STUDY ON WORKING CAPITAL MANAGEMENT OF ASHOK LEYLAND Submitted to the SRM SCHOOL OF MANAGEMENT In partial fulfillment of the requirement for the award of the degree of MASTER OF BUSINESS ADMINISTRATION BY A.Seetha Raman Reg.No:35106170 Under the guidance of Prof.T.P.NAGESH SRM Institute of Science and Technology SRM University SRM Nagar Kattankulathur-603203 May 2008
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STUDY ON WORKING CAPITAL MANAGEMENT OF
ASHOK LEYLAND
Submitted to the
SRM SCHOOL OF MANAGEMENT
In partial fulfillment of the requirement for the award of the degree of
MASTER OF BUSINESS ADMINISTRATION
BY
A.Seetha Raman Reg.No:35106170
Under the guidance of
Prof.T.P.NAGESH
SRM Institute of Science and Technology
SRM University
SRM Nagar
Kattankulathur-603203
May 2008
Bonafide Certificate
This is to certify that the project report titled “Study on working capital
management of Ashok Leyland” is a bonafide record done by A.Seetha Raman
(Reg.No:35106170) in partial fulfillment for the award of the degree of Master of
Business Administration of the SRM University during the period from Feb to May
2008 under my guidance.
Signature of Internal Guide:
(Prof.T.P.Nagesh)
Signature of External Examiner: Signature of HOD:
(Dr.Jayshree Suresh)
Declaration
I, A.Seetha Raman, student of the department of Management Studies, SRM
School of Management, hereby declare that the project work here presented title
“Study on working capital management of Ashok Leyland” is an original work
done by me during the period of Feb to May under the guidance of Prof.T.P.Nagesh,
and submitted to SRM University for the award of Master Degree in Business
Administration. I further declare that, any part of this project itself has not been
submitted elsewhere for award of any other degree.
A.Seetha Raman
(Reg.No:35106170)
Acknowledgement
I am grateful to the Almighty, for the blessing that he showed on me in
completing this project work.
I offer my heartfelt thanks to our respected Chairman, Honorable
Thiru.T.R.Pachamuthu for providing me an opportunity to carry out this project.
I am extremely thankful to Mr.K.M.Balaji, Divisional Manager and
Mr.V.Arun Deputy.Manager, Ashok Leyland, Rajaji Salai, Chennai, for permitting
me to undertake the project in the organization and for all the help and moral support
given to me for successful completion of the project.
It gives me immense pleasure to express my gratitude to our respected
Dr.Jayashree Suresh the Head of the Department and the staff of the Management
studies Department for giving me valuable suggestions in carrying out this project.
I wish to convey my thanks to my project guide Prof.T.P.Nagesh, and all
other faculty members who helped me in various aspects to complete this project
work.
Finally, I would like to thank my friends who motivated me to carry out the
project in a successful manner.
A.Seetha Raman
Table of Contents
Chapter Title Page No.
I Introduction Statement of problem Objective of study Need for study Scope of study Limitation of study
1
2 3 4 5 6
II Review of literature 7
III Company profile 22
IV Data analysis and interpretation Ratio analysis Working capital analysis Fund flow statement
26
40
48 V Findings 56
VI Suggestions and Conclusion 57
Bibliography 59
List of Tables
Table No. Title Page No.
1 Current ratio 26
2 Quick ratio 28
3 Stock turnover ratio 30
4 Stock turnover period 32
5 Debtor’s turnover ratio 34
6 Debtor’s turnover period 36
7 Working capital turnover ratio 38
8 Working capital analysis for the year
ended 2003-04
40
9 Working capital analysis for the year
ended 2004-05
42
10 Working capital analysis for the year
ended 2005-06
44
11 Working capital analysis for the year
ended 2006-07
46
12 Fund flow statement for the year ended
2003-04
49
13 Fund flow statement for the year ended
2004-05
51
14 Fund flow statement for the year ended
2005-06
53
15 Fund flow statement for the year ended
2006-07
55
Chapter I
Introduction
Working capital management is a significant facet of financial management
due to the fact that it plays a pivotal role in keeping the wheels of a business
enterprise running. The requirements of working capital for day-to-day business
activities cannot be overemphasized. It cannot be denied that a firm invests a part of
its permanent capital in fixed assets and keeps a part of it for working capital i.e. for
meeting the day-to-day requirements. We will hardly find a firm which does not
require any amount of working capital for its normal operation. The requirement of
working capital varies from firm to firm depending upon the nature of business,
production policy, market conditions, seasonality of operations, conditions of supply
etc.
