirloskar Group has refocused and restructured its direction
by concentrating on its core segment of agriculture, water supply, power, and air
conditioning. By consciously opting out of hospitality, advertising and unreal
services, the Group has channeled its potential in these core sectors.
The Group aims at unlocking the strength and value in the Kirloskar brand and
distribution to enhance returns for its stakeholders. It has identified and is
implementing processes that would bring greater customer focus and
competitiveness.
Today, the Kirloskar Group is a conglomerate with interests across a diverse
range of industries. It is still spurred by the simple yet profound ethic born with
Laxmanrao Kirloskar that where there is will there are many ways
The Kirloskar Group Of Companies
We are made up of 8 major group companies, who are players in major sectors
like manufacturing, oil and gas, power, construction and mining, agriculture,
industry and transport each led by the best engineering and managerial talent in
India. In addition to engineering, we also have interests in civic utility systems
and in Information Technology and communication. These 8 companies form the
core of Kirloskar group. Each company is a renowned name in its own area of
operation and is respected world wide for its services and products. For us
manufacturing is just not limited to our factory premises and our products. It is
also about world class service.
Kirloskar Brothers Limited. (KBL)
Kirloskar Ferrous Industries Limited. (KFIL)
Kirloskar Middle East FZE. (KMEF)
Kirloskar Oil Engines Limited. (KOEL)
Kirloskar Pneumatic Company Limited. (KPCL)
Kirloskar Proprietary Limited. (KPL)
We are also proud partners in joint ventures with companies as Copeland
Limited. This is a joint venture between Kirloskar Brothers Limited, India's leading
engineering company and Copeland Corporation of the USA, the world leader in
air-conditioning and refrigeration compressors. Also Kirloskar Ebara and Toyota
Kirloskar Motors are other prestigious joint ventures.
Kirloskar Copeland Limited. (KCL)
Kirloskar Ebara Pumps Limited. (KEPL)
We take equal pride in shaping capable managers and dedicated human beings
at Kirloskar Institute of Advanced Management Studies. It is our education center
for imparting knowledge to the managers of tomorrow.
Kirloskar Institute of Advanced Management Studies (KIAMS)
Infrastructure
Production
As history has it, the Kirloskar dream started taking shape on 32 acres of barren
land strewn with cacti and infested with cobras. Driven by the faith in human
ability, Laxmanrao Kirloskar banded together 25 workers and their families and
went to transforming the barren expanse into his dream village. Since then a
century had passed and there has been no looking back. Those 32 acres has
expanded into 350,000 m. sq of developed land with state of art facilities.
Customising engineering to the needs of India's core industries means a
comprehensive production infrastructure that includes process support facilities
and specialised machine building competencies. The Kirloskar Group's
manufacturing facilities are spread over 350,000 m. sq. Each plant is highly
modern, state-of-the-art and ISO certified. And geared to roll out high precision
products that are tailor made to meet customer requirements to the very last
detail. These include products with a high degree of specialisation for
applications like pumps, engines, alternators and compressors, which demand a
high level of accuracy.
Today, while constant facility modernisation and upgradation occur in the
background, the Kirloskar Group's operations grow to span the spectrum of
world-class engineering.
At the base of our production infrastructure we have grey iron foundries that
provide the basic raw material. Then comes the sophisticated pattern shops and
metal working facilities. And world-class processes and management practices.
The Kirloskar Group's worldwide network consists of over 1,200 distribution
points and over 800 service points in India. This ensures easy product
availability, fast and efficient after-sale service and minimum equipment
downtime for the customers. Over 150 company offices operate in perfect
synergy across urban and rural areas in the country and abroad.
We also train our dealers and service professionals to ensure our customers
receive quality service in addition to the benefits of easy accessibility. Thanks to
our efforts in this direction, there is no sector in Indian industry that has been left
unattended by a Kirloskar company.
The Kirloskar ranks amongst the top engineering business houses of India. We
at Kirloskar provide you with the widest range of products to meet all your
requirements. We ensure that our products make your job easier and help in
yielding better results.
The Kirloskar product line consists of more than 200 series. We have a group
turnover of Rs. 2,000 Cr. Approx. The Kirloskar Group makes equipment,
machinery and high-precision engineering products for the transport sector,
including shipbuilding, railways, roads and cargo. We also have a major
presence in auto components, process industries, rubber and plastics, textiles
and also consumer goods industries.
Browse through our Industry Solutions section and you'll see why we at
Kirloskar claim to be the best. In the areas we function we provide the best
choice for all your equipment and engine needs. Over 100-year-old tradition
of excellence in engineering endows us with knowledge and experience to
meet all the challenges that come our way
2. Core Competences:
Kirloskar Pneumatic Company Limited has a distinction of acquiring
technologies from world over and adapting them to maintain highest
standards of quality and reliability.
The company is also specialized in Systems Engineering and Turkey project
expertise.
3. Business Division :
The company has two major business segments viz. Compression Systems
and Transmission products.
The compression systems division compresses of Air and Gas compressors,
Air conditioning and Refrigeration compressors, etc. Where as Transmission
equipment division comprises of Power transmission equipments, Reverse
reduction gears for marine gear engineers etc.
KPCL s operations are sub- grouped into following three major Strategies
Business Units (SUBs).
At Hadapsar: ACD Air Compressor Division,
: TRM Transmission division.
At Saswad: ACR Air conditioning & refrigeration division.
