fyp-working capital management of nesco ltd

1

A

Project Report On

Working Capital Management of Nesco Ltd."

Master of Business Administration (Finance)

Submitted in partial fulfillment of the requirements for award of

Master of Business Administration of Tilak Maharashtra

University, Pune.

Submitted by

Kazi Nasimbanu Rafikmiya

PRN NO: 07208013249

Of

PAI International Centre for Management Excellence, Pune

Guided by

Prof. Ravi Bhandari

Tilak Maharashtra University

Gultekdi, Pune 411 037

www.final-yearproject.com | www.finalyearthesis.com

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ACKNOWLEDGEMENT

Successful completion of any work would be incomplete unless we mention the name of

person who made it possible, whose guidance and encouragement served as a beckon of light

and crowned my efforts success.

I take this opportunity to express my deep sense of gratitude to my respected director

professor R. Ganesan for providing guidance and encouragement me during the research.

I own my profound gratitude to Mr. Ravi sir for helping me during the research and providing

me valuable insights.

I express my deep sense of gratitude to finance manager R.G. Upadhay and External guide

(HR executive) Mr. Mansur Thakor for providing necessary information and kind co-

operation.

I am also thankful to all those persons who have directly or indirectly helped me during the

project report.

Kazi Nasim R.


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Contents

Sr.

No.

Topic Page No.

1. Rationale for the study 1

2. Objectives of Study 2

3. Profile of the company 3 - 22

4. Review of Literature 23 - 43

5. Research Methodology 44

6. Data analysis and interpretations using various

charts and graphs

45 - 52

7. Findings 53

8. Limitation of the study 54

9. Appendix 55 58

10. Bibliography 59


4

Chapter 1

Rationale for

the Study


5

Chapter 2

Objectives of

the Study


6

Chapter 3

Profile of the

Company


7

Chapter 4

Review of

Literature


8

Chapter 5

Research

Methodology


9

Chapter 6

Data

Collection and

Analysis


10

Chapter 7

Finding


11

Chapter 8

Limitation


12

Chapter 9

Appendix


13

Chapter 10

Bibliography


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RATIONALE OF THE STUDY

Study of working capital enables to utilize companys current assets efficiently and manage

its liabilities. To maximize the share holders wealth, it is necessary to generate sufficient

profit. For this reason company has to utilize its working capital at its optimum level.

To run operating cycle, to convert raw material in to cash working capital is required to

understand working capital management, study of working capital is very important and

necessary.

To maintained liquidity of the firms study of working capital is required.

The need for capital or current assets cannot be overemphasized. Given the objective of

financial decision making to maximize the shareholders wealth, it is necessary to generate

sufficient profits. The extent to which profits can be earned will naturally depend, among

other things, upon the magnitude of the sales.

A successful sales programmed is, in other words, necessary for earning profit by any

business enterprise. However, sales do not convert into cash instantly; there is invariably a

time-lag between the sale of goods and the receipt of cash. There is therefore, a need for

working capital in the form of current assets to deal with the problem arising out of the lack

of immediate realization of cash against goods sold. There for sufficient working capital is

necessary to sustain sales activity. Technically, this is referred to as the operating or cash

cycle. The operating cycle can be said to be at the heart of the need for working capital. The

continuing flow from cash to suppliers, to inventory, to account receivable and back into cash

is what is called the operating cycle.


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OBJECTIVES OF THE STUDY

To assess the liquidity of the firm.

To know firms operating efficiency.

To understand effects of the credit policy on working capital.

To understand how working capital contributes profit maximization.

To understand significance of working capital in the company.


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PROFILE OF THE COMPANY

New Standard Engineering Company Ltd. (NSE) is a multi product, multi division enterprise

established in 1939. It was promoted in 1939 by Mr. J. V. Patel. The company was

amalgamated with Burjorji Pestonji & Sons Pvt. Ltd., a company incorporated on April 15,

1946. Its name was subsequently changed to new Standard Engineering Company Ltd. on

May 20, 1959. New Standard Engineering is a well diversified company manufacturing

textile spinning machinery, forging equipment, abrasives & onshore oil recovery equipment

with technology from world's leading corporations viz. Wheelabrator Corporation Inc.,

U.S.A.; Davy McKee (Sheffield) Ltd., U.K.; Salzgitter Machinenbau GmbH, Germany;

&Schubert & Salzer, Ingolstadt, Germany.

Due to prolonged depression in its hitherto main product line-textile machinery & the

gestation period for its new products, the company made losses from 1984 till 1990. As a

result, the company approached the BIFR to restructure its past dues.

The BIFR package has restructured & rescheduled the past dues & also provided need based

working capital requirements of the company that would be met by banks at an interest rate

of 15% p.a. The company has received an award for its outstanding performance in exports of

textile preparatory & spinning machinery for 1991-92.

The company has also reached an agreement with Wheelabrator Allevard, France, to set up a

joint venture for the manufacture of abrasives in India.


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Location Details NESCO

Location Type Address

Secretarial Office Nesco Limited Western Express Highway Goregaon East

Mumbai - 400063

Maharashtra - India

Phone : 66450123

Branch Office Ahmedabad Office B, Jadhav Chamber 3rd floor

Ahmedabad - 380006

Gujarat - India

Phone : 6580924,6580927,6587822

Sales & Marketing Office Benoy Bhavan 27-B, 5th floor Camac Street

Kolkata - 700016

West Bengal - India

Phone : 22809703

Branch Office Coimbatore office 1176,1st floor Old sangam,Trichy road

Coimbatore - 641045

Tamil Nadu - India

Phone : 315088

Registered Office &

Factory

Nesco Complex Western Express Highway Goregaon

Mumbai - 400063

Maharashtra - India

Phone : 66450123

Fax : 66450101

Email : [email protected]

Sales & Marketing Office B-1-102, 10th floor Himalaya House

New Delhi - 110001

Delhi - India

Phone : 30422644

Fax : 30424679

Sales & Marketing Office Fagun Mansion

Chennai (Madras) - 600105

Tamil Nadu - India

Phone : 28271108, 28721821


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Branch Office Bangalore office 15,

Wood Street 2nd floor

Bangalore - 560025

Karnataka - India

Phone : 5300344

Sales & Marketing Office Anand Sojitra Road

Karamsad -

Gujarat - India

Phone : 237992, 233458

Fax : 237991

Sales & Marketing Office Nadiad Khambat Road P.O Vishnoli Anand -

Gujarat - India

Phone : 235347

Factory/plant Nadiad Khambat Road P.O Vishnoli Tal. Pethlad

Anand - Gujarat - India

Phone : 235347


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History of the Company:-

Established in 1939 as the New Standard Engineering Co. Ltd. (NSE), the company is known

as a pioneer in the tool manufacturing segment, as it brought into the country, world class

processes and designs for the manufacture of a number of engineering products. Equipment

such as forging hammers and presses, blow room lines and high production cards for the

textile industry; and sucker rod pumps for on-shore oil recovery were some of the main

product lines that emerged as market leaders. As the products manufactured were high in

quality, the company soon saw an incremental rise in its exports, and not only are it products

market leaders in India, but also have found a niche overseas.

Today, the Engineering Group of Nesco continues to be a leading provider of this equipment

to the Indian Railways, numerous Ordnance Factories, and Forging Plants.

In order to reflect on the various new avenues that the company was entering into, the

promoters of the New Standard Engineering Company, decided to change the name to Nesco

Limited. This reflected in the Company's transformation from a pure play Engineering

Company to that of a diversified one, whose diversification entailed it to be a player in the

services segment.

