A

Summer Project Report

On

“ADANI PORT AND SPECIAL ECONOMIC ZONE”

Submitted to:-

L. J. Institute of Management Studies

In requirement of partial fulfillment of

Masters of Business Administration (MBA)

2-year full time programmer of Gujarat Technological University

Submitted on:-

July 2013

Submitted By:-

JUGAL BHANUSHALI HITESH PATADIYA

No: No:

Batch: 2012-2014 Batch: 2012-2014

\

PREFACE

Summer training is an integral part of the MBA programme. The main objective of the summer

training is to work in the organization and gain valuable knowledge of management skills that will be

useful in the future career building.

The purpose is to study how an organisation functions and how to apply our academic knowledge

in the corporate life. As a practical point of view Adani Ports and Special Economic Zone Limited

(APSEZ), which is one of the leading part of India’s leading infrastructure conglomerate the Adani

Group, has provided us such a great opportunity of summer training in their organisation. It helps us to

get better understanding and working of various theories of financial management.

We learned a lot from this training about the corporate life, which will be useful to us in future.

But as there is one limitation that we can’t disclose all the financial and other information about Adani

Ports and Special Economic Zone Limited (APSEZ) as per company policy, we have not shown all

the data in the project report.

Declaration

It is hereby certified that the work incorporated in the thesis submitted entitled “WORKING

CAPITAL ASSESMENT” submitted by Jugal Bhanushali comprises the result of independent and

original investigation carried out me. The material which obtained and used from other sources has been

duly acknowledged in the thesis.

Date:

Place: Signature of the student

It is certified that the work mentioned above is carried out under my guidance.

Date:

Place: Signature of the faculty guide

Acknowledgement

Executive Summary

INDEX

Chapter

Particular Page No.

Chapter-1 Company profile

1.1 Introduction

1.2 Milestones and core

values

1.3 Commodities

1.4 Group companies

1.5 Vision

1.6 Mission

1.7 Production capacity

1.8 Size of the organisation

1.9 Board of directors

1.1 Information technology

systems

1.11 Organisational

Structures

1.12 Competitors

Chapter-2 Literature Review

2.1 Overview of

pharmaceuticals

industry

2.2 SWOT Analysis

Chapter-3 Working Capital

Management

3.1 Introduction

3.2 Types of working

capital

3.3 Factors determining

Working capital

3.4 Principles of working

capital & W.C. cycle

3.5 Definition

3.6 Components of working

capital

3.7 TANDON COMMITTE

Report

3.8 CORE COMMITTE

Report

Chapter-4 Credit Monitoring

Assessment(CMA)

4.1 What is CMA?

4.2 CMA required

4.3 Form-II(Operating

statement)

Form-III(Analysis of Balance sheet)

Form-IV(Statement of CA & CL)

Form-V(MPBF statement)

Form-VI(Fund flow statement)

Repayment Schedule

Depreciation Schedule

4.4 Comments on financials

4.5 Basis of Assumptions

Bibliography

Chapter 1

Company Profile

1.1 Vision

The Adani Group is engaged in a continuous endeavour to maximise the

realisation of potential in its employees and market opportunities by synergising the

multiple ventures of the Group; thus creating an optimum business model that benefits

both, stakeholders and society.

CORPORATE COMMANDMENTS:

To be driven by excellence at all levels

To approach all aspects of the business innovatively

To be intensely competitive in all endeavours

To constantly raise the bar

To be a globally preferred business associate

To be committed to the welfare of employees and stakeholders

To adopt universal best practices in corporate governance

To be a responsible business entity towards society and the environment

1.2 Mission

To assimilate knowledge, develop capabilities and manage collective enterprise

to profitably tap global business opportunities for the maximal benefit of everyone

associated with Adani.

1.3 Introduction to Adani port

Adani Ports and Special Economic Zone Limited (APSEZ), India's largest

private port and special economic zone, was incorporated as Gujarat Adani Port

Limited (GAPL) in 1998 to develop a private port at Mundra, on the west coast of

India. The company commenced commercial operations in October 2001. Mundra

Special Economic Zone Limited (MSEZL) was incorporated in November 2003, to set

up an SEZ at Mundra. MSEZL was merged with GAPL in April 2006 and the

company was renamed as Mundra Port and Special Economic Zone Limited, to reflect

the nature of business. The board of MPSEZL on Nov 21,2011 has approved a

proposal to change the company's name to Adani Ports and Special Economic Zone

Ltd. and this change in name from MPSEZL to APSEZL has come into effect from

Jan.6,2012.  While earlier, the company had only one operational port at Mundra,

today it also operates ports at Dahej and Hazira in India and at Abbot Point in

Australia. The company is also developing port infrastructure

at Mormugao,Visakhapatnam and Kandla in India, Dudgeon Point in Australia

and Bunyu in Indonesia.

APSEZ is India’s first multi-product port-based special economic zone (SEZ).The

port is located in the Northern Gulf of Kutch, en route major maritime routes and well

connected through rail, road, air & pipelines. This makes it a preferred gateway for

cargo bound westwards. The port has been designed to handle all types of cargo viz.

containers, dry bulk, break bulk, liquid cargo and automobiles.

APSEZ spearheads the group’s logistics business which includes setting up world

class port infrastructure, special economic zones and multi-modal logistics such as

railways. APSEZ currently owns and operates three ports – Mundra and Dahej in

India and Abbot Point in Australia. Mundra Port, which is the largest private port in

India, benefits from deep draft, first-class infrastructure and SEZ status. Adani is also

developing ports at Hazira, Mormugao, Visakhapatnam and Kandla in India

Adani Port & Special Economic Zone Limited was conferred with the Gateway

Awards of Excellence – Ports & Shipping 2012 in the "Private Port of the Year"

category

Port Information

The development of Adani Port & Special Economic Zone Limited was

conceptualised by the entrepreneur Mr. Gautam Adani. The port commenced its

operations with one berth in October 1998. APSEZ today consists of 22 berths with a

total quay length of 6.5 km in addition to 2 single point moorings (SPM) and stands

on the threshold of being the largest commercial port in India.

APSEZ has an effective capacity to handle 185 million tonnes of cargo per

annum – the largest amongst all operational ports in India. APSEZ handled 64 million

tonnes of cargo in the financial year 2011–12. APSEZ was ranked fourth amongst all

commercial ports in India in terms of the total volume of cargo handled in a financial

year.

APSEZ has not only pioneered the concept of deep draft integrated port model,

but also of port based SEZ. The multi-product SEZ consisting Mundra Port and its

surrounding areas is planned to be spread over 135 square kilometres (13,500

hectares). Currently, notified Multi-product SEZ is spread over an area of 6473

Hectare, with an additional 168 Hectares notified as a Free Trade Warehousing Zone.