PRODUCT LINE
PRODUCT LINE
COMPRESSION SYSTEMSTRANSMISSION
PRODUCTS
AIR COMPRESSIONDIVISION
AIR CONDITION & REFRIGERATION
Air Compressor Division (ACD): includes:
1. Centrifugal Air Compressors :
2. Reciprocating, Horizontal, Balanced Opposed, Piston Compressors
3. Electric Screw Compressor Packages
4. Rotary, Twin-Screw, Diesel Engine Driven Compressors
5. Reciprocating, Vertical, Water-Cooled Compressors
6. Compressors and Expressors for Railway brake System:
7. Packaged Balanced Opposed Piston Compressors:
8. Packaged Vertical Reciprocating Air Compressors:
Air Condition & Refrigeration Compressors Includes:
1. Heavy Duty Refrigeration Compressors:
2. Air Conditioning Compressors
3. Refrigeration and Air
Conditioning Screw Compressors - WRV &
XRV series:
4. Transport Air Conditioning units:
Transmission Division Includes:
1. Kirloskar Forward / Reverse Turbo Transmission for Locomotives:
Application:
a. Model L4 r 2 U 2
b. Model L 4 r 2 U
c. Model L 4 r 4 z U 2
2. Reverse Reduction Hydraulic Marine gear Boxes:
3. Power Pack Equipment for Self Propelled Rail vehicles:
4. Multirex Reduction gear Units & Custom Built Gear Boxes:
Roadrailer Division Includes:
1. Kirloskar roadrailer:
2. Kirloskar Autorailer:
Design Collaborations:
Voith Getriebe K.G. (Germany) for Forward
Reverse Turbo
Transmissions and Axie Drives.
Ateliers Et Chantiers De bretange (ACB), (France), for Large Horse power
Marine Gear Boxes in range of 1500 to 4000 HP
Engrenages ET Reduteurs Citroen Messian Durand (CMD), (France) for
Industrial Gear Boxes.
Wabash National Corpn. (USA), for Road Railer.
Cooper Industries,(USA), for Joy Centrifugal Air Compressors.
Grasso Ltd, Holland for Air Conditioning and Refrigeration Compressors.
Joint ventures Companies.
Subsidiary Companies:
Kirloskar McQuay Ltd
KPCL has promoted a joint venture in October 1997 with McQuay
International, USA. McQuay, who is leaders in Heating, Ventilation & Air
Conditioning world wide have shared state of art technology in Kirloskar McQuay
Ltd. This company manufactures and market
International Exposure
The company has been exporting most of the products all over the world
specially, in middle East and far Eastern countries. Our products are well
accepted not only by developing countries but also by pace setters like USA &
UK. in the international market and achieving approximately 10 % of the their
earning from the exports.
Presence in Gulf Area:
Kirloskar Group has been an office in Ajman, UAE known as Kirloskar Middle
East Free Zone Limited, whereby covering middle east market. This is a well
represented Sales & Services setup with Warehouse facilities manned by proper
Engineering Personnel to serve Middle East Market independently. Entire range
of HVAC Equipments
-: OBJECTIVES :-
To identify the financial strengths and weakness of the company.
Through the net profit ratio and other profitability ratio, understand the
profitability position of the company.
Evaluating company s performance relating to Financial Statement
Analysis.
To know the liquidity position of the company, with the help of Current
ratio.
To find out the utility of financial ratio in credit analysis and determining
the financial capability of the firm.
From the analysis of Cash Flow Statement, knowing the cash
management of the company.
From the analysis of Fund Flow Statement, knowing manage the funds of
company s.
From the analysis of working Capital Management, knowing how to
manage the cash for day to day requirement.
Objectives of Financial Statements :
The Objective of Financial Statement is to provide information about the
financial position, performance and changes in financial position of an enterprise
that is useful to a wide range of users in making economic decisions. Financial
Statements are prepared for this purpose to meet the common needs of most
users.
METHODOLOGY
Sources of Data Collection :
Data for this project is collected through two sources
a. Primary Sources.
b. Secondary Sources
-: Primary Sources:-
This data is generated specifically for the purpose of working out the project. This
data means the first hand information, which is collected through various sources
e.g. Questionnaires, Interviews,
Schedules and Formal / Informal information.
Information relating to the project was collected during formal and informal
discussions with the Deputy General Manager (Finance).
Queries arising in due course of the project brought into the notice of
concerned authority and necessary explanation and solutions are
adapted.
-: Secondary Sources:-
Secondary data is generated with the help of following:
Annual Report: Majority of information gathered from data
exhibited in the annual reports of the company. These include
annual reports of the year 2001-02, 2002-03, 2003-04 and 2004-05,
Induction Manual: Information relating to company history and profile
gathered from the induction manual of KPCL.
Reference Books: Theory relating to the subject matter and
various concepts taken up from various financial reference books.
CMA statement: Information relating to estimation of funds and
format of reporting, taken from CMA(Credit Monitoring
Arrangement) statement of the company.
Loan Agreement: Information relating to various rules and
regulations for bank finance taken up from loan agreement between
KPCL and consortium banks.
1. Providing information for economic decision :
The economic decisions that are taken by users of financial statements
require an evaluation of the ability of an enterprise to generate cash and cash
equivalents and of the timing and certainty of their generation. This ability
ultimately determines the capacity of an enterprise to pay its employees and
suppliers, meet interest payments, repay loans and make distributions to its
owners.
2. Providing information about financial position :
The financial position of an enterprise is effected by the economic resources
it controls, its financial structure, its liquidity and solvency and its capacity it
adopt to changes in the environment in which it operates.