While the company originally operated from Byculla, and set up two more plants at Parel and

Santacruz. In 1959 it consolidated all these three operations and moved to a 70 acre estate on

the Western Express Highway at Goregaon in Mumbai.

In 1986, the company diversified into the realty business by developing and providing

customized built-up space for multinational companies and leading corporates at Goregaon.

In 1992, the company setup an exhibition centre - known as the Bombay Exhibition Centre -

at its complex on the Western Express Highway at Goregaon, Mumbai. Starting with a hall

area of 2, 00,000 sq. ft., this has now been expanded to over 5, 00,000 sq. ft. This venue holds

the distinction of being the largest exhibition centre promoted by the private sector in India

and has hosted over 500 national and international exhibitions, trade fairs, and events since

inception. What sets this Venue apart from the rest is the presence of various permanently air

conditioned hall's ranging from an area of 2,000 Sq. Mts to 20,000 Sq. Mts.


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ORGANIZATION STRUCTURE:-

Milestones Achieved:-

First to bring into India, world class manufacturing process and product designs for

Forging tools and pumps for on-shore oil recovery.

First Private Exhibition Centre located in the heart of Mumbai, just adjacent to the

Western Express Highway, which serves as an important arterial road transporting

goods to and from the City.

S J PATEL

CMD

R G UPADHAYAY

Finance

M P PARIKH

CEO

M A VASAVDA

PRESIDNET

T K KACHHIA

VP

J R SUKHADIA

WORKS(K)

B K PATEL

FOUNDRY

P K PARMAR

DESIGN

S R SHAH

PURCHASE

B A PATEL

WORKS (V)

S K MACWAN

HR

A R KANSARA

P&A

N R PATEL

QC

A R SHAH

ED

N R SHAH

DGM

R H BHATT

MARKETING


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Founder and Chairman:-

Shri Jethabhai Vaghjibhai Patel

Founder Nesco Group

12 July 1904 24 January 1996

From a humble beginning, the respected founder Shri Jethabhai Patel created a diversified

business group. He was a true entrepreneur, a person ahead of his times who had courage,

conviction and confidence to achieve the most difficult.

Starting the New Standard Eng. Co. (now known as Nesco Ltd) in 1939 as a small job

workshop, Jethabhai never looked back. He continued to expand by setting up one new unit

after another. He also acquired and turned around 10 companies, as a result he was often

referred as Doctor of Sick Units.

Jethabhai was a pioneer, manufacturing for the first time in India several new products. He

established relations with world leading companies so as to bring to India the latest

technology products.

The Bhagavad Gita states "Your right is with the action only, never to the fruits." This was

closest to Jethabhai's heart.

Jethabhai gave utmost importance to the youth of rural areas and strived to give them the

right direction. He firmly considered that excellent outcome can be attained only by effective

management. Jethabhai's main motto was "There is no substitute for hard work".


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Jethabhai believed in giving back to the society and helped set up schools, hospitals, and

contributed to several other social causes. Jethabhai's values, vision, leadership qualities,

humility will guide and inspire us and future generations at Nesco. Though Jethabhai is no

more, his legacy will live forever.


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Companys Mission:-

"Setting the stage for exhibiting progress" The Bombay Exhibition Centre is driven to emerge

as a purpose-built Convention and Exhibition Centre which offers organizers, participants

and visitors, a touch of Indian hospitality backed up by robust infrastructure for the

successful culmination of any event.

Leave Blank The Realty Group imbibes best practices for facilities development and

management, which delivers a secure and pleasant working environment for its client and

their employees.

"The pioneers in meshing global designs with local manufacturing talent" The Engineering

Group delivers stable and functional tools which delivers customer satisfaction and trust,

backed up by a constant improvement in design, cost efficiency, delivery and after sales

service.

Companys Vision:-

The company is committed to customer satisfaction by providing excellent / world class

facilities and services for their exhibitions & events and become top exhibition centre in

India.

Companys Value:-

Nesco Group will act with absolute honesty & integrity in dealing with its Customers,

Employees, Stakeholders and Society at large.

Nesco will always care for its customers by delivering value to them & delight them

through quality products & services.

Nesco will encourage creativity & innovation across the organization and offer equal

opportunity for growth to all employees through a culture of meritocracy, teamwork,

commitment & discipline.

Nesco will always adopt fair practices and will aim to become a symbol of Trust &

Reliability for all stakeholders. It will strive to maximize value for shareholders as

well as all stakeholders in a balanced manner.


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Companys Policy:-

Indabrator firmly believe that quality cannot happen. It has to be built into the product. It is

committed to provide products and services of a quality that meet the needs and expectations

of customers at a competitive price and Achieve product quality excellence by continual

improvement through strictly adhering to quality management system as per ISO 9001

2000 requirements.

It is committed to continually improve environmental conditions by utilising environment

friendly technique to control potential hazards, reduce risk factors and improve

environmental conditions through strictly adhering to environment management system as

per ISO 14000: 2004 requirements.

It is committed to provide training & tools for safe operation systems to continually improve

occupational health & safety of interested parties as per OSHA 180001: 1999 guidelines.

It is committed to comply with current applicable statutory & regulatory requirements for

production, environment management, occupational health & safety management.


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Board of Directors:-

Chairman & Managing Director Shri. Sumant J. Patel

Director Mr. Ram Tarneja

Director Mr. Bharat Patel

Director Mr. Srinivasa Moorthy

Director Mr. Mahendra. K.Chauhan

Jt. Managing Director Mrs. Sudha Patel

Director Mr. Mohan. P. Parikh

Executive Director Mr. Krishna Patel


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NESCO LTD

INDABRATOR DIVISION

BOMBAY EXHIBITION

CENTRENESCO REALTY

GROUP COMPANIES:-


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INDABRATOR DIVISION:-

Indabrator is leading manufacturer, supplier and exporter of surface preparation equipments,

providing services to various Indian industries; mainly Foundries, Forging plants,

Automotive industries, Indian railways, Defence organizations, Heavy engineering industries,

Ship building industries, Chemical and petrochemical industries etc.

It believes in establishing long term business relationships with its clients by providing them

with nothing short of the best.

Its aim is to provide excellence in its entire range of products; it has successfully supplied

more than 10,000 + machines to a cross section of industries in the domestic as well as the

international market. Presently, its export about 20% of its products to the Middle East,

Bangladesh, Indonesia, Sri Lanka, UK, USA, African Countries and many other places across

the globe.

It has its own captive Alloy Iron Foundry employing shell moulding process for manufacture

of wear resistant components for shot blasting machines. This enables its customers to get all

spares of shot blasting machine off the shelf, so that they do not have to maintain undue

inventory. It supplies quality steel shots & grits to the specifications of IS: 4606/SAE J827.

This enables its clients to get quality abrasives i.e. steel shots & grits at reasonable prices and

in shorter delivery period.

Its sales and service branches are located at Mumbai, Delhi, Kolkata, Chennai, Karamsad

(near Anand, Gujarat) and at Dubai (U.A.E.). These branches provide, after sales service

through service engineers stationed at these branches and supply fast wearing spare parts.


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Mission and Values:-

Its Mission is to become the largest Surface Preparation System provider in Asia, known for

its quality, technology, fully integrated range, innovation, dynamism, ethical behaviour and

business results; and build long lasting customer relationships that will make it their preferred

supplier.

Honesty and Integrity: Nesco group will act with absolute honesty and integrity in

dealing with its customers, employees, stakeholders and society at large

Care and Concern: Nesco group will always care for its customers by delivering

value to them and delight them through quality products and services

Teamwork: Nesco will encourage creativity and innovation across the organization

and offer equal opportunity for growth to all employees through a culture of

meritocracy, team work, commitment and discipline

Trust and Reliability: Nesco will always adopt fair practices and thereby, will aim to

become a symbol of trust and reliability for all stakeholders. It will strive to maximize

value for its stakeholders in a balanced manner.