Port Connectivity

APSEZ offers good inland connectivity via rail track, road network, airport and cross

country pipelines.

Rail

Adani Ports and Special Economic Zone Limited has developed a 117 km railway

network from Mundra to Adipur. The rail infrastructure is capable of handling 130

trains per day including double stack container trains and long-haul trains. The rail

route is time and cost effective and provides a distance advantage to customers

situated in the Northern hinterland. ASPEZ also owns 6 locomotives which are

deployed for internal shunting of trains to ensure optimum utilisation of the developed

infrastructure.

Road

APSEZ is connected to the hinterland in Northern and Western parts of India through

the National Highway 8A Extn. & State Highways 6 & 48. For internal connectivity,

the company plans to build 150 km of arterial and sub-arterial road network within the

SEZ, of which 70 km is already completed. The roads are designed according to IRC

Standards Codes and Safety Norms. The port has also constructed a four-lane Rail-

over-Bridge (ROB) in the proximity of the port to ensure that two modes of

transportation i.e. road & rail, do not impede each other’s movement.

Air

Mundra Airport is a licensed airport in ‘Private Category’ with Air Traffic

Control (ATC) which is operated by the Airport Authority of India (AAI). The nearest

commercial airports are at Bhuj (65 km) and Kandla (60 km). The company plans to

extend the current runway at Mundra to 4500 meters. It has also installed a Precision

Approach Path Indicator (PAPI), and approach and runway lighting for safe night

landings for aircraft. APSEZ plans to upgrade an International Air Cargo Hub with

night landing facility.

Pipelines

APSEZ is connected to the northern hinterland with three cross-country pipelines. One

feeds the IOCL Panipet refinery, second crude oil pipeline feeds Batinda refinery and

third is a white oil line which feeds the national capital region.

1.7 Board of Director

Mr. Gautam S. Adani Chairman & Managing Director

Mr. Gautam Adani, the Chairman and Founder of the Adani Group, has

more than 33 years of business experience. Under his leadership, Adani Group has

emerged as a global integrated infrastructure player with interest across Resources,

Logistics and Energy verticals. 

Mr. Adani’s success story is extraordinary in many ways. His journey has been

marked by his ambitious and entrepreneurial vision, coupled with great vigour and

hard work. This has not only enabled the Group to achieve numerous milestones

but also resulted in creation of a robust business model which is contributing

towards building sound infrastructure in India.

Mr. Rajesh S. Adani Director

Mr. Rajesh Adani has been associated with Adani Group since its inception. He is

in charge of the operations of the Group and has been responsible for developing

its business relationships. His proactive, personalized approach to the business and

competitive spirit has helped towards the growth of the Group and its various

businesses. 

Dr. Malay Mahadevia Whole Time Director

Dr. Malay Mahadevia is a Whole Time Director (WTD) of Adani Ports &

Special Economic Zone Ltd (APSEZL). He joined Corporate Sector in 1992 and

worked on developing the port from ground zero. The port today handles multiple

commodities. With a promising throughput of 50 million tons, turnover of more

than Rs 1500 crores, Profit of over Rs 700 Crores, Market Capitalization of Rs

35,000 crores & growing at the rate of 30%, Mundra has the potential to become

one of the largest ports in India. Currently the sectors handled by Dr. Malay

Mahadevia are Marine & Ports, Special Economic Zones, Health Care, Water

Supply, Education, Railway Logistics, and Social Infrastructure. He has been

awarded Outstanding Manager of the year award of Gujarat by Ahmedabad

Management Association in the year 2002 & also a Lead India finalist in Gujarat

organized by Times of India group. He is a member of around a dozen professional

societies including Centre for Engineering & Technology, FICCI, Assocham,

Board of advisors for Maritime studies in Gujarat University, Confederation of

Indian Industry (CII), Gujarat Chamber of Commerce & Industry (GCCI) etc. In

the year 2008 was conferred Ph.D. by Gujarat University in the field of "Coastal

Ecology around Mundra area".

Mr. Rajeeva Sinha Whole Time Director

Mr. Rajeeva Sinha is a Whole-time Director of Adani Ports and Special

Economic Zone Ltd. (APSEZL) He is a former Indian Administrative Service

(IAS) officer with over 35 years of work experience and in-depth knowledge of

shipping and port sectors. He has considerable experience and expertise in port and

shipping management; commercial, legal, labour laws and regulations; project and

financial management and national and international maritime laws.

Mr. Arun Duggal- Director

Mr. Arun Duggal is an independent director of APSEZL, is an experienced

International banker advising Corporations on financial strategy, mergers and

acquisitions and capital raising areas. He has been an International advisor to a

number of corporations, major financial institutions and private equity firms. He is

a Chairman of Board of Directors of Shriram Transport Finance Company,

Shriram Properties Ltd, Shriram City Union Finance Ltd., Shriram EPC Ltd.,

Shriram Capital Limited and Bellwether Microfinance Fund. He is the Vice

Chairman of International Asset Reconstruction Company. He is a member of the

Investment Committee of Axis Private Equity. Mr. Duggal had a 26 years career

with Bank of America and retired as CEO, India for Bank of America. He is a

visiting Professor at IIM Ahmedabad.

Mr. Daniel Trevelyn Joseph – Director

Mr. Daniel Trevelyn Joseph, an independent director of APSEZ, is a

former Indian Administrative Service official belonging to the Maharashtra cadre.

He has served the Government of India and the Government of Maharashtra in

various capacities. Mr. D.T. Joseph was elected as President at the International

Maritime Organization's Plenary Conference in February 2004. In June 2007, he

was appointed as the Chairman of Pay Revision Committee for Class I and Class II

officers in Major Port Trusts and Dock Labor Boards of India.

Mr. Pankaj Kumar- Director

Mr. Pankaj Kumar, IAS, an IAS officer of the 1986 batch is Vice

Chairman and Chief Executive Officer, Gujarat Maritime Board (GMB) is

appointed as GMB nominee on the Board of Directors of APSEZ Ltd. He comes to

steer GMB at an important time, when it is set to play an even more critical role in

Gujarat's and the nation's development through initiatives in shipbuilding,

privatization, creation of maritime institutions and infrastructure.