Information about the economic resources controlled by the enterprise and
its capacity in the past to modify these resources is useful in predicting the
ability of the enterprise to generate cash and cash equivalents in the
future.
Information about financial structure is useful in predicting future
borrowing needs and how future profits and cash flow will be distributed
among those with an interest in the enterprise.
Information is useful in predicting how successful the enterprise is likely to
be in raising further finance.
Information about liquidity and solvency is useful in predicting the ability of
the enterprise to meet the financial commitments as fall due. Liquidity
refers to the availability of cash in the near future after taking account of
financial commitments over this period. Solvency refers to the availability
of cash over the longer term to meet financial commitments as they fall
due.
3. Providing information about performance of an enterprise :
Another important objective of the financial statements is that it provides
information about the performance and in particular its profitability, which is
required in order to access potential changes in the economic resources that are
likely to control in future.
4. Providing information about changes in financial position:
The financial statements provide information concerning changes in the
financial position of an enterprise, which is useful in order to access its investing,
financing and operating activities during the reporting period.
Product groups Major customers Major competitors
Screw compressors
diesel driven at
10KG/CM2
well drilling operation. Atlas Copco,
ELGI.
Screw compressors
electric motor driven
at 7 to 10KG/CM2.
Textile, granites
industries.
Atlas copco, ELGI
Balanced opposed
piston compressor
driven at 3 to 9
KG/CM2.
Power, Petrochemical,
Cement, Steel
Industries.
CPT, Ingersol rand.
Vertical reciprocating
water culled. Driven at
7 to 9 KG/CM2
All small-scale
industries.
IR, ELGI
Centrifugal
compressor Driven by
7 KG/CM2 & above.
Cement, Steel, Textile
industries.
Atlas copco,
Demag.
Railways brake
compressor.
All railways. ELGI
RATIO ANALYSIS
The Balance Sheet and the Statement of Income are essential, but they are only
the starting point for successful financial management. Apply Ratio Analysis to
Financial Statements to analyze the success, failure, and progress of your
business.
Ratio Analysis enables the business owner/manager to spot trends in a business
and to compare its performance and condition with the average performance of
similar businesses in the same industry. To do this compare your ratios with the
average of businesses similar to yours and compare your own ratios for several
successive years, watching especially for any unfavorable trends that may be
starting. Ratio analysis may provide the all-important early warning indications
that allow you to solve your business problems before your business is destroyed
by them.
Balance Sheet Ratio Analysis
Important Balance Sheet Ratios measure liquidity and solvency (a business's
ability to pay its bills as they come due) and leverage (the extent to which the
business is dependent on creditors' funding). They include the following ratios:
Liquidity Ratios
These ratios indicate the ease of turning assets into cash. They include the
Current Ratio, Quick Ratio, and Working Capital.
Current Ratios
The Current Ratio is one of the best known measures of financial strength. It is
figured as shown below:
Current Ratio = Total Current Assets / Total Current Liabilities
The main question this ratio addresses is: "Does your business have enough
current assets to meet the payment schedule of its current debts with a margin of
safety for possible losses in current assets, such as inventory shrinkage or
collectable accounts?" A generally acceptable current ratio is 2 to 1. But whether
or not a specific ratio is satisfactory depends on the nature of the business and
the characteristics of its current assets and liabilities. The minimum acceptable
current ratio is obviously 1:1, but that relationship is usually playing it too close
for comfort.
If you feel your business's current ratio is too low, you may be able to raise it by:
Paying some debts.
Increasing your current assets from loans or other borrowings with a
maturity of more than one year.
Converting non-current assets into current assets.
Increasing your current assets from new equity contributions.
Putting profits back into the business.
Quick Ratios
The Quick Ratio is sometimes called the "acid-test" ratio and is one of the best
measures of liquidity. It is figured as shown below:
Quick Ratio = Cash + Government Securities + Receivables / Total Current
Liabilities
The Quick Ratio is a much more exacting measure than the Current Ratio. By
excluding inventories, it concentrates on the really liquid assets, with value that is
fairly certain. It helps answer the question: "If all sales revenues should
disappear, could my business meet its current obligations with the readily
convertible `quick' funds on hand?"
An acid-test of 1:1 is considered satisfactory unless the majority of your "quick
assets" are in accounts receivable, and the pattern of accounts receivable
collection lags behind the schedule for paying current liabilities.
Working Capital
Working Capital is more a measure of cash flow than a ratio. The result of this
calculation must be a positive number. It is calculated as shown below:
Working Capital = Total Current Assets - Total Current Liabilities
Bankers look at Net Working Capital over time to determine a company's ability
to weather financial crises. Loans are often tied to minimum working capital
requirements.
A general observation about these three Liquidity Ratios is that the higher they
are the better, especially if you are relying to any significant extent on creditor
money to finance assets.
Leverage Ratio
This Debt/Worth or Leverage Ratio indicates the extent to which the business is
reliant on debt financing (creditor money versus owner's equity):
Debt/Worth Ratio = Total Liabilities / Net Worth
Generally, the higher this ratio, the more risky a creditor will perceive its
exposure in your business, making it correspondingly harder to obtain credit.
Income Statement Ratio Analysis
The following important State of Income Ratios measure profitability:
Gross Margin Ratio
This ratio is the percentage of sales dollars left after subtracting the cost of goods
sold from net sales. It measures the percentage of sales dollars remaining (after
obtaining or manufacturing the goods sold) available to pay the overhead
expenses of the company.
