parul project

RESEARCH PROJECT REPORT

ON

“WORKING CAPITAL ANALYSIS OF HMT LTD.”

SUBMITTED FOR THE PARTIAL FULFILLMENT OF THE DEGREE OFMASTER OF BUSINESS ADMINISTRATION

of

Punjab Technical University

By

Vipul Choudhary,100172243525

MBA 3rd SEMESTER

UNDER THE SUPERVISION OF

Ms. RUBY SHARMA

Chandigarh Business School, Landran, Mohali2010-12

Certificate of Supervisor

1

This is to certify that Mr. Vipul choudhary Roll No. 100172243525 has completed the

research project titled “WORKING CAPITAL ANALYSIS OF SAIL”under my

supervision in partial fulfillment of the MASTER OF BUSINESS ADMINISTRATION degree of

Punjab Technical University.

Supervisor’s signature:

Supervisor’s name: Ms. Ruby Sharma

Supervisor’s Designation:

Date:

Place:

Forwarded for evaluation by the Dean: (Dean’s Signature) Seal of the Dean

Declaration

2

I, hereby declare that the research project report titled “WORKING CAPITAL

ANALYSIS OF HMT LTD.” is my own original research work and this report has not

been submitted to any University/Institute for the award of any professional degree or

diploma.

Vipul Choudhary

M.B.A 3rd Sem.

Chandigarh Business School

Date:

Place:

HMT LTD.

3

“LET US LIGHT THE LAMP

OF QUALITY AND PRODUCTIVITY”

INDEX

4

5

1

INTRODUCTION

2

BACKGROUND

3

METHODOLOGY

4

RESULTS & ANALYSIS

5

CONCLUSION & RECOMMENDATIONS

6REFERENCES

6

Corporate ProfilePg- 8-15

HMT Fast ForwardPg- 16-18

HMTs Tractor BusinessPg- 19-20

Finance departmentPg- 21-23

Objective of the StudyPg- 23

CORPORATE VISIONCORPORATE MISSIONCORPORATE OBJECTIVES & GOALSCORPORATE STRENGTHSHMTs PRODUCTSBUSINESS DOMAINMILESTONESACCOLADES OVER THE YEARS

CORPORATE PROFILE

THE 1960sTHE 1970sTHE 1980sTHE 1990sTHE NEW MILLENIUM

HMT FAST FORWARD

HMT TRACOR- PINJOREHMTs TRACTOR BUSINESS

WAGES, SALARIES & EXPENSESMAIN ACCOUNTSOUTWARD BILLING SECTIONINWARD BILLING SECTIONCOSTING SECTIONEXPENSES ITIME OFFICE

FINANCE DEPARTMENT

OBJECTIVEOBJECTIVE OF THE STUDY

1. INTRODUCTION

HMT Limited, with a diverse range of products, over 18 manufacturing units and a

countrywide well established marketing network restructured its various businesses into

different subsidiaries under the ambit of a holding company. The constituent

subsidiaries of HMT Limited are as below while the holding company retains the

Tractors Business Group.

Sr.No. Name of Subsidiary % Holding

1 HMT Machine Tools Limited 100

2 HMT Watches Limited 100

3 HMT Chinar Watches Limited 100

4 HMT International Limited 100

5 HMT Bearings Limited 97.25

6 Praga Tools Limited 51.00

The Holding Company with its Corporate Head Quarters at Bangalore forms the hub for

the activities of the different subsidiaries. The Holding Company while ensuring good

corporate governance also pursues strategies such as

Creation of strategic alliances,

Development of brand equity,

Provision of strategic planning inputs,

Interface with regulatory agencies,

Creation and maintenance of data warehouse with suitable corporate informational data

for the use of all subsidiaries.

7

CORPORATE PROFILE

HMT is India's premier Public Sector conglomerate.

It is a Public Sector Undertaking of the Government of India engaged in the

manufacture of engineering goods in diverse areas such as Machine Tools, Watches,

Tractors, Printing Machinery, Die Casting & Plastic Processing Machinery, Metal

Forming Presses etc.

It began in a small way in 1953 to meet a big commitment:

`To build mother machines to build a modern industrial India '.

From a single Product, single Unit Company in the post independence era it emerged

as a conglomerate by the turn of the twentieth century with

Several manufacturing bases spread over different states in India

A wide & diversified product range

Markets stretching across 38 countries around the world.

Its teams of engineers have created a brand equity that symbolizes:

Machine Tools to a manufacturer

Tractors to a farmer

Watches to millions of people in India and abroad.

Over the years HMT received know-how and know-why from 36 collaborators from 12

countries who were leaders in their respective domains of business.

HMTs marketing and servicing network criss-cross the length and breadth of India,

feeling the pulse of the market and striving to create customer delight.

Their exports are channeled through wholly owned subsidiary viz., HMT (International)

Ltd., with an agency network across the globe.

8

Their Corporate Head Quarters housed at Bangalore formulates strategic plans, policies

and programmes and co-ordinates implementation across our various subsidiaries.

Corporate Vision

Corporate Mission

To establish themselves as one of the world’s premier companies in the

engineering field having strong international competitiveness

To achieve market leadership in India through ensuring customer satisfaction

by supplying internationally competitive products and services

To achieve sustained growth in the earnings of the group on behalf of

shareholders

9

Corporate Objectives & Goals

To encourage the modernization of Indian Industry through the supply of

engineering goods and services of world class excellence

To maintain technological leadership through continuous efforts to update

product technology and manufacturing methods

To globalize our operations by developing a mix of international markets and

businesses

To ensure a satisfactory return on capital employed, to meet the growth needs

and the aspirations of our stakeholders

To present an active, pleasant and productive working environment

Corporate Strengths

10

HMT's Products

Business Domain

11

HMTS MILESTONES

YEAR UNITS / DIVISION LOCATION STATE

1953 Machine Tools I Bangalore Karnataka

1961 Machine Tools II Bangalore Karnataka

1962 Watch Factory I Bangalore Karnataka

1963 Machine Tools III Pinjore Haryana

1965 Machine Tools IV Kalamassery Kerala

1967 Machine Tools V Hyderabad Andhra Pradesh

1971 Tractor Division Pinjore Haryana

1971 Die Casting Division Bangalore Karnataka

1972 Printing Machinery Division Kalamassery Kerala

1972 Watch Factory II Bangalore Karnataka

1973 Precision Machinery Division Bangalore Karnataka

1975 Machine Tools VI Ajmer Rajasthan

1975 HMT (International) Ltd. Bangalore Karnataka

1975 Watch Factory III Srinagar Jammu & Kashmir

1978 Watch Factory IV Tumkur Karnataka

1981 HMT Bearings Limited Hyderabad Andhra Pradesh

1981 Quartz Analog Watches Bangalore Karnataka

1982 Watch Factory V Ranibagh Uttar Pradesh

1982 Specialised Watch Case Division Bangalore Karnataka

1983 Stepper Motor Division Tumkur Karnataka

1985 Ball Screw Division Bangalore Karnataka

1986 CNC Systems Division Bangalore Karnataka

12

1991 Central Re-conditioning Division Bangalore Karnataka

Accolades - over the years

YEAR AWARD INSTITUTED BY

1960-61 Outstanding Performance President of India

1961-62 Outstanding Performance President of India

1970-71 Excellence Performance in Exports Govt. of Mysore

1971-72 Outstanding Export Performance Govt. of Mysore

1971-72 Outstanding Export Performance EEPC

1975-76National Award for Outstanding Export Performance

Ministry of Commerce

1978-79 Best Product at IMTEX - 79 PMT & FIE

1981-82 Best Export Performance EEPC

1981-82 Best Product at IMTEX - 82 FIE Foundation

1982-83 Export Excellence EEPC

1982-83Meritorious Performance in the field of Export


1983 Best Corporate PerformanceHarvard Business School Association of India & Economic Times

1983-84 Most Effective OrganisationFoundation for Organisation Research (FORE)