Quality Certifications

Customer satisfaction is the hallmark that has earned it several accolades and honours. This

has given it a competitive edge over other players functioning in the same industry.

Following are some of the citations bestowed on Nesco Limited.

ISO 9001 : 2000

ISO 14001:2004

ISO 18001:1999.


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Product and Application:-

Applications

Debarring

Deflashing

Descaling

Painting

Peening

Coating removal

Etching

Profiling

Rust removal

Sand removal

Industry Vertical

Automotive

Foundry / Forge

Steel

Railways

Shipyards

Manufacturing

Equipment

Blasting equipments

Peening equipments

Spare

Erection and commissioning

Companys Client:-

Indabrator has supplied 10000+ equipments in last 43 years of its existence in India and

abroad. Its clients range from public sectors enterprises such as BHEL, BEML, NALCO,

Cochin Shipyards, Indian Railways, HAL to private sector corporate like TATA group,

Jindal, L & T, Bajaj and many more.

As per the requirement of its esteemed client we manufacture standard or customized models

of shot blasting / Peening equipments and add value to their primary products.


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BOMBAY EXHIBITION CENTRE:-

Bombay Exhibition Centre (BEC) is the largest and permanent exhibition centre, in the

private sector, in India and was set up in 1991. BEC has hosted several prestigious

International trade fairs/exhibitions ever since.

The centre is ideally situated along the Western Express Highway in Goregaon, within 10

minutes from airports, walking distance to train stations and a 20 minute drive from the heart

of the city. There are numerous hotels, entertainment activities, retail shopping & sightseeing

spots in close proximity.

BEC consists of four halls occupying over 45,000 sq.mtrs of centrally air-conditioned space

for conducting exhibitions. The halls are Wi-Fi enabled, have ample height, good lighting,

well-designed ventilation and strong flooring to withstand even the heaviest machinery.

Major highlights of the available facilities for organizing large or medium scale events in the

commercial and business capital of our country Mumbai, include air-conditioned Seminar/

Convention halls, International lounges, operational air-conditioned restaurants, open air

cafeterias, business communication centres, site offices, service centres and sufficient parking

space within the complex having serene and lush-green surroundings.

Utilities and infrastructure to meet demands of power, water supply and compressed air

supply, telephone lines are available within the exhibition halls to facilitate organization of

major industrial trade fairs/exhibitions.


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Amenities & Facilities:-

The centre is the largest in the private sector in India and plays a pivotal role in further

enhancing the reputation of Mumbai as an international convention city. BEC consists of 4

halls, occupying an area of over 4, 00,000 sq. ft. Plans for expansion are under way. Each hall

is Wi-Fi enabled, has ample height, well air-conditioned with tough flooring that can

withstand even the heaviest machinery

Large parking lots inside BEC accommodate over 2000 vehicles at any given time and

loading / offloading can be done from special bays in the halls.

Due to ample power infrastructure, every single machine in the exhibit area can be powered

and made operational to display its features.

Organisers can avail of the following facilities in and around the premises of BEC: -

A convention centre

Conference and seminar halls

An international lounge

An open air area for inaugural / valedictory functions

Restaurants

It is the BECs endeavour to provide better infrastructure facilities and services for ensuring

the success of the exhibition & event.


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NESCO REALTY:-

Capitalizing on an area of over 70 acres, in 1986, the Company decided to diversify into

facilities development and management business. Strategically located at Goregaon in

Mumbai, adjacent to the Western Express Highway, it was setup with a simple mission to

become "the preferred location" for corporate by constructing good quality premises, backed

up by consistent and reliable amenities such as uninterrupted power and water, to deliver a

safe and enhanced work atmosphere to our clients. It handle complete property transactions

(right from sourcing of clients to concluding the deal) related to leasing of space for various

real estates use viz., InfoTech, commercial office, industrial, retail and logistics /

warehousing.

As part of its ongoing effort to enhance our deliverables in this segment, it has successfully

received permission to develop an IT Park. This effort will cover a half-million Square Feet

and will be recognized by the STPI as an Export Processing Zone. With this, it plans on

attracting most blue chips IT companies

Its reputed licensee's includes:

Schlumberger Asia Services Limited

Sodexo India

Citi Group Services Ltd. (a Citibank subsidiary)

Intelenet Global Services Pvt. Ltd.)

Sparsh (an Intelenet subsidiary)


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REVIEW OF LITERATURE

Concepts of Working Capital

There are two concepts of working capital.

Gross Working Capital:

The term gross working capital, also referred to as working capital, means the total current

assets.

Net Working Capital:

The term net working capital can be defined as the net working capital is deference between

current assets and current liabilities. Net working capital as a measure of liquidity is not very

useful for comparing the performance of different firm, but it is quite useful for internal

control in other words the goal of working capital management is to manage the current

assets and liabilities in a such a way acceptable level of net working capital is maintained.

Types of Working Capital:

There are two types of working capital.

1. Permanent Working Capital

2. Temporary Working Capital

1. Permanent Working Capital:

The operating cycle, thus, creates the need for current assets (working Capital). However, the

need does not come to an end after the cycle is completed. It continues to exits. To explain

this continuing need of current assets, a distinction should be drawn between permanent and

temporary working capital.

Business activity does not come to an end after the realization of cash from customers. For a

company, the process is continuous and hence, the need for a regular supply of working

capital. However, the magnitude of working capital required is not constant, but fluctuating.

To carry on business, a certain minimum level of working capital is necessary on a

continuous and uninterrupted basis. For all practical purposes, this requirement has to be met


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permanently as with other fixed assets. This requirement is referred to as permanent or fixed

working capital.

2. Temporary Working Capital:

Any amount over and above the permanent level of working capital is temporary, fluctuating

or variable working capital. The position of the required working capital is needed to meet

fluctuations in demand consequent upon changes in production and sales as a result of

seasonal changes.

The basic distinction between permanent and temporary working capital is illustrated in

Figure 1. Figure 1 shows that the permanent level is fairly constant, while temporary working

capital is fluctuating-increasing and decreasing in accordance with seasonal demands. In the

case of an expanding firm, the permanent working capital line may not be horizontal. This is

because the demand for permanent current assets might be increasing or decreasing to

support a rising level of activity. In that case the line would be a rising one as shown in

Figure 2.

Changes in Working Capital:

The changes in the level of working capital occur for the following three basic reasons:

Changes in the level of sales and / or operating expenses.

The first factor causing a change in the working capital requirement is a change in the

sales and operating expenses. The changes in this factor may be due to three reasons:

First, there may be a long-run trend of change. For instance, the price of a raw

material, say oil, may constantly rise, necessitating the holding of a large inventory.

The secular trends would mainly affect the need for permanent current assets. In the

second place, cyclical changes in the economy leading to ups and downs in business

activity influence the level of working capital, both permanent and temporary. The

third source of change is seasonality in sales activity. Seasonality-peaks and troughs-

can be said to be the main source of variation in the level of temporary working

capital.

The change in sales and operating expenses may be either in the form of an increase

or decrease. An increase in the volume of sales in bound to be accompanied by higher


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levels of cash, inventory and receivables. The decline in sales has exactly the opposite

effect-a decline in the need of working capital. A change in the operating expenses-

rise or fall has a similar effect on the levels of working capital.