Comparison of your business ratios to those of similar businesses will reveal the
relative strengths or weaknesses in your business. The Gross Margin Ratio is
calculated as follows:
Gross Margin Ratio = Gross Profit / Net Sales
Reminder: Gross Profit = Net Sales - Cost of Goods Sold
Net Profit Margin Ratio
This ratio is the percentage of sales dollars left after subtracting the Cost of
Goods sold and all expenses, except income taxes. It provides a good
opportunity to compare your company's "return on sales" with the performance of
other companies in your industry. It is calculated before income tax because tax
rates and tax liabilities vary from company to company for a wide variety of
reasons, making comparisons after taxes much more difficult. The Net Profit
Margin Ratio is calculated as follows:
Net Profit Margin Ratio = Net Profit Before Tax / Net Sales
Management Ratios
Other important ratios, often referred to as Management Ratios, are also derived
from Balance Sheet and Statement of Income information.
Inventory Turnover Ratio
This ratio reveals how well inventory is being managed. It is important because
the more times inventory can be turned in a given operating cycle, the greater the
profit. The Inventory Turnover Ratio is calculated as follows:
Inventory Turnover Ratio = Net Sales / Average Inventory at Cost
Accounts Receivable Turnover Ratio
This ratio indicates how well accounts receivable are being collected. If
receivables are not collected reasonably in accordance with their terms,
management should rethink its collection policy. If receivables are excessively
slow in being converted to cash, liquidity could be severely impaired. Getting the
Accounts Receivable Turnover Ratio is a two step process and is is calculated as
follows:
Daily Credit Sales = Net Credit Sales Per Year / 365 (Days)
Accounts Receivable Turnover (in days) = Accounts Receivable / Daily Credit
Sales
Return on Assets Ratio
This measures how efficiently profits are being generated from the assets
employed in the business when compared with the ratios of firms in a similar
business. A low ratio in comparison with industry averages indicates an
inefficient use of business assets. The Return on Assets Ratio is calculated as
follows:
Return on Assets = Net Profit Before Tax / Total Assets
Return on Investment (ROI) Ratio
The ROI is perhaps the most important ratio of all. It is the percentage of return
on funds invested in the business by its owners. In short, this ratio tells the owner
whether or not all the effort put into the business has been worthwhile. If the ROI
is less than the rate of return on an alternative, risk-free investment such as a
bank savings account, the owner may be wiser to sell the company, put the
money in such a savings instrument, and avoid the daily struggles of small
business management. The ROI is calculated as follows:
Return on Investment = Net Profit before Tax / Net Worth
These Liquidity, Leverage, Profitability, and Management Ratios allow the
business owner to identify trends in a business and to compare its progress with
the performance of others through data published by various sources. The owner
may thus determine the business's relative strengths and weaknesses.
Acid Test Ratio
QUICK ASSETS
Acid Test Ratio = -------------------------------
QUICK LIABILITIES
Particulars 2001-02 2002-03 2003-04 2004-05 2005-06
Q.A. 12,136.80 12051.57 10880.77 10423.08 10996.5
Q.L. 8385.47 7917.32 8431.19 8605.39 9336.43
A.T.R. 1.45 1.52 1.29 1.21 1.17
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
2001-02 2002-03 2003-04 2004-05 2005-06
AR
Interpretation: -
A quick ratio of 1:1 or more is considered as satisfactory or of sound liquidity
position. In the year 2002-03, compared to previous year, quick assets and
current assets decreased but the decreased rate of current liabilities is greater
than the decreased rate of quick ratios, so quick ratio increased from 1.45 to
1.52. In 2003-04 and 04-05 there was a decrease in quick assets and increase in
current liabilities, so quick ratio decreased from 1.52 to 1.29 and 1.29 to 1.21 in
2003-04 and 04-05 respectively. And It has further decreased to 1.17 in 2005-06.
Inventory Holding Period: -
12 MONTHS
Inventory Holding Period = ----------------------------------------------
INVENTORY TURNOVER RATIO
Particulars 2001-02 2002-03 2003-04 2004-05 2005-06
I.T.R Rs. (in Lacs) 6.26 5.30 4.94 5.26 3.31
Period in Month Rs.
(In Lacs)
12.00 12.00 12.00 12.00 12.00
I.H.P 1.92 2.26 2.43 2.28 3.63
0
0.5
1
1.5
2
2.5
3
3.5
4
2001-02 2002-03 2003-04 2004-05 2005-06
I.H.P
Interpretation: -
In the year 2002-03 there was a decrease in inventory turnover ratio. This shows an
increase in inventory holding period. In 2003-04 there was an increase in holding period
and in 2004-05 it was 2.28 that suggests that there was an increase in sales and decrease
in inventory turnover ratio. In the year 2005-06 it is 3.63.
Debtors Collection Period: -
12 MONTHS
Debtors collection period = -------------------------------------------
DEBTORS TURNOVER RATIO
Particulars 2001-02 2002-03 2003-04 2004-05 2005-06
Period in month 12 12 12 12 12
DT ratio 1.8 2.15 2.4 3 3
D.C.P in month 6.59 5.58 5 4.04 4
6.59
5.585
4.04 4
0
1
2
3
4
5
6
7
2001-02 2002-03 2003-04 2004-05 2005-06
D.C.P in month
Interpretation: -
There is an increase in both debtors and sales, so avg. collection period is
decreasing year by year. That shows that recovery from debtors is improving.