1983-84 Best ProductivityOrganisation Research (FORE)


1984-85 Best ProductivityNational Productivity Council

13


1984-85Meritorious Performance in the field of Export


1985-86 Best Product at IMTEX - 86 CMTI - PMT Trust





1986-87 Excellence in Productivity CEI




1988-89 Company StandardsBureau of Indian Standards

1988-89 Best Product at IMTEX - 89 CMTI - PMT Trust


1988-89Outstanding Performance in Industrial Safety

National Safety Council


1988-89 Best Company for HRD Practices CEI

1990National Award for R&D Efforts in Industry - 1990 in the Mechanical Industrial Sector

Dept. of Scientific and Industrial Research

1989-90 Valuable Contribution & Significant Encouragement to the cause of the Industrial Engineering Profession in

H.N.THADANI

14

India


1990-91Tech. Development for Machine Tools, Bangalore

Directorate General of Technical Development


1992 National Safety National Safety Council

1994Best Performance in Company Standardisation

Sir Jahangir Ghandy Trophy

1995 Best Products at IMTEX - 95 CMTI - PMT Trust Award

1995 Best Product at IMTEX - 95 FIE Foundation

1995-96 Regional 'Top Exporters Shield'Engineering Export Promotion Council, Chennai

1996-97Regional 'Top Exporters Shield -Project Exporters'

Engineering Export Promotion Council, Chennai

1997-98 All India Trophy for Highest ExportersEngineering Export Promotion Council, Kolkata



1998-99Regional Trophy for Highest Exporters in the Group - Services Exporter

Engineering Export Promotion Council, Southern Region, Chennai



15

HMT Fast Forward

It was in the early post independence era that, HMT began in a small way to meet a big

commitment;

'To manufacture mother machines to build modern industrial India'.

HMT was conceived by the Government of India in 1949, and was incorporated in 1953,

with the objective of producing a limited range of machine tools, required for building an

industrial edifice for the country.

THE 1960s:

With the success achieved in the initial years in absorbing the technology and in

attaining production competence far ahead of the original plans, the Company launched

a bold plan of diversification and expansion which resulted in the duplication of the

Bangalore Unit and the setting up of new units at Pinjore, Kalamassery and Hyderabad.

In 1967, recession struck the Indian Engineering Industry and the consumption of

machine tools dipped drastically. The traumatic years of recession did indeed serve to

bring to the fore two latent strengths of HMT, namely, the urge to survive and the

confidence to innovate. With these strengths at full play, the Company emerged from

the recession:

With the world's widest range of machine tools and associated services under a

single corporate entity.

With action plans firmly launched for diversification into Tractors, Presses and Press

Brakes, Printing Machines, Die Casting and Plastic Injection Moulding Machines,

Horological Machinery, etc., which were considered to have economic cycles that

are different from those of machine tools.

With a Watch Factory already established in 1961-62, additional capacities for watch

production were contemplated to provide a greater cushion against cyclical

16

fluctuations in capital goods markets and also to meet the burgeoning demand for

watches.

With export markets of enormous potential under active development.

THE 1970s:

The 70s witnessed the fructification of all the diversification plans as envisaged.

HMT setup

HMT International Limited as a subsidiary company to channel HMT's products and

technical services abroad.

Two more units for manufacture of Watches, one at Srinagar and one at Tumkur.

HMT took over Machine Tool Corporation at Ajmer as its sixth machine tool unit.

THE 1980s:

In the 80s, HMT as a part of vertical integration efforts, launched units to manufacture

Watches at Ranibagh

Watch Cases at Bangalore

Stepper Motors at Tumkur

CNC Systems at Bangalore

Ball screws for use on CNC machines at Bangalore etc.,.

Also

HMT took over Indo-Nippon Precision Bearings Ltd, a state owned unit as a

subsidiary, which was renamed HMT-Bearings Ltd.

HMT took over Praga Tools Ltd as another subsidiary.

THE 1990s:

The Company restructured itself into five Business Groups viz., Machine Tools,

17

Watches, Tractors, Industrial Machinery and Engineering Components as part of

Business Reorganisation.

The New Millennium

HMT is now restructured with addition of three more subsidiaries to those already

existing. HMT now comprises of six subsidiaries under the ambit of the Holding

Company which also manages the Tractors business directly.

HMT Machine Tools Limited, Bangalore

HMT Watches Limited, Bangalore

HMT Chinar Watches Limited, Jammu

HMT Bearings Limited, Hyderabad

Praga Tools Limited, Hyderabad

HMT (International) Limited, Bangalore

The strategic plans of the HMT group are coordinated by the holding company at

Bangalore.

To navigate through the challenges of the new millennium, HMT seeks strategic

alliances from global leaders to synergise its own strengths with symbiotic inputs from

the partners.

For us, the whole world of opportunities is ahead to emerge as a global engineering

conglomerate.

18

HMT’S TRACTOR BUSINESS HMT’s Tractor business commenced its operations in 1971 in technical

collaboration with M/s MOTOKOV, Czechoslovakia Republic. Initially, HMT

started the operation with the manufacture of 25 HP Tractor at the

manufacturing plant established in Pinjore, Haryana State.

Over the years, it has developed Tractors ranging from 25 HP to 75 HP. The

company achieved market leadership in tractors by enlarging its range to cover

most of the applications for the farming community.

Currently the company has three tractor manufacturing units in India located at

Pinjore in Haryana, Mohali in Punjab and Hyderabad in Andhra Pradesh. It has

a well equipped R&D Center duly recognized by the Department of Scientific

and Industrial Research, the Government of India.

The Tractor Business Group of HMT has been a proud recipient of a number of

National Level - Productivity Awards. It has also been certified for ISO-9001 by

KEMA, Netherlands.

It has an installed capacity of 20,000 Tractors for manufacturing and assembly

operations. It has an in-house marketing organization comprising 17 Area

Offices, 11 Stockyards and over 300 Dealers spread across the country. HMT

Tractors Group is ably supported by over 40 Ancillary Units. It has qualified and

experienced workforce.

HMT has produced and marketed over 3,60,000 Tractors since inception in India and

abroad.

19

HMT TRACTORS- PINJORE

Year of Inception: 1971

PRODUCTS:

Tractor Model H.P. Main Feature2522 25 AVL fuel efficient engine & New Style Bonnet

3022 30 Fuel efficient engine (HMT’s Design) New Style Bonnet

3522 35 AVL adapted fuel efficient engine & New Style Bonnet

4511 45 HMT Design

5911 58 Heavy Duty Tractor (Czech’s Design)

7511 75 HMT’s Design, Power Steering & ROPS

2522 OS 25 Low height and width for orchard applications

3522 CS 35 Wetland cultivation

3522 DX 35 Direct Axle Drive

4511 CS 45 Wetland cultivation

4922 EDI 49 AVL adapted fuel efficient engine & New Style Bonnet

OS = Orchard Special; CS = Coastal Special; DX = Direct Axle

20

FEATURES

Integrated plant having captive foundry of capacity 2250 TPA

Facilities to manufacture components for 20000 tractors & engines p.a.

Facilities to assemble 15000 tractors & 20000 engines p.a.

Research & Development Centre

Marketing headquarters

Spare Parts Management Centre

MARKETING THROUGH:-

Area offices: 17

Stockyards : 11

Dealers: 305

Exports through its subsidiary, HMT (International) Limited, a recognized export house.

21

FINANCE DEPARTMENTFinance Department is one of the most functional areas in HMT, Pinjore. Under the

leadership of able and qualified staff, finance department works in hard with other

departments with the sole aim of achieving corporate goals. A systematic procedure has

been charted out which coordinates with the heads of the various departments. HMT is

registered under the Companies Act, 1956, and proper accounts are maintained.