Policy changes

The second major cause of changes in the level of working capital is because of

policy changes initiated by the management. There is a wide choice in the matter of

current assets policy. The term current asset policy may be defined as the relationship

between current assets and sales volume. A firm following conservative policy in this

respect having a very high level of current asset in relation to sales may deliberately

opt for a less conservative policy and vice versa.

Changes in technology:

If a new process emerges as a result of technological developments, which shortens the

operating cycle, it reduces the need for working capital and vice versa.

Computation of working capital:

The two components of working capital (WC) are current assets (CA) and current

liabilities (CL). They have a bearing on the cash operating cycle. In order to calculate the

working capital needs, what is required is the holding period of various types of

inventories, the credit collection period and the credit payment period.

Working capital also depends on the budgeted level of activity in terms of production /

sales. The calculation of WC is based on the assumption that the production / sales are

carried on evenly throughout the year and all costs accrue similarly. As the working

capital requirements are related to the cost excluding depreciation and not to the sale

price. WV is computed with reference to cash cost. The cash cost approach is

comprehensive and superior to the operating cycle approach based on holding period of

debtors and inventories and payment period of creditors. Some problems have been

solved however using the operating cycle approach also.


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Figure 1 Permanent and Temporary Working Capital

Figure 2 Permanent and Temporary Working Capital

Amount of Temporary

Working

Capital

Permanent

Time

Temporary or

Amount of Fluctuating

Working

Capital Permanent

Time


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Estimation of Current Assets:

Raw Materials Inventory: The investment in raw materials inventory is estimated on the basis

of EQ. 1.

Budgeted Cost of raw Average inventory

production X material(s) X holding period

(in units) per units (months/days)

12 months / 365 days

Work-in-Process (W/P) Inventory:

The relevant costs to determine work-in-process inventory are the proportionate share of cost

of raw materials and conversion costs (labour and manufacturing overhead costs excluding

depreciation). In case, full unit of raw material is required in the beginning, the unit cost of

work-in-process would be higher, that is, cost of full unit + 50 per cent of conversion cost,

compared to the raw material requirement throughout the production cycle; W/P is normally

equivalent to 50 per cent of total cost of production. Symbolically,

Budgeted Estimated work Average time span

production X in-process cost X of work-in-process

(in units) per units inventory (months/days)


Finished Goods Inventory:

Working capital required of finance the finished goods inventory is given by factors summed

up in Eq. 3

Budgeted Cost of goods produced Finished goods

production X per unit (excluding X holding period

(in units) depreciation) (months/days)



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Debtors:

The WC tied up in debtors should be estimated in relation to total cost price (excluding

depreciation) symbolically,

Budgeted Cost of sales per Average debt

production X unit excluding X collection period

(in units) depreciation (months/days)


Cash and Bank Balances:

Apart of WC needs for financing inventories and debtors, firms also find it useful to have

some minimum cash balances with them. It is difficult to lay down the exact procedure of

determining such an amount. This would primarily be based on the motives for holding cash

balances of the business firm, attitude of management toward risk, the access to the

borrowing sources in time of need and past experience, and so on.

Estimation of Current Liabilities:

The working capital needs of business firms are lower to that extent such needs are met

through the current liabilities (other than bank credit) arising in the ordinary course of

business. The important current liabilities (CL), in this context are trade-creditors, wages and

overheads.

Trade Creditors:

Budgeted yearly Raw material Credit period

production X cost X allowed by creditors




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Direct Wages:

Budgeted yearly Direct labour Average time-lag in

production X cost X payment of wages



The average credit period for the payment of wages approximates to a half-a-month in the

case of monthly wage payment: The first days monthly wages are paid on the 30th day of the

month, extending credit for 29 days, the second days wages are, again paid on the 30th,

extending credit for 28 days, and so on. Average credit period approximates to half-a-month.

Overheads (Other Than Depreciation and Amortization):

Budgeted yearly Overhead Average time-lag in

production X cost X payment of overheads



The amount of overheads may be separately calculated for different types of overheads. In

the case of selling overheads, the relevant item would be sales volume instead of production

volume.

The better a company manages its working capital, the less the company needs to borrow.

Even companies with cash surpluses need to manage working capital to ensure that those

surpluses are invested in ways that will generate suitable returns investor.

The inventory turnover ratio offers another good instrument for assessing the effectiveness of

WCM. The inventory ratio shows how fast/often companies are able to get their goods

completely off the shelves.

The importance of having working capital is best understood as 'costs expended before

payment received for goods/service provided to the customer'. Therefore, no capital means no

produce and no customers, which means no capital.


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Working capital management

Decisions relating to working capital and short term financing are referred to as working

capital management. These involve managing the relationship between a firm's short-term

assets and its short-term liabilities.

As above, the goal of Corporate Finance is the maximization of firm value. In the context of

long term, capital investment decisions, firm value is enhanced through appropriately

selecting and funding NPV positive investments. These investments, in turn, have

implications in terms of cash flow and cost of capital.

The goal of Working capital management is therefore to ensure that the firm is able to

operate, and that it has sufficient cash flow to service long term debt, and to satisfy both

maturing short-term debt and upcoming operational expenses.

Decision criteria

Working capital is the amount of capital which is readily available to an organization. That is,

working capital is the difference between resources in cash or readily convertible into cash

(Current Assets), and cash requirements (Current Liabilities). As a result, the decisions

relating to working capital are always current, i.e. short term, decisions.

In addition to time horizon, working capital decisions differ from capital investment

decisions in terms of discounting and profitability considerations; they are also "reversible" to

some extent. (Considerations as to Risk appetite

Additionally, working capital is directly affecting by other management issues, such as

product mix, supply chain design and business model (for example agent vs. distributor).

Working capital management decisions are therefore not taken on the same basis as long term

decisions, and different criteria are applied here: the main considerations are cash flow and

liquidity - cash flow is probably the more important of the two.

The most widely used measure of cash flow is the net operating cycle, or cash

conversion cycle. This represents the time difference between cash payment for raw

materials and cash collection for sales. The cash conversion cycle indicates the firm's


41

ability to convert its resources into cash. Because this number effectively corresponds

to the time that the firm's cash is tied up in operations and unavailable for other

activities, management generally aims at a low net count. (Another measure is gross

operating cycle which is the same as net operating cycle except that it does not take

into account the creditors deferral period.)

In this context, the most useful measure of profitability is Return on capital (ROC).

The result is shown as a percentage, determined by dividing relevant income for the

12 months by capital employed; Return on equity (ROE) shows this result for the

firm's shareholders. As above, firm value is enhanced when, and if, the return on

capital, exceeds the cost of capital. ROC measures are therefore useful as a

management tool, in that they link short-term policy with long-term decision making.

Guided by the above criteria, management will use a combination of policies and techniques

for the management of working capital. These policies aim at managing the current assets

(generally cash and cash equivalents, inventories and debtors) and the short term financing,

such that cash flows and returns are acceptable.

Cash management. Identify the cash balance which allows for the business to meet

day to day expenses, but reduces cash holding costs.

Inventory management. Identify the level of inventory which allows for uninterrupted

production but reduces the investment in raw materials - and minimizes reordering

costs - and hence increases cash flow; see Supply chain management; Just In Time

(JIT); Economic order quantity (EOQ); Economic production quantity (EPQ).

Debtors management. Identify the appropriate credit policy, i.e. credit terms which

will attract customers, such that any impact on cash flows and the cash conversion

cycle will be offset by increased revenue and hence Return on Capital (or vice versa);

see Discounts and allowances.

Short term financing. Identify the appropriate source of financing, given the cash

conversion cycle: the inventory is ideally financed by credit granted by the supplier;

however, it may be necessary to utilize a bank loan (or overdraft), or to "convert

debtors to cash" through factoring".