It is known to us that the aim of a business concern is to maximize the
proprietor’s wealth. To fulfill this objective the firm should earn sufficient and steady
return from its operations. It depends upon the successful sales activity. It will only be
possible when a firm invests sufficient amount of fund in current assets for the
production as well as sales activity. Considering the importance of working capital in
any type of business an analysis of working capital of Ashok Leyland was made.
Statement of problem
Working capital is required for every business and it helps in the management
of the day to day activities. The analysis of working capital should be done very
carefully as it is the decisive factor to plan the day to day activities. In order to plan
the working capital for the future the requirement of future funds should be done
carefully. There are various tools of working capital that can be used for analyzing for
the future.
Each firm must analyze the working capital for future operations in order to
avoid the shortage of funds to cater the future needs. The working capital of Ashok
Leyland has been increasing during the period of study. The company must take
efforts to maintain this current trend of working capital in future also.
Objectives of study
ℵ To understand the structure of working capital.
ℵ To study the working capital management with references to liquidity and
solvency of the company.
ℵ To analyze the financial efficiency of the company through ratio analysis.
ℵ To study various sources and application of working capital of the company.
ℵ To suggest the management on effective working capital management.
Need for the study Working capital analysis is helpful to know the financial position of the
company. Cheapest source of funds can be identified and analyzed and prioritize the
utilization of funds for the working capital requirement. The credit period of the
company can be easily known through this analysis. To give suggestion to the
company to improve its financial position, if any.
Scope of the study
The scope of the study is confined to the detailed study about the organization
and to identify the company’s position in the market and to suggest the means of
improvement in the existing system.
Limitation of study
ℵ Past details are not necessarily true indicators of the future.
ℵ The study is based on the result of limited period i.e. 5 years.
ℵ The analysis and interpretation are based on secondary data taken from
financial reports.
ℵ Ratio will not completely show the companies good or bad financial position.
ℵ The figures from the financial statement for analysis were historical in nature
and the time value of money is not considered.
ℵ All the data available are year end figures. So, analysis of financial position
holds good only for the year end.
ℵ The ideal ratios & recommendations are not industry specific.
ℵ In academics certain assumptions are made to ease learning, whereas practical
difficulties exist in the real world.
Chapter II
Review of literature
Capital classification: Capital is one of the essentials for the running of the business. It is well known
that finance is the lifeblood of any business and to carry out any business activity,
capital is necessary. Capital requirement for the business can be classified under two
main categories viz.,
ℵ Fixed capital
ℵ Working capital
Every business needs funds for two purposes-for its establishment and to carry
out its day-to-day operations. Long term funds are required to create production
facilities through purchase of fixed assets such as plant and machinery, land and
building, furniture etc. investments in these assets represent that part of firm’s capital
which is blocked on a permanent or fixed basis and is called fixed assets.
Funds are also required for short term use i.e. for the day to day operations of
the business (eg) Purchase of raw material, payment of wages and other day to day
expenses etc. These funds are known as working capital. In simple words, working
capital refers to the part of the firm’s capital which is required for financing short-
term activities. Funds, thus, invested in current assets keep revolving fast and are
being constantly converted into cash flows out again in exchange for other current
assets. Hence, it is also known as revolving or circulating capital or short-term
capital.
The Institute of Chartered Accounts of India defines working capital as under
“Working capital means the funds available for day-to-day operations of an
enterprise”.
Shubin defines working capital as “Capital required for purchase of raw
materials and for meeting day-to-day expenditure on salaries, wages, rents and
advertising, etc,”
NEED FOR WORKING CAPITAL:
The need for working capital cannot be over emphasized. Every business
needs some amount of working capital. The need arise due to the time gap between
production and realization of cash from sales. There is an operating cycle involved in
the sales and realization of cash. There are time gaps between sales; and sales and
realization of cash. The working capital is needed for the following purposes.
ℵ For the purchase of raw material, components and spares.
ℵ To pay wages and salaries.
ℵ To incur day to day expenses and overhead cost such as fuel, power and office
expenses etc.
ℵ To meet the selling costs as packing, advertising, etc.
ℵ To provide credit facilities to customers.
ℵ To maintain the raw material inventories, work-in-progress, stores and spares
and finished stock.