Finance Department has done so by delegating such responsibilities to the various

functional sections. The complete activity of Finance Department is divided into two

sections:

WAGES/ SALARIES & EXPENSES (SECTION II)

MAIN ACCOUNTS

WAGES/ SALARIES & EXPENSES:It deals with the determination of the monthly wages and salaries of employees, fringe

benefits or retirement, provident fund deduction, income tax, incentives, bonus etc., all

the rewards which an employee gets for rendering his services to the company. History

sheet for each employee is the basis to compute the payment above because it

contains the wage rate which are multiplied with the no. of working days to arrive at

monthly wages & salaries. Under expenses II, fringe benefits to employees are dealt

with, which include payment of medical reimbursement, conveyance allowance,

education expenses, bonus etc.

22

MAIN ACCOUNTS:In main accounts section General Manager (Finance) is the head of the department.

This section is divided among various sub- sections:

1) Outward Billing Section (OBS)

This section mainly deals with accounts relating to sales. The sale of tractors is made

through respective dealers. The Sales Department receives the demand of tractors

through marketing division; the sales invoices prepared by the sales are then sent to

OBS for accounting of these invoices. Accountings relating to freight payment,

insurance claims, dealer etc. and assessment of sales tax, excise duty etc. are also

some of the functions of this department.

2) Inward Billing Section

This section deals with the accounting relating to purchases of raw material and

components, tool stores and spares from outside. The Purchase Department receives

the requisition from production department through stores department; the inspection

department then verifies the material when it comes in, after then the purchase invoice

is sent to IBS for accounting purpose. Also, this department opens a letter of credit in

the name of the supplier which is a common mode of payment in HMT Ltd.

3) Costing Section

This section was set up in 1971. The main purpose of this section is to estimate cost of

the product. This is done with the help of the planning department. This section values

the inventory on the basis of weighted average cost method. The section is very helpful

in planning, decision- making and control of inventory by giving timely information

through management information system.

4) Expenses I

This section deals with the expenses other than employees, like whitewash, repairs of

factory building, its maintenance etc.

23

5) Time Office

As the name suggest. This section keeps the time record of all the employees working

in the company. Salaries of the employees are computed after seeing the daily

attendance register of the employees. There are 25 punching machines in the factory;

these machines keep the time record of all the employees. Then the staff of this section

makes the entries into the attendance register of the employees.

OBJECTIVE OF THE STUDY Working capital management is very important in modern business. The analysis of

working capital is also very useful for short-term management of funds. The following

are objective of study:

To study the size and composition of current assets and current liabilities, increase or decrease in individual current assets and current liabilities and its effect on the working capital position.

To make item-wise analysis of the elements or component of working capital to

identify the items responsible for change in working capital.

To assess the working capital requirement of the company.

To know about the length of operating cycle.

To locate the weaknesses and give suggestions to improve them.

To know the causes of changes in working capital.

24

2. BACKGROUND

CONCEPT OF WORKING CAPITAL

Introduction

Financial management can be divided into two broad areas of responsibility as the

management of long-term capital and the management of short-term funds or working

capital. The management of working capital which constitutes a major area of decision-

making for financial managers is a continuous function which involves the control at the

every ebb and flow of financial resources circulating in the enterprise in one form or

another. It also refers to the management of current assets and current liabilities.

Efficient management of working capital is an essential pre–requisite for the successful

operation of a business enterprise and improving its rate of return on the capital

invested in short-term assets. Virtually every business enterprise requires working

capital to pay-off its short-term obligations. Moreover, every firm needs working capital

because it’s not possible that production, sales, cash receipts and payments are all

instantaneous and synchronised. There elapses certain time for converting raw

materials into finished goods: finished goods into sales and finally realisation of sale

proceeds. Hence, funds are required to support all such activities in the firm. A number

of terms like working funds, circulating capital, temporary funds are used synonymously

for working capital. However, the expression, Working Capital, is preferred by many due

to its popularity and simplicity.

25

Definition of working capitalWorking capital may be defined in two ways, either as the total of current assets or as

the difference between the total of current assets and total of current liabilities.

Like, most other financial terms the concept of working capital is used in different

connotations by different writers. Thus, there emerged the following two concepts of

working capital.

i) Gross concept of working capital

ii) Net concept of working capital

Gross concept:

No special distinction is made between the terms total current assets and working

capital by authors like Mehta, Archer, Bogen, Mead and Baker. According to them

working capital is nothing but the total of current assets for the following reasons:

i) Profits are earned with the help of the assets which are partly fixed and partly current.

To a certain degree, similarity can be observed in fixed and current assets in that both

are partly borrowed and yield profit over and above the interest costs. Logic then

demands that current assets should be taken to mean the working capital of the

corporation.

ii) With every increase in funds, the gross working capital will increase while according

to the net concept of working capital there will be no change in the funds available for

the operating manager.

iii) The management is more concerned with the total current assets as they constitute

the total funds available for operating purposes than with the sources from which the

funds came, and that

iv) The net concept of working capital had relevance when the form of organisation was

single entrepreneurship or partnership. In other words a close contact was involved

between the ownership, management and control of the enterprise and consequently

the ownership of current and fixed assets is not given so much importance as in the

past.

26

Net concept:

Contrary to the aforesaid point of view, writers like Smith, Guthmann and Dongall.

Howard and Gross, consider working capital as the mere difference between current

assets and current liabilities. According to Keith. V. Smith, a broader view of working

capital would also include current liabilities such as accounts payable, notes payable

and other accruals. In his opinion, working capital management involves the managing

of individual current liabilities and the managing of all inter-relationships that link current

assets with current liabilities and other balance sheet accounts. The net concept is

advocated for the following reasons:

i) In the long-run what matters is the surplus of current assets over current liabilities.

ii) It is this concept which helps creditors and investors to judge the financial soundness

of the enterprise.

iii) What can always be relied upon to meet the contingencies is the excess of current

assets over current liabilities, since it is not to be returned; and

iv) This definition helps to find out the correct financial position of companies having the

same amount of current assets.

In general, the gross concept is referred to as the Economics concept, since assets

are employed to derive a rate of return. What rate of return is generated by different

assets is more important than the analyzed difference between assets and liabilities. On

the contrary, the net concept is said to be the point of view of an accountant. In this

sense, working capital is viewed as a liquidation concept.

Therefore, the solvency of the firm is seen from the point of view of this difference

generally, lenders and creditors view this as the most pertinent approach to the problem

of working capital.

27

TYPES OF WORKING CAPITALSometimes, working capital is divided into two varieties as:

i) Permanent working capital

ii) Variable working capital

Permanent Working Capital: Though working capital has a limited life and usually not

exceeding a year, in actual practice some part of the investment in that is always

permanent. Since firms have relatively longer life and production does not stop at the

end of a particular accounting period some investment is always locked up in the form

of raw materials, work-in-progress, finished stocks, book debts and cash. The

investment in these components of working capital is simply carried forward to the next

year. This minimum level of investment in current assets that is required to continue the

business without interruption is referred to as permanent working capital. While

suggesting a methodology for financing working capital requirements by commercial

banks, the Tandon committee has also recognized the need to maintain a minimum

level of investment in current assets. It referred them as, hard core current assets. The

Committee wanted the borrowers to meet this portion of investment out of their own

sources and not to depend on commercial banks.

Variable Working Capital: This is also known as the circulating or transitory working

capital. This is the amount of investment required to take care of the fluctuations in the

business activity. While permanent working capital is meant to take care of the minimum

investment in various current assets, variable working capital is expected to care for the

peaks in the business activity. While investment in permanent portion can be predicted

with some probability, investment in variable portion of working capital cannot be

predicted easily as sudden changes in the business activity causes variations in this

portion of working capital

28

Sources of Working Capital

Long term SourcesSharesDebenturesPublic Deposits Ploughing back of ProfitsLoans from Financial institution

Short Term sources

Commercial BanksIndigenous BanksTrade CreditorsInstallment CreditAdvancesAccount receivableCreditAccrued ExpensesDiffered IncomeCommercial Paper

Sources of Working Capital

29

Principles of Working Capital Management:There are some principles of sound working capital management policy. They are as

follows:

1) Principle of Risk Variation:

Risk here refers to inability of a firm to meet its obligation when they become due for

payment. Large investment in current assets with less dependence on a short term

borrowing increases liquidity reduces risk.