Prof. G. Raghuram – Director

Prof. G. Raghuram is professor in the Indian Institute of Management,

Ahmedabad. His specialization is in infrastructure and transportation systems, and

supply chain and logistics management. His research, consultancy, case studies

and publications focus includes railways, ports and shipping, air and road sector,

service organizations and issues in logistics and supply chain management. He has

also taught at Northwestern University and Tulane University, USA. He has been

visiting faculty at universities in USA, Canada, Yugoslavia, Tanzania, UAE,

Singapore and several institutions in India. He has co-authored four books. He was

the President of Operational Research Society of India (1999-2000) and is a

member of boards and government committees related to infrastructure and

logistics. He is a Fellow of the Operational Research Society of India and Charted

Institute of Logistics and Transport.

Mr. G.K. Pillai – Director

Mr. G K Pillai is a retired IAS officer. He joined Indian Administrative

Service in the year 1972 and belongs to Kerala Cadre. He has done his M.Sc. at

IIT, Chennai. He started his career as Sub-Collector, Quilon and worked in diverse

fields of Revenue Administration. He was District Collector, Quilon; Deputy

Secretary, Labour; Special Officer for Cashew Industry; Special Secretary,

Industries etc. He was Secretary, Health and Family Welfare during 1993-96 and

Principal Secretary to the Chief Minister of Kerala during the period 2001-04.

In the Government of India, he held positions of Under Secretary / Deputy

Secretary in Ministry of Defence and Director / Joint Secretary in the Department

of Surface Transport. Later he served in the Ministry of Home Affairs as Joint

Secretary (North East) from 1996 to 2001. In 2004 he joined Ministry of

Commerce and Industry as Additional Secretary, Department of Commerce and

later served as Secretary, Department of Commerce during 2006-2009. During this

period he actively participated in negotiations for comprehensive economic

cooperation agreements with Singapore, ASEAN, Japan, South Korea. He played a

key role in the enactment of the SEZ Act 2005 and was Chairman of the Board of

approvals for SEZ during 2005 to 2009. He represented State and Central

Government delegations to USA, EU, Argentina, Japan, Canada etc.

He was appointed as Union Home Secretary in June 2009 and retired from

Government service in June 2011.

Mr. Sanjay S. Lalbhai - Director

Mr. Sanjay S. Lalbhai is a Science Graduate with a Master's degree in

Business Management and is the Chairman and Managing Director of Arvind Ltd,

a USD 900 Million Indian conglomerate. He was responsible for acquiring India’s

first denim brand – Flying Machine – in 1981 and for guiding the process of

building Arvind’s current impressive apparel brand portfolio. He serves on the

board of several premier corporates, educational and research institutes. He is the

President of Ahmedabad Education Society and Ahmedabad University, and is a

member of the Board of Governors of Indian Institute of Management,

Ahmedabad. He is also chairman of Ahmedabad Textile Industry’s Research

Association and a member of the Council of Management of the Physical Research

Laboratory. He is also Chairman of CEPT University. Mr. Lalbhai is a member on

the Governing Body of Adani Institute of Infrastructure Management.

1.2 Milestone and Values

Adani port has achieved the following Achievement:-

1994 January – Gujarat Maritime Board (GMB) approved to set up captive jetty at

Mundra

1998 October – Mundra Port commences commercial operations with one berth

2002 October – Agreements signed with Indian Oil Corporation (IOC) for setting

up Single point mooring (SPM) facility and crude oil handling at Mundra

2003 – First container terminal at APSEZ, Mundra International Container

Terminal commences operations (quay length 633 metres)

2005 – First Single point facility at Mundra Port commences operations

2006 April – Notification issued for Special Economic Zone (SEZ) at Mundra

2007

Offer Initial Public Offer (IPO) for 40,250,000 equity shares of Rs. 10 each of

Mundra Port and Special Economic zone Ltd. to public and employees with

price band Rs. 400 – Rs. 440

Terminal Two consisting of 4 solid cargo berths commences operations

Second container terminal at APSEZ, Adani Mundra Container Terminal

commences operations (quay length 632 metres)

2009 – Ro-Ro Terminal for export & import of automobiles commences

operations

2010

Constructed a four lane 1.5 km. long dedicated RoB at a cost of

Rs.500 million. This is the first private four-lane RoB within port area in India

capable of withstanding a load of 100 MT to smoothen and speed up cargo

movement

World’s largest fully mechanised coal import terminal with 60 MMTPA

capacity was put into operation

2011

Second Single Point Facility at APSEZ commences operations for catering to

HMEL Batinda requirements

Terminal Three commences operations

2012

Name changed to Adani Ports and Special Economic Zone Limited [required]

Doubling of the rail connectivity between Mundra and Adipur completed.

APSEZ now has a private rail network of 117 km.

Third container terminal at APSEZ, Adani International Container Terminal

commences operations (quay length 810 metres)

1.3 Commodities

Adani Ports & Special Economic Zone Limited handles a multitude of commodities

including

Steam coal,

Coking coal,

Fertilizers like urea, DAP, MOP, etc.,

Agriculture commodities like yellow peas, DOC, wheat, etc.,

Liquid cargo including crude oil, POL, chemicals, edible oil, etc.,

Containers,

Automobiles,

Steel cargo,

Project cargo and

Minerals.

1.4 Operations

The operations at APSEZ are carried out in a detailed manner, providing necessary

information like schedules, tariffs, trade notices, weather and tidal details amongst

others. For effective and time-saving operations, it also possesses robust IT support

with the aid of top-of-the-line software applications. For the protection of storage, it

has installed state-of-the-art safety and security measures and infrastructure.

From having only one operational port at Mundra in Gujarat, APSEZ now operates

ports at multiple locations. The port projects the company operates in India and

overseas is as follows:

Mundra Port: Designing, engineering, financing, construction, development,

management and operation of multi user and multi-cargo port at Mundra on build,

own, operate and transfer (BOOT) basis situated at Mundra in the District of

Kutch, Gujarat under a concession granted by the Government of Gujarat (GOG).

Adani Petro net (Dahej) Port Pvt. Ltd.: Operates a port in Dahej in Gujarat state

under sub-concession with Petro net LNG Ltd for handling dry bulk and break

bulk cargoes in pursuance to the Concession granted by Government of Gujarat.

Adani Hazira Port Private Ltd.: Engaged in designing, engineering, financing,

construction, development, management and operation of a multi-cargo port in

Hazira in Gujarat State under Sub-Concession route with Shell B.V. for non-LNG

cargoes like coal, containers, automobile and chemicals. There is a plan to build

13 berths at Hazira port for handling general cargo, Container and Liquids.

Adani Murmugoa Coal Terminal Pvt. Ltd.: Licensee for development and

operations of coal import terminals in Major Port of Goa under Concession from

Murmugoa Port Trust.