Creditors Turnover Ratio: -
12 MONTHS
Creditors payment period = -------------------------------------------
CREDITOR TURNOVER RATIO
Particulars 2001-02 2002-03 2003-04 2004-05 2005-06
Period in months 12 12 12 12 12
C.T.R 1.10 1.49 2.24 2.95 3.43
C.P.P 10.90 8.05 5.35 4.07 3.50
10.9
8.05
5.354.07 3.5
0
2
4
6
8
10
12
2001-02 2002-03 2003-04 2004-05 2005-06
cpp
Interpretation: -
In case of KPCL, There is continuous increase in purchases and continuous
decrease in creditors, so payment period is decreasing year by year.
Interest Coverage Ratio: -
EBIT
Interest coverage ratio = ---------------------------
INTEREST
Particulars 2001-02 2002-03 2003-04 2004-05 2005-06
INTEREST 1458.92 852.91 587.35 521.07 488.42
EBT -916.57 55.07 96.00 155.81 1222.41
EBIT 542.35 907.98 683.35 676.88 1710.83
I.C.R 0.37 1.06 1.16 1.30 3.50
0
0.5
1
1.5
2
2.5
3
3.5
4
2001-02 2002-03 2003-04 2004-05 2005-06
I.C.R
Interpretation: -
In case of KPCL, in the year 2002-03 there was a decrease in interest
and increase in EBIT so ratio increased from 0.37 to 1.16, in the year
2003-04. There was a decrease in interest as well as EBIT but the
decrease rate is higher than the decrease rate of EBIT, so the ratio
increased from 1.06 to 1.16 and in the year 2004-05 there was
decrease in interest and increase in EBIT so the ratio increased from
1.16 to 1.30 and further it is increasing from 1.30 to 3.50 in 2005-06
because EBIT has increased with a substantial amount.
Debt to Equity Ratio: -
TOTAL DEBTS
Debt to Equity Ratio = ------------------------------------------
EQUITY (SH. CAP. + R & S)
Particulars 2001-02 2002-03 2003-04 2004-05 2005-06
Equity 3323.58 3360.63 3446.27 3586.83 4636.39
Total Debt 7696.52 7377.36 6599.12 5421.08 4003.93
D.T.E.R. 2.32 2.20 1.91 1.51 0.86
0
0.5
1
1.5
2
2.5
2001-02 2002-03 2003-04 2004-05 2005-06
D.T.E.R.
Interpretation: -
The D/E ratio is 1:1; it implies that for every rupee of outside liability. In case of
our organization there is an improvement in the D/E ratio year by year. There is
continuous decrease in total debt and there is continuous increase in
shareholder s equity (i.e. Reserves and Surpluses) with increasing rate so the
ratio is decreasing from 2.32 to 2.20 in 2002-03, to 1.91 in 2003-04 and to 1.51 in
2004-05, and to 0.86 in 2005-06.
Gross Profit Margin: -
GROSS PROFITS
Gross Profit Margin = --------------------------- x 100
SALES
Particulars 2001-02 2002-03 2003-04 2004-05 2005-06
G/P 265.74
339.70
376.53
386.67
1489.78
SALES 17267.61
19396.94
21646.75
26173.86
30365.16
G/P Margin 1.54
1.75
1.74
1.48
4.90
00.5
11.5
22.5
33.5
44.5
5
2001-02 2002-03 2003-04 2004-05 2005-06
G/P Margin
Interpretation: -
In the year 2002-03 there was an increase in sales as well as increase in gross
profit so ratio of GP increased from 1.54 to 1.75, in the year 2003-04 there was
decrease in sales and in gross profit, (percentage of increase in gross profit is
lower than the percentage of increase in sales), so the ratio of GP and sales has
slightly decreased from 1.75 to 1.74 and in the year 2004-05 similar to 2002-03
there was an increase in sales and a decrease in gross profit, so ratio of GP has
decreased from 1.74 to 1.48 and in the year 2005-06 it has shot up to 4.90
Net Profit Ratio: -
NET PROFIT (AFTER TAX & INTEREST)
Net Profit Ratio = -------------------------------------------------------- X 100
SALES
Particulars 2001-02 2002-03 2003-04 2004-05 2005-06
PAT (918.77)
48.99
95.31
152.78
1066.20
Sales 17267.61
19396.94
21646.75
26414.22
30365.16
N. profit
(loss) margin
(5.32)
0.250
0.440
0.578
3.500
-6-5-4-3-2-101234
2001-02
2002-03
2003-04
2004-05
2005-06
N. profit (loss) margin
Interpretation: -
Net profit ratio is increasing year after year, except for 2001-02,
where there was a loss. After that there is a continuous increase in
PAT as well as in sales from 2002-03 to 2005-06. Therefore, it shows
a continuous increase.
Total Assets Turnover Ratio: -
NET SALES
Total Assets Turnover ratio: ----------------------------------------
AVERAGE TOTAL ASSETS
Particulars (2001-02) (2002-03) (2003-04) (2004-05) (2005-06)
TOTAL F.A
(OP+CL) 3036.27 4295.38 3895.62 3821.93 4486.98
AVERAGE
F.A (A) 1518.14 2147.693 1947.81 1910.97 2243.49
TOTAL C.A
(OP+CL) 22574.65 30223.54 30170.04 29790.71 29277.35
AVG
CURRENT
ASSETS (B)
11287.33 15111.77 15085.02 14895.36 14638.67
AVG.
TOTAL
ASSETS
12805.46 17259.46 17032.83 16806.32 8441.08
SALES 17267.61 19396.94 21646.75 26173.86 30365.16
T.A.T.R 1.35 1.12 1.27 1.56 3.59
Interpretation:
-
There is a continuous increase in sales. In the year 2002-03 there was an
increase in average total assets, so the ratio decreased from 1.35 to 1.12, in
2003-04 and 2004-05 there is a change in average assets and decrease in
average total assets, so ratio increased from 1.12 to 1.27 and from 1.27 to 1.55
respectively. For the year 2005-06 ratio is 3.59.