On the other hand less investment in current assets and greater dependence on debt

increases the risk, reduces liquidity and increases profitability. In other word there is a

definite inverse relationship between the degree of risk and profitability.

A conservative management prefers to minimize risk by maintaining a higher level of

current assets or working capital while a liberal management should be to establish a

suitable trade off between profitability and risk.

2) Principle of Cost of Capital:

The various sources of raising working capital finance have different cost of capital and

the degree of risk involved. Generally higher the risk lower is the cost and lower the risk

higher is the cost. A sound working capital management should always try to achieve a

proper balance between these two.

3) Principle of Equity position:

According this principle, the amount of working capital invested in each component

should be adequately justified by a firm’s equity position. Every rupee invested in the

current assets should contribute to the net worth of he firm.

4) Principle of Maturity of Payment:

This principle is concerned with planning the sources of finance for working capital.

According to this principle, a firm should make every effort to relate maturities of

30

payment to its flow of internally generated funds. Maturity pattern of various current

obligations is an impotent factor in risk assumptions and risk assessments

Importance of working capital The largest portion of financial manager’s time is spent in managing current

assets and current liabilities. A study of Fortune 1000 firms found that more

than one-third of financial management time is spent managing current

assets and about one-fourth of financial management time is spent

managing current liabilities, and

More than half of the total assets of a business are generally invested in current

assets.

CURRENT ASSETS TO TOTAL ASSETS RATIO:-

YEAR 2005-06 2006-07 2007-08 2008-09 2009-10

Current

Assets

19433209

36

19846499

16

18432868

54

13687933

58

12036921

67

Total Ratio

21889478

22

22260185

62

21290050

03

16916289

32

15243669

26

Ratio 0.887:1 0.891:1 0.865:1 0.809:1 0.789:1

31

2005-06 2006-07 2007-08 2008-09 2009-100.72

0.74

0.76

0.78

0.8

0.82

0.84

0.86

0.88

0.9

Current Assets to total assets ratio

Current Assets to total assets ra-tio

Determining the size of working capitalA business undertaking must have adequate amount of working capital to ensure its

productive and distributive activities smoothly. Since there is no precise standards to

measure working capital adequacy, the management has to determine the size of

working capital requirement in the light of certain special attributes of the business firm

and general economic environment within which the firm has to operate. Therefore, due

consideration should be given to the following factors:

FACTORS DETERMINING WORKING CAPITAL:

1) Nature or character of Business:

The working capital requirement of a firm basically depends upon the nature of its

business. Public utility undertaking like Electricity, Water Supply, and Railways need

very limited working capital because they offer cash sales only and supply services, not

products 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

they have to invest large amount in current assets like inventories, receivables and

cash. So they need large amount of working capital.

32

HMT Ltd. is producing capital natured product, tractor. It is a large scale manufacturing

firm and therefore, needs large amount of working capital.

2) Production cycle:

Another factor, which has a bearing on the quantum of working capital, is the production

cycle. The term ‘production or manufacturing cycle’ refers to the time involved in the

manufacturing of goods. It covers the time span between the procurement of raw

material and the completion of the manufacturing process leading to the production of

finished goods.

In other words, there is sometime gap before raw material becomes finished goods. To

sustain such activities that need for working capital is obvious. The longer time span

(production cycle) the large will be the tied up funds and therefore, larger is working

capital need and vise versa. In HMT Ltd. the completion cycle of a tractor is 120 hours.

Therefore, it needs large amount of working capital.

3) Production Policy:

In certain industry the demand is subject to wide fluctuations due to seasonal variations.

The requirement of working capital in such case, depend upon the production policy.

The production can be either kept steady by accumulating inventories during slack

period with a view to meet high demand during peak season of the production could be

curtailed during the slack season and increased during the peak season. If policy is to

keep production steady by accumulating inventories it will require higher working capital

In HMT Ltd., they apply annual production budget as well as monthly budgets for better

utilisation of resources such as labour, material and machinery.

4) Credit Policy:

The credit terms granted to customers have a bearing in the magnitude of working

capital by determining the level of book debts. The credit sales result in higher book

debs. Higher book debts mean more working capital. On the other hand, if liberal credit

terms are available from the supplies of goods trade needs less working capital.

33

The working capital requirement of a business are thus, affected by term of purchase

and sale, and the role given to credit by a company in its dealing with creditors and

debtors.

The credit policy of HMT Ltd. is as follows:

The debtors are divided into four categories, A, B, C and D. Credit period for the

categories is:-

A- 90 days

B- 60 days

C- No period

D- No period

Category C and D debtors have to make payment on the date mentioned on the invoice.

If the payment gets delayed, then 15% simple interest will be charged on the

outstanding amount per annum.

Early Payment Incentive:

For Category A & B- discount at 12% for the no. of days left before the completion of the

credit period.

For category C & D- cash discount is given on the invoice amount at 2%.

5) Growth and Expansion:

The working capital requirement of concern increases with the growth and expansion of

its business activities. Although, it is difficult to determine the relationship between the

growth in the volume of business and the growth in the working capital of a business,

yet it may be concluded that for normal rate of expansion in the volume of business, we

may have retained profits to provide for the working capital but in fast growing concern,

we shall require larger amount of working capital.

No such activity of growth and expansion has taken place in HMT Ltd. during the past

five years.

6) Seasonal Variation:

In certain industry raw material is not available throughout the year. They have to buy

raw material in bulk during the season to ensure uninterrupted flow and process them

during the entire year. So a huge amount is blocked in form of row material during the

34

Receivables

Finished GoodsCash

peak season, which gives more requirements for working capital and less requirement

during the slack season.

7) Earning Capacity:

Some firm have more earning capacity than others due to quality of the products,

monopoly condition etc. Such firms with high earning capacity may generate cash

profits from operations and contribute to their working capital.

8) Dividend Policy:

The dividend policy of a concern influences the requirement of the working capital. A

firm that maintains a steady high rate of cash dividend irrespective of its profits level

needs more working capital than the firm that retains large part of its profits and does

not pay at high rate of cash dividend. No such policy is maintained in HMT Ltd.

9) Other Factors:

Certain other factors such as operating efficiency, management ability, irregularities in

supply, import policy, assets structure, importance of labour, banking facilities etc, also

influence the requirement of working capital.

Methods of Calculation of Required Working CapitalThe methods of calculation of required working capital are as follows:

Working Capital Cycle:

The working capital cycle is also known as operating cycle. It refers to the duration

between the firm’s payment of cash for raw material, entering into production and inflow

of cash from debtors and realization of receivables. Simply speaking, operating cycle is

the duration between the outflow of cash and inflow of cash and this may be evidenced

from the following working capital cycle.

35

The above and network diagram may offer a clear picture of a complete working capital

i.e. it is a cash phenomenon. In the diagram, raw material, stock refers to material only.

In work in process, components involved are raw material, wages, and overhead, more

specifically manufacturing overheads. Finished stock consists of components of

material, wages and overheads inclusive of factory, office and administration and selling

and distribution. Debtors include material, wages, overheads and profits. Credit involves

for the components of raw material, etc. something a contingency margin is also given

while estimating the working capital requirement.

The operating cycle consists of him following events, which continues throughout the life

of a firm remaining engaged in commercial activities.