Adani Vizag Coal Terminal Pvt. Ltd.: Licensee for development and operations

of coal import terminals in Major Port of Visakhapatnam under Concession from

Visakhapatnam Port Trust.

Adani Abbot Point Terminal Pty Ltd.: Recently acquired Abbot Point Coal

Terminal in Queensland, Australia on 99 years lease in June 2011.Adani Ports

plans to invest INR12 billion in this project, which will be operational by 2014 and

will have an annual capacity to handle 20 million tons of cargo.

Adani Kandla Bulk Terminal Pvt. Ltd.: Signed a concession agreement with the

Kandla Port Trust, to set up a dry bulk terminal at the Kandla Port on build,

operate and transfer basis. With this agreement, it is the only private sector

operator having a presence at six ports in India.

1.5 Group Companies

As on March 31, 2012, your Company had eighteen subsidiary companies under its

belt. These group companies broadly operate and focus in India and Outside India.

1. Adani Hazira Port Pvt. Ltd.

2. Adani International Container Terminal Pvt. Ltd.

3. Adani Kandla Bulk Terminal Pvt. Ltd.

4. Adani Logistics Ltd.

5. Adani Murmugoa Port Terminal Pvt. Ltd.

6. Adani Petro net (Dahej) Port Pvt. Ltd.

7. Adani Vizag Coal Terminal Pvt. Ltd.

8. Hazira Infrastructure Pvt. Ltd.

9. Hazira Road Infrastructure Pvt. Ltd.

10. Karnavati Aviation Pvt. Ltd.

11. Rajasthan SEZ Pvt. Ltd.

12. MPSEZ Utilities Pvt. Ltd.

13. Mundra International Airport Pvt. Ltd.

14. Mundra SEZ Textile and Apparel Park Pvt. Ltd.

15. Adani Abbot Point Terminal Holdings Pty Ltd, Australia

16. Adani Abbot Point Terminal Pty Ltd, Australia

17. Mundra Port Holdings Pty Ltd, Australia

18. Mundra Port Pty Ltd, Australia

In order to create more business opportunities and to make strategic

investment, Adani Warehousing Services Pvt. Ltd. was incorporated as wholly owned

subsidiary as on April 19, 2012.The statement pursuant to section 212(1)(e) of the

Companies Act, 1956, containing details of subsidiaries of the Company forms part of

the Annual Report.

On restructuring, Mundra Port Holdings Pty Ltd. had become step down

subsidiary of the Company i.e. March 6, 2012 and Adani Abbot Terminal Holdings

Pty Ltd had become wholly owned subsidiary of the Company i.e. March 15, 2012. In

terms of General Circular issued by Ministry of Corporate Affairs, Government of

India, the Balance Sheet, Profit and Loss Account and other documents of the

subsidiary companies are not being attached with Balance Sheet of the Company.

However, as directed by the Ministry of Corporate Affairs, some key information has

been disclosed in a brief abstract forming part of this Annual Report. Accordingly, the

Annual Report of the Company contains the consolidated audited financial statements

prepared pursuant to clause 41 of the listing agreement as prescribed by SEBI and

prepared in accordance with the accounting standards prescribed by the Institute of

Chartered Accountants of India (ICAI).

The annual accounts of the subsidiary companies and related detailed

information shall be made available to the shareholders of the holding and subsidiary

companies seeking such information on all working days during business hours. The

annual accounts of the subsidiary companies shall also be kept for inspection by any

shareholder/s during working hours at the Company's registered office and that of the

respective subsidiary companies concerned.

1.8 Information technology

Innovative IT Solutions have been the driver for best in class port operations at

APSEZL. With deployment of the best in class applications and systems, the IT

initiatives have consistently been used to streamline enterprise business processes,

improve operating efficiencies and reduce costs. APSEZL aims at seamless

integration of its business operations and an IT platform to provide real time

information and help in improving decision making process and in turn leads to

efficient port operations.

We have ensured that our port has the most updated Systems and Processes in the

entire country

SAP & Lotus Domino

Optical Fibber Cable Network

India’s First CISCO Wi-Fi Network

Enterprise class Siemens Hi-Path 8000 telecom infrastructure

High availability server and storage architecture

Integrated Port Management System

Network security at gateway and desktop levels

Smart card based labour / worker access / monitoring system

Video Surveillance systems to monitor activities of the port premises

1.9 Organisation structure

Chapter 2

Literature Review

2.1 Overview of Adani Port

Adani Group is a business behemoth based in India having a global footprint

with interests in Infrastructure, Power, Global Trading, Logistics, Energy, Port &

SEZ, Mining, Oil & Gas, Agri Business, FMCG products, Real Estate Development,

Bunkering, et al. It is a name well established among the distinguished corporate

entities of India, with a young and highly motivated taskforce of professionals who are

a prized asset of the organisation.

Founded in 1988 with a capital of INR 500,000, Adani Enterprises

Ltd. (formerly known as Adani Exports Ltd.) is today the flagship company of the

Adani conglomerate which posted INR 260 billion revenue in the previous financial

year.

The Adani Group has many distinctions to its merit:

Operator of the largest private port in India

Developer of the largest multiproduct SEZ in India

Owns the largest edible oil refining capacity in India

One of the largest trading houses in India

Largest Integrated Coal Management Firm in India

Promoter of India’s first supercritical technology based power plant

Operator of the world’s largest automated import Coal Terminal having 60

Mint capacity

2.2 SWOT analysis of pharmaceutical industry

SWOT stands for:

S -Strengths

W -Weakness

O -pportunity

T -Threat

Chapter 3

3.1 Introduction

Working capital, also known as net working capital, is a financial metric

which represents operating liquidity available to business. Along with fixed assets

such as plants and equipment, working capital is considered as a part of operating

capital. It is calculated as current assets less current liabilities

The diagram below illustrated the working capital cycle:-

The upper part of the diagram above shows in a simplified form the chain of

events in a manufacturing firm. Each of the boxes in upper part of the diagram can be

seen as a tank through which funds flow. These banks, which are concerned with day-

2-day activities, have funds constantly flowing into and out of them.

The chain starts with the firm buying raw material on credit.

3.2 TYPES OF WORKING CAPITAL

In due course this stock will be used in production, work will be carried out on the

stock, and it will become part of the firm’s work in progress(WIP)

Work will continue on the WIP until it eventually emerges as the finished products.

As production progresses, labour costs and overheads will need to meet.

Of course at some stage trade creditors will need to be paid

When the finished goods are sold on credit, Debtors are increased

They will eventually pay, so that cash will be injected in the firm.