42

Cash is the lifeline of a company. If this lifeline deteriorates, so does the company's ability to

fund operations, reinvest and meet capital requirements and payments. Understanding a

company's cash flow health is essential to making investment decisions. A good way to judge

a company's cash flow prospects is to look at its working capital management (WCM).

Working capital refers to the cash a business requires for day-to-day operations, or, more

specifically, for financing the conversion of raw materials into finished goods, which the

company sells for payment. Among the most important items of working capital are levels of

inventory, accounts receivable, and accounts payable. Analysts look at these items for signs

of a company's efficiency and financial strength.

The better a company manages its working capital, the less the company needs to borrow.

Even companies with cash surpluses need to manage working capital to ensure that those

surpluses are invested in ways that will generate suitable returns for investors.

Not All Companies are the same some companies are inherently better placed than others.

Insurance companies, for instance, receive premium payments up front before having to make

any payments; however, insurance companies do have unpredictable cash outflow as claims

come in.

Timing and lumpiness of payments can pose serious troubles. Manufacturing companies, for

example, incur substantial upfront costs for materials and labor before receiving payment.

Much of the time they eat more cash than they generate.

Investors should favor companies that place emphasis on supply-chain management to ensure

that trade terms are optimized. Days-sales outstanding, or DSO for short, is a good indication

of working capital management practices. DSO provides a rough guide to the number of days

that a company takes to collect payment after making a sale. Here is the simple formula:

Receivables/ Annual Sales/365 Days

Rising DSO is a sign of trouble because it shows that a company is taking longer to collect its

payments. It suggests that the company is not going to have enough cash to fund short-term

obligations because the cash cycle is lengthening. A spike in DSO is even more worrisome,

especially for companies that are already low on cash.


43

The inventory turnover ratio offers another good instrument for assessing the effectiveness of

WCM. The inventory ratio shows how fast/often companies are able to get their goods

completely off the shelves.

Decisions relating to working capital and short term financing are referred to as working

capital management. These involve managing the relationship between a firm's short-term

assets and its short-term liabilities.

As above, the goal of Corporate Finance is the maximization of firm value. In the context of

long term, capital investment decisions, firm value is enhanced through appropriately

selecting and funding NPV positive investments. These investments, in turn, have

implications in terms of cash flow and cost of capital.

The goal of Working capital management is therefore to ensure that the firm is able to

operate, and that it has sufficient cash flow to service long term debt, and to satisfy both

maturing short-term debt and upcoming operational expenses. In so doing, firm value is

enhanced when, and if, the return on capital exceeds the cost of capital.

Working capital is the amount of capital which is readily available to an organization. That is,

working capital is the difference between resources in cash or readily convertible into cash

(Current Assets), and cash requirements (Current Liabilities). As a result, the decisions

relating to working capital are always current, i.e. short term, decisions.

In addition to time horizon, working capital decisions differ from capital investment

decisions in terms of discounting and profitability considerations; they are also "reversible" to

some extent. (Considerations as to Risk appetite and return targets remain identical, although

some constraints - such as those imposed by loan covenants - may be more relevant here).

Additionally, working capital is directly affecting by other management issues, such as

product mix, supply chain design and business model (for example agent vs. distributor).

Working capital management decisions are therefore not taken on the same basis as long term

decisions, and different criteria are applied here: the main considerations are cash flow and

liquidity - cash flow is probably the more important of the two.


44

The most widely used measure of cash flow is the net operating cycle, or cash

conversion cycle. This represents the time difference between cash payment for raw

materials and cash collection for sales. The cash conversion cycle indicates the firm's

ability to convert its resources into cash. Because this number effectively corresponds

to the time that the firm's cash is tied up in operations and unavailable for other

activities, management generally aims at a low net count. (Another measure is gross

operating cycle which is the same as net operating cycle except that it does not take

into account the creditors deferral period.)

In this context, the most useful measure of profitability is Return on capital (ROC).

The result is shown as a percentage, determined by dividing relevant income for the

12 months by capital employed; Return on equity (ROE) shows this result for the

firm's shareholders. As above, firm value is enhanced when, and if, the return on

capital, exceeds the cost of capital.

DETERMINANTS OF WORKING CAPITAL:

The following factors are involved in an assessment of the quantum of working capital

required:

(1). General Nature of Business:

The working capital requirements of an enterprise are basically related to the conduct of

business. Enterprises fall into broad categories depending on the nature of their business. For

instances, public utilities have certain features which bearing on their working capital needs.

The two relevant features are, one cash sale, and second sale of services. In view of these

features company do not maintain big inventories and therefore require less working capital.

(2). Business Cycle:-

The variations in business conditions may be in two directions: (A) upward phase when boom

conditions prevail and (B) downswing phase when economic activity is marked by a decline.

During the upswing of business activity, the need of working capital is likely to grow and in

downswing phase the need of working capital is likely reduce.


45

(3). Production Policy:-

The quantum of working capital is also determined by production policy. In the case of

certain lines of business, the demand for products is seasonal, that is, they are purchased

during certain months of the year.

(4). Credit policy:

The credit policy relating to the sales and purchase also affects the working capital. The

credit policy influences the requirement of working capital in two ways: (a) through credit

terms granted by the firm to its customers/buyers of goods; (b) Credit terms available to the

firm from its creditor.

(5). Production Cycle:-

The term production cycle refers to the time involved in the manufacture of goods. It covers

the time-span between the procurement of raw materials and the completion of the

manufacturing process leading to the production of finished goods. The longer the time-span

the larger will be the tied-up funds, the larger is the working capital needed.

(6). Growth and Expansions:-

If the company decides to expand the business it will require larger amount of working

capital. Other things being equal growth industries require more working capital than those

are static.

(7). Availability of Raw Materials:-

If Raw materials available in all the season, company need not to store extra inventory, which

results in less working capital requirement. If the raw materials is available in only in season

it will required more working capital.

(8). Level of Tax:-

Tax liability is, in a sense, short-term liability payable in cash. If tax liability is increase, it

leads to increase in working capital requirement and vice a versa.


46

(9). Dividend Policy:-

If firm does not pay dividend but retains the profits, working capital increasing. If the firm is

distribute the dividend working capital decreasing.

(10). Depreciation Policy:-

Depreciation charges do not involve any cash outflow but it indirectly affect to the working

capital. Enhance rate of depreciation lower the profit and therefore tax liability and thus,

more cash profits.

(11). Price Level Charges:-

Rising prices necessitate the use of more funds for maintaining an existing level of activity.

The effect of rising prices is that higher amount of working capital is needed.

Areas of Working Capital:-

Cash management:-

Cash management is one of the key areas of working capital management. Apart from the

fact that it is the most liquid current asset, cash is the common denominator to which all

current assets can be reduced because the other major liquid assets that are receivables and

inventory get eventually converted into cash. This underlines the significance of cash

management.

Objective of Cash management:-

Meeting Payment Schedule:-

In the normal course of business, firms have to make payments of cash on a continuous and

regular basis to suppliers of goods, employees and so on. At the same time, there is a constant

inflow of cash through collections from debtors. Cash is therefore aptly described as the oil to

lubricate the ever turning wheels of business without it the process grinds to a stop. A basic

objective of cash management is to meet the payment schedule; that is to have sufficient cash

to meet the cash disbursement needs of a firm.