Avg. Stock of Raw Material

1) Raw Material Holding Period =

Avg. Cost of Consumption per day

Avg. Stock of Work in Process

2) Work in Process Holding Period =

Avg. Cost of Production per day

Avg. Stock of Finished Goods

36

3) Finished Goods Holding Period =

Avg. Cost of Sales per day

Avg. Book Debt

4) Receivables Collection Period =

Avg. Credit Sales per day

Avg. Trade Creditors

5) Creditors Collection Period =

Avg. Credit Purchased per day

In the form of a simple equation working capital cycle or operating cycle can be

represented as bellow:

O = R+W+F+D-C

Where, O = Operating Cycle (In Days)

R = Raw Materials Holding Period

W = Work in Process Holding Period

F = Finished Goods Holding Period

D = Receivables Collection Period C = Creditors Collection Period.

Total Operating CostWorking Capital Required =

Number of Operating Cycle

37

Components of Working Capital:

38

Current Assets:

i) Stock of Raw Material (for…month consumption)

ii) Work In Process (for…Month)a) Raw Materialsb) Direct Labourc) Overheads

iii) Stock of Finished Goods (for…month sales)

iv) Sundry Debtors or Receivables (for…month sales)

v) Payments in Advance (if any)

vi) Balance of Cash (required to meet day-to-day Expenses)

vii) Any Other (if any)

Less: Current Liabilities:

i) Creditors (for…month purchase of raw materials)

ii) Outstanding Expenses (for month)

iii) Others (if any)

Working Capital (CA – CL)

Add: Provision/ Margin for contingencies

Net Working Capital Required

Amount

------

------

------

------

------

------

------

------

------

------

---------

------

----------

Management of working capital:

39

Working capital, in general practice, refers to the excess of current assets over current

liabilities. Management of working capital therefore, is concerned with problems that

arise in attempting to mange the current assets, current liabilities, and interrelationship

that exists between them. In other word it refers to all aspects of administration of both

current assets and current liabilities.

The basic goal of working capital management is to manage the current assets and

current liabilities of a firm in such way that a satisfactory level of working capital is

maintained, i.e. neither inadequate nor excessive. This is so because both inadequate

as well as excessive working capital position is bad for the business. Inadequacy of

working capital, may lead the firm to insolvency and excessive working capital implies

idle funds, which earn no profit for the business. Working capital management policies

of the firm have a great effect on its profitability, liquidity and structural health of the

organization. In this context, working capital management is three-dimensional nature:

Dimension I is concerned with the formulation of the policy with regard to profitability,

risk and liquidity.

Dimension II is concerned with the decision about the composition and level of current

assets.

Dimension III is concerned with the decision about the composition and level of current

liabilities.

This dimension aspect of the working capital has been more clearly and precisely

explained by the following diagram:

Profitability, Risk & Liquidity

Dimension I

Composition & level Of current Liabilities Composition &

Level of current assets Dimension III Dimension II

3. METHODOLOGY

40

The data is secondary in nature. It has been collected from the published annual reports

and accounts of the company which were received from the company itself. Extensive

use has also been made of books, PhD Thesis, website etc.

To process the data scientifically and to make it easily understandable, the profit and

loss accounts and balance sheets have been re-casted and presented in a condensed

form.

For the purpose of analyzing working capital, the techniques of:

-Trend analysis

-Ratio analysis and

-Funds Flow analysis have been used.

PRESENTATION OF THE STUDY The study has five chapters and then references. First chapter deals with the introduction about the company. The second chapter explains the concept of working capital. The third chapter, i.e., the present chapter explains the working of the analysis. The fourth chapter deals with the actual analysis and finds out the result. The last chapter concludes the project and contains recommendations.

SCOPE In this study HMT Ltd. tractor division at Pinjore has been analyzed.The data for the past five years have been considered, i.e., from 2005-06 to 2009-10.

The analysis of working capital position of the firm has been done to

determine the size and composition of the components of the working capital

find out the liquidity position, and

assess the operating cycle (which is a method to determine the requirement of

working capital in a firm)

4. RESULTS41

The results are obtained by applying three techniques, i.e., Trend analysis and

Common size Statement, Ratio Analysis & Funds Flow Statement.

WORKING CAPITAL TREND

ANALYSIS AND COMMON SIZE

STATEMENT

This technique has been used to determine the size and composition of working capital.

The proportion of each item of current assets and current liabilities taking total of

respective head as hundred, working capital statements and indices of working capital

have been calculated, to study the size and composition of current assets and current

liabilities, increase or decrease in individual current assets and current liabilities and its

effect on the working capital position.

Size and Composition of Working CapitalThe size of working capital according to net concept will depend upon what items are

included in current assets and current liabilities I have included inventories, receivables,

short term loans and advance and cash & bank balance in current assets. Other current

assets include patterns, jigs and fixtures. In current liabilities, sundry creditors,

payables, other short term outstanding liabilities, interest accrued but not due and

provision for liabilities are included. Provision for liabilities further includes provision for

contingencies, provision for gratuity, provision for FBT and others.

(In Rs)

Year 2005-06 2006-07 2007-08 2008-09 2009-10Current Assets, Loans & Advances:- Inventories 363877449 317873634 513679230 389672667 280210204

42

18.72 16.02 27.87 28.47 23.28

Sundry Debtors126900649

7133419291

6102744022

0 736757339 666765422 65.30 67.23 55.74 53.83 55.39Cash & Bank Balances 35801150 34837209 70991463 14143026 23171137 1.84 1.76 3.85 1.03 1.93Other Current Assets 10669408 11094515 11556974 10929249 11008944 0.55 0.56 0.63 0.80 0.91Loans & Advances 263966432 286651642 219618967 217291077 222536460 13.58 14.44 11.91 15.87 18.49

TOTAL194332093

6198464991

6184328685

4 1368793358120369216

7 100 100 100 100 100Less Current Liabilities

Current Liabilities110981614

5111635198

8 925986527 813333574 856486731 71.88 69.11 62.93 58.75 59.30Provisions 434183131 498936838 545537410 570985320 587829839 28.12 30.89 37.07 41.25 40.70

TOTAL154399927

6161528882

6147152393

7 1384318894144431657

0 100 100 100 100 100 NET WORKING CAPITAL (C.A.-C.L.) 399321660 369361090 371762917 -15525536 -240624403Base year = 2005-06 100 92.50 93.10 -3.89 -60.26

43

2005-06 2006-07 2007-08 2008-09 2009-10

-500000

0

500000

1000000

1500000

2000000

2500000

Current AssetsCurrent LiabilitiesWorking Capital

Analysis:-During the period of study from 2006 to 2010, the current assets have shown a

decreasing trend, except in 2007, where it increased by 2%, as compared to previous

year. Current liabilities have shown a fluctuating trend.

Overall, in 2010, current assets decreased to Rs 12037 lakhs as compared to Rs 19433

lakhs in 2006, which amounted to a decrease of 38%. During the period current

liabilities also decreased, but the speed of decrease of current assets was more than

that of current liabilities. In 2010, current liabilities decreased to Rs 14443 lakhs from Rs

15440 lakhs during the same period. It amounted to decrease of 6.5% only.

The high rate of decrease in current assets resulted into negative net working capital in

2009 and 2010.

The indices of working capital are calculated as compared to that of 2006, the table

shows that the indices of working capital were less than 2006 for all years.

The inference is that short term solvency and liquidity of the company stood reduced

during the period under study.

44

Regarding the composition of current assets and current liabilities, the table

expresses that debtors constituted the highest proportion of current assets. The

proportion of debtors in total current assets varied from 55% in 2010 to 67% in 2007.

The credit sales and accumulated arrears of dues were the main causes of high

proportion of debtors to current assets. Inventories have occupied the second place and

it varied from 16% in 2007 to 29% in 2009. Loans and advances occupying third place

varied from 12 % in 2008 to 19% in 2010. The fourth position was occupied by cash &

bank balance and varied from 1% in 2009 to 4% in 2008. Other current assets were at

the bottom in the ranking. It varied from 0.55% in 2006 to 0.9% in 2010.