(2001-02)
(2002-03)
(2003-04)
(2004-05)
(2005-06)
Fixed Assets turnover ratio: -
NET SALES
Fixed Assets turnover ratio: - ---------------------------------
AVG. FIXED ASSETS
Particulars (2001-02) (2002-03) (2003-04) (2004-05) (2005-06)
TOTAL OF
FA
(OP+CL)
3036.27 4295.38 3895.62 3821.93 4486.98
AVG.
FIXED
ASSETS
1518.14 2147.69 1947.81 1910.97 2243.49
SALES 17267.61 19396.94 21646.75 26173.86 30365.16
F.A.T.R 11.37 9.03 11.11 13.70 13.53
11.37
9.03
11.11
13.7 13.53
0
2
4
6
8
10
12
14
(2001-02) (2002-03) (2003-04) (2004-05) (2005-06)
(2001-02)
(2002-03)
(2003-04)
(2004-05)
(2005-06)
Interpretation: -
Here we have seen there has been a continuous increase in sales. In the year 2002-
03, there was an increase in average fixed assets as well as in sales but the growth rate of
average fixed assets was higher, so ratio decreased from 11.37 to 9.03. In the year 2003-
04 and 2004-05 there was a decrease in average fixed assets and an increase in sales, so
ratio increased from 9.03 to 11.11 and from 11.11 to 13.70 respectively. But it is slightly
decreasing in 2005-06.
Current Assets turnover ratio: -
SALES
Current assets turnover ratio: - -------------------------------------
AVG. CURRENT ASSETS
Particulars (2001-02) (2002-03) (2003-04) (2004-05) (2005-06)
SALES 17267.61 19396.94 21646.75 26173.86 30365.16
CURRENT
ASSETS 22574.65 30223.54 30170.04 29790.71 29277.35
AVG.
CURRENT
ASSETS
11287.33 15111.77 15085.02 14895.36 14638.67
C.A.T.R 1.53 1.28 1.43 1.76 2.07
1.531.28
1.43
1.76
2.07
0
0.5
1
1.5
2
2.5
C.A.T.R
Interpretation:-
A better current assets turnover ratio is always good for a firm and in case of our
organization, the turnover ratio is moving positively during the past 4 years. Current
assets had decreased in 2002-03 and 2004-05 and increased in 2003-04, but as the growth
rate of sales is higher when compared to decreased rate of current assets so the ratio has
decreased from 1.53 to 1.28 in 2001-02 to 2002-03. Further it has increased to 1.43 in
2003-04 and to 2.07 in 2005-06.
Working Capital turnover ratio
NET SALES
Working Capital turnover ratio = -----------------------------------
NET WORKING CAPITAL
Particulars 2001-02 2002-03 2003-04 2004-05 2005-06
Sales 17,267.61 19,396.94 21,646.75 26,173.86 30365.16
WORKING
CAPITAL
6846.03 7074.72 6746.81 6007.32 5328.20
W.C.T.R. 2.52 2.74 3.21 4.36 5.7
2.52 2.743.21
4.36
5.7
0
1
2
3
4
5
6
2001-02 2002-03 2003-04 2004-05 2005-06
W.C.T.R.
Interpretation:-
A high working capital turnover ratio indicates efficiency in utilization
of resources and the ratio has improved from 2.52 in 2001-02 to 5.7
in 2005-06. Hence we can see that the component of working capital
is consistently reducing which is considered as a positive sign from
the point view of the firm
WHAT IS WORKING CAPITAL?
Working capital refers to the investment by the company in short terms assets
such as cash, marketable securities. Net current assets or net working capital refers to the
current assets less current liabilities.
Symbolically, it means,
Net Current Assets = Current Assets Current Liabilities.
DEFINITIONS OF WORKING CAPITAL:
The following are the most important definitions of Working capital:
1) Working capital is the difference between the inflow and outflow of funds. In
other words it is the net cash inflow .
2) Working capital represents the total of all current assets. In other words it is
the Gross working capital , it is also known as Circulating capital or
Current capital for current assets are rotating in their nature.
3) Working capital is defined as The excess of current assets over current
liabilities and provisions . In other words it is the Net Current Assets or Net
Working Capital .
TYPES OF WORKING CAPITAL
The working capital may be classified into four main types as follows:
1) Net Working Capital.
2) Gross Working Capital.
3) Permanent Working Capital.
4) Variable Working Capital.
There are two concepts as regards to working capital
GROSS WORKING
CAPITAL and NET WORKING CAPITAL.
GROSS WORKING CAPITAL refers to the amount of funds invested in
current assets, which are employed in a business. If a firm gets the highest return on its
investment it should see that the management at the proper time provides the correct
amount of working capital.
NET WORKING CAPITAL refers to the difference between the current assets
and current liabilities. The importance of this concept lies in the fact that the company
has to determine the amount and nature of the current assets to be used in meeting
current liabilities, when they become due for payment. Further the amount to be used
in the business for operational needs is the amount of current assets left after payment
of liabilities
DETERMINANTS OF WORKING CAPITAL
There are no set rules or formula to determine the working capital requirements of
firms. A large number of factors, each having a different importance, influence working
capital needs of firms. Also the importance of the factors changes for a firm over the
period of time. Therefore, an analysis of relevant factors should be made in order to
determine the total investment in working capital. The following is the description of
factors that generally influence the working capital requirements of firms.