47

The importance of sufficient cash to meet the payment schedule can hardly be

overemphasized. The advantages of adequate cash are:

1. It prevents insolvency or bankruptcy arising out of the inability of a firm to meet its

obligations

2. The relationship with the bank is not strained

3. It helps in fostering good relations with trade creditors and suppliers of raw materials as

prompt payment may help their own cash management

4. A cash discount can be availed of if payment is made within the due date.

The firm can meet unanticipated cash expenditure with a minimum of strain during

emergencies, such as strikes, fires or a new marketing campaign by competitors. Keeping

large cash balances, however, implies a high cost. The advantage of prompt payment of cash

can well be realized by sufficient and not excessive cash.

Minimizing Funds Committed to Cash Balances:

The second objective of cash management is to minimize cash balances. In minimizing the

cash balances two conflicting suspects have to be reconciled. A high level of cash balances

will as shown above ensure prompt payment together with all the advantages. But is also

implies that large funds will remain idle, as cash is a non earning asset and the firm will have

to forego profits. A low level of cash balances on the other hand may mean failure to meet

the payment schedule. The aim of cash management therefore should be to have an optimal

amount of cash balances.

Receivables Management:-

A basic strategy to reduce the operating cash requirement of a firm is to accelerate the

collection of receivables so as to reduce the average collection period. The receivables

represent an important component of the current assets of a firm.

Objectives of Receivables Management:-

The term receivable is defined as debt owed to the firm by customers arising from sale of

goods or services in the ordinary course of business. When a firm makes an ordinary sale of

goods or services and does not receive payment, the firm grants trade credit and creates


48

accounts receivable which could be collected in the future. Receivables management is also

called trade credit management. Thus accounts receivables represent an extension of credit to

customers, allowing them a reasonable period of time in which to pay for the goods received.

The sale of goods on credit is an essential part of the modern competitive economics systems.

In fact, credit sales and therefore receivables are treated as a marketing tool so aid the sale of

goods. As a marketing tool they are intended to promote sales and thereby profits. However,

extension of credit involves risk and cost. Management should weigh the benefits as well as

cost to determine the foal of receivables management. The objective of receivables

management is to promote sales and profits until that point is reached where the return on

investment in further funding receivables is less that the cost of funds raised to finance that

additional credit.

Credit Policy:-

The credit policy of a firm provides the framework to determine:

a. Whether or not to extend credit to a customer

b. How much credit to extend

The credit policy decision of a firm has two broad dimensions:

I. Credit standards

II. Credit analysis

A firm has to establish and use standards in making credit decisions, develop appropriate

sources of credit information and methods of credit analysis. We illustrate below how theist

two aspects are relevant to the accounts receivables management of a firm.

Collection Costs:-

The implications of relaxed credit standards are:

i. More credit

ii. A large credit department to service accounts receivable and related matters

iii. Increase in collection costs.

The effect of tightening of credit standards will be exactly the opposite. These costs are likely

to be semi variable. This is because up to a certain point the existing staff will be able to carry


49

on the increased workload, but beyond that additional staff would be required. These are

assumed to be included in the variable cost per unit and need not be separately identified.

Credit Term:-

The second decision is in accounts receivable management is the credit terms. After the credit

standards have been established and the creditworthiness of the customers has been assessed,

the management of a firm must determine the terms and conditions on which trade credit will

be made available. The stipulations under which goods are sold on credit are referred to as

credit terms. These relate to the repayment of the amount under the credit sale. Thus, credit

terms specify the repayment terms of receivables.

Inventory Management:-

The term inventory refers to the stockpile of the products a firm is offering for sale and the

components that make up the product. In other words, inventory is composed of assets that

will be sold in future in the normal course of business operations. The assets which firms

store as inventory in anticipation of need are

i. Raw materials

ii. Work-in-process

iii. Finished goods

The raw material inventory contains items that are purchased by the firm from others and are

converted into finished goods through the manufacturing process. They are an important

input of the final product. The work-in-process inventory consists that are at various stages of

production in a multi-stage production process. Finished goods represent final or completed

products which are available for sale. The inventory of such goods consists of items that have

been produced but are yet to be sold.

The aspects covered are:

A. Determination of the type of control required

B. The basic economic order quantity

C. The reorder point

D. Safety stocks.


50

As a matter of fact, the inventory management techniques are a part of production

management.

Objectives:-

The basic responsibility of the financial manager is to make sure the firms cash flows are

managed efficiently. Efficient management of inventory should ultimately result in the

maximization of the owners wealth. Oder to minimize cash requirements, inventory should

be turned over as quickly as possible, avoiding stock outs that might result in closing down

the production line or lead to a loss of sales. It implies that while the management should try

to pursue the financial objective of turning inventory as quickly as possible, it should at the

same time ensure sufficient inventories to satisfy production and sales demands.

The basic building blocks for the Inventory Management system and Inventory Control

activities are:

Sales Forecasting or Demand Management

Sales and Operations Planning

Production Planning

Material Requirements Planning

Inventory Reduction

The emphases on each area will vary depending on the company and how it operates, and

what requirements are placed on it due to market demands. Each of the areas above will need

to be addressed in some form or another to have a successful program of Inventory

Management and Inventory Control.

Inventory is usually a distributors largest asset. But many distributors arent satisfied with

the contribution inventory makes towards the overall success of their business:

The wrong quantities of the wrong items are often found on warehouse shelves. Even

though there may be a lot of surplus inventory and dead stock in their warehouse(s),

backorders and customer lost sales are common. The material a distributor has committed to

stock isnt available when customers request it.


51

Computer inventory records are not accurate. Inventory balance information in the

distributors expensive computer system does not accurately reflect what is available for sale

in the warehouse.

The return on investment is not satisfactory. The companys profits, considering its

substantial investment in inventory, are far less than what could be earned if the money were

invested elsewhere.

Operating Cycle:-

The continuing flow of from cash to suppliers, inventory to account receivable and back in to

cash is what it called operating cycles.

In other words the term cash cycle refers to the length of time necessary to complete the

following cycle of events:

1. Conversion of cash into inventory

2. Conversion of inventory into receivables

3. Conversion of receivables into cash

The operating cycle which is continuous process is shown in following diagram.

OPERATING CYCLE

Phase 3

Phase 2

Phase 1

CASH

RECEIVABLES

INVENTORY


52

The operating cycle consists of three phases, in phase 1. Cash gets converted into inventory.

This includes purchase of raw materials, conversion of raw materials into work-in-progress,

finished goods and finally the transfer of goods to stock at the end of the manufacturing

process. In the case of trading organizations, this phase is shorter as there would be no

manufacturing activity and cash is directly converted into inventory. The phase is of course,

totally absent in the case of service organizations.

In phase 2 of the cycle, the inventory is converted into receivables as credit sales are made to

customers. Firms which do not sell on credit obviously not have phase 2 of the operating

cycle.

The last phase, phase 3 represents the stage when receivables are collected. This phase

completes the operating cycle. Thus, the firm has moved from cash to inventory, to

receivables and to cash again.


53

RESEARCH METHODOLOGY

Research Design:

A research design is the detailed blue print used to guide a research study towards its

objective. It helps to collect, measure and analysis of data.

The study undertaken is of Descriptive Historical Research Method. Descriptive research is

those which are connected with describing the characteristics of the particular topic.

Secondary data:

Secondary data is collected through magazine, reference books, journal, articles, websites etc.

I have collected data through Balance Sheet of the company, website of the company

and theoretical part from the reference books.


54

DATA COLECTION AND ANALYSIS

Statement of Working Capital

(In Cr.)