In current liabilities, sundry liabilities remained a major item. It varied from 58% of total

current liabilities in 2009 to 72% in 2010. The proportion of sundry liabilities in current

liabilities was towards a decrease till 2009 but later it showed an increase in2010. The

proportion of provisions in current liabilities varied from 28% in 2006 to 41% in 2009.

It is discernible from the table that:-

Debtors occupied a predominant position in the total current assets of the

company, followed by inventories, loans and advances, cash & bank

balance and other current assets respectively.

The percentage of debtors declined from 65% in 2006 to 55% in 2010

which indicates, that earlier excessively huge amount was blocked in

debtors, now some measures have been taken to reduce the block of

huge amount.

Finally, the sundry liabilities were always ahead in composition of current

liabilities as compared to provisions throughout the period of the study.

45

RATIO ANALYSIS

A few important ratios like current ratio, acid test ratio, and absolute liquid ratio are

computed to determine the liquidity position of the company and inventory collection

period, debtor’s conversion period and payables conversion period are worked to

determine the operating cycle of the company.

Liquidity PositionThe word ‘liquidity’ means conversion of assets into cash during the normal course of

business and to have a regular uninterrupted flow of cash to meet outside current

liabilities. It may be defined as the ability to realize value in money- the most liquid of

assets.

The ratios used to find liquidity position are:

- Current Ratio

- Quick Ratio

- Absolute Liquid Ratio

Operating CycleThe concept of operating cycle has been discussed earlier in the topic ‘Background’

under the head ‘Methods of calculation of required working capital’.

It is determined by computing:

- Raw material conversion period

- Work- in process conversion period

- Finished goods conversion period

- Debtors conversion period

- Payables conversion period

46

CURRENT RATIO:-

The two major pillars on which the liquidity of a business stands are the current assets

and current liabilities. The difference between current assets and current liabilities has

been measured in the working capital statement but the magnitude of the amount of

working capital is not the straight indicator of the company’s ability to pay current

liabilities. Ability to meet current obligations is measured more accurately by the ratio of

current assets and current liabilities than the difference between current assets and

current liabilities. Therefore, it is the current ratio that affords a measure of liquidity.

The current ratio is the indicator of the relationship between current assets and current

liabilities.

Current Ratio = Current Assets

Current Liabilities

The relationship is generally expressed in times for the amount of current assets

available for every rupee of current liabilities. The ratio of 2:1 of current assets and

current liabilities is regarded as a satisfactory state of affairs. However, the western

countries rule of 2:1 cannot be taken as permanent yardstick of measuring the short-

term solvency in India because such a rigid insistence on a large current is not feasible

for developing economies.

There is no unanimous opinion in India about what an acceptable current ratio should

be. However, according to Tandon Committee and then by Chore Committee the

acceptable minimum current ratio under Indian conditions is 100:75 i.e. 1.33:1.

Therefore, for the analysis, the current ratio above 1.33:1 indicates an adequate

liquidity, if it is 2:1 or above then it shows more than necessary liquidity while current

ratio below 1.33:1 is suggestive of poor liquidity and weak position.

47

Year 2005-06 2006-07 2007-08 2008-09 2009-10Current Assets (In Rs) 1943320936 1984649916 1843286854 1368793358 1203692167Current Liabilities (In Rs) 1543999276 1615288826 1471523937 1384318894 1444316570

Current Ratio 1.26:1 1.23:1 1.25:1 0.99:1 0.83:1

2005-06 2006-07 2007-08 2008-09 2009-100

0.2

0.4

0.6

0.8

1

1.2

1.4

CURRENT RATIO

CURRENT RATIO

Analysis:-The table and chart reveals the current ratio position of the company during the years

2006 to 2010. It discloses that the current ratio position, on the whole, was not

satisfactory. Moreover, the chart shows a decreasing trend in the ratio, which means,

there was further loss of liquidity with the passing of the time. The current ratio

decreased from 1.26 times in 2006 to 0.83 times in 2010, while it varied in the same

range. The ratio is always below 1.33 which is the indicator of poor liquidity position.

48

QUICK RATIO:-

The current ratio is a good measure where inventory is liquid. But quick ratio provides a better measure of overall liquidity when a firm’s inventory cannot be easily converted into cash.

The quick ratio is calculated as follows:

Quick ratio = Current Assets- Inventory

Current Liabilities

The relationship is generally expressed in times for the amount of liquid assets

available for every rupee of current liabilities. The ratio of 1:1 of liquid assets and

current liabilities is regarded as a satisfactory ratio. But, however, this ratio can also be

not regarded as a yardstick to measure short term solvency.

No committee has determined an acceptable quick ratio in Indian scenario. The

acceptable quick ratio 1:1 is half of acceptable current ratio of 2:1. Therefore, the

acceptable quick ratio for the analysis will be half of acceptable current ratio of 1.33:1,

which is 0.67:1.

Thus, the quick ratio 0.67:1 or above will indicate adequate liquidity. If it is 1:1 or

above, then it will indicate excessive liquidity, and ratio below 0.67:1 will indicate poor

liquidity position.

Year 2005-06 2006-07 2007-08 2008-09 2009-10

Quick Assets (In Rs) 1577576073 1664586394 1328658382 978689086 922842584Current Liabilities (In Rs) 1543999276 1615288826 1471523937 1384318894 1444316570

Quick Ratio 1.02:1 1.03:1 0.90:1 0.71:1 0.64:1

49

2005-06 2006-07 2007-08 2008-09 2009-100

0.2

0.4

0.6

0.8

1

1.2

Quick Ratio

Quick Ratio

Analysis:-

The table and chart reveals the quick ratio position of the company during the years

2006 to 2010. It discloses that the quick ratio position has been satisfactory, except for

the last year (2010), where it was 0.64:1. Also, the chart shows a decreasing trend

over the years, which shows a decrease in liquidity position with the passage of time.

The quick ratio decreased from 1.02 times in2006 to 0.64 times in 2010, while it varied

from 1.03 in 2007 to 0.64 in 2010.

50

ABSOLUTE LIQUID RATIO:-

Although, debtors and bills receivables are generally more liquid than inventories, yet

there may be doubts regarding their realization into cash immediately or in time. Hence,

some authorities are of the opinion that the absolute liquid ratio should also be

calculated together with current ratio and quick ratio so as to exclude even receivables

from the current assets and find out the absolute liquid assets.

The ratio is calculated as follows:

Absolute Liquid Ratio= Cash & Bank + Short-Term Securities Current Liabilities

Absolute liquid assets include cash in hand and at bank and marketable securities or

temporary investments. The acceptable norm for this ratio is 50% or 0.5:1. This ratio is

also expressed in times. But this norm is also acceptable in western countries and not in

a developing country like India.

No acceptable norm has been determined for India. The acceptable norm of 0.5:1 is half

of quick ratio. Therefore, the acceptable norm for the analysis should be half of quick

ratio of 0.67:1, which works out to be 0.34:1.

Year 2005-06 2006-07 2007-08 2008-09 2009-10Absolute Liquid Assets (In Rs) 35801150 34837209 35801150 70991463 23171137Current Liabilities (In Rs) 1543999276 1615288826 1471523937 1384318894 1444316570Absolute Liquid Ratio 0.02 0.02 0.02 0.05 0.02

51

2005-06 2006-07 2007-08 2008-09 2009-100

0.01

0.02

0.03

0.04

0.05

0.06

Absolute Liquid Ratio

Absolute Liquid Ratio

Analysis:-

The table and chart reveals the absolute liquid ratio position of the company during the

years 2006 to 2010. It discloses that the absolute liquid ratio position, on the whole,

was not satisfactory. It remained same for all the five years at 0.02, except for 2008-09

where it was 0.05 times. The ratio always remained below 0.34:1, thus indicating that

the company has very less absolute liquid assets.