Types of working capital: Working capital is the amount of funds necessary to cover the cost of
operating the enterprises. Although it can be classified into a number of types, on the
basis of time we classify working capital as follows:
Working capital
Fixed working capital Floating working capital
Regular Reserve Seasonal Special
Fixed working capital:
While regular working capital is the minimum amount of working capital
required to ensure circulation of current asset from cash to inventories from
inventories to receivables and from receivable from cash and so on. Reserve working
capital is the excess amount over the requirements for regular working capital that
may be provided for contingencies that may arise at unstated periods such as strikes,
rise in prices, depression, etc.
Floating working capital:
Floating or temporary working capital is the amount of working capital that is
required to meet the seasonal demands and some special exigencies. It is further
classified into seasonal and special working capital.
The capital required to the seasonal needs of the enterprise is called seasonal
working capital. Special working capital is that part of working capital which is
required to meet special exigencies such as launching of extensive marketing
campaigns for conducting research, etc. operating Cycle is involved from purchase of
raw materials to sale of the product. The following stages are usually involved in
operating cycle of a manufacturing firm:
ℵ Conversion of cash to raw material
ℵ Conversion of raw material to work in progress
ℵ Conversion of work in progress to finished goods
ℵ Conversion of finished goods to debtors through sales
ℵ Conversion of debtors into cash
Factor determining working capital requirement: While studying the need of working capital in a business, one has to study the
business under varying circumstances such as a new concern, as a growing concern
and as one that has attaining maturity. A concern requires a lot of liquid funds to meet
initial expenses like promotion, formation, etc. these expenses are called preliminary
expenses and are capitalized. The amount needed as working capital in a new concern
depends primarily upon its size and ambitions of its promoters. Greater the size of the
business until generally, larger will be the requirements of working capital. The
amount of working capital needed goes on increasing with the growth and expansion
of business till it attains maturity. At maturity the amount of working capital needed is
called normal working capital. There are may other factors which influence the need
of working capital in business. They are discussed here.
Nature of business:
The working capital requirements of a firm basically depend upon the nature
of its business. Public utility undertakings like electricity, water supply and railways
require very limited working capital because they only offer cash sales and as such no
funds are tied up in inventories and receivables. On the other hand, trading and
financial firms require less investment in fixed assets but have to invest large amount
in the current assets like inventories, receivables and cash. Thus they require more
amount of working capital.
Size of business:
The working capital requirements of a concern are directly influenced by the
size of its business that may be measured in terms of scale of operations. Greater the
size of business unit, larger will be the requirements of working capital, however
small organizations may also need higher working capital due to large overhead
charges, inefficient use of available resources and other economic disadvantages of
small size.
Production policy:
In certain industries the demand is subject to wide fluctuations due to seasonal
variations. The requirements of working capital in such cases depend upon the
production policy. The production could be kept either steady by accumulating
inventory during slack period with a view to meet high demand during the peak
season or the production could be curtailed during the slack season and increased
during the peak season. If the policy is to keep the production steady by accumulating
inventories, it will require higher working capital.
Length of production cycle:
In manufacturing business, the working capital increase in direct proportion to
the length of manufacturing process. Longer the process period of manufacturing,
higher the working capital cycle.
Seasonal variation: In certain industries, raw material is not available throughout the year. Raw
materials have to be bought in bulk during the season to ensure uninterrupted flow
and process them during the entire year. A huge amount is thus blocked in the form of
raw material during such season which gives rise to more working capital
requirements.
Working capital cycle:
In a manufacturing concern the working capital cycle starts with the purchase
of raw material and ends with the realization of cash from the sales of finished
products. This cycle involves purchase of raw materials and stores, its conversion into
stock of finished goods through work in progress with progressive increment of labor
and service cost, conversion of finished stock into sales, debtors and receivable and
ultimately realization of cash and this cycle continues again from cash to purchase of
raw materials and so on. The speed with which the working capital completes the
cycle determines the requirements of working capital-longer the period of the cycle;
larger is the requirement of working capital. A pictorial representation of concepts
involved in the working capital cycle is shown here.
Cash sales
Accounts Receivable
Finished goods
Work in progress Raw materials
Credit sales
Fig: Working capital cycle
Concept of working capital: There are two concept of working capital:
ℵ Gross working capital
ℵ Net working capital
In the board sense, the term working capital refers to the gross working capital
and represents the amount of funds invested in current assets. Thus, the gross working
capital is the capital invested in the ordinary course of business can be converted into
cash within a short period, normally within one year. In the narrow sense, the term
working capital refers to the net working capital. Net working capital is the excess of
current assets over current liabilities, or say:
Net working capital= current assets – current liabilities
Financing of working capital: It is to be remembered that more business fail because of lack of cash than
want of profit. Thus maintaining cash is very crucial for the success or failure of a
business. Working capital also comes under the same frame. Although there are
various sources, as discussed already, the working capital requirements of a concern
can be classified as:
ℵ Fixed working capital
ℵ Variable working capital
In any concern, some operations stay permanent such as investments fixed
assets. This can be easily maintained by fixed working capital, which is permanently
blocked in current assets. Similarly, the amount of capital required to meet seasonal
demands or rise in prices, strikes, etc. highlight the need for variable working capital,
which cannot be permanently employed gainfully in the business.