Particulars

Mar

'04

Mar

'05

Mar

'06

Mar

'07

Mar

'08

Mar

'09

A) Current Assets: -

i) Inventories 3.13 4.50 4.36 3.66 3.66 5.20

ii) Sundry Debtors 3.84 6.28 2.47 8.47 7.48 9.53

iii) Cash & Bank Balance 0.03 0.85 4.12 2.46 1.88 0.86

iv) Fixed Deposit 0.09 1.30 1.91 3.69 8.41 11.78

v) Loans & Advances 2.61 5.48 5.61 10.11 26.69 41.95

Total Current Assets (A) 9.70 18.41 18.47 28.39 49.55 69.32

B) Current Liabilities:-

Current Liabilities (B) 17.11 26.20 34.03 37.38 59.33 65.79

Working Capital (A-B) -7.41 -7.79 -15.56 -11.99 -9.78 3.53

Add : Provisions 0.15 0.82 1.81 15.92 38.93 39.66

Net Working Capital Requirement -7.26 -6.97 -13.75 -3.93 29.15 43.19

Note: - Fixed Deposit and loan and advances are assumed as short-term in nature.

Interpretation:-

From 2004 to 2007 companys working capital is negative which indicates companys

operating efficiency during this period goes down and company is facing difficulties in

meeting its day to day obligations.

In 2008 and 2009 its working capital is positive, which intimates improvement in operating

efficiencies.


55

Current Ratio:-

The current assets of a firm, as already stated, represent those assets which can be, in the

ordinary course of business, converted into cash within a short period of time, normally not

exceeding one tear and include cash and bank balance, marketable securities, inventory of

raw materials, semi-finished and finished goods, debtors net of provision for bad and

doubtful debts, bills receivable and prepaid expenses.

The current liabilities defined as liabilities which are short-term maturing obligations to be

met, as originally contemplated, with a year, consist of trade creditors, bills payable, bank

credit, and provision for taxation, dividends payable and outstanding expenses.

Rationale:-

The current ratio of a firm measures its short-term solvency, that is, its ability to meet short-

term obligations as a measure of short-term/current financial liquidity; it indicates the rupees

of current assets (cash balance and its potential source of cash) available for each rupee of

current liability/obligation payable. The higher the current ratio, the larger is the amount of

rupees available per rupee of current liability, the more is the firms ability to meet current

obligations and the greater is the safety of funds of short-term creditors. Thus, current ratio,

in a way, is a measure of margin of safety to the creditors.

Generally current ratio of 2:1 is considered ideal for the firm.

Current Ratio = Current Assets / Current Liabilities

Particulars Mar '04 Mar '05 Mar '06 Mar '07 Mar '08 Mar '09

Current Assets 9.70 18.41 18.47 28.39 49.55 69.32

Current Liabilities 17.11 26.20 34.03 37.38 59.33 65.79

Current Ratio 0.56 0.70 0.54 0.75 0.83 1.05


56

Interpretation:-

Generally current ratio should 2:1 but as per our calculation in 2004 it was 0.56, it means

company has 0.56 rupees current assets against current liability on rupees 1. Company has

less current assets than current claims against them. In 2009 10 companys current ratio is

1.05 which is not satisfactory. Its short-term solvency is threatened.

0.560.68

0.54

0.750.50

1.05

0

0.2

0.4

0.6

0.8

1

1.2

Mar'04 Mar'05 Mar'06 Mar'07 Mar'08 Mar'09


57

Acid-Test/Quick Ratio:-

The term quick assets refers to current assets which can be converted into cash immediately

or at a short notice without diminution of value. Included in this category of current assets are

(1) cash and bank balance; (2) short-term marketable securities and (3) debtors/receivables.

Thus, the current assets which are excluded are: prepaid expenses and inventory.

Liquid Ratio = Liquid Assets / Liquid Liabilities

Particulars Mar '04 Mar '05 Mar '06 Mar '07 Mar '08 Mar '09

Liquid Assets 6.57 13.91 14.11 24.73 44.46 64.12

Liquid Liabilities 17.11 26.20 34.03 37.38 59.33 65.79

Liquid Ratio 0.38 0.53 0.41 0.66 0.75 0.97

0.38

0.530.40

0.660.75

0.97

0

0.2

0.4

0.6

0.8

1

1.2

Mar'04 Mar'05 Mar'06 Mar'07 Mar'08 Mar'09


58

Interpretation:-

Generally quick ratio of 1:1 represents a satisfactory current financial condition. But we have

seen in table that not evens a single year it has achieved. In all five years liquid ratios are less

than 1.It indicates that firm has found difficult to meet its obligations because its quick assets

are lesser than current liabilities. Similarly both year 2006-07 and 2007-08 the company

suffer from the same position. It is increase by 0.97 in 2009-10.

Companys current financial condition is not satisfactory because liquid assets are less than

liabilities.


59

Inventory Turnover:

This ratio measures the stock in relation to turnover in order to determine how often the stock

turns over in the business.

Inventory Turnover Ratio = Cost of Goods Sold / Average Inventory

Cost of Goods Sold=Sales-Gross Profit

Particulars Mar '05 Mar '06 Mar '07 Mar '08 Mar '09

Cost Of Goods Sold 19.21 33.08 37.24 50.62 46.44

Average Inventory 3.81 4.43 4.01 4.37 5.14

Inventory Turnover Ratio 5.04 7.46 9.29 11.58 9.03

Interpretation:-

It indicates the efficiency of the firm in selling its product. In 2005-06 inventory turnover is 5

times and in 2009-10 it is 9 times in a year. High inventory turnover ratio is good from view

point of liquidity. We can say company sells its product fast.

5.04

7.46

9.29

11.58

9.03

0

2

4

6

8

10

12

14

Mar'05 Mar'06 Mar'07 Mar'08 Mar'09


60

Debtors Turnover Ratio:-

It is determined by dividing the net credit sales by average debtors outstanding during the

year. The analysis of the debtors turnover ratio supplements the information regarding the

liquidity of one item of current assets of the firm. The ratio measures how rapidly receivables

are collected.

Debtors Turnover Ratio = Net credit sales / Average Debtors


Net Credit Sales 16.68 27.24 39.90 63.22 56.81

Average Debtors 5.06 4.37 5.47 7.97 8.50

Debtors Turnover Ratio (Times) 3.30 6.23 7.29 7.93 6.68

Note: - It is assumed that 60% sale is on credit and 40% on cash.

Interpretation:-

The companys debtors turnover ratio of 2005-06 3.30 times, in 2008-09 7.93 times in a year

which indicates company collects its receivable rapidly. We can say year to year the shorter

time leg between credit sells and collection.

3.3

6.237.29

7.93

6.68

0

1

2

3

4

5

6

7

8

9



61

Debtors Collection Period:-

Debtors Collection Period is calculated from following formula:

Debtors Collection Period = 360 / Debtors Turnover Ratio


Days in Years 360 360 360 360 360

Debtors Turnover Ratio 3.30 6.23 7.29 7.93 6.68

Debtors Collection Period

(in Days)

109 58 49 45 54

Interpretation:-

According to debtor collection period from above table, Company was following liberal

credit policy as its collection period of 2005-06 was 109 days. But on account of negative

working it has change its credit policy and reduced its collection period in 2009-10 by 54

days.

109

5849 45

54

0

20

40

60

80

100

120



62

Creditors Turnover ratio:

Creditors Turnover Ratio = Net Credit Purchase / Average Creditors


Net Credit Purchase 20.58 32.94 33.54 52.05 46.55

Average Creditors 7.86 10.20 11.21 17.18 19.73

Creditors Turnover

Ratio(times per year)

2.61 3.22 2.99 2.92 2.35

Interpretation:-

Above stated graph indicates that in Mar05 Company has settled its creditors accounts 2.61

times in a year.