52

RAW MATERIAL CONVERSION PERIOD:-

It measures the velocity of conversion of raw material into work-in-process. It is also

known as raw material holding period. This period is calculated as follows:

RMCP = Average stock of raw material * 365

Raw material consumption

Average stock of raw material has been computed as follows:

Opening stock of raw material + closing stock of raw material

2

A lower number of days mean that the company is taking less time in converting its

raw material into work-in-process and vice-versa.

Year 2005-06 2006-07 2007-08 2008-09 2009-10Average Stock of Raw Material (In Rs) 119334018 111800549.5 102411952 84911824 86744097.5Raw Material Consumption (In Rs) 1568301782 1359561659 1258606003 922220784 1072028579Raw Material Conversion Period 27.77 days 30.01 days 29.69 days 33.61 days 29.53 days

53

2005-06 2006-07 2007-08 2008-09 2009-100

5

10

15

20

25

30

35

40

RMCP

RMCP

Analysis:-The table and chart shows the raw material conversion period during 2006 to 2010. It

uncovers that during the period of study, the RMCP has remained almost same, except

for 2008-09, where it was 34 days. The RMCP has increased from 28 days in 2006 to

30 days in 2010. The RMCP period varied from 28 days in 2006 to 34 days in 2009. The

increase in RMCP is an indicator of reduced speed of conversion of raw material.

WORKING NOTES:-

Year 2005-06 2006-07 2007-08 2008-09 2009-10Opening R.M 127855810 110812226 112788873 92035032 77788616Closing R.M 110812226 112788873 92035031 77788616 95699579Average Stock of Raw Material 119334018 111800549.5 102411952 84911824 86744097.5

54

WORK-IN-PROCESS CONVERSION PERIOD:-

It measures the velocity of conversion of work-in-process into finished goods. It is also

known as work-in-process holding period. This period is calculated as follows:

WIPCP = Average stock of WIP * 365

Cost of production

Average stock of WIP has been computed as follows:

Opening stock of WIP+ closing stock of WIP

2


work-in-process into finished goods and vice-versa.

Year 2005-06 2006-07 2007-08 2008-09 2009-10Average WIP (In Rs) 148685860 124385817.5 99696767.5 101730441 92435706.5Cost of Production (In Rs) 2230748867 2017649391 1868328194 1547190501 1742184563WIP Conversion Period 24.32 days 22.5 days 19.47 days 23.99 days 19.36 days

55

2005-06 2006-07 2007-08 2008-09 2009-100

5

10

15

20

25

30

WIPCP

WIPCP

Analysis:-

The table and chart illustrates the work-in-process conversion period during 2006 to

2010. It discloses that during the period of study, WIPCP has shown a decreasing

trend, except for 2009 where it raised to 24 days again. Overall the WIPCP declined

from 24 days in 2006 to 19 days in 2010. The WIPCP varied from 19 days in 2010 to

24 days in 2006. The decreasing trend indicates that there has been an increase in the

speed of conversion of WIP into finished goods.

56

WORKING NOTES:-

Calculation of Cost of production: - (Amount in Rs)

Particulars 2005-06 2006-07 2007-08 2008-09 2009-10Materials 1730435533 1490541242 1387187375 1042790946 1190107850Add: Salaries & Wages 347747415 375883876 387842875 414606078 437300865Depreciation 33191729 26723906 24838124 28975196 34056116Power & Fuel 53786829 50015931 49003275 42202013 38695591Rent 2617271 2602676 2546046 1905626 2146716Rates & Taxes 51168661 2151214 1934431 2327954 2476789Insurance 4348714 3904544 3351223 1982851 2996051Water & Electricity charges 7811404 8540240 9986050 9927835 10535723Repairs to Buildings 1117668 2038639 2319689 1267328 2056883Repairs to Machinery 428758 587001 820986 577385 458007Printing & Stationery 2151817 2003105 1777621 1415135 1976657 Opening Balance of WIP 146657394 150714326 98057017 101336518 102124364Less: Closing balance of WIP 150714326 98057309 101336518 102124364 82747049TOTAL 2230748867 2017649391 1868328194 1547190501 1742184563

Year 2005-06 2006-07 2007-08 2008-09 2009-10Opening Balance of WIP (in Rs) 146657394 150714326 98057017 101336518 102124364Closing balance of WIP (in Rs) 150714326 98057309 101336518 102124364 82747049

TOTAL (in Rs) 2230748867 2017649391 1868328194 1547190501 1742184563

Average WIP (in Rs) 148685860 124385817.5 99696767.5 101730441 92435706.5

57

FINISHED GOODS CONVERSION PERIOD:-

It measures the velocity of conversion of finished goods into debtors. It is also known

as finished goods holding period. This period is calculated as follows:

FGCP = Average stock of finished goods * 365

Cost of sales

Average stock of finished goods has been computed as follows:

Opening stock of finished goods+ closing stock of finished goods

2


finished goods into debtors and vice-versa.

Year 2005-06 2006-07 2007-08 2008-09 2009-10Average Stock of Finished Goods (In Rs) 98163527.5 90851626.5 187177703.5 227256802 115586344

Cost of Sales (In Rs) 2330378195 2107565504 1932354334 1625773992 1824091652Finished Goods Conversion Period 15.37 days 15.73 days 35.35 days 51.02 days 23.12 days

58

2005-06 2006-07 2007-08 2008-09 2009-100

10

20

30

40

50

60

FGCP

FGCP

Analysis:-

The table and chart illustrates the finished goods conversion period (FGCP) during

2006 to 2010. It discloses that during the period of study, FGCP has shown a

fluctuating trend. Overall the FGCP increased from 15 days in 2006 to 23 days in

2010. In 2009, the FGCP increased by 240% at 51 days, which is very high. The

FGCP varied from 15 days in 2006 to 35 days in 2009. The increase in the FGCP

indicates that there has been decrease in the speed of conversion of finished goods

into debtors.

59

WORKING NOTES:-

Calculation of Cost of Sales: - (Amount in Rs)

Details 2005-06 2006-07 2007-08 2008-09 2009-10Cost of production 2230748867 2017649391 1868328194 1547190501 1742184563Add:-selling & distribution expenses Rebate on Sales 15843551 16526053 7208174 8787522 20738611Advertisement & Publicity 12013174 10646320 10110632 8589739 5817601Bad Debtors written off 0 0 0 15596220 9107Carriage outward 59453640 52723161 38352342 31978701 39082040Warranty claims 12318963 10020579 8354992 13631309 16259730TOTAL 2330378195 2107565504 1932354334 1625773992 1824091652

(Amount in Rs)

Details 2005-06 2006-07 2007-08 2008-09 2009-10Opening balance of stock-in-trade 79113849 67037853 62420049 238027426 94807837Opening balance of stock at showrooms 21269141 28906212 23339139 50568793 71109548Closing balance of stock-in-trade 67037853 62420049 238027426 94807837 58278961Closing balance of stock at showrooms 28906212 23339139 50568793 71109548 6976342Average stock of finished goods 98163527.5 90851626.5 187177703.5 227256802 115586344

60

DEBTORS CONVERSION PERIOD:-

Debtors Conversion Period (DCP), also known as average collection period,

represents the average number of days for which a firm has to wait before its debtors

are converted into cash. It is also called as average debtors holding period. This period

can be calculated as follows:

Debtors conversion period= Average debtors * 365

Net credit sales

Average debtors have been calculated as follows:

Opening balance of debtors+ closing balance of debtors

2

The information regarding credit sales was not given, therefore to calculate debtor

conversion period, following formula is used:

Debtors conversion period= Average debtors * 365

Net sales


finished goods into debtors and vice-versa.

Year 2005-06 2006-07 2007-08 2008-09 2009-10

Average Debtors (In Rs) 1269006497 1301599707 1180816568882098779.