Nature of Business
Sales and Demand Conditions
Technology and Manufacturing Policy
Credit Policy
Availability of Credit
Operating Efficiency
Price Level Changes.
WORKING CAPITAL
A firm requires many years to recover initial investment in fixed assets. On
contrary the investment in current asset is turned over many times a year. Investment in
such current assets is realized during the operating cycle of the firm.
Each component of working capital (namely inventory, receivables and payables) has two
dimensions ... TIME ......... and MONEY. When it comes to managing working capital -
TIME IS MONEY. If you can get money to move faster around the cycle (e.g. collect
dues from debtors more quickly) or reduce the amount of money tied up (e.g. reduce
inventory levels relative to sales), the business will generate more cash or it will need to
borrow less money to fund working capital. As a consequence, you could reduce the cost
of bank interest or you'll have additional free money available to support additional sales
growth or investment. Similarly, if you can negotiate improved terms with suppliers e.g.
get longer credit or an increased credit limit; you effectively create free finance to help
fund future sales.
It can be tempting to pay cash, if available, for fixed assets e.g. computers, plant, vehicles
etc. If you do pay cash, remember that this is now longer available for working capital.
Therefore, if cash is tight, consider other ways of financing capital investment - loans,
equity, leasing etc. Similarly, if you pay dividends or increase drawings, these are cash
outflows and, like water flowing down a plughole, they remove liquidity from the
business.
REQUIREMENTS OF FUNDS
Funds Requirements of company
Fixed Capital Working Capital
Preliminary Expenses Raw Material
Purchase of Fixed Assets Inventories
Establishment work exp. Goods in Process
Fixed working capital Others
Every company requires funds for investing in two types of capital i.e. fixed
capital, which requires long-term funds, and working capital, which requires short-term
funds.
SOURCES OF WORKING CAPITAL
Long-term source Short-term source
(Fixed working capital) (Temporary working capital)
a) Loan from financial institution a) Factoring
b) Floating of Debentures b) Bill discounting
c) Accepting public deposits c) Bank overdraft
d) Issue of shares d) Trade credit
e) Cash credit
f) Commercial paper
Sources of additional working capital include the following:
Existing cash reserves
Profits (when you secure it as cash!)
Payables (credit from suppliers)
New equity or loans from shareholders
Bank overdrafts or lines of credit
Term loans
Late payments erode profits
and
can lead to bad debts.
HANDLING RECEIVABLES (DEBTORS)
Cash flow can be significantly enhanced if the amounts owing to a business are
collected faster. Every business needs to know.... who owes them money.... how
much is owed.... how long it is owing.... for what it is owed.
Slow payment has a crippling effect on business, in particular on small
businesses that can least afford it. If you don't manage debtors, they will
begin to manage your business as you will gradually lose control due to
reduced cash flow and, of course, you could experience an increased incidence
of bad debt. The following measures will help manage your debtors:
1. Have the right mental attitude to the control of credit and make sure that it
gets the priority it deserves.
2. Establish clear credit practices as a matter of company policy.
3. Make sure that these practices are clearly understood by staff, suppliers
and customers.
4. Be professional when accepting new accounts, and especially larger ones.
5. Check out each customer thoroughly before you offer credit. Use credit
agencies, bank references, industry sources etc.
6. Establish credit limits for each customer... and stick to them.
7. Continuously review these limits when you suspect tough times are
coming or if operating in a volatile sector.
8. Keep very close to your larger customers.
9. Invoice promptly and clearly.
10. Consider charging penalties on overdue accounts.
11. Consider accepting credit /debit cards as a payment option.
12. Monitor your debtor balances and ageing schedules, and don't let any
debts get too large or too old.
Recognize that the longer someone owes you, the greater the chance you will
never get paid. If the average age of your debtors is getting longer, or is already
very long, you may need to look for the following possible defects:
Weak credit judgment
Poor collection procedures
Lax enforcement of credit terms
Slow issue of invoices or statements
Errors in invoices or statements
Customer dissatisfaction.
Debtors due over 90 days (unless within agreed credit terms) should generally
demand
immediate attention. Look for the warning signs of a future bad debt. For
example.........
Longer credit terms taken with approval, particularly for smaller orders
Use of post-dated checks by debtors who normally settle within agreed
terms
Evidence of customers switching to additional suppliers for the same
goods
New customers who are reluctant to give credit references
Receiving part payments from debtors.
The act of collecting money is one, which most people dislike for many reasons
and therefore put on the long finger because they convince themselves there is
something more urgent or important that demands their attention now. There is
nothing more important than getting paid for your product or service. A customer
who does not pay is not a customer. Here are a few ideas that may help you in
collecting money from debtors:
Develop appropriate procedures for handling late payments.
Track and pursue late payers.
Get external help if your own efforts fail.
Don't feel guilty asking for money.... its yours and you are entitled to it.
Make that call now. And keep asking until you get some satisfaction.
In difficult circumstances, take what you can now and agree terms for the
remainder. It lessens the problem.
When asking for your money, be hard on the issue - but soft on the
person. Don't give the debtor any excuses for not paying.
Make it your objective is to get the money - not to score points or get
even.
Their range of financial planners, Exl-Plan and Cash flow Plan, contain extensive
facilities for exploring alternative payment scenarios for receivables.
MANAGING PAYABLES (CREDITORS)
Creditors are a vital part of effective cash management and should be managed
carefully to enhance the cash position.