In Mar06 it had increased by 3.22 which show that company had settled its account rapidly.

From Mar07 to Mar09 it has paid its creditors account average of 3 times. If creditors

turnover ratio is high companys requirements of working capital will increase and vice-a-

versa.

2.61

3.222.99 2.92

2.35

0

0.5

1

1.5

2

2.5

3

3.5



63

Creditors Payment Period:-

Creditors Payment Period = 360 / Creditors Turnover Ratio


Days in Years 360 360 360 360 360

Creditors Turnover Ratio 2.61 3.22 2.99 2.92 2.35

Creditors Payment Period

(in Days)

137 111 120 123 153

Interpretation:-

We can analyse that in Mar05 Company has paid its creditor after 137 days. After that this

period is decreasing which shows strict collection policy followed by suppliers. Company

has to settle its payments within short span to time. 1n Mar09 company makes payment after

153 days which is comparatively higher than previous years, it means for this year suppliers

has given more credit period to the company. Longer payment period shows the liberal credit

terms granted by suppliers. It will reduce requirement of current assets by relying on

suppliers credit.

137

111 120123

153

0

20

40

60

80

100

120

140

160

180



64

FINDING

A companys current asset is less than its current liabilities which is not good

condition.

A company facing difficulties in meeting short-term obligation.

As current ratio and quick ratios are less than 1 but it is increasing form year to year.

We can say it is on the way to improve its operating efficiency.

Inventory turnover ratio is higher which indicates that company sold its inventory

very fast.

Company follows strict credit policy in terms of collection because debtors collection

period is decreasing.


65

LIMITATIONS

Working as a trainee for a period of two months the company was reluctant to reveal

its complete information.

The time was not enough for giving an in-depth review of the working capital

management.


66

APPENDIX

Balance sheet of Financial Year Mar04 to Mar09

Profit and Loss Account of Financial Years Mar04 to Mar09

Annual Result in brief


67

Balance Sheet of NESCO ---------------- in Rs. Cr. -------------------

Source of Funds Mar '04 Mar '05 Mar '06 Mar '07 Mar '08 Mar '09

Total Share Capital 2.54 2.54 3.52 7.05 7.05 7.05

Equity Share Capital 2.54 2.54 3.52 7.05 7.05 7.05

Share Application Money 0.00 0.98 0.00 0.00 0.00 0.00

Preference Share Capital 0.00 0.00 0.00 0.00 0.00 0.00

Reserves 8.40 13.79 23.12 36.74 71.95 103.80

Revaluation Reserves 0.00 0.00 0.00 0.00 0.00 0.00

Net worth 10.94 17.31 26.64 43.79 79.00 110.85

Secured Loans 1.15 0.41 0.04 0.00 0.00 16.82

Unsecured Loans 3.79 2.24 2.21 0.00 0.00 0.00

Total Debt 4.94 2.65 2.25 0.00 0.00 16.82

Total Liabilities 15.88 19.96 28.89 43.79 79.00 127.67

Application Of Funds

Gross Block 30.41 40.53 52.50 55.95 56.60 62.36

Less: Accum. Depreciation 15.55 23.63 25.09 26.71 28.35 30.47

Net Block 14.86 16.90 27.41 29.24 28.25 31.89

Capital Work in Progress 0.00 0.00 0.00 0.32 3.64 20.37

Investments 0.06 3.51 13.28 35.65 93.87 110.56

Inventories 3.13 4.50 4.36 3.66 5.09 5.20

Sundry Debtors 3.84 6.28 2.47 8.47 7.48 9.53

Cash and Bank Balance 0.03 0.85 4.12 2.46 1.88 0.86

Total Current Assets 7.00 11.63 10.95 14.59 14.45 15.59

Loans and Advances 2.61 5.48 5.61 10.11 26.69 41.95

Fixed Deposits 0.09 1.30 1.91 3.69 8.41 11.78

Total CA, Loans & Advances 9.70 18.41 18.47 28.39 49.55 69.32

Differed Credit 0.00 0.00 0.00 0.00 0.00 0.00

Current Liabilities 17.11 26.20 34.03 37.38 59.33 65.79

Provisions 0.15 0.82 1.81 15.92 38.93 39.66

Total CL & Provisions 17.26 27.02 35.84 53.30 98.26 105.45

Net Current Assets -7.56 -8.61 -17.37 -24.91 -48.71 -36.13

Miscellaneous Expenses 8.52 8.15 5.56 3.49 1.97 0.98

Total Assets 15.88 19.95 28.88 43.79 79.02 127.67

Contingent Liabilities 1.92 1.81 16.67 10.27 19.30 86.00

Book Value (Rs) 43.03 64.22 75.63 62.15 112.12 157.32


68

Profit loss account ------------------- in Rs. Cr. -------------------

Income Mar

'04

Mar

'05

Mar

'06

Mar

'07

Mar

'08

Mar

'09

Operating income 6.35 21.57 37.33 62.88 88.50 85.48

Expenses

Material consumed 0.40 5.49 10.30 12.92 15.62 16.85

Manufacturing expenses 0.71 1.72 3.70 1.92 2.64 2.88

Personnel expenses 1.60 2.61 3.36 4.10 6.76 6.19

Selling expenses 0.04 0.22 0.67 0.64 0.74 1.12

Administrative expenses 2.05 6.59 11.54 21.88 22.48 15.54

Expenses capitalized - - - - - -

Cost of sales 4.80 16.64 29.56 41.47 48.24 42.57

Operating profit 1.55 4.93 7.77 21.41 40.26 42.91

Other recurring income 2.68 6.43 7.84 6.09 14.13 7.60

Adjusted PBDIT 4.23 11.36 15.61 27.49 54.39 50.50

Financial expenses 0.82 0.80 0.66 0.34 0.80 1.99

Depreciation 0.80 0.95 1.37 1.60 1.69 2.12

Other write offs 2.02 2.77 2.59 2.07 - 0.98

Adjusted PBT 0.59 6.83 10.99 23.48 51.90 45.42

Tax charges 0.28 0.54 1.08 7.36 16.26 13.78

Adjusted PAT 0.30 6.30 9.91 16.12 35.64 31.64

Nonrecurring items -0.65 -0.05 0.01 2.11 2.69 -0.32

Other non cash

adjustments

-0.06 -0.02 -0.03 -0.02 -1.59 1.58

Reported net profit -0.40 6.23 9.90 18.21 36.74 32.90

Earnings before

appropriation

1.12 6.52 10.40 18.71 37.24 33.40

Equity dividend - 0.39 0.42 0.85 0.85 0.85

Preference dividend - - - - - -

Dividend tax - 0.05 0.06 0.14 0.14 0.14

Retained earnings 1.12 6.08 9.92 17.72 36.25 32.41


69

Annual results in brief (Rs crore)

Particular Mar ' 05 Mar ' 06 Mar ' 07 Mar ' 08 Mar ' 09

Sales 27.80 45.41 66.51 105.38 94.69

Operating profit 9.42 12.79 24.28 55.38 49.82

Interest 0.84 0.41 0.12 0.62 1.62

Gross profit 8.59 12.38 29.27 54.76 48.20

EPS (Rs) 21.29 28.18 25.85 52.24 46.57


70

BIBLIOGRAPHY

NAME OF THE

BOOK

AUTHOR EDITION PAGE NO.

Financial

Management

M Y KHAN &

P K JAIN

Sixth reprint 2008

Fifth Edition

13.3 13.45

Financial

Management

I M PANDEY Ninth Edition 520-521

577-590

Web sites:

www.nesco.co.in Dated 08/09/2009

www.moneycontrol.com Dated 09/09/2009


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