Each of these areas-stocks (raw materials, WIP and finished goods), Trade debtors and

trade creditors-Can be viewed as tanks into and from which funds flow.

Working capital is clearly not only aspect of a business that affects the amount of

cash.

Which are working capital Sources?

Own funds

Bank borrowings

Sundry creditors

Advances from customers

Deposits due in a year

Other current liabilities

3.4 PRINCIPLES OF WORKING CAPITAL MANAGEMENT

CLASSIFICATION OF WORKING CAPITAL

Working capital may be classified in to ways:

o       On the basis of concept.

o        On the basis of time.

On the basis of concept working capital can be classified as gross working

capital and net working capital. On the basis of time, working capital may be

classified as:

     Permanent or fixed working capital.

     Temporary or variable working capital

PERMANENT OR FIXED WORKING CAPITAL

Permanent or fixed working capital is minimum amount which is required to ensure

effective utilization of fixed facilities and for maintaining the circulation of current

assets. Every firm has to maintain a minimum level of raw material, work- in-process,

finished goods and cash balance. This minimum level of current assts is called

permanent or fixed working capital as this part of working is permanently blocked in

current assets. As the business grow the requirements of working capital also

increases due to increase in current assets.

TEMPORARY OR VARIABLE WORKING CAPITAL

Temporary or variable working capital is the amount of working capital which is

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

capital can further be classified as seasonal working capital and special working

capital. The capital required to meet the seasonal need of the enterprise is called

seasonal working capital. Special working capital is that part of working capital which

is required to meet special exigencies such as launching of extensive marketing for

conducting research, etc.

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

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

business.

IMPORTANCE OR ADVANTAGE OF ADEQUATE WORKING CAPITAL

    SOLVENCY OF THE BUSINESS: Adequate working capital helps in

maintaining the solvency of the business by providing uninterrupted of

production.

     Goodwill:   Sufficient amount of working capital enables a firm to make

prompt payments and makes and maintain the goodwill.

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

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

     Cash Discounts: Adequate working capital also enables a concern to avail

cash discounts on the purchases and hence reduces cost.

     Regular Supply of Raw Material:   Sufficient working capital ensures regular

supply of raw material and continuous production.

     Regular Payment Of Salaries, Wages And Other Day TO Day

Commitments:   It leads to the satisfaction of the employees and raises the

morale of its employees, increases their efficiency, reduces wastage and costs

and enhances production and profits.

     Exploitation Of Favourable Market     Conditions:   If a firm is having adequate

working capital then it can exploit the favourable market conditions such as

purchasing its requirements in bulk when the prices are lower and holdings its

inventories for higher prices.

     Ability To Face Crises:   A concern can face the situation during the

depression.

     Quick And Regular Return On Investments:   Sufficient working capital

enables a concern to pay quick and regular of dividends to its investors and

gains confidence of the investors and can raise more funds in future.

     High Morale: Adequate working capital brings an environment of securities,

confidence, high morale which results in overall efficiency in a business.

EXCESS OR INADEQUATE WORKING CAPITAL

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

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

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

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

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

DISADVANTAGES OF REDUNDANT OR EXCESSIVE WORKING CAPITAL

1.     Excessive working capital means ideal funds which earn no profit for the

firm and business cannot earn the required rate of return on its investments.

2.     Redundant working capital leads to unnecessary purchasing and

accumulation of inventories.

3.     Excessive working capital implies excessive debtors and defective credit

policy which causes higher incidence of bad debts.

4.     It may reduce the overall efficiency of the business.

5.     If a firm is having excessive working capital then the relations with banks

and other financial institution may not be maintained.

6.     Due to lower rate of return n investments, the values of shares may also

fall.

7.     The redundant working capital gives rise to speculative transactions

DISADVANTAGES OF INADEQUATE WORKING CAPITAL

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

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

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

gaps in purchase of raw material and production; production and sales; and realization

of cash.

Thus working capital is needed for the following purposes:

       For the purpose of raw material, components and spares.

       To pay wages and salaries

       To incur day-to-day expenses and overload costs such as office expenses.

       To meet the selling costs as packing, advertising, etc.

       To provide credit facilities to the customer.

       To maintain the inventories of the raw material, work-in-progress, stores and

spares and finished stock.

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

business under varying circumstances such as a new concern requires a lot of

funds to meet its initial requirements such as promotion and formation etc. These

expenses are called preliminary expenses and are capitalized. The amount needed

for working capital depends upon the size of the company and ambitions of its

promoters. Greater the size of the business unit, generally larger will be the

requirements of the working capital.

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

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

capital required is called normal working capital.

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

FACTORS DETERMINING THE WORKING CAPITAL REQUIREMENTS

1.  NATURE OF BUSINESS: The requirements of working is very limited in

public utility undertakings such as electricity, water supply and railways

because they offer cash sale only and supply services not products, and no

funds are tied up in inventories and receivables. On the other hand the

trading and financial firms requires less investment in fixed assets but have

to invest large amt. of working capital along with fixed investments.

2.  SIZE OF THE BUSINESS: Greater the size of the business, greater is the

requirement of working capital.

3.  PRODUCTION POLICY: If the policy is to keep production steady by

accumulating inventories it will require higher working capital.

4.  LENTH OF PRDUCTION CYCLE: The longer the manufacturing time the

raw material and other supplies have to be carried for a longer in the

process with progressive increment of labor and service costs before the

final product is obtained. So working capital is directly proportional to the

length of the manufacturing process.

5.  SEASONALS VARIATIONS: Generally, during the busy season, a firm

requires larger working capital than in slack season.

6.  WORKING CAPITAL CYCLE: The speed with which the working cycle

completes one cycle determines the requirements of working capital.

Longer the cycle larger is the requirement of working capital.

7.     RATE OF STOCK TURNOVER: There is an inverse co-relationship

between the question of working capital and the velocity or speed with

which the sales are affected. A firm having a high rate of stock turnover

will needs lower amount of working capital as compared to a firm having a

low rate of turnover.

8.     CREDIT POLICY: A concern that purchases its requirements on credit

and sales its product / services on cash requires lesser amt. of working

capital and vice-versa.

9.     BUSINESS CYCLE: In period of boom, when the business is prosperous,

there is need for larger amt. of working capital due to rise in sales, rise in

prices, optimistic expansion of business, etc. On the contrary in time of

depression, the business contracts, sales decline, difficulties are faced in

collection from debtor and the firm may have a large amt. of working

capital.

10. RATE OF GROWTH OF BUSINESS: In faster growing concern, we shall

require large amt. of working capital.