5 701761380.5

Net Sales (In Rs) 2442756514 2196321753 1632515477 1551245631 1847068917Debtors Conversion Period 189.61 days 216.30 days 264.00 days 207.55 days 138.67 days

61

2005-06 2006-07 2007-08 2008-09 2009-100

50

100

150

200

250

300

DCP

DCP

Analysis:-

The table and chart illustrates the debtors conversion period (DCP) during 2006 to

2010. It discloses that during the period of study, DCP has shown an increasing trend

till 2008 and then it showed a decreasing trend. Overall the DCP decreased from 190

days in 2006 to 139 days in 2010. The DCP varied from 139 days in 2010 to 264 days

in 2008. The increase in the FGCP indicates that there has been decrease in the

speed of conversion of finished goods into debtors.

It also indicates that over the years measures have been taken to improve the speed

of conversion of debtors into cash.

According to the credit policy, credit period given to debtors should be not be more

than 90 days. However, during the period of study it has always remained higher than

90 days. In 2010, it was least as compared to last five years, but high as compared to

90 days.

62

PAYABLES CONVERSION PERIOD:-

The average payment period or payables conversion period (PCP) is calculated in the

same manner as the average collection period:

Payables conversion period= Average creditors * 365

Annual purchases

Average creditors are calculated as follows:

Opening balance of creditors+ closing balance of creditors

2

It represents the average number of days taken by the firm to pay its creditors.

Generally, lower the ratio, the better is the liquidity position of the firm and higher the

ratio, less liquid is the position of the firm. But a higher payment period also implies

greater credit period enjoyed by the firm and consequently larger the benefit reaped

from credit suppliers. But, a higher ratio may also imply lesser discount facilities availed

or higher prices for the goods purchased on credit.

Year 2005-06 2006-07 2007-08 2008-09 2009-10Average Trade creditors 484123700 478146580.5 424269134 371094568.5 377639946

Net Credit Purchases 1551258198 1361538306 1237852161 907974368 1089939542Payables Conversion Period 113.91 days 128.18 days 125.10 days 149.17 days 126.46 days

63

2005-06 2006-07 2007-08 2008-09 2009-100

20

40

60

80

100

120

140

160

PCP

PCP

Analysis:-

The average number of days taken by the firm to pay its creditors has not varied much

in the past five years. It varied between 114 days in 2006 and 149 in 2009. Overall the

creditor’s conversion period has shown an increase from 114 days in 2006 to 127 days

in 2010.

It indicates that over the years the firm enjoyed greater credit period. It may also

indicate that there are less discount facilities availed by the company.

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FUNDS FLOW STATEMENT

Statement of Schedule of Changes in Working Capital:-

(Amount in Rs)

Statement of Schedule of Changes In Working Capital

Effect on Working Capital

Particulars 2008-09 2009-10 Increase DecreaseCurrent Assets:- Cash & Bank Balances 14143026 23171137 9028111 Sundry Debtors 736757339 666765422 69991917Inventories 389672667 280210204 109462463Other Current Assets 10929249 11008944 79695 Loans and Advances 217291077 222536460 5245383 TOTAL 1368793358 1203692167 Current Liabilities:- Current Liabilities 813333574 856486731 43153157Provisions 570985320 587829839 16844519TOTAL 1384318894 1444316570 Working Capital (CA-CL) -15525536 -240624403 Net Decrease in Working Capital 225098867 225098867

-15525536 -15525536 239452056 239452056

Analysis:-

The statement shows that there has been increase in the following current assets: -

Cash and bank balance, loans and advances and other current assets, which are

patterns, jigs & fixtures. Following two current assets were decreased: - Sundry

debtors and inventories. Huge amount were locked in these two current assets.

Similarly there was decrease in the current liabilities.

65

But the decrease in the two current assets (debtors and inventories), was so huge that

it resulted in net decrease in working capital.

Sources and Applications of Funds:-

(Amount in Rs)

Sources Rs Applications Rs

Funds from operations50800056

0 Head office Account 733436258

Net decrease in Working Capital22509886

7 Secured loan paid 4206705

Unsecured loan raised14052300

0 Purchase of fixed assets 31257051

Interest paid on LOAN GOI-VRS 313204

Interest paid on LOAN GOI-CAPEX 1328056

Interest paid on LOAN GOI-STATUTORY DUES 15064236

Interest paid on Loan from CHO-VRS Funds 16368917

Interest paid on Cash Credit/ Term Loan 52613663

Interest paid on others 19034337

87362242

7 873622427

Analysis:-

Funds from operations, Net decrease in Working Capital and Unsecured loan raised are the different Sources of Funds. These funds have been applied majorly in head office account.

66

WORKING NOTES:-

FUNDS FROM OPERATIONS RsClosing Balances of P&L Account -569466684Add:- Non-fund & non-operating items Depreciation 34056116Misc. Expenditure written off 2926811Interest on loans: GOI-VRS 57000872

GOI-CAPEX 40002332GOI-Statutory dues 84251165

Loan from Cho-VRS Funds 16368917Cash Credit & Term Loans 50755754

Others 19034337Less:- Non-fund or Non-operating income Profit on sale of assets 638250Opening Balance of P&L Account -773709190Funds from Operations 508000560

Fixed Assets A/c Particulars Rs Particulars Rs

To Balance b/d108828549

8By Accumulated Depreciation a/c 4125947

To Adjusted P&L a/c 638250 To Capital WIP, Machinery & equipment in transit a/c 10513236 To Cash a/c 31257051 By Balance c/d 1126568088

113069403

5 1130694035

67

Accumulated depreciation a/cParticulars Rs Particulars Rs

To Fixed Assets a/c 4125947 By balance b/d78417168

6(balancing Figure) By Adjusted P&L a/c 34056116

To balance c/d81410185

5

81822780

2 81822780

2

Interest a/c (Loan GOI-VRS)Particulars Rs Particulars Rs

To Bank a/c (balancing figure) 313204 By Balance b/d21471393

6

To Balance c/d27140160

4 By Adjusted P&L a/c 57000872

27171480

8 27171480

8

Interest a/c (Loan GOI-CAPEX) Particulars Rs Particulars Rs

To Bank a/c (balancing figure) 1328056 By Balance b/d 100622751To Balance c/d 139297027 By Adjusted P&L a/c 40002332 140625083 140625083

Interest a/c (Loan GOI-Statutory dues)Particulars Rs Particulars Rs


Interest a/c (Cash Credit/ Term Loan )Particulars Rs Particulars Rs


68

5. CONCLUSIONS &

RECOMMENDATIONS

THE RESULTS WHICH WERE FOUND FROM THE ANALYSIS WERE AS

FOLLOWS:

The working capital of the firm has decreased. The reason for the decline of

the working capital is mainly due to the reduction in the two major currents, which

are inventory and debtors.

The operating cycle of the firm has shortened. The main reason for

shortened operating cycle is the reduction in the debtor conversion period and

increase in the payables conversion period. The debtor conversion period has

been shortened because of the introduction of new credit policy.

The application of funds has been majorly in the head office a/c and in

paying of interest on loans.

Giving a closer look at the annual reports reveals that huge amount of

expenditure is incurred on the personnel a/c.

The firm is following the technique of credit monitoring. They follow the

technique of aging schedule, a credit- monitoring technique that breaks down

accounts receivables into groups on the basis of their time of origin.

69

RECOMMENDATIONS

Though, the collection period has reduced compared to previous year, it should

be reduced further so that the chances of bad debts can be minimized. This can be

done by following the collection techniques more vigorously. These can be done

through letters, telephone calls, personal visits, collection agencies or legal actions.

Worker participation management should be encouraged.

No purchases should be made till the stock is disposed off. Techniques like just-

in-time, computerized systems for resource control (like MRP) should be followed to

avoid unnecessary purchases.

70

REFERENCES

Gitman,L.J.Principles of managerial finance.(11th ed.).2009.New Delhi:

Pearson Education

Kumar,A. A study of financial management of sick cotton textile mills in the

northern region.1987. University Business School: Unpublished Thesis

Guthman,H.C. Analysis of financial Statement. (4thEd.).New Delhi: Prentice

Hall of India

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parul project

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