The fixed portion of working capital should be generally financed from the
fixed capital sources while the variable working capital requirements of a concern
may be met from the short-term sources of capital. While these are the broad
categories, they can be further broken down and discussed in detail as explained
below. The various sources of financing for working capital are as follows:
Financing for working capital
-Public deposits -Commercial
paper
-Plough back of profit -Indigenous
bankers
-Loans from financial institution -Trade credits
-Advances
-
Installment credit
-Accounts
receivable- credit
Financing of fixed working capital:
Loan from financial institution:
Financial institution like commercial banks, state financial corporation, etc.
provide shot term, medium term and long term funds for the working capital
requirements.
Financing of variable working capital:
Commercial banks:
The major portion of working capital is provided by commercial banks
through different form such as:
Loans:
A short term loan for a maximum period of one year is obtained from the
banks for meeting working capital requirements. These are obtained lump sum for
which interest is paid quarterly by the company and the repayments at stipulated
intervals.
Cash credit: An arrangement with the bank whereby the bank allows the company to
borrow money up to a certain limits against tangible securities for which interest is
paid on the daily balance. This is a usual practice employed by the company for
meeting working capital requirements.
Overdraft:
An agreement with the bank whereby, a current account holder is allowed to
withdraw more than the balance to their credit limit. While overdrafts are obtained for
shorter periods provide temporary accommodation, cash credits are obtained to suit
requirements longer periods.
Purchasing and discounting of bills
When the seller deposits genuine commercial bills and obtains financial
accommodations from a bank or financial institution, it is known as “bill
discounting”. The option of discounting will be advantageous because the seller is
able to readily encash, which can be used for meeting immediate business obligations.
However, in the process, the seller may lose a little by way of discount charged by the
discounting banker. Purchasing of bills is, the bank can collect the payment
immediately by presenting the bill to the buyer for payment. The charges are less
while compared with bill discounting.
Trade credits:
In present day world, the trade credit arrangements by a concern with its
suppliers are important to the company while purchasing. The main advantages of this
source are: it is a very convenient method of finance, it is flexible and it may be
possible to obtain favorable terms.
Advances:
Most business get advances from their customers and agents against orders
and this sources is the short term finance for the company. It is a very cheap source of
finance. In order to minimize the working capital, some firms having long production
cycle prefer to take advances from their customers.
Ratio analysis: Analysis and interpretation of financial statements with the help of ‘ratios’ is
termed as ‘Ratio analysis’. Ratio analysis involves the process of computing,
determining and presenting the relationship of items or groups of items of financial
statements.
A ‘Ratio’ is a mathematical relationship between two items expressed in a
quantitative form. Ratios can be defined as “Relationships expressed in quantitative
terms, between figures which have cause and effect relationships of or which are
connected with each other in some, manner or the other.
The essence of ratio is putting together of two figures to study their
relationship. The study is in the form of analysis, interpretation and expression of all
the ramifications of the relationship.
It helps in understanding of financial strengths and weakness of the firm. With
the use of ratio analysis one can measure the financial conditions of a firm and can
point out whether it is strong, good, questionable or poor. The conclusion can also be
drawn as to whether the performance of the firm is improving or deteriorating.
Importance of ratio analysis: Ratio analysis is relevant in assessing the performance of a firm in respect of
the following aspects;
ℵ To know the liquidity position
ℵ To check the long term solvency
ℵ To find out he operating efficiency
ℵ To analyze the overall profitability
ℵ To compare two firms
ℵ To analyze the trend of the company
Current ratio:
This also known as working capital ratio. Also called as short- term solvency
ratio. This establishes the relationship between the current assets and current
liabilities. It indicates the ability of the business to meet its current maturing
obligations.
Current asset
Current ratio = -------------------
Current liability
Where, current assets include cash in hand, cash at bank, sundry debtors,
inventory, bills receivables and items which are easily convertible into cash. Current
liabilities include raw materials, sundry creditors, bills payable, outstanding expenses,
bank overdraft, short term loans and the like.