11. EARNING CAPACITY AND DIVIDEND POLICY: Some firms have

more earning capacity than other due to quality of their products, monopoly

conditions, etc. Such firms may generate cash profits from operations and

contribute to their working capital. The dividend policy also affects the

requirement of working capital. A firm maintaining a steady high rate of

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

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

dividend.

12. PRICE LEVEL CHANGES: Changes in the price level also affect the

working capital requirements. Generally rise in prices leads to increase in

working capital.

Others FACTORS: These are:

     Operating efficiency.

     Management ability.

     Irregularities of supply.

     Import policy.

     Asset structure.

     Importance of labour.

     Banking facilities, etc.

 

MANAGEMENT OF WORKING CAPITAL

Management of working capital is concerned with the problem that

arises in attempting to manage the current assets, current liabilities. The basic

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

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

maintained, i.e. it is neither adequate nor excessive as both the situations are

bad for any firm. There should be no shortage of funds and also no working

capital should be ideal. WORKING CAPITAL MANAGEMENT POLICES of

a firm has a great on its probability, liquidity and structural health of the

organization. So working capital management is three dimensional in nature as

1.     It concerned with the formulation of policies with regard to profitability,

liquidity and risk.

2.     It is concerned with the decision about the composition and level of

current assets.

3.     It is concerned with the decision about the composition and level of

current liabilities.

 

  WORKING CAPITAL ANALYSIS

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

business. Adequate amount of working capital is very much essential for the

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

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

is totally effected by the management of working capital. So, a study of

changes in the uses and sources of working capital is necessary to evaluate the

efficiency with which the working capital is employed in a business. This

involves the need of working capital analysis.

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

such as:

1.     Ratio analysis.

2.     Fund flow analysis.

3.     Budgeting.

 

1.    RATIO ANALYSIS

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

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

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

these purposes:

1. Current ratio.

2. Quick ratio

3.  Absolute liquid ratio

4.  Inventory turnover.

5.  Receivables turnover.

6.  Payable turnover ratio.

7.  Working capital turnover ratio.

8.  Working capital leverage

9.  Ratio of current liabilities to tangible net worth.

 

2.    FUND FLOW ANALYSIS

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

from which additional funds were derived and the use to which these sources

were put. The fund flow analysis consists of:

 

a.      Preparing schedule of changes of working capital

b.     Statement of sources and application of funds.

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

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

financial dates.

 

3.    WORKING CAPITAL BUDGET

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

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

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

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

and then comparing the budgeted figures with actual performance for

calculating the variances, if any, so that corrective actions may be taken in

future. He objective working capital budget is to ensure availability of funds as

and needed, and to ensure effective utilization of these resources. The

successful implementation of working capital budget involves the preparing of

separate budget for each element of working capital, such as, cash, inventories

and receivables etc.  

 

ANALYSIS OF SHORT – TERM FINANCIAL POSITION OR TEST OF

LIQUIDITY

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

credit and commercial banks short-term loans are primarily interested to know

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

of a firm can be met in time only when it is having sufficient liquid assets. So

to with the confidence of investors, creditors, the smooth functioning of the

firm and the efficient use of fixed assets the liquid position of the firm must be

strong. But a very high degree of liquidity of the firm being tied – up in current

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

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

position or short-term solvency position of the firm.

1.     Liquidity ratios.

2.     Current assets movements ‘ratios.

 

A)   LIQUIDITY RATIOS

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

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

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

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

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

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

liabilities. If current assets can pay off the current liabilities then the liquidity

position is satisfactory. On the other hand, if the current liabilities cannot be

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

liquidity of a firm, the following ratios can be calculated:

1.     CURRENT RATIO

2.     QUICK RATIO

3.     ABSOLUTE LIQUID RATIO

 

1.   CURRENT RATIO

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

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

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

current assets and current liabilities. Thus,

CURRENT RATIO = CURRENT ASSETS 

                                    CURRENT LIABILITES

The two components of this ratio are:

1)     CURRENT ASSETS

2)     CURRENT LIABILITES

Current assets include cash, marketable securities, bill receivables,

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

outstanding expenses, bill payable, dividend payable etc.

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

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

current ratio represents that the liquidity position of the firm is not good and

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

near to the rule of thumb of 2:1 i.e. current assets double the current liabilities

is considered to be satisfactory.

 

CALCULATION OF CURRENT RATIO

                                                                              (Rupees in Lakes).

Year 2012 2011 2010 2009 2008

Current Assets 23,93,472.15

1,32,572.79 1,39,460.82

1,23,255.26 40,583.37

Current

Liability 3,24,449.73 56,251.49 49,003.90 35,481.02 33,498.17

Current ratio7.377020 2.356787 2.705352 3.473836 1.211510

Interpretation:-

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

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

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

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

current liabilities.

2. QUICK RATIO

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

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

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

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

pay off current obligations immediately.

QUICK RATIO = QUICK ASSETS

                               CURRENT LIABILITES

Where Quick Assets are:

1)           Marketable Securities

2)           Cash in hand and Cash at bank.

3)           Debtors.

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

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

represents that the firms’ liquidity position is not good.

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

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

may be able to meet its short-term obligations. However, a firm having high

quick ratio may not have a satisfactory liquidity position if it has slow paying

debtors. On the other hand, a firm having a low liquidity position if it has fast

moving inventories.

CALCULATION OF QUICK RATIO                                                             

(Rupees in Lacks)

Year 2012 2011 2010 2009 2008

Quick Assets23,93,472.15

1,32,572.79 67,357.35 81,734.73 -67,682.88

Current

Liabilities278902.56 228509.96 49003.9 35481.02 33498.17

Quick Ratio8.581750379 0.580162 1.3745304 2.30361839

-2.0204949

Interpretation :

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

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

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

problem.

3. ABSOLUTE LIQUID RATIO

Although receivables, debtors and bills receivable are generally more liquid

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

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

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

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

Assets includes :

ABSOLUTE LIQUID RATIO =      ABSOLUTE LIQUID ASSETS

                                                       CURRENT LIABILITES

ABSOLUTE LIQUID ASSETS = CASH & BANK BALANCES.

e.g.                                                          (Rupees in Crore)

Year 2012 2011 2010 2009 2008

Absolute

Liquid Assets1,11,841.44 3,865.89 85,868.11 1,13,071.19 88,956.37

Current

Liabilities3,24,449.73 56,251.49 49,003.90 35,481.02 33,498.17

Absolute

Liquid Ratio0.35 0.25 1.75 3.19 2.66

Interpretation :

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

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

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

sanctioned from banks and can easily draw cash.