Purchasing initiates cash outflows and an over-zealous purchasing function can
create liquidity problems. Consider the following:
Who authorizes purchasing in your company - is it tightly managed or
spread among a number of (junior) people?
Are purchase quantities geared to demand forecasts?
Do you use order quantities, which take account of stock holding and
purchasing costs?
Do you know the cost to the company of carrying stock?
Do you have alternative sources of supply? If not, get quotes from major
suppliers and shop around for the best discounts, credit terms, and reduce
dependence on a single supplier.
How many of your suppliers have a returns policy?
Are you in a position to pass on cost increases quickly through price
increases to your customers?
If a supplier of goods or services lets you down can you charge back the
cost of the delay?
Can you arrange (with confidence!) to have delivery of supplies staggered
or on a just-in-time basis?
There is an old adage in business that if you can buy well then you can sell well.
Management of your creditors and suppliers is just as important as the
management of your debtors. It is important to look after your creditors - slow
payment by you may create ill feeling and can signal that your company is
inefficient (or in trouble!).
Remember, a good supplier is someone who will work with you to enhance the
future viability and profitability of your company.
Their range of financial planners, Exl-Plan and Cash flow Plan, contain extensive
facilities for exploring alternative payment scenarios for payables
INVENTORY MANAGEMENT
Managing inventory is a juggling act. Excessive stocks can place a heavy burden
on the cash resources of a business. Insufficient stocks can result in lost sales,
delays for customers etc.
The key is to know how quickly your overall stock is moving or, put another way,
how long each item of stock sit on shelves before being sold. Obviously, average
stock-holding periods will be influenced by the nature of the business. For
example, a fresh vegetable shop might turn over its entire stock every few days
while a motor factor would be much slower as it may carry a wide range of rarely-
used spare parts in case somebody needs them.
Nowadays, many large manufacturers operate on a Just-In-Time (JIT) basis
whereby all
the components to be assembled on a particular today, arrive at the factory early
that morning, no earlier - no later. This helps to minimize manufacturing costs as
JIT stocks take up little space, minimize stock holding and virtually eliminate the
risks of obsolete or damaged stock. Because JIT manufacturers hold stock for a
very short time, they are able to conserve substantial cash. JIT is a good model
to strive for as it embraces all the principles of prudent stock management.
The key issue for a business is to identify the fast and slow stock movers with the
objectives of establishing optimum stock levels for each category and, thereby,
minimize the cash tied up in stocks.
Factors to be considered when determining optimum stock levels include:
What are the projected sales of each product?
How widely available are raw materials, components etc.?
How long does it take for delivery by suppliers?
Can you remove slow movers from your product range without
compromising best sellers?
Remember that stock sitting on shelves for long periods of time ties up money,
which is not working for you. For better stock control, try the following:
Review the effectiveness of existing purchasing and inventory systems.
Know the stock turn for all major items of inventory.
Apply tight controls to the significant few items and simplify controls for the
trivial many.
Sell off outdated or slow moving merchandise - it gets more difficult to sell
the longer you keep it.
Consider having part of your product outsourced to another manufacturer
rather than make it yourself.
Review your security procedures to ensure that no stock "is going out the back
door!"
Higher than necessary stock levels tie up cash and cost more in insurance,
accommodation costs and interest charges.
Their range of financial planners, Exl-Plan and Cash flow Plan, contain extensive
facilities for exploring alternative stock-holding strategies
Other working capital measures include the following:
Bad debts expressed as a percentage of sales.
Cost of bank loans, lines of credit, invoice discounting etc.
Debtor concentration - degree of dependency on a limited number
of customers.
Once ratios have been established for your business, it is important to track them
over time and to compare them with ratios for other comparable businesses or
industry sectors.
When planning the development of a business, it is critical that the impact of
working capital be fully assessed when making cash flow forecasts. Their
financial planning software packages - Exl-Plan and Cash flow Plan - can
facilitate this task as they provide for the setting of targets for receivables,
payables and inventory.
Conclusion
In project period all company member give many information in this project I
calculate Some ratio this ratio is useful interpreat company financial position
Company in improvement stage company know in some profit from last 2 year
Company make payment of more loan those taken in loss year
Defence sales order of Rs. 9 cr was not there for the first quarter of 2005-
06, so the sales has decreased. But other many small order take &
completed without major order company near to goal in this year
Standard current ratio is 2:1 and for industry it is 1.33:1. KPCL s ratios
satisfactory.
Acid test ratio is more than one but it does not mean that company has
excessive liquidity.
Debtors of the company were high; they were increasing year by year, so
more funds were blocked in debtors. But now recovery is becoming faster.
Inventory turnover ratio is improving from 2001-02 to 2005-06, which
means inventory is used in better way so it is good for the company.
Debtors turnover ratio is improving from 2001-02 to 2005-06.increase in
ratio is beneficial for the company because as ratio increases the number
of days of collection for debtors decreases.
Working capital turnover ratio is continuously increasing that shows increasing
needs of working capital.
SUGGESTIONS
1) Net operating cycle is increasing that means there is a need to make
improvements in receivables/debtors management.
2) Company should stretch the credit period given by the suppliers.
3) Company should not rely on Long-term debts and should try to repay the
debts.
4) Company should try to increase Volume based sales so as to stand in the
competition.
5) Production capacity is not utilized to the full extent.
BIBLOGRAPHY : - 1`) FINANCIAL MANAGEMENT - Khan & Jain
2) FINANCIAL MANAGEMENT - Satish Inamdar
3) WWW. KIRLOSKAR.COM
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