Quick ratio:
This ratio is also known as liquid ratio or acid ratio test ratio. This establishes
the relationship between quick assets and current liabilities. Quick assets include all
the current assets except stock and prepaid expenses.
Quick asset
Quick ratio = ---------------------
Current liability
This ratio is significant for the short-term lenders and also as also how quickly
they can be paid off. The standard liquid ratio is 1:1. If the quick assets of a business
are equal to its current liabilities, it indicates the good solvency of the business.
Stock turnover ratio:
This ratio is also called stock velocity ratio. It is calculated to ascertain the
efficiency of inventory management in terms of capital investment. It shows the
relationship between the cost of goods sold and the amount of average inventory. This
ratio is helpful in evaluating and review of inventory policy.
It indicates the number of times the inventory is turned over during a
particular accounting period. Stock turnover ratio indicates whether the investment is
optimum. The quantity of stock should be enough to meet the requirements of the
business but it should not be excessive so that money doesn’t get locked up.
Cost of goods sold
Stock turnover ratio = --------------------------
Average stock
Debtors’ turnover ratio:
It is also called ‘Receivables turnover ratio’. Debtors’ turnover ratio measures
the number of times the receivables are rotated in a year in terms of sales. This ratio
also indicates the efficiency of credit collection and efficiency of credit policy. The
ratio is helpful in determining the operational efficiency of a business concern and the
effectiveness of its credit policy. It is important to maintain a reasonable quantitative
relationship between receivables and sales.
Net sales
Debtor’s turnover ratio = -----------------
Receivables
Working capital turnover ratio:
This is also known as working capital leverage ratio. This ratio indicates
whether or not working capital has been effectively utilized in making sales. In case a
company can achieve higher volume of sales with relatively small amount of working
capital, it is an indication of the operating efficiency of the company. A higher ratio is
the indication of lower investment of working capital and more profit.
Net sales
Working capital turnover ratio = ------------------------
Net working capital
Fund Flow Statement
This statement reveals resources from which funds were obtain by the firm
and the specific uses to which such funds were applied. The effectiveness of financial
management in procuring funds from various sources & using them effectively for
generating income without sacrificing the financial position of the firm is reflected in
fund flow statement.
In the words of Foulke, R.A., “a statement of source and application of fund is
a technical device designs to analysis the changes in the financial condition of
business enterprises between two dates”.
According to: Almond Coleman, “The fund flow statement summarizing the
significant financial changes which were occurred between the beginning & the end
of a company’s accounting periods”.
This fund flow statement has two parts:
ℵ Sources of fund
ℵ Application of fund
The difference between these two parts that is sources & uses of funds
represents net changes in working capital.
The excess of sources of funds over uses of fund is the net increase in working
capital & excess of uses over sources of fund is net decrease in working capital.
The amount of net increase or decrease as shown in fund flow statement
should be equal to the amount shown by schedule of working capital changes.
Chapter III
Company profile
Soon after the independence, there was a need for self reliance. Pandit
Jawaharlal Nehru persuaded Mr. Raghunandan Saran, an industrialist to enter into the
automobile industry. The company was established in 1948 as Ashok Motors, with
an aim to assemble Austin cars. Manufacturing of commercial vehicles was started in
1955 with equity contribution from Leyland Motors. Today the Company is the
flagship of the Hinduja Group, an England-based transnational conglomerate.
In 1948, Ashok Motors was set up in what was then Madras (now Chennai),
for the assembly of Austin Cars. The Company's destiny and name changed soon with
equity participation by British Leyland and Ashok Leyland commenced manufacture
of commercial vehicles in 1955. Early products included the Leyland Comet bus
chassis, which sold in large numbers to many operators, including Hyderabad Road
Transport, Ahmedabad Municipality, Travancore State Transport, Bombay State
Transport and Delhi Road Transport Authority. By 1963 the Comet was operated by
every State Transport undertaking in India, and over 8,000 were in service. The
Comet was soon joined in production by a version of the Leyland Tiger.
In 1968 production of the Leyland Titan ceased in Britain, but was restarted by
Ashok Leyland in India. The Titan PD3 chassis was modified, and a five speed heavy
duty constant-mesh gearbox utilized, together with the Ashok Leyland version of the
O.680 engine. The Ashok Leyland Titan was very successful, and continued in
production for many years.
Ashok Leyland vehicles have built a reputation for reliability and ruggedness.
The 500,000 vehicles being put on the roads have considerably eased the additional
pressure placed on road transportation in independent India.