2.Profitable Ratio

Profitability ratios measure the efficiency of management in the

employment of business resources to earn profits. These ratios indicate the

success or failure of a business enterprise for a particular period of time.

Profitability ratios are used by almost all the parties connected with the

business.

A strong profitability position ensures common stockholders higher

dividend income and appreciation in the value of the common stock in future.

Creditors, financial institutions and preferred stockholders expect a prompt

payment of interest and fixed dividend income if the business has good

profitability position.

Management needs higher profits to pay dividends and reinvest a

portion in the business to increase the production capacity and strengthen the

overall financial position of the company.

Some important profitability ratios are given below:

1. Net profit ratio

2. Gross profit ratio (GP ratio)

3. Operating ratio

4. Expense ratio

5. Dividend yield ratio

6. Dividend payout ratio

7. Return on capital employed ratio

8. Earnings per share (EPS) ratio

9. Return on shareholder’s investment/Return on equity

10. Return on common stockholders’ equity ratio

1. Net Profit Ratio

Net profit ratio is computed by dividing the net profit (after tax) by net

sales. It is a very popular profitability ratio that shows the net operating

earnings on sale of $100.

Formula:

For the purpose of this ratio, net profit is equal to gross profit minus

operating expenses and income tax.  All non-operating revenues and expenses

are not taken into account because the purpose of this ratio is to evaluate the

profitability of the business from its primary operations. Examples of non-

operating revenues include interest on investments and income from sale of

fixed assets. Examples of non-operating expenses include interest on loan and

loss on sale of assets.

Year 2012 2011 2010 2009 2008

Net Profit 1,17,725.95 98,616.00 70,097.56 45,954.94 2,134.12

Sales2,48,190.28 1,88,507.22 1,39,251.70 1,13,512.25 8,182.07

Net Profit Ratio47.43 52.31 50.34 40.48 26.08

Interpretation

Net profit margin measures how much of each dollar earned by the

company is translated into profits. A low profit margin indicates a low margin

of safety: higher risk that a decline in sales will erase profits and result in a net

loss.

2. Gross Profit Margin

Gross profit ratio is a profitability ratio that shows the gross profit as a percentage of total net sales revenue. It is a popular tool to evaluate the operational performance of the business . It is computed by dividing the gross profit figure by net sales and is expressed in percentage.

Formula:

The basic components of the formula of gross profit ratio (GP ratio) are gross profit and net sales. Gross profit is equal to net sales minus cost of goods sold. Net sales are equal to total gross sales

less returns inwards and discount allowed.  The information about gross profit and net sales is normally available from income statement of the company.

Year 2012 2011 2010 2009 2008

Gross profit 1,17,725.95 98,616.00 70,097.56 45,954.94 2,134.12

Sales2,48,190.28 1,88,507.22 1,39,251.70 1,13,512.25 8,182.07

Gross profit

Ratio47.43 52.31 50.34 40.48 26.08

Interpretation The ideal level of gross profit margin depends on the industries, how long the business has

been established and other factors. Although, a high gross profit margin indicates that the company can make a reasonable profit, as long as it keeps the overhead cost in control. A low margin indicates that the business is unable to control its production cost.

3. OPERATION RATIO

This ratio is a test of the efficiency of the management in their business operation. It is a

means of operating efficiency. In normal conditions, the operating ratio should be low

enough so as to leave portion of the sales sufficient to give a fair return to the investors.

Operating ratio plus operating profit ratio is 100. The two ratios are obviously interrelated.

For example, if the operating profit ratio is 20%, it means that the operating ratio is 80%. A

rise in the operating ratio indicates a decline in the efficiency.

Year 2012 2011 2010 2009 2008

Operating cost1,48,109.80 1,15,189.39 82,408.07 66,873.10 4,626.74

Sales2,48,190.28 1,88,507.22 1,39,251.70 1,13,512.25 8,182.07

Operating

Ratio59.68 61.11 59.18 58.91 56.55

INTERPRETATION

Lower the operating ratio, the better is the position because greater is the profitability

and management efficiency of the concern. The higher the ratio, the less favorable is the situation,

because there will be smaller margin of profit available for the purpose of payment of dividend and

creation of reserves.

3. Activity ratios:

Activity ratios (also known as turnover ratios) measure the

efficiency of a firm or company in generating revenues by converting its

production into cash or sales. Generally a fast conversion increases

revenues and profits.

Activity ratios show how frequently the assets are converted into cash or sales and,

therefore, are frequently used in conjunction with liquidity ratios for a deep analysis of

liquidity.

Some important activity ratios are:

1. Asset turnover ratio

2. Fixed assets turnover ratio

1. Assets Turnover ratio

The amount of sales generated for every dollar's worth of assets. It

is calculated by dividing sales in dollars by assets in dollars. It is an

activity ratio that measures the efficiency with which assets are used by a

company. It is computed by dividing net sales by average total assets for a

given period.

Year 2012 2011 2010 2009 2008

Sales2,48,190.28 1,88,507.22 1,39,251.70 1,13,512.25 8,182.07

Total Assets10,359.14 7,597.09 6,645.41 5,258.27 4,519.25

Assets

Turnover Ratio23.96 24.81 20.95 21.59 1.81

Interpretation :

Asset turnover measures a firm's efficiency at using its assets in generating sales

or revenue - the higher the number the better. It also indicates pricing strategy:

companies with low profit margins tend to have high asset turnover, while those with

high profit margins have low asset turnover.

2. Fixed assets Turnover Ratio

A financial ratio of net sales to fixed assets. The fixed-asset

turnover ratio measures a company's ability to generate net sales

from fixed-asset investments - specifically property, plant and

equipment (PP&E) - net of depreciation. A higher fixed-asset

turnover ratio shows that the company has been more effective in

using the investment in fixed assets to generate revenues. Fixed

assets turnover ratio (also known as sales to fixed assets ratio) is computed

by dividing cost of sales by net fixed assets. A high ratio indicates better

utilization of fixed assets and a low ratio means inefficient or under-utilization

of fixed assets.

This ratio is often used as a measure in manufacturing industries,

where major purchases are made for PP&E to help increase output.

When companies make these large purchases, prudent investors

watch this ratio in following years to see how effective the

investment in the fixed assets was.

Year 2012 2011 2010 2009 2008

Sales2,48,190.28 1,88,507.22 1,39,251.70 1,13,512.25 8,182.07

Fixed Assets23,93,472.15 5,30,564.25 4,20,993.40 3,25,142.11 2,84,182.90

Fixed Assets

Turnover

Ratio0.10 0.36 0.33 0.35 0.03

Interpretation :

. A high ratio indicates better utilization of fixed assets and a low ratio means

inefficient or under-utilization of fixed assets.

3. Total Dept to Total Assets turnover ratio

A metric used to measure a company's financial risk by determining

how much of the company's assets have been financed by debt.

Calculated by adding short-term and long-term debt and then

dividing by the company's total assets.

Year 2012 2011 2010 2009 2008

Total Dept0.00 0.00 15,799.03 21,164.32 29,633.69

Total Assets10,359.14 7,597.09 6,645.41 5,258.27 4,519.25

Total Dept to

Total Asset 0 0 2.377435 4.02495878 6.5572141

Interpretation :

A debt ratio of greater than 1 indicates that a

company has more debt than assets, meanwhile, a debt ratio of

less than 1 indicates that a company has more assets than debt.

Used in conjunction with other measures of financial health, the

debt ratio can help investors determine a company's level of risk.

Chapter-4

Credit monitoring Assessment 64

4.1 What is the meaning of credit monitoring assessment ?

o It is nothing but the bank financing for working capital

o It is earlier known as Credit authorization scheme

o RBI prescribed certain forms to be filled for applying is called as CMA data base.

o Calculation is done according to Tandon committee

CMA data is a useful tool consisting of financials of past two years, estimates of

current year and projections of next year of a company seeking debt, generally insisted

by bank to assess the CMA data is a detailed analysis of the working of any company.

To run a business smoothly business strategy required and to get live financial

strategy is required. So, they create a financial strategy plan to give it live that is

nothing but CMA REPORT, showing their past experience with ratio and data which

are also expecting about future market.

This is required to be submitted by the company who has to take more than Rs. 1

Crore of working capital loan from any bank. This is consisting of six parts commonly

known as six forms details are as under:-

Form-I Assessment of working capital required

Form-II Operating statement of the company

Form-III Analysis of balance sheet

Form-IV Comparative statement of current assets and current liabilities

Form-V Computation of Maximum permissible bank finance (MPBF).

Form-VI Fund flow analysis

4.2 FORM-1-WORKING CAPITAL ASSESSMENT REQUIRED

Any enterprise weather industrial, trading or other acquires two types of assets to run

its business as has already been emphasised time and again. It requires fixed assets

which are necessary for carrying on the production/business such as land and

buildings, plant and machinery, furniture and fixtures etc. For a going concern these

assets are of permanent nature and are not to be sold. The other types of assets

required for day to day working of a unit are known as current assets which floating in

nature and keep changing during the course of business. It is these ‘current assets’

which are generally referred as ‘working capital’. We are by now already aware of the

short term nature of these assets are classified as current assets. It may be noted here

that they may not be any fixed ratio between the fixed assets and floating assets for

different projects as their requirement would differ depending upon the nature of

project. Big industrial projects may require substantial investment in fixed assets and

also large investment for working capital. The trading units may not require heavy

investment in fixed assets while the may be carrying huge stocks in trade. The service

unit may hardly require any working capital and all investment may be blocked in

creation of fixed assets.

A set financing pattern is evolved to meet the requirement of a unit for acquisition of

fixed assets and current assets. Fixed assets are to be financed by owned funds and

long term liabilities raised by a unit while current assets are partly financed by long

term liabilities and partly by current liabilities and other short-term loans arranged by

the unit from the bank. The balance sheet of a unit under such dispensation may be

represented as:

The total current assets with the firm may be taken as gross working capital where as

the net working capital with the unit may be calculated as under: 66

Net Working Capital = Current Assets - Current Liabilities

(NWC) (GWC) (Including Bank Borrowings)

This net working capital is also sometimes referred to as ‘liquidated surplus’ with the

firm and has been margin available for working capital requirements of the unit.

Financing of working capital has been the exclusive domain of commercial banks

while they also grant term loans for creation of fixed assets either on their own or in

consortium with State level/All India financial institutions. The financial institutions

are also now considering sanction of working capital loans.

The current assets in the example given in earlier paragraph are financed as under:

Current Assets = Current liabilities + Working capital limits with

banks + Margin from long-term liabilities

The assessment of working capital may involve two aspects as under:-

The level of current assets required to be held by any unit which is adequate for its

day to day functioning, and

The mode of financing of these current assets.

The value of inventory as given in balance sheet is the position as on a particular day

on which balance sheet is drawn and may not be the actual average requirement of the

unit. We will have to; therefore, evaluate the actual consumption pattern to arrive at a

correct decision.

It must, however, be noted that assessment of working capital is always done for

future period, while the financial statements reveal the financial position of a 67

concern as it as a some point of time in the past. If the calculations are based on the

basis of the financial statements as on some previous date, the results derived may not

be workable. Furthermore the newly established units may not provide any financial

statements for the past period. The working capital is always to be assessed on tile

basis of projections for next year. The first most important point, therefore, is to make

as accurate projections as possible for the next year. The projections submitted to the

bank are very critically examined in relation to past performance of the unit, if any,

future prospects and market for the ultimate product production capacity of the unit

and general rate of inflation expected during the year. The projections given for the

next year are, therefore, to be supported by convincing logic to stand scrutiny in the

hands of the bankers.

We shall now make an attempt to define various components of working capital as

taken in the format and explain the most acceptable principles involved in calculating

them for overall assessment of working capital.

A new dimension to financing of working capital by banks was given by Reserve

Bank of India in 1975 by accepting the recommendations of ‘Tandon Committee’

which were later modified by ‘Chore Committee’. These recommendations were

applicable for large advances enjoying working capital limits of Rs. 50.00 lacs and

above. Reserve Bank of India also prescribed a standard format for assessment of

working capital limits to accounts covered

Under ‘Credit Authorisation Scheme’ later on renamed ass, ‘Credit Monitoring

Arrangement. This form has, however, been adopted by many of the banks for

assessment of limits for working capital advances exceeding Rs. 10.00 lacs.

Different firms adopting different techniques is thus in circulation for assessment of

working capital depending upon the size and category of projects as under:

6. Form for assessment of requirements of SSI units up to credit limits of Rs.

2,00,000/- (including composite loans)

7. Form for assessment of requirements of SSI units up to credit limits of above Rs. 2,

00,000/- and up to Rs. 15.00 lacs.

8. Form for assessment of requirements of units with credit limits above Rs. 15.00 lacs

and up to Rs. 1.00 crore

9. Form for assessment of requirements of units with credit limits above Rs. 100 crore.

10. CMA data form for assessment of requirements for units with credit limits above

Rs. 10.00 lacs or as per the cut off point fixed by individual banks.

11. Assessment of limits for projects falling under various segments of priority sector.

69

FORM-II